basic accounting and finance

7/28/2019 basic accounting and finance

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ACCOUNTING AND FINANCE

BANKERS


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TOPICS

BANK RECONCILIATION

TRIAL BALANCE

CAPITAL & REVENUE EXPENDITURE

INVENTORY VALUATION

BILLS OF EXCHANGE

CONSIGNMENT ACCOUNT

JOINT VENTURE

LEASING & HIRE PURCHASE

NON-TRADING ORGANISATIONS DEPRECIATION

MODEL QUESTIONS


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BASICS OF ACCOUNTING

DOUBLE ENTRY SYSTEM

3 TYPES OF ACCOUNTS:

-- REAL: ASSETS OF BUSINESS, TANGIBLE ANDIDENTIFIABLE.

-- PERSONAL: THEY ARE HEADED WITH THE NAME OF

PERSON/BUSINESS/FIRM. DEBTORS OR CREDITORS.

-- NOMINAL: THEY RECORD TRANSACTIONS OF

INTANGIBLES SUCH AS RENT EXPENSES.

.


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BASIC RULES OF ACCOUNTING

RULES:

-- REAL : DEBIT THE ACCOUNT WHEN WE PURCHASE

AN ASSET & CREDIT WHEN WE SELL OR

DEPRECIATE.

-- PERSONAL : DEBIT THE RECEIVER OF GOODS &CREDIT THE GIVER OF GOODS.

-- NOMINAL : DEBIT LOSSES & EXPENSES, CREDIT

INCOMES & GAINS.

-- IN A LEDGER, ASSETS OR LOSSES HAVE DEBIT

BALANCE WHILE LIABILITIES OR GAINS HAVE

CREDIT BALANCE.


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BANK RECONCILIATION STATEMENT

BANK RECONCILIATION( B. R. ) IS BASED ON THEPRINCIPLE OF DOUBLE ENTRY.

CREDIT THE GIVER AND DEBIT THE RECEIVER

B. R. SHOWS CAUSES OF DIFFERENCES BETWEEN CASHBOOK AND PASS BOOK BALANCE

DEBIT BALANCE AS PER CASH BOOK IS CREDIT BALANCEAS PER PASS BOOK = POSITIVE BALANCE

CREDIT BALANCE IN CASH BOOK IS DEBIT BALANCE IN

PASS BOOK = NEGATIVE BALANCE/OVERDRAFT

WHETHER WE START WITH CASH OR PASS BOOKRECONCILIATION ENTRIES WILL REMAIN SAME AS PERPRINCIPLES


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CAUSES OF DIFFERENCES TREATMENT

CASH/PASS BOOK

DT. CR.

.

CHEQUES ISSUED BUT NOT PRESENTED

CHEQUES DEPOSITED BUT NOT COLLECTED

BANK CHARGES

INTEREST ON SAVINGS BANK

INTEREST ON LOAN

AMOUNT PAID BY BANK AS PER STANDING INSTRUCTIONS

. DIRECT PAYMENTS MADE BY CUSTOMERS

. DISHONOUR OF CHEQUES RECEIVED


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CAUSES OF DIFFERENCES TREATMENT

CASH/PASS BOOK

DT. CR.

. PAYMENTS SIDE OF CASH BOOK

UNDERCAST

. DEPOSIT SIDE OF CASH BOOKOVERCAST

. CHEQUE ISSUED BUT NOT TAKEN

IN BANK COLUMN

. DEBIT BALANCE X BROUGHT

FORWARD AS CREDIT BALANCE 2X

. CHEQUE ISSUED BUT RECORDED

TWICE


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IMPORTANT : WHETHER WE ARE RECONCILING PASS BOOK OR CASH

BOOK , EACH OF THE RECTIFICATION ENTRIES WILL

APPEAR ON THE SAME SIDE . ADDITION OR SUBRACTION

OF ENTRIES FROM THE OPENING OR GIVEN BALANCE

DEPENDS UPON WHICH SIDE OF THE LEDGER THEY ARE

CAST OR TO BE CAST. THUS WHAT WE SIMPLY NEED TO

KNOW IS WHETHER EACH FIGURE GIVEN IN THE

PROBLEM IS A DEBIT OR CREDIT ENTRY. I WILL EXPLAIN

WITH THE HELP OF A PROBLEM LATER.


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SIMPLY PUT, IF AN ENTRY IS ALREADY THERE BUT EITHER

THE WHOLE OR PART IT HAS TO BE RECTIFIED THEN THAT

PORTION IS POSTED ON THE OPPOSITE SIDE OF THE

ORIGINAL ENTRY.


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ADVANTAGES OF BANK RECONCILIATION

. VERIFICATION OF ACCURACY OF ENTRIES

. TIMELY CORRECTIVE ACTION

. PREVENTS FRAUDS

. CONTROL TOOL FOR MANAGEMENT


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TRIAL BALANCE

DEFINITION

IT IS A STATEMENT SHOWING CREDIT AND DEBIT

BALANCES FROM THE LEDGER.

HELPS ARITHMETICAL ACCURACY AND FACILITATES

FINAL ACCOUNTS.


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TRIAL BALANCE

BASIC PRINCIPLE :

SINCE IT IS DOUBLE ENTRY BOOK-KEEPING, HENCE,

ASSETS AND EXPENSES ARE DEBIT BALANCES

LIABILITIES AND INCOMES ARE CREDIT BALANCES

. IN CASE OF ARITHMETICAL INACCURACY IDENTIFY

CLERICAL/PRINCIPLE ERRORS AND RECTIFY


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TRIAL BALANCE

TYPES OF ERRORS:

A) CLERICAL ERRORS

-- ERRORS OF OMISSION

--- OMISSION OF TRANSACTION FROM BOOKS

--- COMPLETE OMISSION NOT AFFECTING TRIAL

BALANCE

--- PARTIAL OMISSION AFFECTING TRIAL

BALANCE


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TRIAL BALANCE

-- ERRORS OF COMMISSION

--- FIGURE POSTED ON THE WRONG SIDE OR WITH

WRONG AMOUNT

-- COMPENSATING ERRORS

--- ONE ERROR BALANCES ANOTHER ERROR

. B) ERRORS OF PRINCIPLE

-- ERRORS IN CONTRAVENTION OF ACCOUNTING

PRINCIPLES


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TRIAL BALANCE

RECTIFICATION OF ERRORS IS A SERIES OF STEPS:

PASS THE CORRECT ENTRY

COMPARE THE WRONG ENTRY WITH THE CORRECTONE

PASS THE RECTIFICATION ENTRY

IF TRIAL BALANCE DOES NOT TALLY THEN

DIFFERENCE IS TRANSFERRED TO SUSPENCE

ACCOUNT


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TRIAL BALANCE

TYPICAL TRIAL BALANCE

N A M E DEBIT CREDIT

CAPITAL X

DRAWINGS X

PURCHASES X

SALES X

EXPENSES X

DEBTORS(CUSTOMRES) X

CREDITORS(SUPPLIERS) X CASH X

SALES RETURN X


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TRIAL BALANCE

TYPICAL ERRORS:

-- CLERICAL:

A) SALARY PAID 1000/- BUT POSTED AS 10, 000/-.

RECTIFICATION: CREDIT SALARY WITH 9000/-.

B) SALARY PAID 1000/- BUT POSTED IN RENT A/C.

RECTIFICATION: DEBIT SALARY AND CREDIT RENT WITH

1000/-.

C) GOODS WORTH 100/- SOLD TO VIJAY WRONGLY

RECORDED IN PURCHASE REGISTER. RECTIFICATION: CREDIT SALES AND PURCHASE A/Cs

WITH 100/- EACH AND DEBIT VIJAY WITH 200/-.


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TRIAL BALANCE

AFTER TRIAL BALANCE IS PREPARED ONE FINDS

. D) SALES OF 500/- POSTED AS 5000/- WHILE RENT PAID500/- POSTED AS 5000/-.

. RECTIFICATION: DEBIT SALES WITH 4500/-, CREDITSUSPENCE WITH 4500/-, CREDIT RENT WITH 4500/-,

DEBIT SUSPENCE WITH 4500/-.

E) SALARY PAID AS 1000/- BUT POSTED AS 10,000/- INRENT A/C.

RECTIFICATION: DEBIT SALARY WITH 1000/- SUSPENCEWITH 9000/-; CREDIT RENT WITH 10000/-

F) A PURCHASERS DEBIT BALANCE OF 9000/- HAS NOTBEEN TAKEN.

RECTIFICATION: DEBIT DEBTORS, CREDIT SUSPENCE TOTHE EXTENT OF 9000/-.


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CAPITAL AND REVENUE EXPENDITURE

BASIC PRINCIPLE:

. ALL EXPENSES AND RECEIPTS OF REVENUE NATURE

ARE TAKEN TO TRADING AND PROFIT & LOSS

ACCOUNT

. ALL EXPENDITURES AND RECEIPTS OF CAPITAL

NATURE ARE TAKEN TO BALANCE SHEET


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REVENUE RECEIPTS/PAYMENTS :

. ARE SMALLER IN SIZE(RELATIVELY)

. ARE RECURRING IN NATURE

. THE BENEFITS ARE OVER A SHORTER PERIOD (1 YEAR)

. THE PURPOSE IS TO RUN THE BUSINESS ON A DAY TO

DAY BASIS

. MAINTAIN ASSETS IN WORKING CONDITION


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CAPITAL RECEIPTS/PAYMENTS:

ARE USUALLY LARGE(RELATIVELY)

ARE NON-RECURRING IN NATURE

THE BENEFITS ARE OVER LONGER DURATION

THE PURPOSE IS TO ENHANCE PRODUCTIVITY OFTHE ASSETS


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THERE ARE CERTAIN EXPENDITURES WHICH ARE

OTHERWISE REVENUE IN NATURE BUT SOMETIMES

UNUSUALLY LARGE AND WHOSE BENEFIT TO THE

ORGANISATION MAY ACCRUE AFTER FEW YEARS.THESE

MAY BE TREATED AS DEFERRED REVENUE EXPENDITURE ,

CARRIED TO THE BALANCE SHEET , AND WRITTEN OFF TO

THE PROFIT & LOSS ACCOUNT OVER A PERIOD OF TIME.


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SAME IS THE CASE WITH CERTAIN RECEIPTS SUCH AS

SALE OF ASSETS, WHERE THE RECEIPTS UPTO BOOK

VALUE IS DEDUCTED FROM THE ASSET, AND , IF

BETWEEN BOOK VALUE & COST AS REVENUE

RECEIPT & ABOVE COST AS CAPITAL RECEIPT.

. THERE IS A THIN LINE BETWEEN CAPITAL & REVENUECLASSIFICATION. FOR INSTANCE REPAIRS TO

MACHINERY WHICH KEEPS THE ASSET IN WORKING

CONDITION IS CHARGED TO THE P & L A/C WHILE

BETTERMENT EXPENSE IS CAPITALISED.


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EXAMPLES OF EACH TYPE OF CLASSIFICATION:

CAPITAL NATURE:

-- PURCHASE OF ASSETS SUCH AS BUILDING,

MACHINERY, VEHICLES.-- EXPENDITURE IN PURCHASE /SETTING UP OF

CAPITAL GOODS/ASSETS

-- EXCESS OF SALE PRICE OF ASSET OVER ITS COST

PRICE

-- FUNDS RAISED THRU BANKS/INSTITUTIONS

-- FUNDS RAISED THRU ISSUE OF SHARES, &

DEBENTURES


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REVENUE NATURE:

ALL TRANSACTIONS RELATING TO NOMINAL

ACCOUNTS

EVEN CERTAIN EXPENSES OF NON-RECURRING

NATURE BASED ON MATERIALITY CONCEPT

EXCESS OF SALE VALUE OF ASSET OVER W D VALUE

UPTO COST OF ASSET


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DEFERRED REVENUE EXPENDITURE:

LARGE ADVERTISING EXPENDITURE FOR(SAY)

LAUNCH OF A PRODUCT

EXPENDITURE FOR RAISING OF FUNDS INCLUDING

PREPARATION OF PROJECT REPORT

INITIAL EXPENSES FOR SETTING UP OF A COMPANY


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INVENTORY VALUATION

VALUATION OF STOCKS IS IMPORTANT FROM THEPOINT OF INCOME DETERMINATION.

THE DANGER COULD BE OF EITHER OVERVALUATIONOR UNDERVALUATION OF STOCKS RESULTING IN

OVERSTATING OR UNDERSTATING OF PROFITS.

METHODS OF VALUATION:

-- FIFO

-- LIFO

-- AVERAGE OR WEIGHTED AVERAGE COST METHOD

-- BASE STOCK METHOD

-- ADJUSTED SELLING PRICE METHOD


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INVENTORY VALUATION

UNDER FIFO GOODS ISSUED TO PRODUCTION IS

VALUED AT THE EARLIEST PRICE WHEREAS THE

CLOSING STOCK IS AT THE LATEST PRICE.

UNDER LIFO GOODS ISSUED TO PRODUCTION ISVALUED AT THE LATEST PRICE WHEREAS THE

CLOSING PRICE IS AT THE EARLIEST PRICE.

UNDER WEIGHTED AVERAGE COST METHOD

ARITHMETIC MEAN OF TOTAL PRICE BY TOTALQUANTITY RECEIVED IS TAKEN FOR VALUATION.


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INVENTORY VALUATION

ADJUSTING SELLING PRICE METHOD IS GENERALLY

USED BY SMALL BUSINESSMEN WHO ARE UNABLE

TO DIFFERENTIATE VARIOUS COSTS.

HENCE THEY VALUE THE STOCKS AT SELLING PRICEAND THEN REDUCE ITS VALUE TO THE EXTENT OF

ESTIMATED GROSS MARGIN.


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INVENTORY VALUATION

BASE STOCK METHOD IS SIMILAR TO LIFO. CLOSINGSTOCK IS ALWAYS AT COST AT THE BEGINNING OFBUSINESS. IN TIMES OF INFLATION VERY LOWVALUE OF STOCK MAKES FOR EXCELLENTACCOUNTING.

IT HOWEVER REQUIRES A MINIMUM STOCK TO BEMAINTAINED.

PRESENTLY ACCOUNTING STANDARDS PERMITFIFO(HISTORICAL PRICE) OR WEIGHTED AVERAGE

COST METHOD.

VALUE OF STOCK CAN BE ASCERTAINED BYPERIODIC(PHYSICAL VERIFICATION) OR PERPETUALINVENTORY ( MAINTAINENCE OF STOCK REGISTER).


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INVENTORY VALUATION

CHARACTERISTICS OF DIFFERENT METHODS OF

INVENTORY VALUATION

FIFO :

-- IN RISING MARKET FIFO RESULTS IN HIGHERPROFITS LOCKING UP OF SCARCE W. C.

-- GOODS ARE SOLD AT CURRENT HIGHER PRICES

WHILE COST OF GOODS REFLECTS LOWER THAN

CURRENT COSTS

-- IN FALLING MARKET FIFO RESULTS IN LOWER

PROFITS

.


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INVENTORY VALUATION

-- LIFO :

-- IN FALLING MARKET THE EFFECT IS THE SAME

AS

THAT OF FIFO IN RISING MARKET

-- IN RISING MARKET THE EFFECT IS SAME AS

THAT

OF FIFO IN FALLING MARKET.


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INVENTORY VALUATION

IN THIS CHAPTER IT IS IMPORTANT TO DISCUSS THE

VARIOUS ACCOUNTING CONVENTIONS

CONSERVATISM CONCEPT: RECOGNITION OF

INCREASES IN EARNINGS REQUIRES BETTEREVIDENCE THAN DOES RECOGNITION OF DECREASES

THAT IS EXPENSES

REALISATION CONCEPT: RECOGNITION OF AMOUNT

OF REVENUE THAT HAS CERTAINTY OF

REALISATION

MATCHING CONCEPT: RECOGNITION OF REVENUES

AND EXPENSES FOR A CERTAIN EVENT.


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BILLS OF EXCHANGE

. PROMISSORY NOTE IS SIMILAR ; HAS ONLY 2 PARTIES

BUT SIGNED BY DEBTOR; NOTING NECESSARY.

. ACCOMODATION BILL : THERE IS NO TRANSACTION;

THE BILL IS DISCOUNTED TO RAISE MONEYS FOR

BOTH PARTIES, WHO SHARE THE AMOUNT.


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BILLS OF EXCHANGE

BILL ENDORSED TO C. Cs a/c DR.

TO BILLS RECEIVABLE

( NO ENTRY WHEN BILL IS MET)

BILL SENT FOR COLLECTION

. BANK FOR BILL COLLECTION a/c DR.

TO BILLS RECEIVABLE

. CASH a/c DR.

TO BANK FOR BILL COLLECTION

( BILL SENT FOR COLLECTION IS MET)

.


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BILLS OF EXCHANGE

IN CASE OF DISCOUNTING

CASH a/c DR.

DISCOUNT a/c DR.

TO BILLS RECEIVABLE

( NO ENTRY WHEN BILL IS MET)

THE ENTRIES IN THE BOOKS OF DRAWEE B:.. As a/c DR.

TO BILLS PAYABLE

. BILLS PAYABLE a/c DR.

TO CASH

( BILL IS PAID)


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BILLS OF EXCHANGE

THERE ARE CASES WHEN BILLS ARE DISHONOURED. IN THAT CASE THE ENTRIES ARE AS FOLLOWS:

IN As BOOKS:BILL DIRECTLY SENT FOR PAYMENT

Bs A/C DR.TO BILLS RECEIVABLE

TO CASH( CASH IS THE NOTING CHARGE)

DISHONOUR OF DISCOUNTED BILL

. BILLS RECEIVABLE A/C DR.

NOTING CHARGES A/C DR.

TO CASH

(CASH (notary charges) IS PAID TO THE BANK)


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BILLS OF EXCHANGE

-- Bs a/c DR. TO BILLS RECEIVABLE

TO NOTING CHARGES

(BILL RETURNED TO A)

DISHONOUR OF BILL SENT BY BANK FOR PAYMENT

BILL RECEIVABLE a/c DR.

NOTING CHARGE a/c DR.

TO CASH

TO BANK FOR BILL COLLECTION( DISHONOUR OF BILL FOR COLLECTION)

. Bs a/c DR.TO BILLS RECEIVABLE

TO NOTING CHARGES

(BILL RETURNED TO B)


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BILLS OF EXCHANGE

DISHONOUR OF ENDORSED BILL

. BILLS RECEIVABLE a/c DR.

NOTING CHARGES a/c DR.

TO C

Bs a/c DR.

TO BILLS RECEIVABLE

TO NOTING CHARGES

(BILL RETURNED TO B)


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CONSIGNMENT ACCOUNT

WHEN OWNER SENDS GOODS TO HIS AGENT FOR

THE PURPOSE OF SELLING THEN IT IS CALLED

CONSIGNMENT.

IT IS DIFFERENT FROM SALE IN THAT THE

CONSIGNEE CANNOT DISPOSE OFF THE GOODS

ACCORDING TO HIS CHOICE; DOES NOT RECEIVE

ANY RISK FROM THE CONSIGNOR; CAN RETURN THE

GOODS IF NOT MARKETABLE.


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CONSIGNMENT ACCOUNT

IN CONSIGNMENT ACCOUNTING THERE ARE 3

ACCOUNTS:

CONSIGNMENT ACCOUNT; WHICH SHOWS

GOODS/STOCK AT COST INCLUDING EXPENSES

INCURRED IN SENDING THE GOODS.

CONSIGNEE ACCOUNT; WHICH IS NET OF HIS

SELLING PRICE AND THE NON-RECURRING OR

DIRECT EXPENSES INCURRED BY HIM.

GOODS SENT ON CONSIGNMENT ACCOUNT.


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CONSIGNMENT ACCOUNT

A TYPICAL CONSIGNMENT ACCOUNT WILL APPEARAS FOLLOWS:

DR.CR

To goods sent on by consignee

consignment (goods sold by(invoice value) consignee)

To bank by closing stock

(all expenses incurred by

Consignor in transporting)

To consignee

(all expenses incurred by

Consignee in selling)

To profit & loss a/c


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CONSIGNMENT ACCOUNT

NOTES: CLOSING STOCK IS VALUED AT COST/INVOICE PRICE

+ PROPORTIONATE AMOUNT OF COST INCURRED BYCONSIGNOR IN TRANSPORTING.

IF GOODS ARE LOST IN TRANSIT THE SAME METHODOF COSTING IS APPLIED AND THAT AMOUNT ISCREDITED TO THE CONSIGNMENT ACCOUNT.

NOMINAL LOSSES ARE PROPORTIONATELYCHARGED TO ALL STOCK WHETHER SOLD OR NOT.ABNORMAL LOSS IS DIRECTLY CHARGED TO P&L A/C.

APART FROM FIXED RATE OF COMMISSION ON THEGOODS SOLD AN ADDITION DEL CREDERECOMMISSION IS PAID TO THE CONSIGNEE FORENCOURAGING SALES ON CREDIT BASIS.

HOWEVER THE INHERENT RISKS REMAIN WITH THECONSIGNEE.


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JOINT VENTURE

JOINT VENTURE ACCOUNTS ARE TEMPORARY IN

NATURE ; FOR THE AD HOC PURPOSE OF AN

ASSIGNMENT UNDERTAKEN.

IT IS SIMILAR TO A PARTNERSHIP EXCEPT SUCH

ASSOCIATIONS ARE TEMPORARY IN NATURE.

ALSO IN PARTNERSHIP THE ACCOUNTING IS ON

ACCRUAL BASIS WHILE IN JOINT VENTURE

ACCOUNTING IS ON CASH BASIS.


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JOINT VENTURE

THERE ARE 3 ACCOUNTS:

-- JOINT BANK WHICH SHOWS EACH CO-VENTURERS

INVESTMENT;

-- CO-VENTURERS ACCOUNT

-- JOINT VENTURE INTO WHICH THE FINAL

PROFIT/LOSS IS TRANSFERRED.


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LEASING AND HIRE PURCHASE

FINANCIAL LEASE IS THE MOST POPULAR, LONGTERM IN NATURE, GENERALLY USEFUL FOR PLANT

AND MACHINERY.

OTHER TYPES ARE OPERATING AND SERVICE

LEASES.

LESSOR RECEIVES LEASE RENTALS, CLAIMS

DEPRECIATION.

LESSEE CHARGES THE LEASE RENTALS PAID TO THE

P & L ACCOUNT.


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THE LESSOR BREAKS UP THE RENTALS RECEIVED

INTO FINANCE INCOME AND ANNUAL LEASE CHARGE.

FINANCE INCOME = TOTAL RENTALS OVER THE

LEASE PERIOD + RESIDUAL VALUE OF LEASED ASSET

-- COST OF LEASED ASSET ( FAIR VALUE ).


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USE SUM OF DIGITS METHOD TO FIND ANNUALFINANCE INCOME.

ANNUAL LEASE CHARGE = ANNUAL LEASE RENTANNUAL FINANCE INCOME.

ANNUAL LEASE CHARGE = STATUTORY

DEPRECIATION + LEASE EQUALISATION CHARGE.

LEASE EQUALISATION CHARGE IS DEDUCTED FROMTHE LEASE RENTALS OR THE PROFIT & LOSS

ACCOUNT.


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SOMETIMES THE ANNUAL LEASE IS LESS THANSTATUTORY DEPRECIATION; THEN THE LEASEEQUALISATION CHARGE IS ADDED TO THE PROFIT &LOSS ACCOUNT.

THE LEASE EQUALISATION CHARGE ACCOUNTEDTHROUGH THE LEASE TERMINAL ADJ. A/C WHICHFINALLY IS DEDUCTED FROM THE WRITTEN DOWNVALUE OF THE ASSET.

IN CASE OF OPERATING LEASE IF THE PERIOD IS

LESS THAN 1 YEAR ( WHICH IS GENERALLY THECASE ) THEN THE ENTIRE AMOUNT IS TAKEN TO THEPROFIT & LOSS ACCOUNT.

IF THE PERIOD IS MORE THAN 1 YEAR AND THEENTIRE RENTAL IS TAKEN INTO A LEASE RENT

SUSPENCE ACCOUNT AND YEARLY RENTALS ARE


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NOTES:

FINANCE INCOME IS THE PERCEIVED RETURN ON

LEASED ASSET.

LEASE EQUALISATION CHARGE IS THE EXCESS OF

LEASE RENT AFTER DUE WEIGHTAGE IS GIVEN TO

THE RETURN ON THE LEASED ASSET AND THE

EXTENT OF DEPRECIATION CHARGED.

THIS AMOUNT IS CARRIED FORWARD IN THE

BALANCE SHEET TO BE CHARGED AGAINST THE

WRITTEN DOWN VALUE OF THE ASSET.


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Explanation

The concept of lease equalisation account isan equaliser between the capital recoveryinherent in lease rentals and thedepreciation chargeable as per CompaniesAct.

The objective of the lessor is to write-off anamount equal to the capital recoveryinherent in lease rentals, so as to leave inthe revenue statement only the financingcharges


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HIRE PURCHASE IS DIFFERENT IN THAT THE HIRERIS THE OWNER FOR THE PURPOSE OFDEPRECIATION. ALTHOUGH ACTUAL OWNERSHIPPASSES ON THE DATE OF PAYMENT OF LASTINSTALMENT.

THE HIRE PURCHASE PRICE CONSISTS OF CASHPRICE AND INTEREST.

INSTALMENT SALE IS SIMILAR EXCEPT THATOWNERSHIP PASSES ON TO BUYER AS SOON AS THE1ST INSTALMENT IS PAID.

THE 1ST INSTALMENT IN BOTH CASES IS CALLEDDOWN PAYMENT.

THE SELLER OF THE ASSET IS CALLED VENDOR


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A TYPICAL LEASE TRANSACTION IN THE BOOKS OFTHE LESSOR:

Bank a/c dr.

to lease rent

(lease rent received)

Lease rent a/c dr.

to P & L a/c

(lease rent transferred to profit)

Depreciation a/c dr.

to asset

(annual depreciation

Of the asset)

P & L a/c dr.

to depreciation


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IN THE BOOKS OF THE LESSEE :

Lease rent paid a/c dr.

to bank

(lease rent paid)

P & L a/c dr.

to lease rent

(lease rent charged to P & L)

IF LEASE RENT IS PAID FOR THE ENTIRE PERIOD THESAME IS ACCOUNTED FOR IN BANK A/C AND ANANNUAL AMOUNT IS CHARGED TO P & L A/C EVERYYEAR


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A TYPICAL TRANSACTION IN THE BOOKS OF THEHIRER:

Asset a/c dr.

to vendor(purchase of asset on H P basis-

to the extent of the amount agreed)

. Vendor a/c dr.

to bank

(down payment/instalment)

. Depreciation a/c dr.

to asset

(depn. Of asset)

. P & L a/c dr.


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NON-TRADING ORGANISATIONS

NON-TRADING ORGANISATIONS ARE NON PROFITMAKING BODIES, RENDERING SERVICES TO PUBLIC,COLLECTING MONEYS BY WAY OF MEMBERSHIPFEES, SUBSCRIPTIONS, DONATIONS. HOWEVER TOPREVENT MISUSE OF FUNDS, ACCOUNTS AREMAINTAINED.

RECEIPTS & PAYMENTS STATEMENT CONTAINSREAL

ACCOUNTS, ACTUAL RECEIPTS AND PAYMENTS,BOTH CAPITAL AND REVENUE ITEMS.

. INCOME & EXPENDITURE STATEMENT CONTAINS

NOMINAL ACCOUNTS, OF REVENUE ITEMS OF INCOME& EXPENSES FOR A FIXED PERIOD.


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NON-TRADING ORGANISATIONS

A TYPICAL WAY OF CONVERTING RECEIPTS &PAYMENTS STATEMENT INTO INCOME &

EXPENDITURE STATEMENT IS TAKE THE

RECEIPTS/PAYMENTS OF THE CURRENT YEAR

SUBTRACT THE OPENING BALANCE OF THE

CURRENT YEAR AND ADD THE CLOSING BALANCE (IF ANY ).

THE CLOSING BALANCES WILL CONSTITUTE THE

BALANCE SHEET.


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DEPRECIATION

DEPRECIATION IS A CHARGE ON PROFITS, TOACCOUNT FOR THE FALL IN THE VALUE( NOTIONALOR OTHERWISE ) OF AN ASSET DURING THE PERIODOF USE.

DEPRECIATION OR WRITING OFF OF A CERTAIN

PORTION OF AN ASSET ON AN ANNUAL BASIS IS APRUDENT WAY OF SAVINGS FOR REPLACEMENT OFTHE ASSET AFTER ITS USEFUL LIFE IS OVER.

SINCE DEPRECIATION IS AN OPERATING COST ANDTHEREFORE TAX DEDUCTIBLE, EACH YEAR THE

SAVING IS TO THE EXTENT OF (TAX RATE)* ANNUALDEPRECIATION.


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DEPRECIATION

DEPRECIATION CAN ALSO BE LOOKED IN ADIFFERENT WAY.

DEPRECIATION IS AN ACCOUNTING PROCESS FOR

THE GRADUAL CONVERSION OF THE CAPITALIZED

COST OF FIXED(TANGIBLE) ASSETS INTO EXPENSE.

SIMILARLY, INTANGIBLE ASSETS ARE CONVERTED

INTO EXPENSE BY AMORTISATION.

WHILE ASSETS SUCH AS NATURAL RESOURCES ARE

CONVERTED BY PROCESS CALLED DEPLETION.


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DEPRECIATION

IN ORDER TO CALCULATE DEPRECIATION THEREARE BASIC ISSUES TO BE ASCERTAINED :

-- ESTIMATED USEFUL LIFE OF THE ASSET(YEARS).

-- THE RESIDUAL VALUE OF THE ASSET.

-- METHOD TO BE USED FOR PROVIDING

DEPRECIATION.


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DEPRECIATION

METHODS OF DEPRECIATION :. STRAIGHT LINE METHOD. EQUAL FRACTION OF THE

NET COST(COST OF THE ASSET LESS THE RESIDUALVALUE) IS CHARGED EACH YEAR.

WRITTEN DOWN VALUE METHOD. EQUALPERCENTAGE OF THE WRITTEN DOWN VALUE IN THEBOOKS OF THE COMPANY IS CHARGED EACH YEAR.

SINKING FUND METHOD. IT IS STRAIGHT LINE

METHOD BUT THE DEPRECIATION CHARGED OR APORTION OF IT IS KEPT AS A RESERVE, INVESTED INMARKETABLE SECURITIES. THE FUND GROWS INTOREPLACEMENT VALUE OF THE ASSET.

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