JAIIB

1. JAIIB ACCOUNTING & FINANCE FOR BANKERS MODULE D PROF. S.D.BARGIR JOINT DIRECTOR, IIBF 9.11.2006 sudaaba@iibf.org.in

2. MODULE D • BALANCE SHEET EQUATION • PARTNERSHIP ACCOUNTS • COMPANY ACCOUNTS • ACCOUNTS OF BANKING COMPANIES

3. Balance sheet equation

4. Balance Sheet Equation

5. B/s EquationExamples (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 - Nominal account • Profit and Loss Account (Dr. balance) – Application of funds • Net worth less reserves & surplus - Balance in P & L Account* • Balance sheet - Financial position

6. 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

7. 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

8. Provisions of Partnership Act (apply in the absence of partnership deed) • Equal sharing of profits / losses • No interest on capital as well as on drawings • Interest on loan by partner at 6% • No salary, remuneration or commission for any extra work done

9. Goodwill & methods of valuation

10. 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

11. 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

12. 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

13. JOINT LIFE POLICYAccounting treatment • Premium is treated as expense and transferred to P & L A/c at year end like other expenses. The amount recd. from Ins. Co. on surrender of policy or death of partner is treated as income and transferred to partners’ capital a/c. • Premium is treated as asset (Jt. Life Policy A/c).At the end of every year the diff. between surrender value and book value is transferred to P & L A/c. If the amt. recd. From ins. co. is more than surrender value the excess is treated as gain and transferred to partners’ capital a/c.

14. JOINT LIFE POLICYAccounting treatment 3. Joint Life Policy Reserve A/c (JLPR) is created by transferring the premium amount from P & L Appr. A/c. Every year policy is shown at surrender value and difference between book Value and surrender value is trans. to JLPR. Thus Joint Life policy at surrender value appears at asset side and JLPR (at sur.value) appears at liabilities side. On receipt of proceeds from Ins. Co. JLPR a/c is closed by trans. the balance to Joint Life Policy a/c and the policy amount is trans. To capital a/c of partners.

15. EXAMPLES Choose the correct answer In the absence of any profit sharing ratio in a partnership agreement the profits/ losses are to be shared------ • in proportion to the time devoted in the partnership business • in proportion to the share capital contributed by each partner • equally • none of the above

16. Q.Choose the incorrect statement----- • A firm can be formed with maximum number of 10 persons for carrying banking business • A firm can be formed with maximum number of 20 persons for carrying other business • A firm can be formed with maximum number of 50 persons for carrying professional services • A private company can be formed with a maximum number of 50 persons • A public company can be formed with a maximum number of 1000 persons Q.Choose the incorrect statement----- • Issued capital is that capital which is issued to the public. It cannot exceed authorised capital. • Subscribed capital is that part of the issued capital which has been actually paid by the shareholders. • Called up capital is that part of the subscribed capital which has been called from the subscribers.

17. 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

18. Types of companies

19. SHARE CAPITAL • EQUITY • PREFERENCE • CUMULATIVE • REDEEMABLE • PARTICIPATING

20. SHARE CAPITAL • AUTHORISED CAPITAL • ISSUED CAPITAL • SUBSCRIBED CAPITAL • CALLED CAPITAL • PAID UP CAPITAL

21. ISSUE OF SHARE AT PAR

22. SHARE ALLOTMENT/SHARE CALL

23. Issue of shares at premium

24. Issue of shares at discount

25. Forfeiture of shares

26. Re-issue of shares

27. Issue of Bonus shares

28. Share capital Reserves & surplus Secured Loans Unsecured Loans Current Liabilities & Provisions -current Liabilities -Provisions -other provisions Fixed Assets Investments Current Assets, Loans & Advances Current assets Loans & advances Miscellaneous Expenditure ( to the extent not w/o) Profit & Loss Account Schedule VI to Companies ActPart I- form of Balance sheet

29. 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

30. Profit & Loss Account

31. FINAL ACCOUNTS OF BANKING COMPANIES • Definition • Requirements –Accounts & audit • Third Schedule annexed to Banking Regulation Act • Form A- Balance sheet • Form B- Profit & Loss Account • Audit • Submission of accounts- RBI- within 3 months • Publication of accounts- within 6 months

32. Balance sheet-Form A

33. 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.

34. PROFIT & LOSS ACCOUNT-FORM B

35. NOTES TO ACCOUNTS

36. 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%/ 0.40% • Sub-Std.<18 months-10% • Doubtful>18 months-usl-100%-secured.3yrs-50%,>1&<3-30%-upto 1year-20% • Loss assets-100%

37. EXAMPLE Q.Choose the item which is not part of “ other Income” in case of banking companies. • Commission , Exchange and brokerage • Income on investments by way of interest and dividends • Income earned by way of dividends etc. from subsidiaries, joint ventures abroad/ in India • 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 • 13,14,15,16 • 13,15,16,14 • 13,15,14,16 • 13,14,16,15

38. EXAMPLE Q. Which of the following are true----- • 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 • 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----- • Premises wholly owned by the banking company for the purpose of banking business • Other fixed Assets ( including furniture and Fixtures) , Motor Vehicles • 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. • Non banking assets acquired in satisfaction of claims would include immovable properties /tangible assets acquired in satisfaction of claims.

39. EXAMPLE 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----- • One month from the end of the period to which they refer • Six month from the end of the period to which they refer • Three month from the end of the period to which they refer • Nine month from the end of the period to which they refer

40. EXAMPLES • If Rs.10 share has been issued at a premium of Rs.5, on which entire amount has been called up, has been forfeited for non payment of Rs. 4, the ‘Share Capital Account’ will be debited by----- • Rs.15 • Rs.10* • Rs.4 • Rs.6

41. Examples Choose the item which will appear last in respect of share capital in company balance sheet • Paid up capital • Calls in advance* • Subscribed capital • Issued capital

42. Examples • A B and C are sharing profits in the ratio of 2:2:1. C retired from the business and his share was given equally to A and B. The new profit sharing ratio will be ----- • 1:1 • 3:2 • 2:3 • None of the above

43. EXAMPLES • XL,YK and ZP 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) XL used Rs.21,000 belonging to the firm and made a profit of Rs.4,000. YK wants the amount to be given to the firm (ii) ZP used Rs.5,000 belonging to the firm and suffered a loss of Rs. 3000. He wants the firm to bear the loss (iii) XL & YK wishes to appoint TS as new partner. ZP does not agree (iv) XL has given loan of Rs. 100,000 to the firm, he wants interest at 6% ( there is no partnership deed) • YK is right .XL must pay Rs.25,000 to the firm • ZP is right . Firm should bear profit as well as losses. • ZP is right. No new partner can be admitted without the consent of all. • XL is right. He is entitled for interest at 6% in the absence of partnership agreement.

44. EXAMPLES Choose the wrong pair from the following. The information given in the pair is pertaining to banking companies • Notes to the balance sheet - Difference between book value and market value of government securities • Letter of credit - Advances* • Demand loan - tenure less than a year • Fixed Assets - Depreciation to date

45. Examples • The provisional requirement for standard asset is----- • 0.40%(revised) of total outstanding • 10%(revised) of total outstanding • 40%(revised) of total outstanding • 100%(revised) of total outstanding

46. Examples • INVESTMENTS, ADVANCES, FIXED ASSETS AND OTHER ASSETS ARE PART OF SCHEDULE NOS.--RESPECTIVELY • 6,7,8,9 • 7,8,9,10 • 8,9,10,11 • 9,10,11,12

47. Examples • The scheduled banks are required by RBI to transfer at least ------ of their disclosed profit. • 25% • 20% • 10% • None of the above

48. Examples One of the accounts is wrongly debited to “Profit and Loss Appropriation A/c” of a company. Name the wrong account debited • Capital redemption reserve • Interim dividend • Proposed dividend • Provision for tax

49. Examples • SD 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. • Credit Forfeited shares Account by Rs.200 • Credit Share allotment Account by Rs.200 • Credit share premium Account by Rs.100 • Credit Share first call Account by Rs.200

50. . THANK YOU WISH YOU BEST OF LUCK