Bookkeeping AND FINANCE BANKERS J An I B PAPER-2 MODULE C

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Points. BANK RECONCILIATIONTRIAL BALANCECAPITAL

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Bookkeeping AND FINANCE BANKERS J An I B PAPER-2 MODULE " C " By RAVI ULLAL CONSULTANT

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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 Organizations DEPRECIATION MODEL QUESTIONS

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BASICS OF ACCOUNTING DOUBLE ENTRY SYSTEM 3 TYPES OF ACCOUNTS: - REAL : ASSETS OF BUSINESS, TANGIBLE AND IDENTIFIABLE. - PERSONAL : THEY ARE HEADED WITH THE NAME OF PERSON/BUSINESS/FIRM. Indebted individuals 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 THE PRINCIPLE OF DOUBLE ENTRY. CREDIT THE GIVER AND DEBIT THE RECEIVER B. R. Demonstrates CAUSES OF DIFFERENCES BETWEEN CASH BOOK AND PASS BOOK BALANCE DEBIT BALANCE AS PER CASH BOOK IS CREDIT BALANCE AS 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 BOOK RECONCILIATION ENTRIES WILL REMAIN SAME AS PER PRINCIPLES

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BANK RECONCILIATION STATEMENT CAUSES OF DIFFERENCES TREATMENT CASH/PASS BOOK DT. CR. . Checks ISSUED BUT NOT PRESENTED √ Checks DEPOSITED BUT NOT COLLECTED √ BANK CHARGES √ INTEREST ON SAVINGS BANK √ INTEREST ON LOAN √ AMOUNT PAID BY BANK AS PER √ STANDING INSTRUCTIONS . Coordinate PAYMENTS MADE BY CUSTOMERS √ . Shame OF Checks RECEIVED √

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BANK RECONCILIATION STATEMENT CAUSES OF DIFFERENCES TREATMENT CASH/PASS BOOK DT. CR. . Installments SIDE OF CASH BOOK UNDERCAST √ . Store SIDE OF CASH BOOK OVERCAST √ . Check ISSUED BUT NOT TAKEN IN BANK COLUMN √ . Charge BALANCE X BROUGHT FORWARD AS CREDIT BALANCE 2X . Check ISSUED BUT RECORDED TWICE √

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BANK RECONCILIATION STATEMENT IMPORTANT : WHETHER WE ARE RECONCILING PASS BOOK OR CASH BOOK , EACH OF THE RECTIFICATION ENTRIES WILL APPEAR ON THE SAME SIDE . Expansion OR SUBRACTION OF ENTRIES FROM THE OPENING OR GIVEN BALANCE DEPENDS UPON WHICH SIDE OF THE LEDGER THEY ARE CAST OR TO BE CAST. Along these lines 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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BANK RECONCILIATION STATEMENT 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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BANK RECONCILIATION STATEMENT ADVANTAGES OF BANK RECONCILIATION . Confirmation OF ACCURACY OF ENTRIES . Convenient CORRECTIVE ACTION . Forestalls 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 CORRECT ONE 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/ - . Amendment : CREDIT SALARY WITH 9000/ - . B) SALARY PAID 1000/ - BUT POSTED IN RENT A/C. Amendment : DEBIT SALARY AND CREDIT RENT WITH 1000/ - . C) GOODS WORTH 100/ - SOLD TO VIJAY WRONGLY RECORDED IN PURCHASE REGISTER. Correction : 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 PAID 500/ - POSTED AS 5000/ - . . Amendment: DEBIT SALES WITH 4500/ - , CREDIT SUSPENCE WITH 4500/ - , CREDIT RENT WITH 4500/ - , DEBIT SUSPENCE WITH 4500/ - . E) SALARY PAID AS 1000/ - BUT POSTED AS 10,000/ - IN RENT A/C. Correction : DEBIT SALARY WITH 1000/ - SUSPENCE WITH 9000/ - ; CREDIT RENT WITH 10000/ - F) A PURCHASER'S DEBIT BALANCE OF 9000/ - HAS NOT BEEN TAKEN. Amendment: DEBIT DEBTORS, CREDIT SUSPENCE TO THE 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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CAPITAL AND REVENUE EXPENDITURE 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 . Keep up ASSETS IN WORKING CONDITION

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CAPITAL & REVENUE EXPENDITURE CAPITAL RECEIPTS/PAYMENTS: ARE USUALLY LARGE(RELATIVELY) ARE NON-RECURRING IN NATURE THE BENEFITS ARE OVER LONGER DURATION THE PURPOSE IS TO ENHANCE PRODUCTIVITY OF THE ASSETS

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CAPITAL AND REVENUE EXPENDITURE THERE ARE CERTAIN EXPENDITURES WHICH ARE OTHERWISE REVENUE IN NATURE BUT SOMETIMES UNUSUALLY LARGE AND WHOSE BENEFIT TO THE Organization 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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CAPITAL AND REVENUE EXPENDITURE 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 & REVENUE CLASSIFICATION. FOR INSTANCE REPAIRS TO MACHINERY WHICH KEEPS THE ASSET IN WORKING CONDITION IS CHARGED TO THE P & L A/C WHILE BETTERMENT EXPENSE IS Capitalized.

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CAPITAL & REVENUE EXPENDITURE 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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CAPITAL AND REVENUE EXPENDITURE 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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CAPITAL AND REVENUE EXPENDITURE 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 OF STOCKS IS IMPORTANT FROM THE POINT OF INCOME DETERMINATION. THE DANGER COULD BE OF EITHER OVERVALUATION OR UNDERVALUATION OF STOCKS RESULTING IN OVERSTATING OR UNDERSTATING OF PROFIT

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