Accounting and Finance for Bankers: Final Accounts of Banks and Cos

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

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

3. PARTNERSHIP ACCOUNTS • Introduction • Definition • Partnership deed

4. 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

5. 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

6. 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

7. Methods of goodwill

8. 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)

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

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

11. RETIREMENT • 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

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: • Partners Old Ratio New Ratio Loss(Sacrifice)/ • Gain • A 1/2 1/3 –1/6 • B 1/2 1/3 –1/6 • C Nil 1/3 +1/3 • Sacrificing Ratio = Old ratio  (–)  New ratio.

13. examples • Entries to be passed for Goodwill: • 1. When the new partner pays the goodwill privately: • 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: • (a) Cash/Bank a/c Dr. •   To Goodwill a/c • (b) Goodwill a/c Dr. •   To Old partners’ capital a/c • (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: • (a) Cash/Bank a/c Dr. •   To Goodwill a/c • (b) Old partners’ capital a/c Dr. •   To Cash/bank a/c

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: • Goodwill a/c Dr. •   To Old partners’ capital a/c • (In old profit sharing ratio) • 5. When new partner does not bring cash for goodwill but goodwill is raised and written off immediately: • (a) Goodwill a/c Dr. •   To Old partners’ Capital a/c • (In old profit sharing ratio) • (b) All partners’ capital a/c Dr. (including new one) •      To Goodwill a/c • (In new profit sharing ratio)

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: • Old Ratio New Ratio Net Gain/Loss • A 5/10 Nil — • B 3/10 3/5 + 3/10 (3/5 – 3/10) • C 2/10 2/5 + 2/10 (2/5 – 2/10) • 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: • Old Ratio New Ratio Net Gain/Loss • A 5/10 — (–) 5/10 i.e 1/2 • B 3/10 5/8 + 13/40 (5/8 – 3/10) • C 2/10 3/8 +  7/40 (3/8 – 2/10) • Gain ratio will be 13/40 : 7/40 i.e. 13 : 7.

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 • The chart below depicts gain of the continuing partners. • Partners Old Ratio New Ratio Gain • A 1/3 1/2 +1/6 • B 1/3 1/2 +1/6 • C 1/3 Nil (1/3) • Entries if only C’s share of goodwill is raised for above will be: • (a) Goodwill a/c Dr. Rs 30,000 •   To C’s Capital a/c Rs 30,000 • (b) A’s Capital a/c Dr. Rs 15,000 • B’s Capital a/c Dr. Rs 15,000 •   To Goodwill a/c Rs 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. • 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. examples • A and B share profits in the ratio of 70% and 30% respectively as on 31st December 2003. 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 • Stock increased by Rs 5200, Building(Rs.26000/-) and Truck(Rs. 17000) 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. examples • Jan. 2004 Sundry debtors a/c   Dr. 5,000 • Goodwill a/c Dr. 4,000 • Cash a/c Dr. 13,100 • (balancing figure) •   To Creditors a/c 1,600 •   To Provision for bad debt 500 •   To C’s capital a/c 20,000 • (Being various assets brought by C • towards his capital recorded in books)

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

20. examples • General Reserve a/c Dr. 5,400 •   To A’s capital a/c 3,780 •   To B’s capital a/c 1,620 • (Being general reserve distributed in • old profit sharing ratio) • Cash a/c Dr 2,600 •   To A’s Capital a/c 1,620 •   To B’s Capital a/c 980 • (Being cash brought in by old partners)

21. examples • 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. • (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. • (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.

22. examples • 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. • (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. • (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. • (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. • (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.

23. examples • 11) Prepare the Profit and Loss account of Modern Bank Ltd. for the year ended 31st March, 2003, from the following: •   Rs • Interest on Fixed Deposits 1,62,410 • Rebate on Bills discounted 29,000 • Interest on Loans 45,000 • Commission Charged to Customers 62,500 • Establishment 15,000 • Discount on Bills Discounted 89,000 • Interest on Cash Credit 24,000 • Amount Charged against Current Accounts 71,500 • Directors’ Fees 10,000 • Audit Fees 20,000 • Postage and Telegram 2,000 • Printing and Stationery 4,000 • Rent and Taxes 22,500 • Interest on Overdrafts 71,000 • Sundry Charges 1,500 • Interest on Savings Bank Deposits 57,780

24. examples • Profit & Loss Account for the year ended 31st March 2003 • Schedule No. Rs • I. Income • Interest Earned 13 2,71,500 • Other Income 14 62,500 • Total 3,34,000 • II. Expenditure • Interest Expended 15 2,20,190 • Operating Expenses 16 75,000 • Provision for Contingencies — • Total 2,95,190 • III. Profit • Net Profit for the year 38,810

25. examples • Schedules to be annexed with Profit and Loss Account • Schedule13: Interest Earned • Interest on: • Loan 45,000 • Cash Credit 24,000 • Overdrafts 71,000 1,40,000 • Discount on Bills discounted 89,000 • Less: Rebate on Bill Discounted 29,000 60,000 • Amount charged against current accounts 71,500 • 2,71,500 • Schedule 14: Other Income • Commission charged to customer 62,500 • Schedule 15: Interest Expended • Interest paid on •       Fixed Deposits 1,62,410 •       Savings Bank Deposits 57,780 • 2,20,190

26. examples • Schedule 14: Other Income • Commission charged to customer 62,500 • Schedule 15: Interest Expended • Interest paid on •       Fixed Deposits 1,62,410 •       Savings Bank Deposits 57,780 • 2,20,190

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

28. Joint life policy

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

30. 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

31. Balance sheet-Form A

32. 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

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. 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

37. 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

38. 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

39. 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-0.40% (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%

40. SLR & NON SLR DEPOSITS

41. COMPANY ACCOUNTS • Features of a Joint Stock Company • 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. • 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. • 3. Perpetual succession: • A company has a perpetual succession. Death, or insolvency of any shareholder does not affect existence of the company. • 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. • 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.

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 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. Types of companies

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

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

46. ISSUE OF SHARE AT PAR

47. SHARE ALLOTMENT/SHARE CALL

48. Issue of shares at premium

49. Issue of shares at discount

50. Forfeiture of shares