JAIIB

ACCOUNTING & FINANCE FOR BANKERS

SYLLABUS
Candidates are advised to refer to financial news papers / periodicals more particularly
“IIBFVISION”and“BANKQUEST”publishedbyIIBF.

MODULE A –BUSINESS MATHEMATICS AND FINANCE

CalculationofInterestandAnnuities
Calculation of Simple Interest & Compound Interest

Calculation of Equated Monthly Instalments

Fixed and Floating Interest Rates

Calculation of Annuities

Interest Calculation using Products/ Balances

Amortisation of a Debt

SinkingFunds

CalculationofYTM
Debt- Definition, Meaning & Salient Features

Loans

Introduction to Bonds; Terms associated with Bonds

Cost of Debt Capital

Bond value with semi-annual Interest

Current Yield on Bond

CalculationofYield-to-MaturityofBond

TheoremsforBondValue;DurationofBond;PropertiesofDuration;BondPriceVolatility
CapitalBudgeting
PresentValueandDiscounting;DiscountedTechniqueforInvestmentAppraisal;InternalRateofReturn(IRR);Method
ofInvestmentAppraisal;NPVandIRRcompared;InvestmentOpportunitieswithCapitalRationing;InvestmentDecisi
onmakingunderconditionofuncertainty; Expected NPV Rule; Risk Adjusted Discount Rate Approach for NPV
Determination;Sensitivity Analysis for NPV Determination; Decision Tree Analysis for NPV Estimation;
PaybackMethods; ARR.

DepreciationanditsAccounting
Depreciation,itstypesandmethods;ComparingDepreciationMethods

ForeignExchangeArithmetic
FundamentalsofForeignExchange;Forex Markets;DirectandIndirectQuote;SomeBasicExchange Rate Arithmetic
– Cross Rate, Chain Rule, Value date, etc.; Forward Exchange Rates –ForwardPoints;Arbitrage;
CalculatingForwardPoints;Premium/discount; etc.

MODULEB–PRINCIPLESOFBOOKKEEPING&ACCOUNTANCY Definition,Scopeand

AccountingStandards
Nature and Purpose of Accounting; Historical Perspectives; Origins of Accounting Principles;Accounting
Standards in India and its Definition and Scope; Generally Accepted AccountingPrinciples of USA (US GAAP);
Transfer Pricing; Overview of IFRS; Difference between GAAP &IFRS.

BasicAccountancyProcedures
ConceptsofAccountancy;GoingConcernEntity;DoubleEntrySystem;PrincipleofConservatism;RevenueRecognitio
n andRealisation; AccrualandCash Basis.

MaintenanceofCash/SubsidiaryBooksandLedger
RecordKeepingBasics;AccountCategories;DebitandCreditConcepts;AccountingandColumnarAccountingMecha
nics; Journals; Ledgers; subsidiarybooks;etc.

BankReconciliationStatement
NeedforBankReconciliation;CausesofDifferences;PreparationofBankReconciliationStatement; How to prepare
a Bank Reconciliation Statement when Extracts of Cash Book
andPassBookaregiven;AdjustingtheCashBookBalance;AdvantagesofBankReconciliationStatement.

TrialBalance,RectificationofErrorsandAdjusting&ClosingEntries
Meaning of a Trial Balance; Features and Purpose of a Trial Balance; Types of Trial Balance andPreparation of
a Trial Balance; Disagreement of a Trial Balance; Classification of Errors; Locationof Errors; Rectification of
Errors; Suspense Account and Rectification; Rectification of ErrorswhenBooks
areclosed;AdjustingandClosingEntries.

CapitalandRevenueExpenditure
Expenditure;DistinctionbetweenCapitalandRevenueExpenditure;DeferredRevenueExpenditure;
Receipts;GeneralIllustrations.

BillsofExchange
TypesofInstrumentsofCredit;TermandDueDateofaBill;CertainImportantTerms;AccountingEntriestobePassed;A
ccommodationBill etc.

MODULEC–FINALACCOUNTS

BalanceSheetEquation
BalanceSheetEquation;ComputationofBalanceSheetEquation.

PreparationofFinalAccounts
PreparationofTradingA/C;ProfitandLossA/C;Profit&LossAppropriationA/C;Balance sheets

RatioAnalysis
Meaning of Accounting Ratios; Classification of Ratios; Uses of Accounting Ratios; Limitations ofAccounting
Ratios; Calculation and interpretation of various Ratios; Different Users and theirUse ofRatios.

FinalAccountsofBankingCompanies
Definition and Functions of a Bank; Requirements of Banking Companies as to Accounts
andAudit;SignificantFeaturesofAccountingSystemsofBanks;PrincipalBooksofAccounts;PreparationandPresenta
tionofFinancialStatementsofBanks;CMAFormat;AccountingTreatment of Specific Items; Preparation of Profit
and Loss Account; Comments on Profit andLoss Account; Important Items of Balance Sheet; Disclosure
Requirements of Banks; AdditionalDisclosuresprescribed by RBI;Disclosures required underBASELnorms.

CompanyAccountsI &II
DefinitionandTypesofCompanies;DistinctionbetweenPartnershipandLimitedLiabilityCompany; Classes of Share
Capital; Issue of Shares; General Illustrations Non-voting Shares;Form of Balance Sheet; Legal Requirements
for Assets; Legal Requirements for Liabilities; LegalRequirementsforProfit&LossA/c;Preparationof Final
Accounts

AccountinginaComputerizedEnvironment
Meaning,FeaturesofandTermsusedinComputerizedAccounting;DifferencebetweenComputerizedandManualAc
counting;AdvantagesandDisadvantagesofComputerizedAccounting;FunctionsperformedbyComputerizedAcco
untingSoftwaresavailableintheMarket; Computerization – Scope and Experiences in Banking; The Core
Banking Components;InformationSecurity;Internet andWorldWideWeb–Influences onBanking

MODULED–BANKINGOPERATIONS

BankingOperations&AccountingFunctions
PreparationofVouchers,cashreceiptandpaymententries,clearinginwardandoutwardentries, transfer debit and
credit entries, what is KYC and what are the different documents tosatisfy KYC, verify KYC and authenticity of
documents, operational aspects in regard to
openingofalltypesofaccounts,scrutinyofloanapplications/documents,allowingdrawalsandaccounting
entriesinvolvedatvarious stages, operational aspects of CBS
environmentetc.,Backofficeoperationsinbanks,handlingofunreconciled entriesinbanks
 Accounting&FinanceforBankers

Module-A

SimpleInterest

'Simple'interestor'flatrate'interestistheamountofinterestpaideachyearinafixedpercentageof
theamount borrowed or lent atthestart.

Formulaforcalculatingsimple interest:
Interest= PrincipalxRatexTime(PRT),where:
'Interest'isthe totalamount of interestpaid

'Principal'istheamountlentorborrowed

'Rate'is the percentageofthe principal charged as interesteachyear.

'Time'isthe timein yearsof theloan.

Example:

Principal:'P'=Rs.50,000,Interestrate:'R'=10%=0.10,Repaymenttime:T=3years.Findtheamountofinterest
paid.

Interest=PRT
=50,000x0.10x3
=Rs.15,000/-
……………………………………………………………………………………………………………

CompoundInterest

Compound interest is paid on the original principal and accumulated part of

interest.Formulaforcalculatingcompoundinterest:
P=A(1 +r/n)^nt,where
P =theprincipal
A= theamount deposited
r=therate(expressedasfraction,e.g.6 percent=0.06)n =
number of times per year that interest is compoundedt=
numberofyearsinvested
Frequently compounding of Interest. If the interest is
compounded :Annually=P(1 + r)
 Quarterly = P (1 +
r/4)^4Monthly=P(1+r/12)
^12

Example:

The compound interest on Rs. 30,000 at 7% per annum is Rs. 4347. The period (in years)
is:Amount= Rs. (30000 +4347)=Rs.34347.
Letthe time benyears.Then

30000(1+7/100)^n =
34347(107/100)^n=34347/
30000(107/100)^n=11449/
10000(107/100)^n=(107/10
0)^2
n =2years.

The Rule of 72: Allows you to determine the number of years before your money doubles whether
indebtorinvestment.Dividethe number72 bythepercentagerate.
……………………………………………………………………………………………………………

EQUATEDMONTHLYINSTALMENTS(EMIs)

Equated Monthly Installment (EMI) refers to the monthly payment a borrower makes on his
loan.Though it is a combination of interest payment and principal repayment, the total monthly
amount iscalculated in such a way that it remains constant all through the repayment tenure. In
EquatedMonthly Installments (EMIs), the principal and the interest thereon is repaid through equal
monthlyinstallment over the fixed tenure of the loan. The benefit of an EMI for borrowers is that
they knowprecisely how much money they will need to pay toward their loan each month, making
the personalbudgetingprocesseasier.

Formula:

E=P×r×(1+r)n/((1 +r)n -1)

Eis EMI
wherePisPrincipleLoanAmount
r is rate of interest calculated in monthly basis it should be = Rate of Annual
interest/12/100ifits 10%annual ,then its10/12/100=0.00833
nistenureinnumberofmonths
Example:

For 100000 at 10% annual interest for a period of 12 months, it comesto :

100000*0.00833*(1+0.00833)12/((1+0.00833)12-1) =8792

PresentValue

Present value describes how much a future sum of money is worth today. Three most
influentialcomponents of present value are : time, expected rate of return, and the size of the future
cash flow.The concept of present value is one of the most fundamental and pervasive in the world of
finance. Itisthe basis for stock pricing, bond pricing,financialmodeling,banking,insurance,pension
fundvaluation. It accounts for the fact that money we receive today can be invested today to earn
areturn.Inotherwords,presentvalueaccountsforthe timevalueofmoney.

Theformulaforpresentvalue is:
PV=CF/(1+r)n

Where:
CF= cashflowinfutureperiod
r = the periodic rate of return or interest (also called the discount rate or the required rate of
return)n= numberofperiods

Example:

Assume that you would like to put money in an account today to make sure your child has
enoughmoney in 10 years to buy a car. If you would like to give your child 10,00,000 in 10 years, and
youknow you can get 5%interestper year froma savingsaccount during that time,how much
shouldyouputin the account now?

PV=10,00,000/(1+.05)10=6,13,913/-

Thus, 6,13,913 will be worth 10,00,000 in 10 years if you can earn 5% each year. In other words,
thepresentvalueof10,00,000inthis scenariois6,13,913.

……………………………………………………………………………………………………………

FutureValue

The value of an asset or cash at a specified date in the future that is equivalent in value to a
specifiedsumtoday.It referstoa method ofcalculatinghowmuchthe presentvalue (PV)of an asset
orcashwill beworthat a specifictimeinthefuture. There aretwowaystocalculate FV:
Foranassetwithsimpleannualinterest:=OriginalInvestmentx(1+(interestrate*numberofyears))

Foranassetwithinterestcompoundedannually:=OriginalInvestmentx((1+interestrate)^numberofyears)

Depending on the rate of interest, the amount you receive in future(A), will be more than
theamount(P)available now.
A=P(1+r)T,whenthe compoundingisyearly.
Therefore,FV=PresentAmount*(1+r)T. We call(1+r)Tcompounding factor.
E.g.,ifrateofinttis10%p.a.,r=0.10.Therefore,compoundingfactoris1.10for1year,(1.10) 2
=1.21for2 yearsandsoon.
In above example,FV of Rs 100 , after 2 years will be, 100*(1.10) 2=100*1.21=Rs
121.Similarly,FVofRs100, after5years,will be100*(1.10) 5

Example:

10,000investedfor 5yearswithsimpleannualinterestof10%wouldhave afuturevalue of

FV=10000(1+(0.10*5))
=10000(1+0.50)
=10000*1.5
=15000

10,000 invested for 5 years at 10%, compounded annually has a future value of
:FV= 10000(1+0.10)^5)
=10000(1.10)^5
=10000*1.61051
=16105.10
……………………………………………………………………………………………………………

Annuities

Annuities are essentially a series of fixed payments required from you or paid to you at a
specifiedfrequency over the course of a fixed time period. The most common payment frequencies
are yearly,semi-annually (twice a year), quarterly and monthly. There are two basic types of
annuities: ordinaryannuitiesandannuities due.

Ordinary Annuity: Payments are required at the end of each period. For example, straight
bondsusuallypaycouponpaymentsat the endofeverysixmonthsuntil thebond'smaturity date.
Annuity Due: Payments are required at the beginning of each period. Rent is an example of
annuitydue. You are usually required to pay rent when you first move in at the beginning of the
month, andthenonthe firstof each month thereafter.

E.g. Payment of Rs 1000 every year by LIC for next 20 years . Also, a Recurring
depositwith bankforRs100for5years.
2typesofAnnuities.OrdinaryAnnuity;paymentisattheendoftheperiod.AnnuityDue;paymen
tis atthebeginning ofeach period.

……………………………………………………………………………………………………………

PresentValueandFutureValue ofanAnnuity

For calculating PV of Annuity, PV of each payment is calculated and added. E.g. if Rs100 is
paid at the end of each year for 10 years, we calculate PV of each of these
10paymentsofRs100 separately andaddthese10values.
Similarly,forcalculatingFVofAnnuity,FVofeachpaymentiscalculatedandadded.
E.g. if Rs 100 is paid at the end of each year for 10 years, we calculate fv of each
ofthese10paymentsofRs100 separately andadd these10values.

The present value an annuity is the sum of the periodic payments each discounted at the given
rateofinteresttoreflectthe timevalueofmoney.
PVofanOrdinaryAnnuity=R(1−(1+i)^-n)/iPV of an
Annuity Due = R (1 − (1 + i)^-n)/i × (1 + i)Where,
iistheinterestrate percompoundingperiod;
n are the number of compounding periods;
andRisthefixed periodic payment.

In the formulae, given, we have to correctly arrive at r, i.e.the interest rate. E.g.the given
inttrateis12%p.a.Ifthepaymentisreceivedyearly,rwillbeequalto12/100=0.12.Butifpaymentisre
ceivedmonthly,itwillbe12/100*12=0.01.Forquarterlypayment,itwillbe

0.03 andforhalf yearlypayment,itwillbe0.06

Example:

Calculate the present value on Jan 1, 2015 of an annuity of 5,000 paid at the end of each month
ofthecalendaryear 2015.Theannual interestrate is12%.
Solution

Wehave,
PeriodicPayment R=
5,000NumberofPeriods
n=
12InterestRate

i=12%/12=1%PresentValue
PV=5000×(1-(1+1%)^(-12))/1%
=5000×(1-1.01^-12)/1%
=5000×(1-0.88745)/1%
=5000×0.11255/1%
=5000×11.255
=56,275.40
A certain amount was invested on Jan 1, 2015 such that it generated a periodic payment of 10,000at
the beginning of each month of the calendar year 2015. The interest rate on the investment
was13.2%.Calculatetheoriginal investment andthe interest earned.

Solution

PeriodicPayment R=
10,000NumberofPeriods
n=12
InterestRate i=13.2%/12=1.1%
OriginalInvestment =PVof annuity dueonJan1,2015
=10,000×(1-(1+1.1%)^(-12))/1.1%×(1+1.1%)
=10,000×(1-1.011^-12)/0.011×1.011
=10,000×(1-0.876973)/0.011×1.011
=10,000×0.123027/0.011×1.011
=10,000×11.184289×1.011
=1,13,073.20
InterestEarned=10,000×12−1,13,073.20
=1,20,000–1,13,073.20
=6926.80
……………………………………………………………………………………………………………

Sinkingfund

ConceptsameasthatofAnnuity
Suppose,you needafixed amount(A)after,say, 5 years. You deposit an amount(C)everyyear with a
bank. This becomes A after 5 years and can be used for repaying a debt or anyother purpose.
Astherateof inttandtheFVis known,wecancalculate C.
 UnderstandingFormulaforEMI, Annuities

Let us take case of a home loan of Rs 1lac at 12%p.a. ,repayable in 180 installments
(herep=1,00,000andr=12/100*12=.01)
In the 1stmonth, bank will charge interest equal to p*r=Rs 1000 and so, the
outstandingamountwill becomeRs1,01,000.
What happens if the EMI is fixed at p*r, which is Rs 1000?This EMI will meet only the
interestapplied and so the principal will remain unchanged at Rs 1,00,000.This process will
continueandtheloanwillremainoutstandingforever.Therefore,EMIhastobeslightlymorethanp*
rsothat someamountcango towards reducingtheprincipal amount
If EMI hastobemorethanp*r, weshouldmultiplyp*rbya figwhichismorethan1.
This fig is (1+r)n/ (1+r)n-1.You will observe that denominator in less than numerator by 1only. E.g.,
if numerator is 4.3210, the denominator will be 3.3210 .So, this fig is always morethan1.
As you know, (1+r)nis an important fig in business maths, and if the above concept is clear,youwill
never havedifficulty in rememberingEMI formula
Once you are comfortable with EMI formula, you can derive yourself the formula for PV andFVof
Annuities.
Home loan is like an ordinary annuity in which payment takes place at the end of each monthfor
an amount equal to EMI, and p is like the present value of annuity. Therefore, in aquestion, if
periodic payment ,n and r are given, you can calculate PV. FV is calculated bymultiplyingPV
by(1+r)n.
In case of annuity due, the payments are at the beginning of the period and not at the end
asisthecase withordinary annuity.Therefore,both PVandFVwillbe
morethanwhatisarrivedincaseofordinaryannuity.Themultiplyingfactor is (1+r)

Bond
ValueDebt

DEBT means a sum of money due by certain and expresses agreement. In a less technical sense,
itmeans a claim for money. Loans from banks or financial institutions are one of the popular forms
ofdebt.

Bonds
Debt capital consists of mainly bonds and debentures. The holder of debt capital does not receive
ashare of ownership of the company when they provide funds to the firm. Rather, when a
companyfirst issues debt capital, the providers of debt capital purchase a debenture, which involves
lendingmoney to the firm. In return for loaning this money, bond holders have a right to certain
guaranteedpaymentsduringthelifeofthebond.
 ABondisaformof debtraisedbytheissuerofthe bond.
Issuerofthebondspaysinteresttothepurchaserforusinghismoney.
Terms associated with bonds: Face value, Coupon rate, Maturity, Redemption
value,Marketvalue.
Facevalueandredemptionvaluemaybedifferentbutthesearefixedandknown.
Market valueofthebond maybedifferentformthefacevalueand keepschanging.

For example : a company issued a bond of a face value of Rs. 100 carrying a coupon rate of 10
percent for ten years. This entitles the bondholder to receive Rs. 10 (10 per cent of Rs. 100) for ten
yearsas interest. At the end of tenth year, the bondholder is also entitled to receive back the
investedamount of Rs. 100. Irrespective of the level of profits or losses, which company makes during
thatperiodof tenyears,the bondholderis entitledtoreceivethe couponinterest duringthatperiod.
………………………………………………………………………………………………………………
TermsAssociatedwithBonds

FaceValue: Alsoknownastheparvalueandstatedonthefaceofthebond.Itrepresentstheamountborrowed
bythe firm,whichitpromisestorepayafter aspecified period.
Couponrate:A bondcarries aspecificrateofinterest,whichis also calledasthecouponrate.
Maturity:Abondisissuedfor aspecified period.Itis to berepaidonmaturity.
RedemptionValue:
Thevalue,whichthebondholdergetsonmaturity,iscalledtheredemptionvalue.Abondisgenerally
issuedatadiscount(lessthanpar value)andredeemedat par.
MarketValue: Abondmaybetradedonastockexchange.Marketvalueisthepriceatwhichthebondisusually
boughtor soldin themarket.
………………………………………………………………………………………………………………
BondValue

Thepurchaserofthebondsgetsregularinterestpaymentsasalsotheredemptionamounto
nmaturity.

The interest on bond (also called coupon rate) is fixed at the time of its issue. Butinterest
rate in the market keeps changing, and, therefore, market price of bond alsochanges.
The market price or intrinsic value of a bond is different from the face value if
thecouponrate isdifferentfrom themarketinterestrate atthatparticulartime.
MarketvalueisequaltoPVofallthecouponreceiptsandredemptionvaluediscountedatthepre
vailing market rate.

A bond, whosepar valueisRs. 1,000, bears a coupon rate of 12 per centandhas a maturity periodof3
years. Therequiredrateof returnonthe bondis10per cent.Whatisthevalueofthis bond?
Solution

Annual interest payable = 1,000 * 12% =

120Principal repayment at the end of 3 years = Rs.
1,000Thevalueof thebond
=120(PVIFA10%,3yrs)+Rs.1,000 (PVIF10%, 3yrs)
=120(2.487)+1,000(0.751)
=298.44+751
=Rs.1,049.44
………………………………………………………………………………………………………………
A bond, whose par value is Rs. 1000, bears a coupon rate of 12 per cent payable semi-annually
andhasa maturityperiod of 3 years.The requiredrate ofreturn on bondis 10percent.What is
thevalueof thisbond?

Solution

Semi-annual interest payable = 1,000 x 12 per cent/2=

60Principalrepayment at theendof3years= Rs. 1,000
Thevalueof thebond
= 60 (PVIFA 10%/2, 6 pds) + Rs. 1,000 (PVIF 10%/2, 6 pds)
=60(5.0746)+1,000(0.746)=304.48+746=1,050.48
………………………………………………………………………………………………………………
The face value of the bond is Rs. 1,000, coupon rate is 11 per cent, years to maturity is seven
years.Therequiredrateof returnis13 percent,andthenthepresent valueof thebondis
110xPVIFA(13per cent,7) +1,000(PVIF 13percent,7)
110(4.423)+1,000(0.425)=911.53
One year from now, when the maturity period will be six years, the present value of the bond will
be110xPVIFA(13per cent,6) +1,000(PVIF13 percent,6)
110(3.998)+1,000(0.480)=919.78

Similarly,whenmaturity periodis5,4,3,2,1the Bondvaluewillbecome929.87,940.14,952.71,

966.48,982.35,respectively.
……………………………………………………………………………………………………………

YTM

CURRENTYIELDONBOND
It measures the rate of return earned on a bond, if it is purchased at its current market price and
ifthecouponinterestis received.
Currentyield=Couponinterest/currentmarketprice
If a bond of face value Rs. 1,000, carrying a coupon interest rate of 8 per cent, is quoted in
themarket at Rs.800,then the
 Currentyieldofthe bondis= 8percent*1,000/800=10 percent
………………………………………………………………………………………………………………
YIELD-TO-MATURITYOFBOND
Itis therateofreturnearned by aninvestor,whopurchasesa bondandholdsituntil thematurity.

Currentyield=couponinterest/currentmarketprice.
E.g.iffacevalue ofabond isRs50,coupon rateis8%pa,and market
priceisRs40,thenthecurrentyield=4/40=0.1or10%
YieldtoMaturity(YTM)isthatdiscountrateatwhich allfuturecashflowsequalthepresent
marketvalue.

NumericalproblemsonYTM
Consider a Rs. 1,000 par value bond, whose current market price is Rs. 850/-. The bond carries
acoupon rate of 8 per cent and has the maturity period of nine years. What would be the rate
ofreturnthataninvestor earns if hepurchases thebondandholds untilmaturity?
Solution
Ifkd istheyieldtomaturity then,
850 = 80 (PVIFA kd per cent, 9 yrs) + 1,000 (PVIF kd, 9
yrs)To calculatethevalueofkd,wehaveto try severalvalues:
=80(PVIFA12percent,9)+1,000(PVIF12percent,9)
=80x5.328+1,000x(0.361)
=426.24+361=787.24
Since, the above value is less than 850, we have to try with value less than 12 per cent. Let us
trywith
kd =10 percent
=80(PVIFA10percent,9)+1,000(PVIF10percent,9)= 80
x5.759+1.000*0.424=884.72

From the above it is clear that kd lies between 10% and 12%. Now we have to use
linearinterpolationin the rangeof 10%and12%.Usingit,we findthatkd isequaltothe following:
(884.72-850)/(884.72-787.24)
34.72/97.48=10%.+
.71=10.71%
Therefore,theyieldtomaturityis10.71%
………………………………………………………………………………………………………………
For two bonds X and Y having face value of Rs. 1.000, coupon rate of 10 per cent each, years
tomaturity isthreeandsixyears respectively.
Marketvalueof bondXatYTMof10percent is
100PVIFA(10percent,3)+1.000PVIF(10 percent,3)=1,000
Market ValueofBondY atYTMof10 percent is
100PVIFA(10percent,6)+ 1,000PVIF(10percent,6)=1,000
Nowmarketvalueof bondXatYTMof 11 percentis
100PVIFA(11percent,3)+1,000PVIF(11percent,3)=975
AndMarket ValueofBondY atYTMof11 percentis
100PVIFA(11percent,6)+1,000PVIF(11percent,6)=958
Change in price for X on increasing YTM by 1 per cent is (1,000 - 975)/l,000 = 2.5 per
centChange inprice forYonincreasingYTMby1percentis(1,000-958)/1,000= 4.2percent
Thus,longer-term bondismoresensitive tointerestratechangethanshort-term bond.
………………………………………………………………………………………………………………
Consider a bond having a face value of Rs. 1,000 with a coupon rate of 10 per cent and
maturityperiodof fiveyears.Let theYTMbe10per cent.Market priceofthebondwill beequal toRs.1,000.
A1percentincrease inYTMto11percent changesprice toRs.963.04(100PVIFA11percent,5+1000PBV1F11
percent, 5), a decreaseof3.7per cent.
A decrease of 1 per cent YTM to 9 per cent changes the price to Rs. 1,039 (100 PVIFA 9 per cent, 5
+1,000PVIF9 percent,5)anincreaseof3.9 percent.
Thus, an increase in bond's yield caused a price decrease that is smaller than the price
increasecausedbyanequal sizedecreasein yield.
………………………………………………………………………………………………………………
A bond of face value of Rs. 1,000 par value X bond with a coupon rate of 12 per cent maturity
periodofsixyears andYTMof10per cent.Themarketvalueof thebondwill beRs. 1,087.
Consider another identical bond Y but with differing YTM of 20 per cent. The market value of
thisbondwill beRs.734.
If the YTM increase by 20 per cent, i.e. YTM of bond X rises to 12 per cent (10 x 1.2) and bond Y
risesto24per cent (i.e., 20 x1.2) then themarketvalueofboth bondswill changeto:
BondABC:120PVIFA(12percent, 6)+1,000PVIF(12percent.6)=Rs.1,000
BondXYZ:120PVIFA(24per cent,6) +1,000PVIF(24per cent,6)=638

Market value of ABC bond with a lower YTM decreased by 8 per cent whereas in case of XYZ
bondwithan higherYTMthedecreaseis 13 per cent.
……………………………………………………………………………………………………………

TheoremsforBondValuation

When the required Rate of Return is equal to the coupon rate, the value of the Bond is equal toits
parvalue.
When the required rate of return (Kd) is greater than the coupon rate, the value of the bond isless
thanits parvalue.
When the required rate of return is less than the coupon rate, the value of the bond is
greaterthanitsparvalueetc.,
Effectofchangeinmarket interestrate
Effectofmaturity period
Bondprice isinverselyrelatedto YTM
Interest rate elasticity= %age change in price/%age change in YTM .This is always negative
asbothmovein oppositedirection.
……………………………………………………………………………………………………………

CapitalBudgetingTechniques

Usedtochoose betweenvariousprojects.
A capital project involves capital outflow( investment) and capital inflows(net profit) over
thelifeoftheproject.
PVofall cashinflowswillbe +veandPVofallcashoutflowswillbenegative.PV
willdependonthediscountrate( costof capital)
Summationof allthePVsof cashinflowsandoutflowsiscalled NetPresent Value(NPV)
IRRis thatdiscount rateatwhichNPVof aprojectiszero.
Othermethodused forcapital budgetingis payback periodmethod.

DecisionMaking –toacquireornottoacquirethecapital goods.

……………………………………………………………………………………………………………

DepreciationAccounting

Depreciationisamethodofallocatingthecostofatangibleassetoveritsusefullife.Businessesdepreciatelong-
termassetsforbothtaxandaccountingpurposes.Itisadecreaseinanasset'svalue caused by unfavorable
market conditions. a decrease in an asset's value, may be caused by a number ofother factors as well such
as unfavorable market conditions, etc. Machinery, equipment, currency aresomeexamplesofassets
thatare likelytodepreciate over aspecificperiodoftime.

Depreciation–DifferentMethods
Straightlinemethod;(cost-residualvalue)/estimatedusefullife
WrittenDownValuemethodordecliningbalancemethod:%ageisfixed
AcceleratedDepreciation
Sum of years’ digits method; Example, if an asset is to be depreciated over five years, adddigits
5,4,3,2,1 .The total is 15.For the 1 styear depreciation is 5/15,for 2ndyear,4/15 , and soon

Needfordepreciation
Toknowcorrectprofit
Showcorrect financialposition
Makeprovisionforreplacementofassets
Factorsofdepreciation
Costofasset
Residualvalue
Lifeof an asset

AS-6dealswithDepreciationAccounting

……………………………………………………………………………………………………………

Module-B

Unit–6:Definition, ScopeandAccountingStandards

Accounting is often called the language of business. Book-keeping and Accounting not one
andthe same – Book-keeping means recording the business Transactions.Accountancy means
compilationofaccountsin such awaythat oneis ina positiontoknowthe stateofaffairsof thebusiness.

Accountingislanguageofbusiness.
Communicatetheresultofbusiness operationsanditsotheraspects.

Accountingisan art of recording classifyingand summarizingin a significant manner andinterms of

money transactions and eventswhich are in partat leastof financial character
andinterpretingthe resultsthereof.

Definition&scopeofbook-keeping

Book keepingismerelyrecordingthe businesstransactionsinbooks andledgers

Accountancy is wider concept: compilation of accounts in such a way that one is in a position
tounderstandstateof affairsof business.
Usersoffinancialstatementsareincometaxdepartment,S.T.department,shareholders,investors,banksa
ndFIs andsoon.
It is inthe interestof all that financial statements reflect true and fair view of state of affiairs
ofabusinessentity.

Accountancyinvolves:
Systematicclassificationofbusiness transactionsintermsofmoneyandfinancialcharacter.
Summarizing:trialbalanceandb/s
Interpretingthefinancialtransactions.

FinancialStatements:
ManufacturingAccounting.
 TradingAccount
Profit& LossAccount
BalanceSheet
FundsFlow(ChangesinFinancialPosition)
CashFlowStatement

Purposeofaccountancy
Tokeepasystematicrecord
Toascertaintheresultsofoperations
Toascertainfinancialpositionofbusiness.
Tofacilitate rationaldecisionmaking
Tosatisfyrequirementoflawandusefulinmanyrespects.

BasicobjectiveofAccountancy-toprovideinformationtovarioususers.

Income Tax
AuthoritiesSales Tax
AuthoritiesShareholder
sInvestors
Business
AssociatesDirectors
Banks forlendingpurpose

Purpose:
Toknow the Profit&Loss
Toknow theFinancialposition&Liabilitiesposition
To interprettheFinancialPosition

Objectives:
Tokeepasystematicrecord
Toascertaintheresultsoftheoperations
Toascertainthefinancialpositionofbusiness
Tofacilitaterationaldecision-making
Tosatisfytherequirementsoflaw

Advantages:
ForEconomicDecisions
To provide informationtoInvestors
Tocomparethefinancialposition

TypesofAccounting:
FinancialAccounting
CostAccounting
ManagementAccounting
SocialResponsibilityAccounting
HumanResource Accounting
 InflationAccounting

Conceptsof

AccountancyCostConcept:
Business transactionsarerecorded inbooksatcostprice.
Fixedassets arekeptatcostofpurchase andnot attheir marketprice.
Everytransactionis recordedwith presentvalueandnot anyfuturevalue.
Unrealizedgains areignored.
Cost of an asset that has long but limited life is systematically reduced by a process
calleddepreciation.But suchdepreciationhas norelationtomarketvalueofasset.

MoneyMeasurementConcept:
Every transaction is measured in terms of money. Viz production/sales/wages etc all
convertedtomoney.
Inflationordeflationnot includedinvalueofanyasset.

BusinessEntityConcept
Thisconceptseparates theentityofproprietorfrom the business transaction.
Capital contributed by the owner is liability for business because business is different
fromowner.

Anymoneywithdrawnbyprop.Isdrawings.
Profitisliability andlossisanasset.
Allentriesarekept from thepointofviewof businessandnot fromowner.
Anenterpriseis economicunitseparatefromowner.

RealisationConcept
This concept tells us when revenue is treated as realisedor earned.It is treated as realized
onthedatewhenpropertyingoodspassestobuyerandhe becomeslegallyliabletopay.
Nofutureincome isconsidered.
Goodssoldonapproval willbe includedinsales butoncostonly.

GoingConcernConcept
Business isagoingconcernandtransactionsare recordedaccordingly.
If an expense is incurred andutility is consumedduring the year, then it is treated as
anexpenseotherwise itis recorded asan asset.
Reservesandprovisionsarecreatedforanyfutureliability.
Deferredrevenueexpenditureiswritten offovernumberofyears.
Whylossisshownunderassetsside?

DualAspectConcept
Everytransactionhasdoubleeffect.
Accountingequation:assets= cap+liability.

AccountingPeriodConcept
Businesswillrunthroughlongperiod.Henceaccountsofeachperiodisrecorded.
 Results of operations can be knownprecisely onlyafter business ceases to operate and
entireassetsare soldandentire liabilities paid.
But one is interested in knowing periodicallyoperating results of business say yearly or
halfyearlyorquarterly.
Hencealltheexpensesorincomeduringthisaccountingperiodhasto be
takenintoconsiderationirrespectiveof whethertheyarerealised incashorpaidin cash.

Accountingforfulldisclosure
Disclosureofmaterialfacts.(materialandimmaterialfactismatterof judgment)
Contingentliability
Marketvalueof investments.

ConventionorPrinciplesofConservatism
Allpossiblelossestobe takenintoconsiderationandanticipatedprofitsto beignored.
Creationofprovisionfordoubtfuldebts.
Value ofstock
Conventionofconsistency:methodofdepreciation.

DoubleEntrySystem
Scientificsystem:
Everytransactionhastwoaspects.
Crux of accountancy is to find out which two accounts are effectedand which is to be
debitedandwhichis tobecredited.

Journal
Journalrecordseach andevery record.
Buttofindoutatransactioneffectingaperson,expensesaccountorassetonehasto turnoverallpagesof
journal .
Hence transactions arepostedfromjournaltoparticularpagesof ledger.
Hence journal contain acolumnL.F

CashBook
Cash book keeps records of all cash transactions i.e cash receipts and cash payments.
Allreceiptsarerecordedonright side andall paymentsonleftside.
Cashbookisbookoforiginal entry.

Recordkeepingbasis
Recording: journalising as and when transaction takes place. Journal is book of original or
firstentry.
Classifying: all entries in journal or subsidiary books are posted to ledger account (posting)
tofindoutataglance thetotaleffectofall suchtransactions.Ledgerisbookofsecondaryentry.
Summarising: last stage is to prepare the trial balance and final accounts with a view to
ascertaintheprofitor loss duringparticular period.
Itiscustomaryto useto andby whilepostingledger.
Balancinganaccountmeansequalizingtwosides.
Ifdebitsideofaccountexceedcreditside,difference
isputoncreditsideanditissaidtohavedebitbalanceandviceversa..
Adjustingandclosingentries
While preparing trading and profit and loss account all expenses and income for the full periodare to
be taken into consideration. If expenses have been incurred but not paid during thatperiod ,
liabilitiesfor unpaid amount should be created before the accounts can be said to
showtheactualprofitandloss.Allexpensesandincomeshouldproperlybeadjustedthroughaccountin
gentries.
Trial balance is prepared from the books of accounts of organization. Final accounts are the
finalprocessofaccounting.Oncethetrialbalanceisprepared the books arehalfwayclosed.
Now all adjusting entries passed at the time of preparing the final accounts have dual effect
i.eboth debitandcredit.
Hence alladjustingentriespassedafterTrialbalance drawnwillhavetwoeffects.
One in either trading and profit and loss account and other in Balance sheet or one in
tradingaccountandother inProfitandloss account.

Someexamples:
Closing stock adjustment: Will be shown in asset side of balance sheet and will be shown
increditsideoftradingaccount.
Goods lost by fire: Will be shown in credit side of trading account. Will be shown on debit side
ofprofitandloss account.
Outstanding expenses: Will be shown in debit side of profit and loss account. Will be shown
inliabilitiessideof balancesheet.
Prepaid expenses:Prepaid expenses shown inAsset side ( Dr Pre paid expenses) and Credit
P&LExpenditureasthey donotpertainto currentyear.
Depreciation: It is fall in value of asset due to use or passage of time. Depreciation Dr. To
assetaccount

Accountingstandards:
InstituteofcharteredaccountantsofIndiarecognisingtheneedtoharmonisethediverseaccountingpolicie
sandpracticesconstitutedan accountingstandards boardin the year 1977.
ASBformulateaccountingstandardssothatcouncilofICAImaymandatesuchstandards.

DaybookandGLBpostinginabank
The general ledger balance is virtually trial balance of the bank on a particular day. It reflect
thebalances of all accounts. While preparing balance sheet and profit and loss account of branch
ofbank the GLB balancesaretaken.
Balancesheetofallbranchestogetherwhenconsolidatedbecomesthe balancesheetofbank.

Generallyacceptedaccountingprinciples

The common set of accounting principles, standards and procedures that companies use
tocompile their financial statements. GAAP are a combination of authoritative standards (set
bypolicy boards) and simply the commonly accepted ways of recording and reporting
accountinginformation.
GAAP are imposed on companies so that investors have a minimum level of consistency in
thefinancial statements they use when analyzing companies for investment purposes. GAAP
coversuch things as revenue recognition, balance sheet item classification. Companies are
expectedto followGAAP rules whenreportingtheir financialdata viafinancialstatements.
That said, keep in mind that GAAP is only a set of standards. What is important that its
underlyingobjectivesarefollowed intrueperspective.

SomeoftheimportantAccountingStandardsare:
AS-1 -DisclosureofAccountingPolicies
AS-2-Valuationof Inventories
AS-3-CashFlowStatements
AS-4-Contingencies andeventsoccurringafterbalance sheet
AS-5- ChangesinAccountingPolicies
AS-6-DepreciationAccountingetc.

Unit-7:BasicAccountancyprocedures

Attherecordingstage:

Businessentityconcept
Moneymeasurementconcept
Objectiveevidenceconcept
Historicalrecord concept
Costconcept
Dualaspect concept

Atthereporting:
GoingConcernconcept
Accountingperiodconcept
Matchingconcept
Conservatismconcept
Fulldisclosureconcept
Materialityconcept

MainconventionsofAccounting
Accountingoffulldisclosure
ConventionofMateriality
ConventionofConservatism
ConventionofConsistency

Twosystemsofkeepingrecords
Singleentrysystem
Doubleentrysystem

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Unit - 8 : Maintenance of Cash/Subsidiary Books and

LedgerJournal/SubsidiaryBooksandLedger
RecordingkeepingBasics

Recording
Classifying
Summarizing

ClassificationofAccounts

PersonalAccounts
ImpersonalAccounts
Real Accounts
Tangible
Intangible
NominalAccounts
Interest,Rent,Carriage,Commission,Insurance
Salaries,Discountandwages etc

……………………………………………………………………………………………………………

Unit - 9 : Bank Reconciliation

statementBankReconciliationstatement

Bank reconciliation( B.R. ) isbasedontheprincipleofdouble entry.

Creditthegiveranddebitthe receiver
B.R.Showscausesofdifferences betweencashbookandpassbook balance
Debitbalance aspercashbook iscreditbalance asperpassbook=positive balance
Creditbalanceincashbookisdebitbalanceinpassbook=negativebalance/overdraft

Causesofdifferences

Chequeissuedbutnotpresentedforpayment
Chequedepositedbutnotyetrealized
Bank charges
Interestonsavingbank
Int. onoverdraft
Amountdirectlycollectedbybank
Amountdirectlypaidbybank onStd.Instructions
Dishonorof a Cheque
Directpaymentintobankbycustomer
errors

……………………………………………………………………………………………………………
Unit 10 : Trial balance, Rectification of Errors and Adjusting & Closing Entries

Trial balance

A Trial Balance is a list of accounts and their current balances at a given date.It is usually prepared
onthelastdayoftheaccountingperiodandthelistofaccountbalancesarearrangedaccordingtodebitandcredit
balances.

Beforepreparingfinancialstatementsattheend ofaperiod,thebooksmustbebalanced, i.e.todetermine

totaldebitsequal totalcredits.Thisis determined bypreparingatrialbalance.

Debit balances are listed in one column and credit balances are listed in another.The two column
totalsshouldbe equal.Whenthis occurs, theledger is said tobeinbalance.

Preparing a trial balance for a company serves to detect any mathematical errors that
haveoccurredinthedouble-
entryaccountingsystem.Providedthetotaldebtsequalthetotalcredits,thetrialbalanceisconsideredto be
balanced, andthereshouldbe nomathematicalerrorsin the ledgers.

Atrialbalanceispreparedfortworeasons-
To check the arithmetic accuracy, i.e. The debit totals and the credit totals should be equal if
thedouble-entry systemofbook-keepingis followed.

Towriteupthe financialstatements,i.e.TradingandProfit&LossAccounts,andBalance Sheet.

TypesofErrors

Keepinginviewthenatureof errors,all theerrorscanbeclassifiedintothefollowingfour categories:

Errors of Commission : These are the errors which are committed due to wrong posting
oftransactions, wrong totalling or wrong balancing of the accounts, wrong casting of the
subsidiarybooks, or wrong recording of amount in the books of original entry, etc. For example:
Raj HansTraders paid Rs. 25,000 to Preetpal Traders (a supplier of goods). This transaction was
correctlyrecorded in the cashbook. But while posting to the ledger, Preetpal’s account was
debited withRs. 2,500only.
Errors of Omission : The errors of omission may be committed at the time of recording
thetransaction in the books of original entry or while posting to the ledger. These can be of
twotypes:(i)errorofcompleteomission(ii)errorofpartialomissionWhenatransactioniscompletely
omitted from recording in the books of original record, it is an error of completeomission. For
example, credit sales to Mohan Rs. 10,000, not entered in the sales book. Whenthe recording of
transaction is partly omitted from the books, it is an error of partial omission. Ifin the above
example, credit sales had been dulyrecorded in thesales book butthe
postingfromsalesbooktoMohan’saccounthasnotbeenmade,itwouldbeanerrorofpartialomission.
 Errors of Principle : Accounting entries are recorded as per the generally accepted
accountingprinciples. If any of these principles are violated or ignored, errors resulting from such
violationareknown aserrors ofprinciple.For example, amountspent onadditions
tothebuildingsshould be treated as capital expenditure and must be debited to the asset
account. Instead, ifthis amount is debited to maintenance and repairs account, it has been
treated as a revenueexpense.
Compensating Errors: When two or more errors are committed in such a way that the
neteffectoftheseerrorsonthedebitsandcreditsofaccountsisnil,sucherrorsarecalledcompensatinge
rrors.Forexample,ifpurchasesbookhasbeenovercastbyRs.10,000resultingin excess debit of Rs.
10,000 in purchases account and sales returns book is undercast by
Rs.10,000resultinginshortdebittosalesreturnsaccountisacaseoftwoerrorscompensatingeach
other’seffect.

RectificationofErrors

Errors can be classified into two categories for the purpose of rectification of errors-

RectificationofErrorswhichdonot Affect theTrialBalance

The followingerrors donotaffecttheequalityoftheTrial Balancetotals:

Errors of Omission: A transaction is omitted completely from the books so that there is no
debitand credit entry of the transaction, e.g. Drawings of Rs. 5000 cash by the proprietor was
notrecorded.

Errors of Commission: An entry is posted to the correct side of the ledger but to the
wrongaccount, i.e.items have been posted to the wrong account of thesame class, e.g. Payment
ofRs. 1000 cash by a customer A. John was wrongly posted to the account of another customer,
B.Johan.

Errors of Principle: An entry is made in the wrong class of account, i.e. when an expense
istreated as an asset and vice versa, e.g. Repairs to building Rs. 4000 was debited to the
BuildingAccount.

Complete Reversal of Entries: An account that should be debited is credited and vice versa,
e.g.A cheque Rs. 2000 received fromSunita was debited to the account of Sunita and credited
tothe Bank Account.

CompensatingErrors:Errors(orerror)ononesideoftheledgerarecompensatedbyanerror(orerrors),
e.g.ThePurchases AccountandSalesAccountwere bothovercast byRs.1500.

Errors of Original Entry: The original figure may be incorrectly entered although the
correctdouble-entryprinciplehasbeenobservedusingthisincorrectfigure,e.g.CreditsalesofRs.9650
 toRanjitwasrecordedinthe SalesAccountandRanjit'saccountasRs.6950.

RectificationofErrorswhichAffecttheTrialBalance

Errors which are revealed by the Trial Balance are those errors which cause the Trial
Balancetotalstobe indisagreement.

Errors in Calculation: If there is any miscalculation of the Trial Balance totals or the net
accountbalances, the Trial Balance will not balance, e.g. There was an error in the calculation of
the cashbalance, causingtheTrialBalancetotalsnottobalancetoo.

Errors in Omission of One Entry: Omission of either the debit or credit entry of a transaction
willcausethetotalsoftheTrialBalancenottoagree,e.g.AchequeRs.5000receivedforcommissionwas
debitedtotheBankAccountonly.

Posting to the Wrong Side of An Account:Entry intothe wrong side of an account will causeone
side of the ledger to be more than the other, e.g. A cheque of Rs. 8000 paid to creditor,
K.Rajwascredited insteadofdebitedtohisaccount.

Errors in Amount: If the debit entry of a transaction differs in amount with the credit entry,
theTrial Balance will not balance, e.g. Cash Rs. 9650 received from Anand was debited to the
CashAccountas Rs.9650andcreditedtotheaccountofAnandas Rs.6950.

Summary

Anaccounthasadebit balance whenits debit totalexceedsits credittotal.

Anaccounthas a credit balance when itscredittotal exceedsitsdebit total.
Asset,expenses anddrawingsaccountshave debitbalances.
Liability,capitalandrevenue accounts havecreditbalances.
ATrialBalanceisalistofdebitandcreditbalancesextractedfromtheaccountsintheledgerataparticular
date.
TheTrial Balanceisprepared forthepurposeof checking thearithmetical accuracy oftheentriesmadein
theledger.
The total debit balances will equal the total credit balances in the Trial Balance if the double-
entryprinciples ofrecordinghave beenstrictlyadheredto.
Errors that effect the agreement of the Trial Balance totals are wrong calculation of
balances,omission of either a debit or credit entry of a transaction, entry on the wrong side of
an account,anderrorsin amount.
Errors that do not affect the agreement of the Trial Balance totals are complete omission ofentries
of a transaction, errors of commission, errors in principle, compensating errors, anderrorsin
originalentry.
Assetandliabilityaccountsarebalancedandtheirbalancesbroughtdowntothenextaccountingperiod.

Personalaccountsrecordtransactionswithpersonswhohavedealingswiththebusiness,e.g.debtorsandcr
editors accounts.
 AdjustingEntries

Somecommonadjustmentsare:
ClosingStock
Expensesduebutnotpaid(Outstandingexpenses)
Expensespaidinadvance(Prepaidexpenses)
Incomesduebutnotreceived(Accruedincomes)
Incomesnotduebutreceived(Unearnedincomes)
Depreciationonassets
InterestonCapital
InterestonDrawings
InterestonLoan
Baddebtsto be writtenoff
Provisionforbaddebts
Provisionfordiscount onDebtors
Provisionfordiscountoncreditors
Lossesonaccountofaccidents
Commissionpayableonprofit
Goodsusedbytheproprietor
GoodsdistributedasFree Samples

ClosingEntries

Closingconsolidatedjournalentriesare normallypassedfor
Transferofallmanufacturingandpurchaseexpenseto thedebitsideoftradinga/c
TransferofPurchasesandSales returntothe debit side ofTradinga/c
TransferofSalesandPurchasesreturnto thecreditside ofTradinga/c
Transferof closingstock tothecreditoftradingaccountbyanadjustmententry
TransferofGrossprofitto the creditsideofProfit&Lossa/c
TransferofGrosslossto the debit sideofProfit&Lossa/c
Transferofalladministrative,sellingandfinancialexpenses tothedebitofP&LA/c
Transferofalloperationalandnon-operationalincomesto the creditof P&LA/c
TransferofNetprofittothe creditofCapitala/c
TransferofnetlosstothedebitofCapitala/c

……………………………………………………………………………………………………………

Unit -11 :CapitalandRevenueExpenditure

A capital expenditure is an amount spent to acquire or improve a long-term asset such

asequipment or buildings. Usually the cost is recorded in an account classified as Property, Plant
andEquipment. The cost (except for the cost of land) will then be charged to depreciation expense over
theusefullifeof theasset.
 A revenue expenditure is an amount that is expensed immediately—thereby being matchedwith
revenues of the current accounting period. Routine repairs are revenue expenditures because theyare
charged directly to an account such as Repairs and Maintenance Expense. Even significant repairsthat do
not extend the life of the asset or do not improve the asset (the repairs merely return the
assetbacktoitspreviouscondition) arerevenueexpenditures.

DifferencebetweenCapitalandRevenueExpenditure

CAPITAL REVENUE
Largeamount Relativelysmall
Improveorenhanceearning capacity Maintainasset
Longdurationbenefit Shortduration
Non- recurring Recurring
Balancesheetitem Trading/P&LA/citem

CapitalandRevenueExpenditure:Examples

Costofreplacementofdefective partsofthemachinery is……

Capitalexpenditure
Revenueexpenditure
Deferredrevenueexpenditure
LossofgoodsduetofireRs.8000isarevenueexpenditurebecause……
Itisrecurring
Amountinvolved is small
Lossisarisingoutofbusinessoperations
Preliminaryexpenses ,discountallowedonissueofsharesaretheexamplesof
Capitalexpenditure
Deferredrevenueexpenditure
Revenueexpenditure
Expenditureincurredinacquiringthe patentsrights forthebusiness isanexampleof ----
Capitalexpenditure
Deferredrevenueexpenditure
Revenueexpenditure

……………………………………………………………………………………………………………
…

Unit -12 :Bills ofExchange

A written, unconditional order by one party (the drawer) to another (the drawee) to pay acertain
sum, either immediately (a sight bill) or on a fixed date (a term bill), for payment of goods
and/orservices received. The drawee accepts the bill bysigning it, thus converting it into a post-dated
checkanda bindingcontract.It isalsocalled as“Draft”.
 PromissoryNote

A financial instrument that contains a written promise by one party to pay another party a definite
sumof money either on demand or at a specified future date. A promissory note typically contains all
theterms pertaining to the indebtedness by the issuer or maker to the note's payee, such as the
amount,interest rate, maturity date, date and place of issuance, and issuer's signature. Promissory notes
that
areunconditionalandsaleablebecomenegotiableinstrumentsthatareextensivelyusedinbusinesstransactio
nsin numerouscountries.

Apromissorynoteisusuallyheldbythepayee.Oncethedebthasbeendischarged,itmustbecanceledbythepayee
andreturnedtothe issuer.

DifferencebetweenBillofExchangeandPromissoryNote

BillofExchange PromissoryNote
Unconditionalorder Unconditionalpromise
Made bycreditor Madebydebtor
Acceptanceby debtormust No acceptanceas such
Threepartiestoa bill Twopartiesto abill
Ondishonor,notingisnecessarybynotarypublic Notingisnotnecessary

……………………………………………………………………………………………………………

Unit-13:BalanceSheetEquation

Always the total claims (those of outsiders such as creditors and of the proprietors, i.e. net worth)
willequalthe total assetsof thebusiness.

Wecanexpressthesameas:

Assets = Equities (total

claims)or Assets = Liabilities +
Capitalor Liabilities = Assets -
CapitalorCapital=Assets–
Liabilities

ComputationofBalanceSheetEquation
If there is any change in the amount of the assets or the liabilities, the owners' claim or the capital
isbound to change correspondingly. If assets increase and liabilities do not, the capital will increase;
areduction in the amount of assets or an increase in the amount of liabilities will mean a reduction in
theamount ofcapital.

Capital:Itmeanstheamountwhichtheownerofbusinesshasinvestedinthefirmandcanclaimfromthefirm.

Liability: It means the amount which the firm owes to outsiders. Long term liabilities are those
liabilitieswhich are payable after a long term. Current liabilities are those liabilities which are payable in
nearfuture(generallywithinoneyear).

Assets: Assets are things of value owned. Fixed assets are those assets which are purchased for
thepurpose of operating the business but not for resale, e.g. Land, Building, Plant and Machinery,
etc.Current assets are those assets which are kept for short term for converting into cash or for resale,
e.g.unsoldgoods, debtors,cash, bankbalance,etc.

Revenue:Itmeansthe amountwhich,asaresultofoperations,isreceivedbythebusiness.

Expense: It is the amount spent in order to produce and sell the goods and services which produce
therevenue.

Income:Thedifferencebetweenrevenueandexpenseiscalledincome(ifrevenueismorethanexpense).

Debtor: A person who owes money to the firm, mostly on account of credit sales of goods, is called
adebtor.

Creditor:Apersonto whommoney isowedbythe firm iscalledacreditor.

……………………………………………………………………………………………………………

Unit - 14 : Preparation of Final

AccountsTrialBalance

TheTrialBalance is astatementofledger accountbalances asonaparticularinstance.

The trial balance is prepared to check/ensure the arithmetical accuracy of accounting. Preparation
ofTrialBalanceisnotanactthatformsapartoftheactivitiesinvolvedintheregularaccountingcycle.FinalAccoun
tingcanbecompletedwithoutthe preparationof the TrialBalancealso.

The trial balanceis generallyprepared ata timewhen all the ledger accountsare balanced likeat theend of
the accounting period. Theoretically, the trial balance can be prepared as and when needed.
Inthismechanised(computerised)accountingsystems,trialbalanceisastatementthatcanbeautomaticallyder
ived as andwhen needed.

AdjustmentEntries

Theremightbeanumberofaccountingtransactionswhichmightnothavebeentakenintoconsideration by the
time the Trial Balance has been prepared.Some of the reasons for the presence ofsuchtransactions are

Transactionswhichdonotoccurinthenormalcourseofbusiness

There are a number of transactions relating to the business which do not occur in the normal course
ofbusiness.These transactions unlessdeliberatelyrecordeddonot getintothebooksof accounts.

Examplesforsuchtransactions

StocktakenawaybytheproprietorforpersonaluseAbn
ormal lossofstock

Transactionswhichhavetoberecordedonlytowardstheend

Thereareanumberoftransactionsrelatingtothebusinesswhichhavetoberecordedonlyattheendoftheaccoun
tingperiod.Ifthetrialbalancehasbeenpreparedbeforeallsuchtransactionsintoconsiderationhave
beentakeninto consideration,thentheystayunrecordedinthebooksofaccounts.

Depreciation on
AssetsExpenses-
Outstanding/Prepaid
Incomes-Outstanding/Pre-received

TransactionsrelatingtoErrorRectifications

The agreement of a Trial Balance is not a conclusive proof of absence of errors in accounting. Even
incase where the trial balance agrees, there may still be errors existing in the books of accounts.
Theseerrors if identified subsequent to the preparation of the Trial Balance, need to be rectified which
needsjournalentriestobepassedfor rectification.

The transactions which have not yet been journalised, appended to the trial balance are what we
calladjustments. Thus we can say that Adjustments are transactions relating to the business which have
notbeenjournalised bytheendof theaccountingperiod.

Sinceadjustmentsarealsotransactionsrelatingtothebusiness,
weneedtobringthemintotheaccountingbooksbyjournalisingthem.
AccountingfortheTransactions

Recordingthetransactionsrepresentedbyadjustmentsnormallywouldresultintheexistingbalanceintheaffect
edledger accountstoeither increaseor decrease.

»Transaction
Wages totheextentofRs.43,000are incorrectlyrecordedas Salaries.
Thisrepresentsanerrorofprinciplewherebyanexpenditurethatwastobedebitedinaparticularaccounthas
beendebitedtoanother account.

Tobring the effect of this transaction intobooks, the journal entry to rectifythis error has to berecorded.

EffectoftheTransaction

Theeffectofthejournal entry to berecordedin theabovecasecanbe analysedas

(−)FromSalariesonthedebitsideofP/La/c

TheSalariesa/cwhichalreadyhasadebitbalanceiscreditedwhichwillresultinadecreaseintheexistingdebitbala
nce.

Tobringtheeffectofthistransaction,theamountinvolvedinthetransaction(Rs.43,000)isdeductedfromtheSalar
iesa/cbalance (Rs.1,53,000)shown onthedebitsideof the"Profit&Lossa/c".

(+)ToWages onthedebitsideofTradinga/c

TheWagesa/cwhichalreadyhasadebitbalanceisdebitedresultinginanincreaseintheexistingdebitbalance.

Tobringtheeffectofthistransaction,theamountinvolvedinthetransaction(Rs.43,000)isaddedtotheWagesa/c
balance(Rs.18,000)shownonthedebit sideofthe"Tradinga/c".

Thesearetheadjustmentstobemadetobringtheaffectoftheabovetransactionintothebooksofaccounts.

TradingAccount

Trading account is a part of final accounts prepared by a business firm which shows gross profitability
ofbusiness activities during a particular period. In other words, trading account shows total sales,
totalpurchasesandall directexpensesrelatingto purchaseandsales.

Tradingaccountispreparedbymanufacturingcompaniesandtradingcompaniesonlybecausethesalesandpurc
hasesof goods aredoneinthesetypesof businessfirmsonly.

TradingAccountis like a statementwhichis dividedintwo partsi.e.Income partandExpenditurePart.

Inincomepart,weshowthefollowingdetails:-

Sales of goods Less Sales

ReturnsClosingStockof goods

InExpenditurepart,weshowthefollowingaccounts:-

Openingstockofgoods
Purchasesofgoods LessPurchase Returns
Alldirectexpensesrelatingtopurchase,saleandmanufacturingofgoodslikeCartage&FreightExpenses,Rentfo
rgodownorfactory,ElectricityandPowerexpenses,wagesofworkersandsupervisors,Packingexpensesetc.

Profit& LossAccount

Profit & Loss Account is part of final accounts, prepared by a business firm to know the net profit of
thebusiness activitiesduringaparticularperiod.

Profit and Loss Account is different from Trading Account because Trading account shows only the
grossprofit while profit and loss account shows net earnings of the business firm. In profit and loss
account allindirect expensesandindirectincomesare shown.

Profit and Loss Account is prepared with the help of Trial Balance. Profit and Loss Account is just
likeTradingAccountwhichisdividedintwo parts i.e. Income part andExpenditurePart.

Inincomepart,weshowthefollowingaccounts:-

GrossProfitbroughtforward.
Indirect Income i.e. interest received, commission received, rent received etc. In other words
indirectincomemeanswhichisnotdirectlyrelatedtopurchaseorsales.

InExpenditurepart,weshowthefollowingdetails:-

GrossLossbroughtforward
Allindirect Expensesi.e.anyexpenseswhicharrnotrelatedto purchase andsales.

BalanceSheet

Balance Sheet is part of Loss Account final accounts, prepared by a business firm to know its
financialposition on a particular date for a particular period. Balance sheet shows the total liabilities and
totalassetsofa businessfirmona particulardate.
Balance Sheet can be prepared on monthly basis or quarterly basis or half yearly basis or yearly
basisaccording to its requirement. For example all the companies registered with stock exchanges
furnishmonthly details relating to sale, profits, liabilities and assets of listed companies.Therefore
thesecompanies have to prepare the Trading account, Profit and Loss Account and balance sheet on
monthlybasis.But ifwetalk ingeneralthen itisprepared atthe endof thefinancialyear.

BalanceSheetispreparedwiththehelpofTrialBalance.Balancesheetisdividedintwopartsi.e.LiabilitiesandAsset
s.

InLiabilities,weshowthefollowingdetails:-

CapitalSecure
dLoans
UnsecuredLoans
CurrentLiabilities andProvisions
ProfitandLossAccount(Balance ofProfit)

InAssets,weshow thefollowingaccounts:-

Fixed
AssetsInvest
ments
Current Assets, Loans and
AdvancesMiscellaneousExpenditure
ProfitandLossAccount(Balance oflosses)

……………………………………………………………………………………………………………

Unit -15 :RatioAnalysis

Accountingratiosarerelationshipexpressedinmathematicaltermsbetweenaccountingfiguresw
hichformeaningful purpose.
Classification:P&LRatios
Balance SheetRatios
CompositeorInter-StatementRatios.

FunctionalClassification
Profitability
 Turnover/Activity
RatiosFinancial/Solvency
Ratios

Financial Ratios may be further classified as Short Term Ratios/Liquidity Ratiosor

LongTerm/ SolvencyRatios

ReturnonCapitalEmployed
EBIT*100CapitalEmpl
oyed
EarningsbeforeInterest&Tax
Op.Profitmeansprofitfromthe OperationsoftheCompanyplusInt(Longterm)& Tax
Capital Employed = Share Capital+ Reserves & Surplus+ Long Term loans –( Non-
businessassets+ Fictitiousassets)
PropercalculationgivesusReturnonCapitalEmployed

EarningsPerShare(EPS)
EPS = Net Profit after tax & Pref.
DividendNo.ofEquity Shares
ThisshowswhetherequityCapitalofCo.isproperly usedornotCompany’scapacityto payDividend.
EPShelps usatestimatingMarketPriceofthe Company

PriceEarning(P/ERatio)
Market Price of perEquity
ShareEPS
Helpsto decidewhetherto buyShareofaCompany.

GrossProfitRatio
Gross Profit*
100NetSales
IthelpsinPricedecision&ProfitfromOp.beforeChargingallotherexpenses.

NetProfitRatio
Net Operating Profit*
100Netsales

SolvencyRatios
LongTermSolvencyRatios

FixedAssetsRatios:FixedAssets
 LongTerm Funds

Theratioshouldnotbemore thanone.
Ifit isless thanonethenitindicates partoftheWorkingCapitalFinanced throughLongtermFundsi.e.
wemay callCoreWorkingCapital

Debt-EquityRatio
i) DERatio: TotalLongTermDebt
TotalLongTerm Funds
Ii)DERatio: TotalLongTerm Debt
ShareholdersFunds
DebtServiceCoverageRatio=CashProfitavailable fordebtservice
Interest+Instalment

ShortTermSolvencyRatio
CurrentRatio= CurrentAssets
Current
LiabilitiesIdealratio:2
Acceptableto Bank1.33

LiquidityRatio/AcidTestorQuick
Ratio:LiquidAssets
CurrentLiability

TurnoverRatios

StockTurnoverRatio =
Cost of goods Sold during the
yearAverageInventory

Debtors Turn over Ratios (Debtors

Velocity)=CreditSales
AverageAccountsReceivable

Debtors Collection Period

=Monthsordays ina year
Debtorsturnover or
Accountsreceivable
AverageMonthlyordailyCreditsales
FixedAssetsTurnoverRatio=
Cost of Goods
SoldNetFixedAsset
s

CalculatethefollowingratiosforYEMarch2014& 2015
ReturnonCapitalEmployed
CurrentRatio
DebtEquityRatio
FixedAssetsTurnoverRatio
InventoryTurnoverRatio
EarningPerShare

Balance Sheetsasat31stMarch Rs.Lakhs

Liabilities 2013 2014 2015
Sh.Capital:SharesofRs.10each800 1000 1000
Reserves& surplus 700 800 1000
SecuredTermLoans 800 2000 2400
CashCreditsfrombank 800 1000 1500
SundryCreditors 1200 900 1100
4300 5700 7000

Balance Sheetsas at31stMarch Rs.Lakhs

Liabilities 2013 2014 2015
FixedAssets:Gross Block 2800 3000 4000
Less: Dep 920 1400 2000
NetBlock 1880 1600 2000
CurrentAssets:Stock 1520 2400 2800
Debtors 480 500 900
OtherCurrentAssets 420 1200 1300
2420 4100 5000
TotalAssets 4300 5700 7000

EBIT*100
Capital
EmployedEBIT=EarningsbeforeInter
est&Tax
Ret. On Cap. Emp=Total Cap. Employed for March,2013 is Rs. 2300+Rs. 3800 for Mar,2014.So
Av.Cap.Employedis Rs.6100/2=3050lakhs.EBITisRs.1020.SoROCE1020*100= 33.34%
3050
 ROCEforMarch,2015
Total Cap. Employed for March,2014 is Rs. 3800+Rs. 4400 for Mar,2015.So Av. Cap. Employed
isRs.8200/2=4100 lakhs.EBIT isRs.1800.SoROCEis 1800*100=43.90%
4100
CurrentRatio =CurrentAssets

CurrentLiabilities
2014 2015
4100=2.16 5000=1.92
1900 2600

DebtEquityRatio= TotalLongTerm Debt

TotalLongTerm Funds

2014 2015
2000=1.11 2400=1.2
1800 2000

FixedAssetsTurnoverRatio=
Cost of goods Sold during the
yearAverageNetFixed Assets

Wemaytake saleswhen Costof goodsfiguresarenotavailable

4800=2.76 7200 =4
1740 1800
AverageFixedAssetsforMarch,2009=1880+1600=3480/2=1740AverageFix
edAssetsforMarch,2010=1600+2000=3600/2=1800

StockTurnoverRatio=
Cost of goods Sold during the
yearAverageInventory
Wemaytake saleswhen Costof goodsfiguresarenotavailable

Sales 4800=9.8 7200=10.29

AvInv. 490 700

EPS = Net Profit after tax & Pref.

DividendNo.of Equity Shares
 NetProfitafterTaxfor2009 =Rs.300Lakhs= Rs.3=EPS

While no.ofEq.sharesare 100Lakhs

Net Profit after Tax for 2010 =Rs.600 Lakhs = Rs. 6

=EPSWhile no.ofEq.sharesare 100Lakhs

……………………………………………………………………………………………………………

Unit - 16 : Final Accounts of Banking

CompaniesRequirements–Accounts&audit

ThirdScheduleannexedtoBRA
FormA-Balance sheet
FormB-Profit &LossAccount
Audit
Submissionof accounts- RBI- within3months
Publicationofaccounts-within6 months
Auditor-priorapprovalofRBI forappt/removal

Balancesheet-FormA

Capital&Liabilities Assets

1.Capital 6.Cash &BankBal.RBI

2.Reserves&surplus 7.BalanceswithBanks&Moneyatcalland SN

3.Deposits 8.Investments

4.Borrowings 9Advances
5OtherLiabilities&Provisions 10.FixedAssets

11.OtherAssets

Demanddeposits
CreditbalancesinODandCC
Depositspayableatcall
 Overduedeposits
In-operativecurrentaccounts
Maturedtime deposits
Maturedcash certificates
Maturedcertificateofdeposits

Contingentliabilities
Schedule-12

Claimsagainstbanknotacknowledgedasdebts
Liabilityforpartlypaidshares
Liabilityon accountofoutstandingforwardexchangecontracts
Acceptances,endorsement&otherobligations
Otheritemsfor whichbankis contingentlyliable.

PROFIT&LOSSACCOUNT-FORMB

IncomeInterest Schedule.13
EarnedOtherIn Schedule.14
come

ExpenditureInterest Schedule.15
ExpendedOperating Schedule.16
Expenses
Provisionforcontingencies

Profit/Loss

Appropriations

SignificantAccountingPolicies Schedule.17

NotesformingpartofAccounts Schedule.18

OtherIncome
Profitonexchange transactions
Profitonsaleofinvestments
 Profitonrevaluationofinvestments
Profitonsaleoffixedassets
Lettingoflocker (incomefromlockercharges)
Misc.income-Godownrent

Justgothroughthese points
Govt.securitiesshownatbookvalue anddiff. betweenMVandBVisgiveninthenotes
Ifsome fixedassetsarew/oonrevaluationofassets/reductionofcapitalevery
B/Safterwardsshould.showtherevisedfigure fornext5yrs.Withthedate&amt.revised
Other fixed assets includes vehicles, furniture and fixtures. Lockers and safe deposit
vaultsareincluded infurniture
20%toreservefundbeforedeclaringdividend
Goldistreatedas investment
Silver istreatedasother assets
Income from performing assets is recognized on accrual basis while in r/o non-
performingassets it isoncash basis
Inr/oNPA,ifincomeisalready recognized, thenmakeprovision

ASSETCLASSIFICATIONETC
AssetClassification

IncomeRecognition

AssetClassification

SLR&NONSLRDEPOSITS

Performingand
nonperforming(remainoutoforder)
Performing-accrualbasis
Nonperforming-cashbasis

Std-0.40%(revisedfrom0.25%)
Sub-Std.-Unsecured–25%,Secured-15%
Doubtful – Unsecured - 100%, Secured - upto 1year-25%, 1to3yrs-40%,morethan3years
-100%
Lossassets-100%

Heldtomaturity Availableforsale Heldfortrading

Investmentshouldnotexceed Freedomavailable Freedomavailable

25% oftotal investment

-no marked to market. -Markedtomarket Markedtomarket

Profitonsaletreatedascap.Rese -profit on sale Tobesoldwithin90days
rve ofinvestment.takento
P&La/c

……………………………………………………………………………………………………………

Unit–17&18:CompanyAccounts

FeaturesofaJoint stockCompany

Incorporatedassociation
Artificialperson
Perpetualsuccession
Commonseal
Limitedliability
Separationofmanagementfromownership
Transferabilityofshares
Separatelegalstatus
Largemembership

Typesofcompanies
On the basisofincorporation Onthebasisofownership On thebasisofliability
Charteredcompany Privatecompany Co.limitedbyshares
Statutorycompany Publiccompany Co.Ltd.byguarantee
Registeredcompany Governmentcompany Co.withunlimitedliability
Foreigncompany Holdingcompany

SHARECAPITAL

EQUITY
PREFERENCE
– CUMULATIVE

REDEEMABLE
PARTICIPATING

AUTHORISEDCAPITAL
ISSUEDCAPITAL
SUBSCRIBEDCAPITAL
CALLEDCAPITAL
PAID UP

CAPITALISSUEOFSHA

REATPAR

SHAREALLOTMENT/SHARECALL
Share allotment Debited -
a/cSharecapital a/c - Credited
Bank a/c Debited -
Shareallotmenta/c - Credited
Share call Debited -
a/cSharecapitala - Credited
/c
Bank a/c Debited -
Share allotment Debited -
a/cSharecapital a/c - Credited
Sharecalla/c - Credited
Calls in arrears Debited -
a/cShare allotment - Credited
a/cSharecalla/c - Credited

Issue ofsharesatpremium
Shareapplication/ Debited -
allotmenta/c - Credited
SharecapitalA/c - Credited
SharepremiumA/c

Issue ofsharesatdiscount
ShareallotmentA/c Debited -
Discount onissueof sharesA/c Debited -
SharecapitalA/c - Credited

Forfeitureofshares
SharecapitalA/c Debited -
Callin arrearsA/c - Credited
ForfeitedsharesA/c - Credited
Re-issueofshares
BankA/c Debited -
ForfeitedsharesA/c Debited -
SharecapitalA/c - Credited
Capitalreserve A/c - Credited

IssueofBonusshares
Cap. Red. Reserve Debited -
A/cShare premium Debited -
A/cCapital reserve Debited -
A/cGenReserveA/cPro Debited -
fit&Loss A/c Debited -
Bonusto shareholdersA/c - credited
Bonus to shareholders Debited -
A/cEquitysharecapital A/c credited

Balancesheetequation
LIABILITIES ASSETS

Capital 300.00 Fixedassets 700.00

Reserves 200.00 Currentassets 300.00
Term Loans 300.00
CurrentLiabilities 300.00
Total 1000.00 Total 1000.00

Balancesheetequation

Assets = Liabilities
Assets = Liabilities(+) Capital
Liabilities = Assets(-) Capital
Capital = Assets(-) Liabilities

Assets= Liabilities
Assets = Capital +
LiabilitiesAssets=Networt
h +Liabilities
Net worth = Capital + Reserves&
SurplusNet worth=
AssetsLessLiabilities

B/sEquationExample

If the net worth of the business is Rs.1100,fixed assets are Rs. 600, current assets Rs.400,
nvestmentsRs.300,current liabilitiesRs. Nil, what istheamountof claimtooutsiders?
Rs.1300l
Rs. 500
Rs.200
Rs.
NilAns –c

……………………………………………………………………………………………………………

Unit-19:AccountinginComputarisedEnvironment
Nowadays,manyorganisationsperformtheiraccountingworkoncomputersignoringthemanualmeth
odofbookkeeping.Modernaccountsaremorelike computer-keepingratherthanbookkeeping.

Itisanaccountingsystemisonethatperformsthefollowingfunctions:

Itcapturesbusinesstransactionsintheformofaccountingentries.
Theaccountingentriesarethenusedtoprepare financialstatements.
Thefinancialstatementsarepreparedbasedonaccountingstandards.
Variousfinancialreportsare preparedfromthe dataavailablein thefinancialstatements.

Acomputeraccountingsystemrunsbasedonasetofinstructionscalledthesoftwareprogrammesdeveloped
byapersonwhoisacomputersoftwareprofessionalandheiscalledtheprogrammer.The

instructions of the programmer are in a computer language in the form of computer programme(s)
andarecalledthecomputersoftware.Accountingsoftwaremaybewritteninanyofthecomputerlanguages
suchas COBOL,Foxpro,etc.,oronanoperatingplatformsuchasWindows,UNIX,etc.

Digitalcomputersarethekindof computersusedincomputerisedaccounting.

Themainfeaturesofcomputerisedaccountingare:

Speed
Accuracy
VariousInformativeReportscanbeGenerated
Economy
AComputerisedSystemmaybe aSingleStandAlone UnitoraMultipleUser,i.e. LAN,WAN, etc.

Differencesbetweenmanualandcomputerisedsystems

DataStoredinComputerarenotvisibleandthus,theTrailofEventsisDifficultto Establish
AccountingDatacanbemanipulated toGenerateVariousotherReports/Statements

Theadvantagesofcomputerisedaccountingsystemare:

Accurate, HighSpeedandLowCostofOperation
AvailabilityofVariousReportsfromtheSameAccountingData
Error-freeAccounting
AutomaticCompletionofallRecordsbyFeedingOnly OneEntryintotheComputer
Multiple SetofPrintoutsAvailable

Thedisadvantagesofcomputerisedaccountingare:
RequirementofSpecialProgrammeandProfessional
QualifiedStaffRequiredforOperations
CostlyComputerPeripheralsandStationery
Regularback-upis RequiredasDatamaybeLost forVarious Reasons
ComputerViruses

InfluenceofComputerisationinthefunctionsperformedby abank:

ComputerisedBankOperations
ComputerisedAccounting
AcceptingDeposits
Lending
Remittances
ClearingofCheques
StandingInstructions

CentralisedBanking
AutomatedBanking

CoreBankComponentsinclude:

CoreBankFinancialInstitutionInfrastructure
Core BankProductBuild
CoreBankCustomerManagementandCustomerOverview
CoreBankAccountAdministration
CoreBankPayments
CoreBankManagementInformation

InformationSystemsSecurity

InformationSystemsSecurityprovidesessentialinformationformanagingthesecurityofanorganisation
where information technology is an important factor. It is mainly for all the staff, who arethefirst-
linesupport,responsibleforthedaily,efficientoperationofsecuritypolicies,procedures,standards,andpr
actices. Itcovers:

Accesscontrolsystemsandmethodologies
Computeroperationssecurity
e-mailandinternet access
Applicationandsystemsdevelopment
Businesscontinuityanddisasterrecoveryplanning
Telecommunicationsandnetworksecurity
Physicalsecurity
Cryptography
Securitymanagementpractices
Law,investigations,andethics
Internet:

Internet is the inter-connection between several computers of different types belonging to

variousnetworksallovertheglobe.

WorldWideWeb(WWW):

WWWisaseriesofserversthatareinterconnectedthroughhypertext.Hypertextisamethodofpresentingin
formationinwhichcertaintextishighlightedthat,whenselected,displaysmoreinformation on the
particular topic. These highlighted items are called hyperlinks and allow the users
tonavigatefromone document toanotherthatmay belocated ondifferentservers.

……………………………………………………………………………………………………………

Unit -20:BankingOperations

Somebasicfunctionsperformedbythebanksarediscussedbelow.

AcceptingDeposits

DemandDeposits–withdrawableondemand
CurrentAccount
SavingsDeposits
TermDeposits–Receivedforafixedperiod

GrantingLoansandAdvances

Overdraft
CashCredit:
Discountingof Bills
LoansandAdvances

OtherFunctionsare:

RemittanceofFunds
CollectionandPaymentofCreditInstruments
ExecutionofStandingOrders
PurchasingandSaleof Securities
CollectionofDividendsonShares
IncomeTaxConsultancy
ActingasTrusteeandExecutor
ActingasRepresentative andCorrespondent
 LockerFacility
Traveller'sCheques
Letterof Credit
CollectionofStatistics
UnderwritingSecurities
Gift Cheques
ActingasReferee
ForeignExchangeBusiness

Banksarealsopermittedtoperform following ParaBankingActivities :

MutualFundBusiness
MoneyMarketMutualFunds
Cheque WritingFacilityforInvestorsofMutualFunds/MoneyMarketMutualFunds
PrimaryDealershipBusiness
UnderwritingActivities

EquipmentLeasing,HirePurchaseBusinessandFactoringServices
InvestmentinVenture CapitalFunds
SponsorstoInfrastructureDebtFunds
InsuranceBusiness
PensionFundManagement
ReferralServices
Tradingon/MembershipofSEBIapprovedStockExchanges
PortfolioManagementServices

FrontOfficeandBackOfficeofaBank

A bank front office is the network of bank branches located in its service area. The standard
definition ofa front office is all of the departments that interface with the public. As service
providers, banks aredefined by the effectiveness of their front office operations. A reputation for
outstanding customerservice candrivesalesoffinancialproductsandprovidea competitiveadvantage.

The Head Office and Regional/Zonal Offices which do not conduct any banking activities directly
with theclients arecalled BackOffices.

OutsourcingofServicesbyBanks

'Outsourcing'maybedefinedas
abank'suseofathirdparty(eitheranaffiliatedentitywithinacorporategrouporanentitythatisexternaltoth
ecorporategroup)toperformactivitiesonacontinuingbasis thatwouldnormally beundertakenby the
bankitself, nowor inthe future.
Activitiesthatshouldnotbeoutsourced

Banks cannot outsource core management functions like corporate planning, organisation,
managementand control and decision-making functions like determining compliance with KYC
norms for openingdepositaccounts,accordingsanctionfor loans
andmanagementofinvestmentportfolio.

Thekeyrisksinoutsourcingthatneedtobelookedintoby thebanksare:-

Strategic Risk – The service provider may conduct business on its own behalf, which is
inconsistentwiththeoverallstrategic goalsof thebank
ReputationRisk–Poorservicefromtheserviceprovider,itscustomerinteractionnotbeingconsistentwith
theoverallstandards ofthebank
ComplianceRisk–Privacy,consumerandprudentiallawsnotadequatelycompliedwith
Operational Risk – Arising due to technology failure, fraud, error, inadequate financial capacity
tofulfilobligationsand/or provideremedies
Exit Strategy Risk – This could arise from over–reliance on one firm, the loss of relevant skills in
thebank itself preventing it from bringing the activity back in-house and contracts entered into
whereinspeedyexitswouldbe prohibitivelyexpensive
CounterpartyRisk–Dueto inappropriateunderwritingorcreditassessments

CountryRisk –Dueto the political,socialorlegalclimate creatingaddedrisk

Contractualrisk –arisingfrom whetherornotthebank has theabilitytoenforcethecontract
ConcentrationandSystemicRisk–Duetolackofcontrolofindividualbanksoveraserviceprovider,more
sowhenoverallbankingindustry has considerableexposuretooneserviceprovider.

BankingOperationsManual

A banking operations manual helps you get the very best out of each employee. It also helps to
ensurethat each one knows not only their duties but also the policies, products and how to do
things the rightway.

A manual is all you will need to train your people effectively. It is cost effective and the items in it
will beeasier to monitor for compliance. Using a manual to train the frontline will teach them
everything theyneedtoknowtosellthe products andservicesofferedby your bank.

The manual will also have detailed instructions on how to enter information into the system and if
theyshould forget something they can always count on it to show them how to get back on track.
Manualsare great because they are easy to adapt and to amend if needed. A banking manual should
include allthe policies that are to be adhered to as well as the procedures that are needed to remain
in compliancewithall thelaws, rulesandregulationsthat govern bankinginstitutions.

……………………………………………………………………………………………………………
Unit - 21 : Operational Aspects of KYC/Customer

ServiceKYCNorms

The objective of KYC guidelines is to prevent banks from being used, intentionally or unintentionally,
bycriminalelementsformoneylaunderingactivities.KYCproceduresalsoenablebankstoknow/understan
d their customers and their financial dealings better which in turn help them
managetheirrisksprudently.BanksshouldframetheirKYCpoliciesincorporatingthefollowingfourkeyele
ments:

CustomerAcceptancePolicy
CustomerIdentificationProcedures
MonitoringofTransactions
Riskmanagement

PeriodicalupdationofKYC

KYC is required to be done at least every two years for high risk customers, at least every eight years
formedium risk customers and ten years for low risk customers. This exercise would involve all
formalitiesnormallytakenat thetimeofopeningtheaccount.

If there is no change in status with respect to the identity (change in name, etc.) and/or address,
suchcustomers who are categorised as ‘low risk’ by the banks may now submit a self-certification to
thateffectatthe timeofperiodic updation.

In case of change of address of such ‘low risk’ customers, they could merely forward a certified copy
ofthe document (proof of address) by mail/post, etc. Physical presence of such low risk customer is
notrequiredatthe timeofperiodic updation.

Recent simplified KYC measures

by RBIMeasurestakenfor

simplification:

Singledocumentforproofofidentityandproofofaddress

Officially valid documents (OVDs) for KYC purpose include: Passport, driving licence, voters’ ID card,
PANcard, Aadhaar letter issued by UIDAI and Job Card issued by NREGA signed by a State
Governmentofficial.
To further ease the process, the information containing personal details like name, address, age,
gender,etc., and photographs made available from UIDAI as a result of e-KYC process can also be
treated as an‘OfficiallyValidDocument’.

Noseparateproofofaddressisrequiredforcurrentaddress

Since migrant workers, transferred employees, etc., often face difficulties while submitting a proof
ofcurrentaddressforopeningabankaccount,suchcustomerscansubmitonlyoneproofofaddress(either
current or permanent) while opening a bank account or while undergoing periodic updation. Ifthe
current address is different from the address mentioned on the proof of address submitted by
thecustomer,a simpledeclarationbyher/himabouther/his currentaddress wouldbesufficient.

No separate KYC documentation is required while transferring accounts from one branch to
anotherofthesamebank

Once KYC is done by one branch of the bank, it is valid for transfer of the account to any other
branch ofthe same bank. The customer would be allowed to transfer her/his account from one
branch to anotherbranchwithoutrestrictionsandonthebasisofdeclarationofhis/herlocal
addressforcommunication.

SmallAccounts

Those persons who do not have any of the ‘officially valid documents’ can open ‘small accounts’
withbanks. A ‘small account’ can be opened on the basis of a self-attested photograph and putting
her/hissignature or thumb print in the presence of an official of the bank. These small accounts
would be
validnormallyforaperiodoftwelvemonths.Thereafter,suchaccountswouldbeallowedtocontinuefora

further period of twelve more months, if the account holder provides a document showing that
she/hehasappliedforanyof
theofficiallyvaliddocument,withintwelvemonthsofopeningthesmallaccount.

Relaxationregardingofficiallyvaliddocuments(OVDs)forlowriskcustomers

Ifapersondoesnothaveanyofthe‘officiallyvaliddocuments’mentionedabove,butifiscategorisedas ‘low
risk’ by the banks, then she/he can open a bank account by submitting any one of the
followingdocuments:

identitycardwithapplicant'sphotographissuedbyCentral/StateGovernmentDepartments,Statutory/Re
gulatory Authorities, Public Sector Undertakings, Scheduled Commercial Banks, and
PublicFinancialInstitutions;
letterissuedbyagazettedofficer,withadulyattestedphotographoftheperson.

Otherrelaxations

KYC verification of all the members of Self Help Groups (SHGs) is not required while opening the
savingsbank account of the SHG and KYC verification of only the officials of the SHGs would suffice.
No separateKYCverificationis neededat thetimeof credit linkingtheSHG.

Foreignstudents have beenallowedatime ofonemonthforfurnishingtheproofoflocaladdress.

In case a customer categorised as low risk is unable to submit the KYC documents due to
genuinereasons, she/he may submit the documents to the bank within a period of six months from
the date ofopeningaccount.

PhysicalAadhaarcard/letterissuedbyUIDAIcontainingdetailsofname,addressandAadhaarnumber
receivedthroughpostwouldcontinuetobeacceptedasan‘Officially ValidDocument’.

OperationalProceduretobefollowedbybanksfore-KYC exercise

The e-KYC service of the UIDAI is be leveraged by banks through a secured network. Any bank
willing touse the UIDAI e-KYC service is required to sign an agreement with the UIDAI. The process
flow to befollowedisas follows:

SignKYCUserAgency(KUA)agreementwithUIDAItoenablethebanktospecificallyaccesse-KYCservice.

Banks to deploy hardware and software for deployment of e-KYC service across various
deliverychannels.TheseshouldbeStandardisationTestingandQualityCertification(STQC)Institute,Depa
rtment of Electronics & Information Technology, Government of India certified biometric
scannersatbankbranches/microATMs/BC pointsas perUIDAIstandards.

Develop a software application to enable use of e-KYC across various Customer Service Points (CSP)
(includingbankbranch,BCsetc.)asperUIDAIdefinedApplicationProgrammingInterface(API)protocols.
For this purpose banks will have to develop their own software under the broad guidelines
ofUIDAI.Therefore,thesoftwaremaydiffer frombankto bank.

Define a procedure for obtaining customer authorization to UIDAI for sharing e-KYC data with
thebank. This authorization can be in physical (by way of a written explicit consent authorising UIDAI
toshare his/her Aadhaar data with the bank/BC for the purpose of opening bank account)
/electronic formasdefined byUIDAIfromtimetotime.

Sampleprocessflowwouldbeasfollows:
 Customer walks into CSP of a bank with his/her 12-digit Aadhaar number and explicit
consentandrequeststoopena bankaccountwith Aadhaar based e-KYC.

Bank representativemanningtheCSPentersthe number intobank’se-KYCapplicationsoftware.

The customer inputs his/her biometrics via a UIDAI compliant biometric reader (e.g.
fingerprintsona biometricreader).

ThesoftwareapplicationcapturestheAadhaarnumberalongwithbiometricdata,encryptsthis
dataandsendsitto UIDAI’sCentralIdentitiesDataRepository(CIDR).

The Aadhaar KYC service authenticates customer data. If the Aadhar number does not
matchwith the biometrics, UIDAI server responds with an error with various reason codes
dependingontypeof error(as definedby UIDAI).

If the Aadhaar number matches with the biometrics, UIDAI responds with digitally signed
andencrypted demographic information [Name, year/date of birth, Gender, Address, Phone
andemail(ifavailable)]andphotograph.Thisinformationiscapturedbybank’se-
KYCapplicationandprocessed as needed.

Bank’s servers auto populate the demographic data and photograph in relevant fields. It
alsorecordsthefullaudittrailofe-KYC viz.sourceof
information,digitalsignatures,referencenumber,originalrequestgenerationnumber,machineI
Dfordeviceusedtogeneratetherequest, date and time stamp with full trail of message
routing, UIDAI encryption date and timestamp,bank’sdecryptiondate andtimestamp,etc.

The photograph and demographics of the customer can be seen on the screen of computer
atbankbranchesorona handhelddeviceof BCsforreference.

Thecustomercanopenbankaccountsubjecttosatisfyingotheraccountopeningrequirements.

Customer Service in

BanksServiceat

thecounters

Businesshours/workinghours
Displayoftimenorms
Commencement/Extensionofworkinghours
IdentityBadges
ComplaintBoxandBook
Booklets/BrochuresforGuidancetocustomers
DisplayofinformationrelatingtoInterestRatesandServiceCharges– Ratesata quickglance
DisclosureofInformationbybanksinthepublicdomain
Website
 NeedforBankBranches/ATMstobemade accessibleto personswithdisabilities
ProvidingbankingfacilitiestoVisuallyImpairedPersons
Facilitytosick/old/incapacitatednon-pensionaccountholders
Extendedbusinesshoursfornon-cashbankingtransactions

The following non-cash transactions should be undertaken by banks during the extended hours, i.e.,
uptoonehour beforethecloseofworkinghours:

Non-vouchergeneratingtransactions

Issue ofpass books/statement ofaccounts

Issue ofchequebooks
Deliveryofterm depositreceipts/drafts
Acceptanceofshareapplicationforms
Acceptanceofclearingcheques
Acceptanceofbills forcollection

Vouchergeneratingtransactions

Issueoftermdepositreceipts
Acceptanceofchequesforlockerrentdue
Issue oftravellers cheques
Issue ofgift cheques
Acceptanceofindividualchequesfortransfer credit

BankingCodesandStandardsBoardofIndia(BCSBI)

InNovember2003,ReserveBankofIndia(RBI)constitutedtheCommitteeonProceduresandPerformance
AuditofPublicServicesundertheChairmanshipofShriS.S.Tarapore(formerDeputyGovernor) to address
the issues relating to availability of adequate banking services to the
commonperson.TheCommitteerecommendedsettingupoftheBankingCodesandStandardsBoardofIndi
a

(BCSBI).BCSBIwassetuptoensurethatthecommonpersonasaconsumeroffinancialservicesfromthe
banking Industry is in no way at a disadvantageous position and really gets what he/she has
beenpromised.

ThemainobjectivesoftheBCSBI are

Toplan,evolve,prepare,develop,promoteandpublishcomprehensiveCodesandStandardsforbanks,forpr
ovidingfor fairtreatmenttotheircustomers.
To function as an independent and autonomous body to monitor, and to ensure that the Codes
andStandardsadoptedbybanksareadheredto,inletterandspirit,whiledeliveringservicestotheircustome
rs.

BCSBImonitorstheimplementationoftheCodesthroughthefollowingmethods:

ObtainsfrommemberbanksanAnnualStatementofCompliance(ASC)
Visitsbranchestofindoutthe statusofground-levelimplementationofCodes
Studiescomplaintsreceivedfromcustomersandorders/awardsissuedbyBankingOmbudsmen/Appe
llateAuthorityto findout whether thereisanysystem-widedeficiency
OrganizesanannualConferencewithPrincipalCodeComplianceOfficersoftheMemberbanksto
discuss implementationissues.

BCSBIalso

Undertakescampaignsandinitiativesto spread awarenessoftheCodesamongstcustomersandbanks

Providesfacultysupporttotrainingestablishmentsofbanks
Participates inon-locationworkshopsheldby/ formemberbanksto increasecoverage
associateswithcustomerawarenessprogrammesconductedbyBankingOmbudsmen
providescreditcounsellingservices inMumbai
publishesquarterlynewsletterentitled‘CustomerMatters’,containingmattersofinterestto
customers

……………………………………………………………………………………………………………

Unit-22:OperationalAspectsofAccountingEntries

TherearetwotypesoftransactionsinaBank,Cashandnon-cash.

Vouchers

Therearetwotypesofvouchers.

whichevidencesonlydebit orcredittoanaccount
whichcontainsbothdebitandcredittodifferentaccounts(compositevouchers)

Normaldebitvouchersare:

Cheques
Withdrawalforms
Drafts
 Dividend/interestwarrants
Travellers'cheques
Letterofauthoritysignedbythecustomers,containingstandinginstructions.
Debitvoucherspreparedbythebranch
TermDepositreceiptpresentedforpayment

NormalCreditvouchersare:

Pay-in-slips
ApplicationsforissueofDDs, TDs,BCs,RTGS/NEFT,payorders
ChallansfordepositsintoCentral/StateGovtAccounts
Creditvoucherspreparedbythebranch

……………………………………………………………………………………………………………

Unit-23:OperationalAspectsofCash/Clearing

CashReplenishmentatATMs

ImplementationofCTS

ChequeTruncationSystem(CTS)-
Assurescertaincommonminimumsecurityfeaturesinchequesprinted,issuedandhandledby banks
andcustomersuniformly acrossthebankingindustry.

Accordingly, certain benchmarks towards achieving standardisation of cheques issued by banks

acrossthe country have been prescribed like – quality of paper, watermark, bank’s logo in invisible
ink, voidpantograph, etc., and standardisation of field placements on cheques. The benchmark
prescriptions arecollectivelyknown as"CTS-2010standard".

Allbanksprovidingchequefacilitytotheircustomershavebeenadvisedtoissueonly'CTS-2010'standard
cheques. Cheques not complying with CTS-2010 standards will be cleared at less
frequentintervalsi.e. weeklyoncefromNovember1,2014 onwards.

Cheque collection

policiesLocalCheques

Localchequesarepayablewithinthejurisdictionoftheclearinghouseandwillbepresentedthroughthe
clearing system prevailing at the centre. Credit arising out of local cheques shall be given to
thecustomer’s account as indicated in the Cheque Collection Policy (CCP) of the concerned
collecting bank.Notwithstanding to the CCP, ideally, in respect of local clearing, banks shall permit
usage of the shadowcredit afforded to the customers’ accounts immediately after closure of the
relative return clearing onthe next working day or maximum within an hour of commencement of
business on the third workingday fromthe dayof presentationinclearing,subjecttousualsafeguards.

OutstationCheques

Maximum timeframe for collection of cheques drawn on state capitals/major cities/other locations
are7/10/14days respectively.

Ifcheques/instrumentslostintransit/inclearingprocess

If cheques are lost in transit or in the clearing process or at the paying bank's branch under
physicalinstrumentdeliveryclearing,thebankshouldimmediatelybringthesametothenoticeoftheprese
nting customer (beneficiary)’s notice so that the customer can inform the drawer to record
stoppayment and can also take care that other cheques issued anticipating the credit arising out of
the lostcheque arenotdishonouredduetonon-creditoftheamount ofthe lost cheques/ instruments.

In CTS, if the instrument is lost after lodging with the collecting bank but before truncating the same
forsendingthroughimagebasedclearing,thepresentingbankshouldfollowtheprocedureindicatedabove
.

Thecustomerisentitledtobereimbursedbybanksforrelatedexpensesforobtainingduplicateinstruments
andalsointerest for reasonable delays inobtainingthesame.

Cashanditscustody

Cashandsmallcoinbalancesmust bekeptin thestrongroom inthe jointcustody.

Nomemberof staffotherthancashier/tellershouldreceivemoneyoverthecounter.
StrongRoom andsafemustbe underthedoublelockof theCashierandSupervisingOfficial.
Bulk of Cash balances should always be in the strong room/safe in the joint custody.
CashierHandbalancewill bekept as lowas possible.

CheckingofCashBalance

Beforetakingnotesandcoinsinto"JointCustody",thesupervisingofficialwill:

PersonallycountallnotesofdenominationsaboveRs.10.
Countallother notesonthe "clipsystem".
Have allbagsofcoinsweighedinhis presence.
 Take and count few pieces and leave the reminder to be counted in his presence on the
"clipsystem".
InvariablychecktheentireHeadCashier's/Cashier'shandbalanceofloosenotes.
Assure that Head Cashier's/Cashier's hand balance are kept in the cash box and locked in
hispresence.

At the close of working day, verify that the "Joint Custody balance" corresponds exactly with the
entriesintheCashBalanceBook.

Before the safe is closed, the supervising official, Head Cashier and Cashier should check the
bundlesandverify thesamewith theReserveCashRegister.

ShortageorExcessinCash

Any shortage in the cash balance should be recovered on the same day from the
HeadCashier/Cashier.
Failing recovery on the same day, the amount of shortage should be debited to
SuspenseAccounttakingthesignaturesofthemembersresponsibleunderreporttothe
HeadOffice.
HeadCashier/CashierisresponsibleforanyshortageeitherinHandorVaultBalance.
CashierssignedtheDenominationSlipswillberesponsibleforanyshortage inbookofnotes.
Anyexcess inthe CashBalancemust becreditedto Sundry CreditorsAccountonthesame day.

RemittanceofCash

When remittances of currency notes are sent from one office to another, following instructions
must bestrictlycomplied with:

Shouldnotbe allowedtobe carriedwithout armedguard.

Always entrusted to an authorised employee with experienced subordinate staff and
armedguard.
Nightjourneysandunusualhalts atjunctionsshouldbeavoided.
Remittanceboxshouldalwaysbeconveyedinthevanprovided.
Theboxshouldbesecurelychainedandlocked.
Aregistershouldbemaintained to recordallcash remittances.

ClearingOperation

Prerequisitesforsendingchequesforclearing

All the instruments presented through the clearing should bear the "Clearing" stamp with
BankandBranch anddate.
 Bank crossingstampwithMICR code.
Verifythenameofthepayee andonpay-in-slipwhichshouldbeoneandthe same.
Verifythe amountonthechequeandonpay-in-slipwhichshouldbeone andthesame.
Cheques witha/cpayeecrossingmust becollectedtothe payeea/conly.
Send the unpaid Return Cheques through the branch courier to reach the clearing branch
beforestipulatedtime.

Followallthespecifiedinstructionsfor:

Inwardclearingcheques
Outwardclearingcheques
HighValue clearing
ElectronicClearingSystem(ECS)
ClearingHouseAccountReconciliation
BalancingofClearingHouse Account

……………………………………………………………………………………………………………

Unit - 24 : Operational Aspects of Deposit

AccountsCurrentAccounts

Current Account is an account in which there is no limit on the no. of transactions that can be done
in adayand are thereforealsoreferred toas Transactional Accounts. Thesetypeof accountsare
heldneither for the purpose of Investment nor for the purpose of Savings but only for the
convenience of thebusiness as these accountsare themostliquidtypeofaccounts.

Banksdon'tpayanyinterestontheamountlyingintheseaccountsandinsomecasesalsochargeasmall fee
for the services they provide. These types of Bank Accounts are usually opened by
businessesasthereno.oftransactionsareonthehigher side.

Current Accounts (C/As) can be opened by individuals, partnership firms, private and
publiclimitedcompanies,HUFs, societies,trusts,clubs, associations,GovtDepartmentsetc.
No interestispayableoncreditbalancesin CurrentAccounts.
The customers may receive the statements of account according to the frequency desired
bythem.
ChequebooksareissuedtoallCurrentAccountholdersandallwithdrawalsshouldbemadeonlythrough
issueofcheques.
As per RBI directive, the applicant for Current Account should declare in the account
openingform or separately that he/they is/are not enjoying any credit facility with any Bank
and
ifhe/theydoes/doenjoyanycreditfacility,he/theyshoulddeclarefullparticularsthereofindicatin
gthenameoftheBank/branch concerned.
MainFeaturesofSavingsBankAccount

Thereisnorestrictiononthe numberandamountofdeposits.
However,mandatoryPANdetailsarerequiredfordoingcashtransactionsexceedingRs.50,000.
Withdrawalsareallowedsubjecttocertainrestrictions.
Themoney canbewithdrawn eitherbychequeorwithdrawal slipoftherespective bank.
Therateofinterestpayable isbetween4%to6%p.ainIndia.
Savingaccountisofcontinuingnature.Thereisnomaximum periodofholding.
Aminimumamounthastobekeptonsavingaccountto keepitfunctioning.
Noloanfacilityisprovidedagainstsavingaccount.
ElectronicclearingSystem(ECS)/E-Banking/NetBanking/MobileBankingfacilitiesareavailable.

Eligibilitytoopen SavingsBankAccounts

Individuals
Twoormore persons injoint names
Associationsorclubs if eligible as perRBIguidelines
Minorabove10year
Abank shouldnotopenmorethanone SBaccountfor the samepersonin hisindividual name
Ifjointaccounts,operatinginstructionsandsurvivorshipshouldbeobtained

ProhibitedtoopenSavingsBankAccount

GovernmentDepartments
Municipalcorporations
MunicipalCommittees
PanchayatSamitis
StateHousingBoards
WaterandSewerage/Drainage Boards
StateTextBookPublishingCorporations
Societies
MetropolitalDevelopmentAuthority
State/DistrictlevelHousingCo.opSocieities
Anytradingbusinessorprofessionalconcern
PoliticalParty

Theaboveprohibitionwillnotapplyincasethey are eligibleas perRBI guidelines.

UnclaimedDepositsandInoperative/DormantAccounts

In view of the increase in the amount of unclaimed deposits with banks year after year and
theinherent risk associated with such deposits, it is felt that banks should play a more pro-
activeroleinfindingthewhereaboutsoftheaccountholderswhoseaccountshaveremained
 inoperative.Keepingthesefactorsinview,Banksmayfollowtheinstructionsdetailedbelowwhile
dealingwith inoperative/dormant accounts:

Banks should carry out an annual review of accounts in which there are no operations for
morethan one year. Thebanks may approach thecustomersand inform themin writing
thattherehasbeen nooperationin theiraccountsandascertainthereasonsforthesame.

If the letters are returned undelivered, they may immediately be put on enquiry to find out
thewhereaboutsof customersor theirlegalheirs incasetheyaredeceased.

In case the whereabouts of the customers are not traceable, banks should consider
contactingthe persons who had introduced the account holder. They could also consider
contacting theemployer/or any other person whose details are available with them. They
could also considercontacting the account holder telephonically in case his telephone
number / Cell number hasbeen furnished to the bank. In case of Non Resident accounts, the
bank may also contact theaccountholdersthroughemailandobtaintheirconfirmationof
thedetailsoftheaccount.

A savings as well as current account should be treated as inoperative/dormant if there are

notransactionsin theaccountforover aperiodoftwoyears.

In case any reply is given by the account holder giving the reasons for not operating the
account,banks should continue classifying the same as an operative account for one more
year
withinwhichperiodtheaccountholdermayberequestedtooperatetheaccount.However,incaset
he account holder still does not operate the same during the extended period, banks
shouldclassifythe sameasinoperativeaccount aftertheexpiry oftheextended period.

For the purpose of classifying an account as 'inoperative' both the type of transactions i.e.
debitas well as credit transactions induced at the instance of customers as well as third
party shouldbe considered. However, the service charges levied by the bank or interest
credited by the bankshould not be considered. Interest on Fixed Deposit account is credited
in the Savings Bankaccounts as per the mandate of the customer, the same could be treated
as a customer inducedtransaction and the account should be treated as operative account
as long as the interest onFixedDeposit account iscreditedtothe Savings Bankaccount.

Further, the segregation of the inoperative accounts is from the point of view of reducing risk
offrauds etc. However, the customer should not be inconvenienced in any way, just because
hisaccount has beenrenderedinoperative.

Operation in such accounts may be allowed after due diligence as per risk category of
thecustomer. Duediligence would mean ensuringgenuineness ofthe transaction,verification
ofthe signatureandidentityetc.

Thereshouldnotbe anycharge foractivationofinoperativeaccount.

 Banks are also advised to ensure that the amounts lying in inoperative accounts ledger
areproperlyaudited bytheinternal auditors/statutoryauditorsof thebank.

Interest on savings bank accounts should be credited on regular basis whether the account
isoperative or not. If a Fixed Deposit Receipt matures and proceeds are unpaid, the amount
leftunclaimedwith thebankwill attractsavings bankrateofinterest.

BasicSavingsBankDepositAccount(BSBDA)

Banksareadvisedtooffera‘BasicSavingsBankDepositAccount’whichwillofferfollowingminimum
commonfacilitiestoalltheircustomers:

TheBSBAD shouldbeconsideredanormalbankingserviceavailabletoall.
Thisaccountshallnothavethe requirementofanyminimum balance.
The services available in the account will include deposit and withdrawal of cash at bank
branchas well as ATMs; receipt/credit of money through electronic payment channels or by
means
ofdeposit/collectionofchequesdrawnbyCentral/StateGovernmentagenciesanddepartments;
While there will be no limit on the number of deposits that can be made in a month,
accountholderswillbeallowedamaximumof fourwithdrawals
inamonth,includingATMwithdrawals;
Facilityof ATMcardorATM-cum-DebitCard;
The above facilities will be provided without any charges.Further, no charge will be levied
fornon-operation/activationof in-operative‘BasicSavingsBankDeposit Account’.
Banks would be free to evolve other requirements including pricing structure for
additionalvalue-
addedservicesbeyondthestipulatedbasicminimumservicesonreasonableandtransparentbasis
andapplied ina non-discriminatorymanner.
The BSBDA would be subject to RBI instructions on Know Your Customer (KYC) / Anti-
MoneyLaundering(AML) foropeningofbankaccounts issuedfrom timetotime.
If such account is opened on the basis of simplified KYC norms, the account would
additionallybe treatedasa ‘SmallAccount’andwouldbesubject to
conditionsstipulatedforsuchaccounts.
Holders of BSBDA will not be eligible for opening any other savings bank deposit account in
thatbank. If a customer has any other existing savings bank deposit account in that bank,
he/she willbe requiredtocloseitwithin30 days fromthedateofopeningaBSBDA.
Theexistingbasicbanking‘no-frills’accountsshouldbe convertedtoBSBDA.

PhotographsofAccountHolders

The banks should obtain photographs of the depositors/account holders who are authorised
tooperate the accounts at the time of opening of all new accounts. The customers'
photographsshould be recent and the cost of photographs to be affixed on the account
opening forms maybe borneby thecustomers.
 Onlyonesetofphotographsneedbeobtainedandseparatephotographsshouldnotbeobtained for
each category of deposit. The applications for different types of deposit accountsshouldbe
properlyreferenced.

Photographsofpersonsauthorisedtooperatethedepositaccountsviz.S.B.andCurrentaccounts
should be obtained. In case of other deposits viz. Fixed, Recurring, Cumulative
etc.photographs of all depositors in whose names the deposit receipt stands may be
obtained,except in the case of deposits in the name of minor, where guardians'
photographs could beobtained.
Thebanks shouldalsoobtainphotographsof‘Pardanashin’women.
ThebanksshouldalsoobtainphotographsofNon-Resident(External)(NRE),Non-
ResidentOrdinary(Rupee)(NRO),Foreign CurrencyNon-Resident (FCNR)accountholders.

Accountswithsurvivor/nomineeclause

Inthecaseofdepositaccountswherethedepositorhadutilisedthenominationfacilityandmadeavalid
nomination or where the account was opened with the survivorship clause ("either or survivor",
or"anyone or survivor", or "former or survivor" or "latter or survivor"), the payment of the balance
in thedeposit account to the survivor(s)/nominee of a deceased deposit account holder represents a
validdischarge ofthebank'sliability provided:

Thebankhasexercisedduecareandcautioninestablishingtheidentityofthesurvivor(s)/nomineeandt
hefactofdeathoftheaccountholder,throughappropriatedocumentaryevidence;
There is no order from the competent court restraining the bank from making the payment
fromthe accountof thedeceased

It has been made clear to the survivor(s)/nominee that he would be receiving the payment
fromthe bank as a trustee of the legal heirs of the deceased depositor, i.e., such payment to
him shallnot affect the right or claim which any person may have against the
survivor(s)/nominee towhom thepayment ismade.

Itmaybenotedthatsincepaymentmadetothesurvivor(s)/nominee,subjecttotheforegoingconditions,
would constitute a full discharge of the bank's liability. Therefore, while making payment tothe
survivor(s)/nominee of the deceased depositor, the banks are advised to desist from insisting
onproduction of succession certificate, letter of administration or probate, etc., or obtain any bond
ofindemnity or surety from the survivor(s)/nominee, irrespective of the amount standing to the
credit ofthedeceasedaccount holder.

Accountswithoutthesurvivor/nomineeclause

In case where the deceased depositor had not made any nomination or for the accounts other
thanthose styled as "either or survivor" (such as single or jointly operated accounts), banks are
advised
toadoptasimplifiedprocedureforrepaymenttolegalheir(s)ofthedepositorkeepinginviewtheimperative
need to avoid inconvenience and undue hardship to the common person.In this context,banks may,
keeping in view their risk management systems, fix a minimum threshold limit, for
thebalanceintheaccountofthedeceaseddepositors,uptowhichclaimsinrespectofthedeceased

depositorscouldbesettledwithoutinsistingonproductionofanydocumentationotherthanaletterofindem
nity.

OperatingInstructionsonJointAccounts

Banksshouldencourage theopeningofjointaccountsontermssuch as,payableto

EitherorSurvivor
FormerorSurvivor
LaterorSurvivor
AnyoneorSurvivors,orSurvivor

SalientfeaturesofNomination

Nominationfacilitatesfasterandeasierreleaseoffunds/articleswithoutinsistenceonSuccessionCerti
ficate/Probateof Will.
Nominationfacilityisavailabletoaccountholdersoperatingcurrentaccounts,savingsbankaccountsa
ndall typesoftermdepositaccounts, safedepositlockersorsafecustodyofarticles.
Nominationfacility isintendedforindividualsonly.
Nominationcanbemadeinfavourofonepersononly.Itcanbemadeinexistingornewaccountsandcanb
ecancelledorchanged subsequentlybythedepositors.
Nominationcannotbemadeinaccountswheredepositsareheldinarepresentativecapacity
e.g.trustaccountsetc.andinaccountsofpartnershipfirms,H.U.F.,companies,associations,clubs
etc.
Incaseofajointaccountofindividuals,nominationshouldbemadebyall depositorsjointly.
In caseof minor'saccountwhetherself operatedor
otherwise,nominationshouldbemadebyapersonlawfullyentitledtoactonbehalfof theminor.
Nomination favouring the minor is permitted on the condition that the account holder,
whilemakingthenomination,appointsanotherindividual,notbeingaminor,toreceivetheamoun
tof the deposit on behalf of the nominee in the event of the death of the depositor during
theminorityofthe nominee.Dateof birthofminorbeobtained andnoted.
A nomination will continue to be in force even on renewal of term deposit, unless
specificallycancelledor changed.
Name of existing nominee in respect of specific Term Deposit Receipt will not be added
forsubsequentdepositreceipts.Separatenominationwillbeobtainedforeachdepositreceipt.
Nomination facility is available for savings bank accounts opened for credit of pension.
However,BankingCompanies(Nomination)Rules,1985aredistinctfromtheArrearsofPension(N
omination) Rules,1983 and the nomination exercised by the pensioner under the latter
rulesfor receipt of arrears of pension will not be valid for the purpose of deposit accounts
held by thepensioners with banks, for which a separate nomination is necessary in terms of
 the BankingCompanies(Nomination)Rules,1985incaseapensionerdesiresto
availofnominationfacility.
A non-resident can be nominated as a nominee in a resident account. In case of non-
residentnominees, the amount entitled to him from the account(s)/deposit(s) of a deceased
person, willbe credited tohis NRO account.

Safecustodyofarticles:-

Nominationcanbemadeinfavourofoneindividualonly.
Wherethenomineeisaminor,thecustomershall,whilemakingthenomination,appointanother
individual not being a minor, to receive the articles on behalf of the nominee, in
theeventofthedeathof thecustomer duringtheminority ofthenominee.
Nomination facilities are available only in case of individual depositors and not in respect
ofpersonsjointly depositingarticles for safe custody.

Safedepositlockers:-

Incaseofasolehirerofasafedepositlocker,nominationcanbemadeinfavourofonlyoneindividual.
Where the safedepositlockerishired from thebankby two or more
individuals,nominationcanbemadeinfavourof oneormorepersons.
Wherethesafedepositlockerishiredinthenameofaminor,thenominationshallbemadebyapersonla
wfullyentitled toact onbehalfof theminor.
Aminorcanbeappointedasanomineefordeliveringcontentsofahiredlocker.Section45ZEof the
Banking Regulation Act, 1949 does not preclude a minor from being a nominee, forobtaining
delivery of the contents of a locker. However, the bank in such cases,when thecontents of a
locker are sought to be removed on behalf of the minor nominee,hand over thearticlestoa
personwho, in lawiscompetenttoreceivethe articlesonbehalfoftheminor.

……………………………………………………………………………………………………………

Unit - 25 : Operational Aspects of Loan

AccountsTypesofBorrowers

Anindividual
SoleProprietaryFirm
Partnershipfirmandjointventure
HUF
Companies
StatutoryCorporations
TrustsandCo-Opsocieties

Gothroughthesefollowingtermsindetailswithbook
 FundedandNon-FundedCreditFacilities
Term Loans
DemandLoans

BillsPurchased
Bills Discounted
Enduseoffunds
Primary Securities
CollateralSecurities
PersonalSecurityofGuarantor
FixedCharges
FloatingCharges
Margin
PrioritySector
Refinance
CreditRiskManagement
CreditExposureNorms
BaseRateSystemofInterest onAdvances
Fixed/FloatingRateof InterestonLoans
PenalRateof Interest
Security
DocumentsofTitleofGoods
Banker’sGeneralLien
NegativeLien
RestrictionsonAdvances
Rehabilitation
Recovery
aa.Fair PracticeCode

OperationalProcessofLoansintheBanks

ReceiptofLoanApplication
Assessmentofviability andcreditworthiness
Sanction
Disbursement
Monitoringandsupervision
Inspections
Reviewofthe conductof theaccount
Renewalofadvances

Operatinginstructions –AdvanceagainstGoodsandWarehouseReceipts

Go throughthesefollowingoperatinginstructionsindetailswith book

Documentation
 Margin
Valuation
Marketability

GodownBoard
Insurance
GodownsinaPledge Account
PledgingofStocks
Storageofgoodspledgedinthe godownswheregoodsnotpledgedarealsostored
Deliveryofstockspledged
SubmissionofstockstatementsinHypothecationaccounts
Goodshypothecatedinthegodownswheregoodsnothypothecatedarealsolying
Staffaccountability
ChargesforinspectionofGodowns/Assets/Securitiesetc.
Godown charges
Selectivecreditcontrol
Advances against warehouse

receiptsOperational aspects of few common

loan productsGoldLoans

MustbecoveredunderpolicyframedbyBank’sBoard
Prohibitedfromgrantinganyadvanceagainst bullion/primarygold
Enduse ofthefunds tobeensured
Ownershipof theornamentstobeensured
Valuationofgoldornaments tobedone
Preferhallmarkedjewellery
Purpose ofloancanbeforboth Agricultureandnon-agriculture purposes
LoantoValue(LTV)tobemaintained(Max. 75 %ofvalueofgoldornaments)
Maximumamountof loanshouldbewithinboardapprovedlimit
Recordofsecurity
Custodyofornaments
Repaymentshouldnot bemorethan12months(otherthanagriculture)
Returnofornamentson repayment
Deliveryto thirdparties shouldbebyaletterofauthority from thebuyer
Defaultisto beinformedto theborrowerthattheornamentswouldbeauctioned
Shouldbeinsuredforthe approvedvalue
Surpriseverificationofthepockets to becarriedout

EducationalLoans

Serviceareanorms
Eligibilitycriteria
Studenteligibility
Expensesconsideredforloan
Quantumoffinance
 Margin

Security
Documentation
Sanction
Disbursement
Repayment
Follow up
Processingcharges
Capabilitycertificate

HomeLoans

Valuationofproperty
Eligibility
LoantoVale(LTV)ratio
Interestrate
Security
Insurance
Disbursal–forpurchaseofconstructedproperty/builtupproperty
Disbursal–forbuildingconstruction
Repayment
NoForeclosurecharges/Prepaymentpenaltyforfloatingrateindividualborrowers

VehicleLoans

Purpose ofAuto Loan–New/usedCar,MUVs,SUVs,Twowheelers

Eligibility
Documentsrequiredtobesubmitted
LoanTenure
LoantoVale(LTV)ratio
Interestrate–Fixed/Floating
Calculationofinterest
Penalinterest
Bouncedcheque/ECS orSIdishonorurs
Intimationof changeinbaserate
Repayment
Security
Insurance
Prepaymentpenaltyiswaived
Inspection
Feesandcharges
Disbursement

Apartfromtheabove, alltheloanssanctionedmustcomplywith:
 KYC–proper verificationofKYC
CIBILdisclosure–BorrowershouldagreeandgiveconsentfordisclosurebytheBank
Default – In case of default, the borrower must be sent with reminders through post, fax,
email,SMS
Timetakenfordisposalofallocations –shouldbe disposedwithinstipulatedtime

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Unit - 26 : Operational Aspects of CBS

EnvironmentCoreBanking Solutions(CBS)

Core Banking is the integrative approach that efficiently unites different banking systems in selling
theirproductsandserviceswiththeaidofinformationtechnology.Unisonofdifferentbankingsystemfacilit
ates to open up the market thus ideally increases the opportunity for banks to acquire
morecustomersanda bettercustomer retention.

Core Banking Solutions (CBS) is the process which is completed in a centralized environment
i.e.CoreBanking Solution under which the information relating to the customer’s account i.e.
financial dealings,profession, income, family members etc are dealt with. These information are
stored in the CentralServer of the bank that is available to all the networked branches instead of the
branch server. The wordCoreinCoreBankingSolutions (CBS)stands forCentralizedOnlineReal-time
Environment.

CBS is networking of branches, which enables customers to operate their accounts, and avail
bankingservices from bank on CBS network, regardless of where they maintain their account. Thus,
CBS is a steptowardsenhancingcustomer conveniencethrough "AnywhereandAnytimeBanking".

NeedforCoreBankingSolution

Improveoperationalefficiency-reduce costofoperations
Improvecustomerservice
ComplywithAntiMoneyLaundering(AML)/Know YourCustomer(KYC)requirements
Integratewithelectronicpaymentsystems

BenefitsofCBS

CBSwillprovidethefollowingbenefits:

AnytimeandAnywherebanking(onlinemediums/SMS)
Standardised,simpleandautomatedprocesses
Increaseinqualityofthe serviceprovidedto thecustomers
 Timelyandaccurateinformationformanagementdecisionmaking
Strongauditandinternal controls
Bringdownthe costoftransactionandtherebyimprovingoperationalefficiency
Paving way for new value added services thereby generating additional revenue for
theDepartment

ObjectivesofCBS

Thekeyobjectives are asbelow:

To increasethe numberofcustomers
To provide multiple delivery channels like internet, mobile banking, ATMs, thereby
bringingaccesstofinancialservicestothedoorstepsofthe customers
Toenablefastermoneyfundtransfersto reachouttomore customers
To become onestopsolutionforfinancialinclusioninitiativesof theGovernmentofIndia

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Unit-

27:BackOfficeOperations/HandlingofUnreconciledEntriesinBanksFunctionsperf

ormedbytheBack Office

Backofficefunctionscanbe grouped as under:

Book keeping and accounting – Transaction processing, maintenance of General Ledger

andother bookof accounts
Deposits– Calculationandpostingofinterest,servicecharges
Loans – processing end-to-end loan originations, calculation of EMI, calculation and posting
ofinterest,penal interest,processingfee, commission,charges, riskmanagement
Regulatorycompliance– IdentifyingKYCgaps,customergrievance redressalsystem
e-Banking–handlingtransactionsthroughinternet,mobilebankingorATMs
Otherfunctions– Clearing,collection,remittances

ReconciliationfunctionsinBanks

Reconciliationofaccountsforpaymentsinvolvingintermediaries
Reconciliationofaccountsfor with correspondentbanks
ReconciliationofbankaccountswithRBI andotherbanksandinstitutions
ReconciliationofInterbranch entries
ReconciliationofInterOffice transactions
RBI guidelines regarding inter office
entriesReconciliationsetupandprocess
atthebanks