Module A: Accounting Principles and Processes

Unit 1: Definition, Scope and Accounting Standards

● Accountancy is the systematic recording, summarizing, analysis, and

reporting of financial transactions for individuals, businesses, or
organizations, including the preparation of financial statements for an
accurate representation of financial performance and position.
● Branches of Accounting:
1. Cost accounting focuses on tracking and analyzing costs within a
business.
2. Financial accounting involves recording and reporting financial
transactions.
3. Inflation accounting adjusts financial statements for inflation effect.
4. Management accounting provides internal financial information for
decision-making.
5. HRM accounting pertains to tracking and managing human
resources-related costs.

Accounting Standards and Ind AS:

● Accounting Standards are rules set by the Accounting Standards Board
(ASB), established by the Institute of Chartered Accountants of India
(ICAI) in 1977, to standardize accounting policies and methods, with the
ASB creating standards that can be mandated by the ICAI council.

● Under Section 129(5) of the Companies Act 2013, companies not following
accounting standards must disclose deviations, reasons, and financial
effects; the 'National Advisory Committee on Accounting Standards,'
replaced by the 'National Financial Reporting Authority' (NFRA) since
October 1, 2018, collaborates with the ICAI, impacting its powers by
providing recommendations on Accounting Standards.

● Ind AS, introduced for global comparability, align with International

Financial Reporting Standards (IFRS) but are adjusted for the Indian
context. The Institute of Chartered Accountants of India recommends
Accounting Standards to the National Financial Reporting Authority
(NFRA), and the Ministry of Corporate Affairs notifies the standards; India
uses both ICAI and Ind AS standards, totaling 41, with any conflicts
resolved in favor of applicable Acts.

● The Ministry of Corporate Affairs introduced a roadmap for implementing

Indian Accounting Standards (Ind AS) in 2016, affecting scheduled
commercial banks, insurers, and non-banking financial companies.
 ● The adoption, mandated from April 1, 2018, with oversight by RBI and
IRDA for banks and insurance companies, involves changes like financial
asset classification, interest recognition using the effective interest
method, stock option valuation, and an Expected Credit Loss (ECL) model
for impairment, with ECL measurements based on credit quality changes.

● In Stage 1, Expected Credit Loss (ECL) is recognized for exposures

without significant credit risk increase in the next twelve months; in Stage
2, Lifetime ECL is recognized for exposures with a significant risk increase
but not credit-impaired; Stage 3 involves recognizing Lifetime ECL when
credit impairment occurs due to events affecting future cash flows, and
interest revenue recognition varies based on stages—original rates for
stages 1 and 2, and written-down amount for stage 3 assets.

List of AS and Ind AS

AS Name Ind AS Name

AS 1 Disclosure of Ind AS 101 First time

Accounting Policies adoption of Ind
AS

AS 2 Inventories Ind AS 102 Share Based

Payment

AS 3 Cash Flow Ind AS 103 Business

Statements Combination

AS 4 Contingencies and Ind AS 104 Insurance

Events Occurring Contracts
after the Balance
Sheet Date

AS 5 Net Profit or Loss Ind AS 105 Non-Current

for the Period, Assets Held for
Prior Period Items Sale and
and Changes in Discontinued
Accounting Policies
Operations

AS 7 Statement of Cash Ind AS 106 Exploration for

Flows and Evaluation of
Mineral
Resources

AS 9 Revenue Ind AS 107 Financial

Recognition Instruments:
Disclosures

AS 10 Accounting for Ind AS 108 Operating

 Fixed Assets Segments

AS 11 Construction Ind AS 109 Financial

Contracts Instruments

AS 12 In-come Taxes Ind AS 110 Consolidated

Financial
Statements

AS 13 Accounting for Ind AS 111 Joint

Investments Arrangements

AS 14 Segment Reporting Ind AS 112 Disclosure of

Interests in
Other Entities

AS 15 Employee Benefits Ind AS 113 Fair Value

Measurement

AS 16 Borrowing Costs Ind AS 114 Regulatory

Deferral Accounts

AS 17 Leases Ind AS 115 Revenue from

Contracts with
Customers
(Applicable from
April 2018)

AS 18 Related Party Ind AS 116 Leases

Disclosures (Applicable from
April 2019)

AS 19 Leases Ind AS 1 Presentation of

Financial
Statements

AS 20 Provisions, Ind AS 2 Inventories

Contingent
Liabilities and
Contingent Assets

AS 21 Consolidated Ind AS 7 Statement of

Financial Cash Flows
Statements

AS 22 Accounting for Ind AS 8 Accounting

taxes on income Policies, Changes
in Accounting
Estimates and
 Errors

AS 23 Accounting for Ind AS 10 Events occurring

Investments in after Reporting
Associates in Period
Consolidated
Financial
Statements

AS 24 Discontinuing Ind AS 11 Construction

Operations Contracts
(Omitted by the
Companies
(Indian
Accounting
Standards)
Amendment
Rules, 2018)

AS 25 Interim Financial Ind AS 12 Income Taxes

Reporting

AS 26 Intangible Assets Ind AS 16 Property, Plant

and Equipment

AS 27 Financial Reporting Ind AS 19 Employee

of Interests in Benefits
Joint Ventures

AS 28 Impairment of Ind AS 20 Accounting for

Assets Government
Grants and
Disclosure of
Government
Assistance

AS 29 Provisions, Ind AS 21 The Effects of

Contingent Changes in
Liabilities, and Foreign Exchange
Contingent Assets Rates

Ind AS 23 Borrowing Costs

Ind AS 24 Related Party

Disclosures

Ind AS 27 Separate
Financial
Statements
 Ind AS 28 Investments in
Associates and
Joint Ventures

Ind AS 29 Financial
Reporting in
Hyper
inflationary
Economies

Ind AS 32 Financial
Instruments:
Presentation

Ind AS 33 Earnings per

Share

Ind AS 34 Interim Financial

Reporting

Ind AS 36 Impairment of
Assets

Ind AS 37 Provisions,
Contingent
Liabilities and
Contingent
Assets

Ind AS 38 Intangible Assets

Ind AS 40 Investment
Property

Ind AS 41 Agriculture

GAAP vs IFRS

GAAP IFRS

Framework based on legal authority Based on a principles-based

approach

More detailed and prescriptive More high-level and flexible

Requires more disclosures Requires fewer disclosures

More focused on the historical cost More flexibility in the valuation of

of assets assets
Only adopted in the US Globally accepted

Developed by Financial Accounting Developed by International

Standard Board (FASB) Accounting Standard Board (IASB)

Uses FIFO, LIFO and weighted Allows FIFO and weighted average
average cost method of inventory cost method for valuation of
valuation inventories

Uses a cost model for fixed asset Uses a revaluation model for
valuation valuation of fixed assets

Fixed assets are valued using the Allows another model - the
cost model, or the historical value of revaluation model - which is based
the asset less any accumulated on fair value on the date of
depreciation evaluation, less any subsequent
accumulated depreciation and
impairment losses

Transfer Pricing:

● Transfer pricing in Indian banks involves setting prices for goods and
services within a multi-divisional organization, particularly for cross-border
transactions; it varies across institutions and is used to assess branch
performance, applying the Transfer Price Mechanism (TPM) with interest
rates for fund transfers to enhance branch profitability, ensuring
alignment with the arm's length price concept for fairness and compliance
with prudential accounting norms.

● Arm's length price is the price agreed upon by unrelated parties, typically
following OECD guidelines, and despite country-specific variations in laws,
using global transfer pricing policies can help mitigate taxation risks and
establish an appropriate range for arm's length prices across an
enterprise.

● The traditional transfer pricing methods include Comparable Uncontrolled

Price (CUP) Method, Cost Plus Method (CP), and Resale Price Method (RP).
● Non-traditional Transfer Pricing Methods are Profit Split (PS) Method and
Transactional Net Margin Method (TNMM).

Unit 2: Basic Accountancy Procedures

Accounting concepts provide a standardized framework for recording, reporting,
and interpreting financial information.

I. Business Entity Concept

 ● Emphasizes a clear distinction between business and personal affairs of
owners.
● Business is treated as a separate entity from owners or shareholders.
● Transactions and records kept separate from the owner's personal
finances.

II. Money Measurement Concept

● It states that accounting records only transactions measurable in
monetary terms.
● Non-monetary factors like Customer Loyalty, Employee Morale, etc., are
not recorded due to lack of measurable monetary value.
● Ignores qualitative factors impacting business performance (e.g., brand
reputation). Doesn't account for the influence of inflation on transaction
measurement.
● Accounting records transactions in monetary units, not physical units.

III. Going Concern Concept

● Assumption: Business will operate indefinitely without imminent
liquidation.
● Implies the ability to realize assets, settle liabilities, and continue
operations.
● Crucial for assessing financial health, stability, and impacts financial
reporting.
● Applications:
1. Assets and liabilities recorded at historical cost, not potential
liquidation values.
2. Long-term assets (e.g., property, plant, equipment) recorded at
original cost, less depreciation.
3. Depreciation and amortization used to allocate long-term asset
costs over their useful lives.

IV. Cost Concept

● Transactions recorded at historical cost.
● Example: Machinery recorded at the amount paid to the supplier plus
expenses for installation.
● Principle: Emphasizes historical cost as the basis for recording monetary
transactions.
● Objective: Provides a reliable and verifiable foundation for financial
reporting.

V. Accounting Period Concept

● Divides the continuous life of a business into specific time intervals,
usually one year.
● Alternative Name: Periodicity Concept.
● Purpose:
 1. Enables systematic recording, summarization, and presentation of
financial transactions.
2. Facilitates reporting and analysis of financial information.

VI. Realisation concept

● Dictates when revenue should be recognized in financial statements.
● Revenue is recognized when:
1. Goods or services are delivered.
2. Risks and rewards of ownership are transferred.
3. There is reasonable assurance of payment.
● Recognizes revenue when it is realized or realizable and earned.

VII. Dual Aspect Concept

● Fundamental accounting principle forming the foundation of the
accounting system.
● Transaction Impact:
1. Every business transaction affects at least two accounts.
2. One account is debited, and another is credited.
● Equation Representation:
1. Assets = Liabilities + Equity.
2. Reflects the give-and-take relationship in every financial
transaction.

Double Entry System Single Entry System

Records every transaction with at least A financial transaction is recorded only

two accounts. once, either as a debit or a credit.

Provides a systematic and accurate Less accurate and systematic compared

method of recording transactions. to double-entry.

More comprehensive, suitable for larger Simpler, often used by small businesses
businesses. or individuals.

Assets = Liabilities + Equity. No specific equation followed.

VIII. Historical Records Concept

● Assets and liabilities recorded at their original acquisition cost.
● Transactions recorded based on actual historical values, not current
market values.
● Also known as the historical cost concept.

IX. Matching Concept

 ● Matching concept ensures expenses are recognized in the same period as
the related revenues.
● Presents a true picture of a company's financial performance over a
specific accounting period.

X. Convention of full disclosure

● Emphasis: Transparent and comprehensive presentation of relevant
financial information.
● Enables stakeholders to make well-informed decisions.
● Companies offer explanations, details, and clarifications in accompanying
notes.
● Notes provide understanding for presented numbers.
● Disclosure: Significant accounting policies and methods must be disclosed.

XI. Convention of Materiality

● Emphasizes reporting material or significant information.
● Influences financial statement users' decisions.
● Determines inclusion of information in financial statements.
● Ensures only relevant and significant information is presented.

XII. Principle of Conservatism

● Guides recording and reporting of financial transactions and events.
● Recommends caution in uncertainties or ambiguities in valuation.
● Prefers options resulting in lower reported income and asset values.
● Implies recognizing potential losses or expenses promptly.
● Delays recognition of potential gains or revenues until certain.

XIII. Convention of Consistency

● Requires consistent adoption of accounting methods and practices across
periods.
● Ensures comparability in financial statements.
● Application: Same accounting methods for measurement, valuation,
recognition, and presentation over different periods.
● If a change is necessary, entity must disclose nature, reasons, and impact
on financial statements.

Accrual Basis Cash Basis

Recognizes revenue and expenses when Recognizes revenue and expenses only
they are incurred. when cash is received or paid.
Does not consider when the economic
activity occurred.

Unit 3: Maintenance of Cash/ Subsidiary Books and Ledger

Bookkeeping in accounting is the systematic recording and organization of
financial transactions, encompassing sales, purchases, expenses, and revenues,
which are then categorized and summarized into relevant accounts for a
business or individual.

The accounting cycle involves recording transactions in journals, classifying them

into ledger accounts for a comprehensive overview, and summarizing with a trial
balance and final accounts to determine profit, loss, and financial position.

A. Journal
The journal is a chronological record of financial transactions using the
double-entry system, serving as the primary source, including date and
transaction details; entries are later posted to the general ledger for
further record-keeping.

B. Cash Book
The cash book is a specialized accounting record for all cash transactions,
following double-entry accounting with separate columns for receipts and
payments. It serves as both journal and ledger, capturing exclusive cash
transactions chronologically. There are single, double, and three-column
cash books, each with distinct features. The finalization involves
transferring entries to appropriate ledger accounts, and the debit side of
the cash account consistently shows a higher value, termed the debit
balance, which is closed with the notation 'By closing balance carried
down.'

C. Petty Cash Book

A petty cash book tracks small and frequent cash expenses, using the
Imprest System where a fixed sum is provided to a minor cashier for a
specific period, and after submitting expense reports with valid receipts,
the exact amount spent is reimbursed to maintain the original Imprest
Amount.

D. Ledger
Dr
Dat Particular JF Amou Date Particul JF Amou
e s nt ars nt

Cr
J.F. – folio or page number on which its journal entry may be
found

A ledger compiles and organizes financial transactions recorded in the

journal, with separate accounts for various entries, ensuring consistency
 by debiting the same account in both journal and ledger, using 'To' and
'By' for debit and credit sides respectively, and balancing by adjusting the
lower side with the excess and noting it as 'By Balance c/d' or 'To Balance
c/d' based on the discrepancy.

Balancing an account involves equalizing its two sides by placing the

difference on the side with the shortfall; if the debit side exceeds, it has a
debit balance, and if the credit side exceeds, it has a credit balance. Steps
include totaling both sides, putting the difference on the side with excess,
adding totals, and bringing down the balance with appropriate annotations
('To Balance b/d' or 'By Balance b/d'). If the sides are equal, the account
is automatically balanced or closed.

Journal and Ledger are integral under the double-entry system; the journal
serves as the original entry recording transactions chronologically, while the
ledger is the analytical record where entries are posted. The journal is more
reliable as it records entries first, and the processes are termed "journalizing" for
recording and "posting" for ledger entries.

Types of Accounts:

1. Impersonal Account:
Impersonal accounts record transactions for tangible assets, liabilities,
and capital, representing elements with physical or financial value
unrelated to specific individuals or entities. Two types of impersonal
accounts:
1.1 Real Account
These accounts represent elements that have a real, tangible existence or
a financial value. Real accounts are not closed at the end of an accounting
period; their balances are carried forward to subsequent periods.

Real accounts include tangible ones like land and cash (physically
touchable) and intangible ones like goodwill and patent rights (not
physically touchable but measurable in terms of money).

Examples: (a) Plant and machinery (b) Investment (c) Land and building
(d) Stock in hand (e) Bills receivable (f) Trademarks (g) Cash

1.2 Nominal Account

Nominal accounts represent the nature of transactions, explaining how
cash has been spent or earned, encompassing expenses, losses, incomes,
and gains in businesses.
 Examples: (a) Interest (b) Salaries (c) Rent (d) Carriage (e)
Commission received (f) Insurance (g) Discount received (h) Wages

2. Personal Account:
Personal accounts, whether natural (individuals), artificial (corporate
bodies), or representative (groups), document transactions with
customers, suppliers, banks, and the owner; representative personal
accounts aggregate amounts under common titles, such as 'Rent
Outstanding Account,' to simplify recording transactions involving multiple
entities of the same nature.

Examples of Personal Accounts: (a) Bank (an artificial person) (b) Tata
Iron & Steel Co. (a company) (c) Santosh (an individual) (d) Capital
(Rajesh – owner) (e) Bank loan (an artificial person) (f) Rent
outstanding (representative personal account)

Type of Account Rule of Debit and Credit

Real Account Debit what comes in and credit what goes

out.

Nominal Account Debit all expenses and credit all incomes

and gains.

Personal Account Debit the Receiver, Credit the giver.

Important Definitions:
1. A closing entry is a journal entry made at the end of an accounting period
to close out temporary accounts and transfer their balances to permanent
accounts. It helps reset temporary accounts (such as revenue and
expense accounts) to zero for the next accounting period, allowing for a
clean start. Common closing entries involve transferring net income or
loss to the retained earnings account and closing revenue and expense
accounts.
2. In the cash book, when a transaction involves both cash and bank
accounts, it is recorded on both the cash and bank sides, known as a
'Contra Entry.' The letter 'C' is marked in the L.F. column to signify this
dual entry.
3. A compound journal entry, characterized by multiple debits or credits,
requires that all debits be recorded before any credits; the total debits
must equal the total credits in the entry.
4. An opening entry is the initial entry made at the beginning of an
accounting period to record the balances from the previous period or to
open new accounts
Unit 4: Bank Reconciliation Statement
A bank reconciliation statement is a crucial tool for comparing and reconciling
personal or business financial records with the bank's records. It addresses
discrepancies arising from various transactions and timing differences.

The bank statement is received regularly, usually monthly, and is checked for
errors. After correcting any errors, we proceed with three steps:
1. Identify entries not needing changes (in cashbook but not bank
statement) to get the "Adjusted bank balance."
2. Rectify errors in the cashbook.
3. Add missing entries from the bank statement to the cashbook.

These steps lead to a "Bank Reconciliation Statement." The adjusted bank

balance (step 1) is a concept, while steps 2 and 3 adjust the cash book balance.
The reconciled balance aligns with the trial balance and balance sheet.

Format of Bank Reconciliation Statement

Closing balance in Bank Statement XXX

Adjustments to the balance in the

bank statement:

Add: Cheques deposited but not yet XX

credited

Subtract: Cheques issued but not (XX)

presented to the bank for payment

Adjusted balance in the bank XXX

statement

Balance as per cashbook XXX

Adjustments made to cashbook:

Add or subtract: clerical errors XX

Add: credit entries shown in the XX

bank statement but not appearing in
cashbook

Subtract: debit entries shown in the (XX)

bank statement but not appearing
in cashbook
Adjusted (corrected) cashbook XXX
balance
The balances are reconciled if adjusted (corrected) cashbook balance is
equal to adjusted balance in the bank statement.

Causes of Difference in Cashbook and Passbook:

A. Error:
Discrepancies between the cash book and bank statement balances can
arise from errors by the firm (such as omission or incorrect recording of
transactions) or errors by the bank (including omissions or inaccuracies in
recording transactions).
Firm errors involve issues with issued and deposited cheques and
incorrect cash book totaling, while bank errors pertain to mistakes made
by the bank in updating passbook entries.

B. Entries that do not require a change in the cashbook:

The following initially appear in the cash book but reflect in the passbook
only when the transactions are processed by the banks involved.
● Cheques Issued but not Presented for Payment
● Cheques Deposited into Bank but not yet Collected

C. Entries that require a change in the cashbook:

● Bank Charges: Charges deducted from the balance as per
cashbook.
● Interest on Savings Bank: added to the balance as per cashbook.
● Interest on Overdraft: deducted from the balance as per cashbook.
● Amount Collected by Bank on Standing Instruction: added to the
balance as per cashbook.
● Amount Paid by Bank on Standing Instruction: deducted from the
balance as per cashbook.
● Dishonour of a Cheque: deducted from the balance as per
cashbook.
● Direct Payments into the Bank made by Trader's Customers: added
to the balance as per cashbook.

Unit 5: Trial Balance, Rectification of Errors and Adjusting and

Closing Entries

A trial balance is a snapshot of all general ledger accounts and their balances,
serving to confirm the accuracy of recorded transactions and adherence to
double-entry bookkeeping. While discrepancies between debits and credits
suggest potential errors, a balanced trial balance doesn't guarantee error-free
records; it only signifies equality between debits and credits.
Typically prepared at year-end but adaptable to other intervals, it provides
insights into receivables, payables, and aids in final accounts preparation.

There are two types of trial balance: 1. Gross trial balance 2. Net trial balance

1. A gross trial balance includes all the ledger accounts with their respective
debit and credit balances before any adjustments. It provides a
comprehensive view of the financial position of a business without
considering adjustments like accruals or prepayments.

2. In a Net Trial Balance, the net balances of each account are considered,
meaning that any credit balances are subtracted from the debit balances.
If the result is a positive value, it's a debit balance, and if it's a negative
value, it's a credit balance.

An error in a trial balance occurs when the total debits and credits don't match,
signaling a discrepancy in accounting records, potentially stemming from
posting, calculation, or omission errors in ledger accounts; correcting these
errors is essential for maintaining accurate financial statements and reports.

Types of Errors:
A. Clerical Errors: Divided into three parts:
1. Errors of commission: Clerical mistakes involving arithmetical
accuracy, such as incorrectly recording an amount in subsidiary
books, accurately recording an amount in the wrong subsidiary
book, posting the wrong amount on the correct side of an account,
or posting the accurate amount on the wrong side of an account.
2. Compensating Error: When two or more mistakes occur, but their
combined effect offsets each other, allowing the trial balance to
remain in balance despite the individual errors.
3. Error of Omission: Failure to record a transaction, entry, or detail in
the books. Partial omission records only one aspect (debit or
credit), causing a trial balance imbalance. Complete omission
involves not recording an entire transaction, with no impact on the
trial balance.

B. Principle Errors:
Errors of principle occur when accounting principles are not followed
correctly, such as debiting wages for machinery installation or recording a
credit purchase of a fixed asset in the purchase journal. While these errors
don't impact the trial balance agreement, they violate accounting
principles and require correction for accurate financial reporting.

Rectification of Errors:
 ● One-sided errors impact a single account and can be corrected
directly before creating a trial balance.

● On the other hand, two-sided errors affect multiple accounts, with

both debit and credit sides impacted equally. Rectifying two-sided
errors involves recording the accurate entry, presenting the
previously entered erroneous entry, and determining the necessary
rectification by comparing the incorrect and correct entries.

● The Suspense Account is a temporary account utilized to hold the

discrepancy between debits and credits resulting from errors until
identified and corrected. When an error is detected, the difference
is temporarily transferred to the Suspense Account, maintaining
trial balance balance. Once the error is resolved, corrections are
made directly in the relevant accounts, reducing the Suspense
Account balance to zero.

● When discrepancies persist in the trial balance after thorough

checks, they are carried forward to the balance sheet as delaying
final account preparation is not practical. Personal account balances
move to the next year, while nominal accounts (expenses and
incomes) are closed by transferring them to the trading and profit
and loss account. Errors found in nominal accounts in the following
year can't be adjusted directly to avoid impacting the current year's
profit and loss. To rectify such errors, a 'Profit and Loss Adjustment
account' is created, and its balance is later transferred to the capital
account.

Unit 6: Depreciation and its Accounting

● Depreciation is the systematic allocation of tangible fixed asset costs over

their useful life, acknowledging the reduction in value due to wear, tear,
and obsolescence.

● Recognized as an expense on the income statement, it decreases the

asset's carrying amount on the balance sheet, reflecting the consumption
of economic benefits.

● Depletion, similar to depreciation, involves the gradual reduction in the

value of natural resources (e.g., minerals, oil, gas) due to extraction.
Amortization, on the other hand, spreads the cost of intangible assets
(patents, copyrights) over their useful life, in accordance with Indian
Accounting Standard (Ind AS) 38.
 ● To calculate depreciation, consider the asset's cost, estimated residual
value, and the expected number of useful years, focusing on its likely
usage by the firm rather than its physical capacity. For example, if a
machine could physically run for ten years but is expected to be used for
only eight due to technological advancements, the estimated life is
considered as eight years, not ten.

Common causes of depreciation:

1. Accidents
2. Obsolescence
3. Deterioration
4. Wear & Tear
5. Usage and Time
6. Technological

Accounting treatment of depreciation:

Method 1: The depreciation account is debited to the P & L a/c and asset is
reduced by the same amount in the Balance Sheet.

Depreciation A/c Dr.

To Asset A/c

Method 2: A provision for depreciation A/c is created and the asset A/c is not
disturbed. The asset is shown at its original cost in the balance sheet while the
provision is shown in the liabilities side.

Depreciation A/c Dr.

To Provision for Depreciation A/c

Methods of Depreciation:
A. Straight Line Method
● The straight-line method evenly allocates the cost of a tangible
fixed asset over its useful life, being a simple and straightforward
approach.
● Annual depreciation is calculated by dividing the asset's cost by its
estimated useful life, resulting in a consistent reduction in the
asset's book value each year.
!"#$ &'()* "+ ,##*$ - .)'/0 1/23*
● Depreciation = 4#$(5/$*6 7(+* "+ ,##*$

B. Written Down Value Method

The Written Down Value Method, also called the Diminishing Balance or
Declining Balance Method, calculates depreciation by applying a higher
percentage to the remaining book value each period.
 This leads to higher depreciation in the early years, reflecting greater
wear and tear, with the expense decreasing as the asset's book value
declines over time.
Depreciation for first year = (𝐶𝑜𝑠𝑡 𝑜𝑓 𝐴𝑠𝑠𝑒𝑡 − 𝑆𝑎𝑙𝑣𝑎𝑔𝑒 𝑉𝑎𝑙𝑢𝑒) ×
Depreciation Rate
Annual Depreciation Expense = (Book Value at the Beginning of the
Year) ×Depreciation Rate

C. Sum of Years’ Digit Method

The Sum of Years' Digits Method allocates depreciation for a tangible

asset, emphasizing more in the early years and less in later years, based
on the sum of digits representing the asset's useful life.
It is commonly applied to assets, like technology equipment or vehicles,
that undergo rapid depreciation in their initial years.
8*5/(9(9: ;#*+32 7(+*
Depreciation percentage = × 100
.35 "+ <*/'#= >(:($#
The depreciation is charged at the initial cost of the asset.

D. Units of Production Method

● The Units of Production Method allocates depreciation for a tangible
asset based on its actual production or usage, making it suitable for
assets that depreciate in direct proportion to their output or usage.
● It assigns more depreciation during periods of higher production or
usage and less during periods of lower production or usage.
● Depreciation of a period =
,)$3/2 0'"63)$("9 "' 3#/:* 63'(9: $?* 0*'("6
@"$/2 4A0*)$*6 &'"63)$("9 "' ;#/:* 63'(9: $?* 2(+* "+ $?* /##*$
×
𝑇𝑜𝑡𝑎𝑙 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑏𝑙𝑒 𝑎𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑡ℎ𝑒 𝑎𝑠𝑠𝑒𝑡

E. Sinking Fund Method

The Sinking Fund Method is a financial strategy, not a depreciation
method, where regular contributions are set aside in a fund over time to
accumulate funds for future replacement or major repairs of an asset at
the end of its useful life.

Accounting Standards in India, such as AS-10 and Ind AS-16, recognize three
approaches for computing depreciation: Straight Line, Diminishing Balance, and
Units of Production methods. The Income Tax Act acknowledges the Written
Down Value Method (Block wise) and Straight Line Method specifically for Power
Generating Units.

Unit 7: Capital and Revenue Expenditure

Capital Expenditure: Spending on assets that provide long-term benefits, such
as the acquisition or improvement of fixed assets, with lasting value beyond the
current accounting period.

Revenue Expenditure: Spending on day-to-day operational expenses, like

salaries, maintenance, and utilities, aimed at maintaining the normal functioning
of a business within the current accounting period.

Difference between Capital and Revenue Expenditure:

1. Capital Expenditure enhances productive capacity or extends useful life
with lasting impact. Revenue Expenditure is essential for day-to-day
operations, lacking long-term asset creation.
2. Capital Expenditure: Non-recurring. Revenue Expenditure: Recurring
3. Capital Expenditure involves spending on assets with long-term benefits,
not fully consumed in the current period. Revenue Expenditure is incurred
to generate current revenue and is fully consumed within the current
accounting period.
4. Capital Expenditure: Recorded on the balance sheet, capital expenditures
represent long-term investments, subject to depreciation or amortization
over their useful lives. Revenue Expenditure: Recorded on the income
statement, revenue expenditures are deducted from the company's
revenue to calculate net income, reflecting day-to-day operational
expenses.
5. Capital Expenditures: purchasing machinery, equipment, land, buildings,
and vehicles. Revenue Expenditures: salaries and wages, utilities, rent,
office supplies, and marketing expenses.

Capital Receipt: Funds received from non-operating activities, such as the sale of
assets or capital contributions, impacting the capital structure and appearing on
the balance sheet.

Revenue Receipt: Income generated from operational activities, like sales and
services, impacting the income statement and contributing to the calculation of
net income.

Difference between capital and revenue receipt:

1. Capital Receipts increase the entity's capital base or reduce its liabilities,
while Revenue Receipts are earned in routine business operations and do
not create assets or reduce long-term liabilities.
2. Capital Receipts are not recorded in the Profit and Loss Statement, but
any profit or loss from these transactions is reflected in the Profit and Loss
Account. On the other hand, Revenue Receipts are directly routed through
the Profit and Loss Statement.
3. Examples of capital receipt:
● Proceeds from the sale of long-term assets
 ● Borrowings from banks or other lenders
● Issue of shares or bonds
Examples of revenue receipt:
● Sales revenue
● Proceeds from the sale of inventory
● Service fees

Unit 8: Bill of Exchange

An instrument of credit is a financial document or mechanism facilitating
borrowing or obtaining credit from a lender, embodying a formal agreement
specifying terms, conditions, and repayment obligations for the credit
transaction.

A Bill of Exchange is a written instrument signed by the maker, providing an

unconditional order to pay a specific sum of money to a named person or their
order, or to the bearer, on a fixed future date or on demand, as per Section 5 of
the Negotiable Instruments Act.
● Bill Receivable: A bill of exchange in possession of a business, signifying
the right to receive payment from the drawee.
● Bill Payable: A bill of exchange accepted by a business, indicating the
obligation to make payment to the payee or holder of the bill.

In a bill of exchange, the key parties are:

1. Drawer: The entity creating and issuing the bill, instructing the drawee to
make a payment.
2. Drawee: The entity instructed to make the payment; becomes the payer
upon acceptance of the bill.
3. Payee: The entity to whom the payment is directed, typically receiving the
payment on the maturity date.

A promissory note is a written commitment from one party (maker) to another

(payee) to pay a specified sum of money on a future date or upon the
occurrence of a certain event.
In a promissory note, there are two parties:
1. Maker: The individual or entity issuing the note, making a promise to pay
a specified sum to the payee.
2. Payee: The individual or entity to whom the payment is promised, and
who will receive the payment upon the maturity of the promissory note.

A cheque, as per Section 6 of the Negotiable Instruments Act, is a type of bill of

exchange drawn on a specific banker, payable on demand. Key features include
bearer or order payment, presentation to the named banker, matching
signatures with the bank's records, and inclusion of a date. Cheques with future
dates are valid but become payable on or after the specified date, distinguishing
them from bills of exchange.

Accommodation bills are drawn to meet financial needs, involving no debtor-

creditor relationship. The issuer, after obtaining a discount from a bank, uses the
funds or shares them with the drawee. Before maturity, the issuer transfers the
utilized amount to the drawee, who pays the full bill amount to the bank.

Journal Entries

Drawer’s Books: Drawee’s or the

Payer’s Books:

Issue of bill
Bills Receivable A/c Drawer’s A/c Dr.
Dr.
To Bills
To Drawee’s A/c Payable A/c

In case of honor of bill

on maturity Cash/Bank A/c Bills Payable A/c
Dr. Dr.

To Bills To Cash/Bank A/c

Receivable A/c

In case of dishonor of
bill on maturity Drawee’s A/c Bills Payable A/c
Dr. Dr.

To Bills To Drawer’s A/c

Receivable A/c

The bill is discounted

with the bank Bank A/c No entry
Dr.

Discount A/c
Dr.
 To Bills
Receivable A/c

If discounted bill is
dishonored Drawee’s A/c Bills Payable A/c Dr.
Dr. To Bank A/c
To Drawer’s
A/c

If discounted bill is
honored No entry Bills Payable A/c
Dr.

To Cash/Bank A/c

The bill is endorsed

Creditor’s/ Endorsee’s No entry
A/c Dr.

To Bills
Receivable A/c

Dishonor of endorsed
bill Drawee’s A/c Dr. Bills Payable A/c Dr.

To Creditor’s/ To
Endorsee’s A/c Cash/Bank A/c

Honor of endorsed bill

No entry Bills Payable A/c Dr.

To
Drawer’s A/c

Important Terms:

1. Term and Due Date: The maturity date of a promissory note or bill of
exchange, not payable on demand, is determined by adding three days of
grace to the stated period, known as the "term" or "tenor" of the bill. For
instance, a bill drawn on 1st March for one month would mature on 4th
 April. If the due date falls on a public holiday, it shifts to the previous
working day.
2. Holder: Legally entitled person to receive money on the due date.
3. Holder in Due Course: A holder of a negotiable instrument who meets
these conditions - obtained it for valuable consideration, became the
holder before maturity, and had no reason to believe in any title defects
from the previous owner.
4. Bill Sent to Bank for Collection: The bill is forwarded to the bank for the
collection of the amount on behalf of the bill holder.
5. Honouring of Bill: The act of the drawee paying the bill amount on the due
date, indicating that the bill is "honoured" or "met".
6. Dishonour of Bill: Occurs when the drawee is unable or refuses to make
payment on the due date, rendering the bill "dishonoured."
7. Discounting of Bill: The holder endorses the bill to the banker before its
due date to obtain immediate cash.
8. Endorsement of Bill: Transfer of the bill to another person by the holder.
9. Retirement of Bill: When the drawee pays the bill before the due date.
10.Renewal of Bill: If the drawee can't meet the bill on the due date, they
may request the drawer to accept part in cash and draw a new bill for the
balance with interest.
11.Notary Public: Government-appointed officer handling the protesting of
negotiable instruments for dishonour.
12.Noting: On dishonour, the holder presents the bill to a notary public for
necessary entries, known as 'noting.'
13.Protest: Certification by a notary public after noting the dishonour of a
promissory note or bill of exchange.
14.Noting Charges: Amount paid to a Notary Public for recording the
dishonour.
15.Rebate: Allowance given to the drawee if they pay the bill before the due
date.

Unit 9: Operational Aspects of Accounting Entries

In bank accounting, manual processes involve recording entries in physical

ledgers and then transferring them to the journal, with authorized physical
vouchers required.

Computerized systems streamline the process, automating day books and the
General Ledger.

Banks often prioritize direct posting to subsidiary ledgers using the 'voucher
posting' method, creating a daily trial balance for the general ledger. This
accounting approach in banking differs from that of other businesses, where
prime entry books are typically kept current before updating ledgers.
The three kinds of vouchers are: debit voucher, credit voucher, and composite
voucher. Composite Vouchers vouchers contain information about both debit and
credit accounts. They primarily involve transactions related to the bank's internal
accounts, excluding customer accounts.

Credit Vouchers in banking encompass customer pay-in-slips, applications for

various instruments, challans for government deposits, branch-prepared
vouchers for transactions like locker charges, and credit advice from other
branches for payments received through collection instruments.

Debit Vouchers in banking encompass various transactions, including customer-

issued cheques, bank-issued cheques/pay orders, withdrawal forms, drafts from
other branches or banks, dividend/interest warrants, travellers' cheques,
canceled branch-issued drafts/pay orders, and more. Debit vouchers are also
used for term deposit transactions and serve as a debit advice for the realization
of collection instruments sent to other branches. These transactions are
authorized by designated officials or customers, ensuring a comprehensive
record of debits in the banking system.

Unit 10: Back Office Functions

Back offices provide essential support for front office activities in various ways.
In specialized areas like Treasury and Forex operations, they directly aid trading
rooms by overseeing confirmations and settlement transactions.

Reconciliation Function in Banks:

A. Reconciliation of Accounts for Payment Transactions Involving
Intermediaries:
Intermediaries, like aggregators and payment gateways, are crucial in
electronic payment transactions, managing customer payments before
transferring funds to merchants. To mitigate risks and ensure timely
transactions, the RBI has provided guidelines for intermediary operations.
Moreover, banks collaborate with third-party vendors for ATM operations,
involving periodic reconciliation by centralized departments to ensure
accurate records and timely fund movements.

B. Reconciliation of Bank Accounts with RBI:

RBI accounts for transactions like CRR, Repo/Reverse Repo, and
clearing/RTGS, with specific branches designated for these accounts.
Reconciliation, similar to a company's bank account reconciliation,
involves obtaining RBI statements, preparing reconciliation statements,
and using the maker-checker concept for verification. For security
transactions, banks reconcile security balances periodically with custodian
or Demat accounts. RBI mandates quarterly reconciliation of investment
balances with the Public Debt Office's books, adjusting frequency based on
transaction volume.
C. Reconciliation of Bank Accounts with other Banks and Institutions:
Accounts like those for clearing/collection, investments, and money at call
undergo reconciliation similar to RBI balances. This extends to balances
with banks other than RBI, involving meticulous accounting for charges,
interest credits, proper recording of collected bills, and inclusion of
commissions. Cheques in clearing should not be outstanding, and any
returned unpaid cheques must be promptly accounted for. Outstanding
bills or cheques sent for collection should also be accurately credited later.

D. Reconciliation of Intra Branch Entries:

Reconciliation of intra-branch entries involves balancing the general ledger
and subsidiary ledgers within a branch. In manual systems, differences
could arise due to posting errors, totaling mistakes, or other errors during
bookkeeping. Suspense accounts temporarily record items until their
nature is determined or proper classification is made.

E. Reconciliation of Inter-Branch Entries:

1. Origination/Response (Reversal) of Inter Office Transactions:
If the Inter Office account has a debit balance, it's listed on the
assets side of the branch's balance sheet. If it has a credit balance,
it's shown on the liability side. Unmatched or unreconciled
transactions appear as inter-office adjustment balances in the
bank's balance sheet. A debit balance is under 'Other Assets,' and a
credit balance is under 'Other Liabilities and Provisions.'

2. Reconciliation of Inter – Office Transactions:

Inter-Office Guidelines - RBI Guidelines:
● The RBI has issued guidelines regarding inter-office entries to
address the risk of fraud and non-reconciliation, a
widespread issue among banks. Non-reconciliation poses a
"fraud risk factor." Questionable practices observed by RBI
include disguising customer cash transactions, misuse of
funds, routing transactions through office accounts, and
window dressing of loans. To rectify this, RBI instructed
banks to reconcile outstanding inter-branch entries within six
months.
● Banks were advised to segregate credit entries outstanding
for over five years in a Blocked Account, excluding it from net
inter-branch transaction calculations for the balance sheet.
This Blocked Account should be reflected in the balance sheet
under 'Other liabilities and provisions–Others' (Schedule 5).
● Adjustments from the Blocked Account require authorization
from two officials, with one preferably from a different branch
or from the controlling/head office, especially if the amount
 surpasses a specified threshold. Starting April 1, 1999, RBI
recommended category-wise accounts for various
transactions through inter-branch accounts to facilitate
netting by category.
● To address unreconciled debit entries, RBI directed banks to
provision against net debit balances outstanding for more
than six months. Banks should provision 100 percent of the
aggregate net debit under all categories, considering the
credit balance in the Blocked Account and not setting off net
debit against net credit in different categories.
● For demand draft transactions, RBI advised segregating them
from other inter-branch transactions and implementing
weekly reconciliation with close monitoring for larger
amounts.
● Regarding originating debits to the head office account, RBI
advised banks to restrict them to specific purposes like cash
transfers, securities purchase, and withdrawals from
Provident Fund.

3. Reconciliation process in banks:

Daily statements of Inter Office accounts are sent by branches to
the Central Reconciliation Department (CRD). The computer system
matches originating with reversal entries for a specific period, but
human intervention is crucial for unresolved entries. Unreconciled
entries might occur due to time lags, errors in daily statements, or
fraud. Banks with core banking solutions conduct most
reconciliations centrally.

Unit 11: Bank Audit and Inspection

Auditing in India:
● Mandatory under the Companies Act.
● Guidelines in Chapter X of the Companies Act, 2013.
Evolution of Auditing:
● Shift from verifying arithmetic accuracy to ensuring a true and fair
representation of financial statements.
● Integration of computers, leading to Computer Aided Audit Techniques
(CAATs).
Objectives of Auditing:
● Detect and prevent errors and fraud.
● Inherent limitations: reliance on explanations, non-monetary factors,
inability to check all transactions.
Audit Process:
● Systematic examination of a business entity's accounts and records.
● Confirm accuracy of financial statements and regulatory compliance.
● Instill confidence in financial statement users.
Bank Audits:
● Crucial for the banking sector's health, safety, and stability.
● Handles large amounts of public funds and faces various risks.
● Review financial statements, services, and procedures for compliance with
industry standards and regulatory norms.

Types of Audit:
1. Concurrent Audit
● Real-time examination of transactions.
● Conducted continuously throughout the year.
● Often performed by external auditors (chartered accountants).
● Monthly basis is common.
● Objectives: Minimize time gap between transactions and review.
Swift detection and rectification of irregularities.
● Audit Focus: Daily transaction scrutiny, Substantive checking in key
areas, and Prevention of errors accumulation for year-end audits.
● Role in Internal Accounting and Control:
❖ Critical component for sound internal systems.
❖ Acts as an early warning mechanism.
❖ Identifies serious issues promptly.
❖ Prevents fraudulent activities in banks.

2. Internal Audit
● Conducted by bank staff and Chartered Accountant firms.
● Focuses on ensuring accuracy in financial records.
● Key objective: Detecting frauds and errors. Maintains public trust in
the banking system.
● Key Aspects of Internal Audit:
❖ Governance mechanisms.
❖ Risk-based internal audit in risk management.
❖ Procedures for risk-based internal audit.
❖ Role in risk management.
❖ Analysis of non-financial data for financial evaluation.
❖ Adherence to auditing and assurance standards.
● SA 14, issued by the Institute of Chartered Accountants of India,
lays down guidelines for conducting internal audits within an
information technology setting.
● The RBI introduced the Risk-Based Internal Audit (RBIA) system in
Scheduled Commercial Banks (SCBs) through circulars in December
2002 and January 2021. This approach is based on a well-defined
internal audit policy, functional independence, effective
communication channels, and adequate audit resources.
 ● To ensure uniformity and align expectations with best practices, RBI
has issued instructions for banks in the areas of internal audit:
○ Internal audit function needs authority, independence, and
resources. HIA must be a senior executive with independent
judgment and record access.
○ Internal auditors require professional competence in banking,
IT, accounting, data analytics, and forensic investigation.
○ Boards define minimum service periods for internal audit
staff. Consider specialized knowledge for audit function.
○ HIA reports to ACB, MD & CEO, or WTD. Reporting avoids
conflicts and business target influence.
○ HIA appointed for a minimum of three years.
○ Internal audit staff remuneration not tied to audited business
lines' financial performance for independence.
○ Internal audit function not outsourced. Experts hired on a
contractual basis, but audit reports remain internal audit's
responsibility.
○ Banks to document risk-based internal audit framework
aligning with organizational structure, business model, and
risks.

3. Information Systems Audit

● Banks embraced technology, creating complex IT setups with
notable risks.
● Response: Internal Control Frameworks aligned with standards,
bank requirements, and RBI guidelines.
● Assurance on control effectiveness led to the rise of Information
Systems (IS) Audit for independent risk assessment.
● IS Audit evaluates computer systems for asset safeguarding, data
integrity, goal achievement, and resource efficiency.
● Automation transformed Internal Audit, making IS audits vital.
● RBI's April 30, 2004 circular mandated periodic system audits
covering hardware, software, and operational effectiveness.
● RBI guidelines cover IT Governance, Information Security, IS Audit,
IT Operations, IT Services, Outsourcing, Cyber Fraud, Business
Continuity Planning, and Customer Awareness.
● IS Audit Scope:
○ Assess planning and oversight of IT activities
○ Evaluate operating processes and internal controls
○ Review enterprise-wide compliance with IT policies
○ Identify deficient controls
○ Recommend corrective actions
○ Ensure effective implementation by management
● IS Audit Function Recommendations: Enhance Computer-Assisted
Audit Techniques (CAATs) use. CAATs Overview: Suitable for critical
 functions or processes with financial, regulatory, or legal
implications Use depends on efficiency compared to manual
techniques
● Master Circular on Audit Systems recommends: forming separate IS
Audit Teams, adopting continuous risk-based approach, phased
introduction of IS audit in critical areas, assessing Internal Audit
resource involvement, integrating IS audit into post CBS scenario,
and monthly compliance reporting by branch managers.

4. Statutory Audit
● According to the Banking Regulation Act, 1949, banks must
undergo an annual statutory audit by a "Statutory Auditor" as
mandated by law.
● This audit, outlined in Section 30 of the Act, is crucial for a healthy
banking system, focusing on various aspects such as loans, Priority
Sector Lending compliance, regulatory ratios, and statutory norms.
● The audit process includes stages like risk assessment, audit
planning, fraud and money laundering risk assessment, and Basel
III framework assessment.
● Different types of audit reports, such as Statutory Audit Report and
Tax Audit Report, are issued.
● Statutory auditors are appointed based on the RBI's panel of
qualified Chartered Accountants, with input from the Institute of
Chartered Accountants of India and the Comptroller & Auditor
General of India.
● Auditors for private banks are appointed at the AGM of
shareholders, while public sector banks' auditors are appointed by
their Board of Directors.

Other Types of Audit:

1. Revenue Audit: Examination of financial records to verify the accuracy and
completeness of revenue transactions for compliance with laws and
regulations.
2. Stock and Receivables Audit: Assessment of inventory and accounts
receivable management to ensure proper valuation, existence, and
realization.
3. Forensic Audit: In-depth investigation and analysis of financial records to
uncover and address fraud, financial irregularities, or legal disputes.
4. Management Audit: Evaluation of managerial processes, policies, and
efficiency to assess organizational performance and recommend
improvements.
5. Tax Audit: Review of financial records and statements to verify compliance
with tax laws and regulations, ensuring accurate reporting of income and
deductions.