Category: Management Notes

The Revenue Account of general insurance companies must be prepared in conformity with the regulations of IRDA, Regulations 2002, as per the requirements of Schedule B. It has already been stated above that separate Revenue Account is to be prepared for each individual unit i.e. for Marine, Fire, and Accident.

These individual revenue accounts will highlight the result of operation of each individual unit for a particular accounting period. It also reveals the incomes and expenditures of each individual unit. Like Revenue Account of a life insurance company, Revenue Account is prepared under Mercantile System of Accounting.

Items appearing in Revenue Account:

Premiums:

It has already been stated above that general insurance policies are issued for a short period, say, for a year. As a result, many of them may be unexpired at the end of the year. Therefore, the entire premium so received cannot be treated as an income for the current year only. A portion of that amount should be carried forward to the next year in order to cover the unexpired risks. This is what is known as Reserve for Unexpired Risks.

As per Schedule IIB of the IRDA the Reserve for Unexpired Risks should be provided for out of net premium so received as:

(a) 50% for Fire Insurance business;

(b) 50% for Miscellaneous Insurance business;

(c) 50% for Marine Insurance business other than Marine Hull business, and

(d) 100% for Marine Hull business.

In addition to the above, if any company wants to maintain more than this level, it can do so. The same is known as Additional Reserve.

Claims Incurred (Net):

It is the first item that appears in the expenditure side of the Revenue Account of an insurance company. Claims mean the amount which is payable by the insurer, to the insured for the loss suffered by the latter against which the insurance was made.

Claims can be divided into:

(a) Claims intimated but not yet accepted and paid;

(b) Claims intimated, accepted but not paid;

(c) Claims intimated, accepted and paid; and

(d) Claims rejected. But if there is only ‘Claims intimated’ the same is to be treated like (b). That is why, in order to find out the outstanding claims, claims that have been intimated (whether paid or unpaid) should be considered.

At the end of the year the entry for the purpose will be:

Claims A/c Dr.

To Claims Intimated Accepted but Not Paid A/c

Claims Intimated but Not Accepted and Not Paid A/c

A reverse entry should be passed at the beginning of the next year for which there will be no effect in Claims Account. But, if any claim is rejected subsequently, the amount is to be transferred to Profit and Loss Account and Claims Account must be credited for the purpose.

Books Section:

Cash Book:

For recording different types of cash transactions two types of cash books are recorded, viz.

(i) Rough Cash Book which deals with cash receipts and cash payments maintained by a receiving cashier and paying cashier, respectively.

It records serial number, depositor’s name, amount received etc. in cash, whereas, in case of cash payment, serial number, payee’s name, amount paid, number of token etc. are recorded,

(ii) A Fair Cash Book, on the other hand, is one when a separate person, after receiving the above information from the paying and receiving cashier, records the transactions in a separate book. Naturally, the transaction of the fair cash book must tally with the sum total of the above two rough cash books.

Cash Balance:

The cash balance at the close of the day is written in the book which is duly signed by the cashier and the manager.

Day Book:

It records day-to-day transactions of the book relating to cash transfers, clearings etc. Besides the above, Received Waste Book, Sectional Cash Book etc. are also to be maintained.

Ledger and Register Sections:

Ledger Section:

Current Account Ledger:

It records the transactions of those customers who open current account. Generally, the bank does not pay interest on the balance of this account but a nominal charge is taken by the bank for rendering the services. If there are many current accounts, those are to be serially numbered.

Savings Bank Ledger:

It records the transactions of those customers who open savings account in a bank. The detailed description of the customer, viz., name, address, occupation, are recorded along with an account number. If there are many Savings Account ledgers, they are to be serially numbered.

Fixed Deposit Ledger:

It contains transactions of those customers who have deposited their money into the bank for a fixed period. Generally, at the top of the account, depositor’s name and address, rates of interest, period of deposit, the amount so deposited etc. are to be recorded.

General Ledger:

It is actually the key ledger of the accounting system of a bank. It contains a total amount in respect of total Current Accounts, total Savings Bank Account, total Loans Account, total Bills Payable Account, total Expenses and total Revenue Accounts. Each ledger is kept under self-balancing system. A trial balance can easily be prepared which helps to prepare the final account as Well.

Besides the above ledgers overdue fixed deposit ledger, fixed deposit interest ledger, loan ledger, investment ledger may also be prepared.

Register Section:

The register section includes:

Bills for Collection Register, Securities Register, Document Register, Standing Order Register, Cheques Dishonoured Register, Drafts Issue Register, Drafts Payable Register, D.D. Register, Foreign Letters of Credit Register etc.

(a) Principal Books:

(i) Cash Book:

For recording different types of cash transactions two types of cash books are recorded, viz:

(i) Rough Cash Book which deals with cash receipts and cash payments maintained by a receiving cashier and paying cashier, respectively. It records serial number, depositors name, amount received etc. in cash, whereas, in case of cash payment, serial number, payee’s name, amount paid, number of token etc. are recorded,

(ii) A Fair Cash Book, on the other hand, is one when a separate person, after receiving the above information from the paying and receiving cashier, records the transactions in a separate book. Naturally, the transaction of the fair cash book must tally with the sum total of the above two rough cash books.

(ii) Day Books:

It records day-to-day transactions of the book relating to cash transfers, clearings etc. Besides the above, Received Waste Book, Sectional Cash Book etc. are also to be maintained.

(iii) General Ledger:

It is actually the key ledger of the accounting system of a bank. It contains a total amount in respect of total Current Accounts, total Savings Bank Account, total Loans Account, total Bills Payable Account, total Expenses and total Revenue Accounts. Each ledger is kept under self-balancing system. A trial balance can easily be prepared which helps to prepare the final account as well.

(b) Ledger Sections:

Personal Ledger:

(i) Current Account Ledger:

It records the transactions of those customers who open current account. Generally, the bank does not pay interest on the balance of this account but a nominal charge is taken by the bank for rendering the services. If there are many current accounts, those are to be serially numbered.

(ii) Savings Bank Ledger:

It records the transactions of those customers who open savings account in a bank. The detailed descriptions of the customer, viz., name, address, occupation, are recorded along with an account number. If there are many Savings Account ledgers, they are to be serially numbered.

(iii) Fixed Deposit Ledger:

It contains transactions of those customers who have deposited their money into the bank for a fixed period. Generally, at the top of the account, depositor’s name and address, rates of interest, period of deposit, the amount so deposited etc. are to be recorded.

(iv) Loan Ledger:

The loans which are sanctioned to the various parties are recorded in this ledger.

(v) Investment Ledger:

The amounts of investments which are made by the bank are recorded in this ledger.

(c) Register Sections:

The Register Section includes:

(i) Bill for Collections Register;

(ii) Securities Register;

(iii) Document Register;

(iv) Standing Order Register;

(v) Cheques Dishonoured Register;

(vi) Draft Issue Register;

(vii) Draft Payable Register;

(viii) D. D. (Demand Draft) Register;

(ix) Foreign Ledger of Credit Registers;

(x) Safe Deposit Vault Register.

Format of Profit and Loss Account of Banking Company

Banks are required to prepare final accounts for each financial year, i.e., its books are closed each year on 31st March. But for internal purpose, banks usually close their books on 30th September. A banking company is required to prepare its Profit and Loss Account according to Form B in the Third Schedule to the Banking Regulation Act, 1949. From B is in a summary form and the details of the various items are given in the schedules. From B is given as follows:

From ‘B’

Form of Profit and Loss Account

For the year ended 31^st March, (Year)

Particulars	Schedule No.	Year ended on 31-3-(Current Year)	Year ended 31-3- (Previous Year)
I.      Income Interest earned Other Income	13 14
Total:
II.      Expenditure Interest expended Operating expenses Provisions and contingencies	15 16
Total:
III.      Profit/Loss Net Profit/Loss (-) for the year Profit/Loss (-) brought forward
Total:
IV.       Appropriations Transfer to statutory reserve Transfer to other reserves Transfer to Government/Proposed dividend Balance carried over to balance sheet
Total:

SCHEDULE 13: INEREST EARNED

	Year ended on 31-3-(Current Year)	Year ended 31-3- (Previous Year)
I.      Interest/discount on advances/bills                   II.      Income on investments                 III.      Interest on balances with Reserve Bank of India and other inter-bank funds                 IV.      Others
Total:

SCHEDULE 14: OTHER INCOME

	Year ended on 31-3-(Current Year)	Year ended 31-3- (Previous Year)
I.Commission, exchange and brokerage                   II.Profit on sale of investments Less: Loss on sale of investments                 III. Profit on revaluation of investments Less: Loss on revaluation of investments                 IV. Profit on sale of land, buildings and other assets Less: Loss on sale of land, buildings and other assets                   V. Profit on exchange transactions Less: Loss on exchange transaction                 VI. Income earned by way of dividends etc. from subsidiaries/companies and/or joint ventures abroad/in India               VII. Miscellaneous Incomes
Total:

SCHEDULE 15: INTEREST EXPENDED

	Year ended on 31-3-(Current Year)	Year ended 31-3- (Previous Year)
I.      Interest on deposits                   II.      Interest on Reserve Bank of India/Inter-bank borrowings                 III.      Others
Total:

SCHEDULE 16: OPERATING EXPENSES

	Year ended on 31-3-(Current Year)	Year ended 31-3- (Previous Year)
I.      Payments to and provisions for employees                   II.      Rent, taxes and lighting                 III.      Printing and stationery                 IV.      Advertisement and publicity                   V.      Depreciation on bank’s property                 VI.      Directors’ fees, allowances and expenses               VII.      Auditors’ fees, allowances and expenses (including branch auditors)             VIII.      Law charges                 IX.      Postage, telegrams, telephone, etc.                   X.      Repairs and maintenance                 XI.      Insurance               XII.      Other expenditure
Total:

Format of Balance Sheet of a Banking Company

Preparation of Balance Sheet

The Balance sheet of a banking company is to be prepared in Form A given in third schedule to the Act. Unlike the previous form the present one is devoid of details, the latter being shown in the schedules. RBI has given guidelines for compiling the balance sheet. Below are given From A, the schedules there under and the instructions of RBI and in that order.

1. THE THIRD SCHEDULE

(See Section 29)

From ‘A’

FROM OF BALANCE SHEET

Balance Sheet of …………….. (Here enter name of the Banking Company)

Balance Sheet as on 31^st March (Year)

	Schedule	As on 31.3.20.. (current year)	As on 31.3.20.. (previous year)
Capital & Liabilities Capital Reserves & Surplus Deposits Borrowings Other liabilities and provisions	1 2 3 4 5
Total:
Assets Cash and balance with Reserve Bank of India Balances with banks and money at call and short notice Investments Advances Fixed Assets Other Assets	6   7 8 9 10 11
Total:
Contingent Liabilities Bills for collection	12

Schedule 1 – Capital

	Particulars	As on 31.3… (current year)	As on 31.3… (previous year)
I	For Nationalized Banks Capital (Fully owned by Central Government)
II	For Banks Incorporated Outside India Capital (i) (The amount brought in by banks by way of startup capital as prescribed by RBI should be shown under this head) (ii) Amount of deposit kept with the RBI under Section 11(2) of the Banking Regulation Act, 1949.
	Total
III	For Other Banks Authorized Capital (Shares of Rs. Each) Issued Capital (shares of Rs. Each) Subscribed capital (Shared of Rs. Each) Called-up Capital (Shares of Rs. Each) Less: Called unpaid Add: Forfeited shares.

Schedules 2 – Reserve & Surplus

	Particulars	As on 31.3… (current year)	As on 31.3… (previous year)
I	Statutory Reserve Opening Balance Additions during the year Deductions during the year
II	Capital Reserves Opening Balance Additions during the year Deductions during the year
III	Share Premium Opening Balance Additions during the year Deductions during the year
IV	Revenue and other Reserves Opening Balance Additions during the year Deductions during the year
V	Balance in Profit and Loss Account
	Total: (I,, II,, III,, IV and V)

Schedule 3 – Deposits

	Particulars	As on 31.3… (current year)	As on 31.3… (previous year)
A.I	Demand Deposits (i) From banks (ii) From others
II	Saving Bank Deposits
III	Term Deposits (i) From banks (ii) From others
	Total: (I, II and III) B. (i) Deposits of branches in India      (ii) Deposits of branches outside India
	Total:

Schedule 4 – Borrowings

	Particulars	As on 31.3… (current year)	As on 31.3… (previous year)
I	Borrowings in India (i) Reserve Bank of India (ii) Other banks (iii) Other institutions and agencies
II	Borrowings outside India Total (I and II)

Secured borrowings in I & II above – Rs.

Schedule 5: Other Liabilities and Provisions

	Particulars	As on 31.3… (current year)	As on 31.3… (previous year)
I	Bills Payable
II	Inter-office adjustment (net)
III	Interest accrued
IV	Other (including provisions
	Total

Schedule 6: Cash and Balances with Reserve Bank of India

	Particulars	As on 31.3… (current year)	As on 31.3… (previous year)
I	Cash in hand (including foreign currency notes)
II	Balances with Reserve Bank of India (i) In Current Account (ii) In other Accounts
	Total: (I & II)

Schedule 7 – Balances with Banks & Money at Call & Short Notice

	Particulars	As on 31.3… (current year)	As on 31.3… (previous year)
I	In India (i) Balances with Banks     (a) in Current Accounts     (b) in other Deposit Accounts (ii) Money at call and short notice     (a) With banks     (b) With other institutions
	Total (I & II)
II.	Outside India (i) in Current Accounts (ii) in other Deposit Accounts (iii) Money at call and short notice
	Total:
	GRAND TOTAL: (I & II)

Schedule 8 – Investments

	Particulars	As on 31.3… (current year)	As on 31.3… (previous year)
I.	Investments in India In (i) Government securities (ii) Other approved securities (iii) Shares (iv) Debentures and Bonds (v) Subsidiaries and/or joint ventures (vi) Other (to be specified)
	Total:
II.	Investments outside India in (i) Government securities (including local authorities) (ii) Subsidiaries and/or joint ventures abroad (iii) Other investments (to be specified)
	Total:
	GRAND TOTAL:(I & II)

Schedule 9: Advances

	Particulars	As on 31.3… (current year)	As on 31.3… (previous year)
A.	(i) Bills purchase and discounted (ii) Cash credits overdrafts and Loans repayable on demand (iii) Term Loans
	Total:
B.	(i) Secured by tangible assets (ii) Covered by Bank/Government Guarantees (iii) Unsecured
	Total:
C.	I. Advances in India (i) Priority Sectors (ii) Public Sector (iii) Banks (iv) Others
	Total:
	II. Advances Outside India (i) Due from banks (ii) Due from others     (a) Bills purchased and discounted     (b) Syndicated Loans     (c)Others
	Total:
	Grand Total (C.I and II)

Schedule 10: Fixed Assets

	Particulars	As on 31.3… (current year)	As on 31.3… (previous year)
I	Premises At cost as on 31st March of the preceding year Additions during the year Deductions during the year Depreciation to date
II.	Other Fixed Assets (including Furniture and Fixtures) At cost as on 31st March of the preceding year Additions during the year Deductions during the year Depreciation to date
	Total: (I & II)
	TOTAL

Schedule 11: Other Assets

	Particulars	As on 31.3… (current year)	As on 31.3… (previous year)
I	Inter-office adjustment (net)
II.	Interest accrued
III.	Tax paid in advance/tax deducted at source
IV.	Stationery and Stamps
V.	Non-banking assets acquired in satisfaction of claims
Vi.	Others
	Total

Schedule 12: Contingent Liabilities

	Particulars	As on 31.3… (current year)	As on 31.3… (previous year)
I	Claims against the bank not acknowledged as debts
II.	Liability for partly paid investments
III.	Liability on account of outstanding forward exchange contracts
IV.	Guarantees given on behalf of constituents (a) In India (b) Outside India
V.	Acceptances endorsements and other obligations
Vi.	Other items for which the bank is contingently liable
	Total

As per section 5(b): ‘Banking’ means the accepting for the purpose of lending or investment of deposits of money from public, repayable on demand or otherwise and withdrawable by cheque, draft, order or there wise.

• As per section 5(d): ‘Company’ means any company defined in section 3 of the company’s act, 1956 and includes a foreign company within meaning of section 591 of that Act.
• As per section 5(c): Banking Company means any company which transacts the business of banking in India.

Section 210 of the Companies Act governs the preparation of final account of a Company. The Board of Directors of a Company must, within 18 month from the date of incorporation, and subsequently once a year, lay take the company in general meeting the Balance Sheet of the Com­pany and a Profit and Loss Account.

In case of non-profit Companies, an Income and expenditure Account should be submitted. The period to which the account relates is called a Financial Year of the Company. It may be less or more of a calendar year but must not exceed 15 months. It may also be extended to 18 months provided the Register has granted special permission.

The Profit and Loss Account or Income and Expenditure Account the relate, in the case of the first Annual General Meeting of the Company, in a period from the date of a incorporation to a day which shall not precede the day of the meeting by more than nine months.

And in case of any subsequent Annual General Meeting, the period runs from the date of the previous accounts to a date not more than six months prior to the date of meeting.

Section 211 prescribes the form of Balance Sheet and contents of Profit and Loss Account. Every Balance Sheet of Company shall give a true and fair view of the state of affairs of the Company as at the end of the financial year.

It shall also be in the form set out in part 1 of Schedule VI, or in such other form as may be approved by the Central Government [211 (1)].

Provided that nothing contained in this sub-section shall apply to any Insurance or Banking Company or any Company engaged in the generation of supply of electricity or to any other class of Company for which a form of Balance Sheet been specified in or under the Act governing such class of Company.

Every Profit and Loss Account of a Company shall give a true and, fair view of the profit and loss the Company for the financial year. It shall also comply with the requirements of part II of Schedule VI, so far as they are applicable thereto [Sec. 211 (2)].

This requirement does not apply to any Insurance or Banking Company or any Company engaged in the generation of supply of electric­ity, or any other class of company for which a form of Profit and Loss Account has been specified in or under the Act governing such class of Company.

Every Balance Sheet and every Profit and Loss Account of a Company shall be duly signed on behalf of the Board of Directors by the Manager or Secretary, if any, and by not less than two Direc­tors of the Company.

One of the Directors who sign shall be a Managing Director where there is one. The Balance Sheet and Profit and Loss Account must be approved by the Board before they are submitted to the auditors who must in turn attach their report thereto.

The Profit and Loss Account shall be annexed to the Balance Sheet and the auditor’s report shall be attached thereto. If there is any separate, special supplementary report by the auditor, it shall also be attached to the Balance Sheet.

If any person, being a Director of a Company, fails to take all reasonable step to company with the previsions, he shall, in respect of each offence, be punishable with imprisonment for a term which may extend to six months, or with imprisonment for a term which may extend to six months, or with fine which may extend to Rs. 1,000 or with both.

However, the punishment of imprisonment is given only when the offence is committed willfully.

Profit and Loss Account:

The Indian Companies Act is silent as to the form of Profit and Loss Account. But part II of Schedule VI contains a list of items of incomes and expenditure which should be included in the Profit and Loss Account.

The profit and Loss Account of a Company should give a true and fair view of the profit or loss of the Company for the financial year. The first account covers the period since the incorporation of the Company, and subsequent accounts cover the period since the date of the preceding account.

An Income and Expenditure Account takes the place of Profit and Loss Account in the case of a Company not trading for profit.

Statutory Requirements:

Profit and Loss Account shall be so made out as to clearly disclose the result of the working of the Company during the period covered by the account and shall disclose every material feature including credits or receipts and debits or expenses in respect of non-recurring expenditure or expenditure of an exceptional nature. It shall set out the various items relating to the income and expenditure of the Company under the most convenient heads and in particular shall disclose the following information in respect of the accounting period.

The Profit and Loss Account must be prepared with the directions given in part II Schedule VI of the Act. The important provisions are given below:

1. (a) The turnover, that is, the aggregate amount for which sales are effected by the Company, giving the amount of sales in respect of each class of goods dealt with by the Company, and indicating the quantities of such sales for each class Separately.

(b) Commission paid to sole selling agent within the meaning of section 294 of the Act

(c) Commission paid to other selling agents.

(d) Brokerage and discount on sales other than sales trade discount.

2. (a) In the case of manufacturing concerns, the purchase of raw material including consumption and the opening and closing stocks of the good produced indicating the quantity produced.

(b) In the case of trading concerns the purchases made and the opening and the Closing stocks.

(c) In the case of Companies rendering or supplying services, the gross income derived from service rendered or supplied.

(d) In the case of Company which falls under more than one of the categories mentioned in (a), (b) and (c) above, it shall be sufficient compliance with the requirements herein if the total amounts are shown in respect of the opening and closing stocks, purchases, sales up and the gross income from services rendered is shown.

(e) In the case of other Companies, the gross income derived under different heads.

3. In the case of all concerns having work-in-progress, the amounts for which (such works have been completed) at the commencement and at the end of the accounting period.
4. The amount provided for depreciation, renewals or diminution in value of fixed assets. If such provision is not made by means of a depreciation charge, the method adopted for making such provision.

If not provision is made for depreciation, the fact that no provision has been made shall be stated and the quantum of arrears of depreciation computed in accordance with Section 205 (2) of the Act shall be disclosed by way of a note.

The amount of interest on the Company’s debentures and other fixed loans, that is to say loans for fixed periods stating separately the amount of interest if any, paid or payable to the Managing Director, and the Manager, if any.

The amount of charge for Indian Income-tax and other Indian taxation on profit and distinguishing them.

The amount reserved for:

(a) Repayment of share capital and

(b) Repayment of loans.

(a) The aggregate, if material, of any amounts set aside or proposed to be set aside to reserves but not including provisions made to meet any specific liability, contingency or commitment known to exist at the date of the Balance Sheet.

(b) The aggregate, if material, of any amount withdraws from such reserves.

(a) The aggregate, if material of the amounts set aside to provisions made for meeting specific liabilities, contingencies or commitments.

(c) The aggregate, if material, of the amounts withdrawn from such provisions, as no longer required.

Expenditure incurred on each of the following items separately for each item:

(a) Consumption of stores and spare parts.

(b) Power and fuel.

(c) Rent.

(d) Repairs to Buildings.

(e) Repairs to Machinery.

(f) (i) Salaries, Wages and Bonus.

(ii) Contribution to provident and other funds.

(iii) Workmen and staff welfare expenses to the extent not adjusted from any previous provision or reserve.

(g) Insurance

(h) Rates and taxes including taxes on income.

(i) Miscellaneous expenses.

Provided that any item under which the expenses exceed 1% of the total revenue of the Com­pany or Rs. 5,000, whichever is higher, shall be shown as a separate and distinct item against an appropriate account head in the Profit and Loss Account and shall not be combined with any other items to be shown under Miscellaneous Expenses.

(a) The amount of income from investments, distinguishing between trade Investments.

(b) Other income by way of interest, specifying the nature of the income.

(c) The amount of income tax deducted if the gross income is stated under subparagraphs (a) and (b) above.

(a) Profit and losses on investments (showing distinctly the extent of the profits or losses earned or incurred on account of membership of a partnership firm) to the extent not adjusted from any previous provision or reserve.

(b) Profit and losses in respect of transactions of a kind not usually undertaken by the Company or undertaken in circumstances of an exceptional or non-recurring if material in amount.

(c) Miscellaneous income.

(a) Dividends from Subsidiary Companies.

(b) Provisions for losses of Subsidiary Companies.

The aggregate amount of dividends paid and proposed, and stating whether such amounts are subject to deduction of income tax or not.

Amount, if material, by which any items shown in the Profit and Loss Account is affected by any change in the basis of accounting. The Profit and Loss Account shall contain by way of a note detailed information showing separately the following payments provided or made during the financial year to the Directors (in­cluding Managing Directors) the Managing Agents, Secretaries and Treasurers or Manager, if any, by the Company.

The subsidiaries the Company, the subsidiaries of the Company of any other person:

Managerial remuneration under Section 198 of the Act paid or payable during the financial year.

Expenses reimbursed to the Managing Agent under Section 345.

Commission or other remuneration payable separately to a Managing Agent or his associate under Section 356,357 and 358.

Commission received or receivable under Section 356 by the Managing Agent or his associate as selling agent of other concerns in respect of contracts entered into by such concerns with the Company.

The money value of the contracts for the sale or purchase of goods and materials or supply of services, entered into by the Company with the Managing Agent or his associate under Section 360 during the financial year.

Other allowances and commission including guarantee commission. Any other perquisites or benefits in cash or in kind stating the money value where practicable.

Pensions, gratuities, payments from provident funds in excess of own subscription and interest thereon, compensation for loss of office, consideration in connection with retirement from office.

The Profit and Loss Account shall contain or give by way of a note a statement showing the computation of net profits in accordance with Section 340 of the Act with the relevant details of the calculation of the commission’s payable by way of percentage of such profits to the directors including Managing Directors or Managers, if any.

The Profit and Loss Account also contains by way of note detailed information in regard to amounts paid to the auditors whether as fees, expenses or otherwise for services rendered as auditor and in any other capacity.

(VIII) Special points to be remembered while preparing Balance Sheet:

1. Calls-in-arrears:

It refers to the amount not paid by the shareholders on the calls made on them by the company. This item is usually given in the trial balance. It should be deducted from the called up the liabilities side of the Balance Sheet to find paid up capital.

If the Trial balance shows only the paid up capital and the call-in-arrears is given in the adjustment, the amount is first added to the paid up capital to show the called up capital and then deducted against so that the paid up capital can be shown in the outer column.

2. Unclaimed dividend:

It refers to the amount of dividend not collected by the shareholders from the company. This item is always shown on the credit side of Trial Balance. It is shown on the liabilities side of the Balance Sheet under the heading “Current Liabilities”.

3. Forfeited shares account:

This item appears as a credit item in the Trial Balance and is shown on the liabilities side of the Balance sheet by adding it to the paid up capital.

4. Securities premium account:

This item is shown on the liabilities side of the Balance Sheet under the heading “Reserves and Surplus”.

Rebate on Bills Discounted is also known as Discount Received in Advance, or, Unexpired Discount or, Discount Received but not earned.

Its treatment is same as we do in the case of Interest Received in Advance.

Thus:

(i) If it is given only in the Trial Balance:

The same will be shown as a liability and will appear in the liability side of the Balance Sheet.

(ii) If it is given in adjustment:

In that case, the same is deducted from the Income from Interest and Discount in Profit and Loss Account and the same also will appear in the liability side of the Balance Sheet.

Method of Computation of Rebate on Bills Discounted:

For example, a customer discounts a bill of Rs. 60,000 for 3 months at 12% on 1st March 2000, it will be calculated as under:

Bank will earn discount @ 12% for 92 days i.e., = Rs. 60,000 x 12/100 x 92/365 = Rs. 1814.

But this amount of discount is meant for March, April and May. As accounts are prepared on 31st March each year, discount received for 61 days (30 + 31) for April and May is not actually earned. Thus, discount of 61 days i.e., Rs. 601 is called Rebate on Bill Discounted. So, actual income is Rs. 1213/- (i.e., 1814 – Rs. 601).

Treatment in Profit and Loss Account and Balance Sheet:

(i) Discount earned (up to 31.12.1992) will be credited to P & L A/c and unexpired discount will, however, be credited to Rebate on Bills Discounted A/c, and will appear in the liability side of the Balance Sheet.

(ii) Commissions earned will be credited to P & L A/c whereas customers’ liability for acceptance will appear on the asset side of the Balance Sheet and Acceptance on behalf of customer will appear in the liability side as contra items, and

(iii) Loans and advances will appear in the assets side of the Balance Sheet.

It is a method of rapid posting in books maintained under Double Entry principle. Under this system, posting is done from slips and not from journals or cash books.

Slips are loose leaves of journals and these are supplied either by the customers or by the bank staff.

Reasons for adoption of slip system

• Slip System of accounting/ posting is adopted for the following reasons:
• It ensures smooth flow of accounting.
• It can distribute the work of posting among many persons.
• It helps in keeping the accounts of customer upto date.
• This system saves a lot of clerical labour as most of the slips are filled in by the customers and provide an objective evidence of the records.

Features of slip system of posting

• Slip system of posting is based on the Double Entry System. Double Entry System is a system in which each entry affects the two accounts with same amount, i.e. debit is equals to the credit.
• The transactions are entered into by providing the details on the slips.
• It contains the different slips i.e. withdrawal slip, pay-in-slip and cheque for different types of transactions.
• It records the transactions in ledger book of accounts.
• Slips serves as the evidence for the transactions.

Advantages of Slip System:

(i) it reduces the possibility of errors and frauds;

(ii) it saves a lot of time since it is prepared by the customers themselves;

(iii) it provides a good system of internal check etc.

Disadvantages of Slip System:

Chances of Loss of Slips: Slips are just like the loose leaves of the paper. It may be lost, distorted or misappropriated very easily. Thus, it is unjustified to maintain the records in form of the slips.

No Verification: As the posting is done directly to the ledger accounts and no entry is made in the subsidiary books. So verification of accounts is not possible.

Types

Withdrawal Slip

Withdrawal Slip is the slip used for drawing the amount from the bank account. It is a document of bank on which a person writes the date, account number and amount of money to withdraw from the bank. These slips contain the following particulars to be filled:

• Name of the Drawer having bank account
• Account Number
• Date
• Branch of the Bank
• Signature of the Drawer

PAY-IN-SLIP

This is also known as deposit Slip. It is a form supplied by a bank for a depositor to fill out and to deposit the money in the bank. Pay-in-slip is used to deposit the amount in the bank. These slips contains the following particulars to be filled:

• Name of the Depositor having bank account
• Contact Number
• Account Number
• PAN Number
• Date
• Branch of the Bank
• Denominations of the money deposited
• Signature of the Depositor

CHEQUES

Cheque is a negotiable instrument which can be transferred by mere hand delivery. It is a document issued by an individual to his or her bank, directing them to pay the person whose name is mentioned in the document the sum specified in it for such a document to be valid, it is important that the person issuing it has an account in the said bank. An issuer of the cheque is called Drawer, and the one to whom it is issued is the Drawee. Cheque is used to make safe and convenient payment. It is less risky and danger of loss is minimized.

New set of books are opened

The following are the entries recorded by the purchasing company:

1.	Purchasing consideration payable	Business Purchase Account   To Vendor Account	Dr.
2.	Acquiring various assets and liabilities at agreed value	Various Assets Account    To Various Liabilities Account    To Business Purchase Account	Dr.

Note: If the purchase price exceeds the net assets, the excess amount is debited to Goodwill Account; and if the net assets exceeds the purchase price, the excess amount is credited to Capital Reserve.

3.	On payment of purchase price in kinds	Vendor Account         Dr.
		To Share Capital Account
		To Debenture Account
		To Cash/Bank Account

Alternatively: The following entries can also Passed:
1.	Acquiring various assets and liabilities at agreed value	Various Assets Account	Dr.
		To Various Liabilities Account
		To Vendor Account

 

Note: Any difference between the totals of debit and credit is debited to Goodwill Account or credited to Capital Reserve Account.

2.	On payment of purchase price	Vendor Account	Dr.
		To Share Capital Account
		To Debenture Account
		To Cash/Bank Account

Sometimes the purchasing company does not take over the debtors and creditors of the vendor company but it agrees to collect book debts and pays off the creditors out of the collections from debtors. For this purpose, the company charges a commission by way of certain percentage both on the amount collected from debtors as well as the amount paid to creditors. Any profit or loss (in the form of discount and bad debts) should be borne by the vendor since the purchasing company does this work on behalf of the vendors.

The following entries are to be passed:

1. Entries in the Books of Vendors:

(a)	For Closing Debtors Account
	Purchasing Company Suspense, A/c	Dr.
	To Debtors A/c