Tag: Trial Balance

Inter-branch reconciliation is a major activity for banks and financial institutions looking to create a balanced co-ordination between their various branches and their activities.

Inter-branch Reconciliation

These are:

• Comments on the system/ procedure and records maintained.
• Test check for any unusual entries put through inter-branch/ head office accounts.
• Position of outstanding entries; system for locating long outstanding items of high value.
• Steps taken or proposed to be taken for bringing the reconciliation upto- date.
• Compliance with the RBI guidelines with respect to provisioning for old outstanding entries.

Inter-branch accounts are normally reconciled by each bank at the central level. While practices with various banks may differ, the inter-branch accounts are normally sub-divided into segments or specific areas, e.g., ‘Drafts paid/ payable’, ‘inter-branch remittances’, ‘H.O. A/c’, etc. The auditor should report on the year-end status of inter-branch accounts indicating the dates up to which all or any segments of the accounts have been reconciled. The auditor should also indicate the number and amount of outstanding entries in the interbranch accounts, giving the relevant information separately for debit and credit entries. The auditor can obtain the relevant information primarily from branch audit reports. Where, in the course of audit, the auditor comes across any unusual items in inter-branch/head office accounts, he should report the details of such items, indicating the nature and the amounts involved. The auditor should examine the procedure for identifying the high-value items remaining outstanding in inter-branch reconciliation. He should review the steps taken or proposed to be taken by the Management for clearing the outstanding entries in inter-branch accounts, particularly the high-value items. If he has any specific suggestions for expeditious reconciliation of inter-branch accounts including any improvements in the systems to achieve this objective, the same may be incorporated in the report. In the new CBS environment the branch reconciliation is done of IT department at H.O. in most of the banks.

Importance of Reconciling

A regular review of your accounts can help you identify problems before they get out of hand.

1. Catch Fraud before it’s too Late

Signs of fraud should be your priority when reconciling transactions in your bank account.

A few things to consider include:

• Were legitimate checks that you issued duplicated or changed, resulting in more money leaving your checking account?
• Were checks issued without authorization?
• Are there unauthorized transfers out of the account, or did anybody make unauthorized cash withdrawals?
• Does the account have any missing deposits?

2. Prevent Administrative Problems

Reconciling your account also helps you identify internal administrative issues that need attention. For example, you might need to reevaluate how you handle cash flow and accounts receivable, or perhaps change your record-keeping system and the accounting processes you use.

Proper processes for managing your banking transactions result in outcomes such as:

• Knowing how much cash you really have available in your accounts
• Avoiding bounced checks (or failing to make electronic payments) to partners and suppliers
• Avoiding bank fees for insufficient funds or using lines of credit when you don’t really need to
• Knowing if customer payments have bounced or failed, and determining if any action is needed
• Keeping track of your outstanding checks and following up with payees
• Making sure every transaction gets entered into your accounting system properly
• Catching any bank errors

How Bank Reconciliation Works?

To reconcile your accounts, compare your internal record of transactions and balances to your monthly bank statement. Verify each transaction individually, making sure the amounts match perfectly, and note any differences that need more investigation.

Make sure that your bank statements show an ending account balance that agrees with your internal records. If the amounts don’t match, you need an explanation for the difference.

The process can be as formal or informal as you’d like, and some businesses create a bank reconciliation statement to document that they regularly reconcile accounts. If you don’t complete the process monthly, you can perform it daily, quarterly, or for any other period you choose.

Best Time to Reconcile

It’s wise to review your accounts at least monthly. For high-volume businesses or situations with a higher risk of fraud, you may need to reconcile your bank transactions even more often. Some companies reconcile their bank accounts daily.

You can also build protection into your bank accounts, and your bank can provide useful ideas. For example, many banks offer a solution called Positive Pay, which prevents your bank from approving payments out of your account unless you specifically provide instructions to approve individual payments in advance.

Life cycle costing is a system that tracks and accumulates the actual costs and revenues attributable to cost object from its invention to its abandonment. Life cycle costing involves tracing cost and revenues on a product by product base over several calendar periods.

The Life Cycle Cost (LCC) of an asset is defined as:

“The total cost throughout its life including planning, design, acquisition and support costs and any other costs directly attributable to owning or using the asset”.

Life Cycle Cost (LCC) of an item represents the total cost of its ownership, and includes all the cots that will be incurred during the life of the item to acquire it, operate it, support it and finally dispose it. Life Cycle Costing adds all the costs over their life period and enables an evaluation on a common basis for the specified period (usually discounted costs are used).

This enables decisions on acquisition, maintenance, refurbishment or disposal to be made in the light of full cost implications. In essence, Life Cycle Costing is a means of estimating all the costs involved in procuring, operating, maintaining and ultimately disposing a product throughout its life.

Life cycle costing is different from traditional cost accounting system which reports cost object profitability on a calendar basis (i.e. monthly, quarterly and annually) whereas life cycle costing involves tracing costs and revenues of a cost object (i.e. product, project etc.) over several calendar periods (i.e. projected life of the cost object).

Thus, product life cycle costing is an approach used to provide a long-term picture of product line profitability, feedback on the effectiveness of the life cycle planning and cost data to clarify the economic impact on alternative chosen in the design, engineering phase etc.

It is also considered as a way to enhance the control of manufacturing costs. It is important to track and measure costs during each stage of a product’s life cycle.

Characteristics of Life Cycle Costing

1. Product life cycle costing involves tracing of costs and revenues of a product over several calendar periods throughout its life cycle.
2. Product life cycle costing traces research and design and development costs and total magnitude of these costs for each individual product and compared with product revenue.
3. Each phase of the product life-cycle poses different threats and opportunities that may require different strategic actions.
4. Product life cycle may be extended by finding new uses or users or by increasing the consumption of the present users.

Stages of Product Life Cycle Costing

Following are the main stages of Product Life Cycle:

(i) Market Research

It will establish what product the customer wants, how much he is prepared to pay for it and how much he will buy.

(ii) Specification

It will give details such as required life, maximum permissible maintenance costs, manufacturing costs, required delivery date, expected performance of the product.

(iii) Design

Proper drawings and process schedules are to be defined.

(iv) Prototype Manufacture

From the drawings a small quantity of the product will be manufactured. These prototypes will be used to develop the product.

(v) Development

Testing and changing to meet requirements after the initial run. This period of testing and changing is development. When a product is made for the first time, it rarely meets the requirements of the specification and changes have to be made until it meets the requirements.

(vi) Tooling

Tooling up for production can mean building a production line; building jigs, buying the necessary tools and equipment’s requiring a very large initial investment.

(vii) Manufacture

The manufacture of a product involves the purchase of raw materials and components, the use of labour and manufacturing expenses to make the product.

(viii) Selling

(ix) Distribution

(x) Product support

(xi) Decommissioning

When a manufacturing product comes to an end, the plant used to build the product must be sold or scrapped.

Benefits of Product Life Cycle Costing

Following are the main benefits of product life cycle costing:

(i) It results in earlier action to generate revenue or lower costs than otherwise might be considered. There are a number of factors that need to be managed in order to maximise return in a product.

(ii) Better decision should follow from a more accurate and realistic assessment of revenues and costs within a particular life cycle stage.

(iii) It can promote long term rewarding in contrast to short term rewarding.

(iv) It provides an overall framework for considering total incremental costs over the entire span of a product.

Life Cycle Costing Process

Life cycle costing is a three-staged process. The first stage is life cost planning stage which includes planning LCC Analysis, Selecting and Developing LCC Model, applying LCC Model and finally recording and reviewing the LCC Results. The Second Stage is Life Cost Analysis Preparation Stage followed by third stage Implementation and Monitoring Life Cost Analysis.

The Three stages are:

Life Cycle Costing Process

LCC Analysis is a multi-disciplinary activity. An analyst, involved in life cycle costing, should be fully familiar with unique cost elements involved in the life cycle of asset, sources of cost data to be collected and financial principles to be applied.

He should also have clear understanding of methods of assessing the uncertainties associated with cost estimation. Number of iteration may be required to perform to finally achieve the result. All these iterations should be documented in detail to facilitate the interpretations of final result.

Stage 1: LCC Analysis Planning:

The Life Cycle Costing process begins with development of a plan, which addresses the purpose, and scope of the analysis.

The plan should:

1. Define the analysis objectives in terms of outputs required to assist a management decision.

Typical objectives are:

1. Determination of the LCC for an asset in order to assist planning, contracting, budgeting or similar needs.
2. Evaluation of the impact of alternative courses of action on the LCC of an asset (such as design approaches, asset acquisition, support policies or alternative technologies).
3. Identification of cost elements which act as cost drives for the LCC of an asset in order to focus design, development, acquisition or asset support efforts.
4. Make the detailed schedule with regard to planning of time period for each phase, the operating, technical and maintenance support required for the asset.
5. Identify any underlying conditions, assumptions, limitations and constraints (such as minimum asset performance, availability requirements or maximum capital cost limitations) that might restrict the range of acceptable options to be evaluated. Identify alternative courses of action to be evaluated.
6. Identify alternative courses of action to be evaluated. The list of proposed alternatives may be refined as new options are identified or as existing options are found to violate the problem constraints.
7. Provide an estimate of resources required and a reporting schedule for the analysis to ensure that the LCC results will be available to support the decision-making process for which they are required.

Next step in LCC Analysis planning is the selection or development of an LCC model that will satisfy the objectives of the analysis. LCC Model is basically an accounting structure which enables the estimation of an asset components cost.

Stage 2: Life Cost Analysis Preparation

The Life Cost Analysis is essentially a tool, which can be used to control and manage the ongoing costs of an asset or part thereof. It is based on the LCC Model developed and applied during the Life Cost Planning phase with one important difference: it uses data on real costs.

The preparation of the Life Cost Analysis involves review and development of the LCC Model as a “real-time” or actual cost control mechanism. Estimates of capital costs will be replaced by the actual prices paid. Changes may also be required to the cost breakdown structure and cost elements to reflect the asset components to be monitored and the level of detail required.

Targets are set for the operating costs and their frequency of occurrence based initially on the estimates used in the Life Cost Planning phase. However, these targets may change with time as more accurate data is obtained, from the actual asset operating costs or from the operating cost of similar other asset.

Stage 3: Implementing and Monitoring

Implementation of the Life Cost Analysis involves the continuous monitoring of the actual performance of an asset during its operation and maintenance to identify areas in which cost savings may be made and to provide feedback for future life cost planning activities.

For example, it may be better to replace an expensive building component with a more efficient solution prior to the end of its useful life than to continue with a poor initial decision.

The objects of preparing financial statement with the help of Income statement or, Profit and Loss Account and Balance Sheet is to supply the financial information to the users of financial statements as far as possible No doubt, in order to serve such basic objectives, the Income Statement and the Balance Sheet serve very well.

The Balance Sheet exhibits the financial position at the end of the period through the assets (which show the development of resources in various types of properties) and liabilities (which present how these resources were taken).

The Income Statement, on the other hand, measures the results of the operation at the end of the period, i.e., the change in the owner’s equity as a result of the productive and commercial activities for the period.

Thus, the above two statements are very useful although there are other significant relationship between the two Balance Sheets (opening and closing accounting periods) on which the conventional above two statements cannot throw any light further.

For this purpose, it becomes necessary to know what funds are available during the period and application of such funds along with the profit that has been earned as a result of the business activities. So, in order to know such changes in the financial position, it is necessary to prepare a statement known as Funds Flow Statement which will exhibit such financial information to the users of financial statement.

Concept of Funds Flow Statement:

In order to understand the Funds Flow Statement the meaning of ‘fund’ must be known although the ‘fund’ has got different meaning and interpretation Different accountants/ authors have used the term in different sense, e.g. Cash Fund, Capital Fund, Working Capital Fund etc.

In other words, they have been interpreted in various ways, viz.:

(a) Cash Fund:

Some use the expression ‘the amount of Cash’ in a conservative or narrow sense, as it is synonymous with Cash (i.e., un-deposited cash plus demand deposits at bank). Fund statement is a statement where various types of cash transactions are to be evaluated in the form of ‘Cash Flow Statement’ Some others are of opinion that marketable securities should also be added with cash.

(b) Net Monetary Asset Fund:

There are some other accountants who are of opinion that with the amount of cash. Bank and marketable securities, short-term receiv­ables and secondary cash reserves should also be included with such cash fund.

(c) Capital Fund:

Others use the term ‘Fund’ in a broader sense to mean the total amount of resources employed in the business. It is considered as purchasing or spending power or as all financial resources, arising, as several writers have pointed out, from external rather than internal transactions of the firm. In short, this fund includes the financial resources which affects other than working capital.

(d) Working Capital Fund:

Still others are of the view that the amount of Net Working Capital or the excess of current assets over current liabilities, should be consid­ered as ‘Fund’, particularly for the purpose of preparing Funds Flow Statement. The primary argument against this view is that Stock, Debtors, Short-term investments are considered as equivalent to cash.

And that is why at the time of preparing Funds Flow Statement consolidated changes of different items constituting the Fund are taken into consideration instead of incorporating the changes of each individual item. There is no effect of those transactions which are limited to working capital only in this statement.

Now, we are to see which transactions affect working capital and which do not. Transactions which affect Working Capital

The following items that will cause a change in Working Capital:

A. Increase in Working Capital:

1. Issue of Shares and Debentures;
2. Sale of Fixed Assets or Non-Current Assets;
3. Income from different sources.

B. Decrease in Working Capital:

(i) Redemption of Preference Shares or Debentures;

(ii) Purchase of Fixed Assets or Non-Current Assets;

(iii) Payment of Miscellaneous Expenses;

(iv) Payment of Dividend etc.

Transactions which do not affect working capital:

The following items do not bring about any change in Working Capital:

(i) A shift from one current asset to another current asset by an equal amount or from one current liability to another current liability by an equal amount,

(ii) An increase in current assets by a corresponding equal increase in current liabilities;

(iii) A decrease in current assets by a corresponding equal decrease in current liabilities;

(iv) An increase in non-current assets by a corresponding equal increase in non-current liability or fixed liability;

(v) A decrease in non-current liability by a corresponding equal increase in non- current liability.

Concept of Flow:

When economic values are transferred from one asset to another or from one equity to another or from an asset to an equity or from equity to asset or a combination of any of them, the same is referred to the ‘Flow’ of funds.

When ‘Working Capital Fund’ is considered, this ‘flow’ of funds indicates this movement of funds which are expressed as ‘/low in’ or ‘/low out’. It happens particularly when changes are made from non-current assets account (i.e., fixed asset etc.) to current assets account or vice-versa e.g., when a plant is purchased against cash or preference shares are redeemed etc.

However, the flow of funds is a continuous process i.e., as soon as the funds are used, there must be an off-setting source. It may also be stated that the liabilities and net worth represent net source whereas the assets of a firm represent net use of funds.

Funds Flow Statement:

It is a statement which discloses the analytical information about the different sources of a fund and the application of the same in an accounting cycle It deals with the transactions which change either the amount of current assets and current liabilities (in the form of decrease or increase in working capital) or fixed assets, long-term loans including ownership fund.

It gives a clear picture about the movement of funds between the opening and closing dates of the Balance Sheet It is also called the Statement of Sources and Applications of Funds: Movement of Funds Statement: where got where gone statement; Inflow and Outflow of Fund Statement etc.

No doubt. Funds Flow Statement is an important indicator of financial analysis and control. It is a valuable aid to the financial manager and also to a creditor for assessing the uses of funds and also helps to determine how the funds are financed. The financial analyst can evaluate the future flows of a firm on the basis of past data.

This statement supplies an efficient method for the financial manager in order to assess the:

(a) Growth of the firm,

(b) Its resulting financial needs and

(c) To determine the best way to finance those needs.

In particular, funds flow statements are very useful in planning intermediate and long-term financing.

The significance or importance of funds flow statement can be well followed from its various uses given below:

1. It Helps in the Analysis of Financial Operations:

The financial statements reveal the net effect of various transactions on the operational and financial position of a concern. The balance sheet gives a static view of the resources of a business and the uses to which these resources have been put at a certain point of time. But it does not disclose the causes for changes in the assets and liabilities between two different points of time.

The funds flow statement explains causes for such changes and also the effect of these changes on the liquidity position of the company. Sometimes a concern may operate profitably and yet its cash position may become more and more worse. The funds flow statement gives a clear answer to such a situation explaining what has happened to the profits of the firm.

2. It Throws Light on Many Perplexing Questions of General Interest which Otherwise may be Difficult to be Answered, such as:

(a) Why were the net current assets lesser in spite of higher profits and vice-versa?

(b) Why more dividends could not be declared in spite of available profits?

(c) How was it possible to distribute more dividends than the present earnings?

(d) What happened to the net profit? Where did they go?

(e) What happened to the proceeds of sale of fixed assets or issue of shares, debentures, etc.?

(f) What are the sources of the repayment of debt?

(g) How was the increase in working capital financed and how will it be financed in future?

3. It Helps in the Formation of a Realistic Dividend Policy:

Sometimes a firm has sufficient profits available for distribution as dividend but yet it may not be advisable to distribute dividend for lack of liquid or cash resources. In such cases, a funds flow statement helps in the formation of a realistic dividend policy.

4. It Helps in the Proper Allocation of Resources:

The resources of a concern are always limited and it wants to make the best use of these resources. A projected funds flow statement constructed for the future helps in making managerial decisions. The firm can plan the deployment of its resources and allocate them among various applications.

5. It Acts as a Future Guide:

A projected funds flow statement also acts as a guide for future to the management. The management can come to know the various problems it is going to face in near future for want of funds. The firm’s future needs of funds can be projected well in advance and also the timing of these needs. The firm can arrange to finance these needs more effectively and avoid future problems.

6. It Helps in Appraising the Use of Working Capital:

A funds flow statement helps in explaining how efficiently the management has used its working capital and also suggests ways to improve working capital position of the firm.

7. It Helps Knowing the Overall Creditworthiness of a Firm:

The financial institutions and banks such as State Financial Institutions. Industrial Development Corporation, Industrial Finance Corporation of India, Industrial Development Bank of India, etc. all ask for funds flow statement constructed for a number of years before granting loans to know the creditworthiness and paying capacity of the firm. Hence, a firm seeking financial assistance from these institutions has no alternative but to prepare funds flow statements.

Maintenance of Accounts of Educational Institutions

A large number of educational institutions are registered under the India Society Registration Act, 1860. The purpose behind the formation of educational institutions is to spread education and not just earn profits. The following table lists out the sources for collection of amount and also the different types of expenses incurred by the educational institutions:

Main Source of Collection

• Admission fees, tuition fees, examination fees, fines, etc.
• Securities from students.
• Donations from public
• Grants from Government for building, prizes, maintenance, etc.

Types of Expenses / Payments

• Salary, allowances and provident fund contribution for teaching and non-teaching staff.
• Examination expenses
• Stationery & printing expenses
• Distribution of scholarships and stipends
• Purchase and repair of furniture & fixture
• Prizes
• Expenses on sports and games
• Festival and function expenses
• Library books
• Newspaper and magazines
• Medical expenses
• Audit fees and audit expenses
• Electricity expenses
• Telephone expenses
• Laboratory running & maintenance
• Laboratory equipment
• Building Repair & maintenance

Preliminary Audit of Educational Institutions

Following points need to be considered by an Auditor while conducting audit of educational institutions:

• It is to be confirmed whether the letter of his appointment (the Auditor’s) is in order.
• The Auditor should obtain a list of books, documents, register and other records as maintained by the educational institutions.
• He should examine the audit report of last year and should note down the observation and qualification, if any.
• He should note down the important provisions regarding to accounts and audit from the Trust Deed, Charter of Regulations.
• He should examine the Minutes of Meetings of the Board of Trustee or the Governing Body for important decisions regarding the sale or purchase of fixed assets, investments or delegation of finance power.
• In case of colleges and university, the Grants Commission provides Grants to them subject to certain conditions. The Auditor should study all the conditions concerning grants.
• The Auditor should examine the Code of State regarding grant-in-aid.
• He should be aware of all the provisions and rules of related laws concerning books of account and audit.

Internal Control System

The Auditor should independently check the internal control system regarding authorization procedures, record maintenance, safeguarding of assets, rotation and division of staff duty, etc. Following are some of the important aspects that need to be considered by an Auditor to keep a check on the internal control system −

• Whether internal control and internal check system is working, if yes, how effectively.
• Is there is any system to physically verify the fixed assets, stores and consumables at regular interval.
• An Auditor should verify the control system concerning proper authorization, obtaining quotations, proper maintenance of accounts and record regarding purchase of fixed assets, purchase of material, investment, etc.
• Whether bank reconciliation statement is prepared at regular intervals and what kind of action is taken for uncleared cheque which were pending since long.
• Whether waiver of fees is properly sanctioned by appropriate authorities.
• The person who is collecting fees and the cashier should not be the same person.
• Class wise fees receivable and the actual fees received reconcile or not.
• Whether collected fees is deposited in bank on a daily basis.
• Fees collection register should be maintained on a daily basis.
• Whether approved list of supplier of sports material, stationery, lab items are readily available.
• Whether control system for payment is adequate or not.
• The system of letting out conference hall and class rooms, etc. for seminars and conventions.
• Whether fees structure is properly authorized along with change in fee structure if any.

Audit of Assets and Liabilities

The following points need to be considered while conducting an audit of Assets and Liabilities −

• Verification of Assets register should be done considering grants on purchase of assets, if any received from State Government/ University Grant Commission (UGC).
• Verification of depreciation is very important; it should be according to useful life of assets or as per the Companies Act, whichever is applicable.
• If educational institution is running under Indian Public Trust Act, it is must for an Auditor to check, where investments have been made, because as per the Indian Public Trust Act, investment can be made in specific securities only.
• If donation is received in the form of investment, an Auditor has to check all related correspondence with the donor.
• All the applicable requirements of law should be fulfilled for the purchase of investments and fixed assets.
• An Auditor should read and note down the state code and provisions relating to the conditions and procedures of Grants. He should also verify the requirements of State/UGC which are to be fulfilled by educational institutions for receiving Grants and also for continuations of Grants.

Audit of Income of Educational Institutions

The following points need to be considered by an Auditor while conducting audit of the Income of Educational Institutions:

• Fees and charges received on account of admission fees, tuition fees, sports fees, examination fees etc. should be verified based on the approved fees structure.
• Verification of counterfoil copies of fees receipt with fees received register should be done.
• Prescribed conditions by the State Government and the University Grants Commission should be verified whether fulfilled or not.
• Cash book should be verified with counterfoil of receipt book and fees register.
• Fees receivable and actual fees received should be reconciled.
• Charges and fees received and receivable should be examined on account of hostel accommodation, mess, housekeeping and clothing, etc.
• Cash book should be verified with the donation received register.
• Donation received should be accounted for according to the nature of donation means careful distinction should be there for revenue nature donation and capital nature donations; the same procedure is to be followed for Grants received.
• The purpose and utilization of grant should be same.
• Investment register and cash book should be verified for income received on account of interest on investment and dividends, etc.

Audit of Expenses of Educational Institutions

The following points need to be considered by an Auditor while conducting audit of Expenses of Educational Institutions:

• Electricity expenses, telephone expenses, water charges, stationery and printing, purchase of sports items should be properly verified with quotation, purchase bills, inward register and Bills received from service providers, etc. All purchases should be authorized by appropriate person.
• In case where hostels purchase food items, provisions, clothing, etc. should be properly verified.
• Verification of Tax Deducted at Source, Employee State Insurance and Provident Fund should be checked. It is also very important that all deducted amount should be deposited in appropriate Government accounts well within time without any default. These can be verified from relevant bank challans.
• Payment made on account of salary should be verified from terms of appointment and increment policy. Auditor should verify the computation of salary and check whether all required deductions are made out of it or not like advance salary, loan installment, absence from duty, ESI (Employee State Insurance), PF (Provident Fund), etc. The Net Salary Payable amount will be verified from cash book and bank pass book for salary paid.
• Terms and conditions, cash book, voucher and receipts should be the basis for the verification of scholarship paid.
• Appropriate provision should be made on account of outstanding payments.