13

Accounts of Banking Companies

LEARNING OBJECTIVES

After studying this chapter, you should be able to:

  1. Define bank, banking company and scheduled bank.

  2. Appraise business of banking companies.

  3. Understand and interpret minimum paid-up capital and reserves.

  4. Know the details of unclaimed deposits and liquidity requirements.

  5. Enlist the principal books of accounts of a banking company, subsidiary ledgers, other books and registers and statistical books, and their usage.

  6. Understand the salient features of banking accounting.

  7. Know the meaning and significance of SLIP system of ledger posting.

  8. Prepare and present final accounts of banking companies.

  9. Know the usage of different formats of schedules to be furnished with balance sheet (Schedules 1–18).

  10. Treat the following: Transactions relating to bills, demand drafts, travellers’ cheques, letters of credit, branch adjustment income recognition, loans and advances including NPAs.

  11. Explain certain key terms associated with banking.

Accounting procedure for banking companies differs from those of other joint stock companies. Despite the fact that banking companies are incorporated under the Companies Act, 1956, they have to strictly comply with the provisions of The Banking Regulations Act, 1949. In addition, the banking companies will have to adhere to the norms and guidelines issued by the Reserve Bank of India (RBI Act 1934). One has to understand all the important statutory provisions of these acts in order to prepare final accounts of banking companies. In this chapter, all such salient features have been discussed in detail and accounting procedure is explained in various illustrations.

13.1 DEFINITION AND MEANING OF BANK, BANKING AND BANKING COMPANY

Bank: In its broadest sense, the term “bank” is used to refer any institution, which is engaged in carrying on certain kinds of financial business. It may be defined as follows: “A bank is an organization that holds money, important documents and other valuables in safe keeping and the money being paid out on the customer’s order/request.” A bank deals with money. It acts in the same way as a trader buys and sells goods at a profit. It is involved in financial trading activities.

Banking: The Banking Regulation Act, 1949 [Section 5(b)] defines banking as, “accepting for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawals by cheque, draft or otherwise”.

Banking company: As per Section 5(c) of the Banking Regulation Act, banking company means any company, which transacts the business of banking in India.

13.2 FORMS OF BUSINESS OF BANKING COMPANIES

According to Section 6 of the Banking Regulation Act, a bank, in addition to banking business, may indulge in the forms of business, which are listed as follows:

  1. Borrowing, raising or taking up money.
  2. Lending or advancing money.
  3. Drawing, making, accepting, discounting, buying, selling, collecting and dealing with bills of exchange, hundis, promissory notes and other instruments.
  4. Granting and issuing of letters of credit, travellers’ cheques and circular notes.
  5. Buying, selling and dealing with bullion.
  6. Buying and selling, on commission, and underwriting and dealing with stock, shares, debentures, bonds, etc.
  7. Receiving all kinds of scripts or valuables on deposit for safe custody.
  8. Providing safe deposit vaults.
  9. Collecting and transmitting money and securities.
  10. Carrying on and transacting every kind of guarantee and indemnity business.
  11. Undertaking and executing trusts.
  12. Undertaking the administration of estates as executor, trustee or otherwise.
  13. Contracting for public and private loans and negotiating and issuing the same.
  14. Selling, improving, managing, developing, exchanging, leasing, mortgaging, disposing of or turning into accounts or otherwise dealing with all or any part of the property and rights of the company.
  15. Doing all such things, which are incidental or conductive to the promotion or advancement of the business of the company.
  16. Any other form of business, which the Central Government may, by notification in the “Official Gazette”, specify as a form of business in which it is for a banking company to engage.
  17. Acquiring and undertaking the whole or any part of the business of any person or a company when such business is of a nature enumerated or described in this sub-section.

No banking company shall engage in any form of business other than those mentioned above, as per Section 6(2) of the Banking Regulation Act, 1949.

13.3 CLASSIFICATION OF COMMERCIAL BANKS

Commercial banks are classified into two: (1) scheduled banks and (2) other banks.

Scheduled bank: A scheduled bank is one which is included in the second schedule of Reserve Bank of India Act, 1934. A scheduled bank should comply with the following terms:

  1. It must have paid-up capital and reserves as specified in the table below.
  2. The activities to be carried out should not be detrimental to the interests of the depositors.
  3. It should be incorporated under the Companies Act, 1956, that is, it should not be the sole trader for a partnership firm of business organization.

13.3.1 Minimum Paid-up Capital and Reserves

According to Section 11 of the Banking Regulations Act, the minimum limits of paid-up capital and reserve to be completed by a banking company are explained in the following table:

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13.4 IMPORTANT LEGAL PROVISIONS OF BANKING REGULATION ACT 1949

Important legal provisions of Banking Regulation Act, 1949 are as follows:

  1. Trading restrictions: As per Section 8, a banking company cannot directly or indirectly deal with the business of buying or selling or bartering of goods, except in connection with the realization of security given to or held by it or engage in any trade or buy, sell or barter goods for others otherwise than in connection with bills of exchange received for collection or negotiation or for the administration of estates as executor, trustee or otherwise.
  2. Non-banking assets: In case of a failure of a debtor to repay the loan within the stipulated period, the bank can take possession of such assets mortgaged. As per Section 9, a banking company cannot hold any immovable property, however acquired, except for its own use, for any period exceeding 7 years from the date of acquisition there of. The gain or loss on the sale of such assets should be shown in the P & L A/c of the banking company separately.
  3. Authorized capital, subscribed capital and paid-up capital:

    As per Section 12,

    1. The subscribed capital of a banking company must not be less than half (50%) of its authorized capital.
    2. Its paid-up capital must not be less than half (50%) of its subscribed capital.
    3. The share capital of a banking company should comprise of only equity or ordinary shares and such preference shares, which have been issued prior to 1 July 1944.
    4. The voting right of a shareholder on poll in respect of any shares held by him is limited to 10% of the total voting rights of all the shareholders of the company (w.e.f. 31 January 1994).
  4. Payment of commission, brokerage, etc.:

    According to Section 13, a banking company cannot pay out directly or indirectly any commission, brokerage, discount or remuneration in any form in respect of any shares issued by it, exceeding 2½% of the paid-up value of the shares.

  5. Charge on uncalled capital: As per Section 14, a banking company cannot create any charge on unpaid capital. Any such charge is null and void.

    According Section 14A, a banking company cannot create a floating charge on the undertaking or any property of the bank except with the written permission of the RBI certifying that the charge will not be detrimental to the interest of the depositors.

  6. Payment of dividend: According to Section 15, a banking company cannot make payment of dividend until all of its capitalized expenses are completely written off. Payment of dividend out of profits is not proper when capitalized expenses are outstanding. Preliminary expenses, organization expenses, share-selling commission, brokerage, amounts of losses incurred and any expenditure not represented by tangible assets are examples for capitalized expenses.

    A banking company, however, may pay dividends on its shares without writing off the following:

    1. Depreciation in the value of its investments in approved securities where such depreciation has not been actually capitalized or otherwise accounted for as loss.
    2. Depreciation in the value of its investment in other than approved securities where adequate provision has been made to the satisfaction of the auditors of the company.
    3. Bad debts, if any, where adequate provision has been made.
  7. Statutory reserve fund: According to Section 17, every banking company incorporated in India should create a reserve fund and transfer at least 20% of its profit to such reserve funds before any dividend is declared.

    According to RBI direction, every bank has to transfer 25% of the net profits to statutory reserve.

  8. Cash reserves: Under Section 18, every non-scheduled bank shall maintain a cash reserve with itself or with RBI, a sum equivalent to at least 3% of its total time and demand liabilities in India on the last Friday of the second preceding fortnight and shall submit to the RBI before 20th day of every month a return showing the amount so held on alternate Fridays during a month with particulars of its demand and time liabilities in India on such Fridays or if any such Friday is a public holiday, at the close of the business on the preceding working day. From June 1994, banks are required to maintain with RBI a uniform average daily balance (cash reserve) of 15% of their entire net demand and time liabilities.

    It is important to note that from 22 June 2006 the RBI can prescribe the cash reserve ratio (CRR) for scheduled commercial banks without any ceiling rate. Hence, the statutory minimum CRR of 3% of the total demand and time liabilities no longer exist.

    At present CRR is 6% w.e.f. December 2010.

  9. Liquidity requirements: As per the amendment envisaged to Section 24 by the Banking Regulation (Amendment) Act, 2007, effective from 2007, the RBI can prescribe the statutory liquidity ratio (SLR) for scheduled commercial banks in specified assets. The value of such assets of a scheduled commercial bank shall not be less than such a percentage not exceeding 40% of its total demand and time liabilities. The RBI can specify this norm from time to time. At present, the norm for SLR as per RBI is 24% from December 2010.

Any banking company, scheduled or non-scheduled, is required to maintain cash, gold or unencumbered approved securities, which is not less than 25% of the total of its time and demand liabilities in India. This is also referred to “statutory liquidity ratio” (SLR).

Prescribed form: Under Sections 29–33 of the Banking Regulation Act, every banking company is required to prepare a balance sheet in accordance with Form A set out in the Third Schedule of the said Act and a P & L A/c in conformity with Form 15 of the same schedule. The formats have been revised with effect from 1 April 1991.

Accounting year: A banking company has to close its account on 31 March every year, i.e. the accounting year commences on 1 April and closes on 31 March next year.

Loans and advances: There are certain restrictions on the loans granted by banks to persons associated with their management. As per Section 20, the restrictions are as follows:

  1. A banking company cannot grant loans and advances on the security of its own shares.
  2. It should not grant any loan or advance to:
    1. Any of its directors.
    2. A firm in which any of its directors is interested as a partner, manager, or employee.
    3. Any company of which any of the directors of the banking company is a director, manager or guarantor.
    4. Any individual with whom any of its directors is a partner or a guarantor.

13.4.1 Unclaimed Deposits

Banking companies must submit the details regarding all the accounts, which could not be operated for 10 years. At the end of each calendar year, it should be submitted in the prescribed form to RBI. In case of fixed deposits, the said term of 10 years must be reckoned from the date of expiry (maturity) of such fixed deposit.

Limits as to investments in shares and debentures: RBI has removed the limits on investments made by the banks in the equity and debenture issues of 17 financial institutions such as LIC, UTI, IDBI, ICICI, IRBI and so on.

13.5 PRINCIPAL BOOKS OF ACCOUNTS

In order to understand the working of a bank, certain principal books of accounts have to be explained. The following are some of them:

13.5.1 Cash Book

The main activity of a bank is the transaction of money. Every transaction in cash should be entered in a book called cash book. Usually, a bank maintains two cash books: one is for receiving cash and the other is for paying cash. Receiving cashier records the following:

  1. Serial number
  2. Name of the depositor
  3. The amount received

When a client deposits money, he pays it along with the duly filled in paying-in-slip. The cashier (receiving cashier) receives money and returns the counterfoil of the paying-in-slip to the client after signing and stamping it.

When payment is made, the paying cashier receives a token from the client given to him by another bank staff to whom the client gives the cheque/withdrawal slip to withdrawl the amount from his account. The paying cashier records the following in the cash book maintained by him:

  1. Serial number
  2. Name of the payee
  3. Token number
  4. The amount

On the basis of paying-in-slips received by the receiving cashier and the cheques and withdrawal slips received by the paying cashier, these transactions are first entered in the accounts of the customers (clients) and then day books are written.

Cash book is the master book. It is used to verify all accounts. This type of procedure provides a good control over cash transactions. This is also known as “Slip system of posting”.

Cash balance book, cash reserve book and day book are all important books of account with respect to cash transactions.

13.5.2 General Ledger

General ledger contains accounts of all personal ledgers, P & L A/c and accounts of all assets. From this, the trial balance and balance sheet may be prepared at ease. All transactions are first recorded in the books and then posted to ledger.

Accounts with respect to income items (revenue in nature) are entered in the general ledgers.

Some banks prepare P & L A/c in the general ledger and maintain separate books for revenue and expense items.

Some banks maintain summary of revenue accounts in the general ledger.

As the general ledger contains the total accounts of all ledgers it is an important book of accounts.

13.5.3 Subsidiary Ledgers

The following are the various types of ledgers for different purposes:

  1. Receiving cashier’s (counter) cash book
  2. Paying cashier’s (counter) cash book
  3. Savings bank accounts ledger
  4. Current accounts ledger
  5. Recurring deposit accounts ledger
  6. Fixed deposit accounts ledger
  7. Fixed deposit interest ledger
  8. Loan ledger and O/D register
  9. Investment ledger
  10. Cash certificate ledger
  11. Bills discounted and purchased ledgers
  12. Inward and outward bills for collection ledgers
  13. Customers’ acceptances, endorsements and guarantee ledgers
13.6 REGISTERS

In addition to books and ledgers, banks maintain the following registers and other books to record various other transactions. It is important to note that these books and registers are not based on double-entry system.

  1. Bills for collection register
  2. Securities register (securities against loan granted)
  3. Demand drafts, telegraphic transfers and mail transfers registers
  4. Safe deposit vault register
  5. Jewellery register
  6. Standing-order register
  7. Cheques and dishonoured cheques
  8. Document register
  9. Letters of credit register
  10. Letter of guarantee register
13.7 SYSTEM OF BANKING ACCOUNTING

13.7.1 Salient Features

Procedure for banking accounting is entirely different from that of trading concerns. Salient features of banking accounting are as follows:

  1. Slip system (or voucher system): Considering the emergent exigencies of recording the transactions immediately, slip system of posting to ledger is adopted. (This system is explained in detail in the forthcoming pages.)
  2. Voucher summary sheets: Transactions are entered in the accounts of customers straight from the vouchers. Then, they are summarized on summary sheets. After that total of these vouchers are posted to the control accounts in the general ledger.
  3. Self-balancing system: Banking companies used to maintain the ledgers on the self-balancing system. The general ledger contains control accounts or total accounts relating to subsidiary ledgers. At regular intervals, the total balances of individual accounts are compared with the balances of control accounts.
  4. Daily trial balance: The general ledger entries are extracted and got tallied every day.
  5. Double voucher system: Two different vouchers are used to record non-cash transactions: (1) Debt vouchers and (2) Credit vouchers.

13.7.1.1 Slip System (or) Voucher System of Ledger Posting

“Slip system of ledger posting” is defined as a method of instant posting of books of accounts on double-entry system.

In this system, entries are recorded in the accounts of the customers in the ledgers straight from different slips and not from subsidiary books or journals. After that, a day book is written up. Then, entries in the accounts of the customers are tallied with those in the day book.

Thus, the posting in the ledger accounts and writing of the day book are done simultaneously.

Slips are loose leaves of journals or cash books.

A slip is nothing but a voucher. Some of such slips are: pay-in-slips, cheques, withdrawal forms and dockets.

Slip system is essential for the following reasons:

  1. It is essential for a bank to know at any time its position in relation to each individual customer, and the transactions have to be recorded immediately without loosing much time gap. This system is a boon to fulfil its aim.
  2. This system facilitates the banks to keep their customers’ accounts accurate and up to date—may be up to time.
  3. It saves time and labour, as all the slips (except dockets) are filled in by the customers themselves.
  4. It serves as objective evidence of records, as they are filled in by the customers.

Advantages of slip system: The following are the advantages of slip system:

  1. Reduction of work load: The workload of the staff (mainly clerical) is reduced to a great extent, as all the slips (except dockets) are filled in by the customers themselves.
  2. Saves time: Much time is saved as all transactions are recorded on the basis of slips.
  3. Division of labour: This system paves the way of division of work among the bank staff.
  4. Responsibility with accountability: The slip system fixes the responsibility of each employee and the errors made by any one can be easily accounted for.
  5. No interruption: This type of procedure is carried out by the employees without any interruption.
  6. Eliminates subsidiary books: As posting is done on the basis of slips, there is no need to maintain subsidiary books.
  7. Easy and early detection of errors: Each transaction is entered in different books by different employees. At the end of the day, each book gets tallied. If it does not tally, the errors can be easily spotted on the same day and rectified immediately.
  8. Accurate and trustworthy: All books are maintained on self-balancing system. Hence it is accurate and trustworthy.
  9. Facilitates auditing: An important function of auditing is “vouching”. Vouchers facilitate the task of auditing to a great extent.
  10. Objective evidence: It serves as an objective evidence of record for transactions as slips are entered and signed by the customers themselves.

Disadvantages of slip system:

  1. Risk of loss: As transactions are huge, and each such transaction is based on loose slip, there is a chance of loss of slips.
  2. Maintenance: Maintaining a large number of slips is an arduous task. Keeping a date-wise record is not an easy affair.
  3. Easy to manipulate: Dishonest employees can misuse by destroying the slips.
  4. No verification: In case if a slip is lost or destroyed wilfully by a dishonest personnel, it will be very difficult to verify it.
  5. Customer’s role: As each customer may not be well versed in filling up the variety of forms, their role has become vital. Any negligence on their part will mar the entire accounting process.
13.8 PREPARATION AND PRESENTATION OF FINAL ACCOUNTS

A strange feature is that banking companies are not required to prepare their final accounts as per Schedule VI of the Companies Act, 1956. But according to Section 29 of the Banking Regulation Act, they have to prepare these accounts in accordance with Form A (for balance sheet) and Form B (for P & L A/c) of Schedule III annexed to Banking Regulation Act, 1949.

First, let us discuss the preparation of P & L A/c of the banking companies.

 

The Third Schedule
(Section 29)
From B
From of Profit and Loss Account
Profit and Loss Account
for the Year Ended on 31 March ……………
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Schedules
Schedules to be Annexed to Profit and Loss Account
Schedule 13—Interest Earned
  Year Ended on 31 March ….. (Current Year)
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Year Ended on 31 March…..(Previous Year)
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I. Interest/Discount on Advances/Bills

II. Income on Investments

III. Interest or Balances with RBI and Other Inter-bank Funds

IV. Others

    Total:

Schedule 14—Other Income
  As on 31 March…..(Current Year)
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As on 31 March…..(Previous Year)
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I. Commission, Exchange & Brokerage

II. Profit on Sales 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, Building and Other Assets
Less: Loss on Sale of Land, Buildings & Other Assets

V. Profit on Exchange Transactions
Less: Loss on Exchange Transactions

VI. Income Earned by Way of Dividends, etc. From Subsidiaries/Companies and/or Joint Ventures Abroad/in India

VII. Miscellaneous Income

    Total:

Note: Under items II–V loss figures may be shown in brackets.

 

Schedule 15—Interest Expended
  As on 31 March….. (Current Year)
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As on 31 March….. (Previous Year)
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I. Interest of Deposits

II. Interest on RBI/Inter-bank Borrowings

III. Others

    Total:

Schedule 16—Operating Expenses
  As on 31 March…..(Current Year)
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As on 31 March…..(Previous Year)
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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 and Expenses
(Including Branch Auditors’ Fees and Expenses)

VIII. Law Charges

IX. Postages, Telegrams, Telephone, etc.

X. Repairs and Maintenance

XI. Insurance

XII. Other Expenditure

    Total:

13.9 GUIDELINES OF RBI FOR PROFIT AND LOSS ACCOUNT
  1. Schedule 13—Interest earned:
    1. Interest/discount on advances/bills:

      The following items are to be included under this head:

      Interest and discount on all types of loans and advances such as (i) cash credits; (ii) demand loans; (iii) overdrafts, (iv) export loans, (v) loans, (vi) domestic and foreign bills purchased and discounted and rediscounted, (vii) overdue interest and (viii) interest subsidy with respect to such advances and/or bills.

    2. Income on investments: All types of income derived from investment portfolio by way of interest and dividend are to be included in this category.
    3. Interest on balances with RBI and other bank funds: It includes interest on balances with RBI and other banks, call loans, money market placements and so on.
    4. Others: It includes any other discount/interest income not included in the above three categories.
  2. Schedule 14—Other income:
    1. Commission, exchange and brokerage: It includes all types of remuneration on services such as commission on collections, commission/exchange on remittances and transfers, commission on Govt. business, commission on other permitted agency business including consultancy and other services, brokerage, etc. on securities. It does not include foreign exchange income.
    2. Profit on sale of investment: Less—Loss on sale of investments.
    3. Profit on revaluation of investments: Less—Loss on revaluation of investments. Net profit/loss on revaluation of assets has to be shown.
    4. Profit on sale of land, buildings and other assets: Less—Loss on sale of land, buildings and other assets. It includes profit/loss on sale of securities, furniture, land and buildings, motor vehicles, gold, silver and so on. If the net position is a loss, it is to be shown as a deduction.
    5. Profit on exchange transactions: Less—Loss on exchange transactions. It includes profit/loss on dealing with foreign exchange; all income earned through foreign exchange and the commission and charges on foreign exchange transactions excluding interest. Only the net position should be shown.
    6. Income earned by way of dividends from subsidiary companies and joint ventures abroad and in India.
    7. Miscellaneous income: It includes recoveries from constituents for godown rents, income from bank’s properties, security charges, insurance, etc. and any other miscellaneous income. In case, if any item under this head exceeds 1% of the total income, then such particulars may be given in the notes.
  3. Schedule 15—Interest expended:
    1. Interest on deposits: It includes interest paid on all types of deposits from banks and other institutions.
    2. Interest on RBI/Inter bank borrowings: It includes discount/interest on all borrowings and refinance from RBI and other banks.
    3. Others: It includes discount/interest on all borrowings reference from financial institutions. All other payments like interest on participation certificate and panel interest paid may be included in this category.
  4. Schedule 16—Operating expenses:
    1. Payment to and provisions for employees: It includes staff salaries/wages, allowances, bonus and other staff benefits like provided fund, pension, gratuity, leave fare concessions, staff welfare, medical allowances to staff and so on.
    2. Rent, taxes and lighting: It includes rent paid by the banks on buildings, municipal and other taxes paid (excluding income tax and interest tax), electricity and other similar charges and levies. House rent allowance and other similar payment to staff should appear under the head “payment to and provisions for employees”.
    3. Printing and stationery: It includes expenditure on books and forms and stationery used by the bank and other printing charges, which are not incurred by way of publicity expenditure.
    4. Advertisement and publicity: It includes expenditure incurred by the bank for advertisement and publicity purposes including printing charges of publicity matter.
    5. Depreciation on bank’s property: It includes depreciation on bank’s own property, motor cars and other vehicles, furniture, electric fittings, vaults, lifts, leasehold properties, non-banking assets and so on.
    6. Directors’ fees, allowances and expenses: It includes sitting fees and all other items of expenditure incurred on behalf of directors. The daily allowance, total charges, conveyance charges, etc., which though in the nature of reimbursement of expenses incurred may be included under this head. Similar expenses of local committee members may also be included under this head.
    7. Auditor’s fees and expenses (including branch auditor’s fees and expenses): It includes the fees paid to the statutory auditors and branch auditors for professional services rendered and all expenses for performing their duties, even though they may be in the nature of reimbursement of expenses. If external auditors have been appointed by banks themselves for internal inspections and audits and other services the expenses incurred in that context including fees may not be included under this head but shown under “other expenditure”.
    8. Law charges: It includes all legal expenses and reimbursement of expenses incurred with respect to legal service.
    9. Postage, telegrams, telephone, etc.: It includes all postal and courier charges, telegrams, telephones, fax, e-mail, internet expenses and so on.
    10. Repairs and maintenance: It includes repairs to bank property, their maintenance charges and so on.
    11. Insurance: It includes insurance charges on bank’s property, insurance premia paid to deposit insurance and Credit Guarantee Corporation, etc. to the extent they are not recovered from the concerned parties.
    12. Other expenditure: All expenses other than those not included in any of the other heads like license fees, donations, subscriptions to papers, periodicals, entertainment expenses, travel expenses, etc. may be included under this head. If any particular item under this head exceeds 1% of the total income, particulars are made for bad and doubtful debts, provision for taxation and provision for diminution in the notes.
  5. Provisions and contingencies: It includes all provisions made for bad and doubtful debts, provision for taxation, provision for diminution in the value of investments, transfers to contingencies and other similar items.
13.10 SPECIAL TRANSACTIONS

Some items require special treatment while preparing the final accounts of a banking company.

13.10.1 Interest on Doubtful Debts

When a loan is granted to a customer, the accounting treatment is

  1. The customer’s loan account is debited (with amount of loan) in the accounts book of the bank. The interest accrued is to be entered in the debit side of his account. This is to be adopted till he returns the money on the maturity date. This holds good if the financial position of the customer is sound and the bank is in full confidence that the loan will be discharged on the maturity date. The accounting entry for such cases would be: Entry for interest will be :

     

    Customer’s Loan A/c

    Dr

     

        Interest A/c

     

     

     

  2. When a loan is granted to a customer and uncertainty arises as to the settlement of the loan, such a debt becomes doubtful. Then in such cases, interest on doubtful debts cannot be treated as an income. The interest on the doubtful debts may be treated in the following ways:
    1. Interest suspense method
    2. Cash basis
    3. Accrual method
  1. Interest suspense method: Under this method, interest on doubtful debts is credited to interest suspense A/c and debited to customer’s loan A/c.

     

        Entry:

        Customer’s Loan A/c

    Dr.

     

            To Interest Suspense A/c

     

     

    In the balance sheet, “interest suspense A/c” is to be shown on the liabilities side under “Schedule 5: Other Liabilities and Provisions”. Customer’s loan A/c with interest will be shown on the assets side. After sometime, when the loan is repaid fully or partially with interest, then entry is:

    images

    To the extent, interest is received in cash and the amount is transferred to interest account and the balance to the loan account.

    For closure:

    images

    Note: As doubtful debts fall under the category of non-performing assets (NPA), interest income on doubtful debts should not be taken to P&L A/c.

  2. Cash Basis: Till the cash is received, no entry is to be passed.
  3. Accrual method: Under this method, interest account is to be credited with full amount of interest due on doubtful debts. But, at the same, i.e. simultaneously an adequate provision for bad and doubtful debts is to be created and credited.

     

    Entry:

     

    Interest and Discount A/c

    Dr.

    To Provision for Bad and Doubtful Debts

    When bad debt is recovered partially:

    images

Illustration 13.1

Model: Interest on doubt debts

While closing the books of a bank on 31 December 2010, you find in the loan ledger an unsecured balance of images 5,00,000 in the account of one customer Mr. X whose financial condition is reported to you as bad. Interest on the same account amounted to images 50,000 during the year. During the year 2011, the bank accepted 80 paise in the rupee on account of the debt up to 31 December 2010. Give journal and ledger to record these transactions under alternative accounting policies.

Solution

“Alternative accounting policies”: Given in the question denotes the three different methods adopted to treat “interest on doubtful debts”, as described above.

Method 1—Interest suspense method

 

Books of Bank
Journal
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Ledger Accounts
Mr. X’s Loan A/c
images
Interest Suspense A/c
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Method 2—Cash basis

 

Books of Bank
Journal
images
Ledgers
X’s Loan A/c
images
Interest A/c
images
Bad Debts A/c
images

Method 3—Accrual basis method

 

Journal Entries
images

[Bad debts provision has to be reduced to images 4,40,000 for 2011.]

 

X’s Loan A/c
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Provision for Bad and Doubtful Debts A/c
images
Bad Debts A/c
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13.10.2 Bills of Exchange

13.10.2.1 Bills for Collection

In buying and selling process, usually the sellers of the goods used to draw bills on their customers (buyers) for acceptance or bills are endorsed to the sellers.

These bills, also known as hundees, are sent to the banks for collection.

The banks hold these bills till their dates of maturity. When the banks realize the amount, the entry will be:

 

    Cash A/c

Dr.

 

        To Customer’s Current A/c

 

 

Cash A/c is debited with full amount mentioned in the bill and customer’s current A/c is credited with the amount after deduction of bank’s commission.

These are the outstanding bills for collection and are recorded in a subsidiary book known as “outstanding bills for collection register” and the entry is to be made only when bills are collected.

Treatment in final accounts:

Bills held for collection will be shown as a note to the balance sheet.

13.10.2.2 Discounting of Bills

Making payment for the bills before its maturity date is referred to as “discounting of bills”. Sellers of the goods may discount these bills with the bankers or sell these to their bankers.

Accounting entry in the books of account of the banking company will be as follows:

 

Bills Discounted A/c

Dr.

 

    To Customer A/c

 

 

    To Discount A/c

 

 

In the final accounts, bills discounted account is to be shown in the balance sheet under the head: “Advances” and details should be given in Schedule 9 annexed to the balance sheet.

13.10.2.3 Rebate on Bills Discounted

This is also called “unexpired discount” or “discount received but not earned”.

When a bank discounts or purchases a bill, it is credited to discount A/c, treating this as item of income of the accounting period. But at times, bills discounted may mature on a date beyond the relevant accounting period. This is the unearned amount received for such bills, which will mature after the date of preparation of final accounts. Hence, it cannot be treated as income of the current accounting period. The illustrate, if a bills is discounted on 1 December 2010 for 3 months at images 9000 and accounts are closed on 31 December 2010, images 6,000 is the unexpired discount as it is related to 2 months, i.e. January and February in 2011, the next accounting period.

images

If the discount A/c is created with the full amount of discount (earned and unearned) and appears in trial balance, then the entry will be as follows:

images

In final accounts, rebate on bills discounted is shown on the liabilities side of the balance sheet under the head “Other Liabilities and Provisions”. Details are given in Schedule 5.

In the next accounting period, it is transferred to discount A/c and closed thereby.

Note: In case, if rebate on bills discounted is given an adjustment outside the trial balance, then it has to be transferred to provisions account and deducted in P & L A/c.

Illustration 13.2

Model: Rebate on bills discounted.

On 31 March 2010, a bank held the followng bills discounted by it earlier:

images

You are required to calculate the rebate on bills discounted. Also show the necessary journal entry for the rebate.

Solution

STAGE I:    Basic calculations

(A) Calculation of discount after 31 March 2010 for bill value of images 10,95,000.

Step 1:    No. of Days After 31 March 2010

images

Step 2:    Discount Amount for 50 Days:

images

where p is the value of the bill, r is the rate of discount and n is the period.

(B) Calculation of Discount After 31 March 2010 for Bill Value of images 25,55,000:

Step 1 :    No. of Days After 31 March 2010:

images

Step 2:    Discount Amount for 40 days:

images

(C) Calculation of Discount After 31 March 2010 for Bill Value of images 51,10,000.

Step 1 :    No. of Days After 31 March 2010:

images

Step 2:    Discount Amount for 73 days:

images

These are transferred to the following table:

images
Journal
images

Illustration 13.3

Model: Rebate on bills discounted

The following information is available in the books of AZ Bank Limited as on 31 March 2010.

 

 

images    

Bills Discounted

1,20,11,350

Rebate on Bills Discounted (1 April 2009)

3,15,550

Discount Received

12,22,450

Details of bills discounted are as follows:

Value of Bill
Due Date
Rate of Discount(%)
15,00,000
12 June 2010
14
20,00,000
9 July 2010
12
50,00,000
29 July 2010
15
80,00,00
28 August 2010
18

Calculate the rebate on bills discounted as on 31 March 2010 and give necessary journal entries.

Solution

 

Step 1:

No. of days after 31 March 2010 for each bill is calculated as explained in illustration 13.2.

 

The amount for unexpired period is to be calculated and tabulated as follows:

images

Step 2:

Rebate on Bills Discounted (1 April 2009)

3,15,550

Step 3:

Add: Discount Received (Given)

12,22,450

 

 

15,38,000

Step 4:

Less: Rebate on Bills Discounted (31 March 2010)

9,46,109

Step 5:

Amount on Rebate on Bills Discounted for the Year to

 

 

Be Transferred to P & L A/c

5,91,891

Step 6:

Journal entries

 

 

Journal
images

Illustration 13.4

Model: Rebate on bills discounted

The trial balance of BC Bank Ltd. as on 31 March 2011 shows the following balances:

 

 

images    

Interest and Discount

37,27,170

Rebate on Bills Discounted (1 April 2010)

7,150

Bills Discounted and Purchased

2,27,500

The unexpired discount as on 31 March 2011 is estimated to be images 24,125. Draft necessary adjusting entries and calculate the amount of interest and discount to be credited to P & L A/c.

Solution

STAGE I: Ascertainment of interest and discount to be credited to Profit and Loss A/c:

 

Step 1:

Interest and Discount

images

 

(Given in Trial Balance):

37,27,170

Step 2:

Add: Opening Balance (Balance as on 1 April 2010) of

 

 

Bills Discounted (Given)

7,150

 

 

37,34,320

Step 3:

Less: Closing Balance (Balance) as on 31 March 2010) of

 

 

Bills Discounted (Given)

24,125

Step 4:

Interest and Discount to be Transferred (for the Year) to P & L A/c

37,09,195

Stage II: Journal entries

images

Illustration 13.5

Model: Rebate on bills discounted

As on 31 December 2010, the books of Giant Bank Ltd., include among others, the following balances:

 

 

images    

Rebate on Bills Discounted (1 January 2010)

2,70,000

Discount Received

37,50,000

Bills Discounted and Purchased

3,65,00,000

Throughout the accounting year, the bank’s rate for discounting has been 15%.

On Investigation and analysis, the average due date for the bills discounted and purchased is calculated as 14 March 2011.

Show the calculation of the amount to be credited to the Bank’s P & L A/c under discount earned for the year 2010. Show also the journal entries required to adjust the above-mentioned accounts.

Solution

First, discount of the year to be transferred to P & L A/c has to be determined as follows:

 

 

 

images

Step 1:

Balance in Discount Received A/c (Given)

37,50,000

Step 2:

Add: Opening Balance (1 January 2010) (Given)

2,70,000

 

 

40,20,000

Step 3:

Less: Closing Balance (as on 31 December 2010)

 

 

images

10,95,000

Step 4:

Amount of Discount of the Year to be Transferred to P & L A/c

29,25,000

Step 5:

 

 

 

Journal
images
13.11 PROVISION FOR NON-PERFORMING ASSETS

Loans, advances, discounting of bills, purchasing of bills and the like are the main source of income for any bank. Some of such assets may not bring in any income to the banks. In accordance with International Accounting Standards, a distribution is made on the treatment of income on different advances by classifying into “performing assets” and “non-performing assets” (NPA).

13.11.1 Meaning of Non-performing Assets

An asset is said to be a non-performing asset, when it ceases to generate income for a bank. The RBI has given certain guidelines for treating an asset as NPA. Some of them are provided as follows:

  1. Term loans: When interest or instalment on loans is overdue for more than 90 days, the account is to be treated as NPA.
  2. Cash credits and overdrafts: When a cash credit or O/D account remains out of order for more than 90 days, it will be considered as NPA.

    An account is treated as “out of order”, if any one of the following conditions is satisfied:

    1. The outstanding balance remains continuously in excess of the sanctioned limit and or drawing power.
    2. Even if the outstanding balance is well within the sanctioned limit/drawing power, if there are no credits in the account continuously for 90 days as on the date of the balance sheet.
    3. If the credits in such accounts are not sufficient enough to meet the interest debited during the same period.
  3. Bills purchased and discounted: When the bill remains overdue for a period of more than 90 days from its due date, it is to be treated as NPA.
  4. Agricultural advances: Loan granted for short-duration crops is to be treated as NPA, if interest or principal remains overdue for two crop seasons. Loan granted for long-duration crops is to be treated as NPA, if the instalment of principal or interest remains overdue for one crop season.
  5. Other advances: Any other credit facility is to be treated as NPA, if the amount to be received remains overdue for a period of more than 90 days.

13.11.2 Provisions for Non-performing Assets

To create provision for NPAs, the advances of a bank are classified into four categories, with variable provisions explained as follows:

Category I: Standard assets or performing assets: Dues are required to make a provision of a minimum of 0.40% on standard assets also on global loan portfolio basis and not on domestic advances alone.

Category II: Sub-standard assets:

  1. A general provision of 10% on total outstanding has to be created without making any allowance for Export Credit Guarantee Corporation (ECGC).
  2. However, the “unsecured exposures”, which are categorized as sub-standard assets will attract additional provision of 10%. That means 10% + 10% = 20% on the outstanding balance. (When the realizable value of the security is not more than 10% of the outstanding exposure, it is known as unsecured exposure.)
  3. When loans are classified as NPAs and also as sub-standard, a provision of 20% is required.
  4. W.e.f. the year ending on 31 March 2005, the banks are permitted to spread the additional provision consequent upon the reduction in the transition period from sub-standard to doubtful asset from 18 to 12 months over a 4-year period, with a minimum of 20% each year.

Category III: Doubtful assets:

  1. If the debt is not covered by realizable value of the security, 100% provision should be created.
  2. If the debt is secured, then provision is to be made as follows: Provisions Percentage

     

    Provisions

    Percentage

    Up to 1 Year

    20

    1–3 Years

    30

    More than 3 Years

    100

Category IV: Loss assets: This category has been identified as assets, which have lost value but not written off. The entire assets are to be written off completely. However, if the assets are to be retained in the books of accounts for any specific reason, then 10% provision is required to be created.

Illustration 13.6

Model: NPA—Provisions to be created

On 31 March 2011, Indian Inland Bank Ltd. finds its advances classified as follows:

 

 

images

Standard Assets

20,60,500

Sub-standard Assets

1,10,000

Doubtful Assets : (Secured)

 

     : Doubtful for 1 Year

40,000

     : Doubtful for 1−3 Years

25,000

     : Doubtful for More Than 3 Years

10,500

Doubtful Assets: (Unsecured)

22,000

Loss of Assets

15,500

Calculate the amount of provision to be made by the Bank against the above-mentioned advances.

Solution

images

Note: If “unsecured exposures” are included in sub-standard assets, then additional 10% provision has to be made.

Illustration 13.7

Model: Provisions to be created

From the following information, find out the amount of provisions required to be made in the profit and loss A/c of a commercial bank for the year ended on 31 March 2011:

  1. Packing credit outstanding from food processors is images 80,00,000 against which the bank holds securities worth images 20,00,000. Forty per cent of the above advance is covered by ECGC. The above advances have remained doubtful for more than 3 years.
  2. Other Advances:

Assets Classification:

(images in Lakhs)

Standard

5,000

Sub-standard

4,200

Doubtful:

 

For 1 Year

1,200

For 2 Years

800

For 3 Years

600

For More Than 3 Years

400

Loss Assets

800

Solution

  1. Calculation of required provision (packing credit):
    images
  2. Calculation of required provision for other advances:

Note: Doubtful advances are assumed to be fully secured and provision is made accordingly.

Solution

images

Illustration 13.8

Model: Provision to be created

Best Bank Ltd. had extended the following credit lines to a small-scale industry, which had paid any interest since March 2009:

Particulars Term Loan Export Credit

Balance Outstanding on 31 March 2011

images90,00,000

images70,00,000

DICGC/ECGC Cover

50%

40%

Securities Held

images40,00,000

images30,00,000

Realizable Value of Securities

images30,00,000

images20,00,000

Compute the necessary provisions to be made for the year ended on 31 March 2011.

Solution

images
13.12 INCOME RECOGNITION

For the purpose of income recognition, the banks are required to classify their assets into two main categories: performing and non-performing assets (NPAs). The banks should ensure that interest on non-performing assets should not be recognized as income. Such income should not be taken to P & L A/c.

Banks should strictly adhere to the guidelines issued by RBI. Accordingly, banks should recognize their income on “accrual basis” with respect to income on performing assets and on “cash basis” with respect to income on non-performing assets.

Interest on non-performing assets is not recognized unless it is actually realized in cash. But, interest on advances against term deposits is treated as income on due date (even though not actually received in cash) provided if the value of deposit is more than the balance outstanding.

Fees and commission earned by the banks due to re-negotiation or rescheduling of outstanding debts are to be recognized on an accrual basis.

Similarly, the interest on government-guaranteed advances are not to be taken to income account until the same has been realized in cash.

The guidelines of RBI relating to income recovered from NPAs are as follows:

  1. Interest realized on NPAs is to be credited to P & L A/c only if the credits in the accounts to interest are not out of fresh or additional credit facilities sanctioned to the borrower.
  2. The banks should appropriate recoveries in NPAs property.
  3. Although the banks do not recognize income until it is realized, banks are permitted to debit interest to NPA account if it is credited to interest suspense account.

The banks are required to classify the assets of NPA into the following categories:

  1. (a) Sub-standard assets, (b) doubtful assets and (c) loss assets for the purpose of ascertaining provisions to be made for each category. The RBI, in its Master Circular issued on 1 July 2008, has mentioned the following clarifications in respect of assets classification inter alia.
  2. Assets are to be classified on the basis of borrower and not facility wise.
  3. Advances on consortium should be based on the record of recovery of individual member banks.
  4. Exemption from classification of government-guaranteed advances as non-performing assets is not intended to income recognition.
  5. When arrears of interest and principle are paid by the borrower in loan accounts classified as NPAs, such accounts should no longer be treated as NPAs but are to be upgraded as “standard accounts”.
  6. The asset classification of borrowal accounts must be done objectively. When the account reflects any unreliability, it is to be considered as non-performing asset only.

Illustration 13.9

Model: Income recognition

Following are the information provided by ABZ Ltd. regarding the interest on advance along with the measure of assets.

Types of (Classification of) Assets Interest Earned (images in Lakhs) Interest Received (images in Lakhs)
(A) Performing Assets:

 

 

    Term Loans

250
150

    Cash Credits & Overdrafts

900
550

    Bills Purchased & Discounted

400
260

(B) Non-performing Assets:

   

    Terms Loans

150
40

    Cash Credits & Overdrafts

560
55

    Bills Purchased & Discounted

200
20

You are required to calculate the income to be recognized for the year ending on 31 March 2011.

Solution

 

In compliance with the guidelines of the RBI,

  1. Interest on performing assets should be recognized on “accrual basis”.
  2. Interest on non-performing assets (NPAs) should be recognized on “cash basis”.
Determination of Interest Income
images

Illustration 13.10

Model: Preparation of profit and loss A/c

From the following particulars, prepare a profits and loss A/c of Fancy Bank Ltd. for the year ended on 31 December 2010:

images

Solution

Note: Even though the proper procedure is to provide all the schedules only after showing P & L A/c, here in one or more illustrations, schedules with workings are shown first so as to make the students to understand at ease.

 

Step 1:

Schedule 13 is to be prepared as follows:

 

In this schedule, interest earned is to be shown in detail as interest on loans. Discount on bills discounted, interest on cash credits and O/DS have to be shown and added.

 

Schedule 13—Interest Earned
  images(in Lakhs)

Interest on Loans

130

Discount on Bills Discounted

100

Interest on Cash Credits

112.5

Interest on Overdrafts

28

Total

370.5

Note: Rebate on bills is not to be included here. It is to be shown in Schedule 5 annexed to balance sheet, as it is the closing rebate.

 

Step 2:

Schedule 14 is to be prepared. Under this head, i.e., “Other Income”, only one item is to be shown in this problem, i.e., commission charged to customers.

 

Schedule 14—Other Income
  images(in Lakhs)

Commission Charged to Customers

4.5

 

4.5

Step 3:

Schedule 15 is to be prepared under the head “Interest Expended”. Interests on fixed deposits, current accounts and SB accounts have to be shown and get aggregated value.

 

Schedule 15—Interest Expended
  images(in Lakhs)

Interest on Fixed Deposits

140

Interest on Current Account

22.5

Interest on SB A/c

35

Total

197.5

Step 4:

Schedule 16—“Operating expenses” is prepared as follows:

 

Schedule 16—Operating Expenses
  images(in Lakhs)

Establishment Expenses

28

Printing & Advertisement Expenses

    1.5

Rents and Taxes

10

Director’s Auditor’s Fees

2

Postage & Email

1

Sundry Charges

1

Total

43.5

Note: In this problem no data relating to provisions and contingencies are given.

Hence, no need to show under separate head in this question.

 

Step 5:

Preparation of P & L A/c:

 

Fancy Bank Ltd.
Profit and Loss Account
for the Year Ended on 31 December 2010
images

Illustration 13.11

Model: Preparation of P & L A/c

From the following information, prepare the profit and loss A/c of Merchant Bank Ltd. for the year ended on 31 March 2011 in the prescribed form:

 

 

images      

Interest on Loan

5,18,000

Interest on Fixed Deposits

5,50,000

Rebate on Bills Discounted Required

98,000

Commission

16,400

Establishment

1,08,000

Discount on Bills Discounted

3,90,000

Interest on Cash Credit

4,46,000

Interest on Current Account

84,000

Rent and Taxes

36,000

Interest on Overdraft

3,08,000

Director’s Fees

6,000

Auditor’s Fees

2,400

Interest on Savings Bank Deposits

1,36,000

Postage, Phone, Internet Expenses

2,800

Printing and Stationery

5,800

Sundry Charges

3,400

Bad debts to be written off amounted to images 80,000. Provision for taxation may be made @ 50%.

Balance of profit from last year was images 2,40,000. The Directors have recommended a dividend ofimages 40,000 for the shareholders.

[CA (Inter) and ICWA (Final)—Modified]

Solution

First, required schedules are prepared as follows:

 

Step 1:           Schedule 13—Interest Earned

 

Year Ended on 31 March 2011

  images

Interest on Loan

5,18,000

Discount on Bills Discounted

3,90,000

Interest on Cash Credits

4,46,000

Interest on Overdrafts

3,08,000

 

16,62,000

Less: Rebate on Bills Discounted Required

98,000

 

15,64,000

Step 2:           Schedule 14—Other Income

  images

Commission

16,400

 

16,400

Step 3:           Schedule 15—Interest Expended

  images

Interest on Fixed Deposits

5,50,000

Interest on Current Accounts

84,000

Interest on Savings Bank Deposits

1,36,000

 

7,70,000

Step 4:           Schedule 16—Operating Expenses

  images

Establishment

1,08,000

Rent and Taxes

36,000

Directors Fees

6,000

Auditor’s Fees

2,400

Postage, Phone & Interest

2,800

Printing and Stationery

5,800

Sundry Charges

3,400

 

1,64,4000

Step 5:           Provision and Contingencies

  images

Bad Debts Written off

80,000

Provision for Taxation:

 

(images 15,64,000 + images 16,400) − (images 7,70,000 + images 1,64,400 + images 80,000) = images 5,66,000

 

50% of images 5,66,000 = images 2,83,000

2,83,000

 

3,63,000

Step 6:

Preparation of P & L A/c
Merchant Bank Ltd.
Profit and Loss Account
for the Year Ended on 31 March 2011
images

Important note:

According to Section 17 of the Banking Regulation Act, 20% of the current year’s profit is to be transferred to statutory reserve.

However, as per the latest RBI guidelines, 25% of the current year’s profit has to be transferred to statutory reserve. Hence, 25% is transferred to statutory reserve.

Illustration 13.12

Model: Preparation of P & L A/c

The following figures are extracted from the books of Lucky Bank Ltd. for the year ending on 31 March 2011:

 

images    

Interest and Discount Received

60,90,000

Interest Paid on Deposits

36,06,000

Issued and Subscribed Capital

15,00,000

Reserve under Section 17

10,50,000

Commission, Exchange and Brokerage

2,70,000

Rent Received

90,000

Profit on Sale of Investments

2,85,000

Director’s Fees and Allowances

36,000

Rent and Taxes Paid

1,62,000

Stationery and Printing

36,000

Postage and Phone

75,000

Other Expenses

36,000

Audit Fees

12,000

Depreciation on Bank Properties

37,500

Other information:

  1. A customer, to whom a sum of images 7,50,000 has been advanced, has become insolvent and it is expected that 40% can be recovered from his estate. Interest due at 15% on his debt has not been provided in the books.
  2. Provision for bad and doubtful debts on other debts necessary is images 1,50,000.
  3. Rebate on bills discounted as on 1 April 2010 is images 22,500
  4. Provide images 5,00,000 for income tax.
  5. The directors decide to declare 10% dividend.

Prepare the profit and loss A/c in accordance with law. Make necessary assumptions, wherever necessary.

Solution

Note:

  1. Reserve is given in the problem as “reserve under Section 17”. Hence, as per Section 17 of the Banking Regulation Act, 20% of the current year’s profit is to be transferred to statutory reserve.
  2. The debt of insolvent customer is NPA. Hence, interest on it is to be recorded only on cash basis and not on accrual basics. As such, interest due is not to be provided.
Lucky Bank Ltd.
Profit and Loss Account
for the Year Ended on 31 March 2011
images
Schedule 13–Interest Earned
  images

Interest and Discount Received

61,12,500

(images60,90,000 + images21,500)

 

Schedule 14–Other Income
  images

Commission on Exchange and Brokerage

2,70,000

Profit on Sale of Investment

2,85,000

Rent Received (Miscellaneous Income)

90,000

 

6,45,000

Schedule 15—Interest Expended
  images

Interest on Deposits

36,06,000

Schedule 16—Operating Expenses
  images

Payment & Provisions for Employees

3,15,000

Rent & Taxes

1,62,000

Printing & Stationery

36,000

Depreciation on Bank Properties

37,500

Directors Fees and Allowances

36,000

Auditor’s Fees and Allowances

12,000

Postage, Phone, etc.

75,000

Other Expenses

36,000

 

7,09,500

Provisions and Contingencies
  images

Provision for Doubtful Debts of Insolvent Customer

4,50,000

(60% of images 7,50,000)

 

Provision for Doubtful Debts

1,50,000

Provision for Income Tax

5,00,000

 

11,00,000

Illustration 13.13

Model: P & L A/c—preparation

Some of the items in the trial balance of Delhi Bank Ltd. as on 31 December 2010 were as follows:

images

You are required to prepare the P & L A/c of the bank, maintaining the provision for income tax at images 42,000 and provision for bad debts at images 26,000 for the year ended on 31 December 2010.

All workings should form part of your answer.

Solution

 

Delhi Bank Ltd.
profit and Loss Account
for the Year Ended on 31 December 2010
images
Schedule 13—Interest Earned
  images

Interest on Loans

1,12,500

Discount (images 1,00,500 – images 15,000)

85,500

Interest on Cash Credit

52,500

Interest on Overdrafts

47,500

 

2,98,000

Schedule 14—Other Income
  images

Commission Earned

23,250

Less: Loss on Sale of Investment

17,000

 

6,250

Schedule 15—Interest Expended
  images

Interest on Fixed Deposits

77,500

Interest on SB Deposits

37,500

 

1,15,000

Schedule 16—Operating Expenses
  images

Salaries & Allowances

41,000

Printing & Stationery

2,250

Auditor’s Fees

2,500

Director’s Fees

1,250

 

47,000

Provision for Taxation A/c
images
Provision for Bad Debts A/c
images
Provision for Contingencies
  images

*1 Provision for Taxation

36,000

*2 Provision for Bad debts

15,500

 

*3 51,500

Illustration 13.14

Model: Preparation of P & L A/c

The following figures are extracted from the books of Modern Bank Ltd. as on 31 March 2011.

 

images

Interest and Discount Received

18,47,869

Interest Paid on Deposits

10,16,226

Commission, Exchange & Brokerage

1,00,000

Rent Received

27,500

Profit on Sale of Investments

1,00,000

Salaries and Allowances to Staff

1,00,000

Director Fees and Allowances

15,000

Rent and Taxes Paid

50,000

Postage and Internet Expenses

25,143

Depreciation on Bank’s Property

25,143

Depreciation on Bank’s Property

15,000

Stationery

25,000

Preliminary Expenses

7,500

Audit Fees

2,500

The following further information are also given:

  1. A consumer to whom images 5,00,000 has been advanced has become insolvent and it is expected that only 50% can be recovered from his estate.
  2. There were also other debts for which a provision of images 75,000 was found necessary by the auditors.
  3. Rebate on bills discounted as on 31 March 2010 was images 6,000 and rebate on bills discounted as on 31 March 2011 was images 8,000.
  4. Provide images 3,00,000 for income tax.
  5. Write off all preliminary expenses.

Solution

WORKING NOTES:

images
Preparation of Profit and Loss A/c
Modern Bank Ltd.
Profit and Loss Account
for the Year Ended on 31 March 2011
images
Schedule 13—Interest Earned
  images

Interest and Discount

18,45,869

(Ref: Working note 1)

 

Schedule 14—Other Income
  images

Commission, Exchange and Brokerage

1,00,000

Profit on Sale of Investments

1,00,000

Rent Received

27,500

 

2,27,500

Schedule 15—Interest Expended
  images

Interest on Deposits

10,16,226
Schedule 16—Operation Expenses
  images

Staff Salaries & Allowances

10,00,000

Rent, Rates & Taxes

50,000

Printing & Stationery

25,000

Depreciation on Bank’s Property

15,000

Directors’ Fees & Allowances

15,000

Auditor’s Fees

2,500

Postage, Internet, etc.

25,143

Preliminary Expenses

7,500

 

12,40,143

Provisions and Contingencies
  images

Provision for Bad & Doubtful Debts

3,25,000

(images 2,50,000 + images 75,000)

 

Provision for Taxation (Given)

3,00,000

 

6,25,000

The Third Schedule
(Section 29)
Form A
Form of Balance Sheet
Balance Sheet of …Ltd.
as on 31 March

(000’s omitted)

images

 

The following schedules are required to be furnished with the balance sheet:

 

Schedule 1—Capital
images
Schedule 2—Reserves and Surplus
  As on 31 March…(Current Year)
images
As on 31 March…(Previous Year)
images

I. Statutory Reserves:

   

    Opening Balance

    Additions During the Year

     Deductions During the Year

II. Capital Reserves:

 
 

    Opening Balance

    Additions During the Year

    Deductions During the Year

III. Securities 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

xx
xx

    (I, II, III, IV and V)

 
 
Schedule 3–Deposits
images
Schedule 4—Borrowings
images
Schedule 5—Other Liabilities and Provisions
images
Schedule 6—Cash and Balance
images
Schedule 7—Balances with Banks and Money at Call and Short Notice
images
Schedule 8—Investments
images
Schedule 9—Advances
images
Schedule 10—Fixed Assets
images
Schedule 11—Other Assets
images

* In case there is any unadjusted balance of loss the same may be shown under this item with appropriate footnote

 

Schedule 12—Contingent Liabilities
images
13.13 GUIDELINES OF RBI FOR PREPARING BALANCE SHEET

The following are the guidelines of RBI for preparing the balance sheet:

  1. Capital—Schedule 1

    The changes in the items shown in this schedule, if any, during the year, say for instance, fresh contribution made by Govt., fresh issue of capital, capitalization of reserves, etc. may be explained in the “Notes”.

  2. Reserves and surplus—Schedule 2

    Statutory Reserves: Reserves created under any of the sections of the Banking Regulation Act should be disclosed separately.

    Capital reserves: Surplus on revaluation is a capital reserve. Surplus on translation of the financial statements of foreign branches (including fixed assets) should not be treated as revaluation reserve. The capital reserve should not include any amount regarded as free distribution through P & L A/c.

    Revenue and other reserves: The expression “reserve” should not include any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets or retained by way of providing for any known liability.

    Balance of profit: It includes balance of profit after appropriations. In case of any loss, the balance is to be shown by way of deduction.

  3. Deposits—Schedule 3

    A.I. Demand deposits:

    1. From banks: It includes all bank deposits repayable on demand.
    2. From others: It includes all demand deposits of non-bank sectors.

    Credit balance in O/D, cash credit A/c, deposits payable at call, over due deposits, inoperative current accounts, matured time deposits and cash certificates, and certificates of deposits are to be included under this category.

    A.III. Term deposits:

    1. From banks: It includes all types of bank deposits repayable after a specified term.
    2. From others: All types of deposits of non-banking sector repayable after a specified term are to be included under this category. It includes fixed deposits, cumulative and recurring deposits, cash certificates, certificates of deposits, annuity deposits, deposits mobilized under various schemes, ordinary staff deposits, foreign currency non-resident deposit A/c and so on.

    Explanatory notes:

    1. Interests payable on deposits, which are accrued but not due should not be included. It should be shown under “other liabilities”.
    2. Matured time deposits and cash certificates should be treated as demand deposits.
    3. Deposits under special schemes should be included under “term deposits”. If they are not payable at maturity, they should be shown under “demand deposits”.
    4. Deposits from banks will include deposits from the banking system in India, Co-operative banks, foreign banks which may or may not have a presence in India.
  4. Borrowings—Schedule 4

    Explanatory notes:

    1. Inter-office transactions should not be shown as borrowings.
    2. Funds raised by foreign branches by way of certificates of deposits, notes, bonds, etc. should be classified upon documentation as “deposits”, “borrowings”, etc.
    3. Refinance obtained by the banks from RBI and various institutions are being brought under the head “borrowings”. Hence, advances will be shown at the gross amount on the asset side.
  5. Other liabilities and provisions—Schedule 5

    Inter-office adjustments: These are mostly related to the transactions of a head office with its branches. Only net balance will be shown.

    Credit balance of branch adjustment A/c will be shown in the liabilities side of the balance sheet under the head “other liabilities and provisions” (Schedule 5).

    Debit balance will be shown on the assets side of the balance sheet under the head “other assets” (Schedule 11).

    Interests accruing on all deposits, whether the payment is due or not, should be treated as liability.

  6. Balance with banks and money at call and short notice—Schedule 7

    Money at call and short notice: These represent loans related to inter-bank transactions. It includes deposits repayable within or less than 15 days notice lents in inter-bank call money market. This should be shown on the assets side of the balance sheet and details in this schedule.

  7. Advances—Schedule 9
    1. The gross amount of advances including refinance and rediscounts, but excluding provisions made to the satisfaction of the auditors should be shown as advances on the assets side.
    2. Term loans are the loans that are not repayable on demand.
    3. Consortium advances should be shown as net of shares from other participating banks /institutions.

      Details of advances in India and outside India are to be given separately in this schedule.

  8. Acceptances, endorsements and other obligations are not shown in the balance sheet. However, these are included in Schedule 12.

Illustration 13.15

Model: Preparation of balance sheet.

On 31 December 2010, the following balances stood in the books of ABC Bank Ltd., after preparation of its P & L A/c:

 

images(in ’000)

Share Capital: Issued and Subscribed

8,000

Reserve Fund (U/S 17)

12,400

Fixed Deposits

85,200

Savings Bank Deposits

38,000

Current Accounts

46,400

Money at Call & Short Notice

3,600

Investments

50,000

Profit and Loss A/c (Cr.) 1 January 2010

2,700

Dividend for 2009

800

Premises

5,900

Cash in Hand

760

Cash with RBI

20,000

Cash with Other Banks

12,000

Bills Discounted and Purchased

7,600

Loans, Cash Credits and Overdrafts

1,02,000

Bills Payable

140

Unclaimed Dividend

120

Rebate on Bills Discounted

100

Short Loans (Borrowing from Other Banks)

9,500

Furniture

2,328

Other Assets

672

Net Profit for 2010

3,100

Prepare the balance sheet of the bank as on 31 December 2010.

Solution

WORKING NOTES:

Calculation of reserves and surplus to be included in the balance sheet.

images
ABC Bank Ltd.
Balance Sheet as on 31 December 2010
  Schedule No. As on 31 December 2010 images(‘000)

Capital and Liabilities:

 

 

    Capital

1

8,000

    Reserves & Surplus (Ref: Working)…

2

17,400

    Deposits

3

1,69,600

    Borrowings

4

9,500

    Other Liabilities and Provisions

5

360

     

 

2,04,860

Assets:

 

 

    Cash and Balance with RBI

6

20,760

    Balance with Banks and Money at Call & Short Notice

7

15,600

    Investments

8

50,000

    Advances

9

1,09,600

    Fixed Assets

10

8,228

    Other Assets

11

672

     

 

2,04,860

    Contingent Liabilities

12

NIL

    Bills for Collection

NIL

Schedule 1—Capital
  As on 31 December 2010 images(‘000) At on 31 December 2009 images(‘000)

Issued and Subscribed Share Capital

8,000

 

 

8,000

 

Schedule 2—Reserves and Surplus

(images ’000)

images
Schedule 3—Deposits

(images ’000)

  As on 31 December 2010 As on 31 December 2009

Fixed Deposits

55,200

 

Savings Bank Deposit

38,000

 

Current Accounts

46,400

 

 

1,69,600

 

Schedule 4—Borrowings

(images‘000)

  As on 31 December 2010 As on 31 December 2009

Short Loans

9,500

 

Schedule 5—Other Liabilities and Provisions
  As on 31 December 2010 As on 31 December 2009

Bill’s Payable

140

 

Unclaimed Dividend

120

 

Rebate on Bills Discounted

100

 

 

360

 

Schedule 6—Cash and Balances with RBI
  As on 31 December 2010 As on 31 December 2009

Cash in Hand

760

 

Cash with RBI

20,000

 

 

20,760

 

Schedule 7—Balance with Banks and Money at Call and Short Notice
  As on 31 December 2010 As on 31 December 2009

Money at Call and Short Notice

3,600

 

Cash with Other Banks

12,000

 

 

15,600

 

Schedule 8—Investments
  As on 31 December 2010 As on 31 December 2009

Investments

50,000

 
Schedule 9—Advances
  As on 31 December 2010 As on 31 December 2009

Bills Discounted & Purchased

7,600

 

Loans, Cash Credits & Overdrafts

1,02,000

 

 

1,09,600

 

Schedule 10—Fixed Assets
  As on 31 December 2010 As on 31 December 2009

Premises

5,900

 

Furniture

2,328

 

 

8,228

 

Schedule 11—Other Assets
  As on 31 December 2010 As on 31 December 2009

Other Assets

672

 

Schedule 12—Contingent Liabilities
  As on 31 December 2010 As on 31 December 2009

 

Nil

 

Bills for Collection → Nil

Illustration 13.16

Model: Preparation of trial balance and balance sheet

From the following particulars of MN Bank Ltd., having its own premises, prepare the balance sheet in the prescribed form as on 31 December 2010.

(images in ’000)

Authorized Capital

20,000

Subscribed Capital:

 

20,00,000 Shares of images 10 Each images 5 Paid

10,000

Investments

35,000

Bills Discounted (in India)

75,000

Profit & Loss (Cr.)

4,250

Endorsement on Bills for Collection

500

Liability of Customers for Acceptances

25,000

Money at Call and Short Notice

45,000

Cash in Hand

10,000

Cash with RBI

20,000

Reserve

15,000

Cash with State Bank

20,000

Letters of Credit Issued

2,500

Telegraphic Transfer Payable

4,000

Bonus Drafts Payable

6,000

Short Loans

200

Rebate on Bills Discounted

50

Acceptances for Customers

25,000

Loans and Advances

50,000

Cash/Credits

50,000

verdrafts

5,000

Bills Purchased (Payable Outside India)

5,000

Current and Deposit Accounts

2,80,000

Investment Fluctuation Fund

500

Bills for Collection

500

Note: Prepare a trial balance and determine the balancing figure which constitutes the value of premises.

 

[CS (Inter)—Modified]

Solution

 

Step 1:

As per the direction in the question, value of premises is determined by preparing the trial balance as follows:

 

Trial Balance        (images in’000)
images

Step 2:

Preparation of balance sheet:

 

(All figures are transferred from the respective schedules. For details, refer the schedules shown beneath the balance sheet one by one).

 

MN Bank Ltd.
Balance Sheet as on 31 December 2010

 

(images in ’000)

images

WORKING NOTES:

 

Schedule 1—Capital

 

(images in ’000)

  As on 31 December 2010 As on 31 December 2009

Authorized, Issued & Subscribed Capital:

 

 

20,00,000 Shares of images 10 Each

20,000

 

Called-up and Paid-up Capital:

 

 

20,00,000 Shares of images 10 Each, images 5 Called, Paid

10,000

 

Schedule 2—Reserves and Surplus

Reserves

15,000

 

Profit & Loss A/c

4,250

 

Investment Fluctuation Fund

500

 

 

19,750

 

Schedule 3—Deposits

Current and Deposit Accounts

2,80,000

 

Schedule 4—Borrowings

Short Loans

200

 

Schedule 5—Other Liabilities and Provisions

Telegraphic Transfers Payable

4,000

 

Bank Drafts Payable

6,000

 

Rebate on Bills Discounted

50

 

 

10,050

 

Schedule 6—Cash and Balance with RBI

Cash with RBI

20,000

 

Cash in Hand

10,000

 

 

30,000

 

Schedule 7—Balance with Banks and Money at Call

Money at Call & Short Notice

45,000

 

Cash with State Bank

20,000

 

 

65,000

 

Schedule 8—Investments

Investments

35,000

 

Schedule 9—Advances

Loans & Advances

50,000

 

Bills Discounted

75,000

 

Cash Credits

50,000

 

Overdrafts

5,000

 

Bills Purchased

5,000

 

 

1,85,000

 

Schedule 10—Fixed Assets

Premises

5,000

 

Schedule 11—Other Assets

Nil

Nil

 

Schedule 12—Contingent Liabilities

Endorsement on Bills for Collection

500

 

Liability for Customers Acceptances

25,000

 

Letters of Credit Issued

2,500

 

 

28,000

 

Bills for Collection

Nil

 

Illustration 13.17

Model: P & L A/c and balance sheet

From the following figures taken from the books of Inland Bank Ltd., you are required to draft a balance sheet and a profit and loss account as on 31 March 2011:

 

 

images (in ’000)

20,000 Shares of images 100 Each images 50 Paid

1,000

Reserve Fund

700

Fixed Deposit Accounts

1,900

Saving Bank Accounts

6,000

Current Accounts

16,000

Money as Call and Short Notice

600

Investment at Cost

6,000

Interest Accrued and Paid

400

Salaries (Including Salary to General Manager 48,000 and Director Fees images 10,000)

160

Rent

40

P & L A/c (Cr.) 1 April 2009

420

General Expenses (Including Stationery images 10,000 and Auditor’s Fees images 4,000)

20

Dividend for 2009–10

100

Premises (After Depreciation up to 31 March 2010 images 2,00,000)

2,400

Cash in Hand

120

Cash with RBI

3,000

Cash with Other Banks

2,600

Borrowed from Banks

1,400

Interest and Discounts

1,500

Bills Discounted and Purchased

1,200

Bills Payable

1,600

Loans, Overdrafts and Cash Credits

14,000

Unclaimed Dividends

60

Bills for Collection

280

Sunday Creditors

60

Acceptances and Endorsements on Behalf of Customers

400

  1. Rebate on bills discounted and purchased for unexpected term amounted to images 10,000.
  2. Allow 5% depreciation on premises on original cost.
  3. A provision for doubtful debts amounting to images 60,000 is required.
  4. Create a provision of images2,00,000 for taxation.

    The bank has no business outside India.

Solution

 

Inland Bank Ltd.
Profit and Loss Account
for the Year Ended on 31 March 2011
  Schedule No. Year Ended on 31 March 2011 (images in ’000)

I: Income

   

    Interest Earned

13
1,490

    Other Income

14
   
1,490

II: Expenditure

   

    Interest Expended

15
400

    Operating Expenses

16
350

    Provisions and Contingencies

 
260
   
1,010

III: Profit/Loss

   

    Net Profit for the Year (I – II)

 
480

    Profit Brought Forward From Last Year After
    Deducting Last Year Dividend

 
320
   
800

IV: Appropriations:

   

    Transfer to Statutory Reserve

 
120

    25% of images 4,80,000 = images 1,20,000

   

    Balance Carried Forward to Balance Sheet

 
680
   
800
Inland Bank Ltd.
Balance Sheet as on 31 March 2011
 
Schedule No.
Year Ended on 31 March 2011 (images in ‘000)

Capital and Liabilities:

 

 

    Capital

1

1,000

Reserves and Surplus

2

1,500

Deposits

3

23,900

    Borrowings

4

1,400

    Other Liabilities & Provisions

5

1,930

Assets:

 

29,730

    Cash and Balance with RBI

6

3,120

    Balance with Banks & Money at Call and Short Notice

7

3,200

    Investments

8

6,000

    Advances

9

15,140

    Fixed Assets

10

2,270

    Other Assets

11

NIL

 

 

29,730

Contingent Liabilities

12

400

WORKING NOTES:

 

Schedules:

As on 31 March 2011
(images ‘000)

Schedule 1: Capital

 

    20,000 Equity Shares of images 100 Each, images 50 Paid

1,000

Schedule 2: Reserves & Surplus:

 

    Statutory Reserves: Opening Balance

700

    Additions During the Year

120

 

820

    Balance of P & L A/c

680

 

1500

Schedule 3: Deposits

 

    Current Account Deposits

16,000

    Saving Bank Deposits

6,000

    Fixed Deposits

1,900

 

23,900

Schedule 4: Borrowings:

1,400

Schedule 5: Other Liabilities and Provisions:

 

Bills Payable

1,600

Others (Including Provisions)

 

Sundry Creditors                               60

 

    Unclaimed Dividends                      60

 

    Provision for Tax                          200

 

    Rebate on Bills Discounted                 10

330

 

1,930

Schedule 6: Cash and Balances with RBI:

 

    Cash in Hand

120

    Balance with RBI

3,000

 

3,120

Schedule 7: Balances with Banks and Money at Call and Short Notice

 

    Balance with Banks

2,600

    Money at Call and Short Notice

600

 

3,200

Schedule 8: Investments

 

    Investments in India

600

Schedule 9: Advances

 

    Bills Discounted and Purchased

1,200

    Loans, Cash Credits and Overdrafts

13,940

 

15,140

Schedule 10: Fixed Assets

 

    Premises at Cost

2,600

    Depreciation

(330)

 

2,270

Schedule 11: Other Assets

NIL

Schedule 12: Contingent Liabilities

 

    Acceptance, Endorsements & Other obligations

400

Schedule 13: Interest Earned

 

    Interest, Discount on Advances & Bills

1,500

    (Less: Rebate on Bills Discounted)

10

 

1,440

Schedule 14: Other Income

NIL

Schedule 15: Interest Expended

 

    Interest on Deposits

400

Schedule 16: Operating Expenses:

 

    Salaries

150

    Printing & Stationery

10

    Rent, Rates & Listing

40

    Auditor’s Fees

4

    General Expenses

6

    Directors’ Fees

10

    Depreciation on Bank Property

130

 

350

Provisions and Contingencies:

 

    Provision for Bad Debts

60

    Provision for Taxation

200

 

260

Illustration 13.18

Model: Cash reserves and statutory reserves balance sheet

From the following information, prepare a balance sheet with necessary schedules of the New India Bank Ltd. as on 31 March …. and ascertain cash reserves and statutory liquid reserves required:

(images in Lakhs)

  Debitimages Creditimages

Share Capital: 6,00,000 Shares of images 100 Each

600

Statutory Reserves

690

Net Profit Before Appropriation

450

Profit and Loss Account

1,230

Fixed Deposit Account

1,560

Saving Deposit Account

1,350

Current Accounts

90

1,560

Bills Payable

3

Cash Credit

2,439

Borrowing from Other Banks

330

Cash in Hand

480

Cash with RBI

120

Cash with Other Banks

468

Money at Call and Short Notice

630

Gold

165

Government Securities

330

Premises

468

Furniture

210

Term Loan

2373

 

7,773

7,773

Additional Information:

 

Bills for Collection

60,00,000

Acceptances and Endorsements

45,00,000

Claims Against the Bank not Acknowledged as Debits

1,80,000

Depreciation Charges:

 

    Premises

3,00,000

    Furniture

2,40,000

50% of the Term Loans Are Secured by Govt. Guarantees

10% of the Cash Credit Is Unsecured

Note: Cash reserves required 3% of the total demand and time liabilities and stationary liquidity ratios require 30% of the total demand and time liabilities. Statutory reserves: 20% of the net profit.

Solution

Note: Here, the calculations are based on the percentage given in the question (Note)

images
images
images
images
images
Balance Sheet of New India Bank Ltd. As on 31 March………..
images
Schedules

(images in Lakhs)

 
As on 31 March….. Current Year
As on 31 March…. (Previous Year

Schedule 1: Capital

 

 

Subscribed, Called-up and Paid-up Capital:

 

 

6,00,000 Shares of images 100 Each

600

 

Schedule 2: Reserve and Surplus:

 

 

I. Statutory Reserves:

 

 

    Opening Balance

690

 

    Add: Additions During the Year (20% × images 4,50,00,000)

90

 

 

780

 

    Less: Deductions During the Year

Nil

 

 

780

 

II. Capital Reserve

Nil

 

III. Share Premium

Nil

 

IV. Reserve and Other Reserves

Nil

 

V. Balance in P & L A/c (1230 + 360)

1,590

 

 

2,370

 

Schedule 3: Deposits:

 

 

I. Demand Deposits—Current A/c

1,560

 

II. Saving Bank Deposits

1,350

 

III. Term Deposits—Fixed Deposit A/c

1,560

 

 

4,470

 

Schedule 4: Borrowings:

 

 

I. Borrowings in India:

 

 

    (i) RBI

 

    (ii) Other Banks

330

 

    (iii) Other Institutions and Agencies

 

II. Borrowings Outside India

 

 

330

 

Schedule 5: Other Liabilities and Provisions:

 

 

I. Bills Payable

3

 

II. Inter-office Adjustments (Net)

 

III. Interest Accrued

 

IV. Other Liabilities (Including Provisions)

 

 

3

 

Schedule 6: Cash and Balance with RBI:

 

 

I. Cash in Hand

480

 

II. Cash Balance with RBI

120

 

 

600

 

Schedule 7: Balance with Banks and Money at Call and Short Notice:

 

 

I. In India:

 

 

    (i) Balance with Bank

468

 

    (ii) Money at Call and Short Notice

630

 

 

1,098

 

Schedule 8: Investments:

 

 

I. Investment in India in:

 

 

    (i) Govt. Securities

330

 

    (ii) Other (Gold)

165

 

 

495

 

Schedule 9: Advances

 

 

I.  (i) Bills Discounted and Purchased

 

 

    (ii) Cash Credit, Overdrafts and Loans:

 

 

      Payable on Demand:

 

 

        Cash Creditors

2,439

 

        Overdraft

90

 

    (iii) Term Loans

2,373

 

 

4,902

 

II. (i) Secured by Tangible Assets

 

 

      (90% of 2,439 + 50% of 2373)

3,381.60

 

    (ii) Covered by Bank/Govt. Guarantors (50% of 2373)

1,186.50

 

    (iii) Unsecured (10% of 2439 + 100% of 90)

333.90

 

 

4,902.00

 

Schedule 10: Fixed Assets

 

 

    (i) Premises

468

 

    (ii) Other Fixed Assets (Including Furniture)

210

 

 

678

 

Schedule 11: Other Assets

Nil

 

Schedule 12: Contingent Liabilities

 

 

    (i) Claims Against the Bank Not Acknowledge as Debts

1.80

 

    (ii) Acceptance and Endorsements

45.00

 

 

46.80

 

Illustration 13.19

Model: P & L A/c and balance sheet.

From the following figures taken from the books of Asian Bank Ltd., prepare profit and loss account and balance sheet as on 31 March 2011:

 

 

(images in ’000)

5,00,000 Shares of images 10 Each, images Paid up

2,500

Reserve Fund Investments

1,750

Fixed Deposits

4,750

Savings Bank Deposits

15,000

Current Deposits

40,000

Money at Call and Short Notice

2,250

Investments

12,500

Interest Accrued and Paid

1,000

Rent

100

Salaries (Including GM’s Salary 1,20,000)

345

Directors Fees

30

Provident Funds Contribution

25

General Expenses

50

Profit and Loss Account (1 April 2010)

1,000

Bank Drafts

1,550

Unclaimed Dividends

100

Premises (After Depreciation up to 31 March 2010 images 5,00,000)

6,000

Cash

750

Stock of Stationery

50

Cash with RBI

7,000

Traveller’s Cheques

2,500

Balance Writs Other Banks

8,000

Letters of Credit

1,500

Borrowed from Banks

4,000

Owing by Foreign Correspondents

500

Interest and Discounts

3,500

Commission

250

Bill Discounted

3,000

Loans

15,000

Cash Credits and Overdrafts

20,000

Bills for Collection

700

Acceptances on Behalf of Customers

1,000

Dividend for 2009–10

250

Branch Adjustments (Cr.)

50

Rebate on Bills Discounted for Unexpired Term is images 25,000

 

A provision for doubtful debts amounting to images 1,50,000 is required. Create provision for taxation to the extent of images 5,00,000. Charge 5% depreciation on premises on original cost. Travellers’ cheques paid amounted to images 1,00,000.

Solution

 

Asian Bank Ltd.
Profit and Loss Account
for the Year Ended on 31 March 2011
 
Schedule No.
Year Ended on 31 March 2011 (images in ’000)

I. Income:

 

 

  Interest Earned

13

3,475

  Other Income

14

250

 

 

3,725

II. Expenditure:

 

 

  Interest Expended

15

1,000

  Operating Expenses

16

875

  Provisions and Contingencies

 

650

 

 

2,525

III. profit/Loss:

 

 

  Net Profit for the year (I – II)

 

1,200

  Profit Brought Forwarded

 

1,000

 

 

2,200

IV. Appropriations:

 

 

  Transfer to Statutory Reserve

 

300

(images 12,00,000 × 25/100)

 

 

  Transfer to Other Reserves

 

  Transfer to Government/Proposed Dividend

 

250

  Balance Carried to Balance Sheet

 

1,650

 

 

2,200

Schedules to P & L A/c

(images ’000)

Schedule 13: Interest Earned:

 

    Interest and Discount

3,500

    Less: Closing Rebate on Bills Discounted

25

 

3,475

Schedule 14: Other Income:

 

    Commission

250

Schedule 15: Interest Expended

 

    Interest Accrued and Paid

1,000

Schedule 16: Operating Expenses:

 

    Rent

100

    Salaries (Including GM’s Salary)

345

    Directors Fees

30

    Provident Fund Contribution

25

    Central Expenses

50

    Depreciation on Premises

325

    (images 60,00,000 + images 5,00,000) × 5/100)

 

 

875

    Provisions and Contingencies

150

    Provision for Taxation

500

 

650

Now, trial balance has to be prepared and the difference in trial balance is to be taken to other liabilities and provisions.

 

Trial Balance
images

Important note:

As reserve fund investment is shown in the question, then obviously “reserve fund” also should exist.

Calculation of other liabilities and provisions:

 

 

(images in ’000)

Bank Drafts

1,500

Unclaimed Dividends

100

Traveller’s Cheques (images 25,00,000 – images 1,00,000)

2,400

Branch Adjustment (images 50,000 + images 1,00,000)

150

Rebate on Bills Discounted

25

Provision for Taxation

500

Difference in Trial Balance (Ref: T/B)

1,650

 

6,375

 

Asian Bank Ltd.
Balance Sheet as on 31 March 2011
 
Schedule No.
As on 31 March 2011 (images in ’000)

Capital and Liabilities:

 

 

    Capital

1

2,500

    Reserve & Surplus

2

3,700

    Deposits

3

59,750

    Borrowings

4

4,000

    Other Liabilities & Provisions

5

6,375

    

 

76,325

    Assets:

 

 

    Cash & Balance with RBI

6

7,750

    Balance with Banks and Money at Call and Short Notice

7

10,200

    Investments

8

14,250

    Advances

9

38,350

    Fixed Assets

10

5,675

    Other Assets

11

50

    Contingent Liabilities

12

2,500

    Bills for Collection

700

Schedules to be attached to the balance sheet are prepared as follows:

 
As on 31 March 2011 (images in ’000)

Schedule 1: Capital

 

Authorized, Issued and Subscribed Capital:

 

    5,00,000 Shares of images 10 Each

5,000

    Called-up and Paid-up Capital

 

    5,00,000 Shares of images 10 Each, images 5 Paid

2,500

Schedule 2: Reserve and Surplus:

 

    Reserve Fund

1,750

    Statutory Reserve

300

    P & L A/c Balance

1,650

 

3,700

Schedule 3: Deposits

 

    Fixed Deposits

4,750

    Saving Bank Deposits

15,000

    Current A/c Deposits

40,000

 

59,750

Schedule 4: Borrowings

 

    Borrowed from Banks

4,000

Schedule 5: Other Liabilities and Provisions

 

    Bank Drafts

1,550

    Unclaimed Dividends

100

    Traveller’s Cheques

2,400

    Branch Adjustments

150

    Rebate on Bills Discounted

25

    Provision for Taxation

500

    Difference in Trial Balance

1,650

 

6,375

Schedule 6: Cash and Balances with RBI

 

    Cash

750

    Balance with RBI

7,000

 

7,750

Schedule 7: Balance with Banks and Money at Calls and Short Notice

 

     Balance with Other Banks

8,000

     Money at Call and Short Notice

2,250

 

10,250

Schedule 8: Investments

 

     Reserve Fund Investments

1,750

     Investments

12,500

 

14,250

Schedule 9: Advances

 

     Owing by Foreign Correspondents

500

     Bills Discounted

3,000

     Loans

15,000

     Cash Credits and Overdrafts

20,000

 

38,500

     Less: Provision for Doubtful Debts

150

 

38,350

Schedule 10: Fixed Assets

 

     Premises                                                             60,00,000

 

     Less: Depreciation (65,00,000 × 5/100)           3,25,000

5,675

Schedule 11: Other Assets

 

     Stock of Stationery

50

Schedule 12: Contingent Liabilities

 

     Acceptances on Behalf of Customers

1,000

     Letter of Credit

1,500

 

2,500

     Bills for Collection

700

Summary

A bank is an organization, which may involve a number of financial trading activities, regulated by the Banking Regulations Act, 1949.

Banking means accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawals by cheque, draft or otherwise. A company that transacts the business of banking is called a bank company.

A bank which is included in the second schedule of RBI Act, 1934 is referred as “Scheduled Bank”.

Business of banking companies involves the following activities:

  1. Borrow or raise money.
  2. Carry on and transact guarantee and indemnity business.
  3. Undertake and execute trusts.
  4. Acquire and undertake the whole or any part of the banking business of any person or company.
  5. Contract for public and private loans, negotiate and issue them.
  6. To engage in any business, which is authorized by the Govt. No banking company is permitted to carry on business other than those specified in Section 5(2) of the Act.

Banking Regulation Act stipulates certain minimum amount of paid-up capital and reserve (for details refer the text).

For important provisions of the Banking Regulation Act, 1949 refer the main part of the text.

Main features of banking accounting: (i) slip system of posting, (ii) voucher summary sheets, (iii) self-balancing system of ledgers, (iv) daily trial balance and (v) double voucher system.

Preparation of final accounts of banking companies: Third schedule—Form A and B—Formats of P & L A/c and balance sheet along with necessary schedules to be prepared and are explained with illustrations (Ref. Illustrations 13.113.18).

Key Terms

Statutory Reserve Fund: A statutory requirement for banking companies to create and transfer a specified percentage of its profit. Section 17 requires 20% of the profit. RBI stipulates 25% of the net profits to be transferred to statutory reserve.

Cash Reserve: A sum equivalent to 3% of is total time and demand liabilities is to be created and amounted with RBI banking companies. This cash reserve ratio varies from time to time. At present it is 6 %.

Slip System: A system of ledger posting under which entries are made in the personal accounts of the customers in the ledger directly from the slips and not from the subsidiary books or journals.

Slip: Loose leaf of journals or cash books on which transactions are recorded when they incur, for example, pay-in-slip, cheque or withdrawal form.

Rebate on Bills Discounted: A technical term that refers to unearned portion of the discount income received by the bank. This occurs when the bills discounted/purchased by the bank will mature after the closing date of the final accounts.

Non-performing Asset: Asset that ceases to generate income.

QUESTION BANK

Objective Type Questions

I: State whether the following statements are true or false

  1. Regulations regarding appointment of directors, disposal of profits and the like with respect to nationalized banks are not applicable.
  2. A banking company can do any form of business other than those mentioned in Section 6 of the Banking Regulation Act.
  3. Energy banking company is required to prepare final accounts in accordance with Schedule VI of Companies Act, 1956.
  4. A banking company closes its accounts on 31 March every year.
  5. A banking company can directly or indirectly deal with the business of buying or selling or bartering of goods.
  6. A banking company cannot hold any immovable property for any period exceeding 7 years.
  7. The minimum limit of paid-up capital and reserve to be complied with by a banking company varies from place to place.
  8. When capitalized expenses are outstanding, payment of dividend out of the profits is permitted for banking companies.
  9. A banking company cannot create a floating charge on unpaid capital.
  10. A scheduled bank is not required to maintain cash reserves.
  11. The RBI has been empowered to alter SLR.
  12. A banking company can grant loans and advances on security of its own shares.
  13. Profit on sale of investments is an income and should be shown under the head “other income”.
  14. Surplus on transaction of the financial statements of foreign branches is a revaluation reserve.
  15. Interest payable on deposits, which is accrued but not due should be included under the head “deposits”—Schedule 3.
  16. Inter-office transactions should not be shown as borrowings.
  17. Income from non-performing assets (NPAs) is recorded on accrual basis.
  18. For all sub-standard assets, a general provision of 10% is to be made on total outstanding amount.
  19. Provision is required to be made depending upon the period for which the asset has remained doubtful.
  20. The contingent liabilities are to be shown in Schedule 12.

Answers:

  1. True
  2. False
  3. False
  4. True
  5. False
  6. True
  7. True
  8. False
  9. True
  10. False
  11. True
  12. False
  13. True
  14. False
  15. False
  16. True
  17. False
  18. False
  19. True
  20. True

II: Fill in the blanks with apt word(s)

  1. In India, the business of banking is governed by the _____ Act, 1949.
  2. In addition to this 1949 Act, corporate entities carrying on the business of banking are governed by the _____ Act.
  3. The _____ controls and supervises the activities of banking companies in India.
  4. Section _____ of the Banking Regulation Act provides a detailed list of the form of business a banking company can do, in addition to banking business.
  5. The minimum paid-up capital and reserves to be complied with by a banking company, which is incorporated in India and if it has place of business in more than one state but not in Mumbai or Kolkata is images_____.
  6. U/S 17 of the Banking Regulation Act, a banking company incorporated in India is required to create _____ of its net profit and transfer to statutory reserve.
  7. According to Section 13 of the Banking Regulation Act, a bank cannot pay more than _____ of the paid-up value of shares by way of commission, brokerage, etc.
  8. A sum of at least _____ of its time and demand liabilities has to be maintained as cash reserve as per Section 18.
  9. At present, the norm for statutory liquidity ratio (SLR) as per Reserve Bank of India is _____ .
  10. The balance sheet of a banking company should be prepared in Form _____ of Schedule III of the Act.
  11. The P & L A/c of a banking company has to be prepared in Form _____ of Schedule III of the Act.
  12. _____ are the basis for recording transactions in banking.
  13. At present, as per the regulations of RBI, cash reserve is _____.
  14. All appropriations of profit are to be shown in _____ part of P & L A/c.
  15. “Interest earned” is shown in Schedule _____ .
  16. Schedule 14 is related to _____ .
  17. “Interest expended” is shown in Schedule ____ .
  18. Depreciation on bank’s property is to be included under the head “ _____ ”.
  19. Income from “performing assets’ is recorded on “ _____ ”.
  20. At present, banks are required to create a provision of _____ on standard assets on global loan portfolio basis.

Answers:

  1. banking regulation
  2. companies
  3. Reserve Bank of India
  4. 6
  5. images5 Lakhs
  6. 20%
  7. 2½%
  8. 3%
  9. 25%
  10. A
  11. B
  12. Slips
  13. 5%
  14. IV
  15. 13
  16. other income
  17. 15
  18. operating expenses
  19. accrual
  20. 0.40%

III: Multiple choice questions—Choose the correct answer

  1. A banking company in India is regulated by
    1. The Companies Act
    2. Reserve Bank of India
    3. Banking Regulation Act
    4. all of these
  2. Which of the following forms of business is not permitted to carry out by banking companies, as per Section 6 of the Banking Regulation Act?
    1. buying, selling and dealing with bullion
    2. providing of safe deposit values
    3. buying, selling or bartering of goods
    4. undertaking and executing trusts
  3. Every banking company is required to prepare final accounts in conformity with
    1. third schedule of the Banking Regulation Act, 1949
    2. sixth schedule of the Companies Act, 1956
    3. guidelines of RBI
    4. none of these
  4. As per RBI guidelines, the percentage of profit to be transferred to statutory reserve is
    1. 20
    2. 25
    3. 10
    4. 12.5
  5. Which of the following is not classified as “Capitalized expenses”?
    1. preliminary expenses
    2. brokerage
    3. share-selling commission
    4. depreciation on assets
  6. Which of the following is not the permissible factor to form a subsidiary company?
    1. the undertaking and executing of trust
    2. the undertaking of the administration of estates as execute
    3. the undertaking of another sick banking company
    4. the carrying-on business of banking exclusively outside India, with prior permission of the RBI
  7. The inter-office adjustment balance (net) should be shown under the head
    1. other Liabilities and provisions
    2. borrowings
    3. interest expended
    4. none of the above
  8. “Provision for income tax” is to be shown under the head
    1. other assets
    2. other liabilities
    3. operating expenses
    4. loans and advances
  9. Which of the following is not a contingent liability?
    1. guarantees given on behalf of customers
    2. acceptances, endorsements and other obligations
    3. claims against the bank, not acknowledged as debts
    4. traveller’s cheques, gift cheques and the like
  10. Which of the following is not included under the head “advances”—Schedule 9:
    1. cash credit
    2. overdrafts
    3. Money as call
    4. purchasing and discounting of bills

Answers

 

1. (d)

4. (b)

7. (a)

10. (c)

2. (c)

5. (d)

8. (b)

 

3. (a)

6. (c)

9. (d)

 

Short Answer Questions

  1. Define Bank.
  2. Define Banking.
  3. What do you mean by a “banking compan”?
  4. Mention some forms of business that a banking company can carry on.
  5. How can the final accounts of a banking company be presented?
  6. What is the accounting year for banking companies?
  7. Explain the provisions of Section 8 of the Banking Regulation Act relating to “trading”.
  8. What is “statutory reserve”?
  9. Explain the main provisions of Section 15 with respect to payment of dividend.
  10. What is the maximum limit for payment of commission, brokerage, etc.?
  11. What are the major considerations in forming a subsidiary company?
  12. Write short notes on “cash reserves”.
  13. What is meant by “statutory liquidity ratio”?
  14. Enlist the items to be included under “Schedule 13”.
  15. Explain non-performing assets.
  16. Enlist the items to be included in “Schedule 14”.
  17. Mention the items to be shown under the head “interest expended”.
  18. Mention the important items to be shown under the head “provisions and contingencies”.
  19. How will you treat “rebate on bills discounted” in a bank account?
  20. What is the accounting treatment for “money at call and short notice”?
  21. How bank accounts are classified?
  22. Explain “doubtful debts”.
  23. How will you create provision for doubtful debts?
  24. How will you treat “inter-office adjustments” in bank accounts?
  25. Mention the items to be shown under the head “contingent liabilities”.
  26. Write short notes on “non-banking assets”.
  27. How banks advances are classified for the purpose of “provisioning”?
  28. Write short notes on “money at call and short notice”.
  29. Explain “interest suspense account”.
  30. Write short notes on “standard assets”.

Essay Type Questions

  1. Define banking and banking company. Explain in detail the forms of business a banking company may carry on as per Section 6 of the Banking Regulation Act.
  2. Explain in detail the important legal provisions with special reference to final accounts of a banking company.
  3. Draw the proforma of P & L A/c in conformity with Form B of Schedule III of Banking Regulation Act and the schedules to be annexed to it.
  4. Draw the proforma of balance sheet in conformity with Form A of Schedule III and the schedules to be attached to it.
  5. Enumerate the important guidelines issued by the RBI in the preparation of P & L A/c of banking companies.
  6. What are the different types of provisions for NPAs as on date?
  7. How are the following treated in bank final accounts? (i) Rebate on bills discounted, (ii) bad debts and provision for doubtful debts, (iii) provision for taxation, (iv) interest on doubtful debts, (v) money at call and short notice, (vi) advances and (vii) investments.

Exercises

 

Part A—For Undergraduate Level

 

1. Calculate rebate on bills discounted as on 31 March 2011:

images

[Ans.: Rebate: images 8,020.45 (images 2,158.45 + images 1,061.45 + images 1,702.20 + images 3,098.95)]

2. The following accounts are extracted from trial balance of Konark Bank Ltd. on 31 March 2011:

 

 

Dr.

Cr.

 

images images

Interest and

52,26,000

Discounted

 

 

Rebate on Bills

37,500

Discounted

 

 

Bills Discounted

15,36,000

and Purchased

 

 

It is ascertained that proportionate discount not earned on the balance of bills discounted, which will mature in 2011–12 amounts to images 68,100.

Pass the necessary adjustment entries.

[Ans.: Amount of interest and discount to be shown in P & L A/c: images 51,95,400]

3. From the following information, find out the amount of provision to be shown in the P & L A/c of a Commercial Bank:

 

Assets:

images

  Standard

32,000

  Substandard

24,000

  Doubtful:

 

    For 1 Year

4,000

    For 3 Years

6,400

    For More Than 3 Years

1,600

Loss Assets

4,800

[Ans.: Total provision: images 10,800 Lakhs]

4. While closing the books of a commercial bank on 31 December 2010, you find in the loan ledger an unsecured balance of images 3,00,000 in the account of a merchant, whose financial condition is reported to you as doubtful. Interest on the same account amounted to images30,000 during the year.

During the year 2011, the bank accepted 60 paise in the rupee on account of the total debt up to 31 December 2010.

Show the merchant’s loan account.

[Ans.: Amount written off as bad debts: images 1,20,000 Interest taken into account: images 18,000]

5. From the following particulars relating to Himachal Bank Ltd., ascertain the profit balance carried over to the balance sheet:

 

 

    images

Net Profit for the Year

5,12,000

Profit Brought Forward from

4,80,000

Previous Year

 

Transfer to Statutory Reserve

    25%

Transfer to Other Reserves

    10%

Transfer to Proposed Dividend

  80,000

 

[Ans.: images 7,32,800]

6. From the following balances, prepare P & L A/c of New Bank Ltd., in the revised format:

 

 

images

Interest Received

16,26,780

Discount Received

7,31,280

Commission Received

1,32,720

Interest on Deposits

4,81,560

General Expenses

5,47,260

Bad Debts

3,86,130

Note: Rebate on bills discounted: images 1,93,140

[Ans.: Net profit: images 8,82,690 Transfer to statutory reserve: images 2,20,674]

7. On 31 December 2010, the loan ledger in the books of a bank showed a debit balance of images 5,00,000 including images 1,00,000 due from a merchant, which is doubtful. The interest accrued on the loans up to 31 December 2010 was images 25,000 including images5,000 on doubtful debt. The merchant became insolvent and the officialreserve paid a dividend of images 0.25 in the rupee on 31 January 2011.

Pass the necessary journal entries in the books of the bank on 31 December 2010 and 31 January 2011 and prepare the loan account.

[Ans.: Amount written off as bad debts: images 75,000 Interest taken into account: images 1,250]

8. The following is an extract from trial balance of a bank as on 31 December 2010:

 

 

images

images

Bills Discounted and Purchased

7,45,400

Interest and Discount

1,93,24,800

Rebate on Bill Discounted

21,680

It is ascertained that proportionate discount not yet earned on the balance of bills discounted, which will mature in 2011 amounts to images 30,920.

You are required to show the rebate on bills discounted A/c and interest and discount A/c. How will these items appear in the bank’s balance sheet?

[Ans.: Amount of interest and discount to be shown in the P & L A/c: images 1,93,15,560 Rebate on bills—images 30,920 is a liability. Bills discounted images 7,45,400 is as asset]

9. From the following particulars, prepare the P & L A/c of Noida Bank Ltd. for the year ending on 31 March 2011.

 

 

(images in ’000)

Interest on Deposits 16,000

16,000

Commission (Cr.)

500

Interest on Loans

12,450

Sundry Charges (Cr.)

500

Rent and Taxes

1,000

Establishment

2,500

Discount on Bills Discounted

7,450

Interest on Overdrafts

8,000

Interest on Cash Credits

11,600

Auditors’ Fees

175

Directors Fees

80

Bad Debts to be Written off

1,500

[Ans.: Net profit for the year: images 1,82,45,000 Balance carried to B/s: images 1,36,83,750]

10. Prepare the profit and loss A/c for the year ended on 31 December 2010 of Rajasekaran Bank Ltd., from the following particulars:

 

 

(images in ’000)

Interest on Loans

3,000

Interest on Savings Accounts

1,800

Interest on Credit Cards

1,920

Interest on Fixed Deposits

2,280

Interest on Overdraft

600

Amount Charged Against Current Accounts

240

Rebate on Bills Discounted

228

Salaries and Allowances

1,440

Discount

480

Rent, Tax, Insurance, etc.

60

Dearness Allowance

420

Commission, Brokerage and Exchange

180

Managing Director’s Salary

180

Contribution to Provident Fund

120

[Ans.: Net profit for the year: images 1,20,000; Balance carried to B/s: images 90,000]

11. The following are the balances of Khan Bank Ltd. for the year ended on 31 March 2011:

 

 

(images in ’000)

Interest on Loans

1,554

Interest on Fixed Deposit

1,650

Commission Received

48

Salaries & Allowances

324

Discount on Bills Discounted

876

Rebate on Bills Discounted

294

Interest on Cash Credits

1,338

Interest on Current Accounts

252

Rent & Taxes

108

Interest on Overdrafts

924

Director’s Fees

18

Auditors Fees

6

Interest on Savings Bank Deposits

408

Postage & Phone

9

Printing & Stationery

18

Locker Rent

6

Transfer Fees

3

Depreciation on Bank’s Properties

30

Sundry Changes

12

Other information:

  1. Provision for bad debts to be made: images2,40,000
  2. Provision for income tax required: images9,00,000

Prepare P & L A/c of the bank for the year ended on 31 March 2011.

[Ans.: P & L A/c balance carried to B/s: images 5,80,500]

12. From the following ledger balances of Overseas Bank Ltd. prepare P & L A/c:

 

 

(images in ’000)

Interest Paid on Deposits

16,052

Commissions Exchange & Brokerage

4,424

Interest Received

53,226

Discount on Bills Discounted

24,376

Salary & Provident Fund

4,000

Profit on Sale of Fixed Assets

3,000

Printing & Stationery

1,000

Postage & Telephones

2,000

Note: Provide for taxation: images 20,00,000; rebate on bills discounted: images 14,38,000.

[Ans.: Net profit for the year: images 58,53,600 Balance carried to B/s: images 4,39,02,000]

13. Form the following information, prepare P & L A/c of Poone Bank Ltd. for the year ended on 31 December 2010.

 

 

(images in ’000)

Interest on Loans

5,180

Interest on Fixed Deposits

5,500

Relate on Bills Discounted

980

Commission

164

Establishment

1,080

Discount on Bills Discounted (Net)

2,920

Interest on Cash Credits

4,460

Interest on Current Accounts

840

Rent and Taxes

360

Interest on Overdrafts

3,080

Director’s Fees

60

Auditor’s Fees

24

Interest on Saving Bank Deposits

1,360

Postage & Phone

28

Printing & Stationery

58

Sundry Charges

34

Bad debts to be written off amounted to images 8,00,000. Provision for taxation may be made @ 55%.

[Ans.: Provision for taxation:images 31,13,000 Net profit: images 25,47,000 Balance to B/s: images 19,10,250]

14. From the following information prepare P & L A/c of Mumbai Bank Ltd. as on 31 March 2011:

 

 

(imagesin ’000)

Interest and Discount

6,090

Income from Investments

230

Interest on Balance with RBI

360

Commission, Exchange and Brokerage

1,640

Profit on Sale of Investments

220

Interest on Deposits

2,450

Interest Paid to RBI

322

Payment to and Provision for Employees

2,088

Rent, Taxes and Lighting

420

Printing and Stationery

360

Advertisement and Publicity

190

Depreciation

184

Director’s Fees

440

Auditor’s Fees

240

Law Charges

460

Postage & Telephone

140

Insurance

112

Repairs & Maintenance

96

Other information:

  1. Interest and discount mentioned above is after adjustment for the following:

     

    (images in ’000)

    Tax Provision for the Year

    400

    Provision During the Year for Doubtful Debts

    204

    Loss on Sale of Investments

    24

    Rebate on Bills Discounted

    116

     

  2. 25% of the profit is to be transferred to statutory reserves and 5% of the profit is to be transferred to revenue reserve. Profit brought forward from last year is images 32,000.

[Ans.: Net profit for the year: images 10,38,000; Balance carried to B/s: images 7,58,600]

15. From the following particulars of AZ Bank Ltd., prepare a balance sheet as on 31 March 2011 in the revised format:

 

 

(images in Lakhs)

Authorised Capital

80

Subscribed Capital

40

Investments

140

Bills Discounted

300

P & L A/c (Cr.)

17

Endorsement on Bills for Collection

2

Liability of Customers for Acceptances

100

Money at Call and Short Notice

180

Cash in Hand

40

Cash with RBI

80

Statutory Reserve

60

Cash with SBI

80

Letters of Credit Issued

10

Telegraphic Transfers Payable

16

Bank Drafts Payable

24

Short Loans

0.8

Rebate on Bills Discounted

0.2

Acceptances for Customers

100

Loans & Advances

200

Cash Credit

200

Overdraft

20

Bills Purchased

20

Current and Deposit Accounts

1,120

Investment Fluctuation Fund

2

Bills for Collection

2

Buildings

20

 

[Ans.: Balance sheet total: images 1,280 Lakhs]

16. From the following balances of Swasthik Bank Ltd., as on 31 March 20…., prepare its balance sheet in the prescribed form:

 

 

(images in ’000)

Paid-up Share Capital

4,000

(Shares of images 50 each) Fully Paid

 

Bills Discounted

3,600

Reserve Fund

1,540

Cash Credits

4,000

Overdrafts

1,600

Unclaimed Dividends

20

Loans

9,200

Current Deposits

7,600

Furniture

80

P & L A/c (Cr.)

440

Stamps and Stationery

20

Cash in Hand

1,000

Cash with RBI

2600

Branch Adjustment (Dr.)

340

Investments

1,900

Loans (Cr.)

2,400

Recurring Deposits

2,000

Fixed Deposits

4,000

Cash Certificates

2,000

Contingency Reserve

340

 

Adjustments:

  1. Rebate on bills discounted: images 20,000
  2. Provide images 1,60,000 for doubtful debts
  3. Bank acceptance on behalf of customers is images 13 lakhs

[Ans.: P & L balance taken to B/s: images 2,60,000 Balance sheet total: images 2,43,40,000]

17. The following ledger balances of Bank of Triplicane Ltd. as on 31 December 2010 are furnished to you. Prepare P & L A/c and balance sheet as per requirement of law.

 

 

(images in ’000)

Reserve Fund

3,600

Bad Debts Written off

384

General Expenses

546

Current Accounts

60,735

Interest Paid

480

Deposit Accounts

20,760

P & L A/c b/fd

687

Bills Receivable for Customers

4,500

Discounts

732

Endorsements and Guarantees

1,725

Commission

135

Cash

675

Interest Earned

1,650

Balance with RBI

6,090

Endorsements and Guarantees

 

(Constituent Liabilities)

1,725

Balance with Foreign Correspondents

3,618

Bills for Collection

4,500

Borrowings from Banks

19,446

Cash Credit and Overdrafts

46,371

Bills Discounted

18,684

Premises

6,651

Share Capital

6,000

The following information is furnished:

  1. Rebate on bills discounted to provide images 1,92,000
  2. The bank has paid an interim dividend of images 6,00,000 during the year.

[Ans.: Net profit: images 9,15,000 B/s total: images 11,17,35,000 Trial balance difference: images 6,00,000 Interim dividend given in adjustments in a part of trial balance]

18. The following is the trial balance of a banking company as on 31 December 2010:

images

Adjustments:

  1. Interest accrued on investments: images 1,10,000.
  2. The market value of Govt. securities is images 7,50,000 and provision is to be made.
  3. Endorsements on behalf of customers: images 10,50,000.
  4. Authorized capital: 2,50,000 shares of images 20 each.

Prepare P & L A/c and balance sheet as on 31 December 2010.

[Ans.: Net profit: images 9,15,000 Balance taken to B/ s: images 7,36,250 B/s total: images 1,49,15,000]

19. From the following balances of Hope Bank Ltd. as on 31 March 2011, prepare a profit and loss A/c and a balance sheet for the relevant year:

Balances as on 31 March 2011

 

 

(images in ’000)

Share Capital (Equity Shares

9,900

of images 100 Each Fully Paid

 

Reserve Fund

1,920

Current Accounts

30,000

Savings Bank Accounts

15,000

Fixed Deposit Accounts

7,500

P & L A/c

2,400

Money at Call and Short Notice

1,800

Salaries (Including images 3,60,000 to GM)

9,600

Directors’ Fees

150

Investment (at Cost)

22,500

General Expenses

210

Audit Fees

120

Building (Net of Depreciation

6,720

up to 31 March 2010) images 16,80,000

 

Borrowing from Banks

6,300

Cash with Other Banks

5,400

Cash with RBI

9,000

Cash in Hand

750

Interest and Discount Received

30,240

Bills Payable

12,600

Bills Discounted & Purchased

9,000

Term Loans

13,500

Cash Credits

35,010

Sundry Creditors

1,500

Bills for Collection

2,940

Acceptances on Behalf of Customers

7,500

Interest Accrued and Paid

3,600

Depreciation has to be provided at 5% on the original cost of the building. A provision of images 7,50,000 for bad debts and images 60,00,000 for taxation needs to be made.

[Ans.: Net profit: images 93,90,000; Balance sheet total: images 10,25,10,000]

20. The following is the trial balance of Victory Bank Ltd. as on 31 December 2010.

images

The following information should be considered:

  1. Provision for bad and doubtful debts required is images 2,500.
  2. Accrued interest on investments was images 4,0000.
  3. Unexpired discounts amount to images 190.
  4. Interim dividend declared at 4% actual.
  5. Endorsement made on behalf of the customers totalled images 57,500.
  6. Authorized capital was 40,000 equity shares of images 10 each.
  7. images 5,000 was added to the premises during the year. Depreciation at 5% on the opening balance was required.
  8. Market value of Indian Govt. securities was images 1,95,000.

Prepare P & L A/c for the year ended on 31 December 2010 and the balance sheet as on that date.

[Ans.: Net profit for the year: images 34,560 Balance carried to B/s: images 23,920 B/s total: images 5,59,250]

Exercises

 

Part B—For Advanced Level

21. (a) The following particulars are extracted from the (trial balance) books of M/s Sound Bank Ltd. for the year ending on 31 March 2011:

 

    Details

images

1. Interest and Discount

98,31,200

2. Rebate on Bills Discounted (1 April 2010)

32,520

3. Bills Discounted and Purchased

33,72,700

It is ascertained that proportionate discount not yet earned on the bills discounted, which will mature during 2011–12 amounted to images 46,380. Pass the necessary journal entries adjusting the above and show in the ledger of the bank:

  1. Rebate on bills discounted account
  2. Interest and discount account.

(b) Calculate the provision required to be made in respect of advance:

 

Details

Amount

 

images

Term Loan

1,00,000

ECGC Cover

30%

Security

24,00,000

Period for which advance had remained doubtful is 2 years.

[B.Com. (Hons.) Delhi, 2007—Modified]

[Ans.: (a) Transfer of net interest and discount to P & L A/c: images 98,17,340. (b) images 58,24,000]

22. From the following information, prepare P & L A/c of New Bank of India Ltd. as on 31 March 2011:

 

 

(images in ’000)

Interest and Discount

1,82,70

Income from Investments

6,90

Interest on Balances with RBI

10,80

Commission, Exchange and Brokerage

49,20

Profit on Sale of Investments

6,60

Interest on Deposits

73,50

Interest to RBI

9,66

Payment to and Provision for Employees

62,64

Rent, Taxes and Lighting

12,60

Printing and Stationery

10,80

Advertisement and Publicity

5,70

Depreciation

5,62

Directors’ Fees

13,20

Auditor’s Fees

7,20

Law Charges

13,80

Postage & Telephone

4,20

Insurance

3,36

Repairs & Maintenance

2,88

Other information:

  1. Interest and discount mentioned above is after adjustment for the following:

     

     

    (images in ’000)

    Tax Provision for the Year

    13,20

    Provision During the Year

    6,12

    for Doubtful Debts

     

    Loss on Sale of Investment

    72

    Rebate on Bills Discounted

    3,48

     

  2. 20% of profit is transferred to statutory reserve.

    5% of profit is transferred to revenue reserve.

    Profit brought forward from last year is images 96,000.

[B.Com. (Hons.) Delhi, 2008—Modified]

[Ans.: Net profit: images 31,14,000 Transfer to statutory reserve: images 6,22,800; Transfer to statutory reserve: images 1,55,700; Balance carried to B/s: images 24,31,500

23. From the following trial balance and the additional information, prepare a balance sheet of Kuber Bank Ltd. as on 31 March 2011:

 

Debit Balance:

images(in Lakhs)

Cash Credits

1,218.15

Cash in Hand

240.23

Cash with RBI

67.82

Cash with Other Banks

132.81

Money at Call & Short Notice

315.18

Gold

82.84

Government Securities

365.25

Current Accounts

42.00

Premises

133.55

Furniture

95.18

Term Loans

1189.32

 

images

Credit Balances:

 

Share Capital:

 

(29,70,000 Equity Shares of images 10

 

Each Fully Paid up)

297.00

Statutory Reserve

346.50

Net Profit for the Year

 

(Before Appropriations)

225.00

P & L A/c (Opening Balance)

618.00

Fixed Deposit Accounts

775.50

Saving Deposit Accounts

675.00

Current Accounts

780.18

Bills Payable

0.15

Borrowings from Other Banks

165.00

 

images

Additional Information:

  1. Bills for collection: images 18,10,000
  2. Acceptances & endorsements: images 14,12,000
  3. Claims against the bank not acknowledged as debts: images 55,000.
  4. Depreciation charged on premises: images 1,10,000 and furniture: images 78,000.

[B.Com. (Hons.) Delhi, 2009]

[Ans.: Balance in P & L A/c carried to B/s: images 798 Lakhs B/s total: images 3882.33 Lakhs]

24. From the following balances of Saraswati Bank Ltd. as on 31 December 2010, prepare the balance sheet in the prescribed form:

 

 

(images in ’000)

Paid-up Share Capital

 

(of images 10 Each Fully Paid)

1,000

Bills Discounted

900

Reserve Fund

385

Cash Credits

1,000

Overdrafts

400

Unclaimed Dividends

5

Loans

2,300

Current Deposits

1900

Furniture

20

P & L A/c (Cr.)

110

Cash in Hand

5

Cash with Reserve Bank

650

Branch Adjustments (Dr.)

85

Investments

475

Loans (Cr.)

600

Recurring Deposits

500

Fixed Deposits

1,000

Cash Certificates

500

Contingency Reserve

85

Adjustments:

  1. Rebate on bills discounted: images 5,000.
  2. Provide images 40,000 for doubtful debts
  3. Banks acceptances on behalf of customers: images 3,25,000.

[M.Com., Madras—Modified]

[Ans.: Balance carried to B/s: images 65,000 Balance sheet total: images 60,85,000

25. Following are some of the balances as on 31 March 2011 of Sindh Bank Ltd.:

 

 

(images in ’000)

Interest on Advances

2,400

Commission, Exchange and

600

Brokerage

 

Cash Balance

600

Balance with Other Banks

1,200

Cash with RBI

300

Profits on Sale of Investments

60

Other Revenue Receipts

240

Share Capital

6,000

20% Investment in Govt.

900

Securities (Purchased at 60%

 

of Face Value)

 

Other Securities @ 25%

300

(Purchased at Par)

 

Borrowing from Other Banks

900

Printing and Stationery

105

Repairs

75

Statutory Reserves

2,700

P & L A/c (Cr.)

1,950

Bills Purchased and

750

Discounted

 

Cash Credit, Overdrafts &

4,275

Demand Drafts

 

Term Loans

3,825

Fixed Deposits

825

Savings Deposits

975

Current Deposits

375

Premises (Net)

4,125

Furniture

750

Interest (Includes Paid 135)

360

Salary

225

Bills Payable (Net)

75

Postage etc.

60

The following additional information is furnished:

  1. Advances have been classified as under with given details:

     

     

    Cash Credit Overdrafts Demand Loans

    Term Loans (images in ’000)

    Standard Assets

    3,000

    2,925

    Sub Standard

    ?

    ?

    Assets

     

     

    Doubtful–Up to 1 Year

      300

    60

    -1–3 Years

      360

    150

    -More than 3 Years

      150

     240

    Less Assets

       90

    ?

  2. Standard and sub-standard assets in bills portfolio are in the ratio of 9:1.
  3. Term loans comprise loss assets, which are half of its sub-standard.
  4. No provision has been made so far against these assets.
  5. Doubtful assets are secured to the extent of 50% of the dues.
  6. Forty per cent of the total interest on investments has been accrued
  7. Bills for collection images 705 (in thousands)

Prepare final accounts of Sindh Bank Ltd.

 

[M.Com., Mumbai—Modified)

[Ans.: Difference in trial balance: images 5,25,000; Current year profit: images 12,52,686; Balance carried to B/s: images 29,52,150; Provision for bad debts: images 13,72,314; Balance sheet total: images 1,71,75,000]

26. From the following information, prepare profit and loss A/c of Vishali Bank Ltd. for the period ended on 31 March 2010 (working should form part of your answer):

 

 

(images in ’000)

Interest on Loans

1,200

Interest on Fixed Deposits

1,100

Commission

40

Exchange and Brokerage

80

Salaries and Allowances

600

Discount on Bills (Gross)

608

Interest on Cash Credits

960

Interest on Temporary Overdrafts in Current A/c

120

Interest on Savings Bank Deposits

348

Postage, Telegram and Stamps

40

Printing and Stationery

80

Sundry Expenses

40

Rent

60

Taxes and Licenses

40

Audit Fee

40

Additional information:

 

(i) Rebate on Bills Discounted

120

(ii) Salary of Managing Director

120

(iii) Bad Debts

160

(iv) Provision for Income Tax Is to Be Made at 55% (Round off to Nearest Thousand)

 

(v) Interest of images 16,000 on Doubtful Debts Was Wrongly Credited to Interest on Loans Account

 

 

[CS (Inter)—Modified]

[Ans.: Net profit: images 1,08,000]

27. Following facts have been taken out from the records of Akash Bank Ltd. in respect of the year ending on 31 December 2010:

  1. On 1 January 2010 bills for collection were images 14,00,000. During 2010, bills received for collection amounted to images 1,29,00,000, bills collected were images 94,00,000 and bills discounted and returned were images 11,00,000. Prepare bills for collection (asset) A/c and bills for collection (liability) A/c.
  2. On 1 January 2010, acceptances, endorsements, etc., not satisfied, amounted to images 29,00,000. During the year under question, acceptances, endorsements, guarantee, etc. amounted to images 88,00,000. Bank honoured acceptances to the extent of images 50,00,000 and clients paid off images 20,00,000 against the guaranteed liability. Clients failed to pay images 2,00,000, which the Bank had to pay. Prepare the acceptances, endorsements and other obligations A/c as it would appear in the general ledger.
  3. It is found from the books that a loan of images 12,00,000 was advanced on 30 June 2010 at an interest of 10% p.a. payable half-yearly; but the loan was outstanding as on 31 December 2010 without any payment recorded either towards principal or interest. The security for the loan was 20,000 fully paid shares of images 100 each (market value was images 98 as per the Stock Exchange Information as on 31 June 2010. But due to fluctuation, the price has fallen to images 60 per share in October 2010. On 31 December 2010, the price as per Stock Exchange rate was images 82 per share). State how would you classify the loan as secured/unsecured in the balance sheet of the company.
  4. The following balances are extracted from the trial balance as on 31 March 1997:

     

     

    Dr.

    Dr.

     

    images

    images

    Interest & Discount

    1,96,00,000

    Rebate for Bills Discounted

        40,000

    Bills Discounted Purchased

    8,00,000

It is ascertained that the proportionate discounts not yet earned for bills to mature in 1998 amount to images 28,000. Prepare ledger accounts.

 

[CA —Modified]

[Ans.: (a) Bills for collection: images 37,99,000

(b) Acceptances and endorsements:

 

images 45,00,000

(c) Secured loan, interest and discounts:

 

images 1,96,12,000]

28. The following are the figures extracted from the book of Golden Bank Ltd. as on 31 March 2010:

 

 

images

Interest and Discount Received

74,11,476

Interest Paid on Deposits

40,74,904

Issued & Subscribed Capital

20,00,000

Salaries & Allowances

4,00,000

Directors Fees & Allowances

60,000

Rent & Taxes Paid

1,80,000

Postage & Phone

1,20,572

Statutory Reserve Fund

16,00,000

Commission, Exchange &

3,80,000

Brokerage

 

Rent Received

1,30,000

Profit on Sale of Investments

4,00,000

Depreciation on Bank’s Properties

60,000

Stationery Expenses

80,000

Preliminary Expenses

50,000

Auditor’s Fees

10,000

The following further information is given:

  1. A customer to whom a sum of images 20 lakhs has been advanced has become insolvent and it is expected only 50% can be recovered from his estate.
  2. There were also other debts for which a provision of images 3,00,000 was found necessary by the auditors.
  3. Rebate on bills discounted on 31 March 2009 was images 24,000 and on 31 March 2010 was images 32,000.
  4. Provide images 13,00,000 for income tax.
  5. The Directors desire to declare 10% dividend.

Prepare the P & L A/c of Golden Bank Ltd. for the year ended on 31 March 2010 and also show how the P & L A/c will appear in the balance sheet of the P & L A/c. Opening balance was nil as on 31 March 2009.

 

[CA (Inter)—Modified]

[Ans.: Profit: images 6,78,000 Balance to B/s: images 3,42,400]

29. The following is the trial balance of NO SCAM Bank Ltd. as on 31 March 2011:

images

Prepare profit and loss A/c for the year ending on 31 March 2011 and a balance sheet as on that date after taking into account the following information:

  1. Interest accrued on investments: images 30,000.
  2. Rebate on bills discounted: images 6,000.
  3. Interim dividend was declared @ 12%.
  4. images 45,000 was added to the premises during the year. Depreciation @ 5% on opening balance is to be provided.
  5. Endorsements on behalf of customers were images 3,45,000.
  6. The provision for taxation at 1 April 2010 was images 36,000. It is to be maintained at images 93,000.
  7. Authorized capital was 90,00,000, shares of images 50 each.

[ICWA (Final)—Modified]

[Ans.: Net profit: images 3,15,000 B/s total: images 49,92,000]

30. From the following information and balances extracted from the books of accounts of Asia Bank Ltd. as on 31 December 2010, prepare a P & L A/c for the year ended on 31 December 2010 and balance sheet as on that date as per the Banking Companies Act:

Authorized capital in equity shares of images 100 each is images 750 lakhs issued, subscribed and called-up images 50 per share by application and allotment equal amount 3,75,000. Equity shares were subscribed out of which allotment moneys for 20,000 shares were not received.

 

(images in Lakhs)

 

Reserve Fund

70.00

 

Reserve for Doubtful Debts

30.00

 

Loans Advanced Secured

243.50

 

Loans Unsecured

114.00

 

Fixed Deposits

257.00

 

Current Account Deposits

378.00

 

Saving Deposits

241.00

 

Recurring Deposits

95.50

 

LC Account Deposit (Cr.)

7.50

 

Advances on Govt. Scheme

105.00

 

Non-banking Assets

65.00

 

Provision for Income Tax

4.45

 

Balance of & L A/c (Cr.)

16.00

 

Bills Discounted

154.50

 

Cash with RBI

205

 

Cash with Other Banks

213.75

 

Investments in Government Bonds

50.00

 

Building (Writtendown Value)

10.00

Depn. 5%

Furniture (Writtendown Value)

2.50

Depn. 10%

Office Equipment (Written-down Value)

3.00

Depn. 15%

Vehicles (Writtendown Value)

12.50

Depn. 30%

Interest Paid

39.00

 

Interest Received

84.80

 

Exchange & Commission (Cr.)

25.00

 

Salaries and Wages Benifits

16.00

 

Rent and Rates, Lighting, Insurance

4.00

 

Travelling Expenses

8.00

 

Postage & Telephone

1.75

 

Stationery & Printing

1.00

 

Directors’ Fees

0.75

 

Sundry Expenses

3.50

 

Legal Expenses

3.75

 

Cash on Hand

15.25

 

Bills for Collection from Customers

150.00

 

 

Additional Information:

  1. Treat any difference in balances as interbranch adjustment A/c.
  2. Provide depreciation at rates indicated on WDV method.
  3. Provide for loss on sale of non-banking assets: images 8 lakhs.
  4. Bad debts to be written off in Govt. scheme advances is 5 lakhs and provide for doubtful debts at 5% on unsecured loans and Govt. scheme advance.
  5. Interest receivable is images 8 lakhs and payable is 2.25 lakhs.
  6. Interest accrued on investment for half year @ 6% from 1 July 2010.
  7. Provide for taxation @ 55% and 10% surcharge per rupee.
  8. There is claim for salaries to staff for past 2 years, in dispute as images 16 lakhs.
  9. Estimated discount taken into account on bills discounted is images100 lakhs.

[ICWA (Final)–Modified]

[Ans.: Net profit: images3,72,500 B/s total: images 12,88,55,000]

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