JAIIB_CAIIB_2024_NOTES_MCQs

JAIIB AFM Module A: Accounting Principles and

Processes

No. of Unit Unit Name

Unit 1 Definition, Scope & Accounting
Standards including Ind AS
Unit 2 Basie Accountancy Procedures
Unit 3 Maintenance of Cash/Subsidiary
Books and Ledger
Unit 4 Bank Reconciliation Statement
Unit 5 Trial Balance, Rectification of
Errors and Adjusting & Closing
Entries
Unit 6 Depreciation and its Accounting
Unit 7 Capital and Revenue
Expenditure
Unit 8 Bills of Exchange
Unit 9 Operational Aspects of
Accounting Entries
Unit 10 Back Unreconciled Entries in
Banks
Unit 11 Bank Audit & Inspection
JAIIB AFM Module A Unit 1- Definition, Scope and Accounting Standards

Accounting

Accounting often is called the language of business. The basic function of any language
is to serve as a means of communication. In this, context, the purpose of accounting
is to communicate or report the results of business operations and the financial
health of the organization.
Features of Accounting

• Accounting is an art of recording, classifying and summarising business

transactions: it not only records the business transaction but also records them in
an orderly manner. It also classifies business transactions according to their
nature, before recording them in the books of account.
JAIIB_CAIIB_2024_NOTES_MCQs

• Accounting also summarises the data, recorded in books of account, and

presents them in a systematic way, in the form of:

i)Trial Balance
ii)Profit and loss account and iii)Balance
sheet
• Accounting records the transactions it terms of money: Accounting records
business transactions by expressing them in term of money. This makes the
recorded data more meaningful. Events that cannot be expressed in money terms,
are not recorded in the books of account.

• Accounting records only the transactions of a financial Character

• Accounting also interprets the financial data
Purpose and Objectives of Accounting

• To Keep a systematic record

• To Ascertain the result of the operations
• To ascertain the financial position of the business
• To facilitate rational decision- making
• To satisfy the requirements of law (Companies Act, Societies Act, Public Trust
Act etc and also compulsory under the Sales Tax Act and Income Tax Act)
Types of Accounting:

• Financial Accounting
• Cost Accounting
• Management Accounting
• Social Responsibility Accounting
• Human Resource Accounting
• Inflation Accounting

Accounting Standards in India and Its Definition and Scope

The Institute of Chartered Accountants of India (ICAI), recongnising the need to

harmonise the diverse accounting policies and practices, constituted an ‘Accounting
Standards Borad’ (ASB) on 21st April, 1977. The main function of the ASB is to
formulate accounting standards so that the council of ICAI may mandate such standards.

• ASB shall determine the broad areas in which accounting standards need to be
formulated and the priority about the selection thereof.

• In the preparation of the accounting standards, the ASB will be assisted by study
groups constituted to consider specific subjects. It will also hold a dialogue with
JAIIB_CAIIB_2024_NOTES_MCQs

the representatives of the government, public and private sector industries and
other organisations, for ascertaining their views.
Based in the above, an exposure draft of the proposed standard will be prepared
and issued to its members for comments and the public at large.

• After taking into consideration the comments received, the exposure draft will be
finalised by the ASB for submission to the council of ICAI.
A mandatory accounting standard, if not followed, requires the auditors, who are
members of ICAI, to qualify their audit reports, failing which they will be guilty of
professional misconduct. Both the SEBI and Companies Act 2013 require auditors of
qualify the audit reports that do not conform to mandatory accounting standards.
Section 134(5) of the Companies Act 2013 also casts a responsibility on the board of
directors to comply with mandatory accounting standards.
Under the Section 129(5) of the Companies Act 2013, where the financial statements
do not comply with the accounting standards, such companies shall disclose the
following:

• The deviation from the accounting standards

• The reasons for such a deviation
• The Financial effects, of any arising out of such a deviation.
Accountancy Standards

The Institute of Chartered Accountants of India (ICAI) has so far issued twenty-nine
standards:

• (AS 1) Disclosure of Accounting Policies

• (AS 2) Valuation of Inventories
• (AS 3) Cash Flow Statements
• (AS 4) Contingencies and Events Occurring after the Balance Sheet Date
• (AS 5) Net Profit or Loss for the period, Prior Period and Extraordinary Items and
Changes in less Accounting Policies

• (AS 6) Depreciation Accounting

• (AS 7) Accounting for Construction Contracts
• (AS 8) Accounting for Research and Development (deleted w.e.f. 1/4/2003)
• (AS 9) Revenue Recognition
• (AS 10) Accounting for Fixed Assets
• (AS 11) Accounting for the Effects of Changes in Foreign Exchange Rates
• (AS 12) Accounting for Government Grants
• (AS 13) Accounting for Investments
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• (AS 14) Accounting for Amalgamations

• (AS 15) Accounting for Retirement Benefits in the Financial Statements of
Employers

• (AS 16) Borrowing Costs

• (AS 17) Segment Reporting
• (AS 18) Related Party Disclosures
• (AS 19) Leases
• (AS 20) Earnings per Share
• (AS 21) Consolidated Financial Statements
• (AS 22) Accounting for Taxes on Income
• (AS 23) Accounting for Investments in Associates in Consolidated Financial
Statements

• (AS 24) Discontinuing Operations

• (AS 25) Interim Financial Reporting
• (AS 26) Intangible Assets
• (AS 27) Financial Reporting of Interest in Joint Ventures
• (AS 28) Impairment of Assets
• (AS 29) Provisions, Contingent Liabilities and Contingent Assets
Apart from these, there are 3 not mandatory Accounting Standards:

• (AS 30) Financial Instruments; Recognition and Measurement

• (AS 31) Financial Instruments; Presentation
• (AS 32) Financial Instruments; Disclosures
Generally Accepted Accounting Principles of USA (US GAAP)

Generally accepted accounting principles, or GAAP, are a set of rules that

encompass the details, complexities, and legalities of business and corporate
accounting. The Financial Accounting Standards Board (FASB) uses GAAP as the
foundation for its comprehensive set of approved accounting methods and practices.
U.S. law requires businesses that release financial statements to the public and companies
that are publicly traded on stock exchanges and indices to follow GAAP guidelines, which
incorporate 10 key concepts:

• Principle of regularity: GAAP-compliant accountants strictly adhere to

established rules and regulations.
Principle of consistency: Consistent standards are applied throughout the
financial reporting process.
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• Principle of sincerity: GAAP-compliant accountants are committed to accuracy

and impartiality.
• Principle of permanence of methods: Consistent procedures are used in the
preparation of all financial reports.
• Principle of non-compensation: All aspects of an organization's performance,
whether positive or negative, are fully reported with no prospect of debt
compensation.
• Principle of prudence: Speculation does not influence the reporting of financial
data.
• Principle of continuity: Asset valuations assume the organization's operations
will continue.
• Principle of periodicity: Reporting of revenues is divided by standard accounting
time periods, such as fiscal quarters or fiscal years.
• Principle of materiality: Financial reports fully disclose the organization's
monetary situation.
• Principle of utmost good faith: All involved parties are assumed to be acting
honestly.
GAAP compliance makes the financial reporting process transparent and standardizes
assumptions, terminology, definitions, and methods. External parties can easily compare
financial statements issued by GAAP-compliant entities and safely assume consistency,
which allows for quick and accurate cross-company comparisons.
Because GAAP standards deliver transparency and continuity, they enable investors and
stakeholders to make sound, evidence-based decisions. The consistency of GAAP
compliance also allows companies to more easily evaluate strategic business options.
These three rules are:
• Basic accounting principles and guidelines: These 10 guidelines separate an
organization's transactions from the personal transactions of its owners, standardize
currency units used in reports, and explicitly disclose the time periods covered by
specific reports. They also draw on established best practices governing cost, disclosure,
going concern, matching, revenue recognition, professional judgment, and conservatism.
• Rules and standards issued by the FASB and its predecessor, the Accounting
Principles Board (APB): The FASB issues an officially endorsed, regularly updated
compendium of principles known as the FASB Accounting Standards Codification. The
compendium includes standards based on the best practices previously established by
the APB. These organizations are rooted in historic regulations governing financial
reporting, which were implemented by the federal government following the 1929 stock
market crash that triggered the Great Depression.
• Generally accepted industry practices: There is no universal GAAP model followed by
all organizations across every industry. Rather, particular businesses follow industry-
specific best practices designed to reflect the nuances and complexities of different areas
of business. For example, banks operate using a different set of accounting and financial
reporting methods than those used by retail businesses.
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International Financial Reporting Standard (IFRS)

The International Financial Reporting Standards (IFRS) are accounting standards that
are issued by the International Accounting Standards Board (IASB) with the objective
of providing a common accounting language to increase transparency in the presentation
of financial information.

What is IASB?

• The International Accounting Standards Board (IASB), is an independent

body formed in 2001 with the sole responsibility of establishing the
International Financial Reporting Standards (IFRS).
• It succeeded the International Accounting Standards Committee (IASC), which was
earlier given the responsibility of establishing the international accounting
standards. IASB is based in London. It has also provided the ‘Conceptual
Framework for Financial Reporting’ issued in September 2010 which provides a
conceptual understanding and the basis of the accounting practices under IFRS.
The Principal Objective of the IFRS Foundation are:

• To Develop a single set of high quality, understandable, enforceable and globally

accepted International Financial Reporting Standards (IFRSs) through its
standard-setting body, the International Accounting Standard Board (IASB);
• To promote the use and rigorous applications of those standard;
• To take account of the financial reporting needs of emerging economics and small
and medium-sized entities (SMEs); and
• To promote and facilitate adoption of IFRSs, being the standards and
interpretations issued by the IASB, through the convergence of national
accounting standards and IFRSs.
List of International Financial Reporting Standards (IFRS)

Standard No. -Standard Title

• IFRS 01- First-time Adoption of International Financial Reporting Standards

• IFRS 02- Share-based Payment
• IFRS 03- Business Combinations
• IFRS 04- Insurance Contracts
• IFRS 05- Non-current Assets Held for Sale and Discontinue Operations
• IFRS 06- Exploration and Evaluation of Mineral Resources
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• IFRS 07- Financial Instruments: Disclosures

• IFRS 08- Operating Segments
• IFRS 09- Financial Instruments
• IFRS 10- Consolidated Financial Statements
• IFRS 11- Joint Arrangements
• IFRS 12- Disclosure of Interests in Other Entities
• IFRS 13- Fair Value Measurement
• IFRS 14- Regulatory Deferral Accounts
• IFRS 15- Revenue from Contracts with Customers
• IFRS 16- Leases
• IFRS 17- Insurance Contracts
• IAS 1- Presentation of Financial Statements
• IAS 2- Inventories
• IAS 7- Statement of Cash Flows
• IAS 8- Accounting Policies, Changes in Accounting Estimates and Errors
• IAS 10- Events after the Reporting Period
• IAS 11- Construction Contracts
• IAS 12- Income Taxes
• IAS 16- Property, Plant, and Equipment
• IAS 17- Leases
• IAS 18- Revenue
• IAS 19- Employee Benefits
• IAS 20- Accounting for Government Grants and Disclosure of Government
Assistance
• IAS 21- The Effects of Changes in Foreign Exchange Rates
• IAS 23- Borrowing Costs
• IAS 24- Related Party Disclosures
• IAS 26- Accounting and Reporting by Retirement Benefit Plans
• IAS 27- Separate Financial Statements
• IAS 28- Investments in Associates and Joint Ventures
• IAS 29- Financial Reporting in Hyperinflationary Economies
• IAS 32- Financial Instruments: Presentation
• IAS 33- Earnings per Share
• IAS 34- Interim Financial Reporting
• IAS 36- Impairment of Assets
• IAS 37- Provisions, Contingent Liabilities, and Contingent Assets
• IAS 38- Intangible Assets
• IAS 39- Financial Instruments: Recognition and Measurement
• IAS 40- Investment Property
• IAS 41- Agriculture
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Differences between US GAAP and IFRS

Transfer Pricing

Transfer pricing is the method used to sell a product from one subsidiary to another
within a company. This approach is used when the subsidiaries of a parent company are
measured as separate profit centers. Transfer pricing impacts the purchasing behavior of
the subsidiaries, and may have income tax implications for the company as a whole.
Here are the key issues:
• Revenue basis

• Preferred customers

• Preferred suppliers

Traditional Methods
• Market rate transfer price. The simplest and most elegant transfer price is to
use the market price. By doing so, the upstream subsidiary can sell either
internally or externally and earn the same profit with either option. It can
also earn the highest possible profit, rather than being subject to the odd profit
vagaries that can occur under mandated pricing schemes.
JAIIB_CAIIB_2024_NOTES_MCQs

• Adjusted market rate transfer price. If it is not possible to use the market
pricing technique just noted, then consider using the general concept, but
incorporating some adjustments to the price. For example, you can reduce the
market price to account for the presumed absence of bad debts, since corporate
management will likely intervene and force a payment if there is a risk of non-
payment.

• Negotiated transfer pricing. It may be necessary to negotiate a transfer price

between subsidiaries, without using any market price as a baseline. This
situation arises when there is no discernible market price because the market is
very small or the goods are highly customized. This results in prices that are
based on the relative negotiating skills of the parties.

• Contribution margin transfer pricing. If there is no market price at all from

which to derive a transfer price, then an alternative is to create a price based on a
component’s contribution margin.

• Resale Price Methods: The Resale Price (RP) while similar to the Cost plus
method, is found by working backwards from the transactions taking place at the
next stage in the supply chain and is determined by subtracting an appropriate
gross mark-up from the sale price, to an unrelated third party, with the
appropriate gross margin being determined by examining the conditions, under
which, the goods or services are sold and comparing the said transaction to other
third party Transactions.

• Cost-plus transfer pricing. If there is no market price at all on which to base a

transfer price, you could consider using a system that creates a transfer price
based on the cost of the components being transferred. The best way to do this is
to add a margin onto the cost, where you compile the standard cost of a
component, add a standard profit margin, and use the result as the transfer price.

• Cost-based transfer pricing. Have each subsidiary transfer its products to other
subsidiaries at cost, after which successive subsidiaries add their costs to the
product. This means that the final subsidiary that sells the completed goods to a
third party will recognize the entire profit associated with the product.
JAIIB_CAIIB_2024_NOTES_MCQs

JAIIB AFM Module A Unit 2- Basic Accountancy Procedures

Introduction

As with language, accounting has many dialects. There are differences in terminology. In
dealing with the framework of accounting theory, one is confronted with a serious
problem arising from the differences in terminology. A number of words and terms
have been used by different writers to express and explain the same idea or notion.

The various terms used for describing the basic ideas of accounting are: concepts,
postulates, propositions, basic assumptions, underlying principles, fundamentals,
conventions, doctrines, rules, etc.

Concepts of Accountancy

Accounting of often called the language of business through which a business house
normally communicates with the outside world. In order to make this language
intelligible and commonly understand by all, it is necessary that it is based on certain
uniform scientifically laid down standards. These standards are termed as accounting
principles.
Concepts

There following are the main accounting concepts

Cost Concepts: Every business transactions is recorded in the books of accounts at cost
price, e.g, the machinery is recorded in the books by that amount which is paid to the
supplier plus the expenses of bringing and installing the machinery which are necessary
to put it in working order.
Applications

• Fixed assets are kept at the cost of purchase and not their market value.
• Every transaction is recoded with the present value and not any future value.
• Unrealised gains are ignored.
• An item, that has no cost, is not taken in books
JAIIB_CAIIB_2024_NOTES_MCQs

Money measurement concept: Every transaction that is recorded in books of accounts

must be measured in terms of money. All the transactions are converted into a common
form, which is money. Example, quarterly production, sales, wages, etc, all are converted
in terms of money.
Applications

• Health of a proprietor or manager is not taken into the books although it may
have a great impact on the overall business.

• We do not include any inflation or deflation or deflation in the value of any asset.
Business entity Concept: This concept separates the entity of the proprietor from the
business transactions. The capital contributed by the owner is a liability for the
business because business, which is an artificial person, is different from owner.
Applications

• Any money withdrawn by the proprietor is treated separately as drawings.

• Profit is a liability while loss is an asset.
Realisation concept: This concept tells us when is the revenue treated as realized or
earned. It is treated as realized or earned on that date when the property in the goods
pass to the buyer and he becomes legally liable to pay.
Applications

• No future income is considered.

• Goods sold on approval will not be included in sales but taken at cost only.
• The rules of revenue recognition determines that the earning process should be
either complete or near completion.
Historical records Concept: In accounts, The historical cost principle states that
businesses must record and account for most assets and liabilities at their purchase or
acquisition price. In other words, businesses have to record an asset on their balance
sheet for the amount paid for the asset.
Going concern concept: This concept indicates that the business is a going concern and
the transactions are recorded accordingly. If an expense is incurred and its utility is
consumed during the year, then it is treated as an expense, otherwise it is recorded as
an asset.
Applications

• The fixed assets are valued at cost and not at market value.
• Current assets are valued at cost or the market value whichever is less.
• Depreciation is provided based on the total number of years of life of asset.
Balances of one year are carried forward to the next year.

• Reserves and provisions are created for any future liability.

JAIIB_CAIIB_2024_NOTES_MCQs

Matching concept: This concept explains that we have to match the income of a certain
period with expenses of that period only. The term matching refers to the close
relationship that exists between certain expired cost and revenues realized as a result of
incurring those costs. The justification of the matching concept arises from accounting
period concept.
Applications

• All adjustments regarding prepaid expenses, outstanding expenses are made in

the final accounts.

• Deferred revenue expenditure concept arises due to this.

Accounting period concept: An accounting period is the span of time covered by a set
of financial statements. This period defines the time range over which business
transactions are accumulated into financial statements, and is needed by investors so
that they can compare the results of successive time periods.
Main Conventions of Accounting

Accounting of full disclosure: Entries are made in such a way, that they provide
honestly all information relating to the activities of the business. The records should not
conceal anything from outsider. Secret reserves should not be maintained as per this
convention.
Convention of materially: All material information, must be recorded. What is material
depends upon the value of the item involved and circumstances of individual case of
business. Exp: Paisa is not recorded.
Convention of conservatism: While recording transactions, all possible losses must be
taken into consideration, while all anticipated profits should be ignored. This is also
called the principle of prudence.
Convention of consistency: If a method is selected for recording purposes, it must be
regularly followed in the future also. Whenever it is necessary to change, the impact of
such change must be given separately.

Going Concern Entity

The going concern concept of accounting implies that the business entity will
continue its operations in the future and will not liquidate or be forced to
discontinue operations due to any reason. A company is a going concern if no
evidence is available to believe that it will or will have to cease its operations in
foreseeable future.
An example of the application of going concern concept of accounting is the
computation of depreciation on the basis of expected economic life of fixed assets rather
than their current market value. Companies assume that their business will continue for
an indefinite period of time and the assets will be used in the business until fully
depreciated. Another example of the going concern assumption is the prepayment and
accrual of expenses. Companies prepay and accrue expenses because they believe that
they will continue operations in future.
JAIIB_CAIIB_2024_NOTES_MCQs

Double Entry System

There are two systems of keeping records, i.e.

• Single entry system and

• Double entry system
Single entry system

• The single entry system appears to be time saving and economical but it is
unscientific as under this system some transactions are not recorded at all,
whereas some other transactions are recorded only partially. Under the double
entry system of bookkeeping, both aspects of each and every transaction are
recorded. This is known as the dual aspect analysis. Under the single entry
system, only one aspect of the transaction, i.e. personal is recorded and the other
aspect is ignored.
• For example, in case goods are sold on credit to a customer, only the customer’s
account is opened and debited but the goods account is not opened. Under this
system, only the accounts which are absolutely necessary are maintained. Other
accounts, i.e. nominal and real accounts are not opened except cash. The
accounts maintained under this system are incomplete and unsystematic and,
therefore, the system is not reliable. The system is followed by small business
firms.
Double Entry System

• The double entry system is based on scientific principles and is, therefore, used
by most of the business houses. The system recognises the fact, that every
transaction has two aspects and records both the aspects of each and every
transaction.
• Under this system, in every transaction, an account is debited and some other
account is credited. The crux of accountancy lies in finding out which of the two
accounts are affected by a particular transaction and out of these two accounts,
which account is to be debited and which account is to be credited.

Principles of Double Entry System The following are the main principles of double
entry system:

• For every transaction, two parties must be interested.

• Every business transaction has two aspects, one of receiving the benefit and the
other of giving it. In simple words, ‘double entry’ system means ‘every debit has a
corresponding credit’.
• Both the aspects, are recorded in the books of account.
JAIIB_CAIIB_2024_NOTES_MCQs

• The two-fold effect of a business transaction is recorded by debiting one account

and crediting the other account at the same time.
Merits of Double Entry System

• It keeps a complete record of business transactions. Both, the personal accounts

and impersonal accounts are kept. The entire information regarding the value of
assets and profits earned during the year can be easily obtained.
• It provides a check on the arithmetical accuracy of both the accounts, since every
debit has corresponding credit to it and vice versa.
• The detailed profit and loss account can be prepared to show the profits earned
or the loss suffered during any given period.
• The system makes possible the comparison of purchases as well as sales,
expenditure, income, etc., of a current year, with those of the previous years, thus
enabling a businessman to control his business activities.
• The balance sheet can be prepared at any specified point of time or any date
showing the actual amount of assets, liabilities and capital.
• The system being a scientific one, prevents commission of fraud and, if a fraud is
committed, it can be easily detected.
• The accurate details, with regard to any account, can be easily obtained.

System of Keeping Recording

Single entry system: A single entry system records each accounting transaction with a
single entry to the accounting records, rather than the vastly more widespread double
entry system. The single entry system is centered on the results of a business that are
reported in the income statement.
Double entry system: The double-entry system of accounting or bookkeeping means
that for every business transaction, amounts must be recorded in a minimum of two
accounts. The double-entry system also requires that for all transactions, the amounts
entered as debits must be equal to the amounts entered as credits.
Principles of Double Entry system

The following are main principles of double entry system:

• For every transaction, two parties must be interested

• Every business transaction has two aspects, one of receiving the benefit and the other
of giving it. In simple words, “Double entry” system means “every debit has a
corresponding credit”.
• Both the aspects, are recorded in the books of account.
• The two-fold effect of a business transaction is recorded by debiting one account and
crediting the other account at the same time.
JAIIB_CAIIB_2024_NOTES_MCQs

Principle of Conservatism

The conservatism principle is the general concept of recognizing expenses and

liabilities as soon as possible when there is uncertainty about the outcome, but to only
recognize revenues and assets when they are assured of being received. Thus, when
given a choice between several outcomes where the probabilities of occurrence are
equally likely, you should recognize that transaction resulting in the lower amount of
profit, or at least the deferral of a profit. Similarly, if a choice of outcomes with
similar probabilities of occurrence will impact the value of an asset, recognize the
transaction resulting in a lower recorded asset valuation.
Under the conservatism principle, if there is uncertainty about incurring a loss, you
should tend toward recording the loss. Conversely, if there is uncertainty about
recording a gain, you should not record the gain.
The conservatism principle can also be applied to recognizing estimates. For example,
if the collections staff believes that a cluster of receivables will have a 2% bad debt
percentage because of historical trend lines, but the sales staff is leaning towards a
higher 5% figure because of a sudden drop in industry sales, use the 5% figure when
creating an allowance for doubtful accounts, unless there is strong evidence to the
contrary.
Accrual Concept
The accrual concept makes a distinction the receipt of cash and right to receive, it and
the payment of cash and the legal obligation to pay it. In actual business operations, the
obligation to pay and the actual movement of cash may not coincide. The accrual
recognises this distinction. In connection with the sale of goods, revenue may be
received.
• Before the right to receive arise, or
• After the right to receive has been created.

JAIIB AFM Module A Unit 3- Maintenance of Cash/ Subsidiary Books and

Ledger

Record Keeping Basics

Journal

The form of a journal contains a column Ledger folio. Journal records each transaction.
However, if anyone wants to find out transactions affecting a personal account or an
expense account, he will have to turn over pages of journal, add all debits and credits
and then find out the balance of a particular account.
Cash Book

The Book that keeps records of all cash transactions, i.e. cash receipts and cash
payments is called a cash book. Its ruling is like a ledge account and is divided into two
sides, viz, debit and credit. All receipts are recorded on the debit side whereas all
payment are recorded on the credit side. Since it serves the function of cash account,
there is no need for opening cash account in the ledger.
 JAIIB_CAIIB_2024_NOTES_MCQs

Accounting cycle includes the following:

Recording: In the first instance, all transactions should be recorded in the journal or
the subsidiary books as and when they take place.
Classifying: All entries in the journal or subsidiary books are posted to the appropriate
ledger account to find out at a glance the total effect of all such transactions in a
particular account.
Summarising: The last stage is to prepare the trial balance and final accounts with view
to ascertain the profit or loss made during a particular period and the financial position
of the business on a particular date.
Ledger

The Ledger is the principal book of accounts where similar transactions relating
to a particular person or property or revenue or expense are recorded. In other
words, it is a set of accounts. It contains all accounts of the business enterprise whether
real, nominal or personal. The main function of a ledger is to classify or sort out all the
items appearing in the journal or the other subsidiary books under their appropriate
accounts, so that at the end of the accounting period each account will contain the
entire information of all the transactions relating to it in a summarized or condensed
form.
Relationship Between ‘Journal’ and ‘Ledger’

BASIS FOR
JOURNAL LEDGER
COMPARISON

The book in which all the The book which enables to transfer
Meaning transactions are recorded, as and all the transactions into separate
when they arise is known as Journal. accounts is known as Ledger.
What is it? It is a subsidiary book. It is a principal book.
Also known as Book of original entry. Book of second entry.
Record Chronological record Analytical record

The process of recording The process of transferring entries

Process transactions into Journal is known as from the journal to ledger is known
Journalizing. as Posting.

How transactions
Sequentially Account-wise
are recorded?
Debit and Credit Columns Sides
Narration Must Not necessary.
Balancing Need not to be balanced. Must be balanced.
JAIIB_CAIIB_2024_NOTES_MCQs

Journalise the following transactions and post them in their respective ledger
accounts.
2016 Rs.
May 2 Paid interest to Loan 4,000
Ramesh who owed Rs.3,000 has become insolvent. He pays 50
May 3
paise in rupee in full settlement.
A cheque received from Ranjan deposited into bank was
May 4 6,300
returned dishonored.
May 5 Wood used for making office furniture. 5,000
May 21 Due from Rama are bad debts. 600
May 25 Purchased building and issued cheque. 4,300
Journal Entry
Dr. Rs. Cr. Rs.
Date Particulars L.F.
2016
May 2 Interest to Loan A/c Dr. 4,000
To Cash A/c 4,000
(Being interest payment made on loan)
May 3 Cash A/c Dr. 1,500

Bad Debts A/c Dr. 1,500

To Ramesh A/c 3,000

(Being 50 paise in rupee received from
Ramesh out of the debt
of Rs.3,000 in full settlement)
May 4 Ranjan A/c Dr. 6,300

To Bank A/c 6,300

(Being the cheque deposited into bank
dishonoured)
May 5 Furniture A/c Dr. 5,000

To Purchases A/c 5,000

(Being the wood used in making
office furniture)
Bad Debts A/c Dr. 600

To Rama A/c 600

(Being the bad debts written off )

May 21
May 25 Building A/c Dr. 4,300

To Bank A/c (Being 4,300

the goods purchased and payment
made through cheque)
JAIIB_CAIIB_2024_NOTES_MCQs

Account Categories

Classification of Accounts: Accounts are broadly classified into two classes:

• Personal Accounts and

• Impersonal Accounts

The Letter is further sub-divided into:

• Real Accounts
• Nominal Accounts

Personal Accounts

These accounts show the transactions with customers, suppliers, moneylenders, banks
and the owner.
Personal accounts can take the following forms:

• Natural Personal accounts: The term natural person means persons who
are the creation of God. For example, proprietor’s account, supplier’s account,
receiver’s account (Abhinav a/c, Alpa A/c).
• Artificial personal accounts: These accounts include the accounts of
corporate bodies or institutions that are recongnised as persons in business
dealings.
Example: firm’s a/c , club a/c.
• Representative personal account: These are accounts that represent a
certain person or group of person. Example: Salary outstanding, Rent prepaid
etc.
There following list indicates, some more of the usual accounts coming under each
category: (Personal accounts)

• Bank (an artificial Person)

• Tata Iron & Steel Co. (a Company)
• Alpa (an Individual)
• Capital (Abhinav –owner)
• Bank loan (an artificial person)
• Rent outstanding (representative personal account)
JAIIB_CAIIB_2024_NOTES_MCQs

Impersonal Accounts

Real Accounts
Real accounts may be of the following types:
Tangible real accounts: These are accounts of such things that are tangible, i.e, which
can be seen, touched, physically. Example: Land, building, cash etc.
Intangible real accounts: These account represent such things that cannot be touched.
Example: Trademarks, Patent right etc.
There following list indicates, some more of the usual accounts coming under each
category: (Real accounts)

• Plant and machinery

• Investment
• Land and building
• Stock in hand
• Bill receivable
• Trademarks
• Cash

Nominal Accounts
Nominal accounts are opened in the books to explain the nature of the transactions.
Example: Salary is paid to the employees, rent is paid to the property owner etc.
There following list indicates, some more of the usual accounts coming under each
category: (Nominal accounts)

• Interest
• Salaries
• Rent
• Carriage
• Commission received
• Insurance
• Discount received
• Wages
• Credit and Debit Concepp
JAIIB_CAIIB_2024_NOTES_MCQs

Accounting and columnar accounting mechanics

Cash book may be defined as the record of transactions concerning cash receipts and
cash payments. In other words, in cash book, all transactions (i.e receipts and payment
of cash) are recorded as soon as they take place. Cash book is in the form of an account
and actually it serves the purpose of a ‘Cash Account’.
Cash book thus serves the purpose of a book of original entry as well as that of a
ledger account. A cash book has the following features:

• Only cash transactions are recorded in the cash book.

• It performs the functions of both, the journal and the ledger, at the same time.
• All cash receipts are recorded in the debit side and all cash payments are
recorded in the credit side.
• It records only one aspect of transaction i.e, cash.
• All cash transactions are recorded chronologically in the cash book.

Types of Cash book

Simple (Single column) cash book: This cash book will only record cash transactions.
The cash coming in (receipts) will be on the left and the cash payments will be on the
right. And since we will record all cash transactions here there is no need for a cash
ledger account.
Date Particulars L.F Receipt Amount Date Particulars L.F. Vr. Amount
No. No.

Date: The date on which cash is received or paid is entered in this column.
Particulars: The name of the account in respect of which the amount is received or paid
is shown.
LF (Ledger folio): The column shows page number of the ledger where the entry has
been posted.
Two Column Cash Books
Here instead of one column, we have an additional column for discounts. So along with
the cash transactions, we will also record the discounts in the same cash book. So both
discounts received and the discount that is given is recorded here. If any organization is
in a general practice of giving or receiving discounts this is the preferable option.
Discount is a nominal account – so the discount is given (loss) is on the debit side and
discount received (profit) is on the credit side. At the end of the period, we balance both
columns and transfer the closing balances.
JAIIB_CAIIB_2024_NOTES_MCQs

Prepare a two column cash book from the following entries

Cash in Hand – 15000
Received from ABC – 4800; Discount – 200
Goods bought for cash 1500
Cash paid to LMN – 2400; Discount – 100
Cash Book

Sr Particular Cash Discoun Sr Particulars Cash Discoun Sr

N s t N t N
o o o

1 To Bal b/d 1500 1 By 1500

0 Goods Purchase A/
c

2 To ABC 4800 200 2 LMN A/c 2400 1000

A/c 0

By Bal c/d 5700

1980 200 2550 1000

0 0

To Bal b/d 5700

Three Column Cash Books

This cash book has the cash, the discount and additionally the bank columns in it. Since
the development of banking most firms, these days prefer to deal in cheques or other
such bills of exchange. And so having a bank column in your cash book makes things
concise and simpler to understand.
So when you receive a cheque and you deposit it in the bank the same day you make the
entry in the bank column (the debit side in this case). But say you send the cheque later
(not the same day) then this will be a contra entry. A contra entry is transactions that
happen between a cash account and a bank account. Ultimately your Cash & Bank
balance remains the same, the money just moves around.
JAIIB_CAIIB_2024_NOTES_MCQs

Petty Cash Book

In a firm, there are usually cash transactions happening in all the departments. These
we will record in one of the above formats of cash books. But there are many cash
transactions happening for very small amounts. Sometimes there are dozens of such
transactions that occur in just one day. These are known as petty transactions. Examples
are expenses for postage, stationery, traveling, food bills, etc.
So since the number of such transactions tends to be very high we maintain a separate
cash book for them – the petty cash book. Such a cash book is maintained by the petty
cashier (who in most cases also handles the petty cash).
Two types of petty cash book:

• Simple petty cash Book

• Columnar Petty cash Book

Journalising

Journalising refers to recording business transactions systematically and in a

summarised form in the journal. It means a process of entering the twofold effects of
transactions in the form of debt and credit in the journal.
Date Particulars L.F Debit Amount Credit Amount

(i) (ii) (iii) (iv) (v)

Date: In the first column the date of the transaction is entered, the year is most
probably written on the top of the column than to repeat it every day.
Particulars: Here the accounting entry is written in a summarised form of debit and
credit. The names of the accounts involved in the transaction are written in the journal
entry.
On the first line, the account is debited, the word “Dr.” is written at the right end of the
same line of account debited.
On the second line, the account credited is written with a prefix “To” after leaving a little
space towards the start.
Immediately below the entry, a small explanation of the transaction called ‘narration’ is
written. The narration begins with the word “Being”.
Ledger Folio No. (L.F.): In this column, the page number of the Ledger in which the
journal entry is posted, is recorded. This also helps is easy cross verification and
reference in the future.
Debit Amount: The amounts to be debited to the accounts concerned or involved are
written.
Credit Amount: The amounts to be credited to the accounts concerned or involved are
written.
JAIIB_CAIIB_2024_NOTES_MCQs

Rules for Journalising Transactions: (Golden rules of Accountancy)

Personal Account: It relates to persons(natural or legal) with whom a business keeps
dealings.
Rule: Debit the receiver and Credit the giver.
E.g. Goods worth Rs. 5000/- sold to Alpa. Here, because Alpa is the receiver of goods so
it is to be debited.
Real Account: It relates to property or goods which may come or go from the business.
Rule: Debit what comes in and Credit what goes out.
E.g. Goods worth Rs. 7000/- sold on cash. Here, cash a/c is to be debited because cash
flows out.
Nominal Account: It relates to business expenses, losses, incomes, and gains.
Rule: Debit all the expenses or losses and Credit all the incomes, gains or profits.
E.g. Paid Rs. 2000/- as commission to the agent. Here, commission a/c is debited
because it is a business expense.
Solved Example for You
Question: Journalise the following transactions in the Journal of Mr. Abhinav for
the year 2018
• January 1 – Paid rent Rs. 4000/-
• January 2 – Sold goods to Harsh for Rs.
10,000/Answer:
In the Journal of Mr. Abhinav

Date Particulars Debit Amount Credit Amount

2018 Rent A/c ………………. Dr. 4000

01/01 To Cash A/c 4000

(Being rent paid)

02/01 Harsh A/c ……….. Dr. 10,000 10,000
To Goods A/c

(Being goods sold to Harsh on credit)

Total 14,000 14,000
JAIIB_CAIIB_2024_NOTES_MCQs

JAIIB AFM Module A Unit 4- Bank Reconciliation Statement

Recording Transactions in cash Book

Record the following transactions in a bank column cash book for December
2019:
₹

01 Started business with cash 80,000

04 Deposited in bank 50,000

10 Received cash from Abhinav 1,000

15 Bought goods for cash 8,000

22 Bought goods by cheque 10,000

25 Paid to Alpa by cash 20,000

30 Drew from Bank for office use 2,000

Cash book

Dr. Cr.

Date Receipts L.F. Cash Bank Date Payments L.F. Cash Bank
₹ ₹ ₹ ₹

2019 2019

01 Capital 80,000 04 Bank C 50,000

Dec Dec
04 Cash C 50,000 15 Purchases 8,000
Dec Dec
10 Abhinav 1,000 22 Purchases 10,000
Dec Dec
JAIIB_CAIIB_2024_NOTES_MCQs

31 Rent paid by cheque 1,000

30 Bank C 2,000 25 Alpa 20,000

Dec Dec
30 Cash C 2,000
Dec
31 Rent 1,000
Dec
31 Balance 5,000 37,000
Dec c/d
83,000 50,000 83,000 50,000

Cash Book and Passbook

BASIS FOR CASH BOOK PASSBOOK
COMPARISON

Meaning A book that keeps a record of A book issued by the bank to the
cash transactions is known as account holder that records the
cash book. deposits and withdrawals is known
as passbook.
Understanding Reconciliation

The Bank statement is received periodically, say every month. We check it for clerical
and if any errors are found, we obtain a revised statement containing no errors. The
balance is this statement gives us a firm starting point to proceed for:

• Finding out entries which do not requires change in cashbook (these entries are
present in the cashbook but not in the bank statement). These entries give us the
‘Adjusted bank balance’.
• Finding out clerical mistake in our cashbook and rectifying them.
JAIIB_CAIIB_2024_NOTES_MCQs

Prepared by Firms Bank

Side affected Receipts will be shown in the Deposits will be shown in credit
debit side while payments side while withdrawals are shown
are entered in credit side. in debit side.

Preparation Discretionary Compulsory

Recording of cheque Date of deposit Date on which the amount is

deposited for actually collected from the debtor's
collection bank

Recording of cheque Date of issue. When the amount is paid by the

issued to the bank to the creditor.
creditor

What do the Debit balance shows cash at Debit balance shows overdraft
balances reflect? bank while the credit balance while the credit balance shows cash
shows overdraft. at bank.

• Finding out entries which require change in our cashbook (these entries are present
in the statement but not in the cashbook).

Preparing Reconciliation Statement

Based on these 3 steps, we can prepare a statement called “Bank Reconciliation”. It is

pertinent to note that step 1 gives the adjusted bank balance which is a national figure
and not the actual balance in the account with in bank while step 2 and 3 result in
actually changing the balance in the cashbook by correction of errors and posting of
missing entries. This cash book balance should be equal to the adjusted bank balance
as arrived in step 1. This is balance which goes to the trial balance and balance sheet.
Bank Reconciliation Statement as in___________
JAIIB_CAIIB_2024_NOTES_MCQs

Closing balance in bank statement Rs…………………………………..

Adjustments to the balance in the bank Rs ……………………….
statement
(a)Add: cheque deposited but not yet
Rs ………………………………..
credited
(b)Subtract: Cheque issued but not
presented to the bank for payment

Adjusted balance in the bank statement Rs ………………………. A

Balance as per cashbook Rs…………………..

Adjustment made to cashbook Rs. ………………..
(a)Add or subtract: clerical errors
(b) Add: Credit entries shown in the bank Rs………………….
statement but not appearing in cash book
Rs. ………………………
(c)Subtract: Debit entries shown in the
bank statement but not appearing in
cashbook Adjusted (corrected) cashbook Rs. …………………….B
balance
Need for Preparing a Bank Reconciliation Statement

• Accuracy
• Check on the Entries
• Rectifying Incorrect Entries
• Updated Cash Book
• Detection of Delays
• Check on the Dishonest Behavior of Employees

Example:
The cash book of Mr Abhinav shows Rs 8364 as the balance at the bank as on 31
December 2018, but you find this does not agree with the balance as per the bank pass
book, which shows a balance of Rs 15534.
On scrutiny, you find the following discrepancies:

• On 1st December, the payment side of the cash book was undercast by Rs100
• A cheque of Rs 131 issued on 25th December, was not taken in the bank
column.
• One deposit of Rs 150 was recorded in the cash book as if there is no bank
column therein.
JAIIB_CAIIB_2024_NOTES_MCQs

• On 18th December, the debit balance of Rs 1526 as on the previous day, was
brought forward as credit balance.
• Of the total cheque, amounting to Rs 11,514 drawn in the last week of
December, cheques aggregating to Rs 7815 were encashed in December.
• Dividend of Rs 250, collected by bank and, subscription of Rs 100, paid by it,
were not recorded in the cash book
• One out-going cheque of Rs 350 was recorded twice in the cash book.

Rough working: Correction of cash book for errors

Item Debit Credit

Deposit entry (shown in 150

cash column)

Wrong carry forward of 3052

balance

Outgoing cheque 350

recorded twice

Undercasting payment 100

side

Cheuqe issued 131

Total 3552 231

The bank reconciliation statement will be as under:

Closing balance in bank statement Rs 15534
Adjustments to the balance in the
bank statement
(a)Add: cheque deposited but not
yet credited
Rs 3699
(b)Subtract: Cheque issued but not
presented to the bank for payment

___________________________
Adjusted balance in the bank Rs 11835 A
statement
JAIIB_CAIIB_2024_NOTES_MCQs

Balance as per cashbook Rs 8364

Adjustment made to cashbook
(a)Add or subtract: clerical errors Rs. 3321
(b) Add: Credit entries shown in the bank Rs. 250
statement but not appearing in cash book
(c)Subtract: Debit entries shown in the
Rs. -100
bank statement but not appearing in
cashbook Adjusted (corrected) cashbook _______________________
balance
Rs. 11835 .B

How to prepare a Bank Reconciliation statement when extracts of cash Book

and Pass Book are given

When the cash book and pass book abstracts are given, the following points should
be noted.

• Find out the period for which both the abstracts are given
• Compare the cash book debit side with the pass book credit side and the cash
book credit side with the pass book debit side.
• When the period for which both the abstracts are given is common, i.e. the cash
book abstract relates to January and the pass book abstract is also given for
January, take into account only uncommon entries.
• When the period for which both the abstracts are given is uncommon, i.e, the
cash book relates to January but the pass book relates to February, take into
account only common entries.
• Where the period is same, uncommon entries will appear in the reconciliation
statement.
• When the period is different, common entries will appear in the reconciliation
statement.

Adjusting The Cash Book Balance

We have learnt that certain entries appear in the pass book first and then by comparing
the pass book with the cashbook, these missing entries are incorporated in the cash
book. The trader must know the correct bank balance at any time so that he can issue
cheques only to the extent of the available bank balance. Therefore, preparing a bank
reconciliation statement, the accountant makes the necessary corrections in the cash
book and adjusts the cash book balance.
The items, which can usually be adjusted in the cash book are:

• Payment made by bank as per standing instructions.

• Bank charges, interest on bank overdraft debited by the bank.
• Collection of interest in securities and dividend on shares by bank.
• Debits for the dishonor of cheques in the pass book.
JAIIB_CAIIB_2024_NOTES_MCQs

• Direct deposits made by customers of the trader.

• Errors committed in the cash book.

Advantages of Bank Reconciliation Statement

Following are the advantage of preparing the bank reconciliation statement:

• It helps the management to check the accuracy of the entries made in the cash
book.
• It helps to detect errors and to take timely action for the correction of balances.
• It is a very important control technique for the management.
• It shows the correct bank balance at any particular time
• It reveals frauds committed by the staff handling cash and cheques and thus,
helps the management to have effective control.

JAIIB AFM Module A Unit 5- Trial Balance, Rectification of Errors and Adjusting
& Closing Entries

Trial Balance
Multiple entries in various accounts will make a Ledger. Taking all the ledger
balances and presenting them in a single worksheet as on a particular date is Trial
Balance.
To understand a trial balance, we must first understand the following:
• Double entry system – Recording two entries for a single transaction that is
equal and opposite in nature
• Journal – All transactions recorded in double entry system of bookkeeping
• Ledger – Summary of all journals of a similar nature.
Features and Purpose of a Trial Balance
• It is a list of debit and credit balance drawn from ledger.
• It includes cash and Bank balance.
• Its main purpose is to establish arithmetical accuracy of transactions recorded in
the books of account.
• It is usually prepared at the end of the year but it can also be prepared any time,
as and when required, e.g, monthly, quarterly or half yearly.
• It enables the trader to know amounts receivable from customers and amounts
payable to suppliers.
• It facilities preparation of final accounts.
Types of Trial Balance and Preparation of Trial Balance There are two

types of Trial balance:

• Gross Trial Balance
• Net Trial Balance
JAIIB_CAIIB_2024_NOTES_MCQs

Gross Trial Balance

It is Prepared in the following stages:

• Take totals of debit and credit columns of each ledger account.

• Take totals of receipts and payments of cashbook showing separately cash, bank
and discount columns.
• Write names of all accounts as per the ledger and cash, bank and discount
accounts as per cash book onto a statement.
• Enter the debit and credit totals against each item.
• Finally take total of debit and credit columns.

Example:
On 31st March 2014, the totals of debit and credit sides of various ledger accounts and
receipts and payments sides of cash and bank columns of cash book of Mr. Abhinav are
as under:
Total of debit side (Rs.) Name of the account Total of credit
side (Rs.)

10, 000 Abhinav Capital 1,35,000

25,000 Drawings -

15,000 Stock on 31st March, 1996 -

1,90,000 Purchases 4,000

- Purchases Returns 18,000

6,000 Sales 2,45,000

13,000 Sales Returns --

12,000 Expenses -

3,05,000 Customers 2,50,000

2,00,000 Suppliers 2,35,000

1,00,000 Car -

2,81,000 Dena Bank 2,75,000

43,000 Cash 38,000

Solution
JAIIB_CAIIB_2024_NOTES_MCQs

Gross Trial Balance as on 31st March 2014

Name of the Account L.F Debit (Rs.) Credit (Rs.)

Abhinav Capital 10000 1,35,000

Drawings 25000 --

Stock on 31st March, 15000 --

2013

Purchases 190000 4000

Purchases Returns -- 18000

Sales 6000 2,45,000

Sales Returns 13000 --

Expenses 12000 --

Customers 3,05,000 2,50,000

Suppliers 2,00,000 2,35,000

Car 1,00,000 --

Dena Bank 2,81,000 2,75,000

Cash 43,000 38,000

Total 12,00,000 12,00,000

Net Trial Balance

Under this trial Balance, net balance of each amount are drawn and shown in trial
balance. If debit total of an account is more, it will show debit balance and of credit total
of an account is more, it will show a credit balance.
Net Trial Balance as on 31st march 2014
Name of the Account L.F Debit (Rs.) Credit (Rs.)

Abhinav Capital 1,25,000

Drawings 25000 --

Stock on 31st March, 15000 --

2013

Purchases 186000

Purchases Returns -- 18000

JAIIB_CAIIB_2024_NOTES_MCQs

Sales 2,39,000

Sales Returns 13000 --

Expenses 12000 --

Customers 55000 --

Suppliers 35,000

Car 1,00,000 --

Dena Bank 6000

Cash 5000

Total 4,17,000 4,17,000

Disagreement of a Trial Balance

Disagreement of a trial balance may be caused by the wrong totaling or balancing

of ledger accounts. While totaling the figure of subsidiary books there may arise some
errors that will cause disagreement of trial balance. Omission to post a ledger balance
also causes the disagreement of a trial balance.

Classification of Errors

Errors can be broadly divided into two type:

• Clerical Errors
• Principle Errors

Clerical Errors

• Errors of Omission,
• Errors of Commission, and
• Compensating errors.

Errors of Omission
The Errors of Omission will occur when a transaction is not recorded in the books of
accounts or omitted by mistake. The Errors of Omission two types.

• Partial
• Complete

The partial errors may happen in relation to any subsidiary books. This is the result of
when a transaction is entered in the subsidiary book but not posted to the ledger. For
example, cash paid to the suppliers has been entered in the payment side of the cash
book but it will not be entered in the debit side of the suppliers account.
JAIIB_CAIIB_2024_NOTES_MCQs

The complete omission may happen the transaction is completely omitted from the
books of accounts. For example, an accountant fails to enter a specific invoice from the
sales day book.
Errors of Commission
When a transaction is entered in the books of accounts in wrongly, this may be entered
as partially or incorrectly. This kind of errors are known as Errors of Commission. The
Errors of Commission may happens because of ignorance or negligence of the
accountant. This may be of different types, the main reasons are Errors relating to
subsidiary books and Errors relating to ledger. Following are some of the examples:

• Posting of correct amount but on the wrong side

• Posting of a wrong amount but on the correct side
• Posting of a wrong amount amount on wrong side of an account

Compensating Errors
Compensating Errors are those errors which compensates themselves in the net results
of the business. This means, if there are over debit in one account which will be
compensated by the over credit in some account in the same extent of the business. Like
that, if there is a wrong debit in one account which will be neutralized by some wrong
credit in the same extent of the business.
Errors of Principles
This kind of errors are occurs when the entries are made against the principle of
accounting. These Errors are made because of the following reasons:-

• Errors happens due to the inability to make a distinction between the revenue
and capital items.
• Errors happens due to the inability to make a difference between the business
expenses and personal expenses.
• Errors happens because of the inability to make a distinction between the
productive expense and nonproductive expenses.
JAIIB_CAIIB_2024_NOTES_MCQs

Rectification of Errors
One- sided Errors

• These errors affect only one account. Thus, these are one-sided errors. We can
rectify these errors by giving an explanatory note in the account or by passing a
journal entry with the help of Suspense A/c. When we detect an error before
posting to the ledger, we can correct it by simply crossing the wrong amount,
writing the correct amount above it and initializing it. Similarly, we can also
correct an error in the ledger account.
• Errors of casting, errors of carrying forward the balances, errors of balancing the
accounts, errors of posting the wrong amount in the correct account, error of
posting in the correct account on the wrong side, omitting to show an account in
the trial balance, posting in wrong side with wrong amount are the examples of
errors affecting the Trial Balance.
Two-sided Errors

• These errors affect two or more accounts simultaneously. Thus, these are
twosided errors. We can rectify these by passing a journal entry giving the
correct debit and credit to the accounts. In order to rectify an error, we need to
cancel the effect of wrong debit or credit by reversing it and restore the effect of
correct debit or credit.
• When there is short debit or excess credit in an account we need to debit the
concerned account. Whereas, when there is short credit or excess debit in an
account we need to credit the concerned account.
• Complete omission to record an entry in the journal or the subsidiary books,
incorrect recording of transactions in the books, complete omission of posting
and errors of principle are the examples of these errors.

Suspense Account

When the trial balance does not tally due to the one-sided errors in the books, an
accountant puts the difference between the debit and credit side of the trial balance on
the shorter side as the Suspense A/c. As and when we locate and rectify the errors, the
balance in the Suspense A/c reduces and consequently becomes zero. Thus, we cannot
categorize the Suspense A/c. It is a temporary account and can have debit or credit
balance depending upon the situation.
While using the Suspense A/c to rectify the one-sided errors, the accountant needs
to follow the following steps:

• Identification of the account with the error.

• Ascertainment of the excess debit or credit or short debit or credit in the above
account.
• In case of short debit or excess credit in an account, we need to debit the
concerned account. Whereas, in case of short credit or excess debit in an account
we need to credit the concerned account.
• Pass the necessary journal entry by debiting or crediting the Suspense A/c
JAIIB_CAIIB_2024_NOTES_MCQs

Example
Q: Trial Balance of M/s Srivastav Enterprises did not agree. It puts the difference to the
Suspense A/c. Rectify the following errors and prepare the Suspense A/c to ascertain
the original difference in the trial balance.
Amount paid for the installation of the machinery ₹10000 was posted to the Repairs
and maintenance A/c.
Total of Purchases book ₹50000 was not posted to the ledger.
Goods returned to John ₹3000 were recorded in Sales Book.
Salary paid to Ram ₹6000 was debited to his personal account.
Depreciation written-off on furniture ₹500 was not posted to the furniture account.
Ans: In the books of M/s Srivastav Enterprises

Date Particulars Amount Amount

(Dr.) (Cr.)

1. Machinery A/c Dr. 10000

To Repairs and Maintenance A/c 10000

(Being rectification of the wrong

journal entry in the Repairs and
maintenance A/c)

2. Purchases A/c Dr. 50000

To Suspense A/c 50000

(Being rectification of the omission

to post the total of purchases book
in the ledger)

3. Sales A/c Dr. 3000

To Purchases Return A/c 3000

JAIIB_CAIIB_2024_NOTES_MCQs

(Being rectification of wrong

recording of the purchases return in
the sales book)

4. Salary A/c Dr. 6000

To Ram’s A/c 6000

(Being rectification of wrong debit

to the personal account of an
employee)

5. Suspense A/c Dr. 500

To Furniture A/c 500

(Being rectification of omission of

posting in the furniture account)

Suspense A/c

Date Particulars Amount Date Particulars Amount

Difference as per 49500 2. By Purchases A/c 50000

Trial balance

5. To Furniture A/c 500

50000 50000

Entries Adjusting and Closing

Adjusting Entries

• Final Account are the accounts which are prepared at the end of the trading year.
These accounts show the final results of the business carried out. Final accounts
are prepared to find out profit earned or loss sustained by a concern.
JAIIB_CAIIB_2024_NOTES_MCQs

• At the end of the accounting year, all ledger accounts are balanced and then trial
balance is prepared. Form the trial balance, final accounts, i.e. trading, profit and
loss account and balance sheet are drawn. While preparing trading and profit
and loss account, all expenses and incomes for the full period are to be taken
into consideration. If expenses have been incurred but not paid or income is due
but not received, necessary entries are required to be passed to show the correct
picture of the business. These entries are called “Adjusting Entries’.

Closing Entries
At the end of cash year, all accounts of expenses and incomes must be closed. The
balance of these accounts are transferred to trading account and profit and loss account.
The entries passed to transfer these balances are called “Closing entries”.

JAIIB AFM Module A Unit 6-Depreciation and Its

Accounting
Depreciation

Depreciation is a charge to profit and loss account for the fall in value of an asset
during each year of its use.

• Depreciation is a part of the opening cost.

• It is a reduction in the value of the asset.
• The decrease in the value of an asset is due to its use, caused by wear and tear, or
by other reasons.
• The decrease in the value of an asset is gradual and continuous.

Causes of Depreciation

• Wear and tear due to actual use

• Obsolescence
• Accidents
• Fall in market price
• Efflux of time

Need for Depreciation

• To know the correct profit

• To show correct financial position
• To make provision for replacement of asset
JAIIB_CAIIB_2024_NOTES_MCQs

Factors of Depreciation

For calculating depreciation, the basic factors are:

• The cost of the asset;

• The estimated resident or scrap value at the end of its life;

• The estimated number of year of its commercial life.

Methods of Depreciation

The following are the various methods for providing depreciation:

• Fixed percentage on original cost or fixed instalment or straight line method.

• Fixed percentage on diminishing balance or reducing instalment methods or
written down value method.
• Units of production method
• Sum of years digits method
Straight line Method

• Straight line method, the cost of the asset is written off equally during its useful
life.
• Therefore, an equal amount of depreciation is charged every year throughout the
useful life of an asset.
• After the useful life of the asset, its value becomes nil or equal to its residual
value.
• Thus, this method is also called Fixed Instalment Method or Fixed percentage on
original cost method.
If an asset is used only for 3 months in a year then depreciation will be charged only for
3 months. However, for the Income Tax purposes, if an asset is used for more than 180
days full years’ depreciation will be charged.
Advantages

• It is the simplest method of calculating depreciation.

• It is easy to understand, as there is no variation in the amount of depreciation
charged from year to year.
Disadvantages

• The depreciation is equal for all the year, however, the expenditure on repairs
and renewal goes on increasing as the asset gets older, resulting in higher
amount charged to profit and loss account on account of deprecation and repairs
in the subsequent years.
Formula:
• Amount of Depreciation = (Cost of Asset – Net Residual Value) / Useful Life
• The rate of Depreciation = (Annual Depreciation x 100) / Cost of Asset
JAIIB_CAIIB_2024_NOTES_MCQs

Journal Entries for Straight Line Method of Depreciation

Example
Q. Abhinav purchased a machine on 1 Apr 2015 for ₹400000. The useful life of the
machine is 3 years and its estimated residual value is ₹40000. At the end of its useful
life, the machine is sold for 40000. Prepare the necessary ledger accounts in the books
of Abhinav for the year ending 31st December every year. Use SLM.
Ans: In the books of Abhinav Working
Notes:
Calculation of amount of depreciation
Depreciation = (Cost of Asset – Net Residual Value)/Useful life =
(400000 – 40000)/3 = 120000 p.a.
Machinery A/c
JAIIB_CAIIB_2024_NOTES_MCQs

Depreciation A/c

Diminishing Balance Method or Written-down Value Method

• According to the Diminishing Balance Method, depreciation is charged at a fixed

percentage on the book value of the asset.
• As the book value reduces every year, it is also known as the Reducing Balance
Method or Written-down Value Method.
• Since the book value reduces every year, hence the amount of depreciation also
reduces every year.
• Under this method, the value of the asset never reduces to zero.
Amount of depreciation=Book Value× Rate of Depreciation/100
Advantage

• This method is recognised under the Income-Tax Act and the Companies Act.
• The total expenditure on repairs and renewal and depreciation on asset are
equal in all year, as in the initial years the depreciation will be more and less and
in later years the expenditure on repairs will be high and depreciation less,
through both may not exactly compensate the decrease/increase in the other.
Disadvantage

• The asset can never be reduced to zero value on the books

• Difficult to understand, as there is variation in the depreciation charged from
year to year.
JAIIB_CAIIB_2024_NOTES_MCQs

Journal entry for Diminishing Balance Method of Depreciation

Example on Diminishing Balance method

Q. M/s. Srivastav and sons purchased a machine on 1 Apr 2015 for ₹400000 from
ABC & Co. and paid ₹100000 on its installation. The useful life of the machine is 3
years and its estimated residual value is ₹40000. On 31st March 2018, M/s.
Srivastav and sons sell the machinery for 250000.
Charge depreciation as per the W.D.V. method @10 % p. a. Prepare the necessary
ledger accounts in the books of Anil for the year ending 31st December every
year.
Ans: In the books of M/s. Srivastav and sons
Machinery A/c
JAIIB_CAIIB_2024_NOTES_MCQs

Working Notes:
Calculation of amount of depreciation
Amount of depreciation=Book Value × Rate of Depreciation/100

• 2015: Depreciation = 500000 x 10/100 x 9/12 = 37500

• 2016: Depreciation = 462500 x 10/100 = 46250
• 2017: Depreciation = 416250 x 10/100 = 41625
• 2018: Depreciation = 374625 x 10/100 x 3/12 = 9366
Calculation of loss on sale of machinery
Loss = Book Value on 1 Jan 2018 – depreciation for 3 months – cash received
= 374625 – 9366- 250000 = 115259

Units Of Production Method

• Accounting Standards in India (AS-10 and Ind AS-16) recognise 3 methods of

calculating depreciation.
• These are Straight line method, Diminishing Balance method and the Units of
Production method.
• This method is a usage based method.
• The depreciation amount is not based on passage of time but actual use of the
asset.
• This method is suited to those assets which depreciate in proportion to their use
rather than having a useful life measured in number of years.
JAIIB_CAIIB_2024_NOTES_MCQs

• In this method, the useful life is measured in term of production output or

number of units which an asset is capable of producing during its lifetime. This
method gives very accurate measure of the depreciation but suffers from the
drawback of the need to maintain elaborate records.
FORMULA:
Depreciation amount during a period = (Actual production or usage during the
period / of Total Expected Production or Usage during the asset life of the asset )×
Total depreciable amount
Example;
▪ Company ABC Ltd. Purchases a pen production machine. This machine can
manufacture 1,000,000 pens after which it will have to be scrapped. The
purchase price of the machine is Rs. 100,000 and the scrap value is estimated at
Rs. 10,000. During the first year of production, the machine produced 200,000
pens.
▪ The depreciation amount in the first year will be; = (200,000/1,000,000) ×
(100,000 – 10,000) = 0.2 × 90,000 = 18,000

Sum Of the Years Digits Method

According to SOYD method, to calculate the depreciated value we have to take the
expected life of an asset (in years0 count back to one and add the figures together. This
is a method of calculating deprecation of an asset that assumes a higher depreciation
charge and a greater tax benefit in the early years of an asset’s life.
Example
A new machine was purchased for Rs. 3 lac with 5 years economic life. What is
WDV at the end of 3rd year as per SOYD method?
Sum of Years Digit total = 5+4+3+2+1=15
Depreciation for 3 years = 12/15*300000=240000
WDV at the end of 3rd year = 300000-240000=60000
Example;
Company ABC Ltd. Purchases a pen production machine. This machine can
manufacture 1,000,000 pens after which it will have to be scrapped. The purchase
price of the machine is Rs. 100,000 and the scrap value is estimated at Rs. 10,000.
During the first year of production, the machine produced 200,000 pens.
The depreciation amount in the first year will be; = (200,000/1,000,000) × (100,000
– 10,000) = 0.2 × 90,000 = ` 18,000
JAIIB_CAIIB_2024_NOTES_MCQs

Replacement Of A Fixed Asset And Creation Of Sinking Fund

• Since depreciation expense is a non-cash expense (i.e. cash is usually paid out in
the year the asset is acquired, but the expense is distributed over several years),
• it is important to plan for the replacement of fixed assets as they wear out or
become obsolete.
• For example, some organisations set aside an amount of cash equal to the
amount of their yearly depreciation expense so that money will be available to
purchase a new asset once the current one is fully depreciated.
• Under this method, a ‘Depreciation Fund’ or ‘Sinking Fund’ is created and the
amount is invested in readily saleable securities.
• At the end of the life of the asset, the securities are sold and the sale proceeds of
the old assets are used for replacement of the asset.

Amortisation Of Intangible Assets

• Many of the intangible assets (e.g. patents, licences, trademarks, etc.) also have a
limited useful life.
• Therefore, it is logical to reduce their value in every accounting year before
carrying them to the new accounting year. This is called amortisation.
• Our discussion about depreciation, in this chapter, is equally applicable to
amortization.
• Indian Accounting Standard (Ind AS) 38, which deals with intangible assets,
describes amortisation as under; “Amortisation is the systematic allocation of the
depreciable amount of an intangible asset over its useful life.”
• This Standard defines an intangible asset as, “an identifiable non-monetary asset
without physical substance”.
• Some other examples of intangible assets are; Scientific or technical knowledge,
design and implementation of new process or systems, intellectual property,
copyrights, computer software, motion picture films, marketing rights, fishing
licences etc.

JAIIB AFM Module A Unit 7- Capital and Revenue Expenditure

Expenditure

Expenditure means spending on something. This can be a payment is cash or can

also be the exchange of some valuable item in exchange for goods or services. It is
the process of causing a liability by a commodity. Receipts and invoices keep the records
of expenditures. An expense is a word very similar to expenditure but expense shows
the deduction in the value of the asset while expenditure simply denotes the obtaining
of assets. Two types of expenditures are present on the basis of time durations, That
is
JAIIB_CAIIB_2024_NOTES_MCQs

• Capital expenditures
• Revenue expenditures
Capital Expenditures

These are expenditures for high-value items that holds longer duration
requirements. Capital expenditures are long-term expenditures. In other words,
when the expenses are made for a particular asset but they do not get completely
consumed in the specific time. Due to this the earning capacity increases, and in the
meanwhile, the price of the assets decreases. Example: Cash money spent on business
purposes, Purchasing of Plants and machinery items Etc.
Costs which are classified as Capital Expenditure

• Initial costs: These include purchase price including duties and non-refundable
taxes, costs directly attributable to bringing the asset to the location and
condition necessary for it to be operational. This is also applicable to acquisition
of intangible assets.
• Subsequent costs: These include costs of parts of some items of the assets
requiring replacement at regular intervals. These also include the costs of major
inspections for potential faults in the assets.
Some of the examples of the above costs are:

• Costs of employee benefits arising directly from the construction or acquisition

of the asset
• Costs of site preparation
• Initial delivery and handling costs
• Installation and assembly costs
• Costs of testing
• Professional fees
• Research of development expenditure
• All directly attributable costs necessary to create, produce and operate an
internally generated intangible asset
Revenue Expenditures

In contrast to the capital expenditure, revenue expenditures are not the highvalue
items, instead, they are the routine expenditures that takes place in the normal
business. In other words, this kind of expenditure maintains fixed assets.
Unlike capital expenditure, earnings do not increase but stay maintained in revenue
expenditure. The assets get consumed in an accounting year and no future benefits
are available.
JAIIB_CAIIB_2024_NOTES_MCQs

Capital VS Expenditure

Capital Expenditure Revenue Expenditure

Amount spent of usually large. Amount spent is relatively small.

The purpose is to improve or enhance The Benefit is short duration

business or productive or earning capacity

The benefit of long duration The benefit is short duration

It is non-recurring It is recurring

It is shown in balance sheet It is shown in profit and loss account.

Not matched with capital receipts Matched with revenue receipts

Receipts
Capital Receipts

Capital Receipts are from issue of Equity/ Preference share/ Capital Instruments or
from sale of Disposal of fixed Assets/Long Term investment or from Grants received
from Government for Building of Capital Assets. Capital receipts are not routed through
Profit & Loss account. However profit/loss, if any, arising from such transactions is
recorded in the P & L account.
Revenue Receipts

Revenue Receipts are from day to day operation of the company or receipts where is no
further obligation on the entry to perform certain actions. Revenue Receipts are routed
through Profit and loss account.
JAIIB AFM Module A Unit 8- Bills of Exchange

Types of Instruments of Credit

In a business, credit transactions play very important role. For manufacturing

goods, manufacturer purchases raw materials, the majority of which will be on
credit.
Credit may also be granted by a moneylender, a banker or financial institution. Credit is,
generally, provided by obtaining, a written document called ‘Instrument of Credit’. The
serves as a proof of existence of credit.

• Bills of Exchange
• Promissory Notes
JAIIB_CAIIB_2024_NOTES_MCQs

Bills of Exchange

• Drawer: A person who draws the bill.

• Drawee: A person on whom the bill is drawn
• Payee: A person who is going to receive money.
Features of Bills of Exchange

• A bill of exchange an instrument in writing.

• It is drawn and signed by the maker i.e. drawer of the bill.
• Contains an unconditional order to a person i.e. drawee.
• The specified amount is payable to the person whose name is mentioned in the
bill or to his order or to the bearer.

• It specifies the date by which amount should be paid. (Section 5 of Negotiable

Instrument Act).

• Payment of the bill must be in the legal currency of the country.

• It must be properly stamped.
• It must bear a revenue stamp.
Bills of Exchange Example
Mr. Abhinav srivastav draws a bill on Ms. Alpa jha for 3 months for ₹ 50,000, payable to
Mr. Niraj kumar or his order on 15th April 2019.
Mr. Abhinav srivastav has ordered Ms. Alpa jha to pay ₹ 50,000 to Mr. Niraj kumar. If the
order is acceptable to Ms. Alpa jha, he will write across the bill as follows:
Accepted
Ms. Alpa jha
Sector 56, Noida, UP
17th April 2019
When the drawee writes such acceptance on the bill, it becomes a bill of exchange.in the
above example Mr. Abhinav srivastav is the drawer of the bill, Ms. Alpa jha is the
acceptor and Mr. Niraj kumar is the Payee. Ms. Alpa jha will pay the amount to Mr. Niraj
kumar.

Promissory Notes

A written undertaking by the buyer to make a payment on a specified date can

take the form of a bill of exchange or a promissory note. We have seen earlier that a
bill of exchange is drawn by the creditor and accepted by the debtor. A promissory
notes, on the other hand, is written by the debtor (buyer) promising the creditor (seller)
to pay a specified sum after a specified period. Thus, it can be defined as:
JAIIB_CAIIB_2024_NOTES_MCQs

Features of Promissory Notes

• An instrument in writing
• Containing an unconditional undertaking
• Signed by the maker to pay a certain sum of money
• To or to the order of a certain person or the bearer of the instrument (section
4 of the Negotiable instrument Act)

In a case of Promissory notes, there are two parties:

• Maker: A person who makes the note and promises to make the payment.
• Payee: A person who is to receive money.

Or

• The holder: A holder is basically the person who holds the notes. He may be
either the payee or some other person.

Essential Elements of a Promissory Note

• Written notes
• Express undertaking
• Unconditional promise
• Specific amount
• Legal tender

Example:
JAIIB_CAIIB_2024_NOTES_MCQs

Difference between Bills of Exchange and Promissory Note

Bills of Exchange Promissory Notes

It is an unconditional order to pay It is an unconditional promise to pay.

It is made by a creditor. It is made by a debtor.

Acceptance by debtor is necessary No acceptance is required

On dishonor of a bill, it is usually noted by the Nothing is not necessary.

notary Public.

Cheque
Essential Features of cheque

• A cheque must have to fulfill all the essential elements of a bill of exchange.
• It must be payable to bearer or to order but in either case, it must be payable
on demand.
• The banker named pays it when it is presented for payment.
• The signature must tally with the specimen sign of the drawer kept in the
bank
• A cheque must be dated.
• A cheque drawn with a future is valid but the same is payable on or after such
specified period.

Difference between Bills of Exchange and Cheque

Bills of Exchange Cheque

A bill of exchange can be drawn upon any A cheque can be drawn only upon a bank.
person including a bank.

A bill of exchange requires acceptance. A cheque does not requires any acceptance

The acceptor of a bill of exchange is allowed A cheque is always payable on demand

three days of grace after the date maturity of
the bill.

Notice of dishonor is necessary Notice does not requires any stamp.

A bill of exchange must be stamped A cheque does not require any stamp.
JAIIB_CAIIB_2024_NOTES_MCQs

Term And Due Date Of A Bill

Every promissory note or bill of exchange which is not expressed to be payable on

demand, at sight or on presentment matures on the date it falls due. This period of a bill
is called ‘Term’ or ‘Tenor’ of the bill. The date of maturity in such cases is calculated
after adding three days of grace to the actual period of the bill. Let us suppose, a bill is
drawn on 1st March for a period of one month, then, its due date will be 1st April plus
three days of grace, i.e. 4th April. If the due date falls on a public holiday say 26th
January, then it becomes due on the previous working day, i.e. 25th January.

Accommodation Bill

Accommodation Bills are drawn and accepted with no consideration passed or

received. The Bill, which is drawn just to oblige a friend, who is in need of money, of
course without any trading activities, with sole intention of raising funds required for
ready cash is known as Accommodation Bill.
The accommodating party, i.e., the drawee accepts the Bill drawn by the accommodated
party (drawer). That is the Drawer of the accommodation bill can be called
accommodated party and drawee can be called accommodating party. After the Bill is
accepted, the drawer discounts it with a bank and obtains the cash.
Before the due date of the Bill, Drawer provides funds to the Acceptor, who honours the
Bill. Since the acceptance is given without consideration and to help the accommodated
party to raise the funds, the accommodated party has to discharge the Bill by himself or
provide funds to accommodating party.
Thus, there is always a mutual understanding between the parties and hence, these
bills are called Accommodation Bills.
Example:

Mr. A accepted a bill for Rs 20,000 drawn by B to enable the latter to raise funds at three
months on 1st October 2004. The bill was duly discounted by B at their Bank at 6% per
annum. On the due date B remitted the amount to the acceptor and the Bill was duly
met. Pass journal entries in the books of both the parties.
JAIIB_CAIIB_2024_NOTES_MCQs

Discount: 20,000 x 6/100 x 3/12 = Rs 300

Bill Books

Two types of Bill Books

• Bills Receivable Book

• Bills Payable Book

Bills Receivable Book

Bills receivable book is a book where all the bills, which are received, are recorded and
posted directly to the credit of respective customer’s account from there. The total
amount of bills so received during the period, either at the end of the week or month, is
to be posted to, in one lump sum, to the debit of the bills receivable account. The usual
form of bills receivable book, with imaginary figures is shown below.
N Date Fro Accep Date Term Date Wher Amo L. How Rema
o. of m tor of due e unt F Dispo rks
Recei who bill paya sed off
pt m ble

1 1/1/ A A 1/1/ 1mo 1/1/ Delhi 4000 - - -

20 20 nht 20
Bills Payable Book

This is a book where all particular relating to the bills accepted are recorded and ,
posted from there, directly to the debit of the respective creditor’s account. The total
amount of the bills so accepted during the period, either at end of the week or month, is
to be posted in one lump sum to the credit of bills payable account. The usual form of
‘Bill payable book’ with imaginary figures,
JAIIB_CAIIB_2024_NOTES_MCQs

N Date Draw Paye Dat Ter Dat Wher Amou L. How Remar
o. of n by e e of m e e nt F Dispos ks
Recei bill due payab ed off
pt le

Important Terms

• Honouring of Bill: When the drawee pays the amount of the bill on due date, the
bill is said to be ‘Honoured Bills’.
• Dishonour of Bill: When the drawee pays the amount of the bill on due date, the
bill is said to be ‘Honoured Bills’.
• Discounting of Bills: The drawer may discount the bill with the bank before the
due date. The bank charges discounting charges from the drawer at a certain
rate.
Thus, at the time of discounting the bank deposits the net amount after charging such
amount of discount in the account of the holder of the bill.
Discount = Amount of bill
× Rateofinterestordiscount/100 × Remainingperiodtomaturity/12

• Endorsement of bills: Transfer of bill to same other person by the holder.

• Retirement of bills: When a drawee pays the bill before its due date. It is called
retirement of bill.
• Renewal of bill: Renewal of bill of exchange is an act of cancellation of old bill
before its maturity in return of a new bill, including interest, for an extended
period. It is done by drawer on request of drawee.
• Accommodation of bill: An accommodation bill is a bill of exchange signed for
by a person (the accommodation party) acting as a guarantor. The
accommodation party is liable for the bill should the acceptor fail to pay at
maturity. Accommodation bills are sometimes also referred to as windbills or
windmills.
• Notary Public: A notary public of the common law is a public officer constituted
by law to serve the public in non-contentious matters usually concerned with
estates, deeds, powers-of-attorney, and foreign and international business.
• Rebate: When a bill is paid by drawee before due date, same allowance is given
to him. This allowance is called ‘Rebate’.

JAIIB AFM Module A Unit 9 - Operational Aspects Of Accounting Entries

Introduction

• Ultimate objective of recording the financial transactions is to prepare the

balance sheet and the P&L account

• Purpose: All the stakeholders get a fair picture of results of the operations of the
enterprise during the accounting period as also the financial position at the end
of the accounting period.

• Always in terms of number of monetary units.

JAIIB_CAIIB_2024_NOTES_MCQs

• Debit or credit entry: The accounting entry could be a debit entry or a credit
entry.

• Double entry system: Every credit/debit accounting entry should have one or
more corresponding debit/credit entry. Each such pair of accounting entries
affects two (or more) accounts in the ledger.
For example, if a customer deposits cash of Rs. 2,000 in a bank branch for credit to
his account, the pair of accounting entries:
Bank a/c (Customer a/c) Dr. 2000
To Cash A/c 2000
• Branch level operations in the bank result in initiating a large number of
accounting entries and it is very important to know how these should be dealt
with.
A peculiar feature of accounting entries in the bank is that these are :

• 1st entered in the ledger accounts concerned and then in the journal.
• In manual operations, the entries are entered in the physical ledgers by the staff
concerned.
• After that, all the entries in a particular ledger head are entered in the journal
(day book) and
• finally, the total is entered in the control account concerned of the General
Ledger which is used in preparing the balance sheet and the P&L account.
Any accounting entry in manual operations can only be made based on a physical
voucher which is authenticated by the authorised officer of the branch.
In case of computerised operations, the accounting entry in the system is made by the
staff concerned and authenticated by the official concerned. The system takes care of
the remaining operations affecting the day books and the GL.
The branch staff has only to enter the accounting entry, originated at the branch, to the
accounts concerned and all other operations till the preparation of financial statements
are automatically performed by the system.

But, it is still important to understand the manual system of accounting so that the staff
concerned is clear about the process involved and is able to reply to the queries of the
customers and auditors instead of claiming ignorance of the systems and procedures.

Peculiar Features Of Accounting System In Banks

• In the case of banks, the need for the ledger accounts, especially those of
customers, being accurate and up-to-date is much stronger than in most other
types of enterprises.
• A bank cannot afford to ignore its ledgers particularly those containing the
accounts of its customers and has to enter every transaction into the ledgers as
soon as it takes place.
JAIIB_CAIIB_2024_NOTES_MCQs

• In the case of banks, relatively lesser emphasis is placed on books of prime entry
such as cash books or journals.
• This is unlike most other types of enterprises where books of prime entry are
generally kept up-to-date while ledgers, including the general ledger and
subsidiary ledgers for debtors, creditors, etc. are written afterwards.

• Banks follow the accounting procedure of ‘voucher posting’ under which the
vouchers are straightaway posted to the individual accounts in the subsidiary
ledgers.

• At the end of each day, the debit and credit vouchers relating to a particular type
of transaction (e.g. savings bank accounts, current accounts, demand loans, cash
credit accounts, etc.) are entered on separate voucher summary sheets and the
total thereof is posted to the respective control account in the general ledger.
• The general ledger trial balance is prepared every day.
Types of Transactions

• Transactions in a bank are of two types, cash and non-cash. In the latter case,
also called ‘transfer transactions’, one or both of the accounts concerned may be
of the customers or the internal accounts of the bank.
• For example, if ‘A’ deposits a cheque drawn in his favour by ‘B’, who is also a
customer of the branch, the accounts of the two customers will be affected. On
the other hand, if ‘A’ deposits a draft drawn on the branch, the ‘Draft, account, an
internal account of the bank, will be debited. Likewise, on payment of interest on
deposit accounts, the ‘Interest Account’ at the branch will be debited and many
personal accounts credited.

Vouchers

Both debit and credit operations on all accounts, either by customers or by the bank
itself, are made by means of vouchers. There are two kinds of vouchers, one, which
evidences only debit or credit to an account, and the other, which contains both debit
and credit to different accounts. For the sake of convenience, the latter kind of vouchers
may be called ‘composite vouchers’.
The debit vouchers are, broadly the following:

• Cheques issued by the customers.

• Cheques/pay orders issued by the bank.
• Withdrawal forms received from the savings bank account holders.
• Drafts issued by other branches of the bank payable at the branch.
• Drafts issued by other banks on the branch, in terms of an approved
arrangement between the two banks.
• Dividend/interest warrants issued by the bank’s customers and payable by the
branch in terms of an approved arrangement.
• Travellers’ cheques issued by any branch of the bank which are presented to the
branch for payment.
JAIIB_CAIIB_2024_NOTES_MCQs

• Drafts/pay orders issued by the branch itself which are cancelled at the request
of the customer and amount is refunded to him.
• . Instruments like traveller’s cheques/gift cheques, etc., of other banks which are
paid by the branch in terms of an approved arrangement.
• Letters of authority signed by the customers, containing standing instructions.
• Debit vouchers prepared by the branch on its printed stationery which are
authorised by a designated official of the bank and may also carry authority from
the customers in some cases, if the debit is to his account at the branch.
• In respect of realisation of collection instrument sent to other branches of the
bank, a debit advice (which may be known by different names in different banks)
prepared by the other branch may itself act as a debit voucher.
• Term deposit receipts presented for payment, renewal or premature closure.
The credit vouchers which are also of many kinds broadly encompass the following:

• Pay-in-slips filled by the customers (depositors as well as borrowers) for deposit

of amounts in their accounts. Generally, the pay-in-slips are in a standard format
adopted by the bank but there may be cases of a special kind of pay-in-slips in
respect of some customers pursuant to a formal agreement between the bank
and the customer.
• Applications for issue of term deposits, demand drafts, RTGS/NEFT, banker’s
cheques, pay orders, gift cheques, travellers’ cheques and other similar
instruments. Some of these applications may be made on behalf of the branch
itself for the payments it has to make.
• Challans for deposits into the accounts of Central/State Government, e.g. on
account of direct/ indirect taxes or under schemes like public provident fund,
etc.
• Credit vouchers prepared by the branch on its printed stationery which are
authorised by an official of the bank. Normally, these vouchers are signed on
behalf of the branch only but there may be some instances where the customer
concerned also signs on the voucher as evidence that the transaction actually
pertains to him. Examples are: deposit of locker charges (credit to an income
account of the bank), deposit of money with the bank for purchase of non-
judicial stamps required for execution of documents in favour of the bank, etc.
• On payment of collection instruments from other branches of the bank, a credit
advice (which may be known by different names in different banks) or a copy of
the collection schedule received from the other branch may itself be treated as a
credit voucher.

Accounting Systems of Different Banks

• It is difficult to identify a single accounting system that describes all the features
of systems in operation in different banks as the accounting systems of different
banks vary in terms of hardware configuration, software capabilities, levels of
hardware and software security, and nature of transactions processed.

• The accounting system in a bank is designed keeping in view the nature and
volume of operations and information needs of the stakeholders.
JAIIB_CAIIB_2024_NOTES_MCQs

• Every big bank has customized banking software as per its own requirement and
as such, the accounting systems differ amongst different banks.
Illustration
PB branch of bank ABC Ltd. has a number of deposit accounts.
Mr. A also has his SB account in that branch.
On February 28, 2022, Mr. A had the following transactions concerning his account:
• Deposited Rs. 2,000 by cash
• Deposited cheque of Rs. 5,000 issued on the same branch by another customer,
Mr. B
• Cheque of Rs. 3,000 deposited earlier is paid through clearing
• Cheque of Rs. 4,000 issued to Mr. C is received at the branch in clearing
• Purchased draft for Rs. 6,000 on an outstation branch of the bank (Draft issued at
par by the branch)
(a) What will be the different entries in the account of Mr. A (assume opening balance of
Rs. 9,000) ?
(b) Which other accounts will be affected by each of the other entries?
(c) How the control account pertaining to Savings Bank, in the General Ledger, will
beaffected by the transactions in the account of Mr. A?
( a) The entries in the account of Mr. A, due to the above transactions, are given in
the following table:

(b) The accounts affected by the transactions in the account of Mr. A will be as
under:

• Deposit of Rs. 2,000 by cash will be credited to Mr. A’s account and result in a
debit entry of Rs. 2,000 in the cash account. This entry is part of the cash scroll of
the cashier concerned. The total of the cash scroll is taken in the cash book.
• Deposit of the cheque of Rs. 5,000 issued on the same branch by another
customer, Mr. B, will result in a transfer credit entry of Rs.5000 in the account of
Mr. A. The corresponding debit entry will be a transfer entry of Rs. 5,000 in the
account of Mr. B.
JAIIB_CAIIB_2024_NOTES_MCQs

• Payment received through clearing for a Cheque of Rs. 3,000 deposited earlier
will result in a credit entry (clearing-in) in the account of Mr. A and a debit entry
of Rs. 3,000 in the account of the bank conducting the clearing house.
• Cheque of Rs 4,000 issued to Mr. B is received at the branch in clearing will result
in debit to his account (clearing –out) and a credit entry of Rs 4,000 in the
account of the bank conducting the clearing house.
• Purchase of a draft for Rs. 6,000 on an outstation branch of the bank at par, will
result in debit entry of Rs. 6,000 in the account of Mr. A and credit entry of Rs.
6,000 in Inter- Office account/ Draft account
(c)At the end of the day, all the vouchers pertaining to the transactions in all the
Savings Bank accounts at the branch, including those pertaining to the
transactions in the account of Mr. A, will be entered in the SB Day Book.
The credit and debit summations of the Day Book will be entered in the respective
columns of the SB control account in the GL and the balance derived.
Separate vouchers are not prepared for ATM/Internet Banking/Mobile banking/system
triggered standing instructions/interest application, transactions. Such transactions are
processed and recorded by the system.)

JAIIB AFM Module A Unit 10 - Back Office Functions/ Handling Unreconciled Entries In
Banks

Introduction

• Back office consists of administration and support personnel in a financial

services company, who are not client facing.
• They are a major contributor to the banking business.
• With the introduction of computerisation in the banks, the roles of front office
and back office are changing and many of the activities, which were previously
performed by the front office, are now performed by the back office, resulting in
cost savings and economies of scale as also freeing the time for the front office
staff to focus on sales and servicing functions.

• Also, computerisation has eliminated the need of back office being a part of the
branch.

• Back offices may be located somewhere other than the bank branch or bank
office.

• One of the important functions of the back office is to reconcile the accounting
entries specially the inter office entries.
Functions Performed By The Back Office

• Back offices carry out various functions to support the front office activities.

• In specialised functions like Treasury operations and Forex, the back offices
perform the mainstream role of directly supporting the trading room or front
office by controlling confirmations and settlement transactions.
JAIIB_CAIIB_2024_NOTES_MCQs

The back office functions relating to the normal banking activities can be grouped
as under:
Book keeping and accounting:

• Transaction processing,
• Maintenance of General Ledger and other books of account,
• Balancing of branch accounts,
• Reconciliation of entries and sub-systems, • Rreparation of financial statements.
Deposits:

• Calculation and posting of interest,

• Service charges,
• Reminders for renewals of term deposits,
• nature of operation of account - single/jointly, etc.
Loans:

• Processing end-to-end loan originations or any aspect of loan servicing,

• Loan modification,
• Default management and collections,
• Calculation of EMIs,
• Calculation and posting of interest,
• Penal interest,
• Processing fee,
• Commission and prepayment charges,
• Processes implementation for credit products,
• Operational Limits,
• Risk management, etc.
Regulatory Compliance:

• Identifying KYC gaps,

• Customer grievance redressal system, etc.
E- banking:

• Handling transactions through internet,

• Mobile banking or ATMs,
• Card based payments, etc.
Other functions:

• Clearing, collection, remittances, etc.

JAIIB_CAIIB_2024_NOTES_MCQs

Reconciliation Function In Banks

The basic reconciliation functions in a bank can be divided into groups, as under:

Reconciliation of accounts for payments involving intermediaries

• Reconciliation of accounts with correspondent banks
• Reconciliation of bank accounts with RBI and other banks and institutions
• Reconciliation of intra branch entries and sub-systems
• Reconciliation of inter branch/office entries

Reconciliation Of Inter Branch/Office Entries

• Origination/Response (Reversal) of Inter Office Transactions Inter office

transactions mostly originate at branches.

• Each branch may have a number of transactions with other branches, as well as
with the head office of the bank.

• In many transactions, undertaken by the branch, one leg of the transaction

involved is Inter Office Account.

• For example, when a draft is issued, the account of the customer is debited and
the Inter office account is credited. This draft is paid by the other branch by
crediting the account of the payee and debiting the Inter Office account.

• The Inter Office entries of both the branches are reconciled and do not appear in
the statement of unreconciled entries.
The major types of transactions, which result in Inter Office debit or credit entry,
are:

• Issue of remittance instruments like drafts on other branches.

• Payment of remittance instruments like drafts drawn by other branches.
• Payment to/receipts from other branches of the proceeds of instruments
received/sent for collection/ realisation/clearing.
• Transactions through NEFT, ECS and RTGS.
• ATM transactions of the customer either at ATMs linked with other branches or
with merchant establishments.
• Transactions through payment gateways of ATM etc.
• Payment of instruments like gift cheques/banker’s cheques/interest
warrants/dividend warrants/ repurchase warrants/refund warrants/travelers
cheques, etc., which are paid by the branch on behalf of other branches which
have received the amount for payment of these instruments from the customers
concerned.
• Operations by the authorised branches on the bank’s NOSTRO accounts.
• Foreign exchange transactions entered into by the branch for which it has to deal
with the nodal forex department of the bank for exchange of rupees with foreign
currency.
JAIIB_CAIIB_2024_NOTES_MCQs

• Deposits and withdrawal of money by branches from the currency chest

maintained by another branch.
• Cash sent to/received from other branches.
Head office interest receivable and payable by the branches.
• Profit/loss transferred by the branch to head office.
• Government receipts and payments handled by the branch either as the nodal
branch or as an agent of the nodal branch.
• Internet based transactions other than inter account transfers with the same
branch.
• Credit card related transactions of the customers.
• Nostro Accounts of Indian branches maintained with overseas branches of the
bank.
• Capital Funds with the Overseas Branches.
• Head Office balances with the overseas branches including subordinated debt
lent to the overseas branches.
• Transactions from Overseas Branches.
• Payments made under LCs of other branches.
• GST transactions of Bank branches within a zone and Zonal or Head office.
Reconciliation of Inter – Office Transactions

• A debit/credit Inter Office transaction, originated at one branch, should result in

a corresponding credit/debit transaction (reversal entry) in the Inter Office
account at the other branch.

• There may be a time lag in the case of some types of transactions like drafts
issued. Therefore, every entry in the Inter Office account should be reconciled
with a corresponding entry in the account at another branch/office of the bank.

• The unreconciled inter-office entries indicate the existence of errors or, more
seriously, of frauds.
Illustration

• Branch A issues a draft for Rs. 5,000 on branch B of the bank.

• The account of the customer is debited for Rs. 5,000 and the Inter office account
is credited by Rs. 5,000.
• The branch includes this entry in the daily statement of inter office account,
submitted to the centralised reconciliation department(CRD).
• This draft is paid after 2 days by the branch B by crediting the account of the
payee and debiting the Inter Office account as a responding entry.
• Branch B sends the daily statement to the centralised reconciliation department
and the responding entry of Rs.5,000 is included in it.
• The central reconciliation department matches the originating and responding
entries and these do not appear in the statement of unreconciled entries
prepared by the department.

• What happens if branch A has not issued the draft and the draft paid by the
branch B is a forged one.
JAIIB_CAIIB_2024_NOTES_MCQs

• In this case, there will not be any entry pertaining to this draft in the daily
statement of Branch A, while the daily statement of branch B will contain a
responding entry of Rs.5,000.
• The CRD will not be able to match the responding entry and it will appear as an
unreconciled entry in the statement prepared by the department.

• Follow up by the staff of CRD will reveal the fact of payment of forged draft.
In core banking systems, office accounts are bifurcated between accounts which
have a requirement of entering a mandatory reference number while passing the
entry (pointing) and accounts which do not have such a mandate (non-pointing).

• In case of pointing accounts, the reconciliation process is easier as the entries

can be knocked off based on the reference number and each outstanding entry
outstanding on the reporting date can be identified.
• In case of non-pointing accounts, reconciliation requires manual intervention
and tracking due to non-availability of a unique reference number. Thus in most
of the above mentioned types of transactions, which need to be reconciled, the
reconciliation is automatically executed by the system.

• As such, monitoring is required only in those cases, where manual intervention is

required.
The typical and most common types of errors observed in office accounts are as
under:

• Recording of particulars in incorrect fields.

• Posting of transactions in incorrect office accounts.
• Errors in writing the amounts.
• Double recording of the same transaction.
• Squaring off the transaction by the same amount without checking the
transactions.
• Forced matching of transactions.
RBI guidelines regarding Inter office entries

• Considering the fraud prone nature and the fact that there are large number of
transactions in inter-office account and the non-reconciliation is widely
extended across the banks, RBI has taken a number of measures to achieve an
expeditious reconciliation of these transactions by the banks concerned.

• Non- reconciliation results in a ‘fraud risk factor’.

Certain objectionable practices observed by RBI in respect of office accounts are as
follows:

• Disguising the cash transactions of customers to avoid and bypassing reporting

of Cash/Suspicious Transactions.
• Misuse of funds and indulgence in window dressing by disbursal or repayment of
loan through Office Account General Ledger.
JAIIB_CAIIB_2024_NOTES_MCQs

Reference number keying in requirements not made mandatory in case of

pointing accounts.
• Opening of saving and current account and routing their transactions through
office accounts.
• Dummy debits to the office account and credit to the borrowers account and
then reversing the entries to maintain the “standard” status of borrower or to
prevent the account from becoming NPA.
• Netting off liability related GLs with debit balances with credit
• balances in other GLs resulting in disclosing net outstanding in Financials of the
Bank.
Many income accounts do not have debit freeze or reference id for reversing
charges.

• RBI had instructed the banks to reconcile the entries outstanding in their inter
branch accounts within a period of six months.
• Banks have been advised by RBI to segregate the credit entries outstanding for
more than five years in inter-branch accounts and transfer them to a separate
Blocked Account which should be shown in the balance sheet under the head
‘Other liabilities and provisions–Others’ (Schedule 5).
• While arriving at the net amount of inter-branch transactions for inclusion in the
balance sheet, the aggregate amount of Blocked Account should be excluded and
only the amount representing the remaining credit entries should be netted
against debit entries.
• Banks have been advised that any adjustment from the Blocked Account should
be permitted only with the authorisation of two officials, one of whom should be
from outside the branch concerned, preferably from the controlling/head office if
the amount exceeds a particular amount.
• RBI had also advised the banks to maintain, beginning April 1, 1999,
categorywise (head-wise) accounts for various types of transactions put through
interbranch accounts so that the netting can be done category-wise.
• Further, considering the fact that an unreconciled debit entry in the Inter Office
account may not represent an asset as a result of fraud or otherwise, the Reserve
Bank of India vide its circular DBOD. No.BP.BC.73/21.04.018/2002-03 dated
February 26, 2003 has advised the banks to make provision against the net debit
balance in the inter-branch account in respect of entries outstanding for more
than six months.
▪ Accordingly, banks are required to arrive at the category-wise position of
unreconciled entries outstanding in the inter-branch accounts for more than six
months as on March 31 and make provision equivalent to 100 percent of the
aggregate net debit under all categories.
While doing so, the banks are required to ensure that:

• The credit balance in the Blocked Account created is also taken into account; and •
The net debit in one category is not set-off against net credit in another category.
JAIIB_CAIIB_2024_NOTES_MCQs

JAIIB AFM Module A Unit 11 – Bank Audit & Inspection

Introduction

• Book: “An Introduction to Indian Government Accounts and Audit”

Issued by: The Comptroller and Auditor General of India,
• Defines audit as: “An instrument of financial control. It acts as a safeguard on
behalf of the proprietor (whether an individual or group of persons) against
extravagance, carelessness or fraud on the part of the proprietor’s agents or
servants in the realization and utilisation of the money or other assets and it
ensures on the proprietor’s behalf that the accounts maintained truly represent
facts and that the expenditure has been incurred with due regularity and
propriety. The agency employed for this purpose is called an auditor.”

• In India, the Companies Act, makes audit of company accounts compulsory.

• Chapter X of the Companies Act, 2013 deals with the appointment of auditors,
their removal, resignation, eligibility, qualification, disqualification,
remuneration, powers and duties and auditing standards.
Role Of Audit and Inspection

• With the increase in the size of the companies and the volume of transactions,
the main objective of audit shifted to ascertaining whether the accounts were
true and fair, rather than true and correct.

• Hence the emphasis was not on arithmetical accuracy but on a fair

representation of the financial efforts.

• The later developments in auditing pertain to the use of computers in accounting

and auditing.

• With the advent of technology and rapid changes taking place in technology and
emergence of various risks, the importance of data analysis has increased to a
great extent.
Computer Aided Audit Techniques (CAATs) have become a part of the audit to
process data of audit significance and to improve the effectiveness and efficiency of the
audit process.

• Thus, while the overall objective and scope of audit do not change simply
because the

• data is maintained on computers,

• the procedures followed by the auditor in his study and evaluation of the
accounting system and related Internal Controls

• the nature, timing and extent of his other audit procedures are affected in a
Computerised Information System environment.
JAIIB_CAIIB_2024_NOTES_MCQs

• Audit procedures are now transformed from ‘Auditing around the computer’ to
‘Auditing through the computer’.

• The incidental objectives of auditing are detection and prevention of errors and
frauds.
Limitations:

• The auditor’s work involves exercise of judgment and he can only express an
opinion. He has to depend on explanations by others.

• Certain non-monetary facts can’t exhibit the true position.

• Auditor can’t check each and every transaction.

• Audit involves a systematic and scientific examination of the books of account

and records of a business entity to confirm that the profit and loss account and
the Balance Sheet are properly drawn up to exhibit a true and fair picture of the
financial state of affairs of the business and results of the financial period.

• It is also meant to cross check that the applicable regulatory provisions have
been adhered to.

• Audit provides comfort to the users of the financial statements of a business that
the information available in the statements can be relied upon.

• Banking sector deals with large amounts of public monies exposed to various
risks in its operations. It is important that the banking sector stays healthy, safe
and stable.

• Quality bank audit plays a crucial role to ensure this.

• Banking operations are mainly conducted at the branches, while other offices act
as controlling authorities or administrative offices.

• These offices lay down policies, systems and Internal Control procedures so that
the conduct of business is in compliance with the statutory/regulatory
provisions and in compliance of accepted accounting principles and practices
that cover all transactions and economic events.

• The transactions in banks are voluminous and it should be ensured that in the
system of recording, transmission and storage of information/data, is free of
risks of errors, omissions, irregularities and frauds.

• Bank managements continuously endeavour to make the internal control

systems robust, safe and secure.

• Bank audit is the procedure of reviewing the financial statements, services and
procedures adopted by Banks as required under various legislations and the
guidelines of Reserve Bank of India.

• It is the routine procedure that all banks must undergo in order to ensure that
they are in compliance with industry standards and regulatory norms.
JAIIB_CAIIB_2024_NOTES_MCQs

Emergence Of Risk-Based Internal Audit (RBIA) and Its Significance

The internal audit system in banks, historically, concentrated on

• Transaction testing,
Testing of accuracy
• Reliability of accounting records and financial reports, • Integrity, reliability and
timeliness of control reports,
• Adherence to legal and regulatory requirements.
However, in the changing scenario, the scope of internal audit has widened to evaluate
the adequacy and effectiveness of risk management procedures and internal control
systems adopted by the banks.
Thus, RBI vide circular dated December 27, 2002, had introduced Risk-Based Internal
Audit (RBIA) system in Scheduled Commercial Banks.
(SCBs) as part of their internal control framework.
This was further supplemented vide circular dated January 07, 2021.
This framework relies broadly on

• Well-defined policy for internal audit,

• Functional independence with sufficient standing,
• Effective channels of communication
• Adequate audit resources with sufficient professional competence.
The internal audit function of banks is expected to proactively identify the new risks to
ensure that appropriate controls are in place to mitigate them.
The Guidance Note of Reserve Bank of India on RBIA/RBS states that the audit function
should provide high quality counsel to management on effectiveness of risk
management and internal controls including regulatory compliance by the Bank.

• The Risk-Based Internal Audit would not only offer suggestions for mitigating
current risks but also anticipate areas of potential risks and plays an important
role in protecting the bank from various risks.

• The implementation of Risk-Based Internal Audit would mean that greater

emphasis is placed on the internal auditor’s role in mitigating risks.

• Risk-Based Internal Auditing is a methodology that links internal auditing to an

organisation’s overall risk management framework.

• RBIA allows internal audit to provides an assurance to the Board of Directors

and the Senior Management on the quality and effectiveness of bank’s internal
controls, risk management and governance related systems and processes.

• RBIA is not about auditing risks but about auditing the management of risk.
• It focuses on the process applied by the management team to respond to risks.
JAIIB_CAIIB_2024_NOTES_MCQs

• Focus is shifted from the historical internal audit system of fullscale transaction
testing to risk identification, prioritization of audit areas and allocation of audit
resources in accordance with the risk assessment.

• Not only covers assessment of risks at the branch level but also covers,

• as an independent assessing authority,

• assessment of risks at the corporate level

• overall process in place to identify, measure, monitor and control risks.

• Banks are encouraged to adopt the International Internal Audit standards, like
those issued by the Basel Committee on Banking Supervision (BCBS) and the
Institute of Internal Auditors (IIA).
To bring uniformity in approach followed by the banks, as also to align the
expectations on Internal Audit function with the best practices, RBI has issued
instructions to the banks, a gist of which is as under:

• Authority, Stature and Independence

• Competence
• Staff Rotation
• Tenor for appointment of Head of Internal Audit
• Reporting Line
• Remuneration
• Outsourcing
• Documentation
Types Of Bank Audits

As banks accept deposit from the public and also lend funds, authenticity and reliability
of accounts is a must for public confidence. Keeping this view in mind, banks are
subjected to multiple types of audit. Bank Audit can be classified into three broad
categories: -

• Concurrent Audit
• Internal Audit/Information System Audit
• Statutory Audit
Concurrent Audit

• Concurrent audit is an examination which is contemporaneous with the

occurrence of transactions or is carried out as near thereto as possible.
• It attempts to shorten the interval between a transaction and its examination by
an independent person.
• It is a continuous audit, which goes on all the year around, usually conducted by
external auditors (chartered accountants) on a monthly basis.
• In Concurrent Audit, daily basic transactions are examined and checked. This
ensures that any irregularities are nipped in the bud. There is an emphasis in
favour of substantive checking in Key areas rather than test checking.
JAIIB_CAIIB_2024_NOTES_MCQs

• Through Concurrent Audit, any irregularities or non-conformities are easily

found out as and when they happen and are rectified immediately; thereby
avoiding the piling up of irregularities which may become a huge problem for
any branch when the year-end audit comes around.
Concurrent Auditors check daily maximum cash balance adherence compliance,
KYC norms compliance, proper documentation of new loan disbursements,
whether new loans have been made as per rules and regulations, revenue
leakages etc. among other things like putting any new RBI instructions to work.
Any exceptions are reported in the Concurrent Audit Report.
• Concurrent Audit is a measure to help a Branch to work smoothly and rectify any
mistakes to avoid the cascading effect of the irregularities.
RBI’s Guidelines on Concurrent Audit System in Commercial Banks

RBI has revised the guidelines on Concurrent Audit System in Commercial Banks vide
RBI Circular Reference No. DBS.CO.ARS.No.BC.01/08.91.021/2019-20 dated 18th
September 2019. Concurrent audit aims at shortening the interval between a
transaction and its independent examination. It is, therefore, integral to the
establishment of sound internal accounting functions and effective controls and is
regarded as part of a bank’s early warning system to ensure timely detection of serious
errors and irregularities, which also helps in averting fraudulent transactions and
preventive vigilance in banks.
The revised guidelines cover the following:

• Coverage
• Appointment of Auditors
• Accountability • Tenure
• Remuneration
• Review of effectiveness of Concurrent Audit
• Reporting System
Internal Audit/Information Systems Audit

Internal Audit
Internal Audit is generally undertaken by bank’s own staff and to some extent by the
firms of Chartered Accountants.
• Aimed: At ensuring the accuracy and correctness of the books of account of
banks.
• One of the broad objectives: Detection of frauds, along with detection of errors,
omissions, irregularities etc.,
• Internal auditor’s job in banks: Invariably include detection of perpetrated
frauds.
• It cannot be denied that frauds have virtually engulfed the entire banking sector
be it public, private or foreign banks.
JAIIB_CAIIB_2024_NOTES_MCQs

• Considering the adoption of liberalised policy in the Indian Economy and the
sweeping changes in the banking scenario, an auditor’s priorities should
centre around detection of frauds inter alia other important objectives of
the audit of banks.

• Many banks are conducting Internal Audits instead of Concurrent Audits or even
in addition to the Concurrent Audits.

Important aspects to be considered about Internal Audit are:

• Internal Audit’s important role in overall governance mechanism of the Banks,

• Role of Risk-Based Internal Audit in evaluating & improving the effectiveness of
Risk Management and governance processes
• Risk-Based Internal Audit Procedures
• Role of Internal Audit in Risk Management
• Evaluation of Financial Information through analysis of non-financial data
• Auditing and Assurance Standards.
Information Systems Audit (IS)
• In the past decade, with the increased technology adoption by Banks, the
complexities within the IT environment have given rise to considerable
technology related risks requiring effective management.
• This led the Banks to implement an Internal Control Framework, based on
various standards and their own control requirements and the current RBI
guidelines.
• As a result, Bank managements and RBI, need an assurance on the effectiveness
of internal controls implemented and expect the IS Audit to provide an
independent and objective view of the extent to which the risks are managed.
IS Audit is a process of collecting and evaluating evidence/information to determine
whether a computer system could:

• Safeguard its assets (hardware, software and data) through adoption of

adequate security control measures;
• Maintain data integrity;
• Achieve goals of the organisation effectively; and
• Result in the efficient use of the available information System resources.
Reserve Bank of India Guidelines on Information Systems Audit

Reserve Bank of India has been taking many initiatives in sensitising Banks to the risks
and concerns that emerge from adoption of information Technology. Various Committee
reports, instructions and circulars have been issued from time to time towards assisting
banks in adopting sound Information System Audit policy framework and practices on
Information Security, Electronic Banking, Technology Risk Management and Cyber
Frauds.
JAIIB_CAIIB_2024_NOTES_MCQs

Final guidelines in these areas were issued by RBI vide its circular dated 29th April,
2011. These Guidelines cover the following areas:

• Information Technology (IT) Governance

• Information Security
• Information Systems Audit
• Information Technology (IT) Operations
Information Technology (IT) Services
• Outsourcing
• Cyber Fraud
• Business Continuity Planning
• Customer Awareness Programmes & Legal aspects
Scope of IS Audit

• Determining effectiveness of planning and oversight of IT activities

• Evaluating adequacy of operating processes and Internal controls
• Determining adequacy of enterprise-wide compliance efforts, related to IT
policies and Internal Control procedures
• Identifying deficient controls, recommend corrective action to address
deficiencies and follow-up and to ensure that the management effectively
implements the required actions.
Computer-Assisted Audit Techniques (CAATs)

IS Audit Function needs to enhance the use of CAATs, particularly for critical functions
or processes carrying financial or regulatory or legal implications. The extent to which
CAATs can be used will depend on factors such as efficiency and effectiveness of CAATs
over manual techniques.
CAATs may be used in critical areas like:

• Detection of revenue leakages

• Treasury Functions
• Assessing impact of control weaknesses
• Monitoring customer transactions under AML requirements
• Areas where large volume of transactions are reported
CAATs may be used to perform the following audit procedures among others:

• Test of transactions and balances, such as recalculating interest

• Analytical Review procedures, such as identifying inconsistencies or significant
fluctuations
• Compliance tests of general controls: testing set up or configuration of the
operating system or access procedures to the programme libraries
• Sampling programmes to extract data for audit testing
• Compliance tests of application controls such as testing functioning of a
programmed control
• Re-calculating entries performed by the entity’s accounting Systems
• Penetration testing
JAIIB_CAIIB_2024_NOTES_MCQs

Statutory Audit

Introduction As per the Banking Regulation Act, 1949, annual Financial Statements in
the form of Profit and Loss Account and Balance Sheet are required to be audited in
accordance with the requirements of applicable statutes.
Salient Features

• It is conducted by a ‘Statutory Auditor’ - the word ‘Statute’ means - mandated or

compulsorily required by any law or Act.
• In case of Banks, sub-section (1) of Section 30 of the Banking Regulation Act,
1949 requires that the Balance Sheet and Profit and Loss account of a banking
company should be audited.
• Independent audit of financial statements of Banks is important for a healthy,
safe and sound banking system.
• Statutory audit does not look at the intricacies of the banking transactions
(which are looked into by concurrent and Internal audits); instead they rely on
the concurrent audit & internal Audit Reports and test checking to form their
opinion.
• Statutory audit mainly looks at the loans and advances, Compliance with
Priority Sector Lending (PSL) requirements, CRR, SLR, CRAR
Stages in Statutory Audit
There is a sea change in banking as use of technology and its continuous evolution has
enabled banks to provide its customers comfort of anytime, anywhere banking. The
auditor should not assume that the system generated information is correct and can be
relied upon without evidence.
The stages in Bank/Statutory audit are:

• Initial consideration by the statutory auditor

• Identifying and assessing the Risks of Material Misstatements
• Understanding the Risk Management Process
• Engagement - Team Discussions
• Establishing the overall Audit strategy
• Developing the Audit Plan
• Preparation of Audit Planning Memorandum
• Determining Audit Materiality
• Assessment of ability to continue as Going Concern
• Assessing the Risks of Fraud including Money Laundering
• Assessing Specific Risks
• Assessing Risks Associated with Outsourcing of Activities
• Response to the Associated Risks
• Conformity to Basel III framework
• Reliance on/review of other reports
• Classification of NPAs (It should be based on the record of recovery)
JAIIB_CAIIB_2024_NOTES_MCQs

• Asset classification (It should be Borrower-wise and not facility-wise) In

carrying out his Substantive procedures, the auditor should examine all large
advances while other advances may be examined on a sampling basis.
Types of Audit Reports to be issued by Statutory Auditors

• Statutory Audit Report (As per SA 700/705/706 Issued by ICAI)

Long Form Audit Report (As per the requirements of RBI guidelines)
• Tax Audit Report (As per Income-tax Act, 1961) RBI has revised the format of
Long Form Audit Report vide its circular dated September 05, 2020
Appointment of Statutory Auditors in Banks
Sub-section (1) of section 30 of the Banking Regulation Act, 1949 requires that the
Balance Sheet and Profit and Loss of a banking company should be audited by a person
duly qualified under any law for the time being in force to be auditor of companies. RBI
prepares a panel of Chartered Accountants eligible for conducting statutory audit of
banks based upon the data obtained from the Institute of Chartered Accountants of
India. Inputs of Comptroller & Auditor General of India are also obtained before
finalising the list. As per the provisions of relevant enactments:

• The auditors of Private Banks are appointed at the Annual General Meeting of
the shareholders.
• The auditors of Public Sector Banks are appointed by their Board of Directors.
(As per RBI guidelines)
Some of the Important Auditing, Review and Other Standards applicable to the audit of
Financial Statements as prescribed by the Institute of Chartered Accountants of India
are given below:

• 300 (Revised) Planning and Audit of Financial Statements

• 220 (Revised) Quality Control for an Audit of Financial Statements
• 210 (Revised) Agreeing to terms of Audit Engagement
• 510 (Revised) Initial Audit Engagements - Opening balances
• 315 Identifying and Assessing the Risks of Material Misstatements through
Understanding the entity and its environment
• 299 Responsibility of Joint Auditors
• 600 Using the work of Another Auditor
• 250 Consideration of Laws and Regulations in an Audit of Financial Statements
• 240 The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial
Statements
• 330 The Auditors Responses to Assessed Risks
JAIIB_CAIIB_2024_NOTES_MCQs

Various Other Types Of Audits Undertaken By Banks

Other than Concurrent Audit, Internal Audit & Statutory Audit, banks undertake the
following types of audits:

• Revenue Audit (known as Income & Expenditure audit) Revenue Audit is

usually conducted at Exceptionally Large/Very Large/Large and Medium
branches and is aimed at identifying cases related to leakage of interest and
other charges.
• Stock and Receivables Audit In terms of extant RBI guidelines, stock audits may
be assigned to qualified professionals (Chartered Accountants/Cost
Accountants/consultants) periodically, say annually to check on the stock and
book debts statements submitted by the borrowers to the bank. Only large
borrower accounts are normally are subjected to this audit.
• Forensic Audit Forensic Audit is an examination and evaluation of a firm’s or
individual’s financial information for use of evidence in court. Concept of
Forensic Audit may be defined as “A concentrated audit of all the transactions of
the entity to find the correctness of such transactions and to report whether or
not any financial benefit has been attained by way of presenting an unreal
picture.
• Management Audit Management Audit is an assessment of methods and
policies of an organisation’s management in the administration and the use of
resources, tactical and strategic planning and employee and organisational
improvement. The main objective of management audit is to see how far the
objectives of management are fulfilled. It aims to ascertain whether sound
management prevails throughout the organisation and evaluates its efficiency in
the system of its operation.
• Tax Audit including Goods and Services Tax (GST) Audit This is an analysis of
the tax returns submitted by an individual or business entity, to see if the tax
Information and resulting income tax payment is valid. Statutory auditors of
Banks usually deal with provision for Taxation & GST.