Unit – 4
ACCOUNTS OF BANKING AND INSURANCE COMPANIES
Introduction
ACCOUNTS OF BANKING COMPANIES:
Banking Regulation Act, 1949 regulates the Banks in India and their activities.
Under Section 5(b) of the said Act defines ‘Banking’ as:
- Accepting deposits of money from public for the purpose of lending or investing.
- These deposits are repayable on demand or otherwise, and can be withdrawn by cheque, draft or otherwise.
‘Banking Company’ is defined as – Any bank which transacts the business as stated in Section 5(b) of the Act in India is called a Banking Company.
The Business of Banking Companies:
1) Borrowing and lending money.
2) Managing and selling the property which may have come into its possession in satisfaction of claims.
3) Drawing, Accepting and Discounting bills of exchange, hundis, promissory notes, debentures and securities.
4) Granting and issuing of letters of credit and traveller’s cheques.
5) Buying and selling in bullion.
6) Buying and selling of foreign exchange including foreign bank notes.
7) Underwriting shares and debentures.
8) Providing Safe Deposit Vaults.
9) Doing all such other things which are incidental for the promotion of banking business.
10) Any other form of business which the Central Government, through Official Gazette may specify.
Reserve Fund:
Every Banking Company, incorporated in India, is required to create and make addition to the Reserve Fund by transferring at least 25% of its profit of every reported year to the Reserve Fund. This transfer is made before declaring any dividend.
ACCOUNTS OF INSURANCE COMPANIES:
Meaning:
Insurance is a contract, where the ‘Insurer’ covers the protection of losses suffered by the ‘Insured’. The Insurance Company is the Insurer and the other party who opts for being protected is called Insured. The consideration in return which the Insured gives to Insurer is called ‘Insurance Premium’. The term of Insurance Contract is termed as Insurance Policy’.
Regulatory Bodies:
The Companies conducting the Insurance Business are regulated by Insurance Regulatory and Development Authority of India Act, 1999. The Act provides framework for the accounting procedures of Insurance Companies.
Also, the Insurance Companies need to abide the Accounting Standards laid down by the Institute of Chartered Accountants of India.
Branches of Insurance Business:
The Insurance Business is broadly divided into two parts, Life Insurance and General Insurance. In academics, Fire and Marine Insurance are majorly taught to the students of Commerce Stream. These two Insurance are part of General Insurance business.
Incomes and Expenditures of Insurance Company:
The major income for any Insurance Company is ‘Premium’. Premium is the amount which the Insured pays to the Insurance Company to safeguard against losses. The other incomes which an Insurance Company may generate are – Dividend on Investments, Rent on the properties let out, etc.
The major expenses of an Insurance Company are Claims, and Commission. Besides these, expenses like Annuities, Bonus, Office Expenses, etc. are also incurred.
Books of Accounts:
An Insurance Company needs to maintain books of accounts like any other company. But, it is compulsory for them to maintain the following Registers –
- Register of Policies: Details of Policy holders like Name, Address, Date of Policy, etc.
- Register of Claims: Name and Address of Claimant, Date of Claims, etc. are included.
- Register of Licensed Insurance: Name of Insurance Agents, Address, License No., Commission Due to them, etc. are listed in this Register.
The three registers mentioned above are Statutory Books, that is, the Law governing the Insurance Companies prescribe maintenance of these books. Other than Statutory Books, Subsidiary Books like Cash Book, Premium Register, Cash Receipts, etc. are also maintained.
BANKING COMPANY
Q1) Following are the figures extracted from the books of Top Bank Ltd as on 31.3.2017.
Particulars | Amount (Rs.) |
Interest and Discount Received Interest paid on Deposits Issued and Subscribed Capital Salaries and Allowances Directors Fees and Allowances Rent and Taxes paid Postage and Telegrams Statutory Reserve Fund Commission, Exchange and Brokerage Rent received Profit on Sale of Investments Depreciation on Bank’s properties Statutory Expenses Preliminary Expenses Auditor’s Fee | 59,29,180 32,59,920 16,00,000 3,20,000 48,000 1,44,000 96,460 12,80,000 3,04,000 1,04,000 3,20,000 48,000 44,000 40,000 28,000 |
Additional Information:
1) A customer to whom a sum of Rs. 16 lakhs has been advanced has become insolvent and it is expected only 40% can be recovered from his estate.
2) There were also other debts for which a provision of Rs. 2,10,000 was found necessary by the auditors.
3) Rebate on bills discounted on 31.3.2016 was Rs. 19,000 and on 31.3.2017 was Rs. 25,000.
4) Preliminary Expenses are to be fully written off during the year.
5) Provide Rs. 9,00,000 for Income Tax.
6) Profit and Loss A/c Opening Balance was NIL as on 31.3.16.
Prepare the Profit and Loss A/c of the Bank for the year ended 31.3.2017.
Solution: Top Bank Ltd.
Profit and Loss A/c for the year ended on 31st March, 2017
Sr. No. | Particulars | Schedule | Amount |
I | Income: Interest Earned Other Income |
13 14 |
59,23,180 7,28,000 |
| TOTAL |
| 66,51,180 |
II | Expenditure: Interest Expended Operating Expenses
Provisions and Contingencies (960000+210000+900000) |
15 16 |
32,59,920 7,68,460
20,70,000 |
| TOTAL |
| 60,98,380 |
III | Profit/Loss Net Profit for the year Profit brought forward |
|
5,52,800 NIL |
| TOTAL |
| 5,52,800 |
IV | Appropriations Transfer to Statutory Reserve (25%) Balance carried over to Balance Sheet |
|
1,38,200 4,14,600 |
| TOTAL |
| 5,52,800 |
Schedules:
Sr. No. | Particulars | Amount |
I | Schedule 13: Interest Earned Interest/Discount on Advances/Bills (Working Note 1) |
59,23,180 |
| TOTAL | 59,23,180 |
I II III | Schedule 14: Other Income Commission, Exchange and Brokerage Profit on Sale of Investments Rent Received |
3,04,000 3,20,000 1,04,000 |
| TOTAL | 7,28,000 |
I | Schedule 15: Interest Expended Interest paid on deposits |
32,59,920 |
| TOTAL | 32,59,920 |
I II III IV V VI VII VIII | Schedule 16: Operating Expenses Payment to and Provisions for Employees Rent and Taxes Depreciation on Bank’s Properties Director’s Fee, Allowances and Expenses Auditor’s Fee Law (Statutory) Charges Postage and Telegrams Preliminary Expenses |
3,20,000 1,44,000 48,000 48,000 28,000 44,000 96,460 40,000 |
| TOTAL | 7,68,460 |
Working Note 1
Particulars | Amount (Rs.) |
Interest/Discount Add: Rebate on Bills Discounted on 31.3.2016 Less: Rebate on Bills Discounted on 31.3.2017 | 59,29,180 19,000 25,000 |
TOTAL | 59,23,180 |
INSURANCE COMPANY
Q1) From the following balances extracted from the books of Great General Insurance Company Ltd as on 31.3.2011, you are required to prepare Revenue Accounts in respect of Fire and Marine Insurance business for the year ended 31.3.2011 and Profit and Loss Account for the same period:
Particulars | Amount | Particulars | Amount |
Director’s Fee Dividend Received Provision for Taxation (as on 1.4.2010) | 80,000 1,00,000
85,000 | Interest Received Fixed Assets (1.4.2010) Income Tax paid during the year | 19,000 90,000
60,000 |
Particulars | Fire | Marine |
Outstanding Claims on 1.4.2010 Claims paid Reserve for Unexpired Risk on 1.4.2010 Premiums Received Agent’s Commission Expenses of Management Re-Insurance Premium (Dr.) | 28,000 1,00,000 2,00,000 4,50,000 40,000 60,000 25,000 | 7,000 80,000 1,40,000 3,30,000 20,000 45,000 15,000 |
The following additional points are also to be taken into consideration:
a) Depreciation on Fixed Assets to be provided at 10% p.a.
b) Interest accrued on Investments Rs.10,000.
c) Closing provision for taxation on 31.3.2011 to be maintained at Rs. 1,24,138.
d) Claims Outstanding on 31.3.2011 were Fire Insurance Rs. 10,000; Marine Insurance Rs. 15,000.
e) Premiums Outstanding on 31.3.2011 were Fire Insurance Rs. 30,000; Marine Insurance Rs. 20,000.
f) Reserve for Unexpired Risk to be maintained at 50% and 100% of Net Premium in respect of Fire and Marine Insurance respectively.
g) Expenses of Management due on 31.3.2011 were Rs. 10,000 for Fire Insurance and Rs. 5,000in respect of Marine Insurance.
Solution: Form B – RA (Prescribed by IRDA)
Great General Insurance Co. Ltd
Revenue A/c for the year ended 31st March, 2011
Fire and Marine Insurance Business
Particulars | Sche- Dule | Fire | Marine |
Premiums Earned (net) Interest, Dividends and Rent – Gross Double Income Tax Refund Profit on Sale of Fixed Assets |
| 4,27,500 - - - | 1,40,000 - - - |
TOTAL (A)
|
| 4,27,500 | 1,40,000 |
Claims Incurred (net) Commission Operating Expenses related to Insurance Business Bad Debts Indian and Foreign Taxes | 2 3 4 | 82,000 40,000 70,000
- - | 88,000 20,000 50,000
- - |
TOTAL (B) |
| 1,92,000 | 1,58,000 |
Profit from Insurance Business (A-B) |
| 2,35,500 | (18,000) |
Schedules forming part of Revenue A/c
Particulars | Fire | Marine |
1 – Premiums Earned (net) Premiums from direct business written Less: Premium on Reinsurance Ceded Total Premium Earned Less: Change in Provision for Unexpired Risk (Working Note 4) |
4,80,000 (25,000) 4,55,000 (27,500) |
3,50,000 (15,000) 3,35,000 (1,95,000) |
TOTAL
| 4,27,500 | 1,40,000 |
2 – Claims Incurred (net) (Working Note 1)
| 82,000 | 88,000 |
4 - Operating Expenses related to Insurance Expenses of Management (Working Note 2) |
70,000 |
50,000 |
Form B – PL (Prescribed by IRDA)
Great General Insurance Co. Ltd
Profit and Loss A/c for the year ended 31st March, 2011
Particulars | Current Year | Previous Year |
OPERATING PROFIT/(LOSS) (a) Fire Insurance (b) Marine Insurance (c) Miscellaneous Insurance Income from Investments (a) Interest, Dividend and Rent (gross) (b) Profit on Sale of Investments Less: Loss on Sale of Investments Other Income (To be specified) |
2,35,500 (18,000) -
1,29,000 -
- |
|
TOTAL (A) | 3,46,500 |
|
Provisions (Other than Taxation) Depreciation Other Expenses Director’s Fee |
9,000
80,000 |
|
TOTAL (B) | 89,000 |
|
Profit Before Tax (A) – (B) | 2,57,500 |
|
Provision for Taxation (Working Note 5) | 99,138 |
|
Profit After Tax | 1,58,362 |
|
Working Notes:
Sr. No. | Particulars | Fire | Marine |
1 | Claims under policies Less Reinsurance Claims paid during the year Add: Outstanding on 31st March, 2011
Less: Outstanding on 1st April, 2010 |
1,00,000 10,000 1,10,000 (28,000) |
80,000 15,000 95,000 (7,000) |
| TOTAL
| 82,000 | 88,000 |
2 | Expenses of Management Expenses paid during the year Add: Outstanding on 31st March, 2011 |
60,000 10,000 |
45,000 5,000 |
| TOTAL | 70,000 | 50,000 |
3 | Premiums Less Reinsurance Premiums Received during the year Add: Outstanding on 31st March, 2011
Less: Reinsurance Premiums |
4,50,000 30,000 4,80,000 (25,000) |
3,30,000 20,000 3,50,000 (15,000) |
| TOTAL | 4,55,000 | 3,35,000 |
4 Reserve for Unexpired Risks is 50% of Net Premium for Fire and 100% of Net Premium for Marine Insurance.
5 Provision for Taxation A/c
Date | Particulars | Amount | Date | Particulars | Amount |
31.3.11
31.3.11 | To Bank A/c (Tax Paid) To Balance c/d | 60,000
1,24,138 | 1.4.10 31.3.11 | By Balance b/d By P & L A/c | 85,000 99,138 |
| TOTAL | 1,84,138 |
| TOTAL | 1,84,138 |
