Why assets have debit balance?

PLAY ROLES and FIND RULES-PART-3 (Read previous ones) A rather unscientific method that I used to understand debits and credits.

Let us have a small recap. Whoever contributes/gives money/goods to OUR business are treated as creditors/lenders. The list of CREDITORS are –FIRSTLY WE-capital, OTHERS/ BANKS-loans and SUPPLIERS OF GOODS-sundry creditors. So ‘our business keeps their contributions as credit balances. In short ALL BALANCES (ON LIABILITIES side of balance sheet) are to be repaid to these people (creditors) during the course of business.

Think of ‘Assets’ side of BALANCE sheet! They are usually on the right side! Remember we post debit transactions on the LEFT side of LEDGERS.

ASSETS AND REAL ACCOUNT RULE:

Now you are a banker! Your cash balance is Rs.500000; you receive cash Rs.100, 000 for deposit in to Lalu’s account.

After this receipt your cash balance gets increased to 600000=! Isn’t it?

Now it’s your cash. When another cheque drawn by Shiela for Rs.125000 comes, you pay and now your balance is Rs.475000. Okay? IT IS YOUR BANK’S/business’ ASSET and that is why you can use this cash to pay another party’s cheque.

If you purchase some LAND and construct a BUILDING it is bank’s asset.

If you purchase COMPUTERS, it is again an asset.

WITH the same money if a business-say-hardware business- buys some STOCK, it becomes business’s asset.

Why are they called asset?

 They can help our business. They have a value. If sold later, they fetch some money for business. IN A WAY THEY ARE DEBTORS; BUSINESS HAS INVESTED MONEY IN THEM AND THE assets, WHEN SOLD, get back money. (Even otherwise they have a value-E.g.: land and building- always appreciating)

These assets are DEBTs to business. Business has lent/SPENT MONEY ON them. So we have them as DEBIT BALANCE in our balance sheet.

Let us see the transactions:

1. When you received cash- DEBIT CASH                              100000  

        (Result: This debit increased the debit balance of cash to DR.600000)

                                               Credit Lalu’s current account with 100000         

Result: your cash increase. RULE: DEBIT what comes in for REAL accounts

2. Then you paid Shiela Rs.125, 000. Debit Sheila’s current account Rs125, 000

                                                        CREDIT CASH                        Rs125, 000

(Your credit transaction decreased the debit balance of cash to DR.475000.

Rule: CREDIT WHAT GOES OUT)

 Debit transaction in an asset account always increase debit balance.

 Credit transaction in an asset account always decrease debit balance.

Mortgage

How Shivraj bought a house in his village through ‘MORTGAGE’?

“Namasthe! Shivraji...welcome. I was expecting your visit. You are the talk of our village.” Arun kumar Yadav, first time, stood up and gave a respectful welcome.

Shivraj was in all smiles. Now, he was the proud owner of one of the largest cattle farms in the villages nearby. He had also kept his word and paid in advance all his dues to Yadav. So, there was no reason why Yadav should not stand up and welcome.

“Yadvji ... Namasthe! Because of God’s will and your blessings I am here. You might have known that I am planning to purchase a land and build a house. The agreement is over. I have already paid 1/2 of the price. I need only 500 gold coins to pay the balance. I need your help. You can have my land and house as the security. Within three years I’ll pay the entire money with interest. Till that time, you can be in possession of my land and house. I will live in my present hut”

“I whole heartedly appreciate your talk and promise. We respect your sincerity, hard work and above all your promise. So, you need not give your house to me.

 1.  You need to give only the title deeds and parental deeds which you got from the seller. That is more than enough.

2.   In case of your failure, I may approach the King’s court for establishing my right as mortgagee. I’ll get court’s nod for selling or auctioning of your property to adjust my loan.

But, I know as usual, you will foreclose the loan with your hard earned money.”

“Thank  you....Yadavji! Then, I can live in my home on my own land, if I pay the dues without fail every month! Am I right?”

Within a week of this discussion, Shivraj started building a house. The house had the same mango tree which was a witness in his case in Birbal’s court.”

There were rumors among people that Birbal might visit the house during warming ceremony.

A Recap:

Bailment: Delivery a goods for a certain purpose. If it is over, the goods should be returned safely.

(Read previous post on BAILMENT)

Pledge:  is delivery of goods as security for a loan. Possession is with the creditor (bank- ex: jewels-jewel loan)

(Read previous post on PLEDGE.)

Mortgage: Mortgage – Banks in India, usually, encourage Equitable Mortgage.

  It is cost effective. No registration charges.

  1 The debtor has to deliver the documents to title deeds to a banker in a notified area for having secured a debt or to get a new loan.

The purpose of deposit of title deeds is to create a security against the debt.

(State governments notify what are these towns. His property can be in any place- even in a village or in a not notified area)

2. He can have his loan in a nearby village branch of the same bank.

3. The legal ownership passes to the creditor (bank).

4. But creditor has to go to a court of law for remedy- that is sale in case of failure and adjust the loan

Law that deals with Mortgage is ‘Transfer of property act-1882.

Hypothecation

Hypothecation

A small recap:

Bailment –delivery of goods for a specific purpose and getting it back after the purpose or period is over.

Pledge: This is also bailment of goods as security for obtaining a loan.

              Pledge is defined in sec 172 of Indian contract act 1872.

Now let us see what hypothecation is.

Shivraj got back his jewel and really wanted to expand his cattle farm. He visited the same old good wealthy man and offered him his jewels and land for a debt with which he planned to purchase some more cows and sheep.

“Shivrajji, thank you.... You have come to me. I know that you are growing rich. Now you are one of the respectable members of our village. So I don’t need any security. But please sign this document which says,

1. I have a right on your cattle (moveable asset) existing and to be purchased.
2. I can use this right in case you fail to pay. I can sell them and appropriate the proceeds to the adjustment of the loan.

This is enough. I have faith in you that you will pay in advance.”

Shivraj felt very happy. He also knew well that he would pay in advance and come for a bigger amount for purchase of a house.

pledge: Delivery of goods is essential and possession is with creditor.

Hypothecation: No delivery of goods; possession is with debtor. When debtor fails to pay the debt, the charge crystallizes from a floating charge into fixed charge.

When banks give vehicle loan, they don’t take any security.

When banks give loan on stock, they don’t take them into possession.

They get an agreement of hypothecation signed by borrower. That is the charge.

Hypothecation is defined by law very lately in SARFAESI Act 2002.

We will see how Shivraj got a loan under ‘Mortgage’. OK?

What is pledge?

What is a pledge?

 Advocate Shyam did not expect this sudden and forced entry of the couple. He looked at them for a minute and asked them to take their seat. Both the faces showed various feelings mixed with anger and fear. The lady might have been crying and was in a mood to burst out.

“Tell me ...what happened?” asked, Lawyer Mony in soothing tone.

“Sir, we got a loan from the ‘Triple one Finance’. We gave our Gold Ornaments as security. This happened a year ago. Yesterday they called us and told that all the jewels were auctioned to adjust the loan. The jewels are worth nine lac rupees. That was given to me as a gift-sridhan- by my father. I want my jewels back” As you guessed this was from our lady.

 Mony further enquired “Have you got your notice from the finance?”

“No. They told me that they had issued a notice and it was in the news paper. But, I searched my name. It was not there too. I got inside information that mine was wrongly sold”. The man replied in all his suppressed anger.

Mony in a confident and assured tone explained “Don’t worry. You will get back everything. When we give something...that is physically deliver the security to the Pawnee (one who takes the article and gives money as loan), the contract is called PLEDGE. The Financier has to take care of it with utmost care as if it is his own article. If you don’t pay, he can sell or auction only after due notice with reasonable time to pay back the money due. Here, there is failure on the part of the company. We can sue (go to court) them.”

So, Remember bailment is just delivering some thing for safe keeping or any other purpose. Pledge is also a type of bailment; but, the purpose is security and getting a loan.

Both bailee and Pawnee (the takers of the goods) have to take care of the articles given to them and return them after the purpose is over.

The pawnor (who gives the gold or any goods) cannot suppress facts about damages in the goods and cheat them- for example, if he cheats them with covering gold or spurious gold, he has to face the law and then compensate the financier for cheating.

JAIIB-Understand personal accounts -2

Play Roles and find it yourself!-personal accounting rule

Better to read previous title before venturing in to this one.

Is there any short cut to find out PERSONAL ACCOUNTS...? Yes.

In GENERAL all LIABILITIES (WHO HAVE LENDED MONEY TO BUSINESS) appearing on the balance sheet are PERSONAL ACCOUNTS.

Liabilities mean all which ‘the business has to give back to somebody including the owner’.

Let us play the role of an entrepreneur. You start a business. You bring in capital to business with an expectation that it has to give you a profit and also return the capital plus appreciation in the long run. Don’t you expect?

So, shall we call you as a long term contributor or CREDITOR to business? Do you accept this idea? After all your capital is a DEBT TO BUSINESS and it has to return the profit plus your capital. Am I clear?

Suppose you bring in Rs.100000=.

According to accounting principles-YOU and BUSINESS are separate. Naturally your accountant enters your 100000 on the credit side in the books of business.

You add one more lac. They again post this second lac on the credit side and now you are happy to see your balance: Rs.200000 under CAPITAL ACCOUNT.

You GAVE 200000 to your business and they applied the principle ‘CREDIT THE GIVER’-your capital account is the ‘GIVER’S ACCOUNT’. Reserves and profit accounts are also ‘Giver’s accounts’-that is yours.

You need more funds. Your father agrees to give 100000 as LOAN. Your accountant enters this on credit side (right side of ledger) of the account which runs in your father’s name. Please note it again that GIVER IS CREDITED.

BANK lends you Rs. 500000. Where it will be posted? Yes.... you are correct. Bank account in your ledgers is CREDITED. It’s again a LOAN.

I forgot to tell you what your business is. You are in the business of hardware. A wholesaler (Ram Mohan & co) supplies goods on credit. He gives goods worth 200000. He GIVES YOUR BUSINESS A DEBT and business has to pay back the money. Don’t forget: Credit the GIVER. This debt can be called BILLS PAYABLE/SUNDRY CREDITORS.

Except the last one, all monies have come in thru CASH or BANK CHEQUE.

Think.... Am I right?

We know the credit side now. Naturally the other side-contra is CASH OR BANK.

The entries can be:

1.  Debit cash   200000 & Credit capital   200000 (because you bring in cash)

     Debit cash 1000000 & Credit father’s account    100000 (Father gave you cash)

     Debit cash   500000 & Credit bank                       500000 (Bank gives a cheque)

2. For supplier: Debit PURCHASES A/C       200000

                          Credit   Ram Mohan & co     200000. 

Are these entries ....Okay?

When the business pays back any amount to you or your father or bank: DEBIT THE Receiver’s accounts and-credit cash/bank (because we always pay back in cash or cheque).

Let us try REAL ACCOUNTS in next post.

JAIIB- PERSONAL accounting rule-1

Rule FOR PERSONAL ACCOUNTING:

I was quite confused with what A REAL ACCOUNT is and which one is PERSONAL ACCOUNT. It was when I appeared for my CAIIB-PART.1, because I was a non-commerce graduate!

Some of you might have been baffled with this unknown mystery ‘DEBIT-CREDIT’ which sometimes look tougher than rocket technology..

Let me share some ideas, (not very scientific), with you about personal and real accounts and HOW I had overcome them.

HERE it is not RULES but ROLES which we have to play. Are you ready to play?

Imagine that you are looking after SAVINGS BANK DESK. Ram comes there and enquires about his balance. As a responsible banker and with all politeness, you inform him that it is (CREDIT BALANCE)10,200. NOW, Ram remits Rs1200- to his account. What will you do? You credit the amount to his account. Then, the balance increases to Rs.11400-. Correct...?

Analyze the transaction. When he GAVE money to BANK for his account, in order to increase his balance, you added/CREDITed his account: HE GAVE AND YOU CREDITED; “CREDIT the GIVER.”

He comes again the next day; He gives a cheque for Rs. 5000-. The balance has to come down. Isn’t it? You debit his account. So balance is decreased to 6200. Okay!

Analyze this transaction When he drew a cheque for Rs,5000-, you reduced the balance. You DEBITED the amount AND he RECEIVED the cash. DEBIT THE RECEIVER. This is PERSONAL ACCOUNT.

.

All creditors/liabilities have credit balances. So, when they GIVE something/money to us, we have to add them, you CREDIT them with money/value. Remember ‘CREDIT THE GIVER’. The reverse is the order when they receive money: DEBIT THE RECEIVER.

 Play the ROLE and find it yourself.

Any short cut to find out PERSONAL ACCOUNTS...?

In GENERAL all LIABILITIES (WHO HAVE LENDED MONEY TO BUSINESS) appearing on the balance sheet are PERSONAL ACCOUNTS.

Let us understand REAL ACCOUNTS later.

.

                                                

WHAT IS BAILMENT?

What is bailment?
There was a commotion next door. I could not bear the curiosity to go and have a look at it. There was a heated argument between two people who I knew were friends. 

This is the gist of what happened. Ramesh left his car with Rakesh requesting him to take care of it during his absence. When he came back , he could see a dent on the front of the car and the DVD player was different inside the car. When asked Rakesh replied that he had used the car and had met with an accident. He refused to repair the damages. Ramesh swore to go to police and court.

The question is: Whether Ramesh can go to court.

Yes. Ramesh can claim damages. He had given the car for safe keeping. But Rakesh used it and met with some accident and he changed the DVD player without informing Ramesh.

The contract of Bailment says that goods have to be returned safely or can be disposed on the instructions of the bailor.

Bailor - The person who gives the goods.
Bailee: one who receives and takes care of it and gives back or acts on the instructions of giver.
Bailment: Giving/ making delivery of a thing/goods for some purpose.

Is there a Bailor - Bailee relationship in Banking?

 Yes.
1. In Jewel loan: Borrwer is bailor of jewel.Bankers, who are bailees, have to return the jewels back in the same shape and without any loss or damage.
2. When bankers take possession of (securities) the assets of defaulting borrowers, they have the duty to return them after the dues are paid. 

CONTRACT-2

CONTRACT-2
1. “Gokul is 17 years old from a rich family. He has got a PAN number which is an ESSENTIAL Id for registration purposes. Nayak proposes an agreement for sale of his flat to Gokul because he likes this flat very much.”
Whether the agreement is valid?
No… not at all. Minors cannot be a party to any agreement. Because, law tells they do not have the maturity of mind. All agreements with minors are invalid only.
2. After two years, again our Nayak called Gokul to his flat. But Gokul refuses to sign the agreement. Nayak’s relatives coerced/forced/bullied Gokul to sign the agreement. 
Whether this is a valid contract? No.
Free consent is a must for any agreement.
3. Mr A became a lunatic/mental: His relatives tried to get his signature in a contract.
Whether it is valid? No.
4. Court has ordered Mr Y ineligible for contracting. He IS forbidden/ stopped to go for any agreement/contract till further orders from court WITH ANY OTHER PARTY.
But Mr G wanted to have an agreement with him because he is an expert in computer operations.
Whether this is valid in the eyes of law? It is an invalid agreement. When court announces ineligibility, such person cannot be a party to any contract.
5. A contract can be oral or written.
In short, contract is an enforceable agreement between 2 or more people. There must be an offer by a proposer and acceptance by the other party. There must be a consideration on the part of all parties. All the parties should willingly give consent to any agreement. Minors, people of unsound mind (mentally ill) and legally forbidden people cannot make any valid agreements. Agreement can be oral or written. One of the exemptions, as far as ‘CONSIDERATION’ is: agreements out of love and affection among close relatives need not have any consideration.

What is a contract? ----1

What is a –CONTRACT?

At last I received that much long awaited sms. I called my brother immediately to share the news ! He is a lawyer.
“Hi, I have got the orders for joining PNB…Gandhipuram branch”
“Congrats…but ...my friend’s sister didn’t receive any orders.” as usual my brother was worried about his friend’s sister.
“I got a sms from the bank.” I exclaimed.
“Fool…sms is information. It is not an order or offer letter.” Instead of appreciating me and guiding me, he shouted at me angrily.
“What is an offer? I don’t know .With this sms shall I go to the branch and join now?” I again asked.
My brother barked “No…you can’t. You have to give ‘yes’ to the appointment to accept the contract. I will explain you .First receive the offer letter. Then talk to me” I think he started to forget his friend’s sister. I also thought what a contract is.
Yes. Bank’s offers of job are also contracts. They give you a salary. In turn you have to do the job.
Contract means agreement. 
An agreement always has minimum two parties or more than that:
1. Proposer/promisor (in this case bank which makes the offer).
2. Promisee (you who accepted the job for a salary)
If I accepted the job without anything in return, can it be an agreement? No, it can’t be a VALID CONTRACT.
There must be some consideration-something in return to each other- in a valid contract.
Contract=Agreement=offer by a proposer + acceptance by another person
Consideration is the binding factor on all sides. It is a must.
Bank offers a job. Consideration is salary.
You say “ok” to it. Accept it. The consideration,  in return on your part, is to do the job perfectly.
Accept it. Enjoy a life full of happiness!