Staff College, Bengaluru

Written Exam Special – 2021-22 (Clerk to Officer)

Compiled By: Staff college Bengaluru

Promopedia 2021-22

Staff College, Bengaluru

Disclaimer: This is purely a voluntary effort for dissemination of knowledge and enabling people to prepare for

promotion test. Best efforts have been put to provide the accurate and updated information. However, the

users are requested to refer relevant circulars and policies of our Bank for further clarity –

11.11.2021



The Companies Act 2013 passed by the Parliament received the assent of the

President of India on 29th August 2013. The Act consolidates and amends the law

relating to companies. The Companies Act 2013 was notified in the Official Gazette

on 30th August 2013.Some of the provisions of the Act have been implemented by a

notification published on 12th September, 2013. The provisions of Companies Act

1956 are still in force.

Parliament approved the long-awaited overhaul of legislation governing Indian

companies on 9 August 2013. The new law is aimed at easing the process of doing

business in India and improving corporate governance by making companies more

accountable. The 2013 Act also introduces new concepts such as one – Person

Company, small company, dormant company and Corporate Social Responsibility (CSR)

etc. The Act introduces significant changes in the provisions related to governance,

e-management, compliance and enforcement, disclosure norms, auditors, mergers and

acquisitions, class action suits and registered valuers. The act is now in force w.e.f.

1st April 2014.

COMPANIES ACT 2013

https://www.advisorkhoj.com/resources/images/articles/Key-highlights-of-New-Indian-Companies-Act-2013/Companies-Act-2013.pdf

https://www.advisorkhoj.com/resources/images/articles/Key-highlights-of-New-Indian-Companies-Act-2013/Companies-Act-2013.pdf



Introduction of One Person Company (OPC)

It's a Private Company having only one Member and at least One Director. This

concept is already prevalent in the Europe, USA, China, Singapore and in several

countries in the Gulf region. It was first recommended in India by an expert

committee (headed by Dr. J.J. Irani) in 2005. The one basic pre-requisite to

incorporate an OPC is that the only natural-born citizens of India, including small

businessmen, entrepreneurs, artisans, weavers or traders among others can take

advantage of the ‘One Person Company’ (OPC) concept outlined in the new Companies

Act. OPC shall have no compulsion to hold AGM (Annual General Meeting).

The threshold limits of paid-up capital and turnover applicable for OPCs have been removed so that there are no restrictions on the growth of OPCs. Earlier, the threshold ceilings on the paid-up share capital of ₹50 lakh/average annual turnover of ₹2 crore was a primary requisite.

When a Private Company converts into OPC: The private company has to file Form INC-6 for converting itself into an OPC. The paid-up share capital of a private company should not be exceeding Rs.50 lakhs and should not have an average annual turnover of more than Rs. 2 crore at the time of such conversion into OPC.

What is a Small Company?

Small Company is a company other than a public company with a paid-up share capital not exceeding Rs.10 crore or turnover not exceeding Rs.100 crore.

The 2013 Act provides exemptions to Small Companies primarily from certain requirements relating to board meeting, presentation of cash flow statement and certain merger process

What is a Small LLP?

The Limited Liability Partnership (Amendment) Bill, 2021 provides for formation of a small LLP where: (i) the contribution from partners is up to Rs 25 lakh (may be increased up to five crore rupees), (ii) turnover for the preceding financial year is up to Rs 40 lakh (may be increased up to Rs 50 crore). The central government may also notify certain LLPs as start-up LLPs (as recognized through notifications).

Minimum members for private company

The new act has increased the limit of the number of members from 50 to 200.



Immediate changes in stationery

The letterhead, bills or invoices, quotations, emails, publications & notifications,

letters or other official communications, should bear the full name of contact person,

address of company’s registered office, Corporate Identity Number ( CIN No. which

is a 21 digit number allotted by Government), Telephone number, fax number, Email

id, contact website (if any).

Memorandum of Association & Article of Association

Memorandum of Association (also known as Charter of the Company or document of

outdoor management) specifies relationship of the company with outside world.

Articles of Association (document of indoor management) lays down the regulations

for carrying the objects, activities and management of its internal affairs as defined

in its Memorandum of Association.

Commencement of business

Companies (public/private company) registered under Companies Act 2013 needs to

file the following with the Registrar of Companies (ROC) in order to commence their

business –

1. A declaration by the director in prescribed form stating that the subscribers/

promoters to the memorandum have paid the value of shares agreed to be

taken by them

2. A confirmation that the company has filed a verification of its registered

office with the Registrar of Companies (ROC)

In the case of a company requiring registration from any sectoral regulators such as

RBI, SEBI etc., approval from such regulator shall be required prior to starting the

business.

Financial Year

The Companies Act 1956 Act provided companies to elect financial year. The

Companies Act 2013 Act eliminates the existing flexibility in having a financial year

different than 31 March. The 2013 Act provides that the financial year for all

companies should end on 31 March, with certain exceptions approved by the National

Company Law Tribunal. Companies should align the financial year to 31 March within



two years from 01 April 2014.

Eligibility age to become Managing Director or whole time Director

The eligibility criterion for the age limit has been revised to 21 years as against the

existing requirement of 25 years.

Number of directorships held by an individual

- Section 165 provides that a person cannot have directorships (including alternate

directorships) in more than 20 (twenty) companies, including ten (ten) public

companies. It provides a transition period of one year from 1 April 2014 to comply

with this requirement

Board of Directors and Disqualifications for appointment of director

- The 2013 Act requires that the company shall have a maximum of 15 (fifteen)

directors (earlier it was 12) and appointing more than 15 (fifteen) directors will

require special resolution by shareholders.

Further, it requires appointment of at least one woman director on the board for

prescribed class of companies. It also requires that company should have at least 1

(one) resident director i.e. who has stayed in India for a total period of not less than

182 (hundred and eighty two days) in the previous calendar year.

All existing directors must have Directors Identification Number (DIN) allotted by

central government. Directors who already have DIN need not take any action.

However, Directors not having DIN should initiate the process of getting DIN

allotted to him and inform the respective companies on which he is a director. The

Company, in turn, has to inform the registrar of companies (ROC).

Independent Directors

- The 2013 Act defines the term "Independent Director". In case of listed

companies, one third of the board of directors should be independent directors.

There is a transition period of 1 (one) year form 01 April 2014 to comply with this

requirement. The 2013 Act also provides additional qualifications/ restrictions for

independent directors as compared to the 1956 Act.



Section 150 enables manner of selection of independent directors and maintenance of

databank of independent directors and enables their selection out of data bank

maintained by a prescribed body

Resident Director:

Every Company must have atleast one director who has stayed in India for a total

period of 182 days or more in previous calendar year. For existing companies, the

compliance need to be made before 31st March 2015.

Loans to director

– The Company cannot advance any kind of loan / guarantee / security to any director,

Director of holding company, his / her partner/s, his/ her relative/s, Firm in which he

or his relative is partner, private limited in which he is director or member or any

bodies corporate whose 25% or more of total voting power or Board of Directors is

controlled by him.

Appointment of managing director, whole time director or manager [section 196

of 2013 Act]

- The re-appointment of a managerial person cannot be made earlier than one year

before the expiry of the term instead of two years as per the existing provision of

section 317 of the 1956 Act. However, the term for which managerial personnel can

be appointed remains as five years. Further, the 2013 Act lifts the upper bar for age

limit and thus an individual above the age of 70 years can be appointed as key

managerial personnel by passing a special resolution.

Key Managerial Personnel (KMP)

- The Provisions relating to appointment of KMP includes (i) the Chief Executive

Officer (CEO) or the managing director (MD) or the manager (ii) the company

secretary (iii) the whole-time director; (iv) the Chief Financial Officer (CFO); and (v)

such other officer as may be prescribed is applicable only for Public Limited

Companies having paid up capital more than 10 crore and Private Limited Companies

are exempted from appointment of KMPs.



Attending Board Meetings

- As per section 167 of the Act, a Director shall vacate his/her office if he/she

absents himself from all the meetings of the Board of Directors held during a period

of 12 (twelve months) with or without seeking leave of absence of the Board. Simply

speaking, attending at least one Board Meeting by a director in a year is a must else

he has to vacate his/her office.

Board meetings

- Atleast 7 days notice to be given for Board Meeting. The Board need to meet

atleast 4 times within a year. There should not be a gap of more than 120 days

between two consecutive meetings.

Appointment of Statutory Auditors

- Every Listed company can appoint an individual auditor for 5 years and a firm of

auditors for 10 years. This period of 5 / 10 years commences from the date of their

appointment. Therefore, those companies who have reappointed their statutory

auditors for more than 5 / 10 years, have to appoint another auditor in their Annual

General Meeting for year 2014.

Other specialized services which cannot be provided by Statutory Auditors

- The Statutory Auditor of the Company cannot give following specialized services

directly or indirectly to the company –

a. Accounting and book keeping services

b. Internal audit

c. Design and implementation of any financial information system

d. Actuarial services

e. Investment advisory services

f. Investment banking services

g. Rendering of outsourced financial services

h. Management and/or any other services as may be prescribed



Corporate Social Responsibility (CSR)

The company has to constitute a CSR committee of the Board and 2% of the average

net profits of the last three financial years are to be mandatorily spent on CSR

activities by an Indian company if any of the following criteria is met:

Net worth of Rs.500 crores or

Turnover of Rs. 1000 crores or more or

Net profit of Rs. 5 crores or more

Contributing to Incubators, which has been notified by the Government of India, is

eligible for spending under CSR. This is a prosperous time for incubators and

entrepreneurs and can really change the entrepreneurial eco system in India.

Financial statements

- Financial Statements are now defined under the Act as comprising of the following.

All companies (except one person Company, small company and dormant company)are

now mandatorily required to maintain the following, which may not include the cash

flow statement) –

A balance sheet as at the end of the financial year

A profit and loss account / an income and expenditure account for the financial

year, as the case may be

Cash flow statement for the financial year

A statement of changes in equity (if applicable)

Any explanatory note annexed to, or forming part of, any document referred

to in sub-clause (i) to sub-clause (iv)

As per sec-2(h) of Indian Contract Act, a contract is AN AGREEMENT ENFORCEABLE

BY LAW. ALL CONTRACTS ARE AGREEMENTS, BUT ALL AGREEMENTS ARE NOT CONTRACTS

Agreements can become contracts, if they are made by free consent of parties

competent to contract, for a lawful consideration, with a lawful object and are

not expressly declared as void

An agreement is combination of lawful offer and unconditional acceptance

Indian Contract Act



Minority, lunacy, insolvency, purdahnashin etc. makes persons incompetent to

contract

No consideration, no contract. Consideration is give & take benefit for both

parties

Undue influence, coercion and fraud takes away the free consent factor

As per sec-2(g). anything unenforceable by law is void

When the modalities of an agreement is such that it can be either valid or void

as per the option of parties, it can be termed as a voidable contract

Both void and voidable contracts may be unenforceable, but not illegal

Offer and acceptance are two sides of the coin called agreement

Offer and invitation to offer are not one and the same. An invitation to offer

is to responded by lawful offers

Offer is the intention to create legal relationships, not for fun

Communication of offer either written or oral is necessary

Cross offers/counter offers are not encouraged

Offers can be distinguished as standing, open, continuing, specific or general

Acceptance must be communicated to the offeror

Acceptance must be absolute and unqualified and made during the validity of

offer

As per sec-6, an offer can be revoked by notice/ by lapse of time/ by failure

to fulfill a condition/by death or insanity of the offeror

As per sec-5, an acceptance can be revoked at any time before sending

communication to the offeror

Consideration is the most essential element of a valid contract. It may be past,

present or future. It may be an act or abstinence or promise in exchange as

reciprocation of both parties. It may not be adequate except for illegal &

fraudulent purposes. It should not lead to illegal, immoral or acts opposing

public policy (sec-23)

As per section 39, actual breach of contract takes place on non-performance

on the due date. Anticipatory breach of contract may take place before the

due date



Law Related To Appropriation Of Payments

When the debtor owes several distinct debts to a creditor, and he makes some

payment which is not enough to cover the payment of all the debts in full; the

question arises as to which particular debt the payment proceeds to be

appropriated/applied. The rule of appropriation as per contract act are as

follows:

When the debtor indicates a choice to apply the amount to a particular debt,

the creditor has to follow it faithfully. In case, the creditor does not want it,

he must not accept the payment at all (sec-59)

When a debtor fails to make any indication of his intention for appropriation,

then the creditor has a right to appropriate the amount to any actually due and

lawful debt. Even, a time barred debt is lawfully due (sec-60)

In case, neither debtor nor creditor makes any indication for appropriation,

then the payment shall be applied/appropriated in discharge of debts in order

of time. Here, the oldest one is to be discharged first of all, even though time

barred. THE FAMOUS CLAYTON’S RULE IS REFERRED HERE (SEC-61)

QUASI CONTRACTS deal with certain relations resembling those created by a

contract. However, this may not be always a valid contract. The basis and legal

sanction here suggest that no one should have unjust benefit at the cost of the

other party(AIR 1990)

Some examples of quasi contracts are: (sec-68 to 72)

Claims for necessaries supplied to a person incompetent to contract

Reimbursement of money paid, due by another

Obligation of a person enjoying benefits of non-gratuitous Act( not

free/charity)

Responsibility of finder of lost goods

Liability of a person getting benefit under mistake or coercion



1.INDEMNITY:

Sec 124 of Indian Contract Act define Contract of Indemnity as” A contract

by which one party promises to save the other from loss caused to him by the

conduct of the promisor himself, or by the conduct of any other person”. Thus,

in this case the Indemnifier (one who gives indemnity) undertakes through the

contract of indemnity that he would make good the loss incurred by the

Indemnified (in whose favour the indemnity is given) on account of his own

conduct or conduct of a third person.

In Banks we generally take Indemnity Bond while issuing duplicate DD or

duplicate Deposit Receipt etc.

We also obtain counter-Indemnity from the borrowers wherever we issue

Letter of Guarantee. Through this counter Indemnity, borrower undertakes to

indemnify the bank.

2. GUARANTEE:

2.1. As per Sec.126 of Indian Contract Act 1872,”it is a contract to perform the

promise or discharge the obligation of a third person in case of his default”. There

are three parties to a contract of Guarantee i.e. Principal Debtor (borrower), Surety

(Guarantor) and Creditor (Bank). Guarantor’s liability arises on default made by the

principal debtor.

2.2. A Guarantee may be specific or continuing one. Guarantee issued for a specific

single transaction is called “specific guarantee”. When a guarantee extends to a

serious of transactions it is called a “continuing guarantee “(Sec.129). Normally the

guarantee obtained by the bank for the loan given is a continuing guarantee.

2.3. Guarantees are also further classified into Performance Guarantee, Financial

Guarantee, and Deferred Payment Guarantee.

INDEMNITY/ GUARANTEE



2.4. The liability of the guarantor is co-extensive with that of principal debtor

(borrower) (u/s 128).

2.5. Consideration for Guarantee:

Anything done or any promise made to the principal debtor is sufficient consideration

to the surety for giving the guarantee (Sec 127) and law does not require any

separate consideration to be given to the guarantor for a valid contract of guarantee.

3. GUARANTEE BY TWO OR MORE PERSONS:

3.1. Two or more persons can undertake a “joint liability” or a “joint and several

liability”. Guarantee taken by the Bank is usually is with “joint and several liability”

clause. All the joint sureties should sign the guarantee document. Those who have not

signed the guarantee shall not be liable for the guarantee. Further, even the

guarantee may not be enforceable even against those who signed the guarantee, if

the other guarantors have not signed

4. GUARANTEE BY PARTNERSHIP FIRM:

4.1. Where the partnership firm is giving the guarantee, all the partners should sign

the guarantee on behalf of the firm to bind the firm, unless providing guarantee is a

normal business of the firm. In case partners are giving their personal guarantee for

the loan taken by the firm, then they have to sign the guarantee in their personal

capacity (without the firm’s seal).

5. GUARANTEE BY A LIMITED COMPANY:

5.1. A limited Company can give a guarantee if the Memorandum of Association and

Articles of Association expressly permit for giving such guarantee. A Board

resolution to be passed for giving the guarantee and authorizing specific persons to

execute the guarantee. Common seal is required to be affixed in presence of

directors/executives authorized in the board resolution/AOA.



6. DETERMINATION OF LIABILITY:

The liability of the guarantor stands determined (crystallization) on happening of any

of the following events:

6.1. Revocation of Guarantee:

When the continuing guarantee is revoked, guarator’s liability stands determined and

he is liable for the balance in the account as on the date of receipt of notice by bank

6.2. Death of Guarantor:

Death of surety results in revocation of gurantee as to future transactions. Deceased

guarantor’s asset is liable for the balance in the account as on date of receipt of the

news of death by the bank. On getting the information of death, bank should stop

further credits in the account (so as to avoid application of Clayton’s Rule). If Bank

decides to continue operation, account is to be first ruled off (either by opening new

account in Finacle or with one simultaneous credit and debit entry in the same

account to reflect “ruling off”) and also an undertaking to be obtained from the legal

heirs of the deceased guarantor that they are liable for the balance in the account

on the day the Bank has the notice of death of the guarantor.

7. LIMITATION FOR GUARANTEE:

Limitation against the guarantor starts from the date demand is made on the

guarantor. It is advised that branches are to obtain composite DBC signed by

borrower and the guarantor to extend the limitation period against the guarantor

also due to conflicting judgments of various High Courts on extending limitation

against the guarantor’s liability. However, now it is the settled law that the limitation

against the guarantor starts from the date of demand made on him. However,

branches to continue to take guarantor’s signature on the composite DBC.



8. DIFFERENCE BETWEEN

INDEMNITY & GUARANTEE:

No of parties

INDEMNITY

There are two parties

viz., indemnifier and

indemnity holder

(indemnified).

GUARANTEE:

There are three parties viz.,

Creditor, principal debtor and

surety

No of contracts Generaly one contract It includes three sub-

contracts

Nature It is simple in nature

as there is one

contract and two

persons involved

It is complex in nature as

there are three parties and

three contracts

Liability Absolute liability

rests with the

Indemnifier

There will be two types of

liabilities viz., primary and

secondary liability which will be

with principal debtor and

surety respectively

Recovery The indemnifier

cannot recover any

loss from anybody

after compensating

the indemnified

On making payment to

creditor, surety can recover

that amount from the principal

debtor

Interest of parties Indemnity contract

gets formed upon

indemnifier’s interest.

Guarantee contract gets

formed upon principal debtor’s

interest



As per sec-13, a negotiable instrument means and includes a promissory note, a

bill of exchange or a cheque

The special of this instrument is that the right, title and interest can be

transferred all at a time from one person to another by mere delivery and

sometimes by endorsement & delivery. The transferee of the negotiable

instrument, who takes it in good faith and for consideration gets a good title

even though the title of the transferor is defective(sec-9)

As per sec-4, a promissory note must be writing and signed by the maker, must

be an unconditional undertaking to pay, it must be payable in money only in

certain amount and the payee must be certain person

As per sec-5, a bill of exchange is an instrument in writing, contains an

unconditional order, directing a certain person to pay a certain sum of money,

only to or the order of a certain person or the bearer of the instrument

Parties in a bill of exchange include drawer, drawee, payee, acceptor, drawee in

case of need

As per sec-6, a cheque is a bill of exchange drawn on a specified banker and

not expressed to be payable otherwise than on demand

A promissory note cannot be made payable to the maker himself

A bill of exchange can be accepted before payment and enjoys days of grace

As per sec-31 of RBI Act which supersedes the N.I. Act prohibits issue of

bearer promissory note and bill of exchange

Crossing is a special feature applicable only to Cheques

Noting and protest are features applicable to bill of exchange

Any negotiable instrument made or drawn and payable in India or drawn in

India on a person resident in India is called as inland instrument

Foreign instrument is one which is not an inland instrument. Examples are:

promissory note made in India payable at London, made in London payable at

Bangalore, bill of exchange drawn in India and payable in Paris, bill drawn in

New York payable at Mumbai.

NEGOTIABLE INSTRUMENTS ACT



NI Act amended in 2018, included an amount of Interim compensation payable by

the drawer to the complainant during the court proceeding that can be up to 20% of

the amount of cheque.

A contract of sale of goods is a contract whereby the seller transfers or

agrees to transfer the property in the goods to the buyer for a price( sec-4 of

the Act )

Where under a contract of sale, the property in the goods is transferred from

the seller to the buyer, the contract is called as a SALE. But when the

transfer of property in the goods is to take place at a future time or subject

to some conditions thereafter to be fulfilled, the contract is called AN

AGREEMENT TO SELL

AN AGREEMENT TO SELL BECOMES A SALE WHEN THE TIME ELAPSES OR

THE CONDITIONS ARE FULFILLED SUBJECT TO WHICH THE PROPERTY

IN THE GOODS IS TO BE TRANSFERRED

Goods form the subject matter of Sale and include all kinds of movable

property other than actionable claims and money. It also includes stocks and

shares, growing crops, grass & things attached to or forming part of the land

Goods may be existing, future or contingent. The price in a contract of sale

must be expressed in terms of money only

When the price is not determined specifically, the buyer must pay the seller a

reasonable price (sec-9 )

A stipulation in a contract of sale with reference to goods sold/to be sold may

be a condition or a warranty (sec-12.1)

A CONDITION is a stipulation essential to the main purpose of the contract.

Its violation gives a right to the buyer to cancel/refuse the contract

A WAARANTY is a stipulation collateral to the main purpose of the contract.

Its violation gives rise to a claim for damages, but not a right to reject the

goods and treat the contract as refused/cancelled

Sale of Goods Act



In a contract of sale, there is an implied warranty that 1. The buyer shall have

and enjoy quiet possession of the goods 2. The goods are free from any charge

or encumbrance in favor of any third party

CAVEAT EMPTOR means LET THE BUYER BE AWARE and thus a privilege

available to seller. However, this privilege shall not be available when 1. Implied

warranty is there 2. The buyer gives a choice and depends solely on the seller’s

skill/judgment 3. There is practice in trade to deny this privilege 4. there is a

fraud committed by seller

The general rule of law is that only the owner of the goods or any person

specifically authorized by him can sell the goods. If any other person sells

it, the title of the buyer will not be better than that of the unauthorized

seller

Some exceptions to the above rule are: 1. Sale by a mercantile agent 2. Sale

under the implied authority of the owner 3. Sale by one of the several joint

owners 4. Sale by a seller in possession of goods under a voidable contract 5.

Sale by a seller in possession after sale 6. Sale by a buyer in possession after

having bought or agreed to buy the goods 7. Sale by an UNPAID SELLER

The rights of an unpaid seller are:

Lien of unpaid goods

Stoppage of goods in transit

Withholding delivery of unpaid goods

Re-sale of unpaid goods

Suit against the buyer for unrealized price

Suit against the buyer for damages

Refusal/cancellation/repudiation of the contract made earlier with the buyer

Suit for realization of interest as time value for money

A bill of lading is a document which acknowledges receipt of goods delivered to

a general ship for carriage of goods and is negotiable

It contains the terms & conditions of the carriage of goods, which have been

agreed upon by parties

BILLS OF LADING



It is also a document of title to goods described therein. Bill of Lading 3

originals will be issued by the carrier

In case of a bill of lading, the transferee, even though he acquires it bona fide

and for value; takes it subject to all the defects in the title of the transferor

A clean bill of lading is one not indicating any defects in packing but a claused

bill of lading contains some qualifying remarks about quality of packing

When goods are to be carried partly by sea and partly by land; it is called

through multi modal bill of lading

In a received bill of lading, the ship owner only acknowledges the receipt of

goods for shipment in a particular ship without mention of time of shipment.

But on board bill of lading is better and preferred one as it contains the actual

date of loading on Board

As per UNIFORM CUSTOMS & PRACTICES ON DOCUMENTARY CREDIT, a

Letter of Credit is “ any arrangement, however named or described, whereby a

Bank(Issuing bank) acting at the request and in accordance with the

instructions of a customer(the applicant of credit) is to make payment to or to

the order of a third party(the beneficiary) or is to pay, accept or negotiate

bills of exchange(drafts) drawn by the beneficiary or authorities, such

payments to be made or such drafts to be paid, accepted or negotiated by

another Bank; against stipulated documents and compliance with stipulated

terms & conditions.”

Parties to a letter of credit are: the Applicant, The Issuing Bank, The

beneficiary, The Advising Bank, the confirming Bank and the nominated Bank

authorized to negotiate the Letter of Credit

Types of Letter of Credit are irrevocable, confirmed, unconfirmed, red clause,

Green Clause, revolving, transferable, back to back

AS PER SUPREME COURT VERSION: “A LETTER OF CREDIT IS

INDEPENDENT OF AN UNQUALIFIED CONTRACT OF SALE OR

UNDERLYING TRANSACTION. THE AUTONOMY OF AN IRREVOCABLE

LETTER OF CREDIT IS ENTITLED TO PROTECTION. AS A RULE, COURTS

REFRAIN FROM INTERFERING WITH THAT AUTONOMY.”

“THE issuing Bank has to pay under the letter of credit WHEN THE DOCUMENTS

ARE PRESENTED exactly as per LC terms



IT is a contract whereby one person, called as the INSURER, ASSURER OR

UNDERWRITER undertakes(indemnifies) to make good the loss of another

called THE INSURD OR ASSURED by payment of money to him on the

happening of a specified event

The consideration for which the insurer undertakes to indemnify the assured

is called PREMIUM

The instrument in which the contract of insurance is generally described is

called THE POLICY. The policy itself is not the contract. It is the evidence of

contract

The thing or property insured is called the subject matter of insurance

and the interest of the assured in the subject matter is called insurable

interest

PERILS INSURED AGAINST IS THE LOSS ARISING FROM UNCERTAIN

EVENTS OR CASUALTIES IN FORM OF DESTRUCTION/DAMAGE TO

PROPERTY OR DEATH/DISABLEMENT OF A PERSON.

FUNDAMENTAL ELEMENTS OF INSURANCE:

1. IT must have all essential elements of a valid contract

2. It is a contract of malafide i.e. of utmost good faith. A mis-statement or

withholding of any material information is fatal to the contract of insurance

3. It is a contract of indemnity. The assured is paid for the actual loss not

exceeding the amount of policy

4. The assured must be so situated with regard to things insured that he would

benefit from its existence and suffer loss from its destruction

5. The assured can recover the loss only if it is caused by any of the perils

insured against

6. If for any reason the risk is not run, the consideration fails and the insurer

must return the premium

The Law of Insurance



7. In the event of any mishap to the insured property, if the assured fails to take

all necessary steps to mitigate the loss; the insurer can avoid the payment of

loss which is attributable to the assured’s negligence

8. Where there are two or more insurances on one risk, the principle of

contribution applies between different insures

9. The insurer who has agreed to indemnify the assured on making good for loss,

is entitled to succeed to all ways and means by which the assured might have

protected himself against the loss. THIS IS CALLED AS THE DOCTRINE

OF SUBROGATION

If an insurer has insured a venture in which the risk involved is beyond his

capacity, he may insure the same risk either wholly or partially with other

insurers. This facility is called RE-INSURANCE and can be resorted to in all

kinds of insurance

Where the assured insures the same risk with two or more independent

insurers and the total sum insured exceeds the actual value of subject matter,

the assured is said to be OVER INSURED BY DOUBLE INSURANCE. But, in

case of loss, the assured cannot recover more than the actual amount of loss

This is because, a contract of insurance (other than life and personal accident

insurance) is a contract of indemnity

Insurance ombudsman handles all grievance regarding insurance policies and

has the authority to handle claims up to Rs. 30 lakhs.

The law relating to Insolvency of a debtor is contained in two statutes: the

PRESIDENCY TOWNS INSOLVENCY ACT, 1909 APPLYING TO the

presidency towns of Bombay, Calcutta and Madras; while the PROVINCIAL

INSOLVENCY ACT, 1920 applies to rest of India

INSOLVENCY



The two main aspects of insolvency act are: 1. To protect the embarrassed

debtor from harassment by his creditors and 2. To ensure an expeditious but

equitable distribution of his assets amongst the creditors

A person can be adjudged insolvent only if he is a debtor and has committed an

act of insolvency

An act of insolvency is something done or suffered by a debtor which gives

jurisdiction to the Insolvency Court to adjudge him as insolvent

A debtor commits an act of insolvency in each of the following cases:

1. If he transfers his property or any part thereof with intention to defeat or

delay his creditors

2. Any whole or part transfer of his property, which would be void under any

law in force as a proof of fraudulent preference in the pre-insolvency stage

3. If he departs or remain out of India with an intention to defeat or delay his

creditors

4. Departs from his dwelling house or usual place of business or otherwise

absents himself

5. Secludes himself so as to deprive his creditors of the means of

communicating with him

6. If any of his properties sold or attached for a period of not less than

21days in execution of the decree of any court for payment of money

7. If he petitions to be adjudged insolvent or he is imprisoned in execution of

the decree of any court for payment of money

8. If he has given notice to any of his creditors to the effect that he has

suspended or is about to suspend payment of his debt

9. If an insolvency notice issued against him remains unsatisfied

Stages in insolvency proceedings include a. presentment of insolvency petition

b. appointment of interim receiver c. order of adjudication and d. discharge of

insolvent

The following debts of the insolvent are called preferential debts and paid in

priority over the other debts of the insolvent:

All debts due to the Govt. or any local authority like municipal taxes, land

revenue, water tax etc

Salaries and wages due to any low paid clerk/servant or laborers in respect of



services rendered during four months before the presentation of the

insolvency petition

Rent due to landlord not exceeding one month

All preferential debts as above, rank equally among themselves and are paid in

full when property is sufficient to meet them. When property is insufficient, it

is distributed in equal proportions

INSOLVENCY AND BANKRUPTCY CODE-2016

The code has come in to force w e f 1.12.2016)( IC No 766/02.01.2017)

Definitions

1. Insolvency:

A state of being unable to pay the money owed by a person or company on time.

2. Bankruptcy:

It is the legal status of a person or other entity that cannot repay the debts it owes

to creditors. Bankruptcy is imposed by a court order, initiated by the debtor

(In this chapter, we refer Bankruptcy to Individuals & and insolvency and liquidation

to Companies)

Scope of IBC 2016

Insolvency and Bankruptcy code (IBC 2016) is a consolidated law which deals with:

1. Reorganization

2. Restructuring

3. Insolvency

4. Winding up or dissolution

4. Provides rights apart from SARFAESIA and DRT

5. Provisions regarding Insolvency and Liquidation of companies have been put in

force on 1.12.2016



6. The provisions in the Insolvency Code in respect of insolvency resolution and

Bankruptcy for individuals and partnership firms have been notified and made

effective from 1-12-2019 only for personal guarantors of corporate debtors

(not for other individual and partnership firms)

Process and Eligibility

In the process:

7. First step is insolvency resolution

8. Second step is liquidation of the company

9. Eligibility criterion: Dues of Rs. 1 crore and more

Insolvency Resolution Process - Steps

Application is filed with NCLT (National Company Law Tribunal) for IRP

(Insolvency Resolution Process)

1 Banks will furnish all details of borrower

2 Submit proof of default

3 Recommend the name of IRP(Insolvency resolution professionals

licensed by IBBI)

• NCLT appoints the IRP, makes a public announcement of 180 days moratorium.

The Corporate Insolvency Resolution Process (CIRP) shall mandatorily be

completed within a period of 330 days from the insolvency commencement date,

including any extension of the period of corporate insolvency resolution process

granted under section 12 of Insolvency Code.

• IRP will take control of the management of the company, collects all

information for determining the financial position of the company

Within 180/330 days lenders to submit the Resolution Plan to IRP, involving

strategy for running the company, payment of other creditors etc. (Requires

approval of 66% of secured/unsecured creditors) No legal action can be taken



during the moratorium period

The approved plan will be placed before NCLT

Once approved, implemented by IRP, and binding on all stake holders

1. If Resolution Plan is unsuccessful, NCLT orders liquidation

2. Liquidator will be appointed by NCLT, who completes the process of

distribution

Important bodies under IBC 2016

IBBI: Insolvency and Bankruptcy Board of India

1. Acts as a Regulator for the process

2. Maintains the list of Resolution professionals

3. Constituted by Govt. of India

NCLT and NCLAT: National Company Law Tribunal and National Company Law

appellate Tribunal

Action Points

1. Branches to examine each NPA account of companies and file application

before NCLT in consultation with Law Officer and the Advocate

2. To take approval from controlling office to invite expression of interest from

Insolvency Resolution Professionals (3 quotation to be obtained)

3. After proper background check, recommend the Resolution Professional to

NCLT

Powers of liquidator under IBC 2016

1. Receives and verifies creditors’ claims

2. Takes control and custody of assets

3. Evaluates the assets and property

4. Protects the assets and runs the business till assets sold



5. Distributes the sale proceeds among the creditors and stake holders, as per

order mentioned by IBC

Order of distribution of proceeds under IBC 2016

In order of preference:

1. Costs and fee of the IRP and Liquidator

2. Workmen dues for 2 years preceding the date of liquidation and debts

payable to secured creditors in equal proportion

3. Wages and dues of the employees preceding 1 year

4. Debts payable to unsecured creditors

5. Government Tax Dues and unpaid secured creditors in equal proportion

6. Other remaining debts and dues

7. Preference share holders

8. Equity share holders

Bank’s Options:

Bank may opt not to surrender the securities to the liquidator, in that case, in the

order of preference as “Secured Creditors” Bank will not be having a preference

In this case, Bank will proceed against the secured assets in its own way by

completing legal action (SARFAESIA or DRT) after the moratorium and realize the

assets.

Fast Track Insolvency Resolution Process:

The Regulations and the fast track resolution process are applicable to the following

categories of corporate debtors.

a. a small company as defined under the Companies Act, 2013.

b. a Startup (other than the partnership firm).

c. an unlisted company with total assets, as reported in the financial statement of the

immediately preceding financial year, not exceeding rupees one crore.



The process to be completed within 90 days with an additional grace period of 45

days i.e. maximum period of 135 days (Extension is granted only if 75% of the

committee of creditors agree for it)

Our Bank guidelines say that we should prefer not to surrender the securities to the

liquidator.

1. Actionable claims include claims as to UNSECURED DEBTS or as to beneficial

interest in movable property. Examples are: money due for goods sold, the right to

claim benefit of a contract for purchase of goods, a claim to money under

insurance policy, a claim to rent falling due in future, a claim to recover arrears of

maintenance, a Muslim widow’s claim for unpaid dower(share of deceased husband’s

property) and a negotiable instrument

2. The transfer of an actionable claim whether with or without consideration is to be

affected only by execution of an instrument in writing signed by the transferor.

An oral transfer is invalid. The written document need not be registered

3. All rights and remedies of the transferor shifted to the transferee after

execution of the instrument

4. The transferee of an actionable claim after execution of documents, may sue or

institute proceedings in his own name without the transferor’s consent

MORTGAGES AND CHARGES

As per sec-100 of Transfer of Property Act: where immovable property is

offered as security by one party to another for payment of money in a

contract other than MORTGAGE, the lender is said to have a charge on the

property

All mortgages are charges, but all charges are not mortgages

Mortgage is a transfer of an interest in a specific immovable property, but

charge only creates a right

A mortgage is good against a subsequent transferee, whereas charge is only

good against a subsequent transferee with notice of charge

A charge may be created by act of parties or operation of law, but the

ACTIONABLE

CLAIMS



mortgage can be created by act of parties only

Generally, there is no personal liability to pay in a charge, whereas it is very

much there in a mortgage

A charge created by operation of law does not require registration, while a

simple mortgage requires registration

Mortgage relates to specified property, while charge may related to

unspecified property too

LIEN is a CHARGE by operation of law

The law relating to the stamping of documents is governed by Indian Stamp Act.,

1899 and the respective State Stamp Acts. Under Indian Constitution, the rate of

stamp duty in respect of 10 different documents is included in the Central List. The

items are Promissory Note, Bill of Exchange, Receipt, Cheque, Bill of Lading, Policy of

insurance, Transfer of shares, Debentures, Proxies, Receipts. (“Cheque” is totally

exempt from stamp duty). In respect of these items accordingly the stamp duty

rates are determined by Parliament and the Central Government. As regards all other

instruments stamp duty rates are determined by the appropriate State Governments

and Legislatures. Accordingly these items are contained in the State Stamp Act. In

some of the State Stamp Act, they have included also the provisions of Indian Stamp

Act and the Rates of stamp Duty applicable for those instruments covered by the

Central Act.

DUE STAMPING:

In order to be enforceable in a court of law, any instrument, which is required

to be stamped, has to be “duly stamped".

The words "due Stamping" as per stamp Act means stamped with appropriate

stamp and stamps of requisite value is used for the same.

Documents which are unstamped or insufficiently stamped or bear a wrong

stamp will be inadmissible in evidence.

Indian Stamp Act



STAMP DUTY HOW PAYABLE:

The stamp duties which are payable under the Stamp Act are to be paid by

means of stamps according to the provisions of the Stamp Act or where no

such provisions are applicable according to the Rules made by the state

Governments.

These rules may include provisions regarding the description and number of the

stamps to be used or as in the case of promissory notes and bills of exchange

the size of the paper on which the instruments are to be written etc.

MODES OF STAMPING:

The stamp duty for the purpose of Stamp Act is to be paid by means of either

adhesive stamps or impressed stamps.

The impressed stamps are otherwise called non-judicial stamp papers. In most

of the States the impressed stamps are substituted with special adhesive

stamps.

Such Special Adhesive stamps can be cancelled by the officials of the Bank

(Branch Manager or Officer handling the documents/stamps) as provided in

the respective State Act.

The following instruments to be stamped with adhesive stamps: (a) Receipts

(b) Bills of Exchange and promissory notes drawn or made outside India (c)

Entry as an advocate, vakil or attorney or on the rolls of the High Court (d)

Notarial acts and (e) Transfer by endorsement of shares in any incorporated

company or other Body Corporate.

Whenever special adhesive stamps are not available, the instrument can be

typed and executed on non-judicial stamp paper of requisite value. Where non-

judicial stamp papers are used, care should be taken to ensure that each non-

judicial stamp paper is typed or written in hand with at least some portion of

the matter.

The printed document duly signed by the executants has to be attached to the

stamp paper bearing portion of the printed material duly typed/handwritten

and duly signed by the executants in such a way that the printed document



becomes an integral part of the stamp paper.

The executants should also authenticate the cancelled portion in the printed

document, by signing along the cancelled portion.

In respect of documents which do not require registration with the Registrar

of Assurances, the typing of document on non-judicial stamp paper can be on

both sides of the paper.

Many States have now introduced E-Stamping system. These E-stamp papers

have to be used in the similar way a non-judicial stamp paper is used.

WHERE DOCUMENT IS TO BE EXECUTED AT TWO OR MORE PLACES:

The document should be properly and adequately stamped at the place where it

is first executed as per the stamp duty applicable to that State.

Then the document is to be forwarded to the other place/State for execution.

If the stamp duty payable in this State is more than the duty paid in the first

State, then the difference of the stamp duty should be paid in the second

state either by purchasing non-judicial stamp or special adhesive stamp or e-

stamping as the case may be. A noting also should be made on this additional

stamp duty paid “this stamp paper form part of ........(name of the document)

dated ......... and signature of the executants should be obtained on this stamp.

When document is executed at different places, the executants should put the

date of execution below their signature. The Bank officer getting the

documents executed should also put a noting on a separate paper having got the

document executed in the different place mentioning the name of the

executants, place, date etc.

TIME OF STAMPING

In terms of Section 17 of Indian Stamp Act, instruments executed in India are

required to be duly stamped before or at the time of execution.

Documents executed out of India :

The documents executed outside India have to be stamped with proper stamp

duty as may be applicable in the place in India where it is received.



In the case of documents other than the Bill of Exchange and Promissory Note,

the instrument has to be stamped within 3 months from the date of receipt of

the said documents in India.

In the case of Usance Bills of Exchange, they have to be stamped by the first

holder in India before presentation of the same for acceptance or for payment

and in the case of Promissory Notes before he endorses transfers or

negotiates the same in India.

Documents executed out of India are required to be stamped with Indian

stamps, despite the fact of them bearing foreign stamps.

CANCELLATION OF STAMPS:

1. The duty of cancelling the adhesive stamps on instruments is on the party

affixing it, and failing that, on whoever executed the instruments.

2. In terms of Section 12 of the Stamp Act, any instrument bearing an adhesive

stamp which has not been cancelled so that it can be used again, shall so far as

such stamp is concerned be deemed to be unstamped.

3. As regards revenue stamps, it has to be cancelled by the executant under his

full signature. As regards special adhesive stamps, it depends on the

respective State Stamp Rules. In certain States, it has to be affixed and

cancelled only at the respective Stamp Depot.

4. With regard to the correct procedure for cancellation of stamps, the

respective Nodal Regional Offices/Zonal Offices have to issue suitable

guidelines to the branches under their jurisdiction.

5. The person affixing any adhesive stamp to an instrument chargeable with duty

shall cancel the stamp on or before execution so that it cannot be used again.

A person may cancel an adhesive stamp by writing on or across the stamp his

name or initials or the name or initials of the firm or company with the date of

so writing or any other effectual manner so that the stamps cannot be used

again.



6. Instruments stamped with impressed stamps should be written in such a

manner that the stamp appears on the face of the instrument and it cannot be

used for or applied to any other instrument. Only one instrument can be

written on the same stamp paper.

RATE/AMOUNT OF STAMP DUTY PAYABLE:

As stated above, the rates of stamp duty in respect of 10 documents are

determined by the Central Government. All other instruments chargeable with

stamp duty shall be as prescribed in Schedule to the respective State Stamp

Act.

For each instrument, appropriate rate/s of stamp duty is/are prescribed. The

Schedule has been subject to amendment by respective States and also the

modification in the rates of stamp duty from time to time. The State

Government has the right to reduce or remit the stamp duties in respect of

those classes of instruments falling within their purview.

Hence, Branches have to refer to their respective State Stamp Act to know

the stamp duty payable on different instruments. They can get it from the Law

Officer attached to their Regional Office.

CONSEQUENCES OF INSTRUMENTS NOT DULY STAMPED:

The instrument may be impounded i.e. ordered to be kept in the custody of law by the

competent authority in case it is not stamped or under-stamped. In the case of a

receipt, instead of impounding, a properly stamped receipt may be required at the

discretion of the Officer.

They are inadmissible in evidence nor can be acted upon or registered by an Officer

except in the following cases:

(a) On payment of penalty of 10 times the value of proper stamp duty or deficiency as

the case may be including Pro-notes and Bills of exchange.

(b) Unstamped receipt will be admitted on payment of Re. 1 as penalty.

(c) Instruments, which are not duly stamped, can be admitted in criminal proceedings.



(d) Instruments which are executed by or on behalf of the Government.

UNDER STAMPING - REMEDIES:

As per Stamp Law, the instruments attracting stamp duty if under-stamped can be

rectified by payment of penalty upto 10 times the deficiency as determined by the

Adjudicating Authority or by the Court, if the same is impounded by the Court during

judicial proceedings. While every care has to be taken to ensure that the documents

are duly stamped, if it comes to the notice of the Branch that there are under-

stamped documents, Branch concerned may send such documents to the Adjudicating

Authority for adjudication and for proper stamping with due permission from the

controlling Office.

The Collector can adjudicate such a document about the stamp duty payable or

accept the deficit stamp duty if it is brought to him within one month of execution

(Sec 32 of Stamp Act).

If any instrument is not duly stamped not being an instrument chargeable [with a

duty not exceeding ten naye paise] only or a bill of exchange or promissory note,

either by accident, mistake or urgent necessity and the same is brought before the

Collector within one year of execution, the Collector if satisfied with the reason can

collect the stamp duty/deficit stamp duty and penalty and give the necessary

endorsement (Sec 41 & 42 of Stamp Act).

INTRODUCTION: Certain documents executed while availing loan have to be registered

with various authorities. These authorities are:

a. Registrar of Assurances (Sub-Registrar/SRO)

b. Registrar of Companies (ROC)

c. CERSAI

Each of these registrations is covered under different laws. Registration with

Registrar of Assurances is covered under the Indian Registration Act (also State

Registration Acts), whereas the registration with ROC is covered under the Indian

Companies Act. Registration with CERSAI is covered under SARFAESI Act.

Registration

act:



2. REGISTRATION WITH THE SRO/REGISTRAR OF ASSURANCES

2.1. Indian Registration Act provides for registration of certain transactions with the

Authorities constituted under the Act. The Authority constituted under the Act is

called the Registrar of Assurances or popularly known as the Sub-Registry or SRO.

2.2. The purpose of this registration is that matters, which are of public interest or

transactions with individuals particularly those involving a charge over immovable

property are made known to others so that the people dealing with the property have

knowledge about the charges/ownership of the property.

2.3. The Registration Act classifies instruments into three categories (a) those

requiring compulsory registration (b) those which are optionally registerable and (c)

those which need not be registered. All those transactions affecting immovable

property, subject to certain exceptions, are required to be compulsorily registered.

2.4. The Transfer of Property Act, 1882 provides that any transfer of Immovable

property of value Rupees 100 or above are required to be carried out through a

registered instrument only i.e. a Deed duly registered with the Registrar of

Assurances. There are a few exceptions. One such exception so far as Bank

documentation is concerned is equitable mortgage (mortgage by deposit of title

deeds). Accordingly equitable mortgage is NOT required to be registered (however,

now many states EMs also require compulsorily registration like Maharashtra, Gujarat

etc.).

2.5. Many States have now made provision for registration of EM also with the

SRO. Wherever there is such provision, branches have to register the EM with SRO.

Even in those states where registration of EM is not mandatory, branches should

explore the possibility of registering the EMs

2.6. Again, as per Transfer of Property Act, transfer of or charge on movable

property is not required to be registered. Accordingly, the hypothecation

Agreements/Pledge Agreements Banks usually take from the Borrower whereby a

charge is created over the movable property are NOT required to be registered.

2.7. The period within which documents are to be registered as per Registration Act

is 4 months from the date of execution of the document. If the document is

presented for registration beyond this period it will not be accepted by the Sub-



Registry. However, owing to urgent necessity or unavoidable accident if a document is

submitted for registration after 4 months, Sub Register may accept such document

for registration within delayed period not exceeding 4 months along with a fine not

exceeding ten times the amount of registration fees (Sec 25 of Registration Act).

2.8. The documents requiring compulsory registration generally dealt with by Bankers

are Lease deeds where Banks take premises on lease for housing its Branches or for

residential purposes. In such cases the Lease deed for any period beyond 11 months is

to be compulsorily registered.

2.9. Similarly, simple mortgage deeds require compulsorily registration. Presentation

of documents for registration and also execution of documents, which require

registration, are to be done on behalf of the Bank by P.A. Holder Officers. In the

absence of PA holder in the branch, it can be done by the Branch Manager or an

Officer duly authorized by the Branch Manager.

2.10. The documents which require registration, apart from attracting stamp duty as

per provisions of the relevant stamp Act, shall also attract Registration charges as

per relevant Registration Act & Rules in vogue from time to time.

2.11. The consequences of non-registration of those documents requiring compulsory

registration are quite disastrous. As per Registration Act, a document requiring

compulsory registration if not registered shall be void and has no evidentiary value

before the court of law. Further, as per Registration Act, there is no remedy

prescribed for curing the defect of non-registration. Accordingly due care has to be

taken to get those documents requiring registration to be registered within the

stipulated time.

2.12. The documents dealt with by the bank and which require compulsory

registration with SRO are Simple Mortgage Deed and Lease Deed for more than 11

months. Though registration of Power of Attorney is not mandatory as per the

Registration Act, branches should generally insist for registered Power of Attorney

whenever it is acting upon a power of attorney.



3.REGISTRATION OF CHARGES WITH REGISTRAR OF COMPANIES

3.1. Definition of charge:

As per Section-2 (16) of the Companies Act 2013, Charge means - An

interest or lien

created on the property or assets of a company or

any of its undertakings or both as security and includes a mortgage;

3.2. Need for creating a charge on company’s assets:

3.2.1. Almost all the large and small companies depend upon share capital and

borrowed capital for financing their projects. Borrowed capital may consist of funds

raised by issuing debentures, which may be secured or unsecured, or by obtaining

financial assistance from Financial Institution or banks.

3.2.2. With a view to enable a person who intends to deal with a Company as a secured

creditor to ascertain whether the Company has already encumbered its property,

Section 77 of the Companies Act 2013 requires a company to file with the Registrar

of Companies complete particulars together with the instrument, if any, creating or

evidencing the charge or a certified copy of such instrument within 30 days of

creation of the charge.

3.3. Types of Charges to be registered:

3.3.1. As per Section 77 of the Companies Act 2013, Companies are required to

register ALL TYPES OF CHARGES with ROC within 30 days of its creation -

Charges created within or outside India,

on its property or assets or any of its undertakings,

whether tangible or otherwise, and

situated in or outside India

3.4. Time Limit for Registration of Charges:

3.4.1. The charges to be registered with ROC are to be registered within a period of

30 days of its creation, in form CHG-1.



3.4.2. After expiry of 30 days but not beyond 300 days (30 days + additional period

of 270 days), the Company may make an application to the ROC with additional fees.

3.4.3. Application to be supported by a declaration in Form CHG-10 from the CS or

Director of the Company that such belated filing will not adversely affect the rights

of any creditors of the company.

3.4.4. After Expiry of 300 days -Application for Condonation of Delay is to be made

to Regional Director in form CHG-8.

3.5. Duty of registration of charge:

3.5.1. As per Section 77 it is duty of Company to Create charge.

3.5.2. As per Section 78, if Company fails to file form for registration of charge

then, the person (Bank) in whose favour charge is created will apply to the Registrar

for registration of charge along with instrument created for charge (Form No. CHG-1

or CHG-9 as the case may be).

3.5.3. Registrar upon receipt of such application within a period of 14 days after

giving notice to the Company, unless the company itself register the charge or shows

sufficient cause why such charge should not be registered, allow such registration on

payment of such fees as may be prescribed. The person is entitled to recover from

the company the amount of fees.

3.5.4. It is not the responsibility of Person/Bank (in whose favour charge is created)

to file form. Therefore if company fails to file form for registration of charge and

Bank also not filed form then Bank will not be liable to pay any penalty.

3.5.5. However, to safeguard its interest, Bank should ensure that the registration of

charges wherever applicable is done within the specified time.

3.6. Certificate of Registration of Charge:

After filling of Creation of charge ROC will issue a certificate of registration of

charge in form CHG-2. The certificate issued by the Registrar under CHG-2 shall be

conclusive evidence that the requirements of Act and the rules made there under as

to registration of creation of charge have been complied with.



3.7. Modification of charge:

3.7.1. Provisions of Modification of charge are completely same as provisions of

Creation of Charge. After filling form for Modification of Charge Registrar will issue

certificate for modification of charge in form CHG-3.

3.7.2. Any modification in the terms or conditions or the extent or operation of any

charge registered under that section also requires registration.

3.7.3. The following are examples of what would constitute ‘modification’:

Security created for enhanced limit of credit facility

Further charge for the same loan or credit facility by way of additional

security on different property

Release of a part of security from the operation of the charge

Inclusion of different type of loan or credit facility within the overall limit

(provided original charge has not been registered for overall limit as such

without giving break up)

Addition of another creditor as a charge holder by modifying the original

document of charge, with or without any additional credit limit

Change in chargeable rate of interest (other than Base Rate/MCLR) (provided

these terms are mentioned in the original forms)

Change in the nature of security in respect of a charge already created (eg.

EM, SM, Hypothecation to Pledge)

Handing over title deeds by the mortgagee to another creditor for

continuation of security

Assignment of a charge

3.8. Satisfaction of charge:

3.8.1. Charge is created as security for loan or debentures or as security for some

other purpose. If the amount of loan is repaid or debentures are fully paid or other

purpose is fulfilled, there remains no necessity of the charge. This is called

satisfaction of charge.

3.8.2. As per Section 82 – Satisfaction of charge will be filed in form CHG-4 within

30 days of satisfaction of charge. If company fails to file form CHG-4 within 30 days

of satisfaction of charge, then company has to go for condonation of delay for



satisfaction of charge.

3.9. Effect of registration of charge:

3.9.1. As per Section- 81 ROC will maintain Register of Charges in respect of each

company, containing particulars of all charges registered. The Register of charges

maintained by ROC is open for inspection by any person on payment of prescribed

inspection fees.

3.9.2. Deemed Notice: Any person intending to lend moneys or who has lent money to

a company can know which of company’s assets are already charged and extent of

charge.

3.9.3. Charge binding even on subsequent purchaser: Provisions relating to charge

apply even to a subsequent purchaser, even if he had not purchased property directly

from company. The purchaser is required to make reasonable enquiries as to title of

vendor.

3.10. Effect of non-registration of charge:

3.10.1. As per Section 77(3), If charge is not registered with ROC, the charge shall

not be taken into account by the liquidator in liquidation proceedings or any other

Creditor. Mere filing of charge with Registrar would not be sufficient. It has to be

actually registered by ROC and certificate of registration should be issued.

3.10.2. However, this is so only if company is under winding up/liquidation. Otherwise,

contract or obligation for repayment of the money secured by charge is there even if

charge was not registered - Sec 77(4)

3.11. Penalty for not filing charges:

If any company contravenes any provision of this Chapter, the company shall be

punishable with fine which shall not be less than one lakh rupees but which may

extend to ten lakh rupees and every officer of the company who is in default shall be

punishable with imprisonment for a term which may extend to six months or with fine

which shall not be less than twenty-five thousand rupees but which may extend to

one lakh rupees, or with both. 10



3.12. Process of Creation or Modification of Charge:

Process of Creation/ Modification of charge is as under:-

3.12.1. Company to conduct a Board meeting to arrive at a positive decision to avail

the facility including security of Charges. In the said business of availing facility,

authority to execute necessary documents is also required to be given.

3.12.2. File extracts of the said resolution with the Registrar of Companies in form

MGT 14 within 30 days of its passing.

3.12.3. Execute necessary documents for availing the facility including the security

being given.

3.12.4. Make entries in the register of Charges maintained in form CHG-7 forthwith

after the creation/ modification/ satisfaction and get it authenticated by Director

or Secretary of the company or any person authorized by the board.

3.12.5. Submit form CHG-1 (for other than debentures) or Form CHG-9 (for

debentures including rectification) with the prerequisite fees within a period of 30

days from the date of creation/ modification of charge. After due compliance,

Registrar shall issue certificate of registration in form CHG-2, where charge is

registered under section 77(1) or 78 or in form CHG-3, where charge is registered

under section 79.

3.12.6. If CHG-1 (for other than debentures) or Form CHG-9 (for debentures

including rectification) is not being submitted within the period of 30 days, however

within the period of 300 days, prepare an application for condonation in form CHG-10

which shall be supported by a declaration by the secretary or director of the

company that delay shall not affect the rights of creditors. After due compliance,

Registrar shall issue certificate of registration in form CHG-2, where charge is

registered under section 77(1) or 78 or in form CHG-3, where charge is registered

under section 79.

3.12.7. If CHG-1 (for other than debentures) or Form CHG-9 (for debentures

including rectification) is after 300 days, prepare an application for condonation in

form CHG-8 and submit the same with Regional Director having territorial

jurisdiction over the registered office of the company under The Companies Act,

2013.



3.12.8. Pay the requisite penalty imposed by the Regional Director having territorial

jurisdiction over the registered office of the company. Normally 15 days’ time is

being given for the payment of penalty.

3.12.9. After payment of requisite penalty, submit the chalans with Regional director

office with the covering letter containing request to issue and order allowing

condonation of delay.

3.12.10. Submit the order issued by the regional director with the ROC within the

stipulated time given in the order itself in form INC 28.

3.12.11. After the approval of the form INC 28, get the form CHG-1 (for other than

debentures) or Form CHG-9 (for debentures including rectification) approved. After

due compliance, Registrar shall issue certificate of registration in form CHG-2, where

charge is registered under section 77(1) or 78 or in form CHG-3, where charge is

registered under section 79.

3.13. Process of filing Satisfaction of Charge:

Process of Satisfaction of Charge is as under:-

3.13.1. Gets the letter of satisfaction from the bank containing declaration that

there are no dues towards the facility provided.

3.13.2. Conduct a Board meeting to consider the letter of satisfaction and after

taking note of the same in the said board meeting pass the resolution containing

authorization to file form CHG-4 with letter of satisfaction as an attachment. It

must be noted that the said form CHG-4 is required to be submitted within 30 days

of satisfaction. The period of 300 days is applicable in case of creation/modification

of charges only and for satisfaction of charges, there is no relaxation of time period.

3.13.3. Make entries in the register of Charges maintained in form CHG-7 forthwith

after the satisfaction and get it authenticated by Director or Secretary of the

company or any person authorized by the board.

3.13.4. Submit form CHG-4. After due compliance, Registrar shall issue certificate of

registration of satisfaction in form CHG-5.



3.13.5. If CHG-4 is not being submitted within the period of 30 days, prepare an

application for condonation in form CHG-8 and submit the same with Regional

Director having territorial jurisdiction over the registered office of the company

under The Companies Act, 2013.

Registration of Charges with CERSAI

Particulars of creation, modification, or satisfaction of security interest should be

registered with CERSAI in case of,

Mortgage by deposit of title deeds.

Creation of security interest -other types of mortgages.

Hypothecation of plant and machinery, stocks, debts including book debts or

receivables, whether existing or future.

Intangible assets, being know how, patent, copyright, trademark, licence,

franchise or any other business or commercial right of similar nature.

‘Under construction’ residential or commercial or a part thereof by an

agreement or instrument other than mortgage.

The previous requirement of mandatory CERSAI registration within 30 days of

charge creation has been removed. Now there is no maximum time period for CERSAI

registration. However the bank which registers first will get first priority.

The limitation act 1963 provides period of limitation for different types of

suits, appeals and applications. This act is applicable throughout India except

Jammu and Kashmir.

The law favours the diligent & not the indolent.

Limitation period is the time limit within which action can be taken in a court of

law to enforce any legal right.

The limitation period bars the remedy of filing a suit.

LAW OF LIMITATION



It does not take away the right of recovering the debt.

If different parties put their signatures on different dates, the date on which

the last party signs is the “date of document execution”

Limitation starts from the last date of execution

Limitation exclusions

exercising the right of lien

setoff or

selling the goods pledged to bank

(This does not involve filing suits).

If otherwise not specified limitation period is normally three years

commencing from the subsequent date of document.

Periods excluded for calculating limitation

Section 4 – when the court is closed

Section 14 – suit filed in wrong court by mistake

Section 12 – first day of the cause of action can be excluded in computing

period of limitation.

Section 15 (5) - in computing limitation period for any suit, the period for

which defendant has been absent from India shall be excluded.

The period the party in prison or mental asylum to be excluded

Section 15 (1) – when cause of action is restrained by injunction from court

such period of injunction is to be excluded for the purpose of computing

limitation.

How to extend limitation period?

Before expiry of document

Acknowledgement of debt –section 18 binds the person who has signed.



Part payment , slip signed by party – section 19

Ordinary letter where liability of the bank is admitted

Revival letter

Mention in balance sheet

To extend limitation period in our Bank - Formats

Simple DBC (SD 22)– to be obtained once in half year from borrower

Composite DBC – (SD 23) preferably once in a year, both from the borrower/s

and guarantor/s.

SD 23 - extends the limitation of mortgage also (IC 3733 dated 13.07.1988)

SD 23A – to be taken once along with usual DBC subsequent to shift from

BASE RATE to MCLR

Even though liability of guarantor is co extensive with that of borrower (u/s

128 of ICA, 1872), as a abundant caution signature/s of guarantor/s are also

obtained on SD 23 and SD 23A

Regularizing time barred debts

Obtaining an express & unconditional agreement to pay the time barred debt.

[section 25(3) of the contract act ]

This agreement is a valid consideration for fresh promise to pay.

Format available in “guide on documentation” (format 29)

If possible fresh & full set of documents may be obtained

Limitation period for various documents

Nature of Doc. Limitation Period

DP NOTE 03years from the subsequent date

of execution.



Term Loan Document 03 years from the due date of each

installment

SD-1,

Letter of Guarantee

03 years from the date of cause of

action. 03 years from the date of

recall of advance from the

guarantor. (as a abundant caution-

03 yrs from date of SD 01)

SD-02,

Pledge Agreement

Bank can dispose the pledged good after

notice and recover the advance even if

document is time barred.

SD-03, SD 06 etc.,

Hypothecation

Agreement

03 years from the subsequent date of

execution. However if goods are taken

into possession and kept in pledge, then no

limitation for disposal.

Mortgage 12 years from the date of cause of action.

(money becomes due and payable)

Abundant caution – 12 yrs from date of

Mortgage)



Letter of Hypothecation

of Bill

Three years from date of each bill.

Counter Indemnity Three years from the date of

payment of the invoked amount.

For balance due on a

mutual, open and current

a/c, CC a/c

03 years from close of financial year

in which last item/ transaction is

admitted

Limitation in case of suit filed accounts

Appeal to high court

against lower court

90 days from decree date

Appeal to other courts on

the decree at lower court

30 days from date of decree

Execution of decree 12 years from date of decree

Who can sign AOD / DBC?

Individual who has signed the document

Partnership firm – partner authorized as per mandate. As an abundant caution,

all partners to sign. If different partners have signed AOD on different dates,

the date on which first partner has signed is the relevant date

Company – directors authorized to sign AOD as per resolution (separate point

to be there in resolution)



Joint accounts – all joint borrowers

HUF – Karta to sign. However after disruption of HUF, his signature is of no

use

Accounts of Deceased persons – legal heirs

Other important points on limitation

Limitation period is 03 years from date of dishonor of cheque to file a civil suit

For filing criminal proceedings as u/s 142, it is 01 month from date of cause of

action

In mortgage suits – application for Final decree has to be filed before 03

years from the time granted in Preliminary decree

Limitation period is applicable for initiating proceedings under Revenue

recovery acts prescribed under State acts

Part payments into loan account made on basis of standing instructions does

not extend limitation period

If suit is to be filed against Govt. Dept or Public Officer, 2 months notice to

be given (Sec.15(2) read with Sec.80 of CPC) – limitation will extend by this 2

months

Court on being satisfied about the reason, can accept a plaint beyond limitation

period (Sec 5)

Cheque given towards payment – even postdated cheque cleared subsequently

extends limitation for 3 years from date of payment/date of collection

Cheque given towards payment of dues within limitation period, but postdated

which is beyond limitation date gets bounced. Even then the account is within

limitation. The date on which the cheque was received by Bank is the relevant

date for calculating limitation period



Adjustment of deposit under lien does not extend limitation

Initiation of SARFAESIA action does not automatically extend limitation

Pledged goods can be disposed off even after limitation

Court is bound to reject the case where limitation has expired, even though

limitation has not been set up as a defense

If documents signed by partners/directors on different dates, the limitation

runs from the date when the last person has signed.

DBCs signed by partners/ directors on different dates, limitation is to be

reckoned from first date of execution by first person

TYPES OF CHARGES

Fixed charge- Ex. For L & B, plant and machinery

Floating charge- Ex. On stocks in a CC a/c

Parri Passu charge – when several creditors are there (simultaneous charge,

may be in specified proportion OR in the ratio of loans )

Exclusive charge – charge of only one Bank

First charge – charge created in favour of first creditor

Second charge – asset already charged to first creditor, and the charge of

second Bank are subject to the rights of first charge holder

Mode of creating charges

Lien

Right of set off

Right of appropriation

Pledge

Hypothecation

Mortgage



Assignment

Charge wise classification - LIEN

Right of creditor to retain the possession of goods and securities of borrower

/ guarantor till loan is adjusted (Ex. Bills, cheques, share certificates)

Banker’s lien is a General lien (u/s 171 of ICA)

Tailor withholding clothes till payment is made – Particular lien u/s 170 of ICA)

Negative lien – when borrower does not create any charge on assets, but gives

an undertaking to bank stating that-

He is the owner of the assets and is free from encumbrances

He will not dispose of the asset OR create any other charge without permission

from the Bank

It has no legal enforceability in the court of law

Right of setoff

Adjustment of credit balance to debit balance

Prior notice to be issued to the depositor

Loan should be due, cannot be exercised for future debts

Can be exercised for time barred debts

Loan and deposits should be in same name

Guarantors funds can be attached after giving due notice

Though right can be made on term deposit, it can be made only after the term

deposit matures

Right of appropriation

When the borrower has more than one loan in the bank



Express instructions by debtor - As per instructions of the borrower (u/s 59

of Indian contract Act)

To be appropriated to the particular loan as instructed by borrower

Omission by debtor to intimate - In the absence of instructions (u/s 60 of

ICA)

Can be appropriated by Bank to any loan which is due at its discretion (may be

even time barred debt)

Non appropriation – (u/s 61 of ICA)

When the borrower does not indicates or the Bank appropriates, the payment

shall be applied in order of time (Whether loan is in time or time barred)

If debts are of equal standing, the payment shall be applied proportionately

Frequent transactions

In case of overdraft / CC accounts where several transactions are there, both

debits as well as credits, each credit entry is deemed to be appropriated

against debit in chronological order – FIFO-CLAYTON’S RULE

When a FDR is appropriated before its maturity – It is called Right of

appropriation

When FDR is appropriated after maturity – It is called Right of set off

Pledge

Section 172 of the Indian contract act,1872,defines the term pledge as under :

The bailment of goods as security for payment of a debt or performance of a

promise is called pledge.

Ex. Pledge of Gold

Ownership is with borrower, while the possession is with the bank

Only goods {u/s 2(7) of sales of goods act} can be pledged



Bank to take care of goods pledged to it including insurance

Can be sold/ auctioned only after giving notice to borrower

Hypothecation

In hypothecation, the possession of the property offered as security remains

with the borrower and an equitable charge is created in favour of the lender.

“It is a charge against property to secure a debt -where neither ownership nor

possession is passed to the creditor”.

Ex. Hypothecation of stocks, vehicles

Defined in SAFAESI act (U/S 2-n)

Hypothecated goods can be taken to possession only after giving due notice to

the borrower

Comparison of Hypothecation and Pledge

Hypothecation Pledge

Defined in SARFAESI act 2002 u/s 2n Indian contract act 1872

u/s 172

Parties

.Banker

.Borrower

Hypothecatee

Hypothecator

Pledgee

Pledger

Nature of securities Movable assets – stocks,

Machinery, vehicles

Only goods

Ownership Borrower Borrower

Possession With borrower (in trust for

the Bank)

With the bank



Right of Sale Available through court only

However, sale is possible after

taking possession under SARFAESI

Can be sold in public auction

after giving notice to borrower

Registration of

charge with ROC

u/s 125 of companies act Not required

Limitation 3 years Not applicable

Assignment

Assignment is the process by which one can transfer his right/ interest/ title

over his actionable claims (existing or future) to another. (section 130 of

transfer of property act) Eg. life policies

Loan amount to be decided on the basis of surrender value of the policy



Question Set-1

Commercial Law

1. Which of the following statement is correct? A] As per Indian Contract Act 1872 “An Agreement enforceable by law is a contract B] An agreement can be described as proposal + acceptance thereof

C] All contracts are necessarily to be agreement but all agreements do not constitute contracts D] All above statements are correct

2. The Contract entered into will not be valid if

A] Contract is induced by misrepresentation, undue influence, or fraud B] Any of the parties to the contract is minor / of unsound mind / disqualified as per law/contracted during drunkenness C] Object of the contract or the consideration for the contract is not lawful D] a + b + c

3. Voidable contract is one

A] Which is enforceable by law at the option of one or more persons but not at the option of others B] When one or more parties to the contracts have not exercised free consent C] Which remains valid and binding till not repudiated by the party having the right to do so

D] All above are correct

4. A and B are sureties to the loan availed by C. C fails to pay. A & B are compelled to pay the whole sum. C is creditor to D.

A] A & B can recover it from D B] A & B can recover if from C C] Either from C or D D] None of the above.

5. The rule in Clayton’s case applied in the case of : A] Term loans only B] Clean advances only C] Accounts having credit balances D] Running accounts having debit balances



6. According to the rule in Clayton’s case, the moneys paid in by a customer in his current account are to be applied towards adjustment of overdraft :

A] At the option of the banker B] As directed by the customer C] As agreed to between the banker and the customer mutually D] In the order of time in which the debts were incurred

7. To avoid operation of rule in Clayton’s case a banker should rule-off the account which is overdrawn and open a fresh account for further transactions when:

A] A new partner is admitted to a partnership firm B] The bank receives notice of death or insolvency of a partner or a joint account holder C] There is a change in the board of directors of the company D] None of the above

8. ‘M’ a minor by fraudulently representing himself as a major induced a banker to

sanction him a loan subsequently he refused to repay: A] Bank can file a suit against M on attaining majority. B] Bank can file a suit against M and natural guardian C] Bank can file a suit against the Natural Guardian of M only D] None of the above

9. A contract entered into by a minor, ratified on attaining majority is A] Valid

B] Voidable C] Void D] Contract

10. Mr. Parry Mason had agreed to construct himself a guesthouse for Royal Bank.

He had also avail term loan from the Royal Bank for Rs.5.00 lac. Incidentally, Mr. Parry Mason died before construction of the guesthouse and the term loan outstanding was Rs.4.50 lac on the date of his death. Now,

A] Death of Mr. Parry Mason results in discharge of contract for construction of guesthouse and his legal successors shall not be liable to pay compensation to Royal Bank. B] For the outstanding in term loan for Rs.4.50 lac, his legal successors will be liable to pay. C] The maximum liability of the legal successors would be limited to the extent of value of assets inherited or the term loan outstanding, whichever is less D] All above are true



11. INDEMNITY [Section 124 of Indian Contract Act 1872] is a contract by which A] One party promises to save the other from loss caused to him by the conduct of the promissory himself or by the conduct of any other person B] One party assures to make good loss to the guarantor C] One party assures to banker to make good the loss D] None of the above

12. In a contract of guarantee (Sec.126 of ICA of 1872)

A] The person who gives guarantee is called surety

B] The person for whom guarantee is given is called the “principal debtor” C] The person to whom the guarantee is given is called the “principal creditor” D] All the above

13. The guarantee (Sec.126 of ICA 1872) is contract to

A] Perform the promise or discharge the liability of a third person (principal debtor) in case of default B] Perform or discharge the liability of a surety C] Perform or discharge the liability of creditor D] None of the above

14. Mr. AB has given his personal guarantee to the Bank for advance made to ABC

Ltd. A] Mr. AB is primarily liable to pay to Bank B] Mr. AB and ABC Ltd. Are primarily liable to pay to Bank C] Mr. AB is liable to pay only if ABC Ltd. fails to pay to Bank D] None of them are liable to pay to Bank

15. A bank loan sanctioned to Ms. Priyanka (who is a minor) is guaranteed by Ms.Sonia. In case of default

A] Bank can recover dues from Ms. Priyanka B} Bank can recover dues from Ms. Sonia C] Bank can recover from both of them jointly D] Bank cannot recover from any one as Ms. Priyanka is not competent to contract.

16. Bank sanctioned loan of Rs.1 lac to Mr. Hritik for which Mr. Rajesh gave his

guarantee on 1st Jan.1995. Outstanding in account was Rs.1.10 lac on 01.Jan 1998 (date of which suit). The bank is eligible to recover from them

A] Rs.1.00 lac (being original loan amount) B] Rs. 1.10 lac (being dues on the date when documents became time barred) C] Rs.1.25 lac + interest from 01.Jan.1999 D] Bank can not recover any sum



17. The major distinction between indemnity and the guarantee is that A] In a contract of indemnity there are only two parties – Indemnifier and Indemnified, whereas in a contract of guarantee there are three parties namely the Principal Debtor, Creditor and Surety B] In a contract of indemnity, the liability of a promisor is primary and independent, whereas in a contract of guarantee the primary liability is of the principal debtor c] Both are true d] Both (a & b) are false

18. Shahrukh, Salman and Sanjay have given guarantee for Rs.1.00 lac for loan

sanctioned to Sri Entertainment by the Bank. On default by Sri Entertainment, Shahrukh was compelled to pay entire dues to the Bank as a guarantor. Now

A] Shahrukh can recover pro rata share from other two co- guarantors B] Shahrukh can recover entire dues from Sri Entertainment but not from Salman and Sanjay C] Shahrukh cannot recover from any one D] Shahrukh can file counter suit against bank

19. In the above case, now :

A] Shahrukh steps into shoes of the Bank B] Bank will have to hand over securities to Shahrukh (in their possession obtained from Sri Entertainment] C] Bank cannot part with securities to Shahrukh D] A & B as above

20. For loans sanctioned by the Bank to D against personal guarantee by A, B & C, in case of default, if Bank releases anyone of A or B or C or D

A] It can recover its dues from the remaining parties B] On release of the principal debtor D, all guarantors are automatically released C] Bank’s rights are not affected D] All the above are incorrect

21. Though in Bank guarantee document there is a clause that terms of loans can

be changed at the sole discretion of the Bank. A] The guarantors are not bound by these changes unless expressly agreed upon for specific change B] Guarantors can be discharged of their liability by such changes C] The claim of Bank against guarantor may not remain maintainable in court D] All the above are true



22. The guarantee given by the Public Ltd. Co. shall not be valid unless it is A] Registered with Office of Registrar of Company B] Signed by Managing Director and the secretary of the company C] In conformity with Provision of Articles of Association and Memorandum of Association D] As per C above and signed by persons authorized by the Board of the Company.

23. The Guarantee given by the following are not valid

A] Insolvent b] Minor c] Lunatic d] All above 24. The Guarantee given by a partner on behalf of firm for the third person

A] is valid in all cases B] is not valid in all cases C] is valid – If business of the firm is to give guarantee D] None of the above

25. Whenever the beneficiary invokes the guarantee

A] The bank should not pay the money unless it is paid by the applicant customer B] The bank has to pay without delay or demur – irrespective of the fact that applicant customer pays or not C] The bank shall try to postpone the payment under some pretext or other D] The bank shall pursue the customer to bring stay order from the court

26. Generally bank issues guarantee which is

A] Performance guarantee

B] Financial guarantee C] Deferred payment guarantee D] All the above

27. In performance guarantee, the liability of the bank is to

A] Actually perform the job as per contract, in case of default by the applicant customer B] The bank cannot perform actual job, and hence no liability C] Reimburse as per guarantee terms and not to actually perform the job as per contract D] Pursue the applicant customer to complete the job

28. The limitation clause in a bank guarantee is meant for

A] Limiting amount and period of bank’s liability under guarantee contract B] Limiting the stamp duty on guarantee letter C] Limiting the number of pages in guarantee letter D] None of the above



29. At the time of issuance of letter of guarantee A] It is a term loan and fixed liability for the bank B] It is a contingent liability – which may or may not arise – butneed be controlled under contra head C] It is a specific and definite fund based liability to the extent of LG amount D] None of the above

30. The Guarantee related to Export / Import business issued in favour of the

Overseas parties

A] Can be issued by any of the branches without any restriction B] Any branch can issue it after obtaining RBI approval C] It can be issued by Foreign Exchange Dealing Branches D] None of the above

31. In a contract of bailment of goods A] Ownership and possession of goods remain with bailor B] Delivery of goods are to be made by the bailor to bailee for some purpose. On completion of the purpose, the goods are to be returned to bailor are disposed off as directed by the bailor C] Ownership and possession passes on to bailee D] None of the above

32. When Anil hands over his clothes to washing company for wash, it is a

A] Contract of bailment B] Contract of guarantee for washing C] Contract of performance D] None of the above

33. A pledege is a contract where by

A] Standing crop is mortgaged as a security B] Vehicle is hypothecated as a security C] Bailment of goods as a security for payment of debt or performance of promise is made D] None of the above

34. As a Pledgee, bank has got the rights to A] Keep possession of goods for payment of principal dues, interest and reasonable maintenance charges B] If bank incurs extra ordinary expenses for protection of goods, it is entitle to recover the same. C] Bank can sell goods under section 176 (after giving notice to the pledger) to recover its dues D] All the above



35. A Bank sold shares which were held under pledge agreement wherein it was provided that the bank can sell shares without notice to pledgee. The court may hold the sale invalid because

A] The provision in the pledge agreement for disposal of shares without notice to pledgee was against the provision of law, and hence, voidab-initio B] The pledge agreement was not executed after obtaining permission from court C] The pledge agreement was not notarized D] The court cannot hold sale invalid

36. Main parties in case of Agency Agreement are

A] Debtor – Creditor B] Bailor – Bailee C] Lessor – Lessee D] Principal – Agent

37. In case of agency agreement A] Agent is under control of principal and cannot bind principal B] Agent merely acts subject to general plan, directions and the requirement of the person engaging him C] Agent himself is liable in case principal disowns D] Agent has authority to bind principal

38. ABC and Co., entrusts to XYZ (as agent) to sell goods with instructions not to

sell goods for less than Rs.4000/- per tonne. XYZ sells it for Rs.3500/- per tonne.

A] ABC & Co. is not bound by sales made by XYZ

B] ABC & Co. is bound by sales made by XYZ C] ABC & Co. is bound by sales but can recover damages from XYZ D] None of the above

39. Bank acts as agent of the customer while collecting bills. As an agent, it is the

duty of the Bank to – A] Act according to directions given by customer and in absence of specific direction as per custom of trade B] Render proper accounts and not to disclose confidential information C] To obtain fresh / further instructions in case of difficulty D] All the above



40. Mr. Laloo, an officer in the bank who has power of Attorney from the Bank receives Rs.50000/- from the depositor, issues FDR but does not credit the amount in Bank. Mr. Laloo has misappropriated the amount. Under the circumstances,

A] Bank is not liable for payment to the depositor, as the fraud committed by the agent which do not fall within its authority do not affect the principal B] Since Mr. Laloo had the authority to issue receipt, bank shall be liable to depositor C] Bank should pay only Rs.25,000/- to depositor

D] None of the above 41. A Negotiable Instrument means

A] Bill of Exchange and Demand Draft B] Cheque payable to bearer C] Demand Promissory Note D] All above instruments

42. Which of the following is not Negotiable Instrument

A] Share Certificate with blank transfer form B] FDR of the Bank C] Railway receipt, Motor lorry receipt D] All above

43. The term “Allonge” refers to a sheet of paper attached A] To a Negotiable instrument for the purpose of making endorsement thereon when there is no space on the instrument B] Stamps affixed on a document C] A sheet of paper attached to a mortgage deed for the purpose of witness

D] All the above

44. Which of the following is incorrect A] Negotiable Instruments are not transferable B} Holder in due course cannot acquire absolute and good title when transferor has defective title C] Holder-in-due course cannot file suit as instrument is not in his own name D] All the above

45. Section 31 of RBI Act 1934 prohibits issue of Promissory Note, Bill of Exchange, Demand Draft by the Bank, payable to bearer on demand because

A] It will increase frauds in the Banks B] Such instrument if issued would amount to be currency notes, and in India only RBI can issue currency notes C] Both of above D] None of the above



46. There cannot be a holder in due course of cheque bearing a] ‘A/c Payee’ Crossing

b] ‘& Co.’ crossing c] Special crossing d] Not Negotiable crossing 47. In order to operate a valid Bill of Exchange the instrument must satisfy the

condition of a] It must be in writing and signed by drawer

b] Drawer, Drawee and amount to be paid must be certain c] Payee must be certain person or the bearer of the instrument d] All the above 48. The term ‘drawee-in-case of need’ refers to

a] A person from whom money may be demanded in case of need b] The maker of the Bill of Exchange c] A person to whom a bill is got to be presented for payment, when

it is dishonoured by the drawee d] The banker of the drawee 49. Section 138 of Negotiable Instrument Act 1991 provides that where a cheque is

returned due to insufficiency of funds or where it exceeds the amount of credit limit sanctioned by the Bank, the drawer shall be punished with

a] Imprisonment up to one year b] Fine which may extend up to twice the cheque amount c] None of the above

d] Either a or b or both 50. When the day on which bill of exchange falls due for payment is a public

holiday, the bill shall be deemed to be due on

A] The immediate proceeding business day B] The immediate following business day C] The same day of maturity D] None of the above



Answers 1 d 2 d 3 c 4 a 5 d 6 d 7 b 8 d 9 c 10 c

11 a 12 d 13 b 14 b 15 d 16 d 17 c 18 a 19 d 20 b

21 c 22 d 23 d 24 c 25 b 26 d 27 c 28 a 29 b 30 c

31 b 32 a 33 c 34 d 35 a 36 d 37 b 38 c 39 d 40 b

41 d 42 d 43 a 44 d 45 b 46 d 47 d 48 c 49 d 50 a

Question Set-2

Commercial Law

1. Maximum number of partners in a firm carrying out business A] 20 B] 10 C] 100 D] 50

2. While allowing loans to partnership firm, banks get loan document Executed by partners on behalf of firm, as also in their personal capacity, so that in case of default a] Partners personal property can also be applied to meet with the bank dues

before payment to other personal creditors of the partners b] It is only for the sake of formalities c] It is mandatory as per partnership act of 1932 d] None of the above

3. The mandate for operation in the account of Amar. Akbar and Antony – A partnership firm is that the only Amar and Akbar will operate account singly. However, the third partner Antony has given the notice to the bank to stop the operations in the account. The bank a] Cannot stop operations, as Antony has no authority to give such mandate for operations in the account.

b] Must stop operations in the account, till order from court c] Should stop operations in the account. Any further withdrawal will be with joint signature of all the three partners or fresh mandate given by all the three jointly d] None of the above



4. Which of the following document is not recognized by Sale of goods act 1930 as

a title of goods a] Bill of lading, dock warrant and warehouse keeper’s certificate

b] Railway receipt and Motor Lorry Receipt c] Delivery warrant or order for delivery of goods d] All above are title to the goods 5. An unpaid seller of the goods can exercise his rights for

a] Lien over goods b] Stoppage of goods in transit c] Lien over goods and stoppage of goods in transit d] None of the above 6. Bill of Lading is a title of goods and when it accompanies export bill for negotiation of purchase, the banker should accept only if

a] Consignor copy is enclosed b] Entire set of three documents is enclosed c] Bill of Lading issued in a special form d] B/L is issued by agent of the shipping company

7. The parties to the Letter of Credit are

a] Applicant (the buyer of the goods) and beneficiary (seller/supplier/the

party to whom L/C is addressed)

b] Issuing bank (importer / buyer’s bank who lends its name to credit),

advising bank (issuing bank’s branch or correspondent to whom L/C is

sent for inward transmission to beneficiary) and Negotiating Bank (to

whom the beneficiary presents his documents for negotiation or

acceptance )

c] Reimbursing bank (third bank, which repays/settles or funds to the

negotiating bank at the request of L/C issuing bank) and confirming bank

(the bank adding confirmation to the credit)

d] All the above

8. Exporter insists Letter of Credit from Importer so that

a] Exporter is assured of the credit worthiness of the Importer b] The Exporter is assured of payment against the delivery of prescribed set of documents as per L/C terms



c] The Exporter is assured of the payment after the goods are delivered to importer d] None of the above

9 Incase of goods supplied under L/C, being of inferior quality and not

acceptable to the buyer

a] L/C issuing bank can refuse to make payment b] Supplier is bound to pay back to negotiating bank

c] L/C issuing bank should reimburse to negotiating bank, if documents are strictly as per L/C terms d] None of the above

10 The Letter of Credit which cannot be amended or cancelled unilaterally by the

issuing bank without the expressed consent of all the parties there to is known as

a] Revocable Letter of Credit b] Revolving Letter of Credit c] Red Clause Letter of Credit d] Irrevocable Letter of Credit

11 In International Trade, the letters of credit are governed by

a] Foreign Exchange Regulation Act 1973 b] Exchange Control Manual of RBI c] Uniform Customs and Practice for Documentary Credit [Published by International Chamber of Commerce]

d] Foreign Exchange Dealers Association

12 In case of Import Letter of Credit, commission etc., is charged as per the rates prescribed by

a] Exchange Control Manual of RBI b] Indian Banks Association c] FEDAI d] Individual Banks - at their discretion

13 Letter of Credit is a] Fund based limit and there is no liability controlled by the bank b] Term Loan limit and there is fixed liability c] Non-fund based limit at the time of opening of L/C and it is a contingent liability d] None of the above



14 In L/C business, the issuing bank a] Does not earn any income b] Earns fee based income in the form of commission etc., depending upon amount of L/C, tenor, validity period etc. c] May recover commission only after negotiation of the documents d] Recovers interest every quarter from the date of issue of L/C.

15 A Bill of Lading is a

a] Quasi Negotiable instrument issued by shipping company

b] Bill of Exchange issued by the shipping agent or the shipping company c] Negotiable instrument issued by the exporters bank d] None of the above

16 A Contract of Insurance is a contract of

a] Guarantee b] Indemnity c] Surety d] None of the above

17 Insurable interest arises on account of

a] Ownership of goods b] Possession of goods c] Contract of Bailment d] Any of the above

18 A Contract of Insurance is based on

a] Speculation

b] Risk Management c] Utmost good faith d] None of the above

19 In case of Life Insurance Policy, ‘ the sum assured’ indicates

a] Total premium payable by the assured b] Total sum payable by the corporation on the happening of the event c] Total sum payable by corporation on premature closure of policy d] None of the above

20 The average clause in an insurance policy indicates a] Average annual premium payable on policy b] Average value of stock insured c] The portion of the loss to be borne by the insured d] None of the above

21 Insolvency rules are governed by a] Presidency Towns Insolvency Act 1909

b] Provincial Insolvency Act 1920



c] Both the above d] None of the above

22 When liability of a person exceeds the value of his assets and he is unable to

repay his debits in full, a] He is declared Insolvent b] He is declared Criminal c] His liabilities are taken over by the court d] None of the above

23 As per the rules for insolvency proceedings

a] Person himself may approach the court to declare him as Insolvent b] Creditor can make a petition to the Court for debtor to be adjudged insolvent c] None of the above d] Both - a & b

24 As soon as Bank receives intimation that Insolvency petition has been filed in

the court for a particular customer a] Bank should stop paying cheques drawn by customer before date of petition b] Bank should stop cheques drawn by the customer after the date of petition c] No Account should be opened in the name of even un discharged insolvent d] All the above

25 In case of a joint account of A & B, if the Bank received intimation about

insolvency proceedings against A, a] Bank can honour cheques drawn by A or B even after filing of Insolvency petition b] Bank can honour cheques drawn by B only c] Bank can honour cheques drawn by B only upto 50% of the balance in the account d] The balance in the account shall be allowed to be withdrawn under the joint authority of official assignee / receiver and the solvent account holder

26 The Stamp duty charges on security document obtained by the bank are as per

rates prescribed by a] Banking Companies Regulation Act b] Indian Stamps Act c] State’s Stamps Act d] both b and c



27 Security documents of the Bank should be stamped a] Before filing of a suit b] Before execution of decree c]Before execution of documents d] None of the above

28 Demand Promissory Notes should be adequately stamped prior to execution

with a] Judicial Stamp paper

b] Non-judicial stamp paper c] Special Adhesive stamps d] Revenue Stamps

29 A Bank branch in Mumbai has to obtain Mortgage on properly situated in

Ahmedabad owned by a person staying in Kolkata. The Bank can a] Obtain documents on Stamp papers of Maharashtra State duly executed in Mumbai b] Obtain documents on Stamp paper of Gujarath State executed in Mumbai c] Get documents on Stamp paper of Gujarath executed in Kolkata d] Get documents on stamp papers of West Bengal duly executed in Mumbai

30 In case of not duly stamped security documents

a] It may not be admitted as evidence b] It can be impounded by the person having the authority by law c] None of the above d] Both a & b

31 Two distinctive features of the company are : a] Minimum and Maximum number of shareholders b] Legal personality and limited liability c] Articles of Association and Memorandum of Association d] None of the above

32 A Public and Private Ltd. Co. must have minimum number of directors a] 7 and 2 respectively b] any number and 50 respectively c] 3 and 2 respectively d] none of the above

33 Which of the following document is not required to open account of the Private Ltd., Co.,

a] Articles of Association b] Memorandum of Association c] Certificate of Incorporation d] Certificate of Commencement of Business



34 Please fill in the blanks Articles of Association is a document which__________________ whereas Memorandum of Association is a documents which a] Defines scope of its activities and relation with the outside world .Lays down bye-laws for management of internal affairs b] Enables company for commencement of business +Invites public to subscribe share capital c] None of the above d] Both of the above are true

35 One of your valued customers A Ltd. is sanctioned fresh term loan of Rs. 50 Lacs. While release of term loan, it was noticed that upon release of said amount, the borrowing of the company will exceed its paid up capital and free reserves. Under the circumstances

a] The loan can not be allowed in terms of section 293 I.D. of Companies Act 1956 b] Prior approval of Registrar of Companies required c] Prior approval of Company Law Board is required d] The borrowing should be authorised by share holders by resolution in the General Meeting.

36 The usual time limit for presenting documents other than bill for registration

under the Registration Act is a] Within 4 months from date of execution b] Within 30 days from execution

c] Within 12 years from execution d] There is no such time limit

37 When loan is granted on security of immovable property mortgage is created on

it. An immovable property means a] Land and Building b] Tree/Standing Crop grown on the earth and fixed on it c] Machinery fixed on the earth d] All the above

38 For Equitable Mortgage, Original title deed has to be deposited with the

creditor or his authorised representative by a] Owner of property b] Authorised agent of the owner c] Either of A or B d] Bank Manager



39 A dies after execution of documents. A had given power of attorney to B to present document for registration. When B presents document for registration.

a] Power of Attorney given to B was terminated on death of A, and hence, Registrar will refuse to register b] The proper person to present said document will be “legal representative” or “assign” of deceased c] Both are correct d] Both above observation are wrong

40 Which of the following statement is incorrect : a] It is not mandatory to register equitable mortgage, even if the memorandum of entry is recorded b] The equitable mortgage is created by the factum of deposit of title deed and not by reason of recording memorandum c] The memorandum merely recites the creation of equitable mortgage and is not a document creating a charge on properly d] None of the above

41 Mortgage is defined in

a] Section 58 of Transfer of Property Act b] Section 104 of Negotiable Instrument Act c] Section 2 of Indian Contract Act d] Sales of Goods Act

42 The purpose of the Mortgage is to

a] Transfer the ownership of others property b] Transfer the interest in the property for securing a debt or obligation

c] Transfer the property at the instance of Registrar of Assurances d] None of the above

43 In Hypothecation, possession and ownership of goods remain with the

borrower, hence, the position of the Bank is a] As strong as in pledge b] Less strong than pledge but stronger than in mortgage c] a and b are correct d] a and b are incorrect

44 Under lien, the banker’s right is to

a] sell the security on behalf of customer b] retain the security till the loan is paid in full by the customer c] deal with the security as if the Bank is the owner d] none of the above



45 The type of charges available to Banker is a] Lien b] Pledge c] Hypothecation d] All the above

46 Debit Balance confirmation obtained by the Bank from the borrower would give rise to fresh period of limitation from the date when the acknowledge was so signed, provided

a] DBC was signed before the expiry of documents b] DBC was signed by borrower himself or his representative c] DBC was signed for the specified dues of the Bank

d] All the three aspects were complied with

47 Which of the following balance confirmations held by Bank is treated as valid DBC

a] Telegram from borrower acknowledging debt b] Disclosure of dues to the Bank in published annual report of a limited company c] Paying-in-slip signed by borrower during the validity of documents d] B and C above

48 Jaya L. was sanctioned term loan for Rs.5.00 lac on 11 Jan.1995 repayable in 7

years. Jayal L. paid instalmentsupto 11 Jan.1997. Bank could not obtain DBC or fresh documents till 11 Jan.1999, when it was decided to file suit.

a] Documents have expired in Jan.1998 and bank cannot file suit against Jaya L. in Jan.1999 b] Repayment of loan installment till Jan.1997 by Jaya L. tentamounts to admission of a liability and gives fresh start of limitation period. Bank can

file suit in Jan.1999. c] Though documents have expired in Jan.1998, bank can appeal to court even after limitation period is over d] None of the above

49 Which of the following statement is correct

a] For foreclosure by the mortgagee, the limitation period is thirty years from the date when the money secured by the Mortgage becomes due. b] For loans recoverable by monthly installments, the limitation period is three years from the date when each instalment falls due. c} For a suit against the guarantor, the limitation period is three years from the date when the money becomes due against guarantor. d] All above statements are correct



50 When a borrower transfers a specific interest in immovable property to secure a present, past or future debt for performance of a promise which can give rise to a monetary liability, it is called

a] Hypothecation b] Pledge c]Lien d] Mortgage

Answers-

1 c 2 a 3 c 4 c 5 c 6 b 7 d 8 b 9 c 10 d

11 c 12 d 13 c 14 b 15 a 16 b 17 d 18 c 19 b 20 d

21 c 22 a 23 d 24 d 25 d 26 d 27 c 28 d 29 b 30 d

31 b 32 c 33 d 34 a 35 d 36 a 37 a 38 c 39 c 40 d

41 a 42 b 43 d 44 b 45 d 46 d 47 d 48 b 49 d 50 d



ACCOUNTANCY

1 The Journal

It is the beginning. It is the place of systematically recording all

business transactions

Transactions are routed through various types of Accounts

All accounts are classified either as Personal or impersonal in nature

All personal accounts can be defined as related to persons: living or

dead, real or artificial, physical or legal, individual or any

constitutional formation of more than one individual person

The rule in Personal Account is, “DEBIT THE RECEIVER, CREDIT THE

GIVER”

ALL impersonal accounts are further sub divided into Real and Nominal

accounts

Real accounts are related to all tangible asset accounts having definite

shape and size. Here the rule is: “DEBIT WHAT COMES IN, CREDIT

WHAT GOES OUT”

NOMINAL accounts are name sake intangible transactions happening

only as book entries without having any physical evidence. This may be

part of asset or liability or both or income & expenditure. Here the

rule is: “DEBIT ALL EXPENSES & LOSSES, CREDIT ALL INCOMES

& GAINS”

THE two unique words DEBIT AND CREDIT are used as noun, verb

and adjective

2 Posting

The task of posting ledger accounts on the basis of journal is known as

posting

Journalizing is more important because it is the first point to decide

which account is to be debited and which one to be credited



In capital account, debit decreases and credit increases the value

In asset account, debit increases and credit decreases the value

In liability account, debit decreases and credit increases the value

In expenditure account, debit increases and credit decreases the

balance

In income account, debit decreases and credit increases the balance

It is well established that on receipt of cash, cash a/c is debited and

on payment of cash; the a/c is credited

On the above basis, the cash a/c can be prepared straightaway

without the transaction being first journalized. Since the cash

transactions will be numerous, it is better to keep a separate book to

contain only the cash transactions. The book is known as CASH BOOK

Cash discounts comprise cash receipts from customers and payment to

suppliers. The column on the debit side of cash book will record

discount received from suppliers and the one on the credit side will

record discount allowed to customers

3 Cash book

The CASF BOOK which contains columns for discount in addition to

usual cash column is known as DOUBLE COLUMN CASH BOOK

CASH AND BANK accounts are usually one and same thing from

Accountancy point of view. But for clarity in recording, when a CASH

BOOK apart from the cash and discount columns contains the

additional column for Bank transactions, it is called as TRIPLE

COLUMN CASH BOOK

THERE may be large number of small payments which if taken to

CASH BOOK, would make it bulky and undesirably voluminous. Usually,

such payments are made through PETTY CASH account

In IMPREST system petty cash, all small payments are recorded

as sundry items without the head for expenditure

In ANALYTICAL system, the petty cash items are properly

analyzed and distinctly accounted for in books



A petty cash cycle is fixed period say a week or a fortnight or a

month

An asset a/c will show debit balance

A liability a/c will show credit balance

A capital a/c will show credit balance

An expenditure a/c will show debit balance

An income a/c will show credit balance

4 TRIAL BALANCE

It helps us to check the accuracy of our accounting work

If the total of debit entries made in various accounts are listed

and similarly, if another list is prepared with all credit entries;

then the total of these two lists must be equal

If it is not equal, it means there is some error- needs to be

rectified/verified

The two lists of debit and credit balances if combined in one

statement, it would be known as Trial Balance: a baby Balance

Sheet

It facilitates, apart from checking the arithmetic accuracy of

ledger postings/entries; the preparation of Profit & Loss A/c and

Balance Sheet smoothly

Errors disclosed by a Trial Balance usually are:

Wrong totaling of subsidiary books

Posting of the wrong amount

Posting an amount on the wrong side

Omission of an account from ledger accounts

Omission of an amount from Trial Balance

5 Errors are of two types: principles and clerical error

Clerical errors are further subdivided into errors of omission,

errors of commission and compensating errors

Errors of principles are major errors which does not affect the

Trial Balance, but the Balance Sheet



Treating an asset as expenditure and vice versa, treating a

liability as income and vice versa are examples of errors of

principle

Errors of omission may be total or may be partial. If it is total i.e.

omitted from both debit and credit sides, then it will not affect

the Trial Balance. Only in case of partial omission, it will affect

the Trial Balance

Errors of commission may take any of the following forms:

Trial balance

Wrong amount posted in subsidiary books not affecting Trial

Balance

Posting in wrong account not affecting Trial Balance

Wrong amount posted in ledger account affecting Trial Balance

Posting in the wrong side of the ledger affecting the Trial Balance

Wrong totaling of subsidiary books affecting the Trial Balance

6 BANK RECONCILIATION:

CASH transactions are reflected in Cash Book

Bank transactions through cheques and pay-in-slips are reflected

in passbooks/statements furnished by the Bank periodically

However, the passbook balance seldom agrees with that of cash

book in totality

The main reasons of difference maybe cheques issued but not yet

paid by the bank, outstation cheques which has already been

accounted for in the cash book are yet to be collected by the

Bank, entries of bank charges/interest/commission etc. do not

find a place in cash book unless notified by Bank

Entries that have been made in Cash Book, but not in the Passbook

Entries that have been made in the Passbook, but not in the Cash

Book

The reconciliation flow chart would be beginning with the balance

as per Bank Passbook, jotting down items of differences sorted



out as above and concluding with balance as per Cash Book

All expenses of recurring nature the utility of which is not beyond

1 year are classified as Revenue Expenditure

All expenses of huge nature the utility of which are spread over a

number of years by creating an asset are classified as Capital

Expenditure

All huge expenses of occasional nature yet the utility are not

lasting beyond a certain period are classified as deferred capital

expenditure. It is first capitalized to be treated as revenue

expenditure for a number of years

Trading and Profit & Loss account includes all revenue items like

purchases, sales, manufacturing/trading/establishment expenses

etc. in form of both incomes and expenses. The net result is

either profit or loss

This account is usually divided into two portions. The first portion

is known as Trading account showing the broad results of trading

or manufacturing activities

In trading concerns, the sales proceeds are compared with the

amount paid for purchases together with the expenses directly

related to purchases. The difference between the amount

realized by sale and purchase price paid is GROSS PROFIT. If the

purchase price is more than the sales price, there is a gross loss

In case of a manufacturing concern, the sales proceeds will be

compared to the total cost incurred in making or manufacturing

goods. If the sales proceeds exceed the cost of manufacturing, it

will be gross profit or else gross loss for an opposite position

7 TRADING AND PROFIT & LOSS ACCOUNT:

ONLY revenue receipts and revenue expenses to be entered

Expenses and incomes relating to the period only for which the

accounts are being prepared only need to be considered

All expenses and incomes relating to the period concerned should



be considered even if the expenses are not yet been paid by cash

or income has yet been received by cash

While preparing Trading and Profit & Loss account, distinction

should be made between the personal items and business items of

income & expenditure

Domestic & household expenses and Income Tax paid not to

appear in Profit & Loss Account

The BALANCE SHEET is always prepared at a certain date unlike

the Profit & Loss account which is prepared for a year or less.

Even one single transaction will change the position of ASSETS &

LIABILITIES

The ASSETS and LIABILITIES can be arranged either in order

of liquidity or in the order of permanence

THE SELF BALANCING LEDGER SYSTEM

It is a way to condense the TRIAL BALANCE and thus help in

locating the area in which the error lies. The method is simply to

divide up the main ledger and to prove the accuracy of each part

separately

The distinct advantages of this system:

Errors are localized and thus quickly located and rectified

Work can be done simultaneously on all ledgers and thus

completed soon

Figures for the total amounts owing by debtors and owing to the

creditors will be readily available

The total debtors and total creditors are posted in totals and kept in main

ledger. This will show up inaccuracies or mischief , if any

When in a subsidiary ledger, only one sided entries are made

containing either debit or credit balances alone; no trial balance is

possible in this case. A system like this is called as “SECTIONAL

LEDGER”

8 DEPRECIATION



It means a fall in value of the asset. The net result of an asset’s

depreciation is that sooner or later the asset will become useless.

Land is usually not considered for depreciation

The main causes of depreciation are:

Wear and tear by using the tangible asset

Mere passage of time

Obsolescence: when it becomes out of demand

Accidents/breakdowns

Fall in demand/market prices

The most interesting part of depreciation is that it is not visible

like other expenses till the very end. For, there is no actual

payment made for it, though it is treated as an expense in Profit

& Loss account

Depreciation helps in setting the assets in the Balance Sheet at

their proper values. It helps in reporting correct figures of

profit/loss. It ensures retention of enough funds for replacement

of the asset at the end of the estimated life

The basic factors for calculating depreciation are the original

cost of the asset item, the estimated number of years of its

commercial life and the estimated residual or scrap value at the

end of life

Methods for providing depreciation are:

A. Fixed percentage on original cost or straight line method

B. Fixed percentage on diminishing balance

C. Annuity method in time value of money

D. Sinking fund method

E. insurance policy method

F. revaluation method

G. depletion method

H. machine hour rate method



9 PROVISIONS FOR BAD & DOUBTFUL DEBTS:

This estimate is prepared in actual practice by carefully

considering the position of each individual person, who owes money

to the firm

Profit & Loss account is debited and provision for bad debts

account is credited

Thus, profit will be reduced. Provision is carried forward to next

year and deducted from sundry debtors while preparing the

Balance Sheet. At the end of the year, the bad debts account will

be transferred to the Provision account, not the P & L account

DISCOUNT RECEIVED AND RESERVE FOR DISCOUNT ON

CREDITORS: this amount will represent a gain which is expected

to arise in the following year but in respect of present creditors

Reserve for discount on creditors account is debited and profit &

loss account is credited

This reserve for discount account is carried forward showing a

debit balance and deducted from Sundry creditors while

preparing the Balance Sheet

DISCOUNT ALLOWED AND PROVISION FOR DISCOUNT ON

DEBTORS: DISCOUNT ALLOWED to debtors is a loss to the firm

and thus debited to Profit & Loss account

Provision also may be made by passing entry of profit & loss a/c

debited and provision for discount on debtors credited

Sundry debtors stand reduced by the amount of discount

Main features of Partnership firms are:

Fixed and fluctuating capital

Interest on capital brought in by partners including the sleeping

partner

Interest on drawings made by partners



Valuation of goodwill on the occasions of CHANGE IN PROFIT

SHARING RATIO, ADMISSION OF A NEW PARTNER,

RETIREMENT, DEATH, DISSOLUTION AND

AMALGAMATION OF FIRMS

CONCEPT OF super profit, average profit and capital employed

Goodwill= super profit/normal rate of return*100

Capital employed= total tangible assets minus total outside

liabilities

Treatment of annual premium and maturity proceeds to Capital

a/c of partners of joint life policy in profit sharing ratio

In absence of specific insertion in partnership deed, the

Partnership Act,1932 becomes applicable. As per the bindings of

the Act:

i. Partners share profit/loss equally

ii. No partner is entitled to remuneration

iii. No interest on capital is allowed

iv. No interest on drawings is charged

v. Loan given by partners to carry interest @6% p.a

Transfer of general reserves to existing partners in the old profit

sharing ratio and debiting the new partner’s capital account in the

new profit sharing ratio

Revaluation of Assets and Liabilities



Accountancy Questions: 1. Which of the following is incorrect?

a] Total assets minus capital introduced in the beginning equals total outside liabilities. b] Tangible Net worth means Tangible Assets minus outside liabilities c] Profits or losses have effect on net worth. d] Value of human resources is shown as an asset in Balance Sheet

2. Which of the following is false?

a] Capital is decreased by losses and increased by profits. b] Taking loans although assets are increased does not increase Revenue c] A transaction which increases the capital is called income d] Amount owed to outsiders (excluding the proprietor) is called outside liabilities

3. The liabilities of a firm are Rs.30000; the capital of the proprietor is Rs.70000.

The total Assets are:

a] Rs.70000 b] Rs.100000 c] Rs.40000 d] None of the above

4. Which of the following statements is true?

a] The Balance sheet represents an expansion of the equation “Assets=Liabilities + Capital “ b] Assets minus original capital = liabilities c] A firm has an asset of Rs.12000 and liabilities of Rs.4000 the capital of the firm therefore should be Rs.16000. d] If a firm borrows money its capital will be reduced.

5. Which of the following is correct? Trial balance…

a] is prepared every year b] is prepared after preparing the profit and loss account c] shows the profit earned by the firm during a period d] has two columns debit and credit



6. Drawings by the proprietor would:

a] Decrease both assets and owner’s equity b] Increase assets as well as owner’s equity c] decrease assets and increase owner’s equity d] Increase assets and decrease owner’s equity

7. Sale of machinery for cash would

a] decrease total assets b] decrease current assets c] decrease fixed assets and increase current assets d] increase fixed assets and decrease current assets

8. Cash deposited with the bank

a] increases total assets b] increases current assets c] decreases current assets d] none of the above

9. On January 1, 2001 the position of Mr. V Arun was as follows. Stock in hand

Rs.2400/-, Bills payable Rs.400/-, Cash at Bank Rs.1800/-, Plant and machinery Rs.1000/- Owing by debtors Rs.500/-, Owing to creditors Rs.800/- investments Rs.2000/-, Loan from S. Chandni Rs.1500/-. What was the amount of Mr. Arun’s capital ?

a] Rs.10000/- b] Rs.6000/- c] Rs.8000/- d] Rs.5000/-

10. On 1-1-2001 Mr. Menon had goods worth Rs.40000/- in his godown. During the year he purchased goods worth Rs.60000/-. His sales during the year were Rs.70000/- and there were goods still lying in his godown worth Rs.43000/-. What is the amount of his Gross Profit ?

a] Rs.10000/- b] Rs.12000/- c] Rs.18000/- d] Rs.13000/-

11. State which of the following correctly complete the sentences given

below. The cash book records…………. a] all cash receipts b] all cash payments c] all cash receipts and payments d] cash and credit sale of goods



12. Complete the sentence. The balance in Petty cash book is ………….

a] an expenses b] a profit c] an asset d] none of the above

13. Goods sold on credit will be entered in the ………….

a] cash book b] sales book c] sundry debtors account d]none of the above

14. A bank Reconciliation Statement is prepared so that the difference in the under mentioned balance is reconciled

a] the difference in the balances of the bank and cash balances b] the difference in the balances in the Pass Book in the beginning and at the end. c] the difference in the Pass book and cash book balances.

15. The Pass Book of the Account holder is a copy of :

a] The bank columns in the Cash book of the Account holder. b] The relevant account in the books of a Bank c] The cash columns in the cash book of the customer.

16. A Bank reconciliation Statement :

a] is prepared to ascertain the causes for the difference in the cash columns of the cash book and the bank columns

b] is prepared to establish the causes for the difference between the cash balance and the pass book balance. c] is prepared to establish the causes of the difference between the balances shown by the bank columns of the cash book and that shown by the pass book.

17. Accounting concept which requires the practice of crediting closing stock to the trading account is :

a] Objectivity concept b] Accrued concept c] Dual Aspect concept d] Matching concept

18 Which one of the following is not taken into account in adjusting pass book

balance : a] mistakes in pass book

b] mistakes in cash book c] Bank charges debited in pass book

d] dividends credited in the pass book



19. Favourable Bank balance means :

A] debit balance in the cash book B] credit balance in the cash book C] credit balance in the pass book D] debit balance in the pass book

20. A amount of Rs.2000/- is credited twice in the passbook, when overdraft as per

cashbook is the starting point a] Rs.2000/- will be added b] Rs.2000/- will be deducted c] Rs.4000/- will be deducted d] Rs.4000/- will be added 21. Cheque issued against salary is recorded in the a] bank columns of the cash book b] cash columns of the cash book c] both cash and bank columns of the cash book d] none of the above 22. Bank Reconciliation Statement is : a] a Ledger Account b] a separate statement c] a journal

d] a part of the Bank Pass Book. 23. On 31st March 2000 the Cash Book showed a balance of Rs.1500/- as cash at

Bank, but the bank pass Book made up to the same date showed that cheques for Rs.185, Rs.100 and Rs.175 respectively has not been presented for payment; also cheques to the amount of Rs.410/- paid into the account had not yet been cleared. Fine by means of a Reconciliation statement the balance shown in the pass book.

A] 1550 b] 2550 c] 1425 d] 1675 24. The balance of cash at bank, as shown by the Cash book of Pran on 31st

December 2000 was Rs.7500/-. On checking the entries with the pass book, it was found that cheques of Rs.1200/- paid in on 30th December were not yet credited and cheques of Rs.2600/- issued on 28th December were not presented until 3rd January. There was a credit of Rs.125/- for interest in the pass book and a debit of Rs.10/- for bank charges which were not entered in the cash book.



After preparing the Bank Reconciliation Statement balance as per Pass Book will be:

A] Rs.9015 b] Rs.9035 c] Rs.9040 d] Rs.8550 25. An overdraft of Rs.7500/- on 31st December 2000 appeared in the books of Mr.

Prakash. On going through the cash book, it was found that two cheques for Rs.500/- and Rs.700/- deposited in the month of December were not credited in the pass book till January 2, 2001 and three cheques for Rs.600/-, Rs.800/- and

Rs.1200/- issued on December 28 were not presented for payment till January 3, 2001. In addition to this, Bank had credited the merchant for Rs.125/- as interest and had debited him for Rs.10/- as bank charges, for which there were no corresponding entries in the cash book. The bank had charged Rs.675/- as interest, not yet recorded. Prepare a Bank Reconciliation Statement as on December 31, 2000; where overdraft as per Pass book will be:

A] Rs. 6670 b] Rs.5985 c] Rs. 6100 d] Rs.7500 26. Which of the errors will be revealed by the Trial Balance: a] compensating error b] errors of principle c] writing an amount in the wrong account but on the correct side. d] wrong balance of an account

27. Point out the types of errors given below : [ Put 1 against errors of omission, 2 against errors of commission, 3 against errors of principle, 4 against compensating errors and 0 if it is not an error]

a] Sale of Rs.120/- was written in the purchases book

b] salary paid to Ram has been debited to his account c] purchase of furniture has been entered in the purchases books d] Rs.120/- received from Ganesh has been debited to his account e] Frieght paid on machinery has been debited to the freight ccount f] The discount columns of the cash book have not been posted. g] Repairs to buildings have been debited to the buildings account. h] The total of the sales book is Rs.100/- short i] The sale of Rs.337/- has been posted as Rs.373/- j] The amount of dishonoured bill has been debited to general expenses account.



28. Goods worth Rs.1000/- taken by the proprietor for domestic use should be credited to :

a] Sales account

b] proprietor’s personal expenses account c] purchase account d] expenses account 29. Errors of commission do not permit

a] correct totaling of the balance

b] correct totaling of the trail balance c] the trial balance to agree 30. The preparation of Trial Balance helps in

a] locating errors of omission b] locating errors of principle c] locating clerical errors 31. Rs.200/- received from Mr. Mahajan whose account was previously written-off as a bad debt should be credited to :

a] Bad debts recovered account b] Mahajan’s account c] Income account 32. Sale of office furniture should be credited to :

a] sales account

b] Office equipment account c] cash account 33. A bill of exchange has ________________ parties a] Two b] Three c] Four 34. The party which is ordered to pay the amount is known as a] Drawer b] Acceptor c] Payee d] Drawee 35. 3 days are added for ascertaining the date of maturity, it is known as days of _________________ a] maturity b] Grace c] Payment



36. Mathew draw on Rajesh 3 bills of exchange respectively on 29th, 30th and 31st January, 2004. The term in each case is one month. What will be the due date of payment ?

a] 3rd, 4th and 5th March

b] 3rd March c] 2nd, 3rd and 4th March d] 1st, 2nd and 3rd March

37. A four months bill drawn on 1st January, 2004 will mature for payment on

a] 3rd March 2004 b] 4th May, 2004 c] 5th May 2004 d] 2nd April 2004 38. The bills receivable book is a part of : a] the journal b] the ledger c] the profit and loss account d] cash book 39. The rebate on bill shows that :

a] it has been paid before the date of maturity b] it has been paid after the date of maturity c] it has been dishonoured d] before or after availing at the discretion

40. Below are given the names of some assets. Classify them

[Put a for Fixed Assets, b for fictitious assets, c for current assets, d for wasting assets and e for liquid assets]

1. Good will 2. Sundry debtors 3. Loose tools 4. Motor vehicles 5. Closing stock of materials 6. work in progress 7. Bank balance 8. Formation expenses 9. Stock of finished goods 10. Prepaid expenses 11. Mines



41. State which of the following statement are correct : a] Capital is the difference between the assets and the liabilities to outsiders

b] Gross profit is ascertained by deducting purchases from sales c] The value of the closing stock show the amount of the profit earned. d] Wages paid for erecting machines are debited to the wages account 42. Which of the following statement is not correct

a] Fixed assets are always shown at cost b] The donation paid to an orphanage is debited to the account of the orphanage

c] The value put on the closing stock affects profit. d] The value put on the closing stock affects net worth. 43. Out of the following which are 1) Capital Expenditure 2) Revenue expenditure

and 3) deferred revenue expenditure.

a] Rs.1200/- spent on the repairs of machines. b] Rs.2500/- spent on the overhaul of machines purchased secondhand c] White washing expenses d] Paper purchased for use as stationery e] Advertising campaign to launch a new product f] Renovation of the cinema hall g] Brokerage paid in connection with purchase of land h] Expenses incurred to get the manager’s office air conditioned i] Loss on investments

j] Expenses to move the stock of goods from one place to another. 44. Of the following, which is not a Revenue Expenditure:

a] Replacing the mosaic floor by Glazed tiles in the office. b] Expenses incurred to set right defects in a new machine before it is used. c] Freight paid on a machine for bringing it to own premises. d] All of the above. 45. Good will is a] Current Asset b] Intangible assets c] Tangible asset d] book asset 46. Stock is included a] in the category of fixed assets b] as part of current assets c] as part of intangible assets d] unless it is sold not included



47. The profit and loss account shows

a] the financial position of the concern b] the net profit earned c] the gross profit earned d] the ability to manage the problems of business 48. The Manufacturing account is prepared

a] to ascertain the profit or loss on the goods produced. b] to ascertain the cost of manufacture goods. c] to show the sale proceeds from the goods produced during the year. d] to verify systems related to manufacturing process. 49. We give below various items of expenses and incomes, Classify them into a] outstanding expenses b] outstanding income c] prepaid expenses and d] unearned income

rent paid in advance subscriptions received in advance Rent due unpaid wages unpaid advertising expenses premium paid in advance interest to be received rates paid in advance insurance premium received by the insurance company in advance.

50. State which of the statement given below are true

a] Outstanding rent is shown as an outstanding asset b] Adjustment entries are passed throughout the year like other

entries. c] The provision for doubtful debts account has a debit balance. d] Depreciation is a loss.



Answers 1 D 2 c 3 b 4 a 5 a 6 d 7 c 8 d 9 d 10 d

11 C 12 a 13 b 14 c 15 b 16 c 17 c 18 c 19 a 20 b

21 A 22 b 23 a 24 a 25 a 26 d 27 @ 28 a 29 a 30 a

31 C 32 b 33 b 34 d 35 b 36 b 37 b 38 a 39 a 40 *

41 A 42 b 43 * 44 d 45 b 46 b 47 b 48 a 49 * 50 d

Question No.27

a. 2 b] 2 c] 3 d] 2 e] 3 f] 1 g] 3 h] 4 I] 2 j] 2

*Question No.40

I Goodwill – Fictitious Asset

II Sundry Debtors – Current Asset

III Loose Tools – Current Asset

IV.Motor Vehicle- Fixed Assets

V Closing Stock of Materials – Current Assets

VI Work in progress – Current Asset

VII Bank Balance – Current Asset

VIII Formation expenses – Fictitious Asset

IX Stock of finished goods – Current Asset

X Prepaid expenses – current asset

XI. Mines – Fixed Asset



*Q.No.43

A] Revenue F] Revenue

B] Capital G] Capital

C] Revenue H] Capital

D] Revenue I] Revenue

E} Deferred Revenue Expenditure j] Revenue

*Q.No.49

1. Rent Paid in Advance : Prepaid Expenses 2. Subscription received in Advance: Unearned Income 3. Rent due – Outstanding income

4. Unpaid wages – Outstanding Expenses 5. Unpaid advertising expenses _ outstanding expenses 6. Premium paid in advance – Prepaid expenses 7. Interest to be received – Outstanding income 8. Rates paid in advance – Prepaid expenses 9. Insurance premium received by the insurance company in advance – unearned

income.

Accountancy questions: 1. State which of the statement will correctly complete the various sentencesThe

amount of Rs.1000/- paid to the Hindustan Transport Company to send a machine to us should be debited to

a] The Hindustan Transport Company b] Freight account c] Machine account d]Cash account

2. Which is correct about Outstanding Income . It is ….

a] an asset b] a liability c] an expense

3. State which of the statement will correctly complete the various sentences

Outstanding Rent is a] a real account b] a nominal account c] a personal account without name



4. The Manager is entitled to a commission of 5% on the profit after deducting the

commission. The profit before deducting the commission is Rs.2100/-. Therefore the commission will be

a] Rs.100/- b] Rs.105/- c] Rs.110/-

5. Prepaid rent is shown as

a] an asset b] a liability c] an expense 6. State whether the following statements are True or False

a] Balance sheet is a statement showing financial position of the concern on a particular date.

b] Profit cannot be computed properly unless depreciation is provided c] Cash at bank is classified as Current Assets d] The balance of machinery account is transferred to Profit & Loss account e] Every adjustment is to be recorded at two places f] Trial Balance is an absolute proof of the accuracy of the books of accounts g] Provision for discount on creditors will always show a debit balance h] Balance sheet is a position statement I] Goodwill is a fictitious asset j] Capital is increased by profits and is decreased by losses

7. If total assets decreased by Rs. 60,000 during a period of time and total liabilities

decreased by Rs.24,000/- during the same period, the amount and direction of

the period’s change in capital is –

a] Rs.60,000 decrease b] Rs.84,000 decrease c] Rs.36,000 decrease d] Rs.24,000 decrease

8. During a period of rising prices, higher profits can be shown by valuing stock at

a] LIFO b] FIFO c] Weighted average price d] none of the above



9. A book keeper has submitted to you to following Trial balance wherein the totals of the Debit and Credit balances are not equal

Debit Balances [Rs.] Credit Balances [Rs.]

Capital 7670

Cash in hand 30

Purchases 8990

Sales 11060

Cash at Bank 885

Fixtures and Fittings 225

Freehold premises 1500

Lighting & Heating 65

Bills receivable 825

Returns Inward 30

Salaries 1075

Creditors 1890

Debitors 5700

Stock at Jan. 01,2004 3000

Printing 225

Bills payable 1875

Rates, Taxes & Insurance 190

Discounts allowed 200

24175 21705

You are required to : a] Redraft the Trial Balance correctly b] Prepare a Trading & Profit Account and a Balance sheet after taking into account the following adjustments

1. Stock on hand on 31st December’2004 was value at Rs.1800

2. Depreciate Fixtures and Fittings by Rs.25 3. Rs.35 was due and unpaid in respect of salaries

4. Rates and Insurance has been paid in advance to the extent of Rs.40.00

10. Depreciation arises because of

a] wear and tear b] inflation c] fall in the value of the asset d] none 11. The loss on the sale of an asset is debited to

a] reserves b] depreciation fund c] P & L Account d] none



12. State which of the statements correctly completes the various sentences

The diminishing value method means a method by which a] The rate of depreciation falls year by year b] The amount on which depreciation is calculated falls year byyear c] The rate as well as the amount to which it is applied falls year by year d] none

13. Goods sent on consignment are debited

a] Goods sent on consignment account b] Consignment account c] account of the consignee d] none

14. The total of the outward consignment book is credited to

a] Goods sent on consignment account b] Purchases account c] Consignment account d] none

15. Mention the statement that will correctly complete the following sentence

Freight cartage, insurance etc paid in connection with consignment are debited to

a] Freight and Insurance account b] The concerned consignment account c] Trading account d] none

16. Mention the statement that will correctly complete the following sentence.

The balance in the goods sent on Consignment Account is shown a] On the liabilities side of the balance sheet b] On the asset side of the balance sheet c] On the credit side of the Trading account d] none

17. Mention the statement that will correctly complete the following sentence

The balance in the Consignment Stock account is shown a] On the liabilities side of the balance sheet b] On the credit side of the trading account c] On the asset side of the balance sheet

d] none



18. Fill in the blanks with the appropriate words given in brackets

In the case of Del-credere commission, the _______________ is liable for bad debts. a] Consignor b] Consignee c) No such commission d] none

19. Goods sent on consignment is ______________

a] Sale b] not a sale c) considered sale at the option of buyer d] none

20. If the consignee sells goods, he credits _______________

a] Sales account b] Consignor c] Purchaser d] none 21. S & T entered into a joint venture to buy scrap and then sell it. S invested Rs. 5,00,000 and T sold it for Rs.8,00,000. How much money should T sent to S ?

a] 5.00 lac b]8.00 lac c] 6.50 lac d] 13.00 lac

22. Which of the following is correct?

a] Co-ventures are really partners for the purpose of the venture b] A joint venture is limited to a particular venture, hence the liability of the co-venture is limited c] Only natural persons, not joint stock companies, can enter into a joint venture d] None of the above

23. With whom does a partnership firm registered a] Registrar of firms b] Registrar of companies c] Registrar of deeds d] Sub Registrar estates

24. Complete the following by adding one of the statements given:

Current account for partners should be opened when a] Capitals are fixed b] Capitals are fluctuating c] When capitals are either fixed or fluctuating d] none.




When A and B sharing profits and losses in the ratio 3:2 admit C as partner giving him 1/5 share of profits. This will be given by A and B a] Equally b] In the ratio of their profits c] In the ratio of their capitals d] none


In the absence of an agreement profits and losses are divided a] In the ratio of capital b] In the ratio of time devoted by each partner c] Equally d] none

27. Complete the following by adding one of the statement given. When a new partner gives cash for goodwill, the amount is credited to a] Goodwill account b] Capital account of the new partner c] Cash account d] none

28. In the case of the following state the number of statement which will correctly

complete the sentence : On a hundred rupee share, Rs.80 have been called up: on forfeiture the amount to be debited to the share capital account will be A] Rs.100 b] Rs. 80 c] Rs.50 29. Complete the following by adding one of the statements given in

If on admission of a new partner there is a profit on revaluation of assets, it is transferred to a] The capital account of old partners in the new ration b] The capital accounts of all the partners in the new ratio c] The capital account of the old partners in the old ratio



30. Complete the following by adding one of the statements given. The interest on the capital accounts of partners is credited to a] Interest account b] Partners’ capital account c] Profit & Loss account d] None of these

31. The partnership deed provides for a salary of Rs.700 per month to

partner X. If X withdraws only Rs.500 in a months, the remaining Rs.200/- is a] Credited to Profit & Loss [Adjustment] Account b] Credited to the current account of partner X c] Credited to Salary Payable account d] Debited to his capital account

32. X, Y and Z are partners in a firm. If B is to be admitted as a new partner

a] Old partnership has to be dissolved b] Old firm has to be dissolved c] Both old firm and partnership have to be dissolved d] Neither firm nor partnership need to be dissolved

33. The current account of a partner

a] will always have a credit balance b] will always have a debit balance

c] may have a debit balance or credit balance d] can never have a debit balance

34. Interest payable on the capital of the partners is charged in :

a] Profit & Loss Account b] Profit & Loss [Adjustment] Account c] Profit & Loss Appropriation Account d] Realization Account

35. A, B and C are equal partners. A & B die together in a plane crash. This accident results in

a] Dissolution of partnership b] Dissolution of firm c] Dissolution of firm as well as dissolution of partnership d] Neither dissolution of firm nor dissolution of partnership



36. On dissolution all assets are transferred to realization a/c at: a] Book value b] Market value c] Cost or market value, whichever is less d] None of these

37. Provision of bad and doubtful debts appearing in the books at the time of dissolution of firm is transferred to :

a] Capital accounts of the partners b] Debtors account c] Bad debts account d] Realization

38. On dissolution of a firm, an amount realised from the unrecorded asset is credited to

a] Revaluation account b] Realisation account c] Cash account d] Asset account

39. A retiring partner continues to be liable for obligations incurred after his retirement

a] if unpaid amount is transferred to his loan account b] if he does not give public notice

c] if he starts a similar business elsewhere d] none of these

40. Partnership can be brought to an end by giving notice when

a] partnership is for a fixed period b] partnership is not for a fixed period c] partnership is at will d] the purpose for which it was established has come to an end

41. Loss arising from insolvency of a partner is to be borne by other partners

a] in equal ratio b] in the ratio of their capital c] in the profit sharing ratio d] in the gaining ratio



42. In self-balancing and sectional balance system, Goodwill account is opened in

a] Debtors ledger b] General ledger c] Creditors ledger d] None of these

43. In self balancing and sectional balance system, provision for Doubtful debts

account is opened in

A] Debtors ledger B] General ledger C] Creditors ledger D] None of these

44. In self-balancing and sectional balance system, General Ledger account(s) are opened in

A] Debtors ledger B] In both Debtors ledger and Creditors ledger C] Creditors ledger D] None of these

45. Share Application account is a

A] Personal Account B] Real Account

C] Nominal Account D] None of these

46. For which of the following purpose, share premium can be used

A] in writing off the discount on debentures of the company B] in writing off the preliminary expenses of the company C] issuing bonus shares D] in providing for the premium payable on the redemption of

preference share E] All of the above.

47. Capital Redemption Reserve Account is created

A] Voluntarily to accumulate funds to redeem preference share in future B] To meet legal requirements regarding redemption of preference shares C] Out of share premium account to redeem preference shares

D] Out of share forfeiture account to redeem preference shares



48. A company wishes to pay dividend on shares. State which of the following may

be used for the purpose.

A] Premium on shares B] Profit on re-issue of forfeited shares C] Profit on sale of land D] General Reserve

Answer

1 c 2 a 3 C 4 a 5 A 6 * 7 b 8 a 9 * 10 a

11 c 12 b 13 B 14 a 15 B 16 c 17 c 18 b 19 b 20 b

21 c 22 b 23 A 24 a 25 B 26 c 27 a 28 b 29 c 30 b

31 b 32 d 33 C 34 a 35 C 36 b 37 a 38 b 39 b 40 c

41 c 42 d 43 B 44 b 45 A 46 c 47 a 48 d

*Q.No.6.

A] True B] True C] True D] False E] True F] False G] True H] True

I] True J] True

*Qno.9

Corrected Trial Balance

Account Debit Balance Credit Balance

Capital 7670

Cash in Hand 30

Purchases 8990

Sales 11060

Cash at Bank 885

Fixtures and Fixtures 225

Free Hold premises 1500



Lighting and Heating 65

Bills Receivable 825

Returns Inward 30

Salaries 1075

Creditors 1890

Debtors 5700

Stock on 01.01.04 3000

Printing 225

Bills Payable 1875

Rates taxes and Insurance 190

Discount allowed 200

Suspense A/c difference in TB 445

22940 22940

Closing stock – 31.12.2004 – Balance sheet and Trading account

Depreciation on F/F P & L and Balance sheet to F/F

Salary – Rs.35 outstanding Salary in Balance Sheet and P/L add to Sal

Rates and Insurance – Rs.40/- less in P/L and Balance sheet prepaid.



Wish you

All the Best!!

Staff College, Bengaluru

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