Accounts of Banking, Electricity and Insurance Companies: formula sheet

Key formulas

Interest earned (Schedule 13)

Interest/discount on advances and bills + Income on investments + Interest on balances with RBI and other inter-bank funds + Others

Adjust discount on bills for rebate: add opening rebate, deduct closing rebate.

Rebate on bills discounted

Income for the year = Discount received + Opening rebate − Closing rebate

Closing rebate is the unearned discount. Show it under Other Liabilities and Provisions (Schedule 5).

Total expenditure

Interest expended (Sch. 15) + Operating expenses (Sch. 16) + Provisions and contingencies

Interest on deposits and borrowings goes to Schedule 15, not Schedule 16.

Net profit

Total income − Total expenditure

Income tax provision is part of Provisions and Contingencies, so net profit in Form B is after it.

Profit available for appropriation

Net profit for the year + Profit brought forward

If there is a loss, deduct it from the amount brought forward.

Statutory reserve

Transfer = at least 20% of the year's net profit

Transfer this before declaring any dividend. Use the rate or amount given in the question.

Balance carried to balance sheet

Profit available − Statutory reserve − Other reserves − Proposed dividend

Shown in Schedule 2 under Balance in Profit and Loss Account.

Form A check

Total of Capital and Liabilities = Total of Assets

Contingent liabilities and bills for collection are outside this total.

NPA test

Overdue > 90 days → NPA

Applies to interest or instalment overdue on term loans, and to bills overdue. Cash credit or overdraft accounts that are out of order are also NPAs.

Sub-standard asset

NPA for ≤ 12 months

Provision: 15% of total outstanding. Add 10% on the unsecured exposure, which makes 25% on the unsecured part.

Doubtful asset – secured portion

Up to 1 year: 25% | 1 to 3 years: 40% | More than 3 years: 100%

Applied to the realisable value of the security. Period is how long the asset has been doubtful.

Doubtful asset – unsecured portion

Unsecured portion = Outstanding − Realisable value of security; Provision = 100%

Always 100% on the part not covered by security, whatever the age.

Loss asset

Provision = 100% of outstanding

Applies to the balance not yet written off.

Standard asset

General provision = Rate × Standard advances

Use the rate stated in the question. 0.40% is the common rate for general advances. Rates differ for some sectors.

Interest on NPA

Recognised on receipt basis only

Reverse interest accrued but uncollected when the account becomes NPA.

Income from bills discounted

Income = Discount received + Opening rebate − Closing rebate

Closing rebate = Unexpired discount on bills at the year-end. It appears under other liabilities.

Reasonable return

Reasonable return = Capital base × (Bank rate + stated percentage) ÷ 100

Use the bank rate and the extra percentage given in the question. Textbooks commonly add 2% to the bank rate, but follow the question.

Clear profit

Clear profit = Net profit before interest − interest on debentures and loans − contingencies reserve appropriation (and any other deduction the question states)

Check what the question lists as deductions. Do not deduct dividends, which are appropriations from clear profit.

Excess or shortfall over reasonable return

Excess = Clear profit − Reasonable return (if positive)

Excess is shared or transferred as the question directs. If clear profit is lower, there is no excess.

Capital Account balance

Balance = Total capital receipts − Total capital expenditure

A credit balance appears on the liabilities side of the General Balance Sheet. A debit balance appears on the assets side.

Structure of the double account system

Revenue Account → Net Revenue Account → Appropriation; Capital Account → General Balance Sheet

Revenue items never go into the Capital Account and capital items never go into the Revenue Account.

Net premium

Net premium = Direct premium + Reinsurance premium accepted − Reinsurance premium ceded

Use the net figure as the base for the unexpired risk reserve.

Premium earned (net)

Premium earned = Net premium + Opening reserve for unexpired risks − Closing reserve for unexpired risks

Reserve for unexpired risks is normally shown as an adjustment, not as a separate expense.

Closing reserve for unexpired risks

Closing reserve = Net premium × rate (usual exam convention: fire 50%, marine 100%)

Use the rate stated in the question. Marine 100% is usual for a single-voyage basis.

Claims incurred (net)

Claims paid + Closing outstanding claims − Opening outstanding claims − Reinsurance recoveries (adjusted for outstanding)

Add claim expenses such as survey fees to claims.

Net commission

Commission = Commission paid on direct business + Commission on reinsurance accepted − Commission received on reinsurance ceded

Commission received on reinsurance ceded reduces the net commission.

Underwriting result

Revenue account balance = Premium earned − Claims incurred − Net commission − Expenses of management

A positive balance is transferred to profit and loss account; a negative balance is a loss.

Statutory requirements

Separate accounts for each class (s.10); shareholders' and policyholders' funds kept separate (s.11(2))

Section 11 requires the accounts in accordance with the specified regulations.

Quick revision

• Banks and insurers use formats prescribed by their governing laws, not the general company format.
• Learn each statement as a list of heads in order, then fill in the figures.
• Show working notes for every adjusted figure to earn step marks.
• NPA classification depends on how long the account has stayed overdue or unrecognised.
• Income on an NPA is not recognised as income in the usual way, so check what you must exclude.
• Provision rates depend on the asset category, so memorise the categories before the rates.
• Electricity company accounts follow the regulated-business idea, so link figures to the regulatory framework.
• Insurance accounts are prepared class by class, so keep each class of business separate.
• Adjustments for outstanding items and reserves change both the revenue account and the balance sheet.
• In MCQs, read the exact wording of the term and pick the option that matches the rule, not general accounting habit.

Common mistakes

• Treating the whole discount on bills as income of the year. Fix: Deduct the closing rebate from income and show it as a liability in Schedule 5. If an opening rebate is given, add it to income.
• Showing interest paid on deposits under Operating Expenses. Fix: Interest on deposits and borrowings goes to Schedule 15. Schedule 16 is for staff, rent, printing, fees, depreciation and similar costs.
• Applying the doubtful asset percentage to the full outstanding instead of splitting it into secured and unsecured parts. Fix: Always split first. Secured = realisable value of security. Unsecured = outstanding − that value. Then apply separate rates.
• Taking the sub-standard rate as 25% on the whole outstanding. Fix: Use 15% on the total outstanding, then add 10% on the unsecured part only. For a fully secured loan it stays at 15%.
• Treating the double account system as a different kind of bookkeeping from double entry. Fix: Say that double entry is the debit-credit rule, while the double account system is a format that separates capital and revenue statements. Both are used together.
• Putting capital expenditure such as plant purchase into the Revenue Account, or depreciation into the Capital Account. Fix: Tag every item as capital or revenue before you start. Fixed asset purchases go to the Capital Account. Depreciation is a revenue charge.
• Calculating the reserve on gross premium instead of net premium. Fix: Always compute net premium first, then apply the reserve rate.
• Adding the closing reserve instead of deducting it. Fix: Opening reserve is added to net premium and closing reserve is deducted when computing premium earned.

Exam tips

• Write the Form name and schedule numbers on the answer. Form headings and the correct grouping carry marks, not only the final profit figure.
• Read the adjustments line by line. The rebate on bills discounted, tax provision and statutory reserve are the usual hidden items.
• Keep schedule workings as numbered notes. If the final figure is wrong, you still earn step marks for correct schedules.
• For MCQs, learn the schedule numbers and the heads under each form. Many questions ask which schedule an item belongs to, or whether an item sits in Form A or Form B.
• Check that Form A balances before you finish. A mismatch usually points to the closing profit balance or an item shown on the wrong side.
• In MCQs, read the exact word: 'secured' versus 'unsecured', and how long the asset has been doubtful. Most wrong options use the wrong band.
• Always show the secured and unsecured split in written answers. Examiners award separate marks for each line.
• If the question gives a standard-asset provision rate, use it. If it does not, state the rate you assume.