Difference between Insurable and uninsurable risks.

When you have a business, there are various risks involved that could result in the failure of your business. However, not all the risks can be insured.

Factors determining uninsurable risk

A risk is uninsurable when an insurance company cannot calculate the probability of the risk and therefore cannot work out a premium that the business must pay. For example, you cannot take out insurance against possible failure of your business.

Risk is too widespread, for example, when there is a war in the country.

When the loss is incurred due to your own deliberate actions, it cannot be insured. If, for example, you have financial problems in your business and decide to set fire to your business in order to get a cash payout from insurance, this will be a void claim.

You cannot insure a business for:

price fluctuations from the time the order for goods is placed and the delivery of the goods

different price levels at different places

new inventions that replace old technology, eg. in the IT industry

nuclear weapons or war

changes in fashions when goods become obsolete

Factors determining insurable risk

If the insurance company has enough statistics to work out the probability of the risk, this is called an insurable risk.

Actuaries are highly qualified people working for insurance companies; their role is to work out exactly what risks the company will carry. The degree of the risk will influence the insurance premium.

Some examples of insurable risk

Fire insurance

A fire insurance contract is a contract of indemnity for losses suffered due to a fire. A building and its contents can be insured against fire, but additional clauses must be added for damage by hail, wind or riot. Fire insurance is expensive – the bigger the risk, the higher the premium. The fire insurance will also have a clause called the iron safe clause. All books and records must be kept safe to backup the claim after a fire.

The book value and the market or replacement value of insured property

Assuming a building is insured for R100 000 (book value), and the replacement value is R300 000. Should the building burn down, the insurance company will only pay out the R100 000 and the owner of the building will lose R200 000 should it be rebuilt.

Storm, damage and theft

This is a common insurance contract that will protect a homeowner’s house building (homeowners’ policy) and the contents of the house (householders policy).

Money in transit

Banks make use of armoured vehicles to transport cash to cash depots and to their outlets. A policy can be taken out for the amounts transported.

Fidelity insurance

An employer can take out fidelity insurance to protect his business against dishonest employees

What is a Trial Balance?

Trial Balance is a list of closing balances of ledger accounts on a certain date and is the first step towards the preparation of financial statements. It is usually prepared at the end of an accounting period to assist in the drafting of financial statements. Ledger balances are segregated into debit balances and credit balances. Asset and expense accounts appear on the debit side of the trial balance whereas liabilities, capital and income accounts appear on the credit side. If all accounting entries are recorded correctly and all the ledger balances are accurately extracted, the total of all debit balances appearing in the trial balance must equal to the sum of all credit balances.

Purpose of a Trial Balance

¨       Trial Balance acts as the first step in the preparation of financial statements. It is a working paper that accountants use as a basis while preparing financial statements.

¨       Trial balance ensures that for every debit entry recorded, a corresponding credit entry has been recorded in the books in accordance with the double entry concept of accounting. If the totals of the trial balance do not agree, the differences may be investigated and resolved before financial statements are prepared. Rectifying basic accounting errors can be a much lengthy task after the financial statements have been prepared because of the changes that would be required to correct the financial statements.

¨       Trial balance ensures that the account balances are accurately extracted from accounting ledgers.

¨       Trail balance assists in the identification and rectification of errors.

Example

Following is an example of what a simple Trial Balance looks like:

1.    Title provided at the top shows the name of the entity and accounting period end for which the trial balance has been prepared.

2.    Account Title shows the name of the accounting ledgers from which the balances have been extracted.

3.    Balances relating to assets and expenses are presented in the left column (debit side) whereas those relating to liabilities, income and equity are shown on the right column (credit side).

4.    The sum of all debit and credit balances are shown at the bottom of their respective columns.

Limitations of a trial balance

Trial Balance only confirms that the total of all debit balances match the total of all credit balances. Trial balance totals may agree in spite of errors. An example would be an incorrect debit entry being offset by an equal credit entry. Likewise, a trial balance gives no proof that certain transactions have not been recorded at all because in such case, both debit and credit sides of a transaction would be omitted causing the trial balance totals to still agree. Types of accounting errors and their effect on trial balance are more fully discussed in the section on Suspense Accounts.

How to prepare a Trial Balance

Following Steps are involved in the preparation of a Trial Balance:

1.    All Ledger Accounts are closed at the end of an accounting period.

2.    Ledger balances are posted into the trial balance.

3.    Trial Balance is cast and errors are identified.

4.    Suspense account is created to agree the trial balance totals temporarily until corrections are accounted for.

5.    Errors identified earlier are rectified by posting corrective entries.

6.    Any adjustments required at the period end not previously accounted for are incorporated into the trial balance.

Closing Ledger Accounts

Ledger accounts are closed at the end of each accounting period by calculating the totals of debit and credit sides of a ledger. The difference between the sum of debits and credits is known as the closing balance. This is the amount which is posted in the trial balance.

How closing balances are presented in the ledger depends on whether the account is related to income statement (income and expenses) or balance sheet (assets, liabilities and equity). Balance sheet ledger accounts are closed by writing ‘Balance c/d’ next to the balancing figure since these are to be rolled forward in the next accounting period. Income statement ledger accounts on the other hand are closed by writing ‘Income Statement’ next to the residual amount because it is being transferred to the income statement as revenue or expense incurred for the period.

The steps involved in closing a ledger account may be summarized as below:

1.    Add the totals of both sides of a ledger

2.    The higher of the totals among the debit side and credit side must be inserted at the end of BOTH sides.Closing balance is the balancing figure on the side with the lower balance.

3.    In case of ledger accounts of assets, liabilities and equity, ‘balance c/d’ is written next to the closing balance whereas in case of income and expenses ledger accounts, ‘Income Statement’ is written next to the closing balance.

4.    The closing balances of all ledger accounts are posted into the trial balance.

Next sections contain examples illustrating how the various types of ledger accounts are closed at the period end 31 December 2011

Slums.!!

In India, the rural to urban migration rate is very high. This implies that while more and more people are migrating from rural areas to towns and cities, neither are urban areas expanding enough, nor are the rural areas developing.

The main reason for this is that agriculture based villages provide only seasonal employment, and there is lack of other employment opportunities, condemning people to a state of perpetual poverty.

Thus, cities are getting overburdened and municipalities are not being able to provide enough accommodation. Therefore, the migrants are forced to settle in small colonies of make-shift homes, leading to spread of slums such as J.J. Colonies of Delhi and Dharawi of Mumbai.

Bank Reconciliation Statement !

Making mistakes with your accounting can lead to more than just embarrassing situations when checks bounce or collection calls are made to companies that have already paid their bills. Performing bank reconciliations helps you spot fraud and reduce the risk of transactions that can cause late fees and penalties.

 

Error Detection

A bank reconciliation helps you spot accounting errors common to any business. These mistakes can include addition and subtraction errors, double payments, lost checks and missed payments. You might have recorded an invoice as paid in your general ledger, but a bank reconciliation might reveal you forgot to write the check. At times, your bank might make an error in your favor. You will be liable for returning that money, even if you’ve already spent it.

Fee and Interest Tracking

Each month, your bank adds any fees, penalties or interest payments it has applied to your account. You might have overdraft fees, go under your account balance requirement or earn interest on your checking account balance. If you order checks or stop payment on a check, you might incur a fee, depending on the features of your account. A monthly bank reconciliation lets you add or subtract these amounts in your general ledger.

Fraud Detection

You might not be able to stop an employee from stealing your money once, but you might be able to prevent a second theft. Bank reconciliations help you spot ongoing fraudulent transactions. Have an independent party perform your reconciliations to prevent an accounting employee from continuing to falsify your general ledger and reconciliations.

Receivables Tracking

Payments due one month might not appear on your bank statement until the next month if you receive the payments near the end of the month. In other instances, you might accidentally leave one check off a deposit slip if you are filling out a slip with many entries. As you perform a review of last month’s receivables, you might not see a payment that was made and contact a customer to ask where the payment is. Bank reconciliations confirm all of your receipts, helping you avoid awkward situations or identifying the entry for a receipt you didn’t deposit.

Transaction Status Updates

Just because you’ve sent a payment doesn’t mean the payee has cashed the check or even received it. A bank reconciliation statement might reveal that a check you wrote months ago still hasn’t been cashed. Uncashed checks can cause you to believe you have more money to spend than you do. Bank reconciliations allow you to spot checks that haven’t been paid and contact the payee to urge her to cash the check. In some instances, the payee will ask you to stop payment on — and reissue — a check that didn’t arrive or was lost or stolen.

Difference Between Bill of Exchange and Promissory note.

Bill Of Exchange

Definition of ‘Bill Of Exchange’

A non-interest-bearing written order used primarily in international trade that binds one party to pay a fixed sum of money to another party at a predetermined future date.

So we can explains ‘Bill Of Exchange’

Bills of exchange are similar to checks and promissory notes. They can be drawn by individuals or banks and are generally transferable by endorsements. The difference between a promissory note and a bill of exchange is that this product is transferable and can bind one party to pay a third party that was not involved in its creation. If these bills are issued by a bank, they can be referred to as bank drafts. If they are issued by individuals, they can be referred to as trade drafts.

We can distinguish or difference between bill of exchange and promissory note by the points :

1. Number Of Parties :-

Bill of exchange : There are three parties in the bill of exchange.

Promissory note : There are two parties in the promissory note.

2. Number Written By :-

Bill of exchange : It is written by the creditor.

Promissory note : It is written by the debtor.

3. Order And Promise :-

Bill of exchange : In a bill of exchange it is an order.

Promissory note : In a pro-note it is a promise to make the payment.

4. Acceptance :-

Bill of exchange : It must be accepted by the drawee before.

Promissory note : It requires no acceptance.

5. Dishonour Notice :-

Bill of exchange : In this case notice of dishonour must be given by the holder to the concerned parties.

Promissory note : In case of promissory note there is no need to serve the notice to the maker.

6. Protest :-

Bill of exchange : A foreign bill must be protested in case of dishonour.

Promissory note : Protect is not needed in case of pro-note.

7. In Sets :-

Bill of exchange : A foreign bill can be drawn in sets.

Promissory note : A pro-note cannot drawn in sets.

8. Liability :-

Bill of exchange : The drawer is liable only when the acceptor does not honour the bill.

Promissory note : The liability of pro-note maker is primary.

9. Payable To Bearers :-

Bill of exchange : A bill can be drawn if it is not drawn payable to bearer on demand.

Promissory note : A pro-note can not be drawn payable to the bearer.

10. Drawer and Payee :-

Bill of exchange : In this case drawer or payee may be the same person.

Promissory note : In case of pro-note the drawer can not become the payee.

11. Drawer’s Position :-

Bill of exchange : In this case the drawer of accepted bill stands in an immediate relation with the acceptor and not the payee.

Promissory note : The drawer of the pro-note stands immediate relations with the payee.

12. Conditional :-

Bill of exchange : The acceptance of the bill may be conditional with the holders consent.

Promissory note : A pro-note cannot be made conditional.

13. Presentment :-

Bill of exchange : In this case provision relating to presentment for acceptance is applicable.

Promissory note : Such provision is not applicable in case of promissory note.

The points of distinction between a promissory note and a bill of exchange are as follows:

1. Number of parties:

In a promissory note there are two parties the maker of the note and the payee. In a bill of exchange there are three parties the drawer, the drawee and the payee.

2. The maker of a note cannot be the payee.

In the case of a promissory note the maker cannot be the payee for the simple reason that the same person cannot be both the promisor and the promisee. But in a bill of exchange the drawer and the payee may be one and the same person as where a bill is drawn “Pay to me or my order.”

3. Promise and order:

In a promissory note there is a promise to make the payment whereas in a bill of exchange there is an order for making the payment.

4. Acceptance:

A promissory note requires no acceptance as it is signed by the person who is liable to pay. The drawer of a bill of exchange is generally the creditor of the drawee and therefore it must be accepted by the drawee before it can be presented for payment.

5. Nature of liability:

The liability of the maker of a pro-note is primary and absolute but the liability of a drawer of a bill of exchange is secondary and conditional. It is only when the acceptor does not honour the bill that the liability of the drawer arises as a surety. (Sees. 30 and 32).

6. Maker’s position:

The maker of a promissory note stands in immediate relation with the payee, while the maker or drawer of an accepted bill stands in immediate relation with the acceptor and not the payee (Explanation to Sec. 44).

The position of the maker of a pro-note also differs from the position of the acceptor of a bill. A promissory note must contain an unconditional promise to pay and therefore the maker, who himself is the originator of a note, cannot make it conditional.

In the case of a bill of exchange although the drawer, who is the originator of a bill, has to make an unconditional order to pay but under Section 86 the acceptor may accept the bill conditionally.

7. Payable to bearer:

A promissory note cannot be drawn ‘payable to bearer,’ while a bill of exchange can be so drawn provided it is not drawn ‘payable to bearer on demand.’

8. Notice of dishonour:

In case of dishonour of a bill of exchange, notice of dishonour must be given by the ‘holder’ to all prior parties who are liable to pay (including the drawer and endorsers), whereas in case of dishonour of a promissory note, no notice is necessary to the maker.

9. Applicability of certain provisions:

The provisions relating to presentment for acceptance, acceptance, acceptance supra protest and drawing of bills in sets are applicable only to a bill of exchange, they are not applicable to a promissory note.