Professional Knowledge (Banking, Finance and Accounting)
What this section tests
Professional Knowledge examines banking operations, finance and accounting fundamentals: the accounting rules of double entry, final accounts, bank reconciliation, provisions versus reserves, asset classification and NPA norms, capital adequacy under Basel III, and core banking ratios such as CASA, NIM and CRAR.
Core rules
- Double entry: every transaction has equal debits and credits. Personal accounts - debit the receiver, credit the giver; real accounts - debit what comes in, credit what goes out; nominal accounts - debit expenses and losses, credit incomes and gains.
- Accrual concept: income is recognised when earned, not when received. This is why interest on an account that turns NPA stops being recognised after 90 days of overdue.
- Asset classification: standard, substandard (NPA for up to 12 months), doubtful (over 12 months) and loss.
- Basel III capital in India: CET1 5.5% + Additional Tier 1 of 1.5% + Tier 2 of 2% = 9% minimum, before the 2.5% capital conservation buffer.
Worked example
Goods sold to Ram for ₹10,000 on credit. Ram is a personal account and the receiver, so debit Ram ₹10,000; Sales is a nominal income account, so credit ₹10,000. Had the sale been for cash, the debit would go to Cash (a real account - what comes in), with the same credit to Sales.
Traps
- A provision is a charge against profit for an expected loss; a reserve is an appropriation of profit. Provision reduces profit, reserve does not.
- In bank reconciliation, cheques issued but not yet presented are added to the balance as per the cash book when reconciling with the passbook.
- Confusing capital expenditure (asset created) with revenue expenditure (day-to-day expense).
- Applying 90-day NPA recognition to the wrong base - it is overdue, not the loan's total tenure.