Notesale: Turn your study into money

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Books  of  original  entry  
Explain  the  function  of  a  three-­‐column  cash  book  
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Three  columns  on  each  side  -­‐  debit  and  credit  side
...
 

•

Helpful  to  businessmen,  since  it  reveals  the  cash  and  bank  deposits  at  a  glance  

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Helps  to  prepare  final  accounts  

The  ledger  
Understand  the  significance  of  a  balance  in  the  VAT  account  
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Credit  balance:  The  business/owner  owes  the  government/revenue  and  custom  by  $1000  

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Debit  balance:  The  business/owner  is  owed  by  the  government/revenue  and  custom  by  $1000  

Explain  the  need  for  ledger  sub-­‐divisions  
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Facilitates  division  of  labor  in  the  maintenance  of  ledger  

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Becomes  easy  to  locate  errors  in  ledger  accounts  

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Helps  the  ledger  clerks  to  complete  their  respective  work  in  time  with  perfection  

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It  becomes  easy  to  refer  to  any  particular  account  

Explain  reasons  for  compiling  a  trial  balance  
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Checks  the  arithmetical  accuracy  of  ledger  accounts  

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Give  material  for  preparing  final  accounts  

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Proof  that  the  double  entry  of  each  transaction  is  made  

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Reveal  errors  
Ø errors  in  calculation    
Ø errors  in  omitting  either  the  debit  or  the  credit  entry    
Ø posting  of  entries  to  the  wrong  side  of  the  account    
Ø errors  in  debiting  an  account  with  one  amount  and  crediting  the  corresponding  account  with  another  amount  

Explain  the  possible  shortcomings  of  an  agreed  trial  balance  
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Cannot  prove  that  all  transactions  have  been  correctly  analyzed  and  recorded  in  proper  accounts
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All  the  transactions  have  been  recorded  and  nothing  has  been  omitted
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Explain  the  types  of  error  that  do  not  cause  disagreement  of  the  trial  balance  
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Errors  of  omission  

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Errors  of  commission  

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Compensating  errors  

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Errors  of  Principle  

Explain  the  need  for  a  petty  cash  book  
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Helps  to  keep  the  detail  out  of  the  cash  book      

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Reduce  postings  to  the  expense  accounts  

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Reduce  main  cashier’s  burden  as  petty  cash  can  be  kept  by  junior  accounting  staff  

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It  helps  to  control  petty  expenses  more  effectively  by  comparing  of  petty  expenses  between  one  and  two  period
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All  the  items  of  cash  receipts  are  recorded  on  the  left  hand  side  and  all  items  of  cash  payments  on  the  right  hand  side  in  order  of  date
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Trading  account,  profit  and  loss  account,  balance  sheet  of  sole  trader  
Explain  the  nature  of  working  capital  
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Working  capital  is  a  measure  of  both  a  company's  efficiency  and  its  short-­‐term  financial  health
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Adjustments
Differentiate  between  bad  debts  and  provision  for  bad  (doubtful)  debts  
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Bad  debt  is  a  specifically-­‐identified  account  receivable  that  will  not  be  paid  and  so  should  be  written  off  at  once  

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A  doubtful  debt  is  one  that  may  become  a  bad  debt  in  the  future  and  for  which  it  may  be  necessary  to  create  an  allowance  for  doubtful  accounts
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Advantages:  
1
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2
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3
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 The  total  of  debit  side  of  cash  book  will  agree  with  the  total  of  receipt  side  of  this  account
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Explain  the  nature  and  purpose  of  an  income  and  expenditure  account  prepared  on  the  accruals  basis  
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It  is  in  fact  like  a  Profit  and  Loss  Account  of  a  profit-­‐seeking  concern  

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Only  revenue  transactions  are  included  in  it
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Surplus  or  deficit  of  a  concern  is  ascertained  through  this  account
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Its  balance  is  transferred  to  Accumulated  Fund  Account
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 Eg
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 These  remain  constant  throughout  the  relevant  range
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Variable  costs:  costs  that  vary  with  output
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 Variable  costs  may  
include  wages,  utilities,  materials  used  in  production,  etc
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 Consist  of  net  purchases  of  raw  material,  carriage  on  raw  material,  
opening  stock  of  raw  material  and  closing  stock  of  raw  material  

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Prime  cost:  Basic  cost  of  manufacturing  the  goods
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Production  cost:  Total  cost  of  manufacturing  the  gods
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 This  account  is  fluctuated
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 Drawings  and  share  of  profits
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 It  is  fixed  and  is  not  affected  by  any  
entry  other  than  contribution  of  capital
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Purpose  of  an  appropriation  account  
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To  show  the  appropriation  of  the  profit  and  losses  among  the  partners  

 
Limited  company  
Explain  the  meaning  of  limited  liability  
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A  limited  liability  is  a  type  of  liability  that  does  not  exceed  the  amount  invested  in  a  partnership  or  limited  liability  company
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 While  a  shareholder  can  participate  wholly  
in  the  growth  of  a  company,  his  or  her  liability  is  restricted  to  the  amount  of  the  investment  in  the  company,  even  if  it  subsequently  goes  
bankrupt  and  racks  up  millions  or  billions  in  liabilities
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Issued  capital:  the  amount  of  capital  (out  of  subscribed  capital)  which  has  been  issued  by  the  company  to  the  subscribers  and  thus  are  now  
shareholders
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 Equity  is  divided  according  to  how  many  shares  an  
individual  holds  

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Loan  capital:  money  required  to  run  a  business  which  is  raised  from  loans  rather  than  shares
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 The  main  advantage  of  debentures  to  companies  is  the  
fact  that  they  have  a  lower  interest  rate  than  e
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 overdrafts
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Difference  between  preference  shares  and  ordinary  shares  
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Ordinary  shares  are  riskier  than  preference  shares,  in  terms  of  uncertainty  in  dividends  payments  and  lower  claim  in  company  assets  as  opposed  
to  the  fixed,  and  usually  cumulative  dividends  and  priority  asset  claims  for  preference  shares
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 However,  the  
control  that  preference  shareholders  have  in  the  company  is  minimal  as  they  are  not  offered  voting  rights,  and  as  such  cannot  influence  
company  policies  or  decisions  

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Ordinary  shares  may  be  preferable  since  they  offer  potential  for  growth  in  dividends  in  terms  of  higher  earnings  in  times  the  company  is  
financially  thriving,  and  allow  the  shareholder  a  say  in  the  company’s  important  decisions  such  as  the  selection  of  the  board  of  directors
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Market  value  is  the  value  of  a  company  according  to  the  stock  market
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Book  value  simply  implies  the  value  of  the  company  on  its  books,  often  referred  to  as  accounting  value
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 Whether  book  value  is  an  accurate  assessment  of  a  company's  value  is  determined  by  
stock  market  investors  who  buy  and  sell  the  stock
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Distinguish  between  charges  against  the  Income  Statement  and  the  appropriation  a/c  
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Profit  and  loss  account  is  a  statement  that  shows  the  quantum  of  surplus  funds  available  to  the  entity  at  the  end  of  a  financial  period
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Profit  and  loss  account  is  a  standalone  statement  and  the  profit  and  loss  appropriation  account  is  an  extension  of  the  former
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P&L  appropriation  account  usually  gives  details  about  how  the  surplus  money  is  going  to  be  spent-­‐  I  mean  how  much  of  it  goes  to  each  
partner,  how  much  is  to  be  invested  in  capital  expenditure,  how  much  to  be  used  as  earmarked  reserves  etc
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 This  reduces  the  amount  owed  by  the  customer  
Statement  of  Account  

When  goods  are  returned,  or  there  has  been  an  over  charge,  a  supplier  may  issue  a  

Sales  returns  book  

Prepared  and  sent  to  the  customer  by  the  supplier
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 This  is  proof  that  goods  

 

were  delivered
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Cash  book  

Bank  deposit  slip  

Used  to  record  the  bankings  deposited  to  the  bank  

Cash  book  

Petty  cash  voucher  

Petty  cash  payments,  used  as  evidence  of  cash  payment  to  another  party  

Petty  cash  book  

Payroll  records  

Cash  paid  by  the  business,  used  to  verify  payments  made  to  employees  in  the  form  of  

Cash  book  

salaries  and  wages  and  includes  timesheets
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Cash  book  

Bank  Reconciliation  
Advantages  
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Provide  an  accurate  and  updated  bank  balance  

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Identification  of  errors  made  by  the  bank  or  in  the  cash  book  

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Assist  in  the  prevention  of  fraud    

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Identification  of    i)  bank  charges,  ii)  standing  orders/direct  debits,  iii)  dishonored  cheque,  iv)  credit  transfer  

Disadvantages  
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Time  consuming  

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Unnecessary  for  a  small  business  

 
Control  account  
Advantages  
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The  balance  of  the  control  account  can  assist  in  the  preparation  of  the  balance  sheet  at  the  year  end  by  providing  a  total  for  debtors
...
 Accruals  and  prepayments  
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The  cost  of  the  fixed  asset  is  spread  over  the  useful  life  of  the  asset  

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The  balance  sheet  will  show  a  true  figure  for  both  assets  and  prevents  overstatement  of  assets  

Prudence  
Requires  that  final  accounts  should  always  report  a  conservative  figure  for  profit  or  the  valuation  of  assets  
Profits  are  not  to  be  anticipated  and  all  known  liabilities  should  be  provided  for  at  the  year  end
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 Provision  for  doubtful  debts,  bad  debt  expense,  provision  for  depreciation  
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Business  is  able  to  report  a  profit  which  accurately  reflects  the  true  cost  that  has  been  incurred  for  the  year  instead  of  simply  the  
amount  that  has  been  paid  è  Prevent  overstatement  of  profit  

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The  balance  sheet  will  also  show  a  true  figure  for  both  assets  and  liabilities  è  Prevent  overstatement  of  assets  

Materiality  
Identifies  that  some  items  in  accounts  may  have  low  monetary  value  that  is  not  worthwhile  recording  them  separately
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 Year  end  stocks  of  paper  clips  
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Not  valued  for  end  of  year  stocks  of  the  final  accounts  because  the  amount  is  not  the  purpose  of  the  final  accounts  

•

The  amount  is  not  material  and  does  not  justify  the  time  and  effort  involved
...
 All  profits,  drawings  etc  are  entered  in  the  current  account  
Ø Profit  and  loss:  required  to  produce  an  appropriation  account  where  the  agreed  share  of  profits  etc  would  be  shown  
Ø Balance  Sheet:  ‘financed  by’  section  where  the  balances  of  both  the  current  and  capital  accounts  would  be  shown  
Advantages  
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Additional  capital  

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Share  the  workload  and  risk  

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Greater  borrowing  capacity  

Disadvantages  
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Receiving  less  profit  

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Sharing  business  decisions  

Explain  why  partners  have  agreed  to  be  charged  interest  on  drawings  
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Penalize  partners  on  the  basis  of  amount  and  timing  of  drawings  from  the  business  

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Discourage  partners  from  taking  money  out  of  the  business    

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Help  business  cash  flow  and  liquidity  

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Ensure  they  do  not  incur  additional  interest  charges  which  may  be  incurred  if  they  were  to  overdraw  their  bank  account  

 
Limited  companies  
Advantages  
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Profits  pass  through  the  LLC  and  taxes  are  paid  personally  by  the  members  (owners)  of  the  company
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Members  are  allowed  to  participate  fully  in  management  of  the  company
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No  limit  on  the  number  of  members  for  a  LLC
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Offers  a  large  amount  of  flexibility;  members  decide  how  to  operate  various  business  aspects  through  the  operating  agreement
...
 

 
Computers  in  accounting  
Uses  
Ø Preparation  of  final  accounts  
Ø Payroll  (Staff  salaries)  
Ø Stock  control  (Automatic  adjustment  of  stock  levels)  

Advantages  
•

Speed:  Input  of  transaction  only  once  for  it  to  be  recorded  in  a  number  of  different  account  records  

•

Automatic  production  of  documents:  Fast  and  accurate  production  of  business  documents  

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Motivated  staff:  Acquire  new  skills  and  improve  their  career  prospects  

Disadvantages  
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High  capital  expenditure:  Replacement  of  computers  and  updating  software  

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System  failure:  Loss  of  data  if  no  back  ups  

•

Security  breaches:  Staff  fraud  and  danger  of  viruses  

 
 

 

Accounting  ratios  
1
...


Selling  goods  at  higher  prices  
Buying  the  goods  at  cheaper  prices  

What  would  be  the  reason  for  decrease  in  GPM  
•
•

Offering  trade  discounts  

•

Not  passing  on  increase  prices  

•
3
...
What  is  meant  by  working  capital  
•

It  is  the  money  required  to  meet  its  every  day  expenses  

5
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How  to  improve  working  capital  
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Introduction  of  further  capital  

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Obtaining  long  term  load  

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Reducing  owner’s  drawings  

•

Selling  out  useless  fixed  assets  

7
...
For  identifying  causes  of  changes  
•

For  stock  replacement  

•

For  comparison  

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For  corrective  action  

•

For  identifying  causes  of  changes  

9
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How  to  reduce  the  risk  of  bad  debts  
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Obtain  reference  from  new  customers  

•

Fix  a  limit  for  each  credit  customer  

•

Follow  up  over  dues  promptly  

•

Refuse  further  supplies  until  old  dues  are  paid  

11
...
Limitations  of  ratio  analysis  
•
•

Difference  in  firm’s  policy  because  some  firms  are  selling  on  cash  and  on  credit  terms  

•

Difference  in  firm’s  policy  

•
 

Difference  in  type  of  stock  which  affects  rate  of  stock  turnover  and  GPM  

Difference  in  management  
 

Depreciation  

Trade  discount  
•
•

Not  available  to  general  public  

•

Given  for  bulk  buying  

•

Encourage  customer  loyalty  

•

Prearranged  to  business  in  the  same  trade  

Cash  discount  
•

Offered  by  business  to  encourage  prompt  payment  by  
credit  customers  

•

Help  business’s  cash  flow  

•

Result  in  fewer  bad  debts  

Capital  income  
•

Income  derived  from  sources  other  than  the  sale  of  
goods  or  services  

•

Normally  long  term  

•

May  have  to  be  repaid  at  some  point  in  the  future  

Eg
...
 Motor  vehicles  
Revenue  income  
•

Income  from    
i)

Sales  of  goods  and  services  
Eg
...
 Rent  received,  discount  received  
Revenue  expenditure  
•

Expenditure  on  the  day  to  day  running  of  the  business  

•

Short  term  effect  on  the  business  (less  than  1  yr)  

Eg
...
 

•

This  may  be  because  the  debtor  does  not  have  enough  
money  in  his  bank  account  

A  reduction  in  the  value  of  an  asset  over  time,  due  in  
particular  to  wear  and  tear

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