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F.Y.B.Com
ACCOUNTANCY PAPER - I
ACCOUNTANCY & FINANCIAL
MANAGEMENT
© UNIVERSITY OF MUMBAI
Dr. Suhas Pednekar
Vice-Chancellor
Universityof Mumbai,
Mumbai

Dr. Shephali Pandya Anil R Bankar


Director Incharge, Associate Prof. of History & Asst. Director &
Institure of Distance & Open Learning, Incharge Study Material Section,
Universityof Mumbai, Mumbai IDOL, University of Mumbai, Mumbai

Course and Programme : Dr. Madhura Kulkarni


Co-ordinator Asst. Prof-cum-Asst. Director, IDOL,
University of Mumbai, Mumbai-400 098.
Course Writer : Prof. M.A. Gandhi
Maharshi Dayanand College ofArts, Science
& Commerce, Shri Mangaldar Verma Chowk,
25 - Dr. S. S. Road, Parel, Mumbai - 400012.
: Dr. V. N. Yadav
Shankar N. College of Arts & Commerce,
Bhyander (E), Dist. Thane.
: Prof. Ashok A. Gujar
102, Gomati Niwas Sasmira Road,
Worli, Mumbai - 400030.
: Prof. Jaya Maglani
H.R. College,
Churchgate, Mumbai - 400020
Re-Edited : Dr. Atul V. Bhave
Department of Commerce,
Rayat Shikshan Sanstha's,
Abasaheb Marathe Arts & New Commerce,
Science College, Rajapur, (Vikhare-Gothane)
Dist. Ratnagiri -416702

May, 2019 F.Y.B.Com., Accountancy Paper - I, Accountancy & Financial


Management

Published by : Director Incharge,


Institute of Distance and Open Learning ,
University of Mumbai,
Vidyanagari, Mumbai - 400 098.

DTP Composed : Ashwini Arts


Gurukripa Chawl, M.C. Chagla Marg, Bamanwada,
Vile Parle (E), Mumbai - 400 099.

Printed by :
CONTENTS
Unit No. Title Page No.

SECTION - I

1 Introduction to accounting standards 1


2. AS - 1 Disclosure of Accounting Policies 13
3. AS - 2 Valuation of Inventories 25
4. AS- 9 Revenue Recognition 52
5. Inventory Valuation - I 65
6. Inventory Valuation II - 80
7. Capital, Revenue Expenditure & Receipts 98
8. Final Accounts of Manufacturing Concern
(Proprietary Firm) 134
9. Final Accounts II 165
10. Departmental Accounts - I 198
11. Departmental Accounts - II 217
12. Hire Purchase - I 241
13. Hire Purchase - II 257
SECTION - II
14. Accounting from Incomplete Records - I
(Single Entry System) 279
15. Accounting from Incomplete Records - II 290
16. Consignment Account - I 311
17. Consignment Account - II 325
18. Branch Accounts - I 349
19. Branch Accounts - II 367
20. Fire Insurance Claim - I 392
21. Fire Insurance Claim - II 404


I

Revised Syllabus
Applicable for IDOL Students
With Effect from the Academic Year 2018-2019
Accountancy and Financial Management

Section I
Modules at a Glance

Sr. No. Modules


1 Accounting standards issued by ICAI and Inventory
valuation
2 Final Accounts
3 Departmental Accounts
4 Accounting for Hire Purchase

Modules / Units
Sr.
No.
1 Accounting standards issued by ICAI and Inventory
valuation
 Accounting standards:
Concepts, benefits, procedures for issue of accounting
standards Various AS :
AS – 1: Disclosure of Accounting Policies
Purpose, Areas of Policies, Disclosure of Policies,
Disclosure of Change in Policies, Illustrations
AS – 2: Valuation of Inventories (Stock)
Meaning, Definition, Applicability, Measurement of
Inventory, Disclosure in Final Account, Explanation
with Illustrations.
AS – 9: Revenue Recognition
Meaning and Scope, Transactions excluded, Sale of
Goods, Rendering of Services, Effects of
Uncertainties, Disclosure, Illustrations.
 Inventory Valuation
Meaning of inventories Cost for inventory valuation
Inventory systems : Periodic Inventory system and
II

Perpetual Inventory System Valuation: Meaning and


importance
Methods of Stock Valuation as per AS – 2 :
FIFO and Weighted Average Method Computation of
valuation of inventory as on balance sheet date: If
inventory is taken on a date after the balance sheet or
before the balance sheet

2 Final Accounts
Expenditure: Capital, Revenue Receipts: Capital,
Revenue Adjustment and Closing Entries
Final accounts of Manufacturing concerns (Proprietary
Firm)

3 Departmental Accounts
Meaning
Basis of Allocation of Expenses and Incomes/Receipts
Inter Departmental Transfer : at Cost Price and Invoice
Price Stock Reserve Departmental Trading and Profit &
Loss Account and Balance Sheet

4 Accounting for Hire Purchase


Meaning Calculation of interest
Accounting for hire purchase transactions by asset
purchase method based on full cash price
Journal entries, ledger accounts and disclosure in balance
sheet for hirer and
vendor (excluding default, repossession and calculation of
cash price)
III

Section II
Modules at a Glance

Sr. No. Modules


1 Accounting from Incomplete Records
2 Consignment Accounts
3 Branch Accounts
4 Fire Insurance Claim

Sr. Modules
No.
1 Accounting from Incomplete Records
Introduction
Problems on preparation of final accounts of Proprietary
Trading Concern (conversion method)
2 Consignment Accounts
Accounting for consignment transactions Valuation of
stock Invoicing
3 Branch Accounts
Meaning/ Classification of branch
Accounting for Dependent Branch not maintaining full
books: Debtors method Stock and debtors method
4 Fire Insurance Claim
Computation of Loss of Stock by Fire Ascertainment of
Claim as per the Insurance Policy Exclude: Loss of
Profit and Consequential Loss
IV

Question Paper Pattern


Question Particular Marks
No

Q-1 Objective Questions 20 Marks


A) Sub Questions to be asked 12 and to
be answered any 10
B) Sub Questions to be asked 12 and to
be answered any 10
(*Multiple choice / True or False / Match
the columns/Fill in the blanks)
Q-2 Full Length Question 15 Marks
OR
Q-2 Full Length Question 15 Marks

Q-3 Full Length Question 15 Marks


OR
Q-3 Full Length Question 15 Marks

Q-4 Full Length Question 15 Marks


OR
Q-4 Full Length Question 15 Marks

Q-5 Full Length Question 15 Marks


OR
Q-5 Full Length Question 15 Marks

Q-6 A) Theory questions 10 Marks


B) Theory questions 10 Marks
OR
Q-6 20 Marks
Short Notes
To be asked 06
To be answered 04

Note:

Question of 15 marks may be divided into two sub questions


of 7/8 and 10/5 Marks.


1

1
INTRODUCTION TO ACCOUNTING
STANDARDS

Unit Structure:

1.0 Objectives
1.1 Introduction
1.2 Meaning of Accounting Standards
1.3 Formation of the Accounting Standards Board
1.4 Scope of Accounting Standards
1.5 Procedure for Issuing an Accounting Standard
1.6 Compliance with the Accounting Standards
1.7 List of the Accounting Standards as issued by ICAI
1.8 List of IAS / IFRS and corresponding IND AS notified by
MCA
1.9 List of IFRS issued by IASB
1.10 Questions

1.0 OBJECTIVES

After studying the unit students will be able to:


 Understand the meaning of Accounting Standard.
 Know the scope of Accounting Standard.
 Understand the composition, objectives and functions of
Accounting Standard Board.
 Explain the procedure for issuing Accounting Standards.
 Know the list of Accounting Standards issued by ICAI

1.1 INTRODUCTION

Financial statements are prepared to summarize the end-


result of all the business activities by an enterprise during an
accounting period in monetary terms. These business activities
vary from one enterprise to the other. It is very difficult to compare
the financial statements of different reporting enterprises because
of different methods and principles adopted by these business
enterprises in preparing their financial statements. Accounting
standards are evolved to make these methods and principles
2

uniform and financial statements comparable to the possible extent.


Following are the different group of persons interested in the
financial statements:-

1. Bankers
2. Shareholders
3. Investors
4. Creditors
5. Customers
6. Employees
7. Competitors
8. Income tax/Sales tax/Excise authorities

1.2 MEANING OF ACCOUNTING STANDARDS

1.2.1 MEANING
‘Accounting Standards are written, policy documents
issued by expert accounting body or by Government or other
regulatory authorities covering the aspects of recognition,
measurement, treatment, presentation and disclosure of accounting
transaction in the financial statement.’ The main purpose of
formulating accounting standard is to standardize the diverse
accounting policies with a view to eliminate to the extent possible
the incomparability of information provided in financial statements
and add reliability to such financial statements. Accounting
standards ensure the consistency and the comparability of the
financial statements reported by the different enterprises creating a
general sense of confidence that users have in the fairness and
reliability of the statements they rely.

Accounting Standards will not, however, apply to


enterprises only carrying on the activities which are not of
commercial, industrial or business nature, e.g., an activity of
collecting donations and giving them to flood affected people.
Exclusion of an enterprise from the applicability of the Accounting
Standards would be permissible only if no part of the activity of
such enterprise is commercial, industrial or business in nature.
Even if a very small proportion of the activities of an enterprise are
considered to be commercial, industrial or business in nature, the
Accounting Standards would apply to all its activities including
those which are not commercial, industrial or business in nature.

1.2.2 OBJECTIVES:
1. To standardise the diverse accounting policies.
2. To standardise the accounting practices.
3. To enhance the reliability of financial statements.
4. To eliminate non-comparability of financial statements
3

1.2.3 ADVANTAGES:
1. It provides the accountancy profession with useful working rules.
2. It assists in improving quality of work performed by accountant.
3. It strengthens the accountant’s resistance against the pressure
from directors to use accounting policy which may be suspect in
that situation in which they perform their work.
4. It ensures the various users of financial statements to get
complete crystal information on more consistent basis from
period to period.
5. It helps the users to compare the financial statements of two or
more organizations engaged in same type of business
operation.

1.2.4 DISADVANTAGES:
1. Users are likely to think that said statements prepared using
accounting standard are foolproof.
2. They have been derived from social pressures which may
reduce freedom.
3. The working rules may be rigid or bureaucratic to some users of
financial statement.
4. The more standards there are, the more costly the financial
statements are to produce.

1.3 FORMATION OF THE ACCOUNTING


STANDARDS BOARD

The Institute of Chartered Accountants of India (ICAI),


recognizing the need to harmonize the diverse accounting policies
and practices in use in India, constituted the Accounting Standards
Board (ASB) on 21st April, 1977.

1.3.1 COMPOSITION OF THE ACCOUNTING STANDARDS


BOARD (ASB)
The composition of the ASB is fairly broad-based and
ensures participation of all interest-groups in the standard-setting
process. Apart from the elected members of the Council of the ICAI
nominated on the ASB, the following are represented on the ASB:

1. Nominee of the Central Government representing the


Department of Company Affairs on the Council of the ICAI.
2. Nominee of the Central Government representing the Office of
the Comptroller and Auditor General of India on the Council of
the ICAI.
4

3. Nominee of the Central Government representing the Central


Board of Direct Taxes on the Council of the ICAI.
4. Representative of the Institute of Cost and Works Accountants
of India.
5. Representative of the Institute of Company Secretaries of
India.
6. Representatives of Industry Associations (1 from Associated
Chambers of Commerce and Industry (ASSOCHAM), 1 from
Confederation of Indian Industry (CII) and 1 from Federation of
Indian Chambers of Commerce and Industry (FICCI)
7. Representative of Reserve Bank of India
8. Representative of Securities and Exchange Board of India
9. Representative of Controller General of Accounts
10. Representative of Central Board of Excise and Customs
11. Representatives of Academic Institutions (1 from Universities
and 1 from Indian Institutes of Management)
12. Representative of Financial Institutions
13. Eminent professionals co-opted by the ICAI (they may be in
practice or in industry, government, education, etc.)
14. Chairman of the Research Committee and the Chairman of
the Expert Advisory Committee of the ICAI, if they are not
otherwise members of the Accounting Standards Board
15. Representative(s) of any other body, as considered
appropriate by the ICAI

1.3.2 OBJECTIVES OF THE ACCOUNTING STANDARDS


BOARD
The following are the objectives of the Accounting Standards
Board:
i. To conceive of and suggest areas in which Accounting
Standards need to be developed.

ii. To formulate Accounting Standards with a view to assist the


Council of the ICAI in evolving and establishing Accounting
Standards in India.

iii. To examine how far the relevant International Accounting


Standard/International Financial Reporting Standard can be
adapted while formulating the Accounting Standard and to
adapt the same.
5

iv. To review, at regular intervals, the Accounting Standards from


the point of view of acceptance or changed conditions, and, if
necessary, revise the same.

v. To provide, from time to time, interpretations and guidance on


Accounting Standards.

vi. To send comments on various consultative papers such as


exposure drafts, discussion papers etc., issued by
International Accounting Standards Board and various other
International bodies such as Asian-Oceania Standard-Setters
Group (AOSSG).

vii. To carry out such other functions relating to Accounting


Standards.

1.3.3 FUNCTIONS OF THE ACCOUNTING STANDARDS BOARD

The main function of the ASB is to formulate Accounting


Standards so that such standards may be established by the ICAI
in India. While formulating the Accounting Standards, the ASB will
take into consideration the applicable laws, customs, usages and
business environment prevailing in India.

The ICAI, being a full-fledged member of the International


Federation of Accountants (IFAC), is expected, inter alia, to actively
promote the International Accounting Standards Board’s (IASB)
pronouncements in the country with a view to facilitate global
harmonization of accounting standards. Accordingly, while
formulating the Accounting Standards, the ASB will give due
consideration to International Accounting Standards (IASs) issued
by the International Accounting Standards Committee (predecessor
body to IASB) or International Financial Reporting Standards
(IFRSs) issued by the IASB, as the case may be, and try to
integrate them, to the extent possible, in the light of the conditions
and practices prevailing in India.

1.4 PROCEDURE FOR ISSUING AN ACCOUNTING


STANDARD

The Accounting Standards are issued under the authority of


the Council of the ICAI. The ASB has also been entrusted with the
responsibility of propagating the Accounting Standards and of
persuading the concerned parties to adopt them in the preparation
and presentation of financial statements. The ASB will provide
interpretations and guidance on issues arising from Accounting
Standards. The ASB will also review the Accounting Standards at
periodical intervals and, if necessary, revise the same. The
6

following procedure is adopted for formulating Accounting


Standards:

1. The ASB determines the broad areas in which Accounting


Standards need to be formulated and the priority in regard to the
selection thereof.

2. In the preparation of Accounting Standards, the ASB will be


assisted by Study Groups constituted to consider specific
subjects. In the formation of Study Groups, provision will be
made for wide participation by the members of the Institute and
others.

3. The draft of the proposed standard will normally include the


following:
a) Objective of the Standard,
b) Scope of the Standard,
c) Definitions of the terms used in the Standard,
d) Recognition and measurement principles, wherever
applicable,
e) Presentation and disclosure requirements.
4. The ASB will consider the preliminary draft prepared by the
Study Group and if any revision of the draft is required on the
basis of deliberations, the ASB will make the same or refer the
same to the Study Group.
5. The ASB will circulate the draft of the Accounting Standard to
the Council members of the ICAI and the specified bodies for
their comments.

6. The ASB will hold a meeting with the representatives of


specified bodies to ascertain their views on the draft of the
proposed Accounting Standard. On the basis of comments
received and discussion with the representatives of specified
bodies, the ASB will finalize the Exposure Draft of the proposed
Accounting Standard.

7. The Exposure Draft of the proposed Standard will be issued for


comments by the members of the Institute and the public. The
Exposure Draft will specifically be sent to specified bodies (as
listed above), stock exchanges, and other interest groups, as
appropriate.

8. After taking into consideration the comments received, the draft


of the proposed Standard will be finalized by the ASB and
submitted to the Council of the ICAI.

The Council of the ICAI will consider the final draft of the
proposed Standard and if found necessary, modify the same in
7

consultation with the ASB. The Accounting Standard on the


relevant subject will then be issued by the ICAI.

1.5 COMPLIANCE WITH THE ACCOUNTING


STANDARDS

Accounting Standards are mandatory from the respective


dates mentioned in the standards. Hence, it is the duty of the
management to see that all the Accounting Standards are complied
with while preparing financial statement, in the case of any
deviation, necessary disclosure should be made in the audit report
so as to make the readers aware of the deviations.

The mandatory status of an Accounting Standard implies


that while discharging their attest functions, it will be the duty of the
members of the Institute

(a) To examine whether ‘Statements’ relating to accounting matters


are complied with in the presentation of financial statements
covered by their audit. In the event of any deviation from the
‘Statements’, it will be their duty to make adequate disclosures in
their audit reports so that the users of financial statements may be
aware of such deviations; and

(b) To ensure that the ‘Statements’ relating to auditing matters are


followed in the audit of financial information covered by their audit
reports. If for any reason a member has not been able to perform
an audit in accordance with such ‘Statements’, his report should
draw attention to the material departures there from.

1.6 LIST OF THE ACCOUNTING STANDARDS AS


ISSUED BY ICAI

The council of the Institute of the Chartered Accountants of


India has so far issued 32 Accounting Standards, However AS- 8
on Accounting for Research and Development (stands withdrawn
after introduction of AS-26), thus effectively there are 31
Accounting standards.
8

Accounting Title of Accounting Standard


Standard No.
AS-1 Disclosure of Accounting Policies
AS-2 Valuation of Inventories
AS-3 Cash Flow Statements
AS-4 Contingencies and Events (Occurring after
the Balance Sheet Date)

AS-5 Net Profit or Loss for the Period, Prior


Period Items and Changes in Accounting
Policies
AS-6 Depreciation Accounting
AS-7 Construction Contracts
AS-8 Accounting for Research and Development
(standard withdrawn after introduction of
AS-26)
AS-9 Revenue Recognition
AS-10 Accounting for Fixed Assets
AS-11 The Effect of Changes in Foreign
Exchange Rates
AS-12 Accounting for Government Grants
AS-13 Accounting for Investments
AS-14 Accounting for Amalgamations
AS-15 Employee Benefits
AS-16 Borrowing Cost
AS-17 Segment Reporting
AS-18 Related Party Disclosures
AS-19 Leases
AS-20 Earnings per Share
AS-21 Consolidated Financial Statements
AS-22 Accounting for Taxes on Income
AS-23 Accounting for Investment in Associates in
Consolidated Financial Statements
AS-24 Discontinuing Operations
AS-25 Interim Financial Reporting
9

AS-26 Intangible Assets


AS-27 Financial Reporting of Interests in Joint
Venture

AS-28 Impairment of Assets


AS-29 Provisions, Contingent Liabilities and
Contingent Assets

AS-30 Financial Instruments: Recognition and


Measurement

AS 31 Financial Instruments: Presentation


AS 32 Financial Instruments: Disclosures

1.7 LIST OF IAS / IFRS AND CORRESPONDING IND


AS NITIFIED BY MCA

IAS No. Title Corresponding


Converged IND
AS
IAS-1 Presentation of Financial IND AS 1
Statements
IAS-2 Inventories IND AS 2
IAS- 7 Cash Flow Statements IND AS 7
IAS-8 Accounting policies, change in IND AS 8
accounting estimates and errors

IAS-10 Events after the Balance Sheet IND AS 10


date

IAS-12 Income Taxes IND AS 12


IAS-16 Property, Plants and Equipment IND AS 16
IAS- 17 Leases IND AS 17
IAS-19 Employees Benefits IND AS 19
IAS-20 Accounting for Government IND AS 20
Grants and Disclosure of
Government Assistance
IAS-21 The Effect of Changes in IND AS 21
Foreign Exchange Rates
IAS-23 Borrowing Costs IND AS 23
10

IAS-24 Related Party Disclosures IND AS 24


IAS-26 Accounting and Reporting by
Retirement Benefit Plan
IAS-27 Consolidated and Separate IND AS 27
Financial Statements
IAS-28 Investments in Associates and IND AS 28
Joint Ventures
IAS-29 Financial Reporting in Hyper IND AS 29
Inflationary Economies
IAS-32 Financial Instruments :- IND AS 32
Presentation
IAS-33 Earnings per Share IND AS 33
IAS-34 Interim Financial Reporting IND AS 34
IAS-36 Impairment Assets IND AS 36
IAS-37 Provisions, Contingent Liabilities IND AS 37
and Contingent Assets
IAS-38 Intangible Assets IND AS 38
IAS-40 Investment Property IND AS 40
IAS-41 Agriculture IND AS 41

1.8 LIST OF IFRS ISSUED BY IASB

IFRS:-
The term ‘IFRS’ includes standards and interpretations approved by
IASB and the International Accounting Standards and
interpretations issued by the International Financial Reporting
Interpretations Committee.

International Accounting Standards Board (IASB) has issued the


following International Financial Reporting Standards (IFRS):-

IAS No. Title Corresponding


Converged IND AS

IFRS-1 First Time Adoption of IFRS IND AS 101


IFRS-2 Share based payments IND AS 102
IFRS-3 Business Combination IND AS 103
IFRS-4 Insurance Contracts IND AS 104
11

IFRS-5 Non-currents Assents held for IND AS 105


sale and discontinued
operations
IFRS-6 Exploration for and evaluation IND AS 106
of mineral resources
IFRS-7 Financial instruments: IND AS 107
disclosure
IFRS-8 Operating segment IND AS 108
IFRS-9 Financial instruments IND AS 109
IFRS-10 Consolidated Financial IND AS 110
Statements
IFRS-11 Joint Arrangement IND AS 111
IFRS-12 Disclosure of Interest in Other IND AS 112
Entities
IFRS-13 Fair Value Measurement IND AS 113
IFRS-14 Regulatory Deferral Accounts IND AS 114
IFRS-15 Revenue from contracts with IND AS 115
customers
IFRS-16 Leases -

1.9 QUESTIONS

1. What do you understand by Accounting standard?


2. What is the need and purpose of accounting standards?
3. Briefly explain the importance of accounting standards?
4. What is the duty of the auditor in case of non-compliance of
mandatory accounting standard?
5. Briefly explain the procedure for issuing an accounting
standard?
6. Select Correct Alternative:

i. Accounting standards are important


1. For making correct financial statements
2. For correct valuation of inventories
3. For correct treatment of depreciation and lease and
investment
4. All of the above
12

ii. Accounting standards are statements prescribed by


1. Law
2. Bodies of shareholders
3. Professional accounting bodies
4. All of the above

iii. The Policy of ‘anticipate no profit and provide for all possible
losses’ arises due to convention of
1. Consistency
2. Disclosure
3. Conservatism
4. All of Above

iv.Accounting has certain norms to be observed by the


accountants in recording of transactions and preparation of
financial statements. These norms reduce the vagueness and
chances of misunderstanding by harmonizing the varied
accounting practices. These norms are
1. Accounting regulations.
2. Accounting guidance notes.
3. Accounting standards.
4. Accounting framework.

v. Following is the example of external users:


1. Government.
2. Owners.
3. Management.
4. Employees.
vi. Following is the example of internal users:
1. Government.
2. Investors.
3. Creditors.
4. Employees.

vii. The information provided in the annual financial statements


of an enterprise pertain to
1. Business Industry.
2. Economy.
3. Individual business entity.
4. None of the above.

Answers: i-4, ii-3, iii- 3, iv-3, v-1, vi-4, vii-3


13

2
AS-1 DISCLOSURE OF ACCOUNTING
POLICIES

Unit Structure:

2.0 Objectives
2.1 Introduction
2.2 Meaning and Nature of Accounting Policies
2.3 Areas of different Accounting Policies
2.4 Notes to Accounts
2.5 Disclosure of Accounting Policies
2.6 Disclosure of Change in Accounting Policies
2.7 Illustrations
2.8 Practical Applications
2.9 Questions

2.0 OBJECTIVES

After studying the unit students will be able to:

 Understand the meaning and nature of accounting policies.


 Explain the areas of different accounting policies.
 Know the disclosure of accounting policies.
 Know the disclosure of change in accounting policies.
 Give some examples of significant accounting policies.
 Solve the practical problems related to accounting policies.

2.1 INTRODUCTION

Accounting Standard (AS) 1 issued by the Accounting


Standards Board, the Institute of Chartered Accountants of India on
‘Disclosure of Accounting Policies’ deals with the disclosure of
significant accounting policies followed in preparing and presenting
financial statements. It may be noted that this Accounting Standard
is now mandatory for use by companies listed on a recognized
stock exchange and other large commercial, industrial and
business enterprises in the public and private sectors. Accounting
Standards are intended to apply only to items which are material.
14

2.2 MEANING AND NATURE OF ACCOUNTING


POLICIES

‘Accounting policies are the specific accounting principles


and methods of applying those principles adopted by the enterprise
in the preparation and presentation of the financial statements.’ E.g.
to depreciate fixed asset of the company over a period of time is
accounting policy and which method should follow to depreciate the
asset (SLM or WDV) is method of accounting.

There is no single list of accounting policies which are


applicable to all circumstances. The differing circumstances in
which enterprises operate in a situation of diverse and complex
economic activity make alternative accounting principles and
methods of applying those principles acceptable.

IMPORTANCE OF ACCOUNTING STANDARD (AS) 1


The view presented in the financial statements of an
enterprise of its state of affairs and of the profit or loss can be
significantly affected by the accounting policies followed in the
preparation and presentation of the financial statements. The
accounting policies followed vary from enterprise to enterprise.
Disclosure of significant accounting policies followed is necessary if
the view presented is to be properly appreciated. The disclosure of
some of the accounting policies followed in the preparation and
presentation of the financial statements is required by law in some
cases.

PURPOSE OF ACCOUNTING STANDARD (AS) 1


The disclosure of significant accounting policies and the
manner in which accounting policies are disclosed in the financial
statements would facilitate better understanding of financial
statements and a more meaningful comparison between financial
statements of different enterprises.

FUNDAMENTAL ACCOUNTING ASSUMPTIONS


The Financial Statements are prepared with the following three
Fundamental Accounting Assumptions. Unless otherwise
specified, it is assumed that the Financial Statements are prepared
according to following assumptions:
1. Going Concern,
2. Consistency,
3. Accrual.
15

They are explained as follows:


1. Going Concern:
The enterprise is normally viewed as a going concern, that
is, as continuing in operation for the foreseeable future. It is
assumed that the enterprise has neither the intention nor the
necessity of liquidation or of curtailing materially the scale of the
operations.

2. Consistency:
It is assumed that accounting policies are consistent from
one period to another.

3. Accrual:
Revenues and costs are accrued, that is, recognized as they
are earned or incurred (and not as money is received or paid) and
recorded in the financial statements of the periods to which they
relate.

It is mandatory to disclosure if the above mentioned


assumptions are not followed.

2.3 AREAS OF DIFFERENT ACCOUNTING POLICIES

The following are examples of the areas in which different


accounting policies may be adopted by different enterprises.
 Methods of depreciation, depletion and amortization
 Treatment of expenditure during construction
 Conversion or translation of foreign currency items
 Valuation of inventories
 Treatment of goodwill
 Valuation of investments
 Treatment of retirement benefits
 Recognition of profit on long-term contracts
 Valuation of fixed assets
 Treatment of contingent liabilities.

CONSIDERATIONS IN THE SELECTION OF ACCOUNTING


POLICIES

The primary consideration in the selection of accounting


policies by an enterprise is that the financial statements prepared
and presented on the basis of such accounting policies should
represent a true and fair view of the state of affairs of the enterprise
as at the balance sheet date and of the profit or loss for the period
ended on that date.
16

For this purpose, the major considerations governing the


selection and application of accounting policies are:—
1. Prudence
2. Substance over Form
3. Materiality

They are explained as follows:

1. Prudence: In view of the uncertainty attached to future events,


profits are not anticipated but recognized only when realized
though not necessarily in cash. Provision is made for all known
liabilities and losses even though the amount cannot be
determined with certainty and represents only a best estimate in
the light of available information. Example of Prudence is to
select an accounting policy where inventory valuation is at lower
of cost or net realizable value.

2. Substance over Form: The accounting treatment and


presentation in financial statements of transactions and events
should be governed by their substance and not merely by the
legal form. Best example of this assumption can be state is hire
purchase. If company is purchasing any asset on hire purchase
system then purchaser is not legal owner at the time of
purchase. In hire purchase ownership is transferred on the
payment of the last installment but actually the asset is in the
possession of purchaser and he is using in his business
operation, so substantially he is better owner than legal. It
should be recorded in the books of purchaser.

3. Materiality: Financial statements should disclose all “material”


items, i.e. items the knowledge of which might influence the
decisions of the user of the financial statements. That means if
profit & loss accounts contains an irregular transaction which is
not routine and probably effects shareholders or investors, the
same should be disclosed separately. Example- Any expense
having amount more than Rs.5000 or 1% of turnover whichever
is higher should be disclosed separately rather to club with
miscellaneous expenses.

2.4 NOTES TO ACCOUNTS

Notes to accounts are the explanation given by the


management about the items in the financial statements i.e. Profit
and Loss Account and Balance Sheet. The management of the
institute has to give more explanation and information as regards
the items given in the Profit and Loss Account and Balance Sheet
and any other item in the way of notes to accounts. E.g. Disclosure
17

of details of contingent liability by notes to accounts. Notes to


accounts are part and parcel of the financial statement.

2.5 DISCLOSURE OF ACCOUNTING POLICIES

To ensure proper understanding of financial statements, it is


necessary that:-

1. All significant accounting policies adopted in the preparation and


presentation of financial statements should be disclosed.

2. The disclosure of the significant accounting policies as such


should form part of the financial statements and the significant
accounting policies should normally be disclosed in one place.

3. Disclosure of accounting policies or of changes therein cannot


remedy a wrong or inappropriate treatment of the item in the
accounts.

4. If the fundamental accounting assumptions of Going Concern,


Consistency and Accrual are followed in financial statements,
specific disclosure is not required. If a fundamental accounting
assumption is not followed, the fact should be disclosed.

2.6 DISCLOSURE OF CHANGE IN ACCOUNTING


POLICIES

A change in the accounting policies should be made in


the following conditions:

1. Adoption of different accounting policies is required by statue


or for compliance with an Accounting Standard.

2. It is considered that change would result in more appropriate


presentation of financial statements.

In case if there is a change in accounting policies, the


following information must be disclosed:

1. Any change in the accounting policies which has a material


effect in the current period or which is reasonably expected to have
a material effect in later periods should be disclosed.

2. In the case of a change in accounting policies which has a


material effect in the current period, the amount by which any item
in the financial statements is affected by such change should also
be disclosed to the extent ascertainable. Where such amount is not
ascertainable, wholly or in part, the fact should be indicated.
18

2.7 ILLUSTRATIONS

Significant accounting policies can be found in financial


statements of public companies. Some examples of significant
accounting policies are as follows:

1. Inventories
This significant accounting policy comes from 2017-18
annual financial statements of Zimmer Holdings, Inc.

Inventories are stated at the lower of cost or market, with


cost determined on a first-in first-out basis.

2. Property and Equipment


This significant accounting policy comes from 2017-18
annual financial statements of Google, Inc.

We account for property and equipment at cost less


accumulated depreciation and amortization. We compute
depreciation using the straight-line method over the estimated
useful lives of the assets, generally two to five years. We
depreciate buildings over periods up to 25 years. Depreciation for
equipment commences once it is placed in service and depreciation
for buildings and leasehold improvements commences once they
are ready for our intended use. Land is not depreciated

3. Cash and Cash Equivalents


This significant accounting policy comes from 2017-18
annual financial statements of Hill-Rom, Inc.
We consider investments in marketable securities and other
highly liquid instruments with a maturity of three months or less at
date of purchase to be cash equivalents. Investments which have
no stated maturity are also considered cash equivalents.

2.8 PRACTICAL APPLICATIONS

1. A Company has switched over to weighted average formula for


ascertaining the cost of inventory, from the earlier practice of using
FIFO. The closing inventory by using FIFO is Rs. 4 lakh and that by
weighted average formula is Rs.3.85 lakh. Explain the Accounting
Treatment/Disclosures as necessary

Ans: The fact that change in accounting policy pull down profit and
value of inventory by Rs.15,000 is to be disclosed.

2. Shreya’s Ltd. prepared Profit and Loss Account and the Balance
Sheet for the year 2017-18.The accounting policies about Profit and
19

Loss Account have been disclosed below Profit and Loss Account
and accounting policies about Balance Sheet have been disclosed
before Balance Sheet. Comment

Ans: As per AS-1, the accounting policies adopted for preparation


of final accounts should form part of the final accounts. These
policies should be disclosed at one place only forming part of the
accounts. It should not be disclosed separately.

3. PG Ltd. prepared Profit & Loss Account and Balance Sheet on


cash basis. Comment.

Ans: As per AS-1, accrual basis is the fundamental accounting


assumption. The company follows cash basis. The fundamental
accounting assumption is not followed; it should be disclosed in the
form of a note to the accounts.

4. Akshata Ltd. prepared final accounts for the year 2017-18.


During the year accident took place in the factory, the worker who
got injured lodged a claim of Rs.3,00,000 against the company .The
claim is under dispute, the accountant did not mention this in the
accounts, Comment.

Ans. Claim for compensation under dispute is a contingent liability.


As per AS-1, it should be disclosed as a foot-note to the final
accounts. The company must make a disclosure about the
contingent claim.

5. Draft the Accounting policies to be disclosed in the financial


statements for the following items:
i. Revenue Recognition-Sale of goods

Ans. Sales are recognized when good are invoiced and dispatched
to customers and are recorded inclusive of excise duty, net trade
discount and sales tax.

ii. Revenue Recognition-Sale of Equipment

Ans. Sale of Equipment is recognized when (1) it has a firm


contract, (2) the product has been shipped to and accepted by the
customer or the service has been provided, and (3) amounts are
reasonably assured of collection. Most equipment sales require
installation of the product. As such, revenue is recognized at the
time of delivery and installation at the customer location. Equipment
revenues are based on established prices by product type and
model and are net of discounts.
20

iii. Revenue Recognition-Sales Return

Ans. A sales return is accepted only when the equipment is


defective and does not meet product performance specifications.

iv. Inventories

Ans. Inventories, other than scrap, are valued at cost, on weighted


average basis. Scrap is valued at realizable value.

v. Depreciation – Machinery Spares

Ans. Machinery spares which can be used only in connection with


an item of fixed asset and whose use is expected to be irregular are
capitalized and depreciated over the residual useful life of the
related plant and machinery.

vi. Depreciation- Fixed Assets

Ans. Fixed assets ( Other than leasehold land, technical knowhow


and temporary structure) are depreciated on straight-line method
(SLM) at the rate and in the manner prescribed in schedule XIV to
the Companies Act, 1956 by writing off 95% of the cost of the
assets over the specified period of the assets.

6. Explain requirement in the following cases with reference to


DISCLOSURE OF ACCOUNTING POLICIES (AS-1)

1. Where proper disclosures regarding changes in accounting


policies have not been made by a company, in the method of
providing depreciation on plant and machinery from straight line
method to written-down value method and due to the change the
net profit for the year, the net block as well as the reserves and
surplus lowered by Rs.50,00,000.

Ans. The company has not disclosed in its accounts the fact of
change, from this year, in the method of providing depreciation
on plant and machinery from straight line method to written-down
value method, as also the effect of this change. As a result of this
change, the net profit for the year, the net block as well as the
reserves and surplus are lower by Rs.50,00,000 each as compared
to the position which would have prevailed had this change not
been made.

2. Where a company has not disclosed all significant accounting


policies like treatment of research and development costs and has
also not disclosed the accounting policies at one place.
21

Ans. The company had disclosed those accounting policies the


disclosure of which is required by the Companies Act, 1956. Other
significant accounting policies, viz., those relating to treatment of
research and development costs have not been disclosed nor have
all the policies been disclosed at one place, which is contrary to
Accounting Standard (AS) 1, `Disclosure of Accounting Policies'
issued by the Institute of Chartered Accountants of India.

2.9 QUESTIONS

1. What is an accounting policy?


2. List out different Accounting policies?
3. Mention the areas in which different policies may be adopted
by different organizations?
4. Write a short note on selection of accounting policies?
5. What are basic accounting assumptions?
6. What are the disclosure requirements of AS-1 issued by ICAI?
7. What do you understand by “notes to accounts”?

8. Select Correct Alternative:

i. Accounting policy is
1. accounting postulate
2. accounting convention
3. accounting standard
4. specific accounting principle or method chosen by
management out of permissible alternatives

ii. Example of accounting policy is


1. Method of depreciation chosen by management
2. Separate entity concept
3. Balance sheet
4. Standard audit

iii. RPC Ltd. follows the written down value method of


depreciating machinery year after year due to
1. Comparability.
2. Convenience.
3. Consistency.
4. All of the above.

iv. A change in accounting policy is justified


1. To comply with accounting standard.
2. To ensure more appropriate presentation of the financial
statement of the enterprise.
3. To comply with law.
4. All of the above.
22

v. Fundamental accounting assumptions are


1. Materiality.
2. Business entity.
3. Going concern.
4. Dual aspect

vi. M/s ABC Brothers, which was registered in the year 2000,
has been following Straight Line Method (SLM) of
depreciation. In the current year it changed its method from
Straight Line to Written down Value (WDV) Method, since
such change would result in the additional depreciation of
Rs. 200 lakhs as a result of which the firm would qualify to
be declared as a sick industrial unit. The auditor raised
objection to this change in the method of depreciation.

The objection of the auditor is justified because


1. Change in the method of depreciation should be done only with
the consent of the auditor.

2. Depreciation method can be changed only from WDV to SLM


and not vice versa.

3. Change in the method of deprecation should be done only if it is


required by some statute and change would result in
appropriate presentation of financial statement.

4. Method of depreciation cannot be changed under any


circumstances.

vii. State the case where the going concern concept is applied?

1. When an enterprise was set up for a particular purpose,


which has been achieved, or to be achieved shortly.

2. When a receiver or liquidator has been appointed in case of


a company which is to be liquidated.

3. Fixed assets are acquired for use in the business for earning
revenues and are not meant for resale.

4. When an enterprise is declared sick.

viii. Principle requires that the same accounting method should


be used from one accounting period to the next.
1. Conservatism.
2. Consistency.
3. Business entity.
4. Money measurement.
23

ix. The cost of a small calculator is accounted as an expense


and not shown as an asset in a financial statement of a
business entity due to __________
1. Materiality concept.
2. Matching concept.
3. Periodicity concept.
4. Conservatism concept.

x. It is generally assumed that the business will not liquidate in


the near foreseeable future because of
1. Periodicity.
2. Materiality.
3. Matching.
4. Going concern.

xi. The accounting concept requiring the practice of crediting


closing stock to the trading account
1. Going concern
2. Cost
3. Matching
4. All of Above

xii. Accounting Principles are generally based on


1. Practicability
2. Subjectivity
3. Convenience in recording
4. All of Above

xiii. “Substance of any transaction should be considered while


recording them and not only the legal form” is the statement
which holds true for
1. Substance over form.
2. Disclosure of accounting policies.
3. Both (a) and (b).
4. None of the three.

xiv. Change in the method of depreciation is change in


________.
1. Accounting estimate.
2. Accounting policy.
3. Measurement discipline.
4. None of the above.

Answers: i-4, ii-1, iii-3, iv-4, v-3, vi-3, vii-3, viii-2, ix-1, x-4, xi-1, xii-1,
xiii-3, xiv-2
8. State whether the following statements are true or false:

1. The ‘materiality concept’ refers to the state of ignoring small


items and values from accounts.
24

2. Accounting principles are rules of action or conduct which are


adopted by the accountants universally while recording
accounting transactions.

3. The ‘conservatism concept’ leads to the inclusion of all


unrealized profits.

4. Accounting concepts are broad assumptions.

5. India is a member of IASC (International Accounting Standards


Committee).

6. The Institute of Chartered Accountants of India (ICAI), the apex


body of accounting and auditing, constituted an Accounting
Standards Board (ASB) on April 21, 1977, to pronounce
standards on various items of the financial statements.

Answers: True: 1, 2, 4, 5, 6
False: 3.


25


3
AS-2 VALUATION OF INVENTORIES
Unit Structure:

3.0 Objectives
3.1 Introduction
3.2 Objective and Scope of AS-2
3.3 Measurement of Inventories
3.4 Net Realisable Value
3.5 Disclosures
3.6 Disclosure Practice on Valuation of Inventories (AS-2)
3.7 Guidance Note on MODVAT / CENVAT issued by the ICAI
and Valuation of Inventory
3.8 Cost of Inventories
3.9 Practical Applications
3.10 Exercises

3.0 OBJECTIVES

After studying the unit students will be able to:


 Understand objective and scope of AS-2.
 Make the measurement of inventories at various cases.
 Solve the examples related to allocation of Fixed Overheads
 Calculate the cost of inventories.
 Solve the problems on calculation of the cost of inventories.

3.1 INTRODUCTION

Accounting Standard (AS) 2 'Valuation of Inventories', issued


by the Council of the Institute of Chartered Accountants of India
supersedes Accounting Standard (AS) 2, 'Valuation of Inventories',
issued in June, 1981. The revised standard comes into effect in
respect of accounting periods commencing on or after 1.4.1999 and
is mandatory in nature. Inventories consist of Finished Goods
which are held for sale in the ordinary course of business, Raw
Material & Work in Progress.
26

DEFINITION
1. INVENTORY
Inventories are assets:
 Held for sale in the ordinary course of business,
 In the process of production for such sale or
 In the form of materials or supplies to be consumed in the
production process or in the rendering of services.

Inventories encompass goods purchased and held for


resale, for example, merchandise purchased by a retailer and held
for resale, computer software held for resale, or land and other
property held for resale. Inventories also encompass finished goods
produced, or work in progress being produced, by the enterprise
and include materials, maintenance supplies, consumables and
loose tools awaiting use in the production process. Inventories do
not include machinery spares which can be used only in connection
with an item of fixed asset and whose use is expected to be
irregular; such machinery spares are accounted for in accordance
with Accounting Standard (AS) 10,Accounting for Fixed Assets.

2. NET REALISABLE VALUE


Net realizable value is the estimated selling price in the ordinary
course of business less the estimated costs of completion and the
estimated costs necessary to make the sale.

3.2 OBJECTIVE AND SCOPE OF AS-2

3.2.1 OBLECTIVE
A primary issue in accounting for inventories is the
determination of the value at which inventories are carried in the
financial statements until the related revenues are recognized. This
Statement deals with the determination of such value, including the
ascertainment of cost of inventories and any write-down thereof to
net realizable value.

3.2.2 SCOPE
This Statement should be applied in accounting for inventories
other than:
a. work in progress arising under construction contracts, including
directly related service contracts (see Accounting Standard (AS)
7, Accounting for Construction Contracts 3);
b. work in progress arising in the ordinary course of business of
service providers;
c. shares, debentures and other financial instruments held as
stock-in-trade; and
27

d. producers' inventories of livestock, agricultural and forest


products, and mineral oils, ores and gases to the extent that
they are measured at net realizable value in accordance with
well established practices in those industries.

The inventories referred to in paragraph (d) are measured at net


realizable value at certain stages of production. This occurs, for
example, when agricultural crops have been harvested or mineral
oils, ores and gases have been extracted and sale is assured under
a forward contract or a government guarantee, or when a
homogenous market exists and there is a negligible risk of failure to
sell. These inventories are excluded from the scope of this
Statement.

3.3 MEASUREMENT OF INVENTORIES

Inventories should be valued at the lower of cost and net


realizable value.

3.3.1 Cost of Inventories


The cost of inventories should comprise all costs of
purchase, costs of conversion and other costs incurred in bringing
the inventories to their present location and condition.

3.3.2 Costs of Purchase


The costs of purchase consist of the purchase price
including duties and taxes (other than those subsequently
recoverable by the enterprise from the taxing authorities), freight
inwards and other expenditure directly attributable to the
acquisition. Trade discounts, rebates, duty drawbacks and other
similar items are deducted in determining the costs of purchase.

3.3.3 Costs of Conversion


The costs of conversion of inventories include costs directly
related to the units of production, such as direct labour. They also
include a systematic allocation of fixed and variable production
overheads that are incurred in converting materials into finished
goods. Fixed production overheads are those indirect costs of
production that remain relatively constant regardless of the volume
of production, such as depreciation and maintenance of factory
buildings and the cost of factory management and administration.
Variable production overheads are those indirect costs of
production that vary directly, or nearly directly, with the volume of
production, such as indirect materials and indirect labour.
28

Fig 3.1: Measurement of Inventory


3.3.4 Allocation of fixed Overheads
The allocation of fixed production overheads for the purpose
of their inclusion in the costs of conversion is based on the normal
capacity of the production facilities. Normal capacity is the
production expected to be achieved on an average over a number
of periods or seasons under normal circumstances, taking into
account the loss of capacity resulting from planned maintenance.
The actual level of production may be used if it approximates
normal capacity. The amount of fixed production overheads
allocated to each unit of production is not increased as a
consequence of low production or idle plant.
Unallocated overheads are recognized as an expense in the
period in which they are incurred. In periods of abnormally high
production, the amount of fixed production overheads allocated to
each unit of production is decreased so that inventories are not
measured above cost. Variable production overheads are
assigned to each unit of production on the basis of the actual use
of the production facilities.
29

1.3.5 Examples - Allocation of Fixed Overheads


Example 1.

Total Production 100 Units


Normal Capacity 50 Units
Goods Sold 80 Units
Closing Stock 20 Units
Direct Cost 10 per unit
Fixed Overhead Rs.80
Variable Overhead Rs.120

Ans: Valuation of Stock = Direct Cost + Fixed Cost + Variable Cost


=10 + 0.8 + 1.2
= Rs.12

Fixed Cost= (80/100) = Rs.0.8

Variable cost= (120/100) = Rs.1.2

Note: In case of Actual Production is abnormally high then, Fixed


Overhead is allocated to Finished Goods on actual Production
basis.

3.3.6 Joint Products


A production process may result in more than one product
being produced simultaneously. This is the case, for example,
when joint products are produced or when there is a main product
and a by-product. When the costs of conversion of each product
are not separately identifiable, they are allocated between the
products on a rational and consistent basis. The allocation may be
based, for example, on the relative sales value of each product
either at the stage in the production process when the products
become separately identifiable, or at the completion of production.
Most by-products as well as scrap or waste materials, by their
nature, are immaterial. When this is the case, they are often
measured at net realizable value and this value is deducted from
the cost of the main product. As a result, the carrying amount of the
main product is not materially different from its cost.

3.3.7 Other Costs


Other costs are included in the cost of inventories only to the
extent that they are incurred in bringing the inventories to their
present location and condition. For example, it may be appropriate
to include overheads other than production overheads or the costs
30

of designing products for specific customers in the cost of


inventories.

Interest and other borrowing costs are usually considered as


not relating to bringing the inventories to their present location and
condition and are, therefore, usually not included in the cost of
inventories.

3.3.8 Exclusions from the Cost of Inventories


In determining the cost of inventories in accordance with
paragraph 6, it is appropriate to exclude certain costs and
recognize them as expenses in the period in which they are
incurred. Examples of such costs are:

(a)Abnormal amounts of wasted materials, labour, or other


production costs;

(b)Storage costs, unless those costs are necessary in the


production process prior to a further production stage;
(c) Administrative overheads that do not contribute to bringing the
inventories to their present location and condition; and
(d) Selling and distribution costs.

3.3.9 Cost Formulae


1. Specific Identification Method for–
i) Goods not ordinarily interchangeable;
ii) Goods/services produced and segregated for specific
projects.

Specific identification of cost means that specific costs are


attributed to identify items of inventory. This is an appropriate
treatment for items that are segregated for a specific project,
regardless of whether they have been purchased or produced.
However, when there are large number of items of inventory which
are ordinarily interchangeable, specific identification of costs is
inappropriate since, in such circumstances, an enterprise could
obtain predetermined effects on the net profit or loss for the period
by selecting a particular method of ascertaining the items that
remain in inventories.

2. FIFO, Weighted Average Method in other cases.


The cost of inventories, in other cases should be assigned
by using the first-in, first-out (FIFO), or weighted average cost
formula. The formula used should reflect the fairest possible
approximation to the cost incurred in bringing the items of inventory
to their present location and condition.
31

A variety of cost formulae is used to determine the cost of


inventories other than those for which specific identification of
individual costs is appropriate. The formula used in determining the
cost of an item of inventory needs to be selected with a view to
providing the fairest possible approximation to the cost incurred in
bringing the item to its present location and condition. The FIFO
formula assumes that the items of inventory which were purchased
or produced first are consumed or sold first, and consequently the
items remaining in inventory at the end of the period are those most
recently purchased or produced. Under the weighted average cost
formula, the cost of each item is determined from the weighted
average of the cost of similar items at the beginning of a period and
the cost of similar items purchased or produced during the period.
The average may be calculated on a periodic basis, or as each
additional shipment is received, depending upon the circumstances
of the enterprise.
3.3.10 Techniques for the Measurement of Cost
Techniques for the measurement of the cost of inventories,
such as the standard cost method or the retail method, may be
used for convenience if the results approximate the actual cost.
Standard costs take into account normal levels of consumption of
materials and supplies, labour, efficiency and capacity utilization.
They are regularly reviewed and, if necessary, revised in the light of
current conditions.
The retail method is often used in the retail trade for
measuring inventories of large numbers of rapidly changing items
that have similar margins and for which it is impracticable to use
other costing methods. The cost of the inventory is determined by
reducing from the sales value of the inventory the appropriate
percentage gross margin. The percentage used takes into
consideration inventory which has been marked down to below its
original selling price. An average percentage for each retail
department is often used.

3.4 NET REALISABLE VALUE

3.4.1 MEANING
It means the estimated selling price in ordinary course of
business, less estimated cost of completion and estimated cost
necessary to make the sale. Estimation of NRV also takes into
account the purpose for which the inventory is held.
3.4.2 When cost of inventories may not be recoverable?
i. If inventories are damaged,
ii. If they have become wholly or partially obsolete,
iii. If their selling prices have declined.
iv. If the estimated costs of completion or the estimated costs
necessary to make the sale have increased.
32

The practice of writing down inventories below cost to net


realizable value is consistent with the view that assets should not
be carried in excess of amounts expected to be realized from their
sale or use. An assessment is made of net realizable value as at
each balance sheet date.

3.4.3 Net Realizable Value for Raw Material - Para 24 of AS 2


1) If finished goods in which Raw Material is used, is sold at or
above cost, then net realizable value of Raw Material is considered
more than its cost.
2) If finished goods in which Raw Material used is sold below cost,
then net realizable value of Raw Material is equal to replacement
price of Raw Material.
3.4.4 Analysis of Inventory valuation under cost and NRV
Aspects
33

Example 2:
Suppose, there are 1,00,000 units in stock, of which 60,000 are to
be delivered for Rs.40 each as per contract with one of the
customer. Cost of stock is Rs.45 per unit & NRV is estimated of
Rs.50 per unit. What will be the value of stock?

Ans. In this case, 60,000 units will be valued at Rs.40 & balance
stock of 40,000 units will be valued at Rs.45 per unit.

Example 3:

Items X Y Z Total
Cost 20 16 8 44
NRV 14 16 12 42

How will you value the stock under provisions of AS-2?

Ans:

Items X Y Z Total
Cost 20 16 8 44
NRV 14 16 12 42
Value
14 16 8 38
(under AS 2)

3.5 DISCLOSURES

The financial statements should disclose:


i. Accounting policies relating to inventories
ii. Cost formula used
Iii.Carrying amount of inventories with appropriate classifications

Information about the carrying amounts held in different


classifications of inventories and the extent of the changes in these
assets is useful to financial statement users. Common
classifications of inventories are raw materials and components,
work in progress, finished goods, stores and spares, and loose
tools.

3.6 DISCLOSURE PRACTICE ON VALUATION OF


INVENTORIES (AS-2)

Illustration:
This significant accounting policy comes from 2006 annual financial
statements of Bharat Forge America Inc.
34

Inventories are stated at the lower of cost or market, with the cost
determined on the First-In, First-Out (FIFO) method.

Explain requirement in the following cases with reference to

VALUATION OF INVENTORIES (AS-2)

1. The company is valuing its stocks at `cost' instead of `lower of


cost or net realizable value". Further, in valuing the closing stock at
cost, the company has included interest and other borrowings in
`cost'.

Ans. That the company is valuing its stocks at ‘cost' instead of


`lower of cost and net realizable value’. Further, in valuing the
closing stock at cost, the company has included interest and other
borrowings in ‘cost'. This is not in accordance with principles of
valuation of inventory as laid down in Revised Accounting
Standard AS-2 on Valuation of Inventories , issued by the
Institute of Chartered Accountants of India, which recommends,
inter alia, that the inventories should be valued at `lower of cost
and net realizable value' and that the interest and other borrowing
should not normally be included in the cost.

2. The Company in respect of its Chemical Division followed the


practice of valuing its inventories on FIFO basis. This year it
changed the basis of valuation from FIFO to LIFO basis. If this
change had not been made, the profit of the Company would have
been higher by Rs.20 lakhs and inventories would have been
higher by Rs.20 lakhs.

Ans. The Company in respect of its Chemical Division followed the


practice of valuing its inventories on FIFO basis. This year it
changed the basis of valuation from FIFO to LIFO basis. Had this
change not been made, the profit of the Company would have been
higher by Rs.20 lakhs and inventories would have been higher by
Rs.20 lakhs. This is not accordance with principles of valuation of
inventory as laid down in Revised Accounting Standard AS-2 on
`Valuation of Inventories', issued by the Institute of Chartered
Accountants of India, which recommends, inter alia, that the
inventories should be value at FIFO and at LIFO.

3. As per the past practice, the excise duty paid on finished


goods inventory amounting to Rs.3 crores has been treated as
prepayment till the goods are sold and estimated excise duty of
Rs.2 crores on finished goods lying in the factory premises but not
cleared from excise bonded warehouse as on March 31, 2011 has
not been included in inventory valuation.
35

Ans. As per the past practice, the excise duty paid on finished
goods inventory amounting to Rs.3 crores has been treated as
prepayment till the goods are sold and estimated excise duty of
Rs.2 crores on finished goods lying in the factory premises but not
cleared from excise bonded warehouse as on March 31, 2011 has
not been provided and hence, not included in inventory valuation.
This treatment, however, has no effect on the profits for the year.

3.7 GUIDANCE NOTE ON MODVAT/CENVAT ISSUED


BY THE ICAI AND VALUATION OF INVENTORY

ICAI issued a “Guidance Note on Accounting Treatment for


MODVAT / CENVAT”, with the substitution of the MODVAT Credit
Scheme with CENVAT w.e.f. 1-4-2000. The revised Guidance Note
has provided clarification on the above anomaly, with examples on
both the inclusive method (Sec.145A) and exclusive method (AS-
2), where it is clear that the above anomaly is only in respect of the
disclosure, with no effect on the total profit/loss of the enterprise.

Therefore, for purposes of tax filings and tax audit forms, the
inclusive method should be used as per section 145A of the
Income-tax Act, whereas for purposes of general purpose financial
statements, the exclusive method under AS-2 should be followed.

Inclusive Method (Gross Value Approach)

 Raw material is accounted for at gross value inclusive of


specified duty.
 CENVAT credit available on final products can be accounted for
through a separate account CENVAT Credit Availed Account.
 Inputs may be consumed partly. CENVAT Credit available
should be segregated into two parts:
- CENVAT Credit on inputs consumed in respect of final
products;
- CENVAT credit on inputs lying in the stock.

CENVAT credit available on inputs consumed for final products is


adjusted with the cost of raw material consumed.

CENVAT credit available on inputs lying in the godown should be


adjusted against the value of closing stock of raw material.

Exclusive Method (opening separate CENVAT Credit Account)

 Specified duty (i.e., duty paid against which CENVAT credit is


available) paid on inputs is debited to a separate account,
namely CENVAT Credit Receivable (Input) Account.
36

 As and when CENVAT credit is actually utilized against


payment of excise duty on final products, CENVAT Credit
Receivable (Input) Account is credited.
 Inputs consumed and inventory is valued excluding specified
duty.

Balance standing in the CENVAT Credit Receivable (Input)


Account is shown on the asset side of the Balance Sheet
under Advances.

3.8 COST OF INVENTORIES

A] Cost of Purchase:
I] Purchase Price xx
ii] Duties & Taxes xx
iii] Freight Inward xx
iv] Other Expenditure directly
attributable to acquisition xx xx
Less: i] Duties and Taxes recoverable
from tax authorities xx
ii] Trade discount xx
iii] Rebate xx
iv] Duty Drawback xx
v] Other similar items xx xx xxx
B] Cost of Conversion:
Direct Materials xx
Direct Labour xx
Direct Expenses xx
Systematic allocation of:
Variable Production Overheads xx
Fixed Production Overheads xx xxx
C] Other Costs:
Cost incurred for bringing the
inventories to their present xxx
location and condition xxx

3.9 PRACTICAL APPLICATIONS

Illustration 1: (Duties and taxes not recoverable)


Ambalal furnishes you following details
Ascertain the cost of purchase of inventory
i] Purchase of Raw materials Rs. 10 lakhs
ii] Duties and Taxes paid on the
acquisition and are not recoverable Rs. 2 lakhs
iii] Carriage inward Rs. 1 lakhs
iv]Others paid for acquisition of inventory Rs. 1 lakhs
37

Solution:
Cost of Purchase Rs. in lakhs
Cost of Purchase of Raw Materials 10
Duties & Taxes not recoverable 02
Carriage inward 01
Other Expenses 01
Total 14

Illustration 2
Big Bagha Associates furnishes you following details from which
you are required to ascertain cost of purchase of inventories.
i] Cost of Purchase of Inventory Rs. 20 lakhs
ii] Duties & Taxes paid and are
recoverable from Tax Authorities Rs. 5 lakhs
iii] Trade Discount Rs. 2 lakhs
iv] Duties & Taxes paid and not recoverable Rs. 2 lakhs
v] Freight Inwards Rs. 1 lakhs
vi] Other Expenses directly attributable
to Acquisition of Inventory Rs. 2 lakhs

Solution : Big Bagha Associates

Calculation of Cost of Purchase Rs. in lakhs


Cost of Purchase 20
Duties & Taxes paid and not recoverable 02
Freight Inward 01
Other Expenses 02
25
Less : Duties & Taxes recoverable from
Tax Authorities 05
Trade Discount 02 07
Total 18

Illustration 3
Chrome Ltd. manufactures different types of Dichromates.
From the following information find the value of inventory per kg
of Sodium Dichromate
Material cost Rs. 150 per kg
Direct Labour Cost Rs. 50 per kg
Direct Variable Production Overheads Rs. 20 per kg
Fixed production overheads for the year on normal capacity of
1,00,000 kgs is Rs.15 lakhs.
Finished goods on stock at the end of the year 3,000 kgs.

Solution: Chrome Ltd.


Cost per kg of Sodium Dichromate
As per AS-2 cost of conversion includes a systematic
allocation of fixed and variable production overheads, which are
38

incurred for converting materials into finished goods. The allocation


of fixed production overheads is based on normal capacity.

Statement of Cost (Per Kg) Rs.


Material Cost 150
Direct Labour 50
Direct Variable Production Overheads 20
 15,00,000 
Fixed Production Overheads   15
 1,00,000 
235
Value of Stock = 3,000 kgs @ Rs. 235
= Rs. 7,05,000

Illustration 4
Ind Ltd. manufacture computers, during the year ended 31st March,
2008 the company manufactured 550 computers, it has the policy
of valuing finished stock of goods at a standard cost of Rs.1.8 lakhs
per computer. The details of the cost are as under;
(Rs. in Lakhs)
Raw material consumed 400
Direct Labour 250
Variable production overheads 150
Fixed production overheads 290
(Including interest of Rs. 100)

Compute the value of cost per computer for the purpose of


closing stock.

Solution: As per AS-2 (Revised) (refer point 3.6), on valuation of


Inventories, finished stock of goods should be valued on the basis
of absorption costing. While absorbing fixed production overheads
the normal production capacity is considered. In this case, finished
stock has been valued at a standard cost of Rs.1.8 lakhs per
computer which incidentally synchronizes with the value computed
on the basis of absorption costing as under:
, (Rs. in lakhs)
Materials 400
Direct Labour 250
Fixed production overheads 150
Fixed production overheads 290
Less : Interest 100 190
Total Cost 990

Number of computers produced 550


(Assumed to be normal production)
Cost per computer 990/550 = Rs. 1.80 lakhs

Policy of the company to value closing stock is not as per


AS-2. As per para 18 of AS-2, (refer point 3.9-1) the techniques of
39

standard cost method may be used for convenience if the result


approximates to the actual cost and standard cost is regularly
reviewed if necessary. In the instant case, the cost of inventory can
be conveniently calculated as per absorption costing. Therefore,
there is no reason that standard costing method should be adopted.

Illustration 5

Dolphin Simulators Ltd. manufactures simulators.


Raw material was purchased at Rs. 100 per kg. Price of raw
material is on the decline. The finished goods in which the raw
material is incorporated are expected to be sold at below cost.
10,000 kgs of raw material is in stock at the year-end. Replacement
cost is Rs. 80 per kg. How will you value the inventory?

Solution :
Dolphin Simulators Ltd.
As per para 24 of AS-2, on valuation of inventories, material and
other supplies held for use in the production of inventories are not
written down below cost if the finished products in which they will
be incorporated are expected to be sold at or above cost. However,
when there has been a decline in the price of materials and it is
estimated that the cost of the finished products will exceed net
realisable value, the materials are written down to net realisable
value. In such circumstances, the replacement cost of the material
may be the best available measure of their net realisable value.

Hence, in this case, the stock of 10,000 kgs. of raw material will
be valued at Rs.80 per kg. The finished goods, if on stock, should
be valued at cost or net realisable value, whichever is lower.
Illustration 6
Lurcko Pvt. Ltd. manufactures computers. During the year
ended 31st March, 2017, the company manufactured 1000
computers. The break up of cost is as under:
Raw Material Rs. 450 lakhs
Direct Labour Rs. 300 lakhs
Variable Production Overheads Rs. 200 lakhs
Fixed Production Overheads
(Includes interest of Rs.100 lakhs) Rs. 300 lakhs
Compute the cost per computer for the purpose of closing
stock.

Solution:
As per AS-2 Inventory should be valued as per absorption
costing. The cost is calculated as under :
40

Calculation of Cost of Purchase


Rs. in lakhs
Raw Material 450
Direct Labour 300
Variable Production Overheads 200
Fixed Production Overheads 300
Less Interest 100 200
1150

Cost per computer = 1,150 Lakhs /1,000 = Rs. 1.15 lakhs


Note: Interest is excluded from cost of inventory.

Illustration –7
Gurecha Pvt. Ltd. furnishes you following information from
which you are required to value inventory of Finished Goods.
Material cost Rs. 200 per kg.
Direct Labour cost Rs. 40 per kg.
Direct variable production overhead Rs. 20 per kg.
Fixed production charges for the year on normal capacity of
one lakh kgs. is Rs. 20 lakhs. 2000 kgs. of finished goods are on
stock at the year-end.
Solution: Gurecha Pvt. Ltd.
In accordance with paras 8 & 9 of AS-2, (refer point 3.6) the
cost of conversion include a systematic allocation of fixed and
variable production overheads that are incurred in converting
materials into finished goods. The allocation of fixed production
overheads for the purpose of their inclusion in the cost of
conversion is based on the normal capacity of the production
facilities.
Thus, cost per kg. of finished goods can be computed as
follows:
Rs Rs.
Material cost 200
Direct Labour cost 40
Direct variable production overhead 20
Fixed production overhead
(Rs. 20,00,000/100000) 20 80
280

Thus, the value of 2000 kgs. of finished goods on stock at


the year-end will be Rs.5,60,000 = (2000 kgs. X Rs. 280)
Illustration 8
Hirel Techno points Associates is a company situated at MIDC,
Pune. The company deals in three products A, B and C, which are
neither similar nor interchangeable. At the time of closing of its
41

accounts for the year 2016-17; the historical cost and net realisable
values of the items of closing stock are given below:

Items : Historical Cost Net Realisable Value


(Rs. in lakhs) (Rs. in lakhs)
A 25 20
B 20 20
C 10 15
55 55

What will be the value of stock?

Solution: HIREL TECHNOPOINTS, PUNE


Historical Cost or Net Realisable Value whichever is less is
the value of stock. This should be done item by item as given
below:
Rs. in lakhs
A. Net Realisable Value 20
B. Historical Cost 20
C. Historical Cost 10
Value of Closing Stock 50

Illustration 9
The company deals in three products, A, B and C, which are
neither similar nor interchangeable. The Historical Cost and Net
Realizable Value of the items of closing stock for the year 2016-17
are determined as follows:

Items Historical Cost Net Realizable Value


(Rs. in lakhs) (Rs. in lakhs)
A 40 28
B 32 32
C 16 24

What will be the value of Closing Stock?


Ans: As per Para 5 of AS 2 on Valuation of Inventories, inventories
should be valued at the lower of cost and net realizable value.
Inventories should be written down to net realizable value on an
item-by item basis in the given case.

Items Historical Cost Net Realizable Valuation of


Value closing stock
(Rs. in lakhs) (Rs. in lakhs) (Rs. in lakhs)
A 40 28 28
B 32 32 32
C 16 24 16
Total 88 84 76
Hence, closing stock will be valued at Rs. 76 lakhs.
42

Illustration 10
X Co. Limited purchased goods at the cost of Rs.40 lakhs in
October, 2011. Till March, 2012, 75% of the stocks were sold. The
company wants to disclose closing stock at Rs.10 lakhs. The
expected sale value is Rs.11 lakhs and a commission at 10% on
sale is payable to the agent. Advice, what is the correct closing
stock to be disclosed as at 31.3.2012.
Ans: As per Para 5 of AS 2 “Valuation of Inventories”, the
inventories are to be valued at lower of cost and net realizable
value. In this case, the cost of inventory is Rs.10 lakhs. The net
realizable value is 11, 00,000 @ 90% = Rs.9, 90,000. So, the stock
should be valued at Rs.9, 90,000.
Illustration 11
The Company X Ltd. has to pay for delay in cotton clearing
charges. The company up to 31.3.2017 has included such charges
in the valuation of closing stock. This being in the nature of interest,
X Ltd. decided to exclude such charges from closing stock for the
year 2006-07. This would result in decrease in profit by Rs.5 lakhs.
Comment.
Ans: As per Para 12 of AS 2 (revised), interest and other borrowing
costs are usually considered as not relating to bringing the
inventories to their present location and condition and are therefore,
usually not included in the cost of inventories. However, X Ltd. was
in practice to charge the cost for delay in cotton clearing in the
closing stock. As X Ltd. decided to change this valuation procedure
of closing stock, this treatment will be considered as a change in
accounting policy and such fact to be disclosed as per AS 1.
Therefore, any change in amount mentioned in financial statement,
which will affect the financial position of the company should be
disclosed properly as per AS 1, AS 2 and also a note should be
given in the annual accounts that, had the company followed earlier
system of valuation of closing stock, the profit before tax would
have been higher by Rs. 5 lakhs.
Illustration 12
Normal capacity = 20,000 units
Production = 18,000 units
Sales = 16,000 units
Closing Stock = 2,000 units
Fixed Overheads = Rs. 60,000
Calculate cost of fixed overheads to closing stock
Ans: Fixed Overheads = Rs.60,000 / 20,000 = Rs. 3 per unit
Fixed Overheads will be bifurcated into three parts:
Cost of Sales: 16,000*3 = 48,000
Closing Stock: 2,000 *3 = Rs. 6,000
Under normal capacity: 2,000 *3 = Rs. 6,000
(to be charged to P/L A/c)
43

Illustration 13

Normal capacity = 20,000 units


Production = 25,000 units
Sales = 23,000 units
Closing Stock = 2,000 units
Fixed Overheads = Rs 60,000
Calculate Cost of fixed overheads to closing stock

Ans: Fixed Overheads = Rs 60,000/20,000 = Rs.3 per unit


But, Due to production above normal capacity = Rs.60,000 / 25,000
= Rs. 2.40 per unit
Cost of Sales: 23,000 * 2.4 = Rs. 55,200
Closing Stock: 2,000 * 2.4 = Rs. 4,800

Illustration 14
Ascertain the cost of Inventory by using the data given below:

i. Purchase Price Rs.20 lakhs


ii. Duties and Taxes paid on acquisition and are Rs.2 lakhs
not recoverable
iii. Freight inward Rs.2 lakhs
iv .Others paid for acquisition of inventory Rs.1 lakhs

Ans. Cost of Purchase:


Cost of Inventory Rs. in lakhs
Purchase Price 20
Duties and Taxes paid on acquisition and are not 02
recoverable
Freight inward 02
Others paid for acquisition of inventory 01
Total 25

Illustration 15
Zenith Ltd. manufactures computers. During the year ended 31st
March 2017, the Company manufactured 5,000 computers and
incurred following cost:

i. Raw Material Rs.400 lakhs


ii. Direct Labour Rs.400 lakhs
iii.Variable Production overheads Rs.150 lakhs
iv. Fixed Production overheads Rs.250 lakhs
(including interest 50 lakhs)

Compute cost per computer for the purpose of closing stock.


44

Ans.

Cost of Purchase Rs. in lakhs


Raw Material 400
Direct Labour 400
Variable Production overheads 150
Fixed Production overheads 200
Total 1,150

Note: Interest excluded from cost of Inventory

Cost per Computer (1,150 lakhs / 5,000) Rs. 23,000

3.10 EXERCISE

3.10.1 PRACTICAL PROBLEMS

1. How do you ascertain the cost of purchase of inventory by using


the following data
i] Purchase Price Rs. 5,00,000
ii] Duties and Taxes paid on the Acquisition
of Inventory and are not recoverable Rs. 2,00,000
iii] Freight Inward Rs. 1,00,000
iv] Other Expenses for Acquisition of Materials Rs. 2,00,000

[Ans. Rs. 10,00,000]

2. Ganesh Pvt. Ltd. produces product x 2007.


The production cost per unit
Raw Materials Rs. 15
Labour Rs. 6
Direct Expenses Rs. 5
Normal capacity 10,000 units p.a.
Actual production 7,000 units
Fixed Factory overheads Rs. 30,000 p.a.
Closing Stock 2500 units

Calculate the value of closing stock

Normal Capacity 10000units


Actual Production 7000 units
Total Fixed overheads 30000
Fixed overhead per unit 3Rs

Ans. Value of closing stock= 2500 units@29 =72500


45

3. Company deals in three products X, Y and Z, which are neither


similar nor interchangeable. At the time of closing its account for
the year 2001-2002. The historical cost and net realisable
values of the items of closing stock are determined as below :
Items Historical Cost Net realisable value
(Rs. in lakhs) (Rs. in lakhs)
X 20 14
Y 16 16
Z 8 12
44 42
What will be the value of closing stock?

[Ans. : Rs. 38]

4. Company is collecting Gumkriya from the plant of forest for


collecting Gumkriya. Company paid Rs.5 crores to forest
department as license fee for financial year 2001-2002. During
the year it collected 1 crore kg. of Gumkriya from the forest and
sold 60 thousand kg. for Rs.12 crores. Other direct expenses
and overheads were Rs.7 crores for the financial year 2001-
2002. The company valued the closing stock of 40,000 kg. at
Rs. 4.80 crores following the AS-2. Whether the valuation is
correct.
[Ans. : AS-2 does not apply to forest product]

5. X Ltd. is selling refrigerator; purchase price of the Refrigerator is


Rs.15,000 as per the terms of sales. The refrigerator is to be
delivered and installed at customer’s house free of cost. X Ltd.
has hired Y & Co. for the purpose and being paid Rs.1,000 –
per Refrigerator for delivery and installation. At year ended on
31-3-2002, 10 refrigerator were in stock. The market price of the
refrigerator is Rs.15,750. Calculate the value of closing stock as
per AS-2.
[Ans. : Rs. 1,47,500]

6. Apple Consultancy Ltd. is the management consultant giving the


consultancy in the field of re-structuring, amalgamation and
valuation. The company has got consultancy contract worth
Rs.20 lakhs from Y Ltd. for giving their report of restructuring of
the organization. X Consultancies Ltd. commences the work on
1-3-2008 and expect that work will take four months to be
completed. X Consultancy Ltd. has deployed four senior
consultants for the assignment whose salary is Rs. 20,000 per
month. For the year ended 31-3-2008. The company values the
work-in-progress of Rs.80,000 in its financial statement applying
the formula of valuation of cost or nets realisable value
whichever is less as per AS-2.
Is the valuation of W.I.P. of Rs. 80,000 is correct. If not why?
[Ans. : AS-2 does not apply to service contract]
46

7. Z Ltd. produced 10,000 units of product A during 2007-2008 per


unit cost is as follows :
Raw Material Rs. 100
Direct wages Rs. 50
Direct Expenses Rs. 2
Rs. 152
Production overhead is Rs. 20,000 of which 40% is fixed. The
company sold 800 units and 2,000 units were in stock as on 31st
March 2008. Normal capacity is 50,000 units.
Calculate the value of closing stock.
[Ans.: Rs. 309600]

8. Historical Cost and Net Realibsable Value of five inventory


items are given below :
Items : Historical Cost Net Realisable Value
Rs. Rs.
A 20,000 30,000
B 12,000 10,000
C 12,000 18,000
D 32,000 26,000
E 28,000 26,000
1,04,000 1,10,000
Determine the value of inventory.
[Ans. Rs. 94,000]

9. Cost of Production of Product x 100 is given below :


Direct Material per unit Rs. 150
Direct Wages per unit Rs. 100
Overheads per unit Rs. 50
Rs. 300

As on the balance sheet date, replacement cost of material is


Rs. 120 per unit. There were 2,000 units of material on 31st March,
2008
Calculate the value of stock of material under the following
conditions:

i] If finished product is sold at Rs.320 per unit, what will be the


value of stock of material.
ii] If finished product is sold at the rate of Rs.280 per unit, what will
be the value of closing stock of materials.

[Ans. (i) Rs. 3,00,000. (ii) Rs. 2,40,000]

10. Indulkar Ltd. produced 1,00,000 units during the year 2006-07.
The cost per unit is as follows:
Direct Materials Rs. 100
Direct Labour Rs. 50
Direct Expenses Rs. 10
47

Production overheads are Rs. 2,00,000 of which 60% is


variable. The company sold 80,000 units and 20,000 units were in
stock as on 31st March, 2007. Normal capacity is 50,000 units.
Calculate the value of Closing Stock.

[Ans. Variable Production Overheads Rs. 1,20,000

Fixed Production Overheads Rs. 80,000


Variable Production Overheads
per unit Rs. 1,20,000
Rs. 1,00,000 = 1.20
Fixed Production Overheads Rs. 80,000 = 1.60
Per unit Rs. 50,000
Cost per unit Rs. 162.80
Value of Stock = 20,000 x 162.80
= Rs. 32,56,000]

3.10.2 THEORY QUESTIONS


1] What are the objectives of AS-2?
2] Under what circumstances AS-2 is applicable?
3] Define the term ‘Inventories’?
4] Write a detailed note on ‘Measurement of Inventories’?
5] State and explain important aspects of ‘Inventory Valuation’.
6] Write short notes on
i] Treatment of other cost
ii] Inclusion of excise duty in valuation of finished goods
iii] Exclusion from cost of inventories
iv] Disclosure of inventory valuation policy in financial
statement.
v] Cost formula
vi] Net realisable value
7] Explain the following
a] Cost of purchase
b] Cost of conversion
c] Standard method
d] Retail method
e] Specific cost method
f] Net Realisable value
8] Compare the following
i] Standard cost and retail method
ii] Historical cost and Realisable value
9] Briefly explain Main Product, Joint Product and By Product.
48

3.10.3 OBJECTIVE TYPE QUESTIONS


1. Select Correct Alternative:

1. Under inflationary conditions, ________ method will show


highest value of closing stock?
a. FIFO
b. LIFO
c. Weighted Average
d. None of the above
2. The inventory valuation method that identifies the invoice cost of
each item in ending inventory to determine the cost assigned to
that inventory is the:
a. Weighted-average inventory method.
b. Retail inventory method.
c. Specific identification method.
d. First-in, First-out method.

3. A company had the purchases shown below during the current


year. On December 31, there were 26 units remaining in ending
inventory. These 26 units consisted of 2 from January, 4 from
February, 6 from May, 4 from September and 10 from
November. Using the specific identification method, what is the
cost of the ending inventory?

January 10 units @ 120


February 20 units @ 130
May 15 units @ 140
September 12 units @ 150
November 10 units @ 160

a. 3,500
b. 3,800
c. 3,960
d. 3,280

4. The original cost of an inventory item is above the replacement


cost. The inventory item's replacement cost is above the net
realizable value. Under the lower of cost or market method, the
inventory item should be valued at:
a. Original cost.
b. Replacement cost.
c. Net realizable value.
d. Net realizable value less normal profit margin.
49

5. A manufacturer has the following per-unit costs and values for


its sole product:
Cost Rs.10.00
Current replacement cost Rs.5.50
Net realizable value Rs. 6.00
Net realizable value less normal profit margin Rs. 5.20
In accordance with AS 2, what is the per unit carrying value of
inventory in the manufacturer’s statement of financial position?

a. 5.20
b. 5.50
c. 6.00
d. 10.00
6. AS-2 is related to :
a. Valuation of inventories
b. Accounting for Construction Contracts
c. Cash Flow Statements
d. Depreciation accounting
7. Assuming constant inventory quantities, which of the following
inventory-costing methods will produce a lower inventory
turnover ratio in an inflationary economy?

a. FIFO (first in, first out).


b. LIFO (last in, first out).
c. Moving average.
d. Weighted average.
8. In specific identification method of inventory valuation the
method applicable will be

a. FIFO
b. LIFO
c. Average cost
d. None of the above
9. Sales for the year ended 31st March, 2005 amounted to
Rs.10,00,000. Sales included goods sold to Mr. A for Rs. 50,000
at a profit of 20% on cost. Such goods are still lying in the
godown at the buyer’s risk. Therefore, such goods should be
treated as part of

a. Sales.
b. Closing stock.
c. Goods in transit
d. Sales return
50

10. Approximate actual cost method of inventory valuation is --

a. Actual cost
b. Standard cost
c. Weighted average cost
d. FIFO
11. A company normally sells its product for Rs.20 per unit, which
includes a profit margin of 25%. However, the selling price has
fallen to Rs.15 per unit. This company's current inventory
consists of 200 units purchased at Rs.16 per unit. Replacement
cost has now fallen to Rs.13 per unit. Calculate the value of this
company's inventory at the lower of cost or market.
a. 2,600
b. 2,550
c. 2,700
d. 3,000
12. A businessman purchased goods for Rs.25,00,000 and sold
70% of such goods during the accounting year ended 31st
March, 2005. The market value of the remaining goods was
Rs.5,00,000. He valued the closing stock at Rs.5,00,000 and
not at Rs.7, 50,000 due to

a. Money measurement.
b. Conservatism.
c. Cost.
d. Periodicity.
13. At the end of the accounting year, material A costing Rs.10,000
was having net realizable value of Rs.9,500 only, while material
B costing Rs.12,000 was having a net realizable value of
Rs.13,000 in the market and material C costing Rs.15,000 was
having net realizable value of Rs.14,000 only. The total amount
of closing stock will be
a. Rs.37, 000.
b. Rs. 35,500.
c. Rs. 36,500.
d. Rs. 38,000.
14. The following data has been provided by Omega Ltd.:
Item No. Units Cost per unit Realization value
per unit
1 2 10 11
2 10 5 4
3 2 2 2
51

The value of inventory on item by item basis will be


a. Rs. 40.
b. Rs.64.
c. Rs.66.
d. Rs.60.

15. “Inventories should be out of godown in the sequence in which


they arrive” is based on
a. HIFO.
b. LIFO.
c. FIFO.
d. Weighted average.

Answers: 1- a, 2-c, 3-b, 4-c, 5-c, 6-a, 7- a, 8-d, 9- a, 10-c, 11-a,


12- b,13- b,14-b, 15-c.




52

4
AS-9 REVENUE RECOGNITION

Unit Structure:

4.0 Objectives
4.1 Introduction
4.2 Purpose
4.3 Non Applicability of AS-9
4.4 Revenue Recognition
4.5 Effect of Uncertainties on Revenue Recognition
4.6 Disclosure Requirements
4.7 Practical Applications
4.8 Exercises

4.0 OBJECTIVES

After studying the unit the students will be able to:


 Understand the purpose and scope of AS-9.
 Know the non applicability of AS-9
 Explain the effects of uncertainties on revenue recognition.
 Understand the circumstances in which revenue recognition has
been postponed.
 Recognize revenue practically.

4.1 INTRODUCTION

Revenue is the gross inflow of cash, receivables or other


consideration arising in the course of the ordinary activities of an
enterprise from the sale of goods, from the rendering of services
and from the use by others of enterprise resources yielding
interest, royalties and dividends. This Statement AS-9, Revenue
Recognition issued in 1985 deals with the bases for recognition of
revenue in the statement of profit and loss of an enterprise. The
statement is concerned with the recognition of revenue arising in
the course of the ordinary activities of the enterprise from

1. The sale of goods,


2. The rendering of services, and
3. The use by others of enterprise resources yielding interest,
royalties and dividends.
53

Revenue recognition is mainly concerned with the timing of


recognition of revenue in the statement of profit and loss of an
enterprise. The amount of revenue arising on a transaction is
usually determined by agreement between the parties involved in
the transaction. When uncertainties exist regarding the
determination of the amount, or its associated costs, these
uncertainties may influence the timing of revenue recognition. This
standard is mandatory for all enterprises.

4.2 PURPOSE

The Purpose of AS-9 is recognizing revenue arising in the


course of the ordinary activities of the enterprise.

SCOPE of AS-9
It includes the following activities:
 Sale of goods.
 Rendering of services.
 Use by others of enterprise resources yielding interest,
royalties and dividends.

4.3 NON APPLICABLITY of AS-9

This Statement does not deal with the following aspects of revenue
recognition to which special considerations apply:
1. Revenue arising from construction contracts.
2. Revenue arising from hire-purchase, lease agreements.
3. Revenue arising from government grants and other similar
subsidies.
4. Revenue of insurance companies arising from insurance
contracts.
5. Profit or loss on sale of fixed assets
6. Realized or unrealized gains resulting from changes in foreign
exchange rates

Examples of items not included within the definition of “revenue” for


the purpose of this Statement are:
1. Realized gains resulting from the disposal of and unrealized
gains resulting from the holding of, non-current assets e.g.
appreciation in the value of fixed assets;

2. Unrealized holding gains resulting from the change in value of


current assets and the natural increases in herds and
agricultural and forest products;
54

3. Realized or unrealized gains resulting from changes in foreign


exchange rates and adjustments arising on the translation of
foreign currency financial statements;

4. Realized gains resulting from the discharge of an obligation at


less than its carrying amount;

5. Unrealized gains resulting from the restatement of the carrying


amount of an obligation.

4.4 REVENUE RECOGNITION

1. Sale of goods
A key criterion for determining when to recognize revenue
from a transaction involving the sale of goods is that the seller has
transferred the property in the goods to the buyer for a
consideration. The transfer of property in goods, in most cases,
results in or coincides with the transfer of significant risks and
rewards of ownership to the buyer. However, there may be
situations where transfer of property in goods does not coincide
with the transfer of significant risks and rewards of ownership.
Revenue in such situations is recognized at the time of
transfer of significant risks and rewards of ownership to the
buyer. Such cases may arise where delivery has been delayed
through the fault of either the buyer or the seller and the goods are
at the risk of the party at fault as regards any loss which might not
have occurred but for such fault. Further, sometimes the parties
may agree that the risk will pass at a time different from the time
when ownership passes.

At certain stages in specific industries, such as when


agricultural crops have been harvested or mineral ores have been
extracted, performance may be substantially complete prior to the
execution of the transaction generating revenue. In such cases
when sale is assured under a forward contract or a government
guarantee or where market exists and there is a negligible risk of
failure to sell, the goods involved are often valued at net realizable
value. Such amounts, while not revenue as defined in this
Statement, are sometimes recognized in the statement of profit
and loss and appropriately described.

Thus, sale of goods is recognized when


1. The property in goods in transferred for a price.
2. All significant risks and rewards have been transferred and
no effective control is retained.
3. No significant uncertainty exists regarding the amount of
consideration.
4. It is reasonable to expect ultimate collection of
consideration.
55

2. Rendering of Services
Revenue from service transactions is usually recognized as
the service is performed, either by the proportionate completion
method or by the completed service contract method.

i) Proportionate Completion Method — Performance consists


of the execution of more than one act. Revenue is recognized
proportionately by reference to the performance of each act.
The revenue recognized under this method would be
determined on the basis of contract value, associated costs,
number of acts or other suitable basis. For practical purposes,
when services are provided by an indeterminate number of acts
over a specific period of time, revenue is recognized on a
straight line basis over the specific period unless there is
evidence that some other method better represents the pattern
of performance.

ii) Completed service Contract Method — Performance consists


of the execution of a single act. Alternatively, services are
performed in more than a single act and the services yet to be
performed are so significant in relation to the transaction taken
as a whole that performance cannot be deemed to have been
completed until the execution of those acts. The completed
service contract method is relevant to these patterns of
performance and accordingly revenue is recognized when
the sole or final act takes place and the service becomes
chargeable.

Revenue recognition in rendering of services


Completed service method recognises revenue only
 When service complete or substantially complete.
 In such cases there are more than one act involved and
revenue is recognised on' execution of all those acts.

Proportionate completed method


 Recognises revenue proportionate with the degree of
completion of services.
 There is more than one act involved and revenue is
recognised on execution of certain acts.

Thus, Service is recognized when


 Service is recognised either on completed service or
proportionate completion method.
 No significant uncertainty exists regarding amount of
consideration.
 It is reasonable to expect ultimate collection of
consideration.
56

EXAMPLES
1] On sale, buyer takes title and accepts billing but delivery is
delayed at buyer’s request.

Ans. Revenue should be recognised notwithstanding that physical


delivery has not been completed.

2] Sale on approval.

Ans. Revenue should not be recognised until the goods have been
formally accepted or time for rejection has elapsed or where no
time has been fixed, a reasonable time has elapsed.

3] Sales with the condition of ‘money back if not completely


satisfied.

Ans. It may be appropriate to recognize the sale but to make


suitable provision for returns based on previous experience.

4] Consignment sales.

Ans. Revenue should not be recognised until the goods are sold to
a third party.

5] Instalment sales.

Ans. Revenue of sale price excluding interest should be recognised


on the date of sale.

6] Special order and shipments.

Ans. Revenue from such sales should be recognized when the


goods are identified and ready for delivery.

7] Where seller concurrently agrees to repurchase the same goods


at a later date.

Ans. The sale should not be recognised, as this is a financial


arrangement.

8] Subscriptions received for publications.

Ans. Revenue received or billed should be deferred and


recognised either on a straight-line basis over time or where the
items delivered vary in value from period to period, revenue should
be based on the sales value of the item delivered.
57

9] Sale of show tickets.

Ans. Revenue should be recognised when the event takes place.

10] Guaranteed sales of agricultural crops.

Ans. When sale is assured under forward contract or government


guarantee, the crops can be recognised at net realizable value
although it does not satisfy the criteria of revenue recognition.

Rendering of Services

1] Installation Fees
Ans. In cases where installation fees are other than incidental to
the sale of a product, they should be recognised as revenue only
when the equipment is installed and accepted by the customer.

2] Advertisement commission received

Ans. It is recognised when the advertisement appears before


public.

3] Insurance agency commission received

Ans. It is recognised on the effective commencement or renewal


dates of the related policies.

4] Tuition fees received

Ans. It should be recognised over the period of instruction.

5] Admission fees

Ans. Revenue from artistic performances, banquets and other


special events should be recognised when the event takes place.
When a subscription to a number of events is sold, the fee should
be allocated to each event on a systematic and rational basis.

6] Entrance and membership fees


Ans. Revenue recognition from these sources will depend on the
nature of the services being provided. Entrance fee received is
generally capitalised. If the membership fee permits only
membership and all other services or products are paid for
separately, or if there is a separate annual subscription, the fee
should be recognised when received. Publications to be provided
during the year, it should be recognised on a systematic and
rational basis having regard to the timing and nature of all services
provided.
58

3. Use of enterprise resources by others:


The use of such enterprise resources by others gives rise to:
(i) Interest—charges for the use of cash resources or amounts
due to the enterprise;
(ii) Royalties—charges for the use of such assets as know-how,
patents, trademarks and copyrights;
(iii) Dividends—rewards from the holding of investments in
shares.

Revenue recognition in use of enterprise resources by others


1.Interest: Revenue is recognized on the time basis determined by
the amount outstanding and the rate applicable.

2.Royalty: Revenue is recognized in accordance with the terms of


the relevant agreement.

3.Dividends: Revenue is recognized only when a right to receive


payment is established.

When interest, royalties and dividends from foreign countries


require exchange permission and uncertainty in remittance is
anticipated, revenue recognition may need to be postponed.

4.5 EFFECT OF UNCERTAINTIES ON REVENUE


RECOGNITION

1. Recognition of revenue requires that revenue is measurable


and that at the time of sale or the rendering of the service it
would not be unreasonable to expect ultimate collection.

2. Where the ability to assess the ultimate collection with


reasonable certainty is lacking at the time of raising any claim,
e.g., for escalation of price, export incentives, interest etc., and
revenue recognition is postponed to the extent of uncertainty
involved. In such cases, it may be appropriate to recognize
revenue only when it is reasonably certain that the
ultimate collection will be made. Where there is no
uncertainty as to ultimate collection, revenue is
recognized at the time of sale or rendering of service even
though payments are made by installments.

3. When the uncertainty relating to collectability arises


subsequent to the time of sale or the rendering of the service,
it is more appropriate to make a separate provision to
reflect the uncertainty rather than to adjust the amount of
revenue originally recorded.
59

4. An essential criterion for the recognition of revenue is that the


consideration receivable for the sale of goods, the rendering of
services or from the use by others of enterprise resources is
reasonably determinable. When such consideration is not
determinable within reasonable limits, the recognition of
revenue is postponed.
5. When recognition of revenue is postponed due to the effect
of uncertainties, it is considered as revenue of the period
in which it is properly recognized.

4.6 DISCLOSURE REQUIREMENTS

In addition to the disclosures required by Accounting


Standard 1 on ‘Disclosure of Accounting Policies’ (AS 1), When
recognition of revenue is postponed due to the effect of
uncertainties, an enterprise should disclose the circumstances in
which revenue recognition has been postponed.
Question:-Explain requirement in the following cases with reference
to REVENUE RECOGNITION (AS-9)
Accounts of certain items of income are recorded on cash basis, As
a result, the net profit for the year and current assets are
understated by Rs.20,000 each.

Ans. Accounts of certain items of income recorded on cash basis


which is not in line with the Accounting Standard 9 regarding
"Revenue Recognition" issued by the Institute of Chartered
Accountants of India. As a result, the net profit for the year and
current assets are understated by Rs.20,000 each as compared to
the position which would have prevailed if the company has
accounted for interest income on accrual basis." should be
disclosed.

4.7 PRACTICAL APPLICATIONS

1) Arjun Ltd. sold farm equipments through its dealers. One of the
conditions at the time of sale is payment of consideration in 14
days and in the event of delay interest is chargeable @ 15% per
annum. The Company has not realized interest from the dealers
in the past. However, for the year ended 31.3.2018, it wants to
recognize interest due on the balances due from dealers. The
amount is ascertained at Rs.9 lakhs. Decide whether income by
way of interest from dealers is eligible for recognition as per AS
9.

Ans. As per AS 9 “Revenue Recognition”, where the ability to


assess the ultimate collection with reasonable certainty is lacking at
60

the time of raising any claim, the revenue recognition is postponed


to the extent of uncertainty expected. In such cases, the revenue is
recognized only when it is reasonably certain that the ultimate
collection will be made.
In this case, the company never realized interest for the
delayed payments made by the dealers. Hence, it has to recognize
the interest only if the ultimate collection is certain.
The interest income hence is not to be recognized.

2) Y Ltd. used certain resources of X Ltd. In return X Ltd. receives


Rs.10 lakhs and Rs.15 lakhs as interest and royalties
respectively, from Y Ltd. during the year 2017 –2018. State on
what basis X Ltd. should recognize their revenue, as per AS 9.

Ans. As per AS 9 on ‘Revenue Recognition’, interest of Rs.10


lakhs received in the year 2017-2018 should be recognized on the
time basis, whereas royalty of Rs.15 lakhs received in the same
year should be recognized on accrual basis as per the terms of
relevant agreement.

3) The Board of Directors of X Ltd. decided on 31.3.2017 to


increase sale price of certain items of goods sold retrospectively
from 1st January, 2017. As a result of this decision the company
has to receive Rs.5 lakhs from its customers in respect of sales
made from 1.1.2017 to 31.3.2017. But the Company’s
Accountant was reluctant to make-up his mind. You are asked
to offer your suggestion.
Ans. As per Para 10 of AS 9 ‘Revenue Recognition’, the additional
revenue on account of increase in sales price with retrospective
effect, as decided by Board of Directors of X Ltd., of Rs.5 lakhs to
be recognized as income for financial year 2016-17, only if the
company is able to assess the ultimate collection with reasonable
certainty. If at the time of rising of any claim it is unreasonable to
expect ultimate collection, revenue recognition should be
postponed.
4) X Limited has recognized Rs.10 lakhs on accrual basis income
from dividend on units of mutual funds of the face value of
Rs.50 lakhs held by it as at the end of the financial year 31st
March, 2017. The dividends on mutual funds were declared at
the rate of 20% on 15th June, 2017. The dividend was proposed
on 10th April, 2017 by the declaring company. Whether the
treatment is as per the relevant Accounting Standard? You are
asked to answer with reference to provisions of Accounting
Standard.
Ans. Paragraph 8.4 and 13 of Accounting Standard 9 on Revenue
Recognition states that dividends from investments in shares are
61

not recognized in the statement of profit and loss until a right to


receive payment is established. In the given case, the dividend is
proposed on 10th April, 2017, while it is declared on 15th June,
2003. Hence, the right to receive payment is established on 15th
June, 2017. As per the above mentioned paragraphs, income from
dividend on units of mutual funds should be recognized by X Ltd. in
the financial year ended 31st March, 2018.

5) The stages of Production and sale of the producer are as


follows (all in rupees):

Stage Activity Cost to Net Realizable


date(Rs.) Value(Rs.)
A Raw Materials 45,000 43,000
B WIP 1 47,000 48,000
C WIP 2 50,000 54,500
D Finished Product 55,000 1,10,000
E For Sale 55,000 1,10,000
F Sale Agreed 55,000 1,10,000
G Delivered 56,950 1,10,000
H Paid For 56,950 1,10,000

State and explain the stage at which you think revenue will be
recognized?
Ans. According to As-9, sales will be recognized only when
1. The sale value is fixed and determinable.
2. Property of the goods is transferred to the customer.
Both these conditions are satisfied at stage F, when sales are
agreed at a price and goods allocated for delivery purpose.

4.8 EXERCISE

4.8.1 PRACTICAL PROBLEMS


1. AST Co. Ltd. uses certain resources of BST Co. Ltd. In return
BST Co. Ltd. received Rs. 8 lakhs and Rs. 12 lakhs as interest and
royalties from AST Co. Ltd. during the year 2017-18.You are
required to state on whether and what basis this revenues can be
recognized by BST Co. Ltd.?
2. X Limited has recognized Rs.10 lakhs on accrual basis income
from dividend on securities of the face value of Rs.50 lakhs held by
it as at the end of the financial year 31st March, 2017. The
dividends on mutual funds were declared at the rate of 20% on 25th
May, 2017. The dividend was proposed on 10th April, 2017 by the
declaring company. Whether the treatment is as per the relevant
Accounting Standard? You are asked to answer with reference to
provisions of Accounting Standard.
62

3. The Board of Directors of X Ltd. decided on 31.3.2017 to


increase sale price of certain items of goods sold retrospectively
from 1st January, 2017. As a result of this decision the company
has to receive Rs.5 lakhs from its customers in respect of sales
made from 1.1.2017 to 31.3.2017. The decision was communicated
to customers and was approved. Can X Ltd. recognize revenue
pertaining to increase in sale -price?
4. Goods worth Rs.6 lakhs are supplied to Ram & Co on 15th March
2017 on sale on approval basis. Comment in light of AS-9 whether
revenue should be recognized?

4.8.2 THEORY QUESTION


1. When can revenue be recognized in the case of transaction of
sale of goods?

Ans. As per AS 9 Revenue Recognition, revenue from sales


transactions should be recognized when the following
requirements as to performance are satisfied, provided that at
the time of performance, it is not unreasonable to expect
ultimate collection:
(i) The seller of goods has transferred to the buyer the
property in the goods for a price or all significant risks and
rewards of ownership have been transferred to the buyer
and the seller retains no effective control of the goods
transferred to a degree usually associated with ownership;
and
(ii) No significant uncertainty exists regarding the amount of
the consideration that will be derived from the sale of
goods.
2. What are the two general criteria that must be satisfied before a
company can recognize revenue?
3. Explain why, in most cases, a seller recognizes revenue when it
delivers its product rather than when it produces the product.
4. Distinguish between the percentage-of-completion and
completed contract methods of accounting for long-term
contracts with respect to income recognition. Under what
circumstances should a company use the completed contract
method?
5. When does a consignor recognize revenue for a consignment
sale?
63

4.8.3 OBJECTIVE TYPE QUESTIONS


1. Select Correct Alternative:

i. In AS-9 Revenue recognition applies to


1. Sale of goods only
2. Sale of services only
3. Use of enterprises resources by other only
4. All the above
ii. In AS-9 Revenue recognition requires that revenue from divided
be recognized
1. On date of proposal
2. On date of declaration
3. On date of dispatch of divided warrant
4. On accrual basis
iii. Revenue from sale of products, is generally, realized in the
period in which
1. Cash is collected.
2. Sale is made.
3. Products are manufactured.
4. None of the above.
iv. AS-9 deals with Revenue recognition except:
1. Revenue arising from construction contracts.
2. Revenue arising from hire-purchase, lease agreements.
3. Both (1) & (2)
4. None of these
v. Revenue is the gross inflow of cash through
1. sale of goods,
2. rendering of services,
3. Yielding interest, royalties and dividends.
4. All of the above

.vi. As per AS 9 items not included in the definition of “revenue” are:


1. Unrealized holding gains resulting from the change in value
of current assets, and the natural increases in herds and
agricultural and forest products;
2. Realized gains resulting from the discharge of an obligation
at less than its carrying amount;
3. Unrealized gains resulting from the restatement of the
carrying amount of an obligation.
4. All of the above

Answers: i-4, ii-2, iii-2, iv-3, v-4, vi-4


64

2. Match the following:

1. AS 1 (i) Revenue Recognition


2. AS 9 (ii)Disclosure of Accounting
policies.
3. AS 10 (iii) Non- Refundable Taxes
4. AS 2 (iv) Accounting for Fixed Assets.
5. Cost of Purchase include (v) Inventory Valuation
6. Completed contract method (vi) Refundable Taxes
7. Percentage of completion method (vii)Defers recognition until project
is complete
8. Consignment sales (viii)Recognition proportion to work
completed.
(ix)Risks and rewards of ownership
retained by seller

Answers: 1-ii, 2-i, 3-iv, 4-v, 5-iii, 6-vii, 7-viii, 8-ix



65

5
INVENTORY VALUATION - I

UNIT STRUCTURE

5.0 Objectives
5.1 Introduction
5.2 Importance of inventory / stock valuation
5.3 Methods of stock valuation
5.4 Valuation of stock at lower of cost or market price
5.5 First In First Out (FIFO)
5.6 Average Cost
5.7 Reconciliation at Physical Stock and Stock as Per Stock
Register
5.8 Exercise

5.0 OBJECTIVES

After studying the unit students will be able to:


 Understand the meaning of inventory and importance of
inventory valuation.
 Explain the methods of stock valuation.
 Know the advantages and disadvantages of FIFO method
and Average cost method.
 Understand the reconciliation of physical stock and stock as
per stock register.
 Solve the problems of stock valuation.

5.1 INTRODUCTION

The stock that kept to meet further requirements of


production and sales is called “Inventory”. The basic reason for
holding stock is to keep up the production activities undisturbed. It
is neither physically possible nor economically justifiable to wait for
the stocks to arrive at the time when they are actually required.
Therefore, keeping of inventory is a must for the efficient working of
an industrial unit. The principal types of inventories are:
(i) Raw materials and suppliers,
(ii) Work-in progress and
(iii) Finished goods.
66
Raw materials represent goods kept by a manufacturing
firm prior to being utilized in the production process generally
include tools, stores and spares which are consumed in the
production of goods and service.

Work-in progress represent the semi finished goods and


include those materials that have been commuted to production
process but have not yet been converted into finished goods.

Finished goods are completed goods awaiting sale. In a


manufacturing concern or in case of trading concern, it will
comprise only finished goods or stock in trade owned by it for sale
to customers in the normal course of business.

5.2 IMPORTANCE OF INVENTORY / STOCK


VALUATION

The balance sheet of a concern must show true and fair view
of the financial position of the concern. For this purpose assets
including inventory should be properly valued to exhibit a true and
fair view.

If stock is valued at a value which is less than the actual


value and as a result, the profits will reduce. Shareholders would
get less dividend. On the other hand, if inventory is valued at a
value which is more that the actual value, the profits would be
inflated and the shareholders would receive more dividend, a part
of which would thus be paid out of capital. Payment of dividend out
of capital would exhaust the capital and the company would be
insolvent. Moreover, under / over valuation of inventory will not only
affect the operating results and financial position of the current
period but will also affect those of the next period.

The following are some of the important reason for too


much emphasis on inventory or stock valuation:

1. Sufficient stock for production / sale process :


For all manufacturing and trading concerns, inventory
represents a major current asset investment. Adequate inventory is
essential for the Production / Sales process of an enterprises as
insufficient inventory hampers production and fails to generate
sufficient sales. This shows the necessity for proper valuation of
inventory.

2. Proper determination of profit :


The proper determination of profit depends upon the proper
valuation. If the ending inventory is valued at a lower figure, profit is
under stated and if it is overvalued, profit is overstated. This shows
that proper method of valuation of inventory should be followed.
67
3. True financial position :
Over valuation of inventory amounts to window dressing
which gives wrong idea about the liquid position of the company.
The proper valuation of inventories which constitute a significant
portion of current assets is essential so that short term creditors
may not be misled about the liquid position of the company.
Balance sheet can exhibit a true and fair view of the financial
position of a company if there is a proper valuation of inventory
which constitutes a major portion of current assets.

5.3 METHODS OF STOCK VALUATION


Methods of taking inventories / stock

Method of Inventory

(1) Periodic inventory method. (2) Perpetual inventory Method

1. Periodic Inventory Method:


Under this method of taking inventories, value of stock is
determined by physical counting of the stock on the accounting
date of preparation of the final accounts. It is possible that stock
taking may take a week or so in large enterprises and purchases
and sales may have to be suspended for that period to get correct
figure of closing inventory. This method of ascertaining the value of
stock at the end of the year is also known as annual stock taking.
Thus this method is based on physical stock taking, it provides data
once in a year. It is simple and economical method of stocktaking. It
can be adopted in small concerns. It does not provide basis for
control.
2. Perpetual Inventory Method:
Perpetual Inventory Method is defined as a system under
which records are maintained by the controlling department, which
reflects the physical movements of stock and their current balance.
Under this method, stock registers are maintained to make a record
of the physical movements of stock and their current balance.
Stores ledger is maintained to keep a record of the receipt and
issue of the materials and also reflects the balance in store.
Similarly, work-in-progress ledger is maintained to give the value of
work-in-progress on hand and a finished goods ledger is
maintained to know the value of finished goods on hand. Thus, this
system provides a running record of inventories on hand at any
time. To ensure the accuracy of perpetual inventory records ,
physical verification of the inventory is made by a program of
continuous stock taking.
It is possible that the balance of stock by the perpetual
inventory may differ from the actual balance of stock as ascertained
by physical verification. Any difference noted between actual stocks
68
as disclosed by the physical verification and the stocks shown by
stock records should be investigated and rectification will be made.
If the physical verification reveals that actual balance of stock is
more than the balance shown by the stores ledger or work-in-
progress ledger or finished goods ledger, debit note is prepared
and stock records are adjusted accordingly so that balance may
reconcile with actual balance. A Stock Adjustment Account is
prepared and debited with the shortage of stock and credited with
surplus.
Continuous stock taking is an essential feature of the
perpetual inventory system. But the two terms, perpetual inventory
and continuous stock taking should not be taken as one; perpetual
means the system of stock records and continuous stock taking
whereas continuous stock taking means only the physical
verification of stock records with actual stocks.
In continuous stock taking, physical verification is spread
throughout the year. Every day 10 to 15 items are taken at rotation
and checked in order to maintain surprise element in short
verification and each item is checked for a number of times during
the year. On the other hand, surprise element is missing in case of
periodical checking because checking is usually done at the end of
the year. In short, this method is based on records. It requires a lot
of recording and is thus expensive. It can be adopted only in big
concerns. It provides data on running basis and thus facilitates the
preparation of financial statements at shorter intervals. It also
provides basis for control by investigation of the discrepancies
arising from the comparison of physical stock with their book
values.
Difference between Periodic Inventory and Perpetual
Inventory.
The following are the main differences between the two
methods of taking inventory.

Periodic Inventory Perpetual Inventory


1. It is based on physical 1. It is based on records.
stock taking
2. It provides data 2. It provides the data on running
periodically i.e. once in basis and thus facilitates the
year. preparation of financial
statements at shorter intervals.
3. It does not provide basis 3. It provides basis for control by
for control. investigating the discrepancies
arising from the comparison of
physical stock with book values.
69

4. It is simple and 4. It is expensive as it requires a lot


economical method of of recording because of an
taking inventory and can elaborate method of taking
be adopted in small inventory. It can be adopted by
concern. big concerns only.

5.4 VALUATION OF STOCK AT LOWER OF COST


OR MARKET PRICE

Stock is valued at cost or market price whichever is lower.


Stock is valued at lower of cost or market price to ensure that
anticipated profits must not be accounted for until they have been
realized and that full provision should be made for anticipated
losses. This principle of valuation is on the important accounting
convention of conservatism. Conservatism means taking the
gloomy view of a situation. It is policy of caution or playing safe and
had its origin as a safeguard against possible losses in a world of
uncertainty. According to this principle of valuation based on
convention of conservatism, if market price of the stock is higher
than the cost of the stock, the higher amount is ignored in the
accounts because profit is not booked by valuing inventory at
market value which is higher than cost value. It is possible that
dividends to shareholders may be distributed out of unrealized
profit. It will not be sound policy and in the future, if the expected
market price is not realized and there is a loss, unrealized profit
distributed will amount to distribution of dividend out of capital. On
the contrary, if the stock is valued at market price which is lower
than the cost. In this way, anticipated loss is taken into
consideration and even if a loss occurs in the future, the business
will not be affected adversely because loss has already been
provided by valuing the asset at a lower value and if there is no loss
as expected, it is quite good for the business.

Cost in relation to stock is outlay of cash or its equivalent in


the acquisition or manufacturing of the inventory concerned. In
other words, cost of stock is the sum of the applicable expenditure
and charges directly or indirectly incurred in brining inventory to its
existing condition and location.

Market value in relation to stock is the realizable value of the


stock in the market i. e. the price at which it can be replaced, the
valuation of stock affects the profit of the year. Therefore, the
method of valuation of stock should not be changed from year to
year to enable comparison of profits of different years.

Methods for Valuation of Stock:


The following are the various methods of the valuation of inventory:
70

5.5 FIRST IN FIRST OUT (FIFO)

5.5.1 Meaning
Under this method, the earliest lot of materials or goods purchased
or goods manufactured are exhausted first and closing stock is out
of the latest consignments received or goods manufactured and is
valued at the cost of such goods. In other words, cost of goods sold
is calculated keeping in view the earliest lots exhausted on the
presumption that units are sold in which they were acquired. In
short, under this method, it is assumed that goods or materials
which are purchased first are issued first. Stock consist of latest
purchase. Hence items lying in the stock should be valued at latest
purchase price.

5.5.2 Advantages

(1) This method is simple to understand and easy to operate.

(2) It is logical method because it takes into consideration the


normal procedure of utilizing first those items of inventory which
are received or manufactured first.

(3) This method is very useful when prices are falling because cost
of goods so sold will be high on account of using earliest lots
which are costly.

(4) Closing stock is valued nearer the market price as it would


consist of recent purchase of units.

(5) This method is useful when transactions are not too many and
prices are fairly steady.

(6) This method is useful when inventory is subject to deterioration


and obsolescence.

5.5.3 Disadvantages

(1) This method increases the possible clerical errors if the price
fluctuates, considerably at every time as issue of material is
sold, the store ledger clerk will have to go through his and
ascertain the price to be changed.

(2) If the prices fluctuate, comparison between different jobs


executed by the concern becomes difficult because one job
started a few minutes later than another of the same nature may
have consumed the supply of lower priced or higher priced
stock.
71

5.6 AVERAGE COST

The principal on which the average cost method is based is


that all items on the store are so mixed up that consumption of
material or sale of finished goods are carried out at the average
cost of the various items on hand. Average may be of two types:

(a) Simple Average Method (not in syllabus)


(b) Weighted Average Method

Stock taking is done which consist of following items :-


1,000 units purchased @ Rs. 10 per unit
2,000 units purchased @ Rs. 11 per unit
3,000 units purchased @ Rs. 12 per unit

Weighted Average Method : This price is obtained by dividing the


total cost of items in stock by the total quantity of items in hand.

Per unit weighted average cost is calculated as follows :-


(1.000  10)  (2,000  11)  (3,000  12)
Rs. 11.33 
(1,000  2,000  3,000)

The above rate is used to value the cost of sale of goods or cost
of consumption of goods.
Weighted average method is quite superior to other methods
and it is better to follow this method. This method can be used with
advantage in those cases where price and quantity vary widely.
The average rate does not change with issue but would vary with a
fresh supply of materials received when a new average will have to
be calculated. In a period of fluctuating price, this method will even
out the fluctuations. This method is goods as the weighted average
rate lies in between the extreme rates as shown by FIFO and LIFO
method. However, the difficulty is that fresh calculations are needed
at every purchase of materials or goods.

Practical Problems

Problem No: 01
A firm has just completed six months operations from 1st
January, 2000, to 30th June, 2017. It is about to value its stock at
cost price. It has dealt with only one type of goods. From the
particulars given below, your are required to value closing stock at
the half year ending 30th June, 2017 under following method of
stock valuation –

(i) FIFO Method and


(ii) Weighted Average Method
72

Purchase Sales
Amount Amount
Date Units Rate Units Rate
Rs. Rs.
15-1-17 200 20 8,000 - - -
16-2-17 - - - 300 25 7500
17-3-17 600 22 13,200 - - -
18-4-17 - - - 400 - 12,00
19-5-17 800 25 20,000 - - -
10-6-17 - - - 400 32 12,800
30-6-17 - - - 200 38 7,600

The firm had opening stock of 200 units at Rs.19 per unit.

Solution :
We have to prepare ‘Store Ledger’ showing of goods and the
closing stock as on 30th June, 2017.

STORE LEDGER
FIFO METHOD
Receipt (Purchase) Issue (Sales) Balance
Qty. Qty. Qty.
Date Rate Amount Rate Amount Rate Amount
Unit Unit Unit
(Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)
Op.St.
1-1-
- - - - - - 200 19 3,800
17
15-1-
200 20 4,000 - - - 200 19 3,800
17
- - - - - - 200 20 4,000
16-1-
- - - 200 19 3,800
17
- - - 100 20 2,000 100 20 2,000
17-3-
600 22 13,200 - - - 100 20 2,000
17
- - - - - - 600 22 13,200
19-4-
- - - 100 20 2,000 300 22 13,200
17
- - - 300 22 6,600
19-5-
800 25 20,000 - - - 300 22 6,600
17
- - - - - - 800 25 20,000
10-6-
- - - 300 22 6,600 700 25 17,500
17
- - - 100 25 2,500
30-6-
- - - 200 25 5,000 500 25 12,500
17
28,500
Cost of Goods sold
Value of Closing stock
73

Receipt (Purchase) Issue (Sales) Balance


Qty. Qty. Qty.
Date Rate Amount Rate Amount Rate Amount
Unit Unit Unit
(Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)
1-1-17 - - - - - - 200 19.00 3,800
15-1-17 200 20.00 4,000 - - - 400 19.50 7,800
16-1-17 - - - 300 19.50 5,850 100 19.50 1,950
17-3-17 600 22.00 13,200 - - - 700 21.64 15,150
19-4-17 - - - 400 21.64 8,657 300 21.64 6,493
19-5-17 800 25.00 20,000 - - - 1100 24.08 26,493
10-6-17 - - - 400 24.08 9,634 700 24.08 16,859
30-6-17 - - - 200 24.08 4,817 500 24.08 12,042
28,954
Cost of Goods sold
Value of Closing stock

Notes :

(i) The rate changes every time goods are purchased. The
average rate is found out by dividing the total amount with the
total units on hand.

(ii) The rate remains unaffected with the issue or sale of goods.

5.7 RECONCILIATION AT PHYSICAL STOCK AND


STOCK AS PER STOCK REGISTER.

Problems of stock taking for the purpose of final accounts:


At the end of the last day of the accounting year, stocks in
hand are verified and valued for the purpose of recording in the
final accounts. But in case of big organisations, it may not be
possible to verify the stock exactly on the last date of the
accounting period owing to certain difficulties. In such a case, stock
is taken under either few days earlier or later, according to the
situation or convenience and assuring least disturbance in the
normal flow of work. Therefore, stock taken under circumstances
shall always be subject to some adjustments where stock taking is
completed few days before the closing date should be adjusted with
the value of stock taking so as to arrive at the value of stock on the
ending date of accounting year, Similarly, if stock taking takes place
on the date after the closing date, the whole of the transactions of
goods from the closing date (*i.e. stock taking date) are to be
adjusted with the value of stock on the date of stock taking so as to
arrive at the value of stock on the closing date of accounting year.
74
(A) When stock taking takes place on any date after the year
end dates
If the stock is taken on a later date, the following
adjustments are required to arrive at the stock as on the closing
date.
Statement showing value of stock as to the end of the
accounting year.

Rs.
The value of stock on the later date …. X
Add : Sales at cost between two dates
i.e. date of closing and Date of stock taking (Actual goods X
between)

Add : Purchase returns during the said period X

Less : Purchase between two dates i.e. date of closing and


date of stock taking (Actual – goods received between
the Two dates) X

Less : Sales return (At cost price) between the above two
dates X

Add : Any under costing in stock sheet X

Less : Any over costing in stock sheet X

Less: Any goods held on consignment basis (as Agent) X

Less : Any goods included in stock but title of such has been
transferred to the buyer X

Less : Goods purchased between the two dates but already


received before the closing date (such represents
purchases of next accounting year) (normally it
happens when goods are received first & invoice is
received later on) X

Add : Goods sold between the two dates but already X


delivered before Closing date (Such goods represents
sales of next accounting Year) (Normally it happens
when goods are delivered to Customer first & invoice
is prepared on later date)
75

Add : Any goods sent to consignee between the two dates


(Whether They sold by consignee or not) X
Value of physical stock as on the date of closing X

Add : Any goods purchased before closing date hence


included in Purchase of the last accounting year but
not received until the Date of stock-taking
X

Add: Any goods sent to customer before closing date on X


approval basis but lying with them as an approved as
on the date closing (Such goods must be taken at cost
price) Value of stock-in-trade as on the date of closing
for inclusion In final accounts.

B) If
stock are taken on an earlier date
If stock is taken on a date before the closing date of
accounting year, the necessary adjustments should be made in
respect of transactions of goods taken place between the date of
stock-taking and closing date so as to obtain the correct value of
stock as on the closing date.
Statement showing value of stock as on the ending date of
accounting year.

Rs.
The value of stock on the later date X
Add : Purchase between the two dates i.e. from the date
of stock taking to the date of closing (Goods
actually received up to the date of closing X

Add: Sales returns (at cost price) between the two dates X

Less: Sales (at cots) between the two dates (goods


actually delivered) X

Less: Purchase returns between the two dates X


Less: Goods sent on approved basis (at cost price)
between the two dates X

Less: Goods sent to consignee (at cost price) (whether


sold or not) between the two dates X
76

Less: Goods received from consignor and held on their


behalf X

Add: Any under costing in stock sheet X

Less: Any over costing in stock sheet X


Value of physical stock on the date of closing X

Add: Goods purchased before the closing date but not


received upto the end of the accounting year
(Goods-in-transit) X
Add: Cost of goods sent on approval basis but not
approved before the closing date still lying with the
customers as on the date of the closing. X

Add: Unsold goods in the hands of the consignee as on


the date of closing. Value of stock-in-trade as on
the date of closing for inclusion in final accounts X

5.8 EXERCISE

1. Select the correct alternative:


1. If Cost of goods sold is Rs.80,700, Opening stock Rs.5,800 and
Closing stock Rs.6,000. Then the amount of purchase will be
(a)Rs.80,500
(b)Rs.74,900
(c)Rs.74,700
(d)Rs.80,900.
2. If sales are Rs. 2,000 and the rate of gross profit on cost of
goods sold is 25%, then the Cost of goods sold will be
(a)Rs. 2,000.
(b)Rs. 1,500.
(c)Rs. 1,600.
(d)None of the above.
3. The total cost of goods available for sale with a company during
the current year is Rs.12,00,000 and the total sales during the
period are Rs.13,00,000. If the gross profit margin of the
company is 331/3% on cost, the closing inventory during the
current year is
(a)Rs.4,00,000
(b)Rs.3,00,000
(c)Rs.2,25,000
(d)Rs.2,60,000.
77
4. C Ltd. recorded the following information as on March 31, 2005:
Rs.
Stock as on April 01, 2016 80,000
Purchases 1, 60,000
Sales 2, 00,000
It is noticed that goods worth Rs.30, 000 were destroyed due
to fire. Against this, the Insurance company accepted a claim of
Rs.20,000.The Company sells goods at cost plus 33 %. The value
of closing inventory, after taking into account the above
transactions is,
(a)Rs.10,000
(b)Rs.30,000
(c)Rs.1,00,000
(d)Rs.60,000
5. Consider the following for Alpha Co. for the year 2017-18:
Cost of goods available for sale Rs.1, 00,000
Total sales Rs. 80,000
Opening stock of goods Rs. 20,000
Gross profit margin 25%
Closing stock of goods for the year 2017-18 was
(a)Rs.80,000
(b)Rs.60,000
(c)Rs.40,000
(d)Rs.36, 000.
6. Cost of physical stock on 15.4.16 was Rs.3,00,000. Sales
amounting Rs.1,00,000 and purchases worth Rs.50,000 were
held between 31.3.16 and 15.4.16. Goods are sold at a profit of
20% on sales. Value of inventory as on 31.3.16 is
(a)Rs.3,50,000.
(b)Rs.2,70,000.
(c)Rs.3,30,000.
(d)Rs.3,00,000.
7. Record of purchase of T.V. sets.

Date Quantity Price per unit


Units Rs.
March 4 900 5
March 10 400 5.50
Record of issues
March 5 600 Units
March 12 400 Units
The value of T.V. sets on 15 March, as per FIFO will be
(a)Rs.1,500
(b)Rs.1,650
(c)Rs.1,575.
(d)None of the three.
78
8. Goods costing Rs.4,80,000 were sent on consignment basis.
Goods are invoiced at 125% of the cost price. The invoice price
and the loading will be:
(a)Rs.6,00,000 and Rs.1,00,000.
(b)Rs.5,00,000 and Rs.1,00,000.
(c)Rs.6,00,000 and Rs.1,20,000.
(d)Rs.5,00,000 and Rs.1,20,000.

9. A firm dealing in cloth has 15000 meters of cloth on April 1,


2015 valued at Rs.1,50,000 according to FIFO. The firm
purchased 20,000 meters @ Rs.12 per meter during the year
ending 31st March, 2016 and sold 30,000 meters @ Rs.25 per
meter during the same period. As per FIFO, the closing stock
will be valued at:
(a)Rs.60,000
(b)Rs.1,25,000
(c)Rs.50,000
(d)None of the above.

10. A minimum quantity of stock always held as precaution against


out of stock situation is called _________
(a)Zero stock.
(b)Risk stock.
(c)Base stock.
(d)None of the above.

11. A trader has credited certain items of sales on approval


aggregating Rs.60,000 to Sales Account. Of these, goods of the
value of Rs.16,000 have been returned and taken into stock at
cost Rs.8,000 though the record of return was omitted in the
accounts. In respect of another parcel of Rs.12,000 (cost being
Rs.6,000) the period of approval did not expire on the closing
date. Cost of goods lying with customers should be
(a)Rs. 12,000.
(b)Rs. 54,000.
(c)Rs. 6,000.
(d)None of the above.

12. If cost of physical stock on 31.3.2018 is Rs.2,80,000 and out of


which stock of Rs.1,20,000 is held as consignee. Goods costing
Rs. 25,000 were damaged beyond repair and were expected to
realize at Rs.5,000 only. The value of own stock on 31.3.2018
will be
(a)Rs.2,60,000
(b)Rs.1,60,000
(c)Rs.1,35,000
(d)Rs.1,40,000
79
13. Bank overdraft as per trial balance is Rs.1,60,000. Bank has
allowed the customer to overdraw 80% of the hypothecated
value of the stock. Hypothecation of stock has been done by the
bank at 80% of the original closing stock value. The amount of
closing stock is
(a)Rs. 2,00,000.
(b)Rs. 2,50,000.
(c)Rs. 1,02,400.
(d)Rs. 1,28,000.

14. Mr. Prakash sells goods at 20% above cost. His sales were
Rs.10,20,000 during the year. However, he sold damaged
goods for Rs.20,000 costing Rs.30,000. This sale is included in
Rs.10, 20,000. The amount of gross profit is:
(a)Rs. 1,90,000
(b)Rs.2,50,000
(c)Rs.2,40,000
(d)Rs.2, 00,000.

15. Opening stock of raw material of a manufacturing concern is


Rs.10,000, Purchase during the year is Rs.2,00,000, Wages
Rs.50,000, Carriage Rs.5,000, Factory overheads
Rs.1,25,000 and closing stock of raw material is Rs. 15,000.
The amount to be transferred is
(a)Rs. 3,75,000 to cost of goods manufactured account.
(b)Rs.3,75,000 to cost of goods sold account.
(c)Rs. 3,75,000 to cost of sales account.
(d)Rs. 3,75,000 to cost to company account.

16. Goods costing Rs. 600 is supplied to Ram at the invoice of 10%
above cost and a trade discount for 5%. The amount of sales
will be
(a)Rs. 627.
(b)Rs. 660.
(c)Rs. 570.
(d)Rs. 620.

17. Goods purchased Rs.1,00,000. Sales Rs. 90,000. Margin 20%


on sales. Closing stock is
(a)Rs. 10,000.
(b)Rs. 25,000.
(c)Rs. 28,000.
(d)None of the above.

Answers: 1- d, 2- c, 3-c, 4-d, 5-b, 6-c, 7-b, 8-c, 9-b, 10-c, 11-c, 12-d,
13-b, 14-a, 15-a, 16-a, 17-c


80

6
INVENTORY VALUATION II
ILLUSTRATION & EXERCISE
Unit Structure :
6.0 Objectives
6.1 Solved Problems
6.2 Exercises

6.0 OBJECTIVES

After studying the unit, students will be able to solve the practical
problems on inventory valuation.

6.1 SOLVED PROBLEMS


Illustration No. 1
From the following particulars prepare Stores Ledger for the month
of March 2018
(a) FIFO to “ABC”,
(b) Weighted average to “XYZ”.
ABC XYZ
Stocks (Kgs) on1-3-2018 2,000 @ Rs. 28 4,000 @ Rs. 13
Purchases (Kgs)
[i] On 11-3-2018 1,800 @ Rs. 27 2,500 @ Rs. 14
[ii] On 21-3-2018 1,700 @ Rs. 25 2,000 @ Rs. 18
Sales (Kgs)
[i] On 6-3-2018 1,300 2,500
[ii] On 15-3-2018 1,400 2,000
[iii] On 18-3-2018 700 1,300
[iv] On 29-3-2018 1,100 1,700
(IDE, Nov. 1999, adapted)
81

Solution :
(A) FIFO to “ABC”
STOCK LEDGER OF ABC
Date Receipts Issues Balance
Units Price Amt. Units Price Amt. Units Price value
01-3-2008 Opening - - - - - 2,000 28.00 56,000

06-3-2008 - - - 1,300 28.00 36,400 700 28.00 19,600

700 28.00 19,600


11-3-2008 1,800 27.00 48,600 - - -
1,800 27.00 48,600

700 28.00 19,600


15-3-2008 - - - 1,100 27.00 29,700
700 27.00 18,900

18-3-2008 - - - 700 27.00 18,900 400 27.00 10,800

400 27.00 10,800


21-3-2008 1,700 25.00 42,500 - - -
1,700 25.00 42,500

400 27.00 10,800


29-3-2008 - - - 1,000 25.00 25,000
700 25.00 17,500

Therefore, the value of stock of ABC as on 31-3-2004 :


1,000 units @ Rs. 25.00 = Rs. 25,000
(B) Weighted Average (Under Perpetual System of Inventory)
STOCK LEDGER OF XYZ
Date Receipts Issues Balance
Wt. Avg. Wt. Avg.
Units Price Amt. Units Amt. Units Value
Rate Rate

01-3-2008 Opening - - - - - 4,000 13.00 52,000

06-3-2008 - - - 2,500 13.00 32,500 1,500 13.00 19,500

11-3-2008 2,500 14 35,000 - - - 4,000 13.63 54,500

15-3-2008 - - - 2,000 13.63 27,250 2,000 13.63 27,250

18-3-2008 - - - 1,300 13.63 17,712 700 13.63 9,538

21-3-2008 2,000 18 36,000 - - - 2,700 16.87 45,538

29-3-2008 - - - 1,700 16.87 28,672 1,000 16,866


82

Working Notes :

1] Issued of XYZ on March 15 is valued at Rs. 13.63 which is the


weighted average rate, arrived at as follows :

19,500  35,000 54,500


  13.625r / o13.63
1,500  2,500 4,000

2] Issue of XYZ on March 29 is valued at Rs. 16.87 per kg. which


is the weighted average rate arrived at as follows :

9,538  36,000 45,538


  16.865r / o16.87
700  2,000 2,700

Therefore, the value of stock as on 31-3-2008 : 1,000 units @


Rs. 16.87 = Rs. 16,867
Illustration : 2
From the following information relating A to Z item, value closing
stock on 31-12-2008 applying – (a) FIFO, (b) Weighted Average
Stocks (Kgs) on 1-12-2008 5,000 units @ Rs. 14
Purchases (Kgs)
[i] On 18-12-2008 4,200 units @ Rs. 13
[ii] On 23-12-2008 3,800 units @ Rs. 9
Sales (Kgs)
[i] On 7-12-2008 1,200 units
[ii] On 16-12-2008 2,600 units
[iii] On 19-12-208 1,800 units
[iv] On 30-12-2008 3,400 units
(IDE, April 1999, adapted)
83

Solution :

(A) FIFO
STOCK LEDGER
Date Receipts Issues Balance

Units Price Amt. Units Price Amt. Units Price value

01-12-2008 Opening - - - - - 5,000 14.00 70,000

07-12-2008 - - - 1,200 14.00 16,800 3,800 14.00 53,200

16-12-2008 - - - 2,600 14.00 36,400 1,200 14.00 16,800

1,200 14.00 16,800


18-12-2008 4,200 13.00 54,600 - - -
4,200 13.00 54,600

1,200 14.00 16,800


19-12-2008 - - - 3,600 13.00 46,800
600 13.00 7,800

3,600 13.00 46,800


23-12-2008 3,800 9.00 34,200 - - -
3,800 9.00 34,200

200 13.00 2,600


30-12-2008 - - - 3,400 13.00 44,200
3,800 9.00 34,200

Therefore, the value of stock as on 31-12-2008 : 4,000 units @


Rs. 36,800

B] Weighted Average (Perpetual Inventory system)


STOCK LEDGER
Date Receipts Issues Balance
Wt. Avg. Wt. Avg.
Units Price Amt. Units Amt. Units Value
Rate Rate

01-12-2008 Opening - - - - - 5,000 14.00 70,000

07-12-2008 - - - 1,200 14.00 16,800 3,800 14.00 53,200

16-12-2008 - - - 2,600 14.00 36,400 1,200 14.00 16,800

18-12-2008 4,200 13.00 54,600 - - - 5,400 13.22 71,400

19-12-2008 - - - 1,800 13.22 23,800 3,600 13.22 47,600

23-12-2008 3,800 9.00 34,200 - - - 7,400 11.05 81,800

30-12-2008 - - - 3,400 11.05 37,584 4,000 44,216


84

Working Notes :
[1] Issue on December 19 is valued at Rs. 13.22 which is the
weighted average rate, arrived at as follows :
16,800  54,600 71,400
  13.222r / o13.22
1,200  4,200 5,400
[2] Issue on December 30 is valued at Rs. 11.05 per kg. which is
the weighted average rate arrived at as follows :
47,604  34,200 81,804
  11.054r / o11.05
3,600  3,800 7,400

Therefore, the value of stock as on 31-12-2003 : 4,000 units @


Rs.11.05 = Rs. 44,216
Illustration : 3
The following particulars have been extracted in respect of
Material X. Prepare a Stores Ledger Account showing the receipts
and issues, pricing the materials issued on the basis of
(a) Weighted Average and
(b) First In First Out.
[i] 01-10-2017 Opening Stock 200 units at Rs. 3.50 per unit
[ii] 03-10-2017 Purchased 300 units at Rs. 4.00 per unit
[iii] 13-10-2017 Purchased 900 units at Rs. 4.30 per unit
[iv] 23-10-2017 Purchased 600 units at Rs. 3.80 per unit
Issues :
[i] 05-10-2017 Issued 400 units
[ii] 15-10-2017 Issued 600 units
[iii] 25-10-2017 Issued 600 units
85

Solution:

(A) FIFO
STOCK LEDGER OF ‘X’
Date Receipts Issues Balance

Units Price Amt. Units Price Amt. Units Price value

01-10-2017 Opening - - - - - 200 3.50 700

200 3.50 700


03-10-2017 300 4.00 1,200 - - -
300 4.00 1,200

200 3.50 700


05-10-2017 - - - 100 4.00 400
200 4.00 800

100 4.00 400


13-10-2017 900 4.30 3,870 - - -
900 4.30 3,870

100 4.00 400


15-10-2017 - - - 400 4.30 1,720
500 4.30 2,150

400 4.30 1,720


23-10-2017 600 3.80 2,280 - - -
600 3.80 2,280

400 4.30 1,720


25-10-2017 - - - 400 3.80 1,520
200 3.80 760

Therefore, the value of stock as on 31-10-2017 : 400 units @


Rs. 3.80 = Rs. 1,520

(B) Weighted Average (Perpetual Inventory System)


STOCK LEDGER OF ‘X’
Date Receipts Issues Balance
Wt. Wt.
Units Price Amt. Units Avg. Amt. Units Avg. Value
Rate Rate

01-10-2017 Opening - - - - - 200 3.50 700


03-10-2017 300 4.00 1,200 - - - 500 3.80 1,900
05-10-2017 - - - 400 3.80 1,520 100 3.80 380
13-10-2017 900 4.30 3,870 - - - 1,000 4.25 4,250
15-10-2017 - - - 600 4.25 2,550 400 4.25 1,700
23-10-2017 600 3.80 2,280 - - - 1,000 3.98 3,980
25-10-2017 - - - 600 3.98 2,388 400 3.98 1,592
86

Working Notes:

[1] Issue on October 5 is valued at Rs. 3.80 which is the weighted


average rate, arrived at as follows :

700  1,200 1,900


  3.80
200  300 500

[2] Issue on October 15 is valued at Rs. 4.25 which is the weighted


average rate, arrived at as follows :

380  3,870 4,250


  4.25
100  900 1,000

[3] Issue on October 25 is valued at Rs. 3.98 which is the weighted


average rate, arrived at as follows :

1,700  2,280 3,980


  3.98
400  600 1,000

Illustration 4
From the following particulars, prepare stock record by FIFO and
Weighted Average Method.

Date Transaction Units Rate Rs.

04-1-2018 Purchase 40 30

17-1-2018 Purchase 60 28

20-1-2018 Sale 50 35

22-1-2018 Purchase 80 29

25-1-2018 Sale 80 33

28-1-2018 Sale 20 34

30-1-2018 Purchase 100 26

31-1-2018 Sale 90 35

Stock on hand on 1st January 2018 was 50 units @ Rs.25 each.


87

Solution :

(A) FIFO
STOCK LEDGER X’

Date Receipts Issues Balance


Units Price Amt. Units Price Amt. Units Price value
01-1-2018 Opening - - - - - 50 25.00 1,250
50 25.00 1,250
04-1-2018 40 30.00 1,200 - - -
40 30.00 1,200
50 25.00 1,250
17-1-2018 60 28.00 1,680 - - - 40 30.00 1,200
60 28.00 1,680

40 30.00 1,200
20-1-2018 - - - 50 25.00 1,250
60 28.00 1,680

40 30.00 1,200
22-1-2018 80 29.00 2,320 - - - 60 28.00 1,680
80 29.00 2,320

40 20
30.00 1,200 28.00 560
25-1-2018 - - -
28.00 1,120 29.00 2,320
40 80
28-1-2018 - - - 20 28.00 560 80 29.00 2,320
80 29.00 2,320
30-1-2018 100 26.00 2,600 - - -
100 26.00 2,600
80 29.00 2,320
31-1-2018 - - - 90 26.00 2,340
10 26.00 260

Therefore, the value of stock as on 31-01-2008 : 90 units @ Rs.


26 = Rs. 2,340.

[B] Weighted Average (Perpetual Inventory System)


STOCK LEDGER

Date Receipts Issues Balance


Wt. Avg. Wt. Avg.
Units Price Amt. Units Amt. Units Value
Rate Rate
01-1-2018 Opening - - - - - 50 25.00 1,250
04-1-2018 40 30.00 1,200 - - - 90 27.22 2,450
17-1-2018 60 28.00 1,680 - - - 150 27.53 4,130
20-1-2018 - - - 50 27.53 1,377 100 27.53 2,753
22-1-2018 80 29.00 2,320 - - - 180 28.18 5,073
25-1-2018 - - - 80 28.18 2,254 100 28.18 2,819
28-1-2018 - - - 20 28.18 564 80 28.18 2,255
30-1-2018 100 26.00 2,600 - - - 180 26.97 4,855
31-1-2018 - - - 90 26.97 2,427 90 26.97 2,428
88

Working Notes :

[1] Issue on January 20 is valued at Rs. 27.53 which is the


weighted average rate, arrived at as follows :

1,250  1,200  1,680 4,130


  27.533r / o 27.53
50  40  60 150

[2] Issue on January 25 is valued at Rs. 28.18 per kg. which is the
weighted average rate arrived at as follows:

2,753  2,320 5,073


  28.183r / o 28.19
100  80 180

[3] Issue on January 31 is valued at Rs. 26.97 per kg. which is the
weighted average rate arrived at as follows:

2,255  2,600 4,855


  26.971r / o 26.97
80  100 180

Therefore, the value of stock as on 31-1-2004 : 90 units @ Rs.


26.97 = Rs. 2,428.

[4] Note: The Stock Book entries for both purchases / receipts and
sales / issued are always made at cost. The selling price, even if
given, is to be ignored.
Illustration: 5
Sumit Ltd. has purchased and issued the materials in the following
order:

Month Date Particulars Units Cost Per Unit Rs.


August, 2017 01 Purchases 300 3
04 Purchases 600 4
06 Issues 500 -
10 Purchases 700 4
15 Issues 800 -
20 Purchases 300 5
23 Issues 100 -
Ascertain the quantity of closing stock as on 31st August, 2017
and what will be the value under the following methods.
[i] First in first out method.
[ii] Weighted Average method.
(IDE, Nov. 2000, adapted)
89

Solution :
(A) FIFO
STOCK LEDGER
Date Receipts Issues Balance

Units Price Amt. Units Price Amt. Units Price value

1-8-2017 Opening - - - - - Nil Nil Nil

1-8-2017 300 3.00 900 - - - 300 3.00 900

300 3.00 900


4-8-2017 600 4.00 2,400 - - -
600 4.00 2,400

300 3.00 900


6-8-2017 - - - 400 4.00 1,600
200 4.00 800

400 4.00 1,600


10-8-2017 700 4.00 2,800 - - -
700 4.00 2,800

400 4.00 1,600


15-8-2017 - - - 300 4.00 1,200
400 4.00 1,600

300 4.00 1,200


20-8-2017 300 5.00 1,500 - - -
300 5.00 1,500

200 4.00 800


23-8-2017 - - - 100 4.00 400
300 5.00 1,500

Therefore, the value of stock as on 31-8-2003 : Rs. 2,300


[B] Weighted Average (Perpetual Inventory System)
STOCK LEDGER
Date Receipts Issues Balance

Wt. Avg. Wt. Avg.


Units Price Amt. Units Amt. Units Value
Rate Rate

01-8-2017 Opening - - - - - Nil Nil Nil

01-8-2017 300 3.00 900 - - - 300 3.00 900

04-8-2017 600 4.00 2,400 - - - 900 3.67 3,300

06-8-2017 - - - 500 3.67 1,834 400 3.67 1,466

10-8-2017 700 4.00 2,800 - - - 1,100 3.88 4,266

15-8-2017 - - - 800 3.88 3,103 300 3.88 1,163

20-8-2017 300 5.00 1,500 - - - 600 4.44 2,663

23-8-2017 - - - 100 4.44 444 500 4.44 2,219


90

Working Notes :

[1] Issue on August 6 is valued at Rs. 3.67 which is the weighted


average rate, arrived at as follows :

900  2,400 3,300


  3.666r / o 3.67
300  600 900

[2] Issue on August 15 is valued at Rs. 3.88 per kg. which is the
weighted average rate arrived at as follows :

1,465  2,800 4,265


  3.877r / o 3.88
400  700 1,100

[3] Issue on August 23 is valued at Rs. 4.44 per kg. which is the
weighted average rate arrived at as follows:

1,161 1,500 2,661


  4.435r / o 4.44
300  300 600

Therefore, the value of stock as on 31-8-2002 : 500 units @ Rs.


4.44 = Rs. 2,219.
Illustration :6
Following are the purchases and sales of wheat in the
months of March, 2018. Prepare a statement showing valuation of
stock on the basis of Weighted Average method.

Date Purchases Rate Sales


2018 (Kg.) (Rs.) (Kg.)
March 1 600 4 -
4 - - 300
5 300 3.80 -
10 - - 200
18 200 4.20 -
23 - - 400
29 400 4.40 -
31 - - 300
Out of purchases on March 5, 50 Kgs were returned to the
supplier on March 8.Out of Sales on March 23, a customer returned
20 Kgs. on March 26.
91

B] Weighted Average (Perpetual Inventory System)


STOCK LEDGER
Date Receipts Issues Balance
Wt. Avg. Wt. Avg.
Units Price Amt. Units Amt. Units Value
Rate Rate
01-3-2018 600 4.00 2,400 - - - 600 4.00 2,400

04-3-2018 - - - 300 4.00 1,200 300 4.00 1,200

05-3-2018 300 3.80 1,140 - - - 600 3.90 2,340

05-3-2018 - - - 50 3.90 195 550 3.90 2,145

10-3-2018 - - - 200 3.90 780 350 3.90 1,365

18-3-2018 200 4.20 840 - - - 550 4.01 2,205

23-3-2018 - - - 400 4.01 1,604 150 4.01 601

26-3-2018 20 4.01 80 - - - 170 4.01 681

29-3-2018 400 4.40 1,760 - - - 570 2,441


4.28
31-3-2018 - - - 300 4.28 1,285 270 1,156
4.28

Working Notes :

[1] Issue on March 5 & March 10 is valued at Rs. 3.90 which is the
weighted average rate, arrived at as follows :

1,200  1,140 2,340


  3.90
300  300 600

[2] Purchase returns of 50 kg. are out of the total stock of 600 kg.
which was valued at Rs. 3.90 per kg.
[3] Issue on March 23 is valued at Rs. 4.01 per kg. which is the
weighted average rate arrived at as follows :

1,365  840 2,205


  4.01
350  200 550

[4] Sales on March 23 are out of stock valued at Rs. 4.01 per kg.
Hence returns of 20 kg. are also taken at a rate of Rs. 4.01 per kg.
[5] Weighted Average Rate on March 31 is arrived at as follows :

681 1,760 2,441


  4.28
170  400 570
92

Therefore, the value of stock as on 31-3-2008 : 270 units @ Rs.


4.28 = Rs. 1,156
Illustration : 7
A company deals in 3 products viz. A, B and C. The details for
purchases and sales for January 2018 are as under.
Product A B C
Units Rs. Units Rs. Units Rs.
Selling Price per
100 200 250
Unit
Opening Stock 100 60 100 100 50 120
Purchases :
Jan 9 300 65 200 110 50 135
Jan 20 100 64 50 120 100 140
Jan 29 50 68 50 125 20 130
Closing Stock 140 70 60

You are required to prepare a trading and profit and loss account
for the month assuming the selling and distribution expenses to be
Rs. 63,000. Use FIFO method for stock valuation.

Solution
Stock Ledger (FIFO Method)
Product – A
Date Purchases Sales Closing Stock
Qty. Rs. Qty. Qty. × Rs. = Amount
01-1-2018 - - 100 × 60 = 6,000
09-1-2018 300 × 65 - 100 × 60 = 6,000
300 × 65 = 19,500
25,500
20-1-2018 100 × 64 - 100 × 60 = 6,000
300 × 65 = 19,500
100 × 64 = 6,400
31,900
29-1-2018 50 × 68 - 100 × 60 = 6,000
300 × 65 = 19,500
100 × 64 = 6,400
50 × 68 = 3,400
35,300
Total Sales 100 ×60 90 × 64 = 5,760
During 300 ×65 50 × 68 = 3,400
January 10 × 64 9,160
410
93

Product – B

Date Purchases Sales Closing Stock


Qty. Rs. Qty. Qty. × Rs. = Amount
01-1-2018 - - 100 × 100= 10,000
09-1-2018 200 × 110 - 100 × 100= 10,000
200 × 110= 22,000
32,000
20-1-2018 50 × 120 100 × 100= 10,000
200 × 110= 22,000
50 × 120 = 6,000
38,000
29-1-2018 50 × 125 100 × 100= 10,000
200 × 110= 22,000
50 × 120 = 6,000
50 × 125 = 6,250
44,250
Total Sales 100× 100 20 × 120 = 2,400
During 200 × 110 50 × 125 = 6,250
January 30 × 120 8,650
330
94

Product C
Date Purchases Sales Closing Stock
Qty. Rs. Qty. Qty. × Rs. = Amount
01-1-2018 - - 50 × 120 = 6,000
02-1-2018 50 × 135 50 × 120 = 6,000
50 × 135 = 6,750
12,750
20-1-2018 100 × 140 - 50 × 120 = 6,000
50 × 135 = 6,750
100 × 140= 14,000
26,750
29-1-2018 20 × 130 - 50 × 120 = 6,000
50 × 135 = 6,750
100 × 140= 14,000
20 × 130 = 2,600
29,350
Total Sales 50 × 120 40 × 140 = 5,600
During 50 × 135 20 × 130 = 2,600
January 60 × 140 8,200
160

Note : 1
Number of units sold during January :
Product A B C
Opening Stock 100 100 50
Add : Total Purchase 450 300 170
550 400 220
Less : Closing Stock 140 70 60
Units Sold 410 330 160
95

Dr. Trading Account Cr.


Particulars Rs. Particulars Rs.
To Opening Stock By sales
A 100 × 60 =6,000 A 410 × 100 = 41,000
B 100 × 100 = 10,000 B 330 × 200 = 66,000
C 50 × 120 = 6,000 22,000 C 160 × 250 = 40,000 1,47,000
To Purchases By Closing Stock
A 29,300 A 9,160
B 34,250 B 8,650
C 23,350 86,900 C 8,200 26,010
To Gross Profit c/d 64,110
1,73,010 1,73,010
Dr. Profit & Loss Account Cr.

Particulars Rs. Particulars Rs.

To Selling & Distribution


63,000 By Gross Profit b/d 64,110
Expenses

To Net Profit 1,110

64,110 64,110

6.2 EXERCISES
Problem 1
From the following particulars, value the closing stock
separately under : (A) FIFO; (B) Weighted Average
1st April, 2018 Opening Stock 800 @ Rs. 4
4th April, 2018 Sales 200
8th April, 2018 Purchase 1,000 @ Rs. 5
10th April, 2018 Sales 500
12th April, 2018 Sales 200
15th April, 2018 Purchase 700 @ Rs.5.50
18th April, 2018 Sales 500
20th April, 2018 Purchase 1,200 @ Rs.6.00
th
28 April, 2018 Sales 1000
96

The market value of 30th April, 2018 is Rs. 5.75.


Problem 2
The following is an extract of the record of receipt and issue of
certain chemicals in a chemical factory during the month of March,
2018.
Date Particulars Units Rate
2018
Opening balance 500 Tonnes @ Rs.200
March 1

“3 Issue 70 Tonnes

“4 Issue 100 Tonnes

“5 Issue 80 Tonnes

“ 13 Received 200 Tonnes @ Rs.190

Returned from
“ 14 150 Tonnes
Department

“ 16 Issue 180 Tonnes

“ 20 Received 240 Tonnes @ Rs.-192

“ 24 Issue 300 Tonnes

“ 25 Received 320 Tonnes @ Rs.194

“ 26 Issue 115 Tonnes

“ 27 Received 350 Tonnes @ Rs.195

“ 30 Issue 400 Tonnes

Issues are to be priced on the principle of ‘First-in-First-out’


Principle. The stock verifier has found shortage of 10 tonnes on the
22nd June, 1999 and left a note accordingly.
Prepare a Store Ledger Control Account for the material
showing the above transactions.
97

Problem 3
Find the value of closing stock on FIFO method
Receipts : Purchase of Pipes

04.06.2017 20 Pipes @ Rs. 15.00 each

17.06. 2017 30 Pipes @ Rs. 14.00 each

02.07. 2017 40 Pipes @ Rs. 14.50 each

30.07. 2017 30 Pipes @ Rs. 13.00 each

Sold :

20-6-2017 25 Pipes

05-7-2017 40 Pipes

31.07. 2017 45 Pipes

On 28.07.2017, 2 pipes sold on 20.6.2017 were received


back, out of which one pipe was found damaged on 28.7.2017 and
had to be discarded.




98

7
CAPITAL, REVENUE EXPENDITURE
AND RECEIPTS
Unit Structure :
7.0 Objectives
7.1 Introduction
7.2 Characteristics / Tests for Capital or Revenue
7.3 Expenditure
7.4 Capital Expenditure
7.5 Revenue Expenditure
7.6 Distinctions between Capitals Expenditure and Revenue
Expenditure
7.7 Deferred Revenue Expenditure
7.8 Capital Receipts
7.9 Revenue Receipts
7.10 Distinctions between Capital Receipts and Revenue
Receipts
7.11 Deferred Revenue Income
7.12 Revenue Profit and Capital Profit
7.13 Revenue Loss and Capital Loss
7.14 Effect of Wrong Treatment On Profit
7.15 Illustration
7.16 Exercises

7.0 OBJECTIVES

After studying the unit students will be able to:


 Understand the meaning and characteristics of capital
expenditure and revenue expenditure.
 Distinguish between capital expenditure and revenue
expenditure.
 Understand the meaning and characteristics of capital receipts
and revenue receipts.
 Distinguish between capital receipts and revenue receipts.
 Understand the meaning and characteristics of deferred
revenue expenditure
 Know the disclosure of various items in final accounts.
99

 Recognise with reason the given item is of capital nature or


revenue nature or deferred revenue nature.

7.1 INTRODUCTION

Final Accounts prepared at the end of the year consists of


Income Statement and Balance Sheet. These are prepared from
trial balance. Debit balance shown in trial balance represents either
revenue expenses or capital expenditure, credit balances are either
revenue income or capital receipts. All revenue expenses & gains /
incomes are transferred to Income Statement. Capital expenditure
represents assets shown on assets side of the Balance Sheet.
Credit balance represents either gains or capital receipts, various
gains shown in Income Statement and capital receipts shown on
liabilities side of the Balance Sheet. Therefore, it is very essential to
know, WHICH and WHY, how to distinguishing which are capitals
or revenue? While recording transaction in various books of
accounts, it is necessary to classify them into revenue or capital.
This classification is relevant for adherence to the requirements as
per A.S. 9 & the accounting concept of matching costs with
revenue.

7.2 CHARACTERISTICS / TESTS FOR CAPITAL OR


REVENUE

For deciding whether it is CAPITAL OR REVENUE following


features should be tested.

1. Business Activity / Nature :


In case such activities are recurring nature i.e. purchases or
sales of goods or rendering serves, it is revenue. Expenditure
pertains to investing / financing activity, it is capital expenditure.

2. Long / Short Term Benefits :


Benefits of expenditure is for short term, normally it is
Revenue e.g. wages paid, rent paid, while if benefits for long term,
it is capital, e.g. purchase of Plant, Furniture, etc.
3. Recoverable :
Amount spent is recoverable in short term, it is revenue, if it
is recoverable in long term, it is capital e.g. sale of goods is
revenue, sale of assets is capital receipts.

4. Recurring - Non-recurring :
Any recurring receipts / payments are recurring in nature,
then it is revenue, if such receipts are non-recurring, it may be
capital expenditure e.g. issue of shares is capital receipts and
interest received is revenue income.
100

5. Effect on Funds and Profits :


Revenue receipts and revenue payments affects profits
whereas capital receipts increases funds, capital payments or
expenditure increases assets.

6. Treatment in Final Accounts :


Revenue receipts or payments are shown in Income
Statement, capital expenditure or receipts are shown in the Balance
Sheet.

7. Materially of amount :
Huge or small amount doesn’t indicate whether it is capital or
revenue.

8. Treatment by other party :


Treatment by other party to transaction is not relevant. E.g.
furniture sold by furniture manufactures is revenue receipts for him,
it is capital expenditure for buyer as it is assets purchased, thus,
there are no clear cut tests / rules, whether it is capital or revenue,
it can be decided upon nature of transactions / nature of business /
ultimately nature of receipts or payments.

7.3 EXPENDITURE

7.3.1 Meaning:
As per guidance notes issued by I.C.A.I. in relation to
Financial Statements, “Expenditure means incurring a liability or
disbursement of cash or transfer of property for the purpose of
obtaining goods, services or assets” Expenditure does not only
involve outflow of resources, but also giving rise to liability or
transfer of property. Such expenses may be Capital or Revenue
expenditure, depends up benefits that firm gets i.e. short term or
long term. An expenditure whether it is Capital or Revenue is
dependent on various factors, such as:

7.3.2 Benefit of expenditure:


In case benefit of it is available for short period i.e. less than
12 months, it is revenue expenditure. Expenditure is for longer
period i.e. more than one year, it is capital expenditure.

7.3.3 Recurring or non-recurring:


Revenue expenditure is reoccurring, is payable again and
again, i.e. rent, wages, salaries etc. It is considered as period cost.
However, capital expenditure is not payable as per period, it is
incurred only when Fixed Assets are purchased.
101

7.3.4 Decreases Cost of production / increased earning


capacity
Expenses on increasing earning capacity are treated as
capital expenditure whereas expenses incurred for keeping assets
in working condition are revenue expenditure.

7.4 CAPITAL EXPENDITURE

7.4.1 Meaning:
Capital Expenditure means an expenditure carring probable
future benefit [Guidance Notes - I.C.A.I.] Eric. Kohler has defined
Capital expenditure as “expenditure intended to benefit future
periods, an addition to fixed assets. The term is generally restricted
to expenditure that add to Fixed Assets units or those have effects
of increasing earning capacity, efficiency, life span or economy of
an existing assets.”

In short, Capital Expenditure means:


i) Expenditure incurred for acquisition of Fixed Assets.
ii) Expenditure incurred in connection to acquisition of Fixed
Assets.
iii) Expenditure which results in increases earning capacity of
business.
iv) Expenditure which decreases cost of operation.

Balance in capital expenditure being an asset is carried


forward to subsequent period; still it is fully depreciated or disposed
off. Depreciation is charged annually either on book value or cost of
Fixed Assets.

7.4.2 Characteristics / Tests:


If expenditure has any of the following features, then it is
treated as Capital Expenditure.

1. Long Term Benefits :


The benefits of capital expenditure can be enjoyed for long
periods and future period of time e.g. purchased of Plant &
Machinery.

Any expenditure incurred in connection with acquisition of


fixed assets, e.g. Custom duty paid on machinery imported,
installation cost of machinery.

2. Investing Activity :
Such expenditure pertains to investing activity. Capital
expenditure helps to set up and develop a business. It creates and
increases earning capacity of the business. It gives birth to a new
source of income. It leads to acquisition of new asset. Examples
102

are Fixed Assets like Machinery, Furniture & Fixtures, Computer,


etc.

3. Recoverable :
Money spent on capital expenditure can be recovered
though income generated by the Assets itself or even by selling the
assets at the end of its economic life or at the time of replacement
of assets.

4. Non-recurring :
Capital expenditure is non-recurring in nature, i.e. it need not
be incurred again and again. If a firm takes Building on rent, it is
payable every month, but if it purchased Building, it does not
purchase another building for many years.

5. Effect on Funds and Profits :


Capital expenditure decreases funds in current year as
money goes out of business. But it may increase profits in future
from income derived by using such assets. Investment purchased
is capital expenditure, income earned from investment is Revenue
Receipt.

6. Increases in performance of existing Assets :


Normally amount spent is large, but not necessarily, e.g.
Calculator purchased, it is shown in the Balance Sheet as assets at
book value [cost less depreciation].

7.4.3 Examples of Capital Expenditure:


Purchase of any Fixed Asset for use in the business, as per
AS-10, cost of fixed asset includes :
a. Cost of purchase of Fixed Assets.
b. Custom duty, taxes, cusses on cost.
c. Freight paid for transportation to factory site.
d. Professional charges paid in connection with acquisition of
Fixed Assets, Installation of assets e.g. Legal charges paid
for preparing documents, project report, conducting
feasibility study, market surveys, negotiations for
Collaboration etc.
e. Office and administrative expenditure connected with
project.
f. Interest on loan taken for purchase of Fixed Assets till it is
put to use.
g. Any expenditure incurred during construction period.
h. Cost of an addition or extension to an existing asset.
i. Cost of development of Wasting Assets.
j. Cost of acquisition of an Intangible Assets.
103

7.5 REVENUE EXPENDITURE

7.5.1 Meaning:

1. REVENUE EXPENDITURE

Revenue expenditure means expenditure incurred for


carrying out the day to day business activities and from which no
future benefits expected. [Guidance Notes - ICAI].

Eric Kohler has defined revenue expenditure as


“Expenditure charged against operations, a term used to contrast
with capital expenditure”.

Any expenditure which is not capital expenditure is Revenue


Expenditure. The items of expenditure having immediate or short-
term benefices less than 12 months are treated as Revenue
Expenditure.

2. COST
Cost means amount of expenditure incurred on a specific article,
product or activity [Guidance notes ICAI]. Thus, cost may be the
cost of an asset or cost of goods or cost of services.

3. Expenses
Expenses means:
a) A cost relating to the operation during the accounting period.
b) A cost relating to the income earned during the accounting
period.
c) A cost whose benefits do not extend beyond the accounting
period.
d) An expired cost i.e. that portion of expenditure from which no
further benefits are expected. [Guidance Notes ICAI].
e) Expenditure incurred to maintain assets in working condition.
f) Expenditure of revenue nature incurred after the plant starts
commercial production. [AS-10].
g) Research and development cost written off.

In short, Revenue expenses means operating costs,


matching costs, period cost, product cost and expired costs
incurred during the accounting year.

7.5.2 Characteristics / Test:

If expenditure have any of the following characteristics or


tests, it should be treated as Revenue Expenditure:
104

1. Business Activity :
The expenditure that pertain to business activity is recorded
as revenue expenditure, as it helps to run a business and earn
income. Examples are purchase of goods, fees paid etc.

2. Maintain Assets :
Expenditure that helps to maintains fixed assets in working
condition is treated as revenue expenditure. e.g. repairs,
maintenance.

3. Not Recoverable :
Money spent on revenue expenditure is not irretrievably
gone. It can be recovered hence expired costs and revenue losses
are treated as revenue expenditure.

4. Recurring :
Revenue expenditure is recurring in nature. A same type of
expenditure is incurred again and again. e.g. salaries paid, rent,
traveling expenses, audit fees.

5. Reduces Funds and Profits :


Revenue expenditure reduces both funds and profits of the
current year. As money goes out, the funds available with the
concern are reduced. And as the money goes out irretrievably (i.e.
never to comes back), it reduces the profits of the concern.

7.5.3 Disclosure in final accounts:


Revenue expenditure pertains to current year is shown as
expenditure in the Profit & Loss A/C. However, part of the
expenses, if pertains to next year, is shown in the Balance Sheet as
prepaid expenditure, on the assets side. Revenue expenditure
incurred but not paid is taken in Profit & Loss A/C and it is shown in
the Balance Sheet as liabilities.

7.5.4 Examples:
1. Cost relating to business activities during the accounting year is
treated as revenue expenditure i.e.
 Cost of production [purchases of goods, wages paid.
manufacturer expenses etc.]
 Cost of administration [salaries, rent, printing & stationery,
audit fees etc.]
 Selling & Distribution cost [commission, traveling expenses,
advertisement, etc.]
 Cost of raising finance [interest on loans, debentures
interest, and cash discount, etc.]
105

2. Cost relating to income earned during the same accounting


period are treated as revenue expenditure e.g. carriage, freight,
buying expenses, interest on loans.

 Costs whose benefits do not extend beyond the accounting year


are treated as revenue expenditure i.e. white washing factory,
loose tools and packing materials.

 Expired Costs: Expenditure from which no future benefits


expected is treated as revenue expenditures e.g. Depreciation
on Fixed Assets, when any asset is sold at loss, book value
represents loss on sale of assets, it is treated as expired cost &
written off as expired cost, debited to Profit and Loss A/C.

 Revenue Loss: is treated as revenue expenditure e.g. goods


destroyed by fire, bad debts and unsalable goods written off.
Revenue losses arises in respect of business activities [trading
or / and manufacturing] or in respect to current assets such as
stock, cash lost, debtors etc.

 Revenue expenditure incurred after the plant has begun


commercial production is treated as expenses. AS - 10.

 Expenditure on repairs which maintains the standard of


performance of an existing fixed assets and machinery spares
consumed are treated as revenue expenditure . A.S.-10.

 According to A.S.8, any Research & Development costs


incurred but it is not certain whether it will give rise to any
benefit in future can be treated as revenue expenditure.

7.6 DISTINCTIONS BETWEEN CAPITAL


EXPENDITURE AND REVENUE EXPENDITURE

No. Capital Expenditure Revenue Expenditure


1. Its benefit extends for more It benefits only for current
than one accounting year . accounting year [12 months]
2. It is incurred for acquisition of It is incurred for earning
fixed assets . revenue.
3. It may be incurred to improve It maintained fixed assets in
the existing fixed assets held working condition.
by the concern.
4. It increases revenue earning It does not change revenue
capacity. earning capacity.
106

5. It benefits more than one It benefits only in the same


accounting year. accounting year.
6. It decreases funds, but It decreases funds as well
benefits for longer period. as profits of business.
7. It may decreases cost of It decreases profits of
production. current year.
8. It is shown on assets side of It is shown as expense in
Balance Sheet. Revenue A/C.
9. Examples = goodwill, plant & Examples = purchases of
machinery, land, building, goods, wages, salaries,
furniture & fixtures, railway legal fees, rents. Insurance,
sidings etc. carriage, interest, selling
expenses, commission. etc.

CHECK YOUR PROGRESS

1. Fill in the blanks


a. Revenue expenditure is shown on ------------- side of Profit &
Loss A/C.
b. -------------- expenditure is incurred for acquisition of Fixed
Assets.
c. -------------- expenditure benefits only in same accounting
year.
d. Purchase of goods is the example of ------------------
expenditure.
e. Goodwill is the---------------------------expenditure.
f. Cost relating to income earned during the --------- accounting
period are treated as revenue expenditure.
g. Expenditure from which no future benefits expected is
treated as --------------expenditures.
h. Goods destroyed by fire is a ------------------------- expenditure.
i. Expenditure pertains to investing / financing activity is --------
expenditure.
j. Custom duty, taxes, cusses on cost is a -----------
expenditure.
k. Expenditure which results in increase in earning capacity of
business is ---------------------- expenditure
l. Expenditure which decreases cost of operation is --------------
expenditure.
107

2. Enlist the tests for treating the expenditure as Revenue.


3. Define the following terms:
a. Revenue expenditure
b. Capital expenditure
c. Cost
d. Expenditure

7.7 DEFERRED REVENUE EXPENDITURE

7.7.1 Meaning:
Deferred Revenue Expenditure is that of revenue
expenditure which is carried forward on the presumption that it will
benefit over subsequent periods.

Guidance note issued by ICAI “Deferred Revenue


Expenditure is that part of expenditure for which payment has been
made or a liability incurred but which is carried forward on
presumption that it will benefit over a subsequent period or
periods”.

They are of a Quasi Capital Expenditure. Any heavy revenue


expenditure which is incurred in one year but it is likely to benefit
more than one accounting year, are considered as deferred
revenue expenditure. To defer means to postpone. Deferred
Revenue Expenditure has mixed nature and has same features of
both revenue and capital expenditure.

7.7.2 Medium term Benefits:


The Deferred Revenue Expenditure has medium term
benefits, may be 3 to 4 years, therefore, cost of expenditure is
divided in say 3 to 4, or 5 years, the part of Deferred Revenue
Expenditure benefit for current year debited to Profit & Loss A/C,
remaining balance carried to subsequent years till It is fully written
off. e.g. Discount allowed Rs.1,00,000 on issue of Debentures,
Debenture, likely to be redeemed after 10 years. The benefits of
issue of Debentures are for 10 years. Every year 1,00,000/10 =
Rs.10,000 shall be written off, balance in Discount on issue of
Debentures carried forward. After ten year, there will be no balance
in that account.

7.7.3 Nature of Expenses :


Deferred Revenue Expenditure should be Revenue
Expenditure by nature in the first instance, for example,
advertisement. But its matching with revenue may be deferred
considering the benefit to be accrued in future.
108

7.7.4 Revenue Expenses, Deferred Revenue Expenditure &


Prepaid Expenditure:

A thin line of difference exists between revenue expenses,


deferred revenue expenditure and prepaid expenses. Revenue
Expenditure is short time expenses, benefits of all these are
excused in the same accounting year. In some cases, part of
Revenue Expenses is treated as Deferred Revenue Expenditure
and is carried forward on the presumption that it will benefit over
subsequent period or periods. e.g. heavy advertisement for new
product launch in the market, such expenses may be assumed, it is
going to benefit for 3 to 5 years, hence it can be treated as
Deferred Revenue Expenditure. The benefits available from prepaid
expenses can be precisely [not presumption] estimated but that is
not so in case of Deferred Revenue Expenditure. e.g. Insurance
premium paid for the year ended 30th June 2018 Rs. 24,000/-
Accounting year ended 31st March 2018. In this case three months
premium pertains to subsequent period, = 24000/12*3 = Rs. 6000.
Amount is ascertained and carried forwards according as prepaid
insurance Rs. 6000/-.

7.8 CAPITAL RECEIPTS

7.8.1 Meaning:
Receipts means an amount received by a concern either
during its business activity [supply of goods or services] or during
its financing [obtaining money as capital or loan or sale of assets].
Receipt arising out of business activity is known as revenue
receipts, wherever receipts arising out of financing activity are
known as capital receipts or liability.

Capital receipts means an amount received by a concern in


the course of financing activity [obtaining money as capital or loan
or sale of Assets]. A concern need money to carry on its business
activities and investing activities. The money is obtained either from
the owner or loans or sales of assets or sales of investment. Capital
receipts are non-recurring in nature.
 Capital means the amount invested in the concern by its
owners, it to be refunded only when the concern finally stops its
business and is closed down.
 Liability means amounts received as loan basis from outsiders
e.g. from Bank, financial institution.
 Capital receipts are recognized on accrual basis as soon as the
rights of receipts are established. Capital receipts are not
credited to Profit & Loss A/C, it is shown as the liability or it may
reduce from Fixed Asset. However, it may be credited to Profit &
Loss A/C to the profit realized on sale of asset.
109

7.8.2 Characteristics / Tests:


If receipts have any of the following features, then it should
be treated as Capital Receipts:

 Financing Activity:
Receipts which arises from financingl activities are
concerned as Capital Receipts. It provides funds to acquire
new fixed assets. e.g. capital introduced, loan taken from
sale of assets, etc.

 Non-recurring:
Capital receipts are always non-recurring in nature. Such
amounts are not received again and again. These are long
term commitments.

 Returnable:
Money received as loan is returnable, as per various terms
agreed upon. Capital introduced is paid back to owner when
business is closed down.

 Effect on fund and profits:


Capital receipts increases fund available to business in the
year of receipts, as money comes in the business. But it may
decreases profits in future as one has to pay interest on
loan. However, in long term, it will increase profits of the firm.
e.g. Say you are borrowing @ 12%; return on investment to
firm say 18% and then extra 6% increases return to owner,
without additional capital. This is possible only when returns
are higher from the business.

7.8.3 Disclosure in Final Accounts:


Capital receipts are shown in Balance Sheet on liability side.
Capital receipts from sale of fixed assets are deducted from
concerned fixed assets.

7.8.4 Example:
a) Additional capital introduced by the owner Rs. 1,50,000.
b) Loan of Rs. 5,00,000 taken from H.D.F.C. Bank.
c) Investment costing Rs. 75,000 sold.
d) Grants from government received Rs.1,75,000 for
construction of building.

7.9 REVENUE RECEIPTS

7.9.1 Meaning:
 Revenue receipts are those items of income, which are
received or accrued in ordinary course of business. Revenue
receipts means receipts from customers for sale of goods or
110

rendering services or for use of funds or use of assets.


[Guidance Notes - I.C.A.I.] Revenue receipts are recurring
in nature; this gives rise to Gross Income regularly so long
as the business continues.

 Income means revenue earned during the particular


accounting year.

7.9.2 Characteristics / Tests:


If receipts have any of the following features, then it should
be treated as Revenue Receipts:

a) Business Activity:
Receipts in course of business activities are recorded as
Revenue Receipts e.g. Sale of goods, interest received, dividend
received, discount earned, etc.
b) Recurring:
Revenue Receipts are recurring in nature. Same types of
receipts are received again and again on regular basis, periodically
received in gap of two or three months, like interest on loan given.
c) Not Returnable:
Revenue Receipts are not returnable / refundable. It needs
not be paid back as concern has supplied goods or rendered
services to customers. Amounts received for sale of goods or
rendering reverses, in normal case, money is not to be refunded to
customers back. Legal ownership is with seller and need not to be
paid back.
d) Increase in funds and profits:
Revenue receipts increases both funds and profits of the
current year. As money received in the from of income, it increases
profits and it is not to be refunded. It increases funds available at
disposals with the concern.

7.9.3 Disclosure in final accounts:


Revenue receipts pertaining to current year are credited to
Profit & Loss A/C. Revenue receipts relating to future period shown
in the Balance Sheet as received in advance, on liability side. [as
income received in advance]. However income is different than
receipts. Income excludes revenues relating to the further period,
received in advance & includes income earned in current year but
not received [income receivable] and income received in earlier
years for current year.
111

7.9.4 Examples:

Sales of goods:
Goods means the commodities in which the concern deals.
Sales of goods whether manufactured or purchased are revenue
income.

Revenue is said to be arise from sale of goods when sale is


complete and the buyer has no legal right to return the goods or
ask for refund. If at the time of receipts, sale is not complete or
buyer has right to ask for refund, [sale on approval, goods sent on
consignment] then it is treated as advance and the receipt is based
on advance and not as revenue. Only when the sale is complete,
such advance is to be treated as revenue.

Rendering of Services:
Services means ‘AID TO TRADE’, such as marketing,
financing, administration, distribution, transport etc. Receipts are
taken as revenue when services are provided.

 Interest :
Interest is taken as income on loan given by the concern.
Amount received when such loan itself is returned, then it is
capital receipt.

 Dividend :
Receipt is treated as dividend when it is in the form of a reward
from investment in shares. Amount is received on sales of such
shares themselves are treated as capital receipts.

 Royalty :
Receipt is treated as royalty when it is received for used of
assets such as know-how, patents, trademarks and copyrights.
Amount received on outright sales of such patents etc. are
capital receipts.

 Insurance claim :
Compensation received from insurance company for loss of
current assets e.g. loss of goods, loss of cash due to theft etc.,
are treated as revenue receipts.

7.9.5 GOVERNMENT GRANTS


Grants received from Government are of two types. Grants
received for capital expenditure is capital receipt e.g. for road
construction, for Equipments to be purchased. However, grant
received to re-imbrue or compensate for specified revenue
expenditure or revenue losses are revenue receipts. [e.g. salary
grant, rent, power grant] are treated as Revenue Receipts [A.S. -
15 on Government Grants]. In brief, any receipt is recurring &
112

benefits are likely to be lost for not more than 12 months, are
Revenue Receipts.

7.10 DISTINCTIONS BETWEEN CAPITAL RECEIPTS


AND REVENUE RECEIPTS

No. Capital Receipts Revenue Receipts


1. It is non-recurring in nature. It is recurring in nature.
2. It arises from financial / It arises from business
investing activity. activity.
3. Capital receipts which are They are not repaid in
liabilities are to be repaid as normal course of business.
per terms.
4. They are not gains to the They are gains to the
concern. concern.
5. They appear in Balance They appear in Income
Sheet. Statement.
6. Capital receipts are Revenue receipts are
recognized on accrual basis matched with Revenue
but not matched with capital expenditure at the end of
expenditure. accounting year.
7. Examples of capital receipts Examples of revenue
are capital brought in by receipts are sale of goods,
owner, loan taken, sale of rent received, interest
fixed assets and sale of received, discount earned,
investment. income from investment etc.
8. Capital receipts may be In increases profits as well
capital profit, it increases as funds of business
funds available. concern.

CHECK YOUR PROGRESS


1. Fill in the blanks
a. Commission received is --------------receipt.
b. Rent received by sub-letting premises is -------------receipt.
c. Sale proceeds on sale of old car is -------------receipt.
d. Sale of furniture by furniture dealer is -------------receipt.
e. --------------- means assets held for short period.
f. Capital of owner of business is shown on -------------- side of
balance sheet.
g. ------------- assets does not have physical identity.
h. Grants received from Government for capital expenditure is
a--------------------------receipt.
113

i. Grant received for road construction is a ------------receipt.


j. Grant received for re-imbrues or compensate for specified
revenue expenditure or revenue losses are--------------
receipts.
k. Sales of goods whether manufactured or purchased are ------
income.
l. Revenue receipts pertaining to current year are ------------ to
Profit & Loss a/c.
m. Revenue receipts relating to ---------- period shown in the
balance sheet as received in advance, on-------- side.
n. Deferred revenue expenditure should be ----------expenditure
by nature in the first instance.
o. Discount on issue of debenture is a ----------------expenditure.

2. Define the following terms:


a. Revenue receipts
b. Capital receipts
c. Deferred revenue expenditure
3. What is the difference between income and receipt.

7.11 DEFERRED REVENUE INCOME

7.11.1 Meaning:

Deferred Revenue Income means income received in


advance before it is earned, which is carried forward to subsequent
period to which it relates [Guidance note - ICAI] such income is
received in advance. Such items of income is shown as ‘Income
received in advance’ on the liability side of Balance Sheet.

7.11.2 Examples:

Club annual membership fees received in advance from


some members is to be treated as income received in advance, to
be carried forward to the period it belongs.

Educational institution fees may be collected for entire


course, say three years, two years fees received is income
received in advance.

Grants received from Government for acquiring depreciable


assets are treated as deferred income. Proportionate amount of
grant basined on useful life of asset [i.e. total grant divided by the
useful life of assets] is taken as income every year and credited to
Profit & Loss A/C. [A.S. - 15 on Government Grants - I.C.A.I.]
114

7.12 REVENUE PROFIT AND CAPITAL PROFIT

Business activities give rise to revenue profit whereas


investing and financing activities give rise to capital profit. Revenue
profit / operating profit mean the net profit arising from the normal
operations / operating activities of the concern. Net operating profit
means excess of gross operating income over total operating
expenditure during the particular period. Capital profit arises when
assets or investment sold at higher price than cost. Shares are
issued by the company at higher price than face value / nominal
value, extra amount received is credited to Securities Premium A/C
and not to Profit and Loss A/C. In case of sale of Fixed Assets,
difference between sale proceeds and cost is capital profit,
difference between cost and book value is revenue profit. e.g. Plant
costing Rs. 7,50,000/- book value on date of sale Rs. 4,50,000/-
[due to depreciation], sold for 9,00,000/-

Capital profit = 9,00,000 - 7,50,000= Rs. 1,50,000 [sale proceeds -


cost]
Revenue profit = 7,50,000 - 4,50,000 = Rs. 3,00,000 [cost - book
value]

7.13 REVENUE LOSS AND CAPITAL LOSS

Revenue due to business activity is revenue loss, e.g. loss


on sale of goods, bad debts, goods lost by theft. Such revenue
losses are expired cost and debited to Profit & Loss A/C. On the
other hand, losses due to investing and financing activity is capital
loss. Capital loss due to investing activity is debited to Profit and
Loss A/C as expired cost with no future benefits whereas losses
due to capital, financing i.e. discount on issue of shares is carried
forward as ‘fictitious assets’ shown in the Balance Sheet under the
heading “Miscellaneous Expenditure”.

7.14 EFFECT OF WRONG TREATMENT ON PROFIT

We believe that to erris human, to ignore its effect will cost


on someone, who may blame accountant.
Any error in classification of payments / receipts will affect
final accounts. Every receipts and payments are classified into
either Revenue or Capital. Revenue expenditure & incomes are
transferred to Profit & Loss A/C to ascertain net profit or loss for the
period. Capital expenditure and capital receipts are shown in the
balance sheet. Balance shown in the balance sheet are carried
forward to subsequent period. Thus, any error in classification will
effect on accuracy of entire final accounts. Effect of such error can
be as under:-
115

1. Revenue Expenditure is shown as Capital Expenditure:

Revenue expenditure wrongly capitalized will increase profits


of this year and assets are overvalued, depreciation part in
subsequent year shall decrease profits of all subsequent years e.g.
Repairs to Machinery Rs. 60.000 wrongly debited to Machinery
A/C. Since it is wrongly capitalized, expenditure not debited to Profit
& Loss A/C profit shall be shown at higher amount and also at
higher amount, in subsequent year, due to higher depreciation, it
will reduce profits.

2. Capital Expenditure is shown as Revenue Expenditure :


As capital expenditure is debited to Profit & Loss A/C, Profit
& Loss A/C will show lower profit and Balance Sheet shows lower
assets. It will affect profits / loss in subsequent years also, as
depreciation shall not be charged, as entire amount is already
debited to Profit & Loss A/C e.g. Furniture purchased for
Rs.51,000, wrongly recorded in purchase day book. In this case,
gross profit as well as net profit reduced by Rs. 51,000/- .Furniture
is not added to furniture in Balance Sheet. So, Balance Sheet
shows fixed assets lower by Rs.51,000 if this type of error results in
to Window Dressing.

3. Capital Receipts are shown as Revenue Receipts:


The Profit & Loss A/C shows higher profits and the Balance
Sheet shows lower liabilities or higher assets. e.g. Sale of old
assets for Rs. 25,000 recorded in Sales Day Book. In this case, as
sales are shown at higher amount, Gross Profit, Net Profit shall be
higher, since it is not deducted from assets, they are shown at
higher amount by Rs. 25,000. Profit or loss on sale of assets are
also not accounted. Deposit received from customers’ Rs. 27,000,
wrongly credited to interest A/C, profit shown by Profit & Loss A/C
will be higher and liabilities are shown lower by Rs. 27,000.

4. Revenue Receipts are shown as Capital Receipts:


The Profit & Loss A/C shows lower profit and the Balance
Sheet shows higher liabilities, or lower assets e.g. Commission
received Rs. 71,000, from Z & Co. credited to Z & Co., income is
shown less and Z & Co. as liability.

Sale of goods wrongly credited to Furniture A/C, sales is


shown lower results in lower income and Furniture is reduced by
the same amount, assets are shown at lower amount.
116

7.15 ILLUSTRATION

Illustration 1:
State with reason whether following are capital or revenue
expenditure:
i) Rs.12,000, paid for removable of stock to new site.
ii) Purchase of NOKIA mobile phone Rs.5,000 for office work.
iii) Expenses incurred in connection with obtaining a licence for
starting the factory for Rs.27,000.
iv) Legal fees to acquire property Rs.10,000.
v) The amount spent for replacement of work out part of
machine Rs.50,000.
vi) Money spent to reduce working expenses Rs.25,000.
vii) Ring & Pistons of an engine were changed at cost of
Rs.10,000 to get fuel efficiency.

Solution :
i) Rs.12,000, paid for removable of stock to new site is
revenue expenditure. This is neither bring enduring benefit
nor enhance the value of the asset.
ii) Purchase of NOKIA mobile phone Rs.5,000 is capital
expenditure; as it is incurred for acquisition of fixed assets.
iii) Money paid Rs. 27,000 for obtaining license to start a factory
is a capital expenditure. This is an item of expenditure
incurred to acquire the right to carry on business.
iv) Legal fees to acquire property Rs.10,000 are part of cost of
that property. It is incurred to possess the ownership rights
of the property and hence it is a capital expenditure.
v) The amount spent for replacement of work out part of
machine Rs.50,000 is revenue expenditure since it is part
of its maintenance cost. If was incurred to keep machine in
working condition.
vi) Money spent on reducing working expenses Rs.25,000 is
capital expenditure, as it generates long term benefit to the
entity. It is part of intangible fixed assets. if is incurred for
any specific assets then it is also capital expenditure. It
should be capitalized.
vii) Rs.10,000 spent in changing rings and pistons of an engine
to get fuel efficiency is capital expenditure. This is an
expenditure on improvement of fixed assets. It results in
increasing profit earning capacity of the business by cost
reduction.
117

Illustration 2 :
State whether the following expenditure is a capital, revenue
or deferred revenue expenditure. Give reasons :
1. Legal expenses incurred in connection with issue of capital.
2. Cost of replacement of a defective part of the machinery.
3. Expenditure incurred in preparing a project report.
4. Expenditure for training employees for better running of
machinery.
5. Expenditure incurred for repairing cinema screen.

Solution:
1. Deferred revenue expenditure: Legal expenses incurred in
connection with issue of capital are not treated as revenue
expenditure because the funds from issue of shares will benefit
the concern for many years, it is not treated as capital
expenditure because it does not create any real asset. Hence, it
is treated as deferred revenue expenditure and written off over
certain number of years.

2. Revenue expenditure: As replacement of a defective part will


help to maintain the machinery in working condition.

3. Capital expenditure: If the project is implemented; as


according to Accounting Standard 10, all expenditure till a
project commences is capitalized. However, if the project is
given up or not implemented and the amount is small, it will be
written off as revenue expenditure (as expired costs which will
bring no benefit in future); if the project is not implemented and
the amount is heavy, it will be treated as deferred revenue
expenditure.

4. Revenue expenditure: As expenditure for training employees


for better running of machinery is cost of administration related
to normal business activities incurred in order to earn income
during the year.

5. Revenue expenditure: As expenditure incurred for repairing


cinema screen is a cost incurred to maintain an existing asset in
working condition.

Illustration 3:
State, with reasons, whether you would consider the
following as capital expenditure or revenue expenditure :
1. Amount spent on uniform of workers.
2. White-washing of the factory building.
118

3. Cost of stores consumed in manufacturing machinery for


installation in own factory.
4. Wages paid for construction of the building extension.
5. Import duty on raw material purchased.
(June 1980, adapted)

Solution :
1. Revenue expenditure: As amount spent on uniform of workers
is an administration cost related to normal business activities.
2. Revenue expenditure: As white-washing of the factory of
building is a cost of maintaining an asset in working condition.
3. Capital expenditure: As cost of stores consumed in
manufacturing machinery for installation in own factory is a
direct cost incurred for manufacturing an asset which is to be
capitalized as per Accounting Standard 10.
4. Capital expenditure: As wages paid for construction of an
extension to an existing asset is a direct cost incurred for
acquiring an asset which is to be capitalized as per Accounting
Standard 10.
5. Revenue expenditure: As import duty on raw material
purchased is a direct product cost related to normal business
activities incurred in order to earn income during the year.

Illustration 4:
State with reasons, whether you would consider the following as
capital expenditure or revenue expenditure.
1. Raw material costing $ 2,000/- was imported when 1 dollar was
worth Rs. 40; when payment was actually made the foreign
exchange was purchased at the rate of 1 dollar equal to Rs. 42.
2. Premium paid in connection with acquisition of leasehold
premises.
3. Renovation of factory canteen.
4. Fees paid for renewal of licence for factory.
(April 1984 adapted)

Solution :

1. Revenue Expenditure: As due to change in exchange rate, raw


material cost, which is a direct product cost, has gone up. Cost
of raw materials = 2000 × 40 = `80,000. it is purchased of
goods. However, extra amount paid 2000 × (42 - 40) = 4,000
119

shall be treated as loss due to exchange fluctuation is also


revenue expenditure, should be debited to profit & loss a/c.

2. Capital expenditure: As premium paid in connection with


acquisition of leasehold premises is a direct cost incurred in
connection with the acquisition of an asset to be added to the
cost of the asset [Accounting Standard 10].

3. Revenue expenditure: As renovation of factory canteen helps


to maintain the asset in working condition.

4. Revenue expenditure: As fees for renewal of factory licence is


a recurring expenditure incurred in the course of normal
business activities.

Illustration 5:
Electric Engineers Private Limited removed their factory to a
more suitable premises in Navi Mumbai. State with reasons the
accounting treatment for the following items:

1. A sum of Rs.99,500 was spent for dismantling, removing and re-


installing plant, machinery and fixtures.
2. The removal of stock from the old factory to the new at a cost of
Rs.1,000.
3. Plant and Machinery which stood in the books at `1,50,000
included a machine at a book value of Rs. 1,50,000 included a
machine at a book value of Rs. 3,400. This being obsolete, was
sold off at Rs. 900 and was replaced by a new machine which
cost Rs. 4,800.
4. The freight and cartage on the new machine amounted to `300
and erection charges Rs.550.
5. The furniture appeared in the books at Rs.15,000. Of these,
some portion of the book value at Rs.3,000 was discarded and
sold at Rs.1,200. New furniture of the book value of `2,400 was
acquired.
6. A sum of Rs.2,200 was spent on painting the new factory
(Oct. 1981, adapted)

Solution:
1. Deferred revenue expenditure: Cost of dismantling, removing
and re-installing plant etc. is not treated as revenue expenditure
because it is not a normal operating cost. If it is not treated as
capital expenditure because it does not create any real asset.
120

Hence it is treated as deferred revenue expenditure and written


off over certain number of years.
2. Revenue expenditure: As removal of stock from the old factory
to the new is a normal operating cost related to a current asset
(stocks) and not capital asset.
3. When a machine costing Rs.3,400 is sold for Rs.900 received
on sale of machinery is treated as capital receipt; and the book
value of the machine becomes Rs.2,500. As the machine has
been sold at its book value represents an ‘expired cost’ with no
future benefits i.e. loss on sale of asset which is to be written off
by debit to the Profit and Loss Account. Cost of new machine
(Rs.4,800) will be treated as Capital expenditure.
4. Capital expenditure: As freight and cartage on the new
machine as well as the erection cost is a direct cost of bringing
an asset to a condition where it can be put to use, which is
capitalized as per Accounting Standard 10.
5. Loss on sale of old furniture (Rs.3,000 - Rs. 1,200) is written off
as expired cost by debit to the Profit and Loss Account; cost of
new furniture (Rs.2,400) will be treated as Capital expenditure.
6. Capital expenditure: painting the new factory is a direct cost till
an asset is first put to use, which is capitalized as per
Accounting Standard 10.

Illustration 6:
State with reasons whether the following are Capital or
Revenue Expenditure:

1. Freight and cartage on new machine Rs.150, and erection


charges Rs.200.
2. Fixtures of the book value of Rs.1,500 was sold off at Rs.600
and fixtures of the value of Rs.10,000 was acquired, cartage on
purchase Rs.50.
3. A sum of Rs.100 was spent on painting the factory.
4. Rs.5,150 spent on repairs before using a second-hand car
purchased recently to put it in useable condition.
(FY, March 1995, adapted)

Solution :
1. Capital expenditure: Freight and cartage on new machine and
erection charges are capitalized as all costs till an asset is
installed are added to its cost as per Accounting Standard 10.
2. When fixtures are sold at Rs.600.Amount received on sale are
treated as Capital receipt and credited to Fixtures A/C; the
book value of the fixtures indicating Loss on sale of old fixtures
121

(1,500-600) is treated as an expense (expired cost) and written


off by debit to the Profit and Loss Account cost of new fixtures
(Rs.10,000) and cartage (Rs.50) will be treated as Capital
expenditure.
3. Revenue expenditure: As painting the factory helps to maintain
the asset in good working condition.
4. Capital expenditure: Repairs before using a second-hand car
purchased recently to put it in useable condition are capitalized
as per Accounting Standard 10 which states that all direct costs
of bringing the asset to its working condition for its intended use
form part of the cost of the asset.

Illustration 7:
State with reasons whether the following items relating to a
sugar mill company are capital or revenue:

1. A motor truck costing Rs.15,000 and standing in the books at


Rs.7,250 was sold for Rs.12,000.
2. Rs.20,000 received from the issue of further shares, the
expenses of the issue being Rs. 2,500.
3. Rs.75,000 being cost of land purchased for agricultural farm and
`450 paid for land revenue.
4. Rs.1,50,000 paid for excise duty on sugar manufactures.
5. Rs.50,000 invested in a government loan, interest received
Rs.4,500
6. Rs.60,000 spent on construction of railway siding.
(FY, March 1996; adapted).

Solution :
1. Capital receipt: As Rs.12,000 is received from sale of a capital
asset. The profit on sale of asset (Rs.12,000 - Rs. 7,250) will be
credited to the profit and loss account as an extraordinary item
of income on sale of motor truck.
2. Capital receipt: (Rs.20,000) : As amount has been received
from issue of shares in the course of financing activity of the
company. Rs.2,500 spent as expenses on issue of shares will
be treated as deferred revenue expenditure. It is not treated as
revenue expenditure because it is not a normal operating cost. It
is a nonrecurring expenditure. It is not treated as capital
expenditure because it does not create any real asset. Hence it
is treated as deferred revenue real asset. Hence, it is treated as
deferred revenue expenditure and written off over certain
number of years.
122

3. Rs.75,000 will be treated as capital expenditure as agricultural


land is a capital asset; Rs.450 paid for land revenue is revenue
expenditure in the course of normal operations of business.
4. Revenue expenditure: Excise duty on sugar manufactured is
the cost incurred during the course of normal business
operations incurred in order to earn income. It is recurring
expenses payable on manufacture of excisable goods.
5. Capital expenditure: Purchase of government loan is an
investment which will be returned on due date. Interest received
Rs.4,500, being income revenue income to be credit to Profit &
Loss A/C.
6. Capital expenditure: As cost of construction of railway siding is
for acquisition of a capital asset.

Illustration 8 :
State which of the following items are capital, revenue and
deferred revenues. Explain with reasons.
1. Expenditure incurred on overhauling machinery.
2. Taxes paid.
3. Wages paid to the workers for election of a new machinery.
4. Cost of goodwill.
5. Heavy expenditure incurred on advertisements.
6. Cost of construction of a building.
7. Machinery costing Rs.10,000 sold for Rs.12,000
8. Purchased machinery for Rs.15,000.
(FY, October 1996; adapted)
Solution :

1. Revenue expenditure: As expenditure incurred on overhauling


machinery helps to maintain the machinery in working condition.
2. Revenue expenditure: If taxes are on goods purchased e.g.
sales tax (Income tax is treated as drawings), goods
manufactured, then excise duty has to pay.
3. Capital expenditure: Wages paid to workers for erection of a
new machinery are capitalized as all costs till an asset is
installed are added to its cost as per Accounting Standard 10.
4. Capital expenditure: As cost of goodwill is an acquisition of
capital (intangible) asset.
5. Deferred revenue expenditure: If the heavy expenditure
incurred on advertisements is going to benefit for a number of
years.
123

6. Capital expenditure: As cost of construction of a building helps


to create a capital asset.
7. Capital receipt: As the amount of Rs.10,000 is received on sale
of fixed asset. Profit on sale (Rs.2,000) is credited to the Profit &
Loss A/c as an extra-ordinary item of income.
8. Capital expenditure: As it is an acquisition of a fixed asset.

Illustration 9:
State whether the following expenditure is a capital, revenue
or deferred revenue expenditure. Give reasons:
1. Legal expenses incurred in connection with issue of Equity
Shares of the company.
2. Cost of replacement of a defective part of the machinery.
3. Expenditure incurred in preparing a project report.
4. Expenditure for training employees for better running of
machinery.
5. Purchase of machinery for sale.
6. Daily wages paid to office peon.
(FY, April, 1996, adapted)

Solution:
1. Deferred revenue expenditure: Legal expenses incurred in
connection with issue of equity shares are not treated as
revenue expenditure because the funds received from issue of
shares will benefit the concern for many years. It is not treated
as capital expenditure because it does not create any real
asset. Hence, it is treated as Deferred Revenue Expenditure
and written off over certain number of years.
2. Revenue expenditure: As replacement of a defective part will
help to maintain the machinery in working condition.
3. Capital expenditure: If the project is implemented; as
according to Accounting Standard 10, all expenditure till a
project commences is capitalized. However, if the project is
given up or not implemented and the amount is small, it will be
written off as revenue expenditure (as expired costs which will
bring no benefit in future); if the project is not implemented and
the amount is heavy, it will be treated as Deferred Revenue
Expenditure.
4. Revenue expenditure: As expenditure for training employees
for better running of machinery is cost of administration related
to normal business activities incurred in order to earn income
during the year.
124

5. Revenue expenditure: As expenditure incurred for purchase of


machinery for sale is a direct product cost related to normal
business activities incurred in order to earn income during the
year.
6. Revenue expenditure: As daily wages paid to office peon is
cost of administration related to normal business activities
incurred in order to earn income during the year.

Illustration 10:
State whether the following expenditure is a capital, revenue
or deferred revenue expenditure. Give reasons:
1. Payment for purchase of goods.
2. Payment for purchase of stationery.
3. Payment for purchase of a car.
4. Payment for heavy inaugural expenses.
5. Partial refund of capital to a partner.
6. Payment of a loan taken earlier.
7. Payment of salaries.
8. Wages for erection or machinery.
(FY, October, 1996 adapted)

Solution :

1. Revenue expenditure: As expenditure incurred for purchase of


goods is a direct product cost related to normal business
activities incurred in order to earn income during the year.
2. Revenue expenditure: As purchase of stationary is cost of
administration related to normal business activities incurred in
order to earn income during the year.
3. Capital expenditure: As purchase of a car helps to create a
capital asset.
4. Deferred revenue expenditure: Heavy inaugural expenses are
not treated as revenue expenditure because these will benefit
the concern for many years. These are not treated as capital
expenditure because these expenses do not create any real
asset. Hence these are treated as deferred revenue expenditure
and written off over certain number of years.
5. Capital expenditure: As partial refund of capital to a partner
reduces the liabilities of the concern.
6. Capital expenditure: As payment of a loan taken earlier
reduces the liabilities of the concern.
125

7. Revenue expenditure: As salaries is cost of administration


related to normal business activities incurred in order to earn
income during the year.
8. Capital expenditure: As wages for erection of machinery is a
direct cost incurred for acquiring an asset which is to be
capitalized as per Accounting Standard 10.

Illustration 11. :
State, with reasons, whether you would consider the
following as capital expenditure or revenue expenditure:
1. Stock of Rs.25,000 was destroyed by fire of which Rs.15,000
was received from the Insurance Company.
2. The concern spent Rs.1,00,000 on heavy advertisement
campaign to introduce a new product in the market.
3. Cost of dismantling a plant from a particular locality and
reinstalling the same in another locality.
4. Cost of transporting newly purchased furniture.
5. Amount spent by factory in overhauling its plant which has
enhanced the life of the plant by five years.
6. Travelling expenses for a trip abroad for purchase of capital
goods.
7. Amount spent on replacement of defective part of an old plant.
8. Cost of Goodwill purchased.
(FY, May 1998, adapted)

Solution :
1. Revenue loss / expenditure: Of net amount of Rs.10,000 as
loss of stock by fire is related to loss of current assets (stocks)
and not capital assets. Insurance claim received is revenue
receipts.
2. Deferred revenue expenditure: Expenses on heavy
advertisement campaign to introduce a new product in the
market are not treated as revenue expenditure because these
will benefit the concern for many years. These are not treated
as capital expenditure because these expenses do not create
any real asset. Hence these are treated as deferred revenue
expenditure and written off over certain number of years.
3. Deferred revenue expenditure: Cost of dismantling a plant
from a particular locality and reinstalling the same in another
locality is not treated as revenue expenditure because it will
benefit the concern for many years. It is no treated as capital
126

expenditure because it does not create any real asset. Hence, it


is treated as deferred revenue expenditure and written off over
certain number of years.
4. Capital expenditure: As cost of transporting newly purchased
furniture is a direct cost incurred for acquiring an asset which is
to be capitalized as per Accounting Standard 10.
5. Capital expenditure: Amount spent by factory in overhauling its
plant which has enhanced the life of the plant by five years is an
expenditure which helps to improve the standard of
performance (working life) of an existing asset and is to be
capitalized as per Accounting Standard 10.
6. Capital expenditure: As traveling expenses for a trip abroad for
purchase of capital goods is a direct cost incurred for acquiring
an asset which is to be capitalized as per Accounting Standard
10.
7. Revenue expenditure: As amount spent on replacement of
defective part of an old plant will help to maintain the plant in
working condition.
8. Capital expenditure: As cost of Goodwill purchased is a direct
cost incurred for acquiring an asset which is to be capitalized
as per Accounting Standard 10.

Illustration 12:
State, with reasons, whether you would consider the
following as capital expenditure or revenue expenditure:
1. Professional fees paid in connection with acquisition of
leasehold premises.
2. Cost of registration and documentation of a newly formed
company.
3. Compensation paid to a retrenched employee for loss of
employment.
4. Expenditure incurred on purchase of cloth for uniform of
employees.
5. Payment of import duty on purchase of raw materials.
(FY, November 1998, adapted)

Solution:
1. Capital expenditure: As professional fees paid in connection
with acquisition of leasehold premises is a direct cost incurred in
connection with the acquisition of an asset to be added to the
cost of that asset [Accounting Standard 10].
127

2. Deferred revenue expenditure: Cost of registration and


documentation of a newly formed company is not treated as
revenue expenditure because it will benefit the concern for
many years. It is not treated as capital expenditure because it
does not create any real asset. Hence it is treated as deferred
revenue expenditure and written off over certain numbers of
years. This type of expenses may be group known as
preliminary expenses.
3. Revenue expenditure: As compensation paid to a retrenched
employee for loss of employment is an administrative
expenditure incurred in the course of normal business activities.
However, if the amount is heavy, it may be treated as Deferred
Revenue Expenditure, as it is a non-recurring expenditure, not
in the normal course of business which benefits the business for
many years by way of reduction in salary.
4. Revenue expenditure: As purchase of cloth for uniform of
employees is an administrative expenditure incurred in the
course of normal business activities.
5. Revenue expenditure: As payment of import duty on purchase
of raw materials is a direct product cost incurred in the course of
normal business activities in order to earn income. It should be
added to cost of material purchased.

Illustration 13 :
Saraswati Sisters removed their factory to their New Mumbai
premises. They carried out the following transactions:-
1. Cost of dismantling, transporting and re-installing the plant
Rs.50,500.
2. An old plant having depreciated value of Rs.60,000 was sold for
Rs.55,000.
3. A new machine was purchased for Rs.2,00,000 and installed at
the cost of Rs.35,000.
Apportion these into capital and revenue.
(IDE March 2000, adapted)

Solution :
1. Deferred revenue expenditure: Cost of dismantling,
transporting and re-installing plant etc. is not treated as revenue
expenditure because it is not a normal operating cost. It is not
treated as capital expenditure because it does not create any
real asset. Hence it is treated as deferred revenue expenditure
and written off over certain number of years.
128

2. Capital receipt: As the machine has been sold, its book value
represents an ‘expired cost’ with no future benefits i.e. loss on
sale of asset which is to be written off. Rs.55,000 is treated as
capital receipt.
3. Capital expenditure: Cost of new machine (Rs.2,00,000) will
be treated as capital expenditure. Installation cost (Rs.35,000) is
a direct cost of bringing an asset to a condition where it can be
put to use which is capitalized as per Accounting Standard 10.
Therefore, cost of machinery shall be Rs.2,35,000.

7.16 EXERCISES

1. Write short notes on


a) Capital Expenditure
b) Deferred Revenue Expenditure
c) Capital Profit
d) Revenue Expenditure
e) Revenue Profit.

2. Distinguish between
a) Capital expenditure & revenue expenditure.
b) Revenue expenditure & deferred revenue expenses.
c) Revenue receipts & income.
d) Revenue profits & capital profit.
e) Revenue receipt & capital receipt.

3. Practical problems

Exercise 1 : S. Jaggi sells and services typewriters. State which of


the following are capital expenditure and which are revenue
expenditure, giving reasons for your answer.
a. Purchase of a typewriter for office use.
b. Purchase of typewriters for re-sale.
c. Traveling expenses to service typewriters.
d. Purchase of spare parts to service typewriters.
e. Wages of mechanic
f. Wages of office staff.
g. Telephone charges.
h. Purchase of tools for servicing work.
[Ans. Capital - (a), (h); Revenue - other]

Exercise 2: Indicate - briefly giving your reasons in each case -


which of the following represent capital receipts, capital
expenditure, revenue income, revenue expenditure.
129

a. Interest on bank overdraft.


b. Purchase of typewriter for re-sale by the Office Supplies Co.
c. Purchase of typewriter for office use by the Sonali Social
Club.
d. Sale of a delivery van by Office Supplies Co.
e. Receipt of commission by a firm of brokers.
[Ans. CR - (d); CE - (c); RI - (e); RE - (a), (b)]

Exercise 3: State which of the following are Capital Expenditure


and which are Revenue Expenditure, giving reasons in each case.
i) Payment by cheque for carriage on purchases.
ii) Purchase of packing material for distribution of goods from
the Calcutta Paper Mill Ltd.
iii) Purchase of duplicator for use in own office from Gulab &
Co.
iv) The firm acquired a private car from B. Raha, one of the
partners of the firm.
[Ans. RE - (i) & (ii); CE - (iii) & (iv)]

Exercise 4: During the year 2017 A. Ashar had the following


transactions :-
1. Purchased a new motor van Rs.17,500 from B.G. Traders Ltd.
on credit.
2. Paid cheque Rs.740 to Office Furnishing Ltd. being Rs.650 for a
new office desk and Rs.90 for repair of an existing desk.
3. Paid Rs.1,420 by cheque for repairs and improvements to
premises. Rs.1,000 of this amount is to be capitalized.
4. Purchased additional premises for Rs.30,000 which was paid by
cheque.
State the total amount of capital expenditure involved in the above
transactions.
[Ans. Capital expenditure - Rs. 49,150]

Exercise 5: State with reasons whether the following are Capital or


Revenue expenditure:
1. Expenses incurred in connection with obtaining a licence for
starting the factory were Rs. 8,000.
2. Rs.1,500 paid for removal of stock to a new site.
3. Rings and Pistons of an engine were changed at a cost of Rs.
4,000 to get fuel efficiency.
130

4. Rs. 2,500 spent as lawyer’s fee to defend a suit claiming that


the firm’s factory site belonged to the plaintiff. The suit was not
successful.
5. Rs. 8,000 were spent on advertising the introduction of a new
product in the market, the benefit of which will be effective
during four years.
6. A factory shed was constructed at a cost of Rs.1,20,000. A sum
of Rs.7,000 had been incurred in the construction of temporary
huts for storing building material.
[Ans. : CE - (i), (iii), (vi), RE - (ii), (iv); DRE - (v)]

4. Objectives type Questions:


Multiple Choice Questions:
1) Amount received from insurance company on account of
machinery damaged completely by fire.
a) Capital Receipts b) Revenue Receipt
c) Revenue Expenditure d) Capital Expenditure

2) Subsidy of Rs.20,000 received from Government by a


manufacturing concern.
a) Capital Receipt b) Capital Expenditure
c) Deferred Revenue income d) Revenue Receipts

3) Grant Rs.5,00,000 received from Government for construction


of Building.
a) Revenue income b) Capital Income
c) Capital Receipts d) Non of the above

4) Amount received from I.F.C.I. as a medium term loan for


working capital.
a) Deferred Revenue income b) Capital Receipt
c) Revenue Receipts d) Capital Profit

5) Painting of office premises Rs.---1,00,000 once in five year.


a) Revenue Expenditure b) Revenue loss
c) Deferred Revenue Expenditure d) Capital Expenditure

Ans. : 1 - a, 2 - d, 3 - c, 4 - b, 5 - c

Multiple Choice Questions:


Pick up the correct answer from the following choices:
1) Amount received from S.B.I. as a term loan.
a) Revenue Receipt b) Capital Receipt
b) Capital Loss d) Non of above
131

2) Dividend on shares received


a) Deferred Revenue Income b) Revenue expenses
c) Revenue Income d) Capital Gain

3) Insurance claim received for loss of stock by fire.


a) Revenue Loss b) Capital Loss
c) Revenue Receipt d) Capital Receipt

4) Subsidy of Rs.10,000 received from Government for purchase


of computer.
a) Capital Receipt b) Revenue Receipt
c) Capital Loss d) Liability payable

5) Audit fees paid to Chartered Accountant.


a) Revenue Expenditure b) Capital Expenditure
c) Capital Loss d) Revenue Receipts

6) Legal fees paid to lawyer to defend civil suit.


a) Capital Expenditure b) Revenue expenditure
c) Deferred Revenue expenditure d) Non of the above

7) Travelling expenses of the director on trips abroad for purchase


of machinery.
a) Revenue expenditure b) Capital Expenditure
c) Revenue Loss d) All of the above

Ans. : 1 - b, 2 - c, 3 - c, 4 - a, 5 - a, 6 - b, 7 - b

Multiple Choice Questions:


Pick up the correct answer from the following choices :
1) A bad debts recovered during the year.
a) Capital receipt b) Revenue Receipt
b) Revenue loss d) Capital expenditure
2) Sale of old plant & machinery at loss.
a) Capital loss b) Capital gain
c) Capital Receipt d) Revenue receipt
3) Heavy advertisement expenditure to launch a new product.
a) Revenue Expenditure b) Capital expenditure
c) Deferred Revenue Expenditure d) Revenue loss

4) Annual white-washing expenses.


a) Capital Expenditure b) Revenue Expenditure
c) Revenue loss d) Deferred Revenue expenditure
132

5) Goods withdrawn by proprietor for own use.


a) Capital Gain b) Capital loss
c) Capital Receipt d) Non of the above
6) Stationery purchased for office use.
a) Revenue expenditure b) Capital expenditure
c) Revenue loss d) Capital loss
7) Amount spend on the overhauling of old machinery purchased.
a) Capital expenditure b) Revenue expenditure
c) Deferred revenue expenditure d) Capital loss
8) Placed an order for purchase of plant.
a) Capital expenditure b) Revenue expenditure
c) Revenue loss d) None of the above
Ans. : 1 - b, 2 - c, 3 - c, 4 - b, 5 - d, 6 - a, 7 - a, 8 - d

Match the following columns :

Column A Column B
1) Capital work-in-progress a) Deferred revenue expenditure
2) Raw material purchased b) Capital Receipt
3) Heavy advertisement c) Investment
4) Sale of old furniture d) Revenue expenditure
5) Purchase of shares e) Drawing
f) Capital expenditure
g) Deferred revenue income
Ans. : 1 - g, 2 - d, 3 - a, 4 - b, 5- c
Match the following columns :

Column A Column B
a) Capital receipt i) Profit for current year
b) Revenue expenditure decrease ii) Sundry debtors
c) Current assets iii) Current liability
d) Bills payable iv) Revenue expenditure
e) An Expenditure from which no v) Non-recurring nature
future benefit is expected
f) Capital introduced by the vi) Capital receipt
proprietor
vii) Fixed Assets
viii) Fictitious assets

Ans. : a - v, b- i, c- ii, d- iii, e- iv, f - vi


133

State with reasons whether the following statements are True


or False.
i) Legal fees paid to acquire a property is capital expenditure.
ii) Expenses incurred on the repairs & white washing for the first
time on purchase of an old building are revenue expenditure.
iii) Amount spent for replacement of worn out part of machine is
revenue expenditure
iv) Expenditure means payment made by business to obtain some
benefit.
v) Capital expenditure is recurring in nature.
vi) Intangible asset is an asset which has a physical identify.
vii) Revenue expenditure reduces profit & funds for the year.
Ans. : True : i, ii, iv, vii
False : iii, v, vi

State with reasons whether the following statements are True


or False.
a) Carriage paid for purchases of machinery is capital expenditure.
b) Repairs to furniture Rs.500 is capital expenditure.
c) A petrol car engine was replaced by a diesel engine is revenue
expenditure.
d) Purchase of 10% Govt. loan is capital expenditure.
e) Custom duty paid on import of raw materials is revenue
expenditure.
f) A sum of Rs.45,000 was spent on painting of office building
once in five years is revenue expenditure.
Ans. : True : a, d, e,
False : b, c, f.



134

8
FINAL ACCOUNTS OF MANUFACTURING
CONCERN [PROPRIETARY FIRM]

UNIT STRUCTURE

8.0 Objectives
8.1 Introduction
8.2 Manufacturing Account
8.3 Trading Account of A Manufacturer
8.4 Profit & Loss Account
8.5 Balance Sheet
8.6 Specimen Forms
8.7 Adjustments
8.8 Exercise

8.0 OBJECTIVES

After studying the unit, students will be able to:


 Understand the meaning, purpose, form and items of
Manufacturing A/C.
 Understand the form and items of Trading A/C and Profit &
Loss A/C.
 Know the meaning and form of Balance sheet.
 Draw the specimen forms of final accounts.
 Understand the meaning, types and closing entries for
adjustments.

8.1 INTRODUCTION

All business transactions are recorded in books of accounts.


The primary function of accounting is to accumulate accounting
data in a manual that the amount of profit or loss suffered during
the period can be determined along with status of the business in
financial terms. Final Accounts are prospered for this purpose. Final
Accounts are also known as Financial Statements. Preparation of
Final Accounts is last phase of the accounting process.

The accounting process starts from recording all business


transactions in set of books. At the end of accounting year, a
135

statement is proposed listing all balances namely Debit & Credit.


This statement is called Trial Balance. The total of debit and credit
balances must tally with each other.

This chapter deals with preparation of Final Accounts of


manufacturing concern carried on by sole proprietor. Sole
proprietor concern means business is camped and headed by one
person only.

Final Accounts of Manufacturers include Manufacturing A/C,


Trading A/C, Profit & Loss A/C and Balance Sheet. Normally Final
Accounts are prepared for a period of 12 months, called as
Accounting Year, Calendar Year (ending on 31st December) or
Financial Year / Govt Year (ending on 31st March) or it many any
other year ended (Diwali).

The purpose of preparing Manufacturing A/C is to ascertain


cost of goods produced during the period. Manufacturing A/C is
part of Final Account, it addition to Trading A/C and Profit & Loss
A/C. Costs of finished goods produced are then transferred to
Trading Account. Trading and Profit & Loss A/C is prepared to find
out gross profit and net profit/loss of the year. These accounts
measure the result of business operations. It is essential to match
revenues of an accounting period with costs assignable in earning
the said revenues. This process is known as “The Matching
Concept” which leads to the preparation of Final Accounts. Balance
Sheet is prepared to show the financial position of the business at
the end of accounting year.

Once all the adjustment entries are passed, the Trial


Balance contains a ready list of the closing balances of all ledger
accounts. The Trial Balance can now be directly used for preparing
the Final Accounts i.e. the Profit & Loss Account and the Balance
Sheet. In case of a Manufacturer, the Profit & Loss Account is
divided into: (a) Manufacturing Account, (b) Trading Account and
(c) Profit & Loss Account. In case of a trader, the Profit & Loss
Account is divided into: (a) Trading Account, and (b) Profit & Loss
Account. Each account in the Trial Balance must be shown in either
the Profit & Loss Account or the Balance Sheet.

8.2 MANUFACTURING ACCOUNT

8.2.1 Meaning:

A manufacturer sells finished goods manufactured by


himself in his factory; while a trader sells goods purchased by him
from the manufacturer. The manufacturer purchases raw materials
and converts them into finished goods by means of machinery and
136

labour in the factory. So, it is necessary for a manufacturer to


spend on wages to workers, on the manufacturing process, on the
factory etc. The manufacturer, therefore, prepares a “Manufacturing
Account” to find out his cost of finished goods manufactured.
Manufacturing A/C means an account showing the summary of the
cost of the manufacturing activity during the accounting year.

8.2.2 Purposes

The manufacturing account serves the following purposes.


i) It shows total cost of finished goods manufactured.
ii) It also shows cost of raw material consumed.
iii) It also provide details of appropriate i.e. direct and indirect
manufacturing cost.
iv) Comparison of cost of finished goods as per Manufacturing
Account and as per cost records kept by Costing Department.
v) Finished goods manufactured may be transferred to Trading
at market price. In such care production profit can be
ascertained.

8.2.3 FORM
Manufacturing Account is a ledger account. Its title is written
as Manufacturing Account for the year ended ….. It is divided into
two equal sides Debit and Credit, (see Worksheet 6.5 for specimen
Manufacturing Account.)

8.2.4 ITEMS
A Manufacturing Account contains the following items:
1. Opening Stock of WIP:
The opening stock of Work-in-process (WIP) is shown as the
first item on the debit side of the Manufacturing Account. Work-
in-process means raw materials not yet fully converted into
finished goods, also known as partly finished goods. The value
of Work-in-Process is made up of the cost of raw material and
the manufacturing expenses incurred for processing.
2. Raw Materials:
Next, the consumption of raw materials (also called Rs.direct
materials’) is shown as follows:
Opening stock of raw materials.
Add : Purchase of raw materials
Add : Direct Purchase Expenses
(Carriage inwards, freight inwards, octroi, customs duties)
Less : Purchase returns of raw materials
Less : Closing stock of raw materials
= Consumption of raw materials
137

Direct purchase expenses means all expenses incurred in


connection with purchase of raw materials e.g. transportation,
loading and unloading, coolie charges, insurance etc. Goods may
be purchased locally or imported from other countries. Local
purchases involve expenses of Carriage inward, Freight inward,
Coolie charges and cartage etc. Imported goods involves imports
expenses of dock dues, customs duties, insurance etc. These
expenses increase the cost of purchased raw materials.

a) Carriage Inward: Carriage expenses means expenses for


transporting goods. These are also known as freight, cartage,
coolie and cartage etc. The expenses for transporting the goods
purchased from the supplier to manufacturer’s premises, known
as Carriage inward. Freight inward etc. are debited to the
Manufacturing Account. The expenses on transporting the
goods sold from manufacturer’s premises to the customer,
known as Carriage outward, Freight outward, are debited to the
Profit & Loss A/C. The expenses on transporting new machinery
etc. purchased are debited to the Machinery A/C. i.e. that
expenses are capitalized.

b) Octroi Duty: Octroi duties mean the taxes paid to a Municipality


on goods brought within the municipal area from outside. Octroi
on purchase of goods is debited to the Manufacturing Account.
Octroi on machinery purchased is debited to the Machinery A/C.

c) Dock Dues, Custom Duties: Dock dues mean the expenses of


unloading the goods in a port. Custom duties means the taxes
paid to the Government; on goods imported from other
countries, also known as import duties. Freight, insurance, dock
dues and customs duties on imports of Raw Materials are
debited to the Manufacturing Account. However, if goods are
sold to other countries (exported), expenses on such exports
(freight, dock dues for loading the goods on ship, export duties
etc.) should be debited to the Profit & Loss Account, since they
are selling expenses. Dock dues and custom duties on
machinery imported are debited to the Machinery A/C.

(3) Wages: These include the wages paid to workers directly


engaged in production, also known as direct or productive
wages or direct labour costs. (A combined item of Wages and
Salaries appearing in the trial balance is shown in the
Manufacturing Account, while a combined item of Salaries and
Wages is shown in the Profit & Loss Account).

(4) Manufacturing Expenses: These include the expenses directly


connected to manufacture such as royalty, hire charges of
special machinery, design expenses etc. While royalty for using
know-how connected with manufacturing process is taken to
138

Manufacturing Account, royalty for use of trade mark is a selling


expense shown in the Profit and Loss Account.

(5) Factory Expenses : These include all expenses incurred at the


factory such as (a) stores, oil, grease (b) salary to supervisors
(c) power and fuel (d) repairs and maintenance of factory
building and machinery (e) depreciation of factory assets such
as factory building and machinery (f) rent, rates and taxes,
insurance, lighting of factory building and so on.

(6) Closing Stock of WIP: The value of closing stock of work-in-


process is shown on the credit side of the Manufacturing
Account.

[Note: Alternatively, instead of showing opening WIP on debit and


closing WIP on credit, the difference between the opening and
closing stocks of WIP is calculated first. If opening stock is more
than closing stock, the difference (opening stock of WIP – closing
stock of WIP) is shown on the debit side of the Manufacturing A/C;
if closing stock is more than opening stock (closing stock of WIP –
opening stock of WIP), the difference is shown on the credit side of
the Manufacturing A/C].”

(7) Sale of Scrap: Sale of scrap is shown on the credit side of the
Manufacturing Account.

(8) Cost of Production: The cost of production of goods is found


out by balancing the Manufacturing Account. The Manufacturing
Account is balanced like a ledger account. We take the totals of
both the debit and credit sides of the Manufacturing A/C. In a
Manufacturing A/C, the debit side will always be bigger than the
credit side. This indicates the Net Cost of Production of the
concern. Thus, Gross cost of production Less WIP (Closing)
and Sales of scrap = Net cost of production. We write the
amount of cost of production on the credit side of the
Manufacturing A/C and carry it down to the debit side of the
Trading Account. The cost of production (also known as cost of
manufacture or cost of goods produced is transferred to the
Trading Account in order to find out the Gross Profit or Gross
Loss on sale of finished goods.

8.2.5 CLOSING ENTRIES:

The following worksheet shows entries to be passed to


transfer the closing balances of the Goods Accounts and other
Manufacturing Expenses Accounts, to the Manufacturing Account:
139

WORKSHEET 1: CLOSING ENTRIES


(MANUFACTURING A/C)

No. Entries Amount


(1) Transfer Debit Balances : Dr. Cr.
Manufacturing Account Dr. X
To Opening Stock of WIP A/c X
To Raw Material Purchases A/c X
To Direct Purchase Expenses A/c X
To Wages A/c X
To Manufacturing Expenses A/c X
To Factory Expenses A/c X
(2) Closing Stock of WIP :
Closing Stock of WIP A/c Dr. X
To Manufacturing Account X
(3) Sales of Scrap :
Sales of Scrap A/c Dr. X
To Manufacturing Account X
(4) Transfer Cost of Production to Trading
A/c.
Trading Account Dr. X
To Manufacturing Account X

8.2.6 TRANSFER AT PRICE HIGHER-THAN-COST:

1) Transfer at Sales Price or Cost + Fixed %: We have already


seen how manufacturing account is prepared when the
manufactured items are transferred at cost to the Trading
account. However, the items produced by the manufacturing
section may be transferred to the Trading A/C at a price higher
than the cost i.e. (i) at cost plus a mark-up (e.g. cost + 25%); or
(ii) at selling price.

2) Entries for Transfer: If the goods are transferred at a higher-


than-cost price, the transfer to the Trading A/C will be credited
to the Manufacturing Account at the transfer value (i.e. loaded
price or selling price) and not at cost of manufacturing. The
excess of transfer price over the cost of manufacturing will
indicate the manufacturing profit. If, cost of manufacturing is
more than the transfer price it shows as manufacturing loss.
140

3) Closing Stock of Finished Good at Transfer Value: If some


of the manufactured goods remain unsold and form part of the
closing stock of finished goods at the year-end, such closing
stock will be valued at the transfer price in Trading A/C.

If the transfers to the Trading Account were made at cost price,


the closing stocks would also be valued at cost and no further
adjustment is needed.

If all the goods transferred at higher-than-cost have been sold, it


means that the anticipated profits have been actually earned
and no further adjustment need be made.

However, if any of the finished goods transferred to the Trading


Account at loaded price or selling price are in stock, the value of
the stock needs to be adjusted. Thus, if the cost is Rs.100 and
the goods are transferred at Rs.120, the profit element (Rs.20)
is included in the closing stock. Otherwise, it will amount to
taking credit for anticipated or unrealised profit which is against
the accounting principle of “conservatism.” Unrealised profit
included should be considered as Stock Reserve.

4) Stock Reserve: The unrealised profit in closing stock is


eliminated by creating a stock reserve in respect of the stock of
manufactured goods. The amount of stock reserve is calculated
by the following formula:

Stock reserve =

Profit Included in Transfer Price



Transfer Value of Stock
Transfer Price

5) Entry for Stock Reserve: The creation of the reserve is made


by the concern in the General Profit and Loss Account as
follows:
Profit of Loss A/c. Dr.
To Stock Reserve A/c.
(Being the reserve created for unrealised profit included in
closing stock)
6) Balance Sheet: The relevant part of the Balance Sheet will
appear as follows:
141

Balance Sheet as at….

Assets Rs.
Current Assets :
Closing Stock (Transfer Value) xx x y
Less : Stock Reserve (xx) XX
XX

7) Next Year: In the beginning of the next year, the above entry
is reversed as follows:
Stock Reserve A/c. Dr.
To Profit & Loss A/c.

8.3 TRADING ACCOUNT OF A MANUFACTURER

8.3.1 ITEMS

1) Opening Stock of Finished Goods: The opening stock of


Finished Goods (FG) is shown as the first item on the debit side
of the Trading Account.

2) Cost of Finished Goods manufactured: Next, the Cost of


goods manufactured transferred from the Manufacturing
Account is shown on debit side of the Trading Account.

3) Sales of Finished Goods: The net sales of finished goods


(sales less returns) are shown on the credit side of the Trading
Account.

4) Other Out Going of Finished Goods : Sometimes, the Trial


Balance or it may be given by way of adjustment may contain
Other Goods Accounts such as Goods Lost by Fire A/c, Goods
Withdrawn by Proprietor, Goods Distributed as Free Samples,
etc. These accounts record the cost of finished goods lost,
withdrawn or distributed. Since goods go out, these accounts
are shown on credit side. These balances are transferred on the
credit of the Trading Account.

5) Closing Stock of Finished Goods: The closing stock of


Finished Goods is shown as the next last item on the credit side
of the Trading Account.

6) Gross Profit or Gross Loss: The final result is found out by


balancing the Trading Account. The Trading Account is
balanced like a ledger account. We take the totals of both the
debit and credit sides of the Trading A/c. If the credit side is
higher, it indicates that the value of sales is more than the cost
of goods manufactured & sold. This is called the Gross Profit
142

earned by the business. Thus, Income From Goods Sold Less


Cost of Goods Sold = Gross Profit. We write the amount of
Gross Profit on the debit side and carry it down on credit side of
the Profit and Loss Account. If the debit side is higher, it
indicates that the cost of manufacture is more than the value of
sales. This is called Gross Loss. Gross Loss = Cost of Goods
Sold Less Sales. We write the amount of Gross Loss on the
credit side of the Trading A/c and carry it down to the debit side
of the Profit and Loss Account. The Gross Profit or Gross Loss
is transferred to the Profit and Loss Account in order to find out
the Net Profit or Net Loss after deducting other indirect
expenses. Thus, Gross Profit Less Expenses = Net Profit. In
case expenses are more than Gross Profit, then it amounts
to Net Loss.

8.3.2 Closing Entries:


The following worksheet shows entries to be passed to
transfer the closing balances of the Sales Accounts and other
Accounts, to the Trading Account:

WORKSHEET 2: CLOSING ENTRIES (TRADING A/C)

A/o. Entries Amount


(1) Transfer Debit Balances : Dr. Cr.
Trading Account Dr. X
To Opening Stock of Finished Goods A/c X
To Returns Inwards A/c X
(2) Transfer Credit Balances :
Sales of Finished Goods A/c. Dr. X
Finished Goods Lost/Taken/Distributed A/c X
(at cost) Dr. X
To Trading A/c X
(3) Closing Stock of Finished Goods
Closing Stock of Finished Goods A/c Dr. X
To Trading Account X
(4) Transfer Gross Profit or Gross Loss to
Profit & Loss A/c:
(i) Gross Profit :
Trading Account Dr. X
To Profit & Loss A/c X
(ii) Gross Loss :
Profit & Loss A/c Dr. X
To Trading Account X
143

8.4 PROFIT & LOSS ACCOUNT

8.4.1 Meaning

Closing balances of all nominal accounts, relating to the


remaining income and expenses are transferred to Profit & Loss
A/c. Debit side of the Profit & Loss A/c shows expenses like
Administrative Expenses, Selling Expenses, Financial Expenses,
Depreciation and other Unusual Expenses and Losses. Credit side
of the Profit & Loss A/c shows Other Business Incomes and Gains.
The balance of the Profit & Loss A/c shows the result of business
operations during the year. The net profit or net loss shown by the
Profit & Loss A/c is transferred to the Capital Account of the
proprietor.

8.4.2 FORM
Profit & Loss Account is a ledger account. Its title, is written
as “Profit & Loss Account for year ended….. “ It is divided into two
equal sides: Debit and Credit as per the specimen shown in
Worksheet 7.

8.4.3 ITEMS
The following items normally appear in a Profit & Loss
Account.
(1) Gross Profit or Gross Loss b/d : The Gross profit b/d from the
Trading Account is the first item on the credit side of the Profit &
Loss Account. If there is Gross loss, it is the first item shown on
the debit side of the Profit & Loss Account.
(2) Administrative Expenses: Administrative expenses are the
expenses incurred to plan, organize, administer and control the
business. Examples are (a) Salaries to office staff, (b) Rent,
rates, insurance, lighting of office, (c) Printing, telephones, telex,
postage, (d) Depreciation and repairs of office equipments,
building, furniture, vehicles, (e) Legal charges, Audit charges,
Bank charges etc.
(3) Selling and Distribution Expenses: Selling expenses are the
expenses incurred to create and increase demand for goods.
Distribution expenses are the expenses incurred from the time
goods sold leave the trader’s premises till the goods reach the
customer. Examples are (a)Packing materials (b) Salaries of
Sales and Distribution staff (c) Traveling, Conveyance (d)
Commission or discount on sales (Advertisement or showroom
expenses (f) Warehouse or sales office rent, rates, insurance,
lighting etc. (g) Freight outward, carriage outwards, expenses
on exports (h) Depreciation and repairs or delivery van, vehicles
etc.
144

(4) Finance & Interest Expenses: Finance expenses are the


expenses incurred to obtain loans, bank charges and cash
discount to debtors etc. The other item shown under this head is
interest paid on loans.

(5) Losses: Losses include amounts lost by the business by way of


Goods lost by fire, Goods distributed as free samples, Bad
debts, Loss on sale of fixed assets etc. These are debited to the
Profit & Loss Account.

(6) Other Income : Other income includes amounts received by


way of interest on loans given, dividends received on amounts
invested in shares, rent received from premises given on rent,
discount received, commission received, Profit on sale of fixed
assets and so on. All these amounts/incomes are credited to the
Profit & Loss Account.

(7) Gains: Gains includes amounts received by the business by


way of recovery of bad debts, subsidies or grants received etc.
These are credited to the Profit & Loss Account.

(8) Appropriations: Appropriations mean amounts transferred out


of net profits for payment of income-tax or creating a reserve
(e.g. reserve for contingencies). These appear on the debit side
of the Profit & Loss A/c. Income Tax is considered as personal
expenses. Therefore, it should be treated as Drawings.

9) Net Profit or Net Loss: The net profit or the net loss is found
out by balancing the Profit & Loss Account. The Profit & Loss
Account is balanced like a ledger account. We take the totals of
both the debit and credit sides of the Profit & Loss Account. If
the credit side is higher, it indicates that the Total Income is
more than the Total Expenses. This is called the Net Profit
earned by the business. Thus, Income Less Expenses = Net
Profit. In the next step, the amounts of income tax or transfer to
Reserves etc. (known as Rs. appropriations’ out of profits) are
debited to the Profit and Loss Account. Appropriations can be
made only after ascertaining the amount of net profits (as the
amount of income-tax depends upon the amount of net profits).
Then, write the amount of Net Profit on the debit side and
transfer it to the credit of the Capital Account.

If the debit side is higher, it indicates that the Expenses are


more than Income. This is called Net Loss. Thus, Expenses Less
Income = Net Loss. In case of net losses, there can be no
appropriations (e.g. no income-tax is payable if there is a net loss).
We write the amount of Net Loss on the credit side of the Profit &
Loss Account A/c and transfer it to the debit of the Capital Account.
The Net Profit or Net Loss belongs to the owner and hence is
145

transferred to the Capital Account. The net profit is a reward to the


owner for his money invested in the business, for his efforts in
running the business and for the risks taken by him.

8.4.4 Closing Entries:

The following work-sheet shows entries to be passed to


transfer the closing balances of the Nominal Accounts to the Profit
& Loss Account:

WORKSHEET 4: CLOSING ENTRIES (P & L A/C)

No. Entries Amount


(1) Transfer Debit Balances : Dr. Cr.
Profit & Loss Account Dr. X
To Various Expense Accounts X
To Various Losses Accounts X
(2) Transfer Credit Balances :
Various Income Accounts Dr. X
Various Gains Accounts Dr. X
To Profit & Loss Account X
(3) Appropriations :
Profit & Loss Account Dr. X
To Income-tax (Drawings) X
To Reserve (e.g. Contingency Reserve) A/c X
(4) Transfer Net Profit or Net Loss to Capital A/c
(i) Net Profit:
Profit & Loss Account Dr. X
To Capital A/c X
(ii) Net Loss :
Capital A/c X
To profit & Loss A/c X

CHECK YOUR PROGRESS

1. Define the following terms


a. Appropriations
b. Finance expenses
c. Selling and distribution expenses
d. Administration expenses
146

e. Manufacturing A/c
f. Direct Expenses
g. Stock reserve.
2. Fill in the blanks:
a. If the debit side of the Profit and Loss A/c is higher, it
indicates ----------------.
b. Gross loss is shown on the ----------------side of the P &L A/c.
c. --------- side of the Profit & Loss A/c shows Expenses.
d. The Income From Goods Sold Less Cost of Goods Sold = ---
------------------.
e. Manufacturing Account is prepared to find out cost of ---------.
f. Opening and closing balances of finished goods are shown
on the ----------------------- A/c.
3. Enlist the items to be shown on the debit side of the
Manufacturing A/c.
4. Give the formula for calculating the consumption of raw
materials.

8.5 BALANCE SHEET

8.5.1 Meaning
From the Trial Balance, all Nominal (manufacturing
Expenses) Accounts are transferred to the manufacturing and
Trading Account and all the Nominal Accounts of Income and
Expenses are transferred to the Profit & Loss Account. At this
stage, only the Real Accounts pertaining to Assets and the
Personal Accounts of debtors, creditors and liabilities remain in the
Trial Balance. All these remaining accounts are shown in a
statement known as the Balance Sheet. Balance Sheet is a
statement containing the list of all Real and Personal Accounts as
on a particular day, normally the year end. The Real Accounts and
Personal Accounts are classified in the Balance Sheet into Assets
and Liabilities. Debtors are included under Assets and Creditors
and Capital Account are shown under liabilities. Hence, Balance
Sheet also means a statement of assets and liabilities of the
business as on the last day of the accounting year. Balance Sheet,
thus, shows the financial position of the business i.e. what it
owns and what it owes.

Balance Sheet is not an account; it is a statement. As its


name suggests, it is a Sheet of Balances, remaining after the
Manufacturing, Trading and Profit & Loss Account is prepared.
While preparing a Balance Sheet, no closing entries are passed, as
the balances are not transferred from the Trial Balance, but only
listed in the Balance Sheet. Various Assets & External Liabilities
may be transferred to Capital Account by passing following entries.
147

Date Particulars L. F. Dr. Cr.


Rs. Rs.
31.3 1] Capital A/c Dr. X
To Fixed Assets A/c X
To Current Assets X
[Being various assets transferred
to capital A/c]
2] Loans A/c Dr. X
Sundry creditors A/c Dr. X
Bills Payable A/c Dr. X
Other Sunday Liabilities A/c Dr. X
To Capital A/c X

After passing above entries at the end of the year, all


accounts are closed.

In next year above entries are revised, to open books of


Accounts.

The balances appearing in the Balance Sheet are carried


forward as the opening balances of these accounts in the ledger of
the next year. A Balance Sheet need not be balanced; its totals
must always tallied. The Total Assets must always be equal to the
Total Liabilities.

8.5.2 Form:

The title is written as Balance Sheet as on… Balance Sheet


is not an Account, hence the words DR. and CR. are not required.
Balance Sheet is vertically divided into two side: Left Hand Side
and Right Hand Side. Left hand side of the Balance Sheet shows
Liabilities like Capital, Reserves, Loans, Creditors for goods,
outstanding expenses etc. Right hand side of the Balance Sheet
shows Assets e.g. Fixed Assets (Gross Cost Less Depreciation),
Investments, Current Assets like pre-paid expenses, advances,
debtors, stock, cash bank etc. (See Worksheet 8.)

8.5.3 Order:

The Various items of assets and liabilities are listed in the


order of permanence of the items. On the Assets side, the
permanent or the long term items i.e. the Fixed Assets are shown
first, followed by short term assets i.e. the current assets. On the
Liabilities side, the long term liabilities i.e. Capital and Loans are
148

shown first, followed by short term liabilities i.e. current liabilities. In


case, the items are shown in order of liquidity, the assets and
liabilities are shown in the reverse order, i.e. short term items are
shown first, followed by long term items.

8.5.4 Items:

(1) Fixed Assets: Fixed Assets are items like Goodwill, Land,
machinery, building and trucks etc, which benefit the business for a
long term. Fixed assets are not normally sold: Fixed Assets may be
tangible or intangible. Tangible Assets are items like machinery,
building etc. which physically exist (tangible means that which can
be touched). Intangible Assets are invisible items like Goodwill,
Patent, and Trade Marks etc. which do not physically exist, but do
benefit the business over a long period of time. Goodwill means the
reputation of a concern which attracts more and more customers to
it., enables to earn more super profit on Capital employed. Patent
means a legal right of an inventor or of a new product to exclusively
use or sell such product. Trade Mark is a registered name or
symbol of a product which can be used only by the owner of the
trade mark.

(2) Investments: Investments includes items like Shares,


Debentures and Savings certificates etc. which earn interest or
dividends.

(3) Fictitious Assets: Fictitious Assets include items like Deferred


Revenue Expenses, Preliminary Expenses etc. Deferred Revenue
Expenses is defined as the expenses which are carried forward as
their benefit is also available in subsequent years. To defer means
to carry forward. For example, if advertising expenses of
Rs.1,00,000 incurred in 2012 are expected to benefit the business
for 5 years, the entire amount of Rs.1,00,000 is not debited to the
Profit & Loss Account in 2012. Only 1/5th amount (Rs.20,000) is
debited to the Profit & Loss Account every year for 5 years from
2012 to 2016. The amount not yet written off at the year end will be
shown as Deferred Advertising Expenses on the Asset side in the
Balance Sheet.

(4) Current Assets: Current Assets are items like cash, debtors,
stock etc. which remain in the business only for a short time [less
than 12 months]. Current assets are constantly changed into cash.
Thus, goods are sold and cash is received, debtors pay their dues
and cash is received and so on. Current Assets also includes
Pre-paid Expenses and Income Receivable.

(5) Capital: Capital means the amount due to the owner of the
business. Capital is shown on liabilities side of the Balance Sheet
as follows:
149

Capital A/c b/d (opening balance)


Add: Net Profits for the year
Less: Net Loss for the Year
Less: Drawings
= Closing Balance of Capital

(6) Reserves: Reserve means part of profits “reserved” for future


use. It is an amount set aside out of profits to meet any unknown
sudden liability in future. Out of Net Profits, some amount is
transferred first to the Reserve, only if it is asked the only part of
profit to be transferred to reserve and only the balance is
transferred to the Capital Account.

(7) Loans: Loans include Bank Loans and the amounts borrowed
from others on which interest is paid.

(8) Current Liabilities: Current Liabilities are short term liabilities.


These include creditors for goods, outstanding expenses, various
provisions for expenses, income received in advance, Bank over
draft. Current liabilities are payable within 12 months.

CHECK YOUR PROGRESS


1. Fill in the blanks:
a. A Balance Sheet need not be balanced; its totals must
always -------------------.
b. Balance Sheet is not an Account, it is a -----------------------.
c. Left hand side of the Balance Sheet shows ----------------.
d. Right hand side of the Balance Sheet shows --------------.
e. Goodwill and patents are --------------------assets.
f. Deferred Revenue Expenses is a ----------------------asset.
g. Balance Sheet is a statement containing the list of all ---------
and ----------- Accounts.
h. Current assets are constantly changed into -----------------.
i. Current liabilities are payable within ----------months.
j. The items which earn interest or dividends are termed as ---.

2. Enlist the items shown on the assets side of the Balance Sheet.
3. Define the following terms:
a. Balance Sheet
b. Current Assets
c. Tangible Assets
d. Intangible Assets
e. Capital
f. Current Liabilities
150

8.6 SPECIMEN FORMS:

8.6.1 Specimen Form of Manufacturing Account

Dr. Manufacturing Account for the year ended… Cr.


Particulars Rs. Rs. Particulars Rs.
To Work-in-process xxx By Work-in-process xxxx
(Opening) (Closing)
To Raw materials By Sales of scrap xxxx
consumed:
Opening Stock xxx By Trading Account xxxx
Add : Purchase xxx (Cost of production
tfd Bal.)
Add : Purchase expenses
- Carriage Inward xxx
- Octroi duty xxx
- Dock dues xxx
- Custom duties xxx
Less : Purchase Returns (xxx)
Less : Closing stock of (xxx) xxxx
materials
To Direct Wages xxxx
To Direct manufacturing
expenses
To Royalty related to xxx
manufacture
To Hire of special xxx
machinery
To Design Expenses xxx xxxx
To Direct factory
expenses
To Stores, oil, grease xxx
To Salary to supervisors xxx
To Power and fuel xxx
To Repairs of factory xxx
assets
To Deprecation on factory xxx
assets
To Rent, lighting of xxx xxxx
factory building
Total xxxx Total xxxx
151

8.6.2 Trading Account for the year ended …..


Dr. Cr.
Particulars Rs. Particulars Rs.
To Opening stock (FG) xxxx By Sales xxxx
To Manufacturing Less:Return inwards xxxx xxxx
Account (cost of xxxx By Goods lost or xxxx
destroyed
Production tfd.) By Goods taken by xxxx
proprietor
To Purchase of FG By Goods given as free xxxx
sample
To Gross profit c/d xxxx By Closing stock (FG) xxxx
By Gross loss c/d xxxx
Total xxxx Total xxxx

8.6.3 WORKSHEET 7: PROFIT & LOSS ACCOUNT

Profit & Loss Account for the year ended……


Dr. Cr.
Particulars Rs. Particular Rs.
To Gross Loss xxxx By Gross Profit b/d xxxx
b/d Other Income or Gains
To Administrative xxxx By Commission received xxxx
Expenses
To Rent, insurance & xxxx By Discount received xxxx
repairs
To Office salaries xxxx By Provision for discount xxxx
To Postage, telephones, xxxx From creditors
Telex etc. xxxx By Interest on loans xxxx
To Printing & stationery xxxx Given to outsiders xxxx
To Fees (legal/audit etc.) By Income (dividend) on xxxx
To Sundry/general xxxx Investments
Expenses xxxx By Profit on sale of fixed
To Selling & Distribution xxxx Assets
Expenses xxxx By Net loss tfd. to capital
To Salesmen’s salaries, xxxx
Commission, etc, xxxx
To Traveling xxxx
152

To Carriage outwards,
Freight, duties xxxx
To Warehousing charges
To Packing expenses xxxx
To Royalties on sale xxxx
To advertising & sales xxxx
Promotion expenses
To Goods given as free
Samples
To Financial Expenses & xxxx
Interest
xxxxx
To Interest & bank xxxx
charges
To Bad debts & provision xxxx
for Bad debts
To Discount given
To provision for discount xxxx
on Debtors

Depreciation xxxx
To Depreciation on :
- Building xxxx
- Motor vehicles/delivery
vans
- Office equipments
To Unusual Expenses or
Losses
To Goods lost or
destroyed
(Cost less insurance
claim)
To Loss on sale of fixed
Assets
To Appropriations
To Reserves
To Net profit tdf. to
Capital ….. xx
Total xxxx Total xxxx
153

8.6.4 WORKSHEET 8: BALANCE SHEET :


There may be either Net Profit or Net Loss.
Balance Sheet as at ……….

Liabilities Rs. Assets Rs.


Capital A count : Fixed Assets
Balance b/d (opening) x Goodwill xxxx
Land xxxx
Add : Fresh capital x Plants & machinery xx
Brought in
Add : Net profit for the x Less : Depreciation x
Years xxxx
Less : Drawing xx Premises/Building x
xxxx
Less : Loss during the - Less Depreciation x
Year xx xxxx
Reserves Vehicles
General Reserve xx
Loans -Less : Depreciation xx
Loans from bank xx xxxx
Bank overdraft xx xxxx Furniture & fittings xx
Current Liabilities
Sundry creditors xx - Less Depreciation xx xxx

Less : Provision for xx Investments xxxx


Discount Investment in xxxx
Bills payable xx Shares/bonds xxxx
Outstanding expense xx Current Assets xxxx
Income received in Closing Stock xxxx
Advance xx xxx Debtors xx xxxx
- Less; Prov, for bad x xxxx
Debts x
- Recoverable x
- Less : Prov, for
Discounts xx
- Relisable xx
154

Loans and advance xx


Given xx
Bills receivable xx
Prepaid expenses xx
Cash at bank xx
Cash in hand
Fictitious assets
Deferred expenses
Not written off xx
Capital account debit
Balance xx xxx
Total xxxx Total xxxx

8.7 ADJUSTMENTS:

8.7.1 Meaning:

The trial Balance prepared indicates summery of all actual


transactions recorded in the Book of Accounts. The trial balance
ignores items not yet recorded in the books of accounts. e.g.
closing stock, outstanding expenses, prepaid expenses,
Depreciation, bad about etc. unless & until these items are not give
true and fair view of business operations and financial position.
These items must be recorded in books of accounts. The book
balances need to be adjusted from all items which pertains for the
period but not recorded in books. Adjustments mean recording
such items relating the current year but not appearing in the Trial
Balance.

8.7.2 Accounting:

Adjustment entries are passed in the journal proper at the


end of the year. Entries are passed by following rules of debit &
credit, then they are posted into the ledger. It should be noted that
each adjustment has two effects in the final Accounts.

Adjustments may be given below the Trial Balance, or may


be given in the Trial Balance, called implied adjustment,
155

Adjustment Journal Entries Manufacturing Balance Sheet


Trading
Profit & Loss A/c.

1) Closing Stock i. Stock of Raw Debit from Raw Show as “Stock of


(Goods Material A/c Dr material Raw Material on
Purchased but To Raw Material Purchases, or debit Asset Side”
remain unsold). . Consumed. side of
a. Raw Material. Manufacturing A/c.

b. Work in ii. Stock of work Credit side of mfg Show as “Stock of


Progress in progress A/c Dr A/c Show on credit W.I.P on Asset
To Trading A/c side of Trading A/c. Side.
Show as “Stock of
Finished Goods”
on Asset Side.
c. Finished iii. Stock of - All stock may be
Goods. Finished Goods as under Stock of
A/c Dr. To Raw Material
Trading A/c. Stock W.I.P. Stock
of Finished Goods
2) Prepaid Prepaid Deduct from the Show as “Prepaid
Expenses Expenses A/c. Dr conserved Expense Expenses” on
To Expenses. on debit side. asset side.
A/c.
3) Outstanding Expense A/c Dr Add to concerned Show on
expense related To outstanding exp. on debit side. “outstanding exp.”
to current year expenses A/c on liabilities side.
but not record /
paid.
4) Income Income Add to Concerned Show “income
Receivable Receivable A/c Dr income on credit Receivable” on
To Income A/c. side. asset side.

5) Income Income A/c Dr. Deduct from Show as |income


Received in To Income concerned income received in
advance income Received in on credit side. advance” as on
Received but not allowance A/c. liabilities side
accrued. i.e.
relates to
subsequent year.
6) Depreciation Depreciation A/c Depreciation on Deduct
Dr. factory Assets debit Depreciation from
To Fixed Asset to mfg. a/c Concerned Asset
A/c Depreciation on on asset side. OR
other asset debit to Add to provision
profit & A/c. for depreciation
A/c
156

7) Goods Loss by Fire/Theft a)” Loss by fire” -


destroyed Lost & A/c. Dr. To debit A/c profit &
Stolen. trading A/c. or loss A/c.
a) Uninsured To purchases
goods. Good lost A/c. b) Credit Cost of
goods lost to
trading A/c.
8) Unrecorded Sundry debtors Add to sales on Add to Sunday
Sales. A/c Dr To Sales Credit side of debtors on assets
A.c. trading a/c. side.

9) Unrecorded
Sales (return) Sales Return A/c Deduct from Sales Deduct from
Good Returned Dr. Credit side of Sunday Debtor on
by Customer but Trading A/c. Asset Side.
To Sundry
Credit not, is not
Debtor.
Prepared.
Recorded.
10) Unrecorded Purchase A/c Dr Add to Purchase on Add to Sunday
Purchases: To Supplier A/c. debit side of mfg. Creditors on the
Goods Purchase A/c Or Trading A/c. Liabilities Side.
but not recorded
in Purchase day
book.
11) Unrecorded Supplier A/c Dr. Deduct from Deduct from
Purchase return. To Purchase Purchase on debit Sunday Creditors
Goods retuned Return A/c side of mfg. A/c Or on the liabilities
to suppliers but Trading A/c.. side.
debit note not
prepaid
preceded.
12) Goods Free samples A/c Deceit to P & L A/c -
distributed as Dr as Advertisement
free sample. To Trading A/c. A/c
Credit to Trading
A/c as goods
distributed as free
samples.
13] Good Drawings A/c Dr. Credit to Trading Deduct from
withdrew by To Trading A/c. A/c as personal use capital on
owner for goods withdrawn Liabilities Side
personal use for own use.
14] Interest on Interest A/c Dr. Added to interest Add to Loon, as
Loan outstanding To Loon A/c on debit side Profit interest
& Loss A/C. outstanding on
Liabilities Side.
157

15) Good Sold a)For consolation a) Deduct from a) Deduct from


on approve not of Sales Sales on Trading Sunday Debtor on
yet approved. a) at sales Price A/c Credit Side. asset side.
Goods sold on b) Credit to Trading b) Add to Closing
Sales A/c Dr To
Sales or Return A/c on stock with Stock on asset
Customer
basis Customer customer i.e. add to side.
save right to b) For stock with
closing stock.
return goods Customer at cost.
Stock on approval
A/c Dr
To Trading A/c.
16)Baddebts Bad debts A/c Dr Add Bad depts. on Deduct from
/Further bad To Sunday debit side of Profit Sunday debtors an
debit to be Debtors. & Loss A/c. [as new Assets Side.
written off bad debts]
17) Provision for Profit & Loss Ac Profit & loss A/c Asset Side Sundry
Bad Debts/ Dr. Debit Side Debtors x –
doubtful debts: To R.D.D. A/c To new BDD x (Adj) Further / New Bod
Provision made debts)x) x – New
+ Bad debts x (Trial
for future out of R.d.d. X = x (x)
Bal)
present credit final Balance after
sales. + New Bad debts all other
x adjustment tilting
(adj)
x to Sunday
Debtors.
x
-Old R.D.D
x
(T.Bal)
18) Reserves for Discount A/c Dr When old R.D.D is Deduct from
Discount on To R.F.D.C. A/c more than required Sunday debtors on
Debtors: should be credited Asset side, after
Provision made to profit & loss A/c. adjustment as
for Discount on Add to discount on R.D.D.
Debtors: the debit side of the
Profit & Loss A/c.
19) Reserve for Reserve for Add it discount on Deduct from
discount on discount on Credit side of the sundry Creditors
Creditors: Creditors A/c Dr Profit & Loss A/c. on Liabilities Side.
To Discount A/c.

8.7.3 HIDDEN ADJUSTMENT/TEMPLED ADJUSTMENT.

Sometimes information about adjustments is given in the trial


balance. These adjustments should be considered while preparing
final accounts.

For example, Trial balance shows the following information.


158

Trial Balance as on 31st December 2012.

No. Particulars Rs. Rs.


1 Rent (11 months) 22,000
2 Insurance (For the Year 31.3.13) 12,000
3 10% Govt Bonds (30-06-12) 1,00,000
4 Interest on Govt Bonds - 2,500.
5 12% Investment (Face value Rs. 1.12.000
1,00,000)
6 Interest on investment - 9,000.
7 18% Bank Loan (01.10.12) 2,00,000
8 Advertisement (3 years) 30,000.
9 Building Rent (3/4 Factory) 60,000

Solution: Explanation:

1) Rent Paid for 11 months Rs. 22,000. It implies that Rent for one
month is outstanding.
= 22,000 / 11 = Rs. 2,000.
Add to Rent on Debit side of P & L A/c, Show in the Balance Sheet
Liabilities

2) Insurance Premium Paid for the year ended 31/03/13. Trial


Balance as on 31/12/12.

Therefore, 3 months insurance is paid in advanced  Prepaid


Insurance = 12,000 x 3/12 = Rs. 3,000/-.
Less from insurance on P & L A/c. Debit Side and write on Asset
side of Balance Sheet.

3 and 4: 10% Govt Bonds Purchased on 30-06-12; Interest on


6
Bonds for SDC months = 1,00,000 x 10% x = Rs. 5,000/-. Out of
12
Rs.5,000, Rs.2,500 are only received. Balance interest
Rs.2,500/- still not received. It is outstanding. Income on date of
Balance Sheet. Add to interest on credit side of P & L. A/c. and
show on asset side of Balance sheet as Interest Account bat not
received.

5 and 6: 12% Investment face value of Rs.1,00,000 Purchase for


Rs.1,12,000. Interest on this investment received Rs.9,000 only.
Interest should be always calculated on face value.
Interest for the year = 1,00,000 x 12%
= Rs.12,000/-.
159

Out of this, Rs.9,000/- only received. Balance Rs.3,000 still


receivable. Add to credit side of P & L A/c to income and show on
assets side of Balance sheet as Interest Receivable.

7. 18% Bank Loan taken on 1st Oct. 12.


Therefore, 3 months interest due to be provided
Outstanding Interest = 2,00,000 x 18% x 3/12
= Rs. 9,000/-.
Add to interest on Debit side of P & L A/c and add to Bank Loan on
Liabilities Side of Balance Sheet.

8. Advertisement Rs.30,000 paid for 3 years.


2
Two years advertisement 3,00,000 x = Rs. 20,000 is prepaid.
3
Prepaid Advertisement Rs.20,000, deduction from
Advertisement on debit side of P & L A/c show on Assets Side of
Balance Sheet, as a Prepaid Insurance.

9. Building Rent Rs.60,000.


3 3
Offices. Therefore, 60,000 x = Rs.45,000 should be
4 4
1
debited to the Manufacturing A/c. balance (i.e. ) Rs.15,000 to be
4
debited to Profit & Loss A/c.

Journal Entries

No Particulars J.H. Rs. Rs.


1 Rent A/c. Dr. 2000
To Outstanding Rent A/c 2000
2 Prepaid Insurance A/c Dr. 3000
To insurance A/c 3000
3-4 Interest Receivable A/c Dr. 2500
To interest. A/c 2500
5-6 Interest Receivable A/c Dr. 3000
To Interest A/c. 3000
7 Interest A/c. Dr. 9000
To 18% Bank Loan. A/c 9000
8 Prepaid Advertisement A/c Dr. 20,000
To Advertisement A/c 20,000
9 Manufacturing A/c Dr. 45,000
Profit & Loss A/c Dr. 15,000
To Building Rent A/c. 60,000.
160

8.8 EXERCISES

1. Write Short note on


a. Manufacturing A/c
b. Work in Progress.
c. Transfer of Goods at price higher than cost.
d. Stock Reserve
e. Trading A/c
f. Current Assets
2. Explain goods sold on sales or return basis.
3. Why Manufacturing A/c is prepared.
4. Explain how to calculate Raw Material consumed.

5. Objective Type Questions:

a. Multiple Choice Question

1. Debit Balance of Manufacturing A/c show:


a) Gross Profit b) Gross Loss,
c) Net Loss d) None of above.

2. Carriage inward shown in Trial Balance debited to:


a) Manufacturing A/c b) Profit & Loss A/c
c) Capital A/c d) Selling & Distribution exp.

3. Raw Material Consumed is transferred to:


a) Trading A/c b) Purchase A/c
c) Manufacturing A/c d) Balance Sheet.

4. Sale of scrap is credited to:


a) Manufacturing A/c. b) Cash/Bank A/c
c) Raw Material Consumer d) Trading A/c.

5. Credit Balance in Trading A/c shows.


a) Net Loss b) Cost of Goods sold
c) Gross Profit d) Gross Loss.

6. Carriage on machinery purchased debited to:


a) Manufacturing A/c b) Trading A/c
c) Plant & Machinery A/c d) Trading A/c

7. Prepaid Insurance shown in the Trial Balance is shown in :


a) Profit & Loss A/c
b) Liability side of Balance Sheet
c) Asset Side of Balance Sheet
d) Deducted insurance on Dr. side of Profit & Loss A/c.
161

8. Consumption of Raw Materials shown to:


a) Credit Side of Trading A/c
b) Credit side of Profit a Loss A/c
c) Debit Side of Manufacturing A/c
d) Purchases A/c
9. Stock of Raw Material given in Trial Balance is shown on:
a) Debit Side of Manufacturing A/c
b) Credit side of manufacturing A/c
c) Asset gives of the balance sheet
10. Opening work-in-progress appearing in the trial balance is
shown on:
a) Debit Side of manufacturing A/c
b) Trading A/c.
c) Credit side of manufacturing A/c
d) Asses side of Balance sheet
e) Non-of the above.
11. Depreciation of Factory Building is shown under.
a) Trading A/c b) Profit & Loss A/c.
c) Manufacturing A/c d) All of the above.
12. Trade Mark is:
a) Current Assets b) Fixed Asses
c) Intangible Asset d) Movable properties
13. Opening Stock of Raw Materials is :
a) Added to purchase of finished Goods.
b) Deducted from Raw Material Consumed.
c) Added to purchase of Raw Materials.
d) None of the above.
14. Reserve for Discount on creditors shows :
a) Credit Balance b) Debit Balance
c) Nil Balance d) Non of above
15. Manufacturing A/c balance always shows.
a) Gross Profit b) Net Profit
c) Cost of production d) Cost of sales.
16. Goodwill is:
a) Current Assets b) Fictitious Assets
c) Fixed Assets d) Terrible Assets
17. Trade Discount shall be shown:
a) Debit Side of Mfg. A/c b) Deducted from purchases
c) Debit side of p & L A/c. d) None of the above

Ans. 1-d, 2-a, 3-c, 4-a, 5-c, 6-c, 7-c, 8-c, 9-a, 10-a, 11-c, 12-c, 13-c,
14-a, 15-c, 16-b, 17-d.
162

b. Fill in The Blanks.


1) Debit balance of Manufacturing A/c indicates _______.
2) Plant & machinery is a --------------- asset.
3) Income received in advance is shown on _______ side of
Balance Sheet.
4) Income Tax Paid is transferred to ________ A/c.
5) Goods distributed as free samples is credited to _____ A/c.
6) Goods withdrawn by proprietor is credited to ______ A./c.
7) Commission paid is credited to ______ A/c.
8) _______ shows the finical position of business.
9) Manufacturing A/c is prepared only by ______.
10) Debit balance of Profit & Loss A/c shows ________.
11) Net Profit is transferred to ________ A/c.
12) Prepaid Insurance is credited to ______ A/c.
13) Depreciation on office equipments is credited to _______ A/c.
14) Bad debt written off is credited to _____ A/c.
15) _______ note is prepared for sales return of goods.
16) Gross Profit, 25% on cost is equal to _____ % on sales.
17) Bank Overdraft is shown on ______ side of Balance Sheet.
18) Stock of Stationery is shown on ______ side of Balance Sheet.
19) Carriage paid on furniture purchased is debited to _______ A/c.
20) Debit balance of Manufacturing A/c is transferred to ____ A/c.
21) Carriage outward paid is credited to _______ A/c.
22) Opening stock of work in progress is debited to _______ A/c.
23) Recovery of bad debts is credited _______ A/c.
24) Octroi paid on plant purchased is debited to ________ A/c.

Ans.
1) Cost of production, 2)Fixed, 3) Liabilities,
4) Drawings, 5) Trading A/c, 6) Trading A/c
7) Cash A/c Bank A/c, 8) Balance Sheet 9) Manufacturer
10) Net Loss 11) Capital A/c 12) Insurance A/c,
13) Office Equipment 14) Sundry debtors 15) Credit Note
16)20% 17) Liabilities 18) Assets
19) Furniture 20) Trading 21) Cash / Bank A/c,
22) Manufacturing 23) P & L 24) Plant
163

c. Match the following Columns:


1)
COLUMN A COLUMN B
a) Purchase of Raw Material i) Credit Balance
b) Bank Overdraft ii) Assets side of Balance Sheet.
c) Outstanding Wages iii) Manufacturing A/c
d) Prepaid Insurance iv) Capital A/c
e) Goodwill v) Liabilities side
vi) Intangible Assts
Ans. a) - iii, b)- i c)v d)- ii e)- vi

2)
COLUMN C COLUMN D
i) Income due but not received a) Bills Payable
ii) Current Liabilities b) Manufacturing A/c
iii) Tallied Balance sheet c) Carriage paid on Good sold
iv) Carriage Inward d) Capital A/c
v) Drawings e) Profit Loss A/c
f) Asset side of Balance Sheet
j) Arithmetical accountancy
Ans. i) f, ii) – a, iii) – j, iv) b, v) –d

3)
COLUMN E COLUMN F
i) Raw Material consumed a) Profit & Loss A/c Credit Side
ii) Profit on Sale of Assets b) Added to income.
iii) Accrued Income c) Tangible Assets
iv) Furniture d) Manufacturing A/c
v) Outstanding Expenses in Trial e) Profit & Loss A/c Debit Side
Balance
f) Liabilities Side
g) Fixed Asset
Ans. i) – d, ii) – a, iii) – b, iv) – g, v) – f
164

d. State Whether the following statements are True or False :-

1) Trial Balance shows financial position of the concern.


2) Goodwill written off is credited to Trading A/c
3) Credit balance of Profit & Loss A/c is net profit
4) Interest on capital is credited to Drawing A/c
5) The Drawing A/c always shows debit balance.
6) Income received in advance is asset.
7)Provision for Depreciation is also known as Accumulated
Depreciation.
8) Interest on Drawings is debited to Profit and Loss A/c.
9) Stock is always valued at cost.
10) Prepaid expenses in Trial balance is shown on Assets side of
the Balance Sheet.
11) Withdrawal of cash by the proprietor is credited to Cash A/c.
12) Trading A/c shows Net Profit or Net Loss.
13) All income and expenses are shown in the Balance Sheet.
14) Balance Sheet is always prepared for the year ended.
15) Carriage Outwards is credited to Trading A/c.
16) Capital A/c of proprietor is always shown on Asset Side of
Balance Sheet.
17) Manufacturing A/c is prepared to find out Gross Profit.
18) Interest on investment is calculated on Face Value of the
investment.

Ans. False: 1,2, 4, 6, 7, 9, 12, 13, 14, 15, 16, 17


True: 3, 5, 8, 10, 11, 18


165

9
FINAL ACCOUNTS II

UNIT STRUCTURE

9.0 Objectives
9.1 Solved Problems
9.2 Exercise

9.0 OBJECTIVES

After studying the unit students will be able to solve the


practical problems on final accounts.

9.1 SOLVED PROBLEMS

Illustration 1: (Mfg. & Tr. A/c)


From the following particulars, prepare a Manufacturing
Account and a Trading Account for the year ended 31-3-2018.

Particulars Rs. Particulars Rs.


Raw Materials 12,000 Carriage Inwards 1,000
(1-4-2012)
Work –in-Progress 8,000 Returns Outward 2,000
(1-4-2012)
Finished Goods 9,000 Royalty on 1,000
(1-4-2012 Production
Purchase of Raw 80,000 Purchase of Finished 8,000
Materials goods
Direct Wages 10,000 Carriage Outwards 500
Indirect Wages 8,000 Fuel and Power 2,500
Sales 1,74,000 Repairs and 1,500
Maintenance
Returns Inward 5,000 Raw Materials (31-3- 6,000
2013)
Depreciation on 4,000 Work-in-Progress 2,500
Factory Assets (31-3-2013)
Purchase of 37,000 Finished Goods (31- 5,000
Finished Goods 3-2013)
166

Adjustments:

(i) Outstanding Direct Wages amounted to Rs. 3,000; (ii) Prepaid


Fuel and Power amounted to Rs.500.

Manufacturing Account
For the year ended 31-3-2018
Dr Cr
Particulars Rs. Rs. Particulars Rs.
To Work-in-Progress 8,000 By Work-in- 2,500
(Opening Progress
(Closing)
To Raw Materials By Trading A/c 1,20,000
consumed :
Opening Stock 12,000 (Cost of
Production
transferred)
Add : Purchase 80,000
Add : Carriage 1,000
Inward
93,000
Less : Returns 2,000
outward
91,000
Less : Closing Stock 6,000 85,000
To Direct Wages 10,000
Add : Outstanding 3,000 13,000
To Manufacturing
Expenses :
- Royalty on 1,000
Production
To factory Expenses
:
- Indirect Wages 8,000
- Depreciation on 4,000
Factory Assets
- Fuel and Power
2,500
Less : Prepaid 500 2,000
- Repairs and 1,500 15,500
maintenance
1,22,500 1,22,500
167

Trading Account
For the year ended 31-3-2018
Dr Cr
Particulars Rs. Particulars Rs. Rs.
To Opening stock 9,000 By Sales 1,74,000
(FG)
To Manufacturing 1,20,000 Less : Returns 5,000 1,69,000
A/c (Cost of Inward
Production tfd.)
To Purchase (FG)
37,000 By Closing 5,000
To Gross Profit c/d
(tfd. To P & L A/C) 8,000 Stock (FG)

1,74,000 1,74,000

Note: The concern is a manufacturer as well as a trader. Hence the


Trading a/c shows purchase of finished goods (for re-sale) and
closing stock of such goods held for re-sale.

Illustration 2: (Mfg. Tr., P & L A/c + Adjustments)

The following information is given to you from the books of a


manufacturer in respect of the year ending 31st March, 2018.

Particulars Rs. Particulars Rs.


Stock of Raw 25,000 Electricity & 6,000
Material (1-4-2017) Telephone
Freight Inward 8,500 Selling Expenses 6,000
Freight Outward 6,000 Miscellaneous 14,000
Expenses
Direct Wages 18,000 Stock of Finished 30,000
Goods : (31-3-2018)
Indirect Wages 14,000 Provision for Doubtful 8,500
Debts
Sales 4,80,000 Depreciation on Plant 4,000
and Machinery
Stationery 1,500 Depreciation of
Office
Traveling Expenses 5,000 Furniture and 3,000
Equipments
Salaries (H.O.) 26,000 Repairs to Plant and 4,650
Machinery
168

Factory Expenses 26,000 Sale of Scrap 3,700


Interest on Loan 1,800 Purchase of Raw 2,50,000
paid Materials
Returns-Inward 5,000 Coal Consumed 9,000
Returns-outward 3,500 Work-in-progress 7,000
(1-4-2017)
Power and fuel 8,000 Bank Interest 2,600
received

Adjustments necessary for the following:

(a) Finished goods worth Rs.5,000 were distributed as free


samples.
(b) A loan was obtained on 1st October, 2017 for Rs. 50,000
carrying interest 10% p.a.
(c) Bad debts to be written off Rs..750 and provision for doubtful
debts to be maintained Rs.7,000.
(d) Electricity and Telephone to be apportioned as Factory 3/5th
and Office 2/5th.
(e) A fire occurred destroying finished goods worth Rs.15,000.
Insurance Company admitted a claim of Rs.12,000 not yet
received.
(f) Stock on 31-3-2018 stationery in hand Rs.150, Raw Materials
Rs.22,000.Work-in-Progress Rs.4,000, Finished Goods
Rs.40,000.

You are required to prepare the Manufacturing Account and


Trading Account and Profit and Loss Account for the year ended on
31st March 2018. (ICWA adapted)
169

Solution:
Manufacturing Account
For the year ended 31-3-2018
Dr. Cr.
Particulars Rs. Rs. Particulars Rs.
To Work-in Progress 7,000 By Work-in 4,000
(Opening) Progress
(Closing)
To Raw Materials By Sale of scrap 3,700
Consumed :
Opening Stock 25,000 By Trading A/c 3,44,550
Add : Purchases 2,50,000 (Cost of
production tfd.)
Add : Carriage 8,500
Inwards
2,83,500
Less : Returns 3,500
outward (-)
2,80,000
Less : Closing Stock 22,000 2,58,000
To Wages 18,000
To Factory
Expenses :
Wages indirect 14,000
Factory expenses 26,000
Power and fuel 8,000
Coal consumed 9,000
Electricity and 3,600
telephone
(3/5 x 6,000)
Depreciation on 4,000
Machinery
Repairs to Plant 4,650 69,250
3,52,250 3,52,250
170

Trading and Profit & Loss Account


For the Year ended 31-3-2018
Dr. Cr.
Particulars Rs. Rs. Particulars Rs. Rs.
To Opening 30,000 By Sales 4,18,000
Stock (FG)
To 3,44,550 Less : 5,000 4,13,000
Manufacturing Returns
A/c
(Cost of By Goods
production distributed
efd.) as
To Gross Profit 98,450 Free 5,000
c/d samples
By Goods 15,000
destroyed
by fire
By Closing 40,000
Stock (FG)
4,73,000 4,73,000
To Salaries 26,000 By Gross 98,450
Profit b/d
To Electricity & 2,400 By Bank 2,600
Telephone Interest
received
(2/5x6,000) By Provision 750
for doubtful
To Stationery 1,500 Debts not
required
Less : Stock- 150 1,350 (8,500-750-
in-hand 7,000)
To Interest on 1,800
loan
Add : 700 2,500
Outstanding
[(50,000 x 6/1 700
2 x 10% -
1,800]
To Traveling 5,000
expenses
To Selling 6,000
expenses
To Fright 6,000
outward
171

To 14,000
Miscellaneous
expenses
To Loss by fire 15,000
Less : Claim
admitted by
Insurance Co. 12,000 3,000
To
Depreciation
Office
Furniture & 3,000
Equipments
To 5,000
Advertisement
s
(free samples)
To Net profit 27,550
tfd. To Capital
A/c.
1,01,800 1,01,800

Illustration 3:
Vinayaka’s Trial Balance as on 31st March 2012 is as follows:

Particulars Dr. Rs. Cr. Particulars Dr. Rs. Cr. Rs.


Rs.
Opening Printing and 5,200
Stock Stationery
- Raw 2,50,000 Bank Charges 2,500
Materials
- Work-in- 80,000 Traveling 10,000
Progress Expenses
- Finished 2,20,000 Discount 3,300
Goods
Purchases 2,15,000 Sales Return 11,000
Buildings 1,50,000 Advertisement 5,500
Plant & 3,60,000 Sales 7,80,000
Machinery
Furniture 40,000 Capital 8,50,000
Trade Mark 30,000 Sundry 52,000
Creditors
172

Wages 83,000 Sundry 82,500


Debtors
Factory 4,000 Discount 2,500
Taxes
Motive 9,000 Miscellaneous 5,500
Power Expenses
Factory 5,000 Bills Payable 34,000
Insurance
Salary to 11,000 Bill 16,000
Office Staff Receivable
Office Rent 10,500 Corporation 98,000
Bank
Carriage 2,500 Cash on hand 9,000
Inward
17,18,500 17,18,500

Adjustments:

(1) Closing Stock: Rs.


Raw Materials 85,000
Work-in-Progress 30,000
Finished Goods 2,05,000
(2) Factory taxes prepaid Rs.2,000
(3) Depreciation: Furniture 10%
Plant & Machinery 15%
Trade Mark 20%
Building 5%

Prepare Manufacturing, Trading and Profit & Loss Account for the
financial year 2017-18 and Balance Sheet as on 31-3-2018.
(IDE, Mar. 2000, adapted)
173

Solution:

VINAYAK
Manufacturing & Trading Account
For the year ended 31-3-2018
Dr. Cr.
Particulars Rs. Rs. Particulars Rs. Rs.
To Work-in- 80,000 By Work- 30,000
process in-process
(Opng.) (CI.)
To Raw By Trading 5,85,500
materials Account
consumed: (Cost of
Opening 2,50,000 production
Stock tfd.)
Add : 2,15,000
Purchase
- Carriage 2,500
Inward 4,67,500
Less : Closing 85,000 3,82,500
stock
To Direct 83,000
Wages
To Direct
factory
expenses
- Factory 4,000
Taxes
Less : 2,000 2,000
Prepaid taxes
To Motive 9,000
Power
- Factory 5,000
Insurance
To
Depreciation
Plant & 54,000
Machinery
(15%)
6,15,500 6,15,000
174

To Opening 2,20,000 By Sales 7,80,000


stock (FG)
To Less : 11,000 7,69,000
Manufacturing Return
Account Inwards
(Cost of 5,85,500 By Closing 2,05,000
production stock (FG)
tfd.).
To Gross 1,68,500
profit c/d
9,74,000 9,74,000

Profit & Loss Account


For the year ended 31-3-2018
Dr Cr
Particulars Rs. Rs. Particulars Rs.
To Salaries to 11,000 By Gross Profit 1,68,500
Office Staff B/d
To Office Rent 10,500 By Discount 2,500
Received
To Printing & 5,200
stationery
To Bank charges 2,500
To Traveling 10,000
Expenses
To Miscellaneous 5,500
Expenses
To Advertisement 5,500
To Discount 3,300
To Depreciation on
- Tr. Mark (20%) 6,000
- Building (5%) 7,500
- Furniture (10%) 4,000 17,500
To Net profit tfd. 1,00,000
To capital
1,71,000 1,71,000
175

Balance Sheet As At 31-3-2018

Liabilities Rs. Rs. Assets Rs. Rs.


Capital Fixed Assets :
Account :
Balance 8,50,000 Building 1,50,000
b/d
(opening)
Add:-Net 1,00,000 9,50,000 Less: Depreciation -7,500 1,42,500
profit for @5%
the years
Current Plant & machinery 3,60,000
Liabilities :
Sundry 52,000 Less : Depreciation 54,000 3,06,000
Creditors @15%
Bills 34,000 Furniture 40,000
Payable
Less : Depreciation 4,000 36,000
@10%
Trade Mark 30,000
Less : Depreciation 6,000 24,000
@20%
Current Assets :
Closing Stock :
- Raw Materials 85,000
- Work-in-Progress 30,000
- Finished Goods 2,05,000 3,20,000
Debtors 82,500
Bills receivable 16,000
Prepaid taxes 2,000
Corporation Bank 98,000
Cash in hand 9,000
10,36,000 10,36,000
176

Illustration 4:
Amar Chemicals has the following Ledger Balance as on 31st
March 2018.

Particulars Dr. Rs. Cr. Rs. Particulars Dr. Rs. Cr. Rs.
Goodwill 50,000 Net Sales 11,00,000
Factory 20,000 Miscellaneous 4,000
Shed Income
Machinery 1,30,000 Bad Debts 5,000
Reserve
Furniture 8,000 Purchase of 8,60,000
Materials
Investments 10,000 Freight on 50,000
Materials
Capital 1,95,000 Factory Power 15,000
Bank Loan 3,00,000 Salaries and
Wages
Creditors 1,50,000 - Factory 1,50,000
Debtors 1,35,000 - Office 65,000
Stock on Repairs and 2,500
1-4-2018 Renewals
- Materials 1,30,000 Rent and Taxes 16,500
-Work-in- 7,500 Insurance 3,900
Progress
-Finished 82,500 General 18,100
Goods Expenses
17,54,000 17,54,000

The following additional information is available:

(1)Closing Stock: Materials Rs.2,10,000; Work-in-Progress


Rs.12,500 and Finished Goods Rs.2,07,500.

(2) Depreciation to be provided at 2.5% on Factory Shed, 10%


on Machinery and 15% on Furniture.

(3) Repairs and rent and taxes are to be apportioned between


Factory and Office in the ratio of 3: 2.

(4) Reserve for bad and doubtful debts are to be provided at 4% on


debtors.

(5) Insurance Premium covers a period of one month in advance.


177

You are required to prepare Manufacturing, Trading, and Profit and


Loss Account for the year ended 31st March 2018 and Balance
Sheet as on that date.
(Mumbai, Nov. 1998, adapted)

Solution:

AMAR CHEMICALS
Manufacturing & Trading Account
For the year ended 31-03-2018
Dr Cr
Particulars Rs. Rs. Particulars Rs.
To Work-in- 7,500 By Work-in- 12,500
process(Opng.) process (CI.)
To Raw By Trading 10,14,900
materials Account
consumed : (Cost of
Opening Stock Production
1,30,000 efd.)
Add : Purchase
8,60,000
Add : Freight on
Materials 50,000

10,40,000
Less: Closing 2,10,000 8,30,000
stock
To Direct
factory
expenses
- Factory Power 15,000
- Salary & 1,50,000
wages
- Repairs etc. 1,500
(3/5)
- Rent & Taxes 9,900
(3/5)
- Depreciation
on factory
assets
Factory shed 500
- Machinery 13,000 1,89,900
10,27,400 10,27,400
178

To Opening 82,500 By Sales 11,00,000


stock (FG)
To 10,14,900 By Closing 2,07,500
Manufacturing stock (FG)
Account (cost of
Production tfd.)
To Gross profit 2,10,100
c/d
13,07,500 13,07,500

Profit & Loss Account


For the year ended 31-03-2018
Dr Cr
Particulars Rs. Rs. Particulars Rs.
To Office Salary & Wages 65,000 By Gross profit b/d 2,10,100
To Repairs & Renewals 1,000 By Miscellaneous 4,000
(2/5) Income
To Rent & Taxes (2/5) 6,600
To Insurance 3,900
Less : Prepaid 325 3,575
(3,900 x 1/12)
To General Expenses 18,100
To Depreciation on 1,200
Furniture
To Reserve for Doubtful 5,400
Debts
Less : Old RDD 5,000 400
To Net profit tfd. To capital 1,18,225
2,14,100 2,14,100
179

Balance Sheet
As At 31-03-18

Liabilities Rs. Rs. Assets Rs. Rs.


Capital Fixed
Account : Assets :
Balance b/d 1,95,000 Goodwill 50,000
(opening)
Add : Net 1,18,225 3,13,225 Machinery 1,30,000
profit for the
year
Loans : Less : 13,000 1,17,000
Depreciation
@10%
Loans from 3,00,000 Factory 20,000
bank Shed
Current Less : 500 19,500
Liabilities : Depreciation
@2.5%
Sundry 1,50,000 Furniture 8,000
creditors
Less 1,200 6,800
Depreciation
@15%
Investment 10,000
Current
Assets :
Closing
Stock
- Raw 2,10,000
material
- Work-in- 12,500
process
- Finished 2,07,500 4,30,000
goods
Debtors 1,35,000
Less : Prov. 5,400
for bad
1,29,600
debts
325
Prepaid
insurance
7,63,225 7,63,225
180

Illustration 5:

Following is the Trial Balance of Mrs. Rashmi as on 31-3-2018

Particulars Dr. Rs. Cr. Rs. Particulars Dr. Rs. Cr. Rs.
Capital/Drawings 40,000 8,00,000 Printing and 41,400
Stationery
Opening Stock Office Rent 64,600
* Raw Materials 50,800 Bills 3,01,000
Receivable
* Work in 25,800 Bills 1,00,000
progress Payable
* Finished goods 2,18,000 Sundry 6,00,000 4,00,000
Debtors
and
Creditors
Purchase of 22,24,000 Plant and 16,00,000
Raw Materials Machinery
Wages 79,200 Motor Car 6,00,000
Power and Fuel 48,500 Returns 24,000 30,000
* Factory Rent 25,000 Interest @ 22,000
14% on
Investments
Carnage 34,700 Investments 2,00,000
outward (1-4-2011)
48,74,000 Bad Debts 10,000
Ins. Durance 51,000 Provision
Premium for Bad and
Cr.
Discount 5,000 19,000 Doubtful 6,000
debts
Life 8,000
Insurance
Premium
paid
62,51,000 62,51,000
181

a) Closing Stock Cost Price Market Price


Raw Materials 90,000 1,00,000
Work in Progress 90,000 50,000
Finished Goods 4,00,000 3,60,000
b) Depreciate Plant & Machinery @ 15% p.a. and Motor Car @
20% p.a.
c) General Insurance prepaid was Rs.9,000.
d) Provide for outstanding factory rent Rs.13,000.
e) Finished goods costing Rs.20,000 and Raw materials costing
Rs.30,000 were destroyed by fire. Insurance Company
admitted claim of Rs.15,000 for finished goods and Rs.20,000
for Raw Materials by the date of Balance Sheet.
f) Write off Rs. 20,000 as Bad debts.
g) Create provision for doubtful debts and provision for discount
on debtors @ 5% and 2% respectively.
h) On 30-3-2018 goods costing Rs.40,000 were purchased on
credit (included in closing stock) which remained unrecorded.
i) Purchase include Rs.80,000 in respect of Plant and
Machinery purchased on 1-10-2011.
j) Proprietor had withdrawn goods at sale price of Rs.30,000
which included profit element of 20% on cost.

This amount was recorded through sales register and was wrongly
debited to Mrs. Rama’s (Debtor) Account. Being the Accountant of
Mrs. Rashmi, you are required to prepare Manufacturing, Trading
and Profit and Loss Account for year ended 31st March, 2018 and
Balance Sheet as at the date.
(Oct. 1996)
182

Solution:
Dr. Mrs. RASHMI
Manufacturing Account
For the year ended 31-03-2018
Dr. Cr.
Particulars Rs. Rs. Particulars Rs.
To Work-in- 25,800 By Work-in- 50,000
Progress Progress
(Opening) (Closing)
To Raw Materials By Trading 24,72,300
consumed : A/c (Cost of
production
transferred)
Opening Stock 50,800
Add : Purchases 22,24,000
Add : Unrecorded 40,000
purchases
Less : Purchases 30,000
Returns
Less : Machinery
Purchased 80,000
Less : Destroyed 30,000
by fire
Less : Closing 90,000 20,84,800
Stock
To Wages 79,200
To Factory
Expenses.
Factory Rent 25,000
Add : Outstanding 13,000
38,000
Power and Fuel 48,500
Depreciation : 2,46,000 3,32,500
Plant & Machinery
25,22,300 25,22,300
183

Trading and Profit and Loss Account


For the year ended 31-3-2018
Dr. Cr.
Particulars Rs. Rs. Particulars Rs. Rs.
To Opening stock 2,18,000 By Sales 48,74,000
(FG)
To Manufacturing 24,72,300 Less : Sales 24,000
A/c returns
(Cost of Production 48,50,000
tfd.)
To Gross profit c/d 25,34,700 Less : Goods 30,000 48,20,000
for personal
use
By Goods for 25,000
personal use
(cost)
By Goods 20,000
destroyed by
fire
By Closing 3,60,000
stock (FG)
52,25,000 52,25,000
To Carriage 34,700 By Gross 25,34,700
Outwards Profit b/d
To Discount Allowed 5,000 By Discount 19,000
Received
To Printing and 41,400 By Interest on 22,000
Stationery Investments
To Insurance 51,000 Add : Interest 6,000 28,000
Receivable
Less : Prepaid 9,000 42,000
To Office Rent 64,600
To Bad Debts 10,000
Add : Further Bad 20,000
Debts
Add : New R.D.D. 27,500
Less : Old R.D.D. 6,000 51,500
To Provision for 10,450
discount on debtors
To Depreciation on 1,20,000
car (20% x 6,00,000)
To Loss by Fire :
- Raw Materials 10,000
- Finished Goods 5,000 15,000
To Net profit tfd. To 21,97,050
capital
25,81,700 25,81,700
184

Balance Sheet
As at 31-03-2018
Liabilities Rs. Rs. Assets Rs. Rs.
Capita / Fixed Assets :
Account :
Balance b/d 8,00,000 Plant and 16,00,000
(opening) Machinery
Add : Net 21,97,050 Add : New 80,000
Profit Machinery
29,97,050 16,80,000
Less : 73,000 29,24,050 Less : 2,46,000 14,34,000
Drawing Depreciation
[WN3] [WN1]
Current Motor Car 6,00,000
Liabilities :
Bills Payable 1,00,000 Less : 1,20,000 4,80,000
Depreciation @
20%
Sundry 4,00,000 Investments :
Creditors
Add : 40,000 4,40,000 Investment 2,00,000
Unrecorded (1-4-2017)
Purchase
Outstanding 13,000 Current Assets :
Rent
Closing Stock :
- Raw Materials 90,000
- Work in 50,000
Progress
- Finished 3,60,000 5,00,000
Goods
Debtors 6,00,000
Less : Goods for 30,000
own use
5,70,000
Less : Further 20,000
Bad Debts
5,50,000
185

Less : Prov. for


doubtful debts
(5/100x5,50,000) 27,500
5,22,500
Less : Prov. for 10,450 5,12,050
Discount on
Debtors (2/100 x
5,22,500)
Insurance Claim
:
- for Raw 20,000
Materials
- for Finished 15,000 35,000
Goods
Bills Receivable 3,01,000
Interest 6,000
Receivable
[WN2]
Prepaid 9,000
Insurance
34,77,050 34,77050

Working Notes:

1. Depreciation of Plant and Machinery Rs.


Depreciation on Rs. 16,00,000 for
Full year @ 15% 2,40,000
Depreciation on Rs. 80,000 for 6 months
(80,000 x 15/100 x 6/12) 6,000
2,46,000

2. Interest Receivable on Investments Rs.


Total Interest on Investments
(2,00,000 x 14/100) 28,000
Less: Interest actually received 22,000
Balance Interest receivable 6,000

3. Total Drawings made Rs.


Drawings as per Trial Balance 40,000
Add: Goods withdrawn for personal use 25,000
Add: Life Insurance paid as per
Trial Balance 8,000
Total Drawings 73,000
186

Illustration 6:

The Trial Balance Mr. Lakhamichand is as below, Prepare final


accounts for the year ended 31-12-2017.

Debit Balances Rs. Credit Balances Rs.


Cash in hand 1,000 Capital Account 41,860
Machinery 30,000 Sales 1,38,780
Drawings 2,500 R.D.D. 560
Factory, Power 450 Sundry Creditors 8,800
and Fuel
Office Salaries 6,225
Carriage outwards 500
Manufacturing 9,300
wages
Furniture and 3,400
Fixture
Opening Stock :
- Finished goods 4,000
- Work-in-progress 7,250
- Raw Materials 2,800
Carriage Inwards 1,000
Rent (Factory ¾) 4,000
Sundry Debtors 21,600
Advertisement 775
Printing & 1,200
Stationery
Factory Insurance 1,280
Purchase of Raw 82,950
Material
Balance at Bank 8,530
Discount Allowed 610
Miscellaneous 630
Expenses
1,90,000 1,90,000
187

Adjustments:

(1)Closing Stock: Finished Goods Rs.6,500, Raw Materials Rs.750


and Work-in-progress Rs.4,750.

(2) A Motor car purchased on 1-10-2017 for Rs.10,000 has been


included in purchases.

(3) Depreciate Machinery at 15% p.a., Motor Car at 20% p.a.,


Furniture and Fixtures at 15% p.a.

(4) Provision for R.D.D. should be maintained at 10% of the


debtors.

(5) Provision for unrealised Rent in respect of portion of the office


sub-let at Rs.120 p.m. from 1-10-2017 has to be made.
(April 96, adapted)

Solution:
LAKHAMICHAND
Manufacturing Account
For the year ended 31-12-2017
Dr. Cr.
Particulars Rs. Rs. Particulars Rs.
To Work-in- 7,250 By Work-in- 4,750
Progress Progress
(Opening) (Closing)
To Raw Materials To Trading 97,030
consumed : A/c
Opening Stock 2,800 (Cost of
production
transferred)
Add : Purchases 82,950
Add : Carriage 1,000
Inwards
86,750
Less : Motor Car 10,000
Purchase
Less : Closing 750 76,000
Stock
To Manufacturing 9,300
Wages
188

To Factory
Expenses :
Rent 3,000
[3/4 x 4,000]
Insurance 1,280
Power and Fuel 450
Depreciation on 4,500 9,230
Plant
1,01,780 1,01,780

Trading Account
For the year ended 31-12-2017
Dr. Cr.
Particulars Rs. Particulars Rs.
To Opening stock 4,000 By Sales 1,38,780
(FG)
To Manufacturing A/c 97,030 By Closing stock 6,500
(Cost of Production (FG)
tfd.)
To Gross profit c/d 44,250
1,45,280 1,45,280

Profit and Loss Account


For the year ended 31-12-2017
Dr. Cr.
Particulars Rs. Rs. Particulars Rs.
To Office Salaries 6,225 By Gross 44,250
Profit b/d
To Carriage 500 By Rent 360
Outwards Accrued
To Office Rent (1/4 x 1,000
4,000)
To Advertisement 775
To Printing and 1,200
Stationery
To Discount Allowed 610
189

To Miscellaneous 630
Expenses
To Prov. for Bad &
Doubtful Debts
New R.D.D. 2,160
Less : Old R.D.D. 560 1,600
To Depreciation :
- on Motor Car 500
(10,000x20/100x3/12)
- on Furniture & 510 1,010
Fixtures
(3,400 x 15/100)
To Net profit tfd. To 31,060
capital
44,610 44,610

Balance Sheet
As at 31-12-2017

Liabilities Rs. Rs. Assets Rs. Rs.


Capital Fixed Assets :
Account :
Balance b/d 41,860 Plant and Machinery 30,000
(opening)
Add : Net profit 31,060 Less : Depreciation @ 4,500 25,500
15%
72,920 Motor Car 10,000
Less : 2,500 70,420 Less : Depreciation @ 500 9,500
Drawings 20% (for 3 months)
Current
Liabilities :
Sundry 8,800 Furniture & Fixtures 3,400
creditors
Less : Depreciation @ 510 2,890
15%
Current Assets :
Closing Stock :
190

- Raw Materials 750


- Work in Progress 4,750
- Finished Goods 6,500 12,000
Debtors 21,600
Less : New R.D.D. 2,160 19,440
Rent Accrued 360
Balance at Bank 8,530
// Cash in Hand 1,000
79,220 79,220

Illustration 7:
The following balances are extracted from the ledger accounts of
Mr. Bharat as on 31st December, 2017.

Particulars Dr. Rs. Cr. Rs. Particulars Dr. Rs. Cr. Rs.
Mr. 1,40,000 Wages 30,000
Bharat’s
Capital Salaries 22,000
Plant and 45,000 Trade
Machinery
Opening Expenses 9,000
Stock
Raw 20,000 Rent 12,000
Materials
Finished 5,000 Consignment 33,000
goods (Mr. X) A/c.
Purchases 3,74,000 4,60,000 Cash 5,000
and Sales
Debtors 1,35,000 90,000
and
Creditors
6,90,000 6,90,000

Adjustments:

(1) Opening stock of finished goods include stock of stationery


of Rs.200.
(2) Closing stock of raw materials Rs. 10,000, closing stock of
finished goods Rs.20,000 (including stock of stationery
Rs. 100.)
191

(3) Trade expenses include payment of stationery of Rs.2,000.

(4) Closing creditors include creditors for stationery of Rs.500 for


credit purchases.

(5) Mr. Bharat sent goods costing Rs.33,000 to Mr. X (consignee)


who sold two third of the quantity for Rs.35,000. The consignee
has incurred expenses of Rs.2,000 and is entitled for
commission of 5% on sales.

(6) Sales include a sum of Rs.32,000 received on sale of all goods


received on behalf of Mr. Y (consignor). Mr. Bharat is entitled to
a commission of 10% on these sales for which no entries were
passed. The expenses of Rs.1,000 for sale on behalf of Mr. Y
are debited to trade expenses (the expenses should be incurred
by Mr. Y)

(7) Provide 10% depreciation on plant and machinery.


Prepare manufacturing account, trading account and profit
and loss account for the year ended 31st December, 2017 and
the Balance Sheet on that date.
(March 95, adapted) 2012.
MR. BHARAT
Manufacturing Account
For the year ended 31-12-2017
Dr. Cr.
Particulars Rs. Rs. Particulars Rs.
To Raw Materials By Trading A/c 4,18,000
consumed (Cost of
Opening Stock 20,000 production tfd.)
Add : Purchases 3,74,000
3,94,000
Less : Purchases (500)
of Stationery
Less : Closing (10,000) 3,83,500
Stock
To Wages 30,000
To Factory
Expenses :
To Depreciation 4,500
on Machinery
4,18,000 4,18,000
192

Trading Account

For the year ended 31-12-2017

Dr. Cr.
Particulars Rs. Rs. Particulars Rs. Rs.
To Opening 5,000 By Sales 4,60,000
stock (FG)
Less : Stock 200 4,800 Less : 32,000
of Stationery Consignment
Sales [Y]
To 4,18,000
Manufacturing
A/c Cost of
Production
To Gross 38,100 [35,000 – 2,000 4,30,000
profit c/d 33,000]
By Closing
stock
Finished 20,000
Goods
Less :
Closing
stock of
Stationery 100
19,900
Add : Unsold 11,000 30,900
Goods of
Consignment
[X]
4,60,900 4,60,900
193

Profit and Loss Account

For the year ended 31-12-2017

Dr. Cr,
Particulars Rs. Rs. Particulars Rs.
To Office Salaries 22,000 By Gross 38,100
Profit b/d
To Trade 9,000 By 3,200
Expenses Commission
from
Consignor
Less : Payment for (2,000) By Net Loss 5,050
Stationery tfd. To Capital
Less : Expense of (1,000) 6,000
Consignor Y
To Stationery
Consumed
Opening stock 200
Add : Stationery 2,000
Add : Credit 500
Purchase
2,700
Less : Closing (100) 2,600
Stock
To Rent 12,000
To Commission to 1,750
Consignee
(5% x 35,000)
To Expenses 2,000
incurred by X
46,350 46,350
194

Balance Sheet
As on 31-12-2017

Liabilities Rs. Rs. Assets Rs. Rs.


Capital / Account : Fixed Assets :
Balance b/d 1,40,000 Plant and 45,000
(opening) Machinery
Add : Net profit 5,050 1,34,950 Less : 4,500 40,500
Depreciation
@ 10%
Current Liabilities
Sundry creditors 90,000
Less : Creditors for 500 89,500
Stationary
Creditors for 500 Current
stationary Assets :
Due to Y 32,000 Closing Stock
:
Less: Commission 3,200 - Raw 10,000
(10%) Materials
Less : Expenses of 1,000 27,800 - Finished
consignor Y Goods 19,900
included in trade Add : Unsold 30,900
goods (x)
11,000
- Stock of 100 41,000
stationary
Debtors 1,35,000
Consignment 33,000
A/c Mr. X
Add : sales of 2,000
X
35,000
Less : 2,000
Expenses
Less : 2,000
Expenses
Less: 1,750 31,250
Commission
(5%)
Cash in hand 5,000
2,52,750 2,52,750
195

9.2 EXERCISE

Illustration 1
From the following details for the year ended 31st March 2018
prepare Manufacturing, Trading and Profit & Loss Account of M/s
Razavi Traders:

Particulars Rs. Particulars Rs.


Opening stock: Electric and water charges 4,000
Raw Material 60,000 Wages 1,40,000
Work in progress 50,000 Salary of works manager 6,000
Finished goods 75,000 Office salaries 5,000
Purchase of raw materials 3,20,000 Advertisement 2,000
Sales 6,25,000 Deprecation
Purchase returns 5,000 - on Plant 3,000
Sales returns 4,000 - on Factory Shed 1,000
Carriage inward 1,500 - on Office Furniture 6,00
Carriage outward 1,000 Closing Stock
Duty and clearing charges 2,000 - Raw material 40,500
Factory rent 3,000 - Work in progress 60,000
Office rent 2,000 - Finished goods 55,000

Illustration 2
From the following Trial Balance and additional information of Miss.
Shabana, prepare Manufacturing, Trading and Profit and Loss A/c
for the year ended 31st March, 2018 and Balance Sheet as on that
date.

Trial Balance
As on 31st March, 2018

Particulars Dr. Rs. Cr. Rs.


Bank Overdraft 49,000
Advertising 18,400
Audit Fees 10,500
Bad Debts 1,600
Bills of Exchange 20,350 20,000
Goodwill 50,000
Commission received 1,000
Discount received 2,000
196

Drawings 2,650
Land and Building 40,000
General Expenses 12,350
Insurance 3,150
Interest on Bank Overdraft 2,000
Investment in Shares 56,000
Plant and Machinery 1,00,000
Capital 2,70,000
Purchases 2,10,320
R.D.D. 1,000
Return Inwards 1,280
Return Outwards 3,320
Debtors 81,750
Wages 30,250
Creditors 65,000
Opening Stock 40,000
Sales 3,21,280
Salaries 52,000
7,32,600 7,32,600

The following further information is available:


(1)Closing Stock on 31st March, 2018 is Rs.87,000.

(2) Outstanding Wages Rs.2,500.


(3)Insurance is prepaid to the extent of Rs.650.
(4) Depreciate Plant and Machinery @10% p.a. and Land and
Building@5% p.a.
(5) Write off Rs.1,750 for Bad debts. Provide 5% for Doubtful Debts
on debtors.

(Ans.: G/P – Rs. 1,27,250, N/P Rs. – 14,150, Balance sheet total-
4,18,000.)
197

Illustration 3:

From the following particulars presented by Mazumdar Bros,


prepare a Manufacturing Account for the year ended 31-03-2012.

Particulars Rs. Particulars Rs.


Opening Stock : Carriage Inward 1,000
- Raw Materials 3,000 Hire of Special Plant 2,000
- Work-in-Progress 4,000 Factory Rent 4,000
- Finished Goods 8,000 Repairs to Plant 2,000
Closing Stock : Repairs to Factory 1,000
- Raw Materials 1,000 Supervisor’s Salary 8,000
- Work-in-Progress 5,000 Factory Wages 1,000
- Finished Goods 4,000 Royalties on 2,000
production
Purchase of Raw 40,000 Works Manager’s 6,000
Materials Salary
Wages of workers 20,000 Salary of Works Staff 3,000
Light, Gas etc. 2,000
(Factory)




198

10
DEPARTMENTAL ACCOUNTS I

UNIT STRUCTURE
11.0 Objectives
11.1 Introduction
11.2 Branch Accounts and Departmental Accounts
11.3 Departmental Accounting
11.4 Basis of Allocation
11.5 Inter Department Transfers of Goods / Services
11.6 Closing Stock at Transfer Value
11.7 Stock Reserve
11.8 Departmental Final Accounts
11.9 Proforma of Departmental Accounts
11.10 Exercise

11.0 OBJECTIVES

After studying the unit students will be able to:


 Distinguish between Branch and Departmental Store.
 Know the purpose of Departmental Store.
 Understand the accounting procedure of Departmental Store.
 Explain the Basis of allocation of common expenditure and
common income among different departments
 Understand the accounting procedure for Inter-Departmental
Transfers of Goods.
 Calculate the value of closing stock and preparation of Stock
Reserve A/c.
 Prepare Departmental Final Accounts.

11.1 INTRODUCTION

A large business concern may be divided into different


segments; each segment is known as department. All departments
operate under one roof. The division into various departments may
199

be on basis of functions, processes or products or may be any


combination of above as it may be suitable to the organisation.
Management is usually interested in finding out the working results
of each department to ascertain their relative efficiencies.
Departmental Accounts are of great help to the management as
information for taking various types of decisions. Management can
compare result of one department with other departments.

Company may intra or inters departmental comparison, may


be again that of same departments in the previous periods. This will
help them to formulae sound policy of expansion/diversion/merger
even if required, may be closing down a particular unprofitable
departments.

11.2 BRANCH ACCOUNTS AND DEPARTMENTAL


ACCOUNTS

A business may be expanded having number of branches as


well as having number of departments under one roof. A large
business may have various departmental stores at different places.
e.g. Big Bazaar has departmental stores at various places, like in
Mumbai, Pune, Navi Mumbai, Surat, and so on .

Distinguish between Branch & Departmental Store

No. Branch Departmental Store


1. Located at different places, Departmental stores are
may be in different countries. always located under one
roof.
2. Normally branches are Normally concerns purchase
opened by manufacturer to different types of goods
avoid middleman’s chain. directly from manufactures,
sales to end users.
3. Branches sale one type of Departmental Stores
goods manufactured by purchase goods from different
them. manufactures & sales under
one roof.
4. Branches may be domestic Departments are located at
[in same country] &/ or one place, under one roof
foreign branches. only.
5. Since the branches located Common expenses are
at different places, the always allocated in some
problem of allocation of ratio.
common expanses does not
arises.
200

6. Accounting treatments The departments are located


depends upon types of under one roof, all accounting
branches, i.e. dependent records are maintained by
branch or impendent branch. head office.
7. Reconciliation may be Question of such
required for cash & goods in reconciliation doesn’t arise,
transit. as all departments are at
same place.
8. In case of foreign branch, This problem does not arise
question of conversion of in Departmental Accounting.
foreign currency in Head
Office currency arises.

11.3 DEPARTMENTAL ACCOUNTING

11.3.1 Purpose:

In Departmental Accounting, if only a single Profit & Loss


Account is prepared for the entire business, then profit / loss of
each department cannot be ascertained. In Departmental
Accounting, each department is treated as separate entity for the
purpose of recording and reporting. In same premises, a separate
Account Department records all transactions of all departments.
Books of Accounts are so designed, so it is possible to prepare
separate Trading A/c, Profit & Loss A/c for each department. The
working of one department can be compared with another
department. It facilities infra / inter comparison for same period with
that of same department in the previous periods. This helps
management to formulate sound policy for expansion, merger of
departments, closing of loss making departments. Preparation of
separate accounts serves the following purposes :

a) Gross Profit or Loss, Net Profit or Loss of each department


can be ascertained.
b) Running cost of each department can be calculated.
c) Corrective timely measures for inefficient department can be
taken.
d) It helps to fix branch manager’s commission on basis on
profit.
e) Departmental transfers can be recorded at transfer price /
selling price.
f) Stock reserve, unrealized profit on goods transferred can be
calculated.
g) Assist the management for controlling the business more
efficiently, intelligently.
201

h) Wastage of material, money, human recourses can easily


detect.
i) A separate stock records can be maintained department
wise for controlling stock.
j) Department managers responsibly can be fixed and called
for various reporting.
k) Department budget can be prepared.

11.3.2 Books of Accounts:


For preparation of Profit & Loss A/c of each department, it is
necessary that separate sets of Books of Accounts should be
maintained for each department. Instead of that Accounts
Department maintains various Subsidiary Books in columnar form,
it will also be necessary to devise a basis for allocation of common
expenses among the departments. Normally, each department
records its sales & maintains stock records. Daily cash collection in
department is transferred to main cashier or deposited in Bank.
Stocks are physically verified periodically.

11.3.3 Divisions of Subsidiary Books:


Subsidiary Registers are designed in such a way to record
transactions of each department in same register; separate
columns are made for each department in same subsidiary book,
such as purchase Journal, Sales Journal, Return Inwards, Return
Outwards, etc.

Specimen of Departmental ------- Journal


[Purchases, Purchases Returns, Sales, Sales Returns etc.]

Date Serial Name L.F. Total Depts. Dept. Dept. Dept. Ref.
No. Rs I II III IV

Total Rs xxxxx x x x x

Direct Expenses / Sales etc. can be recovered in department, e.g.


cash sales; cash is to be deposited with main cashier on same day.

11.4 BASIS OF ALLOCATION

Allocation of common expenditure among different


departments:
Expenses incurred specially for each department are
recorded separately and charged directly thereto, e.g. Salaries paid
to staff working in the particular dept.
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11.4.1 Common expenses:

The benefits of which is shared by all the departments and which


are capable of precise allocation are distributed among the
department concerned on equitable basis considered suitable in the
circumstances of the case.

11.4.2 Common indirect expenses:

Common indirect expenses are the expenses which cannot


be directly identified with particular departments, however
departments are benefited. Such expenses which are not capable
of accurate measurement are dealt with as shown in the chart.

The following table gives suitable basis for allocation of such


expenses.

Item of Expenses / Income Basis of Allocation


1. Rent and Rate Floor space occupied by each
department
2. Lighting On the basis of actual
consumption, if actual is not
available on the number of
electric points or Power of
Lamps used or area covered
3. Advertisement Sales
4. Sales Commission Sales
5. Discount Allowed to Sales
Customers
6. Bad debts Actual of each department or
on sales
7. Electric Power for Machines On the H.P. of equipments or
number of machines in each
department and the number of
working hours.
8. Works Manager’s Salary Time spent by him for each
department
9. Depreciation Value of assets employed by
each department
10. Air-conditioning Space occupied
11. Insurance :
i) Stock Value of stocks held in each
of the departments
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ii) Buildings Floor space occupied or


capital value of the assets
insured
12. Staff Welfare No. of employees in each of
the department
13. Printing and Stationery Turnover of the departments
14. Freight
a) Inward Net purchases of each of the
department
b) Outward Net sales of each of the
department
15. Repairs to Building On the basis of space
occupied by each department
16. Heating On the basis of points, lamps
used or area
17. Discount Earned Sales ratio
18. Commission Received Sales ratio
19. Discount Received On the basis of purchases
20. Delivery Van Expenses On the basis of sales.
21. Traveling Expenses On the basis of sales.
22. Administration Expenses On the basis of time devoted
23. Postage, Telephone, Printing Sales following the rule “What
and Stationery the traffic will bear”.
24. Workmen’s Compensation Wages incurred by each
department.
25. PF and ESI Contribution Wages
26. Canteen Subsidy, Medical Number of workers
Benefits
27. Store Expenses, Expenses Material consumed or Net
On Purchase, Direct Purchases of each
Expenses On Purchases, department
Octroi Expenses
28. All Production, Factory Either on cost of material
Expenses consumed or wages of each
dept.
29. Selling and Distribution Exp. Sales ratio or k.g. or units sold
by each dept.
204

11.4.3 Non Allocable Expenses / Uncommon Expenses / Gains


 The other common expenses which can’t be identified or
allocable on suitable basis.
 The financial or accounting expenses or losses / income e.g.
interest/ loss on sale of investment.
 Examples - Interest on loans and advances, legal fees, loss
on sale of any asset, income tax, audit fees, loss by fire.
 All these expenses should be debited to General Profit and
Loss Account.
 Normal income may be as a whole, which can’t be allocated
to particular department. However, some income on basis of
purchases (discount earned) or sales e.g. discount allowed,
commission received etc.

CHECK YOUR PROGRESS


1. Define the terms:
a. Department
b. Branch
c. Non Allocable Expenses
d. Common Expenses
e. Common Indirect Expenses

2. Give the examples of uncommon expenses.


3. Give suitable basis for allocation of the following expenses:
a. Factory Expenses
b. Canteen Subsidy
c. Delivery Van Expenses
d. Commission Received
e. Discount Received
f. Works Manager’s Salary
g. Air Conditioning
h. Bad Debts

11.5 INTER DEPARTMENT TRANSFERS OF GOODS /


SERVICES

Usually department supply goods / services to one another.


These transactions should be separately recorded and changed to
the department benefiting these by & credited to the department
providing it. Total of such benefits should be disclosed in the
Departmental Trading, Profit & Loss A/c, to distinguish them from
other items of income or expenses.
205

The departmental transfer may be:


1) At cost
2) At cost plus profit (loading) (transfer value)
3) At selling price (transfer value = sale value)

11.5.1 Transfer at cost:

Usually goods are transferred at cost on the assumption that


departmental stores as a whole one entity profit / loss earned or
suffered only when goods are sold to outsides / external parties.

11.5.2 Transfer at cost plus profit:

Goods may be transferred at cost plus profit [transfer value /


loaded price] so that both departments are in a position to ascertain
profit / loss accurately.

11.5.3 Transfer at selling price:

In such case departmental transfers are recorded at usual


selling price. Each department records such transfers as its goods
are sold to outsiders. In such a case, each department is in position
to account for profit or losses accurately, due to this, profit or loss of
one department would not be affected due to efficiencies or
inefficiency of another department.

11.5.4 Accounting for transfer of goods or services:

Receiving department should be debited at transfer price


and department transferring goods / services should be credited at
same value. [Transfer Price / Selling Price].

11.6 CLOSING STOCK AT TRANSFER VALUE

When one department transfers goods, at transfer price


[may be at cost plus profit or selling price], is included profit
charged by another department. In case, at the end of accounting
year, part of goods remains unsold i.e. closing stock valued at cost
to receiving department which includes profit charged by
transferring department. Profits are always accounted only when
realized. Therefore, value of stock needs to be adjusted by creating
stock reserve.

11.7 STOCK RESERVE

The unrealized profit included in closing stock of receiving


department is eliminated by creating stock reserve. Stock reserve is
calculated as under:
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Stock Reserve =

Profit included in transfer price


Transferred value of closing stock ×
Transfer price

Entry for unrealized profit, is passed by concern in the


General Profit & Loss A/c as under :

General Profit & Loss A/C Dr.


To Stock Reserve A/C

The amount of stock reserve is deducted from value of stock in the


Balance Sheet.

In the beginning of the next year, entry passed for stock


reserve is reversed.

Stock Reserve A/C Dr.


To General Profit & Loss A/C

E.g. Goods costing Rs.20,000 transferred by A department to Z


department at Rs.24,000. Half of goods remained unsold at the end
of the year.

For recording transfer:

i) Department Z’s Trading A/c Dr. 24,000


To Department A’s Trading A/c 24,000

ii) Stock of Department Z


Stock A/c Dr. 12,000
To Department Z’s Trading A/c 12,000

iii) General Profit & Loss A/c Dr. 2,000


To Stock Reserve A/c 2,000

11.8 DEPARTMENTAL FINAL ACCOUNTS

The Departmental Final Accounts contain:

 Departmental Trading A/c


 Departmental Profit & Loss A/c
 General Profit & Loss A/c

Departmental Profit & Loss A/c is prepared in columnar form


at the end of the year. The respective columns indicate the gross
profit & net profit or net loss from each department as well as total.
207

The net profit or loss of the respective department will be carried to


General Profit & Loss A/c where in expenses and incomes, which
are not allocated to the various departments, are debited or
credited. The balance of this account is transferred to Balance
Sheet. However, the Balance Sheet is in usual form and not in the
columnar form.

11.9 PROFORMA OF DEPARTMENTAL ACCOUNTS

Departmental Trading A/c


For the year ended

Particulars Basis Dept. Dept. Total Particulars Basis Dept. Dept. Total
A B A B
To Opening A xxx xxx xxxx By Sales A xxx xxx xxxx
Stock
To Purchase A xxx xxx xxxx Less : xxx xxx xxxx
Returns
Less: xxx xxx xxxx By A xxx xxx xxxx
Purchase Transferred
Returns to Dept. A
To Received A xxx xxx xxxx By Cost of A xxx xxx xxxx
from Dept. B Goods Lost
To Purchase A xxx xxx xxxx By Cost of A xxx xxx xxxx
Expenses Goods
Damaged
To Direct A xxx xxx xxxx By Closing A xxx xxx xxxx
Wages Stocks
To Lighting, xxx xxx xxxx
Power
To Repairs xxx xxx xxxx
Workshop
Cost
To Stores xxx xxx xxxx
Dept. Cost
To Other xxx xxx xxxx
Factory
Expenses
To Gross xxx xxx xxxx By Gross xxx xxx xxxx
Profits c/d loss c/d
Total Rs xxx xxx xxxx Total Rs xxx xxx xxxx
208

Profit & Loss A/c

For the year ended

Particulars Basis Dept. Dept. Total Particulars Basis Dept. Dept. Total
A B A B
To Gross xxx xxx xxxx By Gross xxx xxx xxxx
Loss b/d Profit b/d
To xxx xxx xxxx By xxx xxx xxxx
Salesman’s Discount
Salaries Received
Commission
To Traveling xxx xxx xxxx
Expenses
To Carriage xxx xxx xxxx
Outwards
To Ware xxx xxx xxxx
Housing
Charges
To Packing xxx xxx xxxx
Expenses
To xxx xxx xxxx
Advertising
To Other xxx xxx xxxx
Selling
Expenses
To Other xxx xxx xxxx
Distribution
Expenses
To Bad xxx xxx xxxx
Debts /
Discount
To Rent, xxx xxx xxxx
Taxes
Repairs
To Staff xxx xxx xxxx
Welfare
To Canteen xxx xxx xxxx
Expenses
To xxx xxx xxxx
Contribution
to PF, ESIS
To Insurance xxx xxx xxxx
209

- Assets xxx xxx xxxx


- Stocks xxx xxx xxxx
- Workmen xxx xxx xxxx
To Officer xxx xxx xxxx
Salaries
To Postage xxx xxx xxxx
Telephones
To Printing xxx xxx xxxx
and
Stationary
To Other xxx xxx xxxx
Admin /
Office
Expenses
To xxx xxx xxxx
Depreciation
on Assets
To Net Profit xxx xxx xxxx By Net xxx xxx xxxx
Ltd. Loss Ltd.
To Gen. xxx xxx xxxx By Gen. xxx xxx xxxx
Profit & Loss Profit &
A/C Loss A/C
Total Rs xxx xxx xxxx Total xxx xxx xxxx

General Profit and Loss Account

For the year ended

Particulars Amounts Particulars Amounts


Rs. Rs.
To Net Loss from By Net Profits tfd. From
Depts. Deptts.
- Department A Xxxx - Department A Xxxx

- Department B Xxxx - Department B Xxxx

To Stock Reserve Xxxx By Interest on Loans Xxxx


(Opening Stock) Given
- Department A Xxxx By Dividends on Shares Xxxx
Received
- Department B Xxxx By Profits on Sale of Xxxx
Assets
210

To General Admin. Xxxx By Stock Reserve (on


Expenses Closing Stock)
To Audit / Legal Xxxx - Department A Xxxx
Fees
\\1h00
To Interest and Xxxx - Department B Xxxx
Bank Charges Paid
To Depreciation Xxxx
(General Assets)
To Loss on Goods Xxxx
Destroyed /
Damaged
To Loss on Sale of Xxxx
Fixed Assets
To Income Tax Xxxx

To Transfer to Xxxx
Reserves
To Net Profit tfd. to Xxxx But Net Loss tfd. to xxxx
Capital Capital
Total xxxx Total xxxx

Balance Sheet
As on

Liabilities Amounts Assets Amounts


Rs. Rs.
Capital : x Buildings x
Add : Net Profit x Furniture x
x Closing Stock x
Less: Drawings x x Less Profit on Inter
Loans x Departmental Goods x
Sundry Creditors x Sundry Debtors x
Bills Payable x Bill Receivable x
Outstanding Expenses x Bank Balance x
Cash on hand x
Total xxx Total xxx
211

11.10 EXERCISE

A) Theory Questions

1. What is meant by Departmental Accounts?


2. What are the advantages of Departmental Accounts?
3. What difficulties are faced in the preparation of Departmental
Profit & Loss Account?
4. What are the different methods of allocating expenses
among the departments?

B) Objective Questions
a. Test your understanding by selecting the most appropriate
alternative:

1. Repairs and maintenance charges relating to Plant & Machinery


are apportioned over different departments according to :
a) The number of machines in each department.
b) Book value of machines.
c) Area occupied by each machine.

2. Lighting charges are apportioned over the departments on the


basis of :
a) Number of light points.
b) Cost of machines.
c) Sales.

3. Items of expenses not connected with any department are :


a) Charged to departments on the basis of total sales.
b) Charged to the General Profit & Loss Account.
c) Charged to departments on the basis of fixed assets
employed.

4. Cost of electric power should be apportioned over different


departments according to :
a) H.P. of motors
b) No. of light points.
c) Cost of machines.

5. Supervision charges should be apportioned over the different


departments on the basis of :
a) Time devoted for supervision.
b) Area occupied by each department.
c) Sales of each department.
212

6. Which of the following is divided in the ratio of number of


employees?
a) Rent b) Repairs
c) Wages d) Carriage

7. Following entry is passed in journal means :


Stock Reverse A/c Dr.
To General Profit & Loss A/c.
a) Unrealized profit on closing stock
b) Loss on sale of goods by department.
c) Unrealized profit on opening stock.
d) Profit on sale of goods.

8. Which of the following allocated in the sales ratio :


a) Discount allowed b) Advertisement
c) Commission d) All the above

9. Credit balance in Departmental Trading A/c means


a) Gross Loss b) Gross Profit
c) Net Profit d) Non of the above

10. Which of the following not debited to Department Trading A/c.


a) Loss due to fire b) Purchases
c) Carriage d) Opening Stock

11. Which of the following not debited to department Trading, Profit


& Loss A/c.
a) Abnormal gain b) Abnormal loss
c) Income tax d) All of the above

12. Canteen subsidy is allocated on the basis of each department.


a) Sales b) Purchases
c) No. of workers d) Value of assets in canteen

13. Air - conditioning is allocated on the basis of each department.


a) Purchases b) Sales
c) Area occupied d) No. of employees

14. Postage is allocated on the basis of each department.


a) Purchases b) No. of employees
c) Value of stock d) Sales
213

15. Which of the following debited to General Profit and Loss A/c.
a) Wages b) Closing stock reserve
c) Opening stock reserve d) Net loss

16. Debit balance in General Profit & Loss A/c means :


a) Net loss b) Net profit
c) Departments profit transferred d) All of the above

Answer: 1-b, 2-a, 3-b, 4-a, 5-a, 6 - C, 7 - C, 8 - d, 9 - b, 10 - a,


11 - d, 12 - c, 13 - c, 14 - d, 15 - b, 16-a.

b) State whether True or False


1) Carriage outwards debited to Departmental Trading A/c.
2) Distribution expenses are allocated to Department on the
basis of sales of each department.
3) Audit fees is credited to General Profit & Loss A/c.
4) Management expenses debited to al& Loss A/c.
5) Insurance of stock is allocated in the ratio of value of stock in
each department.
6) Net loss appears on the debit side of Departmental Profit &
Loss A/c.
7) Bad debts recovery is debited to General Profit And Loss A/c.
8) Return inwards deducted from purchases of each department.
9) Rent of building is allocated on the basis of sales of each
department.
10) All expenses are allocated on the basis of sales of each
department.
11) Goods transferred by department must be recorded at cost.
12) Stock reserve is reduced from stock in the Balance Sheet.
13) Departmental gross profit is credited to Departmental Profit &
Loss A/c.
14) Depreciation is to be apportioned on the basis of value of
assets in each department.
15) If purchases & sales are double in Department A as
compared to Department B, gross profit is also double in
Department A as compared to Department B.
16) Cost of insurance of stock is allocated in the ratio of
employees employed in each department.
17) Each department is treated as separate entity for the purpose
of preparing Trading, Profit & Loss A/c.
214

18) Loss due to fire in department is debited to general profit &


loss a/c.
19) Legal expenses incurred by a department is debited to
General Profit & Loss A/c.

Answer:
False: 1, 3, 6, 7, 8, 9, 10, 11, 15, 16
True: 2, 4, 5, 12, 13, 14, 15, 17, 18, 19

c) Fill in the blanks:


1) Income Tax paid is debited to --------------- A/c.
2) Closing stock reserve is credited to --------------- A/c.
3) Power is allocated on the basis of ------------ of each
department.
4) Depreciation is allocated on the basis of ------------ of each
department.
5) Legal charges should be debited to -------------- A/c.
6) Goods transferred by A Department to B Department credited
to -------------- Department Trading A/c.
7) Depreciation on delivery van should be allocated on basis of
-------- of each department.
8) Goods transferred by Z department to K Ltd. should be
credited to -------------- Department Trading A/c.
9) Stock Reserve is not required if goods are transferred at ------.
10) Income from investment should be credited to --------------- a/c.
11) Contribution to P.F. is allocated on the basis of ---------- of
each department.
12) Profit of a department is credited to ------------- A/c.
13) For transferring opening stock reserve ------------- A/c is
credited.

Answer:
1) Drawing, 2) Stock Reserve, 3) No. of electric points,
4) value of assets, 5) General Profit & Loss A/c, 6) A dept.,
7) Sales, 8) Z dept., 9) cost, 10) General Profit & Loss A/c,
11) Wages or Salaries, 12) General Profit & Loss, 13) Stock
Reserve.
215

d) Match the following:


I)
Column A Column B
Common Expenses Basis of Allocation
A) Rent 1) No. of employees in each
department
B) Cost of stores 2) Value of plant in each
department
C) Depreciation on plant 3) Floor area of each department
D) Labour welfare 4) Purchase of each department
5) Material consumed by each
department

Answer: I)A - 3, B - 5, C - 2, D - 1

II)
Column A Column B
1) Stock Reserve a) General Profit & Loss A/c
2) Loss due to fire b) Debit to A Dept. Trading A/c
3) Transfer of goods from A c) Debited to Dept. Trading A/c
Dept. to K Dept.
4) Selling expenses d) Sales of each department
e) Deduct from stock in Balance
Sheet
f) Debit to K Dept. Trading A/c
Answer: II) 1 - e, 2 - a, 3 - e, 4 - d

III)
Column A Column B
A) Insurance of machinery 1) Wages
B) Power 2) On the basis of credit sales
C) E.S.I. contribution 3) General Profit & Loss A/c
D) Discount received 4) W.D.V. of machinery
E) Audit fees 5) H.P. of machinery
6) On the basis of credit
purchases

Answer: A – 4, B – 5, C – 1, D – 6, E - 3
216

IV)
Column A Column B
Common Expenses Basis of Allocation
i) Repairs to Building 1) Space occupied by each
Department
ii) Bad debts 2) Purchases of each Department
iii) Carriage inwards 3) Sales of each Department
iv) Medical benefits 4) Stock of each Department
5) Sales Return of each department
6) Purchases of each dept.
7) No. of workers

Answer: I - 1, ii - 3, iii - 2, iv - 7

V)
Column A Column B
Common Expenses Basis of Allocation
1) Manager salaries a) On basis of sales of each dept.
2) Building Insurance b) Actual of each dept.
3) Traveling expenses c) On the basis of time devoted
4) Discount received d) Floor space occupied
e) On basis of purchases of each dept.

Answer: 1 - c, 2 - d, 3 - a, 4 - e
VI)
Column A Column B
Common Expenses Basis of Allocation
1) Depreciation of Delivery a) On the basis of points in each
Van dept.
2) Lighting b) On the basis of purchases of
each dept.
3) Works manager’s c) On the basis of sales of each
salaries dept.
4) Purchase manager’s d) Value of stock purchased by
salary each dept.
e) Time spent by him for each
dept.
Answers: 1 -c, 2 - a, 3 - e, 4- b

217

11
DEPARTMENTAL ACCOUNTS II

UNIT STRUCTURE
11.0 Objectives
11.1 Solved Problems
11.2 Exercise

11.0 OBJECTIVES

After studying the unit students will be able to prepare the


Departmental final accounts

11.1 SOLVED PROBLEMS

Illustration 1
Mr. Ramkrushna is the proprietor of Venus; a shop selling
books and toys for the purpose of his accounts. He wishes the
business to be divided into two departments: Department R: Books,
Department V: Toys.

The following balances have been extracted from his books


as at 31st March 2018.

Name of the Account Amount


(Rs)
Sales : Department R 3,00,000
: Department V 2,00,000
Stock : Department R 5,000
: Department V 4,000
Purchases : Department R 2,36,000
: Department V 1,64,000
Salesmen : Department R 20,000
: Department V 15,000
Book delivery wages 3,000
General office salaries 15,000
218

Rates 2,600
Fire insurance - building 1,000
Heating & lighting 2,400
Repairs to premises 500
Telephone 500
Cleaning 600
Audit Fees 2,400
General office expenses 1,200
Discount Allowed 5,000
Discount Received 2,000
Stock (closing) Department R 6,000
Department V 3,000

The floor area occupied Department R one fifth Department V four -


fifth. Prepare Trading and Profit and Loss Account for the year
ended 31st March 2018 apportioning the overhead expenses, where
necessary to show the Departmental Profit or Loss. Show clearly
the basis on which the expenses are apportioned.

Solutions : 1

Venus Trading
Trading and Profit and Loss Account
For the year ended 31st March 2018

Particulars Dept. R Dept. V Particulars Dept. R Dept. V


(Rs) (Rs) (Rs) (Rs)

To Opening stock 5,000 4,000 By Sales 3,00,000 2,00,000


To Purchases 2,36,000 1,64,000 By Closing Stock 6,000 3,000
To Gross Profit c/d. 65,000 35,000
3,06,000 2,03,000 3,06,000 2,03,000
To Salaries 10,000 15,000 By Gross profit 65,000 35,000
b/d
To Delivery Wages 3,000 -- By Dis. Received 1,180 820
To Gen Office 9,000 6,000
Salaries
To Rates 520 2,080
To Fire Insurance 200 800
219

To Lighting & 480 1,920


Heating
To Repairs to 100 400
Premises
To Telephone 300 200
To Cleaning 120 480
To Audit Fees 1,440 960
To General Office 720 480
Exp.
To Dis. Allow 3,000 2,000
To Net profit 37,300 5,500
66,180 35,820 66,180 35,820

Working Notes:
1) Sales ratio: 3: 2
2) Purchase ratio: 59: 41
3) Floor space ratio: 1: 4

Illustration No. 2

From the following particulars of Kirti Enginer’s prepare a


departmental Trading and Profit and loss account for their two
departments viz. Cars Department and Dolls Department for the
year ended 31st March 2018:

Particulars Cars Dolls


Opening stock 50,000 1,50,000
Wages 30,000 60,000
Sales 9,00,000 1,80,000
Closing stock 1,20,000 60,000

Other Information :
Raw materials consumed (Cars) 3,60,000
Stores consumed 90,000
Advertising 15,000
Packing expenses (Dolls) 6,000
Office expenses 48,000
Depreciation on factory equipment 32,000
Building 16,000
220

Additional Information :
a) Dolls making does not require any equipment
b) Only 1/8 of the total area of building is occupied by dolls
Department.
c) Office expenses are to be allocated in ratio of 5:1.
d) Value of materials used by Dolls department is Rs. 20,000
out raw materials consumed.

Kirti Engineers
Trading and Profit and Loss Account
For the year ended 31st March 2018
Particulars Cars Dolls Particulars Cars Dolls
(Rs.) (Rs.) (Rs.) (Rs.)
To Opening 1,50,000 50,000 By Sales 9,00,000 1,80,000
Stock
To Raw Material 3,40,000 20,000 By Closing 1,20,000 60,000
Stock
To Stores 85,000 5,000
To Wages 60,000 30,000
To Gross Profit 3,85,000 1,35,000
c/d
10,20,000 2,40,000 10,20,000 2,40,000
To Packing Exp. -- 6,000 By Gross 3,85,000 1,35,000
Profit b/d
To 12,500 2,500
Advertisement
To Office Exp. 40,000 8,000
To Dep. On 32,000 --
Factory
Equipment
Building 14,000 2,000
To Net Profit 2,86,500 1,16,500
3,85,000 1,35,000 3,85,000 1,35,000

Notes :
1) Stores are allocated in proportion of raw materials consumed
it. 17:1.
2) Sales Ration 5:1.
221

Illustration 3: (Transfer of goods at cost)


The following figures are extracted from the books of M/s
Krishna. For the year ended 31st December 2017.

Particulars Department
P Q R
Rs Rs Rs
Purchases 4,40,000 5,20,000 1,10,000
Sales 6,10,000 9,25,000 3,20,000
Return Inward 10,000 25,000 20,000
Return Outward 40,000 20,000 10,000
Wages 8,000 5,000 7,000
Stock on 01.01.2017 45,000 35,000 40,000
Stock on 31.12.2017 65,000 20,000 10,000

Other Information’s :

1. Goods transferred from P to Q Rs.10,000 and to R Rs.8,000.


2. Goods transferred from R to P Rs.5,000 and to Q Rs.6,000.
3. Goods transferred from Q to P Rs.6,500 and to R Rs.5,600.
4. Telephone charges Rs.15,800 to be apportioned in the ratio
of 3:1:1 among departments P, Q and R respectively.
5. Rent Rs.24,000 to be divided as ¼, 2/4 and ¼ among
Departments P, Q and R respectively.
6. Other Expenses
Discount allowed Rs.18,000
Bad debts Rs.15,000
Income tax Rs.58,000
Legal expenses Rs.24,000
Insurance of goods Rs.8,600

You should allocate aforesaid expenses as you deem best


indicating the basis of allocation. All working should form a part of
your answer.

Prepare Departmental Trading and Profit and Loss account.


In columnar form and General Profit and Loss accountant for the
year ended 31st December, 2017.
222

M/s Krishna
Departmental Trading and Profit & Loss Account
For the year ended 31.12.2017

Particulars Departments Particulars Departments


P (Rs.) Q (Rs.) R (Rs.) P (Rs.) Q (Rs.) R (Rs.)
To Opening 45,000 35,000 40,000 By Sales 6,00,000 9,00,000 3,00,000
Stock (Net)
To 4,00,000 5,00,000 1,00,000 By Closing 65,000 20,000 10,000
Purchases stock
(Net)
To Wages 8,000 5,000 7,000 By Transfer 18,000 -- --
To Transfer -- 10,000 8,000 By Transfer -- -- 11,000
To Transfer 5,000 6,000 -- By Transfer -- 12,100 --
To Transfer 6,500 -- 5,600
To Gross 2,18,500 3,76,100 1,60,400
Profit c/d
6,83,000 9,32,100 3,21,000 6,83,000 9,32,100 3,21,000
To 9,480 3,160 3,160 By Gross 2,18,500 3,76,100 1,60,400
Telephone Profit b/d
To Rent 6,000 12,000 6,000
To Discount 6,000 9,000 3,000
To Bad debts 5,000 7,500 2,500
To Insurance 3,440 4,300 860
To Net Profit 1,88,580 3,40,140 1,44,880
2,18,500 3,76,100 1,60,400 2,18,500 3,76,100 1,60,400

General P & L Account


For the year ended 31.12.2017

Particulars Rs. Particulars Rs.


To Legal Expenses 24,000 By Net Profit b/d
To Income Tax 58,000 P 1,88,580
To Net Profit c/d 5,91,600 Q 3,40,140
To B/S -- R 1,44,880
6,73,600 6,73,600

Notes :

1. Purchases and Sales are recorded at Net.


2. Telephone charges are apportioned in the ratio 3:1:1.
223

3. Discount allowed and Bad debts are apportioned in the ratio of


Sales 2:3:1.
4. Insurance on goods is assumed to be on purchases & hence
allocated in the ratio of purchases 4:5:1.

Alliteratively, it may be assumed to be on stock and


allocated in the ratio of closing stock 65:20:10.

Illustration No. 4 (Inter department transfer at selling Price)

Following are the particulars of Dilip Kumar for the year ended 31st
March 2018.

Particulars Dept. A Dept. B


Rs. Rs.
Opening Stock 20,000 14,000
Sales 1,44,000 1,88,000
Purchases 1,40,000 1,80,000
Transfer to other Department 16,000 12,000
Transfer to other Department 12,000 16,000

1. Closing stock of ‘B’ department is Rs.30,000. In which goods


worth Rs.8,000 are such which were transferred by A
department.
2. Closing Stock of A department is Rs.32,000 in which goods
worth Rs.12,000 are such, which were transferred by B
department.
3. Opening Stock of A department includes goods of Rs.1,600
which were transferred by B department. Gross Profit of B
department in the last year was 10%.
4. Opening stock of B department includes goods of Rs.3,200
which was transferred by A department. Gross Profit of A
department in the last year was 25%.

Prepare Department Trading and Profit & Loss Account and


General Profit & Loss Account of Dilip Kumar from the above
particulars.
224

Solution :
Dilip Kumar
Departmental Trading and Profit & Loss Account
For the year ended 31.03.2018
Particulars Dept. P Dept. Q Particulars Dept. P Dept. Q
Rs. Rs. Rs. Rs.
To Opening Stock 20,000 14,000 By Sales 1,44,000 1,88,000
To Purchase 1,40,000 1,80,000 By Transfer 16,000 12,000
To Transfer 12,000 16,000 By Closing 32,000 30,000
Stock
To Gross Profit 20,000 20,000
b/d
1,92,000 2,30,000 1,92,000 2,30,000

General Profit & Loss Account


For the year ended 31.03.2018
Particulars Rs. Particulars Rs.
To Stock Reserve By Gross Profit
b/d
Department (A) W.N.1 1,040 Department A 20,000
Department (B) W.N.2 200 Department B 20,000
To Net Profit c/d 38,760
40,000 40,000

Working Note No. (1)

Total Sales of Dept. B = (1,88,000 + 12,000) = 2,00,000


20,000 100
Gross Profit Ratio of Dept. B =  10%
2,00,000 1
12,000 10
Stock Reserve of Department A is  1200
100 1
Stock Reserve of Department A on opening stock is
Opening stock of Department A includes goods of Rs. 1,600
From Department B
Gross profit of last year is 10%
 Stock reserve on opening stock of department A =
16,00 10
 160
100 1
Net Stock Reserve = 1200 - 160 = 1040
225

Working Note No. (2)


Total Sales of department A (Rs. 1,44,000 + 16, 000 = 1,60,000
20,000 100
Gross profit Ratio of Dept A  12.50%
1,60,000 1
Stock Reserve of department A
8,000 12.5
On closing stock 1000
100
3,200 25
On opening stock   800
100 1
Net stock Reserve = 1,000 - 800 = 200

Illustration 5:

Ram Krishna Motors has three departments i.e. Jeep, Car


and Servicing. The Department Jeep and Department Car sell
spare parts and occupy a showroom. The servicing department
uses a garage.

From the following particulars, prepare


a) Departmental Trading, Profit & Loss A/c
b) General Profit and Loss Account

Particulars Department
Jeep Car Servicing
Rs. Rs. Rs.
Opening Stock 70,000 25,000 --
Purchases 1,75,000 35,000 --
Sales 3,00,000 1,00,000 50,000
Wages 10,000 5,000 7,000
Closing Stock 40,000 8,000 --
Discount allowed 2,000 3,000 --

Other Expenses : Rs.


Show room Expenses 11,000
Lighting Expenses 6,000
Transfer from Jeep to Servicing at cost 18,000
Transfer from Car to Servicing at cost 5,000
Directors fees 2,000
Bad debts 1,800
Income from Investment 1,500
Depreciation on Garage Equipment 4,000
Depreciation on showroom Furniture 2,000
226

Additional Information:
1. Show-room rent for one month is out-standing Rs. 1,000.
2. The departments using show room share the space and
furniture equally.
3. 50% of light bill is to be charged to servicing department and the
balance equally to other departments.
4. Allocate the above expenses as you deem best indicating the
base of allocation.

Solution :

Ram Krishna Motors


Departmental Trading and Profit & Loss A/c
For the year ended

Particulars Departments Particulars Departments


P (Rs.) Q (Rs.) R (Rs.) P (Rs.) Q (Rs.) R (Rs.)
To opening 70,000 25,000 -- By Sales 3,00,000 1,00,000 50,000
stock (Net)
To 1,75,000 35,000 -- By Transfer 18,000 5,000 --
Purchases
To Wages 10,000 5,000 7,000 By Stock 40,000 8,000 ---
To Transfer -- -- 23,000
To Gross 1,03,000 48,000 20,000
Profit c/d
3,58,000 1,13,000 50,000 3,58,000 1,13,000 50,000
To 5,500 5,500 -- By Gross 1,03,000 48,000 20,000
Showroom Profit b/d
To lighting 1,500 1,500 3,000
To Bad-debts 1,200 400 200
To Deep on -- -- 4,000
G.
To Dep on 1,000 1,000 --
Fur
To o/s. Rent 500 500 --
To Discount 2,000 3,000 --
To Net Profit 91,300 36,100 12,800
1,03,000 48,000 20,000 1,03,000 48,000 20,000
227

General Profit & Loss Account

For the year ended

Particulars Rs. Particulars Rs.


To Directors fees 2,000 By Income from 1,500
Investment
By Net Profit :
To N.P. c/d to B/s 1,39,700 Jeep 91,300
Car 36,100
Servicing 12,800
1,41,700 1,41,700

Illustration 6:
A firm has two departments X and Y. From the following
figures prepare the Departmental Trading and Profit and Loss
Account for the year ended 31st December 2017.

Particulars Departments
X Y
Rs. Rs.
Opening Stock 40,000 50,000
Purchase 1,50,000 1,00,000
Sales 2,50,000 1,50,000
Salaries 16,800 12,000
Particulars Rs.
General Salaries 20,000
Carriage Inward 20,000
Carriage Outward 16,000
Advertising 12,000
Rent and Rates 18,000
Interest on Bank Loan 5,000
Lighting 2,400
Discount Received 3,000
Insurance 2,000
228

Area occupied by the two departments is in the ratio of 2:1.


General salaries are to be allocated equally. Insurance premium is
for a comprehensive policy, allocation being inconvenient. Closing
Stocks were : X Rs. 36,000, Y Rs. 40,000.
(April 2003, adapted)

Solution :

Departmental Trading and Profit & Loss Account


For the year ended 31-12-2017

Particulars Dept. X Dept. Y Particulars Dept. X Dept. Y


Rs. Rs. Rs. Rs.
To Opening 40,000 50,000 By Sales 2,50,000 1,50,000
Stock
To Purchase 1,50,000 1,00,000 By Closing 36,000 40,000
Stock
To Carriage 12,000 8,000
Inward (3:2)
To Gross Profit 84,000 32,000
c/d
2,86,000 1,90,000 2,86,000 1,90,000
To Salaries 16,800 12,000 By Gross 84,000 32,000
Profit b/d
To General 10,000 10,000 By Discount 1,800 1,200
Salaries (1:1) Received
(3:2)
To Carriage 10,000 6,000 By Net Loss 6,100
Outward (5:3) c/d
To Advertising 7,500 4,500
(5:3)
To Rent & 12,000 6,000
Rates (2:1)
To Lighting 1,600 800
(2:1)
To Net Profit 27,900 --
c/d
85,800 39,300 85,800 39,300
229

General Profit & Loss Account

Particulars Rs. Particulars Rs.


To Net Loss b/d 6,100 By Net Profit b/d 27,900
(Department Y) (Department X)

To Interest on Bank Loan 5,000


To Insurance 2,000
To Profit transferred to 14,800
Capital A/c
(Balance Figure)
27,900 27,900

Working Notes :

1) Purchase Ratio (PR) : Department X Department Y


1,50,000 1,00,000
3 2

2) Sales Ratio (SR) : Department X Department Y


2,50,000 1,50,000
5 3

Illustration 7

From the following information of Mr. Apte a proprietor


having three departments X, Y and Z prepare Departmental
Trading and Profit & Loss A/c for the year ended 31st December
2017 and Balance Sheet on that date.

Trial Balance as on 31st December 2017

Particulars Debit Rs. Credit Rs.


Mr. Apte’s Capital 1,00,000
Stock :
X 20,000
Y 15,000
Z 10,000
230

Purchases :
X 90,000
Y 70,000
Z 50,000
Sales
X 1,00,000
Y 75,000
Z 50,000
Salaries 25,000
Rent & Rates 5,000
Selling & Distribution Expenses 9,000
Land & Building 25,000
Furniture & Fixtures 10,000
Cash in Hand 5,000
Cash at Bank 10,000
Sundry Debtors 25,000
Sundry Creditors 44,000
3,69,000 3,69,000

Other Information :
1. Stock in Trade as on 31st December, 2017 was X
Rs. 35,000, Y Rs. 25,000 and Z Rs. 20,000.
2. Salaries are to be allocated in the ratio of 40%, 30%, 30%
amongst all the departments.
3. The floor space occupied by each department is in the
proportion of 40%, 30% and 30%.
4. Selling and distribution expenses are to be allocated on the
basis of sales of each department.
(IDE - November 2010, April 2005, adapted)
231

Solution :
Departmental Trading and Profit & Loss Account
For the year ended 31-12-2017
Dr. Cr.
Particulars Basis Dept. X Dept. Y Dept. Z Total
Rs. Rs. Rs. Rs.
To Opening Given 20,000 15,000 10,000 45,000
Stock
To Purchase Given 90,000 70,000 50,000 2,10,000
To Gross Profit 25,000 15,000 10,000 50,000
1,35,000 1,00,000 70,000 3,05,000
To Salaries 4:3:3 10,000 7,500 7,500 25,000
To Rent & Rates 4:3:3 2,000 1,500 1,500 5,000
To Selling & Sales 4,000 3,000 2,000 9,000
Distribution
To Net Profit c/d 9,000 3,000 - 12,000
25,000 15,000 11,000 51,000

Departmental Trading and Profit & Loss Account


For the year ending 31-12-2017
Dr. Cr.
Particulars Basic Dept. X Dept. Y Dept. Z Total
Rs. Rs. Rs. Rs.
By Sales Given 1,00,000 75,000 50,000 2,25,000
By Closing Given 35,000 25,000 20,000 80,000
Stock
1,35,000 1,00,000 70,000 3,05,000
By Gross 25,000 15,000 10,000 50,000
Profit b/d
By Net Loss 1,000 1,000
b/d
25,000 15,000 11,000 51,000
232

Balance Sheet
As on 31-12-2017

Particulars Basic Dept. X Assets Rs.


Mr. Apte’s Capital 1,00,000 Land & Building 25,000
Add : Net Profit 11,000 1,11,000 Furniture & Fixtures 10,000
Sundry Creditors 44,000 Sundry Debtors 25,000
Closing Stock 80,000
Cash at Bank 10,000
Cash in Hand 5,000
1,55,000 1,55,000

Illustration 8:
Tailors Ltd. have two departments, A and B. The latter
department gets all its requirements from the A department at the
usual selling price. On 31st December 2017 the following was the
trial balance :

Particulars Debit Rs. Credit Rs.


Share Capital 1,00,000
Stock (A Department) 40,000
Stock (B Department) 2,500
Purchases : A 5,50,000
Purchases : B 5,000
Sales A 6,25,000
Sales B 75,000
Transfer of Goods to B Department 25,000 25,000
Director’s Fees and Remuneration 15,000
Wages and Salaries : A 10,000
Wages and Salaries : B 20,000
Rent and Rates (3/4 to A) 4,000
Lighting ¾ to B) 1,000
Depreciation : B 2,500
Depreciation : A 500
Office Expenses 1,500
Furniture and Fittings 10,000
233

Office Salaries 8,000


Equipment 25,000
Carriage Inwards (A) 33,000
Investment 50,000
Income from Investments 5,000
Cash at Bank 27,000 -
8,30,000 8,30,000

Closing stock of A on hand was Rs. 48,000 and that in B


amounted to Rs. 3,750. It is desired to ascertain profit or loss on
strict accountancy principles.

Solution :
Trading and Profit & Loss A/c
For the year ended 31st December 2017

Particulars Dept. X Dept. Y Particulars Dept. X Dept. Y


Rs. Rs. Rs. Rs.
To Opening 40,000 2,500 By Sales 6,25,000 75,000
Stock
To Purchase 5,50,000 5,000 By Transfer 25,000 --
of Goods to
Dept. (B)
To Transfer of -- 25,000 By Closing 48,000 3,750
Goods From Stock
Dept. (A)
To Carriage 33,000 --
Inwards
To Wages & 10,000 20,000
Salaries
To Gross 65,000 26,250
Profit c/d
6,98,000 78,750 6,98,000 78,750
To Rent & 3,000 1,000 By Gross 65,000 26,250
Rates (3:1) Profit b/d
To Lighting 250 750
(1:3)
To 500 2,500
Depreciation
To Net Profit 61,250 22,000
c/d
65,000 26,250 65,000 26,250
234

General Profit & Loss Account


For the year ended 31st December 2017

Particulars Amt. Particulars Amt.


Rs. Rs.
To Director’s Fees & 15,000 By Net Profit b/d
Remuneration Department (A) 61,250
To Office Salaries 8,000 Department (B) 22,000 83,250
To Office Expenses 1,500 By Income from Investment 5,000
To Stock Reserve A/c 375
To Net Profit c/fd 63,375
88,250 88,250

Balance Sheet
As on 31st December 2017
Liabilities Amt. Assets Amt.
Rs. Rs.
Share Capital 1,00,000 Furniture & Fittings 10,000
Profit & Loss A/c 63,375 Equipment 25,000
Investments 50,000
Stock
Department (A) 48,000
Department (B) 3,750
51,750
Less : Stock Reserve 375 51,375
Cash at Bank 27,000
1,63,375 1,63,375

Working Note :

The gross profit of department (A) is Rs. 65,000 and its sales
(including transfers) amount to Rs. 6,50,000.

65,000
Gross Profit Rate = × 100 = 10%
6,50,000
Stock Reserve = 10% on 3,750 = 375
235

11.2 EXERCISE

Practical Exercises:

1. Trading, Profit & Loss A/c of the Modern Electronics Ltd. for the
year ended 31st March 2018 is presented in the following form.
Trial Balance
As on 31st March 2018
Particulars Amt. Particulars Amt.
Rs. Rs.
To Purchases : By Sales
T.Vs(A) 2,81,400 T.Vs(A) 2,71,200
Refrigerators (B) 1,81,200 Refrigerators (B) 2,00,000
Spare Parts (C) 1,00,000 Spare Parts and 50,000
Receipts from servicing
(C) Department
To Spare parts 28,800 By Transfer from 28,800
received by (C) Department (A) to
Department from Department (C)
(A) Department

To Indirect Wages 96,000


& Salaries
To Rent 21,600 By Closing stock :
To Office 22,000 T.Vs (A) 1,20,200
Expenses
To Net Profit 69,000 Refrigerators (B) 40,600
-- Spare Parts (C) 89,200
8,00,000 8,00,000

Prepare Departmental Accounts for each of the three


Departments A, B and C after taking into consideration the
following information:

a) T.Vs and Refrigerators are sold at the showroom and


repairing and servicing jobs are carried out at the workshop.
b) Salaries and wages comprise as follows :
Showroom ¾ and workshop ¼
It was decided to allocate showroom salaries and wages in
the ratio of 1:2 between Departments A and B.
236

c) The workshop rent is Rs. 500 per month. The rent of the
showroom is to be divided equally between Departments A
and B as both the Departments occupy equal floor space.
d) Allocate office expenses on the basis of turnover of each
department.
e) Inter-departmental transfers take place at cost to transferor
department.
[Ans. Gross Profit - A : Rs. 1,38,800: B : Rs. 59,400, C : Rs. 10,400,
Net Profit - A : Rs. 95,553, B : Rs. 4,842, C : Rs. 21,711]

2. Dadar Departmental Stores has three departments X, Y and Z.


The following particulars regarding the three departments are
given :-

Particulars X Y Z
Rs. Rs. Rs.
Opening Stock 30,000 30,000 60,000
Purchases 1,00,000 60,000 2,00,000
Sales 4,00,000 3,00,000 3,00,000
Closing Stock 20,000 40,000 40,000

The following expenses were also incurred:

Particulars Amt.
Rs.
Rent and Taxes 18,000
General Expenses 24,000
Discount Allowed 30,000
Sales Promotion Expenses 40,000
Salesman’s Salary 10,000
Discount Received 15,000
Commission Received 10,000

a) Goods worth Rs. 8,000 were transferred from Department X


to Department Y.
b) Allocate general expenses, rent and taxes equally among
the three departments.
237

c) Commission received is to be divided in the ratio of 4:3:3


respectively.
Prepare Departmental Trading and Profit & Loss Account.
(M.U. November 1998)

3. The following Trail Balance for the year ended 31st March 2018
was extracted from the books of Shri Mukesh.

Trial Balance
As on 31st March 2018

Particulars Debit Credit


Rs. Rs.
Capital on 1.4.2017 50,000
Drawings Account 10,000
Stock on 1.4.2017
Radios 45,000
Watches 21,000
Sales :
Radios 2,94,000
Watches 1,46,000
Purchases :
Radios 2,25,000
Watches 1,15,000
Salaries 12,600
Publicity Expenses 8,900
Rent, Rates and Taxes 3,200
Commission 10,600
Sundry Expenses 5,000
Furniture and Fixtures 12,400
4% Govt. of India Loan 10,000
Sundry Debtors 16,800
Sundry Creditors 8,800
Interest 400
Reserve for Bad and Doubtful Debts 800
Cash Balance 4,500
5,00,000 5,00,000
238

Prepare the Departmental Trading and Profit & Loss Account


for the year ended 31st March, 2018 after taking into account the
following :

a) Stock as on 31st March, 2018 was : Radios : Rs. 30,000


Watches Rs. 24,000
b) An amount of Rs.1,200 out of sundry debtors has to be
written off as bad debts and the provision for doubtful debts
has to be increased thereafter to 10% of the debts
outstanding.
c) The expenses outstanding as on 31st March, 2018 are
Publicity Rs.1,300, Salaries Rs.1,200 and Commission
Rs.1,700.
d) Provide 10% depreciation on furniture & fixtures.
e) Revenue items to be allocated in ratio 2:1 between Radio
and Watches.
(Answer: Net Profit - Radio - 22,467 Watches – 18,233)

4. From the following particulars given by M/s Tins and Toys,


prepare a Departmental Trading and Profit & Loss Account for
their two departments, viz. Tins Dept. and Toys Dept. for the
year ended 31st March, 2018.

Particulars Rs.
Opening Stock Toys 5,000
Tins 15,000
Raw Material consumed (Tins) 36,000
Stores consumed 9,000
Wages : Tins 6,000
Toys 3,000
Advertisement 1,500
Packing Expenses (Toys) 600
Office Expenses 4,800
Depreciation : Factory Equipment 3,200
Building 1,600
Sales : Tins 90,000
Toys 18,000
Closing Stock : Toys 6,000
Tins 12,000
239

You are also given the following additional information :


a) Toys are made of end bits of sheets of raw material used by
Tins Department. The value of such material used during the
year by Toys Department Rs. 2,000.
b) Toy-making does not require any equipment.
c) Only one-eighth of the total area of building is occupied by
Toys Department.
[Ans. Net Profit - Toys : Rs. 11,650, Tins : Rs. 28,650]

5. Following information is available from the books of Trupti


Departmental Stores for the year.

Account heads Departments Total


A B C
Rs. Rs. Rs. Rs.
Purchases 1,00,000 1,50,000 4,00,000 6,50,000
Sales 3,05,000 6,10,000 9,15,000 18,30,000
Returns inwards 5,000 10,000 15,000 30,000
Returns outwards 10,000 5,000 15,000 30,000
Opening stock 25,000 35,000 50,000 1,10,000
Closing stock 40,000 25,000 20,000 85,000
Wages 90,000
Postage 1,500
Salaries 3,000
Office expenses 4,500
Rent 12,000
Discount allowed 9,000
Professional 12,000
charges
Bad debts 6,500
Interest 31,500
Insurance 3,400
240

Additional Information :
1) Departmental transfers :
i) Department A to B Rs. 5,000 and to C Rs. 10,000.
ii) Department B to C Rs. 5,000 and to A Rs. 2,500.
iii) Department C to A Rs. 3,500 and to B Rs. 4,500.

2) Allocation of expenses.
i) Postage, salaries, office expenses and professional
charges : Equally
ii) Rent A - 1, B - 1, C - 2
iii) Insurance A - 8, B - 5, C - 4
iv) Wages and interest A - 2, B - 3, C - 4.

You are required to prepare Departmental Trading and Profit


and Loss Account for the year.
[Ans. Gross profit A Rs. 2,14,000 B Rs. 4,13,000; C Rs. 4,38,000 Net
profit A Rs. 1,92,817; B Rs. 3,86,333; C Rs. 4,02,450]


241

12
HIRE PURCHASE - I

Unit Structure :

12.0 Objectives
12.1 Introduction
12.2 Meaning of Hire-Purchase Transaction
12.3 Difference between Installment Payment and Hire-Purchase
System
12.4 Calculation of Interest
12.5 Interest Included in Amount of Installment
12.6 When Interest is not included in Installments
12.7 Rate of Interest is not given
12.8 Calculation of Depreciation
12.9 Accounting Methods
12.10 Full Cash Price Method (Credit Purchase/Sale Method)
12.11 Practical Problems
12.12 Exercises

12.0 OBJECTIVES

After studying the unit students will be able to:

 Know the meaning of Hire purchase.


 Distinguish between Installment system and Hire purchase
system.
 Calculate interest under different conditions.
 Calculate depreciation under Hire purchase system.
 Journalise the hire purchase transactions.
 Understand the accounting procedure.

12.1 INTRODUCTION

All big business houses and multinationals make sales


on cash basis as well as on credit basis. When the goods are
sold the purchaser may either make the full payment at one time
(cash basis) or may defer the payment (credit basis). The credit
242

sales are very important and essential for the growth of business.
The sale proceeds under credit sales are not immediately collected
but are collected in monthly, quarterly or yearly installments. When
the price of an article is paid by installments, the total amount
paid is higher than the actual cash price of the article. The
excess price is the charge for interest and the risk involved. This
arrangement of making the payment in installments is beneficial to
both the seller and the buyer. There are two systems of deferred
payments, namely, (i) Hire Purchase System, and (ii) Installment
Payment System. Hire-purchase system is the most secured and
effective tool of collecting the proceeds of a credit sale. Under
this system, the goods are delivered to the purchaser at the
time of agreement before the payment of installments but the title
on the goods is transferred after the payment of all
installments as per the hire-purchase agreement.

12.2 MEANING OF HIRE-PURCHASE TRANSACTION

12.2.1 Meaning
Hire-purchase is a credit purchase of an asset by the
hire-purchaser from the hire- vendor. The asset is delivered in the
possession of the purchaser at the time of commencement of the
agreement. The price under hire-purchase system is paid in
installments. The installments may be annual, six monthly,
quarterly, etc. The installment includes the part of the outstanding
cash price and the interest on the outstanding cash price from the
date of the last installment paid to the due date of the installment.
The hire-purchaser becomes the owner of the goods after the
payment of all installments as per the agreement. The hire-
purchaser has a right to use the goods as a bailer and terminate
the agreement at any time in the capacity of a hirer.

12.2.2 Default in the payment of any installment:


Hire-purchase means a transaction where the goods are
sold by hire-vendor to the purchaser under the hire-purchase
agreement. If there is a default in the payment of any
installment, the hire vendor will take away the goods from the
possession of the purchaser without refunding him any amount.
The payment of every installment is treated as the payment
of hire charges by the purchaser to the hire vendor till the
payment of the last installment. After the payment of the last
installment, the amount of various installments paid is appropriated
towards the payment of the price of the goods sold and the
ownership or the goods is transferred to the purchaser. Hire
vendor continues to be the owner of the goods till the payment of
last installment.
243

12.2.3 Hire-Purchase Agreement

A hire purchase agreement is one under which the buyer


takes delivery of goods, promising to pay the price in certain
number of installments and until full payment is made, to treat the
payment as hire charges for using the said goods. In fact, a hire
purchase agreement stipulates that (i) the delivery of goods will be
given by the owner of goods to the hire purchaser; (ii)
payment will be made in installments, (iii) each installment will
be treated as hire charge so that if default in respect of payment
of even the last installment is made, the seller will be entitled to
take away the goods without compensating, the hire purchaser in
any form, and (iv) if all installments are paid and the other
conditions are fulfilled, the ownership of the goods will pass to the
buyer. Hire-purchase agreement means a contract between the
hire vendor and the hire purchaser regarding the sale of goods
under certain conditions.
Usually every hire-purchase agreement shall contain the
following terms.

1. Date of hire-purchase: The date on which the hire-purchase


agreement will commence.

2. Description of the goods: The description of the goods that


will be delivered to the hire-purchaser at the commencement of the
agreement.

3. Hire-Purchaser: A Person who gets the possession of the


asset/goods from the owner under a hire-purchase agreement. He
is the buyer (Hire-Purchaser) of the goods.

4. Hire-Vendor: A Person who sells goods under a hire-purchase


agreement.

5. Cash price of the goods: Cash price means the price at which
goods may be purchased against cash payment.

6. Hire-purchase price: Hire purchase price means the total


amount which is payable by the hire-purchaser under the
agreement.

7. Down payment: The down payment means the amount which


is required to be paid by hire-purchaser to the hire vendor at the
time of commencement of hire-purchase agreement.

8. Rate of interest: The rate of interest is the interest charged


by the hire vendor on the outstanding amount of the cash price
due to the hire-purchaser.
244

9. Installments: The number of installments to be paid by the


hire-purchaser along with the amount of each installment and the
date of payment of each installment. The installment paid by the
purchaser is also called as “Hire”.

12.3 DIFFERENCE BETWEEN INSTALLMENT


PAYMENT AND HIRE-PURCHASE SYSTEM

Installment payment transaction is a system of purchase


and sale of goods in which title of goods is immediately transferred
to the purchaser at the time of sale of goods and the sale price
of the goods is paid in installments. The followings are the
differences between Hire-purchase system and Installment
payment system:

Hire-purchase system Installment payment system


1.The transfer of ownership 1.The ownership is transferred
takes place after the payment immediately at the time of
of all installments. agreement.
2. Hire-purchase agreement is 2.The agreement is like a
like a contract of hire though contract of credit purchase.
later on it may become a
purchase after the payment of
last installment.

3.The vendor has a right to 3.The vendor has no right to


take back goods from the take back the goods from the
possession of the hire- possession of the purchaser; he
purchaser. can simply sue for the balance
due.
4.The provisions of the Hire- 4.The provisions of Sale of
Purchase Act apply to the Goods Act apply to the
transaction. transaction.

CHECK YOUR PROGRESS


1. Enlist the terms included in the Hire Purchase Agreement.
2. Define the terms:
a. Hire Purchase
b. Hire Purchaser
c. Hire Vendor
d. Installment
e. Hire Purchase Agreement
f. Down Payment
245

3. Fill in the blanks


a. A contract for sale of goods may be either a sale or an
................... to sell.
b. Under a hire purchase agreement payments are made in ...
..,...........
c. Each installment payment is treated as...................
d. A hirer has the right to .................. the agreement before
payment of the last installment by paying the seller the agreed
amount.
Answers: i) agreement, ii) installment,
iii) hire charges iv) terminate

4. State whether the following statements are True or False:


a. If the hirer fails to pay the last installment, the amounts paid
earlier are considered as hire charges.
b. Under hire-purchase system the purchaser becomes the
owner of the goods immediately after the down payment.
c. Under hire-purchase system the buyer does not charge the
depreciation on the asset till he becomes the owner.
d. Interest is calculated on the hire purchase price at the given rate
of interest.

Answers: True - (i). False - (ii), (iii), (iv).

12.4 CALCULATION OF INTEREST

Interest i s to b e cal culat ed on the outstanding balance


except down payment. The calculation of interest is made under
three conditions:

1. Rate of Interest given and Interest included in amount of


installment:
2. Rate of Interest given and Interest is not included in
installments:
3. Rate of interest not given:

12.5 INTEREST INCLUDED IN AMOUNT OF


INSTALLMENT
In case if hire-purchase price i.e. payment made in the
form of down payment and all installments is more than the cash
price, it is regarded that the interest is included in installments.
Following steps should be followed for calculating the amount
of interest on each installment.
i) Calculate the outstanding cash price at the time of first
installment by subtracting Down Payment from the Cash Price.
246

ii) Calculate interest on the outstanding cash price at the time of


first installment by applying the given rate of interest, the mode of
installment must be considered (whether the installment is annual,
half-yearly or quarterly).

iii) Calculate the amount of cash price included in the first


installment by subtracting the amount of interest as calculated
in step (ii) from the amount of the first installment.

iv) Calculate the outstanding cash price at the time of second


installment by Subtracting the amount of cash price of the first
installment from the outstanding Cash price at the time of first
installment i.e., (i) - (iii).

v) Calculate interest on the second installment by applying the rate


of interest to the outstanding cash price at the time of second
installment. It is explained in the following example.

Example : On 1st January, 2009, Mr. A purchased from M/s B &


Co. one 'Motor Car' under hire-purchase system, Rs.10,000 being
paid on delivery and the balance in three annual installments of
Rs.10,000 each payable on 31st December each year. The cash
price of the motor car is Rs. 37,250 and vendors charge interest @
5% per annum on yearly balances. Find out the amount of
cash price and interest included in each installment.

Calculation of
Cash Cash Interest Installment
Price price (Rs.) (Rs.)
paid
Date Calculation (Rs.)
(Rs.)
1/1/2009 Cash Price 37250
1/1/2009 Less Down Payment paid 10000 10000 0 10000
1/1/2009 Outstanding cash price 27250
31/12/09 Add Interest@5% 1363
31/12/09 Total Amount Due 28613
31/12/09 Less Installment paid 10000 8637 1363 10000
31/12/09 Outstanding cash price 18613
31/12/10 Add Interest@5% 931
31/12/10 Total Amount Due 19544 9069 931 10000
31/12/10 Less Installment paid 10000
31/12/10 Outstanding cash price 9544
*Add Interest@5%
31/12/11 (Bal fig) 456
31/12/11 Total Amount Due 10000
31/12/11 Installment paid 10000 9544 456 10000
247

CHECK YOUR PROGRESS


1. A Ltd. purchased a machine on hire purchase from Z Ltd, on
January 1, 2009, paying Rs.8,000 immediately and agreeing to
pay three annual installments of Rs.8,000 each on December
31, every year. The cash price of the machine is Rs.29,800 and
the vendors charge interest @ 5% per annum. Calculate the
amount of interest paid by the buyer to the seller every year.
st nd rd
Answers: Interest for 1 Year: 1090, 2 Year: 745, 3 Year: 365

12.6 WHEN INTEREST IS NOT INCLUDED IN


INSTALLMENTS
When the total amount paid in the form of down payment
and all installments is exactly equal to the cash price, it is
regarded that the interest, is not included in installments. It means
that interest is payable in addition to the agreed amount of
installment. It is explained in the following example.

Example: On 1st January, 2009, Mr. A purchased from M/s B &


Co. one 'Motor Car' under hire-purchase system, the cash price
being Rs.37,250. Rs.10,000 being paid on delivery and the
balance in three equal annual installments payable on 31st
December every year. In addition to it, interest at 5% per annum
was also payable to vendors on outstanding balances. Find out
the amount of cash-price and interest included in each installment.

Calculation of Interest
Cash Cash Interest Installment
Price Price (Rs.) (Rs.)
Date Calculation (Rs.) paid
(Rs.)

1/1/2009 Cash Price 37250


1/1/2009 Less Down Payment paid 10000 10000 0 10000
1/1/2009 Outstanding cash price 27250
31/12/09 Add Interest@5% 1363
31/12/09 Total Amount Due 28613
31/12/09 Less Installment paid 10446 9083 1363 10446
31/12/09 Outstanding cash price 18167
31/12/10 Add Interest@5% 908
31/12/10 Total Amount Due 19075 9083 908 9991
31/12/10 Less Installment paid 9991
31/12/10 Outstanding cash price 9084
31/12/11 *Add Interest@5%(Bal fig)
454
31/12/11 Total Amount Due 9538
31/12/11 Total Amount Paid 9538 9084 454 9538
248

CHECK YOUR PROGRESS

1. A Ltd purchased machinery on hire purchase basis from B


ltd on the following terms: Cash price Rs.79,250, Cash Down
Payment 25% and Balance to be discharged in 3 equal
installments together with interest @10% p.a. to be paid at
the end of each year. Compute the payment of interest and
installment to be made each year
st nd rd
Answers: Interest for 1 Year: 5,944, 2 Year: 3,962, 3 Year: 1,981,
st nd rd
Installment for 1 Year: 25,757, 2 Year: 23,775, 3 Year: 21,792

12.7 RATE OF INTEREST IS NOT GIVEN

When rate of interest is not given, there can be two situations.

1. When cash price and the amounts of installments are given and
the amount of each installment is same.
2. When cash price and the amounts of installments are given and
the amount of each installment is not same.

12.7.1 When Rate of Interest is not given and installments are


of same amount:

When cash price and the amounts of installments are given and the
amount of each installment is same.
Example: On 1 st January, 2009, Mr. A purchased from M/s B &
Co. one 'Motor Car' under hire-purchase system, Rs.10,000 being
paid on delivery and the balance in three annual installments of
Rs. 10,000 each payable on 31st December every year. The
cash price of the motor car is Rs.37,250. Find out the amount of
cash price and interest included in each installment.

*Add Interest@5% 477


Bal fig(Amount Due-Amount Paid) 456
Consider balancing figure while calculating last installment

The total interest of Rs 2,750 is to be apportioned among the 1st,


2nd and 3rd installment in the ratio of 3:2:1.(since there are three
installments 3/6, 2/6, and 1/6 respectively)
(1)Share of 1st installment in the Interest= 2,750x3/6 = Rs1,375

(2)Share of 2nd installment in the Interest= 2,750x2/6 = Rs.917

(3)Share of 3rd installment in the interest= 2,750x1/6 = Rs.458


249

CHECK YOUR PROGRESS

1. A purchased a machine for down payment of Rs.20,000 and


3 annual installments of Rs.20,000 each. Cash price is
Rs.74,500. Find out the amount of cash-price and interest
included in each installment.

st nd rd
Answers: Interest for 1 Year: 2,750, 2 Year: 1,833, 3 Year:
st nd
917, Cash Price included for 1 Year: 17,250, 2 Year: 18,167,
rd
3 Year: 19,083

12.7.2 When Rate of Interest not given and Installments given


of different amounts

When cash price and amounts of installments are given but the
amount of each installment is not equal:

Example: Cash price of a machine is Rs.1,25,000 on 1st


January, 2009. Its hire- purchase price is Rs.1,50,000. This hire
purchase price is paid in the following manner: Rs.30,000 on 1st
January, 2009, Rs. 35,000 at the end of the first year, Rs.40,000
at the end of second year; Rs. 45,000 at the end of third year.
Calculate interest and cash price included in each installment.

Step 1: Calculation of Interest

Hire Purchase Price 1,50,000


Less: Cash Price 1,25,000
Total Interest 25,000

Step 2: Apportionment of Interest

Total Interest of Rs.25,000 is to be apportioned among the three


installments in the following manner:

At the end of Year 1 2 3 T


Outstanding Hire 120000 85000 45000 250000
Purchase Price
*Interest 12000 8500 4500 25000

* Interest = Outstanding Hire Purchase Price before


Installment* Total Interest /Total of Outstanding Hire
Purchase Price for all installments
250

Interest at the end of year 1 =120000* 25000 = Rs.12000


250000

Interest at the end of year 2 = 8500 * 25000 = Rs.8500


250000

Interest at the end of year 3 = 45000* 25000 = Rs.4500


250000

CHECK YOUR PROGRESS

1. MTC purchased a taxi on hire purchase terms. The cash


price was Rs.87,092.

Payments were to be made as under


On 1.1.2009 Rs.20,000 (down Payment)
On 31.12.2009 Rs.35,000
On 31.12.2010 Rs.25,000
On 31.12.2011 Rs.20,000
Calculate interest and cash price included in each installment.

st nd rd
Answers: Interest for 1 Year: 7122, 2 Year: 4006, 3 Year:
st nd rd
1780, Cash Price included for 1 Year: 27878, 2 Year: 20994, 3
Year: 18220

12.8 CALCULATION OF DEPRECIATION

Under Hire-Purchase system, the ownership is not


transferred to the buyer. Hence, there is a dispute about charging
of the depreciation on the asset. However, from practical point of
view, depreciation on asset should be charged at a certain rate on
the cash price of the asset acquired. The logic behind provision of
depreciation on asset is

1. Asset is used by the buyer


2. Asset is to be shown at its real value
3. The Hire-purchaser is going to be owner after the payment of
last installment

Depreciation should be provided as a matter of policy in the


books of the buyer. Depreciation should be charged on asset every
year on the cash price under straight line or reducing balance
method.
251

12.9 ACCOUNTING METHODS

The method of accounting for hire-purchase transactions


depends on the value of sales. Hire purchase accounting
methods for goods of small sales value may be Debtors Method
or Stock and Debtors Method. If the goods have substantial
sales value then the accounting methods as per AS 10, which
deals with the valuation of the Fixed Assets, Assets acquired on
hire-purchase terms, are to be recorded at their cash- price. The
interest has to be written off as an expense. The accounting
entries can be passed by the buyer in any of the three methods

1. Asset Accrual Method (Actual Cash Price Method)


2. Interest Suspense Method
3. Full Cash Price Method

Assets taken on Hire purchase basis should be considered


like ordinary purchase.

12.10 FULL CASH PRICE METHOD


(CREDIT PURCHASE / SALE METHOD)

Under Full Cash Price Method, the Hire-Purchaser is


considered as the owner of the asset, the asset is recorded at
full cash price on the basis of the substance over form. The full
cash price of the asset is debited to the Asset account and
credited to the Hire-Vendor account. Interest account is debited
and the Hire-Vendor account is credited with the interest on the
outstanding balance. When the installment is paid, the Hire-
Vendor A/c is debited and the Bank A/c is credited .At the time of
the preparation of the final accounts, Interest is transferred to
Profit & Loss Account and Asset is shown in the Balance Sheet
at the cost less depreciation. The balance due to Hire- Vendor is
shown in the Balance Sheet as a Liability.
252

 BOOKS OF HIRE PURCHASER

13.10.1 Journal Entries in the books of Hire-Purchaser:

1. For buying assets (entering


agreement) on hire purchase: A
Full Cash Price
Asset A/c Dr.
To Hire-Vendor A/c
2. For paying the down Down Payment
payment to vendor:
Vendor A/c Dr
To Cash/ Bank A/c

3. When Interest is Due on Interest on outstanding


unpaid installments: balance
Interest A/c Dr.
To Hire Vendor A/c

4. For Installment Payment Amount of Installment


( Interest payment will
be also included in it):
Vendor A/c Dr
To Cash/ Bank A/c
5. For charging Depreciation: Calculated on Cash Price
Depreciation A/c Dr.
To Asset A/c

6. For transferring Interest and


Depreciation to Profit and
Loss Account:
Profit and Loss A/c Dr.
To Interest A/c
To Depreciation A/c

(Repeat entry Nos. 3, 4, 5, and 6 in subsequent years)

However, a firm may maintain a Provision for Depreciation A/c


instead of charging depreciation to asset on Hire-purchase A/c, in
such case the journal entry is

Profit and Loss A/c Dr.


To Provision for Depreciation for Asset on Hire-Purchase A/c
(Being the asset on hire-purchase is shown on its historical cost).
253

12.10.2 Disclosure in Balance Sheet

Balance Sheet of Hire-Purchaser

Liabilities Rs. Ass Rs.


Hire-Purchase Fixed Assets:et xxxx
Balance in Hire- xxxx Asset(at cash Price) xxxx
Less :Instalment xxxx Less Depreciation xxxx
Instalment not yet xxxx

 BOOKS OF HIRE VENDOR

12.10.3 Journal Entries in the books of Vendor:

1. For selling on hire purchase:


Hire-Purchaser A/c Dr. Full Cash Price
To Hire Sales A/c
2. For receiving the down payment: Down Payment
Cash/ Bank Dr
To Hire-Purchaser A/c
3. For Interest receivable Interest on outstanding
Hire-Purchaser A/c Dr balance
To Interest A/c

4. For Installment Received Amount of Installment


( Interest receipt will
be also included in it):
Cash/ Bank A/c Dr.
To Hire-Purchaser A/c
5. For transferring Interest to
Profit and Loss Account:
Interest A/c Dr.
To Profit and Loss A/c
(Repeat entry Nos. 3, 4, and 5, in subsequent years)

12.10.4 Disclosure in Balance Sheet

Balance Sheet of Hire-Vendor


Liabilities Rs. Asset Rs.
Hire-Purchase Debtors
Balance in Hire- Purchaser xx
254

12.11 EXERCISE

1. Explain the meaning of Hire-Purchase System.

2. Write notes on:


(a) Hire-Purchase Price (b) Cash Price (c) Initial Payment

3. Objective Questions

 MULTIPLE CHOICE QUESTIONS

1. Hire Purchase Price means the total amount payable by the hirer,
made up of ---------
(a) the cash price of the article and the interest
(b) the cash price of the article less interest
(c) the cash price of the article and the down payment
(d) the installments and the interest

2. Each Hire Purchase installment amount is made up of ---------


(a). part payment towards cash price only
(b). part payment towards interest only
(c). part payment towards cash price plus interest
(d).none of the above

3. Under ---------method, entries are made as if asset is purchased


for full price on credit on the date of Hire Purchase agreement
itself.
(a). Actual Cash Price
(b). Full Cash Price
(c). Asset Accrual
(d).None of the above

4. The Hire Purchaser can record the asset under Full Cash Price
Method at its ---------
(a). Hire Purchase Price
(b). Cash price
(c).None of the above

5. Interest in the Hire Purchase transaction, is charged on the -------


-- cash price
(a). Outstanding
(b). Full cash price
(c).None of the above

6. Under Hire –Purchase system buyer becomes the owner of


goods ---------
(a). immediately after the receipt of goods
(b). immediately after the down payment
255

(c). immediately after the payment of the last installment


(d).None of the above

7. Under Hire –Purchase agreement the buyer agrees to pay --------


(a). Cash price only.
(b). Interest only
(c). Cash Price and Interest

8. The last installment paid under Hire –Purchase comprises ---------


(a). Cash price only.
(b). Interest only
(c). Cash Price and Interest

Answers:1.-(a), 2. -(c), 3.- (b). 4. - (b), 5.-(a), 6. -(c), 7. -(c), 8 -(c).

 FILL IN THE BLANKS

1. is the purchase price payable if full payment is


made immediately.

2. means the total amount payable by the hirer,


made up of the cash price of the article and interest.

3. is the initial amount payable at the time of


signing the agreement.

4. As soon as payment is made, the hirer gets


possession of the article and can start using it immediately

5. Each Hire Purchase installment amount is made up of part


payment towards plus interest

6. Each Hire Purchase installment amount is made up of part


payment towards cash price plus

7. Under the Hire –Purchase system, depreciation is provided on


price

8. Under the Hire –Purchase system, depreciation is provided by


the

9. If the Hire –Purchaser makes a down payment on signing the


contract, it will not include any amount of

10. Depreciation is to be calculated on the full as the


same is not affected by the extent of payment made.
256

Answers: 1. - Cash Price - 2. - Hire Purchase Price, 3. – Down


Payment, 4. -Down, 5. - Cash Price 6. - Interest, 7. –Full Cash, 8. -
Hire –Purchaser, 9. –Interest, 10. - Cash Price

 STATE WHETHER TRUE OR FALSE

1. Actual Cash Price Method is also known as Interest Suspense


Method.

2. Full Cash Price Method is also known as Asset Accrual Method.


3. Asset Accrual Method is also known as Credit Purchase Method.

4. Actual Cash Price Method is also known as Credit Purchase


Method.

5. The hire-purchaser has the right to terminate the agreement at


any time before the property passes.

6. If the amount of each installment is equal, the total interest can


be allocated to different installments by the fixed installment
method.

7. Under the Hire –Purchase system, the buyer has the option to
return the goods.

8. When assets are acquired under the hire purchase system,


depreciation need not be provided as the vendor still continues
to be the legal owner of the asset.

9. Hire Purchase Price is equal to Cash Price

10. Under the Hire –Purchase system, the interest is paid by the
vendor to the hirer.

11. Cash Price is the purchase price payable if full payment is


made immediately.
12. Hire Purchase Price is the initial amount payable at the time of
signing the agreement.

Answers: TRUE: (5) (6) (7) (11)


FALSE: (1) (2) (3) (4) (8) (9) (10) (12)





257

13
HIRE PURCHASE - II

Unit Structure :
13.0 Objectives
13.1 Solved Problems
13.2 Exercises

13.0 OBJECTIVES

After studying the unit students will be able to the practical


problems on Hire purchase system.

13.1 SOLVED PROBLEMS

Illustration 1.

Raj Textiles Ltd. purchased Motor Car on hire-purchase


system. According to the terms, Rs. 30000 was payable on
delivery on 1st January, 2005: and the balance by 4 annual
installments of Rs.30000 each on 31st December. Krishna Motor
Ltd who sold the Motor Car charged 5 % p.a. interest on the
yearly balances. The cash value of the Car on delivery was
1,36,338. Depreciation @ 20% on diminishing balances was
written off in each year. Show Journal Entries in the books of Raj
Textiles Ltd
258
Journal Entries
In the books of Raj Textiles Ltd.

Date Particulars Debit(Rs.) Credit(Rs.)

1/1/05 Motor Car A/c Dr. 136338


To Krishna Motor Ltd A/c 136338
(Being total cash price due to the hire-vendor
for purchase of Motor Lorries)
1/01/05 Krishna Motor Ltd A/c Dr 30000
To Cash/ bank 30000
A/c
(Being down payment paid)
31/12/05 Interest A/c Dr. 5317
To Krishna Motor Ltd A/c 5317
(Being Interest due on unpaid Cash Price)
31/12/05 Krishna Motor Ltd A/c Dr 30000
To Cash/ bank 12000
A/c
(Being Installment
31/12/05 Depreciation A/c Dr. 27268
To Motor Car A/c 27268
(Being Depreciation charged)

31/12/05 Profit and Loss A/c Dr. 32585


To Interest A/c 5317
To Depreciation A/c 27268
(Being Interest and Depreciation transferred
to profit and loss account)
31/12/06 Interest A/c Dr. 4083
To Krishna Motor Ltd A/c 4083
(Being Interest due on unpaid Cash Price)
31/12/06 Krishna Motor Ltd A/c Dr 30000
To Cash/ bank 30000
A/c
(Being Installment paid)

31/12/06 Depreciation A/c Dr. 21814


To Motor Car A/c 21814
(Being Depreciation charged)

31/12/06 Profit and Loss A/c Dr. 25897


To Interest A/c 4083
To Depreciation A/c 21814
(Being Interest and Depreciation transferred
to profit and loss account)
31/12/07 Interest A/c Dr. 2787
To Krishna Motor Ltd A/c 2787
(Being Interest due on unpaid Cash Price)
259
31/12/07 Krishna Motor Ltd A/c Dr 30000
To Cash/ bank 30000
A/c
(Being Installment paid)
31/12/07 Depreciation A/c Dr. 17451
To Motor Car 17451
A/c
31/12/07 (Being Depreciation charged)
Profit and Loss A/c Dr. 20238
To Interest A/c 2787
To Depreciation A/c 17451
(Being Interest and Depreciation transferred
to profit and loss account)
31/12/08 Interest A/c Dr. 1426
To Krishna Motor Ltd A/c 1426
(Being Interest due on unpaid Cash Price)
31/12/08 Krishna Motor Ltd A/c 30000
Dr 30000
To Cash/ bank
A/c
31/12/08 Depreciation A/c Dr. 13961
To Motor Car 13961
A/c
(Being Depreciation charged)
31/12/08 Profit and Loss A/c Dr. 15387
To Interest A/c 1426
To Depreciation A/c 13961
(Being Interest and Depreciation transferred
to profit and loss account)

Working Note: 1. Calculation of Interest

Date(1) Opening Cash Inter Instalme Closing


Cash Price est nt Cash Price (Rs.)
Price paid(Rs.) (Rs. (Rs (6)=(2)-(3)
(Rs.) (3)=(5-4) ) .)
(2) @5 (5)
% (4) Given
1/1/2005 136338 30000 0 30000 106338
31/12/2005 106338 24683 5317 30000 81655
31/12/2006 81655 25917 4083 30000 55738
31/12/2007 55738 27213 2787 30000 28525
31/12/2008 28525 28574 1426 30000 0
Total 136387 13613 150000
260
Working Note: 2.

Calculation of Depreciation

Calculation of Depreciation
Date Calculatio (Rs.)
1/1/2005 Cash Price n 136338
31/12/05 less Depreciation 27268
31/12/05 Book-Value 109070
31/12/06 less Depreciation 21814
31/12/06 Book-Value 87256
31/12/07 less Depreciation 17451
31/12/07 Book-Value 69805
31/12/08 less Depreciation 13961
31/12/08 Book-Value 55844

Illustration 2.
Rama Company purchased Machinery from XY Trading Ltd. on 1st
January, 2009 on hire-purchase system. The cash price of the
Machinery was Rs.3,00,000 which was payable as under:
On 01-01-2009, Rs.1,00,000
On 31-12-2009, Rs.80,000
On 31-12-2010, RS.80,000
On 31-12-2011, RS.80,000
The purchasing company decided to write off depreciation @
20% of the cost price each year. You are required to give the
necessary journal entries in the books of both the parties for three
years. Also show the calculation of interest, depreciation and the
installment.
Journal Entries
In the books of Rama Company
Date Particulars Debit(Rs.) Credit(Rs.)

1/1/09 Machinery A/c Dr. 300000


To XY Trading Ltd A/c 300000
(Being total cash price due to the hire-vendor
for purchase of Truck)
1/1/09 XY Trading Ltd A/c Dr 100000
To Cash/ bank A/c 100000
(Being Down Payment paid)

31/12/09 Interest A/c Dr. 20000


To XY Trading Ltd A/c 20000
(Being Interest due on unpaid Cash Price)
261
31/12/09 XY Trading Ltd A/c Dr 80000
To Cash/ bank A/c 80000
(Being Installment paid)

31/12/09 Depreciation A/c Dr. 60000


To Machinery A/c 60000
(Being Depreciation charged)

31/12/09 Profit and Loss A/c Dr. 80000


To Interest A/c 20000
To Depreciation A/c 60000
(Being Interest and Depreciation transferred to
profit and loss account)
31/12/10 Interest A/c Dr. 13333
To XY Trading Ltd A/c 13333
(Being Interest due on unpaid Cash Price)
31/12/10 XY Trading Ltd A/c Dr 80000
To Cash/ bank A/c 80000
(Being Installment paid)

31/12/10 Depreciation A/c Dr. 60000


To Machinery A/c 60000
(Being Depreciation charged)

31/12/10 Profit and Loss A/c Dr. 73333


To Interest A/c 13333
To Depreciation A/c 60000
(Being Interest and Depreciation transferred to
profit and loss account)
31/12/11 Interest A/c Dr. 6667
To XY Trading Ltd A/c 6667
(Being Interest due on unpaid Cash Price)
31/12/11 XY Trading Ltd A/c Dr 80000
To Cash/ bank A/c 80000
(Being Installment paid)

31/12/11 Depreciation A/c Dr. 60000


To Machinery A/c 60000
(Being Depreciation charged)

31/12/11 Profit and Loss A/c Dr. 66667


To Interest A/c 6667
To Depreciation A/c 60000
(Being Interest and Depreciation transferred to
profit and loss account)
262
Journal Entries
In the books of XY Trading Ltd A/c

Date Particulars Debit(Rs.) Credit(Rs.)

1/1/09 Rama Company A/c Dr. 300000


To Sales A/c 300000
(Being total cash price due from the
hire- Purchaser for sale of Truck)
1/1/09 Cash/ bank A/c Dr 100000
To AB Transport Company A/c 100000
(Being Down Payment Received )
31/12/09 Rama Company A/c Dr. 20000
To Interest A/c 20000
31/12/09 (Being
Cash/ Interest
bank A/c Drdue on unpaid Cash Price) 80000
To AB Transport Company A/c 80000
(Being Installment Received)
31/12/09 Interest A/c Dr. 20000
To Profit and Loss A/c 20000
(Being Interest transferred to profit and loss
account)
31/12/10 Rama Company A/c Dr. 13333
To Interest A/c 13333
(Being Interest due on unpaid Cash Price)
31/12/10 Cash/ bank A/c Dr 80000
To AB Transport Company A/c 80000
(Being Installment Received)
31/12/10 Interest A/c Dr. 13333
To Profit and Loss A/c 13333
(Being Interest transferred to profit and
loss account)
31/12/11 Rama Company A/c Dr. 6667
To Interest A/c 6667
(Being Interest due on unpaid Cash Price)
31/12/11 Cash/ bank A/c Dr 80000
To AB Transport Company A/c 80000
(Being Installment Received)
31/12/11 Interest A/c Dr. 6667
To Profit and Loss A/c 6667
(Being Interest transferred to profit and loss A/c)

Working Note: 1. Calculation of Interest

Step 1: Calculation of Total Interest:


Hire-purchase Price = 1,00,000 + (80,000 x 3) = Rs.3,40,000
Less: Cash Price - Rs.3,00,000
Total Interest = Rs.40,000
263
Step 2: Apportionment of Interest:

The total interest of Rs 40,000 is to be apportioned among the


1st, 2nd, and 3rd installment in the ratio of 3:2:1.(since there are
three installments3/6,2/6, and 1/6 respectively)

(1)Share of Interest in the 1st installment = 40000x3/6 = Rs.20,000

(2)Share of Interest in the 2nd installment = 40000x2/6 = Rs.13,333

(3)Share of interest in the 3rd installment = 40000x1/6 = Rs.6,667

Working Note: 2. Calculation of Depreciation


Cost of Machinery = Rs. 300000
Less Depreciation (@ 20% of the cost price)=
60000(300000*20/100)

Illustration 3.
Ramsons purchased two printing machines from King Printers on
Hire-purchase basis on 1st July ,2007 .The terms of the contract
were as follows:-

i) The cash price of the each printing machine was Rs.75,000

ii) Rs.15,000 was paid on the signing of the contract on 1stJuly 2007

ii)The balance was paid in installments of Rs. 20,000 plus interest


at 15% per annum

iv)The installments were paid on 31st December every year


st
commencing from 31 December 2007. King Printers charged
depreciation at 10% per annum under S.L.M. system. They closed
their books on 31st December. Show in books of Ramsons
necessary account.
264
In books of Ramsons
King Printers A/c

Date Particulars RS. Date Particulars RS.


01/07/2007 To Cash A/c 30000 01/07/2007 By Machine 150000
31/12/2007 To Cash A/c 49000 31/12/2007 By Interest A/c 9000
31/12/2007 To Balance 80000
159000 159000
31/12/2008 To Cash A/c 52000 01/01/2008 By Balance b/d 80000
31/12/2008 To Balance 40000 31/12/2008 By Interest A/c12000
92000 92000
31/12/2009 To Cash A/c 46000 01/01/2009 By Balance b/d 40000
31/12/2009 By Interest A/c 6000
46000 46000

Interest A/c

Date Particulars RS. Date Particulars RS.


31/12/07 To King Printers A/c 9000 31/12/07 By Profit & Loss A/c 9000
9000 9000

12000 12000
31/12/08 To King Printers A/c
31/12/08 By Profit & Loss A/c
12000 12000

6000 6000
31/12/09 To King Printers A/c By Profit & Loss A/c
31/12/09
6000 6000

Machine A/c

Date Particulars RS. Date Particulars RS.


1/7/2007 To King Printers A/c 150000 31/12/2007 By Depreciation A/c 7500
31/12/2007 By Balance c/d 142500
75000 150000
1/1/2008 To Balance b/d 142500 31/12/2008 By Depreciation A/c 15000
31/12/2008 By Balance c/d 127500
142500 142500
1/1/2009 To Balance b/d 127500 31/12/2009 By Depreciation A/c 15000
31/12/2009 By Balance c/d 112500
127500 127500
265
Depreciation A/c

Date Particulars RS. Date Particulars RS


31/12/2007 To Machine A/c--1 7500 31/12/2007 By Profit &Loss A/c .
7500
7500 7500
31/12/2008 To Machine A/c--2 15000 31/12/2008 By Profit &Loss A/c 15000
15000 15000
31/12/2009 To Machine A/c--3 15000 31/12/2009 By Profit &Loss A/c 15000
15000 15000

Working Note: 1
Calculation of Depreciation
Date Calculation (Rs.)
1/7/2001 Cash Price 150000
31/12/01 less Depreciation for 6 months-----------1 7500
31/12/01 Book-Value 142500
31/12/02 less Depreciation-----------------------------2 15000
31/12/02 Book-Value 127500
31/12/02 less Depreciation-----------------------------3 15000
31/12/02 Book-Value 112500

Working Note: 2
Calculation of Interest
Cash Cash Interest Instalment
Price Price (Rs.) (Rs.)
Calculation
(Rs.) paid
(Rs.)
1/7/2007 Cash Price 150000
Less Down Payment
1/7/2007 paid 30000 30000 0 30000
31/12/07 Outstanding cash price 120000
31/12/07 Add Interest@ 15% 9000
31/12/07 Total Amount Due 129000
31/12/07 Less Instalment paid 49000 40000 9000 49000
31/12/07 Outstanding cash price 80000
31/12/08 Add Interest@ 15% 12000
31/12/08 Total Amount Due 92000 40000 12000 52000
31/12/08 Less Instalment paid 52000
31/12/08 Outstanding cash price 40000
31/12/09 Add Interest@ 15% 6000
31/12/09 Total Amount Due 46000
31/12/09 Total Amount Paid 46000 40000 6000 46000
266
Illustration 4.
On 1st January, 2003 Kavita Ltd. purchased Machinery on Hire-
Purchase System from Jaya Traders for Rs. 26,000. They paid
Rs. 2000 on signing the contract and four half –yearly
installments of Rs. 6,000 plus interest at 20% per annum each
on 30th June and 31st December every year thereafter.
Depreciation was written off at rate of 10% per annum on the
diminishing balance system.
i) Prepare Ledger accounts in the books of Kavita Ltd and Jaya
Traders for the years 2003-2004; and
ii) Disclose the relevant items in Balance sheet of Kavita Ltd and
Jaya Traders as on 31st December 2003

In books of Kavita Ltd. Industries Ltd


Jaya Traders A/c

Date Particulars RS. Date Particulars RS.


01/01/2003 To Cash A/c 2000 01/01/2003 By Plant A/c 26000
30/06/2003 To Cash A/c 8400 30/06/2003 By Interest A/c 2400
31/12/2003 To Cash A/c 7800 31/12/2003 By Interest A/c 1800
31/12/2003 To Balance 12000
30200 30200
30/06/2004 To Cash A/c 7200 01/01/2004 By Balance 12000
31/12/2004 To Cash A/c 6600 30/06/2004 By Interest A/c 1200
31/12/2004 By Interest A/c 600
13800 13800

Interest A/c

Date Particulars RS. Date Particulars RS.


30/06/2003 To Jaya Traders A/c 2400 31/12/2003 By Profit &Loss A/c 4200
31/12/2003 To Jaya Traders A/c 1800
4200 4200
30/06/2004 To Jaya Traders A/c 1200 31/12/2004 By Profit &Loss A/c 1800
31/12/2004 To Jaya Traders A/c 600
1800 1800
267
Machinery A/c

Date Particulars RS. Date Particulars RS.


1/1/2002 To Jaya Traders A/c 26000 31/12/2002 By Depreciation A/c 2600
31/12/2002 By Balance c/d 23400
26000 26000
1/1/2003 To Balance b/d 23400 31/12/2003 By Depreciation A/c 2340
31/12/2003 By Balance c/d 21060
23400 23400

Depreciation A/c

Date Particulars RS. Date Particulars RS.


31/12/2003 To Machinery A/c 2600 31/12/2003 By Profit &Loss A/c 2600

31/12/2004 To Machinery A/c 2340 31/12/2004 By Profit &Loss A/c 2340

An Extract of Balance sheet of Kavita Ltd. as on 31st


December 2003

Liabilities Rs. Asset Rs.


Hire-Purchase Creditors Fixed Assets:
Balance in Jaya Traders 12000 Machinery (at cash Price) 26000
Less Depreciation 2600
23400

In books of Jaya Traders


Kavita Ltd. A/c

Date Particulars RS. Date Particulars RS.


01/01/2003 To Sales A/c 26000 01/01/200 By cash A/c 2000
30/06/2003 To Interest A/c 2400 30/06/200 By cash A/c 8400
31/12/2003 To Interest A/c 1800 31/12/200 By cash A/c 7800
31/12/200 By Balance 12000
30200 10400
01/01/2004 To Balance b/d 12000 30/06/200 By cash A/c 7200
30/06/2004 To Interest A/c 1200 31/12/200 By cash A/c 6600
31/12/2004 To Interest A/c 600
13800 13800
268
Interest A/c

Date Particulars RS. Date Particulars RS.


31/12/2003 To Profit & 4200 30/06/2003 By Kavita Ltd. 2400
LossA/c 31/12/2003 A/c
By Kavita Ltd. 1800
4200 A/c 4200
31/12/2004 To Profit & 1800 30/06/2004 By Kavita Ltd. 1200
31/12/2004 By Kavita Ltd. 600
1800 1800

An Extract of Balance sheet of Jaya Traders as on 31st December


2003

Liabilities Rs. Asset Rs.


Hire-Purchase Debtors
Kavita Ltd A/c 12000
Working Note: 1

Calculation of
Cash Cash Interest Instalment
Price Price (Rs.) (Rs.)
Date Calculation (Rs.) paid
(Rs.)
01/01/2003 Cash Price 26000
01/01/2003 Less Down Payment paid 2000 2000 0 2000
01/01/2003 Outstanding cash price 24000
30/06/2002 Add Interest@ 20%* 2400
30/06/2002 Total Amount Due 26400
30/06/2002 Less Instalment paid 8400 6000 2400 8400
30/06/2002 Outstanding cash price 18000
31/12/2003 Add Interest@20%* 1800
31/12/2003 Total Amount Due 19800
31/12/2003 Less Instalment paid 7800 6000 1800 7800
31/12/2003 Outstanding cash price 12000
30/06/2004 Add Interest@20%* 1200
30/06/2004 Total Amount Due 13200
30/06/2004 Less Instalment paid 7200 6000 1200 7200
30/06/2004 Outstanding cash price 6000
31/12/2004 Add Interest@20%* 600
31/12/2004 Total Amount Due 6600
31/12/2004 Less Instalment paid 6600 6000 600 6600
*Interest calculated for 6 months
269
Illustration 5.

Farhan Industries Ltd. acquired a plant at Cash Price of Rs.


75,000, delivered on 1st January 2002, on the following hire
purchase terms:
1) An initial payment of Rs. 20,000 payable on delivery: and

2) Four half –yearly installments of Rs. 15,000 each commencing


from 30th June, 2002.

In arriving at these terms the plant manufacturer computed


interest at 7% per annum. Farhan Industries Ltd decided to write
off depreciation @ 10% of the cost price each year. You are
required to show the accounts in the books of Farhan Industries
Ltd for the years ending on 31st December 2002 and 31st
December 2003, necessary to record the above transactions

In books of Farhan Industries Ltd


Vendors A/c

Date Particulars RS. Date Particulars RS.


01/01/2002 To Cash A/c 20000 01/01/2002 By Plant A/c 75000
30/06/2002 To Cash A/c 15000 30/06/2002 By Interest A/c 1925
31/12/2002 To Cash A/c 15000 31/12/2002 By Interest A/c 1467
31/12/2002 To Balance 28392
78392 78392

30/06/2003 To Cash A/c 15000 01/01/2003 By Balance 28392


31/12/2003 To Cash A/c 15000 30/06/2003 By Interest A/c 994
31/12/2003 By Interest A/c 614
30000 30000

Interest A/c

Date Particulars RS. Date Particulars RS.


30/06/2002 To Vendors A/c 1925 31/12/2002 By Profit &Loss A/c 3392
31/12/2002 To Vendors A/c 1467
3392 3392
30/06/2003 To Vendors A/c 994 31/12/2003 By Profit &Loss A/c 1608
31/12/2003 To Vendors A/c 614
1608 1608
270
Plant A/c

Date Particulars RS. Date Particulars RS.


01/01/2002 To Vendors A/c 75000 31/12/2002 By Depreciation A/c 7500
31/12/2002 By Balance c/d 67500
75000 75000
1/1/2003 To Balance b/d 67500 31/12/2003 By Depreciation A/c 7500
31/12/2003 By Balance c/d 60000
67500 67500

Depreciation A/c

Date Particulars RS. Date Particulars RS.


31/12/2002 To Plant A/c 7500 31/12/2002 By Profit &Loss A/c 7500

31/12/2003 To Plant A/c 7500 31/12/2003 By Profit &Loss A/c 7500

Working Note: 1. Calculation of Interest

Opening Cash Interest Instalment Closing


Date Cash Price (Rs.) (Rs.) Cash Price
(1) Price paid(Rs.) @5% (5) Given (Rs.) (6)=(2)-(3)
(Rs.) (3)=(5-4) (4)
(2)

1/1/2002 75000 20000 0 20000 5500


31/6/2002 55000 13075 1925 15000 4192
31/12/2002 41925 13533 1467 15000 5
2839
31/06/2003 28392 14006 994 15000 2
1438
31/12/2003 14386 14386 614* 15000 60
Total 75000 5000 80000
*Balancing Figure

Illustration 6.
Bombay Trading Company purchased on 1st January, 2005 a
machine on Installment purchase system. The cash price of the
machine was Rs. 15,450 payment was to be made as under:
1. On 1st January, 2005 (on signing the contract) Rs. 3,000
2. On 31st December, 2005 Rs. 7,500
3. On 31st December, 2006 Rs. 4,500
4. On 31st December, 2007 Rs. 3,000
271
Bombay Trading Company charged depreciation at
10% p.a. under diminishing balance method; you are required
to prepare necessary accounts in the books of Bombay
Trading Company.

In books of Bombay Trading Company


Hire-Vendor A/c
Date Particulars RS. Date Particulars RS.
01/01/2005 To Cash A/c 3000 01/01/2005 By Machine 15450
31/12/2005 To Cash A/c 7500 31/12/2005 By Interest A/c 1500
31/12/2005 To Balance 6450
16950 16950
31/12/2006 To Cash A/c 4500 01/01/2006 By Balance b/d 6450
31/12/2006 To Balance 2700 31/12/2006 By Interest A/c 750
7200 7200
31/12/2007 To Cash A/c 23000 01/01/2007 By Balance b/d 2700
31/12/2007 By Interest A/c 300
3000 3000

Interest A/c
Date Particulars RS. Date Particulars RS.
31/12/05 To Hire-Vendor A/c 1500 31/12/05 By Profit & Loss A/c 1500
1500 1500
31/12/06 To Hire-Vendor A/c 750 31/12/06 By Profit & Loss A/c 750
750 750
31/12/07 To Hire-Vendor A/c 300 31/12/07 By Profit & Loss A/c 300
300 300

Machine A/c
Date Particulars RS. Date Particulars RS.
1/1/2005 To Hire-Vendor A/c 15450 31/12/2005 By Depreciation A/c 1545
31/12/2005 By Balance c/d 13905
75000 75000
1/1/2006 To Balance b/d 13905 31/12/2006 By Depreciation A/c 1391
31/12/2006 By Balance c/d 12514
13905 13905
1/1/2007 To Balance b/d 12514 31/12/2007 By Depreciation A/c 1251
31/12/2007 By Balance c/d 11263
12514 12514
272
Depreciation A/c

Date Particulars RS. Date Particulars RS


31/12/2005 To Machine A/c 1545 31/12/2005 By Profit &Loss A/c .
1545
1545 1545
31/12/2006 To Machine A/c 1391 31/12/2006 By Profit &Loss A/c 1391
1391 1391
31/12/2007 To Machine A/c 1251 31/12/2007 By Profit &Loss A/c 1251
1251 1251

Working Note: 1. Calculation of Interest


Step 1: Calculation of Total Interest:
Hire-purchase Price = Rs.18000
Less: Cash Price - Rs.15450
Total Interest = Rs.2550

Step 2: Apportionment of Interest


Total Interest of Rs.2550 is to be apportioned among the three
installments in the following manner:

At the end of Year 2005 2006 2007 Total


Outstanding Hire 15000 7500 3000 25500
Purchase Price
*Interest 1500 750 300 2550

* Interest = Outstanding Hire Purchase Price before


Installment* Total Interest

Total of Outstanding Hire Purchase Price for all installments

Interest at the end of year 1 =15000* 2550 = 1500


25500

rest at the end of year 2 = 7500 * 2550 = 750


25500
Interest at the end of year 3 = 3000* 2550 = 300
25500
273
Working Note: 2. Calculation of Depreciation

Date Calculation (Rs.)


1/1/2005 Cash Price 15450
31/12/05 less Depreciation 1545
31/12/05 Book-Value 13905
31/12/06 less Depreciation 1391
31/12/06 Book-Value 12515
31/12/07 less Depreciation 1251
31/12/07 Book-Value 11263

Illustration 7.
Doshi Roadways purch ase d t wo trucks f rom Tata Ltd. on
hire-purchase system on 1st January, 2006. The cash price of
each truck was Rs. 125,000. Payment was made as follows:
1.1.2006: RS 30,000 per truck.
31.12.2006: RS 45,000 per truck.
31.12.2007: RS 40,000 per truck.
31.12.2008: RS 35,000 per truck.
Depreciation at 20% per annum on original cost is charged.
You are required to: Calculate interest per year; and show the
necessary accounts in the books of Doshi Roadways.

In books of Doshi Roadways


Tata Ltd A/c
Date Particulars RS. Date Particulars RS.
01/01/2006 To Cash A/c 60000 01/01/2006 By Truck A/c 250000
31/12/2006 To Cash A/c 90000 31/12/2006 By Interest A/c 26087
31/12/2006 To Balance 126087
276087 276087
31/12/2007 To Cash A/c 80000 01/01/2007 By Balance 126087
31/12/2007 To Balance 62391 31/12/2007 By Interest A/c 16304
142391 142391
31/12/2008 To Cash A/c 70000 01/01/2008 By Balance 62391
31/12/2008 By Interest A/c 7609
70000 70000
274
Interest A/c

Date Particulars RS. Date Particulars RS.


31/12/06 To Tata Ltd. A/c 26087 31/12/06 By Profit & Loss A/c 26087
26087 26087
31/12/07 To Tata Ltd. A/c 16304 31/12/07 By Profit & Loss A/c 16304
16304 16304
31/12/08 To Tata Ltd. A/c 7609 31/12/08 By Profit & Loss A/c 7609
7609 7609

Truck A/c

Date Particulars RS. Date Particulars RS.


1/1/2006 To Tata Ltd. A/c 250000 31/12/2006 By Depreciation A/c 25000
31/12/2006 By Balance c/d 225000
250000 250000
1/1/2007 To Balance b/d 225000 31/12/2007 By Depreciation A/c 25000
31/12/2007 By Balance c/d 200000
225000 225000
1/1/2008 To Balance b/d 200000 31/12/2008 By Depreciation A/c 25000
31/12/2008 By Balance c/d 175000
200000 200000

Depreciation A/c

Date Particulars RS. Date Particulars RS


31/12/2006 To Truck A/c 25000 31/12/2006 By Profit &Loss A/c .
25000
31/12/2007 To Truck A/c 25000 31/12/2007 By Profit &Loss A/c 25000
31/12/2008 To Truck A/c 25000 31/12/2008 By Profit &Loss A/c 25000

Working Note: 1. Calculation of Interest

Step 1: Calculation of Total Interest:


Hire-purchase Price = Rs. 300000
Less: Cash Price - Rs. 250000
Total Interest = Rs. 50000

Step 2: Apportionment of Interest

Total Interest of Rs.2550 is to be apportioned among the three


installments in the following manner:
275

At the end of Year 2005 2006 2007 Total

Outstanding Hire 240000 150000 70000 460000


Purchase Price
*Interest 26087 16304 7609 50000

* Interest = Outstanding Hire Purchase Price before


Installment* Total Interest
Total of Outstanding Hire Purchase Price for
all installments

Interest at the end of year 1 = 240000* 50000 = 26087


460000

Interest at the end of year 2 = 150000* 50000 = 16304


460000

Interest at the end of year 3 = 70000* 50000 =7609


460000
Working Note: 2. Calculation of Depreciation
Cost of Truck= Rs. 125000
.

Less Depreciation (@ 20% of the cost price) = Rs.25000


( 125000*20/100)

Illustration 8.
Priya Trading purchased a machine on 1.1.2010 on hire purchase
system from Rita Traders. The necessary details are given below:

Cash Price Rs.60000


Amount paid on signing the agreement Rs.20000
First Annual Installment Rs.18000
Second Annual installment Rs.16000
Last annual installment Rs.13860
Rate of Interest 10% p.a.

Depreciation at 20% on cash price of machine by reducing


installment method is charged. Calculate interest per year; and
show the necessary accounts in the books of Rita Traders.
276
In books of Rita Traders
Priya Trading A/c

Date Particulars RS. Date Particulars RS.


01/01/2010 To Sales A/c 60000 01/01/2010 By cash A/c 20000
31/12/2010 To Interest A/c 4000 31/12/2010 By cash A/c 18000
31/12/2010 By Balance 26000
64000 64000
01/01/2011 To Balance b/d 26000 31/12/2011 By cash A/c 16000
31/12/2011 To Interest A/c 2600 31/12/2011 By Balance 12600

28600 28600
01/01/2012 To Balance 12600 31/12/2012 By cash A/c 13860
31/12/2012 To Interest A/c 1260
13860 13860

Interest A/c
Date Particulars RS. Date Particulars RS.
31/12/2010 To Profit & Loss 4000 31/12/2010 By Priya 4000
A/c Trading A/c
4000 4000
31/12/2011 To Profit & Loss 2600 31/12/2011 By Priya 2600
A/c Trading A/c
2600 2600
31/12/2012 To Profit & Loss 1260 31/12/2012 By Priya 1260
A/c Trading A/c
1260 1260

Working Note: 1. Calculation of Interest

Date(1) Opening Cash Interest Installment Closing


Cash Price (Rs.) (Rs.) (5) Cash
Price paid @10%(4) Given Price
(Rs.)(2) (Rs.) (Rs.)
1/1/2010 60000 20000 0 20000 40000
31/12/2010 40000 14000 4000 18000 26000
31/12/2011 26000 13400 2600 16000 12600
31/12/2012 12600 12600 1260 13860 0

13.2 EXERCISE

1. Raja Transport Ltd. purchased a Motor car on 1st January,


2005, on hire-purchase basis from Meenakshi Motors Ltd. The
cash –price of the Motor car was Rs.74,500. Under the agreement,
277
a sum of Rs.20,000 was payable initially on 1st January, 2005:
and the balance in three annual installments of Rs. 20,000 each
falling due from 1st April, 2005. The financial year of the Raja
Transport Ltd. end on the 31st March. The company charges
interest at 5% p.a. and depreciation at 10% p.a on cash price of
the Motor-car on diminishing balance method. Prepare Motor-car
Account, Meenakshi’s Motors Ltd Account and Interest Account in
the books of Raja Transport Ltd.
st
Answers: Interest for 3 months till 1 April, 2005: Rs. 681, Interest
st
for year ending 31 March, 2006: Rs. 1759, Interest for year ending
st
31 March, 2007: Rs. 847.

2. On 1.1.2002 Mr. Singh purchases machinery on Hire purchase


system. The hire purchase agreement provided an initial down
payment of Rs.1,500; the balance is to be paid in 4 equal half-
yearly installments of Rs.2,000 each. Cash price is Rs.8,934. Rate
of interest per annum is 6% and the rate of depreciation is 10% on
original cost. Pass journal entries in the books of Mr. Singh from
1.1.2002 to 31.12.2003

Answers: Interest for half year ending 30/06/02: 223, Interest for
half year ending 31/12/02: 170, Interest for half year ending
30/06/03: 115, Interest for half year ending 31/12/03: 58.

3. X Company Ltd. purchased a machine from Y Machines Ltd.


on hire-purchase basis, the cash price being Rs.55,850
Rs.15,000 was paid on the signing of the contract and the
balance in three annual installments of Rs.15,000 each on
31st March each year. Interest is charged at 5% per annum.
Depreciation was written off at rate of 10% per annum on the
diminishing balance system. Give journal entries in the books of X
Company Ltd. whose accounting year ends on 31st March
each year, under Full Cash Price Method.

Answers: Interest for 1st Year: 2043, 2nd Year: 1395, 3rd Year: 714.

4. M/s Asha Refrigeration Ltd. supplied Refrigerators to Ashok


Hotel on the installment system, on 1st July, 2004. The cash price
of Refrigerator was Rs. 22,350. Under Installment system, it was
agreed to pay Rs.6,000 on that date and Rs.6,000 annually for
three years. Depreciation was to be written off the asset 10% p.a.
Show the relevant Ledger account in the books of both the parties
for three years.

st nd rd
Answers: Interest for 1 Year: 825, 2 Year: 550, 3 Year: 275.
278
5. On 1st April, 2008 Modern Traders Ltd. took delivery of one
Truck from GEM Motors Ltd. on Hire-Purchase Agreement,
payable in three equal installments of Rs.60,000 each on 31st
March, 2009, 2010, 2011. The cash value of the Truck on
delivery was Rs.1,63,400. Vendor charges interest at 5% per
annum on the yearly balances. The purchaser wrote off
depreciation @ 25 per cent on the diminishing value method for
each year. Pass the necessary Journal entries to record the above
transactions in the books of both the parties.

st nd rd
Answers: Interest for 1 Year: 8170, 2 Year: 5579, 3 Year:
2852.




279

14
ACCOUNTING FROM INCOMPLETE
RECORDS I
(SINGLE ENTRY SYSTEM)

Unit Structure :

14.0 Objectives
14.1 Introduction
14.2 Types of Single Entry
14.3 Incomplete form of Double Entry
14.4 Conversion Method
14.5 How to search for Required Information?
14.6 Preparation of Final Accounts under Conversion of Single
Entry
14.7 Single Entry Illustration
14.8 Exercise

14.0 OBJECTIVES

After studying the unit the students will be able to:


 Understand the types of Single Entry.
 Know the Advantages and disadvantages of Single Entry.
 Explain the difference between Double entry and Single
entry.
 Understand the Conversion Method.
 Calculate the required figures.

14.1 INTRODUCTION

The term ‘Single Entry’ refers to a method of maintaining the


accounts in a manner convenient to a business house. Single Entry
system does not follow the principles of double entry system. Under
this system businessman maintains / records only few accounts
which are absolutely essential. i.e. Personal accounts of debtors
and creditors under .ingle Entry System. Real and Nominal
accounts are normally not maintained. The system of recording
transactions varies from person to person. E.g. Trader may record
280

amount receivable from customers and when he receives money


he either cancels the amount or circle the amount indirectly where
he noted credit sale.

E.g. Goods sold to Anand on credit

Anand 5 Kgs Sugar Rs. 150


10 Kgs Rice Rs. 500
Total Rs. 650

On receipt of the cash from Anand, the above records may


be cancelled OR the original amount recorded may be circled as
amount is received Rs.650. On Receipt of cash no other entry is
passed. For credit purchases he may maintain file or folder for
unpaid invoice / bill on payment of amount, he may remove the bill /
invoice or just cancels on payment. In simple words ,Single Entry
System is incomplete form of account keeping.

Eric Kohler has defined “Single Entry System is a system


of book keeping in which as a rule only records of cash and of
personal accounts are maintained. It is always incomplete
double entry. The incompleteness varying under different
circumstances”

14.2 TYPES OF SINGLE ENTRY

1. Pure Single Entry

Under this method entries are made directly in personal accounts of


debtor and creditor because the subsidiary books are not
maintained at all. In this type the duel aspect of each transaction is
ignored, hence it is called Pare Single Entry System.

2. Quasi Single Entry / Impure Double Entry :

Under this system businessman maintains some of the subsidiary


books like cash book, sales book, purchases book etc. in addition
to the personal accounts of Debtors and Creditors. But they do not
maintain real and nominal account.

14.3 INCOMPLETE FORM OF DOUBLE ENTRY

14.3.1 Introduction:

A small businessman who carries business himself and he


may not be familiar with the system of double entry and the
complex accounting principles, concepts etc. Such businessman
maintains records of the transaction by way of note without
281

following accounting principles. He may record only one aspect or


partial records of same transaction and the same way he may
ignore some transactions. For E.g. Depreciation of assets, loss of
uninsured stock of goods by fire. Goods/cash withdrawn from
business etc. such accounting is known as Single Entry.

14.3.2 Special Features:

Following are special features of incomplete records.


1] Some transactions are recorded properly by giving effect for
both the receipt and payments.
2] Some transactions are not recorded at all e g. Goods / cash
withdrawn from business for personal use.
3] Some transactions are recorded partially either Debit or Credit
aspect is recorded.
4] Some personal transactions are recorded wrongly E.g.
Insurance Premium paid is recorded as business expenses.
5] Single Entry System is defective and unscientific and their form
is unsuitable for big business. Only Sole Trader and
Partnership Organisations may keep their books of accounts
under this system.
6] Under Single Entry System only Personal and Cash accounts
are maintained. Real and Nominal accounts are not
maintained.
7] The Single Entry System of accounting varies from person to
person, from business to business.
8] No rigid rules and principles are followed under this system and
therefore the records suffer from all types of errors.

14.3.3 Advantages:
Following are relative advantages of this System
1] Simplicity: It is very simple method of accounting business
transactions. Any person can record transactions which he feels
necessary, the way he wants to record.

2] Requires no expertise: Maintenance of accounting records


does not require adequate knowledge of Book Keeping.

3] Economical: It is less costly than double entry book keeping


method.
4] Suitable for small concerns: It is most suitable for small
concerns having limited transaction and few assets and liabilities. It
is suitable as owners are having full control in business as regards
cash, goods etc.
282

5] Speed: The business transactions are recorded immediately /


simultaneously.

6] To ascertain the profit or loss: Determination of Profit or Loss


is much easier.

14.3.4 Disadvantages / Defects:

Incomplete records suffer from the following defects:-

1] It is not based on recognized accounting principles.

2] It does not record all transactions. Some transactions record only


one effect. In some transactions both effects are recorded and
some transactions are not recorded at all. Therefore these
accounting records are not accepted by Tax Authorities.

3] Arithmetical accuracy of accounts cannot be checked as trial


balance cannot be prepared.

4] Final Account i.e. Trading and Profit and Loss Account and
Balance Sheet cannot be prepared as all transactions are not
recorded. Hence Gross Profit, Net Profit OR Loss cannot be
ascertained. Balance Sheet cannot be prepared as Real Accounts
and other accounts are not maintained.

5] This system gives scope for misappropriations and frauds


relating to cash / goods etc.

6] In the absence of real accounts, it becomes difficult to know the


exact financial position of the business and valuation of goodwill on
sale of the business.

7] This system of account is inaccurate, crude, defective and


unscientific and hence not recognized under various statues of
Government, Bank etc.

14.3.5 Difference between Single Entry System and Double


Entry System:

Double Entry System Single Entry System

1] Two aspects of each and every 1] Two aspects of each and every
transactions are recorded. transactions are not recorded.

2] It is a complete scientific and 2] It is incomplete and unscientific


satisfactory system of book keeping. system of book keeping.
283

3] It is possible to prepare trial balance 3] It is not possible to prepare Trial


to verify the arithmetic balance to verify arithmetic accuracy
accuracy of transaction. of transaction.
4] There is no much scope for mis- 4] There is much scope for negligence,
appropriation and fraud as the misappropriation & fraud as
accounting is full proof. accounting is a faulty.

5] All the personal, real and nominal 5] Only personal accounts of debtors &
accounts are maintained creditors and cash book are
maintained.
6] It is possible to prepare trading and 6] It is not possible to prepare trading
profit and loss account as accounts profit & loss A/cs as accounts of
of purchases, sales, returns & purchases, sales, Returns &
expenses are maintained. expenses are not maintained.
7] Balance sheet can be prepared 7] Statement of affairs can be prepared
on the basis of book values of basis of book values of some assets
assets and liabilities and capital accounts maintained and on
estimates & owners memory.
8] It is suitable for all types of suitability 8] It is suitable only for very small
business business whether small or large.
concerns.
9] It is complex, costly and requires 9] It is simple, economical and does not
expert knowledge and skill and need expert knowledge and detailed
elaborate books of accounts books of accounts

14.3.6 Ascertainment of Profit or Loss under Single Entry


System.
When accounts are kept under Single Entry system, there are two
methods to ascertain Profit or Loss.
4.1 Statement of Affairs Method [Not in Syllabus]
4.2 Conversion Method.

14.4 CONVERSION METHOD


14.4.1 Introduction:
In order to come over various limitations of Single Entry
System, it becomes necessary to prepare final account by
converting Single Entry into Double Entry. So, it is possible for the
trader to ascertain Gross Profits, Profit or Loss for the period, to
ascertain net worth of business. Conversion of single entry into
double entry involves the complete process of journalising, posting,
balancing, preparing Trial Balance and the Final accounts.
However, instead of preparing all ledger accounts this is done by
preparing control accounts. These control accounts are to be
prepared within the scattered information which is equivalent to
284

Trial Balance. If such information is inadequate or missing, it should


be ascertained first from various control accounts before preparing
Final Accounts.

Thus, conversion of single entry into double entry is nothing but


preparation of final accounts with or without trial balance.

14.4.2 Sources of information. Missing information can be


ascertained from the following sources;
i] Cash book
ii] Opening control accounts of Sundry Debtors, Sundry Creditors,
Bills receivable, Bills payable.
iii] Opening Balances of Real Accounts.

14.4.3 Analysis of Ledger Account:

1. Sundry Debtors Account:


Sundry Debtors account is prepared to find out either the missing
credit sales or closing balance or cash received etc.

Sundry Debtors A/c


Dr Cr
To Opening balance of debtors By Cash Received from Debtors
To credit sales if given (if not given By Bills receivable received
balancing figure is credit sales) By Returns Inwards
To Bills Receivable dishonoured By Discount Allowed
By Bad Debts
By Transfers to Creditors
By Transfers to Creditors
By balance (closing) (either given
or balancing figure)

Note: Only one amount of either credit sales or cash received or


closing balance can be missing and not all.

2. Sundry Creditors Account:


Sundry Creditors Account is prepared to find out either credit
purchases or cash paid or closing balance of sundry creditors.
285

Sundry Creditors A/c


DR CR
To Cash paid to Creditors By Opening Balance of Creditors
To Bill payable accepted By Credit Purchases (either given or
balancing figure)
To Discount received By Bills Payable Dishonoured.
To Returns outward
To Transfer from debtors
To Closing balance of Creditors
(either given or balancing figure)
Note: Any one to the above item will be missing not all.

3. Bills Receivable Account:


This account is prepared to find out Acceptance received or
Bills honored (cash received) or Bills dishonored or opening
balance or closing balances.

Bills Receivable A/c


DR CR
To opening balance (if given) By Cash Received (on presentation of Bills)
To Sundry Debtors (Bills received from By Sundry Debtors (Bills returned
Debtors (if given) dishonoured.)
By Closing Balance (balancing figure if not
given)

Note: Any one of the above item will be missing.


4. Bills Payable Account:
This account is prepared to find out bills payable accepted or
honored or opening balance or closing balance of bills payable
account.

Dr. Bills Payable Account CR.


To cash paid (on account of Bills Payable By Opening balance
To Sundry Creditors (Bills payable By Sundry Creditors (Bills accepted in
dishonoured) their favour)
To Closing Balance.

Note: 1] Any one of the above item will be missing.


2] First Bills Receivable and Bills Payable Account should be
closed. Then, Sundry Debtors and Sundry Creditors should be
closed.
5. Cash / Bank A/c.
It is prepared to find out opening or closing balances of cash in
hand or cash sales or cash purchases etc.
286

14.5 HOW TO SEARCH FOR REQUIRED


INFORMATION?

How to Search for Required Information?

Final Items Where to find it out


Accounts
A)Trading 1) Opening Stock Opening Statement of Affairs
Account (Debit 2) Purchases Payment side of Cash Book
Side) Cash Purchases Creditors Account
Credit Purchases Payment side of Cash Book and / or
3) Buying Expenses such Adjustment
as Freight Carriage, Octroi,
Duty etc. Payment side of Cash Book and / or
4)Manufacturing Expenses Adjustment
5) Purchases Returns Sundry Creditors Account
B)Trading 1) Sales i) Receipt side of Cash Transaction
Account 2) Cash Sales ii) Total Debtors Account
(Credit Side) 3)Credit Sales iii)Other Information
C) Gross Profit 1)Sales Returns Other Information or total Debtors Account
(to be Deducted from sales) If gross profit % is given, ascertained from
Gross Profit Sales or Cost of goods sold, Closing Stock
may be balance figure on Trading A/c
Credit side. Payment side of Cash Book :
Adjustment and from other information
D) P & L A/c a) Administrative Expenses Total Debtors Account and or other
(Debit Side) b) Selling Expenses information
c) Distribution Expenses Comparison of Opening & Closing value of
assets
d) Other Expenses such as
Discount, Bad debts etc. From Trading Account
e) Depreciation Receipt side of Cash Transactions
E) P & L A/c a) Gross Profit From Adjustments
(Credit Side) b) Income received From Receipt side of cash book or
c)Income receivable from opening statement of affairs
adjustment or income
received
F)Balance a) Sundry Creditors & Bills a) From closing Balance given or other
sheet Payable information, or
(Liabilities) b) Opening Capital b) from Opening Statement of Affairs
c)Additional Capital c) Cash Book Receipt side
Introduced
G)Balance 1) Cash in hand and Bank From Receipt side of cash book opening
Sheet (Assets) Balance or opening statement of affairs
2) Sundry Debtors and Bills a) From closing balance given or other
,eceivable information or
3) Fixed Assets b) by preparing debtors account & Bills
Buildings, Machinery etc. receivable account
and Addition to them From Opening statement of affairs or from
other information
287

14.6 PREPARATION OF FINAL ACCOUNTS UNDER


CONVERSION OF SINGLE ENTRY

Open the following Ledger Accounts.

1] Trading Account
2] Profit and Loss Account
3] Balance Sheet at the end of the Year
4] Sundry Debtors A/c
5] Sundry Creditors A/c
6] Bills receivable A/c if it is required.
7] Bills payable A/c if it is required.
8] Cash / Bank A/c (If Bank transactions are given separately two
columns Cash Book should be opened)
9] Statement of affairs at the beginning of the period.

After opening the above Account, following steps should be


taken:

1] Transfer Opening Balances in Opening Statement of Affairs


and respective Ledger Account as ‘ To Opening Balance b/d’
2] For transactions during Year. Pass Journal entry in mind and
post the same in Ledger A/c
3] Transfer closing balance in Balance Sheet at the end of the
year and show as closing balance in respective Account.
4] Ascertain missing item and record the missing items
respectively. The missing item is ascertained from the
concerned Ledger Account from the information available.
Such Ledger would not tally due to missing items. Hence, the
balancing figure in the Ledger Account would indicate the
missing debit or credit item. Then record the missing item, tally
the concerned account and complete the double entry of all
transactions.
5] Lastly prepare final accounts by using the balances of such
tallied accounts. Ascertained net profit from profit and loss
account and thereafter it should be added to capital account in
the closing balance sheet. The balance sheet at the end of the
year tallies.
288

14.7 EXERCISES

A. Essay-type Questions

1. Explain the term “Single Entry System.” Enlist the limitations of


maintaining incomplete records.
2. Distinguish between Single Entry System and Double Entry
System.
3. Distinguish between Statement of Affairs and Balance Sheet.
4. Explain the term “Conversion Method.” Enlist the important
stages involved in the preparation of final accounts under
Single Entry System.
5. Explain the accounting procedure required to be taken to
convert single entry books into double entry when all the
subsidiary books are maintained.

B. Fill In the blank

1. Single Entry system does not follow the principles of ---------------


----------system.
2.If Bank transactions are given separately-------- columns Cash
Book should be opened.
3.The Opening Balances are to be transferred to ----------------- and
respective Ledger Accounts.
4.The closing balance has been transferred in ---------------------- at
the end of the year and show as closing balance in respective
Account.
5.Under conversion method credit purchases are ascertained by
preparing ----------------------------A/c.
6. If cash sales or cash purchases are the missing figures they are
ascertained by preparing --------------------------A/c.
7. ----------------------- account is prepared to find out either the
missing credit sales or closing balance or cash received etc.
8. Cash paid on account of bills honored is ascertained by
preparing ---------------------------a/c.
9.Before closing the Sundry Debtors and Sundry Creditors A/c ------
--------------------and ------------------------should be closed.
(Answers: 1. Double Entry, 2. Two, 3. Opening Statement of
Affairs, 4. Balance Sheet, 5. Total Creditors A/c, 6. Cash A/c, 7.
Sundry Debtors, 8. Bills Payable, 9. Bills Receivable A/c and
Bills Payable A/c)
289

C. State whether the following statements are True or False

1. In single entry system, only one entry is made for all types
of transactions.
2. Single entry system is similar to double entry system.
3. Companies may follow single entry system,
4. Small traders follow single entry system only.
5. Statement of affairs differs from balance sheet.
6. Trial balance can be prepared from the books kept under
single entry system.
7. In single entry both the aspect of the transaction are
recorded.
8. In single entry system usually personal accounts and cash
account are maintained.

(Answers: False:-1, 2, 3, 4, 6, 7. True:-5, 8.)


290

15
ACCOUNTING FROM INCOMPLETE
RECORDS - II

Unit Structure:

15.0 Objectives
15.1 Practical Problems
15.2 Exercise

15.0 OBJECTIVES

After studying the unit the students will be able to solve the
practical problems on single entry.

15.1 PRACTICAL PROBLEMS

Illustration: 1
Mr. Ketan carries on a small business, but he does not
maintain complete set of account books. He banks all receipts
makes all payments by means of cheques. He maintains properly a
Cash Book, Sales Ledger and Purchase Ledger. He also makes a
proper record of the assets and Liabilities as at the close of every
accounting year. From such records you are able to gather the
following facts.

Receipts for the year ended 31st Dec, 2017 RS. RS.

From Sundry Debtors 17,625


Cash Sales 4,125
Paid in by Ketan, the Proprietor 2,500 24,250
24,250 24,250

Payments made in the year ended 31st Dec, 2017.


New plant purchased 625
Drawings 1,500
Wages 6,725
Salaries 1,125
Interest paid 75
Telephone 125
Rent 1,200
291

Light and Power 475


Sundry Expenses 2,125
Sundry Creditors (purchases Ledger Account) 7,625
21,600
Assets and Liabilities
31.12.2016 31.12.2017
RS. RS.
Sundry Creditors 2,525 2,400
Sundry Debtors 3,750 6,125
Bank 625 ?
Stock 6,250 3,125
Plant 7,500 7,315
From the above data, prepare the Trading and Profit & Loss
Account for the year ended 31st December, 2017 & the Balance
Sheet as on that date. [Adapted, C.A. Inter]

Solution:
Mr. Ketan
Trading and profit & Loss Account
Dr. For the year ended 31st December, 2012. Cr.
Particulars Rs. Particulars Rs

To Opening Stock 6,250 By Sales: Cash 4,125


To Purchases(1) 7,500 Credit 20,000
To Wages 6,725 --------- 24,125
To Light & power 475 By Closing Stock 3,125
To Gross Profit C/d 6,300 ---------
27,250 27,250
----------
To Salaries 1,125 By Gross Profit 6,300
To Interest 75
To Telephone 125
To Rent 1,200
To Sundry Expenses 2,125
To Depreciation(3) 810
To Net Profit transferred
to Capital Account 840
______ _____
6300 6,300
===== =====
292

Mr. Ketan
Balance Sheet
As on 31st Dec, 2017
Liabilities RS Assets RS.

Sundry Creditors 2,400 Cash as Bank (4) 3,275


Capital Account
As on 1.01.2017 15,600 Sundry Debtors 6,125
Add Introduced Stock 3,125
During the year 2,500 Plant : On 1-1-17 7,500
Add Net Profit 840 Add Purchased
--------- During the year 625
18,940 --------
Less Drawings (1,500) 17,440 8,125
--------- Less Depreciation (810)
7,315
----------
19,840 19,840

Working Notes:

(1) Calculation of Credit Purchases:


Dr. Sundry Creditors Account Cr.
RS. RS.
To Cash Account 7,625 By Balance b/d 2,525
To Balance c/d 2,400 By Credit Purchases 7,500
( Bal. Fig.)
10,025 10,025

(2) Calculation of Credit Sales:


Dr. Sundry Debtors Account Cr.

RS. RS.
To Balance b/d 3,750 By Cash Account 17,625
To Credit Sales (Bal. Fig.) 20,000 By Balance c/d 6,125
23,750 23,750
----------- ----------

(3) Calculation of Depreciation on Plant RS.


Book Value of Plant on 1.1.2017 7,500
Add New Plant Purchased 625
8,125
Less : Book Value of Plant on 31.12.17 7,315
Depreciation for the year 810
293

(4) Calculation of Balance at Bank Rs.


Balance as at 1.1.17 625
Add Receipts for the year 24,250
24.875
Less Payments made during the year 21,600
Balance as at 31.12.2017 3,275

(5) Statement of Affairs as on 1.1.2017


RS. RS.
Sundry Creditors 2,525 Cash at Bank 625
Capital (Balancing fig) 15,600 Sundry Debtors 3,750
Stock 6,250
Plant 7,500
18,125 18,125

Illustration: 2
Mr. Sharma does not maintain his books according to the Double
Entry System. From the Following information prepare Profit and
Loss Account and Balance Sheet as at June 30,2018.
(A) Assets and Liabilities:
Particulars 30.06.17 30.06.18
Rs. Rs.
Stock 19.800 1,13,200
Creditors 31,000 14,500
Debtors 1,18.000 1,25,000
Premises 90,000 90,000
Furniture 11,000 11,500
Air Conditioner 15,000 15,000

(B) Creditors as at 30.6.2018 include Rs.15,000 for the purchase of


Air Conditioner.
(C) Cash Transactions.
Particulars RS.
Cash as at July 1, 2017 15,000
Collections from Customers 1,60,800
Payment to Creditors (Trade) 1,44,000
Rent, Rate, Taxes 11,500
Salaries 1,12,000
Sundry Expenses 18,000
Drawings by Sharma 30,000
Loans from Mrs. Mishap 23000
Capital Introduced 12000
Sundry Income 16500
Cash Sales 11,500
Cash Purchases 15,000
Paid to creditors for Air conditioner 15,000
294

(D) Bad Debts written off Rs.1,200.

Solution:
Trading and Profit and Loss Account
Dr. For the year ended 30 June 2017 Cr.

Particulars RS. Particulars Rs.


To Opening Stock 19,800 By Sales :
To Purchases Cash 11,500
Cash 15,000 Credit (1) 1,69,000
Credit (2) 1,42,500 1,80,500
----------- 1,57,500 By Closing Stock 1,13,200
To Gross Profit c/d 1,16,400
2,93,700 2,93,700

To Salaries 1,12,000 By Gross Profit b/d 1,16,400


To Rent, Rates & Taxes 11,500 By Sundry Income 16,500
To Sundry Expenses 18,000 By Net Loss transferred
To Bad Debts 1,200 to Capital A/c 9,800

1,42,700 1,42,700

Balance Sheet
As on 30 June 2017

Liabilities RS. Assets RS.


Mr. Sharma Capital A/c Premises 90,000
As at 1.7.2016 (4) 2,37,800 Furniture 11,500
Add Capital Air Conditioner 15,000
Introduced 12,000 Stock 1,13,200
Debtors 1,25,000
2,49,800
Less Drawings (30,000)
-----------
2,19,800-
Less : Loss for the
Year (9,800)
-------- 2,10,000
Loan from Mr. Mishap 23,000
Bank Overdraft Balance (3) 1,07,200
Sundry Creditors 14,500
-----------
3,54,700 3,54,700
295

Working Notes:
1. Total Debtors Account:
Particulars RS. Particulars RS.
To Balance b/d By Bank 1,60,800
To Credit Sales 1,18,000 By Bad Debts 1,200
(Balancing figure) 1,69,000 By Balance c/d 1,25,000
2,87,000 2,87,000

2. Total Creditor A/C

To Bank 1,44,000 By Balance b/d 16,000


To Balance b/d 14,500 (RS.31,000 – 15,000)
for Air Condition
By Credit Purchases 1,42,500
(Balancing figure)
1,58,500 1,58,500

3. Bank Account
Dr Cr.
Particulars Rs. Particulars RS.
To Balance b/d 15,000 By Payment to Creditors
To Collection from Debtors 1,60,800 (trade) 1,44,000
To Sundry Income 16,500 By Rent Rate & Taxes 11,500
To Loan From Mr. Shula 23,000 By Salaries 1,12,000
To Capital Introduced 12,000 By Sundry Expenses 18,000
To Cash Sales 11,500 By Drawing 30,000
To Balance b/d By Cash Purchases 15,000
(Balancing figure 1,07,200 By payment to Creditor
Bank Overdraft) For Air Conditioner 15,000
By Purchase of Furniture
Cl. Bal. of Furniture 11,500
Less Open Bal: 11,000 500
------------ --------- -----------
3,46,000 3,46,000

4. Opening Balance Sheet as at 1.7.2017.

Liabilities Rs Assets Rs.


Creditors: Premises 90,000
Trade cred. (31000-15000) Furniture 11.000
16,000 Air Conditioner 15,000
For air Conditioner 15,000 31,000 Stock 19,800
---------- Debtors 1,18,000
Capital ( Bal. fig. ) 2,37,800 Cash 15,000
2,68,800 2,68,800
296

Illustration:3
From the following information, prepare Trading and Profit and Loss
Account and the Balance Sheet as on 31st Dec, 2017.

Assets and Liabilities 1.1.2017 31.12.2017


Rs Rs.
Sundry Creditors 15,770 12,400
Outstanding Expenses 600 330
Sundry Expenses 11,610 12,040
Stock 8,040 11.120
Cash in hand and at Bank 6,960 8,080
Sundry Debtors ? 17,870

Following further details of the transaction for the year 2017 are
available from the incomplete records.

Particulars RS. Particulars RS.


Cash and Discount Credited to Cash Purchases 1,030
Debtors 64,000 Sundry Assets Purchased 430
Returns From Debtors 1,450 & Paid by Cheques
Bad Debts 420 Personal Drawings by 3,180
Cash and credit Sales 71810 Cheques
Discount Allowed by Creditors 700 Cash deposited into the Bank 5,000
Returns to Creditors 400 Cash withdrawn from Bank 9,240
Capital Introduced-Paid in to Cash on hand 31.12.17 1,200
Bank 8,500 Payments to Creditors by
Cash received from Debtors 62,500 Cheques 60,270
Paid into the Bank Expenses paid 9,570

(Mumbai University)

Solution
Bank Account
Dr. (To find out opening Bank Balance) Cr.
Particulars RS. Particulars RS.
To Opening Balance ( Bal.. fig) 4,000 By sundry Assets 430
To Sundry Debtors 62,500 By Drawing 3,180
To Capital Brought 8,500 By Cash Withdrawn 9,240
To Cash Deposited 5,000 By Sundry Creditors 60,270
By Balance C/d 6,880
80,000 80,000
297

a) Closing Cash Balance and Bank Balance is Rs.8,080 of which


Closing Cash Balance is Rs.1,200. Hence Closing Bank Balance is
Rs.6,880.

b) With the help of opening Bank Balance, Cash in hand at the


beginning can be found out as under.

CASH Account
Dr. Cr.
Particulars RS. Particulars RS.
To Opening Balance
(6,960-4,000) 2,960 By Cash Purchases (given) 1,030
By Bank (Deposited) 5,000
To Bank (Drawn for Office use) 9,240 By Expenses Paid in Cash 9,570
To Cash Sales (Balancing Figure 4,600 By Closing Balance (as given 1,200
16,800 16,800

d) Credit Sales should be ascertained by deducting Cash Sales


from total Sales. Thus

Particulars RS.
Cash and Credit Sales (as given) 71,810
Less Cash Sales ( as ascertained) 4,600
67,210

Dr. Total Creditors Account Cr.


Particulars RS. Particulars RS.
To Bank (Paid to By Opening Balance 15,770
Creditors by cheques) 60,270 (as given)
To Discount Received 700 By Credit Purchases 58,000
To Returns Outwards 400 (Balancing Fig.)
To Closing Balance (as 12,400 Given)
73,770 73,770

Dr. Total Debtors Account Cr.


Particulars RS. Particulars RS.
To Opening Balance By Bank (Cash received) 62,500
(Difference) 16,530 By Discount Allowed
To Credit Sales (64,000-62,500) 1,500
(as found out) 67,210 By Returns Inwards 1,450
By Bad Debts 420
By Closing Balance 17,870

83,740 83,740
298

Balance Sheet
As on 31.12.16

Particulars RS. Particulars RS.


Sundry Creditors 15,770 Cash in hand (as per Casha/c 2,960
Outstanding Expenses 600 Cash at Bank 9as per Banka/c 4,000
Capital (Balancing fig.) 26,770 Sundry Debtors 16,530
Sundry Assets (given 11,610
Stock in Hand (given) 8,040
43,140 43,140

Trading Account
Dr. For the year ending 31.12.2017 Cr.
Particulars RS. Particulars RS.
To Opening Stock Purchases 8,040 By Sales
To Purchase Cash 4,600
Cash 1,030 Credit 67,210
Credit 58,000 71,810
59,030 Less Returns 1,450 70,360
Less Returns 400 58,630 By Closing Stock 11,120
To Gross Profit 14,810 ----------
---------
81,480. 81,480
====== ========

Profit and Loss Account


Dr. For the year ending 31.12.2017 Cr.

Rs. Rs.
To Expenses 9,570 By Gross Profit 14,810
Less of 2018 600 By Discount 700
-------
8,970
Add of 2017 330
------ 9,300
To Discount 1,500
To Bad Debts 420
To Net Profit 4,290
---------- ------------
15,510 15,510
===== ======
299

Balance Sheet
As on 31.12.2017
Liabilities Rs Assets Rs.
Opening Capital 26,770 Sundry Assets 11,610
Add Addi, Capital 8,500 Add Purchases of Assets 430 12,040
Add, Net Profit 4,290 ---------- ---------
Sundry Debtors 17,870
Total 39,560 Closing Stock 11,120
Less Drawings 3,180 36,380 Cash at Bank 6,880
Outstanding Expenses 330 Cash in hand 1,200
Sundry Creditors 12,400
49,110 49,110

Illustration 4
You are given:
(a) The Balance Sheet of Jani at 31st December, 2017.
(b) The Cash Account for the year ended 31st December, 2017.
(c) Additional Information.

You are required to prepare Trading and Profit and Loss


Account for the year ended 31st December 2017 and Balance
sheet as on that date.

Balance Sheet as on 31-12-2017


Liabilities Rs Assets Rs.
Sundry Creditors 2,000 Cash 1,500
Bills Payable 4,000 Bills Receivable 2,000
Outstanding Wages 100 Sundry Debtors 2,500
Capital 9,900 Stock 2,000
Furniture 1,000
Plant and Machinery 7,000
16,000 16,000
===== =====

Cash A/c for the year ended 31-12-2017


Receipts Rs. Payments Rs.
To Balance 1,500 By Wages 2,000
To Cash Sales 3,500 By Drawings 1,200
To Debtors 8,000 By Payment to Creditors 3,500
To Bills Receivable 7,500 By Bills Payable 6,000
By Sundry Expenses 3,000
By Rent, Rates and Taxes 2,000
By Balance c/d 2,800
20,500 20,500
300

Additional Information : Rs
Sundry Debtors 31-12-2017 4,000
Sudry Creditors 31-12-2017 2,200
Bills Receivable 31-12-2017 4,500
Bill Payable 31-12-2017 5,000
Stock 31-12-2017 3,000
Bills Receivable dishonoured during the year 500
Bills payable dishonoured 200
Discount allowed 250
Bills Receivable Endorsed 1,500
Bills Receivable endorsed dishonored 200
Discount Received 650

Jani’s
Dr. Trading and Profit and Loss Cr.
Account for the year ended 31-12-2017

Particulars Rs. Particulars Rs. Rs.


To Opening Stock 2,000 By Sales
To Purchase [WN 2) 12,950 Cash 3,500
To Wages -Credit [WN] 4] 21,050 24,550
(2,000 – 100[O/s for
P.Y.]) 1,900
To Gross Profit c/d 10,700 By Closing Stock 3,000
27,550 27,550
To Discount Allowed 250 By Gross Profit b/d 10,700
To Rent rates Taxes 2,000 By Discount received 650
To Sundry Expenses 3,000
To Net Profit tr
to Capital 6,100
11,350 11,350
Balance Sheet
As at 31-12-2017
Liabilities Rs. Rs. Assets Rs.
Capital Account : Plant 7,000
Balance b/d (opening) 9,900 Furniture 1,000
Add : Net Profit 6,100 Stock 3,000
16,000 Sundry Debtors 4,000
Less : Drawings 1,200 14,800 Bills Receivable 4,500
Sundry Creditors 2,500 Cash 2,800
Bills payable 5,000
22,300 22,300
301

Working Notes:
Dr. (1) Bills Payable Account Cr.
Particulars Rs. Particulars Rs.
To Cash 6,000 By Balance b/d 4,000
To Creditors (B/P Dishonoured) 200 By Sundry Creditors 7,200
To Balance c/d 5,000 (Balancing figure)
11,200 11,200

(2) Dr (2) Sundry Creditors Account Cr.


Particulars Rs Particulars Rs.
To Cash 3,500 By Balance b/d 2,000
To Discoun 650 By Bills Payable (Dishonoured) 200
To Bills Payable [WN 1] 7,200 By Debtors (endorsed B/R
dishonoured) 200
To Bills Receivable (B.R. Endorsed)1,500 By Credit Purchases (bal.figure)12,950
To Balance c/d 2,500
15,350 15,350

(3) Dr. Bills Receivable Account Cr.


Particulars Rs. Particulars Rs.

To Cash 3,500 By Balance b/d 2,000


To Discount 650 By Bills Payable (Dishonoured) 200
To Bills Payable [WN 1] 7,200 By Debtors (endorsed B/R
Dishonoured) 200
To Bills Receivable (B.R. Endorsed) 1,500 By Credit Purchases (bal.figure)12,950
To Balance c/d 2,500
15,350 15,350

(4) Dr. Sundry Debtors Account Cr.


Particulars Rs. Particulars Rs.

To Balance b/d 2,500 By Cash 8,000


To B/R (Dishnoured) 500 By Discount 250
To Creditors By Bills Receivable (WN 3) 12,000
(endorsed B/R dishonoured) 200 By Balance c/d 4,000
To Credit Sales (balancing figure 21,050
24,250 24,250
302

Illustration 5
You are given :- (I) A Balance Sheet of Z as on 1st January 2017
(II) A Summary of Cash Transactions for 2017 (III) A List of
remaining transactions for that year.
(I)
Liabilities Rs. Assets Rs. Rs.
Loans 12,000 Debtors 40,000
Creditors 27,000 Less : Provision 750 39,250
Bills Payable 1,500 Bills receivable 10,000
Capital 1,40,000 Stock 45,000
Plant 30,000
Buildings 55,000
Cash 1,250

1,80,500 1,80,500

(II)

Receipts Rs Payments Rs.


To Balance on 1-1-2008 1,250 By Payment to Creditors 1,10,000
To Amount received form debtors 1,72,000 By Cash Purchases 25,000
To Bills receivable 35,000 By Bills Payable 45,000
To Cash Sales 24,500 By Loans Paid 12,000
By Salaries 9,000
By Rent 6,000
By Interest 450
By General charges 750
By Drawings 15,500
By Balance on 31-12-2008 9,050
2,32,750 2,32,750

(III)
Rs.
Total Purchases 2,15,000
Total Sales 2,35,000
Discount allowed to customers 1,250
Discount allowed by creditors 1,850
Bills receivable received during the year 60,000
Bill payable granted during the year 50,000
Stock 31st December 2017 90,000
Owing for outstanding liabilities 1,500
Commission earned by the firm but not received 1,200
Provide 5% reserve for doubtful debts and 2½% for discount on
debtors and depreciate buildings by 2½% and plant by 5% p.a. You
are required to prepare Trading and Profit and Loss Account and
Balance Sheet from the above. (Mar. 95, adapted)
303

Solution :
Trading and Profit and Loss Account
Dr. For the year ended 31-12-2017 Cr.
Particulars Rs. Rs Particulars Rs Rs.

To Opening Stock 45,000 By Sales :


To Purchases Cash 24,500
-Cash 25,000 –Credit 2,10,500 2,35,000
-Credit 1,90,000 2,15,000 By Closing Stock 90,000
To Gross profit 65,000
3,25,000 3,25,000
To Discount Allowed 1,250 By Gross profit b/d 65,000
To Salaries 9,000 By Discount Received 1,850
To Ren 6,000 By Commission Receivable 1,200
To Interes 450
To General Charges 750
To Outstanding payable 1,500
To Reserve for Bad
debts (5% x 16,500) 825
To Reserve for
Discount on debtors 392
[(2.5% x (16,500 – 825)]
To Depreciation :
-Building (2.55% x 55,000 ) 1,375
-Plant (5% x 30,000) 1,500 2,875
To Net Profit tfd. To Capital 45,008
68,050 68,050

Balance Sheet
As on 31-12-2017
Liabilities Rs. Rs. Assets Rs. Rs.
Capital Account of X Building 55,000
Opening Balance 1,40,000 Less : Depreciation 1,375 53,625
Add : Net Profit 45,008 Plant 30,000
1,85,008 Less : Depreciation 1,500 28,500
Less : Drawings 15,500 1,69,508 Closing Stock 90,000
Sundry Creditors [WN 2] 55,150 Sundry Debtors [WN 4] 16,500
Bills Payable [WN 1] 6,500 Less : Reserve for Doubtful
Outstanding Liabilities 1,500 Debts 5% 825

15,675
Less : Reserve for
Discount on Debtors 2.5%392 15,283
Bills Receivable [WN 3] 35,000
Commission Receivable 1,200
Cash 9,050
2,32,658 2,32,658
304

Working Notes :

(1) Ascertaining Closing Balance of Bills Payable A/c:

Dr. Bills Payable Account Cr.


Particulars Rs. Particulars Rs.
To Cash 45,000 By Balance b/d 1,500
To Balance c/d (Balancing figure) 6,500 By Sundry Creditors 50,000
51,500 51,500

(2) Ascertaining Closing Balance of Creditors:

Dr. Sundry Creditors Account Cr.


Particulars Rs. Particulars Rs.
To Cash 1,10,000 By Balance b/d 27,000
To Discount Received 1,850 By Credit Purchases 1,90,000
To Bills Payable 50,000
To Balance c/d (Balancing figure) 55,150
2,17,000 2,17,000

(3) Ascertaining Closing Balance of B.R. A/c :

Dr. Bills Receivable Account Cr.


Particulars Rs. Particulars Rs.
To Balance b/d 10,000 By Cash 35,000
To Sundry Debtors A/c 60,000 By Balance c/d (balancing figure) 35,000
70,000 70,000

(4) Ascertaining Closing Balance of Debtors:


Dr. Sundry Debtors Account Cr.
Particulars Rs. Particulars Rs.

To Balance b/d 39,250 By Cash 1,72,000


To Credit Sales 2,10,500 By Discount 1,250
By Bills Receivable 60,000
By Balance c/d
(Balancing figure) 16,500
2,49,750 2,49,750
305

Illustration 6
From the following particulars of Ada Teda Associates,
prepare Trading, Profit & Loss A/c. for the year ended 31st
March,2018 and Balance sheet as on that date :

Assets and Liabilities 31st March 31st March


2017 2018
Rs. Rs.
Furniture 8000 10000
Stock 12000 15000
Debtors 25000 ?
Creditors 19000 24000
Outstanding General Expenses 1500 1800
Cash at Bank 12000 15600
Bills Receivables 12400 18550
Bills Payables 8400 7400

Receipts & Payments during the year

Particulars Rs.
Receipts from Debtors 105600
Payments to Creditors 64500
Carriage 2400
Paid for Printing & Stationary 12350
Paid for Salaries 6800
Paid for Rent 7200
Paid for General Expenses 9450
Commission received 24550

a) Goods costing Rs.5,240 were used by the proprietor for his


personal use.
b) Goods are sold at a profit margin of 25% on sales.
c) Goods costing Rs.2,460 were distributed as free samples.
d) Discount allowed to debtors Rs.480 and discount received from
creditors Rs.820.
e) Bills of exchange accepted in favour of creditors Rs.41,300 and
drawn on Debtors Rs.34,540.
f) Any difference in cash book should be assumed to be drawings
made or capital introduced by the proprietor.
306

Solution:

In the books of Ada Teda Associates,


Opening Balance Sheet
As on 1st April 2017
Liabilities Rs. Assets Rs.
Capital 40500 Furniture 8000
Stock 12000
Creditors 19000 Debtors 25000
O/s General 1500 Cash at Bank 12000
Expenses
Bills payable 8400 Bills Receivables 12400
69400 69400

Sundry Debtors A/c


Particulars Rs. Particulars Rs.
To Balance B/d 25000 By bank 105600
To credit sales 137760 By bills receivable 34540
By discount allowed 480
By balance C/d 22140
162760 162760

Bills Receivable A/c


Particulars Rs. Particulars Rs.
To Balance B/d 12400 By bank 28390
To sundry debtors 34540
By balance C/d 18550
46940 46940

Sundry Creditors A/c


Particulars Rs. Particulars Rs.
To Bank 64500 By Balance b/d 19000
To Discount 820 By Credit Purchases 111620
Received
To Bills Payable 41300
To Balance c/d 24000
130620 130620
307

Bills Payable A/c


Particulars Rs. Particulars Rs.
To Bank 42300 By Balance b/d 8400
By Sundry Creditors 41300
To Balance B/d 7400
49700 49700

Cash/ Bank A/c


Particulars Rs. Particulars Rs.
To Balance B/d 12000 By Furniture 2000
To Receipts from 105600 By Bills Payable 42300
Debtors
To Commission 24550 By Payments to 64500
Received Creditors
To Bills Receivable 28390 By Carriage 2400
By Printing & Stationary 12350
By Paid for Salaries 6800
By Paid for Rent 7200
By Paid for Gen. 9450
Expenses
By Drawings 7940
By balance C/d 15600
170540 170540

Trading Profit & Loss A/c


Dr. For the year ended 31-03-2017 Cr.
Particulars Rs. Particulars Rs.
To Opening Stock 12000 By Sales 137760
To Purchases 111620 By Goods Withdrawn 5240
To Carriage 2400 By Free Samples 2460
To Gross Profit c/d 34440 By Closing Stock 15000
160460 160460
To Printing & 12350 By Gross Profit b/d 34440
Stationary
To Salaries 6800 By Disc Received 820
To Rent 7200 By Commission Recd 24550
To Gen. Exp 9450
Add :clo.o/s 1800
Less op.o/s 1500) 9750
308

To Advt 2460
To Discount Allowed 480
To Net Profit c/d 20770

59810 59810

Balance Sheet
As on 31st March 2017
Liabilities Rs. Assets Rs.
Capital 40500 Furniture 10000
Add Net Profit 20770 Stock 15000
Less Goods (5240) Debtors 22140
Less Drawing (7940) 48090 Cash at Bank 15600
Creditors 24000 Bills Receivables 18550
O/s General Expenses 1800
Bills payable 7400
81290 81290

15.2 EXERCISES

15.3.1 Practical Problems:


Q.1. Siddharth carries on a grocery business and does not keep his
books on a double entry basis. The following have been extracted
from his books

01.04.2017 31.3.2018
Rs Rs
Cash 1800 400
Bank 3,000 8,400
Credit balance in Debtors A/c 500 700
Debit balance in Creditors A/c 1,000 1,500
Debit balance in Debtors A/c 18,000 8,200
Credit balance in Creditors A/c 9,000 12,000
Bills payable 9,000 16,000
Bills receivable 18,000 16,000
Stock 60,000 25,000
Building 1,00,000 1,00,000
309

The following information is available from his records:


Rs
Renewals of the bills of exchange during the year 5,000
Bills of exchange dishonoured 3,000
Bills of exchange discounted with bank 8,500
Interest on discount of Bills 4,000
Collection from Debtors by cash 5,000
Collection from debtors by cheque 95,000
Cash discount to debtors 2,000
Sales returns 18,000
Purchases by cash 10,000
Purchases by cheque 30,000
Payment to creditors by cash 6,000
Payment to Creditors by cheque 80,000
Cash discount allowed by creditors 5,000
Purchase returns 7,000
Drawings by cash 2,000
Drawings by cheque 3,000
Capital introduced during the year 15,000
Bills payable honoured (net amount paid) 55,000
Discount as retirement of Bills payable 2,000
Expenses paid during the year Rs
Salaries 12,000
Rent 9,000
Transport 6,000

Expenses outstanding at the year end: - Rs


Salaries 1,000
Transport 500

Prepare Trading & Profit & Loss A/c for the year ended 31st March,
2017 & Balance sheet as on the date.

Q.2. Anil who was carrying business, not maintaining proper books
of accounts. The following figures could, however, be ascertained
from incomplete records.

Particulars 31.12.2016 31.12.2017


Rs Rs
Balance at bank 3,950 7,070
Stock in trade 22,550 20,360
Trade Debtors 22,500 ?
Trade Creditors 12,740
Furniture 15,000 ?
Motor Cycle 2,000 ?

Sales during 2017 amounted to Rs. 1,60,380 and purchase


Rs. 1,23,020
310

Analysis of Cash Book 2017

Paid for Credit Purchases 1,27,920 Electric Charges 2,500


Received for Credit Sales 1,45,480 Advertising & Pub 1,740
Further Capital brought in 10,000 Delivery charges 1,360
By Anil
Salaries paid 17,500 Motor cycle expenses 3,620
Rent paid for 6 months 6,000 Sundry Expenses 1,400
Ending 30th June 2012
Taxes paid for 6 months 6,000 Drawing 5,520
upto 31.3.12

On 31st Dec. 2017, there were outstanding liabilities for Electricity


charges Rs.520; advertisement Rs.260 and Sundry expenses Rs.
150. Provide 5% for doubtful Debts. Anil is to be charged with one
third of the expenses of the motor cycle.

From the above information, prepare a profit and loss A/c for the
year ended 31st Dec. 2017 and Balance sheet on that date


311

16
CONSIGNMENT ACCOUNTS I

Unit Structure:

16.0 Objectives
16.1 Introduction
16.2 Salient Features of Consignment Sale
16.3 Meaning of Terms Involved in Consignment
16.4 Distinction between Consignment and Sale
16.5 Valuation of Closing Stock
16.6 Accounting Treatment
16.7 Exercises

16.0 OBJECTIVES

After studying the unit the students will be able to:


 Know the meaning and features of Consignment.
 Understand the important terms in Consignment.
 Distinguish between Consignment and Sales.
 Record the transactions in the books of consignor and
consignee.

16.1 INTRODUCTION

Manufacturers concentrate on manufacturing goods and


product. Selling is a specialized activity. It requires expert
knowledge. Wholesalers are also interested in wholesale business.
They do not wish to reach individual buyer and they do not have
such capacity. There are many ways in which goods can ultimately
reach the consumer. One of the ways to channelize the goods to
the ultimate consumer is consignment sale. In this type of sale, a
businessman (the Consignor) sends goods to another businessman
(the Consignee) to be sold at the risk of the consignor. The
relationship between consignor and consignee is that of Principal
and Agent. The ownership of the goods remains with the consignor
until the goods are sold. Goods which are sent to the consignee is
called as consignment.
312

16.2 SALIANT FEATURES OF CONSIGNMENT SALE

1. Goods are sent by the consignor to the consignee with an


objective to earn profit.
2. The relationship of consignor and consignee is that of Principal
and Agent.
3. Both the parties enter into an agreement of consignment sale.
The transactions between both the parties are governed by this
agreement. The law applicable is THE LAW OF AGENCY.
4. The property and ownership of the goods remains with the
consignee until the goods are sold.
5. The goods sent on consignment are at entire risk of the
consignor. The consignee is not responsible for any loss.
6. When goods are sent to the consignee, it is not sale, therefore,
consignor cannot prepare sale invoice. He prepares a document
called as proforma invoice.
7. When goods are sent to the consignee, it is not sale, therefore,
consignor cannot ask for price, therefore, he asks for an
advance from the consignee.
8. The consignee is entitled to claim and deduct all the reasonable
expenses incurred by him.
9. The consignee is responsible to pay to the consignor the
amounts realized from sale of goods.
10. The consignee agrees to sell goods for commission at agreed
rate and therefore, he is entitled to deduct his commission due
from sale proceeds.
11. Any stock remaining unsold with the consignee belongs to the
consignor.
12. The profit or loss on sale of goods sent on consignment belongs
to the consignor.

16.3 MEANING OF TERMS INVOLVED IN


CONSIGNMENT

1. CONSIGNOR: The person who sends the goods, owner of the


goods. He is the Principal.
2. CONSIGNEE: The person who receives the goods and who
sells the goods. He is the agent.
313

3. CONSIGNMENT : The goods which are sent to be sold by the


consignee

4. COMMISION: The consignee sells goods on behalf of the


consignor. The remuneration paid by the consignor for this
activity is commission. The consignee is supposed to sell the
goods at a fixed price, if he sells the goods at higher price then
he may be paid additional commission. This is known as
overriding commission. The consignee may sell goods for cash
or on credit terms. When goods are sold on credit there is a risk
of bad debts. This loss by bad debts is borne by the consignor.
Goods are sold on credit by the consignee. He knows the local
market and the customers very well. The consignor, in such
case may allow additional commission to the consignee and
pass on the risk of bad debts to the consignee. This additional
commission is called as Del Credre Commission. In such case,
all the bad debts are to be borne by the consignee. Del Credre
Commission is calculated on total sales, unless otherwise
specified.

5. PROFORMA INVOICE: When goods are sent by the consignor,


he sends one document giving details of goods sent along with
it. This document is called as Proforma Invoice. Proforma
Invoice gives the particulars of goods sent as regards quantity,
weight, rate etc. Proforma Invoice may be prepared at cost price
or at a higher price, called as invoice price. When it is prepared
at invoice price, the consignee does not know the profit made by
the consignor.
314

Sample of Proforma Invoice.

PROFORMA INVOICE
VAIBHAV CYCLE TRADERS
125, S.V.S ROAD
DADAR MUMBAI
400 028

SENT TO : SURJEET CYCLES ,PUNE


DATE: 1ST June 2013
Sr. Particulars Quantity MRP Amount
No. Rs.
1. BSA SLR 50 3200 1,60,000
2. Hero CLS 60 3600 2,16,000
Total 3,76,000
Less:20%Trade Discount 75,200
3,00,800

E.& O.E.

Sd/-

(For Vaibhav CycleTraders)

6. ACCOUNT SALES: After the sales the consignee informs the


consignor about the sales made by him by sending him one
document called as Account Sales. This is a statement giving
details of quantity of goods sold, type of goods sold, expenses
incurred, commission due etc.
315

Sample of Account Sales

ACCONUT SALES
SURJEET CYCLES
424,KARVE ROAD
PUNEI
411 005

SENT TO : VAIBHAV CYCLE TRADERS


DATE:15TH JULY 2013
RE: Consignment of 110 cycles received on 1st June 2013

Sr. Particulars of goods sold Quantity MRP Amount


No. Rs.
1. BSA SLR 40 3200 1,28,000
2. Hero CLS 40 3600 1,44,000
Total 2,72,000
Less: Expenses incurred 75,200
Unloading 2500
Freight 2000
Godown rent 3500
Commission@10% 7520 15,520
59,680
Less: Advance sent by DD on 25,000
5th June 2013
Balance due remmited as per 34,680
Bank Draft enclosed
E.& O.E.

Sd/-
(For Surjeet Cycles )
316

16.4 DISTICTION BETWEEN CONSIGNMENT AND


SALE

Sr. No. Consignment Sale Normal Sale


1. The two parties involved are The two parties involved are
consignor and consignee. seller and buyer.
2. The relationship between The relationship is seller and
consignor and consignee is buyer both are principals and
that of principal and agent. there is no agent.
3. Consignor sends a proforma The seller sends a regular
invoice to the consignee. invoice to the buyer.
4. Ownership of goods remains Ownership of the goods is
with the consignor. transferred to the buyer
immediately.
5. Consignee is entitled to The buyer is not entitled to any
commission on goods sold by commission for goods sold.
him.
6. Profit on goods sold belongs Profit on goods sold by the
to consignor. buyer belongs to the buyer.
7. Risk of loss/damage is borne Risk of loss/damage is borne by
by consignor buyer.
8. Consignee can return the Buyer cannot return unsold
unsold goods to the goods to the seller.
consignor.
9. The governing law is Law of The governing law is Sale of
Agency. Goods Act.

16.5 VALUATION OF CLOSING STOCK

At the end of the year, it may happen that consignee has not
sold all the goods which were sent to him for sale. These goods
belong to the consignor and hence must be included in his closing
stock. As usual, these goods are valued at cost or market value
whichever is lower. Valuation of these goods is done as follows:
317

Particulars Rs. Rs.


Cost of goods to the consignor Xx
Add: Proportionate Expenses incurred by the
consignor
Carriage Xx
Freight Xx
Insurance Xx
Packing and Forwarding Xx Xx
Add: Proportionate Expenses incurred by the
consignee
Carriage Xx
Freight Xx
Octroi Xx
Unloading Xx
Clearing charges Xx
Any other direct expense Xx Xx
Xx
Only proportionate expenses are to be taken into account
while valuing the closing stock.
(Total Expenses X Quantity of Goods in Closing Stock) / Total
Quantity of Goods Received
Note: Following expenses are not to be considered in the above
 Godown Rent.
 Warehouse Charges.
 Discount.
 Bad Debts.
 Office and Administration Expenses.
 Selling and Distribution Expenses.

CHECK YOUR PROGRESS


1. Define the following terms:
a. Consignment
b. Consigner
c. Consignee
d. Account Sale
e. Proforma Invoice
f. Del Creder Commission
g. Overriding Commission
2. Give the specimens of the following
a. Account Sale
b. Proforma Invoice
3. Explain how the value of the closing stock is ascertained?
318

16.6 ACCOUNTING TREATMENT

A) In the books of consignor:


The consignor opens following accounts in his Ledger.
1. Consignment A/c. This is similar to Trading, Profit And Loss A/c.
2. Consignee A/c (Type of the A/c is Personal A/c)
3. Goods Sent on Consignment A/c (Type of the A/c is Real A/c)

PROFORMA JOURNAL ENTRIES


Sr. No. Particulars Dr. Rs. CR. Rs.
1. Goods sent on consignment
Consignment A/c Dr. Xx
To Goods Sent on Consignment A/c Xx

2. Loading on goods sent


Goods Sent on Consignment A/c Dr. Xx
To Consignment A/c Xx

3. Expenses incurred by the consignor


Consignment A/c Dr. Xx
To Cash A/c Xx

4. Advance received from the consignee


Bank A/c Dr. Xx
To Consignee A/c Xx

5. Bill drawn on consignee and accepted


by him
Bills Receivable A/c Dr. Xx
To Consignee A/c Xx

6. Discounting of the bill with the bank


Bank A/c Dr. Xx
Consignment/ Discount A/c Dr. Xx
To Bill Receivable A/c xx

7. Goods returned by the consignee


Goods Sent on Consignment A/c Dr. xx
To Consignment A/c Xx
319

8. Expenses incurred by the consignee


Consignment A/c Dr. Xx
To Consignee A/c Xx

9. Cash sales made by the consignee


Consignee A/c Dr. Xx
To Consignment A/c Xx

10. Credit sales made by the consignee


Consignee A/c Dr. Xx
To Consignment A/c Xx

11. Amount collected by the consignee from


debtors
NO ENTRY

12. Consignees commission


Consignee A/c Dr. Xx
To Consignment A/c Xx

13. Del Credre commission


Consignee A/c Dr. Xx
To Consignment A/c Xx

14. Bad debts


(if Del Credre commission is paid)
NO ENTRY

15. Bad debts (if no Del Credre)


Consignment A/c Dr. Xx
To Consignee A/c Xx

16. Amount remitted by consignee


Bank/ Bills Receivable A/c Dr. Xx
To Consignee A/c Xx

17. Closing sock with consignee


Stock on Consignment A/c Dr. Xx
To Consignment A/c Xx
320

18. Loading on closing stock with


consignee
Consignment A/c Dr. Xx
To Stock Reserve Xx

19. Transfer of profit on Consignment


Consignment A/c Dr. Xx
To Profit and Loss A/c Xx

20. Transfer of Loss on Consignment


Profit and Loss A/c Dr. Xx
Consignment A/c Xx

21. Closing stock of goods sent on


consignment A/c
Goods sent on consignment A/c Dr. Xx
To Trading A/c Xx

B) In the books of consignee:


The consignor opens following accounts in his Ledger.
1. Consignor A/c (Type of the A/c is Personal A/c)
2. Consignment Debtors A/c (Type of the A/c is Personal A/c)

PROFORMA JOURNAL ENTRIES


Sr. No. Particulars Dr. Rs. Cr. Rs.
1. Goods received on consignment
NO ENTRY

2. Expenses incurred by the consignor


NO ENTRY

4. Advance paid to the consignor


Consignor A/c Dr. Xx
To Bank A/c Xx

5. Bill drawn on consignor and accepted


by Consignee
Consignor A/c Dr. Xx
To Bills Payable A/c Xx
321

6. Discounting of the bill with the bank


NO ENTRY

7. Goods returned by the consignee


NO ENTRY

8. Expenses incurred by the consignee


Consignor A/c Dr. Xx
To Cash A/c Xx

9. Cash sales made by the consignee


Cash A/c Dr. Xx
To Consignor A/c Xx

10. Credit sales made by the consignee


Consignment Debtors A/c Dr. Xx
To Consignor A/c Xx

11. Amount collected by the consignee


from debtors
Cash A/c Dr. Xx
To Consignment Debtors A/c Xx

12. Consignees commission


Consignor A/c Dr. Xx
To Commission A/c Xx

13. Del Credre Commission


Consignor A/c Dr. Xx
To Commission A/c Xx

14. Bad debts


(if Del Credre Commission is paid)
Bad Debts A/c Dr. xx
To Consignment Debtors A/c Xx
15. Bad debts (if no Del Credre)
Consignor A/c Dr. Xx
To Consignment Debtors A/c Xx
322

16. Amount remitted by consignee


Consignor A/c Dr. Xx
To Bank A/c Xx

16.7 EXERCISE

1. Distinguish between Consignment and Sales.


2. Describe how the consignment account is maintained in the
books of (a) the consignor (b) the consignee.

3. If a consignment remains partly unsold (closing stock or


unsold stock) at the time of balancing the books, how do you deal
with it?
4. Objective Type Questions:

 MULTIPLE CHOICE QUESTIONS

1. Ownership of goods sent on consignment remains with


a. Consignee
b. Consignor
c. Both Consignor & Consignee
d. Either with consignee or consignor

2. The relationship between Consignee and Consignor is that of


a. Agent and principal
b. Principal and Agent
c. Creditor and Debtor
d. Supplier and Customer

3. Consignee sells goods for consignor for


a. Profit
b. Commission
c. Friendship
d. Service to his customers

4. Expenses incurred by consignee on goods received on


consignment are borne by
a. Consignor
b. Consignee
c. Both of them in agreed ratio
d. Either by consignee or consignor
323

5. Consignment A/c is prepared in the books of


a. Consignee
b. Consignor
c. Both Consignor & Consignee
d. Either in consignees books or in consignors books

6. An Account sales is
a. Prepared by the consignor
b. Sent by the consignee to the consignor
c. A ledger account in the books of consignee
d. A ledger account in the books of consignee

7. Type of consignment account is


a. Real A/c
b. Nominal A/c
c. Personal A/c
d. Artificial A/c

8. Profit on sale of goods on consignment belongs to


a. Consignor
b. Consignee
c. Both of them in agreed ratio
d. Neither consignee nor consignor

9. Proforma invoice is sent by


a. Consignee to consignor
b. Consignor to consignee
c. Consignee to cash customers
d. Consignee to credit customer

10. Closing stock with consignee is shown in


a. The Balance Sheet of the consignor
b. The Balance Sheet of the consignee
c. The Balance Sheet of the consignor and consignee both
d. The Balance Sheet of neither consignor nor consignee

11. Del Credre Commission is paid by consignor to consignee


a. On total sales
b. On credit sales only
c. On cash sales only
d. On closing stock
324

12. In the books of consignee the sale of goods is credited to:


(a). consignor's account
(b). sales account
(c). consignee's account

13. Goods sent on consignment should be debited by consignor


to:
(a). consignment account
(b). goods sent on consignment account
(c). consignors account

14. In the books of consignor, the balance of the consignment


stock would be shown:
(a). as an asset in the balance sheet.
(b). as liability in the balance sheet.
(c). On the credit side of the trading account.
15. In the books of consignee, on dispatch of goods by the
consignor the entry would be:
(a). Consignment Account [Dr.]
To Goods Sent on Consignment Account [Cr.]
(b). Consignment Account [Dr.]
To Consignor Account [Cr.]
(c). No entry

16. In the books of consignee the expenses incurred by him on


consignment are debited to:
(a). consignment account
(b). cash account
(c). consignor's account

Answers: 1. b, 2. a, 3. b, 4. d, 5. b, 6. b, 7. b, 8. a, 9. b, 10. a,11.b,


12. a,13. a, 14. a, 15. c, 16. c.


325

17
CONSIGNMENT II

Unit Structure :

17.0 Objectives
17.1 Solved Problems
17.2 Exercises

17.0 OBJECTIVES

After studying the unit students will be able to solve the


practical problems on Consignment Accounting.

17.1 SOLVED PROBLEMS

Illustration 1:
Ratanlal consigned 500 boxes of tea costing Rs.100 per box
to Sohanlal. Ratanlal paid freight Rs.500, insurance Rs.200 and
sundry expenses Rs.80. He drew a bill of exchange on Sohanlal
and received it from Sohanlal duly accepted for Rs.10,000. The bill
was discounted with the Bank by giving a discount of Rs.100.
Mr. Sohanlal sold 300 boxes of tea at Rs.150. He paid
Rs.180 for carriage. He was entitled to a commission of 5% on total
sales. The balance due was sent by bank draft.

Give Consignment Account and Sohanlal’s Account in the


books of the consignor.
326

Solution :

In the Books of Ratanlal


Consignment to Sohanlal A/c
Dr. Cr.
Particulars Rs. Particulars Rs.
To Goods sent on 50,000 By Sohanlal (Sales) 45,000
Consignment
To Bank By Consignment 20,384
Stock
Freight 500
Insurance 200
Sundry Expenses 80 780
To Discount 100
To Sohanlal’s A/c
Carriage 180
Commission 2,250 2,430
To Profit & Loss A/c 12,074
65,384 65,384

In the Books of Ratanlal


Consignment to Sohanlal A/c
Dr. Cr.
Particulars Rs. Particulars Rs.
To Consignment A/c 45,000 By Consignment A/c
Carriage 180
Commission 2,250 2,430
By Bills Receivable 10,000
By Bank A/c 32,570
45,000 45,000

Note :
1. Valuation of Stock : Rs.
200 boxes @ Rs.100 = 20,000
+ Proportionate Expenses 200 * 960 / 500 = 384
20,384
327

Illustration 2 :
The Mumbai Indian consigned to their Calcutta agent
Kolkatta Riders Rs.10,000 worth of goods, drawing a bill of
exchange on Calcutta for the amount. They pay freight and
Insurance on the consignment amounting to Rs.650. The goods
were received in Calcutta and in due course the Account sales was
received as follows.

Account sales of 200 Bales of goods from Mumbai Indian.


Particulars Rs. Rs.

200 Bales of goods sold at 14,000


Less : Consignee’s Expenses
Delivery Charges etc. 500
Godown rent 70
Insurance 80
Sundry Charges 18
Commission 700 1,368
12,632
Bill of Exchange 10,000
Balance Cash herewith 2,632

Enter these particulars in the Ledger of the consignor and


complete the transactions showing final profit or the loss on the
consignment. Show the Consignor’s Account in the books of the
consignee.

Solution :
LEDGER OF MUMBAI INDIAN
Consignment Account
Dr. Cr.
Particulars Rs. Particulars Rs.
To Goods Sent on Consignment 10,000 To Kolkatta Rider A/c (Sales) 14,000
A/c
To Cash / Bank A/c
(Mumbai Indian’s Expenses) 650
To Kolkatta Rider A/c (Expenses) 668
To Kolkatta Rider A/c (Comm.) 700
To Profit & Loss A/c (Profit) 1,982
14,000 14,000
328

Kolkatta Rider’s Account


Dr. Cr.
Particulars Rs. Particulars Rs.
To Consignment A/c 14,000 By Bills Receivable 10,000
(Sales) A/c (Advance)
By Consignment A/c 668
(Expenses)
By Consignment A/c 700
(Comm.)
By Cash / Bank A/c 2,632
(Remittance)
14,000 14,000

Goods sent on Consignment Account


Dr. Cr.
Particulars Rs. Particulars Rs.
To Trading A/c 10,000 By Consignment A/c 10,000
(transfer)
10,000 10,000

LEDGER OF KOLKATTA RIDER


Mumbai Indian’s Account
Dr. Cr.
Particulars Rs. Particulars Rs.
To Bills Payable A/c 10,000 By Cash / Bank A/c 14,000
(Advance) (Sales)
To Cash / Bank A/c 668
(Expenses)
To Commission A/c 700
To Cash / Bank A/c 2,632
(remittance)
14,000 14,000

Illustration 3:
Sen & Co. of Calcutta consign goods costing Rs.25,000 to
their agent, Mustak of Mysore, on which they pay freight, Insurance
and charges Rs.1,500, drawing on him a bill of exchange at 90
days for Rs.20,000. They discount the bill at Mercantile Bank being
charged Rs.200 thereof. After two months they received from their
agent an Account Sales informing that the entire consignment has
been sold for Rs.35,000, that expenses amounting to Rs.700 have
329

been incurred and showing as a deduction the agreed commission


of 2 percent on the amount realized. A draft on the Syndicate Bank
was enclosed for the balance due.

Show important ledger accounts in the books of both the parties.

Solution :
LEDGER OF SEN & CO
Consignment Account
Dr. Cr.
Particulars Rs. Particulars Rs.
To Goods sent on Consignment A/c 25,000 By Mustak A/c (Sales) 35,000
To Cash / Bank A/c 1,500
To Bills Receivable A/c (Discount) 200
To Mustak A/c (Expenses & Comm.)
Expenses 700
Commission (2% × 35,000) 700 1,400
To Profit & Loss A/c (Profit) 6,900
35,000 35,000

Mustak’s Account
Dr. Cr.
Particulars Rs. Particulars Rs.
To Consignment A/c 35,000 By Bills Receivable A/c 20,000
(Sales) (Advance)
By Consignment A/c 1,400
(Expenses & Comm.)
By Bank A/c (Remittance) 13,600
35,000 35,000

Goods sent on Consignment Account


Dr. Cr.
Particulars Rs. Particulars Rs.
To Trading A/c (transfer) 25,000 By Consignment A/c 25,000
25,000 25,000
330

LEDGER OF MUSTAK
Sen & Co.’s Account
Dr. Cr.
Particulars Rs. Particulars Rs.
To Bills Payable A/c (Advance) 20,000 By Cash/Bank A/c (Sales) 35,000
To Cash / Bank A/c (Expenses) 700
To Commission A/c 700
To Bank A/c (remittance) 13,600
35,000 35,000

Illustration 4:
Jayesh of Mumbai consigned 100 pieces of shirting @
Rs.30 per piece to Bhavesh on consignment basis. The consignee
is entitled to commission of 5% on sales. Jayesh spent its
Rs.1,000 for dispatching the goods. Bhavesh spent Rs.300 for
freight & insurance. Jayesh draws a bill on Bhavesh Rs.2,000
which is discounted for Rs.1,960. All the goods were sold by
Bhavesh for Rs. 6,000.

Pass entries and show necessary Ledger A/c is in the books


of Consignor and Consignee.
Solution :
Journal Entries
In books of Jayesh (Consignor)
Date Particulars Debit Credit
(Rs.) (Rs.)
1 Consignment A/c Dr. 3,000
To Goods Sent on Consignment A/c 3,000
(Being goods sent to Bhavesh on
consignment)
2 Consignment A/c Dr. 1,000
To Cash / Bank A/c 1,000
(Being expenses paid)
3 Bills Receivable A/c Dr. 2,000
To Bhavesh A/c 2,000
(Being bill draw on Bhavesh)
4 Bank A/c Dr. 1,960
Discount A/c 40
To Bill Receivable A/c 2,000
(Being bill Discounted)
331

5 Bhavesh A/c Dr. 6,000


To Consignment A/c 6,000
(Being consignment sales by Bhavesh)
6 Consignment A/c Dr. 300
To Bhavesh A/c 300
(Being consignment expenses paid by
Bhavesh)
7 Consignment A/c Dr. 300
To Bhavesh A/c 300
(Being 5% commission on sales payable
to Bhavesh)
8 Consignment A/c Dr. 1,400
To Profit & Loss A/c 1,400
(Being consignment profit transferred to
P/L A/c)
9 Goods Sent on Consignment A/c Dr. 3,000
To Trading A/c
3,000

Dr. Consignment A/c Cr.


Particulars Rs. Particulars Rs.
To Goods sent on 3,000 By Bhavesh A/c 6,000
Consignment A/c (Sales)
To Cash Bank A/c 1,000
(Expenses)
To Bhavesh A/c 300
(Expenses)
To Bhavesh A/c 300
(Commission)
To Profit & Loss A/c 1,400
(Profit)
6,000 6,000
332

Dr. Bhavesh A/c. Cr.

Particulars Rs. Particulars Rs.


To Consignment A/c 6,000 By Bills Receivable A/c 2,000
By Consignment A/c 300
(Expenses)
By Consignment A/c 300
(Commission)
By Balance c/d (Unpaid) 3,400
6,000 6,000

Dr. Goods sent on Consignment A/c. Dr.

Particulars Rs. Particulars Rs.


To Trading A/c (bal. fig.) 3,000 By Consignment A/c 3,000
3,000 3,000

[Note: Discount is not considered as consignment expenses


therefore not debited to Consignment A/c. It will be debited to P/L
A/c.]
Journal Entries
In books of Bhavesh (Consignee)
Date Particulars L. Debit Credit
F. ( Rs. ) ( Rs. )
(1) Jayesh A/c Dr. 2,000
To Bills Payable A/c 2,000
(Being bill accepted)
(2) Jayesh A/c Dr. 300
To Bank A/c 300
(Being consignment expenses paid)
(3) Bank A/c Dr. 6,000
To Jayesh A/c 6,000
(Being goods sold)
(4) Jayesh A/c Dr. 300
To Commission A/c 300
(Being commission @ 5% charged)
333

Dr. Jayesh A/c Cr.

Particulars Rs. Particulars Rs.


To Bills Payable A/c 2,000 By Bank A/c 6,000
To Bank A/c 300
To Commission A/c 300
To Balance c/d 3,400
6,000 6,000

Illustration - 5 :
Amit of Bombay consigned 150 T.V. sets at Rs.4,000 each
to Nitin of Nagpur. He paid Rs.24,000 for freight and Rs.4,000 for
wages. Nitin took delivery of the T.V. sets and paid Rs.40,000 for
octroi and other charges.

The consignee accepted a bill of Rs.1,60,000 drawn by the


Consignor for 3 months.

The Consignee sent an account sale after two months


stating that he has sold 120 sets at Rs.6,000 each and paid
Rs.10,000 for advertisement and other selling expenses.

The Consignee is entitled to a commission of 4% on gross


sale proceeds.

Pass necessary journal entries in the books of Amit and


prepare Consignment A/c.

Solution:
Journal Entries in the Books of Amit
Date Particulars L.F. Debit Credit
(Rs.) (Rs.)
? Consignment A/c Dr. 6,00,000
To Goods Sent on Consignment A/c 6,00,000
(Being goods sent to Nitin of Nagpur
on Consignment)
? Consignment A/c Dr. 28,000
To Bank A/c 28,000
(Being freight and wages paid)
? Consignment A/c Dr. 40,000
To Nitin’s A/c 40,000
(Being expenses paid by Nitin)
334

? Bills Receivable A/c Dr. 1,60,000


To Nitin’s A/c 1,60,000
(Being bill received duly accepted by
Nitin)
? Nitin’s A/c Dr. 7,20,000
To Consignment A/c 7,20,000
(Being goods sold by Nitin)
? Consignment A/c Dr. 10,000
To Nitin’s A/c 10,000
(Being advertisement expenses paid
by Nitin)
? Consignment A/c Dr. 28,800
To Nitin’s A/c 28,800
(Being commission @4% on
Rs.7,20,000)
? Consignment Stock A/c Dr. 1,33,600
To Consignment A/c 1,33,600
(Being unsold stock adjusted in the
Account). [Note 1]
? Consignment A/c Dr. 1,46,800
To Profit & Loss A/c 1,46,800
(Being profit transferred to Profit &
Loss A/c)

Note :

Valuation of Closing Stock : (30 sets unsold) Rs.


30 sets at Rs. 4,000 1,20,000
Add : Proportionate expenses of Consignor 28,000*30/150
5,600
Add : Proportionate non-recurring expenses of Consignee
40,000*30/150 8,000
1,33,600
335

Dr. Consignment A/c Cr


.Particulars Rs. Particulars Rs.
To Goods sent on 6,00,000 By Nitin’s A/c (Sales) 7,20,000
Consignment A/c
To Bank A/c (Expenses) 28,000
To Nitin’s A/c (Expenses) 40,000
To Nitin’s A/c 10,000 By Consignment 1,33,600
(Adv. & Selling exp.) Stock A/c
To Nitin’s A/c (Commission) 28,800 (see working)
To Profit & Loss A/c (Profit) 1,46,800
8,53,600 8,53,600

Illustration 6:
On 15 January, 2017 Jamshed & Co. of Mumbai sent to
Mukherjee Co. of Kolkata 400 bicycles at an invoice price of
Rs.100 per bicycle to be sold on commission. Freight and
insurance were Rs.600. Account sale was received from consignee
as follows 15th March – 100 bicycles were sold @ Rs.145 on which
5% Commission and Rs.375 for expenses were deducted.

10th April – 150 bicycles were sold @ Rs.140 on which 5%


Commission and Rs.290 for expenses were deducted.

From the above information, prepare Consignment A/c in the


books of Jamshed & Co. and close it on 30th April, 2013 keeping in
mind that no sales were made afterwards. Also show accounts in
the books of Mukherjee & Co.

Solution:
LEDGER OF JAMSHED & CO.
Dr. Consignment Account Cr.
2017 Particulars Rs. 2017 Particulars Rs.
Jan. 15 To Goods sent on 40,000 Mar. 15 By Mukherjee & 14.500
Consignment A/c Co. A/c
(Sales)
Jan. 15 To Cash/Bank A/c 600 Apr. 10 By Mukherjee &
Co. A/c
(Jamshed & (Sales) 21,000
Co.’s Expenses) Apri. 30 By Stock on
Mar, 15 To Mukherjee & Co. 375 Consignment A/c 15,225
A/c
(Expenses)
336

Mar. 15 To Mukherjee & Co. 725


A/c
Apri. 10 To Mukherjee & Co. 290
A/c
(Expenses)
Apri. 10 To Mukherjee & Co. 1,050
A/c
(Comm.)
Apr. 30 To Profit & Loss A/c 7,685
(Profit)
50,725 50,725

Dr. Mukherjee & Co.’s Account Cr.


2017 Particulars Rs. 2017 Particulars Rs.
Mar. 15 To Consignment 14,500 Mar. 15 By Consignment 375
A/c A/c
(Sales) (Expenses)
Apr. 10 To Consignment 21,000 Mar. 15 By Consignment 725
A/c A/c
(Sales) (Comm.)
Apr. 10 By Consignment 290
A/c
(Expenses)
Apr. 10 By Consignment 1,050
A/c
(Comm.)
Apr. 30 By Balance c/d 33,060
35,500 35,500

Dr. Goods sent on Consignment Account Cr.


2017 Particulars Rs. 2017 Particulars Rs.
Apr. 30 To Trading A/c 40,000 Jan. 15 By Consignment 40,000
(transfer) A/c
40,000 40,000
337

LEDGER OF MUKHERJEE & CO.

Dr. Jamshed & Co.’s Account Cr.


2017 Particulars Rs. 2017 Particulars Rs.
Mar. 15 To Cash/Bank A/c 375 Mar 15 By Cash/Bank 14,500
(Expenses) A/c (Sales)
Mar. 15 To Commission A/c 725 Apr 10 By Cash/Bank 21,000
A/c (Sales)
Apr. 10 To Cash/Bank A/c 290
(Expenses)
Apr. 10 To Commission A/c 1,050
Apr. 30 To Balance c/d 33,060
35,500 35,500

Valuation of Closing Stock


Cost = 40,000
+ Expenses = 600
------------
40,600

Cl. St. 150 sets out of total 400 sent =40,600 *150 / 400
= Rs.15,225

Illustration 7:
Keshav of Kanpur consigned 150 T.V., sets at Rs.4,000
each to Kamalakar of Kolhapur. He paid Rs.24,000/- for freight and
Rs.4,000/- for wages. Kamlakar took delivery of T.V. sets & paid
Rs.40,000 for customs duties and other charges.

The Consignee accepted a bill of Rs.1,60,000 drawn by the


Consignor for 3 months. The Consignee sent an Account Sales
after two months stating that he has sold 120 sets at Rs.6,000
each. He had paid Rs.10,000 for advertisement and other selling
expenses. The Consignee is entitled to a commission of 4% of
gross sale proceeds. Consignment stock should be valued after
taking Consignor’s expenses and customs duty into consideration.
Prepare Consignment Account and Consignee’s Account in the
books of the Consignor.
338

Solution :

In the books of Keshav of Kanpur.


Dr. Consignment Account. Cr.
Particulars Rs. Particulars Rs.
To Good sent on Consignment 6,00,000 By Kamalkar’s A/c (Sales) 7,20,000
A/c (150 x 4,000) (120 x 6,000)
To Cash A/c: By Stock on Consignment A/c
Freight 24,000 (Cost 30 x 4,000) = 1,20,000
Wages 4,000 28,000 Expenses
30/150 x 68,000
To Kamalkar’s A/c 40,000 13,600
(Custom duties)
1,33,600
To Kamalkar’s A/c
(Advertisement & Other 10,000
Expenses)
To Kamalakar’s A/c
(Commission 4%) 28,800
To P/L Loss A/c (Profit) 1,46,800
8,53,600 8,53,600

Dr. Kamalkar’s Account. Cr.


Particulars Rs. Particulars Rs.
To Consignment A/c 7,20,000 By Consignment A/c 40,000
(Sales) (Customs duty)
By Bills Receivable A/c 1,60,000
By Consignment A/c 10,000
(Expenses)
By Consignment A/c 28,800
(Commission)
By Balance c/d 4,81,200
7,20,000 7,20,000

Illustration 8:
Namdeo of Nagar consigned 250 Refrigerators at Rs.6,000
each to Vasant of Pune. He paid Rs.15,000 for carriage and
Rs.20,000 for insurance. Vasant took delivery of the refrigerators
and paid Rs.60,000 for octroi and other charges. The consignee
accepted a bill of Rs.2,00,000 drawn by consignor for four months.
The consignee sold 200 refrigerators at Rs.7,500 each. He
has paid Rs.18,000 for selling expenses and Rs.12,000 for other
expenses. The consignee is entitled to a commission at 10% on the
gross sales.
339

Prepare consignment account in the book of consignor.


Solution:
In the books of Namdeo of Nagar
Dr. Consignment to Pune A/c. Cr.
Particulars Rs. Particulars Rs.
To Goods Sent on 15,00,000 By Vasant’s A/c 15,00,000
Consignment A/c (Sales
(250 x 6,000) 200 x 7,500)
To Cash/Bank A/c. By Closing Stock 3,19,000
Carriage 15,000
Insurance 20,000 35,000
To Vasant’s A/c 60,000
(Octroi & other charges)
To Vasant’s A/c.
Selling Exps. 18,000
Other Exps. 10% 12,000
10% Commission 1,50,000 1,80,000
To Profit on Consignment 44,000
transferred to P & L A/c.
18,19,000 18,19,000

Illustration 9:
Karanth sold goods on behalf of Vijay Sales on consignment
basis. On January 1, 2017, he had with him a stock of Rs.20,000
on consignment.

Karanth had instruction to sell the goods at cost plus 25%


and was entitled to a commission of 4% on sales. In addition to 1%
del credere commission on total sales for guaranteeing collection of
all the sales proceeds.

During the year ended 31st December, 2017, cash sales


were Rs.1,20,000, credit sales Rs.1,05,000 and Karanth’s
expenses relating to the consignment Rs.3,000 being salaries and
insurance. Baddebts were Rs.3,000 and goods sent on
consignment Rs. 2,00,000.

From the above, prepare Consignment Account and


Consignee’s Account in the books of Vijay Sales and important
Ledger accounts in the books of Karnath.
340

Solution:

Ledger of Vijay Sales

Dr. Consignment Account Cr.


Particulars Rs. Pariculars Rs.
To Stock on Consignment 20,000 By Karanth A/c (cash 1,20,000
A/c b/d Sales)
To Goods sent on 2,00,000 By Karanth A/c 1,05,000
Consignment A/c (Cr. sales)
To Karanth A/c 3,000 By Stock on 40,000
(Expenses) consignment A/c
To Karanth A/c (Comm.) 9,000
To Karanth A/c 2,250
(Del Cr. Comm.)
To Profit & Loss A/c 30,750
(Profit)
2,65,000 2,65,000

Dr. Karanth’s Account Cr.


Particulars Rs. Particulars Rs.
To Consignment A/c 1,20,000 By Consignment A/c 3,000
(Cash Sales) (Expenses)
To Consignment A/c 1,05,000 By Consignment A/c 9,000
(Cr. Sales) (Comm.)
By Consignment A/c 2,250
(Del Cr. Comm.)
By Balance c/d 2,10,750
2,25,000 2,25,000

Dr. Goods sent on Consignment Account Cr.


Particulars Rs. Particulars Rs.
To Trading A/c 2,00,000 By Consignment A/c 2,00,000
(transfer)
2,00,000 2,00,000
341

Ledger of Karanth

Dr. Vijay Sales’s Account Cr.


Particulars Rs. Particulars Rs.
To Cash/Bank A/c 3,000 By Cash/Bank A/c 1,20,000
(Expenses) (Sales)
To Commission A/c 9,000 By Consignment 1,05,000
Debtors A/c.
To Del Credere 2,250
Commission A/c (Cr. Sales)

To Balance c/d 2,10,750


2,25,000 2,25,000

Dr. Consignment Debtors Account Cr.


Particulars Rs. Particulars Rs.
To Vijay Sales A/c 1,05,000 By Cash/Bank A/c 1,02,000
(collection)
By Del Credere 3,000
Commission A/c
1,05,000 1,05,000

Dr. Commission Account Cr.


Particulars Rs. Particulars Rs.
To Profit & Loss A/c (Bal. Tfd.) 9,000 By Vijay Sales’s A/c 9,000
9,000 9,000

Dr. Del Credere Commission Account Cr.


Particulars Rs. Particulars Rs.
To Consignment Debtors 3,000 By Vijay Sales’s A/c 2,250
A/c (Bad Debts)
By Profit & Loss A/c 750
(Bal. Tfd.)
3,000 3,000

Dr. Profit & Loss Account Cr.


Particulars Rs. Particulars Rs.
To Del Creder 750 By Commission A/c 9,000
Commission A/c
(Net tfd.)
To Profit c/d to Balance 8,250
Sheet
9,000 9,000
342

Working Note :

Closing Stock
Cost of Opening Stock 20,000
Cost of Goods Sent 2,00,000
--------------
Total Cost of Goods 2,20,000
Less : Cost of Goods Sold (2,25,000 x 80%) 1,80,000
--------------
Value of Closing Stock 40,000

Illustration 10:
Amiankusum of Calcutta consigned on 1-1-2017 goods at
invoice value of Rs.12,500 which was made up by adding 25% on
cost, to Manasumukul of Arunachal. Amlankusum paid Rs.300 as
freight and Rs.200 as insurance on these goods.
On 30-6-2017 Amlankusum received a remittance of
Rs.7,000 with an Account Sales from Manasumukul showing that
he had –
(1) Sold 3/5 of goods for Rs.9,000.
(2) Paid Rs.150 as landing charges and Rs.250 as selling
expenses.
(3) Retained his commission of 10% on gross sales.
You are required to write up –
(a) The Consignment to Arunachal A/c, and
(b) Manasumukul’s Personal A/c
as they would appear in the books of Amlankusum for the period
ended 30-06-2017 which is the end of his accounting year.

Solution :
LEDGER OF AMLANKUSUM
Dr. Consignment Account Cr.
Particulars Rs. Particulars Rs.
To Goods Sent on 12,500 By Manasmukul A/c 9,000
Consignment A/c (Sales)
To Cash/Bank A/c 500 By Stock on Consignment 5,260
(Amlankusum’s Expenses) A/c
To Manasmukul A/c 400 By Goods sent on 2,500
(Expenses) Consignment A/c (Load)
To Manasmukul A/c (Comm.) 900
[9,000 x 10%]
To Stock Reserve (Load) 1,000
To Profit & Loss A/c (Profit) 1,460
16,760 16,760
343

Dr. Manasmukul’s Account Cr.


Particulars Rs. Particulars Rs.
To Consignment A/c 9,000 By Consignment A/c 400
(Cash Sales) (Expenses)
By Consignment A/c 900
(Comm.)
By Cash/Bank A/c 7,000
(Remittance)
By Balance c/d 700
9,000 9,000

Dr. Goods Sent on Consignment Account Cr.


Particulars Rs. Particulars Rs.
To Consignment A/c (Load) 2,500 By Consignment A/c 12,500
To Trading A/c (transfer) 10,000

12,500 12,500

Ledger of Manasmukul

Dr. Amlankusum’s Account Cr.


Particulars Rs. Particulars Rs.
To Cash/Bank A/c 400 By Cash/Bank A/c 9,000
(Expenses) (Sales)
To Commission A/c 900
To Cash/Bank A/c 7,000
(Remittance)
To Balance c/d 700
9,000 9,000

Working Notes :
1. Closing Stock
Value of Goods Sent 12,500
Amlankusum’s Expenses 500
Manasmukul’s Expenses (landing charges) 150
Total value 13,150

Illustration 11:
H. Ltd. forwarded on 1-7-2017, 100 bicycles to Vasu of
Hyderabad to be sold on behalf of H Ltd. The cost of each bicycle
was Rs.150 but the Invoice price was Rs.200. H. Ltd. incurred
Rs.1,000 on freight and insurance. Vasu received the consignment
on 14-7-2017 and accepted a three months draft drawn upon him
344

by H. Ltd. for Rs.10,000. Vasu paid Rs.400 as rent and Rs. 250 as
insurance and by 31-12-2017 had disposed of 80 bicycles at
Rs.205 each. Vasu is entitled to a commission of 5 per cent on
sales including a del credere commission of 1%. Vasu sold 20
bicycles on credit and was not able to recover sales proceeds of 5
bicycles because of insolvency of the debtor.

Prepare Ledger Accounts to record the above transactions in


the books of H. Ltd. and Vasu.

Solution :

LEDGER OF H LTD.
Dr. Consignment Account Cr.
Particulars Rs. Particulars Rs.
To Goods sent on 20,000 By Vasu A/c (Cash Sales) 12,300
Consignment A/c
To Cash/Bank A/c 1,000 By Vasu A/c (Cr. sales) 4,100
(H. Ltd.’s Expenses) By Stock on Consignment 4,200
A/c
To Vasu A/c (Expenses) 650 By Goods sent on 5,000
Consignment A/c
To Vasu A/c (Comm.) 656
(Load)
[4% x (12,300 + 4,100)]
To Vasu A/c (Del Cr. 164
Comm.)
[1% x (12,300 + 4,100)]
To Stock Reserve (Load) 1,000
To Profit & Loss A/c (Profit) 2,130
25,600 25,600

Dr. Vasu’s Account Cr.


Particulars Rs. Particulars Rs.
To Consignment A/c 12,300 By Bills Receivable 10,000
(Cash Sales) A/c (Advance)
To Consignment A/c 4,100 By Consignment A/c 650
(Cr. Sales) (Expenses)
By Consignment A/c 656
(Comm.)
By Consignment A/c 164
(Del Cr. Comm.)
By Balance c/d 4, 930
16,400 16,400
345

Dr. Goods sent on Consignment Account Cr.


Particulars Rs. Particulars Rs.
To Consignment A/c (Load) 5,000 By Consignment A/c 20,000
To Trading A/c (transfer) 15,000
20,000 20,000

LEDGER OF VASU
Dr. H Ltd.’s Account Cr.
Particulars Rs. Particulars Rs.
To Bills Payable A/c 10,000 By Cash/Bank A/c 12,300
(Advance) (Sales)
To Cash/Bank A/c 650 By Consignment 4,100
(Expenses) Debtors A/c
To Commission A/c 656 (Cr. Sales)
To Del Creder 164
Commission A/c
To Balance c/d 4,930
16,400 16,400

Dr. Consignment Debtors Account Cr.


Particulars Rs. Particulars Rs.
To H Ltd.’s A/c 4,100 Ny Cash/Bank A/c (collection) 3,075
By Del Credere Commission 1,025
A/c
4,100 4,100

Dr. Commission Account Cr.


Particulars Rs. Particulars Rs.
To Profit & Loss A/c 656 By H Ltd.’s A/c 656
(Bal. Tfd.)
656 656

Dr. Del Credere Commission Account Cr.


Particulars Rs. Particulars Rs.
To Consignment Debtors A/c 1,025 By H Ltd.’s A/c 164
(Bad Debts) By Profit & Loss A/c 861
(bal. Tfd.)
1,025 1,025
346

Dr. Profit & Loss Account Cr.


Particulars Rs. Particulars Rs.
To Del Creder Commission 861 By Commission A/c 656
A/c
(Net tfd.) By Loss c/d to Balance Sheet 205
861 861

Working Notes :
1. Closing Stock
Value of Goods Sent (Quantity x Rato) 20,000
H Ltd.’s Expenses 1.000
Vasu’s Direct/Non-recurring Expenses Nil
----------
Total Value 21,000
Closing Stock Value 21,000 * 20 /100 4,200

17.2 EXERCISES

1. On 1st June, 2013; Bendre of Bombay consigned 100 cases


costing Rs.700 each to Shirole of Solapur. Bendre paid Rs.500 for
carriage. Shirole paid Rs.100 for Octroi and Rs.350 for carriage
and other expenses. Shirole sent Rs.4,000 as an advance against
the consignment. Shirole sold 90 cases for Rs.72,000. Shirole is
entitled to a Commission of 5% on total sales.
Pass journal entries in the books of both the parties.
[Ans. Profit Rs. 4,545]

2. Ajay of Delhi sent on consignment goods to Banita of Baroda


100 sewing machines on consignment costing Rs.200 each. The
consignor paid Rs.1,000 by way of freight and insurance. Benita
spent Rs.500 by way of godown rent and other expeses. At the end
of the year,10 machines remaining unsold with Banita. The
consignee sold sewing machines @ Rs.250 per machine. Banita
remitted the sale proceeds after deducting expenses and her
commission which was 5% of the goods sold.

Prepare Consignment Account and Consignee’s Account in the


books of the consignor.
[Ans. Profit on Consignment Rs. 1,975
Value of Unsold stock Rs. 2,100
Amount remitted by Consignee Rs. 20,875]

3. M/s Raman & Co. consigned to Arora of Akola 500 radio sets
costing Rs.450 each. They paid freight Rs.2,500, insurance Rs.500
and sundry expenses Rs.3,000. Arora took delivery of the goods by
paying clearing charges Rs.700 and carriage Rs.500. M/s. Raman
& Co. drew three months bill for Rs.1,00,000 which was discounted
347

at 5% p.a. Arora sold 300 sets at Rs.600 each and the balance at
Rs.550 each. Arora is entitled to commission of 5% on sale
proceeds. Arora remitted the balance due by a bank draft.

Show Consignment Account and Arora’s Account in the books


of M/s Raman & Company.
(Ans. Profit Rs. 46,000; Commission Rs. 14,500: Balance received
from Arora Rs. 1,74,300.)

4. M/s Ramesh Oil Mills, Mumbai, consigned 4,000 litres of Castor


oil (in 10 litre tins) to Chatterji of Kolkatta on 1st April, 2017. The
cost of oil was Rs.20 per litre. The consignors paid Rs.10,000 as
freight and insurance.During transit, 5 tins were totally destroyed for
which the Insurance Company paid directly to the consignor
Rs.900 in full settlement of the claim.

Chatterji took delivery of the consignment on 10th April 2017


and accepted bill drawn on him by Ramesh Oil Mills for Rs. 20,000
for 3 months. On June 30, 2017, Chatterji reported that 3,500 litres
were sold at Rs.30 per litre. The expenses were as following:

Particulars Rs.
Godown Rent 400
Advertisement 2,000
Salaries to Salesmen 4,000

Chatterji charged a normal commission of 3% and del credere


commission of 3%. He sold the remaining stock of oil for Rs.19,000
to X and C, who were declared bankrupt after two months and only
50 paise per rupee where realised from them.

Prepare the following accounts in the books of consignor,


assuming that the consignee paid the amount due by bank draft:
1) Consignment Account.
2) Consigneer’s Account.
3) Goods Sent on Consignment Account.
(Ans. Profit Rs. 21,285; Final Remittance Rs. 1,24,000; Abnormal Loss
Rs. 1,125)

5. M & Co of Nagpur sent 100 sewing machines on consignment to


Nandini of Nasik, spent Rs.250 on packing. The cost of each
machine was Rs.112 but it was now invoiced at 25% above cost.
One case containing 5 machines was lost in transit. Nandini
paid Rs.475 as freight on the remaining machines. He had to spend
Rs.95 as cartage and octroi duty and Rs.190 as godown rent and
Rs.50 as other expenses. He sold 75 machines @ Rs.190. He
found 10 machines defective and therefore returned them to
Nagpur at cost, Nandini is entitled to a commission of 5% on
348

invoice price and 20% of any excess price realised on the invoice
price and 1% del credere commission. Nandini could not realise
sale proceeds of 5 machines.

Prepare Consignment Account, Consignee’s Account,


Consignment Stock Account and Consignment Stock Reserve
Account in the books of M & Co.

[Ans. Profit on consignment Rs. 3,470. Loss Rs. 572.50. Stock Account Rs.
1,485 Commission Rs. 1417.50]


349

18
BRANCH ACCOUNTS I

Unit Structure:

18.0 Objectives
18.1 Introduction
18.2 Types of Branches
18.3 Debtors System
18.4 Stock and Debtors System
18.5 Exercises

18.0 OBJECTIVES

After studying the unit the students will be able to:

 Explain the types of Branches.


 Understand the methods of accounting of Branch
transactions
 Journalise the transactions related to Branch Account.
18.1 INTRODUCTION

A large business enterprise may have one main office and


one or more small offices maintained mainly for the purpose of
increasing sales. Such small outlet is called as a branch. The main
office is called as Head Office.

Branch is an additional place of business opened mainly for


the convenience of customers.

The basic purpose of maintaining branch accounts is to


evaluate the performance of the branch and ascertain profit made
by the branch.

18.2 TYPES OF BRANCHES

A) Dependent Branch
B) Independent Branch
350

A) Dependent Branch: Head office sends goods to the branch,


either at cost or at a price higher than the cost, called as invoice
price. The branch sells the goods on cash or credit basis and
remits all the cash received to the head office. The branch
expenses are paid by the branch itself or by the head office
depending upon the policy of the enterprise. This branch
depends upon the head office for the purpose of maintaining
accounts. The branch does not maintain complete set of double
entry books of accounts. The branch maintains only necessary
records on memorandum basis and sends periodic reports to
the head office. It is the head office that does all the accounting
work.

B) Independent Branch: This branch, as the name suggests,


does not depend upon head office. It does all the accounting
work by itself. It maintains complete set of double entry books of
accounts. At the end of the year, a trial balance is extracted
from the ledger. This trial balance is then sent to the head office
for finalization.

In case of Dependent Branches, Head Office can maintain


accounts of the branch by adopting any one of the following two
methods:

1. Debtors System

2. Stock and Debtors System

18.3 DEBTORS SYSTEM

In this type of system, the head office opens one account in


its Ledger for every branch. The type of this account is personal
account.
The rule applicable is
“ Debit the Receiver and Credit the Giver”

All transactions between branch and head office are


recorded in this account. All the transactions between branch and
third party are not recorded by the head office. Here, the branch is
treated as a debtor and hence, only transactions between branch
and head office are recorded. Since actual owner of the branch is
head office itself, assets and liabilities of the branch are assets and
liabilities of head office, these are also recorded through branch
account.
351

Sometimes goods are sent to the branch at a price higher


than the cost price. This price is called as Invoice Price. The profit
element added to the cost price is called as Loading. Branch
Manager is expected to sell the goods at this price. In such case,
we have to find out the loading on all the transactions of goods
between branch and head office.

Chart showing calculation of loading:

% on Cost % on Sales
100% on cost (1/1 of Cost) 50% on sales (1/2on sales)
rd
50 % on cost (1/2 of cost) 331/3 on sales (1/3 on sales)
331/3rd on cost (1/3 of cost) 25% on sales (1/4 on sales)
25% on cost (1/4 of Cost) 20% on sales (1/5 on sales)
20% on cost (1/5 of Cost) 16 2/3% on sales (1/6on sales)

PROFORMA JOURNAL ENTRIES

Sr. Particulars Dr. Cr.


No. Rs. Rs.

1 Branch Assets at the beginning


Branch A/c Dr.
To Opening Stock A/c xx
To Furniture A/c xx
To Debtors A/c xx
To Cash A/c xx
To Prepaid Expenses A/c xx
2 Branch liabilities at the beginning
Branch Creditors A/c Dr. xx
Loading on opening stock A/c Dr. xx
Outstanding Expenses A/c Dr. xx
To Branch A/c xx

3 Goods sent to branch


Branch A/c Dr. xx
To Goods Sent to Branch xx

4 Loading on above .
Goods Sent to Branch A/c Dr xx
To Branch A/c xx
352

5 Goods Returned by Branch


Goods Sent to Branch A/c Dr. xx
To Branch A/c xx

6 Loading on above
Branch A/c Dr. xx
To Goods Sent to Branch A/c xx

7 Expenses of branch paid by head office


Branch A/c Dr. xx
To Cash A/c xx

8 Cash sent to branch for expenses


Branch A/c Dr. xx
To Cash A/c xx

9 Cash remitted by branch to head office


Cash A/c Dr. xx
To Branch A/c xx

10 Branch Assets at the end of the year


Closing Stock A/c Dr. xx
Furniture A/c Dr. xx
Debtors A/c Dr. xx
Cash A/c Dr. xx
Prepaid Expenses A/c Dr. xx
To Branch A/c xx

11 Branch liabilities at the end of the year xx


Branch A/c Dr.
To Branch Creditors A/c xx
To Loading on Closing Stock A/c xx
To Outstanding Expenses A/c xx

12 Net Profit made by the Branch


Branch A/c Dr. xx
To Profit & Loss A/c xx

13 Net Loss made by the Branch


Profit & Loss A/c Dr. xx
To Branch A/c xx
353

PROFORMA OF BRANCH A/C

Particulars Dr. Particulars Cr.


Rs. Rs.
To Balance B/d By Balance B/d
Opening Stock xx Opening Stock Reserve
Opening Cash xx xx
Opening Debtors xx Opening Creditors
Opening Furniture xx xx
Opening Prepaid Exp Opening O/S Expenses
xx xx xx Xx

To Goods Sent to Branch By Goods Sent to Branch


A/c Xx A/c Xx
(sent by HO to Branch) (Loading on goods sent
to branch)

To Goods Sent to Branch By Goods Sent to Branch


A/c Xx A/c xx
(loading on goods returned (goods returned by
by branch) branch)

To Cash A/c By Cash A/c


-branch expenses paid by -cash remitted by branch
HO xx to head office xx
-Cash remitted to branch for -cash sales xx
expenses xx Xx -*cash from debtors xx Xx

To Balance B/d To Balance B/d


Closing Stock Reserve xx Closing Stock xx
Closing Creditors xx Closing Cash xx
Closing O/S Expenses xx Closing Debtors xx
xx Closing Furniture xx
Closing Prepaid Exp xx
Xx

xxx xxx

Following transactions between branch and third party are not


recorded in the above Branch A/c
1. Cash Sales made by branch
2. Credit Sales made by branch
3. Credit Sales returns at the branch
4. Discount allowed to branch debtors
5. Cash collected from debtors
6. Bad debts at branch
7. Expenses paid by branch out of cash collected
354

*If any one of these three figures is not given then Prepare Branch
Debtors A/c as follows

Proforma of Branch Debtors A/c

Particulars Rs. Particulars Rs.


To Balance b/d Xx By Bad Debts Xx
To Credit Sales Xx By Branch cash Xx
By Discount allowed Xx
By Credit Sales returns Xx
By Balance c/d Xx
Xx Xx

If branch manager is allowed to make expenses out of cash


collected and remits the balance cash to Head Office, then prepare
Branch Cash A/c as follows:-
Proforma of Branch Cash A/c

Particulars Rs. Particulars Rs.


To balance B/d Xx By Branch Expenses
To Cash Sales Xx Rent Xx
To Branch Debtors Xx Salaries Xx
Insurance Xx
Sundry expenses Xx
By Cash remitted to head Xx
office
By Balance C/d Xx
Xx Xx

18.4 STOCK AND DEBTORS SYSTEM

Under this system, head office maintains following accounts for


each branch:

1. Branch Stock Account: Type of this account is Real Account.


This account is always maintained at invoice price. This account
gives us stock at branch at any given time at invoice price.
Normally balancing figure in this account is closing stock. If
closing stock and all other relevant figures are already given
then this account should balance by itself. If it does not balance
355

then balancing figure indicates either shortage of stock or


surplus of stock. If debit side is heavy (i.e. Dr. balance) then it is
surplus of stock and if credit side is heavy (i.e. Cr. balance) then
it is shortage of stock. If the Dr. balance is more then it is
regarded as excess Gross Profit

2. Goods Sent to Branch Account: Type of this account is Real


account. Transactions of goods between Branch and Head
Office are recorded through account. This account gives us cost
of goods sent to the branch. At the end of the year, this account
shows credit balance and it is transferred to Trading A/c.

3. Branch Stock Adjustment Account: Type of this account is


Nominal account. Entries regarding loading are passed through
this account. This account gives us gross profit made by the
Branch at any given time. The gross profit as shown by this
account is transferred to Branch Profit and Loss Account.

4. Branch Profit and Loss Account: Type of this account is


Nominal Account. All the losses and expenses pertaining to the
Branch are debited to this account and all the profits pertaining
to the branch are credited to this account. This account gives us
Net Profit or Net Loss made by the branch.

5. Branch Debtors Account: Type of this account is Personal


Account. Entries regarding Branch Debtors are recorded
through this Account.

6. Branch Cash Account: Type of this account is Real Account.


Transactions pertaining to branch cash are recorded through
this account. This account gives us cash position at
the branch at any given time.

7. Branch Expenses Account: All the expenses of the Branch


are debited to this account. At the end of the year, balance in
this account is transferred to Branch Profit and Loss account.

If the branch expenses are directly debited to Branch Profit


and Loss Account, then this account is not opened at all.
356

PROFORMA JOURNAL ENTRIES

Sr. Particulars Dr. Cr.


No. Rs. Rs.

1 Branch Assets at the beginning


Branch stock(at invoice price)
Branch Cash
Branch Debtors
Taken as opening Dr. balances in the
respective accounts

2 Branch liabilities at the beginning


Branch Creditors A/c
Taken as opening cr. balance in the
Branch Creditors Account
Loading on Opening Stock A/c
Taken as opening cr. balance in the
Branch Stock Adjustment Account

3 Goods sent to branch


At Invoice Price
a. Branch Stock A/c Dr. xx
To Goods Sent to Branch A/c xx

b. Loading on above
Goods Sent to Branch A/c Dr. xx
To Branch Stock Adjustment A/c xx
357

4 Goods Returned by Branch


a. At Invoice Price
Goods Sent to Branch A/c Dr. xx
To Branch Stock A/c xx

b. Loading on above
Branch Stock Adjustment A/c Dr. xx
To Goods Sent to Branch A/c xx

5. Cash sales at Branch


Branch Cash A/c Dr. Xx
To Branch Stock A/c Xx

6. Cash Sales Returns


Branch Stock A/c Dr. Xx
To Branch Cash A/c Xx

7. Credit Sales at Branch


Branch Debtors A/c Dr. Xx
To Branch Stock A/c Xx

8. Credit Sales Returns


Branch Stock A/c Dr. Xx
To Branch Debtors A/c Xx

9. Cash collected from Branch Debtors


Branch Cash A/c Dr. Xx
To Branch Debtors A/c Xx

10. Bad debts at Branch


Branch Profit And Loss A/c Dr. Xx
To Branch Debtors A/c Xx
358

11. Discount allowed to Branch Debtors


Branch Profit And Loss A/c Dr. Xx
To Branch Debtors A/c Xx

12. Cash sent to Branch


Branch Cash A/c Dr. xx
To Cash A/c Xx

13. Cash remitted by Branch to Head Office


Cash A/c Dr. xx
To Branch Cash A/c Xx

14. Expenses incurred at branch


Branch Expenses A/c Dr. Xx
To Branch Cash A/c Xx

15 Expenses of Branch paid by Head Office


Branch Expenses A/c Dr. Xx
To Cash A/c Xx

16. Surplus of Stock at branch


Branch Stock A/c (at invoice price) Dr. Xx
To Branch Stock Adjustment A/c Xx
(loading)
To Branch Profit and Loss A/c Xx
(cost Price)

17. Shortage of Stock at branch


Branch Stock Adjustment A/c Dr. Xx
(loading)
Branch Profit and Loss A/c Dr. Xx
(cost Price)
To Branch Stock A/c (at invoice price) Xx

18. Closing of Goods Sent To Branch A/c


Goods Sent To Branch A/c Dr. Xx
To Trading A/c Xx
359

19. Closing of Branch Expenses


Branch Profit And Loss A/c Dr. Xx
To Branch Expenses A/c Xx

20. Transfer of Gross Profit


Branch Stock Adjustment A/c Dr. Xx
To Branch Profit And Loss A/c Xx

21. Closing of Branch Profit and Loss A/c


a. If it shows Credit Balance i.e. Profit
Branch Profit & Loss A/c Dr. xx
To Profit & Loss A/c Xx

b. If it shows Debit Balance i.e. Loss


Profit & Loss A/c A/c Dr. xx
To Branch Profit & Loss A/c Xx

22 Branch Assets at the end of the year


Closing Stock (at Invoice Price)
Debtors
Cash
--Shown as debit balances in respective
Accounts

23. Branch liabilities at the end of the year


Branch Creditors
Loading on Closing stock
--Shown as credit balances in respective
Accounts
360

PROFORMA OF VARIOUS ACCOUNTS


Branch Stock A/c(At Invoice Price)

Particulars Rs. Particulars Rs.


To Balance b/d Xx By Branch Debtors A/c Xx
(Opening Stock) (Credit Sales )
To Goods Sent to Branch A/c Xx By Branch Cash A/c Xx
(Cash Sales )
To Branch Debtors A/c By Goods Sent to Branch A/c Xx
(Sales Returns) (Goods Returned)
To Branch Cash A/c By Shortage Xx
(Sales Returns)
To Surplus Xx By Balance c/d (Closing Stock) Xx
Xx Xx

Goods Sent to Branch A/c

Particulars Rs. Particulars Rs.


To Branch Stock Adjustment Xx By Branch Stock A/c Xx
A/c (loading on goods sent) (Invoice Price)
To Branch Stock A/c Xx By Branch Stock Adjustment A/c Xx
(Goods Returned by branch) (Loading on goods returned)
To Trading A/c Xx Xx
Xx Xx

Branch Stock Adjustment A/c (Loading Element)

Particulars Rs. Particulars Rs.


To Goods Sent to Branch A/c Xx By Balance B/d Xx
(Loading on goods returned) (Loading on opening Stock)
To Shortage (Loading) Xx By Goods Sent to Branch A/c Xx
(Loading on goods sent)
To Branch Profit & Loss A/c Xx By Surplus (Loading) Xx
(Transfer of gross profit)
To Balance B/d Xx
(Loading on closing stock)
Xx Xx
361

Branch Profit and Loss A/c

Particulars Rs. Particulars Rs.


To Branch Expenses Xx By Branch Stock Adjustment Xx
(Gross Profit )
To Branch Debtors (Bad Xx
Debts)
To Branch Debtors (Discount ) Xx By Net Profit Transferred to Xx
general P& L A/c
To Depreciation on Branch Xx
Assets
To Net Profit Transferred to Xx
general P& L A/c
Xx Xx

Branch Debtors A/c

Particulars Rs. Particulars Rs.


To Balance b/d Xx By Branch P & L A/c Xx
(Bad debts)
To Branch Stock A/c Xx By Branch cash Xx
(Credit sales )
By Branch P & L A/c (Discount Xx
allowed)
By Branch Stock A/c Xx
(Credit sales returns)
By Balance c/d Xx
Xx Xx
362

Branch Cash A/c

Particulars Rs. Particulars Rs.


To Balance B/d Xx By Branch Expenses A/c
To Branch Stock A/c Xx Rent Xx
(Cash sales)
To Branch Debtors Xx Salaries Xx
To Cash A/c Insurance Xx
(from head office for
expenses)
Sundry expenses Xx
By Branch Cash A/c
(Cash Sales returns )
By Branch Debtors A/c
(Credit Sales returns)
By Cash remitted to head Xx
office A/c
By Balance C/d Xx
Xx
Xx Xx

Sometimes all the cash collected by the branch is remitted to head


office and expenses of Branch are paid out of petty cash maintained
at branch.

Branch Petty Cash A/c

Particulars Rs. Particulars Rs.


To balance B/d Xx By Branch Expenses A/c
To Cash A/c Rent Xx
(from head office for
expenses)
Salaries Xx
Insurance Xx
Sundry expenses Xx
By Balance C/d Xx
Xx Xx
363

Sometimes goods are sent to branch at cost price then


Branch Stock A/c is maintained at cost price and Branch Stock
Adjustment Account is not at all required.

18.5 EXERCISE

1. Explain the types of branches.


2. Elaborate the accounting procedure under the Debtors Method.
3. Which accounts are opened under the Stock and Debtors
Account System?
4. Objective type questions:

 State whether the following statements are True or False.


1. Under Debtors System, bad debts and discount allowed are
shown in the Branch Account.
2. Under Debtors System, Debtors at close are shown on the Debit
Side of the Branch Account after adjusting for bad debts,
discount allowed etc.
3. Under Debtors System, Depreciation is not shown in the Branch
Account.
4. Reserve for Bad Debts and Reserve for Discount on Debtors
will be recorded separately in the Branch account under the
Debtors System.
5. Actual petty expenses incurred by the Branch Account under
the Debtors system will not be recorded in the Branch Account.
6. Sales Returns will not appear directly in the Branch Account
under the Debtors System.
7. Branch Account under Debtors System is a Real Account.
8. Under Debtors System, Branch Account is debited with losses
like bad debts, discounts allowed and depreciation.
9. When the Branch Manager is allowed petty cash on Imprest
System, the amount remitted by Head Office to reimburse the
actual expenses will be debited to the Branch Account.
10. Branch Account is a nominal account in nature and is prepared
in the Branch Books.

(Answers: False – 1, 2, 4, 7, 8, 10 True – 3, 5, 6, 9)


364

 Indicate the correct answers:

1. Under Debtors System, the Debtors at close are shown


(i) On the credit side of the Head Office Account
(ii) On the debit side of the Branch Account
(iii) On the credit side of the Branch Account after adjusting for
bad debts, discount allowed etc.
(iv) Are not shown in the Branch account

2. Under Debtors System, treatment of Reserve for Bad debts is


(i) Shown it on the credit side of Branch a/c
(ii) It is not shown in Branch a/c
(iii) It is deducted from the Branch Debtors and the good
Branch debtors are shown in the Branch account
(iv) It is shown on the debit side of the general Profit and Loss
account

3. The treatment of petty expenses made by the Debtors System


is as follows
(i) It is not recorded in the Branch account
(ii) It is shown on the debit side of the Branch account
(iii) It is shown on the general Profit and Loss account of Head
Office
(iv) Only the closing balance of Petty Cash
(Opening balance plus amount reduced from Head Office less
petty expenses) will appear in the credit side of the Branch
account

4. Under Debtors System, the Branch Account is


(i) Real Account
(ii) Nominal Account
(iii) Personal Account
(iv) None of the above

5. Stock Reserve in relation on opening Stock appears (under the


Debtors System)
(i) On the debit side of the Branch Account
(ii) On the credit side of the Branch Account
(iii) On the Credit side of Head Office Account
(iv) None of the above

6. Stock reserve in relation to closing stock appears (under the


Debtors System)
(i) On the debit side of the Branch Account
(ii) On the credit side of the Branch Account
(iii) On the debit side of Head Office Account
(iv) None of the above
365

7. The cash and credit sales of the branch are Rs.5,000 and
Rs.15,000 respectively. The amount collected from debtors is
Rs.10,000. The amount to be credited to Branch Account under
the Debtors System will be
(i) Rs.20,000 (ii) Rs.15,000
(iii) Rs.10,000 (iv) Rs.25,000

8. The opening balance of Petty Cash at the Branch is Rs.2,000,


Amount received from the Head Office for Petty Expenses is
Rs.10,000, the closing balance of Petty Cash is Rs. 3,000; Which of
the following is the right answer under the Debtors System?
(i) Rs.9,000 on the Debit side of the Branch Account as Petty
Expenses.
(ii) Rs.3,000 on the Credit side of the Branch Account as Petty
Cash.
(iii) Rs.7,000 on the Credit side of the Branch Account as Petty
Cash Expenses.
(iv) None of the above.

(Answers: 1-(iii); 2-(iii); 3-(iv); 4-(ii); 5-(ii); 6-(i); 7-(ii); 8-(ii) )

 Fill in the Blanks:

1. The system of operating at several places through one’s own


establishments is called .

2. The main establishment located at the main place of activity


is called the and the subsidiary establishment
located at various places are called .

3. Branches may be divided into 3


categories, branches, branches
and foreign branches.
4. Goods supplied to Dependent Branches by the Head Office
may be either at or at price.

5. The One Account System or Debtors System is generally


adopted when the branch is fairly in size.

6. Branch Account is a in nature and is prepared


in the Head Office Books.

7. Under Debtors System, bad debts and discounts allowed


are in the Branch Account.

8. Under the Debtors System, the debtors (at close) are shown
on the of the Branch Account after adjusting bad
debts, discount allowed etc.
366

9. Under Debtors System, fixed assets is shown on the credit


side only after the amount of depreciation, if
any.

10. Under the Debtors System, the Head Office will record all
the transactions relating to the branch in the Branch Account
through and relationship between the
Branch and the Head Office.

11. Under the Debtors System, the Reserve for Doubtful Debts
/Reserve for Discount on Debtors, should be from
closing Debtors and only the good closing Debtors will be
recorded in the Branch Account.

12. Actual petty expenses incurred by the branch


will in the Branch Account under the Debtors
System.

(Answers: 1- Branch Organization; 2 - Head Office, Branches;


3 - Dependent, Independent; 4 - Cost, Invoice; 5 - Small;
6 - Nominal Account; 7 - not taken/ shown; 8 - Credit side;
9 - deducting; 10 - Debtors, Creditors; 11 - deducted; 12 - not be
recorded)




367

19
BRANCH ILLUSTRATIONS

Unit Structure:
19.0 Objectives
19.1 Solved Problems
19.2 Exercises

19.0 OBJECTIVES
After studying the unit the students will be able to solve the
practical problems on Branch Accounting.

19.1 SOLVED PROBLEMS

Illustration No. 1:

Moonlight Ltd. has a head office at Chandrapur and branch


at Poona Branch is are supplied goods from the head office at 20%
profit on sales price. Accounts are kept at head office from where
all expenses (except petty expenses) are paid. Such petty
expenses are paid by the branches which are allowed to maintain
petty cash balance of Rs. 4,600 on imprest system

Particulars Rs.
Balance on 1-4-2017
Petty Cash at Branch 4,600
Stock at Branch at Sales Price 1,00,000
Sundry Debtors at Branch 48,000
Sundry Creditors at Branch 22,400
Furniture at Branch 56,000
Rent Prepaid (upto 30-06-2018) 2,600
Transactions during the year ended 31-03-2018
Goods sent to Branch less Returns 8,08,000
Cash Sales at Branch 11,60,000
Credit Sales at Branch 1.90.000
Allowances to Debtors 3,000
Cash from Debtors 1,60,000
368

Bad Debts written off 2,400


Cash Purchases by the Branch 81,000
Credit Purcahses 1,99,600
Creditors at the end 46,000
Payments made by the Head Office:
Rent for one year (paid on 01-07-2017) 5,600
Salaries 24,000
Insurance paid for the year ending 30-06-2018 1,920
Payments made by the Branch :
Petty Expenses 960
Balance on 31-03-2018 :
Stock at Sales Price 75,000

Write off 10% depreciation on furniture.


Solution

In the Books of Moonlight Ltd.


Dr. Branch A/c Cr.
Particulars Rs. Rs. Particulars Rs.
To Balance b/d By Balance b/d
Petty Cash 4,600 Creditors 22,400
Stock 1,00,000 By Cash (Remittance) 10,63,000
Debtors 48,000 By Goods sent to 1,61,600
Branch
Furniture 56,000 By Balance c/d:
Prepaid Rent 2,600 Branch Stock 75,000
To Goods sent to Branch Debtors 72,600
Branch A/c 8,08,000 Branch Petty Cash 4,600
To Bank A/c: Branch Furniture 50,400
Rent 5,600 Rent Prepaid 1,400
Salaries 24,000 Insurance Prepaid 480
Insurance 1,920 31,520 Stock Reserve 20,000
By Bank A/c
(Petty Expenses) 960
By Balance c/d:
Creditors 46,000
Stock Reserve 15,000
Profit & Loss A/c 3,58,800
14,71,480 14,71,480
369

Working Notes :`

Dr. 1. Cash A/c Cr.


Particulars Rs. Particulars Rs.
To Cash Sales. 11,60,000 By Purchases 81,000
To Debtors 1,60,000 By Creditors 1,76,000
By Cash remitted
(Balancing Figure) 10,63,000
13,20,000 13,20,000

Dr. 2. Petty Cash A/c Cr.


Particulars Rs. Particulars Rs.
To Balance b/d 4,600 By Petty Expenses 960
To Reimbursement 960 By Balance c/d 4,600
of Expenses
5,560 5,560

Dr. 3. Debtors A/c Cr.


Particulars Rs. Particulars Rs.
To Balance b/d 48,000 By Allowances 3,000
To Sales 1,90,000 By Bad Debts 2,400
By Cash 1,60,000
By balance c/d 72,600
2,38,000 2,38,000

Dr. 4. Creditors A/c Cr.


Particulars Rs. Particulars Rs.
To Cash (Balancing 1,76,000 By Balance b/d 22,400
Figure)
To Balance c/d 46,000 By Purchases 1,99,600
2,22,000 2,22,000

Illustration No. 2 :
Amit Traders of Pune have their branch at Mumbai. Prepare
the Branch A/c in the books of the H.O from the following
transactions with the branch for the year.
370

Particulars Rs.
Opening Balance :
Petty cash at Bank 1,250
Stock at Branch 77,000
Debtors at Branch 41,250
Goods supplied to Branch during the year 3,78,000
Amount Remitted to the Branch :
For Petty cash expenses 7,500
For Salary 18,500
For Rent & Taxes 6,000
Closing Balance :
Petty cash at Bank 1,880
Stock at Branch 57,880
Debtors at Branch 1,26,150
Discount allowed to customers 1,060
Amount Remitted by the Branch:
Cash Sales 26,250
Realisation from debtors 4,10,350
Mr. Shah to whom goods were sold by the Branch
directly remitted the Amt. to the H.O. 9,000

Solution:
(In the Books of Head Office at Pune)
Dr. Mumbai Branch A/c Cr.
Date Particulars Rs. Date Particulars Rs.
To Balance By Bank A/c
b/d
Petty cash 1,250 Cash Sales 26,250
Stock 77,000 Realisation
from
Debtors 41,250 1,19, 500 Debtors 4,10,350
To Goods 3,78,000 Remitted to 9,000 4,45,600
Sent to Branch H.O.
To Bank A/c
Petty cash 7,500 By Balance
expenses c/d
Salary 18,500 Petty cash 1,880
Rent & Taxes 6,000 32,000 Stock 57,880
To General P 1,02,010 Debtors 1,26,150 1,85,910
& L A/c
6,31,510 6,31,510
371

Note:
Discount Allowed to Customers Rs.1,060 is already reduced
from closing Debtors and hence, separate Entry is not passed.

Illustration No. 3 :
Hari is having his Head Office at Mumbai and Branch Office
at Nasik. Prepare the Branch Account in the books of the Head
Office from the following transactions with the branch:

Particulars Rs. Particulars Rs.


Opening Balance at Amounts remitted to
branch : the branch for :
- Petty Cash 1,000 - Petty Cash 4,000
Expenses
- Stock 39,500 - Salary 12,000
- Debtors 21,000 - Rent and Taxes 3,500
Goods Supplied to 3,10,000 Closing balances at
branch during the year Branch :
Amounts remitted by - Petty Cash 950
the branch :
- Cash Sales 1,13,200 - Debtors 53,000
- Realisation from 2,30,300 - Stock 26,500
debtors

Solution:
In the books of H. O.
Dr. Nasik Branch Account Cr.
Particulars Rs. Particulars Rs.
To Balance b/d: By Bank (Remittances) :
Branch Petty Cash 1,000 Cash Sales 1,13,200
Branch Stock 39,500 Realisation from Debtors 2,30,300
Branch Debtors 21,000 By Balance c/d:
To Goods sent to 3,10,000 Branch Petty Cash 950
Branch
To Cash remitted for: Branch Debtors 53,000
Petty Cash Expenses 4,000 Branch Stock 26,500
Salary 12,000
Rent 3,500
To General P & L A/c 32,950
(Bal. Fig.)
4,23,950 4,23,950
372

Illustration No. 4:
Following information is given to you from the books of
Shivam Law Agency for its branch at Virar for the financial year
2017-18. Prepare Virar Branch A/c in the books of Shivam Law
Agency.
Particulars Rs. Particulars Rs.
Balance as on 1-4-2017 Transactions during 2017-2018
-Branch Debtors 1,200 - Goods sent H.O. 7,800
- Stock 600 - Cash sent by H.O. for petty 2,000
cash
- Cash 100 - Goods lost at branch 750
Balance as on 31-3-2012 - Credit Sales 3,600
- Branch Debtors ? - Insurance claim received by 600
branch
- Cash 600 - Cash received from debtors. 2,400
- Stock 1,000 - Discount allowed 480
- Bad debts 520
- Goods returned by debtors 100
- Branch Exp. paid by H. O. 320
Salary
- Advt. 780
- Amount remitted by branch to 8,460
H.O.
(Nov. 1997, adapted)

Solution :

In the books of H.O.


Dr. Virar Branch Account Cr.
Particulars Rs. Particulars Rs.
To Balance b/d: By Bank 8,460
Debtors 1,200 By Balance c/d:
Stock 600 Closing stock 1,000
Cash 100 Cash 600
To Goods sent to Branch 7,800 Debtors (WN 1) 1,300
To Cash (Petty Cash) 2,000 By General P & L A/c 1,440
To Cash : (Bal. Fig. : Loss)
Salary 320
Advertisement 780 1,100
12,800 12,800
373

Working Notes:

1) In Memorandum Books of Branch

Dr. Debtors Account Cr.


Particulars Rs. Particulars Rs.
To Balance b/d 1,200 By Sales Returns 100
To Sales 3,600 By Cash 2,400
By Bad Debts 520
By Discount 480
By Balance c/d (bal. 1,300
fig.)
4,800 4,800

2) It is assumed that remittance to H. O. Rs.8,460 includes the


amount received as insurance claim.
3) No direct entry will be passed in Branch A/c for Goods lost
Rs.750: it is indirectly adjusted in the closing stock of the Branch
Rs.1,000.

Illustration No. 5:
Idea Traders, Mumbai opened a branch at Delhi on 1st
January 2017. The following information is available in respect of
the branch for the year 2017.

Transactions during the year Rs.


Goods sent to branch 85,000
Cash sales at the branch 45,000
Credit sales at the branch 75,000
Salaries of the branch staff paid by H. O. 16,500
Office expenses of the branch paid by H. O. 12,000
Cash remittance to branch towards petty cash 6,000
Closing Balance on 31st Dec, 2017
Petty cash at branch 500
Debtors at branch 5,000
Stock at branch 27,000

Prepare Branch A/c to show the profit or loss from the Branch for
the year 2017.
374

Solution:

(In the Books of Head Office at Mumbai)


Dr. Delhi Branch A/c. Cr.
Date Particulars Rs. Date Particulars Rs.
To Goods Sent to 85,000 By Cash A/c
Branch
To Cash A/c Cash Sales 45,000
Salaries 16,500 Realisation from
Office 12,000 28,500 debtors 70,000 1,15,000
expenses
To Cash A/c 6,000
(for petty expenses) By Balance c/d
Petty cash 500
To General P & L A/c 28,000 Stock 27,000
Debtors 5,000 32,500
1,47,500 1,47,500

Dr. Memorandum Debtors A/c. Cr.


Date Particulars Rs. Date Particulars Rs.
To Credit Sales 75,000 By Cash Received 70,000
By Balance c/d. 5,000
75,000 75,000

Illustration No. 6:
From the following details relating to the Delhi Branch for the
year ending on 31st March 2018, prepare the Branch Account in the
books of the Head Office.

Particulars Rs. Particulars Rs.


Stock as on 1-4-2017 25,000 Cash received from 65,000
Debtors
Debtors as on 1-4-2017 10,000 Cash paid by Debtors 5,000
directly to H.O.
Fumiture as on 1-4-2017 6,000 Stock as on 31-3-2018 15,000
Petty Cash as on 1-4- 1,000 Goods returned by 2,000
2017 Branch
Insurance Pre-paid as on 300 Goods returned by 1,000
1-4-2017 Debtors
375

Salaries outstanding as 4,000 Cash sent to Branch


on 1-4-2017 for Expenses:
Goods sent to branch 2,00,000 -Rent (Rs.800 p.m.) 9,600
during 2017-2018
Cash Sales during the 2,70,000 - Salary 48,000
year (Rs.4,000 p.m.)
Total Sales 3,50,000 - Petty Cash 2,000
Petty Cash Expenses 2,200 Insurance 1,200
(upto June, 2018)
Discount allowed to 500
Debtors

Goods costing Rs. 2,500 were damaged in transit and a sum


of Rs.2,000 was recovered from the insurance company in full
settlement of the claim. Depreciate the Furniture @ 10% p.a.

Solution:

IN THE BOOKS OF H.O.


Dr. Delhi Branch Account Cr.
Particulars Rs. Particulars Rs.
To Balance By Balance b/d 4,000
b/d: (O/S Salary)
Stock 25,000 By Bank
(Remittances):
Debtors 10,000 -by Branch 3,37,000
Cash (WN 3)
Furniture 6,000 - by Branch
Debtors
Petty Cash 1,000 directly to H.O. 5,000
Prepaid 300
Insurance
To Goods 2,00,000 By Goods Sent
Sent to to Branch
Branch (returns by
To Bank branch) 2,000
(Remittance
by H.O.)
Rent 9,600 By Balance c/d:
Salary 48,000 Stock 15,000
Petty Cash 2,000 Debtors (WN 1) 18,500
376

Insurance 1,200 60,800 Petty Cash 800


(WN 2)
To Balance 4,000 Furniture 5,400
c/d (O/S (6,000-600)
salary)
To Net Profit 80,900 Prepaid 300 40,000
tfd. to Insurance
General P & (WN 4)
L A/c
(Bal. Fig.)
3,88,000 3,88,000

Working Notes :
The missing figures are ascertained by preparing memorandum
ledger accounts as shown below :

(1) Ascertaining debtors closing balance :

Dr. Delhi Branch Debtors Account Cr.


Particulars Rs. Particulars Rs.
To Balance b/d 10,000 By Cash A/c 5,000
(collection by H.O.)
To Credit Sales 80,000 By Branch Cash A/c 65,000
(Total 3,50,000-Cash (collection by Branch)
2,70,000)
By Returns Inwards 1,000
By Discount Allowed 500
By Balance c/d 18,500
(Balancing figure)
90,000 90,000

(2) Ascertaining petty cash closing balance :

Dr. Delhi Branch Petty Cash Account Cr.


Particulars Rs. Particulars Rs.
To Balance b/d 1,000 By Petty Expenses A/c 2,200
To Brach Cash A/c 2,000 By Balance c/d 800
(Balancing figure)
3,000 3,000
377

(3) Ascertaining remittance to H. O.:

Dr. Delhi Branch Cash Account Cr.


Particulars Rs. Particulars Rs.
To Cash Sales 2,70,000 By Salaries to the 4,000
previous year
To Collection from 65,000 By Salaries for the 44,000
Debtors current year
To Remittance from H. 60,800 By Rent 9,600
O.
To Insurance Claim 2,000 By Petty Cash 2,000
By Insurance 1,200
By Cash H.O. 3,37,000
3,97,800 3,97,800

Illustration No. 7:

M/s R. T. Ltd has a head office at Poona and branch at


Nasik. The head office sends goods to branch at price to show
profit of 2.5% on cost. The following transactions relate to the year
2017. All the information’s given below is at invoice price.

Stock on 1st January, 2017 Rs.20,000 and on 31st


December, 2017 Rs.25,000. Goods were sent to branch
Rs.1,00,000 of which goods worth Rs. 5,000 were returned. Branch
sold goods for Rs. 82,000 on credit but customers returned goods
worth Rs. 2,000. On 1st January, 2017; Rs. 2,000. On 1st January,
2017; Rs. 28,000 was due from customers. During the year,
Rs.88,200 was received from customers after allowing discount @
2% special discount of Rs. 5,000 was allowed to one customer.
Cash sales amounted to Rs. 10,000. Branch remitted entire sum
received by it. Rs.6,000 was sent from Poona to Nasik to pay rent
Rs.2,400; salary Rs.2,400 ; sundry expenses Rs.1,200.

You are required to prepare Branch Account & Goods sent


to Branch Account.
378

Solution

In the books of M/s. R.T.Ltd.

Nasik Branch A/c

Particulars Rs. Rs. Particulars Rs. Rs.


To Balance b/d By Balance b/d
Stock 20,000 Stock Reserve 4,000
Debtors 28,000 48,000 By Goods sent to Branch 5,000
To Goods sent to Branch 1,00,000 By Cash
To Cash 6,000 from Debtors 88,200
To P & L A/c (Bal. Fig.) 5,200 from Cash Sale 10,000 98,200
To Balance c/d By Goods sent to branch 19,000
Stock Reserve 5,000 (Profit Element)
By Balance c/d
Stock 25,000
Debtors 13,000 38,000
1,64,200 1,64,200

Goods sent to Branch A/c

Particulars Rs. Particulars Rs.


To Nasik Branch 5,000 By Nasik Branch A/c 1,00,000
To Nasik Branch
(Profit Element 19,000
on 95,000@20%)
To Trading A/c 76,000
(Balance Figure)
1,00,000 1,00,000

Illustration No.8:
Mandar Chemicals has a branch at Patna. Goods are
invoiced to the Branch at cost plus 30%. From following details
prepare Branch Account.
379

Particulars Rs. Particulars Rs.


Stock on 1-1-2017 26,000 Goods returned to H.O. 6,500
Debtors on 1-1-2017 50,000 Goods returned by Branch 3,000
Debtors to Branch
Cash-in-Hand on 1-1-2017 250 Total Sales of the Branch 2,23,000
Goods sent to Patna 1,30,000 Cash Sales 1,70,000
Branch
Cheques sent to Branch Expenses paid by Branch 23,000
a) Salary 3,000 Collection from Debtors 84,000
b) Rent 2,000 Closing Stock on 31-12-2017 1,04,000
Furniture Purchased by 10,000 Cash Balance on 31-12-2017 130
H.O. for the Branch

Depreciation on Furniture at 10% p.a.

Solution :

In the books of Mandar Chemicals


Dr. Patna Branch Account Cr.
Particulars Rs. Particulars Rs.
To Balance b/d: By Stock Reserve A/c b/d
Stock 26,000 (26,000 x 30/130) 6,000
Cash 250 By Goods sent to Branch 30,000
A/c
Debtors 50,000 (Load:1,30,000 x 30/130)
To Goods sent to Branch A/c 1,30,000 By Goods sent to Branch 6,500
A/c (returns)
To Goods sent to Branch A/c 1,500 By Cash (WN 1) 2,31,120
(Load 6,500 x 30/130) By Balance c/d:
To Bank A/c; Closing Stock 1,04,000
Salary 3,000 Cash 130
Rent 2,000 Debtors (WN 2) 16,000
Furnitre 10,000 15,000 Furniture (10,000 – Depr. 9,000
1,000)
To Stock Reserve c/d 24,000
(Load:Cl, Stock
104,000 x30/130)
To General P & L A/c (bal. fig.) 1,56,000
4,02,750 4,02,750
380

Working Notes:

(1) Patna Branch Cash/Bank Account

Dr. Cr.
Particulars Rs. Particulars Rs.
To Balance b/d 250 By Expenses 23,000
To Cash Sales 1,70,000 By Cash sent to H.O. 2,31,120
(bal. flg.)
To Debtors 84,000 By Balance c/d 130
2,54,250 2,54,250

(2) Patna Branch Total Debtors Account

Dr. Cr.
Particulars Rs. Particulars Rs.
To Balance b/d 50,000 By Sales Returns 3,000
To Credit Sales 53,000 By Cash 84,000
(2,23,000-1,70,000) By Balance c/d (bal. fig.) 16,000
1,03,000 1,03,000

(3) Profit or Loading:

Cost + Profit = Invoice Price


100 + 30 = 130
So, Profit or loading is 30/130 of Invoice Price.

Illustration No.9:

Raj Oils Ltd. opened a branch at Shrinagar on 1st January,


2017. Goods are invoiced to the branch at cost plus 33 1/3 % which
is the selling price. From the following particulars relating to 2016
and 2017, ascertain the profit made of Shrinagar Branch in the two
years and show how the relevant items will appear in Company’s
Balance Sheet on 31st December, 2016 and 2017.
381

Particulars 2016 2017


Rs. Rs.
Goods sent to Shrinagar branch ... … … 45,000 70,000
during the year at selling price
Sales at branch :
Cash … … … 15,000 30,400
Credit … … … 19,600 41,000
Cash received from debtors … … … 15,400 32,300
Discount allowed to customers … … … 200 500
Cash sent to branch for expenses … … … 6,000 10,000
(including Petty Cash)
Goods returned by the Branch … … … 1,500 -
(Invoice price)
Stock at 31st December at invoice … … … 8,400 6,900
price
Petty Cash at branch on 31st … … … 90 40
December

(Mar, 96, adapted)

Solution:

In the books of H.O.

Dr. Shrinagar Branch Account Cr.


Particulars 2016 2017 Particulars 2016 2017
Rs. Rs. Rs. Rs.
To Balance b/d By Stock Reserve 2,100
Stock (IP) - 8,400 A/c
(Load on Opening
Stock)
Debtors - 4,000 By Cash/Bank
Petty Cash - 90 (Remittance
Received)
To Goods sent 45,000 70,000 -Cash Sales 15,000 30,400
to Branch A/c
(IP)
To Cash 6,000 10,000 -Collection from 15,400 32,300
Debtors
To Goods Sent 375 - By Goods Sent to 11,250 17,500
to branch A/c Branch A/c
(Load on (Load on Goods
Returns) Sent)
382

To Stock 2,100 1,725 By Goods sent to 1,500 -


Reserve A/c Branch A/c
(Load on (Returns at IP)
Closing Stock)
To Net Profit By Balance c/d:
transferred to
General P & L 2,165 7,225 Stock (IP) 8,400 6,900
A/c
Debtors (WN 1) 4,000 12,200
Petty Cash 90 40
55,640 1,01,440 55,640 1,01,440

Working Notes :

(1) Dr. Shrinagar Branch Debtors Account Cr.


Particulars 2016 2017 Particulars 2016 2017
Rs. Rs. Rs. Rs.
To Balance b/d -
4,000 By Cash received 15,400 32,300
from customers
To Credit Sales 19,600 41,000
By Discount 200 500
By Balance c/d 4,000 12,200
(Balancing figure)
19,600 45,000 19,600 45,000

(2) Dr. Shrinagar Branch Petty Cash Account Cr.


Particulars 2016 2017 Particulars 2016 2017
Rs. Rs. Rs. Rs.
To Balance b/d - 90 By Petty Cash 5,910 10,050
Expenses
To H.O. Cash 6,000 10,000 (Balancing figure)
By Balance c/d 90 40
6,000 10,090 6,000 10,090

(3) H. O. invoices goods at 33.33% over cost.


Profit is ¼ or 25% of Invoice Price.
Illustration No.10:
Sarda Brothers, Bombay has a branch at Nagpur. All goods
required for sale at Nagpur Branch are supplied from Bombay at
cost plus 25% and all cash received at the Branch is banked daily
in the Head Office Account opened in a Bank at Nagpur.
383

From the following particulars, give the Branch Account and


Branch Debtors Account.

Particulars Rs.
Stock (1.1.2017) 79,000
Debtors (1.1.2017) 1,13,000
Petty Cash (1.1.2017) 900
Returns from Customers 4,000
Goods invoiced to Branch 2,50,000
Returned Goods to Head Office 10,000
Bad Debts 1,000
Cash Sales 14,000
Branch Expenses paid by Head Office
Rent 14,000
Salary 15,000
Sundries 7,000
Allowances given 4,500
Petty Cash Expenses at Branch 2,400
Total Sales 3,49,000
Remittances to branch for Petty Cash 2,800
Stock (31.12.2017) 84,000
Debtors (31.12.2017) 1,95,100

Solution
In the books of Sarda Brothers Bombay
Dr. Nagpur Branch A/c Cr.
Particulars Rs. Particulars Rs.
To Branch Stock 79,000 By Goods sent to branch 10,000
To Branch Debtors 1,13,000 By Cash A/c
To Branch Petty Cash 900 i) Cash Sales 14,000
To Goods sent to Branch A/c 2,50,000 ii) Collection 2,43,400 2,57,400
from Debtors
To Cash A/c By Branch Stock 84,000
Rent 14,000 By Branch Debtors 1,95,100
Salary 15,000 By Branch Petty Cash 1,300
Sundry Expenses 7,000 36,000 By Stock Reserve 15,800
(Loading)
To Petty Cash A/c 2,800 By Goods sent to branch 50,000
(Loading)
To Stock Reserve (Loading) 16,800
To Goods Sent to Branch
(Loading) 2,000
To General Profit & Loss A/c
(Balance Figure) 1,13,100
6,13,600 6,13,600
384

Dr. Branch Debtors A/c Cr.


Particulars Rs. Particulars Rs.
To Balance b/d 1,13,000 By Cash A/c (Balance Figure) 2,43,400
To Credit Sales 3,35,000 By Return Inward 4,000
By Bad Debts 1,000
By Allowances to Customers 4,500
By Balance c/d 1,95,100
4,48,000 4,48,000

Loading :
Cost + Loading = Invoice Price
100 + 25 = 25
25 1
Loading  
125 5

Illustration No. 11:


J. S. Trading Company, Nagpur, invoices goods to its Kanpur
Branch at cost which sells on credit as well as for cash. From the
following particulars, prepare Branch Stock Account, Branch
Debtors Account, Branch Expenses Account. Cash is immediately
remitted by Branch to Head Office. Expenses are paid directly by
Head Office.

Particulars Rs.
Stock at Branch on 1-1-2017 ………… 7,560
Goods from Head Office ………… 35,500
Goods returned by customers ………… 300
Total Sales ………… 46,760
Cash Sales ………… 16,750
Goods returned to Head Office ………… 350
Stock at Branch on 31st December 2017 ………… 6,950
Debtors on 1st January 2017 ………… 13,000
Cash paid by customers ………… 24,600
Discount and commission to customers ………… 1,360
Bad Debts ………… 300
Rent Rates and Taxes ………… 900
Salaries and Wages etc. ………… 3,650
385

Solution :

Dr. Branch Stock Account Cr.


Particulars Rs. Particulars Rs.
To Balance b/d 7,560 By Cash (Cash sales) 16,750
(Stock on 1-1-2017)
To Goods sent to branch 35,500 By Branch Debtors (Credit 30,010
A/c Sales)
To Branch Debtors A/c 300 By Goods sent to branch 350
(Sales Return) A/c (Return from Branch )
To Gross Profit transferred 10,700 By Balance c/d (stock on 6,950
to Profit & Loss A/c 31-12-2012)
54,060 54,060

Dr. Branch Debtors Account Cr.


Particulars Rs. Particulars Rs.
To Balance b/d (Debtors 13,000 By Cash 24,600
1-1-2017)
To Branch Stock A/c 30,010 By Branch Stock A/c 300
(Sales Return)
(Credit Sales 46,760 – By Discount and Commission 1,360
16,750)
By Bad Debts 300
By Balance c/d (Bal. Fig.) 16,450
43,010 43,010

Dr. Branch Expenses Account Cr.


Particulars Rs. Particulars Rs.
To Bad Debts 300 By Branch Profit & Loss A/c 6,210
To Discount and 1,360
Commission A/c
To Cash A/c.
Rent, Rates and Taxes 900
Salaries and Wages 3,650
6,210 6,210

Dr. Branch Profit and Loss Account Cr.


Particulars Rs. Particulars Rs.
To Branch Expenses A/c 6,210 By Gross Profit transferred 10,700
To Net Profit transferred to from Branch Stock A/c
General Profit & Loss A/c
4,490
10,700 10,700
386

Dr. Goods Sent to branch Account Cr.


Particulars Rs. Particulars Rs.

To Branch Stock A/c 350 By Branch Stock A/c 35,500


To Trading A/c 35,150
35,500 35,500

Illustration No. 12:

Following particulars are related to Solapur Branch for the


year ended 31st March, 2018. Goods are invoiced to Branch @ cost
plus 50%. Branch remits all cash received to the head office and all
expenses are met by the Head office. From the following
particulars, prepare the necessary accounts under the stock and
Debtors method.

Transactions during the year. Rs.

Stock (at invoice price) on 1st April , 2017 93,000


Branch Debtors on 1st April, 2017 68,000
Goods invoiced to branch at cost 3,40,000
Sales at Branch :
Cash Sales 2,50,100
Credit Sales 3,10,000
Cash received from Debtors 3,04,000
Goods returned by Debtors 12,000
Goods returned by Branch to HO 1,500
Shortage of Stock 4,500
Discount allowed to Debtors 2,000
Expenses at Branch 54,000
387

Solution :

In the Books of Pune Head Office


Dr. Solapur Branch Stock A/c. Cr.
Particulars Rs. Particulars Rs.
To Balance b/d 93,000 By Sales
To Goods Sent to 5,10,000 Cash 2,50,100
Branch
To Branch Debtors A/c 12,000 Credit (Deb.) 3,10,000 5,60,100
By Goods Sent to Br. A/c. 1,500
(Returns)
By Branch Adj. A/c 4,500
(Shortage)
By Balance c/d 48,900
6,15,000 6,15,000

Dr. Solapur Branch A/c. Cr.


Particulars Rs. Particulars Rs.

To Balance b/d 68,000 By Branch Cash 3,04,000


To Branch Stock A/c 3,10,000 By Branch Stock A/c 12,000
(Credit Sales) (Sales Returns)
By Discount 2,000
By Balance c/d 60,000
3,78,000 3,78,000

Goods Sent to Solapur Branch A/c.


Dr. Cr.
Particulars Rs. Particulars Rs.
To Branch Stock A/c. 1,500 By Branch Stock A/c 5,10,000
(Returns) 1,70,000 By Goods Sent to Branch 500
To Branch Adjs. A/c 3,39,000
5,10,500 5,10,500

Solapur Branch Cash A/c.


Particulars Rs. Particulars Rs.
To Sales 2,50,100 By Head Office Cash A/c. 5,54,100
To Debtors 3,04,000
5,54,100 5,54,100
388

Solapur Branch Adjustment A/c.


Particulars Rs. Particulars Rs.
To Branch Stock Res. A/c. 16,300 By Branch Stock Res. 31,000
A/c.
(closing Stock) 2.(e+f) Opening Stock) 2. (d)
To Goods Sent to Br. A/c. 500 By Goods Sent to Br. A/c. 1,70,000
To Branch Stock A/c. 4,500 2(a)
(Shortage)
To Gross Profit c/d 1,79,700
2,01,000 2,01,000

Solapur Branch Profit & Loss A/c.


Particulars Rs. Particulars Rs.

To Discount 2,000 By Gross Profit 1,79,700


To Branch Exp. A/c 54,000
To Net Profit 1,23,700
1,79,700 1,79,700

Note : (1) Loading (20%on CP = 1/3rd of IP)

Inv Price (1/3rd) Rs.


Rs.
(a) Goods sent to Branch 5,10,000 1,70,000
Goods returned 12,000 4,000
4,98,000 1,66,000
(b) Goods return to Branch 1,500 500 Cost
(c) Shortage 4,500 1,500 3,000
(d) Stock-Opening 93,000 31,000
(e) -Closing 48,900 16,300

(2) Assumption : Shortage is of Normal (nothing abnormal)


389

19.2 EXERCISES

1. M/s Gupta Brothers are having their Head Office at Delhi and
Branch at Calcutta. The following are the transactions of the
Head Office with Branch for the year :

Particulars Rs. Particulars Rs.


st
Stock at Branch as on 1 Jan. 30,800 Amount sent to Branch :
st
Debtors at the Branch as 1 16,500 - Salary 7,440
January
Petty Cash as on 1st Jan. 500 - Rent 2,400
Goods supplied to the Branch 1,51,200 - Petty Cash 3,000
Remittance from Branch : Stock at Branch as on 23,150
31st Dec.
- Cash Sales 10,500 Sundry Debtors at the
Branch as
- Realisation of Debts 1,57,740 on 31st Dec. 50,460
st
Petty Cash an on 31 750
Dec.

Show the Branch Account in the books of the Head Office.


(Ans.: N.P. Rs. 30,760)

2. From the following information, prepare Delhi Branch Account in


the books of head office for the year ending 31st March, 2018 :

Particulars Rs. Particulars Rs.


Opening Stock (at cost) 1,78,000 Discount allowed to Customers 500
Opening Debtors 14,000 Bad Debts written off 1,000
Opening Petty Cash 250 Credit Sales 7,29,400
Furniture 6,000 Cash Sales 32,000
(in the beginning)
Opening Creditors 6,000 Petty Expenses paid by Branch 8,000
Goods sent to Branch 5,22,000 Cheques sent to Branch of
(at Cost) expenses :
Goods returned by 7,800 Salaries 30,000
Branch to H.O. (at cost)
Goods returned by 5,700 Rent and Insurance 12,000
Customers to Branch
Cash received by 6,11,000 Petty Cash 7,870
Branch from its
customers
390

Goods are sold to customers at cost plus 50%. Depreciate the


furniture @ 10% p.a.
(Ans.: N.P. Rs. 1,99,800 Cl. bal. 1,25,200, Cl. Petty-Cash 120)

STOCK & DEBTORS


3. Mumbai Soap Mills Ltd has two branches at Kolhapur and at
Pune. Goods are invoiced to branches at cost plus 50%. From
the following particulars, prepare necessary accounts under
“Stock and Debtor System” to find out profit earned by the
branches.

Particulars Rs. Pune


Rs.
Stock on 1.4.2017 (at Invoice Price) 9,300 15,600
Debtors on 1.4.2017 6,800 8,700
Goods invoiced to Branches at cost 34,000 36,000
Cash Sales 25,010 35,000
Credit Sales 31,000 30,100
Cash from Debtors 30,400 29,800
Goods returned by Debtors 1,200 1,500
Goods returned by branch to H.O. 1,500 -
Goods transferred from Pune to Kolhapur 2,100 2,100
Surplus in stock - 300
Shortage in stock 450 -
Discount allowed to customers 200 350
Expenses at branches 5,400 6,700

[Ans. Branch Stock Account Debit Balance L Kolhapur Rs. 5,640; Pune Rs.
4,200., Br. Debtors on 31.3.2013 : Kolhapur Rs. 6,000; Pune Rs. 7,150.
Gross profit : Kolhapur Rs. 18,270; Pune Rs. 21,200. Net Profit : Kolhapur
Rs. 12,370; Pune Rs. 14,350]

4. Ruchika Ltd. sends goods to its branch at cost plus 25%. The
following particulars are available in respect of the branch for
the year ended 31st March, 2018.

Particulars Rs.
Opening stock at Branch at cost to the Branch 80,000
Goods sent to Branch at Invoice Price 12,00,000
Loss in transit at invoice price 18,000
Pilferage at invoice price 6,000
391

Sales 12,10,000
Expenses 60,000
Closing Stock at Branch at cost to the Branch 40,000
Recovery from insurance company against loss in 10,000
transit

Prepare :
i) Branch Stock Account.
ii) Goods Sent to Branch Account.
iii) Branch Adjustment Account.
iv) Branch Profit & Loss Account in the books of H.O.
[Ans. Gross Profit Rs. 2,43,800. Net Profit Rs. 1,77,000]

5. Ferwani Traders with head office in Kolhapur had a branch at


Satara.
Following information is provided :

(1) Mark-up on cost by Head Office on goods sent 33 1/3%


to branch
(2) Goods sent to branch at invoice price Rs.8,70,000
(3) Goods Returned by branch debtors Rs. 24,000
(4) Goods Returned by branch Rs. 32,000
(5) Stock on hand at branch (1-4-2016) (at cost) Rs. 9,000
(6) Stock on hand at branch (Invoice price) Rs. 45,000
(31-3-2017)
(7) Cost of free sample given by branch Rs. 3,000
(8) Expenses at Branch Rs. 34,000
(9) Goods of invoice value Rs.15,000 were in transit from HO to
branch on 31-3-2017.
(10) Branch Manager was allowed to buy goods for own use at a
special discount of 10%; branch manager availed of the
concession and bought goods costing Rs.12,000 during the
year.
Prepare Branch Stock Account, Branch Debtors Account and
Branch Profit and Loss Account.
(Mumbai TY April 2001, adapted)
[Ans.: Profit Rs. 1,57,900)


392

20
FIRE INSURANCE CLAIM I

UNIT STRUCTURE
20.0 Objectives
20.1 Introduction
20.2 Requisite of Insurance
20.3 Procedure of Claim for Loss of Stock
20.4 Steps for Calculating the Claim
20.5 Exercise
20.6 Illustrations

20.0 OBJECTIVES

After studying the unit the students will be able:


 To introduce the topic
 To know about the term fire insurance claim
 To understand the meaning of Average Clause
 To make ready for calculating the claim amount
 To illustrate the practical problems

20.1 INTRODUCTION
Insurance contract is a contract of indemnity. Under this
contract, an insurance company indemnifies the insured for loss of
property due to the reasons like fire, flood, earthquake, etc. A
business organisation usually get its property insured against the
risk of fire and other natural calamities. On the occurrence of fire or
accident, the business organisation has to estimate the loss and
lodge a claim with insurance company.

Losses due to fire are of two types:


 Loss of assets and
 Loss of profit
Loss of assets affects so badly on business activities which
ultimately affects profits of the business. Therefore the business
concerns take a fire insurance policy in respect of,
 Loss of stock only,
 Loss of profit only, OR
393

 A comprehensive or Package Policy which covers loss of all


the items i.e. stock, other assets, profit, expenses etc.
20.2 REQUISITE OF INSURANCE

A fire at the place of business place destroys assets like


building, furniture and machinery. It also destroys records. It also
disturbs the normal functioning of the business. Therefore, the
prudent businessman usually chooses to take insurance policy in
order to cover the risk of loss due the occurrence of the fire. If
unfortunately, the fire broke out, the businessman gets
compensation equal to the amount of loss sustained. In order to
receive compensation, the businessman has to lodge the claim with
the insurance company for loss of stock. In order to lodge the claim,
businessman has to find out the stock on the date of fire. In
absence of the proper record of the stock, it becomes challenging
to compute the amount of claim.

20.3 PROCEDURE OF CLAIM FOR LOSS OF STOCK

I. If proper stock records are maintained or if records are not


destroyed by fire:-
In such a case calculation of claim will be as follows:
A. Calculate the amount of stock lost by fire:
Particulars Amounts
Stock on the date of fire xx
(-) Salvage xx
Stock lost by fire xx

B. Calculation of the amount of claim:


a) If there is no average clause then
Stock lost by fire = Amount of claim

b) If there is average clause then


Amount of claim = Policy Amount/ Stock on the Date of Fire × Stock
lost by fire

II. If proper stock records are not maintained or if records are


destroyed by fire:-

A. Calculation of the Percentage of Gross Profit:

Determine the Gross Profit to Sales ratio. In absence of any


information, it is required to take the figure of pervious year for
determining the percentage of gross profit. If the information about
sale and gross profit is available, it is essential to take average of
these figures.
394

Prepare a Trading Account in the usual manner. Following are


some of the items associated with preparation of Trading Account:

(i) Stock:
Stock contains stock of raw materials, work in progress, finished
goods, etc. In absence of any clear information, stock is considered
as stock of finished goods only. Such stock should be valued at
cost. If any other basis is given, convert it to cost.

(ii) Purchases less returns.

(iii) Wages.

(iv) Manufacturing expenses.

(v) Sales less returns.

(vi) Gross profit.

The rate of Gross profit is the key for determining the stock on
the date of fire. Therefore, there should be regularity in the gross
profit ratio.

B. Memorandum Trading Account

It is required to prepare Memorandum Trading Account up to


the date of fire by gathering figures in respect of opening stock,
purchases, direct expenses and sales from the record. In case the
record is destroyed by fire, the information can be discovered from
the documentary evidence.
The estimated value of stock on the date of fire is the balancing
figure on the credit side of the Memorandum Trading Account.
While preparing Memorandum Trading Account, following points
should be taken into consideration:

(i) Period:
This Account is prepared for the period from last date of accounts
to the date of fire which is given in the problem.

(ii) Opening Stock:


The opening stock should be valued at cost.

In case of undervaluation of stock:


Cost of stock = (100\100 – Rate of Undervaluation) × Value of stock

In case of overvaluation of stock:


Cost of stock = (100\100 + Rate of Overvaluation) × Value of stock
395

(iii) Purchases:
Purchases should be taken into account for the period from
last date of accounts to the date of fire. Goods received but not
accounted should be added to purchases. If the amount of
purchases is not given, it can be calculated by preparing Creditors
Account.
Particulars Amounts
Purchases xx
Less: Goods included in purchases but not actually xx
received
Add: Unrecorded Purchases xx
Less: Purchase Returns xx
Purchases to be debited to Trading A/c xx

If purchases are not given, it should be decided by preparing


creditors A/c as follows.
Creditors A/c
Particulars Amounts Particulars Amounts
To Bank A/c XX By Balance b/d XX
To Discount A/c XX By Purchases XX
To Bills Payable A/c XX (Bal. Fig.)
To Balance c/d XX
XX XX

(iv) Sales:
Sales should be taken into account for the period from last
date of accounts to the date of fire. Goods included in the above
sales but not delivered should be deducted from sales.
Misappropriated cash sales and goods delivered but not recorded
should be added to sales.
Particulars Amounts
Sales xx
Less: Goods sold but not delivered xx
Less: Sale of assets xx
Add: Unrecorded sales xx
Less: Sales returns xx
Sales to be credited to Trading A/c xx

If sales are not given, it should be ascertained by preparing


Debtors A/c as follows:
Debtors A/c
Particulars Amounts Particulars Amounts
To Balance b/d XX By Bank A/c XX
To Sales A/c XX By Discount A/c XX
(Bal.fig.) By Sales Returns A/c XX
By Bills Receivable A/c XX
XX XX
396

(v) Wages:
Wages for the period from the last accounts to the date of
fire should be debited to Memorandum Trading Account.
Amount of wages should be calculated as follows:
Particulars Amounts
Wages paid xx
Less: Wages incurred for installation of machinery xx
Less: Outstanding wages of the last year paid during xx
the year
Add: Outstanding wages for the current year xx
Wages to be debited to Trading A/c xx

(vi) Manufacturing Expenses:


Manufacturing expenses or factory expenses for the period from
last date of accounts to the date of fire should also be considered.

(vii) Gross Profit and Gross Profit Ratio:


Gross profit ratio should be at a certain percentage on cost or on
sales. Consistent gross profit ratio over the past years is essential
to find out stock on the date of fire. Gross profit ratio should be
adjusted under the following circumstances:

(a)Different gross profit ratios in past years should be averaged out.

(b) Change in material prices.

(c) Change in expenses ratio.

(d) Change in sales price.

(e) Different gross profit ratios for different goods.

The ratio of Gross Profit for the purpose of claim should be at


normal rate.

(i) If information about the Gross Profit Ratio of the immediately


preceding year is given, then the Gross Profit Ratio of the previous
year should be taken as a normal rate of Gross Profit.

(ii) If the rate of Gross Profit of previous years has been falling from
year to year consistently then it is not proper to consider the
average rate of gross profit of previous years as normal rate of
gross profit. In such a situation, make an estimate of the rate of
gross profit that is likely to prevail in the current year and consider
that rate as the normal rate of gross profit , e.g., gross profit rates
for three years have been 25%, 20% and 15%. In this case,
average will be 20%, Instead of taking average reasonable gross
profit rate likely to prevail will be 10%.The above procedure should
be followed, in case of continuous rise in the rate of gross profit.
397

(viii) Abnormal Goods:


Goods which are slow moving or which are damaged are called
as abnormal goods. Valuation of such goods may be at cost or at a
lower value as given. It becomes necessary to adjust purchases,
sales and stock on account of abnormal goods.

Abnormal items are treated as follows:

1. If abnormal items are included in closing stock:


(a) Deduct value of abnormal items from closing stock.
(b) Deduct cost of abnormal items from purchases.
(c) Deduct sale of abnormal items from sales.

2. If abnormal items are included in opening stock:


(a) Deduct value of abnormal items from opening stock.
(b) Deduct sale of abnormal items from sales.
(c) Deduct value of abnormal items, if any, from closing stock.

3. If abnormal items are written off to some extent from closing


stock:
(a) Deduct the value of remaining items from closing stock.
(b) Deduct cost of abnormal items from purchases.
(c) Deduct sale of abnormal items from sales.

(ix) Stock:
Balancing figure in Memorandum Trading Account after adjustment
of gross profit is the stock of normal goods. Then, it should be
adjusted for:-
(i) Goods with consignee or third party and
(ii) Salvage, i. e. realisable value of scrap or partly damaged goods.
The adjusted stock is the amount of loss suffered.

Memorandum Trading A/c


For Period __
Particulars Amounts Particulars Amounts
To Opening Stock XX By Sales XX
Less: Returns
To Purchases XX By Goods Distributed as XX
Less: Returns Free Samples
To Wages XX By Stock Sent on XX
Consignment
To Carriage XX By Bills Receivable XX
To Gross Profit C/d XX By Stock Sent on Approval XX
XX By Closing Stock (Stock XX
on the date of fire)
(Bal.fig.)
XX XX
398

C. Loss of Stock
Deduct the amount of salvage from the value of stock on the
date of fire to get the value of loss of stock.

Loss of Stock = Stock on the Date of Fire – Salvage.

D. Average Clause
The insurance policy is taken for compensating probable
loss in the future and not to earn profit. Therefore, a fire insurance
policy generally includes an average clause in order to discourage
under insurance of stock. As per this clause, the insurance
company pays compensation to the insured proportionately if the
value of stock or asset on the date of fire is more than the amount
of insurance policy.

Formula applied in case of an Average Clause:


Claim = (Value of policy / Value of stock on the date of fire) × Value
of stock destroyed by fire

For example:- suppose stock of Rs.2,00,000 may be insured say


for Rs.1,50,000. So if fire occurs and the actual loss is
Rs.1,30,000 the insured can recover the amount of loss if there is
no ‘average clause’ in the policy.

To discourage such tendency of under-insurance and


prevent the misuse of insurance there is an ‘Average Clause’
included in the policy.The effect of this clause is that the insured
does not get the full amount of loss, even though the policy amount
is more than the loss. The insured gets only proportionate amount
of loss. The base of this principle is that in case of under-insurance
the owner of the property himself acts as an insurer to the extent
the property has not been insured with the insurance company. In
the above example insured is self-responsible for the amount of the
stock
Rs.50,000 (Rs.2,00,000 – Rs.1,50,000) as he has under-
insured the stock. The formula for calculating the amount of claim if
there is Average Clause:

Amount of claim = Sum Insured (amount of claim) X Actual loss


Total stock on the date of fire

= 1,50,000 / 2,00,000 X 1,30,000

=Rs.97,500
399

20.4 STEPS FOR CALCULATING THE CLAIM

1. Prepare the Trading A/c for the previous accounting years &
calculate the gross profit.

2. Calculate the Gross Profit Ratios for the previous accounting


years & choice a Gross Profit Ratio for the Memorandum Trading
Account.

3. In order to ascertain the closing stock (i.e.) stock on hand as on


the date of fire, prepare a Memorandum Trading A/c. This A/c is
from the commencement of the accounting year to the date of fire.

4. Record everything that is applicable in the Memorandum Trading


A/c.

5. Calculate the gross profit as a percentage of sales on the basis


of Gross Profit Ratio in step 2.

6. The Memorandum Trading A/c should be balanced. The


balancing figure would represent closing stock.

7. Statement of claim
Closing Stock xx
(-) Salvage (xx)
Amount of Loss or claim xx

8. Average Clause:
If closing stock is greater than the amount of policy.
Claim = (Value of policy / Value of stock on the date of fire) × Value
of stock destroyed by fire

Adjustments:
1. The Stock should always be valued at cost. If there is any
undervaluation or overvaluation then the stock should be brought
back to cost.

2. Purchases & Sales should include only purchases & sales of


goods. Purchases & sales of assets should be excluded from the
purchases & sales.

3. Unrecorded purchases and sales if any should be recorded.

4. Purchases should include those goods which have been actually


received before the date of fire. Whether the invoice is received or
not is not material, similarly, sales should include only those goods
which have been dispatched before the date of fire.
400

5. Salvage should be valued either at cost or market value


whichever is less.

6. The insurance company would compensate the insured to the full


extent of firefighting expenses.

20.5 EXERCISES

A) Theory Questions
1. What is the treatment of Abnormal Goods?
2. Write short note on Memorandum Trading Account.
3. What is the procedure of computing claim for loss of stock?
4. Write short note on Average Clause.
5. Write short note on need of insurance.

B) Test your understanding by selecting the most appropriate


alternative:

1. Salvage refers to --------------


a) Stock destroyed by fire. b) Stock moving fast.
c) Stock saved from fire. d) Stock moving slow.

2. Purchase of furniture should be ------------


a) Added to purchase. b) Deducted from purchase.
c) Ignored. d) None of the above.

3. Unrecorded sales should be --------------.


a) Added to sales. b) Deducted from sales.
c) Ignored. d) None of the above.

4. Percentage of Gross Profit should be--------------.


a) Increasing b) Decreasing
c) Fluctuating d) Constant

5. Percentage of Gross Profit should be at --------------.


a) cost b) market value
c) marginal price d) realisable value

6. Debtors Account is prepared to find out ----------------.


a) cash sales b) credit sales
c) cash purchases d) credit purchases

7. Credit purchases should be ascertained from ---------------A/c.


a) Total Creditors b) Total Debtors
c) Cash d) Bank
401

8. Abnormal items included in the closing stock should be ---------.


a) added to sales b) deducted from sales
c) deducted from purchases d) deducted from closing stock

9. As per Average Clause, insurance company pay compensation


----------------.
a) more than the loss b) less than the loss
c) equal to loss d) proportionately

10. Goods sent on approval is --------------.


a) debited to Memorandum Trading A/c
b) credited to Memorandum Trading A/c
c) added to sales
d) deducted from sales

11. Carriage on purchase should be --------------.


a) debited to Memorandum Trading A/c
b) credited to Memorandum Trading A/c
c) added to sales
d) deducted from sales

12. In fire insurance, compensation is -----------------.


a) equal to policy amount b) less than policy amount
c) actual loss incurred d) stock on the date of fire

13. Goods sent on consignment are --------------.


a) debited to Memorandum Trading A/c
b) credited to Memorandum Trading A/c
c) added to sales
d) deducted from sales

14. Fire insurance ----------------.


a) covers risk of loss b) decreases loss
c) prevents loss d) None of the above

15. Sales are Rs.50,000, gross profit is 25% on sales, the gross
profit will be ---------------- .
a) Rs.12,500 b) Rs.10,000
c) Rs.25,000 d) None of the above

16. If opening creditors are Rs.30,000, closing creditors are


Rs.45,000 and the payment to creditors Rs.87,500, then credit
purchases will be ---------------- .
a) Rs.1,02,500 b) Rs.1,00,000
c) Rs.97,500 d) Rs.1,07,500

Answer: 1-c, 2-b, 3-a, 4-d, 5-a, 6 - b, 7 - a, 8 - d, 9 - d, 10 - b,


11 - a, 12 - c, 13 - b, 14 - a, 15 - a, 16-a.
402

C) State whether the following statements are True or False:


1) In case of overvaluation of stock, it should be brought down to
cost.
2) Insurance avoids loss due to fire.
3) Valuation of stock should be carried out at market value only.
4) Goods sent on consignment should be credited to Memorandum
Trading A/c for deciding the stock on the date of fire.
5) It is not compulsory to insure the stock.
6) Sale of asset should be debited to Trading A/c.
7) Average Clause do not affect calculation of claim.
8) Credit purchases are ascertained from Total Debtors A/c.
9) Abnormal goods are fast moving goods.
10) Memorandum Trading A/c is prepared to find out credit sales.
11) Average Clause is not applicable when goods are fully insured.
12)Goods saved from fire as called as abnormal goods.
13)Normal good are slow moving goods.
14) If sales are Rs.2,00,000 and gross profit is Rs.40,000 ,then
gross profit ratio is 20% .
Answer:
False : 2, 3, 6, 7, 8, 9, 10,12,13
True : 1, 4, 5,11,14

D) Fill in the blanks:


1) Credit purchases can be ascertained from --------------- A/c.
2) Sale of asset should be deducted from --------------- .
3) Slow moving goods are also known as ------------ goods.
4) In fire insurance, insured get compensation equal to ------------
incurred.
5) Purchases should be -------------- to Trading A/c.
6) -------------- Account is prepared to find out credit sales.
7) Wages incurred on installation of machinery should be
deducted from ---------.
8) Goods saved from the fire is called as --------------.
9) --------- businessman takes out an insurance policy.
10) Stock distributed as free sample should be credited to ---- A/c.
403

11) Memorandum Trading A/c is prepared to find out ---------- on


the date of fire.
12) ------------- = Salvage + Loss of Stock.

Answer:
1) Total Creditors, 2) Sales, 3) Abnormal, 4) loss, 5) debited,
6) Total Debtors, 7) Wages, 8) salvage, 9) Prudent, 10) Trading,
11) stock, 12) Stock on the date of fire

E) Match the following:


I)
Column A Column B
A) Mark up 1) Fast moving goods
B) Average Clause 2) Stock on the date of fire -
Salvage
C) Abnormal Goods 3) Slow moving goods
D) Loss of Stock 4) Discourage the insurance
5) Based on cost

Answer: I) A - 5, B - 4, C - 3, D - 2

II)
Column A Column B
A) Shop soiled goods 1) Total Debtors A/c
B) Insurance 2) Total Creditors A/c
C) Credit sales 3) Contract of Indemnity
D) Credit purchases 4) Abnormal Goods
5) Normal Goods

Answer: II) A - 4, B - 3, C - 1, D - 2


404

21
FIRE INSURANCE CLAIM II
ILLUSTRATION & EXERCISE

Unit Structure:

21.0 Objectives
21.1 Solved Problems
21.2 Exercises

21.0 OBJECTIVES

After studying the unit, students will be able to solve the


practical problems on computation of Fire Insurance Claim.

21.1 SOLVED PROBLEMS

Illustration No. 1
Ascertain purchases when cost of goods sold is Rs. 1,00,000.
Opening stock : Rs. 10,000.
Closing stock : Rs. 25,000 .
Solution:
Cost of goods sold = Opening Stock + Purchases – Closing Stock
1,00,000 = 10,000 + Purchases – 25,000
1,00,000 – 10,000 + 25,000 = Purchases
Purchases = Rs.1,15,000
Illustration No. 2
Find out sales when cost of goods sold is Rs. 1,60,000 and Gross
Profit ratio 20%.
Solution:
Gross Profit = 1,60,000 × 20/80
= Rs.40,000
Sales = Cost of Goods Sold + Gross Profit
= 1,60,000 + 40,000
= Rs.2,00,000
405

Illustration No. 3
(Calculation of Claim in case of under insurance, using
average clause)
Find out the actual claim in the following case:
Particulars Amounts
Rs.
Value of stock on the date of fire 8,000
Value of the Insurance Policy 6,000
Value of stock saved from fire 1,000
There is an average clause in the policy.
Solution:
1. Calculation of Actual Amount of Loss
Particulars Amounts
Rs.
Value of stock on the date of fire 8,000
Value of stock saved from fire 1,000
Actual Amount of Loss 7,000

2. Calculation of Amount of Claim


Claim = (Value of policy / Value of stock on the date of fire) × Value
of stock destroyed by fire
=(5,000 /8,000)× 6,000
=Rs. 3,750

Illustration No. 4
Razavi Traders have taken a fire policy of Rs.4,80,000 covering its
stock in trade. A fire occurs on 31-3-2018 and stock was destroyed
with the exception of the value of Rs.1,24,080.
Following particulars are available from the books of accounts of
the firm:
Stock on 31-12-2017 Rs. 1,80,000
Purchases to the date of fire Rs. 7,80,000
Sales to the date of fire Rs. 5,40,000
Carriage Inwards to the date of fire Rs. 24,000
Commission paid on purchases 2%
Rate of Gross Profit on cost 50%
406

The policy was subject to average clause. You are required to


calculate:-
(i) Total loss of stock.
(ii) Amount of claim to be lodged with the Insurance Company.
(iii) Loss suffered due to under insurance

Solution:
Step 1
In the books of Razavi Traders
Memorandum Trading Account
For the period from 1-1-2018 to 31-3-2018
Dr. Cr.

Particulars Amounts Particulars Amounts


Rs. Rs.
To Opening stock 1,80,000 By Sales 5,40,000
To Purchases 7,80,000 By Closing Stock 6,39,600
(Bal.Fig.)
To Commission 15,600
(2/100 × 7,80,000)
To Carriage 24,000
Inwards
To Gross Profit C/d 1,80,000
[5,40,000×1/3]
11,79,600 11,79,600
Note: 50% or 1/2 on cost = 1/3 on sales.
Step 2
Calculation of Actual Loss

Particulars Rs.
Stock on the date of fire 6,39,600
Less: Salvage 1,24,080
Actual Loss 5,15,520

Step 3
Calculation of Amount of Claim
Claim = (Value of policy / Value of stock on the date of fire) × Actual
Loss
= 4,80,000 / 6,39,600 × 5,15,520
= Rs. 3,86,882
407

Step 4
Calculation of loss due to under insurance
Particulars Rs.
Actual Loss 5,15,520
Less: Amount of claim 3,86,882
Loss due to under insurance 1,28,638

Illustration No. 5
A fire broke out in the warehouse of Ankita Traders Ltd. on 30th
September 2017. The company desires to file a claim with the
insurance company for loss of stock. From the following information
prepare a statement showing the amount of claim. The last
accounts of company were prepared on 31.12.2016.
Stock on 31.12. 2016 Rs. 1,20,000
Sundry debtors on 31.12. 2016 Rs .3,20,000
Sundry debtors on 30.9. 2017 Rs . 2,40,000
Cash received from debtors Rs .11,52,000
Purchases from 1.1. 2017 to 30.9. 2017 Rs .10,00,000
Rate of Gross Profit on sales 25%

Solution:
Step 1
In the books of Ankita Traders Ltd.
Dr. Total Debtors A/c Cr.
Particulars Amounts Particulars Amounts
Rs. Rs.
To Balance b/d 3,20,000 By Cash received 11,52,000
To Credit Sales 10,72,000 By Balance c/d 2,40,000
(Bal. fig.)
13,92,000 13,92,000
408

Step 2
In the books of Ankita Traders Ltd.
Memorandum Trading Account
For the period from 1-1-2017 to 30/09/2017
Dr. Cr.
Particulars Amounts Particulars Amounts
Rs. Rs.
To Opening stock 1,20,000 By Sales 10,72,000
To Purchases 10,00,000 By Closing Stock 3,16,000
(Bal.Fig.)
To Gross Profit C/d 2,68,000
(10,72,000 × 25%)
13,88,000 13,88,000

Step 3
Statement of Claim

Particulars Rs.
Stock on the date of fire 3,16,000
Less: Salvage Nil
Amount of claim 3,16,000

Illustration No. 6
A fire occurred in the premises of Mr. Dinkarrao on 7th November
2017. From the following particulars, prepare a statement of claim
to be lodged with insurance company:-
Particulars Rs.
Stock on 01/04/2016 80,000
Stock on 31/03/2017 98,000
Purchases during 2016 - 17 6,75,000
Sales during 2016 - 17 8,10,000
Purchases from 01/04/2017 to 07/11/2017 5,05,400
Sales from 01/04/2017 to 07/11/2017 6,25,000

In valuing the stock for Balance Sheet on 31st March 2017 Rs.8,000
had been written off. Certain stock having cost Rs.14,000. Half of
these goods were sold in May 2017 for Rs.2,000. The balance is
estimated to be worth 60% of original cost. Subject to this
exception, gross profit had remained at uniform rate. The policy
amount was Rs.1,20,000.The stock salvaged was worth Rs.7,500.
409

Solution :

Step 1
In the books of Mr. Dinkarrao
Trading Account
For the year ended 31/03/2017
Dr. Cr.
Particulars Abnormal Normal Particulars Abnormal Normal
Rs. Rs. Rs. Rs.
To Opening - 80,000 By Sales - 8,10,000
stock
To Purchases 14,000 6,61,000 By Closing 6,000 92,000
Stock
To Gross Profit - 1,61,000 By Profit and 8,000 -
C/d Loss A/c

14,000 9,02,000 14,000 9,02,000

Step 2
Gross Profit Ratio =Gross Profit / Net Sales X 100
=1,61,000/ 8,10,000X 100
=19.88% i.e. 20.00%

Step 3
In the books of Mr. Dinkarrao
Memorandum Trading Account
For the period ended from 01/04/2017 to 07/11/2017
Dr. Cr.
Particulars Abnormal Normal Particulars Abnormal Normal
Rs. Rs. Rs. Rs.
To Opening 6,000 92,000 By Sales 2,000 6,23,000
stock
To Purchases 5,05,400 By Closing 4,200 99,000
Stock
To Gross Profit 1,24,600 -
C/d
(6,23,000×20%)
7,22,000 7,22,000
410

Step 4
Loss of Stock
Particulars Rs.
Stock on the date of fire (99,000+ 4,200) 1,03,200
Less: Salvage 7,500
Loss of Stock 95,700

Step 5
Claim
Claim = Amount of Policy / Stock on the date of fire × Actual Loss
= 1,20,000 / 1,03,200 × 95,700
=Rs.1,11,279

Note:-Average clause is not applicable as the amount of policy


is more than the stock on the date of fire. Claim by average
clause is more than actual loss.
Therefore, Claim =Rs. 95,700.

Illustration No. 7
Fire occurred in the factory of X Co. Ltd on 30th June 2018
which had taken an insurance policy of Rs.50,000 subject to
average clause.

From the following particulars, calculate the claim to be


recovered from the Insurance Company:-

Particulars Rs
Stock on 31/12/2017 50,000
Purchases from 1/1/2018 to the date of fire 2,00,000
Sales from 1/1/2018 to the date of fire 2,40,000

It was ascertained that the company had made an average


gross profit of 25% on sales for past five years. The value of the
goods salvaged was Rs.14,000.
411

Solution:

Step 1
In the books of X Co. Ltd
Memorandum Trading Account
For the period from 01/01/2018 to 30/06/2018
Dr Cr

Particulars Amounts Particulars Amounts


Rs. Rs.
To Opening stock 50,000 By Sales 2,40,000
To Purchases 2,00,000 By Closing Stock 70,000
(Bal. Fig.)
To Gross Profit C/d 60,000
(2,40,000 × 25%)
3,10,000 3,10,000

Step 2
Statement of Claim

Particulars Rs.
Stock on the date of fire 70,000
Less: Salvage 14,000
Amount of claim 56,000

Illustration No. 8
A fire occurred in the factory of Good Luck Co. Ltd on 15th April
2018. The value of the goods saved from fire was Rs.1,40,000.
Following information is available:-

Year Sales Gross


Rs. Profit
Rs.
2015-16 30,00,000 9,80,100
2016-17 27,50,000 9,35,000
2017-18 30,00,000 10,00,000

The stock on 31st March 2018 was valued at


Rs.4,85,000.Purchases, sales and wages from 1st April 2018 to
14th April 2018 were ascertained at Rs.3,75,000, Rs.7,95,000 and
Rs.1,50,000 respectively.

Calculate the claim to be recovered from the Insurance


Company
412

Solution:

Step 1
In the books of Good Luck Co. Ltd
Memorandum Trading Account
For the period from 01/04/2018 to 14/04/2018

Dr Cr
Particulars Amounts Particulars Amounts
Rs. Rs.
To Opening stock 4,85,000 By Sales 7,95,000
To Purchases 3,75,000 By Closing Stock 4,80,000
(Bal. Fig.)
To Wages 1,50,000
To Gross Profit C/d 2,65,000
(7,95,000×33.33%)
12,75,000 12,75,000

Step 2

Statement of Claim

Particulars Rs.
Stock on the date of fire 4,80,000
Less: Salvage 1,40,000
Amount of claim 3,40,000

Working Note:-

Gross Profit Ratio =Gross Profit / Net Sales X 100

Year Calculation Ratio


2015-16 9,80,100/30,00,000 X 100 32.67
2016-17 9,35,000/27,50,000 X 100 34.00
2017-18 10,00,000/30,00,000 X 100 33.33

Average rate of gross profit for last three years is 33.33%

Illustration No. 9
Balaji Co. Ltd. have taken a fire insurance policy of Rs.1,60,000
covering its stock in trade. A fire occurred in the factory on 31st
March 2018 and stock was destroyed with the exception of
Rs.40,980 worth.

From the following particulars, calculate the claim to be


recovered from the Insurance Company:-
413

Particulars Rs.
Stock on 1/1/2018 60,000
Purchases from 1/1/2018 to the date of fire 2,60,000
Sales from 1/1/2018 to the date of fire 1,80,000
Carriage paid on purchases 1,600

Commission paid to the purchase manager on purchase: - 2%


Average Gross Profit on cost:-50%
The policy was subject to average clause.

Solution:

Step 1
In the books of Balaji Co. Ltd.
Memorandum Trading Account
For the period from 01/01/2018 to 31/03/2018
Dr Cr
Particulars Amounts Particulars Amounts
Rs. Rs.
To Opening stock 60,000 By Sales 1,80,000
To Purchases 2,60,000 By Closing Stock 2,06,800
(Bal.Fig.)
To Carriage paid on 1,600
purchases
To Commission to 5,200
the purchase
manager
(2,,60,000 × 2%)
To Gross Profit C/d 60,000
(1,80,000× 33.33%)
3,86,800 3,86,800

Step 2

Statement of Claim
Particulars Rs.
Stock on the date of fire 2,06,800
Less: Salvage 40,980
Actual Loss 1,65,820

Claim = Amount of Policy / Stock on the date of fire × Actual Loss


= 1,60,000 / 2,06,800 × 1,65,820
=Rs.1,28,294
414

Illustration No. 10
Fire occurred on 14th October 2017 destroyed the stock of
Salunkhe and Associates. From the following available particulars,
calculate the claim to be recovered from the Insurance Company:-

Particulars Rs.
Stock on 1/4/2016 88,600
Stock on 1/4/2017 75,100
Purchases for the year up to 31/3/2016 2,07,700
Purchases from 1/4/2017 to the date of fire 74,700
Sales for the year up to 31/3/2016 3,05,000
Sales from 1/4/2017 to the date of fire 1,18,000

Rs.1,200 had been written off a particular line of goods which


had originally cost Rs.3,600 and which were sold in June 2017 for
Rs.3,500. Except as regards this transactions, the ratio of gross
profit had remained unchanged throughout. The value of the goods
salvaged was Rs.10,232.

Solution:

Step 1
In the books of M/s Salunkhe and Associates
Memorandum Trading Account
For the year ended 31st March 2016
Dr Cr
Particulars Amounts Particulars Amounts
Rs. Rs.
To Opening stock 88,600 By Sales 3,05,000
To Purchases 2,04,100 By Closing Stock 72,700
2,07,700 75,100
Less: Abnormal Less: Abnormal
3,600 2,400
To Gross Profit C/d 85,000
3,77,700 3,77,700

Step 2

Gross Profit Ratio =Gross Profit / Net Sales X 100


=85,000 / 3,05,000 X 100
=27.87%
415

Step 3
In the books of M/s Salunkhe and Associates
Memorandum Trading Account
For the period from 01/04/2017 to 14/10/2017
Dr Cr
Particulars Amounts Particulars Amounts
Rs. Rs.
To Opening stock 72,700 By Sales 1,18,000 1,14,500
Less: Abnormal
3,500
To Purchases 74,700 By Closing Stock 64,810
To Gross Profit C/d 31,910
(1,14,500 × 27.87%)
1,79,310 1,79,310

Step 4
Statement of Claim
Particulars Rs.
Stock on the date of fire 64,810
Less: Salvage 10,232
Amount of claim 54,578

Illustration No. 11
On 13th December 2017, a fire in the godown of Minal Stores
damaged stock to a large extent. From the following available
particulars, prepare statement of claim to be submitted to Insurance
Company:-

Particulars Rs.
Balance on 31/03/2017
Stock 6,80,000
Creditors 90,000
Debtors 1,25,000
Transactions from 01/04/2017 to 13/12/2017
Payment to creditors 3,72,000
Return outwards 12,000
Return inwards 18,000
Receipt from debtors 6,20,000
Credit purchases 3,42,000
Credit sales 6,18,000

Sales are made at a profit of 33.33% on selling price. The


policy is for Rs.5,40,000 with average clause. Salvage value of
stock damaged is Rs.20,000.
416

Calculate the claim to be recovered from the Insurance


Company

Solution:
Step 1
In the books of Minal Stores
Memorandum Trading Account
For the period ended from 01/04/2017 to 13/12/2017
Dr Cr
Particulars Amounts Particulars Amounts
Rs. Rs.
To Opening stock 6,80,000 By Sales 6,18,000 6,00,000
Less: Returns
18,000
To Purchases 3,30,000 By Closing Stock 6,10,000
3,42,000 (Bal. Fig.)
Less: Returns
12,000
To Gross Profit C/d 2,00,000
(6,00,000 × 33.33%)
12,10,000 12,10,000

Step 2
Loss of Stock
Particulars Rs
Stock on the date of fire 6,10,000
Less: Salvage 20,000
Loss of Stock 5,90,000

Step 3

Amount of claim
Claim = Amount of Policy / Stock on the date of fire × Actual Loss
= 5,40,000 / 6,10,000× 5,90,000
=Rs.5,22,295

Illustration No. 12
The business premises of M/s Patel Timber Mart Ltd destroyed by
fire on 15/07/2017. However, the books of accounts and stock
amounting to Rs.18,000 were salvaged and the following
information was available from the books:-
417

Year Gross Sales


Profit
Rs.
Rs.
2012-13 2,04,250 8,17,000
2013-14 2,02,350 6,74,500
2014-15 1,90,000 7,60,000
2015-16 1,77,650 7,10,600
2016-17 1,52,000 7,60,000

Additional information:-

1. Stock on 31/03/2017 Rs.92,250.

2. Purchases from 01/04/2017 to 14/07/2017 Rs.89,250.

3. Sales from 01/04/2017 to 14/07/2017 Rs.1,60,000.

4. Wages from 01/04/2017 to 14/07/2017 Rs.28,500.

5. The policy is for Rs.80,000 subject to average clause.

You are required to prepare a statement of claim against the


Insurance Company with any comments, if necessary.

Solution:

Step 1
Gross Profit Ratio =Gross Profit / Net Sales X 100

Year Calculation Ratio


2012-13 2,04,250 / 8,17,000 X 100 25.00%
2013-14 2,02,350 / 6,74,500 X 100 30.00%
2014-15 1,90,000 / 7,60,000 X 100 25.00%
2015-16 1,77,650 / 7,10,600 X 100 25.00%
2016-17 1,52,000 / 7,60,000X 100 20.00%

Average rate of gross profit =25+30+25+25+20 / 5


=125 / 5
=25.00%
418

Step 2
In the books of M/s Patel Timber Mart Ltd
Memorandum Trading Account
For the period ended from 01/04/2017 to 13/07/2017
Dr Cr
Particulars Amounts Particulars Amounts
Rs. Rs.
To Opening stock 92,250 By Sales 1,60,000
To Purchases 89,250 By Closing Stock 90,000
(Bal. Fig.)
To Wages 28,500
To Gross Profit C/d 40,000
(1,60,000 ×25.00%)
2,50,000 2,50,000

Step 3
Loss of Stock

Particulars Rs.
Stock on the date of fire 90,000
Less: Salvage 18,000
Loss of Stock 72,000

Step 4
Claim
Claim = Amount of Policy / Stock on the date of fire × Actual Loss
= 80,000 / 90,000× 72,000
=Rs.64,000

Illustration No. 13
Ajinkya Ltd suffered loss of stock due to fire on 31st May 2018.
From the following information, prepare a statement showing the
amount of claim to be lodged:-

Particulars Rs.
Stock on 01/01/2017 38,400
Purchases during 2017 1,60,000
Sales during 2017 2,02,600
Stock on 31/12/2017 31,800
Purchases from 01/01/2018 to 31/05/2018 54,000
Sales from 01/01/2018 to 31/05/2018 61,400

An item of stock purchased in 2016 at a cost of Rs.10,000 was


valued at Rs.6,000 on 31st December 2016.Half of the stock was
sold in 2017 for Rs.2,600. Remaining stock was valued at Rs.2,400
on 31st December 2017.1/4th of the original stock was sold in March,
419

2018 for Rs.1,400.The remaining stock was considered to be worth


60% of the original cost. Salvage was Rs.12,000.The amount of the
policy was Rs.30,000.There was an average clause in the policy.

Solution:
Step 1
In the books of Ajinkya Ltd
Trading Account
For the year ended 31/12/2017
Dr Cr
Particulars Amounts Particulars Amounts
Rs. Rs.
To Opening stock 32,400 By Sales 2,02,600 2,00,000
38,400 Less: Abnormal 2,600
Less: Abnormal
6,000
To Purchases 1,60,000 By Closing Stock 29,400
31,800
Less: Abnormal 2,400
To Gross Profit C/d 37,000

2,29,400 2,29,400

Step 2
Gross Profit Ratio =Gross Profit / Net Sales X 100
=37,000 / 2,00,000 X 100
=18.50%

Step 3
In the books of Ajinkya Ltd
Memorandum Trading Account
For the period ended from 01/04/2017 to 31/05/2017
Dr Cr
Particulars Amounts Particulars Amounts
Rs. Rs.
To Opening stock 29,400 By Sales 61,400 60,000
Less: Abnormal
1,400
To Purchases 54,000 By Closing Stock 34,500
(Bal. Fig.)
To Gross Profit C/d 11,100
(60,000 × 18.50%)
94,500 94,500
420

Step 4

Loss of Stock

Particulars Rs
Stock on the date of fire (34,500 + 1,500) 36,000
Less: Salvage 12,000
Loss of Stock 24,000

Step 5

Claim
Claim = Amount of Policy / Stock on the date of fire × Actual Loss
= 30,000 / 36,000 × 20,000
=Rs.20,000

Working Note:-
Particulars Abnormal Valued
Rs. Rs.
10,000 6,000
½ Sold 5,000 3,000
5,000 3,000
¼ Sold 2,500 1,500
Balance 2,500 1,500

Illustration No. 14
A fire occurred in the premises of Mr. Rajendra on 15th October
2017. From the following particulars, prepare a statement of claim
to be lodged with insurance company:-

Particulars Rs.
Stock on 31/03/2016 1,98,000
Stock on 31/03/2017 2,42,000
Purchases during 2016 -17 6,40,000
Sales during 2016 -17 8,00,000
Purchases from 01/04/2017 to 15/10/2017 8,00,000
Sales from 01/04/2017 to 15/10/2017 7,58,000

The stock on 31st March 2016 was valued at 90% of cost price
and on 31st March 2017 was valued at 10% above cost. The stock
salvaged was of the value of Rs.35,600. The claim was subject to
average clause.
421

Solution:
Step 1
In the books of Mr. Rajendra
Trading Account
For the year ended 31/03/2017
Dr Cr
Particulars Amounts Particulars Amounts
Rs. Rs.
To Opening stock 2,20,000 By Sales 8,00,000
1,98,000
Add:-Undervalued
22,000
To Purchases 6,40,000 By Closing Stock 2,20,000
2,42,000
Less: Overvalued
22,000
To Gross Profit C/d 1,60,000
10,20,000 10,20,000

Step 2
Gross Profit Ratio =Gross Profit / Net Sales × 100
=1,60,000 / 8,00,000 × 100
=20.00%

Step 3
In the books of Mr. Rajendra
Memorandum Trading Account
For the period ended from 01/04/2017 to 15/10/2017
Dr Cr
Particulars Amounts Particulars Amounts
Rs Rs
To Opening stock 2,20,000 By Sales 7,58,000
To Purchases 6,00,000 By Closing Stock 2,13,600
(Bal. Fig.)
To Gross Profit C/d 1,51,600
(7,58,000×20.00%)
9,71,600 9,71,600

Step 4
Loss of Stock
Particulars Rs
Stock on the date of fire 2,13,600
Less: Salvage 35,600
Loss of Stock 1,78,000
422

Step 5
Claim
Claim = Amount of Policy / Stock on the date of fire × Actual Loss
= 2,00,000 / 2,13,600 ×1,78,000
=Rs.1,66,667

Illustration No. 15
On 7th May 2018, the premises and stock of a firm destroyed by
fire, however, books of accounts being saved. In order to make a
claim on their fire policy, they ask your advice and you are able to
obtain the following information. The stock on hand has always
been valued at 5% below cost.

Particulars 2015 2016 2017 2018


Rs. Rs. Rs. Rs.
Opening Stock 22,800 30,400 36,100 39,900
Wages 28,400 31,200 34,200 12,000
Purchases 91,000 1,10,000 1,20,000 41,000
Sales 1,40,000 1,70,000 1,86,000 75,000
Closing Stock 30,400 36,100 39,900 -

Prepare a statement of submission to the insurance company


in support of your claim for loss of stock.

Solution:
Step 1
In the books of the firm
Trading Account
For the year ended 31/03/2017
Dr Cr

Particulars 2015 2016 2017 Particulars 2015 2016 2017


Rs. Rs. Rs. Rs. Rs. Rs.
To Opening 24,000 32,000 38,000 By Sales 1,40,000 1,70,000 1,86,000
Stock
To Purchases 91,000 1,10,000 1,20,000 By Closing 32,000 38,000 42,000
Stock

To Wages 28,400 31,200 34,200


To Gross Profit 28,600 34,800 35,800
C/d
1,72,00 2,08,000 2,28,000 1,72,000 2,08,000 2,28,000
0
423

Step 2
Gross Profit Ratio =Gross Profit / Net Sales × 100

Year Calculation Ratio


2015 28,600/ 1,40,000 × 100 20.43%
2016 34,800/ 1,70,000 × 100 20.47%
2017 35,800/ 1,86,000 × 100 19.25%

Average rate of gross profit =20.43 + 20.47 + 19.25 / 5


=60.15 / 3
=20.05% i.e. 20.00%

Step 3
In the books of the firm
Memorandum Trading Account
For the period ended from 01/04/2018 to 31/05/2018

Particulars Amounts Particulars Amounts


Rs. Rs.
To Opening stock 42,000 By Sales 75,000
To Purchases 41,000 By Closing Stock 35,000
(Bal. Fig.)
To Wages 12,000
To Gross Profit C/d 15,000 -
(75,000×20%)
1,10,000 1,10,000

Step 4
Statement of Claim

Particulars Rs
Stock on the date of fire 35,000
Less: Salvage Nil
Amount of claim 35,000
424

21.2 EXERCISES

Illustration 1:
A fire occurred in the business premises of M/S Black on
th
15 October ,2017. From the following particulars ascertain the loss
of stock and prepare a claim for insurance.

Particulars Rs.
Stock on 1-1-2016 30,600
Purchases from 1-1-2016 to 31-12-2016 1,22,000
Sales from 1-1-2007 to 31-12-2016 1,80,000
Stock on 31-12-2016 27,000
Purchases from 1-1-2017 to 14-10-2017 1,47,000
Sales from 1-1-2017 to 14-10-2017 1,50,000

The stocks were always valued at 90% of cost. The stock


saved was worth Rs.18,000.The amount of the policy was
Rs.63,000. There was an average clause in the policy.
(Amount of claim = Rs. 47,250)
(Ans.: G/P Rs.25,000, Stock on the date of Fire Rs.17,600, Amount of Claim
Rs.14,000)

Illustration 2:
On 21st June, 2017 the premises of X Ltd. were destroyed by
fire but sufficient records were saved from which the following
particulars were ascertained.
Rs.
Stock at cost on 1-1-2016 73,500
Stock at cost on 31-12-2016 79,600
Purchases during the year 2016 3,98,000
Sales during the year 2016 4,87,000
Purchases from 1-1-2017 to 21-6-2017 1,62,000
Sales from 1-1-2017 to 21-6-2017 2,31,200

In valuing the stock for the Balance Sheet at 31st December


2016 Rs.2,300 had been written off from certain stock which was a
poor selling line, having cost Rs.6,900.A portion of these goods
was sold in April 2017 at a loss of Rs.250 on the original cost of
Rs.3,450.The remainder of this stock now estimated to be worth the
original cost. Subject to above exception, gross profit had remained
at a uniform rate throughout.
The stock salvaged was Rs.5,800.
Show the amount of claim.
[Ans : Insurance Claim – Rs.52,250]
425

Illustration 3:
The premises of M/s. Thin and Company were destroyed by
fire on 1st September 2014 and some stock was found badly
damaged. The accounts of the firm are closed on 31st December
each year. On 31st December 2013, stock was valued at cost
Rs.26,544 against Rs.19,228 as at 31st December 2012.
Purchases and sales were as follow:

Particulars Rs.
Purchases for the year 2013 90,516
Sales for the year 2013 1, 04,000
Purchases from 01/01/2014 to 01/09/2014 69,654
Sales from 01/01/2014 to 01/09/2014 98,340

In addition to the above following additional information is collected:


i) Sometime in May 2014 goods costing Rs.10,000 were
distributed as part of advertisement campaign in support
whereof no entry appears to have been passed in the books.
ii) During 2014, cash sales of Rs.1,190 were misappropriated and
these were not recorded in the books.
Ascertain the estimated value of Stock on the date of the
assuming that the rate of gross profit has been constant.
[Ans: Amount of Claim Rs.6,574]

Illustration 4:
The premises of M/s Weakend were destroyed by fire on
30-06-2018. Following figures were collected from available
sources. Prepare statement of claim, showing the amount of claim.
The firm closes its books on 31st December every year.

Details 2015 2016 2017 30/06/18


Rs. Rs. Rs. Rs.
Opening Stock 20,000 22,000 11,800 34,020
Sales 2,22,000 2,02,500 1,93,500 28,000
Purchases 1,60,000 1,45,000 1,70,000 35,000
Freight Outward 6,000 7,000 3,000 2,500
Freight Inward 5,000 3,000 5,000 1,000
Return Inward 22,000 4,000 6,000 2,000
Closing Stock 22,000 11,800 34,020 ?
426

Further Information:
1) In 2015, while valuing closing stock, a slow moving item costing
Rs.5,000 was valued at Rs.4,000 and this was sold in 2016, for
Rs.4,500.
2) In 2016, while valuing closing stock, an item costing Rs.6,000
was wrongly valued at Rs.7,000 and was sold in 2017 for
Rs.5,500.
3) In 2017 while valuing closing stock, goods costing Rs.12,000
were valued at Rs.10,000. 50% of these goods were sold
before 30-06-2018 for Rs.6,000.
4) The goods salvaged were Rs.10,000.
[Ans : Insurance Claim – Rs.40,020]

Illustration 5:
A fire occurred in the godown of X Ltd. on 9th March, 2018,
destroying the entire Stock. The books and records were salvaged
from salvaged from which the following particulars were
ascertained :
Rs.
Sales for the year, 2017 10,01,000
Sales for the period 1-1-2018 to 8-3-2018 3,00,000
Purchases for the year, 2017 8,00,000
Purchases for the period 1-1-2018 to 8-3-2018 1,25,000
Stock on 1-1-2017 3,31,100
Stock on 31-12-2017 3,85,000

The company has been following the practice of valuing the


Stock of goods at actual cost plus 10%. Included in the Stock on
1-1-2017 were some shop-soiled goods which originally cost
Rs.2,000, but were valued at Rs.1,100. These goods were sold
during the year 2017 for Rs.1000. Subject to these, the rate of
Gross Profit on the basis of valuation of Stock was uniform.

You are required to ascertain the value of the Stock destroyed.

[Ans : Rs.2,50,000]


427

(REVISED COURSE)
(3 Hours) (Total Marks : 100)

N.B. 1) All questions are compulsory, subject to internal option.


2) Figures to the right indicates full marks.
3) Working notes should form part of your answer.

1. a) State whether the following statements are True or False


(Any Ten) (10)
i) Goodwill is tangible Asset.
ii) Assets purchased on Hire Purchase are never depreciated.
iii) Balance sheet is real account.
iv) Capital Account can never show debit balance.
v) Accounting Standards are issued by Company Law Board.
vi) Inventory is always valued at cost or markets whichever is
higher.
vii) Limited companies cannot maintain their accounts on
single entry system.
viii) Account sale is sent by the consignee to the consignor.
ix) Loading 25% on cost is same as 20% on sales.
x) Reserve for bad and doubtful debts is subtracted from
debtors in the Balance Sheet.
xi) No proper books of accounts are maintained under single
entry system.
xii) Purchase Returns are also called as Returns outwards.

b) Match the following (Any Ten) (10)

Column A Column A
Discount Received Balance sheet liability side
Discount allowed Profit and loss account debit
side
Returns inwards Subtracted from purchases
Returns outwards Profit and loss account credit
side
Bank overdraft Subtracted from sales
Proforma Invoice Debited to debtors account
Dependent branch Debited to bills Receivable
account
Independent branch Credited to capital account
428

Bills receivable dishonored Depends upon head office for


maintaining books of accounts
Bills receivable accepted by Does not Depend upon head
customers office for maintaining books of
accounts
Additional capital introduced Credited to cash account
Drawings of the proprietor Sent by consignor along with
goods sent
Balance Sheet Asset Side

2. Following is the Trial Balance of Snow Coolers as on


31st March, 2019. (10)

Particulars Debit ` Credit `


Monika’s Capital A/c 6,50,000
Stock on 1st April, 2018
Raw materials 45,000
Finished Goods 65,000
Monika’s drawings 30,000
Furniture 1,10,000
Machinery 2,50,000
Bills Receivable / Bills Payable 25,750 19,370
Purchase of Raw Materials 6,45,730
Sales 9,18,350
Bank Overdraft 46,150
Motor Car 75,000
Returns Inward / Returns outward 8,350 5,730
Rates & Taxes 18,360
Power & Fuel 22,400
Factory Expenses 18,430
Printing & Stationary 23,490
Sundry Debtors 78,390
Sundry Creditors 53,200
Salaries (11 months) 22,000
429

Wages 12,400
Insurance 6,500
General Expenses 11,200
Commission Received 25,000
10% Loan (taken on 01-10-2018) 1,00,000
Interest on above loan 5,000
Bad debts 2,400
Advertisement 6,600
Reserve for doubtful debts 4,200
Building (50% Factory, 50% Office) 3,40,000
18,22,000 18,22,000

Adjustments :
1) Stock as on 31st March, 2019 is valued at Raw Materials
`45,000, Finished Goods `86,300.
2) Depreciate Machinery at 10% p.a., Furniture is 15% p.a.,
Building at 5% p.a., Motor Car at 20% p.a.
3) Of the debtors `3,390 are bad. Provide reserve doubtful
debts at 5%.
4) Wages outstanding `500.
5) Insurance is prepaid to extent of `1,500.
From the above Trial Balance and the adjustments prepare
manufacturing A/c, Trading A/c, Profit and Loss A/c for the
year ended 31st March 2019 and Balance Sheet as on that
date.
OR
2. From the following details available, prepare stores
ledger under F.I.F.O. method. (15)

Date Particulars Quantity (Kg) Rate ` per Kg.


st
1 February 2019 Balance 800 kg 25
nd
2 February 2019 Received 300 kg 26
5th February 2019 Issued 500 kg
th
8 February 2019 Received 900 kg 27
th
9 February 2019 Issued 300 kg
10th February 2019 Received 400 kg 28
th
11 February 2019 Issued 600 kg
th
14 February 2019 Issued 100 kg
430

3. From the following particulars of Thirumala Traders,


Sangli prepare Trading and Profit and Loss Account of
the two departments Flower and Petal for the year ended
31st March 2019) (15)

Flower ` Petal ` Total `


Opening Stock (1-04-2018) 35,460 44,540 80,000
Purchases 5,38,340 7,61,660 13,00,000
Carriage Inwards 3,560 5,320 8,880
Salaries 65,200
Sales 7,00,000 8,00,000 15,00,000
Discount Received 4,320 5,340 9,660
Rent and Rates 48,000
Traveling expenses 45,450
Carriage Outwards 6,450
General Expenses 34,680
Advertising 33,300
Discount Allowed 7,500
Insurance 24,600
Selling commission 36,000

Further information is relevant :


1) General expenses and Insurance are to be allocated equally.
2) The area occupied is Flower 3/5 and Petal 2/5.
3) Number of employees Flower 2, Petal 3.
4) The closing stock of the two departments were Flower
`1,77,360 and Petal `2,11,520.

OR

3. On 1st January 2016 M/s Fufa Fabricators, Faltan purchased


one Molding Machine from Baba Batteries, Balapur on Hire
purchase system. The cash price of the machine is 2,80,000.
The firm paid down payment `80,000 on 1st January 2016
and balance in 3 annual installments of `80,000 each
including interest at 10% p.a. commencing from 31st
December 2016.
M/S Fufa Fabricators provide depreciation on machinery at
20% p.a. on written Down Value Method on 31st December
every year.
431

You are required to give


1 Molding Machine A/c 2 Baba Batteries, Balapur A/c
For the years ended 31st December 2016, 2017, 2018 in
books of M/s Fufa Fabricators, Faltan

4. M/s Yogen Cement Suppliers does not maintain double entry


books of accounts. They have furnished you with the
following information. (15)

Particulars 1st April 2018 ` 31st March 2019 `


Sundry Debtors 36,270 48,530
Stock 51,740 1,44,400
Sundry Creditors 24,020 32,160
Furniture 15,000 25,000
Buildings 1,20,000 ?
Cash and Bank balance 51,010 45,070

Summary of Cash transactions for the year 2018-2019

Receipts `
Cash Sales 66,700
Received from Debtors 84,340
Paid to Creditors 56,420
Wages paid 18,200
Salaries paid 34,000
Printing & Stationery Expenses paid 12,670
Conveyance expenses paid 1,750
Drawings 32,960
Furniture Purchased on 1st October 2018 10,000
Additional capital introduced 50,000
Cash purchases 23,490
General expenses paid 17,490

Returns inwards were `2,310 and returns outwards were


`1,440. Bad debts written off were `1,090. Depreciation is to
be provided on Furniture @ 10% p.a. and on Buildings @
5% p.a. Wages outstanding `800.
432

Prepare Trading Profit and Loss Account of M/s. Yogen


Cement Suppliers for the year ended 31st March 2019 and
Balance Sheet as on that date.

OR

4. On 14th December 2018 the premises of Honey Hosiery


were destroyed by fire, but sufficient records were saved
from which the following particulars were found : (15)

Particulars `
Stock (1.4.2017) 93,200
Stock (31.03.2018) 1,32,000
Purchases (F.Y. 2017-2018) 7,74,000
Sales (F.Y. 2017-2018) 9,34,000
Purchases (1.4.2018 to 14.12.2018) 7,45,000
Sales (1.4.2018 to 14.12.2018) 8,40,000

Stock for the Balance sheet at 31-03-2018 was valued at


20% above cost. During May 2018 Miss Honey had
withdrawn goods costing `23,000. The policy amount was
`1,20,000. The stock salvaged was worth `34,000. Show the
amount of claim to be lodged with the insurance Company.

5. Jayant of Jejuri consigned, 100 Washing Machines costing


`6,200 per machine to Manu of Mumbai on 1st June 2019.
Freight charges incurred on the consignment were `18,000.
On the same day Jayanti drew a bill on Manu for 6,00,000
payableon 30th September 2019 which Manu accepted. The
bill was discounted by Jayant with his bankers on 1st July,
2019 at 12% p.a. Manu paid 12,000 for unloading and
`13,000 for godown rent. Manu rendered account to Jayant
on 31st August 2019 showing sales of 80 machines for
`7,60,000 and selling expenses of 25,000 and 20 machines
for `1,80,000 after incurring expenses of `44,000. Manu’s
commission was @ 10% on sales. On this date manu
remitted to Jayant the amount due to him.
You are required to prepare consignment Account and Manu
of Mumbai’s Account in the books of Jayant of Jejuri.

OR
433

5. M/s Abhijeet Ayurveda, nagpur has a branch at Chandrapur.


All purchases are made by Head Office. Goods are sent to
Branch at Cost. The branch does not maintain double entry
books of accounts, the books are kept at head office. Branch
sells goods for cash as well as on credit. All cash received is
sent to head office after meeting all the expenses of the
branch. From the following information supplied to you,
prepare branch account in the books of head office for the
year ended 31st March 2019.

Particulars `
Stock on branch at cost on 1st April 2018 1,10,000
st
Debtors at branch on 1 April 2018 36,090
Cash at branch on 1st April 2018 25,700
Furniture at branch on 1st April 2018 80,000
Goods sent to Branch 6,54,890
Cash Sales 2,43,600
Credit Sales 6,12,980
Cash received from debtors 5,89,300
Bad debts at branch 1,290
Expenses paid by Branch
Salaries 36,300
Rent 18,000
Printing and Stationary 21,650
Sundry Expenses 12,650 88,600
Goods returned by Branch to Head Office 12,750
Goods Returned by branch debtors 3,480
Cash remitted by branch to Head Office ??
Stock at branch on 31st March 2019 1,25,000
st
Debtors at branch on 31 March 2019 ??
Cash at branch on 31st March 2019 70,000
Furniture at branch on 31st March 2019 72,000
434

6. Answer following questions. (20)


a) What is manufacturing account? Give its proforma.
b) What is branch? Explain in detail Stock and Debtors method
of Branch accounting.

OR

6. Write short notes on (Any Four) (20)


a) Distinguish between Capital Expenditure and Revenue
Expenditure.
b) What is inventory valuation? Explain weighted average
method of stock valuation.
c) What is accounting policy? Give four examples of accounting
policies.
d) What is single entry system of maintaining accounts? What
are its disadvantages?
e) Valuation of closing stock under consignment system.
f) Debtor system of branch accounting.

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