Financial Accounting 0070682178, 9780070682177

Table of contents :
Cover
Contents
1. Introduction to Accounting
2. Accounting Cycle: Journal and Ledger
3. Cash Book and Petty Cash Book
4. Subsidiary Books
5. Trial Balance
6. Final Accounts of Sole Trading Concerns
7. Accounts from Incomplete Records or Single Entry System
8. Accounting for Non-Trading Organisations
9. Depreciation Accounting
10. Rectification of Errors
11. Bank Reconciliation Statement
12. Self-balancing System
13. Insurance Claims
14. Hire Purchase and Installment Accounting
15. Branch Accounts
16. Departmental Accounts
17. Average due Date and Account Current
18. Royalty Accounts
19. Consignment Account
20. Joint Venture Account
21. Accounting for Bills of Exchange
22. Insolvency of Individual and Partnership Firm
23. Accounting for Sale or Return, Investment Accounts and Voyage Accounts
24. Human Resource Accounting, Inflation Accounting, Social Responsibility Accounting and Environmental Accounting
25. Partnership Accounts, Capital Accounts, Appropriation of Profits and Final Accounts of a Firm
26. Admission, Retirement and Death of a Partner
27. Dissolution, Insolvency of Firm, Piecemeal Distribution and Amalgamation of Firms

Citation preview

Financial Accounting

About the Authors Dr S John Gabriel, M Com, M Phil, MBA, Ph D, is an Associate Professor of Commerce at Madras Christian College (Autonomous), Tambaram, Chennai. He has management accounting. He is a member in the panel of examiners and Board of Studies of various colleges and universities. He has presented several research articles at various seminars and conferences. His works have been published in several peer-reviewed academic journals. He continues his research work, currently doing a research project of UGC, and also guides and advises M Phil and Ph D students. Dr A Marcus, M Com, M Phil, Ph D, is an Assistant Professor of Commerce at Loyola College (Autonomous), Nungambakkam, Chennai, from where he earned his Bachelor’s, Master’s and Ph D degrees. For the past two decades he has been Moreover, he has expertise cost and management accounting. He is a member in the panel of examiners for many colleges and universities. He has also published many research articles and guides M Phil students in their studies and research.

Financial Accounting S John Gabriel

A Marcus

Associate Professor of Commerce Madras Christian College (Autonomous), Chennai

Assistant Professor of Commerce Loyola College (Autonomous), Chennai

Tata McGraw Hill Education Private Limited NEW DELHI McGraw-Hill Offices New Delhi New York St Louis San Francisco Auckland Bogotá Caracas Kuala Lumpur Lisbon London Madrid Mexico City Milan Montreal San Juan Santiago Singapore Sydney Tokyo Toronto

Tata McGraw-Hill Published by the Tata McGraw Hill Education Private Limited, 7 West Patel Nagar, New Delhi 110 008. Financial Accounting Copyright © 2010 by Tata McGraw Hill Education Private Limited. No part of this publication may be reproduced or distributed in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise or stored in a database or retrieval system without the prior written permission of the publishers. The program listings (if any) may be entered, stored and executed in a computer system, but they may not be reproduced for publication. This edition can be exported from India only by the publishers, Tata McGraw Hill Education Private Limited. ISBN (13): 978-0-07-068217-7 ISBN (10): 0-07-068217-8 Managing Director: Ajay Shukla Head—Higher Education Publishing and Marketing: Vibha Mahajan Publishing Manager—B&E/HSSL: Tapas K Maji Assistant Sponsoring Editor—B&E/HSSL: Hemant K Jha Development Editor: Shalini Negi Assistant Manager (Editorial Services): Anubha Srivastava Senior Copy Editor: Sneha Kumari Senior Production Manager: Manohar Lal Production Executive: Atul Gupta Product Manager: Vijay S Jagannathan Senior Product Specialist: Daisy Sachdeva General Manager—Production: Rajender P Ghansela Assistant General Manager—Production: B L Dogra Information contained in this work has been obtained by Tata McGraw-Hill, from sources believed to be reliable. However, neither Tata McGraw-Hill nor its authors guarantee the accuracy or completeness of any information published herein, and neither Tata McGrawHill nor its authors shall be responsible for any errors, omissions, or damages arising out of use of this information. This work is published with the understanding that Tata McGraw-Hill and its authors are supplying information but are not attempting to render engineering or other professional services. If such services are required, the assistance of an appropriate professional should be sought. Typeset at Tej Composers, WZ-391, Madipur, New Delhi 110063, and printed at Pushp Print Services, B-39/12A, Gali No. 1, Arjun Mohalla, Maujpur, Delhi-110 053 Cover Design: K Anoop Cover Printer: SDR Printer RQLLCRQZDRARQ The McGraw-Hill Companies

To our beloved Parents, Teachers and Students

Preface

We have great pleasure in introducing our first book on Financial Accounting to the teachers and students of commerce. This book has special features such as it has been written in simple language and in a lucid style with a view to explaining the principles and practices of financial accounting to students. While giving adequate explanation of theoretical aspects, it uses illustrations liberally for explaining various concepts. It contains more than 500 illustrations, 400 theory-based questions and 300 exercise problems. This book has been designed to satisfy the requirements of Choice Based Credit System (CBCS) which has been introduced throughout India in the recent past. Utmost care has been taken to cover the syllabi of various universities and autonomous colleges in India. “Learning Objectives” in the beginning, “Index for Illustrations” in the middle and “Points to Remember” at the end of each chapter give a bird’s eye view of the contents of that chapter. Objective type and short and long answer questions have been given to make the financial accounting concepts very clear to the students. All the illustrations, theoretical questions and exercise problems have been properly sectionalised and suitably grouped according to the intricacies involved. This book also incorporates the latest developments in the field of accounting like human resource accounting, social responsibility accounting, environmental accounting, etc. In a nutshell, this is a comprehensive book which explains all the aspects of financial accounting to meet the requirements of undergraduate and postgraduate students of commerce and teaches students, step by step, to understand theoretical concepts and to work out the problems in financial accounting. The authors bring in contributions from their diverse backgrounds to the pages of this textbook, making it more interesting, current and practical.

Acknowledgements We express our sincere thanks and gratitude to the publishing team at Tata McGrawHill Education Private Ltd., New Delhi, for their encouragement and support, without which it would not have been possible to bring out this book. We also look forward to valuable suggestions from the teachers and students of commerce for further improvement of this book. Authors

Contents

Preface

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23.

Introduction to Accounting Accounting Cycle: Journal and Ledger Cash Book and Petty Cash Book Subsidiary Books Trial Balance Final Accounts of Sole Trading Concerns Accounts from Incomplete Records or Single Entry System Accounting for Non-Trading Organisations Depreciation Accounting Rectification of Errors Bank Reconciliation Statement Self-balancing System Insurance Claims Hire Purchase and Installment Accounting Branch Accounts Departmental Accounts Average due Date and Account Current Royalty Accounts Consignment Account Joint Venture Account Accounting for Bills of Exchange Insolvency of Individual and Partnership Firm Accounting for Sale or Return, Investment Accounts and Voyage Accounts

vii

1 12 38 58 77 87 133 188 249 297 341 385 419 475 561 627 665 691 722 756 785 814 841

x

Contents

24. Human Resource Accounting, Inflation Accounting, Social Responsibility Accounting and Environmental Accounting 25. Partnership Accounts, Capital Accounts, Appropriation of Profits and Final Accounts of a Firm 26. Admission, Retirement and Death of a Partner 27. Dissolution, Insolvency of Firm, Piecemeal Distribution and Amalgamation of Firms

874 895 925 1004

1

Introduction to Accounting

Learning Objectives After studying this chapter, you should be able to understand the

WHAT IS ACCOUNTING ? Accounting is an activity or process of recording business transactions in the books of accounts. It is a language of business. The purpose of accounting is to present data in a systematic way so that profit or loss of business can be ascertained during a particular period of time. The accounting system owes its origin to Luco Pacioli who first published the Principles of Double Entry System in the year 1494 at Venice in Italy. Internationally, there are three popular systems of accounting namely, British system, American system and Islamic system. In our country, we follow British System of Accounting, which is based on double entry system of book-keeping that is governed by statutes, accounting standards and other directives issued by various authorities.

Definition of Accounting The American Institute of Certified Public Accountants has defined Financial manner in terms of money, transactions and events which are, in part, at least of a

identifying, measuring and communicating economic information to permit informed

2

Financial Accounting

Salient Features of Accounting 1. Accounting is an art or skill or knack of recording business transactions.

3. Transactions are recorded in terms of money. 4. Business transactions 5. Transactions should enable interpretation of results.

Objectives of Accounting The objective of accounting is to provide essential information for running business control over these factors.

Functions of Accounting

3. To keep record of assets and liabilities. 5. To communicate the results to various parties, namely, owners, investors, employees, government, etc.

Classification of Accounting (i) Financial Accounting: The purpose of Financial Accounting is to record

(ii) Cost Accounting: The main purpose of this accounting is to record actual

(iii) Management Accounting: This relates to application of accounting principles and knowledge to solve managerial problems in order to make proper decision in management.

Users of Accounting Information The accounting information is useful to various parties related to business (1) Internal users: They are management, owners and employees. (2) External users: They are investors, creditors, government, consumers, competitors, etc.

Limitations of Accounting (i) Only monetary transactions can be recorded. (ii) Business transactions are recorded at cost price in the books.

Introduction to Accounting

3

(iii) Financial statement prepared on the basis of accounting records will not reveal the true position of business. accounting staff regarding depreciation, valuation of stock, deferred revenue

Systems in Accounting (i) Cash system: Under this system only cash receipts and payments are recorded. (ii) Credit or Mercantile system: Only credit transactions are recorded under this system. (iii) Mixed system: It is a combination of both cash and credit system. Rules of Double Entry Accounting System (i) Debit the receivers, credit the giver – Personal Account (ii) Debit what comes in; credit what goes out – Real Account (iii)

Personal Account A personal account is debited with the cash or goods received by that account and credited with cash or goods given by that account. A reference to that account on any date will reveal whether that account has received more than it has given and viceversa. In other words, a personal account will show whether any account is due by that person or due to that person. Example – Ram’s Account, Canara Bank Account, XYZ Co. Ltd. Account, Mrs. Revathy Account.

Real Account A real account is maintained to record the particulars of each asset received or acquired or given away or parted with. A reference to this account on any particular we look into the cash account on a particular date, we can know the balance of cash Example – Machinery Account, Cash Account, Stock Account, Goodwill Account.

Nominal Account

ferred to debit side and all credit balances of the

ominal account are transferred

Example – Salary Account, Discount Account, Rent Received Account, Wages Account.

4

Financial Accounting

Accounting Concepts and Conventions Generally Accepted Accounting Principles (GAAP) are the base for preparing accounting statements to give results of business transactions. The accounting feasibility. Firstly, the results of accounting statements are relevant to the people who need accounting information. Secondly, accounting information are free from personal bias so it is very objective. ing Concepts and Conventions. They are discussed in detail below.

Accounting Concepts 1. Business Entity Concept transactions are recorded in the books of account, but not personal or private affairs of the proprietor or owner. Therefore, the proprietor is treated as a creditor and the capital contributed by him is treated as a liability which will appear on the liabilities position and the earning capacity of the business.

2. Money Measurement Concept the books of accounts. It means that non-monetary transactions cannot be recorded marketing strategies, value of human resources do not appear in accounting. This concept makes an assumption that value of money remains constant. So it fails to

3. Going Concern Concept This concept makes an assumption that (members may come and members may go) business will go on forever. In other words, continuity of business activity is

Account and Balance Sheet.

4. Cost Concept According to this concept, asset is recorded in the books of account at the price at which it is acquired—that is at cost. This cost is the basis for all subsequent accounting treatment for the asset. The asset recorded at cost price is reduced by depreciation. This cost price value is called book value of the asset. This asset will disappear from Balance Sheet when the life of the asset in over and sold as scrap. Thus, the Balance Sheet is prepared on the basis of Cost Concept.

Introduction to Accounting

5

5. Dual Aspect Concept This is the basic principle of accounting. All business transactions involve a two-fold in the business, the business has to give out cash or the obligation or pay for it. For the seller of furniture. Thus, a giver necessarily implies a receiver and a receiver necessarily implies a giver. So, every business transaction affects two accounts. Therefore, we can say every debit has got corresponding credit and vice-versa. Double entry book keeping is a system of accounting by which receiving and giving aspects of each transaction are recorded at a time. Assets = Liabilities Value of Total Assets = Value of Capital + Liabilities to third parties Capital = Total Assets – Liabilities to third parties

6. Accounting Period Concept proprietor or investor wants to know the results of the operations of business. incurred during this accounting period of 12 months. Every year Final Accounts

In addition to Final Account, accounting reports are also prepared periodically to

7. Matching Concept

8. Realisation Concept This concept is also known as ‘Revenue Recognition Concept’. According to the concept, the revenue is considered as earned on the date when it is realised, that is if the goods, services are sold to customers, the customer becomes legally liable to pay concern during a particular accounting period.

9. Objectivity Concept Objectivity means a material thing that can be seen or touched. So, there must be vouchers, etc. Evidence should be such which will minimise the error, intentional bias or fraud. Accounting record should be based on documentary evidence so that it is easy to verify and, therefore, universally acceptable.

Accounting Conventions The term ‘Conventions’ means custom or customary practice or traditions. The

Financial Accounting

6

Accounting Conventions are to be followed while preparing accounting statements. The Accounting Conventions are as follows.

1. Convention of Full Disclosure According to this, the accounting statements should disclose all significant information or complete information about the business transactions, interest of proprietors, creditors, investors, if any. There must be adequate disclosure and publication of result of the business so as to dissipate any suggestion that hidden industry.

2. Convention of Consistency Rules, practices and procedures of accounting should be continuously observed and applied, so that the management can take proper decision regarding problems or issues. According to Yorston, Smith and Brown, “Consistency serves to eliminate personal bias and to even out personal judgement, but it must not become a fetish so

3. Convention of Conservatism

or market price whichever is less.

4. Convention of Materiality as follows. “An item should be regarded as material if there is reason to believe that knowlThe term materiality means important, essential, relevant, etc. According to this convention, only important and relevant information are to be considered. Unimportant items can be left out or merged with other items. Moreover, according to IAS-5

disclosed.

Index for Illustrations Ill. No. 1 2 3

Types

Introduction to Accounting

7

Finding the Nature of Accounts Illustration 1 State the nature of accounts (nominal, real or personal) and show which account will (i) Rent paid (ii) Rent received (iii) Interest received

(vi) Goods purchased (vii) Discount allowed (viii) Capital introduced

Solution Account

Nature of Account

Debited/Credited

Real Real Real

Real

Finding the Varied Nature Illustration 2 Following is the list of various accounts. Find out (ii) Which are real, nominal or personal accounts (a) Cartage paid (f) Furniture (b) Interest (received) (g) Goods (c) Rent paid (h) Cash (d) Hitesh (owner) (i) Bank (e) Rajesh (customer) (j) Bank overdraft Solution Accounts

(i)

(ii)

Real Real Real

Financial Accounting

8

Identifying the Place of Record Illustration 3 On which side the following accounts will be recorded in the books of accounts? Also mention the nature of account. (a) (b) (c) (d) (e) (f) (g)

Amar Account, the proprietor Freight Account Commission Paid Account Interest Received Account Machinery Account Cash Account Creditor’s Account

Solution Accounts

Place of record in the books of accounts

Nature of Account

Points to Remember

manner in terms of money transactions and events of the past having the

going concern concept, cost concepts, dual aspect concept, accounting period concept, matching concept, realisation concepts, objectivity concept. consistency, convention of conservation and convention of materiality. Assets = Liabilities Value of Total Assets = Value of Capital – Liabilities to third parties Capital = Assets – Liabilities to third parties

Introduction to Accounting

9

Examination Questions I. Objective Questions 1. Fill in the blanks (i) Accounting is_____________________. (ii) The British system of accounting is based on ___________________. (iii) Business transactions are of ________________________character. (iv) The accounting information is useful to_____________________. (v) There are __________________main systems of recording business transactions. 2. Choose the correct answer

(b) to calculate total cost (c) to solve managerial problems (ii) The accounting information is useful to (a) students (b) teachers (c) management (a) Proprietor Account (c) Cash Account (a) Cost concept (c) Consistency concept 3. Match the following

(b) Customer Account

(b) Matching concept

a

e

4. State whether the following statements are True or False 1. The objective of accounting is to provide essential information. 2. Accounting is an art. 3. Business transactions are recorded at invoice price in the books. 4. Both monetary and non-monetary transactions are recorded in the books of account. Answers 1. (i) (iii) (v) 2. (i)

An art, Financial, Three. a;

(ii) Double entry, (iv) Various parties, (ii) c;

(iii) c;

(iv) b.

10

Financial Accounting

3.

(i) b; (v) d. 4. (i) True;

(ii) c;

(iii) e;

(iv) a;

(ii) True;

(iii) False;

(iv) False.

II. Descriptive Questions A. Very Short Answer Questions 1. What is accounting? 2. What is real account? 3. What is personal account? 4. What is nominal account? 5. Mention the systems in accounting? B. Short Answer Questions 2. Is accounting an art? 3. What are the rules of Double Entry system? 4. Discuss in brief the possible users of accounting information? 5. What are assets? 6. What are liabilities? 7. What is cash system? C. Detail Answer Questions

4. 5. 6. 7. 8. 9.

‘Accounting is the language of business’—Discuss. ‘Accounting is useful to business’—Discuss. Discuss the limitations of accounting. What are Accounting Concepts and Conventions? How does book-keeping differ from accounting? What are the functions of accounting? personal, real and nominal accounts?

III. Exercise Problems Finding the Nature of Accounts

Problem 1 Under which heading (personal, real or nominal) would you classify the following

Introduction to Accounting

11

Solution

Finding the Varied Nature

Problem 2 Following is the list of various accounts. Find out (i) Which are assets, and liabilities; and (ii) Which are real, nominal or personal accounts. (b) (c) (d) (e) (f) (g)

Bank loan borrowed Advance paid to land lord Rent paid Goods purchased Assets sold Jagan, the proprietor

Solution

(d). Identifying the Place of Record

Problem 3 You are given a number of accounts below. State which of them will show a debit

2

Accounting Cycle: Journal and Ledger

Learning Objectives After studying this chapter, you should be able to understand the

ACCOUNTING CYCLE Accounting is a process or an activity of identifying, measuring and communicating the business transactions to the interested parties to make decisions. The communication is preceded by an accounting cycle. The following are the different stages in the accounting cycle: 1. 2. 3. 4.

Journalising of business transactions Ledger posting Balancing ledger accounts Preparing Trial Balance

6. Preparing Balance Sheet

Accounting Equations The basic accounting equation is expressed by the Balance Sheet which is Sources of funds = Uses of funds Proprietor’s funds + Outside liabilities = Assets Capital = Assets – Liabilities Total assets = Total equity Owner’s equity = Total equity – Creditors

Accounting Cycle—Journal and Ledger

13

The equation gives foundation to Double Entry System of book-keeping. This equation holds good for all business transactions and events at all periods of time since every transaction and event has two aspects.

Meaning of Debit and Credit The word ‘debit’ is derived from the Latin word ‘debitum’ which means ‘due for that’. The word ‘credit’ is derived for the Latin word ‘creder’ which means ‘due to that’. But, debit basically means to enter an amount on the left side of an account and credit means to enter the amount on the right side of an account. In the abbreviated form ‘Dr.’ stands for debit and ‘Cr.’ for credit. When the book lies open in front of you and you look at the book (not the book at you) then the side where you have your heart is the left or Debit side. The side away from your heart is the right side and is called Credit side. In the British system of accounting, entries are made in the book of accounts as debit and credit as per rules of double entry accounting system.

Rules of Double Entry 1. Debit the receiver; Credit the giver – Personal Account 2. Debit what comes in; Credit what goes out – Real Account 3. Debit all expenses and losses; Credit all incomes and gains – Nominal Account

Meaning of an Account An account is a summary of business transactions for a particular period of time. statements. It includes not only the amount of transactions but also their effect and direction.

Meaning of Journal Journal is the book of original entry. This book is a record of day-to-day business transactions. The process of recording the business transactions is called “Journalising”. An entry made in the journal is called journal entry. The journal has Credit, as shown below:

Journal Entry Mr. Abraham started his business with a capital of Rs.10 Lakhs on 1.1.2009. How this information is to be entered in the journal is given in the following steps.

14

Financial Accounting

Steps in Journalising

3. Identify the rules, for debit and credit, applicable for each account. 4. Ascertain which account has to be debited and which has to be credited. 5. Write the name of the account to be debited very close to the left hand side along with abbreviations ‘Dr’ on the same line against the name of the account in “particulars column” and the amount to be debited on the debit amount column against the name of the account. 6. Similarly, write the name of the account to be credited in the next line preceded by a word “To” at a few spaces towards right in particulars column and the amount to be debited in the credit amount column against the name of the account. 7. Then write narration (i.e., a brief explanation) within brackets in the next line in particulars column. 2009

Journal Proper In modern business, the Journal proper is used to make entries for transactions which cannot be conveniently recorded in any of the subsidiary books or which are not numerous necessitating the use of a special book. Therefore, it is called residuary book. The following are the transactions passed through the Journal Proper: (i) Opening Entries Journal entries are made for opening ledger accounts for assets namely cash, furniture, stock, etc. brought in by the trader to the business. When the balances of assets and liabilities are brought forward from the books of the previous year to the current year’s books, opening entries are also passed. and stock Rs. 5,000. The opening entries are:

500

(ii) Closing Entries Journal entries made to close the accounts at the end of the accounting period are called closing entries. Entries are passed to transfer Stock Account, Purchases

Accounting Cycle—Journal and Ledger

15

Account, Returns Account and Sales Account to Trading Account and the Nominal

1

-

2

3

4

5

6 (a)

6 (b)

(iii) Adjusting Entries The journal is used to make the necessary adjustments for the preparation of the

expenses, prepaid expenses, income received in advance and accrued income, interest on capital, provision for depreciation of assets, reserve for doubtful debts,

16

Financial Accounting

reserve for discount on debtors and reserve for discount on creditor, etc. at the end of the year. Such entries are called adjusting entries.

2

3

4

5

6

7

8

9

Ledger Posting Ledger posting is the second stage in the accounting cycle, next to journal entries. Ledger is a main book of accounts, it contains Assets Account, Liabilities Account, Expenses Account, Income or Revenue Account and Capital Account. Ledger may

period and shows their net effect ultimately”. Ledger is prepared on the basis of journals. The journal entries are posted into ledger account. There are three different types of ledgers, namely

Accounting Cycle—Journal and Ledger

17

Bought ledger contains all suppliers’ accounts from whom goods have been bought on credit. Sold ledger or debtors ledger contains all customers accounts to whom goods have been sold on credit. as nominal ledger. Ledger posting is an activity of transferring entries from journal to ledger. It is necessary to post all the entries from journal to ledger because it helps to understand the net effect of various transactions relating to a particular account. Ledger posting is complete only when both debit aspect and credit aspect of the journal entry has been transferred to the concerned account in the ledger. For example

2009

Ledger

2009 --

--

--

2009 --

--

--

Balancing of Ledger Account At the end of every year ledger accounts are closed and balanced. Balancing of credit items and its effect of entries posted in one particular account. It may be debit balance or credit balance or nil balance depending upon the total of debit items and credit items. If the total of debit side exceeds the total of credit side in one particular account, then that account is said to have debit balance. On the other hand if the total of credit side exceeds the total of debit side in one particular account, then that account is said to have credit balance. Normally personal and real accounts are balanced. Nominal account is not balanced because it is closed by transferring the

18

Financial Accounting

Balancing Procedures Given Below 1. Total both debit side and credit side separately. 3. If the total of debit side exceed the total of credit side, put the difference on the credit side by writing “By balance c/d” and similarly, if the total of credit side exceeds the total of debit side, put the difference on the credit side by writing to “To balance c/d”. 4. These balances, i.e., By balance c/d or To balance c/d, are carried forward to the next year by writing To balance b/d or By balance b/d.

Differences between Journal and Ledger 2. Recording of business transactions in the journal book is called Journalising. whereas recording the transactions in the ledger is called ledger posting. 3. Ledger posting is done only at the end of accounting year whereas journalising the transactions is done throughout the year. 4. In ledger, accounts are prepared in ‘T’ form which is not required in the case of journal. ledger posting in the second step in the accounting cycle.

Index for Illustrations Method

Ill. No.

Type

3

6 7 8 9

I – ACCOUNTING EQUATIONS Simple Problems Illustration 1 Total assets of Mr. A on 31st December, 2002 were Rs. 1,00,000. His liabilities were: Creditors Rs. 10,000, Bank overdraft Rs. 8,000, Bills payable Rs. 9,000, and Outstanding salaries Rs. 4,000. Calculate his capital as on that date.

Accounting Cycle—Journal and Ledger

19

Solution Capital = Assets – Liabilities Total assets = Rs. 1,00,000 Total liabilities = Creditors (10,000) + Bank overdraft (8,000) + Bills Payable (9,000) + Outstanding salaries (4,000) = Rs. 31,000 Mr. A’s capital = Assets (1,00,000) – Liabilities (31,000) = Rs. 69,000 as on 31st December 2002. Illustration 2 Calculate total assets, total equity, owner’s equity, if: (i) (ii) (iii) (iv)

Capital is Rs. 80,000 Creditors are Rs. 50,000 Revenue during the period is Rs. 1,00,000 and Expenses during the same period are Rs. 80,000

Solution Total assets = Total equity Total equity = Capital + Creditors + Revenue – Expenses 80,000 + 50,000 + 1,00,000 – 80,000 = Rs. 1,50,000 Therefore, Total assets = Rs. 1,50,000 Owner’s equity = Total equity – Creditors = 1,50,000 – 50,000 = Rs. 1,00,000 Therefore, Owner’s equity = Rs. 1,00,000

Finding the Missing Figures Using the Accounting Equations Illustration 3 You are required to complete the gaps in the following table:

? ? ? ? ? ?

Solution Assets (a) 25,000

– –

Liabilities 3,600

= =

Capital 21,400

(b) 56,000

–

9,800

=

46,200

Assets (c) 33,600

– –

Capital 25,000

= =

Liabilities 8,600

(d) 39,200

–

32,900

=

6,300

20

Financial Accounting

Capital

+

Liabilities

=

Assets

(e) 38,400

+

12,600

=

51,000

(f) 79,500

+

23,300

=

1,02,800

Finding the Effect of Transactions on Assets, Liabilities and Capital Using the Accounting Equation Illustration 4 Aravind had the following transactions. Use accounting equation to show their effect on his assets, liabilities and capital: (a) Started business with Rs. 15,000. (b) Purchased securities for cash Rs. 7,500. (c) Purchased a building for Rs. 15,000 giving Rs. 5,000 in cash and the balance through a loan. (d) Sold securities costing Rs. 1,000 for Rs. 1,500. (e) Purchased an old car for Rs. 2,800 cash. (f) Received cash Rs. 3,600 as salary. (g) Paid cash Rs. 500 for loan and Rs. 300 for interest. (e) Paid cash for household expenses Rs. 300. (f) Received cash for dividend on securities Rs. 200. Solution Accounting Equation: Assets = Liabilities + Capital No.

Transactions

Assets (Rs.)

Liabilities (Rs.)

Capital (Rs.)

0 (+) Rs. 7,500 for addition in asset (–) Rs. 7,500 for reduction in cash (asset) New Accounting Equation

15,000

0

15,000

New Accounting Equation

25,000

10,000

15,000

25,500

10,000

15,500

25,500

10,000

15,500

29,100

10,000

19,100 Contd.

(+) Rs. 1,500 for addition in cash (asset) due to sale (–) Rs. 1,000 for reduction in value of assets due to sale of securities New Accounting Equation (+) Rs. 2,800 for addition in value of assets due to pur chase of car (–) Rs. 2,800 for reduction in cash (asset) New Accounting Equation (+) Rs. 3,600 for addition in cash (asset) on receipt of salary (+) Rs. 3,600 for addition in capital New Accounting Equation

Accounting Cycle—Journal and Ledger

21

Contd.

New Accounting Equation

28,300

9,500

18,800

New Accounting Equation

28,000

9,500

18,500

New Accounting Equation

28,200

9,500

18,700

Illustration 5 Show the Accounting Equation on the basis of the following transactions:

300

500

Solution Transaction No. (i) (ii)

Equities Creditors

Capital

Assets Cash

Stock

Debtors

Furniture

(iii) (iv)

(vi) (vii)

(viii)

(ix) 500 73,000

73,000

Financial Accounting

22

II – JOURNAL ENTRIES Opening Entries for Existing Concern Illustration 6 The following balances appeared in the books of Mr. Balu on 31st March, 2002. Pass the necessary opening entry for 2002–03: Credit balances : Capital Rs. 30,000; Bills Payable Rs. 5,000; Creditors Rs. 10,000 Debtors Rs. 12,000; B/R Rs. 9,000; Cash Rs. 2,000 30 Paid for : Salaries Rs. 3,500 Rent Rs. 1,500 30 Sold goods worth Rs. 10,000 less 10% trade discount. Solution 2002

Opening Entries for New Concern Illustration 7 Journalise the following business transactions in the books of Mr. Andrew 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Mr. Andrew started his business with a capital of Rs. 10,00,000 Opened a current account with a bank by depositing Rs. 5,00,000 Purchased raw-materials for Rs. 1,00,000 Bought machinery for Rs. 1,50,000 Sold goods to Mr. James for Rs. 10,000 Ready cash sales Rs. 5,000 Travelling expenses paid Rs. 2,000 in cash Commission received for Rs. 3,000 Salaries paid to employees for Rs. 10,000 by cheque Rent paid Rs. 5,000

Accounting Cycle—Journal and Ledger

23

Solution Journal entries in the books of Mr. Andrew 1

2

3

4

5

6

7

8

9

10

Note: When the goods or raw-materials are purchased—Open (debit) Purchases Account Purchased or Sold Account The reason being, Purchase or Sale of goods, is a real account in nature.

Financial Accounting

24

III – COMPREHENSIVE PROBLEM Journal, Ledger and Trial Balance Illustration 8 Journalise the following transactions in the books of Kapil and prepare Ledger Account and Trial Balance. 2002

2 3 5 8

200 40

25 28 30

400 200

Solution (I) Journal entries in the books of Mr. Kapil June 1

2

3

5

8

Accounting Cycle—Journal and Ledger

25

200 200

40

25

400 400

28 60

30

200

(II) Ledger 1. Cash A/c 2002 2

3 2

5

6

25

7

28

3

30 30 30 30

4 400 8 200

26

Financial Accounting

2. Capital A/c 2002

3. Bank A/c 2002 5

4. Purchases A/c 2002 8

5. Furniture A/c 2002 3

6. Sales A/c 2002 8

7

7. Arvind Walia A/c 2002 6

9

200

40

Accounting Cycle—Journal and Ledger

27

8. Amrit Lal A/c 2002 -

4

28 28

60

9. Return Inwards A/c 2002 7

200

200

200

200

10. Return Outwards A/c 2002 8

11. Discount A/c 2002 7

40

8

60

20

30

60

60 20

12. Drawings A/c 2002 3

13. Telephone Rent A/c 2002 400

400

400

400

400

14. Stationery A/c 2002 200

200

200

200

200

Financial Accounting

28

15. Rent A/c 2002

16. Salaries A/c 2002

(III) – Trial Balance of Mr. Kapil as on 30th June 2002 L.F. No.

Name of the Account

Debit (Rs.)

Credit (Rs.)

1 2 3 4 5 6 7 8 9

200

10 11

20

12 13

400

14

200

15 16 58,520

Ledger and Trial Balance Illustration 9 Enter the following, directly into ledger and prepare a Trial Balance 2002

5 6 7 8

25

58,520

Accounting Cycle—Journal and Ledger

Solution (I) Ledger Account 1. Cash A/c 2002

2002 2

3 9 5 25 30

2. Capital A/c 2002

2002

3. Purchase A/c 2002 7

2002 7

4. Sales A/c 2002

2002 6 8

5. Rent A/c 2002

2002

6. Chandran A/c 2002

2002 4

8

29

Financial Accounting

30

7. Danush A/c 2002

2002 3

8. Suresh A/c 2002

2002 4

9. Salary A/c 2002

2002

10. Commission A/c 2002

2002 2000

11. Drawings A/c 2002

2002

(II) Trial Balance as on 30th Sept 2002 L.F. No

Name of the Account

Debit (Rs.)

Credit (Rs.)

2 3 4 5 6 7 8 9

30,000

30,000

Accounting Cycle—Journal and Ledger

31

Points to Remember Different stages in the accounting cycle are Jounalising the business transactions, Ledger posting, Balancing ledger account, Preparation of Trial balance, preparation of Trading account and Rules of Double Entry 1. Debit the receiver; Credit the giver – Personal Account 2. Debit what comes in; Credit what goes out – Real Account 3. Debit all expenses and losses; Credit all incomes and gains – Nominal Account An Account is a summary of business transactions for a particular period Journal proper is residuary book. Important Accounting Equations Sources of funds = Uses of fund proprietor’s funds + Outside liabilities = Assets. Capital = Assets – Liabilities

Examination Questions I. Objective Questions (i) Debit the ______________ (ii) Credit what ____________ (iii) Credit all ______________ (iv) Ledger is a book of ____________ (v) Journal proper is a______________ book. 2. Choose the correct answers (i) Commission received is (a) Personal account (b) Real account (c) Nominal account (ii) Example for adjusting entry (a) Rent outstanding (b) Rent received (c) Rent paid (iii) Bought ledger also known as (a) Creditor ledger (b) Debtor ledger (iv) Ledger book contains (a) Only personal account (b) Only real account (c) Personal, real and nominal account

32

Financial Accounting

3. Match the following (i)

a

(ii)

b

(iii)

c

(iv)

d

(v)

e

(i) (ii) (iii) (iv) (v)

Ledger is a book of original entry The accounting equation is Capital = Assets – Liabilities All the losses and expenses are credited The word credit is derived from the Latin word Creder Journal entries are posted into ledger accounts.

Answers 1. (i) receiver, 2. 3.

(i) (c); (i) (b);

(ii) goes out,

(iii) income and gains,

(ii) (a); (ii) (a);

(iii) (a); (iii) (e);

(iv) (c). (iv) (c);

(v) (d).

II. Descriptive Questions A. Very Short Answer Questions 1. What is meant by journal? 2. What is meant by ledger? 3. What is debit? 4. What is credit? 5. What do you mean by the term ‘Account’? B. Short Answer Questions 2. What are the different stages in accounting cycle? 3. What are the rules of Double Entry? 4. What are the steps in journlising business transactions? 5. What is journal proper? 6. What are the difference between journal and ledger? C. Detail Answer Questions 1. Explain in detail the various steps in journalising? 2. What are opening, closing entries and adjusting entries? Explain with example. 3. What are the procedures to be followed in ledger posting? 4. Explain in details the procedures for balancing ledger account? entry system of book-keeping?

Accounting Cycle—Journal and Ledger

33

III. Exercise Problems A. Accounting Equations

Simple Problems Problem 1 If the total assets of a business are of Rs. 1,30,000 and net worth is Rs. 80,000, calculate creditor’s equity. [Ans. Rs. 50,000] Problem 2 If owner’s equity of a business is Rs. 70,000 and liabilities are of Rs. 40,000, calculate total equity of the business. [Ans. Rs. 1,10,000] Problem 3 Calculate total equity if – (a) (b) (c) (d)

Owner’s equity is Rs. 40,000 Equity of creditors is Rs. 25,000 Revenue during the period is Rs. 50,000 Expenses during the same period are Rs. 40,000

Also calculate revised value of owner’s equity. [Ans. Total equity Rs. 75,000, owner’s equity Rs. 50,000] Problem 4 Show Accounting equation on the basis of the following: Raman started business with Rs. 25,000 Purchased goods on credit from Shyam Rs. 10,000 Sold goods to Soman costing Rs. 1,500 for Rs. 1,800 on credit (Madras B.Com) [Ans. Assets Rs. 35,300, Liabilities Rs. 10,000, Capital Rs. 25,300]

Finding the Missing Figures Using the Accounting Equations Problem 5 Complete the gaps in the following table:

? ? ? ? ? ?

[Ans. (a) Rs. 76,200 (b) Rs. 1,03,200 (c) Rs. 15,200 (d) Rs. 2,08,200 (e) Rs. 52,000 (f) Rs. 3,18,000]

Financial Accounting

34

Problem 6 Determine the missing amount in each of the Accounting Equations below:

? ? ? ? ?

[Ans. (a) Rs. 44,000 (b) Rs. 5,600 (c) Rs. 13,000 (d) Rs. 14,000 (e) Rs. 12,600]

Finding the Effect of Transactions on Assets, Liabilities, using the Accounting Equation Problem 7 Convert the following statements into equation form: (a) (b) (c) (d) (e)

Bought a motor van on credit Rs. 5,000 Repaid by cash a loan owed to P. Singh Rs. 10,000 Bought goods for Rs. 1,500 paying by cheque The owner puts a further Rs. 50,000 cash in the business A debtor returns goods of Rs. 800 to us. We agree to make an allowance for them (f) Bought goods on credit Rs. 2,200 (g) The owner takes out Rs. 1,000 goods for his personal use (h) We pay a creditor Rs. 1,900 by cheque [Ans. (a) + Motor Van + Creditors; (b) – Cash – Loan; (c) + Stock – Bank; (d) + Cash + Capital; (e) + Stock – Bank; (f) + Stock + Creditors; (g) – Stock – Capital; (h) – Creditors – Bank] Problem 8 Arvind had the following transactions. Use accounting equation to show their effect on his assets, liabilities and capital. (a) Brought Rs. 45,000 in cash to start business. (b) Purchased securities for cash Rs. 22,500.

(d) (e) (f) (g)

balance through a loan. Sold securities costing Rs. 3,000 for Rs. 4,500. Purchased an old car for Rs. 8,400 cash. Received cash for rent Rs. 10,800. Paid cash Rs. 1,500 for loan and Rs. 900 for interest.

(i) Received cash for dividend on securities Rs. 600. [Ans. Rs. 84,600]

Accounting Cycle—Journal and Ledger

35

Problem 9 Show the accounting equations for the following transactions of Hitesh for the year 2002:

[Ans. Assets – Rs. 2,65,200 = Liabilities Rs. 20,000 + Capital Rs. 2,45,200]. B. Journal Entries

Journalising Transactions Problem 10 Journalise the following transactions: (a) Sold goods to Selvan for cash Rs. 1,000 (b) Purchased a cycle for the personal use of proprietor and paid by cheque Rs. 2,000 (c) Paid wages by cheque Rs. 100 (d) Returned defective goods to Ram Rs. 50 (e) Received a cheque for Rs. 600 from Mani (f) Deposited the above cheque on the next day into bank (g) Mani’s cheque was dishonoured after three days Problem 11 Journalise the following transactions:

3 4 5 6 7 8 9

Financial Accounting

36

Problem 12 Journalise the following transactions:

3 5 6 8 500 500 200 20 28 29 30

600

Problem 13 Pass the opening entry in the journal of Ram (as on 1.1.2001) from the following particulars: Cash in hand -Rs. 1,000 Cash at bank -Rs. 5,000 Stock -- Rs. 20,000 Land and building -- Rs. 1,00,000 Plant and machinery -- Rs. 50,000 Owing from Mr. X -- Rs. 12,500 Prepaid insurance -Rs. 500 Owing to Z Ltd. -Rs. 3,750 Interest received in advance -Rs. 250 C. Comprehensive Problems

Journalising and Preparing Ledger Problem 14 Journalise the following transactions, post them in the ledger and balance the accounts on 31st Jan.1999.

2 5 7

20 25 30

Accounting Cycle—Journal and Ledger

37

Preparation of Ledger Problem 15 On May 1, 1999, the following were the ledger balances of M/s. Kishan Lal & Co. Cash in hand Bills payable

Rs.600; Rs. 2,000;

Cash at bank Jamal (Dr.)

Rs. 14,000; Rs. 1,600;

Sanker (Dr.) Capital

Rs. 3000; Rs. 19,400

Rahim (Cr.)

Rs. 1,800;

Transaction during the month were: 2 3 5 8 28

20 25

300 600

Post the above in the relevant Ledger Account.

Ledger Accounts Journal Entries, Ledger and Trial Balance Problem 16 Journalise the following transactions and post them to ledger and extract the trial balance:

3 4 5 6 7 8 9

(Bharathiar University, B. Com.)

3

Cash Book and Petty Cash Book

Learning Objectives After studying this chapter, you should be able to understand the Importance and meaning of Cash Book Procedures for Preparing Cash Book Kinds of Cash Book, Trade Discount and Cash Discount Petty Cash Book, Imprest System and its advantages

CASH BOOK Cash Book is an important book which is maintained to record only cash transaction i.e., cash receipts and cash payments. Normally, cash transactions are numerous in every business. If the cash transactions are entered in the journal, that will result in unnecessary clerical work involving debiting and crediting the cash receipts and cash payments. Therefore, if Cash Book is maintained separately, postings are made directly from the Cash Book to ledger account. Cash book is an example of special journal. Moreover, Cash Book helps the management to know cash and bank balances from time to time in order to plan for future operation.

Meaning Cash Book is a book of primary entry or original entry because entries relating to cash transactions are entered first in this book. From this Cash Book entries are posted to ledger accounts. Therefore, it serves the purpose of a subsidiary book and also a ledger, and there is no need for opening a cash account. It records receipts and payments of cash transactions only, wherein the receipts are entered in the debit side (also known as receipts side) and the payments are entered in the credit side (also known as payment side).

Procedures for Preparing Cash Book Cash receipts and cash payments are recorded in the cash column but cheques received and cheques issued are recorded in the bank column. Withdrawal of cash through cheques will affect both cash and bank column, this type of entry is called

Cash Book and Petty Cash Book

39

‘contra entry’ which is denoted as ‘c’. In addition to these, any cash discount allowed or received when cash is received or paid is recorded in the discount column.

Kinds of Cash Book Depending upon the nature of business and types of cash transactions, the Cash Book has been classified into various kinds. They are as follows: 1. Simple Cash Book or Single Column Cash Book—This book has cash column only. 2. Two Column Cash Book or Double Column Cash Book—This book has both cash and discount columns. 3. Three Columnar Cash Book or Triple Column Cash Book—This book has cash, bank and discount columns. 4. Petty Cash Book.

Single Column Cash Book This format record only receipts and payments of cash transactions. recorded in their respective ledger account). organisation that does not have regular bank transactions or the practice of allowing or receiving the discount. Single Column Cash Book Dr.

Cr.

Date

Particulars

Dr. Cr. R. No. V. No. L.F.

– – – – –

R. No.

L.F.

Rs.

Date

Particulars

V. No.

L.F.

Rs.

Debit side to record the receipts of the cash Credit side to record the payments of the cash Receipt No. through which cash is received by the transaction Voucher No. through which cash payment is made for the transaction Ledger Folio of the accounts that involve the cash receipt or payment

Two Columnar Cash Book

payments are recorded in the credit side. and discount received is recorded in credit side discount column. represents the total of discount allowed and the credit side discount column indicates the total discount earned and they are taken to the their respective ledger accounts.

40

Financial Accounting

Two Column Cash Book Dr. Date

Cr. Particulars

R. No.

L.F.

Discount allowed

Rs.

Date

Particulars

V. No.

Discount received

L.F.

Rs.

Three Columnar Cash Book

are recorded in the credit side. payments are recorded in the credit side. from bank) are recorded in both the side of cash and bank columns with the mark ©, as Cash Book is a journal as well as ledger for both cash and bank. allowed and the discount earned is recorded in the credit side. Triple Columnar Cash Book Dr. Date Particulars R. No. L.F.

Cr. Discount Cash Bank Date Particulars V. No. L.F. Discount Cash allowed Rs. Rs. received Rs. Rs.

Bank Rs.

Petty Cash Book The word petty is derived from a French word ‘petit’ which means small. This Petty Cash Book is maintained to record petty expenses made namely, printing, stationery, postage and telegrams, carriage and cartage, travelling expenses, office expenses, sundry expenses, etc.

Trade Discount It is an allowance given by the wholesaler to the retailer. Trade discount is a reduction from the catalogue price allowed by the wholesaler to the retailer. The retailer makes profit by selling the goods at catalogue price. But the rate (percentage) of discount differs from business to business or commodity to commodity. Trade discount is shown by way of deduction in invoice. Therefore, no separate entries are required in the Cash Book.

Cash Discount It is an allowance given by the receiver of cash to the payer for prompt payment within the stipulated time period as per credit terms of a receiver. When goods are sold on credit, the customer is expected to make payments before the due date. In order

Cash Book and Petty Cash Book

41

to encourage the customer to make the payment before the due date, cash discount is given. This discount encourages the customers to take advantage of the benefit i.e., availing of this discount facility. In the Cash Book, both discount received and discount paid are recorded in the discount columns accordingly and then the total discount are posted to the ledger.

Distinction between Cash Discount and Trade Discount Cash Discount

Trade Discount

1.

Cash discount allowed or earned will appear in the Cash Book

1.

Trade discount will not be recorded in the Cash Book

2.

This discount is allowed to encourage the prompt payment/payment within the stipulated time

2.

Trade Discount is offered or earned to prompt purchase of more goods or sale of more goods

3.

It is reduced from the amount due, if the amount is paid/received within the given time period

3.

It is adjusted in the bill amount as it is allowed/earned at the time of transaction

4.

It is uniformly followed in all the trade for better collection of the due

4.

It is seasonal and offered mostly in the offseason time

Contra Entries When in a transaction both cash and bank are involved (cash deposit into the bank; cash drawn from the bank), either of the cash or bank are debited and credited simultaneously. Since the Cash Book is both the journal and also the ledger account, there is no separate place to record the cash and the bank transaction and so, such entries are marked with © in the L. F. No. column of both debit side and the credit side of cash and bank transactions entered. Those entries are called as ‘contra entries’.

Imprest System The best method of maintaining petty cash transactions is under the Imprest System.

given period or earlier when the petty cashier expends the amount, he produces to the cashier the Petty Cash Book with the vouchers for payments made. The cashier after satisfying himself as to the correctness of the transactions, issues a cheque to the petty cashier for the exact amount expended. The petty cashier has now with him the amount in which he had as an opening balance. the consolidated amount of the individual expenses maintained in the Petty Cash Book.

(Being expenses are recorded in the relevant ledger account) Thus, maintenance of a fixed lump sum amount as balance in the beginning of every week or month or any other given period by receiving the expended amount from the cashier is called as ‘Imprest System’.

42

Financial Accounting

Advantages of Imprest System (i) Under this system, petty cashier is sure to have a safe balance in the beginning of every week or month in his account. (ii) The cashier is relieved of the work of making entries in his Cash Book for petty disbursements as it is the duty of petty cashier. (iii) The petty cashier has to produce the Petty Cash Book along with supporting vouchers whenever there is a need of reimbursement of the amount spent. This will help to have a control on him.

Illustrations Index for Illustrations Method

Ill. No.

I

Single Column Cash Book

II

Two Columnar Cash Book

III

IV

Three Columnar Cash Book

Petty Cash Book

Type

1

Credit sales, credit purchases, purchase returns

2

Discount allowed/earned, cheque payment

3

Credit purchases, receipt/payment through cheque

4

Excess cash deposited in bank

5

Trade discount offered

6

Bank overdraft given as opening balance

7

Two bank accounts of which one is overdraft

8

Petty cash book with journal entry

9

Imprest system

I – SINGLE COLUMN CASH BOOK Credit Sales, Credit Purchases, Purchase Returns Illustration 1 transactions in the Cash Book: 2006, April 7 8 10 11 12 17 19 20 21 22 25 27 29 29

Rs. Paid rent advance to the landlord Paid for stationery Purchased goods for cash Cash sale made Cash as advance received from Sugan Goods sold to Sugan on credit Paid to Shankar & Co. as advance for the goods supplied Purchased goods from Shankar & Co on credit Paid for furnishing for the shop Sales return from Sugan Goods purchased from Shankar & Co. was returned to them Paid wages Drawn cash for the personal purpose

15,000 500 12,000 4,000 7,000 3,000 10,000 5,000 20,000 2,000 500 2,000 2,000 2,000

Cash Book and Petty Cash Book

43

Solution Cash Book Date

Particulars

R.No.

L.F.

Rs.

2006 April 5

Date

Particulars

V.No.

L.F.

Rs.

2006 To Capital A/c

50,000

April 7

By Rent Advance A/c

15,000

12

To Sales A/c

7,000

8

By Stationery A/c

500

17

To Sugan A/c

3,000

10

By Purchases A/c

12,000

11

4,000 A/c

20

By Shankar & Co A/c

5,000

22

2,000

29

By Wages A/c

29

By Drawings A/c

30

By Balance c/d

2,000 2,000 17,500

60,000 May 1

To Balance b/d

60,000

17,500

Note: Cash Book record only the transactions that involve cash receipts and cash payment. Hence the transactions of goods sold on credit, goods purchased on credit purchase returns and Sales Returns are not recorded in the Cash Book.

Discount Allowed/Earned, Cheque Payment Illustration 2 As on January 1, 2008 Balan had Rs. 14,000 in hand. During the month his transactions are given as under. Prepare Single Column Cash Book. January

Rs.

5

5,000

7 8

4,500 Rent paid

2,000

11

Cash received from Jeevan on account of goods sold

5,500

11

Discount allowed to him

16

Cash sales

2,000

16

Deposited into the bank account

4,000

18

Paid to Bharath (settled fully on the balance of Rs. 2,000)

1,950

21

Goods purchased and made through cheque

3,500

22

Postage stamps purchased

24 25 29

110

25 400

Received from Suresh for the goods sold last month

2,500 250

Financial Accounting

44 Solution

Cash Book Date

Particulars

R. No

L.F.

Rs.

2008 Jan 1

Date

To Balance b/d

14,000

Jan 7

To Bank (withdrawal)

5,000

11

To Jeevan A/c

16 25

5

Particulars

V. No.

L.F.

By Salaries and wages A/c

4,500

8

By Rent A/c

2,000

5,500

16

By Bank A/c (Deposited)

4,000

To Sales A/c

2,000

18

By Bharath A/c

1,950

To Suresh A/c

2,500

22

By Postage A/c

24

By Stationery A/c

400

29

By Travelling expenses A/c

250

31

By Balance c/d

25

15,875

29,000 Feb 1

Rs.

2008

To Balance b/d

29,000

15,875

Note: Since it is a single columnar cash book, transactions of (i) discount allowed to for purchases made through cheque are not recorded in the Cash Book.

II – TWO COLUMNAR CASH BOOK Credit Purchases, Receipt/Payment through Cheque Illustration 3 From the following information, prepare Two Columnar Cash Book: 2007 July

Rs.

1

Cash in hand

1,200

3

Cash received from Natesh

5,850

Allowed him discount

150

4

Purchased goods for cash

5,400

5

Paid to Mathan

1,950

Discount allowed by him 9

Cash sales

50 4,500

10

Withdrew from bank

4,000

12

Credit purchases from Hemanth

6,000

18

Paid to Hemanth in full settlement

5,850

20

Received from Vasan

5,350

Discount offered to him 23

Receipt of interest from investment by cheque

150 3,200

24

1,200

28

3,000

30

Deposited into the bank

2,500

Cash Book and Petty Cash Book

45

Solution Two Columnar Cash Book (with Cash and Discount Columns) Dr. Date

Cr. Particulars

R.No. L.F. Discount (Allowed)

Rs.

2007

Date Particulars V. No. L.F. Discount (Earned)

Rs.

2007

July To Balance 1 b/d

1,200

4

By Purchases A/c

5,850

5

By Mathan A/c (discount received)

5,400

3

To Natesh A/c (discount allowed)

5

To Sales A/c

4,500

18

By Hemanth A/c (discount received)

10

To Bank A/c (Withdrawn from bank)

4,000

30

By Bank A/c (cash deposited into bank)

2,500

20

To Vasan A/c (discount allowed)

24

To Bank A/c (Withdrawn from bank for

31

By Balance c/d

6,400

150

150

1,950

150

5,850

5,350

1,200

300 22,100 Aug To Balance 1 b/d

50

200 22,100

6,400

Note: The total of discount allowed column (Rs. 300) will be transferred to the debit side The total of discount received column (Rs. 200) will be transferred to the credit

investment by cheque and (iii) Office rent paid through cheque should not be recorded in the Cash Book as cash is not involved in those transactions.

Excess cash deposited in bank Illustration 4 From the following particulars, prepare a Two Columnar Cash Book 2008 July 1 4 5 7

Rs. Cash in hand Goods purchased for cash Wages paid in cash

8,500 2,500 3,500 4,000 Contd

Financial Accounting

46 Contd 9

Cash paid to Rajesh Discount allowed Cash sales Cash received from Sharan Discount offered to him Purchased stationery from Raghul on credit Borrowed loan from Mahesh in cash Cash received from Nathan Discount allowed Paid for transport charges Amount deposited into bank Senthil received cash from us Discount offered by him Purchased goods from Amar on credit Purchase made in cash Salary paid All the cash in excess of Rs. 3,000, deposited into bank

11 12 14 17 19 22 24 26 28 30 31 31

2,450 50 12,000 3,400 100 500 5,000 4,400 100 240 3,500 2,950 50 4,800 2,400 4,000

Solution Two Columnar Cash Book (with Cash and Discount Columns) Dr.

Cr.

Date

Particulars R. No. L.F. Discount (Allowed)

Rs.

Date Particulars V. No. L.F. Discount (Earned)

Rs.

2008 July 1

To Balance b/d

8,500

2008 By July Purchases 4 A/c

2,500

7

To Bank A/c

4,000

5

By Wages A/c

11

To Sales A/c

12,000

9

By Rajesh A/c

12

Sharan

3,400

22

By Travelling Expenses A/c

17

To Mahesh A/c

5,000

24

By Bank A/c

19

To Nathan

4,400

26

By Senthil A/c

30

By Purchases A/c

31

Salary A/c

31

By Bank (amount deposited in excess of Rs. 3,000

12,760

31

By Balance c/d

3,000

100

100

200 37,300 August To Balance 1 b/d

3,000

3,500 50

2,450 240

3,500 50

2,950 2,400

4,000

100 37,300

Cash Book and Petty Cash Book

47

Note:

transactions.

III – THREE COLUMNAR CASH BOOK Trade Discount Offered Illustration 5 Mr. Richard maintains both cash and bank transactions in his Cash Book and you are asked to maintain the following transactions by preparing a Cash Book: 2005, Jan 1 4 5 6 7 8 10 11 12 17 19 22 25

Balance of cash in hand Rs. 3,700, at bank Rs. 8,450 Paid to Robin by cheque Rs. 1,950 in full settlement of his account for Rs. 2,000 Purchased goods for cash Rs. 1,000 and for cheque Rs. 3,500 Wages paid in cash Rs. 1,500 Paid to Rai Rs. 1,280 by cheque in full settlement of his account for Rs. 1,300 Sold Goods for cash Rs. 800 and offered a trade discount of Rs. 50 Received cheque from Ranvir Rs. 3,250 in full settlement of account for Rs. 3,300 Deposit made into bank Rs. 2,500 Received cheque from Robert Rs. 4,500 as a part payment Payment made through cheque to RR & Sons Rs. 5,850 in full settlement of his account of Rs. 6,000 Received cheque from Rajan & Co. in full settlement of his account of Rs. 6,000 having deducted cash discount of 2% Ranvir ‘s cheque dishonoured and returned

Solution Cash Book Dr.

Cr.

Date Particulars R. L.F. No.

Cash Bank

Discount

Date Particulars V. L.F. DisNo. count (Earned)

(Allowed) 2005

2005

Jan 1

Cash Bank

Jan To Balance

3,700

8,450

4

b/d

50

By Robin

1,950

(discount earned)

6

To Bank

C

3,000

5

(withdrawn)

By

1,000

3,500

purchases

10 To Sales

750

6

By Cash

C

3,000

(drawn for 11 To Ranvir 12 To Cash

50 C

3,250

7

By Wages

2,500

8

By Rai

(deposited

(discount

into bank)

earned)

1,500 20

1,280

Contd.

Financial Accounting

48 Contd.

17 To Robert

4,500

12 By Bank

C

2,500

(deposited Into bank) 22 Rajan & Co.

120

5,880

19 RR & Sons 25 By

150

5,850

50

3,250

Ranvir 170

31 To

31 Discount

Discount

Earned A/c

Allowed A/c

(Transferred)

(Transferred)

270

31 By Balance

2,450

5,750

c/d 7,450 24,580 Feb. To Balance 1

2,450

7,450 24,580

5,750

B/d

Note: as this discount is offered at the point of sale and reduced from the invoice directly.

Bank Overdraft Given as Opening Balance Illustration 6

2005 June 1

Balance of cash in hand Rs. 400 and bank overdraft Rs. 5,000

4

Introduced cash Rs. 10,000 as further capital of which Rs. 5,000 was deposited into bank

5

Sold goods for cash Rs. 3,000

6

Collected from Xavier Rs. 8,000 by cheque and allowed from a discount of Rs. 200. Deposited the amount on the same day

10

Purchased goods for cash Rs. 2,000 and by cheque Rs. 3,000

11

Paid Ram Rs. 2,500 by cheque and discount received Rs. 100

12

Paid commission to an agent Rs. 500

15 16

Paid rent Rs. 100

17

Drew a cheque for personal use Rs. 1,000

18

Cash sales Rs. 5,000

20

Collected from Yogi Rs. 4,000 in cash and deposited into bank on the same day

23

Dividend received by cheque Rs. 100 and deposited into bank

28 29

Deposited cash into bank Rs. 7,000

Cash Book and Petty Cash Book

49

Solution Cash Book Dr.

Cr.

Date Particulars R. L.F. DisCash No. count (Rs.) (Allowed)

Bank

Sept

Date

Particulars

V. L.F. Dis- Cash No. count (Earned)

Bank (Rs.)

Sept

1

To Balance b/d

4

To Capital

4

To Cash

5

To Sales

6

To Xavier’s A/c

400 10,000 C

18 To Sales A/c

By Balance b/d

4

By Bank A/c

5,000

10

By Purchases A/c

11

By Ram A/c

8,000

12

By Commission A/c

3,000 200

1

5,000

5,000 C

5,000 2,000 3,000

100

2,500 500

2,000

15 Furniture A/c

20 To Yogi A/c 23 To Dividend A/c 29 To Cash A/c 30 To Discount Allowed A/c (Transferred)

C

4,000

16

By Rent A/c

100

17

By Drawings A/c

1,000

7,000

28

By Salaries A/c

2,000

29

By Bank

30

Discount Earned A/c (Transferred)

30

By Balance c/d

200

18,400 24,100 Oct 1 To Balance b/d

100

C

7,000 100

1,800 10,600 18,400 24,100

1,800 10,600

Two Bank Accounts of which one is Overdraft Illustration 7 of 21st May, 2002 in the Cash Book and balance the same: Rs. (a) Cash 150 State Bank of India 25,000 Bank of India (overdraft) 3,000 (b) Received a cheque of Rs. 5,350 from Merwan Bros. in full settlement of invoice for Rs. 5,500. The cheque was deposited in Bank of India, who charged Rs. 3 as collection charges.

50

Financial Accounting

(c) Cash purchases Rs. 10,000. Paid bearer cheque on State Bank of India. (d) Transferred Rs. 5,000 from State Bank of India to Bank of India. (e) Withdrew Rs. 5,000 from State Bank of India – Rs. 3,000 for office use and Rs. 2,000 for personal use. (f) Paid advance salary to Manager Rs. 1,000 by bearer cheque on Bank of India. Solution Cash Book Date Particulars R. L. Disc. Cash No. F.

SBI

BOI

2002

Date Particulars V. L. Disc. Cash No. F.

SBI

BOl

2002

May

May

21 To Bal. c/d

150 2,5000

21 Mel

150

21 By Bal. b/d

3,000

5,350 21 By Bank

3

charges 21 SBI

C

21 SBI

C

5,000 21 Purchases 3,000

10,000

21 BOl

C

5,000

21 Cash

C

3,000

21 Drawings

2,000 1,000

21 Advance salary to Manager 21 By Bal. c/d 150 3,150 25,000 10,350 22 To Bal. b/d

3,150 5,000 6,347 –

3,150 25,000 10,350

3,150 5,000 6,347

IV – PETTY CASH BOOK Petty Cash Book with Journal Entry Illustration 8 The petty cashier of a concern received Rs. 200 on 1st of June 2005 to meet the petty expenses for that month. Open the relevant accounts in the Petty Cash Book. Also show how it appears in the journal. June

Rs.

Rs.

2

Postage

20.00

12

Cleaning powder

4

Carriage

15.00

14

Snacks and Tea

5

Auto charge

40.00

15

Electric bulb

6

Files and papers

17.20

19

Courier

6

Conveyance

10

24

Tips to peon

8

Photocopy

8.50

27

Local Call

12 17.50 12 16 10.00 6.00

Cash Book and Petty Cash Book

51

Solution Petty Cash Book Dr.

Cr.

Amount Date Received

Particulars

Rs. 2005 200.00 June Cash 1 received 2 Postage 4 Carriage 5 Auto charge 6 Files/papers 6 Conveyance 8 Photo copy 12 Cleaningpowder 14 snacksTea 15 Electricbulb 19 courier 24 Tips to peon 27 Local Call 30

V. No.

Postage and Telephone Rs.

Carriage

Conveyance

Stationery

Misc. expenses

Total Payment

Rs.

Rs.

Rs.

Rs.

Rs.

20.00 15.00 40.00 17.20 10.00 8.50 12.00 17.50 12.00 16.00 10.00 6.00 42.00

15.00

50.00

25.70

51.50

Balance c/d

200.00

20.00 15.00 40.00 17.20 10.00 8.50 12.00 17.50 12.00 16.00 10.00 6.00 184.20 15.80 200.00

Journal Entry June 30

Rs. Postage and Telephone A/c Dr. Carriage A/c Dr. Conveyance A/c Dr. Stationery A/c Dr. Misc. expenses A/c Dr. To Petty Cash A/c (Being petty expenses recorded in the respective ledger accounts)

Rs. 42.00 15.00 50.00 25.70 51.50 184.20

Imprest System Illustration 9 Imprest System. The petty cash limit fixed was Rs. 250 and the cashier draws money under the Imprest System as and when the balance available with him is below Jan 1 2 3 3 5 7 9 10 16

Paid opening balance Paid towards conveyance charges Purchased stationery Wages to sweeper Paid towards conveyance charges Postage stamps purchased Wages to sweeper Telegram charges paid Convenyance charges paid

Rs 250 42 83 21 62 110 42 9.50 22.50

Jan 19 19 19 22 25 28 28 31 31

Postage stamps purchased Wages to sweeper Telegram charges paid Entertainment expenses Wages to sweeper Postage stamps purchased Taxi charges paid Entertainment expenses Wages to sweeper

Rs 49.00 81.00 14 31 63 36 27.50 31 42

Financial Accounting

52 Solution

Petty Cash Book Dr.

Cr.

Amount Date Received Rs. 250

Particulars

Jan 1

Balance b/d

2

Conveyance

3

Stationery

3

Wages

5

Conveyance

V. No.

Postage & Telephone

Wages

Conveyance

Stationery

Rs.

Rs.

Rs.

Rs.

Rs.

Rs.

42.00

42.00 83.00

83.00

21.00

21.00 62.00

21.00 5

Misc. exTotal penses Payment

104.00

62.00 83.00

–

Balance c/d

208.00 42.00

250.00

250.00

42.00

6

Balance b/d

208.00

6

Bank

7

Postage

9

Wages

10

Telegram

16

Conveyance

19

Postal stamps

110.00

42.00

9.50

9.50 22.50

22.50

49.00 168.50

19

110.00 42.00

49.00 42.00

22.50

–

–

Balance c/d

233.00 17.00

250.00

250.00

17.00

19

Balance b/d

233

19

Bank

19

Wages

19

Telegram

22

Entertainment

25

Wages

28

Postal stamps

81.00

14.00 31.00 63.00

31.00 63.00

36.00 50.00

28

81.00

14.00

36.00 144.00

–

–

31.00

Balance c/d

225.00 25.00

250.00

250.00

25.00

28

Balance b/d

225.00

28

Bank

28

Auto

31

Entertainment

31

wages

27.50

31

Balance c/d

149.50 Feb 1 Balance b/d

31.00

31.00

100.50

42.00 42.00

250.00

27.50 31.00

42.00 27.50

149.50 250.00

Cash Book and Petty Cash Book

53

Points to Remember Cash Book is maintained to record only cash transactions. It is a book of primary entry. Cash receipts and payments are recorded in the cash column. Cheques receipts and issues are recorded in the bank column. Kinds of Cash Book—Single Column, Double Column, Three Columnar and Petty Cash Book. Trade discount is given for bulk purchase. Cash discount is given for early payment i.e., before the due date. Petty Cash Book is maintained to record all petty expenses. Imprest system is the best method of maintaining petty cash transactions.

Examination Questions I. Objective Questions 1. Fill in the blanks (i) Whenever a transaction relates to cash and bank, it is recorded on ____________ of Cash Book. (ii) Cash Book is a book of ______________ entry. (iii) From the Cash Book, entries are posted to __________ accounts. (iv) Cash discount received is recorded in the ____________ column. (v) The word petty is derived from a French word__________. 2. Choose the correct answers (i) Cash Book is an example of

(ii) The three columns on each side of the three columnar Cash Book represent: (a) Real and Nominal account (b) Real and Personal account (c) Real, Personal and Nominal account (iii) Simple Cash Book is maintained to record:(a) Cash transactions only (b) Bank transactions only (c) Cash and discount transactions only 3. Match the following (i)

Cash Book

a

(ii)

Trade discount

b

Reduction from catalogue price

(iii)

Cash discount

c

Cash and bank column

(iv)

Imprest system

d

Cash transaction only

(v)

Contra entry

e

Petty cash

54

Financial Accounting

4. State whether the following statements are True or False (i) Cash Book may be defined as the record of transactions concerning cash receipts and payments. (ii) Cash Book can also be sub-divided into many subsidiary Cash Books. (iii) Discount account should be balanced in the Cash Book. (iv) The petty cashier is handed over a small sum, called imprest, to meet the requirements of ledger folio, debit and credit columns. (v) Three columnar Cash Book consists of ledger folio, debit and credit columns. Answers 1. (i) (iv) 2. (i) 3. (i) 4. (i)

both sides, discount, b; d; True,

(ii) (v) (ii) (ii) (ii)

primary or original, petit. c; (iii) a. a; (iii) b; True, (iii) False,

(iii) ledger,

(iv) e; (v) c. (iv) True, (v) False.

II. Descriptive Questions Short nswer Questions 1. What is Cash Book? 3. What do you understand by cash discount? 4. What is Petty Cash Book? 5. What is Simple Cash Book?

2. What are the difference between trade discount and cash discount? 3. What are the advantages of Imprest System? 1. What are the various kinds of Cash Book? 3. Cash Book serves the purpose of a subsidiary book and a ledger—

III. Exercise Problems A. Single Column Cash Book Problem 1

transactions in a single column Cash Book and find the closing balance.

Cash Book and Petty Cash Book

July

55 Rs.

1

Purchased stationery, paid cash Purchased goods for cash

2 3 4 5 6

Cash sales Received for Gopal, as advance for a consignment of goods Paid Sethi & Co., cash Paid for sign board Cash sales Purchased old typewriter

40 650 200 150 200 140 130 160 300

(Osmania B.Com) [Ans. Closing balance Rs. 50] B. Two Columnar Cash Book Problem 2 2000 Nov 1 5 6 10 14 16 19 24 29 30

Rs. Cash in hand Sold goods for cash Credit purchases from Varun Received from Mohan Discount allowed to him Paid for electricity charges Bought stationery Paid cash to Varun Rs. 4,300 in full settlement Received cash from Velavan Discount allowed to him Paid salaries

390 6,420 4,350 4,240 40 250 336 2,800 770 30 2,000

C. Three Columnar Cash Book Problem 3 1999

Rs.

Jan 1 2 3 5 8 12 15 18 20 21 25 31

Cash in hand Balanced at bank Cash sales Paid into bank Purchased stationery Paid Mahesh by cheque Discount received Gave a cheque for cash purchases Drew for personal use Received from Suresh, a cheque for Rs. 1,970 in full settlement of account for Rs. 2,000 and deposited it in bank Drew from bank Paid wages Bank returned cheque of Suresh dishonoured Bank charges as per pass book

410 8,920 4,500 4,000 100 280 20 1,500 500

1,000 800 10

(Osmania B. com) [Ans. Cash balance Rs. 510 and Bank balance Rs. 10,130]

Financial Accounting

56

Problem 4 Prepare a Three Column Cash Book from the following: 2000 Mar 1

Rs. Cash in hand

90,000

Cash at bank

75,000

3

Cash sales deposited in Bank

3,000

4

Amount deposited by a customer directly in Bank

4,500

5

Sold goods to Rakesh on credit

9,000

6 7

15,000 Received a cheque from Jagan

1,500

Discount allowed

100

The cheque was sent to bank for collection. Paid to Vivek by cheque

4,500

12

9

Goods returned by Rakesh

1,500

13

Interest allowed by bank

3,000

14

Cheque received from Jagan is dishonoured. Bank charges Rs. 10 for the dishonoured cheque

15

A bill receivable for Rs. 15,000 discounted in bank at 10%

17 19

Withdrew from bank for paying medical expenses of the owner

20

Rakesh’s cheque deposited in bank

22

Purchased building and payment made by cheque

24

Bad debts recovered

31

An insolvent debtor pays 40% of Rs. 5,000 due from him

3,000

1,00,000 1,000

Probelm 5 1996 Sep 1 4 5 6 10 11 12 15 16 17 18 20 23 28 29

Rs. Balance of cash in hand Bank overdraft Introduced cash Rs. 10,000 as further capital of which Rs. 5,000 was deposited into bank. Sold goods for cash Collected from X Rs. 8,000 by cheque and allowed discount Rs. 200 X’s cheque sent to bank for collection Purchased goods for cash Rs. 2,000 and by cheque Paid Rs. 2,500 by cheque and discount received Paid commission to an agent Rent paid Drew a cheque for personal use Cash sales Collected from Y Rs. 4,000 in cash and deposited into bank the next day. Dividend received by cheque Rs. 100 and deposited it into bank. Deposited cash into bank

400 5,000 3,000

3,000 100 500 2,000 100 1,000 5,000 2,000 7,000

Cash Book and Petty Cash Book

57

D. Petty Cash Book Problem 6 Rs. 400 and has seven analysis columns for ‘Postage and Telegrams’, ‘Printing and

2000 Mar 1 2 3 7 9 10 16 17 21 24 28 31

Rs. Petty cash in hand Received cash to make up imprest Bought stamps Paid for stationery Paid for railway fare Paid to Sekar Paid for carriage Paid for repairs to typewriters Paid for bus fare Paid for telegram Paid for printing charges

41.50 358.50 44.80 22.40 38.50 10.00 40.00 25,20 83 21 13 70

Problem 7 transactions in his Petty Cash book. 1985 Sep 1 2 5 8 12 16 20 25 27 28 30 30

Rs. Received for petty payments Postage Stationery Advertisement Wages paid Carriage Conveyance Travelling expenses Postage Telegram Registered postage

500 40 25 50 20 15 22 80 50 10 20 5

(Bharathidasan, B. Com) [Ans.

4

Subsidiary Books

Learning Objectives After studying this chapter, you should be able to understand the

ACCOUNTING BOOKS (i)

Kinds of Subsidiary Books

Subsidiary Books

59

1. Purchase Day Book

Purchase Day Book Date

Particulars

LF

Details

Amount (Rs.)

LF

Details

Amount (Rs.)

Details

Amount (Rs.)

Details

Amount (Rs.)

2. Sales Day Book

Sales Day Book Date

Particulars

3. Purchase Returns Book

Purchase Returns Book Date

Debit Note No.

Particulars

LF

4. Sales Returns Book

Sales Returns Book Date

Credit Note No.

Particulars

LF

60

Financial Accounting

5. Bills Receivable Book

LF

6. Bills Payable Book

LF

7. Journal Proper

1. Opening Entry: 2. Closing Entry: 3. Transfer Entry: 4. Adjusting Entry:

Subsidiary Books

61

Index for Illustrations Method

Ill. No.

I

Type

1 2

II

3 4

III

5 6 7 8 9

IV

10

V

11

I – PURCHASE DAY BOOK Without Ledgers Illustration 1

2007 2 11 17 26

Solution Purchase Day Book Date

Particulars

LF

Details

Amount (Rs.)

2007

Total (debited to Purchase A/c)

1,84,095

Financial Accounting

62

With Ledgers Illustrations 2

5

6 10

15 20

In the Books of Selvam Enterprises Purchases Book LF 2005 5 – –

–

10 – –

–

15 –

Note:

Ledger Accounts Purchases Account 2005

Subsidiary Books

63

Sounder & Co. Account 2005

–

Raj & Sons Account 2005

–

Natesh & Co. Account 2005

–

II – SALES DAY BOOK Without Ledgers Illustration 3

2006 8

12

19

Solution Sales Day Book Date

Particulars

2006

Less:

Less:

LF

Details

Amount (Rs.)

Financial Accounting

64

With Ledgers Illustration 4

7

10

17

22 28

Solution Sales Book of Mahesh Corporation Date

Particulars

LF

Details (Rs.)

Amount (Rs.)

7

Less: 10

17

Note:

Ledger Accounts Sales Account –

Subsidiary Books

65

Krishna Associates Account April 7

To Sales

Rs. 24,300

–

Chander Decors Account April 10 To Sales

Rs. 7,500

–

Nandan Furniture Mart Account April 17

To Sales

Rs. 8,500 –

III – RETURNS BOOK Purchase Returns Book Illustration 5 Prepare Purchase Returns Book from the following particulars: Sept 4

Returned to Jai Beem Distributers 70 m of synthetic cloth @ Rs. 120

12

Bharani & Sons 20 printed bed spread @ Rs. 300

22

Raj Cloth Traders 220 m of shirting cloth @ Rs. 170

28

Velvette Agencies 150 m of cloth of Rs. 100

Solution Purchase Returns Book Date

Debit Note No.

Particulars

LF

Details

Amount (Rs.)

July 1

To Jai Beem Distributers – 70 m of Synthetic Cloth @ Rs. 120

8,400

July 15

To Bharani & Sons – 20 Printed Bed Spread @ Rs. 300

6,000

July 20

To Raj Cloth Traders – 220 m of Shirting Cloth @ Rs. 170

37,400

July 31

To Velvette Agencies – 150 m of Cloth of Rs. 100

15,000

Total (Credited to Purchase Returns A/c)

66,800

Sales Returns Book Illustration 6 Prepare Sales Returns Book from the following particulars 2004 Aug. 4

Returned to us by Mehta & Co. 250 bags coffee @ Rs. 120

Aug. 11

Returned by Kavin & Brothers, 200 chests tea @ Rs. 90 per chest

Aug. 21

Returned by Rajvir Coffee 50 tins of ghee @ Rs. 1,200 per tin

66

Financial Accounting

Solution Sales Returns Book Date

Credit Note No.

Particulars

LF

Details

Amount (Rs.)

2004 120

Total (Debited to Sales Returns A/c)

1,08,000

Purchase Return Book, Sales Return Book and Ledgers Illustration 7

2005 7 11 17 22 26 29

Solution Purchase Return Book Date

Debit Note No.

Particulars

LF

Less:

Details

Total (Rs.)

500

Total (Credited to Purchase Returns A/c)

Sales Return Book Date

Credit Note No.

Particulars

LF

Details

Total (Rs.)

2005

Total (Debited to Sales Returns A/c)

10,500

Subsidiary Books

67

Ledger Purchase Return Account Date

Particulars

Amount

Date

Particulars

Amount

Particulars

Amount

Particulars

Amount

Particulars

Amount

Particulars

Amount

Particulars

Amount

2005

Sales Return Account Date

Particulars

Amount

Date

2005

Rajvir Apparel Account Date

Particulars

Amount

Date

Particulars

Amount

Date

Particulars

Date

Particulars

Date

AA Fabrics Date

Maruthi Textiles Account Amount

Date

Saral Cool Wear Account Amount

Date

Vaishnavi Kidswear Account Date

Particulars

Amount

Date

Particulars

Amount

Dharani Garments Account Date

Particulars

Amount

Date

Particulars

Amount

Purchase Day Book, Purchase Return Book and Ledgers Illustration 8

2008 2 4 8 11 15 17 21 22 26 27 29 30

600

200

300

68

Financial Accounting

Solution Purchase Day Book Date

Particulars

LF

Details

Amount (Rs.)

2008 4 15 17 22 26 27 29 Total (debited to Purchases A/c)

31,000

Purchase Return Book Date

Credit Note No.

Particulars

LF

Details

Total (Rs.)

2008 600 21

200

30

300 Total (Credited to Purchase Returns A/c)

1,100

General Ledger Purchase Account Date

Particulars

LF

Amt. (Rs.)

Date

Particulars

LF

Amt. (Rs.)

Particulars

LF

Amt. (Rs.)

Particulars

LF

Amt. (Rs.)

Particulars

LF

Amt. (Rs.)

Particulars

LF

Amt. (Rs.)

2008

Purchase Return Account Date

Particulars

LF

Amt. (Rs.)

Date 2008

Anand Account Date

Particulars

LF

Amt. (Rs.)

Date 2008

2008 600

Nambi Account Date

Particulars

LF

Amt. (Rs.)

Date 2008

Babu Account Date

Particulars

LF

Amt. (Rs.)

Date 2008

2008 200

Subsidiary Books

69

Lal Account Date

Particulars

LF

Amt. (Rs.)

Date

Particulars

LF

Amt. (Rs.)

Particulars

LF

Amt. (Rs.)

LF

Amt. (Rs.)

LF

Amt. (Rs.)

Particulars

LF

Amt. (Rs.)

Particulars

LF

Amt. (Rs.)

Particulars

LF

Amt. (Rs.)

2008

Maran Account Date

Particulars

LF

Amt. (Rs.)

Date 2008

Chari Account Date

Amt.

Amt. (Rs.)

Date

26

26

300 30

Seenu Account Date

Particulars

LF

Amt. (Rs.)

Date

Particulars

2008

Pandi Account Date

Particulars

LF

Amt. (Rs.)

Date 2008

Raj Account Date

Particulars

LF

Amt. (Rs.)

Date 2008

Furniture Account Date

Particulars

LF

Amt. (Rs.)

Date

2008

Sales Day Book, Sales Return Book and Ledgers Illustration 9

2002 1 5 7 10 15 20 25 30 31

200 300 300

Financial Accounting

70 Solution

Sales Day Book Date

Invoice No.

Customer's Name

LF

Amount Rs.

Remarks

2002 201 5

202

7

203

15

204

25

205

31

206 Total (credited to Sales A/c)

23,500

Sales Return Book Date

Credit Note No.

Customer's Name

LF

Amount Rs.

Remarks

2002 1

200

20

2

300

30

3

300 Total (Debited to Sales Returns A/c)

800

General Ledger Sales Account Date

Particulars

LF

Amt. (Rs.)

Date

Particulars

LF

Amt. (Rs.)

Particulars

LF

Amt. (Rs.)

Particulars

LF

Amt. (Rs.)

2002

Sales Return Account Date

Particulars

LF

Amt. (Rs.)

Date

2002 800

Abay Account Date

Particulars

LF

Amt. (Rs.)

2002

Date 2002

200

Anjan Account Date

Particulars

LF

Amt. (Rs.)

Date

Particulars

LF

Amt. (Rs.)

Particulars

LF

Amt. (Rs.)

2002

Bhanu Account Date

Particulars

LF

Amt. (Rs.)

2002

Date 2002

300

Dhanraj Account Date 2002

Particulars

LF

Amt. (Rs.)

Date

Particulars

LF

Amt. (Rs.)

2002 300

Subsidiary Books

71

Varun Account Date

Particulars

LF

Particulars

LF

Amt. (Rs.)

Date

Particulars

LF

Amt. (Rs.)

Particulars

LF

Amt. (Rs.)

2002

Raghavan Account Date

Amt. (Rs.)

Date

2002

IV– BILLS RECEIVABLE AND BILLS PAYABLE BOOK Illustration 10 2005 5 7 9 17 27

Solution Bills Receivable Book LF 2005 5 17 27

Bills Payable Book LF

2005 9

V– MISCELLANEOUS PROBLEMS Debit Note and Credit Note Illustration 11

72

Financial Accounting

Solution

Debit in Account with Vivek Electricals

Credit in Account with Bharani Electricals

Subsidiary Books

Points to Remember

Examination Questions I. Objective Questions (i)

(i)

a

(ii)

b

(iii)

c

(iv)

d

(v)

e

73

74

Financial Accounting

Answers

II. Descriptive Questions

III. Exercise Problems

A. Purchase Day Book Problem 1

Subsidiary Books

Problem 2

��� ��� Less:

B. Sales Day Book Problem 3

Less:

C. Purchase Day Book and Sales Day Book Problem 4

75

76

Financial Accounting

5

Trial Balance

Learning Objectives After studying this chapter, you should be able to understand the Meaning of Trial Balance Purpose of Preparing Trial Balance Procedures for Preparing Trial Balance Errors Disclosed and not Disclosed by Trial Balance Locate Error in the Trial Balance

TRIAL BALANCE A Trial Balance is a statement of ledger account balances as on a particular instance. It lists both debit and credit balances from the ledger accounts including cash and bank balances on a specified date. It is prepared with the object of testing the arithmetical accuracy of the books. In short, Trial balance is a list of ledger balances. Under the double entry system of book-keeping, every debit should have a corresponding credit. Therefore, on a given date, the total of the debit balances must be equal to the total of the credit balances. In order to test whether all the entries from the subsidiary books have been posted to the proper sides in the ledger accounts, a Trial Balance is prepared. If both debit and credit sides agree, the books are arithmetically accurate.

Purpose of Preparing Trial Balance 1. To test the arithmetical accuracy of the postings. This is proved if totals of debit and credit sides agree. Balance Sheet.

Procedures for Preparing a Trial Balance A trial balance format has ledger folio, particulars, debit and credit columns. The names of the accounts are entered in the particulars column and the balances of the ledger accounts are entered in the appropriate columns. If an account shows a debit

78

Financial Accounting

balance, the amount is entered in the debit column and if a credit balance, it is entered in the credit column.

Common Errors Disclosed by Trial Balance Agreement of Trial Balance will be affected by the following errors: 1. 2. 3. 4. 5.

Omission to post an entry from the subsidiary book to the ledger account. Posting a wrong amount from the subsidiary book to the ledger. Posting an amount in the wrong side of an account. Posting an amount twice in the account. Errors in balancing the ledger account, in totalling the Trial Balance and preparing a list of debtors and creditors from the ledger account. 6. Omission of a ledger account balance in the Trial Balance. 7. Recording balance on the wrong side in the Trial Balance.

Errors not Disclosed by Trial Balance (i) Error of omitting to record an entry in the subsidiary book or Error of Omission (ii) Error committed in recording the amount of transaction in the subsidiary book or Error of Commission (iii) Error committed without the knowledge of the principle. (iv) Error committed on one side of an account which is compensated by another error committed on the opposite side or Compensating Error. (v) Error committed in posting the amount to the proper side of wrong account.

Steps to Locate Error in a Trial Balance When a Trial Balance disagrees, the following steps should be taken to locate the error. (i) Check the opening balances brought forward to the current year’s books. (ii) Check whether the closing balances of cash and bank are included in the Trial Balance. (iii) Check the totals of subsidiary books, to see whether they are posted to their respective ledger accounts. (iv) Check the totals of debit and credit columns and also list of debtors and creditors. (v) Check whether all ledger balances are recorded correctly on the proper side of Trial Balance. (vi) Check whether there are any unposted items in the subsidiary books. (vii) Check whether the balances in the ledger accounts are properly brought down. In spite of taking the above steps, if the Trial Balance disagrees, check all the postings one by one.

Trial Balance

79

Illustrations Index for Illustrations Ill. No. 1 2 and 3 4

Type Preparation of Trial Balance Redrawing the Trial Balance correctly Finding the capital balance

Preparation of Trial Balance Illustration 1 The following balances were extracted from the ledgers of a business organisation on 31.03.2006. Prepare a Trial Balance as on that date. Rs. Drawings Creditors Debtors Loan from Kumar Opening stock Investment Sales Sales returns Travelling expenses Trading expenses Rent Purchases

12,000 86,000 1,00,000 20,000 94,000 25,000 2,56,000 2,000 9,200 5,000 4,000 1,41,600

Rs. Capital Bills payable Bills receivable Furniture Cash in hand Taxes Salaries Purchase returns Commission paid Discount earned Bank overdraft

48,000 8,000 10,400 9,000 1,800 7,000 19,000 2,200 200 8,000 12,000

Solution Trial Balance as on 31st March 2006 Name of the Account Drawings Capital Creditors Bills Payable Debtors Bills Receivable Loan from Kumar Furniture Opening Stock Cash in Hand Investment Taxes Sales Salaries Sales Returns Purchase Returns Travelling Expenses Commission Paid Trading Expenses Discount Earned Rent Bank Overdraft Purchases

Debit (Rs.) 12,000

Credit (Rs.) 48,000 86,000 8,000

1,00,000 10,400 20,000 9,000 94,000 1,800 25,000 7,000 2,56,000 19,000 2,000 2,200 9,200 200 5,000 8,000 4,000 12,000 1,41,600 4,40,200

4,40,200

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Financial Accounting

Redrawing the Trial Balance Correctly Illustration 2 From the following details, Redraw the Trial Balance as on 31.3.08 correctly: Debit

Rs.

Drawings Buildings Purchases Purchase Returns Sundry Creditors Trade Expenses Cash at Bank Bills Payable Wages Salaries Rent, Rates, etc.

10,000 16,000 36,440 5,600 15,750 14,000 3,800 3,000 3,900 8,500 9,300

Credit

Rs.

Capital Sales Sundry Debtor Loan from Bank Opening Stock Sales Returns

30,000 66,940 14,600 5,000 5,800 3,950

1,26,290

1,26,290

Solution Trial Balance as on 31.3.2008 Name of the Account

Debit (Rs.)

Drawings

10,000

Building

16,000

Purchases

36,440

Credit (Rs.)

Purchase Returns

5,600

Sundry Creditors

15,750

Trade Expenses Cash at Bank

14,000 3,800

Bill Payable

3,000

Wages

3,900

Salaries

8,500

Rent, Rates, etc.

9,300

Capital

30,000

Sales Sundry Debtors

66,940 14,600

Loan from Bank Opening Stock Sales Returns

5,000 5,800 3,950 1,26,290

1,26,290

Illustration 3 The following Trial Balance has been prepared wrongly. You are asked to prepare the Trial Balance correctly.

Trial Balance

Name of the Account

Debit Balance (Rs.)

Cash in Hand Purchase Returns Wages Establishment Expenses Sales Returns Capital Carriage Outward Discount Received Commission Earned Machinery Stock Debtors Creditors Sales Purchases Bank Overdraft Manufacturing Expenses Loan from Ashok Carriage Inward Interest on Investments

81

Credit Balance (Rs.) 2,000

4,000 8,000 12,000 8,000 22,000 2,000 1,200 800 20,000 10,000 8,000 12,000 44,000 28,000 14,000 14,000 14,000 1,000 1,000 1,13,000

1,13,000

Solution Corrected Trial Balance as on ……… Name of the Account Cash in Hand

Debit (Rs.)

Purchases Returns Wages Establishment Expenses Sales Returns

4,000 8,000 12,000 8,000

Capital Carriage Outward

22,000 2,000

Discount Received

1,200

Commission Earned

800

Machinery

20,000

Stock

10,000

Debtors

8,000

Creditors

12,000

Sales Purchases

44,000 28,000

Bank Overdraft Manufacturing Expenses

14,000 14,000

Loan from Ashok Carriage Inward

Credit (Rs.)

2,000

14,000 1,000

Interest on Investments

1,000 1,13,000

1,13,000

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Financial Accounting

Finding the Capital Balance Illustration 4 Redraw correctly the Trial Balance given below and find the capital balance. Rs. Capital

Rs. ? Debtors

Bad Debts Recovered

7,580

250 Bank Deposit

Creditors

2,750

1,250 Discount Allowed

Returns Outward

40

350 Drawings

Bank Overdraft

600

1,570 Returns Inward

Rent

450

360 Sales

Salaries

850 Bills Payable

Postage

300

Cash in Hand

14,690 1,350

210

Opening Stock

2,450

Purchases

11,870

(Manonmaniam University, B. Com) Solution Corrected Trial Balance as on ……… Name of the Account

Debit (Rs.)

Credit (Rs.) 8,000

Capital Bad debts recovered

250

Creditors

1,250

Returns Outward

350

Bank Overdraft Rent

1,570 360

Salaries

850

Postage

300

Cash in Hand Opening Stock Purchases

210 2,450 11,870

Debtors

7,580

Bank Deposit

2,750

Discount Allowed

40

Drawings

600

Returns Inward

450

Sales

14,690

Bills Payable

1,350 27,460

Capital balance = Rs. 8,000

27,460

Trial Balance

83

Points to Remember

Final Accounts.

the ledger accounts are entered in the appropriate columns. amount, posting an amount in the wrong side, posting an amount twice, errors in balancing ledger accounts, etc. Commission, Error of Principle, Compensatory Error, etc. need to be checked.

Examination Questions I. Objective Questions 1. Fill in the blanks (a) Trial Balance is a list of ________________________. (b) Trial Balance is prepared to test_______________ accuracy of the posting. (c) Under the Double Entry System of book-keeping every debit should have a _________. 2. Choose the correct answer (i) A Trial Balance shows (a) Both debit and credit balances (b) Only debit balances (c) Only credit balances (ii) A Trial Balance is (a) an account (b) a statement (c) both account and statement (iii) Trial Balance contains the balance of (b) Income and Expenditure (c) All the above (iv) Trial Balance facilitates the preparation of (a) Final Accounts (b) Manufacturing Account only

84

Financial Accounting

(v) The agreement of Trial Balance is (a) A good proof of correct entries and ledger posting (b) Not a conclusive proof of any accuracy (c) All the above 3. Match the following (i)

Error of Omission

a

Wrong entry on one side of an account which is equal to another error on the opposite side

(ii)

Error of Commission

b

Error committed without the knowledge of accounting procedures

(iii)

Error of Principles

c

Error committed in recording the amount of transaction in the subsidiary book

(iv)

Compensatory Error

d

Error of omitting to record an entry

4. State whether the following statement are True or False: (i) The total of debit side of the Trial Balance need not be equal to the total of its credit side. (ii) The agreement of Trial Balances does not prove that the books are absolutely correct. (iii) Trial Balance is prepared for construction of Final Accounts. Answers 1. (a) (c) 2. (i) 3. (i) 4. (i)

ledger balances, corresponding credit (a); (ii) (b); d; (ii) c; False, (ii) True,

(b) (d) (iii) (iii) (iii)

Arithmetical, Balance Sheet. (c); (iv) (a); b; (iv) a True.

(v) (c)

II. Descriptive Questions A. Very Short Answer Questions 1. What is a Trial Balance? 2. What are the procedures for preparing Trial Balance? 3. What are the purposes of preparing Trial Balance? B. Short Answer Questions: 1. What is a Trial Balance? What is the object of preparing it? 2. How is a Trial Balance prepared? 3. Does a Trial Balance agrees always? Explain. C. Detail Answer Questions: 1. What are the steps to be taken to locate error in a Trial Balance? 2. What are the errors which prevent the agreement of a Trial Balance? 3. Explain in details the errors which a Trial Balance will not disclose.

Trial Balance

85

III. Exercise Problems

Preparation of Trial Balance Problem 1 From the under-mentioned balances extracted from the books of a sole trader on 31st December, prepare a Trial Balance as on that date. Rs. Cash in Hand Capital Purchases Bills Payable Stock (Opening) Sundry Debtors Sundry Creditors Wages

2,400 2,00,000 2,40,000 44,000 70,000 1,00,000 48,000 32,000

Rs. Plant and Machinery Sales Furniture Bad Debts Reserve Bills Receivable Rent and Taxes Salaries

1,20,000 4,00,000 30,000 2,000 40,000 20,000 40,000

[Ans. 6,94,400]

Redrawing the Trial Balance Correctly Problem 2 Correct the following Trial Balance Dr.

Cr. Rs.

Return Outwards Opening Stock Salaries Creditors Bank Carriage Inwards Rent Received Discount Allowed Purchases Bills Payable

16,000 34,200 12,000 28,000 45,000 6,000 3,000 2,000 1,00,000 20,000

Rs. Debtors Carriage Outwards Capital Machinery Returns Inward Discount Received Trade Expenses Building Sales

2,66,200

15,000 5,000 55,200 18,000 3,000 4,000 6,000 20,000 1,40,000 2,66,200

Problem 3 Correct the following Trial Balance by identifying the errors: Dr.

Cr. Rs.

Opening Stock Purchases Wages Rent, Rates Salaries General expenses Plant Sundry creditors Furniture Cash at Bank Sales Building

10,000 49,000 15,000 1,000 8,000 900 15,000 20,000 8,000 5,000 1,28,600 60,000 3,20,500

Rs. Loan A/c (Cr.) Sundry Debtors Capital Provision for Bad Debts Sales Returns Discount Allowed

15,000 42,000 50,000 2,800 2,000 500

1,12,300

(Bharathiar University, B Com.) [Ans. Total of Trial Balance Rs. 2,16,400]

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Financial Accounting

Problem 4 The following Trial Balance has been prepared wrongly. You are asked to correct the Trial Balance. Name of Accounts

Debit Rs.

Cash in Hand Purchase Returns Wages Establishment Expenses Sales Returns Capital Carriage Outwards Discount Received Commission Earned Machinery Stock Debtors Creditors Sales Purchases Bank Overdraft Manufacturing Expenses Loan from Ashok Carriage Inward Interest on Investments

– 4,000 8,000 12,000 – 22,000 – 1,200 800 – – 8,000 – – 28,000 14,000 – 14,000 1,000 – 1,13,000

Credit Rs. 2,000 – – – 8,000 – 2,000 – – 20,000 10,000 – 12,000 44,000 – – 14,000 – – 1,000 1,13,000

[Periyar University, B. Com.] [Ans. Total of corrected Trial Balance Rs.1,13,000]

Finding the Capital Balance Problem 5 Prepare a Trial Balance from the following as on 31st December 2008 Rs. Cash Opening Stock Debtors Sales Wages Creditors Bad Debts Reserve Carriage Trade Marks Advertising Salaries Machinery

Rs. 370 5,700 3,200 63,900 13,200 5,200 400 300 5,300 1,250 10,900 28,900

Land and Buildings Rent received Electricity Bills receivable Travelling expenses Insurance Purchases Purchase returns Discounts (Dr.) Bad debts Bank Capital

28,000 5,000 6,500 1,700 2,300 3,600 12,000 500 300 700 8,500 ?

[Ans. Capital Rs. 57,720, Trial Balance Total Rs. 1,32,720]

6

Final Accounts of Sole Trading Concerns

Learning Objectives After studying this chapter, you should be able to understand the Meaning and importance of Final Accounts Advantages of preparing Trading Account Items usually appear in a Trading Account Importance of Profit and Loss Account Items of Profit and Loss Account Balance Sheet and its Significance Adjustment Entries

FINAL ACCOUNTS The main objective of preparing Final Accounts is to provide final results of any business organisation. The Final Account comprises two financial statements, namely, Income Statements (Trading and Profit and Loss Account) and Position Statement (Balance Sheet). The Trading Account is prepared at the end of accounting year to ascertain the result of trading i.e., Gross Profit. The gross profit is the excess of selling price over the cost of goods sold during a specified period. The Profit and Loss Account is prepared to show the net results of the business (i.e. Net Profit or Loss). If the profit exceeds the loss, the excess is called “Net Profit”, but if the losses exceed the profit, the difference represents “Net Loss”. A Balance Sheet is a statement prepared on a specified date containing a summary of assets and liabilities including the balances of accounts remaining after the Trading and Profit and Loss Accounts are prepared. It is prepared to exhibit a true and fair view of the state of affairs of a concern at the certain date.

Advantages of Preparing a Trading Account (i) It shows gross profit or gross loss. (ii) A comparison can be made of the purchases and sales and stock of a particular period with similar item relating to the previous period. This will reveal weak points, if any in the business.

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Financial Accounting

(iii) Gross Profit Ratio can be ascertained, i.e. gross profit to turnover or sales. It helps the trader to know whether sales have made at the fixed price. (iv) Percentages of the various items of expenses to gross profit can be prepared to make an analysis. The following items usually appear in the debit and credit side of the Trading Account.

Debit Side (i) Opening stock—Stock of raw material in the beginning of the year is called Opening Stock. This item has to be debited to Trading Account as a first item. Sometimes it may include stock of semi-finished goods or finished goods. (ii) Purchases—It represents total amount of Purchases made. It includes both cash and credit Purchases. These Purchases are meant for resale. While preparing Trading Account, only net purchases are debited after deducting purchase returns (or) return outwards. Purchase of any fixed asset such as machinery, furniture, land, etc. should not be included in the amount of purchases. (iii) Direct Expenses—These expenses are debited to the Trading Account because these are directly related to manufacturing activity. The examples are carriage inwards, factory rent, carriage, wages, manufacturing expenses, coal, gas, water, import duty, fuel expenses, packing charges and consumable stocks such as engine oil, soft soap, cotton waste, oil grease and waste, etc.

Credit Side (i) Sales—It represents both cash sales and credit sales. While preparing Trading Account, only net sales are credited after deducting sales returns or return inwards. Sales of any fixed asset such as machinery, furniture, land, etc. should not be included in the amount of sales. (ii) Closing stock—It denotes the value of goods remaining unsold at the end of trading period. Usually stock is given outside the Trial Balance. If it is given in the Trial Balance, this Stock Account will show debit balance and, therefore, it appears only on the asset side of the Balance Sheet.

Profit and Loss Account Preparation of Profit and Loss Account is the second step in Final Accounts. The purpose of preparing this account is to ascertain net profit or net loss at the end of the trading period. For calculating net profit or net loss, this account considers only indirect expenses and incomes. These indirect expenses and incomes include administration expenses, management expenses, selling and distribution expenses, expenses for maintaining assets, losses and incomes from other sources, namely non-trading incomes such as dividend on investment, interest on loans given, profit on sale of fixed assets, etc. All these indirect expenses (not directly relating to manufacturing activities) are debited to Profit and Loss Account. All these indirect incomes are credited to Profit and Loss Account. Finally, this Profit and Loss Account is closed by transferring the net profit (or loss) to Capital Account of the proprietor. This Capital Account will appear on the liabilities side of the Balance Sheet.

Final Accounts of Sole Trading Concerns

89

Debit items of Profit and Loss Account 1. 2. 3. 4. 5. 6.

Gross loss from Trading Account Management expenses Selling and distribution expenses Financial expenses Abnormal losses, if any Net profit transferred to Capital Account

Credit items of Profit and Loss Account (i) (ii) (iii) (iv)

Gross profit from Trading Account Indirect incomes Abnormal gain Net loss transferred to Capital Account

Balance Sheet A Balance Sheet is a statement of assets and liabilities including the balances of accounts, prepared on a specified date. It is prepared to reveal the true and fair view of the state of affairs of a concern of a particular date. The Balance Sheet is prepared, after preparing Trading and Profit and Loss account. Even though the Balance Sheet has assets and liabilities, on the asset side it contains, along with assets, items which are not assets like preliminary expenses, underwriting commission, etc. and on the liabilities side, items like reserves, Profit and Loss A/c credit balances, etc. The Liabilities side of the Balance Sheet consists of the following items: 1. Capital This is the main source of finance for business organisations. This is the amount contributed by owners in the case of trading concerns, by partners in the case of partnership firms and by shareholders in the case of public and private companies. 2. Long-term Liabilities These are loans which are repayable after a long period of time normally more than 5 years (e.g. bank loan, debenture loan, etc.). 3. Current Liabilities/Short-term Liabilities These are repayable within a period of one year. These current liabilities are paid by using current assets of a business concern e.g., amount due to creditors, outstanding expenses, bills payable, bank overdraft. 4. Contingent Liabilities They are not certain liabilities or actual liabilities, they may become an actual one depending upon the happening of certain event which is uncertain. Due to this uncertainty in nature, these liabilities are shown as footnote just below the Balance Sheet, e.g. liability on a dispute pending at court of law, arrears of cumulative preference dividends, etc. The Asset side of the Balance Sheet consists of the following items: 1. Fixed Assets or Permanent Assets These Assets are of permanent nature which are acquired and held in the

90

2.

3.

4.

5.

6.

Financial Accounting

business for the purpose of earning income. These are not intended for resale. These are tangible assets, e.g. land and building, plant and machinery, furniture and fixtures, etc. Current Assets or Floating Assets These assets are acquired temporarily for the purpose of subsequent conversion into money. Unlike fixed assets, these assets are intended for resale, e.g. Stock, Book Debts, Bills Receivable, etc. Wasting Assets These are fixed assets which depreciate due to wear and tear. They are consumed or exhausted through being worked in the business, e.g. mines. Intangible Assets These assets are those which have no physical existence. They cannot be touched, e.g. goodwill, patent rights, copyrights, etc. Fictitious Assets They are not assets at all. They represents losses carried forward or expenses of exceptional nature, e.g. preliminary expenses, debit balance of Profit and Loss A/c, underwriting commission, discount on issue of shares and debentures. Liquid Assets These are readily convertible into cash. All current assets are liquid assets except stock and prepaid expenses, e.g. bills receivable, book debts, shortterm investments, etc.

Methods of Arranging the Assets and Liabilities in a Balance Sheet There are two methods of marshalling or arranging the assets and liabilities in the Balance Sheet. They are: 1. Order of Realisability

2. Order of Permanence

Order of Realisability According to this method, the assets are shown in the Balance Sheet in the order in which they realisable. Assets which are easily or readily convertible into cash are recorded first and then assets which are not easily or readily convertible into cash are recorded next. On the other hand, liabilities which should be paid off first are shown first and then the Liabilities which can be paid off next are shown at last. Format of Balance Sheet According to Order of Realisability Liabilities

Rs.

Assets

Bills Payable

Cash in Hand

Loan Borrowed

Cash at Bank

Bank Overdraft

Investment

Sundry Creditors

Sundry Debtors

Outstanding Expenses

Bills Receivable

Capital

Closing Stock Loose Tools Plant and Machinery Land and Building

Rs.

Final Accounts of Sole Trading Concerns

91

Order of Permanence According to this method, assets which are permanent and fixed will appear first. The current assets or floating assets will appear next. Similarly, long-term liabilities will appear first, followed by current liabilities. This is a reverse case of order of realisability. Format of Balance Sheet According to Order of Permanence Liabilities

Rs.

Assets

Capital

Land and Buildings

Long-term Liabilities

Pant and Machinery

Sundry Creditors

Loose Tools

Bank Overdraft

Stock in Trade

Bills Payable

Rs.

Sundry Debtors Bills Receivable Investment Cash at Bank Cash in Hand

These methods are being followed by sole trading concerns and partnership firms, whereas companies are expected to follow the form of Balance Sheet which is mentioned in the Companies Act. Adjustments Item i

Closing Stock

Entry Closing Stock A/c

Treatment Dr.

To Trading A/c ii

Outstanding Expenses

Expenses A/c

Trading A/c – Credit side Dr. Debit side

To Outstanding Expenses A/c iii

Prepaid Expenses

Balance Sheet – Asset side

Prepaid expenses A/c

Dr.

Balance Sheet – Liabilities side Balance Sheet – Asset side

To Expenses A/c Debit side

iv

Accrued Income

Accrued Income A/c

Dr.

Balance Sheet – Asset side

To Income A/c v

Income Received in Advance

Income A/c

Dr. that income)

To Income Received in Advance A/c vi

Depreciation

Depreciation A/c

Balance Sheet – Liabilities side

Dr.

To Assets A/c

ducted from that asset)

vii

Bad Debts

Bad Debts A/c

Dr.

To Sundry Debtors A/c from debtors)

Financial Accounting

92 viii

ix

x

xi

Provision for bad and doubtful debts

Provision for discount on debtors Provision for discount on creditors Interest on capital

To provision for bad and doubtful debts A/c B.D. Debtor A/c

To provision for discount on debtor A/c

ducted from Debtors)

Provision for Discount on Creditor A/c

Dr.

Balance Sheet – Liabilities side

Interest on Capital A/c

Dr.

To Capital A/c

xii

Interest on Drawing

ed from debtors)

Balance Sheet – Liabilities side

Capital A/c

Dr.

ducted from Capital)

To Interest on Drawing

Dr.

Manufacturing Account This account is prepared by organisations which are engaged in manufacturing activities. The purpose of preparing this account is to ascertain cost of raw-material consumed, manufacturing wages paid, and other expenses which are directly and indirectly relating to manufacturing activity, so that the organisation can determine the total cost of production. This cost of production is transferred to Trading Account. Format of Manufacturing Account Rs.

Debit (Rs.)

Rs.

Credit (Rs.)

To Opening Work-inProgress

xxx

By Sale of Scrap

xxx

To Raw Material consumed

xxx

By Closing Work-inProgress

xxx

By Cost of Production

xxx

To Opening stock of Raw Material

xxx

Add: Purchases

xxx

Less: Closing Stock of Raw Material

xxx

Trading Account)

xxx To Carraige Inwards

xxx

To Wages

xxx

To Fuel and Power

xxx

To Coal, Gas and Water

xxx

To Other Factory Expenses

xxx xxxxx

xxxxx

Final Accounts of Sole Trading Concerns

93

Format of Trading Account Rs.

Debit (Rs.)

Rs.

To Opening Stock

xxx

By Sales

xxx

To Cost of Production

xxx

Less: Sales Returns

xxx

Credit (Rs.)

xxx Account is prepared) To Purchases

xxx

Less: Purchase Returns

xxx

By Closing Stock

xxx

By Gross Loss c/d

xxx

xxx To Direct Expenses Freight

xxx

Carriage Inwards

xxx

Wages

xxx

Coal, Gas and Water

xxx

Manufacturing Expenses

xxx

Factory Lighting and Heating

xxx

Factory Lighting and Heating

xxx

Factory Manager’s Salary

xxx

Royalty Output

Xxx xxx

transferred to

xxxxx

xxxxx

Format of Profit and Loss Account Profit and Loss Account of ……….. for the year ending …………. Rs. To Gross Loss b/d To Management Expenses:

Debit (Rs.) xxx

Rs.

Rent, Rates and Taxes Printing and Stationery Postage and Telegram

xxx xxx xxx xxx

By Interest Received By Discount Received By Commission Received By Income from Investment By Rent Received By Apprenticeship Premium

Telephone Charges

xxx

By Income on Debenture

Law Charges Audit Fees

xxx xxx

By Miscellaneous Revenue Receipts

Credit (Rs.) xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx

Financial Accounting

94 Insurance

xxx

General expenses To Financial Expenses:

xxx

Discount allowed

xxx

Bank Charges Interest on Capital Discount on Bills To Selling and Distribution Expenses: Advertisement Salesman’s salaries Commission To Maintenance Expenses:

xx xxx xxx

Depreciation Repairs and Renewals

xxx xxx

By Net Loss transferred to Capital A/c

xxx

xxx xxx xxx

To Provision for Debts xxx xxx xxx xxx

To Carriage Outwards

xxx xxx

To Agent’s Commission

xxx xxx

To Loss on Sale of Asset

xxx xxx

Capital A/c xxxxx

xxxxx

Illustrations Index for Illustrations Type I

Ill. No.

ADJUSTING ENTRIES

1–3 4–7

II

PROVISION FOR DEBTS

III

MANUFACTURING ACCOUNT

IV

FINAL ACCOUNTS

8 9 – 18

Final Accounts of Sole Trading Concerns

95

I – ADJUSTING ENTRIES Adjusting Journal Entries Illustration 1 What adjustment entries are required to be made in the books for the following? (i) Goods in stock worth Rs. 8,000 are destroyed by fire. Insurance company accepts the claim of Rs. 6,000. (ii) A debt of Rs. 3,500 previously written off is now recovered to the extent of Rs. 1,800. (iii) Interest has accrued on Investments Rs. 2,500. (iv) The proprietor has withdrawn goods worth Rs. 1,200 out of stock. (v) A provision of doubtful debts of Rs. 500 is to be provided against debtors. Solution Adjusting Journal Entries L. F. Insurance Company A/c

Dr.

6,000 2,000

To Trading A/c

8,000

Cash A/c To Bad Debts Recovered A/c

Dr.

Accrued Interest A/c To Interest A/c

Dr.

Drawings A/c To Purchases A/c

Dr.

1,800 1,800

2,500 2,500

1.200 1,200

500 To Provision for Doubtful Debts A/c

500

Illustration 2 From the following information, pass adjusting journal entries in the books of Rane Corporation for the year ended 31st March, 2007: (a) Closing stock of raw material and of finished goods worth Rs. 30,000 and Rs. 40,000, respectively; (b) Wages and printing expenses are outstanding to the extent of Rs. 10,000 and Rs. 5,000, respectively; (c) Premium towards the LIC and advance Income Tax amounting Rs. 6,000 and Rs. 15,000 were paid, respectively; (d) Depreciation on machinery Rs. 8,000 and on building Rs. 12,000;

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Financial Accounting

(e) Commission received in advance amounting Rs. 15,000; (f) Interest accrued on investment Rs. 5,000. The net profit of the concern before making the above adjustment was Rs. 1,25,000. Find the net profit after making the above adjustments. Solution Books of Rane Corporation (a) Adjusting Journal Entries 2007

L.F.

March 31 Stock of Raw Materials A/c Stock of Finished Goods A/c To Trading A/c

Wages A/c Printing Charges A/c To Expenses Outstanding A/c

Dr. Dr.

30,000 40,000 70,000

Dr. Dr.

10,000 5,000 15,000

Outstanding Account) Drawings A/c

Dr.

21,000 6,000 15,000

To Income Tax A/c

Depreciation A/c To Machinery A/c To Building A/c

Dr.

Commission Received A/c To Commission Received in Advance A/c

Dr.

Accrued Interest A/c To Interest on Investment A/c

Dr.

20,000 8,000 12,000

15,000 15,000

5,000 5,000

(b) Net Profit after making the above adjustments Rs.

Rs. 1,25,000 70,000 5,000 75,000 15,000 20,000 15,000

2,00,000

1,50,000

Final Accounts of Sole Trading Concerns

97

Illustration 3 Following are the balances extracted from the books of Madhav & Sons as on 31st December 2008, from which prepare the closing entries, Trading and Profit and Loss Account and Balance Sheet as on that date. Rs. Opening Stock

Rs. 500

Bills Receivable

200

2,250 Returns Outward

Purchases

250

19,500 Trade Expenses

Wages

100

1,400

Insurance Sundry Debtors

500

500 Cash in Hand

450

15,000 Cash at Bank

5,375

Carriage Inward

400 Rent and Taxes

Interest on Capital

350 Sales

550 25,000

Stationery

225 Bills Payable

Returns inward

650 Creditors

1,700 12,825

400 Capital Carraige outward

8,950

725

Closing stock was valued at Rs. 12,500. Solution Books of Madhav & Sons (a) Journal Entries 2002 Dec. 31

Particulars Trading A/c

L.F Dr.

21,550 500 19,250 1,400 400

To Wages A/c To Carriage Inward A/c

24,350 To Trading A/c

24,350

12,500 To Trading A/c

12,500

15,300 To Trading A/c

15,300

2,900 To Insurance A/c To Commission A/c To Interest on Capital A/c To Stationery A/c To Trade Expenses A/c To Rent and Taxes A/c To Carriage Outward A/c

500 400 350 225 100 550 725

98

Financial Accounting

Commission A/c

Dr.

200 200

12,600 To Capital A/c

12,600

(b) Trading and Profit and Loss Account for the year ended 31st December 2008 Rs. To Opening Stock To Purchases

Rs.

500 By Sales

25,000

19,500 24,350 12,500

19,250 By Closing Stock 1,400 400 15,300

To Wages To Carriage Inward

To Insurance To Commission To Interest on Capital To Stationery To Trade Expenses To Rent and Taxes To Carriage Outward

36,850

36,850

550 400 To Commission 350 225 100 550 725 12,600

15,300 200

15,500

15,500

(c) Balance Sheet as on 31st December 2008 Liabilities

Rs.

Creditors Bills Payable Capital – Opening

8,950 12,600

Assets

Rs.

12,825 Cash in Hand 1,700 Cash at Bank Bill Receivable Closing Stock 21,550 Sundry Debtors

450 5,375 2,250 12,500 15,000 500

36,075

36,075

II – PROVISION FOR DEBTS Journal, Ledger, Final Accounts – Bad Debts Illustration 4 A part of the Trial Balance as on 31st March 2005 as follows: Rs. Sundry Debtors Bad Debts Provision for Doubtful Debts

Additional Information: 1. Write off further bad debts Rs. 1,000

Rs. 50,000 4,000 4,000

Final Accounts of Sole Trading Concerns

99

2. Provide for doubtful debts at 5% on Debtors Write journal entries, open ledgers and show them in Final Accounts Solution (i) Journal Entries 2005

L.F.

March 31 Bad Debts A/c To Sundry Debtors A/c

Rs.

Dr.

Rs. 1,000 1,000

Provision for Doubtful Debts A/c To Bad Debts A/c

Dr.

5,000 5,000

3,450 To Provision for Bad Debts A/c

3,450

(ii) Ledger Accounts Bad Debts Account 2005 Mar 31

Rs. To Balance b/d To Debtors A/c

2005

4,000 1,000

Mar 31

Rs. By Provision for Debts A/c

5,000

5,000 5,000

Provision for Debts Account 2005 Mar 31

Rs. To Bad Debts A/c To Balance c/d

2005

5,000

Mar 31

Rs. 4,000 3,450

By Balance b/d

2,450 7,450

7,450

(iii) Final Accounts Profit and Loss Account for the year ended 31st Dec 2004 Rs.

Rs.

Rs.

To Provision for Debts A/c 2,450 4,000 1,000 7,450 3,450

Balance Sheet Liabilities

Rs.

Rs.

Assets Debtors

Rs. 50,000 49,000

46,550

100

Financial Accounting

Illustration 5 On 1st January 2005, the Provision for Bad Debts A/c showed a credit balance of Rs. 2,500. During the year the bad debts amounted to Rs. 3,000. The debtors on 31st December, 2005 amounted to Rs. 96,000 and a provision of 6% for doubtful debts was maintained. In 2006, the bad debts amounted to Rs. 2,200 and the debtors at the end of the year amounted to Rs. 45,000, on which a provision of 6% for bad debts was to be maintained. Prepare Journal Entries and Provision for Doubtful Debts Account and show how these items appear in the Final Accounts. Solution (1) Journal Entries 2005 Dec 31

L.F. Bad Debts A/c To Sundry Debtors A/c

Dr.

Provision for Doubtful Debts A/c To Bad Debts A/c

Dr.

Rs.

Rs. 3,000 3,000

3,000 3,000

6,080 To Provision for Doubtful Debts A/c

2006 Dec 31

6,080

Bad Debts A/c To Sundry Debtors A/c

Dr.

Provision for Doubtful Debts A/c To Bad Debts A/c

Dr.

2,200 2,200

2,200 2,200

(2) Provision for Doubtful Debts Account 2005 Dec 31

Rs. To Bad Debts A/c To Balance c/d

3,000 5,580

2005 Jan 1 Dec 31

Rs. By Balance b/d

8,580 2006 Dec 31

2,500 6,080 8,580

2006 To Bad Debts A/c Balance c/d

2,200 812 2,568

Jan 1

By Balance b/d

5,580

5,580

5,580 2007 Jan 1

By Balance b/d

2,568

Final Accounts of Sole Trading Concerns

101

(3) Final Accounts Profit and Loss Account 2005

Rs.

Rs.

2005

Rs.

Rs.

To Provision for Debts 5,580 Nil 3,000 8,580 6,080 2006

2006

To Provision for Debts

By Provision for Debts

812

2,568 Nil 2,200 4,768

Nil

To be credited, since the balance is negative

Balance Sheet Liabilities

Rs.

Assets

Rs.

2005 Sundry Debtors

96,000 93,000 87,420

2006 Sundry Debtors

45,000 42,800 40,232

Provision for Discount on Creditors Account Illustration 6 Following are the extract supplied by a firm from which prepare Provision for Discount on Creditors Account: Creditors balance—as on 1st Jan 2005 Rs. 1,00,000, as on 1st Jan 2006 Rs. 80,000; Discount earned at the end of 2005 and 2006 were Rs. 800 and Rs. 1,000, respectively. A firm maintains a provision of discount on creditors @ 2.5%. Provision for Discount on Creditors Account 2005

Particulars

Dec 31

Rs. 300

To Balance c/d ¥

2005 Jan 1 Dec 31

Particulars By Balance b/d By Discount Earned

Rs. 2,000 800

2,500 2,800

2,800

102

Financial Accounting

2006

2006

Dec 31

1,500 To Balance c/d ¥

Jan 1 Dec 31

By Balance b/d By Discount Earned

2,500 1,000

2,000 3,500

3,500

Provision for Debts, Provision for Discount on Debts, Provision for Discount on Creditors—Ledger Accounts and Final Accounts Illustration 7 Following information is supplied from the books of a concern: Provision for Debts @ 5%; (Opening balance as on 1.1.2005 Rs. 1,500) Provision for Discount on Debtors @ 2%; (Opening balance as on 1.1.2005 Rs. 500) Provision for Discount on Creditors @ 1%; (Opening balance as on 1.1.2005 Rs. 300) Also the balances for the following as on 31.12.2005 and 31.12.2006 are provided: Bad Debts written off

1,800

Discount allowed Sundry Debtors

100

20,000

12,000

Discount received Sundry Creditors

300

600 300

50

15,000

10,000

Show the necessary accounts in the ledger. Also show how the items would appear in the Final Accounts for the years given. Solution (a) Ledger Accounts Bad Debts Account 2005 Dec 31

Rs. 1,800

Dec 31

To Sundry Debtors A/c

300

Dec 31

2006 Dec 31

2005

To Sundry Debtors A/c

Rs. By Provision for Debts A/c

1,800

By Provision for Debts A/c

300

2006

Provision for Doubtful Debts Account 2005 Dec 31

Rs. To Bad Debts A/c To Balance c/d

1,800

2005 Jan 1 Dec 31

Rs. By Balance b/d

1,500 1,300

1,000 2,800 2006 Dec 31

2,800 2006

To Bad Debts

300 100

Jan 1

By Balance b/d

1,000

To Balance c/d 600 1,000

1,000

Final Accounts of Sole Trading Concerns

103

Discount Allowed Account 2005 Dec 31

Rs.

2005

To Sundry Debtors A/c

600

Dec 31

To Sundry Debtors A/c

100

Dec 31

2006 Dec 31

Rs. By Provision for Discount on Debtors A/c

600

By Provision for Discount on Debtors A/c

100

2006

Provision for Discount on Debtors Account 2005 Dec 31

Rs. To Discount Allowed To Balance c/d

2005

600

Jan 1 Dec 31

Rs. By Balance b/d

500 480

380 980 2006 Dec 31

980 2006

100 52

To Discount Allowed

Jan 1

By Balance b/d

380

To Balance c/d 228 380

380

Discount Received Account 2005 Dec 31

Rs.

2005

To Reserve for Discount on Creditors A/c

300

Dec 31

To Reserve for Discount on Creditors A/c

50

Dec 31

2006 Dec 31

Rs. By Sundry Creditors A/c

300

By Sundry Creditors A/c

50

2006

Reserve for Discount on Creditors Account 2005 Jan 1 Dec 31

Rs. To Balance b/d

400 200

2005 Dec 31 Dec 31

Rs. By Discount Received By Balance c/d

300 300

600 2006 Jan 1

600 2006

To Balance b/d

300

Dec 31

By Discount Received

50 50

By Balance c/d 200 300

300

104

Financial Accounting

(b) Final Accounts Profit and Loss Account 2005

Rs.

Rs.

2005

To Provision for debts

Rs.

Rs.

By Provision for Discount on Creditors 1,000 1,800 Nil

300 300

2,800

600 200 1,300

To Provision for Discount on Debtors 380 600 980 480 2006

2006

To Provision for debts

100

By Provision for Doubtful Debts By Provision for Discount on Debtors

600 300 Nil 900

52

By Provision for Discount on Creditors Nil

200 50

balance is negative)

250 300

To Provision for Discount on Debtors

balance is negative)

Nil

228 100 328 52 balance is negative)

Nil

To Provision for Discount on Creditors

50

Balance Sheet Rs. Sundry Creditors

Sundry Debtors

15,000

20,000

Discount on Creditors 19,000

14,700 Discount on Debtors

18,620

Final Accounts of Sole Trading Concerns

105

Rs. Sundry Creditors

Sundry Debtors

10,000

12,000

Discount on Creditors

11,400 9,800 Discount on Debtors 11,172

III – MANUFACTURING ACCOUNT Illustration 8 From the following information, prepare the Manufacturing Account and Trading Account: Rs. Opening stock of Raw Material

Rs.

40,000 Sales

Carriage on Raw Materials

1,85,000

2,000 Repairs-Plant and Machinery

Purchase of Raw Materials

5,000

30,000 Manufacturing Wages

18,000

Opening stock of Finished Goods

20,000 Factory Rent and Taxes

24,000

Electric power consumed

12,000 Sales Returns

15,000

Opening stock of Work in Progress

15,000 Depreciation on Factory Buildings

12,000

Returns-Raw Materials

2,000 Depreciation on Plant

Factory Insurance

8,000

10,000

Closing stock of Raw Material Rs. 12,000, Work in Progress Rs. 14,000 and Finished goods Rs. 30,000. Solution Manufacturing and Trading Account for the year ended.... Rs. To Materials Consumed Opening stock of Raw Material

Rs. By Closing Stock of Work in Progress By Closing Stock of Raw Materials By Cost of Production

40,000 30,000 70,000 2,000 72,000

14,000 12,000 1,48,000

Trading Account) 70,000

To Electric power To Manufacturing Wages To Repairs on Plant and Machinery To Factory rent and Taxes Depreciation on Factory Building Plant To Factory Insurance To Opening stock of Work in Progress

12,000 18,000 5,000 24,000 12,000 10,000 8,000 15,000 1,74,000

To Opening stock of Finished Goods To Cost of Production

20,000 By Sales

1,74,000 1,85,000 1,70,000

1,48,000 By Closing stock of 32,000 Finished Goods 2,00,000

30,000 2,00,000

106

Financial Accounting

IV – FINAL ACCOUNTS

Provision for Debts, Unexpired Expenses, Interest on Capital, Unexpired Apprentice Premium Illustration 9 From the following Trial Balance, extracted from the books of Rakhaldas Ramji, prepare a Trading and Profit and Loss Account for the year ended 30th September 2004 and a Balance Sheet as on that date. Rs. R.R.’s Capital Account R.R.’s Drawing Account

Rs. –

90,000

6,480

–

Land and Buildings

25,000

–

Plant and Machinery

14,270

–

Furniture and Fixtures

1,250

–

Carriage Inwards

4,370

–

Sales Sales Return

21,470

–

–

2,470

–

91,230

1,760

–

Bank Charges

140

–

Coal, Gas and Water

720

–

Rates and Taxes

840

–

–

120

Purchases

42,160

–

–

8,460

Bills Receivable

1,270

–

Trade Expenses

1,990

–

Sundry Debtors

37,800

–

–

12,170

Purchase Returns

Sundry Creditors Apprentice Premium Fire Insurance Cash at Bank Cash in Hand Salaries

26,420

–

–

500

490

–

13,000

–

850

–

4,670

–

2,04,950

2,04,950

(a) Charge depreciation on land and building at 2 ½%, on plant and machinery at 10% and on furniture and fixtures at 10%. (b) Make a reserve of 5% on sundry debtors for bad debts. (c) Carry forward the following unexpired amounts: Fire insurance Rs. 125; Rates and taxes Rs. 240; Apprentice premium Rs. 400 (d) Charge 5% interest on capital but not on drawings (e) The value of stock as on 30th Sept. 2004 was at Rs. 29,390. (Madurai, Manomaniam Sundaranar, Madras, B.Com)

Final Accounts of Sole Trading Concerns

107

Solution Trading and Profit and Loss Account for the year ended 30th September 2004 Rs. To Opening Stock To Purchases

Rs.

Rs.

26,420 By Sales

91,230

42,160

89,470 33,700 By Closing Stock 21,470 4,370 720 32,180

To Wages To Carriage Inwards To Coal, Gas and Water

29,390

1,18,860 To Salaries To Bank Charges To Rates and Taxes To Trading Expenses To Fire Insurance

840

1,18,860

4,670 140 By Discount By Apprentice 600 Premium 1,990

490 365

To Depreciation on Land and Building Plant and Machinery Furniture and Fixtures To Provision on debts

Rs.

32,180 120 500 100 580

To Provision on debts

625 1,427 125

1,890 Nil Nil 1,890 Nil the balance is negative) To Interest on Capital 4,500 18,538 32,980

32,980

Balance Sheet as on 30th September 2004 Liabilities Capital

Sundry Creditors Apprentice Premium Unexpired

Rs. 90,000 18,538 4,500 1,13,038

Rs.

Assets

Cash in Hand Cash at Bank 1,06,558 Sundry Debtors

Rs.

Rs. 850 13,000

37,800 35,910

Bills Receivable 12,170 Closing Stock Prepaid Expenses 400 Fire Insurance Rates and Taxes Land and Building Plant and Machinery

1,270 29,390 125 240 25,000

24,375

14,270 12,843

Furniture and Fixtures

1,250 1,125

1,19,128

1,19,128

108

Financial Accounting

Adjusted Purchases, Opening Stock not given, Closing Stock given in Trial Balance, Manager’s Commission before Charging, Interest Due on Loan Illustration 10 Below is the Trial Balance of Arumugam as at 31st December 2004. Debit Balances

Rs.

Arumugam’s Current A/c

Credit Balances

Rs.

1,500 Capital Account

Adjusted Purchases

50,000

6,99,200

Salaries

20,000

4,200 Sales

Carriage on Purchase

400 Discount

Carriage on Sale

500 Sundry Creditors

Lighting

300

Rates and Insurance

400

Buildings

27,000

Furniture

6,000

Sundry Debtors

8,000

Cash in Hand

250

Cash at Bank

1,500

7,20,000 500 20,000

61,250 8,10,500

8,10,500

Prepare Trading and Profit and Loss Account for the year ended December 31, 2004 and the Balance Sheet as at that date after taking into consideration the following: 1. Rates have been prepaid to the extent of Rs. 175. 2. Bad debts totaling Rs. 500 have to be written off. 3. A provision for doubtful debts @ 5% on debtors is necessary. 4. Buildings have to be depreciated at 2% and furniture at 10%. 5. The manager is entitled to a commission of 5% of net profits before charging such commission. (Madurai, B.Com) Solution Trading and Profit and Loss Account for the year ended 31st December, 2004 Rs. To Carriage on Purchases

To Salaries To Lighting To Carriage on Sales To Rates and Insurance

Rs.

Rs.

Rs.

6,99,200 By Sales 400 20,400

7,20,000 Nil

7,20,000

7,20,000

4,200 300 By Discount 500

20,400 500

400 225 1,800 Contd. Trial balance, it is not recorded in the Trading A/c

Final Accounts of Sole Trading Concerns

109

Contd. To Provision for debts New Prov (Adj) (8,000 – 500) @ 5% (+) Bad debts (T/B) (+) Bad debts (Adj)

375 Nil 500

(–) Old Prov (T/.B)

875 Nil

To Depreciation on Buildings Furniture To Manager’s Commission Total of credits (–) Total of Debits

875

540 600 20,900 (9,040) 11,860

(11,860 ¥ 5%)

593 11,267 20,900

20,900

Balance Sheet as on 31st December 2004 Liabilities Capital

Rs. 50,000 11,267

(–) Current A/c

61,267 (1,500)

Loan from K (+) Interest due

20,000 1,800

Sundry Creditors Manager’s Commission Due

Assets

Cash in Hand Cash at Bank Sundry Debtors (–) Bad debts (Adj) 59,767 (–) New Prov (Adj)

Rs. 250 1,500 8,000 (500) (375) 7,125 61,250

21,800

Closing Stock Prepaid Rates and 20,000 Insurance 593 Furniture (–) Depreciation Buildings (–) Depreciation

1,02,160

175 6,000 (600)

5,400

27,000 (540)

26,460 1,02,160

Treatment of Debtors, Furniture, Expense Outstanding Appears in Trial Balance Illustration 11 From the following balances, prepare Trading and Profit and Loss Account for the year ended 31st December 2004 and Balance Sheet as on that date: Rs. Capital Cash at Bank Purchases Creditors

30,000 Trade Charges 3,418 Debtors 35,640 Sales 3,920 Returns Outwards

Rent and Tax

700 Drawings

Bills Payable

2,690 Rent Owing

Rs. 460 17,078 29,360 1,756 2,600 160 Contd.

110

Financial Accounting

Contd. 500

270

Rs. 200 on 30th June) Bills Receivable

3,560 Salaries

1,200

Returns Inwards

2,460

Information: 1. Stock at the end was valued at Rs. 12,800 (Market values Rs. 13,100). 2. Rs. 300 paid to X against our acceptances were debited by mistake to Y’s A/c and from there it was included in the list of Sundry debtors. 3. Travelling expenses paid to our Sales Representative Rs. 250 per month were debited to his personal account. 4. Depreciate furniture at 10% p.a. 5. Provide for Doubtful Debts to the extent of 5% on debtors. 6. Goods costing Rs. 500 were used by the proprietor. (Madurai, B.Com) Solution Trading and Profit and Loss Account for the year ended 31st December 2004 Rs. To Purchases

Rs.

Rs. By Sales

35,640

Rs.

29,360 26,900

33,884 12,800

33,384 6,316 39,700 To Salaries To Trade charges To Interest and Discount To Rent, Rates and Tax To Travelling Expenses To Depreciation on

39,700 6,316 43

1,200 460 By Net Loss 270 700 3,000 40

To Provision for 689 6,359

6,359

Balance Sheet as on 31st December 2004 Liabilities Creditors Bills Payable

Rs. 2,690

Rs.

Assets

3,920 Cash at Bank Bills Receivable 2,390 Debtors

Rs.

Rs. 3,418 3,560

13,778 13,089

160 Capital

Closing Stock Furniture

30,000

12,800 500 460

26,857 33,327

33,327

Final Accounts of Sole Trading Concerns

Working Note (a) Depreciation on Furniture Opening Balance = 300 ¥ 10% ¥ 1 year = Addition during the year = 200 ¥ 10% ¥ 6/12 = Total Depreciation = (b) Provision for Debts Opening Debtors = (–) Travelling Allowance wrongly included = (–) Acceptances Debited wrongly = Net Debtor Balance = New Provision for Debts = 13,778 ¥ 5% = Rs. 689

111

30 10 40 17,078 (3,000) 1(300) 13.778

(c) Rent owing appears in Trial Balance. It is, therefore, treated in Balance sheet and not considered in Profit and Loss Account.

Interest on OD, income received in advance, Bad debt in trial balance and adjustment, provision for debts, purchase of furniture in Purchase account Illustration 12 From the following the balance extracted from the books of Ravidran as on 31.12.1999, Prepare Trading and Profit and Loss Account for the year ended December 31st 1999 and a Balance sheet as on that dates: Trial Balance Debit Furniture

Rs.

Credit 640 Capital

Motor Vehicles

6,250 Provision for Bad Debts

Buildings

7,500 Sundry Creditors

Bad Debts Sundry Debts

125 Sales

Rs. 12,500 200 2,500 15,450

3,800 Bank Overdraft

2,850

3,460 Purchases Return

125

Purchases

5,475 Commission

375

Taxes and Insurance

1,250

General Expenses Salaries

782 3,300

Sales Return

200

Advertising

450

Interest

118

Cash

650

Adjustment required (a) Stock on hand on 31.12.99 was Rs. 3,250. (b) Depreciate building at 5%, furniture at 10% and motor vehicles at 20%. (c) Rs. 85 are due for interest on overdraft.

112

Financial Accounting

(d) (e) (f) (g)

Salaries Rs. 300 and Taxes Rs. 120 are outstanding. Insurance amounting to Rs. 100 is prepaid. One-third of the commission received is the respect of work to be done next year. Write off a further Rs. 100 as bad debts and provision for bad debts is to be made equal to 5% on sundry debtors. (h) Purchases include purchase of furniture Rs. 200 on 1.1.1999. (Madras, BA Corp)

Solution Trading and Profit and Loss Account for the year ended 31st December 1999 Rs. To Opening Stock To Purchases

Rs.

Rs.

3,460 By Sales

15,450

5,475 15,250 3,250

5,150 By Closing Stock 9,890 18,500 To Advertising To Interest

18,500 9,890

450 118 85

By Commission 203 ¥ 1/3)

To Taxes and Insurance

375 250

1,250 120 1,370 1,270

To General Expenses To Salaries

782 3,300 300

To Depreciation Building Furniture Motor Vehicles To Provision for debts ¥

3,600

375 84 1,250

185 125 100 410 210 1,916 10,140

10,140

Final Accounts of Sole Trading Concerns

113

Balance sheet as on 31st December 1999 Liabilities Capital

Creditors Bank Overdraft

Rs.

Rs.

12,500 1,916

Cash 14,416 Sundry Debtors

2,850 85

Outstanding expenses Salaries Taxes Commission Received in advance

Asset

Rs.

Rs. 650

3,800

2,500

3,515

Closing Stock 2,935 Prepaid Insurance Furniture 300 120

3,250 100 640 200 840 756

125 Motor Vehicle

6,250 5,000

Building

7,500 7,125

20,396

20,396

Goods drawn in Sales Account, Manager’s Commission after Charging Illustration 13 You are required to prepare the Trading and Profit and Loss Account for the year ended 31st March, 2004 and a Balance Sheet as on that date. Trial Balance Debit

Rs.

Credit 95,280 Capital

Purchases

2,62,590

Rs. 1,46,900 35,000

Manufacturing Wages

45,970 Sundry Creditors

Plant and Machinery

34,800 Sales

Fixtures and Fittings

13,970 Provision for Doubtful Debts

Sundry Debtors

67,500 Commission Received

10,640

Bills Receivable

15,000 Purchase Returns

13,360

Sales Returns Salaries Bad Debts Repairs and Renewals Rent and Taxes Travelling Expenses

8,500

8,780 16,000 8,620 9,370 11,120 6,880

Insurance

6,400

Drawings

16,050

Cash in Hand

8,030

Cash at Bank

24,970

Interest and Discount

86,270 3,62,030

11,370 6,62,700

6,62,700

114

Financial Accounting

Adjustments: (a) Closing stock is valued at Rs. 1,27,000. (b) Depreciate (1) Plant and Machinery by 5%, (2) Fixtures and Fittings by 10% p.a. (c) Outstanding interest on loan is Rs. 350. (d) Sales include Rs. 1,030 worth of goods taken by the proprietor for his private use. (e) The Manager is entitled to a commission of 10% on the net profit after charging such commission. (Madurai, B.Com) Solution Trading and Profit and Loss Account for the year ended 31st March 2004 Rs. To Opening Stock To Purchases

Rs. 95,280 By Sales

Rs.

2,62,590 2,49,230 45,970 By Closing 88,740 Stock

To Manufacturing Wages

4,79,220 To Salaries To Rent and Taxes To Repairs and Renewals To Travelling Expenses To Insurance To Interest and Discount

Rs. 3,62,030

16,000 11,120 By Commission 9,370 Received 6,880 6,400 11,370 350

3,52,220

1,27,000 4,79,220 88,740 10,640

11,720

To Provision for debts Nil 8.620 Nil 8,620 120 To Depreciation Plant Fixtures To Manager’s Commission Total of credit side

1,740 1,397 9,380 34,633

34,633 ¥ 10/110

3,149 31,484 99,380

99,380

Final Accounts of Sole Trading Concerns

115

Balance Sheet as on 31st March 2004 Liabilities

Rs.

35,000 350 Capital

Assets

86,270 Cash in Hand Cash at Bank 3,149 Bills Receivable Debtors 35,350

Sundry creditors Manager Commission Due

Closing Stock Fixtures

1,46,900 31,484

Rs.

Rs. 8,030 24,970 15,000

67,500 66,470 1,27,000 13,970 12,573

1,78,384

Plant and Machinery

34,800

162,334

33,060

2,87,103

2,87,103

Commission, Provision for Debts Illustration 14 The following Trial Balance was extracted from the books of Chandar as on 31st December 2007: Debit Balance

Rs.

Credit Balance

Rs.

Plant and Machinery

20,000 Capital

80,000

Manufacturing Wages

34,500 Sundry Creditors

44,560

Salaries

15,850 Bank Loan

15,000

Furniture

10,000 Purchases Return

Freight on Purchases Freight on Sales Building Manufacturing Expenses Insurance and Tax Goodwill General Expenses Factory Fuel and Power

1,860 Sales 2,140 Provision for Bad Debtors 24,000 9,500 4,250 25,000 8,200 1,280

Sundry Debtors

78,200

Factory Lighting

950

Opening Stock

34,200

Motor Car

12,000

Purchases

1,02,000

Sales Returns

3,100

Bad Debts

1,400

Interest and Bank Charges

400

Cash at Bank

4,200

Cash in Hand

1,120

1,740 2,50,850 2,000

116

Financial Accounting

Prepare Trading and Profit and Loss Account for the year ended 31st December 2007 and the Balance Sheet as on that date taking into consideration the following information: (a) Stock in hand on 31st December 2007 was valued at Rs. 30,500 (b) Depreciation Plant and machinery by 10%, furniture by 5%, Motor car by Rs. 1,000 (c) Bring Provision for bad debts to 5% on Sundry debtors. (d) A commission of 1% on the gross profit is to be provided for Works Manager. (e) A commission of 2% on net profit (after charging the Works Manager’s commission) is to be credited to the General Manager. Solution Trading and Profit and Loss Account for the year ended 31st Dec. 2007 Rs. To Opening Stock To Purchases (–) Returns

1,02,000 (1,740)

To Freight on Purchases To Manufacturing Wages To Factory Fuel and Power To Factory Lighting To Manufacturing Expenses

To salaries To Freight on Sales To Insurance and Tax To General Expenses To Provision for debts New Prov (Adj) 78,200 @ 5% (+) Bad debts (T/B) (+) Bad debts (Adj) (–) Old Prov (T/B) To Interest and Bank Charges To Depreciation Plant and Machinery Furniture Motor Car To Works Manager’s Commission (95,700 @ 1%) To General Manager’s Commision Total of Credits (–) Total of Debits

Rs.

Rs.

34,200 By Sales (–) Return 1,00,260 By Closing Stock 1,860 34,500 1,280 950 9,500 95,700

2,50,850 (3,100)

Rs. 2,47,750 30,500

2,78,250

2,78,250

15,850 2,140 4,250 8,200

95,700

3,910 1,400 Nil 5,310 (2,000)

3,310

400 2,000 500 1,000

957

95,700 (38,607) 57,093

(57,093 ¥ 2%)

1,142 55,951 95,700

95,700

Final Accounts of Sole Trading Concerns

117

Balance sheet as on 31st March 2004 Liabilities Creditors Bank Loan Outstanding Commission Works Manager due General Manager due Capital

Rs.

80,000 55,951

Rs.

Asset

44,560 Cash in Hand 15,000 Cash at Bank Sundry Debtors 957 1,142 Closing Stock 1,35,951 Furniture

Motor Car

Plant and Machinery

Rs.

Rs. 1,120 4,200

78,200 3,910

74,290 30,500

10,000 500

9,500

12,000 1,000

11,000

20,000 2,000

18,000

Building Goodwill 1,97,610

24,000 25,000 1,97,610

Sale on Approval, Goodwill written off, Bad Debt in Adjustment, Free Samples Illustration 15 From the following Trial Balance of Ram on December 31, 2004, prepare the Final Accounts: Debit Balances Drawings

Rs.

Credit Balance 6,000 Bank Overdraft

Rs. 25,000

Wages

15,500 Interest on Investment

5,800

Stock

12,800 Bills Payable

4,600

Loan to Krishna

4,000 Interest on Loan to Krishna

Rent

5,000 Capital

General Expenses Investments Purchases Freight and Carriage Goodwill

1,480 Doubtful Debts Provision 60,000 Sales 1,60,000 Sundry Creditors 2,100 40,000

Bills Receivable

6,200

Rates and Taxes

1,800

Sales Returns

2,100

Insurance

900

Cash in Hand

2,500

Savings Bank

1,200

Postage and Telegrams

3,800

Land and Buildings

25,000

Plant and Machinery

10,000

Sundry debtors

16,500

Packing charges Bad Debts

400 1,280

320 1,00,000 250 2,30,000 12,590

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Financial Accounting

Adjustments: 1. Closing stock as on 31st December 2004 was Rs. 16,000. 2. Goods worth Rs. 700 were sent on 25th December as “Sale on Approval basis” for Rs. 810. 3. 20% of the Goodwill should be written off. 4. Further, Bad debts was estimated at Rs. 350. 5. Increase Reserve for Bad and Doubtful debts to the extent of Rs. 1,500. 6. Depreciate Land and Buildings by 3% and Plant and Machinery by 10%. 7. Goods worth Rs. 800 were distributed as free samples. (Agra, Bhopal, B.Com) Solution Trading and Profit and Loss Account for the year ended 31st December 2004 Rs. To Opening Stock To Purchases

Rs.

Rs.

12,800 By Sales

Rs.

2,30,000

1,60,000 1,59,200

2,27,900

2,100 15,500 54,190 By Closing Stock

To Freight and Carriage To Wages

2,27,090 16,000 700 16,700

2,43,790 To Rent To General Expenses To Rates and Taxes To Insurance To Postage and Telegrams To Packing Charges To Provision for debts

5,000 1,480 1,800 900 3,800 400

2,43,790 54,190 By Interest on Investments By Interest on Loan to Krishna

5,800 320

1,500 1,280 350 3,130 2,880 Goodwill written off To Depreciation : Land and Building Plant and Machinery

8,000

750 1,000 800 33,500 60,310

60,310

Final Accounts of Sole Trading Concerns

119

Balance Sheet as on 31st December 2004 Liabilities Creditors Bills Payable Bank Over Draft Capital

Rs.

1,00,000 33,500 1,33,500 6,000

Rs.

Assets

Rs.

12,590 Cash in Hand 4,600 25,000 Bills Receivable Sundry Debtors

2,500 1,200 6,200 16,500 16,150

1,27,500 15,340 13,840 Closing Stock

16,000 700

16,700 60,000

Investments Plant and Machinery

10,000 9,000

Land and Buildings

25,000 24,250

Loan to Krishna Goodwill

4,000 40,000 32,000

1,69,690

1,69,690

Furniture Sale in Sales Book, Private Purchase, Sales Book Overcast, Wages Outstanding Treatment, Fall in Stock Value Illustration 16 From the following Trial Balance of a trader you are required to prepare Trading and Profit and Loss Account for the year ending 31st December 2004 and a Balance Sheet as on that date: Rs.

Rs.

Cash in Hand

1,000

–

Stock

3,500

–

–

3,900

19,200

–

Creditors Debtors Drawings Sales Purchases

5,130

–

–

92,800

81,200

–

Wages

7,200

–

General Expenses

5,170

–

Furniture

4,000

–

Goodwill

3,000

–

–

32,700

1,29,400

1,29,400

Capital

Financial Accounting

120

Adjustments: (a) Furniture (book value on 1st January 2004 Rs. 400) was sold on 30th June 2004 for Rs. 450 and was passed through the Sales Book. (b) Depreciate furniture at 10% p.a. (c) Private purchases amounting to Rs. 100 were passed through the Purchase Day Book. (d) Sales Book was overcast by Rs. 50. (e) Wages outstanding Rs. 50 though included in the Wages Account was not included in the Trial Balance. (f) Stock at the end was valued at Rs. 4,500. In view of the constant fall in prices, it has been decided to write off stock by 10%. (Mysore, B.Com) Solution Trading and Profit and Loss Account for the year ended 31st December 2004 Rs. To Opening Stock To Purchases

Rs.

Rs.

3,500 By Sales 81,200 81,100

92,300

7,200 By Closing Stock 4,550

To Wages

To General Expenses To Depreciation Furniture ¥ 1 year ¥ 6/12

Rs.

92,800

4,050

96,350

96,350

5,170

4,550 Sale price

360 20

4,500

450 70

380 By Net Loss

930

5,550

5,550

Balance Sheet as on 31st December 2004 Liabilities Creditors Wages Outstanding Capital

Rs.

32,700

Rs.

Assets

3,900 Cash in hand 50 Debtors Closing Stock

Rs.

Rs. 1,000 19,200

4,500 4,050

27,470 26,540 Furniture

4,000 3,620 3,240

Goodwill 30,490

3,000 30,490

Final Accounts of Sole Trading Concerns

121

Machinery Purchased-Payment Due, Wages for Erection, Drawings in Stationery, Provision for Debts, Discount on Debtors and Creditors, Loss of Stock Illustration 17 From the following Trial Balance of Deepak, you are required to prepare a Trading and Profit and Loss Account for the year ended on 31st December 2004 and a Balance Sheet as on that date after making the necessary adjustments: Dr. Capital and Drawings Purchases and Sales Returns Freehold Property Plant and Machinery Salaries Printing and Stationery Furniture and Fixtures Discount Bills Payable Opening Stock Wages Sundry Debtors and Creditors Insurance Charges Gas and Fuel Bad Debts Freight and Duty Loose Tools 1st Jan Factory Lighting Provision for Doubtful Debts 1st Jan Interest on Loan to Prem Cash at Bank Cash in Hand

Rs. 10,000 84,000 2,000 60,000 1,00,000 14,000 2,000 4,000 1,500 – 30,000 37,000 25,000 3,000 2,700 600 2,600 5,000 2,000 2,600 – 40,000 – 25,000 5,500

Cr. Rs. 2,00,000 2,10,000 1,000 – – – – – – 5,700 – – 40,000 – – – – – – – 800 – 1,000 – –

Adjustments: 1. Wages Rs. 1,500 and Salaries Rs. 700 were outstanding. 2. Insurance prepaid Rs. 400. 3. A new machinery was installed on 30th Sept 2004, costing Rs. 15,000, but it was not recorded in the books and no payment was made for it. Wages Rs. 1,000 paid for its erection have been debited to wages. 4. Loose Tools were valued at Rs. 1,500 on December 2004. 5. Depreciate plant and machinery by 10% and furniture and fixtures by 5%. 6. Drawings account balance includes an item of Rs. 200 drawn in cash for the purchase of stationery which was used in business. 7. Maintain a provision of 5% on sundry debtors for doubtful debts and 2% for discount on debtors and 2% discount on creditors. 8. Stock on 31st December 2004 was Rs. 70,000. 9. Stock of the value of Rs. 5,000 was destroyed by fire on 25th December 2004 and the insurance company admitted a claim of Rs. 4,000. (Mangalore, B.Com)

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Financial Accounting

Solution Trading and Profit and Loss Account of Mr. Deepak for the year ended 31st December 2004 Rs. To Opening Stock To Purchases

Rs.

Rs.

30,000 By Sales

Rs.

2,10,000

84,000

2,08,000 83,000

To Wages

By Closing stock By Insurance Co.

37,000 1,500

70,000 4,000

38,500

1,000 37,500

To Gas and Fuel To Freight and Duty To Factory Lighting

2,700 5,000 2,600 1,22,200 2,83,000

To Salaries

14,000 700

To Printing and Stationery

2,000 200

2,83,000 1,22,200

14,700 By Interest on Loan

1,000 1,000

2,000

By Provision for 2,200 Discount on Creditors 1,100 1,500

To Discount To Insurance

3,000 2,600 2,600

To Trading A/c 1,000 To Provision for debts

1,250 600 Nil 1,850 1,050 To Provision for discount on debtors Debtor balance

25,000 Nil 23,750 475

To Depreciation Loose Tools Plant and Machinery

500 10,000 400

10,400

¥ 3/12 Furniture and Fixtures

200 88,075 1,25,300

1,25,300

Final Accounts of Sole Trading Concerns

123

Balance Sheet as on 31st December 2004 Liabilities Capital

Rs.

Rs.

Assets

2,00,000 88,075

Cash in Hand Cash at Bank Closing Stock Sundry Debtors

2,88,075 9,800

Rs.

Rs. 5,500 25,000 70,000

25,000

2,78,275 23,275

Creditors-opening

40,000 15,000

Insurance Co. due Prepaid Insurance

55,000

Plant and Machinery

discount on creditors

53,900

1,00,000 15,000 1,000 1,16,000

5,700

Bills Payable Outstanding Wages Salaries

4,000 400

1,05,600 1,500 700 Freehold Property Furniture and Fixtures

60,000 4,000 3,800

Loose Tools

2,000 1,500

Loan to Prem

40,000

40,000 ¥ 1,000 41,000 3,40,075

3,40,075

Bad debts in Trial Balance and in Adjustment, Provision for Debts, Provision for Discount on Debtors, Creditors, Bill Receivable Discounted Illustration 18 The following is the Trial Balance of Mr. X on 31st December 2004 and it is desired to prepare Final Accounts showing the results of the transactions for the year: Debit Balances Plant and Machinery

Rs.

Credit Balances

Rs.

5,000 Capital

4,000

260 Sales

48,000

Opening Stock

4,800 Bills Payable

Motor Vans

1,200 Sundry Creditors

Sundry Debtors

4,570 Doubtful Debts Reserve

560 5,200 250

Cash in Hand

40 Returns Outwards

550

Cash at Bank

650 Discount Received

370

Wages : Factory

15,000

Purchases

21,350

1,400 Bills Receivable

720

Returns Inwards

930 Contd.

Financial Accounting

124 Contd. Drawings

700

Rent

600

Factory Lighting and Heating

80

Telephone

35

Insurance

30

Advertising

565

General Expenses

100

Bad Debts

250

Discount Allowed

650

The following adjustments are to be made: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.

Stock on 31st December 2004 valued at Rs. 5,200. Rent due, but not paid till 31st Dec. 2004 Rs. 200. 3 months factory lighting and heating due but not paid Rs. 30. Insurance paid in advance Rs. 10. 10% depreciation to be written off plant and machinery. 5% depreciation to be written off for furniture. 25% depreciation to be written off for motor van. Write off further bad debts Rs. 70. The provision for doubtful debts to be increased to Rs. 300. Discounts of 2.5% on debtors and creditors are to be anticipated. Bills receivable Rs. 400, not yet due, were discounted on 31st Dec. 2004. (Madurai, B.Com)

Solution Trading and Profit and Loss Account for the year ended 31st December 2004 Rs. To Opening Stock To Purchases

Rs.

Rs.

4,800 By Sales 21,350 550

47,070 20,800 By Closing Stock

To Wages To Factory Lighting

Rs.

48,000

5,200

15,000 80 30

110 11,560

To Rent

To Telephone To Insurance

600 200

52,270

52,270

1,400

11,560 370

By Discount Received 800 By Discount on Creditors ¥ 35

130

30 20

To Advertising To General Expenses To Discount Allowed

565 100 650 Contd.

Final Accounts of Sole Trading Concerns

125

Contd. To Provision for debts 300 250 70 620 370 To Provision for Discount on Debtors ¥ To Depreciation Plant and Machinery Furniture Motor Van

107

500 13 300 7,200 12,060

12,060

Balance Sheet as on 31st December 2004 Liabilities Capital

Rs.

Rs.

Assets

4,000 7,200

Cash in Hand

Rs.

440 650

11,200 Cash at Bank 10,500 Sundry Debtors Sundry Creditors

Rs.

40 400

4,570

5,200

Discount Bills Payable Outstanding Expenses Rent Factory, Lighting and Heating

5,070 560

on Debtors 4,093 Bills Receivable

720

200 30 Closing Stock Insurance Prepaid Furniture and Fittings

320 5,200 10 260 247

Motor Vans

1,200

Plant and Machinery

5,000

900

4,500 16,360

16,360

Points to Remember Final Accounts consists of Trading A/c, Profit and Loss A/c and a Balance Sheet. Trading A/c is prepared to find out Gross Profit or Gross Loss. Profit and Loss A/c is prepared to find out Net Profit or Net Loss. Balance Sheet is a statement. It is prepared to reveal the true and fair view of the state of affairs of a concern on a particular date.

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Financial Accounting

Examination Questions I. Objective Questions 1. Fill in the blanks (a) Goodwill and Copyright are the examples of __________________ assets. (b) While making the adjusting entry in respect of depreciation ______ account is credited. (c) Stock of material_________________ is called Opening Stock. (d) Fixed assets are not intended for_________________ . (e) Liquid assets are readily convertible into__________________ . 2. Choose the correct answers (i) Current liabilities are such obligations which are to be satisfied. (a) Within one year (b) Within two years (c) Within three years (ii) Interest on capital is (a) Expenditure for business (b) Expense for business (c) Income for business (iii) The Provision for Bad and Doubtful debt is made by crediting (b) Debtors Account (c) Provision for Bad Doubtful Debt Account (iv) While making an adjusting entry in respect of Closing Stock, we debit (a) Closing Stock (b) Trading Account (c) Purchase Account 3. Mach the following Balance Sheet

a

Intangible Assets

Trading Account

b

Current Assets

c

A Statement

Book Debts

d

Goodwill

e

4. State whether the following statements are True or False (i) All liabilities which become due for payment in one year are classified as long term liabilities. (ii) Balance Sheet is a statement prepared on a specified date. (iii) Carriage inwards are debited to Profit and Loss Account. (iv) Capital Account will appear on the Asset side of Balance Sheet. (v) Wasting Assets are fixed assets which depreciated due to wear and tear. Answers 1. (a) Intangible, (d) Resale,

(b) Assets A/c, (c) In the beginning of the year, (e) Cash.

Final Accounts of Sole Trading Concerns

2. 3. 4.

(i) a; (i) c; (i) False;

(ii) b; (ii) d; (ii) True;

(iii) c; (iii) e; (iii) False;

127

(iv) a (iv) b; (v) a (iv) False; (v) True

II. Descriptive Questions A. Very Short Answer Questions 1. What is Balance Sheet? 2. What is Gross Profit? 3. What are Current Assets? 4. What do you mean by Direct Expenses? 5. Write an entry for Closing Stock. B. Short Answer Questions 1. What are the advantages of preparing Trading Account? 2. What are the components of Final Account? 3. Explain the meaning of Order of Realisability. 4. Write a proforma Balance Sheet according to order of permanence. 5. What is the purpose of preparing Manufacturing Account? C. Detail Answer Questions 1. Explain in detail the items usually appear both Debit and Credit side of Trading Account. 2. What is Balance Sheet? Explain in detail the various assets of an organisation? 3. Explain the procedures for preparing Trading and Profit and Loss A/c in detail. III. Exercise Problems Adjusting Journal Entries

Problem 1 Pass journal entries to incorporate the following at the time of preparing final accounts: (a) Provide 2.5% for discount on Debtors and a Bad Debts Provision @ 10% on Debtors. (Debtors Rs. 30,000). (b) Closing stock was valued at Rs. 43,000. (c) Wages owing Rs. 2,500. (d) Insurance paid in advance Rs. 1,500. (e) Included in Debtors is Rs. 1,000 owing by the proprietor. (f) Plant which stood Rs. 75,000 in the books on the Ist day of the year was disposed of for Rs. 30,000 in part exchange for a new machine costing Rs. 60,000. A net invoice of Rs. 30,000 passed through Purchase Book. (g) Purchase invoices amounting Rs. 15,000 had been omitted from the books. (h) A neon sign costing Rs. 7,500 was included advertising. (i) The Debits for two dishonoured cheques for Rs. 4,500 and Rs. 3,000, respectively had not been entered in the Cash Book. In the case of the second

128

Financial Accounting

cheque for Rs. 3,000, it was expected that the Debtors would be in a position to pay a dividend of 75 paise in the rupee. (j) Private purchases amounting to Rs. 15,000 had been included in Purchase Book. Journal Entries on Provision for Debts

Problem 2 On 1st July 2003, M/s. Purohit and Company had a Provision for Bad Debts of Rs. 6,067 against their book debts. During the year ended on 30th June 2004, Rs. 6,524 proved to be bad and they desire to maintain the provision for Bad Debts @ 4% on book debts which stood at Rs. 1,93,560 without any adjustment for Bad Debts. Show the journal entries on 30th June 2004 in the books of the firm to record these adjustments. [Ans. New Provision Rs. 7,481; Provision debited to P and L A/c Rs. 7,938] (Madras, B.Com)

Problem 3 On 1st April, 2003 a firm had an existing provision for Bad debts of Rs. 800. On 31st March, 2004, the total debtors amounted to Rs. 20,500 out of which Rs. 600 were bad and had to be written off. The firm wants to maintain a provision @ 5% per annum on debtors. You are required to show Provision for Bad Debts Account, Profit and Loss Account, Bad Debts Account and Balance Sheet. [Ans. New Provision A/c Rs. 995; Debited to Profit and Loss A/c Rs. 795; Net Debtors as per Balance Sheet Rs. 18,905] Bad Debts Account, Provision for Debts Account, Final Account

Problem 4 The following is the extract from the Trial Balance of Mr. A as on 31st December 2004.

Bad Debts Sundry Debtors Provision for Doubtful Debts

Dr.

Cr.

Rs.

Rs. 4,000

–

1,50,000

–

–

6,000

It is desired to maintain a provision of 5% for Bad and Doubtful debts. Give the necessary journal entries. Prepare Bad Debts Account and Provision for Bad and Doubtful Debts Account. Also show how the relevant items would appear in the Profit and Loss Account and Balance Sheet. (Madurai, B.Com) [Ans. New Provision Rs. 7,500; Debited to Profit and Loss A/c Rs. 5,500; Net Debtors as per Balance Sheet Rs. 1,42,500]

Final Accounts of Sole Trading Concerns

129

Provision for Debts, Provision for Discount on Debtors Account

Problem 5 The following items have been given in the Balance Sheet as on 31st December 2003. Rs. Debtors

Rs. 20,000

Less : Reserve for Bad Debtors

1,000 19,000

Less : Reserve for Discount on Debtors

570

18,430

The Debtors were for Rs. 36,000 on 31st December 2004. Bad debts incurred in 2004 were Rs. 300 and discounts allowed Rs. 200. It is the practice to maintain provisions for bad debts and for discounts on debtors at 5 per cent and 3 per cent, respectively. Prepare the Provision for Bad Debts Account and also Provision for Discounts on Debtors Account, showing how such items appear in the Profit and Loss Account and the Balance Sheet. (Madurai, B.Com) [Ans. New Provision Rs. 2,100; Debited to Profit and Loss A/c Rs. 1,100; New Provision for Discount on Debtors Rs. 1,026; Debited to Profit and Loss A/c Rs. 656; Net Debtors as per Balance Sheet Rs. 33,174] Manufacturing and Trading Account

Problem 6 The following are the balances in the ledger of Mr. Bahadur for the year ended on 31st March 2005: Particulars Discount Carriage Inwards Rent, Rates and Taxes Printing and Stationery

Amount Rs. Dr.

Particulars

Amount Rs.

2,000 Fuel and Coal

10,500

8,000 Factory Power

15,000

14,200 Depreciation on Plant 2,000 Opening Stock of Raw Materials

11,000 1,20,200

Purchase of Raw Materials

2,52,800 Opening Stock of Finished Goods

52,400

Sales

4,40,000 Factory Wages

52,600

Prepare manufacturing and trading account for the year ended on 31st March 2008. The stock as on 31.3.2008 was: raw materials Rs. 46,900 and finished goods Rs. 1,52,300. [Ans. Cost of production Rs. 4,23,200; Gross Profit Rs. 1,16,700] Preparing Trial Balance to Find Capital

Problem 7 Prepare a Trial Balance, Trading and Profit and Loss Account for the year ending on 30th June 2004 and a Balance Sheet as on that date:

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Financial Accounting

Cash Opening Stock Debtors Sales Wages Creditors Bad Debts Provision Carriage Trade Mark Advertising Salaries Machinery

Rs. 370 5,700 3,200 63,900 13,200 5,200 400 300 5,300 1,250 10,900 28,900

Rs. 28,000 5,000 6,500 1,700 2,300 3,600 12,000 500 700 300 8,500 ??

Land and Buildings Rent Received Bills Receivable Travelling Expenses Insurance Purchases Purchase Returns Bad Debts Bank Capital

Adjustments: 1. Closing Stock valued at Rs. 3,200, included damaged goods worth Rs. 200 which had to be written off 2. Depreciate Machinery by 20% and Land and Buildings by 10% 3. Insurance prepaid Rs. 600 4. Rent received included Rs. 300 relating to July 2004 5. Provide for Bad Debts Reserve @ 5% on Debtors. (Kerala, B.Com) [Ans. Opening Capital Rs. 57,720; Gross Profit 29,900; Net Profit 7,610; Balance Sheet 70,830] Interest Outstanding, Debtor Insolvent, Loss on Fire

Problem 8 The Trial Balance of Mr. X as on 31st December 2004 was as follows:

Purchases Sales Reserve for Doubtful Debts Sundry Debtors Sundry Creditors Bills Payable Opening Stock Wages Salaries Furniture Postage Power and Fuel Trading Expenses Bad Debts Cash in hand and at Bank Outstanding Wages Trading Expenses accrued but not paid Drawings Capital

Dr.

Cr.

Rs.

Rs.

1,62,505 – – 50,200 – – 26,725 23,137 5,575 7,250 4,226 1,350 5,831 525 3,000 10,000 – – 4,452 – 3,04,776

– 2,52,400 5,200 – 30,526 3,950 – – – – – – – – – – 2,000 700 – 10,000 3,04,776

Final Accounts of Sole Trading Concerns

131

Prepare the Trading and Profit and Loss Account for the year ended 31st December 2004 and the Balance Sheet as on date taking into account the following information: 1. Depreciation on furniture to be charged at 10% p.a. 2. Sundry Debtors include an item of Rs. 500 due from a customer who has become insolvent. 3. Reserve for Doubtful Debts is to be maintained at 5% on debtors. 4. Goods to the value of Rs. 1,500 have been destroyed by fire and the Insurance Company has admitted the claim for Rs. 1,000. 5. Stock as an 31st December 2004 was Rs. 12,550. (Madurai, B.Com) [Ans. Gross Profit Rs. 52,733; Net Profit Rs. 37,666; Balance Sheet Rs. 80,390] New Machine not Recorded, Wages Treatment, Provision for Debts, Loss on Fire

Problem 9 From the following particulars extracted from the books of Mr. Somu, you are required to prepare a Trading and Profit and Loss Account for the year ended 31st December 2004 and a Balance Sheet as on that date, after making the necessary adjustments: Rs. Capital Account

2,08,000 Bills Payable

Rs. 5,000

Drawings Account

12,000

35,000

Purchases

90,000 Wages

32,000

Returns Inwards

2,000 Sundry Creditors

Land and Buildings

60,000 Postage and Telegrams

40,000 1,400

Plant and Machinery

1,00,000 Insurance Charges

1,600

Sales

2,10,000 Gas and Fuel

2,700

Returns Outwards

1,000 Bad Debts

Salaries

Discount A/c

12,000

Dr.

600 2,600

2,500 Freight and Duty

9,000

5,000 Loose Tools

2,000

1,200 Factory Lighting

1,600

Sundry Debtors

26,600 Provision for Doubtful Debts

Investments

40,000 Interest on Investments

4,000

Cash at Bank

26,600 Cash in Hand

2,400

1. 2. 3. 4.

800

Stock on 31st December 2004 was valued at Rs. 66,000. Wages Rs. 1,600 and Salaries Rs. 600 were outstanding. Insurance prepaid was Rs. 400. A new Machine was installed on 30th September 2004 costing Rs. 14,000, but it was not recorded in the books and no payment was made for it. Wages Rs. 1,000 paid for its erection have been debited to Wages Account. 5. Loose Tools were valued at Rs. 1,600 on 31st December 2004. 6. Depreciate Plant and Machinery by 10% p.a., Furniture and Fixtures by 5% p.a., and Land and Buildings by 2% p.a.

132

Financial Accounting

7. Of the Sundry Debtors Rs. 600 are bad and should be written off. 8. Maintain a provision of 5% on Sundry Debtors for doubtful debts. 9. Stock valued at Rs. 1,500 was destroyed by fire on 25.12.2004, but the Insurance Co. admitted a claim for Rs. 1,000 only. (Madurai, B.Com) [Ans. Gross Profit Rs. 1,05,600; Net Profit Rs. 73,675; Balance Sheet Rs. 3,30,875] Provision for Debts, Discount on Debtors, Creditors, Loss on Fire

Problem 10 From the following Trial Balance of Ramesh as on 31st Dec. 2004 prepare a Trading and Profit and Loss Account for the year ended 31.12.2004 and a Balance Sheet as on that date after making necessary adjustments. Debit Balances : Drawings

Rs.

Credit Balances

3,000 Capital 10,000 Sundry Creditors 2,500 Sales

Stock Purchases Returns Inwards Sundry Debtors

7,500 Return Outwards 41,000 Reserve for Doubtful Debts 1,000 Discounts 10,300 Rent Received

Furniture and Fixtures

2,500

Freight and Duty

1,000

Carriage Outwards Rent, Rates and Taxes

5,000 60,000 500 200 400 600

250 400

Trade Expenses

200

Postage and Telegrams

400

Salaries and Wages

40,000

2,300

Printing and Stationery

Insurance Charges

Rs.

350 10,650

Cash in Hand

3,100

Cash at Bank

10,250 1,06,700

1,06,700

Adjustments: 1. 2. 3. 4. 5.

Stock on 31.12.2004 was valued at Rs. 7,300. Write off Rs. 300 as bad debts. The Reserve for doubtful debts is to be maintained at 5% on debtors. Create a reserve for discounts on debtors and creditors at 2%. Depreciate Furniture and Fixtures at 5% p.a. and Plant and Machinery at 20% p.a. 6. Insurance prepaid was Rs. 50. 7. A fire occurred on 26th Dec.2004 in the godown and stock of the value of Rs. 2,500 was fully insured and the Insurance Company admitted the claim in full. (Madurai, B.Com) [Ans. Gross Profit Rs. 19,800; Net Profit Rs. 3,235; Balance Sheet Rs. 45,135]

7

Accounts from Incomplete Records or Single Entry System

Learning Objectives After studying this chapter, you should be able to understand the

SINGLE ENTRY SYSTEM Accounting records are not properly maintained under this system. If the accounting records are not maintained properly as in the case of Double Entry System, it can be termed as accounts from incomplete records or Single Entry System. Very few sole traders keep their accounts according to the principles of Double Entry System. But most of the sole trader do not maintain proper books of Accounts. They maintain only Cash Book and Personal Accounts for their convenience. In other words, they do not maintain Nominal Accounts. Therefore, this Single Entry System is a kind of Imperfect Double Entry System. Kohler defines this system as follows: “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, varying with circumstances”.

Types of Single Entry (i) Pure Single Entry—If only Personal Accounts are maintained, it is called Pure Single Entry. (ii) Quasi Single Entry—This system goes beyond the keeping of Personal Accounts but falls short of complete system of Double Entry. It is also known as Single Entry in popular sense.

Characteristics of Single Entry System 1. It is an incomplete or defective double entry system.

134

Financial Accounting

2. In this system, Cash Book and Personal Account are maintained. 3. The Cash Book, under this system, consists of both business and personal transactions of the proprietor. 4. The proprietor has to depend on original vouchers for information relating to credit purchases and sales made. 5. Since, the records are maintained according to the convenience of the proprietor, there is no uniformity in maintaining the accounting records under this system. Sheet from the incomplete records.

Difference between Single Entry System and Double Entry System 1. Single Entry System is a system of incomplete records, whereas Double Entry System is a system of complete records. 2. Under Single Entry System, Cash Book and Personal Account are maintained, whereas under Double Entry System, Personal, Real and Nominal Accounts are maintained. 3. Accounting information is not reliable under Single Entry System because of incomplete records, whereas accounting information are very much reliable under Double Entry System because a complete record of business transactions is maintained. 4. Trial Balance cannot be prepared to check the accuracy of business transactions under Single Entry System, whereas Trial Balance can be prepared under Double Entry System. prepared under Single Entry System, whereas they can be prepared under Double Entry System.

Defects of Single Entry System 1. This system does not record both debit and credit aspects of business transactions. So it is not a scientific system. 2. It is not possible to check arithmetical accuracy of business transactions under this system. prepared because Real and Nominal Accounts are not maintained. 4. Accounting information from incomplete records is not reliable. 5. Since accounting information are not reliable, obtaining loans from banks and financial institutions is difficult. 6. It is not be possible to assess the financial strength or true and fair view of an organisation because of lack of complete information.

Methods of Ascertaining Profit Profit earned by an organisation under this system, can be ascertained by the following two methods.

Accounts from Incomplete Records or Single Entry System

135

(i) Net Worth Method or Statement of Affairs (ii) Conversion Method

(i) Net Worth Method To ascertain profit of a business, Trading Account and Profit and Loss Account are prepared, but under Single Entry System it is not possible because of lack of adequate information. Therefore, under this system, profit is ascertained by preparing Statements of Affairs. A Statement of Affairs is defined as “any statement showing the assets, liabilities and net worth of an enterprise”. Therefore, it is similar to Balance Sheet. The excess for assets over liabilities is capital. The Statements of Affairs in the beginning and at the end are prepared to find out opening capital and closing capital, respectively. After ascertaining capitals, they are compared with each other. If Closing Capital (at the end) is more than the opening capital (in the beginning) the difference is Profit. If closing capital is less than the opening capital, the difference is Loss. Moreover, it is necessary to consider other adjustments (i.e., additional capital, drawing, etc.) to ascertain profit or loss. This profit (loss) is further adjusted for depreciation, interest on capital, drawings, provision for bad debts to calculate net profit (or loss). This method is also known as Capital Comparison Method. Formula of ascertaining profit is as follows Net profit = Capital at the end + Drawing – Additional Capital – Opening Capital Statement showing profit or loss for the year Capital at the end of the year

xxx

Add: Drawings

xxx xxx

Less: Additional Capital introduced during the year

xxx xxx

Less: Capital in the beginning of the year

xxx xxx

Difference between Balance Sheet and Statement of Affairs 1. Balance Sheet is prepared in Double Entry System, whereas Statement of Affairs is prepared in Single Entry System. 2. In the case of Balance Sheet, Assets are equal to Liabilities, whereas, in Statement of Affairs, Assets are not equal to Liabilities (the difference is Capital). 3. It is easy to locate any omission made in items of Balance Sheet because of omissions, the Balance Sheet does not tally. Whereas, it is difficult to locate any omission made in the case of Statement of Affairs. 4. Balance Sheet is prepared only to find out financial position (true and fair) of a business. Whereas Statement of Affairs is prepared to find out both financial position and trading results of business.

136

Financial Accounting

(ii) Conversion Method Under this method the Single Entry (incomplete) System is converted into Double Entry (complete) System to ascertain profit or loss for a particular period of time. Steps in Conversion First, prepare a Statement of Affairs to find out the Opening Capital, if the same is not given in the problem. Sometimes information required to prepare Statement of Affairs are not given and in that case the missing information is found out by preparSecondly, prepare Cash Book to find out either cash balance in the beginning or at the end. When both the balances are given, if debit side (receipts) total is more than credit side (payment) total the difference can be sundry expenses, drawing or cash purchases, and if credit side is more than the debit side, the difference can be treated as sundry income, cash sales or additional capital introduced during the year. Thirdly, prepare all other accounts namely, Total Debtors Account, Bills Receivable Account, Total Creditor Account, Bills Payable Account, etc. By preparing these debtors, creditors, etc. to ascertain gross profit, net profit and also financial position of an organisation. For ascertaining profit under Conversion method, the following ledger account are prepared: Debtors Account Date

Particulars

Date

Particulars

Rs.

Date

Particulars

Rs.

Particulars

Rs.

Bills Receivable Account Rs.

Date

Accounts from Incomplete Records or Single Entry System

137

Creditors Account Date

Particulars

Date

Particulars

Rs.

Date

Particulars

Rs.

Particulars

Rs.

Bills Payable Account Rs.

Date

Cash Book Receipts

Cash

Bank

Payment

Cash

Bank

Index for Illustrations Type

Ill. No.

I

FINDING MISSING FIGURE

1 – 11

II

STATEMENT OF AFFAIRS

12 – 14

III

CONVERSION METHOD

15 – 25

I – FINDING MISSING FIGURE Illustration 1 Calculate the Closing Stock:

Financial Accounting

138

Sales Rs. 3,00,000; Purchase Rs. 2,50,000; Carriage Inwards Rs. 3,500;

Opening Stock Rs. 25,000; Wages Rs. 5,000; Rate of Gross Profit on cost 20%.

Solution Memorandum Trading Account Particulars

Rs.

Particulars

Rs.

¥

*Working Note: cost price That is cost price is 100 and the gross profit is 20; Sale Price = Cost Price + Gross Profit; Cost Price (100) + Gross profit (20) = Sale Price (120) [Ans. Closing stock = Rs. 33,500]

Illustration 2 Calculate the Opening stock

Solution Memorandum Trading Account Particulars

Rs.

Particulars

*Working Note: That is cost price is 6 and the gross loss is 1; = Sale Price (5)

Rs.

Accounts from Incomplete Records or Single Entry System

139

[Ans. Opening Stock = Rs. 44,000]

Illustration 3 From the following facts, you are required to determine the amount of total sales: Opening stock Rs. 8,000; Purchases Rs. 40,000; Closing stock Rs. 7,000; Gross

Solution Memorandum Trading Account Particulars

Rs.

Particulars

Rs.

¥

(a) To find Gross Profit Ratio on cost of goods sold That is sale price is 6 and the gross profit is 1; Cost or cost of goods sold = Sale Price – Gross Profit; Cost of goods sold = Sale Price (6) – Gross Profit (1) = 5 (b) To find Sales Cost of goods sold = Opening Stock (8,000) + Purchases (40,000) – Closing Stock (7,000) = 41,000 *Sales = Cost of goods sold + Gross Profit on cost of goods sold ¥ 41,000 = 8,200) = Rs. 49,200 [Ans. Total sales = Rs. 49,200]

Finding Total Sales Illustration 4 From the following data, calculate Total Sales made during the year 2004:

140

Financial Accounting

Solution Debtors Account Particulars

Rs.

Particulars

Rs.

Cash Sales + Credit Sales = Total Sales 12,000 + 60,075 = Rs.72,075 [Ans. Total Sales = Rs. 72,075]

Finding Bills Receivable Illustration 5 Calculate bills received from customers:

Solution Bills Receivable Account Particulars

Rs.

Particulars

Rs.

[Ans. Bills Receivable from Debtors = Rs. 32,000]

Finding Opening balance of Bills Payable Illustration 6 Based on the information, find the Opening balance of Bills Payable: Bills Payable issued Rs. 40,000; Bills Payable paid Rs. 25,000 Bills payable dishonoured Rs. 15,000; Bills Payable as on 31st Dec. Rs. 17,000

Accounts from Incomplete Records or Single Entry System

141

Solution Bills Payable Account Rs.

Rs.

Finding Total Purchases Illustration 7 From the following facts supplied by Mr. Arun who keeps his books on single entry, you are required to calculate total purchases:

Solution Sundry Creditors Account Particulars

Rs.

Particulars

Rs.

Bills Payable Account Date

Particulars

Rs.

Date

Particulars

Rs.

Cash purchases + Credit purchase = Total Purchase 1,29,000 + 2,01,500 = Rs. 3,30,500 [Ans. Rs. 3,30,500]

Finding Credit Sales and Credit Purchases Illustration 8 Based on the details given below, find the credit sales and credit purchases: Cash Receipts and Payments:

Rs.

142

Financial Accounting

Note: Discounts allowed Rs. 500 and discounts earned Rs. 350. Solution Total Debtors Account Rs.

Rs.

Rs.

Rs.

Rs.

Rs.

Rs.

Rs.

[Ans. Credit Sales Rs. 70,700; Credit Purchases Rs. 1,04,990]

Illustration 9 Find out Profit from the information given below:

Accounts from Incomplete Records or Single Entry System

143

Solution To find the Profit or Loss

Illustration 10 Sankar started his business with Rs. 25,000 as capital on January 1, 2000. During the year he introduced Rs. 4,000 as additional capital and withdrew at the rate of Rs. 600 per month. On Dec. 31, 2000, his position was as follows:

He keeps his books under the single entry method. Determine his profit or loss for the period 2000. Solution

Liabilities

Rs.

Assets

Rs.

Rs. ¥

144

Financial Accounting

Illustration 11 Panwar commenced business on January 1, 1998 with a capital of Rs. 10,000, which he paid into the bank account opened for that purpose. On the same date he bought stock valued at Rs. 6,500 and furniture which cost Rs. 2,000. He kept his books on single entry basis. On 31st Dec. 1988, stock valued at Rs. 8,300. There were book debts amounting to Rs. 3,400 of which Rs. 200 represented debts which were irrecoverable. Creditors amounted to Rs. 3,600 and the cash book showed a balance of Rs. 1,650 but according to pass book, the balance at Panwar’s credit was only Rs. 1,450, he having given his son Rs. 200 and omitted to enter in the Cash Book. Panwar withdrew Rs. 500 worth of goods from his shop. He took 1,000 as loan from his wife during the year. Prepare a statement showing profit or loss in the business for the year ending 31st December, 1998 from the above information. Solution

Liabilities

Rs.

Assets

Rs.

Rs.

II – STATEMENT OF AFFAIRS Illustration 12 Abdul keeps his books by single entry system. He supplies you the following information relating to his business for the year 1999.

Accounts from Incomplete Records or Single Entry System

1.1.1999 (Rs.)

145

31.12.1999 (Rs.) – –

–

Abdul had written Rs. 500 per month for his personal use. He had introduced Rs. 2,000 as additional capital on 4th August 1999. He desires that provision of 5% on Debtors should be made. Write off 10% as depreciation on furniture and office equipment. Ascertain profit or loss for the year 1999. Solution

Liabilities

Liabilities

Rs.

Rs.

Assets

Rs.

Assets

Rs.

Rs. ¥

146

Financial Accounting

Illustration 13 Ramesh keeps his books on single entry basis. Prepare a statement of affairs as on 31.10.1992 and a statement of profit (or) loss the period ending 31.10.1992. Assets and Liabilities

1.11.91(Rs.)

31.10.1992 (Rs.)

Ramesh had withdrawn Rs. 2,000 during the year and had introduced fresh capital of Rs. 4,200 on 1.7.1992. A provision of 5% on debtors is necessary. Write off depreciation on plant at 10% and furniture at 15%. Interest on capital is to be allowed at 5%. Solution

Liabilities

Liabilities

Rs.

Rs.

Assets

Assets

Rs.

Rs.

Accounts from Incomplete Records or Single Entry System

147

Rs. ¥

583

Opening Capital, Closing Capital, Statement of Profit, P and L Account and Adjusted Statement of Affairs Illustration 14 A retail trader had not kept proper books of accounts, but from the following details, and also to prepare his Statement of Affairs on at that date:

The drawings during the year amounted to Rs. 2,400. Depreciate Fixtures and Fittings by 10%. Rs. 600 is irrevocable from Debtors. Provide 5% Reserve for Doubtful Debts and a Reserve of Rs. 200 in respect of Bills Receivable. Solution

Liabilities

Rs.

Assets

Rs.

148

Financial Accounting

Liabilities

Rs.

Assets

Rs.

Rs.

Rs.

Liabilities

Rs.

Rs.

Rs.

Assets

Rs.

Rs.

Accounts from Incomplete Records or Single Entry System

149

III – CONVERSION METHOD Opening Capital, Credit Sales, Credit Purchases – Not Given Illustration 15 The position of Mohan’s business as on 1.1.98 was as under: Sundry Creditors Rs.1,70,000; Freehold Premises Rs. 5,00,000; Stock Rs. 2,50,000; Sundry Debtors Rs. 2,00,000; Furniture Rs. 20,000. An abstract of the Cash Book is appended below: Liabilities

Rs.

Assets

Rs.

The following additional information is available: Closing Stock Rs, 3,00,000; Closing Debtors Rs. 2,50,000; Closing Creditors Rs. 1,20,000. No additional were made during the year to premises and furniture but 1 they are to be depreciated @ 10% and 15%, respectively. A bad debt provision of 2 2 is to be raised. 1998 and a Balance Sheet on that date. Solution Trading and Profit and Loss Account for the year ended 31st December 1998 Particulars

Rs.

Rs.

Particulars

Rs.

Rs.

150

Financial Accounting

Balance Sheet as on 31st December 1998 Liabilities

Rs.

Assets

Rs.

*Working Note: Liabilities

Rs.

Assets

Drawings, Credit purchase, Credit sales–Not given Illustration 16 the year ended 30th June 2004 and a Balance Sheet as on that date:

Rs.

Accounts from Incomplete Records or Single Entry System

151

Cash Transactions:

Note: Shortage of cash to be treated as drawings. Bad debts already written off Rs. 100. Depreciation on Plant had to be provided at 10%. Solution Trading and Profit and Loss Account for the year ended 30.6.04 Rs.

¥

Rs.

Rs.

Rs.

152

Financial Accounting

Balance Sheet as on 30.6.04 Liabilities

Rs.

Rs.

Assets

Rs.

Rs.

Working Note: Liabilities

Rs.

Assets

Rs.

Rs.

Rs.

Rs.

Rs.

Rs.

Rs.

Accounts from Incomplete Records or Single Entry System

153

Capital, Interest on Drawings Illustration 17 Mr. Gopal does not keep his books on Double Entry System. He maintained a Cash Book during the year 2004 from which the following information is obtained:

Assets and Liabilities

1.1.2004 (Rs.)

31.12.2004 (Rs.)

?

On 31st December 2004, stock could not be taken due to some unavoidable circumstances. During the past years, the rate of gross profit was 40% on turnover. After providing depreciation on Buildings at 5% and Interest at 6% on Capital and Drawings, prepare Final Accounts for the year ended 31st December 2004. Solution Trading and Profit and Loss Account for the year ended 31st December 2004

¥

125

¥ ¥

413

154

Financial Accounting

Balance Sheet as on 31st Dec 2004 Liabilities

Rs.

Rs.

Assets

Rs.

Rs.

125

413

Working Note:

Opening stock + Purchases + Gross profit – Sales = Closing stock 3,800 + 7,600 + 4,560 – 11,400 = Rs. 4,560

Cash Sales, Credit Sales, Credit Purchase, Opening Capital – Not Given Illustration 18 Sankaran keeps his books on single entry system. He gives you the following information:

Accounts from Incomplete Records or Single Entry System

155

– –

Receipts and Payments during the year:

2004 and a Balance Sheet after providing for bad debts at 10%. There was a considerable amount of cash sales. Solution Trading and Profit and Loss Account for the year ended 31st December 2004

¥

156

Financial Accounting

Balance Sheet as on 31st December 2004 Liabilities

Rs.

Rs.

Assets

Rs.

Rs.

Working Note:

Liabilities

Rs.

Assets

Rs.

Accounts from Incomplete Records or Single Entry System

157

Closing Debtor, Closing Creditor, Bills Receivable, Bills Payable, Provision for Debts Illustration 19 Mr. Baby keeps his books Single Entry, furnishes the following information: The Statement of Affairs as on 1st January 2004:

A summary of Cash Transactions for 2004:

A list of remaining transactions for 2004:

Provide 5% reserve for doubtful debts and 2% from discount on debtors and depreciate buildings by 5% and plant by 10% p.a. for the period 2004.

158

Financial Accounting

Solution Trading and Profit and Loss Account for the year ended 31st December 2004

¥

323

¥

Balance Sheet as on 31st December 2004 Liabilities

Rs.

Rs.

Assets

Rs.

Rs.

Accounts from Incomplete Records or Single Entry System

159

Working Note:

Credit sales, Bills received, Credit purchase, Bills payable, closing bank, closing capital – Not Given Illustration 20 Mr. Sharma who keeps his books by Single Entry System instructs you to prepare his Balance Sheet as on 31st December 2004 together with the Trading and Profit and year you find the following:

160

Financial Accounting

Particulars of his other assets and liabilities assets and liabilities are as follows : Rs.

Rs.

Capital

83,300

?

Stock

37,400

46,800

Debtors

24,000

28,000

Creditors

18,000

3,000

Bills Receivable

8,000

10,000

Bills Payable

2,000

400

Furniture

1,200

1,200

Buildings

24,000

24,000

8,700

?

Bank

Reserve Rs. 2,000 for doubtful debts and write off 5% depreciation on buildings and furniture. Rs. 3,000 are outstanding wages. (Bangalore, B.Com) Solution Trading and Profit and Loss Account for the year ended 31st December 2004 Rs.

(+) Outstanding

Rs.

56,200 Cash

To Purchases (c) To Wages

Rs.

Rs.

37,400 By Sales

To Opening Stock

Credit (a)

24,000 3,000

17,200 1,06,800

1,24,000

27,000 50,200 By Closing Stock

46,800

1,70,800

1,70,800

To Salaries

13,000

50,200

To Rent, Rates and Taxes

11,560 By Commission

To Reserve for Bad Debts

3,000

2,000

To Depreciation Buildings Furniture

1,200 60 25,380 53,200

53,200

Accounts from Incomplete Records or Single Entry System

161

Balance Sheet as on 31st December 2004 Liabilities

Working Note:

Rs.

Rs.

Assets

Rs.

Rs.

162

Financial Accounting

Depreciation, Credit Purchase, Credit Sales, Opening Capital, Closing Bank Balance Illustration 21 for the year ended 31st December, 1999 and the Balance Sheet as on that date: Receipts for the year ended 31st December 1999

Payments made in the year ended 31.12.1999 625

75 125 475

Assets and Liabilities As on 31.12.1998 (Rs.)

As on 31.12.1999 (Rs.)

625

–

Accounts from Incomplete Records or Single Entry System

163

Solution Trading and Profit and Loss Account for the year ended 31st December 1999 Particulars

Rs.

Particulars

Rs.

475

75 125

Balance Sheet as on 31st December 1999 Liabilities

Rs.

Assets

Rs.

625

Working Note: Particulars

Rs.

Particulars

Rs.

164

Financial Accounting

625

Particulars

Rs.

Particulars

Rs.

Assets

Rs.

625

Liabilities

Rs.

625

Air Conditioner Purchased, Furniture Purchased, Credit Sales, Credit Purchase, Opening Capital, Closing Cash Balance Illustration 22 Mr. Sankar did not maintain his books under Double Entry System as well his Bank the year ended 30.6.1999 as his Balance Sheet as on that date: (a) Assets and Liabilities

30.6.1998 (Rs.)

30.6.1999 (Rs.)

(b) Creditors as on 30.6.1998 include Rs. 15,000 for Purchase of Air Conditioner. (c) Cash Transaction: Particulars

Rs.

(d) Bad-debts written off Rs. 1,200.

Particulars

Rs.

Accounts from Incomplete Records or Single Entry System

165

Solution Trading and Profit and Loss Account for the year ended on 30th June 1999 Particulars

Rs.

Particulars

Rs.

Balance Sheet as on 30th June 1999 Liabilities

Rs.

Assets

Rs.

Working Note: Particulars

Particulars

Rs.

Rs.

Particulars

Particulars

Rs.

Rs.

Financial Accounting

166

(b) Statement of Affairs as on 30.6.98 (to find the opening capital) Particulars

Rs.

Creditors

Particulars

Rs. 19,800

31,000 Stock-in-Trade

Capital-Opening (balance)

2,37,800 Debtors

1,18,000

Building

90,000

Furniture

11,000

Air Conditioner

15,000 15,000

Cash 2,68,800

2,68,800

(c) Cash Account (to find the closing balance) Particulars

Rs.

To Debtors (received)

Particulars 15,000 By Creditors (payment)

To Balance b/d

Rs. 1,44,000 11,500

1,60,800 By Rent and Taxes

1,12,500

To Sundry Income

16,500 By Salaries

To Loan from Mrs. Babu

23,000 By Sundry Expenses

18,000

To Sales-Cash

11,500 By Drawings

30,000

To Capital (additional)

12,000 By Purchases–cash

15,000 15,000

By Air Conditioner (paid)

To Balance c/d (o/d)

1,07,700 By Furniture – Purchased (opening 11,000 – closing 11,500) 3,46,500

500 3,46,500

Opening Capital, Credit Purchase, Credit Sales, Closing Cash/Bank Balance–Not Given Illustration 23 Mr. Bharat keeps his books by Single Entry. During the year 2007, he kept a Cash Book of which the following is an analysis: Rs. Received from Sundry Debtors

Rs.

1,28,000 Paid to Creditors

1,15,400

Additional Capital Introduced on 1st Oct. 2007

16,000 Salaries Paid

6,000

Loan Borrowed at 16% p.a. on 1st July 2007

21,000 Drawings

8,000

Deposits in the Bank during the year Withdrawals from the Bank

1,00,000 General Expenses

7,800

72,000

The following balance existed on 1st Jan. 2007: Sundry Debtors Rs. 30,000; Sundry Creditors Rs. 23,000; Bank Overdraft Rs. 16,000; Buildings Rs. 85,000; Stock Rs. 43,600 and Cash Balance Rs. 1,200. The following balances existed on 31st Dec. 2007: Sundry Debtors Rs. 32,000; Sundry Creditors Rs. 23,800 and Stock Rs. 52,000. Depreciate Building by 5%. Prepare Trading and Profit and Loss Account for the year ended 31st Dec. 2007 and Balance Sheet as on that date.

Accounts from Incomplete Records or Single Entry System

167

Solution Trading and Profit and Loss Account for the year ended on 31st December 2007 Particulars

¥

Rs.

Particulars

Rs.

¥

Balance Sheet as on 31st December 2007 Liabilities

Rs.

Assets

Rs.

Working Note: Particulars

Rs.

Particulars

Rs.

Particulars

Rs.

Particulars

Rs.

Liabilities

Rs.

Assets

Rs.

168

Financial Accounting

Liabilities

Cash (Rs.)

Bank (Rs.)

Assets –

Cash (Rs.)

Bank (Rs.) –

–

–

–

–

–

– –

–

– –

Partnership Illustration 24 The following details are given:

of Rs. 100 for discount on Debtors.

Accounts from Incomplete Records or Single Entry System

169

B share profits and losses equally. Solution Trading and Profit and Loss Account for the year ended 31st December 2004

Balance Sheet as on 31st December 2004 Liabilities

Rs

Assets

Rs.

Working Note: Rs.

Rs.

170

Financial Accounting

Opening Bank Balance, Total Purchases, Total Sales, Receipts during the Year Illustration 25 31.12.2004 and the Balance Sheet as on that date together with workings, if any, in respect of Mr. Adam’s business from the following information: Assets and Liabilities

31.12.2003 (Rs.)

31.12.2004 (Rs.)

(a) Sundry debtors as on 31.12.2004 include Bad debts of Rs. 1,000. (b) Fixed assets include property rented out for which rent of Rs. 500 was received for the year and utilised for personal use. (c) Repairs to premises, etc. amount to Rs. 600 which remained unpaid as on 31.12.2004. (d) All sales receipts were banked after meeting business expense of Rs. 5,000 and personal expenses of Rs. 3,000. (e) Cash purchases and cash sales amounted to Rs. 1,000 and Rs. 2,000, respectively. (f) His account with bankers reveals that withdrawals amounted to Rs. 70,000 and deposits Rs. 90,000 for the year.

Accounts from Incomplete Records or Single Entry System

171

Solution Trading and Profit and Loss Account for the year ended 31st December 2004

Balance Sheet as on 31st December 2004 Liabilities

Working Notes:

Rs.

Rs.

Assets

Rs.

Rs.

172

Financial Accounting

Liabilities

Rs.

Assets

Rs.

Points to Remember maintained by the traders. defective Double Entry System. quasi single entry. Affairs Method and Conversion Method.

capital in the beginning

Examination Questions I. Objective Questions 1. Fill in the blanks (i) The statement of affairs in the beginning is prepared to find out _______________ . (ii) If there are no drawings, the difference between capital at the end and capital in the beginning will show ________________________ .

Accounts from Incomplete Records or Single Entry System

173

(iii) Cash paid to creditors can be located either from cash book or ______________ . (iv) Opening stock + purchases – closing stock =____________________ . (v) The figure of credit sales can be located from ____________ account. 2. Choose the correct answer (i) Under single entry system, net profit is calculated (a) by preparing balance sheet (b) by preparing trading account (c) by comparing the capital at the end with the capital in the beginning (ii) Cash received from debtors can be calculated from (a) Bills Payable Account (b) Creditor Account (c) Debtors Account (iii) Capital at the end is ascertained from (a) Opening statement of affairs (b) Closing statement of affairs (c) Cash Account at the end (iv) Total sales consist (a) cash sales and credit sales (b) cash sales, credit sales, bad debts (c) cash sales, credit sales, sales returns (v) Credit purchases are calculated from (a) Total Creditor Account (b) Total Debtor Account (c) Total Stock Account 3. Match the following: (i)

Cash received

a

(ii)

Credit sales

b

Opening statement of affairs Closing statement of affairs

(iii)

Credit purchases

c

Cash Account

(iv)

Opening capital

d

Debtors Account

(v)

Closing capital

e

Creditor Account

4. State whether the following statement are True or False (i) Single Entry System is one of the systems in accounts. (ii) Books according to Single Entry System can be kept by sole trading concerns. (iii) Only personal accounts and Cash Book transactions are recorded under Single Entry System. (iv) Statement of affairs in prepared to find out both financial position and trading results of a business. (v) It is possible to check arithmetical accuracy of business transactions under Single Entry System. Answers 1. (i) Capital in the beginning,

(ii) Profit,

174

Financial Accounting

(iii) (v) 2. (i) 3. (i) 4. (i)

Creditors Account, Debtors Account c; (ii) c; c; (ii) d; False; (ii) True;

(iv) Cost of sales, (iii) b; (iii) e; (iii) True;

(iv) a. (v) a (iv) a; (v) b (iv) True; (v) False

II. Descriptive Questions A. Very Short Answer Questions 1. Define Single Entry System? 2. What is meant by Statement of affairs? 3. What are the types of Single Entry System? 4. What is pure single entry? 5. What is Quasi Single Entry? B. Short Answer Questions 1. What are the characteristics of Single Entry System? 2. What are methods of ascertainment of profit under Single Entry System? 3. What is net-worth method? 4. What is conversion method? 5. What are the defects of Single Entry System? C. Detail Answer Questions 1. Define Single Entry System? Mention the procedures for calculation profit by (i) Statement of Affairs method and (ii) Conversion method. 2. What is Single Entry System? What are the characteristics and defects? 3. What is a Statement of Affairs? How does it differ from balance sheet? 4. “Single Entry System goes beyond the keeping of personal accounts but falls short of complete system of double entry”. Discuss. III. Exercise Problems Finding Missing Figure Profit Problem 1 Mr. Rajan’s Capital on a given date is Rs. 10,00,000, a year earlier it was Rs. 2,50,000. Amount withdrew for personal use was Rs. 50,000. Capital introduced during the year was Rs. 2,00,000. Find the profit of Mr. Anand. [Ans. Profit for the year Rs. 6,00,000] Problem 2 Mr. Ashok maintains books on Single Entry System. The following information is available for him:

Accounts from Incomplete Records or Single Entry System

175

[Ans.

Credit sales Problem 3 Find out Credit Sales from the following

[Ans. Credit sales Rs. 70,500]

Total Sales Problem 4 From the following information, you are required to calculate total sales:

[Ans. Total sales = cash sales + credit sales = 40,900 + 95,300 = 1,36,200] Problem 5 From the following figures drawn from the books of a trader, who maintains his accounts as per Single Entry System, you are required to calculate total sales:

[Ans. Total Sales Rs. 1,23,456]

176

Financial Accounting

Opening Debtor Balance Problem 6 Find out the amount of Balance of Debtors on 1st January:

[Ans. Opening Debtor balance Rs. 33,000]

Bills Receivable Received from Debtors Problem 7 Find out the amount of Bills Receivable received during the year:

[Ans. Amount of Bills Receivable received from Debtors Rs. 40,000]

Credit Purchases Problem 8 Find out Credit Purchases from the following:

[Ans. Credit purchases Rs. 28,400]

Credit Purchases and Total Purchases Problem 9 From the following details find out the credit purchases and total purchases:

[Ans. Credit purchase Rs. 30,800; Total purchases Rs. 59,800]

Accounts from Incomplete Records or Single Entry System

177

Credit Purchase and Credit Sales Problem 10 Rajeswar had not kept proper books of accounts. From the following particulars extracted from his books of accounts ascertain the credit purchases made and also the credit sales effected during the year 2007:

[Ans. Credit purchase Rs. 17,000, Credit sales Rs. 21,900]

Paid to Creditors, Received from Debtors Problem 11 Find out the amount paid to Creditors and the amount received from Sundry Debtors from the following:

[Ans. Paid to Creditors Rs. 98,765, Received from Debtors Rs. 1,23,456]

178

Financial Accounting

II. Statement of Affairs Problem 12 Mohan, a retail merchant commenced business with a capital of Rs. 12,000 on 1.1.94. Subsequently on 1.5.94 he invested further capital of Rs. 5,000. During the year, he has withdrawn Rs. 2,000 for his personal use. On 31.12.1994, his assets and liabilities were as follows:

Calculate the profit (or) loss made during the year 1994. [Ans. Closing capital Rs. 20,000; Profit for the year Rs. 5,000] Problem 13 On January 1, 1997 a trader started a business with a capital of Rs. 1,00,000 with which he opened a bank account. On the same day, he bought furniture for shop costing Rs. 4,800 and goods for trade costing Rs. 25,000. On December, 31 his Stock in hand was valued at Rs. 29,000 and furniture stood at Rs. 6,300. On which date, his book debts amounted to Rs. 78,000 of which Rs. 1,200 was considered to be bad. Creditors amounted to Rs. 15,000. His balance as per cash book was Rs. 5,500 a cheque for Rs. 400 sent for deposit on December 30, was not realised till after December 31, and cheque for Rs. 700 issued on December 29, was not presented to Bank till December 31, Bank charges for the year amounted to Rs. 50 but this was not known to the trader on December 31. His drawings during the year amounted to Rs. 9,300. He had also taken for personal use goods from the shop valued at Rs. 1,500. Prepare a statement showing the trader’s profit or loss during 1997. [Ans. Closing capital Rs. 1,02,250; Profit for the year Rs. 13,050] Problem 14 A commenced business on April 1, 1998 with a capital of Rs. 1,00,000. He immediately bought furniture for Rs. 20,000. On 30th September 1998, he borrowed Rs. 50,000 from his wife at 9% per annum (interest not yet paid) and introduced a further capital of his own amounting to Rs. 15,000. A drew at the rate of Rs. 3,000 per month at the end of each month for household expenses. On 31st March, 1999 his position was as follows: Cash in hand Rs. 2,000, Cash at Bank Rs. 26,000, Sundry Debtors Rs. 48,000, Stock Rs. 68,000, Bills Receivable Rs. 16,000, Sundry Creditors Rs. 5,000 and owing Rent Rs. 1,500. Furniture is to be depreciated by 10%.

Accounts from Incomplete Records or Single Entry System

179

Ascertain the profit or loss for the year ended 31st March 1999. [Ans. Closing capital Rs. 1,19,250; Profit for the year Rs. 40,250] Problem 15 Chidambaram commenced business on 1st January 2000 with a capital of Rs. 20,000. Soon thereafter, he bought furniture and fixture for Rs. 4,000. On 30th June, 2000, he borrowed Rs. 10,000 from his brother at 12% per annum (interest not yet paid) and introduced a further capital of his own amounting to Rs. 3,000. He withdrew @ Rs. 600 p.m. at the end of each month for household expenses. On 31st December, 2000 his position was as follows: Cash in hand Rs. 400; Cash at bank Rs. 5,200; Sundry debtors Rs. 9,600; Stock Rs. 10,000; Bills Receivable Rs. 3,200; Sundry creditors Rs. 1,000 and Owing for rents Rs. 300. Furniture and fittings are to be depreciated by 10%. Ascertain the profit or loss made by Chidambaram during 2000. [Ans. Closing capital Rs. 20,100; Profit for the year Rs. 4,300]

Problem 16 Khan maintains books on single entry. He gives you the following information:

He has taken Rs. 4,000 from the business to meet his personal expenses. Calculate the profit or loss for the year 1994. [Ans. Opening capital Rs. 38,000 Closing capital Rs. 51,000; Profit for the year Rs. 17,000] Problem 17 X keeps his book on the Single Entry System and the following information is available:

– – –

180

Financial Accounting

He has drawn out of the business Rs. 500 during the year. Prepare a Statement showing his profit for the year ended 31st December 2004 after writing off 10% depreciation on Furniture and making a provision for bad debts at 10% on Sundry debtors. [Ans. Opening capital Rs. 3,500; Closing capital Rs. 4,790; Profit for the year Rs. 1,790] Problem 18 Gopu maintains his books of accounts by the Single Entry System. His Assets and

During the year Gopu introduced Rs. 5,000 as further capital in the business and withdrew Rs. 750 per month. From the above, prepare a statement showing the profit or loss made by him for the year needed 31st December 1999. [Ans. Opening Capital Rs. 26,500; Closing Capital Rs. 34,800; Profit for the year Rs. 12,300] III. Conversion Method Problem 19 ance Sheet:

Other details: Bad debts Rs. 1,.250; Discount received Rs. 3,750; Discount allowed Rs. 2,500; Sundry Expenses Rs. 7,500; Payment to creditors Rs. 1,12,500; Received from debtors Rs. 1,33,750; Drawings Rs. 10,000; Sales returns Rs. 3,750. Charge depreciation on furniture 5%. Purchase return Rs. 1,250. [Ans. Gross Profit Rs. 27,500; Net Profit Rs. 19,875; Balance Sheet total Rs. 19,840 Opening capital Rs. 58,750; Credit Purchase Rs. 23,750]

Accounts from Incomplete Records or Single Entry System

181

Problem 20 Mr. Mustafa keeps his books under single entry system. On 1.1.1999 his capital was Rs. 69,000. An analysis of his cash book for the year gives the following particulars:

The following were his assets and liabilities:

Balance Sheet as on 31.12.99 after providing interest on capital at 5% depreciation on furniture at 5%, depreciation on plant at 10% and a reserve of 5% on debtors. [Ans. Gross Profit Rs. 52,000; Net Profit Rs. 32,080; Balance Sheet Total Rs. 1,26,030; Credit Sales Rs. 95,000 and Credit Purchase Rs. 29,500] Problem 21 Mr. Razak commenced business as a cloth merchant on 1.4.89 with a capital of Rs. 10,000. On the same day, he purchased furniture and fittings for cash Rs. 3,000. Account for the year ended on 31st March 1997 and a Balance Sheet as on that date:

182

Financial Accounting

Razak took cloth worth Rs. 500 from the shop of private use and paid Rs. 200 to his son, but omitted to record these transactions in his books. On 31st March 1997, his Sundry debtors were Rs. 5,200 and Sundry creditors Rs. 13,600. Stock-in-hand on 31st March 1997 was Rs. 16,500. [Ans. Gross profit Rs. 39,000; Net profit Rs. 15,800; Balance sheet total Rs. 27,500 Cash received from debtors Rs. 64,300; Cash paid to creditors Rs. 67,400; Closing cash balance Rs. 2,800] Problem 22 Mr. Krishnan commenced business on 1.1.98 with a capital of Rs. 25,000. He immediately bought furniture for Rs. 4,000. During the year, he borrowed Rs. 5,000 from his wife and out of which introduced a further capital of Rs. 3,000. He has withdrawn Rs. 600 at the end of each month for family expenses. From the following particulars and Balance Sheet as on 31.12.98.

Krishna has used goods worth Rs. 1,300 for private purposes and paid Rs. 500 to his son which is not recorded anywhere. On 31.12.98, his debtors were worth Rs. 21,000, creditors Rs. 15,000 and stock in trade Rs. 10,000. Furniture is to be depreciated at 10% p.a. [Ans. Gross Profit Rs. 35,300; Net profit Rs. 23,000 Balance Sheet total Rs. 59,000; closing cash balance Rs. 24,400; cash received from debtors Rs. 46,700 and cash paid to creditors Rs. 50,000] Problem 23 Mr. X keeps his records under Single Entry System. From the following prepare a ance Sheet as on that date. Cash Book analysis shows the following:

75

Accounts from Incomplete Records or Single Entry System

183

Further details available are:

To provide—5% interest on X’s capital balance as on 1.4.1995, Rs. 1,500 for doubtful debts, 5% depreciation on all fixed assets and 5% group insurance commission to staff. [Ans. Gross Profit Rs. 36,720; Net Profit Rs. 15,400; Balance Sheet Total Rs. 56,420 Opening Capital Rs. 35,000; Opening Cash Balance Rs. 4,000; Credit Purchase Rs. 12,500 Credit Sales Rs. 33,000] Problem 24 Mr. Umesh carries on a grocery business and does not keep his books on Double Entry basis. The following particulars have been extracted from his books:

The following cash transactions took place during the year ending 30th June, 2004:

During the year Umesh had taken goods from the business for his own consumption which amounted to Rs. 1,950 for the whole year and had not paid any money into business for them. the year ending on 30th June, 2004, after charging 10% depreciation on Plant and Machinery and, also (2) the Balance Sheet as on 30th June, 2004.

184

Financial Accounting

[Ans. Gross Profit Rs. 34,850; Net Profit Rs. 10,900; Balance Sheet Total Rs. 68,300 Credit Sales Rs. 1,77,500; Credit Purchase Rs. 1,29,500; Opening Capital Rs. 49,150] Problem 25 Mr. Joseph carries on a small business, but he does not maintain a complete set of account books. He banks all receipts and makes all payments by cheques. From such records you are able to gather the following facts: Receipts for the year ended 31st December, 2004 Cash from Debtors

Payments made during the year ended 31st December, 2004 35,250 Furniture Purchased

Cash Sales

8,250 Drawings

Paid in by Mr. Joseph from the Sales Proceeds of his Scooter

5,000 Wages

1,250 3,000 13,450

Salaries

2,650

Rent

2,400

Sundry Expenses

5,200

Paid to Creditors

15,250

Assets and Liabilities Furniture

As on 1.1.2004 (Rs.)

As on 31.12.2004 (Rs.)

15,000

15,500

7,500

12,250

Stock

12,500

6,250

Bank

1,250

?

Sundry Creditors

5,050

4,800

Sundry Debtors

Rs. 250 reserve for doubtful debts is to be provided. From the above particulars prepare Trading and Profit and Loss Account for the year ended on 31st December 2004 and the Balance Sheet as on that date. [Ans. Gross Profit Rs. 13,550; Net Profit Rs. 2,300; Balance Sheet Rs. 40,300 Credit Purchase Rs. 15,000; Credit Sales Rs. 40,000; Closing Bank Balance Rs. 6,550 Opening Capital Rs. 31,200] Problem 26 A Trader, who has not kept a complete set of books, asks you to prepare his final accounts for the year ended on 31st December 2004. You are, however, able to obtain the following information: Summary of his Cash Transactions Balance of Cash on 1st January 2004 Takings Personal Drawings Purchases

Rs. 5,170 42,050 3000 32,400

Salaries

2,500

Rent

1,200

Electricity Charges

350

Printing and Stationery

350

Advertising

450

Accounts from Incomplete Records or Single Entry System

185

15 –

The stock on 31st December 2004 was valued at Rs. 4,500, but the trader has no record of the stock on 1st January 2004, he informs you, however, that he invariably sells his goods at cost plus 33 %. ance Sheet as on that date. [Ans. Gross Profit Rs. 10,950; Net Profit Rs. 5,855; Balance Sheet Rs. 16,570 Opening Stock Rs. 2,850; Opening Capital Rs. 9,850; Closing Cash Balance Rs. 6,970] Problem 27 The books of Hemu showed the following figures:

? ? –

The cash book showed the following figures:

Additional information: (i) Cost of goods sold during the year Rs. 1,05,300. (ii) Hemu maintains a steady gross profit at the rate of 25% on sale. (iii) Bad debts written off during the period Rs. 400 and past bad debts (already written off) recovered Rs. 200. You are required to prepare: (b) Balance Sheet as on that date.

186

Financial Accounting

[Ans. Gross Profit Rs. 35,100; Net Profit Rs. 16,450; Balance Sheet total Rs. 82,950 Opening Capital Rs. 50,600; Purchases Rs.1,10,300; Cash Sales Rs. 14,600 Credit Sales Rs.1,25,800; Opening Debtor Balance Rs. 45,600; Opening Creditor Balance Rs. 21,400] Problem 28 The following information is supplied from which you are required to prepare the Balance Sheet as on the date :

?

Further transactions relating to the year are:

?

[Ans. Gross Profit Rs. 51,000; Net Profit Rs. 29,400; Balance Sheet total Rs. 77,800 Credit Sales Rs. 40,000; Opening Debtor Balance Rs. 18,000; Credit Purchases Rs. 2,41,000 Opening Capital Rs. 47,400] Problem 29 Mr. Ram Gopal keeps his books on Single Entry System. His position a the beginning and end of the year were as follows:

Accounts from Incomplete Records or Single Entry System

187

From his Cash Book following information was available:

Other information relating to his business: 355

You are asked to prepare Final Accounts for the year 2004. [Ans.

Opening capital Rs. 14,298]

8

Accounting for Non-Trading Organisations

Learning Objectives After studying this chapter, you should be able to understand to

N

T

O

ACCOUNTS OF NON-TRADING ORGANISATIONS Non-Trading Organisations are established to promote art, science, religion, charity or any other useful object. The primary objective of these organisations is to render Examples of such non-trading organisations are sports clubs, social clubs, libraries, hospitals, educational institutions, religious organisations, voluntary organisations, charitable societies and similar organisations not formed with the intention of

These organisations usually prepare:

Receipts and Payments Account This account is nothing more than a summary of cash transactions of the organisation. This account may be adequate for small clubs, though it does suffer from the

all payments whether they are of revenue or capital nature and also whether they are

Accounting for Non-Trading Organisations

189

period this account shows only cash or bank balance. Receipts and Payments Account for the year ended.. Receipts

Rs.

Payments

Rs.

Income and Expenditure Account with current year expenses/losses and credited only with current year incomes and gains. The excess of income over expenditure (i.e., surplus) or excess of expenditure

Income and Expenditure Account for the year ended… Expenditure

Rs.

Income

*

*

*

Rs.

Financial Accounting

190

Balance Sheet Non-trading organisations prepare Balance Sheet in the usual manner. It is prepared at the end of an accounting period after preparing Income and Expenditure Account. It includes assets and liabilities. Excess of assets over liabilities is termed as Capital Fund or General Fund. This Capital Fund/General Fund includes surplus, capital receipts and receipts that are capitalized. The format of Balance sheet is as follows. Balance Sheet of ………as on ……………… Liabilities Capital Fund Add: Surplus

Add: Life Membership

Prize Fund Building Fund Outstanding Expenses Creditors

Rs.

Assets

xxx xxx

Fixed Assets: Buildings Add: Additions

xxx xxx xxx xxx

Furniture Add: Additions xxx xxx xxx xxx xxx xxx xxx

Less: Sale of furniture

Rs. xxx xxx xxx xxx xxx xxx xxx

- Prize Fund - Building Fund Fixed Deposits Current Assets Sports Equipment

xxx

xxx

xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx

Distinction between Receipts and Payments Account and Income and Expenditure Account Receipts and Payments Account

Income and Expenditure Account

1 2 3 4

ments

5 6 7

-

8 9

Important Items used in the Accounts of Non-Trading Organisation and their Meaning and Treatment 1. Capital Fund Capital of non-trading organisation is known as Capital Fund or General Fund. This amount is excess of assets over liabilities. It includes surplus, capital receipts and

Accounting for Non-Trading Organisations

191

2. Subscription

subscription is treated as revenue receipt, whereas life time membership subscription is treated as capital receipt.

3. Entrance Fee or Admission Fee This fee is paid by persons at the time of joining the club, association, societies, etc.

4. Donations These are gifts from member or general public specially supporters, well wishers,

5. Legacy Expenditure ccount, but if it is treated as a capital receipt, it has to be included in capital fund.

6. Life Membership Fee as it is a capital receipt.

7. Sale of Old Newspapers and Periodicals The sale proceeds of old newspapers, magazines, journals, etc. are treated as revenue

8. Sale of Old Asset The sale proceeds of old asset are treated as capital receipt and hence, credited to the

9. Government Aid/Grant Government educational institutions, hospitals receive aid or grant from government Grant— 1. General aid/grant is given for the purposes of maintenance of institutions.

192

Financial Accounting

10. Honorarium delivering lecture, for giving a performance (by an artist), etc.

Preparation of Receipts and Payments Account from Income and Expenditure Account Steps

side.

balance.

Preparation of Income and Expenditure Account from Receipts and Payments Account Steps

Index for Illustrations Type

Ill. No. 1–14 15–24 25–28 29–32 33–34

Accounting for Non-Trading Organisations

193

I – SMALL PROBLEMS A – Calculation of Subscriptions Subscription as in Income and Expenditure Account Illustration 1 ended 31st December 2006:

current year. Solution

Illustration 2

Solution

Illustration 3 From the following particulars, compute the amount of subscription to be shown in

194

Financial Accounting

–2004

Solution

Subscription as in Income and Expenditure Account, Opening and Closing Balance Sheet Illustration 4

Solution (i) Income and Expenditure Account

Accounting for Non-Trading Organisations

195

(ii) Balance Sheet as on 31st December 2003 Liabilities

Rs.

Asset

Rs.

(iii) Balance Sheet as on 31st December 2004

Preparation of Subscription Account Illustration 5

(Delhi B.Com, Pass, Regular) Solution Subscription Account Date

Particulars

LF

1999

Rs.

Date

Particulars

LF

Rs.

1999

Subscription Account, Subscription as in Income and Expenditure Account Illustration 6 following amount of subscription:

(Delhi B.Com Hons)

Financial Accounting

196 Solution

(i) Subscription Account Date

Particulars

1997

LF

Rs.

Date

Particulars

LF

Rs.

1997

¥ 12

(ii) Subscription to be shown in the Income and Expenditure Account

Subscription as in Receipts and Payments Account Illustration 7 ended 31st December 2004. during 2004.

Solution

Accounting for Non-Trading Organisations

Illustration 8

Solution Statement showing Subscription received as per Receipts and Payments Account

Note: calculation.

B – Calculation of Stationery Stationery amount as in Income and Expenditure Account Illustration 9 year ended 31st December, 2006:

197

198

Financial Accounting

Solution Stationery amount to be shown in Income and Expenditure Account

Illustration 10

(Delhi B.Com Pass, Regular) Solution Stationery amount to be shown in the Income and Expenditure Account

Advance paid given Illustration 11

Accounting for Non-Trading Organisations

199

Solution Amount of stationery to be shown in Income and Expenditure Account

1445

C – Calculation of Expenses Prize Fund Maintained and Expense Incurred Illustration 12

Solution

Note:

expenses.

Expenses with Prepaid and Outstanding Details Illustration 13

the following information:

200

Financial Accounting

Solution

D – Calculation of Prize Fund Treatment of Match Fund and Prizes Paid Illustration 14 Given:

How the above said items appear in the books of accounts? Solution (a) Match Fund

(b) Prizes paid during the year

II – INCOME AND EXPENDITURE ACCOUNT A. Only Income and Expenditure Account Given: Income and Expenditure Particulars Illustration 15

Contd.

Accounting for Non-Trading Organisations

201

Contd.

(Delhi B.Com, Pass, Regular) Solution Income and Expenditure Account for the year ended... Expenditure

Rs.

Rs.

Income

Rs.

Rs.

B. Income and Expenditure Account and Closing Balance Sheet Given: Receipts and Payments Account Illustration 16

Receipts

Rs.

Payments

Rs.

75

202

Financial Accounting

(Ranchi, B.Com) Solution Income and Expenditure Account for the year ended 31st December 1991 Expenditure

Rs.

Rs. 85

Income

985

Rs.

Rs.

¥

45

¥

225 75

14,800

14,800

Balance Sheet as on 31st December 1991 Liabilities

Rs.

Rs.

Assets

Rs.

Rs.

¥ 135

85

32,085

32,085

Given: Receipts and Payments Account and Information Illustration 17 the year ended 31st December 2004. Debit

Rs.

Credit

Rs.

175

(a) This item includes subscription outstanding brought over from previous year

period.

Accounting for Non-Trading Organisations

203

the close of the period. Entrance fees are to be capitalised. The outstanding liabilities

(Madras B.Com) Solution Income and Expenditure Account for the year ended 31st December 2004 Expenditure

Rs.

Rs.

Income

Rs.

Rs.

175 735

Balance Sheet as on 31st December 2004 Liabilities

Rs.

50,010

Assets

Rs.

50,010

204

Financial Accounting

Given: Receipts and Payments Account and Opening Balance Sheet Illustration 18 Balance Sheet (31st March 2003) Liabilities

Rs.

Assets

Rs.

Receipts and Payments Account Rs.

following adjustments:

furniture are also to be depreciated at the same rate.

Rs.

Accounting for Non-Trading Organisations

205

Solution Income and Expenditure of Alpha Literary Society for the year ended 31st March 2004 Expenditure

Rs.

Rs.

Income

Rs.

2,44,200

Rs.

2,44,200

Balance Sheet as on 31st March 2004 Liabilities

Rs.

Rs.

8,15,800

* 1,000

500

Assets

Rs.

Rs.

8,15,800

206

Financial Accounting

C. Income and Expenditure Account, Closing Balance Sheet and Opening Balance Sheet Given: Receipts and Payments Illustration 19

each, some members have paid their annual subscription in advance during the year.

(Delhi, B.Com, Pass)

Accounting for Non-Trading Organisations

207

Solution Income and Expenditure for the year ended 31st March 1998 Expenditure

Rs.

Rs.

Income

Rs.

98,300

Rs.

98,300

Balance Sheet as on 31st March 1998 Liabilities

Rs.

Rs.

Assets

Rs.

1,41,250

Rs.

1,41,250

Working Note (1) Balance Sheet as on 31st March 1997 Liabilities

Rs.

Rs.

Assets

Rs.

Rs.

208

Financial Accounting

(2) Subscription received in advance 1,000 1,500 52,500 3,000

Subscription Calculation, Loss on Sale of Furniture Illustration 20 Receipts

Rs.

Rs.

Payments

Rs.

Rs.

are as follows

You are also required to show calculations for the loss on sale of furniture. (Madurai, B.Com)

Accounting for Non-Trading Organisations

209

Solution Income and Expenditure Account for the year ended 31st December 2004 Expenditure

Rs.

Rs.

Income

Rs.

13,220

Rs.

13,220

Balance Sheet as on 31st December 2004 Liabilities

Rs.

Rs.

Assets

Rs.

36,430

Rs.

36,430

Working Note (a) Balance Sheet as on 1st January 2004 Liabilities

Rs.

Rs.

Assets

Rs.

25,260

Rs.

25,260

(b) Depreciation of Furniture ¥ 120

210

Financial Accounting

(c) Loss on Sale of Furniture: 1,200

¥

50 Illustration 21

Receipts and Payments Account for the year ended 31st December 2004 Receipts

Rs.

Payments

Rs.

461

On 1.1.2004 Rs.

On 31.12.2004 Rs.

64

(Madurai, B.Com)

Accounting for Non-Trading Organisations

211

Solution Income and Expenditure Account for the year ended 31st December 2004 Expenditure

Rs.

Rs.

Income

Rs.

Rs.

64

461

79,100

79,100

Balance Sheet as on 31st December 2004 Liabilities

Rs.

Rs.

Assets

Rs.

Rs.

212

Financial Accounting

(a) Balance Sheet as on 1st January 2004 Liabilities

Rs.

Rs.

Assets

Rs.

Rs.

64

1,77,380

1,77,380

Illustration 22

Receipts

Rs.

Rs.

Payments

Rs.

Rs.

Other information provided

? ?

Accounting for Non-Trading Organisations

213

Solution Income and Expenditure Account for the year ended 31st December 2007 Expenditure

Rs.

Rs.

Income

Rs.

Rs.

¥ 17,050

17,050

Balance Sheet as on 31st December 2007 Liabilities

Rs.

Rs.

Assets

Rs.

Rs.

56,850

56,850

Rs.

Rs.

(a) Subscription Account

7,200

7,200

214

Financial Accounting

(b) Balance Sheet as on 31st December 2006 Liabilities

Rs.

Rs.

Assets

Rs.

Rs.

Amended Income and Expenditure Account Illustration 23

Income and Expenditure Account of Calcutta Checkers Society for the year ended 31st Dec 2004 Expenditure

Rs.

Income

Rs. 675

1565 37

65

124 57

3,468

3,468

Treasurer Note

(Madurai, B.Com) Solution Income and Expenditure Account for the year ended 31st December 2004 Particulars

Rs.

Rs. 675

Particulars

Rs.

Rs.

37 124 57 645 42

Accounting for Non-Trading Organisations

215

Balance Sheet as on 31st December 2004 Liabilities

Rs.

Rs.

Assets

Rs.

Rs.

65

42

Workings Receipts and Payments Account for the year ended 31st December 2004 Receipts

Rs.

Rs.

Payments

Rs.

Rs. 675 37 124 57

65

3,348

3,348

Balance Sheet as on 31st December 2003 Liabilities

Rs.

Rs.

Assets

5,162

D. Trading Account, Income and Expenditure Account, Closing and Opening Balance Sheet Illustration 24 club.

Rs.

Rs.

5,162

Financial Accounting

216

Receipts and Payments Account for the year ended 31st March 2004 Receipts

Rs.

Payments

Rs.

(Calcutta, M.Com) Solution Trading Account for the year ended 31st March 2004 Rs.

Rs.

59,800

Rs.

Rs.

59,800

Accounting for Non-Trading Organisations

217

Income and Expenditure Account for the year ended 31st December 2004 Expenditure

Rs.

Rs.

Income

Rs.

Rs.

¥

Balance Sheet as at 31st March 2004 Liabilities

Rs.

Assets

Rs.

Working Note (a) Balance Sheet as at 1st April 2003 Liabilities

Rs.

Rs.

(b) Rental Calculation

Assets

Rs.

Rs.

Rs.

(–) outstanding for 3 months ¥ 6,250 1,250 5,000 (c) Subscription Calculation (–) Outstanding (previous year)

218

Financial Accounting

(+) Outstanding (current year)

1,000 30,020 400

(d) Competition prize (+) Opening stock 500 4,300

III – RECEIPTS AND PAYMENTS ACCOUNT A. Only Receipts and Payments Account Given: Income and Expenditure Account and Opening Balance Sheet Illustration 25 Income and Expenditure Account for 2004 Expenditure

Rs.

Income

Rs.

31,300

31,300

Balance Sheet as on 31st Dec 2004 31.12.2003 Rs.

33,800

Liabilities

31.12.2004 Rs.

31.12.2003

41,100

33,800

Assets

31.12.2004 Rs.

41,100

Accounting for Non-Trading Organisations

219

(Calcutta, M.Com) Solution Receipts and Payments Account for the year ended 31st December 2004 Receipts

Rs.

Payments

Rs.

64,600

64,600

Working Notes (a) Donations and Subscriptions

Rs.

(b) Printing and Stationery

Rs.

(c) Honorarium to Secretary

Rs.

(d) Wages paid

Rs.

220

Financial Accounting

(e) Purchase of Equipment in 2004

Rs.

B. Receipts and Payments Account and Closing Balance Sheet Given Income and Expenditure Account and Information Illustration 26

Income and Expenditure Account for the year ended on 31st March 2003 Expenditure

Rs.

Rs.

Income

Rs.

Rs.

Additional information

575

–

?

(Delhi, B.Com, Pass)

Accounting for Non-Trading Organisations

221

Solution Receipts and Payment Account for the year ended 31st March 2003 Expenditure

Rs.

Rs.

Income

Rs.

4,86,430

Rs.

4,86,430

Balance Sheet as on 31st March 2003 Liabilities

Rs.

Rs.

Assets

Rs.

Rs.

575

7,99,770

7,99,770

Working Notes (a) Opening balance of Capital Fund Balance Sheet as on 31st March 2002 Liabilities

Rs.

7,75,650

Assets

Rs.

7,75,650

222

Financial Accounting

(b) Subscriptions received during the year

(c) Medicines purchased

(d) Equipment purchased

(e) Payment for Electricity and Water

C. Receipts and Payments Account and Income and Expenditure Account Given: Balance Sheet and Information about Two Branches Illustration 27

Balance Sheet as on 31st December 2004 Rs

Rs. 25

289 385

14

Accounting for Non-Trading Organisations

223

the above.

96

(Madurai, M.Com) Solution Receipts and Payments Account for the year ended 30th June 2004 Receipts

Rs.

Rs.

Payments

Rs.

Rs.

25

289 385

14

Income and Expenditure for the year ended 31st December 2004 Expenditure

Rs.

Rs.

Income

Rs.

Rs.

84

289

Balance Sheet as on 1st January 2004 Liabilities

Rs.

Assets

Rs. 25

(a) Branch Expenses Branch Expenses

Rs.

Rs.

24

84

Financial Accounting

224

D. Receipts and Payments Account, Income and Expenditure Account, Closing Balance Sheet and Opening Balance Sheet Illustration 28 ended 31.12.2000 are as follows:

31.12.2000. Solution Receipts and Payments Account for the year ended 31st December 2000 Receipts

Rs.

Rs.

Payments

Rs.

Rs.

Income and Expenditure for the year ended 31st December 2000 Expenditure

Rs.

Rs.

86,200

Income

Rs.

Rs.

86,200

Accounting for Non-Trading Organisations

225

Balance Sheet as on 31st December 2000 Liabilities

Rs.

Rs.

Assets

Rs.

2,04,200

Rs.

2,04,200

Balance Sheet as on 1st January 2000 Liabilities

Rs.

Rs.

Assets

Rs.

Rs.

¥

1,90,500

1,90,500

Working Notes (a) Subscription

Rs.

(b) Medicine Purchased

Rs.

(c) Medicine Consumed

Rs.

Financial Accounting

226

(d) Depreciation on Equipment

Rs.

IV – TRIAL BALANCE To Prepare Income and Expenditure Account and Closing Balance Sheet Illustration 29

Debit balances

Rs.

Credit balances

Rs.

The investments were made against the various funds commonly.

(Delhi B.Com, Pass) Solution Income and Expenditure Account for the year ended 31st March 1998 Expenditure

Rs.

Rs.

Income

Rs.

Rs.

Contd.

Accounting for Non-Trading Organisations

227

Contd.

25,87,000

25,87,000

Balance Sheet as on 31st March 1998 Liabilities

Rs.

Rs.

Assets

29,83,000

Rs.

Rs.

29,83,000

Illustration 30

Debit

Rs.

375 475

Credit

Rs.

Financial Accounting

228

The following further information are supplied to enable you to make the necessary adjustments:

(Kerala B.Com) Solution Income and Expenditure Account for the year ended 31st December 1997 Expenditure

Rs.

Rs.

Income

Rs.

Rs.

Rs.

Rs.

475

Balance Sheet as on 31st December 1997 Liabilities

Rs.

Rs.

Assets

375 Contd.

Accounting for Non-Trading Organisations

229

Contd.

3,34,770

3,34,770

Illustration 31

from their books as on 31st March, 2004 which coincided with the end of the last term of the year, was as follows: Debits

Rs.

Credits

Rs.

You are given the following additional information: respectively (2) On 31st March, 2004 amounts owing for food and fuel and laundry were (3) Fees, other than extras are payable in advance and accounts are sent out at the

Financial Accounting

230

of the premises. capitalised under Furniture and Fittings. annum on cost at the end of the year. such commission.

(Madras, B.Com) Solution Income and Expenditure Account for the year ended 31st December 2004 Expenditure

Rs.

Income

Rs.

588

238

64,568

64,568

Accounting for Non-Trading Organisations

231

*

¥ Balance Sheet as on 31st December 2004 Liabilities

Rs.

Assets

Rs.

588

26,600

26,600

Illustration 32

Receipts

Rs.

Payments

Rs.

232

Financial Accounting

Donation and surplus on account of tournament should be kept in reserve for a

(B.Com Kerala) Solution Income and Expenditure Account for the year ended 31st March 1998 Expenditure

Rs.

Rs.

Income

Rs.

Rs.

75

5,600

5,600

Balance Sheet as on 31st March 1998 Liabilities

Rs.

Rs.

Assets

Rs.

Rs.

225 17,725

17,725

Working Note Balance Sheet as on 31st March 1997 Liabilities

Rs.

Rs.

Assets

Rs.

Rs.

Accounting for Non-Trading Organisations

233

V – TO PREPARE CLOSING AND OPENING BALANCE SHEETS Illustration 33 for the year Receipts and Payment Account Receipts

Rs.

Payments

Rs.

Income and Expenditure Account Expenses

Furniture

Rs.

Income

Rs.

10,000

Financial Accounting

234 Solution

Balance Sheet as on 31.12.1996 Liabilities

Rs.

Rs.

Assets

Rs.

Rs.

2,69,900

2,69,900

Balance Sheet as on 31.12.1997 Liabilities

Rs.

Rs.

Assets

Rs.

Rs.

2,92,200

2,92,200

Illustration 34 From the following information given in the books of a sports club prepare the Receipts and Payment Account for the year 31.12.1985 Receipts

Rs.

Payments

Rs.

1984 1985 1986

Income and Expenditure Account for the year ended 31.12.1985 Expenditure

Rs.

Income

Rs.

Accounting for Non-Trading Organisations

235

workings clear. (Delhi, B.Com Hons) Solution Balance Sheet as on 1st January 1985 Liabilities

Rs.

Rs.

Assets

Rs.

1,48,000

Rs.

1,48,000

Balance Sheet as on 31st December 1985 Liabilities

Rs.

Rs.

Assets

Rs.

Rs.

1984 1985

1,68,900

Points to Remember

Trading Organisations

Examination Questions I. Objective Questions 1. Fill in the blanks

surplus.

1,68,900

236

Financial Accounting

(i) Debit balance (iii) No opening balance at all

3. Match the following i

a

ii

b

iii

c

iv

d

v

e

and ends with the balance at the end. Answers

Accounting for Non-Trading Organisations

2. (a) (i); 3. (i) e; 4. (i) False;

(b) (iii); (ii) d; (ii) False;

(c) (iii); (iii) c; (iii) True;

237

(d) (i); (e) (ii) (iv) b; (v) a. (iv) False; (v) True

II. Descriptive Questions A. Very Short Answer Questions 1. What is the primary objective of Non-Trading Organisations? 2. Give examples of Non-Trading Organisations? 3. What is Receipts and Payments Account? 4. What is Income and Expenditure Account? 5. What is Legacy? B. Short Answer Questions 1. What are the features of Receipts and Payments Account? 2. What are the features of Income and Expenditure Account? 3. Write a note on the following (i) Subscription (ii) Entrance Fee (iii) Donations C. Detail Answer Questions 1. State the difference between Receipts and Payments Account and Income and Expenditure Account? 2. Give the format of Balance Sheet of Non-Trading Organisations? 3. What are the steps in preparing Receipts and Payments Account from Income and Expenditure Account? 4. What procedure will you follow to prepare Income and Expenditure Account and Balance Sheet from the details of receipts and payments? III. Exercise Problems Small Problems Subscription

Problem 1 From the following details relating to Subscriptions of Coimbatore sports club, calculate the subscriptions income for the year ended 31st December, 1990: Subscriptions received as per Receipts and Payments Accounts for the year ended 31.12.1990 Rs. 10,000. Subscription outstanding as on 31.12.1989, Rs. 2,000 Subscription outstanding as on 31.12.1990, Rs. 4,000 Subscriptions received in advance as on 31.12.1989, Rs. 3,000 Subscriptions received in advance as on 31.12.1990, Rs. 2,000 (Bharathiar, B.B.M) [Ans. Subscriptions in IE A/c Rs. 13,000] Problem 2 Expenditure A/c for the year ended 31.12.96:

238

Financial Accounting

Problem 3 ncome (Bharathiar, B.B.M) [Ans. Problem 4

(Osmania, B.Com) [Ans. Problem 5

1993–94 1994–95 1995–96

1994–95 1995–96

(Periyar, B.Com) [Ans. Problem 6

Accounting for Non-Trading Organisations

239

(Bharathidasan, B.Com)/(Bharathiar, B.B.M) [Ans.

Sports Material

Problem 7

Opening stock of sports materials Opening creditors for sports materials

12,000 5,000

(Bharathidasan, B.Com) [Ans. Problem 8

(Delhi, B.Com) [Ans. Match Fund

Problem 9

240

Financial Accounting

–

288

(Bharathiar, B.Com) [Ans.

Stationery

Problem 10 stationery from the following data:

(Periyar, B.Com)/(Bharathidasan, B.Com)/ (Bharathiar, B.Com)/(Manonmania, B.Com) [Ans. Salary

Problem 11

(Bharathiar, B.B.M) [Ans.

Income and Expenditure Account Problem 12

Accounting for Non-Trading Organisations

241

(Pondicherry, B.Com) [Ans. Problem 13

(Bharathiar, B.B.M, B.Com) [Ans. Problem 14

242

Financial Accounting

(Manonmanian, B.Com, Bharathidasan, B.Com) [Ans. Problem 15

1993

125

175

Outstanding were:

(Bharathiar, B.Com) [Ans. Problem 16

Accounting for Non-Trading Organisations

243

(Bharathiar B.Com, B.B.M) [Ans.

Income and Expenditure Account and Balance Sheet Problem 17

525 1996 1997 1998

75

(Pondicherry, B.Com) [Ans.

244

Financial Accounting

Problem 18

after making the following adjustments:

(Bharathidasan, B.Com, Manonmanian, B.Com) [Ans. Problem 19

Accounting for Non-Trading Organisations

245

The college had the following assets as on 31st March, 1983: Furniture Rs. 35,000; Land and Buildings Rs. 1,60,000: Library Books Rs. 24,000; Investments Rs. 10,000 and Outstanding Tuition Fee Rs. 2, 200. Provide for depreciation on the closing balances of the following assets: Land and building @ 5%; Furniture @15% and Library books @ Rs. 2000. (Bharathiar, B.B.M) [Ans. Opening Capital Fund: Rs. 2,51,200]

Opening Balance Sheet and Closing Balance Sheet Problem 20 The following is the Receipts and Payments A/c and Income and Expenditure A/c of a club the year ending 31.3.2000 Receipts

Rs.

Payments

To Balance b/d

4,000 By Salaries

To Endowment

2,000 By Advertisement

To Subscription

Rs, 6,000 1,200

10,200 By Provisions Purchased

To Entrance Fees

6,800

800 By Printing and Stationery

700

To Donation for Books

1,300 By Bank

1,000

To Entertainment

4,000 By Sports Material

2,800

To Sale of Furniture

700 By Creditors (1999-2000)

1,000

By 4% Investments

1,920

(Book value Rs. 800)

By Balance c/d

1,280

23,000

23.000

Income and Expenditure A/c for the year ended 31.3.2000 Expenditure Loss on Sale of furniture Salaries

Rs.

Income

Rs.

100 By Subscriptions

10,000

6,700 By Entrance Fees

Advertisement

400

1,000 By Interest on Investment at 4% 300 on Face Value of Rs. 2,000

Audit Fees Provisions

80

6,000

Printing and Stationery Sports Material (Written off)

750 By Entertainment

4,000

2,000 By Excess of Expenditure over Income 16,850

2,370 16,850

(Periyar, B.Com) [Ans. Problem 21 From the following information given in the books of a sports club, prepare the

246

Financial Accounting

1984 1985 1986

(Delhi, B.Com. (Hons) [Ans.

Receipts and Payments Account Problem 22

[Bharathiar, B.Com] [Ans.

Accounting for Non-Trading Organisations

247

Problem 23 2004.

Other information is as follows:

?

[Ans. Problem 24

Contd.

248

Financial Accounting

Contd.

–

– –

[Ans.

9

Depreciation Accounting

Learning Objectives After studying this chapter, you should be able to understand to Define Depreciation Explain different methods of depreciation Distinguish between Fixed Instalment Method and Diminishing Balance Method Understand significance of Accounting Standard 6 (Revised).

DEPRECIATION The term Depreciation is used to denote a reduction in value of fixed assets due to wear and tear. According to Carter, “Depreciation is the gradual and permanent decrease in the value of an asset from any cause”. Fixed assets are those assets which will provide service for a period longer than one year. All fixed assets are subject to depreciation except land. Even for land, in some cases, there is depreciation e.g., oredeposits in mines, quarries, oil wells, etc.

Definition of Depreciation According to J.R. Batliboi, “The term Depreciation represents loss or diminution in the value of an asset consequent upon wear and tear, obsolescence, effluxion of time or permanent fall in market value”. According to Spicer and Peglar, “Depreciation may be defined as the measure of the exhaustion of the effective life of an asset from any cause during a given period”. According to Indian Accounting Standard-6, “Depreciation is the allocation of the depreciable amount of an asset over its estimated useful life”. According to the American Institute of Certified Public Accountants, “Depreciation accounting aims to distribute the cost or other basic value of tangible capital assets, less salvage (if any), over the estimated useful life of the unit (which may be a group of assets) in a systematic and rational manner”. Thus, Depreciation means a gradual and permanent reduction in value of an asset due to wear and tear, obsolescence, or any other form. Therefore, provision for depreciation should he made on fixed assets (except land) in the system of accounting.

250

Financial Accounting

Other Terms of Depreciation The term depreciation covers:

Depletion It refers to the physical deterioration of natural resources by exhaustion e.g., oredeposits in mines, oil wells, quarries, etc.

Amortisation It refers to gradual writing off the value of intangible assets e.g., goodwill, patents, copyrights, etc.

Obsolescence It refers to the asset going out of use resulting from invention of improved technique or equipment or change in taste, fashion, etc.

Causes of Depreciation (a) Wear and tear due to usage; (b) Depletion due to physical deterioration of natural resources; (c) Obsolescence due to invention of new technique, change in taste or fashion, etc. (d) Expiry of time due to fixed period of legal life of an asset e.g., Lease agreement, patents and copyrights, etc.

Objectives of Depreciation There are three important reasons for provision for depreciation— (a) It enables the firm to ascertain profit made or loss incurred during the accounting period. (b) It helps the firm to show fixed assets at their proper value. (c) It makes the firm to replace the old fixed assets by a new (economical) one.

Methods of Calculating Depreciation (I) Fixed Instalment Method Under this method fixed amount or percentage of depreciation is charged, on the original cost of the asset, throughout the life of the asset, moreover, if the amount of depreciation and number of years are shown in a graph, this will form a straight line. That is why this method is also known as Original Cost Method or Straight Line Method. The amount of depreciation may be calculated under the following two methods. (i) When the asset has no Scrap value Amount of depreciation = Total cost of machine/Useful life (ii) When asset has Scrap value Amount of depreciation = (Total cost of machine – Scrap value)/Useful life In addition to the above, the rate of depreciation can also be calculated as follows: Rate of depreciation = (Depreciation amount ¥ 100)/Total cost of asset

Depreciation Accounting

251

Advantages (i) This method is very easy to understand and simple to calculate the amount of depreciation (ii) This method is suitable for those assets whose benefits remain uniform in every year e.g., furniture, fixtures, office equipment, patents, etc. Disadvantages (i) Under this method, amount of depreciation remains the same every year because it does not take into consideration the fall in value of assets due to usage. (ii) This method is based on an assumption that, the asset is equally useful through its estimated life which is illogical. (iii) It does not take into account changes taking place in the market due to seasonal fluctuations.

(II) Diminishing Balance Method Under this method, the rate of depreciation is fixed year after year whereas the amount of depreciation goes on decreasing because the amount of depreciation is calculated on the balance value of an asset brought forward from the previous year. Depreciation under this method is more in the initial year and less in latter years. This method is also known as Written Down Value Method or Reducing Instalment Method. The rate of depreciation is calculated as under: R =1–n where,

R n s c

s c

= Rate of Depreciation = Number of useful years = Scrap value = Cost of an asset.

Distinction between Fixed Instalment Method and Written Down Value Method Basis of Distinction

Fixed Instalment Method

Written down value Method

Depreciation

Calculated on original cost

Calculated on written down value

Amount of Depreciation

Remains constant

Goes on decreasing

Depreciation plus repairs and renewals

Amount goes on increasing in later years as compared to that of initial years

Amount remains almost uniform year after year

Value of asset

Value of asset become, zero or equal to its scrap value.

Value of asset does not become zero

Calculation

Simple

252

Financial Accounting

Change in Method of Depreciation According to the Accounting Standard 6 (revised) issued by ICAI, the method of charging depreciation should be applied consistently. A firm can change the method of charging depreciation from Fixed Instalment Method to Written Down Value method or vice versa. If the change is with immediate effect or prospective effect, no adjustment is required. Whereas if a change in the method of depreciation with retrospective effect, the following steps are to be taken: 1. Calculate total depreciation till date according to old method. 2. Calculate total depreciation till date according to new method. 3. Ascertain the difference between the total depreciation under old method and new method. 4. If the amount of depreciation is more under the new method than the old method, adjust it by passing the following journal entry. Profit and Loss A/c To Asset A/c

Dr.

xxx xxx

5. If the amount of depreciation is less under the new method than the old method, adjust it by passing the following journal entry. Asset A/c To Profit and Loss A/c

Dr.

xxx xxx

6. Charge depreciation from the current account year by adopting New Method. According to AS 6 (Revised), the following information should be disclosed in the financial statement of an enterprise: (i) The historical cost or other amount substituted for historical cost of each class of depreciable assets. (ii) Total depreciation for the period for each class of assets. (iii) The related accumulated depreciation. (iv) Depreciation methods and any changes thereof, along with their effects of material. (v) Depreciation rates or the useful life of the assets, if they are different from the principal rates specified in the statute governing the enterprise. (vi) Effect of revaluation, if any. According to AS 6 (Revised), depreciable assets are assets which – (i) are expected to be used during more than one accounting period; (ii) have a limited useful life; and (iii) are held by an enterprise for use in the production or supply of goods and services, for rental to others, or for administrative purposes and not for the purpose of sale in the ordinary course of business.

(III) Sum of the Digits Method This is an American method. It is a different form of Diminishing Balance Method based on the assumption that with the asset getting older, the amount of depreciation

Depreciation Accounting

253

also goes on decreasing. According to this method, depreciation is calculated by using the following formula: Depreciation = [Remaining life of the asset including current year/Total of all the digits representing the life of the asset (in years)] ¥ Amount to be written off Advantages (i) The total charge to Profit and Loss Account for depreciation decreases as the cost of repairs tends to increase. (ii) Rate of depreciation is fixed. (iii) This method is recognised by the Income Tax Act. (iv) This method is suitable for building, plant, machinery, etc. Disadvantages (i) Calculation of proper rate of depreciation is not very easy. (ii) It does not take into consideration the capital invested in the asset and interest thereon. (iii) It does not make any provision for replacement of old asset. (iv) In this method, it takes a very long time to write down the value of an asset and the value can never be reduced to zero. (v) Possibility of obsolescence is more due to technological advancement.

(IV) Annuity Method The three methods mentioned above do not consider the amount spent on purchase of an asset as an investment and interest on such investment. But this method considers interest on investment made calculated from annuity tables. Depreciation here includes some portion of the asset and some portion of this expected amount of interest also. This method is suitable for those assets which require huge amount of capital e.g., leasehold property. The following journal entries are required. (i) When an asset is purchased Asset A/c To Bank A/c (ii) When Interest is charged

Dr.

Asset A/c To Interest A/c (iii) When depreciation is charged

Dr.

Depreciation A/c To Asset A/c

xxx xxx xxx xxx

Dr.

xxx xxx

Advantages (i) This method considers interest on investment made. (ii) It is a scientific approach as it considers purchase of an asset as an investment and charges interest. (iii) It is suitable only for those assets which require huge capital investment.

254

Financial Accounting

Disadvantages (i) It is not suitable as it creates uniform effect on Profit and Loss Account. (ii) It is not at all suitable for those assets which require small capital.

(V) Depreciation Fund Method This method is also known as Sinking Fund Method as the amount of depreciation is calculated with the help of Sinking Fund Tables. For all the above mentioned methods, ready cash may not be available at the time of replacement of an asset. This particular aspect is taken care of in this method. Here, the amount of depreciation charged to profit and loss should be kept aside in Depreciation Fund Account and invested in readily saleable securities through Depreciation Fund Investment Account. The interest on such investment is also invested in similar securities. The investments accumulate and at the time replacement of old assets, these investments are sold out and new assets are purchased with the sale proceeds without disturbing the financial position. This method provides adequate amount of funds for replacement of assets. Since the securities also earn interest, there is no need to provide for full amount of depreciation, something less is enough. The Journal entries are as follows: For the First Year (i) When asset is purchased Assets A/c To Bank A/c (ii) When depreciation is charged

Dr.

xxx xxx

Depreciation A/c Dr. xxx To Depreciation Fund A/c xxx (iii) When depreciation is transferred to Profit and Loss A/c Profit and Loss A/c To Depreciation A/c (iv) When investment is made Depreciation Fund Investment A/c

Dr.

xxx xxx

Dr.

xxx

To Bank A/c

xxx

For Second and Subsequent Years (i) When depreciation charged Depreciation A/c Dr. xxx To Depreciation Fund A/c xxx (ii) When depreciation is transferred to Profit and Loss A/c Profit and Loss A/c To Depreciation A/c

Dr.

xxx xxx

Depreciation Accounting

(iii) When interest received Bank A/c Dr. To Interest on Depreciation Fund Investment A/c

xxx xxx

(iv) When interest is transferred Interest on Depreciation Fund Investment A/c To Depreciation Fund A/c

Dr.

xxx xxx

For Last Year (Year of Sale of Investment) (i) When depreciation is charged Depreciation A/c Dr. xxx To Depreciation Fund A/c xxx (ii) When Depreciation is transferred to Profit and Loss A/c Profit and Loss A/c To Depreciation A/c (iii) When interest received

Dr.

xxx

Bank A/c Dr. To Interest on Depreciation Fund Investment A/c (iv) When interest is transferred Interest on Depreciation Fund Investment A/c To Depreciation Fund A/c (v) When investments are sold

Dr.

Depreciation Fund A/c To Depreciation Fund Investment A/c (viii) When old asset is written off Depreciation Fund A/c To Asset A/c

xxx xxx

xxx xxx

Bank A/c Dr. To Depreciation Fund Investment A/c (vi) When profit on investment transferred Depreciation Fund Investment A/c To Depreciation Fund A/c (vii) When loss is transferred

xxx

Dr.

xxx xxx

xxx xxx

Dr.

xxx xxx

Dr.

xxx xxx

255

256

Financial Accounting

(ix) When Depreciation Fund A/c is closed, if there is a credit balance Depreciation Fund A/c To Profit and Loss A/c

Dr.

xxx xxx

(If there is a debit balance, reverse entry is required)

(VI) Insurance Policy Method Under this method, an insurance policy is taken for an asset to be replaced. Premium is paid in the beginning of every year. This premium is equal to the amount of depreciation. At the end of the policy period, the Insurance company will pay the amount which is used to buy a new asset in order to replace old one. The journal entries are as follows: For First and Subsequent Years (i) When premium is paid in the beginning of the year Depreciation Insurance Policy A/c Dr. xxx To Bank A/c xxx (ii) When depreciation is charged at the end of the year Profit and Loss A/c Dr. To Depreciation Reserve A/c

xxx xxx

For the Last Year First two journal entries are repeated. At the end of policy period: (i) When policy amount is received Bank A/c Dr. To Depreciation Insurance Policy A/c (ii) When profit is transferred Depreciation Insurance Policy A/c Dr. To Depreciation Reserve A/c (iii) When Depreciation Reserve A/c is closed

xxx

Depreciation Reserve A/c To Asset A/c (iv) When new asset is purchased

xxx

New Asset A/c To Bank A/c

Dr.

xxx xxx

xxx

xxx Dr.

xxx xxx

Advantages (i) Under this method, asset is secured against any loss, as the insurance company undertakes the risk.

Depreciation Accounting

257

(ii) It is very simple and suitable for those assets which are to be replaced at the end of their lives. (iii) A definite amount is received from insurance company on maturity of the policy. Disadvantages (i) There is no possibility of making profit, as in the case of depreciation fund method, due to increase in market value of investments. (ii) Since the same amount of depreciation is charged to Profit and Loss Account every year, Profit and Loss A/c does not show the true financial position.

(VII) Revaluation Method Under this method, asset is revalued at the end of every year. If book value is more than the revaluation amount, the difference is depreciation and charged to Profit and Loss Account. But, if revaluation amount is more than the book value, this excess is ignored and no depreciation is charged to Profit and Loss Account. This method is suitable for livestocks, loose tools, patents, copyrights, etc. This method is also known as Annual Revaluation Method.

(VIII) Depletion Method This method is suitable for natural resources e.g., oil wells, mines, quarries, etc. Value of mines depends upon the quantity of minerals extracted from it. If the whole quantity of minerals is taken out, it reaches the stage of depletion, which is why this method is called Depletion Method. Depreciation under this method is calculated by using the following formula: Depreciation = (Output (in tonnes) of one year/Total quantity of minerals expected to be taken out during the life of the mine) ¥ Original cost of mine

(IX) Machine – Hour Rate Method Under this method, depreciation is calculated on the basis of estimated working hours. Here, the life of machine is calculated on the basis of working hours but not in years. The formula for calculation of depreciation is as follows: Depreciation = (Original cost of machine – Scrap value if any)/Estimated life of the machine in hours

(X)- Kilometre Method This method is used to calculate depreciation in transport companies. This is an appropriate method for buses, lorries, cars and similar types of vehicles. The formula for calculation of depreciation is: Depreciation per kilometre = (Cost of vehicle – Scrap value if any)/Estimated life in kilometres

Financial Accounting

258

Illustrations Index for Illustrations Type

Ill. No.

(i)

Straight line method

(ii)

Written down value method

1–6

(iii)

Provision for depreciation account

10–12

(iv)

Change in method-prospective

13–14

(v)

Change in method-retrospective

15–17

(vi)

Depreciation fund method

18–22

7–9

I – STRAIGHT LINE METHOD Amount of Depreciation Illustration 1 JK Brothers purchased two assets, particulars of which are given as under: Cost Furniture Plant

Scrap value

Estimated life

Rs. 73,200

Rs. 480

6 years

Rs. 1,52,800

Rs. 3,280

8 years

You are required to determine the amount of depreciation to be written off in each case. Assume that the company has adopted straight-line method of depreciation. Solution Amount of depreciation = (Total cost of machine – Scrap value)/Useful life The amount of depreciation to be written off in case of furniture and plant are: Furniture = (73,200 – 480)/6 = Rs. 12,120 (p.a) Plant = (1,52,800 – 3,280)/8 = Rs. 18,690 (p.a)

Depreciation amount, Rate of Depreciation and Asset Account Illustration 2 An asset is purchased for Rs. 25,000. Depreciation is to be provided annually according to the straight line method. The useful life of the asset is 10 years and the residual value is Rs. 500. You are required to find out (a) depreciation amount (b) the rate of depreciation and (c) Asset Account for the first three years. Solution (a) Amount of depreciation = (Total Cost of Machine – Scrap Value)/Useful Life = (25,000 – 500)/10 = Rs. 2,450 (p.a) (b) Rate of depreciation = (Depreciation amount ¥ 100)/Total cost of asset = (2,450 ¥ 100)/25,000 = 9.85%

Depreciation Accounting

259

(c) Asset Account Date Year I Jan 1

Particulars

LF

Rs. 25,000

To Bank

Date Year I Dec 31

Particulars

LF

By Depreciation By Balance c/d

2,450 22,550

25,000 Year II Jan 1

To Balance b/d

22,550

25,000 Year II Dec 31

By Depreciation By Balance c/d

2,450 20,100

22,550 Year III Jan 1

To Balance b/d

20,100

22,550 Year III Dec 31

By Depreciation By Balance c/d

2,450 17,650

20,100 Year IV Jan

To Balance b/d

Rs.

20,100

17,650

Depreciation Amount without Rate of Depreciation Illustration 3 A packing concern dealing with containers provides the particulars of purchase and estimated value of containers for three years, from which prepare Containers Account: 2005 Rs. Containers purchased Estimated value on 31st Dec

2006 Rs.

2007 Rs.

12,000

4,800

8,850

8,100

7,950

10,500

Solution Containers Account Date 2005 Jan 1

Rs. To Bank

12,000

Date 2005 Dec 31

Rs. By Depreciation By Balance c/d

12,000 2006 Jan 1

To Balance b/d To Bank

8,100 4,800

12,000 2006 Dec 31

By Depreciation By Balance c/d

12,900 2007 Jan 1

To Balance b/d To Bank

7,950 8,850

To Balance b/d

4,950 7,950 12,900

2007 Dec 31

By Depreciation By Balance c/d

16,800 2008 Jan 1

3,900 8,100

6,300 10,500 16,800

10,500

Capitalising Expense, 3 Purchases and 1 Sale Illustration 4 Madhan Co. Ltd. has imported a machine on July 1, 2003 for Rs. 1,28,000, paid customs duty and freight Rs. 64,000 and incurred erection charges Rs. 48,000. Another local machinery costing Rs. 80,000 was purchased on January 1, 2004. On

260

Financial Accounting

July 1, 2005 a portion of the imported machinery (value one third) got out of order and was sold for Rs. 27,840. Another machinery was purchased to replace the same for Rs. 40,000. Depreciation to be calculated at 20% p.a. under straight line method. Show the Machinery Account for 2003, 2004 and 2005. Solution Machinery Account Date 2003 July 1

Particulars To Bank (I) To Bank (a)

Rs. 1,28,000 1,12,000

Date 2003 Dec 31

Particulars By Depreciation A/c (I) 2,40,000 ¥ 20% ¥ 6/12 By Balance c/d

2,40,000 2004 Jan 1

To Balance b/d To Bank (II)

2,16,000 80,000

To Balance b/d To Bank (III)

2,32,000 40,000

By Depreciation (I) 2,40,000 ¥ 20% ¥ 1 year (II) 80,000 ¥ 20% ¥ 1 year By Balance c/d

By Bank (Sale) (I) By Depreciation (b)

2,72,000 To Balance b/d

48,000 16,000 2,32,000 2,96,000

2005 July 1 Dec 31

sale) (b) By Depreciation (I) 1,60,000 (c) ¥ 20% ¥ 1 year (II) 80,000 ¥ 20% ¥ 1 year (III) 40,000 ¥ 20% ¥ 6/12 By Balance c/d 2006 Jan 1

24,000 2,16,000 2,40,000

2004 Dec 31

2,96,000 2005 Jan 1 July 1

Rs.

27,840 8,000 20,160

32,000 16,000 4,000 1,64,000 2,72,000

1,64,000

(a) Expense on purchase to be capitalised Rs. Customs and Freight Erection charges

64,000 48,000 1,12,000

(b) Profit or loss on sale of machine on 1.7.2005 Rs. Cost price (2,40,000 ¥ 1/3) as on 1.7.2003 (–) Depreciation (80,000 ¥ 20% ¥ 6/12)

80,000 8,000

WDV as on 1.1.2004

72,000

(–) Depreciation (80,000 ¥ 20% ¥ 1 year)

16,000

WDV as on 1.1.2005

56,000

(–) Depreciation till date of sale (6 months) WDV on date of sale (–) Sold for

8,000 48,000 27,840 20,160

(c) 2/3rd of the machine (I) is still existing = 2,40,000 ¥ 2/3 = 1,60,000

Depreciation Accounting

261

Machine Purchased in Instalment and Sale of 1 Machine Illustration 5 On July 1, 2005 Shyam Ltd. purchased second-hand machinery for Rs. 40,000 and spent Rs. 6,000 on reconditioning and installing it. On January 1, 2006 the firm purchased new machinery worth Rs. 24,000. On Jun 30, 2007 the machinery purchased on January 1, 2006 was sold for Rs. 16,000. On July 1, 2007 fresh machinery was purchased on instalment basis, payment for this machinery was to be made as follows: July 1, 2007

Rs. 10,000

June 30, 2008

Rs. 12,000

June 30, 2009

Rs. 11,000

Payments in 2008 and 2009 include interest Rs. 2,000 and Rs. 1,000 respectively. The Company writes off depreciation @ 10% p.a. an original cost. The accounts are closed every year on 31st March. Show the Machinery Account for three years ending March 31, 2008. Solution Machinery Account Date 2005 July 1 2006 Jan 1

Particulars

Rs.

To Bank (I) To Bank (exp.)

40,000 6,000

To Bank (II)

24,000

Date 2006 Mar 31

Particulars By Depreciation (I) 46,000 ¥ 10% ¥ 9/12 (II) 24,000 ¥ 10% ¥ 3/12 By Balance c/d

70,000 2006 Apr 1

To Balance b/d

65,950

To Balance b/d To Bank (III) (a)

By Depreciation (I) 46,000 ¥ 10% ¥ 1 year (II) 24,000 ¥ 10% ¥ 1 year By Balance c/d

To Balance b/d

46,350

46,350 2008 Apr 1

To Balance b/d

40,950

4,600 2,400 58,950 65,950

2007 58,950 June 30 By Bank (Sale) 30,000 By Depreciation (I) 46,000 ¥ 10% ¥ 3/12 (b) Mar 31 By Depreciation (II) 24,000 ¥ 10% ¥ 1 year (III) 30,000 ¥ 10% ¥ 9/12 By Balance c/d 88,950

2007 Apr 1

3,450 600 65,950 70,000

2007 Mar 31

65,950 2007 Apr 1 July 1

Rs.

16,000 1,150 20,800 2,400 2,250 46,350 88,950

2008 Mar 31

Depreciation (II) 24,000 ¥ 10% ¥ 1 year (III)30,000 ¥ 10% ¥ 1 year By Balance c/d

2,400 3,000 40,950 46,350

262

Financial Accounting

Working Note (a) To find the actual cost of machine purchased on 1.7.2007 is installments Total instalment amount (10,000 + 12,000 + 11,000) (–) Total interest (2,000 + 1,000) * Actual cost of machine

Rs. 33,000 Rs. 3,000 Rs. 30,000

Machine A/c

(b) Profit or Loss on machine (I) sold on 30.6.2007 Cost price (1.7.2005) (–) Depreciation 46,000 ¥ 10% ¥ 9/12 WDV as 1.4.2006 (–) Depreciation 46,000 ¥ 10% ¥ 1 year WDV as on 1.4.2007 (–) Depreciation till date of sale 46,000 ¥ 10% ¥ 3/12 WDV on date of sale (–) Sold for

46,000 3,450 42,550 4,600 37,950 1,150 36,800 16,000 20,800

Purchase of 5 Lorries and Sale of one Lorry Illustration 6 Jeevan Logistics Company purchased 5 lorries at Rs. 5,00,000 each on April 1, 2006. The company writes off depreciation @ 20% per annum on original cost and observes calendar year as its accounting year. On October 1, 2008 one of the lorries met with an accident and is completely destroyed. Insurance company pays Rs. 1,20,000 in full settlement of the claim. On the same day the company purchases a used lorry for Rs. 3,00,000 and spends Rs. 40,000 on its overhauling. Prepare Lorry Account for the three years ending on December 31, 2008. Solution Lorry Account Date 2006 Apr 1

Particulars To Bank

Rs. 25,00,000

Date 2006 Dec 31

Particulars By Depreciation 25,00,000 ¥ 20% ¥ 9/12 By Balance c/d

25,00,000 2007 Jan 1

To Balance b/d

21,25,000

2007 Dec 31

21,25,000 2008 Jan 1 Oct 1

To Balance b/d To Bank To Bank (exp)

16,25,000 3,00,000 40,000

2008 Oct 1

By Depreciation 25,00,000 ¥ 20% ¥ 1 year By Balance c/d By Balance c/d By Bank (Sale) By Depreciation 5,00,000 ¥ 20% ¥ 9/12

Dec 31 Depreciation 4 ¥ 5 lac ¥ 20% ¥ 1 year 3,40,000 ¥ 20% ¥ 3/12 By Balance c/d 19,65,000 2008 Jan 1

To Balance b/d

12,23,000

Rs.

3,75,000 21,25,000 25,00,000

5,00,000 16,25,000 21,25,000 1,20,000 75,000 1,30,000 4,00,000 17,000 12,23,000 19,65,000

Depreciation Accounting

263

Rs. Cost price (1.4.2006)

5,00,000 75,000

(–) Depreciation 5,00,000 ¥ 20% ¥ 9/12 WDV as 1.1.2007

4,25,000

(–) Depreciation 5,00,000 ¥ 20% ¥ 1 year

1,00,000

WDV as on 1.1.2008

3,25,000

(–) Depreciation till date of sale 5,00,000 ¥ 20% ¥ 9/12

75,000

WDV on date of sale

2,50,000

(–) sold for

1,20,000 1,30,000

II – WRITTEN DOWN VALUE METHOD Purchase and Sale of Asset Illustration 7 A manufacturing concern whose books are closed on 31st December every year, purchased machinery for Rs. 50,000 on 1.1.2000. Additional machinery was acquired for Rs. 10,000 on 1.7.2001 and for Rs. 16,061 on 1.1.2004. Certain machinery purchased for Rs. 10,000 on 1.1.2000 was sold for Rs. 5,000 on 30.6.2003. Give the Machinery Account for 5 years writing off depreciation at 10% p.a. on written down value. Solution Machinery Account Rs. 2000 Jan 1

To Bank (I)

2001 Jan 1 July 1

To Balance b/d To Bank (II)

2002 Jan 1

To Balance b/d

2003 Jan 1

To Balance b/d

2000 50,000 Dec. 31 By Depreciation (I) 50,000 ¥ 10% ¥ 1 year By Balance c/d 50,000 2001 45,000 Dec. 31 By Depreciation 10,000 (I) 45,000 ¥ 10% ¥ 1 year (II) 10,000 ¥ 10% ¥ 6/12 By Balance c/d 55,000 2002 50,000 Dec. 31 By Depreciation (I) 40,500 ¥ 10% ¥ 1 year (II) 9,500 ¥ 10% ¥ 1 year By Balance c/d 50,000 2003 45,000 June 30 By Bank (Sale) By Depreciation 7,290 ¥ 10% ¥ 6/12 (a) Dec. 31 By Depreciation (I) 29,160 ¥ 10% ¥ 1 year (b) (II) 8,550 ¥ 10% ¥ 1 year By Balance c/d 45,000

Rs.

5,000 45,000 50,000

4,500 500 50,000 55,000

4,050 950 45,000 50,000 5,000 365 1,925 2,916 855 33,939 45,000

264

Financial Accounting

Rs. 2004 Jan 1

To Balance b/d To Bank (III)

33,939 16,061

Rs. 2004 Dec 31

Rs. Depreciation 33,939 ¥ 10% ¥ 1 year (III) 16,061 ¥ 10% ¥ 1 year By Balance c/d

3,394 1,606 12,878 17,878

17,878 2005 Jan 1

To Balance b/d

12,878

*Working Note Rs. Cost price of part machine on 1.1.2000 (–) Depreciation 10,000 ¥ 10% ¥ 1 year WDV as 1.1.2001 (–) Depreciation 9,000 ¥ 10% ¥ 1 year WDV as on 1.1.2002 (–) Depreciation 8,100 ¥ 10 ¥ 1 year WDV as on 1.1.2003 (–) Depreciation till date of sale 7,290 ¥ 10% ¥ 6/12 WDV on date of sale (–) sold for

10,000 1,000 9,000 900 8,100 810 7,290 365 6,925 5,000 1,925

(b) WDV of existing machine (I) Total WDV as on 1.1.2003 = 36,450 (–) WDV of sold machine as on 1.1.2003 = 7,290 WDV of existing machine (I) = 29,160

Machine Sold/Exchanged/Destroyed Illustration 8 X Ltd. purchased a machine for Rs. 60,000 on 1.1.2003. Depreciation is provided @ 10% p.a. on diminishing balance method. Prepare the Machinery Account for the year 2005 in each of the following alternative cases: (a) Machine being sold on 1.7.2005 for Rs. 27,500 (b) Machine being purchased on 1.7.2005 costing Rs. 65,000 in exchange of the old one and paying an amount of Rs. 30,000 (c) Machine being destroyed by fire on 1.7.2005 with scrap value of Rs. 500 and insurance company accepting the claim for Rs. 26,000 Solution (a) Machine being sold Machinery Account Date 2005 Jan 1

Particulars To Balance b/d

Rs. 48,600

Date 2005 July 1 Dec 31

48,600

Particulars By Bank (Sale) By Depreciation*

Rs. 27,500 2,430 18,670 48,600

Depreciation Accounting

265

Rs. WDV as on 1.1.2005 (given) (–) Depreciation till date of sale (48,600 ¥ 10% ¥ 6/12) WDV on date of sale

48,600 2,430 46,170

(–) Sold for

27,500 18,670

(b) Machine being exchanged Machinery Account Date 2005 Jan 1 July 1

Particulars

Rs.

To Balance b/d To Vendor

48,600 65,000

Date 2005 July 1

Particulars

Rs. 35,000 2,430 11,170

By Vender (exchange) By Depreciation*

Dcc 31 By Depreciation 65,000 ¥ 10% ¥ 6/12 By Balance c/d 1,13,600

3,250 61,750 1,13,600

Rs. WDV as on 1.1.2005 (given) (–) Depreciation till date of sale (48,600 ¥ 10% ¥ 6/12) WDV on date of sale

48,600 2,430 46,170

(–) Exchange value Net (65,000 – 30,000)

35,000 11,170

Machinery Account Date 2005 Jan 1

Particulars To Balance b/d

Rs. 48,600

Date 2005 July 1 Dcc 31

Particulars

Rs.

By Bank (Scrap) By Insurance Co. By Depreciation *

500 26,000 2,430 19,670 48,600

48,600

Rs. WDV as on 1.1.2005 (given) (–) Depreciation till date of sale (48,600 ¥ 10% ¥ 6/12) WDV on date of sale (–) Claim accepted (26,000) and Scrap (500)

48,600 2,430 46,170 26,500 19,670

Machine Purchased, 1 Sold, 1 Scraped Illustration 9 The Machinery Account of a factory showed a balance of Rs. 3,80,000 on 1st January, 2006. The accounts are closed every year on 31, December. Depreciation is written off @ 10% p.a. on diminishing balance. On 1st June, 2006 new machinery was acquired at a cost of Rs. 57,783 and on the same date a machine which had cost Rs. 12,000 on 1st January, 2001 was sold for Rs. 1,500 and another machine which had cost Rs. 1,200 on 1st January 2002 was scarpped without realising anything. Show the Machinery Account for the year 2006. (B.Com., Madras)

266

Financial Accounting

Solution Machinery Account Date 2006 Jan 1 June 1

Particulars To Balance b/d To Bank

Rs. 3,80,000 57,783

Date 2006 June 1

Particulars

Rs. 1,500 295 5,291 Nil 33 754

By Bank (Sale) By Depreciation (a) By Bank (Scrapped) (b) By Depreciation (b)

Dec 31 By Depreciation (old existing machine-(c) 3,72,127 ¥ 10% ¥ 1 yr) (New machine 57,783 ¥ 10% ¥ 7/12) By Balance c/d 4,37,783 2007 Jan 1

To Balance b/d

37213 3,371 3,89,326 4,37,783

3,89,326

Rs. Cost price (1.1.2001) (–) Depreciation (12,000 ¥ 10% ¥ 1 year) WDV as on 1.1.2002 (–) Depreciation (10,800 ¥ 10% ¥ 1 year) WDV as on 1.1.2003 (–) Depreciation (9,720 ¥ 10% ¥ 1 year) WDV as on 1.1.2004 (–)Depreciation (8,748 ¥ 10% ¥ 1 year) WDV as on 1.1.2005 (–)Depreciation (7,873 ¥ 10% ¥ 1 year) WDV as on 1.1.2006 (–)Depreciation till date of sale (7,086 ¥ 10% ¥ 5/12) WDV as on date of sale (–) Sold for

12,000 1,200 10,800 1.080 9,720 972 8,748 875 7,873 787 7,086 295 6,791 1,500 5,291

Rs. Cost price (1.1.2002) (–) Depreciation (1,200 ¥ 10% ¥ 1 year) WDV as on 1.1.2003 (–) Depreciation (1,080 ¥ 10% ¥ 1 year) WDV as on 1.1.2004 (–) Depreciation (972 ¥ 10% ¥ 1 year) WDV as on 1.1.2005 (–)Depreciation (875 ¥ 10% ¥ 1 year) WDV as on 1.1.2006 (–)Depreciation till date of sale (787 ¥ 10% ¥ 5/12) WDV as on date of sale (–) Scrap

1,200 120 1,080 108 972 97 875 88 787 33 754 Nil 754

Depreciation Accounting

267

(c) WDV of the old existing machine as on 1.1.2006 Rs. WDV of the total machine

3,80,000

(–) WDV of sold machine

7,086

(–) WDV of scrapped machine

787

WDV of the existing machine

3,72,127

III – PROVISION FOR DEPRECIATION ACCOUNT No Provision Account, Provision Account, Journal, Ledger and Balance Sheet Illustration 10 Sujatha Job Works purchased a machine by cheque for Rs. 1,50,000 on 1st January 2006. The life of the machine estimated as 10 years and assuming the scrap value at the end of that time as Rs. 10,000. It was decided to write off depreciation by equal annual instalments. You are required to (a) pass necessary journal entries for 2006 and 2007 (b) show necessary Ledger Accounts (c) prepare Balance Sheet (i) when no provision for Depreciation Account is maintained and (ii) when provision for Depreciation Account is maintained. Solution Amount of depreciation = (Total cost of machine – Scrap value)/Useful life = (1,50,000 – 10,000)/10 = Rs. 14,000 (p.a.) (i) When no provision for Depreciation Account is maintained in the Books of Sujatha Job Works (a) Journal Entries Date

Particulars

Rs.

Rs.

2006 Jan 1

Machinery Account

Dr.

1,50,000

To Bank A/c …

1,50,000

(Being machinery was purchased and paid through cheque) Dec 31

Depreciation Account

Dr.

14,000

To Machinery Account

14,000

(Being depreciation charged on the Machinery Account) Dec 31

Dr. To Depreciation Account

14,000 14,000

268

Financial Accounting

2007 Dec 31

Depreciation Account

Dr.

14,000

To Machinery Account

14,000

(Being depreciation charged on the Machinery Account) Dec 31

Dr.

14,000

To Depreciation Account

14,000

(b) Ledger Machinery Account Date 2006 Jan 1

To Bank

Rs.

Date

1,50,000

2006 Dec 31

Rs. By Depreciation By Balance c/d

14,000 1,36,000

1,50,000 2007 Jan 1

To Balance b/d

1,36,000

1,50,000 2007 Dec 31

By Depreciation By Balance c/d

14,000 1,22,000

1,36,000 2008 Jan 1

To Balance b/d

1,36,000

1,22,000

Depreciation Account Date 2006 Dec 31 2007 Dec 31

Rs. To Machinery To Machinery

Date

Rs.

14,000

2006 Dec 31

14,000

14,000

2007 Dec 31

14,000

(c) Balance Sheet as at 31st December 2006 Liabilities

Assets

Rs.

Machinery

Rs.

1,50,000 14,000

1,36,000

Balance Sheet as at 31st December 2007 Liabilities

Assets

Rs.

Machinery

Rs.

1,36,000 14,000

1,22,000

(ii) When provision for Depreciation Account is maintained (a) Journal Entries Date

Particulars

Rs.

Rs.

2006 Jan 1

Machinery Account To Bank Account

Dr.

1,50,000 1,50,000

(Being machinery was purchased and paid through cheque) Contd.

Depreciation Accounting

269

Contd. Rs. Dec 31

Depreciation Account

Dr.

Rs.

14,000

To Provision for Depreciation Account

14,000

(Being depreciation is debited to Provision for Depreciation Account) Dec 31

Dr.

14,000

To Depreciation Account

14,000

2007 Dec 31

Depreciation Account

Dr.

14,000

To Provision for Depreciation Account

14,000

(Being depreciation is debited to Provision for Depreciation Account) Dec 31

Dr. To Depreciation Account

14,000 14,000

(b) Ledger Machinery Account Date 2006 Jan 1

To Bank

Rs.

Date

1,50,000

2006 Dec 31

Rs. By Balance c/d

1,50,000 2007 Jan 1

To Balance b/d

1,50,000

1,50,000 2007 Dec 31

By Balance c/d

1,50,000 2008 Jan 1

To Balance b/d

1,50,000

1,50,000 1,50,000

1,50,000

Depreciation Account Date 2006 Dec 31 2007 Dec 31

Rs.

Date

To Provision for Depreciation A/c

14,000

2006 Dec 31

To Provision for Depreciation A/c

14,000

2007 Dec 31

Rs. 14,000

14,000

Provision for Depreciation Account Date 2006 Dec 31

Rs. To Balance c/d

14,000

Date 2006 Dec 31

Rs. By Depreciation A/c

14,000 2007 Dec 31

To Balance c/d

28,000

14,000 14,000

2007 Jan 1 Dec 31

By Balance b/d By Depreciation

28,000

14,000 14,000 28,000

2008 Jan 1

By Balance b/d

28,000

270

Financial Accounting

(c) Balance Sheet as on December 31st 2006 Liabilities

Assets

Rs.

Machinery

Rs.

1,50,000 14,000

1,36,000

Balance Sheet as on 31st December 2007 Liabilities

Assets

Rs.

Machinery

Rs.

1,36,000 14,000

1,22,000

Provision for Depreciation - SLM Illustration 11 On April 1, 2003, Joy Machine Tools purchased a machinery for Rs. 20,000. On 1st October in the same accounting year, additional machinery costing Rs. 10,000 was purchased. On 1st October, 2004, the machinery purchased on 1st April, 2003, having become obsolete, was sold off for Rs. 9,000. On October 1, 2005, new machinery was purchased for Rs. 25,000 while the machinery purchased on 1st October, 2003 was sold for Rs. 8,500 on the same day. The firm provides depreciation on its machinery @ 10% per annum on original cost on 31st March every year. Show (a) Machinery Account, (b) Depreciation Account and (c) Provision for Depreciation Account for the period of three accounting years ending March 3, 2006. Solution Books of Joy Machine Tools (a) Machinery Account Date 2003 Apr 1 Oct 1

Particulars To Bank (I) To Bank (II)

Rs. 20,000 10,000

Date 2004 Mar 31

Particulars By Balance c/d

30,000 2004 Apr 1

To Balance b/d

30,000

By Bank (sale (I)) By Provision for Depreciation (b) By Balance c/d

30,000 To Balance b/d To Bank

10,000 25,000 500

9,000 8,000 3,000 10,000 30,000

2005 Oct 1 2006 Mar 31

By Bank (sale (II)) By Provision for Depreciation (d) By Balance c/d

35,500

30,000 30,000

2004 Oct 1 2005 Mar 31

2005 Apr 1 Oct 1 2006 Mar 31

Rs.

8,500 2,000 25,000 35,500

Depreciation Accounting

271

(b) Depreciation Account Date 2004 Mar 31

Particulars To Prov. for Depreciation

Rs. 2,500

Date

Particulars

Rs.

2004 Mar 31

2,500

2,500 2004 Oct 1 2005 Mar 31

To Prov. for Depreciation

1,000

To Prov. for Depreciation

1,000

2,500

2005 Mar 31

2,000

2,000 2005 Oct 1

To Prov. for Depreciation

2006 Mar 31

To Prov. for Depreciation

500

2,000 2006 Mar 31

1,750

1,250 1,750

1,750

(c) Provision for Depreciation Account Date 2004 Mar 31

Particulars To Balance c/d

Rs. 2,500

Date

Particulars

2004 Mar 31

By Depreciation (2,000 + 500)

Rs. 2,500

2,500 2004 Oct 1

2,500 2004 Apr 1

To Machinery A/c (2,000 + 1,000)

3,000

To Balance c/d

1,500

2005 Mar 31

Oct 1 2005 Mar 31

By Balance b/d

2,500

By Depreciation A/c

1,000 1,000

By Depreciation A/c

4,500 2005 Oct 1 To Machinery A/c 01.10.95 (500 + 1,000 + 500) 2006 Mar 31

To Balance c/d

2,000

4,500 2005 Apr 1 Oct 1 2006 Mar 31

By Balance b/d By Depreciation A/c

1,500 500

By Depreciation A/c

1,250

1,250 3,250

3,250 2006 Apr 1

By Balance b/d

1,250

Working Note (a) Profit or loss on sale of machine on 1.10.2004 Rs. Cost price as on 1.4.2003 (–) Depreciation (20,000 ¥ 10% ¥ 1 year) WDV as on 1.4.2004 (–) Depreciation till date of sale (20,000 ¥ 10% ¥ 6/12) WDV as on 1.10.2004 (–) sold for

20,000 2,000 18,000 1,000 17,000 9,000 8,000

(b) Provision for Depreciation on the Machine sold on 1.10.2004 = 2,000 + 1,000 = 3,000

272

Financial Accounting

(c) Profit or Loss on sale of machine on 1.10.2005 Rs. Cost price as on 1.10.2003

10,000 500

(–) Depreciation (10,000 ¥ 10% ¥ 6/12) WDV as on 1.4.2004

9,500

(–) Depreciation (10,000 ¥ 10% ¥ 1 year)

1,000

WDV as on 1.4.2005

8,500 500

(–) Depreciation till date of sale (10,000 ¥ 10% ¥ 6/12) WDV as on date of sale

8,000

(–) Sold for

8,500 500

(d) Provision for Depreciation on the Machine sold on 1.10.2005 = 500 + 1,000 + 500 = 2,000

Machinery Account, Machinery Disposal Account and Provision for Depreciation Account-SLM Illustration 12 On 1st January 2003 Rajeshwar Industries purchased 5 machines for Rs. 50,000 each. His accounting year ends on 31st December. Depreciation at the rate of 10% on initial cost has been charged to Profit and Loss Account and credited to separate Provision for Depreciation Account. On 1st January 2004, one machine was sold for Rs. 42,500 and on 1st January 2005 a second machine was sold for Rs. 41,500. An advanced model which costs Rs. 60,000 was purchased on 1st July 2004. The same rate of depreciation was decided for the new machine also. You are required to show (a) Machinery Account, (b) Machinery Disposal Account and (c) Provision for Depreciation Account. Solution Books of Rajeswar Industries - Ledger (a) Machinery Account Date 2003 Jan 1

To Bank (I) (5 ¥ Rs. 50,000)

Rs.

Date

2,50,000

2003 Dec 31

Rs. By Balance c/d

2,50,000 2004 Jan 1 July 1

To Balance b/d To Bank (II)

2,50,000 60,000

2004 Jan 1 Dec 31

By Machinery Disposal A/c (I) By Balance c/d

3,10,000 2005 Jan 1

To Balance b/d

2,60,000

2,60,000 To Balance b/d

2,10,000

50,000 2,60,000 3,10,000

2005 Jan 1 Dec 31

2006 Jan 1 1995

2,50,000 2,50,000

By Machinery Disposal A/c (II) By Balance c/d

50,000 2,10,000 2,60,000

Depreciation Accounting

273

(b) Machinery Disposal Account Date 2004 Jan 1

To Machinery (I)

Rs.

Date

50,000

2004 Jan 1

Rs. By Provision for Depreciation 50,000 ¥ 10% By Bank (sale)

5,000 42,500

Dec 31 (a)

2,500 50,000

50,000 2005 Jan 1 Dec 31

To Machinery (II)

50,000

(b)

1,500 51,500

2005 Jan 1

By Provision for Depreciation 50,000 ¥ 10% ¥ 2 years By Bank (sale)

10,000 41,500 51,500

(c) Provision for Depreciation Account Date 2003 Dec 31

Rs. To Balance c/d

25,000

Date 2003 Dec 31

Rs. By Depreciation (2,50,000 ¥ 10%)

25,000 25,000

25,000 2004 Jan 1 Dec 31

To Machinery Disposal A/c To Balance c/d

5,000 43,000

2004 Jan 1 Dec 31

By Balance b/d Depreciation (old) 50,000 ¥ 4 ¥ 10% (new) 60,000 ¥ 10% ¥ 6/12

25,000

By Balance b/d Depreciation (I) 50,000 ¥ 3 ¥ 10% (II) 60,000 ¥ 10% ¥

43,000

By Balance b/d

59,000

20,000 3,000 48,000

48,000 2005 Jan 1 Dec 31

To Machinery Disposal A/c To Balance c/d

5,000 59,000

2005 Jan 1 Dec 31

15,000 6,000 64,000

64,000 2006 Jan 1

Working Notes Rs. Cost of Machine as on 1.1.2003 (–) Depreciation (50,000 ¥ 10% ¥ 1 year)

50,000 5,000

WDV as on date of sale (1.1.2004)

45,000

(–) Sold for

42,500 2,500

Rs. Cost of Machine as on 1.1.2003 (–) Depreciation (50,000 ¥ 10% ¥ 1 year)

50,000 5,000

WDV as on 1.1.2004

45,000

(–) Depreciation (50,000 ¥ 10% ¥ 1 year)

5,000

WDV as on date of sale (1.1.2005)

40,000

(–) Sold for

41,500 1,500

274

Financial Accounting

IV – CHANGE IN METHOD - PROSPECTIVE SLM to WDV Illustration 13 A manufacturing company purchased on 1st January 2001 a second hand plant for Rs. 30,000 and immediately spent Rs. 20,000 on overhauling it. On 1st July 2001, additional machinery costing Rs. 25,000 was purchased. On 1st July 2003, the plant purchased on 1st January 2001 became obsolete and was sold for Rs. 10,000. On that date a new machine was purchased at a cost of Rs. 60,000. Depreciation was provided for annually on 31st December at the rate of 10% p.a. on the original cost of asset. On 2004, however, the company changed this method of providing depreciation and adopted the method of writing off 15% on diminishing value. Show the Machinery Account as it would appear in the books of the company for the years 2001 to 2004. (B.Com., Hons., Delhi) Solution Machinery Account Rs. 2001 Jan 1 July 1

To Bank (I) (30,000 + 20,000) To Bank (II)

Rs. 2001 Dec 31

50,000 25,000

By Depreciation 50,000 ¥ 10% (I) 25,000 ¥ 10% ¥ 6/12 (II) By Balance c/d

75,000 2002 2001

To Balance b/d

68,750

75,000 2002 Dec 31

By Depreciation 50,000 ¥ 10% (I) 25,000 ¥ 10% (II) By Balance c/d

68,750 2003 * Jan 1 July 1

To Balance b/d To Bank (III)

61,250 60,000

5,000 1,250 68,750

5,000 2,500 61,250 68,750

2003 * July 1

By Bank (sale) (I) By Depreciation 50,000 ¥ 10% ¥ 6/12

10,000

(a) By Depreciation 25,000 ¥ 10% (II) 60,000 ¥ 10% ¥ 6/12 By Balance c/d

27,500

2,500

Dec 31

1,21,250 2004 Jan 1

To Balance b/d

75,750

75,750

2,500 3,000 75,750 1,21,250

2004 Dec 31

By Depreciation 75,750 ¥ 15% By Balance c/d

11,362 64,388 75,750

Depreciation Accounting

275

Working Note (a) Profit or loss on sale of machine on 1.7.2003 Rs. Cost price as on 1.1.2001

50,000 5,000

(–) Depreciation (50,000 ¥ 10%) WDV as on 1.1.2002

45,000 5,000

(–) Depreciation (50,000 ¥ 10%) WDV as on 1.1.2003

40,000 2,500

(–) Depreciation till date of sale (50,000 ¥ 10% ¥ 6/12) WDV on date of sale

37,500

(–) Sold for

10,000 27,500

WDV to SLM Illustration 14 Xylo Ltd. purchased a machine on 1.1.2003 for Rs. 80,000 and spent Rs. 20,000 towards its installation. It also purchased another machine on 1.7.2003 for Rs. 40,000. On 1.7.2005, the machine installed on 1.1.2003 was sold for Rs. 55,000 spending Rs. 5,000 towards dismantling charges. On the same date another machine was purchased for Rs. 30,000. The company provided depreciation at 10% p.a. on written down value method. In 2006, the company decided to change the method of charging depreciation to straight line method @ 15%. The change is not to be made with retrospective effect. Show Machinery Account from 2003 to 2007. Solution Machinery Account Rs. 2003 Jan 1 July 1

To Bank (I) (80,000 + 20,000) To Bank (II)

Rs. 2003 Dec 31

1,00,000 40,000

By Depreciation 1,00,000 ¥ 10% (I) 40,000 ¥ 10% ¥ 6/12 (II) By Balance c/d

1,40,000 2004 Jan 1

To Balance b/d

1,28,000

1,40,000 2004 Dec 31

By Depreciation 90,000 ¥ 10% (I) 38,000 ¥ 10% ¥ (II) By Balance c/d

1,28,000 2005 Jan 1 July 1

To Balance b/d To Bank (dismantling) To Bank (III)

1,15,200 5,000 30,000

10,000 2,000 1,28,000

9,000 3,800 1,15,200 1,28,000

2005 July 1

By Bank (sale) (I) By Depreciation 50,000 ¥ 10% ¥ 6/12 (a)

55,000

(a) By Depreciation 34,200 ¥ 10% ¥ (II) 30,000 ¥ 10% ¥ 6/12 (III) By Balance c/d

21,950

4,050

Dec 31

3,420 1,500 64,280

1,50,200 Contd.

276

Financial Accounting

Contd. Rs. 2006 * Jan 1

To Balance b/d

64,280

Rs. 2006 * Dec 31

Rs. By Depreciation 40,000 ¥ 15% 30,000 ¥ 15% By Balance c/d

64,280

6,000 4,500 53,780 64,280

Working Note (a) Profit or Loss on sale of machine on 1.7.2005 Rs. Cost price as on 1.1.2003

1,00,000

(–) Depreciation (1,00,000 ¥ 10%)

10,000

WDV as on 1.1.2004

90,000 9,000

(–) Depreciation (90,000 ¥ 10%) WDV as on 1.1.2005

81,000 4,050

(–) Depreciation till date of sale (81,000 ¥ 10% ¥ 6/12) WDV on date of sale

76,950

(–) Sold for

55,000 21,950

V – CHANGE IN METHOD - RETROSPECTIVE Illustration 15 On January 1, 2005, Bhuvana Ltd. purchased a machine for Rs. 58,000 and spent Rs. 2,000 on its erection. On July 1, 2005, an additional machinery costing Rs. 20,000 was purchased. On July 1, 2007 the machine purchased on 1.1.2005 was sold for Rs. 28,600 and on the same date a new machine was purchased at a cost of Rs. 40,000. Depreciation was provided for annually on December 31 at the rate of 10% p.a. on written down value of the machinery. In 2008, the company decided to change the method of depreciation from written down value method to straight line method @ 5% p.a. Prepare the Machinery Account for the first four calendar years. Solution Machinery Account Date 2005 Jan 1

July 1

Particulars To Bank (cost) (erection) (I) To Bank (II)

Rs.

58,000 2,000 20,000

Date

Particulars

31.12.95 By Depreciation (I) 60,000 ¥ 10% (II) 20,000 ¥ 10% ¥ 6/12 By Balance c/d

80,000 2006 Jan 1

To Balance b/d

73,000

73,000

Rs.

6,000 1,000 73,000 80,000

2006 Dec 31

By Depreciation A/c (I) 54,000 ¥ 10% (II) 19,000 ¥ 10% By Balance c/d

5,400 1,900 65,700 73,000 Contd.

Depreciation Accounting

277

Contd. Date 2007 Jan 1 July 1

Rs. To Balance b/d To Bank (III)

65,700 40,000

Date 2007 July 1

Rs. By Bank (Sale) (I) By Depreciation (a)

28,600 2,430

(a) By Depreciation (II) 17,100 (b) ¥ 10% (III) 40,000 ¥ 10% ¥ 6/12 By Balance c/d

17,570

Dec 31

1,05,700 2008 Jan 1 Dec 31

To Balance b/d (adjusted) (e)

53,390 3,110

1,710 2,000 53,390 1,05,700

2008 Dec 31

By Depreciation (II) 20,000 ¥ 5% (III) 40,000 ¥ 5% By Balance c/d

56,500

1,000 2,000 53,500 56,500

Working Note Rs. Cost price as on 1.1.2005

60,000 6,000

(–) Depreciation (60,000 ¥ 10%) WDV as on 1.1.2006

54,000 5,400

(–) Depreciation (54,000 ¥ 10%) WDV as on 1.1.2007

48,600

(–) Depreciation till date of sale (6 months)

2,430

WDV on date of sale

46,170

(–) Sold for

28,600 17,570

(b) WDV of existing old machine as on 1.1.2007 Rs. WDV as on 1.1.2007

65,700

(–) WDV of sold machine as on 1.1.2007 (a)

48,600 17,100

(c) Depreciation under old method and rate (WDV-10%) Rs. (II) 1,000 + 1,900 + 1,710

4,610

(III) 2,000

2,000 6,610

(d) Depreciation under new method and rate (SLM-5%) Rs. (II) 20,000 ¥ 5% ¥ 2 ½ years

2,500

(III) 40,000 ¥ 5% ¥ 6/12

1,000 3,500

278

Financial Accounting

(e) Difference between new and old method Rs. 3,500 (–) Total Depreciation as per Old Method (WDV-10%)

6,610

To be adjusted (excess depreciation to provide)

3,110

Depreciation not on Year of Sale Illustration 16 X Ltd. purchased on 1st January, 2003 certain machinery for Rs. 1,94,000 and spent Rs. 6,000 on its erection. On 1st July, 2003, additional machinery costing Rs. 1,00,000 was purchased. On 1st July, 2005 the machinery purchased on 1st January, 2003 having become obsolete was auctioned for Rs. 1,00,000 and on the same date, new machinery was purchased at a cost of Rs. 1,50,000. Depreciation was provided for annually on 31st December at the rate of 10% per annum on the original cost of the machinery. No depreciation need be provided when a machinery is sold or auctioned, for that part of the year in which sale or auction took place. In 2006, however, X Ltd. changed this method of providing depreciation and adopted the method of writing off 15% p.a. on the written down value on the balance as appeared in Machinery Account on 1.1.2006. Show the Machinery Account for the calendar years 2003 to 2006. Solution Machinery Account Date 2003 Jan 1 July 1

Particulars To Bank (I) (1,94,000 + 6,000) To Bank (II)

2004 01.01.94

2005 Jan 1 July 1

To Balance b/d To Bank (III)

Rs.

Date 2003 Dec 31

2,00,000 1,00,000

Particulars

Rs.

By Depreciation A/c (I) 2,00,000 ¥ 10% (II)1,00,000 ¥ 10% ¥ 6/12 By Balance c/d

20,000 5,000 2,75,000

3,00,000

3,00,000

2004 2,75,000 31.12.94 By Depreciation A/c (I) 2,00,000 ¥ 10% (II) 1,00,000 ¥ 10% By Balance c/d

20,000 10,000 2,45,000

2,75,000

2,75,000

2,45,000 1,50,000

2005 Jan 1

Dec 31

By Bank (Sale) (I) By Depreciation (a) (b) By Depreciation (II) 1,00,000 ¥ 10% (III) 1,50,000 ¥ 10% ¥ 6/12 By Balance c/d

3,95,000 2006 Jan 1

To Balance b/d

2,17,500

60,000 10,000 7,500 2,17,500 3,95,000

2006 Dec 31

11,919 By Depreciation (2,17,500 – 11919) = 2,05,581 ¥ 15% By Balance c/d

2,17,500

1,00,000 Nil

30,837 1,74,744 2,17,500

Depreciation Accounting

279

Working Note (a) Depreciation under old method and rate (SLM-10%) Rs. 25,000

(II) 1,00,000 ¥ 10% ¥ 2 ½ years

7,500

(III) 1,50,000 ¥ 10% ¥ ½ year

32,500

(b) Profit or Loss on sale of machine on 1.7.2005 Rs. 2,00,000

Cost price (2,40,000 ¥ 1/3) as on 1.1.2003

20,000

(–) Depreciation (2,00,000 ¥ 10%) WDV as on 1.1.2004

1,80,000 20,000

(–) Depreciation (2,00,000 ¥ 10%) WDV as on 1.1.2005

1,60,000

(–) Depreciation till date of sale (not to provide)

Nil

WDV on date of sale

1,60,000

(–) Sold for

1,00,000 60,000

(c) Depreciation under new method and rate (WDV-15%) Rs. (II) 2003 – 1,00,000 ¥ 15% ¥ 6/12

Rs. 7,500

2004 – 92,500 ¥ 15%

13,875

2005 – 78,625 ¥ 15%

11,794 33,169

(III) 2005 – 1,50,000 ¥ 15% ¥ 6/12

11,250 11,250 44,419

(d) Difference between New and Old method Rs. Total Depreciation as per New Method (WDV-15%) (c)

44,419 32,500

To be adjusted

11,919

One Year Account Illustration 17 Chandan Co. commenced business on 1st January, 2002 when they purchased plant and equipment for Rs. 70,000. They adopted a policy of (i) Charging depreciation at 15% per annum on diminishing basis and (ii) Charging full year’s depreciation on additions. On 1st August 2003 and on 30th September 2006, the company purchased machine costing Rs. 15,000 and Rs. 20,000 respectively.

280

Financial Accounting

On 1.1.2006 it was decided to change the method and rate of depreciation to 10% on straight line basis with retrospective effect from 1.1.2002, the adjustment being made in the accounts for the year ending on 31st December, 2006. Calculate the difference in depreciation to be adjusted in the Plant and Equipment A/c on 1.1.2006, and show the ledger amount for the year 2006. Solution Plant and Equipment Account Rs. 2006 Jan 1 To Balance b/d (a) Sept 30 To Bank A/c Dec 31

45,752 20,000 6,748

Rs. 2006 Dec 31

By Depreciation By Balance c/d

10,500 62,000

72,500

72,500

Working Note: (a) Calculation of Opening Balance Plant and Equipment Account Rs. 2002 Jan 1

To Bank A/c (I)

70,000

Rs. 2002 Dec 31

By Depreciation (I) 70,000 ¥ 15% By Balance c/d

7,00,000 2003 Jan 1 Aug 1

To Balance b/d To Bank A/c (II)

59,500 15,000

10,500 59,500 7,00,000

2003 Dec 31

By Depreciation (I) 59,500 ¥ 15% (II) 15,000 ¥ 15% By Balance c/d

8,925 2,250 63,325

74,500 2004 Jan 1

To Balance b/d

63,325

74,500 2004 Dec 31

By Depreciation (I) 50,575 ¥ 15% (II) 12,750 ¥ 15% By Balance c/d

7,586 1913 53,826

63,325 2005 Jan 1

To Balance b/d

53,826

63,325 2005 Dec 31

By Depreciation (I) 42,989 ¥ 15% (II) 10,837 ¥ 15% By Balance c/d

6,448 1,626 45,752

53,826

53,826

(b) Depreciation under old method and rate (WDV-15%) Rs. (II) 10,500 + 8,925 + 7,586 + 6,448 (III) 2,250 + 1,913 + 1,626

33,459 5,789 39,248

Depreciation Accounting

281

(c) Depreciation under new method and rate (SLM-10%) Rs.

Rs.

(II) 70,000 ¥ 10% ¥ 4 years

28,000

(III) 15,000 ¥ 10% ¥ 3 years

4,500

28,000 4,500 32,500

(d) Difference between new and old method Rs. 32,500 (–) Total Depreciation as per Old Method (WDV-15%) (b)

39,248 6,748

VI – DEPRECIATION FUND METHOD Journal and All Ledgers Illustration 18 A company purchased a machine on 3 years’ lease on January 2005 for Rs. 1,00,000. It is decided to provide for the replacement of lease at the end of 3 years by setting up a sinking fund. It is expected that the investments will fetch interest at 5%. Sinking Fund Table shows that to provide the requisite sum at 5% at the end of 3 years, an investment at Rs. 31,728.88 is required every year. Investments are made to the nearest rupee. On 31st December, 2007, the investments were sold for Rs. 59,000. On 1st January 2008, the same lease was renewed for a further period of 3 years by paying Rs. 1,30,000. Show (i) The journal entries (ii) Prepare ledger of (a) Lease, (b) Depreciation, (c) Depreciation Fund, (d) Depreciation Fund Investment (e) Interest on Sinking Fund Investment Account (f) New Lease. Solution (i) Journal Entries Date 2005 Jan 1

Particulars

Rs. Dr.

1,00,000

To Bank Account Dec 31

Dec 31

Depreciation Account To Sinking Fund Account (Being depreciation is provided and debited to Sinking Fund Account) Sinking Fund Investment Account To Bank Account (Being the investment purchased from Sinking Fund)

1,00,000 Dr.

To Depreciation Account

31,728.88 31,728.88

Dr.

31,729 31,729

Dr.

Dec 31

Rs.

31,728.88 31,728.88 Contd.

282

Financial Accounting

Contd. 2006 Dec 31

Dec 31

Dec 31

Dec 31

Bank Account To interest on Sinking Fund Investment Account (Being interest received at 5% on Rs. 31,729) Interest on Sinking Fund Investment Account To Sinking Fund Account (Being interest is transferred to Sinking Fund Account) Depreciation Account To Sinking Fund Account (Being depreciation is provided and debited to Sinking Fund Account) Sinking Fund Investment Account To Bank Account (Being the investment purchased from Sinking Fund – 31728.88 + 1586.45 = 33,315.33)

Dr.

Dr.

1,586.45 1,586.45

Dr.

31,728.88 31,728.88

Dr.

33,315 33,315

31,728.88

To Depreciation Account 2007 Dec 31

Dec 31

Dec 31

Dec 31

Dec 31

Dec 31

Rs. 1,586.45

Dr.

Dec 31

Rs. 1,586.45

31,728.88

Bank Account To interest on Sinking Fund Investment Account (Being interest received at 5% on 65,044 (31729 + 33315) Interest on Sinking Fund Investment Account To Sinking Fund Account (Being interest is transferred to Sinking Fund Account) Depreciation Account To Sinking Fund Account (Being depreciation is provided and debited to Sinking Fund Account) Bank Account To Sinking Fund Investment Account (Being the investment sold) Sinking Fund Account To Sinking Fund Investment Account (Being the loss on sale of investment transferred to Sinking Fund A/c) Sinking Fund Account

Dr.

3,252.20 3,252.20

Dr.

3,252.20 3,252.20

Dr.

31,728.88 31,728.88

Dr.

59,000 59,000

Dr.

6,044 6,044

Dr.

1,00,000 1,00,000

(Being the lease amount written off and transferred to Sinking Fund Account) Dr.

Dec 31

6,018.71

To Sinking Fund Account (Being the balance in Sinking Fund

6,018.71

2008 Jan 1

Dr. To Bank Account

1,30,000 1,30,000

(ii) Ledger Accounts (a) Lease Account Date 2005 Jan 1

Rs. To Bank A/c

1,00,000 1,00,000

Date 2005 Dec 31

Rs. By Balance c/d

1,00,000 1,00,000 Contd.

Depreciation Accounting

283

Contd. 2006 Jan 1

To Balance b/d

1,00,000 1,00,000

2007 Jan 1

To Balance b/d

1,00,000 1,00,000

2006 Dec 31

By Balance c/d

1,00,000 1,00,000

2007 Dec 31

By Sinking Fund A/c

1,00,000 1,00,000

(b) Depreciation Account Date 2005 Dec 31

Rs. To Sinking Fund A/c

31,728.88 31,728.88

2006 Dec 31

To Sinking Fund A/c

31,728.88 31,728.88

2007 Dec 31

To Sinking Fund A/c

31,728.88 31,728.88

Date 2005 Dec 31

Rs. 31,728.88 31,728.88

2006 Dec 31

31,728.88 31,728.88

2007 Dec 31

31,728.88 31,728.88

(c) Sinking Fund Account Date 2005 Dec 31

Rs. To Balance c/d

31,728.88 31,728.88

2006 Dec 31

To Balance c/d

65,044.21

Date 2005 Dec 31 1996 Jan 1 Dec 31

Rs. By Depreciation A/c

31,728.88 31,728.88

By Balance b/d By Depreciation A/c By Interest on Sinking Fund Investment A/c

31,728.88 31,728.88

65,044.21 2007 Dec 31

1,00,000 To Sinking Fund Investment A/c

2007 Jan 1 Dec 31

6,044

By Balance b/d By Interest on Sinking Fund Investment A/c By Depreciation A/c

1,06,044

1,586.45 65,044.21 65,044.21 3,252.20 31,728.88 6,018.71 1,06,044

(d) Sinking Fund Investment Account Date 2005 Dec 31

To Bank

31,729 31,729

2006 Jan 1 Dec 31

To Balance b/d To Bank

31,729 33,315 65,044

2007 Jan 1

Rs.

To Balance b/d

65,044 65,044

Date 2005 Dec 31

Rs. By Balance c/d

31,729 31,729

2006 Dec 31

By Balance c/d

65,044 65,044

1996 Dec 31

By Bank (sale)

59,000 6,044 65,044

284

Financial Accounting

(e) Interest on Sinking Fund Investment Account Date

Rs.

2006 Dec 31

To Sinking Fund A/c

2007 Dec 31

To Sinking Fund A/c

Date

Rs.

1,586.45

2006 Dec 31

By Bank A/c

1,586.45

3,252.20

2007 Dec 31

By Bank A/c

3,252.20

(f) New Lease A/c Date 2008 Jan 1

Rs. To Bank A/c

Date

Rs.

1,30,000

Ledger Illustration 19 On January 1, 2000, R acquired for Rs. 3,00,000 the lease of some factory premises of which five years were unexpired. To amortise the lease over the five years and to provide for renewal, it was decided to set up a sinking fund by taking annual instalments out of profits and investing cash of the same amount at five per cent compound interest. Taking Re. 0.180975 as the annual instalment required to produce Re. 1 in five years at 5 per cent, write up the Sinking Fund Account for the entire period of five years. (B.Com., Hons., Calcutta) Solution Sinking Fund Account Rs. 2000 Dec 31

To Balance c/d

54,292.50

Rs. 2000 Dec 31

54,292.50

54,292.50 2001 Dec 31

To Balance c/d

1,11,299.63

54,292.50 2001 Jan 1 Dec 31 Dec 31

By Balance b/d By Bank (Interest)

1,11,299.63 2002 Dec 31

To Balance c/d

1,71,157.11

1,11,299.63 2002 Jan 1 Dec 31 Dec 31

By Balance b/d By Bank (Interest)

1,71,157.11 2003 Dec 31

To Balance c/d

2,34,007.47

3,00,000

3,00,000.00

1,11,299.63 5,564.98 54,292.50 1,71,157.11

2003 Jan 1 Dec 31 Dec 31

By Balance b/d By Bank (Interest)

2,34,007.47 2004 Dec 31

54,292.50 2,714.73 54,292.50

1,71,157.11 8,557.86 54,292.50 2,34,007.47

2004 Jan 1 Dec 31 Dec 31

By Balance b/d By Bank (Interest)

2,34,007.47 11,700.37 54,292.16 3,00,000.00

Depreciation Accounting

285

*Working Note For Re. 1, annual contribution = 0.180975 For Rs. 3,00,000, annual contribution = (3,00,000 ¥ 0.180975)/1 = Rs. 54,292.50

Only Ledgers - Depreciation Fund Policy Account Illustration 20 A machine is purchased for Rs. 2,20,000 on 1st January 2003. At the end of 4 years it has to be replaced. For this purpose an insurance policy is taken out, the annual premium being Rs. 48,000. At the end of 4 years, a new machine costing Rs. 3,00,000 is installed and the old machine is written off. Give the necessary Ledger Accounts. Solution Machinery Account Rs. 2003 Jan 1

To Bank

2,50,000

Rs. 2003 Dec 31

By Balance c/d

2,50,000 2004 Jan 1 2005 Jan 1 2006 Jan 1

To Balance b/d To Balance b/d To Balance b/d

2,50,000 2,50,000

2,50,000

2004 Dec 31

By Balance c/d

2,50,000

2,50,000

2005 Dec 31

By Balance c/d

2,50,000

2,50,000

2006 Dec 31

By Balance c/d

2,50,000

Depreciation Fund Account Rs. 2003 Dec 31

To Balance c/d

48,000

Rs. 2003 Dec 31

By Depreciation

48,000 2004 Dec 31

To Balance c/d

96,000

2004 Jan 1 Dec 31

By Balance b/d By Depreciation

96,000 2005 Dec 31

To Balance c/d

1,44,000

48,000 48,000 48,000 48,000 96,000

2005 Jan 1 Dec 31

1,44,000

By Balance b/d By Depreciation By Depreciation A/c

96,000 48,000 1,44,000

Depreciation Fund Policy Account Rs. 2003 Jan 1

To Bank

48,000

Rs. 2003 Dec 31

By Balance c/d

48,000 2004 Jan 1 Dec 31

To Balance b/d To Bank

48,000 48,000 96,000

48,000 48,000

2004 Dec 31

By Balance c/d

96,000 96,000 Contd.

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Financial Accounting

Contd. 2005 Jan 1 Dec 31

To Balance b/d To Bank

96,000 48,000

2005 Dec 31

By Balance c/d

1,44,000 2006 Jan 1 Dec 31

To Balance b/d To Bank To Depreciation Fund

1,44,000 48,000

1,44,000 1,44,000

2006 Dec 31

By Bank

2,20,000

28,000 2,20,000

2,20,000

(New) Machinery Account 2006 Dec 31

To Bank

3,00,000

SF A/c, SFI A/c Illustration 21 On 1st April 2004, Genesis Ltd. purchased a machine for Rs. 1,10,000 and spent Rs. 6,000 on its installation. It is assumed that the expected life of the machine is 4 years with the estimated scrap value as Rs. 16,000. To replace the machine on the expiry of its life, the company establishes a Sinking Fund Investments having the interest @ 5%. On 30th June 2008, the machine sold off as scrap for Rs. 18,000 and the investments were realised at 5% less than the book value. On 1st July 2008, a new machine is installed at a cost of Rs. 1,25,000. Sinking Fund Table shows that Re. 0.2320 invested each year will produce Re. 1 at the end of 4 years at 5%. Show the necessary Ledger Accounts in the books of Genesis Ltd. for all the years. Solution Sinking Fund Account Rs. 2004 Mar 31

To Balance c/d

23,200

Rs. 2004 Mar 31

23,200

23,200 2005 Mar 31

To Balance c/d

47,560

23,200 2005 Apr 1 Mar 31

To Balance b/d By Bank - Interest @ 5%

47,560 2006 Mar 31

To Balance c/d

73,138

47,560 2006 Apr 1 Mar 31

To Balance b/d By Bank - Interest @ 5%

73,138 2007 Mar 31

To Balance c/d

99,995

99,995

23,200 1,160 23,200

47,560 2,378 23,200 73,138

2007 Apr 1 Mar 31

To Balance b/d By Bank - Interest @ 5%

73,138 3,657 23,200 99,995

Depreciation Accounting

287

Sinking Fund Investment Account Rs. 2005 Mar 31

To Bank

23,200

Rs. 2005 Mar 31

By Balance c/d

23,200 2006 Mar 31

To Bank To Bank (1,160 + 23,200)

23,200 23,360

2006 Mar 31

By Balance c/d

47,560 2007 Mar 31

To Balance To Bank (2,378 + 23,200)

47,560 25,578

23,200 23,200 47,560 47,560

2007 Mar 31

By Bank A/c - Sale Proceeds (73,138 ¥ 95%) By Sinking Fund A/c -

69,481 3,657

73,138

73,138

(I) Working Note For Re. 1, annual contribution = 0.2320 For Rs. 1,00,000* annual contribution = (1,00,000 ¥ 0.2320)/1 = Rs. 23,200 *(1,10,000 + 6,000 – 16,000)

DF opening balance given Illustration 22 A company established a Depreciation Fund to replace the machinery whose cost was Rs. 10,00,000. On 1st April, 2005 the Depreciation Fund stood at Rs. 3,20,000 represented by 7% Port Trust Bonds with a face value of Rs. 3,50,000. The annual depreciation was Rs. 60,000. On 1st October, 2006, the company replaced machinery at a cost of Rs. 15,00,000 except an old machine valuing Rs. 80,000, all other machinery was sold for Rs. 4,40,000. Prepare the necessary Ledger Accounts for the year ended on 31st March, 2006 assuming that at the end of March 2006, the required investment was made in Port Trust Bonds at par and on 1st October, 2006 the bonds were sold for Rs. 4,36,000 of which Rs. 14,000 represented interest after 1st April, 2006. Solution (1) Plant and Equipment Account Rs. 2005 Apr 1

To Balance b/d

10,00,000

Rs. 2006 Mar 31

By Balance c/d

10,00,000 2006 Apr 1

To Balance b/d

10,00,000

10,00,000

10,00,000 10,00,000

2006 Oct 1

By (New) Plant and Equipment A/c By Bank (sale) By Depreciation Fund A/c – transfer

80,000 4,40,000 4,80,000 10,00,000

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Financial Accounting

(2) New Plant and Equipment Account Rs. 2006 Oct 1

To Bank To (Old) Plant and Equipment A/c

15,00,000

Rs. 2007 Mar 31

By Balance c/d

15,80,000

80,000 15,80,000

15,80.000

(3) Depreciation Fund Account Rs. 2006 Mar 31

To Balance c/d

4,04,500

Rs. 2005 Apr 1 2006 Mar 31

By Balance b/d By Interest on Depreciation Fund Investment A/c 3,50,000 ¥ 7% A/c (annual depreciation)

4,04,500 2006 Oct 1

To Plant and Equipment A/c (transfer) (2)

4,80,000

3,20,000

24,500 60,000 4,04,500

2006 Apr 1 Oct 1

By Balance b/d By Depreciation Fund

4,04,500 17,500

By Interest on D.F. Investment A/c (given) 4,80,000

14,000 44,000 4,80,000

(4) Depreciation Fund Investments Account Rs. 2005 Apr 1 2006 Mar 31

To Balance b/d (Face value Rs. 3,50,000) To Bank (Face value Rs. 84,500) (4,04,500 – 3,20,000)

Rs. 2006 Mar 31

By Balance c/d

84,500 4,04,500

2006 Apr 1 Oct 1

To Balance b/d To Depreciation Fund A/c –

4,04,500

3,20,000

4,04,500

4,04,500 2006 Oct 1

By Bank [4,36,000 – 14,000 (interest)]

4,22,000

17,500 4,22,000

4,22,000

(5) Interest on Depreciation Fund Investments Account Rs. 2006 Mar 31

To Depreciation Fund A/c – transfer (3)

Rs. 2006 Mar 31

24,500

By Bank (7% on Rs. 3,50,000)

24,500 2006 Oct 1

To Depreciation Fund A/c – transfer (3)

24,500 2006 Oct 1

14,000

24,500

By Bank (given)

14,000

Depreciation Accounting

289

(6) Profit and Loss Account Date 2006 Mar 31 2006 Oct 1

Particulars

Rs.

To Depreciation Fund A/c – (annual Depreciation) (3)

60,000

To Depreciation Fund A/c – Transfer (3)

44,000

Date

Particulars

Rs.

(7) Bank Account Date 2006 Mar 31

2006 Apr 1 Oct 1

Particulars To Balance b/d To Interest on Depreciation Fund Investments A/c

To Balance b/d To Depreciation Fund Investment A/c [4,36,000 – 14,000 (interest)] To Interest on D.F. Inv. A/c (given)

Rs. Not given

Date 2006 Mar 31

24,500

xxxx

2006 Oct 1 2007 Mar 31

Particulars By Depreciation Fund Investment A/c By Balance c/d By Plant and Equipment A/c (purchase)

By Balance c/d

Rs.

84,500 xxxx

15,00,000

xxxx

4,22,000 14,000

Points to Remember

Method, Sum of the Digits Method, Annuity Method, Depreciation Fund Method, Insurance Policy Method, Revaluation Method, Depletion Method, Machine Hour Rate Method, Kilometre Method, etc. Method on the basis of calculation, amount of depreciation, depreciation plus repairs and renewals, value of asset, etc. retrospective effect.

Examination Questions I. Objective Questions 1. Fill in the blanks (i) Depreciation means a gradual and permanent ___________________ in value of an asset due to wear and tear.

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Financial Accounting

(ii) _____________________ refers to the asset is going out of use resulting from invention of improved technique, change in taste, fashion, etc. (iii) Depreciation helps the firm to show _____________________ asset at their proper value. (iv) ______________________ is an American method. (v) Revaluation method is also known as ______________________. 2. Choose the correct answers (a) The depreciation is an expense accruing __________ . (i) from the consumption of same readily consumable assets (ii) from the use of fixed assets (iii) from the use of various services (iv) None of the above (b) Depreciation is the process________ . (i) of all allocation of cost of the asset to the periods of its life (ii) of valuation of assets (iii) of maintenance of an asset in a state of efficiency (c) The Profit on Depreciation Policy is transferred to (i) depreciation Fund account (ii) asset account (iii) profit and Loss account (iv) None of the above (d) Under Annuity method, the amount of depreciation is __________ . (i) increasing every year (ii) decreasing every year (iii) fixed for all the years (iv) All the above (e) The amount charged to depreciation goes on declining in _________ . (i) depreciation Fund method (ii) annuity method (iii) written Down Value method (iv) original Cost method 3. Match the following (i)

Fixed Instalment Method

a

Depreciation Fund Method

(ii)

Depletion

b

Goodwill

(iii)

Amortisation

c

Technological advancement

(iv)

Obsolescence

d

Physical deterioration of natural resources

(v)

Sinking Fund Method

e

Original Cost Method

4. State whether the following Statements are True or False (a) The terms depreciation, depletion and amortisation convey the same measuring. (b) Incase of Written Down Value method of depreciation, the asset gets reduced to 0.

Depreciation Accounting

291

(c) Depreciation Fund Account is closed by transferring it to Depreciation Fund Investment Account. (d) The purpose of taking an insurance policy is to replace an asset when it is worn out. (e) When expired utility of a physical asset is to be recorded, it is known as Depreciation. Answers 1. (i) (iii) (v) 2. (a), 3. (i) 4. (a)

reduction; (ii) obsolescence; fixed; (iv) Sum of the Digits Method; Annual Revaluation Method (ii); (b), (i); (c), (i); (d), (iii); (e), (iii) e; (ii) d; (iii) b; (iv) c; (v) a False; (b) False; (c) False; (d) True; (e) True

II. Descriptive Questions A. Very Short Answer Questions 1. Define depreciation 2. What is Depletion Method? 3. What is Machine Hour Rate Method? 4. For which type of assets can the Revaluation Method be Suitable? 5. What is Annuity Method? 6. Explain the term Obsolescence? 7. What is meant by Amortisation? B. Short Answer Questions 8. What are the causes of depreciation? 9. Explain the basic factors affecting the amount of depreciation? 10. Distinguish Written Down Value Method from Straight Line Method. 11. Explain the procedure for change in method of depreciation? 12. What are the advantages and disadvantages of Annuity Method? 13. What are the various methods of providing depreciation? C. Detail Answer Questions 14. Explain Reducing Balance Method of providing for depreciation and its advantages and disadvantages? 15. Describe the procedure for change in method of depreciation (a) With prospective effect and (b) With retrospective effect. 16. Enumerate the methods of calculating depreciation. Discuss briefly advantages and disadvantages of any three methods? 17. What is depreciation? What are the different methods of depreciation used for different assets? Does the method of depreciation used has impact on profits of the firm? If so, give an example? 18. Define depreciation, distinguish it from (a) Depletion;

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Financial Accounting

(b) Amortisation; and (c) Obsolescence. III. Exercise Problems

I Straight Line Method Amount of Depreciation and Rate of Depreciation

Problem 1 An asset is purchased for Rs. 25,000. Depreciation is to be provided annually according to the straight line method. The useful life of the asset is 10 years and the residual value is Rs. 5,000. You are required to find out the rate of depreciation. (B.Com., Madras) [Ans. Amount of depreciation Rs. 2,000 (p.a); Rate of depreciation 8%] SLM-Purchase and Sale

Problem 2 On 1st January, 2001, machinery was purchased for Rs. 25,000. On 1st June, 2002 additions were made to the amount of Rs. 5,000. On 1st March, 2003 additions were made to the amount of Rs. 3,200. On 30th June, 2004 machinery of which the original value on 1st January, 2001 was Rs. 4,000 was sold for Rs. 3,000. Depreciation is charged at 10% on original cost. Show the Machinery A/c for the four years from 2001 to 2004. (B.Com., Calcutta) [Ans. Closing balance as on 31st Dec 2004 Rs. 18,921] SLM- 1 Purchase and 1 Sale

Problem 3 Mr. Shanmugavel purchased (second hand) a machine for Rs. 8,000 on 1st April, 2001. He spent Rs. 3,500 on its overhaul and installation. Depreciation is written off @ 10% p.a. on the original cost. On 30th June, 2004 the machine was found to be unsuitable and sold for Rs. 6,500. Prepare the machine account from 2001 to 2004 assuming that the accounts are closed on 31st December, every year. (B.Com. Madras) [Ans. Loss on sale Rs. 1,262.50] Problem 4 A machine was purchased on 1st July, 2001 at a cost of Rs. 14,000 and Rs. 1,000 was spent on its installation. The depreciation is written off at 10% on the original cost every year. The books are closed on 31st December, every year. The machine was sold for Rs. 9,500 on 31st March, 2004. Show the Machinery Account for all the years. (B.Com. Madras) [Ans. Loss on sale Rs. 1,375]

Depreciation Accounting

293

SLM – 3 Purchase and 1 Sale of Machine

Problem 5 On 1st October 2002 Timestar Ltd. purchased a machine costing Rs. 60,000 and spent Rs. 10,000 for erection and overhauling. On 1st April, 2003, a part of the machine was purchased for Rs. 30,000. On 1st July 2003, machinery purchased on 1st October 2002 was sold for Rs. 56,000 as it was absolute. On 1st January 2004, a new machine was purchased for Rs. 15,000. Depreciation was provided annually on 31st December at the rate of 10% p.a. on the original cost of the assets. Show the Machinery Account for 3 years in the books of the company. (B.Com. Madurai) [Ans. Closing balance as on 31st Dec 2004 Rs. 38,250]

II. Written Down Value Method Purchase and Sale

Problem 6 A manufacturing concern whose books are closed on 31st December every year, purchased machinery for Rs. 50,000 on 1.1.2000. Additional machinery was acquired for Rs. 10,000 on 1.7.2001 and for Rs. 16,061 on 1.1.2004. Certain machinery purchased for Rs. 10,000 on 1.1.2000 was sold for Rs. 5,000 on 30.6.2003. Give the Machinery Account for 5 years writing off depreciation at 10% p.a. on written down value. (B.Com., Vikram) [Ans. Closing balance 31st Dec 2004 Rs. 12,878] 3 purchase and 1 sale

Problem 7 On 1st January, 2002, a Limited Company purchased machinery for Rs. 12,000 and on 30th June 2003 it acquired additional machinery at a cost of Rs. 2,000. On 31st March 2004 one of the original machines which had cost of Rs. 500 was found to have become obsolete and was sold as scrap for Rs. 50. It was replaced on that date by a new machine costing Rs. 800. Depreciate the machinery at the rate of 15% p.a. on the written down value. Show the ledger accounts for the first 3 years. (B.Com, Bombay) [Ans. Closing balance 31.12.2004 Rs. 9,405]

III. Provision for Depreciation Account Depreciation Method, Provision Method – Balance Sheet - SLM

Problem 8 Show the Machinery Account in the Balance Sheet as on December 31, 2008 based on the information given below if the company adopts: (i) Depreciation method (ii) Provision for Depreciation adopted

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Financial Accounting

Cost price of the Machinery Rs. 75,000; (ii) Depreciation @ 10%; (iii) Date of purchase-January 1, 2004. [Ans. Depreciation method – Machinery balance as on 31.12.2008 Rs. 67,500; Provision for Depreciation adopted – Machinery balance as on 31.12.2008 Rs. 37,500] Provision Account

Problem 9 Mani Ltd. acquired a machine for Rs. 5,40,000 on 1st April, 2000. Depreciation was to be charged at 20% on straight line method. During 2002-03, a modification was made to improve its technical reliability at a cost of Rs. 50,000 which was considered would extend the useful life of the machine for two years. At the same time an important component of the machine was replaced at cost of Rs. 10,000 because of excessive wear and tear. Routine maintenance during the said accounting period cost Rs. 7,500. Show the machine account, provision for depreciation on Machine Account and the charge to Profit and Loss Account for the year ending 31st March 2003 only. (B.Com., Madras) [Ans. Machinery balance Rs. 6,00,000; Provision for depreciation balance Rs. 2,92,800] Only Machinery A/c: Machinery Account and Provision for Depreciation A/c-SLM

Problem 10 On January 1, 2006, Subhan Ltd. purchased a machinery for Rs. 12,00,000. On July 1, 2008, a part of the machinery purchased on January 1, 2006 for Rs. 80,000 was sold for Rs. 45,000 and a new machinery at a cost of Rs. 1,58,000 was purchased and installed on the same date. The company has adopted the method of providing 10% p.a. depreciation on the original cost of the machinery. Show the necessary ledger accounts assuming that (a) ‘Provision for Depreciation Account’ is not maintained (b) ‘Provision for Depreciation Account’ is maintained. [Ans. If provision account is not maintained – Machinery A/c – Rs. 9,34,100; If provision account is maintained – Machinery A/c – Rs. 12,78,000; Provision A/c Rs. 3,43,900] Provisions for Depreciation and Maintenance Account

Problem 11 A combined provision for depreciation and repairs and renewals was made every year at 15% of the original cost of a machine purchased at Rs. 50,000. The ‘Provision for Depreciation and Maintenance Account’ that was opened for the purpose was, therefore, debited with the actual costs of repairs and renewals which were as stated below: Year

1

2

3

4

5

Repair/renewal cost (Rs.)

1,500

1,600

2,100

3,000

4,200

Depreciation Accounting

295

At the end of the fifth year the machine was sold out at Rs. 20,000 after utilising a few of its minor parts valued at Rs. 4,000, in installing in its place a new machine purchased at Rs. 75,000. The resulting loss in the disposal of the old machine was debited to revenue. Write up. (a) Provisions for Depreciation and Maintenance Account for the five years (b) Old and the New Machine Accounts at the end. (B.Com, Calcutta) [Ans. Provision a/c balance Rs. 25,100]

V. Change in Method – Retrospective Problem 12 X Ltd. which depreciates its machinery at 10% on Diminishing Balance Method had on 1st January 2004, Rs. 4,86,000 to the debit of Machinery Account. Part of the machinery purchased on 1st Jan. 2002 for Rs. 60,000 was sold for Rs. 40,000 on 1st July 2004 and a new machinery at a cost of Rs. 70,000 was purchased and installed on the same date, installation charges being Rs. 5,000. The Company wanted to change its method of depreciation from Diminishing Balance Method to Straight Line Method with effect from 1st January 2002 and adjust the difference before 31st December 2004. The rate depreciation remains the same as before. (B.Com., Madras) [Ans. Difference in depreciation to adjust Rs. 5,400] Problem 13 Tempo Diary Industries Ltd. purchased a Plant worth Rs. 1,00,000 on 1st January 2001. They decided to write off at 10% by straight line method. After 2 years they decided to change the method of depreciation to that of diminishing balance method by charging 15% p.a. from 2001. The difference due to this change in the method is to be adjusted by transferring to Profit and Loss Account for the third year. Show the Plant Account for 4 years. (B.Com., Madras) [Ans. Machinery balance as on 31.12.2004 Rs. 52,200] Problem 14 On 1st October, 2004 a firm commenced operations with machinery installed at a cost of Rs. 20,000; its scrap value was estimated at 5% and life at 10 years. The firm decided to provide depreciation at 25% p.a. on the diminishing value, its books being closed on 31st March each year. On 1st April, 2008 it decided to change the method of depreciation to straight line basis from the very beginning. Prepare Machinery Account for the year ended 31st March, 2009 and show the relevant entries in the Profit and Loss A/c. Work to the nearest rupee. [Ans. Depreciation to adjust Rs. 5,967]

296

Financial Accounting

VI. Depreciation Fund Method Problem 15 A company has acquired a lease of a cinema building for a term of 5 years by payment of Rs. 4,00,000. It is proposed to depreciate the lease by the annuity method, charging 5% p.a. Show the Ledger Account of asset during the period of the lease. Reference to the Annuity Table shows that the amount for Rs. 1 for 5 years at 5% is Re. 0.230975. Calculations are to be made to the nearest rupee. (B.Com., Madurai, Bombay) Problem 16 A firm purchased a lease for Rs. 10,000 to be depreciated over a period of four years under annuity system. The rate of interest is 5% p.a. The Annuity Table shows that the annual amount required to write off rupee one in four years at 5% p.a. is Re. 0.282012. Prepare the Lease Account for four years. (B.Com., Mangalore)

10 Learning Objectives After studying this chapter, you should be able to understand the Different types of errors. Errors preventing the agreement of Trial Balance Errors not preventing the agreement of Trial Balance Steps in locating errors.

ERRORS IN TRIAL BALANCE Trial Balance is prepared to ensure arithmetical accuracy of the ledger. If the Trial Balance in which the total of debits does not equal to or tally the total of credits, it is evident that there are some errors or mistakes. The errors and mistakes may occur while passing journal entry (or) posting them into ledger (or) balancing the books of accounts. Therefore, it is necessary to correct or rectify these errors or mistakes then only it is possible to have true and fair view of business transaction.

Type of Errors Errors in Accounting are broadly classified into four different categories namely 1. Errors of Principle 3. Errors of Omission

2. Errors of Commission 4. Compensating Errors

1. Errors of Principle If any accounting principle is violated in classification of income or expenditure it is called Error of Principle. For example, if revenue expenditure or receipts are treated as capital expenditure or receipts and vice versa. Expenses incurred for installation of machinery should be treated as capital expenditure and not revenue expenditure and similarly, amount spent on repairs of an asset is revenue expenditure should not be treated as capital expenditure and so on.

2. Error of Commission If any error is committed in ledger postings, calculations, totalling, carry forward balancing of ledger account, etc. is called Errors of Commission. For example,

298

Financial Accounting

posting of wrong amounts, i.e., if goods sold for Rs. 750 is posted to Sales Account as Rs. 570, etc.

3. Errors Omission If any transaction is omitted to be recorded in the books of accounts, it is called as Error of Omission. The omission may be wholly or partially. This type of error is possible while posting entries from subsidiary books to ledger accounts concerned e.g., a cash discount of Rs. 20 was allowed to a customer and was credited to his account but no entry was made in the Cash Book.

4. Compensating Errors If an error committed on debit side which compensates by another error on credit side, to the same extent is called Compensating Error. For example, if a cash sale of Rs. 1,471 has been recorded as Rs. 1,417 and a cash discount of Rs. 117 is allowed to customer has been recorded as Rs. 171. The error in under crediting in the first entry is compensated by excess credit in the second entry. Due to this error, the arithmetical accuracy of Trial Balance is not at all affected and it is very difficult to identify this error.

Agreement of Trial Balance The agreement of a Trial Balance does not prove that the books are absolutely correct. It proves only the arithmetical accuracy of the accounts. A Trial Balance may agree even if the following errors may have been committed: (i) (ii) (iii) (iv) (v)

Error of Omission Error of Commission Compensating Error Error of Principle and Posting to wrong accounts.

Following errors will prevent the agreement of the trial balance. In other words, the following errors disclosed by disagreement of Trial Balance: (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix)

Omission to post an entry from subsidiary book to the ledger account. Posting a wrong amount from the subsidiary book to the ledger account. Posting an amount on the wrong side of an account. Posting an amount twice in the account. Errors in casting (totalling) the subsidiary books. Errors in balancing the subsidiary book. Error in carry forward the balances in the book. Omission of a ledger account balance in the Trial Balance. Omission to post the periodical total of the subsidiary books to the ledger accounts. (x) Errors in preparing the list of creditors and debtors from ledger. (xi) Errors in totalling the trial balance. (xii) Recording the balance on wrong side in the trial balance.

Rectification of Errors

299

(xiii) Confusion in amounts. E.g. taking Rs. 115 as Rs. 151 or taking Rs. 785 as Rs. 758 and so on.

Steps in Locating Errors When a Trial Balance disagrees, the following steps are to be taken to locate the errors: 1. The balances opening brought forward from previous year’s books to current year’s books should be checked. 2. Check whether the closing balances of cash and bank are included in the Trial Balance. 3. Check up the totals of subsidiary book and also see whether they are posted to their respective ledger accounts. 4. Check up the totals of credit and debit (sides) columns of the Trial Balance and also the list debtors and creditors. 5. See whether all ledger balances are correctly recorded in the proper sides of the Trial Balance. 6. Check whether there are any items not posted in subsidiary books. 7. Check whether the ledger accounts balances are properly brought down. 8. Find out the amount of difference in Trial Balance and see whether there is any similar amount is remaining unposted. 9. And also see whether there is any amount in the Trial Balance which is equal to half of the amount of difference and that this is recorded on the proper side. After taking all these steps, the Trial Balance still disagrees, the final step to be taken is to check all postings thoroughly.

Suspense Account When Trial Balance disagrees and errors are not located a suspense account is opened for the difference in order to avoid further time delay in preparation of final accounts. The opening of suspense account is a temporary arrangement, and this account should not be allowed to remain in the books of accounts for long.

Illustrations Index for Illustrations Type I.

1–7 8 9–12

II. 13 14

300

Financial Accounting

III.

15 16 17 18–20

IV.

21–23 24–26

I – RECTIFYING JOURNAL ENTRIES Illustration 1 Pass the rectifying entries for the following: (a) Rs. 5,000 spent on erection of machinery was charged to Repairs A/c. (b) A cheque for Rs. 12,000 from Sundar was dishonoured, its amount was posted to Allowance A/c. (c) Mr. Shekar, a debtor cheque of Rs. 4,500 received through Shanmugham was credited to Shanmugham’s Account. Solution Rectifying Journal Entries (a)

(c)

Illustration 2 Rectify the following errors. 1. Office furniture purchased on credit from Jagan for Rs. 5,000 posted as Rs. 500. 2. Office furniture purchased on credit from Jagan for Rs. 5,000 posted to Jaganathan Account. 3. Ofice furniture purchased on credit from Jagan for Rs. 5,000 posted to Plant and Machinery Account.

Rectification of Errors

301

Solution Rectifying Journal Entries 1.

2.

3.

Illustration 3 Rectify the following errors: 1. Sales to Manoj Rs. 5,500 was recorded as Rs. 5,050. 2. Sales to Manoj Rs. 3,400 was recorded as Rs. 4,300. 3. Wages paid Rs. 4,300 were recorded in the Cash Book as Rs. 3,040 Solution Rectifying Journal Entries 1.

450 450

900

2.

900 reverse entry) 3.

Illustration 4 Following errors were committed. Rectify them. (i) (ii) (iii) (iv)

Sales to A Rs. 3,000 were not recorded. Purchases from B Rs. 2,200 were omitted from the books. Bill receivable of Rs. 4,500 endorsed to C was not entered in the book. Sales returns of Rs. 2,500 from D were not recorded.

Solution Rectifying Journal Entries (i)

Contd.

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Financial Accounting

Rs.

Rs.

(ii)

(iii)

(iv)

Illustration 5 Give the correct journal entries for the following: (i) Repairing cost of a building, i.e., Rs. 500 has been charged to Building account. (ii) Rs. 5,000 paid to Joyce in settlement of his account has been posted to the debit of purchase account. (iii) Credit sales of Rs. 2,000 to Chander have been posted to the debit of Miscellanous Expenses Account. (iv) Rs. 750 received from Vasan has been credited to account of Dasan. (v) Wages account includes Rs. 1,000 being wages paid to workers engaged in construction work of the office building. Solution Rectifying Journal Entries (i)

500 500

(ii)

(iii)

(iv)

750 750

(v)

Illustration 6 How will you rectify the following errors discovered before preparation of the Trial Balance? (a) Rs. 3,000 spent for repairs of building has been posted to Building Account. (b) A sale of Rs. 5,200 to Suresh has been entered in the Sales Book as Rs. 2,500. (c) Goods worth Rs. 500 purchased from Vishwam have been omitted to be recorded in the books.

Rectification of Errors

(d) (e) (f) (g)

303

Rs. 4,000 paid as salary to office staff has been debited to his personal account. Rs. 175 discount offered by a creditor has been debited to Discount Account. The total of bad debts written off amounting Rs. 500 not posted. The total of Discount Allowed column in Cash Book for the month of March, 2005 amounting to Rs. 200 was not posted.

Solution Rectifying Journal Entries (a)

(c)

(e) Since only one account is affected (Discount account), there is no need of journal entry to rectify this error. The error will be rectified in Discount Account as under:

Rs.

Rs. By Rectifying of posting of 175 on ………

(f) There is no need to pass rectifying journal entry, the reason being only one account is affected (i.e., Bad Debts Account). This is rectified in the Bad Debts Account as follows:

Rs.

Rs.

500

(g) Journal entry is not required to rectify this error as the error is only in Discount Account. The rectification is shown as under:

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Financial Accounting

Rs.

Rs.

200

Illustration 7 Pass rectification entries for the following transactions: (a) A builder’s bill for Rs. 14,500 for erection of a small shed was debited to Repairs Account. (b) Repairs to plant amounting to Rs. 1,500 had been charged to Plant and Machinery Account. (c) Wages amounting Rs. 2,500 paid to the factory workers towards erection of machinery were debited to Wages Account. (d) A cheque for Rs. 17,500 received from Prem was credited to the account of Ram. (e) Goods to the value of Rs. 700 returned by X were included in closing stock, but no entry was made in the books. (f) Goods purchased for the office staff, valuing Rs. 20,000 was included in ‘Purchases’. The amount was deducted from the Salaries Account of the staff. (g) A bill of exchange received from Rajan for Rs. 30,000 returned by the discounting bank as it was dishonoured and credited to Bank Account and debited to Bills Receivable Account. (h) Goods sold to Maran Rs. 285 have been wrongly entered in the Sales Journal as Rs. 825. Solution Rectifying Journal Entries (a)

(c)

(e)

700 700

Contd.

Rectification of Errors

Rs. (f)

(g)

(h)

Salaries Account To Purchases Account (Being goods purchased for members of staff, now reduced from Purchases Account and debited to Salaries A/c)

Dr.

Rajan Account To Bills Receivable Account (Being bills receivable returned by bank as

Dr.

Sales Account To Maran Account (Being wrong amount entered in sales journal now

Dr.

E

305 Rs.

20,000 20,000

30,000 30,000

540 540

E

From the following errors detected, give the rectifying journal entries and also show the effect on the Final Accounts. (i) An amount of Rs. 5,000 spent for the erection of a vehicle shed was debited to Repairs account. (ii) A cheque amounting to Rs. 2,000 received from Rathnam & Co. was dishonoured and debited to Discount A/c. (iii) A sum of Rs. 1,500 drawn by the proprietor was debited to General Expenses Account. (iv) Goods valuing Rs. 2,000 returned by Naren were included into the stock but no entry was made in the books. (v) A cheque for Rs. 5,000 received from Bharath was credited to the account of Sharath and debited to cash instead of bank account. (vi) Wages paid to the factory workers towards addition made to the new machinery amounted to Rs. 2,500 were posted to Wages Account. Solution

Particulars (i)

(ii)

(iii)

(iv)

L.F

Building A/c To Repairs A/c (Being the erection of vehicle shed wrongly

Dr.

Rathnam & Co. A/c To Discount A/c (Being the cheque dishonoured and wrongly

Dr.

Drawings A/c To General Expenses A/c (Being the cash drawn by proprietor wrongly

Dr.

Sales Return A/c To Naren A/c (Being the goods returned by Naren omitted to be recorded now recorded)

Dr.

Dr. (Rs.)

Cr. (Rs.)

5,000 5,000

2,000 2,000

1,500 1,500

2,000 2,000

306

Financial Accounting

Rs.

Rs.

(v)

(vi)

(i)

(ii)

(iii) (General Expense) (iv)

(v)

(vi)

II – RECTIFICATION WITH SUSPENSE ACCOUNT

Illustration 9 Pass journal entries to rectify the following errors and place the difference in the Suspense Account. (i) Salaries paid Rs. 25,580 posted in Sales A/c as Rs. 25,850. (ii) Travelling expenses of Rs. 250 paid through petty cash has been debited to Telephone Charges Account. (iii) Cost of a new air-conditioning unit Rs. 15,000 purchased and fitted to office vehicle, has been debited to Office Fittings A/c.

Rectification of Errors

307

Solution Rectifying Journal Entries (i)

270 270

250

(ii)

250

(iii)

Illustration 10 The credit column of a Trial Balance as on 31st March, 2006 is short by Rs. 1,600. On 1st April 2006 the following errors were discovered: (i) A credit item of Rs. 5,300 has been debited to the personal account of Rajesh as Rs. 3,500. (ii) Depreciation of Plant and Machinery Rs. 8,500 was not been debited to Depreciation Account. (iii) Discount of Rs. 5,800 allowed to M/s. Sanjay & Co. has been credited to them as Rs. 8,500. (iv) The total of Purchase Returns Book has been overcast by Rs. 4,000. Pass the rectification entries. Assuming that the difference in Trial Balance is taken to a Suspense Account, you need not show the Suspense Account. Solution Rectifying Journal Entries

(i)

(ii) (Being the omission of posting to Depreciation (iii)

(iv)

Financial Accounting

308

Illustration 11 How do you rectify the following errors after the preparation of the Trial Balance? (a) An item of Rs. 2,000 paid for purchase of a machine has been debited to Purchases Account from the Cash Book. (b) A credit sale of Rs. 3,000 to Bhanu duly entered in the Sales Book has been credited to Bhanu’s Account. (c) An item of Rs. 4,500 for the purchase of furniture has been wrongly passed through the Purchase Book. (d) Rs. 550 posted to debit of stationery, instead of Ratha, in payment of his account. (e) Rs. 4,000 withdrawn by the proprietor for his personal use has been debited to Travelling Expenses Account. (f) Rs. 1,000, cost of repairing building, has been charged to Buildings Account. (g) A sum of Rs. 5,000 paid to Alen has been debited to Balan Account. Solution Rectifying Journal Entries (a)

(c)

errors of commission) 550 550 (e)

(f)

(g)

Illustration 12 Rectify the following errors: 1. Goods sold to A for Rs. 12,000 was wrongly passed through Purchase Book. 2. Goods sold to B for Rs. 4,000 was wrongly passed through Purchase Book but B Account was correctly debited.

Rectification of Errors

309

3. Goods purchased from C for Rs. 6,000 passed through Sales Book. 4. Goods purchased from D passed through Sales Book but D Account was correctly credited Rs. 5,000. 5. Goods sold to E a creditor for Rs. 9,000 posted to the credit of his account. 6. Goods purchased from F a customer for Rs. 7,000 posted to the debit of his account. 7. Goods returned by G were passed through Return Outward Book Rs. 1,600. 8. Goods returned to H Rs. 5,000 passed through Returns Inward Book. 9. Goods returned to I Rs. 1,200 passed through Return Inward Register though correct entry was made in his account. 10. Goods returned by J passed through Returns Outward Book though correct entry was made in his account Rs. 4,400. Solution Rectifying Journal Entries 1.

2.

3.

4.

5.

6.

7.

8.

Contd.

310

Financial Accounting

Contd. Rs.

Rs.

9.

10.

E E Illustration 13 Give journal entries to correct the following errors and show clearly what would be effect of such rectification on the Profit and Loss Account and the Balance Sheet of the firm: (a) Discount received was undercast by Rs. 60; (b) The Debit side of Madhan, a customer was overcast by Rs. 2500; (c) A payment of Rs. 5,000 for legal expenses was not passed from the Cash Book. (d) Rs. 550 the total of the Returns Inwards Book was posted to the credit of the Returns Outwards Account. (e) A sum of Rs. 7,500 was received from Prakash, and was duly entered in the Cash Book but was posted to his account as Rs. 5,700. (f) A sum of Rs. 8,000 written off as depreciation of Machinery was not posted to Depreciation Account. (g) An item of Rs. 1,250 having entered in the Sales Return Book was debited to the account of Bhaskar, a customer who had returned the goods. (h) An item of Rs. 4,900 was posted in the Sales Account as Rs. 9,400. (i) Purchase of a machine component for Rs. 7,900 was entered in the Purchases Book. (j) A debit balance of Rs. 2,560 in Electricity Account was entered on the wrong side in the Trial Balance. Solution Rectifying Journal Entries (a)

60 60

Contd.

Rectification of Errors

311

Contd. Rs.

Rs.

(c)

550 550

(e)

(f)

(g)

(h)

(i)

(a)

nominal account (c)

(e) nominal account Contd.

Financial Accounting

312 Contd. (f)

(g) nominal account. (h) sales. (i) purchases.

Illustration 14 Following errors were identified. (a) Cash Rs. 1,200 paid to Dhanush posted as Rs. 2,100 (b) Purchase of stationery worth Rs. 750 not posted in the Cash Book. (c) Rs. 2,600 paid towards the purchase of office furniture was charged to Office Expenses Account. (d) Credit sales made to Vikram for Rs. 2,000 were posted to the credit of his account. (e) A purchase of Rs. 4,200 from Vijay was passed through the Sales Day Book as Rs. 2,400. How would you rectify the errors assuming that: (i) They were detected before preparing the Trial Balance. (ii) They were detected after preparing Trial Balance, but before preparing Final Accounts. The difference being taken to Suspense Account. (iii) They were detected after preparing Final Accounts. Solution (i) When errors are detected before preparing the Trial Balance (a) The error is one-sided. No journal entry is needed. The error is rectified by crediting Dhanush Account with Rs. 900. (b) The error is one-sided. No journal entry is needed. The omission is rectified by posting Rs. 750 in Stationery Account. (c) The error is two-sided. It is rectified by the following entry:

(d) The error is one-sided. No journal entry is needed. Vikram Account is credited instead of being debited. The error is rectified by debiting Rs. 4,000 (2,000 + 2,000) in Vikram Account.

Rectification of Errors

313

(e) It is rectified by the following entry: Rs.

Rs.

(ii) When errors are rectified after preparing the Trial Balance but before preparing Final Accounts Rs. 900

(a)

Rs. 900

750 750 (c)

(e)

(iii) When errors are detected after preparing Final Accounts Rs. 900

(a)

Rs. 900

750 750 (c)

(e)

III – RECTIFICATION USING P AND L ADJUSTMENT ACCOUNT Illustration 15 Keshav Enterprise closes its books on March 31 every year. In September 2006, the books for the year 2006-07 contained some errors inspite of an agreed trial balance. The errors were: (a) Rs. 4,200 paid for purchase of office furniture was posted to the Purchase Account. (b) The Sales Book was overcast by Rs. 700. (c) Rs. 1,550 paid for freight on machinery was debited to freight account for Rs. 2,050. (d) Opening stock was overstated by Rs. 5,000 by a wrong casting in the inventory. (e) An amount of Rs. 1,600 received in full settlement from a customer after he was allowed a discount of Rs. 120 but while writing the books, the amount received was entered in the discount column and the discount allowed was entered in the amount column.

314

Financial Accounting

(f) A Cheque of Rs. 14,660 received from Suman, after allowing him discount of Rs. 140 was endorsed to Rajiv in full settlement for Rs. 15,000. The Cheque was fully dishonoured but no entries for dishonour were passed in the books. Give journal entries to rectify the above errors using the Profit and Loss Adjustment Account, where necessary. Solution Rectifying Journal Entries (a)

700 700

(c) 500

(e)

1480 1480

(f) 200

The Profit and Loss Adjustment Account is used since the profits for 2006–07 are already arrived at in the Balance Sheet. Adjustment Account can be adjusted against the balance in the Profit and Loss A/c.

E Illustration 16 An accountant could not tally the Trial Balance. The difference was temporarily placed to a Suspense Account for preparing the Final Accounts. The following errors were discovered later on: (i) The Sales Book was undercast by Rs. 120. (ii) Entertainment expenses Rs. 110 though correctly entered in the Cash Book were omitted to be posted in the ledger. (iii) Commission of Rs. 250 paid was posted twice, first to Discount Account and again to Commission Account. (iv) A sale of Rs. 3,900 to Thomas, though correctly entered in the Sales Book, was posted wrongly to his account as Rs. 9,300.

Rectification of Errors

315

You are required to pass the necessary rectifying journal entries in the books of the next accounting year so as not to affect the net profit of the year. Solution Rectifying Journal Entries (i)

120 120

110

(ii)

110

250

(iii)

250

(iv) To Thomas

(v)

280 280

110 260 370

120 250 370

E Illustration 17 The Profit and Loss Account of Mr. Basu for the year ended on 31st March 2007 showed a net profit of Rs. 12,000 after taking into account closing stock of Rs. 4,220. On scrutinising the books, the following information could not be obtained: 1. Mr. Basu has taken goods valued Rs. 7,500 for his personal use without making entry in the books. 2. Purchases include Rs. 3,200 spent on the acquisition of a furniture for the business outlet. 3. Invoices for goods of Rs. 2,600 have been entered on 29th March 2007, but such goods were not included in stock. 4. Rs. 2,500 have been included in closing stock in respect of goods purchased and invoiced on 28th March 2007 but not purchase of April 2007. 5. Goods sold valuing Rs. 3,500 sold and delivered to Mohan, a customer in March have been entered in April 2007.

Financial Accounting

316 Solution

Journal Entries 1. 7500

2.

3.

4.

5.

into account)

E Illustration 18 The books of Mahindar reveals the following errors after closing the accounts for the year ended on 31st March 2008 and the Balance Sheet was prepared as on the date by showing the difference in Suspense Account. (a) Old furniture purchased for Rs. 13,200 on January 1, 2008, was debited to the Repair and Maintenance Account. The depreciation @ 10% p.a. is charged each year on the written down value of the furniture. (b) A credit sale of Rs. 8,000 to Vasanth was correctly recorded in the Sales Day Book but was posted to the credit of his account. The business has the practice of providing 5% on doubtful debts and 2% on discount on debtors.

Rectification of Errors

317

(c) Machinery was purchased on October 1, 2008 for Rs. 40,000. A cheque payment was made by the proprietor on his personal account. No entry was, therefore, made in the books of the concern. A depreciation of 10% p.a. is chargeable on such asset. (d) Goods valuing Rs. 12,000 was sold on credit to Mr. Varadhan was omitted to be recorded in his account. Pass necessary rectification journal entries and prepare the Suspense Account. Solution Rectifying Journal Entries (a) (i)

(ii)

330 330

(c) (i)

(ii)

532 532

318

Financial Accounting

330

532

By Vasanth

Illustration 19 Jagan enterprises closed the books for year ended 31st March 2005 and the following errors were located after preparing the Balance Sheet, the difference being placed in the Suspense Account: (a) The balance of Furniture Account on 1st April 2004 was carried forward from previous year as Rs. 13,500 instead of Rs. 15,300. A depreciation of 10% p.a. was charged on written down value. (b) Goods sold to Jaiprakash for Rs. 14,000 was correctly recorded in the Sales Day Book but was posted to the credit of his account. A provision for debts @ 5% was raised in the books. (c) Rs. 1,560 paid for freight on Machinery was debited to Freight Account as Rs. 1,660. (d) Purchase made from Balu Brothers for Rs. 1,750 were entered in the Sales Book as Rs. 1,570. Pass necessary rectification entry and close Suspense Account assuming that the Profit of last year transferred to Capital Account. Solution Rectifying Journal Entries (a) (i)

(ii)

180 180

(i)

(ii)

Contd.

Rectification of Errors

319

Contd. Rs.

Rs.

(c) 100

180

180 100 180

100 To Difference in Trial Balance

Illustration 20 After closing the books for year ended on 31st March 2002, Harish found the books showing the difference, which he transferred to the debit of his Capital Account and prepared the Profit and Loss Account and Balance Sheet. He traced the following errors committed during 2001–02: (a) Machine having the book value of Rs. 28,200 was sold on credit for Rs. 17,500 to Jairam. The amount was posted to the credit of his account. (b) Mr. Rajan, a debtor paid Rs. 4,200 by cheque was received and correctly dealt with. It was, however returned dishonoured and was debited to Trade Expenses Account. (c) The closing stock as on 31st March 2002 overcast by Rs. 12,000. (d) The income-tax paid by Harish Rs. 5,760 was debited to Income-Tax Account as Rs. 6,750. (e) A table purchased for Rs. 2,500 was debited to general expenses as Rs. 3,500. Pass the rectifying journal entries and find the difference between in the books on 31st March 2002? Solution Rectifying Journal Entries (a)

Contd.

320

Financial Accounting

Contd. Rs.

Rs.

(c)

990

(e)

5760 990 By Suspense

990 By Jairam

IV – SUSPENSE JOURNAL AND LEDGER Illustration 21 On 31st March 2005, the Trial Balance of Prabhu did not agree. The difference was placed in a newly opened Suspense Account. Subsequently, the following errors were located: (i) A credit sale for Rs. 2,000 has been passed through the Purchases Book. The Customer’s Account has, however, been correctly debited.

Rectification of Errors

321

(ii) A credit purchase for Rs. 1,720 had been posted to the debit of the creditor’s account as Rs. 1,270. (iii) The purchases book for February 2005 had been undercast by Rs. 500. Pass journal entries to rectify the above mentioned errors and prepare the Suspense Account. Solution Rectifying Journal Entries (i)

(ii)

(iii)

500 500

By Difference in Trial Balance 500

Illustration 22 Following are errors located for which pass the rectifying entries and show the Suspense Account: (i) Purchase amounting to Rs. 1,511 was entered in the Purchase Book as Rs. 1,115 and posted to the Supplier’s Account Rs. 1,151. (ii) Bills Receivable from Anand of Rs. 1,500 was posted to the credit of Bills Payable Account and also credited to the account of Anand. (iii) A sales return of Rs. 175 was not entered in the financial accounts though it was duly taken in the Stock Book. (iv) A cheque of Rs. 1,750 received for loss of stock by fire had been deposited in the proprietor’s private bank account. (v) An amount of Rs. 3,000 was received in full settlement from a customer after he was allowed a discount of Rs. 150 but while writing the books, the amount received was entered in the discount column and discount allowed in the amount column.

322

Financial Accounting

Solution Rectifying Journal Entries (i)

396 360 36

(ii)

(iii)

175 175

(iv)

(v)

To Balance

36

Illustration 22 In taking out a Trial Balance, a book-keeper finds that it has Rs. 107.89 excess debit. Being desirous of closing his books, he places the difference to a newly-opened Suspense Account which is carried forward. In the next period he discovers that (a) credit item of Rs. 87.27 has been debited to personal account as Rs. 78.72; (b) a sum of Rs. 75 written off fixtures as depreciation has not been posted in the Fixture Account; (c) Rs. 1,400 paid for Furniture purchased has been charged to the ordinary Purchase Account; (d) A discount of Rs. 38.69; allowed to customer has been credited to him as Rs. 37.79; (e) the total of the Inward Returns has been added Rs. 89 short; and (f) an item of sale for Rs. 49 was posted as Rs. 94 in the Sales Account. Give the correcting entries and prepare the Suspense Account. Solution Rectifying Journal Entries (a)

165.99 165.99

Contd.

Rectification of Errors

323

Contd. Rs.

Rs.

75 75

(c)

0.90 0.90

(e)

89 89

45

(f)

45

165.99 75.00 0.90 241.89

107.89 89.00 45.00 241.89

Illustration 23 A trader found that there is difference in the Trial Balance and carried to Suspense Account and opened with a credit of Rs. 7,340. Pass the entries required to rectify the following errors and state any inference that may be drawn. (a) A Sales Invoice for Rs. 1,200 for goods sold on credit to David was entered in the Purchase Book. (b) Goods bought on credit From Rajeswar for Rs. 2,400 were wrongly debited to his account as Rs. 4,200. (c) A Cash discount of Rs. 150 allowed to Kamal remained unposted to his account in the Ledger from the Cash Book. (d) The Sales Book for the month of April undercast by Rs. 200. (e) Rs. 360 paid for repairs to machine was debited to Machine Account as Rs. 630. (f) Purchase of Rs. 500 from Vaman & Co. was entered in the Purchase Returns Book. However, the account of Vaman & Co. stands credited by the amount.

324

Financial Accounting

Solution Rectifying Journal Entries (a)

Dr.

Dr.

(c)

Dr.

150 150

Dr.

200 200

Dr. Dr.

(e)

360 270 630

Dr. Dr.

(f)

To Kamal To Sales

150 200 270

500 500

500 500

Illustration 24 The book-keeper of a trading concern, having failed to agree with the Trial Balance, opened a Suspense Account and entered the difference in the Trial Balance therein. The following errors were then subsequently discovered: (a) A cheque for Rs. 750 received from Janaki & Co. having been dishonoured was wrongly debited to Allowances Account. (b) The discount column of the Cash Book representing discount allowed to customers for the month of March was over added by Rs. 130. (c) The total of the Purchase Book for March was undercast by Rs. 200.

Rectification of Errors

325

(d) An item of Rs. 150 representing returns inwards from Prakash & Co. was omitted to be credited to their account from the Returns Inwards Book. (e) The credit side of Rajan Brothers Account in the Ledger had been overcast by Rs. 110. (f) Sale of old furniture amounting to Rs. 750 had been credited to Sales Account. (g) Bills receivable accepted by Chander & Co. for Rs. 2,000 which had been sent to the bankers for collection, having been dishonoured and returned by the bank had debited to Bills Receivable Account. You are required to: (i) make rectifying journal entries (ii) show the Suspense Account (iii) explain how the rectification of the above errors would affect the profit already disclosed by the accounts. Solution (i) Rectifying Journal Entries (a)

Dr.

750 750

Dr.

130 130

(c)

Dr.

200 200

Dr.

150 150

(e)

Dr.

110 110

(f)

Dr.

750 750

(g)

Dr.

326

Financial Accounting

Rs. 30 130 150 310

Rs. 200 110

310

Note: The Suspense Account shows a debit balance of Rs. 30 in the Trial Balance before discovering the errors, i.e., the credit side of the Trial Balance exceed the debit side by Rs. 30 before the discovering the errors. (iii) disclosed by the accounts as these do not involve any nominal account. 130) because Allowances Account and Discount Account have been given credit. Rs. 750) because Purchases Account was given less debit and Sales Account was unduly credited last year. disclosed by the accounts will decrease by Rs. 70 (Rs. 950 – Rs. 880). Illustration 25 The Trial Balance of a business concern is out by Rs. 3,620 (excess debit) the following errors were found subsequently to have been committed. Pass journal entries to correct them and also prepare the Suspense Account: (a) Cash amounting Rs. 500 received from Jeevan on 31st December, 2004 but has been entered in the Cash Book on 3rd January, 2006. (b) The Sales Returns Book for year undercast by Rs. 200. (c) Goods purchased from Pal Brothers for Rs. 750 had been posted on the debit side of its account as Rs. 570. (d) An amount of Rs. 350 received from Balan had been dishonoured on maturity and was debited to Discount Allowed Account. (e) Goods returned by Dhanapal of Rs. 250 taken into stock, but no entry was made in the books. (f) A bicycle purchased for Rs. 1,500 for the proprietor had been charged to General Expenses Account. (g) A sale of Rs. 1,500 has been passed through the Purchase Day Book. The Customer’s Account has, however, been correctly debited. (h) A sale of Rs. 1,000 has been passed through the Purchase Day Book. The Customer’s Account has, however, been correctly debited.

Rectification of Errors

327

(i) On the scrutiny, it was found that the cashier had misappropriated the following amount and had not recorded in the books-cash sales (Rs. 2,000) and receipt from customer (Rs. 5,000), cash purchases Rs. 250 and paid towards credit purchases (Rs. 1,000 and discount offered Rs. 50). (j) Goods purchased by the employees amounting Rs. 2,500 (deducted from their salaries) but the same was debited to Purchases Account. Solution Rectifying Journal Entries (a)

Dr.

500 500

Dr.

200 200

(c)

Dr.

Dr.

350 350

(e)

Dr.

250 250

(f)

Dr.

(g)

Dr.

500 500

(h)

Dr.

(i) (1)

Dr.

(2)

Dr.

250 250 Contd.

328

Financial Accounting

Rs. (3)

Rs.

Dr. 950 50

(4)

Dr.

Dr.

Trial Balance 200 500

Illustration 26 The Trial Balance for the year ended 31st March 2006 prepared by Mr. Thomas did not agree. He placed the difference in the Suspense Account showing the credit balance of Rs. 1,250. He traced the following errors for which pass the rectifying entries and prepare the Suspense Account. (a) Purchase Day Book was overcast by Rs. 550. (b) Goods purchased on credit for Rs. 6,000 were not posted to the personal ledger of the Mr. Raja, the supplier. (c) Credit sales for Rs. 4,000 were passed through Purchase Day Book. (d) Sales Returns Book was undercast by Rs. 200. (e) Cash Purchase for Rs. 15,000 by issue of a cheque were treated as cash as well as credit purchase. (f) Salary paid Rs. 5,000 was posted to the Wages Account on the credit side as Rs. 500. (g) The proprietor had endorsed the Bills Receivable for Rs. 5,000 to a supplier was dishonoured and the personal accounts of both the debtors and creditors were debited by Rs. 500. (h) Income tax paid Rs. 1,500 was wrongly posted to the credit side of Trade Expense Account as Rs. 150. (i) A customer purchased goods on credit for Rs. 2,000 was posted to Creditors Account with the same amount on the debit side. (j) The total in the bank column of the Cash Book was overcast by Rs. 200 on the debit side.

Rectification of Errors

329

Solution Rectifying Journal Entries

(a)

Dr.

550 550

Dr.

(c)

Dr.

Dr.

200 200

(e)

(f)

Dr. Dr.

(g)

500

Dr. Dr.

(h)

150

(i)

Dr.

Dr.

200 200

Rs.

Rs.

550 200 200 850

500 150

330

Financial Accounting

Points to Remember Errors in accounting are to be rectified in order to have correct picture of business transaction of a firm. The accounting errors are broadly classified into four different categories. Errors of Principle involve an error without the knowledge of accounting principle. Error of Commission involves an error committed in recording the amount of transaction in the subsidiary books. Error of Omission involves an error of omitting to record an entry in the subsidiary book. Compensating Error is an error committed on one side of an account which is compensated by one or more errors committed on the opposite side. When the Trial Balance disagrees due to error, a Suspense Account is opened to record the difference, this enables the accountant to prepare Final Accounts without any further loss of time.

Examination Questions 1. Fill in the blanks (a) Wages paid for the erection of machinery debited to Wage A/c is an example of __________. (b) Wages paid for installation of machinery debited to ________. (c) Sales of Rs. 1,000 to Suresh were not recorded while rectifying this errors, Suresh’s Account will be _______ by Rs. 1,000. (d) Some expenses are incurred at the time of sale of an asset. This amount is debited to ___________ account. (e) Rs. 715 received from Ramesh posted to Ramesh account as Rs. 751 is called as Error of __________. 2. Choose the correct answer (i) Error which affects one account can be (a) Error of Omission (b) Error of Principle (c) Error of Commission (d) None of the above (ii) Error of Commission arises when (a) any transaction is wrongly recorded (b) any transaction is left (c) any transaction is recorded according to accounting principles. (d) None of the above (iii) Error of Principle arises when (a) there is no distinction between capital and revenue items (b) there is no distinction between fixed assets and current assets

Rectification of Errors

331

(c) there is a complete omission (d) None of the above. (iv) An error committed on debit side which equals by another error on credit side to the same extent is called (a) Error of Principle (b) Error of Commission (c) Compensating Error (d) None of the above 3. Match the following (i)

Error of Omission

(ii)

Error of commission

a

respect of legal charges is left out. (iii)

Error of principle

c

amount. (iv)

4. State whether the following statements are True or False: (a) Compensating errors affect the agreement of Trial Balance. (b) The process of totaling the transaction at the end of accounting period is called casting. (c) Error of Omission is disclosed by Trial Balance. (d) Preparation of suspense account is temporary arrangement.

1. (a) (c) (e) 2. (i) (i) (a)

Error of Principle; debited Commission c; (ii) a; b; (ii) a; False; (b) True;

(b) Machinery A/c; (d) Asset A/c (iii) a; (iii) d; (c) True;

(iv) c (iv) c (d) True

A. Very Short Answer Questions (a) What is Suspense Account ? (b) What is Error of Principle? (c) What is Compensating Error? (d) Mention two errors not disclosed by Trial Balance. B. Short Answer Questions (a) What are the different types of errors ? (b) Explain Error of Commission with examples ? (c) Mention the errors not disclosed by Trial Balance with examples. (d) What are the errors which prevent the agreement of Trial Balance?

332

Financial Accounting

C. Detail Answer Questions (a) How would you locate the errors when Trial Balance disagrees? (b) Explain various methods of rectification of errors by suitable examples.

Pass journal entries to rectify the following errors: (i) A cheque of Rs. 750 received for loss of stock by fire has been deposited in the proprietor’s private bank account. (ii) Bills receivable from Mr. Aar of Rs. 1,000 was posted to the credit of Bills Payable Account and also credited to the account of Mr. Aar.

The Trial Balance of Patel & Co. Ltd. having disagreed, the difference was temporarily placed on a Suspense Account. Subsequently, the following errors were discovered and you are required to pass the rectifying entries: (a) Sale of Rs. 30 was wrongly entered in the Sales Returns Book, but the posting therefrom was correctly made to the debit of the Customer’s account. (b) A sale of Rs. 12.58 was posted to the Customer’s Account as Rs. 9.78. (c) The addition of the Sales Day Book for the month was undercast by Rs. 100. (d) An item of Rs. 40 was wrongly credited to the Supplier’s Account from the Returns Outwards Book. (e) An item of Rs. 105.62 was posted to Supplier A/c as Rs. 110.31 from the Purchase Book. (f) A cash discount of Rs. 20 had remained unposted to the Customer’s Account from the receipt side of the Cash Book.

Rectify the following errors: (a) A credit purchase of Rs. 925 from Shankar has been entered as Rs. 295. (b) Sales return of Rs. 200 from Jahangir has been entered in the Sales Book. (c) A credit sale of Rs. 1,000 to Shayam has been omitted to be entered in Sales Book. (d) Purchase of goods for Rs. 100 for private use of the proprietor has been debited to Purchase Account. (e) Cash sales of Rs. 150 to Abdul has been wrongly credited to his account. (f) Rs. 25 paid for commission has been wrongly treated as receipt of commission. (g) Rs. 400 paid for commission has been wrongly debited to Furniture Account. (h) A credit sale of Rs. 300 to Savitri was wrongly debited to Gayatri.

Rectification of Errors

333

Pass necessary journal entries to rectify the following errors: (a) An item of Rs. 53 has been debited to a personal account as Rs. 35. (b) A sum of Rs. 100 written off as depreciation on furniture was not debited to Depreciation Account. (c) The total of Purchase Book was added Rs. 60 short. (d) A machine bought for Rs. 5,000 has been debited to Purchase Account. (e) Sale of old machine for Rs. 500 to Mahesh has been entered in Sales Book. (f) Total of Returns Outwards Book was Rs. 100 short. (g) A sale of Rs. 359 to Ramu has been entered correctly in Sales Book but credited to Ramu’s Account as Rs. 395. (h) Repairs Rs. 680 to Motor Truck has been debited to Motor Vehicle Account as Rs. 860. (i) Cash received from Joseph Rs. 300 has been debited to Jose’s Account. (j) Furniture purchased for Rs. 3,000, but there is no entry in books.

Rectification E E The Trial Balance of Hopeless Ltd., having disagreed, the difference of Rs. 147.12 excess debit was temporarily placed in a “Suspense Account” and carried forward. In the next year, the following errors in connection with the previous year were discovered: (a) (b) (c) (d)

A credit item of Rs. 190.06 was debited to K. Ramu’s Account. Rs. 1,650 for addition to machinery was debited to Repairs Account. The total of Returns Inward Account was undercast by Rs. 10. Rs. 160 written off machinery as depreciation was not posted to Depreciation Account. (e) An item of sales for Rs. 18 was posted as Rs. 81 in the Sales Account.

Pass journal entries to rectify the errors and show the Suspense account. State also the effect of these correcting entries on the Profit and Loss A/c.

The account books of Messers Hari Ram Sita Ram were closed on 31st December 2004. On that date there was a difference of Rs. 360 in their Trial Balance. The Trial Balance was totalled by transferring Rs. 360 on the debit of the Suspense Account. Afterwards the following mistakes were found out: (a) In the Cash Book, total of the discount column on the debit side was overcast by Rs. 60. (b) The Purchase Book was undercast by Rs. 200.

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Financial Accounting

(c) Bhola Nath had returned the goods worth Rs. 100 but no entry was made in his account. (d) Credit total of Harinath’s Account was overcast by Rs. 20. (e) There was a debit balance of Rs. 300 in Hiral’s Account but this was not included in the Total Debtor’s List. Pass necessary entries in the journal to rectify the above errors. Open a Suspense Account and point out the effect of each entry on the Profit and Loss Account.

The book keeper of a trading concern having failed to agree the Trial Balance, opened a Suspense Account and entered the difference in the Trial Balance therein. The following errors were subsequently discovered: (i) A cheque for Rs. 75 received from Jones & Co. having been dishonoured was wrongly debited to Allowance Account. (ii) The discount column of the Cash Book representing discount allowed to customers for the month of December was over added by Rs. 30. (iii) The total of Purchases Book for December was undercast by Rs. 100. (iv) An item of Rs. 50 representing return inwards from P. Basu & Co. was omitted to be credited to their account from the Return Inwards Book. (v) The credit side of R. Roy’s Account in the ledger had been overcast by Rs. 10. (vi) A sale of old furniture amounting to Rs. 75 had been credited to Sales Account. (vii) A bill receivable accepted by S. Sampat & Co. for Rs. 200 which had been sent to the bankers for collection, having been dishonoured and returned by the bank, had been debited to Bills Receivable Account. (viii) A balance of Rs. 150 owing by B. Jijibhoy, a customer, had been omitted from the list of sundry debtors. You are required to ascertain the total amount of difference in the trial balance. Show the Suspense Account as opened by the book keeper and subsequent adjusting entries made therein. You are further, required to explain how the rectification of the above errors would affect the profit already disclosed by the account.

The Trial Balance of A was short by Rs. 3,380 on the credit side. The difference was made good by creating a Suspense Account. The following errors were detected and rectified subsequently. (a) (b) (c) (d) (e) (f)

An amount of Rs. 1,100 incurred towards Plant and Machinery was not posted. The Purchase Book was overcast by Rs. 2,000. The sale of old machinery for Rs. 1,600 was taken to the Cash Book as sales. Commission paid Rs. 400 was taken to the credit side of the account. Purchase of stationery for Rs. 108 was entered in the Purchase Book. Purchases made for Rs. 1,550 from B were debited to his account even though it was properly recorded in the Purchase Book.

Rectification of Errors

335

(g) Goods returned by C amounting to Rs. 350 were not taken to Returns Inwards Book. (h) The discount Rs. 180 received from D was not posted to Discount Account. (i) Rs. 250 cash received from E was posted to F’s Account. Pass necessary rectification journal entries, prepare the Suspense Account and also show the effects of these errors on the Profit and Loss Account.

Rectify the following errors and show their effects on Trial Balance and on profit or loss; before rectification and after: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

The Sales Day Book is totaled Rs. 10 short. Payment of Trade Expenses Rs. 55 not paid. Goods bought from H for Rs. 100 is wrongly posted to the debit of his account. Commission Rs. 25 paid has been posted twice to that account. Discount Column on the receipt side of Cash Book totaling Rs. 123.12 has been debited to Trade Expenses Account. An amount of Rs. 200 withdrawn by the proprietor for his personal use has been debited to Trade Expenses Account. A purchase of goods from Nathan amounting to Rs. 300 has been wrongly entered through the Sales Book. Rs. 50 received from Shaw & Co. have been credited to Sen & Co. Rs. 175 paid on account of salary to the cashier Govind stands debited to his personal account. Installation charges of machinery, Rs. 570 have been debited to Installation Expenses Account.

Some mistakes were committed in the books of Careless Brothers for the year ended on 31st December 2004 and the Final Accounts were completed taking the difference in Suspense Account shown in the Balance Sheet: The following mistakes were detected in March 2005 on scrutiny of the books of the earlier year: 1. Sales Day Book was undercast by Rs. 500. 2. Credit sale of Rs. 450 was debited to Party’s Account Rs. 540. 3. Credit purchase of Rs. 215 was wrongly debited to Supplier’s Account as Rs. 250. 4. An old furniture having a book value of Rs. 400 was taken over by the Furniture Supplier at an agreed value of Rs. 300 as part exchange for a new furniture of Rs. 500 supplied. The bill for the net amount was passed through Return Inwards Day Book.

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Financial Accounting

5. White-washing and repairing charges of building amounting to Rs. 320 were charged to Building Account on which depreciation was charged @ 2.5%. You are required to pass the journal entries to rectify the above mistakes and draw the Suspense Account and Profit and Loss Adjustment Account.

A book-keeper finds that his Trial Balance debit side is short by Rs. 308 and so for the time being he balances the sides by putting the difference to Suspense Account. Subsequently, the following errors were discovered: (a) An entry for the goods sold for Rs. 102 to Madhav was posted to his account as Rs. 120. (b) Rs. 100 being the monthly total of discount allowed to customers were credited to Discount Account in the Ledger. (c) Rs. 275 paid by Madhav were credited to Jadav’s Account. (d) Rs. 26 appearing in the Cash Book, as paid for the purpose of stationery for office use has not been posted to Ledger. (e) The debit side of Purchases Account was undercast by Rs. 100. You are required to make the necessary journal entries and the Suspense Account.

A book-keeper prepared a Trial Balance on 31.03.2003 which showed a difference of Rs. 140 (Excess credit). The difference was placed to Suspense Account. The following errors were subsequently located: 1. A sale to Bimal of goods for Rs. 600 had been posted to the wrong side of his account. 2. A credit purchase of goods for Rs. 1,640 from Ramesh had been posted to the personal account as Rs. 640. 3. A cash sale of old furniture for Rs. 1,500 had been passed through the sales account. 4. The Discount Received Account had been short cast by Rs. 60. 5. Payment of errors Rs. 3,400 was debited to the personal account of the landlord. Pass journal entries to rectify the errors and prepare the Suspense Account.

In taking out trial balance finds that he is out by Rs. 38.04 excess debit. Being desirous of closing his books, he places the difference to a newly opened Suspense Account which is carried forward. In the next period he discovers that: (a) A credit item of Rs. 97.43 has been debited to a personal account as Rs. 79.34.

Rectification of Errors

337

(b) A sum of Rs. 95 written off as depreciation has not been posted to the depreciation account. (c) Rs. 1,500 paid for furniture purchased has been charged to Ordinary Purchase Account. (d) A discount of Rs. 37.41 allowed to a customer has been credited to him as Rs. 36.14. (e) The total of the Return Inwards Book has been added Rs. 9 short. (f) An item of sale for Rs. 59 was posted as Rs. 95 in the Sales Account. Give the correcting entries and prepare Suspense A/c.

A book-keeper failed to balance his Trial Balance, the credit side exceeding the debit side by Rs. 175. This amount was entered in a Suspense Account. Later, the following errors were discovered: 1. The total of the credit side of Ramesh’s Account was overcast by Rs. 100. 2. The Sales Book was undercast by Rs. 100. 3. Goods worth Rs. 100 purchased from Chandra were wrongly entered in the Sales Book. The account of Chandra was correctly credited. 4. The total of Returns Outward Book amounting to Rs. 200 was not posted to the ledger. 5. A credit balance of Rs. 755 of Rent Receivable Account was shown as Rs. 570. 6. Goods worth Rs. 620 sold to Raj were correctly entered in the Sales Book, but posted to Raj’s Account as Rs. 260. Give the journal entries to rectify the above errors and prepare the Suspense Account.

Rectifying the following errors by using Suspense Account: 1. 2. 3. 4. 5. 6.

Goods sold to Rama Rs. 1,000 were not posted to his account. Purchase Book was overcast by Rs. 400. Sales Book was undercast by Rs. 53. Purchase Return Book was undercast by Rs. 16. Cash received from Govind Rs. 111 was posted to his account as Rs. 1,111. Cash paid to Raghu Rs. 770 was posted to his account as Rs. 170.

16 The Trial Balance of A prepared on 31st December 2004 did not tally. As he wanted to close his books and prepare the Final Accounts he placed the difference to a newly opened Suspense Account which was carried forward to the next year. In the next year the following errors were discovered:

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Financial Accounting

(a) An amount of Rs. 80 owed by a debtor was omitted to be included in the schedule of Sundry Debtors. (b) A sum of Rs. 270 paid for repairs to furniture and fixtures was found to be debited to Furniture and Fixture Account Rs. 720. (c) The Purchase Return Book for the month of May was cast Rs. 50 short. (d) Bills receivable received from P for Rs. 1,200 was found entered in the Bills Payable Day Book at Rs. 2,100. (e) An amount of Rs. 300 received from the estate of an insolvent debtor was found to be credited to his account which was already written off last year as bad. (f) Old machinery sold on credit for Rs. 700 was passed through the Sales Book. (g) A payment of Rs. 500 to a creditor in full settlement of Rs. 540 was found credited to his account. Pass journal entries to rectify the above errors and prepare the Suspense Account, showing also how would you find out the difference in the Trial Balance.

The Trial Balance of a firm is out by Rs. 2,788 (excess debit). The following errors were found, subsequently, to have been committed. Prepare journal entries and Suspense Account. (a) An amount of Rs. 100 was received from D. Das on 31st December 2004 but had been entered in the Cash Book on 3rd January 2005. (b) The Returns Inward Book for December had been cast Rs. 100 short. (c) A purchase of Rs. 671 had been posted to the debit of the Creditor’s Account as Rs. 617. The creditor is Panna & Co. (d) A cheque for Rs. 200 received from Joshi had been dishonoured on maturity and was passed to the debit of Allowances Account. (e) Goods amounting to Rs. 100 had been returned by a customer and were taken into stock, but no entry in respect thereof was made in the books. (f) Rs. 2,000 paid for the purchase of a motorcycle for Dutt (a partner) had been charged to Miscellaneous Expenses Account. (g) A sale of Rs. 200 to Singh and Company was credited to their account. (h) A sale of Rs. 1,000 has been passed through the Purchase Day Book. The Customer’s Account has, however, been correctly debited.

The Trial Balance of a book keeper shows an excess of debits over credits by Rs. 261. The difference in placed in a suspense account to facilitate closing of the books. Later on the following errors were discovered: (a) A credit item of Rs. 349 has been debited to a personal account at Rs. 439. (b) A sum of Rs. 625 written off fixtures as depreciation has not been posted to Depreciation Account.

Rectification of Errors

339

(c) Rs. 9,000 paid for furniture brought have been charged to the Purchase Account. (d) A discount allowed to a customer has been credited to him as Rs. 145 in place of Rs. 154. (e) A sale of Rs. 594 was posted as Rs. 495 in Sales Account. (f) The total of Returns Inward Book has been added Rs. 10 short. Give journal entries to correct these errors and prepare the Suspense Account.

A book-keeper placed the difference in his figures in a Suspense Account. Later on the following errors were discovered. Pass journal entries and raise the Suspense Account showing the balance before the discovery of errors: 1. Cash Rs. 2,532 paid by Sanjay was posted as Rs. 2,352. 2. Sale to Swadesh of Rs. 550 was not posted, to his account. 3. The account of a creditor, Jagan was overadded on the credit side by Rs. 100 and the balance taken out was in excess to that extent. 4. The balance of petty cash in hand of Rs. 150 was placed on the credit side of the trial balance. 5. A debit balance of Rs. 370 in Ravindra’s Account was omitted from the Trial Balance. 6. Goods returned by Sanjay by Rs. 85 were credited to him but were not recorded in the Sales Returns Book. 7. Sales Book was overcast by Rs. 100. 8. The discount column on the debit side of the Cash Book was underadded by Rs. 50. 20 An accountant while balancing his books found that there was a difference of Rs. 1,669.37 in the Trial Balance on its debit side which was short by the above amount. The difference was for the time being placed in the Suspense Account. Subsequently, the following errors were traced out: (a) Goods worth Rs. 100 as returned by Mohan were not posted to his account, although they were duly entered in the Sales Returns Book. (b) The total discount received was overcast by Rs. 100.37. (c) The credit balances of Interest Account, Rs. 200 was placed on the debit side of the Trial Balance. (d) An account of Rs. 130 instead of being debited to Ram’s Account was debited to Hari’s Account. (e) An amount of Rs. 734.50 appearing in the Cash Book as paid to Dayalbagh Stores was credited to the latter’s account. (f) Furniture Account as standing in the books at Rs. 400 was not incorporated in the Trial Balance.

340

Financial Accounting

(g) The Purchases Book was undercast by Rs. 100. (h) Salary Account standing in the books at Rs. 4,100 was entered in the Trial Balance as Rs. 4,000. (i) Rs. 2,000 received from the sale of a machinery were credited to Sales Account. Give journal entries to correct the above errors, and prepare the Suspense Account.

11

Bank Reconciliation Statement

Learning Objectives After studying this chapter, you should be able to understand the Need for Bank Reconciliation Statement Various reasons for the difference between balance as per Cash Book and balance as per Pass Book Steps in preparing Bank Reconciliation Statement

BANK RECONCILIATION STATEMENT A Bank Reconciliation Statement is prepared to find the balance of Pass Book by taking the balance of Cash Book or vice versa. Cash Book entries are not recorded in the Pass Book and Pass Book entries are not recorded in the Cash Book form the substance of this statement.

Need for Bank Reconciliation Business firms need to maintain the bank account because most of the transactions of receipts and payments take place through bank only. All payments are made by cheques and all receipts are deposited and accounted into banks. This makes the business firms to maintain a Cash Book with bank column. All deposits into banks and withdrawals from banks are recorded in the bank column of the Cash book. Similarly banks also record these transaction in a separate folio (i.e., Bank Ledger) when the balance between the Cash Book and Pass Book does not tally on the given data, the need for bank reconciliation arises. The bank balance as shown in our Cash Book may not agree with the balance as shown in the bank Pass Book on any given date. There are various reasons for the difference between balance as per Cash Book and balance as per Pass Book. They are as follows: 1. Cheques issued or drawn in favour of various parties (suppliers or other creditors) by the firm may not have been presented by them to the bank for payment. Therefore, entries for such transactions will not be found in the Pass Book until the cheques have been presented by the parties.

342

Financial Accounting

2. Cheques paid into bank for credit by the firm may not have been collected by the bank. These entries will not be recorded in the pass book. 3. Amount credited by the bank in the firm’s account with interest on current account and debited with bank charges, overdraft, etc. have not been recorded in the firm’s cash book. 4. The bank might have debited the firm’s account with the amount of cheques and bill dihonoured and no entries for these transactions are made in the firm’s Cash Book. Hence, the purpose of a Bank Reconciliation Statement is to explain clearly the difference between the balance of bank account, (as shown in the firm’s Cash Book) and the balance as shown on the bank statement.

Pass Book and Cash Book Pass Book A copy of the account maintained by the bank is given to each account holder showing his own transactions only. This copy is called a bank statement or Pass Book. Cash Book It is a record of all the transactions of bank deposits and withdrawals made by the business firm in a given period. Normally, balance shown by the Pass Book and Cash Book should tally.

Favourable Balance The Cash Book of a business firm normally shows only the favourable balance (debit balance). It means that the business firm is having an adequate amount of cash balance in its accounts to meet its expenses. Similarly, when the Pass Book of a bank has adequate amount of money as balance to meet its commitments, it means that the Pass Book shows favourable balance (credit balance).

Overdraft Balance When the Cash Book of a business firm shows credit balance and the Pass Book of a bank shows debit balance, it is called as overdraft balance.

Steps in Preparing Bank Reconciliation Statement The ultimate objective of the statement is to bring the given Cash Book balance to Pass Book balance or to bring the given Pass Book balance to Cash Book balance.

A. Given Favourable Cash Book Balance Bank Reconciliation Statement as on --------------Particulars

Add (Rs.)

Deduct (Rs.)

Favourable/Debit Balance of Cash Book Cheques deposited but not cleared

Amount (Rs.) xxxxx

xxxxx

the same reduced balance be deducted Contd.

Bank Reconciliation Statement

Rs.

Rs.

343 Rs.

xxxxx

the same increased balance should be added xxxxx -

should be added xxxxx

be deducted xxxxx

should be added xxxxx

be deducted xxxx

should be added (+) xxxx

B. Given Favourable Pass Book Balance Bank Reconciliation Statement as on --------------Particulars

Add (Rs.)

Deduct (Rs.)

Favourable/Credit Balance of Pass Book Cheques deposited but not cleared

Amount (Rs.) xxxxx

xxxxx

the same reduced balance should be added xxxxx

the same increased balance be deducted xxxxx -

be deducted Contd.

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Financial Accounting

Rs. xxxxx

Rs.

Rs.

should be added xxxxx

be deducted xxxxx

should be added xxxx

be reduced (+) xxxx

(Assume the problem is that of favourable cash balance type and treat accordingly, except that the opening overdraft balance of Cash Book should be recorded as negative balance)

C. Given Overdraft Cash Book Balance Bank Reconciliation Statement as on --------------Particulars

Add (Rs.)

Deduct (Rs.)

Amount (Rs.)

Overdraft/Credit balance of Cash Book xxxxx

Cheques deposited but not cleared

the same reduced balance be deducted xxxxx

the same increased balance should be added xxxxx -

should be added xxxxx

be deducted Contd.

Bank Reconciliation Statement

345

Contd. Rs.

Rs.

Rs.

xxxxx

should be added xxxxx

be deducted xxxx

should be added (+) xxxx

(Assume that the problem is of favourable cash balance in the pass book and treat accordingly, except that the opening overdraft balance of Pass Book should be recorded as negative balance)

D. Given Overdraft Pass Book Balance Bank Reconciliation Statement as on --------------Particulars

Add (Rs.)

Deduct (Rs.)

Amount (Rs.)

Overdraft/Debit Balance of Pass Book (xxxxx) xxxxx

Cheques deposited but not cleared

the same reduced balance should be added xxxxx

the same increased balance be deducted xxxxx -

be deducted xxxxx

should be added xxxxx

be deducted Contd.

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Financial Accounting

Contd. Rs.

Rs.

Rs.

xxxxx

should be added xxxx

be reduced (+) xxxx

Illustrations Index for Illustrations Type

Ill. No.

Unique Feature Favourable Pass Book Balance

A

Bank Reconciliation

Overdraft Pass Book Balance Favourable Pass Book Balance Overdraft Pass Book Balance Favourable Cash Book Balance

B

Bank Reconciliation

Overdraft Cash Book Balance Favourable Cash Book Balance

C

Amended Cash Book

D

Miscellaneous

Overdraft Cash Book Balance Given Favourable Cash Book Given Overdraft Cash Book Given Favourable Pass Book Given Overdraft Pass Book Reconciliation Statement

Adjustments

A. BANK RECONCILIATION STATEMENT – CASH BOOK Given Favourable Cash Book Balance – Answer Favourable Pass Book Balance Illustration 1 From the following particulars, prepare a Bank Reconciliation Statement as on 31st March 2008.

Bank Reconciliation Statement

347 Rs.

(a) (b) (c) (d)

Balance as per the Cash Book

Solution Bank Reconciliation Statement as on 31st March, 2008 Particulars (a)

Add (Rs.)

Deduct (Rs.)

Amount (Rs.)

Favourable/debit balance of the Cash Book

(b) (c)

Cheques deposited not cleared

(d)

(Favourable) Balance as per the Pass Book

6,128

Illustration 2 On 31st March 2007 the Cash Book of a trader showed a favourable balance of Rs. 4,470 but the pass book showed a favourable balance of Rs. 4,720. The difference was due to the following reasons: (a) Interest on Investments of Rs. 195 was credited in Pass Book but no entry was passed in the Cash Book. (b) Debit of Rs. 35 for bank charges appeared twice in Pass Book but no entry was made in the Cash Book. (c) Mr. Prakash deposited a cheque of Rs. 465 directly into Trader’s Bank Account for which there is no entry in the Cash Book. (d) A cheque for Rs. 340 received from Mr. Sundar and deposited into bank was returned, dishonoured by bank on 31st March which the Trader returned on 2nd April, 2008. Reconcile the balance. Solution Bank Reconciliation Statement as on 31st March 2007 Particulars

Add (Rs.)

Deduct (Rs.)

Amount (Rs.)

Favourable/debit balance of the Cash Book (a) (b)

¥

(c) (d)

(Favourable) Balance as per Pass Book

4,720

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Financial Accounting

Illustration 3 From the following particulars, prepare a Bank Reconciliation Statement showing the balance as per bank Pass Book on 31st March, 2005. (a) The bank column of the Cash Book of the firm had recorded the cheques of Madhav Rs. 1,650, Yadhav Rs. 2,650 and Joghesh Rs. 3,160 in March 2005 but was credited by the bank only in April, 2005. (b) The cheques were issued to Mano Rs. 2,500, Roshan Rs. 4,500 and Rajan Rs. 4,200 in March 2005 but were presented only in the first week of April 2005. (c) A cheque for Rs. 3,100 was received from a customer and entered in the Cash Book but was sent to bank only in April 2005. (d) In the Pass Book, there was a credit for Rs. 24 towards interest and a debit of Rs. 200 towards bank charges. (e) The Balance as per Cash Book was Rs. 25,000 on 31st March, 2005. Solution Bank Reconciliation Statement as on 31st March 2005 Particulars

Add (Rs.)

Deduct (Rs.)

Amount (Rs.)

Favourable/debit balance of the Cash Book (a) (b)

Cheques issued but not encashed

(c) the bank (d) Cash Book (e)

Bank charges not entered in the Cash Book

(Favourable) Balance as per the Pass book

25,464

Illustration 4 On 31st March, 2006, the Cash Book of Mr. Varun showed a bank balance of Rs. 7,500. On checking the Pass Book with the Cash Book, he found the following differences: (a) Cheques worth Rs. 3,600 were deposited by him in bank account on 28th March 2006; however, no credit was given until 31st March 2006. On 1st April 2007 bank gave credit of Rs. 3,100 and debited Rs. 500 being return of one cheque. (b) He had issued cheques amounting to Rs. 1,500 before 31st March, of which Rs. 400 have been debited in the Pass Book after 1st April. (c) There is a credit of Rs. 115 interest in the Pass Book which remains to be adjusted.

Bank Reconciliation Statement

349

(d) A debit of Rs. 25 in respect of charges in the Pass Book, which has been adjusted in the Cash Book as on 31st March. (e) A debit in the Pass Book on 2nd April in respect of a cheque paid on 31st March and was dishonoured. (f) There was a debit of Rs. 25 in the Pass Book for interest on temporary overdraft. (g) A wrong debit of Rs. 420 was given in the Pass Book for interest on investments collected by the bank on his behalf. This has been adjusted in the Cash Book. (h) A bill receivable for Rs. 820 discounted with the bank for Rs. 800 in February, 2006 has been dishonoured as on 31st March, 2006. (i) A cheque for Rs. 90 which was debited in the Cash Book has been omitted to be banked. Solution Books of Mr. Varun Bank Reconciliation Statement as on 31st March, 2006 Particulars

Add (Rs.)

Deduct (Rs.)

Amount (Rs.)

Favourable/debit balance of the Cash Book (a)

Cheque deposited not credited

(b) (c)

115

(d) (g) bank but debited in the Pass Book instead of crediting. Double the amount to be ¥ (h)

Bill discounted with the bank dishonoured

(i)

Cheque debited in the Cash Book omitted to be banked (+) 515

(Favourable) Balance as per the Pass book

(+) 515

2,640

Note

Given Favourable Cash Book Balance – Answer Overdraft Pass Book Balance Illustration 5 On 31st March 2007, the Cash Book of Ram showed a balance of Rs. 4,000 at bank. He had deposited cheques worth Rs. 9,000 in the bank before 31st March, but cheques

Financial Accounting

350

worth Rs. 2,000 only had been credited before the date. Similarly, out of cheques for Rs. 6,000 issued during March, cheques for Rs. 4,000 were presented and paid in April 2005. The Pass Book also showed a payment of Rs. 430 as Insurance premium and Rs. 3,000 against a Promissory Note as per instructions. There was a credit in the Pass Book for Rs. 500 for interest on investments collected and a debit of Rs. 40 for interest and Rs. 30 for bank charges. Prepare a Bank Reconciliation Statement as on 31st March 2007. (B. Com., Madurai, adopted) Solution Bank Reconciliation Statement as on 31st March 2007 Particulars

Add (Rs.)

Deduct (Rs.)

Amount (Rs.)

Favourable/debit balance as per Cash Book

entered in the Cash Book: Insurance premium

500 but not entered in the Cash Book Bank charges not entered in the Cash Book

Overdraft balance as per the Pass Book

(–) 2,000

Illustration 6 From the following information, prepare Bank Reconciliation Statement of Varun as on 31st December, 2005. Rs. (i) (ii) (iii) (iv) (v) (vi) (vii)

Bank Balance as per the Cash Book

Bank Reconciliation Statement

351

Solution Bank Reconciliation Statement as on 31st December, 2005 Particulars (i)

Add (Rs.)

Deduct (Rs.)

Amount (Rs.)

Favourable/debit balance of the Cash Book

(ii) (iii) in the Cash Book (iv) not recorded in the Cash Book (v) recorded in the Cash Book (vi)

Cheques were issued not presented

(vii) bank

Overdraft Balance as per the Pass Book

(–) 3,880

Illustration 7 From the following particulars prepare a Bank Reconciliation statement of Sarath as on 31st March, 2005: Rs. (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (x) (xi)

Balance as per the Cash Book

Cheques received and sent to bank without recording in the Cash Book Bank charges not recorded in the Cash Book

150 800

800

Solution Bank Reconciliation Statement as on 31st March, 2005 Particulars (i)

Favourable/debit balance of the Cash Book

(ii)

Cheques issued not presented

Add (Rs.)

Deduct (Rs.)

Amount (Rs.)

(iii) (iv)

Cheques entered in Cash Book but omitted to be sent to the bank

(v)

Cheques received and sent to bank without recording in the Cash Book

(vi)

Bank charges not recorded in the Cash Book

150

(vii) Contd.

352

Financial Accounting

Rs.

Rs.

Rs.

800

(viii) (ix) the Cash Book (x) not recorded in the Cash Book

800

(xi) recorded in the Cash Book

Overdraft balance as per the Pass Book

(–) 6,700

Given Overdraft Cash Book Balance – Answer Favourable Pass Book Balance Illustration 8 On 31st March, 2003, the Cash Book of Maran showed a bank overdraft of Rs. 6,470. On the same date, he received the bank statement. On perusal of the statement, Maran ascertained the following information: Rs. (i) (ii) (iii) (iv) (v)

From the above information, you are required to prepare the Bank Reconciliation Statement to ascertain the balance as per the bank statement. Solution Books of Maran Bank Reconciliation Statement as on 31st March, 2003 Particulars

Add (Rs.)

Deduct (Rs.)

Amount (Rs.)

Overdraft balance as per Cash Book (i) (ii) recorded in the Cash Book (iii) recorded in the Cash Book (iv) (v)

Bank charges not recorded in the Cash Book

Favourable balance as per the Pass Book

6,830

Bank Reconciliation Statement

353

Illustration 9 From the following particulars prepare a Bank Reconciliation statement of Rajesh as at 31st March, 2006: Rs. (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (x) (xi)

Overdraft balance as per Cash Book

Cheques received and sent to the Bank without recording in the Cash Book Bank charges not recorded in the Cash Book 550 500 800

Solution Bank Reconciliation Statement as on 31st March, 2006 Particulars (i)

Add (Rs.)

Deduct (Rs.)

Amount (Rs.)

Overdraft balance as per the Cash Book

(ii) (iii) (iv) omitted to be sent to the bank (v)

Cheques received and sent to bank without recording in the Cash Book

(vi)

Bank charges not recorded in the Cash Book

(vii)

Bank Credited for interest not recorded in Cash Book 550

(viii) Cash Book

500

(ix) in the Cash Book (x) not recorded in the Cash Book (xi)

800

Favourable balance as per the Pass Book

12,600

Given Overdraft Cash Book Balance – Answer Overdraft Pass Book Balance Illustration 10 On checking Devraj’s Cash Book (having the overdraft balance Rs. 3,500) with the bank statement of his account for the month of March, 2005, you find the following: (a) The payment side of the Cash Book has been undercast by Rs. 250.

354

Financial Accounting

(b) A cheque for Rs. 700 drawn on his savings deposits above has been shown as drawn on current account. (c) Under instructions from Devraj, the bank has transferred interest Rs. 750 from his deposit account to his current account on 3rd April, 2005. This amount had, however, been taken in the Cash Book before 31st March, 2005. (d) Cheques amounting to Rs. 3,500 drawn and entered in the Cash Book had not been presented. (e) Cheques amounting to Rs. 7,000 sent to the bank for collection, though entered in Cash Book had not been entered by the bank. (f) Bank charges of Rs. 50 as per the bank statement of account had not been taken in the Cash Book. (g) Dividends of the amount of Rs. 1,500 had been paid direct to the bank, but not entered in the Cash Book. (h) A cheque issued to Raghav for Rs. 300 was replaced when out of date. But, it was entered in the Cash Book again, no other entry having been recorded. Both cheques issued, but not presented as shown above. You are required to arrive at the balance as it would appear in the bank statement as on 31st March, 2005. Solution Books of Devraj Bank Reconciliation Statement as on 31st March, 2005 Particulars

Add (Rs.)

Deduct (Rs.)

Amount (Rs.)

Overdraft balance as per the Cash Book (a) (b)

Cheques drawn on savings deposit A/c

(c) (d) (e) (f)

50

(g) in the Cash Book

Overdraft balance as per the Pass Book

(–) 5,850

Note (h): A cheque issued to Raghav replaced when out of date, but entered in the Cash Book again, no other entry having been recorded = Needs no treatment Illustration 11 From the following particulars, prepare a Bank Reconciliation Statement for Mr. Jayraj as at 31.12.2005. (i) Bank Balance as per the Cash Book (credit) Rs. 7,520. (ii) Cheques issued, but not presented Rs. 3,350.

Bank Reconciliation Statement

355

(iii) Cheque deposited, but not credited by Bank Rs. 12,400. (iv) A cheque drawn for Rs. 50 had been incorrectly entered in the Cash Book as Rs. 15. (v) A debtor directly deposited cheque to Mr. Jayraj’s bank account, but was not recorded in Cash Book Rs. 3,200. (vi) Credit side of the Cash Book (Bank Column) was undercast by Rs. 200. (vii) A cheque for Rs. 4,200 drawn by Mr. Mohan, had been debited to Mr. Jayraj’s Account by error. (viii) Bank paid a bill payable for Rs. 1,140, but it was recorded in the Cash Book as Rs. 2,140. (ix) The receipt column of the Cash Book has been overcast by Rs. 300. (x) Discount allowed Rs. 250 has been entered by mistake in the Bank Column of the Cash Book. (xi) Mr. Jayraj instructed the bank on 30.12.05 to transfer Rs. 12,000 to Fixed acted on 2nd January 2006. (xii) Bank debited Mr. Jayraj’s account with Rs. 1,600 being the amount of a cheque deposited by him as it was dishonoured. This was, however, not entered in his Cash Book. (xiii) Cheques amounting to Rs. 2,800 though actually deposited in the bank, were not recorded in the Cash Book. Solution Books of Jayraj Bank Reconciliation Statement as on 31st December, 2005 Particulars (i)

Add (Rs.)

Deduct (Rs.)

Amount (Rs.)

Overdraft Balance as per the Cash Book

(ii) (iii) (iv) (v) (vi)

Cash Book undercast in credit side

(vii) (viii) (ix)

Receipt side of Cash Book overcast

(x) column of Cash Book (xi) the Pass Book (xii)

Dishonoured cheque not recorded in the Cash Book

(xiii)

Cheque deposited not entered in the Cash Book

Overdraft balance as per the Pass Book

(–) 4,155

356

Financial Accounting

B. BANK RECONCILIATION STATEMENT – PASS BOOK Given Favourable Pass Book Balance – Answer Favourable Cash Book Balance Illustration 12 From the following particulars prepare a Bank Reconciliation Statement as on 30th June, 2006 and ascertain bank balance as it would appear in the Cash Book. 1. Bank Pass Book showed a balance of Rs. 1,950 on 30.06. 2006 (Favourable) 2. Interest of Rs.125 has been debited in the Pass Book, but has not been entered in the Cash Book. 3. Cheques issued, but not credited prior to 30th June, 2006 amounted to Rs. 1,150. 4. Club bill directly debited to bank account, not yet reflected in the Cash Book Rs. 1,270. 5. Cheques paid into bank, but not cleared and credited before 30th June, 2006 Rs. 1,250. 6. Interest on investment collected by the bankers and credited in the Pass Book, not yet entered in the Cash Book, amounted to Rs. 1,180. 7. A cheque for Rs. 290 was issued for LIC premium which was returned as the amount in figure and words was not tallying. The premium was subsequently paid in cash and this was not rectified in the books of accounts. Solution Bank Reconciliation Statement as on 30th June, 2006 Particulars 1

Add (Rs.)

Deduct (Rs.)

Amount (Rs.)

Favourable/credit balance as per the Pass Book Interest debited in the Pass Book not entered in the Cash Book

not entered in the Cash Book 5 and credited not entered in the Cash Book not reversed in the Cash Book

(Favourable) Balance as per Cash book

1,975

Illustration 13 From the following particulars, prepare a Bank Reconciliation Statement as on 31st March 2004. (1) Bank balance as on 31st March 2004 as per Pass Book Rs. 15,200.

Bank Reconciliation Statement

(2) (3) (4) (5) (6) (7) (8)

357

Bank Charges debited Rs. 130 in the Pass Book. Cheques issued, but not presented to the bank for payment Rs. 2,000. Cheques deposited to the bank, but not credited in the Pass Book Rs. 7,000. A cheque entered as a deposit in the Cash Book instead of a payment of Rs. 220. Rs. 364 paid into the Bank had been entered twice in the Cash Book. The receipt column of the Cash Book has been overcast by Rs. 1,000. A cheque drawn for Rs. 9 had been incorrectly entered in the Cash Book as Rs. 99. (B. Com., Calcutta)

Solution Bank Reconciliation Statement as on 31st March 2004 Particulars 1

Add (Rs.)

Deduct (Rs.)

Amount (Rs.)

Favourable/credit balance as per the Pass Book Bank charges debited in the Pass Book but not in the Cash Book

credited in the Pass Book 5 ¥ in the Cash Book been overcast 8

(Favourable) Balance as per the Cash book

22,044

Illustration 14 From the following particulars, prepare a Bank Reconciliation Statement showing the balance as per the Cash Book on 31st March 2004 Rs. 1.

Balance as per the Pass Book

5.

Cheques deposited into bank without recording in the Cash Book Cheques issued to creditors but not recorded in the Cash Book

500

100 8. 50 10. 11. charges being Rs. 10 100 recording the discount charges

(B. Com., Madras, Calcutta)

358

Financial Accounting

Solution Bank Reconciliation Statement as on 31st March 2004 Particulars 1

Add (Rs.)

Deduct (Rs.)

Amount (Rs.)

Favourable/credit balance as per the Pass Book 500 Cheques deposited into the bank without recording in the Cash Book

5 Book 100

Book 8

Debit side of the Cash Book was overcast 50 Book

10 11 Book 100 charges

(Favourable) Balance as per the Cash book

8,660

Given Favourable Pass Book balance – Answer Overdraft Cash Book Balance Illustration 15 On 30th June, the pass book of Messers Thin and Short showed a balance of Rs. 2,000 at the bank. They had sent cheques amounting to Rs. 10,000 to the bank before 30th June, but it appears from the Pass Book that cheques worth Rs. 9,000 had been credited before that date. Similarly out of cheques for Rs. 5,000 issued during the month of June, cheques for Rs. 4,000 were presented and paid in July. The Pass Book also showed the following payments: (a) Rs. 320 as premium according to standing instructions and (b) Rs. 2,000 against a promissory note as per instructions. The Pass Book showed that the bank had collected Rs. 1,800 as interest on government securities. The bank had charged as interest Rs. 50 and incidental expenses Rs. 20. There was no entry in the Cash Book for the payment of interest, etc. A bill sent for collection was returned dishonoured on 28th June amounting to Rs. 600. Prepare the Bank Reconciliation Statement as on 30th June. (B. Com., Madurai)

Bank Reconciliation Statement

359

Solution Bank Reconciliation Statement as on 30th June 2004 Particulars

Add (Rs.)

Deduct (Rs.)

Amount (Rs.)

Favourable/credit balance of the Pass Book

entered in Cash Book

entered in Cash Book entered in Cash Book

(Overdraft) Balance as per the Cash book

(–) 410

Illustration 16 Prepare a Bank Reconciliation Statement as on 31st March, 2004 from the following information: (1) Bank balance as per Banker’s record is Rs. 1,000. (2) Cheques worth Rs. 5,000 were deposited in bank account, but bank has cleared cheques worth Rs. 2,000 only. (3) Interest on Overdraft Rs. 100 debited in the Pass Book has been shown in the Cash Book as interest given by bank on deposit. (4) Bank charges Rs. 25 entered in the Pass Book only. (5) Cheques issued for Rs. 10,000 to a creditor not presented to the bank. (6) Cheque issued for Rs. 200 to Smith has been wrongly entered in the cash column on the payment side of the Cash Book. The same has not been presented to the bank. (7) Bank has credited our account in the Pass Book for a cheque worth Rs. 1,000 though the same has not been deposited by us. (B. Com., MS., Agra, Bhopal) Solution Bank Reconciliation Statement as on 31st March 2004 Particulars 1

Add (Rs.)

Deduct (Rs.)

Amount (Rs.)

Favourable/credit balance of the Pass Book Interest on overdraft debited in the Pass Book and not in Cash Book

100 Contd.

360

Financial Accounting

Contd. Rs.

Rs.

Rs.

100 the Cash Book as interest received 5

Bank charges entered in the Pass Book and not in Cash Book

(Overdraft) Balance as per the Cash book

(–) 6,775

Note: Item No. 6 does not affect the reconciliation statement.

Given Overdraft Pass Book Balance – Answer Favourable Cash Book Balance Illustration 17 Prepare a Bank Reconciliation Statement as on 31st December, 2002 from the following information. (i) Debit balance as per the Pass Book Rs. 3,500. (ii) Cheques amounting to Rs. 2,400 issue prior to 31st December, were presented before the bank is January, 2003. (iii) A customer directly deposited Rs. 1,000 in the bank account, not recorded in the Cash Book. (iv) Bank charges Rs. 140 debited by the bank, not recorded in the Cash Book. (v) Cheques deposited for collection prior to 31st December, amounting to Rs. 12,500, not yet cleared. (vi) Amount credited by the bank not entered in the Cash Book Rs. 1,100. Solution Bank Reconciliation Statement as on 31st December 2002 Particulars (i)

Add (Rs.)

Deduct (Rs.)

Amount (Rs.)

Overdraft/debit balance of the Pass Book

(ii) (iii) Cash Book (iv)

Bank charges not entered in the Cash-Book

(v) (vi)

Favourable balance as per the Cash Book

4,640

Bank Reconciliation Statement

361

Illustration 18 Prepare Bank Reconciliation Statement as on 30th September 2005 from the following information of Mr. Mahesh (a) Balance as per the Pass Book on 30th September 2005 overdrawn Rs. 5,000. (b) He deposited a cheque for collection of Rs. 3,000 and made entry in the Cash Book, appears in the Pass Book on 5th October 2005. (c) Cheques issued to parties, but not presented for payment till 30th September 2005, are of Rs. 1,525, Rs. 2,835 and Rs. 1,900. (d) Cheques deposited for collection but not collected by bankers till 30th September 2005 Rs. 7,860 and Rs. 2,410. (e) Interest on investments collected by bankers on 30th September 2005 Rs. 2,955 entered in Cash Book on 3rd October 2005 on receipt of bank intimation. (f) Bank charges Rs. 50 (dated 25th September) not entered in the Cash book. (g) Cheque deposited for collection on 30th September 2005, but returned dishonoured on 3rd October 2005 of Rs. 3,945. (h) Bankers have made mistake in balancing by showing overdraft balance in excess by Rs. 500 on 30th September 2005, which was rectified in the bank Pass Book on 7th October 2005 when notified. Solution Bank Reconciliation Statement as on 30th September 2005 Particulars (a)

Add (Rs.)

Deduct (Rs.)

Amount (Rs.)

Overdraft/debit balance of the Pass Book

(b) (c) (d)

Cheques deposited but not cleared

(e) (f)

50

(g) 500

(h) overdraft balance in excess

Favourable balance as per the Cash Book

3,550

Given Overdraft Pass Book Balance – Answer Overdraft Cash Book Balance Illustration 19 From the following particulars ascertain the balance that would appear in the Cash Book of Sameer on 31st March 2002 when the books were closed. (1) The bank overdraft as per the Pass Book on 31st March, 2002 Rs. 5,240. (2) Interest on overdraft for 6 months Rs. 260, is debited in the Pass Book.

362

Financial Accounting

(3) Bank charges of Rs. 70 for the above period is also debited in the Pass Book. (4) Cheques issued, but not cashed till 31st March, 2002 amounted to Rs. 3,175. (5) Cheques paid into bank, but not cleared before 31st March, 2002, were for Rs. 1,170. (6) Interest on investments is collected by the Bankers and credited in the Pass Book Rs. 600. Also State the balance in the Cash Book should be shown in the Balance Sheet Solution Bank Reconciliation Statement as on 31st March, 2002 Particulars 1

Add (Rs.)

Deduct (Rs.)

Amount (Rs.)

Overdraft/debit balance of the Pass Book Interest on overdraft debited in the Pass Book Bank charges debited in the Pass Book

5

Overdraft as per the Cash Book

(–) 7,515

Bank balance that should be in the Balance Sheet Particulars

Rs.

Rs.

Overdraft as per Cash Book

Correct overdraft balance in the Cash Book should be

Illustration 20 From the following particulars prepare a bank reconciliation statement of Arun as at 30th April, 2002: (a) Overdraft on 30th April, 2002 as per bank Pass Book Rs. 19,035; (b) Cheque deposited in bank, not recorded in the Cash Book Rs. 5,105; (c) Cheque received and recorded in the bank column, but not sent to bank for collection Rs. 1,015; (d) (i) Several cheques were drawn in the end of April totalling to Rs. 11,075, of these cheques totaling Rs. 7,075 were cashed. (ii) Similarly, several cheques totaling to Rs. 5,000 were sent for collection. Of these, cheques of the value of Rs. 1,500 were credited on 5th May, 2002 and Rs. 2,500 were credited on 7th May, 2002, the last being credited before 30th April 2002. (e) On 11th April, 2002, the credit side of bank column of the cash book was cast Rs. 1,000 short and on 15th April, 2002 the credit balance of Rs. 3,500 was brought forward on 16th April, 2002 as debit balance of Rs. 3,500.

Bank Reconciliation Statement

363

(f) Chamber of Commerce fee of Rs. 2,250 was paid by the bank but was not record in the Cash Book. (g) In the Cash Book, a bank charge of Rs. 130 was recorded twice; another bank charge of Rs. 55 was not recorded at all. (h) Interest of Rs. 2,400 was charged by the bank, but was not recorded in the Cash Book. Solution Bank Reconciliation Statement as on 30th September, 2002 Particulars (a)

Add (Rs.)

Deduct (Rs.)

Amount (Rs.)

Overdraft/debit balance of the Pass Book

(b) recorded in the Cash Book (c) (d)

Cheques received and recorded in the bank column (i) (ii)

(e)

(i) Undercasting as per the Cash Book (ii) Double the amount of credit balance taken as debit balance

(f) cash book (g)

Bank charges recorded twice

(h)

Bank charges not recorded

55

(i) but not recorded in the cash book

Overdraft as per the Cash book

(–) 10,550

C. AMENDED CASH BOOK Given Favourable Cash Book Illustration 21 The Cash Book of Mohan showed a balance of Rs. 4,270 on 31st December 2006 at the bank. This figure did not agree with the bank Pass Book. A comparison of the two revealed the following: (a) The bank has debited Mohan with Rs. 850, the annual premium on his life policy according to his standing instructions and with Rs. 40 as bank charges. (b) The bank has credited Mohan by Rs. 1,100, the proceeds of a bill. (c) Mohan paid in cheques totaling Rs. 2,100 on December 26th, of which those for Rs. 1,560 were collected in December and one of Rs. 150 was returned as dishonoured on 31st December, which Mohan received on 2nd January, 2007. The cash collection on 31st December, 2006 totaling to Rs. 510 was entered

364

Financial Accounting

in the Cash Book column on the same day, but it was banked on 2nd January, 2007. (d) In December, 2006 Mohan issued cheques totalling to Rs. 2,850 of which those for Rs. 750 had not been presented by 31st December, 2006. Mohan has not yet recorded in the Cash Book matters mentioned in (a) and (b) and the dishonoured cheque mentioned in (c) above. Show the corrections to be made in the Cash Book so as to ascertain the balance to be shown in the Balance Sheet and then prepare the Bank Reconciliation Statement. Solution Amended Cash Book (Bank column only) 2006

Particulars

Dr. (Rs.)

2006

Particulars

Cr. (Rs.) 850 150

Jan 1

Bank Reconciliation Statement as on 31st December, 2006 Particulars

Add (Rs.)

Deduct (Rs.)

Amount (Rs.)

Balance as per amended Cash Book

510 but was omitted to be banked (c)

Favourable balance as per Pass Book

Given Overdraft Cash Book Illustration 22 On 30th June, 2005 the bank column of the Cash Book of Shankar showed a credit balance of Rs. 9,710. On comparison of the Cash Book and bank statement, you find that: (a) Cheques issued amounting to Rs. 12,520 in June, 2005 had been entered in the Cash Book as Rs. 12,250. The charges were not presented at the bank for payment until July, 2005. (b) A cheque for Rs. 250 paid into the bank in May, 2005 had been debited by the bank in error in June, 2005. (c) Interest of Rs. 720 charged by the bank was not recorded in the Cash Book. (d) Cheque received and recorded in the Cash Book, but not sent to the Bank for collection Rs. 2,120.

Bank Reconciliation Statement

365

(e) Payment received from a customer direct by the bank Rs. 2,370 but no entry was made in the Cash Book. (f) Rs. 3,290 was entered in the cash book as paid into bank on 30th June, 2005, but credited by the bank until the following day. (g) The payment side of the Cash Book had been undercast by Rs. 200. You are required to show the necessary corrections in the Cash Book and to prepare a statement reconciling the amended cash balance with that shown in the bank Pass Book as on 30th June, 2005. Solution Books of Shankar Amended Cash Book (Bank column only) 2005

Particulars

Dr. (Rs.)

2005

Particulars

Cr. (Rs.)

Interest A/c (c) undercasting of credit side (g)

Bank Reconciliation Statement as at 30th June, 2005 Particulars

Add (Rs.)

Deduct (Rs.)

Amount (Rs.)

Balance as per the amended Cash Book 500 Cheque received and entered in the Cash Book but not sent to bank for collection (d) Cheque received and entered in the Cash Book but not sent to bank for collection (f)

Overdraft/debit balance of the Pass Book

Given Favourable Pass Book Illustration 23 On 31st December, the bank column of the Cash Book shows a debit balance of Rs. 922. On examination of the Cash Book and the bank statement you find that: (a) Cheques amounting to Rs. 1,260 issued before 31st December and entered in the Cash Book were not presented for payment till after that date.

366

Financial Accounting

(b) Cheques amounting to Rs. 500 entered in the Cash Book as sent to the bank on 31st December, were entered in the bank statement after that date. (c) A cheque from a debtor Rs. 146 had been dishonoured prior to 31st December, but no record appeared in the Cash Book. (d) A dividend warrant for Rs. 76 was paid direct to the bank and nothing appeared in the Cash Book. (e) Bank interest and charges amounting to Rs. 84 were not entered in the Cash Book, but appeared in the Pass Book. (f) There was no entry in the Cash Book for a club membership subscription Rs. 20 paid by the bank. (g) Bank’s charges for a cheque book received Rs. 2 was entered in the Cash Book twice. (h) A cheque for Rs. 54 drawn by a customer had been charged to this account, in error, during September. Make appropriate adjustments into the Cash Book to bring down the correct balance and prepare a Bank Reconciliation Statement reconciling the corrected Cash Book balance. (B. Com., Hons. Delhi) Solution Amended Cash Book (Bank column only) Date

Particulars

Dr. (Rs.)

Date

Particulars

Cr. (Rs.)

dishonoured) (c)

entered) (d)

completed) (e)

(Omission of bank entered) (f)

Jan 1

Bank Reconciliation Statement as on 31st December 2004 Particulars

Add (Rs.)

Deduct (Rs.)

Balance as per the amended Cash Book 500 charged to this account (h)

Favourable balance as per Pass Book

Amount (Rs.)

Bank Reconciliation Statement

367

Given Overdraft Pass Book Illustration 24 According to the Cash Book of Vasan, there was a balance of Rs. 1,650 in his favour on 30th June. But according to the Pass Book, this account was overdrawn. On investigation, you find that: (i) The receipt column of the Cash Book have been overcast by Rs. 2,100. (ii) Cheques drawn and entered in the Cash Book in June, amounted to Rs. 1,560 were not presented for payment until July. (iii) Discount received from a supplier of Rs. 300 had been included with the cheques entered in the bank column of the Cash Book in April. (iv) An amount of Rs. 1,750 paid directly into Vasan’s Account by a customer in May, had not yet been entered in the Cash Book. (v) A cheque payment of Rs. 1,250 in April, had been entered in the Cash Book as Rs. 1,520. (vi) The Bank had charged in business account with a cheque for Rs. 1,200 in February which should have been passed through Vasan’s private account. (vii) Bank charges of Rs. 180 on 31st December last and Rs. 200 on 30th June, had not yet been entered in the Cash Book. (viii) Cheques to the value of Rs. 2,980 received from customers were recorded in the Cash Book on 20th June, but not found in the Pass Book till 2nd July. You are asked to prepare statement (i) adjusting Vasan’s Cash Book balance as on 30th June, (ii) reconciling the adjusted Cash Book balance with the balance shown by the bank statement on 30th June. Solution Amended Cash Book (Bank column only) Date

Particulars

(Discount received

(Cheque paid for

Dr. (Rs.)

Date

Particulars

of bank charges now

Cr. (Rs.)

368

Financial Accounting

Bank Reconciliation Statement as on 30th June Particulars

Add (Rs.)

Deduct (Rs.)

Balance as per the amended Cash Book Cheques drawn, but not yet presented (ii)

Amount (Rs.) 1,490

1,560

Wrong entry in the Business Account (vi)

1,200

Cheques deposited, but not yet credited (viii)

2,980 (+) 1,560

(–) 4,180

(+) 1,560 3,050 (–) 4,180

Overdraft balance as per the Pass Book

(–) 1,130

D. MISCELLANEOUS To Prepare Amended Cash Book, Amended Bank Reconciliation Statement Illustration 25 M/s Sasi Agencies found the following on comparing their Cash Book and the Pass Book, on 30th September, 2004. When the books were to be closed, the Pass Book showed a balance of Rs. 2,360. (a) While carrying forward a total in the Cash Book on one page (Cr. side), it was written as Rs. 18,410 instead of Rs. 14,810. (b) A cheque issued by the firm in February 2004, for Rs. 2,150 was not yet presented. (c) The bank had charged Rs. 30 as bank charges and Rs. 250 for other services rendered in respect of sale of shares. (d) The firm had sent cheques, totalling to Rs. 4,510 to the bank for collection. Of these, cheques for Rs. 1,350 had not yet been collected. (e) Of the cheques issued in September, 2004 totaling to Rs. 3,470 only those for Rs. 1,780 had been paid. Prepare the Bank Reconciliation Statement, showing the balance to be entered in the Balance Sheet. Solution (a) Bank Reconciliation Statement as on 30th September, 2004 Particulars

Add (Rs.)

Deduct (Rs.)

Credit balance as per the Pass Book

2,360

Excess c/f of the Cash Book balance

3,600

Cheque issued, but not presented Bank charges, and service charges (30 + 250) Cheque sent for collection, but not collected

Amount (Rs.)

2,150 280 1,350

Cheque issued, but not paid

1,690 (+) 1,630

(–) 7,440

(+) 1,630 3,990 (–) 7,440

Overdraft balance as Cash Book

(–) 3,450

Bank Reconciliation Statement

369

(b) Correct Balance of Cash Book Particulars

Rs.

Rs.

Deduct (Rs.)

Amount (Rs.)

Overdraft balance as per the Pass Book Bank charges and service charges not entered in the Cash Book

Correct Debit balance as per the Cash Book

(c) Bank Reconciliation Statement Particulars

Add (Rs.)

Balance as per the Cash Book (corrected)

Favourable Balance as per Pass Book

Given Extract of Cash Book and Pass Book Illustration 26 Prepare, a Bank Reconciliation Statement as on 30th September 2000, from the following entries in the bank columns of the Cash Book and the corresponding Pass Book. Cash Book (Bank column only) Dr.

Cr.

Date 2000

Particulars

Rs.

Date 2000

Particulars

Rs.

Sept 1 8

18 100 100

Pass Book Date

Particulars

Withdrawals (Rs.)

Deposits (Rs.)

Balance (Rs.)

Sept 1 5

Contd.

Financial Accounting

370 Contd. 11

15 100

Solution Bank Reconciliation Statement as on 30th September, 2000 Particulars

Add (Rs.)

Deduct (Rs.)

Amount (Rs)

Balance as per the Cash Book

Bank charges not entered in Cash Book

15

Favourable balance as per Pass Book

Illustration 27 From the following extracts from the Cash Book and the Pass Book for the month of March 2003, prepare the Bank Reconciliation Statement as on 31st March 2003: Cash Book (Bank column only) Dr. Date 2003

Cr. Particulars

Rs.

Date 2003

Particulars

Mar 1 10 dishonoured) 15

15 18

Rs.

Bank Reconciliation Statement

371

Pass Book Date

Particulars

Withdrawals (Rs.)

Deposits (Rs.)

Balance (Rs.)

Mar 1

10

100 instructions

Solution 1. Note that the Cash Book and Pass Book are given for the same period, i.e., March 2003. Hence, mark out only those items which are not appearing in both the books. 2. Bank Pass Book represents Firm’s Account and therefore, compare debit side of the book with the credit side of the other and vice versa: Bank Reconciliation Statement as on 31st March, 2003 Particulars

Add (Rs.)

Deduct (Rs.)

Amount (Rs.)

Balance as per Cash Book

100

Favourable balance as per the Pass Book

Given Two Bank Accounts Illustration 28 Pawan is having two accounts (I and II) with S.B.I. On 31st December, 2007, his ledger shows a balance of Rs. 5,000 in account I and overdrafts of Rs. 2,250 in

372

Financial Accounting

account II. On verification of the ledger entries, the following facts were noticed: (i) Deposit of Rs. 1,500 made in account ‘I’ on 20th December, 2007 has been entered in the ledger in account ‘II’. (ii) Withdrawal of Rs. 500 from account ‘I’ on 2nd November, 2007 has been entered in the ledger in account ‘II’. (iii) Two cheques of Rs. 500 and Rs. 750 deposited in ‘I’ account on 1st December, 2007 (and entered in the books in ‘II’ account) have been dishonoured by the bankers. The entries for dishonour of these cheques have been entered in the books in ‘II’ account. (iv) In the accounts ‘I’ and ‘II’ Pawan has issued on 29th December, 1997, cheques for Rs. 10,000 and Rs. 1,000, respectively, and these have not been encashed till 31st December, 2007. (v) Incidental charges of Rs. 10 and Rs. 25 charged in the accounts ‘I’ and ‘II’, respectively, have not been entered in the books. (vi) The bank has credited interest of Rs. 50 for account ‘I’ and has charged interest of Rs. 275 for account ‘II’ which have not been recorded in the books. (vii) Deposits of Rs. 5,000 and Rs. 3,500 made into the accounts ‘I’ and ‘II’, both on 30th December, 2007, have been given to the bank till 31st December, 2007. Solution Bank Reconciliation Statement as on 31st December, 2007 of Account ‘I’ Particulars

Add (Rs.)

Deduct (Rs.)

Amount (Rs.)

Favourable balance as per Cash Book 500 Incidental charges not entered in the Cash Book Interest on deposit and overdraft not recorded in Cash Book

10 50

Favourable balance as per the Pass Book

Bank Reconciliation Statement as on 31st December, 2007 of Account ‘II’ Particulars

Add (Rs.)

Deduct (Rs.)

Overdraft balance as per the Cash Book 500 Incidental charges not entered in the Cash Book Incidental charges not entered the in Cash Book Interest on deposit and overdraft not recorded in the Cash Book

Overdraft balance as per Pass Book

Amount (Rs.)

Bank Reconciliation Statement

373

Illustration 29 Sri Balan maintained two separate Banking Accounts, one with Union Bank and the other with State Bank. On 31st December, 2004, the bank balances as per bank statements were Rs. 556 and Rs. 1,308, respectively. But the bank balance in Balan’s book on that date were Rs. 2,870 (Dr.) and Rs. 4,680 (Dr.), respectively. On verification of these records, the following information was ascertained: (a) A cheque of Rs. 250 from Roy which was directly remitted to the Union Bank account was not entered in Balan’s books. (b) A cheque for Rs. 700 drawn on State Bank and paid to Sen & Co. was entered in Union Bank account in Balan’s book. (c) Payments of Rs. 1,020 by Union Bank to Life Insurance Corporation of India under a standing order was not recorded in Balan’s book. (d) Cheques lodged, but not yet credited Rs. 212 for Union Bank and Rs. 1,600 for State Bank. (e) A cheque for Rs. 57 paid on State Bank was returned dishonoured but this was not recorded in Balan’s books. (f) Bank charges of Rs. 32 and Rs. 45 for Union Bank and State Bank, respectively were not accounted for 4th January, 2005. (g) Rs. 350 recorded to be deposited into State Bank on 31st December, 2004 was actually credited by the Bank on 4th January, 2005. (h) There were no unpresented cheques except one for Rs. 620 drawn on State Bank. Ascertain actual bank balances of Sri Balan on 31st December, 2004 and prepare a Bank Reconciliation Statement. (B. Com., Calcutta, Bombay) Solution Books of Sri Balan Cash Book (Bank column only) Dr. 2004

Cr. Particulars

Union Bank

State Bank

2004

Particulars

(Cheque drawn on State Bank but recorded in Union Bank) Bank Insurance Premium Cheque dishonoured (Cheque drawn on State Bank but recorded in Union Bank)

Jan 1

Union Bank

State Bank

Financial Accounting

374

Bank Reconciliation Statement as on 31st Dec 2004 of Union Bank Particulars

Add (Rs.)

Deduct (Rs.)

Amount (Rs.)

Balance as per the Cash Book Nil Bank balance as per the Pass Book

Bank Reconciliation Statement as on 31st Dec 2004 of State Bank Particulars

Add (Rs.)

Deduct (Rs.)

Amount (Rs.)

Balance as per the Cash Book

Amount recorded in the Cash Book as being

Bank balance as per the Pass Book

Adjustments Illustration 30 Bank balance as per current account statement as on 31st March 2005 was Rs. 24,000. But bank balance as per Cash Book on the same date was Rs. 29,600. On scrunity it was found that a cheque of Rs. 4,000 was deposited but not yet collected. However, there was an overcastting in the Cash Book on 26th March 2005 by Rs. 1,600. Pass necessary rectification journal entry and show a Bank Reconciliation Statement. Solution Rectification Journal Entry Particulars Suspense Account

Dr.

Cr.

Dr.

Bank Reconciliation Statement as on 31st March 2005 Particulars Bank balance as per the Cash Book (corrected)

Favourable balance as per the Pass Book

Rs.

Bank Reconciliation Statement

375

Illustration 31 Given below a Bank Reconciliation Statement: Bank Reconciliation Statement as on …… Particulars

Add (Rs.)

Deduct (Rs.)

Amount (Rs.)

Balance as per the Cash Book Cheques dishonoured

Balance as per Pass Book

Which balance should be shown in the Balance Sheet? Solution Particulars

Rs.

Balance as per the Cash Book (given) Cheques dishonoured Bank balance to be shown in the Balance Sheet

Points to Remember tally on a given date, the need for bank reconciliation arises. A statement prepared to find the balance of Pass Book by taking the balance of Cash Book or vice-versa is called a Bank Reconciliation Statement. There are steps in preparing the bank reconciliation statement.

Examination Questions I. Objective Questions 1. Fill in the blanks (i) When money is withdrawn from the bank, _____ the concern’s account in its books. (ii) Discount received entered in the _____ side. (iii) Cheques dishonoured is entered in the ____ side of Cash Book. (iv) When cheques issued, but not presented for payment, will be added when favourable balance as per ___ book is the starting point. (v) Payment made by cheque entered in the _____ side of cash book. 2. Choose the correct answer (i) Bank reconciliation statement is (a) A part of the Cash Book (b) A ledger account

376

Financial Accounting

(c) A statement showing the difference in opening and closing balances of Pass Book. (d) A statement showing the reasons for difference between the balances of Cash book and Pass Book. (ii) Bank reconciliation statement is prepared by (a) Suppliers (b) Customers (c) Business firm (d) Government (iii) Favourable balance as per Cash Book means (a) Debit balance in the bank column of the Cash Book (b) Debit balance in the pass book (c) Credit balance in the bank column of the Cash Book (d) none of the above (iv) Overdraft balance as per Pass Book means (a) credit balance in the Cash Book (b) credit balance in the bank column of the Cash Book (c) Debit balance in the bank column of the Cash Book (d) none of the above 3. Match the following (i)

Cheques deposited

a

(ii)

Cheques issued

b

Bank charges

d

(iii)

c

(iv) (v)

e

4. State whether the following statements are True or False (i) The error of under casting the cash book is not relevant at the time of preparing the bank reconciliation statement. (ii) Bank charges, interest charges and collection charges are recorded in bank column. (iii) Over draft balances shown on the debit side of the Cash Book. (iv) Bank reconciliation statement is a statement of bank Pass Book. Answers 1.

(i) (iv) 2. (i) 3. (i) 4. (i)

Debit; cash; c; c; False;

(ii) (v) (ii) (ii) (ii)

payment; Credit d; e; True;

II. Descriptive Questions A. Very Short Answer Questions 1. What is Pass Book?

(iii) payment; (iii) a; (iii) a; (iii) False;

(iv) b; (v) d (iv) b; (v) d (iv) False

Bank Reconciliation Statement

377

2. What is meant by cheque deposited? 3. What is overdraft? 4. What is meant by cheque dishonoured? B. Short Answer Questions 1. What is Bank Reconciliation Statement? 2. What is the purpose of preparing Bank Reconciliation Statement? 3. What is the need for Bank Reconciliation Statement? C. Detail Answer Questions 1. What is Bank Reconciliation Statement? How is it prepared? 2. What are the reasons for difference in Cash Book and Pass Book balances? Pass Book. III. Exercise Problems A. Bank Reconciliation Statement – Cash Book

Problem 1 From the following particulars of a business concern, prepare a Bank Reconciliation Statement as on 31st March 2004: (i) Bank balance as per Cash Book Rs. 9,400. (ii) During the month, total amount of cheques for Rs. 12,400 was deposited into the bank, out of which one cheque for Rs. 1,860 had been entered in the Pass Book on 2nd April 2004. (iii) During the month, cheques for Rs. 14,930 were drawn in favour of creditors. Of them, one creditor for Rs. 6,430 encashed on 4th April, whereas another creditor for Rs. 720 had not encashed his cheque. (iv) As per instruction, the bank on 26th March had paid Rs. 4,400 to a creditor, but by mistake, the same has not been recorded in the Cash Book. (v) According to agreement, on 24th March, a debtor had deposited directly into the Bank Rs. 9,000, but the same has not been recorded in the Cash Book. (vi) In the month of March, the bank without any intimation had debited the account of the business for a sum of Rs. 180 as bank charges and credited the same for Rs. 300 as interest. (B.Com, Bombay, Kerala MS) [Ans. (Favourable) Balance as per Pass Book Rs. 19,410] Problem 2 On 31st December, the bank column of the Cash Book shows a debit balance of Rs. 922. On examination of the Cash Book and bank statement, you find that: (a) Cheques amounting to Rs. 1,260 issued before 31st December and entered in the Cash Book were not presented for payment till that date. (b) Cheques amounting to Rs. 500, entered in the Cash Book as sent to the bank on 31st December were entered in the bank statement after that date. (c) A cheque from a debtor for Rs. 146 had been dishonoured prior to 31st December, but not recorded in the Cash Book.

378

Financial Accounting

(d) A dividend warrant for Rs. 76 was paid direct to the bank and nothing appeared in the Cash Book. (e) Bank interest and charges amounting to Rs. 84 were not entered in the Cash Book, but appeared in the Pass Book. (f) There was no entry in the Cash Book for a club membership subscription of Rs. 20 paid by the bank. (g) Bank’s charges for a cheque book received Rs. 2 was entered in the Cash Book twice. (h) A cheque for Rs. 54 drawn by a customer had been charged to this account, in error, during September. Make appropriate adjustments into the Cash Book to bring down the correct balance and prepare a Bank Reconciliation Statement, reconciling the corrected Cash Book balance. (B.Com., Hons Delhi) [Ans. (Favourable) Balance as per Pass book Rs. 1,456] Problem 3 On checking Meenal’s Cash Book with the bank Statement of the overdraft current (a) Cash Book showed an overdraft of Rs. 450. (b) The payment side of the Cash Book had been undercast by Rs. 15. (c) A cheque for Rs. 75 drawn on his saving deposit account has been shown as drawn on current account. (d) Cheques amounting to Rs. 15,000 drawn and entered in the Cash Book had not been presented. (e) Cheques amounting to Rs. 16,000 sent to the Bank for collection, though entered in the Cash Book, had not been credited by bank. (f) Bank charges of Rs. 75 as per bank statement of account had not been taken in the Cash Book. (g) Dividends of the amount of Rs. 250 had been paid direct to the bank and not entered in the Cash Book. You are required to arrive at the balance as it would appear in Bank Statement as on 30th November, 1996. [Ans. Balance as per Pass Book Rs. 1,215] Problem 4 Prepare a Bank Reconciliation Statement from the following particulars: On 31st December, 1990 the Cash Book of a merchant showed a bank overdraft of Rs. 1,729, the Pass Book which was different. On comparing the two Books, the following discrepancies were noted: (a) Cheques drawn for Rs. 600 were entered in the Cash Book, but were not presented at the bank till first week of January 1991.

Bank Reconciliation Statement

379

(b) Cheques amounting to Rs. 1,680 were deposited in the bank, but of these, those for Rs. 930 were collected by December 31. (c) A cheque for Rs. 150 received from Mahesh Chander and deposited in the bank in December was dishonoured, but advice of non-payment was received from the bank on January 3, 1991. (d) Rs. 2,500 being the proceeds of a bill receivable collected, appeared in the Pass Book but not in the Cash Book. (e) Bank charges Rs. 15 and interest on overdraft Rs. 85 appeared in the Pass Book, but not in the Cash Book, Ascertain the balance appearing in the Pass Book. [Ans. Balance as per Pass Book (Cr.) Rs. 371] Problem 5 Rajiv’s Cash Book showed a credit balance of Rs. 9,200 on 31st December 2004. On examining entries with the Pass Book, it was found that— (a) Out of the two cheques issued to Surendar on 27th December, one for Rs. 980 and another for Rs. 680, the cheque for Rs. 720 was cashed only on 2nd January, 2005. (b) Out of the three cheques deposited in the bank for collection on 26th December for Rs. 500, Rs. 700 and Rs. 900, respectively, the cheque for Rs. 700 only was collected by 31st December. (c) There was a credit in the Pass Book for Rs. 125 towards interest collected directly by the banker on behalf of Rajiv and a debit in the Pass Book for Rs. 25 towards collection charges but no corresponding entries were found in the Cash Book. (d) A cheque for Rs. 1,250 being entered in the Cash Book was omitted by oversight to be deposited in the bank for collection. (e) A wrong credit for Rs. 300 relating to some other account was found in the Pass Book. [Ans. Overdraft balance as per Pass Book Rs. 10,730] B. Bank Reconciliation Statement – Pass Book

Problem 6 Prepare Bank Reconciliation Statement from the following: (a) Balance as per the Pass Book on 31st December 2004 Rs. 10,266. (b) Cheques drawn on 31st December 2004, but not cleared till 3rd January 2005, Rs. 10,212, Rs. 981 and Rs. 1,128. (c) Interest on overdraft not entered in the Cash Book Rs. 1,510. (d) Outstation cheques Rs. 21,000 lodged in the bank on 13th December, 2004, but not collected and credited in January 2005. (e) A bill receivable for Rs. 2,500 due on 31st December 2004 was sent to the bank for collection two days before and entered in the Cash Book forthwith, the proceeds were credited on 1st January 2005.

380

Financial Accounting

(f) Rs. 100 insurance premium paid by the bank under standing order on 31st December, 2004 had not been entered in the Cash Book. (B. Com., Punjab) [Ans. (Favourable) Balance as per Cash book Rs. 23,055] Problem 7 at the bank. They had sent cheques amounting to Rs. 10,000 to the bank before 30th June, but it appears from the Pass Book that cheques worth Rs. 9,000 had been credited before that date. Similarly, out of cheques for Rs. 5,000 issued during the month of June, cheques for Rs. 4,000 were presented and paid in July. The Pass Book also showed the following payments: (a) Rs. 320 as premium according to standing instructions and (b) Rs. 2,000 against a promissory note as per instructions. The Pass Book showed that the bank had collected Rs. 1,800 as interest on government securities. The bank had charged as interest Rs. 50 and incidental expenses Rs. 20. There was no entry in the Cash Book for the payment of interest, etc. A bill sent for collection was returned, dishonoured on 28th June amounting to Rs. 600. Prepare the Bank Reconciliation Statement as on 30th June. (B. Com., Madurai) [Ans. (Overdraft) Balance as per Cash book Rs. 410] Problem 8 Prepare a Bank Reconciliation Statement as on 31st March, 2004 from the following information: (1) Bank Balance as per banker’s record is Rs. 1,000. (2) Cheques worth Rs. 5,000 were deposited in bank account, but bank has cleared cheques worth Rs. 2,000 only. (3) Interest on Overdraft Rs. 100 debited in the Pass Book has been shown in the Cash Book as interest given by the bank on deposit. (4) Bank charges Rs. 25 entered in the Pass Book only. (5) Cheques issued for Rs. 10,000 to a creditor not presented to the bank. (6) Cheque issued for Rs. 200 to Smith has been wrongly entered in the cash column on the payment side of the Cash Book. The same has not been presented to the bank. (7) Bank has credited our account in the Pass Book for a cheque worth Rs. 1,000 though the same has not been deposited by us. (B. Com., MS., Agra, Bhopal) [Ans. Problem 9 A Bank Pass Book for Account No. I shows an overdraft of Rs. 6,500 on 31st March, 2002. This does not agree with the Cash Book balance. From the following particulars, ascertain the Cash Book balance:

Bank Reconciliation Statement

381

Cheques amounting to Rs. 15,000 were paid into bank in March out of which, it appears only cheques amounting to Rs. 4,500 were credited by bank. Cheques issued during March amounted in all to Rs. 11,000. Out of these, cheques for Rs. 3,000 were unpaid on 31st March 2002. The bank wrongly debited Account No. I with Rs. 500 in respect of a cheque drawn on Account No. 2. The account stands debited with Rs. 150 for interest and with Rs. 30 for Bank charges. The bank has paid the annual subscription of Rs. 100 to a club according to the instructions. The entries for interest charges and subscription have not been made in the Cash Book. [Ans. (Favourable) balance as per Cash Book Rs. 1,780] Problem 10 From the following information, prepare a Bank Reconciliation Statement as on 31st December, 2006 for Basu Brothers: (a) Bank overdraft as per the Cash Book on 31st December, 2006 (b) Interest debited by Bank on 26th December, 2006 but no advice received (c) Cheque issued before 31st December, 2006, but not presented to the bank (d) Transport subsidy received from the State Government directly by the Bank but not advised to the company (e) Draft deposited to the bank, but not credited till 31st December, 2006 (f) Bills for collection by the bank till 31st December, 2006, but no advice received by the company (g) Amount wrongly debited to company account by the bank for which no details are available

Rs. 15,940 1,652 2,200 3,150 4,250 3,450 630

[Ans. Problem 11 From the following particulars ascertain the Balance that would appear in Cash Book of A on 31st March 1992 when the books were closed. (1) The Bank Overdraft as per Pass Book on 31st March, 1992 Rs. 6,340. (2) Interest on Overdraft for 6 months ending 31st March, 1992, Rs. 160, is debited in the Pass Book. (3) Bank charges of Rs. 30 for the above period is also debited in the Pass Book. (4) Cheques issued but not cashed prior to 31st March, 1992 amounted to Rs. 1,168. (5) Cheques paid into Bank but not cleared before 31st March, 1992 were for Rs. 2,170. (6) Interest on investments is collected by the bankers and credited in the Pass Book Rs. 1,200.

382

Financial Accounting

Also State what the balance in the Cash Book should be shown in the Balance Sheet [Ans. Correct overdraft balance in the Cash Book Rs. 5,338] Problem 12 From the following information prepare a Bank Reconciliation Statement as on 31st Rs. (1)

(5)

What is the amount for bank balance that should be shown in the Balance Sheet of the company, as at 31st December. [Ans. Bank overdraft as per Pass Book Rs. 1,06,570] C. Amended Cash Book

Problem 13 During the month of April 2003, the Cash book of a business shows an opening debit balance of Rs. 27,000 in its bank column. During the month, the total deposits in the bank amounted to Rs. 56,000 and the total cheques written for payments amounted to Rs. 58,000. There was a standing order to the bank to make a payment of Rs. 20,000 which appears in the Bank Statement and not recorded in the Cash Book. The Cash book includes Rs. 6,000 of cheques written and Rs. 14,900 of deposits which are not yet appearing in the bank statement. The balance in the bank statement was Rs. 3,900 (Dr.) at the end of April, 2003. You are required to show the Cash Book entries and prepare a Bank Reconciliation Statement. [Ans. Cash Book balance Rs. 25,000; Problem 14 On 31st December, 1997. Mr. Kapoor’s bank Pass Book showed a balance of Rs. 6,000 to his credit. Before that date, he had issued cheque amounting to Rs. 1,500 of which cheques amounting to Rs. 900 were presented for payment. A cheque of Rs. 800 paid by him into the bank on 29.12.97 was not credited in the Pass Book till 31.12.97. He had also received a cheque for Rs. 160 which although entered by

Bank Reconciliation Statement

383

him in the bank column of the Cash Book, was omitted to be sent to the bank. On 31.12.97, a cheque of Rs. 250 received by him was sent to the bank but the same was not entered in the Cash Book. There was a credit of Rs. 85 for interest and debit of Rs. 10 for bank charges in the Pass Book, but those were not accounted for in the Cash Book. Draw up a reconciliation statement showing adjustment between Cash Book and bank Pass Book and work out the balance as per Cash Book on 31.12.1997 after these adjustments. [Ans. Cash book balance Rs. 6,360; OD Balance as per cash book Rs. 6,035] D. Miscellaneous

Problem 15 Prepare a Bank Reconciliation Statement as on 31st Jan 2004. from the following extracts from the Cash Book (bank column) and the bank Pass Book. Pass Book Date

Particulars

Withdrawals (Rs.)

Deposits (Rs.)

Balance (Rs.)

Jan 1

10 15 500

10

Cash Book (Bank column only) Dr. Date 2004

Cr. Particulars

Rs.

Date

Particulars

Rs.

2004 Jan 1

8 10 500

Feb 1

384

Financial Accounting

Problem 16 Mr. Bharath has two accounts with Union Bank, Account No. I and Account No. II. On 31st December, 2004, his Cash Book shows balance of Rs. 5,400 and Rs. 2,70,400 in the two accounts respectively. On checking the bank statements, the following were noticed: (a) Rs. 27,000 was transferred from Account No. II to Account No. I by the Bank without advice to Bharat. (b) Bank charged Rs. 10 as incidental charges in respect of each account. (c) Cheques amounting to Rs. 15,421 issued in Account No. I in the last week of December were not yet presented to the bank. (d) A cheque for Rs. 14,272 deposited by Mr. Bharat into Account No. II has been credited by the bank in Account No. I. (e) Credit Balance of Rs. 2,100 in Account No. I on 31st October, 2004 was wrongly carried forward as debit balance in the bank statement. (f) Income tax refund order for Rs. 1,640 deposited in Account No. I has been cleared and credited to the account in the first week of January 2005. You are required to prepare Bank Reconciliation Statement showing the balance as per Bank Statements. (B. Com., Madurai, MS, Jabalpur) Ans.

12

Self-balancing System

Learning Objectives After studying this chapter, you should be able to

SELF-BALANCING SYSTEM Small business organisations maintain single ledger where all accounts are maintained because of limited number of transactions. Whereas in the case big business organisations single ledger does not serve the purpose because of large

General Ledger

Special Ledgers It can further be divided into— goods on credit. goods on credit.

Advantages of Self-Balancing Ledger

386

Financial Accounting

Method of Posting

Preparation of Trial Balance

divided and each ledger is made to balance on its own.

Sectional Balancing System

Advantages of Sectional Balancing section.

Self-Balancing Ledger Format

are as follows:

In General Ledger

In Debtors Ledger In Creditors Ledger

Self-balancing System

387

Self-Balancing Ledger-Format (A) General Ledger Book (i) Debtors’ Ledger Adjustment Account

To General Ledger Adjustment A/c

By General Ledger Adjustment A/c

Note:

(ii) Creditors’ Leger Adjustment Account

To General Ledger Adjustment A/c

By General Ledger Adjustment A/c

Note: (B) Debtors’ Ledger Book General Ledger Adjustment Account

To Debtors’ Leger Adjustment A/c

By Debtors’ Leger Adjustment A/c

Contd.

388

Financial Accounting

Contd.

Note: bills receivable discounted and trade discount allowed do not affect the account. (C) Creditors’ Ledger Book General Ledger Adjustment Account

To Creditors’ Ledger Adjustment A/c

By Creditors’ Leger Adjustment A/c

Note: Reserve for discount on creditors does not affect the account. Transfer from one ledger to another in Self-Balancing System Self-Balancing Entries in relation to Debtors’ Ledger L.F.

Self-Balancing Entries in relation to Creditors’ Ledger L.F.

Self-balancing System

389

Multi Ledgers

belong to.

Index for Illustrations Type

Ill. No. 1–3 4–11 12 13–17

I – LEDGER Debtors Account and Creditors Account Illustration 1

Solution Debtors’ Account Date

Particulars

Rs.

Date

Particulars

Rs.

Financial Accounting

390

Date

Particulars

Rs.

Date

Particulars

Rs.

Sales Ledger and Total Debtors Account Illustration 2

A C D F

(Bangalore, Adopted) Solution Sales Ledger (Subsidiary Ledger) A’s Account Date

Particulars

Date

Particulars

Rs.

Date

Particulars

Rs.

Particulars

Rs.

Particulars

Rs.

B’s Account Rs.

Date

C’s Account Date

Particulars

Rs.

Date

Self-balancing System

391

D’s Account Date

Particulars

Date

Particulars

Date

Particulars

Date

Particulars

Rs.

Date

Particulars

Rs.

Particulars

Rs.

Particulars

Rs.

Particulars

Rs.

Particulars

Rs.

E’s Account Rs.

Date

F’s Account Rs.

Date

G’s Account Rs.

Date

General Ledger Total Debtors’ Account Date

Particulars

Rs.

debtor closing balance.

A C D F

Date

Financial Accounting

392

Creditors Account Illustration 3 information given below:

dishonored due to technical reasons.

Solution Creditors Account Date

Particular

Rs.

Date

Particular

Rs.

II – GENERAL LEDGER BOOK General Ledger Book - Sales Ledger Adjustment Account Illustration 4

(Madurai. B.Com)

Self-balancing System

393

Solution General Ledger Book Sales Ledger Adjustment Account Date 2001

Date Rs.

2001

Rs.

Note:

Illustration 5

(Madras, B.Com) Solution General Ledger Book Sales Ledger Adjustment Account 1996

1997

1996

394

Financial Accounting

General Ledger Book—Debtor Ledger Adjustment A/c and Creditor Adjustment A/c Illustration 6

Solution General Ledger Book (i) Debtors Ledger Adjustment Account Date

Particulars

Rs.

Date

Particulars

Rs.

Self-balancing System

395

(ii) Creditors Ledger Adjustment Account Date

Particulars

Rs.

Date

Particulars

Rs.

“

General Ledger Book, Creditor Ledger Book Illustration 7

Solution (I) General Ledger Book Creditors’ Ledger Adjustment Account Date

Particulars

Rs.

Date

Particulars

Rs.

396

Financial Accounting

(II) Creditors’ Ledger Book General Ledger Adjustment Account Date

Particulars

Rs.

Date

Particulars

Rs.

General Ledger Book, Debtors Ledger Book Illustration 8

Solution (I) General Ledger Book Debtors Ledger Adjustment Account Date

Particulars

L.F

Rs.

Date

Particulars

L.F

Rs.

Self-balancing System

397

(II) Debtors Ledger Book General Ledger Adjustment Account Date

Particulars

L.F

Rs.

Date

Particulars

L.F

Rs.

Two Sets of General Ledger Book, Debtor Ledger Books Illustration 9

–

(Delhi, B.Com)

398

Financial Accounting

Solution (I) General Ledger Book Debtor Ledger Adjustment Account A–M Rs.

N–Z Rs.

A–M Rs.

N–Z Rs.

–

(II) A to M Debtors Ledger Book (a) General Ledger Adjustment Account Rs.

Rs.

N to Z Debtors Ledger Book (b) General Ledger Adjustment Account Rs.

General Ledger Book, Sales Ledger Book and Bought Ledger Book Illustration 10

Rs.

Self-balancing System

399

Solution (I) General Ledger Book (a) Bought Ledger Adjustment Account Date

Particulars

Rs.

Date

Particulars

Rs.

(b) Sales Ledger Adjustment Account Date

Particulars

Rs.

Date

Particulars

Rs.

(II) Sales Ledger Book General Ledger Adjustment Account Date

Particulars

Rs.

Date

Particulars

Rs.

400

Financial Accounting

(III) Bought Ledger Book General Ledger Adjustment Account Date

Particulars

Rs.

Date

Particulars

Rs.

General Ledger Book, Sales Ledger Book, Bought Ledger Book Illustration 11

Balance as on

Debtors Balance

Creditors Balance

?

?

Solution A. General Ledger Book (i) Sales Ledger Adjustment Account Date 2008

Date Particulars

L.F.

Rs.

2008

Particulars

L.F.

Rs.

Self-balancing System

401

(ii) Bought Ledger Adjustment Account L.F

L.F

B. Sales Ledger Book General Ledger Adjustment Account Date 2008

Particulars

L.F.

Rs.

Date 2008

Particulars

L.F.

Rs.

L.F

Rs.

C. Bought Ledger Book General Ledger Adjustment Account Date 2008

Particulars

L.F

Rs.

Date 2008

Particulars

III – DEBTOR LEDGER BOOK AND CREDITOR LEDGER BOOK Debtors Ledger Book (General Ledger Adjustment Accounts) Illustration 12

Balance as on

Debtors Balance Dr. Cr. ?

Creditors Balance Cr. Dr. ?

402

Financial Accounting

Particulars

Rs.

Particulars

Rs.

Solution (I) Debtors’ Ledger Book General Ledger Adjustment Account Date 2007

Particulars

Rs.

Date 2007

Particulars

Rs.

(II) Creditors’ Ledger Book General Ledger Adjustment Account Date 2007

Date Particulars

Rs.

2007

Particulars

Rs.

Self-balancing System

403

IV – JOURNAL ENTRIES AND ADJUSTMENT ACCOUNTS Journal Entries under Self-Balancing System and Sectional Balancing System Illustration 13 The Debtors list of a business concern showed a balance of Rs. 1,00,000 which included Rs. 1,000 owed by Mr. A and Rs. 5,000 by Mr. B. Also the balance of Creditor showed Rs. 2,00,000 that included Rs. 3,000 owed to Mr. A and Rs. 300 to Mr. B. Give the necessary Journal Entries for the transfer under (i) Self-Balancing System and (ii) Sectional Balancing System. Solution Books of a Business Concern-Journal Entries (i) Self-Balancing System Date

Particulars

L.F

Dr.(Rs.)

A (in Creditors’ Ledger) A/c Dr. To A (in Debtors’ Ledger) A/c (Being the transfer of A’s Account from Debtors’ Ledger in Creditors’ Ledger)

1,000

B (in Creditors’ Ledger) A/c Dr. To B (in Debtors’ Ledger) A/c (Being transfer of B’s Account from Creditors’ Ledger in Debtors’ Ledger)

300

General Ledger Adjustment A/c (in Debtors’ Ledger) To Debtors Ledger Adjustment A/c (in General Ledger) (Being the entry to show reduction in Total Debtors)

Dr.

Creditors Ledger Adjustment A/c (in General Ledger) To General Ledger Adjustment A/c (in Creditors Ledger) (Being the entry to shown reduction in Total Creditors)

Dr.

Cr.(Rs.) 1,000

300

1,300 1,300

1,300 1,300

(ii) Sectional Balancing System Date

Particulars

L.F

Dr. (Rs.)

A (Creditors Ledger) A/c Dr. To B (in Debtors’ Ledger) (Being transfer of A’s account from Debtors’ to Creditors’ Ledger)

1,000

B (Creditors’ Ledger) A/c Dr. To B (in Debtors’ Ledger) (Being transfer of B’s Account from Creditors’ Ledger to Debtor’ Ledger)

300

Total Creditors A/c Dr. To Total Debtors’ A/c (Being the entry to show the reduction in Total Creditors’ and Total Debtors’ Ledger)

1,300

Cr. (Rs.) 1,000

300

1,300

Financial Accounting

404

Rectifying Entries Illustration 14

posted therefrom to the credit of his account.

Solution L.F 1

2

3

4

Contd.

Self-balancing System

405

Contd. 5

Journal Entries and Ledger Illustration 15

Solution Books of Trading Concern-Journal Entries Date

Particulars

L.F

Dr. (Rs.)

Cr. (Rs.)

A

Contd.

406

Financial Accounting

Sales Ledger Book General Ledger Adjustment Account L.F

Rs.

L.F

Rs.

L.F

Rs.

General Ledger Book Sales Ledger Adjustment Account L.F

Illustration 16

Rs.

Self-balancing System

407

7,375

(B.Com, Madurai) Solution (a) Total Debtors and Total Creditors Accounts Total Debtor’s Account Date 2004

Date Particulars

Rs.

2004

Particulars

Rs.

Particulars

Rs.

Total Creditor’s Account Date 2004

Date Particulars

Rs.

2004

7,375

11,455 11,455

(b) Journal Entries under Self-Balancing System Journal Entries

Contd.

408

Financial Accounting

Contd.

(c) Adjustment Accounts General Ledger Book Debtors Ledger Adjustment Account

Creditors Ledger Adjustment Account

7,375

11,455 11,455

Self-balancing System

409

Debtor’s Ledger Book General Ledger Adjustment Account

Creditor’s Ledger Book General Ledger Adjustment Account

7,375

11,455 11,455

Journal, Ledger, Trial Balance (Self-Balancing System) Illustration 17

Suppliers P Q

Credit Purchases

Cash Paid

Discount Earned

Bills Payable Accepted

Solution (i) Journal Entries L.F.

Dr. (Rs.)

Cr. (Rs.)

Contd.

410

Financial Accounting

Contd.

(ii) Ledger Accounts under Self-balancing System Creditor Ledger Book P’s (Creditor) Account Date

Particulars

Date

Particulars

Rs.

Date

Particulars

Rs.

Particulars

Rs.

Q’s (Creditor) Account Rs.

Date

Self-balancing System

411

R’s (Creditor) Account Date

Particulars

Date

Particulars

Rs.

Date

Particulars

Rs.

Particulars

Rs.

S’s (Creditor) Account Rs.

Date

General Ledger Adjustment Account Date

Particulars

Rs.

Date

Particulars

Rs.

(iii) Trial Balance (Creditors’ Ledger) Dr. (Rs.)

Cr. (Rs.)

(ii) General Ledger Book Purchase Account Date

Particulars

Rs.

Date

Particulars

Rs.

Particulars

Rs.

Cash Account Date

Particulars

Rs.

Date

412

Financial Accounting

Discount Earned Account Date

Particulars

Date

Particulars

Rs.

Date

Particulars

Rs.

Particulars

Rs.

Bills Payable Account Rs.

Date

Creditors Ledger Adjustment Account Date

Particulars

Rs.

Date

Particulars

Rs.

(iii) Trial Balance (General Ledger) Dr. (Rs.)

Points to Remember

Cr. (Rs.)

Self-balancing System

413

Examination Questions I. Objective Questions 1. Fill in the blanks (i) Under Self-Balancing System, Debtors’ Ledger is also called _______ . (iii) Under Sectional Balancing, only ____________ledger is made SelfBalancing. (iv) Sectional Balancing System is the Self-Balancing of _________the 2. Choose the correct answers (a) Debtors’ Ledger (b) Creditors’ Ledger (c) Both (a) Creditors’ Ledger (b) Debtors’ Ledger (c) General Ledger (a) Creditors’ Ledger (b) Debtors’ Ledger (c) General Ledger (a) Debtors’ Ledger (b) Creditors’ Ledger (c) None of the above 3. Match the following (i)

Goodwill

(a)

(ii)

Bills Receivable

(b)

Special Ledger Bought Ledger

(iii)

Bills Payable

(c)

General Ledger

(iv)

Self-Balancing

(d)

Sold Ledger

4.

only.

Answers 1. (i) (iii) 2. (i) 3. (i)

Sales Ledger; General; c; (ii) c; c; (ii) d;

(ii) (iv) (iii) (iii)

Trial Balance; a section of c; (iv) c b; (iv) a

414

Financial Accounting

II. Descriptive Questions

III. Exercise Problems

Debtors’ Ledger Account Problem 1

insolvent and his estate realised nothing.

[Ans.

Self-balancing System

415

General Ledger Book-Sales Ledger Adjustment Account Problem 2 From the following information, prepare the Sales Ledger Adjustment Account as on 31st March 2002: Sales (including cash sales, Rs. 10,000) Cash received from debtors

1,08,602 Bills Receivable dishonoured

1,120

88,753 Bad debts written off

Discount allowed to debtors

3,890

480 Sundry charges debited to customers

3,78

Acceptance received from debtors

7,120 Transfers to Bought Ledger

100

Returns from debtors

5,430 Provision for doubtful debts

2,500

(Madurai, B.Com) [Ans. Sales Ledger Adjustment Account balance Rs. 50,169]

Creditor Ledger Adjustment Account Problem 3 From the following particulars prepare the relevant adjustment account as would appear in the General Ledger of Mr. Vasu for the month of March Date 1 2 11 13 14 25 26 27 28 30 31

Purchased form Mr. X., Rs. 2,000. Paid Rs. 1,600 after adjustment the initial advance in full to Mr. X. Paid Rs. 1,000 to Mr. R towards the purchases made in Feb. in full. Paid advance to Mr. Y Rs. 3,000. Purchased goods form Mr. A Rs. 4,000. Returned goods worth Rs. 500 to Mr. A. Settle the balance due to A at a discount of 10%. Goods purchased form Mr. Y Rs. 2,500 against the advance paid on 13th. Received back the advance from Mr. P paid on 28th Feb Rs. 2,000. Purchases from B Rs. 2,000. Goods returned to Q Rs. 750. The goods were originally purchased for cash in February.

[Ans. Creditors Ledger Adjustment Account balance Rs. 1,250]

General Ledger Book, Debtors Ledger Book Problem 4 From the following, prepare necessary Ledger Accounts Rs. Creditors balance on 1st Jan

Cr.

Creditors balance on 1st Jan

Dr.

Rs.

90,200 Goods returned

5,200

5.500 Discount received

5,400

Credit purchases

2,45,200 Creditor balance on 31st Dec

Dr.

Cash paid to creditors

1,60,000 Transfer from Creditors Ledger to Debtors Ledger

Bills Payable accepted

1,05,000

6,800 5,000

(Bombay, Karnataka, B.Com) [Ans. Purchase Ledger Adjustment A/c (General Ledger) Rs. 56,100; General Ledger Adjustment A/c (Purchase Ledger) Rs. 56,100]

416

Financial Accounting

General Ledger Book—Sales Adjustment Account, Bought Adjustment Account Problem 5

(Andhra, B. Com) [Ans.

General Ledger Books—Purchase, Sales Adjustment Accounts Problem 6

174 2924

512 336 234 564

152 154

(Mysore, B.Com) [Ans.

Self-balancing System

417

Sold, Bought and General Ledgers-Adjustment Accounts Exercise 7

325

275

375

(Madurai, B.Com) [Ans.

Debtors, Creditors Ledger and Nominal Ledger-Adjustment Accounts Problem 8

275 325

375

(Bombay, Karnataka, B.Com) [Ans.

418

Financial Accounting

Journal and Ledgers Problem 9

particulars:

(Madurai, B.Com) [Ans.

13

Insurance Claims

Learning Objectives After studying this chapter, you should be able to Explain insurance claim and its types Understand the essence of Average Clause Calculate exact amount of insurance claim to be made

INSURANCE Insurance plays a major role in protecting business from risks and uncertainties, the reason being, risks and uncertainties are very common in business venture. All order to safeguard the business from these risks, Insurance policy is taken. In other

Insurance Claim Insurance company undertakes the risk, by accepting premium and agrees to indemnify the loss to the extent of sum insured on the happening of a certain event. destroys the goods or assets partly or wholly, it will affect day-to-day operations of a

Types of Loss I. Loss of stock or assets Loss of Stock or Assets Policy

It is very easy to calculate loss of all assets due

420

Financial Accounting

Under such circumstances, a technical expert (actuary) is appointed by the

Stock Policy’. Procedure for Calculating Claim – Loss of Stock Step 1 year) Step 2 Step 3

¥ 100)/sales

Memorandum Trading Account Particulars To Opening Stock To Purchases To Wages

Rs. xxx xxx xxx xxx

Particulars By Sales By Closing Stock

xxx

Rs. xxx xxx

xxx

Step 4 Calculation of the amount of the claim

xxx Step 5 Application of ‘Average Clause’ when the policy amount is less than the stock ¥ Average Clause

Business concerns at times assume that the whole stock may not

value, which is called as ‘under-insurance’. In order to discourage under-insurance, clause is included, the insurance company is liable to pay only the proportionate loss by which the sum insured bears to the value of the property. For example, if property worth Rs. 1,00,000 is insured for Rs. 75,000 and property worth Rs. 40,000 ¥ insured and the insurance company in the ratio of risk covered. ¥ covers the damages to properties namely plant and machinery, buildings and other

this stage of interruption. In order to give complete protection to the manufacturer,

Insurance Claims

421

Consequential Loss Policy. This policy enables the manufacturer to install new plant and machinery or erect new building, or put the factory into operation to resume following items:

interest on deductions, rent, rates and taxes, etc.) (c) Increased cost of working if any, i.e., additional expenses to sustain business

earning capacity of business.

Step I Standard Turnover (Sales in abnormal period in the preceding year)

xxx

Add/Deduct – Increase / Decrease in Trend

xxx

Adjusted Standard Turnover

xxx

Less – Sales in Indemnity Period

xxx

Short Sales

xxx

Step II

= ¥

Step III ¥ Step IV Claim for increased working expenses incurred (a) Actual increased cost of working

xxxx

(or) ¥ Actual increased cost of working]/ xxxx (or) (c) Saved turnover ¥

xxxx

(Least of the above)

Step V xxx Add Claim for increased working expenses (Step IV)

xxx xxx

Less – Savings in standing charges

xxx xxx

422

Financial Accounting

Step VI Application of average clause clause is applied) xxx Add/Deduct – Increase/decrease in Trend

xxx

Adjusted annual turnover

xxx

¥ turnover Average Clause insurance and the standing charges are not covered by the policy. Accounting Treatment for Fire Claims (1) Loss of Stock Policy

Insurance Company A/c

Dr.

To Stock Destroyed A/c To Stock Damaged A/c

The amount of stock destroyed and stock damaged transferred to Trading Account Stock Destroyed A/c

Dr.

Stock Damaged A/c

Dr.

To Trading A/c

When the damaged goods are sold Bank A/c

Dr.

To Stock Damaged A/c

The balance in the Stock Destroyed Account and Stock Damaged Account are transferred/closed

To Stock Destroyed A/c To Stock Damaged A/c

Insurance Company A/c

Dr.

Contd.

Insurance Claims

423

Contd.

Insurance Company A/c

Dr.

To Expense on Fire Account

Claim amount received from the insurance company Bank A/c

Dr.

To Insurance Company Account

Insurance Company A/c

Dr.

To Fixed Asset Account

The balance in the Fixed Asset Account transferred/closed Fixed Asset Account

Dr.

To Fixed Asset Account

Illustrations–Loss of Stock Policy Index for Illustrations Type I

1–5

II

Calculation of Closing Stock

6–8

III

Application of Average Clause

9–12

Memorandum Trading Account, Application of Average Clause

13–17

Comprehensive Problems

21–27

Three and more Years

28–29

Miscellaneous Problems

30–32

18–20

I – CALCULATION OF GROSS PROFIT Illustration 1

424

Financial Accounting

Solution Step 1 Rs. To Opening Stock To Purchases To Wages

Step 2

Rs.

72,000 By Sales 3,63,200 By Closing Stock 48,000 94,400

4,72,000 1,04,000

5,77,600

5,77,600

¥

¥

Illustration 2

were consigned, but were lost in accident against which insurance company paid Solution Step 1 Particulars To Opening Stock To Purchases To Wages

Rs.

Particulars

6,40,000 By Sales 37,52,000 By Closing Stock 4,00,000

Rs. 46,40,000 8,80,000 80,000

9.28.000 By Loss due to Accident A/c 1,20,000 57,20,000

Step 2

57,20,000

¥

¥

Illustration 3

Solution Step 1 Particulars To Opening Stock (Rs.5,76,000 ¥ To Purchases To Wages

Rs.

Particulars

By Sales 6,40,000 By Closing Stock 37,52,000 (Rs.9,68,00 ¥ 4,00,000

Rs. 46,40,000 8,80,000 80,000

9.28.000 By Loss due to Accident A/c 1,20,000 57,20,000

57,20,000

Insurance Claims

Step II

¥

425

¥

Poor Selling Item Illustration 4

Solution Step 1 Particulars

Abnormal Items Rs.

Abnormal Items Rs.

73,500 3,91,100

–

97,400

6,900

97,400

5,62,000

6,900

5,68,900

To Opening Stock To Purchases To Gross (Balancing

Total Items Rs.

Particulars

By Sales 73,500 By Closing Stock 3,98,000 By Gross Loss

Step 2

Normal Items Rs.

Abnormal Items Rs.

Total Items Rs.

4,87,000 75,000

– 4,600 2,300

4,87,000 79,600 2,300

5,62,000

6,900

5,68,900

¥

¥

Illustration 5

A portion of these goods were sold in December at a loss of Rs. 250 on the original Solution Step 1 Particulars

To Opening Stock To Purchases To Gross (Balancing

Normal Items Rs. 73,500 3,91,100

– 6,900

97,400 5,62,000

Step 2

Abnormal Items Rs.

Total Items Rs.

Particulars

By Sales 73,500 By Closing Stock 3,98,000 By Gross Loss

Normal Items Rs.

Abnormal Items Rs.

Total Items Rs.

4,87,000 75,000 –

3,200 2,300 1,400

4,90,200 77,300 1,400

5,62,000

6,900

5,68,900

97,400 6,900

5,68,900

¥

¥

Financial Accounting

426

II – CALCULATION OF CLOSING STOCK Adjustment in Purchases and Sales Accounts Illustration 6

1 3

invoice had not been received from suppliers, though the goods have been received at the godown. Solution Particulars To Opening Stock To Purchases

Rs.

Particulars

Rs.

1,20,000 By Sales 2,70,000 1,60,000 By Closing stock 1,00,000

(33

1 3

90,000 3,70,000

3,70,000

Purchase and Sales not G Illustration 7 Stock as

Solution Working Note 1 Particulars To Bank A/c To Balance c/d

Rs.

Particulars

Rs.

8,750 By Balance b/d 250 By Credit Purchase 2,00,000

1,00,000

2,09,000

2,09,000

1,09,000

Working Note 2 250

Insurance Claims

(+) Cash purchases* Total purchases (net)

= =

427

Rs. 36,250 Rs. 1,45,000

*Note

¥ Working Note 3 Particulars To Balance b/d To Credit Sales

Rs.

Particulars

Rs.

2,00,000 By Bank A/c 1,48,000 By Balance c/d

2,47,240 760 1,00,000

3,48,000

3,48,000

Working Note 4 760 Rs. 1,47,240 Total net sales

Rs.

=

Note*

¥ Working Note 5

Particulars To Opening Stock

Rs.

Particulars

55,000 1,45,000 By Closing stock

Rs. 1,84,050 61,963

46,013 2,46,013

Poor Selling Stock Written off, a Part is Sold and the Balance in the Closing Stock Illustration 8

to 30.6.2002 Rs. 2,31,200.

2,46,013

Financial Accounting

428

was now estimated to be worth its original cost for the purposes of claim. Subject to

Solution

Particulars

Normal Items (Rs.)

To Opening Stock To Purchases To Gross

Abnormal Items (Rs.)

Total Items (Rs.)

Particulars

By Sales 81,900 By Closing Stock 1,62,000 By Gross Loss

75,000 1,62,000

6,900 –

45,600

–

45,600

2,82,600

6,900

2,89,500

Normal Items (Rs.)

Abnormal Items (Rs.)

Total Items (Rs.)

2,28,000 54,600 –

3,200 3,450 250

2,31,200 58,050 250

2,82,600

6,900

2,89,500

(Balancing

III – APPLICATION OF AVERAGE CLAUSE Illustration 9

(b) Rs. 50,000 Solution (a) Average clause is applied only when there is ‘Under-Insurance’, i.e. when the

Hence, the amount of claim will be restricted to the value of stock lost by Calculation of the amount of the claim Less:

¥ ¥

Insurance Claims

429

claim under the following conditions. 1. Sum insured Rs. 1,00,000 (ii) Sum insured without average clause Rs. 50,000 (ii) Sum insured with average clause Rs. 50,000 Solution 1. Calculation of the amount, if the sum insured is Rs. 1,00,000 ¥ As the goods are fully insured, the amount of claim is equal to actual loss Rs. 75,000. 2. Calculation of the amount, (i) In case of under-insurance without average clause, claim is restricted to claim is Rs. 75,000 (ii) if the sum insured without average clause Rs. 50,000 In case of under-insurance without average clause, claim is restricted to actual Rs. 50,000 (i) (Rs. 75,000), there is under-insurance and so average clause is applied. ¥ ¥ (ii) if the sum insured with average clause Rs. 50,000 (Rs. 75,000), there, is under-insurance and so average clause is applied. ¥ ¥ Illustration 11

be Rs. 1,05,000. Ascertain the claim admitted by the insurance company. Solution (Rs. 1,05,000), there is under-insurance and so average clause is applied. ¥ ¥

430

Financial Accounting

Illustration 12

Sons will get from the insurance company. Solution 20,000), there is under-insurance and so Average Clause is applied. ¥ ¥

IV – MEMORANDUM TRADING ACCOUNT, APPLICATION OF AVERAGE CLAUSE Good Condition and Damaged Condition Illustration 13 Most of the stocks were destroyed, cost of stock salvaged being Rs. 11,200. In addition, some stock was salvaged in a damaged condition and its value in that condition was agreed at Rs. 10,400. From the books of accounts, the following

sales during that period amounted to Rs. 1,54,000. On the basis of his accounts for the past three years, it appears that he earns on Compute the amount of the claim. Solution Step 1 Particulars To Opening Stock To Purchases

Rs.

Particulars

83,500 By Sales 1,12,000

Rs. 1,54,000 80,000

38,500 2,34,000

Step 2 Calculation of the amount of the claim

2,34,000

Insurance Claims

431

Step III Application of average clause

¥ ¥

Illustration 14 the stock was destroyed. Salvage was Rs. 15,000. Agni gives you the following

Goods costing Rs. 5,000 were taken by Agni for Personal use; Cost price of stock

1 3

clause. Agni asks you to prepare a statement of claim to be made on the Insurance Company. Solution Step 1

To Opening Stock To Purchases

Rs.

Rs.

40,000 By Sales

90,000 60,000

85,000 80,000

(33

30,000

1 3

1,50,000

1,50,000

Step 2 Calculation of the amount of the claim Rs. 15,000 Rs. 45,000 Step 3 Application of average clause So average clause is applied. ¥ ¥

Illustration 15

432

Financial Accounting

his stock for Rs. 15,00,000. His practice was to place his selling price at cost plus 1

33 3 %. He closes his books on 31st March every year.

showing the amount of claim. Solution Step 1 31.12.2001 Rs.

Rs.

To Opening Stock To Purchases

Note* 1 % of the cost price 3 1 on the cost price 3

\ Step 2 Calculation of the amount of the claim

Rs. 12,00,000 Step 3 Application of Average Clause

¥ ¥

Insurance Claims

433

Rs. 90,000 3,90,000 2,70,000 2% 2,400 50%

Stock on 31st December 1997

Commission paid to the purchase Carriage paid on purchase

(i) total loss of stock and (ii) amount of claim to be made against the insurance company. Solution Step 1 Rs. To Opening Stock To Purchases Add: Commission @ 2% Add: Carriage

Rs. 3,90,000 7,800 Rs. 2,400

-

5,80,200

It is also assumed as ½ on the cost price

G \ Step 2 Calculation of the amount of the claim

Step 3 Application of average clause So average clause is applied. ¥ ¥

Illustration 17

2,70,000 3,10,200

4,00,200 90,000

*Note

Purchase and Wages

Rs.

90,000 By Sales

5,80,200

434

Financial Accounting

Rs. Stock as on 1.10.2001 Purchases from 1.10.2001 to 31.12.2001 Wages from 1.10.2001 to 31.12.2001 Sales from 1.10.2001 to 31.12.2001

29,700 75,000 33,000 1,40,000

1 3

salvaged. Insurance policy was for Rs. 25,000 and claim was subject to average clause.

included in wages. (iii) Purchases included the purchase of the plant for Rs. 5,000. Solution Step 1 Rs. To Opening Stock (29,700 ¥ To Purchases

Rs. 1,40,000

By Sales 33,000

To Wages

30,500

75,000 5,000

70,000

33,000 500

32,500

35,000 1,70,500

1,70,500

*Note 1 3

\ Step 2 Calculation of the amount of the claim

Rs. 27,500

Insurance Claims

435

Step 3 Application of Average Clause So average clause is applied. ¥ ¥

V – COMPREHENSIVE PROBLEMS WITHOUT AVERAGE CLAUSE Illustration 18

Stock, including old stock all at cost:

Rs.

31st December 2002 31st December 2003 Purchases 2003 Sales 2003 Purchases January – April 2004 Sales January – April 2004

900 2,200 22,510 30,300 8,350 10,400

Solution Step 1 year) Rs. To Stock To Purchases

Rs. 900 By Sales 22,510 By Stock 9,090

30,300 2,200

32,500

32,500

Step 2 ¥ 100)/Sales ¥ Step 3 Rs. To Stock A/c To Purchases A/c

Rs. 2,200 By Sales A/c 8,350

10,400 3,270

3,120 13,670

13,670

436

Financial Accounting

Step 4 Calculation of the amount of the claim

Illustration 19

Rs. 1,32,720 96,140 3,48,270 4,52,580 5,20,000 4,91,700

Stock on 31.12.2004 Stock on 31.12.2003 Purchases up to 31.12.2004 Sales up to 31.12.2004

(a) In May 2005, goods costing Rs. 10,000 were given away for advertising a purpose, but no entry being made in the books. (b) During 2005, a clerk had appropriated as unrecorded cash sales of Rs. 4,000.

and prepare a statement showing the claim for loss of stock. Solution Step 1 year) Rs. To Opening Stock To Purchases

Rs.

96,140 By Sales 4,52,580 By Closing Stock 1,04,000

5,20,000 1,32,720

6,52,720

6,52,720

Step 2 ¥ 100)/Sales ¥ Step 3

Insurance Claims

437

Rs To Opening Stock To Purchases

Rs

1,32,720 By Sales Rs. 3,48,270 Rs. 10,000 3,38,270

Rs. 4,91,700 Rs. 4,000 4,95,700 74,430

99,140 5,70,130

5,70,130

Step 4 Calculation of the amount of the claim

200

Increase in Purchase and Sales Price

Rs. Stock at cost on 1st January, 2003 Stock at cost on 1st January, 2004 Purchases 2003 Purchases from 1st January, 2004 to 15 September, 2004 Sales 2003 Sales from 1st January, 2004 to 15th September, 2004

20,000 30,000 40,000 88,000 60,000 1,05,000

Rs. 2,000. Solution Step 1 year) Rs. To Opening Stock To Purchases

Rs. 20,000 By Sales 40,000 By Closing Stock 30,000

60,000 30,000

90,000

90,000

Step 2 ¥ 100)/Sales ¥

438

Financial Accounting

Step 3 Rs.

Rs. 30,000 By Sales 88,000

To Stock To Purchases

1,05,000 65,500

52,500 1,70,500

1,70,500

Step 4 Calculation of the amount of the claim

VI – COMPREHENSIVE PROBLEMS Illustration 21 particulars, ascertain the loss of stock and prepare a claim for insurance. Rs. Stock as on 1.1.2001 Purchases from 1.1.2001 to 31.12.2001 Sales from 1.1.2001 to 31.12.2001 Stock on 31.12.2001 Purchases from 1.1.2001 to 15.10.2002 Sales from 1.1.2002 to 15.10.2002

30,600 1,22,000 1,80,000 27,000 1,47,000 1,50,000

in the policy. Solution Step 1 year) Rs. To Opening Stock (30,600 ¥ To purchases

Rs.

34,000 By Sales By Closing Stock 1,22,000 (27,000 ¥

1,80,000 30,000

54,000 2,10,000

2,10,000

Step 2 ¥

¥

Insurance Claims

439

Step 3 Rs. To Opening Stock To Purchases

Rs.

30,000 By Sales 1,47,000

1,50,000 72,000

45,000 2,22,000

2,22,000

Step 4 Calculation of the amount of the claim

Rs. 54,000 Step 5 Application of average clause 72,000), average clause is applied. ¥ ¥ Illustration 22

Rs. Stock of goods at cost on 1st April, 2001 Purchases of goods for the year from 1st April, 2001 to 31st March, 2002 Sales for the year 2001–2002 Purchases less returns for the period from 1st April, 2002 to 20th July, 2002 Sales less returns for the above period

1,00,000 1,08,000 4,20,000 6,00,000 1,40,000 3,10,000

purchases invoice had not been received from suppliers, though goods have been received at the godown. Goods salvaged from the accident were worth Rs.12,000 and these were handed over to the insured. Ascertain the value of the claim for loss of goods/stock which could be preferred on the insurer, and the amount of the claim if sum insured is Rs. 50,000. Solution Step 1 year) Particulars To Opening Stock To Purchases

Rs.

Particulars

Rs.

1,00,000 By Sales 4,20,000 By Closing Stock 2,00,000

6,00,000

7,20,000

7,20,000

1,20,000

Financial Accounting

440 Step 2

¥

1 3

¥

Step 3 Particulars To Opening Stock To Purchases

Rs.

Particulars

1,20,000 By Sales Rs. 1,40,000 Rs. 20,000

Rs. Rs. 3,10,000 Rs. 40,000

2,70,000

1,60,000 90,000

1,00,000

3,70,000

3,70,000

Step 4 Application of average clause there is under-insurance and therefore, average clause is applied. ¥ ¥

Illustration 23

Rs. Purchases for 2002 Sales for 2002 Purchases from January 1, 2003 to May 1, 2003 Sales from January 1, 2003 to May 1, 2003 Stock on January 1, 2002 Stock on December 31, 2002 Wages paid during 2002 Wages paid during January 1, 2003 to May 1, 2003

8,88,000 11,60,000 1,82,000 2,40,000 1,44,000 2,42,000 1,00,000 18,000

Calculate the amount of claim to be submitted with the insurance company for the Solution Step 1 year)

Insurance Claims

441

Trading Account for the year ended 31.12.2002 Rs. To Opening Stock (1,44,000 ¥ 100/90) To Purchases To Wages

Rs.

By Sales 1,60,000 By Closing Stock 8,80,000 (2,42,000 ¥ 100/110) 1,00,000

11,60,000 2,20,000

2,32,000 13,80,000

13,80,000

Step 2 ¥

¥

Step 3 Particulars To Opening Stock To Purchases To Wages (20% on sales)

Rs.

Particulars

2,20,000 By Sales 1,82,000 18,000

Rs. 2,40,000 2,28,000

48,000 4,68,000

4,68,000

Step 4

Step 5

¥ ¥ Illustration 24

Rs. Purchases for the year 2003 Sales for the year 2003 Purchases from 1st January to 1st April 2004 Sales from 1st January 2004 to 1st April 2004 Stock on 1st January 2003 Stock on 31st December 2003 Wages paid during the year 2003 Wages paid during 1st January 2004 to 1st April 2004

16,76,000 23,20,000 3,64,000 4,80,000 2,88,000 4,84,000 2,00,000 36,000

442

Financial Accounting

unfortunately, however, were lost in an accident. Since there was no insurance, the loss had to be borne by him in full.

Solution Step 1 year)

To Opening Stock (2,88,000 ¥ To Purchases To Wages

Rs.

Rs.

3,20,000 By Sales 18,76,000 By Goods Sent on Consignment 2,00,000 By Closing Stock 4,64,000 (4,84,000 ¥

23,20,000

28,60,000

28,60,000

1,00,000 4,40,000

Step 2 ¥

¥

Step 3 Rs. To Opening Stock To Purchases To Wages

Rs.

4,40,000 By Sales 3,64,000 36,000

4,80,000 4,56,000

96,000 9,36,000

9,36,000

Step 4 Calculation of the amount of the claim

Rs. 4,00,000 Step 5 Application of average clause there is under-insurance and therefore, Average Clause is applied. ¥ ¥ Illustration 25

Insurance Claims

443

Rs. Purchase for the year 2001 Sales for the year 2001 Purchase from 1st January, 2002 to 1st April, 2002 Sales from 1st January, 2002 to 1st April, 2002 Stock on 1st January, 2001 Stock on 31st December, 2001 Wages paid during the year. 2001 Wages paid during 1st Jan, 2002 to 1st April, 2002

37,52,000 46,40,000 7,28,000 9,60,000 5,76,000 9,68,000 4,00,000 72,000

lost in an accident. As there was no insurance, the loss was borne by him in full. Stock at the end of each year prior to the year 2001 had been valued at the cost less

Solution Step 1 year) Particulars

Rs.

To Purchases To Wages

Particulars By Sales

To Opening Stock

Rs. 46,40,000 2,00,000

6,40,000 37,52,000 By Closing Stock 4,00,000

8,80,000

9,28,000 57,20,000

57,20,000

Step 2 ¥

¥

Step 3 Particulars To Opening Stock To Purchases To Wages

Rs. 8,80,000 By Sales 7,28,000 72,000

Particulars

Rs. 9,60,000 9,12,000

1,92,000 18,72,000

Step 4 Calculation of the amount of the claim

18,72,000

444

Financial Accounting

Step 5 Application of average clause (Rs. 9,12,000), average clause is applied. ¥ ¥ Illustration 26

ascertain the insurance claim which the company should claim from the insurance Rs. Purchases for the year 1997 Sales for the year 1997 Purchases from 1st January 1998 to 1st April 1998 Sales from 1st January 1998 to 1st April 1998 Stock on 1st January 1997 Stock on 31st December 1997 Wages paid during the year 1997 Wages paid during 1st January 1998 to April 1998

9,38,000 11,60,000 1,82,000 2,40,000 1,44,000 2,42,000 1,00,000 18,000

Fire also broke out on 21st December, 1997 and destroyed stock of the estimated cost of Rs. 50,000.

Solution Step 1 year)

Rs. To Opening Stock (1,44,000 ¥ To Purchases To Wages

Rs.

By Sales 1,60,000 By Stock Destroyed by Fire 9,38,000 By Closing Stock 1,00,000 (2,42,000 ¥

11,60,000 50,000 2,20,000

2,32,000 14,30,000

14,30,000

Step 2 ¥ Step 3

¥

Insurance Claims

Rs. To Opening Stock To Purchases To Wages

445

Rs.

2,20,000 By Sales 1,82,000 By Stock on the date of Fire 18,000

2,40,000 2,28,000

48,000 4,68,000

4,68,000

Step 4 Calculation of the amount of the claim

Rs. 2,00,000 Step 5 Application of average clause there is under-insurance and therefore, average clause is applied. ¥ ¥ Increase in the purchase price and sales price Illustration 27 From the following information, compute the amount of claim under loss of stock Sum assured Accounting year Reason for damage on 30.6.2002

Rs. 9,000 Calendar year Rs. 5,000 Uniform from year to year Rs. 90,000 Rs. 70,000 Rs. 4,00,000 Rs. 6,00,000 Rs. 6,00,000 Rs. 8,80,000

Stock as on 1.1.2001 Stock as on 31.12.2001 Purchases during 2001 Sales during 2001 Purchases from 1.1.2002 to 30.6.2002 Sales from on 1.1.2002 to 30.6.2002

Solution Step 1 year) Particulars To Opening Stock To Purchases

Rs.

Particulars

90,000 By Sales 4,00,000 By Closing Stock

Rs. 6,00,000 70,000

1,80,000 6,70,000

6,70,000

446

Financial Accounting

Step 2 ¥

¥

Step 3 Particulars

2001 basis Rs. 70,000 5,00,000 1,00,000

To Opening Stock To Purchases

2002 Rs.

Particulars

2001 basis Rs.

70,000 By Sales

2002 Rs.

8,00,000 80,000

8,80,000

6,00,000 By Stock on the date -

2,40,000

2,22,000

10,000

12,000

8,10,000

8,92,000

8,10,000

8,92,000

Step 4 Calculation of the amount of the claim

Rs. 7,000 Step 5 Application of average clause there is under-insurance and, therefore, average clause is applied. ¥ ¥

VII – THREE AND MORE YEARS Illustration 28 2009. From the books and other records that were saved, the following information

Opening stock as valued Purchases less Returns Sales less Returns Wages Closing stock as valued

2006 Rs.

2007 Rs.

2008 Rs.

2,709 7,490 12,000 1,740 3,240

3,240 8,000 13,200 1,900 3,600

3,600 8,100 14,000 2,090 3,690

2009 Rs. 3,690 600 1,200 200 –

Prepare a statement for submission to the insurance company in support of the claim for loss of stock. Solution Step 1 year)

Insurance Claims

Particulars

2006 Rs.

2007 Rs.

2008 Rs.

Particulars

447

2006 Rs.

2007 Rs.

2008 Rs.

3,010 7,490 1,740 3,360

3,600 8,000 1,900 3,700

4,000 8,100 2,090 3,910

12,000 3,600

13,200 4,000

14,000 4,100

15,600

17,200

18,100

15,600

17,200

18,100

Wages

(1) Opening Stock ¥ ¥ ¥

(2) Closing Stock ¥ ¥ ¥

Step 2 ¥ 100)/Sales ¥ ¥ ¥ Step 3 Liabilities To Opening Stock (3600 ¥ To Purchases less Returns To Wages ¥

Rs.

Assets

Rs. 1,200

By Sales less Returns 4,000 By Closing Stock 8,100 2,090 3,910

4,036

18,100

18,100

Step 4 Calculation of the amount of the claim

Illustration 29

2004 Rs. Opening Stock Purchases Sales

2,000 16,600 20,000 500 600

2005 Rs. 2,200 14,500 19,850 300 700

2006 Rs. 1,180 17,000 18,750 500 300

1.1.2007 to 30.6.2008 Rs. 3,402 3,500 2,600 100 25

Financial Accounting

448

In 2004, while valuing closing stock, some defective goods costing Rs. 500 were

Solution Step 1 year) Trading Account for the years 2004 Rs. To Stock Less: Abnormal Items To Purchases

2005 Rs.

2006 Rs. 1,180 By Sales 700 Less: Abnormal Items

2004 Rs.

2005 Rs.

2006 Rs.

20,000

19,850 450

18,750 550

2,000

2,200 400

2,000 16,000 500 3,800

1,800 14,500 300 3,880

480 17,000 By Closing Stock 500 3,822

20,000

19,400

19,200

2,300

1,080

3,602

22,300

20,840

21,802

22,300

20,480

21,802

*Step 2 ¥ 100)/Sales ¥ ¥ ¥ Step 3

To Opening Stock To Purchases

Normal Items

Abnormal Items

Rs.

Rs.

2,402 3,500 100

By Sales By Closing Stock

Normal Items

Abnormal Items

Rs.

Rs.

2,000 4,402

600 600

6,402

1,200

400 6,402

1,200

Step 4 Calculation of the amount of the claim Rs. Abnormal items

4,402 600

Less: Salvaged stock

5,002 800

Amount of claim

4,202

Insurance Claims

449

VIII – MISCELLANOUS

on an average clause. Stock valued at Rs. 1,20,000 was salvaged. Stock was insured showing the calculation of claim. Solution Books of the trader – Journal entries Particulars

L.F. No.

Insurance Company A/c

Dr.

Debit (Rs.)

Credit (Rs.)

3,60,000 2,40,000

To Trading A/c

6,00,000

Calculation of the amount of the claim

Rs. Application of Average Clause

¥ ¥

Illustration 31

Rs. Machinery Furniture

Pass the journal entries to record the damage and the claim recovered.

38,750 2,788 762 3,568

450

Financial Accounting

Solution Books of the Trader – Journal entries Particulars

Debit (Rs.)

Insurance Company Accout

Dr.

Credit (Rs.)

45,868

To Machinery Account

38,750 2,788

To Furniture Account

762 3,568

Bank Account Dr.

45,868

To Insurance Company Account

45,868

Illustration 32

Payment to creditors for goods

Rs. 75,000

Rs. 7,000.

during next two months at cost. From the particulars given, compute the amount of claim applying the average clause. Solution

Sundry Creditors Account Rs. To Bank To Balance c/d

Rs. 75,000 By Balance b/d 1,800

3,500 73,300

76,800

76,800

Insurance Claims

Normal Items

To Opening Stock To Purchases

Rs. 8,700 73,300

Abnormal Items Rs. 3,800 –

Total

Rs. 12,500 By Sales 73,300 By Closing Stock (Balancing

(25% on purchases 17,000 99,000

–

Normal Items

Abnormal Items

451 Total

Rs. 85,000

Rs. 3,800

Rs. 88,800

14,000

–

14,000

17,000

3,800 1,02,800

99,000

3,800 1,02,800

(ii) Calculation of the amount of the claim

Rs. 7,000 (iii) Application of average clause (Rs. 14,000), average clause is applied. ¥ ¥

Index for Illustrations Type I

Simple Problems

1–3

II

Comprehensive

4–10

III

Miscellaneous

10–12

I – SIMPLE PROBLEMS Calculation of Short Sales Illustration 1

Note: Special circumstances clause in the policy provided for the increase of

452

Financial Accounting

Solution Calculation of short sales Rs. 20,00,000 Add increase in trend

2,00,000

Adjusted standard turnover

22,00,000

Less – sales in indemnity period

8,00,000

Short sales

14,00,000

Illustration 2

Solution ¥

¥

Amount of Insurance Claim Illustration 3 Calculate the amount of claim from the following data, if sum insured is (a) Rs. 10,00,000 and (b) Rs. 7,50,000

increased cost of working Rs. 50,000. Solution (a) If the sum insured is Rs. 10,00,000 Rs. 2,80,000 50,000 3,30,000 Less – savings in standing charges 3,30,000

Application of average clause annual turnover. Rs. 44,00,000 Add/deduct – increase/decrease in trend

4,40,000

Adjusted annual turnover

48,40,000 ¥

9,68,000

Insurance Claims

453

(b) If the sum insured is Rs. 7,50,000 Rs. 2,80,000 50,000 3,30,000 Less – Savings in Standing charges 3,30,000

Application of Average Clause on annual turnover. Rs. 44,00,000 Add/deduct – increase/decrease in trend

4,40,000

Adjusted annual turnover

48,40,000 9,68,000

¥

Claim to be made ¥ ¥

II – COMPREHENSIVE Illustration 4 From the following information, compute the amount of claim under the loss of

Increase in cost of working Saving in insured standing charges

Rs. Rs.

15,000 5,000

Sales were evenly throughout the period Standing Charges (out of which Rs. 25,000 have not been insured)

Rs. 1,25,000

454

Financial Accounting

Solution Step 1 Calculation of short sales Rs. 2,50,000 Adjusted standard turnover

2,50,000

Less – Sales in indemnity period

1,50,000

Short sales

1,00,000

Step 2 Step 3 ¥

¥

Step 4 Claim for increased working expenses (Least of the following) Rs. 15,000 14,400

¥ ¥

37,500

¥ 1,50,000 ¥ 25%

14,400

Step 5 Rs. 25,000 14,400 39,400 Less – Savings in standing charges

5,000 34,400

Step 6 Application of average clause Rs. 4,50,000 Add/deduct – Increase/decrease in trend Adjusted annual turnover

4,50,000 1,12,500

¥

(Rs. 1,12,500), Average clause applies) Claim to be made ¥ ¥

Finding the Trend of Sales Illustration 5

Insurance Claims

Sales in 2005

Rs. 50,000

Sales in 2007

72,000

455

Rs.

Indemnity period 9 months Policy value

25,000

where was there any additional cost. Solution Step 1 Calculation of short sales Rs. 21,600 4,320 Adjusted standard turnover

25,920

Less – Sales in indemnity period

5,920

Short Sales

20,000

*Annual increase in sales ¥ ¥ ¥ Step 2 ¥ 100]/Accounting year turnover ¥

= [( Step 3 ¥

¥

Step 4 Claim for increased working expenses (Least of the following)—Not given Step 5

456

Financial Accounting

Rs. 2,000 2,000 Less – Savings in standing charges 2,000

Step 6 Application of average clause Rs. 86,400 Add – 10% increase in trend Adjusted annual turnover

86,400 8,640

¥

Since the policy amount (Rs. 25,000) is not

Illustration 6

the corresponding period in the preceding year it was Rs. 1,70,000. A sum of Rs. 20,000 was spent as additional expense to mitigate the effect of the loss, there

Prepare a claim to be submitted in respect of the consequential loss policy. Solution Step 1 Calculation of short sales Rs. 1,70,000 Add/deduct – Increase/decrease in trend Adjusted standard turnover

1,70,000

Less – Sales in indemnity period

80,000

Short sales

90,000

Step 2 ¥ 100 ¥

Insurance Claims

457

Step 3 ¥ 90,000 ¥ Step 4 Claim for increased working expenses – given Rs. 2,000 Step 5 Rs. 36,000 20,000 56,000 Less – Savings in standing charges 56,000

Step 6 Application of average clause applies) Rs. 7,80,000 Add/deduct – Increase/decrease in trend

–

Adjusted annual turnover

7,80,000 3,12,000

Claim to be made ¥ ¥

Illustration7

Rs. Opening Stock Purchases Standing Charges

Rs.

50,000 Sales 3,00,000 Closing Stock 78,750 36,250 35,000

4,75,000 25,000

5,00,000

5,00,000

458

Financial Accounting

Solution Step 1 Calculation of short sales Rs. 1,50,000 Add - 20% increase expected in the current year

30,000

Adjusted standard turnover

1,80,000

Short sales

1,60,000

20,000

Step 2 ¥ 100]/Accounting year turnover

= [( ¥ Step 3 ¥

¥

Step 4 Claim for increased working expenses – Not given Step 5 Rs. 24,000 24,000 Less – Savings in standing charges 24,000

Step 6 Application of average clause Rs. 5,00,000 Adjusted annual turnover

5,00,000 75,000

¥

Rs. 75,000, average clause applies. Claim to be made ¥ (24,000 ¥

Illustration 8 From the following particulars, prepare a claim for loss of profit under the

Insurance Claims

459

Rs. Period of indemnity six months Sum insured Turnover for the year ended 30th June, 2005

40,000 2,00,000 12,500 28,500 1,98,000 56,000 1,10,000

Standing charges for the accounting year ending 31st March, 2005 Turnover for the year ending 31st March, 2005 Turnover for the indemnity period from 1.7.2005 to 31.12.2005 Turnover for the period from 1.7.2005 to 31.12.2005

over the turnover of the preceding year. Solution Step 1 Calculation of short sales Rs. 1,10,000 11,000 Adjusted standard turnover

1,21,000

Less – Sales in indemnity period

56,000

Short sales

65,000

Step 2 ¥ 100]/Accounting year turnover ¥

= [( Step 3 ¥

¥

Step 4 Claim for Increased working expenses (Least of the following) Rs. 14,250 14,250

¥ ¥ ¥

14,250

Step 5 Rs. 13,462 14,250 27,712 Less – Savings in standing charges 27,712

Step 6 Application of average clause Rs. 2,00,000 Add – 10% increase in trend

20,000

Adjusted annual turnover

2,20,000 ¥

45,562

460

Financial Accounting

Claim to be made ¥ (27,712 ¥

Illustration 9

Liabilities

Rs.

To Opening Stock To Purchase To Standing Charges

Assets

Rs.

50,000 By Sales 3,00,000 By Closing Stock 78,750 36,250 35,000

4,75,000 25,000

5,00,000

5,00,000

Solution Step 1 Calculation of short sales Rs. 1,50,000 30,000 Adjusted standard turnover

1,80,000

Less – Sales in indemnity period

20,000

Short Sales

1,60,000

Step 2 ¥ 100]/Accounting year turnover ¥

= [( Step 3 ¥

Step 4 Claim for increased working expenses Not given – Nil Step 5

¥

Insurance Claims

461

Rs. 24,000 24,000 Less – Savings in standing charges 24,000

Step 6 Application of average clause Rs. 5,00,000 Add – Increase in trend only in the previous year Adjusted Annual Turnover

5,00,000 75,000

¥

(Rs. 75,000), Average clause applies) Claim to be made ¥ (24,000 ¥

III – MISCELLANOUS

To Opening Stock To Purchases

Rs.

Rs.

6,18,750 By Sales 27,18,750 By Closing Stock 2,51,250 1,20,000 78,750

30,00,000 7,87,500

37,87,500

37,87,500

Rs.

462

Financial Accounting

reduction in turnover amounted to Rs. 2,70,000 as compared with the turnover of period corresponding the previous year. Building was worth Rs. 15,00,000 on the

(i) Loss of stock (iii) Loss of building Solution Step 1

To Opening Stock To Purchase

Rs.

Rs.

6,18,750 By Sales 27,18,750 By Closing Stock 4,50,000

30,00,000 7,87,500

37,87,500

37,87,500

Step 2 ¥

¥

Step 3

Rs. To Opening Stock

Rs.

7,87,500 By Sales 1,65,000 By Closing Stock

1,50,000 8,25,000

22,500

(1,50,000 ¥

9,75,000

9,75,000

Step 4 Calculation of the amount of the claim

Working Note

Rs. To Bank To Balance C/d

Step 1

Rs.

1,60,020 By Balance b/d 2,30,980

2,26,000 1,65,000

3,91,000

3,91,000

Insurance Claims

463

Step 2 ¥ 100]/Accounting year turnover ¥

= [( Step 3 ¥

¥

Step 4 Claim for increased working expenses (Least of the following) – Not given Step 5 Rs. 29,700 29,700 Less – Savings in standing charges 29,700

Step 6 Application of average clause

Rs. 2,51,250.

¥ ¥

Journal Entries Illustration 11

Buildings Plant and machinery Fittings Stock damaged Stock destroyed Fire expenses

Book Value

Claimed

Admitted

Rs.

Rs.

Rs.

50,000 70,000 12,000 28,000 45,000 – –

60,000 75,000 15,000 30,000 50,000 55,000 1,200

45,000 60,000 13,500 17,000 40,000 37,000 1,200

and most of the stock lying in a godown adjacent to the factory was also destroyed.

464

Financial Accounting

company paid the amount for all claims on 27th September 2004. above particulars including the Cash Book entries. Solution Books of Bombay Steel Traders – Journal Entries L.F Yoga Krishna Company A/c To Buildings A/c To Plant and Machinery A/c To Fittings A/c To Stock Damaged A/c To Stock Destroyed A/c

Dr.

Rs.

Rs.

2,13,700 45,000 60,000 13,500 17,000 40,000 9,000 28,000 1,200

To Fire Expense A/c

Stock Damaged A/c Dr. Stock Destroyed A/c Dr. To Trading A/c (Being book value of stock damaged and stock destroyed cred-

28,000 45,000

Bank A/c To Stock Damaged A/c

Dr.

13,000

Stock Damaged A/c

Dr.

73,000

13,000 2,000 2,000

5,000 To Stock Destroyed A/c (Being balance of stock destroyed, i.e. Rs. 45,000 –

5,000

15,000 To Building A/c To Plant and Machinery A/c

5,000 10,000 -

Fitting A/c

1,500

Dr.

1,500 Fire Expenses A/c To Bank A/c

Dr.

Bank A/c Dr. To Yoga Kshema Insurance Company A/c (Being receipt of various claims admitted by the insurance com-

1,200 1,200 2,13,700 2,13,700

Insurance Claims

465

Illustration 12 Saran Ltd. provides the following information; (a) Claims made against and admitted by the insurance company Claimed Rs. Stock damaged Stock destroyed building

40,000 50,000 1,60,000 3,25,000

Admitted Rs. 30,000 Machinery 35,000 Furniture 1,00,000 Fire expenses 3,15,000

Claimed Rs.

Admitted Rs.

3,10,000 8,500 1,000

3,00,000 6,000 1,000

Accumulated Depreciation Rs. Building Machinery Furniture

Original Cost Rs.

60,000 1,20,000 5,000

3,00,000 4,50,000 15,000

advertising suspense, now worthless. (e) Repairs and renovations to building costs Rs. 19,000. Give necessary journal entries in the books of the Saran Ltd. Solution

Particulars 1

Insurance Company Account

L.F. Dr.

Dr. (Rs.)

Cr. (Rs.)

7,87,000

To Buildings Account

3,15,000

To Machinery Account

3,00,000

To Furniture Account

6,000

To Stock Damaged Account

30,000

To Stock Destroyed Account

35,000 30,000 20,000 50,000 1,000

To Fire Expenses Account (Being the claim for various items admitted by the insurance com2

Bank Account To Insurance Company Account (Being the claim amount received from the insurance

Dr.

7,87,000 7,87,000

466 3

Financial Accounting

Stock Damaged Account

Dr.

40,000

Stock Destroyed Account

Dr.

50,000

To Trading Account

90,000

(Being the Stock Damaged and Stock Destroyed Account is cred4

25,000 10,000 15,000 (Being the difference in the Stock Damaged Account and the

5

Depreciation Account

Dr.

46,875 9,000 37,125 750

6

Building Account

Dr.

84,000 19,000 50,000 15,000

7

Machinery Account

Dr.

7,125 7,125

8

3,250 3,250 (Being the loss suffered on furniture since the amount recovered is

Working Notes ¥ ¥ period) ¥ (c) ½ is in respect of advertisement expense (1,00,000 ¥ Rs. 10,000 Rs. 15,000 ¥ 9/12

¥ ¥

¥

Insurance Claims

¥

467

¥

Rs. 750 Building 6 (i) (Rs.) Original cost Accumulated Depreciation Depreciation Balance Repair

Machinery 7 (j) (Rs.)

Furniture 8 (k) (Rs.)

3,00,000

4,50,000

60,000

1,20,000

15,000 5,000

2,40,000

3,30,000

10,000

9,000

37,125

750

2,31,000

2,92,875

9,250

19,000

–

–

Total

2,50,000

2,92,875

9,250

Claim admitted

3,15,000

3,00,000

6,000

7,125

3,250

Difference

3,250

Capital Reserve

Reserve A/c.

Points to Remember premium and agrees to indemnify the loss to the extent of sum insured on the happening of a certain event.

insurance.

earning capacity of business. Loss of stock policy ¥ 100)/Sales ¥ ¥ ¥ annual turnover

468

Financial Accounting

Examination Questions I. Objective Questions 1. Fill in the blanks (i) The object of the average clause is to discourage ________________. (ii) Loss of stock policy covers only _________________ property.

______________.

2. Choose the correct answer (i) Standing charges are (a) Fixed expenses

(a) Encourage full insurance

(b) Variable expenses

(b) Discourage under insurance

(iii) Under the average clause, the loss is suffered by both insurer and insured (c) in the ratio of risk covered

(d) only by the insurer

Hence, there are short sales to the extent of

3. Match the following (i)

Loss of stock

(ii)

a

Cost of Sales

b

Discourage under insurance

(iii)

Average clause

c

Material property

(iv)

Memorandum Trading Account

d

Earning capacity of business

(i)

portion of loss only.

Insurance Claims

Answers 1. (i) under-insurance; (iii) earning capacity; 2. (i) a; (ii) b;

(ii) material; (iv) sales; (iii) a;

469

(v) stock salvaged. (iv) a.

A. Very Short Answer Questions

B. Short Answer Questions

C. Detail Answer Questions 1. Explain average clause in insurance policy with reference to loss of

Problem 1

Stock on 1.1.2002 Rs. 17,000; Purchases from 1.1.2002 to the date of fire

[Ans. Problem 2

for personal use and goods sold for Rs. 2,500 were returned to the merchant. On

470

Financial Accounting

Compute the claim to be made with the insurance company. [Ans.

Amount of Claim Problem 3

[Ans.

Problem 4

insured will get from the insurers. [Ans. Average clause Rs. 14,000] Problem 5

subject to average clause. Stock salvaged was Rs. 12,000. Stock was insured for

[Ans. Problem 6 Calculate insurance claim from the following facts assuming that the insurers met their liability under the policy on ‘average basis’ - A trader’s stock valued at

the books at Rs. 24,000. [Ans. Problem 7

Insurance Claims

471

Rs. Stock as on 1.1.2001 Purchases from 1.1.2001 to 31.12.2001 Sales from 1.1.2001 to 31.12.2001 Stock on 31.12.2001 Purchases from 1.1.2001 to 15.10.2002 Sales from 1.1.2002 to 15.10.2002

30,600 1,22,000 1,80,000 27,000 1,47,000 1,50,000

in the policy. [Ans. Claim Rs. 54,000; Average clause Rs. 47,250]

C Problem 8 Fire occurred in the premised on 1.1.2005 and the business books and records were Rs. Purchases for the year ending 30.6.2004 Sales for the year ending 30.6.2004 Purchases from 1.7.2004 to 31.12.2004 Sales from 1.7.2004 to 31.12.2004 Stock on 30.6.2004 Stock on 30.6.2003

60,000 90,000 35,000 50,000 28,000 40,000

Calculate the amount of claim to be presented to the insurance company in respect

[Ans. Problem 9

Rs Purchases for the year ended 31.3.2004 Sales for the year ended 31.3.2004 Purchases from 1.4.2004 to 1.9.2004 Sales from 1.4.2004 to 1.9.2004 Stock on 31st March 2003 Stock on 31st March 2004

7,00,000 11,00,000 2,40,000 3,60,000 3,00,000 3,40,000

by Rs. 20,000. Calculate the amount of the claim to be presented to the insurance company in respect of losses.

[Ans.

472

Financial Accounting

From the following particulars in respect of Ram Prasad, ascertain the insurance

[Ans. Average clause Rs. 2,00,000] Problem 11

Rs. Stock on 1.1.2003

63,000

Purchases for the year ending 31.12.2003

4,00,000

Sales for the year ending 31.12.2003

5,00,000

Wages for the year ending 31.12.2003

20,000

Salary for the year ending 31.12.2003

10,000

Stock on 31.12.2003

81,000 2,00,000 3,00,000

Stock salvaged

10,000 30,000

[Ans. Average clause Rs. 24,000]

– Problem 1

Rs. Total variable expenses

3,50,000 1,20,000 60,000 90,000

Insurance Claims

473

standing expenses will remain constant. Ascertain the extent to which the company

[Ans. Problem 2 and as a result there was diminished turnover, as compared with the corresponding which adequately covered the dislocation and no special factors existed.

[Ans. Rs. 1,500] Problem 3 From the following information, you are required to work out the claim under the

10. Increased cost of working during the period of indemnity was Rs. 15,000.

[Ans. Problem 4

474

Financial Accounting

Prepare the claim to be submitted to the insurance company. [Ans. Problem 5 From the following information, compute the amount of claim under the loss of

Increase in cost of working Saving in insured standing charges

Rs. 15,000 Rs. 5,000

Sales were evenly throughout the period standing charges (out of which Rs. 25,000 have not been insured) Rs. 1,25,000 [Ans.

14

Hire Purchase and Installment Accounting

Learning Objectives After studying this chapter, you should be able to Explain hire purchase and instalment purchase systems Understand the differences between hire purchase and instalment purchase Use accounting entries for maintaining books of hire purchaser and hire vendor Understand the procedure for preparing Hire Purchase Trading Account Explain accounting treatment for instalment purchase system

HIRE PURCHASE SYSTEM Hire purchase and instalment purchase system are very popular among customer because customers need not pay price of goods in a lump sum, the price can be paid in convenient installments agreed to by both the seller and the buyer. According to Hire Purchase Act 1938, England “when goods are bought under hire purchase system, the property in the goods or ownership remains with the seller until the last payment is made and in the event of default, he can again take possession of them subject to legal requirements”. In India, hire purchase transactions are governed by the Hire Purchase Act, 1972. According to Section. 2(c) of this Act, “Hire purchase agreement is an agreement under which goods are let on hire and under which the hirer has an option to purchase them in accordance with the terms of the agreement and includes and agreement under which (i) possession of goods is delivered by the owner thereof to a person on the condition that such person pays the agreed amount in periodic installments (ii) the property in the goods is to pass to such person on the payment of the last of such installments and (iii) such person has a right to terminate the agreement at any time before the property so passes”.

476

Financial Accounting

Content of Hire Purchase Agreement According to Section 4 of Hire Purchase Act, 1972, any Hire Purchase Agreement must contain the following: (a) The hire purchase price of the goods to which the agreement relates. (b) The cash price of the goods, that is to say, the price at which the goods may be purchased by the hirer for cash. (c) The date on which the agreement shall be deemed to have commenced. (d) The number of installments by which the hire purchase price is to be paid, the amount of each of those installments and the date or the mode of determining the date, upon which is payable and the person to whom and the place where it is payable. (e) The goods to which the agreement relates, the manner sufficient to identify them.

Important Terms used in Hire Purchase Agreement Hire Price payable by the purchaser or buyer periodically or installment price. Hirer Buyer of goods according to hire purchase agreement. Hire vendor Owner of seller of goods according to hire purchase agreement. Hire purchase agreement It is an agreement of hiring. Down payment It is an initial payment made by the hirer at the time of signing hire purchase agreement. Cash price Cash price does not include interest that is hire purchase price minus interest is called cash price. Hire purchase price It is total sum payable by the hirer to the hire vendor. This price includes total cash price plus interest component. Interest Hire purchase charges are popularly known as interest. This is the difference between hire purchase price and cash price.

Salient Features of Hire Purchase 1. 2. 3. 4. 5.

Hire purchase is a credit purchase Hire purchase is paid in installments Goods are transferred to the buyer on signing the agreement. Ownership of goods remains with the hire vendor or seller. Hire purchaser will become owner of the goods only when he pays the last installment 6. The hire purchaser can use the goods and keep goods in proper condition until the last installment is paid off. 7. If the hire purchaser fails to pay any one instalment or even the last installment, the hire vendor will take possession of the goods and the installments paid by the hire purchaser will be treated as hire charges for using the goods.

Termination of Hire Purchase Agreement The hire purchaser, at any time can terminate the agreement by giving 14 days notice in writing to the hire vendor. The hire purchaser has to redeliver the goods of the hire

Hire Purchase and Installment Accounting

477

vendor. On the other hand, the hire vendor will have the right to retain the installment (hire charges) already paid by the hire purchaser. The hire vendor has a right to recover the arrears of hire charges due and he will also have right to repossess the goods.

Accounting Treatment 1

On the date of Purchase

Books of the Hire Vendor

Books of the Hire Purchaser

For the sale of the asset

For the purchase of the asset

Hire Purchaser A/c To Hire Sale A/c (Cash price) 2

Dr. Asset A/c To Hire Vendor A/c (Cash price)

For the cash down received Cash/Bank A/c To Hire Purchaser A/c

For the cash down paid Dr. Hire Vendor A/c To Cash/Bank A/c

For the interest due 1

2

3

Cash/Bank A/c To Hire purchaser A/c

Dr.

For the interest due Dr. Interest A/c To Hire Vendor A/c

For the installment received

At the end year and the subsequent years

Hire Purchaser A/c To Interest A/c

Dr.

Dr.

For the installment paid Dr. Hire Vendor A/c To Cash/Bank A/c

For depreciation on the asset

For depreciation on the asset

No Entry

Depreciation A/c To Asset A/c

Dr.

Dr.

For transferring interest and depreciation For transferring interest and 4

Interest A/c

Dr. To Interest A/c To Depreciation A/c

Calculation of Interest Hire purchase price includes both cash price and interest. Therefore, calculation of interest component is very important. On the basis of calculation of interest, accounting problems are classified into four different categories. (i) When rate of interest, installments and cash price are given. (ii) When rate of interest and installments are given, but cash price is not given. (iii) When installments and total cash price are given, but rate of interest is not given. (iv) When rate of interest and installments are given, calculating cash price using Annuity Table.

Default and Repossession When the hire purchaser fails to pay any installment, the hire vendor has a right to repossess the goods sold as per hire purchase agreement. There are two types of repossession— (a) Complete repossession—Repossession of all the goods hired out; and (b) Partial repossession—Repossession of only a few of goods hired out.

478

Financial Accounting

For Complete Repossession Entries relating to interest and depreciation will be made in the books of both hire purchaser and hire vendor except the entry for payment of installment up to the date of default. In the Books of Hire Purchaser Hire purchaser will close the account of hire vendor by transferring the balance to Asset Account by debiting Hire Vendor’s Account and crediting the Asset Account and then Asset Account is closed by transferring the balance to Profit and Loss Account (which is loss on hire purchase due to repossession). In the Books of the Hire Vendor Hire vendor will close the account of hire purchaser by transferring the balance of “Goods Repossessed Account”. This Goods Repossessed Account is further debited with expenses incurred on repair and overhauling charges of goods repossessed and credited with the selling price. Good Repossessed Account is closed by transferring balance to Profit and Loss Account (which is profit on hire purchases due to repossession).

For Partial Repossession Entries relating to interest and depreciation will be made in the book of both hire purchaser and hire vendor except the entry for payment of installment up to the date of default as in the case of complete repossession. In the Books of Hire Purchaser The hire purchaser debits the Vendor Account and credits the Asset Account (Hire Vendor Account is not closed in this case). The Asset Account shows the value of goods still left with the hire purchaser after charging depreciation. The Asset Account shows profit or loss on default and the same is transferred to Profit and Loss Account. In the Books of Hire Vendor The hire vendor credits the Hire Purchaser Account and debits the Goods Repossessed Account. The Goods Repossessed Account is further debited with expenses incurred on repair and overhauling charges and credited with the selling price. The Goods Repossessed Account is closed by transferring the balance (profit or loss on default) to Profit and Loss Account.

Hire Purchase Trading Account When hire purchase transactions are large in number and value of goods sold is very small, the hire vendor follows an alternative method of recording these numerous transactions of small value. The reason being, it is very difficult to maintain large number of hire purchase account and also to calculate interest for each case. In such circumstances, Hire Purchase Trading Account is prepared to ascertain profit or loss.

Methods of Ascertaining Profit There are two methods of preparing Hire Purchase Trading Account. (1) Debtor method (2) Stock and debtors method

Hire Purchase and Installment Accounting

479

Debtors Method Under this method the hire purchase trading account is either (a) at cost price or (b) at selling price. (a) Accounting entries at cost price (i)

For sale of goods

Hire Purchase Trading Account To Goods sold on Hire Purchase Account (ii)

Dr.

xxx

For installment money received

Bank Account To Hire Purchase Trading Account (iii)

Dr.

For installment due Dr.

xxx xxx

For goods repossessed

Goods Repossessed Account To Hire Purchase Trading Account (v)

xxx xxx

Installment Due Account To Hire Purchase Trading Account (iv)

xxx

Dr.

xxx xxx

For goods buying with hire purchaser

Hire Purchase Stock Account To Hire Purchase Trading Account

Dr.

xxx xxx

(vi) Hire Purchase Trading Account

Dr.

xxx xxx

(vii) xxx To Hire Purchase Trading Account

xxx

Format of Hire Purchase Trading A/c (at cost price) To Opening Balance Hire Purchase Stock Hire Purchase Debtors To Goods Sold on Hire Purchase (cost)

xxx xxx xxx

By Cash (Down payment and installment received) By Goods Repossessed A/c By Closing Balance Hire Purchase Stock Hire Purchase Debtors

xxx xxx

xxx xxx xxx xxx xxx xxx

(b) Accounting entries when goods are sold at selling price or loaded price (Load = Difference between selling price and cost price) Following are the additional entries to be passed – (viii)

For removal of load in opening stock

Hire Purchase Stock Reserve Account To Hire Purchase Trading Account (ix)

Dr.

xxx xxx

For removal of load in closing stock

Hire Purchase Trading Account To Hire Purchase Stock Reserve Account

Dr.

xxx xxx

480 (x)

Financial Accounting

For removal of load in goods sold on hire purchase

Goods Sold on Hire Purchase A/c To Hire Purchase Trading A/c

Dr.

xxx xxx

Stock and debtors method This method is similar to branch stock and debtors method. The following accounts are opened under this method. (1) (2) (3) (4) (5) (6) (i)

Shop Stock Account Hire Purchase Stock Account Hire Purchase Debtors Account Goods Sold on Hire Purchase Account Stock Reserve Account Hire Purchase Adjustment Account For purchase of goods

Shop Stock A/c To Purchase A/c (ii)

xxx

Dr.

xxx xxx

Dr.

xxx xxx

Dr.

xxx xxx xxx

For expenses incurred on repairs of goods repossessed

Goods Repossessed A/c To Bank A/c (vii)

xxx

For goods repossessed

Goods Repossessed A/c To Hire Purchase Debtors A/c To Hire Purchase Stock A/c

(vi)

Dr.

For installment money received

Bank Account To Hire Purchase Debtors A/c (v)

xxx

For installment due

Hire Purchase Debtors A/c To Hire Purchase Stock A/c (iv)

xxx

For sale of goods

Hire Purchase Stock A/c To Goods Sold on Hire Purchase Account (iii)

Dr.

Dr.

xxx xxx

For sale of goods repossessed

Bank A/c To Goods Repossessed Account

Dr.

xxx xxx

(viii) Goods Repossessed A/c To Hire Purchase Adjustment A/c (ix)

Dr.

xxx xxx

For loss on sale of goods repossessed

Hire Purchase Adjustment A/c To Goods Repossessed A/c

Dr.

xxx xxx

Hire Purchase and Installment Accounting

(x)

For eliminating loading included in opening stock

Stock Reserve A/c To Hire Purchase Adjustment A/c (xi)

Dr.

For eliminating loading included in closing stock Dr.

xxx xxx

For eliminating loading included in goods sold on hire purchase

Goods Sold on Hire Purchase A/c To Hire Purchase Adjustment A/c (xiii)

xxx xxx

Hire Purchase Adjustment A/c To Stock Reserve A/c (xii)

481

Dr.

xxx xxx

For closing Goods Sold in Hire Purchase A/c

Goods Sold on Hire Purchase A/c To Shop Stock A/c

Dr.

xxx xxx

(xiv) Hire Purchase Adjustment A/c

Dr.

xxx xxx

(xv)

For loss on hire purchase: xxx

To Hire Purchase Adjustment A/c

xxx

INSTALMENT PURCHASE SYSTEM Under this system purchase price is payable in instalment basis and the purchaser becomes the owner of goods on the date of transaction. This system is also known as Installment Payment system.

Installment Purchase Agreement Both the buyer and seller enter into an agreement for Installment purchase. This agreement is similar to hire purchase agreement. According to this agreement, buyer makes down payment and seller transfer both possession and ownership title of goods to the buyer. If the buyer fails to pay the installments, seller cannot take possession of the goods. But, seller can sue the buyer in the Court of Law for recovery of installment money.

Accounting Treatment 1

On the date of Purchase

Books of the Hire Vendor

Books of the Hire Purchaser

For the sale of the asset

For the purchase of the asset

Hire Purchaser A/c Dr. Asset A/c Dr. (cash price) To Hire Sale A/c (cash price) Interest Suspense A/c Dr. (total interest) To Interest Suspense A/c (total interest) To Hire Vendor A/c 2

For the cash down received Cash/Bank A/c To Hire Purchaser

For the cash down paid Dr. Hire Vendor A/c A/c To Cash/Bank A/c

Dr.

482

Financial Accounting

1

At the end

2

3

4

DISTINCTION BETWEEN HIRE PURCHASE AND INSTALLMENT PURCHASE

Index for Illustrations Type

Ill. No. 1–4 5–6 7–8 9–10 11–14 15–16 17–21 22–27 28–33 34–39 40–42

Hire Purchase and Installment Accounting

483

I – CALCULATION OF INTEREST When all Information is Given Illustration 1 A car was purchased by a customer under hire purchase system on April 1, 2005, the total cash price of the car is Rs. 3,30,000, payable Rs. 1,00,000 on signing of the agreement and three equal annual installments of Rs. 1,00,000 payable on 31st March for 3 years. Interest is charged at 15% per annum. Based on the above information, calculate interest paid by the customer. Solution Calculation of Interest – When all the particulars are given Rs. Cash price 1.4.2005

3,30,000

Cash Down

1,00,000

Balance

2,30,000

Interest 15%

34,500

Total due on 31.3.2006

2,64,500

1st installment paid

1,00,000

Balance

1,64,500

Interest 15%

24,675

Total due on 31.3.2007

1,89,175

2nd installment paid

1,00,000

Balance

89,175

Interest due (balance)

10,825

Total due on 31.3.2008

1,00,000

3rd Installment paid

1,00,000

Balance

Nil

Total interest = 1st installment (34,500) + 2nd installment (24,675) + 3rd installment (10,825) = Rs. 70,000

When Interest is not given Illustration 2 Arul purchased machinery under the hire purchase system from Mr. Balu. The cash price of the machinery was Rs. 15,000. The payment for the purchase is to be made as follows : On signing the agreement Rs. 3,000; end of the first year Rs. 5,000; end of the second year Rs. 5,000; end of the third year Rs. 5,000. Calculate the amount of interest included in each installment. (B.Com., Madras) Solution Calculation of Interest (When interest is not given) Total hire purchase price = 3,000 + (5,000 ¥ 3) 18,000 Total cash price = 15,000 Total interest 3,000

484

Financial Accounting

Particulars

Installment due

Proportion

Calculation

Interest Rs.

15 or 3

3,000 ¥ 3/6

1,500

Total hire purchase price (–) cash down

= Rs. 18,000 = Rs. 3,000

Outstanding (–) 1st instalment

= Rs. 15,000 = Rs. 5,000

10,000

10 or 2

3,000 ¥ 2/6

1,000

Outstanding (–) 2nd instalment

= Rs. 10,000 = Rs. 5,000

5,000

5 or 1

3,000 ¥ 1/6

500

15,000

3,000

6

When Cash Price is not given Illustration 3 Kumar purchased an electronic gadget on hire purchase system on April 1, 2002. As per terms, he is required to pay Rs. 8,000 down, i.e., on April 1,2002, Rs. 7,000 on March 31, 2003, Rs. 7,000 on March 31, 2004 and Rs. 6,000 on March 31, 2005. Interest is charged at 20% per annum. You are required to calculate total cash price of the asset and interest paid with each installment. Solution Calculation of interest (when cash price is not given) Year

Instalment due

Interest paid

Cash price paid

1,000

6,000 – 1,000 = 5,000

3rd Installment – 31.3.2005

6,000 ¥ 20/120

2nd Installment – 31.3.2004

7,000 + 5,000 = 12,000 ¥ 20/120

2,000

7,000 – 2,000 = 5,000

1st Installment – 31.3.2003

7,000 + 5,000 + 5,000 = 17,000 ¥ 20/120

2,833

7,000 – 2,833 = 4,167

Cash Down – 1.4.2002

8,000

0

8,000 – 0 = 8,000

5,833

Total

22,167

Together with Installment Illustration 4 On April 1, 2004 Mr. Vasant purchased a machine on hire purchase system. According to the terms of the agreement Rs. 80,000 was to be paid on the signing of the contract. The balance was to be paid in four annual installments of Rs. 50,000 each plus interest. The cash price of the plant was Rs. 2,80,000. Interest chargeable on outstanding balance was 20% per annum. Find yearly interest payable by Mr. Vasant. Solution Calculation of Interest – Interest together with Installment Payment

1.4.2004 Cash Down interest

Installment (Part principal + interest)

2nd payment

Cash price Rs.

2,80,000 80,000

80,000 + 0

2,00,000

2,00,000 ¥ 20% = 40,000

1st payment Interest

Interest Rs.

50,000 + 40,000 = 90,000 1,50,000

Nil

80,000

40,000

50,000

30,000

50,000

1,50,000 ¥ 20% = 30,000 50,000 + 30,000 = 80,000

Hire Purchase and Installment Accounting

Interest

1,00,000

3rd payment

1,00,000 ¥ 20% = 20,000 50,000 + 20,000 = 70,000

Interest

50,000

4th payment

485

20,000

50,000

50,000 ¥ 20% = 10,000 50,000 + 10,000 = 60,000

10,000

50,000

1,00,000

2,80,000

II – JOURNAL ENTRIES AND LEDGERS IN THE BOOKS OF PURCHASER Illustration 5 On 1st January, 2002 SS Logistics Ltd. purchased van from Sharan Motors on hire purchase basis, paying Rs. 1,50,000 through cheque on spot and agreed to pay annual instalment of Rs. 1,00,000 up to the year ending on 31st December 2004. The cash price of the van taken was Rs. 4,20,000. The supplier’s charged interest at 5% per annum and 10% depreciation is charged on cash price on reducing installment method each year. Show journal entries and the important ledgers in the books of the SS Logistics Ltd. Solution Calculation of Interest – When all the particulars are given Rs. Cash price 1.1.2002

4,20,000

Cash down

1,50,000

Outstanding 31.12.2002

2,70,000

Interest 5%

13,500

Total due

2,83,500

1st installment

1,00,000

Outstanding 31.12.2003

1,83,500

Interest 5%

9,175

Total due

1,92,675

2nd installment

1,00,000

Outstanding 31.12.2004

92,675

Interest due (balance)

7,325

3rd installment

1,00,000

Books of SS Logistics Ltd (A) Journal Entries 2002 Jan 1 1

On the date of purchase Van A/c

Dr. 4,20,000

To Sharan Motors A/c

4,20,000

(Being the asset is accounted on cash price) 2

Sharan Motors A/c To Bank A/c (Being cash down paid)

Dr.

1,50,000 1,50,000

486

Financial Accounting

2002 Dec 31 1

Interest A/c

Dr.

13,500

To Sharan Motors A/c

13,500

(Being interest due charged) 2

Sharan Motors A/c

Dr.

1,00,000

To Bank A/c

3

1,00,000

Deprecition A/c

Dr.

42,000

To Van A/c

42,000

(Being depreciation charged on the asset) (4,20,000 ¥ 10%) 4

44,500 To Interest A/c

13,500

To Depreciation A/c

42,000

2003 Dec 31 1

At the end of the second year Interest A/c

Dr.

9,175

To Sharan Motors A/c

9,175

(Being interest due charged) 2

Sharan Motors A/c

Dr.

1,00,000

To Bank A/c

1,00,000

(Being second installment paid) 3

Deprecition A/c

Dr.

37,800

To Van A/c

37,800

(Being depreciation charged on the asset) (3,78,000 x 10%) 4

46,975 To Interest A/c

9,175

To Depreciation A/c

2004 Dec 31 1

37,800

At the end of the third year Interest A/c

Dr.

7,325

To Sharan Motors A/c

7,325

(Being interest due charged) 2

Sharan Motors A/c To Bank A/c (Being third installment paid)

Dr.

1,00,000 1,00,000

Hire Purchase and Installment Accounting

3

Deprecition A/c

Dr.

487

34,020

To Van A/c

34,020

(Being depreciation charged on the asset) (3,40.200 ¥ 10%) 4

41,345 To Interest A/c

7,325

To Depreciation A/c

34,020

(B) Ledger Accolunts (i) Van Account Date 2002 Jan 1

Particulars

L.F.

To Sharan Motors

Rs.

Date

4,20,000

2002 Dec 31

Particulars

L.F.

By Depreciation By Balance c/d

42,000 3,78,000

4,20,000 2003 Jan 1

To Balance b/d

3,78,000

4,20,000 2003 Dec 31

By Depreciation By Balance c/d

37,800 3,40,020

3,78,000 2004 Jan 1

To Balance b/d

Rs.

3,78,000

3,40,020

(ii) Sharan Motors Account Date 2002 Jan 1 Dec 31

Particulars To Bank To Bank To Balance c/d

L.F.

Rs. 1,50,000 1,00,000 1,83,500

Date 2002 Jan 1

Particulars By Machinery By Interest

4,33,500 2003 Dec 31

To Bank To Balance c/d

1,00,000 92,675

To Bank

1,00,000 1,00,000

Rs. 4,20,000 13,500 4,33,500

2003 Jan 1

By Balance b/d By Interest

1,92,675 2004 Dec 31

L.F.

1,83,500 9,175 1,92,675

2004 Jan 1

By Balance b/d By Interest

92.675 7,325 1,00,000

Illustration 6 A hire purchase agreement entered into between hire purchaser and Hire vendor to purchase an airconditioner. The agreement spread for five years payable Rs. 10,000 annually after paying cash down on Rs. 5,000. The hire vendor charge 4% interest per annum and the hire purchaser provide 10% as depreciation per year on the original cost. Assuming the present value of Re. 1 per annum is Rs. 4.4518, write the journal entries and the ledger accounts in the books of hire purchaser.

488

Financial Accounting

Solution Working Note Calculation of Interest (When interest is not given) Total HP price = 5,000 + (5 ¥ 10,000) = Rs. 55,000 (–) Total cash price = 10,000 ¥ 4.4518 = Rs. 44,518 Total interest = Rs. 10,482 Particulars

Installment due

Proportion

Calculation

Interest

50 or 5

10,482 ¥ 5/15

3,494

Total hire purcahse price (–) cash down

= 55,000 = 5,000

Outstanding (–) 1st installment

= 50,000 = 10,000

40,000

40 or 4

10,482 ¥ 4/15

2,795

Outstanding (–) 2nd installment

= 40,000 = 10,000

30,000

30 or 3

10,482 ¥ 3/15

2,096

Outstanding (–) 3rd installment

= 30,000 = 10,000

20,000

20 or 2

10,482 ¥ 2/15

1,398

Outstanding (–) 4th installment

= 20,000 = 10,000

10,000

10 or 1

10,482 ¥ 1/15

699

50,000

15

Total

10,482

Books of Hire Purchaser (A) Journal Entries 1st year Jan 1 1

On the date of purchase Airconditioner A/c

Dr.

44,518

To Hire vendor A/c

44,518

(Being the asset is accounted on cash price) 2

Hire vendor A/c

Dr.

5,000

To Bank A/c

5,000

(Being cash down paid) 1st year Dec 31 1

Interest A/c

Dr.

3,494

To Hire Vendor A/c

3,494

(Being interest due charged) 2

Hire Vendor A/c

Dr.

10,000

To Bank A/c

3

Deprecition A/c To Van A/c (Being depreciation charged on the asset) (44,518 ¥ 10%)

10,000

Dr.

4,452 4,452

Hire Purchase and Installment Accounting

4

7,946 To Interest A/c

3,494

To Depreciation A/c

4,452

2nd year Dec 31 1

489

At the end of the second year

Interest A/c

Dr.

2,795

To Hire Vendor A/c

2,795

(Being interest due charged) 2

Hire vendor A/c

Dr.

10,000

To Bank A/c

10,000

(Being second instalment paid) 3

Deprecition A/c

Dr.

4,452

To Van A/c

4,452

(Being depreciation charged on the asset) (44,518 ¥ 10%) 4

7,247 To Interest A/c

2,795

To Depreciation A/c

4,452

3rd year Dec 31 1

At the end of the third year Interest A/c

Dr.

2,096

To Hire Vendor A/c

2,096

(Being interest due charged) 2

Hire Vendor A/c

Dr.

10,000

To Bank A/c

10,000

(Being third installment paid) 3

Deprecition A/c

Dr.

4,452

To Van A/c

4,452

(Being depreciation charged on the asset) (44,518 ¥ 10%) 4

6,548 To Interest A/c

2,096

To Depreciation A/c

4,452

490

Financial Accounting

4th year Dec 31 1

At the end of the fourth year Interest A/c

Dr.

1,398

To Hire Vendor A/c

1,398

(Being interest due charged) 2

Hire Vendor A/c

Dr.

10,000

To Bank A/c

10,000

(Being fourth installment paid) 3

Deprecition A/c

Dr.

4,452

To Van A/c

4,452

(Being depreciation charged on the asset) (44,518 ¥ 10%) 4

5,850 To Interest A/c

1,398

To Depreciation A/c

4,452

5th year Dec 31 1

Interest A/c

Dr.

699

To Hire Vendor A/c

699

(Being interest due charged) 2

Hire Vendor A/c

Dr.

10,000

To Bank A/c

3

10,000

Deprecition A/c

Dr.

4,452

To Van A/c

4,452

(Being depreciation charged on the asset) (44,518 ¥ 10%) 4

5,151 To Interest A/c

699

To Depreciation A/c

4,452

(B) Ledger Accounts Airconditioner Account Date 1st Year Jan 1

Particulars To Hire vendor

2nd Year Jan 1 To Balance b/d

L.F.

Rs. 44,518

Date 1st Year Dec 31

Particulars By Depreciation By Balance c/d

L.F.

Rs. 4,452 40,066

44,518

44,518

2nd Year 40,066 Dec 31 By Depreciation By Balance c/d

4,452 35,614

40,066

40,066

Hire Purchase and Installment Accounting

3rd Year Jan 1 To Balance b/d

35,614

4th Year Jan 1 To Balance b/d

5th Year Jan 1 To Balance b/d

3rd Year Dec 31 By Depreciation By Balance c/d

491

4,452 31,162

35,614

35,614

4th Year 31,162 Dec 31 By Depreciation By Balance c/d

4,452 26,710

31,162

31,162

5th Year 26,710 Dec 31 By Depreciation By Balance c/d

4,452 22,258

26,710

26,710

Hire Vendor Account Date 1st Year Jan 1 Dec 31

Particulars To Bank To Bank To Balance c/d

2nd Year Dec 31 To Bank To Balance c/d 3rd Year Dec 31

To Bank To Balance c/d

L.F.

Rs. 5,000 10,000 33,012

Date 1st Year Jan 1

Particulars By Machinery By Interest

To Bank To Balance c/d

To Bank

44,518 3,494 48,012

2nd Year 10,000 Jan 1 By Balance b/d 25,807 By Interest

33,012 2,795

35,807

35,807

10,000 17,903

3rd Year Jan 1

By Balance b/d By Interest

10,000 9,301

10,000

25,807 2,096 27,903

4th Year Jan 1

By Balance b/d By Interest

19,301 5th Year Dec 31

Rs.

48,012

27,903 4th Year Dec 31

L.F.

17,903 1,398 19,301

5th Year Jan 1

By Balance b/d By Interest

10,000

9,301 699 10,000

Interest Account Date 1st Year Dec 31

Particulars To Hire Vendor

Rs. 3,494

Date

Particulars

1st Year Dec 31

Rs. 3,494

A/c 3,494 2nd Year Dec 31 To Hire Vendor

3,494

2nd Year 2,795 Dec 31

2,795 A/c

2,795 3rd Year Dec 31

To Hire Vendor

2,795

3rd Year 2,096 Dec 31

2,096 A/c

2,096 4th Year Dec 31

To Hire Vendor

1,398

2,096 4th Year Dec 31

1,398 A/c

1,398

1,398

492 5th Year Dec 31

Financial Accounting

To Hire Vendor

699

5th Year Dec 31

699 A/c

699

699

Depreciation Account Date 1st Year Dec 31

Particulars To Hire Vendor

L.F.

Rs. 4,452

Date

Particulars

L.F.

Rs.

1st Year Dec 31

4,452 A/c

4,452 2nd Year Dec 31 To Hire Vendor

4,452

2nd Year 4,452 Dec 31

4,452 A/c

4,452 3rd Year Dec 31 To Hire Vendor

4,452

4,452 3rd Year Dec 31

4,452 A/c

4,452 4th Year Dec 31

To Hire Vendor

4,452

4,452 4th Year Dec 31

4,452 A/c

4,452 5th Year Dec 31

To Hire Vendor

4,452

4,452 5th Year Dec 31

4,452 A/c

4,452

4,452

III – JOURNAL ENTRIES AND LEDGERS IN BOTH BOOKS Illustration 7 Joy & Co. purchased photo copier from Mahesh & Co. on hire purchase system on April 1, 2004, payment being made Rs. 29,850 down and Rs. 30,000 annually for three years. The installments were required to be paid on March 31 each year. The cash price of the asset purchased was Rs. 93,000. Mahesh & Co. charged interest @ 20% per annum. Joy & Co. provided depreciation @ 20% per annum on the diminishing balance method. The books of accounts are closed on March 31 every year. Pass journal entries and show important ledger accounts in the book of both the parties. Solution Working Note Calculation of Interest – When all the particulars are given Rs. Cash price 1.4.2004

93,000

Cash Down

29,850

Outstanding 31.12.2004

63,150 Contd.

Hire Purchase and Installment Accounting

493

Contd. Interest 20%

12,630

Total due

75,780

1st installment

30,000

Outstanding 31.12.2005

45,780

Interest 20%

9,156

Total due

54,936

2nd installment

30,000

Outstanding 31.12.2006

24,936

Interest due (balance) (30,000 – 24,936)

5,064

3rd installment

30,000

(A) Journal Entries Books of the Mahesh & Co.

On the date of Purchase (1.1.2004)

Joy & Co. A/c To Hire Sale A/c (Cash price)

For the purchase of the asset Dr. 93,000 Machine A/c 93,000 To Mahesh & Co. A/c (Cash price)

For the cash down received

2

Cash/Bank A/c To Joy & Co. A/c

1

At the end of the

Books of the Joy & Co.

For the sale of the asset

1

2

(31.12,2004) 3

4

For the cash down paid Dr. 29,850 Mahesh & Co. A/c 29,850 To Cash/Bank A/c

Dr. 29,850 29,850

For the interest due Joy & Co. A/c To interest A/c

For the interest due Dr. 12,630 Interest A/c 12,630 To Mahesh & Co. A/c

Dr. 12,630 12,630

For the installment received Cash/Bank A/c To Joy & Co. A/c For depreciation on the asset No Entry

For transferring interest

For the installment paid Dr. 30,000 Mahesh & Co A/c Dr. 30,000 30,000 To Cash/Bank A/c 30,000 For depreciation on the asset Depreciation A/c Dr. 18,600 To Machine A/c 18,600 (93,000 ¥ 20%) For transferring interest

Interest A/c

Dr. 12,630 To Interest A/c To Depreciation A/c

At the end of the second year (31.12,2005)

Dr. 93,000 93,000

For the interest due Joy & Co. A/c To interest A/c For the instalment received Cash/Bank A/c To Joy & Co. A/c For depreciation on the asset No Entry

For transferring interest and Interest A/c

12,630 18,600

For the interest due Dr. 9,156 Interest A/c Dr. 9,156 9,156 To Mahesh & Co. A/c 9,156 For the instalment paid Dr. 30,000 Mahesh & Co. A/c Dr. 30,000 30,000 To Cash/Bank A/c 30,000 For depreciation on the asset Depreciation A/c Dr. 14,880 To Machine A/c 14,880 (74,400 ¥ 20%) For transferring interest and Dr. 9,156 To Interest A/c To Depreciation A/c

9,156 14,880

494

Financial Accounting

For the interest due

For the interest due

Joy & Co. A/c To interest A/c

Dr. 5,064 Interest A/c 5,964 To Mahesh & Co. A/c

For the installment received Cash/Bank A/c To Joy & Co. A/c

At the end of the third year (31.12,2006)

Dr. 5,064 5,064

For the instalment paid Dr. 30,000 Mahesh & Co. A/c 30,000 To Cash/Bank A/c

Dr. 30,000 30,000

For depreciation on the asset

For depreciation on the asset

No Entry

Depreciation A/c To Machine A/c (59,520 ¥ 20%)

For transferring interest and

For transferring interest and

Interest A/c

Dr. 11,904 11,904

Dr. 5,064 To Interest A/c To Depreciation A/c

5,064 11,904

(B) Ledger Account (i) In the Books of Joy & Co. Photo copier Account Date 2004 Jan 1

Particulars

L.F.

To Bombay Co.

Rs. 93,000

Date 2004 Dec 31

Particulars

L.F.

By Depreciation By Balance c/d

18,600 74,400

93,000 2005 Jan 1

To Balance b/d

74,400

93,000 2005 Dec 31

By Depreciation By Balance c/d

14,880 59,520

74,400 2006 Jan 1

To Balance b/d

59,520

74,400 2006 Dec 31

By Depreciation By Balance c/d

11,904 47,616

59,520 2007 Jan1

To Balance b/d

Rs.

59,520

47,616

Mahesh & Co. Date 2004 Jan 1 Dec 31

Particulars To Bank To Bank To Balance c/d

L.F.

Rs. 29,850 30,000 45,780

Date 2004 Jan 1

Particulars By Machinery By Interest

1,05,630 2005 Dec 31

To Bank To Balance c/d

30,000 24,936

To Bank

30,000 30,000

Rs. 93,000 12,630 1,05,630

2005 Jan 1

By Balance b/d By Interest

54,936 2006 Dec 31

L.F.

45,780 9,156 54,936

2006 Jan 1

By Balance d/d By Interest

24,936 5,064 30,000

Hire Purchase and Installment Accounting

495

(ii) In the Books of Mahesh & Co. Joy & Co. Account Date 2004 Jan 1 Dec 31

Particulars

L.F.

To Hire Sales A/c To Interest A/c

Rs. 93,000 12,630

Date 2004 Jan 1 Dec 31

Particulars

L.F.

By Bank By Bank By Balance c/d

29,850 30,000 45,780 1,05,630

By Bank By Balance c/d

30,000 24,936 54,936

By Bank

30,000

1,05,630 2005 Jan 1 Dec 31

To Balance b/d To Interest A/c

45,780 9,156 54,936

2006 Jan 1 Dec 31

To Balance b/d To Interest A/c

24,936 5,064 30,000

2005 Dec 31

2006 Dec 31

Rs.

30,000

Journal Entries, Ledger in Both Books, Balance Sheet, Extract of P/L Account Illustration 8 The Madras Company purchased machinery from the Bombay Company on hire purchase agreement on 1st January, 2006, paying cash Rs. 10,000 and agreeing to pay three further instalments of Rs. 10,000 each on the 31st December of every year. The cash price of the machinery is Rs. 37,250 and the Bombay Company charges interest at 5% per annum. The Madras Company writes off 10% every year on cash value of the machinery on the reducing installment system. (a) Journalise these entries in the books of both the parties. (b) Open the necessary accounts in the books of both the companies. (c) Show the Machinery Account in the Balance Sheet of Madras Company as on 31st December, 2007 and (d) The extract of the Profit and Loss Account in the books Madras Company. Solution Working Note Calculation of Interest – When all the particulars are given Rs. Cash price 1.1.2006 Cash down Outstanding 31.12.2006

37,250 10,000 27,250

Interest 5% Total due 1st installment Outstanding 31.12.2007 Interest 5% Total due 2nd installment Outstanding 31.12.2008 Interest due (balance) (10,000 – 9,544) 3rd installment

1,363 28,613 10,000 18,613 931 19,544 10,000 9,544 456 10,000

496

Financial Accounting

(A) Journal Entries 1

On the date of Purchase (1.1.2006)

2

1

2 At the end of the 3 (31.12,2006)

4

Books of the Bombay Company

Books of the Madras Company

For the sale of the asset

For the purchase of the asset

Madras Company A/c To Hire Sale A/c (Cash price) For the cash down received Cash/Bank A/c To Madras Company A/c For the interest due Madras Company A/c To Interest A/c

Dr. 37,250 Machine A/c 37,250 To Bombay Company A/c (Cash price) For the cash down paid Dr. 10,000 Bombay Company A/c 10,000 To Cash/Bank A/c For the interest due Dr. 1,363 Interest A/c 1,363 To Bombay Company A/c

2

At the end of the second year (31.12,2007)

3

4

Interest A/c

2

At the end of the third year (31.12.2008)

3

4

Dr. 1,363 1,363

Dr. 1,363 1,363 3,725

For the interest due For the interest due Madras Company A/c Dr. 931 Interest A/c Dr. 931 To interest A/c 931 To Bombay Company A/c 931 For the installment received For the instalment paid Cash/Bank A/c Dr. 10,000 Bombay Company A/c Dr. 10,000 To Madras Company A/c 10,000 To Cash/Bank A/c 10,000 For depreciation on the asset For depreciation on the asset No Entry Depreciation A/c Dr. 3,353 To Machine A/c 3,353 (33,525 ¥ 10%) For transferring interest and For transferring interest and Interest A/c

1

Dr. 10,000 10,000

For the installment received For the installment paid Cash/Bank A/c Dr. 10,000 Bombay Company A/c Dr. 10,000 To Madras Company A/c 10,000 To Cash/Bank A/c 10,000 For depreciation on the asset For depreciation on the asset No Entry Depreciation A/c Dr. 3,725 To Machine A/c 3,725 (37,250 ¥ 10%) For transferring interest and For transferring interest and

To Interest A/c To Depreciation A/c 1

Dr. 37,250 37,250

Dr. 931

For the interest due Madras Company A/c Dr. 456 To Interest A/c 456 For the instalment received Cash/Bank A/c Dr. 10,000 To Madras Company A/c 10,000 For depreciation on the asset No Entry

For transferring interest and Interest A/c

To Interest A/c 931 To Depreciation A/c 3,353 For the interest due Interest A/c Dr. 456 To Bombay Company A/c 456 For the instalment paid Bombay Company A/c Dr. 10,000 To Cash/Bank A/c 10,000 For depreciation on the asset Depreciation A/c Dr. 3,017 To Machine A/c 3,017 (30,172 ¥ 10%) For transferring interest and

Dr. 456 To Interest A/c To Depreciation A/c

456 3,017

Hire Purchase and Installment Accounting

497

(B) Ledger Account (i) In the Books of Madras Company Machinery Account Date 2006 Jan 1

Particulars

L.F.

To Bombay Co.

Rs. 37,250

Date 2006 Dec 31

Particulars

L.F.

By Depreciation By Balance c/d

3,725 33,525

37,250 2007 Jan 1

To Balance b/d

33,525

37,250 2007 Dec 31

By Depreciation By Balance c/d

3,353 30,172

33,525 2008 Jan 1

To Balance b/d

30,172

33,525 2008 Dec 31

By Depreciation By Balance c/d

3,017 27,155

30,172 2009 Jan 1

To Balance b/d

Rs.

30,172

27,155

Bombay Co. Account Date 2006 Jan 1 Dec 31

Particulars

L.F.

To Bank To Bank To Balance c/d

Rs. 10,000 10,000 18,613

Date 2006 Jan 1

Particulars

L.F.

By Machinery By Interest

37,250 1,363

38,613 2007 Dec 31

To Bank To Balance c/d

10,000 9,544

38,613 2007 Jan 1

By Balance b/d By Interest

18,613 931

19,544 2008 Dec 31

To Bank

10,000

Rs.

19,544 2008 Jan 1

By Balance b/d By Interest

9,544 456

19,544

19,544

Interest Account Date 2006 Dec 31

Particulars To Bombay Co.

L.F.

Rs. 1,363

Date

Particulars

2006 Dec 31

L.F.

Rs. 1,363

A/c 1,363 2007 Dec 31

To Bombay Co.

931

1,363 2007 Dec 31

931 A/c

931 2008 Dec 31

To Bombay Co.

456

931 2008 Dec 31

456 A/c

456

456

498

Financial Accounting

Depreciation Account Date 2006 Dec 31

Particulars

L.F.

To Machinery A/c

Rs. 3,725

Date

Particulars

L.F.

2006 Dec 31

3,725

3,725 2007 Dec 31

To Machinery A/c

3,353

3,725 2007 Dec 31

3,353

3,353 2008 Dec 31

To Machinery A/c

3,017

Rs.

3,353 2008 Dec 31

3,017

3,017

3,017

(ii) In the Books of Bombay Company Madras Co. Account Date 2006 Jan 1 Dec 31

Particulars To Hire Sales A/c To Interest A/c

L.F.

Rs. 37,250 1,363

Date 2006 Jan 1 Dec 31

Particulars By Bank By Bank By Balance c/d

38,613 2007 Jan 1 Dec 31

To Balance b/d To Interest A/c

18,613 931

To Balance b/d To Interest A/c

9,544 456

Rs. 10,000 10,000 18,613 38,613

2007 Dec 31

By Bank By Balance c/d

19,544 2008 Jan 1 Dec 31

L.F.

10,000 9,544 19,544

2008 Dec 31

By Bank

10,000

10,000 10,000

Hire Sales Account 2008 Dec 31

To Trading A/c

37,250

2008 Jan 1

By Madras Co.

37,250

37,250 37,250

Interest Account 2006 Dec 31

1,363

2006 Dec 31

By Madras Co.

1,363 2007 Dec 31

931

1,363 2007 Dec 31

By Madras Co.

931 2008 Dec 31

456 456

1,363

931 931

2008 Dec 31

By Madras Co.

456 456

Hire Purchase and Installment Accounting

499

(C) Balance Sheet of Madras Co. as on 31st 2007 Liabilities

Assets

Creditors Bombay Co.

Machinery 9,544 (–) Depreciation

33,525 3,353 30,172

(D) Extract of Profit and Loss Account Particulars

Rs.

Particulars

2006

To Interest To Depreciation

1,363 3,725

2007

To Interest To Depreciation

931 3,353

2008

To Interest To Depreciation

456 3,017

Rs.

IV – ONLY JOURNAL ENTRIES IN PURCHASER BOOK Books of Hire Vendor—Repairs and Maintenance Illustration 9 Jai Machines Ltd. sold a high powered engine to Verma Fabricators on 1st January 2003 for Rs. 1,66,050. As per the agreement, Rs. 40,000 was paid as cash down and the balance was payable in three instalments on 1st July, 2003, 1st January 2004 and 1st July 2004. As per the records of Jai Machines, the manufacturing cost of the engine was Rs. 1,30,000 and the sale price was Rs. 1,60,000. The hire purchase agreement provided the interest charge as 5% per annum normal repair expense to be borne by the hirepurchaser for 2 years from the date of sale and keep 30% of profit on sale for the service. In the first year the repair expense came to Rs. 2,500 and in the second year, it was Rs. 3,500. Assuming the accounts are closed as per the calendar year, pass the journal entries in the books of Hire vendor Solution Calculation of Interest (When interest is not given) Total hire purchase price = 1,66,050 Total cash price = 1,60,000 Total interest = 6,050 Particulars

Instalment due (Rs.)

Proportion

Calculation

Interest (Rs.)

3

6,050 ¥ 3/6

3,025

Total HP price (–) cash down

= Rs. 1,66,050 = Rs. 40,000

Outstanding (–) 1st installment

= Rs. 1,26,050 = Rs. 42,016

84,034

2

6,050 ¥ 2/6

2,017

Outstanding (–) 2nd installment

= Rs. = Rs.

42,017

1

6,050 ¥ 1/6

1,008

84,034 42,017

1,26,050

6

6,050

500

Financial Accounting

Books of Jai Machines Ltd.–Journal entries 2003 Jan 1 1

On the date of purchase Verma Fabricators A/c

Dr.

1,60,000

To Hire Sales A/c

1,51,000

To Repairs Reserve A/c

9,000 ¥ 30% =

9,000) credited to Repair Reserve A/c) 2

Bank A/c

Dr.

40,000

To Verma Fabricators A/c

40,000

(Being cash down received from the hire purchaser) 2003 June 30 1

Verma Fabricators A/c

Dr.

3,025

To Interest A/c

3,025

(Being interest due credited) 2

Bank A/c

Dr.

42,016

To Verma Fabricators A/c

2003 Dec 31 1

42,016

At the end of the second term Verma Fabricators A/c

Dr.

2,017

To Interest A/c

2,017

(Being interest due credited) 2

Bank A/c

Dr.

42,017

To Verma Fabricators A/c

3

Repair Reserve A/c

42,017

Dr.

2,500

To Bank A/c

2,500

(Being repair expense incurred and paid) 4

Interest A/c

Dr.

5,042 5,042

Hire Purchase and Installment Accounting

2004 June 30 1

501

At the end of the third term

Verma Fabricators A/c

Dr.

1,008

To Interest A/c

1,008

(Being interest due credited) 2

Bank A/c

Dr.

42,017

To Verma Fabricators A/c

42,017

Dec 31 3

Repair Reserve A/c

Dr.

3,500

To Bank A/c

3,500

(Being repair expense incurred and paid) 4

Interest A/c

Dr.

Repair Reserve A/c Dr.*

1,008 3,000 4,008

* Repair reserve balance = 9,000 (Cr.) – [2,500+3,500] (Dr.) = 3,000

Purchased and Transferred to Other Hire Purchaser Illustration 10 On 1st January, 2006, Xavio & Co. entered into an agreement to purchase 200 electrical appliances on hire purchase system from Yameen Brothers. Price was to be paid in equal half yearly instalments of Rs. 14,770 on 30th June and 31st December each year for three years. Cash Price was Rs. 400 per sewing machine and rate of interest was 6% per annum payable on half yearly balances. On 1st January, 2007 after paying two instalments Xavio & Co. transferred the machines to Zakir & Co. after receiving Rs. 20,000. Zakir & Co. paid this amount to Xavio & Co. immediately and remaining installments to Yameen Brothers on due dates. Record the above transactions in the books of Zakir & Co. by way of journal entries for the financial year ended 30th June, 2007. Charge depreciation on electrical appliances @ 10% per annum. Books of Xavio & Co. – Journal Entries Date 2007 Jan 1

Particulars Electrical Appliances A/c

L.F. Dr.

Debit (Rs.)

Credit (Rs.)

* 74.889

To Xavio & A/c

20,000

To Yameen Brothers A/c

54,889 (a)

(Being the electrical appliances were taken on hire purchase agreement) * 20,000 + 54,889 = 74,889

Financial Accounting

502

June 30

Interest A/c

Dr.

1,647

To Yameen Brothers A/c

1,647

(Being interest charged for 6 months – 54,889 ¥ 6% ¥ 6/12) Yameen Brothers A/c

Dr.

14,770

To Bank A/c

14,770

(Being half yearly installment paid) Depreciation A/c

Dr.

3,744

To Electrical Appliances A/c

3,744

(Being depreciation provided – 74,889 ¥ 10% ¥ 6/12) 5,391 To Interest A/c

1,647

To Depreciation A/c

3,744

Working Note (a) Yameen Brothers Account Date

Particulars

2006 June 30 To Bank Dec 31 To Bank Dec 31 To Balance c/d

L.F.

Rs.

Date

Particulars

L.F.

2006 14,770 Jan 1 By Electrical Appli14,770 June 30 ances A/c 54,889 Dec 31 (200 ¥ 400/ –) By Interest 80,000 ¥ 6% ¥ 6/12 By Interest A/c 67,630 ¥ 6% ¥ 6/12

Rs.

80,000 2,400 2,029

84,429

84,429

V – LEDGER IN BOOKS OF PURCHASER Illustration 11 Pillai & Co. purchased a machine on hire purchases system and paid Rs. 2,400 on the date of signing agreement, Rs. 2,560 at the end first year; Rs. 3,560 at the end of second year and Rs. 3,300 at the end of third year. Interest @10% per annum is included in the instalments and the depreciation charged at 10% per annum on the cost. Prepare necessary accounts in the books of Pillai & Co. Solution Calculation of interest (when cash price is not given) Year 3rd Instalment – Dec 31, 3rd year 2nd Instalment – Dec 31, 2nd year 1st Instalment – Dec 31, 1st year Cash Down – Jan 1, 1st year Total

Installment

Interest paid

Cash price paid

3,300 ¥ 10/110

300

3,300 – 300 = 3,000

3,000 + 3,560 = 6,560 ¥ 10/110

596

3,560 – 596 = 2,964

3,000 + 2,964 + 2,560 = 8,524 ¥ 10/110

775

2,560 – 775 = 1,785

2,400

0

2,400 – 0 = 2,400

1,671

10,149

Hire Purchase and Installment Accounting

503

Ledger Account - In the Books of Pillai & Co Machine Account Date 1st year Jan 1

Particulars

L.F.

To Hire vendor

Rs. 10,149

Date 1st year Dec 31

Particulars

L.F.

By Depreciation By Balance c/d

1,015 9,134

10,149 2nd year Jan 1 To Hire vendor

3rd year Jan 1

To Hire vendor

Rs.

10,149

2nd year 9,134 Dec 31 By Depreciation By Balance c/d

1,015 8,119

9,134

9,134

8,119

3rd year Dec 31

By Depreciation By Balance c/d

1,015 7,104

8,119

8,119

Hire Vendor Account Date 1st year Jan 1 Dec 31

Particulars

L.F.

To Bank To Bank To Balance c/d

Rs. 2,400 2,560 5,964

Date 1st year Jan 1 Dec 31

Particulars

L.F.

By Machinery By Interest

10,149 775

10,924 2nd year Dec 31

3rd year Dec 31

To Bank To Balance c/d

To Bank

Rs.

10,924

2nd year 3,560 Jan 1 By Balance b/d 3,000 Dec 31 By Interest

5,964 596

6,560

6,560

3,300

3rd year Jan 1 Dec 31

By Balance b/d By Interest

3,000 300

9,763

9,763

Interest Account Date 1st year Dec 31

Particulars To Hire vendor

L.F.

Rs. 775

Date

Particulars

1st year Dec 31

L.F.

Rs. 775

A/c 775 2nd year Dec 31 To Hire vendor

775

2nd year 596 Dec 31

596 A/c

596 3rd year Dec 31

To Hire vendor

300

596 3rd year Dec 31

300 A/c

300

300

Installment by Annuity Illustration 12 Under hire purchase agreement, a machine was purchased for Rs. 22,730. First payment was to made at the time of taking delivery of the machine and the balance is to be paid by four equal annual instalments. The hire vendor charged 5% as interest

504

Financial Accounting

per year. Depreciation provided by the hire purchaser is assumed to be 10% on the original cost. Prepare ledger accounts in the books of the hire purchaser. Note: The present value of Re. 1 for 5 years @ 5% is Rs. 4.5460 Solution Working Note (b) Calculation of Interest – When all the particulars are given Rs. Cash price Jan 1, 1st year

22,730

Cash Down

5,000

Outstanding Dec 31, 1st year

17,730

Interest 5%

887

Total due

18,617

1st instalment

5,000

Outstanding Dec 31, 2nd year

13,617

Interest 5%

681

Total due

14,298

2nd instalment

5,000

Outstanding dec 31, 3rd year

9,298

Interest 5%

465

Total due

9,763

3rd instalment

5,000

Outstanding Dec 31, 4th year

4,763

Interest (balance =

237

4th instalment

5,000

Ledger Account – In the Books of Hire Purchaser Machine Account Date 1st year Jan 1

Particulars To Hire Vendor

2nd year Jan 1 To Hire Vendor

3rd year Jan 1

To Hire Vendor

L.F.

Rs. 22,730

Date 1st year Dec 31

Particulars By Depreciation By Balance c/d

To Balance b/d

To Balance b/d

2,273 20,457 22,730

2nd year 20,457 Dec 31 By Depreciation By Balance c/d

2,273 18,184

20,457

20,457

18,184

15,911 15,911

5th year Jan 1

Rs.

22,730

3rd year Dec 31

By Depreciation By Balance c/d

18,184 4th year Jan 1

L.F.

13,638

2,273 15,911 18,184

4th year Dec 31

By Depreciation By Balance c/d

2,273 13,638 15,911

Hire Purchase and Installment Accounting

505

Hire Vendor Account Date 1st year Jan 1 Dec 31

Particulars To Bank To Bank To Balance c/d

L.F.

Rs. 5,000 5,000 13,617

Date 1st year Jan 1 Dec 31

Particulars By Machinery By Interest

23,617 2nd year Dec 31

To Bank To Balance c/d

To Bank To Balance c/d

5,000 4,763

Rs. 22,730 887 23,617

2nd year 5,000 Jan 1 By Balance b/d 9,298 Dec 31 By Interest 14,298

3rd year Dec 31

L.F.

13,617 681 14,298

3rd year Jan 1 Dec 31

By Balance b/d By Interest

9,298 465

9,763 4th year Dec 31

To Bank

5,000

9,763 4th year Jan 1 Dec 31

By Balance b/d By Interest

4,763 237

5,000

5,000

Finding Cash Price using Annuity Table Illustration 13 A vehicle was purchased by Pradeep Transport Co. on 1st January, 2006 on a hire purchase system, by paying Rs. 10,000 on signing the agreement and the balance was payable as Rs. 10,000 annually for three years. Interest charged @ 5% and depreciation provided at 20% per annum under written down value method. Note: The present value of an annuity of Re. 1 per annum @ 5% Rs. 2.7232. Give necessary ledger accounts in the books of Pradeep Transport Co. Solution Working Note (a) Calculation of cash price = (Installment ¥ Annuity Table) + Down Payment = (10,000 ¥ 2.7232) + 10,000 = Rs. 37,232 (b) Calculation of Interest – When all the particulars are given Rs. Cash price – 1.1.2006

37,232

Cash down

10,000

Outstanding 31.12.2006

27,232

Interest 5%

1,362

Total due

28,594

1st instalment

10,000

Outstanding 31.12.2007

18,594

Interest 5%

930

Total due

19,524

2nd instalment

10,000

Outstanding 31.3.2008 Interest due (balance) 3rd instalment

9,524 476 10,000

506

Financial Accounting

Ledger Account - In the Books of Pradeep Transport Co Vehicle Account Date 2006 Jan 1

Particulars

L.F.

Rs.

To Hire Vendor

37,232

Date 2006 Dec 31

Particulars

L.F.

By Depreciation By Balance c/d

7,446 29,786

37,232 2007 Jan 1

To Hire Vendor

29,786

37,232 2007 Dec 31

By Depreciation By Balance c/d

5,957 23,829

29,786 2008 Jan 1

To Hire Vendor

23,829

Rs.

29,786 2008 Dec 31

By Depreciation By Balance c/d

4,766 1,9063

23,829

23,829

Hire Vendor Account Date 2006 Jan 1 Dec 31

Particulars

L.F.

Rs.

To Bank To Bank To Balance c/d

10,000 10,000 18,594

Date 2006 Jan 1

Particulars

L.F.

By Machinery By Interest

37,232 1,362

38,594 2007 Dec 31

To Bank To Balance c/d

10,000 9,524

38,594 2007 Jan 1

By Balance b/d By Interest

18,594 930

19,524 2008 Dec 31

To Bank

10,000

Rs.

19,524 2008 Jan 1

By Balance b/d By Interest

9,524 476

10,000

10,000

Installment Paid Half-yearly Illustration 14 Vasan Cargo agreed to purchase trolleys on hire purchase system from Madhan Ltd. for Rs. 4,600.and paid Rs. 1,400 when the trolleys were acquired on 1st July, 2006 and the balance was to be paid by half-yearly installments of Rs. 800 plus interest at 5% per annum. Depreciation charged 10% per annum on diminishing balance method. Accounts are closed on 30th June each year. Prepare Trolleys Account and Madhan Ltd. Account to record the above transactions in the books of Vasan Cargo. Solution Calculation of Interest – Interest together with Installment Payment

Instalment (Part principal + interest)

1.7.2006

4,600

Cash Down

1,400

1,400 + 0

Due on 31.12.2006

3,200

3,200 ¥ 5% ¥ 6/12 = 80

Interest Rs.

Nil

Cash price Rs. 1,400 Contd.

Hire Purchase and Installment Accounting

507

Contd. 1st payment Due on 30.6.2007 2nd payment Due on 31.12.2007

800

800 + 80 = 880

2,400

2,400 ¥ 5% ¥ 6/12 = 60

800

800 + 60 = 860

1,600

1,600 ¥ 5% ¥ 6/12 = 40

3rd payment

800

800 + 40 = 840

Due on 30.6.2008

800

800 ¥ 5% ¥ 6/12 = 20

4th payment

800

800 + 20 = 820

80

800

60

800

40

800

20

800

200

4,600

Solution Ledger Account – In the Books of Vasan Cargo Trolleys Account Date

Particulars

L.F.

2006 July 1

2007 July 1

2008 July 1

Rs.

Date

Particulars

L.F.

Rs.

2007 4,600 June 30 By Depreciation By Balance c/d

460 4,140

4,600

4,600

2008 4,140 June 30 By Depreciation By Balance c/d

414 3,726

4,140

4,140

3,726 3,726

Madhan Ltd. Account Date

Particulars

2006 July 1 To Bank Dec. 31 To Bank 2007 June 30 To Bank To Balance c/d

L.F.

Rs.

Date

Particulars

2006 1,400 July 1 By Trolleys 880 Dec. 31 By Interest 2007 860 June 30 By Interest 1,600 4.740

2007 Dec. 31 To Bank 2008 June 30 To Bank

2007 840 July 1 By Balance b/d Dec. 31 By Interest 820 2008 June 30 By Interest 1,660

L.F.

Rs. 4,600 80 60 4,740 1,600 40 20 1,660

VI – LEDGER IN BOTH THE BOOKS Illustration 15 On 1st January, 2005 Jaiveer Agencies took delivery from Bhupathy & Co. a machine under hire purchase system, Rs. 15,000 being paid on delivery and the balance amount in five annual installments of Rs. 10,000 each payable on January 1, each year. The cash down price of the machinery is quoted at Rs. 50,000. Jaiveer

508

Financial Accounting

Agencies charged depreciation @ 10% per annum on straight line method. Show the necessary ledger accounts in the books of Jaiveer Agencies and Bhupathy & Co. Solution Working Note Calculation of Interest (When interest is not given) Total hire purchase price = 15,000 + (10,000 ¥ 5) = Rs. 65,000 Total cash price = Rs. 50,000 Total interest = Rs. 15,000 Particulars

Instalment due (Rs.)

Total hire purchase price = Rs. 5,000 (–) cash down = Rs. 15,000

Proportion

Calculation

Interest (Rs.)

50 or 5

15,000 ¥ 5 /15

5,000

50,000

Outstanding (–) 1st instalment

= Rs. 50,000 = Rs. 10,000

40,000

40 or 4

15,000 ¥ 4/15

4,000

Outstanding (–) 2nd instalment

= Rs. 40,000 = Rs. 10,000

30,000

30 or 3

15,000 ¥ 3/15

3,000

Outstanding (–) 3rd instalment

= Rs. 30,000 = Rs. 10,000

20,000

20 or 2

15,000 ¥ 2/15

2,000

Outstanding (–) 4th instalment

= Rs. 20,000 = Rs. 10,000

10,000

10 or 1

15,000 ¥ 1/15

1,000

Total

15

15,000

Solution (i) Ledger Account—In the Books of Jaiveer Agencies Machine Account Date 2005 Jan 1

Particulars To Bhupathy & Co.

L.F.

Rs. 50,000

Date 2005 Dec 31

Particulars By Depreciation By Balance c/d

50,000 2006 Jan 1

To Balance b/d

45,000

To Balance b/d

40,000

By Depreciation By Balance c/d

To Balance b/d

35,000

By Depreciation By Balance c/d

To Balance b/d

30,000 30,000

5,000 40,000

5,000 35,000 40,000

2008 Dec 31

By Depreciation By Balance c/d

35,000 2009 Jan 1

5,000 45,000

45,000 2007 Dec 31

40,000 2008 Jan 1

Rs.

50,000 2006 Dec 31

45,000 2007 Jan 1

L.F.

5,000 30,000 35,000

2008 Dec 31

By Depreciation By Balance c/d

5,000 25,000 30,000

Hire Purchase and Installment Accounting

509

Bhupathy & Co Account Date 2005 Jan 1 Dec 31

2006 Dec 31

2007 Dec 31

2008 Dec 31

2009 Dec 31

Particulars

L.F.

To Bank To Bank To Balance c/d

Rs. 15,000 10,000 30,000 55,000

To Bank To Balance c/d

10,000 24,000 34,000

To Bank To Balance c/d

10,000 17,000 27,000

To Bank To Balance c/d

10,000 9,000 19,000

To Bank

10,000

Date 2005 Jan 1

Particulars

L.F.

By Machinery By Interest

Rs. 50,000 5,000 55,000

2006 Jan 1

2007 Jan 1

2008 Jan 1

2009 Jan 1

By Balance b/d By Interest

30,000 4,000 34,000

By Balance b/d By Interest

24,000 3,000 27,000

By Balance b/d By Interest

17,000 2,000 19,000

By Balance b/d By Interest

9,000 1,000 10,000

10,000

(ii) Ledger Account—In the Books of Bhupathy & Co Jaiveer Agencies Account Date 2005 Jan 1

2006 Jan 1

2007 Jan 1

2008 Jan 1

2009 Jan 1

Particulars

L.F.

Rs.

Date

Particulars

L.F.

Rs.

To hire purchase Sales To Interest

2005 Jan 1 By Bank 50,000 Dec. 31 By Bank 5,000 By Balance c/d 55,000

15,000 10,000 30,000 55,000

To Balance b/d To Interest

2006 30,000 Dec. 31 By Bank 4,000 By Balance c/d 34,000

10,000 24,000 34,000

To Balance b/d To Interest

2007 24,000 Dec. 31 By Bank 3,000 By Balance c/d 27,000

10,000 17,000 27,000

To Balance b/d To Interest

2008 17,000 Dec. 31 By Bank 2,000 By Balance c/d 19,000

10,000 9,000 19,000

To Balance b/d To Interest

2009 9,000 Dec. 31 By Bank 1,000 10,000

10,000 10,000

510

Financial Accounting

Illustration 16 An asset was purchased under hire purchase system with a cash price of Rs. 15,500. On signing the hire purchase agreement, the payment made was Rs. 3,000 and subsequent amount was paid as follows-First year end Rs. 5,000; Second year end Rs. 5,000 and Third year end Rs. 5,000. Make necessary ledger accounts in the books of the both parties charging depreciation @ 10% diminishing balance method. Solution Working Note Calculation of Interest (When interest is not given) Total hire purchase price = 3,000 + (5,000 ¥ 3) Rs. 18,000 Total cash price = Rs. 15,500 Total interest Rs. 2,500 Particulars

Instalment due (Rs.)

Proportion

Calculation

Interest (Rs.)

15 or 3

2,500 ¥ 3/6

1,250

Total Hire Purchase price (–) cash down

= Rs. 18,000 = Rs. 3,000

Outstanding (–) 1st instalment

= Rs. 15,000 = Rs. 5,000

10,000

10 or 2

2,500 ¥ 2/6

833

Outstanding (–) 2nd instalment

= Rs. 10,000 = Rs. 5,000

5,000

5 or 1

2,500 ¥ 1/6

417

15,000

6

2,500

Solution (i) Ledger Account-In the Books of Hire Purchaser Asset Account Date 1st year Jan 1

Particulars

L.F.

Rs. 15,500

To Hire vendor

Date 1st year Dec 31

Particulars

L.F.

By Depreciation By Balance c/d

1,550 13,950

15,500 2nd year Jan 1 To Balance b/d

15,500

2nd year 13,950 Dec 31

By Depreciation By Balance c/d

1,395 12,555

13,950 3rd year Jan 1

To Balance b/d

12,555

13,950 3rd year Dec 31

By Depreciation By Balance c/d

1,256 11,299

12,555 4th year Jan 1

To Balance b/d

Rs.

12,555

12,555

Hire Vendor Account Date 1st year Jan 1 Dec 31

Particulars To Bank To Bank To Balance c/d

L.F.

Rs. 3,000 5,000 8,750 16,750

Date 1st year Jan 1

Particulars By Machinery By Interest

L.F.

Rs. 15,500 1,250 16,750

Hire Purchase and Installment Accounting

2nd year Dec 31 To Bank To Balance c/d

5,000 4,583

2nd year Jan 1 By Balance b/d By Interest

8,750 833

9,583 3rd year Dec 31

To Bank

5,000

511

9,583 3rd year Jan 1

By Balance b/d By Interest

4,583 417

5,000

5,000

(ii) Ledger Account—In the Books of Hire Vendor Hire Purchaser Account Date

Particulars

1st year Jan 1

To Hire Purchase Sales To Interest

2nd year Jan 1 To Balance b/d To Interest 3rd year Jan 1

To Balance b/d To Interest

L.F.

Rs.

15,500 1,250 16,750 8,750 833 9,583 4,583 417 5,000

Date 1st Year Jan 1 Dec 31

Particulars

L.F.

Rs.

By Bank By Bank By Balance c/d

3,000 5,000 8,750 16,750

2nd year Dec 31 By Bank By Balance c/d 3rd year Dec 31

5,000 4,583 9,583

By Bank

5,000 5,000

VII – DEFAULT AND COMPLETE REPOSSESSION Books of Purchaser Illustration 17 A machine was purchased by X Traders from Y Traders on 1st January, 2005 under hire purchase scheme. The cash price was Rs. 14,900 payable at the end of every six months (Rs. 4,000) over two years, interest being 6% per annum. X Traders provided depreciation at 10% on the reducing balance method. It paid the first instalment on 30th June, 2005, but failed to pay the instalment due for 30th June 2006 and so, Y Traders recovered the machine. Prepare Y traders Account in the books of X Traders. Assume the books are closed on the 30th June every year. Solution Calculation of Interest – When all the particulars are given Rs. Cash price 1.1.2005 Cash down Outstanding 30.6.2005 Interest 6% (6 months) Total due 1st installment Outstanding 31.3.2007 Interest 6% (6 months) Total due 2nd installment (default)

14,900 Nil 14,900 447 15,347 4,000 11,347 340 11,687

512

Financial Accounting

Contd.

Books of X Traders Machine Account Date 2005 Jan 1

Particulars

L.F.

To Y Traders A/c

Rs.

Date

Particulars

14,900

2005 June 30

By Depreciation By Balance c/d

L.F.

745 14,155

14,900 2006 July 1

To Balance b/d

14,155

Rs.

14,900 2005 June 30

By Depreciation By Y Traders

1,416 7,918

A/c (Balance)

4,821

14,155

14,155

Y Traders Account Date

Particulars

2005 June 30 To Bank June 30 To Balance c/d 2006 Dec 31 To Bank 2007 June 30 To Machinery A/c

L.F.

Rs.

Date

Particulars

L.F.

Rs.

2005 4,000 Jan 1 By Machinery A/c 11,347 June 30 By Interest

14,900 447

15,347

15,347

2006 4,000 July 1 By Balance b/d Dec 31 By Interest 7,918 2007 June 30 By Interest

11,347 340 231

11,918

11,918

Illustration 18 On 1st April, 2005, Ragav Electronics sold a generator to Parvathi Engineering costing Rs. 3,13,600 on an hire purchase agreement to pay Rs. 90,000 as down payment and Rs. 90,000 as annual installments on 31st March. Interest being charged at 10% per annum and the purchaser charged 10% as depreciation adopting written down value method. Since the purchaser failed to pay the instalment due on 31st March, 2007, the vendor repossessed the generator. Prepare the necessary ledger accounts in the books of Parvathi Engineering. Solution Calculation of Interest – When all the particulars are given Rs. Cash price 1.4.2005 Cash down Outstanding 31.3.2006 Interest 10% Total due 1st installment Outstanding 31.3.2007 Interest 10% Total due 2nd installment

3,13,600 90,000 2,23,600 22,360 2,45,960 90,000 1,55,960 15,596 1,71,556 default

Hire Purchase and Installment Accounting

513

Books of Parvathi Engineering – Ledger Accounts Generator Account Date 2005 Apr 1

Particulars

L.F.

Rs.

Date 2006 Mar 31

To Ragav Electronics

3,13,600

Particulars

L.F.

By Depreciation By Balance c/d

31,360 2,82,240

3,13,600 2006 Apr 1

To Balance b/d

2,82,240

Rs.

3,13,600 2007 Mar 31

28,224

By Depreciation By Hire Vendor (Goods repossessed)

1,71,556 82,460

A/c sion) 2,82,240

2,82,240

Ragav Electronics Account Date 2005 April 1 2006 Mar 31

Particulars To Bank To Bank To Balance c/d

L.F.

Rs. 90,000 90,000 1,55,960

Date 2005 April 1 2006 Mar 31

Particulars

L.F.

By Generator

To Generator A/c (Repossessed)

22,360 3,35,960

2006 Jan 1 1,71,556

3,13,600

By Interest

3,35,960 2006 Dec 31

Rs.

By Balance b/d By Interest A/c

1,71,556

1,55,960 15,596 1,71,556

Both the Books Illustration 19 Ram purchased a van for Rs. 42,000. Payment is made as Rs. 10,000 down and four instalments of Rs. 10,000 each at the end of each year. Interest is charged at 10% per annum. Buyer depreciates the van at 10% per annum on written down value method. Ram after having paid the down payment and first installment at the end of first year, could not pay the second installment and the hire vendor took possession of the van. The hire vendor after spending Rs. 1,280 on repairs sold it for Rs. 31,000. Show the ledger accounts in the books of Ram and Hire vendor. (B. Com., Madras, Adapted) Solution Calculation of Interest – When all the particulars are given Rs. Cash price

42,000

Cash down

10,000

Outstanding

32,000

Interest 10%

3,200

Total due

35,200

1st installment

10,000

514

Financial Accounting

Outstanding

25,200

Interest 10%

2,520

Total due

27,720

2nd installment (defaulted)

Nil

Books of Ram – Ledger Accounts Van Account Date 1st Year Jan 1

Particulars

L.F.

Rs.

To Hire vendor

42,000

Date 1st year Dec 31

Particulars

L.F.

By Depreciation By Balance c/d

4,200 37,800

42,000 2nd year Jan 1 To Balance b/d

37,800

Rs.

42,000 2nd year Dec 31

3,780

By Depreciation By Hire vendor (goods Repossd)

27,720 6,300

A/c 37,800

37,800

Hire Vendor Account Date

Particulars

L.F.

1st Year Jan 1 To Bank Dec. 31 To Bank To Balance c/d

Rs. 10,000 10,000 25,200

Date 1st Year Jan 1

Particulars

L.F.

By Van A/c By Interest

45,200 2006 Dec. 31

To Van A/c (repossessed)

27,720

Rs. 42,000 3,200

45,200 2006 Jan 1

By Balance b/d By Interest A/c

25,200 2,520

27,720

27,720

Books of Hire Vendor – Ledger Accounts Ram Account Date

Particulars

L.F.

1st year Jan 1 To Hire Purchase Sales To Interest

Rs.

42,000 4,500

Date 1st Year Jan 1 Dec 31

Particulars

L.F.

By Bank By Bank By Balance c/d

10,000 10,000 25,200

45,200 2006 Jan 1

To Balance b/d To Interest

25,200 2,520

Rs.

45,200 2006 Dec 31

By Repossessed Stock A/c

27,720

27,720

27,720

Repossessed Stock Account Date

Particulars

2nd year To Ram Dec 31 To Bank (Expenditure)

L.F.

Rs.

Date

Particulars

27,720 2nd year By Bank (Sale) Dec 31 1,280

L.F.

Rs. 31,000

2,000 31,000

31,000

Hire Purchase and Installment Accounting

515

Illustration 20 On 1st January, 2005 Swift Transport Corporation purchased from Madras Motors a van costing Rs. 1,20,000 on the hire purchase system. Payment was to be made Rs. 30,000 down and the remainder in three equal instalments together with interest at 5%. Delhi Transport writes off deprecation @ 20% on the diminishing balance. It paid the instalment due at the end of the first year but could not pay the next. The vendor spent Rs. 4,500 towards repair and sold for Rs. 68,000. Based on the above prepare the relevant ledgers in both the parties. Solution Calculation of Interest – Interest together with Instalment Payment

1.1.2005

Instalment (Part principal + interest)

Interest Rs.

Cash price Rs.

1,20,000

Cash Down

30,000

30,000 + 0

Due on 31.12.2005

90,000

90,000 ¥ 5% = 4,500

1st payment

30,000

30,000 + 4,500 = 34,500

Due on 31.12.2006

60,000

60,000 ¥ 5% = 3,000

2nd payment (default)

30,000

30,000 + 3,000 = 33,000

Nil

30,000

30,000

4,500

30,000

3,000

(A) In the Books of Swift Transport Corporation Machine Account Date 2005 Jan 1

Particulars

L.F.

To Madras Motors

Rs.

Date

1,20,000

2005 Dec 31

Particulars

L.F.

By Depreciation By Balance c/d

24,000 96,000

1,20,000 2006 Jan 1

To Balance b/d

96,000

Rs.

1,20,000 2006 Dec 31

By Depreciation By Madras Motors

19,200 63,000

A/c (Balance)

13,800

96,000

96,000

Madras Motors Account Date

Particulars

2005 Jan 1 To Bank Dec. 31 To Bank To Balance b/d

L.F.

Rs. 30,000 34,500 60,000

Date

Particulars

2005 Jan 1

By Van A/c By Interest A/c (90,000 ¥ 5%)

1,24,500 2006 Dec. 31 To Van A/c

63,000

63,000

L.F.

Rs. 1,20,000 4,500 1,24,500

2006 Jan 1

By Balance b/d By Interest A/c (60,000 ¥ 5%)

60,000 3,000 63,000

516

Financial Accounting

(B) In the Books of Madras Motors Swift Transport Corporation Account Date 2005 Jan 1

Particulars

L.F.

Rs.

Date

Particulars

L.F.

2005 Jan 1 By Bank 1,20,000 Dec. 31 By Bank 4,500 By Balance c/d

To Hire Purchase Sales To Interest

30,000 34,500 60,000

1,24,500 2006 Jan 1

To Balance b/d To Interest

Rs.

1,24,500

2006 60,000 Dec. 31 By Repossessed 3,000 Stock A/c

63,000

63,000

63,000

Repossessed Stock Account Date 2006 Dec 31

Particulars

L.F.

To Mds Motors To Bank (Repairs)

Rs.

Date

Particulars

L.F.

63,000 2006 4,500 Dec. 31 By Bank (Sale)

Rs. 68,000

500

A/c

68,000

68,000

Entry for Repossession Illustration 21 Raj Music maintains the hire purchase transaction under stock and debtor system. It sold to Madhavan a music system for which he is required to pay a total of Rs. 12,000 in the form of 12 monthly instalments of Rs. 1,000 each. Madhavan paid four instalments as per the agreement but failed to pay the balance installments. Raj Music repossessed the music system after seventh installment, the repossessed value being Rs. 8,500. Pass the journal entry in the books of Raj Music to give effect to repossession of goods. Solution Books of Raj Music – Journal entry Particulars Goods Repossessed A/c To Hire Purchase Stock A/c To Hire Purchase Debtors A/c To Hire Purchase Adjustments A/c

L.F. Dr.

Debit (Rs.)

Credit (Rs.)

8,500 5,000 3,000 500

[Being 5 instalments (Rs. 5,000), 3 instalments (Rs. 3,000) had become, but not received and the balance transferred to Adjustment Account]

VIII – DEFAULT AND PARTIAL REPOSSESSION Books of Purchaser Illustration 22 Maruthi Movers purchased from Delpin Transport Corporation three Lorries costing Rs. 5,00,000 each on the hire purchase system on 1.1.2007. Payment was to be made

Hire Purchase and Installment Accounting

517

Rs. 3,00.000 down and the remainder in 3 equal instalments payable on 31.12.2007, 31.12.2008 and 31.12.2009 together with interest @ 9% per annum. Maruthi Movers write off depreciation @ 20% on the diminishing balance. It paid the instalment due at the end of the first year, i.e. 31.12.2007, but could not pay the next on 31.12.2008. Delpin Transport Corporation agreed to leave one tempo with the purchaser on 1.1.2009, adjusting the value of the other 2 tempos against the amount due on 1.1.2009. The tempos were valued on the basis of 30% depreciation annually. Show the necessary accounts in the books of Maruthi Movers for three years starting from 2007. Solution Calculation of Interest – Interest together with Instalment Payment

Rs.

1.1.2007 Cash down Due on 31.12.2007 1st payment Due on 31.3.2008 2nd payment

Instalment (Part principal + interest)

15,00,000 3,00,000 12,00,000 4,00,000 8,00,000 4,00,000

Interest Rs.

3,00,000 + 0 12,00,000 ¥ 9% = 1,08,000 4,00,000 + 1,08,000 = 5,08,000 8,00,000 ¥ 9% = 72,000 4,00,000 + 72,000 = 4,72,000

Cash price Rs.

Nil

3,00,000

1,08,000

4,00,000

72,000

3,00,000 (defaulted)

L.F.

Rs.

Books of Maruthi Movers – Ledger Accounts Lorry Account Date 2007 Jan 1

Particulars

L.F.

To Delpin Transport Corp

Rs. 15,00,000

Date 2007 Dec 31

Particulars By Depreciation By Balance c/d

3,00,000 12,00,000 15,00,000

15,00,000 2008 Jan 1

2008 12,00,000 Dec. 31 By Depreciation By Delpin Transport Corporation (Goods Repossessed) (a)

To Balance b/d

2,40,000

4,90,000

A/c sessed) By Balance c/d (b)

1,50,000 3,20,000 12,00,000 64,000 2,56,000 3,20,000

12,00,000 2009 Jan 1

To Balance b/d

3,20,000 3,20,000

2010 Jan 1

To Balance b/d

2,56,000

2009 Dec 31

By Depreciation By Balance c/d

Delpin Transport Corporation Account Date Particulars 2007 Jan 1 To Bank Dec. 31 To Bank To Balance c/d

L.F.

Rs.

Date Particulars 2007 3,00,000 Jan 1 5,08,000 Dec. 31 By Interest 8,00,000 16,08,000

L.F.

Rs. 15,00,000 1,08,000 16,08,000

518

Financial Accounting

2008 Dec. 31 (Repossessed) (a) To Balance c/d 2009 Dec 31

To Bank

2008 Jan 1 By Balance b/d 4,90,000 Dec. 31 By Interest A/c 3,82,000 8,72,000 2009 By Balance b/d 4,16,380 Jan 1 By Interest A/c Dec 31 (3,82,000 ¥ 9%) 4,16,380

8,00,000 72,000 8,72,000 3,82,000 34,380 4,16,380

Working Note (a) Value of two lorries repossessed by Delpin Transport Corporation Cash price 1.1.2007 (5,00,000 ¥ 2)

10,00,000

Depreciation @ 30%

3,00,000

WDV as on 1.1.2008

7,00,000

Depreciation @ 30%

2,10,000

Value of two lorries repossessed

4,90,000

(b) Value of one lorry left with Maruthi Movers Cash price 1.1.2007 (5,00,000 ¥ 1)

5,00,000

Depreciation @ 20%

1,00,000

WDV as on 1.1.2008

4,00,000

Depreciation @ 20%

80,000

Value of one lorry left

3,20,000

Illustration 23 Under the hire purchase agreement Mr. X purchased seven air conditioners for his office on 1st July, 2007. The cash purchase price of each asset was Rs. 50,000. At the time of delivery he paid 20% of the cash price and the balance in five half-yearly instalments starting from 31st December, 2007 with interest @ 5% per annum. Accounts are maintained June-July. He failed to pay the second instalment due on 30th June, 2008 and so the hire vendor repossessed 3 airconditioners by agreeing to allow him a credit for the amount paid against these 3 assets less 25% and leaving 4 with Mr. X. Mr. X charged depreciation at 20% under straight line method. Draw ledgers in the books of Mr. X. Solution Calculation of Interest – When all the particulars are given Rs. Cash price 1.7.2007 (50,000 ¥ 7) Cash Down (20%) Outstanding 31.12.2007 Interest 5% (6 months) Total due 1st installment * (56,000 + 7,000) Outstanding 30.6.2008 Interest 5% (6 months) Total due 2nd installment (56,000 + 5,600)

3,50,000 70,000 2,80,000 7,000 2,87,000 63,000 2,24,000 5,600 2,29,600 Default

Hire Purchase and Installment Accounting

519

* Total cash price = 50,000 ¥ 7 = 3,50,000 (–) cash down Balance

70,000 2,80,000

To be paid in 5 equal instalments = 2,80,000/5 = 56,000 Instalment to be paid together with interest = 56,000 + 7,000 = 63,000

Ledger of Mr. X Hire Vendor Account Date 2007 July 1 Dec 31 2008 Jun 30

Particulars

L.F.

Rs.

Date

Particulars

L.F.

2007 70,000 July 1 By Airconditioner 63,000 Dec 31 By Interest 2008 June 30 By Interest 40,500 1,89,100

To Bank To Bank To Airconditioner (Repossessed) To Balance c/d

Rs. 3,50,000 7,000 5,600

3,62,600

3,62,600

Air Conditioner Account Date 2007 July 1

Particulars

L.F.

To Hire vendor

Rs.

Date

3,50,000

2008 Jun 30

Particulars By Depreciation 3,50,000 ¥ 20% By Hire vendor Repossessed (a)

By Balance c/d (b) 3,50,000

L.F.

Rs.

70,000 40,500 79,500 1,60,000 3,50,000

Working Note (The vendor agreed to allow credit for the amount paid for 3 assets less 25%) (a) Value of 3 assets repossessed by the hire vendor Amount paid on cash down (70,000 ¥ 3/7)

30,000

Amount paid towards 1st instalments (56,000 ¥ 3/7)

24,000

Total amount paid by Mr. X for 3 assets

54,000

(–) 25% allowed by the hire vendor

13,500

Amount credited for the 3 assets

40,500

(b) Value of 4 assets left with hire purchaser Cash price 50,000 ¥ 4 Depreciation @ 20% WDV of asset left with

2,00,000 40,000 1,60,000

Illustration 24 On 1st July 2001,Thuran Constructors purchased few building equipement from Farook Agencies for Rs. 44,610. Payment was to be made in four equal half-yearly instalments of Rs. 12,000 each. Interest is to be charged @ 3% per half year. Thuran Constructors paid first instalment on 1st January 2002 but could not pay second instalment. Accordingly Farook Agencies seized the machines but certain machines having a cash price of Rs. 20,000 was left with Thuran Constructors

520

Financial Accounting

and loss on the remaining machines had to be suffered by the hire purchaser. The repossessed assets were sold for Rs. 22,000 on that date. Farook Agencies waived interest after 30th June, 2002. New agreement was made for the payment of balance amount. Assuming the accounts are closed on 31st December, prepare necessary accounts in the books of Thuran Constructors. Provide depreciation @ 6% per annum on diminishing balance method. Solution Calculation of Interest – When all the particulars are given Rs. Cash price 1.7.2001

44,610

Cash down

Nil

Outstanding 31.12.2001

44,610

Interest 3%

1,338

Total due

45,948

1st installment

12,000

Outstanding 1.7.2002

33,948

Interest 3%

1,018

Total due

34,966

2nd installment

Default

Books of Thuran Constructors – Ledger Accounts Building Equipment Account Date 2001 July 1

Particulars

L.F.

To Farook Agencies

Rs. 44,610

Date 2001 Dec 31

Particulars

L.F.

By Depreciation 44,610 ¥ 6% ¥ 6/12 By Balance c/d

1,338 43,272

44,610 2002 Jan 1

To Balance b/d

43,272

Rs.

44,610 2002 Jun 30

By Depreciation 43,272 ¥ 6% ¥ 6/12. By cash-sale

1,298 22,000

A/c1,156 18,818

By Balance c/d 43,272

43,272

Farook Agencies Account Date 2001 Dec 31

Particulars To Balance c/d

L.F.

Rs. 45,948

Date 2001 Jan 1 Dec 31

Particulars By Building Equipment By Interest

45,948 2002 Jan 1 July 3

To Cash To Cash-sale To Balance c/d

12,000 22,000 12,966 46,966

L.F.

Rs.

44,610 1,338 45,948

2002 Jan 1 Jun 30

By Balance b/d By Interest A/c

45,948 1,018 46,966

Hire Purchase and Installment Accounting

521

*Working Note Loss on sale of the equipment Cash price of the asset sold (44,610 – 20,000)

24,610 738

Depreciation 24,610 ¥ 6% ¥ 6/12 WDV as on 1.1.2002

23,872 716

Depreciation 23,872 ¥ 6% ¥ 6/12 WDV of the asset sold

23,156

(–) sold for

22,000 1,156

Books of Purchaser, Balance Sheet Illustration 25 An hire purchase agreement was entered between Bharat Associates and Dev Finance Ltd, wherein the former purchased three vehicles costing Rs. 1,00,000 each from the latter on 1st January, 2001. The terms were: Payment on delivery Rs. 25,000 for each vehicle and balance of the principal amount by 3 equal instalments plus interest at 15% per annum to be paid at the end of each year. Bharat Associates writes off 25% depreciation each year on diminishing balance method. Installments for 31st December, 2001 and 31st December, 2002 were duly paid but failed to pay the final instalment. Dev Finance Ltd., repossessed two vehicles adjusting values against the amount due. The repossession was done on 1st January, 2004 on the basis of 40% depreciation on the diminishing balance method. You are required to – (i) Write up the ledger accounts in the books of Bharat Associates showing the above transactions up to 1.1.2004 and (ii) Show the disclosure of the balances arising from the above with the Balance Sheet of Bharat Associates as on 31st December, 2003. Solution Calculation of Interest – Interest together with Instalment Payment

1.1.2001 Cash down Interest 1st payment (due on 31.12.2001) Interest

Instalment (Part principal + interest)

Cash price Rs.

3,00,000 75,000 2,25,000 75,000

25,000 + 0

Nil

25,000

33,750

75,000

22,500

75,000

11,250

75,000

2,25,000 ¥ 15% = 33,750 75,000 + 33,750 = 1,08,750

1,50,000

1,50,000 ¥ 15% = 22,500

75,000

75,000 + 22,500 = 97,500

Interest

75,000

75,000 ¥ 15% = 11,250

3rd payment (due on 31.12.2003)

75,000 75,000 + 11,250 = 86,250 (default)

2nd payment (due on 31.12.2002)

Interest Rs.

522

Financial Accounting

Books of Bharat Associates – Ledger Accounts Vehicle Account Date

Particulars

L.F.

2001 Jan 1

2002 Jan 1

2003 Jan 1

2004 Jan 1

To Balance b/d

To Balance b/d

To Balance b/d

Rs.

Date

Particulars

L.F.

Rs.

2001 Dec. 31 By Depreciation 3,00,000 By Balance c/d

75,000 2,25,000

3,00,000

3,00,000

2002 2,25,000 Dec. 31 By Depreciation By Balance c/d

56,250 1,68,750

2,25,000

2,25,000

2003 1,68,750 Dec. 31 By Depreciation By Balance c/d

42,188 1,26,562

1,68,750

1,68,750

1,26,562

2004 Jan 1

43,200 (a)

repossession) (b) By Balance c/d

41,175 42,187

1,26,562

1,26,562

Dev Finance Ltd. Account Date

Particulars

L.F.

2001 Jan 1 To Bank Dec. 31 To Bank To Balance c/d 2002 Dec. 31 To Bank To Balance c/d

Rs.

Date

Particulars

L.F.

3,00,000 33,750

3,33,750

3,33,750

2002 97,500 Jan 1 By Balance b/d 75,000 Dec. 31 By Interest

1,50,000 22,500

1,72,500 2003 Dec. 31 To Bank

2004 Dec. 31 To vehicles (a) To Balance c/d

Rs.

2001 By Vehicles 75,000 Jan 1 By Interest 1,08,750 Dec. 31 1,50,000

1,72,500

2003 86,250 Jan 1 By Balance b/d Dec. 31 By Interest

75,000 11,250

86,250

86,250

43,200 43,050

2004 Jan 1

By Balance b/d

86,250

86,250

86,250

Balance Sheet of Bharat Associates as on 31st December, 2003 Liabilities Hire Purchase Instalment Due Principal Interest

Rs.

75,000 11,250

Rs.

Assets

Fixed Assets Vehicles (Cost) (–) Accumulated Depreciation 86,250 (75,000 + 56,250 + 42,188)

Rs.

Rs.

3,00,000 1,73,438 1,26,562

on Repossession

41,175

Hire Purchase and Installment Accounting

523

Working Note (a) Value of two vehicles repossessed by Dev Finance Ltd. 2,00,000

Cash price 1.1.2001 (1,00,000 ¥ 2) Depreciation @ 40%

80,000

WDV as on 1.1.2002

1,20,000

Depreciation @ 40%

48,000

WDV as on 1.1.2003

72,000

Depreciation @ 40%

28,800

WDV as on 1.1.2004

43,200

(b) Value of one vehicle left with Bharat Associates WDV of three vehicle as on 1.1.2004

1,26,562 42,187

Proportionate WDV of one vehicle 1,26,562 ¥ 1/3 WDV of two vehicles repossessed But vehicle was repossessed at (a)

84,375 (–) 43,200 41,175

Both the Books Illustration 26 On 1st January, 2005 five vehicles were purchased by a hire purchaser on the hire purchase system. The cash price of each vehicle is Rs. 55,000. The payment was to be made as follows: 10% of cash price down and 25% of cash price at the end of each of the four subsequent half years. The payment due on 31st December, 2005 could not be made and hence, vehicles were seized by the vendor but, after negotiations, the hire purchaser was allowed to keep three vehicles on the condition that the value of the other two vehicles would be adjusted against the amount due, the vehicles being valued at cost less 25% depreciation. The hire purchaser books are closed on 30th June each year and he charges 15% depreciation on vehicle on the original cost. The vendor spent Rs. 6,000 on getting the vehicles thoroughly overhauled and sold them for Rs. 95,000. Show the various accounts in the books of both are parties. Solution Calculation of Interest (When interest is not given) Total hire purchase price 10% of cash down (55,000 ¥ 5 ¥ 10%) = 27,500 25% of cash price ¥ 4 installments (55,000 ¥ 5 ¥ 25% ¥ 4) = 2,75,000 = 3,02,500 (–) Total cash price (55,000 ¥ 5) = 2,75,000 Total interest = 27,500

524

Financial Accounting

Particulars

Installment due (Rs.)

Proportion

Calculation

Interest (Rs.)

4

27,500 ¥ 4/10

11,000

Total hire purchase price (–) cash down

= Rs. 3,02,500 = Rs. 27,500

2,75,000

Outstanding (–) 1st instalment

= Rs. 2,75,000 = Rs. 68,750

2,06,250 (default)

3

27,500 ¥ 3/10

8,250

Outstanding (–) 2nd instalment

= Rs. 2,06,250 = Rs. 68,750

1,37,500

2

27,500 ¥ 2/10

5,500

Outstanding (–) 3rd instalment 68,750

= Rs. 1,37,500 = Rs.

68,570

1

27,500 ¥ 1/10

2,750

10

27,500

Books of Hire Purchaser – Ledger Accounts Vehicle Account Date 2005 Jan 1

2005 July 1

Particulars

L.F.

To Hire Vendor

Rs.

Date

Particulars

L.F.

20,625 2,54,375

2,75,000

2,75,000

2005 2,54,375 Dec. 31 By Depreciation By Hire vendor (goods Repossd)

To Balance b/d

Rs.

2005 2,75,000 June 30 By Depreciation 2.75,000 ¥ 15% ¥ ½ By Balance c/d

20,625 82,500

A/c (loss on reposs) By Balance c/d (b)

11,000 1,40,250

2,54,375

2,82,240

Hire Seller Account Date 2005 Jan 1 Jun 30

Particulars

L.F.

Rs.

Date

Particulars

L.F.

2005 27,500 Jan 1 By Vehicle June 30 By Interest 68,750 1,89,750

To Bank To Bank To Balance c/d

2005 Dec. 31 (Repossessed) (a) To Balance c/d

Rs. 2,75,000 11,000

2,86,000

2,86,000

2005 July 1 By Balance b/d 82,500 Dec. 31 By Interest A/c 1,15,500

1,89,750 8,250

1,98,000

1,98,000

Books of Hire Vendor – Ledger Accounts Hire Purchaser Account Date 2005 Jan 1 Jun 30

Particulars To Hire Sale To Interest

L.F.

Rs.

Date

Particulars

L.F.

Rs.

2005 2,75,000 Jan 1 By Bank 11,000 June 30 By Bank By Balance c/d

27,500 68,750 1,89,750

2,86,000

2,86,000

Hire Purchase and Installment Accounting

2005 July 1 To Balance b/d Dec. 31 To Interest A/c

525

2005 1,89,750 Dec. 31 By Repossessed 8,250 Stock A/c (a) Dec. 31 By Balance c/d

1,15,500

1,98,000

1,98,000

82,500

Repossessed Stock Account Date

Particulars

L.F.

2005 Dec. 31 To Hire Purchaser To Bank – Repair

Rs.

Date

Particulars

2005 82,500 Dec. 31 By Bank (Sale) 6,000 6,500

L.F.

Rs. 95,000

A/c 95,000

95,000

Working Note (a) Value of two lorries repossessed by Hire Vendor Cash price 1.1.2005 (55,000 ¥ 2)

1,10,000

Depreciation @ 25% (Jan 1 to Dec 31)

27,500

WDV as on 1.1.2006

82,500

(b) Value of three vehicles left with Hire Purchaser Cash price 1.1.2005 (55,000 ¥ 3)

1,65,000

Depreciation @ 15%

24,750

WDV as on 1.1.2006

1,40,250

Calculation in the Books of both Illustration 27 Shyam purchased 3 machines from Ram & Co. costing Rs. 1,00,000 each. As the second instalment was not paid by Shyam, Ram & Co. repossessed two machines and spent Rs. 50,000 on repairing and sold them for Rs. 1,65,000. Both the parties followed the written down value method, but Shayam provided 20% and Ram & Co. provided at 30% to charge the depreciation. Based on the above information, calculate (a) (b) (c) (d)

Value of machinery taken over by the hire vendor Value of machinery left with the hire purchaser Profit or loss on repossession in the books of hire vendor Profit or loss on sale of machinery after repossessing in the books of hire vendor

Solution (a) Value of two machines taken over by the hire vendor Cash price (1,00,000 ¥ 2) Depreciation @ 30%, 1st year WDV as on Jan 1, 2nd year

2,00,000 60,000 1,40,000

Depreciation @ 30%, 2nd year

42,000

WDV as on Jan 1, 3rd year (taken over by hire vendor)

98,000

526

Financial Accounting

(b) Value of one machine left with the hire purchaser Cash price (1,00,000 ¥ 1)

1,00,000

Depreciation @ 20%, 1st year

20,000

WDV as on Jan 1, 2nd year

80,000

Depreciation @ 20%, 2nd year

16,000

WDV as on Jan 1, 3rd year (left with hire purchaser)

64,000

(c) Profit or loss on repossession in the books of hire purchaser Cash price of two machines repossessed (1,00,000 ¥ 2) Depreciation @ 20%, 1st year WDV as on Jan 1, 2nd year Depreciation @ 20%, 2nd year WDV as on Jan 1, 3rd year But taken over by the hire vendor for (a)

2,00,000 40,000 1,60,000 32,000 1,28,000 98,000 30,000

(d) Profit or loss on sale of machine after repossessing in the books of hire vendor Repossessed value of two machines (a) Add-Repair expenses

98,000 50,000

Total value

1,48,000

(–) Sold for

1,65,000 17,000

IX – HIRE PURCHASE TRADING ACCOUNT Only Hire Purchase Trading Account Illustration 28 Ram sells goods on hire purchase basis at a profit of 50% on cost. Following particulars are given to you relating to the business during 2008: Hire purchase stock (at selling price) as on 1st January, 2008 Instalments due on 1st January, 2008 Goods sold on hire purchase during the year (at selling price) Cash received from hire purchase customers during the year Goods repossessed (installments due Rs. 2,000) as valued Hire purchase stock (at selling price) as on 31st December, 2008 Installments due on 31st December, 2008

Rs. 9,000 5,000 87,000 60,000 500 30,000 9,000

Prepare Hire Purchase Trading Account showing the profit earned for 2008.

Hire Purchase and Installment Accounting

527

Solution Books of Ram – Ledger Accounts Hire Purchase Trading Account Date

Particulars

L.F.

Rs.

To Hire Purchase Stock A/c (Opening) To Hire Purchase Debtors (Opening-instalment due) Dec. 31 To Goods Sold on Hire Purchase To Stock Reserve 30,000 ¥ 50/150 A/c

Date 2008 Jan 1

2008 Jan 1

9,000 5,000

87,000 10,000 20,500

Dec 31

Particulars By Cash A/c By Goods Repossessed By Stock Reserve 9,000 ¥ 50/150 By Goods Sold on Hire Purchase 87,000 ¥ 50/150 By Hire Purchase Stock (Closing) To Hire Purchase Debtors (Closinginstalment due)

1,31,500

L.F.

Rs. 60,000 500 3,000

29,000 30,000

9,000 1,31,500

Illustration 29 From the following information extracted from the books of Eastern Bankers Ltd., prepare an account for the year ended 31st December, 2008 showing the profit in respect of hire purchase business of the company – Rs.

Installments due, but not received as on 1.1.2008 Instalments due, but not received as on 31.12.2008 Cash received during the year 2008 by way of hire purchase installments Value of stock out on hire purchase as on 1.1.2008 at cost Cost price of truck out on hire purchase as on 31.12.08 Total amount of instalments receivable in respect of above Total amount of instalments received and due up to 31.12.08 in respect of above Purchase of trucks during the year 2008 Sales of trucks otherwise than on hire purchae (at a profit of 6.25% of cost thereof) Body building charges in respect of some of the trucks sold on HP Interest paid Unsold trucks on hand on 31.12.2008

30,000 50,000 40,00,000 1,00,000 20,00,000 24,00,000 18,00,000 40,00,000 4,25,000 2,00,000 40,000 80,000

528

Financial Accounting

Solution Books of Eastern Bankers Ltd – Ledger Accounts Hire Purchase Trading Account Date 2008 Jan 1

Particulars

L.F.

Rs.

Date 2008 Dec 31

To Hire Purchase Stock (Opening) Cost (1,00,000) 1,20,000

Dec 31

To Hire Purchase Debtors (Opening) To Goods Sold on Hire Purchase (1) To Body Building Charges To Interest To Stock Reserve: 6,00,000 ¥ 20/120

30,000 42,24,000 2,00,000 40,000

Particulars

L.F.

By Stock Reserve 1,20,000 ¥ 20/120 By Goods sold on Hire Purchase 42,24,000 ¥ 20/120 By Cash By Hire Purchase Debtors (Closing) By Hire Purchase Stock 24,00,000 – 18,00,000

Rs.

20,000

7,04,000 40,00,000 50,000 6,00,000

1,00,000 6,60,000 53,74,000

53,74,000

Working Note (1) Amount of goods sold on hire purchase Total units purchased

40,00,000

Units unsold

80,000

Cost price of unsold units

4,00,000

(4,80,000)

¥ 4,25,000 Cost price of sold units

35,20,000

Goods sold on hire purchase at hire purchase price

42,24,000

7,04,000

(2) Loading on hire purchase Cost of the units sold Rs. 20,00,000 Hire purchase price of the units sold (given) Rs. 24,00,000 Profit (loading) Rs. 4,00,000 ¥ 100

Hire Purchase Trading Account, Hire Purchase Stock Account, Hire Purhcase Debtors Account Illustration 30 A Ltd. company has a hire purchase department. Goods are sold on hire purchase at cost plus 50%. From the following particulars, find out the profit or loss made in the hire purchase department. Jan 1 Goods out on hire purchase (at hire purchase price) Goods sold on hire purchase during the year (at hire purchase price) Cash received during the year Goods received back (H.P. installments unpaid Rs. 4,000) Dec. 31 Goods with hire purchase customers (at hire purchase)

Rs. 5,000 81,000 56,000 500 30,000

Hire Purchase and Installment Accounting

529

Solution Books of A Ltd. – Ledger Accounts Hire Purchase Trading Account Date

Particulars

Jan 1

To Hire Purchase Stock (Opening) To Goods sold on Hire Purchase To Stock Reserve 30,000 ¥ 50/150

Dec 31

L.F.

Rs.

Date Jan 1

15,000 Dec 31 81,000 10,000

A/c 18,500

Particulars

L.F.

Rs.

By Cash By Repossessed Stock By Stock Reserve 15,000 ¥ 50/150 By Goods Sold on Hire Purchase 81,000 ¥ 50/150 By Hire Purchase Stock (closing) To Hire Purchase Debtors (Closinginstalment due) (2)

56,000 500 5,000

27,000 30,000

6,000

1,24,500

1,24,500

Working Notes (1) Hire Purchase Stock Account Date Jan 1

Particulars

L.F.

To Balance b/d To Goods Sold on Hire Purchase

Rs.

Date

15,000

Jan 1 Dec 31

81,000

Particulars

L.F.

Rs.

By Hire Purchase Debtors (Balance) By Balance c/d

66,000 30,000

96,000

96,000

(2) Hire Purchase Debtors Account Date

Particulars

L.F.

Jan 1

To Balance b/d (Opening) Dec. 31 To Hire Purchase Stock A/c (1)

Rs.

Date Nil

Particulars

L.F.

Rs.

Jan 1

By Cash By Repossessed Stock 66,000 Dec. 31 By Balance c/d (Closing) (Balance)

56,000

66,000

66,000

4,000 6,000

Illustration 31 From the following particulars prepares Hire Purchase Trading Account in the books of a trader who sells his goods on hire purchase after adding 60% to the cost. There was no stock of goods in the shop of the trade in the beginning or at the end of the year. 2009

Rs.

Jan 1

Stock with customers at hire purchase price

Dec 31

Sales during the year at hire purchase price

43,560

Cash received from customers

28,800

Stock with customers at hire purchase price price

24,000

Instalment due, but not received

10,800

2,500

530

Financial Accounting

Books of Hire Purchase Trader – Ledger Accounts Hire Purchase Trading Account Date 2009 Jan 1

Dec 31

Particulars

L.F.

Rs.

Date 2009 Dec 31

To Hire Purchase Stock (Opening) To Hire Purchase Debtors (Opening-instalment due) (2) To Goods Sold on Hire Purchase To Stock Reserve 24,000 ¥ 60/160

10,800 940

43,560 9,000

Particulars

L.F.

By Cash By Stock Reserve 10,800 ¥ 60/160 By Goods Sold on Hire Purchase 43,560 ¥ 60/160 By Hire Purchase Stock (Closing) To Hire Purchase Debtors (Closinginstallment due)

Rs. 28,800 4,050

16,335 24,000

2,500

11,385 75,685

75,685

Working Notes (1) Hire Purchase Stock Account Date

Particulars

L.F.

2009 Jan 1 To Balance b/d Dec. 31 To Goods Sold on Hire Purchase

Rs.

Date

Particulars

L.F.

Rs.

2009 10,800 Dec. 31 By Hire Purchase Debtors A/c (Bal43,560 ance) By Balance c/d

30,360

54,360

54,360

24,000

(2) Hire Purchase Debtors (Instalment Due ) Account Date

Particulars

L.F.

Rs.

2009 Jan 1 To Balance b/d Dec. 31 (Opening) (Balance 940 To Hire Purchase Stock A/c (1)

Date 2009 Dec 31

Particulars By Cash By Balance c/d (Closing)

L.F.

Rs. 28,800 2,500

30,360 31,300

31,300

HP Trading Account – Retail Price, Hire Purchase Price Illustration 32 A hire purchase trader sold goods worth Rs. 27,500 to one his customers. He used to sell to the retail customers with the retail price to show a gross profit of 20% on that price. He adds 10% to the retail price, when he sells to the hire purchase customers. Goods worth Rs. 2,400 was returned to him by a customer who paid nothing. The total instalment received during the year was Rs. 7,700. Based on the above information, prepare Hire Purchase Trading Account such that the profit to be taken into account is such proportion of the profits as installments received bear to the total goods out on hire purchaser.

Hire Purchase and Installment Accounting

531

Solution Books of Hire Purchase Trader – Ledger Accounts Hire Purchase Trading Account Date

Particulars

L.F.

To Goods Sold on Hire Purchase To Stock Reserve (16,500 ¥ 30/110)

Rs.

Date

27,500 4,500 2,100

A/c

Particulars

L.F.

By Cash By Goods sold on Hire Purchase (27,500 ¥ 30/110) By Goods Repossessed By Hire Purchase Stock A/c (1)

Rs. 7,700

7,500 2,400 16,500

34,100

34,100

Working Notes (1) Hire Purchase Debtors (Installment Due) Account Date

Particulars

L.F.

To Hire Purchase Stock A/c (Goods sent)

Rs. 27,500

Date

Particulars

L.F.

By Cash Goods returned at Hire Purchase (2,400 ¥ 110/80) By Balance c/d (Closing) (Balance)

27,500

Rs. 7,700

3,300 16,500 27,500

(2) Profit on the instalment received = 7,700 ¥ 30/110 = Rs. 2,100 (3) To find retail price, cost price and hire purchase price Retail price = Assume retail price as Rs. 100 Cost price = 100 – 20 = Rs. 80 Hire purchase price = 100 + 10 = Rs. 110 Load = Hire purchase price (110) – Cost price (80) = 30

Total Hire Purchae Sale Illustration 33 Vishwam Trading Company commenced its activity on 1st April, 2008 purchased and sold goods worth Rs. 72,500 and Rs. 63,900 (excluding hire purchase sales), respectively. The hire purchase transactions were as follows: 20 TVs sold at Rs. 4,000 each, cash down of Rs. 1,000 and the balance payable as Rs. 250 per unit for 20 months. 10 Refrigerators at Rs. 20,000 each, cash down of Rs. 4,000 and the balance payable as Rs. 2,000 per unit for 12 months. During the year 2008, the company received 8 instalments per TV and 5 installments per refrigerator. One customer who paid two installments towards refrigerator failed to pay the balance and so the company repossessed the goods for Rs. 10,000. Value of the closing stock including the repossessed goods as on 31st March, 2009 was Rs. 1,10,000.

532

Financial Accounting

Prepare Hire Purchase Trading Account and General Trading Account and find the profit or loss of the company. Books of Vishwam Trading Company Hire Purchase Trading Account Particulars To Goods Sold on Hire Purchase (Cash price) TV-20@ Rs. 4,000 Refrigerator 10@ Rs. 20,000

Rs.

Particulars

By Cash (a) By Goods Repossessed By Hire Purchase Stock (Cost price) 2,80,000 TV (b) Refrigerator (b) 54,000

80,000 2,00,000

Rs. 1,94,000 10,000

40,000 90,000 1,30,000

3,34,000

3,34,000

General Trading Account for the year ended 31st March, 2009 Particulars

Rs.

To Purchases

Particulars

7,25,000 By Sales 2,94,000 By Goods Sold on Hire Purchase (at Cost) By Closing Stock

Rs. 6,39,000 2,80,000 1,10,000 (10,000)

10,19,000

1,00,000 10,19,000

Working Note (a) Cash Received TVs-Cash down-20 @ Rs. 1,000

20,000

Instalments-20 units, 8 instalments @ Rs. 250

40,000

Refrigerators-Cash down-10 @ Rs. 4,000

40,000

Instalments-9 units, 5 instalments @ Rs. 2,000

90,000

On Repossession-2 instalments @ Rs. 2,000

60,000 1,30,000 4,000

Total cash received

1,94,000

(b) Hire purchase stock value TVs: Hire purchase price = cash down (1,000) + instalment (20 @ 2,500 = 5,000) = Rs. 6,000 on 20 units

1,20,000

(–) Cash received (a)

60,000

Net hire purchase price

60,000 40,000

Cost price of the hire purchase stock = 60,000 ¥ 4,000/6,000 Refrigerator: hire purchase price = Cash down (4,000) + instalment (12 @ 2,000 = 24,000) = Rs. 28,000 on 10 units (–) Cash received (40,000 + 90,000 + 4,000)

2,80,000 (1,34,000)

(–) 10 instalment not received on repossessed unit (10 @ Rs. 2,000)

(20,000)

Net hire purchase price

1,26,000

Cost price of the hire purchase stock = 1,26,000 ¥ 20,000/28,000

90,000

Hire Purchase and Installment Accounting

533

X – STOCK AND DEBTOR SYSTEM Hire Purchase Trading, Shop Stock, Debtors’, Stock Illustration 34 Ram Lakshman Company have a hire purchase department. Goods are sold on hire purchase at cost plus 50%. From the following particulars relating to the hire purchase department, find out the profit for the year ending December 31, 2000. Rs. 2000 Jan. 1

Stock out with customers at selling price

9,000

Stock at shop at cost

18,000

Instalment due

5,000

Dec. 31 cash received from customers

60,000

Goods repossessed (instalment due Rs. 2,000) as valued

500

Instalment due, customers paying

9,000

Stock at shop at cost (excluding repossessed goods)

20,000

Goods purchased during the year

60,000

Solution Books of Ram Lakshman Company – Ledger Accounts Hire Purchase Trading Account Date

Particulars

L.F.

Rs.

Date 2000 Jan 1

2000 Jan 1

To Hire Purchase Stock (Opening) (Cost) * To Hire Purchase Debtors (Opening) To Stock at Shop (Opening) (Cost) Dec. 31 To Purchases

6,000 Dec 31 5,000 18,000 60,000 20,500

A/c

Particulars

L.F.

By Cash By Goods Repossessed By Hire Purchase Stock (Closing) (Cost) By Hire Purchase Debtors (Closing) By Stock at shop (Closing) (Cost)

Rs. 60,000 500

20,000 9,000 20,000

1,09,500

1,09,500 ¥ 50/150 = 3,000) = 6,000

Working Note (1) Shop Stock Account Date 2000 Jan 1

Particulars To Balance b/d To Purchases (Balance)

L.F.

Rs.

Date

18,000

2000 Jan 1

Particulars

L.F.

Rs.

By Goods Sold on Hire Purchase 60,000 (at Cost) (3) 87,000 Dec. 31 ¥ 2/3 By Balance c/d

58,000

78,000

78,000

20,000

Financial Accounting

534

(2) Hire Purchase Debtors Account Date 2000 Jan 1

Particulars

L.F.

To Balance b/d To Hire Purchase Stock (Instalment Due) (Balance)

Rs. 5,000 66,000

Date

Particulars

2000 Jan 1

By Cash By Goods Repossessed A/c By Balance c/d

Dec 31

L.F.

Rs. 60,000 2,000 9,000

71,000

71,000

(3) Hire Purchase Stock Account Date 2000 Jan 1

Particulars

L.F.

To Balance b/d To Goods Sold on Hire Purchase (Balance)

Rs.

Date

9,000

2000 Jan 1

87,000

Dec 31

Particulars

L.F.

By Hire Purchase Debtors (2) By Balance c/d

Rs.

66,000 30,000

96,000

96,000

Hire Purchase Stock, Debtors, Shop Stock, Adjustment Account Illustration 35 Verma Designers Ltd., sells a patent product on hire purchase terms has the following transactions for the year to 31st Dec. 2009. The gross profit is 25% on selling price. Rs. Jan 1

Dec. 31

Stock out on hire at hire purchase price

40,000

Stock in hand (in the shop)

5,000

Installments due (customers still paying)

3,000

Stock out on hire at hire purchase price

46,000

Stock in hand (in the shop)

7,000

Installments due

5,000

Cash received in Installments during the year

80,000

Prepare the necessary accounts to find out gross profit of Verma Designers Ltd. For the year to 31st December, 2009. Solution (a) HP Stock Account Date

Particulars

2009 Jan 1 To Balance b/d Dec. 31 To Goods Sold on Hire Purchase Shop Stock* Hire Purchase Adjustment*

L.F.

Rs. 40,000

Date 2009 Jan 1 Dec. 31

Particulars

L.F.

By Hire Purchase Debtors (a) By Balance c/d

* 88,000

* Goods sold on hire purchase Credit side (82,000 + 46,000 =1,28,000) – Debit (40,000) = 88,000 88,000 – 22,000 = 66,000

82,000 46,000

66,000 22,000 1,28,000

88,000 ¥ 25% = 22,000

Rs.

1,28,000

Hire Purchase and Installment Accounting

535

(b) HP Debtors Account Date 2009 Jan 1 Dec 31

Particulars

L.F.

To Balance b/d To Hire Purchase Stock A/c (Instalment Due) (Balance)

Rs.

Date

Particulars

L.F.

Rs.

2009 3,000 Jan 1 By Cash A/c Dec. 31 By Balance c/d 82,000

80,000 5,000

85,000

85,000

(c) Shop Stock Account Date 2009 Jan 1 Dec 31

Particulars

L.F.

To Balance b/d To Purchases

Rs. 5,000 68,000

Date 2009 Jan 1 Dec 31

Particulars

L.F.

By Hire Purchase Stock A/c (a) By Balance c/d

Rs. 66,000 7,000

73,000

73,000

(d) Hire Purchase Adjustment Account Date

Particulars

2009 Jan 1 To Stock Reserve Dec. 31 (46,000 ¥ 25%) A/c

L.F.

Rs.

Date

Particulars

L.F.

Rs.

2009 Jan 1

By Stock Reserve 11,500 (40,000 ¥ 25%) 20,500 Dec 31 By Hire Purchase Stock A/c (88,000 ¥ 25%) 32,500

10,000 22,000 32,500

HP Stock, Debtors, Adjustment Account Illustration 36 Home Needs Corporation supplied the furniture on hire purchase terms at a profit of 50% above the cost. The following are the transactions for the year ended 31st December 2009: Rs. Jan 1 Jan 1

Stock out on hire at cost Installments due (customers still paying) Goods repossessed during the year (for installments unpaid Rs. 300) evaluated at Installments realised during the year

Dec. 31 Stock out on hire at cost Dec. 31 Installments due (customers still paying)

20,000 1,800 150 39,000 16,000 3,000

Prepare Hire Purchase Stock Account, Hire Purchase Debtors Account and Hire Purchase Adjustment Account.

536

Financial Accounting

Solution (a) Hire Purcahse Stock Account Date

Particulars

2009 Jan 1

To Opening Stock

Rs. 20,000 10,000 30,000

To Goods Sold on Hire Purchase Shop Stock@ Hire Purchase Adjustmt A/c

Date 2009 Jan 1 Dec 31

Particulars By Hire Purchase Debtors (b) By Closing Stock Cost (given)

Rs.

40,500 16,000 8,000

23,000

24,000 11,500 *34,500 64,500

@

64,500

Shop stock = 34,500 – 50/150 of 34,500 = 34,500 – 11,500 = 23,000

(b) Hire Purchase Debtors Account Date 2009 Jan 1

Particulars

L.F.

Rs. 1,800

To Balance b/d To Hire Purchase Stock A/c (Instalment Due)

Date 2009 Jan 1

40,500

Particulars

L.F.

By Repossessed Stock A/c By Hire Purchase Adjustment A/c (300 – 150) By Cash A/c By Balance c/d

Rs.

150

150 39,000 3,000

42,000

42,000

(c) Hire Purchase Adjustment Account Date 2009 Jan 1

Particulars

L.F.

Rs. 8,000 150

To Stock Reserve To HP Debtors A/c -

Date 2009 Jan 1

Particulars By Stock Reserve By Goods sold on Hire Purcahse

L.F.

Rs. 10,000 11,500

sion) 13,350 A/c 21,500

21,500

Hire Purchase Stock (Invoice Price, Cost Price), Shop Stock, Debtors Account Illustration 37 Following information is given about a trader who sells goods under hire purchase at a profit of 25% on cost price. Based on which prepare (a) Hire Purchase Stock Account (Double Column), (b) Shop Stock Account, and (c) Hire purchase Debtors’ Account in the books of the trader. Stock in Godown: On 1.4.2008 On 31.3.2009

Rs. 30,000 25,000

Hire Purchase and Installment Accounting

537 Rs.

Overdue instalments: On 1.4.2008 On 31.3.2009 Goods with customers on hire purchase: On 1.4.2008 Purchases Instalments received

2,000 3,000 36,000 64,600 60,000

Solution Books of Hire Purchase Trader – Ledger Accounts (a) Hire Purchase Stock Account Date 2008 Apr 1 2009 Mar 31

Particulars

Invoice Price 36,000

To Balance b/d To Goods Sold on Hire Purchase (b)

Cost Price

Date

*28,800

2009 Mar 31

69,600 #

Particulars

By Hire Purchase Debtors (c) By Balance c/d

Invoice Price

61,000 **62,000

Cost Price

@

61,000 49,600

87,000 12,200

1,23,000

1,10,600

1,23,000

1,10,600

¥ 36,000 = 7,200) = Rs. 28,800 ** Debit total (36,000 + 87,000 = 1,23,000) – Credit total (61,000) = 62,000 @ #

¥ 62,000 = 12,400) = Rs. 49,600 Goods sold on hire purchase = 69,600 + 25% of 69,600 (17,400) = 87,000

(b) Shop Stock Account Date 2008 Apr 1 2009 Mar 31

Particulars

L.F.

Rs.

To Balance b/d

30,000

To Purchases

64,600

Date 2009 Mar 31

Particulars

L.F.

Rs.

By Cost of Goods sold on Hire Purchase 69,600 25,000

By Balance c/d 94,600

94,600

(c) HP Debtors Account Date 2008 Apr 1 2009 Mar 31

Particulars To Balance b/d To Hire Purchase Stock A/c (Installments due)

L.F.

Rs. 2,000

Date 2009 Mar 31

Particulars By Bank A/c By Balance c/d

L.F.

Rs. 60,000 3,000

61,000

63,000

63,000

538

Financial Accounting

HP Stock, Shop Stock, Debtors, Adjustment and Illustration 38

1 . From the 3 following particulars prepare Shop Stock Account, Hire Purchase Debtors Account, Hire Purchase Stock Account and Hire Purchase Adjustment Account:

Roy Brothers sold goods under the hire purchase system at cost plus 33

2009 Jan 1

Rs. 4,000 500 300 8,000

Stock out with hire-purchase customer at selling price Stock at shop at cost Installments due Dec. 31 Cash received from customers Goods repossessed (instalments due Rs. 2,000) valued at Rs. 500 Installments due, customers paying Stock at shop at cost Stock out with Hire purchase customers at selling price

500 1,200 4,600

Verify your result by preparing Hire Purchase Trading Account. Solution (a) Shop Stock Account Date 2009 Jan 1 Dec 31

Particulars

L.F.

Rs. 500 8,300

To Balance b/d To Purchases

Date 2009 Jan 1 Dec 31

Particulars

L.F.

By Cost of Goods Sold A/c (c) (10,800 ¥ 3/4)* By Balance c/d (1,200 – 500)

Rs.

8,100 700

8,800

8,800

* 1/3 on cost price = ¼ on sale price Cost price = sale price – load = 3/4

(b) Hire Purchase Debtors Account Date

Particulars

L.F.

Rs.

Date

Particulars

L.F.

2009 Jan 1

2009 Jan 1 To Balance b/d Dec. 31 (Opening) To Hire Purchase Stock A/c

By Cash By Repossessed Dec. 31 Stock A/c By Hire Purchase 10,200 Adjustment A/c (2,000 – 500) By Balance c/d (Closing)

Rs. 8,000 500

300

1,500 500

10,500

10,500

(c) HP Stock Account Date 2009 Jan 1 Dec 31

Particulars To Balance b/d To Goods Sold on Hire Purchase (Balance)

L.F.

Rs.

Date

4,000

2009 Jan 1

10,800

Dec 31

14,800

Particulars By Hire Purchase Debtors A/c (b) By Balance c/d

L.F.

Rs.

10,200 4,600 14,800

Hire Purchase and Installment Accounting

539

(d) Hire Purchase Adjustment Account Date 2009 Jan 1 Dec 31

Particulars

L.F.

To Stock Reserve (4,600 ¥ 1/4) To Hire Purchase Debtors (2,000 – 500)

Rs. 1,150 1,500

1,050

Date 2009 Dec 31

Particulars

L.F.

By Stock Reserve 4,000 ¥ 1/4 By Goods sold on Hire Purchase Stock (10,800 ¥ 1/4)

Rs. 1,000

2,700

A/c 3,700

3,700

Verification Hire Purchase Trading Account Particulars To Hire Purchase Stock A/c (Opening) To Hire Purchase Debtors A/c (Opening) To Goods Sold on Hie Purchase To Stock Reserve A/c 4,600 ¥ 1/4

Rs. 4,000 300 10,800 1,150 1,050

Particulars By Cash By Repossessed Stock By Stock Reserve 4,000 ¥ 1/4 By Goods Sold on Hire Purchase 10,800 ¥ 1/4 By Hire Purchase Stock A/c (Closing) By Hire Purchase Debtors (Closing)

17,300

Rs. 8,000 500 1,000 2,700 4,600 500 17,300

Comprehensive Problem Illustration 39 John & Co. sells goods on hire purchase basis. It fixes hire purchase price by adding 50% to the cost of the goods. The following are the figures relating to his hire purchase business for the year ending on 31st March, 2005:

Hire Purchase Stock Hire Purchase Debtors Shop Stock

01.04.2004 Rs. 12,000 300 10,000

31.03.2005 Rs. ? ? 15,000

Goods produced during the year Rs. 65,400, Cash received from customers, during the year Rs. 92,400. Total amount of installments that fell due during the year Rs. 92,700. One customer to whom goods had been sold for Rs. 1,200 paid only 5 installments of Rs. 100 each. On his failure to pay the monthly instalment of Rs. 100 each on 4th March 2005, the goods were repossessed on 27th March 2005 after due legal notice. Prepare the Hire Purchase Trading Account.

540

Financial Accounting

Solution Books of John & Co. – Ledger Accounts Hire Purchase Trading Account Date

Particulars

L.F.

Rs.

Date

Particulars

L.F.

Rs.

2005 Mar 31

2004 Apr. 1

To Hire Purchase Stock (Opening) To Hire Purchase Debtors (Opening) 2005 To Goods Sold on Mar. 31 Hire Purchase (ii) To Stock Reserve (9,300 ¥ 50/150)

By Bank By Stock Reserve (12,000 ¥ 50/150 ) By Goods Sold on Hire Purchase (90,600 ¥ 50/150) By Goods Repossessed (v)

12,000

300 90,600

92,400

4,000 30,200

3,100

467 By Hire Purchase Stock (Closing) (iii) By Hire Purchase Debtors (Closing) (iv)

2,05,000

9,300

500

13,15,000

13,15,000

Working Note (i) Shop Stock Account Date 2004 Apr 1

Particulars To Balance b/d To Purchases

L.F.

Rs. 10,000 65,400

Date 2004 Apr 1

Dec 31

Particulars

L.F.

By Goods Sold on Hire Purchase (Balance) By Balance c/d

75,400

Rs.

60,400 15,000 75,400

(ii) Goods Sold on Hire Purchase Account Particulars To Shop Stock A/c (i) To Hire Purchase Trading A/c 60,400 ¥ 50/100

Rs.

Particulars

Rs.

60,400 By Hire Purchase Trading A/c (Balance)

90,600

30,200 75,400

90,600

(iii) Memorandum Hire Purchase Stock Account Particulars To Balance b/d To Goods Sold on Hire Purchase

Rs.

Particulars

12,000 By Hire Purchase Debtors 90,600 By Goods Repossessed A/c By Hire Purchase Trading (Balance) 1,02,600

Rs. 92,700 600 9,300 1,02,600

(iv) Memorandum Hire Purchase Debtors Account Particulars To Balance b/d To Hire Purchase Stock A/c

Rs.

Particulars

Rs.

300 By Bank A/c 92,700 By Goods Repossessed A/c By Hire Purchase Trading A/c (Balance)

92,400 100 500

93,000

93,000

Hire Purchase and Installment Accounting

541

(v) Value of goods repossessed ¥ Unpaid amount Cost price = 1,200 – (1,200 ¥ Hire purchase price of goods sold (given) = 1,200 Unpaid amount = 1,200 (sold) – (100 ¥ 5 = 500) received = 700 ¥ 700 = Rs. 467

XI – INSTALMENT SYSTEM OF ACCOUNTING Journal, Ledger in both Parties Illustration 40 A transport company purchased some vehicles on 1st January, 2000 total worth Rs. 7,45,000 on the instalment system. As per the agreement Rs. 2,00,000 was to be paid on signing the agreement and the balance in three instalments of Rs. 2,00,000 each year. Interest charged at 5% per annum by the hire vendor. The transport company has decided to write off depreciation @ 10% annually on the diminishing balance of the cash value. Pass the journal entries and open necessary ledger accounts in the books of both the parties. Solution Working Note Calculation of Interest – When all the particulars are given Rs. Cash price 1.1.2000

7,45,000

Cash down

2,00,000

Outstanding 31.12.2000

5,45,000

Interest 5%

27,250

Total due

5,72,250

1st installment

2,00,000

Outstanding 31.12.2001

3,72,250

Interest 5%

18,613

Total due

3,90,863

2nd installment

2,00,000

Outstanding 31.12.2002

1,90,863

Interest (Balance)

9,137

3rd instalment

2,00,000

(A) Journal Entries Books of the Hire vendor 1

On the date of Purchase (1.1.2001)

For the sale of the asset Transport Co. A/c Interest Suspense A/c To Hire Sale A/c (Cash price)

2

For the cash down received Cash/Bank A/c To Transport Co. A/c

Books of the Transport Company For the purchase of the asset Dr. 7,45,000 Vehicle A/c Dr. 55,000 To Hire Vendor A/c 8,00,000 To Interest Suspense A/c (Cash price)

Dr. 8,00,000 7,45,000 55,000

For the cash down paid Dr. 2,00,000 Hire Vendor A/c 2,00,000 To Cash/Bank A/c

Dr. 2,00,000 2,00,000

542

Financial Accounting

For the interest due 1

For the interest due

Interest Suspense A/c To Interest A/c

Dr. 27,250 Interest A/c 27,250 To Interest Suspense A/c

For the instalment received At the end of the

2

(31.12,2001)

3

4

Cash/Bank A/c To Transport Co. A/c

For the instalment paid Dr. 2,00,000 Hire Vendor A/c 2,00,000 To Cash/Bank A/c

For depreciation on the asset

For depreciation on the asset

No Entry

Depreciation A/c To Machine A/c (7,45,000 ¥ 10%)

For transferring interest and

For transferring interest and

Interest A/c

For the interest due

At the end of the second year (31.12,2002)

3

4

Dr. 18,613 Interest A/c 18,613 To Interest Suspense A/c

For the instalment received Cash/Bank A/c To Transport Co. A/c

For depreciation on the asset

For depreciation on the asset

No Entry

Depreciation A/c To Machine A/c (6,70,500 ¥ 10%)

For transferring interest and

For transferring interest and

For the interest due

Dr. 9,137 Interest A/c 9,137 To Interest Suspense A/c

For the installment received

Dr. 67,050 67,050

18,613 67,050 Dr. 9,137 9,137

For the installment paid

2

Cash/Bank A/c To Transport Co. A/c

3

For depreciation on the asset

For depreciation on the asset

No Entry

Depreciation A/c To Machine A/c (6,03,450 ¥ 10%)

For transferring interest and

For transferring interest and

Interest A/c

Dr. 2,00,000 2,00,000

For the interest due

Interest Suspense A/c To Interest A/c

4

Dr. 18,613 18,613

Dr. 18,613 To Interest A/c To Depreciation A/c

At the end of the third year (31.12,2003)

27,250 74,500

For the instalment paid Dr. 2,00,000 Hire Vendor A/c 2,00,000 To Cash/Bank A/c

Interest A/c

1

Dr. 74,500 74,500

For the interest due

Interest Suspense A/c To Interest A/c 2

Dr. 2,00,000 2,00,000

Dr. 27,250 To Interest A/c To Depreciation A/c

1

Dr. 27,250 27,250

Dr. 2,00,000 Hire Vendor A/c 2,00,000 To Cash/Bank A/c

Dr. 2,00,000 2,00,000 Dr. 60,345 60,345

Dr. 9,137 To Interest A/c To Depreciation A/c

9,137 60,345

Hire Purchase and Installment Accounting

543

(B) Ledger Accounts (i) In the Books of Transport Company Vehicle Account Date 2001 Jan. 1

2002 Jan. 1

2003 Jan. 1

2004 Jan. 1

Particulars

L.F.

To Hire vendor

To Balance b/d

To Balance b/d

To Balance b/d

Rs.

Date

Particulars

L.F.

Rs.

2001 7,45,000 Dec. 31 By Depreciation By Balance c/d

74,500 6,70,500

7,45,000

7,45,000

2002 6,70,500 Dec. 31 By Depreciation By Balance c/d

67,050 6,03,450

6,70,500

6,70,500

2003 6,03,450 Dec. 31 By Depreciation By Balance c/d

60,345 5,43,105

6,03,450

6,03,450

5,43,105

Hire Vendor Account Date

Particulars

L.F.

2001 Jan 1 To Bank Dec. 31 To Bank To Balance c/d

Rs. 2,00,000 2,00,000 4,00,000

Date 2001 Jan 1

Particulars

L.F.

By Vehicle By Interest Suspense

7,45,000 55,000

8,00,000 2002 Dec. 31 To Bank To Balance c/d

2,00,000 2,00,000

8,00,000 2002 Jan 1

By Balance b/d

4,00,000

4,00,000 2003 Dec. 31 To Bank

2,00,000

Rs.

4,00,000 2003 Jan. 1

By Balance b/d

2,00,000

2,00,000

2,00,000

Interest Account Date

Particulars

2001 Dec. 31 To Interest Suspense

L.F.

Rs.

Date

Particulars

2001 27,250 Dec. 31

L.F.

Rs. 27,250

A/c 27,250 2002 Dec. 31 To Interest Suspense

27,250

2002 18,613 Dec. 31

18,613 A/c

18,613 2003 Dec. 31 To Interest Suspense

18,613

2003 9,137 Dec. 31

9,137 A/c

9,137

9,137

544

Financial Accounting

Depreciation Account Date

Particulars

L.F.

Rs.

2001 Dec. 31 To Vehicle A/c

Date

Particulars

L.F.

2001 74,500 Dec. 31

Rs. 74,500

A/c 74,500 2002 Dec. 31 To Vehicle A/c

74,500

2002 67,050 Dec. 31

67,050 A/c

67,050 2003 Dec. 31 To Vehicle A/c

67,050

2003 60,345 Dec. 31

60,345 A/c

60,345

60,345

(ii) In the Books of Hire Vendor Transport Co. Account Date 2001 Jan 1

2002 Jan 1

2003 Jan 1

Particulars To Hire Purchase Sales To Interest Suspense

To Balance b/d

To Balance b/d

L.F.

Rs.

7,45,000 55,000

Date 2001 Jan 1 Dec 31

Particulars By Bank By Bank By Balance c/d

L.F.

Rs. 2,00,000 2,00,000 4,00,000

8,00,000

8,00,000

2002 4,00,000 Dec. 31 By Bank By Balance c/d

2,00,000 2,00,000

4,00,000

4,00,000

2003 2,00,000 Dec. 31 By Bank

2,00,000

2,00,000

2,00,000

Hire Sales Account 2001 Jan 1

To Trading

7,45,000

2001 Jan 1

By Transport Co.

7,45,000

7,45,000 7,45,000

Interest Account 2001 Dec 31

2001 27,250 Dec. 31 To Vehicle A/c

74,500

27,250

74,500

A/c 2002 Dec. 31

18,613

2002 Dec 31

To Vehicle A/c

67,050

A/c 18,613 2003 Dec. 31

9,137

67,050 2003 Dec 31

To Vehicle A/c

60,345

A/c 9,137

60,345

Hire Purchase and Installment Accounting

545

Illustration 41 On April1, 2005 Mercury Co. purchased an equipment on installment purchase system. The cash price of the machine was Rs. 8,00,000 and it was agreed that the purchaser should pay the vendor Jupitor & Co. Rs. 2,00,000 at the time of signing the contract and the balance in three annual installments of Rs. 2,00,000 each plus interest at 25% per annum on yearly balance. Mercury Co. depreciated the machine annually at 15% per annum on diminishing balance method. Pass the necessary journal entries and prepare ledger accounts in the books of both the parties. Solution Calculation of Interest – Interest together with Instalment Payment

Instalment (Part principal+interest)

1.4.2005

8,00,000

Cash down

2,00,000

2,00,000 + 0

Interest

6,00,000

6,00,000 ¥ 25% = 1,50,000

Due on 31.3.2006

2,00,000 + 1,50,000 = 3,50,000

Interest

4,00,000

Due on 31.3.2007 2,00,000

Due on 31.3.2008

Cash price Rs.

Nil

2,00,000

1,50,000

2,00,000

1,00,000

2,00,000

50,000

2,00,000

3,00,000

8,00,000

4,00,000 ¥ 25% = 1,00,000 2,00,000 + 1,00,000 = 3,00,000

Interest

Interest Rs.

2,00,000 ¥ 25% = 50,000 2,00,000 + 50,000 = 2,50,000

(A) Journal Entries Books of the Jupitor & Co. 1

On the date of Purchase (1.4.2005)

Books of the Mercury Co.

For the sale of the asset Mercury Co. A/c Interest Suspense A/c To Hire Sale A/c (Cash price)

2

For the purchase of the asset Dr. 8,00,000 Equipment A/c Dr. 3,00,000 To Jupitor & Co. A/c 11,00,000 To Interest Suspense A/c (Cash price)

For the cash down received Cash/Bank A/c To Mercury Co. A/c

For the cash down paid Dr. 2,00,000 Jupitor & Co. A/c 2,00,000 To Cash/Bank A/c

For the interest due 1

Interest Suspense A/c To Interest A/c

At the end of the 3

Cash/Bank A/c To Mercury Co. A/c For depreciation on the asset

For depreciation on the asset

No Entry

Depreciation A/c To Equipment A/c (8,00,000 ¥ 15%)

For transferring interest and

For transferring interest and

Interest A/c

Dr. 1,50,000 1,50,000

For the instalment paid Dr. 2,00,000 Jupitor & Co. A/c 2,00,000 To Cash/Bank A/c

(31.3.2006)

4

Dr. 2,00,000 2,00,000

For the interest due Dr. 1,50,000 Interest A/c 1,50,000 To Interest Suspense A/c

For the instalment received 2

Dr. 11,00,000 8,00,000 3,00,000

Dr. 2,00,000 2,00,000 Dr. 1,20,000 1,20,000

Dr. 1,50,000 To Interest A/c To Depreciation A/c

1,50,000 1,20,000

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Financial Accounting

1

For the interest due

For the interest due

Interest Suspense A/c To Interest A/c 2 At the end of the second year (31.3.2007)

Dr. 1,00,000 Interest A/c 1,00,000 To Interest Suspense A/c

For the instalment received Cash/Bank A/c To Mercury Co. A/c

3

4

For the instalment paid Dr. 2,00,000 Jupitor & Co. A/c 2,00,000 To Cash/Bank A/c

Dr. 2,00,000 2,00,000

For depreciation on the asset

For depreciation on the asset

No Entry

Depreciation A/c To Equipment A/c (6,80,000 ¥ 10%)

For transferring interest and

For transferring interest and

Interest A/c

Dr. 1,02,000 1,02,000

Dr. 1,00,000 To Interest A/c To Depreciation A/c

1

For the interest due

1,00,000 1,02,000

For the interest due

Interest Suspense A/c To Interest A/c

Dr. 50,000 Interest A/c 50,000 To Interest Suspense A/c

For the instalment received At the end of the third year (31.3.2008)

Cash/Bank A/c To Mercury Co. A/c

Dr. 2,00,000 Jupitor & Co. A/c 2,00,000 To Cash/Bank A/c

3

For depreciation on the asset

For depreciation on the asset

No Entry

Depreciation A/c To Equipment A/c (5,78,000 ¥ 15%)

For transferring interest and

For transferring interest and

Interest A/c

Dr. 50,000 50,000

For the instalment paid

2

4

Dr. 1,00,000 1,00,000

Dr. 2,00,000 2,00,000 Dr. 86,700 86,700

Dr. 50,000 To Interest A/c To Depreciation A/c

50,000 86,700

(B) Ledger Account (i) In the Books of Mercury Co. Equipment Account Date 2005 Apr 1

Particulars To Jupitor & Co.

L.F.

Rs.

Date

8,00,000

2006 Mar 31

Particulars By Depreciation By Balance c/d

8,00,000 2006 Apr 1

To Balance b/d

6,80,000

To Balance b/d

5,78,000 5,78,000

2008 Apr 1

To Balance b/d

4,91,300

Rs. 1,20,000 6,80,000 8,00,000

2007 Mar 31

By Depreciation By Balance c/d

6,80,000 2007 Apr 1

L.F.

1,02,000 5,78,000 6,80,000

2008 Mar 31

By Depreciation By Balance c/d

86,700 4,91,300 5,78,000

Hire Purchase and Installment Accounting

547

Jupitor & Co. Account Date 2005 Apr 1 2006 Mar 31

2007 Mar 31

2007 Mar 31

Particulars

L.F.

Rs.

To Bank

2,00,000

To Bank To Balance c/d

Date 2005 Apr 1

3,50,000 5,50,000 11,00,000

To Bank To Balance c/d

3,00,000 2,50,000 5,50,000

To Bank

2,50,000 2,50,000

Particulars

L.F.

By Equipment By Interest Suspense

Rs. 8,00,000 3,00,000

11,00,000 2006 Apr 1

By Balance b/d

5,50,000 5,50,000

2007 Apr 1

By Balance b/d

2,50,000 2,50,000

Interest Account Date 2006 Mar 31

Particulars

L.F.

To Interest Suspense

Rs.

Date

1,50,000

2006 Mar 31

Particulars

L.F.

1,50,000

1,50,000 2007 Mar 31

1,00,000 To Interest Suspense

1,50,000 2007 Mar 31

1,00,000

1,00,000 2008 Mar 31

To Interest Suspense

50,000

Rs.

1,00,000 2008 Mar 31

50,000

50,000

50,000

Depreciation Account Date 2006 Mar 31

Particulars

L.F.

To Equipment A/c

Rs.

Date

1,20,000

2006 Mar 31

Particulars

L.F.

1,20,000

1,20,000 2007 Mar 31

To Equipment A/c

1,02,000

1,20,000 2007 Mar 31

1,02,000

1,02,000 2008 Mar 31

To Equipment A/c

86,700

Rs.

1,02,000 2008 Mar 31

86,700

86,700

86,700

(ii) In the Books of Jupitor & Co. Mercury Co. Account Date 2005 Apr 1

Particulars To Hire Purchase Sales To Interest Suspense

L.F.

Rs.

Date

8,00,000 3,00,000

2005 Apr 1 2006 Mar 31

8,00,000

Particulars By Bank By Bank By Balance c/d

L.F.

Rs. 2,00,000 3,50,000 5,50,000 11,00,000

548 2006 Apr 1

Financial Accounting

To Balance b/d

5,50,000

2007 Mar 31

By Bank By Balance c/d

3,00,000 2,50,000 5,50,000

By Bank

2,50,000 2,50,000

5,50,000 2007 Apr 1

To Balance b/d

2,50,000 2,50,000

2007 Mar 31

Hire Sales Account 2005 Apr 1

To Trading A/c

8,00,000 8,00,000

2005 Apr 1

By Mercury Co.

8,00,000 8,00,000

Interest Account 2006 Mar 31

1,50,000

2006 Mar 31

To Equipment A/c

1,20,000

A/c 1,50,000 2007 Mar 31

1,00,000

1,20,000 2007 Mar 31

To Equipment A/c

1,02,000

A/c 1,00,000 2008 Mar 31

50,000

1,02,000 2008 Mar 31

To Equipment A/c

86,700

A/c 50,000

86,700

Ledger in Purchaser Book Illustration 42 On 1st January, 2005 a mining company bought wagons on the installment system. The cash price of wagons was Rs. 11,175 and payment was to be made as follows: An amount of Rs. 3,000 was to be paid on signing of the agreement and the balance in three instalments of Rs. 3,000 each at the end of each year 5% interest is charged by the wagons company per annum. The company had decided to write off 10% annually on the fixed installment method. Open the necessary account in the books of the company. Solution Calculation of Interest – When all the particulars are given Rs. Cash price 1.1.2005 Cash down Outstanding 31.12.2005 Interest 5% Total due 1st installment Outstanding 31.12.2006 Interest 5% Total due 2nd installment Outstanding 31.12.2007 Interest due (Balance) 3rd installment

11,175 3,000 8,175 409 8,584 3,000 5,584 279 5,863 3,000 2,863 137 3,000

Hire Purchase and Installment Accounting

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Ledger Account – In the Books of Mining Co. Wagon Account Date 2005 Jan 1

Particulars

L.F.

Rs.

To Hire Vendor

11,175

Date 2005 Dec 31

Particulars

L.F.

By Depreciation By Balance c/d

1,118 10,057 11,175

By Depreciation By Balance c/d

1,118 8,939 10,057

By Depreciation By Balance c/d

1,118 7,821 8,939

11,175 2006 Jan 1

To Balance b/d

10,057

2006 Dec 31

10,057 2007 Jan 1

To Balance b/d

8,939

2007 Dec 31

8,939 2008 Jan 1

To Balance b/d

Rs.

7,821

Hire Vendor Account Date 2005 Jan 1 Dec 31

2006 Dec 31

2007 Dec 31

Particulars

L.F.

Rs.

To Bank To Bank To Balance c/d

3,000 3,000 6,000 12,000

To Bank To Balance c/d

3,000 3,000 6,000

To Bank

3,000 3,000

Date 2005 Jan 1

2006 Jan 1

Particulars

L.F.

By Wagon By Interest Suspense

Rs. 11,175 825 12,000

By Balance b/d

6,000 6,000

2007 Jan 1

By Balance b/d

3,000 3,000

Interest Account Date

Particulars

L.F.

2005 Dec. 31 To Interest Suspense

Rs.

Date

Particulars

L.F.

Rs.

2005 409 Dec. 31 409 409

409 2006 Dec. 31 To Interest Suspense

2006 279 Dec. 31 279 279

279 2007 Dec. 31 To Interest Suspense

2007 137 Dec. 31 137 137

137

Depreciation Account Date

Particulars

2005 Dec. 31 To Wagon A/c

L.F.

Rs.

Date

Particulars

L.F.

Rs.

2005 1,118 Dec. 31 1,118 1,118

1,118 Contd.

550

Financial Accounting

Contd. 2006 Dec. 31 To Wagon A/c

2007 Dec. 31 To Wagon A/c

2006 1,118 Dec. 31

1,118

1,118

1,118

2007 1,118 Dec. 31

1,118

1,118

1,118

Points to Remember Hire purchase is a credit purchase. Purchase price is paid in installments. If a hire purchaser fails to pay installment, hire vendor take possession of goods. Hire purchaser becomes the owner of the goods when the last installment is paid off. On default, hire vendor takes possession of the goods from hire purchaser. There are two types of repossession – complete repossession and partial repossession. Hire purchase is an agreement on hire; Installment purchase is an agreement of sale. If there is default in ‘installment purchase’, vendor cannot take possession of goods. When the transactions are very large in number and value of sale is small, Hire Purchase Trading Account is prepared to ascertain profit. There are two methods of preparing Hire Purchase Trading Account:

Examination Questions I. Objective Questions 1. Fill in the blanks (i) Interest is calculated on _________. (ii) Difference between hire purchase price and cash price is ________. (iii) The vendor credits ________ at the time of hire sales transaction. (iv) Hire purchase is a ________ purchase. (v) The loss on goods repossessed is _____ to Hire Purchase Adjustment Account. 2. Choose the correct answer (i) Down payment made at the time of hire purchase transaction is debited to (a) Asset Account (b) Purchase Account (c) Hire Vendor Account

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(ii) The amount of interest is credited by hire purchaser to (a) Interest Account (b) Hire Vendor Account (c) Assets Account (iii) Stock at shop is debited to (a) Stock with Purchaser Account (b) Stock in Shop Account (c) Installment Account (iv) The goods with purchaser are transferred from Stock in Shop Account at (a) Cost price (b) Hire purchase price (c) None of these (v) When goods are repossessed by the hire vendor, the balance in asset Account is transferred to (a) Hire Purchaser Account (b) Goods Repossessed Account (c) Profit and Loss Account 3. Match the following (i)

Down payment

a

Interest

(ii)

Instalment price

b

Purchaser of goods

(iii)

Stock and Debtors method

c

Cost price

(iv)

Hirer

d

Hire Purchase Trading Account

(v)

Debtors method

e

Cash price

4. State whether the following statements True or False (i) Interest is calculated on hire purchase price. (ii) Depreciation on asset is calculated on cash price of asset. (iii) In hire purchase, ownership title is transferred from hire vendor to hire purchaser at the time of signing the agreement. (iv) Instalment purchase is governed by Sale of Goods Act. (v) Instalment purchase is an agreement of sale. Answers 1. (i) (iv) 2. (i) 3. (i) 4. (i)

cash price; credit; c; e; False;

(ii) (v) (ii) (ii) (ii)

Interest; debited a; a; True;

(iii) Sales Account; (iii) b; (iii) b; (iii) False;

II. Descriptive Questions A. Very Short Answer Questions 1. What is hire purchase system? 2. What is instalment purchase system? 3. Explain the Hire Purchase Trading Account? 4. What is hire purchase price? 5. What is partial repossession?

(iv) b; (v) c. (iv) d; (v) c. (iv) True; (v) True

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Financial Accounting

B. Short Answer Questions 1. What is meant by Default and Repossession? 2. What are the rights of hire purchaser? 3. What are the features of hire purchase system ? 4. What are the features of installment purchase system? 5. Explain complete repossession and partial repossession. C. Detail Answer Questions 1. Distinguish between hire purchase and installment purchase system. Discuss fully accounting aspects of them. 2. Explain the stock and debtors method relating to numerous sale of small value of good under hire purchase system. 3. Explain in detail, the accounting procedures for complete repossession of goods. 4. Explain in detail, the accounting procedures for partial repossession of goods. 5. What is Hire Purchase Trading Account? How do you ascertain profit or loss according to Debtors method and Stock and Debtors method? III. Exercise Problems Calculation of Interest

When all the Information are Given Problem 1 Raman purchases a motor car from Bharathan whose cash price is Rs. 56,000 on 11.93. Rs. 15,000 is paid on signing the contract and the balance is to be paid in three equal annual instalments of Rs. 15,000 each. The rate of interest is 5% per annum Calculate the amount of interest included in each instalment. [Ans. Interest 1st year: Rs. 2,050; 2nd year: Rs. 1,403; 3rd year: Rs. 547] (B.Com., Madras) Problem 2 Mohan purchases a car on hire purchase system. The total cash price of the car is Rs. 15,980, payable Rs. 4,000 down and in three instalments of Rs. 6,000, Rs. 5,000 and Rs. 2,000 at the end of first, second and third years, respectively. Interest is charged at 5% per annum. You are required to calculate interest paid by hirer, each year. [Ans. Interest 1st year: Rs. 599; 2nd year: Rs. 329; 3rd year Rs. 92] (B.Com., Madras)

Finding the Cash Price Problem 3 Calculate cash price of a machine from the following information: Down payment Rs. 10,000; 4 annual instalments at the end of each year Rs. 10,000; and

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Rate of interest 5% per annum. [Ans. Cash price Rs. 45,459] (B.C.A/B.Sc., Madras) Problem 4 Mr. X purchased a cycle on hire purchase for Rs. 1,000 to be paid as follows: On signing the agreement Rs. 120; At the end of the first year Rs. 170; At the end of the second year Rs. 160; At the end of the last year Rs. 550. The vendor charged interest at 10 % per annum on the cash value remaining unpaid each year. Calculate the cash value of the cycle. [Ans. Cash Price: Rs. 820] (B.Com., Madras) Problem 5 Mr. Anbu purchased a machine by hire purchase system for Rs. 30,000 to be paid as follows: Down payment Rs. 5,000; At the end of the first year Rs. 7,000; At the end of the second year Rs. 6,500; At the end of the third year Rs. 6,000; At the end of the fourth year Rs. 5,500. Interest is charged on the value at 10 % per annum. At what value should the machine be capitalised? [Ans. Cash price Rs. 25,000] (Bharathidasan, B.Com, Madras)

When Instalment Amounts are not Given Problem 6 KAS Transport Ltd. purchased from Delhi Motors 3 trucks costing Rs. 50.000 each hire purchase system. Payment has to be made Rs. 30.000 down and the remainder in three equal annual instalments together with interest at 9%. Calculate interest for each car. [Ans. Interest 1st year Rs. 10,800; 2nd year Rs. 7,200; 3rd year Rs. 3,600] (B.Com., Madras) Problem 7 A Machine costing Rs. 50,000 was purchased on hire purchase basis. Rs. 10,000 was paid on signing the agreement and the balance in four equal instalments of Rs. 10,000 each annually with interest at 5%. Calculate interest and show the amount payable on each instalment. [Ans. Instalment amount: Rs. 12,000; Rs. 11,500; Rs. 11,000; Rs. 10,500] (B.Com., Madras)

Journal Entries Problem 8 The Madras Trading Co. purchased a motor car from Bombay Motor Co. on hire purchase agreement on 1.1.80 paying cash Rs. 10,000 and agreeing to pay further three instalments of Rs. 10,000 each on 31st December each year. The cash price of the car is Rs. 37.250 and the Bombay Motor Co. charges interest at 5% per annum.

554

Financial Accounting

The Madras Trading Co. writes 10% per annum as depreciation on the reducing balance method. Journalise the above in the books of both the parties. [Ans. Interest: 1st Rs. 1363; 2nd Rs. 931; 3rd Rs. –456; Closing balance of motor car Rs. 27,155] (B.Com., BCS, Madras) III. Ledger Books

Hire Purchaser Books Problem 9 ‘M’ Ltd. sold a lorry to Arun on hire purchase system. The cash price was Rs. 7.45.000. Rs. 2.00.000 was to be paid on delivery and the balance in three installments of Rs. 2.00.000 each at the end of each year. ‘M’ Ltd charged interest of 5% per annum. Arun depreciates the lorry at 10% per annum on reducing balance method. Prepare necessary ledger accounts in the books of Arun. [Ans. Interest: 1st year: Rs. 27,250; 2nd year: Rs. 18,613; 3rd year: Rs. 9,137; (B CA./BSc. (ICE), Madras) Problem 10 On 1.1.93 Ramasamy company purchased a car from Alagappan and company. At the time of agreement a sum of Rs. 24,000 was paid out of cash down price of the car and the balance would be payable in 3 equal annual installments with interest at 5% per annum. The amount of last instalment including interest was Rs. 33,600. Depreciation was to be provided at 10% per annum on the reducing balances. Prepare (a) Motor Car Account and (b) Algappan Account in the books of Ramasamy Company. [Ans. Interest: Rs. 4,800; Rs. 3,200 and Rs. 1,600; Cash price Rs. 1,20,000; Closing Balance Motor Car Rs. 87,480] (B.Com., Madras)

Both the Parties Problem 11 Rakesh purchased a motor car on hire purchase system. The total cash price of the car is Rs. 15,980 payable Rs. 4.000 down and three instalments of Rs. 6.000. Rs. 5.000 and Rs. 2.000 payable at the end of first, second and third years, respectively. Interest is charged at 5% per annum. You are required to prepare ledger accounts in the books of both the parties. Rate of depreciation is 10% on straight line method. Calculations are to be made to the nearest rupee. [Ans. Interest: 1st year Rs.599; 2nd year Rs. 329; 3rd year Rs. 92] (B.Com., Madras) Problem 12 Mr. Gupta purchased machinery under hire purchase agreement from Mr. Pankaj. The cash price of the machinery was Rs. 15,500. The payments for the purchase are to be made as under: On signing the agreement Rs. 3,000; First year end Rs. 5,000: Second

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year end Rs. 5,000; Third year end Rs. 5,000. Make necessary ledger accounts in the books of both the parties charging depreciation @ 10% on diminishing balance method. [Ans. Interest 1st year: Rs. 1,250; 2nd year: Rs. 833; 3rd year: Rs. 417] (B.Com. (ICE), Madras) Problem 13 Mr. Raman purchased a TV on hire purchase on the following terms: Rs. 1,200 to be paid on signing the agreement, Rs. 1,700 at the end of the first year, Rs. 1,600 at the end of the second year and Rs. 5,500 at the end of third and last year. The hire vendors charged interest at 10% per annum on cash value of the TV. Mr. Raman wished to provide depreciation at 10% per annum on the diminishing balance method. Write up the necessary ledger accounts in the books of both the parties. [Ans. Interest: 1st year: Rs. 700; 2nd year: Rs. 600; 3rd year: Rs. 500; Cash Price: Rs. 8,200] (B.Com., Madras) IV. Default and Complete Repossession

Books of Purchaser Problem 14 A machinery was purchased on hire purchase basis agreeing to pay four annual instalments of Rs. 4,230 at the end of each year commencing from the date of the agreement. Interest is charged @ 5% and is included in the annual payments of Rs. 4,230. Show Machinery Account and Hire Vendor Account in the books of purchaser when he commits a default in paying third installment and the asset was repossessed. Purchaser provides depreciation on the machinery at 10% per annum on straight line method. [Ans. (B.Com., Madras) Problem 15 X Ltd purchased a piece of machinery on 1st January, 1980 on the hire purchase system. The cash price of the machinery was Rs. 29,800. Terms of payment were Rs. 8,000 half-yearly over two years, the first payment to be made on 30th June, 1980. Rate of interest was 6% per annum. X Ltd wrote off 10% depreciation under WDV method and closed its books on 30th June every year. It could not pay the instalment due on 30th June, 1981 and as a consequence, the hire vendor took possession of the machinery. Give the Machinery Account and show the loss suffered by X Ltd. [Ans. Loss on repossession: Rs. 9,643; Hire vendor balance (B.Com., Madras) Problem 16 Mohan purchased on 1st October 1992, a machine on hire purchase system. The cash price was Rs. 20,000, payment was to be made as to Rs. 5,000 down and

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Financial Accounting

Rs. 4,000 annually for five years. The machine was depreciated at 15% per annum on the diminishing value. The third annual instalment could not be paid and the vendor seized the machinery. Record the above transactions in the books of Mohan assuming accounts are closed on 31st December. [Ans. Loss on repossession: Rs. 1,343; Transfer from hire vendor: Rs. 11,000] (B.Com., Madras)

Both the Books Problem 17 Mr. A purchased a machine from B Ltd. for Rs. 5,60,000, payment to be made Rs. 1,50,000 down and three instahnents of Rs. 1,50,000 each at the end of each year. He depreciates the asset at 10% per annum on written down value method. Due to financial difficulty, Mr. A having paid down payment and first instalment at the end of the first year could not pay second instalment and the seller took possession of the asset. Open ledger account in the books of both the parties to record the transactions. [Ans. Loss due to repossession; Rs. 1,60,267] (BCA, Madras) Problem 18 Balu purchased a machinery from Kumar & Co. on hire purchase system on 1.1.1995. The cash price of the machine was Rs. 1,00,000. Rs. 20,000 to be paid at the time of taking delivery and balance by four instalments of Rs. 20,000 plus interest @ 5% on yearly balances. Balu failed to pay the instalment due on 31.12.1996. Kumar & Co. took possession of the machinery and valued the same in their books after charging depreciation @ 10% per annum on reducing balance method. In 1997, Kumar & Co. incurred Rs. 1,000 for reconditioning and re-sold the machinery for Rs. 90,000. Show the ledger accounts in the books of Mr. Balu and Kumar & Co. [Ans. Loss on repossession Rs. 18,000; Balance transferred to Machinery Rs. 63,000; Gain on sale of repossessed goods Rs. 26,000] (B.Com., Madras) V. Default and Partial Repossession

Books of Purchaser Problem 19 Balaji & Co. purchased from the vendor two machines of Rs. 10,500 each on hire purchase system. The payment was to be made Rs. 6,000 down and the remainder in three equal instalments of Rs. 5,000 each together with interest at 15% per annum. Balaji & Co. writes depreciation at 10% per annum on written down value and could not pay their second instalment. After negotiations, it was agreed that vendors would leave one plant with the purchaser adjusting the value of the other against amount due, treating the machines at 20% depreciation on diminishing balance. Show accounts in the books of Balaji & Co. [Ans. Loss on default: Rs. 1,785; Value of repossessed stock: Rs. 6,720; Value of one machine left with the buyer: Rs. 8,505] (B.Sc., Madras)

Hire Purchase and Installment Accounting

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Books of both Parties Problem 20 On 1.1.1994, X, a television dealer, bought 5 television sets from Superfine Television Co. on hire purchase. The cash price of each set was Rs. 20,000, it was agreed that Rs. 25,000 should be paid immediately and the balance in three instalments of Rs. 30,000 each at the end of each year. The Television Co. charges interest @ 10% per annum. The buyer depreciates television sets at 20% per annum on the diminishing balance method. X paid cash down and two installments but failed to pay the last installment. Consequently, the Television Co. repossessed three sets, leaving two sets with the buyer and adjusting the value of 3 sets against the amount due. The sets repossessed were valued on the basis of 30% depreciation p.a. on the written down value. The sets repossessed were sold by the Television Co. for Rs. 30,000 after necessary repairs amounting to Rs. 5,000. Open necessary ledger accounts in the books of both the parties. [Ans. Rs. 20,580; Profit on resale: Rs. 4,420] (B.C.A., B.Sc. (ICE), Madras) Problem 21 On 1.1.84 five trucks were purchased by ‘A’ on hire purchase system. The cash price of each truck is Rs. 55,000. The payment was to be made as follows: 10% of cash price down; 25% of cash price at the end of each of the 4 subsequent half years. The payment due on 31.12.84 could not be made and hence, trucks were seized by the vendors. But after negotiations, ‘A’ was allowed to keep three trucks on the condition that the value of the other two trucks could be adjusted against the amount due, trucks being valued at cost Iess 25% depreciation. A’s books are closed on 30th June each year and he charges 15% depreciation on trucks on the original cost. The vendors spent Rs. 6,000 on getting the trucks thoroughly overhauled and sold them for Rs. 95,000. Show the various accounts in the books of both the parties. [Ans. Loss on default Rs. 11,000] (B.Com., Madras) VI. Stock and Debtor System Problem 22 X Company Ltd. has a hire purchase department. Goods are sold on hire purchase at cost plus 50%. From the following particulars, find out the profit or loss made in the hire purchase department. Jan 1

Dec. 31

Goods out on hire purchase (at hire purchase price)

Rs.

Goods sold on hire purchase during the year (at hire purchase price)

Rs. 4,05,000

75,000

Cash received during the year

Rs. 2,80,000

Goods received back (instalments due Rs. 20,000)

Rs.

Goods with hire purchase Customers (at hire purchase price)

Rs. 1,50,000

2,500

[Ans. Profit: Rs. 92,500; Instalments due at the end: Rs. 30,000] (B.Com., Madras)

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Financial Accounting

Problem 23 A trading company has a hire purchase department. Goods are sold on hire purchase on cost plus 40%. From the following information, prepare Hire purchase Trading Account, in the books of the company: 1.1.2000

Goods out on hire purchase at hire purchase price

Rs.

31.12.2000 Goods sold on hire purchase at hire purchase price

63,000

Rs. 13,15,000

Cash received

Rs.

2,10,000

Rs. 8,400) valued at

Rs.

2,400

Goods with hire purchase customers at hire purchase price

Rs. 11,36,500

Goods repossessed (Hire purchase installments unpaid

[Ans. Closing instalment balance Rs. 23,100; Profit Rs. 63,000] (B.C.A./B.Se., Madras, B.C.A./B.Se. (ICE), Madras) Problem 24 A trader sells goods on hire purchase System. Prepare Hire Purchase Trading Account assuming that the seller charges 20% profit on cost price. 1998 Jan 1

Dec. 31

Stock out on hire purchase

Rs. 4,500

Stock in hand at shop

Rs.

600

Instalment overdue

Rs.

400

Stock on hire at Hire Purchase Price

Rs. 4,800

Stock in hand

Rs.

800

Instalments overdue

Rs.

700

Purchases during the year

Rs. 6,500

Cash received during the year

Rs. 6,840

[Ans. Profit Rs.1,090] (B.Sc., Madras) Problem 25 The following are the particulars from the books of a trader who sells goods of small value on hire purchase system at 50% profit on cost. 1991 Jan 1 Stock with the customers Stock in the shop Instalments due Dec 31 Stock in the shop Instalments due Goods Repossessed (instalments due Rs. 3,000) valued at which had been included in the stock at the end at Rs. 500

Rs. 9,000 18,000 5,000 20,500 9,000 500

Cash received from customers

60,000

Goods purchased during the year at cost

60,000

Prepare Hire Purchase Trading Account for the year 1991. [Ans. Profit Rs. 19,833; Stock with customers (closing) Rs. 29,000] (B.Com. (ICE), Madras)

Hire Purchase and Installment Accounting

559

VII. Instalment System

Only Journal Entries in Purchaser Book Problem 26 On 1.1.1994 Hari purchased machinery under instalment system. The down payment was Rs. 10,000 and the balance is payable in four annual instalments of Rs. 10,000 each. Interest is charged at 5% per annum. Hari writes off depreciation at 15% per annum on straight line method. Calculate the cash price of the machine, interest and give journal entries in the books of Hari. [Ans. Interest: 1st year: Rs. 1,773; 2nd year Rs. 1,362; 3rd year Rs. 930; 4th year Rs. 476] (B.Com., Madras)

Entries and Accounts in Both the Parties Problem 27 On 1.1.95 the Colliery Company purchased 5 wagons on the installment system. The cash price of the wagons was Rs. 1,490 and Rs. 400 was to be paid on signing the agreement and the balance in three instalments of Rs. 400 each at the end of each year. Interest is charged at 5% per annum by the wagon company. The Colliery Company has decided to write off 10% annually on the diminishing balance of the cash value. Make the entries and open the necessary accounts in the books of both the parties. [Ans. Interest: 1st year: Rs. 54.50; 2nd year: Rs. 37.22; 3rd year: Rs. 18.28; Interest Suspense A/c Rs. 110] (B.Com., Madras)

Ledger in Purchaser Problem 28 On 1.1.90 Velan bought a machine from Devi & Co. on the instalment system. The cost price of the machine was Rs. 17,430 and the payment was to be made as follows: Rs. 5,000 to be paid on signing on the agreement and the balance in three instalments of Rs. 5,000 each at the end of each year. It is agreed to charge interest at the rate of 10% by Devi & Co., VeIan has decided to write off 15% annually on the diminishing balance on the value of the assets. Show the ledger accounts in the books of Velan. [Ans. Interest 1st year Rs. 1,243; 2nd year Rs. 867; 3rd year Rs. 460; Interest suspense Rs. 2,570] (B.Com., Madras)

Ledger in both Problem 29 Vasantham company purchased a motor car from Sivan on the instalment system on Jan. 1, 2000 paying cash Rs. 20,000 and agreeing to pay three further instalrnents of Rs. 20,000 each on 31st December of the coming years. The cash price of the

560

Financial Accounting

car is Rs. 74,500 and Sivan charges interest at 5% per annum. Vasantham writes off depreciation at 10% per annum on written down value method. Show the ledger accounts in the books of Vasantham and Sivan. [Ans. Interest: 2000: Rs. 2,725; 2001: Rs. 1,861; 2002: (B.C.A./B.Sc., Madras)

Journal in both, Balance Sheet in Purchaser Problem 30 Mohan purchased a plant on instalment system from Rathnam & Co. on 1.1.90. The cash down price for the plant was Rs. 60,000. The price was to be paid as Rs. 19,152 down payment and the balance in three equal annual instalments commencing from 31.12.90 at 5% interest per annum. Re. 1 can buy annuities of Rs. 0.367215 at 5% for three years. Show journal entries in the books of both buyer and seller assuming the books are closed on 31st December each year and depreciation is charged at 10% per annum on reducing instalment method. Also, show how the items will appear in the Balance Sheet of Mohan on 31.12.90. [Ans. Interest 1st year: Rs. 2,042; 2nd year: Rs. 1,395; 3rd year: Rs. 715] (B.Com., Madras)

15

Branch Accounts

Learning Objectives After studying this chapter, you should be able to understand the Meaning, objects of branch accounts Types of branches Accounting methods for dependent branches Stock and debtors method Accounting treatment for various types of branches

BRANCH ACCOUNTS The word ‘branch’ means a conceptual extension or sub-division of a large business. Big business concerns open branches at various places to promote sales. When business concerns open a large number of divisions, departments, sections, units, establishments in various parts of a country or the world to extend business activities or to capture new market, such divisions, departments, sections and units are called branches. According to Section 29 of the Companies Act, 1956, “a branch is any establishment carrying on either the same or substantially the same activity as that carried on by the head office of the company”.

Object of the Branch Accounts Branch accounts are prepared 1. 2. 3. 4. 5. 6.

To ascertain profit or loss of branch To control branches To find out financial position of business To estimate branch requirement of goods or cash To give suggestions for improving efficiency of branches To comply with the provision of Company Act 1956 for maintenance of accounting records.

562

Financial Accounting

Types of Branches For the purpose of accounting, branches can broadly be classified into two categories namely 1. Inland branches 2. Foreign branches The inland branches can further be classified into (i) Dependent branches, and (ii) Independent branches.

Dependent Branches Some dependent branches receive goods from head office at cost price and make cash sales only. Some other branches receive goods from head office at cost price and make cash and credit sales. Still others receive goods from head office at invoice price and make cash and credit sales.

Independent Branches These branches not only receive goods from head office, but also manufacture goods or purchase goods from outside. These branches are fully independent, but at the same time they have to follow the instructions of their head office. So these branches keep full system of accounting.

Foreign Branches If branches are opened by a large organisation in foreign countries, those branches are called foreign branches.

Accounting Methods for Dependent Branches (i) (ii) (iii) (iv)

Debtors method Stock and debtors method Final Accounts method Wholesale branch method

Debtors Method Under this method, Branch Account is opened by head office to ascertain profit or loss at the end of the year, if branches is making cash sales only. If both cash and credit sales are made, then both Branch Account and Debtors Account are maintained for the same purpose. Stock and Debtors Method This is another method for ascertaining profit or loss of a branch. This method is applicable only to branches which receive goods from head office at invoice price and make cash and credit sales. Under this method, the following ledger accounts are opened in the books of head office. (a) Branch Stock Account (b) Branch Debtors Account (c) Goods Sent to Branch Account

Branch Accounts

563

(d) Goods Sent to Branch Account (e) Stock Reserve Account (f) Branch Adjustment Account. Final Accounts Method Under this method, Branch Trading and Profit and Loss A/c are prepared to ascertain profit in the books of head office. Wholesale Branch Method This method is useful to ascertain retail profit made by the branch, when goods are invoiced at wholesale price. For example, let us assume the cost price is Rs. 100 and the goods are invoiced to branch at wholesale price which is Rs. 150, the selling price (retail price) is Rs. 175. In this case branch has made a profit of Rs. 75 (i.e., Rs. 175 – Rs. 100), but the real profit made by the branch is Rs. 25 only. The reason being, by selling to wholeseller, profit of Rs. 50 would have been made by head office. So, contribution of the branch is only Rs. 50. Therefore, when head office has branches they earn additional profit because the branches sell goods to consumers at retail price which is more than the wholesale price. So, it is necessary to make a distinction between whole sale profit and retail profit. If the goods sent to branch remain unsold, it results in unrealised profit for which suitable stock reserve account has to be opened.

Accounting Entries in the Books of Head O sales only In the Books of Head Office (i)

When goods are sent to the branch

Branch Account To Goods sent to Branch Account

Dr.

xxx xxx

(ii) Goods sent to Branch Account To Branch Account (iii)

xxx xxx

When cheque sent to the branch to meet expenses

Branch Account To Bank Account (iv)

Dr.

Dr.

xxx xxx

When cash sales are made

Cash Account To Branch Account

Dr.

xxx xxx

(v) Branch Account

Dr.

xxx xxx

(vi)

When loss incurred by the branch xxx

To Branch Account

xxx

Financial Accounting

564

Book of the Head office Branch Account To Balance b/d To Opening Stock To Opening Petty Cash To Goods Sent to Branch A/c To Bank A/c Salary Rent Wages, etc.

xxx xxx xxx xxx

xxx xxx xxx

By Bank A/c (Cash sales) By Goods sent to Branch A/c (Goods returned) By Balance b/d Closing Stock Closing Petty Cash

xxx xxx xxx xxx xxx

xxx xxxx

xxxx

The accounting entries in the books of head office are the same as that adopted when goods are sent to branch at cost price. To calculate true profit and loss of the branch, it is necessary to make following adjustment entries to eliminate the profit (i.e., the difference between invoice price and cost price) (i) Stock Reserve A/c To Branch A/c

Dr.

xxx xxx

(ii) Goods sent to Branch A/c To Branch A/c

Dr.

xxx xxx

(iii) Branch A/c To Stock Reserve A/c

Dr.

xxx xxx

Method (i)

When goods are sent to Branch

Branch Stock A/c To Goods sent to Branch A/c

Dr.

xxx xxx

(ii) Good sent to Branch A/c To Branch Stock A/c (iii)

xxx xxx

When cheque sent to branch to meet expenses

Branch Expenses A/c To Bank A/c (iv)

Dr.

Dr.

xxx xxx

When cash sales are made

Cash A/c To Branch Stock A/c

Dr.

xxx xxx

Branch Accounts

(v)

When credit sales are made

Branch Debtors A/c To Branch Stock A/c (vi)

xxx xxx

Dr.

xxx xxx

Dr.

xxx xxx

Dr.

xxx xxx

When goods returned by debtors

Branch stock A/c To Branch Debtors A/c (xi)

Dr.

When goods damaged or spoiled

Goods Damaged Spoiled A/c To Branch Stock A/c (x)

xxx

When discount allowed to debtors

Branch Expenses A/c To Branch Debtors A/c (ix)

xxx

When cash received from debtors

Cash A/c To Branch Debtors A/c (viii)

Dr.

When cash received from debtors

Branch Debtors A/c To Branch Stock A/c (vii)

565

Dr.

xxx xxx

Adjustment entries

(a) Branch Stock Reserve A/c To Branch Adjustment A/c

Dr.

xxx xxx

(b) Good sent to Branch A/c To Branch Adjustment A/c

Dr.

xxx xxx

(c) Branch Adjustment A/c To Branch Stock Reserve A/c

Dr.

xxx xxx

(d) Branch Adjustment A/c To Branch Stock Reserve A/c (xii)

Closing entries

(a)

for Branch Expenses A/c

Branch Adjustment A/c To Branch Expenses A/c (b)

Dr.

xxx xxx

Dr.

xxx xxx

for Good sent to Branch A/c

Good sent to Branch A/c To Trading Account/Purchases A/c

Dr.

xxx xxx

566 (c)

Financial Accounting

for Branch Adjustment

(i) Branch Adjustment A/c

Dr.

xxx xxx xxx xxx

These branches are completely independent for all business activities but they have to follow the instruction of head office.

Accounting Treatment Recording transactions between Head office and Branch Transactions

Books of Branch

but not received by the branch

Goods in Transit A/c To Branch A/c

Goods sent by the branch, but

No entry

but not received by the branch

Cash in Transit A/c To Branch A/c

4

Cash sent by the branch, but

No entry

5

Asset purchased by the branch, but Asset account maintained

Branch Asset A/c To Branch A/c

Dr.

6

Depreciation on the above asset

Branch A/c To Branch Asset A/c

Dr.

7

Expense incurred by the head

Branch A/c

Dr.

(Ex-technical service)

(or) Branch Expenses A/c

8

Payment made by the branch

Dividend/Purchases A/c Dr. To Branch A/c

To Cash A/c

Cash/Bank A/c To Branch A/c

To Debtor A/c

1 2 3

Dr.

No entry Goods in transit A/c Dr.

Dr.

No entry Cash in Transit A/c Dr.

To Bank A/c Depreciation A/c Dr.

(Ex-dividend) 9

Cash collected by the head

Dr.

(Ex-branch debtor paying the 10

Cash collected by the branch

Branch A/c Dr. To Calls in Arrears A/c

Cash/Bank A/c Dr.

(Ex-collection calls in arrears from the shareholder) 11

Bills drawn by one branch (X Branch) on another branch (Y Branch)

Receiving (X) Branch A/c Dr. Books of Receiving (X) Branch To Paying (Y) Branch A/c Receiving Branch A/c Dr. Books of Paying (Y) Branch To Paying Branch A/c

12

Goods sent by one branch (X) to another branch (Y)

Receiving (Y) Branch A/c Dr. Books of Receiving (Y) Branch To Sending (X) Branch A/c Books of sending (X) Branch

A/c

Branch Accounts

567

At the end of the year, branches send their Trial Balance to head office. The head office will incorporate their Trial Balances. There are two different methods of incorporation – (1) Incorporation of all items in the Trial Balance (or) (2) Incorporation of net profit (or loss), assets and liabilities of branch (a)

For recording opening stock, purchases and Carriage, etc

Branch Trading A/c To Branch A/c (b)

Dr.

xxx xxx

For recording sales less return, closing stock, etc.

Branch A/c To Branch Trading A/c

Dr.

xxx xxx

(c) Branch Trading A/c

Dr.

xxx xxx

(d)

For transfer of gross loss xxx

To Branch Trading A/c (e)

xxx

For recording salaries, rent, etc. xxx

To Branch A/c (f)

xxx

For recording income

Branch A/c

Dr.

xxx xxx

(g) xxx xxx (h)

For transfer for net loss xxx xxx

(i)

For recording various asset of branch

Branch Assets A/c (specify the name of the assets) To Branch A/c (j)

Dr.

xxx xxx

For recording various liabilities of branch

Branch A/c

Dr.

xxx xxx

568

Financial Accounting

liabilities of branch (a)

For transfer of various assets

Branch Assets A/c To Branch A/c (b)

Dr.

xxx xxx

For transfer of various liabilities

Branch A/c

Dr.

xxx xxx

(c) Branch A/c

Dr.

xxx xxx

Accounting Treatment for Foreign Branches The accounting treatment applicable to home branches is also equally applicable to foreign branches. The only difference is the currency conversion.

Illustrations Index for Illustrations Type

Ill. No.

I

Branch Account

1–7

II

Branch Account, Branch Debtors Account

8–13

III

14–17

IV

Stock and Debtor System

18–24

V

Wholesale Pricing

25–27

VI

Adjustment Entries

28–32 33–36

VII

I – BRANCH ACCOUNT Journal Entries in the Head O

Books

Illustration 1 Sun Limited opened a branch at Madurai. It invoiced goods to the Branch at cost plus 25%. Goods sent to the branch (invoiced price) Cash sent to branch for expenses

Rs.

Rs.

50,000 Cash received from debtors

20,000

8,000 Bad debts written off

Sales – Cash

22,000 Stock on 31st December, (invoice price)

Credit

23,000

Journalise the entries to be made in the head office books.

600 4,800

Branch Accounts

569

Solution Particulars (1)

(2)

(3)

(4)

(5)

(6)

L.F.

Branch A/c To goods sent to Branch A/c

Dr.

Branch A/c To Bank A/c

Dr.

Bank A/c To Branch Stock A/c (Being cash sales made by the branch)

Dr.

Branch Debtors A/c To Branch Stock A/c (Being credit sales made by the branch)

Dr.

Bank A/c To Branch Debtors A/c (Being amount received from Branch Debtors Account)

Dr.

Branch expenses (Bad debts) To Branch Debtors A/c (Being bad debts recorded in the Branch Account)

Dr.

Journal Entries in Head O

Debit (Rs.)

Credit (Rs.)

50,000 50,000 8,000 8,000 22,000 22,000 23,000 23,000 20,000 20,000 600 600

B

Illustration 2 Ram Company Ltd., Chennai has a branch at Vellore to which goods are invoiced at cost plus 30%. The following are the transactions between the head office and the branch for the year ending 31.12.2005. Rs. Stock at the branch on 1.1.2005 13,000 Sundry debtors on 1.1.2005 25,000 Petty cash on 1.1.2005 125 Goods sent on branch 65,000 Total sales effected during the year 1,10,000 Cash sales 85,000 Cash received from branch debtors 42,000 Expenses incurred by the branch for the year 11,500 Branch stock on 31.12.2005 52,000 Petty cash on 31.12.2005 65 Prepare the necessary journal entries for these transactions and also show how the Branch Account will appear in the books of the Head Office.

Financial Accounting

570 Solution

Particulars (1)

(2)

(3)

(4)

(5)

(6)

(7)

L.F.

Vellore Branch A/c To Branch Stock A/c To Branch Sundry Debtor A/c To Branch Petty Cash A/c (Being the opening balances of stock, debtors and petty cash of branch is recorded)

Dr.

Vellore Branch A/c To Goods sent to Branch A/c (Being goods sent to branch at invoice price)

Dr.

Bank A/c To Vellore Branch A/c (Being cash sales and receipt from debtors accounted)

Dr.

Vellore Branch A/c To Bank A/c (Being expenses incurred by the branch accounted in Branch Account)

Dr.

Branch Stock A/c Branch Sundry Debtor A/c * Branch Petty Cash A/c To Vellore Branch A/c (Being the closing balances of stock, debtors and petty cash of branch is recorded)

Dr. Dr. Dr.

Stock Reserve A/c To Vellore Branch A/c 13,000 ¥ 100/130 = 10,000 13,000 – 10,000 = 3,000

Dr.

Goods sent to Branch A/c To Vellore Branch A/c 65,000 ¥ 100/130 = 50,000 65,000 – 50,000 = 15,000

Dr.

Debit (Rs.)

Credit (Rs.)

38,125 13,000 25,000 125

65,000 65,000 1,27,000 1,27,000

11,500 11,500

52,000 8,000 65 60,065

3,000 3,000

15,000 15,000

sent to Branch A/c) (8)

(9)

Vellore Branch A/c To Stock Reserve A/c 52,000 ¥ 100/130 = 40,000 52,000 – 40,000 = 12,000

Dr.

Vellore Branch A/c

Dr.

12,000 12,000

78,440 78,440

* Closing debtor balance Opening debtors

Rs. 25,000

(+) Credit sales = Total (1,10,000) – Cash sales (85,000)

25,000

Total debtor

50,000

(–) Receipt from debtors

42,000

Closing balance of debtors

8,000

Branch Accounts

571

Vellore Branch Account Date 2005 Jan 1

Dec 31

Particulars To Balance b/d Branch stock Branch Debtors Petty cash To Goods sent to Branch To Bank-expense To Stock Reserve

Rs.

Date 2005 Jan 1

13,000 25,000 125

Rs.

By Bank Cash sales Debtors

85,000 42,000 1,27,000

Dec 31 65,000 11,500

Particulars

By Stock on opening stock) To Goods sent to

3,000

12,000 stock)

78,440

15,000 By Balance c/d Branch stock Branch debtors Petty cash

52,000 8,000 65

transferred to

2,05,065

Goods ent at Cost P

2,05,065

old in Cash and Credit

Illustration 3 Madhav Brothers are having their head office at Delhi and branch at Meerut. The following are the transactions of the head office with the branch for the year ended 31st August, 2002: Rs. Stock at branch as on 1.9.2001

30,800

Debtors at the branch as on 1.9.2001

16,500

Petty cash as on 1.9.2001

500

Goods supplied to the branch

1,51,200

Remittance from branch: Cash sales–

Rs.

10,500

Realisation of debts–

Rs.

1,67,740 1,78,240

Amount sent to branch : Salary–

Rs.

7,400

Rent–

Rs.

2,400

Petty cash–

Rs.

3,000 12,800

Stock at branch as on 31.8.2002

23,150

Sundry debtors at the branch as on 31.8.2002

50,460

Petty cash as on 31.8.2002

Show the Meerut Branch Account in the books of the head office.

750

572

Financial Accounting

Solution Books of Madhav Brothers Meerut Branch Account Date

Particulars

2001 Sept 1

To Balance b/d Branch Stock Branch Debtors Petty Cash To Goods sent To Branch To Bank (Expenses) Salary Rent Petty Cash

Rs. 30,800 16,500 500

Date 2001 Sept 1

Particulars By Bank Cash Sales Debtors

Rs.

10,500 1,67,740 1,78,240

1,51,200

2002 Aug 31

7,400 2,400 3,000

By Balance c/d Branch Stock Branch Debtors Petty Cash

23,150 50,460 750

12,800 Loss A/c 40.800 to General A/c) 2,52.600

2,52.600

Branch Account at Cost Price, at Invoice Price Illustration 4 A Company of Delhi has a branch at Chennai. Goods are sent by the head office at invoice price which is at the profit 20% on invoice price. All expenses of the branch are paid by the head office. From the following particulars, prepare Branch Account in the head office books: (a) When goods are shown at cost price, and (b) When goods are shown at invoice price. Opening Balance: Stock at invoice price Debtors Petty Cash Goods sent to branch at invoice price Expenses made by head office: Rent Wages Salary Remittances made of head office: Cash sales Cash collected from debtors Goods returned by branch at invoice price

Rs. 11,000 1,700 100 25,000 600 200 900 2,650 21,00 400

Branch Accounts

Balances at the end: Stock at invoice price Debtors at the end Petty cash

573

Rs. 13,000 2,000 25

Solution

Date

Particulars To Balance b/d Branch stock 11,000 ¥ 80/100 Branch Debtors Petty Cash To Goods sent to Branch (–) Returns 19,600 ¥ 80/100 To Bank (Expenses) Rent Wages Salaries

Rs.

Date

8,800 1,700 100

Rs. 2,650 21,000 23,650

By Balance c/d Branch Stock 13,000 ¥ 80/100 Branch Debtors Petty Cash

20,000 (400) 19,600 15,680

600 200 900

Particulars By Bank Cash Sales Debtors

10,400 2,000 25

1,700

8,095

(Profit transferred to General Profit

36,075

Date

Particulars To Balance b/d Branch Stock Branch Debtors Petty Cash To Goods sent to Branch (–) Returns To Bank (Expenses) Rent Wages Salaries

Rs. 11,000 1,700 100

A/c

Date

Particulars By Bank Cash sales Debtors

Rs. 2,650 21,000

23,650

By Stock Reserve 20,000 (400)

600 200 900

19,600

1,700

To Stock Reserve stock) 13,000 ¥ 20/100

36,075

stock) 11,000 ¥ 20/100 To Goods sent to 19,600 ¥ 20/100 By Balance c/d Branch Stock Branch Debtors Petty Cash

2,200

3,920 13,000 2,000 25

2,600

8,095

44,795

44,795

574

Financial Accounting

Invoice P

Cost Plus P

Cash ales only

Illustration 5 Sun & Co. has a branch in Tiruchi and the transactions of the branch for the year ended 31.12.1997 were Rs. Stock of goods at branch on 1.1.97 (Invoice price)

9,200

Goods sent to branch (Invoice price)

68,400

Salaries and wages

3,720

Gross cash sales by branch

68,550

Taxes and insurance

880

Rent

1,450

Sundry expenses

390

Stock of goods as on 31.12.97 (Invoice price)

8,950

The branch sales are exclusively cash and the goods sent to branch have been 1 invoiced at 33 % on cost. You are required to prepare the Branch Account, 3 assuming that all cash sales proceeds are remitted to head office and all expenses of the branches are separated from head office. Solution Tiruchi Branch Account Date

Particulars

1997 Jan 1

To Balance b/d Branch Stock To Goods sent to Branch To Bank (Expenses) Salary Tax and Insurance Rent Sundry Expenses

Dec 31

Rs. 9,200 68,400

Dec 31

3,720 880 1,450 390

Date 1997 Jan 1

6,440

Particulars

Rs.

By Bank Cash Sales By Stock Reserve

68,550

stock) 9,200 ¥ 1/4 To Goods sent to

2,300

68,400 ¥ 1/4 By Balance c/d Branch Stock

17,100 8,950

To Stock Reserve stock) 8,950 ¥ 1/4 A/c

2,238

10,622

96,900

Note 1/3 on cost price = ¼ on sales price

96,900

Branch Accounts

575

Commission Illustration 6 From the following particulars prepare a Branch Account showing the profit or loss from the branch. Rs. Opening stock at the branch

15,500

Goods sent to the branch

45,000

Sales

60,000

Salaries

5,000

Other expenses

2,000

Closing stock could not be ascertained, but it is known that the branch usually sells at cost plus 20%. The branch manager is entitled to a commission of 5% on the profit of the branch before charging such commission. Books of Head Office Branch Account Date

Particulars To Balance b/d Branch Stock To Goods sent to Branch To Bank (Expenses) Salary Other Expenses To Manager’s Commission*

Rs.

Date

45,000 1,35,000

Particulars By Bank Cash Sales By Balance c/d Branch Stock

Rs. 1,80,000 30,000

15,000 6,000 450

A/c (Profit transferred to General Profit 8,550 2,10,000

Working Note Gross profit on sales = 1,80,000 ¥ 20/120 (–) Expenses (15,000 + 6,000) Net profit before manager’s commission * Manager’s commission = 9,000 ¥ 5%

Invoice Price—Cost Plus P

2,10,000

= Rs. 30,000 = Rs. 21,000 = Rs. 9,000 = Rs. 450

Cash and Credit ales

Illustration 7 A head office in Mumbai has a branch in Allahabad to which goods are supplied by head office at cost plus 25%. All cash received by the branch is daily remitted to head office. All expenses are paid from Mumbai. From the following information, show how the Branch A/c will appear in head office books.

576

Financial Accounting

Rs. Stock on 1.4.1990 (at invoice price)

1,25,000

Debtors on 1.4.1990

1,20,000

Goods invoiced from Mumbai

4,00,000

Remittances to Mumbai Cash Sales

1,60,000

Cash received from Debtors

2,90,000 4,50,000 24,000

Cheques received from Mumbai Wages and Salaries

1,10,000

Rent, Rates, etc.

30,000

Sundry Expenses

5,100 1,45,100

Stock on 31.3.1991 (Invoice price)

1,50,000

Debtors on 31.3.1991

2,25,000

Solution Books of Mumbai Head Office Allahabad Branch Account Date

Particulars

1990 Apr 1

To Balance b/d Branch Stock Branch Debtors To Goods sent to Branch (–) Returns

1991 Mar 31

To Bank (Expenses) Wages and Salary Rent and Rates Sundry Expenses

Rs. 1,25,000 1,20,000 4,00,000 24,000

Date 1990 Apr 1

Particulars By Bank Cash Sales Debtors

Rs.

1,60,000 2,90,000 4,50,000

3,76,000

1991 Mar 31

By Stock Reserve stock) 1,25,000 ¥ 25/125 To Goods sent to

25,000

1,10,000 30,000 5,100

1,45,100

3,76,000 ¥ 25/125 By Balance c/d Branch Stock Branch Debtors

75,200 1,50,000 2,25,000

To Stock Reserve stock) 1,50,000 ¥ 25/125 A/c

30,000

1,29,100

9,25,200

9,25,200

Branch Accounts

Cost P

Cash

Credit

577

P

Illustration 8 The following information relates to Madurai branch: Rs. 11,200 Sales at Branch : 6,300 Cash 51,000 Credit

Stock on 1st January Branch debtors on 1st January Goods sent to branch

Rs. 25,000 39,000 64,000

Cash sent to branch for : Rent Salaries Petty Cash

Cash received from debtors Stock on 31st December

1,500 3,000 500

41,200 13,600

5,000

Prepare Branch Account for the year. Solution Books of Bombay Head Office Allahabad Branch Account Date Jan 1

Particulars To Balance b/d Branch Stock Branch Debtors To Goods sent to Branch To Bank (Expenses) Rent Salaries Petty Cash

Rs.

Date

11,200 6,300

Jan 1

Particulars By Bank Cash Sales Debtors

Rs.

25,000 41,200

66,200

51,000 Dec 31 1,500 3,000 500

By Balance c/d Branch stock Branch Debtors* Petty Cash

13,600 4,100 500

Dec 31 A/c (Profit transferred to General Profit

5,000

10,900 84,400

84,400

* Branch Debtors Account Date Jan 1

Particulars To Balance b/d To Sales–Credit

Rs. 6,300 39,000

Date Dec 31

Particulars By Bank–Received By Balance c/d (Balance)

45,300

Cost Plus P Head O (Bad

C

Credit O Returns)

Rs. 41,200 4,100 45,300

Goods Received from

Illustration 9 A head office at Chennai invoices goods to its branch at Madurai at cost plus 25%. The branch also makes its independent purchases from outside for which payments

Financial Accounting

578

are made by the head office. All expenses are paid by the head office and all cash collections made by the branch are limited to the head office every day. From the following particulars, prepare the Madurai Branch Account as they would appear in the books of the Chennai head office for the year ended 31st March, 1999: Rs. 1.4.98

Sundry Debtors

10,000

31.3.99

Stock:

Goods sent to branch

80,000

Bad debts

1,000

12,000 Outside goods

15,000

Discount allowed

3,000

Returns inward

12,000

Cash received from customers

90,000

Branch expenses

18,000

Cash sales

30,000

Total sales

1,50,000

Purchases from outside

45,000

Stock : 16,000 Outside goods

20,000

Solution Books of Head Office Madurai Branch Account Date

Particulars

1998 Apr 1

To Balance b/d Branch Stock Goods Outside Goods

Branch Debtors To Goods sent to Branch 1999 To purchases Mar 31 (from outside) To Expenses To Stock Reserve

Rs.

Date 1998 Apr 1

12,000 15,000

Particulars By Bank Cash Sales Debtors

10,000

1,20,000

80,000

1999 By Stock Mar 31 on opening stock-head 2,400

45,000 18,000 3,200

12,000 ¥ 25/125 To Goods sent 16,000 80,000 ¥ 25/125 By Balance c/d Branch stock

16,000 ¥ 25/125 15,200

1,98,400 Note – 25/100 on cost price = 25/125 on sales price * Branch Debtors Account

30,000 90,000

27,000

stock-head

A/c (Profit transferred to General Profit

Rs.

Goods Outside Goods Branch Debtors*

16,000 20,000 36,000 24,000

1,98,400

Branch Accounts

Date 1998 Apr 1

Particulars

Rs.

Date

Particulars

579 Rs.

1998 To Balance b/d To Sales-Credit

10,000 1,20,000

By Bank (Receipt) By Bad Debts By Discount By Return Inwards By Balance c/d

90,000 1,000 3,000 12,000 24,000

1,30,000

Cost Plus P

Cash B

1,30,000

ebtor Balance

Illustration 10 The Dhamodar Accessories has a branch at Salem. Goods are invoiced to the branch at cost plus 25%. Branch is instructed to deposit cash every day in the head office account in the bank. All expenses are paid by cheque by the head office except petty cash expenses which are paid by the branch manager. From the following particulars, prepare Branch Account in the books of head office. Rs. Stock on 1st January, 2002

2,500

Stock on 31st December, 2002

3,000

Sundry debtors on 1st January, 2002

1,400

Sundry debtors on 31st December, 2002

1,800

Cash sales for the year

10,800

Credit sales for the year

7,000 15,000

Furniture purchased by the branch manager

1,200 18,200 1,640

Expenses paid by the branch

120 1,300

Solution

To Balance b/d Branch Stock Branch Debtors To Goods sent to Branch To Bank-Expense To Bank-Purchase of Safe To Stock Reserve stock) 3,000 ¥ 25/125

2,500 1,400 18,200 1,640 1,300

600

A/c (Profit transferred to General Profit 1,880 27,520

By Bank (Net amount remitted) By Stock on opening stock) 2,500 ¥ 25/125 To Goods sent 18,200 ¥ 25/125 By Balance c/d Branch Stock Branch Debtors (i) By Furniture By Safe By Cash (ii)

15,000

500

3,640 3,000 1,800 1,200 1,300 1,080 27,520

580

Financial Accounting

Particulars

Rs.

Particulars

Rs.

To Balance b/d

1,400

To Sales–Credit

7,000 By Balance c/d

1,800

8,400

8,400

6,600

(ii) Cash in hand has been found as follows Cash sales

10,800

(+) cash received from debtors (i)

6,600 17,400 15,000

(–) Furniture purchased

1,200

(–) Expenses paid

120 (–) 16,320

Cash in hand with branch

Cost Plus P

1,080

Wages Outstanding

Illustration 11 The Bharath Stores Ltd., Chennai has a branch at Madurai. Goods are invoiced to the branch at selling prices being cost plus 25%. The branch keeps its own sales ledger and deposits all cash received daily to the credit of the Head Office Account opened at the Bank of Madurai Ltd., Madurai. All expenses are paid by cheque from Chennai. From the following details, prepare a Branch Account in the head office books and make the necessary adjustments therein to arrive at the actual profit and loss during the year ended 31st March, 1997: Rs. Stock, 1st April, 1996

75,000

Stock, 31st March, 1997

90,000

Sundry debtors, 1st April, 1966

42,000

Sundry debtors, 31st March, 1997

54,000 5,46,000

Rent, rates and taxes Sundry expenses

24,000 4,800

Cash sales for the year

3,24,000

Credit sales

2,10,000

Cash received from ledger accounts

1,98,000

Wages paid Wages still owing

20,400 2,000

Branch Accounts

581

Solution Books of Bharath Stores Ltd. Madurai Branch Account 1996 Apr 1

1997 Mar 31

To Balance b/d Branch Stock Branch Debtors To Goods sent to Branch To Bank (Expenses) Rent, Rates and Tax Sundry Expenses Wages

1996 Apr 1 75,000 42,000 5,46,000

3,24,000 1,98,000 5,22,000

1997 Mar 31

24,000 4,800 20,400 49,200

To Wages Outstanding To Stock Reserve (Load on closing stock) 90,000 ¥ 25/125

By Bank Cash sales Debtors By Stock Reserve (Load on opening stock) 75,000 ¥ 25/125 To Goods sent to Branch (Load) 5,46,000 ¥ 25/125 By Balance c/d Branch stock Branch Debtors*

15,000

1,09,200 90,000 54,000

2,000

18,000 58,000

A/c (Profit transferred to General Profit and Loss A/c)

7,90,200

7,90,200

Note – 25/100 on cost price = 25/125 on sales price * Branch Debtors Account Date 1996 Apr 1

Particulars

Rs.

Date

Particulars

Rs.

1996 To Balance b/d To Sales–Credit

42,000 2,10,000

By Cash 1997 Mar 31

1,98,000

By Balance c/d 54,000

2,52,000

Sales Plus P

B

2,52,000

Balance

Illustration 12 Bharani Corporation is having its branch in Chennai. Goods are invoiced to the branch at 20% profit on sales. Branch has been instructed to send all cash daily to the head office. All expenses are paid by the head office except petty expenses which are met by the branch manager. From the following particulars, prepare Branch Account in the books of Bharani Corporation.

582

Financial Accounting

Rs. Stock on 1st January, 2002 (Invoice price)

Rs. Discount allowed to debtors

30

15,000

Sundry debtors on 1st January

9,000

Cash in hand on 1st January

400 1,200

Rent

1,200

Salary

2,400

Stationery

Goods invoiced from the

300

80,000 1,000

Petty expenses paid by the branch manager

480

Depreciation is to be provided on branch furniture at 10% per annum

Cash received from debtors

30,000

Stock on 31st December, 2002 at invoice price.

Cash sales

50,000

Credit sales

30,000

Goods returned by debtors

280

14,000

Solution Chennai Account Date

Particulars To Balance b/d Branch Stock Branch Debtors Cash Furniture To Goods sent to Branch (–) Returns To Bank (Expenses) Rent Salary Stationery

Rs. 15,000 9,000 400 1,200 80,000 1,000

1,200 2,400 300

A/c (Profit transferred to General Profit

Particulars By Bank Cash Sales Debtors

3,900

79,000 ¥ 20/100 By Balance c/d Branch Stock Branch Debtors* Cash–Opening (–) Petty Expenses

11,190

50,000 30,000 80,000

on opening stock) 15,000 ¥ 20/100 To Goods sent to

2,800

Rs.

By Stock

79,000

To Stock on closing stock) 14,000 ¥ 20/100

Date

Furniture– Opening (–) Depreciation 10%

1,22,490

3,000

15,800 14,000 8,490 400 280 120

1,200 120

1,080

1,22,490

* Branch Debtors Account Particulars To Balance b/d To Sales–Credit

Rs.

Particulars

Rs.

9,000 By Bank – Received 30,000 By Returns Inward By Discount Allowed By Balance c/d

30,000 480 30

39,000

39,000

8,490

Branch Accounts

P

Insurance P

583

Petty Cash B

Furniture Illustration 13 From the details given below relating to Patna branch for the year ending March 31, 2002, prepare Patna Branch Account and Branch Debtors Account in the books of head office. Show your working clearly. Goods are invoiced to give a profit of 20% of selling price. Rs. 5,000 2,000 1,000 200 50 1,000 40,000 55,000 70,000 16,000 500 500

Stock on 1.4.2001 Debtors on 1.4.2001 Furniture on 1.4.2001 Petty cash on 1.4.2001 Insurance prepaid on 1.4.2001 Salaries due on 1.4.2001 Goods sent to branch Cash sales Total sales Cash received from debtors Goods returned by the branch Goods returned by the debtors Cash sent to the branch for : Rent Salaries Petty Cash Insurance (upto June 2002) Petty cash expenses incurred by the branch Stock on 30.3.2002 Depreciate Furniture by 20%

3,600 10,200 600 400 500 3,000

Solution In the Books of Head Office Patna Branch Account 2001 Apr 1

2002 Mar 31

2001 Apr 1

To Balance b/d Branch Stock Branch Debtors Furniture Petty cash Insurance Prepaid To Goods sent to Branch (–) Returns

40,000 500

To Bank (Expenses) Rent Salary Petty cash Insurance

3,600 10,200 600 400

5,000 2,000 1,000 200 50

1,000 55,000 16,000 71,000

2002 By Stock 39,500 Mar 31 on opening stock) 5,000 ¥ 20/100 To Goods sent to

14,800

To Stock on closing stock) 3,000 ¥ 20/100

By Balance b/d Salary outstanding By Bank Cash Sales Debtors

600

39,500 ¥ 20/100 By Balance c/d Branch Stock Branch Debtors* Petty Cash Opening Balance (+) Cash from

1,000

7,900 3,000 800 200 600 Contd.

Financial Accounting

584 Contd. 2002 Mar 31

22,750 (–) Expenses by Branch

(500) 300

Prepaid Insurance 400 ¥ 3/12 Furniture–Opening (–) Depreciation

100 1,000 (200) 800

85,900

85,900

* Branch Debtors Account Particulars To Balance b/d To Sales – Credit Total Sales (–) Cash Sales

Rs.

70,000 (55,000)

Particulars

2,000 By Cash–Received By Sales Return By Balance c/d

Rs. 16,000 200 800

15,000 17,000

17,000

III – BRANCH TRADING, P AND L ACCOUNT, BALANCE SHEET Illustration 14 A company has a branch at Delhi. From the following particulars, find out the profit earned by that branch Rs. Opening stock (Invoice price) Goods sent to branch at invoice price Expenses at branch Sales

20,000 1,10,000 6,000 1,20,000

Goods are invoiced to the branch at cost plus 25%; the sale price is cost plus 50%. Also ascertain the stock reserve that should be maintained in respect to unrealised profit on stock. Solution Books of Head Office Branch Trading Account Particulars To opening Stock (Invoice price) To Goods sent to Branch (Invoice price) To Expenses

Rs.

Particulars

20,000 By Sales By Closing Stock

Rs. 1,20,000 30,000

1,10,000 6,000 14,000 1,50,000

1,50,000

Branch Accounts

Date

Particulars

Rs.

To Balance b/d (Invoice price) To Goods sent to Branch

Date

20,000

Particulars

Rs.

By Sales 1,20,000 ¥ 125/150* (Converting sale price into invoice price) By Balance c/d (Invoice price)

1,10,000

585

1,50,000

1,00,000

30,000 1,30,000

Note

Stock reserve = 1,00,000 ¥ 25/125 = Rs. 20,000

Illustration 15 A Madras merchant has a branch at Pudukottai to which goods are sent at cost plus 25%. The branch keeps its own sales ledger and remits all cash received to the head office every day. All expenses are paid from the head office every day. The transactions for the branch were as follows: Rs. Opening stock at invoice price

Rs.

11,000 Cheques sent to Branch :

Opening debtors

100 Rent

Opening petty cash

100 Wages

200

2,650 Salary

900

Cash sales Credit sales

23,950 Closing stock

Goods sent to branch at invoice price

20,000 Closing debtors

600

13,000 2,000

Bad debts

300 Closing Petty Cash (including miscellaneous income of Rs. 25 not remitted)

Allowance to customers

250 Collection from debtors

Returns inwards

500

125

21,000

Prepare the Branch Trading and Profit and Loss Account and Branch Account for the year 20X1. Book of Madras Merchant (Head Office) To Opening Stock ¥ 25/125)

11,000 2,200

To Goods sent to Branch (–) Returns Net Goods ¥ 25/125)

20,000 (300) 19,700 (3,940)

By Sales Cash 8,800 Credit Net Sales (–) Returns

2,650 23,950 26,600 (500) 26,100

By Closing Stock 15,760 11,940 36,500

¥ 25/125)

13,000 2,600 10,400 36,500 Contd.

586

Financial Accounting

Contd. To Allowance To Rent To Wages To Salary To Bad Debts

250 600 By Miscellaneous 200 Income 900 300 9,715

11,940 25

11,965

11,965

Note 25/100 on cost price = 25/125 on sales price. Branch Account 20X1 Jan 1

To Balance b/d Branch Stock Branch Debtors Petty Cash To Goods sent to Branch (–) Returns

11,000 100 100

20X1 Dec 31

By Bank Cash Sales Debtors

2,650 21,000 23,650

20,000 (300)

20X1 Dec 31 19,700

To Bank Rent Wages Salary

20X1 Jan 1

600 200 900 1,700

To Stock Reserve stock) (13,000 ¥ 25/125)

2,600

A/c (Profit transferred to General Profit

9,715 44,915

By Stock opening stock) (11,000 ¥ 25/125) To Goods sent (19,700 ¥ 25/125) By Balance c/d Branch Stock Branch Debtors Petty Cash

2,200

3,940 13,000 2,000 125

44,915

Illustration 16 Goods are invoiced to the branch by the head office at Rs. 9,200 so as to give 25% profit on cost. From the following particulars, prepare (a) Branch Profit and Loss Account (b) Branch Account. Rs. Sales by the branch Cash remitted by the branch

Stock at the end (Invoice price) Write off furniture at 10%

8,460 8,060 200 200 800 600

Branch Accounts

587

Solution Book of Head Office To Opening Stock To Goods sent to Branch (–) Returns Net Goods ¥ 25/125)

Nil By Sales By Closing Stock ¥ 25/125)

9,200 200 9,000 1,800

8,460 600 120 480

7,200 1,740 To Expenses To Depreciation Furniture 800 ¥ 10%

8,940

8,940

200

1,740

80 1,460 1,740

1,740

Note 25/100 on cost price = 25/125 on sales price. Branch Account To Balance b/d Branch Stock Branch Debtors To Goods sent to Branch (–) Returns To Expenses To Depreciation (Furniture) To Stock Reserve

By Bank Cash to

Nil Nil

8,060 To Goods sent to

9,200 200

(9,000 ¥ 25/125) By Balance c/d Branch Stock Branch Debtors*

9,000 200 80

1,800 600 400

120

stock) (600 ¥ 25/125) A/c

1,460

10,860

10,860

*Branch Debtors Account Date

Particulars To Balance b/d To Sales–Credit

Rs. Nil 8,460

Date

Particulars By Cash–Received By Balance c/d

8,460

Illustration 17 A branch sent the following Trial Balance to its head office.

Rs. 8,060 400 8.460

588

Financial Accounting

Rs.

Rs. –

57,840

Sundry creditors

–

14,000

Sales

–

2,20,000

9,000

–

Balance at bank Cash in hand Sundry debtors Purchases

140

–

54,000

–

1,60,000

–

Rent and rates

4,000

–

General expenses

7,000

–

12,000

–

Salaries Bad debts Machinery Stock on 1st January

700

–

2,400

–

4,600

–

38,000

–

2,91,840

2,91,840

The proportion of head office expenses to be charged to the branch is Rs. 4,500. The salaries include a sum of Rs. 2,600 paid to branch manager who is further entitled to 15% commission on the net profit of the branch before charging such commission. The branch stock on 31st December was Rs. 22,000. Prepare the Branch Trading and Profit and Loss A/c and Balance Sheet allowing 10% depreciation on the fixed assets. Solution Book of Head Office Rs. To Opening Stock To Purchases

To Rent and Rate To General Expenses To Salaries To Bad Debts To Depreciation On Fixtures 2,400 ¥ 10% On Machinery 4,600 ¥ 10% To Commission to Branch Manager (15,100 ¥ 15%)

Rs.

38,000 By Sales 1,60,000 By Closing Stock 44,000

2,20,000 22,000

2,42,000

2,42,000

4,000 7,000 12,000 700 4,500

44,000

240 460 2,265 12,835 44,000

44,000

Branch Accounts

Liabilities

Rs.

Sundry Creditors Branch Manager’s Commission due

57,840 4,500 12,835

Assets

589

Rs. 140 9,000 54,000 22,000

14,000 Cash 2,265 Bank Debtors Stock Fixtures 75,175 (–) Depreciation (10%)

2,400 (240)

Machinery (–) Depreciation (10%)

4,600 (460)

2,160

4,140 91,440

91,440

IV – STOCK AND DEBTOR SYSTEM Branch

Cost Plus P

Illustration 18 The Mumbai head office sent goods to the Chennai Branch at 25% profit over costs. From the following details prepare the Branch Account in the head office books and ascertain the net profit at the branch. Rs. Opening stock at branch at invoice price

20,000

Goods sent to branch at invoice price

90,000 6,000

Pilferage at branch at the cost price of branch

1,200

Closing stock at branch at its cost

16,000

Sales at branch

1,05,000

Salaries and wages at branch

6,000

Other expenses at branch

3,000

Chennai branch received Rs. 4,000 from insurance company in settlement of the claim for the loss of goods in transit. Solution

Date

Particulars To Balance b/d (Invoice price) To Goods sent to Branch To Surplus (Invoice price) (Balance)

Rs. 20,000 90,000 18,200 1,28,000

Date

Particulars By Cash Sales price) By Pilferage (invoice price) By Balance c/d (Invoice price)

Rs. 1,05,000 6,000 1,200 16,000 1,28,200

590

Date

Financial Accounting

Particulars

Rs.

Date

To Branch Stock

Particulars

transit 6,000 ¥ 25/125) To Branch Stock

1,200

1,200 ¥ 25/125) To Branch Stock

240

16,000 ¥ 25/125)

3,200 21,000

stock 20,000 ¥ 25/125) By Goods sent to Branch ¥ 25/125) By Branch Stock 18,200 ¥ 25/125)

25,640 To Branch Expenses Salary/wages Other Expenses

4,000

18,000

3,640 25,640 21,000

6,000 3,000 9,000

6,000 ¥ 100/125 To Pilferage (Cost price) 1,200 ¥ 100/125

Rs.

By Branch Stock

By Surplus (Cost price) 18,200 ¥ 100/125 By Bank (Insurance claim received)

14,560 4,000

4,800 960 24,800 39,560

39,560

Note 25/100 on cost price = 25/125 on invoice price.

Illustration 19 B.K. Ltd. operates a retail branch at Ranchi. All purchases are made by the head office in Kolkata, goods for the branch being delivered to it direct and charges out at selling price which is cost price plus 50%. All cash received by the branch is remitted to Calcutta. Branch expenses are paid by the branch out of an imprest amount which is reimbursed by Kolkata monthly. The branch keeps a sales ledger and certain essential subsidiary books, but otherwise all branch transactions are recorded in the books of Kolkata office. On 1st January, stock-in-trade at the branch, at selling price, amounted to Rs. 48,660 and debtors to Rs. 6,440. During the year ended 31st December the following transactions took place at the branch: Goods received by the branch at selling price Cash sales Credit sales Goods returned to Kolkata at selling price Reduction in selling price authorised by head office Cash received from debtors Debtors written off as irrecoverable Cash discount allowed

Rs. 1,21,800 64,150 51,280 1,560 970 42,660 650 1,120

Branch Accounts

591

A consignment of goods dispatched to the branch in December at a selling price of Rs. 1,200 was not received by the branch until 31st December and had not been included in its stock figure. The expenses relating to the branch, for the year ended 31st December amounted to Rs. 17,290. On 31st December physical stock at the branch, at selling price, amounted to Rs. 52,200. You are required to write up the Branch Stock Account, Branch Adjustment Account including Branch Profit and Loss Account in Kolkata books for the year ended 31st December. Solution Books of Calcutta Head Office Date

Particulars To Balance b/d (Invoice price) To Goods sent to Branch (+) Not received (–) Returns

Rs. 48,660

Date

Particulars By Cash Sales By Branch Debtors–Credit

Rs. 64,150 51,280 1,15,430

1,21,800 1,200 1,23,000 (1,560) 1,21,440

By Branch Adjustment (Reduction in Selling price) Shortage

970 300

By Balance c/d (Invoice price) (+) Not received 1,70,100

Particulars

Rs.

stock–53,400 ¥ 50/150)

Particulars

Particulars

Rs.

100 48,660 ¥ 50/150)

16,220

970 1,21,440 ¥ 50/150

40,480

17,800 37,830 56,700

To Branch Stock Shortage (Cost price) 300 ¥ 100/150 To Branch Expenses To Branch Debtors Bad Debts Discount Allowed

53,400 1,70,100

By Branch Stock

To Branch Stock 300 ¥ 50/150) To Branch Stock (Reduction on Selling price) By Branch Stock

52,200 1,200

Rs.

56,700

Particulars

Rs.

By Branch Adjustment A/c 37,830 200 17,290 650 1,120 18,570 37,830

37,830

Financial Accounting

592

ales at Cost Price Illustration 20 The Kolkata Commercial Company invoiced goods to its Jamshedpur Branch at cost. The head office paid all the branch expenses from its bank except petty cash expenses which were paid by the branch. From the following details relating to the branch, prepare, (1) (2) (3) (4)

Branch Stock Account Branch Debtors Account Branch Expenses Account Branch Profit and Loss Account Rs.

Rs.

Stock (Opening)

21,000

Discount to customers

Debtors (Opening)

37,800

Bad debts

1,800

Goods returned by customers to branch Salaries and wages

1,500

Petty cash (Opening)

600 78,000 3,000

Cash sales

52,500

Advertisement

2,400

Cash received from debtors

85,500

Stock (Closing)

19,500

Allowances to customers

Rent and rates

4,200

18,600 3,600

Debtors (Closing)

29,400

Petty cash (Closing) Credit sales

300 85,200

600

Solution

Date

Particulars To Balance b/d To Goods sent to Branch To Branch Debtors

Rs.

Date

21,000 78,000 1,500 59,700

Particulars By Cash By Goods sent to Branch By Branch Debtors By Balance c/d

1,60,200

Date

Particulars To Balance b/d To Branch Stock

Rs. 37,800 85,200

1,23,000

Rs. 52,500 3,000 85,200 19,500 1,60,200

Date

Particulars By Cash By Bad Debts By Allowances By Discount By Branch Stock By Balance c/d

Rs. 85,500 1,800 600 4,200 1,500 29,400 1,23,000

Branch Accounts

Date

Particulars To Branch Debtors Bad Debts Allowance Discount To Bank Advertisement Salary/wages Rent/rates

Rs.

6,600

2,400 18,600 3,600

24,600

600 300

Particulars

Rs.

Account (Transfer)

1,800 600 4,200

To Petty Expenses Opening (–) Closing

Date

31,500

300 31,500

Date

Particulars

Rs.

To Branch Expenses -

593

31,500

Date

31,500 28,200

Particulars

Rs.

By Branch Stock

59,700

count 59,700

59,700

Illustration 21 A head office in Mumbai has a branch office at Chennai. Goods are sent at cost 1 33 % profit. From the following particulars, prepare Branch Stock Account, Branch 3 Debtors Account, Branch Expenses Account and Branch Adjustment Account: Rs. Stock on 1.1.99 (Invoice price)

15,000

Debtors on 1.1.99

11,400

Goods invoiced to branch during the year (invoice price)

67,000 Rs.

Sales at Branch :

Cash

31,000

Credit

37,400 68,400

Cash received from debtors Bad debts written off Discount allowed to customers Expenses at branch Stock on 31.12.1999 (Invoice price)

40,000 250 300 6,700 13,400

594

Financial Accounting

Solution Books of Head Office in Mumbai Date 1999 Jan 1

Particulars

Rs.

Date 1999

To Balance b/d (Invoice price) To Goods sent to Branch (Invoice price)

15,000

Particulars By Sales Cash Credit

Rs. 31,000 37,400 68,400

67,000

Dec 31

By Balance c/d (Invoice price) By Adjustment Shortage-Invoice price (Balance)

82,000

Date 1999 Jan 1

Particulars

Rs.

200 82,000

Date

Particulars

Rs.

1999 To Balance b/d To Sales-Credit

11,400 47,400 Dec 31

By Cash Received By Bad Debts By Discount By Balance c/d (Balance)

48,800

Date

13,400

Particulars

Rs.

To Bad debt To Discount Cash-Expenses

40,000 250 300 8,250 48,800

Date

250 300 6,700

Particulars By Branch Adjustment (Transfer)

7,250

Rs. 7,250 7,250

(iv) Goods sent to Branch Account Date

Particulars

Rs.

Date

To Branch

Particulars By Branch Stock

¥ ¼)* To Purchase (Balance)

Rs. 67,000

16,750 50,250 67,000

67,000

*Note – 1/3 of cost price = ¼ of sale price

Date

Particulars To Branch Stock (Shortage) To Branch Stock Stock reserve on Closing Stock 13,400 ¥ 1/4 To Branch expenses (iii)

Rs. 200

3,350 7,250

Date

Particulars By Branch Stock Stock Reserve on Opening Stock (15,000 ¥ ¼) By Goods sent to Branch (Stock Reserve–6,700 ¥ 1/4)

Rs.

3,750

16,750

9,700 20,500

20,500

Branch Accounts

595

Illustration 22 The Mumbai Textiles Ltd. opened a branch at Delhi on 1st April 2003. From the following particulars, prepare Delhi Branch Account for 2003–04 and 2004–05 in the books of the head office.

Goods sent to Delhi Cash sent to branch for Rent Salaries Other expenses Cash received from branch Stock on 31st March Petty cash in hand on 31st March

2003–04 Rs. 45,000

2004–05 Rs. 1,35,000

6,000 4,800 2,000 70,000 7,000 120

6,000 6,800 3,000 1,60,000 26,000 260

2003–04

2004–05

70,000

1,60,000

7,000 120

26,000 260

77,120

1,86,260

Solution

Date Apr 1

Mar 31

Particulars To Balance b/d Stock Petty Cash To Goods sent to Branch To Bank Rent Salaries Other Expenses

2003–04

2004–05

Date

7,000 120 Mar 31 45,000

1,35,000

6,000 4,800 2,000 19,320

6,000 6,800 3,000 28,340

77,120

1,86,260

Particulars By Cash Received from Branch To Balance b/d Stock Petty Cash

Goods sent to Branch Account Date Mar 31

Particulars To Purchases (Transfer)

2003-04

2004-05

Date Mar 31

45,000

1,35,000

45,000

1,35,000

Particulars By Branch Account

2003-04

2004-05

45,000

1,35,000

45,000

1,35,000

Illustration 23 Goods are invoiced in the first year to a new Branch at Rs. 2,400, being cost price plus 20% on cost. The sales by the branch are: (i) Cash Rs. 210 (ii) Credit Rs. 1,800 The stock on hand at loaded price is Rs. 390, and bad debts written off are Rs. 200 and discounts allowed to debtors Rs. 50; Rs. 1,300 is received from debtors and all proceeds are remitted to head office intact.

596

Financial Accounting

In the second year, goods costing Rs. 1,440 are sent to the branch while total sales are Rs. 1980 (Rs. 100 cash sales). The stock on hand at loaded price is Rs. 108. Discount allowed to debtors is Rs. 100. Rs. 50 cash received has not yet been remitted by the branch. Closing debtors Rs. 130. There is discrepancy between the balance in the Branch Stock Account recording Rs. 30 in excess. Show ledger accounts in the head office books for (a) Branch Stock Account, (b) Goods Sent to Branch Account and (c) Branch Debtors Account. Solution Book of Head Office Date

Particulars

1st year To Balance b/d To Goods sent to Branch To Branch Debtors

2nd year

To Balance b/d To Goods sent to Branch (Cost price into Invoice price) 1,440 ¥ 120/100

Rs.

Date

Particulars

Rs.

Nil 1st year By Cash Sales 2,400 By Branch Debtors — (Credit sales) By Balance c/d

210 1,800

2,400

2,400

390

2nd year

1,728

390

By Cash Sales By Branch Debtors (Credit sales) 1,980–100 By Branch Adjustment-Discrepancy By Balance c/d

2,118

100

1,880 30 108 2,118

(b) Goods sent to Branch Account Date

Particulars

Rs.

Date

1st year

Particulars

To Branch Adjustment ¥ 20/120 To Trading A/c–Transfer

By Branch Stock

2,400

400 2,000 2,400

2nd year

To Branch Adjustment ¥ 20/120 To Trading A/c-Transfer

2,400 2nd year

By Branch Stock

1,728

288 1,440 1,728

Date

Rs.

1st year

Particulars

Rs.

1,728

Date

1st year

Particulars

Rs.

1st year By Goods sent to (Transferred to

¥ 20/120

400

335 To Balance c/d stock – 390 ¥ 20/120

65 400

400 Contd.

Branch Accounts

597

Contd. 2nd year

2nd year

To Branch Stock 300 ¥ 20/120 To Branch Stock

By Balance b/d By Goods sent to

5

65 ¥ 20/120

288

18

stock–108 ¥ 20/120 (Transferred to

330 353

Date 1st year

Particulars To Branch Stock Credit Sales

Rs.

353

Date Particulars 1st year By Branch Cash–received

Rs. 1,300

1,800 Bad Debts Discount

200 50 250 250 1,800

By Balance c/d 2nd year

To Balance b/d To Branch Stock Credit Sales

1,800 250

2nd year

By Branch Cash 1,900

1,880 Discount By Balance c/d

100 130 2,130

2,130

Illustration 24 A popular agency in Chennai supplied goods to its branch at Trichy at invoice price which is cost plus 50%. All cash received by the branch is remitted to Chennai and all branch expenses are paid by the head office. From the following particulars relating to Trichy branch for the year 2005, prepare: Branch Stock Account, Branch Debtors Account, Branch Expenses Account and Branch Adjustment Account in the books of the Chennai head office to find the gross profit and net profit made by the branch. Rs. 60,000 12,000 100 1,86,000 13,000 86,000 90,000 2,400

Stock with Branch on 1.1.2005 (at invoice price) Branch debtors on 1.1.2005 Petty cash balance 1.1.2005

Credit sales less returns Cash received from debtors Discount allowed to debtors Rent Salaries Petty cash

2,400 24,000 1,000 27,400

Cash sales Stock with branch on 31.12.2005 (at invoice price) Petty cash balance on 31.12.2005

1,04,000 54,000 100

Financial Accounting

598 Solution

Books of Chennai Head Office Particulars To Balance b/d (Opening stock) To Goods sent to Branch (–) Returns

Rs.

1,86,000 13,000

Particulars

By Bank–Cash Sales 60,000 By Branch Debtors Credit Sales By Balance c/d 1,73,000 (Closing stock)

Rs. 1,04,000 86,000 54,000

To Branch Adjustment–Surplus 11,000 2,44,000

Particulars

Rs.

To Balance b/d (Opening balance) To Branch Stock–Credit Sales

2,44,000

Particulars

Rs.

By Bank–Received from Debtors 12,000 By Branch Expenses-Discount 86,000 By Balance c/d

90,000 2,400

98,000

98,000

5,600

Particulars To Bank Rent Salary Petty Cash

Rs.

Particulars

Rs.

By Branch Adjustment 29,800

2,400 24,000 1,000

To Branch Debtors–Discount

27,400 2,400 29,800

Particulars closing stock-54,000 ¥ 50/150)

To Branch Expenses (Transfer)

Rs.

29,800

Particulars

Rs.

18,000 opening stock-60,000 ¥ 50/150 By Goods sent to Branch ¥ 50/150) By Branch Stock ¥ 50/150 63,334

20,000

81,334

81,334

57,667 3,667 63,334

29,800 By Branch Stock 40,867 (Cost price on Surplus 11,000 ¥ 100/150 70,667

Note: 50/100 on cost price = 50/150 on invoice price.

7,333 70,667

Branch Accounts

599

(v) Branch Account Date 2005 Jan 1

Particulars To Balance b/d Branch Stock Branch Debtors Petty Cash To Goods sent to Branch (–) Returns

Rs. 60,000 12,000 100

Date 2005 Jan 1

Particulars By Bank Cash Sales Debtors

Rs.

1,04,000 90,000 1,94,000

1,86,000 13,000

Dec 31 1,73,000

To Bank (Expenses) Rent Salary Petty Cash

2,400 24,000 1,000 27,400

Dec 31 To Stock on closing stock) 54,000 ¥ 50/150

By Stock on opening stock) 60,000 ¥ 50/150 To Goods sent

20,000

1,73,000 ¥ 50/150 By Balance c/d Branch Stock Branch Debtors Petty Cash

57,667 54,000 5,600 100

18,000

A/c 40,867

3,31,367

3,31,367

V – WHOLESALE PRICING Converting Invoice P

ales Price into Cost Price

Illustration 25 A head office sends goods to its branch at 20% less than the list price. Goods are sold to customers at cost plus 100%. From the following particulars, ascertain the profit made at the head office and the branch on wholesale basis. Rs. Purchases

Branch Rs.

2,00,000

Goods sent to branch (invoice price) Sales

–

80,000

–

1,70,000

80,000

Solution

Branch To Purchases (Cost price) To Goods sent to Branch (Received by branch-Invoice price)

2,00,000

Nil 1,15,000

3,15,000

Branch

Nil By Sales (Sales price) By Goods sent to Branch 80,000 (Sent to 16,000 Branch-Invoice price) By Closing Stock (b) (c)

1,70,000

80,000

80,000 65,000

Nil 16,000

96,000

3,15,000

96,000 Contd.

600

Financial Accounting

Contd. To Stock Reserve 16,000 ¥ 60/160)

6,000 1,09,000

Nil 16,000

1,15,000

16,000

1,15,000

16,000

1,15,000

16,000

Working Note (a) Cost Price = 100 Invoice Price = 100 + 100 = 200 Sales Price = 200 – (200 ¥ 20%) = 200 – 40 = 160 (b) Closing stock in Head Office Book (converting Invoice price and Sales price into Cost price) Rs. Purchases (Cost price)

Rs. 2,00,000

¥ 100/200 ¥ 100/160

85,000 50,000 (1,35,000) 65,000

(c) Closing Stock in Branch Book (converting Sales price into Invoice price) 80,000 (64,000)

Goods sent to Branch (Invoice price) ¥ 160/200

16,000

tock Given Illustration 26 A head office sends goods to its branch at 25% less than the list price. Goods are sold to customers at cost plus 60%. From the following particulars, ascertain the profit made by the head office and by the branch. Rs. Opening stock at cost (at invoice price in case of branch)

Branch Rs.

50,000

30,000

Purchases

1,50,000

–

Goods sent to branch

1,08,000

–

Sales

1,60,000

80,000

10,000

6,000

Expenses

Solution

Branch To Opening Stock To Purchase (Cost price) To Goods sent to Branch (Received by branch-Invoice price)

50,000 1,50,000

Nil 78,000 2,78,000

Branch

30,000 By Sales (Sales price) Nil By Goods sent to Branch (sent to 1,08,000 branch–Invoice price) 20,000 By Closing Stock (b) (c)

1,60,000

80,000

1,08,000 10,000

Nil 78,000

1,58,000

2,78,000

1,58,000 Contd.

Branch Accounts

601

Contd. To Expenses To Stock Reserve

10,000

6,000

stock–78,000 ¥ 20/120)

13,000 60,000

Nil stock–30,000 ¥ 20/120 14,000

83,000

20,000

78,000

20,000

5,000

Nil

83,000

20,000

By Stock Reserve

Working Note (a) Cost Price = 100 Invoice Price = 160 – (160 ¥ 25%) = 160 – 40 =120 Sales Price = 100 + 60 = 160 (b) Closing Stock in Head Office Book (converting Invoice price and Sales price into Cost price) Rs. Opening Stock Purchases (Cost price)

Rs.

50,000 1,50,000 2,00,000 ¥ 100/160 ¥ 100/120

1,00,000 90,000 (1,90,000) 10,000

(c) Closing stock in Branch Book (converting Sales price into Invoice price) Opening Stock Goods sent to Branch (Invoice price)

30,000 1,08,000 1,38,000 60,000

¥ 120/160

78,000

tock Given Illustration 27 A head office invoices foods to its branch at 20% less than the list price. Customers are charged for goods sold to them at cost plus 100%. From the particulars given below, prepare accounts for the year 2004 to show the profit made by the head office and the branch.

Opening stock at cost (Invoice price in case of branch) Purchases Goods sent to branch (Invoice price) Sales Expenses

Head Office Rs. 40,000 4,40,000 96,000 6,00,000 86,000

Branch Rs. 16,000 – – 80,000 4,000

602

Financial Accounting

Solution

Head To Opening Stock To Purchase (Cost price) To Goods sent to Branch (received by branch-Invoice price)

To Expenses To Stock Reserve stock–48,000 ¥ 60/160)

40,000 4,00,000

Nil 3,36,000

Branch

Head

16,000 By Sales Nil (Sales price) By Goods sent to Branch (sent to branch–Invoice price) 96,000 By Closing Stock (b) (c) 16,000

Branch

6,00,000

80,000

96,000 80,000

Nil 48,000

7,76,000

1,28,000

7,76,000

1,28,000

86,000

4,000

3,36,000

16,000

6,000

Nil

3,42,000

16,000

By Stock Reserve 18,000 2,38,000

Nil stock–16,000 ¥ 60/160 12,000

3,42,000

16,000

Working Note (a) Cost Price = 100 Invoice Price = 200 – (200 ¥ 20%) = 200 – 40 =160 Sales Price = 100 + 100 = 200 (b) Closing stock in Head Office Book (converting Invoice price and Sales price into Cost price) Rs. Opening Stock Purchases (Cost price)

Rs.

40,000 4,00,000 4,40,000 ¥ 100/200 ¥ 100/160

3,00,000 60,000 (3,60,000) 80,000

(c) Closing Stock in Branch Book (converting Sales price into Invoice price) Opening Stock Goods sent to Branch (Invoice price) ¥ 160/200

16,000 96,000 1,12,000 64,000 48,000

VI – ADJUSTMENT ENTRIES Illustration 28 Give journal entries in the books of head office for the following transactions: (a) Expenses paid by the head office for its Chennai branch Rs. 60,000, for Salem branch Rs. 80,000 not yet adjusted in the accounts. (b) Goods sent by Chennai branch to Salem branch Rs. 40,000 are yet to be recorded.

Branch Accounts

603

Solution

Debit (Rs.) (a)

(b)

Chennai Branch Salem Branch To Expenses A/c (Being expenses incurred for the branches is recorded)

Dr. Dr.

60,000 80,000 1,40,000

Salem Branch Dr. To Chennai Branch A/c (Being receiving branch is debited and giving branch credited)

Books of Head O

Credit (Rs.)

40,000 40,000

Books of Branch

Illustration 29 Give the entries to adjust the following in the books of Chennai Head Office and Madurai Branch: (a) An account of Rs. 2,500 paid as salary to a visiting head office official by the branch, debited to the Salaries Account by the branch. (b) Asset worth Rs. 5,000 purchased and paid by the branch. (c) Depreciation Rs. 1,000 on branch machinery in the head office books is yet to be provided. (d) The branch paid Rs. 700 as dividend to a shareholder on behalf of the head office. Solution

L.F. 1

2

3

4

Expense (Salary) A/c To Branch A/c (Being salary paid by the branch on behalf of head

Dr.

Branch Asset A/c To Branch A/c (Being purchase of branch asset recorded)

Dr.

Branch A/c To Branch Asset A/c (Being depreciation on branch asset accounted)

Dr.

Dividend A/c To Branch A/c (Being the dividend paid to a shareholder by the branch now adjusted)

Dr.

Debit (Rs.)

Credit (Rs.)

2,500 2,500

5,000 5,000 1,000 1,000 700 700

Book of Madurai Branch-Journal Entries Particulars

L.F.

Debit (Rs.)

Credit (Rs.)

2,500

1 To Salary A/c (Being salary paid by the branch on behalf of

2,500

Contd.

Financial Accounting

604 Contd. 2

5,000 To Bank A/c (Being purchase of branch asset and paid by branch recorded)

3

Depreciation A/c

5,000

1,000

Dr.

1,000 (Being depreciation is charged in the books of branch) 700

4 To Bank A/c

Books of Head O

700

Books of Branch

Illustration 30 A head office at Mumbai has a branch at Kolkata. The Company closes its accounts on 31st December each year. What adjustment entries are required to be passed in the books of both the head office and the Kolkata branch for the following? (a) A remittance of Rs. 5,000 by the Kolkata Branch on 22nd December is received by the Head Office on 5th of January. (b) Goods worth Rs. 10,000 sent by Head Office on 20th December reach the Branch on 6th January. (c) Depreciation at 10% p.a. is to be provided on machinery at Kolkata costing Rs. 70,000 the account of which is the Head Office books. (d) The Kolkata Branch paid Rs. 1,000 dividend to a local shareholder on behalf of the Head Office. (e) The Kolkata Branch received an amount of Rs. 500 towards call in arrears on shares from a local shareholders on behalf of the Head office. Solution

L.F.

Debit (Rs.)

Credit (Rs.)

1 2

3

4

5

Goods in Transit A/c To Kolkata Branch A/c (Being goods sent to branch not received, now accounted)

Dr.

Calcutta Branch A/c To Kolkata Branch Machinery A/c (Being depreciation on the branch asset, now ¥ 10%)

Dr.

Dividend A/c To Kolkata Branch A/c (Being dividend paid by the branch on behalf of

Dr.

Calcutta Branch A/c To Calls-in-arrears A/c (Being calls-in-arrears received by the branch on

Dr.

10,000 10,000

7,000 7,000

1,000 1,000

500 500

Branch Accounts

L.F. 1

Cash in Transit A/c To Calcutta Branch A/c (Being cash remitted by the branch not received by the branch, now recorded)

Dr.

Debit 5,000

605

Credit 5,000

2 3

4

5

(No entry to be passed in branch book) Depreciation A/c A/c (Being depreciation on the branch asset, now accounted in branch book–70,000 ¥ 10% A/c To Bank A/c (Being dividend paid by the branch on behalf of Bank A/c

Dr.

7,000 7,000

Dr.

1,000 1,000

Dr.

500 500

A/c (Being calls-in-arrears received by the branch on

Books of Head O

Books of Branch

Illustration 31 Hyderabad head office has branches at Visakhapatnam and Chittoor. It closes its annual accounts on 31st March when the following transactions have taken place: (a) An amount of Rs. 55,000 sent by Visakhapatnam branch on 30th March received by the head office on 5th April. (b) Goods worth Rs. 25,000 despatched by Chittoor branch on 29th March under instructions from the head office and received by the Visakhapatnam branch till 31st March. (c) Depreciation amounting to Rs. 10,000 on Visakhapatnam branch fixed assets when accounts of such assets are maintained at the head office. (d) Goods amounting Rs. 8000 despatched by the head office to Chittoor branch on 30th March received by that branch on 7th April. Show journal entries in the books of the head office and the Visakhapatnam branch as at the close of the year. Solution Debit (Rs.) (a)

Nil

Credit (Rs.) Nil

not received till the closing date (b)

(c)

(d)

Visakapatnam Branch A/c To Chittoor Branch A/c (Being goods sent between branches are accounted) Visakapatnam Branch A/c To Visakapatnam Assets A/c (Being depreciation on assets of Visakhapatnam branch is recorded in its account) Goods in Transit A/c To Chittoor Branch A/c by the concerned branch is recorded)

Dr.

25,000 25,000

Dr.

10,000 10,000

Dr.

8,000 8,000

Financial Accounting

606

Particulars (a)

L.F.

Cash in Transit A/c

Debit (Rs.)

Credit (Rs.)

55,000

Dr.

55,000 (Being cash sent by the branch to 25,000

(b)

25,000 (Being goods transferred between branches are receiving branch) (c)

Depreciation A/c

Dr.

10,000 10,000

(Being depreciation charged in the assets of the branch is recorded)

Entries in Head O

Book and the Two Branch Books

Illustration 32 Pass the adjusting entries for the following in the relevant books 1. Goods valuing Rs. 5,000 sent by the Mumbai head office to Hyderabad branch not received till 30th April. 2. Goods worth Rs. 1,000 returned by the Cochin branch to the head office not received till the accounts closing date. 3. A cheque amounting Rs. 4,000 sent by the Cochin branch received by the head office only on 4th April. 4. Furniture for Rs. 2,000 purchased by the Hyderabad branch as per the instructions of the head office. Depreciation at 10% is to be provided on the asset. 5. Expense of Rs. 700 incurred by the head office on behalf of Cochin branch for the technical service rendered. 6. One of the debtor of Cochin branch paid the due amounting Rs. 5,000 directly to the head office. 7. Goods worth Rs. 5,000 sent by Hyderabad branch to Cochin Branch as per the instruction of head office. Solution

Transactions Goods sent by

Books of Hyderabad Branch

received by the Branch

Goods in Transit A/c Dr. To Hyderabad Branch A/c

Goods returned by Branch not received

No entry

5,0 00

Books of Cochin Branch

No entry

5,000 Goods in Transit A/c To Head

Dr.

1,000

Contd.

Branch Accounts

607

Contd. cheque sent by branch not received

No entry

Asset purchased by Branch Asset Branch, accounted A/c Dr. To Hyderabad Branch A/c Depreciation on the above Asset

Hyderabad Branch A/c Dr. To Hyderabad Branch Asset A/c

Expense incurred

Cochin Branch A/c Dr. To Cochin Branch Expenses

behalf of branch Debtor of branch paying directly to Goods sent by one branch to another Branch

Bank A/c Dr. To Cochin Branch A/c Cochin Branch A/c Dr. To Hyderabad Branch A/c

2,000

Cash in Transit A/c To Head

Dr. 4,000

A/c Dr. 2,000 To Bank A/c 2,000

2,000 200

Depreciation A/c Dr. 200 To Head

200 700

Expenses To Head

Dr.

700

A/c To Debtor A/c

Dr. 5,000 5,000

700 5,000 5,000

Goods from Head 5,000

A/c Dr. 5,000 To Goods sent to

To Head

5,000

VII – INCORPORATION OF BRANCH IN HEAD OFFICE BOOK Journal E Illustration 33 From the following information, show: (a) the journal entries to incorporate the Trial Balance of the branch in the head office books and (b) the Branch Account after incorporation of the branch. The Trial Balance of Agra Branch as on December 31, 1999 is as under: Rs. Purchases

Rs.

17,350

Sales

8,100 Selling expenses

4,260

Administrative expenses

2,040

Sundry expenses

1,380

Petty cash

7,560 Creditors

2,340

50

Cash at bank

1,250

Debtors

6,400

Stock on 1.7.99

38,200

7,270 48,100

48,100

Stock on hand at the branch on 31st December, 1999 Rs. 8,200, Agra Branch Current Account in the head office books showed a balance of Rs. 8,440. While the

608

Financial Accounting

goods sent to Agra Branch Account showed a balance of Rs. 8,980 by the closing date. A provision for doubtful debts is to be raised calculated at 1.5% on debtors. Books of Head Office Branch in the Head Office Books L.F. Agra Branch Trading A/c To Agra Branch A/c (Being the debit side of the Branch Trading A/c is transferred to the Branch A/c) (7,270 + 17,350 + 8,100)

Dr.

Agra Branch A/c To Agra Branch Trading A/c (Being the sales and closing stock transferred to the Branch A/c) (38,200 + 8,200)

Dr.

Agra Branch Trading A/c

Dr.

Debit (Rs.)

Credit (Rs.)

32,720 32,720

46,400 46,400

13,680 13,680

7,776 To Agra Branch A/c

7,776

incorporated in the Branch A/c) 5,904 5,904

Branch Petty Cash A/c Branch Cash at Bank A/c Branch Debtors A/c Branch Closing Stock A/c To Agra Branch A/c (Being the incorporation of various assets from Branch Trial Balance in Branch A/c)

Dr. Dr. Dr. Dr.

Agra Branch A/c To Agra Branch Creditors A/c To Provision for Doubtful Debts A/c (Being the incorporation of various liabilities from Branch Trial Balances in Branch A/c)

Dr.

Goods in Transit A/c To Agra Branch A/c (Being the goods in transit incorporated in Branch A/c)

Dr.

50 1,250 6,400 8,200 15,900

2,436 2,340 96

880 880

(i) Agra Branch Account Particulars To Balance b/d To Branch Trading A/c (b) To Branch Creditors To Provision for Doubtful Debts

Rs.

Particulars

Rs.

8,440 By Branch Trading A/c (a) 46,400 2,340 By Branch Petty Cash A/c 96 By Branch Cash at Bank By Branch Debtors A/c By Goods in Transit (d) By Balance c/d

32,720 7,776 50 1,250 6,400 880 8,200

57,276

57,276

Branch Accounts

To Opening Stock To Purchases

To Expenses (c)

609

Rs.

Rs.

7,270 By Sales 17,350 By Closing Stock 8,100 13,680

38,200 8,200

46,400

46,400

7,776 5,904

13,680

13,680

13,680

Working Note (a) Branch Trading A/c (Debit side) Opening stock (7,270) + Purchases (17,350) + Goods sent from head office (8,100) = Rs. 32,270 (b) Branch Trading A/c (Credit side) Sales (38,200) + Closing stock (8,200) = Rs. 46,400 (c) Branch Profit and Loss A/c (Debit side) Selling expenses (4,260) + Adm. expenses (2,040) + Sundry expenses (1,380) + Provisional debts (96) = Rs. 7,776 (d) Goods in Transit Goods sent to Agra branch 8,980 (–) Goods from head office given in Trial Balance (8,100) Goods in transit Rs. 880

Given Trial Balance of Head O P

B

Illustration 34 A Ltd. Company with its head office at Chennai has a branch office in Kanchipuram which obtains supplies partly from head office at cost and partly from outside suppliers. The branch keeps a separate set of books. On 30.6 2004, the following Trial Balance was extracted.

Share Capital Fixed Assets Opening Stock at cost Debtors and Creditors Cash Purchase and Sales Sundry Expenses Current A/c on 30.6.2004

Dr. (Rs.)

Cr. (Rs.)

Dr. (Rs.)

Cr. (Rs.)

– 16,000 – 14,000 17,000 3,000 1,20,000 15,000 – 11,000

30,000 – 4,000 – 10,000 – 1,40,000 – 12,000 –

– 8,000 – 1,900 1,500 1,000 6,750 2,250 11,500 –

– – – – 2,050 – 20,500 – – 10,350

1,96,000

1,96,000

32,900

32,900

The difference between the balances in the Head Office and Branch Current A/c is due to goods and cash being in transit at the close of the year. Fixed Assets are

Financial Accounting

610

to be depreciated at 10%. Stocks on 30.6.2004 were: Head Office Rs. 10,000; and Branch Rs. 2,100. Prepare Kanchipuram Branch Trading and Profit and Loss A/c and Company’s Trading and Profit and Loss A/c and its combined Balance Sheet, Profit and Loss A/c. Solution

ended 30th June 2004 Rs. To Kanchipuram Branch A/c Stock Purchase Goods received from

Rs. By Kanchipuram Branch A/c Sales Closing stock

1,900 6,750

20,500 2,100 22,600

11,500 20,150 To Kanchipuram Branch 2,450 22,600 To Kanchipuram Branch A/c Sundry expenses Depreciation

22,600 By Kanchipuram Branch Trading A/c

2,250 800

2,450 3,050 By General (Net loss) 3,050

600 3,050

June 2004 Rs. To Opening Stock To Purchase

To Sundry Expenses To Depreciation

Rs.

14,000 By Sales 1,20,000 By Goods Supplied to Branch 28,000 By Closing Stock

1,40,000 12,000 10,000

1,62,000

1,62,000

15,000 1,600 11,400

28,000

28,000

28,000

Rs.

Rs. By Balance b/d (1.7.2003)

A/c

4,000

600 14,800

11,400

15,400

15,400

Branch Accounts

Liabilities

Rs.

Share Capital Branch

Assets

Rs. 16,000 (1,600) 14,400

30,000 10,000 2,050

(–) Depreciation 12,050

Branch (–) Depreciation

611

8,000 (800)

7,200 21,600

14,800 Branch

10,000 2,100

–Branch

17,000 1,500

–Branch

3,000 1,000

12,100

18,500

Goods in Transit (a) Cash in Transit (b)

To Balance b/d To Branch Trading A/c (i) To Branch Creditors A/c

4,000 500 150

56,850

56,850

Rs.

Rs.

11,000 By Goods in Transit (a) 22,600 By Cash in Transit (b) 2,050 By Branch Trading A/c (i)

500 150 20,150 3,050 7,200 2,100 1,500 1,000

By Branch Fixed Assets A/c By Branch Stock A/c By Branch Debtors A/c By Branch Cash A/c 33,650

33,650

Working Note (a) Goods in Transit 12,000 11,500 Goods in Transit

500

(b) Cash in Transit 11,000 10,350 650 500 Cash in Transit

150

Illustration 35 Universal Ltd. had its Head Office in Kolkata and a Branch in Mumbai which keeps its own books. Summarised Trial Balance at 31st December 2004 is given below. The Bombay profit for 2004 has not been incorporated in the head office books.

Financial Accounting

612

Assets and Liabilities Dr. (Rs.) Capital Fixed Assets Current Assets

Cr. (Rs.) 1,00,000

1,40,000 88,000

Mumbai Branch Dr. (Rs.) Cr. (Rs.) 36,500 31,800

49,000 67,000 54,000 Bombay Branch A/c (1.1.2004)

66,400 Nil

Nil Nil 30,000 Nil

Remittances from Branch Nil 5,600 Nil 3,00,000

Goods sent to Branch (at cost)

17,300

Nil 3,00,000

Nil 32,000 Nil 1,00,300

11,450 Nil 66,400 Nil Nil 5,150 1,00,300

The Branch remitted Rs. 2,000 cash to head office on 30th December, 2004 and head office sent goods of Rs. 450 (at cost) to the branch on the same day. Write up the Branch Account in head office ledger, the Head Office Account in branch ledger. You are also required to prepare a summarised Balance Sheet for the entire business. Solution Book of Kolkata Head Office (a) Mumbai Branch Account Rs. 66,400 By Bank–Remittance 5,600 By Cash in Transit 11,450 By Goods in Transit By Balance c/d 83,450

To Balance b/d To goods sent to Branch A/c

Rs. 30,000 2,000 450 51,000 83,450

Book of Bombay Branch Rs. 32,000 By Balance b/d 51,000

To Bank A/c – Remittance By Balance c/d

Rs. 66,400 5,150 11,450 83,000

83,000

Liabilities

Rs. Assets 1,00,000 Fixed Assets

Capital

Branch (a)

67,000 54,000 11,450

Branch

Rs. 1,40,000 36,500 1,76,500

1,32,450 Current Assets

Branch

49,000 17,300

Branch 66,300 Goods in Transit Cash in Transit 2,98,750

88,000 31,800 1,19,800 450 2,000 2,98,750

Branch Accounts

613

Given Two Trial Balance-Journal in both B Accounts in both Books Illustration 36 A Chennai office has an independent Branch at Ahmadabad. From the following particulars, give journal entries to close the books of the branch and prepare the Head Office Account in the books of the branch.

Stock on 1st Jan, 2004

Dr.

Cr.

Rs.

Rs.

8,200

–

12,800

–

Wages

6,550

–

Manufacturing Expenses

3,440

–

Rent

1,700

–

Salaries

5,500

–

Debtors and Creditors

4,000

2,700

Sales

–

34,950

Discount

–

150

Returns to Creditors

–

300

Purchases

General Expenses

Cash at Bank

2,200

–

7,200

–

750

–

–

14,000

52,100

52,100

(a) Closing stock at branch Rs. 14,350. (b) Branch fixed assets maintained in the head office books are: Machinery – Rs. 25,000 and Furniture – Rs. 1,000 Depreciation is to be charged at 10% per annum on Machinery and 15% on Furniture. (c) Rent due is Rs. 150. (d) A remittance of Rs. 4,000 made by the branch on 29th December, 2004 was received by the head office on 5th January, 2005. Prepare– (i) Journal entries to incorporate the Branch Trial Balance in head office books. (ii) Head Office Account in the Branch Trial Balance in head office books. (iii) Entries to close the books of the branch. (iv) Branch Accounts in the books of the Branch.

614

Financial Accounting

Solution A. Books of Ahmadabad Branch (i) Journal Entries 2004 Dec 31

Debit (Rs.) Depreciation A/c

Dr.

Credit (Rs.)

2,650 2,650

(Being depreciation charged on the Cash in Transit A/c

Dr.

4,000 4,000

(Being cash in transit remitted by branch, recorded) Rent A/c To Rent Outstanding (Being rent outstanding debited to Rent Account)

Dr.

150 150 50,150 8,200 12,800 7,200 6,550 3,400 1,850 5,500 2,000 2,650

To Opening Stock To Purchases To Wages To Manufacturing Expenses To Rent To Salaries To General Expenses To Depreciation

Sales A/c Discount Purchase Returns Closing Stock

Dr. Dr. Dr. Dr.

34,950 150 300 14,350 49,750

Total of Debits = 50,150 Total of Credits = 49,750 23,100 750 4,000 4,000 14,350

To Cash At Bank To Cash in Transit To Debtors To Stock Creditors A/c Outstanding Rent A/c

Dr. Dr.

2,700 150 2,850

(ii) Madras Head Office Account Particulars To Sundries (Debits) To Sundries (Assets)

L.F.

Rs.

Particulars

50,150 By Balance b/d 23,100 By Sundries (Credits) By Depreciation By Cash in Transit 73,250

L.F.

Rs. 14,000 49,750 2,850 2,650 4,000 73,250

Branch Accounts

Rs. To Opening Stock To Purchases (–) Returns

12,800 (300)

Rs.

8,200 By Sales By Closing Stock

34,950 14,350

12,500 7,200 6,550 3,400 11,450

To Wages To Manufacturing Expenses

49,300 To Salaries To Rent (+) Outstanding Rent To General Expenses To Depreciation Machinery Furniture

615

49,300 11,450 150 400

5,500 1,700 150

By Discount (Credit) 1,850 2,000

2,500 150 2,650 12,000

12,000

Head Office Books L.F. Ahmadabad Branch Trading A/c To Ahmadabad Branch A/c (Being the debit side of the Branch Trading A/c is transferred to the Branch Account) (8,200 + 12,800 + 7,200 + 6,550 + 3,400)

Dr.

Ahmadabad Branch A/c To Ahmadabad Branch Trading A/c (Being credit side of the Branch Trading A/c transferred to the Branch Account) (34,950 + 300 + 14,350)

Dr.

Ahmadabad Branch Trading A/c

Dr.

Debit (Rs.)

Credit (Rs.)

38,150 38,150

49,600 49,600

11,450 11,450

12,000 To Ahmadabad Branch A/c

12,000

incorporated in the Branch Account) Ahmadabad Branch A/c

Dr.

150 150

incorporated in the Branch Account) 400 400 (Being the net loss transferred is transferred to Contd.

616

Financial Accounting

Contd. Ahmadabad Branch A/c To Ahmadabad Machinery To Ahmadabad Furniture (Being depreciation of branch assets maintained

Dr.

Ahmadabad Branch Cash A/c Ahmadabad Branch Cash in transit A/c Ahmadabad Branch Debtors A/c Ahmadabad Branch Stock A/c To Ahmadabad Branch A/c (Being the incorporation of various assets from Branch Trial Balance in Branch Account)

Dr. Dr. Dr. Dr.

Ahmadabad Branch A/c To Ahmadabad Branch Creditors A/c To Ahmadabad Branch Outstanding Rent A/c (Being the incorporation of various liabilities from Branch Trial Balances in Branch Account)

Dr.

2,650 2,500 150

750 4,000 4,000 14,350 23,100

2,850 2,700 150

(iii) Ahmadabad Branch Account Particulars To Balance b/d To Branch Trading A/c To Branch Machinery A/c To Branch Furniture A/c

Rs.

Particulars

Rs.

18,000 By Branch Trading A/c 49,600 150 By Branch Assets A/c 2,500 150 2,850

38,150 12,000 23,100

73,250

73,250

Points to Remember financial position, etc.

Accounts method and Wholesale Branch method. and credit sales. and credit sales. instructions from head office is called inter-branch transactions.

Examination Questions 1. Fill in the blanks (i) Expenses of branch paid by head office are shown on _____ of the branch account.

Branch Accounts

617

(ii) The excess of branch account’s debit balance over its credit balance will show ______ under debtors method of accounting. (iii) ___ shown as first item on the credit sides of branch account under debtors method of accounting. (iv) ________ account will reveal profit/loss of a branch under stock and debtors method of accounting. (v) The balance of branch expenses account is transferred to _________ account. 2. Choose the correct answer (i) The branch account is (a) Real A/c (b) Personal A/c (c) Nominal A/c (ii) Branch Adjustment A/c is in the nature of (a) Real A/c (b) Personal A/c (c) Nominal A/c (iii) Loss or gain on the sale of fixed asset is (a) Debited to Branch A/c (b) Credited to Branch A/c (c) Not shown in the Branch A/c (iv) The depreciation on fixed assets is (a) Debited to Branch A/c (b) Credited to Branch A/c (c) Not shown in the Branch A/c (v) Petty expenses paid by the branch is (a) debited to Branch A/c (b) credited to Branch A/c (c) not shown in the Branch A/c 3. Match the following (i)

Debtors method

a

Invoice price

(ii)

Stock and debtors method

b

Branch Account

(iii)

Stock reserve

c

Branch Adjustment A/c

(iv)

Foreign branches

d

(v)

Dependent Branches

e

Foreig currency conversion

4. State whether the following statements True or False (i) The Branch Stock Account is always prepared at cost price. (ii) Depreciation on asset appears on the debit side of Branch Account. (iii) Bad debts and discount allowed to customers are shown in the Branch Debtors Account (iv) Only Branch Debtors Account and Branch Stock Account are prepared under stock and debtors method. (v) Branch adjustment is not compulsory under stock and debtors method.

618

Financial Accounting

Answers 1. (i) (iv) 2. (i) 3. (i) 4. (i)

debit side; (ii) loss; Branch Adjustment Account; c; (ii) c; b; (ii) c; False; (ii) False;

(iii) (v) (iii) (iii) (iii)

cash remitted to head office; Branch Adjustment Account. c; (iv) c; (v) a. a; (iv) e; (v) d. True; (iv) False; (v) False.

A. Very short answer questions (1) What is branch accounting? (2) What is debtors method? (3) What are various types of branches? (4) What is Branch Adjustment Account? (5) What is a dependent branch? B. Short answer questions (1) What is wholesale branch method? (2) Explain the stock and debtors method in branch accounting. (3) What are the objects of branch accounting? (4) What is meant by independent branch? (5) What is meant by inter-branch transaction? C. Detail answer questions (1) Explain the accounting procedure for maintaining branch accounts under stock and debtors method. (2) What are the journal entries required for incorporating the Branch Trial Balance in the books of head office. (3) Explain the different types of branches and accounting treatments followed by them. (4) State the reasons for the difference between the balances of Branch Account in the head office books and the Head Office Account in the branch books. How would you reconcile the balances of the two accounts? (5) What is Branch Adjustment Account and explain its significance. III. Exercise Problems

I. BRANCH ACCOUNT Problem 1 A head office in Mumbai has a branch in Ahmedabad to which goods are invoiced by the head office at cost price plus 25%. All cash received by the branch is daily remitted to the head office. All expenses are paid from Mumbai. From the following particulars, show how the Branch Account will appear in head office books (entries to be made at invoice price):

Branch Accounts

Rs.

619 Rs.

Stock on 1st July, 2004 (at invoice price)

12,500

Debtors on 1st July, 2004

12,000

Goods invoiced from Mumbai

40,000

Remittance to Mumbai: Cash sales

16,000

Cash received from debtors

29,000 45,000 2,400

Cheques received from Mumbai: Wages and salaries

11,000

Rent, rates, etc.

3,000 510

Sundry expenses

14,510 Stock on 31st December, 2004 (invoice price)

15,000

Debtors on 31st December, 2004

22,500

[Ans. Branch Profit Rs. 13,410] Problem 2 From the following particulars, prepare Branch Account showing the profit or loss of the branch: Rs. Opening stock at the branch Goods sent to branch Sales (Cash)

30,000 90,000 1,20,000

Expenses: Salaries

10,000

Other expenses

4,000

Closing stock could not be ascertained, but it is known that the branch usually sells at cost plus 20 per cent. The Branch Manager is entitled to a commission of 5 per cent on the profit of the branch before charging such commission. [Ans. Branch Profit Rs. 5,700] Insurance Claim

Problem 3 The Mumbai head office sent goods to Chennai branch at 25% profit over costs. From the following details, prepare the Branch Account in the head office books and ascertain the net profit at the branch.

620

Financial Accounting

Rs. 20,000 90,000 6,000 1,200 16,000 1,05,00

Opening stock of goods at branch at invoice price Goods sent to branch at invoice price Pilferage at branch (a cost to branch) Closing stock of branch at its cost Sales at branch Branch Accounts: Salaries and wages at branch Other expenses at branch

6,000 3,000

Chennai Branch received Rs. 4,000 from the insurance company in settlement of the claim for the loss of goods in transit. [Ans. Branch stock A/c (surplus) Rs. 18,200; Branch Adjustment A/c (Gross Profit) Rs. 21,000; Branch A/c (Net Profit) Rs. 24,800]

Problem 4 Good Luck Ltd. opened a branch on 1st January, 1995 at Kolkata. The following information is supplied to you to prepare the Branch Account: Rs. 50,000 36,000 32,000 600 7,000 8,000

Goods sent to branch Sales : Cash Rs. 20,000 and credit Cash received from debtors Discount allowed to them Cash sent to branch for expenses Stock on 31st December 1995

[Ans. Branch Profit Rs. 6,400] Problem 5 Naga of Trichy has a branch at Chennai. Goods are sent by head office at invoice price which is at the profit of 20% on cost price. All expenses of the branch are paid by the head office. From the following particulars, prepare Branch Account in the head office books, showing goods at invoice price. Rs. Opening Balances: Stock at invoice price Debtors Petty cash

11,000 1,700 100

Goods sent to branch at invoice price

20,000

Rent Wages Salary, etc.

600 200 900

Rs. Cash sales Cash collected from debtors Goods returned by branch at invoice price Balance at the end: Stock at invoice price Debtors Petty cash

2,650 21,000 400

13,000 2,000 25

[Ans. Branch Profit Rs. 7,507]

Branch Accounts

621

Problem 6 From the following particulars relating to Trichy branch, prepare the Branch Account in the books of head office for the year ended 31.12.1998: Rs. Stocks on 1.1.98

30,000

Debtors on 1.1.98

12,000

Petty cash on 1.1.98

200

Goods sent to branch

50,000 600

Sales at Branch: Branch cash

30,000

Branch credit

42,000

Sales returns at branch

250

Bad debts written off

300

Discount allowed to customers

100 3,000

Petty cash sent to branch

500

Petty expenses at branch

400

Furniture purchased by the branch

1,000

Stock on 31.12.1998

12,500

[Ans. Branch Profit Rs. 1,050] Problem 7 From the following details relating to Delhi branch for the year ending March 31, 1987, prepare the Branch Account in the books of head office. Show your working clearly: Rs.

Rs.

Stock on 1.4.1986

25,000

Goods returned from branch

2,000

Debtors on 1.1.1986

10,000

Goods returned by debtors

1,000

Furniture on 1.4.1986

6,000

Cash sent to branch for expenses:

Petty Cash on 1.4.1986

1,000

Rent 9,600

Insurance prepaid on 1.4.1986

800

per

month)

300

Salary (Rs. 4,000 per month) 48,000

4,000

Insurance (up to June, 1987) 1,200

Salaries Outstanding on 1.4.1986

(Rs.

Petty Cash

2,000

60,800 Goods sent to branch during 1986–87

2,00,000

Cash sales during the year

2,70,000

Cash received from debtors

Petty cash expenses

65,000

Cash paid by Debtors directly to head 5,000

Discount allowed to Debtors Stock on 31.3.1987

2,200 500 15,000

622

Financial Accounting

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. Provide depreciation on furniture @ 10% per annum. [Ans. Branch Profit Rs. 80,900] Problem 8 The Super Cycles has a branch at Chennai. Goods are invoiced to the branch at cost plus 25%. Branch is instructed to deposit cash every day in the Head Office Account in the bank. All expenses are paid by cheque by the head office except petty cash expenses which are paid by the branch manager. From the following particulars, prepare Branch Account in the books of head office: Rs. Stock on 1st January

2,500

Stock on 31st December

3,000

Sundry debtors on 1st January

1,400

Sundry debtors on 31st December

1,800

Credit sales for the year Cash sales for the year

Rs. 18,200 1,640 Expenses paid by the branch

120 1,300

10,800 7,000 15,000

Furniture purchased by the Branch Manager

1,200

[Ans. Branch Profit Rs. 180]

Problem 9 A branch sent the following Trial Balance to its head office. Rs.

Rs. –

57,840

Sundry Creditors

–

14,000

Sales

–

2,20,000

9,000

–

Balance at Bank Cash in Hand Sundry Debtors Purchases

140

–

54,000

–

1,60,000

–

Rent and Rates

4,000

–

General Expenses

7,000

–

12,000

–

Salaries Bad Debts Fixture and Fittings Machinery Stock on 1st January

700

–

2,400

–

4,600

–

38,000

–

2,91,840

2,91,840

Branch Accounts

623

The proportion of head office expenses to be charged to the branch is Rs. 4,500. The salaries include a sum of Rs. 2,600 paid to branch manager who is further entitled to 15% commission on the net profit of the branch before charging such commission. The branch stock on 31st December was Rs. 22,000. Prepare the Branch Trading and Profit and Loss A/c and Balance Sheet allowing 10% depreciation on the fixed assets. [Ans. Net Profit Rs. 12,835, Balance Sheet Rs. 91,440]

Goods sent to B

Cost P

Problem 10 The Kolkata Trading Company Ltd. opened a branch at Bangalore on 1st January, 2001. From the following particulars, prepare the necessary accounts for 2001 and 2002 in the books of the head office. 2001 Rs. 40,000

2002 Rs. 1,00,000

Rent

4,000

4,000

Salaries

5,000

5,100

Other expenses

2,000

2,500

60,000

1,35,000

8,000

25,000

150

250

Goods sent to Bangalore Branch Cheque sent to branch for:

Cash received from Branch Stock on 31st December Petty cash in hand 31st December

[Ans. Profit (2001) Rs. 17,150, (2002) Rs. 40,500] Branch

Cost Plus P

Problem 11 Onkar Corporation Ltd. has two branches – one at Jaipur and another at Lucknow. Goods are invoiced to branches at cost plus 50%. Branches remit all cash received to head office and all expenses are met by the head office. From the following particulars, prepare the necessary accounts on the “Stock and Debtors System” to show the profit earned at the Jaipur Branch: Stock on January 1, 2003 Debtors on January 1, 2003 Goods sent to branch (at cost) Sales at branch Cash Credit Cash collected from debtors

Shortage of stock Shortage of stock at branch Discount allowed to customers Expenses at branch

Rs. 9,300 6,800 34,000 25,010 31,000 30,400 1,200 1,500 2,100 450 200 5,400

Financial Accounting

624

Problem 12 Messrs Liberty Traders, Chennai have opened a branch at Trichy on 1.7.2003. The goods were sent by the head office to the branch and invoiced at selling price of the branch which was 125% of the cost price of the head office. The following are the particulars relating to the transactions of Trichy branch: Rs. 2,80,000 Sales: Cash

1,25,000

Credit

1,75,000

Cash collected from debtors

1,56,000

Cash sent to branch for: Wages

3,000

Freight

11,000

Other expenses including godown rent

6,000 20,000

Spoiled cloth in bales written off at invoice price

500

Stock on June 30, 2004 at invoice price

55,500

Ascertain the gross profit and net profit for the Trichy branch for the year ended June 30, 2004 after preparing Branch Stock Account and Branch Debtors Account. [Ans. Adjustment Profit Rs. 59,000, Net Profit Rs. 34,600]

Problem 13 A head office sends goods to its branch at 20% less than the list price. Goods are sold to customers at cost plus 100%. From the following particulars ascertain the profit made at the head office and the branch on wholesale basis. Branch Rs.

Rs. Purchases

2,00,000

Goods sent to branch (invoice price) Sales

–

80,000

–

1,70,000

80,000

[Ans. Net profit (head office Rs. 1,09,000), (Branch Rs. 16,000)] tock G

Problem 14 Head office sends goods to its branch at 25% less than the list price. Goods are sold to customers at cost plus 60%. From the following particulars, ascertain the profit made by the head office and by the branch.

Branch Accounts

Branch Rs.

Rs. Opening stock at cost (at invoice price in case of branch)

625

50,000

30,000

Purchases

1,50,000

–

Goods sent to branch

1,08,000

–

Sales

1,60,000

80,000

10,000

6,000

Expenses

[Ans. Net profit (head office – Rs. 60,000), (Branch – Rs. 14,000)]

Problem 15 Give the journal entries necessary to record the following transaction in the books of a Head Office whose accounts are closed on 31st December. Goods worth Rs. 15,000 sent by the head office on 28th December to its branch, not received by the branch up to 31st December. Problem 16 Raj and Company of Chennai has two branches, one at Mysore and the other at Bangalore. The head office and branches close their accounts on 31st December. The following adjustments have not yet been give effect to and, therefore, you are required to give the adjusting entry for the following: (a) Remittance of Rs. 4,500 made by Mysore branch to Head Office on 30th December received by the head office on 5th Jan. (b) Goods valued at Rs. 2,200 despatched by Banglore branch on 27th December under instructions from head office and received by Mysore branch on 30th December. (c) Depreciation amounting to Rs. 1,100 on Mysore branch assets, the accounts of such assets being maintained by the head office. (d) Goods worth Rs. 9,000 despatched by the head office to Mysore branch on 30th December received by the branch on 7th Jan. Show the entries in the book of the head office.

Problem 17 A firm in Bangalore has a branch at Salem. On March 31, 2002 the Trial Balance of Salem branch stood as follows:

626

Financial Accounting

Rs. Sales less returns

Rs. 8,98,000

Creditors

15,000 3,05,000 38,000

Book debts

2,25,700 6,02,000

Stock on 1.4.2001

1,60,000

Salaries, rent, etc.

1,24,000

Cash in hand and at bank

68,300 12,18,000

12,18,000

Closing stock was valued on 31.3.2002 at Rs. 1,32,000. Give incorporation entries for incorporating the branch trial balance in head office books. Open branch account in the head office books. Problem 18 From the following information, show: (a) the journal entries to incorporate the Trial Balance of the branch in the head office books; and (b) the branch current account after incorporation of the branch data. Pune Branch Trial Balance as on March 31, 2002 is as under: Rs. Purchases

1,73,500

Rs. Sales

81,000 Selling Expenses

42,600

Administrative Expenses

20,400

Sundry Expenses

13,800

Petty Cash

75,600 Creditors

23,400

500

Cash at Bank

12,500

Debtors

64,000

Stock on 1st April, 2001

3,82,000

72,700 4,81,000

4,81,000

Stock in hand at the branch on March 31, 2002 was Rs. 82,000, Pune Branch Current Account in the head office books showed a balance of Rs. 84,400, while the goods sent to Pune branch account showed a balance of Rs. 89,800 by the closing date. A provision for doubtful debts is to be raised, calculated at 1 ½% of Debtors Accounts.

16

Departmental Accounts

Learning Objectives After studying this chapter, you should be able to Explain the meaning of Departmental Accounts Know the reasons for it Differentiate Branch and Departmental Accounts Understand Advantages of Departmental Accounts and Methods and Procedures for Keeping Departmental Accounts

DEPARTMENTAL ACCOUNTS A business firm which has several departments is interested to know the profitability of each department separately as well as the profitability of the firm as on a whole. For example, General Insurance Company has separate departments to look after fire, marine, accident business, etc. Therefore, accounts for these departments are maintained separately to ascertain profit made by each department and also to keep adequate control over departments. The accounts which are prepared to know the profitability of each department separately called ‘Departmental Accounts’. The Departmental Accounts include Trading Account and Profit and Loss Account of each department. The same principle is applicable to a business with several branches. However, the accounting procedures for branches are more complex.

Reasons for Preparing Departmental Accounts (a) It is easy to compare the performance of one department with other departments. (b) It is easy to identify departments with higher profit earning capacity. (c) It enables the firm to Measure the efficiency of same department by comparing the performance year-wise. (d) It is easy to find out departments with higher operating. (e) It enables the firm to take decision on expansion, continuation or closing of departments.

628

Financial Accounting

Distinction between Branch and Departmental Accounts Place Branches are broadly classified into island branches and foreign branches. All branches are located at different places, whereas departments are located at the same place.

Accounts Branch Accounts are maintained by either head office or branch office. But, Departmental Accounts are maintained only by the head office.

Apportionment of Expenses There is no question of apportionment of expenses in the case of branches, whereas apportionment of common expenses is to be done in the case of Departmental Accounts.

Foreign Exchange Conversion In the case of foreign branches conversion of foreign currency into Indian currency is a must, whereas in the case of Departmental Accounts it will not arise.

Advantages of Departmental Accounts Preparation of Departmental Accounts helps to

operating expenses.

departments.

Methods and Procedures for Keeping Departmental Accounts To ascertain profit earned or loss incurred by departments for a particular period of time, Trading Account and Profit and Loss Account are prepared in columnar form. One column is allotted for each department and one column for total. The Profit and Loss Account is closed by transferring profits (or losses) of various departments to General Profit and Loss Account. Expenses pertaining to one department are debited to the respective column of that department concern. If the expenses are common to all departments, those expenses are allocated or apportioned on the basis of various factors.

Departmental Accounts

629

Basis for Allocation of Common Expenses Expenses Sales commission, advertisement, expenses, salary to sales personnel, etc. Rent, depreciation, repairs and maintenance of building Electricity charges Expenses towards welfare and medical facilities to employees Salary paid to works manager Payment of workmen’s compensation Expenses on purchase including carriage inwards

Basis for Allocation Sales made by each department Floor space occupied by each department Power consumption by each department Number of employees in each department Time devoted by the manager in each department Wages of each department Purchases made by each department

However, some expenses cannot be apportioned to departments, e.g., Income tax payable, interest on loan, bank charges, etc. These expenses are to be directly debited to General Profit and Loss Account. Similarly, incomes like dividend received on investments, interest on calls in arrears, etc are to be directly credited to General Profit and Loss Account.

Inter-Departmental Transfers When goods are supplied or transferred to another department and vice-versa, it is called Inter-departmental Transfer. There are two types of transfers namely:

(i) Inter-departmental Transfer at Cost Price When the goods are transferred from one department to another department is said to be inter-department transfer at cost price; the journal entry is required in the departments. The entry is as follows: Debit (Rs.) Transferee Department A/c (Receiving department)

Credit (Rs.)

Dr.

To Transferor department (Giving department)

(ii) Inter-departmental Transfer at Invoice Price When the goods are transferred from one department to another department at invoice price (selling price) is said to be inter-departmental transfer at invoice price. Stock Reserve Account is to the opened for the difference between cost price and invoice price. The journal entries are as follows: Debit (Rs.) (a)

Transferee Department A/c (Receiving department) Transferor Department A/c (Giving department) (At invoice price)

(b) To Stock Reserve A/c (Difference with the between invoice price and cost price)

Dr.

Credit (Rs.)

630

Financial Accounting

Illustrations Index for Illustrations Type I

Ill. No.

Departmental Trading Account

1, 2

II

3

III

4

IV

5 6

V Transfer Only

7

VI Transfer and Stock Reserve

8, 9, 10, 11

VII Account and Stock Reserve VIII

12

IX

13, 14, 15

X

16, 17

I – DEPARTMENTAL TRADING ACCOUNT Calculation of Purchase Price Illustration 1 Mixed goods were purchases for Rs. 1,00,000 and later they were assorted into three categories X, Y, Z as follows: X-1000 units – Selling Price Rs. 20 each Y-2000 units – Selling Price Rs. 22.50 each Z-2400 units – Selling Price Rs. 25 each All the categories yield the same rate of profit. Calculate the purchase price of each category. (B.Com., Madras) Solution

Calculation of Composite Ratio Units Ratio Sale price Composite ratio

X 1000 5 Rs. 20 5 ¥ 20 = 100

Y 2000 10 Rs. 22.50 10 ¥ 22.50 = 225

Z 2400 12 Rs. 25 12 ¥ 25 = 300 = 625

Total purchase price (Rs. 1,00,000) is divided in the ratio of 100:225:300

Calculation of Cost Price X = 1,00,000 ¥ 100/625 = Rs. 16,000 Y = 1,00,000 ¥ 225/625 = Rs. 36,000 Z = 1,00,000 ¥ 300/625 = Rs. 48,000

Departmental Accounts

631

Given the Same Rate of Gross P Illustration 2 Mr. Gopa Kumar of Mumbai purchased goods for his three departments at a total cost of Rs. 4,3000 as under: Department

A: B: C:

400 1,600 1,000

pieces pieces pieces

Sales for three departments were: Department

A: B: C:

200 1,800 1,200

pieces at Rs. 15 per piece pieces at Rs. 20 per piece pieces at Rs. 5 per piece

Other information about stock at the beginning was: Department

A: B: C:

200 500 300

pieces pieces pieces

Mr. Gopa Kumar inform you, that the rate of gross profit is the same for all departments. Prepare Departmental Trading Account. (B.Com., Bombay) Working Note (1) Calculation of composite ratio Units Ratio Sale price Composite ratio

A 400 2 Rs. 15 2 ¥ 15 = 30

B 1600 8 Rs. 20 8 ¥ 20 = 160

C 1000 5 Rs. 5 5 ¥ 5 = 25 = 215

Total purchase price (Rs. 4,300) is divided in the ratio of 30:160:25 (2) Calculation of cost price X = 4,300 ¥ 30/215 = Rs. 600 Y = 4,300 ¥ 160/215 = Rs. 3,200 Z = 4,300 ¥ 25/215 = Rs. 500 (3) Calculation of cost price per unit (Total cost/Total units purchase) A = 600/400 = Rs. 1.50 B = 3,200/1600 = Rs. 2.00 C = 500/1000 = Rs. 0.50 (4) Calculation of closing stock (units) Opening stock + Purchases – Sales = Closing stock A 200 + 400 – 200 = B 500 + 1600 – 1800 = C 300 + 1000 – 1200 =

400 300 100

632

Financial Accounting

(5) Calculation of opening stock (value) A = 200 units ¥ Rs. 1.50 = Rs. 300 B = 500 units ¥ Rs. 2.00 = Rs. 1,000 C = 300 units ¥ Rs. 0.50 = Rs. 150 (6) Calculation of closing stock (value) A = 400 units ¥ Rs. 1.50 = Rs. 600 B = 300 units ¥ Rs. 2.00 = Rs. 600 C = 100 units ¥ Rs. 0.50 = Rs. 50 (7) Calculation of purchases (value) A = 400 units ¥ Rs. 1.50 = Rs. 600 B = 1600 units ¥ Rs. 2.00 = Rs. 3,200 C = 1000 units ¥ Rs. 0.50 = Rs. 500 (8) Calculation of sales (value) A = 200 units ¥ Rs. 15 = Rs. 3,000 B = 1800 units ¥ Rs. 20 = Rs. 36,000 C = 1200 units ¥ Rs. 5 = Rs. 6,000 Solution Departmental Trading Account Particulars To Opening Stock To Purchases

Dept. A Rs.

Dept. B Rs.

Dept. C Rs.

Particulars

Dept. A Rs.

Dept. B Rs.

Dept. C Rs.

300 600 2,700

1,000 3,200 32,400

By Sales 150 By Closing Stock 500 5,400

3,000 600

36,000 600

6,000 50

3,600

36,600

6,050

3,600

36,600

6,050

II – DEPARTMENTAL TRADING AND PROFIT AND LOSS ACCOUNT Illustration 3 The following Trial Balance for the year ended 31st March, 2004 were extracted from the books of Shri Bikam Singh.

Capital on 1.4.2003 Drawings Account Stock on 1.4.2003 Radio Watch Sales: Radio Watch Purchases: Radio Watch Salaries Publicity Expenses

Dr. Rs.

Cr. Rs.

– 10,000

50,000 –

45,000 21,000

– –

– –

2,94,000 1,46,000

2,25,000 1,15,000 12,600 8,900

– – – – Contd.

Departmental Accounts

633

Contd. Dr. Rs. Rent, Rates and Taxes Commission Miscellaneous Expenses Furniture and Fixtures Sundry Debtors Sundry Creditors Interest Provision for Bad and Doubtful Debts Cash Balances

Cr. Rs.

3,200 10,600 5,000 12,400 16,800 10,000 – – – 4,500

– – – – – – 8,800 400 800 –

5,00,000

5,00,000

Prepare the Departmental Trading and Profit and Loss Account for the year ended 31st March, 2004 after taking into account the following: (a) The stock as on 31st March, 2004 was: Radio 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 and the provisions or doubtful debts has to be increased and, therefore, to 10 percent of the debts outstanding. (c) The following expenses are outstanding as on 31st March, 2004: Publicity Rs. 1,000; Salaries Rs. 1,200; Commission Rs. 1,700. (d) Provide 10 per cent depreciation on furniture and fixtures. (e) Revenue items to be allocated in the ratio of 2:1 as between radios and watches. Ignore fractions of a Rupee in calculations. (B.Com., Bombay) Solution Departmental Trading and Profit and Loss Account for the year ended 31st March 2004 Particulars To Opening Stock To Purchases

Dept. A Rs.

Dept. B Rs.

Total Rs.

45,000 2,25,000 54,000

21,000 1,15,000 34,000

By Sales 66,000 By Closing Stock 3,40,000 88,000

3,24,000 9,200 6,800

1,70,000 4,600 3,400

4,94,000 13,800 10,200

2,133 8,200

1,067 4,100

3,200 12,300

3,333

1,667

5,000

827 800

413 400

1,240 1,200

507 22,467 54,267

253 18,233 34,133

760 40,700 88,400

Particulars

Dept. A Rs. 2,94,000 30,000

Dept. B Rs. 1,46,000 24,000

Total Rs. 4,40,000 54,000

3,24,000

1,70,000

4,94,000

54,000 267

34,000 133

88,000 400

54,267

34,133

88,400

c/d To Salaries To Publicity To Rent, Rates and Taxes To Commission To Miscellaneous Expenses To Deprecia tion on Furniture To Bad Debts To Provision for Bad and Doubtful Dedebts

b/d By Interest

634

Financial Accounting

III – DEPARTMENTAL TRADING AND PROFIT AND LOSS ACCOUNT Illustration 4 The Trading and Profit and Loss Account of a company for the six months ended 31st March, 2004 is presented in the following form: Particulars

Rs. Particulars

To Purchases: Television (A) Radio (B) Spare parts for servicing (C) To Salaries and Wages To Rent To Sundry Expenses

1,40,700 90,600 64,400 48,000 10,800 11,000 34,500

Rs.

By Sales: Television (A) Radio (B) Receipts from servicing and repairs (C) By Stock on 31.3.2004 Television (A) Radio (B) Spare parts for servicing (C)

1,50,000 1,00,000 25,000 60,100 20,300 44,600

4,00,000

4,00,000

Prepare Departmental Account for each of three departments A, B and C mentioned above after taking into consideration the following information: 1. Television and radios are sold at the showroom. Servicing and repairs are carried out at the workshop. 2. Salaries and wages comprise as follows: Showroom ¾ Workshop ¼ It was decided to allocate the showroom salaries and wages in the ratio 1:2 between the Departments A and B. 3. The workshop rent is Rs. 500 per month. The rent of the showroom is to be divided equally between the Department A and B. 4. Sundry expenses are to be allocated on the basis of the turnover of each department. (B.Com, Bombay, Delhi) Solution Departmental Trading and Profit and Loss Account for the six months ended 31st March 2004 Particulars To Purchases To Gross

To Salaries and Wages(1) To Rent (2) To Sundry Exp.(3)

Dept. A Rs.

Dept. B Rs.

Dept. C Rs.

Total Rs.

1,40,700

90,600

64,400

2,95,700

69,400

29,700

5,200

1,04,300

2,10,100

1,20,300

69,600

4,00,000

12,000 2,400 6,000 49,000

24,000 2,400 4,000 –

12,000 6,000 1,000 –

48,000 10,800 11,000 34,500

69,400

30,400

19,000

1,04,300

Departmental Accounts

Particulars By Sales By Receipts from Servicing and Repair Job By Closing Stock

Dept. C Rs.

635

Dept. A Rs.

Dept. B Rs.

Total Rs.

1,50,000

1,00,000

–

2,50,000

– 60,100

– 20,300

25,000 44,600

25,000 1,25,000

2,10,100

1,20,300

69,600

4,00,000

67,400 –

29,700 700

5,200 13,800

1,04,300 –

69,400

30,400

19,000

1,04,300

By Gross

Working Note (1) Salaries and wages (48,000) divided between shop and workshop in 3:1 So, shop 48,000 ¥ 3/4 = 36,000 and Workshop 48,000 ¥ 1/4 = 12,000 Further, shop salary (36,000) divided between A and B in 1: 2 So, A 36,000 ¥ 1/3 = 12,000 and B 36,000 ¥ 2/3=24,000 Therefore, A (12,000), B (24,000) and C (12,000) (2) Rent for workshop (500 per month ¥ 12) = 6,000 Balance Rent (10,800 – 6,000) = 4,800 divided equally between A and B. So, A 4,800 ¥ ½ = 2,400 and B 4,800 ¥ ½ = 2,400 Therefore A (2,400), B (2,400) and C (6,000) (3) Sundry expenses divided in sales ratio A (1,50,000): B (1,00,000): C (25,000) or 6:4:1 Therefore, A 11,000 ¥ 6/11 = 6,000, B 11,000 ¥ 4/11 = 4,000; C 11,000 ¥ 1/11 = 1,000

IV – DEPARTMENTAL TRADING AND PROFIT AND LOSS ACCOUNT AND GENERAL PROFIT AND LOSS ACCOUNT Illustration 5 From the following prepare the Departmental Trading and Profit and Loss account and general profit statement of the two departments, viz. cloth department and readymade cloth department: Opening Stock Cloth Readymades Purchases Cloth Readymades Carriage inwards Salaries Cloth Readymades General Rent and rates

Rs. 1,21,600 86,400 5,92,000 5,52,000 22,880 72,000 6,800 92,800 Contd.

Financial Accounting

636 Contd.

Advertising Insurance General expenses Discount allowed Accountancy charges Sales Cloth Readymades Discount received

48,000 64,800 8,000 43,200 14,400 4,000 8,00,000 6,40,000 11,400

The following further information is supplied: (a) Goods transferred from cloth department to readymade cloth department were Rs. 40,000. This has not yet been recorded. (b) General salaries are to be distributed equally to both the departments. (c) The area occupied is in the ratio of 3 : 2. (d) Insurance premium is for a comprehensive policy. (e) The closing stock of the departments: Cloth Rs. 1,42,400; Readymades Rs. 1,24,800. Solution Departmental Trading Account and Profit and Loss Account for the year ended Particulars To Opening Stock TO Purchases To Transfer from Cloth Deptt. To Carriage Inwards (in purchases ratio 592:552)

To Salaries To General Salaries (Equal) To Rent and Taxes (3 : 2) To Advertising (Sales ratio 5 : 4) To General Expenses (Sales ratio 5 : 4) To Discount allowed (Sales ratio 5 : 4)

Cloth Rs.

Readymade Rs.

Particulars

1,21,600 5,92,000 – 11,840

86,400 By Sales 5,52,000 By Transfer to 40,000 Readymade Cloth Dept. 11,040 By Closing Stock

2,56,960 9,82,400 72,000 46,400 28,800

75,360 7,64,800 68,000 46,400 By Discount Received 19,200 (Purchases ratio 592:552)

36,000

28,800

24,000

19,200

8,000 47,680

6,400

2,62,880

1,88,000

Cloth Rs.

Ready made Rs.

8,00,000

6,40,000

40,000 1,42,400

– 1,24,800

9,82,400 2,56,960 5,920

7,64,800 75,360 5,520

–

1,07,120

2,62,880

1,88,000

General Profit and Loss Account for the year ended ………….. Particulars

Rs.

Particulars

Rs. 47,680

Readymades Deptt. b/d To Insurance To Accounting charges

1,07,120 8,000 4,000 1,19,120

Balance Sheet

71,440 1,19,120

Departmental Accounts

637

V – TRADING AND PROFIT AND LOSS ACCOUNT, INTER-DEPARTMENTAL TRANSFER ONLY Illustration 6 Prepare Departmental Trading and Profit and Loss Account from the following particulars of three Departments of XYZ Apparels. Tailoring Rs. 41,280 32,840 2,10,342 14,382 4,00,173 Nil 72,823

Stock on 1st January, 2006 Stock on 31st December, 2006 Purchases Purchase returns Sales for the year Sales returns Wages

Ladies Wear Rs. 33,975 13,828 75,296 5,629 1,54,085 3,259 30,084

Rs. 93,721 81,626 1,39,109 1,823 3,62,189 11,217 24,613

(i) Goods were transferred as follows (all at cost) (a) Tailoring to Ladies Wear Rs. 389 and Outfitting Rs. 6,679; (b) Ladies Wear to Tailoring Rs. 5,315; (c) Outfitting to Tailoring Rs. 4,271 and to Ladies Wear Rs. 5,801. (ii) Apportionate equally stationery Rs. 921; General Charges Rs. 39,627, Insurance Rs. 1,785 and Depreciation Rs. 5,460. (iii) Allocate the following further expenditure as you think best and append notes stating the basis selected for each item. Establishments Rs. 63,395; Bad Debts Rs. 19,823; Advertising Rs. 7,293; and Income Tax Rs. 11,028. (iv) Rent and taxes Rs. 45,437 is to be split up in proportion to space occupied, i.e., Tailoring 4; Ladies Wear 2; Outfitting 3 and others 2. Solution Departmental Trading and Profit and Loss Account for the year ended 31st December 2006 Tailoring Rs. To Opening Stock To Purchase To Transfer from Tailoring To Transfer from Ladies Wear To Transfer from

Less: Return To Wages

41,280 2,10,342 – 5,315 4,271 2,61,208 14,382 2,46,826 72,823 1,20,432

Ladies Wear Rs.

ting Rs.

33,975 93,721 By Sales 75,926 1,39,109 By Transfer to Ladies 389 6,679 Wear By Transfer to – – By Transfer to 5,801 – Tailoring 1,15,461 2,39,509 5,629 1,823 Less: Returns 1,09,832 2,37,686 30,084 24,613 By Closing Stock 60,053 1,80,371

4,40,081 1,99,969 4,42,670

Tailoring Rs.

Ladies Wear Rs.

ting Rs.

4,00,173 1,54,085 3,62,189

389

–

5,801

6,679

–

4,271

– 5,315 4,07,241 1,59,400 3,72,261 – 3,259 11,217 4,07,241 1,56,141 3,61,044 32,840

43,828

81,626

4,40,081 1,99,969 4,42,670 Contd.

638

Financial Accounting

Contd. Tailoring Rs. To Stationery To Postage To General Charges To Insurance To Depreciation To Establishment (Sales ratio) To Bad Debts (Sales ratio) To Advertising (Sales ratio) To Rent and Taxes (given ratio 4 : 2 : 3) To Rent and Taxes – Other Equally divided To Income Tax

Ladies Wear Rs.

ting Rs.

307 221

307 221

307 221

13,209 595 1,820

13,209 595 1,820

13,209 595 1,820

28,176

10,565

24,654

8,810

3,304

7,709

3,242

1,216

2,835

16,523

8,261

12,392

2,754 2,804 41,971

2,754 2,754 1,122 7,102 16,679 1,06,774

1,20,432

60,053 1,80,371

Tailoring Rs.

-

Ladies Wear Rs.

ting Rs.

1,20,432

60,053 1,80,371

1,20,432

60,053 1,80,371

Working Note Sales Ratio 400: 150: 350 or 8: 3: 7 Rent and taxes to be split up in proportion to space occupied (4:2:3:2) Income Tax divided on the ratio of profit before tax (Rs. 44,776 : 17,802 : 1,13,874) or 45 : 18 : 11.

VI – DEPARTMENTAL TRADING AND PROFIT AND LOSS ACCOUNT, INTER-DEPARTMENAL TRANSFER AND STOCK RESERVE Illustration 7 Mr. Mahesh who runs a Departmental store wishes to ascertain separate net profits of the two departments Q and P for the six months ended 30th June, 2006. It is not practicable to take stock on that date. However, the rates of gross profits (calculated without reference to direct expenses) are determined at 40% and 30% on sales at the two departments, respectively. There are in all six departments. Indirect expenses are to be charged in proportion to departmental sales except as to one-third which is to be divided equally. The following figures are extracted from the books for the period ending 30th June, 2006:

Stock, 1st January 2006 Sales Purchases Direct Expenses

Q Rs.

P Rs.

30,000 1,40,000 90,000 18,300

28,000 1,20,000 72,000 28,400

Departmental Accounts

639

Indirect Expenses of all six departments were Rs. 36,000. The sales of other departments were Rs. 1,40,000. Prepare Columnar Trading and Profit and Loss Account for the period ending 30th June, 2006 making a stock reserve for each department @ 7% on estimated value of stock on 30th June, 2006. Solution Departmental Trading and Profit and Loss Account for the period ended 30th June, 2006 Particulars To Stock To Purchases

To Direct Expenses To Indirect Expenses (1)(a) To Indirect Expenses (1) (b) (2/3 on sales) To Stock Reserve (2)

Dept. Q 30,000 90,000 56,000

Dept. P

Particulars

28,000 By Sales 72,000 By Closing Stock 36,000

Dept. Q

Dept. P

1,40,000 36,000

1,20,000 16,000

1,76,000

1,36,000

1,76,000

1,36,000

18,300 2,000

28,400 2,000

56,000

36,000

–

2,720

46,000

38,720

8,400 2,520

7,200 Transferred to 1,120

Tfd. to General Profit and 24,780

–

56,000

38,720

Working Note (1) Indirect expenses (Rs. 36,000) charged in proportion to departmental sales except as to one-third which is to be divided equally (a) i.e. 1/3rd divided equally = 36,000 ¥ 1/3 = 12,000 ¥ 1/6 = 2,000 (b) Balance 2/3rd based on sales = 36,000 ¥ 2/3 = 24,000 Total sales of the store (Q = 1,40,000 + P = 1,20,000 + others = 1,40,000) = Rs. 4,00,000 In proportion to sales = Q = 24,000 ¥ 1,40,000/4,00,000 = 8,400 P = 24,000 ¥ 1,20,000/4,00,000 = 7,200 (2) Stock Reserve = Department Q = 36,000 ¥ 7% = Rs. 2,520 Department P = 16,000 ¥ 7% = Rs. 1,120

VII – DEPARTMENTAL TRADING AND PROFIT AND LOSS ACCOUNT, GENERAL PROFIT AND LOSS ACCOUNT AND STOCK RESERVE Illustration 8 From the data, prepare Departmental Trading and Profit and Loss Account and, therefore, the combined Income Account revealing the concern’s true result for the year ended 31st December, 2002:

640

Financial Accounting

Departments A Rs. Stock (January) Purchase from outside Wages Transfer of goods from Department A Stock (Dec. 31st) at cost to the Department Sale to outside

B Rs.

40,000 2,00,000 10,000 – 30,000 2,00,000

– 20,000 1,000 50,000 10,000 71,000

B’s entire stock represents goods from Department A which transfers them at 25% above its cost. Administrative and selling expenses amount to Rs. 15,000 which is to be allocated between departments A and B in the ratio 4:1, respectively. (B.Com., Chennai, Madurai, Mumbai) Solution Departmental Trading Account for the year ending 31st December 2002 Particulars To Opening Stock To Purchases To Wages To Goods transferred (A to B)

A Dept. 40,000 2,00,000 10,000 – 30,000 2,80,000

To Administrative and Selling (Expenses 4:1)

To Stock Reserve (on unsold stock at Department B) 10,000 ¥ 25/125)

B Dept.

Particulars

A Dept.

B Dept.

– By Sales 20,000 By Transfer of Goods 1,000 (A to B) By Closing Stock 50,000 10,000

2,00,000

71,000

50,000 30,000

– 10,000

81,000

2,80,000

81,000

30,000

10,000

30,000

10,000

12,000 18,000

3,000 7,000

30,000

10,000

B 7,000

25,000

2,000 23,000 25,000

25,000

Illustration 9 The following balances were extracted from the books of Jai Kishan. You are required to prepare Departmental Trading and Profit and Loss Account for the year ended 31st March, 2006, after adjusting the unrealised department profits, if any. Dept. X Opening Stock Purchases Sales

Dept. Y Rs.

Rs.

50,000 6,50,000 10,00,000

40,000 9,10,000 15,00,000

Departmental Accounts

641

General expenses incurred for both the departments were Rs. 1,25,000 and are you also supplied with the following information: (a) Closing stock of Department X Rs. 1,00,000 including goods from Department Y for Rs. 20,000 at cost to Department X. (b) Closing stock of Department Y Rs. 2,00,000 including goods from Department X for Rs. 30,000 at cost to Department Y. (c) Opening Stock of Department X and Department Y include the goods value of Rs. 10,000 and Rs. 15,000 taken from Department Y and Department X, respectively at cost to transferee departments. (d) The gross profit is uniform from year to year. Solution Departmental Trading and Profit and Loss Account for the year ended 31st March 2006 Particulars To Opening Stock To Purchases

Dept. X Rs. 50,000 6,50,000 4,00,000 11,00,000

To General Expenses (Sales ratio 10:15)

Dept. Y Rs.

Particulars

40,000 By Sales 9,10,000 By Closing Stock 7,50,000 17,00,000

50,000

75,000

3,50,000

6,75,000

4,00,000

7,50,000

Dept. X Rs.

Dept. Y Rs.

10,00,000 1,00,000

15,00,000 2,00,000

11,00,000

17,00,000

4,00,000

7,50,000

4,00,000

7,50,000

to General Profit and

General Profit and Loss Account Particulars To Stock Reserve *Department X *Department Y

Rs. 5,000 6,000 10,14,000

Particulars Department X Department Y

10,25,000

Rs. 3,50,000 6,75,000 10,25,000

Working Note *Department X = (20,000 – 10,000) ¥ 50% = Rs. 5,000 *Department Y = (30,000 – 15,000) ¥ 40% = Rs. 6,000 Illustration 10 The firm B.K. Industries have two departments – Cloth and Tailoring. Tailoring department gets all its requirements of cloth from the Cloth department at the usual selling price. From the following particulars, prepare Departmental Trading and Profit and Loss Account for the year ended 31st March, 2004:

642

Financial Accounting

Cloth Dept. Rs.

Tailoring Dept. Rs.

60,000 3,40,000 4,00,000 50,000 – 5,000 1,00,000

8,000 5,000 80,000 – 12,000 2,000 15,000

Stock on 1.4.2003 Purchases Sales Transfer of cloth to Tailoring Department Manufacturing Expenses Selling Expenses Stock on 31.3.2004

The Stock in Tailoring department may be assumed to consists of 80% cloth and 20% other expenses. General Expenses of the business for the year comes to Rs. 23,000. In 2002–03 the Cloth Department earned a gross profit of 30% on sales. (B.Com., Madurai, Calcutta, Madras) Solution Departmental Trading Account for the year ended 31st March 2004 Particulars To Opening Stock To Purchases To Transfer from Cloth To Manufacturing Expenses

To Selling Expenses

Cloth

Tailoring

Total

Particulars

60,000 3,40,000

8,000 5,000

–

50,000

By Sales 68,000 By Transfer to 3,45,000 Tailoring By Closing Stock 50,000

– 1,50,000

12,000 20,000

12,000 1,70,000

5,50,000

95,000

6,45,000

5,000 1,45,000

2,000 18,000

7,000 1,63,00

1,50,000

20,000

1,70,000

Cloth

Tailoring

Total

4,00,000

80,000

4,80,000

50,000 1,00,000

– 15,000

50,000 1,15,000

5,50,000

95,000

6,45,000

1,50,000

20,000

1,70,000

1,50,000

20,000

1,70,000

General Profit and Loss Account for the year ended 31st March 2004 Particulars To General Expenses To Provision on Stock (2) (c)

Rs.

Particulars

Rs.

23,000 2,080 1,37,920

1,63,000

1,63,000

1,63,000

Working Note (1) Rate of Gross Profit of Cloth Dept = 1,50,000 ¥ 100 /(4,00,000 + 50,000) 1 = 33 % 3 (2) Stock Reserve (Tailoring Department) (a) 80% of Rs. 8,000 (Opening stock) is from Cloth department = Rs. 6,400 (b) 80% of Rs. 15,000 (Closing stock) is from Cloth department = Rs. 12,000 (c) Stock reserve on closing stock = 12,000 ¥ 33 1/3% = 4,000 (–) Stock Reserve already in opening stock = 6,400 ¥ 30% = 1,920 2,080

Departmental Accounts

643

Illustration 11 Complex Limited has three departments I, II and III. The following information is provided for the year ended 31st March, 2004: I Rs. Opening stock Direct materials Wages Closing stock Sales

3,000 8,000 5,000 4,000 –

II Rs.

III Rs.

4,000 12,000 10,000 14,000 –

6,000 – – 8,000 34,000

Stocks of each department are valued at cost of the department concerned. Stocks of I department are transferred to II at a margin of 50% above departmental cost. Stock of II department are transferred to III department at a margin of 10% above departmental cost. Other expenses were: Rs. Salaries Printing and Stationery Rent Interest paid Depreciation

2,000 1,000 6,000 4,000 3,000

Allocate expenses in the ratio of departmental gross profits. Opening figures of reserves for unrealised profits and departmental stocks were: Rs. Department II Department III

1,000 2,000

Prepare Departmental Trading and Profit and Loss Account. (B.Com., Madras) Solution Departmental Trading and Profit and Loss Account for the year ended 31st March 2004 Particulars To Opening Stock To Direct Materials To Wages To Internal Transfer (i) c/d

Dept. I Rs.

Dept. II Rs.

Dept. III Rs.

Total Rs.

3,000

4,000

6,000

13,000

8,000 12,000 5,000 10,000

– –

51,000

3,000

12,000

3,000

Dept. I Rs.

By Internal Transfer (i) 18,000 By Sales – 20,000 By Closing 15,000 Stock 4,000

– 18,000 33,000 6,000

Particulars

22,000 47,000 42,000 1,11,000

22,000

Dept. II Rs.

Dept. III Rs.

Total Rs.

33,000 –

– 34,000

51,000 34,000

14,000

8,000

26,000

47,000

42,000 1,11,000 Contd.

644

Financial Accounting

Contd. To Salaries To Printing and Stationery To Rent To Interest Paid To Depreciation

1,000

500

500

500 3,000 2,000 1,500

250 1,500 1,000 750

250 1,500 1,000 750

1,000 6,000 4,000 3,000

8,000

4,000

4,000

Particulars

2,000 By Gross 6,000

3,000

3,000

12,000

2,000

1,000

1,000

4,000

16,000

8,000

4,000

4,000

16,000

Rs.

Particulars

c/d

Rs.

4,000 on Opening Stock Stock (iii)

3,918

3,000 4,918

7,918

7,918

Working Note (i) Calculation of Transfer Particulars

Opening Stock Direct Material Wages Transfer from Department I

Transfers

Department I to II (Rs). 3,000 8,000 5,000 – 16,000 4,000 12,000 6,000 18,000

Department II to III Rs. 4,000 12,000 10,000 18,000 44,000 14,000 30,000 3,000 33,000

(ii) Calculation of Stock Reserve (Department II) Transfer I to II ¥ Closing stock/Total cost of Department II Transfer I to II = Rs. 18,000 Closing stock = Rs. 14,000 Total cost of Department II = Material (12,000) + Labour (10,000) + Transfer (18,000) = 40,000 18,000 ¥ 14,000/40,000 = Rs. 6,300 Stock Reserve (Unrealised profit) = 50% on cost = 50/150 on sales = 6,300 ¥ 50/150 = Rs. 2,100 (iii) Calculation of Stock Reserve (Department III) Closing stock (III) = Rs. 8,000 Profit of 10% on cost (II to III) = 10/110 ¥ 8,000 = Rs. 727 Net closing stock = 8,000 – 727 = 7,273 Therefore, stock reserve = 18,000 ¥ 7,273/40,000 = Rs. 1,091 Rs. 1,818 Rs. 3,918

Departmental Accounts

645

VIII – CONSOLIDATED TRADING ACCOUNT, INTER-DEPARTMENTAL TRANSFER, STOCK RESERVE Illustration 12 AB Ltd. has two departments A and B. From the following particulars, prepare the consolidated Trading Account and Departmental Trading Account for the year ending on 31st March 2005.

Opening stock (at cost) Purchase Sales Wages Carriage Closing Stock: (i) Purchased goods (ii) Finished goods Purchased goods transferred: by B to A by A to B Finished goods transferred: by A to B by B to A

A Rs.

B Rs.

20,000 92,000 1,40,000 12,000 2,000

12,000 68,000 1,12,000 8,000 2,000

4,500 24,000

6,000 14,000

10,000 8,000 35,000 40,000

by A to B by B to A

10,000 7,000

You are informed that purchased goods have been transferred mutually at their respective departmental purchase cost and finished goods at departmental market price and that 20% of the finished stock (closing) at each department represented finished goods received from the other department. Departmental Trading Account for the year ended 31st March 2005 Particulars To Stock To Purchases To Wages To Carriage To Purchased Goods from Other Department To Finished Goods from Other Department To Return of Finished Goods from Other Department

Dept. A Rs. 20,000 92,000 12,000 2,000 10,000 40,000

7,000 38,500 2,21,500

Dept. B Rs.

Particulars

12,000 By Sales 68,000 By Purchased Goods 8,000 to Other Department 2,000 By Finished Goods to Other Department 8,000 By Return of Finished Goods to Other 35,000 Department By Closing Stock Purchased Goods 10,000 Finished Goods 46,000 Other Department (i) Balance (i) 1,89,000

Dept. A Rs.

Dept. B Rs.

1,40,000

1,12,000

8,000

10,000

35,000

40,000

10,000

7,000

4,500 4,800 19,200

6,000 2,800 11,200

2,21,500

1,89,000

Financial Accounting

646

Consolidated Trading Account for the year ended 31st March 2005 Particulars To Opening Stock To Purchases To Wages To Carriage To Stock Reserve (1555 + 642) (iv)

Rs.

Particulars

Rs.

32,000 By Sales 1,60,000 By Closing Stock: 20,000 Purchased Goods 4,000 Finished Goods 2,197

2,52,000 10,500 38,000

82,303 3,00,500

3,00,500

Working Note (i) 20% of the finished stock (closing) at each department represented finished goods received from the other department Department Other Department Balance A = 24,000 ¥ 20% = 4,800 24,000 – 4,800 = 19,200 B = 14,000 ¥ 20% = 2,800 14,000 – 2,800 = 11,200 (ii) Calculation of Net Sales (including transfers) Department A Rs. (a) Sales (b) Add: Transfer

(d) Net Sales plus Transfer

Department B Rs.

1,40,000 35,000 1,75,000 7,000 1,68,000

1,12,000 40,000 1,52,000 10,000 1,42,000

(iii) Rate of Gross Profit A = 38,500 ¥ 100/1,68,000 = 22.917% B = 46,000 ¥ 100/1,42,000 = 32.394% (iv) Unrealised Profit on Closing Stock A = 4,800 ¥ 32.394% = Rs. 1,555 B = 2,800 ¥ 22.917% = Rs. 642

IX – DEPARTMENTAL TRADING AND PROFIT AND LOSS ACCOUNT AND BALANCE SHEET Illustration 13 From the following Trial Balance, Prepare Departmental Trading and Profit and Loss Account for the year ended 31st December and Balance Sheet on that date in the books of a departmental store: Dr. (Rs.) Stock on January 1 Purchase Sales Wages

Dept. X Dept. Y Dept. X Dept. Y Dept. X Dept. Y Dept. X Dept. Y

Cr. (Rs.)

54,000 49,000 98,000 73,500 1,69,000 1,35,200 13,400 2,400 Contd.

Departmental Accounts

647

Contd. Rent Salaries

18,700 13,200 4,200 4,410

Discount Allowed Discount Received Advertising Carriage Inward Furniture and Fittings Plant and Machinery Sundry Debtors Sundry Creditors Capital Drawings

7,380 4,690

1,330

42,000 18,200

6,000

37,370 95,300

9,000 320 19,800

Cash at Bank

4,37,900

4,37,900

The following information is also provided: 1. Rent, lighting and heating, salaries and depreciation are to be apportioned to X and Y Departments as 2 :1. 2. Other expenses and incomes are to be apportioned to X and Y Departments on suitable basis. 3. The following adjustments are to be made: Rent prepaid Rs. 3,700, Lighting and heating outstanding Rs. 1,800 and depreciation on furniture and fittings and plant and machinery 10% per annum. 4. The stock on 31st December, Department X: Rs. 27,480, Y: Rs. 24,010. Solution Departmental Trading Account and Profit and Loss Account for the year ended 31.12...... Particulars

Dept. X Rs.

To Opening Stock To Purchases To Carriage Inwards (Rs. 4,690 in the ratio of purchases, i.e. 980:735) To Wages

To Rent

18,700

(2:1) To Salaries

15,000

54,000 98,000 2,680

13,400 28,400 1,96,480

10,000 8,800

Dept. Y Rs.

Particulars

49,000 By Sales 73,500 By Closing Stock 2,010

2,400 32,300 1,59,210

5,000 Discount Received 4,400 (Rs. 1,330 in the ratio of Pur chases, i.e. 980:735)

Dept. X Rs.

Dept. Y Rs.

1,69,000 27,480

1,35,200 24,010

1,96,480

1,59,210

28,400 760

32,300 570

3,390 Add: Outstanding 1,800 (2:1) 6,000 To Discount Allowed (Rs. 4410 in the ratio of sales, i.e. 169:135.2) To Advertisement (Rs. 7380 in the ratio of Sales, i.e. 169:135.2)

4,000 2,450

2,000 1,960

4,100

3,280

Contd.

648

Financial Accounting

Contd. To Depreciation on Furniture and Fittings (2 : 1) (6000 ¥ 10% = 600) Plant and Machinery (2 : 1) (42000 ¥ 10% = 4,200)

400

200

2,800 –

1,400 14,630

32,550

16,800

32,550

16,800

Rs.

Rs.

Balance Sheet as on 31st December …….. Liabilities Capital : Less: Net Loss, Department X Department Y Less: Drawings Sundry Creditors Outstanding Lighting and Heating Expenses

Rs. 95,300 3,390 91,910 14,630 1,06,540 9,000

Rs.

Assets

Plant and Machinery Less: Depreciation Furniture and Fittings Less: Depreciation Closing Stock Department X 97,540 Department Y 31,370 Sundry Debtors 1,800 Cash at Bank Cash in Hand Prepaid Rent

42,000 4,200 6,000 600

37,800

5,400 27,480 24,010

1,36,710

51,490 18,200 19,800 320 3,700 1,36,710

Illustration 14 Best Tailors Ltd. has two departments, Cloth and Outfitting. The latter department gets all its requirements of cloth from the Cloth department at the usual selling price. On 31st December, 2004 the following was the Trial Balance. Dr. Rs. Share Capital Stock: Cloth Department Purchases: Cloth Sales: Cloth

Director’s Fees and Remuneration Wages and Salaries Cloth Department

Cloth Furniture and Fittings Equipment Carriage Inwards (on cloth) Investments Income from Investments Cash at Bank

– 80,000 4,500

Cr. Rs. 2,00,000 – –

11,00,000 10,000

– –

– – 50,000 30,000 20,000 40,000 8,000 2,000 5,000 1,000 16,000 20,000 3,000 50,000 66,000 1,00,000 – 54,000 16,59,500

12,50,000 1,50,000 50,000 – – – – – – – – – – – – – 9,500 – 16,59,500

Departmental Accounts

649

(i) Closing stock of cloth and hand in the Cloth Department was Rs. 96,000 and that in, Outfitting amounted to Rs. 7,500 (at cost to the respective departments). (ii) It is desired to ascertain profit or loss on strict accountancy principles. (iii) Trading conditions and accounting methods in 2004 were the same as in 2003. From the above information, prepare Departmental Trading and Profit and Loss Account and the Balance Sheet. (B.Com., Madurai) Solution Departmental Trading and Profit and Loss Account for the year ended 31st March 2004 Particulars

Cloth Rs.

Total Rs.

Rs.

To Opening Stock 80,000 To Purchases 11,00,000 To Wages and Salaries 20,000 To Carriage Inwards 66,000 To Cloth Department – Transfer – 1,30,000 13,96,000 To Rent and Rates (3:1) 6,000 1,500 1,000 To Depreciation 1,21,500 1,30,000

Particulars

85,000 By Sales 5,000 (b) 10,000 11,10,000 Department 60,000 – Transfer 40,000 By Closing Stock 66,000

50,000 50,000 52,000 1,82,000 1,57,500 15,53,500 2,000 500 5,000 45,000 52,500

8,000 2,000 6,000 1,66,00 1,82,500

Cloth (A) Rs. 12,50,000

50,000 96,0000

13,96,000 1,30,000

1,30,000

Total (B) Rs. Rs. 1,50,000 14,00,000

7,500

50,000 1,30,500

1,57,500 15,53,500 52,500 1,82,500

52,500

1,82,500

General Profit and Loss Account To Director’s Fees

To Stock Reserve (c) Balance Sheet

Rs. 30,000 16,000 By Income from 3,000 Investment 250,

Rs. 1,66,500 9,500

1,26,750 1,76,000

1,76,000

Balance Sheet as on 31st December 2004 Liabilities Share Capital

Rs. Assets 2,00,000 Equipment 1,26,750 Furniture Investments Closing stock Cloth Dept.

(–) Stock Reserve Cash at Bank 3,26,750

Rs. 50,000 20,000 1,00,000 96,000 7,500 1,03,000 (750) 1,02,750 54,000 3,26,750

650

Financial Accounting

Working Note (a) GP Rate for 2003 = GP/Sales ¥ 100 = 1,30,000/(12,50,000 + 50,000) ¥ 100 = 10% = 1,30,000/13,00,000 ¥ 100 = 10% Thus, GP rate for 2004 also is same (10%). (b) Opening stock of Outfitting Department It is given as cost to the company, which is to be converted into cost to the Outfitting Department. 4,500 + 1/9(4,500) = 4,500 + 500 = Rs. 5,000 (c) Stock Reserve Stock Reserve on closing stock = 7,500 @ 10% = 750 Stock Reserve on opening stock = 5000 @ 10% = 500 Stock Reserve to provide 250 Illustration 15 Following is the Trial Balance of Mr. Rajan as on 31.12.2002 Particulars Capital Account Drawings Account Opening Stock: Department A Department B Department C Purchases: Department A Department B Department C Sales: Department A Department B Department C Sales Returns: Department A Department B Department C Freight and Carriage: Department A Department B Department C Furniture and Fixtures Plant and Machinery Bills Receivable Bills Payable Motor Vehicles Sundry Debtors Sundry Creditors Salaries Power and Water Telephone Charges Bad Debts Rent and Taxes Insurance Wages: Department A Department B Department C Printing and Stationeries Advertising Bank Overdraft

Debit Rs.

Credit Rs. 40,000 1,500 8,500 5,700 1,200

22,000 17,000 8,000 54,000 33,000 21,000 4,000 3,000 1,000 1,400 800 200 4,600 20,000 4,200 8,000 40,000 8,000 7,000 4,500 1,200 2,100 750 6,000 1,500 800 550 150 2,000 3,500 12,000 850 1,75,000

1,75,000

Departmental Accounts

651

Prepare Departmental Trading, Profit and Loss Account and the Balance Sheet taking into account the following adjustment: (a) Outstanding Wages: Department B – Rs. 150 Department C – Rs. 50 (b) Salaries payable Rs. 500 (c) Depreciate plant and machinery and motor vehicles at the rate of 10%. (d) Create a reserve of 5% for bad and doubtful debts. (e) Each department shall share the expenses in proportion to their sales. (f) Closing Stock: Department A – Rs. 3,500 Department B – Rs. 2,000 Department C – Rs. 1,500 (B.Com., Madras) Solution Trading and Profit and Loss Account For the year ended 31st Dec. 2002 Dr.

Cr. Particulars

To Opening Stock To Purchases To Freight and Carriage To Wages add Outstanding

To Salaries add Outstanding To Power and Water To Telephone Charges To Bad Debts To Rent and Taxes To Insurance To Printing and Stationery To Advertising To Depreciation (2,000 + 4,000) To Reserve for Doubtful Debts

A Rs.

B Rs.

C Rs.

A Rs.

B Rs.

C Rs.

8,500 22,000 1,400

5,700 17,000 800

50,000 3,500

30,000 2,000

20,000 1,500

800 20,800

700 7,800

200 11,900

56,500

32,000

2,500

1,500

21,500

56,500

32,000

21,500

1,000

20,800 –

7,800 735

11,900 –

600

360

240

10,50 375

630 225

420 150

3,000 750

1,800 450

1,200 300

1,000 1,750

600 1,050

400 700

3,000

1,800

1,200

200 6,575

120 –

70 6,210

20,800

8,535

11,900

20,800

8,535

11,900

Particulars

By Sales less 1,200 Sales Returns 8,000 By Closing Stock 200

652

Financial Accounting

Balance Sheet as at 31.12.2002 Liabilities

Rs. Assets

Capital A/c

40,000

(6,575 + 6,210)

12,785 52,785

52,050 1,500 Bills Payable Sundry Creditors Bank Overdraft Wages Outstanding Salary Outstanding

4,600 20,000 2,000 18,000 4,200

Bills Receivable Motor Vehicles

735

Department B

Rs.

Furniture and Fixtures Plant and Machinery

40,000 4,000 8,000 400

50,550 Sundry Debtors 8,000 7,000 12,000 200 500 Closing Stock

36,000

7,600 850 7,000

78,250

78,250

X – DEPARTMENTAL TRADING AND PROFIT AND LOSS ACCOUNT, GENERAL PROFIT AND LOSS ACCOUNT, INTER-DEPARTMENTAL TRANSFER AND BALANCE SHEET Illustration 16 A hotel proprietor has two departments, viz. Apartment Department and Meals Department. Following is the Trial Balance of his business. Debit Provisions Stock of provision in the beginning Customer’s Debit Balance Buildings (1/10th used for Meals Department) Furniture and Equipment General Expenses Interest Accrued Income Tax Wages

Rs.

Credit

Rs.

15,500 1,020 10,000 800

Income from Apartment and Department Income from Meals Department Capital Suppliers A/c Provision for Depreciation on Building 2,10,000 Interest 60,000 27,410 200 1,600 400 6,000

46,000 32,000 2,20,000 9,800 24,000 1,130

3,32,930

3,32,930

Additional information: (a) The servant in the Apartment Department had occupied a room worth Rs. 120 and took meals worth Rs. 60. Similarly, servants in the Meals department have occupied a room worth Rs. 150 and took meals worth Rs. 90. (b) Wages are charged in the proportion of ½ to the Apartment Department 1/4th to the provision department and remaining to the General Profit and Loss A/c. (c) Increase provision for depreciation of buildings to Rs. 30,000. (d) A sum of Rs. 800 representing accommodation Rs. 240 and meals Rs. 560 to be charged to proprietor of the hotel. Prepare Profit and Loss Account and Balance Sheet as on 31.3.2005. (B.Com., Madras)

Departmental Accounts

653

Solution Departmental Profit and Loss A/c for the year ended 31st March, 2005 Particulars To Stock To Provisions To Depreciation on Buildings To Wages

Apartment Rs.

Meals Rs. – –

5,400 3,000 180

Particulars

1,020 By Income 15,500 By Proprietor’s A/c (Drawings) 600 1,500 240

Apartment Rs.

Meals Rs.

46,000

32,000

240

560

270

150

46,510

32,710

ment* 37,930

13,850

46,510

32,710

(Departmental)

General Profit and Loss Account for the year ended 31st March, 2005 Particulars

Rs.

To Wages To General Expenses

1,500 27,410 24,000

Particulars

Rs.

Apartment Meals By Interest

37,930 13,850 1,130

52,910

52,910

Balance Sheet as on 31st March, 2005 Liabilities Capital

Rs. 2,20,000

Income Tax 400 Premium 1,600 Meals 560 Apartment 240

2,800 2,17,200 24,000

Suppliers A/c

Particulars

Rs. 2,10,000

Buildings Depreciation Furniture and Equipment Customers A/c Interest Accrued

30,000

1,80,000 60,000 800 200 10,000

241200 9,800 2,51,000

2,51,000

Working Note * Expense incurred towards

Apartment Rs. 120

Meals Rs. 60

Total Expenses

Treatment

180 Debited to Apartment Depart ment

(i)

Apartment Department Ser vants

(ii)

Meals Department Servants

150

90

240 Debited to Meals Department

Total

270

150

420 Credited to Apartment and Meals Departments, respec tively

Illustration 17 From the following balances extracted from the books of a firm, prepare Departmental Trading and General Profit and Loss Account for the year ended 31st December, 2005 and a Balance Sheet as on that date after adjusting the unrealised departmental profits, if any.

654

Financial Accounting

Furniture Opening Stock

Department A Department B Department A Department B

Purchases: General Expenses Debtors Drawings Cash at Bank

Rs. 12,500 Capital 2,500 Sales: 3,000 4,000 Creditors 1,00,000 1,50,000 1,40,000 20,000 28,000 1,00,000

Department A Department B

5,60,000

Rs. 30,000 2,00,000 3,20,000 10,000

5,60,000

Additional information: 1. Closing stock of Department A – Rs. 13,000 including goods from Department B Rs. 4,000 at cost to Department A. 2. Closing Stock of Department B – Rs. 26,000 including goods from Department A Rs. 9,000 at cost to Department B. 3. Sales Department A includes transfer of goods to Department B of the value of Rs. 20,000 and sales of Department B includes transfer of goods to Department A of the value of Rs. 30,000 both at market price to transfer departments. 4. Opening stock of Department A and Department B includes gods to the value of Rs. 1,000 and Rs. 1,500 taken from Department B and Department. A, respectively at cost price to transferor departments. 5. Depreciate land and buildings by 5% and furniture by 10% p.a. (B.Com., Madurai, Madras) Solution Departmental Trading Account for the year ended 31st December 2005 Dr.

Cr.

To Opening Stock To Purchases To Transfers

Total Rs.

Dept. A Rs.

Dept. B Rs.

3,000 70,000 30,000 1,10,000

4,000 1,30,000 20,000 1,92,000

By Sales 7,000 By Transfers 2,00,000 By Closing Stock 50,000 3,02,000

2,13,000

3,46,000

5,59,000

Dept. A Rs. 1,80,000 20,000 13,000

Dept. B Rs. 2,90,000 30,000 26,000

Total Rs. 4,70,000 50,000 39,000

2,13,000

3,46,000

5,59,000

General Profit and Loss Account for the year ended 31st December 2005 Dr.

Cr. Rs. 1,40,000

To General Expenses To Depreciation: Furniture To Provision for unrealised Department A* Department B*

Rs. Department A Department B

625 250 2,400 4,950

1,10,000 1,92,000

875

7350 153775 3,02,000

3,02,000

Departmental Accounts

655

Working Note Calculation of Rate of Gross Profit Department A = 1,10,000 ¥ 100/2,00,000 = 55% Department B = 1,92,000 ¥ 100/3,20,000 = 60% Calculation of Stock Reserve (on closing stock) *Department A= 4,000 ¥ 60% = Rs. 2,400 *Department B = 9,000 ¥ 55%= Rs. 4,950 Calculation of Stock Reserve (on closing stock) There is no need for any adjustments for opening stock which includes interdepartmental transfers. The reason being, goods have been valued at cost to the transferor department and not to transferee departments. Balance Sheet as on 31st December, 2005 Liabilities Capital:

Rs. 30,000 1,53,775 1,83,775 28,000

Sundry Creditors

Assets

Rs.

Fixed Assets

1,55,775 Furniture 10,000 Stock: Department A: Department B:

Sundry Debtors Cash at Bank 1,65,775

12,500 625 2,500 250 13,000 26,000 39,000 7,350

11,875 2,250

31,650 20,000 1,00,000 1,65,775

Points to Remember The accounts which are prepared to know the profitability of each department separately called Departmental Accounts. There are distinction between Branch and Departmental Accounts with regard to place, accounts, apportionment of expenses, and foreign exchange conversion. Advantages of Departmental Accounts are to know profits, measure efficiency, and formulate policies. Expense pertaining to one department is debited to the respective column of the department concerned. Common expenses are apportioned on the basis of various factors to departments. Transfer of the goods from one department to another department is called Inter-departmental Transfer.

656

Financial Accounting

Examination Questions I. Objective Questions 1. Fill in the blanks (i) The Departmental Accounts include Trading account and _________. (ii) Departments are located at _________. (iii) Departmental Accounts are maintained by _________. (iv) Salary to works manager is apportioned on the basis of _________ . (v) When goods are transferred from one department to another is called _________. 2. Choose the correct answer (i) Advertisement and selling expenses are allocated to various departments on the basis of (a) Sales (b) Purchases (c) Stock (d) None of the above (ii) Works Manager’s salary is to be allocated to various departments on the basis of (a) Time devoted (b) Equally (c) Efficiency (d) None of the above (iii) Rent, repairs and maintenance of building are allocated to various departments on the basis of (a) Value of expenses (b) Value of floor space occupied (c) Location of the building (d) None of the above (iv) When goods are transferred from one department to the other, the debit is given to the (a) Transferee department (b) Transferor department (c) Head office (d) None of the above 3. Match the following (i)

Insurance premium paid

a

(ii)

Depreciation

b

Number of employes Stock value

(iii)

Welfare facilities

c

Purchases

(iv)

Carriage inwards

d

Value of machinery

4. State whether the following statements True or False (i) Depreciation on plant is divided equally among different plants. (ii) There is no basis for allocating income tax payable. Hence, it can be taken to the General Profit and Loss Account.

Departmental Accounts

657

(iii) When goods are transferred from one department to the other at invoice price, the transfer price refers to the charge made for goods and services sold internally. (iv) There is no basis for allocating bank charges. Hence, these can be taken to the General Profit and Loss Account. (v) Under Departmental Accounting, Trading and Profit and Loss Accounts are prepared in columnar form. Answers 1. (i) (iii) (v) 2. (i) 3. (i) 4. (i)

Price and Loss A/c; head office, Inter-departmental transfer. a; (ii) a; b; (ii) d; False; (ii) True;

(ii) one place; (iv) time devoted (iii) b; (iii) a; (iii) False;

(iv) a. (iv) c; (iv) True. (v) True.

II. Descriptive Questions A. Very Short Answer Questions 1. What are Departmental Accounts? 2. What is meant by Inter-Departmental Transfer? 3. What are the advantages of Departmental Accounts? B. Short Answer Questions 1. Distinguish between Branch and Departmental Accounts? 2. What are reasons for preparing Departmental Accounts? 3. Give examples for common expenses to all departments? C. Detail Answer Questions 1. What are Departmental Accounts? Explain their advantages? 2. Explain the procedure for the preparation of Departmental Accounts? 3. What are the bases for the apportionment of common expenses to different departments of an organisation? 4. How are transfers from one department to another treated in Departmental Accounts? III. Exercise Problems

Departmental Trading Account Problem 1 P sells two products manufactured in his factory. The goods are made in two departments X and Y for which separate set of accounts are maintained. Some of the manufactured goods of Department X are used as raw material by Department Y and vice versa. From the following particulars you are required to ascertain the total cost of goods manufactured in departments X and Y.

658

Financial Accounting

Total units manufactured Total cost of manufacture

Department X Department Y Rs. 10,00,000 Rs. 5,00,000 Rs. 10,000 Rs. 5,000

Department X transferred 2,50,000 units to Department Y and Department Y transferred 1,00,000 units to Department X. (B.Com, Madras) [Ans. Cost price per unit Dept. X = Re. 0.01; Dept. Y = Re. 0.01 Total cost of units produced X = Rs. 8,500, Y = Rs. 6,500] Problem 2 The following purchases were made by a business house having three Departments: Department A – 1,000 units ¸ Ô Department B – 2,000 units ˝ at a total cost of Rs. 1,00,000 Department C – 2,400 units Ô˛ Stock on 1st January were: Department A – 120 units Department B – 80 units Department C – 152 units The Sales were: Department A – 1,020 units @ Rs. 20 each Department B – 1,920 units @ Rs. 22.50 each Department C – 2,496 units @ Rs. 25 each The rate of gross profit is the same in each case. Prepare Departmental Trading Account. (B.Com., Madurai, Madras) [Ans. Gross profit Rs. 4,080; Rs. 8,640; Rs. 12,480] Problem 3 Mehta Ram of Ram Nagar purchased goods for his three departments as follows: Department A – 200 pieces Department B – 1,400 pieces Department C – 400 pieces Sales of three departments were as follows: Department A – 180 pieces at Rs. 15 per piece. Department B – 1,500 pieces at Rs. 18 per piece. Department C – 450 pieces at Rs. 6 per piece. Mehta Ram informs you that the rate of gross profit is the same in all departments. You are required to find out the cost of purchases for each department. (B.Com., Madras) [Ans. Cost of Purchases Rs. 500; Rs. 4,200; Rs. 400]

Departmental Accounts

659

II. Problem 4 X, the proprietor of a departmental store, decided to calculate separate profits for his two departments ‘L’ and ‘M’ for the month ending 31st January. Stock on 31st January could not be valued for certain unavoidable reasons, but his rate of gross profit (calculated without reference to direct expenses) on sales for the two departments are 40% and 30%. The following figures are given: Department M Rs.

Rs.

Stock on 1.1.2003 Sales Purchases Direct Expenses

9,000 42,000 27,000 5,490

8,400 36,000 21,600 8,520

Indirect expenses for the whole business containing five departments are Rs. 10,800 which are to be charged in proportion to department sales except as to1/6th, which is to be divided equally. Sales for remaining three departments were Rs. 1,02,000. Prepare a Statement showing profits for the two departments. (B.Com., Madras) [Ans. Gross profit Rs. 16,800; Rs. 10,800; Net profit Rs. 8,850; Rs. 120]

III. Problem 5 From the following figures, prepare accounts to disclose total profit and the profit of the two departments A and B. Particulars Opening Stock A B Purchases: A B Carriage inwards Salaries: A B General Rent and Rates

Rs. 15,200 10,800 75,100 69,800 2,860 9,000 8,500 11,600 6,000

Particulars Advertising Insurance General Expenses Discount Allowed Accountancy Charges Sales A B Purchases Returns: A B Discount Received

Rs. 8,100 1,000 5,400 1,800 500 1,00,000 80,00 1,100 800 1,430

The following further information is supplied: (a) Goods transferred from department A to B were Rs. 5,000. This has not yet been recorded. (b) General salaries are to be allocated equally. (c) The area occupied is in the ratio of 3 : 2.

660

Financial Accounting

(d) Insurance premium is for a comprehensive policy, allocation being inconveniencing. (e) The closing stocks of the two departments were: A – Rs. 17,800 and B – Rs. 15,600. (B.Com., Madras) [Ans. Gross profit Rs. 32,120; Rs. 9,420; Net profit A – Rs. 5,960; Net Loss B – Rs. 13,390; General Profit and Loss – Loss Rs. 8,930]

IV. Transfer and Stock Reserve Problem 6 A firm has two departments, Cloth and Readymade Clothes. The clothes were made by the firm itself out of cloth supplied by the Cloth Department at its usual selling price. From the following figure, prepare Departmental Trading and Profit and Loss Account for the year 2002. Particulars

Closing Stock on 1.1.2002 Purchases Sales Transfer to Readymade Clothes Department Expenses: Manufacturing Selling Stock on 31.12.2002

Cloth Depart ment Rs.

Readymade Clothes Department Rs.

3,00,000 20,00,000 22,00,000 3,00,000

50,000 15,000 4,50,000 –

– 20,000 2,00,000

60,000 6,000 60,000

The Stock in the Readymade Clothes department may be considered as consisting of 75% cloth and 25% other expenses. The cloth department earned gross profit at the rate of 15% in 2001. General Expense of the business as a whole came to Rs. 1,10,000. (B.Com., Madras) [Ans. Gross profit Rs.4,00,000; Rs. 85,000; Net profit Rs. 3,80,000; Rs. 79,000; General profit Rs. 3,47,425]

Loss Account and Balance Sheet Problem 7 From the following balances extracted from the books of Tharun Departmental Stores, prepare Departmental Trading and Profit and Loss Account in columnar form for the year ended 31st March 2003 and a Balance Sheet as on that date:

Departmental Accounts

Name of Accounts

Debit (Rs.)

Opening Stock Department I Department II Purchases and Sales Department I Department II Carriage inwards Department I Department II Machinery Department I Department II Salaries Rent Repairs to Machinery Debtors and Creditors Capital Cash in hand Bills Receivable and Bills Payable Drawings Buildings

661 Credit (Rs.)

12,000 9,000 16,000 14,000

30,000 28,000

400 200 2,000 1,600 6,000 1,200 3,000 4,500 1,200 1,500 2,000 6,000 Total

80,600

6,000 16,000 600

80,600

Additional Information: (a) Closing stock on 31.3.2003 Department I Rs. 14,000 and Department II Rs. 12,000. (b) Salary to be allocated in the ratio of 7 : 3 and repairs to machinery in the ratio of 2 : 3. (c) Area of the building is occupied in the ratio of 3 : 2. (d) Depreciate building at 5% and machinery at 10% per annum. [Ans. Gross profit Rs. 15,600; Rs. 16,800; Net profit Rs. 9,100; Rs. 12,440; Balance sheet Rs. 42,140] Problem 8 From the following particulars, you are required to prepare Trading and Profit and Loss Accounts for the year ended 31st December 2005, showing the gross and net profits of each department. Apportion the general expenses of the business on the basis of turnover. Also prepare the Balance Sheet. Trial Balance (31.12.2005) Rs. Capital Plant less Depreciation Stock (1.1.2005) Purchases Wages Departmental charges Returns cost

Department A Department B Department A Department B Department A Department B Department A Department B Department A Department B

15,000 25,000 19,000 46,480 22,050 11,600 5,360 7,530 3,230 – –

Rs. 65,000 – – – – – – – – – 1,160 700 Contd.

662

Financial Accounting

Contd. Sales Rent, Rates etc. Salaries and Commission Advertising Discount and Interest Sundry Expenses Depreciation Sundry Debtors Sundry Creditors Cash at Bank

Department A Department B

– – 3,750 9,450 3,750 2,040 1,530 750 12,530 – 4,350 1,93,400

80,000 40,000 – – – – – – – 6,540 – 1,93,400

Stock in Hand December 31, 2005 Department A Rs. 30,000 and Rs. 20,500. Total sales are Rs. 1,20,000, i.e., Department A Rs. 80,000 and B Rs. 40,000. Proportion of general or indirect expense chargeable to A 2/3 and B 1/3. [Ans. Gross profit Rs. 20,550; Rs. 11,560; Rs. 32,110; Net profit Rs. 6,370; Rs. 4,470; Rs. 10,840; Balance Sheet Rs. 82,380] Problem 9 Mr. Senthil carries on cloth business. Following is the list of balances as on 31st December, 2002: Rs. Capital Account Sales: Department I Department II Sundry Creditors Bills Payable General Reserve Opening Stock Department I Department II Sundry Debtors Bills Receivable Furniture Rent Marine Insurance Purchases: Department I Department II Salaries Commission Advertisement Bank Charges Stationery Telegram Discount (Dr.) Miscellaneous Expenses Investment Cash at Bank

30,000 70,000 30,000 12,000 1,500 750 3,400 1,100 23,000 5,000 1,080 1,800 2,400 43,000 25,000 5,400 2,800 2,200 5,800 120 2,700 600 1,500 900 6,900 2,500 7,050

Departmental Accounts

663

The business is divided into two departments. From the above particulars, Prepare Departmental Trading and Profit and Loss Account for the year ending 31st December, 2002 and also Balance Sheet as on 31.12.2002. Write off 10% depreciation on furniture. Provide Rs. 300 for bad debts and 2% on debtors for discounts. The closing stock were: Department I: Rs. 4,000, Department II: Rs. 1,680. Increase General Reserve by Rs. 3,000. (B.Com., Madras) [Ans. Gross profit Rs. 27,600; Rs. 5,580; Net profit (I) Rs. 8,642; (II) Rs. 2,544; General profit Rs. 3,098; Balance sheet Rs. 50,348]

VI. Transfer, Stock Reserve and Balance Sheet Problem 10 A company has two departments, viz. Piecegoods and Tailoring. All goods purchased by the Tailoring Department from Piecegoods Department are sold at normal market prices, same as prices charged to outside customers. From the following particulars, prepare Departmental Trading and Profit and Loss Account and a Balance Sheet as on 31st March, 2006. Piecegoods Department Rs. Opening Stock Purchases Goods from Piecegoods Department Wages Salaries (Departmental) Closing Stock (at cost to the Department) Sales Printing and Stationery Machinery

20,000 2,20,000 – 600 4,800 38,600 2,43,000 1,000 –

Tailoring Department Rs. Nil 10,000 60,000 6,400 1,200 14,000 1,36,000 600 12,000

Further information: Advertisement Salaries (General) Capital Debtors Creditors Drawings Cash at Bank

Rs. 10,000 18,000 1,20,000 54,000 7,000 1,00,000 41,000 6,400

Depreciate machinery by 10%. The general unallocated expenses are to be apportioned in the ratio of Piecegoods – 3 and Tailoring – 2. [Ans. Gross profit Rs. 1,01,000; Rs. 73,600; Net profit Rs. 78,400; Rs. 59,400; General profit Rs. 1,33,800; Balance sheet Rs. 1,60,800]

664

Financial Accounting

Problem 11 Prepare Departmental Trading Account and General Profit and Loss and Balance Sheet as on 31st December, 2001. Particulars

Dr. Rs.

Cr. Rs.

Capital Furniture Opening Stock: Department A Department B Purchases: Department A Department B Sales: Department A Department B General Expenses Debtors Creditors Drawings Bank

3,00,000 1,25,000 25,000 30,000 40,000 10,00,000 15,00,000 20,00,000 32,00,000 14,00,000 2,00,000 1,00,000 2,80,000 10,00,000 56,00,000

56,00,000

Additional information: (a) Closing stock of Department A is Rs. 1,30,000. It includes stock of Rs. 40,000 which B Department has sent to A Department at cost. (b) Closing stock of B Department is Rs. 2,60,000. It includes stock of Rs. 90,000 which A Department has to sent to B Department at cost. (c) Sales of A Department include goods of Rs. 2,00,000 transferred to B Department. Sales of B Department include goods of Rs. 3,00,000 transferred to A Department. Both of these transfers have been made at market price. (d) Opening stock of A Department includes goods of Rs. 10,000 taken from B Department at cost and opening stock of B Department includes Rs. 15,000 taken from A Department at cost, (e) Depreciation on Land and Buildings @ 5% per year and on furniture @ 10% per year. (B.Com., (Madras) [Ans. Gross profit Rs. 11,00,000; Rs. 19,20,000; General profit Rs. 15,52,000; Balance sheet Rs. 17,31,250]

17

Average Due Date and Account Current

Learning Objectives After studying this chapter, you should be able to Explain the concept Average Due Date and Account Current. Know the steps in calculation of Average Due Date. Understand different methods of calculating interest for Account Current. Explain how number of days is calculated in Account Current.

AVERAGE DUE DATE Average Due Date is the arithmetic average of several due dates. It is also known as Equated Due Date. When a person owes several dues on different dates to another person, at the time of making payment one person looses interest and another person gains. In order to avoid this, one single date is determined to make payment without any loss of interest either to debtor or creditor. Such single date for making payment is called average due date. On this due date the debtor has to make payment in one instalment instead of several payments due on different dates. The creditor is able to calculate the interest on the total amount due for the days from average due date to the settlement date. Calculation of average due date is used to serve some purposes such as,

of partnership firm.

Steps in Calculation of Average Due Date 1. 2. 3. 4. 5.

Choose any one date, preferably the first due date, as least date. Calculate the due date for each transaction. Calculate number of days away from base date to due date. Multiply each amount by number of days so calculated. Divide the total of products by the total amounts.

666

Financial Accounting

6. Calculate the average due date by counting the number of days from the base date chosen. The formula given below is used for calculate average due date Average due date = Base date ± (Total of products/Total of amounts) There is a short-cut method in calculating average due date. The formula is given below: Total number of days (or) months (or)

years calculated from the date off loan to the repayment of Instalment Average due date = Date of lending + Number of instalments

Bills of Exchange and Average Due Date When there are several bills with different due dates, the drawer or payee of the bill wants to cancel those bills and accept a new bill with average due date, in that case both the drawer and payee will not lose or gain anything.

Partnership Business and Average Due Date If there are drawings made by a partner on different dates, it is very difficult to calculate interest at the time of preparing a Balance Sheet. Therefore, if one average due date is determined that will help the firm to calculate interest on drawings while preparing the Balance Sheet of the firm.

ACCOUNT CURRENT It is a statement showing details of various business transactions between two parties during a particular period of time with interest outstanding.

Methods of Calculating Interest There are three methods of calculating interest for account current purposes namely: (i) Interest on individual transaction method (ii) Product of individual transaction method (iii) Product of balances method

(i) Interest on Individual Transaction Method This consists of (a) Interest Table Method, and (b) Interest Number Method (a) Interest Table Method According to this method, interest is calculated by using ready reckoner interest table. With the help of this table, interest can be calculated on different amount at different rates of interest for different period. (b) Interest Numbers Method This method is also known as Index Number Method. According to this method Index Number Column is opened along with amount and days/months columns. Index Number is calculated as: Amount ¥ Number of days)/100

Average Due Date and Account Current

667

(ii) Product of Individual Transaction Method According to this method, interest is calculated on the basis of product (Amount ¥ Number of days)/100 The formula is as follows: Interest = (Balance of products ¥ Rate of Interest)/(365 ¥ 100) Red Ink Interest If the due date of the transaction falls after the date of settlement, i.e. the closing date, account current is prepared. The interest on the product is written in red ink to alert the accountant. This is what is known as red ink interest.

(iii) Product of Balances Method This is also known as Periodic Balance Method or Steps Method. Calculation of interest under this method is suitable for enterprises dealing in finance (especially in banks and post offices). Here, number of days for each transaction is calculated from the due date to the date of next transaction.

Calculation of Number of Days There are three different methods of calculating number of days for account current. They are:

Forward Method Under this method, the number of days are calculated from the due date of transaction to the date of closing the account.

Backward Method It is also known as Époque Method. Under this method, the number of days is calculated from the opening date of transaction to the due date of transaction.

Daily Balance Method Under this method, the number of days are calculated from the date of last transaction to the date of next transaction. For example, if a cheque or demand draft is deposited into the bank, the effective date will be the date on which credit is given, and not the date on which the cheque is deposited. This method is adopted by banks.

Illustrations Index for Illustrations Ill. No.

Type

I

Account Current

II

Average Due Date

III

Account Current and Average Due Date

Financial Accounting

668

I – ACCOUNT CURRENT Illustration 1 The following are the particulars of transactions that have taken place between A and B for a period of six months. In the books of A Rs. July

Aug. Sept.

1 Balance (Dr.)

4,000

10 Purchased goods from B

3,000

25 Paid cash by B

1,000

10 Sold goods to B

10,000

25 Given two months acceptance to B

5,000

10 Paid cash to B

3,000

20 Purchased goods from B

7,000

You are required to prepare an Account Current to be rendered by A and B for the period upto December 31, 2004. Interest is to be charged at an agreed rate of 12% per annum. (B.Com., Madras) Solution B in Account Current with A Dr. Date

Cr. Due Date

Particulars

2004 July 1

July 1

Aug. 10 Aug. 24

Aug 10 Oct 28

Sept 10

Sept 10

To Balance b/d To Sale To Balance of Products To Cash

Dec 31

To Interest on Balance of Products (h)

Amount Rs.

4,000

10,000

5,000

3,000

To Balance b/d

Due Date

Particulars

2004 July 10

July 10

By Purchase

July 25 3,20,000 Sept 20

July 25 Sept 20

By Cash By Purchase

184 (a)

7,36,000

143 (d) 64 (g)

14,30,000

112 (e)

3,36,000

Date

Dec 31

Dec 31 467.87

22,467.87 2005 Jan 1

Days Products up to Rs. Dec 31

11,467.87

28,22,000

By Balance of Products By Balance c/d

Amount Rs.

3,000

1,000 7,000

Days Products up to Rs. Dec 31 174 (b)

159 (c) 102 (f)

5,22,000

1,59,000 7,14,000

14,27,000

11,467.87

22,467.87

28,22,000

Average Due Date and Account Current

669

Working Note: Calculation of days July

Aug.

Sept.

Oct.

Nov.

Dec.

Total

a

July 1 to Dec. 31

31

31

30

31

30

31

= 184

b

July 10 to Dec. 31

21

31

30

31

30

31

= 174

c

July 25 to Dec. 31

6

31

30

31

30

31

= 159

d

Aug. 10 to Dec. 31

—

21

30

31

30

31

= 143

e

Sept. 10 to Dec. 31

—

—

20

31

30

31

= 112

f

Sept. 20 to Dec. 31

—

—

10

31

30

31

= 102

g

Oct. 28 to Dec. 31

—

—

—

3

30

31

= 64

h

Interest on balance of products = 14,27,000 ¥ 1/366 @ 12% = Rs. 467.87

Illustration 2 The following transactions took place between Sohan and Mohan between Jan.1 to January 30, 2005: Rs. Jan. 1 Sold goods to Sohan

1,120

Jan. 10 Received Sohan’s acceptance (due 2 m/d)

500

Feb. 15 Received cash from Sohan

600

Mar. 2 Bought goods from Sohan

2,750

Mar. 3 Accepted Sohan’s Bill one m/d

1,000

April 11 Paid cash to Sohan

1,000

April 30 Sold goods to Sohan (Payable on 31st May)

1,200

May 11 Bought goods from Sohan

750

May 31 Sold goods to Sohan (Payable on 10th June)

1,100

June 15 Bought goods from Sohan

1,500

Prepare Account Current to be sent by Mohan on 30th June, 2005. The rate of interest is 10%. (Kerala) Solution Sohan in Account Current with Mohan as on June 30, 2005 Dr. Date

Cr. Due date

Particulars

Amount Days up to Rs. June

Products

Date

Due date

Particulars

Amount Rs.

Rs.

30

Days up to June

Products Rs.

30

2005

2005

Jan. 1

Jan. 1

To Sales

1,120.00

180

2,016

Jan. 10

Mar 13 By Bills Receivable

Mar. 3

April 6

To Balance of Products

1,000.00

85

850

Feb. 15

Feb. 15

By Cash

April 11

April 11

To Cash

1,000.00

80

800

Mar. 2

Mar 2

By Purchases

500.00

109

545

600.00

135

810

2,750.00

120

3,300

Financial Accounting

670 April 30

May 31

To Sales

1,200.00

May 31

June To 10 Sales

1,100.00

June 30

To Balance of Products

June 30

To Balance c/d

30

May 11

May

By Purchases

750

50

375

11

220

June 15

June 15

By Purchases

1,500.00

15

225

707.65

1,009

June 30

By Interest on Balance of Products

27.65

6,127.65

5,255

20

360

6,127.65

July 1

By Balance c/d

5,255

707.65

Working Note: Calculation of days Jan.

Feb.

Mar.

Apr.

May

June

Total

a

Jan. 1 to June 30

30

28

31

30

31

30

= 180

b

Feb. 15 to June 30

—

13

31

30

31

30

= 135

c

Mar. 2 to June 30

—

—

29

30

31

30

= 120

d

Mar. 13 to June 30

—

—

18

30

31

30

= 109

e

Apr. 6 to June 30

—

—

—

24

31

30

= 85

f

Apr. 11 to June 30

—

—

—

19

31

30

= 80

g

May 11 to June 30

—

—

—

20

—

30

= 50

h

May 31 to June 30

—

—

—

—

—

30

= 30

i

June 10 to June 30

—

—

—

—

—

20

= 20

j

June 15 to June 30

—

—

—

—

—

15

= 15

Interest on balance of products = 1,009 ¥ 1/365 @ 10% = Rs. 27.65

Charging Interest on Debit Items and Interest on Credit Items Illustration 3 Mr. A had the following transactions with B: 2004 Jan. 1

Rs. Balance (Dr.)

1,000

Jan. 10

Goods sold

Feb. 20

Cash received

600

March 5

Goods purchased

April 25

Cash paid

400

May 16

Goods sold

500

May 16

Received a bill for Rs. 300 at one month and discounted for

290

900 1,200

Make out an Account Current to be submitted by A to B on 30th June, 2004 charging interest @ 16% per annum on debit items and following interest @ 12% on credit items. (B.Com., Andhra Pradesh)

Average Due Date and Account Current

671

Solution B in Account Current with A Dr.

Cr.

Date

Due date

Particulars

Jan. 1

To Balance b/d

Amount Rs.

Days up to Jun. 30

Products Rs.

2004 Jan. 1

Date

Due date

Particulars

Amount Rs.

By Cash

900

131 (c)

1,17,900

1,200

117 (d)

1,40,400

300

11 (g)

3,300

Days upto Jun 30

Products

2004

Jan. 10

Jan. 10

Apr. 25

Apr. 25

1,000

To Sales

182 (a)

1,82,000

Feb. 20

Feb 20

172 (b)

1,03,200

Mar. 5

Mar 5

May 16

Jun 19

By Purchase

600

May 16 June 30

May 16

To Bank

400

66 (e)

26,400

To Sales

500

45 (f)

22,500

To Interest on Total of Debit Products (h)

June 30

By Bills Receivable

By Interest on Total of Credit Products (i)

146.10

By Balance c/d 2,646.10 July 1

To Balance b/d

3,34,100

85.77

160.33

2,646.10

2,61,600

160.33

Working Note: Calculation of days Jan.

Feb.

March

April

May

June

31 21 — — — — —

29 29 9 — — — —

31 31 31 26 — — —

30 30 30 30 5 — —

31 31 31 31 31 15 —

30 30 30 30 30 30 11

a b c d e f g

Jan. 1 to June 30 Jan. 10 to June 30 Feb. 20 to June 30 Mar. 5 to June 30 Apr. 25 to June 30 May 16 to June 30 June 19 to June 30

h

Interest on total of debit products = 3,34,100 ¥ 1/366 @ 16% = Rs. 146.10

i

Interest on Total of credit products = 2,61,600 ¥ 1/366 @ 12% = Rs. 85.77

Total = 182 = 172 = 132 = 117 = 66 = 45 = 11

672

Financial Accounting

Deposits and Withdrawals Illustration 4 Mr. Mohan opened a current account with the Indian Bank on 1st January, 2004 and deposited Rs. 7,000. His Deposits (Rs.)

His Withdrawals (Rs.)

Jan. 25

1,500

Jan. 20

4,000

April 15

2,500

Feb. 10

3,000

May 26

800

March 5

2,000

June 20

2,000

May 20

1,800

June 8

2,750

Calculate interest @ 10% per annum of the customer’s debit balances and 6% per annum on credit balances and close the account on 30th June, 2004. Solution Account Current Date

Particulars

Deposits Rs.

With- drawals Dr. / Cr. Rs.

Balance

Balance

Cr. Balance

Rs.

Rs.

Days

Dr.

Rs. 2005 Jan. 1

By Cash

Jan. 20

To Cheque

Jan. 25

By Cash

Feb. 10

7,000

–

Cr.

7,000

19

–

1,33,000

4,000

Cr.

3,000

5

–

15,000

1,500

–

Cr.

4,500

16

–

72,000

To Cheque

–

3,000

Cr.

1,500

24

–

36,000

Mar. 5

To Cheque

–

2,000

Dr.

500

41

20,500

–

Apr. 15

By Cash

2,500

–

Cr.

2,000

35

–

70,000

May 20

To Cheque

1,800

Cr.

200

6

–

1,200

May 26

By Cash

–

Cr.

1,000

13

–

13,000

June 8

To Cheque

2,750

Dr.

1,750

12

21,000

June 20

By Cash

2,000

Cr.

250

10

June 30

To Interest*

86.83

June 30

To Balance

800

– 2,500

336.83 13,886.83

13,886.83

41,500

* Interest on credit balance = 3,42,700 ¥ 1/366 @ 10% = 93.63 Interest on debit balance = 41,500 ¥ 1/366 @ 10% = 6.80 Net interest due = 86.83 Working Note: Calculation of Days Dates between transactions Jan. 1 – Jan. 20 Jan. 20 – Jan. 25 Jan. 25 – Feb. 10 Feb. 10 – Mar. 5 Mar. 5 – April 15

15 5 16 24 41

April 15 – May 20 May 20 – May 26 May 26 – June 8 June 8 – June 20 June 20 – June 30

35 6 13 12 10

3,42,700

Average Due Date and Account Current

673

Product Method and Epoque Method Illustration 5 On 1st January, 2005, Prem owned Rs. 5,400 to Kamal. Prepare Account Current to be rendered by Kamal for the period up to 30th June, 2005. The following transactions have taken place between them during the period of six months. Rs. Jan. 1 Sold goods to Prem

800

Jan. 16 Received from Prem

2,000

Jan. 25 Sold to Prem goods on credit for one month

1,000

Feb. 10 Received three months acceptance from Prem

2,000

Mar. 1 Ought goods from Prem

1,500

April 20 Sold goods to Prem

500

May 7 Prem bought goods

1,200

June 9 Remitted by Prem

800

June 14 Received from Prem

900

Interest is to be charged at an agreed rate of 6% per annum. (B.Com., Madurai) Solution Under Product Method Prem in Account Current with Kamal as on June 2005 Dr. Date

Cr. Due date

Particulars

2005 Jan. 1

Jan. 1

5,400

181

9,77,400

Jan. 1

Jan. 1

To Balance b/d To Sales

800

180

1,44,000

Jan. 25 Apr. 20 May 7 June 30

Feb. 25 Apr. 20 May 7

To Sales To Sales To Sales To Interest on Balance of Products

1,000

125

1,25,000

500

71

1,200

54

July 1

To Balance b/d

Amount Days Products Rs. up to Rs. June 30

116

9,016 1,816

Date

Due date

Particulars

2005 Jan. 16

Jan. 16

By Cash

Feb. 10

May 13

Mar 1 35,500 June 9 64,800 June 14 June 30

13,46,700

Amount Days Rs. up to June 30

Products Rs.

2,000

165

3,30,000

By Bills Receivable Mar By Pur1 chases June By 9 Bank June By 14 Bank By Balance of Products

2,000

48

96,000

1,500

121

1,81,500

800

21

16,800

900

16

14,400

–

–

7,08,000

By Balance c/d

1,816

9,016

13,46,700

Financial Accounting

674

Working Note: Calculation of Days Jan.

Feb.

Mar.

Apr.

May

June

31 30 15 — — — — — — —

28 28 18 3 — — — — — —

31 31 31 31 30 — — — — —

30 30 30 30 30 10 — — — —

31 31 31 31 31 31 24 18 — —

30 30 30 30 30 30 30 30 21 16

a b c d e f g h i j

Jan. 1 to June 30 Jan. 1 to June 30 Jan. 16 to June 30 Feb. 25 to June 30 Mar. 1 to June 30 Apr. 20 to June 30 May 7 to June 30 May13 to June 30 June 9 to June 30 June 14 to June 30

k

Interest on balance of product = 7,08,000 ¥ 1/365 @ 6% = Rs. 116

Total = 181 = 180 = 165 = 125 = 121 = 71 = 54 = 48 = 21 = 16

Solution Under Epoque Method Prem in Account Current with Kamal as on June 2005 Dr. Date

Cr. Due Date

Particulars

Amount Days Rs. up to June 30

Jan. 1

Jan. 1

To Balance b/d

5,400

0 (a)

0

Jan. 1

Jan. 1

To Sales

800

0 (b)

Jan. 25

Feb. To Sales 25

1,000

Apr. 20

Apr. 20

To Sales

May 7

May 7

To Sales

Products Rs.

Date

Due Date

Particulars

Jan. 16

Jan. 16

By Cash

2,000

16

32,000

800

Feb. 10

May 13

By Bills Receivable

2,000

133

2,66,000

56 (d)

56,000

Mar. 1

Mar. 1

By Purchases

1,500

60

90,000

500

110 (f)

55,000 June 9

June By 9 Bank

800

159

1,28,200

1,200

127 (g)

1,52,400 June 14

June By 14 Bank

900

656

1,48,500

By Product of Balance of Principal Amount

–

181

*3,07,700

By Balance c/d

1,816

2005

Amount Rs.

Days up to June 30

Products Rs.

2005

June 30

To Balance of Product

June 30

To Interest

July 1

To Balance b/d

7,08,000 June 30

116

9,016 1,816

9,72,400

9,016

9,72,400

Average Due Date and Account Current

675

Working Note: Calculation of Days Jan.

Feb.

Mar.

Apr.

May

June

— 1 16 31 31 31 31 31 31 31 31

— — — 25 28 28 28 28 28 28 28

— — — — 1 31 31 31 31 31 31

— — — — — 20 30 30 30 30 30

— — — — —

— — — — — — — — 9 14 30

a b c d e f g h i j k

Jan. 1 to Jan. 1 Jan. 1 to Jan. 1 Jan. 1 to Jan. 16 Jan. 1 to Feb. 25 Jan. 1 to Mar. 1 Jan. 1 to Apr. 20 Jan. 1 to May 7 Jan. 1 to May 13 Jan. 1 to June 9 Jan. 1 to June 14 Jan. 1 to June 30

l

Interest = 7,08,000 ¥ 1/365 @ 6% = Rs. 116

*

Product of Balance of principal amount = Total of debit (Rs. 8,900) – Total of credit (7,200) = 1,700 ¥ 181 = 3,07,700

7 13 31 31 31

Total =0 = 01 =16 = 56 = 60 = 110 = 127 = 133 = 160 = 165 = 181

Illustration 6 On 1st January, 2004, X owed Rs. 5,000 to Y on account. During the three months ended 31st March, 2004, the transactions were as follows in the books of Y: Jan. 10

Received two bills for 2 months and 3 months, respectively from X (Rs. 2,000 each)

4,000

Jan. 20

Met a bill for 2 months (due this day) drawn by X on November 17, 2003

1,000

Feb. 9

Paid cash to X

1,000

Feb. 19

Received cash from X

1,000

Mar. 1

Sold goods to X

1,000

Mar. 13

X’s acceptance due this day dishonoured

1,000

Prepare Account Current to be rendered to X on 31st March 2004, interest to be reckoned at 9% per annum. (B.Com., Punjab) Solution X in Account Current with Y Dr. Date

Cr. Due date

Particulars

Amount Days Rs. up to Mar 31

Products Rs.

2004

Date

Due date

Particulars

Amount Rs.

Days up to Mar 31

Products Rs.

2004

Jan. 1

Jan. To Bal1 ance b/d

5,000

91

4,55,000

Jan. 10

Mar. 13

By Bills Receivable

2,000

18

Feb. 9

Feb. To 9 Cash

1,000

51

51,000

Jan. 10

Apr. 13

By Bells Receivable

2,000

(–) 13

Mar. 1

Mar. To 1 Sales

1,000

30

30,000

Feb. 19

By Cash

1,000

41

Mar. 13

Mar. To Bank 13

2,000

18

36,000

Mar. 31

By Balance of Products

36,000

41,000 5,21,000

676

Financial Accounting

Mar. 31

To Product on Bills Receivable per Contra

Mar. 31

To Interest on Balance of Products

April 1

To Bal- 4,128.12 ance b/d

26,000

Mar. 31

By Balance c/d

4,128.12

128.12

9,128.12

5,98,000

9,128.12

5,98,000

Working Note: Calculation of days Jan.

Feb.

Mar.

a

Jan. 1 to March 31

31

29

31

= 91

b

Feb. 9 to March 31

—

20

31

= 51

c

Feb. 19 to March 31

—

10

31

= 41

d

March 1 to March 31

—

—

30

= 30

e

March 13 to March 31

—

—

18

April 1 to April 13 h

Total

= 18 = (–) 13

Interest on balance of products = 5,21,000 ¥ 1/366 @ 9% = Rs. 128.12

Red Ink Interest Illustration 7 You are required to make an Account Current to be rendered by Mahesh as on 30th June 1998, taking interest into account at 5% per annum. The following transactions took place between Vasan and Mahesh. Rs. Jan 1 Balance due to Mahesh Sold goods to Vasan Feb 15 Cash received from Vasan

4,000 2,400 2,000

Mar 2 Purchased goods from Vasan

3,000

Mar 3 Received Vasan’s acceptance at one month

2,000

April 11 Cash paid to Vasan

3,000

April 30 Goods sold to Vasan due on May 31

3,000

May 11 Purchased goods from Vasan due June 10

2,400

May 31 Sold Goods to Vasan due July 20

1,500

June 10 Received Vasan’s acceptance for two months

3,000

June 20 Sold goods to Vasan

2,000

Average Due Date and Account Current

677

Solution Vasan in Account Current with Mahesh as on June 30, 1998 Date

Due date

Particulars

Jan. 1

Jan. 1

To Balance b/d

4,000

181

Jan. 1

Jan. 1

To Sales

2,400

Apr. 11

Apr. 11

To Cash

Apr. 30

May 31

May 31

July 20

Amount Rs.

Days Products up Rs. to June 30

Date

Due date

Particulars

7,24,000

Feb. 15

Feb. 15

By Cash

2,000

135

2,70,000

180

4,32,000

Mar. 2

Mar. 2

By Purchase

3,000

120

3,60,000

3,000

80

2,40,000

Mar. 3

Apr. 6

By Bills Receivable

2,000

85

1,70,000

To Sales A/c

3,000

30

90,000

May 11

June By 10 Purchase

2,400

20

48,000

To Sales

1,500

– 20

Aug. 13

3,000

-44

–

June June To 20 20 Sales

2,000

10

20,000 June 30

1,32,000 June 30

June June To 30 30 Red Ink Interest as per Contra To Interest on Balance of Products

– June 10

By Bills Receivable

Amount Rs.

June By 30 Red Ink Interest as per Contra June By 30 Balance c/d

Days Products up to Rs. June 30

30,000

3,604.11

7,60,000

16,004.11

16,38,000

104.11

16,004.11

16,38,000

Financial Accounting

678

Working Note: Calculation of days a b c d e f g h i j

Jan. 1 to June 30 Jan. 1 to June 30 Feb. 15 to June 30 Mar. 2 to June 30 Apr. 6 to June 30 May. 31 to June 30 June 10 to June 30 June 20 to June 30 July 1 to July 20 July 1 to Aug 13 (31+13)

Jan.

Feb.

Mar.

Apr.

May

June

31 30 — — — — — — —

28 28 13 — — — — — —

31 31 31 29 — — — — —

30 30 30 30 24 — — — —

31 31 31 31 31 0 — — —

30 30 30 30 30 30 20 10 —

Total = 181 = 180 = 135 = 120 = 85 = 30 = 20 = 10 = (–) 20 = (–) 44

Interest on balance of products = 7,60,000 ¥ 1/365 @ 5% = Rs. 104.11

II – AVERAGE DUE DATE Illustration 8 A purchased goods from B, the due dates are as follows: Rs. 600 due on January 1, 2004 Rs. 500 due on February 6, 2004 Rs. 400 due on March 16, 2004 Rs. 300 due on April 25, 2004 Rs. 200 due on May 25, 2004 You are required to calculate the average due date. (B.Com., Madurai) Solution Calculation of Average Due Dates (Base Date = Jan 1) Due date

Amount Rs.

No. of days from base date

Products

1st Jan. 2004

600

–

–

6th Feb. 2004

500

36

18,000

16th March 2004

400

75

30,000

25th April 2004

300

115

34,500

25th May 2004

200

145

2,000

29,000 1,11,500

Average due date = Starting date + No. of days = Jan. 1 + (1,11,500/2,000) = Jan. 1 + 55.75 = Jan. 1 + 56 days = 25th Feb., 2004

Interest Calculation Illustration 9 A purchased from B, for which he accepted bills drawn by B and the bills were to be honoured after three months from the respective dates of the invoice as per the details given below.

Average Due Date and Account Current

Date of Invoice

679

Value of goods (Rs.)

10th Jan., 2004

6,000

20th Feb., 2004

10,000

30th March, 2004

5,000

1st May, 2004

15,000

10th June, 2004

12,000

A preferred to honour all bills on 15th Oct. 2004 and interest @ 8% per annum. Calculate the interest with the help of average due date. (B.Com., Kerala) Solution Calculation of Average Due Date (Base Date = April 13, 2004) Date of transaction

Due date

Amount (Rs.)

No. of days from base date

Products

10th Jan.

13th April

6,000

–

–

20th Feb.

23rd May

10,000

40

4,00,000

30th March 1st May 10th June

3rd July

5,000

81

4,05,000

4th August

15,000

113

16,95,000

13th Sept

12,000

153

18,36,000

48,000

43,36,000

Average due date = Starting date + No. of days = 13th April + (43.36,000/48,000) = 13th April + 90 days = 12th July 2004

Interest Calculation A is expected to pay the bill on 12th July 2004. Since he prefers to pay all the bills on 15th October, he has to pay interest at 8% for 95 days (12th July – 15th October). Interest = 48,000 ¥ 95/366 @ 8% = Rs. 966.72

Bills Receivable and Bills Payable Illustration 10 Mr. Kapoor had the following bills receivable and bills payable against Mr. Ramanathan. Calculate the average due date when the payment can be made or received without any loss of interest to either party. Bills Receivable Date

Amount (Rs.)

Bills Payable Tenure (months)

Date

Amount (Rs.)

Tenure (months)

1.5.2005

2,000

4

10.5.2005

1,000

2

12.6.2005

1,500

2

29.5.2005

3,000

4

15.6.2005

3,000

3

6.6.2005

2,000

2

7.7.2005

1,000

2

17.6.2005

1,500

3

10.7.2005

2,500

1

30.6.2005

500

1

680

Financial Accounting

Gazetted holidays intervening in the period: 15th Aug 2005; 2nd October 2005 18th September 2005 (Emergency holiday) (B.Com., Madurai, Mysore) Solution Bills Receivable—Calculation of Average Due Date (Base Date = July 13) Date of transaction

Due date

Amount (Rs.) No. of days from base date

Products Rs.

1st May

4th Sept.

2,000

53

1,06,000

12th June 15th June 7th July 10th July

14th August 19th Sept. 10th Sept. 13th August

1,500 3,000 1,000 2,500 10,000

32 68 59 31

48,000 2,04,000 59,000 77,500 4,94,500

Bills Payable - Calculation of Average Due Date (Base Date = July 13) Date of transaction

Due date

10.5.2005 29.5.2005 6.6.2005 17.6.2005 30.6.2005

13.7.2005 1.10.2005 9.8.2005 20.9.2005 2.8.2005

Amount (Rs.) No. of days from base date 1,000 3,000 2,000 1,500 500 8,000

0 80 27 69 20

Products – 2,40,000 54,000 1,03,500 10,000 4,07,500

No. of days = Difference in products/Difference in amounts = (4,94,500 – 4,07,500)/(10,000 – 8,000) = 87,000 / 2,000 = 44 days Average due date = Starting date + No. of days = 13th July + 44 days = 26th August 2005

Partner’s Drawing, Interest Calculation Illustration 11 A partner has withdrawn the following sum of money during the half year ending 30th June 2004: January 17

300

April 24

400

January 20

400

May 2

300

February 18

240

May 16

200

March 5

160

June 30

300

March 15

200

Interest is to be charged at 10% per annum. Find out the Average due date and calculate the interest. (B.Com., Kerala Madurai)

Average Due Date and Account Current

681

Solution Calculation of Average Due Dates (Base date = Jan 17) Date of drawings January 17 January 20 February 18 March 5 March 15 April 24 May 2 May 16 June 30

Amount (Rs.) 300 400 240 160 200 400 300 200 300 2,500

No. of days from base date 0 3 32 48 58 98 106 120 165

Products (Rs.) 0 1,200 7,680 7,680 11,600 39,200 31,800 24,000 49,500 1,72,660

Average due date = Starting date + No. of days = Jan 17 + (1,72,660/2,500) = Jan 17 + 6 = Jan 17 + 69 days = 26th March 2004 Interest Calculation A is expected to pay the bill on 26th March 2004. The interest due till 30th June 2004 @10% for 96 days (26th March to 30th June) Interest = 2,500 ¥ 96/366 @ 10% = Rs. 65.57

To Find the Equated Date Illustration 12 Rakesh has to pay the following bills to Anand Date

Amount Rs.

Tenure

January 9, 2003

1,200

February 6, 2003

1,400

March 12, 2003 March 20, 2003 April 10, 2003

3 months 60 days

600

2 months

800

1 month

2,000

30 days

It was agreed between Rakesh and Anand that a fresh bill should be drawn for the aggregate amount on 31st January, 2003. Find the equated tenure of the bill so that neither party stand to lose? Solution Assuming April 20th as Base Date Date of transaction

Tenure

Due date

9th Jan. 6th Feb. 12th March 20th March 10th April

3 months 60 days 2 months 1 month 30 days

April 9 April 7 May 12 April 20 May 10

Amount (Rs.) 1,200 1,400 600 800 2,000 6,000

No. of days up to base date and after – 11 – 13 + 22 0 + 20

Products – 13,200 – 18,200 + 13,200 0 40,000 21,800

Financial Accounting

682

Average due date = Starting date + No. of days = 20th April + (21,800/6,000) = 20th April + 4 = 24th April Therefore, the date for the new bill will be 24th April.

Usance of the Bill Illustration 13 A trader having accepted the following several bills falling due on different dates, now desires to have these bills cancelled and to accept a new bill for the whole amount payable on the average due date. Sl. No.

Date of bills

1.

1st March, 2004

Amount (Rs.) 400

Usance of the bill 2 months

2.

10th March, 2004

300

3 months

3.

5th April, 2004

200

2 months

4.

20th April, 2004

375

1 month

5.

10th May, 2004

500

2 months

You are required to find the average due date. (B.Com., Kerala) Solution Calculation of Average Due Dates (Base Date = May 4) Date of bills

Due date

1st March

4th May

Amount (Rs.) 400

No. of days from base date Products (Rs.) 0

0

10th March

13th June

300

40

12,000 7,000

5th April

8th June

200

35

20th April

23rd May

375

19

7,125

10th May

13th July

500

70

35,000

1,775

61,125

Average due date = Starting Date + No. of Days = May 4 + (61,125 / 1,775) = May 4 + 34.44 = May 4 + 34 days = 7th June, 2004

III – ACCOUNT CURRENT AND AVERAGE DUE DATE Illustration 14 The following is the account of Anand in the ledger of Kamlesh: 2003

Rs.

2003

Rs.

Jan. 1

To Balance b/d

15,000

Mar. 25

By Returns

Mar. 9

To Sales

30,000

Apr. 10

By Cash

May 25

To Sales

7,000 52,000

1,000 15,000

June 3

By Cash

20,000

June 30

By Balance c/d

16,000 52,000

Average Due Date and Account Current

683

Calculate average due date and the amount of interest payable or receivable by Anand at 6% per annum to 30th June, 2003. (B.Com., Kurukshetra) Solution Anand in Account Current with Kamlesh Dr.

Cr.

Due date

Particulars

Amount Rs.

Days up to due date

Products Rs.

Due date

Particulars

Amount Days up Rs. to

Products Rs.

due date

2003

2003

Jan. 1

Mar. 9

To Balance b/d

15,000

To Sales

30,000 67 (b) 20,10,000

0

—

(a)

March 25

By Returns

1,000

Apr. 10

By Cash

15,000

83 (c)

83,000

99

14,85,000

(d) May 25

To Sales

7,000

144

10,08,000

June 3

By Cash

20,000

153

30,60,000

16,10,000

June 30

By Balance c/d

16,000

—

—

(e) June 30

To Balance c/d 52,000

46,28,000

52,000

46,28,000

Working Note: Average due date a b c d e

Jan. 1 – Jan. 1 Jan. 1 – March 9 Jan. 1 – March 25 Jan. 1 – April 10 Jan. 1 – May 25

Jan.

Feb.

Mar.

April

May

June

— 31 31 31 31

— 28 28 28 28

— 8 24 31 31

—

—

—

—

—

—

— 9 30

—

—

— 24

—

Total =0 = 67 = 83 = 99 = 144

—

No. of days = Product/Amount = 16,10,000/16,000 = 100.63 = 101 days Average due date = 1st January, 2002 (–) 101 days = 22nd September, 2002 Interest for 281 days * = 16,000 ¥ 281/365 @ 6% = Rs. 739 * 22nd September, 2002 to 30th June, 2003 = 281 days

Gazetted Holiday Illustration 15 Rajeev owes Anil Rs. 2,000 on Ist July, 2004. He has accepted the following bills drawn upon him by Anil: Bills for Rs. 800 drawn on 12th July—payable one month after date, Bill for Rs. 1,400 drawn on 1st August—payable 2 months after date. Rajeev has also received the following acceptances from Anil: Bill for Rs. 500 drawn on 28th July—payable three months after date Bill for Rs. 400 drawn on 29th July—payable 2 months after date Bill for Rs. 600 drawn on 10th August—payable after 2 months Bill for Rs. 1,000 drawn on 13th August—payable after 3 months.

Financial Accounting

684

Rajeev wants to settle the account with Anil by one single payment on the equated date. Calculate the equated date and the amount to be paid on that date. Holidays during the period are Gazetted holiday—15th August, 2nd October and 31st October Emergency holiday—16th November (B.Com., Madurai) Solution Rajeev in Account with Anil Dr.

Cr.

Date

Due date

Particu- Amount Days lars up to Rs. due date

Products Rs.

Date

2004 2004 July 1

To Balance b/d

2,000

July 28

Oct.

To Bills Payable

500

July 29

Oct.

To Bills Payable

400

Aug.

Oct. 13

To Bills Payable

600

10 Aug.

Nov. 17

To Bills Payable

1,000

13

1

Particulars

Amount Days up to Rs. due date

July 12

Aug. 14

By Bills Receivable

800

Aug. 1

Oct 4

By Bills Receivable

1,400

By Balance c/d

2,300

1,30,500

4,500

2,98,700

Products Rs.

2004

July 1

30

Due date

0

0

(a) 121

60,500

(f) 92

36,800

(c) 104

44

35,200

(b) 95

1,33,000

(d)

62,400

(e) 139

1,39,000

(g) 4,500

2,98,700

Working Note: Calculation of Days July

Aug.

Sept.

Oct.

Nov.

a

July 1 to July 1

—

—

—

—

—

Total =0

b

July 1 to Aug 14

30

14

—

—

—

= 44 = 92

c

July 1 to Oct. 1

30

31

30

1

—

d

July 1 to Oct. 4

30

31

30

4

—

= 95

e

July 1 to Oct. 13

30

31

30

13

—

= 104

f

July 1 to Oct. 30

30

31

30

30

—

= 121

g

July 1 to Nov. 17

30

31

30

31

17

= 139

No. of days = Product/Amount = 1,30,500/2,300 = 56.74 = 57 days Average due date = 1st July (+) 57 days = 27th August, 2004 Amount to be paid on that is Rs. 2,300

Note Due date is 14th Aug. and not 15th August (being Gazetted holiday) Due date is 1st Oct. and not 2nd October (being Gazetted holiday) The due date is 30th Oct. and not 31st October (being Gazetted holiday) The due date is 17th Nov. and not 16th November (being Emergency holiday)

Average Due Date and Account Current

685

Points to Remember Average Due Date is the arithmetic average of several due dates. It is also known as Equated Due Date. Average due date is used for settlement of accounts by way of bills, calculation of interest on drawings in the case of partnership and determination of date for gradual realisation of asset in the event of dissolution of partnership firm. Average due date = Base date ± (Total of products/Total of amounts) Account Current is a statement of details of various business transactions between two parties during a particular period of time with interest outstanding. There are three methods of calculation interest for Account Current, namely Interest on individual transaction, Product of individual transaction, and Product of balances method. There are three different methods of calculating number of days for Account Current, such as, Forward, Backward and Daily balance method.

Examination Questions I. Objective Questions 1. Fill in the blanks (i) Average due date is _______________________ of several due dates. (ii) Calculation of average due date is used for ______________________. (iii) _________________ is a statement of details of various transactions between two parties with interest outstanding. (iv) The interest on the product is written in red ink to ________________. (v) Backward method is also known as ____________________ method. 2. Choose the correct answers (i) The principle of writing Account Current is based on (a) Personal (b) Real (c) Nominal (d) None of the above (ii) In Account Current the name of the receiver of Account Current appears (a) First (b) Last (c) Not appear (d) None of the above (iii) The Product of Balances Method is suitable for (a) Banks (b) Insurance companies (c) Private money lenders (d) All the above. (iv) Number of days are calculated from the due date of transaction to the date of closing the account

686

Financial Accounting

(a) Daily Balance method (b) Backward method (c) Forward method (d) All the above 3. Match the following (i)

Average due date

a

Period with interest outstanding

(ii)

Account current

b

Opening date to due date

(iii)

Interest number method

c

Ready Reckoner table

(iv)

Interest table method

d

Index number

(v)

Époque method

e

Single date

4. State whether the following statements are True or False (i) Average Due Date is calculated to ascertain equated due date. (ii) Red ink interest is calculated with the help of Account Current (iii) Interest Numbers method is similar to Product of Individual Transaction method. (iv) Forward method is also known as Epoque method. (v) Daily Balance method is adopted by post offices. Answers 1. (i) (iii) (v) 2. (i) 3. (i) (v) 4. (i) (v)

Arithmetic average, Account current, Epoque method. a; (ii) b; e; (ii) a; b. True; (ii) True; True

(ii) Settlement of accounts, (iv) to alert Accountant, (iii) a; (iii) d;

(iv) c. (iv) c;

(iii) True;

(iv) False.

II. Descriptive Questions A. Very Short Answer Questions 1. What is average due date? 2. What is Account Current? 3. What is red ink interest? B. Short Answer Questions 1. What are the uses of average due date? 2. How is average due date is calculated? 3. Mention the formula to calculate average due date according to shortcut method. C. Detail Answer Questions 1. What are the various methods used for calculating interest in Account Current. 2. Explain the methods for calculating number of days in Account Current.

Average Due Date and Account Current

687

III. Exercise Problems

A. Account current Problem 1 Mehra owed Rs. 3,000 on 1st Jan., 2004 to Somesh. The following are the transactions that took place between them during 2004. It is agreed between the parties that interest @ 12% per annum is to be calculated on all transactions. 2004 Jan. 16 Jan. 29 Feb. 10 Mar. 7

Rs. 2,000 1,500 1,500 2,000

Somesh sold goods to Mehra Somesh purchased goods from Mehra Somesh pays cash Mehra accepts a bill drawn for one month

They desire to settle their accounts by one single payment on 15th March, 2004. Ascertain the amount to be paid to the nearest rupee. Ignore days of grace. (Madurai) [Ans. Balance Rs. 3,123.60; Interest Rs. 123.60] Problem 2 From the following given particulars, prepare an Account Current to be rendered by B.K. Sinha to B.K. Shrivatsava on December 31, reckoning interest at 5% per annum. June 30 July 2 August 1 August 19 August 30 September 1 September 1 October 22 November 12 December 14

Balance owing by Shrivatsava Goods sold to Shrivatsava (due July 17) Cash received from Shrivatsava Goods sold to Shrivatsava Goods sold to Shrivatsava (due Sept.14) Cash received from Shrivatsava Shrivatsava accepted draft of Sinha at 2 months Goods purchased from Shrivatsava (due Nov. 6) Goods sold to Shrivatsava Cash received from Shrivatsava

Rs. 600 400 500 700 200 300 600 200 1,300 800

[Ans. Balance Rs. 825.37; Interest Rs. 25.37] Problem 3 Prepare an Account Current up to December, 2003 to be rendered by A and B charging interest of 10% per annum. 2003 July 1 15 25 Aug. 6 22 Sept. 10 Oct. 12 Nov. 15 Dec. 10

Opening Balance b/d (Debit) Goods purchased by A from B Goods sold by B to A Goods sold by A to B Goods sold by A to B (Due date on 25th Aug.) Goods sold by A to B (Due on 15th Sept.) Cash paid by A to B Bill drawn by A and B for 3 months Bill accepted by A and B for 3 months

Rs. 1,500 5,000 3,000 8,000 6,000 10,000 2,000 3,000 2,000

(Bombay) [Ans. Balance Rs. 19,082; Interest Rs. 582]

688

Financial Accounting

Problem 4 Santosh had the following transactions with Kamal: 2004

Rs.

Jan. 1 Balance due from Kamal

600

Feb. 6 Purchased goods from him

600

Feb. 28 Sold goods to him

2,000

Mar. 7 Received a cheque from him

300

April 20 Sold him goods (invoice on May 5th)

1,000

May 17 Purchased goods from him (Invoiced on 17th June)

1,500

May 22 Accepted his bill for 2 months

500

June 1 Received his acceptance for 2 months

800

June 15 He returned goods (Out of the goods sold on April 20)

200

Prepare an Account Current up to 30th June, 2004 to be rendered by Santosh to Kamal charging interest at 10% per annum. (Delhi) [Ans. Balance Rs. 775; Interest Rs. 75] Problem 5 The following transactions were effected between Velu and Ram: 2004

Rs.

Jan. 1 Goods sold to Ram

420

Feb. 15 Received cash from Ram

150

March 2 Purchased goods from Ram

1,035

March 3 Ram accepted a bill for one month

300

April 11 Paid to Ram

300

April 30 Sold goods to Ram (Due date 31st May)

348

May 11 Purchased goods from Ram

255

May 31 Sold goods to Ram

375

June 15 Purchased goods from Ram (Due date end of July)

435

(Karnataka) [Ans. Balance Rs. 745.02; Interest Rs. 13.02] Problem 6 Mehra owed Rs. 3,000 on 1st Jan. 2004 to Somesh. The following are the transactions that took place between them during 2004. It is agreed between the parties that interest @ 12% per annum is to be calculated on all transactions. 2004

Rs.

Jan. 16

Somesh sold goods to Mehra

2,000

Jan. 29

Somesh purchased goods from Mehra

1,500

Feb.10

Somesh pays cash

1,500

Mar. 7

Mehra accepts a bill drawn for one month

2,000

They desire to settle their accounts by one single payment on 15th March, 2004. Ascertain the amount to be paid to the nearest rupee. Ignore days of grace. (Madurai) [Ans. Balance Rs. 3,123.60; Interest Rs. 123.60]

Average Due Date and Account Current

689

Red Ink Interest Problem 7 On 1st July 2004, X owed Rs. 8,000 to Y on account. During three months ended 30th September, 2004, the transactions were as follows in the books of Y. Rs. July 10 Received two bills for 2 months and 3 months from X (Rs. 3,000 each)

6,000

Aug. 16 Paid cash to X

2,000

Aug. 25 Met a bill for 2 months (due this day) drawn on June 22, 2004

1,500

Sept. 2 Paid cash to X

1,000

11 Received cash from X

3,000

13 X’s acceptance due this day dishonoured 18 Sold goods to X

2,000

23 Purchase goods from X

1,000

Prepare Account Current to be rendered to X on 30th September, 2004 reckoning interest @ 12% per annum. (Madurai) [Ans. Balance Rs. 6,279.67; Interest Rs. 279.67]

B. Average due date Problem 8 Mr. Ashok has accepted the following bills. Find the average due date. Due date of bills

Amount (Rs.)

23rd June, 2004

1,500

8th July, 2004

2,300

12th August, 2004

3,200

6th September, 2004

2,400

21st September, 2004

600

(Kerala) [Ans. Average due date 5th August] Problem 9 Iqbal owes to Mehta the following sums: Rs. 1,000 due on 16th January, 2004. Rs. 1,600 due on 20th February, 2004 Rs. 1,200 due on 15th March, 2004 Rs. 1,800 due on 31st March, 2004 Iqbal decides to pay all these sums together on a date which will means no loss or gain of interest to him, i.e. on the average due date. Find out the average due date in this case. (Kerala) [Ans. Average due date 3rd March 2004]

690

Financial Accounting

Problem 10 Mr. Komal had accepted the undermentioned bills payable to Suman: Date of acceptance

Term

Amount Rs.

15th Sept., 2004

2 months

10th Oct., 2004

2 months

400

30th Nov., 2004

3 months

500

10th Dec., 2004

3 months

600

30th Jan., 2005

2 months

300

200

Komal desires to pay the aggregate amount of all these bills on such a date as would involve no profit or loss to either of them and Suman agrees. Find out the date of this proposed payment. (Madurai, Calicut) [Ans. Average due date 12th February, 2005] Problem 11 A partner has withdrawn the sums of money during the half year ending 30th June, 2004: Rs. 15th January

500

10th February

400

12th March

700

5th April

800

20th May

1,000

18th June

900

Interest is to be charged at 10% per annum. Find out the average due date and calculate the interest on drawings. (Kerala) [Ans. Average due date April 13th, 2004; Interest Rs. 91.64] Problem 12 Kumar, a partner in a firm has drawn the following amounts for the half year ended 30th June, 2004. Jan. 8

Rs. 440

April 10

Rs. 480

Feb. 12

Rs. 400

May 6

Rs. 400

Mar. 15

Rs. 500

June 8

Rs. 400

Interest is charged at 10% per annum. Ascertain average due date and the amount of interest. (Madurai, Mysore, Madras) [Ans. Average due date 25th March 2004; Interest Rs. 69.44]

18

Royalty Accounts

Learning Objectives After studying this chapter, you should be able to understand the Meaning and definition of Royalty Different types of Royalty Difference between Rent and royalty Calculation of Royalty, Minimum Rent and Shortworkings Sub-lease

ROYALTY Royalty is a periodic payment for acquiring special right for using others property. The person who makes payment is known as lessee or tenant and the person to whom the payment is made is known as lessor or landlord. In the other words, royalty is paid by lessee or tenant to the lessor or landlord for using lessor’s property or asset. For example, when a owner of a coal mine allows another person to use his mine for extracting minerals, namely coal, stones, etc. the person who is extracting minerals from the coal mine, has to compensate the owner or landlord. Such compensation is called “Royalty”.

Definition of Royalty Kohler defines the term “Royalty” as compensation for the use of property based on an agreed portion of the income arising from such use, as the periodic payment to the owner of land for oil, coal, or minerals extracted; to an author for sales of his or her book; to a manufacturer for use of its processing equipment in the production operation of another firm. According to J.R. Batliboi, “the term Royalty expresses an amount payment by one, in return for some special rights or privilege conceded to him by another person, such as the right to publish a book or to manufacture and sell a pastured article or to work a mine”. According to William Pickles, “Royalty is the remuneration payable to a person in respect of the use of an asset, whether hired or purchased from such person,

692

Financial Accounting

calculated by reference to and varying with quantities produced or sold as a result of such asset”.

Types of Royalty There are different types of royalty depending upon the nature of the assets such as Mining royalty, Patent royalty, Copyright royalty, Oil wells royalty, Trademark royalty, Brick making royalty, Royalty to foreign companies for sale of agricultural products, etc.

Difference Between Rent and Royalty Rent is calculated according to time, i.e., monthly, quarterly, half-yearly, and annually or of any other period, whereas royalty is calculated according to production or yield. Rent is payable for using some tangible assets (i.e. building, machinery, etc.), whereas royalty is payable for using both tangible and intangible assets.

Minimum Rent Minimum rent is the minimum amount to be paid to the lessor by the lessee. In the lease agreement a clause is inserted, according to which the lessee has to pay a minimum guaranteed amount to the lessor, if there is no royalty or a very little amount of royalty. Such minimum guaranteed amount is known as minimum rent. This clause will protect the interest of the landlord from the loss incurred. This minimum rent is also known as dead rent, or rock rent or flat rent or fixed rent or contract rent, etc.

Calculation of Minimum Rent during Strike or Accident When production or output is less in any year due to strike or accidents, the lease agreement may include the following points for calculating minimum rent. (i) Reduction in minimum rent by certain percentage, say 10% or (ii) Minimum rent is calculated proportionately depending upon the length of strike period, or stoppage of work. (iii) Actual royalties earned for that year will discharge all the rental obligation of that year.

Shortworking Shortworking is defined as the excess of minimum of rent over royalty. In other words, when royalty is less than the minimum rent, the difference is called shortworkings. According to lease agreement, the lessee is empowered to recover these shortworkings in future, if the royalty is more than minimum rent, depending upon the terms and conditions, the power to recover shortworkings from surplus amount royalty is known as recoupment of shortworkings. This power or right to recoup shortworkings can be of two types such as (i) Fixed (ii) Floating If the power or right to recoup shortworking is restricted for first few years, it is called fixed or restricted recoupment. On the other hand, if the power or right to recoup shortworking is carried forward year after year, then the right is called floating or unrestricted recoupment.

Royalty Accounts

693

Sub-lease If the original lease agreement authorises the lessee to sub-lease, sometimes, the lessee may transfer a part of his right to another person who is called sub-lessee. In the case of sub-lease, the original lessee has to pay royalty to the landlord not only on the basis his output, but also on the output of sub-lessee. Therefore, the lessee serves not only as a “lessee to the landlord”, but also as a “landlord to the sub-lessee”.

ACCOUNTING TREATMENT A. Royalty Account Books of Lessor (Landlord)

Books of Lessee (Tenant)

I. For the Royalty Receivable

For the Royalty Payable

(a) When the Minimum Rent exceeds Royalty Receivable/Payable Tenant A/c To Shortworking (Receivable) A/c To Royalty (Receivable) A/c

Dr. Royalty (Payable) A/c Shortworking A/c To Landlord A/c

Dr. Dr.

(b) When the Minimum Rent is lesser than Royalty Receivable/Payable A/c Tenant A/c Short working A/c To Royalty (Receivable) A/c

Dr. Royalty (payable) A/c Dr. To Shortworking A/c To Landlord A/c

Dr.

(c) When Minimum Rent is equal to Royalty Receivable/Payable A/c Tenant A/c To Royalty (Receivable) A/c

Dr. Royalty (Payable) A/c To Landlord A/c

II. For Royalty Received Bank A/c To Tenant A/c

III.

Dr.

For Royalty Paid Dr. Landlord A/c To Bank A/c

Dr.

For transferring Royalty (Receivable) at For transferring Royalty (Payable) at the end the end of the year of the year

Royalty (Receivable) A/c

Dr. To Royalty (Payable) A/c

IV. Special Entry For writing off Shortworking (Unrecouped) Shortworking A/c

For writing off Shortworking (Unrecouped) Dr. To Shortworking A/c Sub-Lease For the Royalty Receivable (a) When the Minimum Rent exceeds Sub-Royalty Receivable

No entry

Sub-Tenant A/c To Shortworking (Receivable) A/c To Royalty (Receivable) A/c

Dr.

(b) When the Minimum Rent is lesser than Royalty Receivable Sub-Tenant A/c Shortworking A/c To Royalty (Receivable) A/c

Dr.

(c) When Minimum Rent is equal to Royalty Receivable Contd.

694

Financial Accounting

Contd. Sub-Tenant A/c To Royalty (Receivable) A/c

Dr.

For Royalty Received Bank A/c To Sub-Tenant A/c

Dr.

For transferring the difference between Roy and Loss A/c Royalty (Receivable) A/c Dr. (Output of Sub-Tenant ¥ Royalty (Payable) of SubTenant) To Royalty (Payable) A/c (Output of Sub-Tenant ¥ Royalty (Payable) of Tenant) (Difference between both) Special Entry: For writing off Shortworking (Unrecouped) Shortworking Suspense A/c

Dr.

B. Royalty Account (with Minimum Rent) In the Books of Lessee For the Royalty Payable and the amount paid When Royalty (Payable) < Minimum Rent

When Royalty (Payable) > Minimum Rent

When Royalty (Payable) > Minimum Rent

Minimum Rent A/c

Dr. Minimum Rent A/c

Dr. Minimum Rent A/c

To Landlord A/c

To Landlord A/c

To Landlord A/c

Dr.

(Being Minimum Rent payable to (Being Minimum Rent payable to (Being Minimum Rent payable to Landlord) Landlord) Landlord) Royalty (Payable) A/c

Dr. Landlord A/c

Shortworking A/c

Dr.

To Minimum Rent A/c

Dr. Landlord A/c

To Shortworking A/c

To Shortworking A/c

To Minimum Rent A/c

To Bank A/c

Dr.

(Being royalty payable and short- (Being royalty payable and short- (Being royalty paid to Landlord and shortworking uncovered accounted) working due recorded) working due recorded)

To Royalty (Payable) A/c

Special Entry—For writing off Shortworking (Unrecouped) Shortworking A/c

Dr.

Royalty Accounts

695

Illustrations Index for Illustrations Type Journal Entries in the books of lessee Ledger Accounts in the books of lessee – royalty based on output Ledger in the books of lessee – Actual royalty given, minimum rent changes, strike period Journal Entries and Ledger in the books of lessee – Minimum Rent Account Ledger in the books of lessee – Royalty on sales, Minimum Rent Account Ledger in the books of lessor – strike, Shortworking Suspense Account Journal entries and ledger in the books of lessee – Lease, sub-lease Ledger in the books of lessee – Lease, sub-lease

Ill. No. 1 2 3 4 5 6 7 8

Journal Entries in Books of Lessee Illustration 1 A Coal Company takes a lease of mine from 1st January, 2001 paying a minimum rent of Rs. 10,000 per annum merging in a royalty of Re. 0.50 paise per ton of coal raised. The lease contains a provision to the effect that if the minimum rent paid in any year exceeds the royalty for the year, the amount for the excess may be recouped by the coal company out of the royalty payable in the following year only. The coal is raised as follows: 2001 2002 2003 2004

2,000 tonnes 12,000 tonnes 24,000 tonnes 30,000 tonnes

Give journal entries necessary to record these transactions in the books of Coal Company. (B.Com., Madras) Solution Royalty Payable Table Royalty (Payable) Re. 0.50; Minimum Rent Rs. 10,000 per annum; Shortworking recouped = in the following years only Year

Actual royalty

Minimum rent (Rs.)

Payable to lessor

1,000 6,000 12,000

10,000 10,000 10,000

10,000 10,000 10,000

15,000

10,000

15,000

Tons

(Rs.)

2001 2002 2003

2,000 12,000 24,000

2004

30,000

Shortworking

Shortworking Shortworking recouped unrecouped

9,000 4,000

9,000 2,000

2,000

Books of Coal Co.—Journal Entries 2001 Dec 31

For the Royalty Payable [when Royalty (Payable) < Minimum Rent] L.F.

Debit (Rs.)

Royalty (Payable) A/c

Dr.

1,000

Shortworking A/c

Dr.

9,000

To Landlord A/c (Being royalty payable and shortworking due recorded)

Credit (Rs.)

10,000

696

Financial Accounting

Landlord A/c

Dr.

10,000

To Bank A/c

10,000

(Being the royalty paid to the landlord) 1,000 To Royalty (Payable) A/c 2002

1,000

For the Royalty Payable [when Royalty (Payable) < Minimum Rent]

Dec 31

L.F.

Debit (Rs.)

Royalty (Payable) A/c

Dr.

6,000

Shortworking A/c

Dr.

4,000

Credit (Rs.)

To Landlord A/c

10,000

(Being royalty payable and shortworking due recorded) Landlord A/c

Dr.

10,000

To Bank A/c

10,000

(Being the royalty paid to the Landlord) 15,000 To Royalty (Payable) A/c

6,000

To Shortworking A/c

9,000

2003

For the Royalty Payable [when Royalty (Payable) >Minimum Rent]

Dec 31

L.F Royalty (Payable) A/c

Dr.

Debit (Rs.)

Credit (Rs.)

12,000

To Landlord A/c

10,000

To Shortworking A/c

2,000

(Being royalty payable and shortworking due recorded) Landlord A/c

Dr.

10,000

To Bank A/c

10,000

(Being the royalty paid to the landlord) 14,000 To Royalty (payable) A/c

12,000

To Shortworking A/c

2004 Dec 31

2,000

For the Royalty Payable [when Royalty (Payable) = Minimum Rent] Royalty (Payable) A/c To Landlord A/c (Being royalty payable due recorded)

Dr.

15,000 15,000

Royalty Accounts

Landlord A/c

Dr.

697

15,000

To Bank A/c

15,000

(Being the royalty paid to the landlord) 15,000 To Royalty (Payable) A/c

15,000

Royalty on Output, Ledger Accounts in Lessee Book Illustration 2 On 1st January, 2001, Selvin Co. patentees of a new type of gas-burner, issued a license to Gasline Co. for the manufacture and sale of burners for five years on the following terms: (a) Gasline Co. to pay a royalty of Rs. 100 for every burner manufactured subject to a minimum rent of Rs. 50,000 per annum. (b) If, for any year, the royalties calculated to burners manufactured amount to be less than the minimum rent, Gasline Co. may recoup the shortworkings against royalties payable in excess of the minimum rent in the next year only, but not afterwards. (c) Payment to be made on 31st December. Sales and closing stock of burners for five years were: Year

2001

2002

2003

2004

2005

Sales

200

400

600

550

230

Stock on 31st Dec.

50

100

70

150

20

Show the (i) Royalty Account, (ii) Short Workings Account, and (iii) Selvin Limited Accounts in the books of Gasline Co. who close their accounts on 31st December in every year. Solution Working Note Calculation of output in units Closing stock + Sales (–) Opening stock = Output 2001

50

200

0

250

2002

100

400

50

450

2003

70

600

100

570

2004

150

550

70

630

2005

70

230

150

100

Royalty Payable Table Royalty (Payable) Rs. 100 per unit; Minimum Rent Rs. 50,000 per annum.; Shortworing recouped = Next year only

698 Year

Financial Accounting

Output

Actual Royalty

(unit)

@ Rs.100

Minimum Rent (Rs.)

Payable to Lessor

Short-

Shortworking Shortworking

Working

2001

250

25,000

50,000

50,000

25,000

2002

450

45,000

50,000

50,000

5,000

2003

570

57,000

50,000

52,000

2004

630

63,000

50,000

63,000

2005

100

10,000

50,000

50,000

recouped

Unrecouped 25,000

5,000 40,000

Books of Gasline Co. (Lessee) Royalty Payable Account 2001

L.F.

Dec. 31 To Selvin Co.

Rs.

2001

L.F.

25,000 Dec. 31

A/c

25,000 2002

Rs. 25,000 25,000

2002

Dec. 31 To Selvin Co.

45,000 Dec. 31

45,000

45,000

45,000

2003

2003

Dec. 31 To Selvin Co.

57,000 Dec. 31

57,000

57,000

57,000

2004

2004

Dec. 31 To Selvin Co.

63,000 Dec. 31

63,000

63,000

63,000

2005

2005

Dec. 31 To Selvin Co.

10,000 Dec. 31

10,000

10,000

10,000

Shortworking Account 2001 Dec. 31

L.F. To Selvin Co.

Rs.

L.F.

25,000

25,000 2002

To Balance b/d To Selvin Co.

25,000 Dec. 31 5,000

25,000 By Balance c/d

30,000 2003 Dec. 31

5,000 30,000

2003 To Balance b/d

5,000 Dec. 31 By Selvin Co.

5,000

5,000

5,000

2005 Dec. 31

Rs. 25,000

2002 Dec. 31

2001

25,000 Dec. 31 By Balance c/d

2005 To Selvin Co.

40,000 Dec. 31 By Balance c/d

40,000

40,000

40,000

Royalty Accounts

699

Selvin Co. Account L.F.

2001 Dec 31

To Bank

Rs. 50,000

2001 Dec 31

L.F. By Royalties Payable By Shortworking

25,000

50,000 2002 Dec 31

50,000 2002

To Bank

50,000

Dec 31

By Royalties Payable

45,000

By Shortworking

5,000

50,000 2003 Dec 31

50,000 2003

To Bank

52,000

To Shortworking

Dec 31

By Royalties Payable

57,000

5,000 57,000

2004 Dec 31

57,000 2004

To Bank

63,000

Dec 31

By Royalties Payable

63,000

63,000 2005 Dec 31

Rs. 25,000

63,000 2005

To Bank

50,000

Dec 31

By Royalties Payable

10,000

By Shortworking

40,000

50,000

50,000

Actual Royalty (Payable) Given, Minimum Rent Changes every Year, Strike Period, Ledger in Lessee Books Illustration 3 X & Co. owned certain patent rights. It granted a licence to Y & Co. to use such rights on royalty basis. The following are the relevant particulars: Year

1st

2nd

3rd

4th (strike)

5th

Actual Royalty (Rs.)

5,000

10,000

8,000

8,000

14,000

Minimum Rent (Rs.)

8,000

9,000

10,000

12,000

13,000

The deficiency of any year is to be set of against royalties payable in excess of the minimum rent in the two following years. In the event of a strike and the minimum rent not being realised, it was provided that the actual royalties earned for the year would be the full royalty obligation for the year. Show the Royalties Account, X & Co. Account and Short working Account in the books of Y & Co. Solution Royalty Payable Table Royalty (Payable) given; Minimum rent given; Shortworking recouped = in two following years; 4ht year – strike

Financial Accounting

700 Year

Actual royalty (Rs.)

Minimum rent (Rs.)

Payable to lessor

Shortworking

1st

5,000

8,000

2nd

10,000

9,000

9,000

3rd

8,000

10,000

10,000

2,000

4th

8,000*

8,000*

8,000*

Strike

5th

14,000

13,000

13,000

8,000

Shortworking

Shortworking

recouped

unrecouped

3,000 1,000 2,000 1,000

1,000

Books of Y & Co. (Lessee) Royalty Payable Account 1st year Dec. 31

L.F. To X & Co. A/c

Rs.

1st year

5,000

Dec. 31

L.F.

5,000

5,000 2nd year Dec. 31

5,000 2nd year

To X & Co. A/c

10,000

Dec. 31

10,000

10,000 3rd year Dec. 31

10,000 3rd year

To X & Co. A/c

8,000

Dec. 31

8,000

8,000 4th year Dec. 31

8,000 4th year

To X & Co. A/c

8,000

Dec. 31

8,000

8,000 5th year Dec. 31

Rs.

8,000 5th year

To X & Co. A/c

14,000

Dec. 31

14,000

14,000

14,000

X & Co. Account 1st year Dec. 31

L.F. To Bank

Rs.

1st year

8,000

Dec. 31

L.F.

5,000

By Shortworking

3,000

8,000 2nd year Dec. 31

8,000 2nd year

To Bank

9,000

To Shortworking

1,000

Dec. 31

By Royalties Payable

10,000 3rd year Dec. 31

10,000

10,000

Dec. 31

By Royalties Payable

8,000

To Shortworking

2,000

10,000

10,000 4th year

To Bank

8,000

Dec. 31

By Royalties Payable

8,000 5th year Dec. 31

10,000

3rd year To Bank

4th year Dec. 31

Rs.

By Royalties Payable

8,000 8,000

5th year To Bank To Shortworking

13,000

Dec. 31

By Royalties Payable

14,000

1,000 14,000

14,000

Royalty Accounts

701

Shortworking Account 1st year Dec. 31

L.F. To X & Co. A/c

Rs.

1st year

3,000

Dec. 31

L.F. By Balance c/d

3,000

3,000 2nd year Dec. 31

3,000 2nd year

To Balance b/d

3,000

Dec. 31

By X & Co. A/c

1,000

By Balance c/d

2,000

3,000 3rd year Dec. 31

3,000 3rd year

To Balance b/d

2,000

To X & Co. A/c

2,000

Dec. 31

2,000 By Balance c/d

2,000

4,000 4th year Dec. 31

4,000 4th year

To Balance b/d

2,000

Dec. 31

By Balance c/d

2,000

2,000 5th year Dec. 31

Rs.

2,000 5th year

To Balance b/d

2,000

Dec. 31

By X & Co. A/c

1,000 1,000

2,000

2,000

Minimum Rent Account, Journal and Ledger Accounts in Lessee Book Illustration 4 The Bihar Coal Co. Ltd. has leased of a mine on a royalty of 50 paise per tone of coal raised, with a dead rent of Rs. 30,000 per annum and power to recoup shortworkings during the first five years of the lease. The output for the first three years was as follows: 2002 15,000 tonnes; 2003 50,000 tonnes; 2004 75,000 tonnes. Draw the necessary journal entries in the books of company giving effect to the above. You are also required to write up the Minimum Rent Account, Royalties Account, Shortworkings Accout, Landlord Account and Profit and Loss Account. (B.Com., Madurai) Solution Royalty Payable Table Royalty (Payable) = 50 paise per ton; Minimum rent Rs. 30,000 per annum; Shortworking recouped = first five year only Year

Output

Actual royalty

(tons)

@ Rs. 50 ps

Minimum Payable rent (Rs.) to lessor

Shortworking

2002

15,000

7,500

30,000

30,000

22,500

2003

50,000

25,000

30,000

30,000

5,000

2004

75,000

37,500

30,000

30,000

Shortworking

Shortworking

recouped

unrecouped

7,500

702

Financial Accounting

Books of Bihar Coal Company Ltd—Journal Entries 2002

For the Royalty Payable [when Royalty (Payable) < Minimum Rent]

Dec. 31

L.F. Minimum Rent A/c

Debit (Rs.)

Dr.

Credit (Rs.)

30,000

To Landlord A/c

30,000

(Being minimum rent payable to landlord) Royalty (Payable) A/c

Dr.

7,500

Shortworking A/c

Dr.

22,500

To Minimum Rent A/c

30,000

(Being royalty payable and shortworking due recorded) Landlord A/c

Dr.

30,000

To Bank A/c

30,000

(Being payment made to landlord) 7,500 7,500 To Royalty (Payable) A/c

2003

For the Royalty Payable [when Royalty (Payable) < Minimum Rent]

Dec. 31 Minimum Rent A/c

Dr.

30,000

To Landlord A/c

30,000

(Being minimum rent payable to landlord) Royalty (Payable) A/c

Dr.

25,000

Shortworking A/c

Dr.

5,000

To Minimum Rent A/c

30,000

(Being royalty payable and shortworking due recorded) Landlord A/c

Dr.

30,000

To Bank A/c

30,000

(Being payment made to landlord) 25,000 To Royalty (Payable) A/c

2004

25,000

For the Royalty Payable [when Royalty (Payable) > Minimum Rent]

Dec. 31 Minimum Rent A/c

Dr.

37,500

To Landlord A/c

37,500

(Being minimum rent payable to landlord) Landlord A/c

Dr.

37,500

Royalty Accounts

To Shortworking A/c

703 7,500

To Bank A/c

30,000

(Being royalty paid to landlord and shortworking uncovered accounted) 37,500 To Royalty (Payable) A/c

37,500

Books of Bihar Coal Company Ltd (Lessee) Minimum Rent Account 2002

L.F.

Dec. 31 To Landlord A/c

Rs.

2002

L.F.

30,000 Dec. 31 By Royalty (Payable) A/c By Shortworkings a/c

22,500

30,000 2003

Rs. 7,500 30,000

2003

Dec. 31 To Landlord A/c

30,000 Dec. 31 By Royalty (Payable) A/c

25,000

By Shortworkings A/c

5,000

30,000

30,000

Royalty Payable Account 2002

L.F.

Dec. 31 To Minimum Rent

Rs.

2002

L.F.

Rs.

7,500 Dec. 31

7,500

7,500

7,500

2003

2003

Dec. 31 To Minimum Rent

25,000 Dec. 31

25,000

25,000

25,000

2004

2004

Dec. 31 To Minimum Rent

37,500 Dec. 31

37,500

37,500

37,500

Shortworking Account 2002

L.F.

Dec. 31 To Minimum Rent

Rs.

2002

L.F.

Rs.

22,500 Dec. 31 By Balance c/d

22,500

22,500

22,500

2003

2003

Dec. 31 To Balance b/d To Minimum Rent

22,500 Dec. 31 By Balance c/d 27,500

2004 Dec. 31 To Balance b/d

27,500

5,000 27,500 2004 27,500 Dec. 31 By landlord By Balance c/d 27,500

7,500 20,000 27,500

704

Financial Accounting

Landlord Account 2002 Dec. 31 To Bank

L.F.

Rs. 2002 30,000 Dec. 31 By Minimum Rent

L.F.

30,000 2003

Rs. 30,000 30,000

2003

Dec. 31 To Bank

30,000 Dec. 31 By Minimum Rent

30,000

50,000

50,000

2004

2004

Dec. 31 To Bank

30,000 Dec. 31 By Royalties Payable

To Shortworking

37,500

7,500 37,500

37,500

Profit and Loss Account 2002 Dec. 31 To Royalties Payable

L.F.

Rs. 7,500

L.F.

Rs.

2003 Dec. 31 To Royalties Payable

25,000

2004 Dec. 31 To Royalties Payable

37,500

Royalty on sales, Minimum Rent Account Illustration 5 Mr. Khanna wrote a book “Advanced Accountancy” and got it published with Paul Printers on the terms that royalties will be paid at Rs. 5 per copy sold, subject to a Minimum Rent of Rs.15,000 per year, with a right to recoup the shortworking over the first three years of the royalty agreement. The details are as under year

2002

2003

2004

2005

Number of copies printed

2,000

3,000

4,000

5,000

100

200

400

500

Number of copies of closing stock

Prepare Minimum Rent Account, Royalty Account and Khanna Account in the books of Paul Printers. (B.Com., Bangalore, Madurai) Solution Working Notes Calculation of Number of Copies Sold Opening stock (+) No. of copies printed (–) Closing stock = No. of copies sold 2002

Nil

2,000

100

1,900

2003

100

3,000

200

2,900

2004

200

4,000

400

3,800

2005

400

5,000

500

4,900

Royalty Accounts

705

Royalty Payable Table Royalty (Payable) Rs. 5 per copy sold; Minimum rent Rs. 15,000 per annum.; Shortworking recouped = First three years Year

No. of copies sold

Actual royalty @ Rs. 5

Minimum rent (Rs.)

Payable to Shortworking Shortworking Shortworking lessor recouped unrecouped

2002

1,900

9,500

15,000

15,000

5,500

2003

2,900

14,500

15,000

15,000

500

2004

3,800

19,000

15,000

15,000

2005

4,900

24,500

15,000

24,500

4,000

2,000

Books of Paul Printers (Lessee) Minimum Rent Account 2002

L.F.

Dec. 31 To Khanna A/c

Rs.

2002

L.F.

15,000 Dec. 31 By Royalty (Payable) A/c By Shortworkings A/c

9,500 5,500

15,000 2003

Rs.

15,000 2003

Dec. 31 To Landlord A/c

15,000 Dec. 31 By Royalty (Payable) A/c By Shortworkings A/c

14,500 500

15,000

15,000

Royalty Payable Account 2002

L.F.

Dec. 31 To Minimum Rent

Rs. 9,500

2002

L.F.

Dec. 31

9,500

9,500 2003

Rs. 9,500

2003

Dec. 31 To Minimum Rent

14,500

Dec. 31

14,500

14,500 2004

14,500 2004

Dec. 31 To Khanna To Shortworkings

15,000 4,000

Dec. 31

19,000

19,000 2005

19,000 2005

Dec. 31 To Khanna

24,500

Dec. 31

24,500

24,500

24,500

Shortworking Account 2002 Dec. 31 To Minimum Rent

L.F.

Rs. 5,500

2002 Dec. 31

L.F. By Balance c/d

5,500 2003 Dec. 31 To Balance b/d To Minimum Rent

5,500 2003

5,500 500

Dec. 31

By Balance c/d

6,000 2004 Dec. 31 To Balance b/d

Rs. 5,500

6,000 6,000

2004 6,000 6,000

Dec. 31

By Royalty Payable

4,000 2,000 6,000

706

Financial Accounting

Khanna Account 2002 Dec. 31 To Bank

L.F.

Rs.

2002

15,000

Dec. 31

L.F. By Minimum Rent

15,000

15,000

2003 Dec. 31 To Bank

2003 15,000

Dec. 31

By Minimum Rent

15,000

15,000

15,000

2004 Dec. 31 To Bank

2004 15,000

Dec. 31

By Royalty Payable

15,000

15,000

15,000

2005 Dec. 31 To Bank

Rs. 15,000

2005 24,500

Dec. 31

By Royalties Payable

24,500

24,500 24,500

Ledger in Lessor Book, Strike, Shortworking Suspense Account Illustration 6 Jagan Designers owned the patent of a massage chair. On 1st January, 2005, they granted to Western Comforts a licence for 5 years to manufacture and sell the chair on the following terms: (a) Royalty of Rs. 10 per chair sold; (b) Minimum Rent of Rs. 15,000 per annum (c) Shortworking could be recouped only within two years following year in which the shortworking occur subject to a maximum of Rs. 3,500 per annum and (d) If in any year normal sale was not attained due to strike, the minimum rent was to be regarded as having been reduced proportionately, having regard to the length of the stoppage. The number of chairs sold during the lease period was as follows: Year ended 31st December, 2005

900

Year ended 31st December, 2006

1,300

Year ended 31st December, 2007

2,000

Year ended 31st December, 2008

1,100

Year ended 31st December, 2009

1,400

During the year 2008, there was a stoppage due to strike lasting 4 months. You are required to show the (a) Royalty Receivable Account; (b) Royalty Suspense Account and (c) Western Comforts Account in the books of Jagan Designers. Royalty Payable Table Royalty (Payable) Rs. 10 per unit; Minimum rent Rs. 15,000 per annum; Shortworking recouped = within two years following year of shortworking subject to a

Royalty Accounts

707

maximum of Rs. 3,500 per annum; Strike period = Minimum rent to reduce proportionately* Year

2005 2006 2007 *2008 2009

Output (unit) 900 1,300 2,000 1,100 1,400

Actual Minimum Royalty Rent (Rs.) @ Rs. 10 9,000 13.000 20,000 11,000 14,000

15,000 15,000 15,000 10,000 15,000

Payable to lessor

Shortworking

15,000 15,000 16,500 10,000 15,000

6,000 2,000

Surplus Shortworking recouped

5,000 1,000

Shortworking unrecouped

3,500 1,000

2,500 1,000 1,000

1,000

*15,000 ¥ 8/12 = 10,000 Books of Jagan Designers (Lessor) Royalty Receivable Account 2005

L.F.

Dec. 31

Rs.

2005

L.F.

Rs.

9,000 Dec. 31 By Western Comforts

9,000

9,000

9,000

2006

2006

Dec. 31

13,000 Dec. 31 By Western Comforts

13,000

13,000

13,000

2007

2007

Dec. 31

20,000 Dec. 31 By Western Comforts By Shortworking Suspense A/c

16,500

20,000

20,000

2008

3,500

2008

Dec. 31

11,000 Dec. 31 By Western Comforts By Shortworking Suspense A/c

10,000

11,000

11,000

2009

1,000

2009

Dec. 31

14,000 Dec. 31 By Western Comforts

14,000

14,000

14,000

Western Comforts Account 2005 Dec. 31 To Royalty Receivable A/c To Shortworking Suspense A/c

L.F.

Rs.

2005 Dec. 31 By Bank

6,000

2006

15,000 2006 Dec. 31 By Bank

15,000

13,000 2,000 15,000

2007 Dec. 31 To Royalty Receivable A/c

Rs. 15,000

9,000

15,000 Dec. 31 To Royalty Receivable A/c To Shortworking Suspense A/c

L.F.

15,000 2007 Dec. 31 By Bank

16,500

16,500 16,500

16,500

708

Financial Accounting

2008

2008

Dec. 31 To Royalty Receivable A/c

Dec. 31 By Bank

10,000

10,000 10,000

2009

10,000 2009

Dec. 31 To Royalty Receivable A/c To Shortworking Suspense A/c

Dec. 31 By Bank

15,000

14,000 1,000 15,000

15,000

Shortworking Suspense Account 2005

L.F.

Dec. 31 To Balance c/d

Rs.

2005

L.F.

Rs.

6,000 Dec. 31 By Western Comforts

6,000

6,000

6,000

2006

2006

Dec. 31 To Balance c/d

8,000 Dec. 31 By Balance b/d By Western Comforts

6,000 2,000

8,000

8,000

2007

2007

Dec. 31 To Royalty Receivable A/c To Balance c/d

Dec. 31 By Balance b/d

8,000

3,500 2,500 2,000 8,000

2008

8,000 2008

Dec. 31 To Royalty Receivable A/c

Dec. 31 By Balance b/d

2,000

1,000 1,000 2,000

2009 Dec. 31

2,000 2009

1,000 Dec. 31 By Western Comforts

1,000

1,000

1,000

Lease, Sub-lease, Journal Entries in the Lessee Book Illustration 7 The West Bengal Coal Co. obtained the lease, with power to sub-lease a coal mine from a landlord for a period of 20 years from 1st January, 2002. The terms of the lease were: (a) Minimum rent payable is Rs. 20,000 merging into a royalty of Re. 1 per ton of coal raised in any year. (b) Shortworkings is recoverable throughout the term of the lease. (c) The West Bengal Coal co. granted sub-lease of a portion of the mine on 1st January, 2003 for a period of 10 year to Coal Syndicate on the following terms. (i) Minimum rent payable is Rs. 12,500 merging into a royalty of Rs. 1.50 per tonne of coal raised in any year.

Royalty Accounts

709

(ii) Shortworking is recoverable during the first three years of the lease. In the first four years of the output was as follows: Year

West Bengal Coal Co.

Coal Syndicate

Total

2002

7,000 tonnes

Nil

7,000 tonnes

2003

8,000 tonnes

5,000 tonnes

13,000 tonnes

2004

12,000 tonnes

8,000 tonnes

20,000 tonnes

2005

15,000 tonnes

10,000 tonnes

25,000 tonnes

Pass journal entries in the books of the West Bengal Coal co. (B.Com., Madurai, Kerala) Solution Working Note Royalty Payable Table Royalty (Payable) Rs. 1 per ton; Minimum rent Rs. 20,000; Shortworking recouped = throughout the term of lease Year

output (unit)

Actual royalty @ Rs. 1

Minimum rent (Rs.)

Payable to lessor

Shortworking

2002

7,000

7,000

20,000

20,000

13,000

2003

13,000

13,000

20,000

20,000

7,000

2004

20,000

20,000

20,000

20,000

Nil

2005

25,000

25,000

20,000

20,000

Shortworking recouped

Shortworking unrecouped

5,000

Royalty Receivable Table Royalty (Payable) Rs. 1.50 per ton; Minimum rent Rs. 12,500; Shortworking allowed = first three years of the lease Year

output (unit)

Actual royalty @ Rs. 1.50

Minimum rent (Rs.)

2003 2004 2005

Receivable from sub-lessee

5,000

7,500

12,500

5,000

8,000

12,000

12,500

500

10,000

15,000

12,500

Shortworking Suspense

Shortworking Shortworking recouped Unrecouped

2,500

3,000

Books of West Bengal Coal Co—Journal Entries 2002

For the Royalty payable [when Royalty (Payable) < Minimum rent]

Dec. 31

L.F.

Debit (Rs.)

Royalty (Payable) A/c

Dr.

7,000

Shortworking A/c

Dr.

13,000

To Landlord A/c

Credit (Rs.)

20,000

(Being royalty payable and shortworking due recorded)

Landlord A/c To Bank A/c

Dr.

20,000 20,000

(Being the royalty paid to the Landlord) Contd.

710

Financial Accounting

Contd.

7,000 To Royalty (Payable) A/c

7,000

(Being royalty payable transferred to P and Loss Account)

2003 Dec. 31

For the Royalty Payable [when Royalty (Payable) < Minimum Rent] Royalty (Payable) A/c

Dr.

13,000

Shortworking A/c

Dr.

7,000

To Landlord A/c

20,000

(Being royalty payable and shortworking due recorded)

Landlord A/c

Dr.

20,000

To Bank A/c

20,000

(Being the royalty paid to the landlord)

13,000 To Royalty (Payable) A/c

13,000

For the Royalty Receivable from the Sub-Lessee [when Royalty (Receivable) < Minimum Rent] Coal Syndicate A/c

Dr.

12,500

To Royalty Receivable A/c

7,500

To Shortworking Suspense A/c

5,000

(Being entry for royalties receivable and shortworking suspense recorded)

Bank A/c

Dr.

12,500

To Coal Syndicate A/c

12,500

(Being the amount received from sub-lessee)

Royalties Receivable A/c

7,500 7,500

2004 Dec. 31

For the Royalty Payable [when Royalty (Payable) = Minimum Rent] Royalty (Payable) A/c

Dr.

20,000

To Landlord A/c

20,000

(Being royalty payable due recorded)

Landlord A/c To Bank A/c

Dr.

20,000 20,000

(Being the royalty paid to the landlord)

Contd.

Royalty Accounts

711

Contd. 20,000 To Royalty (Payable) A/c

20,000

For the Royalty Receivable from the Sub-Lessee < Minimum Rent] Coal Syndicate A/c

[when Royalty (Receivable)

Dr.

12,500

To Royalty Receivable A/c

12,000

To Shortworking Suspense A/c

500

(Being entry for royalties receivable and shortworking suspense recorded)

Bank A/c

Dr.

12,500

To Coal Syndicate A/c

12,500

(Being the amount received from sub-lessee)

Royalties Receivable A/c

12,000 12,000

2005 Dec. 31

For the Royalty Payable [when Royalty (Payable) > Minimum Rent] Royalty (Payable) A/c

Dr.

25,000

To Landlord A/c

20,000

To Shortworking A/c

5,000

(Being royalty payable due and shortworking recorded) Landlord A/c

Dr.

20,000

To Bank A/c

20,000

(Being the royalty paid to the landlord)

25,000 To Royalty (Payable) A/c

25,000

For the Royalty Receivable from the Sub-Lessee [when Royalty (Receivable) < Minimum Rent] Coal Syndicate A/c

Dr.

12,500

Shortworking Suspense A/c

Dr.

2,500

To Royalty Receivable A/c

15,000

(Being entry for royalties receivable and shortworking suspense recorded)

Bank A/c To Coal Syndicate A/c

Dr.

12,500 12,500

(Being the amount received from sub-lessee) Contd.

712

Financial Accounting

Contd.

Royalties Receivable a/c

15,000 15,000

Shortworking Suspense A/c

Dr.

3,000 3,000

Books of Lessee, Sub-lease, Ledger Illustration 8 Alok obtained on 1st January 2000 from Bobby a lease of some coal bearing land, the terms being a royalty of Re. 0.50 a tonne of coal raised subject to a minimum rent of Rs. 2,000 per annum, with a right of recoupment of shortworkings over the first four years of the lease. Alok granted a sub-lease of part of the land to Chandu on a royalty of Re. 0.75 per tone merging into a minimum rent of Rs. 1,000 per annum with a right of recoupment of shortworkings during the two years following the shortworkings. The output for the first five years is as follows: Year

Alok (in tonnes)

Bobby (in tonnes)

Total (in tonnes)

2000

2,200

800

3,000

2001

2,320

1,080

3,400

2002

2,600

1,400

4,000

2003

2,800

1,800

4,600

2004

3,600

2,400

6,000

Give necessary ledger accounts in the books of Alok. (Bombay, B.Com) Solution Working Note Royalty Payable Table Royalty (Payable) Re. 0.50 paise per ton; Minimum rent Rs. 2,000 per ton; Shortworking recouped = first four years of the lease Year

Total (tonnes)

Actual royalty

Minimum rent (Rs.)

Payable to lessor

Shortworking

Shortworking Shortworking recouped

2000

3,000

1,500

2,000

2,000

500

2001

3,400

1,700

2,000

2,000

300

2002

4,000

2,000

2,000

2,000

Nil

2003

4,600

2,300

2,000

2,000

2004

6,000

3,000

2,000

3,000

300

unrecouped

500

Royalty Accounts

713

Royalty Receivable Table Royalty (Receivable) Re. 0.75 paise per ton; Minimum rent Rs. 1,000 per ton; Shortworking allowed = two years following the shortworkings Year

Output (unit)

Actual Royalty

Minimum Rent (Rs.)

Receivable from Sub-lessee

Shortworking Suspense

Shortworking Shortworking recouped Unrecouped

2000

800

600

1,000

1,000

400

2001

1,080

810

1,000

1,000

190

2002

1,400

1,050

1,000

1,000

50

2003

1,800

1,350

1,000

1,160

190

2004

2,400

1,800

1,000

1,800

350

Books of Alok (Lessee) Royalty Payable Account 2000

L.F.

Dec. 31 To Bobby A/c 3,000 @ 0.50

Rs.

2000 Dec. 31

1,500

L.F. By Royalty Receivable 800 @ 0.50

400

2,200 @ 0.50

1,100

1,500 2001

Rs.

1,500 2001

Dec. 31 To Bobby A/c 3,400 @ 0.50

Dec. 31 1,700

By Royalty Receivable 1,080 @ 0.50

540

2,320 @ 0.50

1,160

1,700 2002

1,700 2002

Dec. 31 To Bobby A/c 4,000 @ 0.50

Dec. 31 2,000

By Royalty Receivable 1,400 @ 0.50

700

2,600 @ 0.50

1,300

2,000 2003

2,000 2003

Dec. 31 To Bobby A/c 4,600 @ 0.50

Dec. 31 2,300

By Royalty Receivable 1,800 @ 0.50

900

2,800 @ 0.50

1,400

2,300 2004

2,300 2004

Dec. 31 To Bobby A/c 6,000 @ 0.50

Dec. 31 3,000

By Royalty Receivable 2,400 @ 0.50

1,200

3,600 @ 0.50

1,800

3,000

3,000

Shortworking Account 2000 Dec. 31 To Bobby A/c

L.F.

Rs. 500 500

2000 Dec. 31

L.F. By Balance c/d

Rs. 500 500 Contd.

714

Financial Accounting

Contd. 2001

2001

Dec. 31 To Balance b/d To Bobby A/c

500 300

Dec. 31

By Balance c/d

800

800 2002

800 2002

Dec. 31 To Balance b/d

800

Dec. 31

By Balance c/d

800

800 2003

800 2003

Dec. 31 To Balance b/d

800

Dec. 31

300 500

By Bobby A/c

800

800

Bobby Account 2000

L.F.

Dec. 31 To Bank A/c

Rs. 2,000

2000 Dec. 31

L.F. By Royalty Payable By Shortworking A/c

1,500 500

2,000 2001

Rs.

2,000 2001

Dec. 31 To Bank A/c

2,000

Dec. 31

By Royalty Payable By Shortworking A/c

1,700 300

2,000 2002

2,000 2002

Dec. 31 To Bank A/c

2,000

Dec. 31

By Royalty Payable

2,000

2,000 2003

2,000 2003

Dec. 31 To Shortworking To Bank

300 2,000

Dec. 31

By Royalty Payable

2,300

2,300 2004

2,300 2004

Dec. 31 To Bank

3,000

Dec. 31

By Royalty Payable

3,000

3,000

3,000

Royalty Receivable Account 2000

L.F.

Rs.

Dec. 31 By Royalty Payable 800 @ 0.50

2000 Dec. 31 By Chandu A/c 800 @ 0.75

L.F.

Rs. 600

400 200 600 2001

600 2001

Dec. 31 By Royalty Payable 1,080 @ 0.50

Dec. 31 By Chandu A/c 1,080 @ 0.75

810

540 270 810 2002

810 2002

Dec. 31 By Royalty Payable 1,400 @ 0.50

Dec. 31 By Chandu A/c 1,400 @ 0.75

1,050

700 350 1,050

1,050 Contd.

Royalty Accounts

715

Contd. 2003

2003

Dec. 31 By Royalty Payable 1,800 @ 0.50

Dec. 31 By Chandu A/c 1,800 @ 0.75

1,350

900 450 1,350 2004

1,350 2004 Dec. 31 By Chandu A/c 2,400 @ 0.75

Dec. 31 By Royalty Payable 2,400 @ 0.50

1,800

1,200 600 1,800

1,800

Shortworking Suspense Account 2000

L.F.

Dec. 31 To Balance c/d

Rs. 400

2000 Dec. 31

L.F. By Chandu A/c

400

400 2001

Rs.

400 2001

Dec. 31 To Balance c/d

590

Dec. 31

By Balance b/d By Chandu A/c

400 190

590 2002

590 2002

Dec. 31 To Chandhu A/c

50 350 190

To Balance c/d

Dec. 31

By Balance b/d

590

590 2003

590 2003

Dec. 31 To Chandu A/c

190

Dec. 31

By Balance b/d

190

190

190

Chandu Account 2000 Dec. 31 To Royalty Receivable To Shortworking Suspense

L.F.

Rs.

2000 Dec. 31 By Bank

1,000

400

2001

1,000 2001 Dec. 31 By Bank

1,000

810 190 1,000

2002 Dec. 31 To Royalty Receivable

Rs.

600

1,000 Dec. 31 To Royalty Receivable To Shortworking Suspense

L.F.

1,000 2002

1,050

1.050

Dec. 31 By Shortworking Suspense By Bank

50 1,000 1,050 Contd.

716

Financial Accounting

Contd. 2003

2003

Dec. 31 To Royalty Receivable

Dec. 31 By Shortworking 1,350 Suspense By Bank

190 1,160

1,350

1,350

2004

2004

Dec. 31 To Royalty Receivable

Dec. 31 By Bank

1,800

1,800 1,800

1,800

Profit and Loss Account L.F.

Rs.

2000 Dec. 31 By Royalty Payable A/c

L.F.

Rs. 200

2001 Dec. 31 By Royalty Payable A/c

270

2002 Dec. 31 By Royalty Payable A/c By Shortworking Suspense 2003

350 350

2003 To Shortworking Suspense

Dec. 31 By Royalty Payable 500 A/c

450

2004 Dec. 31 By Royalty Payable A/c

450

Points to Remember Royalty is a periodic payment for acquiring special right for using others' property. There are various types such as mining royalty, patent royalty, trademark royalty, copyright royalty, etc. Royalty is different from rent. It is calculated on the basis of output whereas rent is calculated on time. Royalty is payable for using others, tangible and intangible assets, whereas rent is payable for using others' tangible assets only. Minimum rent is the minimum guaranteed amount. Shortworking is the excess of minimum rent over royalty.

Royalty Accounts

717

If the original lessee transfers a part of his right to another person (who is called sub-lessee), the transaction is called sub-lease.

Examination Questions I. Objective Questions 1. Fill in the blanks (i) Minimum rent is also called ____________. (ii) The excess of minimum rent over royalty is called ____________. (iii) When shotworking is recouped the lessor credits ____________ account. (iv) Lessee debits ____________ account at the time of payment of royalties. (v) Royalty is paid by lessee to the ____________. 2. Choose the correct answers (i) Royalty account is in the nature of a. Personal account b. Real account c. Nominal account (ii) When royalty is paid, in the books of lessee, it is debited to a. Royalty account b. Lessee account c. Lessor account (iii) If the right to recoup the short workings has expired, short workings are transferred by the lessee to a. Trading account b. Profit and loss account c. Landlord account (iv) Balance at royalty receivable account is transferred to a. Production Account b. Royalty Account c. Profit and Loss A/c (v) Balance at royalty payable account is transferred to a. Royalty Suspense A/c b. Royalty Reserve A/c c. Trading Account 3. Match the following (i)

Dead rent

a

Tenant

(ii)

Shortworking

b

Agreement

(iii) Lesee

c

Minimum rent

(iv) Lessor

d

Minimum rent exceeds production

(v)

e

Landlord

Lease

4. State whether the following statement True or False: 1. Royalty account is closed by transferring it to the trading account

718

Financial Accounting

2. 3. 4. 5. Answers 1. (i) (iv) 2. (i) 3. (i) 4. (i)

Royalty is calculated on the basis of time There are at least three partner involved in sub-lease agreement An agreement between lessor and lessee is called lease Royalty is payable for using both tangible and intangible assets

Dead rent, Landlord’s, c; c; False,

(ii) (v) (ii) (ii) (ii)

Shortworking, Landlord. c; (iii) d; (iii) False, (iii)

(iii) Lessee A/c, b. a; True,

(iv) c (v) c (iv) e; (v) b. (iv) True, (v) True.

II. Descriptive Questions A. Very Short Answer Questions 1. Define royalty? 2. What is dead royalty? 3. What is shortworking? 4. What is shortworking recouped? 5. What is sub-lease? B. Short Answer Questions 1. Distinguish between rent and royalty? 2. What are the different types of royalties? 3. Write a note on “right to recoup shortworking? 4. How do you calculate minimum rent if there is a strike or stop of work? 5. Write necessary journal entries to open Minimum Rent Account in the books of lessee? C. Detail Answer Questions 1. What journal entries are required in the books of landlord and lessee when royalty is less than the minimum rent? 2. What journal entries are required in the books of landlord and lessee when royalty is more than the minimum rent? III. Exercise Problems

Journal, Ledger in Lessee Book Problem 1 New Tech Engineers had patented a quick boiling kettle and gave the licence to Domestic Appliance Company the right to manufacture and sell under the same licence for seven years. The stipulated terms were as follows: (a) A royalty of Rs. 4 to be paid on each kettle sold. (b) A minimum payment of Rs. 30,000 per annum. (c) The right to deduct in two following years any excess of the minimum rent over the calculated royalties in any year.

Royalty Accounts

719

The numbers of kettles sold are: Year ended 31st March, 2001

4,000

Year ended 31st March, 2002

4,500

Year ended 31st March, 2003

5,400

Year ended 31st March, 2004

6,500

Give journal entries and ledger accounts as they would appear in the books of the Domestic Appliance Company to record these transactions. (B.Com., Delhi) [Ans. Unrecouped shortworing Rs. 2,400 (2003)]

Strike, Ledger in Lessee Book Problem 2 X Colliery Company leased a property from a landlord at a royalty of paise 50 per ton with a minimum rent of Rs. 10,000 per annum. Each year’s excess of minimum rent over royalties is recoverable out of royalties of next three years. In the event of strike, if the minimum rent is not reached, the lease provided that the actual royalty earned for the year discharge all the rental obligation for that year. The result of working was as follows: Year

Output in tonnes

2001

15,000

2002

21,000

2003

12,000 (Strike)

2004

16,000

2005

22,000

Write up the Royalties Account, Shortworking Account and Landlord Account for the five years. (B.Com., Karnataka, Madurai,) [Ans. Unrecouped shortworking Rs. 2,000 (2004)]

Minimum Rent Changes every year, Ledger Problem 3 Arun owned certain patent rights. He granted a licence to Bhaskar to use such rights on a royalty basis. The following are the relevant particulars: Year

Minimum rent

Royalty earned

Rs.

Rs.

Rs.

2001

1,750

1,500

2002

2,000

1,800

2003

2,250

1,900

2004

2,500

2,750

2005

2,500

2,600

720

Financial Accounting

The deficiency of any year is to be set off against excess payable within the next two years. Give journal entries and the ledger accounts in the books of Bhaskar. [Ans. Unrecouped Rs. 250 (2003), Rs. 200 (2005)]

Based on Sales, Ledger Problem 4 Mr. Raja owned the patent of a safety lock. He granted Dindigul Lock Company a licence for seven years to manufacture and sell lock on the following terms: (a) Dindugul Lock Company to pay Raja a royalty of Rs. 5 for each lock sold with a minimum annual payment of Rs. 50,000. Account to be settled annually on 31st December. (b) If in any year the royalty calculated on locks sold amounts to less than Rs. 50,000, Dindigul Lock Company will have the right to deduct the deficiency from the royalty payable in excess of that sum in the following years. The number of locks sold was as follows: Year ended 31st December, 2002

8,000

Year ended 31st December, 2003

9,000

Year ended 31st December, 2004

11,000

Year ended 31st December, 2005

18,000

You are required to show the ledger accounts for the above transactions in the books of Dindigul Lock Company. (B.Com., Madurai) [Ans. Unrecouped shortworking Rs. 5,000 (2004)]

Minimum Rent Accout, Journal Entries, Ledger Problem 5 Shiva Tiles Industries Ltd. obtained a lease of land from a landlord for a period of four years from 1st January, 2002, paying a minimum rent of Rs. 8,000 per annum, merging in a royalty of 50 paise per ton of clay raised. The lease contains a clause to that effect that if the minimum rent paid in any year exceeds the royalty for the year, the amount of excess can be recouped by the lessee out of the royalty payable in the following year only. Clay is raised as follows. 2002

2,000 tonnes

2003

10,000 tonnes

2004

30,000 tonnes

2005

32,000 tonnes

Give the journal entries necessary to record these transactions in the books the lessee, and also show the ledger accounts including Minimum Rent Account. [Ans. Unrecouped shortworking Rs. 1,000 (2004)]

Royalty Accounts

721

Sub-lease, Ledger Problem 6 Mr. Rajan obtained a mining lease and from that date he sub-leased a part of the mine to Shankar. Show ledger accounts in the books of Rajan from the following data: Lease (Tonne)

Sub-lease (Tonne)

2001

1,000

1,000

2002

3,000

2,000

2003

12,000

6,000

2004

9,000

2,000 (Strike)

5,000

12,000

2005 Royalty per tonne

Rs.

2

Rs. 3

Dead rent per annum

Rs. 15,000

Rs. 10,000

3 years

2 years

Shortworkings recoverable

In case of strike, royalty earned will discharge all liabilities for the year only. [Ans. Unrecouped shortworking Rs. 16,000 (2003), unrecouped shortworking suspense Rs. 11,000 (2002)]

19

Consignment Account

Learning Objectives After studying this chapter, you should be able to understand the Meaning of Consignment

CONSIGNMENT Manufacturers or wholesalers in order to promote sales on large scale basis, appoint agents at various parts of the country/world. The goods are then despatched by the manufacturers/wholesalers to the agents at various places. The agents sell these goods on behalf of manufacturers/wholesalers on commission basis. In consignment, the goods are transferred by the principal to agents. The principal is called as ‘consignor’ and the agent is called as ‘consignee’. The transaction between the consignor and consignee is called ‘consignment’. In this transaction only the goods are transferred, but not the ownership. Agents are paid commission on the basis of total sales made. In short, consignment is the dispatch of goods to a consignee by the consignor for the purpose of storage and sale.

Salient Features of Consignment (i) Goods are despatched by the consignor (principal) to the consignee (agent). (ii) Consignee is entitled for commission on the basis of sales made by him. (iii) Only possession of goods is transferred to consignee; the ownership title remains with the consignor. (iv) The risk of loss or damage of goods under the possession of consignee will not fall on him. The consignor alone is responsible for the loss or damage of goods since the ownership remains with the consignor. (v) The consignee has got every right to return the goods to the consignor or refuse to sell them.

Consignment Account

723

Differences between Sale and Consignment (a) In sale, normally ownership title along possession of goods is transferred to the buyer by the seller, whereas in consignment only possession of goods is transferred but not the ownership title. (b) In sale, the relationship between the parties is buyer and seller, whereas in consignment, the relationship between the consignor and consignee is principal and agent. (c) In sale, the risk of loss or damage of goods passes with ownership, whereas in consignment, the risk remains with the consignor. So, consignee is not at all responsible for loss or damage of goods. (d) In sale, the consideration is the price, whereas in consignment, the consideration is the commission (e) According to the Contract of Sale, repudiation is not at all possible, whereas in consignment, it is very much possible, the consignee can always refuse to sell the goods by returning them to the consignor.

Important Terms Used in Consignment Accounts (i) Proforma Invoice It is a statement consisting of details of good consigned, such as quantity or weight, quality, price, packing and so on. Such statement is called proforma invoice. It is sent to the consignee along with the goods consigned by the consignor. It is an invoice similar to an ordinary invoice.

(ii) Account Sale It is a statement rendered by the consignee to the consignor consisting of the details of sale proceeds realised by the consignee less commission due to him and expenses incurred by him in respect of consignment.

(iii) Del Credere Commission This is an extra commission paid by the consignor to the consignee for the guarantee that if any debts in respect of goods sold by the consignee become bad, the consignee will hold himself/herself liable for the same.

(iv) Over-riding Commission to the total sales made.

(v) Normal Loss It is an expected loss or anticipated loss because of nature of goods consigned such as evaporation, normal leakage, spoilage, etc. This loss cannot be avoided.

(vi) Abnormal Loss

724

Financial Accounting

Accounting Treatment The Consignment Account is prepared by consignor to know two important things. These are (ii) To calculate the amount due to consignee or due from consignee. The consignment account is nominal account in nature. The following journal entries are required for preparing Consignment Account: I. In The Books of Consignor L.F. (i)

(ii)

(iii)

(iv)

(v)

(vi)

(vii)

(viii)

(ix)

Debit (Rs.)

Credit (Rs.)

Consignment Account

725

(x)

(xi)

(xii)

(xiii)

II. In The Books of Consignee L.F.

Debit (Rs.)

Credit (Rs.)

(i)

(ii)

(iii)

(iv)

(v)

Valuation of Unsold Stock Normally stock is valued at cost price or market price whichever is less. In the case of consignment accounting, stock is valued after considering the expenses incurred,

726

Financial Accounting

such as carriage, freight, insurance, clearing charges, dock dues, customs duty, etc. These are direct expenses. The formula for calculating the value of unsold stock is as follows: Value of unsold stock = Cost price of unsold stock + Proportionate direct expenses

Invoice Price Method Usually, the goods sent on consignment are valued at cost price. But, sometimes the The reason for sending goods at invoice price is to conceal the cost price from the the consignor. In such cases, the following journal entries will appear in the books of the consignor. L.F.

Debit (Rs.)

Credit (Rs.)

(i)

(ii)

(iii)

Memorandum Column Method According to this method, there are two amount columns on debit side and also on price of goods consigned, goods sold and goods unsold at the end. The invoice price column serves as memorandum column as it is in addition to the usual (cost price) column.

Index for Illustrations Type

Ill. No.

I

1–2

II

3–4

III

5–7

IV

8–9

V

10–16

Consignment Account

727

I – ONLY CALCULATIONS Valuation of Unsold Stock Illustration 1 Keshav of Bhopal sent 100 electronic gadgets, which cost Rs. 9,000 each to Santhosh of Chennai on consignment basis. Keshav paid freight of Rs. 12,000, Cartage Rs. 3,000 and Insurance Rs. 4,000. In Chennai, Santhosh has spent Rs. 1,000 as cartage, loading and unloading Rs. 500. The goods have been kept in a godown at a monthly rent of Rs. 1,000 per month. At the end of accounting period, 20 gadgets remained unsold. The selling price of the gadget is Rs. 10,000 at Chennai. What should be the value of stock unsold? Solution Books of Keshav (Consignor)—Calculation of unsold goods

500

¥ Rs.1,84,100

Normal, Additional and Del Credere Commission Illustration 2 Jayam Safe Food, Chennai sent 2,000 sugar free biscuit packs costing Rs. 50 each for sale on consignment basis to Allen Stores, Pondicherry subject to the following terms: Normal selling price per pack is Rs. 60. Consignee’s commission to be calculated as under: (i) 5% commission on normal selling price; (ii) 10% additional commission if selling price is more than the normal selling price and (iii) ½% Del credere commission on total sales for guaranteeing collection of credit sales Reported sales are as follows: Cash sales: 500 packs at Rs. 60 each; 200 packs at Rs. 75 each Credit sales: 400 packs at Rs. 75 each; 400 packs at Rs. 80 each Ascertain the commission due to Allen Stores.

728

Financial Accounting

Solution Calculation of Commission due to Allen Stores, Pondicherry (i) Commission on normal selling price ¥ (ii) 10% additional commission if selling price is more than the normal selling price 900 ¥

800 ¥ (iii) ½% Del credere commission on total sales ¥ 200 ¥ 400 ¥ 400 ¥ 535 6,735

II – SIMPLE JOURNALS WITH CALCULATIONS Normal Loss, Journal Entry Illustration 3

kg and incurred Rs. 1,000 as unloading expenses, Rs. 2,000 as godown rent and Rs. 1,000 as selling expenses. Normal loss expected is 50 kg. Show the treatment of the loss and unsold stock in the books of the Madhavan. Solution In the Books of Madhavan (consignor)—Calculation of Unsold Stock

¥

Rs. 15,000

Total (500) – Normal loss (50) = 450

Consignment Account

729

Journal Entry L.F.

Dr.

Cr.

Unsold Stock, Loss in Transit, Journal for Loss in Transit Illustration 4 expenses towards freight Rs. 500 and insurance Rs. 300. During the transit to consignee, 200 kg were destroyed in an accident. The insurance admitted the claim for unloading Rs. 200, godown rent Rs. 500 and selling expenses Rs. 300. Pass journal entries relating to loss in transit and unsold consignment stock in the books of the consignor. Solution Calculation of Cost of Unsold Stock

500 300 800 ¥

200 Cost of 800 kg

660

800

¥

Rs. 1,105

730

Financial Accounting

Books of Consignor—Journal Entries Journal

L.F.

Dr. (Rs.)

Cr. (Rs.)

660 660

III – JOURNALS AND LEDGERS Goods at Cost Price – Journal and Ledger in Consignor Books Illustration 5 Rs. 700 each bundles to Vasuki Sarees of Chennai to be sold on consignment basis. An advance of Rs. 16,000 were received from Vasuki Sarees. Vasuki Sarees sent an account sale which states that total goods were sold for Rs. 56,000 and Rs. 1,800 were paid for carriage, godown rent and port expenses. Their commission were Rs. 2,000. They sent a bank draft for the balance amount to Joyce Corporation. From the above particulars, pass necessary Journals in the books of Ganpati and also show important accounts. Solution (I) Books of Joyce Corporation of Kancipuram (Consignor) (a) Journal Entries Date

L.F.

Debit (Rs.)

Credit (Rs.)

Consignment Account

731

(i) Consignment Account L.F.

Rs.

L.F.

Rs.

L.F.

Rs.

L.F.

Rs.

Consignment

(ii) Goods sent to Consignment Account L.F.

Rs.

(iii) Vasuki Sarees Account L.F. To Consignment

Rs.

732

Financial Accounting

Cost Price, Normal Loss, Journal, Ledger in Consignor Book Illustration 6

Southern Oil received the consignment and incurred selling expenses Rs. 2,000.

5%. He also reported that petrol in hands was 950 litres. Pass the journal entries and open necessary accounts in the books of consignor. Solution Books of Bharath R (b) Journal Entries Date

L.F.

Debit (Rs.)

Credit (Rs.)

Consignment Account

733

(c) Ledger Accounts Consignment Account L.F.

Rs.

L.F.

Rs.

L.F.

Rs.

L.F.

Rs.

Consignment

(ii) Goods sent to Consignment Account L.F.

Rs.

(iii) Southern Oil Account L.F. To

Rs.

Consignment

*Value of unsold stock Cost of per litre = 75,000 + 5,000/4,950 = Rs. 16.16

Goods at Cost Price – Account Sales, Journals and Ledgers in both Books Illustration 7 Garden Fresh of Ercot consigned on 10th January, 50 cases of fruit juice, costing Rs. 50,000 to Banu Fruit Stall, Chennai for sale on commission of 10% on sale proceeds. Garden Fresh paid freight, packing etc. amounting to Rs. 800. The goods arrived to Chennai on 11th January and the Banu Fruit Stall paid clearing charges Rs. 300; Sundry expenses Rs. 200, carriage Rs. 150 and godown charges Rs. 100. On the same day, Banu Fruit Stall paid on advance of Rs. 10,000 to Garden Fresh of Ercot. The goods were sold by the Banu Fruit Stall as under: 1,150 per case; balance cases for Rs. 20,500. On 25th January, Banu Fruit Stall sent an Account Sale to Garden Fresh along with a draft for the balance.

734

Financial Accounting

Prepare the account sales, journal entries and ledger accounts in the books of Garden Fresh and Banu Fruit Stall. Solution (I) Account Sales Banu Fruit Stall, Chennai-Account Sales (20th January) Rs.

Rs.

300 200 150 100

¥

20th April E & O.E. Signature Banu Fruit Stall, Chennai (II) Books of Garden Fresh of Ercot (Consignor) (a) Journal Entries Date

L.F.

Debit (Rs.)

Credit (Rs.)

10

800 800

11

750 750

Consignment Account

735

25

(b) Ledger Accounts (i) Consignment Account April

L.F.

Rs.

April

L.F.

Rs.

L.F.

Rs.

L.F.

Rs.

800 750

(ii) Goods Sent to Consignment Account April

L.F.

Rs.

April

(iii) Banu Fruit Stall Account April

L.F. To Consignment

Rs.

April

750

736

Financial Accounting

(III) Books of Banu Fruit Stall, Chennai (Consignee) (a) Journal Entries Apr

L.F.

Debit (Rs.)

11

Credit (Rs.)

750 750

Apr 25

(b) Ledger Accounts Garden Fresh, Ercot Account April

L.F.

Rs.

April

L.F.

Rs.

750 To Commission

IV – GOODS SENT AT COST PRICE AND LEDGER ACCOUNTS Cost Price, Abnormal Loss, Ledger Account in Consignor Books Illustration 8 Rachael Music consigned 1,000 radio sets costing Rs. 900 each to its agent Sugam Melodies on 1st July 2008. Rachael Music incurred the following expenditure on sending the consignment–carriage Rs. 650; freight Rs. 7,000 and insurance Rs. 3,250. Its agent received the delivery of 950 radio sets. An accounts sale dated 30th November, 2004 showed that 750 sets were sold for Rs. 9,00,000 and Sugam Melodies incurred Rs. 3,000 for carriage and Rs. 7,500 for the customs duty at

Consignment Account

737

affected. Sugam Melodies incurred expenses amounting to Rs. 2,500 for repairing the damaged radio sets remaining in the stock. Racheal Music lodged a claim with the insurance company which was admitted at Rs. 35,000. Show the Consignment Account and Sugam Melodies Account in the books of Rachael Music. Solution Books of Rachael Music (Consignor) (i) Consignment Account L.F.

Rs.

L.F.

Rs.

Consignment ¥

(ii) Sugam Melodies Account L.F. To

Rs.

L.F.

Consignment Commission

Working Note (a) Value of unsold stock (+) proportionate expenses of consignor 10,900 ¥ 200/1000 (+) Proportionate expense of consignee (3,000 + 7,500) = 10,500 ¥ 200/950 Total value of goods unsold (b) Abnormal loss in units Total units consigned (–) received by consignee Abnormal loss in units (c) Value of abnormal loss 50 units ¥ Rs. 900 (+) proportionate expenses of consignor 10,900 ¥ 50/1,000 Value

= Rs.

2,180

= Rs. 2,211 = Rs. 1,84,391 = 1,000 = 950 = 50 = Rs.

45,000

= Rs. = Rs.

545 45,545

Rs.

738

Financial Accounting

Cost Price, Normal Loss, Abnormal Loss, Ledgers in Consignor Books Illustration 9 An oil agency consigned 200 tins of vegetable oil (one tin contains 10 kg of oil) to its dealer, Sundar costing Rs. 25 per kg. The agency paid Rs. 4,000 for forwarding charges and Rs. 6,000 for freight. 5 tins of oil were totally damaged during transit and nothing could be realised from the insurance company. Sundar took delivery of the oil and sent an account sales showing that 150 tins were sold for Rs. 60,000. The expenses incurred by him were custom duty and clearing charges Rs. 3,580 and selling expenses Rs. 1,000. They are entitled to a commission of 5% on sales. He also reported that 10 kilograms of oil were lost due to leakage. Show the necessary ledger accounts in the books of oil agency. Solution Books of Oil Agency (Consignor) (iii) Consignment Account L.F.

Rs.

L.F.

Rs.

L.F.

Rs.

Consignment

Sundar Account L.F.

Rs.

To Consignment

Working Note (a) Loss in transit ¥ 10 ¥ 25) = Rs. 1,250 (+) Proportionate non-recurring expenses = 10,000 ¥ 5/200 tins = Rs. 250 Value of tins loss in transit = Rs. 1,500 (b) Net value of goods sent 200 tins = 200 ¥ (+) Non-recurring expenses of consignor (+) Non-recurring expenses of consignee

= 10,000 = 3,580

Rs. 13,580 Rs. 63,580

Consignment Account

(–) Value of tins loss in transit (Abnormal loss) Net value of goods sent

739

Rs. (1,500) = Rs. 62,080

(c) Quantity of unsold stock Total kg of oil sent = 2,000 kg (–) Quantity lost in transit (Abnormal Loss) = (50) kg 1,950 kg (–) Normal Loss = (10) kg Quantity available for sale = 1,940 kg (–) Quantity sold = (1,500) kg Quantity of unsold stock = 440 kg (d) Value of unsold stock = (Net value of stock sent ¥ quantity of unsold stock) /quantity received by consignee = (62,080 ¥ 440)/1,940 = Rs. 14,080

V – GOODS SENT AT INVOICE PRICE AND LEDGERS Abnormal L Illustration 10 1,000 Baby bicycles were consigned by Premier Bicycle Co., Delhi to Superior Brother, Kanpur, at an invoice cost of Rs. 150 cash. Premier Bicycle Company paid freight Rs. 10,000 and insurance in transit Rs. 1,500. During the transit 100 bicycles Superior Brothers sent a bank draft to Premier Company for Rs. 50,000 as advance payment and later sets an account sales showing that 800 bicycles were sold at Rs. 220 each. Expenses incurred by Superior Brothers on godown rent and advertisement, etc. amounted to Rs. 2,000. Superior Brothers in entitled to commission of 5%. Prepare necessary ledger accounts in the books of Baby bicycles. (B.Com., Punjab) Solution Books of Baby Bicycles (Consignor) (i) Consignment Account L.F. Consignment

Rs.

L.F.

Rs.

740

Financial Accounting

(ii) Superior Brother Account L.F.

Rs.

L.F.

Rs.

L.F.

Rs.

To Consignment

L.F.

Rs.

To Consignment

Working Note (+) Proportionate non-recurring expense 10,000 + 1,500 = 11,500 ¥ 100/1000 Value of goods lost

= Rs. 1,150 = Rs. 16,150

Invoice Price, Abnormal Loss, Consignment and Stock Lost Account Illustration 11 Abba & Co. consigned goods, cost price of which was Rs. 66,000, to Vinod Agencies on 1.10.2008. The proforma invoice was priced at 20% above cost. Vinod Agencies paid freight and other charges amounting to Rs. 2,000. The Agency was entitled to Rs. 1,000 per annum towards establishment expenses, 5% commission on gross sales and 3% del credere commission. Vinod Agencies further paid Rs. 500 as rent of godown for 3 months ended 31.12.2008. 1 3 credit sales. Out of the balance of goods, one-half was stolen. Abba & Co. claimed Rs. 7,000 from insurance company, but received from them a sum of Rs. 6,900 towards the stolen goods. Balance of stock was valued at the proforma invoice price. Write up the Consignment Account and the stock lost on Consignment Account in the books of Abba & Co. Books of Abba & Co. (Consignor)—Ledger (a) Consignment Account Three-fourth of the goods were sold at 33

2008

L.F.

Rs.

2008

L.F.

Consignment Consignment

¥

Rs.

Consignment Account

741

(b) Abnormal Loss Account 2008

L.F.

Rs.

2008

L.F.

Rs.

To Consignment

Working Note* Invoice price (1/8 of goods) = 79,200/8 = Rs. 9,900 Loading = 9,900 ¥ 20/100 = Rs. 1,650

Memorandum Column Method Illustration 12 Mr. Prabu of Thanjore consigned 500 toys to Robin of Chennai. A Proforma invoice was prepared at Rs. 40 per toy, the cost of which was Rs. 35 per toy. Prabu spent Rs. 750 by way of forwarding charges including insurance premium of Rs. 150. In transit 50 toys were destroyed and Robin received 90% of the cost price in full satisfaction of the claim with insurance company. Robin sold 400 toys at invoice price and spent Rs. 300 for selling expenses. He deducted a commission at 20% on sales and paid the balance to Prabu. Prepare Consignment Account, Consignment Stock Account, and Accidental Loss Account in the books of Prabu under memorandum column method. Solution Books of Mr. Prabu (Consignor) Consignment Account Particulars

Invoice Price

750 300

Cost Price

Invoice Price

Cost Price

Rs.

Rs.

Rs.

Rs.

750 300

Consignment Stock Account Rs.

Rs.

Accidental Loss Account Rs.

Rs. ¥

500

250

742

Financial Accounting

Working Note Number of units unsold Total (500) – Lost in transit (50) – Sold (400) = Unsold units = 50 Number of Abnormal loss = 50 toys Number of unsold stock = 50 toys Valuation Invoice price (Rs.)

Cost price (Rs.)

750

750

Valuation of abnormal loss and unsold stock Value of abnormal loss = 50 toys = Rs. 2,075 Value of unsold stock = 50 toys = Rs. 1,825

Abnormal Loss Calculation, Unsold Goods, Different Units, Ledger Accounts in Consignor Books Illustration 13 Vasan Sea Food Co. Ltd., of Chennai sent to KS Stores, Vellore, 5,000 kg of packed food in 2,000 tins of net weight 1 kg and 6,000 packets of net weight ½ kg, for sale on The cost price and selling price of the product were as under:

10

6

15

7

The consignment was booked on freight “To Pay” basis and freight charges came to 2% of selling value. One case containing 50 one kg tins was lost in transit and the transport carrier admitted to claim of Rs. 450. “Account Sales” sent by the KS Stores— (i) Sale proceeds: 1,500 – 1 kg tins; 4,000 – ½ kg packets (ii) Store rent and insurance charges Rs. 600 Find out the value of closing stock on consignment. Show the Consignment A/c and the KS Stores A/c in the books of Vasan Sea Food Co. Ltd., assuming that the KS Stores has paid the amount due from them.

Consignment Account

743

Solution Books of Vasan Sea Food Co. Ltd., Chennai (Consignor) Consignment Account L.F.

Rs.

signment

L.F.

Rs.

1500 ¥ 15 4000 ¥ 7

2000 ¥ 6000 ¥

450 65 600

¥

KS Stores Account

600 Commission

Working Note (a) Vale of Abnormal Loss (+) 2% on selling price (50 ´ Total value of goods lost in transit (–) Insurance claim Net abnormal loss (b) Unit of unsold stock

(c) Value of unsold stock 450 tins ¥ Rs. 10 2000 packets ¥ Rs. 6

Rs. 15 = 515 = (450) = 65

= =

2000

6000

450

2000

Rs. 4,500 Rs. 12,000 Rs. 16,500

744

Financial Accounting

(+) 2% on selling price 14,000 Rs. 20,750 Total sales value of unsold units 2% freight thereon = 20,750 ¥ 2% Value of unsold units

= Rs. 20,750 = 415 = Rs. 16,915

Invoice Price, Extra Commission, Unsold Goods Taken over by Consignor, Ledger Account Illustration 14 A consignor sent certain components to a consignee, each component costing Rs. 300; the invoice price being Rs. 400. The consignee is entitled to a commission of 15% of the invoice price plus 40% of the excess realised over Rs. 400. He is also responsible for all expenses incurred, but not for freight. The consignor dispatched 200 Motors in January, 2008, drawing on the consignee a draft for Rs. 40,000 for 3 months. Expenses paid by the consignee were: freight Rs. 4,000, customs duty Rs. 2,000, storage Rs. 1,000 and insurance Rs. 800. At the end of March, 2008, the consignee sold 150 components at an average price of Rs. 440. It was agreed then that the consignor would take over the remaining motors on his own account at landed cost plus 20%. Prepare (a) Consignment Account, (b) Consignee Account. Solution Books of Consignor Consignment Account L.F.

Rs.

L.F.

Rs.

L.F.

Rs.

Consignment ¥

To Consignee Consignment 200 ¥

Consignee Account L.F. To Consignment to To Consignment

Rs.

Consignment Account

745

Working Note (a) Commission due ¥ 15% Excess price = Rs. 440 – Rs. 400 = Rs. 400 ¥ 4% Total commission due (b) Component taken over Total units consigned (–) units sold Units taken over

=

Rs. 9,000

= =

Rs. 2,400 Rs. 11,400

= 200 = (150) = 50

(c) Value of components taken over (+) Proportionate Freight and Duty Rs. 6,000 ¥ 50/200 Total cost of components (+) 20% to be added 16,500 ¥ 20% Value of components taken over

= Rs. 1,500 = Rs. 16,500 = Rs. 3,300 = Rs. 19,800

Invoice Price, Damaged Item Taken Back by Consignor (Abnormal Loss), Unsold Item, Ledger Accounts Illustration 15 On 1st April, 2008, Sharan Tea of Darjeeling consigned 2,000 kg of tea costing Rs. 60 per kg to Jamal of Nagpur, Sharan Tea incurred the following expenses – freight Rs. 2,000; insurance Rs. 400 and sundry expenses Rs. 600. During the year ended 31st March, 2009, Jamal incurred the following expenses – freight Rs. 600; godown rent Rs. 500 and carriage to godown Rs. 1,000. sales. On 15th December, Jamal returned 150 kg of tea which were poor quality to Sharan Tea and paid return freight and carriage of Rs. 250. Out of the remaining tea 200 kg being partially damaged were valued at 30% less than cost. Jamal charged his its books every year on 31st March. You are required to prepare the (i) Consignment Account, (ii) Goods sent on Consignment Account and (iii) Jamal of Nagpur Account.

746

Financial Accounting

Solution Books of Sharan Tea (Consignor) Consignment Account 2008

Rs.

2008

Rs.

Consignment 15 250 2009 2009 ¥

Jamal of Nagpur Account 2008

Rs.

2008

Rs. 250

2009

Goods sent on Consignment 2008

Rs.

2008

Rs.

2009

Working Note (a) Sales made by the consignee

Therefore, selling price = Rs. 60 ¥ 100/75 = Rs. 80 Total sales price = 1,200 units ¥ Rs. 80 = Rs. 96,000 (b) Value of Abnormal Loss Cost of damaged Tea = 200 kg ¥ Rs. 60 = Rs. 12,000 (+) Expenses (non-recurring) incurred by consignor = Rs. 3,000 (+) Expense (non-recurring) by consignee = Rs. 1,000 Total non-recurring expenses for 200 kg = Rs. 4,000 Proportionate expenses for 200 damaged units 4,000 ¥ 200/2000 = Rs. 400 Total cost of damaged units = Rs. 12,400

Consignment Account

747

(Damaged goods taken back by the consignee at 30% less than CP) Cost of damaged tea = 200 kg ¥ Rs. 60 = 12,000 (–) 30% less than cost price = (3,600) 8,400 (–) 5% commission on Rs. 8,400 = (420) Rs. 7,980 Value of abnormal loss = 12400 – 7980 = Rs. 4,420 (c) Unsold goods in kg Total units consigned = Rs. 2,000 (–) sold units = Rs. 1,200 Rs. 800 (–) Returned to consignor = Rs. 150 = Rs. 650 (–) partially damaged = Rs. 200 Unsold units = Rs. 450 (d) Value of unsold units Rs. Value of Unsold Stock (+) Non-recurring Expenses of Consignor Consignee For 2000 kg Proportionate expense for 450 kg (4,000 ¥ 450/2000)

Rs. 27,000

3,000 1,000 4,000

(+) Unsold value of damaged goods Total value of unsold stock

900 27,900 7,980 35,880

Invoice Price, Abnormal Loss, Delcredere Commission, Unsold Stock, Ledger Accounts in Consignor Book Illustration 16 Manoj of Delhi sends a consignment of sewing machines to Rajesh of Saharanpur

him. Stock of goods with the agent at the beginning of the year-40 sewing machines are proforma invoice price Rs. 10,000. During the year ended 31st December, 2004, Manoj had the following transactions with Rajesh: (a) Proforma invoice price of 200 sewing machines consigned to Rajesh Rs. 50,000. (b) Freight and insurance on the consignment aid by Manoj Rs. 1,400. (c) Advance received from Rajesh Rs. 15,000.

748

Financial Accounting

(d) Sales made by Rajesh: (i) 80 sewing machines for cash Rs. 21,500. (ii) 100 sewing machines on credit Rs. 28,000. (e) Selling expenses made by the agent Rs. 2,500 and discount allowed by him Rs. 1,000. (f) 30 sewing machines were damaged by the railway for which Rajesh recovered Rs. 2,700. The damaged sewing machines were sold on cash by Rajesh at Rs. 2,300. (g) Out of machines sold on credit, Rs. 2,000 was irrecoverable and considered bad by the agent. (h) The agent remitted the balance due by him by a bank draft. Show ledger accounts to record the above transactions in the books of Manoj. (B.Com., Kerala) Solution Books of Manoj of Delhi (Consignor) (i) Consignment Account 2004

Rs.

2004

Rs.

To Bank

¥ ¥ ¥

840

(ii) Rajesh Account 2004

Rs.

2004

Rs.

¥

115

Consignment Account

749

(iii) Consignment Stock Account 2004

Rs.

2004

Rs.

(iv) Accidental Loss Account 2004

Rs.

2004

Rs.

115

¥

(v) Consignment Stock Reserve Account 2004

Rs.

2004

Rs.

¥

(vi) Goods Sent to Consignment Account 2004

Rs.

Working Note (a) Number of unsold stock Opening stock (+) consigned

2004

= =

(–) sold (80 + 100)

=

(–) damaged stock Unsold stock in units

= =

Rs.

40 200 240 (180) 60 (30) 30

(b) Total invoice price for 40 units given = Rs. 10,000 Invoice per unit = 10,000/40 = Rs. 250 250 – (250 ¥ 25/125) 250 – 50 = Rs. 200

750

Financial Accounting

(c) Value of unsold stock (cost price) (+) Non recurring expense of consignor = 1,400 (+) Non recurring expense of consignee = Nil Expense for 200 units = 1,400 Proportionate expense for 30 units = 1,400 ¥ 30/200 = Rs. 210 Value of unsold stock (Cost price) = Rs. 6,210 (d) Value of unsold stock (invoice price) (+) Proportionate expense for 30 units = 1,400 ¥ 30/200 = Rs. 210 Value of unsold stock (invoice price) = Rs. 7,710

Points to Remember the purpose of storage and for sale but the legal ownership remains with the consignor

guarantee that, if any debts become bad, consignee will hold himself liable for the same less commission due to due to him and expenses incurred by him in respect of consignment amount of sales to the total sales made

Examination Questions I. Objective Questions 1. Fill in the blanks (i) Consignment is ________________ account in nature. (ii) Abnormal loss is ____________ to the Consignment Account. (iii) Abnormal loss is _____________________loss. (iv) Normal loss is also known as__________ . (v) Del credere commission is ___________ commission. 2. Choose the correct answer (i) Del Credere commission is paid to undertake (a) Normal loss (b) Abnormal loss (c) Loss due to bad debts (d) None of these (ii) Over-riding commission is calculated on (a) Cash sales (b) Credit sales

Consignment Account

751

(c) Total sales (d) Amount due from debtors (iii) The unsold stock is valued at (a) Cost price (b) Invoice price (c) Cost price plus direct expenses (d) Cost price plus indirect expenses (iv) Loss of stock is said to be normal only when (a) It is because of leakage (c) It is lost by theft (d) It is unavoidable (v) In consignment, repudiation of contract is (a) Possible completely (b) Impossible (c) Possible to same extent (d) All the above 3. Match the following (i)

Proforma invoice

a

(ii)

Consignee

b

Extra commission

Total sales Agent

(iii)

Accounts sales

c

(iv)

Del credere commission

d

Prepared by consignee

(v)

Overriding commission

e

prepared by consignor

4. State whether the following statements are True or False: (i) There is no difference between overriding commission and del credere commission. (ii) The despatch of goods on consignment is a sale by the consignor (iii) In the consignor’s ledger, the unsold stock with the consignee is credited to consignment account. (iv) For unsold stock, no journal entry is required in the books of consignee. (v) Loss of stock is said to be normal loss when such loss unavoidable. Answers 1. (i) (iii) (v) 2. (i) 3. (i) 4. (i) (v)

Nominal A/c, avoidable, extra. c; (ii) c; e; (ii) c; False; (ii) False; True.

II. Descriptive Questions A. Very Short Answer Questions 1. What is consignment?

(ii) debited, (iv) unavoidable, (iii) c; (iii) d; (iii) True;

(iv) d; (v) a. (iv) b; (v) a. (iv) True.

752

Financial Accounting

2. What is an Account Sales? 3. What is proforma invoice? B. Short Answer Questions 1. What is del credere commission? 2. What are direct expenses? 3. Give examples for normal loss? C. Detail Answer Questions 1. How valuation of stock is done in consignment? 2. Explain commission, del credere commission and overriding commission? 3. Differentiate between sale and consignment? 4. Give journal entries required in the books of consignor and consignee. III. Exercise Problems Calculation

Problem 1 X consigned 100 packets of cosmetics each costing Rs. 300 to his agent at Mumbai. He paid Rs. 500 towards freight and insurance. 15 packets were destroyed on the way. Consignee took delivery of the remaining packets and spent Rs. 700 as godown rent, Rs. 1,000 as clearing charges and Rs. 300 as carriage outward. You are required to calculate the cost of damage and cost of stock at the end if the agent sells away 70 packets. [Ans. Cost of damage Rs. 4,751]

Journals in both Books Problem 2 Mr. Krishna of Mumbai consigned goods of the value of Rs. 15,000 to their agent, Mr. Gopal at Madras. Mr. Krishna paid freight, insurance and other charges Rs. 550 and drew a bill of exchange on Mr. Gopal for Rs. 13,000 at three months. The bill was discounted with the bankers at Rs. 12,850. Mr. Krishna received accounts sales of the consignment for Rs. 17,290 less agents commission Rs. 710 and a bank draft for the balance. Pass journal entries in the books of Mr. Krishna and Gopal. (B.Com., Andhra) Problem 3 Williams of Chennai consigned 300 chests of tea at Rs. 2,000 per chest to Johnson of New Delhi paying freight Rs. 4,000 and other expenses Rs. 2,000. Johnson sold 250 chests at Rs. 2,500 per chest and 25 chest at Rs. 2,200 per chest for cash. Johnson spent for freight and octroi Rs. 3,000 and other expenses Rs. 1,000. He remitted the amount due to Williams after deducting his commission at 5% (normal), 2½% (overriding) and ½% (del credere commission to be given on total sales). Johnson found that one customer to whom credit was allowed paid only Rs. 4,800 against Rs. 5,000 in full settlement. Other customers paid the amount due.

Consignment Account

753

Pass journal entries in the books of both parties and prepare ledger accounts. (B.Com., Delhi) [Ans.

Journal and Ledger in Consignor Book Problem 4 Rama Rao & Co. of Hyderabad consigned to Krishna & Sons of Bangalore 50 pieces ance thereon Rs. 2,000. The consignor received an advance of Rs. 10,000 from the consignee. Rama Rao & Co. received an Account Sales from Krishna & Sons giving particulars as under: Rs.

Commission

The consignor also received a bank demand draft of the balance due from the consignee. From the above particulars, pass journal entries and prepare Consignment Account and Krishna & Sons Account in the books of Rama Rao & Co. [Ans.

Ledger in both Books Problem 5 The Cochin Consignment Account in the books of Ranaji of Mumbai showed a debit balance of Rs. 1,500 representing the cost of 10 bicycles on 1st January, 2004. On March 1, Ranaji sent a further consignment to Cochin of 40 bicycles costing Rs. 160 each. The freight and other charges amounted to Rs. 210. On 1st June, the Cochin Agent sent an Account Sales showing that 8 bicycles from the old stock realized Rs. 140 each and 25 bicycles from the second consignment realized Rs. 200 each and 15 bicycles remained in stock unsold. Two bicycles from the old stock being unsaleable at Cochin were returned to Bombay, for which the Cochin Agent sent a separate debit note for Rs. 30 being expenses incurred by him. The Cochin agent is entitled is entitled to a selling commission of 5 per cent which covers all out-of-pocket expenses in respect of the consignment. Show the necessary account in the books of the consignor, supposing that he closes his accounts on 30th June. (B.Com., Punjab) [Ans. Problem 6 Nanak of Calcutta consigned 100 Prestige Toys to Rajat of Jalpaiguri, costing Nanak spent Rs. 800 as freight and insurance. Rajat was entitled to a commission of 10% on gross sales.

754

Financial Accounting

miscellaneous expenses. Show Consignment A/c and Consignee’s A/c in the books of Consignor. (B.Com., Bombay) [Ans.

Ledger in Consignor Books Problem 7 The Swastic Chemicals, Mumbai, consigned 10,000 kg. of chemicals to Das of Kolkata on 1st April 2004. The cost of the chemicals was Rs. 2 per kg. The Swastic Chemicals paid Rs. 5,000 as freight and insurance. During transit, 250 kg. were accidentally destroyed for which the insurer paid directly to the consignors of Rs. 450 in full settlement of the claim. Das took delivery of the consignment on the 10th April and immediately accepted a Bill drawn on him by the Swastic Chemicals for Rs. 10,000 for 3 months. On 30th rent Rs. 200, on advertisement Rs. 1,000 and on salesmen’s salaries Rs. 2,000. Das it entitled to a commission of 3% plus 1 ½% Del crederes. Das reported a loss of 100 kg. due to leakage. Assuming that Das paid the amount due by bank draft, show the accounts in the books of Swastic Chemicals which close the books on 30th June. (B.Com., Bharthiar) [Ans. Loss on consignment Rs. 656; amount settled Rs. 8,288] Problem 8 A consignment of 10,000 kg of tea, costing Rs. 50 per kg sent on consignment on 1st February, 2004 to an agent on commission of 5% on gross sales. The following expenses are incurred: Rs.

800 800

Some packages containing 2,000 kg of tea were damaged in transit and the contents had to be destroyed on landing as having become unit for sale. 7,000 kg of tea were sold at Rs. 60 per kg and on 28th February, 2004 the date of closing of accounts, the balance of the consignment remained unsold in stock. Draw up the Consignment Outward Account and Consignee’s Account in the books of the consignor, showing the amount due from the consignee on 28th February, 2004. (B.Com., Calcutta) [Ans.

Consignment Account

755

Abnormal Loss Problem 9 Rahim of Kolkata consigned 100 cases of medicine costing Rs. 1,000 per case to Karim of Kanpur on 1st January, 2004. The goods were sold at 25% above the cost.

further entitled to an ordinary commission of 5% and del credere commission of 2.5% on all sales. Rahim incurred the following expenses: Rs.

The cases were received by Karim on 15th January, 2004. The Account sales received from Karim on 30th June revealed the following:

Five cases of medicine were stolen by a dishonest worker. A compensation of Rs. 2,000 was realised from him. Karim incurred unloading charges of Rs. 2,000 and warehouse rent Rs. 3,000. Karim enclosed a bank draft for the balance due. Write up the necessary accounts in the books of Rahim. [(B.Com. (Hons.), Calcutta)] [Ans. Loss on consignment Rs. 16,900; Balance to settle Rs. 96,700] Problem 10 Mohan consigned 400 packets of lip-sticks, each packet containing 100 lip-sticks. Cost price of each packet was Rs. 300. Mohan spent Rs. 50 per packet as cartage, freight, insurance and forwarding commission. One packet was lost on the way and Mohan lodged claim with the insurance company and could get only Rs. 270 as claim on average basis. Consignee took delivery of the rest of the packets and spent Rs. 19,950 as other non-recurring expenses and Rs. 11,250 as recurring expenses. He sold 370 packets at the rate of Rs. 6.50 per lip-stick. He was entitled to 2% commission on sales plus 1% del credere commission. You are required to calculate the cost of stock at the end, cost of abnormal loss and [Ans.

20

Joint Venture Account

Learning Objectives After studying this chapter, you should be able to

JOINT VENTURE Joint Venture is a particular partnership between two or more persons to undertake and complete a single or particular venture without the use of firm’s name. It is assumed that this venture will not operate indefinitely because on completion of the single venture, this partnership is completed. Joint venture is also known as ‘Joint Trade’. Examples are joint consignment of goods, joint construction of a building, joint underwriting of a particular issue of shares or debentures, etc.

Reasons of Joint Ventures (1) An individual may be in a suitable positional relationship to purchase the goods, but lacks capital. The capital may be provided by another person for a share in profits. (2) One party might be in advantageous position regarding purchase of goods, another party is in a position for sale of goods and the third party possesses adequate capital. Thus, in joint venture, individuals may come together for a single venture because they have different skills or talents which will be required for success in business. The individuals who have agreed to undertake a joint venture are called CoVentures.

Salient Features (i) It is a particular partnership without firm’s name;

Joint Venture Account

757

(ii) It is an agreement entered into between two or more persons who have agreed to undertake one particular venture; (iii) It is limited to a single venture; (iv) After completion of the venture, this partnership is concluded; (v) Persons involved in this venture are called co-venturers.

Joint Venture vs Partnership 1. Joint venture is a particular partnership without firm’s name. Partnership has a firm’s name. 2. Individuals involved in joint venture business are called co-venturers; whereas in partnership they are called partners. 3. Joint venture is essentially of a limited nature (to a single venture); whereas partnership is of unlimited nature. 4. Joint venture agreement normally not registered; whereas partnership agreement must be registered, so that it can sue or be sued by others. 5. In joint venture business, profit is ascertained for each independent venture, whereas in partnership, profit is ascertained annually. 6. There is no separate Act for joint venture business, whereas there is Indian Partnership Act, 1932 exclusively for partnership business.

Joint Venture vs Consignment (i) Parties involved in joint venture business are called co-ventures, whereas in consignment, they are called consignor and consignee. (ii) The realationship between co-ventures is like that of partners, whereas the relationship between consignor and consignee is that of principal and agent. (iii) In joint venture, profits are shared equally or as per agreement by co-ventures, whereas no such arrangement is possible in consignment. The consignee is entitled for commission on sales made. (iv) Joint venture is temporary in nature, whereas consignment is not temporary in nature it may continue for a larger period as per agreement. (v) Joint venture is governed by agreement and also by Partnership Act, whereas consignment is governed by Law of Agency.

Different Methods of Recording Joint Venture Transactions There are three methods of recording Joint Ventures transactions, they are as follows:

(i) Maintenance of Separate Set of Books Under this method, all transactions which are related to joint venture are recorded in a separate set of books only at one place of business. For this purpose, it is necessary to maintain (a) Joint Venture Account (b) Joint Bank Account and (c) Co-ventures’ Accounts. The Joint Venture Account is in the nature of nominal accounts and other two accounts are in the nature of personal accounts. Joint Venture Account is prepared to ascertain profit or loss of the joint venture.

758

Financial Accounting

The following are the journal entries where separate set of books are maintained: Where separate set of books is maintained L.F.

Debit (Rs.)

Credit (Rs.)

(i) For cash contributed by co-venturer

(ii) For goods purchased

(iii) For goods supplied by other co-venturer

(iv) For expenses paid

(v) For goods sold

(ii) Maintenance of No Separate Set of Books (a) Maintenance of record by one co-venturer only in his books of account Under this method (a) Joint Venture A/c is prepared to ascertain profit or loss of a venture (b) personal accounts of other co-venturers are prepared; (b) Preparation of memorandam joint venture A/c (Maintenance of record by coventurer in his books of account) Under this method Memorandum Joint Venture account is prepared to ascertain profit or loss of venture. Memorandum Joint Venture account is personal account in nature. This method is a combination of first and second method.

Joint Venture Account

759

The following are the journal entries where separate set of books are not maintained: Where separate set of books are not maintained L.F.

Debit (Rs.)

Credit (Rs.)

(i) For goods purchased by P

(ii) For expenses paid by P

(iii) For goods sold by P

(iv) For Commission received by P

(vi) If there is Loss

The same entries are required if accounts are maintained by Q (Co-venturer)

Index for Illustrations Type

Ill. No.

I

1–7

II

8–13

II – WHERE SEPARATE SET OF BOOKS ARE MAINTAINED Journal Entries and Ledger Accounts Illustration 1 Rajeev and Ashok enter into a joint venture as dealers in land and opened a joint bank account with Rs. 60,000 towards which Rajeev contributed Rs. 40,000. They agreed

760

Financial Accounting

to share profits and losses in proportion to their cash contribution. They purchased a plot of land measuring 5,000 square yards for Rs. 50,000. It was decided to sell the land in smaller plots and a plan was got prepared at a cost of Rs. 1,200. In the said plan, 1/5th of the total area of the land was left over for public roads and the remaining land was divided into 8 plots of equal sizes. Out of 8 plots, 3 plots were sold @ Rs. 15 per square yard and the remaining 5 plots were sold @ Rs. 14 per square yard. Expenses incurred in connection with the plots were : Registration expenses Rs. 4,000, stamp duty Rs. 400 and other expenses Rs. 1,000. Allow 2% on the sale proceeds as a commission to Rajiv. Journalise the above transactions and prepare the necessary ledger accounts. (B.Com., Madurai) Solution Journal Entries Particulars

LF

(Rs.)

(Rs.)

60,000 40,000 20,000

50,000 50,000

1,200 1,200

57,500 57,500

5,400 5,400

1,150 1,150

167 83 250

40,983 19,917 60,900

Joint Venture Account

761

Ledger Accounts Joint Venture Account Rs.

Rs.

50,000 1,200 5,400 1,150

57,500 167 83 250

57,750

57,750

Joint Bank Account Rs.

Rs.

40,000 20,000 57,500

50,000 1,200 5,400 40,983 19,917

1,17,500

1,17,500

Co-Venturers Account Ashok

Ashok

Rs.

Rs.

Rs.

Rs.

167 40,983

83 19,917

40,000 1,150

20,000

41,150

20,000

41,150

20,000

Ledger Accounts (Two co-venturers) Illustration 2 A and B enter into a joint venture to purchase and develop certain lands as industrial estate. For that purpose, a joint bank account was opened wherein A deposited Rs. 60,000 and B deposited Rs. 40,000. A piece of land measuring 18,000 square yards was purchased at Rs. 3 per square yard. The following expenses were paid from the joint bank account: Rs. 14,000 5,000 2,000 3,000 1,000 6,000 2,000 2,000

It was decided to sell land in smaller plots of 500 square yards each. One-sixth of the area was left over for public roads. 10 plots were sold at Rs. 12 per square yard

762

Financial Accounting

through the brokers, who were paid 2% brokerage on the sale price of land. A retained one plot of land for his personal use at an agreed price of Rs. 5,000. The remaining plots were sold at a consolidated price of Rs. 76,200 directly. A and B shared profits and/or losses of the joint venture in the proportion of the amounts invested by them. All transactions have been effected through the bank. Prepare Joint Venture Account, Joint Bank Account and Accounts of A and B assuming that all accounts are settled. (B.Com., Madras) Solution Joint Venture Account Rs.

Rs. 60,000 (10 ¥

54,000 14,000 5,000 2,000 3,000 1,000 6,000 2,000

58,800 5,000 76,200 2,000 87,000

33,000 22,000 55,000 1,42,000

1,42,000

Joint Bank Account Rs.

Rs.

60,000 40,000

87,000 88,000 62,000

58,800 76,200 2,000 2,37,000

2,37,000

Co-Venturers’ Account A

B

A

B

Rs.

Rs.

Rs.

Rs.

60,000 33,000

40,000 22,000

93,000

62,000

5,000 88,000

62,000

93,000

62,000

Joint Venture Account

763

Ledger Accounts (Three co-venturers) Illustration 3 Maran, Saran and Maravan entered into a joint venture agreeing to share profits 6:3:1. They paid into a Joint Bank Account their contribution amount as follows: Maran Rs. 60,000, Saran Rs. 40,000 and Maravan Rs. 20,000. Purchases paid from Joint Bank Account Rs. 1,00,000. Most of the goods were sold for Rs. 2,50,000. Maravan took over damaged goods for Rs. 1,500. Other expenses were as follows: carriage paid by Maran Rs. 5,200; rent paid by Saran Rs. 2,500 and Maravan paid for advertising Rs. 2,000. Prepare the necessary ledger accounts. (B.Com., Madurai) Solution Joint Venture Account 2,50,000

1,00,000 5,200 2,500 2,000

1,500

85,080 42,540 14,180 1,41,800 2,51,500

2,51,500

Joint Bank Account Rs.

Rs.

60,000 40,000 20,000 2,50,000

1,00,000 1,50,280 85,040 34,680

3,70,000

3,70,000

Co-venturers’ Account Maran

Saran

Maravan

Maran

Saran

Rs.

Rs.

Rs.

Rs.

Rs.

Maravan Rs.

60,000

40,000

20,000

5,200 1,50,280

85,040

1,500 34,680

2,500 2,000

1,50,280

85,040

36,180

85,080

42,540

14,180

1,50,280

85,040

36,180

764

Financial Accounting

Illustration 4 A, B and C enter into a joint venture for the construction of a multi-storied building for a joint stock company for a contract price of Rs. 1,00,000. Incidental expenses might have to be paid by the ventures but as per agreement they are entitled to be reimbursed to the extent of actual such expenditure or Rs. 5,000, whichever is less. In this way A spends Rs. 4,000; B–Rs. 5,000 and C–Rs. 6,000. The venturers are to share profits and losses equally but C, being a technical person, is entitled to a special commission of 10% of the profit of the venture after charging commission. They open a Joint Bank Account to which A contributes Rs. 20,000, B–Rs. 15,000 and C–Rs. 15,000. B also gives his own plant to the venture for which he charges Rs. 8,000. Materials are purchased for Rs. 20,000 and wages amount to Rs. 30,000. At the end of the venture, the company paid the agreed contract price (keeping Rs. 10,000 as retention money) to the extent of Rs. 30,000 in cash and the balance in equity shares of the company of Rs. 10 at an agreed value of Rs. 12 per share. The shares are subsequently sold in the market @ Rs. 13 per share. Unused materials costing Rs. 2,000 are taken over by A at Rs. 1,000. The plant is taken back by B at an agreed value of Rs. 2,000. C takes up the retention money at Rs. 7,000. Show necessary ledger accounts in the books of the venture. (B.Com., Bombay) Solution In the books of A, B and C Joint Venture Account Rs. 4,000 5,000 5,000

Rs. 30,000 65,000

8,000 1,000 20,000 30,000

2,000 50,000 7,000 3,000

10,000 10,000 10,000 30,000 1,05,000

1,05,000

Joint Venture Account

765

Joint Bank Account Rs.

Rs. 20,000 30,000

20,000 15,000

50,000

15,000

33,000 36,000

30,000 65,000 95,000

26,000

1,45,000

1,45,000

Co-venturers Account

20,000

15,000

15,000

4,000

5,000

5,000

1,000

2,000 8,000 7000 3,000 33,000

36,000

26,000

34,000

38,000

33,000

10,000

10,000

10,000

34,000

38,000

33,000

Illustration 5 Anand, Bhagavan and Gupta jointly undertake to construct a theatre building for Kala Bharathi Ltd. at a price of Rs. 10,00,000 to be paid as follows: Rs. 8,00,000 in cash by instalments and Rs. 2,00,000 in debentures of the company. They have agreed to share the profits and losses equally and contributed Rs. 1,20,000, Rs. 1,50,000 and Rs. 80,000 respectively. These amounts are deposited in a Joint Bank Account. Anand has got the plans prepared by an architect and paid his fee of Rs. 14,000. Bhagavan has brought into venture a concrete mixer of the value of Rs. 50,000 while Gupta has bought for the venture a truck of the value of Rs. 40,000 and paid the amount from his own funds. They have purchased a plant for Rs. 48,000 and materials worth Rs. 4,80,000 and paid Rs. 3,90,000 for wages. On completion of the venture, Anand has taken over unused materials of the value of Rs. 28,000. The concrete mixer is taken back by Bhagavan at a valuation of Rs. 24,000 while Gupta has taken back the truck at Rs. 16,000. The plant is sold as scrap for Rs. 12,000. On the contract price being fully received, Anand has taken over Debentures at an agreed value of Rs. 1,40,000.

766

Financial Accounting

Show the Joint Venture Account, Joint Bank Account and the Co-venture’s Account. (B.Com., Madurai, Chennai) Solution Joint Venture Account

14,000

28,000

50,000

24,000

40,000

16,000

48,000

12,000 10,00,000

4,80,000 3,90,000

667 667 666

60,000 10,82,000

2,000 10,82,000

Joint Bank Account Rs.

Rs.

1,20,000 1,50,000

48,000

80,000 12,000

4,80,000

8,00,000 34,667

3,90,000 1,75,333 1,03,334

11,96,667

11,96,667

Co-venturers Account Anand Rs. 28,000

Bhagavan Rs. 24,000

Gupta Rs.

1,68,667

Bhagavan

Gupta

Rs.

Rs.

Rs.

1,20,000

1,50,000

80,000

14,000 34,667

50,000

40,000

1,68,667

2,00,000

1,20,000

16,000

1,40,000 667

Anand

667

666

1,75,333

1,03,334

2,00,000

1,20,000

Joint Venture Account

767

Debenture Account Rs.

Rs.

2,00,000

1,40,000 60,000

2,00,000

2,00,000

Joint Venture Investment Account Illustration 6 Chander and Sunder entered into a joint venture for one year agreeing to share profits and losses equally after allowing interest on capital at 5% per annum. Chander contributed Rs. 30,000 and Sunder Rs. 20,000 for which they opened a Joint Bank Account. In addition, Chander invested Rs. 8,000 on goods. They purchased from Inter Goods for Rs. 71,500 and spent Rs. 3,800 by way of freight and insurance. At the end of the year, the bulk of the goods sold were for Rs. 98,740. The remaining goods were taken by Chander for Rs. 9,000. Selling expenses were Rs. 6,940. Prepare Joint Venture Account, Joint Bank Account and also Joint Venture (Investment) Account in the books of Chander and Sunder. (B.Com., Madurai) Solution Joint Venture Account Rs.

Rs. 98,740

8,000 71,500 3,800

9,000 75,300 6,940

1,900

1,000

7,300 7,300

14,600

1,07,740

1,07,740

768

Financial Accounting

Joint Venture Investment Account Rs.

Rs.

9,000

30,000

38,200

20,000

28,300

8,000 1,900 1,000 14,600

75,500

75,500

Joint Bank Account Rs.

Rs.

30,000

3,800 6,940

20,000 98,740

71,500

38,200 28,300 1,48,740

1,48,740

(*) Working Note to find amount due to co-venturers:

30,000 8,000

20,000

38,000

20,000

1,900 7,300

1,000 7,300

47,200 9,000

28,300

38,200

28,300

Without Joint Bank Account Illustration 7 Ramlal and Shyamlal entered into a joint venture for purchase and sale of cotton. They agree to share the profits in the proportion of 2:1 and also to be entitled to an interest of 6% per annum (on monthly basis) on capital invested by each of them. The following transactions took place in between themselves.

Joint Venture Account

769

1. On 1st November, Ramlal purchased 700 bales of cotton @ Rs. 110 per bale, the brokerage being Rs. 4 per bale. 2. On 1st December, Shyamlal purchased 600 bales of cotton @ Rs. 124 per bale, the brokerage being Rs. 4 per bale. 3. On 1st January, Shyamlal sold 350 bales of cotton @ Rs. 138 per bale, the brokerage being Rs. 2 per bale and took the sale proceeds to himself. 4. On 15th January, Ramlal sold 800 bales of cotton @ Rs. 132 per bale, the brokerage being Rs. 2 per bale and took the sale proceeds to himself. It was also agreed that each of the partners at first sell from their own purchase and then if required, from the stock purchased by the other one. The balance of the stock was to be divided between the partners in proportion of their profits sharing ratio, goods being valued at cost to the partners concerned. On 31st January, the partners settled their accounts. Show the accounts of Ramlal, Shyamlal and Joint Venture as would appear when maintained in a separate set of books. (B.Com., Delhi) Solution Joint Venture Account Rs.

77,000 2,800

Rs.

48,300 79,800 47,600

74,400 2,400

1,05,600 76,800

1,04,000

1,197

12,800

768

6,400 260

8,489 4,244 12,733

238

1,71,298

1,71,298

770

Financial Accounting

Ramlal Account Rs.

Rs.

1,05,600 77,000 2,800

79,800

1,04,000 1,197

8,489

12,800

260

27,574

1,17,060

1,17,060

Shyamlal Account

74,400 48,300 2,400 76,800 47,600 768 6,400

4,244

238 27,574 81,812

Working Note: Calculation of Interest Ramlal (a) 79,800 ¥ 6% ¥ 3/12 (Nov. 1 to Jan. 31) = Rs. 1,197 (b) 1,04,000 ¥ 6% ¥ 0.5/12 (Jan. 15 to Jan. 31) = Rs. 260 Shyamlal (a) 76,800 ¥ 6% ¥ 2/12 (Dec. 1 to Jan. 31) = Rs. 768 (b) 47,600 ¥ 6% ¥ 0.5/12 (Jan. 15 to Jan. 31) = Rs. 238

81,812

Joint Venture Account

771

II – WHERE SEPARATE SET OF BOOKS ARE NOT MAINTAINED Journal Entries and Ledger in the Books of One Co-venturer Illustration 8 Arun and Balan entered into a Joint Venture for the purchase and sale of an old house. They purchased one old house for an amount of Rs. 30,000, each contributing Rs. 15,000. Arun had to manage the disposal of the property. Since he was unable to sell the property as a whole, he decided to demolish the house and sell the property piece by piece. He sold the doors, windows and other wooden fittings to the extent of Rs. 12,000. The iron materials were sold at Rs. 4,000. He could secure an amount of Rs. 2,300 through the sale of other miscellaneous items in the building. He spent an amount of Rs. 1,400 for demolishing the house. He also paid certain sundry expenses Rs. 350 in this connection. The site of building was sold at Rs. 25,000. Both the parties shared the profits to the extent of Arun 2/3 and Balan 1/3. Arun paid his share by cheque. Journalise the above mentioned transactions and prepare a Joint Venture Account and Balan’s Account in Arun’s ledger. Solution In the books of Arun (a) Journal Entries L.F.

Dr.

Cr.

30,000 15,000 15,000

18,300 18,300

1,400 1,400 350 350 25,000 25,000

11,550 3,850 7,700

772

Financial Accounting

18,850 18,850

(b) Ledgers (i) Joint Venture Account Rs.

Rs.

15,000 15,000 1,400 350 3,850 7,700

18,300 25,000

43,300

43,300

(ii) Balan Account Rs.

Rs.

18,850 15,000 3,850

Journal Entries and Ledger Accounts in Both Co-venturers Illustration 9 Param and Baskar were partners in a joint venture sharing profits and losses in the proportion of 60% and 40%, respectively. Param supplies goods to the value of Rs. 10,000 and incurs on freight Rs. 500. Baskar also supplied goods to the value of Rs. 8,000 and incurs Rs. 400 towards freight and other incidental charges. Baskar sells the entire stock of goods on behalf of the joint venture for Rs. 25,000. Baskar is also entitled to a commission of 5% on sales. Baskar settles his account by remitting a bank draft. Pass journal entries and ledger accounts in the books of Param and Baskar. Solution Books of Param Journal Entries L.F.

Dr. (Rs.)

Cr. (Rs.)

10,500 10,000 500

8,400 8,400

25,000 25,000

Joint Venture Account

773

1,250 1,250

4,850 1,940 2,910

13,410 13,410

Ledger Account Joint Venture Account Rs.

Rs.

10,000 500 8,400 1,250

25,000

1,940 2,910 4,850 25,000

25,000

Baskar Account Rs.

Rs.

25,000

8,400 1,250 1,940 13,410

25,000

25,000

Books of Baskar Journal Entries L.F.

Dr.

Cr.

10,500 10,500 8,400 8,000 400 25,000 25,000 1,250 1,250

774

Financial Accounting

4,850 2,910 1,940 13,410 13,410

Ledger Account Joint Venture Account Rs.

Rs.

10,500 8,000 400 1,250

25,000

2,910 1,940 4,850 25,000

25,000

Param Account Rs.

Rs.

13,410

10,500 2,910

13,410

13,410

Journal Entries and Ledger in the Books of One Co-venturer (Three Parties) Illustration 10 A, B and C entered into an agreement for a joint venture. Anup bought goods for Rs. 14,400 and took goods valued at Rs. 4,800 from his stock. He received from B and C their shares of investment in the adventure, Rs. 6,400 each. A paid charges and expenses of Rs. 1,460. The goods were sold for Rs. 24,400. A charged 5% commission on sales and rendered statements to B and C. Journalise the above transactions in the books of A. Solution Books of Anup – Journal Entries L.F.

Dr. Rs.

Cr. Rs.

12,800 6,400 6,400 14,400 14,400

Joint Venture Account

775

4,800 4,800 1,460 1,460 24,400 24,400 1,220 1,220 2,520 840 840 840 7,240 7,240 14,480

Ledger Accounts Joint Venture Account Rs.

Rs.

14,400 4,800 1,460 1,220

24,400

840 840 840 2,520 24,400

24,400

B’s Account Rs.

Rs.

7,240

6,400

7,240

7,240

840

C’s Account 7,240

6,400

7,240

7,240

840

Financial Accounting

776

Memorandum Joint Venture Account Illustration 11 Mohan and Nathan enter into a joint venture for the purchase and sale of second hand scooters, and to share profits and losses in the ratio of 3:2. On 15th January, Mohan bought five scooters for Rs. 43,000 and on 20th January, he paid taxes and insurance Rs. 1,600. On 31st January, he sold these scooters for Rs. 58,000 out of which he remitted Rs. 11,000 to Nathan, paying the balance into his own bank account. On 20th January, Nathan bought these scooters for Rs. 36,000 and on 25th January, he paid taxes and insurance Rs. 1,400 and repairing charges amounting to Rs. 2,000. He sold one scooter on 2nd February, for Rs. 14,000 which he paid into his own bank account. Mohan then took over the other scooters at a valuation of Rs. 26,000, and the venture was closed on 10th February. Prepare the Memorandum Joint Venture and the Account of the Joint Venture with Nathan in the books of Mohan. (B.Com., Calcutta) Solution Memorandum Joint Venture Account Rs.

Rs. 58,000

43,000 20

10 1,600

25

14,000 26,000

36,000

1,400 2,000

3,400

8,400 5,600 14,000 98,000

98,000

In the books of Mohan Joint Venture with Nathan Account Rs.

Rs. 58,000

43,000 26,000

20 31

1,600 11,000 8,400 20,000 84,000

84,000

Joint Venture Account

777

Memorandum Joint Venture Account, Account with Seller in the Books of Buyer and viz Illustration 12 A and B enter into a Joint Venture as dealers in land with effect from 1st July. On the same day A advanced Rs. 90,000 and a plot of land, measuring 9,000 square yards, was purchased with this money. It was decided to sell the land in smaller plots and a plan was got prepared at the cost of Rs. 1,000 paid by B. In the said plan 1/3rd of the total area of the land was left over for public roads and the remaining land was divided into 6 plots of equal size. On 1st October, two of the plots were sold at Rs. 30 per square yard, the buyer deducting Rs. 1,000 per plot for stamp duty and the registration expenses to be borne by the buyer. The remaining plots were sold at net price of Rs. 25 per square yard, on 1st December. The sale proceeds of all the plots were received by A. After charging interest at 6% per annum on the investments of A (allowing for money received by him) and allowing 1% on the net sale proceeds of plots as commission to B, the net profits of the joint venture is shared in the proportion of 3/4th to A and 1/4th to B. Draw up the Memorandum Joint Venture Account and the Personal Accounts in the books of A and B showing the balance by one to the other. Assume that the joint venture was completed on 1st December. (B.Com., Delhi) Solution Memorandum Joint Venture Account Rs.

Rs.

90,000 2,250 1,000 1,580

58,000 1,00,000 580

47,813 15,937 63,750 1,58,580

1,58,580

In the book of A Joint Venture with B Account Rs. 90,000 2,250

Rs. 60,000 58,000

47,813 18,517

1,00,000 580

1,58,580

1,58,580

778

Financial Accounting

In the book of B Joint Venture with A Account Rs. 1,000

Rs. 18,517

1,580 15,937 18,517

18,517

Working Note: Interest calculation (a) Rs. 90,000 ¥ 6% ¥ 5/12 (July 1 – Dec 1) = Rs. 2,250 (b) Rs. 58,000 ¥ 6% ¥ 2/12 (Oct 1 – Dec 1) = Rs. 580

Memorandum Joint Venture Account, Calculations Illustration 13 A and B enter into joint venture for guaranteeing the subscription at par of 1,00,000 shares of Rs. 10 each of a joint Stock Company. They agree to share profits and losses in the ratio of 2:3. The terms with the company are 4.5% of commission in cash and 6,000 shares of the company as fully paid up. The public took up 88,000 of the shares and the balance share of the guaranteed issue are taken up by A and B who provide cash equally. The commission in cash is taken by partners in the ratio of 4:5. The entire shareholding of the joint venture is then sold through brokers: 25% at a price of Rs. 9 per share; 50% at a price of Rs. 8.75 per share; 15% at a price of Rs. 8.50 per share, and the remaining 10% are taken over by A and B equally at Rs. 8 per share. The sale proceeds of the shares are taken by the partners equally. Prepare Joint Venture Memorandum Account and the separate accounts of A and B in the books of B and A, respectively showing the adjustment of the final balance between A and B. Ignore interest. (B.Com., Calcutta) Solution Memorandum Joint Venture Account 60,000 60,000

20,000

81,600

25,000 71,100 71,100 7,200 7,200

2,01,600

2,01,600

32,640 48,960

Joint Venture Account

779

In the Books of A Joint Venture with B Account Rs.

Rs.

60,000

20,000

32,640 5,660

71,100 7,200

98,300

98,300

In the Books of B Joint Venture with A Account Rs.

Rs.

60,000

25,000

48,960

71,100 7,200 5,660

1,08,960

1,08,960

Working Notes (a) Purchase of shares

(b) No. of shares with co-venturerers

Shares sold

(c) Commission in terms of cash

¥ ¥ (d) Shares not sold taken over by co-venturers Shares taken over by Co-venturers

Points to Remember Joint venture is a particular partnership to undertake and complete a single venture without the use of firm’s name. In joint venture individuals may come together for a single venture because they have different skills or talents which will be required for success in business.

780

Financial Accounting

Parties involved in this venture are called co-venturers. There are three methods of recording transactions of joint ventures they are: (i) Maintenance of separate set of books (ii) Maintenance of no separate set of books (iii) Preparation of Memorandum Joint Venture account

Examination Questions I. Objective Questions 1. Fill in the blanks (a) Joint venture is a _____________partnership. (b) Parties involved in joint venture are called___________. (c) Joint venture business is limited to a ________venture. (d) Memorandum Joint Venture Account is prepared to ascertain profit or loss, that is of the nature of _________. (e) When purchases are made for the joint venture out of Joint Bank Account, the _____________ account is debited. 2. Choose the correct answers (i) Joint venture Account is of the nature of (a) Personal account (b) Nominal account (c) Real account (d) None of these (ii) Capital accounts of the co-venturers are of the nature of (a) Personal account (b) Real account (c) Nominal account (d) None of these (iii) When goods are purchased for joint venture, the account to be debited is (a) Purchases account (b) Joint Venture account (c) Joint Bank account (d) Co-venturer’s account (iv) The profit at joint venture is transferred to (a) Profit and Loss Account (b) Co-venturer’s Account (c) Joint Bank Account (d) Memorandum Joint Venture Account (v) Under Memorandum Joint Venture Account, transfer of goods from coventurer to another will (a) Affect Joint Venture Account (b) Affect Co-venturers Account (c) Not affect book-keeping parties (d) Affect profit of co-venturer

Joint Venture Account

781

3. Match the following

4. State whether the following statements are True or False: (i) Parties involved in joint venture business are called parties. (ii) Joint Bank Account is opened where separate set of books maintained. (iii) Memorandum Joint Venture Account is nominal account in nature. (iv) Joint Venture business has a definite life. (v) Joint venture business is governed by Indian Partnership Act. Answers 1. (i) (iii) (v) 2. (i) 3. (i) (v) 4. (i)

particular, single, Joint Venture. b; (ii) a; c; (ii) e; b. False; (ii) True;

(ii) co-venturers, (iv) personal, (iii) a; (iii) d;

(iv) a. (iv) a;

(v) c

(iii) False;

(iv) True. (v) False

II. Descriptive Questions A. Very short answer questions 1. What is joint venture? 2. What is Memorandum Joint Venture Account? 3. What is Joint Bank Account? B. Short Answer Questions 4. What are the differences between joint venture and partnership? 5. What are the differences between joint venture and consignment? C. Detail Answer Questions 6. What are the different methods of recording joint venture transactions? Explain in detail? 7. What are the journal entries required when separate set of books is maintained? 8. Give journal entries when separate set of books is not maintained in joint venture business? 9. Explain the significance of Memorandum Joint Venture Account? Under what circumstances such account is prepared?

782

Financial Accounting

III. Exercise Problems A. WHERE SEPARATE SET OF BOOKS ARE MAINTAINED

Journal Entries and Ledger Problem 1 Deshpande and Sons bought goods of the value of Rs. 7,500 and consigned them to Kapoor & Co. to be sold by them in joint venture, profits being divided in two-third and one-third. They also paid Rs. 550 for freight and cartage and drew on Kapoor and Co. for Rs. 3,000 on account. The bill was discounted by Deshpande and Sons for Rs. 2,900. Kapoor and Co. paid Rs. 300 for dock dues, storage rent etc. The sales realized Rs. 12,500 and the sales expenses Rs. 250 were defrayed by Kapoor and Co. The latter forwarded a sight draft for the balance due to Deshpande and Sons after charging their sales commission on 5 per cent on the gross proceeds. Write up the accounts in the Books of Kapoor and Co. No interest need be brought into account. [Ans. Joint Venture Account Profit – Rs. 3,175] Problem 2 A and B, both contractors, undertook a joint venture involving the construction of a building. A Joint Bank Account was opened in which A contributed Rs. 75,000 and B contributed Rs. 37,500. The contract price was Rs. 3,75,000. The result of joint venture was shared to A 2/3 and B 1/3. The details of the transactions were as follows: Rs. 89,000 13,500 12,000 1,65,000 12,000 18,500 10,000 38,500

The stock of materials on the completion of the contract, valued at Rs. 16,500, was taken over by A. Concrete mixer plant was taken over by B for Rs. 30,000. A was to be paid Rs. 18,000 per annum against establishment expenses to be charged to the Joint Venture Account. The contract lasted for 8 months. Prepare Joint Venture Account, Joint Bank Account and Accounts of A and B. (B.Com., Delhi) [Ans. Joint Venture Account profit Rs. 51,000] B. WHERE SEPARATE SET OF BOOKS ARE NOT MAINTAINED

Memorandum Joint Venture Account Problem 3 A and B enter into a joint venture to sell a consignment of timber sharing profits and losses equally. A provides timber from stock at mutually agreed value of Rs. 5,000. He pays expenses amounting to Rs. 250. B incurs further expenses on cartage, stor-

Joint Venture Account

783

age, and coolie charges of Rs. 650 and receives cash for sales Rs. 3,000. He also takes over goods to the value of Rs. 1,000 for his use in his own business. At the close, A over the balance stock in hand which is valued at Rs. 1,100. Prepare Joint Venture Account and Co-sharer’s Account in the books of A. (B.Com., Delhi) [Ans. Memorandum Joint Venture Account – Loss Rs. 400] Problem 4 A and B entered into a joint venture to buy and sell second-hand machinery. Profit and losses were to be shared: A–2/3 and B–1/3. On 18th March, A purchased two machines for Rs. 7,200 and Rs. 8,400. He incurred expenditure of Rs. 1,600 on repairs and on 17th April sold one of the machines for Rs. 12,000 and on 24th April the other machine for Rs. 11,600. He paid Rs. 15,000 of the proceeds into his own bank account and paid the balance to B. On 7th May, A purchased further machine for Rs. 14,400 which was sold on 24th May for Rs. 16,000 less 5% cash discount, the proceed being handed over to B. On 25th March, B purchased a machine for Rs. 8,000 on which he incurred expenditure of Rs. 1,000 and which he sold on 12th April for Rs. 10,400 which he paid into his bank account. This machine was returned by the purchaser on 20th April and B paid him Rs. 10,000 for it. As it was still unsold on 31st May, it was agreed that it should be taken over by A at a valuation of Rs. 9,200. On 31st May, the sum as required in full settlement between A and B was paid by the party accountable. You are required to prepare (a) Memorandum Account for the joint venture showing the net profit. (b) Joint Venture Account as it will appear in the books of A (B.Com., Madurai) [Ans. Memorandum Joint Venture Account Profit Rs. 10,000] Problem 5 In March, A and B enter into a joint venture to buy and sell second-hand scooters. They are to share profits and losses in the ratio of 2:1. On 16th March A buys two scooters for Rs. 4,800 and Rs. 7,200, respectively and incurs an expenditure of Rs. 1,800 for repairs. On 1st April, he sells one of the scooters for Rs. 6,000 and on 10th April, the other scooter, for Rs. 9,300. On 12th April, he buys another scooter for Rs. 9,000 and sells it on 20th April for Rs. 12,000. This amount was paid to B who sent it to his own bank account. On 12th March, B buys a scooter for Rs. 6,000 and incurs an expenditure of Rs. 600 on it. He sells this scooter for Rs. 7,500 on 15th March, but it is returned by the customer on 20th March who is allowed Rs. 7,200 for it. This scooter was still unsold on 30th April and A agreed to take it over at a valuation of Rs. 6,750. On 30th April, the amount required to settle accounts between A and B is paid by the appropriate party.

784

Financial Accounting

Prepare the Joint Venture Account, as it would appear in the books of A and also a Memorandum Joint Venture Account showing the net profit or loss resulting from the transactions. (B.Com., Calcutta) [Ans. Memorandum Joint Venture Account Profit Rs. 4,950] Problem 6 A and B enter into a joint venture as dealers in land with effect from 1st July, 2005. On the same day A advanced Rs. 90,000 and a plot of land, measuring 9,000 square yards, was purchased with this money. It was decided to sell the land in smaller plots and a plan was got prepared a cost of Rs. 1,000 paid by B. In the said plan 1/3rd of the total area of the land was left over for public roads and the remaining land was divided into 6 plots of equal size. On 1st October, 2005, two of the plots were sold at Rs. 30 per square yard. The buyer deduced Rs. 1,000 per plot for stamp duty and registration expenses to be borne by the seller. The remaining plots were sold at net price of Rs. 25 per square yard on 1st December, 2005. The sale proceeds of all the plots were received by A. After charging interest at 6% per annum on the investments of A (allowing for money received by him) and allowing 1% on the net sale proceeds of plots as commission to B, the net profit of the joint venture is to be shared in the proportion of 3/4th to A and 1/4th to B. Draw up the Memorandum Joint Venture Account and personal accounts in the books of A and B showing the balance payable by one to the other. Assume joint venture was completed on December 1st. (B.Com., Delhi) [Ans. Memorandum Joint Venture Account Profit Rs. 63,750]

21

Accounting for Bills of Exchange

Learning Objectives After studying this chapter, you should be able to Learn about Promissory Note and its characteristics. Understand the meaning of the term Bill of Exchange and its characteristics. Explain important aspects of Bill transaction. Work out problem on Bills of Exchange.

PROMISSORY NOTE According to section 4 of the Indian Negotiable Instruments Act 1881, “A Promissory Note is an instrument in writing (not being a bank note or a currency note) containing an unconditional undertaking, signed by the maker to pay a certain sum of money only to, or to the order of a person or to the bearer of the instrument”.

Characteristics of Promissory Note 1. It is an instrument in writing; 2. It is an unconditional undertaking; 3. It must contain a promise to pay; 4. It must be signed by the maker; 5. The sum of money payable to be specified; 6. It must be properly stamped. A promissory note is treated as a Bill Receivable by one who is entitled to receive the amount specified. According to section 31(2) of the Reserve Bank of India Act, it is an order to a pay a certain sum of money to a certain person and not to the bearer of the instrument.

BILL OF EXCHANGE According to section 5 of Indian Negotiable Instruments Act, 1881, “A Bill of Exchange is an instrument in writing containing an unconditional order signed by the maker directing a person to pay a certain sum of money only to, or to the order of a certain person or to the bearer of the instrument”.

786

Financial Accounting

A Bill of Exchange is an instrument widely used by businessmen in the settlement of debts. It is a negotiable instrument.

Characteristics of Bill of Exchange (a) (b) (c) (d) (e) (f) (g)

It is an instrument in writing; It is an unconditional order; It must be signed by the maker (one who draws the bills); It is an order to the drawee; It must be payable to a specified person or to the bearer of the instrument; It must be paid within the specified time; It must be duly stamped.

Format of Bill of Exchange There are three parties involved in a bill transaction, they are (i) Drawer—one who draws or prepares the bill. (ii) Drawee—is a person on whom the bill is drawn (iii) Payee—is a person one who receives the benefit. Format of a Bill of Exchange Stamp CHENNAI 1st April 2010 Rs. 5,000 Two months after date pay to me or my order the sum of Rupees Five Thousand only, for value received To RAMESH SURESH BANGALORE

Cheque It is a Bill of Exchange drawn on a specified banker and not expressed to be payable otherwise than on demand. Cheque is an order to the banker to make payment of certain sum of money only to, or to the order of a person or to the bearer of the instrument.

Options Available in Bills of Exchange In Bills of Exchange, there are three options available to a person of an accepted bill. (1) Retain the Bill to the date of maturity and present it to the acceptor for payment, (2) Gets the Bill discounted before its maturity with the banker (or) (3) Endorse it to the creditor.

Important Aspects of Bills of Exchange The following are the important aspects of Bills of Exchange: (a) Date of Bill Bill must be dated. Normally date is specified on the top of right hand corner. This date is very important for calculating due date of the Bill including three days of grace.

Accounting for Bills of Exchange

787

(b) Validity Period The period (or term) validity is usually does not exceed 90 days from the date of the Bill. For cheque, the date of cheque is important to calculate validity period i.e., six month from the date of the cheque. (c) Endorsement Endorsement is nothing but transfer of Bill to another person. Bills can be transferred to a creditor by the owner of the Bill in writing at the back of the document. Journal Entries to Record the Transaction In the Books of Drawer Bills Receivable A/c

In the Books of Acceptor Dr. Drawer A/c

To Acceptor A/c (Being bill is received)

Cash A/c

Dr.

Bills Payable A/c (Being Bill is accepted)

Dr. Bills Payable A/c

To Bills Receivable A/c

Dr.

To Cash A/c

(Being bill is honoured and the amount is received)

Cash A/c

Dr.

Discount A/c

Dr.

(Being bill is honoured and amount is paid)

No Entry

To Bills Receivable A/c (Being bills receivable is discounted with a bank)

Receiver (to whom it is endorsed) A/c

Dr.

No Entry

To Bills Receivable A/c (Being the Bill is endorsed in favour of another person)

Cash A/c

Dr.

Rebate A/c (Loss)

Dr.

No Entry

To Bills Receivable A/c (Being the bill is retired)

Acceptor A/c

Dr. Bills Payable A/c

To Bills Receivable A/c (Being the bill is dishonoured)

Bank (for collection) A/c

Dr.

To Drawer A/c (Being the bill is dishonoured)

Dr.

No Entry

To Bills Receivable A/c (Being bill sent for collection)

Acceptor A/c To Interest A/c To Bills Receivable A/c (Being the old bill is renewed with new Bill)

Dr. Bills Payable A/c

Dr.

Interest A/c

Dr.

To Drawer A/c (Being the old bill is renewed with new bill)

Contd.

788

Financial Accounting

Contd. Acceptor A/c (Bills Receivable + Noting charge) To Cash A/c (Noting charge)

Dr. Bills Payable A/c Noting Charge A/c

Dr. Dr.

To Drawer A/c

To Bills Receivable A/c (to cancel) (Being the bill is noted)

(Being the bill is noted)

Renewal of Bill When a drawee unable to make payment towards a bill on due date, drawee may make request to the drawer for extension of time. If this request of the drawee is accepted by drawer, the original bill is cancelled and a new bill for another period is drawn for the amount due plus interest for the extended period. This arrangement is known as renewal of a bill.

Accommodation Bill This bill is drawn or accepted without any consideration. This bill is used as an instrument by businessman for raising money in times of need on the basis of their credit worthiness. In other words, this bill is drawn for taking help from others or giving help to others to meet emergency. This bill is, used for financial accommodation of either or both the parties.

Insolvency of the Acceptor When a bill is dishonoured due to insolvency of the acceptor (or drawee), whatever amount received (i.e., partial payment for full settlement of accounts) from the official receiver of an insolvent is to be debited to Drawer’s Account, treating the balance as bad debts.

Discounting of a Bill A bill sold to a banker or some other person to receive payment before the date of maturity of the bill is known as discounting of the bill. The buyer of such bill charges interest for the unexpired period of the bill. Such discount is an expense to the seller and income to the buyer of the bill.

Bill Sent for Collection Here the bill is deposited into bank with instruction that the bill should be retained by the bank till the date of maturity and should be realised on the due date.

Types of Bills There are two types of bills namely (i) Inland Bill—This bill is drawn and accepted for payment with in the same country. (ii) Foreign Bill—This bill is drawn in one country and accepted for payment in another country.

Accounting for Bills of Exchange

789

Illustrations Index for Illustrations Type

Ill. No.

I

Journal Entries

1–8

II

Journal Entries and Ledger

9 – 14

I – JOURNAL ENTRIES Bills Drawn, Accepted, Endorsed and Discounted Illustration 1 Rajan sold goods to Mani on 1st March, 2007 for Rs. 10,000. Rajan drew a bill on Mani for three months. Mani accepted the bill and returned it to Rao who endorsed the bill to Kannan in the full satisfaction of claim for Rs. 10,050. Kannan discounted the bill at 12%. The bill was met on due date. Pass journal entries in the books of Rajan, Mani and Kannan. Solution Journal Entries in the Books of Rajan 2007 March 1

Particulars Mani A/c

L.F.

Dr. (Rs.)

Cr. (Rs.)

10,000

Dr.

10,000

To Sales A/c (Being goods sold on credit)

Bills Receivable A/c

10,000

Dr.

10,000

To Mani A/c (Being bill drawn for three months)

Kannan A/c

10,050

Dr.

10,000

To Bills Receivable A/c

50

To Discount A/c (Being the bill endorsed and received discount)

Journal Entries in the Books of Kannan 2007

Particulars

March 1 Bills Receivable A/c Discount A/c

L.F.

Dr. (Rs.)

Dr.

10,000

Dr.

50

Cr. (Rs.)

10,050

To Rajan A/c (Being bill received and discount allowed) Bank A/c

Dr.

9,700

Discount A/c

Dr.

300

To Bills Receivable A/c (Being the bill discounted at 12%, 10,000 ¥ 12% ¥ 3/12)

10,000

790

Financial Accounting

Journal Entries in the Books of Mani 2007

Particulars

March 1 Purchase A/c

L.F.

Dr. (Rs.)

Cr. (Rs.)

10,000

Dr.

10,000

To Rajan A/c (Being goods purchased)

Rajan A/c

10,000

Dr.

10,000

To Bills Payable A/c (Being bill accepted for three months)

May 4

Bills Payable A/c

10,000

Dr.

10,000

To Cash A/c (Being the bill met on due date)

Endorsed, Discounted, Dishnonoured Illustration 2 On January 1, 2008, Palani sells goods to Ravi for Rs. 5,000. Palani draws a bill on Ravi for Rs. 5,000 for the months which is accepted by the Ravi and returned to the Palani. The bill was endorsed in favour of Varadan in full settlement of Rs. 5,050. The bill was discounted with bank for Rs. 4,800. The bill could not be met on due date. Noting charges incurred is Rs. 30. Pass journal entries in the books of all parties. Solution Journal Entries in the Books of Palani 2008 Jan. 1

Particulars Ravi A/c

L.F. Dr.

Dr. (Rs.)

Cr. (Rs.)

5,000 5,000

To Sales A/c (Being goods sold to Ravi on credit)

Bills Receivable A/c

Dr.

5,000 5,000

To Ravi A/c (Being bill drawn on Ravi)

Varadan A/c

Dr.

5,050 5,000

To Bills Receivable A/c

50

To Discount A/c (The bill is endorsed in favour of Varadan)

Bank A/c

Dr.

4,800

Discount A/c

Dr.

200

To Bills Receivable A/c

5,000

(The bill is discounted with bank)

Contd.

Accounting for Bills of Exchange

791

Contd. April 4

Ravi A/c

5,030

Dr.

5,000

To Bills Receivable A/c

30

To Cash A/c (Being the bill dishonoured and noting charges paid)

Ravi A/c

Dr.

5,030

Discount A/c

Dr.

50 5,080

To Varadan A/c (Endorsed bill in favour of Varadan became dishonoured)

Ravi A/c

5,030

Dr.

5,030

To Bank A/c (Being the bill dishonoured)

Journal Entries in the Books of Ravi 2008 Jan. 1

Particulars Purchase A/c

L.F.

Dr. (Rs.)

Cr. (Rs.)

5,000

Dr.

5,000

To Palani A/c (Being goods purchased on credit)

Palani A/c

5,000

Dr.

5,000

To Bills Payable A/c (Being the bill accepted)

April 4

Bills Payable A/c

Dr.

5,000

Noting Charge A/c

Dr.

30 5,030

To Palani A/c (Being the bill not met on maturity)

Journal Entries in the Books of Varadan 2008 Jan. 1

Particulars

L.F.

Dr. (Rs.)

Bills Receivable A/c

Dr.

5,000

Discount A/c

Dr.

50

Cr. (Rs.)

5,050

To Palani A/c (Being Bills received and discount allowed)

April 4

Palani A/c

Dr.

To Bills Receivable A/c

5,080 5,000

To Discount A/c

50

To Cash A/c (Noting charge)

30

(Being the bill dishonoured on due date and noting charge paid)

792

Financial Accounting

Journal Entries in the Books of Bank 2008 Jan. 1

Particulars Bills Receivable A/c

L.F.

Dr. (Rs.)

Cr. (Rs.)

5,000

Dr.

4,800

To Palani A/c

200

To Discount A/c (Being the bill discounted)

April 4

Palani A/c

5,030

Dr.

5,000

To Bill Receivable A/c

30

To Cash A/c (Noting charge) (Being the bill dishonoured)

Accepted, Endorsed, Renewal Illustration 3 On 1st April, Veeru drew a bill for Rs. 6,000 on Dharam for four months. The bill was duly accepted by Dharam. On 5th April Veeru endorsed the bill in favour of Chanukya. However, on 25th July, Dharam approached Veeru and requested that the bill be renewed for a further period of four months at18% interest per annum. Veeru agreed and paid the necessary money to Chanukya on 4th August. The bill was duly accepted and paid the necessary amount to Chanukya on 4th August. The bill was duly accepted and paid by Dharam. Pass the necessary journal entries with full narration to record the above in the books of Veeru. Solution Journal Entries in the Books of Veeru Date April 1

Particulars Bills Receivable A/c

L.F. Dr.

Dr. (Rs.)

Cr. (Rs.)

6,000 6,000

To Dharam A/c (Being a bill drawn on Dharam)

April 5

Chanukya A/c

Dr.

6,000 6,000

To Bills Receivable A/c (Being the bill endorsed to Chanukya) July 25

Dharam A/c

Dr.

6,000 6,000

To Chanukya A/c (Being the bill cancelled and Chanukya A/c credited)

Dharam A/c To Interest A/c

Dr.

360 360

(Being interest is charged = 6,000 ¥ 4/12 ¥ 18%)

Contd.

Accounting for Bills of Exchange

793

Contd. Aug. 4

Bills Receivable A/c

6,360

Dr.

6,360

To Dharam A/c (Being new bill drawn (renewal) including the interest)

Chanukya A/c

6,000

Dr.

6,000

To Bank A/c (Being amount paid to C against cancellation of the endorsed bill)

Dec. 7

Cash A/c

6,360

Dr.

6,360

To Bills Receivable A/c (Being the amount of bills received on due date)

Renewal of Bill Illustration 4 On 1st May, Merchant & Co. sold goods to AB & Co. for Rs. 500 and drew upon him a bill at three months for the amount. AB & Co. accepted the draft and returned to Merchant & Co. On the due date AB & Co. expressed their inability to meet the bill and offered Rs. 300 in cash and to accept a new bill for the balance plus interest at 12% per annum for three months. Merchant & Co. agreed to the proposal. On maturity, the bill was duly met by AB & Co. Pass entries in the books of the parties to record the above transactions. (B.Com., Karnataka, Madurai) Solution Journal Entries in the Books of Merchant & Co. Date May 1

Aug. 4

Particulars

L.F.

AB & Co. A/c To Sales A/c (Being goods sold on credit)

Dr.

Bills Receivable A/c To AB & Co. A/c (Being bill drawn)

Dr.

AB & Co. A/c To Bills Receivable A/c (Being cancellation of old bill)

Dr.

Cash A/c To AB & Co. A/c (Being the receipt of part payment)

Dr.

AB & Co. A/c To Interest A/c (Being interest = 2,000 ¥ 3/12 ¥ 12%)

Dr. (Rs.)

Cr. (Rs.)

500 500

500 500

500 500

300 300

6 6 Contd.

794

Financial Accounting

Contd.

Nov. 7

Bills Receivable A/c To AB & Co. A/c (Being new acceptance received)

Dr.

Cash A/c To Bills Receivable A/c (Being amount received on bill)

Dr.

206 206

206 206

Journal Entries in the Books of AB & Co. Date

Particulars

May 1

Purchase A/c To Merchant & Co. A/c (Being purchase of goods on credit)

Dr.

Merchant & Co. A/c To Bills Payable A/c (Being acceptance given)

Dr.

Bills Payable A/c To Merchant & Co. A/c (Being cancellation of acceptance)

Dr.

Merchant & Co. A/c To Cash A/c (Being payment of part payment)

Dr.

Interest A/c To Merchant & Co. A/c (Being interest = 200 ¥ 3/12 ¥ 12%)

Dr.

AB & Co. A/c To Bills Payable A/c (Being new acceptance given)

Dr.

Aug. 4

Nov. 7

Bills Payable A/c To Cash A/c (Being acceptance honoured)

L.F.

Dr. (Rs.)

Cr. (Rs.)

500 500

500 500

500 500

300 300

6 6

206 206

206 206

Renewal, Dishonoured, Bankrupt Illustration 5 Devan drew two bills of exchange on 1st January, 2008 for Rs. 6,000 and Rs. 10,000. The bill for Rs. 6,000 was for two months while the bill for Rs. 10,000 was for three months. These bills were accepted by Thangam. On 4th March, 2008 Thangam requested Devan to renew the first bill with interest at 18% per annum for a period at two months. Devan agreed to this proposal. On 20th March, 2008 Thangam received the acceptance for Rs. 10,000, the interest rebate (discount) being Rs. 100. Before the due date of the renewed bill, Thangam

Accounting for Bills of Exchange

795

became insolvent and only 50 paise in a rupee could be recovered from his estate. You are required to give journal entries in the books of Devan. Solution Journal Entries in the Books of Devan 2008 Jan. 1

Particulars

L.F.

Dr. (Rs.)

Bills Receivable I A/c

Dr.

6,000

Bills Receivable II A/c

Dr.

10,000

Cr. (Rs.)

16,000

To Thangam A/c (Being Bills Receivable I and II drawn for 2 months and 3 months, respectively)

March 4 Thangam A/c

Dr.

6,000 6,000

To Bills Receivable I A/c (Being the Bills Receivable I cancelled)

Thangam A/c

Dr.

180 180

To Interest A/c (Being interest charged = 6,000 ¥ 2/12 ¥ 18%) Bills Receivable (New) A/c

Dr.

6,180 6,180

To Thangam A/c (Being the Bills Receivable new (renewal) drawn along with interest) Mar. 20

Cash A/c

Dr.

9,900

Rebate A/c

Dr.

100 10,000

To Bills Receivable II A/c (Being the amount of second bill received and rebate allowed)

May 4

Thangam A/c

Dr.

6,180 6,180

To Bills Receivable (New) A/c (Being the new bill dishonoured)

Cash A/c Bad debts A/c

Dr. Dr.

3,090 3,090

To Thangam A/c (Being half the amount received as full settlement)

6,180

Four Bills for Collection Illustration 6 Rao owed Mohan Rs. 10,000 on 2.1.2004. Rao accepted four bills of exchange drawn by Mohan to discharge the whole debt. The first for Rs. 1,000 at one month, the second for Rs. 2,000 at two months, the third for Rs. 3,000 at three months and last one for Rs. 4,000 at four months. On 15th January, Mohan sent the first bill to

796

Financial Accounting

bank for collection. On 17th January, he endorsed the second bill in favour of X. On 1st February, he got the fourth bill discounted with the bank @ 8% per annum. The first three bills were duly honoured, but the fourth one, i.e., the discounted one, was dishonoured on the due date noting charges being Rs. 50. Show the entries in the books of Rao and Mohan. (CS. B.Com., Madurai, Kerala, Agra) Solution Journal Entries in the Books of Mohan 2004 Jan. 2

Particulars

L.F.

Dr. (Rs.)

Bills Receivable I A/c

Dr.

1,000

Bills Receivable II A/c

Dr.

2,000

Bills Receivable III A/c

Dr.

3,000

Bills Receivable IV A/c

Dr.

4,000

Cr. (Rs.)

10,000

To Rao A/c (Being the four bills accepted for one, two, three and four months, respectively) Jan. 15

Bank for Collection A/c

Dr.

1,000

To Bills Receivable I A/c

Jan. 17

X A/c

1,000

Dr.

2,000 2,000

To Bills Receivable II A/c (Being the second bill endorsed to X) Feb. 1

Bank A/c

Dr.

3,920

Discount A/c

Dr.

80 4,000

To Bills Receivable IV A/c (Being the fourth bill discounted at 8% per annum for 3 months)

Feb. 4

Bank A/c

Dr.

1,000 1,000

To Bank for collection A/c (Being the fourth bill honoured at maturity) April 4

Cash A/c

Dr.

3,000 3,000

To Bills Receivable III A/c (Being the third bill honoured at maturity) May 4

Rao A/c

Dr.

To Bank A/c (Being the fourth bill dishonoured at maturity and noting charges Rs. 50)

4,050 4,050

Accounting for Bills of Exchange

797

Journal Entries in the Books of Rao 2004 Jan. 2

Particulars Mohan A/c

L.F.

Dr. (Rs.)

Cr. (Rs.)

10,000

Dr.

To Bills Payable I A/c

1,000

To Bills Payable II A/c

2,000

To Bills Payable III A/c

3,000

To Bills Payable IV A/c

4,000

(Being the bill accepted for one month)

Feb. 4

Bills Payable I A/c

1,000

Dr.

1,000

To Cash A/c (Being the Bill I honoured at maturity)

March 4 Bills Payable A/c

2,000

Dr.

2,000

To Cash A/c (Being the Bill II honoured at maturity) April 4

Bills Payable A/c

3,000

Dr.

3,000

To Cash A/c (Being the Bill III honoured at maturity) May 4

Bills Payable A/c

Dr.

4,000

Noting Charges A/c

Dr.

50 4,050

To Mohan A/c (Being the Bill IV dishonoured at maturity, noting charges being Rs. 50)

Accommodation Bill Illustration 7 Lalith drew a bill for Rs. 6,000 on Baskar on 1st January, 2008 for 3 months. Lalith got it discounted with his bank for Rs. 5,700 and on 3rd January, 2008 remitted one-third of the amount to Baskar. On due date, Lalith failed to remit the amount due to Baskar, but accepted another bill for Rs. 8,300 for three months which was discounted for Rs. 8,000 and remitted Rs. 4,000 to Lalith. Before maturity of the new bill, Lalith became insolvent and only 50% was realised from his estate on 10th July, 2008. Pass journal entries in the books of Baskar. Solution Books of Baskar—Journal Entries 2008 Jan 1

Particulars Lalith A/c To Bills Payable A/c

L.F. Dr.

Dr. (Rs.)

Cr. (Rs.)

6,000 6,000

(Being bill accepted by Lalith)

Contd.

798

Financial Accounting

Contd. Jan. 3

Cash A/c

Dr.

1,900

Discount A/c

Dr.

100 2,000

To Lalith A/c (Being 1/3rd of the proceed received) April 4

Bills Receivable A/c

Dr.

8,300 8,300

To Lalith A/c (Being the second bill drawn on Lalith) Bank A/c

Dr.

8,000

Discount A/c

Dr.

300 8,300

To Bills Receivable A/c (Being the bill discounted) Bills Payable A/c

Dr.

To Bank A/c

Dr.

Lalith A/c

Dr.

6,000 6,000

4,300 4,000

To Cash A/c

300

To Discount A/c (Being half the proceed of the second bill given to him)

Lalith A/c

Dr.

8,300 8,300

To Bank A/c (Being the second bill dishonoured) Cash A/c

Dr.

4,150

Bad debts A/c

Dr.

4,150

To Lalith A/c

8,300

(Being half the amount of bill received from Lalith)

Accommodation Bill – Both the Parties Illustration 8 X draw a bill for Rs. 1,500 and Y accepts the same for the mutual accommodation of both of them to the extent of X 2/3 and Y 1/3. X discounts the same for Rs. 1,410 and remits 1/3rd of the proceeds to Y. Before the due date, Y draws another bill for Rs. 2,100 on X, in order to provide funds to meet the first bill. The second bill is discounted for Rs. 2,040 with the help of which the first bill is met and Rs. 360 is remitted to X. Before the due date of the second bill X becomes insolvent and Y receives a dividend of 50 paise in the rupees in full satisfaction. Pass necessary entries in the books of X and Y. (B.Com., Madurai, Delhi)

Accounting for Bills of Exchange

799

Solution Journal Entries in the Books of X Date

Particulars Bills receivable A/c

L.F.

Dr. (Rs.)

Cr. (Rs.)

1,500

Dr.

1,500

To Y A/c (Being acceptance received from Y) Bank A/c

Dr.

1,410

Discount A/c

Dr.

90 1,500

To Bills Receivable A/c (Being Y’s acceptance discounted)

Y A/c

500

Dr.

470

To Bank A/c

30

To Discount A/c (Being 1/3rd of the proceeds remitted to Y)

Y A/c

2,100

Dr.

2,100

To Bills Payable A/c (Being acceptance given) Bank A/c

Dr.

360

Discount A/c

Dr.

40* 400

To Y A/c (Being amount received plus 2/3rd of discount) [90-30 = 60 ¥ 2/3 = 40*] Bills Payable A/c

2,100

Dr.

2,100

To Y A/c (Being entry for dishonour of own acceptance)

Y A/c

Dr.

1,400

To Bank A/c

700 700

(Being 50 paise in the rupee paid)

Journal Entries in the Books of Y Date

Particulars X A/c

L.F. Dr.

Dr. (Rs.)

Cr. (Rs.)

1,500 1,500

To Bills Payable A/c (Being acceptance given to X) Bank A/c

Dr.

470

Discount on Bills A/c

Dr.

30

To X Account

500

(Being 1/3rd of the proceeds received from X) Contd.

800

Financial Accounting

Contd.

Bills Receivable A/c

Dr.

2,100 2,100

To X A/c (Being acceptance received from X) Bank A/c

Dr.

2,040

Discount A/c

Dr.

60 2,100

To Bills Receivable A/c (Being acceptance discounted)

Bills Payable A/c

Dr.

1,500 1,500

To Bank A/c (Being own acceptance honoured) X A/c

Dr.

400 40

To Discount A/c

360

To Bank A/c (Being amount remitted plus 2/3rd of discount) X A/c

Dr.

2,100 2,100

To Bank A/c (Being dishonour of X’s acceptance) Bank A/c

Dr

700

Bad Debts A/c

Dr.

700 1,400

To X A/c (Being 50 paise in the rupee received)

II – JOURNAL ENTRIES AND LEDGER Bills Receivable Book and Bills Payable Book Illustration 9 Enter the following transactions in bills receivable book and bills payable book. Particulars of the customers and suppliers of Mahesh as on 1st January, 2008 is under: Debtors

Creditors

P

Rs. 10,000

X

Rs. 10,000

Q

Rs. 10,000

Y

Rs. 5,000

R

Rs. 19,000

Z

Rs. 6,000

He received bills from his Debtors as under: Jan. 10 Jan. 15 Jan. 18 Jan. 19 Jan. 20 Jan. 21 Jan. 21

Mr. P’s acceptance for Rs. 10,000 at 3 months payable at Punjab Bank Acceptance of Mr. X for Rs. 11,000 dated 20th December, 2007 for 2 months sent by Q, payable at Indian Bank Mr. R’s acceptance for Rs. 19,000 at 2 months, payable at Canara Bank Mr. P’s acceptance sent to Mr. X Bill of Indian Bank and Canara Bank discounted with bankers Mahesh’s acceptance for two months for Rs. 500 sent to Y Mohan’s acceptance for three months for Rs. 600 sent to Z

Accounting for Bills of Exchange

801

Solution Bills Receivable Book Bank 2008 Recd from

Accepted by

Bill date

Bill Tenure

10th Jan 15th Jan 18th Jan

P

X

3 months

Q

Y

R

Z

10th Jan 08 20th Dec 07 18th Jan 08

PB IB CB

Matured on

Payable

13th Apr Punjab Bank 2 months 23rd Feb Indian Bank 2 months 21st Mar Canara Bank

Rs.

L.F.

Disposed

1,000

Endorsed (X)

1,100

Discounted

1,900

Discounted

Bills Payable Book Bill Date

drawn

Payee Bill Tenure

Matured on

Rs.

21st Jan.

Y

Y

2 months

24th Mar.

500

21st Jan.

Z

Z

3 months

24th Mar.

600

L.F.

Payable at

Disposed

Three Cases-Journal and Ledger Illustration 10 Ajay sells goods worth Rs. 15,000 to Anup on 15th April, 2007. On the same date Anup accepts a bill for two months drawn on him by Ajay for the amount. Based on the following, given journal entries in the books of Ajay and show the Bills Receivable Account. (a) The bill is retained till maturity. (b) The bills endorsed in favour of Subash. (c) The bill is immediately discounted with bank @ 6% per annum. Assume that the bill is met on maturity. Solution Books of Ajay (a) Journal Entries 2007

Particular

April 15 Anup A/c

L.F. Dr.

Dr. (Rs.) Cr. (Rs.) 15,000 15,000

To Sales A/c (Being goods sold to Anup on credit)

Bills Receivable A/c

Dr.

15,000 15,000

To Anup A/c (Being bills received from Anup for the amount)

Case (a) – Bill retained till maturity No entry Case (b) – Bill endorsed in favour of Subash Sudesh A/c To Bills Receivable A/c

Dr.

15,000 15,000

(Being bill endorsed in favour of Subash)

Contd.

802

Financial Accounting

Contd. Case (c) – Bill discounted with bank Bank A/c

Dr.

14,850

Discount A/c

Dr.

150 15,000

To Bills Receivable A/c (Being bill discounted = 15,000 ¥ 2/12 ¥ 6%)

June 18

On Maturity Case (a) Cash A/c

15,000

Dr.

15,000

To Bills Receivable A/c (Being the bill was paid by Anup on maturity)

Case (b) – No entry Case (c) – No entry

(b) Ledger Accounts Case (a) Bills Receivable Account Dr.

Cr. Date

Particulars

L.F.

Amount

Date

15,000

June 18

2007 April 15

Particulars

L.F.

Amount

2007 To Anup

By Cash

15,000

Case (b) Bills Receivable Account Dr.

Cr. Date

Particulars

L.F.

Amount

Date

15,000

June 18

2007 April 15

Particulars

L.F.

Amount

2007 To Anup

By Cash

15,000

Case (c) Bills Receivable Account Dr.

Cr. Date

Particulars

L.F.

Amount

Date

15,000

June 18

2007 April 15

Particulars

L.F.

Amount

2007 To Anup

15,000

By Cash

14,850

By Discount

150 15,000

Renewal Illustration 11 Ganesh sold goods to Guru on 1st May, 2006, for Rs. 9,600. Ganesh immediately accepted the 3 months’ bill. On the due date, Ganesh requested that the bill be renewed for a further period of 2 months. Ganesh agreed to provide interest @ 9% per annum was paid immediately in cash. The second bill was met on the due date. Give journal entries and ledger accounts in the books of Guru.

Accounting for Bills of Exchange

803

Solution Books of Guru Journal Entries 2006 May 1

Particular

L.F.

Ganesh A/c

Dr. (Rs.)

Cr. (Rs.)

9,600

Dr.

9,600

To Sales A/c (Goods sold to Ganesh as per invoice no….) Bills Receivable A/c

9,600

Dr.

9,600

To Ganesh A/c (Being bill accepted by Ganesh for the due) August 4

Ganesh A/c

9,600

Dr.

9,600

To Bills Receivable A/c (Being the acceptance cancelled for the purpose of renewal)

Ganesh A/c

144

Dr.

144

To Interest A/c (Being interest charged on renewal) [9,600 ¥ 2/12 ¥ 9%] Cash A/c

Dr.

144

Bills Receivable A/c

Dr.

9,600 9,744

To Ganesh A/c (Being the new bill accepted and interest paid in cash)

7.10.2006 Cash A/c

9,600

Dr.

9,600

To Bills Receivable A/c (Being cash received for the new bill)

Ledger Ganesh Account 2006

Particulars

Amount (Rs.)

2006

Particulars

May 1

To sales

9,600 May 1 By Bills Receivable

Aug 4

To Bills Receivable

9,600

To Interest

Aug 4

9,600 144

By Cash By Bills Receivable

144

Amount (Rs.)

19,344

9,600 19,344

Bills Receivable Account 2006

Particulars

Amount (Rs.)

2006

Particulars

Amount (Rs.)

June 1

To Ganesh

9,600 Aug. 4 By Ganesh

9,600

Sept. 1

To Ganesh

9,600 Oct. 7

9,600

19,200

By Cash

19,200

804

Financial Accounting

Sales Account 2006

Particulars

Amount (Rs.)

2006 May 1

Particular

Amount (Rs.)

By Ganesh

9,600

Interest Account 2006

Particulars

Amount (Rs.)

2006 Aug 4

Particulars

Amount (Rs.)

By Ganesh

144

Cash Account 2006

Particulars

Aug. 4

To Ganesh

Oct. 7

To Bills Receivable

Amount (Rs.)

2006

Particulars

Amount (Rs.)

144 9,600 9,744

Three Bills, Discounted, Endorsed, Dishonoured, Noting Charge, Bankrupt Illustration 12 On 1st July, 2007 Dinesh owes Sharan Rs. 15,000 and immediately accepts three bills of Rs. 5,000 each, due respectively in one, two and four months. The first bill is retained by Sharan and is met in due course. The second bill is discounted (discounting charges Rs. 50) and is met in due course. The third bill is endorsed to Tharun, but dishonoured on due date, the noting charges paid being Rs. 100. Under the new arrangement made, Dinesh paid Rs. 2,000 and accepts a new bill for the balance amount due in two months, with interest Rs. 200. The bill is retained by Sharan till due date. On presentation the bill is dishonoured the noting charges being Rs. 200. A week later, Dinesh becomes bankrupt, the estate paying dividend of 50 paise in the rupees in full and final settlement. Pass the journal entries in the books of Sharan with full narration. Solution Journal Entries in the books of Sharan 2007 July 1

Particulars

L.F.

Bills Receivable I A/c Bills Receivable II A/c Bills Receivable III A/c To Dinesh A/c (Being three bills are drawn)

Dr. Dr. Dr.

Bank A/c Discount A/c To Bills Receivable II A/c (Being the Bills Receivable II discounted)

Dr. Dr.

Dr. (Rs.)

Cr. (Rs.)

5,000 5,000 5,000 15,000

4,950 50 5,000

Contd.

Accounting for Bills of Exchange

805

Contd.

Aug. 4

Nov. 4

Tharun A/c To Bills Receivable II A/c (Being the Bills Receivable III endorsed to Tharun)

Dr.

Cash A/c To Bills Receivable I A/c (Being Bills Receivable I amount received)

Dr.

Dinesh A/c To Tharun A/c (Being the endorsed Bills Receivable III dishonoured)

Dr.

Dinesh A/c To Interest A/c (Being interest charged in Dinesh A/c)

Dr.

Cash A/c Bills Receivable (New) A/c To Dinesh A/c (Being new bill and the amount received)

Dr.

5,000 5,000

5,000 5,000

5,100 5,100

200 200

2,000 3,300 5,300

2008 Jan. 7

Dinesh A/c Dr. To Bills Receivable (New) A/c To Cash A/c (Noting charge) (Being Bills Receivable (New) is dishonoured and Noting charge paid)

3,500

Jan. 14

Cash A/c Bad debt A/c To Dinesh A/c (Being half of the amount received in full settlement)

1,750 1,750

Dr. Dr.

3,300 200

3,500

Dinesh Account Dr.

Cr. Date

Particulars

July 1

To Balance b/d

Nov. 4

To Tharun To Interest

Jan. 7

To Bills Receivable (New) To Cash

L.F.

Rs.

Date

Particulars

15,000 July 1

By Bills Receivable

5,100 Nov. 4 200

L.F.

15,000

By Cash

2,000

By Bills Receivable (New)

3,300

3,300 Jan. 14 By Cash 200

Rs.

By Bad Debt

23,800

Accommodation Bill Illustration 13 The following bills were accepted on 1st January, 2008 for four months: (a) By Bhanu, Rs. 10,000 and by Chitra, Rs. 15,000 in favour of Alan. (b) By Alan, Rs. 20,000 and by Chitra, Rs. 5,000 in favour of Balu. (c) By Alan, Rs. 10,000 and by Balu, Rs. 20,000 in favour of Chitra.

1,750 1,750

23,800

806

Financial Accounting

All the bills were discounted @ 18% per annum and the proceeds were shared by the three parties equally. On the due date Chitra became insolvent and later a dividend of 30% was received from his estate. Give journal entries in the books of Alan. Solution Journal Entries in the books of Alan 2008 Jan. 1

Particulars Bills Receivable A/c

L.F. Dr.

Dr. (Rs.)

Cr. (Rs.)

10,000 10,000

To Banu A/c (Being the bill drawn on Bhanu)

Bills Receivable A/c

Dr.

15,000 15,000

To Chitra A/c (Being the bill drawn on Chitra) Bhanu A/c

Dr.

20,000 20,000

To Bills Payable A/c (Being the bill accepted by Bhanu) Chitra A/c

Dr.

10,000 10,000

To Bills Payable A/c (Being the bill accepted by Chitra)

Bank A/c

Dr.

23,500

Discount A/c

Dr.

1,500

To Bills Receivable A/c

10,000

To Bills Receivable A/c

15,000

(Being both the bills were dishonoured)

Banu A/c

Dr.

8,333 7,833

To Bank A/c

500

To Discount A/c [Being 1/3rd of the bill amount (Rs. 23,500) given to Bhanu] Chitra A/c

Dr.

8,333 7,833

To Bank A/c

500

To Discount A/c [Being 1/3rd of proceed (Rs. 23,500) given to Chitra]

Cash A/c

Dr.

7,833

Discount A/c

Dr.

500

To Bhanu A/c

8,333

[Being 1/3rd proceed (Rs. 23,500) received from Bhanu] Contd.

Accounting for Bills of Exchange

807

Contd. Cash A/c

Dr.

9,400

Discount A/c

Dr.

600 10,000

To Chitra A/c [Being 1/3rd proceed (Rs. 28,200) and discount (Rs. 1,800) received from Chitra] Chitra A/c

15,000

Dr.

15,000

To Bank A/c (Being the bill dishonoured on due date) Cash A/c

Dr.

2,500

Bad debt A/c

Dr.

5,833 8,333

To Chitra A/c (Being 30% of 8,333 recovered from Chitra insolvent)

Books of Alan Chitra Account Dr.

Cr. Particulars

To Bills Payable

Rs.

Particulars

Rs.

10,000 By Bills Receivable

15,000

7,833 By Cash

To Bank To Discount To Bank (dishonoured)

9,400

500 By Discount

600

15,000 By Cash

2,500 5,833

33,333

33,333

Accommodation Bill, Journal in Both, Ledger Account Illustration 14 For their mutual accommodation Arun drew and Balan accepted on 1st January, 2008 a bill for Rs. 2,000 at two months. On 4th January, 2008 Arun got the bill discounted with the bank receiving Rs. 1,980 from it and remitted half the proceeds to Balan. On the due date of the bill Arun expressed his inability to send the amount due but agreed to accept a bill for Rs. 2,500 at three months drawn on him by Balan. Balan got the bill discounted for Rs. 2,450 and remitted Rs. 225 to Arun. Before the due date of this bill, Arun became insolvent and only 40% was received from his estate. Pass journal entries in the books of Arun and Balan. Also show Arun’s A/c in Balan’s Ledger. Solution Journal Entries in the Books of Arun 2008

Particulars

Jan. 1

Bills Receivable A/c Dr. To Balan A/c (Being a bill drawn on Balan for mutual accommodation for 2 months)

L.F.

Dr. (Rs.)

Cr. (Rs.)

2,000 2,000

Contd.

808 Jan. 4

Financial Accounting

Bank A/c Discount A/c To Bills Receivable A/c (Being the bill discounted)

Dr. Dr.

Balan A/c To Cash A/c To Discount A/c (Being half of the proceed remitted to Balan)

Dr.

2,000

March 4 Balan A/c To Bills Payable A/c (Being bill accepted for 3 months to meet the Bill I)

June 7

1,980 20

1,000 990 10

Dr.

2,500 2,500

Cash A/c Discount A/c To Balan A/c (Being Rs. 225 received and discount allowed)

Dr. Dr.

Bills Payable A/c To Balan A/c (Being acceptance dishonoured)

Dr.

Balan A/c To Cash A/c

Dr.

225 25 250

2,500 2,500

1,250 500 750

(Being 40% of the due amount paid)

Journal Entries in the Books of Balan 2008 Jan 1

Particulars

L.F.

Arun A/c To Bills Payable A/c (Being a bill accepted for mutual accommodation)

Dr.

Cash A/c Discount A/c To Arun A/c (Being half of the proceed accepted)

Dr. Dr.

March 4 Bills Receivable A/c To Arun A/c (Being a new bill drawn on Arun for 3 months)

Dr.

Jan 4

Bank A/c Discount A/c To Bills Receivable A/c (Being the bill discounted with the bank)

Dr. (Rs.)

Cr. (Rs.)

2,000 2,000

990 10 1,000

2,500 2,500

Dr. Dr.

Arun A/c Dr. To Cash A/c To Discount A/c (Being part amount paid to Arun and discount charged) (Discount = 50 ¥ (1,225/2,450) = Rs. 25)

2,450 50 2,500

250 225 25

Contd.

Accounting for Bills of Exchange

809

Contd.

June 7

Arun A/c To Bank A/c (Being the discounted bill became dishonour)

Dr.

Cash A/c Bad debts A/c To Arun A/c (Being 40% of the amount due received for from Arun)

Dr. Dr.

2,500 2,500

500 750 1,250

Arun Account 2008 Jan. 1

Particulars

L.F.

To Bills Payable

March 4 To Cash A/c

Rs.

2008

2,000

Jan 4

25

June 7

To Bank A/c

2,500

March 4

By Bills Receivable By Cash By Bad Debt

4,750

L.F.

Rs. 990 10

By Discount

225

To Discount A/c

Particulars By Cash

2,500 500 750 4,750

Points to Remember

Drawee and Payee. period, endorsement, acceptance, discount, dishonor, renewal and retiring.

Examination Questions I. Objective Questions 1. Fill in the blanks (i) The person to whom Bill is sent is called_______________ . (ii) The person to whom a Bill is transferred is called___________ . (iii) A Bill is a _________________ instrument. (iv) Retiring of a Bill means making payment ___________ the date of maturity. (v) Accommodation Bills are drawn or accepted without any _________ . 2. Choose the correct answers (i) Bills Receivable Account is a (a) Personal Account (b) Real Account (c) Nominal Account (ii) At the time of drawing a Bill, drawer credits (a) Debtors account

810

Financial Accounting

(b) Creditors account (c) Bills Receivable account (iii) At the time of endorsement of a Bill, the drawer credits (a) The drawee (b) the endrosee’s account (c) Bills Receivable account (iv) At the time of retirement of a Bill, the acceptor debits (a) Bills Payable account (b) Discount account (c) None of the above 3. Match the following (i)

Bill of Exchange

a

A new bill

(ii)

Endorsement

b

Paid before due date

(iii)

Dishonoured

c

Transferred

(iv)

Retirement of bill

d

Unconditional order

(v)

Renewal of bill

e

Non-acceptance

4. State whether the following statements are True or False: (i) Bills discounted by drawer is recorded by drawee also (ii) Cancellation entry is required when a bill is renewed (iii) Bill discounted is against the drawee (iv) Accommodation bill is used as an instrument for raising money in times of need by businessmen (v) Inland bill is drawn in one country and accepted for payment in another country. Answers 1.

(i) (v) 2. (i) 3. (i) 4. (i)

debtor; (ii) consideration b; (ii) d; (ii) False; (ii)

endorse;

(iii) negotiable;

a; c; True;

(iii) b; (iii) e; (iii) True;

II. Descriptive Questions A. Very short answer questions (1) What is bill of exchange? (2) What is accommodation bill (3) What is meant by renewal of bill? B. Short answer questions (4) Define bills of exchange. (5) Define promissory note. (6) What are the two types of bills? (7) What is meant by endorsement of bill?

(iv) before;

(iv) a; (iv) b; (iv) True;

(v) a (v) False.

Accounting for Bills of Exchange

811

C. Detail answer questions (8) What is a bill of exchange? Explain its characteristics? (9) What is promissory note? Explain its characteristics? (10) Explain important aspects of bills of exchange with examples? III. Exercise Problems

A. JOURNAL ENTRIES Problem 1 A accepted a four months draft for Rs. 1,000 drawns on him by B on 15th April. The Bill was discounted with the banker on the next day at 12%. On maturity, the bill was met. Make journal entries in the books of A and B. Problem 2 On 10th March, A sold goods to B and draws on B a bill at three months for Rs. 800, which B accepts immediately returns it to A. The bill is honoured on the due date. Pass entries in the books of both A and B. Problem 3 On 1st June, Ram drew a bill upon Krishna for Rs. 500 at four months date. This was duly accepted and payable at Canara Bank. After the acceptance, the bill was endorsed to Gopal. On the due date, the bill was honoured. Pass the journal entries in the books of all parties. Problem 4 On 1st January, 2004, A draws a bill on B at four months for Rs. 1,000 and B draws on A for similar amount and term. Both the Bills are accepted and discounted at 6% per annum. A meets his own acceptance at maturity, but B’s acceptance is dishonoured. B then accepts a new bill at three months for the amount due by him plus interest at 8% per annum which is duly met at maturity. Journalise the above transactions in the books of A and B. Problem 5 On 1st January, A drew a bill on B for Rs. 1,000 payable after three months, B accepted the Bill and returned it to A. After 10 days, A endorsed the bill to his creditor C. On the due date, the bill was dishonoured and C paid Rs. 5 as noting charges. Record the transactions in the journals of A, B and C. (Madurai) Problem 6 Abdul drew a bill on Basha for Rs. 10,000. The bill was then met on the due date. Pass the entries in the books of Abdul and Basha (a) (b) (c) (d)

If Abdul retained the bill till due date and then realised it on maturity; If he had discounted the same with his banker for Rs. 9,700; If he endorsed it over to his creditor Ameer & Co. in settlement of his debt; If he had sent the same to his bankers for collection.

812

Financial Accounting

Problem 7 On 15th June, Niranjan sold goods to Prema, valued at Rs. 2,000. He drew a bill for 3 months for the amount and discounted the same with his bankers at Rs. 1,960. On the due date, the bill was dishonoured and Niranjan paid the bank the amount due plus the noting charges of Rs. 10. Pass the journal entries in the books of the two parties. (Mysore) Problem 8 X sold goods worth Rs. 5,000 to Y on January 1, 1998 on credit. X drew a bill for three months for the same amount which was accepted and returned by Y. The bill was endorsed to Z in full settlement of a claim of Rs. 5,050. Z discounted the bill on January 5, 1998 at Rs. 4,900. On the due date, Y did not pay the bill and the bank had to pay a noting charge of Rs. 30. After dishonour Y came to X and paid half of the bill and noting charges. For the balance, X drew another bill for two months along with interest @ 12% per annum. Before the due date of the second bill. Y becomes bankrupt and a claim of 40% recovered from his private property. Pass journal entries in the books of all the parties. Problem 9 Raghavan owed Rs. 10,000. On 2nd January, 2008 Raghavan accepted four bills of exchange drawn by Manoj to discharge the whole debt. The first for Rs. 1,000 at one month, the second for Rs. 2,000 at two months, the third for Rs. 3,000 at three months and the last one for Rs. 4,000 at four months. On 15th January, Manoj sent the first bill to the bank for collection. On 17th January he endorsed the second bill in favour of Xavier. On 1st February, he got the fourth bill discounted with the bank @ 8% per annum. The first three bills were duly honoured, but the fourth one (i.e. the discounted one) was dishonoured on the due date, noting charges being Rs. 5. Show journal entries in the books of Raghavan as well as Manoj. Problem 10 Mr. A drew a bill on B on November 1, 2004 for an amount Rs. 4,000 payable three months after that date. On the very same date Mr. A accepted a bill for Rs. 4,000 drawn by B for a period of three months. Both the parties discounted their Bills at 12% per annum. On the due date both the bills were honoured. Make journal entries in the books of both the parties.

B. JOURNAL ENTRIES AND LEDGER Problem 11 On 1st February, Ram received from Hari three acceptances for Rs. 6,000, Rs. 8,000 and Rs. 10,000 for two months. The first bill for Rs. 6,000 was endorsed to Mohan, the second bill for Rs. 8,000 was held till due date and the third bill for Rs. 10,000 was discounted for Rs. 50. At maturity all the bills were dishonoured. Give journal entries in the books of Ram and the ledger accounts in the books of Hari, in respect of these transactions.

Accounting for Bills of Exchange

813

Problem 12 Balan draws a three months bill on Sekhar for Rs. 4,000 on 1st April 2004. Sekhar accepts the bill and sends it to Balan, who gets it discounted with his bank for Rs. 3,940. Balan immediately remits Rs. 985 to Sekhar. On the date, Balan being unable to remit the amount due, accepts a bill for Rs. 4,500 for three months which is discounted by Sekhar for Rs. 4,440. Sekhar sends Rs. 330 to Balan. Before the maturity of the second bill Balan becomes insolvent and his estates paying 40 paise in the rupee. Give journal entries in the books of Balan and Sekhar. Also show the ledger accounts. Problem 13 B and M were in need of funds. On 1.5.1998, B accepted M’s bill for Rs. 6,000 at 3 months. M got a discount at 6% per annum and remitted 1/3rd of the proceeds to B. On the due date, M was not able to send the amount. Instead, he accepted B’s bill for Rs. 4,500 at three months. B got it discounted for Rs. 4,420. Out of it, he sent Rs. 280 to M. Early in October 1998, M became insolvent. His estate paid a final dividend @ 40% only. Give journal entries in the books of B and M and also M’s account in the books of B.

22

Insolvency of Individual and Partnership Firm

Learning Objectives After studying this chapter, you should be able to Explain who an insolvent person is. Understand the procedures to be followed in the case of insolvency. Prepare Statement of Affairs and Deficiency Account for individuals and Partnership Firms. Differentiate Statement of Affairs and Balance Sheet.

INSOLVENCY—MEANING If a person is unable to pay his debts in full and his assets are not adequate to meet the dues, he is said to be an insolvent. If a person commits an act of insolvency, he will be declared as an insolvent by the Court of Law. Insolvency and bankruptcy mean the same thing. While the term bankruptcy is used in English Law, insolvency is used in India. There are two legislations in India to protect the interest of an insolvent person from his creditors. These are: (i) Presidency Towns Insolvency Act, 1909; and (ii) Provincial Insolvency Act, 1920. The Presidency Towns Insolvency Act is applicable to major cities namely, Chennai, Mumbai and Kolkata only. The Provincial Insolvency Act in applicable to rest of India.

Acts of Insolvency (i) If a person (debtor) transfers his property fully or partly to a third party for the benefit of his creditors or delay the payment or do any function to defraud his creditors. (ii) If a person prefers one creditor to another and pays the preferred creditor more than what is actually due to him. (iii) If a person departs from India or remains out of India (iv) If a person departs from his dwelling house or place of business (v) If a person petitions the court to be adjudged an insolvent.

Insolvency of Individual and Partnership Firm

815

(vi) If a person is imprisoned in execution of court order for payment of money. (vii) If property of debtor is sold or attached for a period of not less than 21days in execution of Court of Order as per Provisional Act, 1920.

Insolvency Procedures as per Law The following procedures are to be followed under Insolvency Act, if a person commits an act of insolvency: (i) A creditor can file a petition if the debt is at least Rs. 500 or if debtor commits an act of insolvency. A petition can also be filed by debtor himself for protection from creditors. (ii) A petition may be filed with Court of law either by debtor himself or any of his creditors for adjudication of a person as an insolvent. (iii) If the Court if satisfied with the petition, will pass an order of adjudication declaring the debtor as an insolvent. (iv) On the basis of such an order, the property of insolvent person is handed over to the Official Assignee for equitable distribution amongst the creditors. (v) The order of adjudication gives protection to insolvent person. Therefore, the creditor can sue him and it may also stay any civil proceedings pending against him. (vi) If a person is adjudicated as an insolvent by the court of law, the procedure is, he has to make out and submit (a) Statement of Affairs and (b) Deficiency Account. (Statement of Affairs is prepared to show the financial position of an insolvent person and Deficiency Account is prepared to show deficiency and also to state reasons for it.) (vii) The court examines the insolvent and other parties. If the court satisfies itself that he is not guilty of misconduct, an order of discharge will be passed by the court, subsequently the insolvent person is freed from all the clutches of his debts, except the amount due to government or agents of government.

Statement of Affairs Statement of Affairs is prepared and submitted by an insolvent person to the court of law. It will show the finical position of the insolvent. Statement of Affairs is prepared like Balance Sheet. The Format is as follows: Statement of Affairs of Mr. _______ as on _______ Gross Liabilities Rs. xxx xxx

Liabilities (as stated and estimated by debtors) Unsecured creditors as per list A Fully secured creditors as per list B (–) Estimated value of securities surplus as per contra

Expected to Rank Rs.

xxxx xxx xxx xxx

Nil

Assets (as stated and estimated by Debtors) Property as per list E Book debts as per list F Good Doubtful Bad Bills of exchange as per list G

Book Value Rs.

Estimated to realise (Rs.) xxx xxx xxx xxx xxx Contd.

816

Financial Accounting

Contd. Gross Liabilities Rs.

Liabilities (as stated and estimated by debtors)

xxx

Partly secured creditors as per list C (–) Estimated value of securities List D – Preferential creditors (–) Estimated value of securities Deducted as per contra

Total

Expected to Rank Rs.

xxx xxx xxx

xxx

Assets (as stated and estimated by Debtors)

Book Value Rs.

Surplus as per contra (List B) (–) Preferential creditors as per contra (List D)

Estimated to realise (Rs.) xxx xxx xxx xxx xxxx

xxx xxx xxx xxx

Nil Total

Total

The details of various lists given in Statement of Affairs are as follows: List A–Unsecured Creditors This list includes creditors without security, namely, unsecured trade creditors, unsecured loan creditors, bank overdraft without security, bills receivable discounted and likely to be dishonoured, bills payable and promissory notes, salary, wages, rent over preferential limit. List B–Fully Secured Creditors This list includes all those creditors whose loans are fully secured by insolvent assets. If any surplus available, after meeting the fully secured creditors, the same is transferred to List C (Partly secured creditors) to the required extent and then the balance, if any, transferred to Asset side under the heading ‘Surplus as per contra’. List C–Partly Secured Creditors This list includes all those creditors whose loans are not fully secured by the assets of insolvent person. Whatever amount is unsecured, has to be shown in the expected to rank column as it has to be ranked for the payment of dividend List D–Preferential Creditors This list includes preferential creditors, who get preference in payment over other creditors. The details of Preferential Creditors as per Law are given below: Sl. No.

Type of Preferential Creditors

Presidency Towns Insolvency Act

Amount due to government or Full amount any local authority (Rates and taxes)

Provincial Insolvency Act Full amount

Salary

4 months salary or Rs. 300 Rs. 20 per head whichever is less

Wages

4 months wages or Rs. 100 Rs. 20 per head whichever is less

Rent

One Month (No maximum limit Nil to the amount

List E–Properties All the properties or assets of insolvent person expect book debts and bills of exchange. Examples—machinery, land, insurance polices, stock of goods, utensils, furniture and fittings, bank deposits, cash balance etc.

Insolvency of Individual and Partnership Firm

817

List F–Book Debts Amount due from sundry debtors must be shown separately under the headings Good (realised in full); Doubtful (realised partly), and Bad (loss). List G–Bills of Exchange This list includes amount of bills of exchange, i.e. bills receivable. List H–Deficiency This list shows that the revenue falls short, which is why the insolvent is not able to pay his creditors in full. Deficiency is nothing but excess of Liabilities over Assets of the insolvent.

Differences between Statement of Affairs and Balance Sheet (i) Statement of Affairs is prepared and submitted to Official Assignee whereas Balance Sheet is prepared and submitted to shareholders and the tax authorities. (ii) In Statement of Affairs assets and liabilities are shown at realisable values, whereas in Balance Sheet assets and liabilities are shown at their book values. (iii) Statement of Affairs shows deficiency (i.e., excess of liabilities over assets), whereas Balance Sheet shows capital (i.e., excess of assets over liabilities). (iv) In Statement of Affairs, personal assets and liabilities of the proprietor are shown whereas in Balance Sheet only business assets and liabilities are shown. (v) Statement of Affairs is prepared according to the form which is prescribed by Law, whereas there is prescribed form of Balance Sheet for sole trading concern and partnership firms.

Deficiency Account This Account clearly explains the reasons for deficiency in the case of an insolvent person. There is no prescribed form for this account as in the case of Statement of Affairs. The Deficiency Account is prepared like Capital Account of a sole trader or partner with sides reversed. Deficiency Account as per List H Rs. Capital Interest on capital Surplus from private estate

Rs. Loss from business Bad debts Drawings Loss on sale of assets Loss on bills discounted Other losses, if any

of Affairs Total

Total

Insolvency of Partnership Firm There is no distinction between private assets and business assets as well as private liabilities and business liabilities in the case of insolvency of individuals, whereas distinction is observed between private assets and business assets as also private liabilities and business liabilities in the case of insolvency of partnership firms. The assets of the firm must be used to pay off firm’s liabilities first, surplus, if any, may be used by partners to pay off their private liabilities. Similarly, private assets of

Financial Accounting

818

partners must be used to pay off private liabilities of partners first, surplus, if any, may be used to pay off firm’s liabilities. It is to be noted further that private deficiency of a partner cannot be transferred to Firm’s Statement of Affairs and Deficiency Account. Statement of Affairs and Deficiency Account are prepared separately for the partnership firm and individual partners. If there is an excess of income over expenditure (i.e., surplus) in case of any partner, Surplus Account has to be prepared instead of Deficiency Account.

Illustrations Type I

Insolvency of Individual

II

Insolvency of Partnership Firm

Ill. No. 1–9 10–12

I. Insolvency of Individual Illustration 1 The assets of Ramasamy of Mumbai on 30.6.2000 as shown by his books were Rs. 28,000 and his liabilities Rs. 22,000. He estimated his deficiency Rs. 15,000. He found the following were not taken into accounts. (a) Interest at 6% on his capital from 1.1.2000. (b) A contingent liability of Rs. 1,250 on bills discounted by him for Rs. 5,000. (c) Amount due as wages Rs. 300; Rent Rs. 100; Taxes – Rs. 150. Prepare Statement of Affairs and Deficiency Account. (B.Com., Madras) Solution Statement of Affairs of Mr. Ramasamy as on 30th June, 2000 Assets (as estimated by debtors) List E–Assets Property 22,000 List F–Debtors 1,250 List G–Bills of Exchange Nil (–) Preferential Creditors Nil as per contra

Expected to rank (Rs.)

Liabilities (as estimated by debtors) List A–Unsecured Creditors 22,000 Liabilities 5,000 Bills discounted

Gross liabilities (Rs.)

Nil List B–Fully Secured Creditors List C–Partly Secured 750 Creditors List D–Preferential Creditors Wages Salaries Rent Tax Deducted as per contra 27,750

200 200 300 100 100 150 750

Book value (Rs.) 28,000

Estimated to realise (Rs.) 7,000

Nil

Nil

Nil

Nil 7,000 750 6,250 17,000

Nil 23,250

23,250

Insolvency of Individual and Partnership Firm

819

Deficiency Account (List H) Excess of Assets over Liabilities Capital (28,000 – 22,000)

Rs.

Rs.

Loss on realisation of assets 6,000 (28,000 – 7,000) Bill Discounted 16,800 Preferential Creditors (300 + 100 + 150)

21,000 1,250 550

22,800

22,800

Working Notes (i) Estimated realisation of assets Liabilities = Rs. 22,000 Estimated deficiency = Rs. 15,000 Estimation of realisation through assets = Rs. 7,000 (ii) Preferential Creditors (List D) Wages (300), Rent (100), Taxes (150) = Total (Rs. 550) (iii) Interest on capital (6%) not considered as third liability to be satisfied. Illustration 2 On 1st January 1997, Sandy Enterprises commenced business with Rs. 6,350. It earned a total profit of Rs. 5,554 during 1997, 1998 and incurred loss during 1999 of Rs. 2,500. Its total drawings were Rs. 9,000. Prepare Statement of Affairs and Deficiency Account from the following information: Cash Rs. 230; Stock Rs. 1,000; Debtors—good Rs. 8,000; Doubtful Rs. 1,800; Bad Rs. 1,500; Furniture Rs. 564; Investment in shares Rs. 500; Unsecured creditors Rs. 13,000; Secured creditors Rs. 2,500; Value of securities held by creditors Rs. 35,000; Preferential creditors Rs. 190. Stock realises Rs. 666, Furniture Rs. 282, Investments realised at book value, Doubtful debts realised Rs. 600. (B.Com., Madras) Solution Statement of Affairs of Sandy Enterprises Gross liabilities (Rs.)

Liabilities (as estimated by debtors)

13,000 List A – Unsecured Creditors List B – 2,500 Fully Secured Creditors Securities value Surplus to contra Nil List C – Partly Secured Creditors 190 List D – Preferential Creditors Deducted as per contra

15,690

Expected to rank (Rs.)

2,500 3,500 1,000 190 (190) Nil

Assets (as estimated by debtors)

13,000 List E – Assets Cash in hand Stock in trade Furniture and Fittings Investment Nil List F – Debtors Good Nil Doubtful List G – Bills of Nil Exchange Surplus as per Secured Nil Creditors (List B) (–) Preferential Creditors as per contra

13,000

Book value (Rs.)

Estimated to realise (Rs.)

230 1,000 564 500 7,000 1,800

230 666 282 500 7,000 600

Nil

Nil 1,000 10,278 (190) 10,088 2,912 13,000

820

Financial Accounting

Deficiency Account (List H) Rs. Excess of Assets over Liabilities - given

Affairs

Rs.

Net loss (1999) 6,350 Bad debts as per List E: 5,554 (1,500 + 1,200) Non-Trading Expense 2,912 Drawings Other Losses Stock in trade 1,000 – 666 Furniture and Fittings 564 – 282

2,500 2,700 9,000

334 284 616

14,816

14,816

Illustration 3 On 31st December, 2004 Ram’s assets and liabilities as per books amounted to Rs. 60,000 and Rs. 45,000, respectively. He estimated his deficiency to be Rs. 20,000. He found subsequently that the following had not been taken into account: (a) Interest on his capital of Rs. 30,000 at 6% per annum for one year. (b) Liability on bills discounted amounting in all comes to Rs. 10,000 of which Rs. 3,000 were expected to be dishonoured. (c) Salaries Rs. 1,400; Wages Rs. 500 and Rent to landlord for three months Rs. 150 have to be paid. Prepare his Statement of Affairs and Deficiency Account. (B.Com., Madras) Solution Statement Affairs of Ram as on 31st December 2004 Gross liabilities (Rs.)

Liabilities (as estimated by debtors)

List A – Unsecured Creditors 45,000 Liabilities Rent 100 2 months 10,000 Liability for Bills Discounted

Nil List B – Fully Secured Creditors Nil List C – Partly Secured Creditors List D – Preferential Creditors Salaries 1,400 Wages 500 Rent 50 (1 month) Deducted as per contra

Expected to rank (Rs.)

Assets (as estimated by debtors)

Book value (Rs.)

Estimated to realise (Rs.)

60,000

25,000

List F – Debtors

Nil

Nil

List G – Bills of Exchange

Nil

Nil

List E – Assets

45,000 100 3,000

(–) Preferential Creditors as per contra 48,100 Nil

25,000 (1,950) 23,050 25,050

Nil

1,400 500 50 1,950 (1,950)

Nil 48,100

48,100

Insolvency of Individual and Partnership Firm

821

Deficiency Account (List H) Rs. Capital

Rs.

30,000 Loss on Business 25,050 Liabilities Capital (–) Assets

Affairs

45,000 30,000 (60,000) 15,000

Preferential Creditors (1,400 + 500 + 150) Bills discounted Loss on Realisation Book value of Assets (–) Realised for

2,050 3,000

60,000 (25,000) 35,000

55,050

55,050

Illustration 4 The capital in the business of Mr. Harish on 31st December, 2003 was Rs. 700. During the year 2004, he sustained a trading loss of Rs. 780, and his drawings of the business were Rs. 700. He was compelled to file his petition in the insolvency court. His assets consisted of: (i) Book debts Rs. 1,000 of which Rs. 800 was considered good and the remainder estimated to produce Rs. 100. (ii) Stock (cost Rs. 1,500) estimated to produce Rs. 900. (iii) Machinery (cost Rs. 1,600) estimated to produce Rs. 1,100. (iv) Freehold house valued at Rs. 1,200, the deeds of which were lodged with the bank as security for an overdraft on business account of Rs. 800. (v) His Life Policy (surrender value Rs. 600) given as part security for a private loan of Rs. 1,000. His unsecured creditors amounted to Rs. 4,030, and he owed Rs. 50 his clerk, being salary for the two months ended 30th Nov., 2004. Prepare his Statement of Affairs and Deficiency Account. (Delhi) Solution Statement Affairs of Harish as on 31st December, 2004 Gross liabilities (Rs.)

Liabilities (as estimated by debtors)

Expected to rank (Rs.)

4,060 List A – Unsecured Creditors Salary of clerk (50 – 20)

4,030 30

800 List B – Fully Secured Creditors (–) Value of Securities Surplus to contra

800 (1,200) 400

Assets (as estimated by debtors) List E – Assets Stock Plant List F – Debtors Good Doubtful

Nil List G – Bills of Exchange

Book value (Rs.)

Estimated to realise (Rs.)

1,500 1,600

900 1,100

800 200

800 100

Nil

Nil Contd.

Financial Accounting

822 Contd. Gross liabilities (Rs.)

Liabilities (as estimated by debtors)

Expected to rank (Rs.)

1,000 List C – Partly Secured Creditors (–) Value of Securities

Surplus as per Secured Creditors 400 (List B)

1,000

20 List D – Preferential Creditors Deducted as per contra

Assets (as estimated by debtors)

(600)

(–) Preferential Creditors as per contra

20 (20) Nil

Book value (Rs.)

Estimated to realise (Rs.)

400 3,300 (20)

Nil

3,280 1,180

4,460

4,460

Deficiency Account (List H) Rs. Excess of Assets over Liabilities (Capital) Excess of Private Assets over Private Liabilities House Property LIP-Surrender Value (–) Private Loan of Affairs

1,200 600 (1,000)

Trading Loss 700 Drawings Bad debts (200 – 100) Other Loss Stock (1,500 – 900) Machinery (1,600 – 1,100) 800 1,180 2,680

Rs. 780 700 100 600 500

2,680

Illustration 5 From the following information, prepare a Statement of Affairs and a Deficiency Account of Mr. Unlucky who is declared insolvent on 31st December, 2004. Total Creditors Rs. 62,000 including preferential creditors Rs. 1,000; Secured Creditors holding a first change on building Rs. 15,000 and another secured creditor holds a seconcd change on building Rs. 14,000. Building-book value Rs. 32,000, estimated to realise Rs. 25,000, Debtors Rs. 18,000, Bad debts estimated at Rs. 2,000. Machinery estimated to realise (60% of the book value) Rs. 12,000. Stock book value Rs. 6,000, estimated to realise Rs. 4,000. Bank balance Rs. 1,000. He commenced his business on 1.1.2000 with initial Capital of Rs. 20,000. His drawings were Rs. 200 more than those of the previous year of all years. His drawings were Rs. 1,800 in 2004. The profit of business in first four years was Rs. 4,200. But in the last year business incurred a loss of Rs. 5,200. He paid Rs. 4,000 to his creditor friend on 8.12.2004 by fraudulent preference. He gifted Rs. 1,000 to his daughter on the occasion of her marriage on 9.12.2004. A discounted bill of Rs. 1,200 was dishonoured on 31.12.2004. (B.Com., Saurashtra)

Insolvency of Individual and Partnership Firm

823

Solution Statement Affairs of Unlucky as on 31st December, 2004 Gross liabilities (Rs.)

Liabilities (as estimated by the debtors)

37,200 List A – Unsecured Creditors Creditors (62,000 –1,000 –15,000 – 14,000) Fraudulent preference Bills discounted

Expected to rank (Rs.)

32,000 4,000 1,200

15,000 List B – 15,000 Fully Secured Creditors (25,000) (–) Value of Securities Surplus to contra car10,000 ried to List C List C – Partly Secured Creditors (–) Value of Securities 14,000 List D – Preferential Creditors Deducted as per contra

List E – Assets Machinery 12,000 ¥ 100/60 = 20,000* Stock Bank 37,200 List F – Debtors Good Bad List G – Bill of Exchange

66,200

Book value (Rs.)

Estimated to realise (Rs.)

*20,000 6,000 1,000

12,000 4,000 1,000

16,000 2,000

16,000 Nil

Nil

Nil

Nil

33,000 (–) Preferential Creditors as per contra

14,000 (10,000) 4,000 1,000 (1,000)

Assets (as estimated by the debtors)

(1,000) 32,000 9,200

Nil 41,200

41,200

Deficiency Account (List H) Rs. Capital as on 1.1.2000

Statement of Affairs

Rs.

20,000 Loss in the last year 4,200 Bad debts Drawings 9,200 2000 2001 2002 2003 2004 (+) Gift to daughter

5,200 2,000 1,000 1,200 1,400 1,600 1,800 7,000 (1,000) 8,000

Loss on Realisation Buildings (25,000 – 32,000) Machinery (20,000 – 12,000) Stock (4,000 – 6,000)

7,000 8,000 2,000 17,000

Bills dishonoured 33,400

1,200 33,400

824

Financial Accounting

Illustration 6 A receiving order has been made against Mr. A on 15th September 2004, the particulars of his assets and liabilities are as under: Unsecured Creditors

14,487

Creditors fully secured (holding Life Insurance Policies valued at Rs.12,315)

10,333

Creditors partly secured (the security held is a second charged on assets pledged to fully secured creditors, the surplus available from the latter being estimated at Rs.1,020) Preferential Creditors

1,582 37

Cash in hand

4

Life Insurance Policies, not charged, surrender value estimated

30

Stock and shares, estimated

154

Cycle used in business, estimated

249

Book debts Rs. 76, of which Rs. 39 are good, estimated

52

The debtor has conveyed business furniture to his wife by deed of gift dated 3rd March 2004. The value of this item is estimated at Rs. 300. The Deficiency Account starts from 30th June 2003 on which date the excess of Liabilities over Assets was Rs. 3,936. The causes of failure are unsuccessful trading, Stock Exchange speculation and excessive interest on money borrowed. Prepare the Statement of Affairs and Deficiency Account. (B.Com., Madras) Solution Statement of Affairs of A as on 15th September, 2004 Gross liabilities (Rs.)

Liabilities (as estimated by the debtor)

14,487 List A – Unsecured 10,333 Creditors List B – Fully Secured Creditors (–) Estimated value of security

Expected to rank (Rs.)

10,333

(12,315) 1,982

(–) Amount carried to List C Surplus as per Contra 1,582 List C – Partly Secured Creditors (–) Estimated value of security List D – Preferential Creditors Deducted as 37 per contra

(1,020)

Assets (as estimated by the debtors)

14,487 List E – Assets Cash Furniture Stock and Shares Cycle Life policy List F – Debtors Good Bad and Doubtful List G – Bills of Exchange

Book value (Rs.)

Estimated to realise (Rs.)

4

4 300 154 249 30

39 37

39 13

Nil

Nil

962 Surplus as per contra (–) Preferential Creditors as per contra

1,582 (1,020)

562 (15,049-1714)

962 1,751 (37) 1,714 13,335

37 37

Nil 15,049

15,049

Insolvency of Individual and Partnership Firm

825

Deficiency Account (List H) Income from other security Life Policy Furniture Statement of Affairs

Rs.

Rs.

12,315 Excess of Liabilities over Assets 30 Given 300 Business Loss (*) Loss on Book Debts 13,335

3,936 22,020 24

25,980

25,980

(*) Working Note Balance Sheet has to be prepared to ascertain the business losses. Balance Sheet as on 15th September 2004 Liabilities Unsecured Creditors Creditors fully secured Creditors partly secured Preferential Creditors

Rs. 14,487 10,333 1,582 37

Assets Cash in Hand Stock and Shares Cycle Book Debts Excess of liabilities over assets on 30th June, 2004 Loss from Business

26,439

Rs. 4 154 249 76 3,936 22,020 26,439

– Private assets (Furniture and Life Policy) – not to be shown in the Balance Sheet. Illustration 7 Mr. Jagannath filed a petition in Bankruptcy on 31st March, 2004 when his Balance Sheet was as under: Liabilities

Rs.

Assets

Sundry Creditors

60,000 Cash in Hand

Bank Overdraft

20,000 Land and Buildings

Bills Payable

10,000 Plant and Machinery

Income Tax Payable

600 Sundry Debtors Bills Receivable Drawings Account 90,600

Rs. 600 38,000 12,000 15,000 4,000 21,000 90,600

From the information given below, prepare Statement of Affairs and Deficiency Account: (a) Bank overdraft has a first charge on land and buildings and sundry creditors have a second charge up to Rs. 7,000. (b) Sundry creditors include Rs. 6,000 due to his wife, which amount belongs to her father. (c) Mr. Jagannath gave furniture of Rs. 2,000 as a gift to his brother on 1.1.2004. He recorded the said transaction in his books of accounts as under: Drawings Account Dr. Rs. 2,000 To Furniture Rs. 2,000

Financial Accounting

826

(d) A decree has been passed for Rs. 1,800 against him for which no liability has been created in his books. (e) Assets (including Furniture) are estimated to realise 50% of the book value. (f) Mr. Jagannath’s capital at commencement of business was Rs. 15,000, his trade losses were Rs. 6,000, loss in speculation was Rs. 10,000 and his withdrawals were Rs. 20,000 resulting in his net debit balance of the drawings account Rs. 21,000 as shown in the Balance Sheet. (B.Com., Pune) Solution Statement Affairs Mr. Jagannath as on 31st March, 2004 Gross liabilities (Rs.)

60,000 10,000 1,800 Nil

20,000

Liabilities (as estimated by debtors)

Expected to rank (Rs.)

List A – Unsecured Creditors Sundry Creditors Bills Payable Degree Order List B – Fully Secured Creditors List C – Partly Secured Creditors (–) Value of Security 38,000 ¥ 50%

20,000

Assets (as estimated by debtors)

List E – Assets Cash Plant and Machinery 60,000 Furniture 10,000 1,800 List F – Debtors Nil List G – Bills of Exchange (–) Preferential Creditors as per contra

Book value (Rs.)

Estimated to realise (Rs.)

600 12,000 2,000

600 6,000 1,000

15,000

7,500

4,000

2,000 17,100 (600) 16,500

19,000 1,000

List D – Preferential Creditors 600 Income Tax Deducted as per contra

56,300 600

(600) Nil

92,400

72,800

72,800

Deficiency Account (List H) Rs. Capital

Rs.

15,000 Trading Losses 56,300 Drawings (–) Furniture gifted Loss on Speculation Decree against Losses on realisation Debtors (15,000 – 7,500) Land and Building (38,000 ¥ 50%) Plant and Machinery (12,000 ¥ 50%) Furniture (2,000 ¥ 50%) Bills Receivable (4,000 ¥ 50%) 71,300

6,000 20,000 (2,000) 18,000 10,000 1,800 7,500 19,000 6,000 1,000 2,000 71,300

Insolvency of Individual and Partnership Firm

827

Illustration 8 Mr. Gopal files his insolvency petition on 1st January, 2004. He had the following assets and liabilities (estimated to realise and expected to rank are given in brackets). Rs. Buildings

(35,000)

Machinery

Rs. 40,000

(1,25,000) 1,55,000

Furniture

(10,000)

20,000

Stock

(3,50,000) 4,00,000

Electrical equipment

(1,00,000) 1,00,000

Book debts: Good Bad and doubtful

(20,000) 1,50,000 50,000

Investments

(1,00,000) 1,00,000

Mortgage on electrical equipment

1,00,000

Loan, secured by investments

2,50,000

Loan unsecured

5,00,000

50,000 Liability on bills receivable discounted

(20,000)

Preferential creditors

50,000 20,000

Cash at bank

500

He commenced business with a capital of Rs. 3,00,000. Profit up to 31st December, 2003 was Rs. 2,95,500, after allowing interest on capital of Rs. 30,000. He had withdrawn Rs. 5,30,000. Prepare Statement of Affairs and Deficiency Account. (B.Com., Bangalore) Solution Statement Affairs of Gopal as on 31st January 2004 Gross liabilities (Rs.)

Liabilities (as estimated by debtors)

5,50,000 List A – Unsecured Creditors Loan Bill discounted List B – Fully 1,50,000 Secured Creditors* (–) Value of Securities* Surplus to contra List C – Partly Secured Creditors (–) Value of Securities

Expected to rank (Rs.)

5,00,000 50,000

5,00,000 20,000

1,50,000 4,50,000 3,00,000

Nil

2,50,000 1,00,000 1,50,000

List D – Preferential Creditors Deducted as per contra

7,70,00

20,000 20,000 Nil

Assets (as estimated by debtors) List F – Assets Cash Furniture Machinery Building List F – Debtors Good Doubtful List G – Bill of Exchange Surplus as per contra (List B) (–) Preferential Creditors as per contra (List D)

Book value (Rs.)

Estimated to realise (Rs.)

500 20,000 1,55,000 40,000

500 10,000 1,25,000 35,000

1,50,000 50,000

1,50,000 20,000

Nil

Nil 3,00,000 6,40,500 (20,000) 6,20,500 49,500

Nil 6,70,000

6,70,000

828

Financial Accounting

(*) Mortgage on electrical equipment (1,00,000) + Loan secured by stock (50,000) = Rs. 1,50,000 Value of security = for electrical equipment (1,00,000) + on stock (3,50,000) = Rs. 4,50,000 Deficiency Account (List H) Rs. Capital Interest on Capital

Rs.

3,00,000 Drawings 2,95,500 Loss on Realisation 30,000 Building 49,500 (35,000 – 40,000)

6,75,000

5,30,000

5,000

(1,25,000 – 1,55,000) Furniture (10,000 – 20,000)

30,000

(3,50,000 – 4,00,000) Debtors (20,000 – 50,000)

50,000

10,000

30,000 20,000 6,75,000

Illustration 9 Roshan Lal became insolvent on 31st December, 2004. His position was as follows: Rs.

25,000 91,500 2,000 85,600 30,000 40,000 4,000 5,000 15,000 550 35,950 9,000

Roshan Lal started with a capital of Rs. 70,000 on 1st January, 2002 and the business resulted in a profit of Rs. 8,900 and Rs. 10,000 for the first two years respectively and in a loss of Rs. 5,000 for the third year, after allowing Rs. 3,500 as interest on capital each year. Withdrawals for the whole period amounted to Rs. 30,000. Prepare a Statement of Affairs and the Deficiency Account. (B.Com., Madurai)

Insolvency of Individual and Partnership Firm

829

Solution Statement Affairs of Ram as on 31st December, 2004 Gross liabilities (Rs.)

Liabilities (as estimated by the debtors)

Expected to rank (Rs)

90,000 List A – Unsecured Creditors Bills Payable Non-preferential Creditors (5,000 – 4,600) 40,000 List B Fully Secured Creditors (–) Value of Security

List E – Assets Cash and Bank Stock Furniture Shares (A Co.) List F – Debtors Good 90,000 Bad Doubtful List G – Bills of Exchange

85,600 4,000

400

40,000 (75,000)

Surplus as per contra (List B)

35,000 (–) Carried to List C Surplus as per contra

Assets (as estimated by the debtors)

(25,000) 10,000

30,000 List C – Secured Creditors (–) Value of Security

Estimated to realise (Rs.)

550 35,950 15,000 25,000

550 30,450 3,000 15,000

5,000 15,000 30,000

5,000 Nil 25,000

9,000

7,000

10,000 96,000

Nil (–) Preferential 5,000 Creditors as per contra

30,000 (25,000)

4,600 List D – Preferential Creditors Deducted as per contra

Book value (Rs.)

(4,600) 91,400 3,600

4,600 (4,600)

Nil

1,64,600

95,000

95,000

Deficiency Account (List H) Capital (Rs. 8,900 + Rs. 10,000) (Rs. 3,500 ¥ 3 years) fairs

Rs.

Rs.

70,000

5,000 20,000 30,000

Bad Debts 18,900 Drawings Loss on Realisation 10,500 Stock (30,450 – 35,950) 3,600 Furniture (3,000 – 15,000) Shares in A. Co. (15,000 – 25,000) Shares in B. Co. (75,000 – 91,500) Bills Receivable (7,000 – 9,000) Loss through betting 1,03,000

5,500 12,000 10,000 16,500 2,000 2,000 1,03,000

830

Financial Accounting

II – INSOLVENCY OF PARTNERSHIP FIRM Illustration 10 The following particulars of M/s. Unfortunate, a firm consisting of two partners, Abdul and Rahim, are given: (a) The firm was formed two years ago. The firm made a profit Rs. 15,000 in the first year. Then it incurred substantial losses. (b) Mohamed, a minor, was admitted to the benefits of partnership from the beginning. (c) The firm is insolvent. (d) The financial position, of the firm and the partners, is given below: Liabilities

Firm (Rs.)

Mortgage Loan Unsecured Creditors Preferential Creditors Assets Building Other Assets

20,000 20,000

Abdul (Rs.)

22,000 10,000 10,000 Book Value Rs. 25,000 5,000

40,000

– 2,000 – Reliable Value Rs. – –

30,000 –

Rahim (Rs.)

Mohamed (Rs.)

– 5,000

– –

–

–

– 1,000

– 10,000

1,000

10,000

(e) Other Assets of Mr. Mohamed include Rs. 5,000 deposited in a bank. This represented the share of profit drawn from the firm. (f) The partners Abdul and Rahim each had contributed Rs. 10,000, and the minor had contributed Rs. 5,000, when the business was commenced. The partners shared profit equally. Prepare Statement of Affairs of the firm and its two partners and also the firms’ Deficiency Account. Solution Statement of Affairs of M/s Unfortunate Gross liabilities

Liabilities (as estimated by debtors)

10,000 List A – Unsecured Creditors 22,000 List B – Fully Secured Creditors (–)Security value Surplus to Contra

Expected to rank (Rs.)

22,000

25,000 3,000

Assets (as estimated by debtors)

List E – Assets 10,000 Surplus from Security under List B List F – Debtors List G – Bills of Exchange Surplus as per Secured Creditors

Book Value (Rs.)

20,000

Estimate to produce (Rs.)

5,000 Nil Nil

3,000 8,000

Nil List C – Partly Secured Creditors 10,000 List D – Preferential Creditors Deducted as per contra

Nil

Nil (List B) (–) Preferential Creditors as per contra

(10,000) (2,000) 12,000

10,000 Nil 10,000 Nil

42,000

10,000

10,000

Insolvency of Individual and Partnership Firm

831

Deficiency Account (List H) Rs. Excess of Assets over Liabilities (10,000 + 10,000 + 5,000)

Rs. Net Loss from the carrying business

25,000

(25,000 – 20,000)

Expenditure, other than the usual 15,000 business expenditure (Drawings) Loss on realization of “other 5,000 assets” (20,000 – 5,000 –1,000)

Statement of Affairs

12,000

business (a)

57,000

28,000 15,000 14,000

57,000

Statement of Affairs of Mr. Abdul Rs. Unsecured Creditors as per List A

2,000 Property as per list E Capital Rs. 10,000 2,000

Rs. Nil 2,000 2,000

Statement of Affairs of Mr. Rahim Rs. Unsecured Creditors as per List A

5,000 Property as per list E Capital Rs.10,000 Other Assets

Rs. Nil 1,000 4,000

5,000

5,000

Illustration 11 A firm of Kane and Rane file their petition in bankruptcy and you are asked to draw up a Statement of Affairs and Deficiency Account as on 31st December, 2004 from the following information: Sundry assets on 31st December, 2004 amounted to Rs. 1,22,184 (estimated to realise Rs. 94,600) as against Rs. 1,20,000 on 1.1.2000. The sundry creditors on 31st December, 2004 amounted to Rs. 1,07,270 as against Rs. 92,686 on 1.1.2000. The Capital Accounts (excluding the Current Accounts) on 31st December, 2000 showed a credit of Rs. 20,000. The partners drawings amounted to Rs. 2,800 per annum (Rs. 1,600 for Kane and Rs. 1,200 for Rane). Trading results after charging Rs. 1,000 per annum interest on capitals and Rs. 400 per annum on Rane’s salary were: 2000 – Profit Rs. 2,600; 2001– Profit Rs. 800; 2002 – Loss Rs. 3,200 2003 – Profit Rs. 400; 2004 – Loss Rs. 6,000 On 1st January, 2000, Rane had introduced further cash of Rs. 4,000 duly credited to his Capital Account. (B.Com., Bombay)

832

Financial Accounting

Solution Statement Affairs of Kane and Rane as on 31st December 2004 Gross liabilities (Rs.)

Liabilities (as estimated by debtors)

Expected to rank (Rs.)

Assets (as estimated by debtors)

Book value (Rs.)

Estimated to realise (Rs.)

1,22,184

94,600

List F – Debtors

Nil

Nil

List G – Bills of Exchange

Nil

1,07,270 List A – Unsecured Creditors Nil List B – Fully Secured Creditors Nil List C – Partly Secured Creditors

1,07,270 List E – Assets

Nil

94,600 12,670

1,07,270

1,07,270

1,07,270

Nil Nil

Deficiency Account (List H) Rs. Capital Account 1.1.2000 Current Accounts – 1.1.2000 * (2,600 + 800 + 400) Interest on Capital for 5 years (Rs. 1,000 ¥ 5) Salary to Rane (Rs. 400 ¥ 5) Statement of Affairs

Rs.

20,000 Drawings by partners 7,314 (Rs. 2,800 ¥ 5 years) Loss on 2002 and 2004 3,800 (3,200 + 6,000) Loss on realisation of Assets 5,000 (1,22,184 – 94,600)

14,000 9,200 27,584

2,000 12,670 50,784

50,784

Balance Sheet as on 1st January 2000 Liabilities Creditors Capital Current Accounts

Rs. 92,686 Assets 20,000

Assets

Rs. 1,20,000

7,314 1,20,000

1,20,000

Illustration 12 A and B filed their petition under Insolvency on 31st December, 2004. The books of accounts of the firm showed the following Liabilities and Assets: They owed Rs. 46,000 to Unsecured Creditors; Rs. 30,000 to Creditors having lien on goods and work-in-progress to the extent of Rs. 10,000; Rs. 24,000 to creditors who have been secured over the machinery amounting to Rs. 1,20,000 and their liabilities towards taxes, rent and salaries and amounting to Rs. 2,800. The machinery which was acquired for Rs. 1,20,000 (depreciated out of Profit and Loss Account by Rs. 25,000), estimated to realise Rs. 60,000. Goods on consignment worth Rs. 20,000 were estimated to realise Rs. 15,000. Book debts: Good Rs. 12,000; doubtful Rs. 6,000 estimated to realise Rs. 2,000 and bad Rs. 10,200. Furniture and fittings worth Rs. 4,000 was estimated to realise Rs. 1,200. Stock and work-inprogress Rs. 30,000 estimated to realise Rs. 10,000 and cash on hand Rs. 840.

Insolvency of Individual and Partnership Firm

833

They commenced business on 1st January, 2000 with a total capital of Rs. 85,000. After charging annually Rs. 5,000 for depreciation on machinery, Rs. 6,000 for interest on capital, the firm has earned profit of Rs. 12,000 in 2000, Rs. 6,000 in 2001 and losses of Rs. 2,000 in 2002, Rs. 16,000 in 2003 and Rs. 16,000 in 2004. The total drawings of the partners for the five years amounted to Rs. 23,760. Draw up a Statement of Affairs and Deficiency Account from the information given above. (B.Com., Karnataka) Solution Statement affairs of A and B as on 31st December 2004 Gross liabilities (Rs.)

Liabilities (as estimated by the debtor)

List A – 46,000 Unsecured Creditors List B – Fully 24,000 Secured Creditors (–) Value of machinery Surplus as per contra 30,000 List C – Partly Secured Creditors (–) Value of Security (WIP) 2,800 List D – Preferential Creditors Deducted as per contra

Expected to rank (Rs.) 46,000

24,000

60,000 36,000

Nil

Assets (as estimated by the debtor)

Book value (Rs.)

Estimated to realise (Rs.)

List E – Assets Consignment of Goods Furniture and Fittings Cash

20,000 4,000 840

20,000 4,000 840

List F – Debtors Good Doubtful Bad

12,000 6,000 10,200

12,000 2,000 Nil

Nil

Nil

30,000 List G – Bills of Exchange

10,000 2,800

20,000 Surplus as per contra (List B)

36,000

(2,800)

67,040 Nil (–) Preferential Creditors as per contra

(2,800) 64,240 1,760

1,02,800

66,000

66,000

Deficiency Account of A and B (List H) Rs. Capital Interest on Capital (Rs.6,000 ¥ 5 years) (12,000 + 6,000) Affairs

85,000 Loss for 2002, 2003 and 2004 (2,000 + 16,000 + 16,000) 30,000 Drawings Loss on realization 18,000 Work in progress 1,760 (10,000 – 30,000) Consignment (15,000 – 20,000) Furniture (1,200 – 4,000) Debtors (28,200 – 14,000) Machinery – Book value (–) Depreciation (–) Realisable value

Rs. 34,000 23,760

20,000 5,000 2,800 14,200 1,20,000 (25,000) 95,000 (65,000) 35,000

1,34,760

1,34,760

834

Financial Accounting

Points to Remember An insolvent is a person who is unable to pay his debts in full because of inadequate assets as and when claimed by his creditors. Presidency Town’s Insolvency Act, 1909 and Provincial Insolvency Act are in force to protect the interest of debtors. If a debtor unable to pay his debts (minimum of Rs. 500) or he commits an act of insolvency, a petition may be filed by a creditor or by the debtor himself. If a person is adjudicated as an insolvent, the procedure is to prepare and submit Statement of Affairs and Deficiency Account. In the case of Partnership Firms, Statement of Affairs and Deficiency Account are prepared separately by the Partnership Firm and also by individual partners.

Examination Questions I. Objective Questions 1. Fill in the blanks (i) The term _________is used in English Law instead of insolvency. (ii) The Provincial Insolvency Act,1920 is applicable to _______. (iii) Deficiency Account is prepared to show ___________. (iv) Some part of unsecured creditors has a priority over the other creditors, they are called ________. (v) Statement of Affairs is prepared like___________. 2. Choose the correct answer (i) In Case of insolvency of a Partnership Firm, the Private assets of a partner (a) are first available to the firm (b) are first available to partner’s private liabilities (c) none of these (ii) Statement of Affairs shows the Liabilities and Assets at (a) Book value only (b) Market value or reliable value (c) Both book value and realisable value (iii) Salary outstanding is included in Preferential creditors as per Provincial Insolvency Act to the extent of (a) Rs. 300 per head (b) Rs. 20 per head (c) Rs 100 per head 3. Match the following (i)

Unsecured creditors

a

List F

(ii)

Properties

b

List D

(iii)

Bills of Exchange

c

List E

(iv)

Preferential creditors

d

List G

(v)

Book Debts

e

List A

Insolvency of Individual and Partnership Firm

835

4. State whether the following statements are True or False: (i) A person refusing to discharge a debt of Rs. 500 is said to be insolvent (ii) Amount due to Government, local authorities etc., are Preferential in nature. (iii) Any surplus in the case of fully secured creditors summed not be used for paying partly secured creditors (iv) Private assets of a partner can be used to pay off firm’s liabilities first. Answers 1.

(i) (iii) (v) 2. (i) 3. (i) 4. (i)

bankruptcy; reasons for deficiency; Balance Sheet. b; (ii) c; e; (ii) c; True; (ii) True;

(ii) rest of India; (iv) Preferential creditors; (iii) b; (iii) d; (iii) True;

(iv) b; (iv) a. (iv) False.

II. Descriptive Questions A. Very Short Answer Questions 1. Who is an insolvent? 2. What is Statement of Affairs? 3. What is the purpose of preparing Deficiency Account? 4. What are the contents of List E? B. Short Answer Questions 1. Differentiate between Statement of Affairs and Balance Sheet? 2. Write note on Insolvency of Partnership Firm? 3. What are the contents of List A? 4. What are Preferential Creditors as per Presidency Towns Insolvency Act and Provincial Insolvency Act? C. Detail Answer Questions 1. What is the procedure followed under Insolvency Act when a person commits an act of insolvency? 2. Discuss any 4 adjustments to be made in preparing a Statement of Affairs? 3. Give format of Statement of Affairs? III. Exercise Problems Problem 1 The assets of Maheswar of Mumbai on 30th June, 2004 as shown by his books were Rs. 28,000 and the liabilities Rs. 22,000. He filed his petition in the insolvency court and estimated his deficiency to be Rs. 15,000. After making the above estimate, he found the following items were not passed through his books of account:

836

Financial Accounting

Interest at 6% on his capital from 1st January, 2004; A contingent liability of Rs. 1,250 on bills discounted by him for Rs. 5,000. Amounts due as wages Rs. 300; Rent Rs. 100 and Rates and taxes Rs. 150. Prepare Insolvency Account. [Ans. Deficiency Rs. 16,800] Problem 2 On 1st January 1997, Sandy Enterprises commenced business with Rs. 6,350. He earned a total profit of Rs. 5,554 during 1997, 1998 and incurred loss during 1999 of Rs. 2,500. His total drawings were Rs. 9,000. Prepare Statement of Affairs and Deficiency Account from the following information: Cash Rs. 230; Stock Rs. 1,000; Debtors—good Rs. 8,000, doubtful Rs. 1,800, Bad debts Rs. 1,500; Furniture Rs. 564; Investment in shares Rs. 500; Unsecured creditors Rs. 13,000; Secured creditors Rs. 2,500; Value of Securities held by creditors Rs. 35,000; Preferential creditors Rs. 190; Stock realises Rs. 666; Furniture Rs. 282; Investments realised at book value; Doubtful debts realised Rs. 600. (B.Com., Mysore) [Ans. Deficiency Rs. 2,912] Problem 3 Sukumar became insolvent. He gives the following particulars on 31.3.1995: Sundry debtors—Good Rs. 5,000, Doubtful Rs. 15,250 (estimated to produce Rs. 10,000), Bad Rs. 5,000; Investment in shares Rs. 12,500 (estimated to produce Rs. 7,500); Mining shares Rs. 42,500 (estimated to produce Rs. 38,000); Loss on speculation business Rs. 7,500; Creditors Rs. 45,000; Creditors holding second charge on shares Rs. 17,500 (shares to the extend of Rs. 15,000); Creditors holding first charge on mining shares Rs. 20,000; Bills discounted Rs. 3,500 (of which likely to be dishonored Rs. 1,750), Bills payable Rs. 2,500. Creditors for taxes, cess, etc. Rs. 1,500 (of which Rs. 1,250 preferential); Furniture Rs. 2,000 (estimated to realise Rs. 1,500); Cash in hand Rs. 60; Stock in hand Rs. 19,440 (estimated to realise Rs. 3,500). He commenced business on 1.4.1992 with a capital of Rs. 30,000. He earned profits Rs. 5,000 and Rs. 3,750, respectively in the first two years and in the third year, he suffered a loss of Rs. 2,500 after allowing Rs. 1,500 as interest on capital each year. Withdrawal for the entire period amounted to Rs. 13,000. Prepare a Statement of Affairs and Deficiency Account. (B.Com., Madras) [Ans. Deficiency Rs. 22,690] Problem 4 Prepare a Statement of Affairs and Deficiency Account of Mr. Babulal who filed his petition on 31st December, 2004. The books showed that he owed Rs. 40,100 of which creditors amounting to Rs. 6,500 held stock of the estimated value of

Insolvency of Individual and Partnership Firm

837

Rs. 7,200, others amounting to Rs. 29,000 held stock of the estimated value of Rs. 15,300 and a mortgage on the property at Kolkata at Rs. 13,000; the landlord being a preferential creditor for Rs. 100. Bills had been discounted amounting to Rs. 3,500, in respect of which it was estimated that the firm would be liable for Rs. 500. The assets consisted of the following: Book debts: Good Rs. 1,500; Doubtful Rs. 600, estimated to produce Rs. 400; and Bad Rs. 700. Furniture and fittings Rs. 300, estimated to produce Rs. 150. Cash Rs. 50. Bills receivable Rs. 350. Stock Rs. 1,600, estimated to produce Rs. 1,200. The firm commenced business on 1st January, 2000 with a capital of Rs. 25,000. After charging Rs. 1,000 a year for interest on capital and Rs. 1,300 a year for salary (which were credited to Capital Account and not withdrawn), he had profit in the first year of Rs. 2,700, but in the following four years losses were Rs. 2,000; Rs. 3,700; Rs. 4,000 and Rs. 6,500, respectively. He drew out of cash at the rate of Rs. 1,200 a year. The property at Calcutta cost Rs. 22,000 and stock mortgaged was subjected to a discount of 25%. (B.Com., Karnataka) [Ans. Deficiency Rs. 1,450] Problem 5 On 31st December 2004, Mr. Babu filed his petition in bankruptcy. The information you are able to obtain as to his position is as follows: Rs. Creditors

1,50,000

Creditors partly secured by lien on shares

80,000

Creditors fully secured by lien on stock

20,000

Liability on bills receivable (estimated to rank Rs. 7,000)

14,000

Mortgage on factory building

20,000

Creditors payable in full Book Debts : Good Doubtful and bad (estimated to produce Rs. 4,000) Consignment of goods Stock (estimated to realise Rs. 80,000) Shares (cost and estimated to realise) Cash at bank

6,000 40,000 20,000 10,000 1,20,000 32,000 200

Bills of exchange

2,800

Factory building

22,000

Machinery (estimated to realise Rs. 24,000)

30,000

Fixtures (estimated to realise Rs. 3,000)

6,000

Furniture (estimated to realise Rs. 6,000)

7,000

On 1st January, six years ago, he had Capital of Rs. 1,00,000. Profits were made in the six years of Rs. 21,200 after allowing interest on capital Rs. 20,000 and withdrawals amounted to Rs. 1,27,200.

838

Financial Accounting

Prepare Statement of Affairs and Deficiency Account. (B.Com., Madurai) [Ans. Deficiency Rs. 59,000] Problem 6 Mr. Himan was adjudged insolved on 1st January, 2004. From the following information as to his position, prepare his Statement of Affairs as on that date and Deficiency Account for the three years ended on that date: Rs. Sundry debtors: Good: Bad and doubtful Estimated to realise

Rs. 20,000 Rs. 81,000 Rs. 40,000

1,01,000

Shares in Platinum Ltd. (estimated to produce Rs. 1,82,000)

2,20,000

Creditors on open account

1,90,000 80,000

Creditors holding a second charge on the investment to the extent of Rs. 60,000

70,000

Bills receivable discounted (out of which Rs. 7,000 are expected to rank)

12,000

Creditors for Rent, taxes etc. (preferential Rs. 3,000)

6,000

Furniture (estimated to realise Rs. 6,000)

8,000

Cash in hand

240

Stock (estimated to realise Rs. 60,000)

71,760

Bills receivable (estimated to realise Rs. 14,000)

26,000

Losses on Stock Exchange

30,000

Mr. Himan started the business on 1st January, 2001 with a Capital of Rs. 1,00,000. In first two years, there was a profit of Rs. 55,000 and in the third year, there was a loss of Rs. 10,000. He had been allowed interest at 6% per annum on his original capital for each of the three years. Withdrawals for the whole period amount to Rs. 52,000. Out of his withdrawals he had purchased jewellery for his wife at a price of Rs. 6,000. His wife has offered this jewellery towards paying the debts of her husband. The jewellery is expected to realise Rs. 8,000. (B.Com., Poona) [Ans. Deficiency Rs. 22,760] Problem 7 Mr. Singh’s position on 31st December, 2004 was as follows: Rs. Capital (1.1.2002)

Rs.

10,000 Cash 6,000 Stock (estimated to realise Rs. 5000)

200 10,000

Interest on capital (of all 3 years)

1,500 Machinery (estimated to realise Rs. 2,000)

8,000

Unsecured creditors

5,000 Shares (estimated to realise Rs. 2,000)

3,000

Fully secured creditors

4,000 Furniture (estimated to realise Rs. 500)

Partly secured creditors

6,000 Book Debts (estimated to realise Rs. 6,300)

Preferential creditors

15,000 Trading loss (last year) Speculation loss Drawings of all years 47,500

2,000 10,300 4,000 5,000 5,000 47,500

Insolvency of Individual and Partnership Firm

839

Fully secured creditors and party secured creditors took stock and shares, respectively as security. Mr. Singh was declared insolvent on 31st December, 2004. You are required to prepare his Statement of Affairs and Deficiency Account. (B.Com., Bombay) [Ans. Deficiency Rs. 14,000] Problem 8 Laxmipati filed his insolvency petition on 1st April, 2004. The following information was available: Rs. Buildings (estimated to produce Rs. 60,000) Machinery (estimated to produce Rs. 2,40,000)

70,000 3,00,000

Motor car (estimated to produce Rs. 10,000)

20,000 60,000

Stock-in-trade (estimated to realise Rs. 10,00,000) Good Doubtful to realise Rs. 1,40,000 Investments (estimated to produce Rs. 3,50,000)

12,00,000 4,00,000 2,00,000 3,20,000

Mortgage on machinery

2,00,000

Loans and overdrafts secured by Investments

7,00,000

Liability on bills discounted (estimated to rank Rs. 70,000)

1,40,000

Creditors payable in full

62,000

Bills receivable (estimated to realise Rs. 20,000)

28,000

Cash in hand

200

Cash at bank

1,800

Loans unsecured

15,00,000

Laxmipati started his business with a capital of Rs. 8,00,000 and he has made a profit of Rs. 3,38,000 to the date of his application, after allowing interest on capital to the extent of Rs. 1,00,000. His personal expenses and withdrawals amounted to Rs. 11,00,000. Prepare the Statement of Affairs and Deficiency Account. (B.Com., Karnataka) [Ans. Deficiency Rs. 2,80,000] Problem 9 A filed his petition on 31st December, 2004 and his Statement of Affairs was composed of the following figures: Rs. Creditors for goods Bills payable

75,000 5,000

Creditors secured by lien on shares

40,000

Creditors secured by lien on stock

15,000

Liability on bills discounted, estimated to rank Rs. 3,000 Mortgage on mill Creditors payable in full Book Debts : Good Doubtful and bad, estimated to produce Rs. 2,000

7,000 10,000 3,000 20,000 10,000 Contd.

840

Financial Accounting

Contd. Consignments considered good

5,000

Shares, estimated to realise Rs. 16,000

15,000

Stock, estimated to realise Rs. 40,000

60,000

Cash at bank

100

Bill of exchange

1,400

Mill, estimated to realise Rs. 11,000

20,000

Machinery, estimated to realise Rs. 12,000

15,000

Fixtures, estimated to realise Rs. 4,500

9,800

On 1st January, six years ago, he had a capital of Rs. 50,000. Profits were made in the six years totalling Rs. 45,500 in the first four years and losses were incurred totalling Rs. 25,000 in the last two years after allowing Rs. 2,500 per annum interest on capital. Withdrawals amounted to Rs. 77,200. Prepare his Statement of Affairs and Deficiency Account. (B.Com., Madurai) [Ans. Deficiency Rs. 34,000] Problem 10 Mr. Bhagywan filed his insolvency petition on 31st December, 2004 and his Statement of Affairs was composed of the following: Dr. Rs. Buildings

Cr. Rs.

Estimated to Rs.

70,000

60,000

Machinery

3,00,000

2,40,000

Electric machinery

2,20,000

2,20,000

Furniture

60,000

30,000

13,00,000

9,00,000

Good

4,00,000

4,00,000

Doubtful

1,00,000

40,000

Bad

1,00,000

Stock-in-trade Book debts :

Investments

3,20,000

3,20,000

Mortgage on electric machinery

2,00,000

2,00,000

Loan partly secured on investment

8,00,000

8,00,000

Loan fully secured by lien on stock

2,000

2,000

15,00,000

15,00,000

60,000

60,000

Loan unsecured Liability on bills discounted worth Rs. 1,40,000

70,000

Preferential creditors Bills of exchange Cash with bank Capital (1.1.2000) Add : Interest Less : Drawings

28,000

28,000

2,000

2,000

10,00,000 2,00,000 16,10,000 12,72,000

3,38,000 29,00,000

29,00,000

(B.Com., Pune) [Ans. Deficiency Rs. 3,92,000]

23

Accounting for Sale or Return, Investment Accounts and Voyage Accounts

Learning Objectives After studying this chapter, you should be able to

ACCOUNTING FOR SALE OR RETURN The primary objective of business is to make and maximise profits. Profits making or maximisation highly depends upon sales. In order to promote sales, manufacturers send goods to customers on Sale or Return basis. Here, when goods are transferred to the buyer by the seller, it is not considered as a sale, because the customer if not satisfied with the goods sent, he may return the goods to the sender. On the other hand, if the customer is satisfied with the goods, he may accept the goods and then the transaction is treated as a ‘sale’. Since sale or return transaction is not considered as a sale, it requires special treatment in accounting. There are three methods of accounting treatment for goods sent on sale or return basis. These are: (i) If transactions are very few When sale or return transaction are very few, the transactions may be treated as actual sales made, although it is incorrect theoretically. According to this method, when goods are sent out it is recorded in the sales day book. The following journal entry is passed:

842

Financial Accounting

(ii) If transactions are frequent When the transactions are frequent, they are entered in a separate book called sale or return day book. The format of sale or return day book is given below:

This book is used for the purposes of recording the transactions relating to return or retention of such goods. (iii) If transactions are numerous When sale or return transactions are large in number, separate set of books becomes necessary. They are as follows: (a) Sale or return day book (like an ordinary sales day book) (b) Sale and return day book (like an ordinary inward day Book) (c) Sale or return ledger. The formats are as follows (a) Sale or Return Day Book

(b) Sale or Return Book

(c) Sale or Return Ledger

Accounting for Sale or Return, Investment Accounts and Voyage Accounts

843

The following are the important journal entries: L.F. Customer’s A/c To Sale on Approval A/c

Debit (Rs.)

Credit (Rs.)

Dr.

(Being goods sold under ‘Sale or Return’ basis)

Sale on Approval A/c To Sales A/c

Dr.

(Being goods are approved by the customer)

Sale on Approval A/c Customer’s A/c

Dr.

(Being goods not approved by the customer)

Sale on Approval A/c Trading A/c

Dr.

(Being the stock with customer pending approval is recorded at cost price)

INVESTMENT ACCOUNTS Investment Accounts deal with investment made in corporate securities namely shares, government securities, debentures or bond, etc. There are two types of investments, namely (1) Investment in Fixed Income Bearing Scrips and (2) Investment in Variable Income Bearing Scrips

Difference between Fixed Income Bearing Scrips and Variable Income Bearing Scrips or bonds, whereas variable income bearing scrips include equity shares. Investment Accounts are prepared separately for each type of scrips. half-yearly) on fixed due dates. For registered corporate securities, payment is made to a person on whose name appears in the register of scrips, whereas for bearer scrips payment is made to the holder of scrips.

Cum-interest and Ex-interest Amount paid for cost of scrips constitutes capital and interest. Interest payable is revenue in nature. Generally, the prices paid for scrips depend on quotation. If the price quotation is cum-interest, it means that the price quoted includes interest. Therefore, the buyer has to pay interest for the expired period. If the price quotation is ex-interest, it means that the price quoted excludes interest. Therefore, the buyer has to calculate the interest for the expiry period and pay along with the price quoted. In Investment Accounts, the cost of scrips is to be entered in cost column and the interest is to be entered in interest column. It should be noted here that interest should

844

Financial Accounting

be calculated on the basis of face value of scrips. Brokerage is calculated on the basis of price quotation. The following are the important journal entries:

VOYAGE ACCOUNTS Voyage Accounts are maintained by shipping companies. Voyage Account is prepared to ascertain profit earned or loss incurred on each voyage undertaken by a ship. Voyage is a journey of a ship from one port to another and back. In addition to Voyage Account, shipping companies usually prepare their accounts to ascertain overall profit or loss every year. Voyage Account is a nominal account in nature and is prepared like Profit and Loss Account. Therefore, all expenses which are incurred during a particular voyage are to be debited and income which earned are to be credited to this account. Items which are peculiar to Voyage Accounts and their accounting treatment are as follows.

Expenses that are Debited to Voyage Accounts (i) Port Charges These are the charges paid by shipping companies for using the port, especially for parking the ship and also for loading and unloading of goods. These are the expenses incurred by the shipping company.

Accounting for Sale or Return, Investment Accounts and Voyage Accounts

845

(ii) Bunker Cost It is an expenditure incurred for purchasing coal, fuel, diesel and fresh water, etc. These items are required by a ship during voyage.

(iii) Address Commission It is paid to the agents on the basis of orders procured by them for the voyage. In short, it is calculated on the basis of freight and primage earned by the shipping company.

(iv) Brokage Brokage is paid to brokers of the charters. It is also calculated on the basis of freight and primage earned. The difference in address commission is paid to a charter, whereas brokerage is paid to the agent/broker of the charter.

(v) Stevedoring Charges These charges are paid to the workers for loading the goods in the ship and unloading goods from the ship.

(vi) Insurance Premium It is an expense that comprises premiums for both ship insurance and cargo insurance.

(vii) Depreciation Depreciation on ship, repair expenses, renewals, replacements if any, are to be debited to Voyage Account.

(viii) Consumable Stores It is stores consumed during the voyage and has to be debited to the Voyage Account.

(ix) Other Expenses In addition to the above, salaries and wages of crew, captain and other employees, harbour expenses, managers remuneration, if any, etc. are to be debited to Voyage Accounts.

Incomes that are Credited to Voyage Accounts (a) Freight It is an income which is collected from owner of cargo or goods to carry them from one place to another.

(b) Passage Money It is also an income which is collected from passengers of a ship for their travel.

(c) Primage It is an additional freight collected by a shipping company for the captain, to appreciate him for a safety navigation earliest. But, nowadays, it is received by the shipping company and credited to Voyage Account.

846

Financial Accounting

This Voyage Account is closed by transferring profit or loss to General Profit and Loss Account after each Voyage.

Index for Illustrations Type

Ill. No. 1–7 8 – 13 14 – 19

I – ACCOUNTING FOR SALE OR RETURN Illustration 1 Ramu sells goods to his approved customers on sale or return basis at a profit of 20% on sales treating as actual sales. On 15th September, goods costing Rs. 1,000 were sent to Usha Traders. No confirmation has been received from Usha Traders until 31st December. Give the necessary journal entries in the books of Ramu. (B.Com., Madras) Solution Book of Ramu – Journal Entries

–

Illustration 2 A trader sends goods to his customers on sale or return basis. The following transactions took place during the year 2004.

Accounting for Sale or Return, Investment Accounts and Voyage Accounts

847

Assuming that the trader records the transactions on ordinary sales basis and that the date of Final Accounts was December 31st, show the entries. (B.Com., Calcutta) Solution Books of a Trader – Journal Entries

Illustration 3 On 31.12.92 goods sold at sales price of Rs. 3,000 on sale or return basis were lying with customer Anu and recorded as actual sales. Since no consent has been received from customer, you are required to pass adjustment entries presuming goods were sent on approval at a profit of cost price 20%. Present market price is 10% less than the cost price. (B.Com., Madras) Solution Books of Anu – Journal Entries

* Working Note Goods were sent = Cost + 20% = 100 + 20 = 120 (sale price) For sale price as Rs. 120, cost price is Rs. 100, For sale price Rs. 3,000, cost price = 3,000 ¥ 100/120 = Rs. 2,500 Since Market price is 10% less than the cost price

Financial Accounting

848

Market price = Rs. 2,500 – 10% of Rs. 2,500 2,500 – 250 = Rs. 2,250 (market price) Since goods with customers are valued at cost price or market price which is lesser, value of stock with customer = Rs. 2,250. Illustration 4 Mohan Brothers sells their goods to their Approval customers on sale or return basis, trading all such transactions as actual sales at the time of despatch. They sent on 5th December goods costing Rs. 1,000 to Sriram stores at 20% profit on sales and passed the goods through sales day book. How would you adjust the transaction on 31st December, if Sriram Stores consent is pending? (B.Com., Madras) Solution Books of Mohan Brothers – Journal Entries

* Working Notes Goods were sent = Sale price + 20% For sale price as Rs. 100, cost price = 100 – 20 = Rs. 80 For cost price Rs. 1,000 , Sale price = 1,000 + 20/80 = 1,000 + 250 = Rs. 1,250 (sale price) Illustration 5 Jai Auto Components Ltd. sent out components on sale or returns basis. They maintained a separate set of books for this type of business. During the month of April, they sent out machines on sale or returns as follows:

Show the Day Books.

Accounting for Sale or Return, Investment Accounts and Voyage Accounts

849

Solution Books of Jai Auto Components Ltd Sale or Return Book

–

–

– –

–

–

–

– –

– –

Illustration 6 ABC Kitab Agency sends goods on approval basis as follows:

— — — —

— —

Show how these transactions will be dealt with when books are kept on Double Entry System. Date of approval has not expired in all the cases. Solution ABC Kitab Agency Sales or Return Day Book

Sales or Return Journal

Financial Accounting

850

Goods on Sale or Return Account

31

Sales or Returns Ledger Anil’s Account

Balu’s Account

Chari’s Account

Dani’s Account

Eman’s Account

Farook’s Account

Illustration 7 Allwin Publishing House sent consignment of their publications to the following customers on sale or returns basis in the first week of April, 2007:

Accounting for Sale or Return, Investment Accounts and Voyage Accounts

851

The letter to the customers mentioned that if the books were not approved by them, they should be returned within one month, failing which they would be treated as sold. By the end of that month, the customers from Chennai had retained the books, while those from Kolkata had returned them in time. Mr. Girish of Mumbai had accepted one of the consignments of Rs. 5,000, but returned the others and the time of approval had not yet expired for Mr. Ramana. Show the entries in the sale or return day book and the accounts of the Mumbai parties in the personal ledger. Solution Allwin Publishing House I. Sale or Return Book

— —

— — — —

II. Sale or Return Ledger Books Manoj’s Account

Ramana’s Account

Girish’s Account

Gopal’s Account

Pani’s Account

— — —

852

Financial Accounting

Goods on Sale or Return Total Account

“ “

III. Debtors Ledger Manoj’s Account

Natesh’s Account

Girish’s Account

II – INVESTMENT ACCOUNTS Illustration 8 On 1st April 2007, John purchased 100 (7%) debentures of Rs. 1,000, for Rs. 1,100 from Paul, each cum-interest. Interest is payable on these debentures on 30th June and 31st December each year. Pass the necessary entries in the books of purchase and seller. Solution I. Books of John (Purchaser) – Journal Entries

¥

¥

¥

¥

¥

¥

Accounting for Sale or Return, Investment Accounts and Voyage Accounts

853

II. Books of Paul (Seller) – Journal Entries

¥

¥

Illustration 9 On 31st March, 2005 Arjun bought 100 (8%) Rs. 100 Debentures of Bharat Steels Ltd. from Raman, at Rs. 125 cum-interest, payable on 30th June and 31st December each year. Record the above transaction in the books of Arjun and Raman if the bank charges the commission at 25% to both the parties. Solution Book of Arjun Journal Entries

¥

¥

¥

*Value of investment made (cum-interest price) Purchase Price – 100 @ Rs. 125 (cum-interest) = Rs. 12,500 (+) Bank Commission @ 25% on the face value 100 ¥ Rs. 100 = 10,000 @ 25% = Rs. 2,500 Total cost of the investment made = Rs. 15,000 (–) Interest accrued for 3 months (1st Jan – 31st March) 100 ¥ Rs. 100 ¥ 8% ¥ 3/12 = Rs. 200 Net value of investment = Rs. 14,800 Book of Raman Journal Entry

854

Financial Accounting

*Value of investment sold (cum-interest price) Sale Price – 100 @ Rs. 125 (cum-interest) = (–) Bank Commission @ 25% on the face value 100 ´ Rs. 100 = 10,000 @ 25% = Net cost of the investment made = (–) Interest accrued for 3 months (1st Jan – 31st March) 100 ¥ Rs. 100 ¥ 8% ¥ 3/12 = Net value of investment =

Rs. 12,500 Rs. 2,500 Rs. 10,000 Rs. 200 Rs. 9,800

Illustration 10 Mr. Adam held on 1st July, 2005 Rs. 1,00,000, (3.5%) government loan at Rs. 95,000. Three months interest had accrued. On 31st May he had purchased further Rs. 40,000 of the loan at Rs. 96 (net) cum-interest. On 31st July Rs. 30,000 of the loans was sold at Rs. 94 (net) ex-interest. On 30th November Rs. 20,000 of the loans was sold at Rs. 96 (net) cuminterest. Interest on loans was paid each year on 31st March and 30th September and was collected on 4th April and 5th October. The price of the loans on 31st December was Rs. 96. Draw up the Loans Account, ignore income tax and paise. Solution 3.5% Government Loan Account

– –

– –

–

–

–

–

–

83

–

–

–

– 117

–

788 –

– –

788

–

Working Note Accrued interest (Dr.) = 1,00,000 @ 3.5% ¥ 8/12 = Rs. 875 Interest (Cr.) = 1,00,000 ¥ 3.5% ¥ 6/12 = Rs. 1,750 Interest (Dr.) = 40,000 ¥ 3.5% ¥ 2/12 = Rs. 233

–

Accounting for Sale or Return, Investment Accounts and Voyage Accounts

855

Principal (Dr.) = 38,400 – Rs. 233 = Rs. 38,167 Sales (Cr.) = 30,000 ¥ 3.5% ¥ 4/12 = Rs. 350 Sales (Cr.) = 30,000 ¥ 94/100 = Rs. 28,200 Profit and Loss A/c (Cr.) = 30,000 ¥ 95/100 = Cost (28,500) – Principal (28,200) = Loss (300) Interest received (Cr.) = 1,40,000 ¥ 3.5% ¥ 6/12 = Rs. 2,450 Sale (Cr.) = 20,000 ¥ 96/100 = 19,200 – 2 months interest (20,000 ¥ 3.5% ¥ 2/12 = 117) = Rs. 19,083 Accrued interest (Cr.) = 90,000 ¥ 3.5% ¥ (3/12) = Rs. 788 Illustration 11 Calcutta Investments hold 400 (12%) debentures of Rs. 100 each in Acma Ltd. as on 1st April, 2004 at a cost of Rs. 50,000. Interest is payable on 30th June and 31st December each year. On 1st June, 2004, 200 debentures are purchased cum-interest at Rs. 21,400. On 1st November, 2004 300 debentures are sold ex-interest at Rs. 28,650. On 30th November, 2004, 200 Debentures are purchased ex-interest at Rs. 19,200. On 31st December, 2004, 300 Debentures are sold cum-interest for Rs. 32,250. Prepare Investment Account valuing closing stock as on 31st March, 2005 (applying FIFO method) or market price whichever is lower. The debentures were quoted at par on 31st March, 2005. Solution Books of Calcutta Investments Investment Account Date

Particulars

Nominal Interest Rs.

Rs.

Principal

Date

Particulars

Rs.

2004

Interest

Principal

Rs.

Rs.

Rs.

2004

April 1 To Balance b/d To Bank June 1 (cuminterest) To Bank Nov. 30 (ex- interest)

40,000

1,200

50,000

20,000

1,000

20,400

20,000

1,000

19,200

2005

June 30 By Bank Interest 60,000 ¥ 12% ¥ 6/12 Nov. By Bank 1 (Exinterest) Dec. By Bank 31 (cuminterest)

3,600 30,000

1,200

28,650

30,000

1,800

30,450

2005 Mar. By Interest 31 20,000 ¥ 12% ¥ 6/12 By Interest Accrued 20,000 ¥ 12% ¥ 3/12

Mar. 31 Loss A/c

5,200

and Loss A/c By balance C/d 80,000

8,400

89,600

20,000

600

19,200

2005 April 1

Nominal

To Balance b/d

1,200

600 11,300 20,000

–

19,200

80,000

8,400

89,600

Financial Accounting

856

Working Note Loss on sale Cost of investment sold = (50,000/40,000) ¥ 30,000 Sold on 1st November Loss on sale Total Loss Cost of 100 Debentures = 37,500 ¥ 100/300 = Rs. Cost of 200 Debentures (given) = Rs. Total cost of 300 Debentures = Rs. (–) Sold for = Rs. = Rs. Total Loss: Rs. 8,850 + Rs. 2,450 = Rs. 11,300

= Rs. 37,500 = Rs. 28,650 = Rs. 8,850 12,500 20,400 32,900 30,450 2,450

Illustration 11 XY Investors Ltd. held on 1st January, 2004 Rs. 60,000 of 12% government securities (tax free) of Rs. 100 each at Rs. 56,500. On 1st June, 2004, the Company purchased a further of Rs. 40,000 of the security at 96 ½ cum-interest, brokerage being 1 %. 2

On 31st July, 2004, Rs. 50,000 of security was sold at 94 ½ ex-interest, brokerage being ½ %. On 1st December, 2004, Rs. 20,000 of the security was again sold at 96. Interest on the security was paid each year on 31st March and 30th September and was credited by the bank on 3rd April and 4th October, respectively. The price of the security on 31st December, 2004 was 96. Investors Ltd. closes its books on 31st December each year. Draw up the Investment Account in the books of Investors Ltd. Solution Books of XY Investors Ltd Investment Account Date

Particulars

Nominal Rs.

2004 Jan. 1

To Balance b/d June 1 To Bank (cuminterest) To Profit and Dec. Loss A/c 31

2005 Jan. 1

To Balance b/d

60,000 40,000

Interest Rs.

Principal Rs.

Date

Particulars

2004 April By Bank Inter1,800 56,500 3 est 60,000 ¥ 12% ¥ 800 38,000 6/12 July By Bank -Sales 7,300 31 (94.5%) Oct 4 By Bank (Interest) 50,000 ¥ 12% ¥ Dec. 6/12 1 By Bank- Sales Dec. ( 96%) 31 By Profit and Loss A/c (Loss on sale) By Balance c/d

1,00,000

9,900 94,500

30,000

900 28,350

Nominal Rs.

Interest Rs.

Principal Rs.

3,600 50,000

2,000

47,000

3,000 20,000

400

30,000

900 9,900

1,00,000

18,800 350 28,350 94,500

Accounting for Sale or Return, Investment Accounts and Voyage Accounts

857

Illustration 13 Bharat Plastics Ltd. issued bonus shares and Mr. Shankar received 500 equity shares of the company as bonus shares Mr. Shankar dealt on the stock exchange and had purchased and sold leading scrips but did not maintain his accounts in a proper manner. He furnishes the following data: Investments on hand on July 1, 2008 300 – 3% Conversion Loan 2008 – 2010 of Rs. 100 each purchased at Rs. 60 250 – Equity shares of Rs. 100 each of Everwin Ltd. at Rs. 18 per share. 100 – 9% Preference shares of Rs. 100 each on Bhagwan Fabrics Ltd. at Rs. 95 per share. Transactions during the year: Purchases 750 equity shares of Rs. 10 each of Everwin Ltd. at Rs. 23 250 equity shares of Rs. 10 each of Smart Electronics Ltd. at Rs. 9 125 equity shares of Rs. 10 each of Bright Logistics Ltd. at Rs. 12 Sold 100 – 3% conversion loan 1998-2000 at Rs. 65 100 – 9% preference shares of Bhagwan Fabrics Ltd. at Rs. 99 Interest / Dividend Received 3% Conversion Loan – Interest Received – Rs. 900 9% Preference Shares of Bhagwan Fabrics Ltd. – Rs. 9,000 Everwin Ltd. – Dividend at 20% on 1,000 shares – Rs. 2,000 Everwin Ltd. issues bonus shares and Mr. Shankar received 1,000 equity shares of the company as bonus shares. You are required to show the Investment Account in Mr. Shankar books. Solution In the books of Mr. Shankar 3% Conversion Loan 2008 – 2010 Account

– – ¥

¥

–

–

–

–

¥ –

–

–

Equity Shares of Everwin Ltd. Account

– –

– 1

– – –

– – –

858

Financial Accounting

9% Preference Shares of Bhagwan Fabrics Ltd. Account

– – 1 –

–

–

–

¥ –

–

–

Equity shares of Smart Electronics Ltd. Account

–

Equity Shares of Bright Logistics Ltd Account

– 1

III – VOYAGE ACCOUNTS Illustration 14 India Shipping Co. of Mumbai had a ship by name Bharat, whose written down value as on 1st July, 2005 was Rs. 25 lakhs. The ship was insured for Rs. 30 lakhs at 1% for voyage policy of hull. The ship makes a trip to Sydney and returned to Chennai during the period 1st July, 2005 to 30th September, 2005. The particulars relating to the voyage are given below: (i) Expenses incurred: Salaries of the crew Rs. 25,000; Fuel Rs. 55,000; Port Dues Rs. 30,000 Stores expenses Rs. 32,000; Shares of overhead for the ship Rs. 16,000 (ii) Stevedoring at the rate of Rs. 3 per tonne. (iii) Depreciation was charged on the written value of the ship at the rate of 10% per annum. The freight was insured at 1%. (iv) The particulars of the freight consisted of the following: (a) Leather goods 1,100 tonnes at the rate of Rs. 120 per tonne. (b) Cotton 500 tonnes at the rate of Rs. 150 per tonne. (c) Sugar 1,700 tonnes at the rate of Rs. 100 per tonne. (v) In addition to primage @ 10% the brokerage payable was @ 5%. Prepare Voyage Account for the three months.

Accounting for Sale or Return, Investment Accounts and Voyage Accounts

859

Solution Books of India Shipping Company Voyage Account (1st July 2005 to 30th Sept. 2005)

¥

Illustration 15 Jai Sea Express is regularly employed on cargo trade between India and East Africa. She set on her voyage on 1st July, 2005 and arrived at her destination on 14th August, 2005. You are required to prepare a Voyage Account bearing in mind the following particulars: (a) The vessel was purchased in 1998 for Rs. 100 lakhs and at the time of purchase has 16 years of working life left: Depreciation on ship is charged on straight line method. (b) Standing cost per day excluding recovery of depreciation is Rs. 22,000. (c) The vessel consumes daily 14 tonnes of fuel oil, 2 tonnes of diesel and 15 tonnes of fresh water. The costs of these are Rs. 1,000, Rs. 1,350 and Rs. 20 per tonne, respectively. (d) The vessel carried the under mentioned cargo: 4,000 tonnes on which freight of Rs. 375 per tonne was charged; 3,500 tonnes on which the rate of freight was Rs. 190 per tonne; Both the rates are to be enhanced by a surcharge of 20% over the basic rates. (e) Freight brokers were due a brokerage of 2.5% (f) Port charges at the loading and discharging ports were Rs. 40,000 and Rs. 85,000, respectively.

860

Financial Accounting

Solution Books of Jai Sea Express Voyage Account (1st July, 2005 to 14th August, 2005)

¥

¥

Illustration 16 North Peninsula Ship commenced a voyage on 1st March, 2005 from Port A to Port B and back. The voyage was completed on April 31, 2005. It carried a consignment of vegetables on its outward journey and teak wood on its return journey. The ship was insured at an annual premium of Rs. 6,00,000. From the following particulars, draw up the voyage account: Port charges Rs. 1,25,000; Coal Rs. 7,50,000; Wages and Salaries Rs. 12,50,000; Stores purchased Rs. 2,15,000; Sundry expenses Rs. 1,37,500 Depreciation (annual) Rs. 24,00,000; Freight earned (out) Rs. 32,50,000; Freight earned (return) Rs. 17,50,000; Address Commission 5% on outward and 4% on return freight; Passage money received Rs. 2,50,000; Primage is 5% on freight. The manager is entitled to 5% commission on the freight earned. After charging such commission, stores and coal on hand were valued at Rs. 75,000 on May 31, 2005. Solution North Peninsula Ship Voyage Account

¥ ¥ Contd.

Accounting for Sale or Return, Investment Accounts and Voyage Accounts

861

Contd.

¥

Illustration 17 The Lakshman Sea ways undertook a voyage from Athens to Kolkata on 1st January, 2004 and reaching on 31st March, 2004. The cargo consisted of 900 tonnes of foodgrains and 100 tonnes of engineering goods. The freight charges were Rs. 150 per tonne for foodgrains and Rs. 100 per tonne for engineering goods. In addition primage was 10%. Brokerage was payable at 5%. The expenses were –

–

The ship was insured for Rs. 10,00,000 at 1% for voyage policy of Hull. The frieght was insured @ ½% Depreciation is charged on the written down value of the ship at 5% per annum. The value of ship as on 1st January, 2004 was Rs. 8,00,000. Solution Books of Lakshman Sea ways Voyage Account (from 1st January to 31st March, 2004)

¥

798

862

Financial Accounting

Illustration 18 Chakravathi Ashoka sailed from Kolkata port on 1st February, 2007 and arrived at Chennai port on 31st March, 2007 via Visakhapatnam. The following goods were loaded. 1,000 million tonnes and 200 million tonnes, at Kolkata port for Chennai port and Visakhapatnam port respectively. Another 500 million tonnes were loaded at Visakhapatnam for Chennai. The freight charges were: Kolkata port to Chennai port Rs. 600 million tonnes Kolkata port to Visakhapatnam port Rs. 500 per million tonnes Visakhapatnam port to Chennai port Rs. 400 per million tonnes The freight is subject to 10% primage, 5% address commission and 2.5% brokerage. The freight was insured at ½%. Hull was insured for the voyage at 1%. Depreciation was provided at 3% per annum. The cost of the ship Rs. 1 crore. The following were the expenses incurred at different ports.

—

Stores purchased for the voyage amounted to Rs. 50,000. Opening stock of stores was Rs. 40,000 and closing stock was estimated at Rs. 30,000. Stock of coal at close was estimated at Rs. 30,000 as against stock of Rs. 10,000 at the beginning. The ship will not come back to Kolkata port in the near future as part of the voyage programme. Salaries and wages amounted to Rs. 80,000 per month. Prepare Voyage Account. Solution Chakravathi Ashoka Voyage Account (from 1st Feb. 2007 to 31st March 2007)

Contd.

Accounting for Sale or Return, Investment Accounts and Voyage Accounts

863

Contd.

¥

Illustration 19 Kanishka Marine Inc. undertook a voyage from Port X to Port Y starting on 1st January, 2006 and reaching on 31st March, 2006. The cargo consisted of 900 tonnes of food grains and 100 tonnes of manufacturing goods. The freight charges were Rs. 1,500 per tonne for food grains and Rs. 1,000 per tonne for manufacturing goods. In addition, primage was 10%. brokerage was payable at 5%. The expenses were Port X

Port Y

Rs.

Rs. —

—

The ship was insured for Rs. 1,00,00,000 at 1% for a voyage policy of the hull. The freight was insured at ½ %. Depreciation is charged on the written down value of the ship at 5% per annum. The value on January 1, 2006 was Rs. 80,00,000. Prepare the Voyage Account.

Financial Accounting

864 Solution

Kanishka Marine Inc. Voyage Account Rs.

Rs.

¥ ¥

¥ ¥

Points to Remember Sale or return transaction is not considered as sale. There are three methods of accounting treatment for goods sent on ‘Sale or Return’ basis. They are (1) If transaction are very few (2) If transactions are frequent and (3) If transactions are numerous. Investment Accounts deal with investment made in corporate securities such a shares, debentures, bonds etc. There are two types of investment namely (1) Investment in fixed income bearing scrips; and (2) Investment in variable income bearing Scrips. In Investment Accounts, the cost of scrips is to be entered in cost column and interest is to be entered in interest column. Interest should be calculated on the basis of face value of scrips. Brokerage is calculated on the basis of price quotation. Voyage Accounts are maintained by shipping companies. Voyage Account is prepared to ascertain profit earned or loss incurred each voyage undertaken by a ship.

Accounting for Sale or Return, Investment Accounts and Voyage Accounts

865

In addition to Voyage Account, shipping companies usually prepare their accounts to ascertain overall profit or loss every year. Voyage Account is a nominal account in nature and is prepared like Profit and Loss Account.

Examination Questions I. Objective Questions

Accounting for Sale or Return 1. Fill in the blanks (i) Profit making depends highly upon___________________ . (ii) Sale or return transaction is not considered as a________________ . (iii) When transactions are few, they may be treated as ______________ made. 2. Choose the correct answers (i) Accounting treatment for sale or return has been classified into (a) Three methods (b) Two methods (c) None of the above (ii) When transactions are few, goods sent out are recorded in (a) Sales day book (b) Sale or return day book (c) Sale or return ledger (iii) Transactions relating to return or retention of goods are recorded in (a) Sales or return ledger (b) Sales day book (c) Sale or return day book 3. Match the following

4. State whether the following statements are True or False: (i) Sale or return transaction is considered as sale. (ii) Sale or return transaction requires special treatment in accounting (iii) These are two methods of accounting treatment for goods sent on sale or return basis (iv) Sale or return day book is like an ordinary sales day book. Answers 1. 2.

(i) Sales; (i) a;

(ii) Sale; (ii) a;

(iii) Sales. (iii) c;

866 3. 4.

Financial Accounting

(i) d; (i) False;

(ii) c; (ii) True;

(iii) b; (iii) False;

(iv) a. (iv) True

Investment Accounts 1. Fill in the blanks (i) Fixed income bearing scrips include debentures or bonds and ______ . (ii) Interest on fixed income bearing scrips is to be paid for every________ on fixed due dates. (iii) ____________is calculated on the basis of price quotation. 2. Choose the correct answers (i) Interest is calculated on the basis of (a) Face value of scrips (b) Market value of scrips (c) Both (ii) If the value of investments is equal to nominal value, then it is said to be traded (a) at par, (b) at premium (c) at discount (iii) In the case of cum-interest transaction, the price paid by the buyer is (a) More than the real price of the securities (b) Less than the real price of the securities (c) Equal to the real price of the securities 3. Match the following

4. State whether the following statement are True or False: a. In case of cum-interest price, the interest for the full period is received by the buyer b. In case of ex-interest price, the interest for full period is received by the seller. c. If number of investment is more, then a separate ledger called Investment Ledger is maintained to record all Investment Accounts. Answers 1.

(i) (iii) 2. (i) 3. (i) 4. (i)

Government securities; Brokerage. a; (ii) a; b; (ii) d; True; (ii) True;

(ii) Six months; (iii) a; (iii) a; (iii) True.

(iv) b

Accounting for Sale or Return, Investment Accounts and Voyage Accounts

867

Voyage Accounts 1. Fill in the blanks (i) Voyage Account is prepared to ascertain ________________ of each voyage. (ii) Voyage Account is _______________account in nature. (iii) Post charges are paid by shipping companies for using port, especially for _____________. (iv) Address commission is calculated in the basis ________ and ___________. (v) Insurance premium consisting of both _______ and ____________. 2. Choose the correct answer (i) Banker cost is an expenditure incurred for purchasing (a) coal (b) food (c) furniture (d) all the above (ii) Passage money is an income which is collected from (a) cargo owners (b) passengers (c) agent of cargo (d) none of the above (iii) Primage is additional freight collected (a) from owners of goods (b) for the captain of the ship (c) from passengers (d) none of the above (iv) Voyage Accounts is in the nature of (a) real account (b) personal account (c) nominal account (d) profit and Loss account (v) Port charges are paid for (a) entering into port (b) parking the ship (c) loading and unloading (d) all the above 3. Match the following

868

Financial Accounting

4. State whether the following statements are True or False: (i) Insurance premium is paid for ship insurance only. (ii) Brokage is paid to brokers of the charterer (iii) Passage money is credited to Voyage Account. (iv) Voyage is a journey of a ship from one part to another and back. (v) Coal, fuel, diesel and fresh water are required by a ship for voyage. Answers 1.

(i) (iii) (v) 2. (i) 3. (i) 4. (i)

profit or loss; Parking; ship and cargo insurance a; (ii) b; e; (ii) d; False; (ii) True;

(ii) nomial; (iv) freight and primage (iii) b; (iii) a; (iii) True;

(iv) c; (iv) b; (iv) True

(v) d. (v) c (v) True.

II. Descriptive Questions

Accounting for Sale or Return A. Very short answer questions 1. What is sale or return transaction? 2. How many methods of according treatment are required? B. Short answer questions 1. Explain various methods of accounting treatment for sale or return transactions? 2. What is the purpose of sending goods on approval basis? C. Detail answer questions 1. How goods sent out on ‘Sale or Return’ basis are recorded when such transactions are (i) few, (ii) Moderate and (iii) Numerous? 2. What are the books of original entry prepared when transactions are numerous and how the postings are made?

Investment Accounts A. Very short answer questions 1. What are Investment Accounts? 2. What is brokerage? 3. Mention the types of securities? B. Short answer questions 1. What are the different types of investments? 2. What are ex-interest and cum-interest? 3. Give journal entry for interest received? C. Detail answer questions 1. How investment transactions are prepared? Explain the accounting treatment in the books of buyer?

Accounting for Sale or Return, Investment Accounts and Voyage Accounts

869

2. How to balance Investment Account under the following circumstances: (i) Whole investment is sold and (ii) Only part of the investment is sold?

Voyage Accounts A. Very short answer questions 1. What is Voyage Account? 2. Why is Voyage Account prepared? B. Short answer questions 1. Write a note on the following (i) Port charges (ii) Banker cost (iii) Address commission (iv) Stevedoring charges (v) Prmiage (vi) Passage money 2. Explain in detail the items which are peculiar to Voyage Accounts? III. Exercise Problems

Accounting for Sale or Return Problem 1 Bright Electronics sends goods to its customers on sale or return basis. The following transactions took place during 1999: 1 3

(B.Com., Madras) Problem 2 Globe Book Publishers sent a consignment of their publishers to the following customers on sale or return basis in the first week of April, 1999:

The letter to the customers mentioned that if the books were not approved by them, they should be returned with in one month, failing whcih they would be treated as sold. By the end of that month, the customers from Chennai had retained the

870

Financial Accounting

Books, while those from Kolkata had returned them in time. Govind of Mumbai had accepted one of the consignments of Rs. 700, but returned the other and the time of approval had not expired for Ramesh. Show the entries in the sale or return day book. (B.Com., Madras) Problem 3 Mohan sends goods on sale or return basis to his customers Bharathan, Gugan, Lavan, Saraswathi; and Lakshmi for Rs. 1,000, Rs. 800, Rs. 1,100, Rs. 700 and Rs. 600, respectively. Goods are returnable within a period of 3 weeks. Lavan returned the goods Bhrathan and Lakshmi accepted them. For others, the period of weeks has not yet been expired. Enter the transactions in the sale or return day book and in the connected leger accounts. (B.Com., Madras) Problem 4 M/s. Mehtha Brothers sends out goods on approval as follows: January 10 A – Rs. 300; January 13 A returned Rs. 100 rest retained. January 12 B – Rs. 200; January 22 B retained all the goods. January 30 C – Rs. 1,500; January 31 No intimation. Show how these transactions will appear when books are kept on double entry system. Give journal entries and ledger accounts: (B.Com., Madras) Problem 5 Barkavi Enterprises supplied goods on sale or return basis, the particulars of which are as under:

Books of Barkavi Enterprises are closed on 31st March every year. Exhibit the entries as they would appear in the books of Barkavi Enterprises, viz. the goods sent on sale or return day book, goods on sale or return sold and returned day book. Also show how the Goods on Sale or Return Total Account would appear.

Investment Accounts Problem 6 On 1st December, 2005, a purchaser purchased 2000 (6%) debentures of Rs. 100 each @ Rs. 104 ex-interest per debenture. He paid 1/2% brokerage in this connection. Interest is payable on 30th June and 31st December each year. Pass entries in the books of purchaser.

Accounting for Sale or Return, Investment Accounts and Voyage Accounts

871

Problem 7 On 1st January, 2004, X Ltd. had 10,000 equity shares of Rs. 10 each in Alpha Ltd., purchased for Rs. 1,25,000. The company unlike investment companies does not make any appointment of dividends (received on receivable) in between capital and revenue. On 15th May, 2004, the Alpha Ltd. made a bonus issue of one fully paid share for two held on 15th May, 2004. In addition, on the same day Right shares were issued at 3 for 5 held on that date at a premium of Rs. 3, Rs. 7 to be paid on application and the balance in one call after a month. These shares are not to rank for dividend for the year ending 30th June, 2004. 2,000 Right shares were taken up by X Ltd. and balance right being sold at Rs. 2 each on 25th May, 2004. On 15th Octeber, 2004, the company declared a dividend of 20% for the year ending 30th June, 2004. Make out the Investment Account in the books of X Ltd. Ignore income tax. (B.Com., Calcutta) [Ans. Balance as on 31st March, 2005: Nominal value Rs. 90,000; Interest Rs. 3,375; Principal Rs. 89,400] Problem 8 Mr. Investor finishes the following details relating to his holding in 6% government bonds: Opening balance face value Rs. 60,000 – Cost Rs. 59,000. 1.3.2004 – 100 units purchased ex-interest at Rs. 98. 1.7.2004 – Sold 200 ex-interest out of the original holdings at Rs. 100 1.10.2004 – Purchased 50 units at Rs. 98 cum interest 1.11.2004 – Sold 200 units ex-interest at Rs. 99 out of the original holdings. Interest dates are 30th September and 31st March. Mr. Investor closes his books every 31st December. Show the Investment Account as it would appear in his books. [Ans. Balance as on 31st December, 2004: Nominal value Rs. 35,000; Interest Rs. 525; Principal Rs. 34,336] Problem 9 On 1st April 2003, XY & Company held 9% debentures in B Ltd. of the face value of Rs. 10,00,000 at a cost of Rs. 8,000. Market value on that date was Rs. 9,000. Interest is payable on 31st Dec. every year. On 1st December 2003, debentures of nominal value of Rs. 6,000 were purchased for Rs. 5,000 ex-interest and on 31st December, 2003 debentures of nominal value of Rs. 2,000 were sold cum-interest for Rs. 1,900. On 1st January, 2004 debentures of nominal value of Rs. 6,000 were brought at Rs. 5,800. The market value of the debentures on 31st March, 2004 at Rs. 90. Make out 9% Debentures Account in the books of XY & Company showing Profit and Loss on sale of investment. Stocks on 31st March each year valued at lower of cost or market price. [Ans. Balance as on 31st March, 2004 Nominal value Rs. 20,000; Interest Rs. 400; Principal Rs. 17,200]

872

Financial Accounting

Voyage Accounts Problem 10 Jal Bharat commenced a voyage on 1st October, 2006 from Chennai to London and back. The voyage was completed on 30th November, 2006. It carried a consignment on its outward journey and of machinery on its return journey. The ship was insured and the annual premium was Rs. 24,000. Prepare voyage account from the following information:

[Ans. Net Profit Rs. 49,910] Problem 11 A Mumbai Company acquired a new ship Jalapriya at a cost of Rs. 30,00,000. The ship was ready for service on 1st April. An insurance policy at 2% was taken out on the ship. Freight was insured at a premium of Rs. 10,000 per annum. During the three months the ship had made 2 complete voyages, one to London and back and half way through the next to London. The ship carried the following freight.

5% commission was paid to agents in addition to 1% address commission. The expenses incurred were as follows:

Prepare Voyage Account of the period of 3 months ending 30th June. (B.Com., Bombay) [Ans. Net Profit Rs. 85,540]

Accounting for Sale or Return, Investment Accounts and Voyage Accounts

873

Problem 12 S.S. Jaihind commenced a voyage on 1st October, 2004 from Mumbai to London and back. The voyage was completed on 30th November, 2004. It carried a consignment of tea on its outward journey and of machinery on its return journey. The ship was insured and annual premium was Rs. 1,20,000. Prepare Voyage Account from the following:

Address commission 5% on outward and 4% on inward freight. Primage is 5% on freight. The manager is entitled 5% commission on the profit earned after charging such commission. Stores and coal on hand were valued Rs. 15,000 on 30th November, 2004. (M.Com., Delhi) [Ans. Net Profit Rs. 2,37,667] Problem 13 Sea Gull commenced a voyage on 1st July, 2008 from Mumbai to Dubai and back. The voyage was completed on 31st August, 2008. It carried a consignment of Iron ore on its outward journey and engineering items on its return journey. The ship was insured at an annual premium of Rs. 3,00,000. From the following particulars, draw up the Voyage Account.

The manager is entitled to 10% commission on the profit earned. Stores and coal on hand are worth Rs. 25,000 on the conclusion of journey. [Ans. Net Profit Rs. 83,047]

Human Resource Accounting,

24 Learning Objectives After studying this chapter, you should be able to Define the Human Resource Accounting and its Importance Explain the objectives of Human Resource Accounting Understand the advantages and limitation of Human Resources Accounting Evaluate Human Resources in an organisation. Explain the meaning of Inflation Accounting Understand various methods of Inflation Accounting Calculate current prices for assets, liabilities, expenses, etc. Define Social Accounting Explain the meaning of social cost and social benefit Evaluate social profit Understand the meaning of Environment Accounting Explain the need and objectives of Environmental Accounting Measure environmental assets Identify the limitations and utilities of Environmental Accounting

HUMAN RESOURCE ACCOUNTING The success or failure of an organisation mainly depends on human resources (i.e. employees). The reason being the physical resources namely, materials, machines and money, are having utilised by human resources. The efficient and effective utilisation of all these physical resources highly depends on the quality, calibre, skills and character of the people as the physical resources cannot act on their own. But, the importance of human resources was not taken care of seriously by the organisations. This is because of the wrong perception of the top level officials that the individuals cannot achieve anything without any material resources. Justice Alfred Marshall once said, “The most valuable of all capital is that invested in human being”. However, the efforts and contributions made by the employees for the growth and development of organisation are not shown anywhere in the Balance Sheet of organisations. Therefore, attempts have been made to measure the value of

Human Resource Accounting, Inflation Accounting, Social Responsibility...

875

human beings in monetary terms so that they can be shown in the books of accounts. As a result, a new system called Human Resource Accounting has been evolved.

Meaning Human Resource Accounting is a system of evaluating human resources of an organisation in terms of money in order to record them for the purpose of presenting the information in the books of accounts to communicate the same, i.e. their worthiness to the interested parties. Human Resource Accounting is a branch of Managerial Accounting. It is nothing, but application of accounting concepts and methods to human resource management, as it gives useful information for managerial decision making. So, Human Resource Accounting is very much recognised as a system of information rather than a system of accounting. The methods which are available for evaluation human resources are subjective and not objective. Thus, Human Resource Accounting is a system of information.

Objections Against Human Resource Accounting The valuation of human assets in monetary terms may be objected to on the basis of ownership that the employees are not owned by an organisation like physical assets. Human beings are not slaves or chattels (movable property) in a modern society and they are not the money making agents of an organisation. Therefore, they cannot be treated as physical assets. In addition, money measurement concept is very important concept in conventional accounting practices; it means that only monetary transactions can be recorded in the books of accounts. But, converting human resources into monetary terms is highly a complicated affair. Moreover, there is no scientific formula or methodology to measure the value of human resources.

Definition The American Accounting Association Committee on Human Resource Accounting Human Resource Accounting is the process of identifying and measuring data about human resources and communicating this information to interested parties. Stephen Knauf Human Resource Accounting as the measurement and qualification of human organisational inputs, such as, recruiting, training, experience and commitment. Woodruff Jr., Vice-president of R.G. Barry Corporation, USA Human Resource Accounting is an attempt to identify and report the investments made in human resources of an organisation that are presently not accounted for in conventional accounting practice. Basically, it is an information system that tells the management what changes over the time are occurring to the human resources of the business. M.N.Baker Human Resource Accounting is the term applied by the accountancy profession to quantify the cost and value of employees to their employing organisation.

876

Financial Accounting

Salient Features 1. Valuation of human resources 2. Recording the valuation in the books of accounts 3. Disclosure of the information in the financial statements of an organisation for communication.

Objectives (i) To provide quantitative information for making proper and effective managerial decisions regarding recruitment, selection, training, development and maintenance human resources (ii) To monitor effectively the utility of human resources (iii) To analyse human assets, i.e. whether such assets are conserved, depleted or amortised, etc. (iv) To assess the return on investment in human assets. (v) To help the organisation in making necessary changes in management principles. (vi) To communicate the value of human resources to the organisation, investors, lenders, employees and other interested parties.

Valuation of Human Resource Approaches to the valuation of human resources may broadly be divided into two categories, namely (i) Human Resource Cost Approach (ii) Human Resource Value Approach

(i) Human Resource Cost Approach This approach is cost based valuation of human resources. There are different methods under this approach. They are as follows: (a) Historical Cost Approach Pyle, Brumnet and R.G. Barry Corporation of Columbus, USA have developed this approach. R.G. Barry Corporation of USA made a systematic effort to measure the value of human assets in order to give details in its Annual Report in 1967. According to this approach, the actual costs incurred on recruiting, selecting, hiring, training and developing of an employee are capitalised and are written off over the period for which the employee remains with the firm. If the employee expires or leaves the organisation before retirement, the amount not written off is charged to income of the year in which such incident takes place. This approach is very simple and easy to understand by parties concerned. But, this historic costs are irrelevant for decision making and, therefore, useless. (b) Replacement Cost Approach Rensis Likert & Eric G. Flamhotty have developed it. It is the measure of the cost to replace a firm’s existing human assets. Replacement cost includes the cost of selecting, recruiting, hiring, training, placing and developing new employees to reach the level of competence of the existing employees. In short, it involves measurement of cost to replace a firm’s existing human resources.

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There are two different concepts of replacement cost namely personal or individual replacement cost and positional replacement cost. The personal or individual replacement cost refers to the sacrifices that would have to be incurred today to replace an individual with a substitute, capable of providing a set of services equivalent to that of the individual being replaced. Positional replacement cost refers to the cost incurred for replacing the position, namely manager, accountant, officer, etc. It may be defined as the cost of replacing the set of services expected to be rendered by an individual in the present and future positions. (c) Opportunity Cost Approach It is also known as Hekimian and Jones Competitive Bidding Method or Market Value Method. Opportunity cost is defined as the measurable value of benefits that could be obtained by choosing an alternative course of action. In this approach managers will bid for scarce employees they need to recruit. So, this method is suitable for those human resources which are scarce. In other words, employees not considered scarce are not included in the human asset valuation. (d) Standard Cost Approach David Watson suggested this approach. Under this approach many organisations use standard cost for the valuation of human assets. Employees are classified into various groups based on their hierarchical positions. Standard cost is determined for each group of employees and their value is calculated. But determination of standard cost for each group is a sensitive issue. (e) Total Cost Approach According to this approach total expenditure incurred towards training and development of an employee by an organisation is taken as the value of that employee. This value has to be adjusted every year on the basis of experience, seniority, position, performance, etc.

(ii) Human Resource Value Approach This approach is based on economic value of human resources, various models are as follows: (a) Hermanson’s Valuation Models: Reger Hermanson developed two valuation models for calculating the value of human resources they are— (aa) Hermanson’s Unpurchased Goodwill Model: In this model, the value of human assets of an organisation may be calculated by capitalising the earnings of an organisation in excess of normal earnings earned from similar types of organisation. The excess earnings of an organisation is due to the extra ability of employees. (ab) Hermanson’s Adjusted Discounted Future Wages Model: In this model, future wages are discounted to determine the value of an individual. The discounted future wages are adjusted by an ‘Efficiency Ratio’. This ratio is calculated by dividing actual average earnings of an organisation by the normal earnings of all the organisations. If this ratio is more than 1, it indicates that the rate of return of an organisation is

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Financial Accounting

above the average rate of return for the same group of organisation. If this ratio is less than 1, it indicates a reverse situation. (c) Lev and Schwartz Present Value of Future Earnings Model Lev and Schwartz developed this model in 1971. It is also known as Compensation and Capitalisation of Salary Model. This model is based on the hypothesis that under normal circumstances, future salaries may be used as a surrogate for the value of human resources in view of the close co-relation between an employee’s compensation and his value to the organisation. This model is based on an assumption that employees stay with the organisation till they retire. This model involves the following steps: (i) Classification of employees into various groups according to age, level of skill, assignments, etc.; (ii) Estimation of annual earnings for each group of employees; and (iii) Calculation of present value of future earnings of each group, using appropriate rate of discount. This model has been adopted by Bharat Heavy Electricals Ltd. (BHEL), Cement Corporation of India (CCI), Steel Authority of India (SAIL), Southern Petrochemicals Industrial Corporation Ltd. (SPIC), Infosys, etc. (d) Flamholtz Reward Valuation Model This model was introduced in 1971. It is an improvement on Present Value of Future Earnings Model. It takes into account the possibility of an employee movement from one organisation to another and also his leaving the organisation due to death or retirement. (e) Morse Net Benefit Model This model was suggested in 1973. Under this model, the value of human resources is equivalent to the present value of net benefits derived by the organisation from the service of its employees. (f) S.K. Chakraborthy Aggregate Payment Model Indian Author Prof. S.K. Chakraborthy advocated this model in 1976. Under this model, human resources are valued in aggregate and not on an individual basis. But, he suggested that managerial and non-managerial manpower can be evaluated separately. The value of human resources on a collective basis can be multiplied by the average tenure of employment of the employees in that group and investment made in human resources.

Advantages (i) It provides quantitative information about the value of human resources to the management for making appropriate decisions relating to transfers, promotion, training, retrenchment of human resources. (ii) It provides a basis for planning of both physical and human assets. (iii) It helps the organisation in evaluating the expenditure incurred for imparting further education and training to employees in terms of benefits derived by the organisation. (iv) It helps in identifying the reasons for poor performance or low return on investment.

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(v) It provides information about the worth of human resources to investors, lenders, etc. (iv) It helps the employees in improving their performance by understanding the expenditure incurred by the organisation on them and their contribution towards the growth and development of the organisation.

Limitations (i) Absence of clear-cut procedures or guidelines for valuation of human resources. There is no universally accepted method for the human resource valuation. (ii) Human life is uncertain and, hence, valuing them under uncertainty seems to be unrealistic. (iii) Tax laws do not recognise human beings assets. (iv) There is no empirical evidence that the Human Resource Accounting is a tool of management. (v) There is no clarity in determining the rate of amortisation on human resources. (vi) Human Resource Accounting is a developing concept. Therefore, more researches are necessary to overcome the problems of valuation of human resources.

INFLATION ACCOUNTING Inflation Accounting is system of accounting which records all items of current prices in books of accounts. So, it is also known as Accounting for Price Level Changes. American Institute of Certified Public Accountants defined the Inflation Accounting as follows “Inflation Accounting is a system of accounting which purports to record as a built-in mechanism, in all economic events in terms of current cost”. In the year 1982, a Guidance Note on Accounting for Changing Prices was published by the Institute of Chartered Accountants of India. This Note deals with three important methods for inventory valuation. The three methods are as follows: I. Current Purchasing Power Method (CPP) II. Current Cost Accounting Method (CCA) III. Hybrid Method (Combination of above two methods)

(I) Current Purchasing Power Method According to this method the items which are appearing in the Financial Statement must be stated at current value or current prices. Institute of Chartered Accountants in England and Wales recommended that—through this method (CPP), changes in price level must be considered while preparing financial statements. In order to measure changes in price level we consider wholesale price index of Reserve Bank of India. Changes in price level are made only on the basis of whole sale price index in our country. For converting book values into current values the following formula is used: Conversion Factor =

Price index at the date of revaluation Price index at the date of existiing figures

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Financial Accounting

If the transactions are taking place throughout the year, it is advised to convert them according to average index. This is called “Mid-period Conversion’.

Monetary and Non-Monetary Items Monetary items such as cash, bank, bills, debtors, creditors, outstanding expenses, etc. are receivable or payable at book values only, whereas Non-monetary items such as, land, buildings, machinery, investments, stock, etc. are receivable or payable at current prices. Therefore, under this method all items are to be restated at current prices. Conversion factor for opening items =

Closing index Opening index

Conversion factor for change in items during the year =

Closing index Average index

Cost of Sales and Inventories Cost of sales and inventories will change according to FIFO and LIFO method. The following factors are to be considered for restating inventories and purchases (a) Opening stock (b) Purchases =

=

Closing index Opening index

Closing index Average index

(c) For closing stock =

Closing index Index on the date of purchase of the goods

For Sales and Expenses Taken Place throughout the Year Conversion factor =

Closing index Average index

For Fixed Assets and Depreciation Conversion factor =

Closing index Index on the date of buying the assets

For Payment Made at the End Conversion factor =

Closing index Index on the date of buying the assets

(II) Current Cost Accounting Method This method (CCA) is the most appropriate in the context of the economic environment in India. The main features are: (i) Money is the unit of measurement (ii) Assets and liabilities are shown in the statement at valuation

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(iii) Operating profit struck after charging the value of the business assets consumed, depreciation, cost of sales and monetary working capital at the current cost of profit. (iv) Gearing adjustment is made to arrive at the current cost profit attributed to the shareholders.

(III) Hybrid Method This method is a combination of both CPP and CCA methods. This method is yet to be developed. It suffers from the drawbacks of the above two methods.

Advantages of Inflation Accounting (1) Assets and liabilities are shown at current price, hence Balance Sheet will reveal true and fair view of the financial position of a company (2) Depreciation on fixed assets is calculated at current prices. Therefore, it facilitates easy replacement. (3) Profits can be ascertained at current prices. (4) It gives complete and correct information of various parties concerned.

SOCIAL RESPONSIBILITY ACCOUNTING Business organisations make use of physical resources, financial resources, ad natural resources including human resources for making profits. Business makes use of natural resources of the society for its growth and development. Therefore, business is accountable or responsible to the society. In other words, if business organisation has to function effectively and efficiently, it has to be accountable to the society at a large. Social Responsibility Accounting represents the welfare facilities or benefits are being offered by the business organisation of the society.

Definition Seidler Lee and Seidler Lynn defined Social Responsibility Accounting as “the modification and application of conventional accounting to the analysis and solutions of problems of a social nature”. According to K.V. Ramanathan, “it is the process of selecting firm level social performance variables, methods and measurement procedures, systematically developing information useful for evaluating the firm’s social performance and communicating such information to concerned social groups both within and outside the firm. From the above definitions, it is to be noted that business organisations make profits by exploiting resources of the society and, therefore, they are accountable to the society. The term ‘society’ consists of various groups namely—customers, suppliers, money lenders, employees, shareholders, etc. Social Responsibility Accounting is essential because substantial industrial growth brought not only prosperity, but also problems to the society. Thus, the organisations should solve the problems of the society. Business organisations are responsible to supply superior quality goods at cheaper prices to consumers, pay more wages or salaries to employees, higher dividends to

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Financial Accounting

shareholders, timely payment of dues to creditors, etc. At the same time the primary objective of any business organisation is profit making or maximisation. Therefore, organisation should formulate proper plan which not only achieves the primary objectives of business but also to satisfy needs of the society. This Social Responsibility Accounting is also known as Social Accounting, Social Audit, Socio-Economic Accounting, Social Reporting, etc. Social Responsibility Accounting can be understood with the help of two important concepts namely ‘Social Cost’ and ‘Social Benefits’. If social benefits are more than social costs the difference is “Social Profit” otherwise “Social Loss”.

Social Costs Social Costs are nothing, but sacrifice made by the society towards growth and development of business organisation. They are as follows: (i) Air pollution, (ii) Water pollution, (iii) Deforestation, (iv) Soil erosion, (v) Depletion of natural resources, (vi) Destruction of animal resources, (vii) Manufacturing of dangerous goods or explosives, (viii) Monopoly, (ix) Bankruptcy, (x) Industrial unrest, (xi) Deterioration of law and order, etc.

Social Benefits It is the compensation made to the society like (i) increase in income, (ii) generation of employment opportunities, (iii) contributions made to public interims, donations, gifts etc. (iv) Human resource contribution namely career advance met, welfare facilities to employees, better working conditions for quality of work life, (v) investment on green assets (i.e. contributions to environment to minimise pollution, etc.) (vi) energy audit, generating power through solar energy, (vii) contribution to government exchequer, i.e. payment of corporate taxes, sales taxes, excuse duty, customs duty, etc. (viii) contribution to social projects and so on. If social benefits are more than the social cost or sacrifices, the difference is social profit or social value.

ENVIRONMENTAL ACCOUNTING In general, environment includes—air, water, ground, animals, birds, fish, forests, etc. Researchers feel that environment also includes human welfare, social justice, safety, security, health, education, culture, job opportunities, love, and peace, etc. One thing we can understand that environment is not a permanent asset, so there is a concern for ‘Environmental Protection’. Rapid industrial development is a major cause for deterioration of environment. Article 51 (A) of the Indian Constitution states that – “It is the fundamental duty of every citizen to protect the natural environment in our country”. The Secretary General of United Nations Conferences on Environment and Development, Mr. Maurice Strong (1193), said “Every business that impacts on the environment must accommodate the fact that the environment will have an important impact on its business”. Environmental Accounting is an activity which measures the impact of economic activities on natural resources.

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Definitions Accounting concerns the treatment of environmental issues within the financial statement and within environmental evaluations”. course (or subject) that investigates how environmental issues affect traditional accounting sub-disciplines. environmental resources and services and changes therein and measures their effects on Gross National Product and Net National Product to reveal true maximum income (true Net Capital Formation which a nation can consume while maintaining a sustainable development and growth without jeopardising the interest of the present and future generations as well as of our neighbours”. resources, evaluating effects of economic activities on environment to organisations and supplying information to the interested parties.

Need for Environmental Accounting Environmental protection is a part of the company’s work culture. It is also stated in the Director’s Report of HLL, “Safety and Environmental protection continue to be vital elements of Company’s strategy in its manufacturing operations”. Moreover, investment in green asset (i.e. nature) began to become more prominent. Therefore, Environmental Accounting is necessary to measure the economic values of environment.

Objectives of Environmental Accounting (i) To enumerate environmental assets or revenues; (ii) To study the changes on Environment due to economic activities; (iii) To estimate total amount invested for environmental protection or enhancement; (iv) To assess benefit cost ratio on environment; (v) To measure the growth of gross domestic product (GDP).

Approaches of Environmental Accounting There are various approaches to quantify the environmental assets and their changes due to economic activities. They are as follows. (a) Market Value Approach (b) Present Value Approach (c) Net Value or Price Approach (d) Maintenance Cost Approach (e) Compensation Cost Approach

Limitations of Environmental Accounting Though Environmental Accounting is adopted by many countries, there is no scientific or systematic method to quantify the environmental assets into monetary value.

Financial Accounting

884

The following are the limitations and problems of Environmental Accounting. (1) Evaluation techniques are poor and their impact, misleading and controversial. (2) Environment assets are partly quantified. (3) Rapid changes in social values of environmental assets do not make estimation possible. (4) Risks and uncertainties are very much involved in Environmental Accounting process. (5) Non-availability of adequate and reliable industrial data.

Utilities of Environmental Accounting (a) It helps in optimal allocation of resources. (b) It helps in measuring total income and true net capital formation. (c) It helps to identify production and consumption of goods which damage the environment. (d) It helps to identify the persons responsible, for pollution and depletion, so that goods can be imposed with taxes, penalty charges, etc. (e) It helps to measure environment costs. (f) It provides details of economic dependence on natural resources, internationally deteriorating environment and decrease in environmental area. (g) It helps the government and other bodies for planning the resources.

Illustrations Index for Illustrations I

Human Resource Accounting

1

II III

2–5 Social Responsibility Accounting

6

Human Resource Accounting Illustration 1 From the following information relating to Adam Ltd. calculate the total value of Human Capital by following Lev and Schwartz model: Age

Unskilled No.

Average income

30–39

50

40–49

25

50–54

12

Semi skilled No.

Average income

3,000

40

5,000

4,000

20

6,000

5,000

7

7,000

Apply 15% discount factor.

No

Average income

Skilled

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Solution Working Note (1) – Present value of earnings of ‘unskilled employees’ (a) Age group 30 – 39 assuming that all 50 employees are just 30 years old Average annual income (Rs.)

Years

3,000

10

4,000 5,000

Discount factor (15%)

Present value (Rs.)

5.019

15,057

11 to 20

1.24

4,960

21 to 25

0.205

Total average income of each employee

1,025 21,042 10,52,100

Total average income of 50 employees (50 ¥ 21,042)

(b) Age group 40 – 49 assuming that all 25 employees are just 40 years old Average annual income (Rs.)

Years

Discount factor (15%)

4,000

10

5.019

5,000

11 to 15

0.828

Total average income of each employee

Present value (Rs.) 20,076 4,140 24,216 6,05,400

Total average income of 25 employees (25 ¥ 24,216)

(c) Age group 50 – 54 assuming that all 12 employees are just 50 years old Average annual income (Rs.)

Years

5,000

5

Discount factor (15%) 3.352

Total average income of each employee

Present value (Rs.) 16,760 16,760 2,01,120

Total average income of 12 employees (12 ¥ 16,760)

Working Note (2) – Present value of earnings of ‘semi-skilled employees’ (a) Age group 30 – 39 assuming that all 40 employees are just 30 years old Average annual income (Rs.)

Years

3,500

10

5,000 6,000

Discount factor (15%)

Present value (Rs.)

5.019

17,567

11 to 20

1.24

6,200

21 to 25

0.205

Total average income of each employee

1,230 24,997 9,99,880

Total average income of 40 employees (40 ¥ 24,997)

(b) Age group 40 – 49 assuming that all 20 employees are just 40 years old Average annual income (Rs.)

Years

Discount factor (15%)

5,000

10

5.019

6,000

11 to 15

0.828

Total average income of each employee

Present value (Rs.) 25,095 4,968 30,063 6,01,260

Total average income of 20 employees (20 ¥ 30,063)

(c) Age group 50 – 54 assuming that all 12 employees are just 50 years old Average annual income (Rs.)

Years

6,000

5

Total average income of each employee Total average income of 12 employees (12 ¥ 20,112)

Discount factor (15%) 3.352

Present value (Rs.) 20,112 20,112 2,41,344

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Financial Accounting

Working Note (3) – Present value of earnings of ‘skilled employees’ (a) Age group 30 – 39 assuming that all 40 employees are just 30 years old Average annual income (Rs.)

Years

5,000

10

6,000 7,000

Discount factor (15%)

Present value (Rs.)

5.019

25,095

11 to 20

1.24

7,440

21 to 25

0.205

1,435

Total average income of each employee

33,970 13,58,800

Total average income of 40 employees (40 ¥ 33,970)

(b) Age group 40 – 49 assuming that all 20 employees are just 40 years old Average annual income (Rs.)

Years

Discount factor (15%)

6,000

10

5.019

7,000

11 to 15

0.828

Present value (Rs.) 30,114 5,796

Total average income of each employee

35,910 7,18,200

Total average income of 20 employees (20 ¥ 35,910)

(c) Age group 50 – 54 assuming that all 7 employees are just 50 years old Average annual income (Rs.)

Years

7,000

5

Discount factor (15%)

Present value (Rs.)

3.352

23,464

Total average income of each employee

23,464 1,64,248

Total average income of 7 employees (7 ¥ 23,464)

Total Value of Human Capital Age

Unskilled

Semi skilled Rs.

Working Note

30–39

1(a)

10,52,100

2 (a)

9,99,880

3 (a)

40–49

1(b)

6,05,400

2(b)

6,01,260

3(b)

7,18,200

50–54

1(c)

2,01,120

2(c)

2,41,344

3(c)

.1,64,248

18,58,620

Rs.

Skilled

Working Note

18,42,484

Working Note

Rs. 13,58,800

22,41,248

Illustration 2 Following particulars are given, based on which calculate the cost of sales under (i) Historical Cost Accounting System and (ii) Current Cost Accounting System: Opening Stock of materials on 1.1.2006 (1,000 units @ Rs. 30 per unit) Rs. 30,000 Purchase during the year Nil Units used during the year 800 units Price per unit— 1st January (Rs. 35); 31st December (45); Average for the year (40)

Human Resource Accounting, Inflation Accounting, Social Responsibility...

Solution (i) Historical Cost Accounting System Cost of sales – 800 units @ Rs. 30 Closing stock* – 200 units @ Rs. 30 *Opening stock (1,000) + consumed (800) (ii) Current Cost Accounting System Cost of sales – 800 units @ Rs. 40 Closing stock – 200 units @ Rs. 45

887

= Rs. 24,000 = Rs. 6,000 = Closing stock (200) = Rs. 32,000 = Rs. 9,000

Note (a) The increase in closing stock between Current Cost Accounting method and Historical Cost method (9,000 – 6,000) Rs. 3,000 will be credited to “Current Cost Account Reserve”. (b) The Balance sheet will record closing stock at Rs. 9,000 (c) The increase in cost of sales between Current Cost Accounting method and Historical Cost method (32,000 – 24,000) Rs. 8,000 will be debited to “Profit and Loss Account” and credited to “Current Cost Account Reserve”. Illustration 3 A Company has the following transactions at the given dates and price indices for the first quarter of 2004. Opening Balance (Jan. 1)

6,000

100

Cash Sale (Feb. 1)

17,500

105

Payment to Creditors (Mar. 1)

12,000

108

Cash Purchase (Mar. 1)

2,000

108

Payment of Expenses (Mar. 31)

2,000

110

Closing Balance (Mar. 31)

7,500

110

Calculate monetary gain or loss. (B.Com., Madras) Solution Statement of Cash Conventional Accounting (Rs.) Opening Balance (+) Cash sales (–) Payments Creditors Purchases Expenses Closing balance

6,000 17,500

Converted Values (Rs.)

110/100 110/105

6,600 18,333 24,933

23,500 12,000 2,000 2,000

110/108 110/108 110/110

12,222 2,037 2,000

(16,000)

(16,259)

7,500

8,674

Balance as per converted values = Rs. 8,674 Balance as per Conventional Accounting = Rs. 7,500 Monetary Loss

Conversion Factor

Rs. 1,174

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Illustration 4 Compute the net monetary result of X Company Ltd. as at 31st December, 2004. The relevant data are given below: Cash

5,000

10,000

Book debts

20,000

25,000

Creditors

15,000

20,000

Loan

20,000

20,000

Retail Price index numbers : 1st January (200); 31st December (300); Average for the year (240) (B.Com., Delhi) Solution Statement showing the Net Monetary Result on account of Price Level Changes (I) Liabilities Monetary liabilities (1.1.2004) – Price indices (15,000 + 20,000) = Rs. 35,000 ¥ 300/200 = Rs. 52,500 Increase in monetary liabilities between Jan. to Dec., 2004 (35,000 – 40,000) = Rs. 5,000 ¥ 300/240 = Rs. 6,250 Total monetary liabilities should be = Rs. 58,750 (–) Liabilities as on 31st December, 2004 = Rs. 40,000 Gain on holding the monetary liabilities = Rs. 18,750 (II) Assets Monetary assets (1.1.2004) – Price indices (5,000 + 20,000) = Rs. 25,000 ¥ 300/200 = Rs. 37,500 Increase in monetary assets between Jan. to Dec., 2004 (25,000 – 35,000) = Rs. 10,000 ¥ 300/240 = Rs. 12,500 Total monetary assets should be = Rs. 50,000 (–) Assets as on 31st December, 2004 = Rs. 35,000 Loss on holding the monetary assets = Rs. 15,000 (III) Net Gain Gain on holding the monetary liabilities = Rs. 18,750 Loss on holding the monetary assets = Rs. 15,000 Net gain on monetary items = Rs. 3,750 Illustration 5 A Summary of Balance Sheet of Sun Ltd is given below: Liabilities

Rs.

Assets

Owner’s Equities

11,00,000 Plant and Machinery

Long-term Debts

10,00,000 (Net depreciation)

Current Debts

6,00,000 Cash and Accounts Receivables 27,00,000

Rs. 14,00,000 13,00,000 27,00,000

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The current price index is 280. The plant and machinery and long-term debt were acquired when the price index was at 180. You are required to revise the summary Balance Sheet to restate assets and equities in terms of current price. How will you treat the monetary gain or loss, if any? (M.Com., Delhi) Solution Liabilities on conversion Owner’s equity = Rs. 11,00,000 ¥ 280/180 = Long-term debts = Rs. 10,00,000 ¥ 280/280 = Current debts = Rs. 6,00,000 ¥ 280/280 = Total liabilities on conversion = Assets on conversion Plant and machinery = Rs. 14,00,000 ¥ 280/180 = Cash and accounts receivables = Rs. 13,00,000 ¥ 280/280 = Total assets on conversion = Difference between assets and Liabilities Total assets on conversion = Rs. 34,77,778 Total liabilities on conversion = Rs. 33,11,111 Difference = Rs. 1,66,667 Monetary Gain Owner’s equity on conversion = (+) Difference between assets and liabilities = =

Rs. 17,11,111 Rs. 10,00,000 Rs. 6,00,000 Rs. 33,11,111 Rs. 21,77,778 Rs. 13,00,000 Rs. 34,77,778

Rs. 17,11,111 Rs. 1,66,667 Rs. 18,77,778

Social Responsibility Accounting Illustration 6 From the following information taken from the books of Joy Ltd. relating to staff and the benefit of the community, you are required to prepare a statement classifying various items under the appropriate heads, required under Social Responsibility Accounting: Rs. (000)

Rs. (000)

Environmental improvements

2,105 Concessional conveyance and water supply

Medical facilities

5,000 Generation of business

Training programs Generation of job opportunities Municipal taxes paid Increase in cost of living in the vicinity due to development of IT Park

915

1,205 2,410 4,900

5,855 Educational facilities for children of staff members 965 Subsidised canteen facilities 1,735

2,230 1,270 1,750

drought relief

Financial Accounting

890 Solution

Statement showing the benefits to Staff and Community Rs. (000)

Medical facilities Training programmes Concessional conveyance and water supply Educational facilities for children of staff Subsidised canteen facilities

Rs. (000)

5,000 915 1,205 4,900 2,230 1,270

Total

15,520

(–) B. Social cost to staff (1,750) 13,770

Environmental improvements Generation of job opportunities Municipal tax paid Generation of business Total (–) B. Social cost to community Increase in cost of living in the vicinity due to a development of IT park

2,105 5,855 965 2,410 11,335 (1,735) 9,600

Points to Remember Human Resource Accounting

communicating this information to interested parties. resources cost approach and human resources value approach.

current prices in books of accounts.

(CCA) method and Hybrid Method. profits can be ascertained at current prices so that Balance Sheet will reveal true and fair view of financial position of business.

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Social Responsibility Accounting and measurement procedures for evaluating the firm’s social performance. employees swith competitive salary and shareholders with high dividend. social profit.

Environmental Accounting economic activities on natural resources.

of gross domestic product (GDP). Value Approach, Present Value Approach, Net Price Approach, Maintenance Cost Approach and Compensation Cost Approach.

Examination Questions I. Objective Questions 1. Fill in the blanks (i) According to conventional accounting practice, the amount spent on human resources is treated as an ______________________. (ii) Human Resource Accounting is a system of __________________. (iii) _________________ do not recognise human beings as assets. (iv) R.G. Barry Corporation of USA had first introduced Human Resource Accounting in the year__________________. (v) There are two different concepts of Replacement Cost namely______ and _________. 2. Choose the correct answers (i) Historical Cost Approach suggested by (a) Pyle (b) Lev (c) Organ (d) None of the above (ii) Positional cost is included in: (a) Replacement cost (b) Historical cost (c) Opportunity cost (d) None of the above (iii) Efficiency ratio is calculated on the basis of (a) Efficiency of an employee (b) Earning capacity of an employee

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Financial Accounting

(c) Actual average earnings and normal earnings (d) Excess earnings (iv) Present value of future earnings model is advocated by (a) Lev and Schwartz (b) Hermanson (c) David Watson (d) Hekimian 3. Match the following (i)

Barry Corporation

a

1971

(ii)

Lev and Schwartz

b

1967

(iii)

Morge

c

1976

(iv)

S.K.Chakraborthy

d

1973

4. State whether the following statements are True or False: (i) The most valuable of all capital is that invested in human beings. (ii) The methods which are available for evaluation of human resource are subjective and not objective. (iii) HR Accounting provides basis for planning of both physical and human assets. (iv) There are scientific methods/models to measure the value of human resources. (v) Historical costs are irrelevant for decision – making and therefore useless. Answers 1. (i) (iv) 2. (i) 3. (i) 4. (i)

expense, 1967, b; b; True,

(ii) (v) (ii) (ii) (ii)

information, (iii) Tax law, personal and positional. a; (iii) c; a; (iii) d; True, (iii) True,

(iv) a (iv) c. (iv) False, (v) True.

II. Descriptive Questions

Human Resource Accounting A. Very short answer questions 1. What is Human Resource Accounting? 2. What are the salient features of Human Resource Accounting? 3. What are the two different approaches to Human Resource Valuation? 4. What is Historical Cost Approach? B. Short answer questions 5. Define Human Resource Accounting. 6. What are the Objectives of Human Resource Accounting? 7. What are the limitations of Human Resource Accounting? 8. Explain the advantages of Human Resource Accounting?

Human Resource Accounting, Inflation Accounting, Social Responsibility...

893

C. Detail answer questions 9. Explain the various approaches for the valuation of human resources. 10. Give the meaning and significance of Human Resource Accounting. 11. Define Hunan Resource Accounting and explain the objectives of this system. 12. Explain in detail, Lev and Schwartz Present Value of Future Earning Model.

1. 2. 3. 4. 5. 6.

What is Inflation Accounting? Explain the significance of Inflation Accounting. Explain Current Purchasing Power Method. What is Current Cost Accounting Method. What is conversion factor? What are the advantages of Inflation Accounting?

Social Responsibility Accounting 1. 2. 3. 4. 5. 6.

Define Social Responsibility Accounting? What is Social Responsibility Accounting? Explain the need for Social Responsibility Accounting. What are social costs? What are social benefits? What is social profit?

Environmental Accounting 1. 2. 3. 4. 5. 6.

What is Environmental Accounting? Define Environmental Accounting. Explain the need and objectives of Environmental Accounting? What are the approaches to measure Environmental Accounting? Explain the usefulness of Environmental Accounting? Write a note on Environmental Accounting?

Problem 1 A machine was purchased on 1st January, 2008 for Rs. 1,70,000. The retail price index on that date stood at 200. Find the value of the machine according to Current Purchasing Power Method on 31st December, 2008 when the price index showed 250. [Ans. Value on conversion Rs. 2,12,500; Difference = Rs. 42,500] Problem 2 From the following data calculate (a) cost of sales and (b) cost of inventory under CPP method presuming that the firm is following LIFO method for inventory valuation:

894

Financial Accounting

Inventory as on 1.1.2004 Rs. 8,000; Purchases during 2004 Rs. 48,000 Inventory as on 31.12.2004 Rs. 12,000 Price Index as on 1.1.2004 – 100; As on 31.12.2004 – 140 Average Price Index for 2004 – 125 (B.Com., Delhi) [Ans. (a) Cost of sales = Rs. 49,280 and (b) cost of inventory Rs. 15,680] Problem 3 Mr. X purchased a machine in 2001 for Rs. 1,00,000 when the general price index was 180. He sold the machine in 2003 for Rs. 1,65,000 when the general index was 270. Calculate the profit or loss on the sale of the machine, keeping aside the price level changes. (B.Com., Madurai) [Ans. Converted value Rs. 1,50,000; Profit Rs. 15,000] Problem 4 The information given below relates to monetary account of Ram and Company. Compute the general price level of gain or loss: As on 1st Jan. (Rs.) Monetary assets Monetary liabilities Retail price index Average index

As on 31st Dec. (Rs.)

80,000

1,00,000

1,00,000

1,00,000

200

300 240

(M.com., Madras) [Ans. Net monetary gain Rs. 5,000]

25

Partnership Accounts, Capital Accounts, Final Accounts of a Firm

Learning Objectives After studying this chapter, you should be able to Define partnership Understand partnership, partnership deed, account of partnership firm Calculate interest on capital, interest on drawings, profit sharing ratio, capital ratio, etc. Explain past adjustments and guarantee Prepare Final Accounts of partnership firm

PARTNERSHIP ACCOUNTS Partnership The Trading Account, Profit and Loss Account and Balance Sheet previously explained were related to Sole Trading concern. The next logical development in the concept of business organisation is Partnership.

Definition Section 4 of the Indian Partnership Act, 1932 defines Partnership as “the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all”. Hence, partnership is an agreement between persons for sharing profits of a business. According to the above definition, it is understood that individually they are ‘partners’ and collectively a ‘firm’. The minimum number of partners is 2 and the maximum is 20 as per the Law.

Characteristics of Partnership 1. 2. 3. 4. 5.

Partnership is an agreement between two or more persons. Agreement may be oral or in writing. This agreement is to carry on lawful business. The business is carried on by all partners or any one of the partners. The main object of partnership is to share profits.

896

Financial Accounting

Partnership Deed A deed is an agreement. Most of the partnerships are formed by formal agreement. It is always desirable to have the deed, even though Partnership Act does not insist on it. The deed consists of details of profit sharing ratio, interest on capital, interest on drawings, etc. In the absence of a partnership deed (agreement), the rights and duties of partners are governed by the Indian Partnership Act which provides that (i) (ii) (iii) (iv)

Profit or losses are to be shared equally Interest on capital is not allowed Interest on drawings is not charged Interest at the rate of only 6% per annum is allowed on advances or loans given by a partner or partners (v) No partner is entitled for remuneration for carrying out partnership business

Accounts of Partnership Firm Capital Account, Current Account, Drawings Account are opened in the name of each partner. Besides Profit and Loss Account, Profit and Loss Appropriation Account are also opened in the books of the partnership firm. Profit and Appropriation Account shows how profits are distributed among partners.

Capital Accounts Partner’s Capital Accounts may be maintained according to fixed capital method or fluctuating (or flowing) capital method. Fixed Capital Method Under this method, two accounts are maintained, they are (i) Capital Account (ii) Current Account. Capital Account It will always show the same balance (i.e. capital is fixed) unless any additional capital is introduced or any amount of capital is withdrawn by partners. Current Account Here, all other transactions, such as interest on capital, interest on drawings, salary received, commission received, profit or loss, etc., are shown. Floating Capital Method Under this method, only one account (i.e. Capital Account alone) is maintained to show all transactions relating to a partner and so the capital of partner will be fluctuating. Interest on Capital It has already been stated that in the absence of partnership agreement, no partner is entitled for interest on capital, unless the partnership deed otherwise provides. Interest on capital is always calculated on the capital in the beginning of the year (i.e. opening capital) at a rate specified in the deed. If capital in the beginning of the year is not given, then it has to be ascertained by considering additional capital, drawings, share of profit already credited, etc. Interest on Drawings It is charged if the partnership deed so provides for the same. If the dates and amounts of drawings are clearly given, then interest is calculated according to Product method. The formula is as follows: Interest on Drawings = (Total of products ¥ Rate of interest)/100

Partnership Accounts, Capital Accounts, Appropriation of Profits...

897

calculated for a period of 6 months assuming that drawings are made uniformly during the year. basis of average method. the average period is 6 ½ months. average period is 5 ½ months. is 6 months. Interest on Partners Loan If any loan is given by a partner to the firm the partner is entitled to interest on such loan at the rate given in the partnership deed. If the deed is silent regarding the rate of interest on loan, the partner is entitled to interest at the rate of 6% per annum. This interest on loan is debited to Profit and Loss Account.

Profit and Loss Appropriation Account It should be noted here that all adjustments relating to interest on capital, interest on drawings, salary, commission, etc. are to be made through Profit and Loss Appropriation Account, unless it is otherwise provides in the Deed. The Net profit ascertained as per Profit and Loss Account is transferred to Profit and Loss Appropriation Account and all the adjustment entries are made in this account. The remaining profit is transferred to Capital Account or Current Account of the partners as per profit (or loss) sharing ratio. This Appropriation Account is an extension of Profit and Loss Account. Journal entries relating to Profit and Loss Appropriation Account are as follows: (i)

For Interest on Capital xxx

To Interest on Capital Account (ii)

xxx For Interest on Drawings

Interest on Drawings Account

Dr.

xxx xxx

(iii)

For Salary or Commission xxx

To Salary or Commission Account

xxx

(iv) xxx To Partners Capital or Current Account

xxx

(v) Partners Capital or Current Account

Dr.

xxx xxx

898

Financial Accounting

Calculation of Capital Ratio Capital Ratios of partners are calculated on the basis of their capitals. When capitals are fixed, profit and losses are distributed according to capital ratios. When capitals are fluctuating, capital ratios are calculated according to effective capital which is calculated with the help of product method. Past Adjustments If some errors have occurred in the past are found out after preparing the Fixed Accounts and distribution of profit to partners, those errors are to be rectified by making adjustments through rectification entries. The necessary adjustment entries can be made through Profit and Loss Appropriation Account or Capital Accounts of the partners concerned. Guarantee of Profits Some times in partnership, when a new partner is admitted, he is given a guarantee for a minimum amount of profit by old partners. The person who is given guarantee is called a Guaranteed Partner and such minimum amount of profit is called ‘guaranteed amount’. Suppose if the share of profit of guaranteed partner is less than the guaranteed amount, then the difference (deficiency) is to be borne by the old partners.

Partnership Final Accounts Partnership Final Accounts consist of Trading Account, Profit and Loss Account, Profit and Loss Appropriation Account and Balance Sheet of the firm. The profit ascertained as per Profit and Loss Account is transferred to Profit and Loss Appropriation Account. After making necessary adjustments, the final profits are transferred to Capital Account or Current Account of the partners at an agreed ratio.

Illustrations Index for Illustrations Type I

1–3

II

Interest on Capital

III

Interest on Drawings

IV

4–3 6–7 8–10

V VI

Ill. No.

11–12 Partnership Firm Final Accounts

13–14

Illustration 1 Arjun and Bheem are partners in a firm sharing profits and losses as Arjun 3/4th and Bheem 1/4th. The Profit and Loss Account of the firm for the year ended 31st March, 2004 shows a Net Profit of Rs. 75,000. You are required to prepare the Profit and Loss Appropriation Account by taking into consideration the under-mentioned information. (i) The partners’ Capital A/c—Arjun Rs. 40,000, Bheem Rs. 30,000; (ii) Interest on capital was to be calculated at 5% per annum;

Partnership Accounts, Capital Accounts, Appropriation of Profits...

899

(iii) The Current A/cs of partners—Arjun Rs. 15,000 (Cr.), Bheem Rs. 10,000 (Cr.); (iv) Partners’ drawings amounted to Arjun, Rs. 10,000 and Bheem Rs. 7,500; (v) Interest on drawings was to be charged at 10% per annum at an average of 6 months; (vi) Partners’ salaries—Arjun Rs. 6,000 and Bheem Rs. 4,500; (vii) Arjun’s Loan A/c Rs. 25,000 (The loan was contracted two years back). Solution Rs. To Interest on Capital Arjun = 40,000 @ 5% Bheem = 30,000 @ 5% To Partner’s Salary Arjun Bheem

Rs.

Rs. 75,000

2,000 1,500 6,000 4,500

Arjun = 25,000 @ 6%* Arjun Bheem

Rs.

1,500 45,281 15,094 60,375 75,875

75,875

* Since rate of interest on loan not given, it is assumed as 6% as per Partnership Act. Illustration 2 A and B commenced business in partnership on 1st January, 2004. The partnership was oral and no specific terms were agreed upon. A and B contributed Rs. 40,000 and Rs. 10,000, respectively as their capitals. In addition, A also advanced Rs. 20,000 as a loan to the firm on 1st July, 2004. On 1st April, 2004, A met with a serious accident and could not attend to the business of the firm for 3 months. The profits for the year ended 31st December, 2004 amounted to Rs. 50,600. Disputes have arisen between the partners as to the exact way of sharing the profits. A claims: (a) Interest on his capital as well as a Loan Account at 10% per annum as his capital contribution is larger as compared to that of B. (b) That the Net Profits of the firm should be shared in ratio of capital contribution of each partner. B claims: (a) That net profits should be shared equally. (b) That he should be allowed salary of Rs. 1,000 per month during the period of A’s illness. (c) Interest on Capital and Loan Accounts should be allowed at 6% per annum only.

900

Financial Accounting

You are requested to allocate the profits correctly giving your reasons in support of the allocation you may prefer in the matter. Solution A’s Claim (a) Interest on loan at 10% claimed by A—not acceptable as it is more than 6% as per Partnership Act. (b) Profit share on the basis of capital contributed – not acceptable as there is no proper agreement. Therefore, every partner is entitled to share profits equally as per the Partnership Act. B’s Claim (a) Net Profit shared equally – acceptable as it is in accordance with partnership deed. (b) Entitled for monthly salary – not acceptable as there is no proper agreement and the Partnership Act does not allow the same. (c) Interest on capital at 6% claimed by B—not acceptable as the Partnership Act does not allow the same (d) Interest on loan at 6% claimed by B—acceptable as the Partnership Act allows the same Rs.

Rs. 50,600

Rs. 20,000 @ 6% ¥ (July – December)

600

A – Equally

25,000

B – Equally

25,000 50,600

50,600

Illustration 3 Wilson and Lawrence are in partnership sharing profit and losses in the ratio of 3:2. They decided to admit Clive, their manager as a partner with effect from 1st April 2004, giving one-fourth share of profits. Clive, while a manager, was in receipt of salary of Rs. 13,500 per annum and a commission of 10% of the net profit after charging such salary and commission. In terms of the partnership deed, a by excess mount which Clive will be entitled to receive as a partner over the amount which would have been due to him if he continued to be the manager, would have to be personally borne by Wilson out of his share of profit. Profit for the year ended 31st March 2005 amounted to Rs. 1,12,500. You are required to show the Profit and Loss Appropriate Account for the year ended 31st March 2005.

Partnership Accounts, Capital Accounts, Appropriation of Profits...

901

Solution 1,12,500 Wilson (iv) Clive

48,375 36,000 28,125

(I)

1,12,500 1,12,500

1,12,500

Working Note Particulars

Rs.

Clive as partner 28,125 (13,500)

¥¼ (–) His salary as Manager (–) His commission (1,12,500 – 13,500) = 99,000 ¥ Difference, being borne by Wilson

(9,000) 5,625

Particulars

Rs. 1,12,500

(–) Clive Salary (–) Clive Commission

13,500 9,000 (22,500) 90,000

Particulars

Rs. 90,000

90,000 ¥

54,000 36,000

¥

Particulars (–) Clive difference to be borne by Wilson

Rs. 54,000 (5,625) 48,375

Illustration 4 A, B, C and D are partners sharing profit and losses in the ratio of 4:3:3:2 and their respective capitals on 31st December, 2005 were Rs. 3,000; Rs. 4,500; Rs. 6,000; and Rs. 4,500. After closing and finalising the accounts, it was found that interest on capital @ 6% per annum was omitted. Instead of altering the signed accounts, it was decided to pass single adjusting entry on 1st January, 2006 crediting or debiting the respective partner’s accounts. Show the journal entry.

902

Financial Accounting

Solution (i) Since the interest on capital has to be calculated on the opening balance, it has to be calculated based on the given closing capital balance, assuming the capital maintained is fixed. Interest on capital A = 3,000 ¥ 6% = Rs. 180 B = 4,500 ¥ 6% = Rs. 270 C = 6,000 ¥ 6% = Rs. 360 D = 4,500 ¥ 6% = Rs. 270 Total Interest = Rs. 1,080 (ii) Since profit sharing ratio 4:3:3:2, Interest on capital has to be divided based on this. Profit shared among partners A = 1,080 ¥ 4/12 = Rs. 360 B = 1,080 ¥ 3/12 = Rs. 270 C = 1,080 ¥ 3/12 = Rs. 270 D = 1,080 ¥ 2/12 = Rs. 180 Total Interest = Rs. 1,080 (iii) Since capital has been assumed as ‘fixed’, only the difference between the interest on capital and profit share have to be adjusted in the partners’ current account. Adjustment in the partners’ capital account (Rs.) Interest on capital Profit share Adjustment A = 180 360 (–) 180 B = 270 270 Nil C = 360 270 +90 D = 270 180 +90

Date

Particulars

Amount Rs.

Amount Rs.

180

2006 Jan. 1

90 90 (Being interest on capital omitted, now adjusted in the part ners’ current account)

Illustration 5 After including the profit for the year ended 31st December and dealing with drawings, the capital account of A, B and C stood at Rs. 40,000, Rs. 30,000 and Rs. 20,000 respectively. Subsequently, the following omissions were noticed and it was decided to bring them into account: (i) Interest on Capital @ 5% per annum. (ii) Interest on drawing A Rs. 250; B Rs. 190 and C Rs. 130. (iii) Commission to the manager at 5% on the net profit after charging such commission.

Partnership Accounts, Capital Accounts, Appropriation of Profits...

903

The profit for the year in arriving at the above figures of capital amounted to Rs. 60,000 and their drawings had been A Rs. 10,000, B Rs. 7,500 and C Rs. 4,500. They shared profits and losses as to A one-half, B one-third and C one-sixth. Give the adjusted Capital Account of the partners with entries necessary for such adjustments. (MK, B. Com., Andhra) Solution (i) Interest on Capital Partner A

Partner B

Partner C

Closing capital (+) Drawings

(ii) Manager’s Commission on Net profit after charging such commission

¥

(ii) Overall Adjustments Total

itals (i) Drawing

(ii)

ratio

(iv) Adjusted Capital

904

Financial Accounting

Date

Particulars

Rs.

Dec 31

Rs.

1,645 912 203 2,760

(Being adjustments not considered, are now brought into account)

Illustration 6 Amar and Babu are partners sharing profit in the ratio of 1:1. Amar drew Rs. 300 regularly at the beginning of every month during the year 2007. Babu drew Rs. 1,000 on 1st April, Rs. 600 on 1st July, Rs. 800 on 1st Oct and Rs. 400 on 1st Dec. Calculate Interest on their drawings at 6% per annum. Solution Date of Drawings 2007

Amount Drawn (Rs.)

No. of months for which interest is due

Product

1st January

300

12

1st February

300

11

3,300

1st March

300

10

3,000

1st April

300

9

2,700

1st May

300

8

2,400

1st June

300

7

2,100

1st July

300

6

1,800

1st August

300

5

1,500

1st September

300

4

1,200

1st October

300

3

900

1st November

300

2

600

1st December

300

1

3,600

300

Total of Products

23,400

Interest on drawings per month = 23,400 ¥ 6% x 1/12 = Rs. 117 Date of Drawings 2007

Amount Drawn (Rs.)

No. of months for which interest is due

Product

1st April

1,000

9

9,000

1st July

600

6

3,600

1st October

800

3

2,400

1st December

400

1

Total of Product

400 15,400

Interest on Drawings per month = 15,400 ¥ 6% ¥ 1/12 = Rs. 77 Illustration 7 Vijay and Bhargav are partners sharing profits and losses equally with capitals of Rs. 30,000 and Rs. 20,000, respectively. Their drawings during the year 2004 are as follows:

Partnership Accounts, Capital Accounts, Appropriation of Profits...

905

Vijay’s drawings on 31st March Rs. 500; 30th April Rs. 600; 1st July Rs. 450; 1st December Rs. 1,400. Bhargav drew Rs. 300 at the end of each month. The deed provides interest on capitals and drawings at 6%. Calculate interest on capital and interest on drawings. Solution (a) Interest on Capital Vijay = Rs. 30,000 ¥ 6% ¥ 1 year Bhargav = Rs. 20,000 ¥ 6% ¥ 1 year

= Rs. 1,800 = Rs. 1,200

(b) Interest on Drawings – Vijay (Date of drawing is given) Date of drawings 2004

Amount drawn (Rs.)

No. of months for which interest is due

Product

31st March

500

9

4,500

30th April

600

8

4,800

1st July

450

6

2,700

1,400

1

1st December

Total of Product

1,400 13,400

Interest on drawings per month = 13,400 ¥ 6% ¥ 1/12 = Rs. 67 Date of Drawings 2004

Amount Drawn (Rs.)

No. of months for which interest is due

Product

31st January

300

11

3,300

29th February

300

10

3,000

31st March

300

9

2,700

30th April

300

8

2,400

31st May

300

7

2,100

30th June

300

6

1,800

31st July

300

5

1,500

31st August

300

4

1,200

30th September

300

3

900

31st October

300

2

600

30th November

300

1

300

31st December

300

0 Total of Products

0 19,800

Interest on drawings per month = 19,800 ¥ 6% ¥ 1/12 = Rs. 99

Illustration 8 X, having a capital of Rs. 60,000, takes Y and Z into partnership of January 1, 2004 on the following terms: Y to bring in Rs. 20,000 as capital; interest on capital to be allowed at 5%; Y to receive a salary of Rs. 6,000 annually.

906

Financial Accounting

Z is guaranteed by X that his minimum share of profit shall be Rs. 6,000 per annum; and profits are to be shared as X one-half, Y one-third and Z one-sixth. In the first year of partnership the business shows a profit of Rs. 4,000 before charging Y’s salary or interest on capital. They had drawn during the year X Rs. 10,000; Y Rs. 8,000 (including salary) Z Rs. 6,000. Show the position of partners’ accounts on December 31, 2004 after adjustment. No interest on drawings is to be allowed. What did each partner gain or lose for the year? (B.Com., Andhra) Solution Profit and Loss Appropriation Account Rs.

Rs.

To Salary – Y

6,000

4,000

To Interest on Capital – Y 20,000 @ 5%

By Loss (4,000-6,000 – 1,000) = 3,000 1,000 X = 3,000 ¥ 1/2 Y = 3,000 ¥ 1/3 Z = 3,000 ¥ 1/6

1,500 500 7,000

7,000

7,000

Current Account X Rs. To Drawings To Loss share

Y Rs.

X Rs.

X Rs.

Y Rs.

10,000 8,000 6,000 By Cash A/c – Capital 6,500 1,500 1,000 500 By Salary By Interest on Capital 42,000 18,000

60,000

60,000 27,000 6,500

60,000 27,000

Z Rs.

20,000 6,000 1,000 6,500 6,500

Illustration 9 Hari and Mohan were in partnership sharing profits in proportion of 3:2. On 1st January, 2004, their capitals were Rs. 30,000 and Rs. 20,000, respectively. Interest was agreed to be allowed on capital and charged on drawings at 10% per annum. Mohan is to be allowed an annual salary of Rs. 4,800 which had not been withdrawn. During the year 2004, Hari withdrew Rs. 200 per month and Mohan Rs. 400 per month on the first day of every month in anticipation of profits. The profits for the year, prior to calculation of interest on capital and drawings but after charging Mohan’s salary, amounted to Rs. 22,500. A provision of manager’s commission at 5% on net profit (after charging such commission) is to be made. Show the allocation of profits and prepare the partners’ Current Accounts, if the capitals are fixed. (B.Com., Madurai)

Partnership Accounts, Capital Accounts, Appropriation of Profits...

907

Solution Rs. To Interest on Capitals Hari = 30,000 @ 10% Mohan = 20,000 @ 10%

Rs.

Rs. 22,500

3,000 2,000

To Manager Commission (22,500 + 390 – 5,000) = 17,890 ¥ Hari = 17,038 ¥ Mohan = 17,038 ¥

Rs. By Interest on Drawings Hari = 200 ¥ 10% ¥ 6.5 5,000 Mohan = 400 ¥ 10% ¥ 6.5

130 260 390

852 10,223 6,815 17,038 22,890

Date

Hari Rs.

22,890

Mohan Rs.

Hari Rs.

Mohan Rs.

2004 To Drawings To Interest on Drawings

2,400 130 10,693

To Interest on Drawings

130

4,800 By Interest on Capital 260 By Salary 8,555

3,000

2,000 4,800

10,223

6,815

10,223

6,815

13,223

13,615

10,693

8,555

260 By Salary

10,693

8,555

13,223

13,615

4,800

2005

Illustration 10 On 1st January, 2004 Sunil and Kapil commenced business as partners with an initial capital of Rs. 20,000 and Rs. 30,000 in their respective accounts. The partnership deed provides that: (a) Profit and loss shall be shared in the ratio of 2:3 as between Sunil and Kapil. (b) Partners shall be entitled to interest on capital at the commencement of each year at 6% per annum. (c) Interest on drawings shall be charged 8% per annum. During the year ended 31st December, 2004 the firm made a profit of Rs. 19,280 before adjustment of interest on capital and drawings. The drawings of the partners had been: Sunil – Rs. 3,000 drawn at the end of each quarter and Kapil – Rs. 3,000 drawn at the end of each half year commencing from 31.3.2004. You are required to open Profit and Loss Appropriation Account and show the entries for interest on capital and drawings and distribution of profits. And also prepare Capital Accounts.

Financial Accounting

908 Solution

Rs. To Interest on Capital Sunil = 20,000 @ 6% Kapil = 30,000 @ 6%

Rs.

Rs.

Rs. 19,280

1,200 1,800

By Interest on Drawings Sunil (a) 3,000 Kapil (b)

360 120 480

(19,280 + 480 – 3,000) = 16,760 Sunil = 16,760 ¥ Kapil = 16,760 ¥

6,704 10,056

16,760 19,760

19,760

Dr. (Rs.) Dec. 31

Cr. (Rs.)

3,000 1,200 1,800

Dec. 31

360 120 480

Dec. 31

16,760 6,704 10,056

2004 Dec. 31

To Drawings To Interest on Drawings

Sunil

Kapil

Rs.

Rs.

12,000 360 15,544

12,000 120 29,736

27,904

41,856

2004

Sunil Rs.

Jan. 1 Dec. 31

By Interest on Capital

Kapil Rs.

20,000 1,200 6,704

30,000 1,800 10,056

27,904

41,856

15,544

29,736

2005 Jan. 1

Calculation of Interest on Drawings Date of withdrawal

Amount (Rs.)

Months

March 31

3,000

9

3,000 @ 8% ¥ 3,000 @ 8% ¥

June 30

3,000

6

Sept. 30

3,000

3

Dec. 31

3,000

—

Interest (Rs.)

3,000 @ 8% ¥ — 360

Partnership Accounts, Capital Accounts, Appropriation of Profits...

Date of withdrawal

Amount (Rs.)

Months

June 30

3,000

6

Dec 31

3,000

—

909

Interest (Rs.) 3,000 @ 8% ¥ — 120

Illustration 11 A, B and C are partners in a firm with capitals of Rs. 40,000, Rs. 24,000 and Rs. 20,000 respectively on 1.1.2005. The Partnership Deed contains the following clauses: 1. 2. 3. 4. 5.

Interest on capital @ 5% per annum Interest on drawing @ Rs. 4% per annum A to get a salary @ Rs. 400 per month B and C to get 10% commission each on the net profit Profit and Losses to be shared (a) up to Rs. 4,500 in the ratio of 4:3:2 (b) Above Rs. 4,500 equally

The net profit of the firm for the year ended 31st December, 2005 amounts to Rs. 20,500 and the drawings of the partners are: A – Rs. 2,400; B – Rs. 1,600 and C – Rs. 1,000. Prepare (A) Profit and Loss Appropriation Account and (B) Capital Account of the partners assuming (i) Capitals are fixed and (ii) Capitals are fluctuating. Solution Rs. To Interest on Capital A=40,000 @ 5% B=24,000 @ 5% C=20,000 @ 5% To Salary to A=400 ¥ 12 To Commission B=20,500 @ 10% C =20,500 @ 10%

Rs. 20,500

2,000 1,200 1,000

By Interest on Drawings A=2,400 @ 4% ¥ B=1,600 @ 4% ¥ 4,200 C=1,000 @ 4% ¥ 4,800

48 32 20 100

2,050 2,050 4,100

(20,500 + 100 – 4,200 – 4,800 – 4,100) = 7,500 First Rs. 4,500 A=4,500 ¥ B=4,500 ¥ C=4500 ¥ Balance (Rs. 3,000) Divided equally A B C

2,000 1,500 1,000 4,500

1,000 1,000 1,000 3,500 7,500 20,600

20,600

910

Financial Accounting

Date Particulars 2005 Dec. To Balance 31

A (Rs.)

B (Rs.)

C (Rs.)

10,000

24,000

Date 2005 20,000 Jan. 1

10,000

24,000

20,000

Particulars

A (Rs.)

B (Rs.)

C (Rs.)

40,000

24,000

20,000

40,000

24,000

20,000

40,000

24,000

20,000

Date Particulars A (Rs.) 2005 1,000 Jan. 1 By Interest on 2,000 Capital 20 4,800 By Salary 4,030 By Commission

B (Rs.)

C (Rs.)

1,200

1,000

2,050

2,050

2,000 1,000 9,800

1,500 1,000 5,750

1,000 1,000 5,050

7,352

4,118

4,030

A (Rs.)

B (Rs.)

C (Rs.)

40,000

24,000

20,000

2,000 4,800

1,200

1,000

2,050

2,050

2,000 1,000 49,800

1,500 1,000 29,750

1,000 1,000 25,050

47,352

28,118

24,030

2006 Jan 1

Date Particulars A (Rs.) 2005 Dec. To Drawing 2,400 31 To Interest on 48 Drawings 7,352

B (Rs.) 1,600 32 4,118

C (Rs.)

First (4,500) Next (3,000) 9,800

5,750

5,050 2006 Jan 1

Date Particulars 2005 Dec To Drawing 31 To Interest on Drawings To Balance

A (Rs.) 2,400

B (Rs.) 1,600

C (Rs.)

Date 2005 1,000 Jan 1

48

32

20

47,352

28,118

24,030

Particulars

By Interest on Capital By Salary By Commission First (4,500) Next (3,000)

49,800

29,750

25,050 2006 Jan 1

Illustration 12 From the following particulars, prepare the Capital and Current Accounts of the partners. Also prepare the Profit and Loss Appropriation Account of the partnership firm: Particulars 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Capital as on 1.1.2004 Current Accounts on 1.1.2004 Additional Capital brought on 1.9.2004 Partners’ Drawings at the end of every month Salary for partners every month Interest on Drawings and Capital @ 6% p.a. Profit for the year before charging interest on Capital,

A 1 30,000 Dr. 5,000 3,000 – 300 200

B 2 40,000 Cr. 8,000 – 10,000 400 600

C 3 50,000 Cr. 2,000 5,000 – 500 –

Partnership Accounts, Capital Accounts, Appropriation of Profits...

911

Solution Rs. To Interest on Capital – Opening A=30,000 @ 6% B=40,000 @ 6% C=50,000 @ 6% To Interest on Capital – Additional

Rs. 16,000

1,800 By Interest on Drawings A=300 ¥ 6% ¥ 5.5 2,400 B=400 ¥ 6% ¥ 5.5 3,000 C=500 ¥ 6% ¥ 5.5

A=3,000 @ 6% ¥ C=5,000 @ 6% ¥

99 132 165

60 100

10,000 @ 9% ¥

450

A=8,586 ¥ B=8,586 ¥ C=8,586 ¥

1,431 2,862 4,293 8,586 16,396

Date 2004 Dec. 31 To Balance

A

B

C

33,000

40,000

33,000

40,000 55,000

5,000

16,396

Date 2004

A

B

C

40,000

50,000

33,000

40,000

55,000

Jan. 1

33,000

40,000

55,000

Date 2004

A

B

C

Jan. 1 Sept. 1 By Cash Additional Capital

30,000

3,000

5,000

2005

Date 2004

A

Jan. 1 To Balance Dec. 31 To Drawings To Interest on Drawings To Balance

B

C

Jan. 1 Dec. 31 By Interest on

5,000 3,600

99

4,800

132

15,980

8,000

2,000

1,800

2,400

3,000

60 2,400

7,200

6,000 ing By Interest on Capital–Addi tional By Salary By Interest on

165

3,228

450 2,862

4,293

8,699 20,912

9,393

15,980

3,228

1,431 3,008 8,699 2005 Jan 1

20,912

9,393

100

2005 To Balance

3,008

Jan 1

Illustration 13 A and B are partners sharing profits and losses in proportion to their capitals. At the close of their financial year on 31st December, 2008, the following balances stood to

912

Financial Accounting

the credit of the partners: Capital Accounts: Current Accounts: The partnership deed provides

A – Rs. 20,000 and B – Rs. 5,000. A – Rs. 1,060 and B – Rs. 2,800

(a) That B shall be credited with a salary of Rs. 1,000 per annum for managing the business. (b) That B shall be entitled to 10% of the net profit after charging his salary, and interest on capital, Current Accounts and drawings. (c) Interest at 5% per annum to be allowed on Capital and Current Accounts. The partners’ drawings were: A – Rs. 10,000; B – Rs. 3,000 Interest on Drawings: A – Rs. 330; B – Rs. 80 In addition to the above, the following balances were extracted from the books of the firm as on 31st December, 2008: Rs. Freehold premises

15,000 Mortgage interest

Sundry creditors

24,150 Machinery 1st Jan. 2008

Advertising

4,339 Machinery addition in 2008 2,189 Cycles

Sundry debtors

16,020 Factory expenses and in advance 622

Insurance Delivery expenses

364 Cash in hand 2,203 Mortgage on freehold 21,069

Provision for debts 1st Jan. 2008 Trading Account (Credit balance)

600 Patents

Rs. 450 13,280 1,560 900 70 2,841 31 10,000 300 4,000

34,628

You are required to prepare Profit and Loss Account for the year ended 31st December, 2008 and a Balance Sheet as on that date. When preparing the above, the following matters are to be taken into consideration regarding which no entries had been made in the books. (a) Depreciation to be provided as follows: Plant (Old) 10% per annum; Plant (addition) 25%; Office furniture 10% per annum Patents 10% per annum (b) Cycles were valued at Rs. 800 (c) The Provision for bad debts to be made up to 5% on debtors (d) Interest on mortgage has been paid to 30th Sept. 2008 (e) The following amounts are to be carried forward to next year: Insurance Rs. 62; Advertising Rs. 878 (f) Office Salaries Rs. 69 were owing to 31st Dec. 2008

Partnership Accounts, Capital Accounts, Appropriation of Profits...

913

Solution Rs. To Salaries (+) Outstanding

Rs.

2,189 69

Rs. (Trading Account)

34,628

2,258 622 To Insurance (–) Prepaid

364 (62) 302

To Advertising (–) Prepaid

4,339 (878)

To Delivery Expenses To Mortgage Interest (+) Outstanding

450 150

600

801 (600)

201

1,328 390 30 400 100

2,248

To Provision for Debts New Provision (Adj) (16,020 @ 5%)

To Depreciation Old Plant 13,280 ¥ 10% New Plant 1,560 @ 25% Furniture 300 @ 10% Patents 4,000 @ 10% Cycle (900 – 800)

3,461 2,203

22,733 34,628

Rs. To Salary to B To Interest on Capital A=20,000 @ 5% B=5,000 @ 5% To Interest on Current Account A=1,060 @ 5% B=2,800 @ 5%

Rs.

Rs.

1,000

1,250 53 140

22,733 By Interest on Drawings A B

1,000 250

To Commission to B Total of Credits=23,143 (–) Total of debits=2,443 = 20,700 @ 10% A B

34,628

330 80 410

193

2,070 14,904 3,726 23,143

18,630 23,143

914

Financial Accounting

Rs. Sundry Creditors Mortgage on Premises Outstanding Expenses Mortgage Interest 450 ¥ (600 – 450) Capital A B Current Account – A (+) Interest on Capital (+) Interest on Current Account (–) Drawings (–) Interest on Drawings Current Account – B (+) Interest on Capital (+) Interest on Current Account (+) Salary (+) Commission (–) Drawings (–) Interest on Drawings

Rs.

Assets

31 2,841

24,150 Cash in Hand 10,000 Sundry Debtors (–) New Provision (Adj) 150 69 Prepaid Expenses Advertising Insurance 20,000 5,000 Factory Expenses Cycle (–) Depreciation

1,060 14,904 1,000 53 17,017 (10,000) (330)

16,020 (801) 15,219 21,069 878 62 70 900 (100) 800

(–) Depreciation

300 (30)

Patent 6,687 (–) Depreciation

4,000 (400)

270

3,600

2,800 3,726 250 140 1,000 2,070 9,986 (3,000) (80)

Plant and Machinery (+) Addition (–) Depreciation (1328 + Rs. 390) Freehold Premises

13,280 1,560 14,820 (1,718) 13,122 15,000

6,906 72,962

72,962

Illustration 14 From the following details of Partnership Firm of A and B, prepare Manufacturing, Trading and Profit and Loss Account, and Profit and Loss Appropriation Account for the year ending 31st March, 2008, and a Balance Sheet as on 31st March 2008: Debit Balance Raw material (1st Jan)

Rs.

Salary of Partner A

60,000 Salary of Partner B 5,000 Wages

Finished goods (1st Jan) Purchase of raw materials Cash

20,000 Interest on drawings – A 2,10,000 Interest on drawings – B

3,000 30,000 500 600

10,000 Machinery

45,000

2,000 Furniture

5,000

Factory rent

12,000

Factory salary

18,000 Creditors

3,000 Credit Balance 12,000 Sales Debtors

6,000

78,000 Discount received

Rs. 56,000 3,30,000 1,100

Selling expenses

8,000 Capital – A

68,000

Interest on loan paid

4,000 Capital – B

30,000

Discount allowed

3,000

50,000

Other information: (a) Provide 10% depreciation on machinery and furniture.

Partnership Accounts, Capital Accounts, Appropriation of Profits...

915

(b) Loan carries 10% interest and the amount is brought forward from earlier year. (c) Provide 6% interest on partners’ capital. (d) Closing stock – Raw material Rs. 50,000; Work in progress Rs. 10,000; Finished goods Rs. 35,000. (e) Outstanding Expenses – Factory salary Rs. 2,000; Office Salary Rs. 1,000; Factory rent Rs. 1,000. (f) A and B share profits and losses as 3:2 after charging a salary @ Rs. 500 and Rs. 250 per month to A and B, respectively. Solution

Rs. Progress of Raw Materials (+) Purchases

Rs.

5,000 Progress By Cost of Production

10,000 2,82,500

60,000 2,10,000 2,70,000

rial Materials Consumed To Wages To Factory Rent (+) Outstanding To Factory Salary (+) Outstanding

(50,000) 12,000 1,000 18,000 2,000

To Depreciation on Machinery

To Selling Expenses To Depreciation on Furniture

20,000

2,92,500

2,92,500

By Sales 20,000 10,000 Goods 2,82,500 52,500

3,30,000

3,65,000

3,65,000

12,000 1,000

By Discount Received

35,000

52,500 1,100

13,000 3,000 3,000

To Discount Allowed (50,000 @ 10%) Paid in the year Due (5,000 – 4,000)

13,000

4,500

Goods To Purchases To Cost of Production

(+) Outstanding

2,20,000 30,000

4,000 1,000 5,000 8,000 500 21,100 53,600

53,600

916

Financial Accounting

Rs. To Partners’ Salary–A To Partners’ Salary – B To Interest on Capitals – A 68,000 @ 6% To Interest on Capitals – B 30,000 @ 6%

6,000 3,000

6,220 ¥

3,732

Rs. 21,100

4,080 1,800

2,488

6,220 ¥

21,100

Liabilities

Rs.

Creditors Outstanding Expenses Factory Salary Factory rent

Capital – Partner A (+) Interest on Capital

68,000 3,732 4,080 75,812

Rs.

21,100

Assets

56,000 Cash Debtors 2,000 1,000 Raw Material 1,000 1,000 Finished Goods 50,000 Furniture (–) Depreciation

Rs.

Rs. 2,000 78,000 50,000 10,000 35,000

5,000 (500) 4,500

Plant and Machinery (–) Depreciation

45,000 (4,500) 40,500

(–) Interest on Drawings

(500) 75,312

Capital – Partner B (+) Interest on Capital

30,000 2,488 1,800

(–) Interest on Drawings

34,288 (600) 33,688 2,20,000

2,20,000

Points to Remember Partnership is an agreement between two or more persons for sharing profit of a business Partnership deed is an agreement consisting of the details of profit sharing ratio, rate of interest on capital, drawings, etc. There are two different methods of preparing Capital Accounts (i) Fixed Capital (ii) Fluctuating Capital The Final Accounts of the Partnership Firm consists of Trading Account, Profit and Loss Account, Profit and Loss Appropriation Account and Balance Sheet.

Partnership Accounts, Capital Accounts, Appropriation of Profits...

917

Examination Questions 1. Fill in the blanks (i) Minimum number of persons required to start Partnership business is _________ . (ii) Number of partners should not exceed for Partnership business is ___________ . (iii) If the dates and amounts of drawings are given clearly then Interest is calculated according to _________method. (iv) In the absence of Partnership Deed, partner is entitled to Interest on loan at the rate of _____ p.a. (v) ___________is an extension of Profit and Loss Account. 2. Choose the correct answers (i) Profit sharing ratio is calculated (a) Equally among partners (b) As per ratios given in details (c) On the basis of capitals of partners (d) All the above (ii) Partner is entitled to interest on loan as per agreements as the rate (a) 6% per annum (b) 5 ½ % per annum (c) 7% per annum (d) none of the above (iii) Interest on capital is always calculated on (a) Capital in the beginning (b) Capital at the end (c) Capital in the middle of the year (d) All the above (iv) Under Floating Capital method (a) Capital Account alone is prepared (b) Current Account alone is prepared (c) Both Capital and Current Accounts are prepared (d) All the above (v) According to Average Method, interest on drawings is calculated for a period of (a) 6 months (b) 5 ½ months (c) 6 ½ months (d) All the above

918

Financial Accounting

3. Match the following (i) (ii)

Fixed capital

a b

(iii)

c

(iv)

d

(v)

e

4. State whether the following statements are True or False (a) Interest on drawings is an income for the firm (b) Interest on capital is always calculated at the rate of 6% per annum (c) Interest on loan is calculated at the rate of 6% per annum as per Partnership Act (d) Profit and Loss Appropriation Account is prepared to make adjustments regarding interest on capital, drawings, etc. (e) Guaranteed amount is nothing, but minimum amount of profit. Answers 1. (i) (v) 2. (i) 3. (i) (v) 4. (i) (v)

2, (ii) 20, (iii) Product Profit and Loss Approprial Account, (d) (ii) (a) (iii) (a) e; (ii) c; (iii) a; d. True; (ii) False; (iii) True; True

(iv) 6% (iv) (c) (iv) b;

(v) (a)

(iv) True.

II. Descriptive Questions A. Very short answer questions (1) Define partnership? (2) What is partnership deed? (3) Explain past adjustment? (4) What is meant by guarantee of profits? (5) What is the purpose of preparing Profit and Loss Appropriation Accounts? B. Short answer questions (1) What are the characteristics of partnership? (2) Explain the significance of partnership deed? (3) What is fixed capital method? (4) What is floating capital method? (5) Write a note on interest on partner’s loan? C. Detail answer questions (1) What is Interest on drawings? Explain the method of calculating it? (2) How do you treat the following in the absence of partnership deed? (i) Interest on capital (ii) Interest on drawings

Partnership Accounts, Capital Accounts, Appropriation of Profits...

919

(iii) Interest on loan (iv) Profit sharing ratio (3) Explain the meaning and characteristics of partnership? (4) Write a note on (i) Past adjustments (ii) Guarantee of profits (5) What are details to be inserted in a partnership deed to avoid future disputes among partners? Explain in detail.

Problem 1 X, Y and Z are in partnership sharing profits and losses in the ration of 3:2:1. Z’s share is, however, guaranteed by X and Y at a fixed minimum of Rs. 8,000. The net profit for the year ended 31st December, 2005 was Rs. 36,000. Show the Profit and Loss Appropriation Account indicating the amount due finally to each partner. [Ans. Profit share after adjustment: X–Rs. 16,800; Y–Rs. 11,200; Z–Rs. 8,000] Problem 2 A and B are partners in a firm sharing profits and losses in the ration of 4:1. on 1st April, 2004, the capital of the partners were: A–Rs. 50,00 and B–Rs. 40,000. The Profits and Loss Account of the firm for the year ended 31st March, 2005 showed a net profit of Rs. 1,75,000. You are required to give the Profit and Loss Appropriation Account of the firm after taking into consideration the following: (i) Interest on capital at 5% per annum (ii) Interest on B’s loan Account of Rs. 50,000 for the whole year (iii) Interest on drawings of partners at 6% per annum. Drawing of A–Rs. 15,000; B–Rs. 10,000 (iv) Transfer 10% of the distribution profit, before distribution, to the Reserve Fund of the firm. [Ans. Profit share after adjustment: Rs. A–Rs. 1,21,140; B–Rs. 30,285] Problem 3 X and Y started a business in a partnership firm on 1st January, 2005, without any partnership agreement, and with a capital of Rs. 20,000 to which X’s contribution was Rs. 15,000 and Y’s Rs. 5,000. In the middle of the year, X further introduces Rs. 3,000 to the partnership as a loan without any agreements as to interest. The profit for the year ended December, 2005 comes to Rs. 12,000. During the whole year, Y was fully engaged in the business. There arises a dispute between X and Y. Both of them put forward their claims as follows: X’s Demand: (1) Interest @ 10% on his capital and loan. (2) Division for profits on the basis for contribution of capital.

920

Financial Accounting

Y’s Demand: (1) Since he is fully engaged in the firm, he needs a salary of Rs. 500 per month (2) Divisible profits should be divided equally (3) Interest should be allowed on capital and loan at 5% per annum. [Ans. Profit share after adjustment: X–Rs. 5,955; Y–Rs. 5,955]

Problem 4 On 31st December, 2005 after the close of the accounts, the Capital Accounts of A, B and C stood in the books of the firm at Rs. 40,000; Rs. 30,000 and Rs. 20,000, respectively. It was subsequently discovered that interest at 5% per annum on partners capital at the beginning of the year and interest on drawing of partners were left out of considerations. The interest on drawings amounted to A–Rs. 250; B–Rs. 180; C– Rs. 100. The profit for the year in arriving at the above figures for capital amounted to Rs. 60,000 and the partners drawing had been A– Rs. 10,000; B–Rs. 7,500 and C–Rs. 4,500. The partners shared profit and losses as A one-half, B one-third and C one-sixth, respectively. You are required to give the necessary journal entry to rectify the above omissions. [Ans. Adjusted capital – Debit A–Rs. 285, Credit B–Rs. 5; C–Rs. 280] Problem 5 The net profit of a firm for the year ended 30th June, 2004 was Rs. 15,000 which has been duly distributed among its three partners Ram, Shyam and Gopal in their agreed proportions of 2:2:1, respectively. On 5th July, 2004 it was discovered that the under mentioned transactions were not passed through the books of accounts of the firm for the year ended 30th June, 2004 which stood duly closed on that date: (a) Commission due to Ram for a special transactions of Rs. 1,700. (b) Interest on capital at 5 per cent per annum. (c) Interest on drawings: Ram Rs. 165, Shyam Rs. 125 and Gopal Rs. 100. In addition to these, the rent of Ram’s house amounting to Rs. 200 paid by the firm had been charged in the Profit and Loss Account. The capital accounts of the partners are fixed and on the close of business on 30th June, 2004 were : Ram Rs. 40,000, Shyam Rs. 25,000 and Gopal Rs. 15,000. You are required to give one journal entry to rectify the above omissions. [Ans. Adjusted capital – Debit Shyam Rs. 919, Gopal Rs. 372, Credit Ram Rs. 1,291]

Problem 6 The capital account of Ajay and Binu stood at Rs. 40,000 and Rs. 30,000, respectively.

Partnership Accounts, Capital Accounts, Appropriation of Profits...

921

The drawings of the partners had been Ajay – Rs. 1,200 drawn at the end of each quarter and Binu – Rs. 1,800 drawn at the end of each half year. The interest on drawings charged at the rate of 5%. Find the interest on drawings in the account of Ajay and Binu. [Ans. Interest on drawings: Ajay Rs. 90; Binu Rs. 45] Problem 7 X and Y are partners sharing profits and losses in the ratio of 3:2. X has contributed Rs. 15,000 and Y has contributed Rs. 10,000 towards capital of the business. X is entitled to a salary of Rs. 2,000 per annum and interest is to be calculated at 5% per annum on the capital and drawings of each partner. The drawings during the year were as follows: X

Y

1st April

Rs. 300

1st Feb

Rs. 200

1st June

Rs. 500

1st April

Rs. 600

1st Aug.

Rs. 200

1st June

Rs. 200

1st Oct.

Rs. 800

1st Nov.

Rs. 900

The profit of the firm before charging salary and interest on capital and drawings amounted to Rs. 12,285. Show the profit and loss appropriation account [Ans. Net profit after adjustment shared: X Rs. 5,400, Y Rs. 3,640; Interest on drawings: X Rs. 40, Y Rs. 45]

Problem 8 Three chartered accountants Das, Roy and Sen form a partnership, profits being divisible in the ratio of 3:2:1, subject to the following: (i) Sen’s share of profit is guaranteed to be not less than Rs. 15,000 per annum; (ii) Roy gives guarantee to the effect that gross fees earned by him for the firm shall be equal to his average gross fee of the proceeding five years when he was carrying on profession alone (which average works out at Rs. 25,000). The profit for the first year of the partnership is Rs. 75,000. The gross fees earned by Roy for the firm are Rs. 16,000. You are required to show the distribution of profit. [Ans. Profit shares of Das Rs. 41,400, Roy Rs. 27,600, Sen Rs. 15,000; Capital Account balance: Das – Rs. 41,400; Roy – Rs. 18,600; Sen – Rs. 15,000]

922

Financial Accounting

Problem 9 A, B and C are partners sharing profits and losses in the proportion of 4:3:2. During the year 2005, their fixed capital and drawings (including salaries) were as follows: Partners

Capital (Fixed)

Drawings including salaries Rs.

A

2,40,000

24,000

B

1,60,000

18,000

C

1,00,000

15,000

Each partner is entitled to a salary of Rs. 1,000 per month and interest @ 5% per annum on the capital at the middle of the year, B made an advance of Rs. 1,00,000 to the firm bearing interest at 6% per annum. The net profit for the year stood at Rs. 1,09,000 before charging interest on capital and loan, but after charging partners salaries. Prepare the Partner’s Current Account. [Ans. Profit shares of A–Rs. 36,000; B–Rs. 27,000; C–Rs. 18,000; Capital account balance A–Rs. 39,000; B–Rs. 29,000; C–Rs. 20,000] Problem 10 A and B are partners and on 31st December, 2004, the Capital of the partnership was Rs. 2,10,000 of which Rs. 1,40,000 stood at the credit of A and Rs. 70,000 at the credit of B. Profit and Loss were to be divided as to 2/3 and 1/3 respectively. On 31st December, 2005, the following information was given to you as to the position of affairs: (a) The total combined capital was Rs. 2,46,500. (b) B had drawn Rs. 3,000. (c) B had to be credited with Rs. 5,000 as special salary earned during the year 2005, as agreed by the partners. (d) The partners were to be credited with 5% interest on capital. You are required to prepare a statement showing how the capital of Rs. 2,46,500 is divided between A and B. [Ans. Profit shares of A Rs. 10,500, B Rs. 24,000; Capital Account balance A–Rs. 1,63,000; B–Rs. 83,500]

Problem 11 On 1st January, 2004, A and B enter into partnership contributing Rs. 20,000 and Rs. 15,000, respectively, and sharing profits and losses in the ratio of 3:2. B is allowed a salary of Rs. 4,000 per year. Interest on capitals is to be charged at 5% per annum and 5% interest is to be charged on drawings. During the year A withdrew Rs. 3000 and B Rs. 6,000, interest on drawings being Rs. 70 and Rs. 50, respectively. Profit in 2004 before the above noted adjustments amounted to Rs. 10,580. Show

Partnership Accounts, Capital Accounts, Appropriation of Profits...

923

how the profit is to be distributed. Also show the capital accounts of A and B under fixed capital method and fluctuating capital method. [Ans. Share of profit: A Rs. 2,760, B Rs. 1,840; Fixed capital A Rs. 20,000, B Rs. 15,000; Current capital: A Rs. 890, B Rs. 690; Under fluctuating capital method: A Rs. 20,890; B Rs. 15,690] Problem 12 A and B started a business on 1st January, 2005 with contribution Rs. 50,000 by A and Rs. 40,000 by B. On 30th June, 2005, B made a further contribution of Rs. 10,000 towards his capital. Drawings during the year come to Rs. 40,000 by A and Rs. 5,000 by B. 6% interest is to be charged on capitals and no interest is to be charged on drawings. B is to be allowed a salary of Rs. 500 per month. The profit for the year comes to Rs. 32,000 before charging salary and interest on capitals. Show the profit and Loss Appropriation Account and the partners capital accounts under fixed capital method and fluctuation capital method. [Ans. Share of profit: A Rs. 10,150, B Rs. 10,150; Fixed capital: A Rs. 50,000, B Rs. 50,000; Current capital: A Rs. 9,150; B Rs. 13,850; Under Fluctuating capital method: A Rs. 59,150; B Rs. 63,850.]

Problem 13 A and B are partners sharing profits and losses in the proportion of 3:5 respectively. The under mentioned balance were extracted from their books on 31st December, 2005. Debit Balance

Rs.

Commission paid

A’s Drawing Account

4,000 Travelling expenses

B’s Drawing Account

3,000 Carriage inward

Goodwill

40,000 Motor vans

Purchases

85,000

Sundry debtors

40,500

Return inward

15,000 Credit Balance

5,000 Plant and machinery

Rent Postage and telegram Advertising

3,750 A’s Capital Account 500 B’s Capital Account 9,000 Sales

5,000 2,000 5,800 20,860 10,000 2,90,350 65,000 40,000 1,60,000

11,500 Sundry creditors

1,450

Cash in hand

16,000 Return outward

2,500

Wages

14,000 Bills payable

Telephone charges Salaries Printing and stationary

5,000

8,900 12,500

12,250 7,540

Take into account the following adjustment. 1. Write off Rs. 250 from office furniture 10% on Plant and machinery 20% on Motor vans

2,90,350

924 2. 3. 4. 5.

Financial Accounting

Create a Reserve of 5% on sundry debtors for bad debts. Write off one-fifth of the advertising expenses. Partners are entitled to interest on capital @ 5% per annum. B is entitled to salary of Rs. 1,800 per annum. Prepare: (a) Trading and Profit and Loss Account for the year ended on 31st December, 2005. (b) Balance as on that date. [Ans. Gross profit Rs. 57,200; Net profit Rs. 23,213; Profit share A Rs. 9,698, B Rs. 6,465; Balance sheet Rs. 1,44,613]

26

Admission, Retirement and Death of a Partner

Learning Objectives After studying this chapter, you should be able to Calculate Profit Sharing Ratio, Sacrificing Ratio and Gaining Ratio Revalue assets and liabilities Understand treatment of Goodwill and Accounting Standard 10 of ICAI Explain adjustment of accumulated reserves, profits and capitals and Treatment of Admission, Retirement and Death of Partner

ADMISSION OF PARTNER Whenever a new partner is admitted into the firm, the firm is reconstituted under which the old partnership comes to an end and a new one comes into existence. According to Section 31(1), of the Indian Partnership Act 1931, a person can be admitted as a new partner only with the consent of all the existing partners unless otherwise agreed upon. A new partner has the (a) Right to share assets of the firm; and (b) Right to share future profits of the firm. In order to acquire these rights, the new partner has to contribute capital to the firm. He is entitled to get back this capital at the time of termination of partnership.

Adjustments The following adjustments are necessary at the time of admission of a new partner into the firm: I. Calculation of new profit sharing ratio II. Revaluation of assets and liabilities III. Adjustment of accumulated profits, reserves and losses IV. Adjustment for goodwill V. Adjustment of capital

I. Calculation of New Profit Sharing Ratio When a new partner is admitted to the firm, he takes share from future profits of the

926

Financial Accounting

firm, i.e. he acquires share of profits from old partners. In other words, old partners sacrifice some share of profit in favour of new partner. Therefore, it is necessary to calculate new profit share of all partners (including the new partner) after admission. The new partner may acquire his share of profit (a) (b) (c) (d)

from old partners in old profit sharing ratio or from old partners at an agreed ratio or from only one old partner or from more than one partner

Calculation of Sacrificing Ratio Sacrificing Ratio is the ratio at which old partners sacrifice their share of profits in favour of the new partner. This sacrificing ratio is calculated only in the case admission. The formula to calculate sacrificing ratio is as follows: Sacrificing Ratio = Old profit sharing ratio – New profit sharing ratio Calculation of Gaining Ratio Gaining ratio is calculated when a partner returns or dies. Whenever a person retired or dies, the continuing partners will also get the share of retired or deceased partner. This ratio is called Gaining Ratio. The formula to calculate gaining ratio is as follows: Gaining Ratio = New profit sharing ratio – Old profit sharing ratio

II. Revaluation of Assets and Liabilities Whenever a new partner is admitted, the firm has to revalue both assets and liabilities. The reason being if there is any profit on revaluation of assets and liabilities, it has to be shared by all the partners according to their profit sharing ratio. If there is a loss, such loss also has to be borne by the old partners accordingly. For the purpose of revaluation of assets and liabilities, ‘Revaluation Account’ has to be opened. It is a nominal account in nature. Sometimes it is also called Profit and Loss Adjustment Account. There are two Adjustment Accounts: (a) Revaluation Account It is prepared to record the assets and liabilities in the books of accounts. (b) Memorandum Revaluation Account It is prepared to record assets and liabilities at their old figures in the books of accounts. Revaluation Account The following entries are necessary to prepare Revaluation Account to record the assets and liabilities at their revised values in the books of accounts. (a)

For any increase in the value of asset

Assets Account To Revaluation Account (b)

Dr.

xxx xxx

For any decrease in the value of asset

Revaluation Account To Assets Account

Dr.

xxx xxx

Admission, Retirement and Death of a Partner

(c)

For any increase in the value of liabilities

Revaluation Account To Liabilities Account (d)

927

Dr.

xxx xxx

For any decrease in the value of Liabilities

Liabilities Account To Revaluation Account

Dr.

xxx xxx

(e) (i) Revaluation Account To Old Partners Capital Account (in the old ratio)

Dr.

xxx xxx

(e) (ii) For Closing Revaluation A/c (if there is Loss) Old Partners Capital Account To Revaluation Account (in the old ratio)

Dr.

xxx xxx

Memorandum Revaluation Account This account is prepared, when partners decide not to show revised values of assets and liabilities in the books of the firm. This Memorandum Revaluation Account is divided into two parts. The first part is prepared like Revaluation Account and the second part is prepared like reverse of Revaluation Account (i.e. first part). Example—whatever entries debited to in the first part are to credited in the second part and the entries which are credited in the first part are to be debited in the second part. Further, it is to be noted that the first part of Memorandum Revaluation Account is closed by transferring the resultant profit (or loss) to old partners’ Capital Account (or Current Account) in the old ratio, whereas the second part of this account is closed by transferring the resultant profit (or loss) to all partners’ Capital Account, including the new partner in the new profit sharing ratio.

III. Adjustment of Accumulated Profits, Reserves and Losses Before admitting a new partners, accumulated profits, reserves (or losses) are to be transferred to old partners’ Capital Accounts in their old profit sharing ratio. The reason is that the new partner is not entitled to take any share from the accumulated profit or losses and reserves of the firm before he becomes the partner of a firm. General Reserve Account

Dr.

Any other Reserve Account To Old Partners Capital Account (in the old ratio)

Dr.

xxx xxx xxx xxx

IV. Adjustment for Goodwill Goodwill is established when reputation of a business results in more profits. Goodwill is an intangible asset. The factors responsible for Goodwill are—good location, efficiency of management, satisfied customers, market without competition), etc. Definition “Goodwill is nothing more than probability that the old customers will resort to the old place”—Lord Eldon

928

Financial Accounting

Thus, goodwill is the value of the reputation which the business builds due to its efficient service to its customers and quality of its products. Methods of Calculation of Goodwill (i) Average Profit Method The value of goodwill is calculated on the basis of number of years of purchase of average profit of pervious years. Example—Suppose profit of the five preceding years are Rs. 10,000 Rs. 12,000, Rs. 10,000, Rs. 14,000 and Rs. 10,000, assuming goodwill is based on 3 years purchase, then the total value of goodwill is equal to (10,000 +12,000 + 10,000 +14,000 +10,000) / 5 = 56,000 / 5 Thus Average Profit = Rs. 11,200 Goodwill (based on 3 years purchase) = Rs. 11,200 ¥ 3 = Rs. 33,600. (ii) Super Profit Method Super profit is the excess of actual profit over the normal profit. Example – Assuming Goodwill is calculated on the basis of 3 years purchase of super profit, Super Profit = Actual Profit (Rs. 1,00,000) – Normal Profit (Rs. 50,000) = Rs. 50,000 Goodwill (based on 3 years purchase) = Rs. 50,000 ¥ 3 = Rs. 1,50,000. (iii) Capitalisation of Profits Method According to this method, goodwill is calculated on the basis of capitalised value of profit and actual capital Example – Given actual capital invested is Rs. 5,00,000, average profit earned is Rs. 1,00,000, normal rate of return is 15% per annum, goodwill is calculated as under Capitalised value of profit = (1,00,000 / 15) ¥ 100 = Rs. 6,66,666 Goodwill = Capitalised value of Profits – Actual capital = Rs. 6,66,666 – Rs. 5,00,000 = Rs. 1,66,666 (iv) Goodwill is Based on Incoming Partner’s Share of Profit Sometimes goodwill is calculated on the basis of incoming partner’s share of profit. Suppose a new partner is admitted for 1/4th share of profit of the firm and he brings Rs. 50,000 as his share of goodwill. then the goodwill of the firm is Rs. 50,000 ¥ 4 = Rs. 2,00,000. (v) Hidden Goodwill When the value of goodwill is not directly given, then it has to be calculated on the basis of net worth of the firm. Net worth (including goodwill) = xxx (–) Net worth (excluding goodwill) = xxx Goodwill = xxx (Net worth = Capital of the firm or Capitals of all partners + Accumulated reserves and profits – Accumulated losses) Methods of Accounting for Goodwill (a) Revaluation Method This method is applicable when new partner does not have his share of goodwill in cash. In this case various journal entries are required –

Admission, Retirement and Death of a Partner

(i)

929

When there is no goodwill appearing in the book

Goodwill Account To Old Partners’ Capital Account

Dr.

xxx xxx

(This entry is passed for raising goodwill in the books of accounts)

(ii)

When goodwill is appearing in the books at an amount less than the its present value

Goodwill Account (for the difference) To Old Partners’ Capital Account (iii)

Dr.

xxx xxx

When goodwill is appearing in the books at an amount more than its present value

Old Partners’ Capital Account (for the difference) To Goodwill Account

Dr.

xxx xxx

(This is very rare in Partnership business)

(b) Memorandum Revaluation Account According to this method, goodwill is raised in the business and then written off. Therefore, two Journal Entries are required. (i)

For raising goodwill

Goodwill Account To Old Partners’ Capital Account (ii)

Dr.

xxx xxx

For writing off goodwill

All Partners’ Capital Account (including new partners in the new ratio) To Goodwill Account

Dr.

xxx xxx

(c) Premium Method This method is applicable only when the new partner brings in his share of goodwill in cash. The journal entries are (i)

For goodwill brought in

Cash Account To New partner’s Capital Account (ii)

xxx xxx

For transferring goodwill to old partner’s Capital A/c

New Partner’s Capital Account (for actual amount brought in by this partner) To Old partners’ Capital Account

(iii)

Dr.

Dr.

xxx xxx

For withdrawal of premium amount

Old Partners’ Capital Account (The extent they were given credit) To Bank Account

Dr.

xxx xxx

Accounting Standard 10 for Goodwill Issued by Institute of Chartered Accountants of India (ICAI) According to Para 16 of Accounting Standard (AS) 10, goodwill is to be recorded in the books only when some consideration in money or money’s worth has been paid for it. Goodwill should generally be written off over a period (say 3 to 5 years).

930

Financial Accounting

According to the above AS-10, only goodwill which is purchased can be shown in the books of accounts. Therefore, in the case of admission, retirement or death of partner, goodwill cannot raised in the books of the firm as there is no consideration for money or money’s worth paid for goodwill. Only the premium of goodwill brought in by a new partner in cash can be shown in the books of the firm.

V. Adjustment of Capitals At the time of admission of a partner, the capitals of the partners must be adjusted according to their new profit sharing ratio. There are two ways to adjust their capitals— (i) Adjustment of Capitals of other Partners on the Basis of Incoming Partner’s Capital The new capital of the firm must be calculated on the basis of incoming partner’s profit sharing ratio and capital. Capital required for each partner can be calculated on the basis of new ratio. This required capital should be compared with actual capital of each partner. If actual capital is more than the required capital, the excess may be withdrawn by the partner. If actual capital is less than the required capital, the deficiency has to be brought in by the partner and to be transferred to the debit side of his current account. (ii) Determine new Partner’s Capital on the Basis of Total Capital of the old Partners (The total capital of the old partners has to be calculated after making all adjustments). Assume the partner takes 1/4th share of profit, the balance 3/4th is shared by the old partners on the basis of their total capital. Example – The total capital of the firm is Rs. 3,00,000 for 3/4th share, then the new partner has to bring Rs. 1,00,000 for his 1/4th share of profit. Thus, the new capital of the firm (including new partner’s capital) is Rs. 4,00,000.

RETIREMENT OF PARTNER If the partner leaves the firm due to old age, ill health, etc., it is called retirement. According to Section 32 (1) of the Indian Partnership Act, “a partner may retire (a) with a consent of all other partners (whether implied or expressed) or (b) in accordance with an express agreement by the partners, or (c) by conveying his intention to retire (in case of Partnership of Will) by a written notice”. The retiring partners gets the amount due to him from the firm at the time of his retirement.

Adjustments The following adjustments have to be made when a partner retires or dies: I. II. III. IV.

Calculation of gaining ratio Treatment of goodwill Revaluation of assets and liabilities Calculation of accumulated profit or losses

Admission, Retirement and Death of a Partner

931

V. Calculation of amount due to the retiring partner VI. Adjustment of capitals of partners

I. Calculation of Gaining Ratio When a partner retires or dies, the profit of the firm will be shared by other partners. The difference between their new profit sharing ratio and old profit sharing ratio is called gaining ratio.

II. Treatment of Goodwill Goodwill of the firm has to be treated as per partnership agreement. There are three methods of treating Goodwill of the firm – (i)

When goodwill is raised

Goodwill Account To All Partner’s Capital Account (in the old ratio)

Dr.

xxx xxx

(ii) (a) When goodwill is raised and then written off Goodwill Account To All Partner’s Capital Account (in the old ratio)

Dr.

xxx xxx

(Being goodwill is raised) (b) Continuing Partner’s Capital Account To Goodwill Account ( in Gaining ratio)

Dr.

(Being goodwill is written off)

(iii)

When goodwill A/c is not maintained

Continuing Partner’s Capital Account To Retiring Partner’s Capital Account (in the gaining ratio with his share of goodwill)

Dr.

xxx xxx

III. Revaluation of Assets and Liabilities Revaluation Account is prepared to revalue assets and liabilities of the firm in the same manner as it is done in the case of a partner.

IV. Calculation of Accumulated Profits and Reserves Calculation of accumulated profits and reserves, if any is necessary in order to find out retiring or deceased partner’s share. These profits and reserves are to be distributed among the partners in their profit sharing ratio. This share of profits and reserves are transferred to Capital Accounts or Current Accounts of the partners as the case may be.

V. Calculation of Amount due to the Retiring Partner Amount due to the retiring partner includes his capital, interest on capital, his share on profits, reserves and goodwill, profit on revaluation of assets and liabilities, etc.

VI. Adjustment of Capitals of Continuing Partners Capitals of continuing partners have to be adjusted after retirement or death of a partner according to their new profit sharing ratio on the basis of total capital of the

932

Financial Accounting

firm. Capitals of continuing partners are calculated individually according to their profit sharing ratio. If there is any surplus, it may be withdrawn and if there is any deficiency, the deficiency has to be contributed by the partner concerned.

DEATH OF PARTNER The accounting procedures are the same as it is done in the case of retirement of a partner. The only difference is, in the case of retirement whatever amount in due to the retiring partner may be paid in cash, whereas in the case of death, amount due to the deceased partner is transferred to his legal heirs or representative’s account.

Life Insurance Policies If a partner dies, then the firm has to pay the amount due to deceased partner to his legal representatives or heirs in cash. This sudden payment of cash may affect the working of the partnership firm. Therefore, in order to avoid this sudden financial strain, insurance policy is taken on the lives of the partners individually or jointly. If it is the individual policy, amount will be paid by the insurance company on the death of partner concerned. In the case of joint life policy, there are three methods of treatment – I. When premium paid is treated as business expense (i)

On payment of premium

Joint Life Premium Account To Bank Account (ii)

Dr.

xxx xxx

On closing the Premium Account xxx

To Joint Life Premium Account (iii)

On the death of a partner

Insurance Company Account To Partners Capital Account (iv)

xxx

Dr.

xxx xxx

On receipt of the amount

Bank Account To Insurance Company Account

Dr.

xxx xxx

II. When premium paid is not treated as business expenses (i)

On payment of premium

Joint Life Policy Account To Bank Account (ii)

Dr.

xxx xxx

On transfer of excess of surrender value in Joint Life Policy A/c xxx

To Joint Life Policy Account (iii)

xxx

On the death of a partner

Insurance Company Account To Joint Life Policy Account

Dr.

xxx xxx

Admission, Retirement and Death of a Partner

(iv)

On receipt of amount from insurance company

Bank Account To Insurance Company Account (v)

933

Dr.

xxx xxx

On transfer of balance in Joint Life Policy A/c

Joint Life Policy Account To All Partners Capital Account

Dr.

xxx xxx

III. When the Joint Life Policy is treated as an asset (i)

On payment of premium

Joint Life Policy Account To Bank Account

Dr.

xxx xxx

(ii) xxx To Joint Life Policy Reserve Account (iii)

xxx

On transfer of balance in Joint Life Policy A/c

Joint Life Policy Reserve Account To Joint Life Policy Account (iv)

Dr.

xxx

On death of a partner

Insurance Company Account To Joint Life Policy Account (v)

Dr.

On receipt of the amount Dr.

xxx xxx

On transfer of balance in Joint Life Policy Reserve A/c

Joint Life Policy Reserve Account To Joint Life Policy Account (vii)

xxx xxx

Bank Account To Insurance Company Account (vi)

xxx

Dr.

xxx xxx

On transfer of balance in Joint Life Policy A/c

Joint Life Policy Account To All Partners’ Capital Account

Dr.

xxx xxx

Illustrations—Admission of Partner Index for Illustrations Type

Ill. No.

I

Ratios

II

Capital Adjustment

1–4 5–6

III

Goodwill

7 – 10

IV

Admission of Partner – Journal, Ledger and Balance Sheet

11 – 14

V

Admission of Partner – Ledger Accounts and Balance Sheet

15 – 18

934

Financial Accounting

I – RATIOS Given Old Ratio, New Partner Share—To Find New Ratio Illustration 1 The partners A and B shared their profits and losses in the ratio of 2:1. C was admitted for 1/4th share in profit. Calculate new profit sharing ratio. Solution Given old ratio = 2:1 New partner given 1/4 share The balance divided among the old partners = 1 – 1/4 = 3/4 in the old ratio A = 3/4 ¥ 2/3 = 6/12 B = 3/4 ¥ 1/3 = 3/12 C = 1/4 or 3/12 New Ratio = 6:3:3 or 2:1:1

Given Old Ratio, Share Taken from Old Partners—To Find New Ratio Illustration 2 P and Q share profit and losses in the ratio of 7:3. R was admitted as a new partner with 3/7th share, of which 2/7th given by P and 1/7th given by Q. Calculate new ratio. Solution Given old ratio = 7:3 New partner given 3/7 share – taken 2/7th from P and 1/7th from Q Old Ratio (–) Sacrificing Ratio = New Ratio P = 7/10 – 2/7 = (49 – 20)/70 = 29/70 Q = 3/10 – 1/7 = (21 – 10)/70 = 11/70 R = 3/7 or 30/70 New Ratio = 29:11:30

New Partner Share is Given—Different Options Illustration 3 A, B and C are partners in a firm, sharing profits and losses in the ratio of 4:3:2. D is admitted into the firm. Find the new ratio, if the share given to D is (a) 1/5; (b) 1/3; (c) 1/8; (d) 1/10; (e) his 1/5 share is given by A 1/10 and B 1/10. Solution (a) New partner D’s share = 1/5 The balance divided among the old partners = 1 – 1/5 = 4/5 in the old ratio A = 4/5 ¥ 4/9 = 16/45 B = 4/5 ¥ 3/9 = 12/45 C = 4/5 ¥ 2/9 = 8/45 D = 1/5 or 9/45 New Ratio = 16:12:8:9

Admission, Retirement and Death of a Partner

935

(b) New partner D’s share = 1/3 The balance divided among the old partners = 1 – 1/3 = 2/3 in the old ratio A = 2/3 ¥ 4/9 = 8/27 B = 2/3 ¥ 3/9 = 6/27 C = 2/3 ¥ 2/9 = 4/27 D = 1/3 or 9/27 New Ratio = 8:6:4:9 (c) New partner D’s share = 1/8 The balance divided among the old partners = 1 – 1/8 = 7/8 in the old ratio A = 7/8 ¥ 4/9 = 28/72 B = 7/8 ¥ 3/9 = 21/72 C = 7/8 ¥ 2/9 = 14/72 D = 7/8 or 9/72 New Ratio = 28:21:14:9 (d) New partner D’s share = 1/10 The balance divided among the old partners = 1 – 1/10 = 9/10 in the old ratio A = 9/10 ¥ 4/9 = 36/90 B = 9/10 ¥ 3/9 = 27/90 C = 9/10 ¥ 2/9 = 18/90 D = 1/10 or 9/90 New Ratio = 36:27:18:9 or 4 : 3 : 2: 1 (e) D’s 1/5 share is given by A 1/10 and B 1/10 Old Ratio (–) Sacrificing Ratio = New Ratio A = 4/9 – 1/10 = (40 – 9)/90 = 31/90 B = 3/9 – 1/10 = (30 – 9)/90 = 21/90 C = 2/9 – 0 = = 20/90 D = 1/5 = = 18/90 New Ratio = 31:21:20:18

Given Old Ratio, New Ratio – To Find S

Ratio

Illustration 4 A and B were partners in a firm sharing profits in the ratio of 3:2. They admit C into partnership and the new ratio for sharing profits will be 4:3:2. You are required to calculate the sacrificing ratio: (B.Com., Madurai) Solution Old Ratio (–) New Ratio = Sacrificing Ratio A = 3/5 – 4/9 = (27 – 20)/45 = 7/45 B = 2/5 – 3/9 = (18 – 15)/45 = 3/45 Sacrificing Ratio of A and B = 7:3

936

Financial Accounting

II – CAPITAL ADJUSTMENT Illustration 5 Chari and Dani have equal share in the partnership firm. On 1st April their capital account showed Rs. Rs. 13,000 and Rs. 11,000, respectively. They admitted Elango as partner for 1/4th share of the firm. Elango brought his capital based on the combined capitals of the old partners. Based on the information, pass the journal entries and make the necessary adjustment in the Partners’ Capital Account. Solution (i) New ratio Elango profit share = 1/4th The balance being 1 – 1/4 = 3/4th shared by Chari and Dani New Ratio Chari = 3/4 ¥ 1/2 = 3/8 Dani = 3/4 ¥ 1/2 = 3/8 Elango = 1/4 or 2/8 (ii) New capital of the firm Total capital of the firm = Rs. 13,000 + Rs. 11,000 = Rs. 24,000 Elango brings capital based on the combined capital of old partners i.e. 3/8 + 3/8 = 6/8 = Rs. 24,000 Total capital of the firm would be = 8/6 ¥ 24,000 = Rs. 32,000 Elango contribution towards capital = 1/4 of Rs. 24,000 = Rs. 8,000 Chari new capital = 3/8 of Rs. 32,000 = Rs. 12,000 Dani new capital = 3/8 of Rs. 32,000 = Rs. 12,000 (iii) Capital adjustment Chari to take back excess capital contributed = 13,000 – 12,000 = Rs. 1,000 Dani to bring in additional capital = 11,000 – 12,000 = Rs. 1,000 (iv) Journal Entries 2004 Jan 1

Rs. Cash A/c To Elango’s Capital A/c (Being capital brought in by Elango)

Dr.

Chari’s Capital A/c To Cash A/c (Being Chari to take back excess capital contributed)

Dr.

Cash A/c To Dani A/c (Being Dani to bring in additional capital)

Dr.

Rs.

8,000 8,000

1,000 1,000

1,000 1,000

New Ratio, Adjustment of Capital, Journal Entries, Capital Account Illustration 6 A and B are partners sharing profits in the ratio of 3:2 with capitals of Rs. 12,000 and Rs. 5,400, respectively. C is admitted as a new partner for 1/3 share of profits with a capital of Rs. 7,500. Adjust the capitals of them in the new profit sharing ratio.

Admission, Retirement and Death of a Partner

937

Give necessary Journal Entries. (B.Com., Bharathidasan) Solution (i) New ratio New partner share = 1/3 The balance divided among the old partners = 1 – 1/3 = 2/3 in the old ratio A = 2/3 ¥ 3/5 = 6/15 B = 2/3 ¥ 2/5 = 4/15 C = 1/3 or 5/15 New Ratio = 6:4:5 (ii) Adjustment of Capital The firm’s total capital to be Total capital of the firm has to adjusted on the basis of C’s Capital Rs. 7,500 ¥ 3/1 = Rs. 22,500 Thus, A’s capital = 22,500 ¥ 6/15 = Rs. 9,000 B = 22,500 ¥ 4/15 = Rs. 6,000 C = Given = Rs. 7,500 A = Old capital (Rs. 12,000) – New capital (Rs. 9,000) = Excess capital by him = Rs. 3,000 B = Old capital (Rs. 5,400) – New capital (Rs. 6,000) = Capital shortfall = Rs. 600 Adjusting Journal Entries (a)

For transferring excess capital of A to his Current Account

A’s Capital Account To A’s Current Account

Dr.

3,000 3,000

(b) B’s Current Account To B’s Capital Account

Dr.

600 600

Capital Account

To Current A/c To Balance c/d

A Rs.

B Rs.

C Rs.

A Rs.

3,000 9,000

By Balance b/d 7,500 By Cash A/c

12,000

6,000

5,400 600

12,000

6,000

12,000

6,000

9,000

6,000

By Bal b/d

B Rs.

C Rs. 7,500 7,500

III – GOODWILL Goodwill Under Three Methods Illustration 7 Calculation the value of Goodwill in the following cases: (a) Goodwill estimated at three years purchases of the Average Profits of the last four year. Profit being 1st year—Rs. 8,000; 2nd year—Rs. 10,000; 3rd year— Rs. 16,000; 4th year— Rs. 14,000.

Financial Accounting

938

(b) Total capital invested Rs. 1,00,000; Actual profit Rs. 20,000; Normal rate of interest is 10%. Partners, salary Rs. 6,000; Goodwill at three years purchase of the super profits. (c) Net Profit of the firm Rs. 15,000; Capital invested Rs. 1,00,000; Normal rate of return 10%. Use the capitalisation method. Solution (a) Goodwill under Average Profit Method Average profit = (8,000 + 10,000 + 16,000 + 14,000) / 4 = 48,000/4 = Rs. 12,000 Goodwill (three years purchase) = Average profit (12,000) ¥ 3 = Rs. 36,000. (b) Goodwill under Super Profit Method Average profit (–) Normal profit = Super profit Actual profit = 20,000 (–) Salary = (6,000) Average profit = 14,000 (–) Normal profit 1,00,000 @ 10% = (10,000) Super Profit = 4,000 Goodwill (three years purchase) = Super profit (4,000) ¥ 3 = Rs. 12,000. (c) Goodwill under Capitalisation Method Net Profit given = Rs. 15,000 Capitalisation = (15,000 ¥ 100)/10 = 1,50,000 (–) Capital invested = (1,00,000) Goodwill = 50,000

Goodwill and Capital – Journal Entry Illustration 8 X and Y are partners in a firm sharing profits and losses of 75% and 25%, respectively. Their capital accounts as on 1st Jan. 2004, were Rs. 50,000 and Rs. 40,000, respectively. They admit Z as a partner for 1/5th share of future profits of the firm. Z introduces Rs. 40,000 of which Rs. 20,000 was to be considered as premium for goodwill. You are asked to record the above transactions in the books of the firm and show also the future profits sharing ratio. (B.Com., Calcutta) Solution Journal 2004 Jan 1

Rs. Bank Account Dr. (Capital) To Z Capital Account (Goodwill) To X Capital Account (75% of 20,000) To Y Capital Account (25% of 20,000) (Being the capital of Z brought into the business of which Rs. 20,000 is considered as goodwill amount)

Rs.

40,000 20,000 15,000 5,000

Admission, Retirement and Death of a Partner

939

Goodwill Adjustment Illustration 9 Alen and Balan were partners sharing profits and losses in the ratio of 3:2. Cimon was admitted as a partner with the following conditions: (a) Cimon’s goodwill was fixed to be Rs. 9,000, but not be brought in as cash; (b) Cimon was given 3/8th share in profit/losses for the capital brought in by him Rs. 25,000; (c) The Goodwill has to be raised in the books. (d) The new profit and loss ratio of Alen and Balan was decided as 2:3 (e) It was agreed to write off the Goodwill raised in the books. Pass the adjusting journal entries. Solution Journal Entries Rs. Bank Account To Cimon’s Capital Account (Being capital brought in by Cimon)

Dr.

Alen Capital Account (9,000 ¥ 10/40)* Balan Capital Account (9,000 ¥ 15/40) Cimon Capital Account (9,000 ¥ 15/40) To Goodwill Account

Dr. Dr. Dr.

Rs.

25,000 25,000

2,250 3,375 3,375 9,000

*New Partner Cimon’s share = 3/8 The balance divided among the old partners = 1 – 3/8 = 5/8 in the old ratio Alen = 5/8 ¥ 2/5 = 10/40 Balan = 5/8 ¥ 3/5 = 15/40 Cimon = 15/40 New Ratio = 10:15:15

Treatment of Goodwill Illustration 10 Pass the journal entries for the following: (a) The existing ratio of partners A and B are equal; New partner C share 1/4 of profit; Amount brought in by him towards capital and goodwill being Rs. 12,000 and Rs. 2,000, respectively. No Goodwill to appear in the books. (b) The existing ratio of partners A and B are 4:3; New partner C brought Rs. 4,000 as premium for his share in profit. All the partners to share the future profits equally; No Goodwill to appear in books. (c) A and B are partners share profits in the ratio of 5:4. New partner C is admitted into partnership with premium paid by him of Rs. 6,000; goodwill recorded in the books at Rs. 10,000, not to appear. Future profit sharing ratio is 4:3:3. (d) The existing ratio of partners A and B are 3:2. C is admitted for 3/10 share, 2/3 taken from A and 1/3 taken from B. Goodwill Account recorded in the books

Financial Accounting

940

Rs. 8,000. C could not bring his share of Goodwill in cash but the firm raised the goodwill to Rs. 13,000. (e) A, B and C existing ratio = 4:4:2. Goodwill not appearing in the books but valued at Rs. 12,000. New profit sharing ratio agreed to be equal. Goodwill not to appear in the books. Solution (a) Working Note Old ratio = 1/2; 1/2 New partner given 1/4 share The balance divided among the old partners = 1 – 1/4 = 3/4 in the old ratio A = 3/4 ¥ 1/2 = 3/8 B = 3/4 ¥ 1/2 = 3/8 C = 1/4 or 2/8 New Ratio = 3:3:2 Old Ratio (–) New ratio = Sacrificing Ratio A = 1/2 – 3/8 = (6 – 3)/8 = 3/8 B = 1/2 – 3/8 = (6 – 3)/8 = 3/8 Sacrificing ratio = 3:3 or (equal) Journal Rs. Cash A/c Dr. (Total contribution) To C’s Capital A/c (Capital brought in) To A’s Capital A/c (goodwill shared) To B’s Capital A/c (goodwill shared)

Rs.

4,000 12,000 1,000 1,000

(Being cash brought towards capital and goodwill, partners sharing goodwill in

(b) Working Note Old Ratio = 4/7:3/7 New partner share not given, but new ratio given New ratio = 1/3:1/3:1/3 Old ratio (–) New ratio = Sacrificing ratio A = 4/7 – 1/3 = (12 – 7)/21 = 5/21 B = 3/7 – 1/3 = (9 – 7)/21 = 2/21 Sacrificing ratio = 5:2 Journal Rs. Cash A/c Dr. (goodwill brought) To A’s Capital A/c (4,000 ¥ 5/7) To B’s Capital A/c (4,000 ¥ 2/7) ration which is not to appear in the books)

(c) Working Note Old ratio = 5:4

Rs.

4,000 2,857 1,143

Admission, Retirement and Death of a Partner

941

New partner share not given, but new ratio given New ratio = 4:3:3 Old ratio (–) New ratio = Sacrificing ratio A = 5/9 – 4/10 = (50 – 36) / 90 = 14/90 B = 4/9 – 3/10 = (40 – 27) / 90 = 13/90 Sacrificing ratio = 14:13 Journal Rs. A’s Capital A/c B’s Capital A/c To Goodwill A/c

Dr. Dr.

Rs.

5,556 4,444 10,000

(Being goodwill written off among old partners) Bank A/c To A’s Capital A/c (6,000 ¥ 14/27) To B’s Capital A/c (6,000 ¥ 13/27)

Dr.

6,000 3,111 2,889

(Being premium brought in by C, credited to A and

(d) Journal Rs. Goodwill A/c To A’s Capital A/c To B’s Capital A/c (Being goodwill increased and credited in the capital accounts of A and B in old ratio)

Dr.

Rs.

5,000 3,000 2,000

(e) Journal Rs. Goodwill A/c To A’s Capital A/c To B’s Capital A/c To C’s Capital A/c (Being goodwill raised and credited to Partners Capital Account in the old ratio)

Dr.

A’s Capital A/c B’s Capital A/c C’s Capital A/c To Goodwill A/c (Being goodwill written off among the existing partners in the given new ratio)

Dr. Dr. Dr.

Rs.

12,000 4,800 4,800 2,400

Rs.

Rs.

4,000 4,000 4,000 12,000

IV – ADMISSION OF PARTNER – JOURNAL, LEDGER AND BALANCE SHEET Illustration 11 Brick, Sand and Cement were partners in a firm sharing profits and losses in the ratio of 3:2:1. Following is their balance share as on 31st December, 2004:

Financial Accounting

942

Liabilities

Rs.

Capital Accounts:

Rs.

Assets

Rs.

Land and buildings

50,000

Furniture

15,000

Brick

30,000

Sand

20,000

Stock

20,000

Cement

10,000

60,000 Sundry debtors

7,500

29,800 Bills receivable

5,000

Sundry creditors

6,200 Cash and bank

2,500

Bills payable

4,000

Reserve

1,00,000

1,00,000

Lime is to be admitted as a partner with effect from 1st Jan 2005, on the following terms: (a) Lime will bring Rs. 15,000 as capital and Rs. 12,000 as premium for goodwill. Half of the goodwill will be withdrawn by partners. (b) Lime will be revalued as follows: Land and buildings Rs. 56,000; Furniture Rs. 12,000 Stock Rs. 16,000; Debtors Rs. 7,000 (d) The claim of a creditor for Rs. 2,300 is paid at Rs. 2,000 (e) Half of the reserve is to be withdrawn by the partners Record the journal entries in the books of the firm, prepare partners’ Capital Account and show the opening Balance Sheet of the firm. (B.Com., Calcutta) Solution Books of the Partnership firm of Brick, Sand and Cement (a) Journal Entries 2005

L.F.

Rs.

Rs.

Not necessary II. Revaluation of assets and liabilities Revaluation A/c To Furniture A/c To Stock A/c To Provision for Debtors A/c

Dr.

7,500 3,000 4,000 500

(Being the reduction in the value of assets debited to Revaluation A/c) Land and Building A/c To Revaluation A/c

Dr.

6,000 6,000

(Being increase in the value of land and building credited to Revaluation A/c) Creditors A/c To Bank A/c To Revaluation A/c (Being payment to creditors and discount from them transferred to Revaluation A/c)

Dr.

2,300 2,000 300

Admission, Retirement and Death of a Partner

Brick Capital A/c Sand Capital A/c Cement Capital A/c To Revaluation A/c*

Dr. Dr. Dr.

943

600 400 200 1,200

(Being balance in Revaluation A/c (Loss) transferred to partners, Capital A/c)

Reserve A/c To Brick Capital A/c To Sand Capital A/c To Cement Capital A/c

Dr.

29,800 14,900 9,933 4,967

(Being Reserve transferred to partners’ Capital A/c in old ratio) Brick Capital A/c Sand Capital A/c Cement Capital A/c To Bank A/c

Dr. Dr. Dr.

7,450 4,967 2,483 14,900

(Being half of the reserve drawn by partners as cash) IV. Adjustment for Goodwill Bank A/c To Lime Capital A/c

Dr.

27,000 27,000

(Being capital (Rs. 15,000) and goodwill (Rs. 12,000) contributed by the new partner Lime) V. Adjustment of Capital Lime Capital A/c To Brick Capital A/c To Sand Capital A/c To Cement Capital A/c

Dr.

12,000 6,000 4,000 2,000

(Being goodwill credited to the old partners’ Capital A/c in old ratio) Brick Capital A/c Sand Capital A/c Cement Capital A/c To Bank A/c

Dr. Dr. Dr.

3,000 2,000 1,000 6,000

(Being half of goodwill drawn by the old partners in old ratio)

(*) Balance in Revaluation Account Credits = 6,000 + 300 = 6,300 (–) Debits = 7,500 = Net Loss = Rs. 1,200* (b) Capital Account Sand

Cement

Lime

To Partners – To Bank 3,000 To Bank 7,450 To Revaluation 600 To Balance c/d 39,850

Brick

– 2,000 4,967 400 26,566

– 1,000 2,483 200 13,284

12,000 – – – 15,000

50,900

33,933

16,967

27,000

Brick By Balance b/d 30,000 By Goodwill 6,000 By Bank – By Reserve 14,900

By Bal b/d

Sand 20,000 4,000 – 9,933

Cement

Lime

10,000 – 2,000 – – 27,000 4,967 –

50,900

33,933

16,967 27,000

39,850

26,566

13,284 15,000

Financial Accounting

944

(c) Balance Sheet as on 1st January, 2005 (After admission) Liabilities Capital Accounts Bricks Sand Cement Lime Creditors (–) Amount settled

Rs.

Assets

39,850 26,566 13,284 15,000 6,200 (2,300)

Bills Payable

Rs.

Cash (+) Received from Lime (–) Goodwill drawn (–) Reserve drawn (–) Creditors paid

2,500 27,000 (6,000) (14,900) (2,000) 6,600 7,500 (500)

Sundry Debtors 3,900 (–) Provision 4,000 Stock (20,000 – 4,000) Bills Receivable Furniture (15,000 – 3,000) Land and Building (50,000 + 6,000)

7,000 16,000 5,000 12,000 56,000

1,02,600

1,02,600

Illustration 12 X and Y share profits in the ratio of 3:1. On 31st March, 2004, their balance share stood as under Liabilities

Rs.

Creditors General reserve

Assets

Rs.

25,500 Cash in hand

500

8,000 Cash at bank

3,000

4,000 Bills receivable Capital Accounts:

Debtor

X

60,000

Y

32,000

Less: Provision 92,000 Stock Fixtures Land and Buildings 1,29,500

2,000 34,000 2,000

32,000 40,000 2,000 50,000 1,29,500

From April 1, 2004, Z was admitted into partnership on the following terms: (a) That Z pays Rs. 30,000 as his capital for one-fifth share in future profits of the firm. (b) That stock and fixtures be reduced by 10% and provision for bad debts be maintained at 5%. (c) That the value of land and buildings having appreciated and raised to Rs. 60,000. (d) That the share of Z in the firm’s goodwill be valued at Rs. 4,000, but Z will not be required to bring cash for goodwill. (e) That the capitals of the partners be in their profit-sharing ratio, the necessary amounts being paid in or withdrawn. Pass Journal Entries and prepare the Balance Sheet following the admission of Z in the firm. Also give working notes in detail. (B.Com. (Hons), Calcutta)

Admission, Retirement and Death of a Partner

945

Solution Books of Partnership Firm (a) Journal Entries 2004

L.F.

Rs.

Rs.

Given old ratio = 3:1 New partner given 1/5 share The balance divided among the old partners = 1 – 1/5 = 4/5 in the old ratio A = 3/4 ¥ 4/5 = 12/20 B = 1/4 ¥ 4/5 = 4/20 C = 1/5 or 4/20 New Ratio = 12:4:4 or 3:1:1 II. Revaluation of assets and liabilities April 1 Revaluation A/c To Fixtures A/c (2,000 ¥ 10%) To Stock A/c (40,000 ¥ 10%)

Dr.

4,200 200 4,000

stock debited to Revaluation A/c) Land and Building A/c Dr. (60,000 – 50,000) Provision for Debts A/c Dr. (34,000 ¥ 5% = 1,700 – 2,000) To Revaluation A/c

10,000 300 10,300

(Being increase in the value of land and building and decrease in provision credited to Revaluation A/c) Revaluation A/c (a) To X Capital A/c (3/4) To Y Capital A/c (1/4)

Dr.

6,100 4,575 1,525

the old partners’ Capital A/c in old ratio)

General Reserve A/c To X Capital A/c To Y Capital A/c

Dr.

8,000 6,000 2,000

(Being general reserve transferred to partners’ Capital A/c in old ratio) 4,000 To X Capital A/c To Y Capital A/c

3,000 1,000

Capital A/c in old ratio)

1/5th Share of Z’s goodwill Rs. 4,000. The total goodwill = 4,000 ¥ 5/1 = Rs. 20,000 to be raised in the old partners’ Capital A/c in the old ratio Goodwill A/c To X’s Capital A/c (3/4) To Y’s Capital A/c (1/4) (Being goodwill raised in the books of old partners in old ratio)

Dr.

20,000 15,000 5,000

946

Financial Accounting

V. Adjustment of capital Cash A/c To Z Capital A/c (*) To X Capital A/c (*) (Being necessary amount brought in by Z and X to adjust the Capital A/c)

Dr.

Y Capital A/c (**) To Cash A/c (Being excess cash in Y Capital A/c withdrawn by him)

Dr.

31,425 30,000 1,425

11,525 11,525

Balance Sheet as on 1st April 2004 (after Admission) Liabilities

Rs.

Creditors Capital Accounts X Y Z

Assets

Rs. 20,400 3,000 2,000

25,500 Cash in Hand (***) Cash at Bank 90,000 Bills Receivable 30,000 Debtors 30,000 (–) Prov. for debts

34,000 (1,700) 32,300

Stock (–) Revaluation

40,000 (4,000)

Fixtures (–) Revaluation

2,000 (200)

36,000

1,800 50,000 10,000

Land and Buildings (+) Revaluation

60,000 20,000

Goodwill 1,75,500

1,75,500

Working Notes (a) Revaluation Account Rs. To Fixtures To Stock To Capital Accounts X Y

Rs.

200 By Land and Building 4,000 By Provision for Debts

10,000 300

4,575 1,525 10,300

10,300

(b) Capital Accounts X To Cash (**) To Balance c/d

90,000

Y 11,525 30,000

Z

X

By Balance b/d 30,000 By Cash (*) By General Reserve By Goodwill By Revaluation By Cash (*)

90,000

41,525

30,000 By Balance b/d

Y

Z

60,000

32,000

6,000 3,000 15,000 4,575 1,425

2,000 1,000 5,000 1,525

90,000

41,525

30,000

90,000

30,000

30,000

30,000

Admission, Retirement and Death of a Partner

947

(c) Cash Account To Balance b/d To Z Capital To X Capital

Rs.

Rs.

500 By Y Capital A/c 30,000 By Balance c/d (***) 1,425

11,525 20,400

31,925

31,925

Illustration 13 A, B and C were partners sharing profits and losses in the ratio of 3:2:1. On 1st January, 2004 they admitted D into partnership on the following terms: D to have one-sixth share which he purchased entirely from A, paying A Rs. 40,000 for that share of goodwill (through the books of the firm). Of this amount, A was to withdraw Rs. 30,000 and D to bring in proportionate capital. It was further agreed that investments should be reduced to their market value, viz. Rs. 18,000 and that plant should be reduced to Rs. 29,000. A sum of Rs. 3,000 included in creditors was to be written back as there was no liability to pay the amount. The Balance Sheet on 31st December, 2003 was as follows: Liabilities Creditors

Rs.

Assets

Rs.

1,05,000 Cash at Bank

Capital Accounts

40,000

Debtors

60,000

A

60,000 Stock

50,000

B

40,000 Investments at cost

30,000

C

20,000 Furniture and Fittings

10,000

Plant

35,000

2,25,000

2,25,000

The profits for 2004 were Rs. 60,000 and the drawings were Rs. 15,000 for A and B each and Rs. 7,500 for C and D each. Journalise the entries to be made on D’s admission, and give the Capital Accounts and Balance Sheet on 31st December, 2004. (B.Com., Delhi) Solution Books of Partnership Firm of A, B and C (a) Journal Entries 2004

L.F.

Rs.

Rs.

Jan. 1 Given old ratio = 3:2:1 New partner given 1/6 share The balance divided among the old partners = 1 – 1/6 = 5/6 in the old ratio A = 3/6 ¥ 5/6 = 15/36 B = 2/6 ¥ 5/6 = 10/36 C = 1/6 ¥ 5/6 = 5/36 D = 1/6 or 6/36 New ratio = 15:10:5:6 Contd.

948

Financial Accounting

Contd. Rs.

Rs.

II. Revaluation of Assets and Liabilities Revaluation A/c To Investment Reserve A/c To Plant A/c

Dr.

18,000 12,000 6,000

(Being the decrease in value of assets recorded by debiting Revaluation A/c) Sundry Creditors A/c To Revaluation A/c

Dr.

3,000 3,000

(Being the decrease in the value of creditors credited to Revaluation A/c) A’s Capital A/c B’s Capital A/c C’s Capital A/c To Revaluation A/c (18,000 – 3,000) (Being loss on Revaluation A/c transferred to partners’ Capital A/c in the old ratio)

Dr. Dr. Dr.

7,500 5,000 2,500 15,000

No information

V. Adjustment of capital Bank A/c To D’s Capital A/c (c) To A’s Capital A/c

Dr.

63,000 23,000 40,000

(Being the new partner D brings capital and goodwill and

A’s Capital A/c To Bank A/c (Being the amount withdrawn by A)

Dr.

30,000 30,000

(b) Capital Account A (Rs.) To Bank To Revaluation To Drawings To Balance c/d

30,000

B (Rs.) –

C (Rs.)

D (Rs.)

– By Balance b/d 7,500 5,000 2,500 By Bank 15,000 15,000 7,500 7,500 67,500 40,000 20,000 25,500 Loss A/c 2:2:1:1 (a)

A (Rs.)

B (Rs.)

C (Rs.)

60,000 40,000

40,000 20,000

D (Rs.)

–

1,20,000 60,000 30,000 33,000 By Balance b/d

– 23,000

20,000

20,000 10,000 10,000

1,20,000

60,000 30,000 33,000

67,500

40,000 20,000 25,500

Admission, Retirement and Death of a Partner

949

(c) Balance Sheet Liabilities Creditors Capital Accounts A B C D

Rs.

Assets

Rs.

1,02,000 Bank (d) Debtors 67,500 Stock 40,000 Investment 20,000 (–) Decrease 25,500 Furniture and Fittings Plant (–) Depreciation

88,000 60,000 50,000 30,000 (12,000) 18,000 10,000 35,000 (6,000) 29,000

2,55,000

2,55,000

Working Note (a) New ratio Old ratio (–) Sacrificing ratio = New ratio Old ratio = 3:2:1 D = 1/6th share entirely from A A = 3/6 – 1/6 = 2/6 B = 2/6 C = 1/6 D = 1/6 Thus, new Ratio = 2:2:1:1 (b) Net Capital of the firm (After adjustment) Total capital of the firm (60,000 + 40,000 + 20,000) = (+) Goodwill brought by New partner D = (–) Loss on revaluation (–) Cash withdrawn by partner A

1,20,000 40,000 1,60,000

= 15,000 = 30,000

Net Capital of the firm = (c) Capital to be brought in by new partner D Capital for 5/6th share = Rs. 1,15,000 Full capital will be = 1,15,000 ¥ 6/5 = Rs. 1,38,000 D’s Capital for 1/6th share will be = 1,38,000 ¥ 1/6 = Rs. 23,000 (d) Bank balance Rs. Opening bank balance = 40,000 Cash brought in (40,000 + 23,000) = 63,000 Profit for the year = 60,000 (–) Cash drawn by A (from D) = (30,000) (–) Cash drawn from business A and B (Rs. 15,000 each) = (30,000) C and D (Rs. 7,500 each) = (15,000) Closing bank balance = 88,000

(45,000) 1,15,000

Financial Accounting

950

Illustration 14 Seed and Stalk were partners carrying in a business of fruit-gardening and sharing profits and losses in the ratio of 3:2. On 30th June, 2005 their Balance Sheet was as follows: Liabilities

Rs.

Capitals: Seed Stalk Reserve Sundry Creditors

30,000 25,000 10,000 16,000

Asset

Rs.

Land Fruit Tree Stock Sundry Debtors Cash

40,000 20,000 11,000 8,000 2,000

81,000

81,000

On the above mentioned date, flower was admitted into the partnership on the following terms: (1) Flower was to pay Rs. 20,000 as capital and Rs. 10,000 as goodwill for a onefourth share in profits. (2) Land was to be revalued at Rs. 45,000 and fruit trees at Rs. 25,000. Stock was to be written down by Rs. 2,000. Creditors included Rs. 500 no longer payable and this so, was to be written back. (3) Capitals of all partners were to be in the profit sharing ratio, and for this purpose Current Accounts were to be opened. (4) Give journal entries to record matters arising out of Flower’s admission and Balance Sheet of the firm as newly constituted. (B.Com., Delhi, Kerala) Solution Books of the partnership firm (b) Journal Entries 2005

L.F.

Rs.

Rs.

Given old ratio = 3:2 New partner given 1/4 share The balance divided among the old partners = 1 – 1/4 = 3/4 in the old ratio A = 3/5 ¥ 3/4 = 9/20 B = 2/5 ¥ 3/4 = 6/20 C = 1/4 or 5/20 New Ratio = 9:6:5 A = 3/5 – 9/20 = (12 – 9)/20 = 3/20 B = 2/5 – 6/20 = (8 – 6)/20 = 2/20

II. Revaluation of Assets and Liabilities Land A/c Fruit Tree A/c Creditors A/c To Revaluation A/c (Being the increase in the value of assets and decrease in the value of liabilities credited to Revaluation A/c)

Dr. Dr. Dr.

5,000 5,000 500 10,500

Contd.

Admission, Retirement and Death of a Partner

951

Contd. Rs. Revaluation A/c To Stock A/c (Being the decrease in the value of stock debited to Revaluation A/c)

Dr.

Revaluation A/c To Seed Capital A/c To Stalk Capital A/c Credit (10,500) – Debit (2,000) = 8,500

Dr.

General Reserve A/c To Seed Capital A/c To Stalk Capital A/c (Being General Reserve credited to old Partners Capital A/c)

Dr.

Flower Capital A/c To Seed Capital A/c To Stalk Capital A/c (Being goodwill credited to old partners’

Dr.

Rs.

2,000 2,000

8,500 5,200 3,400

10,000 6,000 4,000

10,000 6,000 4,000

V. Adjustment of Capital Cash A/c To Flower Capital A/c (Being cash brought in by the new partner)

Dr.

Seed Capital A/c To Seed Current A/c (Being the excess capital of Seed transferred to his Current A/c)

Dr.

Stalk Capital A/c To Stalk Current A/c (Being the excess capital of Stalk transferred to his Current A/c)

Dr.

30,000 30,000

11,100 11,100

12,400 12,400

Capital Account Seed Rs.

Stalk Rs.

11,100 36,000

12,400 24,000

47,100

36,400

To Current A/c To Balance c/d*

Flower Rs. By Balance b/d 10,000 By Cash 20,000 By Flower Capital By Revaluation By Reserve 30,000 By Balance b/d

Seed Rs.

Stalk Rs.

30,000

25,000

6,000 5,200 6,000

4,000 3,400 4,000

Flower Rs. 30,000

47,100

36,400

30,000

36,000

24,000

30,000

952

Financial Accounting

*Capital to be adjusted as per the new partner’s capital 20,000 ¥ 20/5 = Rs. 80,000 Seed = 80,000 ¥ 9/20 = Rs. 36,000; Stalk = 80,000 ¥ 6/20 = Rs. 24,000 Balance Sheet as on 30th June, 2005 (after admission) Liabilities

Rs.

Creditors Current A/c Seed Stalk

Asset

Rs.

15,500 Bank (Opening) (+) Capital brought 11,100 12,400

Capital A/c Seed Stalk Flower

2,000 30,000 32,000 8,000

Debtors 23,500 Stock (–) Revaluation

11,000 (2,000)

Fruit Trees (+) Revaluation

20,000 5,000

Land (+) Revaluation

40,000 5,000

36,000 24,000 20,000

9,000

80,000

25,000

45,000 1,19,000

1,19,000

V – ADMISSION OF PARTNER – LEDGER ACCOUNTS AND BALANCE SHEET Illustration 15 The following was the Balance Sheet of A, B and C sharing Profit and Losses in the ratio of 6:5:3. Balance Sheet of A, B and C Liabilities Sundry Creditors Bills Payable Reserve: A – Capital B – Capital C – Capital

Rs. 18,900 6,300 7,000 39,900 33,600 16,800 1,22,500

Asset Land and Building Furniture Closing Stock Debtors Cash at Bank

Rs. 50,400 7,350 29,400 26,460 8,890 1,22,500

They agreed to take ‘D’ into partnership and give him 1/8 share of the profits on the following conditions: (1) (2) (3) (4) (5) (6) (7)

D to bring in Rs. 16,000 as his capital. The furniture to be written down by Rs. 920. The Stock to be depreciated by 10%. A reserve of Rs. 1,320 to be made of outstanding expenses. That the value of land and buildings to be written up to Rs. 65,100. That the goodwill of the firm to be valued at Rs. 8,820. Open the ledger accounts in the books of firm on the admission of the new partner D. Also prepare the new firm’s Balance Sheet. (B.Com., Madurai)

Admission, Retirement and Death of a Partner

953

Solution Revaluation Account Rs. To Stock To Furniture To Reserve for Outstanding Expenses

Rs.

2,940 By Land and Building 920 1,320

A Capital A/c B Capital A/c C Capital A/c

14,700

4,080 3,400 2,040 14,700

14,700

Capital Account A Rs.

B Rs.

C Rs.

D Rs.

A Rs.

To Balance c/d 50,760

42,650

22,230

16,000 By Balance b/d By Reserve By Revaluation By Goodwill By Cash

39,900 3,000 4,080 3,780

33,600 16,800 2,500 1,500 3,400 2,040 3,150 1,890

50,760

42,650

22,230

16,000

50,760

42,650 22,230 16,000

50,760

42,650 22,230 16,000

By Balance b/d

B Rs.

C Rs.

D Rs.

16,000

Balance Sheet (after admission) Liabilities

Rs.

Reserve for Outstanding Expenses Sundry Creditors Bills Payable Capital A/c A B C D

Asset

1,320 Goodwill 18,900 Land and Building 6,300 (50,400 + 14,700) Furniture 50,760 (7,350 – 920) 42,650 Closing Stock 22,230 (29,400 – 2,940) 16,000 Debtors Cash (8,890 + 16,000) 1,58,160

Rs. 8,820 65,100 6,430 26,460 26,460 24,890 1,58,160

Illustration 16 The following was the Balance sheet of A and B who were sharing profit two-third and one-third on 31st December, 2005, respectively. Creditors Capitals: A B

Rs.

Rs.

65,900 Cash at Bank Sundry Debtors 30,000 Stock 20,000 Plant and Machinery Building

1,200 9,700 20,000 35,000 50,000

1,15,900

1,15,900

They agreed to admit C into partnership on the following terms: (a) C was to be given one-third share in profit and was to bring Rs. 15,000 as capital;

954

Financial Accounting

(b) (c) (d) (e)

That the value of stock and plant and machinery were to be reduced by 10%; That a provision of 5% was to be created for doubtful debts; That the Building Account was to be appreciated by Rs. 9,500; Investments worth Rs. 400 (not mentioned in the Balance Sheet) were taken into account; and (f) That the value of liabilities and assets other than cash are not to be altered.

Prepare Memorandum Revaluation Account, Capital Accounts and the Balance Sheet of newly reconstituted firm. Solution Memorandum Revaluation Account Rs. To Stock To Plant To Provision for Debts

Rs

2,000 By Building 3,500 By Investment 485

A Capital (2/3) B Capital (1/3)

9,500 400

2,610 1,305

To Building To Investment

9,900

9,900

9,500 By Stock 400 By Plant By Provision for Debts

2,000 3,500 485

(Transferred in new ratio) A Capital (4/9) (*) B Capital (2/9) C Capital (3/9)

1,740 870 1,305

9,900

9,900

(*) Given old ratio = 2:1 New partner given 1/3 share The balance divided among the old partners = 1 – 1/3 = 2/3 in the old ratio A = 2/3 ¥ 2/3 = 4/9 B = 1/3 ¥ 2/3 = 2/9 C = 1/3 or 3/9 New ratio = 4:2:3 Capital Account

To Revaluation Loss To Balance c/d

A Rs.

B Rs.

1,740 30,870

870 20,435

32,610

21,305

C Rs. 1,305 By Balance b/d 13,695 By Cash 15,000 By Balance b/d

A Rs.

B Rs.

30,000

20,000

2,610

1,305

C Rs. 15,000

32,610

21,305 15,000

30,870

20,435 13,695

Admission, Retirement and Death of a Partner

955

Balance Sheet as on 31st December 2005 (after admission) Liabilities Sundry Creditors Capital Account A B C

Rs.

Asset

65,900 Cash Sundry Debtors 30,870 Stock 20,435 Plant 13,695 Building

Rs. 16,200 9,700 20,000 35,000 50,000

1,30,900

1,30,900

Illustration 17 Balance Sheet as on 31st December, 2004 of Ramesh, Kumar and Papu who were sharing profits and losses in the ratio of 2:3:5. Liabilities

Rs.

Capitals:

Assets Cash

Rs. 18,000

Ramesh

36,000 Bills Receivable

24,000

Kumar

44,000 Furniture

28,000

Papu

52,000 Stock

44,000

Creditors

64,000 Debtors

42,000

Bills Payable

32,000 Investments

32,000

14,000 Machinery

34,000

Goodwill 2,42,000

20,000 2,42,000

They admit Shilpa into partnership on the following terms: 1. 2. 3. 4.

Furniture, investments and machinery to be reduced by 15%; The value of stock to be taken at Rs. 48,000; Goodwill to be valued at Rs. 26,000; Shilpa to bring Rs. 32,000 towards capital for 1/6 share and old partners to adjust their capitals accordingly; 5. Outstanding rent amounted to Rs. 1,800; 6. Prepaid salaries Rs. 800; and 7. Adjustments of capitals to be made by cash.

Prepare Revaluation A/c, Capital Accounts of the old partners, Cash Account and the Balance Sheet of the new firm. (B.Com., Karnataka) Solution Revaluation Account To Furniture To Investments To Machinery To Outstanding Rent

Rs.

Rs.

4,200 By Stock 4,800 By Prepaid Salaries 5,100 By Revaluation (Loss) 1,800 Ramesh Capital Kumar Capital Papu Capital

4,000 800

15,900

2,220 3,330 5,550 15,900

956

Financial Accounting

Capital Accounts Ramesh

Kumar

Papu

Rs.

Rs.

Rs.

2,220 5,780

3,330

5,550

32,000

48,000

80,000 32,000 and Loss By Goodwill By Cash

40,000

51,330

85,550 32,000

To Revaluation Loss To Cash To Balance c/d (*)

Shilpa By Balance b/d By Cash

By Balance b/d

Ramesh

Kumar

Papu

Rs.

Rs.

Rs.

36,000

Shilpa

44,000 52,000 32,000

2,800 1,200

4,200 7,000 1,800 3,000 1,330 23,550

40,000

51,330 85,550

32,000

32,000

48,000 80,000

32,000

(*) Given old ratio = 2:3:5 New partner given 1/6 share The balance divided among the old partners = 1 – 1/6 = 5/6 in the old ratio Ramesh = 2/10 ¥ 5/6 = 10/60 Kumar = 3/10 ¥ 5/6 = 15/60 Papu = 5/10 ¥ 5/6 = 25/60 Shilpa = 1/6 or 10/60 New ratio = 10:15:25:10 or 2 : 3 : 5 : 2 Capital accounts of old partners are adjusted on profit sharing ratio 32,000 ¥ 6/1 = Rs. 1,92,000 Ramesh = 1,92,000 ¥ 2/12 = Rs. 32,000; Kumar = 1,92,000 ¥ 3/12 = Rs. 48,000 Papu = 1,92,000 ¥ 5/12 = Rs. 80,000; Shilpa (given) Rs. 32,000 Cash Account To Balance b/d To Kumar Capital To Papu Capital To Shilpa Capital To Balance b/d

Rs.

Rs.

18,000 By Ramesh Capital 1,330 By Balance c/d 23,550 32,000 74,880

5,780 69,100

69,100

69,100

Balance Sheet as on 1st January 2005 (after admission) Liabilities Creditors Bills Payable Outstanding Rent Capital Accounts Ramesh Kumar Papu Shilpa

Rs.

Assets

64,000 Cash 32,000 Bills Receivable 1,800 Debtors Stock (44,000 + 4,000) 32,000 Investments (32,000 – 4,800) 48,000 Furniture (28,000 – 4,200) 80,000 Machinery (34,000 – 5,100) 32,000 Goodwill Prepaid Salaries 2,89,800

Rs. 69,100 24,000 42,000 48,000 27,200 23,800 28,900 26,000 800 2,89,800

Admission, Retirement and Death of a Partner

957

Illustration 18 A, B and C are partners in a firm sharing profits and losses in the ratio of 3:2:1. Their Balance Sheet on 1st January, 2004 was as follows: Liabilities

Amount

Assets

Rs.

Amount Rs.

Creditors

8,800 Cash in Hand

General Reserve

7,200 Stock in Trade

15,400

Debtors

11,100

Capital Accounts :

Rs.

A

18,000

Bills Receivable

B

15,000

Investments

C

11,000

44,000 Land and Building

Current Accounts:

B’s Current Account

A

780

C

1,220

600

5,700 2,950 26,000 250

2,000 62,000

62,000

On the above date, D was admitted into partnership on the following conditions: (a) (b) (c) (d)

D should bring Rs. 5,000 as his capital. Goodwill was valued at Rs. 15,000. A, B, C and D will share profits in the ratio of 4:3:2:1. The value of stock reduced by Rs. 2,000 and a provision for doubtful debts be made @ 10% on debtors. (e) Land and building be appreciated by 25%. (f) A liability of Rs. 1,290 be created against bills discounted. (g) The Capital Accounts of the partners be re-adjusted on the basis of their profit sharing ratio through Current Accounts. Prepare Revaluation Account, Partner’s Capital and Current Accounts and the Balance Sheet of the new firm, assuming that the new firm does not show the goodwill in the books. (B.Com., Kerala, Punjab) Solution Revaluation Account Rs. To Stock To Provision of Debts To Liability for Bill Discounted A Current A/c B Current A/c C Current A/c

2,000 By Land and Buildings 1,110 1,290

Rs. 6,500

1,050 700 350 6,500

6,500

958

Financial Accounting

Capital Account A

B

C

D

A

B

C

D

Rs.

Rs.

Rs.

Rs.

Rs.

Rs.

Rs.

Rs.

To Current A/c To Balance c/d (*) 20,000 20,000

By Balance b/d By Cash 5,000 By Current A/c

18,000 15,000

1,000 15,000 10,000 15,000

5,000

20,000 15,000

11,000

5,000

20,000 15,000

10,000

5,000

11,000

By Balance b/d

11,000 5,000

2,000

(*) Capital Adjustment New partner capital Rs. 5,000 Total capital based on his share = Rs. 5,000 ¥ 10/1 = Rs. 50,000 A’s capital balance should be = 50,000 ¥ 4/10 = Rs. 20,000 B’s capital balance should be = 50,000 ¥ 3/10 = Rs. 15,000 C’s capital balance should be = 50,000 ¥ 2/10 = Rs. 10,000 D’s (given) = Rs. 5,000 Current Account

To Balance b/d To Capital A/c To Goodwill (4:3:2:1) To Balance c/d

A

B

C

D

A

B

C

D

Rs.

Rs.

Rs.

Rs.

Rs.

Rs.

Rs.

Rs.

780 3,600 7,500 1,050

2,400 5,000 700

1,220 1,200 2,500 350 1,000

12,930

8,100

6,270

4,930

8,350

3,270

250 2,000 6,000 4,930

4,500 3,000 3,350 3,270

12,930

8,100 6,270

To Balance b/d

By Balance b/d By General Reserve By Goodwill 1,500 By Revaluation By Capital A/c By Balance c/d 1,500 1,500 By Balance b/d

1,500 1,500

Balance Sheet as on 1st January, 2004 (after admission) Liabilities Liability for bill discounted Creditors Capital Accounts A B C D Current Accounts A B C

Amount Rs.

Assets

Amount Rs.

1,290 Cash (600 + 5,000) 8,800 Stock (15,400 – 2,000) Debtors (11,100 – 1,110) 20,000 Bills Receivable 15,000 Investments 10,000 Land and Buildings 5,000 (26,000 + 6,500) D’s Current A/c 4,930 3,350 3,270

5,600 13,400 9,990 5,700 2,950

71,640

71,640

32,500 1,500

Admission, Retirement and Death of a Partner

959

Illustrations—Retirement and Death of Partner Index for Illustrations Type I

Ratios

II

Goodwill

III

Retirement of Partner – Journal, Ledger and Balance Sheet

Ill. No. 1–6 7–9 10 – 11

IV

Retirement of Partner – Ledger Accounts and Balance Sheet

12 – 13

V

Admission Retirement of Partner

14 – 16

VI

Death of Partner

17 – 21

I – RATIOS Illustration 1 A, B and C are partners with the profit and loss sharing as 2:3:1. A retires and his share is taken by the remaining partners in the ratio of 3:2. Find the new ratio. Solution Old ratio = 2:3:1 Retired partner share taken by others = 3:2 Old ratio + Gaining ratio = New ratio B = 3/6 + (2/6 ¥ 3/5) = 3/6 + 6/30 = (15 + 6)/30 = 21/30 C = 1/6 + (2/6 ¥ 2/5) = 1/6 + 4/30 = (5 + 4)/30 = 9/30 New ratio = 21:9 or 7:3 Illustration 2 Three partners A, B and C share their profit and losses in the ratio of 2:2:1. One of the partner A retired from the business by selling his share to B and C for Rs. 4,800 and Rs. 1,200, respectively. From the above, calculate the new ratio of the existing partners. Solution Capital share of retiring partner (A) purchased by B (Rs. 4,800) and C (Rs. 1,200) which is in the proportion of 4:1 Old ratio + Gaining ratio = New ratio B = 2/5 + (4/5 ¥ 2/5) = 2/5 + 8/25 = (10 + 8)/25 = 18/25 C = 1/5 + (1/5 ¥ 2/5) = 1/5 + 2/25 = (5 + 2)/25 = 7/25 Thus, new ratio = 18:7 Illustration 3 A, B and C are in partnership sharing profit or losses in the ratio of 5:3:2. Find the new ratio and gaining ratio in the following cases: (a) A retires, B and C continue. (b) B retires, A and C continue. (c) C retires, A and B continue.

960

Financial Accounting

Solution Since no information is given about the profit share of retiring partner taken by others, it is assumed the existing partner will continue with the old ratio Case (a) Old ratio = 5:3:2 A retires leaving 5/10 share. So, new ratio = 3:2 Gaining ratio = 3:2 Case (b) Old ratio = 5:3:2 B retires leaving 3/10 share. So, new ratio = 5:2 Gaining ratio = 5:2 Case (c) Old ratio = 5:3:2 C retires leaving 2/10 share. So, new ratio = 5:3 Gaining ratio = 5:3 Illustration 4 P, Q, R and S run a business concern under a partnership agreement and share the profit and losses in the ratio of 1/3, 1/6, 1/3 and 1/6, respectively. R retired and the remaining partners decided to share the profit and losses equally. Calculate the gaining ratio. Solution New ratio – Old ratio = Gaining ratio P = 1/3 – 1/3 = 0 Q = 1/3 – 1/6 = 2/6 S = 1/3 – 1/6 = 2/6 = 0:2:2 or 0:1:1 Illustration 5 A, B and C are three partners sharing profits in the ratio of 4:3:2. B retires and goodwill of the firm is valued at Rs. 10,800. No goodwill appear in the books of the firm. A and C decide to share the profits in the future in the ratio of 5:3 and that no Goodwill Account will be raised in the books of the firm. Find out gaining ratio. Pass entries. (B.Com. (Pass), Delhi)

Admission, Retirement and Death of a Partner

961

Solution (a) Gaining ratio New ratio – Old ratio = Gaining ratio A = 5/8 – 4/9 = (45 – 32)/72 = 13/72 C = 3/8 – 2/9 = (27 – 16)/72 = 11/72 Gaining ratio of A and C = 13:11. (b) Retiring partner (B) share of goodwill Rs. 10,800 ¥ 3/9 = Rs. 3,600 (c) Journal Entry L.F. A’s Capital A/c C’s Capital A/c To B’s Capital A/c

Dr. Dr.

Dr. (Rs.) Cr. (Rs.) 1,950 1,650 3,600

(Being the share of goodwill of the retiring partner debited to the A and B Capital A/c in the gaining ratio)

Illustration 6 L, M and N run a partnership firm and share the profit and losses in ratio of 1/2, 3/10 and 1/5, respectively. M retired after some time and his share was taken up by L and N in the ratio of 2:1. S was admitted into the business for 1/4th share of profits, 75% of which was given by L and the balance was given by N. Calculate the new profit sharing ratio admitting S. Solution Existing ratio (after retirement) = 1/2, 1/5 Retired partner share taken by others = 2:1 Old ratio + Gaining ratio = New ratio L = 1/2 + (3/10 ¥ 2/3) = 1/2 + 6/30 = (15 + 6)/30 = 21/30 = 7/10 N = 1/5 + (3/10 ¥ 1/3) = 1/5 + 3/30 = (6 + 3)/30 = 9/30 = 3/10 New ratio after retirement or Old ratio before admission (L and N) = 7:3 New partner share = 1/4. Given by L (3/4) and N (1/4) L = 3/4 ¥ 1/4 = 3/16 N = 1/4 ¥ 1/4 = 1/16 Sacrificing ratio = 3:1 Old ratio (–) Sacrificing ratio = New ratio L = 7/10 – 3/16 = (112 – 30)/160 = 82/160 N = 3/10 – 1/16 = (48 – 10)/160 = 38/160 S = 1/4 or = 40/160 New ratio after admission (L, N and S) = 82:38:40 or 41:19:20

Financial Accounting

962

II – GOODWILL Illustration 7 Ram, Shyam and Rahim are partners sharing profits in the ratio of 4:3:2. Shyam retires and the goodwill is valued at Rs. 21,600. No goodwill appears as yet in the books of the firm. Assuming that Ram and Rahim share profits in the future in the ratio of 5:3, pass entries for goodwill separately under the following conditions: (a) When Goodwill Account is raised (b) When Goodwill Account is raised, but written off. (c) When only Shyam’s Goodwill Account is raised and then written off. Solution Journal Entries L.F.

Dr. (Rs.)

Cr. (Rs.)

(a) When Goodwill Account is raised Goodwill A/c To Ram’s Capital A/c To Shyam’s Capital A/c To Rahim’s Capital A/c

Dr.

21,600 9,600 7,200 4,800

(Being goodwill raised and credited in the partners’ Capital A/c in old ratio) (b) When Goodwill Account is raised, but written off Goodwill A/c To Ram’s Capital A/c To Shyam’s Capital A/c To Rahim’s Capital A/c

Dr.

21,600 9,600 7,200 4,800

(Being goodwill raised and credited in the partners’ Capital A/c in old ratio) Ram’s Capital A/c Rahim’s Capital A/c To Goodwill A/c

Dr. Dr.

13,500 8,100 21,600

(Being goodwill written off and debited in the partners’ Capital A/c in new ratio) (c) When only Shyam’s Goodwill Account is raised and then written off Goodwill A/c To Shyam’s Capital A/c

Dr.

7,200 7,200

(Being the retiring partners share of goodwill is raised) Ram’s Capital A/c Rahim’s Capital A/c To Goodwill A/c (Being the retiring partner’s share is written off and debited to existing partners’ Capital A/c in gaining ratio 13:11*)

Dr. Dr.

3,900 3,300 7,200

Admission, Retirement and Death of a Partner

963

(*) Gaining ratio New ratio (–) Old ratio = Gaining ratio Ram = 5/8 (–) 4/9 = (45 – 32)/72 = 13/72 Rahim = 3/8 (–) 2/9 = (27 – 16)/72 = 11/72 Gaining Ratio = 13:11 Illustration 8 Journalise the following transactions: (1) A, B and C are in partnership sharing profits in the ratio of 5:3:2. A retires and the goodwill of the firm on the date of his retirement is valued at Rs. 25,000. B and C decided to continue the business and write off the goodwill so created. (2) A, B and C are equal partners. Goodwill appears in the books at Rs. 10,000. C retires and goodwill as revalued at Rs. 16,000. Now A and B decide to share future profits and losses in the ratio of 3:2. (3) A, B and C are partners sharing profits in the ratio of 4:3:3. Goodwill does not appear in the books. C retires from the firm and his share of goodwill is estimated to be Rs. 6,000, which was purchased by A and B in equal proportion. A and B decide not to open Goodwill Account. (B.Com., Kerala) Solution Journal Entries L.F. (1)

Goodwill A/c To A’s Capital A/c To B’s Capital A/c To C’s Capital A/c

Dr.

Dr. (Rs.)

Cr. (Rs.)

25,000 12,500 7,500 5,000

(Being goodwill raised in the books of all partners in the old ratio) B’s Capital A/c C’s Capital A/c To Goodwill A/c

Dr. Dr.

15,000 10,000 25,000

(Being goodwill written off and debited in the existing partners’ Capital A/c in new ratio) (2)

Goodwill A/c To A’s Capital A/c To B’s Capital A/c To C’s Capital A/c

Dr.

6,000 2,000 2,000 2,000

(Being the increase in the value of goodwill is raised in the books of all partners in old ratio) (3)

A’s Capital A/c B’s Capital A/c To C’s Capital A/c (Being C’s share of goodwill is written off and debited in the existing partners’ Capital A/c)

Dr. Dr.

3,000 3,000 6,000

Financial Accounting

964

Illustration 9 Three partners X, Y and Z contributed towards capital Rs. 1,00,000, Rs. 80,000 and Rs 60,000, respectively and agreed to share their profit and losses in the ratio of 3:2:1. At the closing date of the accounting year Y retired from the firm and the goodwill of the firm was valued at Rs. 1,80,000. Based on the above information, you are required to pass necessary journal entries under the following circumstances. Also find out the amount payable to Y. (a) (b) (c) (d) (e)

Total goodwill raised and maintained in the books. Total goodwill raised but written off later. Only Y’s share of goodwill is raised and maintained in the books. Only Y’s share of goodwill is raised, but later on written off. Y is given his share of goodwill without raising Goodwill A/c.

Solution Journal Entries Particular (a)

Goodwill A/c To X’s Capital A/c To Y ‘s Capital A/c To Z’s Capital A/c

L.F. Dr.

Rs.

Rs.

1,80,000 90,000 60,000 30,000

(Being goodwill raised and credited in the books of partners’ Capital A/c in old ratio) (b)

Goodwill A/c To X’s Capital A/c To Y’s Capital A/c To Z’s Capital A/c

Dr.

1,80,000 90,000 60,000 30,000

(Being goodwill raised and credited in the books of partners’ Capital A/c in old ratio) X’s Capital A/c Z’s Capital A/c To Goodwill A/c

Dr. Dr.

1,35,000 4,500 1,80,000

(Being goodwill written off and debited in the existing partners’ Capital A/c in new ratio) (c)

Goodwill A/c To Y’s Capital A/c

Dr.

60,000 60,000

(Being the goodwill share of retiring partner is raised and maintained in the books) (d)

Goodwill A/c To Y’s Capital A/c

Dr.

60,000 60,000

(Being the goodwill share of retiring partner is raised and maintained in the books) X’s Capital A/c Z’s Capital A/c To Goodwill A/c (Being goodwill raised earlier, now written in the existing partners’ capital in gaining ratio)

Dr. Dr.

45,000 15,000 60,000

Admission, Retirement and Death of a Partner

Rs. (e)

X’s Capital A/c Z’s Capital A/c To Y’s Capital A/c

Dr. Dr.

965 Rs.

45,000 15,000 60,000

(Being the retiring partner’s share of goodwill raised and written off without recording in Goodwill A/c)

III – RETIREMENT OF PARTNER Journal, Ledger and Balance Sheet Illustration 10 P, Q and R were partners sharing profits and losses in the ratio of P 5/10, Q 3/10, R 2/10. They had taken a joint life policy of the face value of Rs. 20,000. On 31st December, 2004 its surrender value was Rs. 4,000. On this date the Balance Sheet of the firm stood as under: Liabilities

Rs.

Sundry Creditors

Assets

Rs.

5,300 Fixed Assets

Expenses Outstanding

25,000

700 Stock

Reserve

11,000

3,000 Book Debts

Capitals:

Rs.

P

20,000

Q

10,000

R

8,000

9,000

Cash at Bank

2,000

38,000 47,000

47,000

On this date Q decided to retire and for the purpose: (i) Goodwill was valued at Rs. 15,000, (ii) Fixed Assets were valued at Rs. 30,000; and (iii) Stock was considered as worth Rs. 10,000. Q was to be paid through cash brought in by P and R in such a way as to make their capitals proportionate to their new profit sharing ratio which was to be P 3/5 and R 2/5. Goodwill was to be passed through books without raising a Goodwill account; the joint life policy was also not to appear in the Balance Sheet. Record these matters in the Journal of the firm and prepare the resultant Balance Sheet. (B.Com., Delhi) Solution Books of Partnership Firm Journal Entries L.F.

Dr. (Rs.)

Cr. (Rs.)

New ratio - Old ratio = Gaining ratio P = 3/5 – 5/10 = (6 – 5)/10 = 1/10 R = 2/5 – 2/10 = (4 – 2)/10 = 2/10 Gaining ratio = 1:2 Contd.

966

Financial Accounting

Contd. P’s Capital A/c R’s Capital A/c To Q’s Capital A/c (Being the goodwill is adjusted with recording in Goodwill A/c in gaining ratio 1:2)

Dr. Dr.

1,500 3,000 4,500

III. Revaluation of assets and liabilities Fixed Asset A/c To Revaluation A/c

Dr.

5,000 5,000

assets credited to Revaluation A/c) Revaluation A/c To Stock A/c

Dr.

1,000 1,000

(Being the decrease in the value of stock debited to Revaluation A/c) Revaluation A/c To P’s Capital A/c To Q’s Capital A/c To R’s Capital A/c Credit (5,000) – Debit (1,000) = 4,000

Dr.

4,000 2,000 1,200 800

to partners’ capital A/c)

A Capital A/c C Capital A/c To B’s Capital Account (Being B’s Share of reserve credited to his account and debited to Capital Accounts of A and C in gaining ratio, i.e. 3:7)

Q’s Capital A/c To Cash A/c (Being the retiring partner is settled with cash)

3,000 1,500 900 600

Dr.

17,800 17,800

VI. Adjustment of capitals of partners Cash A/c To P’s Capital A/c To R’s Capital A/c (Being cash brought into by P and R to settle the retiring partner)

Dr.

(*) 17,800 5,400 12,400

VII. Joint Life Policy P’s Capital A/c R’s Capital A/c To Q’s Capital A/c (Being the surrender value of joint life policy is recorded = 4,000 ¥ 3/10 in gaining ratio 1:2)

Dr. Dr.

400 800 1,200

Admission, Retirement and Death of a Partner

967

Capital Account

To Q To Q To Cash To Balance c/d (*)

P

Q

R

P

Q

R

Rs.

Rs.

Rs.

Rs.

Rs.

Rs.

1,500 400 17,800 27,000

28,900

17,800

3,000 By Balance b/d 800 By Revaluation By P 18,000 By R By P By R By Reserve By Cash (*) 21,800

20,000 2,000

1,500 5,400 28,900

By Balance b/d

10,000 1,200 1,500 3,000 400 800 900 17,800

27,000

8,000 800

600 12,400 21,800 18,000

Balance Sheet as on 31st December, 2004 Liabilities

Rs.

Sundry Creditors Expenses Outstanding Capital Accounts P R

Assets

Rs.

5,300 Fixed Assets (25,000 + 5,000) 700 Stock (11,000 – 1,000) Book Debts 27,000 Cash (2,000 + 17,800 – 17,800) 18,000

30,000 10,000 9,000 2,000

51,000

51,000

(*) Working Note Total capital of the partners should be – P = Credits (20,000 + 2,000 + 1,500) – Debits (1,500 + 400) = Rs. 21,600 Q = To settle = Rs. 17,800 R = Credits (8,000 + 800 + 600) – Debits (3,000 + 800) = Rs. 5,600 = Rs. 45,000 (The existing partners should have the capital proportion based on the new capital in the given new ratio) New capital share of P = Rs. 45,000 ¥ 3/5 = Rs. 27,000 Existing capital after adjustment = Rs. 21,600 Cash brought in by him = Rs. 5,400 New capital share of R = Rs. 45,000 ¥ 2/5 = Rs. 18,000 Existing capital after adjustment = Rs. 5,600 Cash brought in by him = Rs. 12,400 Illustration 11 A, B and C were partners, sharing profits in the proportion of one-half, one-third and one-sixth, respectively. The firm’s Balance Sheet as on 31st March, 2005 stood as under: Liabilities Creditors Bills Payable General Reserve A’s Capital B’s Capital C’s Capital

Rs.

Asset

19,000 Cash 5,000 Debtors 12,000 Less: Provision 40,000 30,000 25,000

Stock Motor Vans 95,000 Plant and Machinery Land and Building 1,31,000

Rs. 2,500 16,000 500 15,500 25,000 8,000 35,000 45,000 1,31,000

968

Financial Accounting

B retires on that date subject to the following adjustments: (1) The goodwill of the firm to be valued at Rs. 18,000. (2) Plant to be depreciated by 10% and Motor Vans by 15%. (3) Stock to be appreciated by 20% and Building by 10%. (4) Provision for doubtful Debts to be increased by Rs. 1,950. (5) Liability for workmen’s compensation to the extent of Rs. 450 is to be brought into account. It was agreed that A and C will share profits in future in the ratio of A-3/5th and C-2/5th. Pass journal entries. Prepare Memorandum Revaluation Account, Capital Account and Balance Sheet when the assets and liabilities are to continue to appear at their original figures. (B.Com., Madurai) Solution Books of Partnership Firm Journal Entries L.F.

Dr. (Rs.)

Cr. (Rs.)

Old Ratio = 1/2, 1/3, 1/6 or 3/6:2/6:1/6 New ratio - Old ratio = Gaining ratio A = 3/5 – 3/6 = (18 – 15)/30 = 3/30 C = 2/5 – 1/6 = (12 – 5)/30 = 7/30 Gaining ratio = 3:7

Goodwill A/c To A’s Capital A/c To B ‘s Capital A/c To C’s Capital A/c (Being goodwill raised in the partners’ Capital A/c in old ratio)

Dr.

A’s Capital A/c C’s Capital A/c To Goodwill A/c (Being goodwill written off in the new ratio)

Dr. Dr.

18,000 9,000 6,000 3,000

10,800 7,200 18,000

III. Revaluation of assets and liabilities Memorandum Revaluation A/c To A’s Capital A/c To B’s Capital A/c To C’s Capital A/c

Dr.

2,400 1,200 800 400

partners Capital A/c in old ratio) A’s Capital A/c C’s Capital A/c To Memorandum Revaluation A/c in the new ratio among existing partners)

Dr. Dr.

1,440 960 2,400

Admission, Retirement and Death of a Partner

Rs. A’s Capital A/c C’s Capital A/c To B’s Capital A/c (Being the share of reserve of retiring partner is transferred to existing partners’ Capital A/c in gaining ratio)

Dr. Dr.

B’s Capital A/c To B’s Loan A/c (Being balance due to B transferred to his Loan A/c)

Dr.

969

Rs.

1,200 2,800 4,000

40,800 40,800

Memorandum Revaluation Account Rs. To Plant To Motor Van To Provision for Debts To Workmen Fund (in old ratio) A’s capital A/c B’s capital A/c C’s capital A/c

Rs.

Rs.

3,500 By Stock 1,200 By Buildings 1,950 450

5,000 4,500

1,200 800 400 2,400

To Stock To Buildings

9,500

9,500

5,000 By Plant 4,500 By Motor Van By Provision for Debts By Workmen Fund

3,500 1,200 1,950 450

(in new ratio) A capital A/c B capital A/c

1,440 960 2,400

9,500

9,500

Capital Account A To B’s Capital To Goodwill To Memorandum Revaluation To B’s Loan To Balance c/d

B

B

C

40,000

30,000

25,000

9,000

4,000 6,000

3,000

36,760

2,800 By Balance b/d 7,200 By A and C Capital A/c 960 By Goodwill By Memorandum 17,440 Revaluation

1,200

800

400

50,200 40,800

28,400

50,200

40,800

28,400

1,200 10,800 1,440 40,800

C

A

By Balance b/d

36,760

17,440

Balance Sheet after Retirement Liabilities Sundry Creditors Bills Payable General Reserve B’s Loan A/c A’s Capital A/c B’s Capital A/c

Rs. 19,000 5,000 12,000 40,800 36,760 17,440 1,31,000

Asset Cash Debtors (16,000 – 500) Stock Motor Vans Plant and Machinery Factory Building

Rs. 2,500 15,500 25,000 8,000 35,000 45,000 1,31,000

970

Financial Accounting

IV – RETIREMENT OF PARTNER Ledger Accounts and Balance Sheet Illustration 12 The following is the Balance Sheet of A, B and C who were sharing profits in the ratio of 2:2:1 on 31.12.2004. Liabilities

Rs.

Creditors 5% Mortgage Loan Capital Accounts:

Assets

12,000 Plant and Machinery 16,600 Furniture Rs.

Rs. 49,000 4,800

Stock in Trade

22,800 21,600

A

33,600

Sundry Debtors

B

25,200

Cash in Hand

C

12,000

1,200

70,800 99,400

99,400

On 1.1.2005, C retired from the business and claimed his share in the secret reserve/profit arising out of the following: (1) During the year 2004, purchase of machinery at a cost of Rs. 5,000 was charged to Purchase Account, the installation charge of Rs. 300 to erect the machinery being charged to Machinery Repairs Account (2) Rs. 1,200 received from Mr. X towards rent of property sub-let was credited to his Personal Account instead of to Rent Account, so as to reduce his debit balance from Rs. 1,600 to Rs. 400 debit. (3) Interest on mortgage loan was paid in advance up to 31.12.2005 and the whole amount was charged to Interest Account in 2004. After rectifying the above errors, it was mutually decided as under: (a) The goodwill of the firm be valued at three times the average profits of the last three years. Such profits should be the correct profits and not the book profits. The book profits for the last three years were: 2002 Rs. 13,830, 2003 Rs. 32,000, 2004 Rs. 12,020. (b) Machinery be depreciated by 10% and the provision for bad and doubtful debts be made at 5% on debtors. (c) There is a liability for Rs. 483 for bills discounted. (d) Goodwill should appear in the books to the extent of the retiring partner’s share therein. (e) C should be paid half his dues in cash which shall be brought in by A and B in their profit-sharing proportions and the other half shall be left in the business as C’s loan. Show Ledger Accounts and Balance Sheet of A and B. (B.Com., Mangalore)

Admission, Retirement and Death of a Partner

971

Solution Books of Partnership Firm Profit and Loss Appropriation Account To Capital Account A B C

Rs.

Rs.

By Machinery (5,000 + 300) 2,932 By X A/c (Rent) 2,932 By Prepaid Interest 1,466

5,300 1,200 830

7,330

7,330

Revaluation Account Rs. To Machinery (4,900 + 530) To Provision for Debts On old balance = 21,600 @ 5% From X = 1,200 @ 5% To Provision for Bills Discounted

Rs.

5,430 By Capital Accounts A 1,080 B 60 C 483

2,822 2,821 1,410

7,053

7,053

Capital Account

To Revaluation To Cash To C’s Loan To Balance c/d

A

B

C

A

B

C

Rs.

Rs.

Rs.

Rs.

Rs.

Rs.

2,822

2,821

39,983

31,584

–

–

–

–

1,410 By Balance b/d 12,546 12,546 Appropriation By Goodwill (*)

– By Cash A/c 42,805

34,405

26,502 By Balance b/d

33,600

25,200

12,000

2,932

2,932

1,466 13,036 13,036

–

–

6,273

6,273

–

42,805

34,405

26,502

39,983

31,584

–

(*) Goodwill Calculation Total of three years profit 2002 = Rs. 13,830 2003 = Rs. 32,000 2004 (Correct profit) = Rs. 12,020 Machinery (5,000 + 300) = Rs. 5,300 X A/c (Rent) = 1,200 Prepaid Interest = 830 Rs. 19,350 Total adjusted profit = Rs. 65,180 Average profit = Rs. 21,727 3 years purchase = Rs. 21,727 ¥ 3 = Rs. 65,180 Retiring partner share of goodwill = Rs. 65,180 ¥ 1/5 = Rs. 13,036

972

Financial Accounting

Balance Sheet as on 1st January 2004 Liabilities

Rs.

Creditors Mortgage Loan Provision for Bills Discounted C’s Loan A/c Capital Accounts A B

Assets

Rs.

12,000 16,600 483 12,546

Plant and Machinery (49,000 + 5,300 – 4.900 – 530) Furniture Goodwill (*) Sundry Debtors 39,983 (21,600 + 1,200 – 1,080 - 60) 31,584 Stock Prepaid Interest Cash

48,870 4,800 13,036 21,660 22,800 830 1,200

1,13,196

1,13,196

Illustration 13 On 31st December, 2004, the Balance Sheet of A, B and C who were sharing profits and losses in proportion to their capitals stood as follows: Liabilities

Rs.

Creditors Capital Accounts:

Assets

Rs.

10,800 Cash at Bank Rs.

Debtors

A

45,000

Less : Reserve

B

30,000

Stock

C

15,000

90,000 Machinery Land and Building 1,00,800

8,000 10,000 200

9,800 9,000 24,000 50,000 1,00,800

B retires and the following re-adjustments of the assets and liabilities have been agreed upon before the ascertainment of the amount payable to B: (i) That out of the amount of insurance which was debited entirely to Profit and Loss Account, Rs. 1,000 be carried forward as unexpired insurance. (ii) That the land and building be appreciated by 10%. (iii) That the reserve for doubtful debts be brought up to 5% on debtors. (iv) That machinery be depreciated by 5%. (v) That a provision of Rs. 1,500 be made be respect of an outstanding bill for repairs. (vi) That the goodwill of the entire firm be fixed at Rs. 18,000 and B’s share of the same be adjusted into the accounts of A and C who are going to share future profits in the proportion of 3/4 and 1/4, respectively (no Goodwill Account being raised). (vii) That the entire capital of the firm as newly constituted be fixed at Rs. 60,000 between A and C in the proportion of 3/4 and 1/4 after passing entries in their accounts for adjustments, i.e. Actual cash to be paid off or to be brought in by the continuing partners as the case may be. (viii) That B be paid Rs. 5,000 in cash and the balance be transferred to his Loan Account. Prepare the Capital Accounts of the partners and the Balance Sheet of the firm of A and C. (B.Com., Delhi)

Admission, Retirement and Death of a Partner

973

Solution Books of Partnership Firm of A, B and C Revaluation Account Rs. To Reserve for Debts To Machinery To Outstanding Liability for Repairs To Capital Accounts A B C

Rs.

300 By Unexpired Insurance 1,200 By Land and Building 1,500

1,000 5,000

1,500 1,000 500 6,000

6,000

Capital Accounts

To B–Goodwill(*) To Bank-Paid To B’s Loan (Balance) To Balance c/d (**)

A

B

C

A

B

C

Rs.

Rs.

Rs.

Rs.

Rs.

Rs.

45,000 1,500

30,000 1,000 4,500 1,500

15,000 500

45,000

1,500 By Balance b/d By Revaluation By A –Goodwill 32,000 By C – Goodwill By Bank – to bring in 15,000 by Partners

49,500

37,000 16,500

49,500

37,000

16,500

4,500

5,000

By Balance b/d

3,000

1,000

45,000

15,000

(*) Total goodwill = Rs. 18,000 B’s share = 18,000 ¥ 2/6 = Rs. 6,000 Shared between A and C (3:1) = Rs. 4,500 and Rs. 1,500 (**) New capital fixed as Rs. 60,000 To be adjusted based on new ratio between A and C (3:1) as Rs. 45,000 and Rs. 15,000 Balance Sheet as on 31st December, 2004 Liabilities

Rs.

Rs. Creditors Liability for Repairs B’s Loan Capital Accounts A C

Assets

Rs.

Rs. 10,800 Cash at Bank 1,500 (8,000 + 3,000 + 1,000 – 5,000) 32,000 Debtors (10,000 – 500) Stock 45,000 Machinery (24,000 – 1,200) 15,000 Land and Building (50,000 + 5,000) Unexpired Insurance 1,04,300

7,000 9,500 9,000 22,800 55,000 1,000 1,04,300

V – ADMISSION AND RETIREMENT OF PARTNER Illustration 14 A and B were working in partnership sharing profits equally. On 31st December, 2004 A decided to retire and in his place, it was decided that C would be admitted as partner from 1st January, 2005 and his share in the profits will be one-third.

Financial Accounting

974

Balance Sheet of the firm as on 31st December, 2004 was as follows: Liabilities Sundry creditors A’s Capital A/c B’s Capital A/c

Rs. 1,08,600 96,000

Asset

Rs.

29,400 Goodwill Land and Buildings 2,04,600 Furniture Motor Car Sundry Debtors Cash at Bank

30,000 80,100 18,600 24,000 48,300 33,000

2,34,000

2,34,000

It was further decided as follows: 1. The Goodwill should be raised to Rs. 40,000. 2. The Motor Car would be taken over by A at its book value. 3. The value of Land and Buildings would be increased by Rs. 16,560. 4. B and C would introduce sufficient capital to pay off A to leave thereafter a sum for Rs. 14,700 as working capital in a manner that the capitals of the new partners will be proportional to their profit sharing ratio. 5. The new partners decide to show the goodwill as an asset The partners introduced the capital on 10th January, 2005. Show the accounts of the partners and Bank Account with necessary journal entries. Also, prepare the Balance Sheet of the new firm. (B.Com., Mangalore) Solution Books of Partnership Firm Journal Entries 2004

L.F.

Dr. (Rs.)

Cr. (Rs.)

I. Calculation of Ratio Dec 31 Old Ratio = A (1/2) and B (1/2) New Ratio = B (2/3) and C (1/3)

Goodwill A/c To A’s Capital A/c To B’s Capital A/c (Being goodwill raised in the books of old partners in the old ratio)

Dr.

10,000 5,000 5,000

III. Revaluation of assets and liabilities Land and Buildings A/c To Revaluation A/c (Being the increase in the value of land and building credited to Revaluation A/c)

Dr.

Revaluation A/c A’s Capital A/c B’s Capital A/c

Dr.

16,560 16,560

16,560 8,280 8,280

to Old Partners’ Capital A/c) Contd.

Admission, Retirement and Death of a Partner

975

Contd. Rs. A’s Capital A/c To Motor Car A/c To Bank A/c (Being the retiring partner due is settled)

Dr.

Rs.

1,21,880 24,000 97,880

VI. Adjustment of capitals of partners Bank A/c To B’s Capital A/c To C’s Capital A/c (Being cash brought by B and C to adjust the capital in proportion to the new ratio)

Dr.

79,580 16,627 62,953

Cash Account To Balance b/d To B’s Capital A/c (b) To C’s Capital A/c (b)

Rs.

Rs.

33,000 By A’s Capital A/c 16,627 By Balance c/d 62,953

97,800 14,700

1,12,580 To Balance b/d

1,12,580

14,700

Capital Account A Rs. To Motor Car To Bank To Balance c/d

B Rs.

24,000 97,880 1,25,907 1,21,880

1,25,907

C Rs.

A Rs.

B Rs.

C Rs.

By Balance b/d By Goodwill 62,953 By Revaluation By Bank (b)

1,08,600 5,000 8,280

96,000 5,000 8,280 16,627

62,953

1,21,880

1,25,907

62,953

1,25,907

62,953

By Balance b/d

62,953

Balance Sheet as on 10th January 2005 (after retirement and admission) Liabilities Sundry Creditors Capital A/c (b) B C

Rs.

Asset

29,400 Cash at Bank Sundry Debtors 1,25,907 Furniture 62,953 Land and Buildings (80,100 + 16,560) Goodwill 2,18,260

Rs. 14,700 48,300 18,600 96,660 40,000 2,18,260

Working Note (a) Capital of the firm after admission of C Total assets as per new Balance Sheet = Rs. 2,18,260 (–) Liabilities (Creditors) = Rs. 29,400 Capital of the firm = Rs. 1,88,860 (b) Capital contribution by partners after admission Proportionate capital of B as per new ratio = 1,88,860 ¥ 2/3 = Rs. 1,25,907 (–) Adjustments Old capital by A = Rs. 96,000

Financial Accounting

976

Goodwill share of A = Rs. 5,000 Revaluation profit share of A = Rs. 8,280 = Rs. 1,09,280 Cash brought by B to adjust the new capital share = Rs. 16.627 New Partner’s C share = Rs. 1,88,860 ¥ 1/3 = Rs. 62,953 Illustration 15 X, Y and Z were partners in a glassware business and shared profits in the ratio 1/2:1/3:1/6, respectively. On January 1, 2004 their Balance Sheet stock as follows: Rs. Sundry Creditors

Rs.

3,000 Goodwill

Capital Accounts

10,000

Sundry Assets

X

14,000 Cash at Bank

Y

10,000

Z

12,000 11,000

6,000 33,000

33,000

Immediately after the preparation of the above Balance Sheet, the following changes took place: (1) Z retired from the business, and his share valued at Rs. 8,000 was taken over by X and Y who paid the former according to their profit sharing proportions from their personal resources. (2) S was then introduced in the business, as a 1/6 partner on condition that a further sum of Rs. 6,000 was allowed to be credited to X and Y in their respective proportions and that he contributed such a sum as would make his capital equal to 1/4 of the total capital of X and Y after the above adjustments. Show the Capital Accounts of all the partners and the Balance Sheet on S’s admission. (B.Com., Madurai) Solution Books of Partnership Firm Capital Account

To X’s Capital To Y’s Capital To Balance c/d

X

Y

Z

S

X

Y

Z

S

Rs.

Rs.

Rs.

Rs.

Rs.

Rs.

Rs.

Rs.

4,800 3,200

By Balance b/d By 9,500 Goodwill(d) By Goodwill (a) By Z Capital (b) By Bank (c)

14,000

10,000

6,000

9,500

22,400

22,400

15,600

15,600

8,000

By Balance b/d

2,000 3,600

2,400

4,800

3,200

22,400

15,600

22,400

15,600

9,500 8,000

9,500 9,500

Admission, Retirement and Death of a Partner

977

Balance Sheet as on 1st January 2004 Liabilities Sundry Creditors Capital Account X Y S

Rs.

Assets

Rs.

3,000 Goodwill Sundry Assets 22,400 Cash (11,000 + 9,500) 15,600 9,500

18,000 12,000 20,500

50,500

50,000

Working Note (a) New partner (S) amount shared among the partners in the gaining ratio (3:2) i.e., X = 6,000 ¥ 3/5 = Rs. 3,600; Y = 6,000 ¥ 2/5 = Rs. 2,400 (b) Retiring partner (Z) capital taken by existing partners in gaining ratio (3:2) X = 8,000 ¥ 3/5 = Rs. 4,800; Y = 8,000 ¥ 2/5 = Rs. 3,200 (c) New partner (S) to bring 1/4th of the combined capital of existing partners (X and Y) 1/4th (22,400 + 15,600) = Rs. 9,500 (d) Difference between Goodwill as in Balance Sheet (10,000) and new goodwill (8,000) = Rs. 2,000. Illustration 16 Anil, Bimal and Charu are partners sharing profits and losses in the ratio 3:2:1. Balance Sheet of Anil, Bimal, Charu as on 31st December, 2004 Rs. Capital Accounts:

Rs.

Rs. Goodwill

Anil

65,000

Sundry Debtors

Bimal

38,000

Sundry Assets

Charu

28,000

General Reserve Sundry Creditors

10,000 61,400 1,48,000

1,31,000 38,400 50,000 2,19,400

2,19,400

Charu desires to retire from the firm on January 1, 2005. In terms of the agreement, goodwill is to be revalued at Rs. 50,000, sundry debtors at Rs. 41,400, and other sundry assets at Rs. 1,50,000. The amount payable to the retired partner is for the present to be treated as a loan with 5% interest. On the same day, i.e. on January 1, 2005, Dinen is admitted as a partner on payment of Rs. 32,000. Profits and losses are henceforth to be shared in the ratio of 4:3:2 between Anil, Bimal and Dinen. No alteration is made in the book value of assets (other than cash brought in by Dinen and the general reserve). Draw up the final Balance Sheet as on January 1, 2005, on the above basis, after the admission on Dinen. (B.Com., Madurai)

978

Financial Accounting

Solution *Memorandum Revaluation Account Rs. To Provision for Debts

Rs.

20,000 By Sundry Assets By Capital Account (Old ratio) Anil Bimal Charu

2,000

9,000 6,000 3,000 18,000

20,000 To Sundry Assets To Capital Account (New ratio) Anil Bimal Dinen

20,000

2,000 By Provision for Debts 8,000 6,000 4,000

20,000

18,000 20,000

20,000

*Since no alteration is made in the book value of assets, Memorandum Revaluation Account is prepared to record and write off the revaluation effect. Capital Account

To Memorandum Revaluation A/c To Good-will To Charu’s Loan To Balance c/d

Anil

Bimal

Charu

Dinen

Anil

Bimal

Charu

Dinen

Rs.

Rs.

Rs.

Rs.

Rs.

Rs.

Rs.

Rs.

65,000

38,000

28,000

20,000

13,333

6,667

19,200

12,800

6,400

9,000

6,000

17,778

13,333

3,000

38,067 85,422

1,12,200

50,800

70,133 41,067

By Balance b/d By Goodwill By 8,889 Reserve By Cash By 27,111 Members Revaluation A/c 36,000 By Balance b/d

32,000

8,000

6,000

1,12,200

70,133

85,422

50,800

4,000 41,067

36,000 27,111

Balance Sheet as on 1st January 2005 Liabilities Sundry Creditors Charu Loan A/c Capital Accounts Anil Bimal Dinen

Rs.

Assets

50,000 Cash 38,067 Sundry Debtors Sundry Assets 85,422 Goodwill 50,800 27,111 2,51,400

VI – DEATH OF PARTNER Illustration 17 The following is the Balance Sheet of A, B and C on 31st December, 2004.

Rs. 32,000 61,400 1,48,000 10,000

2,51,400

Admission, Retirement and Death of a Partner

Liabilities Sundry Creditors Reserve Fund Capital A B C

Rs.

Rs. 15,000 Rs. 7,500 Rs. 7,500

Asset

979 Rs.

4,500 Cash in Hand 4,800 Cash at Bank Sundry Debtors Furniture 30,000 Tools

300 7,500 9,000 12,000 1,500

39,300

39,300

C died on 31st March 2005. under the terms of the Partnership Deed the executors of a deceased Partners were entitled to: (a) Amount standing to the credit to the partner’s Capital Account. (b) Interest on capital @ 5% per annum. (c) Share of goodwill on the basis of twice the average of the past three years profits. (d) Share of profits form the closing of last financial year to the death on three basis of the last year’s profits. Profits for 2002 Rs. 9,000; for 2003 Rs. 12,000 and for 2004 Rs. 10,500. Profits were shared in the ratio of capitals. Pass the necessary journal entries and find out the amount payable to heir of C. (B.Com., Madurai) Solution Books of Partnership Firm Journal Entries Particulars Interest on Capital A/c To C’s capital A/c

Dr. (Rs.) Dr.

Cr. (Rs.)

94 94

(Being interest on capital due for 3 months credited to C’s Capital A/c) 7,500 ¥ 5% ¥ 3/12 = Rs. 93.75 or Rs. 94 Goodwill A/c To C’s Capital A/c

Dr.

*5,250 5,250

(Being the share of goodwill credited in C’s Capital A/c).

Goodwill based on capital ratio = 21,00 ¥ 1/4 = Rs. 5,250* *656 To C’s Capital A/c

656

¥ 1/4 = Rs. 656* Reserve Fund A/c To C’s Capital A/c (Being the share of Reserve Fund credited to C’s Capital A/c) 4,800 ¥ 1/4 = Rs. 1,200

Dr.

1,200 1,200

980

Financial Accounting

C’s Capital Account Rs. To Executor’s A/c

Rs.

14,700 By Balance b/d By Interest on Capital A/c By Goodwill

7,500 94 5,250 656 1,200

By Reserve Fund 14,700

14,700

Illustration 18 The partnership deed of the Firm run by X, Y and Z provide that in the event of the death of any partner, the existing partners would purchase his share in the firm on the basis of the terms as under: (a) Goodwill calculation is based on 3 years’ purchase of the average of 4 years’ profit; (b) The net amount due on the account of the deceased partner payable to his legal heir in four equal – half yearly instalments from the commencement of 6 months after the death with 5% interest on the outstanding balance; Profit and Loss sharing ratio given as 9:4:3 and the accounts closes on 30th June every year. The four years profits are – 2000 Rs. 35,200; 2001 Rs. 28,160; 2002 Rs. 24,080; 2003 Rs. 8,704. Partner X died on 31st December, 2003 and their Capital Accounts on that date were: X Rs. 10,800; Y Rs. 6,400; Z Rs. 3,600. X’s Current account on 31st December after crediting his share of profit to that date showed a debit of Rs. 960. Show the above in the necessary Ledger Accounts in the books of the firm, recording half- yearly payments to X’s estate by existing partners. (B.Com., Calcutta) Solution Books of Partnership Firm X’s Capital Account 2003

Particulars

Dec. 31 To Current A/c To Executors of X’s A/c

Amount (Rs.)

2003

Particulars

Amount (Rs.)

960 Dec. 31 By Balance b/d 50,400 By Goodwill(*)

10,800 40,560

51,360

51,360

Executors of X Account (installment payable half yearly) Date

Particulars

2004 June 30 To Bank A/c (a) To Balance c/d

Amount (Rs.)

13,860 37,800 51,660

Date 2003 Dec. 31 2004 June 30

Particulars

By X’s Capital By Interest A/c

Amount (Rs.) 50,400 1,260 51,660 Contd.

Admission, Retirement and Death of a Partner

981

Contd. 2004 Dec. 31

To Bank A/c (b) To Balance c/d

13,545 25,200

2004 July 1 Dec. 31

By Balance b/d By Interest

38,745 2005 June 30 To Bank (c) To Balance c/d

13,230 12,600

38,745 2005 July 1 June 30

By Balance b/d By Interest

25,830 2005 Dec. 31

To Bank (d)

12,915

37,800 945

25,200 630 25,830

2005 July 1 Dec. 31

By Balance b/d By Interest

12,915

12,600 315 12,915

Instalment calculation (a) I Part principal = 50,400 ¥ 1/4 = Rs. 12,600 Intalment = 50,400 ¥ 5% ¥ 6/12 = Rs. 1,260 Ist Instalment paid on 30th June, 2004 = Rs. 13,860 (b) II Part principal = 50,400 ¥ 1/4 = Rs. 12,600 Intalment = 37,800 ¥ 5% ¥ 6/12 = Rs. 945 IInd Instalment paid on 31st Dec, 2004 = Rs. 13,545 (c) III Part principal = 50,400 ¥ 1/4 = Rs. 12,600 Intalment = 25,200 ¥ 5% ¥ 6/12 = Rs. 630 IIIrd Instalment paid on 30th June 2005 = Rs. 13,230 (d) IV Part principal = 50,400 ¥ 1/4 = Rs. 12,600 Intalment = 12,600 ¥ 5% ¥ 6/12 = Rs. 315 IVth Instalment paid on 31st Dec 2005 = Rs. 12,915 (*) Goodwill calculation Four years total profit = 35,200 + 28,160 + 24,080 + 8,704 = Rs. 96,144 Average profit = Rs. 24,036 Three years’ purchase = Rs. 24,036 ¥ 3 = Rs. 72,108 X’s share of Goodwill = 72,108 ¥ 9/16 = Rs. 40,560 Illustration 19 A, B and C were in partnership sharing profits equally. C died on 31st March, 2005. The Balance Sheet of the firm as at 31st December 2004 was as under: Liabilities

Rs.

Sundry Creditors

Assets

15,600 Cash in Hand and at Bank

Rs. 4,000

General Reserve

6,000 Debtors

18,000

Investment Fluctuation Fund

2,100 Stocks

28,000

Reserve for Doubtful Debts

1,800 Investments (at cost)

Capital

Rs.

A

30,000

B

25,000

C

21,000

8,000

Freehold Property

30,000

Goodwill

13,500

76,000 1,01,500

1,01,500

982

Financial Accounting

On the date of death it was found that: (1) Freehold property was worth Rs. 57,000; (2) Debtors were all good; (3) Stocks were valued at Rs. 25,000; (4) Investments were valued at Rs. 7,500 and were taken over by A for that value; (5) A liability for workmen’s compensation for Rs. 3,000 was to be provided for; (6) Goodwill was to be valued at one year purchase of average profit of last 5 years; (7) C’s share of profit upto the date of death was to be calculated on the basis of last year’s profit. The profits of the last 5 years were as under: 2000 Rs. 11,500; 2001 Rs. 12,500; 2002 Rs. 8,000; 2003 Rs. 10,000; 2004 Rs. 12,000. Prepare: (i) Revaluation Account, (ii) Capital Account of C and (iii) Balance Sheet of the remaining partners. Solution Books of Partnership Firm Revaluation Account To Stock To Provision for workmen Compensation To Capital Accounts (Equally) A B C

Rs.

Rs.

3,000 By Freehold Property 3,000 By Investment Fluctuation Fund

27,000 1,600

8,133 8,133 8,134 30,400

30,400

Capital Account

To Investment To Goodwill (a) To C’s Executor A/c To Balance c/d

A

B

C

A

B

C

Rs.

Rs.

Rs.

Rs.

Rs.

Rs.

30,000 2,000 8,133

25,000 2,000 8,133

21,000 2,000 8,134

40,133

35,133

32,134

31,733

34,233

7,500 900

900

31,733

34,233

40,133

35,133

By Balance b/d 900 By General Reserve 31,234 Revaluation A/c Suspense A/c (b)

1,000

32,134 By Balance b/d

Balance Sheet Liabilities Sundry Creditors C’s Executor A/c Provision for workmen’s Compensation Capital Account A B

Rs.

Assets

15,600 Cash and Bank 31,234 Debtors 3,000 Stock Freehold Property 31,733 Goodwill 34,233 1,15,800

Rs. 4,000 18,000 25,000 57,000 10,800 1,000 1,15,800

Admission, Retirement and Death of a Partner

983

Working Note (a) Goodwill calculation Goodwill as per Balance Sheet = Rs. 13,500 Goodwill as per calculation Total of 5 years profit = Rs. 54,000 Average of 5 years = Rs. 10,800 One year purchase = Rs. 10,800 ¥ 1 = Rs. 10,800 Difference = Rs. 2700 divided equally (b) Profit share of deceased partner Profit for 2004 = Rs. 12,000 Three months profit = 12,000 ¥ 3/12 = Rs. 3,000 His share = 3,000 ¥ 1/3 = Rs. 1,000 Illustration 20 X, Y and Z carried on business in partnership, profits being divisible to X 1/2; to Y 1/3; and to Z 1/6. The balance sheet on 31st December, 2003 showed their capitals to be X Rs. 20,000; Y Rs. 15,000; Z Rs. 10,000. On 31st March, 2004, X died; and you are instructed to prepare an account for presentation to his executors having to the following facts: (a) The firm had insured the partners’ lives severally, X for Rs. 10,000; Y for Rs. 7,500; and Z for Rs. 5,000. The premiums have been charged to Profit and Loss Account and the surrender value on 31st March, 2004 amounted in each case to one-half of the sum assured. (b) Capital carried interest @ 6% per annum. (c) X’s drawings from 1st January, 2004 upto his death amounted to Rs. 3,500. (d) X’s share of profits for the portion of the current financial year for which he lived was to be taken at the sum calculated on the average of the last three completed years and goodwill was to be raised on the basis of two years’ purchase of the average profit of those three years. The annual profits were Rs. 7,500; Rs. 8,000 and Rs. 9,000, respectively. Pass the necessary journal entries and show the account of executor of X. Solution Books of Partnership Firm Journal Entries L.F. X Capital A/c To X’s Executor A/c (Being the Capital A/c of deceased partner transferred to his Executor A/c)

Dr.

Joint Life Policy A/c Dr. To X Capital A/c To Y Capital A/c To Z Capital A/c (Being the policy amount distributed among the partners in old ratio)

Dr. (Rs.)

Cr. (Rs.)

20,000 20,000

10,000 5,000 3,333 1,667 Contd.

984

Financial Accounting

Contd. Rs. Joint Life Policy (Y) A/c Joint Life Policy (Z) A/c To X’s Executor A/c To Y Capital A/c To Z Capital A/c (Being the surrender value of policies brought into account of partners)

Dr. Dr.

Rs.

3,750 2,500 3,125 2,088 1,042

300 To X’s Executor A/c (Being interest on capital @ 6% per annum for 3 months = 20,000 ¥ 6% ¥ 3/12) X’s Executor A/c To X Drawings A/c (Being drawings transferred to Executor Account of X)

300

Dr.

3,500 3,500

1,021 To X’s Executor A/c

1,021

credited to X Executor’s A/c) Y’s Capital A/c Z’s Capital A/c To X’s Executor A/c (Being the goodwill share of the deceased partner is credited to his Executor’s A/c)

Dr. Dr.

5,445 2,722 8,167

2 years purchase = 16,333 X share = 8,167

X’s Executor Account Rs. To Drawings a/c To Balance c/d

Rs.

3,500 By X’s Capital A/c 34,113 By Life Policy (X) By Life Policy of Y and Z (7,500 + 5,000) ¥ 3/12

By Y and Z Capital A/c Goodwill share = 5,445 + 2,722 37,613

20,000 5,000 3,125 300 1,021 8,167 37,613

By Balance b/d

34,113

Illustration 21 A and B shared profit and losses in the ratio of 5:3 took out a joint life policy for Rs. 40,000 in January, 2002 for 20 years paying an annual premium of Rs. 2,200. The surrender values were: 2002 Rs. Nil; 2003 Rs. 500; 2004 Rs. 1,200 and 2005 Rs. 2,050. B Died on April, 20th 2005 and the claim was received on 25th May. Show the necessary account in all the methods. (B.Com., Madurai)

Admission, Retirement and Death of a Partner

985

Solution First Method (When premium paid is treated as expense) Premium on Joint Life Policy Account Date

Particulars

2002 Jan 1

To Bank A/c

2003 Jan 1

Amount

Date

Particulars

Amount

2,200

2002 Dec 31

2,200

To Bank A/c

2,200

2003 Dec 31

2,200

2004 Jan 1

To Bank A/c

2,200

2004 Dec 31

2,200

2005 Jan 1

To Bank A/c

2,200

2005 Dec 31

2,200

Joint Life Policy Account Date 2005 May 25

Particulars A (40,000 ¥ 5/8) B (40,000 ¥ 3/8)

Amount 25,000 15,000

Date 2005 May 25

Particulars By Bank

40,000

Amount 40,000 40,000

Second Method (When premium paid is treated as an asset) Joint Life Policy Account Date

Particulars

Amount

Date

2002 Jan 1

To Bank A/c

2,200

2002 Dec 31

2003 Jan 1

To Bank Account

2,200

2003 Dec 31

Particulars

2,200

By Balance c/d 2,200 2004 Jan 1

To Balance b/d To Bank A/c

500 2,200

May 25

To Balance b/d To Bank A/c To A’s Capital A/c To B’s Capital A/c (40,000 – 1,200 –2,200 = 36,600 ¥ 5/8, 3/8)

1,200 2,200 22,875 13,725

40,000

1,700 500 2,200

2004 Dec 31

By Balance c/d

2,700 2005 Jan 1

Amount

1,500 1,200 2,700

2005 May 25

By Bank A/c

40,000

40,000

Financial Accounting

986

Third Method (When the Joint Life Policy is treated as an asset) Joint Life Policy Account Date

Particulars

Amount

Date

Particulars

2002 Jan 1

To Bank A/c

2,200

2002 Dec 31

2003 Jan 1

To Bank A/c

2,200

2003 Dec 31

2004 Jan 1

To Balance b/d To Bank A/c

By Joint Life Policy Reserve A/c

2,200

By Joint Life Policy Reserve A/c By Balance c/d

1,700 500

2,200 500 2,200

2,200 2004 Dec 31

By Joint Life Policy Reserve A/c By Balance c/d

2,700 2005 Jan 1

To Balance b/d To Bank A/c To A’s Capital A/c To B’s Capital A/c

1,200 2,200 25,000 15,000

Amount

1,500 1,200 2,700

2005 Dec 31

By Bank A/c By Joint Life Policy Reserve A/c

43,400

40,000 3,400

43,400

Joint Life Policy Reserve Account Date

Particulars

2002 Dec 31 2003 Dec 31

Amount

To Joint Life Policy

2,200

To Joint Life Policy To Balance c/d

1,700 500

Date

Particulars

2,200

2003 Dec 31

2,200

2,200 2004 Dec 31

To Joint Life Policy To Balance c/d

1,500 1,200

2,200 2004 Jan 1 Dec 31

By Balance b/d

2,700 2005 May 25

To Joint Life Policy

3,400

Amount

2002 Dec 31

500 2,200 2,700

2005 Jan 1 May 25

By Balance b/d

3,400

Points to Remember At the time of admission the following adjustments are necessary: 1. Calculation of profit sharing ratio 2. Revaluation of assets and liabilities 3. Adjustment of goodwill 4. Adjustment of accumulated reserves, profit, etc. 5. Adjustment of capitals

1,200 2,200 3,400

Admission, Retirement and Death of a Partner

987

To revalue Assets and Liabilities, Revaluation Account or Memorandum Revaluation Account is opened. There are three methods of treatment of Goodwill—Revaluation Method, Memorandum Revaluation Method and Premium Method.

Examination Questions I. Objective Questions 1. Fill in the blanks (i) For any increase in the value of assets, the Revaluation Account is to be ________ . (ii) For any increase in the value of liabilities, the Revaluation Account is to be _____ . (iii) In case of Memorandum Revaluation Account if its first part shows a profit, then the second part will show_________________ . (iv) When goodwill is to be raised in the books at the time of retirement of a partner, the Capital Accounts of all the partners are to be __________ . (v) Joint Life Policy Reserve Account should be transferred to the Capital Account of ___________ partners. 2. Choose the correct answers (i) General Reserve at the time of admission of a partner is transferred to (a) Revaluation Account (b) Partners Capital Account (c) Profit and Loss Account (ii) Goodwill raised by the partners at the time of admission of a partner will be written off in (a) Old profit sharing ratio (b) New profit sharing ratio (c) Sacrificing ratio (iii) All accumulated losses are transferred to the Capital Accounts of the partners in (a) New profit sharing ratio (b) Old profit sharing ratio (c) Capital ratio (iv) If the old profit sharing ratio is more than the new profit sharing ratio, the difference is (a) Sacrificing ratio (b) Gaining ratio (c) Capital ratio (v) Joint Life Policy Account after the maturity of the policy should be transferred to the Capital Accounts of the partners in (a) New profit sharing ratio (b) Old profit sharing ratio (c) Capital ratio

988

Financial Accounting

3. Match the following (i)

Admission of a partner

a

(ii)

Death of a partner

b

Capital ratio

(iii)

Retirement of a partner

c

Joint life policy

(iv)

Capital

d

Gaining ratio

4. State whether the following statements are true or false (i) Admission of a partner results in reconstitution of firm. (ii) All accumulated profit and losses are transferred to Revaluation Account at the time of admission (iii) Amount due to deceased partner may be transferred to his Loan Account (iv) The amount due to Retiring partner if not in cash is transferred to his legal heirs account. (v) Joint Life Policy Reserve is in the nature of accumulated profits. Answers 1. 2. 3. 4.

(i) (i) (i) (i)

credited; b; b; True;

(ii) (ii) (ii) (ii)

debited; b; c; False;

(iii) (iii) (iii) (iii)

loss; b; d; False;

(iv) (iv) (iv) (iv)

credited; a; a False;

(v) all (v) b (v) True.

II. Descriptive Questions A. Very short answer questions (1) What is sacrificing ratio? (2) What is joint life policy? (3) What is meant by gaining ratio? (4) What is the purpose of Revaluation Account? (5) What is goodwill treatment as per AS10? B. Short answer questions (1) What is the purpose of Memorandum Revaluation Account? (2) What is hidden goodwill? (3) What is premium method? (4) What is surrender value? (5) Distinguish between sacrificing ratio and gaining ratio? C. Detail answer questions (1) What are the adjustments to be made at the time of admission of a partner? (2) How is goodwill treated on admission of a partner? (3) What are the different methods of adjustment of capital on admission of a partner? (4) Explain the procedures to be followed in accounts when a partner retires? (5) What are the different methods of recording joint life policy amount in the books of accounts?

Admission, Retirement and Death of a Partner

989

III. A – EXERCISE PROBLEMS–ADMISSION OF PARTNER I. RATIOS

Problem 1 A, B and C were partners sharing profits and losses in the ratio of 3:2:5. They admitted D and gave him 1/4 share. This share was contributed by them in the ratio of 1:1:3. Find out the new profit-loss sharing ratio of all the partners. (B.Com., Mano. Sundaranar) [Ans. Sacrificing ratio = 1:1:3; New ratio = 5:3:7:5] Problem 2 Find the new ratio of partner admitted in the firm in the following cases, assuming the old ratio of the existing partners A and B as 3:2 (i) They admit C giving 1/4th share; (ii) Admit C for 1/4th share, A giving 1/6th share and B giving 1/12th; (iii) Admitting C by A surrendering his 1/5th share and B 1/2; (iv) Admitting C for 1/4th share dividing the remaining profit in 7:3; (v) A and B are partners sharing profits in the ratio of 6:4. They admit C for are sixth share. [Ans. New ratio = 9:6:5//26:19:15 //12:5:8.// 21: 9: 10 //3:2:1] Problem 3 A and B were partners sharing profits and losses in the ratio of 5:3. They admitted C and gave him 1/5 share. Find out the sacrifice ratio of the old partners and also the new profit-loss sharing ratio of all the partners. (B.Com., Madras) [Ans. New ratio = 5:3:2. Sacrificing ratio = 10:6] Problem 4 A and B were partners sharing profits and losses in the ratio of 3:2. They admitted C as a partner. A contributed 3/4 of his share and B contributed 1/4 of his share to C. Find out the sacrifice ratio of the old partners and also the new profit-loss sharing ratio of all the partners. (B.Com., Mano. Sundaranar) [Ans. Sacrificing ratio = 9:2; New ratio = 3:6:11] II. CAPITAL ADJUSTMENT

Problem 5 Ravi and Murali are partners sharing profit and Loss as 7:5.Vidya is admitted as a partner on the condition that .Vidya should bring in Rs. 20,000 as capital and pay Rs. 15,000 as premium for goodwill. The future profit sharing ratio amongst the partners is 9:6:5.Give journal entries. (B.Com, Madurai)

990

Financial Accounting

Problem 6 X and Y are in partnership sharing profits and losses as 3:2. They admit Z into the firm. Z paying a premium of Rs. 36,000 for 1/6th share of profits. As between themselves, X and Y agree to share future profits and losses equally. Draft journal entry showing the appropriation of premium money. (ICWA, B.Com., Kerala) III. GOODWILL

Problem 7 A and B are trading in partnership sharing profits and losses in the ratio of 3:1. As from 1st January, 2005, it was decided to change the profit sharing ratio to 3:2. Goodwill will be valued at two years’ purchase of the average of three years’ profits .The profits for 2002 Rs. 15,000; 2003 Rs. 20,000 and 2004 Rs. 25,000. Pass the necessary journal entry to give effect to the arrangement. [Ans. Goodwill Rs. 6,000] Problem 8 The average profit of a firm is Rs. 9,000. The firm’s capital is Rs. 60000 and the normal return on business is expected at 10%. Find out goodwill by capitalisation method. [Ans. Goodwill = Rs. 30,000] Problem 9 A and B is partners sharing profits in the ratio of 3:2. They admit C into partnership. C paying a premium of Rs. 1,000 for ¼ share of profit. No Goodwill Account appears in the books. They withdrew the amount of goodwill. Journalise. Problem 10 A and B are partners sharing profits in the ratio 2:1. They admit C as a partner for 1/4th share. His share of goodwill is Rs. 9,000. Give journal entries in the following cases: (1) When the amount of goodwill is paid privately. (2) When the goodwill is received in cash and retained in the business. (3) When the goodwill is received in cash and withdrawn by old partners. (4) When goodwill is raised at full value and then written back. (5) When the goodwill is already shown in the books at Rs. 27,000. (6) When the goodwill is already shown in the books at Rs. 42,000. IV. ADMISSION OF PARTNER – JOURNAL, LEDGER AND BALANCE SHEET

Problem 11 Set out below is the Balance Sheet of Biren and Niren who share profits and losses as 60% to Biren and 40% to Niren.

Admission, Retirement and Death of a Partner

Liabilities

Rs.

Creditors

Assets

40,000 Cash at Bank

Capital Accounts:

Rs.

991 Rs. 2,000

Debtors

25,000 40,000

Biren

40,000

Stock

Niren

30,000

70,000 Plant 1,10,000

43,000 1,10,000

The partners admit Dhiren into the firm on the following terms: (i) Dhiren will pay Rs. 20,000 as his capital for 40% of future profits of the firm, (ii) The firm’s assets are to be revalued before his admission. Stock was to be reduced to Rs. 35,000 and plant was to be depreciated by 10%. A reserve of 1 2 % is to be raised against debtors, (iii) As the new partner is unable to pay 2 anything for the goodwill premium a Goodwill Account is to be raised in the books for Rs. 30,000. (a) You are required to give the journal entries, the Profit and Loss Adjustment Account and the opening Balance Sheet of the new firm. (b) In what ratio will the partners share future profits of the firm? (B.Com., Calcutta) [Ans. Revaluation loss Rs. 9.925; Balance Sheet total Rs. 1,50,075] Problem 12 X and Y were in partnership sharing profits and losses in the ratio of 3:1. On 31st December, 2005, their Balance Sheet stood as under: Balance Sheet of X and Y as on 31st December, 2005 Sundry Creditors Capitals: X Y

Rs.

Rs.

37,500 Cash at Bank Bills Receivable 40,000 Sundry Debtors 10,000 Stock Furniture Building

22,500 3,000 16,000 20,000 1,000 25,000

87,500

87,500

On that date, they admit Z as a new partner on the following terms: (a) to Create a goodwill in the firm for Rs. 20,000. (b) Stock and furniture to be depreciated by 10% (c) Building to be appreciated by 20% (d) Reserve for doubtful debts to be created to the extent of 5% on Debtors. (e) Z pays Rs. 10,000 as his share of capital. Pass journal entries to give effect to theses arrangements and show the Revaluation Account, Capital Accounts and the Balance Sheet of the new firm. [Ans. Revaluation profit Rs. 2,100; Capital Rs. 56,575, Rs. 15,525, Rs. 10,000; Balance Sheet total Rs. 1,19,600] Problem 13 X and Y are partners in a firm sharing profit and losses X–75% and Y–25%. Their Balance Sheet as on 31st December, 2005 is given below:

992

Financial Accounting

Liabilities

Rs.

Sundry Creditors Capitals: X Y

Rs. 30,000 Rs. 20,000

Assets

40,000 Cash 10,000 Debtors 50,000 Stock Furniture Land and Buildings 1,00,000

Rs. 20,000 15,000 35,000 5,000 25,000 1,00,000

Z was admitted as a new partner on the following terms: (1) The value of he stock was to be increased to Rs. 40,000 and that of land and buildings to be reduced by 25%. Furntiure was to be depreciated by10%. Reserve of 5% was to be raised against sundry debtors. (2) Z was to pay Rs. 15,000 to the existing partners as premium for goodwill for 20% of the future profits of the firm. He was also to bring in capital equal to 1/5th of the combined adjusted a capital of X and Y. You are required to journalise the entries in the books of the firm and give the opening Balance Sheet of the new firm on completion of transaction. [Ans. Capital Rs. 46,780, Rs. 25,625, Rs. 18,125, Balance Sheet total Rs. 1,30,625] Problem 14 Marigold and Rose were in partnership, sharing profits and losses as to two-thirds and one-third. As from 1st October, 2003, they agreed to take Jasmine as a new partner. The new partner will have one-sixth share, the old partners agreeing to share equally as between them in the new firm. Jasmine brings in Rs. 50,000 as Capital and Rs. 4,000 as his share of goodwill to be retained in the firm. The following is the Balance Sheet of the old firm as on 30th September, 2003: Liabilities

Rs.

Capital Accounts:

Assets

Rs.

Cash

7,000

Marigold

62,500 Stock

50,000

Rose

37,500 Debtors

30,000

Creditors

50,000 Plant Investments 1,50,000

25,000 38,000 1,50,000

The following revaluation is agreed upon: Stock Rs. 55,000; Plant Rs. 20,000 Investments Rs. 35,000. Debtors : Subject to reserve for bad debts of 5%. It is further agreed that Marigold alone is to be charged with any loss arising from the above. The profit for the year ended 30th September, 2004 was Rs. 1,20,000 and the drawings of the partners were : Marigold Rs. 40,000; Rose Rs. 40,000; Jasmine Rs. 10,000. You are required to journalise the opening adjustments and draw up the Balance Sheet as on 30th September, 2004 making such assumptions as may be necessary. [Ans. Capital Rs. 74,000, Rs. 45,500, Rs. 60,000, Balance Sheet Total Rs. 2,29,500]

Admission, Retirement and Death of a Partner

993

V. ADMISSION OF PARTNER – LEDGER ACCOUNTS AND BALANCE SHEET

Problem 15 Balance Sheet as on 31st Dec. 2004 of Ramesh, Kumar and Papu who were sharing profits and losses in the ratio of 2:3:5. Liabilities

Rs.

Assets

Capitals :

Rs.

Cash

18,000

Ramesh

36,000 Bills Receivable

24,000

Kumar

44,000 Furniture

28,000

Papu

52,000 Stock

44,000

Creditors

64,000 Debtors

42,000

Bills Payable

32,000 Investments

32,000

14,000 Machinery

34,000

Goodwill

20,000

2,42,000

2,42,000

They admit Shilpa into partnership on the following terms: 1. Furniture, investments and machinery to be reduced by 15% 2. The value of stock to be taken at Rs. 48,000 3. Goodwill to be valued at Rs. 26,000 4. Shilpa to bring Rs. 32,000 towards capital for 1/6 share and old partners to adjust their capitals accordings. 5. Outstanding rent amounted to Rs. 1,800. 6. Prepaid salaries Rs. 800. 7. Adjustments of capitals to be made by cash. Prepare Revaluation A/c, Capital Accounts of the old partners, Cash Account and the Balance Sheet of the new firm. (B.Com., Karnataka) [Ans. Revaluation Loss Rs. 11,100; Capital A/c Rs. 32,000; Rs. 48,000; Rs. 80,000; Balance Sheet total Rs. 2,89,800] Problem 16 The following is the Balance Sheet of Sethi and Sobti who share profits and losses 3/5th and 2/5th, respectively: Rs.

Rs.

Sundry Creditors

1,500 Land and Buildings

3,500

Reserve Fund

1,000 Plant

4,500

Stock

3,500

Capital Accounts: Sethi

Rs. 8,000

Sobti

Rs. 3,500

Book Debtors 11,500 Less : Provision Cash at Bank 14,000

Rs. 2,500 Rs. 500

2,000 500 14,000

994

Financial Accounting

They agreed to admit Mahajan into partnership giving him a fifth share on the following terms: (a) The value of land and building to be increased to Rs. 5,000. (b) The Value of Stock to be increased by Rs. 2,200 and plant to be depreciated by 10 per cent. (c) Goodwill to be valued at Rs. 2,000 (d) Provision for doubtful debts to be increased by Rs. 750. (e) Mahajan to bring in capital to the extent of 1/5th of the total of the new firm after adjustment. Show ledger entries recording these adjustments and prepare the Balance Sheet of the new firm, assuming Mahajan to have brought in the requisite cash. Also show the calculation for capital to be introduced by Mahajan. (B.Com., Madurai) [Ans. Revaluation Profit Rs. 2,500; Capital A/c Rs. 11,300; Rs. 5,700; Rs. 4,250; Balance Sheet Rs. 22,750] Problem 17 A, B and C are partners in a firm of accountants who maintain on the cash basis sharing profit and losses in the ratio of 2:3:1. Their Balance Sheet as on 31st March, 2004 on which date D is admitted as a partner is as follows: Liabilities

Rs.

Assets

Rs.

B’s Capital

35,000 Furniture

10,000

C’s Capital

22,000 Motor Car

20,000

Cash at Bank A’s Capital 57,000

18,000 9,000 57,000

D is given 1/4th share in the profit and losses in the firm and the profit and loss sharing ratio as between the other partners remain as before. The following adjustments are to be made prior to D’s admission: (a) The Motor Car is taken over by B at a value of Rs. 25,000. (b) The furniture is revalued at Rs. 18,000. (c) Goodwill Account is raised in the books at Rs. 50,000. It is agreed among A, B and C that C is interested in goodwill only up to a value of Rs. 30,000. (d) Fees billed, but not realised Rs. 11,000 are brought into account. (e) Expenses incurred, but not paid Rs. 3,000 are provided for. D brings in Rs. 20,000 in cash as his capital contribution. He is also to be credited with Rs. 20,000 for having agreed to amalgamate his separate practice as Chartered Accountant with this firm. Prepare Revaluation Account, Capital Accounts and the Balance Sheet of the firm after D’s admission. [Ans. Revaluation Profit Rs. 21,000; Capital A/c Rs. 16,000; Rs. 47,500; Rs. 30,500; Rs. 40,000; Balance Sheet Rs. 1,37,000]

Admission, Retirement and Death of a Partner

995

Problem 18 Madan and Krishna are partners in a business. Their balance sheet as on 31st December, 2004 stood as under: Liabilities

Rs.

Assets

Rs.

Creditors for Expenses

10,000 Cash in Hand

4,000

Sundry Creditors

30,000 Cash at Bank

56,000

Bank Overdraft

20,000 Debtors

30,000

Bills Payable

30,000 Furniture

12,000

Reserves

18,000 Machinery

Capital Accounts:

24,000

Buildings

Madan

Rs. 45,000

Krishna

Rs. 30,000

57,000

75,000 1,83,000

1,83,000

They decided to admit Ram on the following terms: (i) That machinery, buildings and furniture be depreciated at 5%. (ii) That a reserve at 5 per cent be created for doubtful debts. (iii) That a goodwill account for Rs. 30,000 be opened in the books of the firm. (iv) That Ram brings Rs. 45,000 as capital and he will receive 1/4th share in future profits. (v) That the Capital Accounts of all partners be adjusted in proportion to their profit sharing ratio. Prepare Revaluation Account, Capital Accounts of the partners, Bank Account and the initial Balance Sheet of the firm. Show new profit sharing ratio. (B.Com., Maharashtra) [Ans. Revaluation Loss Rs. 6,150; Capital A/c Rs. 67,500; Rs. 67,500; Rs. 45,000; Balance Sheet Rs. 2,70,000] Problem 19 X and Y are partners sharing profits in the ratio 3:2. Following is the Balance Sheet of the firm as on 31st March, 2003: Balance sheet as on 31st March, 2008 Liabilities

Rs.

Assets

Creditors

38,000 Cash and Bank

Salary outstanding

12,000 Debtors (–) Provision

Capital

Bills Receivable

Rs. 10,000 Rs. 40,000 Rs. (4,000)

36,000 15,000

X

40,000 Stock

18,000

Y

38,000 Investments

14,000

1,28,000

Furniture

5,000

Building

30,000 1,28,000

Z was admitted for 1/4th share in profit for which he brought Rs. 10,000 as capital. Due to his admission, the value of provision for debts is estimated to be Rs. 6,500, Furniture Rs. 4,500, building Rs. 45,000. Investment not recorded in the books amounting Rs. 4,300, liability towards bills discounted Rs. 1,200. It was agreed to show the Balance Sheet items at the same old value.

996

Financial Accounting

Prepare Memorandum Revaluation account and Balance Sheet after the admission of Z. [Ans. Revaluation profit Rs. 9,000; Rs. 6,040; Balance Sheet Rs. 1,38,000]

III. B – EXERCISE PROBLEMS – RETIREMENT AND DEATH OF PARTNER I. RATIOS

Problem 1 A, B and C are the partners with profit and loss sharing as 5:3:2. B retired giving 2/3 of his share to A and 1/3 of his share to B. Calculate New profit sharing ratio. [Ans. New ratio 21:9 or 7:3] Problem 2 Calculate the new profit sharing ratio in the following cases: (a) A, B and C share profits in the ratio of 5/12, 4/12 and 3/12. Find the new profit sharing ratio (1) A retires (2) B retires and (3) C retires. (b) A, B and C share profits in the ratio of 1/2, 1/5 and 3/10. Find the new profit sharing ratio (1) A retires, (2) B retires (3) C retires. (c) A, B and C are partners sharing profits in the ratio of 1/4, 2/5 and 7/20. C retires and his share is taken by A and B in the ratio of 1:2. Problem 3 A, B and C running a partnership firm share their profit and losses in the ratio of 1/2, 3/10 and 1/5, respectively. B retires from the concern and the remaining partners decided to share the future profits and losses in the ratio of 3:2. Find the gaining ratio. [Ans. Gaining ratio = 1:2] Problem 4 A, B and C share profits and losses in the ratio of 4:3:2. B retires and A and C changed the sharing ratio as 5:3. After some time they admitted D for 3/10 share of profits 75% of which was given by A and the balance by C. Find the gaining ratio of A and C on B’s retirement and the new ratio on admission of D. [Ans. Gaining ratio = 13:11; New ratio 4:3:3] Problem 5 A, B and C are partners sharing profits and losses in the ratio of 4:3:1. B retires selling his share of profit to A and C for Rs. 8,100; Rs. 3,600 being paid by A and Rs. 4,500 paid by C. The profit for the year after B’s retirement was Rs. 10,500. You are required (i) to give necessary journal entry to record the above said sale of B’s share to A and B; and (ii) to calculate the new profits sharing ratio and distribute the profit between A and C. (B.Com., Mumbai) [Ans. New ratio = 2:1; Rs. 7,000; Profits: A–Rs. 3,500]

Admission, Retirement and Death of a Partner

997

II. GOODWILL

Problem 6 A, B and C were partners sharing profits and losses in the ratio of 2:2:1. On 1st July, 2004, their goodwill was valued at Rs. 30,000, there being no account for it in the books. On this date, B retired. Pass journal entries to record the goodwill if: (a) It is allowed to remain in the books (b) It is not allowed to remain in the books. (c) Only B’s share is recorded; and (d) No account is raised for goodwill. (B.Com., Delhi) Problem 7 (a) A, B and C are equal partners. Goodwill appears in the books at Rs. 10,000. (b) X,Y and Z are partners sharing profits in the ratio of 4:3:3. Goodwill does not appear in the books. Z retires form the firm and his share of goodwill is estimated to be Rs. 6,000, which was purchased by X and Y in equal proportion. X and Y decide not to open Goodwill A/c. (c) Ram, Mohan and Mani were partners sharing profit in the ratio of 2:2:1. on1st January, 2005, their goodwill valued at Rs. 30,000 and there is no Goodwill Account appeared in the books. Mohan retired. No Goodwill is to appear in the books. (d) Pass journal entries. III. RETIREMENT OF PARTNER – JOURNAL, LEDGER AND BALANCE SHEET

Problem 8 A and B are partners in a business sharing profit and losses as A 3/5th and B 2/5th. Their Balance Sheet as on 1st January, 2005 Is given below: Liabilities Capitals A B Reserve Sundry Creditors

Rs. 20,000 15,000

Assets

Rs.

Machinery Stock 35,000 Debtors 15,000 Cash at Bank 7,500 Cash in Hand

19,500 16,000 15,000 6,000 1,000

57,500

57,500

B decides to retire from the business owing to illness and A takes it over and the following revaluation are made: (a) Goodwill of the firm is valued at Rs. 15,000. (b) Depreciation machinery by 7.5% and stock by 15%. (c) A bad debts provision is raised against debtors at 5% and discount reserve creditors at 2.5%.

998

Financial Accounting

Journalise the above transaction in the books of the firms; prepare ledger accounts and the Balance Sheet of A. (B.Com., Delhi, MK) [Ans. Revaluation Loss Rs. 4,425; B Loan Rs. 25,230; A capital Rs. 35,345; Balance Sheet Rs. 67,887] Problem 9 The following is the Balance Sheet of Raman and Deshpande as at 30th June, 2005 on which date Raman retired and his son Pritam joined the firm from 1st July, 2005 with one-fourth share in the profit of the business. Liabilities Creditors Capitals : Raman Deshpande

Rs.

Rs. 50,000 Rs. 31,000

Asset

Rs.

10,000 Goodwill Plant Investments Debtors 81,000 Cash at Bank

12,000 40,000 14,000 15,000 10,000

91,000

91,000

The following adjustment and arrangements have be agreed upon the purposes of retirement and admission of partners: 1. Goodwill to be written up to Rs. 30,000 and plant to Rs. 50,000. 2. Sufficient money to be introduced so as to leave Rs. 11,000 cash after payment of amount due to Raman. 3. Deshpande and Pritam to provide such fund as would make their capitals proportionate to their share of profit. Show the journal entries to record the above transactions assuming that Deshpande and Pritam have paid in cash due on 2nd July, 2005 and the amount due to Raman was paid on the same day. [Ans. Revaluation Profit Rs. 10,000; Capital A/c = Rs. 82,500; Rs. 27,500; Balance Sheet Rs. 1,20,000] Problem 10 A, B and C carrying on business in partnership sharing profits and losses in the ratio of 3:2:1, respectively. On 31st December, 2004 Balance Sheet of the firm stock as follows: Liabilities

Rs.

Sundry Creditors Capital Accounts :

Assets

13,590 Cash Rs.

Debtors

Rs. 5,900 8,000

A

15,000

Stock

11,690

B

10,000

Buildings

23,000

C

10,000

35,000 48,590

B retired on the above-mentioned date on the following terms: (i) Buildings be appreciated by Rs. 7,000. (ii) Provision for bad debts be made @ 5% on Debtors.

48,590

Admission, Retirement and Death of a Partner

999

(iii) Goodwill of the firm be valued at Rs. 9,000 and adjustment in this respect be made without raising Goodwill Account. (iv) Rs. 5,000 be paid to B immediately and the balance due to him be treated as a loan carrying interest @ 6% per annum. Pass journal entries to record the above-mentioned transactions and show the Balance Sheet of the firm as it would appear immediately after B’s retirement. (B.Com., Delhi) [Ans. Balance sheet Rs. 50,190] IV. RETIREMENT OF PARTNER – LEDGER ACCOUNTS AND BALANCE SHEET

Problem 11 The Balance Sheet of A, B and C who were sharing profits in the ratio of 3:2:1 stood as follows on 31st December, 2005. Liabilities Sundry creditors A’s Capital A/c B’s Capital A/c C’s Capital A/c

Rs. 10,000 30,000 18,000 12,000

Asset Land and Buildings Plant and Machinery Stock Sundry Debtors Less: Provision Investments Cash at Bank

70,000

Rs. 30,000 10,000 8,000 Rs. 6000 Rs. 500 5,500 6,500 10,000 70,000

Mr. B having given notice to retire form the firm, the following adjustments in the books of the firm were agreed upon: (a) That investment be reduced to 90%. (b) That land and building be appreciated by 10%. (c) That the stock be appreciated by Rs. 1,250. (d) That the goodwill of the firm be fixed at Rs. 12,000 and B’s Share of the same be adjusted through the Capital Accounts of A and B. (e) That the entire capital of the newly constituted firm be fixed at Rs. 60,000 and be readjusted between A and B in their profit sharing ratio, i.e. 3:1 by bringing in or paying out cash. From the above particulars, prepare Revaluation Account, Partners’ Capital Accounts and the Balance Sheet of the new firm showing B’s balance as loan. (B.Com., Madurai, Madras) [Ans. Revaluation Profit = Rs. 3,600; A capital A/c Rs. 45,000; B’s Loan A/c Rs. 23,200; C’s capital A/c Rs. 15,000; Balance Sheet Rs. 93,200] Problem 12 A, B and C are partners in a firm sharing profits and losses as A 1/2, B 1/6 and C 1/3, respectively. The Balance Sheet on 31st December, 2004 was as follows:

1000

Financial Accounting

Liabilities

Rs.

Assets

Rs.

Bills Payable

10,000 Freehold Premises

50,000

Sundry Creditors

20,500 Plant and Machinery

25,000

Reserve

12,000 Furniture and Fixtures

2,500

Stock in Trade

22,500

Capital Accounts :

Rs.

A

25,000

Sundry Debtors

B

20,000

Less : Reserve for Bad Debts

C

35,000

80,000 Cash

20,000 1,000

19,000 3,500

1,22,500

1,22,500

C retires from the business and the partners agree to the following revaluations. Freehold premises and stock are to be appreciated by 20% and 15%, respectively. Plant and machinery and furniture and fixtures are to be depreciated by 10% and 1 7 %, respectively. 2 Bad debts reserve is to be increased to Rs. 1,500. A Goodwill Account is to be raised at Rs. 20,000. Give effect to the above arrangement and show the Partners’ Capital Accounts, and also the Balance Sheet of A and B as at 31st January, 2005, assuming that they write back the Goodwill Accounts. (B.Com., Andhra) [Ans. Revaluation profit Rs. 10,187; A capital Rs. 31,094; B capital Rs. 22,031; C Loan A/c Rs. 49,062; Balance Sheet Rs. 1,32,687] Problem 13 The balance sheet of A , B and C who are sharing profits and losses in the proportion of one-half, one-third and one-sixth, respectively, was as follows on 30th June, 2002: Liabilities Bills Payable Sundry Creditors A’s Capital A/c B’s Capital A/c C’s Capital A/c

Rs. 6,400 12,500 40,000 25,000 20,000 4,500

1,08,400

Asset Cash in Hand Cash at Bank Bills Receivable Books Debts Stock Furniture Plant and Machinery Building

Rs. 150 25,500 5,400 17,800 22,300 3,500 97,500 2,400 1,08,400

A retires from the business on 1st July, 2002 and his share in the firm is to be ascertained on a revaluation of the assets as follows: Stock at Rs. 20,000 Furniture Rs. 3,000 Plant and machinery Rs. 9,000 Building at Rs. 20,000 Rs. 850 to be provided for doubtful debts

Admission, Retirement and Death of a Partner

1001

The goodwill of the firm is agreed to be valued at Rs. 6,000 A is to be paid Rs. 11,050 in cash on retirement and the balance in three equal yearly instalments together with interest at 5% per annum. Show the necessary accounts required to give effect to the above, the Balance Sheet of the continuing partners and the Account of A till it is finally closed. [Ans. Revaluation loss Rs. 8,400; A Loan A/c Rs. 41,050; B Capital A/c Rs. 25,700; C Capital A/c Rs. 20,350 Balance Sheet Rs. 1,06,000]

V. ADMISSION AND RETIREMENT OF PARTNER Problem 14 A, B and C are in partnership sharing profits and losses in the ratio of 2:2:1. On 31st December, 2005, the firm’s Balance Sheet stands as follows: Liabilities A’s Capital A/c B’s Capital A/c C’s Capital A/c Sundry Creditors

Rs.

Asset

30,000 20,000 10,000

Sundry Assets Bank

Rs. 55,000 15,000

60,000 10,000 70,000

70,000

On the date C decides to retire, the value of goodwill becomes Rs. 15,000 and sundry assets are taken to have increased in value by Rs. 25,000. On C’s retirement, D is admitted as a partner, He pays no premium for goodwill, but brings in Rs. 15,000 as capital profits and losses are to be shared in the ratio of 4:3:3. Show Capital Account and draw up two Balance Sheets, one after C’s retirement and the other after D’s admission. The Goodwill Account is to be wiped off from the books and restore the sundry asset at its original value after D’s admission. (B.Com., Bombay) [Ans. Revaluation profit Rs. 25,000; Capital Rs. 30,000; Rs. 24,000; Rs. 3,000; C Loan Rs. 18,000; Balance Sheet Rs. 85,000] Problem 15 A, B and C were partners entitled to 1/2, 1/3 and 1/6 share of profits, respectively. A summary of their Balance Sheet as on 31.12.2004 was as follows: Sundry Creditors Capitals:

Rs.

Rs.

15,000 Goodwill

50,000

Rs.

A

70,000

B

50,000

C

30,000

Bank Account

60,000

Cash

55,000

1,50,000 1,65,000

1,65,000

The following steps were taken on 1 January 2005: (1) C retired and his interest in firm valued at Rs. 40,000. It was purchased by A and B from their private resources in their profit sharing proportion.

1002

Financial Accounting

(2) The existing goodwill is written off. (3) D was admitted and became entitled to 1/6 share of profits on the condition that A and B should be credited proportionately for goodwill amounting to Rs. 30,000. He should bring in capital equal to 1/5 of the combined capital of A and B after adjustments. Prepare partners’ Capital Accounts and show the opening Balance Sheet of the reconstituted firm as on 1.1.2005. (B.Com., Punjab) [Ans. Balance Sheet Rs. 1,71,000; Capital A/c Rs.76,000; Rs. 54,000; Rs. 26,000]

VI. DEATH OF PARTNER Problem 16 Brown and Smith are partners. The Partnership deed provides inter alia: (i) That the accounts be balanced on 31st December each year. (ii) That the profits be divided as follows: Brown one-half, Smith one-third, and carried to a Reserve Account one-sixth. (iii) That in the event of death of a partner, his executors will be entitled to be paid out: (a) The capital to his credit at date of death; (b) His proportion of reserve at date of the last Balance Sheet; (c) his proportion of profits to death based on the average profits of the last three completed years; (d) By way of goodwill, his proportion of total profits for the preceding three years. On 31st December, 2004, the ledger balances were: Rs.

Rs.

Brown’s Capital

90,000

Smith’s Capital

60,000

Reserve Bills Receivable Investments Cash

30,000 20,000 50,000 1,40,000

Creditors

30,000 2,10,000

2,10,000

The profits for the three years were: 2002–Rs. 42,000; 2003–Rs. 39,000; 2004– Rs. 45,000. Smith died on 1st May, 2005, show the workings of Smith’s: (i) Share of reserve; (ii) Share of profits; (iii) Share of goodwill and draw up Smith’s Executor’s Account as would appear in the firm’s ledger transferring the amount of his Loan Account. [Ans. Executor Balance Rs. 1,28,000] Problem 17 X, Y and Z were partners in a business sharing profit 3/4, 1/8 and 1/8, respectively and their Balance Sheet as on 31st December, 2004 was as follows:

Admission, Retirement and Death of a Partner

Liabilities

Rs.

Creditors Capital Accounts : X

Assets

25,000 Plant Rs. 50,000

Y

30,000

Z

25,000

1003 Rs. 50,000

Debtors

35,000

Stock

20,000

Bank

25,000

1,05,000 1,30,000

1,30,000

Z died on 30th September, 2004 and the partnership deed provided the following: (a) The deceased partner will be entitled to his share of profit up to the date of death, calculated on the previous year’s profit. (b) He will be entitled to his share of goodwill of the firm, calculated on the basis of 3 years purchase of the average profits of the last four years. The net profits for the last four years were 2000–Rs. 80,000; 2001–Rs. 60,000; 2002–Rs. 40,000 and 2003–Rs. 20,000. His drawings amounted to Rs. 1,800 up to the date of death. Interest on capital was to be allowed and on drawings to be charged at 5% (in case of drawings on the total amount) per annum. Ascertain the amount payable to the legal representatives of the deceased partners. (B.Com., Bangalore) [Ans. Executor A/c Rs. 44,695] Problem 18 A and B sharing profits and losses in the ratio of 2:3 took out a joint life policy on 1st January, 2005 for Rs. 20,000 for 10 years. The premium for the whole year is Rs. 2,000. B died on 1st March, 2008 and claim was received on 1st May, 2008. The books of the firm are closed on 31st December each year. The surrender values of the policy at the end of 2005, 2006, 2007 and 2008 were nil, Rs. 400, Rs. 1,200 and Rs. 2,400, respectively. Prepare the Ledger accounts under three methods. [Ans. (a) A gets Rs. 8,000, B’s heir gets Rs. 12,000; (b) Rs. 6,720, Rs. 10,000; (c) Rs. 7,200, Rs. 10,800]

27

Dissolution, Insolvency of Firm, Piecemeal Distribution and Amalgamation of Firms

Learning Objectives After studying this chapter, you should be able to Understand the meaning of dissolution of firm, insolvency, piecemeal distribution and amalgamation of firm Explain various accounting treatments, regarding dissolution, insolvency and amalgamation Workout problems relating to the above mentioned topics

DISSOLUTION OF PARTNERSHIP FIRM Dissolution of firm means a partnership firm coming to an end or permanent closure of partnership business. There is a difference between dissolution of partnership and dissolution of firm. According to Indian Partnership Act—Dissolution of partnership means dissolution of partnership among all the partners of a firm. Example— Admission, retirement or death etc. This is nothing but reconstitution of partnership. Whereas dissolution of firm means closure of partnership firm, i.e. partnership business comes to an end.

Methods of Dissolution of a Firm There are various methods of dissolution of firm. Sections 40 to 44 of Indian Partnership Act deals with dissolution.

(i) Dissolution by Agreement (Sec. 40) When all partners agree to dissolve the firm, then the firm can be dissolved.

(ii) Compulsory Dissolution (Sec. 41) Compulsory dissolution is possible under the following circumstances: (a) When all partners are insolvent or (b) When all partners are insolvent expect one or (c) When the business becomes unlawful

Dissolution, Insolvency of Firm, Piecemeal Distribution...

1005

(iii) Dissolution on Happenings of Certain Events (Sec. 42) (a) (b) (c) (d)

If the term of partnership expires or If the venture of partnership completed or If any partner dies If any partner is adjudicated as an insolvent

(iv) Dissolution by Notice (Sec. 43) In case of partnership at will, when any one of the partners gives notice in writing to all other partners with the intention of dissolving the firm.

(v) Dissolution by the Court (Sec. 44) The court may on any of the following situations order for dissolving the firm: (a) When a partner becomes insane or unsound mind or (b) When a partner becomes incapable of performing his duties permanently or (c) When a partner is proved guilty of misconduct or (d) When there is a persistent breach of agreement by a partner or (e) When there is transfer of interest by a partner to a third party or (f) When the partnership business incurs loss. The object of partnership business is to earn profit if this object is not fulfilled, then the firm can be dissolved or (g) Any other situations, which the Court is satisfied that it would be just and equitable to dissolve the firm.

Settlement of Accounts (Sec. 48) If the partnership deed is silent, the provisions of Sec. 48 are applied to settle accounts at the time of dissolution of a firm.

(i) Settlement of Losses The losses including the deficiencies of capital are to be treated in the following manner: (a) Losses are to be paid out of profits; (b) If profits are not sufficient then the credit balances of capital accounts of partners are to be used to pay losses; (c) Even if the capitals are not sufficient then the partners have to share losses according to profit sharing ratio.

(ii) Application of Assets The assets of the firm shall be applied in the following order: (The assets of the firm including capital contributed by partners to make up the deficiencies) (a) (b) (c) (d)

Firstly, the debts of the firm are to be paid to third parties; Secondly, the partners loans, if any, are to be paid; Thirdly, the partners capital are to be paid; Finally, if there is any balance amount, it shall be divided among the partners according to profit sharing ratio.

1006

Financial Accounting

(iii) Treatment of Firm’s Debts and Private Debts The assets of the firm are first used to pay off the firm’s debts and then, if there is any surplus, it is used to pay off partner’s debts. Similarly, partner’s private assets are first used to pay off partner’s private debts, and then, if there is any surplus, it is used to pay off the firm’s debts.

Accounting Entries on Dissolution The following are various journal entries to close the books of the firm on dissolution: L.F.

Realisation A/c To Assets A/c (at book value)

Debit (Rs.)

Dr.

Credit (Rs.)

xxx xxx

accumulated loss)

Outside Liabilities A/c To Realisation A/c

(iii)

Dr.

xxx xxx

For realisation of assets (including unrecovered assets)

Bank A/c To Realisation A/c

Dr.

xxx xxx

(Being the assets are sold and the Realisation A/c is credited) (iv)

For assets taken away by the partner

Partner’s capital A/c To Realisation A/c

(v)

Dr.

xxx xxx

For payment of liabilities including unrecorded liabilities

Realisation A/c To Bank A/c

Dr.

xxx xxx

(Being the third party liabilities are paid and the Realisation A/c is debited) (vi)

For payment of realisation expenses

Realisation A/c To Bank A/c

Dr.

xxx xxx

(Being the expense on realisation is paid)

Realisation A/c To Partners’ Capital A/c

(vii)

Dr.

xxx xxx

(b) For closing of Realisation Account – If there is loss

Partners’ Capital A/c To Realisation A/c

Dr.

(Being the Realisation A/c is closed and the loss transferred to Partners’ Capital A/c)

xxx xxx

Dissolution, Insolvency of Firm, Piecemeal Distribution...

(viii)

1007

For payment of partner’s loan

Partner’s Loan A/c To Bank A/c

Dr.

General Reserve A/c Joint Life Policy A/c To Partners’ Capital A/c

Dr. Dr.

xxx xxx

xxx

(ix)

xxx

(b) For transferring accumulated loss

Partners’ Capital A/c To Accumulated Loss A/c

Dr.

xxx xxx

(Being the accumulated loss balance debit balance transferred to Partners’ Capital A/c) (x)

(a) For transferring the debit balance in Current A/c

Partners’ Capital A/c To Partners Current A/c

Dr.

xxx xxx

(Being the debit balance in the Partner’s Current A/c transferred to Partner’s Capital A/c) (x)

(b) For transferring the credit balance in Current A/c

Partner’s Current A/c To Partners Capital A/c

Dr.

xxx xxx

(Being the credit balance in the Partner’s Current A/c transferred to Partner’s Capital A/c) (XI) For receiving the amount from Partners Capital A/c Bank A/c To Partners Capital A/c

Dr.

xxx xxx

(Being the amount received from Partners Capital A/c) For making payment to Partners Partners Capital A/c To Bank A/c

Dr.

xxx xxx

(Being the amount paid to partner)

Treatment of Goodwill on Dissolution The following treatment is necessary in the case of goodwill on dissolution: L.F.

Debit (Rs.)

Credit (Rs.)

(a) If goodwill already appears in the books of accounts (If goodwill appears in the Balance Sheet, then it has to be treated like any other assets. So it has to be transferred to Realisation A/c Realisation A/c To Goodwill A/c

Dr.

xxx xxx

(Being Goodwill A/c transferred to Realisation A/c like other assets) (b) If goodwill does not appear in the books of accounts, no journal entry is required to be passed. Nill

1008

Financial Accounting

(c) If goodwill is sold for cash Bank A/c To Realisation A/c

Dr.

xxx xxx

(Being goodwill is sold for cash) (d) If Goodwill is taken over by any partner Partner’s Capital/Current A/c To Realisation A/c

Dr.

xxx xxx

(Being goodwill is taken over by the partner)

Distinction between Revaluation Account and Realisation Account (1) Revaluation Account is prepared to revalue both assets and liabilities. Realisation Account is prepared to record the sale of assets and payment of liabilities. (2) Revaluation Account is prepared at the time of admission, retirement and death of a partner. Realisation Account is prepared at the time of dissolution of firm. (3) Revaluation Account is closed by transferring the balance to Partners’ Capital/ Current Account in the old ratio. Realisation Account is closed by transferring the balance to partners’ capital/ current account in their profit sharing ratio.

INSOLVENCY OF PARTNERSHIP FIRM Insolvency of a Partner If the capital account of a partner shows debit balance and he is unable to bring in required amount of cash to make up his deficiency, he is said to be an insolvent partner. The debit balance of his Capital Account is nothing but a loss due to the insolvency of a partner. The loss which is arising to insolvency of a partner is not an ordinary loss according to a famous English case of Garner Vs. Murray in the year 1903 by Justice Joyee. The partnership of Garner, Murray and wilkins was dissolved. Wilkins was insolvent and could not contribute anything. It was held, “that this debit balance should be shared amongst Garner and Murray in proportion to their capitals, and not in their profit sharing ratios”.

The Rule in Garner Vs. Murray (1) The solvent partners shall bring in cash equal to their realisation loss and (2) The deficiency of insolvent partner shall be distributed by solvent partners in their capital ratio. This case caused great controversy and there have been complex agreements as to precisely how this should be done, and whether the solvent partners should introduce further cash in respect of their share of loss. Any loss on realisation should be divided in the profit sharing ratios. This rule only applies to the final balances on the Partner’s Capital Accounts immediately prior to capital being repaid.

Dissolution, Insolvency of Firm, Piecemeal Distribution...

1009

But the decision in Garner Vs. Murray only applies if there is no agreement to the contrary.

Application of Garner Vs. Murray Rule in India There is nothing which prevents the application of this rule in India. However, in our country only the deficiency of insolvent partner is being shared by solvent partners in their capital ratios and solvent partners do not bring in cash equal to their realisation loss. The deficiency of insolvent partner is transferred to Solvent Partners Account in their capital ratios. The journal entries are as follows: L.F. Solvent Partner’s Capital A/c To Insolvent Partner’s Capital A/c

Dr.

Debit (Rs.)

Credit (Rs.)

xxx xxx

In this case, the final balances on Partners Capital Accounts mean—capitals after making adjustments for accumulated reserves, profits or losses if any, interest on capitals, drawings, interest on drawings, remuneration to a partner, etc. to the date of dissolution but before considering realisation profit or loss.

When all Partners are Insolvent In this case the firm cannot pay creditors in full. The creditors have to bear the loss arising due to insolvency. Here, the following procedures are to be followed: (1) Prepare cash and bank account by ascertain the availability of cash for creditors. (2) Prepare Realisation Account by transferring only assets to it; (3) Debit realisation expenses in this account and then close this account by transferring profit or loss to the Capital Accounts of the partners in their profit sharing ratio. (4) Prepare creditors account to ascertain the unpaid amount to creditors and close their by transferring the balance to deficiency account. (5) Prepare partners capital account to ascertain the deficiency which should be transferred to Deficiency Account to close Capital Accounts and the Deficiency account must tally.

PIECEMEAL DISTRIBUTION In working out dissolution problem, we assume that all assets are realised and all liabilities are paid immediately on the date of dissolution which is not practically possible. Because assets are realised gradually and payments are also made gradually in the following manner: 1. 2. 3. 4.

Firstly, realisation expenses are paid Secondly, outside liabilities are paid Thirdly, partners loans, if any are paid Finally, partners capitals are paid (on the basis of their profit sharing ratio)

1010

Financial Accounting

Methods for Piecemeal Distribution of Cash Two methods are followed for piecemeal distribution of cash. These are:

(I) Proportionate Capital Method It is also known as Surplus Capital Method or Highest Relative Capital Method. According to this method, a partner who has contributed more than his proportionate share of capital (as per profit sharing ratio) should be first paid the excess or surplus amount of capital. The following steps are to be followed under this method regarding payment of capital: (1) Calculate the actual capitals of partners to be repaid; (2) Divide the capitals according to their profit sharing ratio to find out proportionate capital and take relatively lowest capital as base capital; (3) Find out the surplus amount of capital by comparing the proportionate capital with actual capital; (4) The surplus amount of capital should be paid first; (5) Suppose if there are two partners with surplus capitals then payment must be made to the partner who is having more capital then the other as per profit sharing ratio; (6) Repeat these steps till the number of partners reduced to one; (7) At the end, the unpaid balance of capitals will be in their profit sharing ratio and this would be loss on realisation.

(II) Maximum Loss Method According to this method it is assumed that, in future there is no Realisation of assets possible. Steps involved under this method are: (1) Calculate the maximum loss. Maximum loss is the difference between capital due and cash available for distribution; (2) Distribute this maximum loss among partners in their profit sharing ratio; (3) Calculate the balance amount of Capital Account after distributing this maximum loss; (4) If Capital Account show credit balance, then distribute the cash available in proportion to their capital balances; (5) Repeat these steps on next realisation of cash; (6) If Capital Account show debit balance, apply Garner Vs. Murry’s rule to write off the debit balances.

AMALGAMATION OF FIRMS When a new firm is formed to take over two or more firms doing similar business, it is said to be ‘Amalgamation Firms’. The important objectives of Amalgamation are 1. To capture monopoly market; 2. To achieve cut-throat competition; 3. To minimise expenses, etc.

Dissolution, Insolvency of Firm, Piecemeal Distribution...

1011

Accounting Treatment In this case the books of accounts of the old firms are closed. Sometimes all the assets or some are taken over by the new firm. Similarly, all the liabilities or some are taken over by the firm. Therefore, Revaluation Account is prepared to revalue assets and liabilities and the profit or loss on revaluation should be transferred to Partners’ Capital Accounts in their profit sharing ratio. Books of Old Firm (Firm being taken over) The following journal entries are required in the books of old firms: L.F.

New Firm A/c To Assets A/c

Dr.

Liabilities A/c To New Firm A/c

Dr.

Partner’s Capital A/c To Assets A/c

Dr.

Liabilities A/c To Partner’s Capital A/c

Dr.

Debit (Rs.) Credit (Rs.)

xxx xxx

xxx xxx

xxx xxx

xxx xxx

xxx To Partner’s Capital A/c

xxx

(vi) For the accumulated losses transferred to Partners’ Capital A/c Partner’s Capital A/c To Accumulated Loss A/c

Dr.

xxx xxx

Books of New Firm (Purchasing Firm) L.F.

Debit (Rs.) Credit (Rs.)

For assets and liabilities taken over from the old Firm Assets A/c To Liabilities A/c To Partners’ Capital A/c over value)

Dr.

xxx xxx xxx

Financial Accounting

1012

Illustrations Dissolution of Firm- Illustrations Index for Illustrations Type I

Journal Entries and Ledger Accounts

II

Ledger Accounts

Ill. No. 1 2–7

I. Journal Entries and Ledger Accounts Illustration 1 The following is the Balance sheet of a firm as on 31st December, 2005. Particulars Sundry Creditors Bills Payable Bank Overdraft Capital Accounts: Ram Shyam

Rs.

10,000 6,000

Particulars

Rs.

8,000 Cash in Hand 2,000 Sundry Debtors 1,500 Machinery Stock Factory Premises 16,000

500 2,000 6,000 2,000 15,000 2,000

27,500

27,500

The firm was dissolved on 31st December, 2005. The assets were revalued as follows: Debtors Rs. 1,500; Machinery Rs. 3,000; Stock Rs. 1,200 and Factory Premises Rs. 10,000. Bank overdraft and bills payable were paid in full. Creditors were settled in Rs. 7,800. Realisation expenses amounted to Rs. 200. Pass journal entries and prepare Ledger Accounts to close the books of the firm assuming that the profit sharing ratio between Ram and Shyam is 3 : 2. (B.Com., Madurai, Bombay, Mano.Sundaranar, Mysore) Solution Books of the Partnership Firm Journal Entries L.F. Realisation A/c To Sundry Debtors A/c To Machinery A/c To Stock A/c To Factory Premises A/c

Dr.

Sundry Creditors A/c Bills Payable A/c Bank Overdraft A/c To Realisation A/c

Dr. Dr. Dr.

(Being outside liabilities transferred to Realisation A/c

Debit (Rs.)

Credit (Rs.)

25,000 2,000 6,000 2,000 15,000

8,000 2,000 1,000 11,500

Dissolution, Insolvency of Firm, Piecemeal Distribution...

Rs. Cash A/c To Realisation A/c

Dr.

1013 Rs.

15,700 15,700

(Being the assets transferred to Realisation A/c sold) 1,500 + 3,000 + 1,200 + 10,000 = 15,700 Realisation A/c To Cash A/c

Dr.

11,300 11,300

(Being outside liability transferred to Realisation A/c paid by cash) 7,800 + 2,000 + 1,500 = 11,300 Realisation A/c To Cash A/c

Dr.

200 200

(Being expenses on realisation paid) Ram’s Capital A/c Shyam’s Capital A/c To Realisation A/c

Dr. Dr.

5,580 3,720 9,300

(Being realisation loss transferred to Partners’ Capital A/c in the given ratio) Ram’s Capital A/c Shyam’s Capital A/c

1,200 800

Dr. Dr.

2,000

Ram’s Capital A/c Shyam’s Capital A/c To Cash A/c

Dr. Dr.

3,220 1,480 4,700

(Being the amount due to partners settled by cash)

Ledger Accounts Realisation Account Particulars To Sundry Debtors To Machinery To Sales To Factory Premises To Cash (Liabilities paid) To Cash (Expense paid)

Rs. 200 6,000 2,000 15,000 11,300 200

Particulars By Sundry Creditors By Bills Payable By Bank Overdraft By Cash (Assets realised) By Ram Capital A/c By Shyam Capital A/c (Loss on realisation transferred)

36,500

Rs. 8,000 2,000 1.500 15,700 5,580 3,720 36,500

Cash Account Particulars To Balance b/d To Realisation A/c (Assets sold)

Rs.

Particulars

500 By Realisation A/c (Liabilities paid) 15,700 By Realisation A/c (Expenses paid) By Ram’s Capital A/c By Shyam’s Capital A/c (Amount settled) 16,200

Rs. 11,300 200 3,220 1,480 16,200

1014

Financial Accounting

Capital Account Particulars

Ram

Shyam

Particulars

Ram

By Balance b/d

To Realisation A/c (Realisation loss)

5,580

3,720

1,200

800

3,220

1,480

10,000

6,000

Shyam

10,000

6,000

10,000

6,000

To Cash A/c

II. Ledger Accounts Illustration 2 A and B were in partnership sharing profits in the ratio of 3:1. They agreed to dissolve the firm. The assets, other than cash of Rs. 2,000 of the firm realised were worth Rs. 1,10,000. The liabilities and other particulars on that date of the firm were as follows: Creditors A/c Rs. 40,000; A’s Capital A/c Rs. 1,00,000; B’s Capital A/c (Dr.) Rs. 10,000; Profit and Loss A/c (Dr.) Rs. 8,000; and Realisation expenses Rs. 1,000. Creditors were settled in full at Rs. 38,000. Prepare the Realisation Account, Cash Account and Capital Account. Solution To find the assets value, Balance Sheet need to be prepared Balance Sheet Liabilities Creditors A Capital A/c

Rs.

Assets

Rs.

40,000 Cash 1,00,000 B Capital A/c

2,000 10,000 8,000 1,20,000

1,40,000

1,40,000

Realisation Account Rs. To Assets A/c To Cash (Creditors paid) To Cash (Realisation expenses)

Rs.

1,20,000 By Creditors A/c 38,000 By Cash (Assets realised) 1,000 A Capital A/c B Capital A/c (Realisation loss)

40,000 1,10,000 6,750 2,250

1,59,000

1,59,000

Capital Account A

B

A

B

Rs.

Rs.

Rs.

Rs.

To Balance b/d To Realisation (Loss) To Cash A/c (Settled)

6,000 6,750 87,250 1,00,000

10,000 By Balance b/d 2,000 By Cash A/c (Settled) 2,250

1,00,000

14,250

1,00,000

14,250

14,250

Dissolution, Insolvency of Firm, Piecemeal Distribution...

1015

Cash Account Rs. To Balance b/d To Realisation A/c To B Capital A/c

Rs.

2,000 By Realisation A/c 1,10,000 By Realisation A/c 14,250 By A Capital A/c

38,000 1,000 87,250

1,26,250

1,26,250

Illustration 3 Varma and Sharma were running business in partnership sharing profits and losses in the ratio of 5:3. Firm was dissolved on 30th September, 2004 when firm’s position stood as below: Liabilities

Rs.

Reserve Fund

Assets

Rs.

7,500 Cash at Bank

Outstanding liabilities:

2,500

Rs.

Machinery

4,200

Salary

500

Bills Receivable

1,600

Rent

900

1,400 Stock

Capital A/c:

Debtors

Varma

3,700

Sharma

1,800

Joint Life Policy Reserve

Less: Reserve for Debts 5,500 Joint Life Policy (As surrender value)

3,200 3,500 600

2,900 4,000

4,000 18,400

18,400

Machinery and stock realised 80% of book value whereas Rs. 3,080 is collected from customers. Creditors for salary were agreed to accept Rs. 390, but rent is paid in full. Goodwill of the firm realised Rs. 2,500. Joint life policy is surrendered. Expenses of realisation Rs. 200 paid by Varma. Varma is allowed a commission of 10% on all assets realised except goodwill. Show Ledger Accounts. (B.Com., Mano.Sundaranar, Kerala) Solution Books of Partnership Firm of Varma and Sharma Realisation Account Rs. To Machinery To Bills Receivable To Stock To Debtors To Joint Life Policy To Bank (Liabilities paid) (390 + 900) To Varma Capital A/c: Realisation Expenses Commission on Assets Realised (b) To Varma Capital A/c To Sharma Capital A/c

4,200 1,600 3,200 3,500 4,000

By Outstanding Liabilities By Reserve for Debts By Bank (Assets realised) (a) By Joint Life Policy

1,400 600 15,500 4,000

1,290 200 900 1,631 979 21,500

21,500

1016

Financial Accounting

Capital Account

To Cash A/c (Amount settled)

Varma

Sharma

Varma

Sharma

Rs.

Rs.

Rs.

Rs.

11,119

By Balance b/d 5,591 By Reserve Fund

3,700 4,688 1,631

By Realisation Expenses on: Realisation Commission 11,119

1,800 2,812 979

200 900

5,591

11,119

5,591

Bank Account Rs. To Balance b/d To Realisation A/c (Assets realised)

Rs.

2,500 By Realisation A/c (Liabilities paid) 15,500 By Varma Capital A/c By Sharma Capital A/c

1,290 11,119 5,591

18,000

18,000

Working Note (a) Assets realised for Realisation Account Rs. Machinery (80%) = 3,360 Stock (80%) = 2,560 Debtors = 3,080 Goodwill = 2,500 Insurance = 4,000 Total = 15,500 (b) Assets realised by Varma Rs. Machinery = 3,360 Stock = 2,560 Debtors = 3,080 Total = 9,000 Commision to Varma @ 10% = Rs. 900 Illustration 4 The following is the Balance Sheet of Sudhir and Ramesh as on 31st December, 2005: Particulars

Rs.

Sundry Creditors Loan from Sudhir’s Wife Loan from Ramesh Reserve Fund Capital Accounts: Sundhir Ramesh

76,000 20,000 30,000 10,000

Particulars Cash at Bank Stock in Trade Sundry Debtors Less: Provision

Rs. 23,000 12,000 40,000 2,000

36,000

38,000 8,000 56,000 20,000 15,000

1,72,000

1,72,000

Furniture Plant Investments

20,000 16,000

Dissolution, Insolvency of Firm, Piecemeal Distribution...

1017

The firm was dissolved on 31st December 2005, following was the result: 1. Sudhir took over investment at an agreed value of Rs. 16,000 and agreed to pay off the loan to Sudhir’s wife. 2. The assets realised as under: Rs. (a) Stock 10,000 (b) Debtors 37,000 (c) Furniture 9,000 (d) Plant 50,000 Expenses were 2,200 3. The Sundry Creditors were paid off less 2.5% discount. 4. Sudhir and Ramesh share profits and losses in the ratio of 3 : 2. Show Realisation Account, Partner’s Capital Account and Cash Account. Prepare Realisation Account, Partner’s Capital Account and Cash Account. (B.Com., Calcutta, Mysore, Allahabad) Solution Books of Partnership Firm of Sudhir and Ramesh Realisation Account Particulars

Rs.

To Stock in Trade To Sundry Debtors To Furniture To Plant To Investment To Sudhir’s Capital A/c (Mrs. Sudhir’s Loan taken over) To Bank (Creditors paid) (b) To Bank (Expenses)

Particulars

Rs.

12,000 40,000 8,000 56,000 20,000

By Sundry Creditors By Loan from Sudhir’s Wife By Bad Debts Reserve By Bank (Assets realised) (a) 20,000 By Sudhir’s Capital A/c (Investment taken over) 74,100 By Sudhir Capital A/c 2,200 By Ramesh Capital A/c (Realisation loss shared)

76,000 20,000 2,000 1,06,000 16,000 7,380 4,920

2,32,300

2,32,300

Ramesh Loan Account Particulars

Rs.

To Bank (Loan amount received)

Particulars

Rs.

30,000 By Balance b/d

30,000

30,000

30,000

Capital Account Particulars

Ram 9,000

To Realisation A/c (Investment taken over) To Realisation (Realisation loss) To Bank A/c (Amount settled)

16,000 7,380

Shyam

Particulars

6,000 By Balance b/d By Reserve Fund By Realisation A/c (Mrs. Sudhir’s Loan taken over) 4,920

13,620

9,080

46,000

20,000

Ram

Shyam

20,000 6,000

16,000 4,000

20,000

46,000

20,000

1018

Financial Accounting

Bank Account Particulars

Rs.

To Balance b/d To Realisation A/c (Assets realized)

Particulars

23,000 By Realisation A/c (Creditors paid) 1,06,000 By Ramesh Loan A/c (Loan amount paid) By Realisation A/c (Expenses paid) By Sudhir’s Capital A/c By Ramesh’s Capital A/c (Amount settled) 1,29,000

Rs. 74,100 30,000 2,200 13,620 9,080 1,29,000

Working Note (a) Assets realised Stock Debtors Furniture Plant Total

Rs. 10,000 37,000 9,000 50,000 1,06,000

(b) Sundry creditors Sundry Creditors were paid off less 2.5% discount 76,000 ¥ 97.5% = Rs. 74,100 Illustration 5 The following is the Trial Balance of the Firm of P, Q and R on 31st March, 2004: Debits

Rs.

Credits

Freehold Property (Mumbai)

4,50,000 Sundry Creditors

1,85,000

Leasehold Property (Kolkata)

1,50,000 Capitals P

5,00,000

Leasehold Property (Chennai)

1,20,000 Capital Q

4,50,000

60,000 Capital R

3,00,000

Investments

10,000 Stock (Mumbai)

1,80,000

Stock (Kolkata)

1,60,000

Stock (Chennai)

1,40,000

Sundry Debtors

1,25,000

Cash at Bank

40,000 14,35,000

14,35,000

The partners agreed to dissolve the firm on the above date on the following terms: (a) Freehold Property was sold and realised Rs. 5,00,000; Investments realised Rs. 75,000 Debtors Rs. 1,15,000; Office Furniture Rs. 6,000 (b) P retired from the business altogether. (c) Q took over the Kolkata business and the assets in connection therewith at the book values, the goodwill thereof being valued at Rs. 1,00,000. (d) R took over Chennai business and the corresponding assets at book values, the goodwill for the purpose being valued at Rs. 50,000.

Dissolution, Insolvency of Firm, Piecemeal Distribution...

(e) (f) (g) (h)

1019

Expenses of realisation amounted to Rs. 12,000. Mumbai stock was taken over by Q and R equally at book values. P, Q and R shared profits in proportions of 3/5, 1/5 and 1/5, respectively. There was an unrecorded liability of Rs. 8,000 which was paid off.

Prepare: (i) Realisation Account; (ii) Partners’ Capital Accounts and (iii) Bank Account Close the books of the firm, assuming that each partner finally settles his account with the firm. Solution Books of Partnership Firm Realisation Account Rs. To Freehold property (Mumbai) To Leasehold property (Kolkatta) To Leasehold property (Chennai) To Investments To Stock (Mumbai) To Stock (Kolkata) To Stock (Chennai) To Sundry Debtors To Bank A/c (Realisation expenses) To Bank A/c (liabilities paid) (b) To P Capital A/c To Q Capital A/c To R Capital A/c

4,50,000 1,50,000 1,20,000 60,000 10,000 1,80,000 1,60,000 1,40,000 1,25,000 12,000 1,93,000 1,08,600 36,200 36,200

Rs. By Sundry Creditors By Bank A/c (Assets realised) (a) By Q Capital A/c (Taken over by him) Leasehold Property (Kolkata) Stock (Kolkata) Goodwill Stock (Mumbai) By R Capital A/c (Taken over by him) Leasehold Property (Chennai) Stock (Chennai) Stock (Mumbai) Goodwill

1,85,000 6,96,000

1,50,000 1,60,000 1,00,000 90,000

1,20,000 1,40,000 90,000 50,000

17,81,000

17,81,000

Capital Account

To Realisation (Assets taken over) To Bank A/c (Settlement of amount)

P

Q

R

P

Q

R

Rs.

Rs.

Rs.

Rs.

Rs.

Rs.

By Balance b/d By Realisation 5,00,000

1,08,600

4,00,000 By Bank A/c (settlement of amount)

6,08,600 6,08,600

5,00,000

5,00,000

4,00,000

6,08,600

4,50,000 3,00,000 36,200

36,200

13,800

63,800

5,00,000 4,00,000

Bank Account Rs. To Balance b/d To Realisation A/c (Assets realised) To Q Capital To R Capital

Rs.

40,000 By Realisation A/c (Expenses paid) 6,96,000 By Realisation A/c 13,800 (Liabilities paid) 63,800 By P Capital A/c

1,93,000 6,08,600

8,13,600

8,13,600

12,000

1020

Financial Accounting

Working Note (a) Assets Realised Rs. Freehold property = 5,00,000 Investments = 75,000 Debtors = 1,15,000 Office furniture = 6,000 Total = 6,96,000 (b) Liabilities paid Sundry creditors = 1,85,000 Unrecorded liability = 8,000 Total = 1,93,000 Illustration 6 P, Q and R carrying on business as merchants and sharing profits and losses in the ratio of 2:2:1, dissolved their firm on December 31, 2004 on which date their Balance Sheet was as follows: Liabilities

Rs.

Assets

Sundry Creditors

20,300 Cash at Bank

Reserve Fund

10,000 Stock

Joint Life Policy Reserve Capital Accounts :

8,000 Debtors

Rs. 4,500 16,000 10,000

Rs.

Less : Provision

P

15,000

Joint Life Policy

500

11,000

9,500

Q

15,000

Premises

30,300

R

3,000

33,000 71,300

71,300

Note: There is a bill for Rs. 1,000 under discount. The bill was received from Z. The assets except cash at bank, joint life policy, were sold to a company which paid Rs. 65,000 in cash. The joint life policy was surrendered and Rs. 11,300 were received. Z proved insolvent and a dividend of 50% was received from his estate. Sundry Creditors were paid Rs. 19,500 in full settlement. The expenses amounted to Rs. 3,000. Prepare the Realisation Account, Cash Account and Partners’ Accounts. Solution Books of Partnership Firm Realisation Account To Stock To Debtors To Joint Life Policy To Premises To Bank (Liabilities paid) (19,500 + 1,000) To Bank (Expenses) To P Capital A/c To Q Capital A/c

Rs.

Rs.

16,000 10,000 11,000 30,300

500 20,300 8,000 65,000 11,300

By Provision for Debts By Sundry Creditors By Joint Life Policy Reserve By Bank (Assets realised) By Bank (Joint Policy) 20,500 By Bank (From Z) 3,000 1,000 ¥ 50% 5,920 5,920 2,960 1,05,600

500

1,05,600

Dissolution, Insolvency of Firm, Piecemeal Distribution...

1021

Capital Account

To Bank a/c

P

Q

R

P

Q

R

Rs.

Rs.

Rs.

Rs.

Rs.

Rs.

24,920

24,920

7,960 By Balance b/d By Reserve Fund By Realisation A/c

15,000 4,000

24,920

24,920

7,960

15,000 4,000

3,000 2,000

5,920

5,920

2,960

24,920

24,920

7,960

Bank Account To Balance b/d To Realisation A/c (Assets realised) To Realisation A/c (Joint Life Policy) To Realisation A/c (from Z)

Rs.

Rs.

4,500 By Realisation A/c : Creditors By Realisation A/c (Z Bills paid) 65,000 By Realisation (Expense) By P Capital A/c 11,300 By Q Capital A/c 500 By R Capital A/c (Amount settled)

19,500 1,000 3,000 24,920 24,920 7,960

81,300

81,300

Illustration 7 Read, Write and Add give you the following Balance Sheet as on December 31, 2004: Liabilities

Rs.

Read’s Loan Capital Accounts:

Rs.

Read

30,000

Write

10,000

Add

2,000

Sundry Creditors Loan on Hypothecation of Stock Joint Life Policy Reserve

Assets

Rs.

15,000 Plant and Machinery at cost

30,000

Fixtures and Fittings

2,000

Stock Debtors 42,000 Less: Provision 17,800 Joint Life Policy 6,200 Patents and Trade Marks 12,400 Cash at Bank 93,400

10,400 18,400 400

18,000 15,000 10,000 8,000 93,400

The partners Read, Write and Add shared profits and losses in the ratio of 4 : 2 : 3. The firm was dissolved on December 31, 2004 and you are given the following information: (a) Add had taken a loan from insurers for Rs. 5,000 on the security of the Joint Life Policy. The Policy was surrendered and insurer paid a sum of Rs. 10,200 after deducting Rs. 5,000 for Add’s loan for Rs. 300 interest thereon. (b) One of the creditors took some of the patents whose book value was Rs. 6,000 at a valuation of Rs. 4,500. The balance to that creditor was paid in cash. (c) The firm had previously purchased some shares in a joint stock company and had written them off on finding them useless. The shares were now found to be worth Rs. 3,000 and the loan creditor agreed to accept the shares at this value. (d) The remaining assets realised the following amounts: Plant and Machinery Rs. 17,000; Fixtures and Fittings Rs. 1,000; Stock Rs. 9,000 Debtors Rs. 16,500; Patents—50% of their book value

Financial Accounting

1022

(e) The liabilities were paid and a total discount of Rs. 500 was allowed by the creditors. (f) The expenses of realisation amounted to Rs. 2,300. Prepare the Realisation Account, Bank Account, and Partners’ Capital Accounts. Solution Books of Partnership Firm Realisation Account Rs. To Plant and Machinery To Fixtures and Fittings To Stock To Debtors To Joint Life Policy To Patents and Trademarks To Bank (Loan creditors Rs. 6,200 – Share taken Rs. 3,000) To Bank [Creditors Rs. 17,800 – Patents (50%) Rs. 5,000] To Bank (Expenses)

Rs.

30,000 2,000 10,400 18,400 15,000 10,000

By Provision for Debts By Sundry Creditors By Loan on Hypothecation of Stock By Joint Life Policy Reserve By Bank (Assets realised) (*) By Add Capital A/c (Loan Rs. 5,000 + Interest Rs. 300) By Read Capital A/c 3,200 By Write Capital A/c By Add Capital A/c (Realisation Loss)

400 17,800 6,200 12,400 55,700 5,300 2,800 1,400 2,100

12,800 2,300 1,04,100

1,04,100

Capital Account

To Realisation (Loss) To Realisation (Loan) To Bank A/c

Read

Write

Add

Read

Write

Rs.

Rs.

Rs.

Rs.

Rs.

2,800

1,400

2,100 By Balance b/d 5,300 By Bank A/c

30,000

10,000

2,000 5,400

7,400

30,000

10,000

7,400

27,200

8,600

30,000

10,000

Add Rs.

(*) Assets realised = Joint Life Policy (10,200) + Plant and Machinery (17,000) + Fixtures and Fittings (1,000) + Stock (9,000) + Debtors (16,500) + Patents (2,000) = Rs. 55,700 Bank Account Rs. To Balance b/d To Realisation A/c (Assets realised) To Add Capital A/c (amount settled)

Rs.

8,000 By Realisation A/c (Loan Rs. 3,200 + Creditors Rs. 12,800) 55,700 By Realisation A/c (Expenses) By Read’s Loan A/c 5,400 By Read’s Loan A/c By Write Capital A/c

16,000 2,300 15,000 27,200 8,600

69,100

69,100

Insolvency of Partners—Illustrations Index for Illustrations Type I

Ill. No. 1-2

II

When the Capital is Fixed

III

Insolvency of More Than One Partner

3 4

IV

When All Partners are Insolvent

5

Dissolution, Insolvency of Firm, Piecemeal Distribution...

1023

I – WHEN ONE PARTNER BECOMES INSOLVENT (CAPITAL IS FLUCTUATING) Illustration 1 A, B, C and D were partners sharing profits in the ratio of 3:2:3:2. Their Balance Sheet on the date of dissolution was as follows: Liabilities

Rs.

A’s Capital

Assets

Rs.

10,000 Assets

17,000

B’s Capital

5,000 C’s Capital

6,360

Reserve

4,000 D’s Capital

1,640

Creditors

6,000 25,000

25,000

On the above date, C becomes insolvent and was able to contribute only 50 paise in the rupee. Assets realised Rs. 12,500. Realisation expenses amounted to Rs. 400. Prepare Ledger Accounts. (B.Com., Madras) Solution Realisation Account To Assets A/c To Bank A/c (Creditors paid) To Bank A/c (Expenses)

Rs.

Rs.

17,000 By Creditors A/c 6,000 By Bank A/c (Assets realised) 400 By A’s Capital A/c By B’s Capital A/c By C’s Capital A/c By D’s Capital A/c (Realisation loss)

6,000 12,500 1,470 980 1,470 980

23,400

23,400

Capital Account

To Balance b/d To Realisation A/c To C Capital To Bank

A

B

C

D

A

B

C

D

Rs.

Rs.

Rs.

Rs.

Rs.

Rs.

Rs.

Rs.

6,360 1,470

1,640 By Balance b/d 10,000 980 By Reserve 1,200 By Bank 1,470 A Capital (b) B Capital (b)

5,000 800 980

7,830

2,620

6,780

1,470

980

2,184 9,016

1,131 4,669

12,670

6,780

12,670

1,200 3,315 2,184 1,131

800 1,820

7,830

2,620

Bank Account Rs. To Realisation A/c (Assets realised)

Rs.

12,500

Application of Garner vs.Murray realisation loss, as D has debit balance of Capital A/c even though he is solvent.

Financial Accounting

1024

cash to adjust the loss in C’s Capital A/c (a) Capital ratio of solvent partners A Capital Balance Reserve Transfer

B

10,000 1,200

5,000 800

11,200

5,800

(b) Amount brought in by the solvent partners A and B C’s Capital A/c Capital Balance (Dr.) (+) Realisation Loss (–) Reserve Transfer

6,360 1,470 (1,200)

(–) 50% Cash brought in by him

6,630 (3,315) 3,315

ratio = 11,700:5.800 3,315 ¥ 112/170 3,315 ¥ 58/170

2,184 1,131

Illustration 2 Raman, Krishnan and Murugan were partners in a firm. They shared profits and losses in the proportion of 4:3:3. The firm was dissolved and Krishnan was appointed to realise the assets and distribute the proceeds. Krishnan is to receive 5% commission on the amounts realised from sale of assets and is to bear all expenses of realisation. The following was the balance sheet on the date of dissolution: Liabilities Creditors

Rs.

Assets

Rs.

29,500 Cash

Capital Accounts:

Debtors

Raman

15,000 Less: Provision

Krishnan

10,000 Stock Murugan - Capital Overdrawn 54,500

750 22,750 1,250

21,500 30,000 2,250 54,500

Rs. 17,500 was collected from debtors in full settlement. Stock realised Rs. 22,500; Goodwill Rs. 1,000. Creditors were paid Rs. 28,750 in full settlement. In addition, outstanding creditors were also paid Rs. 250. The expenses of dissolution amounted to Rs. 300. Raman and Krishnan received Rs. 1,500 from Murugan in full settlement of accounts. Show the Realisation Account, the Cash Account and the Capital Accounts of the partners in the books of the firm.

Dissolution, Insolvency of Firm, Piecemeal Distribution...

1025

Solution Realisation Account Rs. To Debtors To Stock To Cash (Outstanding creditors paid) To Cash (Creditors paid) To Krishnan Capital A/c Commission = 41,000 @ 5%)

22,750 30,000 250 28,750 2,050

Rs. By Provision for Debt By Sundry Creditors By Cash (Assets realised) (17,500 + 22,500 + 1,000) By Raman Capital A/c By Krishnan Capital A/c By Murugan Capital A/c (Realisation Loss)

83,800

1,250 29,500 41,000 4,820 3,615 3,615 83,800

Capital Account Raman Krishnan Murugan Rs. To Balance b/d (Capital Overdrawn) To Realisation A/c (Loss) To Cash A/c To Murugan A/c (3:2) (a), (b) To Cash a/c

Rs.

4,820

3,615 300

2,619 12,381

1,746 10,004

19,820

15,665

Raman

Rs.

Krishnan Murugan

Rs.

By Balance b/d 2,250 By Realisation Commission due 3,615 By Cash A/c (Cash brought for realisation loss) By Cash A/c By Raman A/c (b) By Krishnan A/c

15,000

5,865

19,820

Rs.

Rs.

10,000 2,050

3,615

4,820

1,500 2,619 1,746 15,665

5,865

Cash Account Rs. To Balance b/d To Realisation A/c (Assets realised) To Raman Capital A/c To Krishnan Capital A/c To Murugan Capital A/c

750 41,000 4,820 3,615 1,500

Rs. By Sundry Creditors By Krishnan Capital (Expenses on dissolution met by him) By Realisation A/c (Outstanding creditors paid) By Raman Capital A/c By Krishnan Capital A/c

28,750 300 250 12,381 10,004

51,685

51,685

Application of Garner vs.Murray balance, he could not be asked to compensate the deficiency of insolvency.

realisation loss. (c) Capital ratio of solvent partners Raman

Krishnan

Capital Balance

15,000

10,000

Capital Ratio

15

10

3

2

Financial Accounting

1026

(d) Amount brought in by the solvent partners A and B Murugan Capital A/c Capital Balance (Dr.) (+) Realisation Loss

2,250 3,615 5,865

Cash brought in by Murugan

(1,500) 4,365

in the capital ratio = 3:2 4,365 ¥ 3/5 4,365 ¥ 2/5

2,619 1,746

II – WHEN THE CAPITAL IS FIXED Illustration 3 A, B and C were in partnership sharing profits and losses in the ratio of 8:5:3. The Capital Accounts were fixed under the partnership agreement, and as a result of continuous losses, the firm resolved to dissolve the partnership. The Balance Sheet of the firm was as follows: Liabilities

Rs.

Assets

Rs.

A Capital A/c

10,000 A Current A/c

4,390

B Capital A/c

4,000 B Current A/c

3,466

C Capital A/c

2,000 C Current A/c

3,040

Sundry Creditors

5,906 Plant

2,100

11,000 Stock

12,118

Bank Loan

Sundry Debtors Cash 32,906

7,144 648 32,906

The firm’s assets were realised as – Plant Rs. 1,200; Stock Rs. 10,460; Debtors Rs. 7,110. C was adjudicated as insolvent and could contribute nothing towards his deficiency in the firm. You are required to close the books of the firm in accordance with decision in Garner vs. Murray. Solution Books of Partnership Firm Realisation Account Rs. To Plant To Stock To Sundry Debtors To Cash (Creditors paid) To Cash (Loan paid)

2,100 12,118 7,144 5,906 11,000

38,268

Rs. By Sundry Creditors By Bank Loan By Cash (Assets realised) (1,200 + 10,460 + 7,110) By A Current A/c By B Current A/c By C Current A/c (Realisation Loss)

5,906 11,000 18,770 1,296 810 486 38,268

Dissolution, Insolvency of Firm, Piecemeal Distribution...

1027

Capital Account

To C current A/c To A and B Current A/c To Cash (Amount paid)

A

B

C

A

B

C

Rs.

Rs.

Rs.

Rs.

Rs.

Rs.

10,000

4,000

3,902

3,526 By Balance b/d By A’s Capital A/c (b) By B Capital A/c (b)

2,000 1,090 436

3,526

10,000

4,000

3,526

5,480 4,520

98

10,000

4,000

Current Account

To Balance b/d To Realisation A/c (Loss) To C Capital A/c

A

B

C

A

B

C

Rs.

Rs.

Rs.

Rs.

Rs.

Rs.

4,390

3,466

1,296 1,090

810 436

3,040 By C Capital A/c By Cash (Cash 486 brought for realisation loss) By Capital A/c

1,296 5,480

810 3,902

6,776

4,712

3,526

6,776

4,712

3,526

3,526

Cash Account Rs. To Balance b/d To Realisation A/c To A Current A/c To B Current A/c

648 18,770 1,296 810

Rs. By Realisation A/c By Realisation A/c By A Capital A/c By B Capital A/c (Amount paid)

5,906 11,000 4,520 98

21,524

21,524

Application of Garner vs. Murray cash to compensate his share of realisation loss or amount to make good the deficiency of the firm. realisation loss and bring cash to make good the deficiency of C and the firm in the capital ratio. deficiency in the firm. (e) Capital ratio of solvent partners A

B

Capital Balance

10,000

4,000

Capital Ratio

10

4

5

2

(f) Amount brought in by the solvent partners A and B C Capital A/c Capital Balance (Cr.) (–) Current Balance (Dr.) (–) Realisation Loss

2,000 (3,040) (486) 1,526

1,526 ¥ 5/7 1,526 ¥ 2/7

1,090 436

Financial Accounting

1028

III – INSOLVENCY OF MORE THAN ONE PARTNER Illustration 4 P, Q and R are partners sharing profits and losses as 5:3:2. The business is dissolved on 31st December, 2008 when the Balance Sheet stands as below: Liabilities

Rs.

P Capital A/c Q Capital A/c R Capital A/c Creditors

Assets

10,000 40,000 20,000 1,00,000

Bank Debtors Stock Motor Bike Machinery

1,70,000

Rs. 5,000 45,000 60,000 10,000 50,000 1,70,000

Machinery and stock were sold for Rs. 25,000 and Rs. 18,000, respectively. Motor bike is taken by Q for Rs. 12,000. Debtors realised Rs. 20,000. The partnership agreement stipulated that the deficiency of any partner in Capital Account is to be met by other partners in profit and loss sharing ratio. P is insolvent and R could bring in Rs. 5,000 only. Prepare the accounts in the books of the firm. (B.Com., Calcutta) Solution Books of Partnership Firm Realisation Account Rs. To Machinery To Motor Bike To Stock To Debtors

50,000 10,000 60,000 45,000

Rs. By Bank (Assets realised) By Q Capital A/c (Motor bike taken by him) By P Capital A/c By Q Capital A/c By R Capital A/c (Realisation loss)

1,65,000

63,000 12,000 45,000 27,000 18,000 1,65,000

Bank Account Rs. To Balance b/d To Realisation A/c (Assets realised) To R’s Capital A/c To Q’s Capital A/c

5,000 By Creditors (Paid)

Rs. 1,00,000

63,000 5,000 27,000 1,00,000

1,00,000

*Creditors Account To Bank

Rs.

Rs.

1,00,000 By Balance

1,00,000

Dissolution, Insolvency of Firm, Piecemeal Distribution...

1029

Capital Account

To Realisation (Bike takenover) To Realisation (Loss) To Q and R Capital A/c

P

Q

R

P

Q

R

Rs.

Rs.

Rs.

Rs.

Rs.

Rs.

By Balance b/d By Q and R Capital

12,000

10,000

40,000

20,000

35,000 45,000

27,000

18,000 By Bank By Q Capital A/c

21,000

14,000 By Bank (Towards realisation loss)

5,000 7,000

To R’s Capital

27,000

7,000 45,000

67,000

32,000

45,000

67,000

32,000

Application of Garner vs. Murray

equivalent to realisation loss. (g) Amount brought in by the solvent partners A and B Insolvent partners

P

Capital Balance (–) Realisation Loss

10,000 (45,000)

R 20,000 (18,000)

35,000 Surplus

Nil 2,000

Cash brought in by Murugan

5,000 35,000

Total Surplus

Nil 7,000

ratio (3:2) 35,000 ¥ 3/5 (Q) 35,000 ¥ 2/5 (R)

21,000 14,000

IV – WHEN ALL PARTNERS ARE INSOLVENT Illustration 5 A and B were in equal partnership. Their Balance Sheet stood as under on 31st December, 1999 when the firm was dissolved: Liabilities Creditors A’s Capital A/c

Rs.

Assets

3,200 Machinery 400 Furniture

1,200 300

Debtors

500

Stock

400

Cash B’s Drawings 3,600

Rs.

180 1,020 3,600

The assets realised – Machinery Rs. 600; Furniture Rs. 100; Debtors Rs. 400; Stock Rs. 300. The expenses of realisation amounted to Rs. 140. A’s private estate

1030

Financial Accounting

is not sufficient even to pay his private debts, whereas in B’s private estate there is a surplus of Rs. 140 only. Give necessary accounts to close the books of the firm. (B.Com., Calcutta) Books of Partnership Firm Realisation Account To Machinery A/c To Furniture A/c To Debtors A/c To Stock A/c To Cash A/c (Realisation expenses)

Rs.

Rs.

1,200 By Cash A/c (Assets realised) 300 By A’s Capital A/c 500 By B’s Capital A/c (Realisation loss) 400 140

1,400 570 570

2,540

2,540

Sundry Creditors Account Rs. To Cash A/c

Rs.

1,580 By Balance b/d 1,620

3,200

3,200

3,200

Capital Account A

B

A

B

Rs.

Rs.

Rs.

Rs.

To Balance b/d To Realisation A/c (Loss)

570 570

1,020 By Balance b/d 570 By Cash A/c 1,590

400 170

140 1,450

570

1,590

Cash Account Rs. To Balance b/d To Realisation A/c (Assets realised) To B’s Capital A/c

Rs.

180 By Realisation A/c (Expense) 1,400 By Sundry Creditors 140

140 1,580

1,720

1,720

Deficiency Account Rs. To A’s Capital A/c To B’s Capital A/c

Rs.

170 By Sundry Creditors 1,450

1,620

1,620

1,620

Note

The cash surplus was paid accordingly and the balance in Creditor’s A/c transferred to Deficiency A/c; A/c.

Dissolution, Insolvency of Firm, Piecemeal Distribution...

1031

Piecemeal Distribution—Illustrations Index for Illustrations Type

Ill. No.

I

Surplus Capital Method and Maximum Loss Method

1

II

Maximum Loss Method

2

I – SURPLUS CAPITAL METHOD AND MAXIMUM LOSS METHOD Illustration 1 A, B and C are partners sharing profits and losses as 5:3:2. The following is their Balance Sheet as at 31st December, 1999 when they dissolve the business. Liabilities

Rs.

Assets

Rs.

Creditors

40,000 Premises

40,000

A’s Loan A/c

10,000 Plant

30,000

A’s Capital A/c

50,000 Stock

30,000

B’s Capital A/c

15,000 Debtors

60,000

C’s Capital A/c

45,000 1,00,000

1,00,000

It was agreed to repay the amount due to the partners as and when the assets were realised – 1st February Rs. 30,000; 1st April Rs. 73,000; 1st June Rs. 47,000. Prepare the statement showing how the distribution should be made under (a) Surplus Capital Method and (b) Maximum Loss Method and write the Cash Account and Partners’ Capital Accounts. (B.Com., Madurai) (a) Surplus Capital Method Statement showing the distribution of surplus based on profit and loss sharing ratio

Capital Balance 50,000/5 = 10,000; 15,000/3 = 5,000 45,000/2 = 22,500

A

B

5

3

C 2

Rs. 50,000

Rs. 15,000

Rs. 45,000

10,000

5,000

22,500

Of the above, B capital share is least (5,000), which is considered as the base and multiply with ratio 5,000 ¥ 5 = 25,000; 5,000 ¥ 3 = 15,000 5,000 ¥ 2 = 10,000

25,000

15,000

10,000 (c)

Surplus Capital (Difference between capital balance and the previous step) 50,000 – 25,000 = 25,000; 15,000 – 15,000 = 0; 45,000 – 10,000 = 35,000

25,000

Nil

35,000 (b)

25,000/5 = 5,000; Nil; 35,000/2 = 17,500 Since A’s share is least (5,000), to be considered as the base and multiply with ratio 5,000 ¥ 5 = 25,000; Nil; 5,000 ¥ 2 = 10,000

25,000

Nil

10,000

Nil

Nil

25,000 (a)

Financial Accounting

1032

Distribution of Cash Creditors Balance

A’s Loan

40,000

Cash Balance

10,000

A

B

50,000

C

15,000

45,000

Nil

I. Realised To creditors

30,000 (30,000)

II. Realised To creditors To A’s Loan To C (a)

73,000 (10,000) (10,000) (25,000)

(30,000) 10,000

Balance to be divided based on the next priority A = 25,000 C = 35,000 – 25,000 = 10,000 i.e. 5:2 A = 28,000 ¥ 5/7 B = 28,000 ¥ 2/7 (b)

(10,000) (10,000) (25,000)

28,000

20,000 Nil

Nil

(8,000)

30,000

15,000

12,000

47,000

III. Realised To be divided between A and C to A = 25,000 (due) – 20,000 (paid) = 5,000 B = 35,000 (due) – 33,000 (paid) = 2,000

(5,000)

(5,000)

(2,000)

To be paid to all the partners on

40,000

capital of the partners are paid as per the priority 40,000 ¥ 5/10, 3/10, 2/10

(40,000)

(2,000)

Loss borne by partners

25,000

15,000

10,000

(20,000)

(12,000)

(8,000)

5,000

3,000

2,000

Capital Account

1/4 To Cash To Cash 1/6 To Cash To Cash To Realisation (Loss)

A

B

C

A

B

C

Rs.

Rs.

Rs.

Rs.

Rs.

Rs.

20,000 5,000 20,000

12,000

25,000 31/12 By Balanced b/d 8,000 2,000 8,000

5,000

3,000

2,000

50,000

15,000

45,000

50,000

15,000 45,000

50,000

15,000 45,000

Cash Account Rs.

Rs.

1/2

To Realisation A/c

30,000

1/2

By Creditors A/c

30,000

1/4

To Realisation A/c

73,000

1/4

By Creditors A/c By A’s Loan A/c By C’s Capital A/c By A’s Capital A/c By C’s Capital A/c

10,000 10,000 25,000 20,000 8,000 Contd.

Dissolution, Insolvency of Firm, Piecemeal Distribution...

1033

Contd. Rs. 1/6

To Realisation A/c

Rs.

47,000

1/6

By A’s Capital A/c By C’s Capital A/c By A’s Capital A/c By B’s Capital A/c By C’s Capital A/c

5,000 2,000 20,000 12,000 8,000

1,50,000

1,50,000

(b) Maximum Loss Method Statement on distribution of cash Creditors Balance

A’s Loan

40,000

10,000

A

B

C

50,000

15,000

45,000

50,000

15,000

45,000

(28,500)

(17,100)

(11,400)

21,500

(2,100)

33,600

shared in capital ratio = 50:45

(1,105)

2,100

(995)

Balance Paid

20,395

Nil

32,605

29,605

15,000

I. Realisation Paid to Creditors

30,000 (30,000)

II. Realisation Paid to Creditors Paid to A’s Loan

73,000 (10,000) (10,000)

(10,000)

(10,000)

53,000

Nil

Nil

(30,000) 10,000

Total Capital Rs. 1,10,000 (–) Cash available

A = 50,000 (–) 20,395 = Rs. 29,605 B = Rs. 15,000 C = 45,000 (–) 32,605 = Rs. 12,395 Total of 29,605 + 15,000 + 12,395 = 57,000 (fund required) III. Realisation = 47,000 57,000 – 47,000 = 10,000

12,395

Thus, the III realisation is paid as mentioned Loss to Partners

(5,000)

(3,000)

(2,000)

24,605

12,000

10,395

5,000

3,000

2,000

Capital Account

1/4 1/6

To Cash To Cash To Realisation (Loss)

A

B

C

A

B

C

Rs.

Rs.

Rs.

Rs.

Rs.

Rs.

20,395 24,605

12,000

32,605 31/12 By Balance b/d 10,395

5,000

3,000

2,000

50,000

15,000

45,000

50,000

15,000

45,000

50,000

15,000

45,000

Financial Accounting

1034

Cash Account Rs.

Rs.

1/2

To Realisation A/c

30,000

1/2

By Creditors A/c

30,000

1/4

To Realisation A/c

73,000

1/4

By Creditors A/c By A’s Loan A/c By A’s Capital A/c By C’s Capital A/c

10,000 10,000 20,395 32,605

1/6

To Realisation A/c

47,000

1/6

By A’s Capital A/c By B’s Capital A/c By C’s Capital A/c

24,605 12,000 10,395

1,50,000

1,50,000

II – MAXIMUM LOSS METHOD Illustration 2 X, Y and Z were in partnership sharing profits and losses in the proportion of 1/2, 1/3 and 1/6, respectively. The partnership was dissolved on 30th June, 2004 when the position was as follows: Liabilities

Rs.

Capital:

Assets Cash in Hand

X

1,40,000

Y

70,000

Z

14,000

Creditors

Rs. 28,000

Sundry Debtors

2,94,000

Stock in Trade

1,12,000

2,24,000 2,10,000 4,34,000

4,34,000

There was a bill for Rs. 10,000 due on 30th November, 2004 under discount. It was agreed that the net realisations should be distributed in their due order (at the end of each month) but as safely as possible. The realisation and expenses were as under: Stock and Debtors (Rs.) 31.7.2004 31.8.2004 30.9.2004 31.10.2004 30.11.2004

84,000 1,26,000 70,000 77,000 35,500

Expenses (Rs.) 7,000 5,400 4,900 3,500 3,500

The stock was completely disposed of and amounts due from debtors were realised, the balance being irrecoverable. The acceptor of the bill under discount met the bill on the due date. Prepare the Statement showing the cash distributed based on Maximum Loss Method. (B.Com., Madurai)

Dissolution, Insolvency of Firm, Piecemeal Distribution...

1035

Solution Net Realised Amount Stock and Debtors (Rs.)

Expenses (Rs.)

Net Realised Amount (Rs.)

31/7

84,000

7,000

77,000

31/8

1,26,000

5,400

1,20,600

30/9

70,000

4,900

65,100

31/10

77,000

3,500

73,500

30/11

35,500

3,500

32,000

Statement Showing Distribution of Cash Cash

Creditors

X

Y

Z

Rs.

Rs.

Rs.

Rs.

Rs.

1,40,000

70,000

14,000

1,40,000

70,000

14,000

Balance in Balance Sheet

28,000

2,10,000

Cash Paid to Creditors

28,000

(28,000)

Nil

1,82,000

31/7 Realised Paid to Creditors Balance 31/8 Realised Paid to creditors Available Cash Liability on Bill Balance

77,000 (77,000)

(77,000)

Nil

1,05,000

1,20,600 (1,05,000)

(1,05,000)

15,600

Nil

(10,000) 5,600

Maximum Loss = (1,40,000 + 70,000 + 14,000) = 2,24,000 – Cash Balance (5,600) = 2,18,400, allocated in 3:2:1

Cash Paid to X Balance due = 1,40,000 – 5,600 = 1,34,400

1,09,200

72,800

36,400

30,800

(2,800)

(22,400)

(25,200)

2,800

22,400

5,600

Nil

Nil 14,000

5,600

(5,600)

–

1,34,400

70,000

30/9 Realised Maximum Loss (1,34,400 + 70,000 + 14,000) = 2,18,400 (–) Realised Amount (65,100) = Rs. 1,53,300, allocated in 3:2:1

76,650

51,100

25,550

among X and Y in 2:1

57,750 (7,700)

18,900 (3,850)

(11,550) 11,550

50,050 (50,050)

15,050 (15,050)

Nil –

84,350

54,950

14,000

39,900

26,600

13,300

Cash Paid to X and Y Balance due = 1,34,400 – 50,050 = 84,350 (X) 70,000 – 15,050 = 54,950 (Y) 14,000 (Z) 31/10 Realised Maximum Loss (84,350 + 54,950 + 14,000) = 1,53,300 (–) realised amount (73,500) = 79,800 allocated in 3:2:1

65,100 –

73,500

Contd.

1036

Financial Accounting

Contd. 44,450 (44,450)

28,350 (28,350)

700 (700)

39,900 (18,900)

26,600 (12,600)

13,300 (6,300)

Cash Paid to Partners

21,000

14,000

7,000

Loss Borne by Partners

18,900

12,600

6,300

Cash paid to X, Y and Z

73,500

30/11 Realisation Amount realised (32,000) + Bill amount received (10,000) = Total Rs. 42,000 Maximum Loss = (39,900 + 26,600 + 13,300) = 79,800 (–) Realised Amount (42,000) = 37,800, allocated in 3:2:1

42,000

Amalgamation of Firm—Illustrations Index for Illustrations Type I

Two Individual Business Forming Partnership Firm

II

Partnership Converted to Company

Ill. No. 1 2-3

I – TWO INDIVIDUAL BUSINESS CONCERNS FORMING PARTNERSHIP FIRM Illustration 1 Mr. Singh and Mr. Khan have been carrying on business as general merchants. They decide to amalgamate and henceforth, trade under the name of Singh and Khan on the following terms: 1. 2. 3. 4.

Each partner shall have a fixed capital of Rs. 10,000. Singh’s stock is to be brought in at Rs. 3,200 and Khan’s at Rs. 2,700. Provisions for bad debts are to be increased to 6% on debtors. Khan’s furniture is not to be taken over while Singh’s furniture is to be taken at Rs. 450. 5. Singh is to pay the loan from his son before amalgamation. 6. Any deficiency on the net assets brought in is to be paid into the firm’s bankers while any excess is to be withdrawn. Singh’s Balance Sheet as on 31st December, 2005 Particulars Creditors Loan from his Son Capital

Rs.

Particulars

1,200 Furniture and Fixtures 600 Machinery 10,635 Stock in Trade Debtors Less: Provision Cash at Bank 12,435

Rs. 350 5,000 3,400 2,750 120 2,630 1,055 12,435

Dissolution, Insolvency of Firm, Piecemeal Distribution...

1037

Khan’s Balance Sheet as on 31st December, 2005 Particulars Creditors Capital

Rs.

Particulars

Rs.

2,100 Furniture and Fixtures 10,100 Machinery Stock in Trade Debtors Less: Provision

200 5,500 2,800 3,025 125 2,900 800

Cash at Bank 12,200

12,200

Give Journal Entries necessary to adjust each trader’s books prior to Amalgamation and the opening entries in the New Firm named as SK Firm and its Balance Sheet. Solution Books of Singh Journal Entries Particulars Revaluation A/c To Stock in Trade A/c To Provision for Debts A/c

L.F. Dr.

Dr. (Rs.)

Cr. (Rs.)

245 200 45

(Being the reduction in the value of stock and increase in the provision for debtors debited to Revaluation A/c) Furniture and Fixtures A/c To Revaluation A/c

Dr.

100 100

(Being increase in the value of Furniture credited to Revaluation A/c) Singh’s Capital A/c To Revaluation A/c

Dr.

145 145

(Being loss on revaluation transferred to Singh’s Capital A/c) Loan from his Son A/c To Bank A/c

Dr.

600 600

(Being loan due to his son paid by Singh) SK Firm A/c Creditors A/c Provision for Bad Debts A/c To Furniture and Fixtures A/c To Machinery A/c To Stock A/c To Debtors A/c To Bank A/c

Dr. Dr. Dr.

10,490 1,200 165 450 5,000 3,200 2,750 455

(Being transfer of assets and liabilities to SK Firm) Singh’s Capital A/c To SK Firm A/c

Dr.

10,490 10,490

1038

Financial Accounting

Books of Khan Journal Entries Particulars Revaluation A/c To Stock in Trade A/c To Provision for Debts A/c

L.F. Dr.

Dr. (Rs.)

Cr. (Rs.)

157 100 57

(Being the reduction in the value of stock and increase in provision on debts debited to Revaluation A/c) Khan’s Capital A/c To Furniture and Fixtures A/c

Dr.

200 200

(Being furniture taken over by Khan accounted in his Capital A/c) Khan’s Capital A/c To Revaluation A/c

Dr.

157 157

(Being loss on Revaluation A/c debited to Khan’s Capital A/c) SK Firm A/c Creditors A/c Provision for Debts A/c To Machinery A/c To Stock A/c To Debtors A/c To Bank A/c

Dr. Dr. Dr.

9,743 2,100 182 5,500 2,700 3,025 800

(Being transfer of assets and liabilities to SK Firm) Khan’s Capital A/c To SK Firm A/c

Dr.

9,743 9,743

Books of SK Firm Journal Entries Particulars Furniture A/c Machinery A/c Stock A/c Debtors A/c Bank A/c To Creditors A/c To Provision A/c To Singh’s Capital A/c

Dr. (Rs.) Dr. Dr. Dr. Dr. Dr.

Cr. (Rs.)

450 5,000 3,200 2,750 455 1,200 165 10,490

(Being assets and liabilities taken over from the Singh business) Machinery A/c Stock A/c Debtors A/c Bank A/c To Creditors A/c To Provision for Debts A/c To Khan’s Capital A/c

Dr. Dr. Dr. Dr.

5,500 2,700 3,025 800 2,100 182 9,743

(Being assets and liabilities taken over from the Khan business) Singh’s Capital A/c To Cash A/c

Dr.

490 490

(Being excess capital of Singh is paid to him) Cash A/c To Khan’s Capital A/c (Being cash brought by Khan) (Being cash required is brought by Khan)

Dr.

257 257

Dissolution, Insolvency of Firm, Piecemeal Distribution...

1039

Balance Sheet of Khan (Revised) as on 31st December, 2005 Liabilties

Rs.

Creditors Capital

Assets

Rs.

2,100 Machinery 9,743 Stock Debtors (–) Provision for debts Cash at Bank

5,500 2,700 3,025 182

12,200

2,843 800 12,200

Balance Sheet of Singh (Revised) as on 31st December, 2005 Liabilties

Rs.

Creditors Capital

Assets

Rs.

1,200 Furniture 10,490 Machinery Stock Debtors (–) Provision for debts Cash at Bank

450 5,000 3,200 2,750 165

11,690

2,585 455 11,690

Balance Sheet of SK Firm as on 31st January, 2006 Particulars Sundry Creditors Capital: Singh Khan

Rs.

10,000 10,000

Particulars

3,300 Furniture and Fixtures A/c Machinery Account Stock Account Debtors Account 20,000 Less: Provision

Rs. 450 10,500 5,900 5,775 347 5,428 1,022

Cash Account 23,300

23,300

Cash Account Particulars

Rs.

To Singh To Khan To Khan’s Capital (Rs. 10,000 – 9,743)

Particulars

Rs.

455 By Singh Capital Account 800 (Rs. 10,490 – 10,000) By Balance c/d 257

490 1,022

1,512

1,512

II – PARTNERSHIP CONVERTED TO COMPANY Illustration 2 Black, White and Green are in partnership. Their profit sharing ratio is 1/2, 1/3 and 1/6, respectively. They decide to convert their form into a private limited company as BWG Private Ltd. on 31st March, 2005. Their Balance Sheet as on the date was as follows: Particulars Creditors Capital: Black Green White

Rs. 8,000 Land and Buildings Stock 17,400 Debtors 8,000 Less: Provision 6,000 Cash 39,400

Particulars

Rs. 11,400 10,000 10,000 1,000 9,000 6,000 3,000 39,400

1040

Financial Accounting

BWG Private Ltd. was incorporated on 31st March, 2005 with an authorised capital of Rs. 50,000 (500 shares of Rs. 100 each) for the purpose of purchasing and continuing the partnership business of Black, Green and White. Rs. 32,900 was the purchase price, which was paid by allotment of 180 shares (fully paid) in BWG Private Ltd. and the balance in cash. The company then issued the remaining shares to Brown and Blue in equal proportion, which paid for them in full. Pass the journal entries necessary to close the books. Solution Books of Black, White and Green Journal Entries Particulars Realisation A/c To Bank A/c To Stock A/c To Debtors A/c To Cash A/c

Dr. (Rs.) Dr.

Cr. (Rs.)

37,400 11,400 10,000 10,000 6,000

(Being the assets are transferred to Realisation A/c) Creditors A/c Provision for Debts A/c To Realisation A/c

Dr. Dr.

8,000 1,000 9,000

(Being the liabilities are transferred to Realisation A/c) BWG Private Ltd. A/c To Realisation A/c

Dr.

32,900 32,900

(Being the purchase consideration recorded) Realisation A/c To Black A/c To White A/c To Green A/c

Dr.

Black Capital A/c White Capital A/c Green Capital A/c

Dr. Dr. Dr.

4,500 2,250 1,500 750

1,500 1,000 500 3,000

Shares in BWG Private Ltd. A/c Cash A/c To BWG Private Ltd. A/c

Dr. Dr.

18,000 14,900 32,900

(Being purchase consideration received in the form of shares in the new company and cash) Black Capital A/c White Capital A/c Green Capital A/c To Share in BWG Private Ltd. A/c

Dr. Dr. Dr.

9,000 6,000 3,000 18,000

(Being distribution of shares among partners) Black Capital A/c White Capital A/c Green Capital A/c To Cash A/c (Being distribution of cash among partners)

Dr. Dr. Dr.

9,150 2,500 3,250 14,900

Dissolution, Insolvency of Firm, Piecemeal Distribution...

1041

Capital Account Particulars

Share in BWG Cash A/c (Balance)

Black

White

Green

Rs.

Rs.

Rs.

Particulars

1,500 9,000 9,150

1,000 6,000 2,500

500 Balance b/d 3,000 3,250

19,650

9,500

6,750

Black

White

Rs.

Rs.

Green Rs.

17,400 2,250

8,000 1,500

6,000 750

19,650

9,500

6,750

*Realisation Loss = 37,400 – 9,000 – 32,900 = Loss Rs. 4,500 divided in the given ratio

Illustration 3 A and B are in partnership sharing profits and losses as to two-thirds and one-third, respectively. Their Balance Sheet in December, 2005 on which date they have agreed to convert their business into a private limited company is as follows: Particulars Sundry Creditors Mortgage on Freehold Premises Capitals: A B

Rs.

20,000 10,000

Particulars

Rs.

30,000 Cash 10,000 Sundry Debtors Stock Plant and Machinery 30,000 Freehold premises

7,000 26,000 16,000 5,000 16,000

39,400

39,400

The company takes over all the assets and liabilities with the exception of the mortgage on freehold premises the purchase price being Rs. 60,000 payable as to Rs. 12,000 in cash, Rs. 24,000 in debentures and the balance in equity shares of the company. Close the books of the firm after the above transactions have been carried out including the payment of mortgage. The partners agree to share the debentures and shares in proportions of their capital. (B.Com., Andhra, Mano. Sundaranar, Kerala) Solution Books of Partnership Firm Realisation Account Rs. Cash A/c Sundry Debtors A/c Stock A/c Plant and Machinery A/c Freehold Premises A/c A’s Capital A/c B’s Capital A/c

Rs.

7,000 Sundry Creditors A/c 26,000 Private Ltd. Company A/c 16,000 (Purchase consideration) 5,000 16,000 13,333 6,667

30,000

90,000

90,000

60,000

Mortgage on Freehold Premises To Cash A/c

Rs.

Rs.

10,000 By Balance b/d

10,000

10,000

10,000

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Financial Accounting

Private Limited Company To Realisation A/c

Rs.

Rs.

60,000 By Cash A/c By Debentures A/c

12,000 24,000 24,000

60,000

60,000

Capital Account A (Rs.) To Shares A/c To Debentures (Both in capital ratio)

B (Rs.)

16,000

8,000 By Balance b/d

16,000 1,333

8,000 667

33,333

60,000

A (Rs.)

B (Rs.)

20,000 13,333

10,000 6,667

33,333

60,000

Cash Account Rs. To Balance b/d To Private Ltd. Co.

7,000 By Realisation A/c 12,000 By Mortgage on Freehold Premises By A’s Capital A/c By B’s Capital A/c (Cash settled) 19,000

Rs. 7,000 10,000 1,333 667 19,000

Points to Remember There are different methods of dissolution of firm. They are—Dissolution by agreement, by notice, by Court, compulsory dissolution. Dissolution on happenings of certain events. 1932 are applied for settlement of loss, application of assets, treatment of firm’s debts and private debts, etc. bring in cash to make up his deficiency, he is said to be an insolvent. the deficiency of insolvent partner is being shared by solvent partners in their capital ratios. payment of liabilities and capital of partners. business is said to be amalgamation of firms.

Examination Questions I. Objective Questions 1. Fill in the blanks (i) The expenses of realisation are ___________to Realisation Account.

Dissolution, Insolvency of Firm, Piecemeal Distribution...

1043

(ii) The realisation loss is distributed in _________ratio. (iii) Unrecorded asset taken over by a partner is __________ to Partner’s Capital Account. (iv) The assets of the firm are first used for making payment to the creditors of the _________. (v) The assets taken over by the new firm are ___________ to the new firms account. 2. Choose the correct answers (i) In Dissolution, Garner Reserve is transferred to (a) Capital Accounts of partners (b) Realisation Account (c) Bank Account (d) None of these (ii) Amount paid towards unrecorded liability is shown in (a) Bank account (b) Liability A/c (c) Realisation A/c (d) Capital A/c (iii) Section 41 of the Indian Partnership Act, 1932, deals with (a) Dissolution by notice (b) Dissolution by Court (c) Compulsory Dissolution (d) None of these (iv) According to Garner vs. Murray’s case rule, the deficiency of insolvent partner shall be distributed by solvent partners in (a) Profit sharing ratio (b) Capital ratio (c) Sacrificing ratio (d) None of these (v) In Amalgamation of firms, if assets are not taken over by new firm, they are transferred to (a) New Firms Account (b) Revaluation Account (c) Realisation Account (d) Partners Capital Account 3. Match the following (a)

Garner vs. Murray

(ii)

(i) Insolvency of a partner

(b)

Surplus capital

(iii)

Piecemeal distribution

(c)

By notice

(iv)

Amalgamation

(d)

(v)

(e)

4. State whether the following statement are True or False: (a) Assets realised are debited to Realisation Account. (b) Dissolution of firm means closure of partnership firm permanently. (c) Proportionate Capital Method is also known as Surplus Capital Method.

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Financial Accounting

(d) The partnership of Garner, Murray and Wilkins was dissolved. (e) Under Piecemeal distribution, assets are realised gradually and payments are made gradually. Answers 1. (i) (iv) 2. (i) 3. (i) 4. (i)

Debited; Firm; a; c; False;

(ii) (v) (ii) (ii) (ii)

Profit Sharing; (iii) Debited; debited c; (iii) c; (iv) b; (v) d a; (iii) b; (iv) e; (v) d True; (iii) True; (iv) True; (v) True

II. Descriptive Questions A. Very short answer questions 1. What is dissolution of the firm? 2. Who is an insolvent? 3. What is Realisation Account? 4. What is proportionate capital method? 5. Define amalgamation of firms? 6. What is maximum loss method? 7. Explain insolvency of a firm? B. Short answer questions 1. What are the different methods of dissolution? 2. Distinguish between Revaluation Account and Realisation Account? 3. Explain the rule in Garner vs. Murray case and its application in India? 4. What are the important objectives of amalgamation of firms? 5. How and under what circumstances a firm may be dissolved? 6. Explain accounting treatment in the case of insolvency of firm? 7. How do you treat unrecorded assets and liabilities at the time of dissolution? C. Detail answer questions 1. Explain accounting treatment in the case of insolvency of a partner? 2. Examine the principles of Garner vs. Murray case decision in the insolvency of a partner with suitable illustration. 3. State the order in which payments are made on piecemeal distribution of cash. 4. How is debit balance of a partner’s Capital Account to be treated in the event of dissolution of a firm? III. Exercise Problems Dissolution of Firm

I. Journal and Ledger Problem 1 Balance Sheet of A, B and C sharing profits and losses as 3:2:1, respectively stood as follows on 31st March, 2004:

Dissolution, Insolvency of Firm, Piecemeal Distribution...

Rs.

Rs.

Creditors

50,400 Cash at Bank

Reserve Fund

10,000 Stock Rs.

3,700 20,100

12,000 Debtors Capital Accounts:

1045

Investments

62,600 16,000

A

30,000

Furniture

6,500

B

20,000

Buildings

23,500

C

10,000

60,000 1,32,400

1,32,400

The firm was dissolved on that date. For the purpose of dissolution, the investments were valued at Rs. 18,000 and stock at Rs. 17,500. A agreed to take over the investments and B to take over the stock and C to take over the furniture at book value. Debtors and buildings realised Rs. 57,000 and Rs. 25,000, respectively. Expenses of realisation amounted to Rs. 450. In addition, one bill for Rs. 500 under discount was dishonoured and had to be taken up by the firm. Give journal entries for the above. (B.Com., Bangalore) Problem 2 Kalyan, Meena and Somu are three partners in a firm sharing profits and losses in the ratio of 5 : 4 : 3. On 31st March, 2005, they decided to dissolve the firm when there state of affairs was as follows: Particulars Sundry Creditors Capital Accounts: Kalyan Meena Somu

Rs.

20,000 9,000 73,030

Particulars

10,800 Cash at Bank Investments Debtors Stock Machinery 1,02,030 Buildings Leasehold Goodwill 1,12,890

Rs. 710 12,400 7,950 9,240 12,000 20,500 37,300 12,790 1,12,890

Kalyan agreed to take over the buildings at Rs. 32,000 and Meena took over goodwill, stock and debtors at book values, leaseholds, at Rs. 29,250 and machinery at Rs. 5,780. Meena also agreed to the creditors. Somu took the investments at the agreed value of Rs. 11,500. Pass necessary journal entries and show the Realisation Account, Partner’s Capital Accounts and Book Account. (B.Com., Madurai) [Ans. Realisation Loss Rs. 3,670; Bank A/c received from Kalyan Rs. 13,529 and Meen Rs. 46,373; Paid to Somu Rs. 60,612]

II. Ledger Accounts Problem 3 A, B and C sharing profits in the ratio of 3 : 2 : 1, agreed upon dissolution of firm. A was appointed to realise the assets and pay off the liabilities for which he was

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Financial Accounting

entitled to a lump-sum amount of Rs. 1,000. The Balance Sheet of the firm on 31st December, 2005 was as under: Particulars Capital Accounts: A B

Rs. 50,000 20,000

Creditors Investment Fluctuation Fund

Particulars

Machinery Stock Investments 70,000 Debtors 18,500 Less: Provision 6,000 C’s Capital A/c Cash

Rs. 40,000 7,500 20,000 9,300 600 8,700 11,500 6,300

94,500

94,500

The investments are taken over by A for Rs. 18,000. B takes over all the stocks at Rs. 7,000 and debtors amount to Rs. 5,000 at Rs. 4,500. Machinery is sold for Rs. 55,000. The remaining debtors realise 50% of the book value. Prepare necessary Ledger Accounts on completion of the dissolution of the firm. (B.Com., Madurai) [Ans. Realisation profit Rs. 14,950; Cash A/c paid A Rs. 40,475 and B Rs. 13,483; received from C Rs. 9,008] Problem 4 Chopra, Shah and Patel were carrying on business manufacturing of sports goods. The profit sharing ratio was 3 : 2 : 1. Their Balance Sheet on 30th June, 2005 was as under: Particulars Sundry Creditors Mrs. Chopra’s Loan Repairs and Renewal Reserve Capital Accounts: Chopra Shah Patel

Rs.

1,00,000 1,50,000 20,000

Particulars

1,50,000 Plant and Machinery 1,30,000 Stock 12,000 Sundry Debtors Less: Provision Prepaid Insurance Investments Cash 2,70,000 5,62,000

Rs. 1,60,000 1,50,000 2,00,000 10,000

1,90,000 4,000 30,000 28,000 27,500

On this date the firm was dissolved. The assets realised as under: Plant and Machinery Rs. 1,00,000 Stock Rs. 1,20,000 Sundry Debtors Rs. 1,60,000 The investments were taken over at a value of Rs. 20,000. He also agreed to pay Mrs. Chopra’s loan. During the course of realisation it was found that a bill for Rs. 50,000 previously discounted by the firm was dishonoured and had to be paid. Expenses of realisation come to Rs. 8,000. Prepare Realisation Account, Partner’s Capital Account and Cash Account. [Ans. Realisation Loss Rs. 1,80,000; Cash A/c paid to Chopra Rs. 1,20,00 and Shah Rs. 90,000; Received from Patel Rs. 10,000]

Dissolution, Insolvency of Firm, Piecemeal Distribution...

1047

Problem 5 Black, White and Green were partners sharing profits and losses in the ratio of 4:3:3. Their Balance Sheet as on 31st December, 2004 was as follows: Liabilities Creditors Bills Payable

Rs.

Assets

Rs.

10,000 Cash

3,000

6,000 Stock

10,000

Black’s Loan

3,000 Debtors

5,000

Employees’ Provident Fund

1,000 Furniture

7,000 20,000

General Reserve

4,000 Building

Provision for Depreciation

2,000 Green’s Current Account

2,500

Contingency Reserve

5,000 Goodwill

4,500

Current Accounts:

6,000

Black

3,000

White

2,000

Capital Accounts: Black

10,000

White

8,000

Green

4,000 58,000

58,000

On 1st January, 2005 the firm was dissolved. Assets were realised as follows: Stock Rs. 12,000, Debtors Rs. 3,000. Building Rs. 11,000. Furniture was taken over by Black. Creditors agreed to accept 75 paise in a rupee. The winding up expenses amounted to Rs. 2,500. There was a joint life policy of Rs. 10,000 which was surrendered to Life Insurance Corporation for Rs. 3,000. Prepare necessary accounts to close the books of the firm. [Ans. Realisation Loss Rs. 8,500; Cash A/c paid to Black Rs. 3,800 and White Rs. 8,350; Received from Green Rs. 150] Problem 6 Following was the balance sheet of M/s. Fat and Thin as on 31st December, 2004. Liabilities

Rs.

Assets

Fat’s Capital

26,000 Cash at Bank

Thin’s Capital

10,000 Stock

Rs. 5,000 20,000

Reserve Fund

8,000 Furniture

Fat’s Loan

5,000 Plant and Machinery

Bills Payable

1,000 Investment

5,000

500 Building

15,000

Outstanding Expenses Sundry Creditors

14,500 Debtors Less: Provision 65,000

2,000 10,000

8,800 800

8,000 65,000

The firm was dissolved on 31st December, 2004. (1) Fat took over Investment at Rs. 4,000. (2) Thin agreed to take over furniture at Rs. 1,500 and agreed to meet the bills payable privately.

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Financial Accounting

(3) Other assets realized as follows: Stock Rs. 19,500; Debtors Rs. 8,500; Plant and Machinery Rs. 11,000; Building Rs. 10,000. (4) The sundry creditors were settled at a discount of Rs. 250. (5) Dissolution proceedings required Rs. 500 duly spent. (6) Fat and Thin sharing profits and losses in the proportion of 3:2. Prepare necessary Ledger Accounts. (B.Com., Bombay) [Ans. Realisation Loss Rs. 5,750; Cash A/c paid to Fat Rs. 23,350 and Thin Rs. 10,400]

Insolvency of Partners I. When Capital is Flucuating Problem 1 A, B and C were partners sharing profits and losses in the ratio of 3:2:1. On 31st December, 1999 their Balance sheet was as follows: Liabilities

Rs.

Sundry Creditors Bills Payable A’s Loan A/c Reserve Fund

Assets

Rs.

30,000 Bank

9,500

5,000 Stock

15,500

6,000 Sundry Debtors

32,000

12,000 Furniture

5,000

6,000 Plant

21,000

Capital A/c – A

20,000 Drawings A/c – A

Capital A/c – B

15,000 Drawings A/c – B

4,000 1,000

C’s Capital A/c

6,000

94,000

94,000

The assets realised as – Stock Rs. 12,200; Sundry Debtors Rs. 30,100; Furniture Rs. 4,200; Plant is taken over by A at Rs. 18,000. A contingent liability for bill receivable discounted materialised to the extent of Rs. 600. Realisation expenses amounted to Rs. 600. C is insolvent but his estate pays Rs. 1,900. Prepare necessary Ledger Accounts to close the books assuming the capitals are fluctuating. (B.Com., Madurai) [Ans. Realisation Loss: Rs. 5,400; Rs. 3,400; Rs. 1,700. Bank = received from C Rs. 1,900; A Rs. 5,100; B Rs. 3,400]

II. When the Capital is Fixed Problem 2 A, B and C are partners sharing profits equally and their Balance Sheet as on 31st December, 2008 is given below: Liabilities

Rs.

Creditors

10,000 Bank

A’ Capital A/c

12,000 Debtors

B’ Capital A/c

9,000 (–) Reserve

Assets

Rs. 1,400 18,000 (900)

17,100 Contd.

Dissolution, Insolvency of Firm, Piecemeal Distribution...

1049

Contd. C’s Capital A/c

1,000 Stock

A’s Current A/c

2,000 C’s Current A/c

5,000

B’s Current A/c

2,000 Furniture

2,100

Reserve Fund

3,000

Bills Payable

15.400

2,000 41,000

41,000

C is insolvent and his estate pays Rs. 1,800 to the firm. The partners dissolved the firm and sold the assets realizing Rs. 23,000. They settled Sundry creditors for Rs. 8,000. Based on the above, prepare the Ledger Accounts and close the firm as per Garner vs. Murray. [Ans. Realisation Loss = A Rs. 3,000l; B Rs. 3,000; C Rs. 3,000. Cash brought in by A and B Rs. 2.400 and Rs. 1,800 respectively towards deficiency of C]

III. Insolvency of more than One Partner Problem 3 The Balance Sheet of A, B, C and D of the firm with sharing ratio 4:3:2:1 as given: Liabilities

Rs.

Assets

Sundry creditors

20,000 Cash

A’s Capital A/c

60,000 Stock

B’s Capital A/c

40,000 Debtors

C’s Capital A/c

Rs. 1,000 8,000 15,000

6,000 Plant

80,000

Goodwill

20,000

D Capital A/c

2,000

1,26,000

1,26,000

As C and D became insolvent, the partners decided to dissolve the firm. An amount of Rs. 1,000 received from C and nothing came from D’s Account. The firm realised cash by selling stock, debtors and plant for Rs. 4,000, Rs. 9,000 and Rs. 50,000, respectively. The firm paid expense on realisation Rs. 6,000 and paid creditors Rs. 24,000 as per their demand. Close the books of the firm by recording the above in the relevant Ledger Accounts. [Ans. Realisation loss = Rs. 28,000; Rs. 21,000; Rs. 14,000; Rs. 7,000. D deficiency borne by A Rs. 5,400; by B Rs. 3,600; C deficiency borne by A Rs. 4,200; by B Rs. 2,800]

IV. When All Partners are Insolvent Problem 4 X and Y are partners sharing profits in the ratio of 3:2. The Balance Sheet given as Liabilities Sundry Creditors

Rs.

Assets

20,000 Stock

X’s Capital A/c

5,000 Debtors

Y’s Capital A/c

3,000 Furniture Cash 28,000

Rs. 12,000 15,000 600 400 28,000

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Financial Accounting

The firm was dissolved on the above date. The assets realised only Rs. 16,000. Realisation expense paid by the firm Rs. 500. X could contribute only Rs. 1,000 and Y had no surplus. Close the books by showing necessary Ledger Accounts [Ans. Realisation Loss Rs. 7,260; Rs. 4,840; Deficiency X Rs. 1,260; Y Rs. 1,840]

Piecemeal Distribution Problem 1 The firm with partners A, B and C having capital as Rs. 20,0000, Rs. 10,000 and Rs. 10,000 respectively decided to dissolve the business concern. The firm had the assets worth Rs. 60,000 and creditors Rs. 20,000. The assets were realised gradually; Rs. 20,000 once, Rs. 20,000 another time and Rs. 10,000 finally. The partners share profit and loss sharing ratio as 3:2:1. Show the distribution of cash based on (i) Proportionate Capital Method and (ii) Maximum Loss Method. Problem 2 A, B and C were in partnership sharing profits and losses as 2:2:1. The Balance Sheet of the firm as on 30th June, 2004 is as follows: Liabilities

Rs.

Partners Capitals :

Assets Sundry Assets

A:

60,000

B:

48,000

C:

40,000

Rs. 2,64,000

Partners Advances : A:

20,000

B:

16,000

Sundry Creditors

80,000 2,64,000

2,64,000

Prepare a statement showing the distribution of cash among the partners as and when the assets were realised. The assets were realised as follows: 31st July Rs. 50,000 31st August Rs. 98,000 30th September Rs. 1,00,000 Adopt Surplus Capital Method. (B.Com., Calcutta, Bombay) Problem 3 A, B and C were in partnership sharing profits and losses in the proportion of 1/2, 1/3 and 1/6. The partnership firm was dissolved on 30th September, 1999 when the position was as given below: Liabilities

Rs.

Assets

Rs.

Creditors

3,15,000 Cash and Bank

A’s Capital A/c

2,10,000 Stock

1,68,000

B’s Capital A/c

1,05,000 Debtors

4,41,000

C’s Capital A/c

42,000

21,000 6,51,000

6,51,000

Dissolution, Insolvency of Firm, Piecemeal Distribution...

1051

The Partnership desired that the net realisations should be distributed according to rules at the end of each month. The realisations and expenses as under: Stock & Debtors (Rs.)

Expenses (Rs.)

31st Oct, 1999

1,26,000

10,500

30th Nov

1,89,000

8,400

31st Dec

1,05,000

7,350

31st Jan 2000

1,15,000

5,250

53,250

5,250

28th Feb

Set out the Cash Account and Capital Account showing monthly distribution of cash realised, using Maximum Loss Method (B.Com., Calcutta)

Amalgamation of Firm I. Two Firms Amalgamate into New Firm Problem 1 Two firms P and Q and R and S agreed to amalgamate their business. Their position as on 31st December, 2005 were as follows: Balance Sheet of P and Q as on 31st December, 2005 Particulars Creditors Capital: P Q

Rs.

Particulars

Rs.

1,04,000 Cash at Bank Debtors 1,82,000 Stock in Trade 1,30,000 Buildings Furniture

1,56,000 1,30,000 42,000 78,000 10,000

4,16,000

4,16,000

Balance Sheet of R and S as on 31st December, 2005 Particulars Creditors Capital: R S

Rs.

Particulars

52,000 Cash at Bank Debtors 91,000 Stock in Trade 65,000 Furniture 2,08,000

Rs. 65,000 1,04,000 26,000 13,000 2,08,000

Creditors and debtors were not taken over by the new firm PQRS. Office buildings were retained by P and Q, but new firm agreed to pay a monthly rent of Rs. 400. The cash required for working of the new firm was estimated at Rs. 1,30,000 to be provided by the partners in their new profit sharing proportion: P – 3/10; Q – 3/10; R – 2/10; S – 2/10. 1. Give journal entries in the books of P and Q and R and S. 2. Give the opening Balance Sheet of PQRS. (B.Com., Madras, Bangalore, Agra)

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Financial Accounting

II. Firm Converted to Company Problem 2 A, B and C were partners in a business and shared profits in the proportion of 1/2, 1/3, 1/6, respectively. Balance Sheet of A, B and C as on 31st December, 2005 Particulars Creditors Capital Accounts: A B C

Rs.

14,000 10,000 6,000

Particulars

3,000 Goodwill Sundry Assets Cash at Bank

Rs. 10,000 12,000 11,000

30,000 33,000

33,000

On January 1, 2006, the following charges took place: 1. C retired from the business and his share, valued at Rs. 8,000 was taken over by A and B who paid the former in their profit sharing proportions, from their personal resources. 2. S was then introduced into the business as a partner with 1/6 share on the condition that a further sum of Rs. 6,000 was allowed to be credited to A and B in their respective proportions, and that S contributed such a sum as would made his capital equal to 1/4 of the total capital of A and B after all the above adjustments. 3. The new firm was converted into a limited company which took over the whole of the assets (except cash) for a consideration of Rs. 34,000 payable in fully paid shares of Rs. 10 each. The Bank balance of the firm was utilised in payment to creditors and the partners. You are required to show the Capital Accounts of all the partners, giving effect to the above transactions. (B.Com., Madurai, Kerela, Mysore) Problem 3 S and V, sharing profits and losses equality, decided to convert their business into a limited company on 31st December, 2004 when their Balance Sheet stood as follows: Liabilities

Rs.

Assets

Rs.

Sundry Creditors

48,000 Sundry Debtors

Loan Creditors

40,000 Bills Receivable

10,000

Bank Overdraft

16,000 Stock in Trade

36,000

Reserve Fund Capital Accounts :

6,000 Patents Rs.

S

40,000

V

40,000

60,000

8,000

Plant and Machinery

16,000

Land and Building

60,000

80,000 1,90,000

1,90,000

(a) The goodwill of the firm was to be valued at two years’ purchase of the profits of the previous three years. (b) The loan creditor was agreed to accept 7 ½% redeemable preference shares in settlement of his claim.

Dissolution, Insolvency of Firm, Piecemeal Distribution...

1053

(c) Land and buildings and, plant and machinery were to be valued at Rs. 1,00,000 and Rs. 24,000, respectively. (d) The vendors were to be allotted equity shares of the value of Rs. 2,10,000. (e) The past working results of the firm showed that they had made profits of Rs. 30,000 in 2002. Rs. 36,000 in 2003 and Rs. 42,000 in 2004 after setting aside Rs. 2,000 to reserve fund each year. You are required to show Realisation Account and Capital Account in the books of the firm assuming that all the transactions are duly completed. (B.Com., Andhra)