This action might not be possible to undo. Are you sure you want to continue?
This study note includes
● ● ● ● ●
Accounts for Miscellaneous Services Computer Software Accounting Accounts of Insurance Companies Accounts of Banking Companies Accounts of Electric Supply Companies.
9.1. ACCOUNTS FOR MISCELLANEOUS SERVICE
1. In addition to usual final accounts, contractors prepare different Contract Accounts to find out cost of each contract, work-in-progress and profit to be considered in case of each contract. (1) Accounting Procedure Contract Accounts for different work site are maintained in the Contract Ledger. Materials sent to the work site, wages to labourers engaged in that work site and any special plant purchased for that particular work site are debited to the specific Contract Account identified by number or name. Materials may be sent to site by suppliers, or from the main stores or supplied by the Contractee. The overheads are charged to different Contract Accounts on the basis of some estimate. When the same plant is used at different worksites appropriate depreciation on the basis of the period for which it is used in a particular worksite is debited to that Contract Account. (II) 1. Contract Account should get the credit. On the other hand, if materials are sold out from a worksite, in addition to the credit to that Contract Account, profit or loss on sale of materials is to be transferred from that Contract Account, as this profit or loss should be shared by all contracts i.e., the amount is adjusted with Profit and Loss Account. Similarly, for accidental loss the Contract Account is credited as against Loss by Accident Account, which is cleared by transfer to Profit and Loss Account to the extent not covered by Insurance Claim. 2. At the end of the year the special plant, if any, is carried down at the estimated value, so that difference between charging price and the price atwhich it is carried down remains charged in that particular account. Similarly, the materials remaining at site are carried down. In addition to these, work certified and the work completed but not certified are carried down. In the alternative, all these may be transferred to Work-in-Progress Account. Some accountants, however, prefer to carry down materials and plant at site in the Contract Account itself and to transfer work certified and work not certified to Workin Progress Account. If Contract Account is given a break before considering certified or uncertified work, upto date cost of contract comes out. 647
ACCOUNTING IN SERVICE ORGANISATION 3. Contractee usually makes payment upto a percentage of the work certified. The percentage of certified work retained is know as retention of security 10% is usual security. If 2% earnest money was paid at the time of tender, 8% is deducted from Running Bills. In addition to 10% 2% 1. T. is also deducted. The amount received is credited to the Contractee’s Account. The amount certified, as already noted, may be carried down in the Contract Account or may be transferred to Work-in-Progress Account. In the alternative, contractee may be debited as against Contract Account or Work-in-Progress Account with the certified work. When the contractee is debited with certified work from the time to time the balance in the acccount represent total retention amount. On the other hand, if the contractee is not so debited, then the credit in his account represents advance payment to be adjusted by debit with contract value against the Contract Account on completion of the work. For valuation of uncertified work the materials used, wages and proportionate overheads for the work completed but not yet certified are considered. Profit on Uncompleted Contract When the contract is not yet complete it is not proper to consider profit therein as earned profit, as nobody knows as to what will happen ultimately. It should be appreciated that the payments are in the nature of advance payments, and hence the contract is for the entire work and not for the part as such. However, if no profit is taken into consideration when the contract is for a lengthened period there is no profit for a number of years, and there is a huge profit in the year of completion. To aviod this, an amount of profit estimated on a very conservative basis to have been earned in the current year is credited to P. & L. Account, the balance being carried forward or credited to WIP Account. No profit is considered if less than one-third is complete. But loss is always taken into consideration. 5.II The estimate of profit in the current year may be either on (a) retrospective basis or on (b) prospective basis. The systems may be compared with the systems of valuation ~f liabilities under Life Insurance Policies. In any case the Contract Account may be balanced off after the items discussed above have been considered, the balance (say, Accounting Profit) being carried down. If there is loss at this stage, it is written off to Profit and Loss Account.
5.III. Under retrospective method the accounting profit as disclosed above is the basis of determination of profit in the current year. The percentage of payment is applied to the accounting profit to convert it to cash or realised basis, as the profit is deemed to have been earned on the work certified. Usually one-third ( when half or more than one-third) or two-thirds (when more than half is complete) thereof is considered as profit to be credited to the Profit and Loss Account. Sometimes, an approximate reasonable ratio having regard to the extent of completion (certified value compared to contract value, or sometime, time spent compared to total time) is taken instead of the above one-third or two-thirds basis. The difference between accounting profit and profit credited to Profit and Loss Account is either carried down to Contract Account or is credited to WIP Account. This method is most commonly used. 648
5.IV. Prospective method is applied when the work is going to be completed shortly. if the Contract Account is balanced without considering certified work or uncertified work, the balance indicates cost incurred upto-date for certified and uncertified work. An estimate for further expenditure on materials, wages etc. for completion of the contract is made. The amount of opening balances at site and the estimated sale or balance at site on completion must be considered for finding out estimated further cost for completion of the work. Net cost already incurred plus estimated future net cost will a mount to estimated total cost for completion of the work. Sometimes a contingency provision is made to have estimated total cost ultimately. The contingency provision may be in terms of a percentage on the estimated total cost or on the estimated ultimate total cost. 6 The excess of the contract value over the estimated ultimate total cost is the estimated total profit on the contract. A reasonable proportion thereof ( according to the extent of as discussed under prospective system above) is considered to be profit earned uptodate. If some profits have already been credited to Profit and Loss Account in earlier years, the excess of estimated uptodate profit over the profits already considered is credited to ProfIt and Loss Account in the current year. Sometimes, to be more conservative, the uptodate estimated profit is converted to realised profit on the basis of percentage of payment.
(Ill) W. I. P. and Completion of Contract 1.. In valuation of Work-in Progress the certified work, uncertified work, materials and plants at site are added and provision for unrealised profit is deducted. The valuation may be available from the Contract Account itself, from Work-in-Progress Account or from both these accounts according to the nature of entries passed for considering the balances etc. In the alternative, uptodate net cost may be found as discussed under prospective system, and the profit considered in accounts is added up with net cost together with balances at site to get the value of Work-in-Progress. If receipts are lying as advances in Contractee’s Account the balance in Contractee’s Account is deducted from the Workin-Progress Account. However, if the contractee’s balance is in excess of the value of Work-in-Progress, the accounts are shown on both the sides. At the beginning of the next year Work-in-Progress Account is closed by transfer to particular Contract Account from both sides separately. In the year of completion the accounting profit (or loss) as disclosed by the Contract Account is transferred to Profit and Loss Account without any further calculation either by retrospective or by Prospective methods. The Contract Account is closed by credit to Contract Account and debit to Contractee’s Account either with full value of contract or with certified value of contract in that year according to the system followed so far.
ACCOUNTING IN SERVICE ORGANISATION Problem : The following are the particulars of a contract up to 31st December, 1975 Rs. Contract Value Machinery installed at site Material sent to site Labour at site Direct expenses Overhead charges allocated Materials returned from site Work certified Cash received Cost of work not certified yet Materials on hand as at 31-12-1975 Wages accrued due on 31-12-1975 Value of machinery as at 31-12-1975 8,00,000 50,000 1.60,000 1,30,000 6,000 5,000 2,000 5,00,000 4,50,000 20,000 4,000 3,000 38000
General Plant costing Rs. 1,00,000 was used for three months. Depreciation @ 20% p.a. is to be provided. Materials costing Rs. 2000 were so1d out for Rs. 3,000. In addition, scraps were sold for Rs. 1,000. Materials costing Rs. 8,000 were lost in an accident. It was decided that 1/3 of the profit should be regarded as a provision against contingencies, and that such provision should be increase to the credit of Profit and Loss Account only such portion of the 2/3 profit as the cash received bore to the work certified. Prepare the Contract Account and Contractee’s Account for the year and show the amount taken to the credit of the Profit arid Loss Account, and also how it will appear in Balance Sheet.
Contract No Account Rs. To Materials To Wages To Direct Expenses To Overheads To Special Plant To Depreciation on General Plant (for 3 Months) To Profit and Loss Account— profit on sale of materials 1,000 3,60,000 To Balance b/’d- cost to date 3,04,000 By Work-in-Progress’ Certified Work Uncertified Work To Profit and Loss Account’ To Work-in-Progress (provision) 86,400 5,20,000 5,20,000 1,29,600 5,00,000 20,000 5,000 1,60,000 1,33,000 6,000 5,000 50,000 By Cash—Materials sold By Cash—Sale of scraps By Loss in Accident By Materials—Return By Work-in-.Progress’ Plant at site Materials at site By Balance c/d— cost to date 3,04,000 3,60,000 38,000 4,000 Rs. 3,000 1,000 8,000 2,000
ACCOUNTING IN SERVICE ORGANISATION Notes: I Profit credited: (a) Profit as per Contract Account : Rs. 2,16,000= Rs. 5,20,000—Rs. 3,04,000 (b) 1/3 provision i.e., 1/3 x 2,16,000=Rs. 72,000/(c) 2/3 x 2,16,000=R.s. 1,44,000/- Cash received Rs. 4,50,000 out of Rs. 5,00,000 i.e., 90%. So, provision is to be increased by 10% of Rs. 1,44,000= Rs. 14400/(d) Total provision is : Rs. 72,000+Rs. 14,400:-=Rs. 86,400. (e) Profit to be credited : Rs. 2,16,000—86,400=Rs. 1,29,600. The profit is same as: 2/3 x 90% of 2,16,000 =1,29,600. 2 Some accountants prefer to transfer only work certified and work uncertified to the Work-in-Progress Account. Work-in-Progress Account Particulars To Contract No ...A/c: Plant at site Materials at site Certified Work Uncertified work 38,000 4,000 5,00,000 20,000 5,62,000 The Contractee’s Accounts will be as below Contractee’s Account Particulars To Balance c/d To Contract No. Rs. 4,50,000 5,00,000 Particulars By Bank (total) Contractee’s Account By Bank (tota1~ By Balance c/d (or, Security Dep.) 5,00,000 50,000 5,00,000 4,50,000 Rs. 4,50,000 5,62,000 Rs. Particulars By Contract No. A/c (provision) By Balance c/d 86,400 4,75,600 Rs.
Obviously, Contract Account in the second case is credited with certified work as against Contractees Account, and not as against Work-in-Progress Account. in the alternative, Work-in-Progress Account may be dispensed with and the balances may be carried down in Contract Account itself. Contract Account No Particulars To Materials To Wages To Direct Expenses To Overheads To Special Plant To Depreciation To Profit on Sale of Materials Rs. 1,60,000 1,33,000 6,000 5,000 50,000 5,000 1,000 3,60,000 Particulars By Cash—materials sold By Cash—scrap By Materials Returned By Loss in Accident By Balance c/d: Plant at site Materials at site Cost 10 date 38,000 4,000 3,04,000 3,60,000 Rs 3,000 1,000 2,000 8,000
Particulars To Balance b/d : Plant at site Materials at site Cost to date To Profit and Loss A/c To Balance c(d’
Particulars By Balance c/d’
38,000 4,000 3,04,000 1,29,600 86,400 5,62,000
Certified Work Uncertified Work Plant at site Materials at site
5,00,000 20,000 38,000 4,000
The Balance Sheet will include: Assets Work-in-Progress Less Contractee’s Account – Note WIP Rs. Rs 4,75,600 4,50,000 5,62,000—Rs.86400 = 25,600 Rs 4,75,600 Rs.
ACCOUNTING IN SERVICE ORGANISATION Problem The Contract Ledger of Company showed the following expenditure in connection with a contract for the erection of a factory: Rs. Special Plant Materials Wages Overhead Charges 1,00,000 1,50,000 3,00,000 60,000
The contract price was Rs. 12,00,000. It was estimated that it would take one more year for the completion of the contract. The work certified was Rs. 8,00,000 and eighty per cent of the certified work was received in cash. At the end of the year materials lying on site were valued at Rs. 20,000 Depreciate the plant by 10 per cent. 6% of wages and 5% of materials may be taken to have been incurred for the portion of work completed but not yet certified. Overheads are charged as a percentage of direct wages. After making the necessary adjustments show how the Contract Account will appear and what profit should be credited to Profit and Loss Account. Neglect depreciation of Plant for use on uncertified portion. Valuation of Uncertified Work: Rs. Materials Wages Overheads 5% of Rs. 1,50,000 6% of Rs. 3,00,000 20% of Rs. 18,000 Contract Account Particulars To Special Plant To Materials To Wages To Overheads To Balance c/d To Profit and Loss A/c To Work-in-Progress A/c Rs. Particulars 1,00,000 By Work-in-Progress A/c: 8,00,000 29,100 90,000 20,000 9,39,100 3,29,100 329,100 1,50,000 Certified Work 3,00,000 Uncertified Work 60,000 Plant 329100 Materials 9,39,100 175520 By Balance b/d 153580 329,100 Rs 7,500 18,000 3,600 29,100
Notes ‘Other alternative systems as discussed in Problem may also be followed. Profit credited: (a) Profit as per account Rs. 3,29,100. (b) Realised Profit 80% of Rs. 3.29,100=Rs. 2,63,280. (c) Rs. 8,00,000 has been certified out of a contract of Rs. 12,00,000 i.e..2/3 So profit to be credited— Rs. 2,63,280x2/3 =Rs. 1,75,520. Problem Y.Ltd undertook a contract No. 80 for Rs. 7,50,000. The contract account showed the following particulars 1973 Materials Rs. 30,000, Wages Rs. 25,000, Overheads Rs. 10,000, Plant Rs. 1,00,000 and Materials at site at close Rs. 3,000. 1974: Materials Rs. 1,00,000, Wages Rs. 60,000, Overheads Rs. 15,000, Materials returned Rs. 8,000. The Plant at its depreciated value was transferred to contract No. 88. Uncertified work Rs. 15,000. 1975 Materials Rs. 1,60,000, Wages Rs. 1,00,000, Overheads Rs. 28,000 and Materials sold Rs. 4,000, The amount of work certified at the end of the first year was Rs. 1,00,000. The work certified upto the end of the second year was Rs. 4,00,000 and the work certified in the third year was Rs. 3,50,000. 80 per cent of the certified work was received in cash. Profit to be taken credit for are one-third and one-half on cash basis in each of the two years respectively. Depreciate plant by 10 per cent on balance at the beginning ui each year. Prepare accounts in respect of the contract at the end of each year.
ACCOUNTING IN SERVICE ORGANISATION Contract No. 80 Particulars 1973 To Materials To Wages To overheads To Plant To Balance c/d 30,000 25,000 10,000 1,00.000 28,000 1,93,000 1,93,000 Rs. Particulars 1973 By Work-in-Progress Ac Materials Plant Certified Work 3,000 90,000 1,00,000 Rs
Particulars 1973 To Profit and Loss Account1 To Work-in-Progress Account 28,000 Particulars 1974 To Work-in-Progress—-Opening balance transferred Materials Plant (‘certified Work) To Materials To Wages To Overheads To Balance c/d To Profit and Loss A/c1 To Work-in-Progress
Rs. 7,467 20,533
Particulars 1973 By Balance b/d
28,000 Rs Particulars 1974 By Work-in-Progress—Opening provision transferred 3,000 By Materials—returned 90,000 By Contract No. 88—Plant 1,00,000 transferred 1,00,000 By Work-in-Progress c/d : 60.000 Uncertified Work 15,000 Certified Work 1,56 533 5,24,533 62,613 By Balance b/d 93,920 1,56,533 1,56,533 15,000 4,00,000 5,24,533 1,56,533 81000 20,533 8,000 Rs.
Particulars 1975 To Work-in-Progress: Uncertified Work Certified Work To Materials To Wages To Overheads To Profit and Loss Account
Rs. Particulars 1975 By Work-in-Progress 15,000 By Bank—sale of materials 4,00.000 BY Contractee’s Account 1,60,000 1,00,000 28,000 1,44,920 8,47,920
93920 4000 7,50,000
Notes Profit credited in 1973 and 1974 1973 Rs. Accounting Profit Cash Profit—on 80% basis Proportionate profit to be credited 1/3x 22,400 1/3 x 1,25,226 =7,467 = 62,613 In absence of specific direction, no profit in 1973 would have been considered as extent of completion was less than one-third. • In 1975 the entire work was certified and hence no provision is necessary. Work-in-Progress Account Particulars 1973 To Contract Account No. 80 Materials Plant Certified Work 3,000 90,000 1,00,000 1,93,000 1,93,000 Rs. Particulars 1973 By Contract no.80 -Provision By Balance c/d 20,533 1, 72,467 Rs. 28,000 22,400 1974 Rs. 1,56,533 1,25,226
ACCOUNTING IN SERVICE ORGANISATION 1974—Jan. 1 Particulars To Balance b/d To Contract No. 80—transfer Dec. 31 To Contract No.80: Uncertified Work Certified Work 15,000 4,00,000 6,08,000 Particulars 1975—Jan. 1 To Balance b/d To Contract No. 80—transfer. To balance c/d 93,920 4,15,000 Contractee’s Account Particulars 1973 To Balance c/d 1974 To Balance c/d 3,20,000 80,000 Rs. Particulars 1973 By Bank (80% of Rs.1,00,000)4 1974 By Balance b/d By Bank 80% of (4,00,000—1.00,000)’ 3,20,000 1975 To Contract Account 7,50,000 7,50,000 1975 By Balance b/d By Bank 3,20,000 4,30,000 7,50,000 2,40,000 3,20,000 80,000 80,000 Rs. 4,15,000 3,21,080 Rs. Particulars 1975 Jan.1 By Contract No.80 (details 4,15,000 6,08,000 Rs. Rs. 1,72,467 20,533 Particulars 1974—Jan-1 By Contract No. 80 (details) Dec. 31 By Contract No. 80—Provision By Balance c/d 93,920 3.21,080 1,93,000 Rs.
Only certified work and uncertified work may be transferred to Work-in Progress Account. It is assumed that full payment has been made in 1975, Each year credit may also be given for full amount, 20% being transferred to Security Deposit. Last year there would be Rs. 1,00,000 refund of Security Deposit. Problem A firm of contractors obtained a contract to build a house for Rs. 6,00 000. The work commenced on 1st April, 1975 and the following expenditure was incurred during the year ended 31st March, 1976 Plant and tools Rs. 20,000 ; Stores and materials Rs. 90,000 Wages Rs. 80,000 ; Sundry expenses Rs. 7,000 and establishment charges Rs. 18,000 Some of the materials were found to be in excess and was sold ultimately for Rs. 17,000 while their cost price was Rs. 14,000. A portion of the Plant was scrapped and sold as scrap for Rs. 3,000 The value of the Plant and tools on site on 31st March, 1975 was Rs. 8,000 and the value of stores and materials on site was Rs. 5,000. Cash received from the contractee was 80% of the work certified and it amounted to Rs.3,20,000 upto 31st March, 1976. The value of work done but not certified was Rs. 30,000, The firm wanted to take into account part-profit for the work done on the basis of an estimate as to what further expenses would be incurred in completing the work such that the profit to he taken into account would be proportional to such estimated profit for the work certified as the work certified bears to the whole work. The estimate was as follow~ (a) That the contract would he completed by 31st December, 1976. (b) The wages on the contract for the next nine months would amount to Rs. 80,000. (c) That the cost of stores and materials required in addition to those on site on 31st March, 1976 would be Rs. 90,000 and that further contract expenses would amount to Rs. 9,000. (d) That a further Rs. 35,000 would have to be spent for installing Plant and tools and the scrap value of these on 31st December, 1976 would be Rs. 8,800. (e) That the establishment charges would cost the same per month as in the year ended 31st March, 1976. (f) 2% on ultimate total cast is to be taken as Contingency Provision.
Prepare Contract, Stores and Materials and Plant Accounts for the year ended 31st March, 1976 and show Pro-forma calculation for the profit that should be credited to Profit and Loss Account of the firm for the year ended 31st March, 1976.
ACCOUNTING IN SERVICE ORGANISATION Pro-forma Contract Account Particulars To Cost incurred upto 1-4-75 (as per Contract A/c) To Estimated Cost of Materials: At Site Add To Estimated Wages To Estimated Expenses To Plant: At Site Installation Less Scrap To Establishment Charges: 1,500x9 To Contingency Provision’ To Estimated Profit on completion 13,500 4,06,700 8,300 4,15,000 1,85,000 6,00,000 6,00,000 8,000 35,000 43,000 8,800 34,200 5,000 90,000 95,000 80,000 9,000 1,75,000 Rs. Particulars By Contract Price Rs. 6,00,000
Generally, the above profit is also converted to realised profit. Here, however, that is not, intended. Provision for unrealised profit : Accounting Profit Less Profit to be credited 2,55,000 1,23,333 1,31,667 Contingency Provision: 2/98 x 4,06,700 = 8,300 Problem After making provision of one-third of profit received draw out Contract Accounts No. 63 and No. 64, Profit and Loss Account and Balance Sheet from the following Trial Balance as on 3 1.12.75 and information
Particulars Contractees’ Account Buildings Creditors Bank Capital Amount Materials Wages Expenses Plant Work-in-Progress (1-1-75)
Dr. Rs. 1,00,000
Cr. Rs. 3,00,000 62,000
35,000 3,00,000 1,00,000 70,000 37,000 2,50,000 70,000 6,62,000 6,62,000
Contract No. 63 which was in progress on 1-1-75 was completed during the year and contract No. 64 was started. There was a provision of Rs. 30,000 for unrealised profit against Contract No. 63 and Work-in-Progress balance is given above after deduction of the provision. Rs. 20,000 materials and Rs. 10,000 wages were paid for Contract No. 63. Rs. 60,000 materials were sent to Contract No. 64 site, but Rs. 3,000 was lost there by accident. Rs. 60,000 wages were paid and Rs. 50,000 plant was used in Contract No. 64 all through, hut Plant costing Rs. 2,()O,UO() was used upto September in contract No. 64 and then it was returned to stores. Rs. 4,000 materials were at site of Contract No. 64. Provide 1O% depreciation on the plant for the entire year. Contract Account No. 63 To Work-in-Progress To Materials To Wages To Expenses To Profit and Loss Account 1,00,000 20,000 10,000 5,000 45,000 1,80,000 1,80,000 By Work-in-Progress’ By Sundry Debtors~ 30,000 1,50,000
ACCOUNTING IN SERVICE ORGANISATION Contract Account No. 64 Particulars To Materials To Wages To Expenses To Special Plant To Dep. on General Plant’ To Balance c/d To Profit and Loss Account To Work-in-Progress
Rs. 60,000 60,000 30,000 50,000 15,000 52,000 2,67,000 31,200 20,800 52,000
Particulars By Loss by Accident By Work-in Progress Plant Materials Uncertified Work Certified Work2 By Balance b/d
Rs. 3,000 45,000 4,000 15,000 2,00.000 2,67,000 52,000
Profit and Loss Account for the year ended 31st December. 1975 Particulars To Depreciation’ on Plant (unabsorbed) To Depreciation on building To Loss by Accident To Expenses (37,000—35.000) To Capital Account 5,000 2,000 3,000 2,000 64,200 76,200 76,200 Rs. Particulars By Profit from Contract A/c Contract No. 63 Contract No. 64 45,000 31,200 Rs.
Notes: 1 2 Net balance of Rs. 70,000 is after deduction of Rs. 30.000 provision. Hence gross value Rs. 100000 together with the provision Rs. 30,000 is transferred to Contract Account. The plant specifically installed is carried down in the contract site Work-in-Progress) after charging depreciation. For General Plant depreciation for 9 months is Charged to Contract No. 64 balance being written off to Profit and Loss Account. of 1,50.000) is received n account of Contract No. 64. Hence certified value is Rs. 1,80,000x 100/20 =Rs. 2,00,000. So, 2/3rd of profit is to be considered. ‘
Profit to be credited to Profit & Loss Account:
Accounting Profit: Rs. 52,000 Realized Profit: 90% of Rs 52,000 = Rs. 46,800 Rs. 46,800 x 2/3 = 31,200 Reasonable. proportion such profit =
Contractees’ Account Particulars To Sundry Debtors~ — of Rs. 1,50.000) To Balance c/d T o Balance b/d To Contract No. 63—transfer1 To Contract No. 64: Plant Materials Certified Work Uncertified Work 4,000 15,000 2,00,000 3,64,000 Balance Sheet as at 31st December, 1975 Liabilities Capital Account Add Profit Sundry Creditors 3,00,000 64,200 3,64,200 62,000 Rs. Assets Buildings Less Depreciation Plant Less Depreciation Sundry Debtors’ Stock of Materials’ Work-in-Progress’ Contract No. 64 Less Contractee’s A/c 1,80,000 Bank 4,26,200 63,200 35,000 4,26,200 2,43,200 1,00,000 2.000 2,00,000 20,000 1,80,000 30,000 20,000 98,000 Rs. 3,64,000 1,20,000 1,80,000 3,00,000 70,000 By Contract No. 63—transfer1 30,000 By Contract No. 64—Provision for Unrealized Profit 45,000 By Balance c/d 20,800 2,43,200 3,00,000 1,00.000 Rs. Particulars By Balance c/d Rs. 3,00,000
ACCOUNTING IN SERVICE ORGANISATION Notes: ~ Debtors’ balance: Rs. 1,50,000—1,20,000=Rs. 30,000.
‘Assuming that there is no handling loss etc., closing stock will be Rs. (1,00,000—20,000— 60,000)=Rs. 20000. WIP = Rs. 2,64,000— Rs. 20,800 = Rs. 2,43,200 Problem From the following expenses incurred during January, 1976 on Contract No. 78 show the day to day account for the Contract 7~ in Contract Ledger: January 2 3 14 15 Wages Materials Wages Plant 4,000 10,000 15,000 20,000 4,000 8,000 3,000
26 Direct Expenses 27 Wages Direct Expenses
On 1-1-76 Rs. 80,000 was carried forward being Rs. 30,000 Materials, Wages Rs. 20,000, Rs. 7,000 Direct Expenses, Rs. 3,000 Indirect Expenses and Plant Rs. 20,000. Certificates for completion were received on 10- 1-76 for Rs. 30,000 and on 17.1.76 for Rs. 35,000. As on 1.1.76 total of work certified amounts to Rs1 1,00,000. Balance Sheet as at 31st December, 1975 Particulars Capital Add Profit Less Drawings Provision for Unrealised Profit Clients’ Deposit Liabilities for Expenses Rs 5,000 24,700 29,700 10,000 19,700 12,800 5,950 600 Particulars Furniture Less Depreciation Library Less Depreciation Work-in-Progress Clients’ Disbursements ‘ Clients’ Control Account Bank (Office) Bank (Clients) Cash 39,050 400 5,000 500 4,500 2,800 2,150 10,000 8,050 5,950 2,000 39,050 Rs. 4,000 3,600
Farm Accounting (Including Agriculture, Horticulture, Dairy and Poultry) 1. Farming activities may constitute in agriculture, horticulture, dairy, poultry, pisiculture and the like or may combine two or more lines. Raising of fruits and flowers as also rearing of sheep and sericulture etc. may also be included in “farming” in the widest sense of the term. Nurseries for growing and selling of seedlings and plants are also within the purview of the term “farming”. In our country we have rarely well-organized farming activities, and as such we have rare use of proper system of accounting in farming. Where there are large scale and organised farms the benefits of Double Entry accounting system may be enjoyed by them. Apart from giving true cost and profit on each line of proper accounting will ensure better control by management. For agriculture detailed accounts should be kept for different crops, as, rice, wheat, jute etc. Moreover, if the same crop is produced in different fields, accounts for each field should also be maintained. The Field Account should be debited with cost of seeds, seedlings, manures and expenses for tilling. Wages for different activities, rent, canal dues or expenses for irrigation and depreciation on agricultural equipments, livestock etc. should also be considered. The Crops Account and Hays Account are debited as against Field Accounts with. cost of production. The cost being common cost the transfer to Hays Account and Crops Account is to be made on the basis of some estimated value of hays. The hays used for feeding the livestock, seeds used for growing seedlings and the cost of food supplied from farm produces to the workers and proprietor do not involve apparent monetary transactions but these “imputed” transactions should be brought into accounts on the basis of estimated values. The Crops and Hays Account are credited on sales, consumption or on use in further production. For growing of vegetables, accounts for different vegetables as cabbage, potato, tomato etc., should be maintained in the lines as above.
(A) Agriculture, Horticulture’ & Nurseries 3.
(B) Dairy & Poultry For rearing of sheep and other live-stock, accounts must be maintained for each type of livestock separately. The cost of Tearing is matched by sale common costs on reasonable basis. The cost of rearing is matched by sale proceeds of the live stock or other products there from. However, in small firms having different types of activities, sometimes account for each type is avoided for the trouble of allocation, and the Farm Account is made up for all items. When accounts for different lives-stocks are being maintained separately, There should also be a column for numbers. In case of birth of calves etc., Calves Accounts -estimated Cost as against Cows or Buffaloes Account. It should be noted that the number of calves will be debited in the number column of Calves Account, but there will be no corresponding credit in the number column of Cows Account. On growing up, the calves are retransferred to Cows Account, Bull Account or Bul-
ACCOUNTING IN SERVICE ORGANISATION locks Account. If no transfer is made at all, the position will be automatically adjusted in the Final Accounts as values of the claves shall be considered in closing stock with those of cows and buffaloes. In case of deaths the account is credited with number and sales of the carcasses and the loss is automatically adjusted, as in closing stock only the value of remaining heads is considered. For different types of farming activities Cash Book, Purchase Book and Sales Book should be maintained in columnar fashion with suitable heads. As for example, Sales Book should have columns for Cattle, Milk, Cream, Butter, Ghee, Poultry, Vegetables, Rice, Wheat, Fruits etc In preparation of final accounts, opening and closings stocks of live stock, crops in hand and hays and straw, growing corps, manures, should be considered. Depreciation, maintenance etc. should also be considered. In Final Accounts of Companies shows the special items in the Profit & Loss Account and Balance Sheet. Builders and House Owners 1. There may be some organization specialization in construction of buildings for selling out. Contractors undertake to construct house etc. for others. But these types of organizations acquire a plot of land, develop it, divide it smaller plots. construct house or flat according to their plans having regard to the needs of the prospective buyers. When the house constructed it is Sold out as such, in such cases until all the houses have been disposed of (Sold or finally retained for own residence ) profit or loss can be found out by taking valuation of houses not yet disposed of. It will be better to have detailed and separate accounts of each unit Otherwise, all the houses (usually being small in one area may he considered as one unit. The cost of. land required or passages. parks etc. will increase the Cost of houses, but if no account for each house is maintained. the cost of land left vacant for these purposes will automatically increase the cost of the entire estate. If a house is retained for the proprietor, its value should also be considered in determining the true profit. When a person or a concern has a number of houses for letting out, detailed accounts for each tenant has to be maintained. But the number of tenants may be very large because there may be many tenants particularly business area) in the same house. The best way to keep accounts of tenants is to maintain Rental Ledger in which against each property (entered with number and address~ the names of tenants with their particulars are entered. The balance is brought forward first and then the rent for the month is booked and then-is the total of debit. The date and number of receipts together with Cash Book folio are entered in the credit side. Any rebate or allowance for repairs carried out or adjustments against advances are also entered in the credit side. there is a column for “total of credits” and the amount therein is deducted from the total of debits” column, balance being carried forward to the next month. House meant for sale may also be let out temporarily. Final Accounts of House Builders considered in Problem 18 of Final Accounts of Companies)
Problem A Civil Engineer decided to build four house on a piece of freehold land which he purchased for Rs. 60,000. He engaged a foremen at a wage of Rs. 300 per month, plus 20 per cent of any profit realized on the sale of the houses after deducting his commission. For that purpose, the land was to be valued at Rs. 20,000 after developments for each of the four plots. The essential figures were as follows Rs. Development Expenses Wages paid, including that of foreman Cost of Materials, Timber, Fittings, etc. Net cost of Scaffolding and Plant Charges for Electricity, Water, etc. Insurance, Advertising etc. Bank Charges Sundry Expenses Law Charges 10,000 40,000 50,000 2,000 1,000 2,000 1,000 800 600
Three of the houses were sold at Rs. 50,000 each the fourth as retained by the owner and was valued at Rs.55,000 and treated as sale at that price. You are required to prepare an account showing the actual profit or loss to the owner. Buildings Construction and Sale Account Particulars To Cost of Land To Development Expenses To Wages (incl. Foreman) To Cost of Materials To Cost scaffolding etc To Electricity To Insurance, Advrt.. To Bank Charges & Interest To Sundry Exp. To Law Charges To Balance c/d Rs. 60,000 10,000 40,000 50,000 2,000 1,000 2,000 1,000 800 600 37,600 2,05,000 2,05,000 Particulars By Stock A/C By Capital Account— house retained Rs. 1,50,000 55,000
ACCOUNTING IN SERVICE ORGANISATION
To Commission1 To Capita! Account — Net Profit
4,600 33,000 37,600
By Balance b/d
Note: Rs. Commission Profit as above Agreed cost of land : 20,000 x 4 Less Cost of land and development charged in the above account : (60,000 +10,000) Charged Profit for Commission Garage and Motor Car Dealers 1. The Garage Companies may provide for garaging of cars, sale of accessories, petrol and even sale of cars and motor cycles in addition to repairs and servicing Job The Accounting will depend upon the size and exact nature of the concern In general, columnar Sales Day Book is suitable for recording sale of car, motor cycle. accessories. Lubricants, petrol, repairs and servicing, hire charges garage charges and the like. When the petrol pump is attached with the garage. it accounts should be separately maintained. The Purchases Book and Cash Book may also be main tained in analytical form. The Garages Accounts for different sections should also be made separately. Transfer are required from one department to another department for goods and spars used and also for benefits enjoyed by employees and proprietor. Old cars purchased may be overhauled with the help of Repairs Section and then sold. The cost of such cars should be increased by credit to Repairs Section. It will be better to have separate ledger for each ship and all expenses and incomes in connection therewith are to he considered in that ledger. Moreover, the expenses and incomes against each voyage should be recorded in the Voyage Account. 70,000 10,000 27,600 80,000 37,600 Rs.
ENTERTAINMENT Cinema, Theatre, Jatra and Circus 1. These organizations have substantial similarity in respect of incomes viz., sale of tickets, programmes, advertisement and the like. These can better be recorded in Cash Book with these columns. The daily sales of tickets is recorded in the Daily Return of Tickets sold and this must be in agreement with the Register of Stamps of Amusement Taxes. The Distributors have the above incomes as against which Amusement Tax is a direct charge. Hire charges of films, advertisement, wages for different groups of staff are to be considered along with rent or depreciation of the buildings, furni ture, Projectors and other equipments Accounts for each book should be drawn by he Distributors. For Producers the income are sale and hire of films as against which fees of artists, expenses of outdoor shooting, charges of studios, remunera tion of Cameramen, Music Directors, Directors etc. are charged. Working Account of each feature should be separate1y drawn out by Producers. In Theatres also similar accounts are maintained. Salaries of Orchestra, cost of dresses, remuneration of artists, rents etc. are considered as running expenses and are recorded preferably in columnar form of Cash Book. The cost of scenery, equipment etc. is capitalized and depreciation is charged along with depreciation on Furniture and Fixture. The accounts of Jatra Party may also be maintained in the same way but usually collections are on contract basis rather than on the basis of sales of tickets. In Circus, accounts for collection and expenses may be maintained in the same way as above. Special care should be given to Live Stock Account and preferably different Live Stock Accounts for different animals should be maintained. Working Account should be drawn for each establishment usually running over a few months; as generally they are of mobile type.
Hotels, Restaurants and Caterers 1. The accounting scheme of the organization will, of course, depend upon its size and exact nature and requirements, but the principle of accounting remains same as in all cases. There may be provision for saving of refreshment only, or for serving of launches and dinners usually with provisions of refreshments; there may be arrangement of bar, and lodging may also be provided. Some may have special section for catering at different places on the occasion of marriage and the like. At any rate, purchases of various types of items should be separately recorded and similarly accounts for sales of various types of items must be separately maintained to disclose the correct position and for helping in proper control. Purchases and expenses may better be recorded through Analytical Purchase book and Cash Book. The purchase Day Book and payments side of Cash Book will be provided with columns for: Wines and Minerals; Groceries and Provisions; Cigarettes and Cigars; Cutlery, Glass and Plates; Bedding and
ACCOUNTING IN SERVICE ORGANISATION 3. 4. Linens ; Furniture and Fixtures; Establishment; and the like. There v~ ill be a Ledger Column also in Cash Book to show disbursement on behalf of visitors. The Receipt side of Cash Book and Sales Book may have analysis columns as : Dinner and Launches, Breakfast, Bar, Cigarettes and Cigars, etc. in Cash Book there will be further columns for Visitors’ Ledger and Personal Ledger. The Sales Book is better maintained together with the account of each visitor (when lodging is provided) in the form of what is known as Window Ledger or Visitors’ Ledger. Account for each day is maintained for each visitor together with details of charges (same as are shown in bills submitted to them ultimately) and the Room No. is indicated against each visitor. The vertical total shows the Debit Total for each visitor, and credits are shown below. The horizontal totals indicate totals of different types of charges during the whole day. The daily total may be posted in ledger or may be carried forward to next day and added up with next day total and carried forward and so on, ultimately being posted to ledger (it required) say, at the end of the month. When there are many rooms and guests, a number of pages has to be used every day. A pro-forma Visitors Ledger (Window Ledger The items may be repeated by the side of Daily Total column to avoid confusion as there may be many columns for visitors in every page. The B.F. and C. F. columns ma also be avoided and Daily Totals may be posted in the General Ledger. Stock Ledger must be maintained in details to have thorough control purchases, usage and sales of different items, and periodical stock must be carried out. At the time of preparation of Final Accounts adjustment entries must be passed for meals, accommodation etc. of the staff and proprietor by crediting these items as against Salaries and Wages or Drawings, as the case may be. It will be better to draw out Working Accounts for different sections as Bar, Accommodation,Restaurant, Supply of Launches and Dinners. The rates and taxes and building repairs, depreciation on beddings together with attendant’s wages and proportionate establishment charges are charged against Accommodation account whereas collections for accommodation arc credited to this accounts. Cost of meat, eggs. fish and poultry. stores, groceries and provisions are apportioned in between Restaurant Section and Launches and Dinners. Depreciation on glass and china. cutlery and plates, table linens etc. should be similarly apportioned. Separate accounts may also be necessary for Billiard Room, Banquet Halls, Garage. Laundry and the like.
Plantation ( Tea, coffee, Rubber etc.) 1. In many plantation concerns there are distinct agricultural aspect and also industrial aspect and hence accounts should be made with an eye to that. Clearing expenses of areas where plantations have been abandoned should be capita used. Expenses of cultivation etc. in areas not bearing are similarly capitalized. When cultivation expenses of “not bearing” area are not available, total cultivation expenses should be distributed on acreage
basis. Wages Accounts should be separately maintained for Planting, Cutting, and Processing. Proper control should be exercised on the employment and payment of outdoor work. The Hospital and Medical Expenses thereon will be ultimately booked to Labour Expenses together with Recruitment and Passage Expenses. Cultivation Account and Processing Account may be Separately prepared. 2. The Garden Returns certified by the Manager are incorporated in Head Office Books. The sales are as per returns from the Brokers. Provision for necessary commission on sales as also on crops, if required, should be made. The Final Accounts should better be drawn out in sections so that the cost of leaves plucked before processing may also be known. It may be pointed out in this connection that closing stock is not valued on the normal basis of “lesser of cost or market price”, but on the basis of the “price since realised” inasmuch as the crop of the season is normally sold out at the time of finalisation of accounts. 6O~ of the income of tea companies is deemed to be agricultural income, and hence provision for Income-Tax is to be made on the basis of 4O% of profit only. Natural Accounting year should better be followed to coincide with the crop-season.
Doctors, Druggists and Nursing Homes 1. Practicing Doctors, whether G. P. (General Practitioners) or specialists, maintain diary, and all details, charges, special points are noted there. From these the Incomes are grouped and recorded in daily Cash Book having columns for visits, consultation fees, prescription served etc. Ii a number of specialists carry on in partnership further columns may be necessary for charge for pathological examinations, surgical operations, X’Ray and other plates, special therapy etc. (For accounts of a Polyclinic see Problem 16, p. 1154) The expenses are also grouped in Cash Book as medical and surgical equipments and plants, special and general furniture and fixture, medicines and drugs, bandaging materials etc. and other expenses. Patients’ Ledger may have to be maintained. In case of Dentists, purchases of dentures (i.e. artificial teeth etc.) and connected materials are to be recorded in separate columns. in case of dispensing Chemists and druggists, sales book and purchases Book are to be ruled with columns for: Prescriptions served, drugs, patent medicines, baby foods, bandaging materials and the like. In case of Nursing Homes accounts for the cabin and bed rents, expenses, and collections from patients should be maintained separately from those. for charges for attendance by Doctors and Surgeons, supply of drugs and medicines etc. Similarly, accounts for food and diet should be separately maintained. Columnar Purchases Book, Charges Book and Cash Book may be maintained for each bed.
ACCOUNTING IN SERVICE ORGANISATION Doctors, Druggists and Nursing Homes 1. Practicing Doctors, whether G. P. (General Practitioners) or specialists, maintain diary, and all details, charges, special points are noted there. From these the Incomes are grouped and recorded in daily Cash Book having columns for visits, consultation fees, prescription served etc. Ii a number of specialists carry on in partnership further columns may be necessary for charge for pathological examinations, surgical operations, X’Ray and other plates, special therapy etc. (For accounts of a Polyclinic see Problem 16, p. 1154) The expenses are also grouped in Cash Book as medical and surgical equipments and plants, special and general furniture and fixture, medicines and drugs, bandaging materials etc. and other expenses. Patients’ Ledger may have to be maintained. In case of Dentists, purchases of dentures (i.e. artificial teeth etc.) and connected materials are to be recorded in separate columns. in case of dispensing Chemists and druggists, sales book and purchases Book are to be ruled with columns for: Prescriptions served, drugs, patent medicines, baby foods, bandaging materials and the like. In case of Nursing Homes accounts for the cabin and bed rents, expenses, and collections from patients should be maintained separately from those. for charges for attendance by Doctors and Surgeons, supply of drugs and medicines etc. Similarly, accounts for food and diet should be separately maintained. Columnar Purchases Book, Charges Book and Cash Book may be maintained for each bed.