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Graduate Course

Paper - II
FINANCIAL ACCOUNTING

CONTENTS

Lesson 8 Preparation of Financial Statement for


Non-Profit Making Entities
Lesson 9 Financial Statement:
Nature, Uses and limitation of Financial
Statements
Lesson 10 Dissolution of Partnership Firms
Lesson 11 Hire Purchase Accounts
Lesson 12 Branch Accounts
Lesson 13 Inventory Valuation
Lesson 14 Single Entry System

Editor
Dr. N.K. Aggarwal

SCHOOL OF OPEN LEARNING


UNIVERSITY OF DELHI
5, CAVALRY LANE, DELHI -110007
Academic Session 2012-13 (5500 Copies)

© School of Open Learning

Published by : Executive Director, School of Open Learning, 5 Cavalry Lane, Delhi-110 007
Printed at: M/s. Arihant Offset, B-8, Suneja Tower-II, District Centre, Janakpuri, New Delhi-110 058
LESSON 8
PREPARATION OF FINANCIAL STATEMENTS FOR NON-PROFIT
MAKING ENTTES

Non-trading institutions like clubs, hospitals, schools etc. do not keep full-fledged account books because
of the expenses involved. They usually prepare the following accounts at the end of the year.
1. Receipts and Payments Account.
2. Income and Expenditure Account.
3. Balance Sheet.

Receipts and Payments Account


The receipts and payments account is merely a Summary of Cash and Bank-transactions for a year. All
that appears in the Cash Book also appears in this account. It starts with the opening Cash or Bank Balance and
ends with the balance of cash or bank at the end of the year. All receipts of Cash or Cheque are recorded on the
debit side and all the payments on the credit side. Receipts and Payments of both Capital and Revenue nature
are recorded. The receipts and payments relating to previous or future year will also be recorded, if the transactions
take place during the year. The balance in the account represents cash in hand or bank at the end of the financial
year. Usually receipts of cash are more than payments. If however, the credit side exceeds the debit side, it
represents the net bank overdraft.
The Receipts and Payment Account does not give any indication whether current (revenue) expenses
are being met out of current (revenue) incomes. There can be a sustantial cash balance, and yet the current
(revenue) incomes are not sufficient to meet out the current (revenue 0 expenses. Large cash balance may result,
for instance, from sale of a building; but that is not an income and is merely conversion of one asset, the
building into another asset viz. cash.
The account which compares current incomes with current expenses is known as Income and Expenditure
Account.

Illustration 1:
From the folowing details of the Bright Club for the year ended 31st December, 1994. Prepare the
Receipts and payments Account for the same:
Rs.
Cash (Jan. 1, 1994) in Hand ............400 6,400
at Bank.......6,000
Subscriptions and Donations received 3,000
Purchase of Govt. Securities 4,600
Sale of Tickets for annual dinner 700
Expenses of Annual Dinner and Entertainment 500
Interest on bank deposits 160
Dividends received 400
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Rs.
Contribution to Flood and Famine Victims 100
Furniture purchased 400
Rent and Hire paid 440
Postage, Printing and Stationery 80
Periodicals & Newspaper 520
Secretary’s Honorarium and Sundries 220
Cash in hand (31st December, 1994) 400

Solution:
Receipts and Payments Account of the Bright Club for the Year ended 31st December, 1994
Dr. Cr.
Rs. Rs.
1994 1994
Fan., 1 To balance b/d Dec., 31 By Govt. Securities 4,600
Cash in hand 400 By Annual Dinner &
Cash at Bank 6,000 6,400 Entertainment 500
By Contribution for Flood and
Famine Victims 100
By Furniture 400
By Rent and hire 440
Upto By Postage, Printing &
Dec., 31 To subscription Stationery 80
and Donations 3,000 By Periodicals and
To Annual Dinner Newspapers 520
realisation 7,00 By Secretary’s Honorarium
To Interest on and Sundries 220
bank deposits 160 By Cash in hand 400
To dividends 400 at Bank 3,400 3,800
10,660 10,660

Income and Expenditure Account


It is prepared just like a Profit and Loss account. The transactions of capital nature and the receipts and
payments pertaining to the previous year or subsequent year will be ommitted. The income and expenditure
relating to current year only will be recorded. Similarly income received in advance or relating to the previous
year will be ommitted. The provision will be made for the accrued incomes but not received. Similarly provision
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will be made for expenditure incurred but not paid. The items of depreciation, bad debts, profit or loss on the
sale of asset etc. will be shown in this account. All incomes will appear on the credit side, and all expenditure on
the debit side. If the credit side total exceeds debit side total, the difference in ‘Surplus’, Excess of Income over
Expenditure. On the other if the debit side total exceeds credit side, the difference is ‘Deficit’ and is called
“Excess of Expenditure over Income.”

Difference between Receipts and Account and Income and Expenditure Account:
(1) A Receipts and payments account is merely a summary of Cash transactions of aparticular period.
Whereas in a non-trading concern Income and Expenditure Account is prepared in mplace of Trading
and Profit & Loss Account.
(2) Receipts and Payments Account is a Real Account. Whereas Income Expenditure Account is a
Nominal Account.
(3) A Receipts and Payments Account records all the actual cash receipts and payments, both of Capital
Revenue, during a period irrespective of whether they pertain to previous, present or subsequent
years. But an Income and Expenditure account records only revenue items of current year. The
transactions of previous or subsequent years are ommitted.
(4) In Receipts and payments Account receipts are on the debit side viz. left hand side and payments on
the credit side viz. on the right hand side. But in Income and Expenditure Account income is shown
in the credit-side and expenditure on the debit side.
(5) A Receipts and Payments Account does not include either the accrued incomes or outstanding
expenditure. But the Income and Expenditure account must bring into account total income received
and accrued and total expenses whether paid or outstanding for the period.
(6) Depreciation, bad debts etc. are not recorded in Receipts and Payments Account, but these losses
are recorded in Income and Expenditure Account.
(7) In case of Receipts and Payments Account, balance at the end represents Cash in hand in the end,
but in Income and Expenditure Account balance represents excess of income over expenditure or
vice versa.
(8) A Receipts and Payments Account need not necessarily be accompanied by a Balance Sheet. But an
Income and Expenditure Account is always accompained by a Balance Sheet.

Illustration 2:
Calculate what amount will be posted to Income and Expenditure Account for the year ending 31st
December, 1994.
(a) (i) In 1986 the amount actually received for subscriptions was Rs. 40 800
(ii) Subscriptions outstanding (Cr. due) on 31st December 93 = 4,500
on 31st December 94 = 4,700
Subscriptions Received in Advance as on 31 st December 94 = 1,600
Subscription for 1995 received in 1994 ...... ...... = 1,500
(b) General Expenses paid in 1994 totalled Rs. 19,300. The following additional information is supplied
to you.
Rs.
Expenses unpiad on 31st Dec., 1993 .... 1,800
Expenses prepaid on 31st Dec., 1993 .... 1 1,100
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Expenses for 1995 paid in 1994 .... 1, 600


Expenses unpaid on 31st Dec., 1994 .... 1900
(c) Stock of stationery on 1st Jan, 1994 Rs. 3,000
Creditors for stationery outstanding on 1st Jan., 1994 2,000
Amount paid for stationery during the year 1994 10,800
Stock of stationery on 31st Dec., 1994 500
Creditors for stationery on 31st Dec., 1994 1,300

Solution:
(i) The amount to be credited as subscription to the Income and Expenditure Accounts is Rs. 41,100
arrived as follows:
Rs.
Subscription actually received 40,800
Add: Subscription for 1994 received in advance in 1993 1,600
Subscription for 1994 still due 4,700 6,300
Less: Subscription for 1993 received in 1994 4,500 47,100
Subscription for 1995 received in 1994 1,500 6,000
Subscription for 1995 .... 41,100
(ii) The expenses for 1994 is Rs. 19,200 calculated as under :-
Rs.
Expenses actually paid in 1994 .... .... 19,300
Add Expenses for 1994 paid in 1993 1,400
Expenses for 1994 not yet paid 1,900 3,300
22,600 Less Expenses for 1995 paid in 1994 ... 1,600
Expenses for 1993 paid in 1994 .... 1,800 3,400
19,200
(iii) The stationery consumed for 1994 is Rs. 12,600 calculated as under :
Stationery already in hand on !st Jan. 3,000
Add : Payment made during the year : 10,800
Less : Paid for the last year : 2,000
8,800
Add : Creditors for stationery at the end .... 1,300 10,100
Total stationery 13,100
Less stationery at the end (still unused) 500
Stationery actually used .... .... 12,600
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Balance Sheet
Non trading institutions should also prepare a balance Sheet in order to know the financial state of
affairs at the end of each year. Balance Sheet can be prepared if there is a Trial Balance. But in the absence of
regular trial balance, the following will be the steps:
(i) Take the previous year’s balance sheet. Adjust the figures for fixed assets, for new acquisitions)
ascertained by pursuing the payment side of the Receipts and Payment Account) and for sale
(ascertained by looking at the receipt side). The figure should be further adjusted for depreciation.
The figure now resulting will appear in the Balance Sheet.
(ii) Go through the receipts and payment and Income and Expenditure accounts and ascertain the amount
of subscription and other incomes outstanding (that is due but yet not received) and expenses prepaid.
These will be put on the asset’s side.
(iii) The amount of cash in hand and bank balance at the end of the year as disclosed by the Receipts and
Payments Account will naturally be shown on the assets side.
(iv) Compare the amount of liabilities as per previous balance sheet with payments made. If there is any
amount still to be paid, it should be entered on the liability side of the balance sheet.
(v) Go through the Receipts and Payments and Income and Expenditure Account ascertain incomes
received in advance and expenses outstanding. These should appear on the liabilities side.
(vi) Special Receipts as shown by the Receipts and Payments Account should be shown in the balance
sheet as a liability.
(vii) To the capital fund disclosded by the previous balance sheet add the surplus (or deduct the Defict),
Life Membership fees and Entrances fees if not already entered in the Income and Expenditure
Account. (If, in Examination Capital Fund is not given, it can be ascertained by deducting liabilities
from assets, on the relevant date).

Steps to prepare Income and expenditure Account from Receipts and Payments Account
1st Step :- Ignore the opening and closing cash and Bank balances.
2nd Step :- Ignore Capital expenditure and Capital Receipts.
For instance, if cash been realised by the Building the amount will not be credited to Income and
Expenditure account. The amount will be deducted from building for balance sheet purpose. Of course, if some
proit or loss has emerged from the sale of Building it will be credited or debited to income and expenditure
Account. For example, if a Building costing Rs. 50,000 is sold for Rs. 56,000 then Rs. 50,000 will be deducted
from building and Rs. 6,000 will be credited to Income and Expenditure Account. Similarly, if money has been
spent to acquire and asset, say, Furniture the amount will be shown in the balance sheet and not debited to
Income and Expenditure Account.
3rd Step :- Recenue receipts or current incomes will be found on the receipts side of the Receipts and
payments Account. These will be credited to the Income and Expenditure Account subject to the following :-
(a) Current income relating only to the year concerned will be credited to Income and Expenditure
Account. For example, if in 1994 subscription have also been received for 1993 and 1995 these
amounts should not be credited to the Income and Expenditure Account.
The amount for 1993 will extinguish a debt owing to the institution and the one for 1995 willl be
“Subscription Received in Advance” and will be shown as a liability in the Blance Sheet. The
amount will be treated as Income in 1995.
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(b) The amount which is due but not yet received in cash should be brought into account. These will be
takern to the Income and treated as an asset, cash for which will be received next year.
(c) Revenue expenses will be found on the payment side of the Receipts and payments acount. These
will be takern to the debit side of the Income and Expenditure Account subject to the following :-
(i) Expenses relating to the previous or future period should not be debited to the Income and
Expenditure Account, only expenses relating to the current year should be so debited.
(ii) Expenses which have been incurred but not yet paid for must be debited to the Income and
Expenditure Account and also stated as a liability to be down in the balance sheet.
(d) Receipts of no-recurring nature (e.g. Life Memberships) should not be credited to Income and
Expenditure Account.
(e) Depreciation and other losses should be ascertained and debited to the Income and Expenditure
Account.
(f) Total the two sides and put the difference on the shorter side as surplus 9if it is to be written on the
debit side) or defict (on credit side). Surplus is added to the Capital Fund, defict is deducte.

Illustration 3:
From the following Receipts and payment Account of a club and from the information supplied, prepare
the Income and Expenditure Account for the year ended 31st December, 1994 and the Balance Sheet as on that
date.
Receipts and Payments Account
for the year ended 31st December, 1993
Dr. Cr.
Rs. Rs.
To balance b/d 250 By Slaries 1,200
To Subscriptions for 1992 250 By General Expenses 300
1993 1,000 By Electric Charges 200
1994 200 By Books 100
Sale of old Furniture costing Rs., 100 60 By News Papers 400
To Rent received from use of Hall 740 By Postage 50
To Profit from Entertainment 400 By Furniture 250
To Sale of News Papers 100 By Balance c/d 500
3,000 3,000

Information:
(a) The club has 50 members each paying an annual subscription of Rs. 25/- Subscription outstanding
On 31st December, 1992 were Rs. 300/-
(b) On 31st December, 1993 salaries outstanding amounted to Rs. 100. Salaries paid included Rs. 100,
for the year 1992.
(c) On 1.1.1993, the Club owned land & Building valued at Rs. 16,300, Furniture Rs. 600 and Books
Rs. 500.
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Solution:
Income & Expenditure Account
for the year ended 31-12-1993
Dr. Cr.
Expenditure Rs. Receipts Rs.
To Salaries 1,200 By Subscription 1,000
Less salaries of 1992 100 Addos/ or 1993 250 1,250
1,100 By Rent received from
Add salary o/s of 1993 100 1,200 the use of Hall 740
By Profit on entertainment 400
To General Expenses 300 By sale of newspapers 100
To Electric Charges 200
To News-Papers 400
To Postage 50
To loss on the sale of
furniture (cost-sale price) 40
To Excess of Income over Expenditure 300
2,490 2,490

Subscription outstanding for 1992 is calculated as follows :-


Subscription due from total members x annual subscription of each members.
50 × 25 = Rs. 1,250
Less received for 1986
= Rs. 1,000
Subscription o/s for 1993 = Rs. 1,250- Rs. 1000 = Rs. 250
Balance Sheet (Opening)
as on 31-12-1992
Liabilities Rs. Assets Rs.
Outstanding salary 100 Land and Building 10,300
Capital fund (balancing figure) 11,850 Furniture 600
Books 500
Subscription outstanding 300
Cash in hand 250
11,950 11,950
10

Balance Sheet
as on 31-12-1993
Liabilities Rs. Assets Rs.
Salary outstanding 100 Land & Building 10,300
Subs, received in advance 200 Furniture 600
Capital Fund (operning) 11,850 Less sold 100
Add Excess of Income over 500
Expenditure 300 12,150 250 750
Books 500
Add new purchase 100 600
Subscription outstanding
1992 50
1993 250
Cash in hand 500
12,450 12,450

Peculiar Items of Non-trading Concerns


1. Donations : Donation is the amount received from some person, firm, company or any other body
by way of a gift. It appears on the Receipt side of the receipt and payments account. Whether or not
it is to be posted to Income and Expenditure Account depends upon its nature. Whenever donation
is received for a specific purpose e.g. donation for Library, Building, School or College it is to be
capitalised and is shown on the liability side of the Balance Sheet. On the other hand General
Donation is treated as income.
2. Entrance Fees : It also appears on the receipt side of the Receipts and Payment Accounts. There are
two views over its treatment in accounts which are discussed below:
(a) Views in favour of Capitalising: Many feel that since the entrance fee is paid once for ever by
a member, it is not of recurring nature therefore should be capitalised.
(b) Views in favour of treating it as income: It is argued that through each member pays entrance
fee only once yet the club receives it every year because of frequent change in the membership
for some reason or the other.
In the absence of any specific instruction student may adopt any one of the above treatment and with
the note justifying the treatment.
3. Legacies : It is like a donation and appears on the receipt side of the Receipt and payment Accounts,
it is not treated income because it is not of recuring nature. Howevrer, legacy of a small amount may
be treated as income and may be shown on the credit side of the Income and Expenditure Account.
4. Sale of old Asset: This amount is not taken to Income and Expenditure Account. But any income or
loss on the sale of assets is taken to Income and Expenditure Account. For example if an Equipment
of Rs. 800 is sold for Rs. 680 then loss of Rs. 120 will appear on the expenditure side of Income and
Expenditure Account and the Book value of the sold equipment will be deducted out of that poarticulat
asset in the Balance Sheet.
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5. Sale of Newspapers : This amount is transferred to the Income & Expenditure Account since selling
the old newspapers is a regular feature therefore it is justified to treat it as income of the particular
year.
Note : If there happens to be a case of income or of an expenses of which there appears a fund, then
expenses incurred or income earned are not taken to Income & Expenditure Account but are shown by way of
addition ( if income ) and by way of deduction (if an expense) from the respective fund e.g. sports expenses met
out of sports fund etc.

Illustration 4:
From the following information relating to Indian Cricket Club, prepare an Income and Expenditure
Account for the year ending 31st March, 1993 and the balance Sheet as at that date. The abstract of the Cash
Book for the year is as follows:
Rs. Rs.
To Members Subscription 25,000 By Upkeep of.Fields and pavilion 10,000
To Members Admission fee 1,500 By Tournament Expenses 3,500
To Sale of old balls 250 By Rates & Insurance 1,000
To Hire of Ground 1,500 By Telephone 250
To Subscription for Tournament 5,000 By Printing & Stationery 500
To Cash drawn from Bank 20,000 By Central charges 250
To Donations 50,000 By Secretary’s Honorarium 850
By Gross Seeds 100
By Bats, Balls etc. 3,500
By Lodgement in Bank 83,250
1,03,250 1,03,250

Assets at 1st April 1992 Rs.


Cash at bank 15,000
Stock of ball etc. 7,500
Printing & Stationery 1,000
Subscriptions due 2,500
Liabilities at 1st April 1992 NIL
Donation and surplus on account of Tournament should be kept in reserve for a payment pavilion.
Subscription due at 31st March, 1993 Rs. 3,750: write off 50% of Bats, Balls a/c 25% of Printing & Stationery
account.
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Solution
Income and Expenditure Account of Indian Cricket Club for the
year ending 31st March, 1993
Dr. Cr.
Expenditure Rs. Income Rs.
To Upkeep fo Field and Pavilion 10,000 By Subscription received 25,000
To Rates and Insurance 1,000 Less relating 1992 2,500
To Telephone 250 22,500
To Printing & Stationery (25% Add outstanding of
of opening stock Purchase) 375 Current year 3,750 26,250
To General Charges 250 By Members Admission fee 1,500
To Secretary’s Honorarium 850 By Sale of old Falls etc. 250
To Grass seeds 150 By Ground 1,500
To Bat & Ball etc 3,500
Add previous Stock 7,500
11,000
(50% to be written off) 5,500
To Excess of Income over
Expenditure 11,125
29,500 29,500

Balance Sheet of Indian Cricket Club as on 31st March 1993


Expenditure Rs. Income Rs.
Capital Fund 26,000 Cash at Bank 78,250
Add Current years Stock of Bats & Balls etc. 5,500
Excess Income over Printing & Stationery 1,125
Expenditure 11,125 37,125 Subscription due 3,750
Reserve for Permanent Pavilion 51,500
88,626 88,625
Working Notes:
Balance Sheet of Indian Cricket Club as on 31st March 1992
Rs. Rs.
Capital Fund (Balancing figure) 26,000 Cash at bank 15,000
Stock of Ball, Bats etc. 7,500
Printing & Stationery 1,000
Subscription due 2,500
26,000 26,000
13

Rs.
(2) Reserve for Permanent
Pavilion .... 50,000
Add Sub. for Tournament .... 5,000
55,000
Less Expenditure regarding tournament 3,500
51,500
(3) Cash at Bank :
Rs.
Opening Balance 15,000
Bank Ledger 83,250
98,250
Less Bank drawn 20,000
78,250

Illustration 5:
The following Receipts and payments Account was prepared by the Secretary of the Holy Cricket Club
for the year ended 31st December 1993
Dr. Cr.
Receipts Rs. Payments Rs.
Jan., 1 Cash in hand 500 Dec., 31 Rent of ground 180
1993 Balance bank as per 1993 Cost of teas 300
Pass Book: Groundsman’s charge 1,200
Deposit A/c 2,200 Moving machine 2,000
Current A/c 1,000 Fares 500
Dec. 31, Donation 1,200 Printing and Stationery 200
Subscriptions 2,000 Misc Office Expenses 250
Bank Interest 50 Repair to Equipment 800
Receipts from teas 500 Honorarium to Secretary
Contributions to fares 200 1985 500
Sale of Equipment 300 Cost of Variety Entertainment 220
Proceeds of Varisty entertainment 1,000 Balance at Bank as per Pass
Interest on Security Book Deposit A/c 2,500
@ 6% of cost 600 Current A/c 680
Cash in hand 220
9,550 9,550
14

The following additional information is given :-


On 1.1.1993 On 31.12.1993
(i) Subscriptions due 300 200
(ii) Due for printing 50 40
(iii) Interest on Deposit Account not entered in pass book — 50
(iv) Estimated value of Equipment and 1,000 2,200
(v) Unpresented Cheques, being payment for
repairs to equipment 450 680
(vi) For the year ended 31st December, 1993 the honourarium to Secretary is to be increased by Rs. 300
and the Groundman is to be receive a bonus of Rs. 240.
You are required to prepare Income & Expenditure Account for the year ended 31st December,
1993 and the Balance Sheet on the date.

Solution:
The Holy Cricket Club
Income & Expenditure Account for the year ended 31st Dec., 1993
Expenditure Rs. Income Rs.
To Groundman’s charge 1,200 By Bank Interest Received ...... 50
Add Bonus Payable 240 1,440 Add Due on Deposit 60 110
To Rent of Ground 180
To Fares 500 By Donation 1,200
Less Contributionto fares 200 300 Subscriptions received 2,000
To Printing & Stationery 200 Add due on 31-12-93 200
Less due on 1-1-93 50 2,200
150 Less due on 1-1-93 300 1,900
Add due on 31-12-93 40 By Receipts from Teas 500
190 Less Cost of Teas 300 200
To Misc. Office Expenses 250 By Proceeds of Variety
To Repairs to Equipment 1,030 Entertainment 1,000
To Honorarium to Secretary 800 Less Expenses 220 780
(Rs. 500 + 300)
To Dep. of Equipment & Machine 500 By Interest on Security 600
To Excess Income over
Expenditure 100
4,790 4,790
15

Balance Sheet as on 31-12-1993


Expenditure Rs. Income Rs.
Due for Honorarium to Cash in hand 220
Secretary (Rs. 500+300) 800
Bonus to Groundman 240 Cash at bank:
Printing 40 Deposit A/c 2,500
Capital Fund: Current A/c
Capital Fund: (Rs. 680-680) NIL
Opening Balance 14,000 Securities 10,000
Add Excess pf Income Interest due on Deposit A/c 60
Over Exp. 100 14,100 Subscription Due
Equipment & Manchinery: 200
Opening Balance 1,000
Add Purchased 2,000
3,000
Less Sale 300
2,700
Less Depreciation 500 2,200
15,180 15,180

Balance Sheet as on 1st Jan., 1993


Rs. Rs.
Honourarium Payable to Secretary 500 Cash in hand 500
Due to Printing 50 Balance at bank
Capital Fund Deposit A/c 2,200
(Balancing figure) 14,000 Current A/c (1,000-450) 550
Securities 10,000
Subscription due 300
Equipment 1,000
14,550 14,550

Working Notes:
(1) Repairs to Equipment (given) .... 800
Less Unpresented Cheques on 1.1.1993 450
16

(it relates to 1993) 350


Add Unpresented Cheque on 31.12.1993 680
(it relates to 1993) 1,030
Amount debited to Income & Expenditure Account.
(2) Before proceeding with the solution opening and closing balances in Current Account should be
calculated as per Club’s books. Since a cheque for Rs. 450 issued last year was not presented to the bank for
payment of the end of that year the opening balance at bank as per pass book must be more by Rs. 450 as
compared to the bank balance as per Club’s books. Thus opening balance as per Club’s books was Rs. 1,000450
= Rs. 550. Similarly closing balance at bank 9current A/c as per Club’s books) should be Rs. 680-680.... Nil.

Illustration: 6
From the following information relating to Delhi Social Club, you are required to purpose;
(a) An income and Expenditure Account (including any profit or loss on bar) for the year ended 31st
Dec., 1994:
(b) A Balance Sheet at that date.
(i) A summary of the Cash Book for the year 1994 is as follow:
Rs. Rs.
Bank blalance at 18th Jan., 1994 836 Bar Suplier 13,461
Annual Subscriptions 3,668 Bar wages 1,099
Bar Tahings 15,392 Salaries and Wages 1,365
Rooms 146 office expenses 424
Income from Invertments 315 Lighting and heating 372
Sales of Invertments Rates and Insurance 287
(original Cost Rs. 263 328 Miscellaneous Expenses 303
Investments Furniture (purchase) 1,400
on 30 June 1994 Bank Balance 900
at 31st Dec., 1994 1,074
(ii) The balance at banks on 1st Jan., 1994 represented Rs. 336 on current Account and Rs. 500 an
on deposit account. All the receipts shown in the alone summary were paid into the current
account except for on 41 deposit account interest (including in income from investments) and
all payments were made from the current account. During 1994, Rs. 300 was transferred from
the current account to the deposit account.
(iii) The following items were outstanding at 31st Dec., .
1993 1994
Rs. Rs.
Subscriptions in arreas 79 98
Salaries & Wages accured 33 41
Creditors for bar Subscribes 1,217 1,325
17

Stock of Stationery 50 65
Subscriptions in advance 14 26
Telephone bill outstanding 29 37
Electricity charges Unpaid 31 44
Debtors for bar sales 12 49
Repairs account outstanding 9 53
Bar Wages accured 21 23
Stock of Coke 40 57
Rates and Insurance prepaid 62 73
Stock of bar supplies 1,422 1,989

(iv) At 31st Dec., 1993, the Club owned the following assets which are shown at the accounts they
on purchases. At 31st Dec., 1993 they had been in the ownership of the Club for the number of
years indicated:
Rs.
Freehold Premier 6,000 12 years
Furniture 1,000 12 years
Furniture 800 5 years
Investments 3,000 4 years
(v) The Club is providing for the depreciation of freehold premiser at 21/2% per annum and of
furniture at 10% per annuam both rates being Calculated on orginal cort.

Solution :-
Delhi Social Clube
Bar Trading Account for the
year ended 31st Dec., 1994
Rs. Rs.
To Stock (Opening) 1,422 By Sales 15,429
To Purchase 13,569 By Stock at the end 1,989
To Bar Wages 1,101
To Bar Profit 1,326
17,418 17,418

Income & Expenditure Account


for the year ended 31st Dec., 1994
Rs. Rs.
To Salaries wages 1,373 By Subscriptions 3,675
To Office Expenses 423 By Hire of Incomes 146
To Lighting and Heating 368 By Income from Investments 315
18

To Rates and Insurance 276 By Profit on Sale of Investments 65


To Repairs 44 By Bar Profits 1,326
To Miscellenous expenses 303
To Depreciation
Premises 150
Furniture 125
To Wxcess of Income over
Expenditure 2,465
5,527 5,527

Balance Sheet
As On 31st Dec., 1994
Rs. Rs.
Capital Fund 8,753 Freehold Premises 6,000
Add Surplus 2,465 11,218 Less: Depreciation Furniture 1,950 4,050
2700
Less Depreciation 1,525 1,175
Creditors for:
Salaries etc. 41 Investments 4,137
Bar Supplies 1,325 Stock of Stationery 65
Telephone 37 Stock of bar Supplies 1,989
Electricty 44 Stock of Coke 57
Repair 53 Bank:
Bar Wages 23 1,523 Deposit Account 851
Subscriptions received 26 Current Account 223
in advance Subscription due 98
Debtor’s for Bar sales Prepaid Rates 49 73
12,767 12,767

Working Notes:
(i) Calculation of Capital Fund
Balance Sheet
as on 31st Dec., 1993
Rs. Rs.
Outstanding Salaries 33 Free Hold Premises 6,000
Creditors for Bar Supplies 1,217 Less Depreciation 1,800 4,000
Subscriptions received in advance 14 Furniture 1,800
Outstanding Telephone Bill 29 less Depreciation 1,400 400
19

Outstanding Charges forElectricty 31 Investments 3,000


Creditors for Repairs 9 Stock of Stationery 56
Outstanding Bar Wages 21 Stock of bar Supplies 1,422
Capital Fund (Balancing) 8,753 Stock of Coke 40
Debtors for Salary 12
Subscriptions due 79
Prepaid Rent etc. 62
Bank - Deposit Account 500
Current Account 336
10,107 10,107

(iii) Bar Purchase Rs. (iii) Bar Wages Rs.


Paid in 1994 13,461 Paid in 1994 1,099
Less: Creditors (1993) 1,217 Less : payment for 1993 121
12,244 1,078
Add : Creditors (1994) 1,325 Add : Outstanding 1994 23
13,569 1,101

(iv) Bar Sales Rs. (v) Subscriptions Rs.


Cash Collected in 1994 15,392 Received 1994 3,668
Less : Debtors (1993) 12 Add : Prepaid 1993 14
15,380 3,692
Add : Debtors (1994) 49 Add : Outstanding 1994 98
15,429 3,780
Less : prepaid, for 1995 26
3,754
Less Outstanding for 1993 79
3675

(vi) Salaries & Wages Rs. (vii) Repairs Rs.


Paid in 1994 1,365 Outstanding as on 31.12.94 53
Less : Outstanding (1993) 33 Less o/s 31.12.93 9
1,332 44
Add : Outstanding (1994) 41
1,373
20

(viii) Office Expenses Rs. (ix) Investments Rs.


Opening Stock Stationery 56 Balance as 31.12.1993 3,000
Paid for in 1994 424 Purchased during 1994 1,400
480 4,400
Less : o/s (1993) Phone 29 Less Disposal 263
451 4,137
Less : Stock of Stationery (1994) 65
386
Add : Outstanding for Phone 1994 37
423

(x) Light and Heat Rs. (xi) Profit as Sale of Investments Rs.
Opening Stock of Coke 40 Sales Price 328
Payments in 1994 372 Less : Value of Investments 263
412 Profit 65
Add: Outstanding for Electricty 94 44
456
Less : Stock of Coke (1994) 57
399
Less : Outstand Electricty (1993) 31
368

(xii) Rates & Insurance Rs.


Pavmens in 1994 287
Less : Prepaid (1994) 73
214
Add : Prepaid (1993) 62
276

Illustration 6
Following are the Income and Expenditure Account of a literary society for the year ending 31st Dece.,
1994 and the balance sheet as on that date:-
21

Income and expenditure Account for the year ending 31.12.1994


Expenidture Rs. Income Rs.
To Expenses By Subscriptions 9,700
Rent 2,800 By Entrance fees 2,000
Printing 900 By Entertainment:
Advertisement 800 Income 4,000
Petty Expenses 220 4,720 Less Cost 3,000 1,000
To Excess of Income over
Expenditure 9,980 By Interest on security 2,000
14,700 14,700

Balance Sheet as on 31st Dec., 1994


Expenditure Rs. Income Rs.
Outstanding for Rent 400 Cash 8,680
Outstanding for Printing 300 Govt. Securities
Capital Fund: on 1-1-94 40,000
On 1-1-94 62,300 Add Purchased
Add Excess of during the year 10,000 50,000
Income over Expenditure 9,980 72,280 Accured Interest 600
Subscription accured 1,300
Library Books 5,200
Furniture 7,200
72,980 72,980

Additional Information:
On 1st Jan., 1994 the position was as following :
Rs.
(i) Outstanding creditor 1,700
(ii) Library books 4,000
(iii) Furniture 5,900
(iv) Accrued interest 500
(v) Outstanding Subscription 1,600
You are required to prepare Receipts and Payments Account.
22

Solution:
As already seen, Receipts and Payments Account concentrates to items (capital and revenue) transacted
in cash during a year although, they may pertain to any period (preceeding, current or subsequent year). But an
income and Expenditure Account embodies ail the revenue items of the given year whether dealt in cash or not.
Hence the sums not dealt in cash such as accrued income or expenses of the current year are eliminated from the
later account so that the precise account of cash received and paid for the years revenue items is obtained to
draw up the former account. Any cash received and paid against the previous and current year’s income and
expenses is found from adjustments shown in the inner columns of Income and Expenditure Account.

Receipts and Payments Account for the year ending 31.12.1994


Receipts Rs. Payments Rs.
To Balance b/d By Cost of Entertainment 3,000
(balancing figure) 12,000 By Rent 2,800
To Subscription 10,000 Less Outstanding 400 2,400
To Entrance Fees 2,000 31-12-1994
To Entertainment 4,000 By Printing .... 900
To Interest 1,900 Less Outstanding 3300 600
On 31-12-1994
By Advertising 800
By Petty Expenses 220
By Outstanding Creditors
for last year 1,700
By Furniture 1,300
By Library Books 1,200
By Investment 10,000
By Balance c/d 8,680
as per balance sheet
29,900 29,900

Working Notes
Subscription : Interest on Security
Income 1994 9,700 Income 1994 2,000
Less Outstanding on 31-12-1994 1,300 Less Accrued but not received on 31-12-1994 600
8,400 1,400
Add outstanding 1-1-94 1,600 Add Accrued but not received on 31-12-93 500
10,000 1,900
Library Books : Furniture :
On 31-12-94 5,200 On 31-12-1994 7,200
Less on 1-1-1994 4,000 Less on 1-1-1994 5,900
Purchase during the year 1,200 Purchased during the year 1,300
23

Illustration 7:
When Receipts and Payments and Income and expenditure Accounts are given and you are required to
prepare the Balance Sheet
The Following particulars relates to the National, Sports Club :

Income and Expenditure Account for the year ended Dec., 31st 1994
Rs. Rs.
To Salaries 4,500 By Entrance Fee 31,500
To Printing & Stationery 6,600 By Subscription 40,800
To Advertising 4,800 By Rents 12,900
To Audit Fees 1,500
To Fine Insurance 3,000
To Depreciation on sports equipment 27,000
To Excess of Income over 42,900
90,300 90,300

Receipts and Payments Amount or h fetaer ended December 31 1994


Rs. Rs.
To Balance b/d 12,600 By Salaries 3,000
To Entrance Fees 31,500 By Printing & Stationery 7,800
To Subscriptions : By Advertising 4,800
1993 1,800 By Fire Insurance 3,600
1994 45,000 By Investment 60,000
1995 1,200 By Balance c /d 23,400
To Rent received 10,500
1,02,600 1,02,600

The Assets on 1st January, 1994 included grounds pavilion Rs. 132,000 sports equipment Rs. 75,000
an Furniture and Fixture Rs. 12,000. Subscriptions in arrear on that date were Rs. 2,400.
Prepare the Balance Sheet on December, 31 1995

Balance Sheet as on December 1995


Liabilities Rs. Assets Rs.
Subscription received in advance 1,200 Club Grounds & Pavilion 1,32,000
Salary outstanding 1,500 Sports Equipments 48,000
Audit Fees outstanding 1,500 Furniture & Fixture 12,000
Capital Fund 2,32,8000 Subscriptions outstanding 2,400
Add excess of income over Cash in hand 23,400
expenditure 42,900 2,75,700 Rent received outstanding 1,500
Fire Insurance prepaid 600
Investments 60,00
2,79,900 2,79,900
24

Working Note:
Balance Sheet as on 31st Dec.,
Capital Fund 2,32,800 Club Grounds & pavilions 1,32,000
(Balancing figure) 2,32,800 Sports equipment 75,000
Printing & Stationery Furniture & Fixture 12,000
outstanding 1,200 Subscription outstanding Cash in hand 2,400
2,34,000 2,34,000
Note :- Printing and stationery over paid for the last years outstanding bills; that in respect of Insurance
is assumed for the next year. Expenses not paid or under paid are liabilities.
25

LESSON 9
FINANCIAL STATEMENTS : THEIR NATURE, USES AND LIMITATIONS

The term ‘financial statements’ refer to those statements which incorporate the accounting data in a
purposive and useful manner. In India, such statements, commonly prepared for supplying to the outsiders,
include the Income statement and the Position Statement which are widely known by the names Profit and Loss
account and Balance Sheet respectively. In addition to these two, the management, for purposes of making
evaluations and financial decisions, also prepares many other statements like funds-flow statement, statement
of retained earnings, statement containing important ratios, statement highlighting various achievements, etc.
According to the International According Standards Commit (ISAC), financial statements include : a balance
sheet, income statement, notes and other statements and explanatory material which are identified as part of the
financial statements.

Maintenance of Accounts:
Tracing back the history of accounting we find that it is as old as money - h only yardstick of accounting
data. Chanakya highlighted the end for maintain of accounting and their audit long back in his well known and
historical published work “ Arthashastra”. The single entry system, also called as the Indian system of accounting,
is as scientific and systematic as the on developed by he Westerns. The present-day system of accounting,
widely known as the double-entry system, was developed by Luccas Pacioli of Italy far back in the 15th century.
But modern uses of accounting data could b be developed only during the last few dads when after the industrial
revolution, complex industrial units with heavy capital investment am into being and the various management
experts like Taylor, Fayol and others emphasised the need for improving h management of financial resources,
efficiency, increasing productivity, And thus maximise output and minimis input. In this task, h ‘American
Institute of Certified Public Accounts” (AICPA) has played a mutable part. Further modern accounting machines
an electronic computers have tremendously added the ‘use value of the accounting data an and h hence or their
proper recording and maintenance.
According to AICPA accounting is “the art of recording, classifying and summarising in a significant
manner and in terms of money transactions an events which are, in part at least, of a financial character, and
interpreting the results there”. Thus, important attributes of accounting are:
(i) events and transactions of a financial nature, even though only partly of this type are record-events
of a non-financial nature, say the passing of control from on person of another, can no be recorded;
(ii) the recorded must b in such a way as of b able of portray the significance of all transactions and
events individually and collectively, class by class and as a whole-this involves both analysis and
summarisation;
(iii) the parties concerned must b able p gather the up message of the results as embodied in the statements
finally prepared. Accounting knowledge should also help a person understand h meaning of the
financial statements of any firm or institution placed before him.
Thus, maintenance of accounts, in on form or the other, dates back to the origin of human civilisation
and man’s taking-up of trade activities. It developed with the growth of h single entry system and was further
improved upon by the invent of the double entry system of accounting. But the double entry system of accounting
itself does no make i obligatory or any organisation, business or not-business, to keep proper accounts or even
the books of accounts. According, originally, was adopted as an aid to memory, a pie of evidence in case of
disputes and as a matter of convenience. But with the growth of civilisation, innovations and transformations in
26

trade, its activities and the manner of organising, it is was felt more and more necessary to maintain proper
accounting records. In the course of time different forms of organisations, namely company, partnership,
cooperative societies, clubs and other associations go legal recognition., It was as early as in the 18th century
when h New York stock exchange and the Securities Exchange commission in USA first recognised h importance
of protecting the interests of ever increasing share holders;’ other investors and their funds invested in any form
in corporate firms (all companies in India). The exchange mad it obligatory on the part of the member firms to
circulate publish accounts of its shareholders so that thy could know the state of affairs and true financial
position of the firms(s) in which hey invest their funds.
Thus, through the efforts of organisations like stock exchanges, investors’ or shareholders’ organisations
and growing awareness of the governments, today, we fin that in almost every civilised country there are laws
which make i obligatory or organisation, both business and nonbusiness, to maintain proper accounts and distribute
them in a given form to those who have invested heir funds in them or otherwise have an interest in their
management. We in India find that Indian Companies Act, cooperative Societies Act Income Tax Act, T. Several
status, rq u i r e d corporate firms, associations and other bodies corporate of maintain proper books of accounts.
Some of these statues even require them of circulate copies of its accounts among its members periodically.
Generally for this purpose most of the organisations have an independent accounting department. Besides
maintaining proper accounting records one of the fundamental responsibilities of a modern accounting department
is the preparation of various financial statements and reports to be used by management and external parties are
generally interested in he financial statements.
(a) Shareholders : In the cas of corporate bodies, Shareholders an learn about the results of operations
and financial position of the company only thought the annual statements showing the profit earned
(for loss suffered) and the assets and liabilities.
(b) Investors: Those who wan to invest their funds in the shares or other securities of a corporate body
are also naturally interested in the financial statements of know how safe the investment already
made is and how safe the proposed investment will be.
(c) Creditors : Generally supplies of goods to various organisations do so on credit, thy would also like
to be satisfied that they will b paid on time, The financial statements greatly hp them in properly
assessing the capability of the organisation to di so.
(d) Labour : Workers being entitled to payment of bonus, which depends on the size like to b satisfy
that the bonus being paid d to them is correct, they are much interested in knowing the profit earned
or loss suffered by the firm. This knowledge also helps them in conducting negotiations for future
ages.
(e) Government: Financial statements also helps the state governments in compiling heir national
accounts. Such statements are of obvious importance for them in ascertaining the income-tax
realizable.
(f) Researchers : As a mirror to business condition, the financial statements are of immense value or
conducting research suits into business affairs, thus statements are, therefore, of great interest to
scholars undertaking research pertaining to aspects such as financing, profitability liquidity etc.

Proposed and Uses of Financial Statements:


Financial statements amy taken the form of an annual report, company prospectus, project report, et. As
discussed above, those statements are frequently used for studying different financial aspects, relating of an
organisation, by shareholders, creditors, financial analysis, government agencies, trade unions banks an even
management. In every cas thy must furnish the receipt in with proper and sufficient information to enable him to
make an gent decision or judgement concerning some aspect of the entity. About the purpose of financial
statements a group of progressive American Accountants, some forty years ago, rightly stated hat “financial
27

statements are prepared or the purpose of presenting a periodical review or report on progress made by the
management and deal with the status of h investment in the business and the results achieved during the period
under review . Thy reflect a combination of recorded facts, accounting conventions, an personal judgements, an
the judgements and conventions applied affect them materially. Thy soundness of the judgement necessary
depends on the competence and integrity of those who make them and on their adherence to generally accepted
accounting principles an conventions”
Again modern account maintain that accounting is useful for the purpose of:
(a) formulating, implementing and approving he policies;
(b) bringing our coordination among different activities: (c) planning and control of day to day
operations;
(d) accounting for responsibilities within the business;
(e) studying specific projects or phases of a business;
(f) measuring he financial position and income of the business; and
(g) reporting on he stewardship of the business to the owners and outsiders such as creditors,
government agencies, etc.
In brief financial statements are prepared with h object of transmitting reliable an useful accounting
information to those who and it, both within and outside the organisation, and that proper us of the information
so transmitted i hp the recipient in making a sound decision.
But, here , we must be aware of the fact that there are no standardised forms which may be adopted by
all industrial, commercial and other organisations, for presenting their accounting information and preparing
financial statements, as consequence, the classification of some of he financial statement items varies widely.
Such a variation is further widened buy the factors like;
• managements’ wishes;
• intended use of he statements;
• accounts’ knowledge, training experience and his attitude towards such statements;
• deviation from the generally accepted accounting principles concepts and changes in terminology.
So, frequently, a researcher or an analyst may desire to recast and rearrange h accounting data in
accordance with his requirements, views and the purpose of analyses.
Accounting is widely accepted as an art. It is also claimed to be a science, but an inexact science. The
more we practise it the better we are in accounting and hence financial statement preparation. Financial statements
reflect the opinion, experience an judgement of the accountant and the management. Thus, the estimated life an
the method of depreciations to be used in the valuation of pant and equipment, the method of inventory valuation,
the valuation of intangibles (patents, goodwill et.) are some of the areas which are largely influence by personal
opinion and value judgements. As a result equally competent accountants, when given the same of fats. May
arrive at different results.

Imitations of financial statements:


An financial statements are prepare with the help of the recorded facts of business transactions. Here
accounting concept and conventions as also the personal judgements of the accountants play an important roe.
As a consequence e, we experience the following imitations of the financial statements.
1. The allocation of revenue and costs to an accounting period involved personal judgment. The problem
involves the achievement of satisfactory (but never a perfect) matching of costs with revenues.
28

Other factors that tend to make statement data uncertain include the existence of contingent assets
and liabilities.
2. The e statements show exact rupee amounts, which give an impression of finality and precision.
Rarely does the stated value of an asset represent the amount of cash that would be realized on
winding up of the business, even the cash balance would be reduced buy the expenses incidental to
the liquidation process. For example, a patent, trade mark, or organisation costs may be stated, due
to a management’s policy, at the conservative value of rupee one : in a liquidation a large sum might
b realised on such assets.
3. Both the basic financial statements, namely balance sheet and profit and loss account, reflect
transactions that involve rupee values of many dates. Du to continuous inflationary pressure on the
economy, prices have ben showing an increasing trend. As a result many industrial pants established
some forty years ago cannot be replaced today even at four times the original historical cost shown
on the balance that. The depreciation charge against current revenues by companies using pre-war
plants is less than the depreciation appropriated on a replacement cost basis. The balance sheet itself
does not indicate the current economic realities.
4. Non-monetary factors which too have a bearing on he working of an organisation, cannot b be
communicated or shown on the financial statements. Such factors include sources and communicated
or shown on the financial statements. Such factors include sources and commitments for materials,
merchandise, and supplies, the reputation, and prestige of the company with the public : h credit
rating of the company; and the efficiency, loyalty and integrity of management an employees,
Contingent assets and liabilities customarily are not, and usually an no b, stated definitely in rupees.
The e forgoing discussion of h imitations of financial statements shown their tentative character under
norma or peacetime conditions. It should b evident that financial statements are still more tentative when abnormal
or wartime conditions prevail.
The variations complained in accounting classifications, practices, opinions and judgements can, to a
are extent, b checked by adopting the following our principles of presenting accounting information :
(a) Classification: the acts figures and items recorded must b grouped in suitable groups or
classification.
(b) Arrangement : The data should be arranged in a manner such that individual items, classes,
totals highlight important facts, events and rations, if any,
(c) Order : The data should be so presented as to bring into focus the important figures, such as
net profit on cost of materials consumed, product sales, etc. in a profit and loss account.
(d) Descriptions : Instead of taking titles verbatim from the edger there should be proper headings
or group names. Also i must b ensured that description of amounts are both accurate and
understandable.
29

LESSON 10
DISSOLUTION OF PARTNERSHIP FIRMS

Dissolution
According to Section 39 of Partnership Act of 1922 “ the dissolution of partnerships between all the
partners of a firm is called dissolution of the firm”.. In the case of dissolution of a firm, an and is put to he
business of the firm, assets are raised, the liabilities are paid of, and accounts of a the partners are settled.
Dissolution of a firm differs from dissolution of a partnership. When a partnership is formed for a
specified terms or venture; it is dissolved on expiry of h term or completion of the venture. Similarly, death,
retirement or insolvency of a partner results in the dissolution of the partnership, but the remaining partners may
continue to run the business in pursuance to an express or implied contract to that effect. If they do not do so, the
firm automatically stands dissolved. The dissolution of a partnership need not necessary lead to dissolution of
the firm but dissolution of a firm necessarily involves dissolution of partnership also. Dissolution of the firm in
addition to the dissolution of partnership takes place when;
(i) he partners agree that the firm be dissolved (Sec. 40);
(ii) all the partners or a the partners except one becomes insolvent (Sec, 41);
(ii) the business of the firm is declared illegal (Sec. 41);
(iv) in cas of partnership at will, a partner gives notice of his intention of dissolve the firm (Se, 42); and
(v) the court orders dissolution of the firm under any one of the following circumstance (Se. 44):
(a) Where a partner becomes of unsound mind;
(b) Where a partner is permanently incapable of performing his duties as a partner;
(c) Where a partner is guilty of misconduct affecting the business:
(d) Where a partner wilfully or persistently commits breach of partnership agreement:
(e) Where a partner transfer his entire interests to a third party;
(f) Where the business cannot the carried on except at a loss; and
(g) On any just and equitable ground.

Settlement of Accounts
According to Section 48 of the Partnership Act, he accounts; unless otherwise agreed upon, are settled
in the following manner:
(a) losses including deficiencies of capita, shall be paid first out of profits, next out of capita and
lastly, if necessary, by the partners individually in the proportions in which they are entitled to
share profits.
(b) The assets of the firm, including any sums contributed by the partners to make up deficiencies of
capital, shall be applied in the following manner and order:
(i) in paying the debts of the firm to third parties;
30

(ii) in paying to each partner rateably what is due to him from the firm for advances as distinguished
from capita;
(iii) in paying to each partner rateably what is due to him an acccunt of capital; an
(iv) the residue, i any, shall b divided among the partners in proportions in which thy are nit to
share profits.
Thus on dissolution of a firm, sa prods of the assets of the assets (including that of Goodwill) and any
sums contributed by h partners to make up deficiencies of capital must b applied:
1. In paying debts due of third parties (including debts d of partners’ spouses);
2. Remainder, in paying partners’ advances (loans) mad by hem over and above their capital
contributions. If the balance is not sufficient to pay h advances fully, ratable payment should b
made. In cases a partner has a debit balance in his capital account, sufficient amount should be
transferred to his capita account from his advance account to make up the debit balance before
allowing it of rank for payment among with advances from other partners.
3. The residue remaining still b used in paying of partners the sums due to them on account of
capitals. To arrive at the sums due to partners on capita accounts, the residue si remaining should
b compared with the total of he capitals (after adjustment of accumulated profits and losses) of a
he partners.The difference between the two should be transferred to heir capita accounts in heir
profit sharing ratio.

Firm’s Debts and Private Debts


Where there are join debts from the firm, and also separate debts due from any partners in his individual
capacity, the legal position as to settlement of such debts is as follows:
(a) Debts of the firm should b paid first our of he property of he firm, and if there is any surplus, then he
share of each partner should be applied in payment of separate debts.
(b) Private property of a partner must be applied in payment of his private debt, and the surplus, if any,
in payment of debts of h firm.

Accounting Treatment on Dissolution


On dissolution he boos of accounts of h firm will have to b finally closed. The procedure is of open
Realisation Accounts and take the following steps;
1. To Close Asset Accounts : Transfer a the assets except ash, Bank and fictitious assets like debit
balance of P & A/c, Advertisement, etc.) at book values to newly opened Realisation Account. The entry will be:
Realisation A/c Dr.
To Various Assets Accounts
(Transfer Book debts at gross value, i.e. wihou deducting provision or Bad and Doubtful Debts, f there
is cash in hand on the date of dissolution, transfer i of Bank Ac. reat Goodwill like any other Assets).
2. To Close liability Accounts : Transfer a he liabilities due to third parties of Realisation Account
(liabilities due to partners should not be so transferred) at book values. The entry will be :
Sundry liability A/c Dr.
To Realisation A/c
31

3. To Close Fictitious Assets Accounts: Transfer a the liabilities Assets A/s to partner capital or
current A/c
The entry Will be
Partners’ Capital A/cs Dr.
To Realisation A/c
To Advertisement etc.
4. To Close Provision or Reserve : (created against an asset): Transfer provision or Reserve Accounts to
Realisation A/c. The entry will be:
Provision A/c Dr.
To Realization A/c
5. To Realise Assets :
(1) When hey are sod in he marker, the entry i b
Bank A/c Dr.
To Realization A/c
(2) When taken over by on or more partners
Partners’s Capitals or (Current A/c) Dr.
To Realisations A/c
(3) When taken over by a creditors on full or payments-No entry will be passes (see point ‘c’ below)
6. To pay off liabilities due to third parties
(a) When paid in cash, the entry will be
Realisations A/c Dr.
To Bank A/c
(b) When partner agrees to discharge a liability
Realisation A/c Dr.
To Partner’s Capita A/c
(c) When a liability is discharged by transferring an asset (other than cash an Bank at book value or
revised, he entry is made by net amount arrived at after deducting he amount of the asset so Transferred from the
gross amount of liability to be paid, The entry will be :
Realisations A/c Dr.
To Bank A/c
Net amount = Gross Amount of liability - Asset transferred
7. Net deal with the expenses on dissolution
(1) When he expenses are to be born by h firm the entry will be
Realisations A/c Dr.
To Bank A/c
(2) When the expense to b paid at a fixed rat to one of the partners who has contracted to bear a the
32

expenses of dissolution, no entry for actual expenses incurred will be made. However, the entry for the amount
paid at fixed rate to he partner will b :
Realisations A/c Dr.
To Partners’ Capital A/c
or Current A/c
Alternatively, the actual expanses paid by a partner may be treated as drawings an in addition to entry
made above or more entry is passed. The entry will be:
Partners Capita or current A/c Dr.
To Bank A/c
(3) When expenses are borne by one of the partners in his personal capacity, no entry will be passed.
8. To Close Accumulated Profits and Reserve A/c (not being Reserves of Provisions against assets) :
Transfer accumulated profits and reserves to the capita or current A/cs. of the partners. The entry will be :
Reserve A/c Dr.
To Partners’ capital or current A/cs
9. To deal with unrecorded dissolution
(1) When he unrecorded assets is realised in cash, the entry will be:
Bank A/c Dr.
To Realisations A/c
(2) when the unrecorded asset is taken over by one of the partners, he entry will be :
Partners Capital or Current A/c Dr.
To Realisations A/c
There will be no transfer entry for such assets’ A/s as they do no appear in the books
10. To Discharge Unrecorded liabilities
(1) When paid in cash, the entry will be:
Realisation A/c Dr.
To Bank A/c
(2) When taken over by one of he partners, he entry will be :
Realisations A/c Dr.
To Partner’s capital or Current A/c
11. To Close Realisation A/c
Realisation A/ will disclose their profit or loss on dissolution. The profit or loss is shared by the partners
in their profit sharing ratio by transfer to their capital or urrent A/cs. The entry will be : In the case of profits
Realisation A/c Dr.
To Partners Capital or Current A/c
In the case of loss
Partners’, Capital A/c or Current A/c Dr.
33

To Realisation A/c
12. To pay off advances due to partners
On making paymnet to partners for advance due to them, the entry will be:
Partners Advances (loans) A/c Dr.
To Bank A/c
(When a partner has a debit balance in his apital A/c, the loan amount equal to the debit balance will be
transferred to the Capital A/c of the partner and only the balance will be transferred to the apital A/c of the
partner and only the balance will be paid).
13. To Close Partners’ Current A/cs
Partners, Ccurrent A/ balances (Dr. or Cr.) should be transferred to their respective Capital A/cs prior to
final distribution of cash amongst the partners.
If Current A/cs show credit balane, the entry will be .
Partners’ Current A/cs Dr.
To Partners’ Capital A/c
If current A/cs show debit balances, the entry will be :
Partners’ Capital A/cs Dr.
To Partners Current A/cs
14. To Close the Capital A/cs of the Partners
In the end any credit balance standing in the capital A/cs is paid, the entry for it will be:
Partners Capital A/cs Dr.
To Bank A/c
If the capital acccount of a partner shows a Debit balance in the end, he will be required to bring in cash
to make up the debit balance. The entry will be :
Bank A/c Dr.
To Partners Capital A/c

Illustration
P.Q. and R sharing profit and losses in the ratio of their capitals agreed upon dissolution of their firm on
31st December, 1994. On that date their Balance Sheet was as under:
Liabilities Rs. Assets Rs.
Capital A/cs Building. 56,000
Rs. Rs.
P-50,000 Plant & Machinery 25,000
Q-40,000 Less Prov. for Depreciation 5,000
R-10,000 1,00,000 20,000
Reserve Fund 10,000 Furniture 6,000
34

P’s Loan 10,000 Investment 10,000


Mrs. P’s Loan 5,000 Less Fluctuation Fund 500 9,500
Joint Life Policy Fund 15,000
Current A/cs Rs. Motor Vehicle 20,000
P-6,000 Joint Life Policy 15,000
R-4,000 10,000 Debtors 10,000
Sundry Creditors 15,500 Less Provision 1,000 15,000
Less provision 500 Stock at Invoice Price Rs. 20,000
For Discounts 15,000 Less Unrealised profit 5,000 15,000
Bills Payable 11,000
Outstanding Expenses 1,000 Unexpired Insurancce 100
Bills Receivanle 5,000
Q’sCurrent A/c 5,000
Cash in band 1,000
Ccash at Bank 9,400
1,77,000 1,77,000

Following further information is given :


1. Life Policy was surrendered for Rs. 13,000
2. Debtors raised 14,000 (including Rs, 1,000 in respect of debt written off as bad earlier).
3. P took over half of Mrs. Fs Loan and for the balance Mrs. P acccepted furniture,
4. Rebate of Rs. 200 was received on retiring all the bill payable immediately.
5. There was an unrecorded Liability of Rs 500
6. Stock-in-Trade which included an obsolete and valueless item of Rs. 1,000 was taken over by P & Q
equally at 20% discount.
7. A machine, completely written off from the books and which was estimated to realise Rs. 3,000 was
taken over by Q.
8. Goodwill realised Rs. 4,000, Building Rs. 60,000, Plant and Machinery Rs. 15,000, and investments
Rs. 8,500.
9. Realisation expenses amounted to Rs. 1,000. Half of the expenses were borne by P.
10. The partners presented the Motor Car of the firm to the manager of the dissolved firm in recognition
of his services.
Pass the entires neccessary to close the books, assuming that each partner finally settled his A/c with
the firm.
35

Solution
Journal
1994 Rs. Rs.
Dec. 31 Realisation A/c Dr. 1,73,100
To Building A/c 56,000
To Paint & Machinery A/c 25,000
To Furniture A/c 6,000
To Investments A/c 10,000
To Motor Vehicle A/c 20,000
To Joint Life Policy A/c 15,000
To Bectors A/c 16,000
To Stock A/c 20,000
To Unexpired Insurance A/c 100
To Bills Received A/c
(Being transfer of various assets to
Realisation A/c at book values)

Sundry Creditors A/c Dr. 15,500


Bills payable A/c Dr. 11,000
Mrs. P’s Loan A/c Dr. 5,000
Outstanding Expenses A/c Dr. 1,000
To Realisation A/c 37,500
(Being various liabilities transferred to Realisation A/c) 15,000
1994
Dec. 31 Joint Life Policy Fund Dr.
Provision for Depreciation Dr. 5,000
Provision for Bad and Doubtful Debts Dr. 1,000
Provision for stock Dr. 5,000
Investment Fluctuation Fund Dr. 500
To Realisation A/c 26,500
(Being various provision transferred to Realisation A/c) 500
Realisation A/c Dr.
To Reserve for Discount on Crs. 500
(Being Reserve for discount transferred to Realisation A/c
36

Bank Dr. 1,19,500


To Realisation A/c 1,19,500
(Being the amount realised cfrom sale of assets.)
Building .... 60,000
Plant
Machinery .... 15,000
Debtors .... 14,000
Goodwill .... 4,000
Investments .... 8,500
Bills
Receivable .... 5,000
Joint Life
Policy .... 13,000
1,19,500

Realisation A/c Dr. 27,300


To Bank 27,300
(Being the payment of various liabilities)
Bills Payable 10,800
(Rs. 11,000-200 Rebate,
Creditors 15,000
Outstanding Expenses 1,000
Unrecorded Liability 500
27,300
Realisation A/c Dr. 2,500
To P’s Current A/c 2,500
(Being half of Mrs. P’s loan taken over by P.)
P’s Current A/c Dr. 6,000
Q’s Current A/c Dr. 6,000
To Realisation A/c 12,000
(being stock taken over by P and Q)
Q’s Current A/c Dr. 3,000
To Realisation A/c 3,000
(being machine taker over by Q)
37

P’s Current A/c Dr. 10,000


Q’s Current A/c Dr. 8,000
R’s Current A/c Dr. 2,000
To Realisation A/c 20,000
(Being Motor Car presented to manager
Loss before in profit sharing ratio.)
Realisation A/c Dr. 500
To Bank 500
(Being realisation expenses paid Rs, 1,000 - 500 borne by P)
” Realisation A/c Dr. 9,600
To P’s Current A/c 4,800
To Q’s Current A/c 3,840
To R’s Current A/c 960
(being profit on realisation transferred to partners Current A/cs)
” Bank Dr. 1,000
To Cash 1,000
(Being the amount of cash in hand transferred to Bank)
P’s Loan Dr. 10,000
To Bank 10,000
(Being P’s loan paid off)
” Reserved Fund Dr. 10,000
To P’s Current A/c 5,000
To Q’s Current A/c 4,000
To R’s Current A/c 1,000
(Being transfer of Reserve Fund to the Current A/cs
of the partners in their profits sharing ratio)
” P’s Current A/c Dr. 2,300
R’s Current A/c Dr. 3,960
To P’s Capital A/c 2,300
To R’s Capital A/c 3,960
(Being transfer of credit balances in P and
R’s Current A/cs to their Capital A/cs)
” Q’s Capital A/c Dr. 14,160
To Q’s Current A/c 14,160
(Being transfer of.Q’s Current A/cDebit balance to this Capital A/c)
38

” P’s Capital A/c Dr. 52,300


Q’s Capital A/c Dr. 25,840
R’s Capital A/c Dr. 13,960
To Bank 92,100
Note 8 : No entry for furniture takern over by Mrs P in satisfaction of balance of her loan [half having been
takern over by Mr.P] will be passed. Here furniture realised only an amount equal to the amount of
loan satisfied by its transfer.
2. In case where Current A/cs of the partners are not in use, their Capital A/cs should be debited or
credited.

Ledger Accounts

Realisation Account
Dr. Cr.
1994 Rs. RS.
Dec.31 To Sundry Assets By Sundry Liabilities:
Building 56,000 Creditors 15,500
Plant & Machinery 25,000 Mrs. P’s loan 5,000
Furniture 6,000 Bills Payable 11,000
Investments 10,000 Outstanding
Motor Vehicle 20,000 Expenses 1,000 32,500
Joint Life Policy 15,000 By Provisions :
Debtors 16,000 Joint Life Policy Fund 15,000
Stock (LP.) 20,000 Provision for
Unexperied Insurance 100 Deprn. 5,000
Bills Receivable 5,000 1,73,100 Provision for Debtors 1,000
To Reserve for
” Discunts Crs. 500 Provision for Stock 5,000
To P’s Current A/c 2,500 Inv. Fluctuation Fund 500 26,500
(Half of Mrs. P’s Loan) By Bank:
” To Bank: Building 60,000
Bills Payable 10,800 Plant & Machinery 15,000
Creditors 15,000 Debtors 14,000
Outstanding Expenses 1,000 Bills Receivables 5,000
Unrecorded Liability 500 27,300 Investments 8,500
39

Joint Life Policy 13,000


To Bank (Realistation expenses) 500 Goodwill 4,000 1,19,500
” To Profit trans ferred to: By P’s Current A/c
Stock 6,000
Car 10,000 16,000
P’s Current A/c 4,800 By Q’s Current A/c
Q’s Current A/c 3,840 Stock 6,000
R’s Current A/c 960 9,600 Machinery 3,000
Car 8,000 17,000
By R’s Current A/c
Car 2,000
2,13,500 2,13,500

Bank A/c
Dr. Cr.
1994 Rs. 1994 Rs.
Dec. To Balance b/d 9,400 Dec. By Realisation A/c
31 To Cash (Balance in 31 Bills Payable 10,800
hand/transferred) 1,000 Creditors 15,00
Outstanding
Expenses 1,000
To Realisation A/c Unrecorded Lib. 500 27,300
Building 60,000 By Realisation A/c
Plant & Machinery 15,000 (Realisation Exp.) 500
Debtors 14,000 By P’s Loan 10,000
Bills Receicable 5,000 By Capital A/cs
Investments 8,500 P’s 52,300
Joint Life Policy 13,000 Q’s 25,840
Goodwill 4,0001 1,19,500 R’s 13,960 92,100
1,29,900 1,29,900
40

Current Accounts
Dr. Cr.
1994 P Q R 1994 P Q R
Rs. Rs. Rs. Rs. Rs. Rs.
Dec. To Balance b/d 5,000 Dec., By Balance b/d 6,000 4,000
To Realsisa tion A/c 6,000 6,000 By Reserve Fund 5,000 4,000 1,000
(Stock)
To Realisation A/c 3,000 By Realisation A/c. 2,500 — —
(Machinery) (Mrs. P’s)
To Realisation A/c 10,000 8,000 2,000 LoanBy Realisation A/c 4,800 3,840 960
(Car) (Profit)
To Capital A/cs 2,300 — 3,960 By Capital A/cs — 14,160 —
18,300 22,000 5,960 18,300 22,000 5,960

Capital Accounts
P Q R P Q R
Rs. Rs. Rs. Rs. Rs. Rs.
1994 1994
Dec. Dec.
31 To Current A/c — 14,160 — 31 By balance b/d 50,000 40,000 10,000
To Bank 52,300 25,840 13,960 By Current A/c 2,300 — 3,960
52,300 40,000 13,960 52,300 40,000 13,960

Alternative Method:
Under this method, the treatment differs from the one already discussed only in respect of the following:
1. Assets and liabilities (including provisions) are not transferred to Realisation A/c. Worthless Assets,
however, are transferred to Realisation A/c. at book accounts
2. Provisions are transferred to the resoectice asset or liability accounts.
3. On realisation of an asset, the sale proceeds are credited to the asset account. The balance remaining
in the account, being profit or loss, is then transferred to Realisation A/c. In case a partner takes over
an asset, the asset account is credited with the value at which the asset is taken over and capital A/c.
or Current A/c. of the partner is debitede.
4. On payment of liabilities, the liability account is debited and cash account credited.
Any balance remaining in the liability account is then transferred to Realisation A/c.
Under this method, in the solution to the previons illustration problem. Realisation A/c. and other
relevant accounts would have appeared as under:
41

Realisation A/c
Dr. Cr.
1994 Rs. 1994 Rs.
Dec. 1 To Plant & Machinery 5,000 Dec.31. By Building 4,000
” To Furniture 3,500 ” By Joint Life Policy 13,000
” To Investments 1,000 ” By Bills Payable (Rebates) 200
” To Stock 3,000 ” By Bank:
” To Debtors 2,000 Bad Debts
” To Unexpired Insurance 100 Recovered 1,000
” To Bank Goodwill 4,000 5,000
Unrecorded Liability 500 By Q’s Current A/c
Realisation Exp. 500 1,000 (Machinery)
To Profit
Transfered to
P’s Current A/c 4,800
Q’s Current A/c 3,840
R’s Current A/c 960 9,600
25,200 25,200

Bank A/c.
Dr. Cr.
1994 Rs. 1994 Rs.
Dec. 31 To Balance b/d 9,400 Dec. By Bills Payable 10,800
” To Cash 1,000 ” By Sundry Creditors 15,000.
” To Building 60,000 ” By Outstanding Exp. 1,000
” To Plant & Machinery 15,000 ” By Realisation A/c
” To Debtors 13,000 ” Unrecorded
” To Bills Receivable 5,000 Liability 500
” To Investments 8,500 ” Realisation Exp. 500 1,000
” To Joint Life Policy 13,000 ” By P’s Loan A/c 10,000
” To Realisation A/c ” By Capital A/cs.
Bad Debts P 52,300
Recovered 1,000 Q 25,840
Goodwill 4,000 5,000 R 13,960 92,100
1,29,900 1,29,900
42

Current A/cs.
1994 P Q R 1994 P Q R
Dec., 31 To Balance b/d — 5,000 — Dec. By Balance b/d 6,000 — 4,000
” To Stock 6,000 6,000 ” By Reserve Fund 5,000 4,000 1,000
” To Motor Vehicle 10,000 8,000 2,000 ” By Mrs. P’s Loan 2,500 — —
” To Realisation A/c — 3,000 — ” By Realisation A/c 4,800 3,840 960
(Match)
” To CapitalA/c 2,300 — 3,960 ” By Capital A/c — 14,160 —
18,300 22,000 5,960 18,300 22,000 5,960

The Capital A/cs, will be ahown as in the previous solution.

Building A/c.
Dr. Cr.
1994 To Balance b/d 56,000 1994 By Bank A/c 60,000
Dec. 31 To Realisation A/c 4,000
60,000 60,000

Plant and Machinery A/c


1994 1994
Dec. 31 To Balance b/d 25,000 Dec. 31 By Provision for Depreciation 5,00,
By Bank 15,000
By Realisation A/c 5,000
25,000 25,000

Furniture A/c
1994 1994
Dec. 31 To Balance b/d 6,000 Dec. 31 By Mrs. P’s Loan 2,500
By Realisation A/c. 3,500
6,000 6,000

Investment A/c
1994 1994
Dec. 31 To Balance b/d 10,000 Dec. 31 By investment Fluctuation Fund A/c 500
By Bank 8,500
By Realisation A/c 1,000
10,000 10,000
43

Motor Vehicle A/c


Dr. Cr.
1994 1994
Dec. 31 To Balance 20,000 1994 By P’s Current A/c 10,000
By Q’s Current A/c 8,000
By R’s Current A/c 2,000
20,000 20,000

Joint Life Policy A/c


1994 1994
Dec. 31 To Balance b/d 15,000 Dec. By Joint Life Policy Fund 15,000
To Realisation A/c 13,000 By Bank 13,000
28,000 28,000

Debtors A/c
1994 1994
Dec.l By Balance b/d 16,000 Dec. 31 By provision for Debtors 1,000
By Bank 13,000
By Realisation A/c 2,000
16,000 16,000

Stock A/c
1994 1994
Dec. To Balance b/d 20,000 Dec 31 By Provisions for Unrealised profits 5,000
By P’s Current A/c 6,000
By Q’s Current A/c 6,000
By R’s Current A/c 3,000
20,000 20,000

Bills Receivable A/c


1994 1994
Dec. 31 To Balance b/d 5,000 Dec 31 By Bank 5,000
5,000 5,000

Mr, P’s Loan A/c


1994 To P’s Current A/c 2,500 Dec. 31 By Balance b/d 5,000
To Furniture A/c 2,500
5,000 5,000
44

Sundry Creditors A/c


1994 To P’s Current A/c 500 Dec. 31 By Balance b/d 15,500
To Bank 15,000
15,500 15,500

Bills Payable A/c


1994 To bank 10,800 1994 By Balance 11,000
Dec. 31 To Realisation A/c 200
11,000 11,000

Outstanding Expenses A/c


1994 Rs. 1994 Rs.
Dec.31 To Bank 1,000 Dec. 31 By Balance b/d 1,000
1,000 1,000

Dissolution before expiry of a fixed term


A partner who on his admission, happens to-pay a premium (goodwill) to the existing partners under a
stipulation that the firm will not be dissolved before the expiry of a fixed ter, will be entitled to a refund of such
an amount of the premium so paid as is reasonable having regard to the terms upon which admission was made
and to the length of perod agreed upon and that already expired, if the firm is dissolved before the expiry of such
a term. However, no claim in this respect will arise if:-
1. the firm is dissolved due to the death of partner:
2. the dissolution is mainly due to the partner’s own misconduct:
3. the dissolution is in pursuance of an agreement containing to propvision for the return of the premium
or any part of it.
Any amount that becomes due to such a partner will be borne by the other partners in their profit
sharing ratio. Suppose X,Y, take Z as a new partner on the condition that Z pays Rs. 20,000 for goodwill and it
is agreed that the partnership would be for 10 years. But if the firm is dissolved after 6 years only without there
being any misconduct on the part of the new partner, death of any partner or without an agreement entered into
not providing for return of goodwill so paid, he will be entitled to a refund of Rs. 8,000

SALE TO A COMAPNY
Often, a partnership firm converts itself into a joint stock limited company or sells its business to an
existing one. Broadly, the procedure already discussed above will be followed for closing the books of the firm.
Realisation Account will be opened ans assets transferred to it, so also liabilities (but not if liabilities are not
assumed by the company). Whatever the company pays as purchase consideration will be credited to the
Realisation Account. If expenses are incurred by the company, no further treatment is necessary beyond
transferring them to the credit of Realisation Account; but id creditors are to be paid by the firm, the actual
amount paid to them will be debited to liability account concerned; the difference betweeen the book figure and
the amount actually paid will be transferred to the realisation Account. The profit or loss on realisation will be
transferred to the capital accounts in the profit-sharing ratio. Besides the above, the main points to be noted are
the following:
45

(a) Usually, the company takes over all the assets including cash. Therefore, cash should also be
transferred to Realisation Account. If however, the company does not take over cash, it will not be transferred.
(b) Usually, the company will discharge the amount due from it in the form of cash, debentures and
shares. Separate accounts will, of course, be opened for debentures and share received, partners will divide the
debentures and shares among themselves, in the absence of an express agreement, in the ratio of their final
claims, that is to say, in the ratio of capitals standing after the loss or profit on realisation and other reserves and
profits have been transferred. Further, since no fraction of a share or debenture can be allotted, the nearest
whole number of shares or debentures should be given to a partner, the necessary adjustment being made in
cash, if there is an agreement of divide the shares or debenturs in a particular manner, the agreement should be
followed.
Notes : (l)Some authorities recommend that shares in joint stock companies should be divided among
partners in the profit-sharing ratio. This will enable partners to enjoy any future profit -sharing ratio. This will
enable partners to enjoy any future profit or loss on shares in the profit-sharing ratio. However, it seems that in
the absence of an agreement, the Partnership Act does not permit this method of distribution. Profits and loss
after dissolution have no bearing on partnership accountts. Shares cannot be treated differnently from other
assets, say stock and furniture, it would of course, be better if the Partnership Deed contains a clause regarding
this matter.
(2) If there is some valueless asset in the bools of the firm and if this has to be divided among the
partners, it should be divided in the profit-sharing ratio so that any ultimate profit or loss may correspond to the
ratio in which profits are shared.
Illustration A.B. and C carry on business in partnership sharing profits and losses in the proportions of
1/2,3/8. and 1/8, respectively. On 31st March, 1991, they agreed to sell their business ot a limited company.
Their position on that date was as follows.
Rs. Rs.
A’s Capital 40,000 Freehold property 48,000
B’s Capital 30,000 Machinery 42,000
C’s Capital 26,000 Book Debts 15,000
Loan on Mortage 16,000 Stock 23,000
Sundry Creditors 18,000 Cash 2,000
1,30,000 1,30,000

The company took the following assets at the valuation shown below:-
Rs. Freehold property 61,000
Machinery 31,800
Book Debtors 14,000
Stock 22,000
Goodwill 10,000
The company also agreed to pay the creditors which was agreed at Rs.17,700. The company paid
Rs. 67,000 in fully paid shares of Rs. 10 each and the balance in cash. The expenses to Rs. 1,500.
Prepare Ledger Accounts in the books of the firm.
46

Solution:
Realisation Account
Dr. Cr.
1991 Rs. Rs. 1 1991 Rs. Rs.
Mar. 31 To Sundry Assets: Mar 31 By Loan on Mortgage 16,000
Freehold property 48,000 By Sundry Creditors 18,000
Machinery 42,000 By Ltd. Company’s A/c-
Book Debts 15,000 F. Property 61,000
Stock 23,000 1,28,000 Machinery 31,800
To Cash-expenses 1,500 Book Debts 14,000
To Cash-Loan paid 16,000 Stock 22,000
To profit transferred to: Good will 10,000
A’s Capital, 1/2 4,800 1,38,800
B’s Capital, 3/8 3,600 Less Creditors 17,700 1,21,100
C’s Capital, 1/8 1,200 9,600
1,55,100 1,55,100

Limited Company’s Account


1991 Rs. 1991 Rs.
Mar. 31 To Realisation A/c By Shares in Ltd. 67,000
purchase consideration 1,21,100 By Cash 54,100
1,21,100 1,21,100

Cash Account
1991 Rs. 1991 Rs.
Mar. 31 To Balance b/d 2,000 Mar.31 By Realisation A/c
To Ltd. Company 54,100 Expenses 1,500
Loan 16,000
By Capital Accounts:
A 16,380
B 12,280
C 9,940 38,600
56,100 56,100
47

Shares in Ltd. Co.


1991 Rs. 1991 Rs.
Mar. 31 To Ltd. Company 67,000 Mar31 By A’s Capital A/c 28,420
By B’s Capital A/c 21,320
By C’s Capital A/c 17,360
67,000 67,000

Capital Accounts
A B C A B C
To Shares in ... Ltd. Co. 28,420 21,320 17,360 By Balance b/d 40,000 30,000 26,000
To Cash (balance) 16,380 12,280 9,940 By Realisation
A/c Profit 4,800 3,600 1,200
44,800 33,600 27,200 44,800 33,600 27,200

Note. Total number of shares received from the limited company is 6,700. These have been divided
among A,B, and C in the ratio of 448,336 and 272 or 28,21 respectively, namely, in the ratio of the amount
finally due to them. Hence

6,700
A gets × 28 or 2,842 shares of Rs. 28, 420:
66

6,700
B gets × 21 or 2,132 shares of Rs. 21,320 : and
66

6,700
C gets × 17 or 1,726 shares of Rs. 17,260
66

Insolvency of a Partner
If on dissolution, the capital account of a partner shows debit balance after his share of profit or loss has
been adjusted therein, he becomes debtor to the firm to that extent and will have to bring insufficient amount to
make up the debit balance in his capital account. If however, the partner is insolvent, the amount due will either
not be realised al all or at any rate will not be paid in full. In such a case, the deficiency this arising will have to
be borne be solvent partners, before the decision in Garner v Murray’s case was delivered, such as loss was
treated as an ordinary loss and was borne by the solvent partners in their profit sharing ratio. But the decision in
the above mentioned case has changed the positon.

Decision in Garner v Murray


If a patner is unable to repay the debt due to the firm on dissolution, it was decided that:
1. First the loss on realisation should be transferred to the Capital accounts of all partners (including
the insolvent partner) in their profit sharing ratio. Then, the solvent partners having credit balance in
their Capital accounts should contribute cash equal to their share of loss on realisation. A solvent
48

Partner with a debit balance in his capital account will only be required to make the debit balance in
the end.
2. Deficiency arising due to insolvency of a partner must be borne by solvent partners in proportion to
their Capitals (here solvent partner means a partner who is solvent and has a credit balnce in his
Capital account just prior to dissolution). Thus the decision makes a distinction i.e. between a loss
occasioned by the default of partner, and an ordinary trading loss.
3. The Capitals in proportion to which the deficiency will have to be borne by the solvent partners
should be the Capital standing at the date on which, the partners determined upon dissolution and
prior to making of any adjustment arising from the realisation of assets. As the Capitals can be fixed
or fluctating for determining the relevant ratio, the real capitals will be ascertained as under:
1. Where the Capitals are fluctuating the Capital amounts are determined after adjusting all the
reserves and accumulated profits, all drawings, interest on capital, interest on drawings to the
date of dissolution but before adjusting loss on realisation.
2. Where the capitals are fixedd, the Capital amounts which the partners had last agreed to be
fixed. (All adjustments for reserves and accumulated profits etc., are through current A/c).
To sum up, when a partner is insolvent and there is deficiency in his capital account, the procedure to
settle the accounts will be.
1. Ascertain at the date of dissolution the solvent partners’ adjusted capitals, if fluctutaing, otherwise
their fixed capitals.
2. Prepare realisation A/c as usual and transfer the loss on realisation to the capital accounts of all the
partners in their profit sharing ratio.
3. Credit, if anything is received from the estate of the insolvent partner, to his capital account.
4. Credit the solvent partners for cash brought in by them equal to their share of loss on realisation. (In
practice, only entries are made and no cash is brought actually, such normal adjustment is sufficient).
5. Determine the ultimate deficency of insolvent partner after making all the asjustments including
receipts from his estate, if any.
6. Transfer this deficiency to the capital accounts of solvent partners in the ratio of thir capitals as
determined (1) above.
7. The solvent partners will then draw out cash according to their claims.

Equity
According to the decision in Garner v. Murray case, only those solvent partners, whose capital accounts
show credit balance on the date on which they determine upon dissolution, are required to bear the loss arising
on account of insolvency of a partner. A partner with no capital or with his capital account showing a debit
balance, however a solvent and affluent he may be, is not called upon to bear any share in insolvent partner’s
capital deficeny as the same has to be borne by solvent partners in proportion of their capitals. Such a partner is
only called upon to bring in the amount, if any, standing to the debit of his own capital account. Again as solvent
partners alone are made to bear the deficiency, so the partner or partners having the large balance irrespective of
their affluence will have to bear large proportion of the deficiency.

Application in India
The decision in Garner v. Murrary may appear to be contrary to the provisions of Partnership Act.
Section 48 (B) (III) clearly provides that the residue remaining still after payingoff outside liabilities and advances
by partners, shall be applied in paying to each partner rateably what is due to him (after adjustment of loss on
49

realisation) on account of capital. Where ther is dificiency in the capital account of an insolvent partner, even
after making ratable payment, the capital account of sol vent partners will not be closed, and on the other hand,
the insolvent partner’s Capital account balance (Def.) will remain unadjusted. A strict interpretation of Sec. (h)
(III) suggest s that the unsatisfied credit balances in the capital accounts of the solvent partners should be
adjusted against the deficiency in the insolvent partners’ capital account. Thus, the solvent partners are made to
bear the deficiency equal to the unsatisfied balances remianing in their capitl accounts after rateable distribution
of the residue. However, in view of there being no judicial ruing of the point as to how the deficiency shoul be
borne by solvent partners, it would not be entirely improper to apply the decision of Garner v. Murray. Therefore,
when working out problems involving application of the dicision on one should indicate whether or not the
rules has been applied.

Illustration
A,B,C, and had been carrying on business in partnership sharing profits and losses in the ratio of
3:2:1:1. They decided to dissolve the partnership on the basis of the following Balance Sheet as on
31st Dec. 1994.
Liabilities Rs. Assets Rs.
Capital A/c Land and Building 30,000
A 25,000 Furniture 10,000
B 15,000 40,000 Stock 25,000
Debtors 10,000
A’s Loan 10,000 Bank 1,500
General Reserve 14,000 Cash in hand 500
Capital Reserve 3,500 Capital A/cs:
Mortgage Loan 10,000 C 3,500
Sundry Creditors 6,000 D 3,000 6,500
83,500 83,500

1. The assets were realised as under:


Rs.
Land & Building 22,500
Furniture 4,000
Stock 15,000
Debtors 6,000
2. Dissolution expenses amounted to Rs. 1000/-
3. Further liability of Rs. 6,500 had to be met.
4. C became insolvent and Rs. 1,300 was realised from his private estate.
Prepare necessary accounts to close the books of the firm. Apply the decision in Garner v. Murray’s
case.
50

Solution:

Realisation A/c
Dr. Cr.
1994 To Sundry Assets 1994 By Sundry Liabilit
Dec. 31 Building 30,000 Dec.31 Mortgage Loan 10,000
Furniture 10,000 S. Creditors 6,000 16,000
Stock 25,000 By Bank
Debtors 10,000 75,000 Building 22,500
Furniture 4,000
To Bank (Real.exp.) 1,000 Stock 15,000
To Bank Debtors 6,000 47,500
Mortgage Loan 10,000 By Loss Transferred to
S. Creditors 6,000 A 15,000
Further Liability 6,500 22,500 B 10,000
C 5,000
D 5,000 35,000
98,500 98,500

Bank A/c
Dr Cr.
1994 Rs. 1994 Rs.
Dec.31 To Banalnce b/d 1,500 Dec.31 By Realisation:
To Cash 500 Mortgage Loan 10,000
To S. Assets S. Creditors 6,000
Building 22,500 Further liability 6,5,00 22,500
Furniture 4,000 By Realisation Exp. 1,000
Stock 15,000 By A’s Loan A/c 10,000
Debtors 6,000 47,500
To Capital A/cs By Capital A/cs
A 15,000 A 29,900
B 10,000 B 18,400 48,300
C 6,000
D 1,300 32,300
81,800 81,800
51

Capital Accounts
A B C D A B C D
1994 Rs. Rs. Rs. Rs. 1994 Rs. Rs. Rs. Rs.
Dec. To Balance 3,500 3,000 Dec. By Balance 25,000 15,000 — —
31 b/d 31 b/d
To Loss By Gen. 6,000 4,000 2,000 2,000
on Real 15,000 10,000 5,000 5,000 Reserve
To C’s By Res. 1,500 1,000 500 500
Capital By Bank
A/c 2,600 1,600 — — (Loss on 15,000 10,000 — —
To Bank 29,900 18,400 — — Reals)
By Bank — — 6,000 1,300
By A’s
By Capital A/c — — 2,600
By B’s
Capital A/c — — — 1,600
47,500 30,000 8,500 8,000 47,500 30,000 8,500 8,000

Note: Where the capitals are fixed, Reserves and other accumulated profits, if any, and loss on realisation
is transferred to partners’ Current Accounts ion their profit sharing ratio. Cash brought in by solvent partners is
credited to their Current Accounts. The insolvent partners’ current account is then transferred to his capital A/c.
After crediting any amount realised from the estate of the insolvent partner, the dificiency is determined and
transferred to the capital A/cs of solvent partner in the ratio of their fixed capitals. The current A/cs of solvent
partner in the ratio of their fixed capitals. The current A.cs of solvent partners are transferred to their capital
accounts to determine amounts finally due to them,

When All the partners are insolvent


If all the partners become insolvent, the balance of cash on the date of dissolution, sales proceeds of the
assets together with whatever is received from the private estate of the partners will not be sufficient to discharge
the claims of third parties in full after meeting realisation expenses. Partners’ advances, if any, will also not be
PAID. Such advances should be transferred to the capital A/cs of thr partners concerned. In such a case, the
dissolution accounts may be prepared in any of the following two methods.

First Method
Under this method the dissolution accounts are prepared in the usual manner. All the assets (except
cash & Bank) and outside liabilities are transferred to Realsisation A/c Available amount of cash (cash balance
on the date of dissolution plus sale proceeds of assets plus cash received fom the private estates of insolvent
partners, if any, minus dissolution expenses) is paid to the creditors which will not be in full discharge in their
claims. The saving (balance remaining unpaid to creditors) will automatically be adjusted in Realisation A/c.
Profit or loss on realisation is distributed amongst the partners in their profit sharing ratio by transfer to their
52

capital accounts. If there is a debit balance in the capital account of any partner, it is transferred to the capital
accounts of the partners showing credit balance at this stage in the ratio of their capitals.

Second Method
Under this method all the asset accounts (except cash and banks) are transferred to Realisation A/c by the
liability A.c are not so transferred. Dissolution expenses are debited to Realisation A/c. The profit or loss on
realisation is transferred to the capital accounts of partner in their profit ratio. Availabel cash (balance on the date
of dissolution plus sale proceeds assets minus dissolution expenses) is utilised in making rateable payment to the
creditors. The balance in the creditors’ accounts remaining unpaid is transferred to Deficiency A/c to which the
balances of partners’ capital accounts are also transferred to finally close the books of accounts of the firm.

Illustration
The Balance Sheet of X,Yand Z who were sharping profits and losses in the ratio of 3:1:1, stood as
follows on 31st December, 1994 i.e., the date of dissolution:
Liabilities Rs. Assets Rs.
Sundry Creditors 90,000 Cash in hand 2,000
Bank Overdraft 1,25,000 Bills Receivable 8,000
X’s Capital A/c 30,000 Debtors 50,000
Z’s Capital A/c 20,000 Stock 80,000
Plant 60,000
Goodwill 20,000
Y’s Capital A/c 45,000
2,65,000 2,65,000

The Assets realised Rs. 1,59,500. Realisation expenses amounted to Rs. 4,000. Show the final adjustment
among the partners, assuming that they are all insolvent and Y’s estate realised Rs. 5,000.
Solution:
(First method)
Realisation A/c
1994 1994 Rs.
Dec. To Sundry Assets Dec.
31 Bills receivable 8,000 31 By Sundry Liabilities:
Debtors 50,000 Bank Overdraft 1,25,000
Stock 80,000 S.Creditors 90,000 2,15,000
Plant 60,000 By Cash (Assets realised) 1,59,500
Goodwill 20,000 2,18,000 By Loss transferred to :
4,000 X’s Capital A/c 6,000
To Cash (Realisation expenses) Y’s Capital A/c 2,000
To Bank (Liabilities) 1,62,500 Z’s Capital A/c 2,000 10,000
3,84,500 3,84,500
53

Cash A/c
1994 Rs. 1994 Rs.
Dec. To Balance 2,000 Dec. By Realisation A/c (Realisation Exp.) 4,000
To Realisation A/c By Realisation A/c (Liabilities) 1,62,500
(Sales proceeds of Assets) 1,59,500
To Y’s Capital A/c
(Reed, from Y’s estate) 5,000
1,66,500 1,66,500

Illustration
Red. Zed and Ted shared profits and losses in the ratio of 5 : 3 : 2 On 31st March, 1990, their balance
sheet was as follows : -
Liabilities Rs. Assets Rs.
Trade Creditors 30,000 Sundry Assets 60,000
Bank Loan 10,000 Profit & Loss Account 40,000
Capitals :
Red 30,000
Zed 20,000
Ted 10,000 60,000
1,00,000 1,00,000

The Bank had a charge on all the assets; these realised Rs. 29,000 in all. Zed’s private estate realised
Rs. 6,000 his private creditors were Rs. 5,000 Ted was unable to contribute anything. Red paid 1/3 of what was
finally due from him (taking the payment also into account) except on account of other partners. Prepare ledger
accounts, passing all matters relating to realisation of assets and payment of liabilities through the Realisation
Accounts.
Solution:
Realisation Account
Dr. Cr.
1990 Rs. 1990 Rs. Rs.
Mar. 31 To Sundru Assets transfer 60,000 Mar. 31 By Trade Creditors 30,000
” By Bank Loan 10,000
” To Cash-Bank Loan 10,000 ” By Bank A/c 29,000
” To Cash-Trade Creditors 20,200 ” By Loss transferred to :
Red’s Capital A/c 10,600
Zed’s Capital A/c 6,360
Ted’s Capital A/c 4,240 21,200
90,200 90,200
54

Cash Book
1990 Rs. 1990 Rs.
Mar. 31 To Realisation A/c 29,000 Mar. 31 By Realisation A/c
” To Zed’s Capital A/c 1,000 Bank Loan 10,000
To Red’s Capital A/c 200 By Realisation A/c
Trade Creditors 20,200
30,200 30,200

Capital Accounts
Red Zed Ted Red Zed Ted
Rs. Rs. Rs. Rs. Rs. Rs.
To Profit & Loss A/c 20,000 12,000 8,000 By Balance b/d 30,000 20,000 10,000
To Realisation A/c Loss 10,600 6,360 4,240 By Cash 1,000
To Red’s Capital A/c 400 By Cash 200
To Ted’s Capital A/c 2,240 By Transfer to
Zed’s Capital A/c 400 2,240
30,600 21,000 12,240 30,600 21,000 12,240

The amount brought in by Reds has been calculated as follows:-


Suppose, the amount brought in by Red is xi.e. 1/3 of amount due from Red. The amount then payable
to trade creditors will be Rs. 20,000 + x, Rs. 20,000 being available without the amount to be brought in by Red,
The loss on realisation will be : Rs. (60,000 + 10,000 + 20,000 + x – 69,000) or Rs. 21,000 + x.
Red’s share will be Rs. 5/10 (21,000 + x) or Rs. 10,500 +l/2x, making the debit balance his capital
account to be Rs. 20,000 + 10,500 + x/2 - 30,000 or Rs. 500 + x/2.
Then 3x = 500 +x/2
6x = 1,000 +x
5x = 1,000
x = 200 Gradual Realisation of Assets and Piecemeal Distribution

GRADUAL REALISATION OF ASSETS AND PIECEMEAL DISTRIBUTION


It has been assumed in the working of all the illustrations so far in this chapter that all the assets are
realised on the date of the dissolution, and that 11 expenses and liabilities are paid on that date. This assumption
enables one to know immediately the profit or loss on realisation which can then be transferred to the capital
accounts; this determines the final amount due to the partners. In actual practice, this assumption is far from
valid. Assets are realised and cash collected gradually. Final results are not known till auite some time. In the
meantime, the cash collected is distributed among the carious paues. The student remembers that in case of
dissolution, first of all the outside creditors have to be paid, then if surplus remains, any loans givens by the
partners over and above their capitals are paid (rateably if the amount available is not sufficient) and last of all,
55

the partners’ capitals are paid off. It is clear, therefore, that any cash in hand or cash clooected should be
distributed among creditors until all of them are paid off. One must remember to keep adequate funds for
liabilities that may arise in future, for instance, for bills discounted exected to be dishonoured. After this, the
cash available should be applied in returing partners’ loans proportiontely if two or more than two partners have
advanced loans to the firm.

Proportionate Capital
The main question is how to distribute cash among partners for return of capital. One must remember
that the profit or loss on realisation of assets will not be known for some time and, therefore, this profit or loss
cannot be adjusted in the capital accounts immediately. And yet cash must be distributed in such a way that the
amounts finally left unpaid (i.e. the loss to be borne by the partners) are in the ratio in which profits and losses
are shared. The available cash cannot be distrubuted according to the profit-sharing ratio (unless the capitals are
themselves in the profit sharing ratio) because that will leave the balances unpaid out of proportion. The cash
available cabbot also be distributed in the ratio of capitals because, then the parttners will be forced to bear the
final loss in the ratio of capitals which may be different from the profit-sharing ratio. Suppose, after paying off
all the creditors, two further i nstalments are collected - one of Rs. 40,000 and the other of Rs. 20,000; suppose
further that there are two pattners (A and B) sharing profits in the ratio of 3:2 and having capitals - A, Rs. 70,000
and B, Rs, 30,000. If cash is distributed in the profit-sharing atio-the position will be as follows:
A B
Rs. Rs.
Amount due 70,000 30,000
First instalment of cash in the ratio of 3:2 24,000 16,000
Balance 46,000 14,000
Second instalment in the ratio of 3:2 12,000 8,000
Balance left unpaid or loss 34,000 6,000
This is obviously wrong because the loss is not in the ratio in which losses are to be borne by A and B.
It cash is distributed in the ratio of capitals, the position will be:
A B
Rs. Rs.
Amount due 70,000 30,000
Fist in stalment in the ratio of 7 : 3 28,000 12,000
Balance 42,000 18,000
Second instalment in the ratio of 7 : 3 14,000 6,000
Loss 28,000 12,000

This also is wrong, because the final loss is again not in the ratio in which lossess are to be borne by
A and B.
In this case, it is obvious that A’s capital is more than his proportionate share. The profitsharing ratio is
3 : 2, Hence, if B’s capital ought to be Rs. 30,00x 3/2 or Rs. 45,000. The proper thing to do is to first of all bring
56

down A’s capital to Rs. 45,000 by paying him enough cash. After that, the cash available will be distributed in
the profit-sharing ratio. It will now be worked out as follows :
A B
Rs. Rs.
Capital 70,00 30,000
First Instalment: Rs. 25,000 To A 25,000 —
Balance Due 45,000 30,000
Rs. 15,000 distributed between A
and B in the rato of 3 : 2 9,000 6,000
Balance due 36,000 24,000
Second instalment in the ratio of 3 : 2 12,000 8,000
Amount unpaid or loss 24,000 16,000

This must be correct, because the loss is being borne by the two partners in the profit-sharing ratio.
The rule to follow in piecemenal distribution is that the partners whose capital is more than proportionate
to other partners’ capitals (considering the profit-sharing ratio) should first be refunded so much as to bring
their capitals to proportionate levels. After this, the cash available should be distributed among the partners in
the profit-sharing ratio. Each partner’s position has to be compared with that of others.

Illustration
Following is the Balance Sheet of M/s. A, B and C who share profits and losses in the ratio of 2 : 2 :1.
Rs. Rs.
Sundry Creditors 15,000 Cash in hand 2,000
Capitals— Sundary Debtors 12,000
A 15,000 Stock 22,000
B 12,000 Furniture & Fixtures 10,000
C 4,000 31,000
46,000 46,000 46,000
The firm was dissolved and the assets were realised gradually; Rs. 1,000 were received once, Rs. 15,000
another time and Rs. 9,000 finally. Show how each instalment is to be distributed.

Solution:
The ratio is 2:2:1 among A, B and C. C’s capital is Rs. 4,000, hence the proportionate capitals of A and
B are Rs. 8,000 each. This means C receives nothing until the capitals of A and B each are brought down to
Rs. 8,000. Now A and B being equal partners, their capitals ought to be equal. A’s capital is Rs. 3,000 more than
B’s and hence before B receives anything, A is paid Rs. 3,000. The following statement shows the distribution.
57

Distribution of Cash
Creditors Capitals
A B C
Rs. Rs. Rs. Rs.
Amount due 15,000 15,000 12,000 4,000
Cash in hand—paid to creditors 2,000 — — —
Balance due 13,000 15,000 12,000 4,000
First instalment:
Rs. 10,000 to creditors 10,000 — — —
Balance due 3,000 15,000 12,000 4,000
Second instalment:
Rs. 3,000 paid to creditors 3,000
Rs. 3,000 paid toA — 3,000 — —
Balance due — 12,000 12,000 4,000
Rs. 4,000 paid each to A and B to bring down their
Capital to Rs. 8,000 4,000 4,000 —
Balance due 8,000 8,000 4,000
Rs. 1,000 distribted among all partners (ratio 2:2:1) 400 400 200
Balance due 7,600 7,600 3,800
Third instalment:
Rs. 9,000 distributed among the partners in profit-sharing ratio 3,600 3,600 1,800
Balance unpaid or Loss 4,000 4,000 2,000

Illutration:
X /and Z were in partnership with a capital of Rs. 30,000 originally contributed in the proportions of 1/
2, 1/3 and 1/6 respectively and shareing profits and losses in the same proportions. The partnership was dissolved
on March 31, the Balance Sheet on which date was as follows:
Liabilities Rs. Assets Rs.
Capitals—X 20,000 Cash 4,000
Y 10,000 Debtors 16,000
Z 2,000 Stock 42,000
Loan— X 6,000
Y 4,000
Creditors 20,000
62,000 62,000
58

It was agreed that the net realisations should be distributed in their due order at the end of each calendar
month. The realisations and expenses were:—
Debtors Stok Expenses
April 4,000 8,000 1,000
May 1,000 10,000 500
June 6,000 11,000 1,000
July 1,000 10,000 400

August 3,000 2,000 500 The stock having been completely disposed of, it was agreed that Z should
take over the remaining debts at Rs. 600. Show how the cash was distributed.

Solution :
The cash available each month is as follows:—

Debtors + Stock – Expenses = Cash


available
Rs. Rs. Rs. Rs.
April 4,000 8,000 1,000 11,000
May 1,000 10,000 500 10,500
June 6,000 11,000 1,000 16,000
July 1,000 10,000 400 10,600
August 3,000 2,000 500 4,500

At the end of August, the total amount to be distributed is Rs. 4,500 cash + Rs. 600 debtors, viz.,
Rs. 5,100.
Proportionate capitals :—

X Y Z
Profit-sharing ratio 3 2 1
Proportionate capitals Rs. Rs. Rs.
(taking Z’s capital as the basis) 6,000 4,000 2,000
Excess capital 14,000 6,000 —
Proportionate capitals as between
X and Y with Y’s capital as the basis 15,000 10,000 —
X’s excess—actual over proportionate 5,000 — — —
59

Statement Showing Distribution of Cash


X’s Y’s X’s Y’s Z’s
Creditors Loan Loan Capital Capital Capital
Rs. Rs. Rs. Rs. Rs. Rs.
Amount due 20,000 6,000 4,000 20,000 10,000 2,000
Cash in hand-paid to Credition 4,000 — — — — —
Balance due 16,000 6,000 4,000 20,000 10,000 2.000
Aprl : Cash, Rs. 11,000 paid Creditors 11,000 — — — —
Balance due 5,000 6,000 4,000 20,000 10,000 2,000
May : Cash, Rs. 10,500-
(a) Rs. 5,000 paid to Creditors 5,000
(b) Rs. 5,500 distributed amongX’s
Loan and Y’s Loan (ratio 6 : 4) 3,300 2,200 — — — —
Balances due — 2,700 1,800 20,000 10,000 2,000
June : Cash Rs. 16,000—
(a) Rs 2,700 paid against X’s Loan &
Rs. 1,800 against Y’s Loan 2,700 1,800 — — — —
(b) Rs. 5,000 paid against X’s Capital to
bring it down to Rs. 15,000 — — 5,000 — — —
(c) Balance Rs. 6,500 distributed between
X and Yin the ratio of 3 : 2 — — 3,900 2,600 — —
— — — 11,100 7,400 2,000
Balance due
July : Cash, Rs. 10,600—
(a) Rs. 5,100 paid to X and Rs. 3,400 to
Y to bring their capital to Rs. 6,000
and Rs. 4,000 respectively) — — — 5,100 3,400 —
(b) Balance Rs. 2,100 distributed between
all partners in profit-sharing ratio 1,050 700 350
Balance due — — — 4,950 3,300 1,650
August : Cash and Debtors, Rs. 5,100 distributed
in profit sharing ratio 2,250 1,700 850*
Balance unpaid or Loss — — — 2,400 1,600 800

* Rs._250 cash Rs. 600 Debtors


60

Alternative Mehtod-Maximum Loss Method. The other method to deal with the problem is to calculate
the maximum possible loss after outside creditors and partners* loans have been paid off. This loss is transferred
to the capitals and thus the amont payable to a partner would be known. If a partner’s share of the loss is more
than the capital, he should be treated as “insolvent” and, in accordance with Garner vs. Murray, the loss should
be transferred to the othelr partners in the ratio of capitals just before dissolution. The amount to the credit of
partners will be equal exactly to the cash in hand and the cash will be distributed among the partners according
to the figures now resulting. Such calculation of maximum loss, whenever an instalment of cash is received,
will show how much is to be paid to various partners. Below is the statement of distribution of cash in illustration
according to this method :

Distribution of Cash
Creditors Capital Accounts
A B C
Rs. Rs. Rs. Rs.
Amounts due a 15,000 15,000 12,000 4,000
Cash in hand paid to Creditors b 2,000 — — —
Balance c 13,000 15,000 12,000 4,000
First instalments :
Rs. 10,000 to Creditors d 10,000 — — —
Balance due e 3,000 15,000 12,000 4,000
Second instalment : Cash Rs. 15,000
(Rs. 3,000 paid to creditors)
(Rs. 12,000 in hand) f 3,000 — — —
Balances due g — 15,000 12,000 4,000
Maximum Loss, (total of capitals minus Rs. 12,000
cash in hand) Rs. 19,000 allocated to
partners in the ratio of 2:2:1 h 7,600 7,600 3,800
Amounts at credit i 7,400 4,400 200
Cash (available), Rs. 12,000, paid j 7,400 4,400 200
Balances of capitals left unpaid (g—j) k 7,600 7,600 3,800
Third instalment, Rs. 9.000;
Maximum loss, Rs. 10.000 allocated L 4,000 4,000 2,000
Amounts at credit and hence cash paid m 3,600 3,600 1,800
Balances left unpaid or loss (k-m) n 4,000 4,000 2,000

Illustration:
Tom, Dick and Harry have capitals of Rs. 9,600, Rs. 6,000 and Rs. 8,400 and share profits and losses
as to one-half, one-third and one-sixth respectively. After paying creditors, the following sums become available
and it was agreed that they shall be distributed as and when determined :—
61

Rs.
January 1-Sale proceeds of Machinery 1,200
March 1-Realisation from Debtros 4,000
No further assets remain to be realised and Dick is insolvent. Show the sums to be paid ot the partners
out of the amounts available.
(C.A. Final)

Solution:
Tom Dick Harry
Rs. Rs. Rs.
Capitala:- a 9,600 6,000 8,400
Jan.1 Maximum possible loss, Rs. 22,800 (total
of capitals minus cash available) allocated
to partners in the ratio of 3:2:1 b 11,400 7,600 3,800
Amounts at credit c –1,800 –1,600 4,600
Tom’s and Dick’s losses transferred to Harry d +1,800 +1,600 –3400
Amount at credit and available cash paid e — — 1,200
balances in capital accounts (a-e) f 9,600 6,000 7,200
Mar.1 Maximum possible loss Rs. 18,800 i.e
Rs. (22,800-4,000) allocated to partners
in profit-sharing ratio g 9,400 6,267 3,133
Amounts at credit h 200 –267 4,067
Dick’s loss transferred to Tom and Hurry
i.e. in the ratio of 96 : 84 i –142 +267 –125
Amount at credit j 58 — 3,942
Balance in capital accounts left unpaid
and hence loss (f-i) k 9,542 6,000 3,258
62

LESSON 11
HIRE PURCHASE ACCOUNTS

The main aim of every businessman is to maximise his profits. This goal can be achieved in two ways.
Firstly by increasing the prices of his goods and secondly, by reducing the cost of production of the goods sold
by him. But in this era of cut-throat competition where prices are usually to be kept in line with others, it is not
possible for a trader to maximise his profits by increasing the prices of his goods. So the only alternative left is
to reduce costs. This can be done, as we know from times immemorial, by resorting to ;large scale [production/
But producing, and that too on a large scale will not help businessman unless additional outlets for their selling
are also found out simultaneously. It may be easy for businessmen selling goods of relatively higher prices, it
may hot be possible to increase his sales without any additional inducements to the consumers. One of such
inducements is to sell goods on credit. But if he does so then he runs the danger of blocking his capital. So a via-
media. Convenieace and ease of payment have popularised this form of trading not only for producers’ goods
buy also for relatively expensive consumer durables such as cars, refrigerators, television sets and others.

Definition
“Under the Hire-Purchase system, goods are delivered to the buyer (called the “Hire-purchaser”) in
return for his undertaking to pay agreed amounts at specified intervals for a certain period, and on the
understanding that at the end of that period when the payments completed, the goods become his absolute
property.” (Principles and Practice of book-keeping and Accounts by B.G. Vickery).
“By hire-purchase is meant the system under which property or a Chattle is acquired by payments made
in instalments, during the period of which title in the property remains with the hire vendor. The payments made
till the final instalment are regarded as being purely in respect of hire, and the title in the property does not pass
to the hire-purchaser until such final payment or some other consideration provided for in the contract has been
fulfilled.” (Accountancy by Pickles).
If we analyse the above definitions we fund that a contract of hire-purchase has the following
characteristics.
(a) Instantaneous delivery of goods : In the case of hire-purchase contracts, the seller is supposed to
hand over the possession of goods to the hire-purchaser immediately after the singing of the agreement.
(b) Payment in instalments: Under a hire-purchase contact the payment for the goods sold is stipulated
to be paid by the hire-purchaser in instalments. These instalments may be of fixed sums or of varying
amounts depending upon the agreement entered into between the two parties.
(c) Interest: Since the payment for the goods is deferred. Some interest is usually charged by the hire
vendor. Such interest is assumed to be included in the instalments unless the agreement specifically
provides otherwise.
(d) Deferment of transfer of property : The hire vendor parts with the possession of his goods but not
with the ownership to the hire-purchaser. The goods so delivered remain the property of the hire
vendor until the whole of the payments are completed.
(e) Right to repossess in case of default: As the property in the goods does not pass to the hire-purchaser,
the hire vendor has the right to repossess the goods so delivered in case the hire purchaser makes a
default in the payment of any instalment. The instalments already paid by the hire-purchaser in such
a case will be treated as hire for the commodity used by him. This means the hire vendors usually
63

not supposed to refund any of the amounts already received by him on repossession of goods for
non payment of any of the instalments by the hire-purchaser. Alternatively, under certain conditions
the hire purchaser may be allowed to retain a certain part of the property, or the hire vendor may
make an allowance for the property returned
(f) Instalments to be treated as hire : As said above every instalment (except the last on e) is treated as
hire for the use of goods as against the purchase price thereof. But with the payment of the last
instalment, every prior instalment is retrospectively treated as a payment for the price of the goods
so delivered.
(g) Liability for the outstanding instalments : The hire-purchaser, under a hire purchase agreement, is
liable for the outstanding (due but unpaid) instalments even after the seller decides to repossess the
goods for non-payment of the instalment by the hire-purchaser.
(h) Liability for future or undue liability : The hire-purchaser is not required to pay the future or undue
instalments once the goods are repossessed by the hire-vendor.
(i) Undertaking by the hire purchaser : The hire-purchaser cannot sell, destroy, damage, exchange or
pledge the goods until the final payment he frequently has to undertake to keep the goods in sound
repair and good condition until the last payment is made. Whereas the hire purchaser has the option
to buy, the hire-vendor is bound to sell.

Difference between hire-Purchase and Credit Sales


Hire-purchase transactions must be distinguished clearly from credit sales, in which the absolute
ownership is immediately transferred to the purchaser, and in which , on default by the purchaser, the seller
cannot repossess the goods, but can only sue for the unpaid instalments. But in case of hire purchase the hire-
vendor has the right to repossess the goods so delivered if the hire purchaser makes default in making payment
of any instalment.

Difference between hire-Purchase and instalment System


The students should very carefully note the distinction between hire-purchase contracts and instalment
contracts. More so because in both the cases, the goods are sold on credit and payment is received in instalments.
The fundamental distinction between the two is that under a hire-purchase agreement the property in the goods
does not pass to the hire-purchaser until he has paid the last instalment, or exercised the option to purchase, as
the case may be. Till then the property in the goods remains with the hire-vendor, although they are in the
possession of the hire-purchaser. The hire-vendor may repossess the goods, if the hire-purchaser fails to pay an
instalment without in any way compensating the hire purchaser for the amount already paid by him. But in the
case of an instalment agreement, the property in the goods passes to the purchaser immediately on delivery. In
the event of default by the purchaser, the seller’s only remedy is to use for the unpaid instalments, he cannot
repossess the goods.
Before we pass on to actual accounting entries let us discuss the problems that one is likely to face
while solving the hire purchase question. These are:-
1. Calculation of interest where cash price, interest rates and insalment are given.
As stated above ordinarily the instalment includes the amount of interest Interests being a nominal
account, its amount should be separated from the cost of the asset. It is very easy to do so once we know and
understand that total Hire-Purchase Price = Cash Price of the goods plus Total Interest. Thus Total Interest =
Hire Purchase Price Less Cash Price of the goods. But it is not enough to find out total Interest as it is or the total
period over which instalments as spread over. To be just and equitable what is required is not the calculation of
total interest, but the periodical interest so that the Profit and Loss Account of the year to which interest belongs
64

can be debited. This can be done by preparing a Memorandum Account of either the Hire-vendor or that of the
Hire-Purchaser. It is prepared in the usual manner.

Example 1
On April 1,1991 Reclamation Limited took delivery of a truck from Temple Truck Dealers on hire
purchase. Payment to be made by three equal instalments of Rs. 3,000 each on March 31, 1993 and 1994. The
Cash value of the truck was Rs. 8,170, the Vendors charging interest at 5% per annum on yearly balance.
Reclamation Limited took delivery of a truck from Temple Truck Dealers on hire purchase, Payment to be made
by three equal instalments of Rs. 3,000 each on March 31, 1992, 1992 and 1994. The Cash value of the truck
was Rs. 8,170, the vendors charging interest at 5% per annum on yearly balance. Reclamation Limited provide
25% depreciation on diminishing balance method. Calculate yearly interest to be charged to Profit and Loss
Account.

MEMORANDUM HIRE-VENDOR’S ACCOUNT


Date Particular Amount Date Particulars Amount
Rs. P Rs. P.
1992 To bank 3,000.00 1992 By Bank 8,170.00
Dec. 31 To Balance c/d 5,578.50 Jan. 1 By Interest 408.50
8,578.50 8,578.50
1993 To Bank 3,000.00 1993 By Balance b/d 5,578.50
Dec. 31 To Balance c/d 2,857.43 Jan. 1 By Interest 278.93
5,857.43 5,857.43
1994 1994 By balance b/d 2,857.43
Dec. 31 To Bank 3,000.00 Jan. 1 By Interest 142.47
Dec. 31 (Balance fig.)
3,000.00 3,000.00

Working Notes:
(i) Interest on the last payment is taken at the differential figure of Rs. 142.57 (viz. Ri 3,0000.00— Rs.
2857-43) although the computed figure is Rs. 142.87. The difference i ignored for the sake of round
of the instalments.
(ii) Interest at 5% per annum is calculated on the reducing balance of amount outstanding.
2. Calculation of interest where rate of interest is not given
Mathematically speaking total interest should be allocated between the years instalment in proportion
of outstanding cash price (or principal) But it is very complicated. Therefore, it i usually appointed in the
proportion of outstanding instalment or hire-purchase price with the hel of a table. For practical purposes it is
fairly precise and simple basis of apportionment.

Example 2:
Assuming the facts as given in example 1, except that the rate of interest is not giver calculate the
amount of interest that should be charged to each year’s Profit and Loss Account.
65

Solution:
Total Interest = Total Hire Purchase Priced-Total Cash Price
or Rs. 9,000 — Rs. 8,170 = Rs.830
This amount of Rs. 830 will be apportioned in the ratio of 3:2:1 as follows :
Instalment Amount outstanding Ratio Interest
1. 9,000 3 3/6 × 830 = Rs. 415
2. 6,000 2 2/6 × 830 = Rs. 277
3. 3,000 1 l/6 × 830 = Rs. 138
If we look at these figures and the compared figure; (as example 1 we find a difference between the
two. This is unavoidable in the second case the figures were estimates only which may or may not reasonable
with exactly calculated figures. These difference are, therefore, to be ignored.

3. Calculation of Cash Price where rate of interest and instalments are given
Sometimes the hire-pucehase problem may omit cash price. Gash price as we know is required for
preparing the asset account in the books of the hire-purchase. The way to proceed is take up the last instalment
first (or to start in ascending order) and to deduct interest from it. The amount of interest can be found out as
follows :-

Rate of Interest
Amount due at the end of the year × 100 + Rate of Int.

Suppose Prem owes Narain Rs. 100 on its January, 1992, the rate of interest being 6% then Prem will
have to pay Rs. 105 on 31st December, 1993. Out of the amount of Rs. 106, 6/ 100 of the amount due the end is
interest. We can find out the amount due at the beginning of the year by deducting the amount of interest for the
year calculated as above. This will also be the amount due at the end of last but one year after paying that year’s
instalment. The total of these two will give amount due at the end of the last but one year before paying the
instalment. The amount due at the beginning of that and other previous years then can be found out by applying
a similar procedure. It can also be done with the help of a table.
Assuming the same facts as in Example I except that no cash price is given, find out the Cash Price.

Solutions:
Instal- Amount due at Amount of Total amount due Interest Principal or
ments the end of the instalment at the end of the year @ 5/105 amount due
year (after paying paid (before paying in the beginning
instalment instalment) of the year.
Rs. P. Rs. P. Rs. P. Rs. P. Rs. P.

3. Nil 3,000.00 3,000.00 143 2,857.00


2. 2,857.00 3,000.00 5,857.00 279 5,578.00
1. 5,578.00 3,000.00 8,578.00 408 8,170.00

Thus Cash Prices = Rs. 8,170 + Cash Down, if any,


66

NOTE: Cash down means the amount paid at the time of signing the agreement, Since there is no time gap
between the signing of the agreement and the cash down payment, no interest occurs and entire
amount goes to increase the overall cash price.

Accounting Treatment
If strict regard is had to legal nature of the contract, the goods should be treated as continuing to belong
to the hire-vendor until all the payments have been paid, and until that time the hire purchaser should treat the
instalments paid as payment for hire or for the option to purchase, except that the portion of each payment
representing interest, should be written off to Profit and Loss Account in the period to which it relates From the
point of view of the hire-vendor, it might be considered that no profit on the transaction has been earned until all
the instalments have been paid. Alternatively credit should be taken in cash accounting period for the profit
included in the instalments that have been paid. Alternatively, credit should be taken in cash accounting period
for the profit included in the instalments that have been received. The instalments not yet due are, in such a case,
treated as stock in trade, valued at proportionate cost.
Since the intention of both the parties is to buy and sell, records of such transactions are made in the
books of both the parties. It can, therefore, readily be received that no rigid rule of accounting can be laid down
owing to the large number of varying circumstances in different business.

Accounting Entries
Set out below are various methods, any of which can be adopted to fit the circumstances (having regard
to the type and value of the goods, and the length of the period of purchase etc.) of the case.

Hire-vendor’s Books
The following entries are passed by the hire-vendor :
1. On sale of goods on Hire-Purchase basis
Hire Purchaser’s A/c ... Dr. With the Cash price of goods
To Sale
2. On receiving the amount of Cash Down
Bank Account ... Dr. With the amount of Cash down.
To Hire-Purchaser’s A/c
3. On Interest becoming due on I Instalment
Hire-Purchaser’s A/c ... Dr With the amount of interest.
To Interest Account
4. On receiving the amount of instalment
Bank Account ... Dr. With the amount of instalment.
To Hire Purchaser’s A/c
5. For Transferring the Interest to P&L A/c
Interest A/c ... Dr.
To Profit & Loss A/c
Entries 3,4, and 5 will be repeated in subsequent year also :
67

Example 4:
Assuming all facts as given in Example 1, pass the necessary journal entries and prepare Ledger Account
in the books of Hire-vendor.

TEMPLE TRUCK DEALERS


Journal Entries
Date Particulars L.F. Dr. Amount Cr. Amount
Rs. P. Rs. P
1991
April, 1 Reclamation Ltd Dr. 8,170.00
To Sales A/c 8,170.00
Delivery truck sold on hire-purchase recorded
at cash sales price
1992
March., 31 Reclamation Ltd. Dr. 408.50
To interest A/c 408.50
Interest @ 5% on Rs. 8,170 made due.
March, 31 Bank A/c Dr. 3,000.00
To Reclamation Ltd 3,000.00
Receipt of first instalment
1993
March, 31 Reclamation Ltd Dr. 278.93
To Interest A/c 278.93
Interest @ 5% on Rs. 5,578.50 made due
March, 31 Bank A/c Dr. 3,000.00
To Reclamation Ltd 3,000.00
Receipt of second instalment
1994
March, 31 Reclamation Ltd. Dr 142.57
To Interest A/c 142.57
Interest @ 5% on Rs. 2,857.43 made due
March, 31 Bank A/c Dr 3,000.00
To Reclamation Ltd. 3,000.00
Receipt of third and last instalment.
68

LEDGER ACCOUNTS
Reclamation Ltd.

Date Particulars Amount Date Particulars Amount


Rs. P. Rs. P.
1991 1992
April, 1 To Sale A/c 8,170.00 March, 31 By Bank 3,000.00
1992
March, 31 To Interest A/c 408.50 March, 31 By Balance c/d 5,578.00
8,578.50 8,578.00
1992 1993
April, 1 To Balance b/d 5,678.50 March, 31 By Bank 3,000.00
1993
March, 31 To Interest A/c 278.93 ” By Balance c/d 2,857.43
5,857.43 5,857.43
1994 1994
April, 1 To Balance b/d 2,857.43 March, 31 By Bank 3,000.00
1984
March, 31 To Interest A/c 142.47
3,000.00 3,000.00

INTEREST ACCOUNT

Date Particulars Amount Date Particulars Amount


Rs. P. Rs. P.
1993 To Profit & Loss 1992 By Reclamation Ltd. 408.50
March, 31 Account—Transfer 408.50 March, 31
408.50 408.50
1993 To Profit & Loss 1993 By Reclamation Ltd. 278.93
March, 31 Account—Transfer 278.93 March, 31
1994 To Profit & Loss 1994 By Reclamation Ltd.
March, 31 Account—Transfer 142.57 March, 31 142.57

SALES ACCOUNT
1992 To Trading A/c 1991 By Reclamation Ltd.
March, 31 Transfer 8,170.00 April, 1 8,170.00
69

Hire-Purchase’s Books
The following are the principal methods of recording hire purchase transactions in the books of the
hire-purchaser :
The full cash price is debited to the Assets Account and the same figure is credited to Hire vendor’s
Account. Interest is credited to his account periodically and all the cash payments’s are debited.
Since the hire purchaser uses the entire asset from the very beginning, depreciation is charged on the
full cash price (with due regard to residual value and method applied as against the instalment paid. The required
journal entries are :
1. For acquiring the assets under hire-purchase agreement
Asset Account Dr. With the full price of the Asset.
To Hire Vendor
2. For making payment of cash down
Interest A/c Dr. Worth the amount of cash down.
Hire-vendor
3. For making the interest due
Interest A/c Dr. With the amount of interest.
To Hire-vendor
4. For making payment of instalment
Hire vendor Dr. With the amount of instalme
To Bank Account
5. For providing Depreciation
Depreciation A/c Dr. With the amount of depreciat
To Assets Account
Profit & Loss A/c Dr.
To Interest A/c
To Close Interest and Depreciation A/c
To Depreciation A/c
(B) The second method is based on the facts that the property or ownership does not vest in the purchaser
untill all the instalments are paid by him. The required journal entries under this method are :—
1. Assets A/c Dr. With down payment of any becoming due
To Hire Vender A/c
2. Hire Vender A/c Dr.
To Bank Down payment made
3. Asset A/c Dr. Cash price of instalment, Interest on Instalment
Interest A/c Dr.
To Hire Vender A/c
70

4. Hire Vender Dr. H.P. Instalment paid


To Bank
5. Depreciation A/c Dr.
To Assets Depreciation charged
Note : Depreciation is always charged on the total cash price of the aaset and note on the debit bvalance
shown by the asset account.
6. Profit & Loss A/c Dr. Interest & Depreciation a/cs. closed by trans-
To Interest A/c ferring to p & L A/c
To Depreciation A/c
Entries 3, 4, 5, 6, will be repeated for subsequent instalment in the future years.

Example 5
Assuming the same facts as given in example number 1 pass the required journal entries in the books of
Reclamation Ltd. and prepare Ledger Accounts therein.

Solution:
RECLAMATION LTD.
(Journal Entries)
Date Particulars L.F. Dr. Amount Cr. Amount
Rs. P. Rs. P
1991
April, 1 Truck A/c Dr. 8,170 00
To Temple Truck Dealer 8,170 00
Purchase of one truck on hire-purchase Basis
1992
March, 31 Interest A/c Dr. 408 50
To Temple Truck Dealers 408 50
Interest @ 5% on Rs. 8,170 made due.

March, 331 Temple Truck Dr. 3,000 00


To Bank Account 3,000 00
Payment of first instalment
March, 31 Deprecitaion A/c Dr. 2,042 50
To Truck A/c 2,042 50
Depreciation 25% on Rs. 8,170.
71

Date Particulars L.F. Dr. Amount Cr. Amount


Rs. P. Rs. P
March, 31 Profit & Loss A/c Dr. 2,451 00
To Interest A/c 408 50
To Depreciation A/c 2,042 50
Transfer entry.

March, 31 Temple Truck Dealers Dr. 3,000 00


To Bank 3,000 00
Payment of second instalments.

March, 31 To Depreciation A/c Dr. 1,531 87


To Truck A/c 1531 87
Depreciation @ 25% on Rs. 6,127,50

March, 31 Profit & Loss A/c Dr. 1,810 80


To Interest A/c 278 93
To Depreciation A/c 1,531 87
Transfer entry.

1994
March, 31 Interest A/c Dr. 142 57
To Temple Truck Dealers 142 57
Interest @ 5% on Rs. 2,857.43 made due.

March, 31 Temple Truck Dealers Dr. 3,000 00


To Bank 3,000 00
Payment of third and last instalment.

March, 31 Depreciation A/c Dr. 1,148 91


To Truck A/c 1,148 91
Depreciation @ 25% on Rs. 4,595.63

March, 31 Profit 7 Loss A/c Dr. 1,291 48


To Interest A/c 142 57
To Depreciation A/c 1,148 91
Transfer entry
72

LEDGER ACCOUNT
Truck Account

Date Particulars L. F. Amount Date Particulars L.F Amount


Rs. P. Rs. P.
1991 1992
April, 1 To Temple Truck March, 31 By Depreciation 2,042.50
Dealers 8,170.00 1993 By Balance c/d 6,127.50
8,170.00 8,170.00
1992
April, 1 To Balance b/d 6,127.50 March,. 31 By Depreciation 1,531.87
” By Balance c/d 4,595.63
6,127.50 6,127.50
1993 1994
April, 1 To Balance b/d 4,595.63 March, 31 By Depreciation 1,148.91
” By Balance c/d 3,446.72
4,595.63 4,595.63
1994
April, 1 To Balance b/d 3,446.72

Temple Truck Delaer


Date Particulars L. F. Amount Date Particulars L.F Amount
Rs. P. Rs. P.
1992 1991
March, 31 To bank 3,000.00 April, 1 By Truck A/c 8,170.00
1992 1985
To Balance c/d 5,578.50 March, 31 By interest A/c 408.00
8,578.50 8,578.50
1992 1992
March, 31 To Bank 3,000.00 April 1 By Balance b/d 5,578.50
1994 1993
To Balance c/d 2,857.43 March, 31 By interest A/c 278.93
5,857.43 5,857.00
1994
March, 31 To bank 3,000.00 April, 1 By Balance b/d 2,857.43
1994
March, 31 By Interest A/c 142.57
3,000.00 (Bal. Fig.) 3,000.00
73

INTEREST ACCOUNTS

Date Particulars L. F. Amount Date Particulars L.F Amount


Rs. P. Rs. P.
1992 To Temple Truck 1992
March, 31 Dealers March, 31 By Profit & Loss
408.50 A/c Transfer 408.50
1993 To Temple Truck 1993
March, 31 Dealers March, 31 By Profit 7 Loss
279.93 Account — transfer 278.93
1994 To Temple Truck 1994
March, 31 Dealer 142.57 March, 31 By Profit & Loss 142.57
Account— Transfer

DEPRECIATION ACCOPUNT

Date Particulars L.F. Amount Date Particulars L.F Amount


Rs. P. Rs P.
1992 1992
March, 31 To Truck A/c 2,042.50 March, 31 By Profit & Loss 2,042.50
Account — transfer
1993 1993
March, 31 To Truck A/c 1,531.87 March, 31 By Profit & Loss A/c 1,531.87
1994 — Ttransfer
1994
March, 31 To Truck A/c 1,148.91 March, 31 By Profit & LossA/c 1,148.91
— Transfer

Default and Repossession


As stated above where the hire-purchaser makes a default in making the payment of any instalment, the
hire-vendor has a right to repossess the goods sold on hire-purchase basis without in any way compensating the
buyer for the instalments already paid by him. The instalments already paid by the hire-purchaser are treated as
hire for the use of the commodity till the date of the repossession. The Hire-vendor in such a case has also the
right to recover from the hire purchaser the instalments becoming due upto the date of repossession. The right of
the hire-vendor arises due to the fact that in hire-purchase agreements the property in the goods sold on hire-
purchase basis does not pass to the buyer unless and until the buyer makes payment of all the instalments. In
practice, however, the hire-vendor exercises this right discriminatingly because indiscriminate repossessions
74

may adversely affect his business. Accordingly, he taken eitheir complete or partial repossession depending
upon the circumstance of each case, let us now discuss each of these in some detail.

Complete repossession
Possession is said so be complete where the hire-vendor repossess, on default by the buyer, the entire
goods sold on hire-purchase basis.

Accounting Treatment
The accounting treatment in case of repossession of goods in the books of the hire-purchaser and hire-
vendor will be as follows:

Book of Hire-Purchaser
(a) Where first method of passing the journal entries is followed. In this case, the buyer debits the asset
account and credits the hire-vendor’s account with the full cash price of the asset at the time of purchasing the
asset on hire-purchase basis, it means he opens an asset account and a hire-vendor’s account in his books. So
when the asset is repossessed by the vendor, he has to close both these accounts. This he can do by first debiting
the hire-vendor’s account by cash paid, if any, and then by transferring the balance in the hire-vendor’s account
to the asset account. Balance, if any, left in the asset account being in the naturle of profit or loss on repossession
by the hire-vendor shall be transferred by him to the profit and loss account.
1. Pass as usual all entries except the entry for payment upto the date of repossession.
2. Far making payment, if any hire-vendor
Hire-Vendor Dr. With the amoung, if any, paid to the hire-vendor.
To Cash/Bank Account

3. For Clossing tyhe Hire-Vendor’s Account


Hire-Vendor’s Account Dr. With the balance in Hire-Vendor’s Account
To Asset Account

4. For Loss on repossession


Profit and Loss Account Dr. With the balance in Asset
To Asset Account Account

In case of Profit, entry number 4 will be reversed.

(b) Where second method of passing the journal entries is followed: In this case the hire-purchaser uses
“Asset Actual Method” recording the hire-purchase transactions in his books. Under this method he capitalises
equivalent to the cash price of the instalment as and when paid. Accrodingly, he opens the Hire-vendor’s account
and immediately closes it down after making the entry for payment of instalment etc. therein. He, however,
maintains an asset account at the amount paid less depreciation, if any, figure

Accounting Treatment
(i) All entreis except the entry for payment will be passed as usual upto the date of repossession.
75

(ii) For closing the Asset Account


Profit and Loss Account Dr. With the balance in Asset Account
To Asset Account

Hire-Vendor’s Books
The hire-vendor, on repossession, will pass the following journal entries in his books:
(1) All entries, except the entry for payment will be passed as usual upto the date of repossession
(2) For receiving the payment, if any, from the hire-purchaser
Cash or bank Account Dr. With the amount, if any, received
To Hire-Purchase’s Account
(3) Closing the hire purchaser’s Account
Goods Repossessed Account Dr. With the estimated value of goods repossessed
To Hire-Purchaser’s Account
It be noted here that the goods repossessed account is debited and hire-purchaser’s account is credited
with the present 9estimated0 value of goods and not with the amount due for which such goods are repossessed.
The balance, if any, in the hire-purchaser’s account is then transferred to Profit and loss Account.
(4) For Profit on Repossession
Hire-purchaser’s Account Dr. With the credit balance in hire-purchaser’s
To Profit and loss Account Account
(5) For Loss on Repossession
Profit and Loss Account Dr. With the debit balance in Hire -Purchaser’s
To Hire-purchaser’s Account Account
(6) For expenses incurred in renovating the repossessed goods
Goods Repossessed Account Dr. With the amount of expenses
To Cash/bank Account
(7) For the sale of repossessed goods
Cash/bank Account Dr. With the amount of sale proceeds.
To Repossessed Goods Account
(8) Profit on sale of repossessed goods
Repossessed goods Account Dr. With the amount of profit
To Profit and Loss Account

Note: In Case of Loss, this entry will be reversed.


76

Example
On January 1, 1993 Ideal Engineers sell on hire-purchase system a machine to Trichur Laboratories for
Rs. 35,500, payable Rs. 8,000 on singing the contract and the balance in 5 annual equal instalments, commencing
from the end of 1993. The cash sale price of the machine is Rs. 28,850 and the rate of interest charged is 10%
per annum.
After paying cash down and the first year-end instalment, the hire-purchaser fails to pay the next
instalment, whereupon the hire-vendor takes back the machine on which 15% depreciation 9on written down
valueO has been charged by the former. The cost of recapture amounts to Rs. 300 and the machine is assessed
at Rs. 19,400.
The machine is subsequently sold for Rs. 22,000 after incurring Rs. 1,500 in renovating the same.
Show the important ledger accounts in the books of both the parties.

Books of Trichur Laboratories


Ideal Engineers
Date Particulars Amount Date Particulars Amount
Rs. P. Rs. P.
1993 1993
Jan. 1 To Bank Account 8,000 Jan., 1 By Machine A/c 28,850
Dec., 1 To Bank Account 5,500 Dec., 1 By Interest A/c 2,085
To Balance c/d 17,435
30,935 30,935
1994 1994
Dec., 31 To Machine A/c 19,178 Jan., 1 By Balance b/d 17,435
(Balancingfigure) Dec., 31 By Interest A/c 1,743
19,178 19,178

Machine Account
Date Particulars Amount Date Particulars Amount
Rs. Rs
1993 1993
Jan. 1 To Ideal Engineers 28,850 Dec., 1 By Depreciation Account 4,327
By Balance b/d 24,523
28,850 28,850
1994 1994
Jan., 1 To Balance b/d 24,523 Dec. 31 By Depreciation Account 3,678
By Idea Engineers 19,178
By P&L Ate. 1,667
24,523 24,523
77

Note : Total loss suffered by Trichur Laboratories is equal to Rs. 3,410, i.e., Rs. 1,743 on account of
interest for the second year and Rs. 1,667 on account of seizure of assets by the hire-vendor.

Books of Ideal Engineers


Trichur laboratories
Date Particulars Amount Date Particulars Amount
Rs. Rs.
1993 1993
Jan., 1 To Sales Accounts 28,850 Jan., 1 By Bank Account 8,000
Dec., 31 To interest Account 2,085 Dec., 31 By Bank Account 5,500
By Balance c/d 17,435
30,935 30,935
1994 1994
Jan., 1 To Cash Balance b/c 17,435 Dec., 31 By Goods Reposse
Dec., 31 To Interest Account 1,743 ssed Account 19,400
To Bank Account 300 By profit & Loss Account—loss 78
(Reposession Expenses)
19,478 19,478

Goods Repossessed Account


Date Particulars Amount Date Particulars Amount
Rs. Rs
1994 1994
Dec., 31 To Trichur laboratories 19,400 Dec., 31 By Bank-Sale Proceeds 22,000
To Bank Account-
Renovation Expenses 1,500
To Profit & Loss A/c profit 1,100
22,000 22,000

Second Method
Books of Trichur laboratories
Ideal Engineers
Date Particulars Amount Date Particulars Amount
Rs. Rs.
1993 1993
Jan., 1 To bank Account 8,000 Jan., 1 By Machine Account 8,000
Dec., 31 To bank Account 5,500 Dec., 31 By Machine Account 3,415
13,500 13,500
78

Machine Account
Date Particulars Amount Date Particulars Amount
Rs. Rs.
1993 1993
Jan., 1 To Ideal Engineers 8,000 Dec., 31 By Depreciation Account 4,327
Dec., 31 To Ideal Engineers 3,415 By Balance c/d 7,088
11,415 11,415
1994 1994
Jan., 1 To Balance b/d; 7,088 Dec., 31 By Depreciation Account 3,678
By Profit and Loss Account—
Total Loss 3,410
7,088 7,088

Partial Repossession
The hire-vendor, may not be harsh enough to take possession of the entire asset. He may adopt a
considerate view and permit the hire-purchaser to retain a portion of the asset or a few pieces (where more than
one pieces are delivered on hire-purchase basis). In such a case, the price for the seized items is settled between
the two parties and their relation in respect of the retained items becomes that of an ordinary debtor and a
creditor, sincle the hire-purchase contract terminates by commission of default.

Account Treatment
The accountng, Treatment is substantially the same as explained under ‘complete
repossession’>However, personal and assets accounts carry balances. The asset account should show the book
value of the asset still in hand.

Example
X purchased seven trucks on hire-purchase on 1st July, 1993. The cash purchase price of each truck
was Rs. 50,000. He was to pay 20% of the cash purchased price at the time of delivery and the balance in five
half yearly instalments starting from 3st December, 1993 with interest at 5% per annum.
On X’s failure to pay the instalment due on 30th June, 1994 it was agreed that X would return 3 trurks
to the vendor and remaining 4 would be retained by him. The returning price of 3 trucks was Rs. 40,000.
Purchaser charges depreciation @ 20% per annum.
Vendor after spending Rs. 1,000 on repairs, sold away all the three trucks for Rs. 40,000.
Show Truck Account and Vendor’s Account in the books of X and X’s Account and Goods Returned
Account in the books of the vendor, assuming that their books are closed in June every year.
79

In the Book’s of ‘X’


Rs. Rs.
1993 1993
July., 1 To Bank Account 70,000 July, 1 By Truck Account 3,50,000
Dec., 31 To Bank Account 63,000 Dec., 31 By Interest Account 7,000
1994 1994
June, 30 To Truck Account 40,000 June, 30 By Interest Account 5,600
To Balance c/d 1,89,100
3,62,600 3,62,600
1994
July 1 By Balance b/d 1,89,100

Truck Account
Rs. Rs.
1993 1994
July, 1 To Hire-Vendor’s Account June, 30 By Depreciation 70,000
3,50,000 By Hire-Vedndor’s Account 40,500
By Profit & Loss Account 79,500
By Balance c/d 1,60,000
3,50,000 3,50,000

In the Books of Hire-Vendor X’s Account


Rs. Rs.
1993 1993
July, 1 To Sale Account 350,000 July, 1 By Bank Account 70,000
Dec., 31 To Intyerest Account 7,000 Dec., 31 By Bank Account 63,000
1994 1994
June, 30 To Interest Account 5,600 June, 30 By Goods Returned Account 40,500
Balance c/d 1,9,100
3,62,600 3,62,600
80

Goods Returned (Repossessed) Account


Rs. Rs.
1993
June, 30 To X’s Account 40,000 June, 30 By Bank Account Sale Proceeds 40,000
Bank Account By Profit and Loss Account Loss 1,500
Repairs Expenses 1,000 (Balancing Figure)
41,500 41,500

Working Notes
(1) Calculation of interest Rs.
Cash Purchased price 9 Rs. 50,000 × 7) 3,50,000
Less Payment on Delivery 70,000
(20% of Rs. 3,50,000) 2,80,000
Rs.
Interest @ 5% on Rs. 2,80,000 for 6 months 7,000
Less Amount of first instalment (Rs. 2,80,000) 56,000
2,24,000
Rs.
Interest @ 5% on Rs. 2,24,000 for 6 months 5,600

(2) Calculation of Depreciation


Total Cash Purchase Price for 7 Trucks 3,50,000
Less Depreciation @ 20% written Down Value 70,000
2,80,000
(3) Calculation of loss on repossession
Written Down Value of 3 Trucks (Rs. 2,80,000 × 3/7) 1,20,000
Less Agreed Value of 3 Trucks siezed 40,500
Loss on Repossession 79,500

Try yourself
P. purchased 4 cars of Rs 14,000 - each on hire purchase system. The Hire-Purchase Price for all the
four cars was Rs. 60,000/- to be paid Rs. 15,000/- each down and three instalments of Rs. 15,000/- each at the
end of each year. Interest is charged @ 5% pa. buyer depreciates car at 10% pa. on straight time method.
After having paid down payment and first instalment, the buyer could not pay the second instalment
and the seller took possession of 3 cars at an agreed value to be calculated after depreciating the cars at 20% p.a.
on written down value method. One car was left with the buyer.
81

The seller, after spending Rs. 12,000/- to repairs, sold away all the three cars for Rs. 35,000-. Open
ledger accounts in the books of both the parties.
Answer : (1) Loss to the buyer on default Rs. 6,720/-
(2) Balance due to the seller Rs. 2,573/-
(3) Profit on sale of repossessed car to the seller Rs. 6,920/-.

Hire-Purchase Trading Account


The system of keeping of hire-purchase transactuion as outlined above is suitable only where the
number of such transactions is small and price of the commodity sold is high. But where the businessman
sells goods of small value e.g., radio, cycle, fans, transistors etc. on hire-purchase system very frequently, it
may become incovenient for him to prepare separate account for each customer, in the way we have discussed
above. Moreover, it is neither desirable nor economical, though technically possible to ascertain the amount
of profit earned or loss incurred on each individual transaction. He can ascertain the profit or loss made
during a particular period by preparing a Hire-Purchase Trading Account. This method is also known as
Goods out or Stock Method.
The underlying feature of this method is to treat all the goods out on hire as a stock. The hire-vendor
prepares only one account i.e. Hire-purchase Trading Account and posts therein all the hire-sales, realisations,
repossessions, etc. no individual account of any hire customer is recorded on double entry. The details (as to the
date of contract, description of article, cost price, hire sale price, number of instalments, amount and due date of
each instalment, realisations, outstanding balance, etc.) of each hire-customer are, however, maintained in a
register etc. as memoranda.

Accounting Treatment
(1) For opening balance of stock on the hire and instalments due but not received.
Hire-Purchase Trading Account Dr. With the opening balance
To Stock in Hire (Hire-Purchase Price)
“ Instalment due
and unpaid - account

(2) For Goods sold on Hire-Purchase


Hire-Purchase Trading Account Dr. With the invoice price of goods sold on
To Goods sold on hire-purchase
Hire-Purchase

(3) For receipt of instalments


Cash/Bank Account Dr. With the amount of Cash Received.
To Hire Purchase Trading Account

(4) For repossession of goods


Goods Repossessed Account Dr. With the estimated value goods repossessed.
To Hire-Purchase Trading Account
82

(5) For instalments due but not received


Instalments Due and unpaid Account Dr. With the closing balance of instalments due.
To Hire-Purchase Trading Account

(6) For goods/stock lying with customers in respect of which instalments are not due.
Stock out on Hire Dr. With the closing balance of Hire-Purchase
To Hire-Purchase Trading Account Price and cost

(7) For removing the loading (excess of Hire-Purchase price over cost price) for the opening stock
Stock Reserve Account Dr. With the difference between Hire-Purchase
To Hire-Purchase Trading Account Price and cost.

(8) For removing the loading from closing stock


Hire-Purchase Trading Account Dr. With the difference between Hire-Purchase
To Stock Reserve Account Price and cost.

(9) For removing the loading from Goods sold on Hire Purchase
Goods sold on Hire-Purchase Account Dr. With the difference between Hire-Purchase
To Hire-Purchase Trading Account Price and cost.

(10) For Profit


Hire-Purchase Trading Account Dr. With the the amount of Profit.
To General Profit and Loss Account

(11) For Loss


Profit and Loss Account Dr. With the amount of Loss.
To Hire-Purchase Trading Account

The students should note that in questions of this type the examiners generally do not give the figure of
Instalment Due and unpoaid. They are, therefore, advised to see before solving a question of this type as to
whether the amount of instalments Due and unpaid is given in the quest’ or not. If it is not given in the question
itself, then it is to be calculated from the information given. The formula formula for calculating the amount of
Instalment Due and unpaid is as folows :
Instalmen6s Due and Unpaid = Hire Purchase Stock lying with the customers in the beginning+Goods
sold on Hire Purchase+Cash Received—Goods Repossessed (amount for which such goods were repossessed)-
Hire-Purchaser Stock lying with the customers at th eend of the year.

Example
From the following details set out the Hire Purchase Trading Account in the books of a trader who sells
a number of articles of comparatively small value daily on the hire-purchase system, showing his profit on this
department of the business for the year ended 31st December, 1994.
83

1994 Rs.
January, 1 Stock in Customer’s hands at selling price 1,620
Dec., 31 Sale of hire purchase goods
During the year at selling price 6,534
Cash received from hire-purchase at Selling Price 2,100
Stock in customers hadn at Selling Price 5,674

Hire-Purchase Trading Account


for the year ending 31st December, 1994
Rs. Rs.
To Stock out on Hire Acount 1,620 By Cash 2,100
To Goods sold on Hire -Purhase Acount 6,534 “ Instalments Due and Unpaid 380
To Stok Reserve Acount 2,128 “ Stock Reserve Account 608
To General Profit and Loss Aount —Profit 930 “ Goods sent on Hire Purhase Acount (loading) 2,450
“ Stok out on Hire Acount 5,674
11,212 11,212

Other Ledger aounts can be prepared as follows:

Stok Out on Hire Acount


Rs. Rs.
1994 1994
Jan., 1 To Balancce b/d 1,620 Jan., 1 By Hire Purhase Trading Account
—Transfer 1,620
1994 1994
Dec., 31 To Hire-Purhase Trading 5,674 Dec., 31 By Balance b/d 5,674
Acount — Transfer
1995
Jan., 1 To Balance b/d 5,674

Goods sold on hire Purchase Account


Rs. Rs.
1994 1994
Dec., 31 To Hire-Purchase Dec., 31 By Hire-Purhase Trading Account 6,534
Trading Account—Loading 2,450
“ Purhase Aount —Transfer 4,084
6,534 6,534
84

Stok Reserve Aount


Rs. Rs.
1994 To Hire Purhase 1994 By Balance b/d
Dec., Trading Account Jan., 1 608
—Transfer 608
1994 1994
Dec., 31 To balance c/d 2,128 Dec., 31 By Hire-Purhase Trading Acount
— Transfer 2,128
1995
Jan., 1 By Balance b/d 2,128

Instalments Due
Rs. Rs.
1994 1994
Dec., 31 To Hire-Purhase Trading Dec., 31 By Balance c/d 380
Acount —Transfer 380

General Profit and Loss Acount (Inusive) for the


year ending 31st Deem,ber, 1994
Rs. Rs.
By Hire-Purhase
Trading Acount -Profit 930

Illustration :
Fantastic Home Ltd. Commenced Business on 1st January, 1991. The business is to sell Radio
Recorders and Televisions both in hire -purhase and Cash basis. The information almost the terms in given
below:-
Radio Recorder Television set
Cost Price 6,000 18,000
Sale Prie (Cash) 7,800 19,500
Down payment for H.P. 600 3,000
Monthly instalments for H. P. 360 660
No. of instalments 20 25
The company purhased goods costing Rs 24,00,000 in all and made ash sales totalling Rs. 15,00,000.
Stock on hand was valued at Rs. 3,90,000 Hire Purhase transations were as follows:
85

Number Instalments Instalments-due


Sold Collected (customer’s Paying)
Radio Reorders 30 300 15
Television sets 25 250 10
4 Radio Recorders and 3 Television sets on which only 10 monthly instalments were collected were
repossessed and were valued at Rs 45,000 This is not inluded in the stock mentioned above.
Prepare Hire Purhase Trading Account to show the profit or loss made by the hire vendor company.

Solution:
Hire Purhase Trading Account
Rs. Rs.
To Goods Sold on H.P. (1) 7,21,500 By Cash 3,66,000
To Stock reserve on By Goods repossessed 45,000
instalments not due (4) 36,600 By Instalments due 12,000
By Goods sold an H.P. Loading 91,500
Profit and Loss Aount (Profit) 55,800 By Instalments not yet
due-stock with customers c/d (3) 29,9,400
813,900 813,900

Working Notes:
1. Cost Price:
Radio Records (30 × 6,000) 1,80,000 30 × 7,800 2,34,000
Television sets (25 × 18000) 4,50,000 25 × 19,500 4,87,500
6,30,000 72,1500
Loading (Margin) = 7,21,500 – 6,30,000 = Rs. 91,500
2. Cash Colleted: Radio Reorders Television sets
Rs. Rs
Down Payment 30 × 600 18,000 25 × 3000 75,000
Instalments 300 × 360 1,08,000 250 × 660 1,65,000
1,26,000 2,40,000
Total 1,26,000 + 240,000 = 3,66,000
3. Instalments not due:
(i.e. Stock with customers)
Radio Recorders:
Total Instalments on 26 sets = 26 × 20 520
Less: Instalments colleted and due (315 – 40) 275
Not yet due 245
86

Amount 245 × 360 = Rs. 88,200


Television Sets
Total Instalments on 22 sets 22 × 25 550
Less: Collected and due (260-30) 230
Not yet due 320
Amount 320 × 660 = Rs. 2,11,200 + 88,200 = 2,99,400

4. Stock Resource
Radio Recorders Television Sets
Total Amount due H.P.P. 7,800 19,500
Cost 6,000 18,000
1,800 17,500

1,800 1,500
Reserve Required = × 88,200 = ×1500
7,800 19,500
= 2,0354 (app.) 16,246 (app.)
Total Rs. 20,354 + 16246 = Rs. 36,600

Stock and Debtors System


Stock and Debtors system is only a varient of Hire-Purcchase Trading Acount. This is preferred by the
management owing to the revelation of detailed information like the aggregate amount of instalments beoming
due (from hire-purhase ustomers, etc).
Under this ystem we prepare (i) Hire-Purhase Stock Aount (ii) Hire-Purhase Debtors Acount, (iii) Hire-
Purchase Adjustment, (iv) Stock Account, and (v) Shop Stock Acccount.
It should be noted at the very outset that Hire-Purhase Stocck Acount, Hire-Purhase Debtors Acount
and Shop Stock Acount are real accounts and this being so, these will (if the firm is not a new firm) have a
opening balance. This opening balance will be a debit opening balance. Moreover, since the Hire-Purhase stock
Account has an opening balance, the Stock Reserve Acount will also have an opening balance. But it will have
a credit opening balane—a balance opposite to that of opening stock balance.
So the students, while solving questions acccording to this method, should first write the opening
balance in these four accounts.

Acounting Treatment
The Journal entries required to be passed under this system are as follows.
(1) For goods sold on Hire-purhase
(a) Hire-Purhase Stock Hire-Purhase Prie of goods
Acount Dr. sold on Hire-Purhase.
To Hire-Purhase Hire-Purhase Price-CCost
Adjustment Account Price (Leading).
“ Shop Stock Account Cost of goods sold on Hire-Purhase
87

(b) Hire-Purhase Debtors Hire-Purhase Prie of goods


Account Dr. sold on Hire-Purhase.
To Hire-Purhase Stock Aount

(c) Shop Stock Acount Dr. Estimated Value of goods repossessed.


Hire-purhase Adjustment Acount Dr. Loss on repossession.
To Hire-Purcchase Debtors Amount due for which goods are repossessed.

(4) Put down the losing balance on the credit side of Hire-Purhase Stock Acount, Hire-Purhase Debtors
Aount and Shop Stock Account on the debit side of Stok Reserve Account.

(5) From removing loading from the Opening Stocck


Stock Reserve Acount Dr. With the amount of loading.
To Hire-Purhase Adjustment Account

(6) For removing the loading from the losing Stok


Hire-Purhase Adjustment Acount Dr. With the amount of loading.
To Stock Reserve Acount
The Hire-Purhase Adjustment acount will now reveal profit or loss. It will reval profit if its redit side
total is greater than its debit side total, and loss if its debit side total is greater than it’s credit side
total.

(6) For Profit


Hire-Purchase Adjustment Acount Dr. With the Amount of profit.
To General Profit and Loss Acount

(8) For Loss


General Profit and Loss Account Dr. With the Amount of Loss.
To Hire-Purhase Adjusltment Aount

Example
J Ram & Co. have a Hire-Purhase Department. Goods are sold on hire-purchase at cost plus 50%. From
the following particulars find out the profit made by the hire-purhase department:
1994 Rs.
Jan., 1 Stock out with Hire-Purchase
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 (instalments due Rs. 2.000) as value 500
88

Instalment due, customers paying 9,000


Stock at shop (exluding repossessed goods) 20,000
Goods Purchased during the year 60,000

Hire-Purhase Stocck Acount


Rs. Rs.
1994 1994
Jan., 1 To Balance b/d 9,000 Dec., By Hire-Purhase Debtors
Dec., 31 To Shop Stocck —Account – Goods sold on Hire Purchase 66,000
Transfer 58,000
To Hire-Purhase Adjustment By Balance c /d 30,000
Aount Loading 29,000
96,000 96,000
1995
Jan,. 1 By Balance b/d 30,000

Hire-Purhase Debtors Account


Rs. Rs.
1994 1994
Dec., 31 To Balance b/d 5,000 Dec., 31 By Banks 60,000
” Hire-Purchase Stock Account ” Shop Stock Account 500
—Transfer (Baianing Figure) 66,000 ” Hire-Purchase Adjustment
Aount (Loss) 1,500
” Balance c /d 9,000
71,000 71,000
1995
Jan., 1 To Balance b/d 9,000

Shop Stock Account


Rs. Rs.
1994 1994
Jan., 1 To Balance b/d 18,000 Dec., 31 By Hire Purchase Adjustment
Dec., 31 “ Purchases 60,000 Account-Transfer 58,000
“ Hire-Purchase - Debtors Balance c/d (Rs, 20,000+Rs. 500 20,500
Account Goods Repossessed 500 Goods Respossessed)
78,500 78,500
1995
Jan., 1 To Balance b/d 20,500
89

Hire Purchase Adjustment Account


Rs. Rs.
1994 1995
Dec., 31 To Hire-Purchase Debtors Dec., 31 By Hire-Purchase Stock
Account Loss on Account-Loading 3,000
Respossession 1,500
“ Hire-Purchase Stock By Hire-Purchase Stock
Account Loading 10,000 Account Loading in
To General Profit and Goods sold on Hire-Purchase 29,000
Loss Account -Profit 20,500
32,500 32,000

Stock Reserve Account


Rs. Rs.
1994 1994
Jan.,1 To Hire-Purchase Adjustment Jan., 1 By Balance b/d 3,000
Account-Transfer 3,000
1994 1994
Dec., 31 To Balance b/d 10,000 Dec., 31 By Hire Purchase Adjustment 10,000
Account-Transfer
1995
Jan., 1 By Balance b/d 10,000

Illustration:
Tee Vee house sold a Colour TV set to RITU on hire purchase system on 1.1.1993 for Rs. 9,200. RITU
paid Rs. 2,000 on the same date to receive the delivery of TV Set and agreed to pay the balance in 12 equal
monthly instalment, each installment becoming due on the last day of each months.
Ritu paid six instalments in time but failed to pay the other instalments In September 1993 (before the
monthly instalment had became due) the seller repossessed the TV Set. The repossessed set was valued at Rs.
3,500.
Show the ledger accounts (on the basis of Stock and Debtors system) in the books of T.V. House.

Solution:
Total instalment 12 (From 1 Jan., to 31st December)
Less: Instalment Paid 6 (From 1 Jan., to 30 June)
Instalment due and not due 6
Ritu have paid instalments for the months of July and August. Hence the number of instalments due is
2 (two) So the number of instalment not due must be 4 (four)
90

Instalments due means Hire Purchase Debtors (600 × 2)


Instalments must due means Hire Purchase Stock Account (600 × 4)
The basic entry on default and consequent repossession will be :
Goods Repossessed Account Rs 3,600 (With the amount of instalments not paid) To Hire Purchase
Debtors Account, 1,200 (With the instalments due) To Hire Purchase Stock Account 2,000 (With the instalments
not due)
Since the goods repossessed have been revalued at Rs, 3,500, the following entry in also required).
Hire Purchase Adjustment Account Dr 100
To Goods Repossessed Account 100

Hire Purchase Stock Account


Rs. Rs.
To Goods sold on H.P (on H.P. Paid) 9,200 By Goods Repossessed Account 2,400
By Hire Purchase 6,800
9,200 9,200

Hire Purchase Debtors Account


Rs. Rs.
To Hire Purchase Stock Account 6,800 By Cash (Drown Payment + 6 Instalments) 5,600
By Goods Repossessed 1,200
6,800 6,800

Goods Repossed Account


Rs. Rs.
To Hire Purchase Stcok Account 2,400 By Hire Purchase Adjustment Account 100
To Hire Purchase To Paid C/d 3,500
Debtors Account 1,200
3,600 3,600
91

LEASE

Introduction
A lease is a contract between two parties called the lessor and the lessee whereby the lessor conveys to
the lessee in return for rent the right to use an asset for an agreed period of time. The ownership of the asset
continues to rest with the lessor whereas the lessee enjoys the right of the use of the asset in consideration of the
rent paid to the lessor. The provisions of the Indian Contract Act, 1872 apply to lease contracts and the relationship
between the lessor and the lessee is that of a bailor and a bailee.
The meaning of the following terms used in connection with leases should be noted :
Inception of the lease : The earlier of the date of the lease agreement and the date of a commitment by
the parties to the principal provisions of the lease.
Lease Term : The non-cancellable period for which the lesseee has agreed to take on lease the asset
together with any further periods for which the lessee has the option to continue the lease of the asset, with or
without further payment, which option at the inception of the lease it is reasonably certain that the lessee will
exercise.
Minimum Lease Payments : The payments over the lease term that the lessee is, or can be required, to
make excluding contingent rent, costs for services and taxes to be paid by and reimbursed to the lessor, together
with :
(a) in the case of the lease, any residual value guaranteed by or on behalf of the lessee; or
(b) in the case of the lessor, any residual value guaranteed to the lessor :
(i) by or on behalf of the lessor; or
(ii) by an independent third party financially capable of meeting this guarantee.
However, if the lessee has an option to purchase the asset at a price which is expected to be sufficiently
lower than the fair value at the date the option becomes exercisable that, at the inception of the lease, is reasonably
certain to be exercised, the minimum lease payments emprise minimum payment payable over the lease term
and the payment required to exercise this purchase option.
Contingent Rent: That portion of the lease payments that is not fixed in amount but is based on factor
other than just the passage of time (e.g., percentage of sales, amount of usage, price indices, market rate of
interest).
Economic Life : Either
(a) the period oyer which an asset is expected to be economically unable by one or more users; or
(b) the number of production or similar units expected to be obtained from the asset by one or
more users.
Useful Life : Either
(a) the period over which the leased asset is expected to be used by the lessee; or
(b) the number of production or similar units expected to be obtained from the use of the asset by
the lessee.
Residual Value : The estimated fair value of the asset at the end of the lease term.
Guaranteed Residual Value : In the case of the lessee, that part of the residual value which is guaranteed
by the lessee or by a party on behalf of the lessee (the amount of the guarantee being the maximum amount that
could, in any event, become payable); and in the case of the lessor, that part of the residual value which is
92

guaranteed by or on behalf of the lessee, or by an independent third party who is financially capable of discharging
the obligations under the guarantee.
Unguaranteed Residual Value : The amount by which the residual value of the asset exceeds its
guaranteed residual value.
Gross Investment in the Lease : The aggregate of the minimum lease payments under a finance lease
from the standpoint of the lessor and any unguaranteed residual value accruing to the lessor.
Unearned Finance Income : The difference between (a) the gross investment in the lease, and (b) the
present value of (i) the minimum lease payments under a finance lease from the standpoint of the lessor, and
(ii) any unguaranteed residual value accruing to the lessor, at the interest rate implicit in the lease.
Net Investment in the Lease : The gross investment in the lease less unearned finance income.
Interest Rate Implicit in the Lease : The discount rate that, at the inception of the lease, cause the
aggregate present value of
(a) the minimum lease payments under a finance lease from the standpoint of the lessor; and
(b) any unguaranteed residual value accruing to the lessor, to be equal to the fair value of the
leased asset.

Types of Lease
Broadly speaking, there are the following two types of lease:—
(i) Financial Lease. It is a lease under which the present value of the minimum lease payments at the
inception of the lease exceeds or is equal to substantially the whole of the fair value of the leased
asset. In this type of lease, the asset is irrevocably leased out by the lessor to the lessee for nearly the
entire useful life of the asset. During the lease term, the lessor is able to recover his capital outlay
plus a return on his investment in the asset. Actually, the lessor plays the role of the financier of the
asset. After the lease agreement has been entered into, the lessor has not to bother himself about the
proper maintenance of the asset with the result that in a financial lease the maintenance of the asset
is made the responsibility of the lessee. A financial lease is also known as a Capital Lease.
(ii) Operating Lease. A lease other than a finance lease is an operating lease. In it, the period of contract
between the lessor and lessee is less than the full expected useful life of the asset. The lease contract
contains a clause by which the lessee is entitled to terminate the contract by giving due notice
thereof to the lessor. Thus, it is a cancellable lease.
In this type of lease, the primary lease period is mostly inadequate for the lessee to recover his investment
in the asset to the full extent. Also, as the lessee enjoys the right of cancellation, the lessor runs the risk of
obsolescence of the asset. Being interested in the proper maintenance of the asset, the lessor bears the expenses
of the maintenance of the leased asset in this type of lease.
It is notable that even a non-concealable lease is also cancellable but only in the following circumstances:
(a) upon the occurrence of some remote contingency,
(b) with the permission of the lessor,
(c) if the lessee enters into a new lease for the same or any equivalent asset with the same lessor, or
(d) upon payment by the lessee of an additional amount such that, at inception, continuation of the lease
is reasonably certain.
93

Leveraged Lease. A finance lease or an operating lease becomes a leveraged lease if in the lease
contract, apart from a lessor and a lessee there is a long-term lender also. In a leveraged lease, the lessor
finances only a small part of the investment involved in the lease and the major portion of the finance is provided
by the long-term lender. This type of lease is used by the lessor when such a huge capital outlay is required for
acquiring the asset that the lessor finds it necessary to use the services of a long-term lender.
Distinction between Finance Lease and Operating Lease. The following are the point of distinction
between a finance lease and an operating lease :
(i) In a finance lease, the lease period covers nearly the entire useful life of the asset whereas in an
operating lease, the lease period is much shorter than the useful life of the asset.
(ii) A finance lease is non-revocable while an operating lease is revocable.
(iii) In a finance lease, the cost of maintenance is borne by the lessee. On the other hand in an operating
lease, the maintenance is the responsibility of the lessor.
(iv) In a finance lease, the lessee runs the risk of obsolescence of the asset; in an operating lease, the
lessor bears this risk.
(v) In a finance lease, the total lease rentals not only cover the cost of the asset but also include a margin
of profit for the lessor. Under an operating lease, the lessee is not given such an option.
Advantages and Disadvantages of Leasing. In recent years, leasing has become very popular. It is
because it is an excellent source of finance available to the industrialists. It provides hundred per cent finance
keeping the debt-equity ratio of the lease unaltered and thus not affecting the capacity of the lessee to raise
further capital for other purposes. The fact that the lessee is not the owner of the asset he uses is a big boon to
M.R.T.P. companies and the small-scale industrial units as it enables them to avoid statutory restrictions in the
path of further growth. In the case of an operating lease, the risk of obsolescence and the major expenses of
maintenance of the asset are also borne by the lessor which facilitates the job of the lessee.
Leasing has a few disadvantages also. The lessee cannot avail himself of certain tax benefits and
benefits like backward area incentives and the state subsidy in respect of the asset used by him on the basis of a
lease. In case of a non-cancellable lease, the lessee runs the irks of technological obsolescence of the asset.
Leasing is not a suitable method of finance of assets to be used in a project in which cash inflow will start after
a fairly long period of time. In the case of those assets also whose value is likely to appreciate over long period
of time, purchase of the asset is better than taking it on lease.
The contents of the following Accounting Standard 19 (AS 19) on Leases should be studied carefully to
understand the different points to be kept in mind while keeping a record of the transactions relating to a lease
in the books of lessor and the lessee.
94

LESSON 12
BRANCH ACCOUNTS

Branch and Department


Generally a business is split into many parts for the purpse to capture the market at different places or
to have better management. If the different parts, usually, selling the same products or rendering the same
services, are located at different places in the same town or in different towns, they are know as branches and
when the various parts are located under the same roof, they are known as departments. A firm which has
branches naturally wants to know the profit earned and loss suffered at each branch,, the systemn of accounting
will naturally depended on the type of branch. Branches may be divded as under:-
(a) Branches which receive goods only from head office, selling goods only for cash, remitting all cash
received to the head office, expenses being met out of remittance from the head office.
(b) Branches similar to the above except that goods are sold for cash and credit.
(c) Branches similar to above (b) with the difference that head office invocies goods to the branch at
selling price or at a price which is high er than Cost price and the office passes entries with the
invoice price.
(d) Branches making their own purchases and manufacturing goods and functioning more or less cases
as an autonomous units.
(e) Foreign branches, i.e. branches located in a foreign country. We will not study the accounting for
such branches it is not in the syhalbs.
Usually, account for the first three types branches are kept by the head office, The fourth and fifth type
of branches generally maintain an independent st of books of accounts.
The simplest case of branch is one where branch receives ggoods only from H,.o., sells goods only for
cash depositing the same with the bank in the name of H.O., and H.O., itself pays all branches’ expenses and
record goods sent to branch at cost.
H.O. maintains a Branch Account to ascertain profits and loss made at the branch. Here ‘Branch Account’
is in the nature of Trading and Profit and Loss Account. Al;l investment in the form of goods and expenses
incurred in respect of branch are recorded on the debit side of the ‘Branch Account’ - Whereas sale proceeds,
closing stock and other items of income are recorded on the credit side of this account, if credits exceed debits,
it means a profit at the branch which is transferred to profit & Loss Account where as id debit exceeds credits,
it means a loss at branch which, like the profit a branch, is transferred to Profit & Loss Account. The entries to
be made in the Head office books are :-
(a) When goods are sent to Branch
*Branch Account Dr.
To Goods sent to Branch Account
(For Cost Price of goods sent to Branch)

* If the branch returns some goods to H.O., a reverse entry will be passed with the Cost price of Goods returned.
95

(b) When branch expenses are met


Branch Account Dr.
To Cash/Bank Account
(For payment for branch expenses)

(c) When sale proceeds deposited by Branch with the bank in the name of Head Office :-
Bank Account Dr.
To Branch Account
(For sale proceeds deposited with the Bank)

(d) When at the end of the year some goods are lying with the Branch unsold.
Branch Stock Account Dr.
To Branch Account
(For cost Price of goods lying at the branch at the end of the year)

(e) When Branch Account reveals a profit


** Branch Account Dr.
To Profit asnd Loss Account
(For transfer of branch profit from Branch Account to profit & Loss Account)

(f) Branch Stock account will appear in the Balance Sheet of Head Office. In the beginning of the next
year, this account is transferred t Branch Account by means of the following en try:-
Branch Account Dr.
To Branch Stock Account
(For Cost of Branch Stock as at the beginning of the year)

(g) Goods sent to Branch Account must be transferred at the end of the year to Purchase Account in
case of trading concern and to Trading Account in the case of manufacturing concern. The entry will
be :-
Goods Sent to Branch Account Dr.
To Purchase Account/Trading Account
(Transfer of Balance in Goods sent to Branch Account to Purchase/Trading Account)

(h) If the branch sells goods on credit also, a few additional entries will have to be made. For cash
received from branch debtors during the year, following entry will be passed :-
Bank Account Dr.
To Branch Account
(For cash received from Branch debtors)

** If Branch Account reveals a loss, a reverse entry will be passed with the amount of loss.
96

(i) At the end of the year, the following entry will be passed with the total amount due from the Branch
Account debtors as at the date:-
Branch Debtors Account Dr.
To Branch Account
(For closng branch debtors)

Branch Debtors will apear in the Balance Sheet of the H.O. and will be transferred to Branch Account
in the beginning of the next account period.
Note:- Sometime H.O. may send sme cash to the branch to meet opetty cash expenses at the branch. At the
end of the year, some cash may be lying with the branch. The amount should be treated in the same
way as stock at branch is treated.

Illustration 1
From the following particulars relating to Bangaslore Branch for the ending 31st December, 1994
prepare the accounts in the head office books:-

Rs.
Stock at Branch on 1st January, 1994 17,800
Branch Debtors on 1st January, 1994 9,400

Petty Cash at Branch on 1st January 1994 40

Goods sent to Branch during the year 56,800

Cash Sales during the year 31,600

Credit Sales during the year 80,800

Cash received from the debtors 75,800

Cash sent to Branch for expenses :-

Rent 4,000

Salaries 12,000

Petty Cash 2,000

Stock at Branch on 31st December 1994 10,800

Petty Cash at Branch on 31st December, 1994 60

Goods returned by the Branch 1,600


97

Solution:

Bangalore Branch Account


Dr. Cr.
Date Particulars Amount Date Particulars Amount
Rs. Rs.
1994 1994
Jan., 1 To Balance b/d Jan.l By Cash
Stock 17,800 to Cash Sales 31,600
Debtros 9,400 Dec.,31 Received from
Petty Cash 40 27,240 Debtors 75,800 1,07,400
Jan.l to Goods sent to Brach
Dec.,31 To Goods sent to Account 1,600
Branch Account 56,800 Branch Stock A/c 10,800
” ” To Cash for Expenses: Branch Debtors A/c
Rent 4,000 Petty Cash at Branch 14,400
Salary 12,000 Account 60
Petty 2,000 18,000
To Profit transferred to
Profit & Loss Account 32,220
1,34,260 1,34,260

Memorandum Branch Debtors Account


Dr. Cr.
To Balance b/d 9,400 By Cash 75,800
To Credit Sales 80,800 By Balance c/d 14,400
90,200 90,200

Godds sent to Branch Account


Rs. Rs.
1994 1994
Jan.l to To Bangalore Branch 1,600 Jan. 1 to By Bangalore Branch 56,800
Dec. 31 A/c returns Dec. 31 Account
Dec.31 To Purchase Account Transfer 55,200
56,800 56,800
98

Branch Stock Account


Rs. Rs.
1994 1994
Jan.l To Balance b/d 17,800 Jan.l To Transfer to Bangalore Branch A/c 17,800
Dec.31 To Banglore Branch A/c 10,800 Dec. 31 By balance c/d 10,800
28,600 28,600
1995
Jan.l To Balance b/d 10,800

Branch Debtors Account


Rs. Rs.
1994 1994
Jan. l To Balance b/d 9,400 Jan.l To Transfer to Bangalore A/c 9,400
Dec. 31 To Bang lore Branch A/c 14,400 Dec. 31 By Balance c/d 14,400
1995 To Balance b/d 14,400
Jan.l 23,800 23,800

Petty Cash at Branch Account


Rs. Rs.
1994 1994
Jan.l To Balance b/d 40 Jan.l By Bangalore Branch A/c 40
Dec. To Balngalore Branch A/c 60 Dec.31 By Balance b/d 60
100 100
1995
Jan.l To Balance b/d 60

Note: No entry is made for credit sales at branch in the H.O. books. The cash received from the debtors
will be remitted to the H.O. along with Cash received for Cash Sales. The H.O. makes no entry for
cash received by it. It will debit cash, credit branch. By the same token, the H.O. makes no entry for
discounts allowed, bad debt written off or returns by the Branch debtors. It the branch has received
to bill of exchange, it will be sent to the H.O.
The entry then will be to debit Bills Receivable Account and Credit Branch Account.

Type (c)
In this case, goods are invoiced to the Branch at selling price. In order to ascertain the profit, a justment
entries will have to be made for the difference between the invoice value of goods sent in branch and their cost.
Similarly stock at branch will be valued at invocie value but, again suitable adjustment will be necessary to
ensure that stock does not appear in the Balance Sheet at more than the cost.
99

The entries in respect of goods sent to Branch and Stock will be as follows:-

(a) When goods are sent to branch Branch Account Dr.


To Goods sent to Branch Account
(For invoice price of the goods sent to branch)

(b) For stock lyiog at branch at the end of the Trading period
Stock at Branch Account Dr.
To Branch Account
(For invoice price of the goods lying at the branch athe end of the year)

(c) For adjustment in the Value of goods sent


Goods sent to Branch Account Dr.
To Branch Account
(For loading invoice price of goods sent to branch)

If some goods have been returned by the branch to Head Office the above mentioned entyr will be
passed only for the loading in invoice price f goods Sent to branch less invocie price of the goods
returned by branch.

4. For adjustment in the value of Closing Stock


Branch Account Dr.
To Stock Reserve Account
(Loading in the amount of closing stock at branch
credited to Branch Stock Reserve Account and debited to Branch A/c)

In the begining of the next year, Branch Stock Reserve Account will be transferred to Branch Account
by means of the following entry:
Branch Stock Reserve Account Dr.
To Branch Account
(Transfer of Branch Stock Reserve Account to Branch Account)

Illustration 2
Mohan Stores of Delhi has a branch at kanpur, goods are sent by the head office at invoice price which
is at a profit of 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:-
100

Rs.
Opneing balance
Stock at invoice price 22,000
Debtors 3,400
Petty Cash 200
Goods sent to branch at invocice price 40,000
Expenses paid by H.O.
Rent 1,200
Wages 400
Sales and other expenses 1,800 3,400
Remittances made to Head Office
Cash Sales 5,300
Cash collected from Debtors 42,000 47,300
Goods returned by branch at invocie price 800
Balance at the end:
Stock at Invoice price 26,000
Debtors at the end 4,000
Petty Cash 250

Solution:
Branch Account
Dr. Cr.
To Opening balances: By Stock reserve (loading) of
Stock 22,000 stock in the beginning 4,400
Debtors 3,400 By Goods sent to branch (loading) 8,000
Petty Cash 200 25,600 By Cash Sales 5,300
To Good sent to branch Account 40,000 ByCash Collected from Customers 42,000 47,300
To Bank
Rent 1,200 By Goods returned to H.O. 800
Wages 400 By Balance:
Salary & other Expenses 1,800 3,400 Stock 26,000
To Stock reserve (loading) on Debtors 4,000
Closing Stock 5,200 Petty Cash 250 30,250
To Goods returned (loading) 160
To Net Profit 16,390
90,750 90,750
101

Illusration:
Naresh Stores Ltd. operate a retail branch at Madras All purchases are made by the Head Office in
Calcutta, goods being charged out to the branch at selling price which is cost plus 50%. All cash received by the
branch in remitted to Calcutta. Branch expenses are paid out of an imprest account which is reimbursed by
Calcutta monthly Branch helps a sales ledger and subsidiary books but other wise all branch transactions are
recorded in the books of the Calcutta Office. On April 1,1990 Stock in trade at Madras, at selling price, amounted
to Rs. 2,76,900 and debtors to Rs. 54,800.
During 1990-91 the following transactions took be place at the branch.
Rs.
Goods received from Calcutta at selling price 9,37,200
Cash Sales 5,21,000
Credit Sales les returns 4,23,700
Goods returned to Calcutta at selling price 14,400
Agreed Allownces to customers off selling price
(already taken into account while involing) 8,200
Cash receiving from debtors 3,98,600
Discount allowed to debtors 97,000
Bad debts written off 4,800
Expenses 1,43,800
On 31 March, 1991 Stock in trade at Madras was found to amount to Rs 2,45,100
You are required to (a) write up the Branch Stock Account, and (b) prepare the Trading and Profit and
Loss Account at the Branch for the year 1990-91

Solution :

Madras Branch Stock Account


Rs. Rs.
To Balance b/d 2,76,900 By Sales- Cash 5,21,000
To Goods sent to Credit 4,23,700 9,44,700
Branch Account 9,37,200 By Allowance to Customers 8,200
By Goods Sent & Branches 14,400
By Shortages (Balancing figure) 1,700
By Balances c/d 2,45,100
12,14,100 12,14,100
102

Branch & Trading and Profit & Loss Account


Rs. Rs.
To Opening Stock (Cost) 1,84,600 By Sales:
(2,76,900-92,300) Cash 5,21,000
To Goods Sent to Branch (Cost) Credit 4,23,700 9,44,700
(9,37,200 - 14,400 - 3,07,600) 6,15,200 By Closing Stock
Gross Profit 3,08,300 (2,45,700-81,700) 1,63,400
11,98,100 11,08,100
To Discount 9,700 By Gross Profit 3,08,300
To Bad debts 4,800
To Expenses 1,43,800
To Nel Profit 1,50,000
3,08,300 30,800

Stock and Debtors System


Account of balance of type (c) can also be prepared in another manner known as the Stock and
Debtors system a Branch Stock Account is mantained whose balance at any time shows the selling price of
goods lying at the branch, a Branch Debtors Account is maintained whose balance at any time reveals the
amount recoverable by the branch from its debtor at that particular time a Branch Expenses Account to show
total expenses incurred in connection with the branch by the branch and H.O. a Branch Adjustment Account
to reveal gross profit or gross loss at the branch and a Branch Profit and Loss Account to reveal net profit, or
net loss made at the branch. Sometimes Branch Profit and Loss A/c merged into Branch Adjustment Account
which is then made to reveal net profit or net loss instead of gross profit or gross loss. Under the method the
entires are made as follows:

1. Where goods are sent to a Branch


Branch Stock Account Dr.
To Goods sent to Branch Account
(For invoice price of goods sent to Branch Account)

Note : The above entry is reversed if goods are returned by branch t Head Office.

2. When expenses are incurred for the Branch


Branch Expenses Account Dr.
To Cash/Bank Account
(For payment made by H.O. for tranch expenses)
103

3. When sales are made at the branch


(a) Cash/Bank Account Dr.
To Branch Stock Account
(For cash sales made at the branch)

(b) Branch Debtors Account Dr.


To Branch Stock Account
(For credit sales made at the branch)

4. When Cash is received n account of


Branch Debtors Cash/Bank Account Dr.
To Branch Debtors Account
(For cash received from branch debtors)

5. When goods are returned by the Branch Debtors to Branch


Branch Stock Account Dr.
To Branch Debtors Account
(For goods returned by Debtors to Branch)

6. When any allowance is made to branch debtors, say discount.


Branch Expenses Account Dr.
To Branch Debtors Account

7. When there is any leakage, loss or wastage at the Branch


Branch Stock Adjustment Account Dr. (with loading)
Branch Profit and Loss Account Dr. (with Cost price)
To Branch Stock Account (With invoice price)

Note : To above entry is reversed if there is surplus in any stock. For the excess of selling price over
charged on goods sent ot branch;

8. Goods sent to Branch Account Dr.


To Branch Stock Adjustment Account

9. For the Adjustment of the invoice price of the closing stock.


Branch Adjustment Account Dr. With the difference in the invoice
To Stock Reserve Account price of the stock and the Cost
value of stock.
(The Stock Reserve Account, will be carried to the
next accouting year and then transferred to the creidt
Branch Adjustment Account)
104

10. For transfer of Branch Expenses Account to Branch Profit & Loss Account
Branch Profit & Loss Account Dr.
To Branch Expenses Account

11. For transfer of Gross profit revealed by branch adjustment account to Branch profit & Loss Account
Branch Adjustment Account Dr.
To Branch Proft & Loss Account
The aboive entry will be reversed if there is a Gross loss.

12. For transfer of Net Proft revealed by Branch proft & Loss Account to General proft & Loss Account
Branch profit & Loss Account Dr.
To (General) profit & Loss Account
The entry will be reversed in case of Net Loss.

13. For transfer of balance in Goods sent to Branch Account to Trading Account or Purchase Account
Goods sent to Branch Account Dr.
To Trading Account/Purchases Accounts

Illustration 3
Oils Ltd. opened a branch at kanpur in 1993. Goods are invoced to the branch at cost plus 25%. The
following figures are given to you for 1993 and 1994 ascertain the profit or Loss made in two years by stock and
debtors system:
Rs. Rs.
To Goods sent to Branch (Inv. Value) 1,40,400 2,65,200
Sales -Cash 50,000 80,000
Credit 70,000 1,60,000
Cash received from Debtors 62,400 1,51,400
Discount allowed to Customers 1,600 2,600
Goods returned by customers 2,000 1,500
Cash remitted to Branch for:
Rent 1,200 1,500
Salaries 6,000 8,000
Sundry Expenses 960 1,000
Stock at Branch as on 31st December 47,800
105

Solution:

Branch Stock Account


Rs. Rs.
1993 1993
To Goods sent to Jan,l By Cash Sales (2) 50,000
Jan.l Branch Account (l) 1,40,400
Dec., 31 To Branch Debtors A/c Dec. 31 By Branch Debtors A/c
Returns 2,000 Credit Sales (3) 70,000
By BalanceC/d 22,400
1,42,400 1,42,400
1994
Jan.l To Balance b/d 22,400

Goods sent to Branch Account


Rs. Rs.
1993 1993
Dec.31 Branch Adjustment A/c (8) 28,080 Jan.l to By Branch Stock A/c (1) 1,40,400
To Purchase Account (11) 1,12,320 Dec.31
1,40,400 1,40,400

Branch Debtors Account


Rs. Rs.
1993 1993
Jan.l To Branch Stock A/c 70,000 Jan. l By Cash (4) 62,400
To Credit Sales (3) to
Dec. 31 Dec., 31 By Branch Stock A/c Returns (5) 2,000
” By Branch Exp. A/c Discount (7) 1,600
By Balance c/d 4,000
70,000 70,000
1994
Jan. 1 To Balance b/d 4,000
106

Branch Expenses Account


Rs. Rs.
1993 1993
Jan. 1 To Cash-Rent (6) 1,200 Dec.31 By Branch Adjustment
Salaries 6,000 A/c Transfered (10) 9,760
S. Exp. 960
To Branch Debtors A/c
Dec. 31 Discount (7) 1,600
9,760 9,760

Branch Adjustment Account


Rs. Rs.
1993 1993
Dec.31 To Stock Reserve A/c Dec.31 By Goods sent to Branch A/c 28,080
20% as Rs, 22400 (9) 4,480
To Branch Exp. A/c 9,760
General profit & Loss A/c
transfer 13,840
28,080 28,080

Stock Reserve Account


Rs. Rs.
1993 1993
Dec. 31 To Balance c/d 4,480 Dec.31 By Branch Adjustment A/c (4) 4,480
1994
Jan. 1 By Balance b/d
4,480 4,480

Note : Figure in Brackers show the setps and entries to be completed.


107

Branch Stock Account


Rs. Rs.
1993 1993
Jan.l To Balance b/d 22,400 Jan. 1 By Cash Sales 80,000
” To Goods sent to to
to Branches A/c 2,65,200 Dec. 31 By Branches Deb. A/c
Dec. 31 To Branch Debtors Credit Sales 1,60,000
A/c Returns 1,500 Dec. 31 By Branch Adj . A/c - Wastage* 1,300
By Balance c/d 47,800
2,89,100 2,89,100
1994
Jan.l To Balance b/d 47,800

Goods sent to Branch Account


Rs. Rs.
1993 1993
Dec. 31 To Branch Adj. A/c 53,040 Jan 1 to By Branch Stock A/c 2,65,200
” ” To Purchases A/c 2,12,160 Dec. 31
2,65,200 2,65,200

Branch Debtor Account


Rs. Rs.
1993 1993
Jan.l To Balance b/d 4,000 Jan.l By Cash 1,51,400
Dec.31
Jan.l to To Branch Stock A/c By Branch Stock A/c
Dec. 31 Credit sales 1,60,000 Returns 1,500
By Branch Exp. A/c Discount 2,600
By Balance c/d 8,500
1,64,000 1,64,000
1994
Jan.l To Balance b/d 8,500

* The wastage is found as a balancing figure after putting the figure of closing stock on the credit side.
108

Branch Expenses Account


Rs. Rs.
1993 1993
Jan. l To Cash-Rent 1,500 Dec.31 By Branch Adj. A/c
Salaries 8,000 Transfer 13,100
Sun Exp. 1,000 1994
Dec. 31 To Branch Debtors A/c Jan.l
Discount 2,600
13,100 13,100

Stock Reseve Accounts


Rs. Rs.
1993 1993
Dec.31 To Branch Adj. A/c Jan.l By Balance b/d 4,480
Transfer 4,480 Dec.31 By Branch Adj. c/d
Dec. 31 To Balance c/d 9,560 (reseve required closingstock) 9,560
14,040 14,040
1994
Jan., l By balance b/d 9,560

Branch Adjustment Account


Rs. Rs.
1993 1993
Dec., 31 To Branch Adj., A/c Dec., 31 By Stock Reserve A/c transfer 4,480
Reserve required
on closing stock 9,560
To Branch Stock A/c By Goods sent to
Wastage 1,300 Branch A/c 53,040
To Branch Exp. A/c 13,100
To profit & loss A/c
(transfer of Net Profit) 33,560
57,520 57,520
109

Distinction between whole-sale and retail profit at branch


Sometimes, the manufacturers of goods sell there goods on retail basis also. In such cases they supply
the goods to these retail branches at a price at which it is supplied to the wholesalers theus keeping them at par
with the wholesalers. Since goods are sold by branches at retail price which is more than wholesale price,
therefore, the difference between their sale price and wholesae price only will be taken to be profit earned by the
branch. For example the cost of an article may be Rs. 100, the wholesales price is Rs. 130 If the articles are sent
to branch and sold there, the proft revealed according to the above method will be Rs. 30 (retail Price minus the
cost.) It is apparent, however, that by selling goods throguh branch Profit is only Rs. 10 Rs. 20 could have been
earned by selling the goods on whole-sale basis to others. For knowing the true profit at retail branches, the
practice adopted sometimes is to charge the branch with wholesale price and then to ascertain the profit. The
Head Office Trading Account will then be credited with goods sent to branches at wholesale price and not at
cost.
It must be remembered however, that the stock at the end of the year at the branch will be valued at
wholesale price. Therefor, the Head Office must create a proper reseve by debtiting its own profit & Loss
account in order to show the branch stock at cost in the Balance Sheet.

Illustration 4
A Ltd. has a retail branch at Nagpur and goods are sold to customers at cost plus 100%. The wholesale
price is cost plus 80 %. Goods are invoiced to Nagpur at wholesale price. From the following particulars find
out the profit made at Head office and Nagpur for the year 1993-9
H.O. Nagpur
Stock on July 1,1993 25,000
Purchases 1,50,000 —
Goods sent to Branch (Invoice Price) 54,000 —
Sales 1,53,000 50,000
Stock on 30th, June 60,000 1,000
Sales at H.O. are made only on whole-sale basius and that at Branch only to customers. Stock at branch
is valued at Invoice Price.

Trading Account for 1993-94


Particulars H.O. Nagpur Particulars H.O. Nagpur
Rs. Rs. Rs. Rs.
To Opening Stock 25,000 — By Sales 1,53,000 50,000
To Purchases 1,50,000 —
To Goods received By Goods sent to
from H.O. 54,000 Branch 54,000 —
To profit & Loss A/c By Closing Stock 60,000 9,000
Gross profit 92,000 5,000
2,67,000 59,000 2,67,000 59,000
110

Profit & Loss Account 1993-94


Particulars H.O. Nagpur Particulars H.O. Nagpur
Rs. Rs. Rs. Rs.
To Stock Reserve against for By Gross profit 92,000 5,000

 160 
Branch Stock A/c  80,000 × 200  4,000 —
 

To Net Profit (Subject to exp.) 88,000 5,000


92,000 5,000 92,000 5,000

Had the solution been attempted on the usual lines it would have been as follows:-

Trading and Profit & Loss Account for 1993-94


Particulars Head Office Nagpur Particulars Head Office Nagpur
Rs. Rs. Rs. Rs.
To Opening Stock 25,000 By Sales 1,53,000 50,000
To Purchase 150,000 By goods Sent to
To goods setn to (at cost)- 30,000

100
Branch at cost 54,000 × By Closing Stock
180
(at cost) 60,000 5,000
30,000
68,000 25,000
243,000 55,000 243,000 55,000

Illustration:
A head office sends goods to its Branch at 20% less than its lisepitce. Goods are sold to customers at
cost plus 100% from the following particulars ascertain the profit made at the head office and the branch in case
of branch on the wholesale basis.
Head Office Branch
Rs. Rs.
Opening show of cost
(at invocie price in case of Branch) 40,000 32,000
Purchases 200,000
Goods Sent ot Branch(at invoice price ) 96,000
Sales 1,70,000 80,000
Expenses 14,000 8,000
111

Solution
H.O Branch By Sales No. Branch
Rs. Rs. Rs. Rs.
To Opening stock 40,000 32,000 By goods sent to 170,000 80,000
To Purchases 2,00,000 Branch A/c 96,000
To Goods From. H.O 96,000 By closing Stock
To Gross Profit c/d 1,21,000 16,000 95,000 64,000
3,61,000 144,000 3,61,000 1,44,000
To Expenses 14,000 8,000 By Gross Profet b/d 1,21,000 16,000
To Stock Reserve By Stock Reserve against
against Brncb stock 24,000 branch opening stick

60 60
64,000 × 32,000 ×
160 160

To Net Profit 95,000 8,000 12,000


1,33,00 16,000 133,000 16,000

Calculation of closing stock


Head office Branch
Rs. Rs.
Opening stock 40,000 32,000 (at invoice price)
Purchases 2,00,000
Goodds from (HO) 96,000 (at invoice price)
2,40,000 1,28,000

 100 
Less cost of goods sent to Barnch  96,000 ×  60,000
 160 

 100 
Less cost of sales to Outisders 1,70,000 ×  85,000
 200 

 160 
For Branch  80,000 ×  64,000
 200 

95,000 64,000
112

Independent Branch
So far we have studied branches which did not keep books of account. Now we s shall deal with
branches keeping their own accooounts.
The Heaaad Office will open its own books an account called “Branch account to shich goods or cash
sent will be debited. When cash is recieved from the branch , thebranch account will be credited. This account
is maintained more or less /like personal accounts so that any expenses incurred on behalf of the branch will
also be debited the account. The balance of this account shows hw much money the branch owes to Head
Office.
Similarly the branch will have “Head Office Account” in its books “goods” or Cash recieved from
Head office be credited and goods and cash sent to Head Office debited.
The balance in the account is usually credit and indicates the amount owed by branch to the Head
Office.
The balance in the branch account (Head Office books ) should agree with the balance in the Head
Office account ((branch books). But due to goods or cash in transit this may, not be so. ITgpods are sent by the
Head Officce it will pass an entry immediately but the branch will record the receipt of goods only on their
receipt. There will surely be some cash to Head Office, it will record it immediately but the Head Office will
wait till actual receipt. On the daate of closing of accooounts, ggoods or cash in transit, the Head Office will
have to pass the folloowing entry:
Goods in Transit Dr.
To Branch Account

Similarly, for cash sent by the branch but still in transit the branch will pass the entry;
Cash in Transit Account Dr.
To Head Office Account

Both Goods and Cash in transit are assets and should be shown in the balance sheet:

Note: If in examination problems, there is a difference in the balance shown by th Head Offece and Branch
Accounts; the difference should be assumed to be due to either gods in transit or cash-intransit.
Suppose in the Head Office boods, branch account shows debit balance to Rs. 26,000/- and in the
branch books. Head Office account shows a credit balance of Rs. 21,000/ - worth of goods or cash
is in transit.
Now we shall take up certain other are peculiar to an independent nranch. Account of fixed assets at the
Branch are usually maintained in Head Office books and not in branch books even if the asset is originally paid
by the branch.
When such an assset is acquired and branch pays for it, the branch passes the following entry:
Head Office Account Dr.
To Cash/Bank Account
The Head Office will pass the following entry on receipt of advice from Branch:
Branch Fixed Asset (by name) Dr.
To Branch Account
113

If Head Office pay s for it, it wiill debit Branch Fixed Asseett Accoount and will credit cash. Branch
passses no entry. Regarding depppreciation there is no peculiarity if the accounts of fixed assets are maintained
in the branch books. But if accounts of such asssets are maintained in Heaad Office books, the entry in respect
of depreciation will be:
Branch Account Dr.
To Branch Fixed Assets Account

In the branch books the entry will be:


Depreciation Account Dr.
To Head Office Account

Head Officce always does some work on behalf of the branch and thus Head Office Charges a reasonable
amount from the branch. For that the Branch passes the following entry:
Head Office Expenses Account Dr.
To Head Office Account

Head Office will pass the following entry:


Branch Account Dr.
To Salaries Account (Or Profit & Loss Account)

There may be inter branch transactions. Suppose A Branch sends goods to B branch, the various entries
to be passed are as follows:
In A’s books:
Head Office Account Dr.
To Goods sent to Branch Account

In B’s books :
Goodds received from Head Office Account Dr.
To Head Office Account

The Head Office will, of course, keep accounts of all the branches and will also record inter branch
transactions.
If, therefore , goods are supplied by A Branch to B Braanch the Head Office will Pass the following
entry :
A Branch Account Dr.
To B Branch Account
114

Illustration 5
Nagrik Cloth Ltd., had a branch at Rohtak. Preliminary account prepared by Rohtak Branch for 1994
showed a profit of Rs. 11,400 without considering the following:
Cash remitted to the Head Office not yet received 3,600
Goods sent by the H.O. not yet received at Rohtak 4,400
H.O. expenses charged to Branch 3,200
Depreciation on Branch assets (account kept in H.O. Books 900
Record the above in the books of both the Head Office and Branch. Also state how much profit has the
branch made.

Solution:

Books of Head office


Date Particulars L.F. Dr. Cr.
1994
Goods in transit Account Dr. 4,400
To Rohtak Branch Account 4,400
(Being goods sent to Rohtak Branch not received there)
Rohtak Branch Account Dr. 3,200
To Salaries Account (or P&L A/c) 3,200
(being H.O. expenses to be received from the branch)
Rothak Branch Account Dr. 900
To Branch Assets Account 900
Depreciation on branch assets (account kept in
H.O. Books charged to Branch A/c)
Cash in Transit Account Dr. 3,600
To Head Office Account 3,600
(Cash sent to HO not yet received there)
Head Office Expenses Account Dr. 3,200
To Head Office Account 3,200
(Expenses Charged by Head Office)
Depreciation Account Dr. 900
To Head Office Account 900
(Depreciation in respect of branch
assets account in Head Office)
115

After making the above entries the profit at the branch will be reduced to Rs. 7,300 i.e. Rs, 11,400
being H.O. expenses depreciation.

Illustration 6
A&Co. Ltd, having their H.O. at Delhi with branches at Lucknow and Allahabad close their annual
account on 31st December, when the following transactions have taken place:
(a) Remittances of Rs. 4,500 mady by Lucknow brnch to its H.O. on 30th December, received by the
H.O. on 5th January.
(b) Goods valuing Rs. 2,200 despatched by the Allahabad on 27th December, under instructions from
the H.O. and received by the Lucknow on 30th December.
(c) Depreciation amounting to Rs, 1,100 on Lucknow branch fixed assets when accounts of such assets
are maintained at the H.O.
(d) Goods worth Rs. 9,000 despatched by the H.O. to Allahabad branch on 30th December received by
that branch on 7th January.
Show these entries in the books of the (i) H.O. and (ii) Lucknow branch as at the close of the year.

Solution:

H.O. JOURNAL
(a) No Entry Rs. Rs.

*(b) Lucknow Branch A/c Dr. 2,200


To Allahabad Branch A/c 2,200
(Goods sent by Allahabad Branch to Lucknow
Branch as per our instalment)
(c) Lucknow Branch A/c Dr. 1,100
To Lucknow Assets A/c 1,100
(Dep, on assets as Lucknow Branch)
(d) Goods-in-Transit A/c) Dr. 9,000
To Allahabad Branch A/c 9,000
(Goods sent by us not yet received by Allahabad Branch)

* Strictly entry (b) is not required as the question requires entries only at the close of the year.
116

Lucknow Branch Journal


Rs. Rs.
(a) Cash-in-transit A/c Dr. 4,500
To Head Office A/c 4,500
(Entry for remittances still on transit) 2,200

(b) Goods from H.O. A/c Dr.


To Head Office A/c 2,200
(Goods received from Allahabad oon Head Office instructions)

(c) Depreciation A/c Dr. 1,100


To Head Office 1,100
(depreciation on assets)

Incorporation of branch trial balance in Head Office books


On the receipt of trial balance from the branhc, the H.O. will take steps to incorporate bracu figures
with its own figures with a view to present a common trading and profit and loss account and Blance sheets.
This process is known as Incorporation’. Before starting to pass entries, the Trading and Profit & Loss Account
of the branch will have to be prepared and after that the combined blance sheet of the branch and the Head
Office. There are two methods for doing this:
Under first method, the Trading and Profit and Loss Account of the Branch is prepared in the regular
way in the books of the Head Office. The entries to be passed are as follows:

1. Branch Trading Account Dr.


To Branch Account
(With the items of opening stock, purchases and other items
appearing on the debit side of Trading Account of the branch
but excluding gross pofit).
2. Branch Account Dr.
To Branch Trading Account
(With Sales; Closing Stock and other items appearing on
credit side of Trading Account of the branch but excluding loss).
2. Branch Trading Account Dr.
To Branch Profit and Loss Account
(For Gross profit revealed by Trading Account).
117

Note: If there is a gross loss, the entry will be reversed:


4. Branch Profit & Loss Account Dr.
To Branch Account
(Fro amounts appearing on the debit side a Profit & Loss
account of the branch but excluding net Profit and Gross Loss)
5. Branch Account Dr.
To Branch Profit & Loss Account
(With items appearing on the credit side of P&L A.c of
Branch but excluding gross profit and net loss).
6. Branch Profit and Loss Account Dr.
To Profit & Loss Account
(With net profit revealed by Profit & Loss Account of the Branch).
The above entry will be reversed if there is a net loss:
It should be noed that Branch Trading Account and Branch Profit and Loss Account will setoff.
It is desired to close the books of the branch completely and to record branch asets and liabilities in the
Head office books for the purpose of reparing common Blance Sheet, the folowing two further entries should be
poassed:
Branch Assets (individually)
To Branch Account
(Incorporation of branch assets as shown in the balance sheet at the branch)
Branch Account Dr.
To Branch Liabilities (individually)
(Incorporation of branch liabilities so outsiders shown in the Blance Sheet of the branch).

Illustration 6
You ar required to prepare the Trading and Profit & Loss Account and consolidated balance sheet of
Eve Ltd., in Calcutta and its branch at Delhi. Give Journal entries incorporation of Delhi branch accounts in the
Head Office and show the branch account in Head Office book after incorporating these in the assets and
liabilities.
The trial balance as on 31st December, 1993 are as under.

H.O. Dr. Branch Dr. H.O. Cr. Branch Cr.


Manufacturing expenses 30,000 10,000 – –
Salaries 30,000 10,000 – –
Wages 1,00,000 40,000 – –
Cash in Hand 10,000 2,000 – –
Purchases 1,50,000 8,000 – –
118

Capital – – 2,00,000 –
Goods received from H.O. – 15,000 – –
Rent 8,000 4,000 – –
General expenses 20,000 5,000 – –
Salaes – – 4,50,000 1,50,000
Gooods sent to Branch – – 15,000 –
Purchase returns – – 5,000 1,000
Opening Stock 50,000 30,000 – –
Discount earned – – 2,000 1,000
Machinery H.O. 1,50,000 – – –
Machinery, branch 50,000 – –
Furniture H.O. 7,000 – – –
Furniture,Branch 3,000 – – –
Debtores 40,000 15,000 – –
Creditors – – 30,000 5,000
H.O. Accounts – – – 45,000
Branch Accounts 54,000 – – –
Total 7,02,000 2,11,000 7,02,000 1,11,000

Closing stock H.O. was Rs. 40,000 and at branch Rs. 30,000. Depreciation is to be chargeal or machinery
@ 20% and fueniture @ 15%. Rent outstanding is Rs. 500 (for branch).

Solution:

H.O..Books
Journal
Rs. Rs.
1993 Delhi Branch Account Dr. 10,450 10,000
Dec. 31 To Branch machinery account
To Branch furniture account 450
(Being the depereciation on branch fixed assets charged to branch)
Branch trading account Dr. 1,75,000
To Delhi Branch account 1,75,000
(Cueing the total of the following items in branch deebited to
branch trading account)
119

Stock 30,000
Purchases 80,000
Wages 40,000
Manufacturing Expenses 10,000
Goods reed from H.O. 15,000
Total 1,75,000
Delhi Branch Accounts Dr. 1,81,000
To Delhi trading acount 1,81,000
(Being the total of the following items at branches credited to
branch trading account)
Sales 1,50,000
Purcchases return 1,000
Branch stock 30,000
Rs. 1,81,000
Delhi Trading account Dr. 6,000
To Delhi Profit & Loss account 6,000
(Being the transfer of gross profit)
Delhi profit & Loss account Dr. 29,950
To Delhi branch account 29,950
(The total of the following expenses at branch debited to
branch profit and loss account)
Rent(including o/s) 4,500
Salaries 10,000
General expenses 5,000
Depreciation 10,450
Rs. 29,950
Delhi Branch account Dr. 1,000
To Delhi profit & Loss account 1,000
(Being the discount earned at Delhi credited to branch profit & loss a/c)
General profit & loss account Dr. 22,950
To Branch profit & loss account 22,950
(being the loss at Delhi transferred to Profit and loss account of the H.O.)
Brach debtors account Dr. 15,000
Branch cash account Dr. 2,000
120

Branch stock account Dr. 30,000


To Delhi Branch account 47,000
(being the transfer of various assetsa to branch to H.O. books)
Delhi Branch account Dr. 5,500
To Branch creditors account 5,000
To Branch expenseso/s account 500
(Being the transfer of liabilitites at branch to H.O. books)

Delhi Branch Account


Date Particulars Amount Date Particulars Amount
1993 Rs. 1978 Rs.
Dec.31 To Balance b/d 54,000 Dec.31 By Delhi Trading A/c
To Branch assets depre -opening stock
ciation 10,450 purchases etc. 1,75,000
To Delhi trading account 1,81,000 By Delhi P&L A/c
sales and stock expenses, 29,950
To Delhi Profit & loss Sundry assets 47,000
account -discount 1,000
To S. Liabilities 5,500
2,51,950 2,51,950

Trading and profit and Loss Account of Eve Ltd.


Fr the year ended 31st December, 1993
H.O. Delhi H.O. Delhi
Rs. Rs. Rs. Rs.
To Opening Stock 50,000 30,000 BY Goods sent to branch 15,000 —
To Purchases less returns 1,45,000 79,000 By Sales 4,50,000 1, 50,000
To Goods receivedfrom H.O. — 15,000 By Closing Stock 40,000 30,000
To Wages 1,00,000 40,000
To Manufacturing ex. 30,000 10,000
To Gross profit carried down 1,80,000 6,000
5,05,000 1,80,000 5,05,000 1,80,000
To Rent (paid and o/c) 8,000 4,500 By Cross Profit b/d 1,80,000 6,000
To Salaries 30,000 10,000 By Discount 2,000 1,000
To General expenses 20,000 5,000 By Net Loss 22,950
To Depreciation:
Machinery 20% 30,000 10,000
FURNITURE 15% 1,050 450
TO NET PROFIT 92,950 —
1,82,000 29,950 1,82,000 29,950
121

(b) lighting and heating expenses are distributed on the basis off units of power consumed by each
department, and so on,
(iii) Common expenses whose benefit are not capable of accurate measurement are dealt with as follows:
(a) Selling expenses, e.g, discounts, bad debts, selling Commission, etc., are apprtioned on the
basis of sales or Cost of production plus Administrative expenses.

Balance Sheet of Eve Ltd.


At a 31st December, 1993
Liabilities Amount Assets Amount
Rs. Rs.
Sbare Capital 2,00,000 Fixed Assets
H.O.profit 92,950 Machinery H.O. 1,50,000
Less profit & Loss at branch (Loss) 22,950 70,000 Branch 50,000
Sundry Creditors 2,00,000
H.O. 30,000 35,000 Less Dep. 40,000 1,60,000
Branch 5,000 Furniture
Rent outstanding at branch 500 H.O. 7,000
Branch 3,000
10,000
Less Dep. 1,500 8,500
Current Assets
Stock Head Office 40,000
Branch 30,000 70,000
Debtors
H.O. 40,000
Branch 15,000 55,000
Cash in hand
H.O. 10,000
Branch 2,000 12,000
3,05,500 3,05,500
Alternatively, instead of passing entries regarding Trading and profit and Loss Account, only one entry
of the profit made or loss suffered at the branch may be passed:
Brach Account Dr.
To H.o. Profit & Loss Account.
For loss the above entry is reversed.
122

LESSON 13
INVENTORY VALUATION

Inventory is an important element of assets of an enterprise. In some enterprises, inventory constitute


the bulk of working capital. In view of this inventory of this inventory valuation and inventory control assume
a pivotal position for many concerns. However, inventory valuation is outside the purview of the present chapter.
According to IAS-2* and AS-2*inventories are tangible property held-
(a) For sale in the ordinary course of business;
(b) in the process of production for such sale or
(c) to be consumed in the production of goods or services for sale,
We can rename the aboive three components of inventory as-
(a) Finished Goods,
(b) Work in process; or
(c) raw materials and components.

Objecctives of Inventory Valurtion


What aaare the objecttivs of inveentory valuation?The two objectives to be achieved by proper valuation
of inventoties are-
(1) Determinationof Income - We know that opening and closing stock affect the quantum of
Gross Profit (and hence net profit) of any concern. Any improper valuation of closing stock(i.e.
inventory) will lead to over and under statement of Gross profits of not only this year but also
next year(as closing stock of this year becomes the opening stock of next year).
(2) Determination of Financial position-Inventory appears as current asset in the balance sheet.
Any improper valuation will lead to distortion in the balance sheet also.
Besides these, inventory is use for computing various ratios which are u sed by proper valuation cannt
be over-emphasised.

Methods of taking Inventories


There are two methods of taking inventories
(1) Periodic Inventory Method,
(2) Perpetual Inventory Method,
Peridic Inventory Method-It requires periodic (annual) stock taking by actual aounting weighting or
measuring at each accounting date. This quantitative units are converted into financial unis by applying appopriate
pricing method (discussed shortly inthis chapter). The cost of sales of the period is obtained as follows-
Cost of sales = op. inventory + current purchase – closing inventory.

*IAS = International Accounting Standards Committee’s IAS-2


AS = Accounting Standards Boards AS-2
123

However, it will not be out of place to state here the effect of any abnormal loss should done away with.
Perpetual Inventory Method-This method provides a running record of inventory hand Records oif
inventory can be compared by physical stock taking to find out are discrepancy of the two. Inventory control is
possible only through continuous stock taking.

Methods of Valuation of Inventories


basically there are theree methods of caluation of inventory-

1. Cost Price
(a) Historical Cost
(i) FIFO
(ii) LIFO
(iii) HIFO
(iv) Specific identification price
(v) Base Stock price
(vi) Simple average method
(vii) Weighted Average Method
(b) Current replacement price
(c) Standard Cost

2. Sale price
(i) Discounted future cash receipts
(ii) Net Realisable value
(iii) Current selling price

3. Lower of cost or sale price


(i) Aggregation total Inventory Method
(ii) Group Mehtod
(iii) Item by item method
Historical ost means the cost of acquisition on cost of production. Cost of acquisition includes not only
the price paid but also includes cost of transportation, insurance in transit, duties paid and other direct expenses.
It further includes indirect cost (like depreciation, rent) aand normal wastage of material and labour. This method
is very objective and personal bias is absent under this method. The man drawback of this method is that it does
not demarcate a line between operational gains and holding gains. This becomes very pronounced in a rapid
inflationary conditions (Holding gains are those gains which arise outof holding the inventory) e.g. an item
purchased two years back at Rs. 15,000 may be purchased at Rs. 20,000 now. If this can be sold at Rs. 30,000
now, the holding profits will be Rs. 20,000 – 15,000 = Rs. 5,000 and operating profts will be Rs. 30,000 –
Rs.20,000 = Rs. 10,000.
(i) FIFO (First in first out method): This method presumes that materials which are received first are
issued first. Issues of materials are pried in order of their purchase. The ending inventory consists of
most recently purchased goods. The closing stock is valued at latest purchase price.
124

Theoreticallly , it is presumed that inventory received first, will be issued first, but in practice this
may not be so. But from the pricing of issue of materials, point of view , this rule is folllwed.
The main defect of this method is that on a rising market, it reports larger earnings. Thiis inventory
gains arising out of holding inventory cannot be separated from the operating.
(ii) LIFo (last in first out) This method is the reverse of FIFO method. This method is based on the
assumption that the materials received last is issued first. Thus oldest acquisitions are from part of
closing stcok. This mwthod excludes the holding profits. But comparisons between similar jobs will
be difficult.
(iii) HIFO (highest in first out)- This method is based on the assumption that highest priced materials are
issued first. It results in closing inventory being kept at the lowest possible price. It leads to certaion
of secret reserves in times of rising prices.

Illustration
From the following find out FIFO and LIFO inventory values under-
1. Perpetual inventory Mehtod
2. Periodic Inventory Method
Rs.
Jan. 1 O.B. 100 Units @ 7 700,00
Jan. 15 Issue 80 units
Jan. 25 Purchases 120 units @ 9 1080.00
Feb 20 Issue 129 units
April 10 Purchases 160 units @ 8 1280.00
May 20 Issue 100 units
Oct 15 Purchases 80 units @ 10 800.00
Dec. 31 Inventory (Closing) 160 units Total 3860.00

Solution
FIFO
Perpetual Periodic
Rs. Rs.
80 units @ Rs. 7 = 560 100 units @ Rs.7 = 700
20units @ Rs. 7 = 140 120 units @ Rs.9 = 1080
100 units @ Rs. 9 = 900 80 units @ Rs. 8 = 640
20 units @ Rs. 9 = 180 Cost of Issue 2440
80 units @ Rs. 8 = 640 Inventory value = Rs. 3860 – 2440 = Rs.l440
Cost of Issue 2420 = 1,440
Inventroy value = 3860 – 2440
125

LIFO
Perpetual Periodic
80 units @ Rs. 7 = 560 80 units @ Rs. 10 = 800
120 units @ Rs. 9 = 1080 160 units @ Rs. 8 = 1280
100 units @ Rs. 8 = 800 60 units @ Rs. 9 = 540
Cost of issue 2440 Cost of issue 2620
Inventoy value = Rs. 3860 – 2420 Inventory value =
= Rs. 1440 Rs. 3860-2620 = Rs.l240

(iv) Specific Identification price - This method is used where materials are purchased specially for a
particular order or job. Its application is confined to high cost items like cars computers, videos,
antiques etvc. The question of precise determination of costs may again arise in case of joint costs
like transportation.

(v) Base Stock price-This method is based widely accepted view that a minimum quantity of inventory
must be held at all items in order to carry on the business. This minimum quantity is costed at the
earliest acquisition price. Quantity over and above the base stock evaluated by some other method
say FIFO or LIFO.

(vi) Simple Average Mthod-is average is average of prices without any regard to quantities purchased.
Here, the issue price is calculated as-

Total of different prices


Issue Pr ice =
Number of Puuchases

The simple average gives equal importance to large and small purchases.

(vii) Weighted Average-Weighted average price is calculated by dividing the total cost of materila in
stock by total quantity of material in hand. Thus weighted average discriminates between small and
large quantity purchases.
(b) Current replacement price-This means the price at which the stock could have acquired at
the date of its issue. Under this method, all the inventories are valued at replacement price.
The historical cost does enable distinction between operational gains and holdig gains. So it
is suggested that taking of replacement costs in place of historical cost is better. This method
suffers one serious drawback. The closing stock, when valued on this basis, will be including
unrealised gains.

(c) Standard Cost - Under this method, the standard price of each material is fixed and all issues
are made out the standard price. The fixation of standard cost depends on a number of factors
like-quantity of material to be purchased which results in bulk discount, market conditions
regarding prices etc. This method is easy to operate. It can warn management about the
efficiency or otherwise of the ourchase department. The fixation of standard cost is subjective
and hence it is its greatest shortcoming.
126

Sale Price
(i) Disconted furture cas receipts- This method is used where goods are produced under long-term
contrcts. In such cases, the timing of receipts are known. They can be discounted at a suitable
interest rate arrived at their present value. Such a discounted value can be taken as value of inventory.
(ii) Net Realisable value-As per IAS-2, net realisable value is the selling price in the ordinary course of
business. From this selling price, cost of completion and cost incurred for making sale is deducted,
it should be noted here that temporary fluctuations in prices should be ignored. Where there are firm
sale contracts, the net realisable value should be taken into account. Any inventory in excess of sale
contracts should be valued on the basis of arket prices.
(iii) Current Selling Price - This method is followed in those cases where there are a government controlled
market. It is because of this the sugar industry in India has shifted over to the caluation of stock on
the current selling price basis. The closing inventory of sugar is split into two parts- levy sugar and
non-levy sugar. The levy sugar is vlaued at levy price and non levy sugar is valued at current selling
price.
3 Lower of Cost or Sale price - Having determined the cost (whatever method is used), such cost
should be reduced to selling price: This is done because of the principle of conservatism. By this principle,
likely profits are to be ignored and likely losses are to be taken into account. Now which market price is to be
considered? Is it not realisable value or replacement cost?
Net realisable value may mean-
(i) The selling price less estimated costs of completion and disposal. This is ceiling of this value.
(ii) Net realisable value as reduced by gross proft, marging. This provides the floor of this value.

The AICPA has suggested for the application of the rule’ lower of cash or market value* the following-
(a) The ceiling figure to be taken when the replacement cost is more that ceiling.
(b) The floor figure is to be taken when replacement cost is less than the floor.
(c) The replacement cost when it lies between the floor and ceilding

Application of principle of cost or market value can be applied in any one of the following three ways-
(1) Aggregate or Total Inventory Method-Under this method total cost and total of net realisable
value is compared and lower of the two is considered for valuation.
(2) Group Method-Under this method, various types of inventories are grouped together on the
bases of theor sismilarities. After this, lower of cost or net realisable price principle is applied
for each category (not of individual item in the category.
(3) Item by Item Method - The cost and net realisable prices are compared by each item and lower
of the two is used for valuation of inventory.
According to AS-2 comparison of the historical cost with net realisable value van be made separately
for each item of inventory, or for groups of similar items. However comparison of the net realisable value of
all dissimilar items ion a class of business, or all inventories of an enterprises on an overall bais, with the
aggregate of the cost of all those items is not advisable because it amounts to setting off loss against unrealised
profi.
127

Illustration
Bed Sheet
Carpets Qty. Cost Mkt. Qty. Cash <kt.
Rs. Rs. Rs. Rs. Rs.
Coarse 50 60 50 100 20 18
Fine 100 100 125 200 30 28
How will value the inventory at lower of cost of market under-
(a) Total Inventory Method
(b) Group Method
(c) Item by Item Method

Solution
(a) Total Inventory Method
Price X Qty.
Qty. Cost Market Cost Market
Rs. Rs. Rs. Rs
Carpets
Coarse 50 60 50 3,000 2,500
Fine 100 100 125 10,000 12,500
Bed-Sheets
Coarse 100 20 18 2,000 1,800
Fine 200 30 28 6,000 5,600
21,000 22,400
Value of inventory = Rs. 21,000
(b) Group Method
Qty. Cost Market Price X Qty Lower of
Cost Market cost or market
Rs. Rs. Rs. Rs. Rs.
Carpets
Coarse 50 60 50 3,000 2,500
Fine 100 100 125 10,000 12,500
13,000 15,000 13,000
128

Bed Sheets
Coarse 100 20 18 2,000 1,800
Fine 200 30 28 6,000 5,600 7,400
8,000 7,400 20,400
Value of inventory = Rs. 20,400
(c) Item by Item Method
Quty. Cost Market Price X Qty. Lower of
Cost Market Cost or market
Carpets
Coarse 50 60 50 3000 2,500 2,500
Fine 100 100 125 10,000 12,500 10,000
Bed Sheets
Coarse 100 20 18 2,000 1,800 1,800
Fine 200 30 28 6,000 5,600 5,600
19,900
Value of Inventory = Rs. 19,900

Ilustration
Mr. Vijay is financial year ends the following 30 June 1994 when it is ascertained at Rs 7,425 you find
that
(i) Sales are entered in the sales book on the day as despatched and returns inwards in return inward
both to have the goods are received back.
(ii) Purchases are entered in the Purchase Day Book as the invoice are received.
(iii) Sales between 30 June and 8 July 1994 as per sales Day Book and Cash Book are Rs 8,600.
(iv) Purchases between 30 June and 8 July as per purchase day book are Rs 660 but these goods amounting
Rs 60 are not received until after stock was taken.
(v) Goods involved during June (before 30 June) but not received until after 30 June amounted to Rs
500 of which Rs 350 worth are received between 30 June to 8 July 1994.
(vi) Rate of Gross profit is 33 1/3 %on cost
129

Solution:
Calculation of Stock A on 30 June, 1994 Rs. Rs.
Stock as on 8 July 1994 7,425
Add: Cost of goods sold 8,600
Less Proft 25% 2,150 6,450
Less: Purchases enterd 660 13,875
Less Received after 8 July 60 600
13,275
Add: Purchases invoiced before 30 June 1994 received
Upto 8 July (500-350) Stock on 30 June 1994 150
13,425

IAS -2 INTERNATIONAL ACCOUNTING STANDARD

Valuation and Presentation of Inventories in the context of the Historical Cost System

Introduction
1. This Statement deals with the valuation and presentatioon of inventories* in financial statements in
the context of the historical cost system, which is the most widely adopted basis on which financial
statements are presented.
2. The Committee is aware of other systems that ate proposed or used in financial istatements, includiog
systems that ate based on replcement costs or other curretn values. Inventroy valuation and
presentatioion in the context of those other systems ar ebeyond the scope of this statement.
International Accounting Standard 1. Disclosure of Accounting policies, requires that the system
adopted must be clearly stated.
3. The Stat em en does not deal with inventories accumulated under loang-term construction contracts
and with in ventory treatment of byproducts.
4. The following terms are used in this atatement with the meanings specified:
Inventories are tangle property (a) held for sale in the ordinary course of busines, (b) in the process of
production for such sale or (c) to be consumed in the production of goods on services for sale.
Historical cost of inventories is the aggregae of costs of purchase, cost of conversion and other costs
incurred in brigning the inventories to their present location nd condition.
Cost of purchase comprise the purchase price including import duties and other purchase taxes, transport
and handling cost, and any other directly attributable costs of acquisition leess trade discounts, rebates, and
subsidies
Costs of voncersion are those costs in addition to the costs of purchases, that relate to bringing the
inventories to their present location and condition.
130

Net realisabe value is the estimated selling price of the assets of many enterprise. The valuation and
presentation of inventories therefore have a significant effect in determining and presenting the financial position
and results of operations of those enterprise.

Determination of Historical Cost


6. In determining historical costs as defined in paragraph 4, defferent interpretations arises in practice
as regards production overhead, other overheads,, and the cost formula to be used.
7. production overhead is comparised of costs incurred for production other than direct materials, and
labour, Examples are indiect materials, and labout depreciation and maintenance of factory buildings
and equipment, and the cost of factory management and administration.
8. Production overhead requires analysis to determine the portion related to bringing the inventories to
their present location and condition and thus to be included in the cost s of conversion when
determining the historical cost of inventories.
9. Both fixed and varibal production overheads incurred during production are usually allocated to
costs of conversion. That practivce is based on the view that they are both incurred in putting
inventories in their presetn location and condition. Fixed production overhead is sometimes excluded
in whole or in part from costs of conversion on the ground that it is not condidered to relate directly
to putting inventories in their present location and condition.
10. In a period of low production or if there is idle plant, it is customary to restrict the allocation of fixed
prodduuction overhead to the costs of conversion by relating it yo yr capacity of the production
facilities and not ot the actual level of the output. Capacity of the production facitlities is variously
interpreted, for example, as the normal production expected to be achieved over a number of periods
or seasons or as the maximum production that as a practical matter can be achieved. The interpretation
is determined in a advance and appliedconsistently, and is not modified for temporary conditions.
11. Similarly, exceptional amounts of waste-material, lobour, or hother expenses-which do not relate to
bringing the inventories to theior presetn location and condition are excluded from converstion cost.

Other Overheads
12. Overheads other thatn profudtion overhead are somtime incurred bringing inventories to their presetn
location and condition, for example expenditues incurred designing products for specific customers.
On the other hand, selling expenses, general administration overheads, research and development
costs, and interest are usually considered not to relate to putting the inventories in their present
location and condition.

Cost Formula Used


13. Several different formulae with widely different effects are in current use for the purpose of assigning
costs, including the following:
(a) First-in,first-out (FIFO)
(b) Weighted average cost
(c) Last-in, First-out (LIFO)
(d) Base stock
(e) Specific indentification
(f) Next-in first out (NIFO)
(g) Latest purchase price.
131

14. The FIFO, weighted average cost, LIFO, base stock, and specific identification formulae use costs
that have been incurred by the enterprise at one time or another. The NIFO and atest pruchase price
methods use costs that have not all been incurred and are therefore not based on historical cost.
15. Specific identification is formula that attributes specific costs to identified items inventory. This is
an apporopriate treatment for goods that have been bought or manufacturedand are segregated for a
specific project, if it is used, however, in respect of items of inventory which are ordinary
interchangeable, the section of items could be made in such a wasy as to obtain predetermine effects
on profits

Valuation of Inventories Below Historical Cost


16. The historical cost of inventories may not be realisable if their selling prices have declined, it they
are damaged, or if they have become wholly or partially obsolete. The practice of writing inventories
down below historical cost to net realisable value accords with the view that the view that current
assets should not be carried in excess of amountsse exected to be realised,. Declins in value are
computed separately for individual items, grouls of similar items, an entire clas of inventopry (for
example, finished goods), or items relating to a class of business, or they are cemputed onan overall
basiss o for all the inventories of the enterprise. The practice of writing inventories down based on
a class of inventory, on a class of business, or on an overall basis results in offsetting lossed incurred
against unrealised agains.
17. In some countires, writedowns are made which are not based on the practices described in paragraph
16. For example, writedowns below historical cost are arrived at by applying an arbitrary percentage
to the amounts otherwise computed or by undiscclosed reductions that result in secret reserves;
these produce inappropriate effects on financial statements.
18. The sub-classification of inventories in financial statements readers of the amounts held in different
categories and the extent of the changes from period to period. Common sub-classifications are
materials work in progress, finished goods, merchandise, and produuction supplies.
19. “inventories” in balance sheets usually consist of items included in the definition of inventories in
paragraph 4. Other items are sometimes shown under the heading “Inventories”, for example, non-
production supplies and research and development supplies.

INTERNATIONAL ACCOUNTS STANDARD -2

Valuation and Presentation of Inventories in the Context


of the Historical Cost System
International Accounting Standard-2 comprises paragraphs 20-36 of this Statement
of this Statement and of the preface to Statements
of International Accounting Standards.
20. Inventories should be valued at the lower of historical cost and net realisable value.

Ascertainment of Historical Cost


21. The historical cost of manufactured inventories should include a systematic allocation of those
production overhead costs that relate to putting the inventories in their present location and condition.
Allocation of fixed production overhead to the costs of conversion should be based on the capacity
of the facitlity. If fixed production overhead has been entirely or substantially excluded from the
132

valuation of inventories on the ground that it does nt directly relate to putting the inventories in their
present location and condition, that fact should be disclosed.
22. overheads other than production overhead should be included as part of inventory cost only to the
extent that they clearly relate to putting the inventories in their present location and condition.
23. Exceptional amounts of wasted material, labour, or other expenses shopuld not be included as part
of inventory cost.
24. Except as set out in paragraph 25 and 26, the historical cost of inventories should be accounted for
using the FIFO formula or a weighted average cost formula.
25. Inventories of items that are not ordinaryily interchangeable or goods mnufactured and segrefated
for specific projects should be accounted for, by using specific, identification of their individual
costs
26. The LFIO or base stock formulas may be used provided that there is disclosur of the difference
between the amount of the inventories as shown in the balance sheet and either (a) lower of the
amount arrived at in accordance with paragraph 25 and net realisable value or (b) the lower of
current cost at the balance sheet date and net realisable value.
27. Techniques such as the standard cost method of valuing products or the retai method of valuing
merchandise may be used for convenience, if they approximate consistently the results that would
be obtained in accordance with paragraph 20.

Ascertainment of Net Realisable Value


28. Estimates of net realisable value should be based not on temporary fluctuations of price or cost but
on the most reliable evidence available at the time the estimates are made as to what the inventories
are expected to realise.
29. Inventories should be written down to net realisable value item by iem or by groups of similar items,
whichever method is used hsould be consistently applied.
30. The net realisable value of the quantity of inventory held to satisfy firm sales contracts should be
based on the contract price. If the sales contracts are for less than the inventory quantities held, net
realisable value for the excess should be based on general market prices*
31. Normal quantities of materials and other supplies held for incorporation in the poduction of goods
should be written down below historical cost, if the finished products in which they will be incorporate
are expected to be realised at or above hisorical cost. Nevetheless, a decline in the price of materials
amy indicate that the histocial cost of finished products to be produced will exceed net realisable
value in which event a writedown of the materials inventories should be made: in this event,
replacement cost may be the best avauikable mesure of the net realisable value of thos materials.

Presentation in the Financial Statements


32. The profit and loss of the priod should be charged with the amount of inventories sold or used
(unless allocated to other asset accounts) and with the amount of any write down in the period to net
realisable value.
33. Inventories should be sub-classified in balance sheets or in notes to the financial statements in a
manner which is approprioare to the business and so as to indicate the amounts held in each of the
main categories.
34. The accounting policies adopted for the purpose fo valuation of inventories, including the cost
formula used, should be diclosed, A change in an accounting policy related to inventories that has a
133

material effect in the current period or may have a material effect in subsequent periods should be
disciosed together tith the reasons.The effect or the change should, if material, be cdisclosed and
quantified. (See International Accounting Standard -1 Disclosure of Accounting Polocies).
35. If items are shown under the caption “inventories” Other than those comprehended by the definition
in paragraph, 4 their nature, amounts and basis of valuation should be disclosed.

Effective Date
36. This international Accounting Standard becomes operative for financial statements covering periods
beginning on or after January 1,1976.

ACCOUNTING STANDARD: 2 (AS: 2)


VALUATION OF INVENTORIES
The following are the specific requirements of Accounting Standard: 2, issued by the Institute of Chartered
Accountants of India regarding valuation of inventories.
(i) Inventories should be valued at lower of historical cost and net realisable value except in the following
circumstances.
(a) Inventory of consumable stores and maintenance supplies should ordinarily be valued at cost.
In appropriate circumstances, however, they may be valued at below cost.
(b) Inventory of by-products should be valued at lower of cost and net realisable value. Where cost
of the by-product cannot be separately determined, it should be valued at net realisable value.
(c) Inventory of reusable waste should be valued at raw material cost less reprocessing cost where
facilities for reprocessing exist.
(d) Inventory of non-reusable waste or inventory of reusable waste for which facilities for
reprocessing do not exist should be valued at net realisable value.
(ii) For the purpose of comparing historical cost with net realisable value each item in the inventory
may be dealt with separately, or similar items may be dealt with as a group.
(iii) The historical cost of inventories should normally be determined by using ‘FIFO’ “Average Cost” or
“LIFO” methods.
(iv) the ‘specific identification’ method may be used for inventories of items that are not ordinarily
interchangeable, or for goods manufactured and earmarked for a specific purpose.
(v) The ‘adjusted selling price’ may be used in retail business or in businesses when the inventory
comprises items the individual costs of which are not readily ascertainable.
(vi) The ‘standard cost’ method of valuing inventories may be used if the results approximate consistently
the result that would be obtained in accordance with paragraph (iii).
(vii) The ‘base stock’ method may be used in exceptional circumstances only.
(viii) The historical cost of manufactured inventories may be arrived at on the basis of either direct costing
or absorption costing. Where absorption costing has been used, the allocation of fixed costs to
inventories should be based on the normal level of production.
(ix) Overheads other than production overheads should be included as part of the inventory cost only to
the extent that they clearly relate to putting the inventories in their present location and condition.
134

(x) The accounting policy adopted for valuation of inventories, including the cost formulae used should
be disclosed in the financial statements. Where the base stock method is used, the difference between
the value at which it is carried and the value by applying the method at which stock in excess of the
base stock is valued should be disclosed.
(ix) Consistency is generally accepted as a fundamental accounting assumption/Therefore, any change
in the accounting policy relating to inventories (including the basis of comparison of historical cost
with net realisable value and the cost formulae used) which has a material effect in the current
period or which is reasonably expected to have a material effect in later periods should be disclosed.
In the case of a change in accounting policy which has a material effect in the current period, the
change should also be disclosed to the extent ascertainable. Where such amount is not ascertainable,
wholly or in part, the fact should be indicated.
135

LESSON 14
SINGLE ENTRY SYSTEM

Definition:
Single entry system of book-keeping is not a system at all. It means recording transactions not according
to well defined rules but according to mere convenience. Under the Double Entry System a transaction must be
recorded with both the aspects. If there is a debit, there must be a credit and vice-versa. It is not so under the
single entry system. Debit and credit may be completed in some transactions, while no record at all may be there
in respect of a number of transactions. Most transactions are recorded only once without completing double
entry. It is all a matter of convenience. Accounts are not maintained. While there is no hard and fast rule; usually
only the cash account, bank account (sometimes the pass book is treated as sufficient for this purpose) and
personal account (that is, account of customers and creditors) are kept. Generally, there will be no accounts to
show purchases, sales, assets, incomes and losses and expenses. There can be no trial balance.
This Single Entry System has the following disadvantages:
(1) Since there is no trial balance, there is no proof of accuracy.
(2) Profit or losses cannot be ascertained properly because of lack of information about purchases,
sales, expenses, etc.
(3) Since accounts relating to assets (furniture, office equipment, etc.) are not maintained, there is
no control over such assets. This may result in wastages and misappropriation.
(4) The Balance Sheet (called Statement of Affairs here) can be prepared only with difficulty and
that too without sufficient accuracy.
(5) Useful comparison for the guidance of management cannot be made because relevant
information will generally be missing.
Joint stock companies cannot keep books on the Single Entry System under law, but sole proprietorships and
partnerships may, if they so wish, adopt this system. But unless the firm is very small, it is not desirable to do so.
How to ascertain profit ? Ascertainment of profit or loss under this system is really simple. “Suppose
I start a business on 1st January, 1993 with Rs. 20,000. On 31st December 1993 I find that may capital is
Rs.25,000 (for finding out capital see below). This surely means that I have made a profit of Rs.5,000, the
capital could not have grown otherwise. But suppose I brought an additional Rs.4,000 as capital during the year.
This explains the increase in capital to this extent This brings down the profit to Rs.1,000. One thing more I
must have drawn some money for private use. Suppose the figure is Rs.500 per month or Rs.6,000 for the year.
Had this money not been drawn, the capital would have been Rs. 31,000 and the profit earned would have been
Rs.7,000. The formula to find out profit, therefore, is:
Rs.
Capital at the end of the year 25,000
Add Drawings during the year 6,000
31,000
Less : Fresh Capital introduced 4,000
Capital in the beginning of the year 20,000 24,000
Profit during the year 7,000
136

How to ascertain capital? Capital is really assets minus liabilities. Under the Single Entry System
also, capital is ascertained in this manner. Statement of Affairs (not at all different from balance sheet) is prepared
and assets and liabilities put on the proper sides. The difference between assets and liabilities is capital. Personal
account and cash accounts are usually maintained and hence the amount of sundry debtors, cash balance, bank
balance and sundty creditors will be readil) available. The amount of other assets can be ascertained only by
physical inspection.
The amount of capital at the beginning and at the end of the year can be ascertained by preparing
statement of affairs. Now we have to find out the profit or loss. For this purpose a ‘statement of profit or loss is
prepared in the following manner:—

Statement of Profit for the year ending on..........


Rs.
Capital at the end —
Add: Drawings during the year —
Less: Additional Capital introduced during the year—
(A) Adjusted Capital at the end of the year —
(B) Less: Capital at the beginning —
Profit or loss —

Illustration-1
A keeps his books by single entry system. From the following information find out the profit earned by
him during 1988.
1st. Jan. 1993 31st Dec. 1993
Rs. Rs.
Bank Balance 740 (Cr.) 400 (Dr.)
Cash in hand — 10
Debtors 5,300 8,800
Creditors 1,500 1,950
Stock 1,700 1,900
Plant 2,000 2,000
Furniture 140 140
On 30th, June, A bought in Rs.600 as additional capital and withdrew Rs.300 for private use. A provision
for doubtful debts @5% is necessary. Plant and Furniture are subject to depreciation @5%. Interest on capital is
to be charged at 5%.
137

Solution

Statement of Affairs as at 1st January, 1993


Liabilities Rs. Assets Rs.
Bank Overdraft 740 Sundry Debtors 5,300
Sundry Creditors 1,500 Stock 1,700
Capital (Balancing figure) 6,900 Plant 2,000
FurnitureTotal 140
Total 9,140 9,146

Statement of Affairs as at 31st December, 1988


Liabilities Rs. Assets Rs.
Sundry Creditors 1,950 Cash in Hand 10
Capital (Balancing figure) 10,753 Cash at Bank 400
Sundry Debtors 8,800
Less Provision for
Doubtful
Debts 440 8,360
Stock 1,900
Plant 2,000
Less Depreciation 100 1,900
Furniture 140
Less Depreciation 7 133
Total 12,703 Total 12,703

Rs.
Profit: Capital as at Dec. 31, 1988 10,753
Add Drawings 300
11,053
Less Fresh Capita 1600
Capital on 1-1-88 6,900
Interest 360* 7,860
Profit earned 3,1193

* Iinterest on Rs. 6,900 for one year and on Rs. 600 for 6 months.
138

Illustration: 2
The following is the Balance Sheet of X, Y, and Z an on December 31, 1993

Balance Sheet
Liabilities Rs. Assets RS.
Sundry Creditors 42,000 Cash in Hand 4,000
Bills Payable 28,000 Cash at Bank 38,000
X’s Fixed Capital 1,50,000 Sundry Debtors 84,000
Y’s Fixed Capital 1,00,000 Stock 67,000
Z’s Fixed Capital 50,000 Furniture & Fittings 20,000
X’s Current Account 4,800 Machinery and Plant 1,60,000
Y’s Current Account 3,400 Z’s Current Account 5,200
3,78,200 3,78,200

The partners share profits in the ratio of 3:2:1 after charging interest 10% interest on Capitals. During
1994, the drawings were : X at Rs. 4000 per month, Y at Rs. 3000 per month and Z at Rs. 25,00 per month.
On 31st December, 1994 the various assets were- Cash in Hand Rs. 3,000, Standry Debtors Rs 86,000
Stock Rs. 1,27,500 at selling price which was fixed at cost plus 25%, Furniture and Fittings Rs. 18,000 and
Machinery and Plant, Rs. 2,50,000. Liabilities were- Sundry Creditors, Rs. 34,000, Bills Payable Rs. 24,000
and Bank Overdraft Rs. 60,000 as per Pass Book which showed that a cheque for Rs. 10,000 deposited had been
returned dishonoured. Ascertain this Profit a Loss made by the firm in 1994 and show the Balance Sheet as on
31st December, 1994.

Solution :

Statement of Affairs-as on December 31, 1993


Liabilities Rs. Assets Rs.
Sundry Creditors 34,000 Cash in Hand 3,000
Bills Payable 24,000 Sundry Debtors
Bank Overdraft 60,000 (Rs. 86,000 + Rs. 10,000) 96,000
Fixed Capital of X, Y and Z 3,00,000 100 Stock (1,27,500 × 100/125) 1,02,000
Combined Current Accounts of Furniture & Fittings 18,000
X, Y, and Z (Balancing figure) 51,000 Machinery and Plant 2,0,000
4,69,000 4,69,000
139

Statement of Profit and Loss


Rs. Rs.
Cempnod Credit Account of X, Y and Z as Dec. 31,1994 51,000
Add: Drawings
X 48,000
Y 36,000
Z 36,000 1,14,000
1,65,000
Less.: Combnicd Current Account X, Y and Z as 31st December, 1993
(4800 + 3400-5200) 3,000
1,62,000
Proffit suljeed to interest
Less-: Interest an Capital as 10%
X 15000
Y 10,000
Z 5,000 30,000
132,000
Proffit dinided ampng X,Y,and Z
X 1/2 66,000
Y 1/3 44,000
Z 1/6 22,000
140

Balance Sheet of Z, X, and Y, as on December 31, 1994


Rs. Rs.
Sundry Creditors 34,000 Cash in Hand 3,000
Bills Payable 24,000 Sundry Debtors 96,000
Bank Overdraft 60,000 Stock 1,02,000
Capital (Fixed) Furniture & Fittings 18,000
X 1,50,000 Machinery and Plant 2,50,000
Y 1,00,000
Z 50,000 3,00,000 Z’s Current Account
Current Accounts Balance on Jan., 1 5,200
P Balance on Jan. 1 4,800 Add : Drawings 30,000
Add : Interest 15,000 35,200
Profit 66,000 Less : Interest 5,000
85,800 Profit 22,000 27,000 8,200
Less : Drawings 48,000 37,800
X Balance on Jan. 1 34,000
Add : lnterest 10,000
Profit 44,000
57,400
Less : Drawings 36,000 21,400
4,77,200 4,77,200

Conversion into Double Entry. If the books arc maintained on Single Entry basis, they can be converted
into double entry basis but with good deal of effort Assuming that accounts of cash, bank, customers and
suppliers have been maintained, the following steps will be necessary:—
(1) Take die statement of affairs at the end of the previous year. Open all accounts (except those already
opened) with proper balances.
(2) Go through the cash book (or cash and bank accounts). Excepting transactions with customers and
suppliers (these transactions must have been posted already) other? should be posted to proper
accounts.
(3) Analyse all personal accounts (a) Analysis of accounts of customers will reveal the following:—
141

Entry Now
Credit Sales Credit Sales A/c
Bills Dishonoured Credit B/R A/c
Charges debited to them Credit Charges A/c
Cash received —
Discount allowed to them Debit Discount A/c
Sales Returns Debit Sales Returns A/c
Bad Debts written off Debit Bad Debts A/c
Bills Receivable received Debit Bills Receivable A/c
(b) Analysis of accounts of suppliers will reveal the following :
Entry Now
Credit Purchases Debit Purchases A/c
Bills Payable Dishonoured Debit Bills Receivable A/c
Cash Paid —
Purchases Returns Credit Returns Outwards A/c
Discount Received Credit Discount A/c
Bills Payable Issued Credit Bills Payable A/c
(4) Go through the waste book and see if any transaction still remains to be recorded.
For instance, interest may be due on loan. The entry to be passed is:
Interest A/c ... ... Dr.
To Loan Creditor
Preparation of Trading and Profit and Loss A/c from Single Entry Records. If Single Entry books
have been converted into Double Entry books, a trial balance can then be taken out. From the trial balance final
accounts can be easily prepared. However, a short cut is also possible. This short cut will be available only if the
summary of cash transactions is prepared.
Students will remember that for preparing the Trading Account the following information is necessary:
Opening Stock (available from previous statement of affairs.)
Purchases (always ascertained by making an inventory.)
Wages, etc.
Sales
Closing Stock
Purchases and sales are ascertained on commonsense basis. If I owe Rs.50/- to the grocer on 1st April,
pay him Rs.90 during the month and still owe him Rs.40 at the end of the month. I must have purchased from
him goods for Rs.80, i,e., Rs.(90 + 40)—50. Similarly, the grocer can calculate the sale to me.
142

In business firms credit purchases and credit sales are found by preparing accounts of total Creditors
and total Debtors. Consider the following:

Total Creditors A/c


Dr. Cr.
Rs. Rs.
To Cash
(as per Cash Book) 43,000 By Balance c/d
To Discounts (given as per previous
(as per analysis) 800 statement of affairs) 9,000
To Returns 1,100 By Credit Purchases
To Balance c/d 8,500 (balancing figure) 44,400
(as per schedule of Creditors)
53,400 53,400

Items on the debit side total Rs.53,400, of this Rs.9,000 is the opening balance. Therefore, the balancing
figure of Rs.44,400 must be the credit purchases. Cash purchases, must have been recorded on the credit side of
the Cash Book and will be taken from there. Thus total purchases can be found out.
Can you find out the credit sales from the following ?
Rs.
Total Debtors on 1st Jan. 1988 15,600
Cash received during 1988 from Drs. 68,200
Discount allowed to them 1,800
Bad Debts written off 600
Returns Inwards 2,500
Bills Receivable received from them 11,000
Bills Dishonoured 1,500
Total Debtors on 1st Dec., 1988 14,300

Make the total debtors A/c. The debit side will be short: The balancing figure will be credit sales.
Thus—
143

Total Debtors Account


Dr. Cr.
Rs. Rs.
To Balance b/d 15,600 By Cash 68,200
To B/R (Dishonoured) 1,500 By Discount 1,800
To Credit Sales By Bad Debts 600
(Balancing figure) 81,300 By Return Inwards 2,500
By B/R 11,000
By Balance c/d 14,300
98,400 98,400
To Balance b/d 14,300

Net credit sales will be (Rs. 81,300 less Rs.2,500 (Returns)) Rs.78,800.
Cash sales will be on the debit side of the Cash Bode. Credit Sales plus Cash Sales give you total sales.
Examination of the credit side of the Cash Book will also reveal wages, carriage inwards, etc., which will be
debited to the Trading Account.
Thus all information to prepare Trading Account becomes available and gross profit will be ascertained.
This is put on the credit side of the Profit and Loss Account Credit side of the Cash Book reveals expenses. These
expenses after proper adjustments (for expenses prepaid or outstanding) will be debited to the Profit and Loss A/c.
Debit side of the Cash Book will reveal incomes (such as sale of old newspapers.) These will be put on the credit
side of the Profit and Loss A/c. The Profit and Loss A/c should also be debited with any depreciation which has to
be written off. Thus net profit or net loss can be ascertained. This will be transferred to the Capital Account
Balance Sheet—Preparation of Balance Sheet is easy. The previous Statement of Affairs will reveal
the various assets. The assets adjusted for depreciation and disposal (see debit side of Cash Book) and new
acquisition (see credit side of Cash Book) will be put in the Balance Sheet at the end of the year. The balances
for cash, debtors, stock and creditors will be given as at the end of the year.
These will put down in the Balance Sheet. Capital will be as per previous Statement of Affairs adjusted
for net profit or net loss and drawings (see credit side of Cash Book).

Illustration: 3
The following information is given:
1st January, 1993 31st December, 1993
Rs. Rs.
Total Debtors 19,300 20,500
Total Creditors 9,800 8,100
Stock 11,600 12,300
Plant and Machinery 30,000 —
Furniture 1,500 —
144

Summary of Cash Book


Rs. Rs.
To Balance b/d 5,000 By S. Creditors 31,000
To Receive from By Wages 15,000
Debtors 78,000 By Salaries 12,000
To Cash Sales 15,000 By Machinery 10,000
To Sales of Old By Investments 6,000
Machinery 4,000 By Drawings 6,000
To Sale of Old By General Exps. 17,000
Packing Boxes 600 By Balance c/d 5,600
1,02,600 1,02,600

Bad Debts written off during the year were Rs. 1,500. Discounts allowed were Rs.2,000 and received
were Rs.600. Depreciation on Machinery is to be 10% on the value of machinery on 31st December, 1988.
Furniture is to be depreciated at 5%. Interest @6% is to be allowed on capital.
Prepare Trading Account, Profit and Loss Account for 1988 and Balance Sheet as at December 31,1988.

Solution:
We must first find (1) Capital in the beginning, (2) Credit Sales and (3) Credit Purchases.

(1) Capital

Statement of Affairs as at 1st January, 1993

Liabilities Rs. Assets Rs.


Sundry Creditors 9,800 S. Debtors 19,300
Capital (Balancing figure) 57,600 Stock 11,600
Plant and Machinery 30,000
Furniture 1,500
Cash 5,000
67,400 67,400
145

(2) Credit Sales:

Total Debtors Account


Dr. Cr.
Rs. Rs.
To Balance b/d 19,300 By Cash 78,000
To Credit Sales By Bad Debts A/c 1,500
(Balancing figure) 82,700 By Discounts 2,000
By Balance c/d 20,500
1,02,000 1,02,000
To Balance b/d 20,500

(3) Credit Purchases:

Total Creditors Account


Rs. Rs.
To Cash 31,000 By Balance b/d 9,800
To Discounts reed. 600 By Credit Purchases
To Balance c/d 8,100 (Balancing figure) 29,900
39,700 39,700
By Balance b/d 8,100

Trading and Profit and Loss Account


for the year ending Dec. 31, 1993
Rs. Rs.
To Opening Stock 11,600 By Sales:
To Purchases 29,900 Credit 82,700
To Wages 15,000 Cash 15,000
To Gross Profit c/d 53,500 97,700
By Closing Stock 12,300
1,10,000 1,10,000
To Salaries 12,000 By Gross Profit b/d 53,500
To General Expenses 17,000 By Sale of Old
To Discount allowed 2,000 Packing boxes 600
146

To Bad Debts 1,500 By Discounts Reed. 600


To Depreciation
Machinery—
10% on Rs.36,000 3,600
Furniture—
5% on Rs. 1,500 75
To Interest on Capital—
6% on Rs. 57,600 3,456 !
To Net Profit-
Transferred to Capital A/c 15,069
Total 54,700 Total 54,700

Balance Sheet of...


as at December 31, 1993

Labilities Rs. Assets Rs.


Rs. Rs. Rs.
Sudry Creditors 81,00 Cash 5,600
Capital Sundry Debtors 20,500
Balance on 1-1-88 57,600 Stock 12300
Add Investments 6,000
Interest 3,456 Furniture 1,500
Profit 15,069 Less Deperciation 75 1,425
76,125 Plant & Machinery
Less Drawing 6,000 70,125 Balance on 1-1-88 30,000
Additions 10,000
40,000
Less Sales 4,000
36,000
Less Depreciation @10% 3,600
32,000
Total 78,225 Total 78,225
147

Illustration: 4
A and B share profits and losses in the ratio of 3 :2. Prepare Trading A/c: Profit and Loss A/c and
Balance Sheet from the following:

1. Cash Book : Bank Balance on 1st Jan., 1993 Rs.8000; A’s drawings 9,000; B’s drawing, Rs.6,000
paid to trade creditors. Rs.60,000, paid against B/P Rs. 16,000; Wages Rs.22,000; Salaries Rs.
10,000; Other trade expenses, Rs.26,510; Received from trade debtors, Rs.91,200; Received against
B/P 16,090; Receipts from cash sales 31,620; cash in hand, Rs.400, (On 31st December, 1993.).
There was no cash in hand on 1st Jan., 1993

2. Particulars of Assets and Liabilities


1.1.1993 31.12.1993
Rs. Rs.
A’s Capital 180,000 ?
B’s Capital 20,000 ?
Stock 39,600 50,000
Creditors 50,000 38,710
Debtors 44,000 14,000
B/R 10,000 14,000
B/P 6,000 Nil
Premises 40,000 40,000
Furniture 2,400 2,400

3. Other Information: A and B will pay interest on drawing as Rs.120 and Rs.60. A and B are entitled
to 5% interest on capital. B will get 6% Commission on the net profits remaining after such
commission.
Allow 5% depreciation in premises and furniture and create a reserve for bad debts amounting Rs.2,650.
148

Trading and Profit and Loss A/c


for the year ending Dec. 31.1993

Rs. Rs. Rs. Rs.


By Sales:
To Stock 39,600 Credit 1,00,000
To Purchases 40,000 Cash 31,620 1,31,620
To Wages 22,000
To G.P.c/d 80,020 By Closing Stock 50,000
1,81,620 1,81,620
To Salaries 10,000 By G.P.b/d 80,020
” Trade Exp. 26,510 ” Int. on Drawings:
Premises 2,000 ” Dcp: A 120
Furniture 120 2,120 B 60 180
2,650
To Res. for bad debts
” Int. On Cap:
A 4,000
B 1,000 5,000

33920 × 6
To B’s Commission 1,920
106
To Net profit
A 19,200
B 12,800 32,000
80,200 80,200
149

Balance Sheet of
A & B, As on Dec. 31,1988

Liablities Rs. Assets Rs.


Rs.
Creditors 14,000 Stock 50,000
Bank overdraft 3,000 Debtors 38,710
A B Less provision 2,650 36,060
Cap. A/c 80,000 20,000 B/R 14,000
+Int. 4,000 1,000 Cash 400
+Net Profit 19,200 12,800 Premises 40,000
1,03,200 33,800 Less dep. 2,000 38,000
+Commission — 1,920 Furniture 2,400
1,03,200 35,720 Less dep. 120 2,280
Less Drawings 9,000 6,000
94,200 29,720 94,080
Less inu on Draw. 120 60 29,660
94,080 29,660 1,40,740 1,40,740

Working notes:

Cash A/c
Rs. Rs.
To Balance 8,000 By A’s Drawings 9,000
To Debtors 91,200 By B’s Drawings 6,000
To B/R 16,090 By Trade Crs. 60,000
To Cash sales 31,620 By B/P 16,000
To Bank Overdraft 3,000 By Wages 22,000
(bal figure) By Salaries 10,000
By Trade Exp. 26,510
By Balance (Cash) 400
1,49,910
1,49,910
150

Total Debtors A/c

Rs. Rs.
To Balance b/d 50,000 By Cash 91,200
To Sales (bal. fig.) 1,00,000 By B/R 20,090
By Balance c/d 38,710
1,50,000 1,50,000

B/R

Rs. Rs.
To Balance b/d 10,000 By Cash 16,090
To S. Eta. (bal. fig.) 20,090 By Balance c/d 14,000
30,090 30,090

B/P

Rs. Rs.
To Cash 16,000 By Balance b/d 6,000
By S. Crs. (bal. fig.) 10,000
16,000 16,000

Trade Crs.

Rs. Rs.
To B/P 10,000 By Balance b/d 44,000
To Cash 60,000 By Purchases (bal. fig.) 40,000
To Bal. c/d 14,000
84,000 84,000
151

Illustration : 5
The following information in sappl from which you arc required to prcpame Trading and Profit and
Loss Accound for the year euded and Balance Sheet an on 31st December, 1993.
Assets and Liabilities Jan 1, 1993 Dec., 31, 1993
Rs. Rs.
Creditons 1,577,00 1,24,000
General expenses owings 6,000 3,300
Sundry Assets 11,61,00 1,20,400
Stock 80,400 1,11,200
Cash in hand and at Banh 69,600 80,800
Debtors ? 1,78,700
Other Transections:
Cash and discount credited to Debtors 6,40,000
Retarus from Debtors 14,500
Bad Debtors 4200
Sals-Cash and Credit 71,8,100
Dicount allowed for creditons 70,00
Rehrns to Creditons 40,00
Calnilal introduced (paid into Bank) 85,000
Recnhts from Debtors ( Paid into Bank) 62,500
Cash Purehase 10,300
Expanses paid by cash 95,700
Purelans of Machinery by chegue 4300
Prawings by chegue 31,800
Cash Payment into Bank 50,000
with drawn from Bank into Cash 92,400
Payments to credihrs by chegue 60,270
Cash in hand at end 12,000
152

Solultion:
It will the holed there since the Coinlal in the leguining in the given, the opening lalance sheet will the
necessary for llius the same to the found out. This regunier information regalding credict sales. But the question
given information rcgamling cash and credit sales Combimed. How it in necessary to prctane the Cash Book
legrdes Total Debtors and Total Creditors Accounts.

Cash Book
Dr. Cr.

Cash Bank Cash Bank


Rs. Rs. Rs. Rs.

To Balance b/d (2) 29,600 40,000 By Purchases 10300


To Capital Account 85,000 By Expenses 95,700
To Sundry Debtors 6,25,000 By Machinery 4,300
To Cash 50,000 By Drawings 31,800
To Balance 92,400 By Bank 50,000 —
To Cash Sales (Balancinti figure) 46,000 By Cash 42,400
By Sundry Creditors 6,02,700
To Balance b/d By Balance c/d (1) 12,000 68,800
1,68,000 8,00,000 1,68,000 8,00,000

12,000 68,800

Note : (1) Cash in hand in given to Rs. 12,000 was a balance bank cash on 68,800 ie, 80,800-12,000
(2) These are balancing of same find iwopening balance at bank in found out by deducting the delirts
from credits in the lanks colums cash lalance,in found.

Sundry Creditors
Rs. Rs.
1993 To Balance b/d 1993 By Cash 6,25,000
Jan., 1 (Balancing figure) 1,65,300 Jan., 1
to By Discount 15,000
Jan.,1 To Credit Sales Dec., 31
to (7,18,100 – 46,000) 6,72,100 By Returns 14,500
Dec., 31 By Bad Debts 4,200
By Balance c/d 1,78,700
8,37,400 8,37,400
1994
Jan., 1 To Balance b/d 1,78,700
153

Capital on 1st jamuin, 1993 :


Total Assets : Sundry Assets 1,16,100
Stock 80,400
Cash in hand and at Bank 69,600
Debtors 1,65,300
4,31,400
Less : Sundry Creditors 1,57,700
Expenses Owings 6,000 1,63,700
Capital on 1st Jan., 1993 2,67,700

Trading and Profit and Loss Account for two yr.


endled December 31, 1993
Rs. Rs.
To Opening Stock 80,400 By Sales:
Credit 6,72,100
To Purchases Cash 46,000
Credil 5,80,000 7,18,100
Cash 10,300 Less : Returns 14,500 7,03,600
5,90,300
Less : Returns 4,000 5,86,300 By Closing Stock 1,12,200
To Gross Profit c/d 1,48,100
8,14,100 8,14,800
To General Expense
(95,700 + 3,300 – 6,000) 93,000 By Gross Profit b/d 1,48,100
To Discount allowed 15,000 By Discount Received 7,000
ToBad debts 4,200
To Net Profit 42,900
1,55,100 1,55,100
154

Balance Sheet
an on December 31, 1993

Rs. Rs.
Liabilities Assets
Sundrv Creditors 1,24,000 Sundry Assets
Balance 1,16,100
Expenses Owing 3,300 Additions 4,300 1,20,400
Capital : Balance on Stock 1,11,200
Jan. 1, 1993 2,67,700
Addition 85,000 Sundry Debtors 1,78,700
Profit 42,900
3,95,600 Cash in hand 12,000
Less : Drawings 31,800 3,63,800
Cash at Branch 68,800
4,91,100 4,91,100

Illustration 6
A trader asks you to prepare a Balance Sheet and Profit and Loss Account for the year ended 31st
December 1994. He kept no books of account, but his system is as follows.
He keeps copies of all invoices in respect of credit sales and marks each copy with the date of payment.
He does not keep copies of Cash memos but he informs you that all takings both Cash and credit, arc paid into
the bank, except that he occasionally withholds certain sums, both for personal use and for petty Cash expenses,
which he notes in a note book.
Analysis of the Pass Book reveals the following :-
Total amount paicf into Bank Expenditure 4,55,500
Personal drawings 30,000
Purchases 3,54,000
Salaries 25,000
Rent 12,000
Electric Light 3,500
Printing and Stationer) 2,500
Advertising 4,500
The Cash at Bank at 31st December, 1994 was Rs.4000.
The persons! drawings shown in the note-book amount to Rs. 12000 and profit Cash to Rs.3000.
Serrating of the copy inverses shows that Rs. 22500 was paid into the Bank during 1994 in respect of
1993 sales, and that Rs. 46,750 is out standing in respect of 1994 sales, exclusive of for bills totalling Rs. 450
which have been marked Irrecoverable
155

Liabilities were:-
31st Dec., 1993 31st Dec., 1994
Rs. Rs.
Purchases 24,000 35,000
Rent 1000 1000
Electric Light 200 150
Advertising — 2500
The stock at 31st December 1994 were Rs. 35000 at Cash but the trader has no sacred of the stocks at
31st December,1993. He informs you however, that he invariably, sells his good at cash plus 33 1/3 percen.

Solution :
Trading and Profit & Loss Account
for the year ending 31st December, 1994

Rs. Rs.
To Stock (Balancing figure) 44,250 By Sales 4,99,000
To Purchase 3,65,000 By Stock 35,000
To Gross Profit (25% on sales) c/d 1,24,750
534,000 5,34,00
To Bad debts 4,250 By Gross Profit b/d 1,24,750
To Petty Expenses 3,000
To Rent 12,000
Add : Outstanding 1,000
13,000
Less : Relating to 1993 1,000 12,000
To Electric Light 3,500
Add : Outstanding 150
3,650
Less : Relating to 1993 200 3,450
To Adversting 4,500
Add : Outstanding 2,500 7,000
To Salaries 25,000
To Printing & Stationery 2,500
To Net Profit transferred to
Capital Account 67,550
1,24,750 1,24,750
156

Balance Sheet as
on 31st December 1994
Liabilities Rs. Assets Rs.
Sundry Creditors 35,000 Stock 35,000
Outstanding Rent 1,000 Bank Balance 4,000
Outstanding Advertising 2,500 Sundry Debtors 46,750
Outstanding Electric Light 150
Capital 21,550
Add : Net Profit 67,550
89,100
Less : Drawings 42,000 47,100
85,750 85,750

Working Notes:

(1)

Balance Sheet on 31st December, 1993


Rs. Rs.
Bank Overdraft 20,000 Stock 4,425
Sundry Creditors 24,000 Sundry Debtors 2,250
Outstanding Rent 1,000
Outstanding Adversting 200
Capital (Balancing figure) 21,550
66,750 6,675

(2) Opening Stock is ascertanced by prepairing Trading Account and taking the Gross Profit on
sales to be 33 1/3%.
(3)
Cash Account
Rs. Rs.
To S. Debtors 12,000 By Drawings 4,70,500
By Petty Cash Expenses 3,000
By Bank 4,55,500
4,70,500 4,70,500
157

Bunk Account
Rs. Rs.
To Cash 4,55,500 By Balance b/d
(Balancing figure) 20,000
By Sundry Creditors 3,54,000
By Drawing 30,000
By Salaries 25,000
By Rent 12,000
By Electric Light 3,500
By By Printing & Stationery 2,500
By Advertising 4,500
By Balance c/d 4,000
4,55,500 4,55,500

Total Creditors Account


Rs. Rs.
To Bank 24,000 By balance b/d 3,54,000
To Balance c/d 35,000 By Purchases (Balancing figure) 3,65,000
3,89,000 3,89,000

Total Debtors Account


Rs. Rs.
To Balance b/d 4,250 By Bad Debts 22,500
To Sales (Balancing Figure) 4,99,000 By Cash 4,70,500
By Balance c/d 46,750
5,21,500 5,21,500
Dec. 31,1992 Dec.31,1993
Rs. Rs.
Cash at Bank 30,000 1,91000
Stock in Trade 2,20,000 2,80,000
Sunder Debtors ? 3,50,000
Sundry Creditors 2,34,000 1,85,000
Fixtures & Finings 20,000
Office Cash 10,000
158

The Cash Book analysis showed the following figures among other:-
Rs. Rs.
Receipts from customers 13,50,000 Motor upkeep 13500
Discount .allowed to them 14000 Printing and Stationery 8000
Further Capital introduced on 1st July 1993 20000 Drawings 66000
Salaries up to Nov. 30, 1993 110000 Payments to trade creditors 11,20,000
Office Rent up to Nov. 30, 1993 22000 Discount allowed by them 12000
Advertising 9000 Travelling Expenses 10000
General Expenses 6000
No ready figure are available for total sales but Jacksons maintain a steady gross profict rate of 25
percent on sales.
There were bills outstanding for petrol Rs. 250, advertising Rs 750 and Printing Rs 450. Provide 5% on
Debtors for doubtful debts and 2 1/2% on Creditors for discounts.
The motor car and fixtures are to be depreciated by 20% and 5% respectively 5% interest is to be
allowed on Capictal.
Prepare Jacksons Trading and Profit and Loss Account for 1993 and his Balance Sheet on Dec. 31, 1994.
159

B.Com. (Hons) I Yr. Commerce Paper-II


LESSON 8
Financial Accounting
Marks..............................%
Roll No................................ Signature of the Lecturer..............................
When completed, send this
Response Sheet to:
Name.................................................................
Address..............................................................
School of Open Learning,
University of Delhi, ...........................................................................
5, Cavalry Lane, Pin Code............................................................
Delhi -110007 (India).

ACADEMIC SESSION 2011–12

1. The following is the Receipts and payments account of the Calcutta Club for the year ended 31 December,
1994
Rs. Rs.
To Balance on 1-1-94 1,500 By Rent 26,000
To Entrance Fees 2,750 By Stationery Expenses 15,340
To Subscriptions: By Wages 26,650
1993 1,000 By Billards and tabes 19,500
1994 84,500 By Repairs wtc. 4,030
1995 1,500 By Interest 7,500
To Locker rent 2,500 By Balance on 31/12/94 11,980
To Special subscription for
Governor’s party 17,250
1,11,000 1,11,000

Locker rent Rs. 300 referred to 1993 and Rs. 500 is still owing, Rent 6,500 referred to 1994 and Rs.
6.500 is still due, stationery expenses etc. Rs, 1,560 rlated to 1993 and Rs, 1,820 is still due; Subscription
unpaid for 1994 i Rs. 2,400 special suubscriptiopon for Governor’s Party outstanding Rs. 2,750/-
From the above information you re requested to make out an Income & Expenditure account fo the
Club for the year ended 31 st December 1994 and Balance Sheet as on that date.
160

On 1st January, 1994 the folowing were the assets and liabilities, amongst other, of the Ramnagar
Club:-
Land and Buildings Rs. 1,20,000; Furniture & Fittings Rs. 12,000; Stock of cutlery and Crockery Rs,
2,000; stock of tinned provisions Rs.2,000 outstanding subscriptions Rs. 1,800; Balance at Bank Rs. 6,800;
Cash in hand Rs. 1,400; Income & Expenditure Account credit balance Rs. 18,400; Sports Fund Rs. 20,000;
Subscription received in advancce Rs. 16,000; outstanding for salaries Rs. 1,600 and priniting & Stationery Bill
Rs. 200.
The receipts during the yea were, Entrance Fees, Rs. 12,000 (half of whcihc is to be credited to the
eneral Fund); Subscriptions Rs. 20,000 Donations to Sports Fund Rs, 4,000. This amount was placed with the
Bank on Fixed Deposit. Iterest on General Fund Invesments Rs. 12,500 @ 5%, purchase price was 96% of the
nominal value. Interest on sports Fund, Bank Fixed deposits Rs. 1,200@ 6%. Receipts from catering Rs. 23,500'
Expenses on Sports events Rs. 100* Repairs to Building Rs 8,000; Catering expenses Rs. 16,000; Purchase of
tinned provisions Rs. 6000; Sundry Expenses Rs. 1,600. The balance at bank on 31st December 1993 was Rs.
21,200.
You are told that subscriptiions for 1993 Rs. 1,400 were outstanding and Rs. 1,200 salaries were not
paid , Rs, 1,200 were received as subscriptions for 1994. The unused stock of tinned provisions was valued at
Rs. 2,800.
From the above detaills you are required to prepare an Income and Expenditure Account for the year
ended 31st December 1993 and a Balance Sheet as at that date, after providing for deprrtlation on Land &
Building at 2 per cent and Furniture & Fittings at 5 per cent and writting off half the value of cuttlery and
crockery.
3. The following particulars relate to the Delhi Sports Club:

(i) Income and Expenditure Account for the year ended 31st Dec., 1994

Expenditure Rs. Income Rs.


To Salaries 900 By Entrance Fee 6,300
To Printng & Stationery 1,320 By Subscriptions 9,360
To Advertising 960 By Rent 2,400
To Audit Fees 300
To Fire Insurance 600
To Dep. on Sports Equip. 5,400
To Excess of Income over
Expenditure 8,580
18,060 18,060

Furniture - 55%
Machinery - Rs. 6,450
Sundry Assets - Rs. 19,800
161

2. Dissolution expenses amounted to Rs. 450


3. All liabilities were discharged.
4. S became insolvent and Rs 250 could be recovered from his estate prepare necessary accounts if:

(i) Partners Capital accounts are fluctuating

(ii) Partners Capital accounts are fixed.


4. X,Y,Z shared profits lossses in the ratio 5:3:2: On 31st December, 1994 their balance sheet was as
follows:
Liabilities Rs. Assets Rs.
Trade Creditors Sundry Assets 1,60,000
Bank Loan 60,000 Loss 40,000
Capitals: 20,000
X 60,000
Y 40,000
Z 20,000 1,20,000
2,00,000 2,00,000

The Bank had a charged on all the assets; these realised Rs. 58,000 in all. Y’s private state realised Rs.
12,000; has private creditors were Rs. 10,000. Z was unable to contribute anything. X paid 1/3 of what was
finally due from him except on account of other partners. Prepare ledger accounts passing all entries relationg to
realisation of assets and payments of liabilities through the realisation Account.
162

B.Com. (Hons) I Yr. Commerce Paper-II


LESSON 9
Financial Accounting
Marks..............................%
Roll No................................ Signature of the Lecturer..............................
When completed, send this
Response Sheet to:
Name.................................................................
Address..............................................................
School of Open Learning,
University of Delhi, ...........................................................................
5, Cavalry Lane, Pin Code............................................................
Delhi -110007 (India).

ACADEMIC SESSION 2011–12

Time allowed : 11/2 Hours.


Q. l. What doyou mean by financial statements and what are their purposes?
Q.2. Discuss the limitations of Financial Statements.
163

B.Com. (Hons) I Yr. Commerce Paper-II


LESSON 9 10
Financial Accounting
Marks..............................%
Roll No................................ Signature of the Lecturer..............................
When completed, send this
Response Sheet to:
Name.................................................................
Address..............................................................
School of Open Learning,
University of Delhi, ...........................................................................
5, Cavalry Lane, Pin Code............................................................
Delhi -110007 (India).

ACADEMIC SESSION 2011–12

1. State the legal provisions for adjusting losses and distributing assets on dissolution of a firm when
no agreement to the contrary exists?
OR
Explain the rule laid down in Garner. V. Murray decision? What conditions should be present for its
operation?
2. Old, Young and Child give you the following Blance Sheet as on 31st Dec., 1993:
Liabilities Rs. Assets Rs.
Capital A/cs. Plant & Machinery 60,000
Old - 60,000 Fixture & Fittings 4,000
Young - 20,000 Patents & Trade Marks 20,000
Child - 4,000 84,000 Joint Life Policy 30,000
Old’s Loan 30,000 Stock 20,800
Joint Life Policy 24,800 Debtors 36,800
Less Provision 800 36,000
Loan on Hypothe cation of Stock 12,4000
Sundry Creditors 35,600 Cash at Bank 16,000
1,86,800 1,86,800
164

The partners shared profits and loss in the ratio 4:2:1. The firm was dissolved on December 31, 1993
and you are given the following information:
(a) The Joint Life Policy was surrendered and insurance paid Rs. 20,400 after adjusting Rs. 10,600
in respect of a loan taken on the security of the Policy.

(b) Some shares held by the firm, which had been written off earlier on finding them valueless,
were now to be worth for Rs, 6,000 and the loan creditors agreed to accept the shares at this
value.

(c) One of the creditors took some of the patents whose book value was Rs. 12,000 at the valuation
of Rs. 9,000, Balance o that creditor was paid in cash.

(d) The remaining assets realised:

Patents & machinery - 34,000

Fixture & Fitting - 2,000

Stock - 18,000

Debtors -33,000

Patents-50% of their book value.

(e) The liabilities were paid and a total discount of Rs. 1,000 was allowed by the creditors.

(f) The expenses of realisation amounted to Rs. 4,600. Close the books of this firm.
3. A.S & R sharing profits and losses in the ratio of 3:2:1 decided to dissolve the firm on
31 December, 1994. On this date the position of the firm was:

Liabilities Rs. Assets Rs.


Capital A/cs. Sundry Assets 33,750
A- 31,000 Machinery 11,250
S- 34,500 Furniture 2,775
R- 22,250 87,750 Stock 14,550
General Reserve 6,450 Bills Receivable 4,200
P& L A/c 3,375 Investments 18,000
A’s Loan 3,000 Debtors 23,250
B’s Payable 3,075 Cash in hand 750
Creditors 9,750 Cash at Bank 4,875
1,13,400 1,13,400
165

1. The Assets realised :


Stock -75%
Investments - 85%
Debtors - Rs. 21,150

(ii) Receipts and Payments Account for the year ended 31st Dec., 1994

Receipts Rs. Payments Rs.


To Balance b/d 2,520 By Salaries 600
To Entrance Fees 6,000 By printing & Stationery 1,560
To Subscriptions: By Advertising 960
1993 360 By Fire Insurance 720
1994 9,000 By Investments 12,000
1995 540 By Balance c/d 4,680
To Rent Received 2,100
20,520 20,520

(iii) The assets on 1st January, 1994 included Club Grounds and pavillion Rs. 24,0000; Sports Equipments
Rs. 15,000 and Furniture & Fixture Rs, 2,400. Subscriptions in arrears on that day were Rs. 480.
Prepare the balance Sheet as at 31st December, 1994.
166

B.Com. (Hons) I Yr. Commerce Paper-II


LESSON 11
Financial Accounting
Marks..............................%
Roll No................................ Signature of the Lecturer..............................
When completed, send this
Response Sheet to:
Name.................................................................
Address..............................................................
School of Open Learning,
University of Delhi, ...........................................................................
5, Cavalry Lane, Pin Code............................................................
Delhi -110007 (India).

ACADEMIC SESSION 2011–12

Note; Attempt any two questions.


1. (a) Based on particulars given below give entries in the books of purchaser amnd the seller under the
hire-purchase system:

X & Co. - Purchaser Y & Co, - Seller

Date of Purchase - 1st January, 1992

Goods Purchased - Lorries

Cassh Price - Rs. 74,500

Instalments Rs. 20,000 on singing the agreement.

Rest in three instalments of Rs. 20,000 each.

Rate of Interest - 50%. Rate of Depreciation - 10 % on Diminishing Balances.

(b) All particulars as above except the cash price is not given.

(c) All particulars as above except the cash price is not given.
2. On lsJanuary, 1993 Trucks were purchased by A on the 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.
167

The payment due on 31st December, 1993 ould not be made and hence trucks were sized by vendor,
but after negotiations, A was allowed to keep 3 trucks on the condition that the value of the other
two trucks would be adjusted against the amount due, the truck being valued at cost less 25%
depreciation. A’s books are closed on 30th June each year and he charges 15% depreciation on
trucks on the original cost.
The vendor spent Rs. 6,000 on getting the trucks thoroughly overhauled and sold them for rs. 95,000.
Show the various accounts in the bools of both the parties.
3. Nand sells goods at hire-purchase, the price being cost plus 50%. From the following afact preoare
Hire-Purchase Trading Account and other relevant Ledger Accounts:
1993 Rs.
Jan.,1 Stock out at hire at selling price 30,000
Instalments Due (customers still paying) 1,800
Goods re-possessed during the year for instalments
unpaid (due and under) Rs. 300 revalued at 150
Instalments realised during the year 39,000
Dec., 31 Stock out on hire at selling price 24,030
Instalments Dur (customers Still paying) 3,000
4. From the following data, prepare the necessary accounts to show the profit earned by Kishore
Ltd who sells the products on hire-purchase system. Goods are sold on hire-purchase at cost
plus 33 1/3%.
1st April 31st March
1993 1994
Stock out on hire at hire-purchase price 36,000 45,000
Stock in hand, at shop 12,000 10,000
Instalment due (Customers still paying) 5,000 8,000
Cash receivd from Hire-purchase Debtors during the ended 31st March, 1994 was Rs. 90,000
168

B.Com. (Hons) I Yr. Commerce Paper-II


LESSON 12
Financial Accounting
Marks..............................%
Roll No................................ Signature of the Lecturer..............................
When completed, send this
Response Sheet to:
Name.................................................................
Address..............................................................
School of Open Learning,
University of Delhi, ...........................................................................
5, Cavalry Lane, Pin Code............................................................
Delhi -110007 (India).

ACADEMIC SESSION 2011–12

Note : Attempt any two questions.


Q. 1. A firm charges out goods to its Kanpur branch at cost. The bnranch remits daily to the H.O. all
the cash collected by it on its sale; brnch expenses are paid out of the amounts provided to the Branch by the
Head Office as on imprest. The following is the summary of transactions of the Branch during the year
ending December 31.
Rs. Rs.
Stock Jan. 1 at cost 20,000 Credit Sales 1,41,000
Stock Dec., 1 at cost 35,800 Cash received from Dr. 1,22,000
Goods received from H.O. 20,000 Discount allowed to Debtors 5,000
Debtors Jan. 1 14,000
Debtors Dec. 31 28,000 Allowance of selling price (in invoices) 30,000
Cash Sales 80,000 Expenses at Branch 16,000
Ascertain to profit earned by the Branch Account.

Additional Exercise
What difference whould have been made to Branch profit in th e above mentioned case if the goods had
been invoiced to the Branch at cost plus 25% instead of at cost. (Treat the first three figures as at invoice).
2. A head office has fixed retail prices at cost plus 100%. It has a retail branch to which goods are
invoiced at Wholesale price which is 20% less than the list price.
169

Q.2. A, B, and C, the and of 1994 most of their looks and records were destroyed into fire. The Balance
Sheet as an 31st December 1993 was on following :-

Capitas Rs. Rs. Rs.


A 45,000 Cash 24,000
B 30,000 Stock 65,000
C 15,000 90,000 Machinery 144,00
Furnitures Fittings 60,00
Crditans 55,000 Advance Paymuns 350
Current Accounts Currant Accounts
A 1450
B 1000 2450 C 1700
Total 14,74,50 14,74,50

The partners dvawrings during 1994 have been proved at A-R 4,000- B-Rs. 10,000 and C-Rs. 6500 On
31st December, 1994 the Cash was Rs. 32,000, Dector Rs. 40,250 stock Rs. 59,000 Advance Payment Rs. 250
and creditions Stock Rs. 60,400, Machinery to the deprecialed by 10% percumnum and Fixtures & Fittings at 7-
1/2% 50% Inlaid is to the allowed on Capitals.The partners same profits as the proportion of 1/2, 1/3 and 1/6.
You are regained to prcpane a statement sowing the net fording profit for the year 1994 and the dinision
of the same between the partner, to get with the Balance Sheet as on 31st December, 1994.
170

B.Com. (Hons) I Yr. Commerce Paper-II


LESSON 13
Financial Accounting
Marks..............................%
Roll No................................ Signature of the Lecturer..............................
When completed, send this
Response Sheet to:
Name.................................................................
Address..............................................................
School of Open Learning,
University of Delhi, ...........................................................................
5, Cavalry Lane, Pin Code............................................................
Delhi -110007 (India).

ACADEMIC SESSION 2011–12

Q.l. Discuss briefly methods of caluation of inventories.


Q.2. A firm takes periodic inventory of petrol at the end of each month. From the following information,
complete by FIFO, LIFO and weighted average method the following:

(a) Value of inventory on June 30

(b) Amount of cost of goods sold during June

(c) profit or loss for June

Sales 9,45,000

General Administration cost 25,000

Op. Stock: 1,00,000 litres

@ Rs. 3 per litre

Purchases

June 1; 2,00,000 litres @ Rs. 2,85 per liter

June 30; 1,00,000 litres @ 3.03 per liter

Closing Stock June 30-1,30,000 liters.


171

Q. 3. A Co. buys and sells four different products. The inventories are valued at lower of cost or market.
The normal G.P. margin for all the profucts is 25% on the sale price calculate the inventory as on
31st December, 1980 from the following information:

Produ. No. of Historical Replacemnt Disposal Estimated selling


Units Cost Cost Cost price

A 400 40 745 10 80
B 300 50 28 15 84
C 200 23 22 3 24
D 600 75 74 20 120
172

B.Com. (Hons) I Yr. Commerce Paper-II


LESSON 14
Financial Accounting
Marks..............................%
Roll No................................ Signature of the Lecturer..............................
When completed, send this
Response Sheet to:
Name.................................................................
Address..............................................................
School of Open Learning,
University of Delhi, ...........................................................................
5, Cavalry Lane, Pin Code............................................................
Delhi -110007 (India).

ACADEMIC SESSION 2011–12

Q.1. Gccta am! D Dhanpat are equal partner in a lrsman in which the looks are bast by single cntrv There
position on 1st July, 1993, was an under :-
Rs. Rs.
Bills Paybles 62,000 Cash in Hand 2,700
Sundry-listens 2,00,000 Cash at Bank 1,38,800
Bank Plcehalec 46,000
Capital Account Sundry Ouctors 4,86,500
G. Gccta 8,00,000 Sundry Dutuors
D. Dlunpat 8,00,000 16,00,000 Stock 33,8,000
Plant & Machinery 8,00,000
Furniture and Fitting 50,000
18,62,000 18,62,000

On 30th June 1994. The following was states of Affairs Canshnitand Rs. 4000, Cash at Bank
Rs.15,800, Sundry Creditors Rs. 21,2000, Stock Rs. 36,7000, Sundry Detours Rs. 66,3,000, Bills
Payables Rs. 6000. Bills ovcrivallc Rs. 88,000.Plant and Machinery and Furniture and Fixtures are
to the deprecated by 100.
Ascertain the profit for the year ended was June, 1994 and down by the statement of Affairs as an
that ditc Mimnung the account a the partners in details, amusing Geeta Walk drew Rs. 10,000 and
Dhanpat with drew Rs, 80,000 during the year.
173

From the following particulars ascertain the profit earned by the branch.
Opening stock (at invoice price) 80,000
Goods setn to Branch (Cash to H.O.) 2,50,000
Sales at Branch 4,75,000
Ascertain the profit at the branch on wholesale price basis. What will be the stock Reserve Account
balance at the end of the year?
3. Pass the Journal entries in the books H.O. and Branch for the folowing adjustments:

(i) Cash in transist, Rs. 15,000.

(ii) Goods sent by H.O. in transit Rs. 30,000.

(iii) Depreciation on fixed asset whose account is maintained in the books of Head Office Rs. 1,200.

(iv) Amount to be charged by Head Office for its services rendered to Branch Rs. 3,600.

(v) Salary of General Sales manager paid by the branch while General Sales manager was on a
visit to Branch, Rs. 2,940.

(vi) Goods costing and invoiced at Rs. 32,550 are sent to branch but the branch receives goods
costing Rs. 32,010 only the remaining goods having been stolen somewhere in transit, Branch
has passed entry only for Rs. 32,010 and disclaim any liability for the balance.
4. Indian Soap Mills Ltd. has two branches, at Agra and kahpur. Goods are invoiced to branches at cost
plus 50%. Branches remit all Cash received to the Head Office and all excess are met by Head
Office. From the following particulars prepare the necessary accounts, on th Stock and Debtors
system, to show the profit earned at the branches:

Agra Kanpur
Stock on 1st Jan., 1994 9,300 15,600
(invoice price)
Debtors on 1st Ja., 1994 6,800 8,700
Goods invoiced to Branches 34,000 36,000
(at cost)
Sales at Branches
Cash Sales 25,010 35,000
Credit Sales 31,000 30,000
Cash collected from Debtors 30,400 29,800
Goods returned by Debtors 1,200 1,500
Goods rreturned by branch to H.O 1,500
174

Agra 2,100 2,100


Surplus in stock 300
Storgage of Stock 450
Discount allowed to Customers 200 350
Expenses at Branches 400 6,700

1. A branch send sthe following trial balance as at 31-12-1994 to the Head Office:
Dr. Cr.
To Opening Stock 16,400 H.O. Account 13,200
Purchases 25.000 Sundry Creditors 2,800
Goods received from H.O. 17,200 Discount received 200
Carriage 2,500
Salaries 5,600
General Expenses 4,100
Sundry Debtors 10,200
Cash 700
81,700 81,700

The closing stock at the branch was Rs, 18,200. Goods worth Rs. 1.500 sent by the Head Office of
28 Decembers, 1994 had not yet reached the branch. Similarly cash Rs. 21,000 remitted by the
branch to the H.O. on 31st December, 1979, has not yet reached H.O. Depreciation on Branch
furniture (whose account is maintained in H.O. Books( is Rs. 500. H.O. expenses chargeable to the
branch Rs. 2,400. Record the above in the Head Office books and also show incorporation entries
along with the Branch account which at present shows a debit balance of Rs. 16,800.
175
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