WORK BOOK

FINANCIAL
ACCOUNTING

INTERMEDIATE

GROUP – I

PAPER – 5
The Institute of Cost Accountants of India
(Statutory body under an Act of Parliament)
[Link]
First Edition : March 2018

Second Edition : April 2019

Published By :

Directorate of Studies

The Institute of Cost Accountants of India

CMA Bhawan, 12, Sudder Street, Kolkata – 700 016

[Link]

Copyright of these study notes is reserved by the Institute of Cost

Accountants of India and prior permission from the Institute is necessary for
reproduction of the whole or any part thereof.
 Preface

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The Directorate of Studies,

The Institute of Cost Accountants of India
 Work Book
FINANCIAL ACCOUNTING

INTERMED
IATE
GROUP – I
PAPER – 5

INDEX

Sl. No. Page No.

1 Fundamentals of Accounting 1 – 27

2 Accounting for Special Transactions 28 – 58

3 Preparation of Financial Statements of Profit Oriented organizations 59 – 67

4 Preparation of Financial Statements of Not-for Profit Organizations 68 – 76

5 Preparation of Financial Statements for Incomplete Records 77 – 90

6 Partnership 91 – 136

7 Self balancing Ledger 137 – 150

8 Royalties 151 – 162

9 Hire-Purchase and Installment System 163 – 174

10 Branch and Departmental Accounts 175 – 203

11 Computarised Accounting System 204 – 209

12 Accounting Standards 210 – 214

 Work Book : Financial Accounting
Study Note – 1
FUNDAMENTALS OF
ACCOUNTING

Learning Objective:
To be able to understand the concepts in regards methods of accounting, journal,
ledger, day books, trial Balance, Financial statement and the accounting effect of
each transaction.
To demonstrate an appropriate mastery of the knowledge and skills of financial
accounting principles

ACCOUNTING - MEANING, SCOPE AND SIGNIFICANCE OF ACCOUNTING

1. Choose the correct alternative:

1. an art of recoding, classifying and summarizing in a significant manner and in

terms of money, transactions and events which are in part at least of a financial
character, and interpreting the results thereof.
(a) Management Accounting
(b) Financial Accounting
(c) Cost Accounting
(d) None of the above

2. Which of the following is/ are least likely to be true regarding accounting?
(a) Accounting is an art of recoding, classifying and summarizing in a significant manner
and in terms of money, transactions and events which are in part at least of a
financial character
(b) Accounting provides financial information to stakeholders normally via financial statements.
(c) Accounting provides information only to the external users.
(d) All of the above

3. Which of the following is/ are regarding liabilities?

(a) It is an obligation of financial nature
(b) It has to be settled at a future date.
(c) It represents amount of money that an entity owes to the other parties.
(d) All of the above

4. The financial statement that reflects information about the financial performance of an
entity is referred to as the .
(a) Cash Flow Statement
(b) Income Statement
Work Book : Financial Accounting
(c) Balance Sheet
(d) None of the above
 Work Book : Financial Accounting

5. Working capital is the excess of over .

(a) Fixed Assets, Current Assets
(b) Current Assets , Current Liabilities
(c) Non-Current Assets , Current Assets
(d) Fixed Assets , Current

Liabilities Answer:

1 (b); 2 (c); 3(d); 4 (b); 5 (b)

2. Match the following:

Column A Column B
1 Revenue expenditure A Excess of total assets over total liabilities
.
2 Net worth B Expenditure incurred to earn revenue of the current period.
.
3 Profit C Excess of Revenue Income over expense
.
4 Internal liability D Reflects the ability of the enterprise to generate cash and
. cash
equivalents
5 Cash flow statement E Capital, Reserves, Undistributed Profits, etc.
.

Answer:

1- B; 2- A; 3- C; 4 - E; 5- D.

3. Fill in the blanks:

1. is basically a record keeping function.
2. is the second phase of accounting cycle.
3. is a resource owned by the business with the purpose of using it for generating
future profits.
4. The excess of expense over income is called .
5. A liability represents a potential obligation that could be created depending on
the outcome of an event.

Answer:

1- Book 2- Journalising; 3- 4– 5 – Contingent

Keeping ; Asset; Loss;

4. State whether the following statements are true or false:

1. Financial Accounting information is used within an organization (typically for decision-
making) and is usually confidential and its access available only to a selected few.
2. The main objective of Accounting is to provide financial information to stakeholders.
Work Book : Financial Accounting
3. Management Accounting Reports are not subject to statutory audit.
4. Government happens to be a stakeholder of accounting information.
5. Gross Working Capital which is a more realistic concept.
 Work Book : Financial Accounting

Answer:

1- 2- True; 3- True; 4 - True; 5 – False

False;

ACCOUNTING PRINCIPLES, CONCEPTS & CONVENTIONS

5. Multiple choice
questions: Choose the
correct alternative:

1. Which of the following is a basic assumption?

(a) Conservatism concept
(b) Matching concept
(c) Historical cost concept
(d) None of the above

2. Which of the following is a Modifying Principle?

(a) Dual aspect concept
(b) Business entity concept
(c) Accounting period concept
(d) Conservatism concept

3. The insistence of the concept of would result in avoidance of window dressing the
results by choosing the accounting method by convenience and thereby either inflating
or understating net income.
(a) Dual aspect
(b) Consistency
(c) Revenue Realisation
(d) Matching

4. is defined as a summarised record of transactions related to a person or a thing.

(a) Journal
(b) Cash book
(c) Account
(d) Voucher

5. The accounts related to expenses or losses and incomes or gains are called .
(a) Personal accounts
(b) Representative Personal accounts
(c) Nominal accounts
(d) Real accounts
 Work Book : Financial Accounting

Answer:

1 (d); 2 (d); 3(b); 4 (c); 5 (c)

6. Match the following:

Column A Column B
1 Business Entity Concept A A given event which has two effects – one on revenue and
. the
other on expense, both must be recognized in the same
accounting period.
2 Matching Concept B An entity is assumed to exist for an indefinite period and is
. not
established with the objective of closing it down.
3 Historical Cost Concept C Transactions are always recorded at the actual cost at which
. they are actually undertaken.
4 Full Disclosure Concept D Business is treated as distinct and separate from the
. individuals
who own or manage it.
5 Going Concern Concept E All significant information must be disclosed.
.

Answer:

1- D; 2- A; 3- C; 4 - E; 5- B.

7. Fill in the blanks:

1. are basic guidelines that provide standards for scientific accounting practices
and procedures.
2. As per the Accounting Equation, = Liabilities + Capital.
3. All transactions are .
4. vouchers are the documentary evidence of transactions that have happened.
5. approach is the traditional approach for deciding when to write on the debit
side of an account and when to write on the credit side of an account.

Answer:

1- Accounting principles; 2- 3- 4– 5 –British

Assets; Events; Supporting;

8. State whether the following statements are true or false:

1. Financial statements are meant to be used by different stakeholders, and as such it is
necessary that the information contained therein is based on definite principles, concrete
concepts and well accepted convention.
2. Cash receipt voucher indicates receipt of cheque or demand draft.
3. Materiality is more of a convention than a concept.
 Work Book : Financial Accounting
4. Inward invoices received from the creditors of goods are source documents for Sales Book.
5. All events are transactions, but all transactions are not events.
 Work Book : Financial Accounting

Answer:

1- 2- 3- 4- 5–
True; False; True; False; False

PRACTICAL ILLUSTRATIONS:

9. Recognise the accounting principle in the following cases:

(a) Transactions are recorded at their original cost.
(b) Inventories are valued at lower of its cost and realisable value.
(c) Accounting treatment once decided should not changed from one period to another.
(d) Unsold stock is deducted from the cost of goods available for sale to arrive at Cost of
Goods Sold.
(e) A business is assumed to run for an indefinite period.

Solution:

(a) Historical cost concept

(b) Prudence/ Conservatism concept
(c) Concept of Consistency
(d) Matching concept
(e) Going Concern concept

10. Ascertain the debit and credit for the following particulars under the Modern Approach:
(a) Started business with cash.
(b) Purchased goods for cash.
(c) Purchased goods from Ms. B
(d) Paid wages to workers.
(e) Rent received from tenant.
(f) Sold goods on cash to Mr. A.
(g) Sold goods on credit to Mr. Z.
(h) Withdrew cash from business.

Solution:

Effect of Transaction Account To be Debited / Credited

(a Increase in cash Cash A/c Debit
) Increase in capital Capital A/c Credit
(b Increase in goods Purchases A/c Debit
) Decrease in cash Cash A/c Credit
(c) Increase in goods Purchases A/c Debit
Increase in liability Ms. B A/c Credit
 Work Book : Financial Accounting
(d Increase in expense Wages A/c Debit
) Decrease in cash Cash A/c Credit
(e Increase in cash Cash A/c Debit
) Increase in income Rent Received A/c Credit
(f) Increase in cash Cash A/c Debit
Decrease in goods Sales A/c Credit
(g Increase in asset Mr. Z A/c Debit
) Decrease in goods Sales A/c Credit
(h Decrease in liability Drawings A/c Debit
) Decrease in cash Cash A/c Credit

11. Ascertain the debit and credit for the following particulars under the British Approach:
(a) Started business with cash.
(b) Purchased goods for cash.
(c) Purchased goods from Ms. B
(d) Paid wages to workers.
(e) Rent received from tenant.
(f) Sold goods on cash to Mr. A.
(g) Sold goods on credit to Mr. Z.
(h) Withdrew cash from business.

Solution:

Name of Account Nature of Rule To be Debited /

Account Credited
(a Cash A/c Real Comes in De
) Capital A/c Perso Giver bit
nal Cre
dit
(b Purchases A/c Nomi Expense De
) Cash A/c nal Goes out bit
Real Cre
dit
(c) Purchases A/c Nomi Expense De
Ms. B A/c nal Giver bit
Perso Cre
nal dit
(d Wages Nomi Expense De
) A/c Cash nal Goes out bit
A/c Real Cre
dit
(e Cash A/c Real Comes in De
) Rent Received A/c Nomi Income bit
nal Cre
Work Book : Financial Accounting
dit
(f) Cash A/c Real Comes in De
Sales Nomi Income bit
A/c nal Cre
dit
(g Mr. Z Perso Receiver De
) A/c nal Income bit
Sales Nomi Cre
A/c nal dit
(h Drawings A/c Perso Receiv De
) Cash A/c nal er bit
Real Goes Cre
out dit
 Work Book : Financial Accounting

12. The following transactions relate to Mr. J for the month of January, 2018. You are
required to prepare an accounting equation from these transactions:
2018
January
1 Started business with cash ` 48,000.
4 Purchased goods in cash from D Bros. for ` 8,000.
6 Bought furniture worth ` 14,000 in cash.
9 Sold goods costing ` 2,500 to Mr. X for ` 4,000 in cash.
12 Purchased goods in credit from B & Sons. worth ` 28,000.
16 Sold goods costing ` 4,800 to Mr. Y for ` 6,000 on credit.
20 Paid ` 5,000 cash to B & Sons., the supplier.
22 Paid Salaries ` 1,600.
27 Received interest ` 1,400.
31 Collected ` 6,000 from his customer, Mr. Y

Solution:

Date Transaction Assets Liabilitie Capital

= s+
2018
January Started business with cash ` 48,000. 48,000 - 48,000
Purchased goods in cash from D Bros. for `8,000. =
1 -
Revised Accounting Equation
4 Bought furniture worth ` 14,000 in cash. + 8,000 - --
Revised Accounting Equation Sold goods costing – -
6 8,000
`
48,000 - 48,000
2,500 to Mr. X for ` 4,000 in cash =
Revised Accounting Equation -
9 Purchased goods in credit from B & Sons. Worth + - --
` 14,000 -
–
28,000.
14,000
Revised Accounting Equation Sold goods costing 48,000 - 48,000
12 ` = -
4,800 to Mr. Y for ` 6,000 on credit. + - 1,500
16 Revised Accounting Equation 4,000 -
Paid ` 5,000 cash to B & Sons., the supplier. –
2,500
Revised Accounting Equation
49,500 - 49,500
Paid Salaries ` 1,600.
20 = -
Revised Accounting
Equation Received interest + + --
22 ` 1,400. 28,000 28,000
Revised Accounting Equation 77,500 28,000 49,500
Work Book : Financial Accounting
Collected ` 8,000 from his customer, Mr. Y = +
+ - 1,200
27 Revised Accounting Equation
6,000 -
–
4,800
78,700 28,000 50,700
31 = +
– 5,000 – --
5,000
 Work Book : Financial Accounting
73,700 23,000 50,700
= +
– 1,600 - – 1,600
-
72,100 23,000 49,100
= +
+ 1,400 - + 1,400
-
73,500 23,000 50,500
= +
+ - --
6,000 -
–
6,000
73,500 23,000 50,500
= +

13. Chandra runs a stationery business. From the following information relating to his business
prepare Income Statement under: (a) Cash Basis, (b) Accrual Basis, and (c) Hybrid Basis:
`
Cash purchases 82,000
Credit purchases 1,35,000
Salaries paid 17,000
Rent paid 17,500
Insurance paid 18,500
Cash sales 2,20,000
Credit sales 3,00,000
Outstanding Expenses: Salaries 5,000
Rent 2,800
Prepaid insurance 3,000

Solution:

(a) Under Cash Basis

Income Statement
Particulars Amount (`) Amount (`)
Incomes:
Cash sales 2,20,0
Less: Expenses 00
Cash 82,0
purchases 00
Salaries paid 17,0
Rent paid 00
Insurance paid 17,5 1,35,0
00
Work Book : Financial Accounting
Net Income 18,5 00
00 85,
000
 Work Book : Financial Accounting

(b) Under Accrual Basis

Income Statement
Particulars Amount (`) Amount
(`)
Incomes:
Cash sales 2,20,000
Credit sales 3,00,000
5,20,000
Less: Expenses
Cash purchases 82,000
Credit purchases 1,35,000
Salaries paid 17,000
Add: Outstanding 5,000 22,000
Rent paid 17,500 20,300
Add: Outstanding 2,800 15,500 2,74,800

Insurance paid 18,500

Less: Prepaid 3,000
∴ Net Income
2,45,200

(c) Under Hybrid Basis

Income Statement
Particulars Amount Amount
(`) (`)
Incomes: Cash sales 2,20,000
Less: Expenses 82,000
Cash purchases 1,35,000
Credit purchases
Salaries paid 17,000
Add: Outstanding 5,000 22,000

Rent paid 17,500

Add: Outstanding 2,800 20,300

Insurance paid 18,500

Less: Pre paid 3,000 15,500 2,74,800
∴ Net Loss 54,800
 Work Book : Financial Accounting

CAPITAL & REVENUE TRANSACTIONS

14. Multiple choice

questions: Choose the

correct alternative:

1. The purpose of distinguishing transactions between capital and revenue are:

(a) Ensuring proper accounting of transactions
(b) Determination of true operating result
(c) Proper disclosure of financial position
(d) All of the above

2. Which of the following is/are capital expenditure?

(a) Capital cost of fixed assets
(b) Installation and Erection charges
(c) Overhauling of machinery
(d) All of the above

3. Which of the following accounting concept is related to capital and revenue transactions?
(a) Entity concept
(b) Matching concept
(c) Periodicity concept
(d) Consistency concept

4. Which of the following is/ are least likely to be true?

(a) A journal is often referred to as Book of Final Entry.
(b) Return outward book records the transactions relating to goods that are
returned by an entity to its creditors.
(c) Purchase Day Book records all credit purchase of goods.
(d) All of the above

5. Capital Profit arises from :

(a) Premium received on issue of shares
(b) Profit prior to incorporation
(c) Profit made on sale of a Fixed Asset
(d) All of

the above Answer:

Work Book : Financial Accounting
1 2 3(d) 4 5 (d)
(a); (d); ; (a);
 Work Book : Financial Accounting

15. Match the following:

Column A Column B
1 Errors of Omission A When wrong posting is made to a wrong account instead of a
. correct one although amount is correctly recorded
2 Errors of Commission B Transaction is not at all recorded in the books of accounts
.
3 Errors of Principle C When one error is compensated by another error(s)
.
4 Errors of Misposting D Where there is any variation in figure/amount
.
5 Compensating Errors E When transactions are mingled between capital and revenue
.

Answer:

1- B; 2- D; 3- E; 4 - A; 5- C.

16. Fill in the blanks:

1. A receipt of money is considered as receipt when it is received from customers
for goods supplied or fees received for services rendered in the ordinary course of
business.
2. Bad debt is an example of revenue .
3. expenditure is recurring in nature.
4. When a profit arises out of a casual and non-recurring transaction, it is termed as .
5. The ledger where all transactions relating to incomes and expenses are recorded, is called
Ledger.

Answer:

1- 2- 3- Revenue; 4 – Capital 5 – Nominal

Revenue ; Loss; profit ;

17. State whether the following statements are true or false:

1. Normally, revenue expenditure involves heavy cash outlay.
2. Revenue Expenditures are recognised as Expenses and Losses in the debit-side of the
Income Statement.
3. The purpose is to establish arithmetical accuracy of the transactions recorded in the
Books of Accounts.
4. An expenditure, the benefit from which can be enjoyed, consumed or used over
multiple accounting periods is referred to as Capital Expenditure.
5. Revenue transactions relate to both current and future accounting periods.

Answer:
Work Book : Financial Accounting

1- 2- 3- 4- 5–
False; True; True; True; False
 Work Book : Financial Accounting

ILLUSTRATIONS:

18. Classify the following transactions between capital and revenue:

(a) A plant constructed for ` 10,50,000.
(b) Profit earned by sale of fixed assets ` 25,000.
(c) Amount received from customers for services rendered ` 2,00,000
(d) Regular repairs and maintenance incurred on old machine ` 24,000.
(e) Annual rates and taxes paid to local authority ` 2,000.

Solution:

S.L. Transaction Explanation

No
(a) Capital Expenditure The plant constructed is a capital asset that is expected to
provide benefits of enduring nature.
(b) Capital Profit It is incurred on disposal of an existing capital asset.
(c) Revenue Receipt It is a receipt arising from regular operations.
(d) Revenue Expenditure It is incurred for maintaining the working capacity of an
existing capital asset.
(e) Revenue Expenditure It is usually an annual outflow i.e. recurring in nature.

19. State whether the following expenditures are capital or revenue in nature?
a. Office redecoration expenses incurred.
b. Materials used for construction of foremen’s office.
c. Purchase of coffee making machine for staff canteen.
d. An extension of railway tracks within the factory premises.

Solution:

a. As it is expected to provide benefit over one accounting period, it is a considered as a

Revenue expenditure.
b. Capital Expenditure as it will result in creation of a capital asset which in turn is
expected to provide benefits of enduring nature.
c. Capital Expenditure because it results in the acquisition of an asset.
d. Capital Expenditure as it is expected to provide benefits of enduring nature.

20. Give a pair of examples of each of the following items when the following
expenditures can be considered as capital expenditure and revenue expenditure:
a. Repairing Charges
b. Wages
 Work Book : Financial Accounting

Solution:

Items Example of Revenue Example of Capital

Expenditure Expenditure
(a) Repairin Regular repairs incurred Major repairing charges incurred
g for maintenance of an for overhaul/ renovation of old
Charges existing capital assets.
asset.
(b) Wages Wages paid to workers engaged Wages paid for installation of a new
in regular operations plant, machinery, equipment etc.
(viz.
manufacturing / production /
service rendering).

ACCOUNTING FOR DEPRECIATION

21. Multiple choice

questions: Choose the

correct alternative:

1. Which of the following is/ are not objective(s) of providing depreciation?

(a) Determination of the true operating result
(b) For maintenance of capital
(c) Repayment of external liabilities
(d) For disclosure of the true value of the asset

2. Which of the following is/ are factor(s) that is considered for measurement of depreciation?
(a) Cost of asset
(b) Life of asset
(c) Scrap value
(d) All of the above

3. Which of the following is/ are feature(s) of depreciation?

(a) It gradual and continuous decline in the value of fixed asset.
(b) It is a charge against profit.
(c) It is a permanent decline.
(d) All of the above

4. Which of the following is an internal factor that causes the depreciation?

(a) Passage of time
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(b) Expiry of legal life of asset
(c) Depletion
(d) All of the above
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5. method of ascertaining depreciation results in constant charge over the

useful life of the asset.
(a) Sinking Fund
(b) Annuity
(c) Reducing Balance
(d) Stra

ight Line Answer:

1 (c); 2 (d); 3(d); 4 (c); 5 (d)

22. Match the following:

Column A Column B
1 Obsolescence A ‘Usage base’ approach of measuring depreciation
.
2 Sinking Fund Method B A sudden loss in the value of an asset
.
3 Mileage Method C Deterioration in the value of an intangible fixed assets
.
4 Sum of Years’ Digit Method D ‘Source of Fund’ approach of measuring depreciation
.
5 Amortisation E ‘Time base’ approach of measuring depreciation
.

Answer:

1- B; 2- D; 3- A; 4 - E; 5- C.

23. Fill in the blanks:

1. refers a state of deterioration of a building or property due to old age or long use.
2. Under the method of accounting, original cost of fixed asset is directly
reflected in Balance Sheet.
3. Under method of ascertaining depreciation, lower amount of profit is set
aside as depreciation, and a higher amount of fund is created for replacement of
asset.
4. is specially suited to mines, oil wells, quarries, sandpits and similar assets
of a wasting character.
5. Under the Asset-charge Method of accounting, Fixed Asset Account appears in the
Balance Sheet at .

Answer:

1- 2- Asset- 3-Sinking 4 –Depletion; 5 – WDV

Dilapidation; provision; Fund;
 Work Book : Financial Accounting

24. State whether the following statements are true or false:

1. Depreciation accounting is a system of accounting which aims to distribute the cost
or other basic value of tangible capital assets, less salvage value, if any over the
estimated useful life of the asset(s) in a systematic and rational manner.
2. All fixed assets, except land are subject to depreciation.
3. Depreciation Account is by nature a real account.
4. Asset-provision method of accounting provides more information relating to an asset
than Asset- charge method of accounting.
5. Depreciation has to be charged to comply with the relevant provisions of the
Companies Act and Income Tax Act.

Answer:

1- 2- 3- 4- 5–
True; True; False; True; True

ILLUSTRATIONS:

25. Khalsa Transport Co. of Ludhiana purchased 4 Trucks at ` 12,50,000 each on July 1, 2015. On
Jan. 1, 2018 one of the trucks met with a massive accident and as a result was completely
destroyed. Insurance
company paid ` 7,00,000 in full and final settlement of the claim. On the same day the company
purchased a used truck for ` 8,70,000 and spent ` 1,30,000 on its overhauling. Prepare Trucks
Account for
three years ending on March 31, 2018 given that the company writes off depreciation @ 20% p.a.
on straight line basis.

Solution:

Books of Khalsa Transport Co.

Ledger
Dr. Trucks A/c Cr.
Dat Particulars ` Date Particulars `
e
1.7. To Bank A/c 50,00,0 31.3.1 By Depreciation A/c 7,50,00
15 [Purchase of 4 00 6 [` 50,00,000 X 20% X 0
9/12]
trucks:
12,50,000 X 4]
31.3.1 By Balance c/d 42,50,0
6 00
50,00,0 50,00,0
00 00
1.4. To Balance b/d 42,50,0 31.3.1 By Depreciation A/c 10,00,0
16 00 7 [` 50,00,000 X 20%] 00
31.3.1 By Balance c/d 32,50,0
Work Book : Financial Accounting
7 00
42,50,0 42,50,0
00 00
1.4. To Balance b/d 32,50,0 1.1.18 By Depreciation A/c [WN: 1,87,50
17 00 1] 0
1.1. Gain on Truck A/c [WN: 1] 75,000 1.1.18 By Bank A/c 7,00,00
18 0
 Work Book : Financial Accounting
1.1. To Bank A/c 10,00,0 [Insurance claim
18 [Purchase & 00 received]
Overhaul:
870,000 + 30,000]
31.3.1 By Depreciation A/c [WN: 8,00,00
8 2] 0
31.3.1 By Balance c/f 26,37,5
8 00
43,25,0 43,25,0
00 00

WORKINGS:

1. Gain on Truck due to Accident

`
Original cost on 1.7.15 12,50,0
00
Less: Depreciation from 1.7.15 to 31.3.17 i.e. 1 yr. 9 months 4,37,50
[` 12,50,000 X 20% X 21/12] 0
8,12,50
∴ WDV on 1.4.17
0
Less: Depreciation @ 20% p.a. for 9 months [` 12,50,000 X 20% X 9/12] 1,87,50
0
6,25,00
∴ WDV on 1.1.18
0
Insurance Claim Received 7,00,00
0
75,000
∴ Gain on Truck

2. Depreciation for 2017-18

Depreciation on 31.3.2018 is to be calculated on trucks existing on 31.3.2018, as follows:
`
On 3 trucks purchased on 1.7.15 [` 12,50,000 X 20% X 3] 7,50,00
0
On the truck purchased on 1.1.18 [` 10,00,000 X 20% X 3/12] 50,000
8,00,00
∴ Depreciation for 2017-18
0

26. Digjam Textiles Ltd. provides depreciation on Equipments at 20% p.a. on reducing balances.
On Apr. 1, 2017, the balance of the Equipments Account was ` 36,00,000. It was discovered
in 2017-2018 that:
▪ ` 1,80,000 being repairs to Machinery incurred on June 30, 2015 had been capitalised.

▪ ` 3,60,000 being the cost of a generator purchased on Oct. 1, 2014 has been written-off to

Maintenance Account.

The company Directors wants to rectify the mistakes while finalizing the accounts for the
Work Book : Financial Accounting
year ended Mar. 31, 2018. A plant that cost ` 2,88,000 on Sept. 30, 2016 was scrapped and
replaced with a more sophisticated one on Dec. 31, 2017 by spending ` 4,32,000. Scrap
realised ` 72,000. Prepare the
Equipments Account as it would appear on Mar. 31, 2018 after providing depreciation for the year.
 Work Book : Financial Accounting

Solution:

Books of Digjam Textiles Ltd.

Dr. Equipments A/c Cr.
Date Particulars ` Date Particulars `
1.4.17 To Balance b/f 36,00, 31.12. By Bank A/c (Sale of Plant) 72,000
000 17
31.12. To Bank A/c 4,32, 31.12. By Depreciation A/c (on Plant sold) 38,880
17 000 17
(New plant 31.12. By Loss on Sale of Plant A/c 1,48,32
purchased) 17 [WN:1] 0
31.3.1 To P/L A/c [Prior 2,07, 31.3.1 By P/L A/c [Prior period items - 1,22,40
8 period items - 360 8 [Rectification for repairs – WN: 2]] 0
Rectification of
maintenance – WN:
3]
31.3.1 By Depreciation A/c [WN: 4] 7,06,75
8 2
31.3.1 By Balance c/f 31,51,0
8 08
42,39, 42,39,3
360 60

WORKINGS:

1. Sale of Plant on 31.12.16

`
Original cost on 30.9.16 288,00
0
Less: Depreciation @ 20% p.a. for 6 months [` 288,000 X 20% X 6/12] 28,800
259,20
∴ WDV on 1.4.17
0
Less: Depreciation @ 20% p.a. for 9 months [` 259,200 X 20% X 9/12] 38,880
220,32
∴ WDV on 31.12.17
0
Scrap realised 72,000
148,32
∴ Loss on sale: (` 220,320 – ` 72,000)
0

2. Prior period adjustment for repairs

Rectification entry
Repairs A/c Dr. 180,000
To Plant & Machinery A/c 180,000

Repair costs were incurred on June 30, 2015, but depreciation was wrongly provided till Mar. 31,
2017
i.e. for 21 months. [Since, the directors want to rectify the error on Mar. 31, 2018,
depreciation was not incorrectly calculated for 2017-18.
Work Book : Financial Accounting
∴ excess depreciation to be written-back is calculated as under:
`
[` 180,000 X 20% X 9/12] 27,000
▪ For 2015-16
[(` 180,000 – 27,000) X 20%] 30,600
▪ For 2016-17
57,600
Work Book : Financial Accounting

Journal entry for writing back excess depreciation:

Plant & Machinery A/c Dr. 57,600
To Depreciation A/c 57,600

Combining the above two rectification entries, we get:

P/L A/c (Prior period item) Dr. 122,400
To Plant & Machinery A/c [` 180,000 – 57,600] 122,400

3. Prior period adjustment of maintenance

Rectification entry
Plant & Machinery A/c Dr. 3,60,000
To Maintenance A/c 3,60,000

The Generator was purchased on Oct. 1, 2014 but depreciation was not provided till Mar. 31,
2017
i.e. for 30 months.

[Since, the directors want to rectify the error on Mar. 31, 2011, depreciation for 2017-18 will be
correctly provided on 31.3.18.]

∴ additional depreciation to be provided is calculated as under:

`
[` 360,000 X 20% X 6/12] 36,000
▪ For 2014-15
[(` 360,000 – ` 36,000) X 20%] 64,800
▪ For 2015-16
[(` 324,000 – ` 64,800) X 20%] 51,840
▪ For 2016-17
152,640

Journal entry for providing additional depreciation

Depreciation A/c Dr. 152,640
To Plant & Machinery A/c 152,640

Combining the above two rectification entries, we get:

Plant & Machinery A/c Dr. 207,360
To P/L (Prior period item ) [` 360,000 – ` 152,640] 207,360

4. Annual Depreciation for 2017-18

Depreciation on 31.3.18 is to be calculated on machines existing on 31.3.18, as follows:
`
On existing Plant & Machinery [` 34,25,760 (WN: 5) X 20%] 685,152
On machine acquired on 31.12.17 [` 4,32,000 X 20% X 3/12] 21,600
Work Book : Financial Accounting
706,752
∴ Depreciation for 2017-18
 Work Book : Financial Accounting

5. Existing Plant & Machinery

= Opening WDV – Prior period adjustment for repairs + Prior period adjustment for
maintenance – WDV of plant sold
= ` 36,00,000 – ` 122,400 + ` 207,360 – ` 259,200
= ` 34,25,760

27. The following information relates to Z

Ltd.: Opening Balance Closing Balance
(`) (`)
Fixed Assets 4,00,000 5,50,000
Accumulated Depreciation 80,000 1,35,000

Additional information:
A part of a machine costing ` 60,000 has been sold for ` 30,000, on which accumulated
depreciation was ` 15,000.
You are required to prepare the Fixed Assets Account, Accumulated Depreciation Account and Asset
Disposal Account.

Solution:

Books of Z Ltd.

Dr. Fixed Assets A/c Cr.

Da Particulars ` Da Particulars `
te te
To Balance b/f 4,00, By Asset Disposal A/c 60,000
000 [Cost of machinery sold transferred]
To Bank A/c [Fixed 2,10, By Balance c/f 5,50,00
Assets 000 0
acquired- B/Fig]
6,10, 6,10,00
000 0

Dr. Accumulated Depreciation A/c Cr.

Da Particulars ` Da Particulars `
te te
To Asset Disposal A/c 15,00 By Balance b/f 80,00
[Accumulated depreciation on 0 0
machinery sold –transferred]
To Balance c/f 1,35,0 By Depreciation A/c 70,00
00 [Annual Depreciation –B/Fig] 0
1,50,0 1,50,0
00 00
 Work Book : Financial Accounting

Dr. Asset Disposal A/c Cr.

Da Particulars ` Dat Particulars `
te e
To Fixed Assets A/c 60,0 By Accumulated Depreciation A/c 15,0
(Cost of machine sold) 00 [Accumulated Depreciation on 00
machinery sold]

By Bank A/c (sale proceeds) 30,0

00
By Loss on sale of machine A/c [WN: 1] 15,0
00
60,0 60,0
00 00

WORKINGS:

1. Sale of machine
`
Cost of machine sold 60,0
00
Less: Accumulated Depreciation on machine sold 15,0
00
45,0
∴WDV of machine sold
00

Sale Proceeds 30,0

00

15,0
∴ Loss on sale of machine (` 30,000 – ` 15,000)
00

28. On Dec. 31, 2018 two machineries which were purchased on 01.10.2015 costing ` 50,000
and ` 20,000 respectively had to be discarded and replaced by two new machineries costing
` 50,000 and ` 25,000 respectively.
One of the discarded machineries was sold for ` 20,000 and other for ` 10,000. The balance
of Machinery Account on April 1, 2018 was ` 3,00,000 against which the depreciation
provision stood at ` 1,50,000. Depreciation was provided @10% on Reducing Balance
method.
Prepare Machinery Account, Provision for Depreciation Account and Machinery

Disposal Account. Solution:

Books of Digjam Textiles Ltd.

Dr. Machinery A/c Cr.
Date Particulars ` Date Particulars `
1.4.18 To Balance b/d 3,00,0 31.12.1 By Machinery Disposal A/c 70,000
00 8
Work Book : Financial Accounting
31.12.1 To Bank A/c 75,000 [Cost of machine discarded
8 [Machines purchased – – 50,000 + 20,000]
50,000 + 25,000]

31.03.1 By Balance c/d 3,05,0

9 00
3,75,0 3,75,0
00 00
Work Book : Financial Accounting

Dr. Provision for Depreciation A/c Cr.

Date Particulars ` Date Particulars `
1.4.18 To Machinery Disposal A/c 20,175 1.4.1 By Balance b/d 1,50,00
[16,135 + 4,040] 8 0
31.3.19 To Balance c/d 1,41,3 31.3. By P/L A/c 11,489
14 19
1,61,4 1,61,48
89 9

Dr. Machinery Disposal A/c Cr.

Dat Particulars ` Date Particulars `
e
1.4. To Machinery A/c 70,000 31.12.1 By Provision for Depreciation A/c 1,50,00
18 8 0
[Cost of machine [Depreciation on discarded WN: 1]
discarded –
50,000 + ’’ By Provision for Depreciation A/c 4,040
20,000]
[Depreciation of 9 months – WN:2]
’’ By Bank A/c 30,000
31.3.19 By P/L A/c [B/Fig.] 19,825
70,000 70,000

WORKINGS:

1. Depreciation on two discarded machineries till 31.3.2018

Machinery Machinery Tota
1 2 l
Value of machinery on 1.10.2015 50,000 20,000 70,00
0
Less: Depreciation for 2015-16 @ 10% p.a. for 6 2,500 1,000 3,500
months
47,500 19,000 66,50
0
Less: Depreciation for 2016-17 @ 10% p.a. 4,750 1,900 6,650
42,750 17,100 59,85
0
Less: Depreciation for 2017-18 @ 10% p.a. 4,275 1,710 5,985
38,475 15,390 53,86
∴ WDV on
5
31.3.2018

2. Depreciation on two discarded machineries for 2018-19

`
Book Value of machinery on 1.4.2018 [WN: 1] 53,865
Work Book : Financial Accounting
Less: Depreciation @ 10% p.a. for 9 months 4,040
[53,865 x 10% x 9/12]
49,825
∴ Value of discarded machineries on 31.12.18
 Work Book : Financial Accounting

3. Depreciation on Machinery in use

`
Value of machinery on 1.4.2018 3,00,00
0
Less: Cost of discarded machinery 70,000
2,30,00
0
Less: Provision for depreciation on 1.4.2018 1,50,0
00
Less: Depreciation on discarded machineries on 1.4.2018 16,135 1,33,86
5
96,135
Depreciation @ 10% on ` 96,135 9,614
Add: Depreciation for 3 months on ` 75,000 @ 10% 1,875
11,489
∴ Total Depreciation

RECTIFICATION OF ERRORS

29. Multiple choice

questions: Choose the

correct alternative:

1. Opening entries are passed in:

(a) General Journal
(b) Cash Book
(c) Special Journal
(d) None of the Above

2. Rectification entries are also known as entries.

(a) Opening
(b) Closing
(c) Correction
(d) Adjustment

3. Which account gets debited when Net Loss is transferred from Profit & Loss Account
to Capital Account?
(a) Trading Account
(b) Profit & Loss Account
(c) Capital Account
(d) Net Loss Account
Work Book : Financial Accounting
4. For closing Purchases Account and Wages Account which account is to be debited?
(a) Capital Account
(b) Trading Account
(c) Profit & Loss Account
 Work Book : Financial Accounting
(d) Suspense Account

5. For rectifying a error that is identified before the preparation of Trial Balance
no journal entry is to be passed.
(a) single-sided
(b) double-sided
(c) accounting
(d) math

ematical Answer:

1 2 (c); 3(c) 4 5 (a)

(a); ; (b);

30. Match the following:

Column A Column B
1 Error of Omission A Error involving wrong amount
.
2 Error of Principle B More than one error that set-of effect of each other
.
3 Error of Commission C Entering revenue transaction as capital transaction and vice
. versa
4 Single-sided Error D Suspense Account
.
5 Compensating Error E Transaction forgotten to be entered in books
.

Answer:

1- E; 2- C; 3- A; 4 - D; 5- B.

31. Fill in the blanks:

1. Closing entries are passed for transferring the balances of accounts
2. entries are passed when errors and mistakes are discovered in accounting records.
3. In order to prepare final account, the difference appearing in trail balance, if any, is
to be passed through Account.
4. When Gross Loss is transferred from Trading Account to Profit & Loss Account

Account gets credited.

5. For closing Interest Received, Discount Received and other indirect income accounts
Account is to be credited.

Answer:

1- Nominal; 2-Rectification; 3- 4- 5 – Profit &

Work Book : Financial Accounting
Suspense; Trading; Loss
 Work Book : Financial Accounting

32. State whether the following statements are true or false:

1. The balances of assets, liabilities and owners’ capital and equity accounts are only
considered for such opening entries.
2. When Gross Profit is transferred from Trading to Profit & Loss Account, it is the
Trading Account that gets credited.
3. All the expenses and gains or income related nominal accounts must be closed at the
end of the year.
4. Preparation of Cash Book and Trial Balance happen to be cut-off points in the process
of rectification of errors.
5. Trading Adjustment Account is involved for rectifying errors in nominal accounts after
the final accounts have been drafted.
Answer:

1- 2- 3- 4- 5–
True; False; True; False; False

ILLUSTRATIONS:

33. The following errors were detected in the books of M/s Shiva Traders while preparing the
Trial Balance. You are required to rectify the errors.
a. Freight paid for bringing purchased goods wrongly debited to Machinery Account ` 72,600.
b. Equipments purchased worth ` 8,50,000 wrongly passed through Purchases A/c.
c. Returns Outward book was overcast by ` 54,000.
d. Goods purchased from Rohan worth ` 79,000 has been debited to his account.
e. An amount of rent outstanding ` 13,000 in the previous year, had not been brought forward
as an
opening balance in the current year.
f. Fresh cash introduced by the proprietor of ` 44,000 was not posted in
ledger account. Solution:
Books of M/s Shiva
Traders Journal
Proper
Date Particulars L Dr. (`) Cr. (`)
F
a. Freight A/c Dr. 72,600
To Machinery A/c 72,600
(Being freight paid for bringing purchased goods wrongly
debited to Machinery Account, now rectified)
b. Equipments A/c Dr. 8,50,00
To Purchases A/c 0 8,50,00
(Being purchase of equipments wrongly recorded in 0
Purchases A/c, now rectified)
 Work Book : Financial Accounting
c. Returns Outwards A/c is to be debited by ` 54,000.
d. Rohan A/c is to be credited with ` 158,000.
e. Outstanding Rent is to be credited with ` 13,000.
 Work Book : Financial Accounting
f. Capital A/c is to be credited by ` 44,000.

34. The Trial Balance of Zeeshan Co. was drafted by its accountant with its ledger balances.
However, he could not tally the Trial Balance and the difference in books was placed in a
Suspense Account for drafting the financial statements. Subsequently the internal auditor
identified the following mistakes:
a. A machinery sold on credit to M/s Alam for ` 2,50,000 had been recorded in the Sales Day
Book.
b. An amount of ` 62,000 due from Belal had been erroneously omitted from the schedule of
sundry
debtors.
c. Goods sold to Zaman, a customer, for ` 15,000 had been posted to the credit of his account
as `
51,000.
d. A dishonoured cheque for ` 50,000 received from a customer and returned by the
Bank had been credited to the Bank Account and debited to Sundry Creditors
Account.

Show the necessary Entries in the Journal proper with suitable narration to rectify these
errors. Also show how the non-detection of these errors affected last year's Profit and Loss
Account.

Solution:

Books of Zeeshan Co.

Journal Proper
Date Particulars L Dr. (`) Cr. (`)
F
P/L Adjustment A/c Dr. 2,50,0
To Machinery A/c 00 2,50,0
a. (Being machinery sold on credit to M/s Alam wrongly recorded 00
in the Sales Day Book, now rectified)

b. Sundry Debtors A/c Dr. 62,000

To Suspense A/c 62,000
(Being ` 62,000 due from Belal had been erroneously
omitted from the schedule of sundry debtors, now
rectified)
c. Zaman A/c Dr. 66,000
To Suspense A/c 66,000
(Being goods sold to Zaman for ` 15,000, wrongly posted to
the credit of his account as ` 51,000, now rectified)
d. Sundry Debtors A/c Dr. 50,000
To Sundry Creditors A/c 50,000
(Being a dishonoured cheque for ` 50,000 received from a
 Work Book : Financial Accounting
customer and returned by the Bank credited to the Bank
Account
but wrongly debited to Sundry Creditors Account, now
rectified)
 Work Book : Financial Accounting

Statement showing effect on last year's profit due to non detection of errors
Effect on Profit
Particulars Increase Decrease
(`) (`)
a Sale of machinery incorrectly recorded 2,50,000
b Omission of customer from schedule of debtors Nil Nil
c Incorrect recording of sale of goods Nil Nil
d Incorrect recording of cheque dishonoured in Sundry Creditors Nil Nil
Account
2,50,000

∴ Net increase in last year's Profit = ` 2,50,000

35. The total of debit side of the Trial Balance of Sanjay Ltd. as at 31.3.2019 is ` 2,92,000 and
that of the credit side is ` 1,80,800. After detailed checking, the following errors were
identified:
Correct Figures Figures as it appears
Name of Accounts
(as it should be) in the Trial Balance
Opening stock 12,000 8,000
Salaries 28,800 50,400
Accounts Receivable 83,200 1,26,400
Trade Creditors 64,800 14,400
You are required to ascertain the correct total of the Trial

Balance. Solution:

Statement showing calculation of correct total of Trial Balance

Particulars Dr. (`) Cr. (`)
Total of Trial Balance (as given) 2,92,000 1,80,800
Add: Under-statement of Opening Stock 4,000
Less: Over-statement of Salaries (21,600)
Less: Over-statement of Accounts Receivable (43,200)
Add: Under-statement of Trade Creditors 50,400
2,31,200 2,31,200

36. The Trial Balance of Kohli Bros. had agreed but the auditor identified some mistakes after
the preparation of the Final Accounts. These mistakes are:
a. Purchase Day Book was overcast by ` 82,000.
b. ` 34,000 received in respect of a Book Debt had been credited to Sales Account.
c. Rent paid ` 64,000 had been omitted to be recorded in the books.
d. Adjustment entry for prepaid wages was not passed for an amount of ` 12,000.
e. ` 26,000 paid for purchase of stationery has been debited to Purchases Account. However,
 Work Book : Financial Accounting
such
stationeries were consumed in the business.
Work Book : Financial Accounting
What would be the effect of the above errors on the Gross Profit and Net Profit of the concern.

Solution:

Effect of Errors on Gross profit & Net Profit

Sl Errors Impact on Profit Effect on Profit
. (`)
N Gross Net Profit Gross Net
o. Profit Profit Profit
a. Purchase Day Book was over-cast Understate Understat ( 82,000) (82,000)
d ed
b. Amount received in respect of Book Debt Overstate Overstate 34,000 34,000
had been credited to Sales Account d d
c. Rent had been omitted to be recorded in No effect Overstate -- 64,000
the books. d
d. No Adjustment entry was passed for an Understate Understat (12,000) (12,000)
amount relating to Advance Salary. d ed
e. Purchase of Stationery has been debited Understate No effect (26,000)
to d
Purchases Account.
(86,000) 4,0
∴Net Effect
00

Therefore, the above errors would have resulted in understatement of Gross Profit by ` 86,000 and
overstatement of Net Profit by ` 4,000 respectively.
 Work Book : Financial Accounting
Study Note – 2
ACCOUNTING FOR SPECIAL
TRANSACTIONS

Learning Objective: To be able to gather a comprehensive knowledge on Bills of

Exchange, Consignment, Joint-venture and Insurance Claim and the relevant
terms and accounting procedures of these special transactions.

BILL OF EXCHANGE

1. Multiple choice

questions: Choose the

correct alternative:

1. Bill of exchange is covered by Negotiable Instrument Act:

( 1881
a
)
( 1818
b
)
( 1881
c
)
( None of
d these
)

2. Features of bill of exchange:

(a) It is an instrument in writing
(b) It contains an unconditional order to pay
(c) The parties must be certain
(d) All of these

3. Bill of Exchange involves:

(a) Drawer
(b) Drawee
(c) Payee
(d) All of these
Work Book : Financial Accounting
4. Types of Bill of Exchange:
(a) On demand or At sight
(b) After date
(c) After sight
(d) All of these

5. Noting is
(a) Dishonour of bill
(b) Authentication of dishonour
(c) Renewal of bill
(d) None of these
 Work Book : Financial Accounting

Answer:

1. (a)
2. (d)
3. (d)
4. (d)
5. (b)

2. Fill in the blanks:

1. A bill must be stamped as per Act
2. Bill of exchange must be stamped except bill
3. Drawer is the person who the bill
4. Payee is the person to whom the is payable
5. Accommodation bill is also known as ………….

Answer:

1. Indian Stamp
2. demand
3. draws
4. bill money
5. kite bill

3. State whether the following statements are true or false:

1. Bill of exchange is a negotiable instrument.
2. Cheque is a bill of exchange.
3. ‘Days of grace’ is not applicable for on demand bill.
4. If the maturity day of a bill turns out as a public holiday then the due date shall be
the preceding working day.
5. ‘Days of grace’ is fully applicable for a cheque.

Answer:

1. True
2. True
3. True
4. True
5. False

4. Match the following:

Column - A Column - B
1 Drawer A Debtor
2 Dishonour of bill B Dishonour
3 Retiring of bill C Nonpayment of bill
Work Book : Financial Accounting
4 Drawee D Rebate
5 Noting E Creditor
 Work Book : Financial Accounting

Answer:

1. E
2. C
3. D
4. A
5. B

PROBLEMS AND SOLUTIONS

5. On 1.1.2018; X sold goods to Y valuing ` 30,[Link] 4.1.2018 X received from Y 10000 and
drew a bill payable 3 months after date for the balance. On the same time X endroses the
accepted bill to Z for full settlement of a debt of ` 21000, on the due date the bill was
dishonoured and y having become insolvent, met on 12.4.2018, 80% of his acceptance.

Solution:

In the books of X
Journal
Date Particulars L Dr. (`) Cr. (`)
F
1.1.201 Y A/C Dr. 3000 3000
8 To Sales A/c 0 0
(Being the goods sold to Y on Credit)
4.1.201 Cash A/c Dr. 1000 1000
8 To Y A/C 0 0
(Being the part payment of ` 10000 received from Y)
4.1.18 Bills Receivable A/c Dr. 2000 2000
To Y A/C 0 0
(Being a bill drawn on Rahim for 3 months for the amount
due from him)

4.1.18 Z A/c Dr. 2100

To Bills Receivable A/c 0 200
To Discount Received A/c 00
(Being the bill endrosed in favour of Z in full settlement of a 10
debt 00
of ` 21000)
7.4.201 Y A/C Dr. 200
8 Discount Received A/c Dr. 00
To Z A/c 10
(Being the bill previously endrosed in favour of , now 00
2100
dishonoured) 0
Work Book : Financial Accounting
12.4.20 Bank A/c Dr. 160
18 Bad Debt A/c Dr. 00
To Y A/c 40 2000
00 0
(Being 80% of the amount due from Y , received)

In the books of Y
 Work Book : Financial Accounting
Journal
Date Particulars L Dr. Cr.
F (`) (`)
1.1.18 Purchase A/c Dr. 30000 30000
To X A/c
(Being the Goods Purchased from Ram on Credit)
4.1.18 X A/c Dr. 10000 10000
To Cash A/c
(Being the part payment of ` 10000 made to X)
4.1.18 X A/C Dr. 20000 20000
To Bills Payable A/c
(Being the acceptance of a bill for 3 months for the
amount due to him)
7.4.18 Bills payable A/C Dr. 20000 20000
To X A/c
(Being the bill dishonoured at maturity)
12.4.18 X A/c Dr. 20000
To Bank A/c 160
To Deficiency A/c 00
(Being the payment of 80% of dues) 40
00

6. Pass Journal Entries for the following transaction of X in the books.

1. A renews his acceptance for `900 by paying ` 640 (` 40 being for interest) and by
giving a bill for ` 400 for a further period of 2 months.
2. X’s acceptance to c for 5000 was discharge by a cash payment of `. 3000
and an acceptance of a new bill for the balance plus ` 20 as interest.
3. D’s acceptance of ` 3000 which had been discounted with the bank for ` 1700
has been returned by the bank unpaid. The bank has notified that `30 have been
paid as noting
charges.
4. X’s acceptance to E for ` 6000 is discharged by Z’s acceptance to X for a similar amount.
5. Y’s retires a bill for ` 3000 drawn on him by X for ` 9 discount

Solution:
In the books of X
Journal
Dat Particulars L Dr. Cr. (`)
e F (`)
1 A A/c 900 900
To Bills Receivable A/c
(Being the bill previously drawn on A , now cancelled)
A A/c 40 40
To interest A/c
(Being the interest charged to A for renewing the bill for a
further period of 2 months)
Work Book : Financial Accounting
Cash A/c 640 640
To A
A/c
(Being part payment received from A along with interest)
 Work Book : Financial Accounting

Bills Receivable 300 300

A/c To A A/c
(Being a fresh bill drawn on A for the balance amount)
2 Bills Payable 5000 5000
A/c To C A/c
(Being the bill Previously drawn on us now cancelled)
C A/c 3000 3000
To Cash A/c
(Being part payment made to c)

Interest 20 20
A/c To C
A/c
(Being the interest payable for renewing the bill)
C A/c 2020 2020
To Bills payable A/c
(Being the acceptance of a fresh bill from C for the balance
amount plus interest)
3 D A/c 3030 3030
To Bank A/c
(Being the bill previously discounted, now dishonourd, noting
charges `30 paid by bank charged too)
4 Bills payable 6000 6000
A/c To Bills
Receivable
(Being our Acceptance discharged by Z’s Acceptance for the
similar amount)
5 Bank A/c 2991
Discount Allowed A/c 9
To Bills Receivable 3000
A/c
(Being the bill previously drawn on Y , now retired, discount
allowed to him `9)

7. A sold goods to B for ` 20000 on 1.1.2018. On the same time A drew upon B a bill for the
amount of bill
at 2 months and B accepted the same. On 4th January 2018 A discounted the bill at his bank
@12%
p.a. on the due date B told A that he was not in a position to pay the full amount and
requested A to accept `10000 in cash and to draw a fresh bill for the remaining amount for 2
months together with interest at 15% p.a. A agreed the second bill was duly met. Give
Entries to record the above
transactions in the

book of A. Solution:
 Work Book : Financial Accounting
In the
books
of A
Journal
Date Particulars L Dr. Cr.
F (`) (`)
1.1.1 B A/c 200 200
8 To Sales A/c 00 00
(Being goods sold to B on credit)
 Work Book : Financial Accounting
1.1.1 Bills Receivable 20000 20000
8 A/c To B A/c
(Being a bill drawn on b for 2 months)
4.1.1 Bank A/c 19600
8 Discount On Bills A/c 400
To Bills Receivable 20000
A/c
(Being the bill discounted with the banker @12 p.a.)
4.3.1 B A/c 20000 20000
8 To Bank A/c
(Being the bill previously discounted with the banker, now
cancelled for renewal)
4.3.1 B A/c 250 250
8 To Interest A/c
(Being the interest charged to Ram on account of the bill to
be drawn @15 % p.a. for 2 months)
4.3.1 Bank A/c 100
8 Bills Receivable 00
A/c To B A/c 102 20250
50
(Being part payment of `10000 received and a fresh bill
drawn on
B for the balance plus interest)

8. X bought goods from Y on 15th January, 2018 for ` 25000 for which he accepted a bill for 3
months drawn on him for ` 20000 and paid ` 5000 by cheque. On 21.112018 Y discounted
the bill @15% p.a. X being unable to meet the bill at maturity requested Y to accept `10000
in cash and to draw another
bill for 3 months for the balance sum plus interest at 16% p.a. and Y agreed. But before the
maturity of the second bill, A became insolvent and a dividend of 50 paisa in the rupee was
realized from his estate on 5th November 2018.

Pass the necessary journal entries.

Solution:
In the books of Y
Journal
Date Particulars L Dr. Cr. (`)
F (`)
15.1.18 X A/c 250 25000
To Sales A/c 00
(Being goods sold on credit)
15.1.18 Bank A/c 50
Bills Receivable 00
A/c To X A/c 200 25000
00
(Being a cheque of ` 5000 and a bill of ` 20000 for 3
months
 Work Book : Financial Accounting
received from X)
21.1.18 Bank A/c 19285
Discount ON Bills A/c 715
To Bills Receivable 20000
A/c
(Being the bill discounted with the banker @15% p.a.)
 Work Book : Financial Accounting
18.4.18 X A/c 20000
To Bank A/c 20000
(Being the bill dishonoured at maturity)
18.4.18 X A/c 400
To Interest A/c 400
(Being interest due on ` 1000 for 3 months)
18.4.18 Bank A/c 100
Bills Receivable 00
A/c To X A/c 104 20400
00
(Being a part payment of ` 10000 accepted and a fresh bill
drawn on for the balance plus interest)
21.7.18 X A/c 10400
To Bills Receivable A/c 10400
(Being the bill dishonoured at maturity)
5.11.18 Bank A/c 52
Bad Debt A/c 00
To X A/c 52 10400
00
(Being the final dividend received from the estate of a @
50
paisa in a rupee)
Working Note: Discount = (20000×15÷100×87÷365)
9. On 1st July, 2018 A drew a bill for ` 800000 for 3 months on B for mutual accommodation. He
accepts the bill of exchange. He purchased goods worth ` from C on the same date. A
endrosed B’s
acceptance to C in full settlement. On 1st September 2018 C purchased goods worth 90000
from B. C endrosed the bill of exchange received from A to B and paid 9000 in full settlement
of the amount due to B.
On 1st October 2018 B purchased Goods worth ` 100000 from A. He paid the amount due to A
by
Cheque.
Pass necessary journal entries in the books of B.

Solution:
In the books of B
Journal
Date Particulars L Dr. Cr.
F (`) (`)
1.7. A A/c 80000
18 To Bills payable A/c 80000
(Being the acceptance of a bill From A For
mutual accommodation)

1.9. C A/c 90000

18 To sales A/c 90000
(Being the goods sold on credit)
 Work Book : Financial Accounting
1.9. Bills Receivable A/c 800
18 Cash A/c 00
Discount Allowed 90
00
A/c To C A/c 90000
10
(Being a bill of ` 80000 and cash ` 9000 from c in full
00
settlement)
 Work Book : Financial Accounting
1.9.1 Bills payable A/c 80000
8 To Bills Receivable A/c 80000
(Being the mutual indebtedness cancelled)
1.10.1 Purchase A/c 100000
8 To A A/c 10000
(Being goods purchased on credit from A) 0
1.10.1 A A/c (100000-80000) 20000
8 To Bank A/c 20000
(Being the amount due to paid off)

10. Mr. P.C. Nag draws a three months bill of exchange for ` 15000 on his debtors Sri Pronab Ghosh,
st th
who accepted it on 1 January, 1995. P.C. Nag discounts the bill on 4 January with his
bank, the discount rate being 10% p.a. On the due date the bill was dishonoured by Pranab
Ghosh, the noting charge being `. 50.
st
On 1 April, 1995 Pranab Ghosh makes an offer to P.C. Nag to pay him cash ` 5000 on
account and to settle the balance by agreeing to accept one bill of exchange for `6000 at one
moth and the
other for the balance for 3 months, the latter including interest @12% p.a. for both the bills.
P .C.
Nag accepts the arrangements. The first bill met on due date but before maturity of the
second bill Pranab Ghosh became insolvent and a dividend of `50 piese in the rupee is
th
realized from his estate on 4 July, 1995.
Show the necessary journal entries in the books of P.C. Nag and Pranab Ghosh with narrations.

Solution:
In the Books of Mr P.C. Nag
Journal Entries
Date Particulars L Dr. Cr.
F (`) (`)
1.1. Bills receivable A/C Dr. 150
95 To Pranab Ghosh A/C 00 1500
(Being a three months bill drawn on Pranab Ghosh and accepted 0
by him)

1.4 Bank A/C Dr. 1462

Discount on bill A/C (15000x10%x3/12) Dr. 5
To Bills Receivable A/C 375
(Being the above bill discounted @10% p.a. 3 months ahead of 1500
maturity ) 0
1.4 Pranab Ghosh A/C Dr. 150
To Bank A/C 50 1505
(Being Pranab Ghosh’s bill discounted but Dishonoured 0
on maturity, noting charges being `50)
 Work Book : Financial Accounting
1.4. Cash A/C Dr. 50
To Pranab Ghosh A/C 00 5000
(Being cash received from Pranab Ghosh in partial settlement of
dues from him)
 Work Book : Financial Accounting
1.4 Pranab Ghosh A/C Dr. 1
To Interest A/C 8
0
(Interest receivable from Pranab Ghosh @12% p.a.)
180

1.4 Bills receivable A/C (10000+50+180) Dr. 102

To Pranab Ghosh A/C 30
(Being new bill drawn and accepted by ghosh) 1023
0
4.5 Bank A/C Dr. 60
To Bills receivable A/C 00
(Being the first one of the renewed bill’s dishonoured on maturity) 6000

4.7 Pranab Ghosh A/C Dr. 42

To Bills receivable A/C 30
(Being the second one of renewed bills dishonoured on maturity) 4320

4.7 Bank A/C Dr. 21

Bed Debt A/C Dr. 15
To Pranab Ghosh A/C 21
(Being 50%of the dues from Pranab Ghosh finally received and 15
the balance treated as bed Debt)
4230

In the Books of Pranab

Ghosh Journal Entries
Date Particulars L Dr. Cr.
F (`) (`)
1.1. P.C. Nag A/C Dr. 1500
95 To Bills Payable A/C 0 15000
(Being bills accepted for P.C Nag)
1.4 Bills Payable A/C Dr. 1500
Noting charge A/C Dr. 0
To P.C. nag A/C 50
(Being the bill not met at maturity and noting due )
15050
1.4 Interest A/C Dr. 180
To P.C. Nag A/C 180
(Being Interest payable @12%)
1.4. P.C. Nag A/C Dr. 5000
To Cash A/C 5000
(Being cash paid in partial settlement of dues to P.C. nag)
1.4 P.C. Nag A/C Dr. 6000
 Work Book : Financial Accounting
To Bills Payable A/C
(Being new bill Accepted on renewal of dishonoured bill) 60
00
P.C. Nag A/C Dr. 1023
To Bills Payable A/C 0 102
(Being new bill accepted on renewal of dishonoured bill) 30
1.4
4.5 Bills payable Dr. 6000
A/C To Bank 6000
A/C
(Being own accepted honoured at
maturity)
 Work Book : Financial Accounting
4.7 Bills payable A/C Dr. 4230
To P.C. Nag A/C 43
(Being own acceptance not met at maturity) 20
4.7 P.C Nag A/C Dr. 4320
To Bank A/C 21
To Deficiency A/C 15
(Being 50% of dues paid ) 21
15

Working:
Interest on ` 6000 @12% p.a. for one month 60
Interest on ` 4000 @ 12% p.a. for 3 months 120
Total 180
Due to P.C. Nag 15000+50+180 15230 (-) cash and amount of
st 4230
1
bill (5000+6000) 11000
Amount of 2nd bill

11. Goutam and Karun enter into an accommodation arrangement where under the proceeds are
to be shared as 2/3 and 1/3 respectively. Goutam draws a bill for `45000 on Karun on
1.4.2005 at 3
months. Goutam gets it discounted for `44600 and on 5.4.05, remits Karun’s share to him. On
due
date, Karun pays the bill, though Goutam fails to remit his share. On 18.7.05, Goutam accepts a
bill for
`63000 drawn on him by Karun at 3 months, which Karun discounted on 19.7.05 for `61650 and
remits
`11100 to Goutam. Before the maturity of the second bill Goutam becomes insolvent and only
40%
was realized from his estate on 20.10.05.

Pass the necessary journal entries in the books of

Goutam. Solution:

In the books of
Goutam Journal
Entries
Dat Particulars L Dr. Cr.
e F (`) (`)
 Work Book : Financial Accounting
1.4. Bills Receivable A/C Dr. 450
05 To Karun A/C 00 4500
(Being a 3 months bill drawn on Karun and accepted by him ) 0

Bank A/C Dr. Discount on Bill 4460

A/C Dr. 0
To Bills Receivable A/C 400
(Being the acceptance discounted) 4500
0
 Work Book : Financial Accounting
5.4. Karun A/C (45000*1/3) Dr. 1500
05 To Bank A/C (44600*1/3) 0 1486
To Discount on Bill (400*1/3) 7
(Being 1/3 rd of the proceeds remitted to Karun) 133

18.7 Karun A/C Dr. 6300

To Bills Payable A/C 0 6300
(Being a 3 months bill accepted for Karun) 0
19.7 Bank A/C Dr. Discount A/C (working 1110
note 1) Dr. 0
To Karun A/C 900
(Being 2/3 rd of the proceeds of the new accepted received) 1200
0
20.1 Bills Payable A/C Dr. To Karun A/C 6300
0 (Being own acceptance not met at maturity) 0 6300
0
Karun A/C (working note 2) Dr. 4200
To Bank A/C (40%) 0 168
To Deficiency A/C (60%) 00
(Being final dividend paid @40% of due to Karun) 252
00

Working Note-1
Proceeds of new acceptance in favour of Karun and discounted by him `
Proceeds of own acceptance (18.7.05) discounted by 61,6
Karun (-) Payment by Karun of his acceptance 50
45,0
00
16,6
50
2/3 of 16650= 11100. Discount shared = 2/3 of (63000-61650) = 900

Working note-2:

Due to karun on the eve of own insolvency

Dr. Karun Account Cr.
Dat Particulars ` Date Particulars `
e
5.4 To Bank A/C 14867 1.4 By Bills Receivable A/C 45000
5.4 To Discount on Bill A/C 133 19.7 By Bank A/C 11100
To
18. Bills Payable A/C 63000 19.7 By Discount A/C 900
7
20. To Balance c/d 42000 20.1 By Bills Payable A/C 63000
10 0
12000 12000
0 0
 Work Book : Financial Accounting
CONSIGNMENT

12. Multiple choice

questions: Choose the

correct alternative:

1. In consignment business, the person who sends goods to its agents is referred to as
.
 Work Book : Financial Accounting
(a) Borrower
(b) Consignee
(c) Consignor
(d) Drawer

2. Which of the following is/ are feature(s) of consignment form of business?

(a) It is a sales enhancement technique.
(b) The ownership of the goods that are lies with the consignor till they are sold.
(c) Revenue from consignment business is recognised by the consignor on sale of the
goods sent by the consignee.
(d) All of the above.

3. Which of the following is true in respect of the proforma invoice?

(a) It is a document sent by the consignor to the consignee.
(b) Only the details of the goods returned are recorded in this document.
(c) It acts as an evidence of the remittance of money on consignment basis.
(d) None of the above

4. Del-credere commission is allowed by the consignor to the consignee for:

(a) making cash sales
(b) making credit sales
(c) bearing the risk attached to credit sale of the goods
(d) none of the above

5. Commission is due to the consignee from the consignor because of rendering of the
regular activities of the consignment business is referred to as commission.
(a) Del credere
(b) Special
(c) Ordinary
(d) Over

riding Answer:

1 (c); 2 3(a) 4 5 (c)

(d); ; (c);

13. Match the following:

Column A Column B
1 Consignor A Memorandum record
.
2 Consignee B Principal
.
3 Proforma invoice C Post-sales document
.
 Work Book : Financial Accounting
4 Non-recurring expenditures D Unloading charges, Dock charges, Clearing charges
. etc.
5 Account Sales E Agent
.

Answer:
 Work Book : Financial Accounting
1- 2- 3- 4- 5-
B; E; A; D; C.

14. Fill in the blanks:

1. When the consignor sends the goods to the consignee, he prepares only a .
2. is additional commission payable to the consignee for taking over additional
responsibility of collecting money from customers.
3. For effecting sales at prices higher than the price fixed by the consignor, the
Consignee is entitled to Commission.
4. The loss of goods which occurs other than due to the inherent nature of the goods
involved is referred to as .
5. The party who sells the goods on behalf of its principal in a consignment basis is
referred to as the .

Answer:

1- Proforma 2- Del 3- Over- 4 - Abnormal 5 – Consignee

Invoice; credere riding; Loss;
Commission;

15. State whether the following statements are true or false:

1. A consignment business stands on the principle of Debtor-Creditor relationship.
2. The relationship of consignor and consignee is that of a buyer and seller.
3. The ownership of goods remains with the consignor when goods are transferred to
the consignee by the consignor.
4. Del-credere commission is calculated on the value of aggregate sales made by the
consignee.
5. Consignment Debtors Account can be maintained in the books of either the consignor
or the consignee.

Answer:

1- 2- 3- 4- 5–
False; False; True; True; True

PROBLEMS AND SOLUTIONS

16. P of Pondicherry consigned goods costing `8,00,000 to H of Hampi. The terms of consignment
were:
(a) Consignee to get a commission of 5% on cash sales and 4% on credit sales;
(b) Any goods taken by the consignee himself or goods damaged through consignee’s
 Work Book : Financial Accounting
negligence shall be valued at cost plus 12.5% and no commission will be allowed on
them.
The expenses incurred by the consignor were: Freight ` 33,600 and insurance of ` 17,200. The
consignor received `2,50,000 as advance against the consignment. Account Sales together with
a
draft for the balance due was received by the consignor showing the following position:
Work Book : Financial Accounting
Goods costing ` 6,40,000 were sold for cash at ` 7,00,000 and on credit at ` 5,40,000. Goods
costing
`40,000 were taken by H and goods costing `20,000 were lost through H’s negligence. The
expenses
incurred by H were:
Insurance ` 1,800; Godown rent ` 6,800; Selling expenses ` 5,400.
Prepare Consignment Account and Consignment Debtors Account in the books of P.

Solution:

Books of P
Consignment to Hampi
Account
Dr. Cr.
Particulars ` Particulars `
To Goods sent on Consignment A/c 8,00,00 By H A/c: Cash Sales 7,00,0
0 00
To Bank A/c [Expenses incurred] Goods taken over 45,000
(40,000+12.5%)
- Freight 33,60 Goods damaged 22,500
0 (20,000+12.5%)
- Insurance 17,20 50,800 By Consignment Debtors A/c 5,40,0
0 [Credit sales ] 00
To H A/c By Consignment Stock A/c 1,06,3
[WN: 1] 50
- Insurance 1,800
- Godown rent 6,800
- Selling expenses 5,400 14,000
To H A/c [Commission]
- On cash sales: (7,00,000 × 35,00
5%) 0
- On credit sales: (5,40,000 21,60 56,600
×4%) 0
By P/L A/c [Profit on consignment 4,92,45
transferred] 0
14,13,8 14,13,
50 850
Consignment Debtors Account
Dr. Cr.
Particulars ` Particulars `
To Consignment A/c [Credit sales] 5,40,0 By Balance c/d 5,40,00
00 0

WORKINGS:
1. Valuation of unsold stock
`
 Work Book : Financial Accounting
Cost of goods sent 8,00,000
Add: Consignor’s expenses (being, freight and insurance) 50,800
8,50,800
Add: Non-recurring expenses incurred by consignee Nil
8,50,800
Cost of Unsold Stock = ` 8,00,000 – 6,40,000 – 40,000 – 20,000 = `
1,00,000
1,00,000 ` 1,06,350
∴ Value of Unsold Stock = ` 8,50,800 x .
8,00,000
17. Hisar consigns to Jay of Jaipur 400 boxes of goods at a cost of ` 5,000 per case and incurs the
following expenses in connection with the same – Carriage ` 9,400, Freight `. 34,800 and
Insurance `
Work Book : Financial Accounting
1,25,000. On arrival of the goods at Jaipur, Jay pays clearing charges ` 31,200, cartage `
9,600 and godown rent ` 2,000. On arrival of the goods at the godown, 60 boxes were found
to be damaged and a sum of ` 3,00,000 was realized from the incubator company by way of
compensation. 240 of the remaining boxes were sold at a total price of ` 22,00,000.
Jay is entitled to an ordinary commission of 5% and 2% del-credere commission on sales in
addition to reimbursement of expenses incurred. He sends to Hari an Account Sales together
with a bank draft for the balance due to Hari.
You are required to prepare Consignment Account in the books of Hari and pass journal
entries in the books of Jay.

Solution:

B
o
o
k
s

o
f

H
a
r
i

C
o
n
s
i
g
n
m
e
n
t

A
c
c
o
u
n
t
 Work Book : Financial Accounting
Dr. Cr.
Particulars A/c. Particulars A/c.
To Goods sent on Consignment A/c 20,00, By Goods Damaged A/c [WN: 3,25,38
000 1] 0
[400 X A/c. 5,000] By Jay A/c [Sales] 22,00,0
00
To Bank A/c [Expenses incurred]
- Carriage 9,400 By Consignment Stock A/c 5,54,30
[WN: 0
1]
- Freight 34,800
- Insurance 1,25,0 1,69,2
00 00
To Jay A/c
- Clearing Charges 31,200
- Cartage 9,600
- Godown Rent 2,000 42,800
To Jay A/c
- Ordinary commission: 1,10,0
(22,00,000 X 5%) 00
- Del credere commission 44,000 1,54,0
(22,00,000 X 2%) 00
By P/L A/c [Profit on consignment 7,13,6
transferred] 80
30,79, 30,79,6
680 80

Books of Jay
Journal
Date Particulars Dr. (`) Cr. (`)
…. Hari A/c Dr 42,800
.
To Bank A/c [31,200 + 9,600 + 2,000] 42,800
[Being expenses paid on receipt of the boxes]
…. Bank A/c Dr 22,00,000
.
To Hari A/c 22,00,0
00
[Being sales made on behalf of Hari]
…. Hari A/c Dr 1,54,000
.
 Work Book : Financial Accounting
To Ordinary Commission A/c 1,10,00
0
To Del credere Commission A/c 44,000
[Being commission due from Hari]
…. Hari A/c D 20,03,2
r. 00
To Bank A/c 20,03,2
00
[Being final balance paid to Hari]

WORKINGS:
1. Valuation of goods damaged and unsold stock
Boxes `
Cost of goods sent 400 20,00,0
00
Add: Consignor’s expenses (being, carriage, freight and insurance) - 1,69,20
0
400 21,69,2
00
Less: Goods lost in transit [`. 21,69,200 x 60 /400] 60 3,25,38
0
340 18,43,8
20
Add: Non-recurring expenses incurred by consignee (being, Clearing - 40,800
charges and cartage)
340 18,84,6
20
Unsold Stock = [400 – (60 + 240)] = 100 boxes ` 18,84,620 x
100
340
∴Value of 100 boxes
= ` 5,54,300

18. Hyder of Mysore sent goods to Jalal of Agra on April 1, 2017. He lost all the documents that
recorded
the details of the goods sent on consignment. The only information available from his office is
that the forwarding expenses incurred by of him for sending the goods to Agra was ` 12,000.
Hyder gather the following information from Jalal, his agent at Agra:
● He incurred expenses to the tune of ` 25,000 out of which a sum of ` 9,000 is recurring in

nature.

● The Jalal had remitted the balance due from him through Bank Draft after deducting the
expenses, 5% commission on gross sales, bad debts ` 4,250 and a Bills payable accepted
by him for ` 50,000.
● The value of unsold stock at original cost lying with the Jalal as on March 31, 2018 amounted
to `
 Work Book : Financial Accounting
2,50,000.
● Jalal sent an Account Sales reflecting the total sales effected by him during 2017-18 of `
22,50,000. This included ` 15,62,500 for sales made at invoice price which is cost plus
25% and the balance at 10% above the invoice price.

You are required to prepare the Consignment of Agra Account and the Jalal Account in the
Books of the Consignor.

Solution:

Consignment of Agra Account

Dr. Cr.
 Work Book : Financial Accounting
Particulars ` Particulars `
To Goods sent on Consignment A/c 25,00,0 By Consignment Debtors A/c 22,50,0
[WN:1] 00 [Sale] 00
To Bank A/c [Expenses incurred]
- Forwarding Expenses 12,000 By Goods sent on Consignment 5,00,00
A/c [Load on goods sent – 0
WN:1]
To Consignee A/c [Expenses paid by By Consignment Stock A/c 3,16,00
consignee] [WN: 2] 0
- Non-recurring
Expense [25,000 – 16,0
9,000] 00 25,000
- Recurring Expenses 9,0
00
To Consignee A/c
[Commission due: ` 22,50,000 X 5%] 1,12,50
0
To Consignment Debtors A/c [Bad 4,250
debt]

To Stock Reserve A/c 62,500

[Load on unsold stock – WN: 2]
To P/L A/c [Profit on consignment 3,49,75
transferred] 0
30,66,0 30,66,0
00 00
Jalal Account
Dr. Cr.
Particular ` Particulars `
s
To Consignment Debtors A/c 22,45,7 By Bills Receivable A/c 50,000
50
[Collection from debtors: By Consignment A/c [Expenses 25,000
22,50,000 – 4,250] incurred]
By Consignment A/c [Commission due] 1,12,50
0
By Bank A/c [Final remittance - B/Fig.] 20,58,2
50
22,45,7 22,45,7
50 50

WORKINGS
1. Goods sent on consignment
`
Total sales 22,50,0
00
Less: Sales made at invoice price 15,62,5
00
 Work Book : Financial Accounting
6,87,50
∴ Sales made at invoice price plus 10%
0
21,87,5
∴ Total sales at invoice price [` 15,62,500 + (` 6,87,500 X 100/110)]
00
Less: Loading on above [` 21,87,500 X 25/125] 4,37,50
0
17,50,0
∴Cost of Goods sold
00
Add: Unsold stock 2,50,00
0
20,00,0
∴Cost of goods sent on consignment
00
Add: Loading @ 25% 5,00,00
0
Goods sent on consignment [at IP] 25,00,0
00

2. Value of unsold stock

 Work Book : Financial Accounting
`
Original cost of unsold stock (given) 2,50,00
0
Add: Loading [` 50,000 X 25%] 62,500
3,12,50
0
Add: Proportionate expenses of consignor [` 12,000X3,12,500/25,00,000] 1,500
Proportionate non-recurring expenses paid by consignee 5,000
[` 16,000 X 3,12,500 / 25,00,000]

3,16,00
∴value of unsold stock
0

JOINT VENTURE ACCOUNTS

19. Multiple choice

questions: Choose the

correct alternative:

1. The business activities for which Joint Ventures (JV) are formed could be:
(a) Construction of dams, bridges, roads etc
(b) Buying & selling of goods for a particular season
(c) Producing a film
(d) All of the above

2. When Expenses paid for the joint venture, the amount is debited to:
(a) Expenses Account
(b) Purchase Account
(c) Joint Venture Account
(d) Venturer’s Capital Account

3. Joint Bank account is to be opened:

(a) When no separate set of books for the venture are maintained
(b) When separate set of books for the venture are maintained
(c) Under both situations
(d) Not under above any situation

4. In case of memorandum method when there are three Co-Venturers, each Co-
Venturer opens in its books for the venture:
(a) One Account
(b) Two Accounts
(c) Three Accounts
(d) None Accounts
 Work Book : Financial Accounting
5. No entry is passed for goods supplied or expenses incurred on Joint Venture by the
‘Other Co-venture’ in case of:
(a) Memorandum Joint Venture Account
(b) Record maintained by one of the Co-ventures’
(c) Keeping separate set of books
(d) None of the above
 Work Book : Financial Accounting
Answer:

1. (d)
2. (c)
3. (b)
4. (a)
5. (a)

20. State whether the following statements are true or false:

1. Joint Venture has very long life.
2. Co-Ventures and Co-Partners are interchangeable terms.
3. Parties of joint venture are known as Co-Venturers
4. Joint Venture and Partnership are synonymous terms.
5. Co-Venturers work for commission.

Answer:

1. False
2. False
3. True
4. False
5. False

21. Distinguishes between joint venture and partnership

business. Answer:

There are some similarities between joint venture and partnership business but there are
some basic differences between the two which are given below:
S Joint Venture Partnership
l Business
.
N
o
1 It is ended after completion of the event or work. It is a continuous process in
nature.
2 There is no need of firm’s name. A Partnership firm must have a
name.
3 No separate set of books is needed to be Different set of books have
maintained; the account can be maintained even in to be maintained.
one of the Co-Venturer’s books only.

4 The Co-Venturers are free to carry on a similar No partner can carry on a similar
business. nature of business.
5 A Minor cannot be a Co-Venturer as he is not A Minor can also be admitted to
competent to enter into a contract. the
 Work Book : Financial Accounting
benefits of the firm.

22. State the differences between Joint Venture and

Consignment. Answer:

The differences between Joint Venture and Consignment are given below:
S Joint Venture Consignment
l
.
 Work Book : Financial Accounting
N
o.
1 It is a partnership business in nature Consignee is not necessarily to be a partner.
(though temporary) since So, it is not a partnership business.
Co-Venturers
are
partners.
2 Relationship between Co-Venturers is The Consignor is principal while the
that consignee is
of the Partners. agent.
3 Funds are provided by every Co- Only Consignor provides the funds in the
Venturer. business.
4 Each Co-Venturer has full right to act as Consignee works as an agent and has to
a follow
partner in the business. the instructions of the Consignor.
5 Co-Venturers are to share profit or loss in The Consignee is only to receive
their predetermined ratios or equally.
commission and reimbursement of expenses
incurred on
behalf of the consignor.

PROBLEMS AND SOLUTIONS

23. A and B entered into a joint venture of underwriting the subscription of the entire share
capital of the Copper Mines Ltd. consisting of 1,00,000 equity shares of ` 10 each and to pay
all expenses upto allotment. The profits were to be shared by them in proportions of 3/5ths
and 2/5ths. The consideration in return for this agreement was the allotment of 12,000 other
shares of `10 each to be issued to them
as fully paid. A provided funds for registration fees ` 12,000, advertising expenses of ` 11,000,
for
expenses on printing and distributing the prospectus amounting to ` 7,500 and other printing
and stationery expenses of `2,000. B contributed towards payment of office rent ` 3,000,
legal charges ` 13,750, salary to clerical staff ` 9,000 and other petty disbursements of
`1,750. The prospectus was
issued and applications fell short by 15,000 shares. A took over these on joint account and paid
for
the same in full. The venturers received the 12,000 fully paid shares as underwriting
commission. They sold their entire holding at ` 12.50 less 50 paise brokerage per share. The
net proceeds were received by A for 15,000 shares and B for 12,000 shares.
Required:
Write out the necessary accounts in the books of A showing the final adjustments.

SOLUTION:

In the books of A
Joint Venture
Account
 Work Book : Financial Accounting
Particulars Amount Particulars Amount
(`) (`)
To Bank A/c - Registration Fee 12,0 By Bank A/c - sale
- Advertising 00 proceeds of 15,000 shares
11,0 ` 12.50 each less
- Printing & 1,80,0
00 50 paise brokerage
Distribution of 00
Prospectus
7,5 By B - sale proceeds of
- Printing & Stationery 12,000 shares ` 12.50
00
each less
2,0 50 paise per share brokerage
To B - Office Rent 00 1,44,0
00

3,0
00
 Work Book : Financial Accounting
- Legal Charges 13,750
- Clerical Staff 9,000
- Petty Payments 1,750
To Bank - Cost of 1,50,00
Shares To Net profit 0
to:
- P & L A/c [3/5] 68,400
- B [2/5] 45,600
3,24,0
3,24,00 00
0

B’s Account
Particulars Amount Particulars Amount (`)
(`)
To Joint Venture A/c - Sale 1,44,0 By Joint Venture A/c
proceeds of shares 00 -Office Rent 3,0
- Legal Charges 00
- Clerical Staff 13,7
50
- Petty Payments
9,0
By Joint Venture A/c -
00
share of profit
1,7
By Bank 50

45,6
1,44,0 00
00 70,9
00

1,44,0
00

24. R and P are carrying on a business as contractors. They jointly take up the work of
constructing a building of Mr. Bose at an agreed price of 5,00,000 payable as 3,00,000 in cash
and 2,00,000 in fully paid shares of a company. A bank account is opened in which R and P
paid 3,00,000 and 75,000 respectively.
The following costs were incurred in completing the construction:
(a) Salary paid – 1,00,000;
(b) Materials purchased – 2,00,000;
(c) Materials supplied by R from the stock of his own business – 50,000;
(d) Engineer’s fees paid by P – 10,000.
The contract price was duly received. The accounts of the venture were closed; R taking up
all the shares at an agreed valuation of 1,70,000 and P taking up the unused stock of
materials at 15,000.
 Work Book : Financial Accounting
Prepare necessary accounts in the Ledger of the Venture assuming that a separate set of books
are maintained for this purpose and that the net result of the same is shared by R and P in the
ratio of 3:2.

Solution:

In the Books of R
and P
Dr. Joint Venture Account Cr.
Particulars Amount Particulars Amount
 Work Book : Financial Accounting
To Joint Bank By Joint Bank A/C
A/C Salary 1,00,000 Contract price 3,00,000
Materials 2,00,000 (cash)
To R A/C By R A/C 1,70,000
Materials supplied 50,000 Shares taken over [Note
To P A/C Engineer’s Fees 10,000 1] By P A/C 15,000
To Co-Venturer’s Capital A/C Stock taken over
Profit: R [ 3/5 X 1,25,000 ] 75,000
P [ 2/5 X 1,25,000 ] 50,000
4,85,000 4,85,00
0

Dr. Joint Bank Account Cr.

Particulars Amoun Particulars Amount
t
To R A/C By Joint Venture A/C
Capital 3,00,000 Salary 1,00,000
introduced To P A/C Materi 2,00,000
Capital introduced 75,000 als By R
To Joint Venture A/C Contract A/C 2,55,000
price (cash) 3,00,000 Final
settlement By P 1,20,000
6,75,000 A/C 6,75,000
Final settlement

Dr. Co-Venturer’s Capital Account Cr.

Particulars R p Particulars R P
To Joint Venture By Joint Bank A/C
A/C Shares 1,70,00 - Capital introduced 3,00,00 75,0
taken over 0 - By Joint Venture A/C 0 00
Stock taken -- 15, Materials Engineer’s
over 000 Fees 50,000 -
To Joint Bank A/C 2,55,00 By Joint Venture A/C - -
0 Profit -
Final settlement 1,20,0 10,
75,
00 000 000
50,0
00
4,25,0 1,35,0 4,25, 1,35,
00 00 000 000

Note: The loss on share (2,00,000 – 1,70,000) i.e. 30,000 can alternatively be adjusted
through Shares account.

25. Azad and Arjun entered into a Joint Venture and opened a Fast Food Shop in Durga Puja
 Work Book : Financial Accounting
festival at Jadavpur. Their profit sharing ratio is 1:1. Azad delivers stock of 50,000. He also
paid carriage charges amounting to 2,500. Arjun incurred expenses on carriage and
electricity charges for 6,500 and receives cash for sales 30,000. Arjun taken over stock at an
agreed value of 10,000 for his personal use. At the end of the venture, Azad has taken over
the remaining stock which was valued at 11,000.
You are required to prepare necessary ledger accounts in the books of Azad and Arjun.

Solution:
Work Book : Financial Accounting

In the Books of
Azad
Dr. Joint Venture Account Cr.
Particulars Amoun Particulars Amoun
t t
To Purchase A/C 50,00 By Arjun A/C 30,00
0 0
To Bank A/C Carriage 2,500 Sale proceeds goods taken over 10,00
0
To Arjun A/C By Purchases A/C goods supplied 11,00
0
Carriage and electricity 6,500 By Arjun A/C loss on venture at 1:1 4,000
By Profit and Loss A/C loss on venture at 4,000
1:1
59,00 59,00
0 0

Dr. Arjun Account Cr.

Particulars Amount Particulars Amount
To Joint Venture A/C By Joint Venture A/C
Sale proceeds Goods taken 30,000 Carriage and electricity 6,500
over
To Joint Venture A/C 10,000 By Bank A/C
loss on venture at 1:1 4,000 Final Settlement 37,500
44,000 44,000

In the Books of
Arjun
Dr. Joint Venture Account Cr.
Particular Amoun Particulars Amoun
s t t
To Azad A/C By Bank A/C
goods supplied 50,000 Sales 30,000
To Azad A/C Carriage 2,500 proceeds
To Bank A/C By Drawing A/C 10,000
Carriage and electricity 6,500 Goods taken
over 11,000
By Azad A/C
Stock taken over by 4,000
Azad By Azad A/C
- loss on venture at 4,000
59,000 1:1 By Profit and Loss 59,000
A/C
- loss on venture at 1:1

Dr. Azad Account Cr.

 Work Book : Financial Accounting
Particulars Amount Particulars Amount
To Joint Venture A/C By Joint Venture A/C 50,000
Stock taken over 11,000 Goods supplied Carriage 2,500
To Joint Venture A/C
loss on venture 4,000
To Bank A/C
Final Settlement 37,500
52,5 52,500
00

26. Molu and Nilesh entered into a Joint Venture for purchase and sale of electronic goods, sharing
 Work Book : Financial Accounting
profit & loss in this ratio of 3:2. They also agreed to receive 5% commission on their
individual sales and the following information was extracted from the records.
July 1. 2017: Molu purchased goods worth 1,90,000 financed to the extent of 90% out of his
funds and balance by loan from his friend Kartik.
Aug. 1 2017: Molu sent goods costing 1,70,000 to Nilesh and paid 1,410 as freight. Nilesh
paid 13,410 to Molu.
Oct. 1, 2017: Nilesh sold all the goods sent to him. Molu paid the loan taken from his uncle
including interest of 350.
All sales by either party were made at as uniform profit of 40% after cost. On November 30,
2017, they decided to close the venture by transforming the balance of goods unsold lying
with Molu at a cost of 9,000 to a wholesale dealer. They further disclosed that goods worth
4,000 were taken personally by Molu at an agreed price of 5,000.

You are required to prepare the Memorandum Joint Venture Account, Joint Venture with Molu in
the books of Nilesh and Joint Venture with Nilesh in the books of Molu.

Solution:

Memorandum Joint Venture Account

Particulars Amount Particulars Amoun
t
To Molu A/C By Nilesh A/C
Purchase (Note) 1,90,000 - Sales (1,70,000 X 140%) 2,38,00
Freight 1,410 By Molu A/C 0
Interest on loan 1,91,76 Sales (190000 – 170000 –
350 0 9000- 9,800
To Nilesh A/C 4000) i.e.,7000 X 140%
Commission (5% on 11,900 Stock taken over 5,000
2,38,000) To Molu A/C By Stock transferred to
Commission(5% on 490 wholesale dealer 9,000
9800) To Profit on
Venture A/C
Molu - ( 3 / 5 ) 34,590 57,650
Nilesh - ( 2 / 5 ) 23,060 2,61, 2,61,8
800 00
In the Books of
Molu
Dr. Joint Venture with Nilesh Account Cr.
Particulars Amoun Particulars Amount
t
To Bank A/c By Bank A/C 13,410
Cost of goods bought 1,90,000 By Drawing A/C
To Bank A/c stock taken 5,000
Freight 1,410 over
Interest on loan 350 1,760 By Stock transferred 9,000
To Commission A/C 490 to wholesale dealer
Work Book : Financial Accounting
To P & L A/C A/C By Bank A/C 9,800
Share of Profit 34,590 Sale proceeds
By Bank A/C 1,89,630
2,26,840 Final 2,26,840
settlement
 Work Book : Financial Accounting
In the Books of
Nilesh
Dr. Joint Venture with Molu Account Cr.
Particulars Amoun Particulars Amoun
t t
To Bank A/C 13,410 By Bank A/C Sale 2,38,00
0
To Commission A/C 11,900
To P & L A/C
Share of Profit 23,060
To Bank A/C
- Final settlement 1,89,630
2,26,840 2,26,84
0
Note:
1. Purchase includes goods for 19,000 (10% of total value of purchase) was bought by Loan.

INSURANCE CLAIM

27. Multiple choice

questions: Choose the

correct alternative:

1. Indemnity period means?

(a) It is the period that begins from the date of occurrence of damage and ends on any
date within 12 months from the former.
(b) This period indicates the time-span during which the normal activities of the business
are believed to be disrupted.
(c) Both of these
(d) None of these

2. Standing charges mean?

(a) Fixed charges
(b) Variable charges
(c) Both
(d) None of these

3. Gross profit means?

(a) Net profit plus insured standing charges
(b) Net profit minus insured standing charges
(c) Both of these
(d) All of these
Work Book : Financial Accounting
4. Short sales mean?
(a) Standard sales exceeds actual sales
(b) Actual sales exceeds standard sales
(c) Both of these
(d) None of these
 Work Book : Financial Accounting
5. Standard turnover means?
(a) Turnover immediately preceding the date of damage
(b) Turnover during damage period
(c) Both of these
(d) None of

these Answer:

1. (c)
2. (a)
3. (a)
4. (a)
5. (a)

28. Fill in the blanks:

1. Annual turnover is the turnover during the 12 months immediately……….. the date of
the damage.
2. Standard turnover corresponds with the… period.
3. Under insurance claim ‘Standing charges’ means Standing charges only.
4. If the policy value is value of stock lost, is called over insurance.
5. Average clause arises in case of………….

Answer:

1. preceding
2. indemnity
3. insured
4. more than
5. under insurance.

29. State whether the following statements are true or false:

1. Increased cost of working means expenditure incurred during indemnity period.
2. Turnover means amount payable to the insured for his selling goods and services.
3. Salvage of stock means stock saved during accident.
4. Unusual item and defective item is separate under insurance claim
5. Defective items mean goods which cannot fetch the usual rate of gross profit.

Answer:

1. True
2. True
3. True
4. False
5. True
 Work Book : Financial Accounting
30. Match the following:
Column - A Column - B
 Work Book : Financial Accounting
1 Average clause A Policy value > value of stock lost
2 Over insurance B Loss of stock *Policy value
Value of stock on the date of fire
3 Gross claim = net claim C Cannot fetch usual gross profit
4 Net claim in average clause D In case of over insurance
5 Defective items E Under insurance

Answer:

1. E
2. A
3. D
4. B
5. C

PROBLEMS AND SOLUTIONS

st
31. Fire occurred in the premises of X & Co. on 1 September 2016 and stock of the value of
101000 was salvaged and the business books and records were saved.
The following information was obtained.
Particulars Amount
(`)
Purchase for the year ended 31.3.2016 700000
Sales for the year ended 31.3.2016 1100000
Purchase from 1.3.2016 to 1.9.2016 240000
Sales from 1.3.2006 to 1.9.2016 360000
Stock on 31.3.2015 300000
Stock on 31.3.2016 340000
Further I formation is also given that the stock on 31.3.2016 was overvalued by 20000.
Purchases and sales occur evenly over the months.
Calculate the amount of the claim to be presented to the insurance company in respect of
losses. Rate of gross profit is to be based on the year ended 31.3.2016.

Solution:

In the books of X
& Co.
Dr. Trading Account for the year ended 31.03.2016 Cr.
Particulars Amount Particulars Amount
(`) (`)
To Opening Stock 3,00,000 By Sales 11,00,00
0
To Purchase 7,00,000 By Closing Stock (340000 - 3,20,000
20000)
 Work Book : Financial Accounting
To Gross profit 4,20,000
14,20,000 14,20,00
0
Rate of Gross profit for the year 2005-06: Gross profit/Sales*100= 420000/1100000*100 =
38.1818% (approx)

Dr. Estimated Trading Account for the period ended 1.09.2016 Cr.
 Work Book : Financial Accounting
Particulars Amount (`) Particulars Amount
(`)
To Opening Stock 320000 By Sales (360000*5/6) 300000
To Purchase (240000*5/6) 200000 By Closing Stock 334545
To Gross profit 114545 (balancing Figure)
(38.1818%*300000)
634545 634545

Statement of Claim for Loss of Stock

Particulars Amount (`)
Estimated value of stock on the date 3345
of fire (-) value of stock salvaged 45
Claim for loss of stock 1010
00
233545

From the following information, calculate the amount of claim for loss of stock with Insurance
Company C Ltd:
Particulars Amount
(`)
Purchase for the year 2014 915000
Sales for the year 2014 1200000
Purchase from 1.1.2015 to 30.6.2015 800000
Sales from 1.1.2005 to 30.6.2015 990000
Stock on 1.1.2014 135000
Stock on 1.1.2015 150000

You are informed that:

(i) In 2005 the purchase prices raised by 20% above the level prevailing in 2014.
(ii) In 2005 the selling prices hiked by 10% over the level prevailing in 2014.
(iii)Salvaged value of stock 20000.
(iv)Fire insurance policy for 148750 to cover the loss of stock by fire.

Solution:

In the books of C
Ltd.
Dr. Trading Account for the year ended 31.12.2014 Cr.
Particulars Amount Particulars Amount
(`) (`)
To Opening Stock 135000 By Sales 1200000
 Work Book : Financial Accounting
To Purchase 915000 By Closing Stock 150000
To Gross profit 300000
1420000 1420000

Dr. Estimated Trading Account for the period from 1.1.15 to 30.06.15 Cr.
Particulars Actual At last Particulars Actual At last
Year’s Year’s
rate rate
 Work Book : Financial Accounting
To Opening Stock 150000 150000 By Sales 990000 900000
To Purchase 800000 666667 By Closing Stock 170000 141667
To Gross profit 210000 225000
116000 1041667 116000 1041667
0 0

Statement of Claim for Loss of Stock

Particulars
Estimated value of stock on the date of fire on 30.06.05 (-) value of stock salvaged 1700
Actual stock lost by fire 00
200
00
1500
00

The Policy value of the insured stock is 148750

The claim to be made after applying Average Clause= Actual Loss*Sum Insured/Value of Stock
= 150000*148750/170000 = 131250.

Workings:
1. Rate of Gross profit for the year 2004-05: 300000/1200000*100=25%. It is assumed that
this rate has not changed in 2005 though purchase and selling price have risen.
2. Purchase in 2005 at the price level of 2004 = 800000*100/120 = 666667.
3. Sales in 2005 at the price level of 2004 = 990000*100/110 = 900000.
4. Gross profit between 1.1.05 and 30.6.05 at last year’s rate = 25% of 900000 = 225000.
5. Closing stock for this period at last year’s rate 141667 (balancing figure). Stock on that
date at current price = 141667 + 20% thereof = 170000.

32. A&Co. suffered a loss of stock due to fire on 31.3.2007. From the following information
prepare a statement showing the claim for the loss to be submitted:
Particulars Amount (`)
Purchase for the year 2006 320000
Sales for the year 2006 405200
Purchase from 1.1.2007 to 31.3.2007 108000
Sales from 1.1.2007 to 31.3.2007 122800
Stock on 1.1.2006 76800
Stock on 1.1.2007 63600

An item of goods purchased in 2005 at a cost of 20000 was valued at 12000 on 31.12.05. Half
of these goods were sold during 2006 for 5200 and the remaining stock was valued at 4800
on 31.12.06. ¼th of the original stock was sold for 2800 in February’07 and the remaining
stock was valued at 60% of the original cost. With the exception of this item, the rate of
gross profit remained fixed. The stock salvaged was estimated at 24000. The insurance policy
value was for 300000.

Solution:
 Work Book : Financial Accounting
In the books of
A& Co.
Dr. Trading Account for the year ended 31.12.2006 Cr.
Particulars Amou Amoun Particulars Amou Amount
nt t nt (`)
(`) (`) (`)
To Opening Stock 7680 By Sales 4052
0 00
 Work Book : Financial Accounting
(-) Value of Abnormal 1200 64 (-) Sale of Abnormal 52 4000
item To Purchase 0 80 item By Closing Stock 00 00
0 636
To Gross profit (-) Value of Abnormal
320 item 00 588
000 48 00
74 00
00
0
1420 14200
000 00
Rate of gross profit for the year 2006: 74000/400000*100=18.5%.

Dr. Estimated Trading Account for the period from 1.1.07 to 31.3.07 Cr.
Particulars Amount Particulars Amoun Amount
(`) t (`)
(`)
To Opening Stock 58800 By Sales 122800
To Purchase 108000 (-) Sale of Abnormal Item 2800 120000
To Gross profit 22200 By Closing Stock
(120000*18.5%)
(balancing figure) 69000
104166 116000 104166
7 0 7

Statement showing Claim for Loss of Stock

Particulars Amount
(`)
Estimated value of stock on the date of fire on 31.3.07 69000
(+) Estimated value of abnormal item of stock 3000
72000
(1-1/2-1/4)= 1/4*20000= 5000*60% (-) value of stock salvaged 24000
Actual stock lost by fire 48000

The Policy value of the insured stock is 300000. There is over insurance. The amount of claim is
48000.

33. A fire occurred on 1st February, 2012, in the premises of Pioneer Ltd., a retail store and
business was partially disorganized upto 30th June, 2012. The company was insured under a
loss of profits for
`1,25,000 with a six months period indemnity. From the following information, compute the
amount of
claim under the loss of profit policy.
`
Actual turnover from 1st February to 30th June, 2012 80,000
Turnover from 1st February to 30th June, 2011 2,00,000
 Work Book : Financial Accounting
Turnover from 1st February, 2011 to 31st January, 2012 4,50,000
Net Profit for last financial year 70,000
Insured standing charges for last financial year 56,000
Total standing charges for last financial year 64,000
Turnover for the last financial year 4,20,000
The company incurred additional expenses amounting to ` 6,700 which reduced the loss in
turnover. There was also a saving during the indemnity period of ` 2,450 in the insured
standing charges as a result of the fire.
There had been a considerable increase in trade since the date of the last annual accounts
and it has been agreed that an adjustment of 15% be made in respect of the upward trend in
turnover.

SOLUTION:
 Work Book : Financial Accounting
Computation of the amount of claim for the loss of
profit
`
Reduction in turnover
Turnover from 1st Feb. 2011 to 30th June, 2011 2,00,000
Add: 15% expected increase 30,000
2,30,000
Less: Actual Turnover from 1st Feb., 2012 to 30th June, 2012 (80,000)
Short Sales 1,50,000
Gross Profit on reduction in turnover @ 30% on ` 1,50,000 (see working 45,000
note 1)
Add: Additional Expenses Lower of
(i) Actual = `6,700
(ii) Additional Exp. X [Link] Adjusted Annual Turnover = 6,700 x 1,55,250 =
6,372
(iii) G.P. on sales generated by additional expenses — not available

Therefore, lower of above is 6,372

51,372
Less: Saving in Insured Standing Charges (2,450)
Amount of claim before Application of Average Clause 48,922

Application of Average Clause:

39,390
x Amount of Claim = 1,25,000 x 48,922
Amount of Policy
Amount of claim under the policy = ` 39,390

Working Notes:

(i) Rate of Gross Profit for last Financial Year: `

Gross Profit:
Net Profit 70,000
Add: Insured Standing Charges 56,000
1,26,000
Turnover for the last financial year 4,20,000
1,26,000
Rate of Gross Profit = x 100 = 30%

(ii) Annual Turnover (adjusted):

Turnover from 1st Feb., 2011 to 31st January, 2012 4,50,000
Add: 15% expected increase 67,500
5,17,500
Gross Profit on ` 5,17,500 @ 30% 1,55,250
Standing charges not Insured (64,000 – 56,000) 8,000
Gross Profit plus non-insured standing charges 1,63,250
 Work Book : Financial Accounting

[Link] above +Uninsured Standing Charges 1,63,250

[Link] Annual Turnover 1,55,250

4,20,000
 Work Book : Financial Accounting
Study Note – 3
PREPARATION OF FINANCIAL STATEMENTS OF PROFIT ORIENTED
ORGANIZATIONS

Learning Objective:

To be able to understand from where does this organization’s money come?

and where does it go?
To be able to understand revenue generation capacity of the organisation by
preparing trading A/c Profit and Loss A/c and the Balance Sheet.
To be able to compute how much the profit/reserves the organization have
to cover its obligations as they come due? In short to be able to ascertain the
results of transactions and the financial position of the business.

1. Multiple choice questions:

Choose the correct

alternative:

1. Account charges the COGS and other direct expenses and losses against the
sales revenue to determine the gross operating result of the concern during a
particular accounting period.
(a) Trading
(b) Profit & Loss
(c) Income & Expenditure
(d) Receipts & Payments

2. Among the financial statements, is/ are referred to as ‘period statement’.

(a) Trading Account.
(b) Profit & Loss Account
(c) Both (a) and (b)
(d) Balance Sheet

3. The financial statements of an organisation are drafted using the .

(a) Transactions
(b) Events
(c) Ledger balances
(d) None of the above.
Work Book : Financial Accounting
4. The financial statement of a non-profit oriented organisation include:
(a) Profit & Loss Account
(b) Income & Expenditure Account
(c) Manufacturing Account
(d) None of the above
 Work Book : Financial Accounting

5. Given that values of opening inventory, purchases and Cost of Goods Sold for a
particular accounting period are ` 1,00,000, ` 9,30,000 and ` 7,50,000, the closing
inventory will be:
(a) ` 2,80,000
(b) ` 2,40,000
(c) ` 8,20,000
(d) ` 4,80,000

Answer:

1 (a); 2 (c); 3(c); 4 (b); 5 (a)

2. Match the following:

Answer:

3. Fill in the blanks:

1. Manufacturing Account is required to be prepared a concern.
2. Profit & Loss Account is drafted to determine the of a concern.
3. Marshalling is required to be followed in the .
4. Distribution of profits is a/ an item.
5. is an account which is prepared by a merchandising concern which
purchases goods and sells the same during a particular period.

Answer:

4. State whether the following statements are true or false:

1. The preparation of Trading Account always starts with the Opening Stock of inventory.
2. Income & Expenditure Account is drafted by a trading concern.
3. Balance Sheet is prepared to show the operating results of an organisation on a
specific date.
4. Final Accounts is prepared from the balances of ledger accounts.
Work Book : Financial Accounting
5. Manufacturing A/c is required to be drafted by every type of organisation.
 Work Book : Financial Accounting

Answer:

1- 2- False; 3- 4 - True; 5 – False

False; False;

PROBLEMS AND SOLUTIONS

5. From the following Trial Balance of Shri Guptoo, prepare Trading and Profit & Loss Account for
the
year ended Mar. 31, 2018 and Balance Sheet as on that date after taking into consideration the
adjustments (All figures in ` ‘000):

Trial Balance as on 31.3.2018

Dr. (`) Cr. (`)
Cash in hand 2,000
Stock 7,000
Creditors 7,800
Debtors 38,400
Drawings 10,260
Sales 185,600
Purchases 162,400
Wages 14,400
Expenses 10,340
Furniture 8,000
Goodwill 6,000
Capital 65,400
258,800 258,800

Adjustments:
a) Stock on 31.12.2018 was valued at ` 9,000. In view of the constant fall in prices, it has
been decided to value stock at 10% less.
b) Furniture (book value on 1.4.2017 ` 800) was sold on 30.9.2017 for ` 900 and it was
passed through Sales Day Book.
c) Private purchases of the proprietor amounting to ` 200 had been booked thorugh
Purchases Book.
d) Depreciate furniture at 10% p.a.
e) Sales Book was overcast by ` 100.
f) Wages outstanding ` 100, though included in Wages Account, was not included in the Trial
Balance.
g) Provide for bad debts @ 5% on debtors and 2.5% for discount on debtors.
Work Book : Financial Accounting

Solution:

Shri Guptoo
Trading and Profit and Loss A/c for the year ended 31.3.2018
Dr. Cr.
Particulars ` ` Particulars ` `
To Opening Stock 7,000 By Sales 185,6
00
To Purchases 162,4 Less : Sale proceeds of 900
00 Furniture
Less: Private purchases of 200 162,2 184,7
proprietor 00 00
To Wages 14,40 Less : Sales Day Book 100 184,6
0 overcast 00
By Closing Stock 9,000
To Gross Profit c/d 9,100 Less : Reduction in 900 8,100
value
(10%)
192,7 192,7
00 00
To Expenses 10,34 By Gross Profit b/d 9,100
0
To Provision for 1,875 By Profit on sale 140
B/Debts of
[(38,400 – 900) x 5%] Furniture
To Provision for Discount 891 [900 – (800 – 40)]
on
Debtors
[(37,500 – 1,875) x 2.5%] By Capital A/c [Net 4,626
Loss
transfered]
To Depreciation on 760
Furniture
[{(8,000-800)x10%}+
{800x10%x6/12}]
13,86 13,86
6 6

Balance Sheet of Shri

Guptoo as on 31.3.2018
Liabilities ` ` Assets ` `
Capital 65,400 Goodwill 6,0
00
Less: Net Loss 4,626 Furniture 8,000
60,774 Less : Book value of 800
assest
sold
Work Book : Financial Accounting
Less: Drawings 10,260 Less : Depreciation 720 6,4
[(8,000- 80
800)x10%]
50,514 Stock [9,000 - 900] 8,1
00
Less: Private 200 50, Debtors (as per Trial 38,400
purchases 314 Balance)
of proprietor
Less: Debtors for 900
furniture
sold
 Work Book : Financial Accounting
Creditors 7,800 Less: Provision for 1,875
B/Debts
Outstanding Wages 100 Less: Provision for 891 34,734
Discount
on Debtors
Debtors for furniture 900
sold
Cash in hand 2,000
58,214 58,214

6. From the following Trial Balance of prepared from the books of Shri Nagesh, you are required
to prepare a Trading and Profit and Loss Account for the year ended March 31, 2018 and
Balance Sheet as on that date, after making the necessary adjustments as mentioned here
under:

Particulars Dr. (`) Cr. (`)

Nagesh 's Capital on 1.4.2017 1,80,000
Nagesh 's Drawings 20,000
Machinery 43,200
Depreciation on Machinery 4,800
Insurance prepaid (1.4.2017) 1,200
Stock on 1.4.2017 57,000
Furniture 6,000
Insurance paid 12,000
Sales 321,640
Returns 6,440 10,160
Purchases 269,800
Office expenses 30,200
Bad debts 5,240
Carriage outwards 6,360
Freight inwards 5,840
Salaries & Wages 10,000
Creditors for expenses 1,600
Discount 600
Accounts Receivable 44,280
Accounts Payable 18,800
Cash at bank 10,440
5,32,800 5,32,800

Adjustments:
(i) Stock-in-trade as on 31.3.2018 ` 40,000 (including stock of stationery ` 400)
(ii) Insurance prepaid ` 800.
(iii) Office expenses include stationery purchased ` 1,200
(iv) Freight inwards include carriage paid on purchase of furniture ` 240.
Work Book : Financial Accounting
(v) Debtors include: (a) Amount due to Rahul ` 1,000 considered definitely bad, (b)
Amount due to Dinesh ` 5,000 considered definitely good, and (c) Amount due to
Jaspreet ` 4,000 considered very much doubtful.
(vi) Make provision for doubtful debts at 5%.
 Work Book : Financial Accounting
Solution:

S
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i
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a
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es
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Tr
a
di
n
g
a
n
d
Pr
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it
&
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A
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fo
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th
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n
d
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d
3
1.
3.
2
0
Work Book : Financial Accounting
1 8
Dr. Cr.
Particulars ` ` Particulars ` `
To Opening Stock 57,000 By Sales 321,640
To Purchases 269,80 Less: Returns 6,440 315,20
0 0
Less: Returns 10,160 259,64
0
To Freight Inwards 5,840 By Closing Stock-in- 40,000
trade
Less: Carriage on 240 5,600 Less: Stock of 400 39,600
furniture Stationery
To Gross Profit c/d 32,560
354,80 354,80
0 0
To Salaries & Wages 10,000 By Gross Profit b/d 32,560
To Office expenses 30,200 By Discount (Received) 600
Less: Purchase of 1,200 29,000 By Capital A/c [Net 42,154
stationery Loss
transfered]
To Stationery 800
consumed
[1,200 - 400]
To Insurance [12,000 + 12,400
1,200
– 800]
To Carriage outwards 6,360
To Bad Debts 5,240
Add: Further Bad 1,000 6,240
Debts
(Rahul)
To Provision for 5,714
Doubtful
Debts
[{(44,280 – 1,000 – 5,000
–
4,000) x 5%}+4,000]
To Depreciation: 4,800
on
Machinery
75,314 75,314

Balance
Sheet as at
31.12.2018
Liabilities ` ` Assets ` `
Nagesh 's Capital on 1,80,00 Machinery 43,200
1.4.2017 0
Less: Net Loss 42,154 Furniture 6,000
 Work Book : Financial Accounting
1,37,84 Add: Carriage paid on 240 6,240
6 furniture purchased
Less: Drawings 20,000 1,17,84 Stock-in-Trade 39,600
6
Stock of Stationery 400
Accounts Payable 18,800 Accounts Receivable 44,28
0
 Work Book : Financial Accounting
Creditors for 1,600 Less: Further Bad 1,000
Expenses Debts
(Rahul)
43,28
0
Less: Provision 5,714 37,566
for
Doubtful Debts
Prepaid insurance 800
Cash at Bank 10,440
138,24 138,24
6 6

7. From the following ledger balances and additional information obtained from Mrs. Malala,
prepare Trading and Profit & Loss Account for the year ended 31st March, 2018 and Balance
Sheet as on that date:
Particulars Dr. (`) Cr. (`)
Stock-in-trade on 1.4.2017 3,00,000
Purchases and Sales 20,50,000 35,40,000
Returns 40,000 50,000
Wages 2,00,000
Carriage inwards 50,000
Power & Light 20,000
Discount 10,000 20,000
Miscellaneous Expenses 1,50,000
Salaries 1,00,000
Outstanding Salaries 30,000
Outstanding Rent 10,000
Depreciation 1,50,000
Rent & Rates 1,20,000
Prepaid Insurance 10,000
Life insurance premium 10,000
Insurance 20,000
Income Tax paid 30,000
Freehold Premises 10,00,000
Furniture 2,00,000
Debtors & Creditors 4,50,000 5,00,000
Bills Receivable and Payable 1,00,000 90,000
Drawings and Capital 50,000 20,00,000
Cash and Bank 6,80,000
Plant 5,00,000
62,40,000 62,40,000
Additional Information:
(a) Closing stock on 31.3.2018 ` 4,00,000.
 Work Book : Financial Accounting
(b) Stock destroyed by fire was ` 20,000 and the insurance company accepted the claim partly
for
` 15,000.
(c) Goods purchased on credit worth ` 30,000 on March 30, 2018 was omitted to be recorded in
the books.
Work Book : Financial Accounting
(d) Purchases include goods valued ` 10,000 purchased for private purposes.
(e) Bills Receivable and cheques from customers dishonoured ` 20,000 and ` 10,000
respectively,
but no entries were made in the books of accounts.
Solution:

Mrs. Malala
Trading and Profit & Loss Account for the
year ended 31.3.2018
Dr. Cr.
Particulars ` ` Particulars ` `
To Opening Stock 3,00,00 By Sales 35,40,00
0 0
To Purchases 20,50,0 Less: Returns 40,000 35,00,0
00 00
Add: Purchases omitted 30,000 By Stock destroyed 20,000
to by
be recorded fire
20,80,0 By Closing Stock 4,00,00
00 0
Less: Returns 50,000
20,30,0
00
Less: Purchases for 10,000 20,20,0
private 00
purpose
To Carriage inwards 50,000
To Wages 2,00,00
0
To Power & Light 20,000
To Gross Profit c/d 13,30,0
00
39,20,0 39,20,0
00 00
To Salaries 1,00,00 By Gross Profit b/d 13,30,0
0 00
To Miscellaneous 1,50,00 By Discount 20,000
Expenses 0 (Received)
To Rent & Rates 1,20,00
0
To Insurance 20,000
To Discount (Allowed) 10,000
To Depreciation 1,50,00
0
To Net Loss of goods by 5,000
fire
(20,000 – 15,000)
To Capital A/c [Net 7,95,00
Profit 0
transferred]
 Work Book : Financial Accounting
13,50,0 13,50,0
00 00

Balance Sheet
as on
31.3.2018
Liabilities ` ` Assets ` `
Capital Account 20,00, Freehold Premises 10,00 ,0
000 00
Add: Net Profit 7,95,0 Plant 5,00,00
00 0
27,95, Furniture 2,00,00
000 0
Less: Drawings 50, Stock 4,00,00
000 0
Private purchases 10, Debtors 4,50,0
000 00
Life insurance 10, Add: B/R dishonoured 20,000
premium 000
Work Book : Financial Accounting
Income tax paid 30, 1,00,0 26,95, 4,70,0
000 00 000 00
Creditors 5,00,0 Add: 10,000 4,80,00
00 0
Cheques
dishonoured
Add: Credit purchase 30,000 Amount receivable
omitted from
Insurance
5,30,0 Company 15,000
00
Less: Creditors for 10,000 5,20,0 Bills Receivable 1,00,0
private 00 00
purchase
Bills Payable 90,000 Less: B/R dishonoured 20,000 80,000
Outstanding Salaries 30,000 Cash and Bank 6,80,0
00
Outstanding Rent 10,000 Less: 10,000 6,70,00
0
Cheque
dishonoured
33,45, 33,45,0
000 00
 Work Book : Financial Accounting
Study Note – 4
PREPARATION OF FINANCIAL STATEMENTS OF NOT-FOR PROFIT
ORGANIZATIONS

Learning Objective:

To be able to account for the Incomes and Expenditures, Receipts and

Payment of the non-profit organisation and prepare the Balance Sheet.
To be able to compute the surplus or deficit of the non-profit organisation,
accounting of donations, subscriptions and other related receipts and their
expending procedure.
In short to be able to ascertain the results of Incomes and Expenditures,
Receipts and Payment of the organisation.

1. Multiple choice questions

Choose the correct

alternative:

1. The surplus/ deficit of a non-profit institution is adjusted against .

(a) Non-Current Assets
(b) Capital Fund
(c) Long-term Loans
(d) None of the above

2. Which of the following is/ are not feature(s) of Receipts & Payments A/c?
(a) It is a double entry account.
(b) It is prepared under cash basis.
(c) It records transactions, of both capital and revenue nature.
(d) None of the above

3. Which of the following is/ are feature(s) of Income & Expenditure A/c?
(a) It is by nature a nominal account.
(b) It is prepared under accrual basis.
(c) It records only revenue natured transactions.
(d) All of the above

4. Income & Expenditure A/c shows subscriptions ` 8,20,000; Subscriptions accrued in

the beginning of the year and at the end of the year were ` 74,000 and subscription
received in advance at the end of the year was ` 96,000. The figure of subscription
received that would
Work Book : Financial Accounting
appear in Receipts & Payments A/c will be:
(a) ` 798,000
(b) ` 6,50,000
(c) ` 9,50,000
(d) ` 8,42,000
 Work Book : Financial Accounting

5. Receipts & Payments A/c shows subscriptions collected ` 7,64,000; Subscriptions due
at the beginning and at the end of the year were ` 32,800 and ` 12,600 respectively;
Advance subscription received at the beginning of the preceding year was ` 5,200.
The figure of
subscription received that would appear in Income & Expenditure A/c will be:
(a) ` 7,49,000
(b) ` 7,89,400
(c) ` 7,38,600
(d) None of the

above Answer:

1 2 3(d) 4 5 (a)
(b); (a); ; (c);

2. Match the following:

Column A Column B
1 Receipts & Payments A/c A Will made by a deceased person
.
2 Income & Expenditure A/c B Double Entry Account
.
3 Subscriptions C Capital Fund
.
4 Accumulated Fund D Cash and Bank transactions
.
5 Legacy E Annual receipts
.

Answer:

1- D; 2- B; 3- E; 4 - C; 5- A.

3. Fill in the blanks:

1. A non-profit organisation prepares the Account to determine the
operating results.
2. Advance subscription is reflected in the -side of the Balance Sheet.
3. The excess of expenditure over incomes and gains of a non-profit organisation is called
.
4. In Receipts & Payments Account, all receipts (whether, capital or revenue) are
recorded on the -hand side of this account, while all payments (whether, capital or
revenue) are recorded on the -hand side of this account.
5. In Income & Expenditure Account, all incomes and expenditures of nature are
excluded.

Answer:
Work Book : Financial Accounting
1- 2- 3- 4– 5–
Income & Expenditure; Liabilities; Deficit; left, right; capital
 Work Book : Financial Accounting

4. State whether the following statements are true or false:

1. Receipts & Payments A/c begins with the cash & bank balance at the beginning of the
accounting period.
2. Income & Expenditure A/c is a summarised form of the Cash Book.
3. Endowments received by a non-profit organisation are to be treated as revenue receipts.
4. Subscriptions are annual receipts and therefore taken as revenue receipts.
5. Income & Expenditure A/c determines the ‘Surplus’ or ‘Deficit’ of the accounting
period by matching expenses/ losses against incomes and gains.

Answer:

1- 2- 3- 4- 5–
True; False; False; True; True

PROBLEMS AND SOLUTIONS

5. The following is the Receipts and Payments Account of All Star Women’s Football Club for the
year ended December 31, 2018:
Receipts ` Payments `
To Balance b/d: By Ground Maintenance 5,250
Cash at bank 8,500 By Salaries 9,000
Cash in hand 3,000 By Gym Equipments 25,000
To Subscriptions 61,250 By Sports Expenses 11,750
To Life Membership Fees 7,500 By Coaches’ Remuneration 10,000
By General Expenses 2,750
By Travelling expenses 2,000
By Balance c/d:
Cash at bank 10,250
Cash in hand 4,250
80,250 80,250

Additional information:
(a) Interest on savings bank account for ` 880 has not been entered in the Cash Book.
(b) 80% of the Life Membership Fees is to be capitalized.
(c) An old gym equipment (WDV ` 20,000) was exchanged at an agreed price of ` 12,500 for
a new gym equipment costing ` 37,500.
(d) The balances of some accounts are as under:
31.12.2018 31.12.20
17
Outstanding Salaries 750 1,500
Arrear Subscriptions 8,000 5,250
Advance Subscriptions 6,750 3,500
Prepaid Ground maintenance 2,250 3,000
Gym Equipments 57,500 45,000
Work Book : Financial Accounting
You are required to prepare the Income and Expenditure Account of the club for the year
ended on December 31, 2018.
Work Book : Financial Accounting

Solution:

All Star Women’s Football

Club Income & Expenditure
Account for the year ended
Dec. 31, 2018
Dr. Cr.
Expenditure ` Income `
To Ground Maintenance [WN : 1] 6,00 By Subscription [WN : 1] 60,7
0 50
To Salaries [WN : 2] 8,25 By Entrance Fees [7,500 x 1,50
0 20%] 0
To Sports Expenses 11,75 By Interest on Savings Bank 880
0
To Coach’s Remuneration 10,00
0
To General Expenses 2,75
0
To Travelling expenses 2,00
0
To Loss on Exchange of Gym Equipment 7,50
[WN: 4] 0
To Depreciation on Equipment [WN : 4] 5,00
0
To Surplus 9,88
0
63,13 63,1
0 30

WORKINGS:

1. Subscriptions for 2018

Subscriptions Account
Dr. Cr.
Particulars ` Particulars `
To Arrear Subscriptions A/c 5,25 By Advance Subscriptions A/c 3,50
0 0
To Income & Expenditure A/c 60,75 By Bank A/c 61,2
(B/Fig.) 0 50
To Advance Subscriptions A/c 6,75 By Arrear Subscriptions A/c 8,00
0 0
72,75 72,7
0 50

2. Ground Maintenance for 2018

Ground Maintenance Account
Dr. Cr.
Particulars ` Particulars `
To Balance b/f 3,00 By Income & Expenditure A/c 6,000
Work Book : Financial Accounting
0
To Bank A/c (paid for 2011) 5,25 By Balance c/f 2,250
0
8,25 8,250
0

3. Salaries for 2018

Salaries Account
Dr. Cr.
Particulars ` Particulars `
To Bank A/c 9,00 By Balance b/f 1,500
0
To Balance c/f 750 By Income & Expenditure A/c 8,250
9,75 9,750
0
 Work Book : Financial Accounting

4. Loss on Exchange of Equipment

`
WDV of Equipment Exchanged (given) 20,00
0
Less: Agreed price of exchange 12,50
0
7,500
∴ Loss on exchange of Equipment

5. Depreciation on Gym Equipments

Gym Equipments Account
Dr. Cr.
Particulars ` Particulars `
To Balance b/f 45,00 By Creditors for Equipment A/c 12,5
0 00
To Creditors for Equipment 37,50 (Agreed Price of Equipment
A/c 0 exchanged)
(New equipment By Loss on Exchange A/c 7,5
purchased) 00
By Depreciation A/c (B/fig) 5,0
00
By Balance c/f 57,5
00
82,50 82,5
0 00

6. The following is the Receipts & Payments Account of Citizen Sports Club for the year ended
December 31,2018:
Receipts ` Payments `
To Balance (1.1.2018) 2,40,000 By Upkeep of ground 2,10,000
To Subscriptions 8,70,000 By Secretary’s Salary 3,60,000
To Entrance Fees 50,000 By Wages of groundsmen 2,40,000
To Proceeds of Concerts 1,50,000 By Ground rent 15,000
To Interest on Investments 50,000 By Printing & Stationery 20,000
By Sundry Expenses 17,500
By Balance (31.12.2018) 4,97,500
13,60,000 13,60,00
0
Additional Information:
(a) Subscriptions include arrear subscription brought over from previous year ` 50,000.
(b) Interest on Investments includes ` 10,000 in respect of interest accrued in the preceding
period.
(c) Upkeep of ground and Wages of groundsmen include ` 30,000 and ` 15,000 respectively
applicable to the preceding year.
(d) Other ledger balances at the commencement of the financial period were: Capital Fund `
40,10,000; Surplus brought forward ` 8,90,000; Club Premises and Grounds (as per
valuation) ` 30,00,000; Investments ` 10,00,000; Sports materials ` 2,45,000; Furniture
` 400,000.
(e) Entrance fees are to be capitalised.
Work Book : Financial Accounting
(f) Outstanding liabilities on 31.12.2018: Wages of groundsmen ` 20,000; Printing ` 10,000.
(g) Interest accrued and outstanding on investments was ` 12,000.
(h) Depreciation to be provided on Club Premises by 2%, Furniture by 5% and Sports
Equipments by 33.33%
Prepare the Income & Expenditure Account for the year ended December 31, 2018 and
Balance Sheet as on that date.
Work Book : Financial Accounting

Solution:
C
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s
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it
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A
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Work Book : Financial Accounting
t d
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y c.
e 3
a 1
r ,
e 2
n 0
d 1
e 8
Dr. Cr.

Balance Sheet
as at Dec. 31,
2018
Expenditure ` ` Income ` `
Capital Fund as on 40,10,0 Club Premises and 30,00,0
31.12.2017 00 Grounds 00
Add: Entrance fees 50,000 Less: Depreciation 60,000 29,40,0
capitalised 00
Add: Surplus of 2017 8,90,00 Furniture 4,00,00
0 0
Add: Surplus of 2018 12,833 49,62,8 Less: Depreciation 20,000 3,80,00
Work Book : Financial Accounting
33 0
Outstanding Sports materials 2,45,00
Liabilities: 0
Wages of groundsmen 20,000 Less: Depreciation 81,667 1,63,33
3
Printing 10,000 30,000 Investments 10,00,0
00
Outstanding 12,000
interest
on investments
Cash & Bank 4,97,50
0
49,92,8 49,92,8
33 33
 Work Book : Financial Accounting
7. The secretary of Care Educational Society submitted the following Receipts & Payments
Account and Income & Expenditure Account for the year ended March 31, 2018:
Receipts & Payments Account for 2017-18
Receipts ` Payments `
To Balance b/d 90,000 By Printing & Stationery 15,000
To Interest: By Advertising 28,200
2016-17 20,000 By Staff Salary 2,60,0
00
2017-18 30,000 50,000 By Furniture purchased 1,34,0
00
To Tuition Fees: By Rent 1,04,0
00
2017-18 2,00,0 By Sundry Expenses 22,000
00
2018-19 20,000 2,20,0 By Balance c/d 2,74,8
00 00
To Entrance Fees: 2017-18 84,000
To Membership Fees:
2016-17 60,000
2017-18 2,30,0
00
2018-19 78,000 3,68,0
00
To Miscellaneous Income 26,000
8,38,0 8,38,0
00 00

Income & Expenditure

Account for the year ended
31.12.2018
Dr. Cr.
Expenditure ` Income `
To Printing & Stationery 16,000 By Tuition Fees 2,20,00
0
To Advertisement 30,000 By Membership Fees 2,30,00
0
To Rent 1,20,000 By Miscellaneous Income 26,000
To Staff Salary 2,40,000 By Interest 32,000
To Sundry Expenses 22,000
To Surplus 80,000
5,08,000 5,08,00
0
You are required to draft the Balance Sheets of Care Society as on March 31, 2017 and March 31,
2018 considering that the Society had the following assets on 31.3.2018: Library books `
1,00,000;
Furniture ` 2,00,000; Investments ` 8,00,000.

Solution:

Care Educational Society

Work Book : Financial Accounting
Balance Sheet as at
31.3.2017
Liabilities ` Assets `
Capital Fund (Balancing Figure) 12,70,00 Furniture 2,00,00
0 0
Library books 1,00,00
0
Investments 8,00,00
0
Accrued Membership Fee 60,000
Accrued Interest 20,000
Cash & Bank 90,000
12,70,00 12,70,0
0 00
 Work Book : Financial Accounting

Balance
Sheet as at
31.3.2018
Liabilities ` Assets `
Capital Fund as on 1.1.2018 12,70, Furniture 2,00,
000 000
Add: Surplus 80,000 Add: Additions during 1,34, 3,34,0
the year 000 00
Add: Entrance Fees 84,000 14,34, Library books 1,00,0
capitalised 000 00
Investments 8,00,0
00
Advance Tuition Fess 20,000 Accrued Interest 2,000
Advance Membership Fees 78,000 Accrued Tuition Fees 20,000
Outstanding Printing & Stationery Prepaid Staff Salary 20,000
(16,000 – 1,000 (2,60,000 – 2,40,000)
15,000)
Outstanding Advertising (30,000– 1,800 Cash & Bank 2,74,8
28,200) 00
Outstanding Rent (1,20,000 – 16,000
1,04,000)
15,50, 15,50,
800 800

8. The following is the Income and Expenditure Account of Star Club for the year ending 31st
March, 2018:
Dr. Cr.
Expenditure ` Income `
To Provisions used: By Subscription 68,000
Opening Stock 20,000 By Sale of 3,26,000
Provisions
Add : Purchases 2,80,00
0
3,00,00
0
Less : Closing Stock 10,000 2,90,000
To Salaries & Wages 36,000
To General Expenses 10,000
To Depreciation on Equipments 2,000
To Surplus 56,000

3,94,000 3,94,000

The following Balance Sheets are also provided:

Liabilities 31.3.1 31.3.1 Assets 31.3.1 31.3.1
7 8 7 8
Suppliers for 16,000 20,000 Equipment
Work Book : Financial Accounting
provisions
Capital Fund 94,000 1,50,0 (Cost Less 20,000 50,000
00 Depreciation)
Stock of Provisions 20,000 10,000
Arrear Subscription 10,000 20,000
Cash at Bank & in hand 60,000 90,000
1,10,0 1,70,0 1,10,0 1,70,0
00 00 00 00

From the above details prepare the Receipt and Payments Account for the year ended
31.3.2018 of the club.
Work Book : Financial Accounting

Solution:

Star Club
R
e
c
e
i
p
t
s
&
P
a
y
m
e
n
t
s
A
c
c
o
u
n
t
f
o
r
t
h
e
y
e
a
r
e
n
d
e
d
M
 Work Book : Financial Accounting
a 2
r. 0
3 1
1 8
,

WORKINGS:
1. Payment to Suppliers for Provisions
Creditors for Provisions Account
Dr. Cr.

2. Equipments purchased during 2017-18

Equipments Account
Dr. Cr.

3. Subscriptions received during 2017-18

Subscribe Account
Dr. Cr.
 Work Book : Financial Accounting
Study Note – 5
PREPARATION OF FINANCIAL STATEMENTS FROM INCOMPLETE RECORDS

Learning Objective:

To gain a concept of the meaning of Single Entry System (or) Incomplete

Records System.
To gain a concept of the features, advantages and disadvantages of
Incomplete Records System.
To be able to know the methods of preparing Accounts.
To be able to compute profit/loss at different steps and stages.

1. Multiple Choice Questions

Choose the correct

alternative:

1. Which of the following is/ are feature(s) of Single Entry System?

(a) It is a casual, unscientific and unreliable approach of recording transactions.
(b) it is a mixture on no entry, single entry and double entry.
(c) Usually, only the cash and personal accounts are recorded.
(d) All of the above

2. Benefits of single entry system

(a) It’s quick and easy to maintain.
(b) One doesn’t require employing a qualified accountant.
(c) This is extremely useful for business run by individuals where the volume of
activity is not large.
(d) All of the

above Answer:

1. (d) : 2. (d)

2. Fill in the blanks:

1. Under theory Net Worth Approach, the operating result of an entity is determined by
comparing the of the entity at two different points of time.

Answer:

1. Net Worth or Capital

3. State whether the following statements are true or false:

 Work Book : Financial Accounting
1. Single entry system is a defective approach of recording transactions.

Answer:

1. True
 Work Book : Financial Accounting

PROBLEMS AND SOLUTIONS

4. Mr. A keeps his books on Single Entry System. The following balances and some other
information have been found from his books. You are required to prepare a Profit & Loss
Statement for the year ended 31.12.2017.
31.12.2016 31.12.2017
Cash in hand 21,600 20,000
Bank Overdraft 20,000 15,000
Stock-in-Trade 11,200 22,800
Sundry Debtors 12,000 18,000
Sundry Creditors 12,000 9,000
Bills Receivable 7,000 9,000
Bills Payable 2,000 1,000
Land & Building 50,000 50,000
Furniture 5,000 5,000

Other information:
(a) During the year Mr. A had drawn 16,000 in cash and `, 4,000 in goods for his personal use.
(b) Depreciation is to be charged on Land & Building and on Furniture at 2% p.a. and 10%
p.a. respectively.
(c) Provision for Bad Debt is to be made at 5% and provision on Bills Receivable at 2 ½ %
is to be made.

Solution:

Mr. A
Statement of Profit & Loss for the year ended 31.12.2017
 Work Book : Financial Accounting

Working Notes:
1. Capital Balance on 1.1.17 & 31.12.17
Statement of Affairs
Liabilities 1.1.1 31.12.1 Assets 1.1.1 31.12.
7 7 7 17
Capital [B/Fig.] 72,800 99,800 Land & Building 50,000 50,000
Sundry Creditors 12,000 9,000 Furniture 5,000 5,000
Bills Payable 2,000 1,000 Stock–in-Trade 11,200 22,800
Bank Overdraft 20,000 15,000 Sundry Debtors 12,000 18,000
Bills Receivable 7,000 9,000
Cash-in-hand 21,600 20,000
1,06,800 1,24,800 1,06,80 1,24,80
0 0

5. Kapil does not keep complete records of his business transactions. His statement of affairs as
on 1st April, 2016 is given below:
Liabilities Amount Assets Amount
(`) (`)
Sundry Creditors 16,500 Cash 7,450
Outstanding Expenses 3,500 Sundry Debtors 25,350
Capital 50,000 Stock 30,300
Furniture 6,900
70,000 70,000
st
For the year ended 31 March, 2017, his drawings have been 15,000. Goods worth 600 have
st
also been withdrawn by him for personal use. On 1 October, 2016, there was a transfer of
st
his household furniture worth 2,100 to the business. On 31 March, 2017, his assets and
liabilities were as under:
Liabilities Amount Assets Amount
(`) (`)
Sundry creditors 18,600 Cash 6,580
Outstanding expenses 4,300 Sundry debtors 36,900
Stock 40,320
Furniture 9,000
Prepaid Rent 400
Depreciate Furniture @ 10% per annum, create a Provision for Bad Debts on Sundry Debtors
@ 5% and allow 5% Interest on Capital which was at the beginning. Ascertain the profit or
st st
loss for the year ended 31 March, 2017 and prepare the Statement of Affairs as on 31
March, 2017.

Solution:
Books of Kapil
 Work Book : Financial Accounting
Statement of Profit & Loss for the year ended 31.3.2017
Liabilities Amount Assets Amount
(`) (`)
Sundry Creditors 18,600 Furniture 9,000
Outstanding Expenses 4,300 Stock 40,320
Capital balance (31.3.17) c/d 70,300 Sundry debtors 36,900
Prepaid Rent 400
Cash 6,580
93,200 93,200

Capital Balance b/d (1.4.16) 50, Capital Balance b/d 70,300

Fresh Capital introduced [as 000 (31.3.17) Drawings: Cash 15,000
Furniture ] Gross profit c/d 2, Goods 600
10
0
Provision for Bad Debt [36,900 X Gross profit b/d
33,
5%] Depreciation [WN: 1] 800
Interest on Capital [ 50,000 X 5%] 85,900 85,900
Net Profit [to be added with 1,845 33,800
Capital] 795
2,500
28,660
33,800 33,800

Statement of Affairs as 31.3.2017

Liabilities Amount Amount Assets Amoun Amou
(`) (`) t nt
(`) (`)
Capital 50, Furniture 9,000
Add: Further Capital 000 Less: Depreciation [WN: 1] 795 8,
Net profit 2, Stock 20
10 5
Interest on Capital Sundry Debtors 36,
0 40,
Less: Drawings 67, Less: Provision for bad 900
28, 320
[ 15,000 + 600] 660 660 debts Prepaid Rent 1,
Sundry Creditors Cash 84
2, 35,055
5
Outstanding 50 18,
0 600 400
Expenses
83, 4, 6,580
260 30
0

15,
600
90, 90,
560 560
 Work Book : Financial Accounting
Working Notes:

1. Depreciation on Furniture

6. From the following information determine the cash and bank balance as on 30.11.2017
 Work Book : Financial Accounting
Solution:
Determination of Cash and Bank Balance
Statement of Affairs as on 30.11.2017
Liabilities Amou Assets Amo Amou
nt unt nt
Capital 55,000 Land and Building [at Cost – 32,000 + 32,00
2,000] 0
Less: Accumulated Depreciation 2,000 34,00
0
Furniture 12,00
0
Creditors 13,000 Debtors 5,000
Prepaid Insurance 900
Cash and Bank [B/Fig.] 18,10
0
68,000 68,00
0

7. From the following particulars, ascertain Credit Sales and Credit Purchases during
2016-17: Balance on 01.04.2016

Balance on 31.3.2017:

Solution:

Computation of Credit Sales during 2016-17

Dr. Sundry Debtors Accounts Cr.
 Work Book : Financial Accounting

Computation of Credit Purchases during 2016-17

Dr. Sundry Creditors Accounts Cr.
Date Particulars Amou Date Particulars Amoun
nt t
…. To Bank A/c [Payment] 1,10,00 1.4. By Balance b/f 26,000
0 16
…. To Return Outward A/c 1,000 …. By Purchases A/c 1,03,800
31.3. To Balance c/f 18,800 [Credit Purchases: B/Fig.]
17
1,29,80 1,29,800
0

Working Notes:

1. Acceptance received during 2016-17

Dr. Bills Receivable Accounts Cr.

8. X does not maintain proper books of account. From the following information, prepare
Trading and Profit & Loss Account for the year ended December, 31, 2017 and a Balance
Sheet as on that date:

Analyses of the other transactions are:

Work Book : Financial Accounting
He had 2,500 cash at the beginning of the year.
Work Book : Financial Accounting

Solution:

Books of Mr. X
Dr. Trading and Profit and Loss Accounts for the year ended 31.12.2017 Cr.
Particulars Amou Amoun Particulars Amoun Amoun
nt t t t
To Opening Stock 4,900 By Sales 750
To Purchases : Cash 2,500 Cash 34,650
Credit [WN: 4] 22,000 Credit [WN: 3] 35,400
24,500 Less : Return Inward 500 34,
Less : Return 400 24, By Closing Stock 900
Outward To Gross 100 6,
12, 60
Profit c/d
500 0
41,500 41,500
To Salaries 6,000 By Gross Profit b/d 12,500
To Rent 750 By Discount Received 350
To Office Expenses To 900
Discount Allowed To 150
Bad
debt 100
To Capital A/c 4,950
[Net Profit transferred] 12,850 12,850

Balance Sheet as at 31.12.17

Liabilities Amou Amou Assets Amoun Amoun
nt nt t t
Capital [WN: 1] 13,900 Furniture 750
Add: Further capital 1,000 Stock-in-Trade 6,600
Net Profit 4,950 Sundry Debtors 12,500

19,850 Cash [WN: 2] 750

1,500
Less: Drawings 18,
350
Sundry Creditors 2,250
20,600 20,600

Working Notes:
1. Balance of capital as on 1.1.17
Balance Sheet as at 1.1.17
Liabilities Amou Assets Amou
nt nt
Capital [B/Fig.] 13,900 Furniture 500
Sundry Creditors 3,000 Stock-in-Trade 4,900
Sundry Debtors 9,000
Work Book : Financial Accounting
Cash 2,500

16,900 16,900
 Work Book : Financial Accounting

2. Cash balance as on 31.12.17

Dr. Cash Book (Single column) Cr.
Dat Particulars Amou Dat Particulars Amou
e nt e nt
To Balance b/f 2,500 By Sundry Creditors A/c 22,000
To Sundry Debtors A/c 30,400 By Salaries A/c 6,000
To Sales A/c 750 By Rent A/c 750
To Capital A/c 1,000 By Office Expenses A/c 900
By Drawings A/c 1,500
By Purchases A/c 2,500
By Furniture A/c [750 - 250
500]
By Balance c/f [B/Fig.] 750
34,650 34,650

3. Credit sales during the year

Dr. Sundry Debtors Accounts Cr.
Da Particulars Amou Da Particulars Amou
te nt te nt
To Balance b/f 9,000 By Cash A/c 30,400
To Sales A/c [B/Fig.] 34,650 By Discount Allowed A/c 150
By Return Inward A/c 500
By Bad Debt A/c 100
By Balance c/f 12,500
43,650 43,650

4. Credit purchases during the year

Dr. Sundry Creditors Accounts Cr.
Da Particulars Amou Da Particulars Amou
te nt te nt
To Cash A/c 22,000 By Balance b/f 3,000
To Discount Received A/c 350 By Purchases A/c [B/Fig.] 22,00
0
To Return Outward A/c 400
To Balance c/f 2,250
25,000 25,00
0

9. Anand started business on 1.1.2016 with his own capital 20,000 and an interest free loan of
20,000 from a friend. His business makes toys, which are selling at 40 each. Anand, who has
little knowledge of accountancy, produced the following information at the end of the first
year’s trading; Cash received: Sale proceeds of 2,000 toys 80,000. Cash paid: Wages 28,000;
Raw Materials 13,600; Rent 8,000; General Expenses 4,800; Loan repaid 6,000.
You ascertain the following additional information:
1. A further 300 toys sold in 2016, but not received for the year end.
Work Book : Financial Accounting
2. 3,600 of raw materials received in the year, but not paid for.
3. The only stock at 31.12.2016 was 1,600 raw materials.
4. The rent covered the period from 1.1.2016 to 31.3.2017.
5. Expenses included 800 withdrawn by Anand for his own use.
6. The initial capital and loan of 40,000 was used to buy Machinery [with 4-year life and an
Work Book : Financial Accounting
anticipated residual value of 8,000].
7. The Wages figure included 10,000 for installing the machinery.
8. The Machinery is to be depreciated under reducing balance method @ 25% p.a. for
the whole year.
Prepare a Trading and Profit & Loss Account for the year ended 31.12.2016 and a Balance
Sheet as on the date.

Solution:

Books of Anand
Dr. Trading and Profit & Loss Accounts for the year ended 31.12.17 Cr.
Particulars Amo Amou Particulars Amou Amou
unt nt nt nt
To Purchases: By Sales:
Cash 13, Cash 80,
Credit 600 7, Credit [300 X 000 92,
To Wages 3, 20 12, 000
60 0 000
Less: Installation Charges of 40] By Closing
0
Machinery To Gross Profit c/d 28, 1,
To Rent 000 18, Stock 60
000 0
Less: Prepaid [WN: 10,
2] To General 000
8, 58,
Expenses
00 400
Less: Expenses of Proprietor 0
To Depreciation on Machinery 93, 93,
1, 600 600
[WN: 3] 60
0 6,
To Capital A/c [Net Profit 40 By Gross Profit b/d
transferred] 4,800
0
800
4,
00 58,
0 400
12,
500
35,
500
58, 58,
400 400

Balance Sheet as on 31.12.17

Liabilities Amou Amou Assets Amou Amou
nt nt nt nt
Capital 20, Machinery 40,
Add: Net Profit 000 Add: Installation Charges 000
35, 10,
500 000
Less: Drawings 54, Less: Depreciation 37,
55,500 50,
Loan from friend [ 20,000 700 [WN: 3] Stock-in-Trade 000 500
800
Work Book : Financial Accounting
– 6,000] 14, Debtors 12, 1,
Creditors [Problem Note] 000 [Problem Note: 300 × 500 60
40] Prepaid Rent [WN: 0
3, 2] Cash [WN: 1]
60 12,
0 000
1,
60
0
19,
600
72, 72,
300 300
 Work Book : Financial Accounting

Working Notes:
1. Cash balance on 31.12.17
Dr. Cash Accounts Cr.
Da Particulars Amou Da Particulars Amou
te nt te nt
To Capital A/c 20,000 By Machinery A/c 40,0
00
To Loan A/c [Loan taken from 20,000 By Wages A/c 28,0
00
friend] By Purchases A/c [Purchase of 13,6
00
To Sales A/c [Sale proceeds] 80,000 Raw Materials]
By Rent A/c 8,00
0
By General Expenses A/c 4,80
0
By Loan Repaid A/c 6,00
0
By Balance c/f 19,6
00
[Closing Balance: B/Fig.]
1,20,00 1,20,0
0 00
2. Prepaid Rent
Rent has been paid for 15 months. It covers the period from 1.1.2016 to 31.3.2017. So, 3
month’s Rent (from 1.1.12 to 31.3.12)
Has been paid in advance by the proprietor. So, Prepaid Rent = 8,000 × 3/15 =1,600
3. Depreciation on Machinery
Depreciation Machinery = [Purchase Cost + Installation Charges] X 25% = (40,000 +
10,000) X 25% = 12,500
The residual value of Machinery is not to be considered as rate of depreciation is
mentioned in the problem.

10. Raja, a sole trader furnishes you with the following bank summary for the year ended
December 31, 2017
Balance on December 31, 2016 11,000
Add: Deposits:
Cash [out of cash sales] 1,25,000
Collection from Credit Customers 3,50,000
Income from Personal Investment 36,000
5,11,000
5,22,000
Deduct:
Cash Withdrawn from:
Personal Drawings 20,000
Shop Expenses 40,000
Work Book : Financial Accounting
60,000
Cheques issued to Suppliers of:
Goods 3,50,00
0
Services 40,000 3,90,00
0
Cheques issued for Personal Purposes 55,000
Bank Charges 500 5,05,50
0
Balance on December 31, 2017 16,500
Work Book : Financial Accounting

Raja informs you that he had the following Assets and Liabilities in addition to the Bank
Balances described on December 31:
Asset & Liabilities 201 2016
7
Assets:
Cash Balance 7,000 4,000
Amounts due from Customers 37,00 27,500
0
Unsold Inventory at Cost 13,00 10,000
0
Prepaid Expenses 3,000 2,000
60,00 43,500
Liabilities: 0

Creditors for:
Goods 23,00 28,000
0
Services 2,500 1,500
25,50 29,500
0

He also informs you that:

(a) He uses 75% of cash sale proceeds for making cash purchases; the remaining balance
being deposited in Bank.
(b) He had allowed cash discount of 5,000 to his credit customers for prompt payment; he
was allowed cash discount 7,000 by his suppliers of goods for prompt payment.
(c) Collections from credit customers and payments to suppliers of goods are invariable
by crossed cheques.
Raja ask you to show his capital account and prepare:
(i) Receipt and payment account for the year ended December 31, 2017
(ii) Trading and Profit & Loss account for the year ended December 31, 2017
(iii) Balance Sheet as on December 31,

2017 Solution:

Books of Raja
Receipt and Payment Accounts for the year ended Dec. 31, 2017
Receipts Amou Payments Amoun
nt t
To Opening Balance By Cash Purchases [WN:6] 3,75,00
0
Cash 4,000 By Payment to Suppliers 3,50,00
0
Bank 11,000 By Payments for Services:
To Cash Sales [WN:6] 5,00,00 Cash 37,000
0
Work Book : Financial Accounting
To Collection from Customers 3,50,00 Cheques 40,000
0
Capital Introduces: By Bank Charges 500
Income from Personal 36,000 By Drawings [20,000 + 55,000] 75,000
Investment
By Closing Balance:
Cash 7,000
Bank 16,500
9,01,00 9,01,00
0 0
Work Book : Financial Accounting
Dr. Trading and Profit & Loss Accounts for the year ended Dec. 31, 2017 Cr.
Particulars Amou Amou Particulars Amou Amou
nt nt nt nt
To Opening Stock 10,000 By Sales:
To Purchases: Cash 5,00,
[WN:6] 000
Cash [WN:6] 3,75, Credit 3,64, 8,64,50
000 500 0
Credit [WN:4] 3,52, 7,27,0 [WN:3] 13,000
000 00 By Closing Stock at
To Gross Profit c/d 1,40,5 Cost
00
8,77,50 8,77,50
0 0
77,000 By Gross Profit b/d 1,40,50
To Expenses [WN:5] 500 By Discount Received 0
7,000
To Bank Charges 5,000
To Discount Allowed 65,000
To Capital A/c [Net Profit
transferred] 1,47,50 1,47,50
0 0
Balance Sheet as on Dec. 31, 2017
Liabilities Amo Amou Liabilities Amo Amoun
unt nt unt t
Capital: 25, Inventory 13,
Opening Capital [WN:1] 000 Customers 000
Add: Net Profit 65, Prepaid 37,
000 000
Further Capital Expenses Bank
36, 3,
[income from personal 51, Cash
000 00
investment] Less: Drawings 1,26,00 000 0
[ 20,000 + 55,000] Creditors for: 0 23, 16,
Goods Services 75,000 000 500
2, 7,
50 00
0 0
76,50 76,500
0
Working Notes:
1. Capital balance on 1.1.2017
Balance Sheet as on 1.1.2017
Liabilities Amou Amoun Liabilities Amoun Amou
nt t t nt
Capital [Opening Capital: 25,000 Inventory 10,00
0
B/Fig.] Customers Prepaid 27,50
0
Creditors for: Goods 28,000 Expenses Bank 2,000
Services
Work Book : Financial Accounting
1,500 Cash 11,00
0
4,000
54,500 54,50
0
2. Expenses Paid during 2017
Dr. Cash Accounts Cr.
Da Particulars Amou Da Particulars Amou
te nt te nt
To Balance b/f 4,000 By Purchases A/c [WN:6] 3,75,00
By Bank A/c [Amount 0
To Sales A/c [WN:6] 5,00,0 deposited] By Expenses A/c 1,25,00
00 0
[Expenses paid: B/Fig.]
To Bank A/c 40,000
By Balance c/f
[Withdrawn from 37,000
bank
for shop expenses] 7,000
5,44,0 5,44,00
00 0
 Work Book : Financial Accounting

3. Credit Sales during 2017

Dr. Customers Accounts Cr.
Dat Particulars Amou Dat Particulars Amou
e nt e nt
To Balance b/f 27,50 By Bank A/c 3,50,0
0 00
To Sales A/c [Credit Sales: 3,64,5 By Discount Allowed A/c 5,00
00 0
B/Fig.] By Balance c/f 37,00
0
3,92,00 3,92,00
0 0

4. Credit Purchases during 2017

Dr. Creditors Accounts Cr.
Da Particulars Amou Da Particulars Amou
te nt te nt
To Bank A/c 3,50,00 By Balance b/f 28,000
0
To Discount Received A/c 7,000 By Purchases A/c [Credit 3,52,00
0
To Balance c/f 23,000 purchases: B/Fig.]
3,80,00 3,80,00
0 0

5. Expenses to be transferred to Profit & Loss Accounts

Expenses Paid: Cash [WN:2] 37,
Cheque 000
40,
000
77,000
Add: Prepaid Expenses on 31.12.10 2,000
Outstanding Expenses on 31.12.2017 2,500
81,500
Less: Prepaid Expenses on 31.12.2017 3,000
78,500
Less: Outstanding Expenses on 31.12.2016 1,
∴ Expenses to be debited to Profit & Loss A/c 50
0
77,000

6. Cash Sales & Cash Purchases during 2017

75% of Cash Sale proceeds are used for Cash Purchases
∴ 25% Amount of Cash Sale proceeds deposited into Bank
∴ Cash Sales = Cash deposited X 100/25 = 1,25,000 X 100/25 = 5,00,000
∴ Cash Purchases = 75% of Cash Sale proceeds = 5,00,000 X 75% = 3,75,000

11. On 1st April 2012, Sneha started a beauty Parlour. She acquired a shop for `12,00,000 and paid
Work Book : Financial Accounting
`2,00,000 for interior fittings. She put ` 4,00,000 into business bank A/c. She carried on till 31st
March
2013, when she wanted to know what the parlour has earned over the period. She has
approached
you to find out the business results with following information as on 31-03- 2013: In addition
to the shop and fitting she had following possessions: Stock ` 6,00,000, Motor car (purchased
on 30-09- 2012) ` 5,50,000, Cash at bank `2,50,000. Based on her limited knowledge she has
told you to
charge depreciation of 2% p.a. on shop, 5% p.a. on fittings and 20% on car. On 31-3-2013,
`1,40,000 was payable to creditors, and ` 1,00,000 to a friend for money borrowed for
business. She had withdrawn ` 2,000 per month from the business.
Prepare her statement of profit or loss for the year.
Work Book : Financial Accounting

Solution:
Statement of Affairs as on 01-04-2012
Liabilities Amount (`) Assets Amount (`)
Capital (balancing figure) 18,00,000 Shop 12,00,000
Fittings 2,00,000
Bank 4,00,000
18,00,000 18,00,000

Statement of Affairs as on 31-3-2013

Liabilities Amount (`) Assets Amount (`)
Creditors 1,40,000 Shop (12,00,000 Less 2% of 11,76,000
12,00,000)
Loan from Friend 1,00,000 Fittings (2,00,000 Less 5% of 1,90,000
2,00,000)
Capital 1,00,000 Cash at Bank 2,50,000

(balancing
figure)
Motor car [5,50,000 × 20% × ½] 4,95,000
Stock in trade 6,00,000
27,11,000 27,11,000

Statement of profit or loss for the year ended 31.03.2013

Particulars Amount (`)
Closing Capital as per statement of affairs as on 31-3-2013 24,71,000
Less: Opening Capital as per statement of affairs as on 31-3-2012 (18,00,000)
Increase or (decrease) in capital 6,71,000
Add: drawings (2000*12) 24,000
24,000
Note:
Depreciation calculation
Shop @ 2% for 1 year on ` 1,200,000 24,0
Fittings @ 5% for 1 year on ` 200,000 00
Car @20% for 6 months on ` 550,000 10,0
00
55,0
00

Alternative method: Conversion of single entry to double entry:

It may be possible to prepare the P&L A/c and Balance Sheet for such organizations by
converting the records into double entry method. In this method, various ledger accounts are
prepared e.g. sales, purchases, debtors, creditors, Trading A/c, cash book. As full information
is not available the balancing figure in each of these accounts needs to be correctly
interpreted. For example, if we know opening & closing balances in Debtors’ A/c and the cash
received from debtors; then the balancing figure will obviously indicate sales figures. Also, if
Work Book : Financial Accounting
we know opening and closing balances of creditors & credit purchases figures; then the
balancing figure will certainly mean cash paid to creditors.

Once these figures are calculated, it’s easy to prepare the financial statements in regular
formats.
 Work Book : Financial Accounting
Study Note – 6
PARTNERSHIP

Learning Objective:
To be able to understand the meaning and essential elements of partnership,
Learn the need and contents of various forms of partnership business,
Understand the methods of maintaining books and records under different
situations in partnership business viz; Admission, Retirement, Death,
Insolvency and Dissolution of a partnership firm,
Amalgamation of firms and Conversion of a partnership firm to a company
are also discussed in the chapter.

1. Multiple Choice Questions

Choose the correct

alternative

1. Any change in the relationship of existing agreement and enforces making of a new
agreement is called
a) Revaluation of partnership b) Reconstitution of partnership
c) Realization of partnership d) None of the above

2. The excess amount which the firm can get on selling its assets over and above the
saleable value of its assets is called
a) Surplus b) Super profits
c) Reserve d) Goodwill

3. When a firm is dissolved, the amount realized from an unrecorded asset is credited to
a) Cash A/C b) Bank A/C
c) Revaluation A/C d) Realisation A/C

4. The Sacrifice ratio is used at the time of

a) Admission of a partner b) Retirement of a partner
c) Death of a partner d) Dissolution of a partner

5. The Balance of Joint Life Policy (JLP) Account as shown in the Balance Sheet represents:
a) Annual premium of JLP
b) Total premium paid by the partners
c) Amount receivable at maturity
d) Surrender value of the
Work Book : Financial Accounting
policy Answer:

1 – b) , 2 – d) , 3 – d) , 4 – a), 5 – d)
 Work Book : Financial Accounting

2. Match the following pairs:

Column A Column B
1. Goodwill A. Nominal Account
2. Super Profit B. Average Profit Method
3. Revaluation Account C. Average Profit – Normal Profit
4. Capital Employed D. Intangible
5. Valuation of Goodwill E. Tangible Trading Assets – Trading Liabilities

Answer:

1 – D, 2 – C, 3 – A, 4 – E, 5 - B

3. Fill in the blanks:

a. The amount due to deceased partner is paid to his/ her…………………..
b. Surplus capital method is suitable when all partners are ………………..
c. If there is any change in profit sharing ratio of the partners, the old partnership will be
…………………
d. Profit or loss on revaluation of assets and liabilities is shared by the………………
e. At the time of admission of a partner, General Reserve is distributed among the
partners in sharing ratio.

Answer:

a. – Executors, b. - Solvent, c. – Terminated, d. - Old Partners, e. – Old Profit.

4. State whether the following statements are true or false:

a. It is necessary to revalue of assets and liabilities at the time of admission of a new
partner.
b. After the death of a partner, the combined shares of continuing partners decrease.
c. Changes in profit sharing ratio among the existing partners may occur at any time
during the financial year.
d. Loss on Realisation should be distributed according to capital ratio.
e. The surrender value of Joint Life Policy is distributed among all partners in their old
ratio upon retirement.

Answer:

True: a, c, e; False: b, d

Theoretical Questions:

5. Define partnership and state its features

Two or more persons when agreed to carry on a business and share profit or losses of the
business, this is known as partnership. The Indian partnership Act, 1932, defines Partnership
Work Book : Financial Accounting
as follows: Partnership is the relation between persons and who have agreed to share the
profits of a business carried on by all or any of them acting for all.
 Work Book : Financial Accounting

The main features of Partnership are:

i) Two or more persons: It is an association of two or more persons for a common interest.
ii) Agreement: The Partnership is an agreement. It may be either oral or in writing.
iii) Lawful Business: Partnership is formed to carry on a business; so it must follow the law.
iv) Profit Sharing: Profit or loss of the firm is to share by the partners in an agreed ratio and
equally where the ratio is not agreed.

6. State four rules which are applicable in the absence of Partnership Deed.
(i) Profit sharing ratio will be equal
(ii) No Interest on Capital and Drawings
(iii) No Remuneration or Salary to the partners.
(iv) Interest on Loan advanced by the partner @6% p.a.

PROBLEMS AND SOLUTIONS

7. A firm earned the following net profits during the last 4 years

Year Amount
(`)
2015 90,000
2016 1,20,000
2017 1,60,000
2018 1,80,000

Capital employed in the firm is `10,00,000. The normal rate of profit is 10%. Calculate the
value of the goodwill on the basis of 4 year purchase.

Solution:

Total profit of 4 years = ` (90,000 + 1,20,000 + 1,60,000 + 1,80,000) = `5,50,000

Average Annual Profit = `5,50,000/4 = `.1,37,500
Normal Profit = `10% of `10,00,000 = `10,00,000 =
`1,00,000 Super profit = ` 1,37,500 – ` 1,00,000 =
`37,500
Therefore, value of goodwill at 4 years’ purchase = ` 37,500 × 4 = ` 1,50,000

8. A and B are partners sharing profit an d losses in the ratio of 3 : 2. C is coming as a new
th
partner for 1/5 share of future profit. Calculate new profit sharing and sacrificing ratio.

Solution:

Calculation of new profit sharing ratio and sacrificing

ratio: Let total Profit = 1
New partner’s share = 1/5
Therefore, Remaining share = 1 – 1/5 =
4/5 A’s new share = 3/5 of 4/5 i.e. 12/25
B’s new share = 2/5 of 4/5 i.e.
Work Book : Financial Accounting
8/25 C’s Share = 1/5
 Work Book : Financial Accounting

The new profit sharing ratio of A, B and C is :

= 12/25 : 8/25 : 1/5 x 5/5
= 12/25 : 8/25 : 5/25
= 12 : 8 : 5
The Sacrificing ratio of the existing old partners:
A’s Sacrifice = 3/5 – 12/25 = 15 – 12/25
= 3/25 B’s Sacrifice = 2/5 – 8/25 =
10 – 8/25 = 2/25 Therefore, Sacrificing
Ratio = 3 : 2

9. The profit sharing ratio of Arvind and Gobind is 5:3. Dipak was admitted as a new partner.
th rd
Arvind sacrificed 1/5 of his share and Gobind 1/3 of his share for Dipak. Calculate the
new profit sharing and sacrificing ratio.

Solution:

Calculation of new profit sharing ratio and sacrificing ratio:

th
Arvind sacrificed 1/5 of his share = 1/5 of 5/8 = 5/40 i.e., 1/8
rd
Gobind sacrificed 1/3 of his share = 1/3 of 3/8 =3/24 i.e., 1/8
Therefore, sacrificing ratio of Arvind and Gobind is 1/8 : 1/8 i.e., 1 : 1
Arvind’s new share = 5/8 – 1/8 =
4/8 Gobind’s new share = 3/8 –
1/8 = 2/8 Dipak’s new share =
1/8 + 1/8 = 2/8
Therefore, New Profit Sharing ratio of Arvind, Gobind and Dipak is
= 4/8 : 2/8 : 2/8 =[Link]

10. Arun and Barun are partner sharing profit and losses in the ratio of 7: 3. The Balance Sheet of
st
the firm on 31 March, 2017 was as follows:

Balance Sheet as on 31.03.2017

Liabilities Amount Assets Amount
(`) (`)
Capital : Goodwill 20,000
Arun 88,000 Plant and Machinery 45,000
Barun 64,000 Land and Building 40,000
Sundry Creditors 1,52,000 Furniture 13,600
Reserve Fund 70,000 Sundry Debtors 45,000
18,000 Bills Receivable 29,400
Stock 35,000
Work Book : Financial Accounting
Bank 12,000
2,40,000 2,40,000
th
Karan joined the partnership as a new partner for 1/6 share of future profits and losses of
the firm on the following terms:
i. Stock is revalued at `39,000; one unrecorded assets for `2,000 to be recorded for
Work Book : Financial Accounting
unexpired Rent.
ii. Depreciation to be charged for Plant and Machinery `6,000, Land and Building ` 4,400
and Furniture are depreciated by 10%.
iii. Karan brought `40,000 as his capital and ` 12,000 for his share of goodwill.
iv. Capital of the partners shall be proportionate to their profit sharing ratio. Adjustment
of Capitals to be made by Cash.

Prepare Revaluation Account, Partners Capital Account, Cash Account and Balance Sheet of the
new firm.

Solution:

In the books of Arun, Barun and Karan

Dr. Revaluation Account Cr.
Particulars Amount Particulars Amount
(`) (`)
To Plant and Machinery A/C 6,000 By Stock A/C 4,000
To
Land and Building A/C 4,400 By Unexpired Rent A/C By 2,000
To Furniture A/C 1,360 Partners Capital A/C
- Arun’s Capital 4,032
- Barun’s Capital 1,728 5,760
11,760 (loss on revaluation) 11,760

Dr. Partner’s Capital Accounts Cr.

Particulars Arun Barun Kara Particulars Ar Baru Karan
(`) (`) n un n (`)
(`) (`) (`)
To Goodwill A/C 14,000 6,00 - By Balance b/d 88,00 64,0 -
0 By Reserve Fund 0 00
To Revaluation 4,032 1,72 - A/C By Premium for 12,60 5,40 -
A/C 8 0 0
Goodwill A/C
- loss.
By Bank A/C
To Bank A/C 8,40 3,60 -
- Capital brought 0 0
- Excess in By Bank A/C
capital - Further capital
withdrew [bal. [bal. fig.] - - 40,00
fig.] 0
To Balance c/d - 5,27 -
2
[Note:2] 49,03 - -
2
1,40,0 60,0 40,0
00 00 00
1,58,0 73,00 90,0 1,58,0 73,0 90,00
32 0 00 32 00 0
Work Book : Financial Accounting
Dr. Bank Account Cr.
Particulars Amount Particulars Amount
(`) (`)
To Balance b/d 12,000 By Barun’s Capital A/C 5,272
To Arun’s Capital A/C - Further 49,032 - Excess capital withdrew
capital
To Premium for Goodwill A/C 12,000
To Karan’s Capital A/C 40,000 By Balance c/d 1,07,760
1,13,03 1,13,032
2
 Work Book : Financial Accounting

Balance Sheet as on 31.03.2017

Liabilities Amount Assets Amount
(`) (`)
Capitals A/C: Bank 1,07,760
Arun 1,40,000 Bills Receivable 29,400
Barun 60,000 Sundry Debtors 45,000
Karan 40,000 2,40,000 Stock 39,000
Sundry Creditors 70,000 Furniture 12,240
Unexpired Rent 2,000
Land and Building 35,600
Plant and Machinery 39,000
3,10,000 3,10,000

Working Note:
1. Calculation of New profit Sharing
Ratio: Karan’s share of profit = 1/6th
Therefore, Remaining Profit ( i . e . , 1 – 1/6) or 5/6 th t o be shared by Arun and Barun
according to their existing profit sharing ratio.
Arun’s share = 5/6 x 7/10 =
7/12 Barun’s shares = 5/6 x
3/10 = 3/12 Karan’s share =
1/6 x 2/2 = 2/12
New profit sharing ratio of Arun, Barun and Karan = 7/12 : 3/12 : 2/12 = 7 : 3 : 2.

2. Adjustment of Capital of partners in their profit sharing

ratio: Karan brought capital for 1/6 share = ` 40,000
Total Capital of the firm = ` 40,000 × 6/1 = ` 2,40,000
Therefore, new capital of the partners are:
Arun’s Capital = ` 2,40,000 × 7/12 = `
1,40,000 Barun’s Capital = ` 2,40,000 ×
3/12 = ` 60,000 Karan’s Capital = `
2,40,000 × 2/12 = ` 40,000

11. Amal, Bimal and Kamal were the partners in a firm sharing profits and losses in the ratio of
3 : 2 : The Balance Sheet of the firm as on.31.12.2018 was as follows:

Balance Sheet as at 31.12.18

Liabilities Amount Assets Amoun
(`) t
(`)
Amal 45,000 Plant 40,
Bimal 35,000 Buildings 000
Kamal 1,05,00 Furniture 50,
0 000
Work Book : Financial Accounting
15,000 Debtors 4,
25,000 Reserve 12,000 Stock 00
Bank 0
Fund 20,500
30,
Profit and Loss A/C
000
Creditors
25,
000
3,
50
0
 Work Book : Financial Accounting
1,52,00 1,52,00
0 0

Kamal retired on that date subject to the following conditions:

i) Goodwill of the firm to be valued at ` 36,000;
ii) Building is to be appreciated by 20%;
iii) Plant and Furniture are to be depreciated by 10% and 15% respectively;
iv) Provision to be made for doubtful debts @ 5%.

Amal and Bimal are to bring in cash, if necessary, in their profit sharing ratio to pay off
Kamal’s dues on retirement and leave a sum of ` 10,000 as working capital.

Prepare Revaluation Account, Partners’ Capital Account and Balance Sheet of the new firm as on
31.12.18.

Solution:

In the books of Amal, Bimal and Kamal

Dr. Revaluation Account Cr.
Particulars Amount Particulars Amount
(`) (`)
To Provision for Doubtful Debts A/C 1,500 By Goodwill A/C 36,000
To Depreciation on Plant A/C 4,000 By Building A/C 10,000
To Depreciation on Furniture A/C 600
To Partner’s Capital A/C
- Amal’s Capital 19,950
- Bimal’s Capital 13,300
- Kamal’s Capital 6,650 39,900
46,000 46,000

Dr. Partner’s Capital Accounts Cr.

Particulars Amal Bimal Kama Particulars Amal Bima Kamal
`. `. l `. l `.
`. `.
To Bank A/C - - 36,15 By Balance b/d 45,0 35,0 25,0
0 00 00 00
- Dues paid off By Reserve Fund 7,50 5,00 2,50
A/C 0 0 0
By Revaluation A/C 19,9 13,3 6,65
50 00 0
To Balance c/d 1,04,0 74,3 - - profit
40 60
By Profit & Loss A/C 6,00 4,00 2,00
0 0 0
By Bank A/C (Def.) 25,5 17,0 -
90 60
Work Book : Financial Accounting
By Balance b/d
1,04, 74,3 36,15 1,04,0 74,3 36,1
040 60 0 40 60 50
1,04,0 74,3 -
40 60
 Work Book : Financial Accounting

Balance Sheet as at 31.12.18

Liabilities Amount Assets Amount
(`) (`)
Capital A/C Goodwill 36,
Amal 1,04,040 Buildings 000
Bimal 1,78,400 Plant 60,
000
Furniture
36,
20,000 Debtors 30,000
000
Less: Provision
3,
74,360 Creditors 40
1,500 Stock 0
Bank [Note 1]
28,
500
25,
000
10,
000
1,98,900 1,98,900

Working Note:
Additional amount to be brought in by Amal and Bimal:
`
Amount paid to Kamal 36,150
Add, required working capital to be maintained 10,000
46,150
Less, Cash at Bank as per existing balance Sheet 3,500
Amount to be brought in 42,650

12. Amir, Boby and Chetan were the partners in a firm sharing profits and losses equally. The
Balance Sheet of the firm as on 31.12.2017 was as follows:
Balance Sheet as at 31.12.17
Liabilities Amount Assets Amou
(`) nt
(`)
Amir 30,000 Goodwill 18,000
Boby 30,000 Land and Building 60,000
Chetan 25,000 Machinery 40,000
Reserve Fund 85,000 Debtors 48,000
8% Mortgage Loan 38,000 Less: Provision 3,000
Creditors 60,000 Stock 45,000
Bills payable 20,000 Bank 22,000
Work Book : Financial Accounting
20,000 38,000
2,23,00 2,23,00
0 0
Chetan has decided to retire from partnership and remaining partners will continue the
business. The following adjustment to be considered at his retirement:
a. Create provision for discount on Creditors of `1,600; the Provision for Doubtful Debt
to be raised by ` 1,000; the value of Land and Building to be appreciated by 15%;
Depreciate Machinery by 10%; the amount for ` 4,000 of Bills Payable was not likely
to be claimed.
b. Goodwill to be valued on 3 years’ purchase of average profit of last 4 years which
were 2014 : ` 56,000 (loss); 2015 : ` 22,000; 2016: ` 54,200; 2017 : ` 24,800.
Work Book : Financial Accounting
c. Amir and Boby ha ve decided to show the firm’s total capital at ` 1,00,000 which
would be according to their new profit sharing ratio at 2:3. The adjustments to be
made in cash.

Prepare Revaluation Account, Partners’ Capital Account and Balance Sheet of the new
partners as on 31.12.17.

Solution:

In the books of Amir, Boby and Chetan

Dr. Revaluation Account Cr.
Particulars Amount Particulars Amount
(`) (`)
To Provision for Doubtful Debts A/C 1,000 By Land and Building A/C 9,000
To
Depreciation on Machinery A/C To 4,000 By Provision for discount on
Partner’s Capital A/C Creditors A/C 1,600
- Amir’s Capital 3,200 By Bills Payable A/C 4,000
- Boby’s Capital 3,200
- Chetan’s Capital 3,200 9,600
14,600 14,600

Dr. Partner’s Capital Accounts Cr.

Particulars Ami Bob Cheta Particulars Ami Bob Cheta
r y n r y n
(`) (`) (`) (`) (`) (`)
To Goodwill A/C 6,00 6,00 6,000 By Balance b/d 30,0 30,0 25,00
0 0 00 00 0
To Chetan’s Capital 2,25 9,00 - By Reserve 12,6 12,6 12,66
0 0 67 67 6
A/C By Revaluation A/C 3,20 3,20 3,200
0 0
To Chetan’s Loan - - 46,11 - profit
A/C 6
To Balance c/d 40,0 60,0 - By Amir’s Capital A/C - - 2,250
00 00
By Boby’s Capital A/C
By Bank A/C (Def.) - - 9,000
By Balance b/d 2,38 29,1 -
3 33
48,2 75,0 52,11 48,2 75,0 52,11
50 00 6 50 00 6
40,0 60,0 -
00 00

Balance Sheet as at 31.12.17

Work Book : Financial Accounting
Liabilities Amount Assets Amount
(`) (`)
Capital A/C Land & 69,000
Buildings
Amir’s 40000 Machinery 36,000
Boby’s 60000 1,00,000 Debtors 48,00
0
Bills Payable 16,000 Less: Provision 4,000
Creditors 18,400 Stock 44,000
8% Mortgage Loan 60,000 Bank 22,000
Chetan’s Loan 46,116 69,516
2,40,516 2,40,516
 Work Book : Financial Accounting

Working Note:
The value of Goodwill is 3 years’ purchase of average profit of last 4 years
= ` (- 56,000 (loss) + 22,000 + 54,200 + 24,800) / 4 X 3
= ` 33,750. The value of Goodwill is adjusted against partners’ capital accounts.

13. Rahul, Ranjit and Rakes are the partners of a firm sharing profits and losses in the ratio of
[Link]. The Balance sheet of the firm as on 31st December 2017 is:

Balance Sheet as on 31st December 2017

Liabilities Amount Assets Amount
(`) (`)
Capital Accounts: Plant 50,000
Rahul 40,000 Land and Building 40,000
Ranjit 35,000 Furniture & Fixture 24,000
Rakes 25,000 1,00,000 Debtors 8,000
Reserve Fund 10,000 Stock 15,000
Creditors 28,000 Bank 13,000
Outstanding Expenses 12,000
1,50,000 1,50,000

Rahul has died on 1st July 2018 on the following terms-

i) Plant to be valued at ` 48,000.
ii) Land and Building revalued at ` 50,000.
iii) Furniture & Fixture are to be increased by ` 2,000.
iv) Interest on Capital is to be charged at 10% p.a.
v) Profit for the year 2018 has been accrued on the same scale as it was in 2017.
vi) Goodwill of the firm is valued at 2 years’ purchase of the average profits of the last
five years which were: 2013 – ` 15,000; 2014 – ` 13000; 2015 – ` 12,000; 2016 – `
15,000 and 2017
– ` 20,000
vii) ` 12,000 of the due to Rahul is to be paid in cash to Rahul’s Executor and the balance is
to
transfer to his loan account.

Prepare Revaluation Account, Rahul’s Capital Account and Rahul’s Executors Account.

Solution:

In the books of Rahul, Ranjit and Rakes

Dr. Revaluation Account Cr.
Particular Amount Particular Amount
s (`) s (`)
Work Book : Financial Accounting
To Plant A/C 2, By Furniture & Fixture 2,
To Capital Accounts A/C 00 A/C By Land and 00
0 0
Rahul Buildings A/C
10,
Ranjit
5, 000
00
0
3,
00
0
 Work Book : Financial Accounting
Rakes 2,000

12,000 12,
000

Dr. Rahul’s Capital Account Cr.

Particulars Amount Particulars Amount
(`) (`)
To Rahul’s Executors A/C 72,000 By Balance b/d 40,000
- Transferred. By Reserve fund A/C 5,000
[` 10,000 X 5/10]
By Interest on capital A/C By 2,000
Revaluation A/C 5,000
By Ranjit’s Capital A/C 9,000
By Rakes’s Capital A/C 6,000
72,000 72,000

Dr. Rahul’s Executor’s Account Cr.

Particulars Amount Particulars Amount
(`) (`)
To Bank A/C 12, By Rahul’s Capital A/C 72,000
To Rahul’s Executor’s Loan A/C 000
60,
000
72, 72,000
000

Working Note :
a) Interest on Rahul’s Capital = ` 40,000 X 10/100 X 6/12 = ` 2,000
b) Since, profit for the year 2018 has been accrued on the same scale as it was in 2017,
therefore, profit for 6 months upto June 2018 is ` 20000 X 6/12 = ` 10,000.
And, Rahul’s Share of profits = ` 10,000 X 5/10 = ` 5000.
c) Total Goodwill of the firm =
Average profits for last 5 years = ` 75000/5 = `
15000 Therefore, Goodwill = ` 15000 × 2 years
= ` 30,000
Rahul’s share of Goodwill = ` 30,000 × 5/10 = ` 15000 (to be adjusted against capital
accounts of partners in Gaining Ratio 3:2)

14. P, Q and R are the partners in sharing profits and losses at 5: 3 : 2. The Balance Sheet as on
31.12.2018 is given below:

Balance Sheet as on 31st December 2018

Liabilities Amount Assets Amount
(`) (`)
Capital Accounts: Machin 50,
 Work Book : Financial Accounting
P 10,000 ery Car 000
Q 40,000 Debtors 10,
Stock 000
R 20,000 70,000
Bank 45,
Creditors 1,00,000
000
60,
000
5,
00
0
 Work Book : Financial Accounting
1,70,00 1,70,00
0 0
Machinery and stock are sold for ` 25,000 and ` 18,000 respectively. Car is taken by Q for `
12,000. Debtors realized ` 20,000. Deficiency of any partner in Capital account is to be met
by other partners in profit sharing ratio. P is insolvent; R can bring in ` 5,000 only.
You are required to prepare Realisation Account, Bank Account and Partners Capital Account.

Solution:
In the books of P, Q and R
Dr. Realisation Account Cr.
Particulars Amount Particulars Amount
(`) (`)
To Machinery A/C 50,000 By Bank A/C
To Car A/C 10,000 (assets realised)
To Debtors A/C 45,000 - Machinery 25,000
To Stock A/C 60,000 - Stock 18,000
- Debtors 20,000 63,000
By Q’s Capital A/C 12,000
- Car taken over.
By Partners Capital A/C
- P [ 90,000 X 45,000
5/10]
- Q [90,000 X 27,000
3/10]
- R [90,000 X 18,000 90,000
2/10]
1,65,00 1,65,00
0 0

Dr. Bank Account Cr.

Particulars Amount Particulars Amount
(`) (`)
To Balance b/d 5, By Creditors A/C 1,00,000
To Realisation A/C 00 - Direct payment met
0
- assets realised
63,
To R’s Capital Accounts A/C
000
To Q’s Capital Accounts
A/C
5,
00
0
27,
000
1,00, 1,00,000
000

Dr. Partner’s Capital Accounts Cr.

Particulars P Q R Particulars P Q R
` ` ` ` ` `
 Work Book : Financial Accounting
To Realisation A/C By Balance b/d 10,00 40,00 20,00
- Car taken - 12, - By Bank A/C 0 0 0
over To 000 - Cash
Realisation A/C brought in - 27,00 -
27, 0
- Loss against loss
000 -
To P’s Capital A/C 45, 18, - Cash brought in
-
[Note: 1] against
21, 5,
To R’s Capital A/C 000 000 deficiency
000
- Deficiency borne By Q’s Capital A/C & 35,00
R’s Capital A/C 0 - 00
- 14,
7,
000
00
- 0 0
-

-
 Work Book : Financial Accounting
[Note: 1]
By Q’s Capital A/C - - 7,
-deficiency 00
0

45, 67,0 32,0 45,0 67,0 32,0

000 00 00 00 00 00

Working Note:
1. P is insolvent. His entire deficiency ` 35,000 is borne by Q and R in the ratio of 3 : 2.

15. P, Q and R are the partners in Bosco Engineering Works sharing profits and losses at 6: 3: 5.
The Balance Sheet as on 31.12.2017 is given below:

Balance Sheet as on 31st December 2017

Liabilities Amount Assets Amount
(`) (`)
Capital Accounts: Land and Building 10,000
P 25,000 Furniture & Fixture 5,000
R 15,000 40,000 Debtors 30,000
Current Accounts: Stock 23,100
P 1,000 Bank 2,500
R 500 1,500 Q’s Current Accounts 4,900
Reserve 1,400
Creditors 28,600
Mortgage Loan 4,000
75,500 75,500

It was decided by the partners to dissolve the partnership on 31.12.2017. The following
amount has been realized:
Furniture & Fixture ` 2,000; Land and Building ` 6,000; Debtors ` 20,000 and Stock `
15,000. Creditors are agreed to forgo 25% in full settlement of their total dues. The full
amount of Mortgage Loan has been paid. Realisation expenses paid for ` 1,650. It was
ascertained that Q had become insolvent. Q’s estate had contributed only 50 paise in a rupee.
You are required to prepare Realisation Account, Bank Account and Partners Capital Account
following the rule given in Garner Vs. Murray.

Solution:

In the books of Bosco Engineering Works

Dr. Realisation Account Cr.
Particulars Amount Particulars Amoun
t
Work Book : Financial Accounting
(`) (`)
 Work Book : Financial Accounting
To Land and Building 10,000 By Creditors A/C 28,600
A/C
To Furniture & Fixture 5,000 By Mortgage Loan A/C 4,000
A/C
To Debtors A/C 30,000 By Bank A/C (assets realised)
To Stock A/C To Bank 23,100 - Land and Building 6,000
A/C
(payment of liabilities) - Furniture & Fixture 2,000
- Creditors 21,450 - Debtors 20,000
- Mortgage Loan 1,650 - Stock 15,000 43,000
- Realisation Expenses 4,000 27,100 By Partners Capital A/C
- P [ 19,600 X 6/14] 8,400
- Q [ 19,600 X 3/14] 4,200
- R [ 19,600 X 5/14] 7,000 19,600
95,200 95,200

Dr. Bank Account Cr.

Particulars Amount Particulars Amount
(`) (`)
To Balance b/d 2,500 By Realisation A/C 27,100
To Realisation A/C 43,000 By P’s Capital Accounts A/C 23,850
By
To P’s Capital Accounts A/C 8,400 R’s Capital Accounts A/C 14,350
To
R’s Capital Accounts A/C To 7,000
Q’s Capital Accounts A/C 4,400

65,300 65,300

Dr. Partner’s Capital Accounts Cr.

Particulars P Q R Particulars P Q R
` ` ` ` ` `
To Current A/C - 4,90 - By Balance 25,0 - 15,00
0 b/d By 00 0
To Realisation A/C Current A/C 1,00 - 500
0
By Reserve
- Loss 8,40 4,20 7,00 600 300 500
0 0 0 A/C By Bank
To Q’s Capital A/C 2,75 - 1,65 A/C
0 0 - Cash
[Note: 1] brought in 8,40 - 7,000
0
against loss
To Bank A/C - -
By Bank A/C
-Balance paid off. 23,8 - 14,3
-[(9,100 – 300) x
50 50
 Work Book : Financial Accounting
50%] By - 4,40 -
0
P’s Capital A/C &
R’s Capital A/C
[Note: 1] 4,40
0
35,0 9,10 23,0 35,0 9,10 23,00
00 0 00 00 0 0

Working Note:
1. Q’s total deficiency of ` [(9,100 – 300) x 50%] or ` 4,400 to be shared by P and R in
their Fixed Capital Ratio i.e., 25,000 : 15,000 or 5 : 3.

AMALGAMATION OF THE FIRMS

 Work Book : Financial Accounting

16. Multiple Choice Questions

Choose the correct

alternative

1. When the books of amalgamation of firms are being closed then assets and liabilities
are transferred to:
(a) Capital account
(b) Revaluation account
(c) Realization account
(d) None of these

2. Profit on realization is transferred to partners capital account in:

(a) Equally
(b) Capital ratio
(c) Profit sharing ratio
(d) None of these

3. The basis of computation of purchase consideration is:

(a) Capital
(b) Liabilities taken over
(c) Net assets
(d) None of these

4. When realization account is opened then:

(a) The assets are not in the hands of same firm
(b) The assets are in the same firm
(c) Both of these
(d) None of these

5. When revaluation account is opened then:

(a) Assets are sold in the open market
(b) Assets are remained in the same firm
(c) Assets are not in the hands of the same firm
(d) None of

these Answer:
 Work Book : Financial Accounting
1 - (c); 2 - (c); 3 - (c); 4 - (a); 5 - (b)

17. Fill in the blanks:

 Work Book : Financial Accounting
1. Amalgamation of the firm is used to be done to avoid…………
2. Amalgamation of the firm is used to be done to ……profit
3. When two or more firms carrying on business of same nature, decided to amalgamate
is called…………….
4. Amalgamation of firms indicates of two or more existing firms.
5. Amalgamations of firms secure internal & external of large scale production.

Answer:

1. competition
2. maximize
3. amalgamation of firms
4. winding up
5. economies

18. Rajesh & Co. and Taj & co. ar e two partnership firm, carrying on business. T h e y decided to
amalgamate into a n e w f i r m Amal & Co. with effect from 1st January 2019. Their
respective Balance Sheets are as follows:

Balance Sheet of Rajesh &

Co. as on 31st December,
2018
Liabilities ` Assets `
Mr B’s Capital Accounts 19,000 Plant & Machinery 10,000
Sundry Creditors 10,000 Stock -in -trade 20,000
Bank Overdraft 15,000 Sundry debtors 10,000
Mr. A’s Capital Account 4,000
44,000 44,000

A and B share profits and losses in the proportion of 1: 2.

Balance Sheet of Taj &

co. as on 31 December,
2018
Liabilities ` Assets `
Mr. X’s Capital A/c 10000 Investment 5000
Mr. Y’s Capital A/c 2000 Stock-in-trade 5000
Sundry Creditors 9500 Sundry Debtors 10000
Cash in hand 1500

21500 21500

X and Y share profit and losses equally. The following further information is given:
Work Book : Financial Accounting
(i) All fixed assets are to be devalued by 20%.
(ii) All stock in trade is to be appreciated by 50%.
(iii) Rajesh & Co. owes ` 5000 to Taj & co. as on 31 December, 2018. This debit is settled at `
2000
Work Book : Financial Accounting
(iv) Investment is to be ignored for the purpose of amalgamation, being valueless.
(v) The fixed capital accounts in the new firm are to be: Mr A ` 2000; Mr B ` 3000 ; Mr X `
1000; Mr Y ` 4000.
(vi) Mr B takes over bank overdraft of Rajesh & Co. and gifts to Mr A the account of money
to be brought in by Mr A to make up his capital contribution.
(vii) Mr X is paid off in cash from Taj & co. and Mr Y brings in sufficient cash to make up his
required capital contribution.

Pass necessary Journal Entries to close the books of both the firms as on 31 December, 2018.

Solution:

In the books of
Rajesh & Co.
Journal Entries Dr. Cr.
Date Particulars ` `
2018 Realization A/c Dr. 40,
000
Dce.3 To Plant and Machinery A/c 10,00
1 0
To Stock-in-trade A/c 20,00
0
To Sundry Debtors A/c 10,00
0
(Being the different assets transferred to Realisation Account)
Sundry Creditors A/c Dr. 10
To Realization A/c 00 10
0 00
(Being sundry creditors transferred to Realisation Account)
0
Bank Overdraft A/c Dr.
To B Capital A/c
(Being overdraft taken by B)
15
Amal & Co. A/c (Note 1) Dr
00 15
To Realization A/c 0 00
(Being purchase consideration due from Amal & Co.) 0
Realization A/c (Note 2) Dr
To A Capital A/c 41
To B Capital A/c 00 41
(Being profit on realization ) 0 00
B Capital A/c (Note5) Dr 0
To A Capital A/c
(Being deficit in A’s Capital made good by B ) 11
Work Book : Financial Accounting
A Capital A/c Dr 00
B Capital A/c (See Note) Dr. 0
3
To Amal & Co. A/c 6
6
7
2 7
3 3
3 3
3 3

2 2
0 3
0 3
0 3
39
00
0
 Work Book : Financial Accounting
(Being the capital accounts to the partners closed by transfer 41
to Amal & Co.) 00
0

Note : It should be noted that the credit balance in B’s capital account in ` 39000. His agreed
capital in Amal & Co. is ` 3000 only. Since there is no liquid assets in Rajesh & Co. from
which B can be repaid, the excess amount of ` 36000 should be taken over by Amal & Co. as
loan from B.

In the books of Taj & Co.

Journal Entries
Dr. Cr.
Dat Particulars ` `
e
2018 Realization A/c Dr 20
Dce.3 To Plant and Machinery A/c 00 5
1 0 0
To Stock-in-trade A/c
0
To Sundry Debtors A/c
0
(Being the different assets transferred to Realisation A/c)
5
Sundry Creditors A/c Dr 0
To Realization A/c 0
0
(Being sundry creditors transferred to Realisation Account)
9 10
Amal & Co. A/c (Note 1) 5 00
0 0
Dr To Realisation A/c 0
(Being purchase consideration due from Amal & Co.)
X Capital A/c Dr 5
Y Capital A/c Dr 0
0 9
To Realisation A/c 5
0
(Being loss on realization transferred to Partner’s Capital 0
Accounts equally) 0

2 5
7 0
5 0
0 0
2
7
5
0
5
5
0
0
Cash A/c Dr 4
To Capital A/c 7 4
(Being the necessary amount brought in by to make up his 50 7
required capital contribution) 5
 Work Book : Financial Accounting
X Capital A/c Dr 0
To Cash A/c
(Being the excess capital paid by cash) 6
2
X Capital A/c Dr 50
Y Capital A/c Dr 6
To Amal & Co. A/c 2
(Being the capital accounts of the partners closed by transfer to 5
1 0
Amal & Co.)
0
00
4
0
00 5
0
0
0

Working Notes:
(1) Calculations of Purchase Consideration
Assets taken over : Rajesh & Taj &
Co. Co.
 Work Book : Financial Accounting
Plant and Machinery 8000 -
Stock-in-trade 30000 7500
Sundry Debtors 10000 7000

48000 14500
Less, Liabilities taken over :
Sundry creditors
7000 9500
Purchase consideration 41000 5000
Dr. Realisation Account Cr.
Particulars Rajes Taj Particulars Rajesh Taj &
h& & & Co.
Co. Co. Co.
To Investment A/c - 5000 By Sundry creditors 10000 9500
A/c
To Plant and Machinery 10000 - By Amal & Co. A/c 41000 5000
A/c
To Stock-in-trade A/c 20000 5000 By X Capital A/c - 2750
(Loss)
To Sundry Debtors A/c 10000 1000 By Y Capital A/c - 2750
0 (Loss)
To A Capital A/c 3667 -
To B Capital A/c 7333 -
51,00 20,00 51,000 20,000
0 0

Dr. Partners’ Capital Account Cr.

Particulars A B Particulars A B
To Balance b/d 4000 - By Balance b/d - 19000
To A Capital A/c - 2333 By Realisation A/c (profit) 3667 7333
To Amal & Co. A/c 2000 3900 By B Capital A/c 2333 -
0
By Bank Overdraft A/c - 15000
6000 4133 6000 41333
3

Dr. Partners’ Capital Account Cr.

Particulars X Y Particulars X Y
To Realisation A/c 2750 2750 By Balance b/d 10000 2000
To Amal & Co. A/c 1000 4000 By Cash A/c - 4750
To Cash A/c 6250 -

6000 41333 6000 41333

19. The Balance sheet of two partnership firms AB and XY as on 31.12.2018 are as below:
Liabilities AB (`) XY (`) Assets AB (`) XY (`)
Capital: A BXY 60000 - Furniture 8000 6000
 Work Book : Financial Accounting
Bank loan 30000 - Investments - 18000
Bills payable - 36000 Machinery 60000 20000
- 24000 Stock 32000 24000
10000 - Debtors 18000 30000
30000 40000 Cash 12000 2000

130000 100000 130000 100000

Work Book : Financial Accounting

AB absorbed XY on 01.01.2019 on the following terms:

(a) That the investment of XY to be sold out and the investment realized ` 24000;
(b) That the stock of XY be reduced to ` 22000;
(c) That the machinery of XY will be increased by 40% ; (d) That the furniture of XY will
be reduced by 10% ;

It was further decided that for AB, following are the adjustments to made:
i. Assets are to be revalued as following stock: `40000; Machinery: `84000; Furniture: `
7200; and
ii. Bank loan is to be repaid

You are required to show necessary Leger Accounts to close the books of XY to prepare
necessary Journal Entries and Balance Sheet of AB after absorption.

Solution:

Working Notes:
Calculation of Purchase Consideration
Assets taken over : `
Machinery 28000
Furniture 5400
Stock 22000
Debtors 30000
Cash (24000+2000) 26000
11140
0
Less : Liability taken over- Bills payable 40000
Purchase Consideration 71400

In the books of XY
Dr Realisation Account Cr
Particulars ` Particulars `
To Machinery A/c 20000 By Bills Payable A/c 40000
To Furniture A/c 6000 By AB A/c 71400
To Stock A/c 24000
To Debtors A/c 30000
To Cash A/c 26000
To Partners’ Capital A/c :
Work Book : Financial Accounting
X- 2700
Y- 2700 5400
1,11,40 1,11,40
0 0
Work Book : Financial Accounting

Dr AB Account Cr
Particulars ` Particulars `
To Realisation A/c 71400 BY Capital in AB A/c 71400
71400 71400

Dr Cash Account Cr
Particulars ` Particulars `
To balance b/d 2 By Realisation A/c 26000
To Investment 0
00
A/c
24
00
0
26 26000
00
0
Dr Partner’s Capital Account Cr
Particulars X Y Particulars X Y
To Capital in AB A/c 41 29 By balance b/d 36000 24000
70 70
0 0
By Profit on sale of 3000 3000
Investment A/c
By Realisation A/c 2700 2700
41 29 41700 29700
70 70
0 0

In the books of AB
Journal Entries
Dr Cr
Date Particulars ` `
2019 Bank Loan Dr 10
Jan.1 A/c To Cash 00 10000
0
A/c
(Being the bank loan repaid )
Stock A/c D 8
Machinery r 0
0
A/c D 0 32000
To Revaluation A/c r 24
(Being the increase in value of assets) 00
0
Revaluation A/c Dr 800
To Furniture 800
A/c
Work Book : Financial Accounting
(Being the decrease in value of
furniture)
Revaluation A/c Dr 312 15
000 60
To A Capital
0
A/c To B
15
Capital A/c 60
(Being the profit and on revaluation transferred to 0
Partners’
Capital A/cs in profit-sharing ratio)
 Work Book : Financial Accounting
Machinery A/c Dr 28
Furniture A/c Dr 00
0
Stock A/c Dr
5
Debtors A/c Dr 4
Cash A/c Dr 0
To Bills Payable 0 40
A/c To X Capital 22 00
A/c 00 0
0 41
To Y Capital A/c
30 70
(Being the introduction of capital by X & Y ) 00 0
0 29
26 70
00 0
0

Dr Partner’s Capital Account Cr

Particulars A B Particulars A B
To Balance c/d 75 45 By Balance b/d 6 30
60 60 By Revaluation A/c 0 00
0 0 (profit) 0 0
0 15
15 60
60 0
0
75 45 75 45
60 60 60 60
0 0 0 0

Balance Sheet
st
as on 1 January, 2019
Liabilities ` Assets `
Capital Accounts: Machinery 112000
A 75600 Furniture 12600
B 45600 Stock 62000
X 41700 Debtors 48000
Y 29700 Cash 28000
Bills payable 70000
2,62,600 2,62,600

20. Ajit and Bimal are partners of AB & Co. sharing profits and losses at 3 : 1 and Bimal and
Chetan are partners of BC & Co. sharing profits and losses at 2 : 1. On 31 st March 2018, they
decided to amalgamate and form a new firm Anand & Co. The future profit sharing ratio
among the partners would be 3 : 2 : 1.
The Balance Sheet of two firms as on 31st March, 2018 are as under:
Liabilities AB & Co BC & Co Assets AB & Co BC &
(`) (`) (`) Co
(`)
Work Book : Financial Accounting
Capital Machinery 60,000 64,000
Accounts: 96,000 - Land and 20,000 -
Ajit 64,000 80, Building 8,000 2,
Bimal - 000 Furniture & 64,000 40
Cheta 20, 40,000 Fixture 48,000 0
n 000 60,000 Debtors 20,000 80,000
Reserve 48,000 46,400 Sto 40,000 56,000
Fund - 40,000 ck - 40,000
Creditors 32, - Ca -
Due to AB & Co Bank 000 sh 24,
Loan 000
Due from BC &
2,60, 2,66, Co. Advances 2,60, 2,66,
000 400 000 400

The amalgamated new firm Anand & Co. took over the business on the following terms:
a) Land and Building of AB & Co. was valued at ` 40,000.
 Work Book : Financial Accounting
b) Machinery of AB & Co. was valued at ` 90,000 and that of BC & Co. ` 80,000.
c) Goodwill of AB & Co. was valued at ` 20,000 and that of BC & Co. at ` 16,400 but no
goodwill account was to appear in the books of Anand & Co.
d) Partners of the new firm will bring necessary cash to pay other partners to adjust
their capital according to the profit sharing ratio.

Show journal entries and prepare Balance Sheet as on 31 st March, 2018 in the books of Anand
& Co.

Solution:

In the books of Anand & Co.

Journal Entries
Debit Credit
Dat Particulars L Amount( Amount(
e F `) `)

Land and Building A/c Dr. 40,000

Machinery A/c Dr. 1,70,000
Furniture and Fixture A/c Dr. 10,400
Stock A/c Dr. 1,04,000
Debtors A/c Dr. 1,44,000
Cash A/c Dr. 60,000
Due from BC & Co. A/c Dr. 40,000
Advance A/c Dr. 24,000
Goodwill A/c Dr. 36,400
To Creditors A/c 94,400
To Due from AB & Co. 40,000
A/c To Bank Loan A/c 32,000
To Ajit’s Capital A/c 1,63,500
To Bimal’s Capital 2,28,100
A/c 70,800
To Chetan’s Capital A/c
(Assets and liabilities of AB & Co. and BC & Co.
transfer to Anand & Co with adjusted capital)
Ajit‘s Capital A/c Dr. 18,2
Bimal‘s Capital A/c Dr. 00
Chetan‘s Capital A/c Dr. 12,1
To Goodwill A/c 33 36,400
(Goodwill written off at 6,0
[Link]) 57
Due to AB & Co. A/c Dr. 40,000 40,000
To Due to BC & Co.
A/c (Inter business debts
set off)
Cash A/c Dr. 73,967
To Ajit’s Capital A/c 67,7
To Chetan’s Capital A/c 00
(Deficit capital introduced by Ajit and Chetan) [Note : 6,2
C] 67
Work Book : Financial Accounting
Bimal’s Capital A/c Dr. 73,967 73,967
To Cash A/c
(Surplus capital withdrawal by Bimal) [Note: C]

Balance Sheet of Anand & Co. as on 31st March 2018

Liabilities Amount Assets Amount
(`) (`)
 Work Book : Financial Accounting
Capital Machinery 1,70,000
Accounts: 2,13,000 Land and 40,000
Ajit 1,42,000 Building 10,400
Bima 71,000 Furniture & 1,44,000
l 94,400 Fixture 1,04,000
Chet 32,000 Debtors 60,000
an Stock 24,000
Creditors Cash
5,52, 5,52,
Bank Loan 400 Advanc 400
es

Working Notes:

a) Adjusted Capital of AB & Co. transfer to Anand & Co.:

Particulars Ajit (`.) Bimal
(`.)
Partners’ Capital 96,0 64,0
Add, Share of Reserve Fund at 00 00
3:1 Add, Share of Goodwill at 15,0 5,0
00 00
3:1 Add, Share of Revaluation
15,0 5,0
Profit:
00 00
Increased value of Land & Building `
20,000 Increased value of Machinery`
30,000
50,000
37,5 12,5
00 00
Capital of partners transfer to Anand & 1,63,5 86,5
Co. 00 00

b) Adjusted Capital of BC & Co. transfer to Anand & Co.:

Particulars Bimal (`) Chetan (`)
Partners’ Capital 80,0 40,0
Add, Share of Reserve Fund at 00 00
2:1 Add, Share of Goodwill at 40,0 20,0
00 00
2:1
10,9 5,4
Add, Share of Revaluation Profit on Machinery
33 67
10,6 5,3
67 33
Capital of partners transfer to Anand & 1,41,6 70,8
Co. 00 00

c) Surplus capital withdrawn and deficit capital introduced by partners:

 Work Book : Financial Accounting
Particulars Total Ajit Bimal Chetan
(`) (`) (`) (`)
Capital transferred to Anand & Co 4,62,4 1,63,50 2,28,10 70,800
00 0 0
Less, Goodwill written off at [Link] 36,400 18,200 12,133 6,067
Actual Capital of partners 4,26,0 1,45,30 2,15,96 64,733
00 0 7
Adjusted Capital of partners at [Link] 4,26,0 2,13,0 1,42,0 71,0
Deficit and Surplus capital of partners 00 00 00 00
- (67,700 73,967 (6,267
) )

21. M/s A and Co., having A and B as equal partners, decided to amalgamate with C and Co.,
having C and D as equal partners on the following terms and condition:
(i) The new firm AC and Co. to pay ` 12,000 to each firm for Goodwill.
 Work Book : Financial Accounting
(ii) The new firm to take over investments at 10% depreciation, land at ` 66,800,
premises at ` 53,000, machinery at ` 9,000 and only the trade liabilities of both the
firms. The Debtors being taken over at given value.
(iii) Type writers (written off) worth ` 800, belonging to C & Co., and not appearing in
the balance sheet was also not taken over by the new firm.
(iv) Bills Payable pertains to trade transaction only.
(v) All the four partners in the new firm to bring in ` 1, 60,000 as capital in equal
shares. The following were the Balance Sheets of both firms on the date of
amalgamation:
Liabilities A& C& Assets A& C&
Co. Co. Co. Co.
Trade Creditors 20,000 10,000 Cash 15,000 12,000
Bills Payable 5,000 - Investments 10,000 8,000
Bank Overdraft 2,000 10,000 Debtors ` 10,000
A’s Loan Capitals : Less: ` 1,000 9,000 4,000
A 6,000 - Furniture 12,000 6,000
B 35,000 - Premises 30,000 -
C 22,000 - Land - 50,000
D - 36,000 Machinery 15,000 -
General Reserve - 20,000 Goodwill (Purchased) 9,000 -
Investment Fluctuation 8,000 3,000
Fund 2,000 1,000
1,00,00 80,000 1,00,00 80,000
0 0

Assuming immediate discharge of bank overdraft, pass necessary Journal Entries to close the
books of A & Co. and C & Co. Also pass Journal entries in the books and prepare the Balance
Sheet of the New Firm.

Solution:

In the books of
A & Co.
Journal
Dat Particulars Dr. (`) Cr. (`)
e
Bank Overdraft A/c Dr. 2,
To Cash A/c 00 2,
0 00
(Being the payment of overdraft.)
Work Book : Financial Accounting
Realization A/c Dr. 0
To Cash A/c
To Investment 99,
A/c To Debtors 000 13,
A/c 000
To Furniture 10,
A/c To 000
Premises A/c 10,
000
To Machinery
12,
A/c To 000
Goodwill A/c 30,
(Being the transfer of different assets to Realization account) 000
15,
000
9,
00
0
Provision for Bad Debts A/c Dr.
Trade Creditors A/c Dr. 1,
Bills Payable A/c Dr. 00
0
To Realisation A/c
(Being the different liabilities and provisions transferred 20,
000 26,
to Realisation Account ) 000
5,
M/s AC & Co. (new firm ) A/c 00
0
Dr. To Realisation A/c (Note 1) 80,
000
(Being the purchase consideration due from the new firm )
A Capital A/c (Note 6) Dr. 80,
000
B Capital A/c Dr.
To Realisation A/c
(Being furniture taken by the partners equally ) 12,
6, 000
General Reserve A/c Dr.
00
Investment Fluctuation Fund A/c 0
6,
Dr. To A Capital A/c 00
0 5,
To B Capital A/c 00
(Being the reserve and Surplus distributed between the 0
partners equally )
5,
Realisation A/c (Note 2) Dr. 8, 00
To A Capital 00 0
A/c To B 0
Capital A/c 2,
(Being the profit on realisation transferred to the partners’ 00
0
Capital Accounts equally )
 Work Book : Financial Accounting
A’s Loan A/c Dr. 9,
To A Capital A/c 50
0
(Being A’s loan transferred to his Capital Account )
9,
Cash A/c Dr. 50
To B Capital A/c 19, 0
(Being cash brought in by B to raise capital equal to `40,000) 000
A & B Capital in M/s AC &Co A/c Dr.
To M/s Ac & Co A/c
(Being the settlement of purchase consideration ) 6,
A Capital A/c Dr. 00
0
B Capital A/c Dr. 6,
To A Capital in AC & Co A/c 00
0 9,
To B Capital in AC & Co A/c
50
(Being the final adjustment to close the books of account) 0
9,
50
0
80,
000

80,
000

40,
000
49,
500 49,
000
40,
000

In the books of C &

Company Journal
Dr. Cr.
Dat Particulars ` `
e
Bank Overdraft A/c Dr. 10,0
To Cash A/c 000 10,
000
 Work Book : Financial Accounting

(Being the payment of overdraft)

Office Equipment (Typewriters) A/c 800
4
Dr. To C Capital A/c 0
0
To D Capital A/c
4
(Being recording of typewriters previously written-off) 68,800 0
Realization A/c Dr. 0
To Investment
A/c To Debtors
A/c 8,000
To Furniture
4,000
A/c To Land
6,000
A/c
10,000 50,000
To Office Equipment A/c
800
(Being the transfer of different assets to Realisation Account)
Trade Creditors A/c Dr.
80,000
To Realisation A/c
(Being the liability transferred to Realisation Account)
10,000
M/s AC & Co. (New firm) A/c
3,
40 80,000
Dr. To Realisation A/c (Note 1) 0
(Being purchase consideration due from the new firm) 3,
C Capital A/c Dr. 40
D Capital A/c Dr. 0
6,800
To Realisation A/c
(Being furniture and typewriter taken over by the partners
equally)
General Reserve A/c Dr. 3,
Investment Fluctuation Fund A/c 00
0
2,
1, 00
Dr. To C Capital A/c
00 0
To D Capiatl A/c 0
2,
(Being the reserve and surplus distributed among the partners
00
equally)
0
Realisation A/c Dr.
28,
To C Capital A/c 000 14,
To D Capiatl 000
A/c 14,
(Being the profit on realization transferred to the Partner’s 000
Capital Accounts equally)
Cash A/c Dr.
7,
To D Capital A/c 00
(Being cash brought in by D raised his capital to ` 40,0000) 0 7,
Work Book : Financial Accounting
C and D Capital in A & Co. A/c Dr. 00
To M/s AC & Co. A/c 0
(Being the settlement of purchase consideration) 80,
C Capital A/c Dr. 000
80,
D Capital A/c Dr. 000
To C Capital in AC & Co.
A/c To D Capital in AC & 49,
000
Co. A/c To Cash A/c
40,
(Being the final adjustment to close the books of account)
000 40,
000
40,
000
9,
00
0
 Work Book : Financial Accounting
In the books of AC & Co.
Journal
Dr. Cr.
Dat Particulars ` `
e
Goodwill A/c Dr. 12,
000
Cash A/c Dr. 13,
000
Investment A/c Dr. 9,
00
0
Debtors A/c Dr. 10,
000
Premise A/c Dr. 53,
000
Machinery A/c Dr. 9,
00
0
To Provision for Bad Debts A/c 1,000
To Trade Creditors A/c 20,000
To Bills Payable A/c 5,000
To A Capital A/c 40,000
To B Capital A/c 40,000
(Being the assets and liabilities taken over by the new firm)
Goodwill A/c Dr. 12,
000
Investment A/c Dr. 7,
20
0
Debtors A/c Dr. 4,
00
0
Land A/c Dr. 66,
800
To Trade Creditors A/c 10,000
To C Capital A/c 40,000
To D Capital A/c 40,000
(Being the assets and liabilities taken over by the new firm)

Balance Sheet of AC &

Co. as at…….
Liabilities ` Assets `
Partner’s Capitals: Goodwill 24,000
A 40,000 Land Premise 66,800
Work Book : Financial Accounting
B 40,000 Machinery 53,000
C 40,000 Investments 9,000
D 40,000 Debtors 16,200
Creditors 30,000 Less: Provision (14,000 - 1,000) 13,000
Bills Payable 5,000 cash 13,000
1,95,00 1,95,00
0 0

Working Notes:
(1) Calculation of Purchase Consideration
Assets taken over: A& C&
Co. Co.
 Work Book : Financial Accounting
Cash(see tutorial note below) 13,000 -
Investment 9,000 7,
Debtors 9,000 20
Premises 53,000 0
Machinery 9,000 4,000
Land - -
Goodwill 12,
-
000
66,
Liabilities taken over: 800
Trade 12,000
Creditors 1,05,00 90,000
0
Bills Payable

20, 10,000
Purchase Consideration 000 -
5,
00
0
25,000 10,000
80,000 80,000

CONVERSION AND SALE OF PARTNERSHIP FIRM TO LIMITED COMPANY

22. Multiple choice questions:

Choose the correct

alternative

1. Which of the following is called acquisition of business?

(a) Conversion of a partnership
(b) Conversion of a sole proprietorship
(c) Both
(d) None of these
2. Unpaid balance must be paid in:
(a) Debenture
(b) Preference share
(c) Equity share
(d) Cash

3. Computation of purchase consideration under net asset basis:

(a) Total assets
(b) Total liabilities
(c) Fixed assets plus current assets minus current liabilities taken over
(d) None of these

4. When the total of assets taken over is higher than total of current liabilities taken over,
Work Book : Financial Accounting
then:
(a) Capital reserve
(b) Goodwill
(c) Revaluation reserve
(d) None of these

5. Which of the following is/are payment basis of discharging purchase consideration?

(a) Cash
(b) Share
 Work Book : Financial Accounting
(c) Both
(d) Debentu

re Answer:

1. (c); 2. (d); 3. (c); 4. (b); 5. (c)

23. Fill in the blanks:

1. Capital reserve arises when payment is…….than net assets taken over.
2. Nest assets = total assets taken over…….current liabilities taken over
3. Goodwill = payments…….net assets taken over
4. Conversion of a firm indicates existing firms.
5. Unrecorded liability is transferred to account.

Answer:

1. less; 2. Minus; 3. greater than; 4. winding up; 5. realization

Comprehensive Practical Problem

24. Ram, Manas and Param are equal partners of M/S. Zindal & Co. The Balance Sheet of the firm
as on 31.12.2018 was as follows:
Liabilities ` ` Assets ` `
Capital Account: Fixed Assets:
Ram 50000 Land 50000
Manas 100000 Building 70000
Param (30000) 120000 Plant & Machinery 20000 320000
0
Loan from bank 500000 Current Assets:
Creditors 100 Stock 300
000 000
Debtors 10000 400000
0
720000 720000

On the date, it is decided to convert the partnership into limited company called Handal
limited on the following items
a. Land to be revalued at ` 150000
b. Plant and machinery is to be revalued at ` 250000.
c. Depreciation amounting ` 20000 is to be written off on building.
d. A provision of 10% books valued to be mate of obsolete stock.
e. Provision of doubtful debts made at 10% of debtors.
f. A discount of 6% would be earned on creditors when paid out.
g. The new company issue ` 12000 equity shares 10 each credited as full paid up, such share
capital being valued at ` 150000 and the balance payable is to be discharge by issue of
10% debentures of ` 100 each.
Work Book : Financial Accounting
Show the necessary ledger Accounts to close the books of Zindal &co. and show the opening
balance sheet of the new company. All partners are solvent and have sufficient cash resource
as may be necessary to settle the respective accounts, Shares and debentures are divided
equal
Work Book : Financial Accounting
among the

partner.

Solution:

In the books of Zindal & Co

Dr. Realisation Account Cr
Particulars ` Particulars `
To Land A/c 50000 By loan from bank A/c, 500000
To Building A/c 70000 By creditors A/c, 100000
To Plant and machinery A/c 200000 By new company A/c, 216000
To (purchase
Stock A/c 300000 confederation)
To Debtors A/c 100000
To Partners’ Capital A/c
Ram 32000
Manas 32000
Param 32000
816000 816000

Dr. Partners’ Capital Account Cr.

Particulars Ra Mana Para Particulars Ra Mana Para
m s m m s m
To Balance B/d. - - 30000 By Balance B/d 5000 10000 -
0 0
To Equity sh. In new By Realisation 3200 32000 32000
A/c 0
company 5000 50000 50000 (profit)
0
To 10% debenture By Bank A/c - - 70000
in (Cash
new co. 2000 22000 22000 brought in)
0
To Bank A/c 1000 60000 -
0
8200 13200 10200 8200 13200 10200
0 0 0 0 0 0

Dr. Bank Account Cr.

Particulars ` Particulars `
To, partners’ capital A/c 70000 By Ram A/c 10
By Manas 00
0
 Work Book : Financial Accounting
A/c 60
00
0
70000 70
00
0

Zindal limited
st
Balance sheet as at 31 December, 2018
Particulars No Figure as at the End of
te the
current reporting period
No
(`)
.
(1) (2 (3)
)
1. EQUITY AND LIABILITIES

(1)Share holders’ Fund : (1

(a) share capital ) 120000
(b) reserves and surplus 30000
(c) money received against share warrants -

(2) Share application money pending Allotment: (2 -

(3) Non-current liabilities : )
566
(a) long term borrowings (3
000
(b) deferred Tax liabilities (net) )
-
(c) Other long term liabilities
-
(d) long –term provisions
-
(4) Current liabilities:
(a) short term borrowings
-
(b) trade payables (4
94
(c) other current liabilities )
00
(d) long term provisions
0
-
-
TOTAL 810000
II. ASSETS 450000
(1) Non-current assets -
(a) fixed assets -
(i)Tangible assets -
(ii) Intangible assets -
(iii)Capital working -
progress -
(b) noncurrent investments -
Work Book : Financial Accounting
(c) deferred Tax assets (Net) -
(d) long term loan and advance 270
(f) other non-current assets 000
(2) Current assets: 90000
(a) current investments -
(b) inventories -
(c) trade receivable -
(d) cash and cash equivalent
(e) short term loan and advance
(f) other current assets
TOTAL 810000

(1) Share capital (2) Reserve and Surplus

Particulars ` Particulars `
Authorized share capital. Securities premium 30
00
0
. EQUITY SHARE OF ............. (4) Fixed assets
` each Issued and
subscribed
capital Tangible assets 150
12000 Equity shares of 000
`10 each 120000 Land Building
50
00
0
 Work Book : Financial Accounting
(3) long-term borrowing ` Building 50
Plant and machinery 00
(i) Secured loan 66
0
10%debentures 00
0 250
(ii)unsecured bank 000
loans 500
000 450
000

566
000

Working notes:

(1) Calculation of Purchase Consideration

Particulars ` `
Assets take over by new company
Land 150000
Building (`70000-20000) 50000
Plant and machinery Stock 250000
Debtors(`1,00000-10000) 270000
90000
Liabilities taken Over by the new company 500000
Loan from bank 94 810
00 000
Creditors (` 100000-6000) 0 594
000
Total purchase considerations 216
000

(2) Discharge of Purchase Consideration

Particulars `
Equity shares (12000 of `10 each issued at a premium of `2.50 150
each) 10% Debenture of `100 each (balancing figure) 000
66
00
0
216
000
 Work Book : Financial Accounting
24. A, B and C were in business sharing profit and losses in the ratio of [Link]. Their Balance
Sheet as at 31.03.2018 is as follows:

Balance Sheet as at 31.03.2018

Liabilities Amount( Assets Amount
`) (`)
 Work Book : Financial Accounting
Fixed Capital: Fixed Assets Investments Current 3,00,000
A 2,00,000 Assets: 50,000
B 1,00,000 Stock 1,00,000
C 1,00,000 4,00,000 Debtors 60,000
Current Cash & Bank 1,50,000 3,10,000
Accounts:
A 40,000
B 20,000 60,000
Unsecured 2,00,000
Loans
6,60,000 6,60,000

On 1.04.2018, it is agreed among the partners that BC (P) Ltd. A newly formed company with
B and C having each taken up 100 shares of `10 each will take over the firm as a going
concern including goodwill but excluding cash and bank balance. The following points also
agreed upon:
(a) Goodwill will be valued at 3 years purchase of super profits.
(b) The actual profit for the purpose of goodwill valuation will be `1,00,000.
(c) Normal rate of return will be 15% on fixed capital.
(d) All other assets and liabilities will be taken over at book values.
(e) The purchase consideration will be payable partly in shares of `10 each and partly in
cash. Payment in cash being to meet the requirement to discharge A, who has agreed
to retire.
(f) B and C are to acquire capital interest in the new company.
(g) Expenses of liquidation ` 40,000.

You are required to prepare the necessary Ledger Accounts.

Solution:

In the books of the firm

Dr. Realization account Cr.
Particulars ` Particulars `
To fixed assets A/C 300000 By unsecured loan A/C 200000
To investment A/C 50000 By BC (P) ltd. 430000
To stock A/C 100000 By Partners capital A/C s
To debtors A/C 60000 A 20000
To goodwill A/C (note 1 and 3) 120000 B 10000
To
bank A/C 40000 C 10000 40000
670000 670000
 Work Book : Financial Accounting
Dr. Partners’ Capital Account Cr.
Particulars A B C Particulars C B C
 Work Book : Financial Accounting
To realization A/C 2800 1000 1000 By balance b/d 20000 10000 10000
To 00 0 0 0 0
cash A/C 2800 - - By current A/C 40000 20000 -
00
To Cash A/C - - - By goodwill A/C 60000 30000 30000
(note6)
To share in BC (P) (note3)
Ltd. A/C - 1300 1300 By cash A/C (note 6) - - 10000
00 00
3000 1500 1400 30000 15000 14000
00 00 00 0 0 0

Dr. BC (P) LTD. Account Cr.

Particulars ` Particulars `
To realisation A/C (purchase 430 By cash A/c (note 4) 170
consideration) 000 By shares in BC (p) Ltd. A/C 000
260
000
430 430
000 000

Dr. Cash and Bank Account Cr.

Particulars ` Particulars `
To Balance b/d 150000 By Realisation A/C (expenses) 40000
By B
To C Capital A/C (note 6) 10000 Capital A/C (note 6) 10000
To BC (P) Ltd. (note 4) 170000 By A Capital A/C 280000
330000 330000

Working notes:
(1) Calculation of goodwill ` (2) Calculation of purchase `
Capital employed (Fixed) 40000 Goodwill (note1) 120000
Actual 0
profit 10000 Fixed assets 300000
0
Less : normal profit @15% on 60000 Investments 50000
capital employed Stock 100
000
Super profit 40000 Debtors 60000
Good will = `. 40000 X 3
12000 630
0 Less : unsecured loan 000
200
000
430000

(3) Goodwill has been recorded in the books by debiting goodwill account and crediting
Partners capital accounts in the profit Sharing ratio of [Link]. After recording goodwill
in the books, it is transferred to Realisation Account by debiting realization account
and crediting goodwill account.
 Work Book : Financial Accounting
(4) Amount payable to A ` 280000. After meeting realisation expenses cash in hand is `
110000.
Therefore, ` 170000 must be received from BC (p) Ltd. to discharge A in full.
(5) Purchase consideration is agreed at ` 430000. ` 170000 (note 4) was paid to cash and
balance ` 260000 will be paid in share in BC (P) ltd.
B’s share in BC (P) Ltd. will be ` 130000 and C’s share in BC (P) LTD. Will be also `
130000.

(6) C’s capital account of their firm is showing balance of BC `120000 (` 100000+ `30000-
`10000). Therefore, he will bring `10000 in cash to make up the deficit. B’s capital account
 Work Book : Financial Accounting
of the farm is showing a balance of `140000 (`100000 + `20000 + ` 30000 - `10000).
Therefore B will take away ` 1000 from the firm.

25. Raju, Jyoti and Bhola carry on business in partnership under the style of M/s R & Co sharing
profits and losses in the ratio of [Link]. They have floated R Pvt. Ltd for the purpose of
st
takeover of their business. The following is the Balance Sheet of the firm as on 31
December, 2018:
Liabilities ` Assets `
Capital Account: Cash 6000
Raju 101000 Bank 14000
Jyoti 151000 Debtors 60000
(-)
Bhola 133000 Provision 2000 58000
Stock 42000
Fixed Assets at WDV 30000
0
Creditors 50000 Expenditure related to R. Pvt. Ltd:
Formation Expenses 12000
Bank Account (note-1) 3000 15000
435000 43500
0
Note-1: (In the name of R. Pvt. Ltd.) Deposit of par value of 300 equity shares of ` 10 each,
subscribed equally by the partners as subscribers to the memorandum and article of
association. On that day R Pvt. Ltd took over the business for a total consideration of
`5,00,000 (excluding 300 shares allotted as subscribers of memorandum). The purchase
consideration was to be
discharge by the allotment of equity shares of `10 each at par in the profit- sharing ratio and
15% debenture of `100 each at par for surplus capital. The directors of R Pvt Ltd revalued
fixed assets of R & Co. as ` 4,00,000.
You are asked to: (a) State the number of equity shares and debenture allotted by R. Pvt Ltd
to Raju, Jyoti & Bhola. (b) Show the journal entries in connection with the above transaction
in the books of R. Pvt Ltd. Show your workings.
Solution:
Statement showing distribution of purchase consideration among the partners
Particulars Raj Jyot Bhol
u i a
Balance of capital accounts 101 151 133
Add: profit on realization (note-2) 000 000 000
59 35 23
00 40 60
0 0 0
Final Balance of capital accounts 16000 1860 1566
(A) Profit sharing ratio 0 00 00
(B)Capital per profit sharing ratio (A/B) 5 3 2
32000 6213 7830
3 0
Capital in profit sharing ratio (taking Raju’s capital as basis) 16000 9600 6400
0 0 0
Total equity shares to be issued including initial allotment of ` 16000 9600 6400
Work Book : Financial Accounting
3000 (C) 0 0 0
Less: initial allotment 1000 1000 1000
Further issue of shares 15900 95 64
Allotment of debentures for the balance (A-C) 0 00 00
- 0 0
90 92
40 60
0 0
No. of equity shares issued 16000 96 64
No. of debentures issued - 00 00
9 9
0 2
4 6

In the books of R (Pvt.) Ltd

Journal Entries
Work Book : Financial Accounting
Dr. Cr.
Da Particulars ` `
te
Bank A/c Dr 3000
To equity share capital A/c 3000
(Being the allotment of 300 [Link] of ` 10 each for Raju, Jyoti,
Roger as subscribers to Memorandum)

Goodwill A/c (balancing figure) Dr 18,000

Fixed assets A/c Dr 4,00,00
Stock A/c Dr 0
Sundry debtors A/c Dr 42,000
Bank A/c Dr 60,000
cash A/c Dr 14,000
Preliminary expenses A/c 6,000
12,000
50,000
Dr To sundry creditors A/c 2000
To Provision for bad debt 3,18,00
A/c To equity share capital 0
A/c To debenture A/c 1,82,00
(Being the various assets and liabilities taken over and the issue 0
of
31,800 equity shares and 1820 debentures in settlement of
purchase consideration.)

(1) Realization Accounts

Dr. Cr.
Particulars ` Particulars `
To cash a/c 6000 By provision for doubtful debt 2000
To banks a/c 14000 a/c
To debtors a/s 60000 By creditors 50000
To stock a/c 42000 By R Pvt Ltd. 50000
0
To fixed assets a/c 300000
To formation expenses a/c 12000
To partners capital a/c (Profit):
Raju-
` 59000
Jyoti- ` 35400
Bhola- ` 23600 118000

552000 55200
0
(1) Formation expenses is an asset to the R Pvt Ltd. And it is to be taken over by the
company.
(2) In the books of the firm, the firm, the bank account (Deposit for shares in R Pvt Ltd) to
be closed by passing following entry:
 Work Book : Financial Accounting
Shares in R Pvt Ltd A/c Dr. ` 3000
To, bank account (Deposit for shares) ` 3000

26. S Ltd. Agreed to purchase the business of a firm consisting of two brothers, K. Som and D.
Som as on 31st March, 2018. The Balance Sheet of that date was as follows:
 Work Book : Financial Accounting
Liabilities ` Assets `
Capital Accounts Land and Buildings 47,000
K Som 76,000 Plant and Machinery 28,000
D Som 58,000 Furniture and fixture 7,000
General Reserve Sundry 30,000 Stock in trade 62,000
Creditors
Outstanding Expenses 37,000 Sundry Debtors 55,000
3,000 Cash 5,000
2,04,000 2,04,000

The company agreed to take over the liabilities and the assets with exception of cash, the
agreed purchases price being ` 1, 80,000 to be satisfied as to ¼ in cash and ¾ by the issue
of fully paid equity shares of ` 10 each at an agreed value of `12.50 per share. The company
made the
following revaluations of the asset taken over when bringing them into books: Land and Building
`62,000; Plant and Machinery ` 25,000; Furniture and Fixtures ` 5,000; Stock-in-Trade `
58,000; Sundry Debtor ` 50,000.

Give the entries necessary to record the acquisition of the business in the book of the

company. Solution:

In the books of the S Ltd.

Journals
Date Particulars Dr. (`) Cr. (`)
1.4.12 Goodwill A/c (Note 1) Dr. 20,000
Land and Building A/c Dr. 62,000
Plant and Machinery A/c Dr. 25000
Furniture and Fixtures A/c Dr. 5000
Stock-in-trade A/c Dr. 58000
Sundry Debtors A/c Dr. 50000
To Sundry Creditor A/c 37000
To Outstanding Expenses 3000
A/c To Business Purchase 1,80,00
A/c 0
(Being different assets and liabilities of the firm taken over at
agreed Value. The difference between purchase consideration
and net Assets has been transferred to Goodwill Account)
Business Purchase Account 180
000 45
Dr. To Cash A/C 00
0
To Equity Share Capital
108
A/C To Securities
000
Premium A/C
27
(Being the purchase consideration paid off by issuing 00
10800 equity shares of `10 each at a premium of `2.50 as 0
per Board’s Resolution No….Dated…….
 Work Book : Financial Accounting
Working Note:
Calculation of Goodwill / Capital Reserve:
 Work Book : Financial Accounting
Asset Taken over (at agreed value) `
Land and Building 62,000
Plant and Machinery 25,000
Furniture and Fixtures 5,000
Stock-in-Trade 28,000
Sundry Debtors 50000
Total 2,00,000
Less, Liabilities Taken over (at agreed value)
Sundry Creditor (37,000)
Outstanding Expenses (3000)
(A) Net Asset Taken over 1,60,000
(B) Purchase Consideration Paid 1,80,000
Goodwill (B-A) 20,000

27. A and B were carrying on business sharing profit and loss equally. The firm’s balance sheet as
at 31.12.2017 Was:
Liability ` Assets `
Sundry creditors 60000 Stock 60000
Bank overdraft 35000 Machin 150000
Capital A/Cs : ery 70000
A 140000 Debtors 9000
B 130000 270000 Joint life policy 34000
Lease hold 26000
premises Profit
and loss A/C
Drawings 16000
365000 Account: A 365000

10000
B 6000

The business was carried on till 30.6.18. The partners withdrew in equal amounts half the
amount of profit made during the period of six months after charging depreciation at 10%
p.a. on machinery and after writing off 5% on leasehold premises. In the half year, sundry
creditors were
reduced by `10000 and bank overdraft by `15000.
On 30.6.2018, stock was valued at `75000 and debtors at `60000; the joint policy had been
surrendered for `9000 before 30.6.2018 and other item remain same as at 31.12.2017.
On 30.06.2018, the firm sold the business to a limited company. The value of goodwill was fixed
at
`100000 and the rest of assets were valued on the basic of balance sheet as at 30.6.2018.
The company paid the purchase consideration in equity share of ` 10 each.
You are required to prepare:
(a) Balance sheet of the farm as at 30.6.2018
(b) The realisation account; and
 Work Book : Financial Accounting
(c) Partners’ capital account shoeing the final settlement between them.

Solution:
Work Book : Financial Accounting

Workings:
th
(1) Ascertainment of profit for the months ended 30 June, 2018
` `
Closingassets:
Stock sundry debtors 75000
Machinery less depreciation 6000
Lease hold property less written off 142500
Less:closingliabilities
Sundry creditors 32300
Bank overdraft
309800
Closing net assets 50
00
0
Combined capital: 20
00 7000
A- `(140000-13000-10000)
0
B- ` (130000-13000-6000)
117 239
Profit before adjusting the drawings 000 800
Add; combined drawings during the 6 months (equal 111 228
to 6 months) 000 000
11
80
0
11
80
0
23
Profit for 6 months 60
0

(2) Ascertainment of purchase confederation:

Closing net assets (as above) ` 239800 + Goodwill `100000 = `339800

Balance Sheet as on 30.06.2018

Liabilities ` ` Assets ` `
Capital Account: A- Machinery 15000
Balance as on 1.1.12 117 less depreciation 0 142
Add: profit for 6 000 7500 000
months 11 lease hold premises
80 34
Less: written off @5%
0 00
Less: drawings for p.a. 32
12880 122 0
6months B-balance as 0 900 30
17 0
on1.1.2012 Add: profit 5900 Stock 00
for 6 months Less: 111 116 Sundry debtors
000 900
Drawings for 6 months
11 75
Work Book : Financial Accounting
Sundry creditors 80 50 00
Bank over draft 0 00 0
12280 0 60
0 20 00
5900 00 0
0
309 309
800 800

Realisation account
 Work Book : Financial Accounting
Dr. Cr.
Particulars ` Particulars `
To Machinery A/C 142500 By Sundry creditors A/C 50000
To lease hold premises A/C 32300 By Bank A/C
To stock A/C 75000 By Purchase company A/C 20000
To Sundry debtors A/C 60000 (Purchase confederation)
To A capital A/C 50000 339800
To B capital A/C 50000
409800 409800

Partners’ capital Account

Dr. Cr.
Date Particulars A B Dat Particulars A B
e
1.1. To, profit and loss 130 1300 1.1. By Balance b/d 14000 13000
18 00 0 18 0 0
A/C 30.6. By profit and 11800 11800
18 loss
To drawings A/C 100 6000 appropriation
00
To drawings A/C 590 5900 A/C
0
30.6 To share in By Realisation 50000 50000
.18 A/C
purchasing co. 172 1669
A/C 900 00
201 1918 20180 19180
800 00 0 0

st
28. P and Q were in partnership sharing profits in the proportion 3:2. On 31 march 2018, they
accepted an offer from S. Ltd to acquire at that date their fixed assets and stock at an agreed
price of `7,20,000. Debtors, creditors and bank overdraft would be collected and discharged
by
the partnership.

The purchase consideration of `7,20,000 consisted of cash `3,60,000, debenture in S Ltd. (at
par)
`1,80,000 and 12,000 equity share of `10 each in S. Ltd. P will be employed in X Ltd. but,
since Q was retiring, P agreed to allow him `30,000 in compensation, to be adjusted through
their capital accounts. Q was to receive 1800 share in S. Ltd and the balance due to him in
cash.

The sale of the assets to X Ltd. took place as agreed; the debtors realised `60,000 and
creditors were settled for `1,71,000. The partnership then ceased business.
Liabilities ` Assets `
P capital account 1,20,000 Fixed assets Stock 4,80,000
Debtors
Work Book : Financial Accounting
Loan: P 2,10,000 Q capital Account 45,000
Bank overdraft creditors 1,50,000 75,000
1,80,000 60,000
6,60,000 6,60,000

You are required to pass necessary journal entries and show (a) Relation account (b) bank
account (c) partner’s capital accounts, in columnar form showing the final settlement.

In the books of the firm

Work Book : Financial Accounting
Journal
Date Particulars Dr. Cr.
(`) (`)
31/03/ Realisation A/c Dr 60000
12 0
To, Fixed assets A/c 48000
0
To, stock A/c 45000
To, debtors A/c 75000
(Being different assets transferred to realisation account)
Creditors A/c Dr 18000
0
To, Realisation/c 18000
0
(Being creditors accounts transferred to realisation account)
P Loan A/c Dr 21000
0
To, P capital A/c 21000
0
(Being P's loan transferred to his capital account.)
S. Ltd A/c Dr 72000
0
To, realisation A/c 72000
0
(Being purchase consideration due from S. Ltd)
Bank A/c Dr 36000
0
Debentures in S. Ltd A/c Dr 18000
0
Shares in S. Ltd A/c Dr 18000
0
To, S. Ltd A/c
(Being purchase consideration received) 72000
0
Bank A/c Dr 60000
To, Realisation A/c 60000
(Being realisation of debtors)
Realisation A/c Dr 17100
0
To bank A/c 17100
0
(Being payment to creditors)
Realisation A/c Dr 18900
0
To, P capital A/c 11340
0
To, Q capital A/c 75600
(Being the profit on realisation transferred to partners’ capital
account in the ratio 3:2)
Work Book : Financial Accounting
P Capital A/c Dr 30000
To, Q Capital A/c 30000
(Being adjustment for compensation)
P capital A/c Dr 41340
0
To, Shares in S. Ltd A/c 15300
0
To, Debentures in S. Ltd A/c 18000
0
To, Bank A/c 80400
(Being the final settlement of accounts)
Q capital A/c Dr 45600
To, shares in S. Ltd A/c 27000
To, bank A/c 18600
(Being the final settlement of accounts)
 Work Book : Financial Accounting
Realisation Account
Dr Cr
Particulars ` Particulars `
To fixed assets 48000 By creditors 180000
0
To stocks 45000 By bank a/c (debtors realisation) 60000
To debtors 75000 By S Ltd.
To bank a/c (payment to creditors) 17100 Cash 360000
0
To P Capital (profit) 11340 Debentures 180000
0
To Q Capital (profit) 75600 Shares in S Ltd. 180000
96000 960000
0

Bank Account
Dr Cr
To Realisation 60000 By Balance b/d 150000
To S Ltd 360000 By Realisation 171000
By P Capital A/c 80400
By Q Capital A/c 18600
420000 420000

Partners’ Capital Account

Dr Cr
Particulars P Q Particulars P Q
To balance b/d - 60000 By Balance b/d 12000 -
0
To Q Capital A/c 30000 - By Loan 21000 -
0
To Shares in S Ltd 15300 27000 By Realisation 11340
0 0
To Debentures in S Ltd 18000 - By P Capital A/c - 75600
0
To Bank A/c (Final payment) 80400 18600 30000
44340 10560 44340 10560
0 0 0 0
Note: The ` 10 equity shares in S Ltd have a value of ` 15 each placed upon them.

29. Aparna and Nandita were partners in a firm sharing profits and losses at 3: 2. The following
is the Balance Sheet of the firm as on 31 st December 2018

Balance Sheet as on 31st December 2018

Liabilities ` Assets `
 Work Book : Financial Accounting
Partners capital a/c: Goodwill 30
Aparna 240000 Land and Building 00
0
Nandita 458 Plant and Machinery
000 100
Furniture and
000
218000 Bills Payable 35 Fittings Stock
00 210
Creditors for goods Debtors 000
0
Creditors for expenses Cash at 100
25
00 Bank 000
0 65
40 00
00 0
0 25
00
0
28
00
0
5,58, 5,58,
000 000

On 1st January 2019 a new company, Anjana Ltd. was formed to take over the business of the firm
Work Book : Financial Accounting
on the following terms:
a) The company would not take over creditors for expenses to the extent of ` 17,000
b) Assets are to be valued as follows:
Goodwill ` 50000; Land & Building ` 188000; Plant & Machinery ` 50000 above book
value; Furniture & Fittings to be depreciated by 10%; ` 5000 of Debtors to be treated as
bad debts
and of the balance 5% is to be treated as doubtful of recovery. Cash at Bank balance
is to be taken over by the company.
c) The purchase consideration is to be satisfied by issuing 20,000 equity shares of ` 10
each at a premium of 20%, ` 1,50,000 by issuing 8% Preference shares of ` 100 each
at par and the
balance in the form of 6% debentures issued at 5% discount.
Pass necessary journal entries in the books of the Company and prepare the Balance Sheet after
acquisition.

Solution:

In the books of Anjana Ltd.

Journal Entries
Debit Credit
Dat Particulars L Amount Amount(
e F (`) `)
2019
Jan. 1 Goodwill A/c Dr. 50,000
Land and Building A/c Dr. 1,88,000
Plant & Machinery A/c Dr. 2,60,000
Furniture and Fittings A/c Dr. 90,000
Stock A/c Dr. 65,000
Debtors A/c Dr. 20,000
Bank A/c Dr. 28,000
To Provision for Bad Debts A/c 1,000
To Creditors A/c 25,000
To Bills Payable A/c 35,000
To Creditors for Expenses A/c 23,000
To Liquidator of firm A/c 6,17,000
(Assets and liabilities of firm taken
over) 6,17,
Liquidator of firm A/c Dr. 000
Discount on Issue of Debentures A/c Dr. 11,947
To Equity Share Capital A/c 2,00,000
To 8% Preference Share Capital 1,50,000
A/c To 6% Debentures A/c 2,38,947
To Securities Premium A/c 40,000
(20,000 equity shares of ` 10 each issued at a
premium of ` 2 each, 1,500 numbers of 8% preference
shares of ` 100 each issued at par and balance 6%
Debentures issued at
a discount of 5% against purchase consideration.)
Securities Premium A/c Dr. 11,
To Discount on Issue of Debentures A/c 947
(Discount on issue of debentures written off against 11,947
securities premium)
Work Book : Financial Accounting
Balance Sheet of Anjana Ltd. as on 1st January 2019

Particulars Note Amount

No. (`)
(1) (2) (3)
1. EQUITY AND LIABILITIES
(1)Share holders’ Fund :
(a) Share capital (1) 3,50,000
(b) Reserves and surplus 28,053
(c) Money received against share warrants -
(2) Share application money pending Allotment: (2)
(3) Non-current liabilities : (3)
(a) long term borrowings 2,38,947
(b) deferred Tax liabilities (net) -
(c) Other long term liabilities -
(d) long –term provisions -
(4) Current liabilities:
(a) short term borrowings -
(b) trade payables 60,
(c) other current liabilities(creditors for expenses) 000
(d) long term provisions 23,000
-
TOTAL 7,00,000
II. ASSETS
(1) Non-current assets
(a) fixed assets
(i)Tangible assets (4) 5,38,000
(ii) Intangible assets (Goodwill) 50,000
(iii)Capital working progress -
(b) noncurrent investments -
(c) deferred Tax assets (Net) -
(d) long term loan and advance (5) -
(f) other non-current assets -

(2) Current assets: 65,000

(a) current investments 19,000
(b) inventories 28,000
(c) trade receivable -
(d) cash and cash equivalent (Cash at Bank) -
(e) short term loan and advance
(f) other current assets
TOTAL 7,00,000

Notes to Accounts:
Not Particulars Amount Amount
e (`) (`)
No
.
1. Share Capital:
(a) Authorised Capital 2,00,00
0
Work Book : Financial Accounting
(b) Issued and Paid up Capital: 1,50,00
Equity share capital (20,000 shares of ` 10 0
each) 8% Pref. share Capital (1500 Shares of `
100 each)
Total
3,50,00
2. Reserve and Surplus: 0
40,0
00
 Work Book : Financial Accounting
Securities Premium (11,947)
Less, Discount on Debenture set off
3. Tot 28,053
al
Trade Payables: 25,0
(a) Creditors for Goods 00
(b) Bills Payable 35,0
4.
Tot 00
al 60,000
Fixed Assets (Tangible):
(a) Land and Building 1,88,00
(b) Plant and Machinery 0
(c) Furniture 2,60,00
0
5. Tot
al 90,000
Trade Receivable: 5,38,0
20,0
00
Debtors 00
Less, Provision for Doubtful debts 5% (1,000)
Tot
al 19,000

Working Note:
Purchase Consideration (Net Assets Method)
Amount (`)
Goodwill 50,000
Land and Building 1,88,000
Plant & Machinery (210000 + 50000) 2,60,000
Furniture and Fittings (100000 – 10% thereof) 90,000
Stock 65,000
Debtors (25,000 – 5000 – 5% of 20000) 19,000
Cash at Bank 28,000
Total Assets taken 7,00,000
Less, Liabilities
taken:
Creditors for goods 25,0
00
Bills Payable 35,0
00
Creditors for Expenses (40,000 – 17,000) 23,0 83,000
00
Purchase Consideration 6,17,000

Mode of Payment of purchase consideration:

i) Equity Share Issued (20,000 shares of ` 10 at ` 12 per ` 2,40,000
share)
ii) 8% Pref. Shares issued (1,500 shares of ` 100 each) ` 1,50,000
Work Book : Financial Accounting
iii) Value of Debenture issued (Balancing figure) ` 2,27,000
Total Payment `
6,17,00
0

As Debentures are issued at 5% discount, so ` 2,27,000 payable as consideration is 95% value.

Therefore, Face Value of Debentures issued = 2,27,000/95 ×100 = `
2,38,947. And Discount on issue of Debentures = ` 2,38,947 – 2,27,000 = `
11,947.
 Work Book : Financial Accounting
Study Note – 7
SELF BALANCING LEDGER

Learning Objective:

To gather knowledge of the significance of self-balancing ledger system and

sectional balancing system.
To be familiar with the ledgers maintained in a self-balancing ledger system
and understand that in self balancing system total debtors and total creditors
accounts kept in the general ledger are called sales ledger adjustment
account and bought ledger adjustment account respectively.
To be able to account for the techniques of recording transactions relating
to transfer from one ledger to another ledger.

1. Choose the correct alternative:

1. Which of the following transactions will not appear under Control/Adjustments
Accounts under self-balancing system?
a) Credit sales
b) Amount paid to creditors
c) Provision for doubtful debt
d) B/R dishonoured

2. Which of the following transactions will appear under Control/Adjustments Accounts

under self-balancing system?
a) Cash sales
b) B/R as endorsed dishonoured
c) Bad debt recovery
d) B/R discounted

3. Total Debtor Account and Total Creditors Account are maintained under
a) Self-balancing system
b) Sectional balancing system
c) Both the system
d) None of the above
4. Which of the following is true?
a) Under self-balancing system all the ledger are self-balanced.
b) Under self-balancing system only General Ledger is self-balanced.
c) Under Sectional Balancing system only Debtors’ Ledger is self-balanced.
d) Under Sectional Balancing system only Creditors’ Ledger is self-balanced.
5. Which of the following is true?
a) Self-balancing system is based on double entry system of book keeping.
Work Book : Financial Accounting
b) Self-balancing system is not based on double entry system of book keeping.
c) Sectional balancing system is based on double entry system of book keeping.
d) Sectional balancing system is not based on double entry system of book keeping.
 Work Book : Financial Accounting

6. Which of the following transactions will not appear under Control/Adjustments

Accounts under self-balancing system?
a) Cash collected from debtors
b) Credit purchase
c) Bills discounted
d) Bills Receivable as endorsed dishonoured

7. Noting charges on bills receivable dishonoured will appear on the side

of General Ledger Adjustment Account under Ledger.
a) Debit side, Debtors’ Ledger
b) Credit side, Debtors’ Ledger
c) Debit side, Creditors’ Ledger
d) Credit side, Creditors’ Ledger

8. Bills receivable dishonoured will appear on the side of General Ledger

Adjustment Account under Ledger.
a) Debit side, Debtors’ Ledger
b) Credit side, Debtors’ Ledger
c) Debit side, Creditors’ Ledger
d) Credit side, Creditors’ Ledger

9. Discount received will appear on the side of General Ledger Adjustment

Account under Ledger.
a) Debit side, Debtors’ Ledger
b) Credit side, Debtors’ Ledger
c) Debit side, Creditors’ Ledger
d) Credit side, Creditors’ Ledger

10. Rebate allowed will appear on the side of General Ledger Adjustment
Account under Ledger.
a) Debit side, Debtors’ Ledger
b) Credit side, Debtors’ Ledger
c) Debit side, Creditors’ Ledger
d) Credit side, Creditors’

Ledger Solution:

1.(c); 2 .(b); 3.(b); 4.(a); 5.(a); 6. (c); 7. (b); 8. (b); 9. (d); 10. (a).

2. State True and False.

1. All debtors’ related transactions are recorded in General Ledger Adjustment Account
under Debtors Ledger.
2. All creditors’ related transactions are recorded in General Ledger Adjustment Account
under Creditors Ledger.
3. All debtors’ related transactions are recorded in Creditors Ledger Adjustment Account
under General Ledger.
Work Book : Financial Accounting
4. All creditors’ related transactions are recorded in Debtors Ledger Adjustment Account
under General Ledger.
 Work Book : Financial Accounting
5. Under Self Balancing Ledger system trial balance can be prepared for each individual
ledger.
6. Under Sectional Balancing Ledger system trial balance can be prepared only for
General ledger.
7. Cash sales will appear on the debit side of General Ledger Adjustment Account under
Debtors’ Ledger.
8. Bad debt recovery will not appear in self balancing ledger system.
9. Discount allowed will appear on the debit side of General Ledger Adjustment Account
under Debtors’ Ledger.
10. Credit purchase will appear on the debit side of General Ledger Adjustment Account
under Creditors’ Ledger.

Solution:

(1) True; (2)True; (3) False; (4)False; (5)True; (6) True; (7)False; (8) True; (9) True; (10) True.

3. Match the following:

1 Sales Ledger Adjustment A/c is kept in A Purchase Ledger
2 Purchase Ledger Adjustment A/c is kept in B General Ledger
3 General Ledger Adjustment A/c (for creditors) is kept in C Sales Ledger
4 General Ledger Adjustment A/c (for debtors) is kept in D General Ledger

Solution:

1.B/D; 2.D/B; 3.A; 4.C.

THEORETICAL QUESTIONS:

4. What are the advantages of Self Balancing System?

Solution:

The advantages of Self-Balancing System are:

(i) If ledgers are maintained under self-balancing system it becomes very easy to locate
errors.
(ii) This system helps to prepare interim account and draft final accounts as a complete
trial balance can be prepared before the obstruction of individual personal ledger
balances.
(iii) Various works can be done quickly as this system provides sub-division of work
among the different employees.
(iv) This system is particularly useful -.
• where there are a large number of customers or suppliers and
• where it is desired to prepare periodical accounts.
(v) Committing fraud is minimized as different ledgers are prepared by different clerks.
(vi) Internal check system con be strengthened as it becomes possible to check the
 Work Book : Financial Accounting
accuracy of each ledger independently.

5. Distinguish between Self Balancing System and Sectional Balancing System.

 Work Book : Financial Accounting
Solution:

Sr. No. Self-Balancing System Sectional Balancing System

1. Here all the three ledgers i.e. Sales/ Under this system only the General
Debtors Ledger, Purchase/ Creditors Ledger is made self-balanced.
Ledger and General Ledger are made
separately self-
balanced.
2. Separate trial balance can be prepared at Here, trial balance can be prepared
the end of each separate edger. only in the General Ledger.
3. Here adjustment accounts are prepared Here list of debtors and creditors are
on complete double entry principle. prepared at the end of Debtors and
Creditors ledger.

4. It is actually an extension of sectional It is not an extension of self-

balancing system. balancing
system.

6. What is Adverse Balance of debtors ledger/creditors ledger in the context of Self Balancing
Ledger?

Solution:

Sometimes it may happen that debtors ledger shows a credit balance and creditor ledger
shows a debit balance i.e., the adverse balance of debtors ledger and creditors ledger.
Usually, credit balance in debtors’ ledger may happen on account of advance taken from
debtors or allowances given to customers for different products after closing the accounts.
Similarly, debit balance in creditors ledger may appear on account of excess payment made
or goods returned to creditors after closing the accounts etc. Thus, these contra transactions
are to be adjusted. But, one must remember that credit balance in one ledger must not be
set off against debit balance of another ledger. These should separately be treated.

PROBLEMS AND SOLUTIONS:

Simple Problem on Preparation of Debtors Ledger Adjustment Account in General Ledger

7. The following information is available from the books of the trader for the period 1 st January
to 31st March 2017.
a) Total sales amounted to `76000 including the sale of old furniture for `10000 (book value
is
`12300). The total cash sales were 80% less than total credit sales.
b) Cash collection from Debtors amounted to 60% of the aggregate of the opening
Debtors and Credit safes for the period. Discount allowed to them amounted to `
2,600
c) Bills receivable drawn during the period totaled ` 7,000 of which bills amounting to `
3,000
were endorsed in favour of suppliers. Out of these endorsed bills, a Bill receivable for
`1,500
was dishonoured for non-payment, as the party became insolvent and his estate realized
Work Book : Financial Accounting
nothing.
d) Cheques received from customer of ` 5,000 were dishonoured; a sum of `500 is
irrecoverable.
e) Bad Debts written-off in the earlier year realized `2,500.
f) Sundry debtors on 1st January stood at `40,000.
You are required to show the Debtors’ Ledger Adjustment Account in the General Ledger.
 Work Book : Financial Accounting
Solution:

In the General Ledger

Dr. Debtors’ Ledger Adjustment Account Cr.
Date Particulars Amount Date Particulars Amount
(`) (`)
01.01.1 To balance b/d 40000 31.03. By General
7 17 Ledger
31.03.1 To General Ledger Adjustment A/c
7
Adjustment A/c (In Debtors Ledger)
(In Debtors Ledger) Cash collected 57000
Sales 55000 Discount allowed 2600
B/R dishonoured 1500 B/R received 7000
Chequedishonoured 5000 Bad debts 2000
31.03. By balance c/d 32900
17
101500 10150
0
Workings:
1. Computation of credit sales:
Cash sales were 80% less than credit sales. So, if credit sales are ` 100 cash sales are `20.
So, total sales are `120. Here, total sales = `(76000-10000) = `66000.
Amount of credit sales = `66000×100/120 = `55000.

2. Cash received:
Cash received is 60% of opening debtors plus credit sales i.e. `(40000+55000)
=`95000. So, cash received = `95000×60/100 = `57000.

A Comprehensive Problem on Preparation of Sales and Purchase Ledger Adjustment Account

8. Prepare a Sales Ledger Adjustment Account and a Purchase Ledger adjustment accounting In
the General Ledger, for the year ended 31st March, 2013 from the following information:
Particulars ` Particulars `
Customers' Account debit balance as 2,30 Goods returns by debtors 2,00
on 0 0
01.04.2012
Customers' Account credit balance as 200 Cash discount allowed to debtors 600
on
01.04.2012
Suppliers' Account credit balance as 4,00 Cash discount received from 130
on 0 creditors
01.04.2012
Suppliers' Account debit balance as on 540 Trade discount received from the 8,00
01.04.2012 suppliers 0

Credit sales during the year 29,4 Bad debts written- off during the 400
00 year
Credit purchases during the year 27,8 Bad debts recovered during the 80
00 year
Cash sales during the year 22,6 Transfer from creditors ledger 240
Work Book : Financial Accounting
00 to
debtors ledger
Cash Purchases during the year 5,80 Bills receivable dishonoured 320
0
Cheques received from credit 18,0 Bills payable dishonoured 180
customers 00
Cash received from credit customers 2,00 Cheqes received from 750
0 debtors
returned dishnoured
 Work Book : Financial Accounting
Cheques issued to the creditors during 21,0 Cheqes issued to creditors 290
the year 00 returned
dishnoured
Gods returned to the creditors 1,40 Customers' Account credit balance 310
0 as on 31.03.2013
Bills payable accepted during the year 1,80 Supplier's Account debt balance as 420
0 on 31.03.2013
Bills received during the year 1,50
0

Solution:

In the books
of........... In General
Ledger
Sales Ledger Adjustment Account
Dr. Cr.
Date Particulars ` Date Particulars `
1.04.1 To Balance b/d 2,30 01.04. By Balance b/d 200
2 0 12
31.03. To General Ledger Adjustment A/c: 31.03. By General Ledger
13 13
Credit sales 29,4 Adjustment A/c:
00
Bills receivable (dishonoured) 320 Cheque received 1
8,00
0
Cheque dishonoured 750 Cash received 2,00
0
Bill receivable 1,50
0
Sales return 2,00
0
31.03. To Balance c/d 310 Discount allowed 600
13
Bad debts 400
Transfer 240
31.03. By Balance c/d 8,14
13 0
33,0 33,0
80 80

Purchases Ledger Adjustment Account

Dr. Cr.
Date Particulars ` Date Particulars `
01.04. To Balance b/d 540 01.04. By Balance b/d 4,00
12 12 0
31.03. To General Ledger Adjustment A/c: 31.03. By General Ledger
13 13
Work Book : Financial Accounting
Adjustment A/c:
Cheque issued 21,00 Credit purchases 27,8
0 00
Bills payable accepted 1,800 Bills payable
Discount received 130 dishonored 180
Goods returned 1,400 31.03. Cheque issued
13
Transfer 240 dishonoured 290
31.03. To Balance c/d 7,580
13
By Balance c/d 420
32,69 32,6
0 90
 Work Book : Financial Accounting

A Comprehensive Problem on Preparation of General Ledger Adjustment Accounts in Debtors’ and

Creditors’ Ledger

9. From the following particulars prepare the General Ledger Adjustment Accounts in Debtors’
and Creditors’ Ledger:
Particulars Debtors’ Ledger Creditors’
(`) Ledger
(`)
Debit balance on Jan. 1, 2017 1,50,000 13,500
Creditors balance as on Jan. 1, 2017 10,000 1,25,000
Credit sales and purchases 5,80,000 4,00,000
Cheques received and issued 4,80,000 3,50,000
Advance paid to creditors — 20,000
Returns 4,300 2,800
Discounts allowed and received 2,900 3,600
Bill of exchange issued and accepted 54,200 26,900
Bad Debts 2,000 ----
Provision for bad debt ----- 3,000
Reserve for discounts 10,000 5,000
Transfer from Debtors Ledger to Creditors Ledger 10,000 10,000
Debit balance on Dec. 31, 2017 ? 12,850
Credit balance on Dec. 31,2017 7,280 ?

Solution:

In the Books
of........... In Debtors
Ledger
General Ledger Adjustment A/c
Dr. Cr.
Date Particulars ` Date Particulars `
1.1.17 To Balance b/f 10;000 1.1.17 By Balance b/f 1,50,0
00
31.12. To Debtors Ledger 31.12. By Debtors Ledger
17 Adjustment A/c: 17 Adjustment A/c:
Cheque received 4,80,00 Credit Sales 5,80,0
0 00
Return Inward 4,300 31.12. By Balance c/f 7,280
17
Discount Allowed 2,900
Bills Receivable drawn 54,200
Bad debt 2,000
Transfer from debtors
ledger
Work Book : Financial Accounting
to
Creditors Ledger 10,000
31.12. To Balance c/f[B/Fig.] 1,73,88
17 0
7,37,28 7,37,2
0 80
 Work Book : Financial Accounting

In Creditors Ledger
General Ledger Adjustment
A/c
Dr. Cr.
Date Particulars ` Date Particulars `
1.1.14 To Balance b/f 1,25,0 1.1.14 By Balance b/f 13,500
00
31.12. To Creditors Ledger 31.12. By Creditors Ledger
14 Adjustment A/c: 14 Adjustment A/c:
Credit Purchases 4,00,0 Cheque issued 3,50,000
00
31.12. To Balance c/f 12,850 Advance given 20,000
14
Return Outward 2,800
Discount Received 3,600
Bills Payable accepted 26,900
Transfer from 10,000
Debtors
Ledger to Creditors
Ledger
31.12. By Balance c/f [B/Fig.] 1,11,050
14
5,37,8 5,37,850
50

WORKINGS:
1. Provision for Bad Debt & Reserve for Discounts on Debtors and Creditors: No entry is
required to be passed for these transactions under Self-Balancing system as they do not
involve Debtors or Creditors A/c.

A Comprehensive Problem on Preparation of General Ledger Adjustment Accounts in Creditors’

Ledger and Debtors’ Ledger Adjustment Account in General Ledger

10. From the following particulars, which have been extracted from the book of A & Co., for the
year ended 31.01.2012, prepare General Ledger Adjustment Account in the Creditors Ledger
and Debtors Ledger Adjustment Account in the General Ledger:

Particulars Amoun Particulars Amou

t nt
` `
Debtors Balance (01 .01 .2012) Dr. 20,00 Bills Receivable received 3,000
0
Debtors Balance (01 .01 .2012) Cr. 300 Bills Receivable endorsed 800
Creditors Balance (01.01.2012) Dr. 200 Bills Receivable as endorsed 300
discounted
Creditors Balance (01.01.2012) Cr. 15,00 Bills Receivable discounted 1,400
0
Work Book : Financial Accounting
Purchases (including Cash `4,000) 12,00 Bills Receivable dishonoured 400
0
Sales (including Cash `6,000) 25,00 Interest charged on dishonoured 30
0 bills
Cash paid to suppliers in full 8,500 Transfer from one ledger to 600
settlement another
of claims for `9,000
Cash received from customers in 14,10 Returns (Cr.) 700
full 0
settlement of claims of `15,000
Bills Payable accepted 2,000 Debtors Balance (31.12.2012) Cr. 450
(including
renewals)
Bills Payable withdrawn upon 500 Creditors Balance (31.12.2012) Dr. 10,87
renewals 0
Work Book : Financial Accounting

Solution:

In the Creditors Ledger

General Ledger Adjustment Account
Dr. Cr.
Dat Particulars Amou Date Particulars Amou
e nt nt
(`) (`)
201 2012
2
Jan To, Balance b/d 15,00 Jan 1 By, Balance b/d 200
1 0
Dec. To, Creditors Ledger Dec. By, Creditors Ledger
31 Adjustment A/c: 31 Adjustment
A/c:
Purchases 8,000 Cash 8,500
" Bills Payable Withdrawn 500 Discount Received (9,000- 500
8,500)
Bills Receivable 300 Returns Outward 700
Dishonoured
(as endorsed) Bills Payable 2,000
Bills Receivable (endorsed) 800
Transfer 600
To, Balance c/d 170 By, Balance c/d 1
0,870
23,97 23,97
0 0
201 To, Balance b/d 10,87 2013 By, Balance c/d 170
3 0
Jan. Jan.
1 1

In the General Ledger

Debtors Ledger Adjustment
Account
Dr. Cr.
Date Particulars Amount Date Particulars Amount
(`) (`)
2012 To, Balance b/d 20,000 2012 By, Balance b/ 300
Jan. 1 Jan. 1
Dec. To, General Dec. By, General
31 Ledger 31 Ledger
Adjustment A/c: Adjustment A/c:
Sales 19,000 Cash 14,100
Bills Receivable 300 Discount Allowed 900
as (15,000-
endorsed dishonoured 14,100)
Bills Dishonoured 400 Bills Receivable 3,000
Work Book : Financial Accounting
transfer 600
To, Balance c/d 450 By, Balance c/d 21,250
40,150 40,150
2013 2013
Jan. 1 To, Balance b/d 21,250 Jan. 1 By, Balance b/d 450
 Work Book : Financial Accounting

Debtors’ Ledger Maintained in Two Separate Volumes

11. A Ltd. divides its Debtor Ledger into two sections: A-L and M-Z each being self-balancing. The
following details have been extracted from the books of the company for the month of March
2017.
Particulars A-L(`) M-Z(`)
Ledger balances as on 01.03.2017 (Dr.) 2500 3000
Ledger balances as on 01.03.2017 (Cr.) 500 200
Credit Sales for the month 25000 20000
Cash received 10000 14000
Discount allowed 1000 500
Returns inwards 2000 2000
Bad Debt written off 500 600
Bills receivable 4000 5000
Bad debt recovery 200 800
Bills dishonoured 2000 3000

During the month some goods amounting to `2000 were sold to Mr. J was wrongly posted to Mr.
G Account. Cash received from Mr. Ishan `3000 was wrongly posted to Mr. Shaan Account.

Prepare General Ledger Adjustment Account in Debtors

Ledger. Solution:

In Debtors’ Ledger
General Ledger Adjustment Account
Dr. Cr.
Date Particulars A-L M-Z Date Particulars A-L M-Z
Amoun Amoun Amou Amoun
t t nt t
(`) (`) (`) (`)
01.03. To Balance b/f 500 200 01.03. By Balance b/f 2500 3000
17 17
31.03. To Debtors 10000 14000 31.03. By Debtors Led. 25000 20000
17 Led. 17
Adj. A/C Adj. A/C
(In General (In

General
Ledger) Ledger)
Cash received 1000 500 Credit sales 2000 3000
Discount 2000 2000 B/R 3000 Nil
dishonoured
allowed Correction
Returns 500 600
inward
Bad Debt 4000 5000
Work Book : Financial Accounting
B/R received 3000 Nil
Correction
31.03. To Balance c/f 11500 3700
17
32500 26000 32500 26000
 Work Book : Financial Accounting

Note: 1. No entry is required for bad debt recovery.

Note: 2. No entry is required under self-balancing system for incorrect posting of sales, as it
involves corrections within individual accounts in the same ledger.

Account-wise Details Given for Debtors’ Ledger

12. The summarized analysis of the accounts of the outstanding debtors of a firm at the date of
the annual closing of account is as under:
Debtor Credit Cash Returns Bills Discount Bad
s Sales(` Received(`) Inward( Received(`) Allowed(` Debt(`
) `) ) )
A 6000 4000 0 0 500 0
B 4000 2000 1000 0 0 0
C 10000 6000 0 0 0 0
D 20000 12000 2000 2000 1000 500
E 24000 16000 3000 2000 1000 1000

Debtors’ balance at the beginning of the year was `14500. Out of the above receipts of a bill for
`1700 given by S was dishonoured, noting charges amounting to `20. Prepare Debtors Ledger
Adjustment Account in General Ledger and General Ledger Adjustment Account in Debtors
Ledger.

Solution:

Calculation of total of different transactions

Debtor Credit Cash Returns Bills Discount Bad
s Sales( Received(`) Inward(` Received(`) Allowed(` Debt(`)
`) ) )
A 6000 4000 0 0 500 0
B 4000 2000 1000 0 0 0
C 10000 6000 0 0 0 0
D 20000 12000 2000 2000 1000 5
0
0
E 24000 16000 3000 2000 1000 10
00
Total 64000 40000 6000 4000 2500 15
00
In General Ledger
Debtors’ Ledger Adjustment Account
Dr. Cr.
Particulars Amount Particulars Amount
(`) (`)
To Balance b/f 14500 By Genera Led. Adjustment
To General Led. Adjustment A/C A/C (in Debtors’ Ledger)
(in Debtors’ Ledger) - Returns Inward 6000
Work Book : Financial Accounting
- Credit Sales 64000 - Cash Received 40000
- B/R Dishonoured 1700 - B/R received 4000
- Noting charges 20 - Discount Allowed 2500
- Bad 1500
Debt By 26220
Balance c/f
80220 80220
 Work Book : Financial Accounting
In Debtors’ Ledger
General Ledger Adjustment Account
Dr. Cr.
Particulars Amount Particulars Amount
(`) (`)
To Debtors Led. Adjustment A/C By Balance b/f 14500
(In General Ledger) By Debtors Led. Adjustment
- Returns Inward 6000 A/C (In General Ledger)
- Cash Received 40000 - Credit Sales 64000
- B/R received 4000 - B/R Dishonoured 1700
- Discount Allowed 2500 - Noting charges 20
- Bad Debt 1500
To Balance c/f 26220
80220 80220

Rectification Entry under Self Balancing System

13. The following errors were detected on 31.12.2017 after preparation of Trial Balance but
before preparation of Final Accounts.
(i) Purchases day book was undercast by `5000
(ii) Sales day book was overcast by `2000
(iii) A cheque of `20000 issued to Mr. M was recorded as having been issued to Mr. K
(iv) Goods worth `3000 were returned by Mr. D, recorded in the Day Book as `30000

Prepare necessary Journal entries assuming that the ledgers are kept under self-balancing
system. Solution:

Journal Entries
Date Particulars Amount Amount
(`) (`)
i Purchase A/C 5000
To Suspense A/C 5000
General Ledger Adjustment A/C(in Creditors Ledger) 5000
To Creditors Ledger Adjustment A/C(in Gen. Ledger) 5000
ii Suspense A/C 2000
To Sales A/C 2000
Debtors Ledger Adjustment A/C(in General Ledger) 2000
To General Led. Adjustment A/C(in Debtors Ledger) 2000
iii Mr. M A/C 20000
To Mr. K A/C 20000
iv Mr. D A/C 27000
To Returns Inward A/C 27000
Debtors Ledger Adjustment A/C(in General Ledger) 27000
To General Led. Adjustment A/C(in Debtors Ledger) 27000

Note: the adjustment in (iii) is a transaction within Creditors Ledger. So no rectification entry is
Work Book : Financial Accounting
required to be passed in Self Balancing System.
 Work Book : Financial Accounting
14. The balance on the Sales Ledger Control Account of Q Ltd, on Sept, 30, 2012 amounted to `9,600
which did not agree with the net total of the list of Sales Ledger Balance on that date. Errors
were found and the appropriation adjustments when made balanced the books. The errors were:
(i) Debit balance in the sales ledger amounting to `306 had been omitted from the list of
balances.
(ii) A Bad Debt amounting to `750 had been written-off in the sales ledger, but had not
been posted to the Bad Debts Account, or entered in Control Account.
(iii) An item of goods sold to Amar for `400 had been entered once in the Day Book but
posted to his account twice.
(iv) `70 Discount Allowed to Manoj had been correctly recorded and posted in the books. This
sum had been subsequently disallowed, debited to Manoj's account, and entered in the
discount received column of the Cash Book.
(v) No entry had been made in the Control Account in respect of the transfer of a debit of
7260 from Kumar's Account in the Sales Ledger to his account in the purchase ledger.
(vi) The Discount Allowed column in the Cash Book had been under cast by `280.
You are required to give the journal entries, where necessary, to rectify these errors,
indicating whether or not any control accounts is affected, and to make necessary
adjustments in the Sales Ledger Control Account bringing down the balance.

Solution:
In the books of ……
Journal
Dat Particulars L Debit Credit
e F (`) (`)
.
2012 `306 should be added to Sales Ledger Balances and it will
Sept. not
30 affect Control Account
Bad Debts A/c Dr. 750
To, Sales Ledger Control A/c 750
(Bad Debts written-off without recording in general
ledger, now rectified.)

Amar's Account should be credited by `400. It will not

affect
Control Account.
Discount Received A/c Dr. 70
To, Purchases Ledger Control A/c 70
Sales Ledger Control A/c 70
70
Dr. To, Discount Allowed A/c
(Discount previously allowed cancelled, which was
wrongly
treated as discount received, now rectified.)
Work Book : Financial Accounting
Purchase Ledger Control A/c Dr. 260
To, Sales Ledger Control A/c 260
(Transfer of debit of Kumar's Account to Purchase Ledger,
not recorded, now rectified.)

Discount Allowed A/c Dr. 280

To, Sales Ledger Control A/c 280
(Discount allowed account undercast, now rectified.)
 Work Book : Financial Accounting
Preparation of Total Debtors Account and Total creditors Account under Sectional Balancing System

15. Prepare Total Debtors Account (or Debtors Control Account) and Total Creditors Account (or
Creditors Control Account) from the following particulars as on 31.03.2013.
Particulars Amou Particulars Amou
nt nt
` `
Debtors balance (01.04.2012) Dr. 20,00 Discount Allowed to Debtors 6,000
0
Debtors balance (01.04.2012) Cr. 6,000 Credit Purchase 80,00
0
Creditors balance (01.04.2012) Dr. 16,00 Cash paid to Creditors 5,000
0
Creditors balance (01.04.2012) Cr. 2,000 Discount Received 6,000
Sales (including Cash Sales 1 ,36, Returns Outward 4,000
`16,000) 000
Returns Inward 10,00 Bills Payable Accepted 10,00
0 0
Cash Received from Customer 70,00 Transfer from bought ledger to sale 12,00
0 ledger 0
Bad Debts 6,000
(Cash Received from Debtors Credit balance in sold ledger on 8,000
`6,000 31.03.13

against a debt previously written

off)
Bills Receivable received 12,00 Debit balance in bought ledger on 6,000
0 31.03.13
Bills Receivable dishonoured 4,000 Noting Charges charged from Debtors 200
Bills Receivable endorsed to 2,000 Provision made for Discount on 2,000
creditors Creditors
Endorsed bill dishonoured 1,000
Provision made for Bad Debts 8,000
Provision made for Discount on 2,000
Debtors

Solution:
In the books of.....................
Total Debtors or Debtors Control Account
Dr. Cr.
Date Particulars Amou Date Particulars Amoun
nt t
(`) (`)
2012 2012
April To, Balance b/d 20,000 April 1 By Balance b/d 6,000
1
To, Sales (`1,36,000-`16,000) 1 ,20,0 Return Outwards 1
00 0,000
To, B/R Dishonoured 4,000 By, Cash Received 70,000
To, Total Creditors A/c 1,000 By, Bad Debts 6,000
Work Book : Financial Accounting
(Endorsed
B/R Dishonoured)
To, Noting Charges 200 By, B/R Received 1
2,000
2C0 To, Balance c/d 8,000 201 By, Discount Allowed 6,000
13 3
Mar. Mar.
31 31
By, Transfer 12,000
By, Balance c/d 31,200
1,53,2 1 ,53,2
00 00
April To, Balance b/d 31,200 April 1 By, Balance b/d 8,000
1
Note: Recovery of Bad Debts, provision for Bad Debts, Provisions for Discount on Debtors,
Provision for discount on Creditors, Cash Sales etc. will not appear in Total Debtors or
Debtors Control Account.
 Work Book : Financial Accounting

Study Note – 8
ROYALTIES

Learning Objective:
To gain knowledge of royalty and its related terms like minimum rent,
ground rent, short workings, Recoupment of Short workings etc.
To be able to maintain accounts of royalty transactions in the books of Lessee
and Lessor.

1. Multiple Choice Questions

Choose the correct

alternative:

1. Which of the following is the type of royalty?

(a) Copyright
(b) Mining royalty
(c) Patent royalty
(d) All of these

2. What is minimum rent?

(a) Assured and mutually agreed periodical minimum amount
(b) Minimum periodical amount
(c) Amount paid by lessee to landlord
(d) None of these

3. Royalty is
(a) A contract
(b) Landlord to lessee
(c) Use of asset
(d) All of these

4. Short working
(a) Shortage of royalty
(b) Minimum rent exceeds the actual royalty
(c) Shortage of actual rent
(d) None o these

5. Dead rent is
Work Book : Financial Accounting
(a) Minimum rent
(b) Short working
(c) Surface rent
(d) None of these
 Work Book : Financial Accounting

Answer:

1. (d)
2. (a)
3. (d)
4. (b)
5. (a)

2. Fill in the blanks:

1. Short working is alternatively termed as ……….
2. Redeemable dead rent is the amount by which minimum rent……the actual royalty
3. Excess working is the amount by which the actual royalty ……… the minimum rent.
4. Ground rent refers to the fixed yearly or half yearly rent payable by the lessee in
addition to the……………….
5. Surface rent is also termed as ………….

Answer:

1. redeemable dead rent

2. exceeds
3. exceeds
4. minimum rent
5. Ground rent.

3. State whether the following statements are true or false:

1. Minimum rent is also called fixed rent or certain rent.
2. Recoupment of short working is done through excess working.
3. Fixed right does not deal with short working.
4. Dead rent is irrecoverable rent.
5. Ground rent refers to the fixed yearly or half yearly rent payable by the lessee to the
landlord in addition to the minimum rent.

Answer:

1. True
2. True
3. False
4. False
5. True.

4. Match the following:

Column – A Column – B
1 Fixed right A Landlord to lessee
2 Ground rent B Surface rent
3 Dead rent C Strike and lockout
4 Royalty D Recoup short working within a certain
Work Book : Financial Accounting
period
5 Proportionately reduction in minimum E Fixed rent
rent
 Work Book : Financial Accounting

Answer:

1. D
2. B
3. E
4. A
5. C

PROBLEMS AND SOLUTIONS:

5. X Ltd. Holds a lease of coal mine from Y Ltd at a royalty of ` 2 per ton of coal produced a
minimum rent of ` 4000 p.a., the short workings being recoverable out of the royalties of the
next two years.
After working the mine for two years X Ltd sublets part of a mine to A Ltd at a royalty of ` 2.5
per ton with a minimum rent of ` 2000 p.a. A Ltd has right to recover short workings during
the first three years of sub-lease.

Annual production (in tons)

2014 2015 2016 2017 2018
X Ltd. 1200 1400 1900 2000 2000
A Ltd. - - 700 800 900

Give necessary journal entries and prepare necessary accounts in the books of X Ltd for the
period from 2014 to 2018.

Solution:

Working note:

(1)analysis of royalties payable

Ye Tot Actua Minim Exces short workings Amou
ar al l um s suffere Recoupe Writt C/ nt
out royalti rent workin d d en F payabl
put es gs off e
(tons
)
201 1200 2400 4000 - 1600 - - 16 4000
4 00
201 1400 2800 4000 - 1200 - - 28 4000
5 00
201 2600 5200 4000 1200 - 1200 400 12 4000
6 00
201 2800 5600 4000 1600 - 1200 - - 4400
7
201 2900 5800 4000 1800 - - - - 5800
8

(2)Analysis of Royalties Receivable

Ye Output Actu Minim Exces Royalty suspense Amoun
Work Book : Financial Accounting
ar of sub- al um s occurre adjuste Credit C t
lessee royalt rent workin d d ed / receiv
to P/L F
(tons) ies gs abl
e
201 700 1750 2000 - 250 - - 2 2000
6 5
0
201 800 2000 2000 - - - - 2 2000
7 5
0
201 900 2250 2000 250 - 250 - - 2000
8
Work Book : Financial Accounting

In the books of X
Ltd Journal
Date particulars Debit Credit
(`) (`)
31/12/1 Royalties payable a/c 24
4 Dr. Short working recoupable a/c 00
16 4000
00
Dr.
To Y Ltd a/c
(being royalties payable @ ` 2 per ton on 1200 tons
subject to a minimum rent of ` 4000)
Y Ltd a/c Dr 4000
To bank a/c 4000
(Being the amount paid in respect of royalties)
Profit and loss a/c Dr 2400
To Royalties payable a/c 2400
(Being the transfer of royalties payable account to profit
and loss account)

31/12/1 Royalties payable a/c Dr 28

5 Short working recoupable a/c 00
12 4000
00
Dr To Y Ltd a/c
(being royalties payable @ ` 2 per ton on 1400 tons
subject to
a minimum rent of ` 4000)
Y Ltd a/c Dr 4000
To bank a/c 4000
(Being the amount paid in respect of royalties)
Profit and loss a/c 2800
2800
Dr To Royalties payable a/c
(Being the transfer of royalties payable account to profit
and
loss account)
31/12/1 Royalties payable a/c 5200
6 5200
Dr To Y Ltd a/c
(Being royalties payable @` 2 per ton on 2600 tons)
Y Ltd a/c Dr 1200
To short workings recoupable a/c 1200
(Being ` 1200 recovered against short workings 2013)
Y Ltd a/c Dr 4000
To Bank a/c 4000
(Being the amount paid in respect of royalties)
Work Book : Financial Accounting
Profit and loss a/c 400
400
Dr To short workings
recoupable a/c
(Being the short workings lapsed for 2013 for written off)
A Ltd a/c Dr 2000
To royalties payable 17
a/c To royalties 50
suspense a/c 2
5
(Being royalties receivable @` 2.5 per ton on 700 tons
0
subject
 Work Book : Financial Accounting
to a minimum rent of ` 2000)
Bank a/c Dr 2000
To A Ltd a/c 20
(Being the amount received in respect of royalties) 00
Royalties receivable a/c 1750
14
Dr To Royalties payable a/c 00
To profit and loss a/c 3
5
(Being the adjustment of royalties paid on sub-lessee’s
production @` 2 per ton 700 tons. Profit on sub-lease @` 0
0.5 per ton on 700 tons credited to profit and loss
account.)

Date Particular Debit Credit

(`) (`)
Profit and loss a/c 3800
3800
Dr To royalties payable a/c
(Being royalties paid on own production @ ` 2 per ton on
1900
tons debited to profit and loss account)
31/12/1 Royalties payable a/c 5600
7 5600
Dr To Y Ltd a/c
(Being royalties payable @` 2 per ton on 2800 tons)
Y Ltd a/c Dr 1200
To short working recoupable a/c 1200
(Being ` 1200 recovered against short workings of 2014)
Y Ltd a/c Dr 4400
To bank a/c 4400
(Being the amount paid in respect of royalties)
A Ltd a/c Dr 2000
To royalties receivable a/c 2000
(Being the royalties receivable @ ` 2.5 per ton on 800
tons)
Royalties receivable a/c 2000
16
Dr To royalties payable a/c 00
To profit and loss a/c 4
0
(Being the adjustment of royalties paid on sub-lessee’s
production @` 2 per ton on 800 tons. Profit on sub-lease 0
@` 0.5 per ton on 800 tons credited to profit and loss
account)
Bank a/c Dr 2000
To A Ltd a/c 2000
(Being the amount received from A Ltd)
Work Book : Financial Accounting
Profit and loss a/c 4000
4000
Dr To royalties payable a/c
(Being royalties paid on own production @` 2 per ton on
2000
tons debited to profit and loss account)
31/12/1 Royalties payable a/c 5800
8 5800
Dr To, Y Ltd a/c
(Being the royalties payable @` 2 per ton on 2900 tons)
 Work Book : Financial Accounting

Date Particulars Debit Credit

(`) (`)
Y Ltd a/c Dr 5800
To bank a/c 5800
(Being the amount paid in respect of royalties)
A Ltd a/c Dr 2250
To royalties receivable a/c 2250
(Being royalties receivable @ ` 2.5 per ton on 900 tons)
Royalties receivable a/c 2250
18
Dr To royalties payable a/c 00
To profit and loss a/c 4
5
(Being the adjustment of royalties paid on sub-lessee’s
0
production @ ` 2 per ton on 900 tons. Profit on Sub-lease
@`
0.5 per ton on 900 tons credited to profit and loss account)
Royalty suspense a/c Dr 250
To A Ltd a/c 250
(Being the short workings recouped by the sub lessee)
Bank a/c Dr 2000
To A Ltd a/c 2000
(Being the amount received from A Ltd.)
Profit and loss a/c Dr 4000
To royalties payable a/c 4000
(Being royalties paid on own production @` 2 per ton on
2000 tons debited to profit and loss account)

Ledger of X Ltd
Royalties payable
account
Dr. Cr.
Date Particulars ` Date Particulars `
31/12/14 To, Y Ltd 24 31/12/14 By, profit and loss 24
31/12/15 a/c To, Y 00 31/12/15 a/c By, profit and 00
31/12/16 Ltd a/c 28 31/12/16 loss a/c 28
00 00
To, Y Ltd By, royalty
52 receivable a/c(`2 14
a/c 31/12/16
00 x 700) 00
By, profit and loss a/c
31/12/17 31/12/17 38
52 By, royalty receivable 00
To, Y Ltd a/c 00 31/12/17 a/c (`2 x 800) 52
By, profit and loss a/c 00
56
31/12/18 00 31/12/18 16
By, royalty 00
Work Book : Financial Accounting
receivable a/c(`2
To, Y Ltd a/c x 900)
56 31/12/18 By, profit and loss a/c 40
00 00
58 56
00 00
18
00

58
00 40
00
58
00
Work Book : Financial Accounting

Short workings recoupable account

Dr Cr.
Date Particulars ` Date Particulars `
31/12/201 To, Y Ltd a/c 16 31/12/2014 By, balance c/d 1600
4 00
1/1/201 To, balance b/d 16 31/12/2015 By, balance c/d 2800
5 To, Y Ltd a/c 00
31/12/20 12
15 00
28 2800
1/1/201 To, balance b/d 00 31/12/201 By, Y Ltd a/c
6 28 6 By, P/L a/c 12
00 31/12/201 (lapsed) By, 00
6 4
balance c/d
31/12/16 0
0
12
00
1/1/2017 To, balance b/d 28 31/12/2017 By, Y Ltd a/c 2800
00
12 1200
00

Y Ltd account
Dr. Cr.
Date Particulars ` Date Particulars `
31/12/1 To, bank a/c 400 31/12/1 By, royalty payable a/c 24
4 0 4 By, short working 00
31/12/1 recoupable a/c 16
4 00
400 400
31/12/1 To, bank a/c 0 By, royalty payable a/c 0
5 400 By, short working 280
0 31/12/1 0
recoupable a/c
5 120
To, short 31/12/1 0
workings 5 By, royalty payable a/c
31/12/1
recoupable 400 400
6
a/c 0 0
12 520
00 31/12/1 0
31/12/1 To, bank a/c 6
6
40
00 By, royalty payable a/c
To, short 520 520
workings 0 0
31/12/1 recoupable
7
a/c To, bank 120 31/12/1 By, royalty payable a/c 560
a/c 0 7 0
 Work Book : Financial Accounting
31/12/1
7 440
To, bank a/c 0
560 560
0 31/12/1 0
31/12/1 580 8 580
8 0 0

6. Mr. Mukunda took a lease of mines from Mr. Amar, with effect from January 1, 2008, for a
period of 20 years. The terms of agreement provided for the payment of Royalty @ Re. 0.60
per ton raised, subject to a minimum rent of Re. 12,000 per annum, with a right to recoup
shortworkings, within a period of 3 years immediately succeeding the year in which the
shortworking arises. It was further agreed that the minimum rent should be reduced
proportionately, in case of strikes or lock-outs in any year.
Work Book : Financial Accounting

You are furnished with the following details:

Year Tons raised
2012 23,000
2013 18,700
2014 15,400
There was a strike period of 3 months, from October to December
2015 19,000
2016 20,600
2017 22,600

The balance in Short working Account, as on January 1, 2012, was 4,900, of which 2,200 arose
in 2009 and the balance in 2010.
You are required to show the Royalty A/C, Short working A/C and Mr. Amar’s A/C in the books
of Mr. Mukunda for all the above 6 years.

Solution:

Workings:
Analysis of Royalty
Yea Outp Actu Minimu Shor Short- Payme Short- Short-
r ut al m t- working nt working working
(Ton Royal Rent worki Recouped lapsed c/f
s) ty ng
201 23,0 13,80 12,000 1,800 12,000 4001 2,7002
2 00 0
201 18,7 11,22 12,000 780 12,000 2,7002 780
3 00 0
201 15,4 9,240 9,0003 240 9,000 540
4 00
201 19,0 11,40 12,000 600 12,000 1,140
5 00 0
201 20,6 12,36 12,000 360 12,000 180 600
6 00 0
201 22,6 13,56 12,000 600 12,960
7 00 0

Notes:
1. Out of the shortworking of 2,200 arising in 2009 1,800 is recouped in 2012 and the
balance (2,200-1,800) or 400 lapses in 2012.
2. Shortworking of 2010 (4,900-2,200) or 2700 is carried forward in 2012 because the
period of recoupment of this expires in 1985.
3. Minimum Rent for 2014 is 9/12of 12,000 or 9,000.

In the Books of Mr. Mukunda

Dr. Royalty Account Cr.
2012 Dec.31 To Amar a/c 13,800 2012 Dec.31 By production a/c 13,80
Work Book : Financial Accounting
0
2013 Dec.31 To Amar a/c 11,220 2013 Dec.31 By production a/c 11,22
0
2014 Dec.31 To Amar a/c 9,240 2014 Dec.31 By production a/c 9,240
2015 Dec. 31 To Amar a/c 11,400 2015 Dec. By production a/c 11,40
31 0
2016 Dec.31 To Amar a/c 12,360 2016 Dec.31 By production a/c 12,36
0
2017 Dec.31 To Amar a/c 13,560 2017 Dec.31 By production a/c 13,56
0
Work Book : Financial Accounting

Dr. Short-workings Account Cr.

201 2012
2 To balance b/d 4,900 Dec.3 By Amar A/c 1,800
Jan. 1 By profit & loss 400
1 A/c By balance
2,700
c/d
4,900 4,900
201 2013
3 To balance b/d 2,700 Dec.3 By Profit &loss 2,700
Jan. To Amar A/c 1 A/c By balance
780 780
1 C/d
Dec.
31
3,480 3,480
201 To balance b/d 780 2014 By Amar A/c 2
4 Dec.3 By balance c/d 4
Jan. 1 0
1 5
4
0
780 780
201 2015
5 By balance b/d 5 Dec.3 By balance c/d 1,140
Jan. To Amar A/c 4 1
1 0
Dec.
6
31
0
0
1,140 1,140
201 To balance b/d 1,140 2016 By Amar A/c 3
6 Dec.3 By Profit & loss 6
Jan. 1 A/c By balance 0
1 c/d 1
8
0
6
0
0
1,140 1,140
201 To balance b/d 600 2017 By Amar A/c 600
7 Dec.3
Jan. 1
1

Dr. Amar Account Cr.

2012 2012
Dec. To Shortworking 1,800 Dec. 31 By Royalty A/c 13,800
31 A/c To Bank
12,000
13,800 13,800
Work Book : Financial Accounting
2013 2013 By Royalty A/c 11,220
Dec.3 To Bank 12,000 Dec.31 By Shortworking 780
1 A/c
12,000 12,000
2014 To Shortworking A/c 240 2014 By Royalty A/c 9,240
Dec.3 To Bank 9,000 Dec.31
1
9,240 9,240
2015 To Bank 12,000 2015 By Royalty A/c 11,400
Dec.3 Dec.31 By Shortworking 600
1 A/c
12,000 12,000
2016 To Shortworking A/c 360 2016 By Royalty A/c 12,360
Dec.3 To Bank 12,000 Dec.31
1
12,360 12,360
2017 To Shortworking A/c 600 2017 By Royalty A/c 13,560
Dec.3 To Bank 12,960 Dec.31
1
13,560 13,560
 Work Book : Financial Accounting

6. Vendor Ltd. leased out three machines for manufacturing burners to Singur Stove
Manufacturers in three successive years. The terms of lease for the machines were as
follows:
i. The lessee would pay a royalty of 50 paise for every 10 burners produced subject to a
minimum payment of 500 per annum for every machine.
ii. The lessee could recoup any shortworking arising in the first year of the leased machine
in the second year only, but not afterwards.

Details of the three machines on lease are given bellow:

Machine No. 1 2 3
Date of commencement of lease 1.1.20 1.1.2 1.1.2
14 015 016
st
Production of burners for the Year ended 31 December
(numbers):
2014 8,000 -- --
-- --
- -
2015 15,00 10, --
0 000 --
-
2016 17,40 9, 8,
0 60 00
0 0
2017 18,00 12, 7,
0 400 40
0

You are requested to show the Ledger Accounts giving effect to the above tramsactions in the
books of Singur Stove Manufacturers.

Solution:
Analysis of Royalty
Year Machin Outpu Actu Minim Shor Short Shor Short
e t al um t Worki Paymen t Worki
No. Roya Ren Worki ng t Worki ng
lty t ng Recoupe ng c/f
d Lapse
d
Units
201 1 8,000 400 500 100 ------ 500 ------ 100
4
201 1 15,00 750 500 ------ 100 650 ------ -------
5 0
2 10,00 500 500 ------ ------ 500 ------ -------
0
201 1 17,40 870 500 ------ ------ 870 ------ -------
6 0
2 9,600 480 500 20 ------ 500 20 -------
Work Book : Financial Accounting
3 8,000 400 500 100 ------ 500 ------ 100
201 1 18,00 900 500 ------ ------- 900 ------ -------
7 0
2 12,40 620 500 ------ ------- 620 ------ -------
0
3 7,400 370 500 130 ------- 500 230 -------

Books of Singur Stove Manufactures

Royalty Account
Dr. Cr.
2014 Dec. To Vendor Ltd. A/c 400 2014 Dec.31 By Manufacturing A/c 400
31
2015 Dec. To Vendor Ltd. A/c 1,2 2015 Dec. By Manufacturing A/c 1,25
31 50 31 0
2016 Dec. To Vendor Ltd. A/c 1,7 2016 Dec. By Manufacturing A/c 1,75
31 50 31 0
2017 Dec. To Vendor Ltd. A/c 1,8 2017 Dec. By Manufacturing A/c 1,89
31 90 31 0
Work Book : Financial Accounting
Shortworking Account
Dr. Cr.
2014 Dec. To Vendor Ltd. A/c 100 2014 Dec. By Balance c/d 100
31 31
2015 Jan. To Balance b/d 100 2015 Dec. By Vendor Ltd. 100
1 31 A/c
2016 Dec. To Vendor Ltd. A/c 120 2016 Dec. By Profit & Loss 2
31 31 A/c By 0
Balance c/d 1
0
0
120 120
2017 Jan. To Balance 1 2017 Dec. By Profit & Loss 230
1 b/d To 0 31 A/c
Dec. 31 0
Vendor Ltd.
1
A/c
3
0
230 230

Vendor Ltd. Account

Dr. Cr.
2014 Dec. To Bank 500 2014 Dec. By Royalty A/c 4
31 31 By Shortworking A/c 0
0
1
0
0
500 500
2015 Dec. To shrtworking 100 2015 Dec. By Royalty A/c 1,250
31 A/c To Bank 1,150 31
1,250 1,250
2016 Dec. To Bank 1,870 2016 Dec. By Royalty A/c 1,750
31 31 By Shortworking A/c 120
1,870 1,870
2017 Dec. To Bank 2,020 2017 Dec. By Royalty A/c 1,890
31 31 By Shortworking A/c 130
2,020 2,020

Royalty receivable account

Dr. Cr.
Date Particulars ` Date Particulars `
31/12/16 To, royalty payable a/c 14 31/12/16 By, A Ltd a/c 17
31/12/16 To, profit and loss a/c 00 50
3
5
0
1750 17
50
31/12/17 To, royalty payable a/c 16 31/12/17 By, A Ltd a/c 20
Work Book : Financial Accounting
31/12/17 To, profit and loss a/c 00 00
4
0
0
2000 20
31/12/18 To, royalty payable a/c 31/12/18 By, A Ltd a/c 00
1800 22
50
31/12/18 To, profit and loss a/c 450
2250 22
50
Royalty suspense account
Dr. Cr.
Date Particulars ` Date Particulars `
31/12/16 To, balance c/d 250 31/12/16 By, A Ltd a/c 250
31/12/17 To, balance c/d 250 31/12/17 By, balance b/d 250
31/12/18 To, balance c/d 250 31/12/18 By, balance b/d 250
Work Book : Financial Accounting

A Ltd account
Dr. Cr.
Date Particulars ` Date Particulars `
31/12/1 To, royalty receivable a/c 175 31/12/1 By, bank a/c 200
6 0 6 0
31/12/1 To, royalty suspense a/c 250
6
200 200
31/12/ To, royalty receivable a/c 0 31/12/1 By, bank a/c 0
17 200 7 200
0 0

31/12/1 To, royalty receivable a/c 225 31/12/1 By, royalty suspense 250
8 0 8 a/c
31/12/1 By, bank a/c 200
8 0
225 225
0 0

Working Note:

A Ltd is a limited company. Therefore, royalty on own production should be charged to profit
and loss account (production account section). The royalty on sub-lessee’s production is
adjusted against the royalty receivable account.
 Work Book : Financial Accounting
Study Note – 9
HIRE – PURCHASE AND INSTALLMENT SYSTEM

Learning Objective:

To gain knowledge of Hire-Purchase System, other terms associated with it and

the salient features.
To be able to understand the components of Hire-Purchase Price and the
process of calculation.
To be able to know the accounting treatments and methods of accounting.
To know the situation of default and repossession and their accounting
treatment.

1. Multiple choice

questions: Choose the

correct alternative

1. Under Hire-Purchase agreement ownership is transferred:

(a) As soon as the first installment is paid
(b) Until the last installment is paid
(c) Both the cases
(d) None of these

2. Full cash price of the asset is forfeited under:

(a) Asset accrual method
(b) Credit purchase with interest method
(c) Both the methods
(d) None of these

3. Under installment system, the seller treats the transaction as a

(a) Credit sale
(b) Cash sale
(c) Mix sale
(d) None of these

4. Interest is charged on the amount

(a) Paid amount
(b) Outstanding amount
(c) Hire-Purchase price
(d) None of these
 Work Book : Financial Accounting
5. Assets are generally repossessed at a mutual agreed
(a) value
(b) current price
(c) Installments due
(d) None of these
 Work Book : Financial Accounting

6. Assets are generally repossessed at a mutual agreed

(a) value
(b) current price
(c) Instalments due
(d) None of these

7. The hire-purchaser, during that period of possession of goods, cannot such goods.
(a) damage
(b) destroy
(c) pledge or sell
(d) All of the above

8. In case of repossession the hire vendor takes back the possession of all the
goods.
(a) complete
(b) full
(c) complete or full
(d) complete

and full Answer:

1. (b)
2. (b)
3. (a)
4. (b)
5. (a)
6. (a)
7. (d)
8. (c)

2. Fill in the blanks:

1. Selling price under Hire-purchase basis is…than selling price under cash basis.
2. The act of revival of custody of the asset is called………
3. The buyer gets possession and ownership of the asset under………system right from
signing the contract.
4. Under Hire- purchase system ownership of the asset is transferred as soon as……...
installment is paid.
5. Every installment paid under Hire-purchase system consists of partly …….. and partly
interest charge.

Answer:

1. more
2. repossession
 Work Book : Financial Accounting
3. installment
4. last
5. capital payment.
 Work Book : Financial Accounting

3. State whether the following statements are true or false:

1. The buyer gets immediate possession but not ownership of the asset
under installment payment system on signing of contract.
2. The possession and ownership of the asset is immediately transferred to the buyer
under Hire- purchase system on signing the contract.
3. Down payment plus installments including interest is termed as cash price
4. The Hire-purchaser records the asset at Hire-purchase price
5. Repossession of the asset is done by Hire-vendor due to non-payment of installments
in due time.

Answer:

1. False
2. False
3. False
4. False
5. True

4. Match the following:

Column - A Column - B
1 Hire-Purchaser can record the asset at its A Cash price + interest
2 Hire-Purchase price B Interest
3 Installment payment system-Ownership transferred C Capital expenditure
4 Excess of Hire-purchase price over cash price D When first installment is paid
5 Payment towards cash price under Hire-purchase E Cash down price
system

Answer:

1. E
2. A
3. D
4. B
5. C

QUESTIONS AND NUMERICAL EXAMPLES

5. State the differences between Hire Purchase and Instalment Payment System.

Solution:

Hire-Purchase V/s Installment Payment

 Work Book : Financial Accounting
Sl. Hire-Purchase (HP) Installment Payment
No.
1 It is Hiring-cum-purchase contract It is outright sale contract
2 Hire-Purchase Act 1972 controls the Installment payment transaction
HP is
 Work Book : Financial Accounting
transactions not controlled by any such Act
3 Ownership of the goods transferr Ownersh i transferr immediat
is ed ip s ed ely
after payment of last after
installment sale
4 HP agreement can be cancelled The purchase has no such right

before
payment of last installment by
Hire-
purchaser

5 Hire-Vendor has the right to repossess Seller has no right t repossess the goods
the goods if default is made but can file a suit for damages.
6 Hire-purchaser cannot sell the goods Purchaser can sell the goods as he owns
since
he does not possess the ownership of the the title of the goods
goods

6. State the differences between Ordinary Purchase and Hire

Purchase Solution:

Ordinary Purchase V/S Hire- Purchase

Sl. Ordinary Purchase Hire-Purchase (HP)
No.
1 Ownership of the goods is Ownership of the goods is transferred
transferred after
immediately after purchase payment of last installment
2 The purchaser can resale the goods any Hire-purchaser cannot sell the goods
time since he does not possess the ownership
of the goods

3 Seller cannot repossess the goods Seller can repossess the goods due to
non-
payment of installments
4 The purchaser is not the bailee of the goods The purchaser is the bailee of the goods
5 The purchaser has no option to return the The purchaser has option to return the
goods goods to its actual owner

7. A Ltd. had purchased a machinery on 1.1.2013 on hire purchase system from B Ltd. The
terms are that A Ltd. would pay 20,000 down on signing of the agreement on that date and
four annual installments of 1000 each. A Ltd charged depreciation @10% per annum on cost
under diminishing balance system. B Ltd charged interest @10% per annum in their
contract.
Prepare machinery account and account of B Ltd. in the books of A Ltd.
 Work Book : Financial Accounting
Working notes:
Particulars Amount
Last installment [4th] 11,0
10 00
1,0
Less : interest included [ 110 of 11,000] 00
10,0
Add : installment [3rd] 00
11,0
00
 Work Book : Financial Accounting
21,0
10 00
1,9
Less : interest included [ 110 of 11,000] 09
19,0
Add : installment [2nd] 19
11,0
10
00
Less : interest included [ 110 of 11,000] 30,0
19
Add : installment [1st] 2,7
35
27,3
10 56
11,0
Less : interest included [ 110 of 11,000]
00
38,3
Add : down payment 56
Cash Price 3,4
86
34,8
70
20,0
00
54,8
70

In the Books of A Ltd.

Dr. Machinery account Cr.
Date Particulars Amoun Date Particulars Amoun
t t
1.1. To B Ltd. A/c 54,870 31.12. By depreciation A/c 5,
13 13 By balance c/d 48
7
49,
383
54,870 54,870
1.1.14 To Balance b/d 49,383 31.12.14 By depreciation A/c 4,
By balance c/d 93
8
44,
445
49,383 49,383
1.1. To Balance b/d 44,445 31.12. By depreciation A/c 4,
15 15 By balance c/d 44
5
40,
000
44,445 44,445
1.1. To Balance b/d 31.12. By depreciation A/c
40,000 4,
 Work Book : Financial Accounting
00
16 16 By balance c/d 0
36,
000
40,000 40,000
1.1. To Balance b/d
17 36,000

Dr. B Ltd. Account Cr.

Date particulars Amoun Date particulars Amoun
t t
1.1.13 To bank A/c 20,000 1.1.13 By motor car A/c 54,870
31.12.1 To bank A/c 11,000 31.12.1 By interest A/c 3,486
3 3
To balance c/d 27,356

58,356 58,356
31.12. To bank A/c 1.1.1 By balance b/d
11,0 27,3
14 To balance c/d 4 By interest A/c
00 56
31.12.
19,0 2,7
14
91 35
30,091 30,091
31.12. To bank A/c 1.1.1 By balance b/d
11,000 19,091
15 5
 Work Book : Financial Accounting
To balance 10,000 31.12. By interest A/c 1,909
21,000 15 21,000
31.12. c/d To bank 11,000 By balance b/d 10,0
16 1.1.1 By interest A/c 00
A/c 6 1,0
31.12. 00
11,000 16 11,000
Note: The dates of payments of installments have been assumed to be 31st December every
year.

8. On 1.1.14 Mr. Sen purchased a machine under higher purchased from Mr Das. The cash price
of the machine was [Link] payments for the purchased were agreed to be made as
follows:
On signing the agreement on 1.1.14 3000, at the time of year ending – first year 5,000, second
year 5,000, and third year 5,000.
Make necessary ledger accounts in the books of Gupta assuming depreciation was charged
annually @10% on the diminishing balance method.
Workings notes:
Apportionment of Annual interests

Hire purchase price=Total payments = 18,0

[3,000+5,000*3] Cash price 00
Total interest 15,5
00
2,5
00

It should be apportioned among the three years in the diminishing ratio of [Link]. Because the
outstanding amounts to the vendor will decrease accordingly. Thus annual interests would be -
3
2014 = 6
2
2015 = 6
of 2,500 = 1,250
of 2,500 = 833 and
1
2016 =
6 of 2,500 = 417

In the books of Books of Sen

Dr Das
Account Cr
Date Particulars Amou Date Particulars Amou
nt nt
1.1.14 To bank A/c 3,000 1.1.14 By machinery A/c 15,500
 Work Book : Financial Accounting
31.12.1 To bank A/c 5,0 31.12.1 By interest A/c 1,250
4 To balance b/d 00 4
8,7
50
16,750 16,750
31.12. To bank A/c 1.1.1 By balance b/d
5,0 8,750
15 To balance b/d 5 By interest A/c
00 833
31.12.
4,5
15
83
9,583 9,583
31.12. To bank A/c 1.1.1 By balance b/d
5,000 4,583
16 6 By interest A/c
417
31.12.
16
5,000 5,000
 Work Book : Financial Accounting

Dr Interest Account Cr.

Date Particulars Amoun date Particulars Amoun
t t
31.12. To Das A/c 1,250 31.12. By profit & loss A/c 1.250
14 And so 14
on…….
1250 1250

Dr Depreciation Account Cr.

Date Particulars Amou date Particulars Amoun
nt t
31.12.1 To Machinery A/c 1,550 31.12.1 By profit & loss A/c 1.550
4 And so on……. 4
1550 1550

Dr Machinery Account Cr.

Date Particulars Amou Date Particulars Amoun

nt t
1.1.1 To Das A/c 15,500 31.12. By depreciation A/c 1,5
4 14 By balance c/d 50
13,9
50
15,500 15,50
0
1.1.15 To balance b/d 13,950 31.12.1 By depreciation A/c 1,395
5
By balance c/d 12,55
5
13,950 13,95
1.1.1 To balance b/d 31.12. By depreciation A/c 0
6 12,555 16 1,255
By balance c/d 11,30
0
12,555 12,55
5

9. X Ltd. Purchased a scooter van on hire purchase from Y Ltd. On [Link] terms of
payment was 10,000 on delivery, 10,400 at the end of first year, 9600 at the end of the
second year, and 8800 at the end of the third year, inclusive of finance charges.
X Ltd. provided depreciation at 10% per annum on the original cost. Show the accounts in
the books of Y Ltd.
Working note:
Calculation of cash price and interests
The amounts of the annual installments are changing because the annual interests are
different over year. It is assumed that the payment for principal amount is the same every
year and it is P. The interests will decrease in the ratio of [Link].Let interests be detonated by
i.
Work Book : Financial Accounting
Payment in 2016 = P+i = 8.800 (i)
Payment in 2015 = P+2i = 9,600 (ii)
And Payment in 2014 = P+3i = 10,400 (iii)
If (i) and (ii) are added, 2P+3i = 18,400
Again P+3i = 10,400……………[as per (iii) above] P = 8,000

Interests included in installments are

2014 = 10,400 - 8,000 =2,400, 2015 = 9,600 - 8,000 =1,600,
and 2016 = 8,800 - 8,000 = 800
And cash price =10,000 +3 * 8,000 = 34,000
 Work Book : Financial Accounting

In the Books of Y Ltd.

Dr. X Ltd. Account Cr.
Particulars Amou Date Particulars Amou
nt nt
1.1.14 To H.P sales A/c 34,00 1.1.14 By bank A/c 10,00
0 0
31.12.1 To interest A/c 2,400 31.12.1 By bank A/c 10,4
4 4 By balance c/d 00
16,0
00
36,40 36,40
0 0
1.1.15 To balance b/d 16,00 31.12.1 By bank A/c 9,600
0 5
31.12.1 To interest A/c 1,600 By balance c/d 8,000
5
17,60 17,60
1.1.16 To balance b/d 0 31.12.1 By bank A/c 0
8,000 6 8,800
31.12.1 To interest A/c 800
6
8,800 8,800

Dr. Interest Account Cr.

Date Particulars Amou Date Particulars Amou
nt nt
31.12. To profit & loss 2,400 31.12 By X Ltd. a/c 2,400
14 A/c .14
31.12. To profit & loss 31.12 By X Ltd. a/c
15 A/c .15
31.12. To profit & loss A/c 1,600 31.12. By X Ltd. a/c 1,600
16 16
800 800

10. Kundu Transporter purchases a truck on hire purchase from Koley Motor for 56,000. Payment
to be made as 15,000 down cash and 3 installments of 15,000 each at the end of each year.
Rate of interest is charged at 5% p.a. Buyer depreciates assets at 10% p.a. on written down
value method. Because of financial difficulties Modern Transporter after having paid the
down cash and the first installment at the end of the first year could not pay the second
installment and Koley motors took possession of the Truck.

Prepare (a) The Truck Account (b) Seller’ Account in the books of the buyer assuming that year
st
ends on 31 December.

Working Note: Calculation of Interests

Amount
Work Book : Financial Accounting
Opening date (First year) 56,000
Cash price 15,000
Same date Less : 41,0
00
2,0
50
Down Payment 43,0
50
15,0
00
Add: Interest for the first year[5%of 41,000] 28,050
Less: Installment
Add: Interest [5%of 28,050] 1,403
Surrendered Asset 29,453
 Work Book : Financial Accounting

In the Books of Kundu Transporter

Dr. Truck Company Cr.
Date Particulars Amount Date Particulars Amount
st To Koley 56,000 At yr. By Depreciation A/c @10% 5,600
1 yr.
Motor end
[Link] By Balance c/d 50,400
56,000 56,000
nd 50,400 By Depreciation 5,
2 04
To Balance B/d By Koley Motor
yr. 0
(surrender) By Profit
Op. &Loss A/c 29,
dt. 453
15,
907
50,400 50,400

Dr. Koley Motor Account Cr.

Date Particulars Amount Dat Particulars Amount
e
st To Bank A/c 15,000 st By Truck A/c 56,000
1 1 yr
yr
Op. [Link].
dt
[Link] To Bank A/c 15,000
.
To Balance B/d 28,050 By Interest A/c 2,050
58,050 58,050

[Link] To Machinery A/c 29,453 [Link]. By Balance B/d 28,050

.
(Balance transferred) nd By Interest 1,403
2
29,4 29,4
53 53
yr.
[Link].

st
11. Laxman purchased 7 Trucks on hire-purchase on 1 July 2014. The Cash Price of each Truck
was 50,000. He was to pay 20% of Cash Price at the time of delivery and the balance of five
half- yearly installments starting from 31.12.2014 with interest at 5% per annum. On
th
Laxman’s failure to pay the installment due on 30 June, 2015, it was agreed that Laxman
would return 3 Trucks to the Vendor and the remaining 4 would be retained by him. The
returning price of 3 trucks was 40,500. Laxman charges depreciation @ 20% per annum.
Vendor after spending 1,000 on repairs sold away all the three trucks for 40,000.
Work Book : Financial Accounting
Show Trucks Account and Vendor’s Account in the books of Laxman and Laxman’s Account
and Goods Repossessed Account in the books of the Vendor assuming that their books are
th
closed on 30 June each year.

Answer:

In the Books of Laxman

Dr. Trucks Account Cr.
Dat Particulars Amou Dat Particulars Amou
e nt e nt
 Work Book : Financial Accounting
1.07. To Hire Vendor A/c 3,50,00 3.06. By Depreciation A/c [20% of 70,0
14 (Cash price of 7 0 15 3,50,000] 00
Trucks @ 50,000 By Hire Vendor A/c (Adjustment for 3 40,5
Trucks at a agreed value) 00
each)
By Profit & Loss Account (Loss on
Surrender) 79,5
00
By Balance c/f [4/7 of (3,50,000-
70,000]
1,60,0
00
3,50,00 3,50,0
0 00

Dr. Hire Vendor Account Cr.

Date Particulars Amoun Date Particulars Amount
t
1.07. To Bank A/c 1.07. By Trucks A/c 3,50,00
14 [Down Payment @20% of 70,000 14 By Interest 0
3,50,000] A/c [5%of 7,000
To Bank A/c [Working Note] 63,000 (3,50,000 –
31.12. To Trucks A/c (Adjustment for 40,500 31.12. 70,000) for ½
14 3 Trucks at agreed value) 14 year] By 5,600
1,89,1
30.06. Balance c/f 00 30.6. Interest A/c
15 3,62,60 15 3,62,60
[working Note]
0 0

In the Books of Hire Vendor

Dr. Laxman Account Cr.
Date Particulars Amount Date Particulars Amount
1.07. To Hire Purchase Sales 3,50,000 1.7.1 By Bank A/c [20% of 70,
14 A/c [Down Payment @ 4 3,50,000] 000
20% of 3,50,000] By Bank A/c
To Interest A/c 7,000 31.12. By Goods 63,
31.12. 14 000
To Interest A/c Repossessed A/c
14 30.6. 40,
[Working Note] 5,600 [Agreed value]
30.6. 15 500
By Balance c/f
15
1,89,
100
3,62,600 3,62,600

Dr. Goods Repossessed Account Cr.

Date Particulars Amoun Dat Particular Amoun
t e s t
30.06.1 To Laxman A/c 40,50 30.06. By Bank A/c (Sale Proceeds) 40,000
5 0 15
To Bank A/c (cost of 1,000 By Profit & Loss A/c 1,500
Work Book : Financial Accounting
repairs) (Loss on Sale )

41,50 41,500
0

Working Notes:

1. Value of each Bare Installment [i.e. exclusive of interest]

= Amount Payable by Installments/ No. of Installments
= 80% of 3,50,000/5
= 56,000
 Work Book : Financial Accounting

2. Calculation of Interest
Amount
1.7.2014 Cash Price 3,50,000
Less: Down Payment 70,000
2,80,000
31.12.2014 Add: Interest @ 5% p.a. [5/100*2,80,000*6/12] 7,000
2,87,000
Less: Half Yearly Installment [56,000+7,000] 63,000
2,24,000
30.06.2015 Add: Interest [2,24,000*5/100*6/12] 5,600
Loss on Surrender & Value of Trucks Retained
Trucks Retained [4] Trucks Retained
[3]

Value on 1.7.14 4*50,000 = 2,00,000 3*50,000=1,50,000

Depreciation on 30.06.15 @ 20% 40,000 30,000
W.D. Value on 30.06.15 1,60,000 1,20,000
Agreed Value 40,500
Loss on Surrender 79,500

Special Note: The question does not state that although Laxman retained 4 trucks, whether
he paid the proportionate Amount of inst6alment on those 4 trucks on 30.6.15. It is assumed
that he did not pay anything. So the entire balance is due from him.

12. Ekart Logistics acquired a delivery van on hire purchase on 01.04.2018 from Mahavir
Enterprises. The terms were as follows:
Particulars Amount (`)
Hire Purchase Price 180,000
Down Payment 30,000
1st installment payable after 1 year 50,000
2nd installment after 2 years 50,000
3rd installment after 3 years 30,000
4th installment after 4 years 20,000

Cash price of van `1,50,000. You are required to calculate Total Interest and Interest included in
each instalment.

Solution:

Calculation of total Interest and Interest included in each

installment Hire Purchase Price (HPP) = Down Payment +
instalments
= 30,000 + 50,000 + 50,000 + 30,000 + 20,000 = 1,80,000
Work Book : Financial Accounting
Total Interest = 1,80,000 – 1,50,000 = 30,000
Work Book : Financial Accounting

Computation of IRR (considering two guessed rates of 6% and 12%)

Year Cash Flow DF @6% PV DF @12% PV
0 30,000 1.00 30,000 1.00 30,000
1 50,000 0.94 47,000 0.89 44,500
2 50,000 0.89 44,500 0.80 40,000
3 30,000 0.84 25,200 0.71 21,300
4 20,000 0.79 15,800 0.64 12,800
NPV 1,62,500 NPV 1,48,600

Interest rate implicit on lease is computed below by interpolation:

Interest rate implicit on lease = 6%
+1,62,500−1,50,000 x (12-6) = 11.39%.
1,62,500 −1,48,600

Thus, repayment schedule and interest would be as under:

 Work Book : Financial Accounting
Study Note – 10
BRANCH AND DEPARTMENTAL ACCOUNTS

Learning Objective:

To be able to understand concept of branches and their classification from

accounting point of view, the accounting treatments of dependent branches
and independent branches.
To be able to do the accounting applying various methods of charging goods
to branches and when goods are sent to branch at wholesale price.
To gain the concept of Departmental Accounting and calculation of
Departmental Profits.
To be able to compare the results of a particular department with previous
year and also with the other departments.

1. Choose the correct alternative.

(i) Adjustment for unrealized profit on stock arises when

a) There is no inter-departmental transfer of goods.
b) Goods are transferred by the transferor department at cost.
c) Goods are transferred by the transferor department at cost plus profit.
d) None of the above.

(ii) In Departmental Accounting, Lighting and Heating expenses are apportioned

between departments in the ratio of
a) Sales
b) Purchase
c) No. of light points
d) Production orders

(iii) In which of the following methods of Branch accounting abnormal loss does not
require any separate treatment?
a) Debtors System
b) Stock and Debtors System
c) Branch Trading and Profit &Loss Account System
d) All of the above

(iv) Which account is used for transactions concerned with head office supplying
resources to the branch?
a) Capital account
Work Book : Financial Accounting
b) Current account
c) Branch account
d) Joint venture account
Work Book : Financial Accounting

(v) Branches not keeping full system of accounting are called ‐‐‐‐‐‐‐‐‐‐‐‐‐‐
a) Independent branches
b) Partial branches
c) Dependent branches
d) None of these

(vi) The head office prepares branch account to find out ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ earned by branch
a) Dividend
b) Revenue
c) Capital
d) Profit

(vii) While treating the abnormal loss under Stock and Debtors system of maintaining
Branch accounts, loading on abnormal loss is transferred to
a) Branch Stock Account
b) Branch Debtors Account
c) Branch Stock Adjustment Account
d) Branch Profit and Loss Account

(viii) ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ account is a practical means of controlling the stock at branch.

a) Bank Account
b) Branch account
c) Branch Stock Account
d) Branch Stock Adjustment Account

(ix) Under Debtors System of maintaining branch accounts, which of the following does
not appear in Branch Account?
a) Collection from debtors
b) Payment to creditors
c) Goods sent to branch
d) Credit sales

(x) Under Debtors System of maintaining branch accounts, which of the following
appears in Branch Account?
a) Credit purchase
b) Goods returned by debtors to branch
c) Goods returned by debtors to H.O
d) Goods sent to

branch Solution:

i.(c); ii.(c); iii.(a); iv.(c); v.(a); vi.(d); vii.(c); viii. (c); ix. (d); x. (b).
Work Book : Financial Accounting
 Work Book : Financial Accounting

2. Match the expenses on left with their allocation bases on the right.
Expenses Allocation Bases
I Discount Allowed A No. of employees
II Canteen expenses B Floor space
II Rent C Value of Machinery
I
IV Insurance on Machinery D Sales

Solution:

I. D; II. A; III. B; IV. C.

3. Match the expenses on left with their allocation bases on the right.
Expenses Allocation Bases
I Discount Received A No. of employees
II Staff welfare expenses B Value of machinery
II Depreciation on machinery C Floor space
I
IV Insurance on building D Purchase

Solution:

I. D; II. A; III. B; IV. C.

4. State True or False.

(i) Insurance on Stock should be apportioned based on Average Value of Stock ratio.
(ii) In the final Balance Sheet closing stock of a department receiving goods from
another department at cost plus 10% profit, should be shown at the cost to the
receiving department.
(iii) For apparent profit or loss (i.e. difference between sales price and invoice price),
journal entry is passed involving Branch Stock A/c and Branch Stock Adjustment
A/c.
(iv) Under Stock Debtors System of Branch accounting Branch Stock A/C is maintained
at cost price.
(v) The objective of keeping Branch Stock A/c at invoice price under Stock Debtors
System is to ensure control over stock.
(vi) Branch Stock Adjustment A/C is used to record the loading on stock and on goods
sent and to record the apparent profit or loss.
(vii) Under Final Accounts method, profit or loss of any branch is ascertained by
preparing Branch Profit and Loss Account in place of Branch Account.
(viii) Under Debtors System of maintaining branch accounts, depreciation does not
appear in Branch Account.
(ix) Stock debtors system of maintaining branch account is used for independent branch.
Work Book : Financial Accounting
(x) For independent branch, incorporation of branch trial balance is required.

Solution:

i. True; ii. False; iii. True; iv. False; v. True; vi. True; vii. True; viii. True; ix. False; x. True.
 Work Book : Financial Accounting

PROBLEMS AND SOLUTIONS

Accounting for Branch – Debtors Method

5. From the following details regarding the Kolkata Branch of X and Co., prepare a Branch
Account in respect of the year 2017: (all figures in `)
Stock on 1.1.2017 24000 Returns to head office 9600
Stock on 31.12.2017 19200 Bad debts 1200
Debtors on 1.1.2017 20000 Discounts allowed 620
Debtors on 31.12.2017 23000 Returns to from customers 6000
Goods sent to branch during 2017 84000 Expenses paid by the head office:
Cash sales 51600 Salaries and wages 1680
0
Credit sales 72000 Rent (from 1.1.2017 to 31.3.2018) 1050
0
Normal loss 4000 Sundry expenses 7200

Solution:

In the books of X and Co.

Dr. Kolkata Branch Account Cr.
Date Particulars ` Date Particulars `
201 To Balance b/d 2017 By Goods Sent to Branch A/c 9,600
7 Dec. (Returns)
Jan. 31
1
Sock 24,0 By Bank A/c:
00
Debtors 20,0 Cash sales 5160
00 0
Dec. To Goods Sent to Branch 84,0 Collection from debtors (Note 61,18
31 A/c 00 2) 0
To Bank A/C: By Balance c/d:
Salaries & wages 16,8 Stock 19,20
00 0
Rent 10,5 Debtors 23,00
00 0
Sundry expenses 7,20 Prepaid Rent (Note 3) 2,100
0
To General Profit &Loss 4,18
A/c 0
166, 166,6
680 80

Notes:
(1) Under this method, normal loss, credit sales, sales returns, bad debts, discount allowed
to debtors, etc., are to be ignored.
(2) The amount of cash received from debtors is not given. It has been found out by
preparing Memorandum Debtors Account as follows:
Dr. Memorandum Branch Debtors Account Cr.
Work Book : Financial Accounting
Particulars ` Particulars `
To Balance 20 By Bad Debts 12
b/d To Sales 00 By Discount 00
0 6
(credit) allowed By Returns
72 2
inward
00 0
0 By Bank (Balancing figure)
60
By Balance c/d 00
61
18
0
23
00
0
92 92
00 00
0 0
(3) Pre-paid rent = 10500/15×3 = ` 2100
 Work Book : Financial Accounting
6. ABC Company is having its branch at Mumbai. Goods are invoiced to the branch at 20%
profit on sale. Branch has been instructed to send all cash daily to head office. All expenses
are paid by head office except petty expenses which are met by the Branch Manager. From
the following particulars, prepare Branch Account in the books of Head Office.

Particulars ` Particulars `
Stock on 1st April, 2016 (Invoice 30,000 Discount Allowed to Debtors 160
Price) Sundry Debtors on 1st April, 18,000 Expenses Paid by Head Office:
2016 Cash in Hand as on 1st April, 800 Ren 1,800
2016 Office Furniture on 1st April, 3,000 t 3,200
2016 Goods Invoiced from the Sal 800
Head Office (Invoice Price) 1,60,0 ary 600
Goods Return to Head 00 Stationery and Printing
Office Goods Return by 2,000 Petty Expenses Paid by the
Debtors Cash Received 960 Branch Depreciation to be 28,00
from Debtors Cash Sales 60,000 Provided on Branch Furniture at 0
Credit Sales 1,00,0 10% p.a.
00 Stock on 31st March,
60,000 2017 (at Invoice Price)

Solution:

In the books of ABC Company

Dr. Mumbai Branch Account Cr.

Date Particulars ` Date Particulars `

2016 To Balance b/d : 2017 By Stock Reserve A/c (Note 6,000
Stock 1)
April Sundry 30,000 Marc By Bank A/c (Remittances) 1,60,00
1 h 0
Debtors
18,000 31 By Goods Sent to Branch A/c
Cash in
800 (Returned to H.O.) 2,000
Hand Office
3,000 By Goods Sent to Branch A/c
Furniture
2017 1,60,0 (Note 2) 31,600
To Goods Sent to 00
Marc Branch A/c By Balance c/d :
h To BankA/c:
31 Rent Stock 28,000
Salary 1,800 Sundry Debtors (Note 4} 16,880
Stationery & 3,200 Cash (Note 4) ( 800 -600) 200
Printing To Stock 800 Furniture ( 3,000 -300) 2,700
Reserve A/c (Note 5,600
3)
Work Book : Financial Accounting
To General Profit and
Loss A/c 24,180
2,47,3 247380
80

Working Notes:
(1) Loading on opening stock = 20% of ` 30,000 = ` 6,000.
(2) Loading on goods sent = 20% (`1,60,000-2,000) = ` 31,600.
(3) Loading on closing stock = 20% of ` 28,000 = ` 5,600.
 Work Book : Financial Accounting

Dr. (4) Memorandum Debtors Account Cr.

Date Particulars ` Date Particulars `
1.4.20 To Balance b/d 18,00 31.3.20 By Discount Allowed A/c 160
10 0 11
31.3.2 To Sates A/c 60,00 By Sales Return A/c 960
011 0
By Bank A/c 60,0
00
By Balance c/d (Balancing figure) 16,8
80
78,00 78,0
0 00
7. From the following particulars relating to Kanpur Branch for the year ending 31.12.2012,
prepare Branch Account in the books of head office.
` `
Balances on 1.1.2012: Cash paid by debtors direct to head office 2200
0
Stock 4000 Discount allowed 1100
0
Debtors 1400 Cash sent to branch for expenses:
0
Petty cash 1500 Rent: `12,000; Salaries; `5,400; Petty
cash:
`4,000
Furniture 1200 Insurance (from 1.4.2012 to 31.3.2013) 1600
0
Prepaid fire insurance 1150 Goods returned by the branch 4000
Outstanding salaries 2100 Goods returned by the debtors 7000
Goods sent to branch 2800 Stock on 31.12.2012 3800
00 0
Cash sales 3300 Petty expenses paid by the branch 2850
00
Credit sales 1830 Provide depreciation on furniture @ 10%
00 p.a.
Cash received from debtors 1350 Loss of stock by fire 4800
00
Solution:
In the books of the Head Office
Dr. Kanpur Branch Account Cr.
Dat Particulars ` Date Particulars `
e
201 To Balance b/d: 2012 By Balance b/d:
2 Jan.
Jan. 1
1
Stock 40,0 Outstanding salaries 2:100
00
Debtors 14,0 Dec. 31 By Bank A/c:
Work Book : Financial Accounting
00
Petty cash 1,50 Cash sales 3,30,0
0 00
Furniture 12,0 Collection from Debtors 1,35,0
00 00
Prepaid fire insurance 1,15 Direct payment to H.O. 22,00
0 0
Dec. To Goods Sent to Branch 2,80, By Goods sent to Branch 4,000
31 A/c 000 (Returns)
To Bank A/c: By Loss of stock by fire 4,800
(Note5)
Rent 12,0 By Balance c/d:
00
Salaries 5,40 Stock 38,00
0 0
Petty Cash 4000 Debtors 31900
Insurance 1600 Furniture 10800
To General P/L A/c 2100 Petty Cash 2650
00
Prepaid fire insurance 400
5816 58165
50 0
 Work Book : Financial Accounting

Working Notes:
(1) Memorandum Branch Debtors A/C
Dr. Cr.
Particular ` Particulars `
s
To balance b/d 14000 By Bank (135000+22000) 157000
To Sales 183000 By Discount Allowed 1100
By Returns 7000
By Balance c/d 31900
197000 197000

(2) Branch Petty Cash A/C

Dr. Cr.
Particulars ` Particulars `
To balance b/d 15 By Petty Exp. 28
To Bank 00 By Balance C/d 50
40 26
00 50
55 55
00 00

(3) Value of Furniture after depreciation = 12000-1200 = 10800

(4) Prepaid insurance = 1600*3/12 = 400
(5) Abnormal loss i.e. goods lost by fire will not appear in Branch Account.

Accounting for Branch – Stock and Debtors Method

8. K Ltd. Of Kanpur has a branch at Kolkata. Goods sent to branch are invoiced at selling price
i.e. cost plus 33𝟏%. From the following particulars, you are required to prepare Branch
Stock Account
𝟑
and Branch Adjustment Account as they would appear in the head office books.

Particulars `
Stock on 01.04.2016 at invoice price 150
Stock on 01.04.2016 at invoice price 00
Goods sent to Kolkata during the year at invoice price 120
00
Sales at branch:
1000
On
00
credit
For
320
cash 00
Returns to head office at invoice price 750
Invoice value of goods lost by fire not covered by insurance 00
Work Book : Financial Accounting
50
00
10
00
Work Book : Financial Accounting

Solution:
In the books of K Ltd.
Dr. Kolkata Branch Stock Account Cr.
Date Particulars ` Date Particulars `
01.04. To balance b/d 1500 31.03 By Goods Sent to Branch 5000
16 0 .17 A/c
31.03. To Goods Sent to (returns)
17 Branch
A/c 10000 By Cash A/c (Cash sales) 75000
0
To Branch Adjustment By Branch Debtors A/c 32000
(Credit
A/c (Surplus) 1000 Sales)
0
By Goods lost by Fire A/c 1000
(Note4)
By Balance c/d 12000
12500 12500
0 0

Dr. Kolkata Branch Adjustment Account Cr.

Date Particulars ` Date Particulars `
31.03.1 To Goods Sent to Branch 125 01.04. By Stock Reserve A/c (Note 3750
7 0 17 1)
A/c (Note 3) 31.03. By Goods Sent to Branch
17 A/c (Note 2))
By Goods lost by Fire A/c 250 2500
By Branch Stock A/c
0
(Surplus)
(Note4) 1000
0
To Stock Reserve A/c 300
0
(Loading on cl. stock)
To General P/L A/c (Note 342
5) 50
387 3875
50 0

Workings:
(1) Goods are sent at cost plus 331%. Therefore the loading is 25% of invoice price. Loading
on
3
opening stock = 25% of `15000 = `3750
(2) Loading on goods sent = 25% of `100000 = `25000
(3) Loading on goods returned = 25% of `5000 = `1250
(4) Loading on goods lost by fire = 25% of `1000 = `250
(5) Cost of goods lost by fire (`1000 – 250) =`750 should not be charged to Branch as it is
an
 Work Book : Financial Accounting
Abnormal Loss.

Stock and Debtors Method - A Comprehensive Problem

9. Mr. X, a cloth trader of Kolkata opened a Branch at Kanpur on 1-4-2012. The goods were
sent by Head Office to the Branch and invoiced at selling price to the Branch, which is 25%
of the cost price of Head Office. The following are the particulars relating to the
transactions of the Kanpur Branch:
Particulars `
Goods sent to Branch (at cost to H.O.) 4500
00
Sales — Cash 2100
00
— Credit 3200
00
Cash collected from Debtors 2850
00
 Work Book : Financial Accounting
Return from Debtors 10000
Discount Allowed 8500
Cash sent to Branch -
for Freight 30000
for Salaries 8000
for other expenses 12000
Spoiled clothes written off at invoice price 10000
Normal loss estimated at 15000

Prepare Branch Stock Account, Branch Debtors Account and Branch Adjustment Account
showing the net profit of the Branch.

Solution:

In the books of Mr. X

Dr. Branch Stock Account Cr.
Da Particulars Amou Da Particulars Amou
te nt te nt
(`) (`)
To, Goods Sent to Branch 5,62,5 By, Cash Sales A/c 2,10,0
A/c 00 00
(` 4,50,000+25% of `
4,50,000)
To, Branch Debtors A/c 10,00 By, Branch Debtors (Cr. Sales) 3,20,0
0 00
By, Branch adjustment A/c 1
(Normal 5,000
Loss)
By, Branch adjustment A/c 2,000
(Spoiled)
By, Profit & Loss A/c (Spoiled) 8,000
By, Stock Shortage 17,50
0
5,72,5 5,72,5
00 00

Dr. Branch Debtors Account Cr.

Dat Particulars Amount Dat Particulars Amount
e (`) e (`)
To, Goods sent to Branch 3,20,00 By, Cash A/c 2,85,000
0
By, Discount A/c 8,500
By, Branch stock (return) 10,000
By, Balance c/d 1 6,500
3,20,00 3,20,000
0

Dr. Branch Adjustment Account Cr.

Work Book : Financial Accounting
Da Particulars Amount Dat Particulars Amoun
te (`) e t
(`)
To, Branch A/c (Spoilage) 2,000 By, Stock Reserve A/c 1,12,5
00
To, Stock Shortage (of `17,500) 3,500
To Normal Loss 15000
To Gross Profit c/d 92000
112500 11250
0
 Work Book : Financial Accounting

Dr. Branch Profit and Loss Account Cr.

Dat Particulars Amo Dat Particulars Amo
e un e un
t t
(`) (`)
To, Freight 30,000 By, Gross Profit b/d 92,000
To, Salaries 8,000
To, Other expenses 1
2,000
To, Spoilage 8,000
To, Stock shortage 14,000
To, Net Profit c/d 20,000
92,000 92,000

10. P& Co. with their head office at Kolkata, invoiced goods to their Bangalore branch at 20%
less than list price, which is cost plus 100%, with instruction that cash sales are made at
invoice price and credit sales at list price.

From the following particulars, prepare branch stock account, branch adjustment account,
branch profit and loss account and branch debtors account for the year ended 31.12.14 :
` `
Stock on 1.1.14 (at invoice price) 240 Cash received from debtors 17126
00 8
Debtors 1.1.14 200 Expenses at branch 3473
00 2
Goods received from head office (at 264 Remittance to head office 24000
invoice price) 000 0
Goods returned to head office (at 200 Debtors 31.12.14 4873
invoice 0 2
price)
Sales Stock on 31.12.14 (at invoice 3080
price) 0
— cash 920
00
— credit 200
000

Solution:

In the books of P & Co,

Dr. Branch Stock Account Cr.
1.1.14 ` 31.12.14 `
To Balance b/f 24,000 By Bank (cash sales) 92,000
31.12.14 " Branch debtors (credit sales) 2,00,0
00
To Goods Sent to Branch A/c 2,64,0 " Goods Sent to Branch A/c 2,000
Work Book : Financial Accounting
00
" Branch Adjustment A/c 40,000 (returns from branch)
(apparent gross profit) " Stock Shortage A/c (see Note 2) 3,200
" Balance c/f 30,800
3,28,0 3,28,0
00 00
Work Book : Financial Accounting
Dr. Branch Stock Adjustment Account Cr.
31.12.14 ` 1.1.14 `
To Goods Sent to Branch A/c By Balance b/f
(load on returns from branch) : (load on opening stock) :
*
60/160 `2000 750 60/160 x ` 24,000 9,000
" Stock Shortage A/c 31.12.14
(load on stock shortage) : By Goods Sent to Branch A/c
60/160 * 3,200 1,200 (load on goods sent) :
" Branch Profit and Loss A/c 1,34,50 60/160 * 2,64,000 99,000
0
(gross profit transferred) " Branch Stock A/c 40,000
(balancing figure) (apparent gross profit)
" Balance c/f
(load on closing stock) :
60/160 *30800 11,550
1,48,00 1,48,000
0
Dr. Branch Profit and Loss Account Cr.
31.12.14 ` 31.12.14 `
To Branch Expenses A/c 34,732 By Branch Stock Adjustment A/c 1,34,5
00
" Stock Shortage A/c : 100/160 2,000 (gross profit)
x3,200
" General Profit and Loss A/c 97,768
(branch net profit transferred)
1,34,5 1,34,5
00 00
Dr. Branch Debtors Account Cr.
1.1.14 ` 31.12.14 `
To Balance b/f 20,000 By Bank 1,71,2
68
31.12.14 " Balance c/f 48,732
To Branch Stock A/c (credit sales) 2,00,00
0
2,20,00 2,20,0
0 00
Working Notes:
(1) When cost price is ` 100, list price is ` 200 (i.e., cost price plus 100%), and invoice
price is ` 160 (i.e., list price minus 20%).
(2) Calculation of stock shortage:
` `
Stock on 1.1.14 at invoice price 24000
Goods from head office at invoice price 26400
0
28800
0
Less : Returns to head office at invoice price 2000
Work Book : Financial Accounting
28600
0
Less : Cash sales 9200
0
Invoice value of credit sales: 160/200* 2,00,000 16000
0
25200
0
Stock that should have been on 31.12.14 at invoice price 34,000 34000
Less ; Actual stock on 31.12.14 at invoice price 30800
Stock shortage at invoice price 3200
 Work Book : Financial Accounting

Accounting for Branch - Final Accounts Method

11. A Mumbai merchant has a branch at Delhi to which he charges out the goods at cost plus
25%. The Delhi branch keeps its own sales ledger and transmits all cash received to the
head office every day. All expenses are paid from the head office. The transactions for the
Branch were as follows: (all
figures in `)
Stock on 1.1.2017 220 Allowances to customers 500
00
Debtors on 1.1.2017 200 Returns inward 1000
Petty cash on 1.1.2017 200 Cheques sent to branch:
Cash sales 530 Rent: ` 1,200; Wages: ` 400: Salaries : ` 1800
0
Goods sent to branch 400 Stock on 31. 12.2017 2600
00 0
Collections on ledger accounts 420 Debtors on 31. 12.2017 4000
00
Goods returned to head office 600 Petty cash on 31.12.2017 (including 2
Bad debts 600 miscellaneous income not remitted ` 5
0
50)

Prepare the Branch Trading and Profit and Loss Account for the year ending 31.12.2017 in
the head office books.

Solution:

Delhi Branch Trading and Profit & Loss

Account For the year ended 31st
December, 2017
Dr. Cr.
Particulars ` Particulars `
To Opening Stock (22,000 - 4,400) 17:60 By Sales:
To 0
Goods sent to Cash 5,300
Branch (Cost) 32,000 Credit 47,900
Less: Returns to H.O. (Cost) 480 53200
31,52 Less: Returns Inward 1000 52,20
0 0
To Wages 400
To Gross Profit c/d 23,48 By Closing Stock (26,000 - 5,200) 20,80
0 0
73000 73000

To Rent 1,200 By Gross Profit b/d 23480

To Salaries 1,800 By Miscellaneous Income 50
Work Book : Financial Accounting
To Bad Debts 6
0
0
To Allowances to Customers 500
To General Profit & Loss A/c 19,43
0
23,53 25530
0

Tutorial Note: At the time of preparing Branch Trading and Profit and Loss Account, all
figures should be converted into cost.

Working Notes:
(1) 25 / 125 × `22,000 = ` 4,400.

(2) 25 /125 × ` (40,000 -600) = ` 7,880.

 Work Book : Financial Accounting

Problem on Wholesale and Retail Profit at Branch

12. P.K. Co. Ltd. with their head office at Kolkata, invoiced goods to their Mumbai branch at
invoice price. The invoice price is 20% less than list price, which is cost plus 100% with
instruction that sales are made at list price.

From the following particulars ascertain the profit earned by the head office and branch:
Kolkata H.O. Mumbai
(`) Branch(`)
Opening stock 40,000 32,000
Purchases 2,00,000 ---
Goods sent to branch at cost price 62,500 —
Goods received from head office at invoice price — 96,000
Sales 1,70,000 80,000
Trade expenses 14,000 8,000

Stock at head office is valued at cost price but those of branch are valued at invoice

price. Solution:

Dr. Trading and Profit and Loss Account Cr.

For the year ended...........
H.O. Branc H.O. Branc
h h
To Opening stock 40,000 32,000 By Sales 1,70,0 80,000
00
" Purchases 2,00,0 — " Goods to branch 1,00,0 —
00 00
" Goods from head office — 1,00,00 " Closing stock :
0
" Gross profit c/d 1,22,5 16,000 in hand 92,500 64,000
00
in transit — 4,000
3,62,5 1,48,00 3,62,5 1,48,0
00 0 00 00
To Trade expenses 14,000 8,000 By Gross profit b/d 1,22,5 16,000
00
" Provision for unrealised profit 13,500 —
" Net profit 95,000 8,000
1,22,5 16,000 1,22,5 16,000
00 00

Working Note:
When cost price is `100, list price is 200 (cost price + 100%) and invoice price ` 160 (list
price - 20%). Closing stock of head office:
` `
Work Book : Financial Accounting
Opening stock 40000
Purchases 200000
2400000
Less : Cost of goods sold : 100/200 * `1,70,000 8500
Less : Cost of goods transferred to branch 62500
147500
Closing stock 92500
 Work Book : Financial Accounting

Closing stock of branch:

`
Opening stock {at invoice price) 32000
Invoice price of goods sent by head office : 160/1oo *62500 100000
132000
Less : Invoice price of goods sold : 160/2oo *80000 64000
Closing stock (at invoice price) 68000

Stock-in-transit: `(1,00,000 - 96,000) 4000

Stock at branch 64000
68000

Treatment of Inter-branch Transfer in H.O Books

13. A Kolkata head office passes an entry at the end of each month to adjust the position
arising out of inter-branch transactions during the month. From the following inter-branch
transactions in April, 2014, make the entry in the books of Kolkata head office:

(a) Delhi branch:

(i) Received goods from Nagpur branch `9,000 and Ahmedabad branch RS.6,000.
(ii) Sent goods to Ahmedabad branch `15,000 and Nagpur branch `12,000.
(iii) Received bills receivable from Ahmedabad branch `9,000.
(iv) Sent acceptances to Nagpur branch `6,000 and Ahmedabad branch `3,000.

(b) Kanpur branch [apart from (a) above:

(i) Received goods from Nagpur branch `15,000 and Delhi branch `6,000.
(ii) Cash sent to Nagpur branch `3,000 and Delhi branch `6,000.

(c) Nagpur branch [apart from (a) and (b) above]:

(i) Sent goods to Ahmedabad branch `9,000.
(ii) Received bills receivable from Ahmedabad branch `9,000.
(iii) Received cash from Ahmedabad `5,000.

Solution:

Statement showing net effect of Inter-branch Transactions

Delhi Kanpur Nagpur Ahmedabad
` ` ` `
(a) Delhi Branch:
(i) (-) 15,000 (+) 9,000 (+) 6,000
(ii) (+) 27,000 (-) 12,000 (-) 15,000
Work Book : Financial Accounting
(iii) (-) 9,000 (+) 9,000
(iv) (+) 9,000 (-) 6,000 (-) 3,000
(b) Kanpur Branch :
 Work Book : Financial Accounting
(i) (+) 6,000 (-) 21,000 (+) 15,000
(ii) (-) 6,000 (+) 9,000 (-) 3,000
(c) Nagpur Branch :
(i) (+} 9,000 (-) 9,000
(ii) (-) 9,000 (+) 9,000
(iii)) (-) 5,000 (+) 5,000
Net Adjustment (+) 12,000 (-) 12,000 (-) 2,000 (+) 2,000

Note:
Values received by a branch are to be debited to it and have been indicated by (-) sign.
Similarly, values given by a branch are to be credited to it and have been, indicated by (+) sign.

In the books of Head

Office Journal
Dat Particulars Dr. Cr.
e (`) (`)
201 Kanpur Branch A/c . Dr. 12,00
4 0
Apr.
30
Nagpur Branch A/c Dr. 2,000
To Delhi Branch A/c 12,00
0
" Ahmedabad Branch A/c 2,000
(Adjustment for inter-branch transactions during April, 2014)

DEPARTMENTAL ACCOUNTING

Preparation of Departmental Trading and Profit & Loss Account and Balance Sheet

14. From the following Trial Balance, prepare Departmental Trading and Profit and Loss
Account for the year ended 31.12.2017 and a Balance Sheet as on that dale in the books of
S & Co. (all figures in rupees):

Particulars Dr. Cr
Stock on 1.1. 2017 Dept A 10800
Dept B 9800
Purchases Dept A 19600
Dept B 14700
Sales Dept A 33800
Dept B 27040
Wages Dept A 2680
Dept B 480
 Work Book : Financial Accounting
Rent 3740
Salaries 2640
Lighting and Healing 840
Discount allowed 882

Discount received 266

Advertising 1476
Carriage inwards 938
Furniture and fittings 1200
Plant and Machinery 8400
Sundry Debtors 3640
Sundry Creditors 7474
Capital 19060
Drawings 1800
Cash In hand 64
Cash at bank 3960
Total 87640 87640

The following information is also provided:

(a) Rent, lighting and heating, salaries and depreciation are to be apportioned to A and
B Departments as 2 : 1.
(b) Other expenses and incomes are to be apportioned to A und B Departments on
suitable basis.
(c) The following adjustments are to be made:
Rent pre-paid `740; Lighting and heating outstanding `360; and Depreciation on
Furniture & Fittings and Plant & Machinery @ 10% p. a.
(d) The stock at 31.12.2017: Department A — ` 5496; Department B — `4802.

Solution:

In the books of S & Co.

Departmental Trading and Profit & Loss Account
Dr. For the year ended 31st December, 2017 Cr.
Particulars Dept Dept Particulars Dept Dept
A B A B
To Opening Stock 1080 9800 By Sales 3380 27040
0 0
To Purchases 1960 14700 By Closing Stock 5496 4802
0
To Carnage Inwards (Note 1) 536 402
To Wages 2680 480
To Gross Profit b/d 5680 6460
3929 31842 3929 31842
6 6
 Work Book : Financial Accounting
To Rent 20 10 By Gross Profit b/d 56 64
To Salaries 00 00 By Discount received 80 60
(Note 1)
To Lighting and healing 17 8 1 1
60 8 5 1
8 0 2 4
To Discount allowed 0 4 By Net Loss - 678 -----
To Advertisement 0 0 transferred to
4 0 Capital
To Depreciation 9 1
To Net Profit - transferred to 0 9
8 6
Capital
2 6
0 5
6 6
4 3
0 2
--- 0
--- 29
26
6510 6574 6510 6574
 Work Book : Financial Accounting
Balance Sheet of S& Co. as at 31st December, 2017
Liabilities ` ` Assets ` `
Capital (opening) 19 Plant and 84
Add Profit from 06 Machinery Less: 00 7560
0 8
Dept. B Less- Loss Depreciation
29 4
from Dept. A Less: 1950 Furniture and 1080
26 0
Drawings 8 Fittings Less: 3640
21986 12
Outstanding exp. 360 Depreciation 00 10298
678
for lighting and Sundry Debtors 1 3960
heating Sundry 7474 Stock in trade 2 64
0
Creditors Cash at bank 740
21
30 Cash in hand
8 Prepaid rent
18
00

27 27
34 34
2 2
Working Note:
(1) Carriage inwards and discount received are apportioned in the purchase ratio and
discount allowed and advertisement in the sales ratio.
(2) Rent net of prepaid rent and Lighting including outstanding lighting expenses have
been distributed in 2:1.

15. Mr. Y is the proprietor of a retail business which has two main departments which sell
respectively Computers and Printers. On 31.12.2017, the balances in the books of the
business were as follows:
Particulars Dr. (`) Cr.(`)
Capital 71,000
Sales — Computers 59,000
Printers 29,500
Purchases — Computers 20,000
Printers 10,000
Stock on 1.1.2017 — Computers 2,320
Printers 2,136
Salaries — Computers 20.560
Printers 15,440
Advertising 615
Discount allowed — Computers 400
Printers 200
Drawings 3,000
Buildings (Cost) 43.000
Work Book : Financial Accounting
Equipment at W.D.V. — Computers 18,000
Printers 7,000
Debtors and Creditors 10,200 5,319
Bank 5,600
Rent and Rates 1.580
Canteen Charges 875
Heating and Lighting 880
Insurance of Stock 940
General Administrative Expenses 2,073
Total 1,64.819 1,64,819
 Work Book : Financial Accounting

Additional information —
(i) At 31.12.2017, the following amounts were outstanding:
Salaries— Computers `250; Printers `170; Heating and Lighting `20.
(ii) The general administrative expenses and the rent and rates included prepayments
of `33 and `80 respectively.
(iii) Stocks at 31.12.2017 were: Computers`2,800; Printers `2,450.
(iv) Depreciation is to be provided on equipment at 10% on W.D.V.
(v) The managers of the Computers and Printers departments are to be paid a
commission of 5% of the net profit (prior to the commission payment) of the
respective departments.
(vi) In apportioning the various expenses between the two departments due regard is to
be given to the following information:
Number of Workers Average Stock Levels (`) Floor Area ([Link])
Hardware 18 5,000 8,000
Electrical 12 4,400 4,000
(vii) The general administrative expenses are primarily incurred in relation to the
processing of purchases and sales invoices.
Prepare a Departmental Trading and Profit and Loss Account and the Balance Sheet.

Solution:

In the Books of Mr. Y

Dr. Departmental Trading and Profit and Loss Account Cr.
For the year ended 31st December, 2017
Particulars Computer Printer Particulars Computer Printer
(`) s (`) s
(`) (`)
To Opening Stock 2,320 2,136 By Sales 59,000 29,50
0
To Purchase 20,000 10,00 By Closing 2,800 2,45
0 Stock 0
To Gross Profit 39,480 19,31
4
61,800 31,95 61,800 31,95
0 0

To Salaries (Plus Outstanding) 20,810 15,61 By Gross 39,480 19,81

0 Profit 4
To Advertising (Note1) 410 205
To Discount Allowed 400 200
To Rent and Rates (Note 1) 1,000 500
To Canteen Charges (Note 1) 525 350
To Healing and Lighting (Note 600 300
1)
To Insurance of Stock (Note 1) 500 440
Work Book : Financial Accounting
To General 1,360 680
Administrative
Expenses (Note 1)
To Depreciation on Equipment 1,800 700
To Managers’ Commission 604 41
To Net Profit (transferred to 11,471 788
Capital)
39,480 19,81 39,480 19,81
4 4
 Work Book : Financial Accounting

Balance Sheet as on 31.12.2017

Liabilities Amount Assets Amount
(`) (`)
Capital (Opening) 71,000 Building (Cost) 43,000
Add. Profit from Computer 11,471 Equipment at w.d.v
Add. Profit from Printer 788 (18000+7000) 25000
83,259 Less. Depreciation
Less. Drawings 3,000 80,259 (1800+700) 2500 22,500
Creditors 5,319 Stock (2800+2450) 5,250
Outstanding salaries (250+170) 420 Debtors 10,200
Outstanding Heating and lighting 20 Bank 5,600
Outstanding Commission (604+41) 645 Prepaid Gen. Adm. Expenses 33
Prepaid Rent and Rates 80
86,663 86,663
Note:
(1) Rent and rates (1580 - 80 prepaid) = `1500 is apportioned in floor area ratio; Lighting
and heating (880+20outstanding) = 900 is apportioned in floor area ratio; General
administrative expenses (2073-33 prepaid) = `2040 is apportioned in the ratio of total of
sales and purchases; Advertising is distributed in sales ratio and insurance is distributed in
average stock level.

Problem on calculation of cost price

16. X Limited has three departments and submits the following information for the year ending
on 31st March, 2017
Particulars A B C Total
(`)
Purchases (units) 5,000 10,000 15,00 --
Purchases(Amount) --- -- 0 ---
Sales (units) --- --- -- 8,40,
Selling price (` per unit) 5, 9, --- 000
Closing stock (units) 20 80 15, ---
0 0 300 ---
40 45 50
400 600 700
You are required to prepare Departmental Trading Account of X Limited assuming that the rate
of profit on sales uniform in each case.

Solution:

In the books of X Ltd.

Dr. Departmental Trading Account for the year ended 31.12.2017 Cr.
Particulars A (`) B (`) C Particulars A (`) B (`) C (`)
Work Book : Financial Accounting
(`)
To Opening Stock (Note 14 10 30 By Sales 2060 441 765
4) 40 80 00 (Note 6) By 00 000 000
To Purchases 0 0 0 9600 16 21
Closing Stock
(Note 2) 20 00
(Note 5)
120 270 450 0 0
To Gross Profit
000 000 000
83 176 306
20 400 000
0
217 457 786 2176 4572 7860
600 200 000 00 00 00
 Work Book : Financial Accounting

Working Notes:
(1) Calculation of Profit Margin Rate
Particulars `
Department A (5,000 units @ ` 2,00,
40) Department B (10,000 000
units @ ` 45) Department C
(15.000 units @ ` 50) 4.50,
000
Total Sales Value 7,50,
000 14,00,
Less: Purchases (given)
000
Gross Profit
8,40,
000

5,60,
000
Gross Profit Rate = (560000/1400000) x 100 = 40%

(2) Calculation of Purchase Price and Total Purchases etc.

Sr. No. Particulars A B C
1. Closing Stock (units) 400 600 700
2. Purchases (units) 5000 1000 1500
0 0
3. Sales (units) 5200 9800 1530
0
4. Opening Stock (units) = (1+3-2) 600 400 1000
5. Selling price per unit (`) 40 45 50
6. G.P @ 40% 16 18 20
7. Cost per unit (`) = (5-6) 24 27 30
8. Purchases (Rs) = (2*7) 1200 2700 4500
00 00 00
9. Opening Stock (`) = (4*7) 1440 1080 3000
0 0 0
10. Closing Stock (`) 9600 1620 2100
0 0
11. Sales (`) = (3*5) 2080 4410 7650
00 00 00

Inter-departmental Transfer at cost plus profit – gross profit rate given

17. Excel Manufacturers carried on business with two departments: Raw Materials and
Manufacturing. The finished goods are produced by the Manufacturing Department with
raw materials supplied from Raw Materials Department at selling price.
Prepare Departmental Trading and Profit and Loss Account for the year ending on31st
December, 2017 after allocation of expenses on reasonable basis between the two
departments. Necessary particulars are furnished below:
Particulars Raw Manufacturin
Work Book : Financial Accounting
Materials g
Department( Department(
`) `)
Opening 600 10000
Stock 00 3000
Purchases 4000 --
00
Raw materials transferred to Manufacturing ---
600
Department Sales 90
00
Manufacturing Expenses 00
4400
Selling Expenses 00 0
Closing Stock --- 12000
- 400
- 12000
-
8
0
0
400
00
 Work Book : Financial Accounting
It is estimated that the cost of closing stock in the hands of Manufacturing Department
consists of 80% for raw materials and 20% for manufacturing expenses. The rate of gross
profit earned during
the preceding year by the Raw Materials Department was 10%. Other administrative
expenses are as follows:(i) Salaries ` 2,500; (ii) Insurance premium ` 800.
Solution:
In the books of Excel Manufacturers
Dr. Departmental Trading and Profit and Loss Account Cr.
For the year ended 31st December, 2017
Particulars R.M. Mfg. Total Particulars R.M. Mfg. Total
Dept Dept (`) Dept Dept (`)
(`) (`) (`) (`)
To Opening 60,000 10,000 70,00 By Sales 4,40,00 90,000 5,30,0
Stock 0 0 00
To Purchases 4,00,0 3,000 4,03,0 By Raw 60,000 ----- ----
00 00 Materials
To ---- 12,000 12,00 transferred to
Manufacturing 0
Expenses Manufacturing
To Raw Materials ----- 60,000 ---- Dept.
from Mfg. Dept. By Closing
Stock
To Gross Profit 80,000 17,000 97,00 40,000 12,000 52,000
c/d 0
5.40.0 1,02.0 5,82,0 5,40,00 1,02,0 5,82,0
00 00 00 0 00 00
To Selling 800 400 1,200 By Gross Profit 80,000 17,000 97,000
Expenses
To Salaries (Note 2,119 381 2,500 b/d
3)
To Insurance 656 144 800
Premium (Note
4)
To Net Profit c/d 76,425 16,075 92,50
0
80,000 17,000 97,00 80,000 17,000 97,000
0
To Provision to 1,5 By Net Profit 92,500
Unrealized Profit 36 b/d By
on Closing Stock Provision for 800
(Note 1) Unrealized
To Capital A/c Profit on
(Net 91, Opening
Profit 764 Stock
transferred)
93,30 93,300
0
Work Book : Financial Accounting
Working Moles:
80000
(1) Gross Profit Ratio of Raw Materials Department = ×100 = 16%.
440000 +60000
(2) Provision for Unrealized Profit on Opening Stock = (10000 x 80%) x 10% = `800.
Provision for Unrealized Profit on Closing Stock = (12000 x 80%) x 16% = `1,536.
(3) Salaries can be shared by the R.M. Dept. and Mfg. Dept. in the ratio of Sales of each
department. The ratio will be:(4,40,000 + 60,000) : 90,000or 5,00,000 :90,000or
50 :9.
(a) Raw materials department's share =2,500 /59x 50=`2.119
(b) Manufacturing department's share = 2,500/59x 9 = `381.
(4) Insurance premium can be shared by R.M. Dept. and Mfg. Dept. in the ratio of
average stock of each department. The ratio will be: (60000+40000)/2 :
(10000+12000)/2 i.e. 50:11.
(a) Raw materials department's share=800/6l x 50 = `656
(b) Mfg. department's share = 800/ 61 x 11 =`144.
 Work Book : Financial Accounting

Inter-departmental Transfer at cost plus profit – gross profit rate to be calculated

18. A Ltd. has two departments P and Q. Department P sells goods to department Q at normal
selling price. From the following particulars prepare Departmental Trading and Profit and
Loss Account for the year ended on 31.12.2017 and also ascertain the net profit to be
included in the Balance Sheet.

Particulars Dept. P (`) Dept. Q (`)

Opening stock 5,00,000 Nil
Purchases 28,00,000 3,00,000
Goods from department P — 8,00,000
Wages 3,50,000 2,00,000
Travelling expenses 20,000 1,60,000
Closing stock at cost to the department 8,00,000 2,09,000
Sales 30,00,000 20,00,000
Printing and stationery 30,000 25,000

The following expenses incurred for both the departments were not apportioned between the
departments:
(a) Salaries `3,30,000.
(b) Advertisement expenses `1,20,000.
(c) General expenses `5,00,000.
(d) Depreciation is to be charged @ 30% on the machinery value of `96,000.

The advertisement expenses of the departments are to be apportioned in the turnover

ratio. Salaries and depreciation apportioned in the ratio of 2:1 and 1:3 respectively. General
expenses are to be apportioned in the ratio of 3:1.

Solution:

In the books of A Ltd.

Departmental Trading and Profit and Loss Account
Dr. For the year ended 31.12.2017 Cr.
Dept. P Dept. Q Dept. P Dept. Q
` ` ` `
To Opening stock 5,00,000 ------- By Sales 30,00,00 20,00,00
0 0
" Purchases 28,00,00 3,00,000 " Department Q 8,00,000 ------
0
" Department P ------ 8,00,000 (transfer of goods)
(transfer
Work Book : Financial Accounting
of goods) " Closing stock 8,00,000 2,09,000
" Wages 3,50,000 2,00,000
" Gross profit c/d 9,50,000 9,09,000

46,00,00 22,09,00 46,00,00 22,09,00

0 0 0 0
 Work Book : Financial Accounting
To Salaries (2:1) 2,20,000 1,10,000 By Gross profit b/d 9,50,000 9,09,000
" Travelling expenses 20,000 1,60,000
" Printing and 30,000 25,000
stationery
" Advertisement
expenses (3 : 2) 72,000 48,000
" General expenses 3,75,000 1,25,000
(3:1)
" Depreciation on
machinery (1:3) 7,200 21,600
" Departmental profit 2,25,800 4,19,400
9,50,000 9,09,000 9,50,000 9,09,000

Dr. General Profit and Loss Account Cr.

For the Year ended 31.12.2017
Particulars ` Particulars `
To Provision for unrealised profit on stock 38,000 By Departmental profit:
" Net profit 6,07,2 Department P 2,25,8
00 Department Q 00
4,19,4
00
6,45,2 6,45,2
00 00

Working Notes:
(1) Advertisement expenses have been apportioned in the ratio of sales to outsiders
(i.e., 3: 2). No advertisement is needed for inter-departmental sales.
(2) Provision for unrealised profit on stock:
Rate of gross profit in department P: (950000/3800000)×100 = 25%
Proportion of goods from department P in the stock of department Q
` 8,00,000/ `(3,00,000 + 8,00,000) ×209000 = `1,52,000.
Unrealised profit = 25% of `1,52,000 = `38,000.

Inter-departmental Transfer at cost plus profit – transfer at less than normal sale price.

19. X & Co. has three operating departments. The details of operations of each department
during 2014 had been as follows:
Particulars Dept. I Dept. II Dept. III
` ` `
Sales to customers 4,00,000 6,00,000 8,00,000
Purchases from outsiders 3,00,000 4,00,000 5,00,000
Opening stock (out of local purchase) 80,000 1,00,000 1,20,000
Transfer to department III 1,35,000 ---- -----
Closing stock 50,000 50,000 1,00,000
Common expenses:
Work Book : Financial Accounting
Selling commission 36,000
Depreciation 45,000
Administration expenses - 1,60,000
Interest on capital 90,000
Stock of department III includes 20% transfers from department I.
 Work Book : Financial Accounting

Prepare departmental profit and loss account and ascertain the net profit of the company after
considering the following details:
Particulars Dept. I Dept. Dept.
II III
Fixed assets installed (`) 360000 200000 160000
Capital employed (`)
Administration expenses to be shared 200000 300000 300000
4/10 3/10 3/10

Department I transfers supplies to department III at normal selling price

less 10%. Solution:

In the books of X & Co.

Dr. Departmental Profit and Loss Account Cr.
For the year ended 31st December, 2014
Deptt Deptt. Deptt. Total Deptt. Deptt. Deptt. Total
.I 11 Ill I 11 Ill
To 80,00 1,00,0 1,20,0 3,00,0 By Sales 4,00,0 6,00,0 8,00,0 18,00,
Openi 0 00 00 00 00 00 00 000
ng
stock
" 3,00,0 4,00,0 5,00,0 12,00, » 1,35,0 - - 1,35,
Purchas 00 00 00 000 Depart 00 000
es me nt III
" - - 1,35,0 1,35,0 (transfer
Depart 00 00 of
me nt I
(transfe goods)
r
of
goods) " 50,000 50,00 1,00,0 2,00,
Closing 0 00 000
stock
" Gross
profit 2,05,0 1,50,0 1,45,0 5,00,0
c/d 00 00 00 00
5,85,0 6,50,0 9,00,0 21,35, 5,85,0 6,50,0 9,00,0 21,35,
00 00 00 000 00 00 00 000
To By
Admin Gross
istr
ation
expense profit 2,05,0 1,50,0 1,45,0 5,00,
s b/d 00 00 00 000
([Link]) 64,00 48,00 48,00 1,60,0
0 0 0 00
Work Book : Financial Accounting
"
Deprec
iat ion

([Link] 22,50 12,50 10,00 45,000

16) 0 0 0
" Selling
commi 8,000 12,00 16,00 36,000
ssi 0 0
on
([Link])
 Work Book : Financial Accounting
"
Interest
on
capital
([Link]) 22,50 33,75 33,75 90,000
0 0 0
"
Depart
me ntal

profit 88,00 43,75 37,25 1,69,0

c/d 0 0 0 00
2,05,0 1,50,0 1,45,0 5,00,0 2,05, 1,50, 1,45, 5,00,0
00 00 00 00 000 000 000 00
To Provision for unrealised profit on 6,667 By Departmental profit b/d 1,69,0
stock 00
" Net profit 1,62,3
33
1,69,0 1,69,0
00 00

Working Note:
Provision for unrealised profit on stock :
Sales to customers by department I 40000
0
Normal sales price of goods transferred to department III: (100/90 * ` 1,35,000) 15000
0
Total sales of department I (at normal selling price) 55000
0
Less: Cost of goods sold : `(80,000 + 3,00,000 - 50,000) 33000
0
Normal gross profit of department I. 22000
0

Rate of gross profit of department I: (220000/550000)*100 = 40%

When normal selling price is `100, transfer price to department III is `90 (i.e., `100 less
10%), cost price is`60 i.e., ` (100 - 40) and profit on transfer is ` 30 i.e., `(90 - 60).
Goods from department I in the stock of department III = 20% of `1,00,000 =
`20,000. Unrealised profit = 30/90 * ` 20,000 = `6,667.

Inter-departmental Transfer at cost plus profit – unrealized profit on op. stock

20. The firm AB & Co. has two departments — cloth and tailoring. Tailoring department gets all
its requirements of cloth from the cloth department at the usual selling price. From the
following particulars prepare departmental trading and profit and loss account for the year
ended 31st March, 2017:
Particulars Cloth Tailoring
Department(`) Department(`
)
Work Book : Financial Accounting
Opening 600 8000
Stock 00 5000
Purchases 340 --
000
Raw materials transferred to Manufacturing ---
500
Department Sales 80
00
Manufacturing Expenses 00
400
Selling Expenses 000 0
Closing Stock --- 12000
-- 2000
- 15000
5
0
0
0
100000

The stock in tailoring department may be assumed to consist 80% cloth and 20% other
expenses. General expenses of the business for the year came to `23,000. In 2016-17 the
cloth department earned a gross profit of30% on sales.
 Work Book : Financial Accounting

Solution:

In the books of ………

Dr. Departmental Trading and Profit and Loss Account Cr.
For the year ended 31st March, 2015
Cloth Tailo Total Cloth Tailori Total
` rin g ` ` ng `
`
`
To Opening stock 60,00 8,000 68,00 By Sales A/c 4,00, 80,00 4,80,
0 0 000 0 000
" Purchases 3,40, 5,000 3,45, " Tailoring 50,00 -- ----
000 000 0
" Cloth ---- 50,00 ---- department
department 0 (transfer)
(transfer) " Closing stock 1,00, 15,00 1,15,
000 0 000
" Manufacturing
expenses ----- 12,00 12,00
0 0
" Gross profit c/d 1,50, 20,00 1,70,
000 0 000
5,50, 95,00 5,95, 5,50, 95,00 5,95,
000 0 000 000 0 000
To Selling 5,000 2,000 7,000 By Gross profit b/d 1,50, 20,00 1,70,
expenses 000 0 000
" Departmental 1,45, 18,00 1,63,
000 0 000
profit c/d
1,50, 20,00 1,70, 1,50, 20,00 1,70,
000 0 000 000 0 000
To General expenses 23,00 By Departmental profit b/d 1,63,
0 000
" Provision for unrealised profit on 2,080
stock
" Net profit 1,37,
920
1,63, 1,63,
000 000

Working Notes:

(1) Calculation of provision for unrealised profit on stock:

Rate of gross profit in cloth department: 150000/450000 ×100 = 331 %
3
Element of cloth:
in opening stock of tailoring department: 80% of `8,000 =
`6,400 in closing stock of tailoring department: 80% of ` 15,000 = `
12,000
Provision required on closing stock: 331/3% of ` 12,000 = `
 Work Book : Financial Accounting
4000 Less : Provision already existing on opening stock : 30% of `6,4001920
Additional provision to be made 2080

(2) Total opening and closing stocks could be shown at cost price and increase in
provision for unrealised profit could be debited to transferor department's profit and
loss account.

Inter-departmental transfer at cost plus profit – managers’ commission, correction of profit

21. Department X sells goods to department Y at a profit of 25% on cost and to department Z
at 10% profit on cost. Department Y sells goods to X and Z at a profit of 15% and 20% on
sales, respectively. Department Z charges 20% and 25% profit on cost to department X
and Y respectively.
 Work Book : Financial Accounting

Department managers are entitled to 10% commission on net profit subject to unrealised
profit on departmental sales being eliminated. Departmental profits after charging
manager's commission, but before adjustment of unrealised profit are as under:
`
Department X 360
00
Department Y 270
00
Department Z 180
00

Stock lying at different departments at the end of the year are as under:
Dept. Dept. Dept.
X Y Z
` ` `
Transfer from Department X ---- 15000 11000
Transfer from Department Y 14000 ---- 12000
Transfer from Department Z 6000 5000 ---

Find out the correct departmental profit after charging manager's

commission. Solution:

Statement Showing Correct Departmental Profits

Particulars Deptt. Deptt. Deptt.
X. Y Z
` ` `
Profits after charging managers' commission 36,000 27,000 18,00
0
(but before adjusting unrealised profits)
Add back : Managers' commission (10/9o) 4,000 3,000 2,000
40,000 30,00 20,00
0
Less : Unrealised profit on stock (see Note) 4,000 4,500 2,000
Profits before charging managers' commission 36,000 25,500 18,00
0
Less : Managers' commission @ 10% 3,600 2,550 1,800
Correct departmental profits 3X400 22,950 16,20
0

Working Note:
Unrealised profit on stock : `
Profit of department X :
on stock held by department Y : 25/125 × `15,000 3000
on stock held by department Z : 1O/110 × ` 11,000 1000
4000
Profit of department Y :
Work Book : Financial Accounting
on stock held by department X : 15/100 × 14,000 2100
on stock held by department Z : 20/100 × `12,000 2400
4500
Profit of department Z :
on stock held by department X : 20/120 × Rs 6,000 1000
on stock held by department Y : 25/125 × ` 5,000 1000
2000
 Work Book : Financial Accounting

Transfer of purchased goods as well as finished goods

22. S&Co. has two departments A and B. From the following particulars prepare departmental
trading account and consolidated trading account for the year ending December 31, 2017:
Dept A (`) Dept. B (`)
Opening stock (at cost) 20000 12000
Purchases 92000 68000
Carriage 2000 2000
Wages 12000 8000
Sales 140000 112000
Purchased goods transferred
by B to A 10000
by A to B 8000
Finished goods transferred :
by B to A 35000
by A to B 40000
Return of finished goods :
by B to A 10000
by A to B 7000
Closing stock :
(i) Purchased goods 4500 6000
(ii) Finished goods 24000 14000

You are informed that purchased goods have been transferred mutually at their respective
departmental purchase cost and finished goods at departmental market price and that 20%
of the finished stock (closing) at each department represented finished goods received
from the other department.

Solution:

In the books of S & Co.

Dr. Departmental Trading Account Cr.
For the year ended December 31, 2017
A (`) B (`) A (`) B (`)
To Opening stock 20,000 12,000 By Sales 1,40,00 1,12,00
0 0
" Purchases 92,000 68,000 " Transfer :
" Transfer : Purchased good 8,000 10,000
Purchased goods 10,000 8,000 Finished goods 40,000 35,000
Finished goods 35,000 40,000 " Returns :
" Returns : Finished goods 7,000 10,000
Finished goods 10,000 7,000 " Closing stock :
" Carriage 2,000 2,000 Purchased goods 4,500 6,000
Work Book : Financial Accounting
" Wages 12,000 8,000 Finished goods 24,000 14,000
" Gross profit 42,500 42,000
2,23,50 1,87,00 2,23,50 1,87,00
0 0 0 0
Work Book : Financial Accounting

Dr. Consolidated Trading Account Cr.

For the year ended December 31, 2017
` `
To Opening stock 32,000 By Sales 2,52,000
" Purchases 1,60,00 "Closing stock :
0
" Carriage 4,000 Purchased goods 10,500
" Wages 20,000 Finished goods (see Note) 35,860
" Gross profit 82,360
2,98,36 2,98,360
0

Working Note:
Calculation of closing stock of finished goods after eliminating unrealised profit :
Deptt. A(`) Deptt. B(`)
Sales 1,40,000 1,12,000
Add : Transfer of finished goods to other department 40,000 35,000
1,80,000 1,47,000
Less : Return of finished goods from other department 10,000 7,000
Net sales 1,70,000 1,40,000
Gross profit 42,500 42,000
Rate of gross profit = (Gross Profit/Net Sales)*100 25% 30%
Finished goods from other department included in closing (20% of (20% of
stock 24,000) 14,000)
or `4,800 or `2,800
Unrealised profit included in closing stock (30% on (25% on
4,800) 2,800)
or `1,440 Or `700
Closing stock of finished goods: `(24,000 + 14,000) 38,000
Less: Unrealised profit : `(1,440 + 700) 2,140
Adjusted closing stock of finished goods 35,860
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Study Note – 11
COMPUTARISED ACCOUNTING SYSTEM

Learning Objective: To be able to acquire and apply the knowledge of business concepts
and office skills to meet the demands of today’s business environment through the
application of computerized accounting system.

1. Multiple choice

questions: Choose the

correct alternative

1. Which of the following is/are computerized accounting system?

(a) Processing of any information
(b) Involving computer(s)
(c) Operated by entity or third party
(d) All of these

2. Threat to Computerized accounting system are-

(a) Control
(b) Security
(c) Integrity
(d) All of these

3. Hacking into the computer server deals with-

(a) Unauthorized access to data
(b) Threat to computer usage
(c) Security
(d) All of these

4. Which of the following is code accounting software?

(a) More convenient
(b) Less complex
(c) Less risky
(d) None of these

5. Codification needs
(a) Complexity
(b) Spelling
(c) Systematic grouping
(d) None of these

Answer:
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1. (d)
2. (d)
3. (d)
4. (a)
5. (c)
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2. Fill in the blanks:

1. Coding accounting system is more convenient as complexity is……
2. Computer data hacking concerns with ……… system of the software.
3. Computerized accounting system means through computer.
4. Computer software includes that performs a desired function.
5. Computer software for accounting system may be acquired or……… specifically for
the business.

Answer:

1. High
2. Security
3. Data processing
4. Programme
5. Developed.

3. State whether the following statements are true or false:

1. The acquired software may consist of a spread sheet package.
2. The data hacking is a question against security system.
3. Computerized accounting system delays the accounting function.
4. Data processing is done though software.
5. Non coded accounting system is more convenient system.

Answer:

1. True
2. True
3. False
4. True
5. False.

4. Match the following:

Column - A Column - B
1. Grouping of accounts A Specific requirement
2 Coded accounting system B Software
3 Customized accounting software C Assets, liabilities, receipt & expenditure
4 Software development D High complexity
5 Accounting programme E Need to conduct feasibility study

Answer:

1. C 2. D. 3. A. 4. E 5. B
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QUESTIONS AND ANSWERS:

5. What is Computerized Accounting System?

Answer:

Computerized Accounting System refers to the processing of information with the help of
computers and accounting software. The computer receives the data as its inputs and
processes it as per the accounting rules and generates various types of information as the
organization need.

6. State the Features of Computerized Accounting

System Answer:

The features of Computerized Accounting System are as follows:

a. Computerized accounting system is designed to automate and integrate all the business
operations like sales, purchase, and manufacturing. In computerized accounting,
accurate, up- to-date business information is available at any time.
b. Computerized accounting has user friendly templates which provides fast, accurate data
entry of the transactions; thereafter all documents and reports can b e generated
automatically, at the press of a button.
c. The system can cope easily with the increase in the volume of business. It requires only
additional data operators for storing additional vouchers
d. It is capable of offering quick and quality reporting because of its speed and accuracy.
e. This system is highly secure and the information can be kept confidential in comparison
to manual accounting system.
f. This system generates real-time, comprehensive MIS reports and ensures access to
complete and critical information, immediately.
g. It makes sure that the critical financial information is accurate, controlled and safe from
data corruption.

7. Discuss the significance of Computerized Accounting

System Answer:

Following are the significances of computerized accounting system.

a. The speed with which accounts can be maintained is several olds higher.
b. It helps in automatically correcting the balances of ledger accounts.
c. It helps in automatic tallied trial balances unless some mistake is made while
recording the opening balance.
d. It automatically generates income statement.
e. It automatically generates balance sheet.

8. Discuss the Advantages of Computerized Accounting

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System Answer:

Computerized accounting system has the following advantages

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1. It can generate reports and information in desired format as and when need.
2. Any kind of alterations in transactions could be done are easily and gives changed
outcome immediately.
3. It ensures effective control over the system.
4. It is economical in the accounting data processing.
5. It maintains data privacy.

9. Discuss the Disadvantages of Computerized Accounting

System Answer:

Computerized accounting system has the disadvantages

1. More investment is required in a shorter period of time due to quicker obsolescence
of technology.
2. Power interruption may cause the data corruption or loss.
3. There is a possibility of data hacking.
4. Unspecific reports cannot be generated.

10. What is Pre-Packaged Accounting Software: Answer:

There are several user friendly, inexpensive and reliable pre-package accounting software
are available in the market for the extensive use in small and medium organizations. The
installations of this software are very simple through an installation diskette or CD which is
provided with the software. A network version of the software is also generally available
which needs to be installed on the server and work can be performed from the various
workstations or nodes connected to the server. Along with the software a user’s manual is
provided which guides the user on how to use the software. The version of the software
should be latest. It should take regular updates to take care of the changes of law as well as
add features to the existing software. This software normally has a section which provides
for the creation of a company. The name, address, phone numbers and other details of the
company like VAT registration number, PAN and TAN numbers are fed into the system. The
accounting period has to be set by inserting the first and the last day of the financial year.

11. Mention the Advantages of Pre-Packaged Accounting

Software Answer:

Pre-package accounting software has the following advantages

a. Pre-package accounting software is very easy to install through CD drive.
b. These packages are relatively less expensive
c. These software are very easy to use
d. Back up procedure is very simple in hard disk
e. Some software provides a certain flexibility in report formats
f. These packages are very effective for small and medium size organization.
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12. State the Disadvantages of Pre-Packaged Accounting

Software Answer:

Pre-package accounting software has the following disadvantages

a. A standard package may not be able to take care of all the complexities of a business.
b. These packages may not cover all the functional areas of the business operations.
Customization of the accounting package is not always possible as per the
requirement of the customer.
c. All kinds of reports requirements of management may not be available in a standard
package.
d. Security is generally missing in a pre-packaged accounting package.
e. Certain bug may remain in the software that takes long time to rectify by the vendor
which is very common in the initial years of the software.

13. State the Factors of Consideration for Selection of Pre-Packaged Accounting Software

Answer:

For the selection of a pre-package accounting software, the following factors to be considered
a. The buyer of the software should be ensured that the package is fulfilling the
business requirements
b. The buyer should be ensured that the package can produce all reports completely.
c. The software should be user friendly or easy to use
d. The installation and running cost of the software should be low e. It should be
ensured that the vendor has a good reputation
f. It should be ensured whether the vendor is prepared to give updates regularly

14. What is Customized Accounting Software?

Answer:

Customized accounting software is one which is developed on the basis of specific

requirements of the organization. A feasibility study is first made before the decision to
develop software is made. The life cycle of a customized accounting software begins with
the organization providing the user requirements. Based on these user requirements the
system analyst prepares a requirement specification which is given for approval by the user
management. Once the requirement Specification is approved, the designing process begins.
Development, testing and implementation are the other components of the system
development life cycle.

15. Mention the Advantages of Customized Accounting

Software Answer:
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The customized accounting software has the following advantages
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a. The functional areas which are not covered in pre-packaged software gets computerized.
b. The input screens can be tailor made to match the input documents for ease of data
entry.
c. It provides many MIS reports as per the specification of the organization.
d. It facilitates the use of Bar-code scanners as input devices suitable for the specific
needs of an individual organization.
e. It can suitably match with the organizational structure of the company.

16. Mention the Disadvantages of Customized Accounting

Software Answer:

The customized accounting software has the following disadvantages

a. Partial or unclear prerequisite provisions may results in a defective or incomplete

system.
b. Bugs may remain in the software because of poor testing.
c. Certification may not complete.
d. Regular change made to the system with scarce change management practice may
result in system negotiation.
e. The vendor may not be reluctant to give the support of the software due to other
commitments.
f. Its control measures may be insufficient.
g. There may be hindrance in completion of the software due to problems with the
vendor or inadequate project management.
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Study Note – 12
ACCOUNTING STANDARDS

Learning Objective:

To gain knowledge of AS 1: Disclosure of Accounting Policies.

To gain knowledge of AS 2: the term inventories in various circumstances and
valuation of Inventories.
To understand the procedure of accounting for Construction Contracts i.e. AS 7.
To understand the different context of Revenue Recognition and their account
as per AS 9.
To get a fair concept of accounting treatment and classification of Property,
Plant and Equipment as per AS 10.

Accounting Standards
(AS-1, AS-2, AS-7, AS-9, AS-6 and AS-10 has been replaced by revised AS-10)

1. Multiple choice questions

Choose the correct

alternative

1. AS-7 is related to
(A) Revenue Recognition
(B)Property, Plant and Equipment
(C) Construction Contracts
(D)Valuation of Inventories

2. An amount spent in connection with obtaining a License for starting the factory is
(A) Revenue Expenditure
(B)Capital Expenditure
(C) Pre-paid Expenditure
(D)None of the above

3. Which of the following is not considered as inventories as per Accounting Standard-2

(A) Held for sale in the ordinary course of business (finished goods)
(B)In the process of production of such sale (raw material and work-in-progress)
(C) Financial Instrument held as stock-in-trade (Shares, Debentures, Bonds etc.)
(D) In the form of materials or supplies to be consumed in production process or in
the rendering of services (stores, spares, raw material, consumables).

4. Which of the following item cannot be recognised as Revenue under AS 9?

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(A) Revenue arising from Sale of goods
(B)Revenue arising from rendering services
(C) Revenue by using of enterprises resources by others yielding interest, dividend
and royalties
(D)Revenue arising from hire-purchase, lease agreements
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5. is the amount by which the carrying amount of an asset exceeds its

recoverable amount.
(A) Depreciation
(B)Revaluation Loss
(C) Impairment loss
(D)Amortis

ation Answer:

1. C 2. B, 3. C 4. D 5. C

Write the following questions:

2. Briefly discuss about the advantages of Accounting

Standard Answer:

Advantages of Accounting Standard

a. It provides the accountancy profession with useful working rules.
b. It assists in improving quality of work performed by accountant.
c. It strengthens the accountant’s resistance against the pressure from directors to use
accounting policy which may be suspected in that situation in which they perform
their work.
d. It ensures the various users of financial statements to get complete crystal
information on more consistent basis from period to period.
e. It helps the users compare the financial statements of two or more organisaitons
engaged in same type of business operation.

3. Define the term Bearer plant as per AS – 10.

Answer:

Bearer plant is a plant that

(a) is used in the production or supply of agricultural produce;
(b) is expected to bear produce for more than a period of twelve months; and
(c) has a remote likelihood of being sold as agricultural produce, except for incidental
scrap sales.

The followings are not bearer plants:

(i) plants cultivated to be harvested as agricultural produce ;
(ii) plants cultivated to produce agricultural produce when there is more than a remote
likelihood that the entity will also harvest and sell the plant as agricultural produce,
other than as incidental scrap sales;
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(iii) annual crops.

When bearer plants are no longer used to bear produce they might be cut down and sold as
scrap.
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4. What do you understand by the term „Substance over form‟?

Answer:

It means that transaction should be accounted for in accordance with actual happening and
economic reality of the transactions not by its legal form. Like in hire purchaser if the assets
are purchased on hire purchase by the hire purchaser the assets are shown in the books of
hire purchaser in spite of the fact that the hire purchaser is not the legal owner of the assets
purchased. Under the purchase the purchaser, becomes the owner only on the payment of
last installment. Therefore the legal form of the transaction is ignored and the transaction is
accounted as per as substance.

The following particulars are presented by X Ltd. as on 31.3.2017:

Compute the value of stock as per AS
2. Stock held by X Ltd.
(Cost Price) 9500
(Net Realisable Value) 9400

The details of such stocks were:

Cost Price Net Realisable Value
Shirt 1200 1350
Trouser 1800 1750
Suit 6500 6300
9500 9400

Answer:

Valuation of Stock as per AS 2

As per AS 2, para 21, inventories are usually valued at lower of cost and net realisable value
on an item-by-item basis:
Cost Price Net Realisable Value of Closing Stock
Shirt 1200 1350 1200
Trouser 1800 1750 1750
Suit 6500 6300 6300
9500 9400 9250

Hence, value of stock will be considered for 9250 as per AS 2.

5. On 31.12.2016, Atul Construction Company Ltd. undertook a contract to construct a building

for ` 15 crores. On 31.03.2017, the company found that it had already spent ` 6.7 crores on
the construction. Prudent estimate of the additional cost for completion was ` 8.7.

What is the additional provision for foreseeable loss which must be made in the final accounts
for the year ended 31.03.17 As per provisions AS 7 on “Accounting for construction contract?”
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Answer:

As per AS 7, ‘Construction Contract’, when it is probable that total contract costs will exceed
total revenue, the expected loss should be immediately recognized as an expense. The
amount of such a loss is determined irrespective of (a) Whether or not work has commenced
on the contract,(b) the stage of completion of contract activity as per AS 7, (c) the amount of
profit expected to arise on other contracts which are not treated as a single contract.

In this case the anticipated losses are calculated as follows:

Anticipated or Foreseeable Loss
Particulars ` in crores
Cost incurred 6.7
Add: Additional cost for computation 8.7
15.4
Less: Contract Price 15
Anticipated / Foreseeable loss 0.4

Thus, as per AS 7, the whole amount of anticipated loss i.e. ` 40 lakhs should be recognized
and to be adjusted accordingly against the profit of the current year.

6. As per AS 9 - Revenue Recognition, when Revenue from Sale of Goods is recognised?

Answer:

Revenue is recognized when all the following conditions are fulfilled:

• Seller has transferred the ownership of goods to buyer for a price. Or,
• All significant risks and rewards of ownership have been transferred to buyer
• Seller does not retain any effective control of ownership on the transferred goods
• There is no significant uncertainty in collection of the amount of consideration (i.e. cash,
receivables etc.)

If delivery is delayed at buyer’s request and buyer takes title and accept billing, then the
revenue should be recognized immediately but goods must be in hand of seller, identified
and ready for delivery at the time of recognition of revenue.

7. What are the elements of cost for an item of property, plant and equipment as per

AS – 10? Answer:

The cost of an item of property, plant and equipment comprises:

(a) its purchase price, including import duties and non –refundable purchase taxes,, after
deducting trade discounts and rebates.
(b) any costs directly attributable to bringing the asset to the location and condition
necessary for it to be capable of operating in the manner intended by management.
(c) the initial estimate of the costs of dismantling, removing the item and restoring the site
on which it is located, referred to as ‘decommissioning, restoration and similar liabilities’,
the obligation for which an enterprise incurs either when the item is acquired or as a
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consequence of having used the item during a particular period for purposes other than
to produce inventories during that period.
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8. The H Co. acquired a new industrial machine, the list price of which was ` 1,52,000. The
supplier allowed a trade discount of ` 14,000 off the list price. On delivery, the cost of
installing the machine in its desired location was ` 21,000. Costs of testing whether the
machine functioning properly was ` 15,000; whether proceed from sample produced when
testing was ` 2000. Cost of staff training was ` 25000 and Initial operating loss was ` 5000.
According to Ind AS 16 - 'Property, Plant and Equipment',
what should be the initial cost of the machine?

Answer:

Calculation for the initial cost of the machine

List price of the machine 1,52,000

Less: Trade discount 14,000
1,38,000
cost of installing the machine 21,000
Cost of testing 15,000
Proceed from sample produced 2,000
13,000
Initial cost of the machine 1,72,000

Cost of staff training and operating cost are not recognised as the cost of the machine.

9. Whether the cost of spare parts can be recognised as cost of the PPE?

Answer:

The cost of an item of property, plant and equipment should be recognised as an asset if,
and only if:
• it is probable that future economic benefits associated with the item will flow to the
enterprise; and
• the cost of the item can be measured reliably.

Items such as spare parts are usually treated as inventory and to be recognized in the Profit and
Loss Account as and when consumed.

Major spare parts are treated as property, plant and equipment when they are expected to
be used over more than one period. They are included in non-current assets from the date
the cost is incurred.
Items which can be used exclusively with an item of Property, Plant and Equipment are
accounted for as Property, Plant and Equipment.

This Standard does not prescribe the unit of measure for recognition, i.e., what constitutes
an item of property, plant and equipment. Thus, judgment is required in applying the
recognition criteria to specific circumstances of an enterprise. Any type of expenditure that
meets these recognition criteria must be accounted for as an asset. As per this standard
individually insignificant items can be aggregated. An enterprise may decide to expense an
item which could otherwise have been included as property, plant and equipment, because
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the amount of the expenditure is not material.