Study Note 9.1, Page 647-672

STUDY NOTE - 9
ACCOUNTING IN SERVICE ORGANISATION

This study note includes
● Accounts for Miscellaneous Services
● Computer Software Accounting
● Accounts of Insurance Companies
● Accounts of Banking Companies
● Accounts of Electric Supply Companies.
9.1. ACCOUNTS FOR MISCELLANEOUS SERVICE
1. In addition to usual final accounts, contractors prepare different Contract Accounts to

find out cost of each contract, work-in-progress and profit to be considered in case of each
contract.
(1) Accounting Procedure
Contract Accounts for different work site are maintained in the Contract Ledger. Materi-
als sent to the work site, wages to labourers engaged in that work site and any special
plant purchased for that particular work site are debited to the specific Contract Account
identified by number or name. Materials may be sent to site by suppliers, or from the
main stores or supplied by the Contractee. The overheads are charged to different Con-
tract Accounts on the basis of some estimate. When the same plant is used at different
worksites appropriate depreciation on the basis of the period for which it is used in a
particular worksite is debited to that Contract Account.
(II) 1. Contract Account should get the credit. On the other hand, if materials are sold out from
a worksite, in addition to the credit to that Contract Account, profit or loss on sale of
materials is to be transferred from that Contract Account, as this profit or loss should be
shared by all contracts i.e., the amount is adjusted with Profit and Loss Account. Simi-
larly, for accidental loss the Contract Account is credited as against Loss by Accident
Account, which is cleared by transfer to Profit and Loss Account to the extent not cov-
ered by Insurance Claim.
2. At the end of the year the special plant, if any, is carried down at the estimated value, so
that difference between charging price and the price atwhich it is carried down remains
charged in that particular account. Similarly, the materials remaining at site are carried
down. In addition to these, work certified and the work completed but not certified are
carried down. In the alternative, all these may be transferred to Work-in-Progress Ac-
count. Some accountants, however, prefer to carry down materials and plant at site in
the Contract Account itself and to transfer work certified and work not certified to Work-
in Progress Account. If Contract Account is given a break before considering certified or
uncertified work, upto date cost of contract comes out.
Financial Accounting 647

3. Contractee usually makes payment upto a percentage of the work certified. The percent-
age of certified work retained is know as retention of security 10% is usual security. If 2%
earnest money was paid at the time of tender, 8% is deducted from Running Bills. In
addition to 10% 2% 1. T. is also deducted.
4. The amount received is credited to the Contractee’s Account. The amount certified, as
already noted, may be carried down in the Contract Account or may be transferred to
Work-in-Progress Account. In the alternative, contractee may be debited as against Con-
tract Account or Work-in-Progress Account with the certified work. When the contractee
is debited with certified work from the time to time the balance in the acccount represent
total retention amount. On the other hand, if the contractee is not so debited, then the
credit in his account represents advance payment to be adjusted by debit with contract
value against the Contract Account on completion of the work.
5. For valuation of uncertified work the materials used, wages and proportionate overheads
for the work completed but not yet certified are considered.
5.1 Profit on Uncompleted Contract
When the contract is not yet complete it is not proper to consider profit therein as earned
profit, as nobody knows as to what will happen ultimately. It should be appreciated that
the payments are in the nature of advance payments, and hence the contract is for the
entire work and not for the part as such. However, if no profit is taken into consideration
when the contract is for a lengthened period there is no profit for a number of years, and
there is a huge profit in the year of completion. To aviod this, an amount of profit esti-
mated on a very conservative basis to have been earned in the current year is credited to
P. & L. Account, the balance being carried forward or credited to WIP Account. No profit
is considered if less than one-third is complete. But loss is always taken into consider-
ation.
5.II The estimate of profit in the current year may be either on (a) retrospective basis or on (b)
prospective basis. The systems may be compared with the systems of valuation ~f liabili-
ties under Life Insurance Policies. In any case the Contract Account may be balanced off
after the items discussed above have been considered, the balance (say, Accounting Profit)
being carried down. If there is loss at this stage, it is written off to Profit and Loss Ac-
count.
5.III. Under retrospective method the accounting profit as disclosed above is the basis of de-
termination of profit in the current year. The percentage of payment is applied to the
accounting profit to convert it to cash or realised basis, as the profit is deemed to have
been earned on the work certified. Usually one-third ( when half or more than one-third)
or two-thirds (when more than half is complete) thereof is considered as profit to be
credited to the Profit and Loss Account. Sometimes, an approximate reasonable ratio
having regard to the extent of completion (certified value compared to contract value, or
sometime, time spent compared to total time) is taken instead of the above one-third or
two-thirds basis. The difference between accounting profit and profit credited to Profit
and Loss Account is either carried down to Contract Account or is credited to WIP Ac-
count. This method is most commonly used.
648 Financial Accounting

5.IV. Prospective method is applied when the work is going to be completed shortly. if the
Contract Account is balanced without considering certified work or uncertified work,
the balance indicates cost incurred upto-date for certified and uncertified work. An esti-
mate for further expenditure on materials, wages etc. for completion of the contract is
made. The amount of opening balances at site and the estimated sale or balance at site on
completion must be considered for finding out estimated further cost for completion of
the work. Net cost already incurred plus estimated future net cost will a mount to esti-
mated total cost for completion of the work. Sometimes a contingency provision is made
to have estimated total cost ultimately. The contingency provision may be in terms of a
percentage on the estimated total cost or on the estimated ultimate total cost.
6 The excess of the contract value over the estimated ultimate total cost is the estimated
total profit on the contract. A reasonable proportion thereof ( according to the extent of
as discussed under prospective system above) is considered to be profit earned uptodate.
If some profits have already been credited to Profit and Loss Account in earlier years, the
excess of estimated uptodate profit over the profits already considered is credited to
ProfIt and Loss Account in the current year. Sometimes, to be more conservative, the
uptodate estimated profit is converted to realised profit on the basis of percentage of
payment.
(Ill) W. I. P. and Completion of Contract
1.. In valuation of Work-in Progress the certified work, uncertified work, materials and plants
at site are added and provision for unrealised profit is deducted. The valuation may be
available from the Contract Account itself, from Work-in-Progress Account or from both
these accounts according to the nature of entries passed for considering the balances etc.
In the alternative, uptodate net cost may be found as discussed under prospective sys-
tem, and the profit considered in accounts is added up with net cost together with bal-
ances at site to get the value of Work-in-Progress. If receipts are lying as advances in
Contractee’s Account the balance in Contractee’s Account is deducted from the Work-
in-Progress Account. However, if the contractee’s balance is in excess of the value of
Work-in-Progress, the accounts are shown on both the sides. At the beginning of the
next year Work-in-Progress Account is closed by transfer to particular Contract Account
from both sides separately.
In the year of completion the accounting profit (or loss) as disclosed by the Contract
Account is transferred to Profit and Loss Account without any further calculation either
by retrospective or by Prospective methods. The Contract Account is closed by credit to
Contract Account and debit to Contractee’s Account either with full value of contract or
with certified value of contract in that year according to the system followed so far.

Problem :
The following are the particulars of a contract up to 31st December, 1975
Rs.
Contract Value 8,00,000
Machinery installed at site 50,000
Material sent to site 1.60,000
Labour at site 1,30,000
Direct expenses 6,000
Overhead charges allocated 5,000
Materials returned from site 2,000
Work certified 5,00,000
Cash received 4,50,000
Cost of work not certified yet 20,000
Materials on hand as at 31-12-1975 4,000
Wages accrued due on 31-12-1975 3,000
Value of machinery as at 31-12-1975 38000
General Plant costing Rs. 1,00,000 was used for three months. Depreciation @ 20% p.a.
is to be provided. Materials costing Rs. 2000 were so1d out for Rs. 3,000. In addition, scraps
were sold for Rs. 1,000. Materials costing Rs. 8,000 were lost in an accident.
It was decided that 1/3 of the profit should be regarded as a provision against contin-
gencies, and that such provision should be increase to the credit of Profit and Loss Account
only such portion of the 2/3 profit as the cash received bore to the work certified.
Prepare the Contract Account and Contractee’s Account for the year and show the
amount taken to the credit of the Profit arid Loss Account, and also how it will appear in
Balance Sheet.

Contract No Account
Rs. Rs.
To Materials 1,60,000 By Cash—Materials sold 3,000
To Wages 1,33,000 By Cash—Sale of scraps 1,000
To Direct Expenses 6,000 By Loss in Accident 8,000
To Overheads 5,000 By Materials—Return 2,000
To Special Plant 50,000 By Work-in-.Progress’
To Depreciation on General Plant Plant at site 38,000
(for 3 Months) 5,000 Materials at site 4,000
To Profit and Loss Account— By Balance c/d—
profit on sale of materials 1,000 cost to date 3,04,000
3,60,000 3,60,000
To Balance b/’d- - By Work-in-Progress’
cost to date 3,04,000 Certified Work 5,00,000
Uncertified Work 20,000
To Profit and Loss Account’ 1,29,600
To Work-in-Progress
(provision) 86,400
5,20,000 5,20,000

Notes:
I Profit credited:
(a) Profit as per Contract Account : Rs. 2,16,000= Rs. 5,20,000—Rs. 3,04,000
(b) 1/3 provision i.e., 1/3 x 2,16,000=Rs. 72,000/-
(c) 2/3 x 2,16,000=R.s. 1,44,000/- Cash received Rs. 4,50,000 out of Rs. 5,00,000
i.e., 90%. So, provision is to be increased by 10% of Rs. 1,44,000= Rs. 14400/-
(d) Total provision is : Rs. 72,000+Rs. 14,400:-=Rs. 86,400.
(e) Profit to be credited : Rs. 2,16,000—86,400=Rs. 1,29,600.
The profit is same as: 2/3 x 90% of 2,16,000 =1,29,600.
2 Some accountants prefer to transfer only work certified and work uncertified to the
Work-in-Progress Account.
Work-in-Progress Account
Particulars Rs. Particulars Rs.
To Contract No ...A/c: By Contract No. A/c
Plant at site 38,000 (provision) 86,400
Materials at site 4,000 By Balance c/d 4,75,600
Certified Work 5,00,000
Uncertified work 20,000
5,62,000 5,62,000
The Contractee’s Accounts will be as below

Contractee’s Account
To Balance c/d 4,50,000 By Bank (total) 4,50,000
To Contract No. 5,00,000 By Bank (tota1~ 4,50,000
By Balance c/d
(or, Security Dep.) 50,000
5,00,000 5,00,000

Obviously, Contract Account in the second case is credited with certified work as against
Contractees Account, and not as against Work-in-Progress Account.
in the alternative, Work-in-Progress Account may be dispensed with and the balances may be
carried down in Contract Account itself.
Contract Account No
Particulars Rs. Particulars Rs

To Materials 1,60,000 By Cash—materials sold 3,000
To Wages 1,33,000 By Cash—scrap 1,000
To Direct Expenses 6,000 By Materials Returned 2,000
To Overheads 5,000 By Loss in Accident 8,000
To Special Plant 50,000 By Balance c/d:
To Depreciation 5,000 Plant at site 38,000
To Profit on Sale of Materials 1,000 Materials at site 4,000
Cost 10 date 3,04,000
3,60,000 3,60,000
To Balance b/d : By Balance c/d’
Plant at site 38,000 Certified Work 5,00,000
Materials at site 4,000 Uncertified Work 20,000
Cost to date 3,04,000 Plant at site 38,000
To Profit and Loss A/c 1,29,600 Materials at site 4,000
To Balance c(d’ 86,400
5,62,000 5,62,000
The Balance Sheet will include:
Assets Rs Rs.
Work-in-Progress 4,75,600
Less Contractee’s Account – 4,50,000 25,600
Note WIP Rs. 5,62,000—Rs.86400 = Rs 4,75,600

Problem
The Contract Ledger of Company showed the following expenditure in connection with a
contract for the erection of a factory:
Rs.
Special Plant 1,00,000
Materials 1,50,000
Wages 3,00,000
Overhead Charges 60,000
The contract price was Rs. 12,00,000. It was estimated that it would take one more year for the
completion of the contract. The work certified was Rs. 8,00,000 and eighty per cent of the certi-
fied work was received in cash. At the end of the year materials lying on site were valued at Rs.
20,000 Depreciate the plant by 10 per cent. 6% of wages and 5% of materials may be taken to
have been incurred for the portion of work completed but not yet certified. Overheads are
charged as a percentage of direct wages. After making the necessary adjustments show how
the Contract Account will appear and what profit should be credited to Profit and Loss Ac-
count. Neglect depreciation of Plant for use on uncertified portion.
Valuation of Uncertified Work:
Rs.
Materials 5% of Rs. 1,50,000 7,500
Wages 6% of Rs. 3,00,000 18,000
Overheads 20% of Rs. 18,000 3,600
29,100
Contract Account

To Special Plant 1,00,000 By Work-in-Progress A/c:
To Materials 1,50,000 Certified Work 8,00,000
To Wages 3,00,000 Uncertified Work 29,100
To Overheads 60,000 Plant 90,000
To Balance c/d 329100 Materials 20,000
9,39,100 9,39,100
To Profit and Loss A/c 175520 By Balance b/d 3,29,100
To Work-in-Progress A/c 153580
329,100 329,100

Notes
‘Other alternative systems as discussed in Problem may also be followed.
Profit credited:
(a) Profit as per account Rs. 3,29,100.
(b) Realised Profit 80% of Rs. 3.29,100=Rs. 2,63,280.
(c) Rs. 8,00,000 has been certified out of a contract of Rs. 12,00,000 i.e..2/3 So profit to be
credited— Rs. 2,63,280x2/3 =Rs. 1,75,520.
Problem
Y.Ltd undertook a contract No. 80 for Rs. 7,50,000. The contract account showed the following
particulars
1973
Materials Rs. 30,000, Wages Rs. 25,000, Overheads Rs. 10,000, Plant Rs. 1,00,000 and Materials
at site at close Rs. 3,000.
1974:
Materials Rs. 1,00,000, Wages Rs. 60,000, Overheads Rs. 15,000, Materials returned Rs. 8,000.
The Plant at its depreciated value was transferred to contract No. 88. Uncertified work Rs.
15,000.
1975
Materials Rs. 1,60,000, Wages Rs. 1,00,000, Overheads Rs. 28,000 and Materials sold Rs. 4,000,
The amount of work certified at the end of the first year was Rs. 1,00,000. The work certified
upto the end of the second year was Rs. 4,00,000 and the work certified in the third year was
Rs. 3,50,000. 80 per cent of the certified work was received in cash.
Profit to be taken credit for are one-third and one-half on cash basis in each of the two years
respectively. Depreciate plant by 10 per cent on balance at the beginning ui each year.
Prepare accounts in respect of the contract at the end of each year.

Contract No. 80

1973 1973
To Materials 30,000 By Work-in-Progress Ac
To Wages 25,000 Materials 3,000
To overheads 10,000 Plant 90,000
To Plant 1,00.000 Certified Work 1,00,000
To Balance c/d 28,000
1,93,000 1,93,000

1973 1973
To Profit and Loss Account1 7,467 By Balance b/d
To Work-in-Progress Account 20,533 28,000
28,000
28,000
Particulars Rs Particulars Rs.

1974 1974
To Work-in-Progress—-Opening By Work-in-Progress—Opening
balance transferred provision transferred 20,533
Materials 3,000 By Materials—returned 8,000
Plant 90,000 By Contract No. 88—Plant
(‘certified Work) 1,00,000 transferred
To Materials 1,00,000 By Work-in-Progress c/d : 81000
To Wages 60.000 Uncertified Work
To Overheads 15,000 Certified Work 15,000
To Balance c/d 1,56 533 4,00,000
5,24,533 5,24,533
To Profit and Loss A/c1 62,613 By Balance b/d 1,56,533
To Work-in-Progress 93,920
1,56,533 1,56,533

1975 1975
To Work-in-Progress: By Work-in-Progress 93920
Uncertified Work 15,000 By Bank—sale of materials 4000
Certified Work 4,00.000 BY Contractee’s Account 7,50,000
To Materials 1,60,000
To Wages 1,00,000
To Overheads 28,000
To Profit and Loss Account 1,44,920
8,47,920 8,47,920
Notes
Profit credited in 1973 and 1974
1973 1974
Rs. Rs.
Accounting Profit 28,000 1,56,533
Cash Profit—on 80% basis 22,400 1,25,226
Proportionate profit to be credited
1/3x 22,400 1/3 x 1,25,226 =7,467 = 62,613
In absence of specific direction, no profit in 1973 would have been considered as extent of
completion was less than one-third.
• In 1975 the entire work was certified and hence no provision is necessary.
Work-in-Progress Account

1973 1973
To Contract Account No. 80 By Contract no.80 -Provision 20,533
Materials 3,000 By Balance c/d 1, 72,467
Plant 90,000
1,93,000 1,93,000

1974—Jan. 1

To Balance b/d 1,72,467 1974—Jan-1
To Contract No. 80—transfer 20,533 By Contract No. 80 (details) 1,93,000
Dec. 31 Dec. 31
To Contract No.80: By Contract No. 80—Provision 93,920
Uncertified Work 15,000 By Balance c/d 3.21,080
6,08,000 6,08,000
1975—Jan. 1 1975 Jan.1
To Balance b/d 3,21,080 By Contract No.80 (details 4,15,000
To Contract No. 80—transfer.
To balance c/d 93,920
4,15,000 4,15,000

1973 1973
To Balance c/d 80,000 By Bank (80% of Rs.1,00,000)4 80,000
1974 1974
To Balance c/d 3,20,000 By Balance b/d 80,000
By Bank
80% of (4,00,000—1.00,000)’ 2,40,000
3,20,000 3,20,000
1975 1975
To Contract Account 7,50,000 By Balance b/d 3,20,000
By Bank 4,30,000
7,50,000 7,50,000

Only certified work and uncertified work may be transferred to Work-in Progress Account. It
is assumed that full payment has been made in 1975, Each year credit may also be given for full
amount, 20% being transferred to Security Deposit. Last year there would be Rs. 1,00,000 re-
fund of Security Deposit.
Problem
A firm of contractors obtained a contract to build a house for Rs. 6,00 000. The work com-
menced on 1st April, 1975 and the following expenditure was incurred during the year ended
31st March, 1976
Plant and tools Rs. 20,000 ; Stores and materials Rs. 90,000 Wages Rs. 80,000 ; Sundry expenses
Rs. 7,000 and establishment charges Rs. 18,000
Some of the materials were found to be in excess and was sold ultimately for Rs. 17,000 while
their cost price was Rs. 14,000. A portion of the Plant was scrapped and sold as scrap for
Rs. 3,000
The value of the Plant and tools on site on 31st March, 1975 was Rs. 8,000 and the value of
stores and materials on site was Rs. 5,000.
Cash received from the contractee was 80% of the work certified and it amounted to
Rs.3,20,000 upto 31st March, 1976. The value of work done but not certified was Rs. 30,000,
The firm wanted to take into account part-profit for the work done on the basis of an estimate
as to what further expenses would be incurred in completing the work such that the profit to
he taken into account would be proportional to such estimated profit for the work certified as
the work certified bears to the whole work.
The estimate was as follow~
(a) That the contract would he completed by 31st December, 1976.
(b) The wages on the contract for the next nine months would amount to Rs. 80,000.
(c) That the cost of stores and materials required in addition to those on site on 31st March,
1976 would be Rs. 90,000 and that further contract expenses would amount to Rs. 9,000.
(d) That a further Rs. 35,000 would have to be spent for installing Plant and tools and the
scrap value of these on 31st December, 1976 would be Rs. 8,800.
(e) That the establishment charges would cost the same per month as in the year ended 31st
March, 1976.
(f) 2% on ultimate total cast is to be taken as Contingency Provision.
Prepare Contract, Stores and Materials and Plant Accounts for the year ended 31st March, 1976
and show Pro-forma calculation for the profit that should be credited to Profit and Loss Ac-
count of the firm for the year ended 31st March, 1976.

Pro-forma Contract Account

To Cost incurred upto 1-4-75 (as By Contract Price 6,00,000
per Contract A/c) 1,75,000
To Estimated Cost of Materials:
At Site 5,000
Add 90,000 95,000
To Estimated Wages 80,000
To Estimated Expenses 9,000
To Plant:
At Site 8,000
Installation 35,000
43,000
Less Scrap 8,800 34,200
To Establishment Charges:
1,500x9 13,500
4,06,700
To Contingency Provision’ 8,300
4,15,000
To Estimated Profit on 1,85,000
completion 6,00,000 6,00,000
Generally, the above profit is also converted to realised profit. Here, however, that is not,
intended.
Provision for unrealised profit : Accounting Profit 2,55,000
Less Profit to be credited 1,23,333
1,31,667
Contingency Provision: 2/98 x 4,06,700 = 8,300
Problem
After making provision of one-third of profit received draw out Contract Accounts No. 63 and
No. 64, Profit and Loss Account and Balance Sheet from the following Trial Balance as on 3
1.12.75 and information

Particulars Dr. Cr.
Rs. Rs.
Contractees’ Account 3,00,000
Buildings 1,00,000
Creditors 62,000
Bank 35,000
Capital Amount 3,00,000
Materials 1,00,000
Wages 70,000
Expenses 37,000
Plant 2,50,000
Work-in-Progress (1-1-75) 70,000
6,62,000 6,62,000
Contract No. 63 which was in progress on 1-1-75 was completed during the year and con-
tract No. 64 was started. There was a provision of Rs. 30,000 for unrealised profit against
Contract No. 63 and Work-in-Progress balance is given above after deduction of the provi-
sion.
Rs. 20,000 materials and Rs. 10,000 wages were paid for Contract No. 63. Rs. 60,000 materi-
als were sent to Contract No. 64 site, but Rs. 3,000 was lost there by accident. Rs. 60,000
wages were paid and Rs. 50,000 plant was used in Contract No. 64 all through, hut Plant
costing Rs. 2,()O,UO() was used upto September in contract No. 64 and then it was returned
to stores. Rs. 4,000 materials were at site of Contract No. 64. Provide 1O% depreciation on
the plant for the entire year.
Contract Account No. 63
To Work-in-Progress 1,00,000 By Work-in-Progress’ 30,000

To Materials 20,000 By Sundry Debtors~ 1,50,000
To Wages 10,000
To Expenses 5,000
To Profit and Loss Account 45,000
1,80,000 1,80,000

Contract Account No. 64

To Materials 60,000 By Loss by Accident 3,000
To Wages 60,000 By Work-in Progress
To Expenses 30,000 Plant 45,000
To Special Plant 50,000 Materials 4,000
To Dep. on General Plant’ 15,000 Uncertified Work 15,000
To Balance c/d 52,000 Certified Work2 2,00.000
2,67,000 2,67,000
4
To Profit and Loss Account 31,200 By Balance b/d 52,000
To Work-in-Progress 20,800
52,000 52,000
Profit and Loss Account for the year ended 31st December. 1975
To Depreciation’ on Plant By Profit from Contract A/c
(unabsorbed) 5,000 Contract No. 63 45,000
To Depreciation on building 2,000 Contract No. 64 31,200
To Loss by Accident 3,000
To Expenses (37,000—35.000) 2,000
To Capital Account 64,200
76,200 76,200
Notes:
1 Net balance of Rs. 70,000 is after deduction of Rs. 30.000 provision. Hence gross value Rs.
100000 together with the provision Rs. 30,000 is transferred to Contract Account.
2 The plant specifically installed is carried down in the contract site Work-in-Progress) af-
ter charging depreciation. For General Plant depreciation for 9 months is Charged to Con-
tract No. 64 balance being written off to Profit and Loss Account. of 1,50.000) is received n
account of Contract No. 64. Hence certified value is Rs. 1,80,000x 100/20 =Rs. 2,00,000. So,
2/3rd of profit is to be considered. ‘
Profit to be credited to Profit & Loss Account:

Accounting Profit: Rs. 52,000
Realized Profit: 90% of Rs 52,000 = Rs. 46,800
Reasonable. proportion such profit = Rs. 46,800 x 2/3 = 31,200
Contractees’ Account

To Sundry Debtors~ — By Balance c/d 3,00,000
of Rs. 1,50.000) 1,20,000
To Balance c/d 1,80,000
3,00,000 3,00,000
T o Balance b/d 70,000 By Contract No. 63—transfer1 1,00.000
To Contract No. 63—transfer1 30,000 By Contract No. 64—Provision for
To Contract No. 64: Unrealized Profit 20,800
Plant 45,000 By Balance c/d 2,43,200
Materials 4,000
Certified Work 15,000
Uncertified Work 2,00,000
3,64,000 3,64,000
Balance Sheet as at 31st December, 1975
Liabilities Rs. Assets Rs.
Capital Account 3,00,000 Buildings 1,00,000
Add Profit 64,200 Less Depreciation 2.000 98,000
3,64,200 Plant 2,00,000
Sundry Creditors 62,000 Less Depreciation 20,000 1,80,000
Sundry Debtors’ 30,000
Stock of Materials’ 20,000
Work-in-Progress’
Contract No. 64 2,43,200
Less
Contractee’s A/c 1,80,000 63,200
Bank 35,000
4,26,200 4,26,200

Notes:
~ Debtors’ balance: Rs. 1,50,000—1,20,000=Rs. 30,000.

‘Assuming that there is no handling loss etc., closing stock will be Rs. (1,00,000—20,000—
60,000)=Rs. 20000.
WIP = Rs. 2,64,000— Rs. 20,800 = Rs. 2,43,200
Problem
From the following expenses incurred during January, 1976 on Contract No. 78 show the
day to day account for the Contract 7~ in Contract Ledger:
January 2 Wages 4,000
3 Materials 10,000
14 Wages 15,000
15 Plant 20,000
26 Direct Expenses 4,000
27 Wages 8,000
Direct Expenses 3,000
On 1-1-76 Rs. 80,000 was carried forward being Rs. 30,000 Materials, Wages Rs. 20,000, Rs.
7,000 Direct Expenses, Rs. 3,000 Indirect Expenses and Plant Rs. 20,000. Certificates for comple-
tion were received on 10- 1-76 for Rs. 30,000 and on 17.1.76 for Rs. 35,000. As on 1.1.76 total of
work certified amounts to Rs1 1,00,000.
Balance Sheet as at 31st December, 1975
Particulars Rs Particulars Rs.

Capital 5,000 Furniture 4,000
Add Profit 24,700 Less Depreciation 400 3,600
29,700 Library 5,000
Less Drawings 10,000 Less Depreciation 500 4,500
19,700 Work-in-Progress 2,800
Provision for Unrealised Profit 12,800 Clients’ Disbursements ‘ 2,150
Clients’ Deposit 5,950 Clients’ Control Account 10,000
Liabilities for Expenses 600 Bank (Office) 8,050
Bank (Clients) 5,950
Cash 2,000
39,050 39,050

Farm Accounting
(Including Agriculture, Horticulture, Dairy and Poultry)
1. Farming activities may constitute in agriculture, horticulture, dairy, poultry, pisiculture
and the like or may combine two or more lines. Raising of fruits and flowers as also
rearing of sheep and sericulture etc. may also be included in “farming” in the widest
sense of the term. Nurseries for growing and selling of seedlings and plants are also
within the purview of the term “farming”.
2. In our country we have rarely well-organized farming activities, and as such we have
rare use of proper system of accounting in farming. Where there are large scale and
organised farms the benefits of Double Entry accounting system may be enjoyed by
them. Apart from giving true cost and profit on each line of proper accounting will en-
sure better control by management.
(A) Agriculture, Horticulture’ & Nurseries
3. For agriculture detailed accounts should be kept for different crops, as, rice, wheat, jute
etc. Moreover, if the same crop is produced in different fields, accounts for each field
should also be maintained. The Field Account should be debited with cost of seeds,
seedlings, manures and expenses for tilling. Wages for different activities, rent, canal
dues or expenses for irrigation and depreciation on agricultural equipments, livestock
etc. should also be considered. The Crops Account and Hays Account are debited as
against Field Accounts with. cost of production. The cost being common cost the trans-
fer to Hays Account and Crops Account is to be made on the basis of some estimated
value of hays. The hays used for feeding the livestock, seeds used for growing seedlings
and the cost of food supplied from farm produces to the workers and proprietor do not
involve apparent monetary transactions but these “imputed” transactions should be
brought into accounts on the basis of estimated values. The Crops and Hays Account are
credited on sales, consumption or on use in further production.
4. For growing of vegetables, accounts for different vegetables as cabbage, potato, tomato
etc., should be maintained in the lines as above.
(B) Dairy & Poultry
For rearing of sheep and other live-stock, accounts must be maintained for each type of live-
stock separately. The cost of Tearing is matched by sale common costs on reasonable basis.
The cost of rearing is matched by sale proceeds of the live stock or other products there from.
However, in small firms having different types of activities, sometimes account for each type
is avoided for the trouble of allocation, and the Farm Account is made up for all items. When
accounts for different lives-stocks are being maintained separately,
There should also be a column for numbers.
In case of birth of calves etc., Calves Accounts -estimated Cost as against Cows or Buffaloes
Account. It should be noted that the number of calves will be debited in the number column of
Calves Account, but there will be no corresponding credit in the number column of Cows
Account. On growing up, the calves are retransferred to Cows Account, Bull Account or Bul-

locks Account. If no transfer is made at all, the position will be automatically adjusted in the
Final Accounts as values of the claves shall be considered in closing stock with those of cows
and buffaloes.
In case of deaths the account is credited with number and sales of the carcasses and the loss is
automatically adjusted, as in closing stock only the value of remaining heads is considered.
For different types of farming activities Cash Book, Purchase Book and Sales Book should be
maintained in columnar fashion with suitable heads. As for example, Sales Book should have
columns for Cattle, Milk, Cream, Butter, Ghee, Poultry, Vegetables, Rice, Wheat, Fruits etc
In preparation of final accounts, opening and closings stocks of live stock, crops in hand and
hays and straw, growing corps, manures, should be considered. Depreciation, maintenance
etc. should also be considered. In Final Accounts of Companies shows the special items in the
Profit & Loss Account and Balance Sheet.
Builders and House Owners

1. There may be some organization specialization in construction of buildings for selling
out. Contractors undertake to construct house etc. for others. But these types of organiza-
tions acquire a plot of land, develop it, divide it smaller plots. construct house or flat
according to their plans having regard to the needs of the prospective buyers. When the
house constructed it is Sold out as such, in such cases until all the houses have been
disposed of (Sold or finally retained for own residence ) profit or loss can be found out by
taking valuation of houses not yet disposed of.
2. It will be better to have detailed and separate accounts of each unit Otherwise, all the
houses (usually being small in one area may he considered as one unit. The cost of. land
required or passages. parks etc. will increase the Cost of houses, but if no account for
each house is maintained. the cost of land left vacant for these purposes will automati-
cally increase the cost of the entire estate. If a house is retained for the proprietor, its
value should also be considered in determining the true profit.
3. When a person or a concern has a number of houses for letting out, detailed accounts for
each tenant has to be maintained. But the number of tenants may be very large because
there may be many tenants particularly business area) in the same house. The best way
to keep accounts of tenants is to maintain Rental Ledger in which against each property
(entered with number and address~ the names of tenants with their particulars are en-
tered. The balance is brought forward first and then the rent for the month is booked and
then-is the total of debit. The date and number of receipts together with Cash Book folio
are entered in the credit side. Any rebate or allowance for repairs carried out or adjust-
ments against advances are also entered in the credit side. there is a column for “total of
credits” and the amount therein is deducted from the total of debits” column, balance
being carried forward to the next month. House meant for sale may also be let out tem-
porarily. Final Accounts of House Builders considered in Problem 18 of Final Accounts
of Companies)

Problem
A Civil Engineer decided to build four house on a piece of freehold land which he purchased
for Rs. 60,000. He engaged a foremen at a wage of Rs. 300 per month, plus 20 per cent of any
profit realized on the sale of the houses after deducting his commission. For that purpose, the
land was to be valued at Rs. 20,000 after developments for each of the four plots. The essential
figures were as follows
Rs.
Development Expenses 10,000
Wages paid, including that of foreman 40,000
Cost of Materials, Timber, Fittings, etc. 50,000
Net cost of Scaffolding and Plant 2,000
Charges for Electricity, Water, etc. 1,000
Insurance, Advertising etc. 2,000
Bank Charges 1,000
Sundry Expenses 800
Law Charges 600
Three of the houses were sold at Rs. 50,000 each the fourth as retained by the owner and was
valued at Rs.55,000 and treated as sale at that price.
You are required to prepare an account showing the actual profit or loss to the owner.
Buildings Construction and Sale Account
To Cost of Land 60,000 By Stock A/C 1,50,000
To Development Expenses 10,000 By Capital Account—
house retained 55,000
To Wages (incl. Foreman) 40,000
To Cost of Materials 50,000
To Cost scaffolding etc 2,000
To Electricity 1,000
To Insurance, Advrt.. 2,000
To Bank Charges & Interest 1,000
To Sundry Exp. 800
To Law Charges 600
To Balance c/d 37,600
2,05,000 2,05,000

To Commission1 4,600 By Balance b/d 37,600

To Capita! Account —
Net Profit 33,000
37,600 37,600
Note:
Rs. Rs.
Commission
Profit as above 37,600
Agreed cost of land : 20,000 x 4 80,000
Less Cost of land and development
charged in the above account : (60,000 +10,000) 70,000 10,000
Charged Profit for Commission 27,600
Garage and Motor Car Dealers
1. The Garage Companies may provide for garaging of cars, sale of accessories, petrol and
even sale of cars and motor cycles in addition to repairs and servicing Job The Accounting
will depend upon the size and exact nature of the concern In general, columnar Sales
Day Book is suitable for recording sale of car, motor cycle. accessories. Lubricants, petrol,
repairs and servicing, hire charges garage charges and the like. When the petrol pump is
attached with the garage. it accounts should be separately maintained. The Purchases
Book and Cash Book may also be main tained in analytical form. The Garages Accounts
for different sections should also be made separately.
2. Transfer are required from one department to another department for goods and spars
used and also for benefits enjoyed by employees and proprietor. Old cars purchased may
be overhauled with the help of Repairs Section and then sold. The cost of such cars should
be increased by credit to Repairs Section.
3.. It will be better to have separate ledger for each ship and all expenses and incomes in
connection therewith are to he considered in that ledger. Moreover, the expenses and
incomes against each voyage should be recorded in the Voyage Account.

ENTERTAINMENT
Cinema, Theatre, Jatra and Circus
1. These organizations have substantial similarity in respect of incomes viz., sale of tickets,
programmes, advertisement and the like. These can better be recorded in Cash Book with
these columns. The daily sales of tickets is recorded in the Daily Return of Tickets sold
and this must be in agreement with the Register of Stamps of Amusement Taxes.
2. The Distributors have the above incomes as against which Amusement Tax is a direct
charge. Hire charges of films, advertisement, wages for different groups of staff are to be
considered along with rent or depreciation of the buildings, furni ture, Projectors and
other equipments Accounts for each book should be drawn by he Distributors. For Pro-
ducers the income are sale and hire of films as against which fees of artists, expenses of
outdoor shooting, charges of studios, remunera tion of Cameramen, Music Directors, Di-
rectors etc. are charged. Working Account of each feature should be separate1y drawn
out by Producers.
3. In Theatres also similar accounts are maintained. Salaries of Orchestra, cost of dresses,
remuneration of artists, rents etc. are considered as running expenses and are recorded
preferably in columnar form of Cash Book. The cost of scenery, equipment etc. is capital-
ized and depreciation is charged along with depreciation on Furniture and Fixture. The
accounts of Jatra Party may also be maintained in the same way but usually collections
are on contract basis rather than on the basis of sales of tickets. -
4. In Circus, accounts for collection and expenses may be maintained in the same way as
above. Special care should be given to Live Stock Account and preferably different Live
Stock Accounts for different animals should be maintained. Working Account should be
drawn for each establishment usually running over a few months; as generally they are of
mobile type.
Hotels, Restaurants and Caterers
1. The accounting scheme of the organization will, of course, depend upon its size and exact
nature and requirements, but the principle of accounting remains same as in all cases.
There may be provision for saving of refreshment only, or for serving of launches and
dinners usually with provisions of refreshments; there may be arrangement of bar, and
lodging may also be provided. Some may have special section for catering at different
places on the occasion of marriage and the like. At any rate, purchases of various types of
items should be separately recorded and similarly accounts for sales of various types of
items must be separately maintained to disclose the correct position and for helping in
proper control.
2. Purchases and expenses may better be recorded through Analytical Purchase book and
Cash Book. The purchase Day Book and payments side of Cash Book will be provided
with columns for: Wines and Minerals; Groceries and Provisions; Cigarettes and Cigars;
Cutlery, Glass and Plates; Bedding and

3. Linens ; Furniture and Fixtures; Establishment; and the like. There v~ ill be a Ledger
Column also in Cash Book to show disbursement on behalf of visitors.
4. The Receipt side of Cash Book and Sales Book may have analysis columns as : Dinner
and Launches, Breakfast, Bar, Cigarettes and Cigars, etc. in Cash Book there will be
further columns for Visitors’ Ledger and Personal Ledger.
5. The Sales Book is better maintained together with the account of each visitor (when
lodging is provided) in the form of what is known as Window Ledger or Visitors’ Led-
ger. Account for each day is maintained for each visitor together with details of charges
(same as are shown in bills submitted to them ultimately) and the Room No. is indicated
against each visitor. The vertical total shows the Debit Total for each visitor, and credits
are shown below. The horizontal totals indicate totals of different types of charges dur-
ing the whole day. The daily total may be posted in ledger or may be carried forward to
next day and added up with next day total and carried forward and so on, ultimately
being posted to ledger (it required) say, at the end of the month. When there are many
rooms and guests, a number of pages has to be used every day. A pro-forma Visitors
Ledger (Window Ledger
6. The items may be repeated by the side of Daily Total column to avoid confusion as there
may be many columns for visitors in every page. The B.F. and C. F. columns ma also be
avoided and Daily Totals may be posted in the General Ledger.
7. Stock Ledger must be maintained in details to have thorough control purchases, usage
and sales of different items, and periodical stock must be carried out.
8. At the time of preparation of Final Accounts adjustment entries must be passed for meals,
accommodation etc. of the staff and proprietor by crediting these items as against Salaries
and Wages or Drawings, as the case may be. It will be better to draw out Working Ac-
counts for different sections as Bar, Accommodation,Restaurant, Supply of Launches and
Dinners. The rates and taxes and building repairs, depreciation on beddings together
with attendant’s wages and proportionate establishment charges are charged against Ac-
commodation account whereas collections for accommodation arc credited to this accounts.
9. Cost of meat, eggs. fish and poultry. stores, groceries and provisions are apportioned in
between Restaurant Section and Launches and Dinners. Depreciation on glass and china.
cutlery and plates, table linens etc. should be similarly apportioned. Separate accounts
may also be necessary for Billiard Room, Banquet Halls, Garage. Laundry and the like.
Plantation
( Tea, coffee, Rubber etc.)
1. In many plantation concerns there are distinct agricultural aspect and also industrial as-
pect and hence accounts should be made with an eye to that. Clearing expenses of areas
where plantations have been abandoned should be capita used. Expenses of cultivation
etc. in areas not bearing are similarly capitalized. When cultivation expenses of “not bear-
ing” area are not available, total cultivation expenses should be distributed on acreage

basis. Wages Accounts should be separately maintained for Planting, Cutting, and Pro-
cessing. Proper control should be exercised on the employment and payment of outdoor
work. The Hospital and Medical Expenses thereon will be ultimately booked to Labour
Expenses together with Recruitment and Passage Expenses. Cultivation Account and Pro-
cessing Account may be Separately prepared.
2. The Garden Returns certified by the Manager are incorporated in Head Office Books. The
sales are as per returns from the Brokers. Provision for necessary commission on sales as
also on crops, if required, should be made.
3. The Final Accounts should better be drawn out in sections so that the cost of leaves plucked
before processing may also be known. It may be pointed out in this connection that clos-
ing stock is not valued on the normal basis of “lesser of cost or market price”, but on the
basis of the “price since realised” inasmuch as the crop of the season is normally sold out
at the time of finalisation of accounts. 6O~ of the income of tea companies is deemed to be
agricultural income, and hence provision for Income-Tax is to be made on the basis of
4O% of profit only. Natural Accounting year should better be followed to coincide with
the crop-season.
Doctors, Druggists and Nursing Homes
1. Practicing Doctors, whether G. P. (General Practitioners) or specialists, maintain diary,

and all details, charges, special points are noted there. From these the Incomes are grouped
and recorded in daily Cash Book having columns for visits, consultation fees, prescription
served etc. Ii a number of specialists carry on in partnership further columns may be nec-
essary for charge for pathological examinations, surgical operations, X’Ray and other plates,
special therapy etc. (For accounts of a Polyclinic see Problem 16, p. 1154)
2. The expenses are also grouped in Cash Book as medical and surgical equipments and
plants, special and general furniture and fixture, medicines and drugs, bandaging materi-
als etc. and other expenses. Patients’ Ledger may have to be maintained. In case of Den-
tists, purchases of dentures (i.e. artificial teeth etc.) and connected materials are to be re-
corded in separate columns.
3. in case of dispensing Chemists and druggists, sales book and purchases Book are to be
ruled with columns for: Prescriptions served, drugs, patent medicines, baby foods, ban-
daging materials and the like.
4. In case of Nursing Homes accounts for the cabin and bed rents, expenses, and collections
from patients should be maintained separately from those. for charges for attendance by
Doctors and Surgeons, supply of drugs and medicines etc. Similarly, accounts for food
and diet should be separately maintained. Columnar Purchases Book, Charges Book and
Cash Book may be maintained for each bed.

Doctors, Druggists and Nursing Homes
1. Practicing Doctors, whether G. P. (General Practitioners) or specialists, maintain diary,

and all details, charges, special points are noted there. From these the Incomes are grouped
and recorded in daily Cash Book having columns for visits, consultation fees, prescription
served etc. Ii a number of specialists carry on in partnership further columns may be nec-
essary for charge for pathological examinations, surgical operations, X’Ray and other plates,
special therapy etc. (For accounts of a Polyclinic see Problem 16, p. 1154)
2. The expenses are also grouped in Cash Book as medical and surgical equipments and
plants, special and general furniture and fixture, medicines and drugs, bandaging materi-
als etc. and other expenses. Patients’ Ledger may have to be maintained. In case of Den-
tists, purchases of dentures (i.e. artificial teeth etc.) and connected materials are to be re-
corded in separate columns.
3. in case of dispensing Chemists and druggists, sales book and purchases Book are to be
ruled with columns for: Prescriptions served, drugs, patent medicines, baby foods, ban-
daging materials and the like.
4. In case of Nursing Homes accounts for the cabin and bed rents, expenses, and collections
from patients should be maintained separately from those. for charges for attendance by
Doctors and Surgeons, supply of drugs and medicines etc. Similarly, accounts for food
and diet should be separately maintained. Columnar Purchases Book, Charges Book and
Cash Book may be maintained for each bed.

Study Note 9.1, Page 647-672

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STUDY NOTE - 9

ACCOUNTING IN SERVICE ORGANISATION

9.1. ACCOUNTS FOR MISCELLANEOUS SERVICE

1. In addition to usual final accounts, contractors prepare different Contract Accounts to

Financial Accounting 647

648 Financial Accounting

Financial Accounting 649

650 Financial Accounting

To Materials 1,60,000 By Cash—Materials sold 3,000

To Wages 1,33,000 By Cash—Sale of scraps 1,000

To Direct Expenses 6,000 By Loss in Accident 8,000

To Overheads 5,000 By Materials—Return 2,000

To Special Plant 50,000 By Work-in-.Progress’

To Depreciation on General Plant Plant at site 38,000

(for 3 Months) 5,000 Materials at site 4,000

To Profit and Loss Account— By Balance c/d—

profit on sale of materials 1,000 cost to date 3,04,000

To Balance b/’d- - By Work-in-Progress’

cost to date 3,04,000 Certified Work 5,00,000

Uncertified Work 20,000

To Profit and Loss Account’ 1,29,600

Financial Accounting 651

Particulars Rs. Particulars Rs.

To Contract No ...A/c: By Contract No. A/c

Plant at site 38,000 (provision) 86,400

Materials at site 4,000 By Balance c/d 4,75,600

Certified Work 5,00,000

Uncertified work 20,000

The Contractee’s Accounts will be as below

652 Financial Accounting

Particulars Rs. Particulars Rs

Particulars Rs. Particulars Rs.

To Balance b/d : By Balance c/d’

Plant at site 38,000 Certified Work 5,00,000

Materials at site 4,000 Uncertified Work 20,000

Cost to date 3,04,000 Plant at site 38,000

To Profit and Loss A/c 1,29,600 Materials at site 4,000

To Balance c(d’ 86,400

The Balance Sheet will include:

Less Contractee’s Account – 4,50,000 25,600

Note WIP Rs. 5,62,000—Rs.86400 = Rs 4,75,600

Financial Accounting 653

Particulars Rs. Particulars Rs

654 Financial Accounting

Financial Accounting 655

Particulars Rs. Particulars Rs

Particulars Rs. Particulars Rs.

Particulars Rs Particulars Rs.

656 Financial Accounting

Particulars Rs. Particulars Rs.

Financial Accounting 657

Particulars Rs. Particulars Rs.

Particulars Rs. Particulars Rs.

1975—Jan. 1 1975 Jan.1

To Balance b/d 3,21,080 By Contract No.80 (details 4,15,000

To Contract No. 80—transfer.

To balance c/d 93,920

Particulars Rs. Particulars Rs.

658 Financial Accounting

(a) That the contract would he completed by 31st December, 1976.

(f) 2% on ultimate total cast is to be taken as Contingency Provision.

Financial Accounting 659

Pro-forma Contract Account