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7/15/2019 Study Material-2
Study Material-2
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Table of contents
1 LESSON 8 PREPARATION OF FINANCIAL STATEMENTS FOR NON-PROFIT MAKING ENTTES
2 LESSON 9 FINANCIAL STATEMENTS : THEIR NATURE, USES AND LIMITATIONS
3 LESSON 10 DISSOLUTION OF PARTNERSHIP FIRMS
4 LESSON 11 HIRE PURCHASE ACCOUNTS
5 LESSON 12 BRANCH ACCOUNTS
6 LESSON 13 INVENTORY VALUATION
7 LESSON 14 SINGLE ENTRY SYSTEM
1 LESSON 8 PREPARATION OF FINANCIAL

STATEMENTS FOR NON-PROFIT MAKING
ENTTES
LESSON 8

PREPARATION OF FINANCIAL STATEMENTS FOR NON-PROFIT MAKING ENTTES

Non-trading institutions like clubs, hospitals, schools etc. do not keep full-fledged account books
because of the expenses involved. They usually prepare the following accounts at the end of the year.
1. Receipts and Payments Account.
2. Income and Expenditure Account.
3. Balance Sheet.
Receipts and Payments Account
The receipts and payments account is merely a Summary of Cash and Bank-transactions for a
year. All that appears in the Cash Book also appears in this account. It starts with the opening Cash or
Bank Balance and ends with the balance of cash or bank at the end of the year. All receipts of Cash or
Cheque are recorded on the debit side and all the payments on the credit side. Receipts and Payments
of both Capital and Revenue nature are recorded. The receipts and payments relating to previous
or future year will also be recorded, if the transactions take place during the year. The balance in the
account represents cash in hand or bank at the end of the financial year. Usually receipts of cash are
more than payments. If however, the credit side exceeds the debit side, it represents the net bank
overdraft.
The Receipts and Payment Account does not give any indication whether current (revenue) expenses
are being met out of current (revenue) incomes. There can be a sustantial cash balance, and yet the
current (revenue) incomes are not sufficient to meet out the current (revenue 0 expenses. Large cash
balance may result, for instance, from sale of a building; but that is not an income and is merely
conversion of one asset, the building into another asset viz. cash.
The account which compares current incomes with current expenses is known as Income and
Expenditure
Account.
Illustration 1:
From the folowing details of the Bright Club for the year ended 31st December, 1994. Prepare the
Receipts and payments Account for the same:
Rs.
Cash (Jan. 1, 1994) in Hand ............400 6,400
at Bank.......6,000
Subscriptions and Donations received 3,000
Purchase of Govt. Securities 4,600
Sale
7/15/2019 of Tickets for annual dinner Study Material-2 700
Expenses of Annual Dinner and Entertainment 500
Interest on bank deposits 160
Dividends received 400
Rs.
Contribution to Flood and Famine 100
Victims
Furniture purchased 400
Rent and Hire paid 440
Postage, Printing and Stationery 80
Periodicals & Newspaper 520
Secretary’s Honorarium and 220
Sundries
Cash in hand (31st December, 400
1994)

Solution:
Receipts and Payments Account of the Bright Club for the Year ended 31st December, 1994
Dr. Cr.


7/15/2019 Rs. Study Material-2 Rs.
1994 1994

Fan., 1 To balance b/d Dec., By Govt. Securities By 4,600
31 Annual Dinner &

Entertainment
Cash in hand
By Contribution for
400
Flood a

6,400 500
Cash at
Famine Victims
Bank 6,000
d

By Furniture 100

By Rent and hire 400

By Postage, Printing & 440

Stationery

By Periodicals and
Upto

Newspapers
Dec., 80

31

To subscription and
By Secretary’s
Donations 3,000
Honorarium and
To Annual Dinner Sundries
realisation
By Cash in hand at 520
To Interest on Bank

7,00
bank deposits
To dividends
220
400
160 3,400
400 3,800
10,660 10,660

Income and Expenditure Account
It
7/15/2019 is prepared just like a Profit and Loss account.Study
TheMaterial-2
transactions of capital nature and the receipts
and payments pertaining to the previous year or subsequent year will be ommitted. The income and
expenditure relating to current year only will be recorded. Similarly income received in advance or
relating to the previous year will be ommitted. The provision will be made for the accrued incomes but
not received. Similarly provision
will be made for expenditure incurred but not paid. The items of depreciation, bad debts, profit or loss
on the sale of asset etc. will be shown in this account. All incomes will appear on the credit side, and
all expenditure on the debit side. If the credit side total exceeds debit side total, the difference in
‘Surplus’, Excess of Income over Expenditure. On the other if the debit side total exceeds credit side,
the difference is ‘Deficit’ and is called “Excess of Expenditure over Income.”

Difference between Receipts and Account and Income and Expenditure Account:
(1) A Receipts and payments account is merely a summary of Cash transactions of aparticular period.
Whereas in a non-trading concern Income and Expenditure Account is prepared in mplace of Trading
and Profit & Loss Account.
(2) Receipts and Payments Account is a Real Account. Whereas Income Expenditure Account is a
Nominal Account.
(3) A Receipts and Payments Account records all the actual cash receipts and payments, both of
Capital Revenue, during a period irrespective of whether they pertain to previous, present or
subsequent years. But an Income and Expenditure account records only revenue items of current year.
The transactions of previous or subsequent years are ommitted.
(4) In Receipts and payments Account receipts are on the debit side viz. left hand side and payments
on the credit side viz. on the right hand side. But in Income and Expenditure Account income is shown
in the credit-side and expenditure on the debit side.
(5) A Receipts and Payments Account does not include either the accrued incomes or outstanding
expenditure. But the Income and Expenditure account must bring into account total income received
and accrued and total expenses whether paid or outstanding for the period.
(6) Depreciation, bad debts etc. are not recorded in Receipts and Payments Account, but these losses
are recorded in Income and Expenditure Account.
(7) In case of Receipts and Payments Account, balance at the end represents Cash in hand in the end,
but in Income and Expenditure Account balance represents excess of income over expenditure or vice
versa.
(8) A Receipts and Payments Account need not necessarily be accompanied by a Balance Sheet. But an
Income and Expenditure Account is always accompained by a Balance Sheet.
Illustration 2:
Calculate what amount will be posted to Income and Expenditure Account for the year ending 31st
December, 1994.
(a) (i) In 1986 the amount actually received for subscriptions was Rs. 40 800 (ii) Subscriptions
outstanding (Cr. due) on 31st December 93 = 4,500 on 31st December 94 = 4,700
Subscriptions Received in Advance as on 31 st December 94 = 1,600
Subscription for 1995 received in 1994 ...... ...... = 1,500
(b)
7/15/2019 General Expenses paid in 1994 totalled Rs.
Study19,300.
Material-2 The following additional information is
supplied to you.
Rs. Expenses unpiad on 31st Dec., 1993 .... 1,800
Expenses prepaid on 31st Dec., 1993 .... 1 1,100
Expenses for 1995 paid in 1994 .... 1, 600
Expenses unpaid on 31st Dec., 1994 .... 1900 (c) Stock of stationery
on 1st Jan, 1994 Rs. 3,000
Creditors for stationery outstanding on 1st Jan., 2,000
1994
Amount paid for stationery during the year 1994 10,800
Stock of stationery on 31st Dec., 1994 500
Creditors for stationery on 31st Dec., 1994 1,300

Solution:
(i) The amount to be credited as subscription to the Income and Expenditure Accounts is Rs. 41,100
arrived as follows:
Rs. Subscription actually received
40,800
Add: Subscription for 1994 received in advance in 1993 1,600

Subscription for 1994 still due 4,700 6,300
Less: Subscription for 1993 received in 1994 4,500 47,100

Subscription for 1995 received in 1994 1,500 6,000
Subscription for 1995 .... 41,100 (ii) The
expenses for 1994 is Rs. 19,200 calculated as under :-
Rs.
Expenses actually paid in 1994 .... .... 19,300
Add Expenses for 1994 paid in 1993 1,400

Expenses for 1994 not yet paid 1,900 3,300
22,600 Less Expenses for 1995 paid in 1994 ... 1,600

Expenses for 1993 paid in 1994 .... 1,800 3,400
19,200
(iii) The stationery consumed for 1994 is Rs. 12,600 calculated as under :
Stationery already in hand on !st Jan. 3,000
Add : Payment made during the year : 10,800
Less :Paid for the last year : 2,000
8,800
Add
7/15/2019 : Creditors for stationery at the end .... 1,300
Study Material-2 10,100
Total stationery 13,100

Less stationery at the end (still 500
unused)
Stationery actually used .... .... 12,600
Balance Sheet
Non trading institutions should also prepare a balance Sheet in order to know the financial state of
affairs at the end of each year. Balance Sheet can be prepared if there is a Trial Balance. But in the
absence of regular trial balance, the following will be the steps:
(i) Take the previous year’s balance sheet. Adjust the figures for fixed assets, for new acquisitions)
ascertained by pursuing the payment side of the Receipts and Payment Account) and for sale
(ascertained by looking at the receipt side). The figure should be further adjusted for depreciation.
The figure now resulting will appear in the Balance Sheet.
(ii) Go through the receipts and payment and Income and Expenditure accounts and ascertain the
amount of subscription and other incomes outstanding (that is due but yet not received) and expenses
prepaid. These will be put on the asset’s side.
(iii) The amount of cash in hand and bank balance at the end of the year as disclosed by the Receipts
and Payments Account will naturally be shown on the assets side.
(iv) Compare the amount of liabilities as per previous balance sheet with payments made. If there is
any amount still to be paid, it should be entered on the liability side of the balance sheet.
(v) Go through the Receipts and Payments and Income and Expenditure Account ascertain incomes
received in advance and expenses outstanding. These should appear on the liabilities side.
(vi) Special Receipts as shown by the Receipts and Payments Account should be shown in the balance
sheet as a liability.
(vii) To the capital fund disclosded by the previous balance sheet add the surplus (or deduct the
Defict), Life Membership fees and Entrances fees if not already entered in the Income and Expenditure
Account. (If, in Examination Capital Fund is not given, it can be ascertained by deducting liabilities
from assets, on the relevant date).
Steps to prepare Income and expenditure Account from Receipts and Payments
Account
1st Step :- Ignore the opening and closing cash and Bank balances.
2nd Step :- Ignore Capital expenditure and Capital Receipts.
For instance, if cash been realised by the Building the amount will not be credited to Income and
Expenditure account. The amount will be deducted from building for balance sheet purpose. Of course,
if some proit or loss has emerged from the sale of Building it will be credited or debited to income and
expenditure Account. For example, if a Building costing Rs. 50,000 is sold for Rs. 56,000 then Rs.
50,000 will be deducted from building and Rs. 6,000 will be credited to Income and Expenditure
Account. Similarly, if money has been spent to acquire and asset, say, Furniture the amount will be
shown in the balance sheet and not debited to Income and Expenditure Account.
3rd Step :- Recenue receipts or current incomes will be found on the receipts side of the Receipts and
payments Account. These will be credited to the Income and Expenditure Account subject to the
following :-
(a)
7/15/2019 Current income relating only to the year concerned will be credited to Income and Expenditure
Study Material-2
Account. For example, if in 1994 subscription have also been received for 1993 and 1995 these amounts
should not be credited to the Income and Expenditure Account.
The amount for 1993 will extinguish a debt owing to the institution and the one for 1995 willl be
“Subscription Received in Advance” and will be shown as a liability in the Blance Sheet. The amount
will be treated as Income in 1995.
(b) The amount which is due but not yet received in cash should be brought into account. These will
be takern to the Income and treated as an asset, cash for which will be received next year.
(c) Revenue expenses will be found on the payment side of the Receipts and payments acount. These
will be takern to the debit side of the Income and Expenditure Account subject to the following :-
(i) Expenses relating to the previous or future period should not be debited to the Income and
Expenditure Account, only expenses relating to the current year should be so debited.
(ii) Expenses which have been incurred but not yet paid for must be debited to the Income and
Expenditure Account and also stated as a liability to be down in the balance sheet.
(d) Receipts of no-recurring nature (e.g. Life Memberships) should not be credited to Income and
Expenditure Account.
(e) Depreciation and other losses should be ascertained and debited to the Income and Expenditure
Account.
(f) Total the two sides and put the difference on the shorter side as surplus 9if it is to be written on
the debit side) or defict (on credit side). Surplus is added to the Capital Fund, defict is deducte.

Illustration 3:
From the following Receipts and payment Account of a club and from the information supplied, prepare
the Income and Expenditure Account for the year ended 31st December, 1994 and the Balance Sheet as
on that date.
Receipts and Payments Account
for the year ended 31st December, 1993

Rs. Rs.
To balance b/d By Slaries
250 1,200
To Subscriptions for By General Expenses By Electric
1992 Charges By Books
250 300
By News Papers

1993
1,000 200
By Postage

1994
200 100
By Furniture

Sale of old Furniture costing Rs., 100
60 400
By Balance c/d

To Rent received from use of Hall
740 50

To Profit from Entertainment
400 250

To Sale of News Papers
100 500
3,000 3,000

Dr. Cr.

Information:
(a) The club has 50 members each paying an annual subscription of Rs. 25/- Subscription outstanding
On 31st December, 1992 were Rs. 300/-
(b) On 31st December, 1993 salaries outstanding amounted to Rs. 100. Salaries paid included Rs. 100,
for the year 1992.
(c) On 1.1.1993, the Club owned land & Building valued at Rs. 16,300, Furniture Rs. 600 and Books
Rs. 500.
Solution:
Income & Expenditure Account for the year ended 31-12-1993

Dr. Cr.
Expenditure
7/15/2019 Rs. Receipts
Study Material-2 Rs.

To Salaries By Subscription
1,200 1,000

1,250
Less salaries of Addos/ or 1993 250

1992 100

By Rent received from the use of
1,200
1,100 Hall
740
By Profit on entertainment

Add salary o/s of
1993 100 400
By sale of newspapers
300
100
200
To General Expenses To Electric
Charges To News-Papers
400
To Postage

50
To loss on the sale of furniture (cost-

sale price)

To Excess of Income over Expenditure

40

300
2,490 2,490

Subscription outstanding for 1992 is calculated as follows :-
Subscription due from total members x annual subscription of each members.
50 × 25 = Rs. 1,250
Less received for 1986
= Rs. 1,000
Subscription o/s for 1993 = Rs. 1,250- Rs. 1000 = Rs. 250
Balance Sheet (Opening)

as on 31-12-1992
Liabilities
7/15/2019 Rs. Assets

Outstanding salary 100 Land and Building 10,300

Capital fund (balancing figure) 11,850 Furniture 600

Books 500

Subscription outstanding 300

Cash in hand 250
11,950 11,950
Balance Sheet as on 31-12-1993
Liabilities
7/15/2019 Rs. Assets

Salary outstanding 100 Land & Building 10,300

Subs, received in advance 200 Furniture 600

Capital Fund (operning) Less sold 100
11,850

500
Add Excess of Income over
12,150 750

250
Expenditure

300
Books 500
600
Add new purchase 100

Subscription outstanding
50
1992
250
1993
500
12,450 Cash in hand 12,450

Peculiar Items of Non-trading Concerns

1. Donations : Donation is the amount received from some person, firm, company or any other body
by way of a gift. It appears on the Receipt side of the receipt and payments account. Whether or not it
is to be posted to Income and Expenditure Account depends upon its nature. Whenever donation is
received for a specific purpose e.g. donation for Library, Building, School or College it is to be
capitalised and is shown on the liability side of the Balance Sheet. On the other hand General
Donation is treated as income.
2. Entrance Fees : It also appears on the receipt side of the Receipts and Payment Accounts. There
are two views over its treatment in accounts which are discussed below:
(a) Views in favour of Capitalising: Many feel that since the entrance fee is paid once for ever by a
member, it is not of recurring nature therefore should be capitalised.
(b) Views in favour of treating it as income: It is argued that through each member pays entrance
fee only once yet the club receives it every year because of frequent change in the membership for
some reason or the other.
In
7/15/2019 the absence of any specific instruction studentStudy
mayMaterial-2
adopt any one of the above treatment and with
the note justifying the treatment.
3. Legacies : It is like a donation and appears on the receipt side of the Receipt and payment
Accounts, it is not treated income because it is not of recuring nature. Howevrer, legacy of a small
amount may be treated as income and may be shown on the credit side of the Income and Expenditure
Account.
4. Sale of old Asset: This amount is not taken to Income and Expenditure Account. But any income
or loss on the sale of assets is taken to Income and Expenditure Account. For example if an Equipment
of Rs. 800 is sold for Rs. 680 then loss of Rs. 120 will appear on the expenditure side of Income and
Expenditure Account and the Book value of the sold equipment will be deducted out of that poarticulat
asset in the Balance Sheet.
5. Sale of Newspapers : This amount is transferred to the Income & Expenditure Account since
selling the old newspapers is a regular feature therefore it is justified to treat it as income of the
particular year.
Note : If there happens to be a case of income or of an expenses of which there appears a fund, then
expenses incurred or income earned are not taken to Income & Expenditure Account but are shown by
way of addition ( if income ) and by way of deduction (if an expense) from the respective fund e.g.
sports expenses met out of sports fund etc.
Illustration 4:
From the following information relating to Indian Cricket Club, prepare an Income and Expenditure
Account for the year ending 31st March, 1993 and the balance Sheet as at that date. The abstract of
the Cash Book for the year is as follows:


To Members Subscription To 25,000 By Upkeep of.Fields and pavilion 10,000
Members Admission fee To

Sale of old balls
1,500 By Tournament Expenses 3,500
To Hire of Ground

250 By Rates & Insurance 1,000
To Subscription for
Tournament
1,500 By Telephone 250
To Cash drawn from Bank
5,000 By Printing & Stationery 500
To Donations
20,000 By Central charges 250

50,000 By Secretary’s Honorarium 850

By Gross Seeds 100

By Bats, Balls etc. 3,500

By Lodgement in Bank 83,250
1,03,250 1,03,250

Assets at 1st April 1992 Rs. Cash at bank
15,000
Stock of ball etc. 7,500
Printing & Stationery 1,000

Subscriptions due 2,500
Liabilities at 1st April 1992 NIL
Donation and surplus on account of Tournament should be kept in reserve for a payment pavilion.
Subscription due at 31st March, 1993 Rs. 3,750: write off 50% of Bats, Balls a/c 25% of Printing &
Stationery account.
Solution
Income and Expenditure Account of Indian Cricket Club for the year ending 31st
March, 1993
Dr. Cr.
Expenditure
7/15/2019 Rs. Income

To Upkeep fo Field and Pavilion 10,000 By Subscription received 25,000

To Rates and Insurance 1,000 Less relating 1992
2,500
To Telephone 250
22,500
To Printing & Stationery (25%
Add outstanding of
of opening stock Purchase) To
General Charges Current year
375
3,750
To Secretary’s Honorarium
250 26,250
By Members Admission fee
To Grass seeds
850 1,500
By Sale of old Falls etc. By Ground
To Bat & Ball etc
150 250
3,500
1,500
Add previous Stock
7,500
11,000 (50% to be written off)
To Excess of Income over

Expenditure
5,500

11,125
29,500 29,500

Balance Sheet of Indian Cricket Club as on 31st March 1993
Expenditure Rs. Income Rs.

Capital Fund Cash at Bank 78,250
26,000
Stock of Bats & Balls etc. Printing & 5,500
Add Current years Stationery Subscription due
1,125
Excess Income over
3,750
Expenditure

11,125
37,125
Reserve for Permanent Pavilion
51,500
88,626 88,625

Working Notes:
Balance
7/15/2019 Sheet of Indian Cricket Club as Study
on 31st March 1992
Material-2
Rs. Rs.

Capital Fund (Balancing figure) 26,000 Cash at bank 15,000

Stock of Ball, Bats etc. Printing & 7,500
Stationery Subscription due
1,000
2,500
26,000 26,000
(2) Reserve for Permanent

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

Illustration 5:
The following Receipts and payments Account was prepared by the Secretary of the Holy Cricket Club
for the year ended 31st December 1993
Dr. Cr.

7/15/2019 Receipts Rs. Payments

Jan., 1 Cash in hand Balance bank 500 Dec., Rent of ground Cost of teas 180
as per Pass Book: 31 Groundsman’s charge

Deposit A/c Moving machine
1993 1993 300
Current A/c Donation Fares
1,200
Subscriptions Bank Interest
Printing and Stationery Misc
2,000
Receipts from teas Office Expenses Repair to
Contributions to fares Sale 2,200 Equipment Honorarium to 500
of Equipment Secretary 200
1,000
Proceeds of Varisty 1985 250
1,200
entertainment
Dec. Cost of Variety Entertainment 800
2,000
31, Interest on Security Balance at Bank as per Pass
50 Book Deposit A/c
@ 6% of cost
500 Current A/c
200 Cash in hand 500
300 220
1,000

2,500
600 680
220
9,550 9,550

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

Income & Expenditure Account for the year ended 31st Dec., 1993
To Groundman’s charge By Bank Interest Received
1,200 ...... 50

Add Bonus Payable 240 Add Due on Deposit 60
1,440 110

To Rent of Ground

By Donation
1,200
To Fares

500
Subscriptions received

2,000

Less Contributionto fares
200
Add due on 31-12-93 200

To Printing & Stationery 200
2,200
1,900

Less due on 1-1-93 50
Less due on 1-1-93
300
150
By Receipts from Teas 200

500
Add due on 31-12-93 40

Less Cost of Teas

300

To Misc. Office Expenses 780
By Proceeds of Variety

To Repairs to Equipment
Entertainment
1,000
To Honorarium to Secretary 600
Less Expenses
220
(Rs. 500 + 300)

To Dep. of Equipment & Machine

To
7/15/2019 Excess Income over 180 By Interest on Security
Study Material-2

Expenditure

300

190

250

1,030

800

500

100
4,790 4,790
Balance Sheet as on 31-12-1993

Due
7/15/2019 for Honorarium to Secretary Cash inStudy
handMaterial-2 220
(Rs. 500+300) Bonus to Groundman

Printing
800
Capital Fund: Capital Fund:

Opening Balance
14,000 240 Cash at bank: Deposit A/c Current
A/c (Rs. 680-680) Securities
2,500
Interest due on Deposit A/c
Add Excess pf Income 40
Subscription Due Equipment &
Manchinery:
Over Exp. Opening Balance

100 1,000
NIL

Add Purchased
10,000
2,000

60
3,000

14,100
Less Sale 300

200
2,700

Less Depreciation
500

2,200
15,180 15,180

Balance Sheet as on 1st Jan., 1993

Rs. Rs.
Honourarium
7/15/2019 Payable to Secretary 500 Cash inStudy
hand Balance at bank
Material-2 500
Deposit A/c

Current A/c (1,000-450) Securities
Due to Printing Capital Fund 50
(Balancing figure) Subscription due

2,200
Equipment

14,000 550

10,000

300

1,000
14,550 14,550

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

(it relates to 1993) 350
Add Unpresented Cheque on 31.12.1993 680 (it relates to
1993) 1,030
Amount debited to Income & Expenditure Account.
(2) Before proceeding with the solution opening and closing balances in Current Account should be
calculated as per Club’s books. Since a cheque for Rs. 450 issued last year was not presented to the
bank for payment of the end of that year the opening balance at bank as per pass book must be more
by Rs. 450 as compared to the bank balance as per Club’s books. Thus opening balance as per Club’s
books was Rs. 1,000450
= Rs. 550. Similarly closing balance at bank 9current A/c as per Club’s books) should be Rs. 680-680....
Nil.
Illustration: 6
From the following information relating to Delhi Social Club, you are required to purpose;
(a) An income and Expenditure Account (including any profit or loss on bar) for the year ended 31st
Dec., 1994:
(b) A Balance Sheet at that date.
(i) A summary of the Cash Book for the year 1994 is as follow:


Bank blalance at 18th Jan., 836 Bar Suplier 13,461
1994
Annual Subscriptions 3,668 Bar wages 1,099
Bar Tahings 15,392 Salaries and Wages 1,365
Rooms 146 office expenses 424
Income from Invertments 315 Lighting and heating 372
Sales of Invertments Rates and Insurance 287
(original Cost Rs. 263 328 Miscellaneous Expenses 303
Investments Furniture 1,400
(purchase)
on 30 June 1994 Bank Balance 900
at 31st Dec., 1994 1,074
(ii) The balance at banks on 1st Jan., 1994 represented Rs. 336 on current Account and Rs. 500 an on
deposit account. All the receipts shown in the alone summary were paid into the current account
except for on 41 deposit account interest (including in income from investments) and all payments
were made from the current account. During 1994, Rs. 300 was transferred from the current account to
the deposit account.
(iii) The following items were outstanding at 31st Dec., .
1993 1994
Rs. Rs.
Subscriptions in arreas 79 98
Salaries & Wages accured 33 41
Creditors for bar Subscribes 1,217 1,325

Stock of Stationery
50 65
Subscriptions in advance 14 26
Telephone bill 29 37
outstanding
Electricity charges 31 44
Unpaid
Debtors for bar sales 12 49
Repairs
7/15/2019 account Study9
Material-2 53
outstanding
Bar Wages accured 21 23
Stock of Coke 40 57
Rates and Insurance 62 73
prepaid
Stock of bar supplies 1,422 1,989

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

Bar Trading Account for the year ended 31st Dec., 1994
Rs. Rs.
To Stock (Opening) To Purchase 1,422 By Sales 15,429
To Bar Wages
13,569 By Stock at the end 1,989
To Bar Profit
1,101

1,326
17,418 17,418

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

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

44 By Bar Profits 1,326
To Repairs
303
To Miscellenous expenses

To Depreciation Premises Furniture

To Wxcess of Income over
150
Expenditure
125

2,465
5,527 5,527
Balance Sheet
As On 31st Dec., 1994

Rs. Rs.
Capital
7/15/2019 Fund Freehold Premises
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8,753 6,000

Add Surplus Less: Depreciation Furniture
11,218 4,050
2,465 1,950

2700

Less Depreciation
1,525 1,175

Creditors for:
Investments 4,137
Salaries
etc. 41 Stock of Stationery Stock of bar 65
Supplies Stock of Coke
Bar Supplies 1,989
1,325 Bank:
57
Telephone Deposit Account Current Account

37 Subscription due

Electricty Debtor’s for Bar sales Prepaid Rates
44 851
Repair 223
53
98
Bar Wages 1,523 49 73
23
26
Subscriptions received in advance
12,767 12,767
Working Notes:
(i) Calculation of Capital Fund
Balance Sheet
as on 31st Dec., 1993
Rs. Rs.
Outstanding Salaries Creditors for 33 Free Hold Premises
Bar Supplies Subscriptions received 6,000
1,217
in advance
Less Depreciation
14 4,000
Outstanding Telephone Bill 1,800
29
Furniture
1,800 less
Depreciation 1,400
400
Outstanding
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Creditors for Repairs Outstanding 31 Investments 3,000
Bar Wages Capital Fund (Balancing)
9 Stock of Stationery Stock of bar 56
Supplies Stock of Coke Debtors for
21 1,422
Salary Subscriptions due Prepaid
8,753 Rent etc. 40
Bank - Deposit Account 12
Current Account 79
62
500
336
10,107 10,107

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

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

(vi) Salaries & Wages Rs. (vii)

Repairs Rs.
Paid in 1994 1,365 Outstanding as on 53
31.12.94
Less : Outstanding (1993) 33 Less o/s 31.12.93 9
1,332 44
Add : Outstanding (1994) 41
1,373
(viii) Office Expenses Rs. (ix) Investments Rs.
Opening Stock Stationery 56 Balance as 31.12.1993 3,000
Paid for in 1994 424 Purchased during 1994 1,400
480 4,400
Less : o/s (1993) Phone 29 Less Disposal 263
451 4,137
Less : Stock of Stationery (1994) 65
386
Add : Outstanding for Phone 1994 37
423
(x) Light and Heat Rs. (xi) Profit as Sale of Investments Rs.

Opening Stock of Coke 40 Sales Price 328
Payments in 1994 372 Less : Value of Investments 263
412 Profit 65
Add: Outstanding for 44
Electricty 94
456
Less : Stock of Coke (1994) 57
399
Less : Outstand Electricty 31
(1993)
368

(xii) Rates & Insurance Rs.

Pavmens in 1994 287

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214
Add : Prepaid (1993) 62
276
Illustration 6
Following are the Income and Expenditure Account of a literary society for the year ending 31st Dece.,
1994 and the balance sheet as on that date:-
Income and expenditure Account for the year ending 31.12.1994

Expenidture Income Rs.
Rs.
To Expenses By Subscriptions By Entrance fees 9,700
By Entertainment:

Income 4,000
Rent 2,800 2,000

Less Cost 3,000
Printing 900

Advertisement
800
1,000
By Interest on security
4,720
Petty Expenses

220

2,000
To Excess of Income over
9,980

Expenditure 14,700 14,700

Balance Sheet as on 31st Dec., 1994
Expenditure Rs. Income
Rs.
Outstanding
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for Printing Capital Fund:

On 1-1-94
300 Govt. Securities
62,300

on 1-1-94 40,000
Add Excess of

Add Purchased
Income over Expenditure
9,980 50,000
during the year 10,000
72,280 600
Accured Interest Subscription
accured Library Books Furniture
1,300

5,200

7,200
72,980 72,980

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

As already seen, Receipts and Payments Account concentrates to items (capital and revenue)
transacted in cash during a year although, they may pertain to any period (preceeding, current or
subsequent year). But an income and Expenditure Account embodies ail the revenue items of the given
year whether dealt in cash or not. Hence the sums not dealt in cash such as accrued income or
expenses of the current year are eliminated from the later account so that the precise account of cash
received and paid for the years revenue items is obtained to draw up the former account. Any cash
received and paid against the previous and current year’s income and expenses is found from
adjustments
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andMaterial-2
Expenditure Account.
Receipts and Payments Account for the year ending 31.12.1994

Receipts Rs. Payments Rs.
To Balance b/d (balancing figure) By Cost of Entertainment 3,000
To Subscription To Entrance Fees
By Rent
To Entertainment To Interest
2,800
12,000
Less Outstanding 400
10,000 2,400
2,000
31-12-1994
4,000
By Printing ....
1,900 900
Less Outstanding 3300

On 31-12-1994 600
By Advertising
By Petty Expenses
By Outstanding Creditors for last 800

year 220
By Furniture
By Library Books
By Investment 1,700
By Balance c/d 1,300
as per balance sheet 1,200
10,000
8,680
29,900 29,900

Working Notes

Subscription : Interest on Security
Income 1994 9,700 Income 1994 2,000
Less Outstanding on 31-12-1994 1,300 Less Accrued but not received on 31- 600
12-1994
8,400 1,400
Add outstanding 1-1-94 1,600 Add Accrued but not received on 31- 500
12-93

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Library Books : Furniture :
On 31-12-94 On 31-12-1994 7,200
5,200
Less on 1-1-1994 4,000 Less on 1-1-1994 5,900
Purchase during the year 1,200 Purchased during the year
1,300
Illustration 7:
When Receipts and Payments and Income and expenditure Accounts are given and you are required to
prepare the Balance Sheet
The Following particulars relates to the National, Sports Club :
Income and Expenditure Account for the year ended Dec., 31st 1994
Rs. Rs.
To Salaries 4,500 By Entrance Fee By Subscription 31,500
By Rents
To Printing & Stationery 6,600 40,800
To Advertising 4,800 12,900
To Audit Fees 1,500
To Fine Insurance 3,000
To Depreciation on sports equipment 27,000
To Excess of Income over 42,900
90,300 90,300

Receipts and Payments Amount or h fetaer ended December 31 1994

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

The
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pavilion Rs. 132,000 sports equipment Rs. 75,000 an
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Furniture and Fixture Rs. 12,000. Subscriptions in arrear on that date were Rs. 2,400.
Prepare the Balance Sheet on December, 31 1995
Balance Sheet as on December 1995

Liabilities Rs. Assets Rs.
Subscription received in advance 1,200 Club Grounds & Pavilion Sports 1,32,000
Equipments Furniture & Fixture
Salary outstanding 1,500 48,000
Subscriptions outstanding Cash in
Audit Fees outstanding 1,500 hand 12,000
Capital Fund Rent received outstanding Fire 2,400
2,32,8000 Insurance prepaid Investments
23,400
Add excess of income over
1,500
expenditure
2,75,700 600
42,900
60,00
2,79,900 2,79,900
Working Note:
Balance Sheet as on 31st Dec.,

Capital Fund (Balancing figure) 2,32,800 Club Grounds & pavilions 1,32,000
Printing & Stationery outstanding

2,32,800 Sports equipment 75,000

Furniture & Fixture 12,000

1,200 Subscription outstanding Cash in 2,400
hand
2,34,000 2,34,000
Note :- Printing and stationery over paid for the last years outstanding bills; that in respect of
Insurance is assumed for the next year. Expenses not paid or under paid are liabilities.
2 LESSON 9 FINANCIAL STATEMENTS : THEIR

NATURE, USES AND LIMITATIONS
LESSON 9

FINANCIAL STATEMENTS : THEIR NATURE, USES AND LIMITATIONS
The term ‘financial statements’ refer to those statements which incorporate the accounting data in a
purposive and useful manner. In India, such statements, commonly prepared for supplying to the
outsiders, include the Income statement and the Position Statement which are widely known by the
names Profit and Loss account and Balance Sheet respectively. In addition to these two, the
management, for purposes of making evaluations and financial decisions, also prepares many other
statements like funds-flow statement, statement of retained earnings, statement containing important
ratios, statement highlighting various achievements, etc. According to the International According
Standards Commit (ISAC), financial statements include : a balance sheet, income statement, notes and
other statements and explanatory material which are identified as part of the financial statements.
Maintenance of Accounts:
Tracing back the history of accounting we find that it is as old as money - h only yardstick of accounting
data. Chanakya highlighted the end for maintain of accounting and their audit long back in his well
known and historical published work “ Arthashastra”. The single entry system, also called as the Indian
system of accounting, is as scientific and systematic as the on developed by he Westerns. The present-
day system of accounting, widely known as the double-entry system, was developed by Luccas Pacioli
of Italy far back in the 15th century. But modern uses of accounting data could b be developed only
during the last few dads when after the industrial revolution, complex industrial units with heavy
capital investment am into being and the various management experts like Taylor, Fayol and others
emphasised the need for improving h management of financial resources, efficiency, increasing
productivity, And thus maximise output and minimis input. In this task, h ‘American Institute of
Certified Public Accounts” (AICPA) has played a mutable part. Further modern accounting machines an
electronic computers have tremendously added the ‘use value of the accounting data an and h hence
or their proper recording and maintenance.
According to AICPA accounting is “the art of recording, classifying and summarising in a significant
manner and in terms of money transactions an events which are, in part at least, of a financial
character, and interpreting the results there”. Thus, important attributes of accounting are:
(i) events and transactions of a financial nature, even though only partly of this type are record-
events of a non-financial nature, say the passing of control from on person of another, can no be
recorded;
(ii) the recorded must b in such a way as of b able of portray the significance of all transactions and
events individually and collectively, class by class and as a whole-this involves both analysis and
summarisation;
(iii) the parties concerned must b able p gather the up message of the results as embodied in the
statements finally prepared. Accounting knowledge should also help a person understand h meaning of
the financial statements of any firm or institution placed before him.
Thus, maintenance of accounts, in on form or the other, dates back to the origin of human civilisation
and man’s taking-up of trade activities. It developed with the growth of h single entry system and was
further improved upon by the invent of the double entry system of accounting. But the double entry
system of accounting itself does no make i obligatory or any organisation, business or not-business,
https://sol.du.ac.in/mod/book/tool/print/index.php?id=1561 to
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keep
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memory, a pie of evidence in case of disputes and as a matter of convenience. But with the growth of
civilisation, innovations and transformations in
trade, its activities and the manner of organising, it is was felt more and more necessary to maintain
proper accounting records. In the course of time different forms of organisations, namely company,
partnership, cooperative societies, clubs and other associations go legal recognition., It was as early as
in the 18th century when h New York stock exchange and the Securities Exchange commission in USA
first recognised h importance of protecting the interests of ever increasing share holders;’ other
investors and their funds invested in any form in corporate firms (all companies in India). The exchange
mad it obligatory on the part of the member firms to circulate publish accounts of its shareholders so
that thy could know the state of affairs and true financial position of the firms(s) in which hey invest
their funds.

Thus, through the efforts of organisations like stock exchanges, investors’ or shareholders’
organisations and growing awareness of the governments, today, we fin that in almost every civilised
country there are laws which make i obligatory or organisation, both business and nonbusiness, to
maintain proper accounts and distribute them in a given form to those who have invested heir funds in
them or otherwise have an interest in their management. We in India find that Indian Companies Act,
cooperative Societies Act Income Tax Act, T. Several status, rq u i r e d corporate firms, associations
and other bodies corporate of maintain proper books of accounts. Some of these statues even require
them of circulate copies of its accounts among its members periodically. Generally for this purpose
most of the organisations have an independent accounting department. Besides maintaining proper
accounting records one of the fundamental responsibilities of a modern accounting department is the
preparation of various financial statements and reports to be used by management and external parties
are generally interested in he financial statements.

(a) Shareholders : In the cas of corporate bodies, Shareholders an learn about the results of
operations and financial position of the company only thought the annual statements showing the
profit earned (for loss suffered) and the assets and liabilities.
(b) Investors: Those who wan to invest their funds in the shares or other securities of a corporate
body are also naturally interested in the financial statements of know how safe the investment already
made is and how safe the proposed investment will be.
(c) Creditors : Generally supplies of goods to various organisations do so on credit, thy would also
like to be satisfied that they will b paid on time, The financial statements greatly hp them in properly
assessing the capability of the organisation to di so.
(d) Labour : Workers being entitled to payment of bonus, which depends on the size like to b satisfy
that the bonus being paid d to them is correct, they are much interested in knowing the profit earned
or loss suffered by the firm. This knowledge also helps them in conducting negotiations for future ages.
(e) Government: Financial statements also helps the state governments in compiling heir national
accounts. Such statements are of obvious importance for them in ascertaining the income-tax
realizable.
(f) Researchers : As a mirror to business condition, the financial statements are of immense value
or conducting research suits into business affairs, thus statements are, therefore, of great interest to
scholars undertaking research pertaining to aspects such as financing, profitability liquidity etc.
Proposed and Uses of Financial Statements:
Financial
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As discussed above, those statements are frequently used for studying different financial aspects,
relating of an organisation, by shareholders, creditors, financial analysis, government agencies, trade
unions banks an even management. In every cas thy must furnish the receipt in with proper and
sufficient information to enable him to make an gent decision or judgement concerning some aspect
of the entity. About the purpose of financial statements a group of progressive American Accountants,
some forty years ago, rightly stated hat “financial
statements are prepared or the purpose of presenting a periodical review or report on progress made
by the management and deal with the status of h investment in the business and the results achieved
during the period under review . Thy reflect a combination of recorded facts, accounting conventions,
an personal judgements, an the judgements and conventions applied affect them materially. Thy
soundness of the judgement necessary depends on the competence and integrity of those who make
them and on their adherence to generally accepted accounting principles an conventions”
Again modern account maintain that accounting is useful for the purpose of: (a) formulating,
implementing and approving he policies;
(b) bringing our coordination among different activities: (c) planning and control of day to day
operations;
(d) accounting for responsibilities within the business; (e) studying specific projects or phases of a
business;
(f) measuring he financial position and income of the business; and
(g) reporting on he stewardship of the business to the owners and outsiders such as creditors,
government agencies, etc.
In brief financial statements are prepared with h object of transmitting reliable an useful accounting
information to those who and it, both within and outside the organisation, and that proper us of the
information so transmitted i hp the recipient in making a sound decision.
But, here , we must be aware of the fact that there are no standardised forms which may be adopted
by all industrial, commercial and other organisations, for presenting their accounting information and
preparing financial statements, as consequence, the classification of some of he financial statement
items varies widely. Such a variation is further widened buy the factors like;
• managements’ wishes;
• intended use of he statements;
• accounts’ knowledge, training experience and his attitude towards such statements;
• deviation from the generally accepted accounting principles concepts and changes in terminology.
So, frequently, a researcher or an analyst may desire to recast and rearrange h accounting data in
accordance with his requirements, views and the purpose of analyses.
Accounting is widely accepted as an art. It is also claimed to be a science, but an inexact science. The
more we practise it the better we are in accounting and hence financial statement preparation.
Financial statements reflect the opinion, experience an judgement of the accountant and the
management. Thus, the estimated life an the method of depreciations to be used in the valuation of
pant and equipment, the method of inventory valuation, the valuation of intangibles (patents, goodwill
et.) are some of the areas which are largely influence by personal opinion and value judgements. As a
result equally competent accountants, when given the same of fats. May arrive at different results.
Imitations of financial statements:
An
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of the recorded facts of business transactions. Here
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accounting concept and conventions as also the personal judgements of the accountants play an
important roe. As a consequence e, we experience the following imitations of the financial
statements.
1. The allocation of revenue and costs to an accounting period involved personal judgment. The
problem involves the achievement of satisfactory (but never a perfect) matching of costs with revenues
Other factors that tend to make statement data uncertain include the existence of contingent assets
and liabilities.
2. The e statements show exact rupee amounts, which give an impression of finality and precision.
Rarely does the stated value of an asset represent the amount of cash that would be realized on
winding up of the business, even the cash balance would be reduced buy the expenses incidental to the
liquidation process. For example, a patent, trade mark, or organisation costs may be stated, due to a
management’s policy, at the conservative value of rupee one : in a liquidation a large sum might b
realised on such assets.
3. Both the basic financial statements, namely balance sheet and profit and loss account, reflect
transactions that involve rupee values of many dates. Du to continuous inflationary pressure on the
economy, prices have ben showing an increasing trend. As a result many industrial pants established
some forty years ago cannot be replaced today even at four times the original historical cost shown on
the balance that. The depreciation charge against current revenues by companies using pre-war plants
is less than the depreciation appropriated on a replacement cost basis. The balance sheet itself does
not indicate the current economic realities.
4. Non-monetary factors which too have a bearing on he working of an organisation, cannot b be
communicated or shown on the financial statements. Such factors include sources and communicated
or shown on the financial statements. Such factors include sources and commitments for materials,
merchandise, and supplies, the reputation, and prestige of the company with the public : h credit
rating of the company; and the efficiency, loyalty and integrity of management an employees,
Contingent assets and liabilities customarily are not, and usually an no b, stated definitely in rupees.
The e forgoing discussion of h imitations of financial statements shown their tentative character under
norma or peacetime conditions. It should b evident that financial statements are still more tentative
when abnormal or wartime conditions prevail.
The variations complained in accounting classifications, practices, opinions and judgements can, to a
are extent, b checked by adopting the following our principles of presenting accounting information :
(a) Classification: the acts figures and items recorded must b grouped in suitable groups or
classification.
(b) Arrangement : The data should be arranged in a manner such that individual items, classes,
totals highlight important facts, events and rations, if any,
(c) Order : The data should be so presented as to bring into focus the important figures, such as net
profit on cost of materials consumed, product sales, etc. in a profit and loss account.
(d) Descriptions : Instead of taking titles verbatim from the edger there should be proper headings
or group names. Also i must b ensured that description of amounts are both accurate and
understandable.
3 LESSON 10 DISSOLUTION OF PARTNERSHIP

FIRMS
LESSON 10

DISSOLUTION OF PARTNERSHIP FIRMS

Dissolution
According to Section 39 of Partnership Act of 1922 “ the dissolution of partnerships between all the
partners of a firm is called dissolution of the firm”.. In the case of dissolution of a firm, an and is put
to he business of the firm, assets are raised, the liabilities are paid of, and accounts of a the partners
are settled.
Dissolution of a firm differs from dissolution of a partnership. When a partnership is formed for a
specified terms or venture; it is dissolved on expiry of h term or completion of the venture. Similarly,
death, retirement or insolvency of a partner results in the dissolution of the partnership, but the
remaining partners may continue to run the business in pursuance to an express or implied contract to
that effect. If they do not do so, the firm automatically stands dissolved. The dissolution of a
partnership need not necessary lead to dissolution of the firm but dissolution of a firm necessarily
involves dissolution of partnership also. Dissolution of the firm in addition to the dissolution of
partnership takes place when;
(i) he partners agree that the firm be dissolved (Sec. 40);
(ii) all the partners or a the partners except one becomes insolvent (Sec, 41); (ii) the business of the
firm is declared illegal (Sec. 41);
(iv) in cas of partnership at will, a partner gives notice of his intention of dissolve the firm (Se, 42);
and
(v) the court orders dissolution of the firm under any one of the following circumstance (Se. 44): (a)
Where a partner becomes of unsound mind;
(b) Where a partner is permanently incapable of performing his duties as a partner;
(c) Where a partner is guilty of misconduct affecting the business:
(d) Where a partner wilfully or persistently commits breach of partnership agreement: (e) Where a
partner transfer his entire interests to a third party;
(f) Where the business cannot the carried on except at a loss; and
(g) On any just and equitable ground.
Settlement of Accounts
According to Section 48 of the Partnership Act, he accounts; unless otherwise agreed upon, are settled
in the following manner:
(a) losses including deficiencies of capita, shall be paid first out of profits, next out of capita and
lastly, if necessary, by the partners individually in the proportions in which they are entitled to share
profits.
(b)
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capital, shall be applied in the following manner and order:

(i) in paying the debts of the firm to third parties;
(ii) in paying to each partner rateably what is due to him from the firm for advances as distinguished
from capita;
(iii) in paying to each partner rateably what is due to him an acccunt of capital; an
(iv) the residue, i any, shall b divided among the partners in proportions in which thy are nit to share
profits.
Thus on dissolution of a firm, sa prods of the assets of the assets (including that of Goodwill) and any
sums contributed by h partners to make up deficiencies of capital must b applied:
1. In paying debts due of third parties (including debts d of partners’ spouses);
2. Remainder, in paying partners’ advances (loans) mad by hem over and above their capital
contributions. If the balance is not sufficient to pay h advances fully, ratable payment should b made.
In cases a partner has a debit balance in his capital account, sufficient amount should be transferred to
his capita account from his advance account to make up the debit balance before allowing it of rank
for payment among with advances from other partners.
3. The residue remaining still b used in paying of partners the sums due to them on account of
capitals. To arrive at the sums due to partners on capita accounts, the residue si remaining should b
compared with the total of he capitals (after adjustment of accumulated profits and losses) of a he
partners.The difference between the two should be transferred to heir capita accounts in heir profit
sharing ratio.
Firm’s Debts and Private Debts
Where there are join debts from the firm, and also separate debts due from any partners in his
individual capacity, the legal position as to settlement of such debts is as follows:
(a) Debts of the firm should b paid first our of he property of he firm, and if there is any surplus,
then he share of each partner should be applied in payment of separate debts.
(b) Private property of a partner must be applied in payment of his private debt, and the surplus, if
any, in payment of debts of h firm.
Accounting Treatment on Dissolution
On dissolution he boos of accounts of h firm will have to b finally closed. The procedure is of open
Realisation Accounts and take the following steps;
1. To Close Asset Accounts : Transfer a the assets except ash, Bank and fictitious assets like debit
balance of P & A/c, Advertisement, etc.) at book values to newly opened Realisation Account. The
entry will be:
Realisation A/c Dr.
To Various Assets Accounts
(Transfer Book debts at gross value, i.e. wihou deducting provision or Bad and Doubtful Debts, f there
is cash in hand on the date of dissolution, transfer i of Bank Ac. reat Goodwill like any other Assets).
2. To Close liability Accounts : Transfer a he liabilities due to third parties of Realisation Account
(liabilities due to partners should not be so transferred) at book values. The entry will be : Sundry
liability A/c Dr.
To
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3. To Close Fictitious Assets Accounts: Transfer a the liabilities Assets A/s to partner capital or
current A/c
The entry Will be
Partners’ Capital A/cs Dr.
To Realisation A/c
To Advertisement etc.
4. To Close Provision or Reserve : (created against an asset): Transfer provision or Reserve
Accounts to
Realisation A/c. The entry will be:
Provision A/c Dr.
To Realization A/c
5. To Realise Assets :
(1) When hey are sod in he marker, the entry i b
Bank A/c Dr.
To Realization A/c
(2) When taken over by on or more partners
Partners’s Capitals or (Current A/c) Dr.
To Realisations A/c
(3) When taken over by a creditors on full or payments-No entry will be passes (see point ‘c’ below)
6. To pay off liabilities due to third parties
(a) When paid in cash, the entry will be
Realisations A/c Dr.
To Bank A/c
(b) When partner agrees to discharge a liability
Realisation A/c Dr.
To Partner’s Capita A/c
(c) When a liability is discharged by transferring an asset (other than cash an Bank at book value or
revised, he entry is made by net amount arrived at after deducting he amount of the asset so
Transferred from the gross amount of liability to be paid, The entry will be :
To Bank A/c
Net amount = Gross Amount of liability - Asset transferred
7. Net deal with the expenses on dissolution
(1) When he expenses are to be born by h firm the entry will be
To
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(2) When the expense to b paid at a fixed rat to one of the partners who has contracted to bear a the
expenses of dissolution, no entry for actual expenses incurred will be made. However, the entry for the
amount paid at fixed rate to he partner will b :
To Partners’ Capital A/c or Current A/c
Alternatively, the actual expanses paid by a partner may be treated as drawings an in addition to entry
made above or more entry is passed. The entry will be:
Partners Capita or current A/c Dr.
To Bank A/c
(3) When expenses are borne by one of the partners in his personal capacity, no entry will be passed.
8. To Close Accumulated Profits and Reserve A/c (not being Reserves of Provisions against assets)
: Transfer accumulated profits and reserves to the capita or current A/cs. of the partners. The entry
will be :
Reserve A/c Dr.
To Partners’ capital or current A/cs
9. To deal with unrecorded dissolution
(1) When he unrecorded assets is realised in cash, the entry will be: Bank A/c Dr.
To Realisations A/c
(2) when the unrecorded asset is taken over by one of the partners, he entry will be : Partners Capital
or Current A/c Dr.
To Realisations A/c
There will be no transfer entry for such assets’ A/s as they do no appear in the books
10. To Discharge Unrecorded liabilities

(1) When paid in cash, the entry will be:
Realisation A/c Dr.
To Bank A/c
(2) When taken over by one of he partners, he entry will be : Realisations A/c Dr.
To Partner’s capital or Current A/c
11. To Close Realisation A/c
Realisation A/ will disclose their profit or loss on dissolution. The profit or loss is shared by the
partners in their profit sharing ratio by transfer to their capital or urrent A/cs. The entry will be : In
the case of profits
Realisation A/c Dr.
To Partners Capital or Current A/c
In the case of loss
Partners’, Capital A/c or Current A/c Dr.
To
7/15/2019 Realisation A/c Study Material-2
12. To pay off advances due to partners

On making paymnet to partners for advance due to them, the entry will be: Partners Advances (loans)
A/c Dr.
To Bank A/c
(When a partner has a debit balance in his apital A/c, the loan amount equal to the debit balance will
be transferred to the Capital A/c of the partner and only the balance will be transferred to the apital
A/c of the partner and only the balance will be paid).
13. To Close Partners’ Current A/cs
Partners, Ccurrent A/ balances (Dr. or Cr.) should be transferred to their respective Capital A/cs prior
to final distribution of cash amongst the partners.
If Current A/cs show credit balane, the entry will be .
Partners’ Current A/cs Dr.
To Partners’ Capital A/c
If current A/cs show debit balances, the entry will be :
Partners’ Capital A/cs Dr.
To Partners Current A/cs
14. To Close the Capital A/cs of the Partners
In the end any credit balance standing in the capital A/cs is paid, the entry for it will be: Partners
Capital A/cs Dr.
To Bank A/c
If the capital acccount of a partner shows a Debit balance in the end, he will be required to bring in
cash to make up the debit balance. The entry will be :
Bank A/c Dr.
To Partners Capital A/c
Illustration
P.Q. and R sharing profit and losses in the ratio of their capitals agreed upon dissolution of their firm on
31st December, 1994. On that date their Balance Sheet was as under:
7/15/2019Capital A/cs Building.

Rs. P-50,000 Rs. Plant &
Machinery
Q-40,000
25,000

Less Prov. for
R-10,000 Depreciation
5,000

Reserve Fund 20,000

1,00,000

6,000
Furniture
10,000
’s
7/15/2019 Loan 10,000 Investment
Study Material-2
10,000

Mrs. P’s Loan 5,000 9,500
Less Fluctuation Fund 500

Joint Life Policy Fund 15,000

Current A/cs Rs. 20,000
Motor Vehicle

P-6,000 15,000
Joint Life Policy
10,000

R-4,000
Debtors

10,000
Sundry Creditors 15,500 15,000

Less
Less provision 500 15,000 Provision
1,000
11,000

For Discounts 15,000
Stock at Invoice
Bills Payable 1,000
Price Rs. 20,000

Outstanding Expenses 100
Less Unrealised
profit 5,000
5,000

Unexpired Insurancce Bills 5,000

Receivanle Q’sCurrent A/c
Cash in band
1,000

Ccash at Bank 9,400
1,77,000 1,77,000

Following further information is given :
1. Life Policy was surrendered for Rs. 13,000
2. Debtors raised 14,000 (including Rs, 1,000 in respect of debt written off as bad earlier).
3. P took over half of Mrs. Fs Loan and for the balance Mrs. P acccepted furniture,
4. Rebate of Rs. 200 was received on retiring all the bill payable immediately.
5.
7/15/2019 There was an unrecorded Liability of Rs 500 Study Material-2
6. Stock-in-Trade which included an obsolete and valueless item of Rs. 1,000 was taken over by P & Q
equally at 20% discount.
7. A machine, completely written off from the books and which was estimated to realise Rs. 3,000
was taken over by Q.
8. Goodwill realised Rs. 4,000, Building Rs. 60,000, Plant and Machinery Rs. 15,000, and investments
Rs. 8,500.
9. Realisation expenses amounted to Rs. 1,000. Half of the expenses were borne by P.
10. The partners presented the Motor Car of the firm to the manager of the dissolved firm in
recognition of his services.
Pass the entires neccessary to close the books, assuming that each partner finally settled his A/c with
the firm.
Solution
Journal
1994
7/15/2019 Study Material-2 Rs. Rs.

Dec. 31 Realisation A/c Dr. 1,73,100

To Building A/c 56,000

To Paint & Machinery A/c 25,000

To Furniture A/c 6,000

To Investments A/c 10,000

To Motor Vehicle A/c 20,000

To Joint Life Policy A/c 15,000

To Bectors A/c 16,000

To Stock A/c 20,000

To Unexpired Insurance A/c 100

To Bills Received A/c

(Being transfer of various assets to
Realisation A/c at book values)
15,500
Sundry Creditors
A/c Dr. Bills
11,000
payable A/c Dr.
Mrs. P’s Loan A/c
Dr. Outstanding Expenses
5,000
A/c Dr.

To Realisation A/c
1,000

(Being various liabilities transferred to Realisation A/c)


7/15/2019 Study Material-2 37,500
15,000
1994 Joint Life Policy
Fund Dr. Provision

for Depreciation
Dec. 31 Dr. Provision for Bad and Doubtful
Debts Dr. Provision

for stock Dr.
Investment Fluctuation 5,000
Fund Dr.
To Realisation A/c 1,000

(Being various provision transferred to Realisation A/c) 5,000
Realisation A/c Dr.

500
To Reserve for Discount on Crs.

(Being Reserve for discount transferred to Realisation A/c
26,500
500

500
Bank Dr. 1,19,500

To Realisation A/c 1,19,500 (Being the amount realised cfrom sale
of assets.)
Building .... 60,000
Plant
Machinery .... 15,000
Debtors .... 14,000
Goodwill .... 4,000
Investments .... 8,500
Bills
Receivable .... 5,000
Joint Life
Policy .... 13,000
1,19,500
Realisation
7/15/2019 A/c Dr. Study
27,300
Material-2
To Bank 27,300 (Being the payment of various liabilities)

Bills Payable 10,800 (Rs. 11,000-200 Rebate,
Creditors 15,000
Outstanding Expenses 1,000
Unrecorded Liability 500
27,300
Realisation A/c Dr. 2,500
To P’s Current A/c 2,500 (Being half of Mrs. P’s loan taken over by
P.)
P’s Current A/c Dr. 6,000
Q’s Current A/c Dr. 6,000
To Realisation A/c 12,000 (being stock taken over by P and Q)
Q’s Current A/c Dr. 3,000
To Realisation A/c 3,000 (being machine taker over by Q)
P’s Current
A/c Dr.
Q’s Current A/c
Dr. R’s Current
A/c Dr. To
Realisation A/c
(Being Motor Car presented to manager
Loss before in profit sharing ratio.)
Realisation
A/c Dr.
To Bank
(Being realisation expenses paid Rs, 1,000 - 500 borne by P)
Realisation
A/c Dr.
To P’s Current A/c To Q’s Current A/c To R’s Current A/c
(being profit on realisation transferred to partners Current
A/cs)
Bank
Dr.
To Cash
(Being the amount of cash in hand transferred to Bank)
P’s
7/15/2019 Loan
Study Material-2
Dr.
To Bank
(Being P’s loan paid off)
Reserved
Fund Dr.
To P’s Current A/c To Q’s Current A/c To R’s urrent A/c
(Being transfer of Reserve Fund to the Current A/cs of the
partners in their profits sharing ratio)
P’s Current
A/c Dr. R’s
Current A/c
Dr.
To P’s Capital A/c
To R’s Capital A/c
(Being transfer of credit balances in P and
R’s Current A/cs to their Capital A/cs)
Q’s Capital
A/c Dr.
To Q’s Current A/c
(Being transfer of.Q’s Current A/cDebit balance to this
Capital A/c)

10,000
8,000
2,000
20,000
500
500
” 9,600
4,800
3,840
960
” 1,000
1,000
10,000
10,000
” 10,000
5,000
4,000
1,000
” 2,300
3,960
2,300
3,960
” 14,160
14,160
”P’s Capital A/c Dr.52,300
Q’s Capital A/c Dr.25,840
R’s Capital A/c Dr.13,960
To Bank 92,100
Note 8 : No entry for furniture takern over by Mrs P in satisfaction of balance of her loan [half having
been takern over by Mr.P] will be passed. Here furniture realised only an amount equal to the amount
of loan satisfied by its transfer.
2. In case where Current A/cs of the partners are not in use, their Capital A/cs should be debited or
credited.
Ledger Accounts
Realisation Account
Dr. Cr.
1994 Rs. RS. Dec.31 To Sundry
Assets By Sundry Liabilities:
Building 56,000 Creditors 15,500
Plant & Machinery 25,000 Mrs. P’s loan 5,000
Furniture 6,000 Bills Payable 11,000
Investments 10,000 Outstanding
Motor Vehicle 20,000 Expenses 1,000 32,500

Joint Life Policy 15,000 By Provisions :
Debtors 16,000 Joint Life Policy Fund 15,000
Stock (LP.) 20,000 Provision for
Unexperied Insurance 100 Deprn. 5,000
Bills Receivable 5,000 1,73,100 Provision for Debtors 1,000
To Reserve for
”
7/15/2019 Discunts Crs. 500 Provision for Stock 5,000
Study Material-2
To P’s Current A/c 2,500 Inv. Fluctuation Fund

500 26,500 (Half of Mrs. P’s Loan) By Bank:
” To Bank: Building 60,000
Bills Payable 10,800 Plant & Machinery 15,000
Creditors 15,000 Debtors 14,000
Outstanding Expenses 1,000 Bills Receivables 5,000
Unrecorded Liability 500 27,300 Investments 8,500
Joint Life Policy 13,000

To Bank (Realistation penses) 500 Goodwill 4,000 1,19,500
ex

” By P’s Current A/c
To Profit trans ferred

to:
Stock 6,000

16,000

Car 10,000

4,800

By Q’s Current A/c
P’s Current A/c Q’s
Current A/c R’s 3,840
Current A/c
Stock Machinery Car 6,000
960 9,600 By R’s Current A/c
3,000 17,000
Car
8,000

2,000

2,13,500 2,13,500

Bank A/c
Dr. Cr.
1994
7/15/2019 Rs. 1994 Study
Material-2 Rs.

Dec. To Balance b/d 9,400 Dec. By Realisation A/c
Bills Payable

Creditors
31 To Cash (Balance in 31 Outstanding 10,800
hand/transferred) Expenses
1,000
Unrecorded Lib. By

Realisation A/c 15,00
(Realisation Exp.)

By P’s Loan

By Capital A/cs

To Realisation A/c
1,000
P’s Q’s R’s

27,300
Building
500

60,000
Plant & Machinery

15,000 500
Debtors

14,000 10,000
Bills Receicable

5,000
Investments

8,500 52,300
Joint Life Policy

13,000 1,19,500 25,840
Goodwill
92,100
4,0001 13,960
1,29,900 1,29,900
Current Accounts
Dr. Cr.
1994 P Q R1994 P Q R

Rs. Rs. Rs. Rs. Rs. Rs.

Dec. To Balance b/d By Balance b/d

To
7/15/2019 Realsisa tion A/c 5,000 Dec., By Reserve
Study Fund
Material-2 6,000 4,000
(Stock)
6,000 6,000 5,000 4,000 1,000
To Realisation A/c By Realisation A/c.
(Mrs. P’s)
(Machinery)

3,000 2,500 — —
LoanBy Realisation
To Realisation A/c
A/c
(Car)
(Profit)
10,0008,000 2,000 4,800 3,840 960

To Capital A/cs
By Capital A/cs

2,300 — 3,960 — 14,160 —
18,30022,0005,960 18,30022,0005,960
Capital Accounts
P Rs. Q Rs. R Rs. P Rs. Q Rs. R Rs.
1994 1994

Dec. Dec.

31 To Current A/c — 14,160 — 31 By balance b/d 50,00040,0000,000
1

To Bank 52,30025,840 13,960 By Current A/c 2,300 3,960
—
52,30040,00013,960 52,30040,0003,960
1

Alternative Method:
Under this method, the treatment differs from the one already discussed only in respect of the
following:
1. Assets and liabilities (including provisions) are not transferred to Realisation A/c. Worthless Assets,
however, are transferred to Realisation A/c. at book accounts
2. Provisions are transferred to the resoectice asset or liability accounts.
3. On realisation of an asset, the sale proceeds are credited to the asset account. The balance
remaining in the account, being profit or loss, is then transferred to Realisation A/c. In case a partner
takes over an asset, the asset account is credited with the value at which the asset is taken over and
capital A/c. or Current A/c. of the partner is debitede.
4.
7/15/2019 On payment of liabilities, the liability account is Material-2
Study debited and cash account credited. Any balance
remaining in the liability account is then transferred to Realisation A/c.
Under this method, in the solution to the previons illustration problem. Realisation A/c. and other
relevant accounts would have appeared as under:
Realisation A/c
Dr. Cr.
1994 Rs. 1994 Rs.

Dec. 1 To Plant & 5,000 Dec.31.By Building 4,000
Machinery

3,500 ”By Joint Life Policy 13,000
” To Furniture

1,000 ”By Bills Payable 200
” To Investments (Rebates) By Bank:

Bad Debts Recovered
3,000 ”
Goodwill
” To Stock

By Q’s Current A/c

2,000

” To Debtors

(Machinery)

100 1,000
” To Unexpired
5,000
Insurance
4,000

500
” To Bank

500 1,000
Unrecorded Liability

Realisation Exp. To Profit
Transfered to
P’s Current A/c Q’s
Current A/c R’s Current
4,800
A/c

3,840

960 9,600
25,200 25,200
Bank A/c.
Dr.
7/15/2019 Study Material-2 Cr.
1994 Rs. 1994 Rs.

Dec. To Balance b/d 9,400 Dec. By Bills Payable 10,800
31
”To Cash 1,000 ” By Sundry Creditors 15,000.
”To Building 60,000 ” By Outstanding Exp. 1,000
”To Plant & 15,000 ” By Realisation A/c
Machinery
”To Debtors 13,000 ” Unrecorded
”To Bills Receivable 5,000 Liability 500
”To Investments 8,500 ” Realisation Exp. 500 1,000
”To Joint Life Policy 13,000 ” By P’s Loan A/c 10,000
By Capital A/cs. P
”To Realisation A/c ”

Bad Debts 52,300
Recovered 1,000 Q 25,840
Goodwill 4,000 5,000 R 13,960 92,100
1,29,900 1,29,900
Current A/cs.
1994 PQ R1994 PQ R
— 5,000 — Dec. 6,000 — 4,000
Dec., 31 To Balance By Balance b/d By
b/d Reserve Fund By
6,000 6,000 ” 5,000 4,000 1,000
Mrs. P’s Loan By

Realisation A/c
” To Stock
10,0008,000 2,000 ” 2,500 — —

” To Motor Vehicle
— 3,000 — ”By Capital A/c 4,800 3,840 960

” To Realisation A/c

(Match)
2,300 — 3,960 ” — 14,160 —

” To CapitalA/c 18,30022,0005,960 18,30022,0005,960

The
7/15/2019 Capital A/cs, will be ahown as in the previousStudy
solution.
Material-2
Building A/c.
Dr. Cr.
1994 To Balance b/d 56,000 1994 By Bank A/c 60,000

Dec. 31 To Realisation A/c 4,000
60,000 60,000
Plant and Machinery A/c
1994 1994

Dec. 31 To Balance b/d 25,000 Dec. By Provision for Depreciation 5,00,
31

By Bank 15,000

By Realisation A/c 5,000
25,000 25,000
Furniture A/c
1994 1994

Dec. 31 To Balance b/d 6,000 Dec. By Mrs. P’s Loan 2,500
31

By Realisation A/c. 3,500
6,000 6,000
Investment A/c
1994 1994

Dec. 31 To Balance b/d 10,000 Dec. By investment Fluctuation Fund 500
31 A/c

8,500
By Bank
1,000
By Realisation A/c
10,000 10,000
Motor Vehicle A/c
1994
7/15/2019 1994 Study Material-2

Dec. 31 To Balance 20,000 1994 By P’s Current A/c By Q’s Current10,000
A/c By R’s Current A/c
8,000
2,000
20,000 20,000

Dr. Cr.
Joint Life Policy A/c
1994 1994

Dec. 31 To Balance b/d 15,000 Dec. By Joint Life Policy Fund 15,000

To Realisation A/c 13,000 By Bank 13,000
28,000 28,000
Debtors A/c
1994 1994

Dec.l By Balance b/d 16,000 Dec. 31 By provision for Debtors 1,000

By Bank 13,000

By Realisation A/c 2,000
16,000 16,000
Stock A/c
1994
7/15/2019 1994 Study Material-2

Dec. To Balance b/d 20,000 Dec 31 By Provisions for Unrealised profits 5,000

By P’s Current A/c By Q’s Current 6,000
A/c By R’s Current A/c

6,000

3,000
20,000 20,000
Bills Receivable A/c
1994 1994

Dec. 31 To Balance b/d 5,000 Dec 31 By Bank 5,000
5,000 5,000
Mr, P’s Loan A/c
1994 To P’s Current A/c 2,500 Dec. By Balance b/d 5,000
31
To Furniture A/c 2,500
5,000 5,000
Sundry Creditors A/c
1994 To P’s Current A/c 500 Dec. 31 By Balance b/d 15,500

To Bank 15,000
15,500 15,500
Bills Payable A/c
1994 To bank 10,800 1994 By Balance 11,000

Dec. 31To Realisation A/c 200
11,000 11,000
Outstanding Expenses A/c
1994 Rs. 1994 Rs.

Dec.31 To Bank 1,000 Dec. 31 By Balance b/d 1,000
1,000 1,000
Dissolution before expiry of
https://sol.du.ac.in/mod/book/tool/print/index.php?id=1561 a fixed term 58/215
A
7/15/2019 partner who on his admission, happens to-pay aStudy
premium
Material-2(goodwill) to the existing partners under a
stipulation that the firm will not be dissolved before the expiry of a fixed ter, will be entitled to a
refund of such an amount of the premium so paid as is reasonable having regard to the terms upon
which admission was made and to the length of perod agreed upon and that already expired, if the
firm is dissolved before the expiry of such a term. However, no claim in this respect will arise if:-
1. the firm is dissolved due to the death of partner:
2. the dissolution is mainly due to the partner ’s own misconduct:
3. the dissolution is in pursuance of an agreement containing to propvision for the return of the
premium or any part of it.
Any amount that becomes due to such a partner will be borne by the other partners in their profit
sharing ratio. Suppose X,Y, take Z as a new partner on the condition that Z pays Rs. 20,000 for goodwill
and it is agreed that the partnership would be for 10 years. But if the firm is dissolved after 6 years
only without there being any misconduct on the part of the new partner, death of any partner or
without an agreement entered into not providing for return of goodwill so paid, he will be entitled to a
refund of Rs. 8,000
SALE TO A COMAPNY
Often, a partnership firm converts itself into a joint stock limited company or sells its business to an
existing one. Broadly, the procedure already discussed above will be followed for closing the books of
the firm. Realisation Account will be opened ans assets transferred to it, so also liabilities (but not if
liabilities are not assumed by the company). Whatever the company pays as purchase consideration will
be credited to the Realisation Account. If expenses are incurred by the company, no further treatment
is necessary beyond transferring them to the credit of Realisation Account; but id creditors are to be
paid by the firm, the actual amount paid to them will be debited to liability account concerned; the
difference betweeen the book figure and the amount actually paid will be transferred to the
realisation Account. The profit or loss on realisation will be transferred to the capital accounts in the
profit-sharing ratio. Besides the above, the main points to be noted are the following:
(a) Usually, the company takes over all the assets including cash. Therefore, cash should also be
transferred to Realisation Account. If however, the company does not take over cash, it will not be
transferred.
(b) Usually, the company will discharge the amount due from it in the form of cash, debentures and
shares. Separate accounts will, of course, be opened for debentures and share received, partners will
divide the debentures and shares among themselves, in the absence of an express agreement, in the
ratio of their final claims, that is to say, in the ratio of capitals standing after the loss or profit on
realisation and other reserves and profits have been transferred. Further, since no fraction of a share
or debenture can be allotted, the nearest whole number of shares or debentures should be given to a
partner, the necessary adjustment being made in cash, if there is an agreement of divide the shares or
debenturs in a particular manner, the agreement should be followed.
Notes : (l)Some authorities recommend that shares in joint stock companies should be divided among
partners in the profit-sharing ratio. This will enable partners to enjoy any future profit -sharing ratio.
This will enable partners to enjoy any future profit or loss on shares in the profit-sharing ratio.
However, it seems that in the absence of an agreement, the Partnership Act does not permit this
method of distribution. Profits and loss after dissolution have no bearing on partnership accountts.
Shares cannot be treated differnently from other assets, say stock and furniture, it would of course, be
better if the Partnership Deed contains a clause regarding this matter.
(2)
7/15/2019 If there is some valueless asset in the bools Study
of the firm and if this has to be divided among the
Material-2
partners, it should be divided in the profit-sharing ratio so that any ultimate profit or loss may
correspond to the ratio in which profits are shared.
Illustration A.B. and C carry on business in partnership sharing profits and losses in the proportions of
1/2,3/8. and 1/8, respectively. On 31st March, 1991, they agreed to sell their business ot a limited
company. Their position on that date was as follows.

Rs. Rs.
A’s Capital 40,000 Freehold 48,000
property
B’s Capital 30,000 Machinery 42,000
C’s Capital 26,000 Book Debts 15,000
Loan on Mortage 16,000 Stock 23,000
Sundry Creditors 18,000 Cash 2,000
1,30,000 1,30,000

The company took the following assets at the valuation shown below:-
Rs. Freehold property 61,000
Machinery 31,800
Book Debtors 14,000
Stock 22,000
Goodwill 10,000
The company also agreed to pay the creditors which was agreed at Rs.17,700. The company paid Rs.
67,000 in fully paid shares of Rs. 10 each and the balance in cash. The expenses to Rs. 1,500.
Prepare Ledger Accounts in the books of the firm.
Solution:
Realisation Account
Dr. Cr.
1991
7/15/2019 Rs. Rs. 1 1991 Rs. ByMaterial-2
Study Loan on Mortgage Rs.
By Sundry Creditors
Mar. 31 To Sundry Mar 31 16,000
Assets: Freehold
By Ltd. Company’s A/c-
property
Machinery 48,000 18,000
Book Debts F. Property
61,000
42,000

Stock
Machinery
15,000
31,800
To Cash- 1,28,000

expenses To
23,000
Cash-Loan paid Book Debts
To profit 1,500 14,000
transferred A’s

Capital, 1/2
16,000 Stock 22,000
B’s Capital, 3/8

to: Good will
C’s Capital, 1/8
10,000

4,800
1,38,800

3,600 1,21,100
Less
9,600
Creditors
1,200 17,700
1,55,100 1,55,100

Limited Company’s Account
1991 Rs. 1991 Rs.

Mar. 31 To Realisation A/c By Shares in Ltd. By Cash 67,000
purchase consideration

1,21,100 54,100
1,21,100 1,21,100

Cash Account
1991
7/15/2019 Rs. 1991 Study Material-2 Rs.

Mar. 31 To Balance b/d 2,000 Mar.31 By Realisation A/c

To Ltd. Company 54,100 Expenses 1,500

Loan 16,000

By Capital Accounts: A
BC 16,380

12,280

9,940 38,600
56,100 56,100
Shares in Ltd. Co.
1991 Rs. 1991 Rs.

Mar. To Ltd. Company 67,000 Mar31 By A’s Capital A/c By B’s 28,420
31 Capital A/c By C’s Capital

A/c
21,320

17,360
67,000 67,000

Capital Accounts
A BC A B C
To Shares in ... Ltd. 28,420 21,320 17,360 By Balance b/d By 40,000 30,000 26,000
Co. To Cash (balance) Realisation A/c

Profit
16,380 12,280 9,940

4,800 3,600 1,200
44,800 33,600 27,200 44,800 33,600 27,200

Note.
7/15/2019 Total number of shares received from the Study
limited company is 6,700. These have been divided
Material-2
among A,B, and C in the ratio of 448,336 and 272 or 28,21 respectively, namely, in the ratio of the
amount finally due to them. Hence
A gets
6,700
66
× 28
or 2,842 shares of Rs. 28, 420:
B gets
6,700
66
× 21
or 2,132 shares of Rs. 21,320 : and
C gets
6,700
66
× 17 or 1,726 shares of Rs. 17,260
Insolvency of a Partner
If on dissolution, the capital account of a partner shows debit balance after his share of profit or loss
has been adjusted therein, he becomes debtor to the firm to that extent and will have to bring
insufficient amount to make up the debit balance in his capital account. If however, the partner is
insolvent, the amount due will either not be realised al all or at any rate will not be paid in full. In
such a case, the deficiency this arising will have to be borne be solvent partners, before the decision in
Garner v Murray’s case was delivered, such as loss was treated as an ordinary loss and was borne by the
solvent partners in their profit sharing ratio. But the decision in the above mentioned case has changed
the positon.
Decision in Garner v Murray
If a patner is unable to repay the debt due to the firm on dissolution, it was decided that:
1. First the loss on realisation should be transferred to the Capital accounts of all partners (including
the insolvent partner) in their profit sharing ratio. Then, the solvent partners having credit balance in
their Capital accounts should contribute cash equal to their share of loss on realisation. A solvent
Partner with a debit balance in his capital account will only be required to make the debit balance in
the end.
2. Deficiency arising due to insolvency of a partner must be borne by solvent partners in proportion to
their Capitals (here solvent partner means a partner who is solvent and has a credit balnce in his
Capital account just prior to dissolution). Thus the decision makes a distinction i.e. between a loss
occasioned by the default of partner, and an ordinary trading loss.
3. The Capitals in proportion to which the deficiency will have to be borne by the solvent partners
should be the Capital standing at the date on which, the partners determined upon dissolution and
prior to making of any adjustment arising from the realisation of assets. As the Capitals can be fixed or
fluctating for determining the relevant ratio, the real capitals will be ascertained as under:
1.
7/15/2019 Where the Capitals are fluctuating the Capital amounts are determined after adjusting all the
Study Material-2
reserves and accumulated profits, all drawings, interest on capital, interest on drawings to the date of
dissolution but before adjusting loss on realisation.
2. Where the capitals are fixedd, the Capital amounts which the partners had last agreed to be fixed.
(All adjustments for reserves and accumulated profits etc., are through current A/c).
To sum up, when a partner is insolvent and there is deficiency in his capital account, the procedure to
settle the accounts will be.
1. Ascertain at the date of dissolution the solvent partners’ adjusted capitals, if fluctutaing,
otherwise their fixed capitals.
2. Prepare realisation A/c as usual and transfer the loss on realisation to the capital accounts of all
the partners in their profit sharing ratio.
3. Credit, if anything is received from the estate of the insolvent partner, to his capital account.
4. Credit the solvent partners for cash brought in by them equal to their share of loss on realisation.
(In practice, only entries are made and no cash is brought actually, such normal adjustment is
sufficient).
5. Determine the ultimate deficency of insolvent partner after making all the asjustments including
receipts from his estate, if any.
6. Transfer this deficiency to the capital accounts of solvent partners in the ratio of thir capitals as
determined (1) above.
7. The solvent partners will then draw out cash according to their claims.
Equity
According to the decision in Garner v. Murray case, only those solvent partners, whose capital accounts
show credit balance on the date on which they determine upon dissolution, are required to bear the
loss arising on account of insolvency of a partner. A partner with no capital or with his capital account
showing a debit balance, however a solvent and affluent he may be, is not called upon to bear any
share in insolvent partner’s capital deficeny as the same has to be borne by solvent partners in
proportion of their capitals. Such a partner is only called upon to bring in the amount, if any, standing
to the debit of his own capital account. Again as solvent partners alone are made to bear the
deficiency, so the partner or partners having the large balance irrespective of their affluence will have
to bear large proportion of the deficiency.
Application in India
The decision in Garner v. Murrary may appear to be contrary to the provisions of Partnership Act.
Section 48 (B) (III) clearly provides that the residue remaining still after payingoff outside liabilities
and advances by partners, shall be applied in paying to each partner rateably what is due to him (after
adjustment of loss on
realisation) on account of capital. Where ther is dificiency in the capital account of an insolvent
partner, even after making ratable payment, the capital account of sol vent partners will not be
closed, and on the other hand, the insolvent partner’s Capital account balance (Def.) will remain
unadjusted. A strict interpretation of Sec. (h) (III) suggest s that the unsatisfied credit balances in the
capital accounts of the solvent partners should be adjusted against the deficiency in the insolvent
partners’ capital account. Thus, the solvent partners are made to bear the deficiency equal to the
unsatisfied balances remianing in their capitl accounts after rateable distribution of the residue.
However, in view of there being no judicial ruing of the point as to how the deficiency shoul be borne
by solvent partners, it would not be entirely improper to apply the decision of Garner v. Murray.
Therefore,
7/15/2019 when working out problems involvingStudy
application
Material-2 of the dicision on one should indicate
whether or not the rules has been applied.
Illustration
A,B,C, and had been carrying on business in partnership sharing profits and losses in the ratio of
3:2:1:1. They decided to dissolve the partnership on the basis of the following Balance Sheet as on
31st Dec. 1994.
Capital A/c Land and Building 30,000

A 25,000 Furniture Stock Debtors 10,000
Bank

Cash in hand Capital A/cs:
B 15,000 40,000 25,000
C

D
10,000
A’s Loan 10,000
1,500
General Reserve Capital Reserve 14,000
Mortgage Loan Sundry Creditors
500
3,500

10,000 3,500

6,000 3,000 6,500
83,500 83,500

1. The assets were realised as under:
Rs.
case.
Land & Building 22,500
Furniture 4,000
Stock 15,000
Debtors 6,000
2. Dissolution expenses amounted to Rs. 1000/-
3. Further liability of Rs. 6,500 had to be met.
4. C became insolvent and Rs. 1,300 was realised from his private estate.
Prepare
7/15/2019 necessary accounts to close the books of the
Studyfirm. Apply the decision in Garner v. Murray’s
Material-2
Solution:
Realisation A/c
1994 To Sundry Assets 1994 By Sundry Liabilit

Dec. 31 Building30,000 Dec.31Mortgage Loan 10,000
Furniture Stock Debtors

10,000 S. Creditors By Bank 6,000 16,000
Building Furniture Stock

Debtors
To Bank (Real.exp.) To
25,000
Bank By Loss Transferred to

Mortgage Loan S.
Creditors Further10,000 75,000
ABCD
Liability

22,500
1,000
4,000 47,500

10,000 15,000

6,000 6,000

6,500 22,500

15,000
35,000
10,000

5,000

5,000
98,500 98,500

Dr. Cr.
Bank
7/15/2019 A/c Study Material-2
Dr Cr.
1994 Rs. 1994 Rs.

Dec.31 To Banalnce 1,500 Dec.31By Realisation:
b/d Mortgage Loan S.

Creditors Further

500 liability 10,000
To Cash
By Realisation Exp. By
A’s Loan A/c
6,000
To S. Assets Building
22,500 22,500
Furniture Stock Debtors

6,5,00
To Capital A/cs
By Capital A/cs
4,000 1,000

ABCD
AB
15,000 10,000

6,000 47,500

48,300

32,300
81,800 81,800

15,000

10,000

6,000
29,900
1,300
18,400
Capital Accounts
A BC D AB C D
1994 Rs. Rs. Rs. Rs. 1994 Rs. Rs. Rs. Rs.

Dec. To 3,500 3,000 Dec. By Balance 25,000 15,000 — —
Balance b/d

b/d
By Gen.
31 31
To Loss on Reserve By
Real To Res. By Bank
C’s (Loss on
6,000 4,000 2,000 2,000
Capital Reals) By
A/c 15,000 10,0005,000 5,000 Bank By A’s
To Bank By Capital
A/c

1,500 1,000 500 500
By B’s

2,600 1,600 — —
Capital A/c
29,900 18,400— — 15,000 10,000 — —

— — 6,000 1,300

— — 2,600

—
— — 1,600
47,500 30,0008,500 8,000 47,50030,000 8,500 8,000

Note: Where the capitals are fixed, Reserves and other accumulated profits, if any, and loss on
realisation is transferred to partners’ Current Accounts ion their profit sharing ratio. Cash brought in by
solvent partners is credited to their Current Accounts. The insolvent partners’ current account is then
transferred to his capital A/c. After crediting any amount realised from the estate of the insolvent
partner, the dificiency is determined and transferred to the capital A/cs of solvent partner in the ratio
of
7/15/2019 their fixed capitals. The current A/cs of solvent
Study partner
Material-2 in the ratio of their fixed capitals. The
current A.cs of solvent partners are transferred to their capital accounts to determine amounts finally
due to them,
When All the partners are insolvent
If all the partners become insolvent, the balance of cash on the date of dissolution, sales proceeds of
the assets together with whatever is received from the private estate of the partners will not be
sufficient to discharge the claims of third parties in full after meeting realisation expenses. Partners’
advances, if any, will also not be PAID. Such advances should be transferred to the capital A/cs of thr
partners concerned. In such a case, the dissolution accounts may be prepared in any of the following
two methods.
First Method
Under this method the dissolution accounts are prepared in the usual manner. All the assets (except
cash & Bank) and outside liabilities are transferred to Realsisation A/c Available amount of cash (cash
balance on the date of dissolution plus sale proceeds of assets plus cash received fom the private
estates of insolvent partners, if any, minus dissolution expenses) is paid to the creditors which will not
be in full discharge in their claims. The saving (balance remaining unpaid to creditors) will
automatically be adjusted in Realisation A/c. Profit or loss on realisation is distributed amongst the
partners in their profit sharing ratio by transfer to their
capital accounts. If there is a debit balance in the capital account of any partner, it is transferred to
the capital accounts of the partners showing credit balance at this stage in the ratio of their capitals.
Second Method
Under this method all the asset accounts (except cash and banks) are transferred to Realisation A/c by
the liability A.c are not so transferred. Dissolution expenses are debited to Realisation A/c. The profit
or loss on realisation is transferred to the capital accounts of partner in their profit ratio. Availabel
cash (balance on the date of dissolution plus sale proceeds assets minus dissolution expenses) is
utilised in making rateable payment to the creditors. The balance in the creditors’ accounts remaining
unpaid is transferred to Deficiency A/c to which the balances of partners’ capital accounts are also
transferred to finally close the books of accounts of the firm.
Illustration
The Balance Sheet of X,Yand Z who were sharping profits and losses in the ratio of 3:1:1, stood as
follows on 31st December, 1994 i.e., the date of dissolution:

Sundry Creditors Bank Overdraft X’s 90,000 Cash in hand Bills Receivable 2,000
Capital A/c Z’s Capital A/c Debtors
1,25,000 8,000
Stock Plant Goodwill
30,000 50,000
Y’s Capital A/c
20,000 80,000
60,000
20,000
45,000
2,65,000 2,65,000

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

Dec. To Balance 2,000 Dec. By Realisation A/c (Realisation 4,000
Exp.) By Realisation A/c

(Liabilities)
To Realisation A/c 1,62,500

(Sales proceeds of Assets) To 1,59,500
Y’s Capital A/c

(Reed, from Y’s estate)

5,000
1,66,500 1,66,500

Illustration
Red. Zed and Ted shared profits and losses in the ratio of 5 : 3 : 2 On 31st March, 1990, their balance
sheet was as follows : -
Trade
7/15/2019 Creditors 30,000 Sundry Assets

Bank Loan 10,000 Profit & Loss Account 40,000
Capitals : Red Zed Ted

30,000
20,000
10,000
60,000
1,00,000 1,00,000

The Bank had a charge on all the assets; these realised Rs. 29,000 in all. Zed’s private estate realised
Rs. 6,000 his private creditors were Rs. 5,000 Ted was unable to contribute anything. Red paid 1/3 of
what was finally due from him (taking the payment also into account) except on account of other
partners. Prepare ledger accounts, passing all matters relating to realisation of assets and payment of
liabilities through the Realisation Accounts.
Solution:
Realisation Account
Dr. Cr.
1990 Rs. 1990 Rs. Rs.

Mar. 31 To Sundru Assets 60,000 Mar. 31By Trade Creditors 30,000
transfer
”By Bank Loan 10,000

”By Bank A/c 29,000

10,000 ”By Loss transferred to :
” To Cash-Bank Loan Red’s Capital A/c Zed’s
20,200
Capital A/c Ted’s Capital
” To Cash-Trade Creditors
A/c
10,600
6,360
4,240 21,200
90,200 90,200
Cash Book
1990
7/15/2019 Rs. 1990 Study Material-2 Rs.

Mar. 31 To Realisation A/c 29,000 Mar. 31 By Realisation A/c

” To Zed’s Capital A/c 1,000 Bank Loan 10,000

To Red’s Capital A/c 200 By Realisation A/c

Trade Creditors 20,200
30,200 30,200

Capital Accounts
Red Zed Ted Red Zed Ted
To Profit & Loss A/c 20,000 12,000 8,000 By Balance b/d 30,000 20,000 10,000

To Realisation A/c Loss 10,600 6,360 4,240 By Cash 1,000

To Red’s Capital A/c 400 By Cash 200

To Ted’s Capital A/c 2,240 By Transfer to
2,240
Zed’s Capital A/c 400
30,600 21,000 12,240 30,600 21,000 12,240

The amount brought in by Reds has been calculated as follows:-
Suppose, the amount brought in by Red is xi.e. 1/3 of amount due from Red. The amount then payable
to trade creditors will be Rs. 20,000 + x, Rs. 20,000 being available without the amount to be brought
in by Red, The loss on realisation will be : Rs. (60,000 + 10,000 + 20,000 + x – 69,000) or Rs. 21,000 +
x.
Red’s share will be Rs. 5/10 (21,000 + x) or Rs. 10,500 +l/2x, making the debit balance his capital
account to be Rs. 20,000 + 10,500 + x/2 - 30,000 or Rs. 500 + x/2.
Then 3x = 500 +x/2
6x = 1,000 +x
5x = 1,000
x = 200 Gradual Realisation of Assets and Piecemeal Distribution
GRADUAL
7/15/2019 REALISATION OF ASSETS ANDStudy
PIECEMEAL
Material-2 DISTRIBUTION
It has been assumed in the working of all the illustrations so far in this chapter that all the assets are
realised on the date of the dissolution, and that 11 expenses and liabilities are paid on that date. This
assumption enables one to know immediately the profit or loss on realisation which can then be
transferred to the capital accounts; this determines the final amount due to the partners. In actual
practice, this assumption is far from valid. Assets are realised and cash collected gradually. Final
results are not known till auite some time. In the meantime, the cash collected is distributed among
the carious paues. The student remembers that in case of dissolution, first of all the outside creditors
have to be paid, then if surplus remains, any loans givens by the partners over and above their capitals
are paid (rateably if the amount available is not sufficient) and last of all, the partners’ capitals are
paid off. It is clear, therefore, that any cash in hand or cash clooected should be distributed among
creditors until all of them are paid off. One must remember to keep adequate funds for liabilities that
may arise in future, for instance, for bills discounted exected to be dishonoured. After this, the cash
available should be applied in returing partners’ loans proportiontely if two or more than two partners
have advanced loans to the firm.
Proportionate Capital
The main question is how to distribute cash among partners for return of capital. One must remember
that the profit or loss on realisation of assets will not be known for some time and, therefore, this
profit or loss cannot be adjusted in the capital accounts immediately. And yet cash must be distributed
in such a way that the amounts finally left unpaid (i.e. the loss to be borne by the partners) are in the
ratio in which profits and losses are shared. The available cash cannot be distrubuted according to the
profit-sharing ratio (unless the capitals are themselves in the profit sharing ratio) because that will
leave the balances unpaid out of proportion. The cash available cabbot also be distributed in the ratio
of capitals because, then the parttners will be forced to bear the final loss in the ratio of capitals
which may be different from the profit-sharing ratio. Suppose, after paying off all the creditors, two
further i nstalments are collected - one of Rs. 40,000 and the other of Rs. 20,000; suppose further that
there are two pattners (A and B) sharing profits in the ratio of 3:2 and having capitals - A, Rs. 70,000
and B, Rs, 30,000. If cash is distributed in the profit-sharing atio-the position will be as follows:
A B Rs. Rs.
Amount due 70,000 30,000
First instalment of cash in the ratio of 3:2 24,000 16,000
Balance 46,000 14,000
Second instalment in the ratio of 3:2 12,000 8,000
Balance left unpaid or loss 34,000 6,000
This is obviously wrong because the loss is not in the ratio in which losses are to be borne by A and B. It
cash is distributed in the ratio of capitals, the position will be:

A Rs. B Rs.
Amount due 70,000 30,000
Fist in stalment in the ratio of 7 : 3 28,000 12,000
Balance 42,000 18,000
Second instalment in the ratio of 7 : 3 14,000 6,000
Loss 28,000 12,000

This also is wrong, because the final loss is again not in the ratio in which lossess are to be borne by A
and B.
In this case, it is obvious that A’s capital is more than his proportionate share. The profitsharing ratio is
3 : 2, Hence, if B’s capital ought to be Rs. 30,00x 3/2 or Rs. 45,000. The proper thing to do is to first of
all bring down A’s capital to Rs. 45,000 by paying him enough cash. After that, the cash available will
be distributed in the profit-sharing ratio. It will now be worked out as follows :
A Rs. B Rs.
70,00 30,000

Capital
First Instalment: Rs. 25,000 To A 25,000 —
Balance Due 45,000 30,000

Rs. 15,000 distributed between A

and B in the rato of 3 : 2 9,000 6,000
Balance due 36,000 24,000
Second instalment in the ratio of 3 : 2 12,000 8,000
Amount unpaid or loss 24,000 16,000

This must be correct, because the loss is being borne by the two partners in the profit-sharing ratio.
The rule to follow in piecemenal distribution is that the partners whose capital is more than
proportionate to other partners’ capitals (considering the profit-sharing ratio) should first be refunded
so much as to bring their capitals to proportionate levels. After this, the cash available should be
distributed among the partners in the profit-sharing ratio. Each partner’s position has to be compared
with that of others.
Illustration
Following is the Balance Sheet of M/s. A, B and C who share profits and losses in the ratio of 2 : 2 :1.
Rs. Rs.
Sundry Creditors 15,000Cash in hand 2,000
Capitals— Sundary Debtors 12,000
A 15,000 Stock 22,000
B 12,000 Furniture & Fixtures 10,000
C 4,000 31,000
46,000 46,000 46,000
The
7/15/2019 firm was dissolved and the assets were realised gradually; Rs. 1,000 were received once, Rs.
Study Material-2
15,000 another time and Rs. 9,000 finally. Show how each instalment is to be distributed.
Solution:
The ratio is 2:2:1 among A, B and C. C’s capital is Rs. 4,000, hence the proportionate capitals of A and
B are Rs. 8,000 each. This means C receives nothing until the capitals of A and B each are brought
down to Rs. 8,000. Now A and B being equal partners, their capitals ought to be equal. A’s capital is Rs.
3,000 more than B’s and hence before B receives anything, A is paid Rs. 3,000. The following statement
shows the distribution.
Distribution of Cash
Creditors Capitals
A B C
Rs. Rs. Rs. Rs.
Amount due 15,000 15,000 12,000 4,000
Cash in hand—paid to creditors 2,000 — — —
Balance due 13,000 15,000 12,000 4,000

First instalment:
Rs. 10,000 to creditors 10,000 — — —
Balance due 3,000 15,000 12,000 4,000

Second instalment:
Rs. 3,000 paid to creditors 3,000
Rs. 3,000 paid toA — 3,000 — —
Balance due — 12,000 12,000 4,000
Rs. 4,000 paid each to A and B to bring down
their
Capital to Rs. 8,000 4,000 4,000 —
Balance due 8,000 8,000 4,000
Rs. 1,000 distribted among all partners (ratio 400 400 200
2:2:1)
Balance due 7,600 7,600 3,800
Third instalment:
Rs. 9,000 distributed among the partners in profit-sharing ratio 3,600
3,600 1,800

Balance unpaid or Loss 4,000 4,000 2,000
Illutration:
X
7/15/2019 /and Z were in partnership with a capital of Rs.Study
30,000 originally contributed in the proportions of 1/
Material-2
2, 1/3 and 1/6 respectively and shareing profits and losses in the same proportions. The partnership
was dissolved on March 31, the Balance Sheet on which date was as follows:
Capitals—X 20,000 Cash 4,000
Y 10,000 Debtors 16,000
Z 2,000 Stock 42,000
Loan— X 6,000
Y 4,000
Creditors 20,000
62,000 62,000
It was agreed that the net realisations should be distributed in their due order at the end of each
calendar month. The realisations and expenses were:—

DebtorsStok Expenses
April 4,0008,000 1,000
May 1,00010,000 500
June 6,00011,000 1,000
July 1,00010,000 400

August 3,000 2,000 500 The stock having been completely disposed of, it was agreed that Z should take
over the remaining debts at Rs. 600. Show how the cash was distributed.
Solution :
The cash available each month is as follows:—
Debtors + Stock – Expenses Cashavailable
=
Rs.Rs. Rs. Rs.

April 4,0008,000 1,000 11,000
May 1,00010,000 500 10,500
June 6,00011,000 1,000 16,000
July 1,00010,000 400 10,600
August 3,0002,000 500 4,500

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

Proportionate capitals :—

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

Statement Showing Distribution of Cash
X’s Y’s X’s Y’s Z’s
Creditors Loan Loan Capital Capital Capital
Amount due 20,000 6,000 4,000 20,000 10,000 2,000
Cash in hand-paid to Credition 4,000 — — — — — Balance
due 16,000 6,000 4,000 20,000 10,000 2.000
Aprl : Cash, Rs. 11,000 paid Creditors 11,000 — — — —
Balance due 5,000 6,000 4,000 20,000 10,000 2,000
May : Cash, Rs. 10,500-
(a) Rs. 5,000 paid to Creditors 5,000 (b) Rs. 5,500 distributed amongX’s
Loan and Y’s Loan (ratio 6 : 4) 3,300 2,200 — — — — Balances
due — 2,700 1,800 20,000 10,000 2,000
June : Cash Rs. 16,000—
(a) Rs 2,700 paid against X’s Loan &
Rs. 1,800 against Y’s Loan 2,700 1,800 — — — — (b) Rs. 5,000 paid against X’s Capital to
bring it down to Rs. 15,000 — — 5,000 — — — (c) Balance Rs. 6,500 distributed
between
X and Yin the ratio of 3 : 2 — — 3,900 2,600 — —
— — — 11,100 7,400 2,000
Balance due
July : Cash, Rs. 10,600—
(a) Rs. 5,100 paid to X and Rs. 3,400 to
Y to bring their capital to Rs. 6,000
and
7/15/2019 Rs. 4,000 respectively) — — — Study
5,100 3,400 — (b) Balance Rs. 2,100 distributed
Material-2
between
all partners in profit-sharing ratio 1,050 700 350
Balance due — — — 4,950 3,300 1,650
August : Cash and Debtors, Rs. 5,100 distributed
in profit sharing ratio 2,250 1,700 850*
Balance unpaid or Loss — — — 2,400 1,600 800

* Rs._250 cash Rs. 600 Debtors
Alternative Mehtod-Maximum Loss Method. The other method to deal with the problem is to calculate
the maximum possible loss after outside creditors and partners* loans have been paid off. This loss is
transferred to the capitals and thus the amont payable to a partner would be known. If a partner’s
share of the loss is more than the capital, he should be treated as “insolvent” and, in accordance with
Garner vs. Murray, the loss should be transferred to the othelr partners in the ratio of capitals just
before dissolution. The amount to the credit of partners will be equal exactly to the cash in hand and
the cash will be distributed among the partners according to the figures now resulting. Such calculation
of maximum loss, whenever an instalment of cash is received, will show how much is to be paid to
various partners. Below is the statement of distribution of cash in illustration according to this method
:
Distribution of
Cash

Creditors Capital Accounts
A B C
Rs. Rs. Rs. Rs.
Amounts due a15,000 15,000 12,000 4,000
Cash in hand paid to b2,000 — — —
Creditors
Balance c13,000 15,000 12,000 4,000
First instalments :

Rs. 10,000 to Creditors d 10,000 — — —
Balance due e 3,000 15,000 12,000 4,000

Second instalment : Cash Rs. 15,000
(Rs. 3,000 paid to
creditors)
f 3,000 — — —
(Rs. 12,000 in hand)
Balances due g — 15,000 12,000 4,000

Maximum Loss, (total of capitals minus Rs. 12,000

cash in hand) Rs. 19,000 allocated to
partners in the ratio of 2:2:1 h 7,600 7,600 3,800
Amounts at credit i 7,400 4,400 200
Cash (available), Rs. 12,000, paid j 7,400 4,400 200
Balances of capitals left unpaid (g—j) k 7,600 7,600 3,800
Third instalment, Rs. 9.000;
Maximum loss, Rs. 10.000 allocated L 4,000 4,000 2,000
Amounts at credit and hence cash paid m 3,600 3,600 1,800
Balances left unpaid or loss (k-m) n 4,000 4,000 2,000

Illustration:
Tom, Dick and Harry have capitals of Rs. 9,600, Rs. 6,000 and Rs. 8,400 and share profits and losses as
to one-half, one-third and one-sixth respectively. After paying creditors, the following sums become
available and it was agreed that they shall be distributed as and when determined :—
Rs. January 1-Sale proceeds of Machinery 1,200
March 1-Realisation from Debtros 4,000
No further assets remain to be realised and Dick is insolvent. Show the sums to be paid ot the partners
out of the amounts available.
(C.A. Final)
Solution:
Tom Dick Harry
Rs. Rs. Rs.
Capitala:- a 9,600 6,000 8,400
Jan.1 Maximum possible loss, Rs. 22,800 (total of capitals minus cash available) allocated
to partners in the ratio of 3:2:1 b 11,400 7,600 3,800
Amounts at credit c –1,800 –1,600 4,600

Tom’s and Dick’s losses transferred to d +1,800 +1,600 –3400
Harry
Amount at credit and available cash e — — 1,200
paid
balances in capital accounts (a-e) f 9,600 6,000 7,200
Mar.1Maximum possible loss Rs. 18,800 i.e

7/15/2019 Rs. (22,800-4,000) allocated to
Study Material-2
partners
in profit-sharing ratio g 9,400 6,267 3,133
Amounts at credit h 200 –267 4,067
Dick’s loss transferred to Tom and
Hurry
i.e. in the ratio of 96 : 84 i –142 +267 –125
Amount at credit j 58 — 3,942
Balance in capital accounts left
unpaid
and hence loss (f-i) k 9,542 6,000 3,258
4 LESSON 11 HIRE PURCHASE ACCOUNTS

LESSON 11
HIRE PURCHASE ACCOUNTS
The main aim of every businessman is to maximise his profits. This goal can be achieved in two ways.
Firstly by increasing the prices of his goods and secondly, by reducing the cost of production of the
goods sold by him. But in this era of cut-throat competition where prices are usually to be kept in line
with others, it is not possible for a trader to maximise his profits by increasing the prices of his goods.
So the only alternative left is to reduce costs. This can be done, as we know from times immemorial,
by resorting to ;large scale [production/ But producing, and that too on a large scale will not help
businessman unless additional outlets for their selling are also found out simultaneously. It may be easy
for businessmen selling goods of relatively higher prices, it may hot be possible to increase his sales
without any additional inducements to the consumers. One of such inducements is to sell goods on
credit. But if he does so then he runs the danger of blocking his capital. So a via- media. Convenieace
and ease of payment have popularised this form of trading not only for producers’ goods buy also for
relatively expensive consumer durables such as cars, refrigerators, television sets and others.
Definition
“Under the Hire-Purchase system, goods are delivered to the buyer (called the “Hire-purchaser”) in
return for his undertaking to pay agreed amounts at specified intervals for a certain period, and on the
understanding that at the end of that period when the payments completed, the goods become his
absolute property.” (Principles and Practice of book-keeping and Accounts by B.G. Vickery).
“By hire-purchase is meant the system under which property or a Chattle is acquired by payments
made in instalments, during the period of which title in the property remains with the hire vendor. The
payments made till the final instalment are regarded as being purely in respect of hire, and the title in
the property does not pass to the hire-purchaser until such final payment or some other consideration
provided for in the contract has been fulfilled.” (Accountancy by Pickles).
If we analyse the above definitions we fund that a contract of hire-purchase has the following
characteristics.
(a) Instantaneous delivery of goods : In the case of hire-purchase contracts, the seller is supposed
to hand over the possession of goods to the hire-purchaser immediately after the singing of the
agreement.
(b) Payment in instalments: Under a hire-purchase contact the payment for the goods sold is
stipulated to be paid by the hire-purchaser in instalments. These instalments may be of fixed sums or
of varying amounts depending upon the agreement entered into between the two parties.
(c) Interest: Since the payment for the goods is deferred. Some interest is usually charged by the
hire vendor. Such interest is assumed to be included in the instalments unless the agreement
specifically provides otherwise.
(d) Deferment of transfer of property : The hire vendor parts with the possession of his goods but not
with the ownership to the hire-purchaser. The goods so delivered remain the property of the hire
vendor until the whole of the payments are completed.
(e) Right to repossess in case of default: As the property in the goods does not pass to the hire-
purchaser, the hire vendor has the right to repossess the goods so delivered in case the hire purchaser
makes a default in the payment of any instalment. The instalments already paid by the hire-purchaser
in such a case will be treated as hire for the commodity used by him. This means the hire vendors
usually
not
7/15/2019 supposed to refund any of the amounts alreadyStudyreceived
Material-2 by him on repossession of goods for non
payment of any of the instalments by the hire-purchaser. Alternatively, under certain conditions the
hire purchaser may be allowed to retain a certain part of the property, or the hire vendor may make an
allowance for the property returned
(f) Instalments to be treated as hire : As said above every instalment (except the last on e) is
treated as hire for the use of goods as against the purchase price thereof. But with the payment of the
last instalment, every prior instalment is retrospectively treated as a payment for the price of the
goods so delivered.
(g) Liability for the outstanding instalments : The hire-purchaser, under a hire purchase
agreement, is liable for the outstanding (due but unpaid) instalments even after the seller decides to
repossess the goods for non-payment of the instalment by the hire-purchaser.
(h) Liability for future or undue liability : The hire-purchaser is not required to pay the future or
undue instalments once the goods are repossessed by the hire-vendor.
(i) Undertaking by the hire purchaser : The hire-purchaser cannot sell, destroy, damage,
exchange or pledge the goods until the final payment he frequently has to undertake to keep the goods
in sound repair and good condition until the last payment is made. Whereas the hire purchaser has the
option to buy, the hire-vendor is bound to sell.
Difference between hire-Purchase and Credit Sales
Hire-purchase transactions must be distinguished clearly from credit sales, in which the absolute
ownership is immediately transferred to the purchaser, and in which , on default by the purchaser, the
seller cannot repossess the goods, but can only sue for the unpaid instalments. But in case of hire
purchase the hire- vendor has the right to repossess the goods so delivered if the hire purchaser makes
default in making payment of any instalment.
Difference between hire-Purchase and instalment System
The students should very carefully note the distinction between hire-purchase contracts and instalment
contracts. More so because in both the cases, the goods are sold on credit and payment is received in
instalments. The fundamental distinction between the two is that under a hire-purchase agreement the
property in the goods does not pass to the hire-purchaser until he has paid the last instalment, or
exercised the option to purchase, as the case may be. Till then the property in the goods remains with
the hire-vendor, although they are in the possession of the hire-purchaser. The hire-vendor may
repossess the goods, if the hire-purchaser fails to pay an instalment without in any way compensating
the hire purchaser for the amount already paid by him. But in the case of an instalment agreement,
the property in the goods passes to the purchaser immediately on delivery. In the event of default by
the purchaser, the seller’s only remedy is to use for the unpaid instalments, he cannot repossess the
goods.
Before we pass on to actual accounting entries let us discuss the problems that one is likely to face
while solving the hire purchase question. These are:-
1. Calculation of interest where cash price, interest rates and insalment are given.
As stated above ordinarily the instalment includes the amount of interest Interests being a nominal
account, its amount should be separated from the cost of the asset. It is very easy to do so once we
know and understand that total Hire-Purchase Price = Cash Price of the goods plus Total Interest. Thus
Total Interest = Hire Purchase Price Less Cash Price of the goods. But it is not enough to find out total
Interest as it is or the total period over which instalments as spread over. To be just and equitable what
is required is not the calculation of total interest, but the periodical interest so that the Profit and Loss
Account of the year to which interest belongs
can
7/15/2019 be debited. This can be done by preparing aStudy Memorandum
Material-2 Account of either the Hire-vendor or
that of the Hire-Purchaser. It is prepared in the usual manner.
Example 1
On April 1,1991 Reclamation Limited took delivery of a truck from Temple Truck Dealers on hire
purchase. Payment to be made by three equal instalments of Rs. 3,000 each on March 31, 1993 and
1994. The Cash value of the truck was Rs. 8,170, the Vendors charging interest at 5% per annum on
yearly balance. Reclamation Limited took delivery of a truck from Temple Truck Dealers on hire
purchase, Payment to be made by three equal instalments of Rs. 3,000 each on March 31, 1992, 1992
and 1994. The Cash value of the truck was Rs. 8,170, the vendors charging interest at 5% per annum on
yearly balance. Reclamation Limited provide 25% depreciation on diminishing balance method.
Calculate yearly interest to be charged to Profit and Loss Account.
MEMORANDUM HIRE-VENDOR’S ACCOUNT
Date Particular Amount Date Particulars Amount
Rs. P Rs. P.
1992 To bank 3,000.00 1992 By Bank 8,170.00

Dec. To Balance c/d 5,578.50 Jan. 1 By Interest 408.50
31

8,578.50 8,578.50

3,000.00 1993 5,578.50
To Bank By Balance b/d
1993

2,857.43 Jan. 1 By Interest 278.93
To Balance c/d
Dec.

31
5,857.43 5,857.43

2,857.43
1994
To Bank By balance b/d By Interest
1994 3,000.00 Jan. 1 (Balance fig.) 142.47

Dec. 3,000.00 Dec. 31 3,000.00
31

Working Notes:
(i) Interest on the last payment is taken at the differential figure of Rs. 142.57 (viz. Ri 3,0000.00— Rs.
2857-43) although the computed figure is Rs. 142.87. The difference i ignored for the sake of round of
the instalments.
(ii) Interest at 5% per annum is calculated on the reducing balance of amount outstanding.
2.
7/15/2019 Calculation of interest where rate of interest is not given
Study Material-2
Mathematically speaking total interest should be allocated between the years instalment in proportion
of outstanding cash price (or principal) But it is very complicated. Therefore, it i usually appointed in
the proportion of outstanding instalment or hire-purchase price with the hel of a table. For practical
purposes it is fairly precise and simple basis of apportionment.
Example 2:
Assuming the facts as given in example 1, except that the rate of interest is not giver calculate the
amount of interest that should be charged to each year’s Profit and Loss Account.
Solution:
Total Interest = Total Hire Purchase Priced-Total Cash Price or Rs. 9,000 — Rs. 8,170 = Rs.830
This amount of Rs. 830 will be apportioned in the ratio of 3:2:1 as follows :
Instalment Amount outstanding Ratio Interest
1. 9,000 3 3/6 × 830 = Rs. 415
2. 6,000 2 2/6 × 830 = Rs. 277
3. 3,000 1 l/6 × 830 = Rs. 138
If we look at these figures and the compared figure; (as example 1 we find a difference between the
two. This is unavoidable in the second case the figures were estimates only which may or may not
reasonable with exactly calculated figures. These difference are, therefore, to be ignored.
3. Calculation of Cash Price where rate of interest and instalments are given
Sometimes the hire-pucehase problem may omit cash price. Gash price as we know is required for
preparing the asset account in the books of the hire-purchase. The way to proceed is take up the last
instalment first (or to start in ascending order) and to deduct interest from it. The amount of interest
can be found out as follows :-
× Rate of Interest
Amount due at the end of the year
100 + Rate of Int.
Suppose Prem owes Narain Rs. 100 on its January, 1992, the rate of interest being 6% then Prem will
have to pay Rs. 105 on 31st December, 1993. Out of the amount of Rs. 106, 6/ 100 of the amount due
the end is interest. We can find out the amount due at the beginning of the year by deducting the
amount of interest for the year calculated as above. This will also be the amount due at the end of last
but one year after paying that year ’s instalment. The total of these two will give amount due at the
end of the last but one year before paying the instalment. The amount due at the beginning of that
and other previous years then can be found out by applying a similar procedure. It can also be done
with the help of a table.
Assuming the same facts as in Example I except that no cash price is given, find out the Cash Price.
Solutions:
Instal- Amount due at Amount of Total amount due Interest Principal or
ments the end of the instalment at the end of the @ 5/105 amount due
year

7/15/2019 year (after paying paid (before paying
Study Material-2 in the
beginning
instalment instalment) of the year.
Rs. P. Rs. P. Rs. P. Rs. P. Rs. P.

3. Nil 3,000.00 3,000.00 143 2,857.00
2. 2,857.00 3,000.00 5,857.00 279 5,578.00
1. 5,578.00 3,000.00 8,578.00 408 8,170.00

Thus Cash Prices = Rs. 8,170 + Cash Down, if any,
NOTE: Cash down means the amount paid at the time of signing the agreement, Since there is no time
gap between the signing of the agreement and the cash down payment, no interest occurs and entire
amount goes to increase the overall cash price.
Accounting Treatment
If strict regard is had to legal nature of the contract, the goods should be treated as continuing to
belong to the hire-vendor until all the payments have been paid, and until that time the hire purchaser
should treat the instalments paid as payment for hire or for the option to purchase, except that the
portion of each payment representing interest, should be written off to Profit and Loss Account in the
period to which it relates From the point of view of the hire-vendor, it might be considered that no
profit on the transaction has been earned until all the instalments have been paid. Alternatively credit
should be taken in cash accounting period for the profit included in the instalments that have been
paid. Alternatively, credit should be taken in cash accounting period for the profit included in the
instalments that have been received. The instalments not yet due are, in such a case, treated as stock
in trade, valued at proportionate cost.
Since the intention of both the parties is to buy and sell, records of such transactions are made in the
books of both the parties. It can, therefore, readily be received that no rigid rule of accounting can be
laid down owing to the large number of varying circumstances in different business.
Accounting Entries
Set out below are various methods, any of which can be adopted to fit the circumstances (having
regard to the type and value of the goods, and the length of the period of purchase etc.) of the case.
Hire-vendor’s Books
The following entries are passed by the hire-vendor :
1. On sale of goods on Hire-Purchase basis
Hire Purchaser’s A/c ... Dr. With the Cash price of goods
To Sale
2. On receiving the amount of Cash Down
Bank Account ... Dr. With the amount of Cash down.
To Hire-Purchaser’s A/c
3. On Interest becoming due on I Instalment
Hire-Purchaser’s
7/15/2019 A/c ... Dr With the
Studyamount
Material-2 of interest.
To Interest Account
4. On receiving the amount of instalment
Bank Account ... Dr. With the amount of instalment.
To Hire Purchaser’s A/c
5. For Transferring the Interest to P&L A/c
Interest A/c ... Dr.
To Profit & Loss A/c
Entries 3,4, and 5 will be repeated in subsequent year also :
Example 4:
Assuming all facts as given in Example 1, pass the necessary journal entries and prepare Ledger
Account in the books of Hire-vendor.
TEMPLE TRUCK DEALERS Journal Entries
Date Particulars L.F. Dr. Amount Cr.
Amount
Rs. P.
Rs. P
1991

April, 1 Reclamation Ltd Dr. 8,170.00

To Sales A/c 8,170.00

Delivery truck sold on hire-purchase recorded at
cash sales price

1992

Reclamation Ltd. Dr.
March., 408.50
31

To interest A/c
408.50

Interest @ 5% on Rs. 8,170 made due.

3,000.00
March, Bank A/c Dr.

31

3,000.00

To Reclamation Ltd


7/15/2019 Receipt of first instalment Study Material-2

1993
Reclamation Ltd Dr. 278.93
March,
31
To Interest A/c 278.93

Interest @ 5% on Rs. 5,578.50 made due

3,000.00

Bank A/c Dr.
March,
3,000.00
31
To Reclamation Ltd

Receipt of second instalment

142.57
1994
Reclamation Ltd. Dr

142.57
March,
31 To Interest A/c

Interest @ 5% on Rs. 2,857.43 made due 3,000.00

Bank A/c Dr 3,000.00
March,
31
To Reclamation Ltd.

Receipt of third and last instalment.
LEDGER ACCOUNTS Reclamation Ltd.

Date Particulars Amount Date Particulars Amount
Rs. P. Rs. P.
1991
7/15/2019 1992
Study Material-2

April, 1 To Sale A/c 8,170.00March, 31 By Bank 3,000.00

1992

March, 31 To Interest A/c 408.50 March, 31 By Balance c/d 5,578.00

8,578.50 8,578.00

1992 1993

To Balance b/d By Bank
5,678.50 3,000.00
April, 1 March, 31

1993

To Interest A/c By Balance c/d
278.93 2,857.43
March, 31 ”

5,857.43 5,857.43

1994 To Balance b/d 1994 By Bank
2,857.43 3,000.00
April, 1 March, 31
To Interest A/c
1984 142.47

March, 31 3,000.00 3,000.00

INTEREST ACCOUNT
Rs. P. Rs. P.
1993 To Profit & Loss 1992 By Reclamation Ltd. 408.50
March, 31 Account—Transfer March, 31
408.50 By Reclamation Ltd. By
Reclamation Ltd.


7/15/2019 408.50 Study Material-2 408.50
1993 To Profit & Loss 1993 278.93
Account—Transfer To

Profit & Loss
March, 31 278.93 March, 31
Account—Transfer
142.57 142.57
1994 1994

March, 31 March, 31

SALES ACCOUNT

1992 To Trading A/c 1991 By Reclamation Ltd.

March, 31 Transfer 8,170.00 April, 1 8,170.00
Hire-Purchase’s Books
The following are the principal methods of recording hire purchase transactions in the books of the
hire-purchaser :
The full cash price is debited to the Assets Account and the same figure is credited to Hire vendor’s
Account. Interest is credited to his account periodically and all the cash payments’s are debited.
Since the hire purchaser uses the entire asset from the very beginning, depreciation is charged on the
full cash price (with due regard to residual value and method applied as against the instalment paid.
The required journal entries are :
1. For acquiring the assets under hire-purchase agreement
Asset Account Dr. With the full price of the Asset.
To Hire Vendor
2. For making payment of cash down
Interest A/c Dr. Worth the amount of cash down.
Hire-vendor
3. For making the interest due
Interest A/c Dr. With the amount of interest.
To Hire-vendor
4. For making payment of instalment
Hire vendor Dr. With the amount of instalme
To Bank Account
5. For providing Depreciation
Depreciation A/c Dr. With the amount of depreciat
To
7/15/2019 Assets Account Study Material-2
Profit & Loss A/c Dr.

To Interest A/c
To Close Interest and Depreciation A/c
To Depreciation A/c
(B) The second method is based on the facts that the property or ownership does not vest in the
purchaser untill all the instalments are paid by him. The required journal entries under this method are
:—
1. Assets A/c Dr. With down payment of any becoming due
To Hire Vender A/c
2. Hire Vender A/c Dr.
To Bank Down payment made
3. Asset A/c Dr. Cash price of instalment, Interest on Instalment
Interest A/c Dr.
To Hire Vender A/c
4. Hire Vender Dr. H.P. Instalment paid
To Bank
5. Depreciation A/c Dr.
To Assets Depreciation charged
Note : Depreciation is always charged on the total cash price of the aaset and note on the debit
bvalance shown by the asset account.
6. Profit & Loss A/c Dr. Interest & Depreciation a/cs. closed by trans- To Interest
A/c ferring to p & L A/c
To Depreciation A/c
Entries 3, 4, 5, 6, will be repeated for subsequent instalment in the future years.
Example 5
Assuming the same facts as given in example number 1 pass the required journal entries in the books of
Reclamation Ltd. and prepare Ledger Accounts therein.
Solution:
RECLAMATION LTD. (Journal Entries)
Amount
Rs. P.
Rs. P
1991
7/15/2019
Study Material-2

April, 1 Truck A/c Dr. 8,170 00

To Temple Truck Dealer 8,170 00

Purchase of one truck on hire-purchase Basis
1992

March, Interest A/c Dr. 408 50
31

To Temple Truck Dealers 408 50

Interest @ 5% on Rs. 8,170 made due.

Temple Truck Dr.

3,000 00
March,
To Bank Account
331
3,000 00

Payment of first instalment

Deprecitaion A/c Dr.

2,042 50

To Truck A/c
March,
31 2,042 50
Depreciation 25% on Rs. 8,170.

Amount
Rs. P.
Rs. P
March,
7/15/2019 Profit & Loss A/c Dr.Study Material-2
2,451 00
31

To Interest A/c 408 50

To Depreciation A/c 2,042 50

Transfer entry.

Temple Truck Dealers Dr.

3,000 00
March,
To Bank
31
3,000 00

Payment of second instalments.

To Depreciation A/c Dr.

To Truck A/c 1,531 87

March,
31 Depreciation @ 25% on Rs. 6,127,50 1531 87

Profit & Loss A/c Dr.

To Interest A/c 1,810 80

March, To Depreciation A/c 278 93
31

Transfer entry. 1,531 87

Interest A/c Dr.

To Temple Truck Dealers 142 57
1994

Interest @ 5% on Rs. 2,857.43 made due. 142 57
March,

31


7/15/2019 Temple Truck Dealers Dr.Study Material-2
3,000 00
To Bank
3,000 00
Payment of third and last instalment.
March, Depreciation A/c Dr.
31

To Truck A/c 1,148 91

Depreciation @ 25% on Rs. 4,595.63 1,148 91

Profit 7 Loss A/c Dr.

March,
To Interest A/c
31
1,291 48

To Depreciation A/c

142 57

Transfer entry

1,148 91

March,
31
LEDGER ACCOUNT Truck Account

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

Rs. P. Rs. P.
1991 1992

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

1993
7/15/2019 6,127.50 1994 Material-2
Study 6,127.50
April, 1 March, 31By Depreciation
To Balance b/d ”By Balance c/d
4,595.63 1,148.91
3,446.72
1994 4,595.63 4,595.63
April, 1

To Balance b/d 3,446.72

Temple Truck Delaer


Rs. P. Rs. P.
1992 1991
March, April, 1
31
To bank 3,000.00 1985 By Truck A/c 8,170.00
1992
March, 31

To Balance c/d 5,578.50 By interest A/c 408.00

8,578.50 1992 8,578.50
1992
April 1
March,
1993
31
To Bank 3,000.00 March, 31 By Balance b/d 5,578.50
1994

To Balance c/d 2,857.43 By interest A/c 278.93

5,857.43 April, 1 5,857.00
1994
1994
March,
31 3,000.00 March, 31 2,857.43
To bank By Balance b/d

142.57
By Interest A/c
(Bal. Fig.)
7/15/2019 3,000.00 Study Material-2 3,000.00
INTEREST ACCOUNTS

Rs. P. Rs. P.
1992 To Temple Truck 1992

March, Dealers March, 31 By Profit & Loss
31

408.50 A/c Transfer 408.50

To Temple Truck 1993
1993

Dealers March, 31 By Profit 7 Loss
March,

31
279.93 Account — transfer 278.93

To Temple Truck 1994

1994
Dealer 142.57 March, 31 By Profit & Loss 142.57

March,
31 Account— Transfer

DEPRECIATION ACCOPUNT
Date Particulars L.F. Amount Date Particulars L.F Amount

Rs. P. Rs P.
1992 1992

March, To Truck A/c 2,042.50 March, 31 By Profit & Loss 2,042.50
31

Account — transfer

1,531.87 1993 1,531.87
1993

7/15/2019 To Truck A/c Material-2
Study
March, March, 31 By Profit & Loss A/c
31

1994 — Ttransfer

1,148.91 1,148.91

To Truck A/c
1994

March, 31 By Profit & LossA/c
March,

31
— Transfer

Default and Repossession
As stated above where the hire-purchaser makes a default in making the payment of any instalment,
the hire-vendor has a right to repossess the goods sold on hire-purchase basis without in any way
compensating the buyer for the instalments already paid by him. The instalments already paid by the
hire-purchaser are treated as hire for the use of the commodity till the date of the repossession. The
Hire-vendor in such a case has also the right to recover from the hire purchaser the instalments
becoming due upto the date of repossession. The right of the hire-vendor arises due to the fact that in
hire-purchase agreements the property in the goods sold on hire- purchase basis does not pass to the
buyer unless and until the buyer makes payment of all the instalments. In practice, however, the hire-
vendor exercises this right discriminatingly because indiscriminate repossessions
may adversely affect his business. Accordingly, he taken eitheir complete or partial repossession
depending upon the circumstance of each case, let us now discuss each of these in some detail.
Complete repossession
Possession is said so be complete where the hire-vendor repossess, on default by the buyer, the entire
goods sold on hire-purchase basis.
The accounting treatment in case of repossession of goods in the books of the hire-purchaser and hire-
vendor will be as follows:
Book of Hire-Purchaser
(a) Where first method of passing the journal entries is followed. In this case, the buyer debits
the asset account and credits the hire-vendor’s account with the full cash price of the asset at the time
of purchasing the asset on hire-purchase basis, it means he opens an asset account and a hire-vendor’s
account in his books. So when the asset is repossessed by the vendor, he has to close both these
accounts. This he can do by first debiting the hire-vendor’s account by cash paid, if any, and then by
transferring the balance in the hire-vendor’s account to the asset account. Balance, if any, left in the
asset account being in the naturle of profit or loss on repossession by the hire-vendor shall be
transferred by him to the profit and loss account.
1. Pass as usual all entries except the entry for payment upto the date of repossession.
2. Far making payment, if any hire-vendor
Hire-Vendor
7/15/2019 Dr. With the amoung, if any, paid to the hire-vendor.
Study Material-2
To Cash/Bank Account
3. For Clossing tyhe Hire-Vendor’s Account
Hire-Vendor’s Account Dr. With the balance in Hire-Vendor’s Account
To Asset Account
4. For Loss on repossession
Profit and Loss Account Dr. With the balance in Asset
To Asset Account Account
In case of Profit, entry number 4 will be reversed.
(b) Where second method of passing the journal entries is followed: In this case the hire-
purchaser uses “Asset Actual Method” recording the hire-purchase transactions in his books. Under this
method he capitalises equivalent to the cash price of the instalment as and when paid. Accrodingly, he
opens the Hire-vendor’s account and immediately closes it down after making the entry for payment of
instalment etc. therein. He, however, maintains an asset account at the amount paid less depreciation,
if any, figure
(i) All entreis except the entry for payment will be passed as usual upto the date of repossession.
(ii) For closing the Asset Account
Profit and Loss Account Dr. With the balance in Asset Account
To Asset Account
Hire-Vendor’s Books
The hire-vendor, on repossession, will pass the following journal entries in his books:
(1) All entries, except the entry for payment will be passed as usual upto the date of repossession
(2) For receiving the payment, if any, from the hire-purchaser
Cash or bank Account Dr. With the amount, if any, received
To Hire-Purchase’s Account
(3) Closing the hire purchaser’s Account
Goods Repossessed Account Dr. With the estimated value of goods repossessed
To Hire-Purchaser’s Account
It be noted here that the goods repossessed account is debited and hire-purchaser’s account is credited
with the present 9estimated0 value of goods and not with the amount due for which such goods are
repossessed. The balance, if any, in the hire-purchaser’s account is then transferred to Profit and loss
Account.
(4) For Profit on Repossession
Hire-purchaser’s Account Dr. With the credit balance in hire-purchaser’s
To Profit and loss Account Account
(5) For Loss on Repossession

Profit
7/15/2019 and Loss Account Dr. With the Study
debitMaterial-2
balance in Hire -Purchaser ’s
To Hire-purchaser’s Account Account
(6) For expenses incurred in renovating the repossessed goods
Goods Repossessed Account Dr. With the amount of expenses
To Cash/bank Account
(7) For the sale of repossessed goods
Cash/bank Account Dr. With the amount of sale proceeds.
To Repossessed Goods Account
(8) Profit on sale of repossessed goods
Repossessed goods Account Dr. With the amount of profit
To Profit and Loss Account
Note: In Case of Loss, this entry will be reversed.
Example
On January 1, 1993 Ideal Engineers sell on hire-purchase system a machine to Trichur Laboratories for
Rs. 35,500, payable Rs. 8,000 on singing the contract and the balance in 5 annual equal instalments,
commencing from the end of 1993. The cash sale price of the machine is Rs. 28,850 and the rate of
interest charged is 10% per annum.
After paying cash down and the first year-end instalment, the hire-purchaser fails to pay the next
instalment, whereupon the hire-vendor takes back the machine on which 15% depreciation 9on written
down valueO has been charged by the former. The cost of recapture amounts to Rs. 300 and the
machine is assessed at Rs. 19,400.
The machine is subsequently sold for Rs. 22,000 after incurring Rs. 1,500 in renovating the same. Show
the important ledger accounts in the books of both the parties.
Books of Trichur Laboratories
Ideal Engineers
Rs. P. Rs. P.
1993 1993

Jan. 1 To Bank Account To 8,000 Jan., 1 By Machine A/c 28,850
Bank Account To

Balance c/d
Dec., 1 5,500 Dec., 1 By Interest A/c 2,085

17,435

30,935 30,935

To Machine A/c
1994 1994


7/15/2019 (Balancingfigure) Material-2
Study
Dec., 31 Jan., 1 By Balance b/d
19,178 17,435
Dec., 31 By Interest A/c
1,743
19,178 19,178

Machine Account
Rs. Rs
1993 1993

Jan. 1 To Ideal Engineers 28,850 Dec., 1 By Depreciation Account 4,327

By Balance b/d 24,523
28,850 28,850

1994 1994
24,523 3,678
Jan., 1 To Balance b/d Dec. 31 By Depreciation Account
19,178
By Idea Engineers
1,667
24,523 By P&L Ate. 24,523
Note : Total loss suffered by Trichur Laboratories is equal to Rs. 3,410, i.e., Rs. 1,743 on account of
interest for the second year and Rs. 1,667 on account of seizure of assets by the hire-vendor.
Books of Ideal Engineers
Trichur laboratories
Rs. Rs.
7/15/2019 1993 1993 Study
Material-2

Jan., 1 To Sales Accounts 28,850 Jan., 1 By Bank Account By Bank 8,000
Account By Balance c/d

Dec., To interest Account 2,085 Dec., 31 5,500
31

17,435

30,935 30,935
By Goods Reposse ssed

Account

1994
By profit & Loss Account—
1994
17,435 loss

To Cash Balance b/c To Dec., 31
Jan., 1 Interest Account To Bank
1,743 19,400
Account

(Reposession Expenses)
Dec.,
300 78
31
19,478 19,478

Goods Repossessed Account
Rs. Rs
1994 1994

Dec., To Trichur laboratories 19,400 Dec., 31 By Bank-Sale Proceeds 22,000
31

To Bank Account-
Renovation Expenses
1,500
To Profit & Loss A/c

profit
1,100
22,000 22,000

Second Method
Books of Trichur laboratories
Ideal Engineers
Date
7/15/2019 Particulars Amount Date Particulars
Study Material-2 Amount
Rs. Rs.
1993 1993
Jan., 1 Jan., 1
Dec., 31 To bank Account 8,000 Dec., 31By Machine Account 8,000
To bank Account 5,500 By Machine Account 3,415
13,500 13,500
Machine Account
Rs. Rs.
1993 1993

Jan., 1 To Ideal Engineers 8,000 Dec., 31 By Depreciation Account 4,327

Dec., 31To Ideal Engineers 3,415 By Balance c/d 7,088
11,415 11,415

1994
1994 7,088 3,678
To Balance b/d; Dec., 31 By Depreciation Account
Jan., 1
By Profit and Loss Account—
Total Loss
3,410
7,088 7,088

Partial Repossession
The hire-vendor, may not be harsh enough to take possession of the entire asset. He may adopt a
considerate view and permit the hire-purchaser to retain a portion of the asset or a few pieces (where
more than one pieces are delivered on hire-purchase basis). In such a case, the price for the seized
items is settled between the two parties and their relation in respect of the retained items becomes
that of an ordinary debtor and a creditor, sincle the hire-purchase contract terminates by commission
of default.
Account Treatment
The accountng, Treatment is substantially the same as explained under ‘complete
repossession’>However, personal and assets accounts carry balances. The asset account should show
the book value of the asset still in hand.
Example
X
7/15/2019 purchased seven trucks on hire-purchase on 1st Study
July,Material-2
1993. The cash purchase price of each truck was
Rs. 50,000. He was to pay 20% of the cash purchased price at the time of delivery and the balance in
five half yearly instalments starting from 3st December, 1993 with interest at 5% per annum.
On X’s failure to pay the instalment due on 30th June, 1994 it was agreed that X would return 3 trurks
to the vendor and remaining 4 would be retained by him. The returning price of 3 trucks was Rs.
40,000. Purchaser charges depreciation @ 20% per annum.
Vendor after spending Rs. 1,000 on repairs, sold away all the three trucks for Rs. 40,000.
Show Truck Account and Vendor’s Account in the books of X and X’s Account and Goods Returned
Account in the books of the vendor, assuming that their books are closed in June every year.
In the Book’s of ‘X’
Rs. Rs.

1993 1993

July., 1 To Bank Account 70,000 July, 1 By Truck Account 3,50,000

Dec., 31To Bank Account 63,000 Dec., 31By Interest Account 7,000

1994 1994

June, To Truck Account 40,000 June, By Interest Account 5,600
30 30

To Balance c/d 1,89,100

3,62,600 3,62,600

1994

By Balance b/d
1,89,100
July 1

Truck Account

7/15/2019 Rs. Material-2
Study Rs.

1993 1994

July, 1 To Hire-Vendor ’s June, By Depreciation 70,000
Account 30
3,50,000
By Hire-Vedndor’s Account 40,500
By Profit & Loss Account

By Balance c/d
79,500

1,60,000
3,50,000 3,50,000

In the Books of Hire-Vendor X’s Account

Rs. Rs.

1993 1993

July, 1 To Sale Account 350,000 July, 1 By Bank Account 70,000

Dec., 31To Intyerest Account 7,000 Dec., 31By Bank Account 63,000

1994 1994

June, To Interest Account 5,600 June, By Goods Returned 40,500
30 30 Account

1,9,100
Balance c/d
3,62,600 3,62,600
Goods Returned (Repossessed) Account

7/15/2019 Rs. Material-2
Study Rs.

1993

June, To X’s Account Bank 40,000 June, By Bank Account Sale 40,000
30 Account Repairs 30 Proceeds By Profit and Loss

Expenses Account Loss (Balancing
Figure) 1,500

1,000
41,500 41,500

Working Notes
(1) Calculation of interest Rs.
Cash Purchased price 9 Rs. 50,000 × 7) 3,50,000
Less Payment on Delivery 70,000

(20% of Rs. 3,50,000) 2,80,000
Rs.
7,000
Interest @ 5% on Rs. 2,80,000 for 6 months
Less Amount of first instalment (Rs. 2,80,000) 56,000
2,24,000
Rs.
Interest @ 5% on Rs. 2,24,000 for 6 months 5,600

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

Try yourself
P.
7/15/2019 purchased 4 cars of Rs 14,000 - each on hire purchase system. The Hire-Purchase Price for all the
Study Material-2
four cars was Rs. 60,000/- to be paid Rs. 15,000/- each down and three instalments of Rs. 15,000/-
each at the end of each year. Interest is charged @ 5% pa. buyer depreciates car at 10% pa. on straight
time method.
After having paid down payment and first instalment, the buyer could not pay the second instalment
and the seller took possession of 3 cars at an agreed value to be calculated after depreciating the cars
at 20% p.a. on written down value method. One car was left with the buyer.
The seller, after spending Rs. 12,000/- to repairs, sold away all the three cars for Rs. 35,000-. Open
ledger accounts in the books of both the parties.
Answer : (1) Loss to the buyer on default Rs. 6,720/- (2) Balance due to the seller Rs. 2,573/-
(3) Profit on sale of repossessed car to the seller Rs. 6,920/-.
Hire-Purchase Trading Account
The system of keeping of hire-purchase transactuion as outlined above is suitable only where the
number of such transactions is small and price of the commodity sold is high. But where the
businessman sells goods of small value e.g., radio, cycle, fans, transistors etc. on hire-purchase system
very frequently, it may become incovenient for him to prepare separate account for each customer, in
the way we have discussed above. Moreover, it is neither desirable nor economical, though technically
possible to ascertain the amount of profit earned or loss incurred on each individual transaction. He
can ascertain the profit or loss made during a particular period by preparing a Hire-Purchase Trading
Account. This method is also known as Goods out or Stock Method.
The underlying feature of this method is to treat all the goods out on hire as a stock. The hire-vendor
prepares only one account i.e. Hire-purchase Trading Account and posts therein all the hire-sales,
realisations, repossessions, etc. no individual account of any hire customer is recorded on double entry.
The details (as to the date of contract, description of article, cost price, hire sale price, number of
instalments, amount and due date of each instalment, realisations, outstanding balance, etc.) of each
hire-customer are, however, maintained in a register etc. as memoranda.
(1) For opening balance of stock on the hire and instalments due but not received.
Hire-Purchase Trading Account Dr. With the opening balance
To Stock in Hire (Hire-Purchase Price) “ Instalment due and unpaid - account
(2) For Goods sold on Hire-Purchase
Hire-Purchase Trading Account Dr. With the invoice price of goods sold on
To Goods sold on hire-purchase
Hire-Purchase
(3) For receipt of instalments
Cash/Bank Account Dr. With the amount of Cash Received.
To Hire Purchase Trading Account
(4) For repossession of goods
Goods Repossessed Account Dr. With the estimated value goods repossessed.
To Hire-Purchase Trading Account
(5) For instalments due but not received
Instalments
7/15/2019 Due and unpaid Account Dr. WithStudy
the Material-2
closing balance of instalments due.
(6) For goods/stock lying with customers in respect of which instalments are not due.
Stock out on Hire Dr. With the closing balance of Hire-Purchase
To Hire-Purchase Trading Account Price and cost
(7) For removing the loading (excess of Hire-Purchase price over cost price) for the opening stock
Stock Reserve Account Dr. With the difference between Hire-Purchase
To Hire-Purchase Trading Account Price and cost.
(8) For removing the loading from closing stock
Hire-Purchase Trading Account Dr. With the difference between Hire-Purchase
To Stock Reserve Account Price and cost.
(9) For removing the loading from Goods sold on Hire Purchase
Goods sold on Hire-Purchase Account Dr. With the difference between Hire-Purchase
To Hire-Purchase Trading Account Price and cost.
(10) For Profit
Hire-Purchase Trading Account Dr. With the the amount of Profit.
To General Profit and Loss Account
(11) For Loss
Profit and Loss Account Dr. With the amount of Loss.
The students should note that in questions of this type the examiners generally do not give the figure
of Instalment Due and unpoaid. They are, therefore, advised to see before solving a question of this
type as to whether the amount of instalments Due and unpaid is given in the quest’ or not. If it is not
given in the question itself, then it is to be calculated from the information given. The formula formula
for calculating the amount of Instalment Due and unpaid is as folows :
Instalmen6s Due and Unpaid = Hire Purchase Stock lying with the customers in the beginning+Goods
sold on Hire Purchase+Cash Received—Goods Repossessed (amount for which such goods were
repossessed)- Hire-Purchaser Stock lying with the customers at th eend of the year.
Example
From the following details set out the Hire Purchase Trading Account in the books of a trader who sells
a number of articles of comparatively small value daily on the hire-purchase system, showing his profit
on this department of the business for the year ended 31st December, 1994.
1994 Rs.

January, 1 Stock in Customer’s hands at selling price 1,620

Dec., 31 Sale of hire purchase goods

During the year at selling price 6,534

Cash received from hire-purchase at Selling Price 2,100

Stock in customers hadn at Selling Price 5,674

Hire-Purchase Trading Account
for the year ending 31st December, 1994

Rs. Rs.

To Stock out on Hire Acount 1,620 By Cash 2,100

To Goods sold on Hire -Purhase 6,534 “ Instalments Due and Unpaid 380
Acount

2,128 “ Stock Reserve Account 608
To Stok Reserve Acount

930 “ Goods sent on Hire Purhase Acount 2,450
To General Profit and Loss Aount (loading) “ Stok out on Hire Acount

—Profit
5,674
11,212 11,212

Other Ledger aounts can be prepared as follows:
Stok Out on Hire Acount

Rs. Rs.

1994 1994
1,620
Jan., 1 To Balancce b/d Jan., 1 By Hire Purhase Trading
Account
1,620

—Transfer
1994 5,674 1994

5,674

Dec., 31 To Hire-Purhase Dec., 31
Trading By Balance b/d


7/15/2019 5,674 Study Material-2
1995 Acount — Transfer

Jan., 1
To Balance b/d

Goods sold on hire Purchase Account

Rs. Rs.

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

“ Purhase Aount —
Transfer 6,534 6,534
Stok Reserve Aount

Rs. Rs.

1994 To Hire Purhase 1994 By Balance b/d

Dec., Trading Account Jan., 1 608
—Transfer 608

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


1994 1994

Dec., 31 To Hire-Purhase Trading Dec., 31By Balance c/d 380
380
Acount —Transfer
General Profit and Loss Acount (Inusive) for the year ending 31st Deem,ber, 1994
Rs. Rs.

By Hire-Purhase

Trading Acount -Profit 930

Illustration :
Fantastic Home Ltd. Commenced Business on 1st January, 1991. The business is to sell Radio Recorders
and Televisions both in hire -purhase and Cash basis. The information almost the terms in given
below:-
Radio Recorder Television set

Cost Price 6,000 18,000

Sale Prie (Cash) 7,800 19,500

Down payment for H.P. 600 3,000

Monthly instalments for H. P. 360 660

No. of instalments 20 25
The company purhased goods costing Rs 24,00,000 in all and made ash sales totalling Rs. 15,00,000.
Stock on hand was valued at Rs. 3,90,000 Hire Purhase transations were as follows:
Number Instalments Instalments-due

Sold Collected (customer’s
Paying)
Radio Reorders 30 300 15
Television sets 25 250 10
4
7/15/2019 Radio Recorders and 3 Television sets on which only
Study 10 monthly instalments were collected were
Material-2
repossessed and were valued at Rs 45,000 This is not inluded in the stock mentioned above.
Prepare Hire Purhase Trading Account to show the profit or loss made by the hire vendor company.
Solution:
Hire Purhase Trading Account
Rs. Rs.

To Goods Sold on H.P. (1) To 7,21,500 By Cash 3,66,000
Stock reserve on instalments not
By Goods repossessed 45,000
due (4)
By Instalments due 12,000

36,600 By Goods sold an H.P. Loading 91,500

By Instalments not yet
Profit and Loss Aount (Profit)
due-stock with customers c/d (3)
55,800 29,9,400
813,900 813,900

Working Notes:
1. Cost Price:
Radio Records (30 × 6,000) 1,80,00030 × 7,800 2,34,000
Television sets (25 × 18000) 4,50,00025 × 19,500 4,87,500
6,30,000 72,1500
Loading (Margin) = 7,21,500 – 6,30,000 = Rs. 91,500
2. Cash Colleted: Radio Reorders Television sets
Rs. Rs
Down Payment 30 × 600 18,000 25 × 3000 75,000
Instalments 300 × 360 1,08,000 250 × 660 1,65,000
1,26,000 2,40,000
Total 1,26,000 + 240,000 = 3,66,000
3. Instalments not due:
(i.e. Stock with customers) Radio Recorders:
Total Instalments on 26 sets = 26 × 20 520
Less: Instalments colleted and due (315 – 40) 275
Not yet due 245
Amount 245 × 360 = Rs. 88,200
Television Sets
Total
7/15/2019 Instalments on 22 sets 22 × 25 550 Study Material-2
Less: Collected and due (260-30) 230

Not yet due 320
Amount 320 × 660 = Rs. 2,11,200 + 88,200 = 2,99,400
4. Stock Resource
Radio Recorders Television Sets

Total Amount due H.P.P. 7,800 19,500
Cost 6,000 18,000
1,800 17,500

Reserve Required
1,800
= ×
7,800
88,200
1,500
=
19,500

×1500
Total Rs. 20,354 + 16246 = Rs. 36,600
= 2,0354 (app.) 16,246 (app.)
Stock and Debtors System

Stock and Debtors system is only a varient of Hire-Purcchase Trading Acount. This is preferred by the
management owing to the revelation of detailed information like the aggregate amount of instalments
beoming due (from hire-purhase ustomers, etc).
Under this ystem we prepare (i) Hire-Purhase Stock Aount (ii) Hire-Purhase Debtors Acount, (iii) Hire-
Purchase Adjustment, (iv) Stock Account, and (v) Shop Stock Acccount.
It should be noted at the very outset that Hire-Purhase Stocck Acount, Hire-Purhase Debtors Acount
and Shop Stock Acount are real accounts and this being so, these will (if the firm is not a new firm)
have a opening balance. This opening balance will be a debit opening balance. Moreover, since the
Hire-Purhase stock Account has an opening balance, the Stock Reserve Acount will also have an opening
balance. But it will have a credit opening balane—a balance opposite to that of opening stock balance.
So the students, while solving questions acccording to this method, should first write the opening
balance in these four accounts.
Acounting Treatment
The Journal entries required to be passed under this system are as follows. (1) For goods sold on
Hire-purhase
(a) Hire-Purhase Stock Hire-Purhase Prie of goods

Acount
https://sol.du.ac.in/mod/book/tool/print/index.php?id=1561 Dr. sold on Hire-Purhase. 111/215
To
7/15/2019 Hire-Purhase Hire-Purhase Price-CCost
Study Material-2
Adjustment Account Price (Leading).

“ Shop Stock Account Cost of goods sold on Hire-Purhase
(b) Hire-Purhase Debtors Hire-Purhase Prie of goods
Account Dr. sold on Hire-Purhase.
To Hire-Purhase Stock Aount
(c) Shop Stock Acount Dr. Estimated Value of goods repossessed.
Hire-purhase Adjustment Acount Dr. Loss on repossession.
To Hire-Purcchase Debtors Amount due for which goods are repossessed.
(4) Put down the losing balance on the credit side of Hire-Purhase Stock Acount, Hire-Purhase Debtors
Aount and Shop Stock Account on the debit side of Stok Reserve Account.
(5) From removing loading from the Opening Stocck
Stock Reserve Acount Dr. With the amount of loading.
To Hire-Purhase Adjustment Account
(6) For removing the loading from the losing Stok
Hire-Purhase Adjustment Acount Dr. With the amount of loading.
To Stock Reserve Acount
The Hire-Purhase Adjustment acount will now reveal profit or loss. It will reval profit if its redit side
total is greater than its debit side total, and loss if its debit side total is greater than it’s credit side
total.
(6) For Profit

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

General Profit and Loss Account Dr. With the Amount of Loss.
To Hire-Purhase Adjusltment Aount
Example
J Ram & Co. have a Hire-Purhase Department. Goods are sold on hire-purchase at cost plus 50%. From
the following particulars find out the profit made by the hire-purhase department:
1994 Rs.
Jan., 1 Stock out with Hire-Purchase
Customers at selling price 9,000
Stock at Shop at cost 18,000
Instalment Due 5,000
Dec., 31 Cash received from customers 60,000

7/15/2019 Goods Repossessed (instalments due Rs. 2.000) as
Study Material-2 500
value
Instalment due, customers paying 9,000

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

Hire-Purhase Stocck Acount

Rs. Rs.
1994 1994

Jan., 1 To Balance b/d 9,000 Dec., By Hire-Purhase Debtors

Dec., 31To Shop Stocck —Account – Goods sold on Hire Purchase 66,000
Transfer 58,000

To Hire-Purhase By Balance c /d 30,000
Adjustment
29,000
Aount Loading

96,000 96,000

1995

By Balance b/d
30,000
Jan,. 1

Hire-Purhase Debtors Account

7/15/2019 Rs.

1994 1994
To Balance b/d 5,000 By Banks 60,000
Dec., 31 Dec.,
31
” Hire-Purchase Stock ” Shop Stock Account 500
Account

66,000 ” Hire-Purchase Adjustment
—Transfer (Baianing
Aount (Loss) 1,500
Figure)

” Balance c /d 9,000

71,000 71,000
1995

Jan., 1

9,000
To Balance b/d

Shop Stock Account

Rs. Rs.

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

Account Goods 500
Repossessed Goods Respossessed)
78,500 78,500

1995
Jan., 1

7/15/2019 To Balance b/d Study Material-2

20,500
Hire Purchase Adjustment Account

Rs. Rs.

1994 1995

Dec., To Hire-Purchase Debtors Dec., 31 By Hire-Purchase Stock
31 Account Loss on
Account-Loading 3,000
Respossession
1,500

“ Hire-Purchase Stock
By Hire-Purchase Stock
Account Loading
10,000 Account Loading in

To General Profit and
Goods sold on Hire-Purchase 29,000
Loss Account -Profit
20,500
32,500 32,000
Stock Reserve Account
Rs. Rs.

1994 1994

Jan.,1 To Hire-Purchase Jan., 1 By Balance b/d 3,000
Adjustment
3,000
Account-Transfer

1994 1994

To Balance b/d 10,000 10,000
Dec., Dec., 31 By Hire Purchase Adjustment
31
Account-Transfer

1995

10,000
Jan., 1 By Balance b/d

Illustration:
Tee Vee house sold a Colour TV set to RITU on hire purchase system on 1.1.1993 for Rs. 9,200. RITU
paid Rs. 2,000 on the same date to receive the delivery of TV Set and agreed to pay the balance in 12
equal monthly instalment, each installment becoming due on the last day of each months.
Ritu paid six instalments in time but failed to pay the other instalments In September 1993 (before the
monthly instalment had became due) the seller repossessed the TV Set. The repossessed set was valued
at Rs. 3,500.
Show the ledger accounts (on the basis of Stock and Debtors system) in the books of T.V. House.
Solution:
Total instalment 12 (From 1 Jan., to 31st December) Less: Instalment Paid 6 (From 1
Jan., to 30 June) Instalment due and not due 6
Ritu have paid instalments for the months of July and August. Hence the number of instalments due is
2 (two) So the number of instalment not due must be 4 (four)
Instalments due means Hire Purchase Debtors (600 × 2)
Instalments must due means Hire Purchase Stock Account (600 × 4) The basic entry on default and
consequent repossession will be :
Goods Repossessed Account Rs 3,600 (With the amount of instalments not paid) To Hire Purchase
Debtors Account, 1,200 (With the instalments due) To Hire Purchase Stock Account 2,000 (With the
instalments not due)
Since the goods repossessed have been revalued at Rs, 3,500, the following entry in also required).
Hire Purchase Adjustment Account Dr 100
To Goods Repossessed Account 100
Hire Purchase Stock Account

Rs. Rs.

To Goods sold on H.P (on H.P. Paid) 9,200 By Goods Repossessed Account 2,400

By Hire Purchase 6,800
9,200 9,200

Hire Purchase Debtors Account

Rs. Rs.

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

1,200
6,800 6,800

Goods Repossed Account

Rs. Rs.

To Hire Purchase Stcok Account 2,400 By Hire Purchase Adjustment 100
Account

To Hire Purchase 3,500
To Paid C/d

Debtors Account 1,200
3,600 3,600
LEASE Introduction
A lease is a contract between two parties called the lessor and the lessee whereby the lessor conveys
to the lessee in return for rent the right to use an asset for an agreed period of time. The ownership of
the asset continues to rest with the lessor whereas the lessee enjoys the right of the use of the asset in
consideration of the rent paid to the lessor. The provisions of the Indian Contract Act, 1872 apply to
lease contracts and the relationship between the lessor and the lessee is that of a bailor and a bailee.
The meaning of the following terms used in connection with leases should be noted :
Inception of the lease : The earlier of the date of the lease agreement and the date of a
commitment by the parties to the principal provisions of the lease.
Lease Term : The non-cancellable period for which the lesseee has agreed to take on lease the asset
together with any further periods for which the lessee has the option to continue the lease of the
asset, with or without further payment, which option at the inception of the lease it is reasonably
certain that the lessee will exercise.
Minimum Lease Payments : The payments over the lease term that the lessee is, or can be
required, to make excluding contingent rent, costs for services and taxes to be paid by and reimbursed
to the lessor, together with :
(a) in the case of the lease, any residual value guaranteed by or on behalf of the lessee; or
(b) in the case of the lessor, any residual value guaranteed to the lessor : (i) by or on behalf of the
lessor; or
(ii) by an independent third party financially capable of meeting this guarantee.
However, if the lessee has an option to purchase the asset at a price which is expected to be
sufficiently lower than the fair value at the date the option becomes exercisable that, at the inception
of the lease, is reasonably certain to be exercised, the minimum lease payments emprise minimum
payment payable over the lease term and the payment required to exercise this purchase option.
Contingent Rent: That portion of the lease payments that is not fixed in amount but is based on
factor other than just the passage of time (e.g., percentage of sales, amount of usage, price indices,
market rate of interest).
Economic Life : Either
(a) the period oyer which an asset is expected to be economically unable by one or more users; or
(b)
7/15/2019 the number of production or similar units expected to be obtained from the asset by one or more
Study Material-2
users.
Useful Life : Either
(a) the period over which the leased asset is expected to be used by the lessee; or
(b) the number of production or similar units expected to be obtained from the use of the asset by
the lessee.
Residual Value : The estimated fair value of the asset at the end of the lease term.
Guaranteed Residual Value : In the case of the lessee, that part of the residual value which is
guaranteed by the lessee or by a party on behalf of the lessee (the amount of the guarantee being the
maximum amount that could, in any event, become payable); and in the case of the lessor, that part of
the residual value which is
guaranteed by or on behalf of the lessee, or by an independent third party who is financially capable of
discharging the obligations under the guarantee.
Unguaranteed Residual Value : The amount by which the residual value of the asset exceeds
its guaranteed residual value.
Gross Investment in the Lease : The aggregate of the minimum lease payments under a
finance lease from the standpoint of the lessor and any unguaranteed residual value accruing to the
lessor.
Unearned Finance Income : The difference between (a) the gross investment in the lease, and
(b) the present value of (i) the minimum lease payments under a finance lease from the standpoint of
the lessor, and
(ii) any unguaranteed residual value accruing to the lessor, at the interest rate implicit in the lease.
Net Investment in the Lease : The gross investment in the lease less unearned finance income.
Interest Rate Implicit in the Lease : The discount rate that, at the inception of the lease,
cause the aggregate present value of
(a) the minimum lease payments under a finance lease from the standpoint of the lessor; and
(b) any unguaranteed residual value accruing to the lessor, to be equal to the fair value of the leased
asset.
Types of Lease
Broadly speaking, there are the following two types of lease:—
(i) Financial Lease. It is a lease under which the present value of the minimum lease payments at
the inception of the lease exceeds or is equal to substantially the whole of the fair value of the leased
asset. In this type of lease, the asset is irrevocably leased out by the lessor to the lessee for nearly the
entire useful life of the asset. During the lease term, the lessor is able to recover his capital outlay
plus a return on his investment in the asset. Actually, the lessor plays the role of the financier of the
asset. After the lease agreement has been entered into, the lessor has not to bother himself about the
proper maintenance of the asset with the result that in a financial lease the maintenance of the asset
is made the responsibility of the lessee. A financial lease is also known as a Capital Lease.
(ii) Operating Lease. A lease other than a finance lease is an operating lease. In it, the period of
contract between the lessor and lessee is less than the full expected useful life of the asset. The lease
contract contains a clause by which the lessee is entitled to terminate the contract by giving due
notice thereof to the lessor. Thus, it is a cancellable lease.
In
7/15/2019 this type of lease, the primary lease period Study
is mostly
Material-2inadequate for the lessee to recover his
investment in the asset to the full extent. Also, as the lessee enjoys the right of cancellation, the
lessor runs the risk of obsolescence of the asset. Being interested in the proper maintenance of the
asset, the lessor bears the expenses of the maintenance of the leased asset in this type of lease.
It is notable that even a non-concealable lease is also cancellable but only in the following
circumstances: (a) upon the occurrence of some remote contingency,
(b) with the permission of the lessor,
(c) if the lessee enters into a new lease for the same or any equivalent asset with the same lessor, or
(d) upon payment by the lessee of an additional amount such that, at inception, continuation of the
lease is reasonably certain.
Leveraged Lease. A finance lease or an operating lease becomes a leveraged lease if in the lease
contract, apart from a lessor and a lessee there is a long-term lender also. In a leveraged lease, the
lessor finances only a small part of the investment involved in the lease and the major portion of the
finance is provided by the long-term lender. This type of lease is used by the lessor when such a huge
capital outlay is required for acquiring the asset that the lessor finds it necessary to use the services of
a long-term lender.
Distinction between Finance Lease and Operating Lease. The following are the point of
distinction between a finance lease and an operating lease :
(i) In a finance lease, the lease period covers nearly the entire useful life of the asset whereas in an
operating lease, the lease period is much shorter than the useful life of the asset.
(ii) A finance lease is non-revocable while an operating lease is revocable.
(iii) In a finance lease, the cost of maintenance is borne by the lessee. On the other hand in an
operating lease, the maintenance is the responsibility of the lessor.
(iv) In a finance lease, the lessee runs the risk of obsolescence of the asset; in an operating lease, the
lessor bears this risk.
(v) In a finance lease, the total lease rentals not only cover the cost of the asset but also include a
margin of profit for the lessor. Under an operating lease, the lessee is not given such an option.
Advantages and Disadvantages of Leasing. In recent years, leasing has become very popular. It is
because it is an excellent source of finance available to the industrialists. It provides hundred per cent
finance keeping the debt-equity ratio of the lease unaltered and thus not affecting the capacity of the
lessee to raise further capital for other purposes. The fact that the lessee is not the owner of the asset
he uses is a big boon to M.R.T.P. companies and the small-scale industrial units as it enables them to
avoid statutory restrictions in the path of further growth. In the case of an operating lease, the risk of
obsolescence and the major expenses of maintenance of the asset are also borne by the lessor which
facilitates the job of the lessee.
Leasing has a few disadvantages also. The lessee cannot avail himself of certain tax benefits
and benefits like backward area incentives and the state subsidy in respect of the asset used by him on
the basis of a lease. In case of a non-cancellable lease, the lessee runs the irks of technological
obsolescence of the asset. Leasing is not a suitable method of finance of assets to be used in a project
in which cash inflow will start after a fairly long period of time. In the case of those assets also whose
value is likely to appreciate over long period of time, purchase of the asset is better than taking it on
lease.
The
7/15/2019 contents of the following Accounting Standard 19Material-2
Study (AS 19) on Leases should be studied carefully to
understand the different points to be kept in mind while keeping a record of the transactions relating
to a lease in the books of lessor and the lessee.
5 LESSON 12 BRANCH ACCOUNTS

LESSON 12
BRANCH ACCOUNTS
Branch and Department

Generally a business is split into many parts for the purpse to capture the market at different places or
to have better management. If the different parts, usually, selling the same products or rendering the
same services, are located at different places in the same town or in different towns, they are know as
branches and when the various parts are located under the same roof, they are known as departments.
A firm which has branches naturally wants to know the profit earned and loss suffered at each branch,,
the systemn of accounting will naturally depended on the type of branch. Branches may be divded as
under:-
(a) Branches which receive goods only from head office, selling goods only for cash, remitting all cash
received to the head office, expenses being met out of remittance from the head office.
(b) Branches similar to the above except that goods are sold for cash and credit.(c) Branches similar
to above (b) with the difference that head office invocies goods to the branch at selling price or at a
price which is high er than Cost price and the office passes entries with the invoice price.
(d) Branches making their own purchases and manufacturing goods and functioning more or less cases
as an autonomous units.
(e) Foreign branches, i.e. branches located in a foreign country. We will not study the accounting for
such branches it is not in the syhalbs.
Usually, account for the first three types branches are kept by the head office, The fourth and fifth
type of branches generally maintain an independent st of books of accounts.
The simplest case of branch is one where branch receives ggoods only from H,.o., sells goods only for
cash depositing the same with the bank in the name of H.O., and H.O., itself pays all branches’
expenses and record goods sent to branch at cost.
H.O. maintains a Branch Account to ascertain profits and loss made at the branch. Here ‘Branch
Account’ is in the nature of Trading and Profit and Loss Account. Al;l investment in the form of goods
and expenses incurred in respect of branch are recorded on the debit side of the ‘Branch Account’ -
Whereas sale proceeds, closing stock and other items of income are recorded on the credit side of this
account, if credits exceed debits, it means a profit at the branch which is transferred to profit & Loss
Account where as id debit exceeds credits, it means a loss at branch which, like the profit a branch, is
transferred to Profit & Loss Account. The entries to be made in the Head office books are :-
(a) When goods are sent to Branch
*Branch Account Dr.
To Goods sent to Branch Account
(For Cost Price of goods sent to Branch)
* If the branch returns some goods to H.O., a reverse entry will be passed with the Cost price of Goods
returned.
(b) When branch expenses are met
Branch Account Dr.
(For
7/15/2019 payment for branch expenses) Study Material-2
(c) When sale proceeds deposited by Branch with the bank in the name of Head Office :- Bank
Account Dr.
To Branch Account
(For sale proceeds deposited with the Bank)
(d) When at the end of the year some goods are lying with the Branch unsold.
Branch Stock Account Dr.
To Branch Account
(For cost Price of goods lying at the branch at the end of the year)
(e) When Branch Account reveals a profit
** Branch Account Dr.
To Profit asnd Loss Account
(For transfer of branch profit from Branch Account to profit & Loss Account)
(f) Branch Stock account will appear in the Balance Sheet of Head Office. In the beginning of the next
year, this account is transferred t Branch Account by means of the following en try:-
Branch Account Dr.
To Branch Stock Account
(For Cost of Branch Stock as at the beginning of the year)
(g) Goods sent to Branch Account must be transferred at the end of the year to Purchase Account in
case of trading concern and to Trading Account in the case of manufacturing concern. The entry will be
:-
Goods Sent to Branch Account Dr.
To Purchase Account/Trading Account
(Transfer of Balance in Goods sent to Branch Account to Purchase/Trading Account)
(h) If the branch sells goods on credit also, a few additional entries will have to be made. For cash
received from branch debtors during the year, following entry will be passed :-
Bank Account Dr.
To Branch Account
(For cash received from Branch debtors)
** If Branch Account reveals a loss, a reverse entry will be passed with the amount of loss.
(i) At the end of the year, the following entry will be passed with the total amount due from the
Branch
Account debtors as at the date:-
Branch Debtors Account Dr.
To Branch Account
(For closng branch debtors)
Branch
7/15/2019 Debtors will apear in the Balance Sheet of Study
the H.O. and will be transferred to Branch Account in
Material-2
the beginning of the next account period.

Note:- Sometime H.O. may send sme cash to the branch to meet opetty cash expenses at the branch.
At the end of the year, some cash may be lying with the branch. The amount should be treated in the
same way as stock at branch is treated.
Illustration 1
From the following particulars relating to Bangaslore Branch for the ending 31st December, 1994
prepare the accounts in the head office books:-
Rs.

Stock at Branch on 1st January, 1994 17,800
Branch Debtors on 1st January, 1994 9,400
Petty Cash at Branch on 1st January 1994 40
Goods sent to Branch during the year 56,800
Cash Sales during the year 31,600
Credit Sales during the year 80,800
Cash received from the debtors 75,800
Cash sent to Branch for expenses :-
Rent 4,000
Salaries 12,000
Petty Cash 2,000
Stock at Branch on 31st December 1994 10,800
Petty Cash at Branch on 31st December, 1994 60
Goods returned by the Branch 1,600
Solution:
Bangalore Branch Account

Dr. Cr.

Rs. Rs.
7/15/2019 1994 1994Study
Material-2

Jan., 1 To Balance b/d Jan.l toBy Cash Cash Sales Received
Dec.,31from

Debtors
Stock Debtros 17,800 31,600
75,800
Petty Cash

9,400
Goods sent to Brach

To Goods sent to
40 27,240 1,07,400
Account

Jan.l

to Branch Account

Branch Stock A/c Branch

Debtors A/c Petty Cash at
Dec.,31To Cash for Branch Account
1,600
Expenses: Rent

56,800
Salary

10,800

Petty
””

To Profit
transferred to 14,400

Profit & Loss 18,000 60

Account
1,34,260 1,34,260

4,000

12,000

2,000


32,220

Memorandum Branch Debtors Account

Dr. Cr.
To Balance b/d 9,400 By Cash 75,800

To Credit Sales 80,800 By Balance c/d 14,400
90,200 90,200

Godds sent to Branch Account
Rs. Rs.

1994 1994

Jan.l To Bangalore Branch 1,600 Jan. 1 By Bangalore Branch 56,800
to to

A/c returns Account
Dec. 31 Dec. 31

To Purchase Account 55,200
Dec.31 Transfer
56,800 56,800
Branch Stock Account

Rs. Rs.

1994 1994

Jan.l To Balance b/d 17,800
Jan.l To Transfer to Bangalore Branch 17,800
A/c

Dec.31 To Banglore Branch A/c 10,800 Dec. 31 10,800
By balance c/d
28,600 28,600

1995

7/15/2019 To Balance b/d Study Material-2
Jan.l
10,800

Branch Debtors Account
Rs. Rs.

1994 1994

Jan. l To Balance b/d 9,400 Jan.l To Transfer to Bangalore A/c 9,400

Dec. 31 To Bang lore Branch A/c 14,400 Dec. 31 By Balance c/d 14,400

1995 To Balance b/d 14,400

Jan.l 23,800 23,800
Petty Cash at Branch Account

Rs. Rs.

1994 1994

Jan.l To Balance b/d 40 Jan.l By Bangalore Branch A/c 40

Dec. To Balngalore Branch 60 Dec.31 By Balance b/d 60
A/c

100 100

1995

To Balance b/d 60
Jan.l

Note: No entry is made for credit sales at branch in the H.O. books. The cash received from the
debtors will be remitted to the H.O. along with Cash received for Cash Sales. The H.O. makes no entry
for cash received by it. It will debit cash, credit branch. By the same token, the H.O. makes no entry
for discounts allowed, bad debt written off or returns by the Branch debtors. It the branch126/215
https://sol.du.ac.in/mod/book/tool/print/index.php?id=1561
has
received
7/15/2019 to bill of exchange, it will be sent to the Study
H.O. Material-2
The entry then will be to debit Bills Receivable Account and Credit Branch Account.
Type (c)
In this case, goods are invoiced to the Branch at selling price. In order to ascertain the profit, a
justment entries will have to be made for the difference between the invoice value of goods sent in
branch and their cost. Similarly stock at branch will be valued at invocie value but, again suitable
adjustment will be necessary to ensure that stock does not appear in the Balance Sheet at more than
the cost.
The entries in respect of goods sent to Branch and Stock will be as follows:-
(a) When goods are sent to branch Branch Dr.
Account

(For invoice price of the goods sent to branch)

(b) For stock lyiog at branch at the end of the
Trading period

Dr.
Stock at Branch Account

To Branch Account
(For invoice price of the goods lying at the branch athe end of the year)
(c) For adjustment in the Value of goods sent
Goods sent to Branch Account Dr. To Branch Account
(For loading invoice price of goods sent to branch)
If some goods have been returned by the branch to Head Office the above mentioned entyr will be
passed only for the loading in invoice price f goods Sent to branch less invocie price of the goods
returned by branch.
4. For adjustment in the value of Closing Stock
Branch Account Dr.
To Stock Reserve Account
(Loading in the amount of closing stock at branch
credited to Branch Stock Reserve Account and debited to Branch A/c)
In the begining of the next year, Branch Stock Reserve Account will be transferred to Branch Account by
means of the following entry:
Branch Stock Reserve Account Dr.
To Branch Account
(Transfer
7/15/2019 of Branch Stock Reserve Account to Branch Account)
Study Material-2
Illustration 2
Mohan Stores of Delhi has a branch at kanpur, goods are sent by the head office at invoice price which
is at a profit of 20% on invoice price. All expenses of the branch are paid by the head office. From the
following particulars prepare branch account in the Head Office books:-
Opneing balance
Rs.
Stock at invoice price 22,000
Debtors 3,400
Petty Cash 200
Goods sent to branch at invocice price 40,000
Expenses paid by H.O.
Rent 1,200
Wages 400
Sales and other expenses 1,800 3,400
Remittances made to Head Office
Cash Sales 5,300
Cash collected from Debtors 42,000 47,300
Goods returned by branch at invocie price 800
Balance at the end:
Stock at Invoice price 26,000
Debtors at the end 4,000
Petty Cash 250
Solution:
Branch Account
Dr.
Cr.
To Opening balances: By Stock reserve (loading) of
Stock stock in the beginning

Debtors By Goods sent to branch
22,000 4,400
(loading) By Cash Sales

ByCash Collected from
Petty Cash
3,400 Customers 8,000

To Good sent to branch
200 25,600 5,300
Account

40,000 42,000 47,300 128/215
To
7/15/2019 Bank Rent Wages By Goods returned
Study Material-2 to H.O.

By Balance:
Salary & other Expenses
Stock

To Stock reserve (loading) 800
on Debtors
1,200

Closing Stock Petty Cash
400 3,400 26,000

To Goods returned
1,800 4,000
(loading) To Net Profit

5,200 250 30,250

160

16,390
90,750 90,750
Illusration:
Naresh Stores Ltd. operate a retail branch at Madras All purchases are made by the Head Office in
Calcutta, goods being charged out to the branch at selling price which is cost plus 50%. All cash
received by the branch in remitted to Calcutta. Branch expenses are paid out of an imprest account
which is reimbursed by Calcutta monthly Branch helps a sales ledger and subsidiary books but other
wise all branch transactions are recorded in the books of the Calcutta Office. On April 1,1990 Stock in
trade at Madras, at selling price, amounted to Rs. 2,76,900 and debtors to Rs. 54,800.
During 1990-91 the following transactions took be place at the branch.
Rs. Goods received from Calcutta at selling
price 9,37,200
Cash Sales 5,21,000
Credit Sales les returns 4,23,700
Goods returned to Calcutta at selling price 14,400
Agreed Allownces to customers off selling price
(already taken into account while involing) 8,200
Cash receiving from debtors 3,98,600
Discount allowed to debtors 97,000
Bad debts written off 4,800
Expenses 1,43,800
On 31 March, 1991 Stock in trade at Madras was found to amount to Rs 2,45,100
You
7/15/2019 are required to (a) write up the Branch StockStudy
Account,
Material-2and (b) prepare the Trading and Profit and
Loss Account at the Branch for the year 1990-91
Solution :
Madras Branch Stock Account
Rs. Rs.

To Balance b/d To Goods sent to 2,76,900 By Sales- Cash
Branch Account 5,21,000

9,44,700
Credit

4,23,700
9,37,200 8,200

By Allowance to Customers
14,400

By Goods Sent & Branches
1,700

By Shortages (Balancing figure) By
Balances c/d 2,45,100
12,14,100 12,14,100
Branch & Trading and Profit & Loss Account

Rs. Rs.

To Opening Stock (Cost) 1,84,600 By Sales: Cash Credit
(2,76,900-92,300)
By Closing Stock
To Goods Sent to Branch (Cost)
5,21,000
(9,37,200 - 14,400 - 3,07,600)
Gross Profit (2,45,700-81,700) By 9,44,700
Gross Profit
4,23,700
6,15,200
To Discount To Bad debts To
Expenses To Nel Profit
3,08,300 1,63,400
11,98,100 11,08,100
7/15/2019 9,700 Study Material-2 3,08,300

4,800

1,43,800

1,50,000
3,08,300 30,800

Stock and Debtors System

Account of balance of type (c) can also be prepared in another manner known as the Stock and Debtors
system a Branch Stock Account is mantained whose balance at any time shows the selling price of
goods lying at the branch, a Branch Debtors Account is maintained whose balance at any time reveals
the amount recoverable by the branch from its debtor at that particular time a Branch Expenses
Account to show total expenses incurred in connection with the branch by the branch and H.O. a
Branch Adjustment Account to reveal gross profit or gross loss at the branch and a Branch Profit and
Loss Account to reveal net profit, or net loss made at the branch. Sometimes Branch Profit and Loss
A/c merged into Branch Adjustment Account which is then made to reveal net profit or net loss instead
of gross profit or gross loss. Under the method the entires are made as follows:
1. Where goods are sent to a Branch
(For invoice price of goods sent to Branch Account)
Note : The above entry is reversed if goods are returned by branch t Head Office.
2. When expenses are incurred for the Branch
Branch Expenses Account Dr.
(For payment made by H.O. for tranch expenses)
3. When sales are made at the branch
(a) Cash/Bank Account Dr.
(For cash sales made at the branch)
(b) Branch Debtors Account Dr.
(For credit sales made at the branch)
4. When Cash is received n account of
Branch Debtors Cash/Bank Account Dr.
To
7/15/2019 Branch Debtors Account Study Material-2
(For cash received from branch debtors)

5. When goods are returned by the Branch Debtors to Branch
To Branch Debtors Account
(For goods returned by Debtors to Branch)
6. When any allowance is made to branch debtors, say discount.
Branch Expenses Account Dr.
To Branch Debtors Account
7. When there is any leakage, loss or wastage at the Branch
Branch Stock Adjustment Account Dr. (with loading) Branch Profit and Loss
Account Dr. (with Cost price)
To Branch Stock Account (With invoice price)
Note : To above entry is reversed if there is surplus in any stock. For the excess of selling price over
charged on goods sent ot branch;

8. Goods sent to Branch Account Dr.
To Branch Stock Adjustment Account
9. For the Adjustment of the invoice price of the closing stock.
Branch Adjustment Account Dr. With the difference in the invoice
To Stock Reserve Account price of the stock and the Cost value of stock.
(The Stock Reserve Account, will be carried to the next accouting year and then transferred to the
creidt Branch Adjustment Account)
10. For transfer of Branch Expenses Account to Branch Profit & Loss Account
Branch Profit & Loss Account Dr.
To Branch Expenses Account
11. For transfer of Gross profit revealed by branch adjustment account to Branch profit & Loss
Account
Branch Adjustment Account Dr.
To Branch Proft & Loss Account
The aboive entry will be reversed if there is a Gross loss.
12. For transfer of Net Proft revealed by Branch proft & Loss Account to General proft & Loss Account
Branch profit & Loss Account Dr.
To (General) profit & Loss Account
The entry will be reversed in case of Net Loss.
13. For transfer of balance in Goods sent to Branch Account to Trading Account or Purchase Account
Goods
7/15/2019 sent to Branch Account
StudyDr.
Material-2
To Trading Account/Purchases Accounts
Illustration 3
Oils Ltd. opened a branch at kanpur in 1993. Goods are invoced to the branch at cost plus 25%. The
following figures are given to you for 1993 and 1994 ascertain the profit or Loss made in two years by
stock and debtors system:
Rs. Rs.
To Goods sent to Branch (Inv. Value) 1,40,400 2,65,200
Sales -Cash 50,00080,000

Credit
70,000 1,60,000
Cash received from Debtors 62,4001,51,400
Discount allowed to Customers 1,6002,600
Goods returned by customers 2,0001,500
Cash remitted to Branch for:
Rent 1,2001,500
Salaries 6,0008,000
Sundry Expenses 9601,000
Stock at Branch as on 31st December 47,800
Solution:

Rs. Rs.

1993 1993

To Goods sent to Jan,l By Cash Sales (2) 50,000
1,40,400
Jan.l Branch Account (l)

Dec., To Branch Debtors Dec. 31 By Branch Debtors A/c
31 A/c
2,000 70,000

Credit Sales (3) By BalanceC/d
Returns
22,400

1,42,400 1,42,400



1994

Jan.l To Balance b/d
22,400

Goods sent to Branch Account

Rs. Rs.

1993 1993
) 1,40,400
28,080
Dec.31 Branch Adjustment Jan.l to By Branch Stock A/c (1)
A/c (8

1,12,320
Dec.31
To Purchase Account
(11) 1,40,400 1,40,400
Branch Debtors Account

Rs. Rs.

1993 1993

Jan.l To Branch Stock A/c 70,000 Jan. lBy Cash (4) 62,400
to

Dec.,
To Credit Sales (3)
31

Dec. 31 By Branch Stock A/c Returns (5) 2,000
”
By Branch Exp. A/c Discount (7)

By Balance c/d
1,600

4,000
70,000 70,000

1994

7/15/2019Jan. 1 To Balance b/d Study Material-2

4,000
Branch Expenses Account

Rs. Rs.

1993 1993

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

To Branch Debtors A/c
960

Discount (7)

Dec. 31
1,600
9,760 9,760

Branch Adjustment Account
Rs. Rs.

1993 1993

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

13,840
28,080 28,080

Stock
7/15/2019 Reserve Account Study Material-2
Rs. Rs.
1993 By Branch Adjustment A/c (4) By
Balance b/d
1993
Dec. 31
To Balance c/d 4,480 Dec.31 4,480

1994

4,480 4,480
Jan. 1

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

1993 1993

Jan.lTo Balance b/d To 22,400 Jan. 1By Cash Sales 80,000
Goods sent to to

Branches A/c
Dec. 31
”
To Branch Debtors

to 2,65,200 By Branches Deb. A/c
A/c Returns

1,60,000

Dec. 31
Dec. 31 Credit Sales

1,300

1,500 By Branch Adj . A/c - Wastage*

By Balance c/d
47,800

To Balance b/d 2,89,100 2,89,100

1994

47,800
Jan.l
Goods sent to Branch Account


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

” ” To Purchases A/c
2,65,200 Dec. 31 2,65,200
Branch Debtor Account

Rs. Rs.

1993 1993

Jan.l To Balance b/d 4,000 Jan.l By Cash 1,51,400

Dec.31

Jan.l to To Branch Stock A/c By Branch Stock A/c
1,60,000 1,500
Dec. 31 Credit sales Returns
2,600
By Branch Exp. A/c Discount
8,500
By Balance c/d

1994
1,64,000 1,64,000
Jan.l To Balance b/d

8,500

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


1993 1993

Jan. l To Cash-Rent 1,500 Dec.31 By Branch Adj. A/c
13,100
Salaries 8,000 Transfer

Sun Exp. 1,000 1994
Dec. 31
To Branch Debtors A/c Jan.l

Discount 2,600
13,100 13,100

Stock Reseve Accounts

Rs. Rs.

1993 1993

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

14,040 14,040

1994

Jan., l By balance b/d 9,560
Branch Adjustment Account


1993 1993
ec., 31

Dec., To Branch Adj., A/c D By Stock Reserve A/c transfer 4,480
31

Reserve required on
closing stock

To Branch Stock A/c
9,560

By Goods sent to
Wastage

Branch A/c 53,040
To Branch Exp. A/c To
1,300
profit & loss A/c
(transfer of Net Profit)
13,100

33,560
57,520 57,520
Distinction between whole-sale and retail profit at branch

Sometimes, the manufacturers of goods sell there goods on retail basis also. In such cases they supply
the goods to these retail branches at a price at which it is supplied to the wholesalers theus keeping
them at par with the wholesalers. Since goods are sold by branches at retail price which is more than
wholesale price, therefore, the difference between their sale price and wholesae price only will be
taken to be profit earned by the branch. For example the cost of an article may be Rs. 100, the
wholesales price is Rs. 130 If the articles are sent to branch and sold there, the proft revealed
according to the above method will be Rs. 30 (retail Price minus the cost.) It is apparent, however, that
by selling goods throguh branch Profit is only Rs. 10 Rs. 20 could have been earned by selling the goods
on whole-sale basis to others. For knowing the true profit at retail branches, the practice adopted
sometimes is to charge the branch with wholesale price and then to ascertain the profit. The Head
Office Trading Account will then be credited with goods sent to branches at wholesale price and not at
cost.
It must be remembered however, that the stock at the end of the year at the branch will be valued at
wholesale price. Therefor, the Head Office must create a proper reseve by debtiting its own
profit & Loss account in order to show the branch stock at cost in the Balance Sheet.
Illustration 4
A
7/15/2019 Ltd. has a retail branch at Nagpur and goods are sold
Study to customers at cost plus 100%. The wholesale
Material-2
price is cost plus 80 %. Goods are invoiced to Nagpur at wholesale price. From the following particulars
find out the profit made at Head office and Nagpur for the year 1993-9
H.O. Nagpur

Stock on July 1,1993 25,000

Purchases 1,50,000 — Goods
sent to Branch (Invoice Price) 54,000
— Sales 1,53,000 50,000
Stock on 30th, June 60,000 1,000

Sales at H.O. are made only on whole-sale basius and that at Branch only to customers. Stock at branch
is valued at Invoice Price.
Trading Account for 1993-94
Particulars H.O. Rs. Nagpur Particulars H.O. Rs. Nagpur
Rs. Rs.
To Opening Stock 25,000 — By Sales 1,53,000 50,000

To Purchases 1,50,000 —

To Goods received from By Goods sent to
H.O.
54,000 —
To profit & Loss A/c
54,000 Branch

60,000 9,000
Gross profit
By Closing Stock
92,000
5,000
2,67,000 59,000 2,67,000 59,000
110
Profit & Loss Account 1993-94
Particulars
7/15/2019 H.O. Nagpur Particulars
Study Material-2 H.O. Nagpur

Rs. Rs. Rs. Rs.
To Stock Reserve against By Gross profit 92,000 5,000
for

160
80,000×

200
4,000 —

To Net Profit (Subject to
88,000 5,000
exp.)
92,000 5,000
92,000 5,000

Branch Stock A/c
Had the solution been attempted on the usual lines it would have been as follows:-
Trading and Profit & Loss Account for 1993-94

Particulars
7/15/2019 Head Office Nagpur Particulars
Study Material-2 Head Office Nagpur

Rs. Rs. Rs. Rs.
To Opening Stock 25,000 By Sales 1,53,000 50,000

To Purchase 150,000 By goods Sent to

To goods setn to (at cost)- 30,000

54,000 × 100
By Closing Stock

(at cost) 60,000 5,000

30,000

68,000 25,000
243,000 55,000 243,000 55,000

Branch at cost 180
Illustration:
A head office sends goods to its Branch at 20% less than its lisepitce. Goods are sold to customers at
cost plus 100% from the following particulars ascertain the profit made at the head office and the
branch in case of branch on the wholesale basis.
Opening show of cost
Head Office Branch
Rs. Rs.
(at invocie price in case of Branch) 40,000 32,000
Purchases 200,000
Goods Sent ot Branch(at invoice price ) 96,000
Sales 1,70,000 80,000
Expenses 14,000 8,000
Solution

7/15/2019 H.O Branch By Sales
Study Material-2 No. Branch

Rs. Rs. Rs. Rs.
To Opening stock 40,000 32,000 By goods sent to 170,000 80,000

To Purchases 2,00,000 Branch A/c 96,000

To Goods From. H.O To 96,000 By closing Stock
Gross Profit c/d
64,000

1,21,000 16,000 95,000

3,61,000 144,000 3,61,0001,44,000
To Expenses
14,000 8,000 1,21,00016,000

By Gross Profet b/d
To Stock Reserve

By Stock Reserve
against Brncb stock against branch opening
24,000
stick

60
64,000 ×
60
160 32,000 ×
160

To Net Profit

95,000 8,000 12,000
1,33,00 16,000 133,000 16,000
Calculation of closing stock

Head Branch
office
Rs. Rs.
Opening stock 40,000 32,000 (at invoice
price)
Purchases 2,00,000
Goodds from (HO) 96,000 (at invoice
price)
2,40,000 1,28,000
96,000 × 100
Less cost of goods sent to Barnch

160
60,000

1,70,000 × 100
Less cost of sales to Outisders
80,000 × 160
200
85,000
For Branch
200
64,000
95,000 64,000
Independent Branch
So far we have studied branches which did not keep books of account. Now we s shall deal with
branches keeping their own accooounts.
The Heaaad Office will open its own books an account called “Branch account to shich goods or cash
sent will be debited. When cash is recieved from the branch , thebranch account will be credited. This
account is maintained more or less /like personal accounts so that any expenses incurred on behalf of
the branch will also be debited the account. The balance of this account shows hw much money the
branch owes to Head Office.
Similarly the branch will have “Head Office Account” in its books “goods” or Cash recieved from Head
office be credited and goods and cash sent to Head Office debited.
The balance in the account is usually credit and indicates the amount owed by branch to the Head
Office.
The balance in the branch account (Head Office books ) should agree with the balance in the Head
Office account ((branch books). But due to goods or cash in transit this may, not be so. ITgpods are
sent by the Head Officce it will pass an entry immediately but the branch will record the receipt of
goods only on their receipt. There will surely be some cash to Head Office, it will record it immediately
but the Head Office will wait till actual receipt. On the daate of closing of accooounts, ggoods or cash
in transit, the Head Office will have to pass the folloowing entry:
Goods in Transit Dr.
To Branch Account
Similarly, for cash sent by the branch but still in transit the branch will pass the entry; Cash in Transit
Account Dr.
To
7/15/2019 Head Office Account Study Material-2
Both Goods and Cash in transit are assets and should be shown in the balance sheet:
Note: If in examination problems, there is a difference in the balance shown by th Head Offece and
Branch Accounts; the difference should be assumed to be due to either gods in transit or cash-intransit.
Suppose in the Head Office boods, branch account shows debit balance to Rs. 26,000/- and in the
branch books. Head Office account shows a credit balance of Rs. 21,000/ - worth of goods or cash is in
transit.
Now we shall take up certain other are peculiar to an independent nranch. Account of fixed assets at
the Branch are usually maintained in Head Office books and not in branch books even if the asset is
originally paid by the branch.
When such an assset is acquired and branch pays for it, the branch passes the following entry: Head
Office Account Dr.
The Head Office will pass the following entry on receipt of advice from Branch: Branch Fixed Asset (by
name) Dr.
To Branch Account
If Head Office pay s for it, it wiill debit Branch Fixed Asseett Accoount and will credit cash. Branch
passses no entry. Regarding depppreciation there is no peculiarity if the accounts of fixed assets are
maintained in the branch books. But if accounts of such asssets are maintained in Heaad Office books,
the entry in respect of depreciation will be:
Branch Account Dr.
To Branch Fixed Assets Account
In the branch books the entry will be:
Depreciation Account Dr.
To Head Office Account
Head Officce always does some work on behalf of the branch and thus Head Office Charges a
reasonable amount from the branch. For that the Branch passes the following entry:
Head Office Expenses Account Dr. To Head Office Account
Head Office will pass the following entry:
Branch Account Dr.
To Salaries Account (Or Profit & Loss Account)
There may be inter branch transactions. Suppose A Branch sends goods to B branch, the various entries
to be passed are as follows:
In A’s books:
Head Office Account Dr.
In B’s books :
Goodds received from Head Office Account Dr.
The
7/15/2019 Head Office will, of course, keep accounts of allMaterial-2
Study the branches and will also record inter branch
transactions.
If, therefore , goods are supplied by A Branch to B Braanch the Head Office will Pass the following
entry :
A Branch Account Dr.
To B Branch Account
Illustration 5
Nagrik Cloth Ltd., had a branch at Rohtak. Preliminary account prepared by Rohtak Branch for 1994
showed a profit of Rs. 11,400 without considering the following:
Cash remitted to the Head Office not yet received 3,600
Goods sent by the H.O. not yet received at Rohtak 4,400
H.O. expenses charged to Branch 3,200
Depreciation on Branch assets (account kept in H.O. Books 900
Record the above in the books of both the Head Office and Branch. Also state how much profit has the
branch made.
Solution:
Books of Head office

Date Particulars L.F. Dr. Cr.
1994

Goods in transit 4,400
Account Dr.

4,400
To Rohtak Branch Account

(Being goods sent to Rohtak Branch not received there)
3,200
Rohtak Branch

Account Dr.
3,200

To Salaries Account (or P&L A/c)

900
(being H.O. expenses to be received from the branch)

900

7/15/2019 Rothak Branch Study Material-2
Account Dr.
3,600

To Branch Assets Account
3,600

Depreciation on branch assets (account kept in

3,200
H.O. Books charged to Branch A/c)

Cash in Transit
3,200
Account Dr.

900

(Cash sent to HO not yet received there)
900
Head Office Expenses
Account Dr.


(Expenses Charged by Head Office)
Depreciation
Account Dr.


(Depreciation in respect of branch assets account in
Head Office)
After making the above entries the profit at the branch will be reduced to Rs. 7,300 i.e. Rs, 11,400
being H.O. expenses depreciation.
Illustration 6
A&Co. Ltd, having their H.O. at Delhi with branches at Lucknow and Allahabad close their annual
account on 31st December, when the following transactions have taken place:
(a) Remittances of Rs. 4,500 mady by Lucknow brnch to its H.O. on 30th December, received by the
H.O. on 5th January.
(b) Goods valuing Rs. 2,200 despatched by the Allahabad on 27th December, under instructions from
the H.O. and received by the Lucknow on 30th December.
(c)
7/15/2019 Depreciation amounting to Rs, 1,100 on Lucknow branch fixed assets when accounts of such assets
Study Material-2
are maintained at the H.O.

(d) Goods worth Rs. 9,000 despatched by the H.O. to Allahabad branch on 30th December received by
that branch on 7th January.
Show these entries in the books of the (i) H.O. and (ii) Lucknow branch as at the close of the year.
Solution:
H.O. JOURNAL
(a) No Entry Rs. Rs.

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

To Allahabad Branch A/c
2,200

(Goods sent by Allahabad Branch to Lucknow

Branch as per our instalment)

Lucknow Branch A/c

Dr.
(c) 1,100

To Lucknow Assets A/c
1,100

(Dep, on assets as Lucknow Branch)

Goods-in-Transit A/c)
(d) Dr. 9,000

To Allahabad Branch A/c 9,000

(Goods sent by us not yet received by Allahabad Branch)

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

(a)
Cash-in-transit A/c 4,500
Dr.

4,500
To Head Office A/c

2,200
(Entry for remittances still on transit)

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

2,200
To Head Office A/c

(Goods received from Allahabad oon Head Office
instructions)
(c)
Depreciation A/c 1,100

Dr. To Head Office
(depreciation on assets) 1,100

Incorporation of branch trial balance in Head Office books
On the receipt of trial balance from the branhc, the H.O. will take steps to incorporate bracu figures
with its own figures with a view to present a common trading and profit and loss account and Blance
sheets. This process is known as Incorporation’. Before starting to pass entries, the Trading and Profit &
Loss Account of the branch will have to be prepared and after that the combined blance sheet of the
branch and the Head Office. There are two methods for doing this:
Under first method, the Trading and Profit and Loss Account of the Branch is prepared in the regular
way in the books of the Head Office. The entries to be passed are as follows:
1. Branch Trading Account Dr.
To Branch Account
(With the items of opening stock, purchases and other items appearing on the debit side of Trading
Account of the branch but excluding gross pofit).
2. Branch Account Dr.
To Branch Trading Account
(With Sales; Closing Stock and other items appearing on credit side of Trading Account of the branch
but excluding loss).
2. Branch Trading Account Dr.
To
7/15/2019 Branch Profit and Loss Account Study Material-2
(For Gross profit revealed by Trading Account).

If there is a gross loss, the entry will be
Note: reversed:
4. Branch Profit & Loss Account Dr.

To Branch Account
(Fro amounts appearing on the debit side a Profit & Loss account of the branch but excluding net Profit
and Gross Loss)
5. Branch Account Dr.
To Branch Profit & Loss Account
(With items appearing on the credit side of P&L A.c of
Branch but excluding gross profit and net loss).
6. Branch Profit and Loss Account Dr.
To Profit & Loss Account
(With net profit revealed by Profit & Loss Account of the Branch). The above entry will be reversed if
there is a net loss:
It should be noed that Branch Trading Account and Branch Profit and Loss Account will setoff.
It is desired to close the books of the branch completely and to record branch asets and liabilities in
the Head office books for the purpose of reparing common Blance Sheet, the folowing two further
entries should be poassed:
Branch Assets (individually) To Branch Account (Incorporation of branch assets as shown in the balance
sheet at the branch) Branch Account Dr.
To Branch Liabilities (individually)
(Incorporation of branch liabilities so outsiders shown in the Blance Sheet of the branch).
Illustration 6
You ar required to prepare the Trading and Profit & Loss Account and consolidated balance sheet of Eve
Ltd., in Calcutta and its branch at Delhi. Give Journal entries incorporation of Delhi branch accounts in
the Head Office and show the branch account in Head Office book after incorporating these in the
assets and liabilities.
The trial balance as on 31st December, 1993 are as under.

H.O. Dr. Branch Dr. H.O. Cr. Branch
Cr.
Manufacturing expenses 30,00010,000 – –
Salaries 30,00010,000 – –
Wages 1,00,000 40,000 – –
Cash in Hand 10,0002,000 – –
Purchases 1,50,000 8,000 – –


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

Closing stock H.O. was Rs. 40,000 and at branch Rs. 30,000. Depreciation is to be chargeal or
machinery
@ 20% and fueniture @ 15%. Rent outstanding is Rs. 500 (for branch).
Solution:
H.O..Books
Journal
1993

Delhi Branch 10,450 10,000
Account Dr.

To Branch machinery account

450
To Branch furniture account

(Being the depereciation on branch fixed assets charged
1,75,000
to branch)

Branch trading
account Dr. 1,75,000

To Delhi Branch account

(Cueing the total of the following items in branch
deebited to branch trading account)

Dec. 31
1,81,000
1,81,000
6,000
6,000
29,950
29,950
1,000
1,000
22,950
22,950
15,000
Stock
7/15/2019 30,000 Study Material-2

Purchases 80,000

Wages 40,000

Manufacturing Expenses 10,000

Goods reed from H.O. 15,000

Total 1,75,000
Delhi Branch
Accounts Dr.

To Delhi trading acount

(Being the total of the following items at branches
credited to branch trading account)

Sales 1,50,000

Purcchases return 1,000

Branch stock 30,000

Rs. 1,81,000
Delhi
7/15/2019 Trading
Study Material-2
account Dr.

To Delhi Profit & Loss account

(Being the transfer of gross profit)

Delhi profit & Loss
account Dr.

To Delhi branch account

(The total of the following expenses at branch debited to
branch profit and loss account)

Rent(including o/s) 4,500

Salaries 10,000

General expenses 5,000

Depreciation 10,450

Rs. 29,950
Delhi Branch
account Dr.

To Delhi profit & Loss account

(Being the discount earned at Delhi credited to branch
profit & loss a/c)
General
7/15/2019 profit & loss
Study Material-2
account Dr.

To Branch profit & loss account

(being the loss at Delhi transferred to Profit and loss
account of the H.O.)
Brach debtors
account Dr. Branch
cash account Dr.

2,000
Branch stock 30,000
account Dr.

47,000
To Delhi Branch account

(being the transfer of various assetsa to branch to H.O.
5,500
books)

Delhi Branch
account Dr. 5,000

To Branch creditors account 500

To Branch expenseso/s account

(Being the transfer of liabilitites at branch to H.O. books)

Delhi Branch Account
1993 Rs. 1978 Rs.
Dec.31
7/15/2019 To Balance b/d 54,000 Dec.31 By Delhi Trading A/c
Study Material-2

To Branch assets depre -opening stock purchases etc.
ciation
10,450 1,75,000

By Delhi P&L A/c expenses,
To Delhi trading
1,81,000
account sales and
stock Sundry assets 29,950

To Delhi Profit & loss 47,000
account -discount
1,000

To S. Liabilities
5,500
2,51,950 2,51,950
Trading and profit and Loss Account of Eve Ltd.
Fr the year ended 31st December, 1993

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

30,000 10,000
1,050 450
92,950 —
1,82,000 29,950 1,82,000 29,950
(b) lighting and heating expenses are distributed on the basis off units of power consumed by each
department, and so on,
(iii)
7/15/2019 Common expenses whose benefit are not Study
capable of accurate measurement are dealt with as
Material-2
follows:
(a) Selling expenses, e.g, discounts, bad debts, selling Commission, etc., are apprtioned on the basis
of sales or Cost of production plus Administrative expenses.
Balance Sheet of Eve Ltd. At a 31st December, 1993
Liabilities Amount Assets
Amount
Rs. Rs. Sbare
Capital 2,00,000 Fixed Assets
H.O.profit 92,950 Machinery H.O. 1,50,000
Less profit & Loss at branch (Loss) 22,950 70,000 Branch 50,000
Sundry Creditors 2,00,000
H.O. 30,000 35,000 Less Dep. 40,000 1,60,000
Branch 5,000 Furniture
Rent outstanding at branch 500 H.O. 7,000
Branch 3,000
10,000
Less Dep. 1,500 8,500
Current Assets
Stock Head Office 40,000
Branch 30,000 70,000
DebtorsH.O. 40,000
Branch 15,000 55,000
Cash in hand
H.O. 10,000
Branch 2,000 12,000
3,05,500 3,05,500
Alternatively, instead of passing entries regarding Trading and profit and Loss Account, only one entry
of the profit made or loss suffered at the branch may be passed:
Brach Account Dr.
To H.o. Profit & Loss Account. For loss the above entry is reversed.
6 LESSON 13 INVENTORY VALUATION

LESSON 13

INVENTORY VALUATION
Inventory is an important element of assets of an enterprise. In some enterprises, inventory constitute
the bulk of working capital. In view of this inventory of this inventory valuation and inventory control
assume a pivotal position for many concerns. However, inventory valuation is outside the purview of
the present chapter.
According to IAS-2* and AS-2*inventories are tangible property held- (a) For sale in the ordinary
course of business;
(b) in the process of production for such sale or
(c) to be consumed in the production of goods or services for sale, We can rename the aboive three
components of inventory as-
(a) Finished Goods,
(b) Work in process; or
(c) raw materials and components.
Objecctives of Inventory Valurtion
What aaare the objecttivs of inveentory valuation?The two objectives to be achieved by proper
valuation of inventoties are-
(1) Determinationof Income - We know that opening and closing stock affect the quantum of Gross
Profit (and hence net profit) of any concern. Any improper valuation of closing stock(i.e. inventory)
will lead to over and under statement of Gross profits of not only this year but also next year(as closing
stock of this year becomes the opening stock of next year).
(2) Determination of Financial position-Inventory appears as current asset in the balance sheet.
Any improper valuation will lead to distortion in the balance sheet also.
Besides these, inventory is use for computing various ratios which are u sed by proper valuation cannt
be over-emphasised.
Methods of taking Inventories

There are two methods of taking inventories
(1) Periodic Inventory Method, (2) Perpetual Inventory Method,
Peridic Inventory Method-It requires periodic (annual) stock taking by actual aounting weighting or
measuring at each accounting date. This quantitative units are converted into financial unis by
applying appopriate pricing method (discussed shortly inthis chapter). The cost of sales of the period is
obtained as follows-
Cost of sales = op. inventory + current purchase – closing inventory.
*IAS = International Accounting Standards Committee’s IAS-2
AS = Accounting Standards Boards AS-2
However,
7/15/2019 it will not be out of place to state here the
Study effect of any abnormal loss should done away
Material-2
with. Perpetual Inventory Method-This method provides a running record of inventory hand Records of
inventory can be compared by physical stock taking to find out are discrepancy of the two. Inventory
control is possible only through continuous stock taking.
Methods of Valuation of Inventories

basically there are theree methods of caluation of inventory-
1. Cost Price
(a) Historical Cost

(i) FIFO (ii) LIFO (iii) HIFO
(iv) Specific identification price
(v) Base Stock price
(vi) Simple average method
(vii) Weighted Average Method
(b) Current replacement price
(c) Standard Cost
2. Sale price
(i) Discounted future cash receipts
(ii) Net Realisable value
(iii) Current selling price
3. Lower of cost or sale price

(i) Aggregation total Inventory Method
(ii) Group Mehtod
(iii) Item by item method
Historical ost means the cost of acquisition on cost of production. Cost of acquisition includes not only
the price paid but also includes cost of transportation, insurance in transit, duties paid and other
direct expenses. It further includes indirect cost (like depreciation, rent) aand normal wastage of
material and labour. This method is very objective and personal bias is absent under this method. The
man drawback of this method is that it does not demarcate a line between operational gains and
holding gains. This becomes very pronounced in a rapid inflationary conditions (Holding gains are those
gains which arise outof holding the inventory) e.g. an item purchased two years back at Rs. 15,000 may
be purchased at Rs. 20,000 now. If this can be sold at Rs. 30,000 now, the holding profits will be Rs.
20,000 – 15,000 = Rs. 5,000 and operating profts will be Rs. 30,000 – Rs.20,000 = Rs. 10,000.
(i) FIFO (First in first out method): This method presumes that materials which are received first are
issued first. Issues of materials are pried in order of their purchase. The ending inventory consists of
most recently purchased goods. The closing stock is valued at latest purchase price.
Theoreticallly , it is presumed that inventory received first, will be issued first, but in practice this
may not be so. But from the pricing of issue of materials, point of view , this rule is folllwed.
The main defect of this method is that on a rising market, it reports larger earnings. Thiis inventory
gains arising out of holding inventory cannot be separated from the operating.
(ii)
7/15/2019 LIFo (last in first out) This method is the reverse of FIFO method. This method is based on the
Study Material-2
assumption that the materials received last is issued first. Thus oldest acquisitions are from part of
closing stcok. This mwthod excludes the holding profits. But comparisons between similar jobs will be
difficult.
(iii) HIFO (highest in first out)- This method is based on the assumption that highest priced materials
are issued first. It results in closing inventory being kept at the lowest possible price. It leads to
certaion of secret reserves in times of rising prices.
Illustration
From the following find out FIFO and LIFO inventory values under-
1. Perpetual inventory Mehtod
2. Periodic Inventory Method

Rs.
Jan. 1 O.B. 100 Units @ 7 700,00
Jan. 15 Issue 80 units
Jan. 25 Purchases 120 units @ 9 1080.00
Feb 20 Issue 129 units
April 10 Purchases 160 units @ 8 1280.00
May 20 Issue 100 units
Oct 15 Purchases 80 units @ 10 800.00
Dec. 31 Inventory (Closing) 160 units Total 3860.00

Solution
FIFO
Perpetual Periodic

Rs. Rs.
80 units @ Rs. 7 = 560 100 units @ Rs.7 = 700
20units @ Rs. 7 = 140 120 units @ Rs.9 = 1080
100 units @ Rs. 9 = 900 80 units @ Rs. 8 = 640

20 units @ Rs. 9 = 180 Cost of Issue 2440
80 units @ Rs. 8 = 640 Inventory value = Rs. 3860 – 2440 =
Rs.l440
Cost of Issue 2420 = 1,440

Inventroy value = 3860 – 2440
LIFO
Perpetual Periodic
80 units @ Rs. 7 = 560 80 units @ Rs. 10 = 800
120 units @ Rs. 9 = 1080 160 units @ Rs. 8 = 1280
100 units @ Rs. 8 = 800 60 units @ Rs. 9 = 540
Cost of issue 2440 Cost of issue 2620
Inventoy value = Rs. 3860 – 2420 Inventory value =
= Rs. 1440 Rs. 3860-2620 = Rs.l240
(iv) Specific Identification price - This method is used where materials are purchased specially for a
particular order or job. Its application is confined to high cost items like cars computers, videos,
antiques etvc. The question of precise determination of costs may again arise in case of joint costs like
transportation.
(v) Base Stock price-This method is based widely accepted view that a minimum quantity of inventory
must be held at all items in order to carry on the business. This minimum quantity is costed at the
earliest acquisition price. Quantity over and above the base stock evaluated by some other method say
FIFO or LIFO.
(vi) Simple Average Mthod-is average is average of prices without any regard to quantities purchased.
Here, the issue price is calculated as-
Total of
Issue Pr ice =
different prices Number of
Puuchases
The simple average gives equal importance to large and small purchases.
(vii) Weighted Average-Weighted average price is calculated by dividing the total cost of materila in
stock by total quantity of material in hand. Thus weighted average discriminates between small and
large quantity purchases.
(b) Current replacement price-This means the price at which the stock could have acquired at the
date of its issue. Under this method, all the inventories are valued at replacement price. The historical
cost does enable distinction between operational gains and holdig gains. So it is suggested that taking
of replacement costs in place of historical cost is better. This method suffers one serious drawback.
The closing stock, when valued on this basis, will be including unrealised gains.
(c) Standard Cost - Under this method, the standard price of each material is fixed and all issues are
made out the standard price. The fixation of standard cost depends on a number of factors like-
quantity of material to be purchased which results in bulk discount, market conditions regarding prices
etc. This method is easy to operate. It can warn management about the efficiency or otherwise of the
ourchase department. The fixation of standard cost is subjective and hence it is its greatest
shortcoming.
Sale Price
(i) Disconted furture cas receipts- This method is used where goods are produced under long-term
contrcts. In such cases, the timing of receipts are known. They can be discounted at a suitable interest
rate arrived at their present value. Such a discounted value can be taken as value of inventory.
(ii)
7/15/2019 Net Realisable value-As per IAS-2, net realisable
Study value is the selling price in the ordinary course of
Material-2
business. From this selling price, cost of completion and cost incurred for making sale is deducted, it
should be noted here that temporary fluctuations in prices should be ignored. Where there are firm
sale contracts, the net realisable value should be taken into account. Any inventory in excess of sale
contracts should be valued on the basis of arket prices.
(iii) Current Selling Price - This method is followed in those cases where there are a government
controlled market. It is because of this the sugar industry in India has shifted over to the caluation of
stock on the current selling price basis. The closing inventory of sugar is split into two parts- levy sugar
and non-levy sugar. The levy sugar is vlaued at levy price and non levy sugar is valued at current selling
price.
3 Lower of Cost or Sale price - Having determined the cost (whatever method is used), such cost
should be reduced to selling price: This is done because of the principle of conservatism. By this
principle, likely profits are to be ignored and likely losses are to be taken into account. Now which
market price is to be considered? Is it not realisable value or replacement cost?
Net realisable value may mean-
(i) The selling price less estimated costs of completion and disposal. This is ceiling of this value. (ii)
Net realisable value as reduced by gross proft, marging. This provides the floor of this value.
The AICPA has suggested for the application of the rule’ lower of cash or market value* the following-
(a) The ceiling figure to be taken when the replacement cost is more that ceiling.
(b) The floor figure is to be taken when replacement cost is less than the floor.
(c) The replacement cost when it lies between the floor and ceilding
Application of principle of cost or market value can be applied in any one of the following three ways-
(1) Aggregate or Total Inventory Method-Under this method total cost and total of net realisable
value is compared and lower of the two is considered for valuation.
(2) Group Method-Under this method, various types of inventories are grouped together on the bases
of theor sismilarities. After this, lower of cost or net realisable price principle is applied for each
category (not of individual item in the category.
(3) Item by Item Method - The cost and net realisable prices are compared by each item and lower of
the two is used for valuation of inventory.
According to AS-2 comparison of the historical cost with net realisable value van be made separately
for each item of inventory, or for groups of similar items. However comparison of the net realisable
value of all dissimilar items ion a class of business, or all inventories of an enterprises on an overall
bais, with the aggregate of the cost of all those items is not advisable because it amounts to setting off
loss against unrealised profi.
Illustration
Bed Sheet
Carpets Qty. Cost Mkt. Qty. Cash <kt.
Rs. Rs. Rs. Rs. Rs.
Coarse 50 60 50 100 20 18
Fine 100 100 125 200 30 28
How will value the inventory at lower of cost of market under- (a) Total Inventory Method
(b)
7/15/2019 Group Method Study Material-2
(c) Item by Item Method

Solution
(a) Total Inventory Method
Price X
Qty.

Qty. Cost Market Cost Market
Rs. Rs. Rs. Rs
Carpets
Coarse 50 60 50 3,000 2,500
Fine 100 100 125 10,000 12,500
Bed-Sheets
Coarse 100 20 18 2,000 1,800
Fine 200 30 28 6,000 5,600
21,000 22,400
Qty. Cost Market Price X Qty Lower of

Cost Market cost or
market
Rs. Rs. Rs. Rs. Rs.
Carpets
Coarse 50 60 50 3,000 2,500
Fine 100 100 125 10,000 12,500
13,000 15,000 13,000

Value of inventory = Rs. 21,000 (b) Group Method

Bed Sheets
Coarse 100 20 18 2,000 1,800
Fine 200 30 28 6,000 5,600 7,400
8,000 7,400 20,400
Value
7/15/2019 of ry = Rs. ,400 Material-2
Study
invento 2

(c) Item byMethod

Item

Cost Market Price X Qty. Lower of
Quty.
Cost Market Cost or
market

Carpets
Coarse 50 60 50 3000 2,500 2,500

Fine 100 100 125 10,000 12,500 10,000

Bed Sheets

Coarse 100 20 18 2,000 1,800 1,800
Fine 200 30 28 6,000 5,600 5,600
19,900
Value of Inventory = Rs. 19,900
Ilustration
Mr. Vijay is financial year ends the following 30 June 1994 when it is ascertained at Rs 7,425 you find
that
(i) Sales are entered in the sales book on the day as despatched and returns inwards in return inward
both to have the goods are received back.
(ii) Purchases are entered in the Purchase Day Book as the invoice are received.
(iii) Sales between 30 June and 8 July 1994 as per sales Day Book and Cash Book are Rs 8,600.
(iv) Purchases between 30 June and 8 July as per purchase day book are Rs 660 but these goods
amounting
Rs 60 are not received until after stock was taken.
(v) Goods involved during June (before 30 June) but not received until after 30 June amounted to Rs
500 of which Rs 350 worth are received between 30 June to 8 July 1994. (vi) Rate of Gross profit is 33
1/3 %on cost
Solution:
Calculation of Stock A on 30 June, 1994 Rs. Rs. Stock
as on 8 July 1994
7,425
Add:
7/15/2019 Cost of goods sold
Less Proft 25% 2,150 6,450

Less: Purchases enterd 660 13,875
Less Received after 8 July 60 600
13,275
Add: Purchases invoiced before 30 June 1994 received
Upto 8 July (500-350) Stock on 30 June 1994 150
13,425

IAS -2 INTERNATIONAL ACCOUNTING STANDARD

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

6. In determining historical costs as defined in paragraph 4, defferent interpretations arises in
practice as regards production overhead, other overheads,, and the cost formula to be used.
7.
7/15/2019 production overhead is comparised of costs Study
incurred for production other than direct materials,
Material-2
and labour, Examples are indiect materials, and labout depreciation and maintenance of factory
buildings and equipment, and the cost of factory management and administration.
8. Production overhead requires analysis to determine the portion related to bringing the inventories
to their present location and condition and thus to be included in the cost s of conversion when
determining the historical cost of inventories.
9. Both fixed and varibal production overheads incurred during production are usually allocated to
costs of conversion. That practivce is based on the view that they are both incurred in putting
inventories in their presetn location and condition. Fixed production overhead is sometimes excluded
in whole or in part from costs of conversion on the ground that it is not condidered to relate directly to
putting inventories in their present location and condition.
10. In a period of low production or if there is idle plant, it is customary to restrict the allocation of
fixed prodduuction overhead to the costs of conversion by relating it yo yr capacity of the production
facilities and not ot the actual level of the output. Capacity of the production facitlities is variously
interpreted, for example, as the normal production expected to be achieved over a number of periods
or seasons or as the maximum production that as a practical matter can be achieved. The
interpretation is determined in a advance and appliedconsistently, and is not modified for temporary
conditions.
11. Similarly, exceptional amounts of waste-material, lobour, or hother expenses-which do not relate
to bringing the inventories to theior presetn location and condition are excluded from converstion
cost.
Other Overheads
12. Overheads other thatn profudtion overhead are somtime incurred bringing inventories to their
presetn location and condition, for example expenditues incurred designing products for specific
customers. On the other hand, selling expenses, general administration overheads, research and
development costs, and interest are usually considered not to relate to putting the inventories in their
present location and condition.
Cost Formula Used
13. Several different formulae with widely different effects are in current use for the purpose of
assigning costs, including the following:
(a) First-in,first-out (FIFO) (b) Weighted average cost (c) Last-in, First-out (LIFO) (d) Base stock
(e) Specific indentification (f) Next-in first out (NIFO) (g) Latest purchase price.
14. The FIFO, weighted average cost, LIFO, base stock, and specific identification formulae use costs
that have been incurred by the enterprise at one time or another. The NIFO and atest pruchase price
methods use costs that have not all been incurred and are therefore not based on historical cost.
15. Specific identification is formula that attributes specific costs to identified items inventory. This is
an apporopriate treatment for goods that have been bought or manufacturedand are segregated for a
specific project, if it is used, however, in respect of items of inventory which are ordinary
interchangeable, the section of items could be made in such a wasy as to obtain predetermine effects
on profits
Valuation of Inventories Below Historical Cost
16. The historical cost of inventories may not be realisable if their selling prices have declined, it
they are damaged, or if they have become wholly or partially obsolete. The practice of writing
inventories down below historical cost to net realisable value accords with the view that the view that
current
7/15/2019 assets should not be carried in excess ofStudy
amountsse
Material-2 exected to be realised,. Declins in value
are computed separately for individual items, grouls of similar items, an entire clas of inventopry (for
example, finished goods), or items relating to a class of business, or they are cemputed onan overall
basiss o for all the inventories of the enterprise. The practice of writing inventories down based on a
class of inventory, on a class of business, or on an overall basis results in offsetting lossed incurred
against unrealised agains.
17. In some countires, writedowns are made which are not based on the practices described in
paragraph
16. For example, writedowns below historical cost are arrived at by applying an arbitrary percentage to
the amounts otherwise computed or by undiscclosed reductions that result in secret reserves; these
produce inappropriate effects on financial statements.
18. The sub-classification of inventories in financial statements readers of the amounts held in
different categories and the extent of the changes from period to period. Common sub-classifications
are materials work in progress, finished goods, merchandise, and produuction supplies.
19. “inventories” in balance sheets usually consist of items included in the definition of inventories in
paragraph 4. Other items are sometimes shown under the heading “Inventories”, for example, non-
production supplies and research and development supplies.
INTERNATIONAL ACCOUNTS STANDARD -2
Valuation and Presentation of Inventories in the Context of the Historical Cost

System
International Accounting Standard-2 comprises paragraphs 20-36 of this Statement of this
Statement and of the preface to Statements of International Accounting Standards.
20. Inventories should be valued at the lower of historical cost and net realisable value.
Ascertainment of Historical Cost
21. The historical cost of manufactured inventories should include a systematic allocation of those
production overhead costs that relate to putting the inventories in their present location and
condition. Allocation of fixed production overhead to the costs of conversion should be based on the
capacity of the facitlity. If fixed production overhead has been entirely or substantially excluded from
the valuation of inventories on the ground that it does nt directly relate to putting the inventories in
their present location and condition, that fact should be disclosed.
22. overheads other than production overhead should be included as part of inventory cost only to the
extent that they clearly relate to putting the inventories in their present location and condition.
23. Exceptional amounts of wasted material, labour, or other expenses shopuld not be included as
part of inventory cost.
24. Except as set out in paragraph 25 and 26, the historical cost of inventories should be accounted
for using the FIFO formula or a weighted average cost formula.
25. Inventories of items that are not ordinaryily interchangeable or goods mnufactured and segrefated
for specific projects should be accounted for, by using specific, identification of their individual costs
26. The LFIO or base stock formulas may be used provided that there is disclosur of the difference
between the amount of the inventories as shown in the balance sheet and either (a) lower of the
amount arrived at in accordance with paragraph 25 and net realisable value or (b) the lower of current
cost at the balance sheet date and net realisable value.
27.
7/15/2019 Techniques such as the standard cost method ofMaterial-2
Study valuing products or the retai method of valuing
merchandise may be used for convenience, if they approximate consistently the results that would be
obtained in accordance with paragraph 20.
Ascertainment of Net Realisable Value

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

32. The profit and loss of the priod should be charged with the amount of inventories sold or used
(unless allocated to other asset accounts) and with the amount of any write down in the period to net
realisable value.
33. Inventories should be sub-classified in balance sheets or in notes to the financial statements in a
manner which is approprioare to the business and so as to indicate the amounts held in each of the
main categories.
34. The accounting policies adopted for the purpose fo valuation of inventories, including the cost
formula used, should be diclosed, A change in an accounting policy related to inventories that has a
material effect in the current period or may have a material effect in subsequent periods should be
disciosed together tith the reasons.The effect or the change should, if material, be cdisclosed and
quantified. (See International Accounting Standard -1 Disclosure of Accounting Polocies).
35. If items are shown under the caption “inventories” Other than those comprehended by the
definition in paragraph, 4 their nature, amounts and basis of valuation should be disclosed.
Effective Date
36. This international Accounting Standard becomes operative for financial statements covering
periods beginning on or after January 1,1976.

ACCOUNTING STANDARD: 2 (AS: 2) VALUATION OF INVENTORIES
The following are the specific requirements of Accounting Standard: 2, issued by the Institute of
Chartered
Accountants of India regarding valuation of inventories.
(i) Inventories should be valued at lower of historical cost and net realisable value except in the
following circumstances.
7/15/2019 (a) Inventory of consumable stores and maintenance supplies should ordinarily be valued at cost. In
Study Material-2
appropriate circumstances, however, they may be valued at below cost.

(b) Inventory of by-products should be valued at lower of cost and net realisable value. Where cost of
the by-product cannot be separately determined, it should be valued at net realisable value.
(c) Inventory of reusable waste should be valued at raw material cost less reprocessing cost where
facilities for reprocessing exist.
(d) Inventory of non-reusable waste or inventory of reusable waste for which facilities for
reprocessing do not exist should be valued at net realisable value.
(ii) For the purpose of comparing historical cost with net realisable value each item in the inventory
may be dealt with separately, or similar items may be dealt with as a group.
(iii) The historical cost of inventories should normally be determined by using ‘FIFO’ “Average Cost”
or
“LIFO” methods.
(iv) the ‘specific identification’ method may be used for inventories of items that are not ordinarily
interchangeable, or for goods manufactured and earmarked for a specific purpose.
(v) The ‘adjusted selling price’ may be used in retail business or in businesses when the inventory
comprises items the individual costs of which are not readily ascertainable.
(vi) The ‘standard cost’ method of valuing inventories may be used if the results approximate
consistently the result that would be obtained in accordance with paragraph (iii).
(vii) The ‘base stock’ method may be used in exceptional circumstances only.
(viii) The historical cost of manufactured inventories may be arrived at on the basis of either direct
costing or absorption costing. Where absorption costing has been used, the allocation of fixed costs to
inventories should be based on the normal level of production.
(ix) Overheads other than production overheads should be included as part of the inventory cost only
to the extent that they clearly relate to putting the inventories in their present location and condition.
(x) The accounting policy adopted for valuation of inventories, including the cost formulae used
should be disclosed in the financial statements. Where the base stock method is used, the difference
between the value at which it is carried and the value by applying the method at which stock in excess
of the base stock is valued should be disclosed.
(ix) Consistency is generally accepted as a fundamental accounting assumption/Therefore, any change
in the accounting policy relating to inventories (including the basis of comparison of historical cost with
net realisable value and the cost formulae used) which has a material effect in the current period or
which is reasonably expected to have a material effect in later periods should be disclosed. In the case
of a change in accounting policy which has a material effect in the current period, the change should
also be disclosed to the extent ascertainable. Where such amount is not ascertainable, wholly or in
part, the fact should be indicated.
7 LESSON 14 SINGLE ENTRY SYSTEM

LESSON 14

SINGLE ENTRY SYSTEM
Definition:
Single entry system of book-keeping is not a system at all. It means recording transactions not
according to well defined rules but according to mere convenience. Under the Double Entry System a
transaction must be recorded with both the aspects. If there is a debit, there must be a credit
and vice-versa. It is not so under the single entry system. Debit and credit may be completed in some
transactions, while no record at all may be there in respect of a number of transactions. Most
transactions are recorded only once without completing double entry. It is all a matter of convenience.
Accounts are not maintained. While there is no hard and fast rule; usually only the cash account, bank
account (sometimes the pass book is treated as sufficient for this purpose) and personal account (that
is, account of customers and creditors) are kept. Generally, there will be no accounts to show
purchases, sales, assets, incomes and losses and expenses. There can be no trial balance.
This Single Entry System has the following disadvantages:
(1) Since there is no trial balance, there is no proof of accuracy.
(2) Profit or losses cannot be ascertained properly because of lack of information about purchases,
sales, expenses, etc.
(3) Since accounts relating to assets (furniture, office equipment, etc.) are not maintained, there is
no control over such assets. This may result in wastages and misappropriation.
(4) The Balance Sheet (called Statement of Affairs here) can be prepared only with difficulty and that
too without sufficient accuracy.
(5) Useful comparison for the guidance of management cannot be made because relevant information
will generally be missing.
Joint stock companies cannot keep books on the Single Entry System under law, but sole
proprietorships and partnerships may, if they so wish, adopt this system. But unless the firm is very
small, it is not desirable to do so.
How to ascertain profit ? Ascertainment of profit or loss under this system is really simple.
“Suppose I start a business on 1st January, 1993 with Rs. 20,000. On 31st December 1993 I find that
may capital is Rs.25,000 (for finding out capital see below). This surely means that I have made a profit
of Rs.5,000, the capital could not have grown otherwise. But suppose I brought an additional Rs.4,000
as capital during the year. This explains the increase in capital to this extent This brings down the
profit to Rs.1,000. One thing more I must have drawn some money for private use. Suppose the figure
is Rs.500 per month or Rs.6,000 for the year. Had this money not been drawn, the capital would have
been Rs. 31,000 and the profit earned would have been Rs.7,000. The formula to find out profit,
therefore, is:
Rs.
Capital at the end of the year 25,000
Add Drawings during the year 6,000
31,000
Less
7/15/2019 : Fresh Capital introduced Study Material-2 4,000
Capital in the beginning of the year 20,000 24,000
Profit during the year 7,000
How to ascertain capital? Capital is really assets minus liabilities. Under the Single Entry System
also, capital is ascertained in this manner. Statement of Affairs (not at all different from balance
sheet) is prepared and assets and liabilities put on the proper sides. The difference between assets and
liabilities is capital. Personal account and cash accounts are usually maintained and hence the amount
of sundry debtors, cash balance, bank balance and sundty creditors will be readil) available. The
amount of other assets can be ascertained only by physical inspection.
The amount of capital at the beginning and at the end of the year can be ascertained by preparing
statement of affairs. Now we have to find out the profit or loss. For this purpose a ‘statement of profit
or loss is prepared in the following manner:—
Statement of Profit for the year ending on..........
Capital at the end —
Add: Drawings during the year —
Less: Additional Capital introduced during the year— (A) Adjusted Capital at the end of the year —
(B) Less: Capital at the beginning —
Profit or loss —
Rs.
Illustration-1
A keeps his books by single entry system. From the following information find out the profit earned by
him during 1988.
1st. Jan. 1993 31st Dec. 1993
Rs. Rs.
Bank Balance 740 (Cr.) 400 (Dr.) Cash in
hand — 10
Debtors 5,300 8,800
Creditors 1,500 1,950
Stock 1,700 1,900
Plant 2,000 2,000
Furniture 140 140
On 30th, June, A bought in Rs.600 as additional capital and withdrew Rs.300 for private use. A
provision for doubtful debts@5% is necessary. Plant and Furniture are subject to
depreciation @5%. Interest on capital is to be charged at 5%.
Solution
Statement of Affairs as at 1st January, 1993
Bank
7/15/2019 Overdraft 740 Sundry Debtors

Sundry Creditors 1,500 Stock Plant FurnitureTotal 1,700

Capital (Balancing figure) 6,900 2,000

140

Total 9,140 9,146

Statement of Affairs as at 31st December, 1988

Sundry Creditors 1,950 Cash in Hand Cash at 10
Bank Sundry Debtors Less

Provision for Doubtful
Capital (Balancing figure) 10,753 400
Debts Stock Plant

Less Depreciation
8,800

Furniture

Less Depreciation

440 8,360
Total

1,900

2,000

100
1,900

140

7
133
Total 12,703 12,703


7/15/2019 Rs.
Study Material-2
Profit: Capital as at Dec. 31, 1988

10,753
Add Drawings 300
11,053

Less Fresh Capita 1600
Capital on 1-1-88 6,900
Interest 360*
7,860
Profit earned 3,1193
* Iinterest on Rs. 6,900 for one year and on Rs. 600 for 6 months.
Illustration: 2
The following is the Balance Sheet of X, Y, and Z an on December 31, 1993
Balance Sheet
Liabilities Rs. Assets RS.
Sundry Creditors 42,000 Cash in Hand Cash at Bank 4,000
Sundry Debtors Stock

Furniture & Fittings Machinery
Bills Payable 28,000 38,000
and Plant Z’s Current Account

X’s Fixed Capital Y’s Fixed Capital 1,50,000 84,000
Z’s Fixed Capital

X’s Current Account
1,00,000 67,000

Y’s Current Account
50,000 20,000

4,800 1,60,000

3,400 5,200
3,78,200 3,78,200

The partners share profits in the ratio of 3:2:1 after charging interest 10% interest on Capitals. During
1994, the drawings were : X at Rs. 4000 per month, Y at Rs. 3000 per month and Z at Rs. 25,00 per
month.
On
7/15/2019 31st December, 1994 the various assets were-Study
Cash in Hand Rs. 3,000, Standry Debtors Rs 86,000
Material-2
Stock Rs. 1,27,500 at selling price which was fixed at cost plus 25%, Furniture and Fittings Rs. 18,000
and Machinery and Plant, Rs. 2,50,000. Liabilities were- Sundry Creditors, Rs. 34,000, Bills Payable Rs.
24,000 and Bank Overdraft Rs. 60,000 as per Pass Book which showed that a cheque for Rs. 10,000
deposited had been returned dishonoured. Ascertain this Profit a Loss made by the firm in 1994 and
show the Balance Sheet as on 31st December, 1994.
Solution :
Statement of Affairs-as on December 31, 1993

Sundry Creditors Bills Payable Bank 34,000 Cash in Hand 3,000
Overdraft

Fixed Capital of X, Y and Z
24,000 Sundry Debtors
Combined Current Accounts of

X, Y, and Z (Balancing figure)
60,000 (Rs. 86,000 + Rs. 10,000) 96,000

3,00,000 100 Stock (1,27,500 × 100/125) 1,02,000
Furniture & Fittings

Machinery and Plant
18,000

51,000 2,0,000
4,69,000 4,69,000
Statement of Profit and Loss

Rs. Rs.
Cempnod Credit Account of X, Y and Z as Dec. 31,1994
51,000
Add: Drawings
X 48,000
Y 36,000
Z 36,000 1,14,000
1,65,000
Less.: Combnicd Current Account X, Y and Z as 31st December, 1993
(4800 + 3400-5200) 3,000
1,62,000
Proffit suljeed to interest
Less-: Interest an Capital as 10%
X 15000
Y
https://sol.du.ac.in/mod/book/tool/print/index.php?id=1561 10,000 174/215
Z
7/15/2019 Study Material-2 5,000 30,000
132,000
Proffit dinided ampng X,Y,and Z
X 1/2 66,000
Y 1/3 44,000
Z 1/6 22,000
Balance Sheet of Z, X, and Y, as on December 31, 1994

Rs. Rs.

Sundry Creditors Bills Payable 34,000 Cash in Hand Sundry Debtors 3,000
Bank Overdraft Capital (Fixed) Stock

X Furniture & Fittings
24,000 96,000
1,50,000

Machinery and Plant
60,000 1,02,000
Y

1,00,000

18,000

Z
50,000 Z’s Current Account
2,50,000

Current Accounts Balance on Jan., 1

5,200

P Balance on Jan. 1
3,00,000
4,800 Add : Drawings
30,000

Add : Interest
15,000 35,200

Profit Less : Interest

66,000 5,000

85,800 Profit 22,000

27,000

Less : Drawings 8,200
48,000

37,800
X
7/15/2019 Balance on Jan. 1 Study Material-2
34,000

Add : lnterest

10,000

Profit
44,000

57,400
21,400
Less : Drawings 4,77,200 4,77,200
36,000

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

Dishonoured Credit B/R A/c Charges debited to
them Credit Charges A/c Cash
received —
Discount allowed to them Debit Discount A/c Sales
Returns Debit Sales Returns A/c Bad Debts written
off Debit Bad Debts A/c
Bills Receivable received Debit Bills Receivable A/c
(b) Analysis of accounts of suppliers will reveal the following :
Entry Now
Credit Purchases Debit Purchases A/c
Bills Payable Dishonoured Debit Bills Receivable A/c
Cash Paid —
Purchases Returns Credit Returns Outwards A/c
Discount Received Credit Discount A/c
Bills Payable Issued Credit Bills Payable A/c
(4)
7/15/2019 Go through the waste book and Study
seeMaterial-2
if any transaction still remains to be
recorded.
For instance, interest may be due on loan. The entry to be passed is: Interest A/c
... ... Dr.
To Loan Creditor
Preparation of Trading and Profit and Loss A/c from Single Entry Records. If Single
Entry books have been converted into Double Entry books, a trial balance can then be taken out. From
the trial balance final accounts can be easily prepared. However, a short cut is also possible. This short
cut will be available only if the summary of cash transactions is prepared.
Students will remember that for preparing the Trading Account the following information is necessary:
Opening Stock (available from previous statement of affairs.) Purchases (always ascertained by making
an inventory.) Wages, etc.
Sales
Closing Stock
Purchases and sales are ascertained on commonsense basis. If I owe Rs.50/- to the grocer on 1st April,
pay him Rs.90 during the month and still owe him Rs.40 at the end of the month. I must have
purchased from him goods for Rs.80, i,e., Rs.(90 + 40)—50. Similarly, the grocer can calculate the sale
to me.
In business firms credit purchases and credit sales are found by preparing accounts of total Creditors
and total Debtors. Consider the following:
Total Creditors A/c
Dr. Cr.

Rs. Rs.
To Cash

(as per Cash Book) To Discounts 43,000 By Balance c/d
(as per analysis) To Returns
To Balance c/d (given as per previous statement
of affairs)

By Credit Purchases
(as per schedule of Creditors) 800 9,000

(balancing figure)
1,100

8,500 44,400
53,400 53,400

Items
7/15/2019 on the debit side total Rs.53,400, of this Rs.9,000
Study Material-2 is the opening balance. Therefore, the
balancing figure of Rs.44,400 must be the credit purchases. Cash purchases, must have been recorded
on the credit side of the Cash Book and will be taken from there. Thus total purchases can be found
out.
Can you find out the credit sales from the following ?
Rs.

Total Debtors on 1st Jan. 1988 15,600
Cash received during 1988 from Drs. 68,200
Discount allowed to them 1,800
Bad Debts written off 600
Returns Inwards 2,500
Bills Receivable received from them 11,000
Bills Dishonoured 1,500
Total Debtors on 1st Dec., 1988 14,300

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

Dr. Cr.

Rs. Rs.

To B/R (Dishonoured) To Credit Sales 1,500 By Discount 1,800
(Balancing figure)

By Bad Debts 600

81,300 By Return Inwards 2,500

By B/R 11,000

To Balance b/d
98,400 98,400
14,300

Net credit sales will be (Rs. 81,300 less Rs.2,500 (Returns)) Rs.78,800.
Cash sales will be on the debit side of the Cash Bode. Credit Sales plus Cash Sales give you total sales.
Examination of the credit side of the Cash Book will also reveal wages, carriage inwards, etc., which
will be debited to the Trading Account.
Thus all information to prepare Trading Account becomes available and gross profit will be ascertained.
This is put on the credit side of the Profit and Loss Account Credit side of the Cash Book reveals
expenses. These expenses after proper adjustments (for expenses prepaid or outstanding) will be
debited to the Profit and Loss A/c. Debit side of the Cash Book will reveal incomes (such as sale of old
newspapers.) These will be put on the credit side of the Profit and Loss A/c. The Profit and Loss A/c
should also be debited with any depreciation which has to be written off. Thus net profit or net loss
can be ascertained. This will be transferred to the Capital Account
Balance Sheet—Preparation of Balance Sheet is easy. The previous Statement of Affairs will reveal
the various assets. The assets adjusted for depreciation and disposal (see debit side of Cash Book) and
new acquisition (see credit side of Cash Book) will be put in the Balance Sheet at the end of the year.
The balances for cash, debtors, stock and creditors will be given as at the end of the year.
These will put down in the Balance Sheet. Capital will be as per previous Statement of Affairs adjusted
for net profit or net loss and drawings (see credit side of Cash Book).
Illustration: 3
The following information is given:
1st January, 1993 31st December, 1993

Rs. Rs.
Total Debtors 19,300 20,500
Total Creditors 9,800 8,100
Stock 11,600 12,300
Plant and Machinery 30,000 —
Furniture 1,500 —
Summary of Cash Book

Rs. Rs.
7/15/2019 To Balance b/d 5,000 By S. Study
Creditors
Material-2 31,000

To Receive from By Wages 15,000

Debtors 78,000 By Salaries 12,000

To Cash Sales 15,000 By Machinery By Investments By 10,000
Drawings

By General Exps. By Balance
To Sales of Old 6,000
c/d

Machinery 4,000 6,000

To Sale of Old 17,000

Packing Boxes 600 5,600
1,02,600 1,02,600

Bad Debts written off during the year were Rs. 1,500. Discounts allowed were Rs.2,000 and received
were Rs.600. Depreciation on Machinery is to be 10% on the value of machinery on 31st December,
1988. Furniture is to be depreciated at 5%. Interest @6% is to be allowed on capital.
Prepare Trading Account, Profit and Loss Account for 1988 and Balance Sheet as at December 31,1988.
Solution:
We must first find (1) Capital in the beginning, (2) Credit Sales and (3) Credit Purchases.
(1) Capital
Statement of Affairs as at 1st January, 1993

Sundry
7/15/2019 Creditors 9,800 S. Debtors

Capital (Balancing figure) 57,600 Stock 11,600

Plant and Machinery 30,000

Furniture 1,500

Cash 5,000
67,400 67,400
(2) Credit Sales:

Dr. Cr.

Rs. Rs.
To Balance b/d To Credit Sales 19,300 By Cash 78,000
(Balancing figure)

By Bad Debts A/c 1,500

82,700 By Discounts 2,000

To Balance b/d
1,02,000 1,02,000
20,500

(3) Credit Purchases:
Total Creditors Account
Rs. Rs.
To Cash 31,000 By Balance b/d 9,800

To Discounts reed. To Balance c/d 600 By Credit Purchases

8,100 (Balancing figure) 29,900
39,700 39,700
7/15/2019 Study Material-2 8,100

By Balance b/d

Trading and Profit and Loss Account for the year ending Dec. 31, 1993
To Opening Stock
To Purchases
To Wages
Rs. Rs.
11,600 By Sales:

29,900 Credit 82,700

15,000 Cash 15,000

53,500 97,700

By Closing Stock 12,300
1,10,000 1,10,000
12,000 53,500

17,000 By Gross Profit b/d By Sale of Old
Packing boxes

2,000 600

To Gross Profit c/d
To Salaries
To General Expenses
To Discount allowed
To
7/15/2019 Bad Debts 1,500 By Discounts Reed.

To Depreciation

Machinery—
3,600
10% on Rs.36,000

Furniture—
75
5% on Rs. 1,500

To Interest on Capital—
3,456 !
6% on Rs. 57,600

To Net Profit-
15,069
Transferred to Capital A/c Total

Total 54,700 54,700

Balance Sheet of...
as at December 31, 1993

Labilities Rs. Assets Rs.

7/15/2019 Rs. Rs. Study Material-2 Rs.

Sudry Creditors 81,00 Cash 5,600

Capital Sundry Debtors Stock 20,500
Investments Furniture
57,600
Less Deperciation Plant &
Balance on 1-1-88 12300
Machinery Balance on 1-
1-88
Add Additions 6,000
3,456 1,500
Interest
15,069 75
Profit Less Sales 1,425
Less
Depreciation@10% Total
76,125
70,125

Less Drawing
6,000 30,000

10,000

40,000

4,000

36,000

3,600
32,000

Total 78,225 78,225
Illustration: 4
A and B share profits and losses in the ratio of 3 :2. Prepare Trading A/c: Profit and Loss A/c and
Balance Sheet from the following:
1.
7/15/2019 Cash Book : Bank Balance on 1st Jan., 1993 Rs.8000;
Study Material-2 A’s drawings 9,000; B’s drawing, Rs.6,000
paid to trade creditors. Rs.60,000, paid against B/P Rs. 16,000; Wages Rs.22,000; Salaries Rs. 10,000;
Other trade expenses, Rs.26,510; Received from trade debtors, Rs.91,200; Received against B/P
16,090; Receipts from cash sales 31,620; cash in hand, Rs.400, (On 31st December, 1993.). There was
no cash in hand on 1st Jan., 1993
2. Particulars of Assets and Liabilities
1.1.1993 31.12.1993
Rs. Rs.
A’s Capital 180,000 ? B’s Capital
20,000 ? Stock
39,600 50,000
Creditors 50,000 38,710
Debtors 44,000 14,000
B/R 10,000 14,000
B/P 6,000 Nil
Premises 40,000 40,000
Furniture 2,400 2,400
3. Other Information: A and B will pay interest on drawing as Rs.120 and Rs.60. A and B are
entitled to 5% interest on capital. B will get 6% Commission on the net profits remaining after such
commission.
Allow 5% depreciation in premises and furniture and create a reserve for bad debts amounting
Rs.2,650.
Trading and Profit and Loss A/c for the year ending Dec. 31.1993

Rs.Rs. Rs. Rs.
By Sales:

To Stock 39,600 Credit
1,00,000

To Purchases 40,000 1,31,620
Cash

31,620
To Wages 22,000

To G.P.c/d 80,020 50,000

1,81,620 1,81,620
By Closing Stock

To Salaries

7/15/2019 10,000 By G.P.b/d
” Trade Exp.
26,510 ” Int. on Drawings:
Premises
2,000
” Dcp: A
120
180
Furniture 120
2,120
B 60

2,650

To Res. for bad debts

” Int. On Cap:
80,200

A 4,000

5,000
B 1,000

33920 × 6
1,920
To B’s
Commission
106

To Net profit

A 19,200
32,000

80,200
B 12,800
Balance Sheet of
A & B, As on Dec. 31,1988

Liablities Rs. Assets Rs.

7/15/2019 Rs.Study
StockMaterial-2
Debtors
38,710
Creditors 14,000 50,000

Less provision
Bank overdraft 3,000
2,650

A Cap. A/c B 36,060
B/R Cash
80,000

Premises
+Int.
20,000 40,000 14,000
4,000

1,000 Less dep. 400
+Net Profit
2,000
19,200

12,800
Furniture
1,03,200
2,400
38,000
33,800
+Commission
Less
—
dep.
1,920 120

1,03,200
2,280
35,720
Less Drawings

9,000
6,000 94,080

94,200
29,720 29,660

Less inu on Draw.
120 60

94,08029,660 1,40,740 1,40,740
Working notes:
Cash A/c

To Balance To Debtors To B/R 8,000 By A’s Drawings By B’s 9,000
Drawings By Trade Crs.
To Cash sales
By B/P
91,200 6,000

To Bank Overdraft
By Wages
16,090 60,000

(bal figure)
By Salaries
31,620 16,000

By Trade Exp.
3,000 22,000

By Balance (Cash)
10,000

26,510

400
1,49,910

1,49,910
Total Debtors A/c

Rs. Rs.

To Sales (bal. fig.) 1,00,000 By B/R 20,090

1,50,000 1,50,000

B/R

Rs. Rs.
To
7/15/2019 Balance b/d 10,000 By Cash

To S. Eta. (bal. fig.) 20,090 By Balance c/d 14,000
30,090 30,090

B/P

Rs. Rs.
To Cash 16,000 By Balance b/d 6,000

By S. Crs. (bal. fig.) 10,000
16,000 16,000
Trade Crs.

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

14,000
84,000 84,000
Illustration : 5
The following information in sappl from which you arc required to prcpame Trading and Profit and Loss
Accound for the year euded and Balance Sheet an on 31st December, 1993.
Assets and Liabilities Jan 1, 1993 Dec.,
31, 1993

Rs. Rs. Creditons
1,577,00 1,24,000
General expenses owings 6,000 3,300
Sundry Assets 11,61,00 1,20,400
Stock 80,400 1,11,200
Cash in hand and at Banh 69,600 80,800
Debtors ? 1,78,700
Other Transections:
Cash
7/15/2019 and discount credited to Debtors
Study Material-2 6,40,000
Retarus from Debtors 14,500
Bad Debtors 4200
Sals-Cash and Credit 71,8,100
Dicount allowed for creditons 70,00
Rehrns to Creditons 40,00
Calnilal introduced (paid into Bank) 85,000
Recnhts from Debtors ( Paid into Bank) 62,500
Cash Purehase 10,300
Expanses paid by cash 95,700
Purelans of Machinery by chegue 4300
Prawings by chegue 31,800
Cash Payment into Bank 50,000 with
drawn from Bank into Cash
92,400
Payments to credihrs by chegue 60,270
Cash in hand at end 12,000
Solultion:
It will the holed there since the Coinlal in the leguining in the given, the opening lalance sheet will the
necessary for llius the same to the found out. This regunier information regalding credict sales. But the
question given information rcgamling cash and credit sales Combimed. How it in necessary to prctane
the Cash Book legrdes Total Debtors and Total Creditors Accounts.
Cash Book

Dr. Cr.

Cash Bank Cash Bank
Rs. Rs. Rs. Rs.

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

Debtors To Cash Machinery By
85,000 Drawings By Bank 95,700
To Balance
By Cash 4,300

6,25,000
To Cash Sales (Balancinti
figure) To Balance b/d By Sundry Creditors 31,800
50,000
92,400 By Balance c/d (1) 50,000 —

46,000 42,400

6,02,700
12,000
68,800
1,68,000 8,00,000 1,68,000 8,00,000
12,000 68,800

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

Sundry Creditors

Rs. Rs.
1993 To Balance b/d 1993By Cash 6,25,000

Jan., 1 (Balancing figure) 1,65,300 Jan., 1
to
By Discount 15,000
Dec.,

31
Jan.,1To Credit Sales
to
(7,18,100 – 46,000) 6,72,100 By Returns 14,500
Dec., 31
By Bad Debts 4,200

By Balance c/d 1,78,700

8,37,400 8,37,400

1994
1,78,700
Jan., 1
To Balance b/d

Capital on 1st jamuin, 1993 :
Total Assets : Sundry Assets 1,16,100
Stock 80,400
Cash in hand and at Bank 69,600
Debtors 1,65,300
4,31,400

Less : Sundry Creditors 1,57,700
Expenses Owings 6,000 1,63,700
Capital on 1st Jan., 1993 2,67,700

Trading and Profit and Loss Account for two yr. endled December 31, 1993
Rs. Rs.

To Opening Stock 80,400 By Sales: Credit
Cash
6,72,100

To Purchases 46,000
Less : Returns
7,18,100

Credil
5,80,000
14,500

7,03,600
Cash By Closing Stock

10,300

5,90,300

5,86,300 1,12,200 192/215

Less : Returns 1,48,100
4,000

8,14,800
8,14,100 By Gross Profit b/d
To Gross Profit c/d

By Discount Receive
93,000 1,48,100

To General Expense 15,000 7,000

(95,700 + 3,300 – 6,000) To 4,200

Discount allowed
d
ToBad debts
42,900

1,55,100 1,55,100
To Net Profit
Balance Sheet
an on December 31, 1993

Rs. Rs.
Liabilities
7/15/2019 Assets
Study Material-2

Sundrv Creditors 1,24,000 Sundry Assets

Balance
1,16,100

Expenses Owing 3,300 1,20,400
Additions 4,300

Capital : Balance on 1,11,200
Stock

Jan. 1, 1993
2,67,700

1,78,700
Addition Sundry Debtors Cash in hand

85,000 Cash at Branch

Profit
42,900 12,000
3,63,800
3,95,600


31,800
4,91,100 4,91,100

Illustration 6
A trader asks you to prepare a Balance Sheet and Profit and Loss Account for the year ended 31st
December 1994. He kept no books of account, but his system is as follows.
He keeps copies of all invoices in respect of credit sales and marks each copy with the date of
payment. He does not keep copies of Cash memos but he informs you that all takings both Cash and
credit, arc paid into the bank, except that he occasionally withholds certain sums, both for personal
use and for petty Cash expenses, which he notes in a note book.
Analysis of the Pass Book reveals the following :-
Total amount paicf into Bank Expenditure 4,55,500
Personal drawings 30,000
Purchases 3,54,000
Salaries 25,000
Rent 12,000
Electric
7/15/2019 Light Study Material-2 3,500
Printing and Stationer) 2,500
Advertising 4,500
The Cash at Bank at 31st December, 1994 was Rs.4000.
The persons! drawings shown in the note-book amount to Rs. 12000 and profit Cash to Rs.3000.
Serrating of the copy inverses shows that Rs. 22500 was paid into the Bank during 1994 in respect of
1993 sales, and that Rs. 46,750 is out standing in respect of 1994 sales, exclusive of for bills totalling
Rs. 450 which have been marked Irrecoverable
Liabilities were:-
31st Dec., 1993 31st Dec., 1994

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

Rs. Rs.
To Stock (Balancing 44,250 By Sales 4,99,000
figure) To Purchase

To Gross Profit (25% on
3,65,000 By Stock 35,000
sales) c

/d 1,24,750

534,000 5,34,00
To Bad debts
4,250 1,24,750

By Gross Profit b/d
To Petty Expenses
3,000

To Rent

12,000
Add : Outstanding

1,000

Less
7/15/2019 : Relating to 1993 13,000 12,000 Study Material-2
1,000
To Electric Light
3,500
Add : Outstanding
150
3,650
Less : Relating to 1993 200 3,450

To Adversting 4,500
7,000
Add : Outstanding 2,500
25,000
To Salaries
2,500
To Printing & Stationery

To Net Profit transferred 67,550
to
1,24,750 1,24,750

Capital Account
Balance Sheet as
on 31st December 1994

Sundry
7/15/2019 Creditors Outstanding Rent 35,000 Stock Study Material-2 35,000
Outstanding Advertising Outstanding

Electric Light
1,000 Bank Balance 4,000
Capital
21,550
2,500 Sundry Debtors 46,750

Add : Net Profit 67,550
150
89,100


47,100
85,750 85,750

Working Notes:
(1)
Balance Sheet on 31st December, 1993
Rs. Rs.
Bank Overdraft Sundry Creditors 20,000 Stock 4,425
Outstanding Rent Outstanding

Adversting Capital (Balancing figure)
24,000 Sundry Debtors 2,250

1,000

200

21,550
66,750 6,675

(2) Opening Stock is ascertanced by prepairing Trading Account and taking the
Gross Profit on sales to be 33 1/3%.

(3) Cash Account

To S. Debtors 12,000 By Drawings 4,70,500

By Petty Cash Expenses 3,000

By Bank 4,55,500
4,70,500 4,70,500
Bunk Account
Rs. Rs.
To Cash 4,55,500 By Balance b/d (Balancing
figure) By Sundry Creditors By

Drawing
20,000
By Salaries

3,54,000
By Rent

30,000
By Electric Light

25,000
By By Printing & Stationery

12,000
By Advertising

3,500
By Balance c/d

2,500

4,500

4,000
4,55,500 4,55,500

Total Creditors Account
Rs. Rs.
To
7/15/2019 Bank 24,000 By balance b/d
Study Material-2 3,54,000

To Balance c/d 35,000 By Purchases (Balancing figure) 3,65,000
3,89,000 3,89,000

Rs. Rs.
To Balance b/d 4,250 By Bad Debts 22,500

To Sales (Balancing Figure) 4,99,000 By Cash 4,70,500

5,21,500 5,21,500


Dec. 31,1992 Dec.31,1993
Rs. Rs.
Cash at Bank 30,000 1,91000
Stock in Trade 2,20,000 2,80,000
Sunder Debtors ?3,50,000
Sundry Creditors 2,34,000 1,85,000
Fixtures & Finings 20,000
Office Cash 10,000
The Cash Book analysis showed the following figures among other:-
Rs. Rs. Receipts from
customers 13,50,000 Motor upkeep
13500
Discount .allowed to them 14000 Printing and Stationery
8000
Further Capital introduced on 1st July 1993 20000 Drawings
66000
Salaries up to Nov. 30, 1993 110000 Payments to trade creditors
11,20,000
Office Rent up to Nov. 30, 1993 22000 Discount allowed by them
12000
Advertising
7/15/2019 Study 9000
Material-2 Travelling Expenses
10000
General Expenses 6000
No ready figure are available for total sales but Jacksons maintain a steady gross profict rate of 25
percent on sales.
There were bills outstanding for petrol Rs. 250, advertising Rs 750 and Printing Rs 450. Provide 5% on
Debtors for doubtful debts and 2 1/2% on Creditors for discounts.
The motor car and fixtures are to be depreciated by 20% and 5% respectively 5% interest is to be
allowed on Capictal.
Prepare Jacksons Trading and Profit and Loss Account for 1993 and his Balance Sheet on Dec. 31, 1994.
B.Com. (Hons) I Yr. Commerce Paper-II
Financial Accounting
LESSON 8
Marks..............................%
Roll No................................ Signature of the
Lecturer.............................. When completed, send this
Response Sheet to:
School of Open Learning, University of Delhi,

5, Cavalry Lane,
Delhi -110007 (India).
Name.................................................................

Address..............................................................

........................................................................... Pin
Code............................................................
ACADEMIC SESSION 2011–12
1. The following is the Receipts and payments account of the Calcutta Club for the year ended 31
December,
1994

Rs. Rs.
To
7/15/2019 Balance on 1-1-94 1,500 By Rent

To Entrance Fees 2,750 By Stationery Expenses 15,340

To Subscriptions: By Wages 26,650

1993 1,000 By Billards and tabes 19,500

1994 84,500 By Repairs wtc. By Interest 4,030
By Balance on 31/12/94
1995 1,500 7,500

To Locker rent 2,500 11,980

To Special subscription for

Governor’s party 17,250
1,11,000 1,11,000

Locker rent Rs. 300 referred to 1993 and Rs. 500 is still owing, Rent 6,500 referred to 1994 and Rs.
6.500 is still due, stationery expenses etc. Rs, 1,560 rlated to 1993 and Rs, 1,820 is still due;
Subscription unpaid for 1994 i Rs. 2,400 special suubscriptiopon for Governor’s Party outstanding Rs.
2,750/-
From the above information you re requested to make out an Income & Expenditure account fo the
Club for the year ended 31 st December 1994 and Balance Sheet as on that date.
Club:-
On 1st January, 1994 the folowing were the assets and liabilities, amongst other, of the Ramnagar
Land and Buildings Rs. 1,20,000; Furniture & Fittings Rs. 12,000; Stock of cutlery and Crockery Rs,
2,000; stock of tinned provisions Rs.2,000 outstanding subscriptions Rs. 1,800; Balance at Bank Rs.
6,800; Cash in hand Rs. 1,400; Income & Expenditure Account credit balance Rs. 18,400; Sports Fund
Rs. 20,000; Subscription received in advancce Rs. 16,000; outstanding for salaries Rs. 1,600 and
priniting & Stationery Bill Rs. 200.
The receipts during the yea were, Entrance Fees, Rs. 12,000 (half of whcihc is to be credited to the
eneral Fund); Subscriptions Rs. 20,000 Donations to Sports Fund Rs, 4,000. This amount was placed
with the Bank on Fixed Deposit. Iterest on General Fund Invesments Rs. 12,500 @ 5%, purchase price
was 96% of the nominal value. Interest on sports Fund, Bank Fixed deposits Rs. 1,200@ 6%. Receipts
from
7/15/2019 catering Rs. 23,500' Expenses on Sports events Rs. 100* Repairs to Building Rs 8,000; Catering
Study Material-2
expenses Rs. 16,000; Purchase of tinned provisions Rs. 6000; Sundry Expenses Rs. 1,600. The balance at
bank on 31st December 1993 was Rs.21,200.
You are told that subscriptiions for 1993 Rs. 1,400 were outstanding and Rs. 1,200 salaries were not
paid , Rs, 1,200 were received as subscriptions for 1994. The unused stock of tinned provisions was
valued at Rs. 2,800.
From the above detaills you are required to prepare an Income and Expenditure Account for the year
ended 31st December 1993 and a Balance Sheet as at that date, after providing for deprrtlation on
Land & Building at 2 per cent and Furniture & Fittings at 5 per cent and writting off half the value of
cuttlery and crockery.
3. The following particulars relate to the Delhi Sports Club:
(i) Income and Expenditure Account for the year ended 31st Dec., 1994

To Salaries 900 By Entrance Fee By6,300
Subscriptions By Rent

To Printng & Stationery 1,320 9,360

To Advertising 960 2,400

To Audit Fees 300

To Fire Insurance 600

To Dep. on Sports Equip. To Excess 5,400
of Income over Expenditure

8,580
18,060 18,060

Furniture - 55% Machinery - Rs. 6,450
Sundry Assets - Rs. 19,800
2. Dissolution expenses amounted to Rs. 450
3. All liabilities were discharged.
4. S became insolvent and Rs 250 could be recovered from his estate prepare necessary accounts if:
(i) Partners Capital accounts are fluctuating
(ii)
7/15/2019 Partners Capital accounts are fixed. Study Material-2
4. X,Y,Z shared profits lossses in the ratio 5:3:2: On 31st December, 1994 their balance sheet was as
follows:
Trade Creditors Bank Loan Capitals: Sundry Assets 1,60,000
X 60,000
60,000 Loss 40,000
Y 40,000
20,000
Z 20,000

1,20,000
2,00,000 2,00,000

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

LESSON 9
Marks..............................%
Response Sheet to:

5, Cavalry Lane,
Name.................................................................

Address..............................................................

...........................................................................
7/15/2019 Study Material-2 Pin
Code............................................................

Time allowed : 11/2 Hours.
Q. l. What doyou mean by financial statements and what are their purposes? Q.2. Discuss the
limitations of Financial Statements.


LESSON 9 10

Marks..............................%
Response Sheet to:

5, Cavalry Lane,
Name.................................................................

Address..............................................................

........................................................................... Pin
Code............................................................
1. State the legal provisions for adjusting losses and distributing assets on dissolution of a firm when
no agreement to the contrary exists?
OR
Explain the rule laid down in Garner. V. Murray decision? What conditions should be present for its
operation?
2. Old, Young and Child give you the following Blance Sheet as on 31st Dec., 1993:
Capital
7/15/2019 A/cs. Old - PlantStudy
& Material-2
Machinery Fixture & 60,000
Fittings Patents & Trade Marks
Young - Child - Old’s Loan
Joint Life Policy
Joint Life Policy 60,000 4,000
Stock

20,000 20,000
Debtors
36,800
Loan on Hypothe cation of 4,000 84,000 30,000
Stock
Less Provision

30,000 800 Cash at Bank 20,800
Sundry Creditors

24,800

36,000

12,4000

35,600 16,000
1,86,800 1,86,800
The partners shared profits and loss in the ratio 4:2:1. The firm was dissolved on December 31, 1993
and you are given the following information:
(a) The Joint Life Policy was surrendered and insurance paid Rs. 20,400 after adjusting Rs. 10,600 in
respect of a loan taken on the security of the Policy.
(b) Some shares held by the firm, which had been written off earlier on finding them valueless, were
now to be worth for Rs, 6,000 and the loan creditors agreed to accept the shares at this value.
(c) One of the creditors took some of the patents whose book value was Rs. 12,000 at the valuation of
Rs. 9,000, Balance o that creditor was paid in cash.
(d) The remaining assets realised:
Patents & machinery - 34,000
Fixture & Fitting - 2,000
Stock - 18,000
Debtors -33,000
Patents-50% of their book value.
(e) The liabilities were paid and a total discount of Rs. 1,000 was allowed by the creditors. (f) The
expenses of realisation amounted to Rs. 4,600. Close the books of this firm.3. A.S & R sharing profits
and losses in the ratio of 3:2:1 decided to dissolve the firm on
31 December, 1994. On this date the position of the firm was:
Liabilities
7/15/2019 Rs. AssetsStudy Material-2 Rs.
Capital A/cs. Sundry Assets Machinery Furniture 33,750
Stock

Bills Receivable Investments
A- 31,000 11,250
Debtors

Cash in hand
S- 34,500 2,775

Cash at Bank
R- 22,250 87,750 14,550

General Reserve 6,450 4,200

P& L A/c 3,375 18,000

A’s Loan 3,000 23,250

B’s Payable 3,075 750

Creditors 9,750 4,875
1,13,400 1,13,400
1. The Assets realised :

Stock -75% Investments
- 85% Debtors - Rs. 21,150
(ii) Receipts and Payments Account for the year ended 31st Dec., 1994
Receipts Rs. Payments Rs.
7/15/2019 To Balance b/d 2,520 By Salaries

To Entrance Fees 6,000 By printing & Stationery 1,560

To Subscriptions: By Advertising 960

1993 360 By Fire Insurance By Investments 720
By Balance c/d

1994 9,000 12,000

1995 540 4,680

To Rent Received 2,100
20,520 20,520

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

LESSON 11
Marks..............................%
Response Sheet to:

5, Cavalry Lane,
Name.................................................................

Address..............................................................

........................................................................... Pin
Code............................................................

Note;
7/15/2019 Attempt any two questions. Study Material-2
1. (a) Based on particulars given below give entries in the books of purchaser amnd the seller under
the hire-purchase system:
X & Co. - Purchaser Y & Co, - Seller
Date of Purchase - 1st January, 1992
Goods Purchased - Lorries
Cassh Price - Rs. 74,500
Instalments Rs. 20,000 on singing the agreement. Rest in three instalments of Rs. 20,000 each.
Rate of Interest - 50%. Rate of Depreciation - 10 % on Diminishing Balances. (b) All particulars as
above except the cash price is not given.
(c) All particulars as above except the cash price is not given.
2. On lsJanuary, 1993 Trucks were purchased by A on the hire-purchase system. The cash price of each
truck is Rs. 55,000. The payment was to be made as follows.
10% of cash price Down.
25% of cash price at the end of each of the 4 subsequent half-years.
The payment due on 31st December, 1993 ould not be made and hence trucks were sized by vendor,
but after negotiations, A was allowed to keep 3 trucks on the condition that the value of the other two
trucks would be adjusted against the amount due, the truck being valued at cost less 25%
depreciation. A’s books are closed on 30th June each year and he charges 15% depreciation on trucks
on the original cost.
The vendor spent Rs. 6,000 on getting the trucks thoroughly overhauled and sold them for rs. 95,000.
Show the various accounts in the bools of both the parties.
3. Nand sells goods at hire-purchase, the price being cost plus 50%. From the following afact preoare
Hire-Purchase Trading Account and other relevant Ledger Accounts:
1993 Rs. Jan.,1
Stock out at hire at selling price 30,000
Instalments Due (customers still paying) 1,800
Goods re-possessed during the year for instalments
unpaid (due and under) Rs. 300 revalued at 150
Instalments realised during the year 39,000
Dec., 31 Stock out on hire at selling price 24,030
Instalments Dur (customers Still paying) 3,000
3

4. From the following data, prepare the necessary accounts to show the profit earned by Kishore Ltd
who sells the products on hire-purchase system. Goods are sold on hire-purchase at cost plus 33 1/ %.
1st April 31st March
1993 1994
Stock out on hire at hire-purchase price 36,000 45,000
Stock
7/15/2019 in hand, at shop 12,000 10,000
Study Material-2
Instalment due (Customers still paying) 5,000 8,000

Cash receivd from Hire-purchase Debtors during the ended 31st March, 1994 was Rs. 90,000
LESSON 12
Marks..............................%
Response Sheet to:

5, Cavalry Lane,
Name.................................................................

Address..............................................................

........................................................................... Pin
Code............................................................

Note : Attempt any two questions.
Q. 1. A firm charges out goods to its Kanpur branch at cost. The bnranch remits daily to the H.O. all
the cash collected by it on its sale; brnch expenses are paid out of the amounts provided to the Branch
by the Head Office as on imprest. The following is the summary of transactions of the Branch during
the year ending December 31.
Rs. Rs.

Stock Jan. 1 at cost 20,000 Credit Sales
1,41,000
Stock Dec., 1 at cost 35,800 Cash received from Dr.
1,22,000
Goods received from H.O. 20,000 Discount allowed to Debtors
5,000
Debtors Jan. 1 14,000
Debtors Dec. 31 28,000 Allowance of selling price (in invoices)
30,000
Cash
7/15/2019 Sales 80,000
Study Material-2Expenses at Branch
16,000
Ascertain to profit earned by the Branch Account.
Additional Exercise
What difference whould have been made to Branch profit in th e above mentioned case if the goods
had been invoiced to the Branch at cost plus 25% instead of at cost. (Treat the first three figures as at
invoice).
2. A head office has fixed retail prices at cost plus 100%. It has a retail branch to which goods are
invoiced at Wholesale price which is 20% less than the list price.
Q.2. A, B, and C, the and of 1994 most of their looks and records were destroyed into fire. The Balance
Sheet as an 31st December 1993 was on following :-
Capitas Rs. Rs.
Rs.

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

The partners dvawrings during 1994 have been proved at A-R 4,000- B-Rs. 10,000 and C-Rs. 6500 On
31st December, 1994 the Cash was Rs. 32,000, Dector Rs. 40,250 stock Rs. 59,000 Advance Payment Rs.
250 and creditions Stock Rs. 60,400, Machinery to the deprecialed by 10% percumnum and Fixtures &
Fittings at 7-1/2% 50% Inlaid is to the allowed on Capitals.The partners same profits as the proportion
of 1/2, 1/3 and 1/6.
You are regained to prcpane a statement sowing the net fording profit for the year 1994 and the
dinision of the same between the partner, to get with the Balance Sheet as on 31st December, 1994.
LESSON 13
Marks..............................%
Response Sheet to:

5, Cavalry Lane,
Name.................................................................

Address..............................................................

........................................................................... Pin
Code............................................................
Q.l. Discuss briefly methods of caluation of inventories.
Q.2. A firm takes periodic inventory of petrol at the end of each month. From the following
information, complete by FIFO, LIFO and weighted average method the following:
(a) Value of inventory on June 30
(b) Amount of cost of goods sold during June
(c) profit or loss for June
Sales 9,45,000
General Administration cost 25,000
Op. Stock: 1,00,000 litres
@ Rs. 3 per litre
Purchases
June 1; 2,00,000 litres @ Rs. 2,85 per liter June 30; 1,00,000 litres @ 3.03 per liter Closing Stock June
30-1,30,000 liters.
Q. 3. A Co. buys and sells four different products. The inventories are valued at lower of cost or
market.
The normal G.P. margin for all the profucts is 25% on the sale price calculate the inventory as on
31st December, 1980 from the following information:

Produ. No. of Historical Replacemnt Disposal Estimated selling
price
Units Cost Cost Cost
A
7/15/2019 BCD 400 40 745 Study Material-2
10 80

300 50 28 15 84

200 23 22 3 24

600 75 74 20 120

LESSON 14
Marks..............................%
Response Sheet to:

5, Cavalry Lane,
Name.................................................................
Address..............................................................
.......................................................................... Pin
Code............................................................

Q.1. Gccta am! D Dhanpat are equal partner in a lrsman in which the looks are bast by single cntrv
There position on 1st July, 1993, was an under :-

Rs. Rs.
62,000 2,700
Bills Paybles Cash in Hand
Sundry-listens 2,00,000 Cash at Bank 1,38,800
Bank 46,000
Plcehalec

Capital
Sundry Ouctors 4,86,500
Account
G. Gccta 8,00,000 Sundry Dutuors
D. Dlunpat 8,00,000 16,00,000 Stock 33,8,000

7/15/2019 Plant &Study
Machinery
Material-2 8,00,000
Furniture and Fitting 50,000
18,62,000 18,62,000

On 30th June 1994. The following was states of Affairs Canshnitand Rs. 4000, Cash at Bank Rs.15,800,
Sundry Creditors Rs. 21,2000, Stock Rs. 36,7000, Sundry Detours Rs. 66,3,000, Bills Payables Rs. 6000.
Bills ovcrivallc Rs. 88,000.Plant and Machinery and Furniture and Fixtures are to the deprecated by
100.
Ascertain the profit for the year ended was June, 1994 and down by the statement of Affairs as an that
ditc Mimnung the account a the partners in details, amusing Geeta Walk drew Rs. 10,000 and Dhanpat
with drew Rs, 80,000 during the year.
From the following particulars ascertain the profit earned by the branch. Opening stock (at invoice
price) 80,000
Goods setn to Branch (Cash to H.O.) 2,50,000
Sales at Branch 4,75,000
Ascertain the profit at the branch on wholesale price basis. What will be the stock Reserve Account
balance at the end of the year?
3. Pass the Journal entries in the books H.O. and Branch for the folowing adjustments: (i) Cash in
transist, Rs. 15,000. (ii) Goods sent by H.O. in transit Rs. 30,000.
(iii) Depreciation on fixed asset whose account is maintained in the books of Head Office Rs. 1,200.
(iv) Amount to be charged by Head Office for its services rendered to Branch Rs. 3,600.
(v) Salary of General Sales manager paid by the branch while General Sales manager was on a visit to
Branch, Rs. 2,940.
(vi) Goods costing and invoiced at Rs. 32,550 are sent to branch but the branch receives goods costing
Rs. 32,010 only the remaining goods having been stolen somewhere in transit, Branch has passed entry
only for Rs. 32,010 and disclaim any liability for the balance.
4. Indian Soap Mills Ltd. has two branches, at Agra and kahpur. Goods are invoiced to branches at cost
plus 50%. Branches remit all Cash received to the Head Office and all excess are met by Head Office.
From the following particulars prepare the necessary accounts, on th Stock and Debtors system, to
show the profit earned at the branches:Agra Kanpur
Stock on 1st Jan., 1994 9,300 15,600 (invoice
price)
Debtors on 1st Ja., 1994 6,800 8,700
Goods invoiced to Branches 34,000 36,000 (at cost)
Sales at Branches
Cash Sales 25,010 35,000
Credit Sales 31,000 30,000
Cash collected from Debtors 30,400 29,800
Goods returned by Debtors 1,200 1,500
Goods rreturned by branch to H.O 1,500


Agra 2,100 2,100
Surplus in stock 300
Storgage of Stock 450
Discount allowed to 200 350
Customers
Expenses at Branches 400 6,700

1. A branch send sthe following trial balance as at 31-12-1994 to the Head Office:
Dr. Cr.

To Opening Stock 16,400 H.O. Account Sundry Creditors 13,200
Discount received

Purchases 25.000 2,800

Goods received from H.O. 17,200 200
Carriage

Salaries
2,500

General Expenses Sundry
5,600
Debtors Cash

4,100

10,200

700
81,700 81,700

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

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Site: School of Open Learning

2 LESSON 9 FINANCIAL STATEMENTS : THEIR NATURE, USES AND LIMITATIONS

3 LESSON 10 DISSOLUTION OF PARTNERSHIP FIRMS

4 LESSON 11 HIRE PURCHASE ACCOUNTS

5 LESSON 12 BRANCH ACCOUNTS

6 LESSON 13 INVENTORY VALUATION

7 LESSON 14 SINGLE ENTRY SYSTEM

1 LESSON 8 PREPARATION OF FINANCIAL

PREPARATION OF FINANCIAL STATEMENTS FOR NON-PROFIT MAKING ENTTES

Add: Subscription for 1994 received in advance in 1993 1,600

Less: Subscription for 1993 received in 1994 4,500 47,100

Add Expenses for 1994 paid in 1993 1,400

22,600 Less Expenses for 1995 paid in 1994 ... 1,600

Add : Payment made during the year : 10,800

Less :Paid for the last year : 2,000

Total stationery 13,100

Receipts and Payments Account

for the year ended 31st December, 1993

Income & Expenditure Account for the year ended 31-12-1993

Balance Sheet (Opening)

Peculiar Items of Non-trading Concerns

Printing & Stationery 1,000

To Excess of Income over

Expenditure Rs. Income Rs.

(2) Reserve for Permanent

The Holy Cricket Club

By Receipts from Teas 200

Balance Sheet as on 31-12-1993

Over Exp. Opening Balance

Balance Sheet as on 1st Jan., 1993

Delhi Social Clube

As On 31st Dec., 1994

(vi) Salaries & Wages Rs. (vii)

Receipts and Payments Account for the year ending 31.12.1994

Less Outstanding 3300

By Outstanding Creditors for last 800

Balance Sheet as on 31st Dec.,

2 LESSON 9 FINANCIAL STATEMENTS : THEIR

3 LESSON 10 DISSOLUTION OF PARTNERSHIP

DISSOLUTION OF PARTNERSHIP FIRMS

capital, shall be applied in the following manner and order:

10. To Discharge Unrecorded liabilities

12. To pay off advances due to partners

Unexpired Insurancce Bills 5,000

Bank Dr. 1,19,500

To Bank 27,300 (Being the payment of various liabilities)

Motor Vehicle 20,000 Expenses 1,000 32,500

To P’s Current A/c 2,500 Inv. Fluctuation Fund

Motor Vehicle A/c

Proportionate capitals :—

Maximum Loss, (total of capitals minus Rs. 12,000

4 LESSON 11 HIRE PURCHASE ACCOUNTS

Bank A/c Dr 3,000.00

LEDGER ACCOUNTS Reclamation Ltd.

1994 To Balance b/d 1994 By Bank

Profit & Loss A/c Dr.

Depreciation 25% on Rs. 8,170.

Profit & Loss A/c Dr.

To Interest A/c 1,810 80

LEDGER ACCOUNT Truck Account

Temple Truck Delaer

(5) For Loss on Repossession