FINANCIAL ACCOUNTING

LESSON 1
INTRODUCTION TO ACCOUNTING

INTRODUCTION
In all activities (whether business activities or non-business activities) and in all organizations
(whether business organizations like a manufacturing entity or trading entity or non-business
organizations like schools, colleges, hospitals, libraries, clubs, temples, political parties)
which require money and other economic resources, accounting is required to account for
these resources. In other words, wherever money is involved, accounting is required to
account for it. Accounting is often called the language of business. The basic function of any
language is to serve as a means of communication. Accounting also serves this function.
MEANING AND DEFINITION OF BOOK- KEEPING
Meaning
Book- keeping includes recording of journal, posting in ledgers and balancing of accounts.
All the records before the preparation of trail balance is the whole subject matter of book-
keeping. It is important to note that only those transactions related to business and which can
be expressed in terms of money are recorded.
Definition
“Book- keeping is the art of recording business transactions in a systematic manner”.
A.H.Rosenkamph.
“Book- keeping is the science and art of correctly recording in books of account all those
business transactions that result in the transfer of money or money’s worth”. R.N.Carter
ACCOUNTING

Meaning of Accounting
Accounting, as an information system is the process of identifying, measuring and
communicating the economic information of an organization to its users who need the
information for decision making. It identifies transactions and events of a specific entity. An
entity means an economic unit that performs economic activities. Business transaction is a
transaction in which money or money’s worth is involved.It can be a cash transaction or a
credit transaction. Cash transaction is a transaction in which the payment is made
immediately. In case of credit transaction the payment is postponed to a future date.
Definition of Accounting
American Institute of Certified Public Accountants (AICPA) which defines accounting as “an
art of recording, classifying and summarizing in a significant manner and in terms of money,
transactions and events, which are, in part at least, of a financial character and interpreting the
results thereof”.

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Objective of Accounting

Objective of accounting may differ from business to business depending upon their specific
requirements. However, the following are the general objectives of accounting.
i) To keeping systematic record: It is very difficult to remember all thebusiness transactions
that take place. Accounting serves this purpose of record keeping by promptly recording all
the business transactions in the books of account.
ii) To ascertain whether the business operations have been profitable or not:
Accounting helps in ascertaining result i.e., profit earned or loss suffered in business during a
particular period. For this purpose, a business entity prepares either a Trading and Profit and
Loss account or an Income and Expenditure account which shows the profit or loss of the
business by matching the items of revenue and expenditure of the some period.
iii)To ascertain the financial position of the business: In addition to profit,a businessman
must know his financial position i.e., availability of cash, position of assets and liabilities etc.
This helps the businessman to know his financial strength. Financial statements are
barometers of health of a business entity.
iv)To portray the liquidity position: Financial reporting should provideinformation about
how an enterprise obtains and spends cash, about its borrowing and repayment of borrowing,
about its capital transactions, cash dividends and other distributions of resources by the
enterprise to owners and about other factors that may affect an enterprise’s liquidity and
solvency.
v)To protect business properties: Accounting provides upto dateinformation about the
various assets that the firm possesses and the liabilities the firm owes, so that nobody can
claim a payment which is not due to him.

Users of Accounting Information:

i)Owners: The owners provide funds or capital for the organization. Theypossess curiosity in
knowing whether the business is being conducted on sound lines or not and whether the
capital is being employed properly or not
ii)Management: The management of the business is greatly interested inknowing the
position of the firm. The accounts are the basis, the management can study the merits and
demerits of the business activity. Thus, the management is interested in financial accounting
to find whether the business carried on is profitable or not.
iii)Creditors: Creditors are the persons who supply goods on credit, orbankers or
lenders of money. It is usual that these groups are interested to know the financial soundness
before granting credit.
iv)Employees: Employees are interested in the financial position of the concern particularly
when payment of bonus depends upon the size of the profits earned.
v)Investors: The prospective investors, who want to invest their money in afirm, of course
wish to see the progress and prosperity of the firm, before investing their amount, by going
through the financial statements of the firm.

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vi)Government: Government keeps a close watch on the firms which yieldgood amount of
profits. The state and central Governments are interested in the financial statements to know
the earnings for the purpose of taxation.
vii)Consumers: These groups are interested in getting the goods at reducedprice. Therefore,
they wish to know the establishment of a proper accounting control,
which in turn will reduce to cost of production, in turn less price to be paid by the consumers.
Researchers are also interested in accounting for interpretation.
viii) Research Scholars: Accounting information, being a mirror of thefinancial performance
of a business organization, is of immense value to the research scholar who wants to make a
study into the financial operations of a particular firm.
Functions of Accounting
i)Record Keeping Function: The primary function of accounting relates torecording,
classification and summary of financial transactions-journalisation, posting, and preparation
of final statements. These facilitate to know operating results and financial positions. The
purpose of this function is to report regularly to the interested parties by means of financial
statements.
ii) Managerial Function: Decision making programme is greatly assisted byaccounting. The
managerial function and decision making programmes, without accounting, may mislead.
iii) Legal Requirement function: Auditing is compulsory in ca s e o fregistered firms.
Auditing is not possible without accounting. Thus accounting becomes compulsory to comply
with legal requirements. Accounting is a base and with its help various returns, documents,
statements etc., are prepared.
iv)Language of Business: Accounting is the language of business. Varioustransactions are
communicated through accounting.

Advantages of Accounting
The following are the advantages of accounting to a business:
i)It helps in having complete record of business transactions.
ii)It gives information about the profit or loss made by the business at the close of a year and
its financial conditions.
iii)It provides useful information for making economic decisions,
iv)It facilitates comparative study of current year’s profit, sales, expenses etc., with those of
the previous years.
v)It supplies information to judge the management’s ability to utilise enterprise resources
effectively in achieving primary enterprise goals.
vi)It provides users information about transactions and other events which are useful for
predicting, comparing and evaluating the enterprise’s earning power.
vii)Errors & Frauds can be minimized.

Limitations of Accounting

1.Records only monetary transactions.

2. Effect of price level changes are not considered.
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3. No Realistic information.
4.Personal bias of Accountant affects the accounting statements.
5.Permits alternative treatments.
6. No real test of managerial performance.
7.Accounting statements do not show the impact of inflation.

Methods of Accounting
Business transactions are recorded in two different ways.
Single Entry Syst
Double Entry System
Single Entry System: It is incomplete system of recording business transactions.
Thebusiness organization maintains only cash book and personal accounts of debtors and
creditors. So the complete recording of transactions cannot be made and trail balance cannot
be prepared.

Double Entry System: It this system every business transaction is having a two foldeffect of
benefits giving and benefit receiving aspects. The recording is made on the basis of both
these aspects. Double Entry is an accounting system that records the effects of transactions
and other events in at least two accounts with equal debits and credits.
Steps involved in Double entry system
a)Preparation of Journal: Journal is called the book of original entry. Itrecords the effect of
all transactions for the first time. Here the job of recording takes place.

b)Preparation of Ledger: Ledger is the collection of all accounts used by abusiness. Here
the grouping of accounts is performed. Journal is posted to ledger.
c)Trial Balance preparation: Summarizing. It is a summary of ledgerbalances prepared in
the form of a list.
d)Preparation of Final Account: At the end of the accounting period toknow the
achievements of the organization and its financial state of affairs, the final accounts are
prepared.
Advantages of Double Entry System
i.Scientific system: This system is the only scientific system of recordingbusiness
transactions in a set of accounting records. It helps to attain the objectives of accounting.
ii.Complete record of transactions: This system maintains a completerecord of all business
transactions.
iii.A check on the accuracy of accounts: By use of this system the accuracyof accounting
book can be established through the device called a Trail balance.

iv.Ascertainment of profit or loss: The profit earned or loss suffered duringa period can be
ascertained together with details by the preparation of Profit and Loss Account.
v.Knowledge of the financial position of the business: The financialposition of the firm can
be ascertained at the end of each period, through the preparation of balance sheet.
vi.Comparative study is possible: Results of one year may be comparedwith those of the
precious year and reasons for the change may be ascertained.
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vii.Helps management in decision making: The management may be alsoto obtain good
information for its work, specially for making decisions.
viii.No scope for fraud: The firm is saved from frauds and misappropriationssince full
information about all assets and liabilities will be available.

Types of Accounts
The object of book-keeping is to keep a complete record of all the transactions that place in
the business. To achieve this object, business transactions have been classified into three
categories:
1.Transactions relating to persons.
2.Transactions relating to properties and assets
3.Transactions relating to incomes and expenses.
The accounts falling under the first heading are known as ‘personal Accounts’. The accounts
falling under the second heading are known as ‘Real Accounts’, The accounts falling under
the third heading are called ‘Nominal Accounts’.

The accounts can also be classified as personal and impersonal. The following chart will
show the various types of accounts:
Accounts

Personal Accounts Impersonal Account

a. Real Account
b. Nominal Account

Personal Accounts: Accounts recording transactions with a person or group ofpersons are
known as personal accounts. Example: Sharma’s A/c, Anand’s A/c, Firm’s A/c, Bank A/c,
Company A/c

When a person starts a business, he is known as proprietor. This proprietor is represented by

capital account for all that he invests in business and by drawings account for all his
withdrawals from the business for personal use. So, capital accounts and drawings account
are also personal accounts.
The rule for personal accounts is: Debit the receiver &Credit the giver
Real Accounts
Accounts relating to properties or assets are known as ‘Real Accounts’, A separate account is
maintained for each asset e.g., Cash Machinery, Building, etc., Real accounts can be further
classified into tangible and intangible.
Tangible Real Accounts: These accounts represent assets and propertieswhich can be seen,
touched, felt, measured, purchased and sold. e.g. Machinery account Cash account, Furniture

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account, stock account etc.
Intangible Real Accounts: These accounts represent assets and propertieswhich cannot be
seen, touched or felt but they can be measured in terms of money. e.g., Goodwill accounts,
patents account, Trademarks account, Copyrights account, etc.
The rule for Real accounts is: Debit what comes in &Credit what goes out
Nominal Accounts
Accounts relating to income, revenue, gain expenses and losses are termed as nominal
accounts. These accounts are also known as fictitious accounts as they do not represent any
tangible asset. A separate account is maintained for each head expense or loss and gain or
income. Wages account, Rent account Commission account, Interest received account are
some examples of nominal account
The rule for Nominal accounts is: Debit all expenses and losses &
Credit all incomes and gains

BRANCHES OF ACCOUNTING
The changing business scenario over the centuries gave rise to specialized branches of
accounting which could cater to the changing requirements. The branches of accounting are;
I.Financial accounting;
Ii.Cost accounting; and
iii.Management accounting.

Financial Accounting
The accounting system concerned only with the financial state of affairs and financial results
of operations is known as Financial Accounting. It is the original form of accounting. It is
mainly concerned with the preparation of financial statements.

Cost Accounting
In view of the limitations of financial accounting in respect of information relating to the cost
of individual products, cost accounting was developed. It is that branch of accounting which
is concerned with the cost ascertainment and cost control. Cost accounting seeks to ascertain
the cost of unit produced and sold or the services rendered by the business unit with a view to
exercising control over these costs to assess profitability and efficiency of the enterprise. It
generally relates to the future and involves an estimation of future costs to be incurred.
Management Accounting
It is an accounting for the management i.e., accounting which provides necessary information
to the management for discharging its functions. According to the Anglo-American Council
on productivity, “Management accounting is the presentation of accounting information is
such a way as to assist management in the creation of policy and the day-to-day operation of
an undertaking.”

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PRINCIPLES OF ACCOUNTING

ACCOUNTING CONCEPTS AND CONVENTIONS

Accounting concepts:
The term ‘concept’ is used to denote accounting postulates, i.e., basic assumptions or
conditions upon which the accounting super-structure is based. The following are the
common accounting concepts adopted by many business concerns.
1. Business Entity Concept 2. Money Measurement Concept
3. Going Concern Concept 4. Dual Aspect Concept
5. Accounting Period Concept 6. Cost Concept
7. Matching Concept 8. Realisation Concept
9. Accrual Concept 10. Objective Evidence Concept

i) Business Entity Concept: A business unit is an organization of personsestablished to

accomplish an economic goal. Business entity concept implies that the business unit is
separate and distinct from the persons who provide the required capital to it. This concept can
be expressed through an accounting equation, viz., Assets = Liabilities + Capital.
ii) Money Measurement Concept: In accounting all events and transactionsare recorded in
terms of money. Money is considered as a common denominator, by means of which various
facts, events and transactions are recorded.
iii)Going Concern Concept: Under this concept, the transactions arerecorded assuming that
the business will exist for a longer period of time, i.e., a business unit is considered to be a
going concern and not a liquidated one. Keeping this in view, the suppliers and other
companies enter into business transactions with the business unit. This assumption supports
the concept of valuing the assets at historical cost or replacement cost. This concept also
supports the treatment of prepaid expenses as assets, although they may be practically
unusable.

iv)Dual Aspect Concept: According to this basic concept of accounting,every transaction

has a two-fold aspect, Viz., 1.giving certain benefits and 2. Receiving certain benefits. The
basic principle of double entry system is that every debit has a corresponding and equal
amount of credit. This is the underlying assumption of this concept. The accounting equation
viz., Assets = Capital + Liabilities or Capital = Assets – Liabilities, will further clarify this
concept, i.e., at any point of time the total assets of the business unit are equal to its total
liabilities. Liabilities here relate both to the outsiders and the owners. Liabilities to the owners
are considered as capital.
V) Periodicity Concept: Under this concept, the life of the business issegmented into
different periods and accordingly the result of each period is ascertained. Though the business
is assumed to be continuing in future (as per going concern concept), the measurement of
income and studying the financial position of the business for a shorter and definite period
will help in taking corrective steps at the appropriate time.
vi) Cost Concept: According to this concept, the transactions arerecorded in the books of

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account with the respective amounts involved. For example, if an asset is purchased it is
entered in the accounting record at the price paid to acquire the same and that cost is
considered to be the base for all future accounting. It means that the asset is recorded at cost
at the time of purchase but it may be methodically reduced in its value by way of charging
depreciation.
vii)Matching Concept: The essence of the matching concept lies in the viewthat all costs
which are associated to a particular period should be compared with the revenues associated
to the same period to obtain the net income of the business.
viii)Realisation Concept: This concept assumes or recognizes revenue whena sale is made.
Sale is considered to be complete when the ownership and property are transferred from the
seller to the buyer and the consideration is paid in full. However, there are two exceptions to
this concept, viz., 1. Hire purchase system where the ownership is transferred to the buyer
when the last instalment is paid and 2. Contract accounts, in which the contractor is liable to
pay only when the whole contract is completed, the profit is calculated on the basis of work
certified each year.

ix)Accrual Concept: According to this concept the revenue is recognized onits realization
and not on its actual receipt. Similarly the costs are recognized when they are incurred and
not when payment is made. This assumption makes it necessary to give certain adjustments in
the preparation of income statement regarding revenues
and costs. But under cash accounting system, the revenues and costs are recognized only
when they are actually received or paid. Hence, the combination of both cash and accrual
system is preferable to get rid of the limitations of each system.

x) Objective Evidence Concept: This concept ensures that all accountingmust be based on
objective evidence, i.e., every transaction recorded in the books of account must have a
verifiable document in support of its, existence like Receipts or Vouchers. Only then, the
transactions can be verified by the auditors and declared as true.

.2.2 Accounting Conventions

The following conventions are to be followed to have a clear and meaningful information and
data in accounting:

i) Consistency: The convention of consistency refers to the state of accountingrules,

concepts, principles, practices and conventions being observed and applied constantly, i.e.,
from one year to another there should not be any change. If consistency is there, the results
and performance of one period can he compared easily and meaningfully with the other. It
also prevents personal bias as the persons involved have to follow the consistent rules,
principles, concepts and conventions. This convention, however, does not completely ignore
changes. It admits changes wherever indispensable and adds to the improved and modern
techniques of accounting.

ii)Disclosure: The convention of disclosure stresses the importance ofproviding accurate, full
and reliable information and data in the financial statements which is of material interest to
the users and readers of such statements. This convention is given due legal emphasis by the
Companies Act, 1956 by prescribing formats for the preparation of financial statements.
However, the term disclosure does not mean all information that one desires to get should be
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included in accounting statements. It is enough if sufficient information, which is of material
interest to the users, is included.
iii)Conservatism: In the prevailing present day uncertainties, the conventionof conservatism
has its own importance. This convention follows the policy of caution or playing safe. It takes
into account all possible losses but not the possible profits or gains. A view opposed to this
convention is that there is the possibility of creation of secret reserves when conservatism is
excessively applied, which is directly opposed to the convention of full disclosure. Thus, the
convention of conservatism should be applied very cautiously.

BASES OF ACCOUNTING
There are three bases of accounting in common usage. Any one of the following bases may
be used to finalise accounts.
Cash basis
Accrual or Mercantile basis
Mixed or Hybrid basis.

Accounting on ‘Cash basis

Under cash basis accounting, entries are recorded only when cash is received or paid. No
entry is passed when a payment or receipt becomes due. Income under cash basis of
accounting, therefore, represents excess of receipts over payments during an accounting
period. Government system of accounting is mostly on cash basis.

Accrual Basis of Accounting or Mercantile System

Under accrual basis of accounting, accounting entries are made on the basis of amounts
having become due for payment or receipt. Incomes are credited to the period in which they
are earned whether cash is received or not. Similarly, expenses and losses are debited to the
period in which, they are incurred, whether cash is paid or not. Under the Companies Act
1956, all companies are required to maintain the books of accounts according to accrual basis
of accounting.

Mixed or Hybrid Basis of Accounting

When certain items of revenue or expenditure are recorded in the books of account on cash
basis and certain items on mercantile basis, the basis of accounting so employed is called
‘hybrid basis of accounting’. For example, a company may follow mercantile system of
accounting in respect of its export business. However, government subsidies and duty
drawbacks on exports to be received from government are recorded only when they are
actually received i.e., on cash basis.

2.5 ACCOUNTING EQUATION

As indicated earlier, every business transaction has two aspects—Receiving of benefit of
some value and Giving of benefit of some value. One aspect is debited and other aspect is
credited. Both the aspects have to be recorded in accounts appropriately. American
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Accountants have derived the rules of debit and credit through a ‘novel’ medium, i.e.,
accounting equation. The equation is as follows:
Assets = Equities
Assets= Properties or possessions owned by a business; Equity= Right to properties--- It
can be Internal or External. Internal equities are the amount contributed by proprietor as
capital. External equities are the “liabilities” i.e.. amount payable to outsiders

Assets = Liabilities + Capital

CONVERSION OF SINGLE ENTRY INTO DOUBLE ENTRY

Single Entry System is an unscientific system of Book Keeping in which for some
transactions both the aspects are recorded , for some only one aspect is recorded and for some
transactions no record is made.

Types of Single Entry System

Pure single entry system is that system under which only Personal Accounts are maintained.

Simple Single Entry System is that system of under which along with Personal Accounts,
a Cash Book is also maintained.

Quai Single Entry System is that system ,under which , in addition to Personal Accounts
and Cash Book subsidiary books are also maintained.

Advantages of Single Entry System

It is economical

Very simple to maintain and easy to understand

Suitable for sole trading and small partnership firms

Disadvantages of Single Entry System

1.No arithmetical accuracy

2.Difficult to ascertain financial position

3.Profit & Loss account cannot be prepared.

4.Encourages Fraud

5. Rectification of errors is difficult.

Difference between Single Entry & Double Entry

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Basis of Double Entry Single Entry
difference
Accounts All personal, real and nominal Only personal accounts and cash accounts
accounts are opened are opened.
Both Both the aspects of a transaction In some cases both and in other cases only
aspects are recorded one aspect is recorded.
Trial Can be prepared Cannot be prepared
Balance
P/L A/C Can be prepared Cannot be prepared
Balance Can be prepared to know the Cannot be prepared to know the financial
sheet financial position position
Method Scientific Method Unscientific Method
Reliability Most Reliable Not Reliable
Utility Suitable for all types of business Suitable only for Sole trading and
Partnership firms.

Ascertainment of Profit under Single Entry System

1. Statement of Affairs Method or Net Worth Method

2. Conversion Method

Statement of Affairs Method: Under this method statement of affairs is prepared to find
out the Capital. The closing capital is compared with the Opening capital and the difference is
considered as the profit or loss. Adjustments are made for the additional capital introduced
or the drawings made by the proprietors

Difference between Statement of Affairs & Balance sheet

Statement of Affairs Balance Sheet

1. Prepared under Single Entry System
of Book keeping
2. Prepared to ascertain the capital
balance
3. Prepared on the basis of Physical
inspection
1. Prepared under Double Entry System
of Book keeping
2. Prepared to know the financial
position as on a particular date.
3. Prepared only from the balances of
Ledger accounts

Conversion Method

The following steps are followed when a Single Entry System is converted into Double
Entry System.

i. Ascertainment of missing information

ii. Preparation of Final Accounts

Ascertainment of missing information: Under Single Entry System some transactions

two aspects are recorded , some transactions one aspect is recorded and some transactions are
not recorded at all. As the entire information is not available missing data are to be found
out for the preparation of the financial statements.
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 Statement of Affairs & Cash account, Debtors a/c, Creditors a/c, Bills Receivable a/c, Bills
Payable a/c etc . are the important ledger accounts which are opened to find out the missing
information. With the available information given in the question find out the basic
information required for the preparation of the final accounts.

Format of Statement of Affairs

Statement of Affairs as on …..

Liabilities Rs Assets Rs
Creditors xxx Land & Building xxx
Bills Payable xxx Plant & Machinery xxx
Bank Overdraft xxx Furniture xxx
Loans xxx Investments xxx
Outstanding Expenses xxx Stock xxx
Income received in advance xxx Debtors xxx
Capital (Balancing Figure) xxx Bills Receivable xxx
Cash in hand xxx
Cash at Bank xxx
Accrued Incomes xxx
Pre- paid expenses xxx
xxx xxx

Total Debtors a/c is prepared to ascertain the Opening or Closing Balance of Debtors, Cash
received from Debtors or Credit Sales.

Total Debtors Account

Particulars Rs Particulars Rs
To Balance b/d xx By Cash xx
To Bills Receivable (dishonored) xx By Bank xx
To Sales (Credit) xx By Bills Receivable ( Received) xx
By Discount Allowed xx
By Sales Returns (returns inwards) xx
By Bad Debts xx
By Balance c/d xx

Total Creditors Account

Particulars Rs Particulars Rs
To Cash xx By Balance b/d xx

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To Bank xx By Bills Payable (dishonored) xx
To Bills Payable xx By Purchases (credit) xx
To Returns Outwards xx
To Discount received xx
To Balance c/d xx

Bills Receivable Account

Particulars Rs Particulars Rs
To Balance b/d xx By Cash xx
To Debtors ( B/R received during the xx By Debtors ( B/R dishonored ) xx
year) By Creditors ( B/R endorsed) xx
By Cash xx
By Discount (B/R discounted) xx
By Balance c/d xx

Bills Payable Account

Particulars Rs Particulars Rs
To Cash xx By Balance b/d xx
To Creditors ( B/P dishonored) xx By Creditors (B/P issued ) xx
To Balance c/d xx

Example 1.

From the following particulars extracted from the bookds of a trader kept under the single
entry system, you are required to find out the figure for credit sales and credit purchases.

Balances 1st January 2012:

Total Debtors 57,200 Payments made against Bills

Bills Receivable 4,000 Payable 7,000

Total Creditors 26,400 B/R dishonored1,100

Bills Payable 2,500 Bad debts previously

Cash paid to creditors 70,250 written off, now recoverd 1,000

Discount allowed by Suppliers 2,650 Cash sales during the year 15,800

Cash received from customers 1,35,400 Cash purchase 12,300

Discount allowed to customers 4,200 Balances ,31-12-2012:

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Returns from customers 1,625 Total Debtors 55,600

Returns to suppliers 1,330 Total Creditors 28,400

Cash received against bills receivable 14,200 Bills Receivable 1,000

Bad Debts written off 3,540 Bills Payable 3,000

Note: When any information relating to Bills Receivable or Bills Payable is given in the
question , before preparing the Debtors A/C or Creditors A/C Bills receivable a/c and Bills
payable a/c is to be opened. Cash sales and Cash Purchases will not appear in Debtors a/c or
Creditors a/c. Bad debts previously written off , now recovered as an income . and the
journal entry is

Cash A/c Dr 1000

To Bad debts recovered 1,000

So it will not appear in the Debtors account.

Bills Receivable Account

Particulars Amount Particulars Amount

To Balance b/d 4,000 By Cash 14,200
To Debtors (B/R received By Debtors (dishonored) 1,100
during the year) B/F 12,300 By Balance c/d 1,000
16,300 16,300

To Balance b/d 1,000

Bills Payable Account

Particulars Amount Particulars Amount

To Cash 7,000 By Balance b/d 2,500
By Creditors ( Bills accepted
during the year)B/F 7,500
To Balance c/d 3,000
10,000 10,000
By Balance b/d
3,000

Total Debtors Account

Particulars Amount Particulars Amount

To Balance b/d 57,200 By Cash 1,35,400
To Bills Receivable 1,100 By Discount 4,200
To Sales (credit) 1,54,365 By Returns Inwards 1,625
By Bad Debts 3,540
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 By Bills Receivable 12,300
By Balance c/d 55,600
2,12,665 2,12,665

To Balance b/d 55,600

Total Creditors Account

Particulars Amount Particulars Amount

To Cash 70,250 By Balance b/d 26,400
To Discount 2,650 By Purchase ( credit) B/F 83,730
To Returns outwards 1, 330
To Bills payable 7,500
To Balance c/d 28,400
1,10,130 1,10,130

By Balance b/d 28,400

Total Sales= cash sales +credit sales= 40,900+95,300=1,36,200

Total Purchases= cash purchase +credit purchase=25,800+40,300=66,100

Ascertainment of Opening Stock & Closing Stock when Rate of Gross profit is given

Cost of goods sold= Sales -- Gross profit

OR

Cost of goods sold= Opening Stock+ Purchases—Closing Stock

Calculation of Profit on Cost and Sales

Based on the information in the problem, percentage of profit on cost must be converted into
percentage of profit on sales or vice versa

For example, if profit is 25% on cost then profit on sales will be 20%

Assuming cost as 100; profit is (25% of 100) that is 25; selling price is cost + profit =
100+25=125. Therefore percentage of profit on sales

Profit on sales= Profit x100 25 x100 =20%

Sales 125

Conversion Table

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Percentage of Profit on Cost Percentage of Profit on Sales
50% or ½ 33 .33% or 1/3
33.33% or 1/3 25% or ¼
25% or1/4 20% or 1/5
20% or 1/5 16.67% or1/6

Example 1

Find out Sales when Cost of Goods sold is 80,000 and Gross Profit ratio is 20% on sales.

Cost of Goods Sold =80,000

Percentage of Gross profit=20% on Sales

20% on sales =25% on Cost

Gross profit =80,000x25/100=20,000

Sales =cost + profit =80,000 +20,000 =1,00,000

Example 2

Ascertain Purchases when cost of goods sold is Rs.2,00,000 ; Opening stock Rs.20,000 and
Closing Stock Rs.50,000

Cost of Goods Sold = Opening Stock + Purchases -- Closing Stock

2,00,000 =20,000 + Purchases -- 50,000

20,000 + Purchases—50,000 =2,00,000

Purchases =2,00,000 – 20,000+50,000 =2,30,000

Illustration 1

Mohan keeping his books under Single Entry System has placed the following facts before
you:

i. His Statement of Affairs as at 1st January 2012

ii. A summary of cash transactions for the year 2012;
iii. A list of remaining transactions for the year.
Statement of Affairs as on 1st January 2012
Liabilities Amount Assets Amount
Bank Overdraft 25,000 Debtors 75,000
Creditors 50,000 Less: Provision 3,750 71,250
Bills Payable 3,000 Bills Receivable 18,000
16
O/S general charges 2,000 Stock 70,000
Capital 1,52,000 Plant 50,000
Building 20,000
Cash in hand 2,750
2,32,000 2,32,000

Cash Account
Particulars Amount Particulars Amount
To Balance b/d 2,750 By Payment to Creditors 1,80,000
To Bills Receivable 50,000 By Cash Purchases 40,000
To Debtors 2,18,000 By Bills Payable 80,000
To Cash Sales 41,000 By Salaries 15,000
To Mrs. Mohan’s Loan 25,000 By Rent 9,000
By General Charges 4,500
By Drawings 5,400
By Balance c/d 2,850
3,36,750 3,36,750

Remaining transactions:

Total Sales 4,02,500 ; Total Purchases 3,60,000 ; Discount allowed to

Customers 1,000 ; Discount allowed by creditors 2,000 ; Bills Receivable as at 31-12-
2012 30,000 ; Bills payable accepted during the year 93,000 ; Stock on 31-12-
2012 85,000 ; Owings for outstanding general charges 3,000 ; Bad debts 2,000 ;
Prepaid Rent 1,800 .

Provide 5% for doubtful debts and 2 ½ % for discount on Debtors. Depreciate building by
2% and Plant by 10%.

You are required to prepare Trading and Profit & Loss A/c and Balance sheet.

Note: Here closing balance of Debtors, B/R received during the year, closing balance of
creditors and Bills payable is not given. These can be found out by preparing Total Debtors
A/C, Total Creditors A/c, Bills Receivable A/C and B/P A/C.

Total Debtors Account

Particulars Amount Particulars Amount

To Balance b/d 75,000 By Cash 2,18,000

17
To Credit Sales 3,61,500 By Bills receivable 62,000
(4,02,500-41,000) By Discount allowed 1,000
By Bad Debts 2,000
By Balance c/d ( B/F) 1,53,500
4,36,500 4,36,500

Total Creditors Account

Particulars Amount Particulars Amount

To Cash 1,80,000 By Balance b/d 50,000
To Discount 2,000 By Purchases (Credit) 3,20,000
To Bills Payable 93,000 (3,60,000—40,000)
To Balance c/d ( B/F) 95,000
3,70,000 3,70,000

Bills Receivable Account

Particulars Amount Particulars Amount

To Balance b/d 18,000 By Cash 50,000
To Debtors ( balancing figure) 62,000 By Balance c/d 30,000
80,000 80,000

Bills Payable Account

Particulars Amount Particulars Amount

To Cash 80,000 By Balance c/d 3,000
To Balance c/d 16,000 By Creditors 93,000
96,000 96,000

Trading & Profit & Loss Account for the year ended 31st December 2012

To Opening Stock 70,000 By Sales:

To Purchases: Cash 41,000
Cash 40,000 Credit 3,61,500 4,02,500
Credit 3,20,000 3,60,000
To Gross Profit c/d 57,500 By Closing Stock 85,000
4,87,500 4,87,500

To Salaries 15,000 By Gross Profit b/d 57,500

To Rent 9,000 By Discount received 2,000
Less Prepaid 1,800 7,200
To General charges 4,500
Less Last years O/S 2,000

2,500 5,500
Add O/s (31—12-2012) 3,000
1,000

18
To Discount allowed
To Bad debts 2,000
Add: New RB&D 7,675
9,675 5,925
Less:Old Reserve 3,750
To Provision for discount on 3,646
Debtors
To Depreciation:
Building—2%of 20,000 400 5,400
Plant – 10%of50,000 5,000 15,829
To Net profit 59,500 59,500

Balance Sheet as on 31st December 2012

Liabilities Amount Assets Amount

O/S General charges 3,000 Cash in hand 2,850
Bills Payable 16,000 Bills Receivable 30,000
Creditors 95,000 Debtors 1,53,500
Bank Overdraft 25,000 LessRBD 7,675
Mrs. Mohan’s Loan 25,000 1,45,825
Capital on 1-1-12 1,52,000 Less Provision for
Less Drawings 5,400 Discount 3’646 1,42,179
1,46,600 Stock 85,000
Add Net Profit 15,829 Prepaid rent 1,800
1,62,429 Plant 50,000
Less Depreciation 5,000 45,000
Building 20,000
Less Depreciation 400 19600
3,26,429 3,26,429

Illustration II

The following is the position of Mr.Hazzare on 1—1 – 2015

19
 Creditors 75,000 Furniture 20,000

Capital 80,000 Debtors 90,000

Stock 40,000

Bank 5,000

1,55,0001,55,000

His Bank transactions during the year were

Receipts from customers 3,50,000; Drawing for personal expenses 60,000;

Payment of Salaries 30,000; Payment of creditors 2,20,000; Payment of Rent 15,000;
Miscellaneous expenses 4,000.

On 31—12—2015 Debtors stood at Rs.95,000 and Creditors Rs. 64,000. No inventory of

stock was taken on 31—12—2015 . But the Gross profit was estimated @50 % on Sales
made during the year. Prepare P/L A/C for the year and Balance Sheet on 31—12—2015 .

Note: Here Opening Balance of Debtors, Closing Balance of Debtors and cash received
from customers are given. By preparing the Debtors a/c credit salescan be found out.
Likewise Credit Purchases is to be ascertained by preparing Creditors A/c. Bank
transactions are given and the opening bank balance is shown in the financial position . The
closing Bank balance is missing . By preparing a Bank A/c bank balance at the end of the
year can be found out. Closing Stock is not mentioned in the question . When the Gross profit
Ratio is given in the question by preparing a Trading A/c closing stock can be ascertained.

Debtors Account

Particulars Amount Particulars Amount

To Balance b/d 90,000 By Bank 3,50,000
To Sales (credit) B/F 3,55,000 By Balance c/d 95,000
4,45,000 4,45,000
Creditors Account

Particulars Amount Particulars Amount

To Bank 2,20,000 By Balance b/d 75,000
To Balance c/d 64,000 By Purchases (Credit) B/F 2,09,000
2,84,000 2,84,000
Bank Account

Particulars Amount Particulars Amount

To Balance b/d 5,000 By Drawings 60,000
To Debtors 3,50,000 By Salaries 30,000
By Creditors 2,20,000
By Rent 15,000
By Miscellaneous Expenses 4,000
By Balance c/d 26,000
3,55,000 3,55,000

20
Memorandum Trading Account for the year ended 31-12-2015

Particulars Amount Particulars Amount

To Opening Stock 40,000 By Sales 3,55,000
To Purchases 2,09,000 By Closing Stock b/F 71,500
To Gross Profit 1,77,500
( 50% on 3,55,000) 4,26,500 4,26,500
Profit & Loss Account for the year ended 31- 12 -2015

Particulars Amount Particulars Amount

To Salaries 30,000 By Gross Profit 1,77,500
To Rent 15,000
To Miscellaneous Expenses 4,000
To Net Profit 1,28,500
1,77,500 1,77,500

Balance Sheet as on 31-12-2015

Liabilities Amount Assets Amount

Creditors 64,000 Furniture 20,000
Capital 80,000 Debtors 95,000
Add Net profit1,28,500 Closing Stock 71,500
2,08,500 Cash at Bank 26,000
Less Drawings 60,000
1,48,500
2,12,500 2,12,500

21
 UNIT 3:

HIRE PURCHASE SYSTEM

MEANING

Hire Purchase System refers to the system wherein, the seller of goods
delivers the goods to the buyer without transferring the ownership of goods till
the last installment is paid. Under this system the ownership will be transferred to
the buyer on payment of the last installment. If the buyer makes any default the
vendor has the right to repossess the goods and the installments already paid
will be treated as the Hire Charges. The transaction may result in purchasing of
goods by the buyer or in hiring the goods. Hence the system is called Hire
Purchase System.

Features or Characteristics of Hire Purchase System

1. It is an agreement between the Hire Vendor and the Hire Purchaser.

2. Payment will be made by the hire purchaser in installments.
3. The possession of the goods passes from the seller to the buyer on signing the
agreement.
4. Ownership of the goods will be transferred to the buyer on payment of the last
installment.
5. Hire Vendor has the right to repossess the goods if there is any default in payment
of any instalments.
6. The buyer has an option to return the goods to the seller and can terminate the
agreement.

Instalment System

Instalment Payment system is a system where the buyer gets the ownership as well as
possession of the goods at the time of signing the contract and the buyer can make the
payment in instalments.

Features of Installment System

1. There will be an outright sale of goods.

2. The possession as well as ownership is passed on to the buyer right at the time of
signing the contract.
3. The buyer can make the payments by installments.
4. The seller cannot repossess the goods in case of default in payment.

22
 5. The buyer cannot exercise the option of returning the goods and terminate the
contract.

Difference between Hire Purchase System & Installment System

Basis of Hire Purchase System Installment System

Difference
Nature of contract Contract of Hiring Contract of Sale
Ownership Transferred after payment of Transferred immediately on signing
all installments. the contract.
Repossession of Hire vendor has the right to Seller cannot repossess the goods in
goods repossess the goods in case of case of default of payment.
default of payment
Return of Goods Buyer can exercise the option Buyer cannot exercise the option of
of return of goods return of goods.
Risk of loss or Risk is on the seller Risk is on the buyer
damage to goods
Important terms

Hire Purchaser ---- the person who obtains the possession of goods for use with an option
to either purchase it or return after use.

Hire Vendor ---- Person who owns the goods, and who parts with the possession of these
goods to the buyer with an option of Hire or Purchase.

Hire Purchase Price -----The total sum payable by the Hire Purchaser to the Hire Vendor
as per the agreement. It includes the Principal and interest.

Net Hire Purchase Price ---- Hire Purchase price less delivery charges, registration charges,
insurance if any included in the price.

Cash Price ---- It is the price of the goods at which the hire purchaser can purchase the
goods for cash. It does not include interest.

Down Payment ---- Amount which is paid at the time of taking delivery of goods.

Difference between Hire Purchase & Sale

Hire Purchase Sale

Governed by the Hire Purchase Act ,1972
Ownership of goods is transferred to the
buyer on payment of all installments
Payment is made in Installments
Hire purchaser pays for the price of goods
and also for interest
On non- payment of any installment, the
seller can repossess the goods
Buyer or Seller can terminate the contract at
any point of time.
Governed by the Sale of Goods Act, 1930
Ownership of goods is transferred to the
buyer immediately.
Makes payment in Lumpusum
Buyer pays only for the price of goods.
On non- payment of any installment , the
seller cannot take back the goods.
Neither the seller nor the buyer can terminate
the contract.

23
Rebate: The hirer can claim rebate from the owner or hire vendor in case he decides to
remit the balance of the purchase price in lumpsum without continuing the hire
purchase agreement till the last installment. In case of early remittance the hire
purchaser gets rebate. It is calculated as

Rebate = 2/3 x Hire Charges x Number of Installments due

Total Number of Installments

Example:

Calculate the amount of rebate and the balance amount to be paid on settlement

Cash Price Rs.30,000 ; Hire Purchase Price Rs.36,000 ; Number of Installments

36. The Hire Purchaser has already paid 24 Installments. He wants to settle the
remaining balance and terminate the agreement.

Rebate = 2/3 x Hire Charges x No.of Installments due

Total No. of Installments

Hire Charges = Hire Purchase Price --- Cash Price

= 36,000 – 30,000 = 6,000

Rebate = 6,000 x2/3 x 12/36

= Rs.1,333

Calculation of amount to be paid on settlement

Total No. of Installments =36

Hire Purchase Price =36,000

Installment amount =36,000/36 =1,000

Balance Number of Installments =36- 24 =12

Balance amount payable = 12 x1,000 =12,000

Less Rebate = 1,333

10,667

24
ACCOUNTING TREATEMENT

Asset Accrual Method

Under this method asset is recorded at the cash price actually paid. As the Hire
Purchaser gets the ownership only after the payment of last installment no Journal
entry is passed when the asset is purchased . Entries are passed for Down Payment
and as and when the installment becomes due.

JOURNAL ENTRIES IN THE BOOKS OF HIRE PURCHASER

Date Particulars LF Debit Credit

1. When Asset is Purchased
No Journal Entry is required
2. When the Down Payment is made
Asset A/c
Dr
To Bank A/c
3. When the Installment becomes due
Asset A/c
Dr
Interest A/c
Dr
To Hire Vendor A/c
4. When the Installment is paid
Hire Vendor A/c
Dr
To Bank A/c
5. When Depreciation is charged
Depreciation A/c
Dr
To Asset A/c
6. When interest & depreciation accounts are
closed by transfer to P/L A/c
P/L A/c
Dr
To Interest A/c
To Depreciation A/c

25
 JOURNAL ENTRIES IN THE BOOKS OF HIRE VENDOR

Date Particulars LF Debit Credit

1. When the item is sold on Hire Purchase
basis
Hire Purchaser A/c
Dr
To Sales A/c
2. When the Down Payment is received
Bank A/c Dr
To Hire Purchaser’s A/c
3. When the Interest becomes Due
Hire Purchaser’s A/c
Dr
To Interest A/c
4. When the Installment is received
Bank A/c Dr
To Hire Purchaser’s
5. When the Interest account is closed
Interest A/c Dr
To P/L A/c

UNDER ASSET ACCRUAL METHOD

STEPS IN HIRE PURCHASE SYSTEM

I. Calculation of Interest
II. Depreciation
III. Calculation of Cash Price in each Installment
Ascertainment of the amount of Interest
1. When Rate of Interest; Total Cash Price & Installments are Given
Cash Price xxx
Less Down Payment xxx
Add Interest for the first year xxx
Less Ist Installment paid xxx
Add Interest for the second year xxx
Less 2nd Installment paid xxx
Add interest for the last year xxx
Less last installment paid xxx
Nil

Example :
26
On Ist January 2015 , Alpha Ltd bought a machine from HMT Ltd. on Hire purchase
System. The Cash Price was Rs.26,350 and the payment was to be made as follows:

Rs.10,000 on signing of the agreement and the balance in 3 yearly installment of Rs.6,000
each. 5% interest is charged by the vendor. Calculate the interest for each year.

Solution :

Cash Price , Rate of Interest & Installments are given

Calculation of Amount of Interest for each year

Cash Price 26,350
Less Down Payment 10,000
Balance Due 16,350
Add interest for the year 2010 (16,350 x5/100) 818
17,168
Less I st installment paid 6,000
Balance Due 11,168
Add 5% interest for the year 2011 (11168x5/100) 558
11,726
Less II Installment Paid 6,000
Balance Due 5,726
Add interest for the year 2012 (6,000- 5,726) 274
6,000
Less III Installment paid 6,000
Nil

Note: Installments given in the question can be’ inclusive of interest’ or Exclusive of
interest.
If the total payment (Down Payment + Installments) is equal to Cash Price interest is not
included in the installment (ie. Exclusive of interest). If the total payment is more than the
cash price interest is included in the installment. (ie. Inclusive of interest)

27
2.When Cash Price & Installments are given, but Rate of interest is not given:

Steps

1. Calculate Total interest

Total Interest = Hire Purchase Price -- Cash Price
2. Calculate the amount of Hire Purchase Price outstanding at the beginning of each
year after subtracting the Down Payment.
3. Find out the ratio of outstanding amounts calculated in step II
4. Apply this ratio to the total interest and calculate the interest on each installment.

Example:
Calculate the amount of interest and principal included in each installment:
Cash Price of the Machine Rs.15,000 ; Rs.1,500 being paid on delivery and the balance in
5 annual installments of Rs.3,000 each payable annually.

Solution: Cash Price & Installments are given but the rate of interest is not given:
First Total Interest is to be calculated
Total interest = Hire Purchase Price – Cash Price
Hire Purchase Price = Down Payment + Total installment Amount
= 1,500 + ( 5 x 3,000)= 1,500+15,000 =16,500
Total Interest =16,500—15,000 =1,500
Second Step: Calculation of amount due at the beginning of each year:
Amount due at the beginning of Ist year (16,500 – 1,500) =15,000
Amount due at the beginning of II nd year (15,000 – 3,000) =12,000
Amount due at the beginning of 3rd year (12,000- 3,000 ) =9,000
Amount due at the beginning of 4th year (9,000 – 3,000) =6,000
Amount due at the beginning of 5th year ( 6,000- 3000) =3,000
Third Step ; Calculation of Ratio of Amount Due
15,000:12,000:9,000:6,000:3,000 =5:4:3:2:1
Fourth Step :Calculation of interest for each year:
1st year =1,500x5/15 =500
2nd year =1,500x4/15 =400
3rd year =1,500 x3/15=300
28
4th year = 1,500 x 2/15 =200
5th year = 1,500 x1/15 =100
Calculation of Principal for each year
Principal =Installment – Interest
1st year 3,000- 500 = 2,500
2nd year 3,000- 400 =2,600
3rd year 3,000 - 300 =2,700
4th year 3,000 – 200 = 2,800
5th year 3,000 – 100 =2,900

II. Ascertainment of Cash Price

Some times the Cash Price will not be given in the question . To find out the cash price
two methods are there.
( i.) Without Annuity Table& (ii) With Annuity Table
a. When the installments are constant
b. When the installments are varying
Ascertainment of Cash Price without the help of Annuity Table
Under this method interest is calculated starting with the last installment
Interest= Total amount due at the time of Installment x Rate of interest
100 + rate of interest
Calculate the cash price of an asset from the following:
Rs.3,000 paid at the time of agreement ; Rs.21,600 paid at the time of I year ; Rs.20,700
paid at the time of II year ; Rs.19,800 paid at the time of III year; Rs.18,900 paid at the
time of IV year ; Rate of Interest is 5% per annum ; Rate of depreciation 25% p.a.

Here the Installments are given. Rate of Interest is given. Annuity value is not given. So
to find out the Cash Price follow the first method ie. Without annuity table

Calculation of Cash Price of an Asset

29
Installment Closing Installment Total Interest Opening
Numbers balance amount 5/105 Balance/
amount Principal
IV Nil 18,900 18,900 18,900x5/105=900 18,000
III 18,000 19,800 37,800 37,800x5/105=1800 36,000
II 36,000 20,700 56,700 56,700x5/105=2700 54,000
I 54,000 21,600 75,600 75,600x5/105=3600 72,000
Add Down Payment 3,000
Cash Price 75,000

Note: If yearly installments are given take the same percentage of interest. When the
installments are given half yearly , rate of interest is to be divided by 2. In case of
Quarterly installments, rate of interest is to be divided by 4. For example Rate of
interest is 10% and 4 annual installments are given . in that case the rate of interest
will remain the same as 10% ( Interest =Total Amount X 10/110). Assume that the
rate of interest is 10% and 4 half yearly installments are given. The effective rate of
interest will be Half of 10% ie. 5% ( Interest = Total amount X 5/105). In case of
Quarterly installments if the rate of interest is given as 20%, then the effective rate of
interest will be one-fourth of 20% ie.5% ( Interest = Total amount X5/105)

Calculation of Cash Price with the help of Annuity Table

If the annuity value is given in the question Second method is to be followed
Cash Price of Installment = Annuity value x Installment
Cash Price = Cash Price of Installment + Down Payment
Example:
Calculate the Cash Price of the Machine.
Down Payment Rs.10,000; 3 Installments of Rs.10,000 each annually. Interest was
charged at 5% p.a. Given the present value of an annuity of Re.1 per annum at 5% Rs.2.7232

Cash Price of Installment =Annuity Value x Installment

= 2.7232 x 10,000 = Rs.27,232
Cash Price of the machine = Down Payment + Cash Price of Installment
= 10,000 +27,232 =Rs.37,232
Example:
30
X Ltd purchased a machine on hire purchase system. The payment is made as follows:
Down payment Rs.23,250 ; I Installment Rs.35,000 ; II Installment Rs.40,000;
III Installment Rs.20,000. The payments are made at the end of 1st year, 2nd year and 3rd
year respectively. Then rate of interest is 5% p.a. The annuity table shows that the present
value of Re.1 for one, two and three years is 0.952, 0.907, and 0.864 respectively. Calculate
the cash price of the machine

Calculation of Cash Price of the machine

Amount Present value of Re.1 Present value of
@5% installment
Down Payment 23,250 1.000 23,250
Ist Installment 35,000 0.952 33,320
2nd installment 40,000 0.907 36,280
3rd Installment 20,000 0.864 17,280
Total Cash Price 1,10,130

Example:
Mr Ashok purchased a machine on hire purchase system from Bhararth Motors on 1-1- 2010.
The Cash price of the machine was Rs.74,500 and the payment was to be made as follows:
On signing of the agreement Rs.20,000 and the balance in 3 installments of Rs.20,000 each
at the end of each year. 5% interest is charged by the vendor. Mr. Ashok has decided to write
off 10% depreciation annually on the diminishing balance method. Pass the necessary
Journal entries and prepare the Ledger accounts in the books of Mr. Ashok under Asset
Accrual Method

Working Note:
Here Cash Price, Installments & Rate of interest is given. So the first method can be used
for calculation of interest.

Step I
Calculation of Interest
31
Cash Price of the Machine 74,500
Less Down Payment 20,000
Balance Due 54,500
Add 5% interest for the year 2010 (54,500 x5/100 ) 2,725
57,225
Less First Installment paid 20,000
Balance Due 37,225
Add 5% interest for the year 2011 (37,225 x 5/100) 1,861
39,086
Less Second Installment Paid 20,000
Balance Due 19,086
Add interest (20,000 – 19086 )( in case of last installment take the 914
balancing figure as the interest ie. The last installment – Balance Due) 20,000
20,000
Less Third Installment paid Nil

Step II: Calculation of Cash Price in each Installment

Cash Price = Installment – Interest
Installment Interest Principal(Cash price)
1. 20,000 2,725 17,275
2. 20.000 1,861 18,139
3. 20,000 914 19,086
Step III : Calculation of Depreciation
Depreciation @10% on Diminishing Balance Method
Cash Price of the machine 74,500
Less 10% for the Ist year(74,500 x10/100) 7,450
Written Down Value ( Balance) 67,050
Less 10% for the IInd year (67,050 x10/100) 6,705
WDV (Balance) 60,345
Less 10% for the IIIrd year (60,345 x10/100) 6,035
Balanc 54,310

Journal Entries in the books of Mr. Ashok ( Hire Purchaser)

Date Particulars Debit Credit
32
1-1-10 Machinery Account Dr 20,000
To Bank Account 20,000
( Being Down Payment made)
31.12.10 Machinery Account Dr 17,275
Interest Account Dr 2,725
To Bharath Motors A/c 20,000
( Being first installment due)
31.12.10 Bharath Motors Account Dr 20,000
To Bank Account 20,000
( Being first installment paid )
31.12.10 Depreciation Account Dr 7,450
To Machinery A/c 7,450
( Being Depreciation charged )
31.12.10 Profit & Loss Account 10,175
Dr 2,725
To Interest Account 7,450
To Depreciation Account
31.12.11 ( Being interest & depreciation transferred) 18,139
Machinery Account Dr 1,861
Interest Account 20,000
Dr
31.12.11 To Bharat Motors A/c 20,000
( Being second installment due) 20,000
Bharath Motors Account
31.12.11 Dr 6,705
To Bank Account 6,705
( Being second installment paid)
31.12.11 Depreciation Account 8,566
Dr 1,861
To Machinery A/c 6,705
( Being Depreciation charged)
31.12.12 Profit & Loss Account 19,086
Dr 914
To Interest A/c 20,000
33
 To Depreciation A/c
31.12.12 (Being interest & depreciation transferred) 20,000
Machinery Account 20,000
Dr
31.12.12 Interest Account 6,035
Dr 6,035
To Bharath Motors
31.12.12 ( Being third installment due) 6,949
Bharath Motors Account 914
Dr 6,035
To Bank Account
( Being third installment paid)
Depreciation Account Dr
To Machinery A/c
( Being depreciation charged)
Profit & Loss Account
Dr
To Interest A/c
To Depreciation A/c
( Being interest & depreciation transferred)

Ledger Accounts in the books of Hire Purchaser

Important ledger accounts to be opened are:
Asset A/c ; Hire Vendor A/c ; Interest A/c & Depreciation A/c

Machinery Account
Date Particulars Amount Date Particulars Amount
34
1.1.10 To Bank 20,000 31.12.10 By Depreciation 7,450
31.12.10 To Bharat Motors 17,275 31.12.10 By Balance c/d 29,825
37,275 37,275
1.1.11 To Balance b/d 29,825 31.12.11 By Depreciation 6,705
31.12.11 To Bharath Motors 18,139 31.12.11 By Balance c/d 41,259
47,964 47,964
1 . 1. 12 To Balance b/d 41,259 31.12.12 By Depreciation 6,035
31.12.12 To Bharath Motors 19,086 31.12.12 By Balance c/d 54,310
60,345 60,345

Bharath Motors Account ( Hire Vendor Account)

Date Particulars Amount Date Particulars Amount
31.12.10 To Bank 20,000 31.12.10 By Machinery 17,275
By Interest 2,725
20,000 20,000
31.12.11 To Bank 20,000 31.12.11 By Machinery 18,139
By Interest 1,861
20,000 20,000
31.12.12 To Bank 20,000 31.12.12 By Machinery 19,086
By Interest 914
20,000 20,000

Depreciation Account
Date Particulars Amount Date Particulars Amount
31.12.10 To Machinery 7,450 31.12.10 By Profit & Loss A/c 7,450
7,450 7,450
31.12.11 To Machinery 6,705 31.12.11 By Profit & Loss A/c 6,705
6,705 6,705
31.12.1 To Machinery 6,035 31.12.12 By Profit & Loss A/c 6,035
6,035 6,035

Interest Account
Date Particulars Amount Date Particulars Amount

35
31.12.10 To Bharath Motors 2,725 31.12.10 By Profit & Loss A/c 2,725
2,725 2,725
31.12.11 To Bharath Motors 1,861 31.12.11 By P/L A/c 1,861
1,861 1,861
31.12.12 To Bharath Motors 914 31.12.12 By P/L A/c 914
914 914

Unit -4 ROYALTY ACCOUNTS

Intrduction

36
 There are some special rights over something which are possessed by some persons

For example Landlord possesses an exclusive right over the mine or Quarry in his land, A
patentee who has invented something new has the right over his patent rights, An Author
has an exclusive copy-right over the work or his writing in the form of a book.

These rights can be given to some other person on lease basis for some consideration. Here
comes the existence of royalty agreement. It is an agreement between two parties

Lessor or Landlord --- Lessee or Tenant

Patentee --- Patentor

Author --- Publisher

Royalty is a periodical sum based on output or sale payable by the lessee to the lessor for
having utilized the rights of the Lessor.

Types of Royalty

Mining Royalty, Patent Royalty, Copyright Royalty

Minimum Rent or Dead Rent Royalty agreements are usually associated with a clause that
the lessee must pay a minimum amount in a particular period. Such minimum amount is
known as minimum rent or Dead rent.

Shortworkings

The excess of minimum rent over actual royalty is called shortworking.

Recoupment or Recovery of shortworking

Recoupment of shortworking refers to recovering the shortworking of any year, from the
surplus royalty of the succeeding years. The right of recoupment can be either Fixed or
Floating.

In case of fixed recoupment the right to recover the shortworking is permitted only over a
fixed or stipulated period. For example the right to recover shortworking is given for a period
of first 3 years or first 4 years or 5 years as the case may be. After that stipulated period the
shortworking which could not recover will become irrecoverable.

In case of floating recoupment the right to recover shortworking is permitted over a

subsequent period following the year of shortworking. For example. The shortworkings can
be recovered in the following two years of the year of deficit. (Next two years or subsequent
two years) only when the actual royalty is less than minimum rent . When the actual royalty
is more after making the adjustment for the recovery of shortworking the remaining amoun t
is to be paid to the landlord.

For example: Minimum Rent---10,000, Actual royalty 8,000 , Shortworking is 2,000

Amount paid to landlord is 10,000
37
Example 2. Actual royalty Rs.15,000 ; Shortworkings to be recovered Rs. 2,000; Amount
paid to landlord Rs.13,000.

Example 3. Actual royalty Rs.20,000. Shortworking to be recovered nil. Amount paid to

landlord Rs.20,000.

Accounting Treatment

Journal Entries in the books of Lessee

(I ) When Minimum Rent Account is not required

i. For Royalties Payable (when the actual royalty is less than Minimum Rent)
Royalties A/c Dr
Shortworkings A/c Dr
To Landlord Account
ii. For Payment of Royalty
Landlord A/c Dr
To Bank Account

iii. For transfer of Royalties to P&L A/c or Production A/c

Production A/c Dr
To Royalties Account
Note: When the actual royalties is more than shortworking and the previous year’s
shortworking is to be recovered. The first journal entry will be as follows:
Royalties A/c Dr
To Shortworking Account (recovered)
To Landlord Account
iv. For transfer of Shortworking Irrecovered to P &L A/c
P &L A/c Dr
To Shortworking A/c

(II.) When Minimum Rent Account is Required

i. For Royalties payable (When actual royalties is less than Minimum Rent)
Minimum Rent A/c Dr
To Landlord A/c
ii. For splitting minimum rent to Royalties & Shortworking
Royalties A/c Dr
Shortworking A/c Dr
To Minimum Rent A/c
iii. For payment of Minimum Rent
Landlord A/c Dr
To Bank A/c
iv. For transfer of Royalties to to production A/c or P& L A/c
Production A/c
To Royalties A/c
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 Or
Profit& Loss A/c Dr
To Royalties A/c

Bihar Coal Company undertook some coal bearing land from Mr. Gupta at a royalty of Re.1.
per ton, with a minimum rent of Rs.17,000 per annum. Each year’s excess of minimum rent
over actual royalties were recoverable during the subsequent three years. The lease, however ,
stipulated that in any year the minimum rent was not attained due to strike, the minimum rent
was to be regarded as having been reduced proportionately having regard to the length of the
stoppage. The output was as follows:

Year Production (Tons)

2005 2,000
2006 14,000
2007 19,000
2008 23,000
2009 15,000(Strike for 3 months)
2010 25,000
Pass Journal entries and prepare ledger account in the books of the Lessee.

Solution: In this question the Minimum Rent A/c is not asked to prepare. So we can
follow the first situation ( without Minimum Rent A/c). When the question specifies to
open Minimum Rent A/c the second situation to be followed. Here the terms for
recovery of shortworkings is given as subsequent three years. That is Floating
Recoupment. Another adjustment is regarding the strike. Some times in the question
some adjustments will be given about the stike. It can be --- During the strike actual
royalty may discharge all rental obligations for that year, or minimum rent will be
proportionately reduced. Make the adjustment accordingly.

Analysis Table

Year Output Actual Minimum shortworki s.w.recov s.w.Irrec Amount

Royalty Rent ng ered overed paid to
landlord
2005 2000 2000 17000 15000 --- --- 17,000
2006 14000 14,000 17,000 3000 --- --- 17,000
2007 19000 19000 17000 --- 2000 --- 17000
2008 23000 23000 17000 --- 6000 7000 17000
2009 15000 15000 12750 --- 2250 750 12750
2010 25000 25000 17000 --- ---- --- 25000

Note:In the year 2009 there was a strike for 3 months . As per the information given the
minimum rent of 2009 is to be reduced proportionately. The period of strike was 3
months. The minimum rent is to be calculated for the remaining 9
months.(17000x9/12=12750). Here the right to recover shortworking is given as the
subsequent three years. In 2005 the shortworking is 15000 and can be recovered for the
next three years that is 2006,07 & 08. In 2006 there is no surplus. In 2007 there is a
39
surplus of 2000 and it can be recovered. In 2008 the surplus is 6000 which is used for
recovering shortworking and time of recovery of2005 is over (15000-(2000+6000)= 7000
will become irrecoverable. And for 2006 three years will be expired in 2009 and the
balance of750 (3000—2250) will become irrecovered.

Journal Entries in the books of Bihar Coal Company ( Lessee)

Particulars Debit Credit

2005 Royalties A/C Dr 2000
Shortworkings A/C Dr 15000
To Gupta ( Landlord) A/c 17000
( Being Royalties Due)
Gupta (Landlord) A/c Dr 17000
To Bank 17000
( Being the royalties Paid)
Production A/c Dr 2000
To Royalties A/c 2000
( Being royalties transferred to production
a/c) 14000
2006 Royalties A/c Dr 3000
Shortworkings A/c Dr
To Gupta 17000
Gupta A/c Dr 17000
To Bank 17000
Production A/c Dr 14000
To Royalties 14000
2007 Royalties A/c Dr 19000
To Shortworkings 2000
To Gupta 17000
( Being royalties due and shortworkings recovered)
Gupta A/c Dr 17000
To Bank 17000
Production A/c Dr 19000
To Royalties 19000
2008 Royalties A/c Dr 23000
To Shortworking 6000
To Gupta 17000
Gupta A/c Dr 17000
To Bank 17000
Production A/c Dr 23000
To Royalties 23000
Profit & Loss A/c Dr 7000
To Shortworking 7000
2009 Royalties A/c Dr 15000
To Shortworking 2250
To Gupta 12750
Gupta A/c Dr 12750
To Bank 12750
Production A/c Dr 15000
To Royalties 15000

40
 Profit & Loss A/c Dr 750
To shortworking 750
2010 Royalties A/c Dr 25000
To Gupta 25000
Gupta A/c Dr 25000
To Bank 25000
Production A/c Dr 25000
To Royalties 25000
Ledger Accounts

Royalties Account

Year Particulars Amount year Particulars Amount

2005 To Gupta 2000 2005 By Production A/c 2000
2000 2000
2006 To Gupta 14000 2006 By Production A/c 14000
14000 14000
2007 To Shortworking 2000
To Gupta 17000 2007 By Production A/c 19000
19000 19000
2008 To Shortworking 6000
To Gupta 17000 2008 By Production A/c 23000
23000 23000
2009 To Shortworking 2250
To Gupta 12750 2009 By Production A/c 15000
15000 15000
2010 To Gupta 25000 2010 By Production A/c 25000
25000 25000

Gupta’s Account

Year Particulars Amount Year Particulars Amount

2005 To Bank 17,000 2005 By Royalties A/c 2000
By Shortworking A/c 15000
17000 17000
2006 To Bank 17000 2006 By Royalties A/c 14000
By Shortworking A/c 3000
17000 17000
2007 To Bank 17000 2007 By Royalties A/c 17000
17000 17000
2008 To Bank 17000 2008 By Royalties A/c 17000
17000 17000

2009 To Bank 12750 2009 By Royalties A/c 12750

12750 12750
2010 To Bank 25000 2010 By Royalties A/c 25000
25000 25000

41
 Shortworkings Account

Year Particulars Amount Year Particulars Amount

2005 To Gupta’s A/c 15000 2005 By Balance c/d 15000
15000 15000
2006 To Balance b/d 15000 2006 By Balance c/d 18000
To Gupta’s A/c 3000
18000 18000
2007 To Balance b/d 18000 2007 By Royalties A/c 2000
By Balance c/d 16000
18000 18000
2008 To Balance b/d 16000 2008 By Royalties A/c 6000
By Profit & Loss A/c 7000
By Balance c/d 3000
16000 16000
2009 To Balance b/d 3000 2009 By Royalties A/c 2250
By Profit & Loss 750
3000 A/c 3000
Note: In the question if the opening stock or closing stock is given in that case read the
question carefully and find out whether the royalty is on the basis of number of units
produced or number of units sold.

No of copies sold= copies printed +Opening Stock -- closing stock

No of units produced or no of units printed= No of copies sold+ closing stock -

Opening stock

Unit- 5:

SALE OF PARTNERSHIP TO A LIMITED COMPANY

42
Sale of a firm to a company refers to , the sale of a partnership firm to a company or
purchasing of a partnership by a company.The firm which is being sold to the company is
called the Vendor Firmand the company which is purchasing the firm is called Purchasing
Company.

Objectives of Conversion of Firm to a Company

I. To increase the Capital

II. To increase the managerial skill
III. To have economy of large scale operation
IV. To get the advantage of Limited liability.
V. To enjoy the other benefits of limited company.

Accounting Treatment

1.Calculation of Purchase Consideration

2. Discharge of Purchase Consideration

3. Closing the books of Vendor Firm

4. Passing incorporation entries in the books of purchasing company.

Purchase Consideration is the price payable by the Purchasing Company to the vendor
Company for taking over the various assets and liabilities.

Methods of calculating Purchase Consideration

Lumpsum Method; Net Payment Method; Net Asset Method

Lumpsum Method--- Fixed amount or a Lumpsum is paid

Net Payment Method—Under Net Payment Method the Aggregate of the various
payments made by the purchasing company will be the amount of purchase
consideration.

For Example:Calculate the amount of purchase consideration from the following details.

The Purchasing company agreed to issue 20000 Equity shares of Rs.10 each at rs.12.50
per share, 1000 9% Preference shares of Rs.100 each at par, 1000 6% Debentures of Rs.100
each at a discount of 10% and pay cash equal to 20% of the total purchase consideration.

Calculation of Purchase Consideration ( Net Payment Method)

20,000 Equity shares of Rs.10 each at Rs.12.50 per share (20,000x12.50) =2,50,000

43
1000 9% Preference shares of Rs.100 each at par (1000x100) =1,00,000

1000 6% Debentures of Rs.100 each at a discount of10%(1000x90) = 90,000

Issue price= 100 – (10% of 100)= 90 per share

Cash equal to 20% of total purchase consideration:1,10,000

5,50,000

Total Purchase Consideration =100; Cash =20 ; Remaining Amount 80.

80=440000

There for 20=4,40,000 x 20/80 =1,10,000

Note: While calculating the purchase consideration the issue price is to be considered.
Securities can be issued at par or at a premium or at a discount. For example Rs.10 share
can be issued at Rs.10 (at par) or at Rs.12 (at a premium) or at Rs.9 (at a discount).

Net Asset Method: Under net asset method Excess of assets taken over over liabilities
taken over is the amount of Purchase consideration.

Purchase Consideration = Assets taken over at agreed values - Liabilities taken over
at agreed values.

For Example: A company takes over the following assets and liabilities from a partnership
firm.

Land & Building Rs.45,000; Plant & Machinery 20,000; Stock 20,000; Debtors 23,200;
Bills Receivable 16,000; Current liabilities 28,800. The value of Goodwill is fixed at Rs.
28,800. Calculate the amount of purchase consideration.

Calculation of Purchase consideration ( Net Asset Method)

Various assets taken over at agreed values:

Land & Building 45000

Plant & Machinery 20000

Stock 20000

Debtors 23200

Bills Receivable 16000

Goodwill 28800

153000

44
Less liabilities taken over 28800

Purchase Consideration 1,24,200

Note: while calculating purchase consideration the assets and liabilities will be
considered at agreed value and if the agreed values is not given in the question the
book value will be considered as the agreed value.

Closing the books of Vendor Firm

1. For transfer of various assets at book value

Realisation A/c Dr
To Concerned Asset A/c
2. For transfer of liabilities at book value
Concerned Liabilities A/c Dr
To Realisation a/c
3. For Purchase Consideration Due
Purchasing Company A/c Dr
To Realisation a/c
4. For Receipt of purchase consideration
Cash A/c Dr
Shares in Purchasing company A/c Dr
Debentures in Purchasing Company A/c Dr
To Purchasing company a/c
5. For payment of Realisation expenses
Realisation A/c Dr
To Cash a/c
6. For sale of assets not taken over by the purchasing company
Cash A/c Dr
To Realisation
7. For payment of liabilities not taken over by the purchasing company.
Realisation A/c Dr
To Cash

8.. For assets taken over by the partners

Partner’s capital A/c Dr
To Realisation
9. For liabilities taken over by the partners
Realisation A/c Dr
ToPartner’s Capital a/c
10. For closing realization Account
A. In case of Profit
Realisation A/c Dr
To Partner’s capital
B. In case of Loss
45
 Partner’s Capital A/c Dr
To Realisation
11. For transfer of Reserve And Surplus
Reserve A/c Dr
Profit &loss A/c Dr
To Partner’s capital a/c
12. For Payment of Partner’s loan
Partner’s Loan A/c Dr
To cash a/c
13. For distribution of Cash or Shares or Debentures
Partner’s Capital A/c Dr
To Cash a/c
To Shares in Purchasing Co.
To Debentures in Purchasing Co.

LEDGER ACCOUNTS
Following Ledger Accounts are opened in the books of the vendor firm
i. Realisation Account
ii. Purchasing Company Account
iii. Shares in Purchasing company account
iv. Debentures in Purchasing Company Account ( If Necessary)
v. Partner’s Capital Account ( in Columnar form providing two or three amount
columns depending upon the number of partners given in the question)
vi. Cash Account

Realisation Account

It is an account opened at the time of liquidation of a firm in order to close all the
other existing ledger accounts. This account is debited with all assets at book values and
credited with all outside liabilities. Cash will be transferred to realization account only when
it is taken over by the purchasing company. When cash is not taken over cash account will
be opened and record the opening balance. Except cash all assets and liabilities (whether
it is taken over or not by the purchasing company) can be transferred to realization account .
(For those assets which are not taken over will be realized and liabilities will be paid off
through realization account) Finally the Realisation account will be closed by transferring
the profit or loss to Partner’s capital account.

Distribution of Shares & Debentures among Partners

Shares & Debentures received from the purchasing company as purchase

consideration are divided amongst the partners. If the question specifies any ratio
46
follow that ratio . When there is no specific information it is to be distributed in the
Final Claim Ratio

Calculation of Final Claim Ratio

Total of the credit balance in the Capital Account xxx

Less : Total Debit balance in the capital account xxx

Xxx

For Example

Partner’s Capital Account

Particulars Rani Raja Particulars Rani Raja
To Realisation a/c 4,100 2,050 By Balance b/d 15,000 10,000
(loss) By Reserve Fund 2,000 1,000
Calculation of Final Claim Ratio

Rani Raja

Total Credit Balance 17,000 11,000

Less Total Debit Balance 4,100 2,050

12,900 8,950

Final Claim Ratio = 12,900 : 8,950

Example

P and Q were partners sharing profits in the ratio of 2:1. Their balance sheet on 31.03.2012
on which date they converted their business into a company was as follows:

Liabilities Amount Assets Amount

Creditors 60,000 Cash 14,000
Mortgage on freehold premises 20,000 Debtors 52,000
Capitals: Stock 32,000
P 40,000 Machinery 10,000
Q 20,000 Freehold Premises 32,000

1,40,000 1,40,000
The company took over all the assets and liabilities except mortgage on freehold premises
for a purchase price of Rs. 1,20,000 payable as to Rs.24,000 in cash , Rs.48,000 in
Debentures and the balance in equity shares of Rs. 100 each.

Close the books of the firm after the above transactions have been carried out, mortgage loan
has been paid and partners agreed to share the debentures and shares in proportion to their
final

47
capitals. Prepare the ledger accounts in the books of the firm and journal entries and balance
sheet in the books of Purchasing company.

Calculation of Purchase Consideration ( Fixed amount is given in the problem. So

Lumpsum Method)

Purchase consideration =1,20,000

Discharge of Purchase Consideration

By Cash 24,000

By Debentures 48,000

By Shares 48,000

Total Purchase consideration 1,20,000

Ledger Accounts in the books of the firm

Realisation Account
Particulars Amount Particulars Amount
To Cash 14,000 By Creditors 60,000
To Debtors 52,000 By Mortgage loan on 20,000
To Stock 32,000 premises 1,20,000
To Machinery 10,000 By Purchasing company
To Freehold Premises 32,000 (Purchase consideration)
To Cash (Loan paid) 20,000
To Partner’s Capital a/c
P 40,000x2/3=26,667
Q 40,000x1/3=13,333 40,000
2,00,000 2,00,000
Purchasing Company Account

Particulars Amount Particulars Amount

To Realisation Account 1,20,000 By Cash 24,000
By Debentures in 48,000
Purchasing Co. 48,000
By Shares in Purchasing Co.
1,20,000 1,20,000
Shares in Purchasing Company Account

Particulars Amount Particulars Amount

To Purchasing Company 48,000 By P’s Capital 32,000
By Q’s Capital 16,000
48,000 48,000

Debentures in Purchasing Company Account

Particulars Amount Particulars Amount

48
To Purchasing Company 48,000 By P’s Capital 32,000
By Q’s Capital 16,000
48,000 48,000
Partner’s Capital Account

Particulars P Q Particulars P Q
To shares in By Balance b/d 40,000 20,000
purchasing Company 32,000 16,000 By Realisation ( 26,667 13,333
To Debentures in Profit on Realisation)
Purchasing Company 32,000 16,000
To Cash ( 2,667 1,333
Balancing Figure)
66,667 33,333 66,667 33,333
Cash Account

Particulars Amount Particulars Amount

To Balance b/d 14,000 By Realisation 14,000
To Purchasing company 24,000 By Realisation ( Loan Paid) 20,000
By P’s Capital 2,667
By Q’s Capital 1,333
38,000 38,000
In the books of Purchasing Company

Journal Entries

Particulars Debit Credit

1. Business Purchase A/c Dr 1,20,000
1,20,000
To Vendor Firm a/c
(Being Purchase Consideration Due)
2. Vendor Firm A/c Dr 1,20,000 24,000
To Cash a/c 48,000
To Share Capital a/c 48,000
To Debentures a/c
( Being purchase consideration discharged)
3. Cash a/c Dr 14,000
Debtors a/c Dr 52,000
Stock a/c Dr 32,000
Machinery a/c Dr 10,000
Freehold Premises a/c Dr 32,000
Goodwill a/c ( Balancing Figure) Dr 40,000 60,000
To Creditors 1,20,000
To Business Purchase

Balance Sheet in the books of the Purchasing Company

49
Souces of Funds Amount Amount
Equity Share Capital 48,000
Reserves & Surplus --
Secured Loans
Debentures 48,000
Unsecured Loans --
96,000
Application of Funds
Fixed Assets
Goodwill 72,000
Machinery 10,000 82,000
Investments --
Current Assets, Loans & Advances
Debtors 52,000
Stock 32,000
Less Current Liabilities & Provisions 84,000
Creditors
60,000
Bank Overdraft 70,000 14,000
10,000 --
Net Current Assets 96,000
Miscellaneous Expenses & Losses

Working Note:

Mortgage on Freehold Premises(liabilities which are not taken over) transferred to

Realization a/c and through the realization account the payment is made. Shares &
Debentures received from the purchasing company is asked to bedistributed according
to the final claim ratio

Calculation of Final Claim Ratio

P Q

Total credit balance in the capital account 66,667 33,333

Less Debit balance in capital accountnil nil

66,667 33,333

Therefore final claim ratio 66,667:33,333 =2:1

Distribution of DebentureDistribution of Shares:

p= 48,000x2/3=32,000 P=48,000x2/3=32,000

Q =48,000x1/3 =16,000 Q = 48,000x1/3=16,000

50