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31, , F.Y.B.Com, ELECTIVE COURSES (EC), DISCIPLINE SPECIFIC ELECTIVE, (DSE) COURSES, SEMESTER - I, UBCOMFSI.1- ACCOUNTANCYAND, FINANCIAL MANAGEMENT I, SUBJECT CODE : UBCOMFSI.1
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CONTENTS, Unit No., , Title, , Page No., , SEMESTER - I, MODULE - 1, , 1, , Introduction to accounting standards, , 1, , 2., , AS - 1 Disclosure of Accounting Policies, , 13, , 3., , AS - 2 Valuation of Inventories, , 25, , 4., , AS- 9 Revenue Recognition, , 52, , 5., , Inventory Valuation - I, , 65, , 6., , Inventory Valuation II -, , 80, , 7., , Capital, Revenue Expenditure & Receipts, , 98, , MODULE -2, , 8., 9., , Final Accounts of Manufacturing Concern - I, (Proprietary Firm), , 134, , Final Accounts II, , 165, , MODULE -3, , 10., , Departmental Accounts - I, , 198, , 11., , Departmental Accounts - II, , 217, , MODULE -4, , 12., , Hire Purchase - I, , 241, , 13., , Hire Purchase - II, , 257, ,
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I, , Revised Syllabus of Courses of B.Com. Programme, , Elective Courses (EC), Discipline Specific Elective (DSE) Courses, , Accountancy and Financial Management I, Semester- I, Modules at a Glance, Sr. No., , Modules, , 1, , Accounting standards issued by ICAI and Inventory, valuation, , 2, , Final Accounts, , 3, , Departmental Accounts, , 4, , Accounting for Hire Purchase, , Sr.No., , Modules / Units, , 1, , Accounting standards issued by ICAI and Inventory, valuation, , , Accounting standards:, Concepts, benefits, procedures for issue of accounting, standards Various AS :, AS – 1: Disclosure of Accounting Policies, Purpose, Areas of Policies, Disclosure of Policies,, Disclosure of Change in Policies, Illustrations, AS – 2: Valuation of Inventories (Stock), Meaning, Definition, Applicability, Measurement of, Inventory, Disclosure in Final Account, Explanation, with Illustrations., AS – 9: Revenue Recognition, Meaning and Scope, Transactions excluded, Sale of, Goods,, Rendering, of, Services,, Effects, of, Uncertainties, Disclosure, Illustrations.
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II, Inventory Valuation, Meaning of inventories Cost for inventory valuation, Inventory systems : Periodic Inventory system and, Perpetual Inventory System Valuation: Meaning and, importance, Methods of Stock Valuation as per AS – 2 :, FIFO and Weighted Average Method Computation of, valuation of inventory as on balance sheet date: If, inventory is taken on a date after the balance sheet or, before the balance sheet, , 2, , Final Accounts, Expenditure: Capital, Revenue Receipts:, Revenue Adjustment and Closing Entries, , Capital,, , Final accounts of Manufacturing concerns (Proprietary, Firm), , 3, , Departmental Accounts, Meaning, Basis of Allocation of Expenses and Incomes/Receipts, Inter Departmental Transfer : at Cost Price and Invoice, Price Stock Reserve Departmental Trading and Profit &, Loss Account and Balance Sheet, , 4, , Accounting for Hire Purchase, Meaning Calculation of interest, Accounting for hire purchase transactions by asset, purchase method based on full cash price, Journal entries, ledger accounts and disclosure in balance, sheet for hirer and, vendor (excluding default, repossession and calculation of, cash price)
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III, , Question Paper Pattern, Question, No, Q-1, , Q-2, Q-2, Q-3, Q-3, Q-4, Q-4, Q-5, Q-5, Q-6, , Q-6, , Particular, , Marks, , Objective Questions, 20 Marks, A) Sub Questions to be asked 12 and to, be answered any 10, B) Sub Questions to be asked 12 and to, be answered any 10, (*Multiple choice / True or False / Match, the columns/Fill in the blanks), Full Length Question, OR, Full Length Question, , 15 Marks, , Full Length Question, OR, Full Length Question, , 15 Marks, , Full Length Question, OR, Full Length Question, , 15 Marks, , Full Length Question, OR, Full Length Question, , 15 Marks, , A) Theory questions, B) Theory questions, OR, Short Notes, To be asked 06, To be answered 04, , 15 Marks, , 15 Marks, , 15 Marks, , 15 Marks, 10 Marks, 10 Marks, 20 Marks, , Note:, Question of 15 marks may be divided into two sub questions, of 7/8 and 10/5 Marks.
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1, , Unit-1, INTRODUCTION TO ACCOUNTING, STANDARDS, Unit Structure:, 1.0, 1.1, 1.2, 1.3, 1.4, 1.5, 1.6, 1.7, 1.8, 1.9, 1.10, , Objectives, Introduction, Meaning of Accounting Standards, Formation of the Accounting Standards Board, Scope of Accounting Standards, Procedure for Issuing an Accounting Standard, Compliance with the Accounting Standards, List of the Accounting Standards as issued by ICAI, List of IAS / IFRS and corresponding IND AS notified by, MCA, List of IFRS issued by IASB, Questions, , 1.0, , OBJECTIVES, , After studying the unit students will be able to:, Understand the meaning of Accounting Standard., Know the scope of Accounting Standard., Understand the composition, objectives and functions of, Accounting Standard Board., Explain the procedure for issuing Accounting Standards., Know the list of Accounting Standards issued by ICAI, , 1.1, , INTRODUCTION, , Financial statements are prepared to summarize the endresult of all the business activities by an enterprise during an, accounting period in monetary terms. These business activities, vary from one enterprise to the other. It is very difficult to compare, the financial statements of different reporting enterprises because, of different methods and principles adopted by these business, enterprises in preparing their financial statements. Accounting, standards are evolved to make these methods and principles
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2, uniform and financial statements comparable to the possible extent., Following are the different group of persons interested in the, financial statements:1., 2., 3., 4., 5., 6., 7., 8., , Bankers, Shareholders, Investors, Creditors, Customers, Employees, Competitors, Income tax/Sales tax/Excise authorities, , 1.2, , MEANING OF ACCOUNTING STANDARDS, , 1.2.1 MEANING, ‘Accounting Standards are written, policy documents, issued by expert accounting body or by Government or other, regulatory authorities covering the aspects of recognition,, measurement, treatment, presentation and disclosure of accounting, transaction in the financial statement.’ The main purpose of, formulating accounting standard is to standardize the diverse, accounting policies with a view to eliminate to the extent possible, the incomparability of information provided in financial statements, and add reliability to such financial statements. Accounting, standards ensure the consistency and the comparability of the, financial statements reported by the different enterprises creating a, general sense of confidence that users have in the fairness and, reliability of the statements they rely., Accounting Standards will not, however, apply to, enterprises only carrying on the activities which are not of, commercial, industrial or business nature, e.g., an activity of, collecting donations and giving them to flood affected people., Exclusion of an enterprise from the applicability of the Accounting, Standards would be permissible only if no part of the activity of, such enterprise is commercial, industrial or business in nature., Even if a very small proportion of the activities of an enterprise are, considered to be commercial, industrial or business in nature, the, Accounting Standards would apply to all its activities including, those which are not commercial, industrial or business in nature., 1.2.2 OBJECTIVES:, 1. To standardise the diverse accounting policies., 2. To standardise the accounting practices., 3. To enhance the reliability of financial statements., 4. To eliminate non-comparability of financial statements
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3, 1.2.3 ADVANTAGES:, 1. It provides the accountancy profession with useful working rules., 2. It assists in improving quality of work performed by accountant., 3. It strengthens the accountant’s resistance against the pressure, from directors to use accounting policy which may be suspect in, that situation in which they perform their work., 4. It ensures the various users of financial statements to get, complete crystal information on more consistent basis from, period to period., 5. It helps the users to compare the financial statements of two or, more organizations engaged in same type of business, operation., 1.2.4, , DISADVANTAGES:, , 1. Users are likely to think that said statements prepared using, accounting standard are foolproof., 2. They have been derived from social pressures which may, reduce freedom., 3. The working rules may be rigid or bureaucratic to some users of, financial statement., 4. The more standards there are, the more costly the financial, statements are to produce., , 1.3, , FORMATION OF THE ACCOUNTING, STANDARDS BOARD, , The Institute of Chartered Accountants of India (ICAI),, recognizing the need to harmonize the diverse accounting policies, and practices in use in India, constituted the Accounting Standards, Board (ASB) on 21st April, 1977., 1.3.1 COMPOSITION OF THE ACCOUNTING STANDARDS, BOARD (ASB), The composition of the ASB is fairly broad-based and, ensures participation of all interest-groups in the standard-setting, process. Apart from the elected members of the Council of the ICAI, nominated on the ASB, the following are represented on the ASB:, 1., , Nominee of the Central Government representing the, Department of Company Affairs on the Council of the ICAI., , 2., , Nominee of the Central Government representing the Office of, the Comptroller and Auditor General of India on the Council of, the ICAI.
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4, 3., , Nominee of the Central Government representing the Central, Board of Direct Taxes on the Council of the ICAI., , 4., , Representative of the Institute of Cost and Works Accountants, of India., , 5., , Representative of the Institute of Company Secretaries of, India., , 6., , Representatives of Industry Associations (1 from Associated, Chambers of Commerce and Industry (ASSOCHAM), 1 from, Confederation of Indian Industry (CII) and 1 from Federation of, Indian Chambers of Commerce and Industry (FICCI), , 7., , Representative of Reserve Bank of India, , 8., , Representative of Securities and Exchange Board of India, , 9., , Representative of Controller General of Accounts, , 10. Representative of Central Board of Excise and Customs, 11. Representatives of Academic Institutions (1 from Universities, and 1 from Indian Institutes of Management), 12. Representative of Financial Institutions, 13. Eminent professionals co-opted by the ICAI (they may be in, practice or in industry, government, education, etc.), 14. Chairman of the Research Committee and the Chairman of, the Expert Advisory Committee of the ICAI, if they are not, otherwise members of the Accounting Standards Board, 15. Representative(s) of any, appropriate by the ICAI, , other, , 1.3.2 OBJECTIVES, BOARD, , ACCOUNTING, , OF, , THE, , body,, , as, , considered, , STANDARDS, , The following are the objectives of the Accounting Standards, Board:, i. To conceive of and suggest areas in which Accounting, Standards need to be developed., ii. To formulate Accounting Standards with a view to assist the, Council of the ICAI in evolving and establishing Accounting, Standards in India., iii. To examine how far the relevant International Accounting, Standard/International Financial Reporting Standard can be, adapted while formulating the Accounting Standard and to, adapt the same.
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5, iv. To review, at regular intervals, the Accounting Standards from, the point of view of acceptance or changed conditions, and, if, necessary, revise the same., v. To provide, from time to time, interpretations and guidance on, Accounting Standards., vi. To send comments on various consultative papers such as, exposure drafts, discussion papers etc., issued by, International Accounting Standards Board and various other, International bodies such as Asian-Oceania Standard-Setters, Group (AOSSG)., vii. To carry out such other functions relating to Accounting, Standards., 1.3.3 FUNCTIONS OF THE ACCOUNTING STANDARDS BOARD, The main function of the ASB is to formulate Accounting, Standards so that such standards may be established by the ICAI, in India. While formulating the Accounting Standards, the ASB will, take into consideration the applicable laws, customs, usages and, business environment prevailing in India., The ICAI, being a full-fledged member of the International, Federation of Accountants (IFAC), is expected, inter alia, to actively, promote the International Accounting Standards Board’s (IASB), pronouncements in the country with a view to facilitate global, harmonization of accounting standards. Accordingly, while, formulating the Accounting Standards, the ASB will give due, consideration to International Accounting Standards (IASs) issued, by the International Accounting Standards Committee (predecessor, body to IASB) or International Financial Reporting Standards, (IFRSs) issued by the IASB, as the case may be, and try to, integrate them, to the extent possible, in the light of the conditions, and practices prevailing in India., , 1.4 PROCEDURE FOR ISSUING AN ACCOUNTING, STANDARD, The Accounting Standards are issued under the authority of, the Council of the ICAI. The ASB has also been entrusted with the, responsibility of propagating the Accounting Standards and of, persuading the concerned parties to adopt them in the preparation, and presentation of financial statements. The ASB will provide, interpretations and guidance on issues arising from Accounting, Standards. The ASB will also review the Accounting Standards at, periodical intervals and, if necessary, revise the same. The
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6, following procedure, Standards:, , is, , adopted, , for, , formulating, , Accounting, , 1. The ASB determines the broad areas in which Accounting, Standards need to be formulated and the priority in regard to the, selection thereof., 2. In the preparation of Accounting Standards, the ASB will be, assisted by Study Groups constituted to consider specific, subjects. In the formation of Study Groups, provision will be, made for wide participation by the members of the Institute and, others., 3. The draft of the proposed standard will normally include the, following:, a) Objective of the Standard,, b) Scope of the Standard,, c) Definitions of the terms used in the Standard,, d) Recognition and measurement principles, wherever, applicable,, e) Presentation and disclosure requirements., 4. The ASB will consider the preliminary draft prepared by the, Study Group and if any revision of the draft is required on the, basis of deliberations, the ASB will make the same or refer the, same to the Study Group., 5. The ASB will circulate the draft of the Accounting Standard to, the Council members of the ICAI and the specified bodies for, their comments., 6. The ASB will hold a meeting with the representatives of, specified bodies to ascertain their views on the draft of the, proposed Accounting Standard. On the basis of comments, received and discussion with the representatives of specified, bodies, the ASB will finalize the Exposure Draft of the proposed, Accounting Standard., 7. The Exposure Draft of the proposed Standard will be issued for, comments by the members of the Institute and the public. The, Exposure Draft will specifically be sent to specified bodies (as, listed above), stock exchanges, and other interest groups, as, appropriate., 8. After taking into consideration the comments received, the draft, of the proposed Standard will be finalized by the ASB and, submitted to the Council of the ICAI., The Council of the ICAI will consider the final draft of the, proposed Standard and if found necessary, modify the same in
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7, consultation with the ASB. The Accounting Standard on the, relevant subject will then be issued by the ICAI., , 1.5 COMPLIANCE WITH THE ACCOUNTING, STANDARDS, Accounting Standards are mandatory from the respective, dates mentioned in the standards. Hence, it is the duty of the, management to see that all the Accounting Standards are complied, with while preparing financial statement, in the case of any, deviation, necessary disclosure should be made in the audit report, so as to make the readers aware of the deviations., The mandatory status of an Accounting Standard implies, that while discharging their attest functions, it will be the duty of the, members of the Institute, (a) To examine whether ‘Statements’ relating to accounting matters, are complied with in the presentation of financial statements, covered by their audit. In the event of any deviation from the, ‘Statements’, it will be their duty to make adequate disclosures in, their audit reports so that the users of financial statements may be, aware of such deviations; and, (b) To ensure that the ‘Statements’ relating to auditing matters are, followed in the audit of financial information covered by their audit, reports. If for any reason a member has not been able to perform, an audit in accordance with such ‘Statements’, his report should, draw attention to the material departures there from., , 1.6 LIST OF THE ACCOUNTING STANDARDS AS, ISSUED BY ICAI, The council of the Institute of the Chartered Accountants of, India has so far issued 32 Accounting Standards, However AS- 8, on Accounting for Research and Development (stands withdrawn, after introduction of AS-26), thus effectively there are 31, Accounting standards.
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8, Accounting, Standard No., , Title of Accounting Standard, , AS-1, , Disclosure of Accounting Policies, , AS-2, , Valuation of Inventories, , AS-3, , Cash Flow Statements, , AS-4, , Contingencies and Events (Occurring after, the Balance Sheet Date), , AS-5, , Net Profit or Loss for the Period, Prior, Period Items and Changes in Accounting, Policies, , AS-6, , Depreciation Accounting, , AS-7, , Construction Contracts, , AS-8, , Accounting for Research and Development, (standard withdrawn after introduction of, AS-26), , AS-9, , Revenue Recognition, , AS-10, , Accounting for Fixed Assets, , AS-11, , The Effect of Changes in Foreign, Exchange Rates, , AS-12, , Accounting for Government Grants, , AS-13, , Accounting for Investments, , AS-14, , Accounting for Amalgamations, , AS-15, , Employee Benefits, , AS-16, , Borrowing Cost, , AS-17, , Segment Reporting, , AS-18, , Related Party Disclosures, , AS-19, , Leases, , AS-20, , Earnings per Share, , AS-21, , Consolidated Financial Statements, , AS-22, , Accounting for Taxes on Income, , AS-23, , Accounting for Investment in Associates in, Consolidated Financial Statements, , AS-24, , Discontinuing Operations, , AS-25, , Interim Financial Reporting
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9, AS-26, , Intangible Assets, , AS-27, , Financial Reporting of Interests in Joint, Venture, , AS-28, , Impairment of Assets, , AS-29, , Provisions, Contingent Liabilities and, Contingent Assets, , AS-30, , Financial Instruments: Recognition and, Measurement, , AS 31, , Financial Instruments: Presentation, , AS 32, , Financial Instruments: Disclosures, , 1.7 LIST OF IAS / IFRS AND CORRESPONDING IND, AS NITIFIED BY MCA, IAS No., , Title, , Corresponding, Converged IND, AS, , IAS-1, , Presentation of Financial, Statements, , IND AS 1, , IAS-2, , Inventories, , IND AS 2, , IAS- 7, , Cash Flow Statements, , IND AS 7, , IAS-8, , Accounting policies, change in, accounting estimates and errors, , IND AS 8, , IAS-10, , Events after the Balance Sheet, date, , IND AS 10, , IAS-12, , Income Taxes, , IND AS 12, , IAS-16, , Property, Plants and Equipment, , IND AS 16, , IAS- 17, , Leases, , IND AS 17, , IAS-19, , Employees Benefits, , IND AS 19, , IAS-20, , Accounting for Government, Grants and Disclosure of, Government Assistance, , IND AS 20, , IAS-21, , The Effect of Changes in, Foreign Exchange Rates, , IND AS 21, , IAS-23, , Borrowing Costs, , IND AS 23
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10, IAS-24, , Related Party Disclosures, , IAS-26, , Accounting and Reporting by, Retirement Benefit Plan, , IAS-27, , Consolidated and Separate, Financial Statements, , IND AS 27, , IAS-28, , Investments in Associates and, Joint Ventures, , IND AS 28, , IAS-29, , Financial Reporting in Hyper, Inflationary Economies, , IND AS 29, , IAS-32, , Financial Instruments :Presentation, , IND AS 32, , IAS-33, , Earnings per Share, , IND AS 33, , IAS-34, , Interim Financial Reporting, , IND AS 34, , IAS-36, , Impairment Assets, , IND AS 36, , IAS-37, , Provisions, Contingent Liabilities IND AS 37, and Contingent Assets, , IAS-38, , Intangible Assets, , IND AS 38, , IAS-40, , Investment Property, , IND AS 40, , IAS-41, , Agriculture, , IND AS 24, , IND AS 41, , 1.8 LIST OF IFRS ISSUED BY IASB, IFRS:The term ‘IFRS’ includes standards and interpretations approved by, IASB and the International Accounting Standards and, interpretations issued by the International Financial Reporting, Interpretations Committee., International Accounting Standards Board (IASB) has issued the, following International Financial Reporting Standards (IFRS):IAS No., , Title, , Corresponding, Converged IND AS, , IFRS-1, , First Time Adoption of IFRS, , IND AS 101, , IFRS-2, , Share based payments, , IND AS 102, , IFRS-3, , Business Combination, , IND AS 103, , IFRS-4, , Insurance Contracts, , IND AS 104
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11, IFRS-5, , Non-currents Assents held for, sale and discontinued, operations, , IND AS 105, , IFRS-6, , Exploration for and evaluation, of mineral resources, , IND AS 106, , IFRS-7, , Financial instruments:, disclosure, , IND AS 107, , IFRS-8, , Operating segment, , IND AS 108, , IFRS-9, , Financial instruments, , IND AS 109, , IFRS-10, , Consolidated Financial, Statements, , IND AS 110, , IFRS-11, , Joint Arrangement, , IND AS 111, , IFRS-12, , Disclosure of Interest in Other, Entities, , IND AS 112, , IFRS-13, , Fair Value Measurement, , IND AS 113, , IFRS-14, , Regulatory Deferral Accounts, , IND AS 114, , IFRS-15, , Revenue from contracts with, customers, , IND AS 115, , IFRS-16, , Leases, , -, , 1.9 QUESTIONS, 1. What do you understand by Accounting standard?, 2. What is the need and purpose of accounting standards?, 3. Briefly explain the importance of accounting standards?, 4. What is the duty of the auditor in case of non-compliance of, mandatory accounting standard?, 5. Briefly explain the procedure for issuing an accounting, standard?, 6. Select Correct Alternative:, i. Accounting standards are important, 1. For making correct financial statements, 2. For correct valuation of inventories, 3. For correct treatment of depreciation and lease and, investment, 4. All of the above
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12, ii. Accounting standards are statements prescribed by, 1. Law, 2. Bodies of shareholders, 3. Professional accounting bodies, 4. All of the above, iii. The Policy of ‘anticipate no profit and provide for all possible, losses’ arises due to convention of, 1. Consistency, 2. Disclosure, 3. Conservatism, 4. All of Above, iv.Accounting has certain norms to be observed by the, accountants in recording of transactions and preparation of, financial statements. These norms reduce the vagueness and, chances of misunderstanding by harmonizing the varied, accounting practices. These norms are, 1. Accounting regulations., 2. Accounting guidance notes., 3. Accounting standards., 4. Accounting framework., v. Following is the example of external users:, 1. Government., 2. Owners., 3. Management., 4. Employees., vi. Following is the example of internal users:, 1. Government., 2. Investors., 3. Creditors., 4. Employees., vii. The information provided in the annual financial statements, of an enterprise pertain to, 1. Business Industry., 2. Economy., 3. Individual business entity., 4. None of the above., Answers: i-4, ii-3, iii- 3, iv-3, v-1, vi-4, vii-3, ,
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13, , Unit-2, AS-1 DISCLOSURE OF ACCOUNTING, POLICIES, Unit Structure:, 2.0, 2.1, 2.2, 2.3, 2.4, 2.5, 2.6, 2.7, 2.8, 2.9, , Objectives, Introduction, Meaning and Nature of Accounting Policies, Areas of different Accounting Policies, Notes to Accounts, Disclosure of Accounting Policies, Disclosure of Change in Accounting Policies, Illustrations, Practical Applications, Questions, , 2.0, , OBJECTIVES, , After studying the unit students will be able to:, , , , , , , , Understand the meaning and nature of accounting policies., Explain the areas of different accounting policies., Know the disclosure of accounting policies., Know the disclosure of change in accounting policies., Give some examples of significant accounting policies., Solve the practical problems related to accounting policies., , 2.1, , INTRODUCTION, , Accounting Standard (AS) 1 issued by the Accounting, Standards Board, the Institute of Chartered Accountants of India on, ‘Disclosure of Accounting Policies’ deals with the disclosure of, significant accounting policies followed in preparing and presenting, financial statements. It may be noted that this Accounting Standard, is now mandatory for use by companies listed on a recognized, stock exchange and other large commercial, industrial and, business enterprises in the public and private sectors. Accounting, Standards are intended to apply only to items which are material.
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14, , 2.2 MEANING AND NATURE OF ACCOUNTING, POLICIES, ‘Accounting policies are the specific accounting principles, and methods of applying those principles adopted by the enterprise, in the preparation and presentation of the financial statements.’ E.g., to depreciate fixed asset of the company over a period of time is, accounting policy and which method should follow to depreciate the, asset (SLM or WDV) is method of accounting., There is no single list of accounting policies which are, applicable to all circumstances. The differing circumstances in, which enterprises operate in a situation of diverse and complex, economic activity make alternative accounting principles and, methods of applying those principles acceptable., IMPORTANCE OF ACCOUNTING STANDARD (AS) 1, The view presented in the financial statements of an, enterprise of its state of affairs and of the profit or loss can be, significantly affected by the accounting policies followed in the, preparation and presentation of the financial statements. The, accounting policies followed vary from enterprise to enterprise., Disclosure of significant accounting policies followed is necessary if, the view presented is to be properly appreciated. The disclosure of, some of the accounting policies followed in the preparation and, presentation of the financial statements is required by law in some, cases., PURPOSE OF ACCOUNTING STANDARD (AS) 1, The disclosure of significant accounting policies, manner in which accounting policies are disclosed in the, statements would facilitate better understanding of, statements and a more meaningful comparison between, statements of different enterprises., , and the, financial, financial, financial, , FUNDAMENTAL ACCOUNTING ASSUMPTIONS, The Financial Statements are prepared with the following three, Fundamental Accounting Assumptions. Unless otherwise, specified, it is assumed that the Financial Statements are prepared, according to following assumptions:, 1. Going Concern,, 2. Consistency,, 3. Accrual.
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15, They are explained as follows:, 1. Going Concern:, The enterprise is normally viewed as a going concern, that, is, as continuing in operation for the foreseeable future. It is, assumed that the enterprise has neither the intention nor the, necessity of liquidation or of curtailing materially the scale of the, operations., 2. Consistency:, It is assumed that accounting policies are consistent from, one period to another., 3. Accrual:, Revenues and costs are accrued, that is, recognized as they, are earned or incurred (and not as money is received or paid) and, recorded in the financial statements of the periods to which they, relate., It is mandatory to disclosure if the above mentioned, assumptions are not followed., , 2.3, , AREAS OF DIFFERENT ACCOUNTING POLICIES, , The following are examples of the areas in which different, accounting policies may be adopted by different enterprises., Methods of depreciation, depletion and amortization, Treatment of expenditure during construction, Conversion or translation of foreign currency items, Valuation of inventories, Treatment of goodwill, Valuation of investments, Treatment of retirement benefits, Recognition of profit on long-term contracts, Valuation of fixed assets, Treatment of contingent liabilities., CONSIDERATIONS IN THE SELECTION OF ACCOUNTING, POLICIES, The primary consideration in the selection of accounting, policies by an enterprise is that the financial statements prepared, and presented on the basis of such accounting policies should, represent a true and fair view of the state of affairs of the enterprise, as at the balance sheet date and of the profit or loss for the period, ended on that date.
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16, For this purpose, the major considerations governing the, selection and application of accounting policies are:—, 1. Prudence, 2. Substance over Form, 3. Materiality, They are explained as follows:, 1. Prudence: In view of the uncertainty attached to future events,, profits are not anticipated but recognized only when realized, though not necessarily in cash. Provision is made for all known, liabilities and losses even though the amount cannot be, determined with certainty and represents only a best estimate in, the light of available information. Example of Prudence is to, select an accounting policy where inventory valuation is at lower, of cost or net realizable value., 2. Substance over Form: The accounting treatment and, presentation in financial statements of transactions and events, should be governed by their substance and not merely by the, legal form. Best example of this assumption can be state is hire, purchase. If company is purchasing any asset on hire purchase, system then purchaser is not legal owner at the time of, purchase. In hire purchase ownership is transferred on the, payment of the last installment but actually the asset is in the, possession of purchaser and he is using in his business, operation, so substantially he is better owner than legal. It, should be recorded in the books of purchaser., 3. Materiality: Financial statements should disclose all “material”, items, i.e. items the knowledge of which might influence the, decisions of the user of the financial statements. That means if, profit & loss accounts contains an irregular transaction which is, not routine and probably effects shareholders or investors, the, same should be disclosed separately. Example- Any expense, having amount more than Rs.5000 or 1% of turnover whichever, is higher should be disclosed separately rather to club with, miscellaneous expenses., , 2.4, , NOTES TO ACCOUNTS, , Notes to accounts are the explanation given by the, management about the items in the financial statements i.e. Profit, and Loss Account and Balance Sheet. The management of the, institute has to give more explanation and information as regards, the items given in the Profit and Loss Account and Balance Sheet, and any other item in the way of notes to accounts. E.g. Disclosure
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17, of details of contingent liability by notes to accounts. Notes to, accounts are part and parcel of the financial statement., , 2.5, , DISCLOSURE OF ACCOUNTING POLICIES, , To ensure proper understanding of financial statements, it is, necessary that:1. All significant accounting policies adopted in the preparation and, presentation of financial statements should be disclosed., 2. The disclosure of the significant accounting policies as such, should form part of the financial statements and the significant, accounting policies should normally be disclosed in one place., 3. Disclosure of accounting policies or of changes therein cannot, remedy a wrong or inappropriate treatment of the item in the, accounts., 4. If the fundamental accounting assumptions of Going Concern,, Consistency and Accrual are followed in financial statements,, specific disclosure is not required. If a fundamental accounting, assumption is not followed, the fact should be disclosed., , 2.6 DISCLOSURE OF CHANGE IN ACCOUNTING, POLICIES, A change in the accounting policies should be made in, the following conditions:, 1. Adoption of different accounting policies is required by statue, or for compliance with an Accounting Standard., 2. It is considered that change would result in more appropriate, presentation of financial statements., In case if there is a change in accounting policies, the, following information must be disclosed:, 1. Any change in the accounting policies 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., 2. In the case of a change in accounting policies which has a, material effect in the current period, the amount by which any item, in the financial statements is affected by such change should also, be disclosed to the extent ascertainable. Where such amount is not, ascertainable, wholly or in part, the fact should be indicated.
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18, , 2.7, , ILLUSTRATIONS, , Significant accounting policies can be found in financial, statements of public companies. Some examples of significant, accounting policies are as follows:, 1. Inventories, This significant accounting policy comes from 2017-18, annual financial statements of Zimmer Holdings, Inc., Inventories are stated at the lower of cost or market, with, cost determined on a first-in first-out basis., 2. Property and Equipment, This significant accounting policy comes from 2017-18, annual financial statements of Google, Inc., We account for property and equipment at cost less, accumulated depreciation and amortization. We compute, depreciation using the straight-line method over the estimated, useful lives of the assets, generally two to five years. We, depreciate buildings over periods up to 25 years. Depreciation for, equipment commences once it is placed in service and depreciation, for buildings and leasehold improvements commences once they, are ready for our intended use. Land is not depreciated, 3. Cash and Cash Equivalents, This significant accounting policy comes from 2017-18, annual financial statements of Hill-Rom, Inc., We consider investments in marketable securities and other, highly liquid instruments with a maturity of three months or less at, date of purchase to be cash equivalents. Investments which have, no stated maturity are also considered cash equivalents., , 2.8, , PRACTICAL APPLICATIONS, , 1. A Company has switched over to weighted average formula for, ascertaining the cost of inventory, from the earlier practice of using, FIFO. The closing inventory by using FIFO is Rs. 4 lakh and that by, weighted average formula is Rs.3.85 lakh. Explain the Accounting, Treatment/Disclosures as necessary, Ans: The fact that change in accounting policy pull down profit and, value of inventory by Rs.15,000 is to be disclosed., 2. Shreya’s Ltd. prepared Profit and Loss Account and the Balance, Sheet for the year 2017-18.The accounting policies about Profit and
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19, Loss Account have been disclosed below Profit and Loss Account, and accounting policies about Balance Sheet have been disclosed, before Balance Sheet. Comment, Ans: As per AS-1, the accounting policies adopted for preparation, of final accounts should form part of the final accounts. These, policies should be disclosed at one place only forming part of the, accounts. It should not be disclosed separately., 3. PG Ltd. prepared Profit & Loss Account and Balance Sheet on, cash basis. Comment., Ans: As per AS-1, accrual basis is the fundamental accounting, assumption. The company follows cash basis. The fundamental, accounting assumption is not followed; it should be disclosed in the, form of a note to the accounts., 4. Akshata Ltd. prepared final accounts for the year 2017-18., During the year accident took place in the factory, the worker who, got injured lodged a claim of Rs.3,00,000 against the company .The, claim is under dispute, the accountant did not mention this in the, accounts, Comment., Ans. Claim for compensation under dispute is a contingent liability., As per AS-1, it should be disclosed as a foot-note to the final, accounts. The company must make a disclosure about the, contingent claim., 5. Draft the Accounting policies to be disclosed in the financial, statements for the following items:, i. Revenue Recognition-Sale of goods, Ans. Sales are recognized when good are invoiced and dispatched, to customers and are recorded inclusive of excise duty, net trade, discount and sales tax., ii. Revenue Recognition-Sale of Equipment, Ans. Sale of Equipment is recognized when (1) it has a firm, contract, (2) the product has been shipped to and accepted by the, customer or the service has been provided, and (3) amounts are, reasonably assured of collection. Most equipment sales require, installation of the product. As such, revenue is recognized at the, time of delivery and installation at the customer location. Equipment, revenues are based on established prices by product type and, model and are net of discounts.
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20, iii. Revenue Recognition-Sales Return, Ans. A sales return is accepted only when the equipment is, defective and does not meet product performance specifications., iv. Inventories, Ans. Inventories, other than scrap, are valued at cost, on weighted, average basis. Scrap is valued at realizable value., v. Depreciation – Machinery Spares, Ans. Machinery spares which can be used only in connection with, an item of fixed asset and whose use is expected to be irregular are, capitalized and depreciated over the residual useful life of the, related plant and machinery., vi. Depreciation- Fixed Assets, Ans. Fixed assets ( Other than leasehold land, technical knowhow, and temporary structure) are depreciated on straight-line method, (SLM) at the rate and in the manner prescribed in schedule XIV to, the Companies Act, 1956 by writing off 95% of the cost of the, assets over the specified period of the assets., , 6. Explain requirement in the following cases with reference to, DISCLOSURE OF ACCOUNTING POLICIES (AS-1), 1. Where proper disclosures regarding changes in accounting, policies have not been made by a company, in the method of, providing depreciation on plant and machinery from straight line, method to written-down value method and due to the change the, net profit for the year, the net block as well as the reserves and, surplus lowered by Rs.50,00,000., Ans. The company has not disclosed in its accounts the fact of, change, from this year, in the method of providing depreciation, on plant and machinery from straight line method to written-down, value method, as also the effect of this change. As a result of this, change, the net profit for the year, the net block as well as the, reserves and surplus are lower by Rs.50,00,000 each as compared, to the position which would have prevailed had this change not, been made., 2. Where a company has not disclosed all significant accounting, policies like treatment of research and development costs and has, also not disclosed the accounting policies at one place.
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21, Ans. The company had disclosed those accounting policies the, disclosure of which is required by the Companies Act, 1956. Other, significant accounting policies, viz., those relating to treatment of, research and development costs have not been disclosed nor have, all the policies been disclosed at one place, which is contrary to, Accounting Standard (AS) 1, `Disclosure of Accounting Policies', issued by the Institute of Chartered Accountants of India., , 2.9, , QUESTIONS, , 1. What is an accounting policy?, 2. List out different Accounting policies?, 3. Mention the areas in which different policies may be adopted, by different organizations?, 4. Write a short note on selection of accounting policies?, 5. What are basic accounting assumptions?, 6. What are the disclosure requirements of AS-1 issued by ICAI?, 7. What do you understand by “notes to accounts”?, 8. Select Correct Alternative:, i., 1., 2., 3., 4., , ii., 1., 2., 3., 4., , Accounting policy is, accounting postulate, accounting convention, accounting standard, specific accounting principle or method, management out of permissible alternatives, , chosen, , by, , Example of accounting policy is, Method of depreciation chosen by management, Separate entity concept, Balance sheet, Standard audit, , iii., , RPC Ltd. follows the written down value method of, depreciating machinery year after year due to, 1. Comparability., 2. Convenience., 3. Consistency., 4. All of the above., , iv., , A change in accounting policy is justified, To comply with accounting standard., To ensure more appropriate presentation of the financial, statement of the enterprise., To comply with law., All of the above., , 1., 2., 3., 4.
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22, v., 1., 2., 3., 4., vi., , Fundamental accounting assumptions are, Materiality., Business entity., Going concern., Dual aspect, M/s ABC Brothers, which was registered in the year 2000,, has been following Straight Line Method (SLM) of, depreciation. In the current year it changed its method from, Straight Line to Written down Value (WDV) Method, since, such change would result in the additional depreciation of, Rs. 200 lakhs as a result of which the firm would qualify to, be declared as a sick industrial unit. The auditor raised, objection to this change in the method of depreciation., , The objection of the auditor is justified because, 1. Change in the method of depreciation should be done only with, the consent of the auditor., 2. Depreciation method can be changed only from WDV to SLM, and not vice versa., 3. Change in the method of deprecation should be done only if it is, required by some statute and change would result in, appropriate presentation of financial statement., 4. Method of depreciation cannot be changed under any, circumstances., vii., , State the case where the going concern concept is applied?, 1. When an enterprise was set up for a particular purpose,, which has been achieved, or to be achieved shortly., 2. When a receiver or liquidator has been appointed in case of, a company which is to be liquidated., 3. Fixed assets are acquired for use in the business for earning, revenues and are not meant for resale., 4. When an enterprise is declared sick., , viii., 1., 2., 3., 4., , Principle requires that the same accounting method should, be used from one accounting period to the next., Conservatism., Consistency., Business entity., Money measurement.
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23, ix., , 1., 2., 3., 4., x., 1., 2., 3., 4., xi., 1., 2., 3., 4., , The cost of a small calculator is accounted as an expense, and not shown as an asset in a financial statement of a, business entity due to __________, Materiality concept., Matching concept., Periodicity concept., Conservatism concept., It is generally assumed that the business will not liquidate in, the near foreseeable future because of, Periodicity., Materiality., Matching., Going concern., The accounting concept requiring the practice of crediting, closing stock to the trading account, Going concern, Cost, Matching, All of Above, , xii., , Accounting Principles are generally based on, 1. Practicability, 2. Subjectivity, 3. Convenience in recording, 4. All of Above, , xiii., , “Substance of any transaction should be considered while, recording them and not only the legal form” is the statement, which holds true for, 1. Substance over form., 2. Disclosure of accounting policies., 3. Both (a) and (b)., 4. None of the three., , xiv., , Change in the method of depreciation is change in, ________., 1. Accounting estimate., 2. Accounting policy., 3. Measurement discipline., 4. None of the above., , Answers: i-4, ii-1, iii-3, iv-4, v-3, vi-3, vii-3, viii-2, ix-1, x-4, xi-1, xii-1,, xiii-3, xiv-2, , 8. State whether the following statements are true or false:, 1. The ‘materiality concept’ refers to the state of ignoring small, , items and values from accounts.
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24, 2. Accounting principles are rules of action or conduct which are, , adopted by the accountants universally while recording, accounting transactions., 3. The ‘conservatism concept’ leads to the inclusion of all, , unrealized profits., 4. Accounting concepts are broad assumptions., 5. India is a member of IASC (International Accounting Standards, , Committee)., 6. The Institute of Chartered Accountants of India (ICAI), the apex, , body of accounting and auditing, constituted an Accounting, Standards Board (ASB) on April 21, 1977, to pronounce, standards on various items of the financial statements., Answers: True: 1, 2, 4, 5, 6, False: 3., ,
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25, , Unit-3, , , AS-2 VALUATION OF INVENTORIES, Unit Structure:, 3.0, 3.1, 3.2, 3.3, 3.4, 3.5, 3.6, 3.7, 3.8, 3.9, 3.10, , Objectives, Introduction, Objective and Scope of AS-2, Measurement of Inventories, Net Realisable Value, Disclosures, Disclosure Practice on Valuation of Inventories (AS-2), Guidance Note on MODVAT / CENVAT issued by the ICAI, and Valuation of Inventory, Cost of Inventories, Practical Applications, Exercises, , 3.0, , OBJECTIVES, , After studying the unit students will be able to:, Understand objective and scope of AS-2., Make the measurement of inventories at various cases., Solve the examples related to allocation of Fixed Overheads, Calculate the cost of inventories., Solve the problems on calculation of the cost of inventories., , 3.1 INTRODUCTION, Accounting Standard (AS) 2 'Valuation of Inventories', issued, by the Council of the Institute of Chartered Accountants of India, supersedes Accounting Standard (AS) 2, 'Valuation of Inventories',, issued in June, 1981. The revised standard comes into effect in, respect of accounting periods commencing on or after 1.4.1999 and, is mandatory in nature. Inventories consist of Finished Goods, which are held for sale in the ordinary course of business, Raw, Material & Work in Progress.
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26, DEFINITION, 1. INVENTORY, Inventories are assets:, Held for sale in the ordinary course of business,, In the process of production for such sale or, In the form of materials or supplies to be consumed in the, production process or in the rendering of services., Inventories encompass goods purchased and held for, resale, for example, merchandise purchased by a retailer and held, for resale, computer software held for resale, or land and other, property held for resale. Inventories also encompass finished goods, produced, or work in progress being produced, by the enterprise, and include materials, maintenance supplies, consumables and, loose tools awaiting use in the production process. Inventories do, not include machinery spares which can be used only in connection, with an item of fixed asset and whose use is expected to be, irregular; such machinery spares are accounted for in accordance, with Accounting Standard (AS) 10,Accounting for Fixed Assets., 2. NET REALISABLE VALUE, Net realizable value is the estimated selling price in the ordinary, course of business less the estimated costs of completion and the, estimated costs necessary to make the sale., , 3.2, , OBJECTIVE AND SCOPE OF AS-2, , 3.2.1 OBLECTIVE, A primary issue in accounting for inventories is the, determination of the value at which inventories are carried in the, financial statements until the related revenues are recognized. This, Statement deals with the determination of such value, including the, ascertainment of cost of inventories and any write-down thereof to, net realizable value., 3.2.2 SCOPE, This Statement should be applied in accounting for inventories, other than:, a. work in progress arising under construction contracts, including, directly related service contracts (see Accounting Standard (AS), 7, Accounting for Construction Contracts 3);, b. work in progress arising in the ordinary course of business of, service providers;, c. shares, debentures and other financial instruments held as, stock-in-trade; and
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27, d. producers' inventories of livestock, agricultural and forest, products, and mineral oils, ores and gases to the extent that, they are measured at net realizable value in accordance with, well established practices in those industries., The inventories referred to in paragraph (d) are measured at net, realizable value at certain stages of production. This occurs, for, example, when agricultural crops have been harvested or mineral, oils, ores and gases have been extracted and sale is assured under, a forward contract or a government guarantee, or when a, homogenous market exists and there is a negligible risk of failure to, sell. These inventories are excluded from the scope of this, Statement., , 3.3, , MEASUREMENT OF INVENTORIES, , Inventories should be valued at the lower of cost and net, realizable value., 3.3.1 Cost of Inventories, The cost of inventories should comprise all costs of, purchase, costs of conversion and other costs incurred in bringing, the inventories to their present location and condition., 3.3.2 Costs of Purchase, The costs of purchase consist of the purchase price, including duties and taxes (other than those subsequently, recoverable by the enterprise from the taxing authorities), freight, inwards and other expenditure directly attributable to the, acquisition. Trade discounts, rebates, duty drawbacks and other, similar items are deducted in determining the costs of purchase., 3.3.3 Costs of Conversion, The costs of conversion of inventories include costs directly, related to the units of production, such as direct labour. They also, include a systematic allocation of fixed and variable production, overheads that are incurred in converting materials into finished, goods. Fixed production overheads are those indirect costs of, production that remain relatively constant regardless of the volume, of production, such as depreciation and maintenance of factory, buildings and the cost of factory management and administration., Variable production overheads are those indirect costs of, production that vary directly, or nearly directly, with the volume of, production, such as indirect materials and indirect labour.
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28, , Fig 3.1: Measurement of Inventory, 3.3.4 Allocation of fixed Overheads, The allocation of fixed production overheads for the purpose, of their inclusion in the costs of conversion is based on the normal, capacity of the production facilities. Normal capacity is the, production expected to be achieved on an average over a number, of periods or seasons under normal circumstances, taking into, account the loss of capacity resulting from planned maintenance., The actual level of production may be used if it approximates, normal capacity. The amount of fixed production overheads, allocated to each unit of production is not increased as a, consequence of low production or idle plant., Unallocated overheads are recognized as an expense in the, period in which they are incurred. In periods of abnormally high, production, the amount of fixed production overheads allocated to, each unit of production is decreased so that inventories are not, measured above cost. Variable production overheads are, assigned to each unit of production on the basis of the actual use, of the production facilities.
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29, 1.3.5 Examples - Allocation of Fixed Overheads, Example 1., Total Production, , 100 Units, , Normal Capacity, , 50 Units, , Goods Sold, , 80 Units, , Closing Stock, , 20 Units, , Direct Cost, , 10 per unit, , Fixed Overhead, , Rs.80, , Variable Overhead, , Rs.120, , Ans: Valuation of Stock = Direct Cost + Fixed Cost + Variable Cost, =10 + 0.8 + 1.2, = Rs.12, Fixed Cost= (80/100) = Rs.0.8, Variable cost= (120/100) = Rs.1.2, Note: In case of Actual Production is abnormally high then, Fixed, Overhead is allocated to Finished Goods on actual Production, basis., 3.3.6 Joint Products, A production process may result in more than one product, being produced simultaneously. This is the case, for example,, when joint products are produced or when there is a main product, and a by-product. When the costs of conversion of each product, are not separately identifiable, they are allocated between the, products on a rational and consistent basis. The allocation may be, based, for example, on the relative sales value of each product, either at the stage in the production process when the products, become separately identifiable, or at the completion of production., Most by-products as well as scrap or waste materials, by their, nature, are immaterial. When this is the case, they are often, measured at net realizable value and this value is deducted from, the cost of the main product. As a result, the carrying amount of the, main product is not materially different from its cost., 3.3.7 Other Costs, Other costs are included in the cost of inventories only to the, extent that they are incurred in bringing the inventories to their, present location and condition. For example, it may be appropriate, to include overheads other than production overheads or the costs
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30, of designing products for specific customers in the cost of, inventories., Interest and other borrowing costs are usually considered as, not relating to bringing the inventories to their present location and, condition and are, therefore, usually not included in the cost of, inventories., 3.3.8 Exclusions from the Cost of Inventories, In determining the cost of inventories in accordance with, paragraph 6, it is appropriate to exclude certain costs and, recognize them as expenses in the period in which they are, incurred. Examples of such costs are:, (a)Abnormal amounts of wasted materials, labour, or other, production costs;, (b)Storage costs, unless those costs are necessary in the, production process prior to a further production stage;, (c) Administrative overheads that do not contribute to bringing the, inventories to their present location and condition; and, (d) Selling and distribution costs., 3.3.9 Cost Formulae, 1. Specific Identification Method for–, i) Goods not ordinarily interchangeable;, ii) Goods/services produced and segregated for specific, projects., Specific identification of cost means that specific costs are, attributed to identify items of inventory. This is an appropriate, treatment for items that are segregated for a specific project,, regardless of whether they have been purchased or produced., However, when there are large number of items of inventory which, are ordinarily interchangeable, specific identification of costs is, inappropriate since, in such circumstances, an enterprise could, obtain predetermined effects on the net profit or loss for the period, by selecting a particular method of ascertaining the items that, remain in inventories., 2. FIFO, Weighted Average Method in other cases., The cost of inventories, in other cases should be assigned, by using the first-in, first-out (FIFO), or weighted average cost, formula. The formula used should reflect the fairest possible, approximation to the cost incurred in bringing the items of inventory, to their present location and condition.
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31, A variety of cost formulae is used to determine the cost of, inventories other than those for which specific identification of, individual costs is appropriate. The formula used in determining the, cost of an item of inventory needs to be selected with a view to, providing the fairest possible approximation to the cost incurred in, bringing the item to its present location and condition. The FIFO, formula assumes that the items of inventory which were purchased, or produced first are consumed or sold first, and consequently the, items remaining in inventory at the end of the period are those most, recently purchased or produced. Under the weighted average cost, formula, the cost of each item is determined from the weighted, average of the cost of similar items at the beginning of a period and, the cost of similar items purchased or produced during the period., The average may be calculated on a periodic basis, or as each, additional shipment is received, depending upon the circumstances, of the enterprise., 3.3.10 Techniques for the Measurement of Cost, Techniques for the measurement of the cost of inventories,, such as the standard cost method or the retail method, may be, used for convenience if the results approximate the actual cost., Standard costs take into account normal levels of consumption of, materials and supplies, labour, efficiency and capacity utilization., They are regularly reviewed and, if necessary, revised in the light of, current conditions., The retail method is often used in the retail trade for, measuring inventories of large numbers of rapidly changing items, that have similar margins and for which it is impracticable to use, other costing methods. The cost of the inventory is determined by, reducing from the sales value of the inventory the appropriate, percentage gross margin. The percentage used takes into, consideration inventory which has been marked down to below its, original selling price. An average percentage for each retail, department is often used., , 3.4, , NET REALISABLE VALUE, , 3.4.1 MEANING, It means the estimated selling price in ordinary course of, business, less estimated cost of completion and estimated cost, necessary to make the sale. Estimation of NRV also takes into, account the purpose for which the inventory is held., 3.4.2 When cost of inventories may not be recoverable?, i. If inventories are damaged,, ii. If they have become wholly or partially obsolete,, iii. If their selling prices have declined., iv. If the estimated costs of completion or the estimated costs, necessary to make the sale have increased.
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32, The practice of writing down inventories below cost to net, realizable value is consistent with the view that assets should not, be carried in excess of amounts expected to be realized from their, sale or use. An assessment is made of net realizable value as at, each balance sheet date., 3.4.3 Net Realizable Value for Raw Material - Para 24 of AS 2, 1) If finished goods in which Raw Material is used, is sold at or, above cost, then net realizable value of Raw Material is considered, more than its cost., 2) If finished goods in which Raw Material used is sold below cost,, then net realizable value of Raw Material is equal to replacement, price of Raw Material., 3.4.4 Analysis of Inventory valuation under cost and NRV, Aspects
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33, Example 2:, Suppose, there are 1,00,000 units in stock, of which 60,000 are to, be delivered for Rs.40 each as per contract with one of the, customer. Cost of stock is Rs.45 per unit & NRV is estimated of, Rs.50 per unit. What will be the value of stock?, Ans. In this case, 60,000 units will be valued at Rs.40 & balance, stock of 40,000 units will be valued at Rs.45 per unit., Example 3:, Items, Cost, NRV, , X, 20, 14, , Y, 16, 16, , Z, 8, 12, , Total, 44, 42, , How will you value the stock under provisions of AS-2?, Ans:, Items, Cost, NRV, Value, (under AS 2), , 3.5, , X, 20, 14, , Y, 16, 16, , 14, , 16, , Z, 8, 12, , Total, 44, 42, , 8, , 38, , DISCLOSURES, , The financial statements should disclose:, i. Accounting policies relating to inventories, ii. Cost formula used, Iii.Carrying amount of inventories with appropriate classifications, Information about the carrying amounts held in different, classifications of inventories and the extent of the changes in these, assets is useful to financial statement users. Common, classifications of inventories are raw materials and components,, work in progress, finished goods, stores and spares, and loose, tools., , 3.6, , DISCLOSURE PRACTICE ON VALUATION OF, INVENTORIES (AS-2), , Illustration:, This significant accounting policy comes from 2006 annual financial, statements of Bharat Forge America Inc.
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34, Inventories are stated at the lower of cost or market, with the cost, determined on the First-In, First-Out (FIFO) method., Explain requirement in the following cases with reference to, VALUATION OF INVENTORIES (AS-2), 1. The company is valuing its stocks at `cost' instead of `lower of, cost or net realizable value". Further, in valuing the closing stock at, cost, the company has included interest and other borrowings in, `cost'., Ans. That the company is valuing its stocks at ‘cost' instead of, `lower of cost and net realizable value’. Further, in valuing the, closing stock at cost, the company has included interest and other, borrowings in ‘cost'. This is not in accordance with principles of, valuation of inventory as laid down in Revised Accounting, Standard AS-2 on Valuation of Inventories , issued by the, Institute of Chartered Accountants of India, which recommends,, inter alia, that the inventories should be valued at `lower of cost, and net realizable value' and that the interest and other borrowing, should not normally be included in the cost., 2. The Company in respect of its Chemical Division followed the, practice of valuing its inventories on FIFO basis. This year it, changed the basis of valuation from FIFO to LIFO basis. If this, change had not been made, the profit of the Company would have, been higher by Rs.20 lakhs and inventories would have been, higher by Rs.20 lakhs., Ans. The Company in respect of its Chemical Division followed the, practice of valuing its inventories on FIFO basis. This year it, changed the basis of valuation from FIFO to LIFO basis. Had this, change not been made, the profit of the Company would have been, higher by Rs.20 lakhs and inventories would have been higher by, Rs.20 lakhs. This is not accordance with principles of valuation of, inventory as laid down in Revised Accounting Standard AS-2 on, `Valuation of Inventories', issued by the Institute of Chartered, Accountants of India, which recommends, inter alia, that the, inventories should be value at FIFO and at LIFO., 3. As per the past practice, the excise duty paid on finished, goods inventory amounting to Rs.3 crores has been treated as, prepayment till the goods are sold and estimated excise duty of, Rs.2 crores on finished goods lying in the factory premises but not, cleared from excise bonded warehouse as on March 31, 2011 has, not been included in inventory valuation.
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35, Ans. As per the past practice, the excise duty paid on finished, goods inventory amounting to Rs.3 crores has been treated as, prepayment till the goods are sold and estimated excise duty of, Rs.2 crores on finished goods lying in the factory premises but not, cleared from excise bonded warehouse as on March 31, 2011 has, not been provided and hence, not included in inventory valuation., This treatment, however, has no effect on the profits for the year., , 3.7 GUIDANCE NOTE ON MODVAT/CENVAT ISSUED, BY THE ICAI AND VALUATION OF INVENTORY, ICAI issued a “Guidance Note on Accounting Treatment for, MODVAT / CENVAT”, with the substitution of the MODVAT Credit, Scheme with CENVAT w.e.f. 1-4-2000. The revised Guidance Note, has provided clarification on the above anomaly, with examples on, both the inclusive method (Sec.145A) and exclusive method (AS2), where it is clear that the above anomaly is only in respect of the, disclosure, with no effect on the total profit/loss of the enterprise., Therefore, for purposes of tax filings and tax audit forms, the, inclusive method should be used as per section 145A of the, Income-tax Act, whereas for purposes of general purpose financial, statements, the exclusive method under AS-2 should be followed., Inclusive Method (Gross Value Approach), , , , , Raw material is accounted for at gross value inclusive of, specified duty., CENVAT credit available on final products can be accounted for, through a separate account CENVAT Credit Availed Account., Inputs may be consumed partly. CENVAT Credit available, should be segregated into two parts:, - CENVAT Credit on inputs consumed in respect of final, products;, - CENVAT credit on inputs lying in the stock., , CENVAT credit available on inputs consumed for final products is, adjusted with the cost of raw material consumed., CENVAT credit available on inputs lying in the godown should be, adjusted against the value of closing stock of raw material., Exclusive Method (opening separate CENVAT Credit Account), , , Specified duty (i.e., duty paid against which CENVAT credit is, available) paid on inputs is debited to a separate account,, namely CENVAT Credit Receivable (Input) Account.
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36, , , As and when CENVAT credit is actually utilized against, payment of excise duty on final products, CENVAT Credit, Receivable (Input) Account is credited., , , , Inputs consumed and inventory is valued excluding specified, duty., , Balance standing in the CENVAT Credit Receivable (Input), Account is shown on the asset side of the Balance Sheet, under Advances., , 3.8, , COST OF INVENTORIES, , A] Cost of Purchase:, I] Purchase Price, ii] Duties & Taxes, iii] Freight Inward, iv] Other Expenditure directly, attributable to acquisition, Less: i] Duties and Taxes recoverable, from tax authorities, ii] Trade discount, iii] Rebate, iv] Duty Drawback, v] Other similar items, B] Cost of Conversion:, Direct Materials, Direct Labour, Direct Expenses, Systematic allocation of:, Variable Production Overheads, Fixed Production Overheads, , xx, xx, xx, xx, , xx, , xx, xx, xx, xx, xx, , xx, , xx, xx, xx, xx, xx, , C] Other Costs:, Cost incurred for bringing the, inventories to their present, location and condition, , 3.9, , xxx, , xxx, , xxx, xxx, , PRACTICAL APPLICATIONS, , Illustration 1: (Duties and taxes not recoverable), Ambalal furnishes you following details, Ascertain the cost of purchase of inventory, i] Purchase of Raw materials, ii] Duties and Taxes paid on the, acquisition and are not recoverable, iii] Carriage inward, iv]Others paid for acquisition of inventory, , Rs. 10 lakhs, Rs. 2 lakhs, Rs. 1 lakhs, Rs. 1 lakhs
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37, Solution:, Cost of Purchase, Cost of Purchase of Raw Materials, Duties & Taxes not recoverable, Carriage inward, Other Expenses, Total, , Rs. in lakhs, 10, 02, 01, 01, 14, , Illustration 2, Big Bagha Associates furnishes you following details from which, you are required to ascertain cost of purchase of inventories., i] Cost of Purchase of Inventory, Rs. 20 lakhs, ii] Duties & Taxes paid and are, recoverable from Tax Authorities, Rs. 5 lakhs, iii] Trade Discount, Rs. 2 lakhs, iv] Duties & Taxes paid and not recoverable, Rs. 2 lakhs, v] Freight Inwards, Rs. 1 lakhs, vi] Other Expenses directly attributable, to Acquisition of Inventory, Rs. 2 lakhs, Solution : Big Bagha Associates, Calculation of Cost of Purchase, Cost of Purchase, Duties & Taxes paid and not recoverable, Freight Inward, Other Expenses, Less : Duties & Taxes recoverable from, Tax Authorities, Trade Discount, Total, , Rs. in lakhs, 20, 02, 01, 02, 25, 05, 02, , 07, 18, , Illustration 3, Chrome Ltd. manufactures different types of Dichromates., From the following information find the value of inventory per kg, of Sodium Dichromate, Material cost, Rs. 150 per kg, Direct Labour Cost, Rs. 50 per kg, Direct Variable Production Overheads, Rs. 20 per kg, Fixed production overheads for the year on normal capacity of, 1,00,000 kgs is Rs.15 lakhs., Finished goods on stock at the end of the year 3,000 kgs., Solution:, , Chrome Ltd., Cost per kg of Sodium Dichromate, As per AS-2 cost of conversion includes a systematic, allocation of fixed and variable production overheads, which are
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38, incurred for converting materials into finished goods. The allocation, of fixed production overheads is based on normal capacity., Statement of Cost (Per Kg), Material Cost, Direct Labour, Direct Variable Production Overheads, 15,00,000 , Fixed Production Overheads , , 1,00,000 , , Rs., 150, 50, 20, 15, 235, , Value of Stock, , = 3,000 kgs @ Rs. 235, = Rs. 7,05,000, , Illustration 4, Ind Ltd. manufacture computers, during the year ended 31st March,, 2008 the company manufactured 550 computers, it has the policy, of valuing finished stock of goods at a standard cost of Rs.1.8 lakhs, per computer. The details of the cost are as under;, (Rs. in Lakhs), Raw material consumed, 400, Direct Labour, 250, Variable production overheads, 150, Fixed production overheads, 290, (Including interest of Rs. 100), Compute the value of cost per computer for the purpose of, closing stock., Solution: As per AS-2 (Revised) (refer point 3.6), on valuation of, Inventories, finished stock of goods should be valued on the basis, of absorption costing. While absorbing fixed production overheads, the normal production capacity is considered. In this case, finished, stock has been valued at a standard cost of Rs.1.8 lakhs per, computer which incidentally synchronizes with the value computed, on the basis of absorption costing as under:, ,, (Rs. in lakhs), Materials, 400, Direct Labour, 250, Fixed production overheads, 150, Fixed production overheads, 290, Less : Interest, 100, 190, Total Cost, 990, Number of computers produced, (Assumed to be normal production), Cost per computer 990/550 = Rs. 1.80 lakhs, , 550, , Policy of the company to value closing stock is not as per, AS-2. As per para 18 of AS-2, (refer point 3.9-1) the techniques of
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39, standard cost method may be used for convenience if the result, approximates to the actual cost and standard cost is regularly, reviewed if necessary. In the instant case, the cost of inventory can, be conveniently calculated as per absorption costing. Therefore,, there is no reason that standard costing method should be adopted., Illustration 5, Dolphin Simulators Ltd. manufactures simulators., Raw material was purchased at Rs. 100 per kg. Price of raw, material is on the decline. The finished goods in which the raw, material is incorporated are expected to be sold at below cost., 10,000 kgs of raw material is in stock at the year-end. Replacement, cost is Rs. 80 per kg. How will you value the inventory?, Solution :, Dolphin Simulators Ltd., As per para 24 of AS-2, on valuation of inventories, material and, other supplies held for use in the production of inventories are not, written down below cost if the finished products in which they will, be incorporated are expected to be sold at or above cost. However,, when there has been a decline in the price of materials and it is, estimated that the cost of the finished products will exceed net, realisable value, the materials are written down to net realisable, value. In such circumstances, the replacement cost of the material, may be the best available measure of their net realisable value., Hence, in this case, the stock of 10,000 kgs. of raw material will, be valued at Rs.80 per kg. The finished goods, if on stock, should, be valued at cost or net realisable value, whichever is lower., Illustration 6, Lurcko Pvt. Ltd. manufactures computers. During the year, ended 31st March, 2017, the company manufactured 1000, computers. The break up of cost is as under:, Raw Material, Rs. 450 lakhs, Direct Labour, Rs. 300 lakhs, Variable Production Overheads, Rs. 200 lakhs, Fixed Production Overheads, (Includes interest of Rs.100 lakhs), Rs. 300 lakhs, Compute the cost per computer for the purpose of closing, stock., Solution:, As per AS-2 Inventory should be valued as per absorption, costing. The cost is calculated as under :
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40, Calculation of Cost of Purchase, Rs. in lakhs, Raw Material, 450, Direct Labour, 300, Variable Production Overheads, 200, Fixed Production Overheads, 300, Less Interest, 100, 200, 1150, Cost per computer = 1,150 Lakhs /1,000 = Rs. 1.15 lakhs, Note: Interest is excluded from cost of inventory., Illustration –7, Gurecha Pvt. Ltd. furnishes you following information from, which you are required to value inventory of Finished Goods., Material cost, Rs. 200 per kg., Direct Labour cost, Rs. 40 per kg., Direct variable production overhead, Rs. 20 per kg., Fixed production charges for the year on normal capacity of, one lakh kgs. is Rs. 20 lakhs. 2000 kgs. of finished goods are on, stock at the year-end., Solution: Gurecha Pvt. Ltd., In accordance with paras 8 & 9 of AS-2, (refer point 3.6) the, cost of conversion include a systematic allocation of fixed and, variable production overheads that are incurred in converting, materials into finished goods. The allocation of fixed production, overheads for the purpose of their inclusion in the cost of, conversion is based on the normal capacity of the production, facilities., Thus, cost per kg. of finished goods can be computed as, follows:, Rs, Rs., Material cost, 200, Direct Labour cost, 40, Direct variable production overhead, 20, Fixed production overhead, (Rs. 20,00,000/100000), 20, 80, 280, Thus, the value of 2000 kgs. of finished goods on stock at, the year-end will be Rs.5,60,000 = (2000 kgs. X Rs. 280), Illustration 8, Hirel Techno points Associates is a company situated at MIDC,, Pune. The company deals in three products A, B and C, which are, neither similar nor interchangeable. At the time of closing of its
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41, accounts for the year 2016-17; the historical cost and net realisable, values of the items of closing stock are given below:, Items :, A, B, C, , Historical Cost, (Rs. in lakhs), 25, 20, 10, 55, , Net Realisable Value, (Rs. in lakhs), 20, 20, 15, 55, , What will be the value of stock?, Solution: HIREL TECHNOPOINTS, PUNE, Historical Cost or Net Realisable Value whichever is less is, the value of stock. This should be done item by item as given, below:, Rs. in lakhs, A. Net Realisable Value, 20, B. Historical Cost, 20, C. Historical Cost, 10, Value of Closing Stock, 50, Illustration 9, The company deals in three products, A, B and C, which are, neither similar nor interchangeable. The Historical Cost and Net, Realizable Value of the items of closing stock for the year 2016-17, are determined as follows:, Items, A, B, C, , Historical Cost, (Rs. in lakhs), 40, 32, 16, , Net Realizable Value, (Rs. in lakhs), 28, 32, 24, , What will be the value of Closing Stock?, Ans: As per Para 5 of AS 2 on Valuation of Inventories, inventories, should be valued at the lower of cost and net realizable value., Inventories should be written down to net realizable value on an, item-by item basis in the given case., Items, , Historical Cost, , Net Realizable, Valuation of, Value, closing stock, (Rs. in lakhs), (Rs. in lakhs), (Rs. in lakhs), A, 40, 28, 28, B, 32, 32, 32, C, 16, 24, 16, Total, 88, 84, 76, Hence, closing stock will be valued at Rs. 76 lakhs.
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42, Illustration 10, X Co. Limited purchased goods at the cost of Rs.40 lakhs in, October, 2011. Till March, 2012, 75% of the stocks were sold. The, company wants to disclose closing stock at Rs.10 lakhs. The, expected sale value is Rs.11 lakhs and a commission at 10% on, sale is payable to the agent. Advice, what is the correct closing, stock to be disclosed as at 31.3.2012., Ans: As per Para 5 of AS 2 “Valuation of Inventories”, the, inventories are to be valued at lower of cost and net realizable, value. In this case, the cost of inventory is Rs.10 lakhs. The net, realizable value is 11, 00,000 @ 90% = Rs.9, 90,000. So, the stock, should be valued at Rs.9, 90,000., Illustration 11, The Company X Ltd. has to pay for delay in cotton clearing, charges. The company up to 31.3.2017 has included such charges, in the valuation of closing stock. This being in the nature of interest,, X Ltd. decided to exclude such charges from closing stock for the, year 2006-07. This would result in decrease in profit by Rs.5 lakhs., Comment., Ans: As per Para 12 of AS 2 (revised), interest and other borrowing, costs are usually considered as not relating to bringing the, inventories to their present location and condition and are therefore,, usually not included in the cost of inventories. However, X Ltd. was, in practice to charge the cost for delay in cotton clearing in the, closing stock. As X Ltd. decided to change this valuation procedure, of closing stock, this treatment will be considered as a change in, accounting policy and such fact to be disclosed as per AS 1., Therefore, any change in amount mentioned in financial statement,, which will affect the financial position of the company should be, disclosed properly as per AS 1, AS 2 and also a note should be, given in the annual accounts that, had the company followed earlier, system of valuation of closing stock, the profit before tax would, have been higher by Rs. 5 lakhs., Illustration 12, Normal capacity = 20,000 units, Production = 18,000 units, Sales = 16,000 units, Closing Stock = 2,000 units, Fixed Overheads = Rs. 60,000, Calculate cost of fixed overheads to closing stock, Ans:, , Fixed Overheads = Rs.60,000 / 20,000 = Rs. 3 per unit, Fixed Overheads will be bifurcated into three parts:, Cost of Sales: 16,000*3 = 48,000, Closing Stock: 2,000 *3 = Rs. 6,000, Under normal capacity: 2,000 *3 = Rs. 6,000, (to be charged to P/L A/c)
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43, Illustration 13, Normal capacity = 20,000 units, Production = 25,000 units, Sales = 23,000 units, Closing Stock = 2,000 units, Fixed Overheads = Rs 60,000, Calculate Cost of fixed overheads to closing stock, Ans: Fixed Overheads = Rs 60,000/20,000 = Rs.3 per unit, But, Due to production above normal capacity = Rs.60,000 / 25,000, = Rs. 2.40 per unit, Cost of Sales: 23,000 * 2.4 = Rs. 55,200, Closing Stock: 2,000 * 2.4 = Rs. 4,800, Illustration 14, Ascertain the cost of Inventory by using the data given below:, i. Purchase Price, , Rs.20 lakhs, , ii. Duties and Taxes paid on acquisition and are, not recoverable, , Rs.2 lakhs, , iii. Freight inward, , Rs.2 lakhs, , iv .Others paid for acquisition of inventory, , Rs.1 lakhs, , Ans. Cost of Purchase:, Cost of Inventory, Rs. in lakhs, Purchase Price, 20, Duties and Taxes paid on acquisition and are not, 02, recoverable, Freight inward, 02, Others paid for acquisition of inventory, 01, Total, 25, Illustration 15, Zenith Ltd. manufactures computers. During the year ended 31st, March 2017, the Company manufactured 5,000 computers and, incurred following cost:, i. Raw Material, ii. Direct Labour, iii.Variable Production overheads, iv. Fixed Production overheads, (including interest 50 lakhs), , Rs.400 lakhs, Rs.400 lakhs, Rs.150 lakhs, Rs.250 lakhs, , Compute cost per computer for the purpose of closing stock.
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44, Ans., Cost of Purchase, Raw Material, Direct Labour, Variable Production overheads, Fixed Production overheads, Total, , Rs. in lakhs, 400, 400, 150, 200, 1,150, , Note: Interest excluded from cost of Inventory, Cost per Computer (1,150 lakhs / 5,000), , Rs. 23,000, , 3.10 EXERCISE, 3.10.1 PRACTICAL PROBLEMS, 1. How do you ascertain the cost of purchase of inventory by using, the following data, i] Purchase Price, Rs. 5,00,000, ii] Duties and Taxes paid on the Acquisition, of Inventory and are not recoverable, Rs. 2,00,000, iii] Freight Inward, Rs. 1,00,000, iv] Other Expenses for Acquisition of Materials, Rs. 2,00,000, [Ans. Rs. 10,00,000], , 2. Ganesh Pvt. Ltd. produces product x 2007., , The production cost per unit, Raw Materials, Labour, Direct Expenses, Normal capacity, Actual production, Fixed Factory overheads, Closing Stock, , Rs. 15, Rs. 6, Rs. 5, 10,000 units p.a., 7,000 units, Rs. 30,000 p.a., 2500 units, , Calculate the value of closing stock, Normal Capacity, Actual Production, Total Fixed overheads, Fixed overhead per unit, , 10000units, 7000 units, 30000, 3Rs, , Ans. Value of closing stock= 2500 units@29 =72500
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45, 3. Company deals in three products X, Y and Z, which are neither, similar nor interchangeable. At the time of closing its account for, the year 2001-2002. The historical cost and net realisable, values of the items of closing stock are determined as below :, Items, Historical Cost, Net realisable value, (Rs. in lakhs), (Rs. in lakhs), X, 20, 14, Y, 16, 16, Z, 8, 12, 44, 42, What will be the value of closing stock?, [Ans. : Rs. 38], , 4. Company is collecting Gumkriya from the plant of forest for, collecting Gumkriya. Company paid Rs.5 crores to forest, department as license fee for financial year 2001-2002. During, the year it collected 1 crore kg. of Gumkriya from the forest and, sold 60 thousand kg. for Rs.12 crores. Other direct expenses, and overheads were Rs.7 crores for the financial year 20012002. The company valued the closing stock of 40,000 kg. at, Rs. 4.80 crores following the AS-2. Whether the valuation is, correct., [Ans. : AS-2 does not apply to forest product], , 5. X Ltd. is selling refrigerator; purchase price of the Refrigerator is, Rs.15,000 as per the terms of sales. The refrigerator is to be, delivered and installed at customer’s house free of cost. X Ltd., has hired Y & Co. for the purpose and being paid Rs.1,000 –, per Refrigerator for delivery and installation. At year ended on, 31-3-2002, 10 refrigerator were in stock. The market price of the, refrigerator is Rs.15,750. Calculate the value of closing stock as, per AS-2., [Ans. : Rs. 1,47,500], , 6. Apple Consultancy Ltd. is the management consultant giving the, consultancy in the field of re-structuring, amalgamation and, valuation. The company has got consultancy contract worth, Rs.20 lakhs from Y Ltd. for giving their report of restructuring of, the organization. X Consultancies Ltd. commences the work on, 1-3-2008 and expect that work will take four months to be, completed. X Consultancy Ltd. has deployed four senior, consultants for the assignment whose salary is Rs. 20,000 per, month. For the year ended 31-3-2008. The company values the, work-in-progress of Rs.80,000 in its financial statement applying, the formula of valuation of cost or nets realisable value, whichever is less as per AS-2., Is the valuation of W.I.P. of Rs. 80,000 is correct. If not why?, [Ans. : AS-2 does not apply to service contract]
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46, 7. Z Ltd. produced 10,000 units of product A during 2007-2008 per, unit cost is as follows :, Raw Material, Rs. 100, Direct wages, Rs. 50, Direct Expenses, Rs. 2, Rs. 152, Production overhead is Rs. 20,000 of which 40% is fixed. The, company sold 800 units and 2,000 units were in stock as on 31st, March 2008. Normal capacity is 50,000 units., Calculate the value of closing stock., [Ans.: Rs. 309600], , 8. Historical Cost and Net Realibsable Value of five inventory, items are given below :, Items :, Historical Cost, Net Realisable Value, Rs., Rs., A, 20,000, 30,000, B, 12,000, 10,000, C, 12,000, 18,000, D, 32,000, 26,000, E, 28,000, 26,000, 1,04,000, 1,10,000, Determine the value of inventory., [Ans. Rs. 94,000], , 9. Cost of Production of Product x 100 is given below :, Direct Material per unit, Rs. 150, Direct Wages per unit, Rs. 100, Overheads per unit, Rs. 50, Rs. 300, As on the balance sheet date, replacement cost of material is, Rs. 120 per unit. There were 2,000 units of material on 31st March,, 2008, Calculate the value of stock of material under the following, conditions:, i], , If finished product is sold at Rs.320 per unit, what will be the, value of stock of material., ii] If finished product is sold at the rate of Rs.280 per unit, what will, be the value of closing stock of materials., [Ans. (i) Rs. 3,00,000. (ii) Rs. 2,40,000], , 10. Indulkar Ltd. produced 1,00,000, The cost per unit is as follows:, Direct Materials, Direct Labour, Direct Expenses, , units during the year 2006-07., Rs. 100, Rs. 50, Rs. 10
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47, Production overheads are Rs. 2,00,000 of which 60% is, variable. The company sold 80,000 units and 20,000 units were in, stock as on 31st March, 2007. Normal capacity is 50,000 units., Calculate the value of Closing Stock., [Ans. Variable Production Overheads, Fixed Production Overheads, Variable Production Overheads, per unit, Fixed Production Overheads, Per unit, Cost per unit, Rs. 162.80, Value of Stock = 20,000 x 162.80, = Rs. 32,56,000], , Rs. 1,20,000, Rs. 80,000, Rs. 1,20,000, Rs. 1,00,000 = 1.20, Rs. 80,000 = 1.60, Rs. 50,000, , 3.10.2 THEORY QUESTIONS, 1], 2], 3], 4], 5], 6], , What are the objectives of AS-2?, Under what circumstances AS-2 is applicable?, Define the term ‘Inventories’?, Write a detailed note on ‘Measurement of Inventories’?, State and explain important aspects of ‘Inventory Valuation’., Write short notes on, i] Treatment of other cost, ii] Inclusion of excise duty in valuation of finished goods, iii] Exclusion from cost of inventories, iv] Disclosure of inventory valuation policy in financial, statement., v] Cost formula, vi] Net realisable value, , 7] Explain the following, a] Cost of purchase, b] Cost of conversion, c] Standard method, d] Retail method, e] Specific cost method, f] Net Realisable value, 8] Compare the following, i] Standard cost and retail method, ii] Historical cost and Realisable value, 9] Briefly explain Main Product, Joint Product and By Product.
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48, 3.10.3, , OBJECTIVE TYPE QUESTIONS, , 1. Select Correct Alternative:, 1. Under inflationary conditions, ________ method will show, highest value of closing stock?, a. FIFO, b. LIFO, c. Weighted Average, d. None of the above, 2. The inventory valuation method that identifies the invoice cost of, each item in ending inventory to determine the cost assigned to, that inventory is the:, a., b., c., d., , Weighted-average inventory method., Retail inventory method., Specific identification method., First-in, First-out method., , 3. A company had the purchases shown below during the current, year. On December 31, there were 26 units remaining in ending, inventory. These 26 units consisted of 2 from January, 4 from, February, 6 from May, 4 from September and 10 from, November. Using the specific identification method, what is the, cost of the ending inventory?, January, February, May, September, November, a., b., c., d., , 10 units @ 120, 20 units @ 130, 15 units @ 140, 12 units @ 150, 10 units @ 160, , 3,500, 3,800, 3,960, 3,280, , 4. The original cost of an inventory item is above the replacement, cost. The inventory item's replacement cost is above the net, realizable value. Under the lower of cost or market method, the, inventory item should be valued at:, a. Original cost., b. Replacement cost., c. Net realizable value., d. Net realizable value less normal profit margin.
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49, 5. A manufacturer has the following per-unit costs and values for, its sole product:, Cost Rs.10.00, Current replacement cost Rs.5.50, Net realizable value Rs. 6.00, Net realizable value less normal profit margin Rs. 5.20, In accordance with AS 2, what is the per unit carrying value of, inventory in the manufacturer’s statement of financial position?, a., b., c., d., , 5.20, 5.50, 6.00, 10.00, , 6. AS-2 is related to :, a. Valuation of inventories, b. Accounting for Construction Contracts, c. Cash Flow Statements, d. Depreciation accounting, 7. Assuming constant inventory quantities, which of the following, inventory-costing methods will produce a lower inventory, turnover ratio in an inflationary economy?, a., b., c., d., , FIFO (first in, first out)., LIFO (last in, first out)., Moving average., Weighted average., , 8. In specific identification method, method applicable will be, a., b., c., d., , of inventory valuation the, , FIFO, LIFO, Average cost, None of the above, , 9. Sales for the year ended 31st March, 2005 amounted to, Rs.10,00,000. Sales included goods sold to Mr. A for Rs. 50,000, at a profit of 20% on cost. Such goods are still lying in the, godown at the buyer’s risk. Therefore, such goods should be, treated as part of, a., b., c., d., , Sales., Closing stock., Goods in transit, Sales return
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50, 10. Approximate actual cost method of inventory valuation is -a., b., c., d., , Actual cost, Standard cost, Weighted average cost, FIFO, , 11. A company normally sells its product for Rs.20 per unit, which, includes a profit margin of 25%. However, the selling price has, fallen to Rs.15 per unit. This company's current inventory, consists of 200 units purchased at Rs.16 per unit. Replacement, cost has now fallen to Rs.13 per unit. Calculate the value of this, company's inventory at the lower of cost or market., a., b., c., d., , 2,600, 2,550, 2,700, 3,000, , 12. A businessman purchased goods for Rs.25,00,000 and sold, 70% of such goods during the accounting year ended 31st, March, 2005. The market value of the remaining goods was, Rs.5,00,000. He valued the closing stock at Rs.5,00,000 and, not at Rs.7, 50,000 due to, a., b., c., d., , Money measurement., Conservatism., Cost., Periodicity., , 13. At the end of the accounting year, material A costing Rs.10,000, was having net realizable value of Rs.9,500 only, while material, B costing Rs.12,000 was having a net realizable value of, Rs.13,000 in the market and material C costing Rs.15,000 was, having net realizable value of Rs.14,000 only. The total amount, of closing stock will be, a., b., c., d., , Rs.37, 000., Rs. 35,500., Rs. 36,500., Rs. 38,000., , 14. The following data has been provided by Omega Ltd.:, Item No., 1, 2, 3, , Units, 2, 10, 2, , Cost per unit, 10, 5, 2, , Realization value, per unit, 11, 4, 2
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51, The value of inventory on item by item basis will be, a. Rs. 40., b. Rs.64., c. Rs.66., d. Rs.60., 15. “Inventories should be out of godown in the sequence in which, they arrive” is based on, a. HIFO., b. LIFO., c. FIFO., d. Weighted average., Answers: 1- a, 2-c, 3-b, 4-c, 5-c, 6-a, 7- a, 8-d, 9- a, 10-c, 11-a,, 12- b,13- b,14-b, 15-c., , , ,
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52, , Unit-4, AS-9 REVENUE RECOGNITION, Unit Structure:, 4.0, 4.1, 4.2, 4.3, 4.4, 4.5, 4.6, 4.7, 4.8, , Objectives, Introduction, Purpose, Non Applicability of AS-9, Revenue Recognition, Effect of Uncertainties on Revenue Recognition, Disclosure Requirements, Practical Applications, Exercises, , 4.0, , OBJECTIVES, , After studying the unit the students will be able to:, Understand the purpose and scope of AS-9., Know the non applicability of AS-9, Explain the effects of uncertainties on revenue recognition., Understand the circumstances in which revenue recognition has, been postponed., Recognize revenue practically., , 4.1, , INTRODUCTION, , Revenue is the gross inflow of cash, receivables or other, consideration arising in the course of the ordinary activities of an, enterprise from the sale of goods, from the rendering of services, and from the use by others of enterprise resources yielding, interest, royalties and dividends. This Statement AS-9, Revenue, Recognition issued in 1985 deals with the bases for recognition of, revenue in the statement of profit and loss of an enterprise. The, statement is concerned with the recognition of revenue arising in, the course of the ordinary activities of the enterprise from, 1. The sale of goods,, 2. The rendering of services, and, 3. The use by others of enterprise resources yielding interest,, royalties and dividends.
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53, Revenue recognition is mainly concerned with the timing of, recognition of revenue in the statement of profit and loss of an, enterprise. The amount of revenue arising on a transaction is, usually determined by agreement between the parties involved in, the transaction. When uncertainties exist regarding the, determination of the amount, or its associated costs, these, uncertainties may influence the timing of revenue recognition. This, standard is mandatory for all enterprises., , 4.2, , PURPOSE, , The Purpose of AS-9 is recognizing revenue arising in the, course of the ordinary activities of the enterprise., SCOPE of AS-9, It includes the following activities:, Sale of goods., Rendering of services., Use by others of enterprise resources yielding interest,, royalties and dividends., , 4.3, , NON APPLICABLITY of AS-9, , This Statement does not deal with the following aspects of revenue, recognition to which special considerations apply:, 1. Revenue arising from construction contracts., 2. Revenue arising from hire-purchase, lease agreements., 3. Revenue arising from government grants and other similar, subsidies., 4. Revenue of insurance companies arising from insurance, contracts., 5. Profit or loss on sale of fixed assets, 6. Realized or unrealized gains resulting from changes in foreign, exchange rates, Examples of items not included within the definition of “revenue” for, the purpose of this Statement are:, 1. Realized gains resulting from the disposal of and unrealized, gains resulting from the holding of, non-current assets e.g., appreciation in the value of fixed assets;, 2. Unrealized holding gains resulting from the change in value of, current assets and the natural increases in herds and, agricultural and forest products;
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54, 3. Realized or unrealized gains resulting from changes in foreign, exchange rates and adjustments arising on the translation of, foreign currency financial statements;, 4. Realized gains resulting from the discharge of an obligation at, less than its carrying amount;, 5. Unrealized gains resulting from the restatement of the carrying, amount of an obligation., , 4.4, , REVENUE RECOGNITION, , 1. Sale of goods, A key criterion for determining when to recognize revenue, from a transaction involving the sale of goods is that the seller has, transferred the property in the goods to the buyer for a, consideration. The transfer of property in goods, in most cases,, results in or coincides with the transfer of significant risks and, rewards of ownership to the buyer. However, there may be, situations where transfer of property in goods does not coincide, with the transfer of significant risks and rewards of ownership., Revenue in such situations is recognized at the time of, transfer of significant risks and rewards of ownership to the, buyer. Such cases may arise where delivery has been delayed, through the fault of either the buyer or the seller and the goods are, at the risk of the party at fault as regards any loss which might not, have occurred but for such fault. Further, sometimes the parties, may agree that the risk will pass at a time different from the time, when ownership passes., At certain stages in specific industries, such as when, agricultural crops have been harvested or mineral ores have been, extracted, performance may be substantially complete prior to the, execution of the transaction generating revenue. In such cases, when sale is assured under a forward contract or a government, guarantee or where market exists and there is a negligible risk of, failure to sell, the goods involved are often valued at net realizable, value. Such amounts, while not revenue as defined in this, Statement, are sometimes recognized in the statement of profit, and loss and appropriately described., Thus, sale of goods is recognized when, 1. The property in goods in transferred for a price., 2. All significant risks and rewards have been transferred and, no effective control is retained., 3. No significant uncertainty exists regarding the amount of, consideration., 4. It is reasonable to expect ultimate collection of, consideration.
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55, 2. Rendering of Services, Revenue from service transactions is usually recognized as, the service is performed, either by the proportionate completion, method or by the completed service contract method., i) Proportionate Completion Method — Performance consists, of the execution of more than one act. Revenue is recognized, proportionately by reference to the performance of each act., The revenue recognized under this method would be, determined on the basis of contract value, associated costs,, number of acts or other suitable basis. For practical purposes,, when services are provided by an indeterminate number of acts, over a specific period of time, revenue is recognized on a, straight line basis over the specific period unless there is, evidence that some other method better represents the pattern, of performance., ii) Completed service Contract Method — Performance consists, of the execution of a single act. Alternatively, services are, performed in more than a single act and the services yet to be, performed are so significant in relation to the transaction taken, as a whole that performance cannot be deemed to have been, completed until the execution of those acts. The completed, service contract method is relevant to these patterns of, performance and accordingly revenue is recognized when, the sole or final act takes place and the service becomes, chargeable., Revenue recognition in rendering of services, Completed service method recognises revenue only, When service complete or substantially complete., In such cases there are more than one act involved and, revenue is recognised on' execution of all those acts., Proportionate completed method, Recognises revenue proportionate with the degree of, completion of services., There is more than one act involved and revenue is, recognised on execution of certain acts., Thus, Service is recognized when, Service is recognised either on completed service or, proportionate completion method., No significant uncertainty exists regarding amount of, consideration., It is reasonable to expect ultimate collection of, consideration.
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56, EXAMPLES, 1] On sale, buyer takes title and accepts billing but delivery is, delayed at buyer’s request., Ans. Revenue should be recognised notwithstanding that physical, delivery has not been completed., 2] Sale on approval., Ans. Revenue should not be recognised until the goods have been, formally accepted or time for rejection has elapsed or where no, time has been fixed, a reasonable time has elapsed., 3] Sales with the condition of ‘money back if not completely, satisfied., Ans. It may be appropriate to recognize the sale but to make, suitable provision for returns based on previous experience., 4] Consignment sales., Ans. Revenue should not be recognised until the goods are sold to, a third party., 5] Instalment sales., Ans. Revenue of sale price excluding interest should be recognised, on the date of sale., 6] Special order and shipments., Ans. Revenue from such sales should be recognized when the, goods are identified and ready for delivery., 7] Where seller concurrently agrees to repurchase the same goods, at a later date., Ans. The sale should not be recognised, as this is a financial, arrangement., 8] Subscriptions received for publications., Ans. Revenue received or billed should be deferred and, recognised either on a straight-line basis over time or where the, items delivered vary in value from period to period, revenue should, be based on the sales value of the item delivered.
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57, 9] Sale of show tickets., Ans. Revenue should be recognised when the event takes place., 10] Guaranteed sales of agricultural crops., Ans. When sale is assured under forward contract or government, guarantee, the crops can be recognised at net realizable value, although it does not satisfy the criteria of revenue recognition., Rendering of Services, 1] Installation Fees, Ans. In cases where installation fees are other than incidental to, the sale of a product, they should be recognised as revenue only, when the equipment is installed and accepted by the customer., 2] Advertisement commission received, Ans. It is recognised when the advertisement appears before, public., 3] Insurance agency commission received, Ans. It is recognised on the effective commencement or renewal, dates of the related policies., 4] Tuition fees received, Ans. It should be recognised over the period of instruction., 5] Admission fees, Ans. Revenue from artistic performances, banquets and other, special events should be recognised when the event takes place., When a subscription to a number of events is sold, the fee should, be allocated to each event on a systematic and rational basis., 6] Entrance and membership fees, Ans. Revenue recognition from these sources will depend on the, nature of the services being provided. Entrance fee received is, generally capitalised. If the membership fee permits only, membership and all other services or products are paid for, separately, or if there is a separate annual subscription, the fee, should be recognised when received. Publications to be provided, during the year, it should be recognised on a systematic and, rational basis having regard to the timing and nature of all services, provided.
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58, 3. Use of enterprise resources by others:, The use of such enterprise resources by others gives rise to:, (i) Interest—charges for the use of cash resources or amounts, due to the enterprise;, (ii) Royalties—charges for the use of such assets as know-how,, patents, trademarks and copyrights;, (iii) Dividends—rewards from the holding of investments in, shares., Revenue recognition in use of enterprise resources by others, 1.Interest: Revenue is recognized on the time basis determined by, the amount outstanding and the rate applicable., 2.Royalty: Revenue is recognized in accordance with the terms of, the relevant agreement., 3.Dividends: Revenue is recognized only when a right to receive, payment is established., When interest, royalties and dividends from foreign countries, require exchange permission and uncertainty in remittance is, anticipated, revenue recognition may need to be postponed., , 4.5 EFFECT OF UNCERTAINTIES ON REVENUE, RECOGNITION, 1. Recognition of revenue requires that revenue is measurable, and that at the time of sale or the rendering of the service it, would not be unreasonable to expect ultimate collection., 2. Where the ability to assess the ultimate collection with, reasonable certainty is lacking at the time of raising any claim,, e.g., for escalation of price, export incentives, interest etc., and, revenue recognition is postponed to the extent of uncertainty, involved. In such cases, it may be appropriate to recognize, revenue only when it is reasonably certain that the, ultimate collection will be made. Where there is no, uncertainty as to ultimate collection, revenue is, recognized at the time of sale or rendering of service even, though payments are made by installments., 3. When the uncertainty relating to collectability arises, subsequent to the time of sale or the rendering of the service,, it is more appropriate to make a separate provision to, reflect the uncertainty rather than to adjust the amount of, revenue originally recorded.
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59, 4. An essential criterion for the recognition of revenue is that the, consideration receivable for the sale of goods, the rendering of, services or from the use by others of enterprise resources is, reasonably determinable. When such consideration is not, determinable within reasonable limits, the recognition of, revenue is postponed., 5. When recognition of revenue is postponed due to the effect, of uncertainties, it is considered as revenue of the period, in which it is properly recognized., , 4.6, , DISCLOSURE REQUIREMENTS, , In addition to the disclosures required by Accounting, Standard 1 on ‘Disclosure of Accounting Policies’ (AS 1), When, recognition of revenue is postponed due to the effect of, uncertainties, an enterprise should disclose the circumstances in, which revenue recognition has been postponed., Question:-Explain requirement in the following cases with reference, to REVENUE RECOGNITION (AS-9), Accounts of certain items of income are recorded on cash basis, As, a result, the net profit for the year and current assets are, understated by Rs.20,000 each., Ans. Accounts of certain items of income recorded on cash basis, which is not in line with the Accounting Standard 9 regarding, "Revenue Recognition" issued by the Institute of Chartered, Accountants of India. As a result, the net profit for the year and, current assets are understated by Rs.20,000 each as compared to, the position which would have prevailed if the company has, accounted for interest income on accrual basis." should be, disclosed., , 4.7, , PRACTICAL APPLICATIONS, , 1) Arjun Ltd. sold farm equipments through its dealers. One of the, conditions at the time of sale is payment of consideration in 14, days and in the event of delay interest is chargeable @ 15% per, annum. The Company has not realized interest from the dealers, in the past. However, for the year ended 31.3.2018, it wants to, recognize interest due on the balances due from dealers. The, amount is ascertained at Rs.9 lakhs. Decide whether income by, way of interest from dealers is eligible for recognition as per AS, 9., Ans. As per AS 9 “Revenue Recognition”, where the ability to, assess the ultimate collection with reasonable certainty is lacking at
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60, the time of raising any claim, the revenue recognition is postponed, to the extent of uncertainty expected. In such cases, the revenue is, recognized only when it is reasonably certain that the ultimate, collection will be made., In this case, the company never realized interest for the, delayed payments made by the dealers. Hence, it has to recognize, the interest only if the ultimate collection is certain., The interest income hence is not to be recognized., 2) Y Ltd. used certain resources of X Ltd. In return X Ltd. receives, Rs.10 lakhs and Rs.15 lakhs as interest and royalties, respectively, from Y Ltd. during the year 2017 –2018. State on, what basis X Ltd. should recognize their revenue, as per AS 9., Ans. As per AS 9 on ‘Revenue Recognition’, interest of Rs.10, lakhs received in the year 2017-2018 should be recognized on the, time basis, whereas royalty of Rs.15 lakhs received in the same, year should be recognized on accrual basis as per the terms of, relevant agreement., 3) The Board of Directors of X Ltd. decided on 31.3.2017 to, increase sale price of certain items of goods sold retrospectively, from 1st January, 2017. As a result of this decision the company, has to receive Rs.5 lakhs from its customers in respect of sales, made from 1.1.2017 to 31.3.2017. But the Company’s, Accountant was reluctant to make-up his mind. You are asked, to offer your suggestion., Ans. As per Para 10 of AS 9 ‘Revenue Recognition’, the additional, revenue on account of increase in sales price with retrospective, effect, as decided by Board of Directors of X Ltd., of Rs.5 lakhs to, be recognized as income for financial year 2016-17, only if the, company is able to assess the ultimate collection with reasonable, certainty. If at the time of rising of any claim it is unreasonable to, expect ultimate collection, revenue recognition should be, postponed., 4) X Limited has recognized Rs.10 lakhs on accrual basis income, from dividend on units of mutual funds of the face value of, Rs.50 lakhs held by it as at the end of the financial year 31st, March, 2017. The dividends on mutual funds were declared at, the rate of 20% on 15th June, 2017. The dividend was proposed, on 10th April, 2017 by the declaring company. Whether the, treatment is as per the relevant Accounting Standard? You are, asked to answer with reference to provisions of Accounting, Standard., Ans. Paragraph 8.4 and 13 of Accounting Standard 9 on Revenue, Recognition states that dividends from investments in shares are
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61, not recognized in the statement of profit and loss until a right to, receive payment is established. In the given case, the dividend is, proposed on 10th April, 2017, while it is declared on 15th June,, 2003. Hence, the right to receive payment is established on 15th, June, 2017. As per the above mentioned paragraphs, income from, dividend on units of mutual funds should be recognized by X Ltd. in, the financial year ended 31st March, 2018., 5) The stages of Production and sale of the producer are as, follows (all in rupees):, Stage, A, B, C, D, E, F, G, H, , Activity, Raw Materials, WIP 1, WIP 2, Finished Product, For Sale, Sale Agreed, Delivered, Paid For, , Cost to, date(Rs.), 45,000, 47,000, 50,000, 55,000, 55,000, 55,000, 56,950, 56,950, , Net Realizable, Value(Rs.), 43,000, 48,000, 54,500, 1,10,000, 1,10,000, 1,10,000, 1,10,000, 1,10,000, , State and explain the stage at which you think revenue will be, recognized?, Ans. According to As-9, sales will be recognized only when, 1. The sale value is fixed and determinable., 2. Property of the goods is transferred to the customer., Both these conditions are satisfied at stage F, when sales are, agreed at a price and goods allocated for delivery purpose., , 4.8, , EXERCISE, , 4.8.1, PRACTICAL PROBLEMS, 1. AST Co. Ltd. uses certain resources of BST Co. Ltd. In return, BST Co. Ltd. received Rs. 8 lakhs and Rs. 12 lakhs as interest and, royalties from AST Co. Ltd. during the year 2017-18.You are, required to state on whether and what basis this revenues can be, recognized by BST Co. Ltd.?, 2. X Limited has recognized Rs.10 lakhs on accrual basis income, from dividend on securities of the face value of Rs.50 lakhs held by, it as at the end of the financial year 31st March, 2017. The, dividends on mutual funds were declared at the rate of 20% on 25th, May, 2017. The dividend was proposed on 10th April, 2017 by the, declaring company. Whether the treatment is as per the relevant, Accounting Standard? You are asked to answer with reference to, provisions of Accounting Standard.
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62, 3. The Board of Directors of X Ltd. decided on 31.3.2017 to, increase sale price of certain items of goods sold retrospectively, from 1st January, 2017. As a result of this decision the company, has to receive Rs.5 lakhs from its customers in respect of sales, made from 1.1.2017 to 31.3.2017. The decision was communicated, to customers and was approved. Can X Ltd. recognize revenue, pertaining to increase in sale -price?, 4. Goods worth Rs.6 lakhs are supplied to Ram & Co on 15th March, 2017 on sale on approval basis. Comment in light of AS-9 whether, revenue should be recognized?, 4.8.2, , THEORY QUESTION, , 1. When can revenue be recognized in the case of transaction of, sale of goods?, Ans. As per AS 9 Revenue Recognition, revenue from sales, transactions should be recognized when the following, requirements as to performance are satisfied, provided that at, the time of performance, it is not unreasonable to expect, ultimate collection:, (i) The seller of goods has transferred to the buyer the, property in the goods for a price or all significant risks and, rewards of ownership have been transferred to the buyer, and the seller retains no effective control of the goods, transferred to a degree usually associated with ownership;, and, (ii) No significant uncertainty exists regarding the amount of, the consideration that will be derived from the sale of, goods., 2. What are the two general criteria that must be satisfied before a, company can recognize revenue?, 3. Explain why, in most cases, a seller recognizes revenue when it, delivers its product rather than when it produces the product., 4. Distinguish between the percentage-of-completion and, completed contract methods of accounting for long-term, contracts with respect to income recognition. Under what, circumstances should a company use the completed contract, method?, 5. When does a consignor recognize revenue for a consignment, sale?
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63, 4.8.3 OBJECTIVE TYPE QUESTIONS, 1. Select Correct Alternative:, i. In AS-9 Revenue recognition applies to, 1. Sale of goods only, 2. Sale of services only, 3. Use of enterprises resources by other only, 4. All the above, ii. In AS-9 Revenue recognition requires that revenue from divided, be recognized, 1. On date of proposal, 2. On date of declaration, 3. On date of dispatch of divided warrant, 4. On accrual basis, iii. Revenue from sale of products, is generally, realized in the, period in which, 1. Cash is collected., 2. Sale is made., 3. Products are manufactured., 4. None of the above., iv. AS-9 deals with Revenue recognition except:, 1. Revenue arising from construction contracts., 2. Revenue arising from hire-purchase, lease agreements., 3. Both (1) & (2), 4. None of these, v. Revenue is the gross inflow of cash through, 1. sale of goods,, 2. rendering of services,, 3. Yielding interest, royalties and dividends., 4. All of the above, .vi. As per AS 9 items not included in the definition of “revenue” are:, 1. Unrealized holding gains resulting from the change in value, of current assets, and the natural increases in herds and, agricultural and forest products;, 2. Realized gains resulting from the discharge of an obligation, at less than its carrying amount;, 3. Unrealized gains resulting from the restatement of the, carrying amount of an obligation., 4. All of the above, Answers: i-4, ii-2, iii-2, iv-3, v-4, vi-4
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64, 2. Match the following:, 1. AS 1, , (i) Revenue Recognition, , 2. AS 9, , (ii)Disclosure of Accounting, policies., , 3. AS 10, , (iii) Non- Refundable Taxes, , 4. AS 2, , (iv) Accounting for Fixed Assets., , 5. Cost of Purchase include, , (v) Inventory Valuation, , 6. Completed contract method, , (vi) Refundable Taxes, , 7. Percentage of completion method, , (vii)Defers recognition until project, is complete, , 8. Consignment sales, , (viii)Recognition proportion to work, completed., (ix)Risks and rewards of ownership, retained by seller, , Answers: 1-ii, 2-i, 3-iv, 4-v, 5-iii, 6-vii, 7-viii, 8-ix, , ,
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65, , Unit-5, INVENTORY VALUATION - I, UNIT STRUCTURE, 5.0, 5.1, 5.2, 5.3, 5.4, 5.5, 5.6, 5.7, 5.8, , Objectives, Introduction, Importance of inventory / stock valuation, Methods of stock valuation, Valuation of stock at lower of cost or market price, First In First Out (FIFO), Average Cost, Reconciliation at Physical Stock and Stock as Per Stock, Register, Exercise, , 5.0, , OBJECTIVES, , After studying the unit students will be able to:, Understand the meaning of inventory and importance of, inventory valuation., Explain the methods of stock valuation., Know the advantages and disadvantages of FIFO method, and Average cost method., Understand the reconciliation of physical stock and stock as, per stock register., Solve the problems of stock valuation., , 5.1, , INTRODUCTION, , The stock that kept to meet further requirements of, production and sales is called “Inventory”. The basic reason for, holding stock is to keep up the production activities undisturbed. It, is neither physically possible nor economically justifiable to wait for, the stocks to arrive at the time when they are actually required., Therefore, keeping of inventory is a must for the efficient working of, an industrial unit. The principal types of inventories are:, (i) Raw materials and suppliers,, (ii) Work-in progress and, (iii) Finished goods.
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66, Raw materials represent goods kept by a manufacturing, firm prior to being utilized in the production process generally, include tools, stores and spares which are consumed in the, production of goods and service., Work-in progress represent the semi finished goods and, include those materials that have been commuted to production, process but have not yet been converted into finished goods., Finished goods are completed goods awaiting sale. In a, manufacturing concern or in case of trading concern, it will, comprise only finished goods or stock in trade owned by it for sale, to customers in the normal course of business., , 5.2, , IMPORTANCE OF INVENTORY / STOCK, VALUATION, , The balance sheet of a concern must show true and fair view, of the financial position of the concern. For this purpose assets, including inventory should be properly valued to exhibit a true and, fair view., If stock is valued at a value which is less than the actual, value and as a result, the profits will reduce. Shareholders would, get less dividend. On the other hand, if inventory is valued at a, value which is more that the actual value, the profits would be, inflated and the shareholders would receive more dividend, a part, of which would thus be paid out of capital. Payment of dividend out, of capital would exhaust the capital and the company would be, insolvent. Moreover, under / over valuation of inventory will not only, affect the operating results and financial position of the current, period but will also affect those of the next period., The following are some of the important reason for too, much emphasis on inventory or stock valuation:, 1. Sufficient stock for production / sale process :, For all manufacturing and trading concerns, inventory, represents a major current asset investment. Adequate inventory is, essential for the Production / Sales process of an enterprises as, insufficient inventory hampers production and fails to generate, sufficient sales. This shows the necessity for proper valuation of, inventory., 2. Proper determination of profit :, The proper determination of profit depends upon the proper, valuation. If the ending inventory is valued at a lower figure, profit is, under stated and if it is overvalued, profit is overstated. This shows, that proper method of valuation of inventory should be followed.
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67, 3. True financial position :, Over valuation of inventory amounts to window dressing, which gives wrong idea about the liquid position of the company., The proper valuation of inventories which constitute a significant, portion of current assets is essential so that short term creditors, may not be misled about the liquid position of the company., Balance sheet can exhibit a true and fair view of the financial, position of a company if there is a proper valuation of inventory, which constitutes a major portion of current assets., , 5.3, , METHODS OF STOCK VALUATION, Methods of taking inventories / stock, Method of Inventory, , (1) Periodic inventory method., , (2) Perpetual inventory Method, , 1. Periodic Inventory Method:, Under this method of taking inventories, value of stock is, determined by physical counting of the stock on the accounting, date of preparation of the final accounts. It is possible that stock, taking may take a week or so in large enterprises and purchases, and sales may have to be suspended for that period to get correct, figure of closing inventory. This method of ascertaining the value of, stock at the end of the year is also known as annual stock taking., Thus this method is based on physical stock taking, it provides data, once in a year. It is simple and economical method of stocktaking. It, can be adopted in small concerns. It does not provide basis for, control., 2. Perpetual Inventory Method:, Perpetual Inventory Method is defined as a system under, which records are maintained by the controlling department, which, reflects the physical movements of stock and their current balance., Under this method, stock registers are maintained to make a record, of the physical movements of stock and their current balance., Stores ledger is maintained to keep a record of the receipt and, issue of the materials and also reflects the balance in store., Similarly, work-in-progress ledger is maintained to give the value of, work-in-progress on hand and a finished goods ledger is, maintained to know the value of finished goods on hand. Thus, this, system provides a running record of inventories on hand at any, time. To ensure the accuracy of perpetual inventory records ,, physical verification of the inventory is made by a program of, continuous stock taking., It is possible that the balance of stock by the perpetual, inventory may differ from the actual balance of stock as ascertained, by physical verification. Any difference noted between actual stocks
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68, as disclosed by the physical verification and the stocks shown by, stock records should be investigated and rectification will be made., If the physical verification reveals that actual balance of stock is, more than the balance shown by the stores ledger or work-inprogress ledger or finished goods ledger, debit note is prepared, and stock records are adjusted accordingly so that balance may, reconcile with actual balance. A Stock Adjustment Account is, prepared and debited with the shortage of stock and credited with, surplus., Continuous stock taking is an essential feature of the, perpetual inventory system. But the two terms, perpetual inventory, and continuous stock taking should not be taken as one; perpetual, means the system of stock records and continuous stock taking, whereas continuous stock taking means only the physical, verification of stock records with actual stocks., In continuous stock taking, physical verification is spread, throughout the year. Every day 10 to 15 items are taken at rotation, and checked in order to maintain surprise element in short, verification and each item is checked for a number of times during, the year. On the other hand, surprise element is missing in case of, periodical checking because checking is usually done at the end of, the year. In short, this method is based on records. It requires a lot, of recording and is thus expensive. It can be adopted only in big, concerns. It provides data on running basis and thus facilitates the, preparation of financial statements at shorter intervals. It also, provides basis for control by investigation of the discrepancies, arising from the comparison of physical stock with their book, values., Difference between Periodic Inventory and Perpetual, Inventory., The following are the main differences between the two, methods of taking inventory., Periodic Inventory, , Perpetual Inventory, , 1. It is based on physical 1. It is based on records., stock taking, 2. It, provides, data 2. It provides the data on running, periodically i.e. once in, basis and thus facilitates the, year., preparation, of, financial, statements at shorter intervals., 3. It does not provide basis 3. It provides basis for control by, for control., investigating the discrepancies, arising from the comparison of, physical stock with book values.
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69, 4. It, is, simple, and 4. It is expensive as it requires a lot, economical method of, of recording because of an, taking inventory and can, elaborate method of taking, be adopted in small, inventory. It can be adopted by, concern., big concerns only., , 5.4, , VALUATION OF STOCK AT LOWER OF COST, OR MARKET PRICE, , Stock is valued at cost or market price whichever is lower., Stock is valued at lower of cost or market price to ensure that, anticipated profits must not be accounted for until they have been, realized and that full provision should be made for anticipated, losses. This principle of valuation is on the important accounting, convention of conservatism. Conservatism means taking the, gloomy view of a situation. It is policy of caution or playing safe and, had its origin as a safeguard against possible losses in a world of, uncertainty. According to this principle of valuation based on, convention of conservatism, if market price of the stock is higher, than the cost of the stock, the higher amount is ignored in the, accounts because profit is not booked by valuing inventory at, market value which is higher than cost value. It is possible that, dividends to shareholders may be distributed out of unrealized, profit. It will not be sound policy and in the future, if the expected, market price is not realized and there is a loss, unrealized profit, distributed will amount to distribution of dividend out of capital. On, the contrary, if the stock is valued at market price which is lower, than the cost. In this way, anticipated loss is taken into, consideration and even if a loss occurs in the future, the business, will not be affected adversely because loss has already been, provided by valuing the asset at a lower value and if there is no loss, as expected, it is quite good for the business., Cost in relation to stock is outlay of cash or its equivalent in, the acquisition or manufacturing of the inventory concerned. In, other words, cost of stock is the sum of the applicable expenditure, and charges directly or indirectly incurred in brining inventory to its, existing condition and location., Market value in relation to stock is the realizable value of the, stock in the market i. e. the price at which it can be replaced, the, valuation of stock affects the profit of the year. Therefore, the, method of valuation of stock should not be changed from year to, year to enable comparison of profits of different years., Methods for Valuation of Stock:, The following are the various methods of the valuation of inventory:
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70, , 5.5, , FIRST IN FIRST OUT (FIFO), , 5.5.1 Meaning, Under this method, the earliest lot of materials or goods purchased, or goods manufactured are exhausted first and closing stock is out, of the latest consignments received or goods manufactured and is, valued at the cost of such goods. In other words, cost of goods sold, is calculated keeping in view the earliest lots exhausted on the, presumption that units are sold in which they were acquired. In, short, under this method, it is assumed that goods or materials, which are purchased first are issued first. Stock consist of latest, purchase. Hence items lying in the stock should be valued at latest, purchase price., 5.5.2 Advantages, (1) This method is simple to understand and easy to operate., (2) It is logical method because it takes into consideration the, normal procedure of utilizing first those items of inventory which, are received or manufactured first., (3) This method is very useful when prices are falling because cost, of goods so sold will be high on account of using earliest lots, which are costly., (4) Closing stock is valued nearer the market price as it would, consist of recent purchase of units., (5) This method is useful when transactions are not too many and, prices are fairly steady., (6) This method is useful when inventory is subject to deterioration, and obsolescence., 5.5.3 Disadvantages, (1) This method increases the possible clerical errors if the price, fluctuates, considerably at every time as issue of material is, sold, the store ledger clerk will have to go through his and, ascertain the price to be changed., (2) If the prices fluctuate, comparison between different jobs, executed by the concern becomes difficult because one job, started a few minutes later than another of the same nature may, have consumed the supply of lower priced or higher priced, stock.
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71, , 5.6, , AVERAGE COST, , The principal on which the average cost method is based is, that all items on the store are so mixed up that consumption of, material or sale of finished goods are carried out at the average, cost of the various items on hand. Average may be of two types:, (a) Simple Average Method (not in syllabus), (b) Weighted Average Method, Stock taking is done which consist of following items :1,000 units purchased, @ Rs. 10 per unit, 2,000 units purchased, @ Rs. 11 per unit, 3,000 units purchased, @ Rs. 12 per unit, Weighted Average Method : This price is obtained by dividing the, total cost of items in stock by the total quantity of items in hand., Per unit weighted average cost is calculated as follows :(1.000 10) (2,000 11) (3,000 12), Rs. 11.33 , (1,000 2,000 3,000), The above rate is used to value the cost of sale of goods or cost, of consumption of goods., Weighted average method is quite superior to other methods, and it is better to follow this method. This method can be used with, advantage in those cases where price and quantity vary widely., The average rate does not change with issue but would vary with a, fresh supply of materials received when a new average will have to, be calculated. In a period of fluctuating price, this method will even, out the fluctuations. This method is goods as the weighted average, rate lies in between the extreme rates as shown by FIFO and LIFO, method. However, the difficulty is that fresh calculations are needed, at every purchase of materials or goods., Practical Problems, Problem No: 01, A firm has just completed six months operations from 1st, January, 2000, to 30th June, 2017. It is about to value its stock at, cost price. It has dealt with only one type of goods. From the, particulars given below, your are required to value closing stock at, the half year ending 30th June, 2017 under following method of, stock valuation –, (i) FIFO Method and, (ii) Weighted Average Method
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72, , Date, , Units, , 15-1-17, 16-2-17, 17-3-17, 18-4-17, 19-5-17, 10-6-17, 30-6-17, , 200, 600, 800, -, , Purchase, Sales, Amount, Amount, Rate, Units Rate, Rs., Rs., 20, 8,000, 300, 25, 7500, 22, 13,200, 400, 12,00, 25, 20,000, 400, 32, 12,800, 200, 38, 7,600, , The firm had opening stock of 200 units at Rs.19 per unit., Solution :, We have to prepare ‘Store Ledger’ showing of goods and the, closing stock as on 30th June, 2017., STORE LEDGER, FIFO METHOD, Date, Op.St., 1-117, 15-117, 16-117, 17-317, 19-417, 19-517, 10-617, 30-617, , Receipt (Purchase), Qty., Rate Amount, Unit, (Rs.), (Rs.), , Issue (Sales), Qty., Rate Amount, Unit, (Rs.), (Rs.), , Unit, , Balance, Qty., Rate Amount, (Rs.), (Rs.), , -, , -, , -, , -, , -, , -, , 200, , 19, , 3,800, , 200, , 20, , 4,000, , -, , -, , -, , 200, , 19, , 3,800, , -, , -, , -, , -, , -, , -, , 200, , 20, , 4,000, , -, , -, , -, , 200, , 19, , 3,800, , -, , -, , -, , 100, , 20, , 2,000, , 100, , 20, , 2,000, , 600, , 22, , 13,200, , -, , -, , -, , 100, , 20, , 2,000, , -, , -, , -, , -, , -, , -, , 600, , 22, , 13,200, , -, , -, , -, , 100, , 20, , 2,000, , 300, , 22, , 13,200, , -, , -, , -, , 300, , 22, , 6,600, , 800, , 25, , 20,000, , -, , -, , -, , 300, , 22, , 6,600, , -, , -, , -, , -, , -, , -, , 800, , 25, , 20,000, , -, , -, , -, , 300, , 22, , 6,600, , 700, , 25, , 17,500, , -, , -, , -, , 100, , 25, , 2,500, , -, , -, , -, , 200, , 25, , 5,000, , 500, , 25, , 12,500, , 28,500, Cost of Goods sold, Value of Closing stock
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73, , Date, 1-1-17, 15-1-17, 16-1-17, 17-3-17, 19-4-17, 19-5-17, 10-6-17, 30-6-17, , Receipt (Purchase), Qty., Rate Amount, Unit, (Rs.), (Rs.), 200 20.00, 4,000, 600 22.00 13,200, 800 25.00 20,000, -, , Issue (Sales), Balance, Qty., Qty., Rate Amount, Rate Amount, Unit, Unit, (Rs.), (Rs.), (Rs.), (Rs.), 200 19.00, 3,800, 400 19.50, 7,800, 300 19.50, 5,850, 100 19.50, 1,950, 700 21.64 15,150, 400 21.64, 8,657, 300 21.64, 6,493, 1100 24.08 26,493, 400 24.08, 9,634, 700 24.08 16,859, 200 24.08, 4,817, 500 24.08 12,042, 28,954, Cost of Goods sold, Value of Closing stock, , Notes :, (i) The rate changes every time goods are purchased. The, average rate is found out by dividing the total amount with the, total units on hand., (ii) The rate remains unaffected with the issue or sale of goods., , 5.7 RECONCILIATION AT PHYSICAL STOCK AND, STOCK AS PER STOCK REGISTER., Problems of stock taking for the purpose of final accounts:, At the end of the last day of the accounting year, stocks in, hand are verified and valued for the purpose of recording in the, final accounts. But in case of big organisations, it may not be, possible to verify the stock exactly on the last date of the, accounting period owing to certain difficulties. In such a case, stock, is taken under either few days earlier or later, according to the, situation or convenience and assuring least disturbance in the, normal flow of work. Therefore, stock taken under circumstances, shall always be subject to some adjustments where stock taking is, completed few days before the closing date should be adjusted with, the value of stock taking so as to arrive at the value of stock on the, ending date of accounting year, Similarly, if stock taking takes place, on the date after the closing date, the whole of the transactions of, goods from the closing date (*i.e. stock taking date) are to be, adjusted with the value of stock on the date of stock taking so as to, arrive at the value of stock on the closing date of accounting year.
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74, (A) When stock taking takes place on any date after the year, end dates, If the stock is taken on a later date, the following, adjustments are required to arrive at the stock as on the closing, date., Statement showing value of stock as to the end of the, accounting year., Rs., The value of stock on the later date …., , X, , Add : Sales at cost between two dates, i.e. date of closing and Date of stock taking (Actual goods, between), , X, , Add : Purchase returns during the said period, , X, , Less : Purchase between two dates i.e. date of closing and, date of stock taking (Actual – goods received between, the Two dates), , X, , Less : Sales return (At cost price) between the above two, dates, , X, , Add : Any under costing in stock sheet, , X, , Less : Any over costing in stock sheet, , X, , Less: Any goods held on consignment basis (as Agent), , X, , Less : Any goods included in stock but title of such has been, transferred to the buyer, , X, , Less : Goods purchased between the two dates but already, received before the closing date (such represents, purchases of next accounting year) (normally it, happens when goods are received first & invoice is, received later on), , X, , Add : Goods sold between the two dates but already, delivered before Closing date (Such goods represents, sales of next accounting Year) (Normally it happens, when goods are delivered to Customer first & invoice, is prepared on later date), , X
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75, , Add : Any goods sent to consignee between the two dates, (Whether They sold by consignee or not), , X, , Value of physical stock as on the date of closing, , X, , Add : Any goods purchased before closing date hence, included in Purchase of the last accounting year but, not received until the Date of stock-taking, , Add:, , Any goods sent to customer before closing date on, approval basis but lying with them as an approved as, on the date closing (Such goods must be taken at cost, price) Value of stock-in-trade as on the date of closing, for inclusion In final accounts., , X, X, , B) If, , stock are taken on an earlier date, If stock is taken on a date before the closing date, accounting year, the necessary adjustments should be made, respect of transactions of goods taken place between the date, stock-taking and closing date so as to obtain the correct value, stock as on the closing date., Statement showing value of stock as on the ending date, accounting year., Rs., The value of stock on the later date, , X, , Add : Purchase between the two dates i.e. from the date, of stock taking to the date of closing (Goods, actually received up to the date of closing, , X, , Add: Sales returns (at cost price) between the two dates, , X, , Less: Sales (at cots) between the two dates (goods, actually delivered), , X, , Less: Purchase returns between the two dates, , X, , Less: Goods sent on approved basis (at cost price), between the two dates, , X, , Less: Goods sent to consignee (at cost price) (whether, sold or not) between the two dates, , X, , of, in, of, of, of
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76, Less: Goods received from consignor and held on their, behalf, , X, , Add: Any under costing in stock sheet, , X, , Less: Any over costing in stock sheet, , X, , Value of physical stock on the date of closing, , X, , Add: Goods purchased before the closing date but not, received upto the end of the accounting year, (Goods-in-transit), , X, , Add: Cost of goods sent on approval basis but not, approved before the closing date still lying with the, customers as on the date of the closing., , X, , Add: Unsold goods in the hands of the consignee as on, the date of closing. Value of stock-in-trade as on, the date of closing for inclusion in final accounts, , X, , 5.8, , EXERCISE, , 1. Select the correct alternative:, 1. If Cost of goods sold is Rs.80,700, Opening stock Rs.5,800 and, Closing stock Rs.6,000. Then the amount of purchase will be, (a)Rs.80,500, (b)Rs.74,900, (c)Rs.74,700, (d)Rs.80,900., 2. If sales are Rs. 2,000 and the rate of gross profit on cost of, goods sold is 25%, then the Cost of goods sold will be, (a)Rs. 2,000., (b)Rs. 1,500., (c)Rs. 1,600., (d)None of the above., 3. The total cost of goods available for sale with a company during, the current year is Rs.12,00,000 and the total sales during the, period are Rs.13,00,000. If the gross profit margin of the, company is 331/3% on cost, the closing inventory during the, current year is, (a)Rs.4,00,000, (b)Rs.3,00,000, (c)Rs.2,25,000, (d)Rs.2,60,000.
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77, 4. C Ltd. recorded the following information as on March 31, 2005:, Rs., Stock as on April 01, 2016, 80,000, Purchases, 1, 60,000, Sales, 2, 00,000, It is noticed that goods worth Rs.30, 000 were destroyed due, to fire. Against this, the Insurance company accepted a claim of, Rs.20,000.The Company sells goods at cost plus 33 %. The value, of closing inventory, after taking into account the above, transactions is,, (a)Rs.10,000, (b)Rs.30,000, (c)Rs.1,00,000, (d)Rs.60,000, 5. Consider the following for Alpha Co. for the year 2017-18:, Cost of goods available for sale Rs.1, 00,000, Total sales Rs. 80,000, Opening stock of goods Rs. 20,000, Gross profit margin 25%, Closing stock of goods for the year 2017-18 was, (a)Rs.80,000, (b)Rs.60,000, (c)Rs.40,000, (d)Rs.36, 000., 6. Cost of physical stock on 15.4.16 was Rs.3,00,000. Sales, amounting Rs.1,00,000 and purchases worth Rs.50,000 were, held between 31.3.16 and 15.4.16. Goods are sold at a profit of, 20% on sales. Value of inventory as on 31.3.16 is, (a)Rs.3,50,000., (b)Rs.2,70,000., (c)Rs.3,30,000., (d)Rs.3,00,000., 7. Record of purchase of T.V. sets., Date, , Quantity, Price per unit, Units, Rs., March 4, 900, 5, March 10 400, 5.50, Record of issues, March 5, 600 Units, March 12, 400 Units, The value of T.V. sets on 15 March, as per FIFO will be, (a)Rs.1,500, (b)Rs.1,650, (c)Rs.1,575., (d)None of the three.
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78, 8. Goods costing Rs.4,80,000 were sent on consignment basis., Goods are invoiced at 125% of the cost price. The invoice price, and the loading will be:, (a)Rs.6,00,000 and Rs.1,00,000., (b)Rs.5,00,000 and Rs.1,00,000., (c)Rs.6,00,000 and Rs.1,20,000., (d)Rs.5,00,000 and Rs.1,20,000., 9. A firm dealing in cloth has 15000 meters of cloth on April 1,, 2015 valued at Rs.1,50,000 according to FIFO. The firm, purchased 20,000 meters @ Rs.12 per meter during the year, ending 31st March, 2016 and sold 30,000 meters @ Rs.25 per, meter during the same period. As per FIFO, the closing stock, will be valued at:, (a)Rs.60,000, (b)Rs.1,25,000, (c)Rs.50,000, (d)None of the above., 10. A minimum quantity of stock always held as precaution against, out of stock situation is called _________, (a)Zero stock., (b)Risk stock., (c)Base stock., (d)None of the above., 11. A trader has credited certain items of sales on approval, aggregating Rs.60,000 to Sales Account. Of these, goods of the, value of Rs.16,000 have been returned and taken into stock at, cost Rs.8,000 though the record of return was omitted in the, accounts. In respect of another parcel of Rs.12,000 (cost being, Rs.6,000) the period of approval did not expire on the closing, date. Cost of goods lying with customers should be, (a)Rs. 12,000., (b)Rs. 54,000., (c)Rs. 6,000., (d)None of the above., 12. If cost of physical stock on 31.3.2018 is Rs.2,80,000 and out of, which stock of Rs.1,20,000 is held as consignee. Goods costing, Rs. 25,000 were damaged beyond repair and were expected to, realize at Rs.5,000 only. The value of own stock on 31.3.2018, will be, (a)Rs.2,60,000, (b)Rs.1,60,000, (c)Rs.1,35,000, (d)Rs.1,40,000
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79, 13. Bank overdraft as per trial balance is Rs.1,60,000. Bank has, allowed the customer to overdraw 80% of the hypothecated, value of the stock. Hypothecation of stock has been done by the, bank at 80% of the original closing stock value. The amount of, closing stock is, (a)Rs. 2,00,000., (b)Rs. 2,50,000., (c)Rs. 1,02,400., (d)Rs. 1,28,000., 14. Mr. Prakash sells goods at 20% above cost. His sales were, Rs.10,20,000 during the year. However, he sold damaged, goods for Rs.20,000 costing Rs.30,000. This sale is included in, Rs.10, 20,000. The amount of gross profit is:, (a)Rs. 1,90,000, (b)Rs.2,50,000, (c)Rs.2,40,000, (d)Rs.2, 00,000., 15. Opening stock of raw material of a manufacturing concern is, Rs.10,000, Purchase during the year is Rs.2,00,000, Wages, Rs.50,000,, Carriage, Rs.5,000,, Factory, overheads, Rs.1,25,000 and closing stock of raw material is Rs. 15,000., The amount to be transferred is, (a)Rs. 3,75,000 to cost of goods manufactured account., (b)Rs.3,75,000 to cost of goods sold account., (c)Rs. 3,75,000 to cost of sales account., (d)Rs. 3,75,000 to cost to company account., 16. Goods costing Rs. 600 is supplied to Ram at the invoice of 10%, above cost and a trade discount for 5%. The amount of sales, will be, (a)Rs. 627., (b)Rs. 660., (c)Rs. 570., (d)Rs. 620., 17. Goods purchased Rs.1,00,000. Sales Rs. 90,000. Margin 20%, on sales. Closing stock is, (a)Rs. 10,000., (b)Rs. 25,000., (c)Rs. 28,000., (d)None of the above., Answers: 1- d, 2- c, 3-c, 4-d, 5-b, 6-c, 7-b, 8-c, 9-b, 10-c, 11-c, 12-d,, 13-b, 14-a, 15-a, 16-a, 17-c, ,
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80, , Unit-6, INVENTORY VALUATION II, ILLUSTRATION & EXERCISE, Unit Structure :, 6.0, 6.1, 6.2, , Objectives, Solved Problems, Exercises, , 6.0, , OBJECTIVES, , After studying the unit, students will be able to solve the practical, problems on inventory valuation., , 6.1 SOLVED PROBLEMS, Illustration No. 1, From the following particulars prepare Stores Ledger for the month, of March 2018, (a) FIFO to “ABC”,, (b) Weighted average to “XYZ”., ABC, XYZ, Stocks (Kgs) on1-3-2018, , 2,000 @ Rs. 28, , 4,000 @ Rs. 13, , [i] On 11-3-2018, , 1,800 @ Rs. 27, , 2,500 @ Rs. 14, , [ii] On 21-3-2018, , 1,700 @ Rs. 25, , 2,000 @ Rs. 18, , [i] On 6-3-2018, , 1,300, , 2,500, , [ii] On 15-3-2018, , 1,400, , 2,000, , [iii] On 18-3-2018, , 700, , 1,300, , [iv] On 29-3-2018, , 1,100, , 1,700, , Purchases (Kgs), , Sales (Kgs), , (IDE, Nov. 1999, adapted)
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81, Solution :, (A) FIFO to “ABC”, STOCK LEDGER OF ABC, Date, , Receipts, Price, Amt., , Units, , Issues, Price, , Units, , Amt., , Units, , Balance, Price, , value, , 01-3-2008, , Opening, , -, , -, , -, , -, , -, , 2,000, , 28.00, , 56,000, , 06-3-2008, , -, , -, , -, , 1,300, , 28.00, , 36,400, , 700, , 28.00, , 19,600, , 700, , 28.00, , 19,600, , 11-3-2008, , 1,800, , 27.00, , 48,600, , -, , -, , 1,800, , 27.00, , 48,600, , 1,100, , 27.00, , 29,700, , 400, , 27.00, , 10,800, , 400, , 27.00, , 10,800, , 1,700, , 25.00, , 42,500, , 1,000, , 25.00, , 25,000, , 15-3-2008, , -, , 18-3-2008, , 21-3-2008, , -, , 700, , 28.00, , 19,600, , 700, , 27.00, , 18,900, , -, , -, , -, , -, , 700, , 27.00, , 18,900, , 1,700, , 25.00, , 42,500, , -, , -, , -, , 29-3-2008, , -, , -, , 400, , 27.00, , 10,800, , 700, , 25.00, , 17,500, , -, , Therefore, the value of stock of ABC as on 31-3-2004 :, 1,000 units @ Rs. 25.00 = Rs. 25,000, (B) Weighted Average (Under Perpetual System of Inventory), STOCK LEDGER OF XYZ, Date, , Receipts, Units, , Price, , Amt., , Issues, Wt. Avg., Rate, , Units, , Amt., , Units, , Balance, Wt. Avg., Rate, , Value, , 01-3-2008, , Opening, , -, , -, , -, , -, , -, , 4,000, , 13.00, , 52,000, , 06-3-2008, , -, , -, , -, , 2,500, , 13.00, , 32,500, , 1,500, , 13.00, , 19,500, , 11-3-2008, , 2,500, , 14, , 35,000, , -, , -, , -, , 4,000, , 13.63, , 54,500, , 15-3-2008, , -, , -, , -, , 2,000, , 13.63, , 27,250, , 2,000, , 13.63, , 27,250, , 18-3-2008, , -, , -, , -, , 1,300, , 13.63, , 17,712, , 700, , 13.63, , 9,538, , 21-3-2008, , 2,000, , 18, , 36,000, , -, , -, , -, , 2,700, , 16.87, , 45,538, , 29-3-2008, , -, , -, , -, , 1,700, , 16.87, , 28,672, , 1,000, , 16,866
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82, Working Notes :, 1] Issued of XYZ on March 15 is valued at Rs. 13.63 which is the, weighted average rate, arrived at as follows :, 19,500 35,000 54,500, , 13.625r / o13.63, 1,500 2,500, 4,000, 2] Issue of XYZ on March 29 is valued at Rs. 16.87 per kg. which, is the weighted average rate arrived at as follows :, 9,538 36,000 45,538, , 16.865r / o16.87, 700 2,000, 2,700, Therefore, the value of stock as on 31-3-2008 : 1,000 units @, Rs. 16.87 = Rs. 16,867, Illustration : 2, From the following information relating A to Z item, value closing, stock on 31-12-2008 applying – (a) FIFO, (b) Weighted Average, Stocks (Kgs) on 1-12-2008, , 5,000 units @ Rs. 14, , Purchases (Kgs), [i] On 18-12-2008, , 4,200 units @ Rs. 13, , [ii] On 23-12-2008, , 3,800 units @ Rs. 9, , Sales (Kgs), [i] On 7-12-2008, , 1,200 units, , [ii] On 16-12-2008, , 2,600 units, , [iii] On 19-12-208, , 1,800 units, , [iv] On 30-12-2008, , 3,400 units, (IDE, April 1999, adapted)
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83, Solution :, (A) FIFO, STOCK LEDGER, Date, , Receipts, Units, , Issues, , Price, , Amt., , Units, , Price, , Balance, Amt., , Units, , Price, , value, , 01-12-2008, , Opening, , -, , -, , -, , -, , -, , 5,000, , 14.00, , 70,000, , 07-12-2008, , -, , -, , -, , 1,200, , 14.00, , 16,800, , 3,800, , 14.00, , 53,200, , 16-12-2008, , -, , -, , -, , 2,600, , 14.00, , 36,400, , 1,200, , 14.00, , 16,800, , 1,200, , 14.00, , 16,800, , 18-12-2008, , 4,200, , 13.00, , 54,600, , -, , -, , 4,200, , 13.00, , 54,600, , 3,600, , 13.00, , 46,800, , 3,600, , 13.00, , 46,800, , 3,800, , 9.00, , 34,200, , 200, 3,800, , 13.00, 9.00, , 2,600, 34,200, , 19-12-2008, , -, , 23-12-2008, , -, , 3,800, , 30-12-2008, , 9.00, , -, , 1,200, , 14.00, , 16,800, , 600, , 13.00, , 7,800, , -, , -, , -, , -, , 34,200, , -, , -, , 3,400, , 13.00, , 44,200, , Therefore, the value of stock as on 31-12-2008 : 4,000 units @, Rs. 36,800, B] Weighted Average (Perpetual Inventory system), STOCK LEDGER, Date, Units, , Receipts, , Issues, , Balance, , Price, , Wt. Avg., Rate, , Wt. Avg., Rate, , Amt., , Units, , Amt., , Units, , Value, , 01-12-2008, , Opening, , -, , -, , -, , -, , -, , 5,000, , 14.00, , 70,000, , 07-12-2008, , -, , -, , -, , 1,200, , 14.00, , 16,800, , 3,800, , 14.00, , 53,200, , 16-12-2008, , -, , -, , -, , 2,600, , 14.00, , 36,400, , 1,200, , 14.00, , 16,800, , 18-12-2008, , 4,200, , 13.00, , 54,600, , -, , -, , -, , 5,400, , 13.22, , 71,400, , 19-12-2008, , -, , -, , -, , 1,800, , 13.22, , 23,800, , 3,600, , 13.22, , 47,600, , 23-12-2008, , 3,800, , 9.00, , 34,200, , -, , -, , -, , 7,400, , 11.05, , 81,800, , 30-12-2008, , -, , -, , -, , 3,400, , 11.05, , 37,584, , 4,000, , 44,216
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84, Working Notes :, [1] Issue on December 19 is valued at Rs. 13.22 which is the, weighted average rate, arrived at as follows :, 16,800 54,600 71,400, , 13.222r / o13.22, 1,200 4,200, 5,400, [2] Issue on December 30 is valued at Rs. 11.05 per kg. which is, the weighted average rate arrived at as follows :, 47,604 34,200 81,804, , 11.054r / o11.05, 3,600 3,800, 7,400, Therefore, the value of stock as on 31-12-2003 : 4,000 units @, Rs.11.05 = Rs. 44,216, Illustration : 3, The following particulars have been extracted in respect of, Material X. Prepare a Stores Ledger Account showing the receipts, and issues, pricing the materials issued on the basis of, (a) Weighted Average and, (b) First In First Out., [i] 01-10-2017 Opening Stock, , 200 units at Rs. 3.50 per unit, , [ii] 03-10-2017 Purchased, , 300 units at Rs. 4.00 per unit, , [iii] 13-10-2017 Purchased, , 900 units at Rs. 4.30 per unit, , [iv] 23-10-2017 Purchased, , 600 units at Rs. 3.80 per unit, , Issues :, [i] 05-10-2017 Issued, , 400 units, , [ii] 15-10-2017 Issued, , 600 units, , [iii] 25-10-2017 Issued, , 600 units
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85, Solution:, (A) FIFO, STOCK LEDGER OF ‘X’, Date, , Receipts, Units, , Issues, , Price, , Amt., , Units, , Price, , Balance, Amt., , 01-10-2017, , Opening, , -, , -, , -, , -, , -, , 03-10-2017, , 300, , 4.00, , 1,200, , -, , -, , -, , 05-10-2017, , -, , -, , -, , 200, 200, , 3.50, 4.00, , 700, 800, , 13-10-2017, , 900, , 4.30, , 3,870, , -, , -, , -, , 15-10-2017, , 23-10-2017, , 25-10-2017, , -, , -, , 600, , 4.00, , 400, , 500, , 4.30, , 2,150, , -, , -, , -, , Price, , value, , 200, , 3.50, , 700, , 200, , 3.50, , 700, , 300, , 4.00, , 1,200, , 100, , 4.00, , 400, , 100, , 4.00, , 400, , 900, , 4.30, , 3,870, , 400, , 4.30, , 1,720, , 400, , 4.30, , 1,720, , 600, , 3.80, , 2,280, , 400, , 3.80, , 1,520, , -, , 3.80, , -, , 100, , Units, , 2,280, , -, , 400, , 4.30, , 1,720, , 200, , 3.80, , 760, , -, , Therefore, the value of stock as on 31-10-2017 : 400 units @, Rs. 3.80 = Rs. 1,520, (B) Weighted Average (Perpetual Inventory System), STOCK LEDGER OF ‘X’, Date, , Receipts, Units, , Issues, , Price, , Amt., , Units, , Wt., Avg., Rate, , Balance, Amt., , Units, , Wt., Avg., Rate, , Value, , 01-10-2017, , Opening, , -, , -, , -, , -, , -, , 200, , 3.50, , 700, , 03-10-2017, , 300, , 4.00, , 1,200, , -, , -, , -, , 500, , 3.80, , 1,900, , 05-10-2017, , -, , -, , -, , 400, , 3.80, , 1,520, , 100, , 3.80, , 380, , 13-10-2017, , 900, , 4.30, , 3,870, , -, , -, , -, , 1,000, , 4.25, , 4,250, , 15-10-2017, , -, , -, , -, , 600, , 4.25, , 2,550, , 400, , 4.25, , 1,700, , 23-10-2017, , 600, , 3.80, , 2,280, , -, , -, , -, , 1,000, , 3.98, , 3,980, , 25-10-2017, , -, , -, , -, , 600, , 3.98, , 2,388, , 400, , 3.98, , 1,592
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86, Working Notes:, [1] Issue on October 5 is valued at Rs. 3.80 which is the weighted, average rate, arrived at as follows :, 700 1,200 1,900, , 3.80, 200 300, 500, [2] Issue on October 15 is valued at Rs. 4.25 which is the weighted, average rate, arrived at as follows :, 380 3,870 4,250, , 4.25, 100 900 1,000, [3] Issue on October 25 is valued at Rs. 3.98 which is the weighted, average rate, arrived at as follows :, 1,700 2,280 3,980, , 3.98, 400 600, 1,000, Illustration 4, From the following particulars, prepare stock record by FIFO and, Weighted Average Method., , Date, , Transaction, , Units, , Rate Rs., , 04-1-2018, , Purchase, , 40, , 30, , 17-1-2018, , Purchase, , 60, , 28, , 20-1-2018, , Sale, , 50, , 35, , 22-1-2018, , Purchase, , 80, , 29, , 25-1-2018, , Sale, , 80, , 33, , 28-1-2018, , Sale, , 20, , 34, , 30-1-2018, , Purchase, , 100, , 26, , 31-1-2018, , Sale, , 90, , 35, , Stock on hand on 1st January 2018 was 50 units @ Rs.25 each.
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87, Solution :, (A) FIFO, STOCK LEDGER X’, Date, , Receipts, Units, , Price, , Issues, Amt., , Balance, , Units, , Price, , Amt., , Units, , Price, , 50, , 25.00, , 1,250, , 50, , 25.00, 30.00, , 1,250, 1,200, , 25.00, 30.00, 28.00, , 1,250, 1,200, 1,680, , 30.00, 28.00, , 1,200, 1,680, , 30.00, 28.00, 29.00, , 1,200, 1,680, 2,320, , 01-1-2018, , Opening, , -, , -, , -, , -, , -, , 04-1-2018, , 40, , 30.00, , 1,200, , -, , -, , -, , 40, 50, , 17-1-2018, , 60, , 28.00, , 1,680, , -, , -, , -, , 40, 60, , 20-1-2018, , -, , -, , -, , 50, , 25.00, , 1,250, , 22-1-2018, , 80, , 29.00, , 2,320, , -, , -, , -, , 40, 60, 40, 60, 80, , 40, 25-1-2018, , -, , -, , 40, , 30.00, , 1,200, , 28.00, , 1,120, , 28-1-2018, , -, , -, , -, , 20, , 28.00, , 560, , 30-1-2018, , 100, , 26.00, , 2,600, , -, , -, , -, , 31-1-2018, , -, , -, , -, , 80, , 29.00, 26.00, , 2,320, 260, , 10, , 20, , value, , 28.00, , 560, , 29.00, , 2,320, , 80, , 29.00, , 2,320, , 80, 100, , 29.00, 26.00, , 2,320, 2,600, , 90, , 26.00, , 2,340, , 80, , Therefore, the value of stock as on 31-01-2008 : 90 units @ Rs., 26 = Rs. 2,340., [B] Weighted Average (Perpetual Inventory System), STOCK LEDGER, Date, , Receipts, Units, , Price, , Issues, Amt., , Units, , Wt. Avg., Rate, , Balance, Amt., , Units, , Wt. Avg., Rate, , Value, , 01-1-2018, , Opening, , -, , -, , -, , -, , -, , 50, , 25.00, , 1,250, , 04-1-2018, , 40, , 30.00, , 1,200, , -, , -, , -, , 90, , 27.22, , 2,450, , 17-1-2018, , 60, , 28.00, , 1,680, , -, , -, , -, , 150, , 27.53, , 4,130, , 20-1-2018, , -, , -, , -, , 50, , 27.53, , 1,377, , 100, , 27.53, , 2,753, , 22-1-2018, , 80, , 29.00, , 2,320, , -, , -, , -, , 180, , 28.18, , 5,073, , 25-1-2018, , -, , -, , -, , 80, , 28.18, , 2,254, , 100, , 28.18, , 2,819, , 28-1-2018, , -, , -, , -, , 20, , 28.18, , 564, , 80, , 28.18, , 2,255, , 30-1-2018, , 100, , 26.00, , 2,600, , -, , -, , -, , 180, , 26.97, , 4,855, , 31-1-2018, , -, , -, , -, , 90, , 26.97, , 2,427, , 90, , 26.97, , 2,428
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88, Working Notes :, [1] Issue on January 20 is valued at Rs. 27.53 which is the, weighted average rate, arrived at as follows :, 1,250 1,200 1,680 4,130, , 27.533r / o 27.53, 50 40 60, 150, [2] Issue on January 25 is valued at Rs. 28.18 per kg. which is the, weighted average rate arrived at as follows:, 2,753 2,320 5,073, , 28.183r / o 28.19, 100 80, 180, [3] Issue on January 31 is valued at Rs. 26.97 per kg. which is the, weighted average rate arrived at as follows:, 2,255 2,600 4,855, , 26.971r / o 26.97, 80 100, 180, Therefore, the value of stock as on 31-1-2004 : 90 units @ Rs., 26.97 = Rs. 2,428., [4] Note: The Stock Book entries for both purchases / receipts and, sales / issued are always made at cost. The selling price, even if, given, is to be ignored., Illustration: 5, Sumit Ltd. has purchased and issued the materials in the following, order:, Month, , Date, , Particulars, , Units, , Cost Per Unit Rs., , August, 2017, , 01, 04, 06, 10, 15, , Purchases, Purchases, Issues, Purchases, Issues, , 300, 600, 500, 700, 800, , 3, 4, 4, -, , 20, 23, , Purchases, Issues, , 300, 100, , 5, -, , Ascertain the quantity of closing stock as on 31st August, 2017, and what will be the value under the following methods., [i] First in first out method., [ii] Weighted Average method., (IDE, Nov. 2000, adapted)
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89, Solution :, (A) FIFO, STOCK LEDGER, Date, , Receipts, Units, , Issues, , Balance, , Price, , Amt., , Units, , Price, , Amt., , Units, , Price, , value, , 1-8-2017, , Opening, , -, , -, , -, , -, , -, , Nil, , Nil, , Nil, , 1-8-2017, , 300, , 3.00, , 900, , -, , -, , -, , 300, , 3.00, , 900, , 4-8-2017, , 600, , 4.00, , 2,400, , -, , -, , -, , 300, 600, , 3.00, 4.00, , 900, 2,400, , 6-8-2017, , -, , -, , -, , 300, 200, , 3.00, 4.00, , 900, 800, , 400, , 4.00, , 1,600, , 10-8-2017, , 700, , 4.00, , 2,800, , -, , -, , -, , 400, 700, , 4.00, 4.00, , 1,600, 2,800, , 15-8-2017, , -, , -, , -, , 400, 400, , 4.00, 4.00, , 1,600, 1,600, , 300, , 4.00, , 1,200, , 20-8-2017, , 300, , 5.00, , 1,500, , -, , -, , -, , 300, 300, , 4.00, 5.00, , 1,200, 1,500, , 23-8-2017, , -, , -, , -, , 100, , 4.00, , 400, , 200, 300, , 4.00, 5.00, , 800, 1,500, , Therefore, the value of stock as on 31-8-2003 : Rs. 2,300, [B] Weighted Average (Perpetual Inventory System), STOCK LEDGER, Date, , Receipts, Units, , Price, , Issues, Amt., , Units, , Wt. Avg., Rate, , Balance, Amt., , Units, , Wt. Avg., Rate, , Value, , 01-8-2017, , Opening, , -, , -, , -, , -, , -, , Nil, , Nil, , Nil, , 01-8-2017, , 300, , 3.00, , 900, , -, , -, , -, , 300, , 3.00, , 900, , 04-8-2017, , 600, , 4.00, , 2,400, , -, , -, , -, , 900, , 3.67, , 3,300, , 06-8-2017, , -, , -, , -, , 500, , 3.67, , 1,834, , 400, , 3.67, , 1,466, , 10-8-2017, , 700, , 4.00, , 2,800, , -, , -, , -, , 1,100, , 3.88, , 4,266, , 15-8-2017, , -, , -, , -, , 800, , 3.88, , 3,103, , 300, , 3.88, , 1,163, , 20-8-2017, , 300, , 5.00, , 1,500, , -, , -, , -, , 600, , 4.44, , 2,663, , 23-8-2017, , -, , -, , -, , 100, , 4.44, , 444, , 500, , 4.44, , 2,219
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90, Working Notes :, [1] Issue on August 6 is valued at Rs. 3.67 which is the weighted, average rate, arrived at as follows :, 900 2,400 3,300, , 3.666r / o3.67, 300 600, 900, [2] Issue on August 15 is valued at Rs. 3.88 per kg. which is the, weighted average rate arrived at as follows :, 1,465 2,800 4,265, , 3.877r / o 3.88, 400 700, 1,100, [3] Issue on August 23 is valued at Rs. 4.44 per kg. which is the, weighted average rate arrived at as follows:, 1,161 1,500 2,661, , 4.435r / o 4.44, 300 300, 600, Therefore, the value of stock as on 31-8-2002 : 500 units @ Rs., 4.44 = Rs. 2,219., Illustration :6, Following are the purchases and sales of wheat in the, months of March, 2018. Prepare a statement showing valuation of, stock on the basis of Weighted Average method., , Date, , Purchases, , Rate, , Sales, , 2018, , (Kg.), , (Rs.), , (Kg.), , March 1, , 600, , 4, , -, , 4, , -, , -, , 300, , 5, , 300, , 3.80, , -, , 10, , -, , -, , 200, , 18, , 200, , 4.20, , -, , 23, , -, , -, , 400, , 29, , 400, , 4.40, , -, , 31, , -, , -, , 300, , Out of purchases on March 5, 50 Kgs were returned to the, supplier on March 8.Out of Sales on March 23, a customer returned, 20 Kgs. on March 26.
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91, B] Weighted Average (Perpetual Inventory System), STOCK LEDGER, Date, , Receipts, Units, , Price, , Amt., , Units, , 01-3-2018, , 600, , 4.00, , 2,400, , -, , 04-3-2018, , -, , -, , -, , 05-3-2018, , 300, , 3.80, , 05-3-2018, , -, , 10-3-2018, , Issues, Wt. Avg., Rate, , Balance, Wt. Avg., Rate, , Amt., , Units, , -, , -, , 600, , 4.00, , 2,400, , 300, , 4.00, , 1,200, , 300, , 4.00, , 1,200, , 1,140, , -, , -, , -, , 600, , 3.90, , 2,340, , -, , -, , 50, , 3.90, , 195, , 550, , 3.90, , 2,145, , -, , -, , -, , 200, , 3.90, , 780, , 350, , 3.90, , 1,365, , 18-3-2018, , 200, , 4.20, , 840, , -, , -, , -, , 550, , 4.01, , 2,205, , 23-3-2018, , -, , -, , -, , 400, , 4.01, , 1,604, , 150, , 4.01, , 601, , 26-3-2018, , 20, , 4.01, , 80, , -, , -, , -, , 170, , 4.01, , 681, , 29-3-2018, , 400, , 4.40, , 1,760, , -, , -, , -, , 570, , 31-3-2018, , -, , -, , -, , 300, , 4.28, , 1,285, , 270, , 4.28, , Working Notes :, [1] Issue on March 5 & March 10 is valued at Rs. 3.90 which is the, weighted average rate, arrived at as follows :, 1,200 1,140 2,340, , 3.90, 300 300, 600, [2] Purchase returns of 50 kg. are out of the total stock of 600 kg., which was valued at Rs. 3.90 per kg., [3] Issue on March 23 is valued at Rs. 4.01 per kg. which is the, weighted average rate arrived at as follows :, 1,365 840 2,205, , 4.01, 350 200, 550, [4] Sales on March 23 are out of stock valued at Rs. 4.01 per kg., Hence returns of 20 kg. are also taken at a rate of Rs. 4.01 per kg., [5] Weighted Average Rate on March 31 is arrived at as follows :, 681 1,760 2,441, , 4.28, 170 400, 570, , 4.28, , Value, , 2,441, 1,156
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92, Therefore, the value of stock as on 31-3-2008 : 270 units @ Rs., 4.28 = Rs. 1,156, Illustration : 7, A company deals in 3 products viz. A, B and C. The details for, purchases and sales for January 2018 are as under., Product, , A, Units, , Selling Price per, Unit, Opening Stock, Purchases :, Jan 9, Jan 20, Jan 29, Closing Stock, , B, Rs., , C, , Units, , 100, , Rs., , Units, , 200, , Rs., 250, , 100, , 60, , 100, , 100, , 50, , 120, , 300, 100, 50, 140, , 65, 64, 68, , 200, 50, 50, 70, , 110, 120, 125, , 50, 100, 20, 60, , 135, 140, 130, , You are required to prepare a trading and profit and loss account, for the month assuming the selling and distribution expenses to be, Rs. 63,000. Use FIFO method for stock valuation., Solution, Stock Ledger (FIFO Method), Product – A, Date, 01-1-2018, 09-1-2018, , Purchases, Qty. Rs., 300 × 65, , Sales, Qty., -, , 20-1-2018, , 100 × 64, , -, , 29-1-2018, , 50 × 68, , -, , Total Sales, During, January, , 100 ×60, 300 ×65, 10 × 64, 410, , Closing Stock, Qty. × Rs. =, Amount, 100 × 60 =, 6,000, 100 × 60 =, 6,000, 300 × 65 =, 19,500, 25,500, 100 × 60 =, 6,000, 300 × 65 =, 19,500, 100 × 64 =, 6,400, 31,900, 100 × 60 =, 6,000, 300 × 65 =, 19,500, 100 × 64 =, 6,400, 50 × 68 =, 3,400, 35,300, 90 × 64 =, 5,760, 50 × 68 =, 3,400, 9,160
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93, Product – B, , Date, , Purchases, Qty., , Rs., , Sales, , Closing Stock, , Qty., , Qty. × Rs. =, , Amount, , 01-1-2018, , -, , -, , 100 × 100=, , 10,000, , 09-1-2018, , 200 × 110, , -, , 100 × 100=, , 10,000, , 200 × 110=, , 22,000, 32,000, , 20-1-2018, , 50 × 120, , 100 × 100=, , 10,000, , 200 × 110=, , 22,000, , 50 × 120 =, , 6,000, 38,000, , 29-1-2018, , 50 × 125, , 100 × 100=, , 10,000, , 200 × 110=, , 22,000, , 50 × 120 =, , 6,000, , 50 × 125 =, , 6,250, 44,250, , Total Sales, , 100× 100, , During, , 200 × 110, , January, , 30 × 120, 330, , 20 × 120 =, , 2,400, , 50 × 125 =, , 6,250, 8,650
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94, Product C, Date, , Purchases, Qty., , Sales, , Rs., , 01-1-2018, , -, , 02-1-2018, , 50 × 135, , Closing Stock, , Qty., , Qty. × Rs. =, , Amount, , -, , 50 × 120 =, , 6,000, , 50 × 120 =, , 6,000, , 50 × 135 =, , 6,750, 12,750, , 20-1-2018, , 100 × 140, , -, , 50 × 120 =, , 6,000, , 50 × 135 =, , 6,750, , 100 × 140=, , 14,000, 26,750, , 29-1-2018, , 20 × 130, , -, , 50 × 120 =, , 6,000, , 50 × 135 =, , 6,750, , 100 × 140=, , 14,000, , 20 × 130 =, , 2,600, 29,350, , Total Sales, , 50 × 120, , 40 × 140 =, , 5,600, , During, , 50 × 135, , 20 × 130 =, , 2,600, , January, , 60 × 140, , 8,200, , 160, Note : 1, Number of units sold during January :, Product, , A, , B, , C, , Opening Stock, , 100, , 100, , 50, , Add : Total Purchase, , 450, , 300, , 170, , 550, , 400, , 220, , Less : Closing Stock, , 140, , 70, , 60, , Units Sold, , 410, , 330, , 160
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95, Dr., , Trading Account, Particulars, , Rs., , Cr., Particulars, , Rs., , To Opening Stock, , By sales, , A 100 × 60 =6,000, , A 410 × 100 = 41,000, , B 100 × 100 = 10,000, , B 330 × 200 = 66,000, , C 50 × 120 =, , 6,000, , 22,000, , C 160 × 250 = 40,000, , To Purchases, , By Closing Stock, , A, , 29,300, , A, , 9,160, , B, , 34,250, , B, , 8,650, , C, , 23,350, , C, , 8,200, , 86,900, , To Gross Profit c/d, , 26,010, , 64,110, 1,73,010, , Dr., , 1,47,000, , 1,73,010, , Profit & Loss Account, , Cr., , Particulars, , Rs., , Particulars, , Rs., , To Selling & Distribution, Expenses, , 63,000, , By Gross Profit b/d, , 64,110, , To Net Profit, , 1,110, 64,110, , 64,110, , 6.2 EXERCISES, Problem 1, From the following particulars, value the closing stock, separately under : (A) FIFO; (B) Weighted Average, 1st April, 2018, , Opening Stock, , 800 @ Rs. 4, , 4th April, 2018, , Sales, , 200, , 8th April, 2018, , Purchase, , 1,000 @ Rs. 5, , 10th April, 2018, , Sales, , 500, , 12th April, 2018, , Sales, , 200, , 15th April, 2018, , Purchase, , 700 @ Rs.5.50, , 18th April, 2018, , Sales, , 500, , 20th April, 2018, , Purchase, , 1,200 @ Rs.6.00, , 28th April, 2018, , Sales, , 1000
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96, The market value of 30th April, 2018 is Rs. 5.75., Problem 2, The following is an extract of the record of receipt and issue of, certain chemicals in a chemical factory during the month of March,, 2018., Date, , Particulars, , Units, , Rate, , 2018, Opening balance, March 1, , 500 Tonnes, , @ Rs.200, , “3, , Issue, , 70 Tonnes, , “4, , Issue, , 100 Tonnes, , “5, , Issue, , 80 Tonnes, , “ 13, , Received, , 200 Tonnes, , “ 14, , Returned from, Department, , 150 Tonnes, , “ 16, , Issue, , 180 Tonnes, , “ 20, , Received, , 240 Tonnes @ Rs.-192, , “ 24, , Issue, , 300 Tonnes, , “ 25, , Received, , 320 Tonnes, , “ 26, , Issue, , 115 Tonnes, , “ 27, , Received, , 350 Tonnes, , “ 30, , Issue, , 400 Tonnes, , @ Rs.190, , @ Rs.194, , @ Rs.195, , Issues are to be priced on the principle of ‘First-in-First-out’, Principle. The stock verifier has found shortage of 10 tonnes on the, 22nd June, 1999 and left a note accordingly., Prepare a Store Ledger Control Account for the material, showing the above transactions.
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97, Problem 3, Find the value of closing stock on FIFO method, Receipts : Purchase of Pipes, 04.06.2017, , 20 Pipes, , @ Rs. 15.00 each, , 17.06. 2017, , 30 Pipes, , @ Rs. 14.00 each, , 02.07. 2017, , 40 Pipes, , @ Rs. 14.50 each, , 30.07. 2017, , 30 Pipes, , @ Rs. 13.00 each, , Sold :, 20-6-2017, , 25 Pipes, , 05-7-2017, , 40 Pipes, , 31.07. 2017, , 45 Pipes, , On 28.07.2017, 2 pipes sold on 20.6.2017 were received, back, out of which one pipe was found damaged on 28.7.2017 and, had to be discarded., , , ,
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98, , Unit-7, CAPITAL, REVENUE EXPENDITURE, AND RECEIPTS, Unit Structure :, 7.0, 7.1, 7.2, 7.3, 7.4, 7.5, 7.6, , 7.11, 7.12, 7.13, 7.14, 7.15, 7.16, , Objectives, Introduction, Characteristics / Tests for Capital or Revenue, Expenditure, Capital Expenditure, Revenue Expenditure, Distinctions between Capitals Expenditure and Revenue, Expenditure, Deferred Revenue Expenditure, Capital Receipts, Revenue Receipts, Distinctions between Capital Receipts and Revenue, Receipts, Deferred Revenue Income, Revenue Profit and Capital Profit, Revenue Loss and Capital Loss, Effect of Wrong Treatment On Profit, Illustration, Exercises, , 7.0, , OBJECTIVES, , 7.7, 7.8, 7.9, 7.10, , After studying the unit students will be able to:, Understand the meaning and characteristics of capital, expenditure and revenue expenditure., Distinguish between capital expenditure and revenue, expenditure., Understand the meaning and characteristics of capital receipts, and revenue receipts., Distinguish between capital receipts and revenue receipts., Understand the meaning and characteristics of deferred, revenue expenditure, Know the disclosure of various items in final accounts.
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99, , , Recognise with reason the given item is of capital nature or, revenue nature or deferred revenue nature., , 7.1, , INTRODUCTION, , Final Accounts prepared at the end of the year consists of, Income Statement and Balance Sheet. These are prepared from, trial balance. Debit balance shown in trial balance represents either, revenue expenses or capital expenditure, credit balances are either, revenue income or capital receipts. All revenue expenses & gains /, incomes are transferred to Income Statement. Capital expenditure, represents assets shown on assets side of the Balance Sheet., Credit balance represents either gains or capital receipts, various, gains shown in Income Statement and capital receipts shown on, liabilities side of the Balance Sheet. Therefore, it is very essential to, know, WHICH and WHY, how to distinguishing which are capitals, or revenue? While recording transaction in various books of, accounts, it is necessary to classify them into revenue or capital., This classification is relevant for adherence to the requirements as, per A.S. 9 & the accounting concept of matching costs with, revenue., , 7.2 CHARACTERISTICS / TESTS FOR CAPITAL OR, REVENUE, For deciding whether it is CAPITAL OR REVENUE following, features should be tested., 1. Business Activity / Nature :, In case such activities are recurring nature i.e. purchases or, sales of goods or rendering serves, it is revenue. Expenditure, pertains to investing / financing activity, it is capital expenditure., 2. Long / Short Term Benefits :, Benefits of expenditure is for short term, normally it is, Revenue e.g. wages paid, rent paid, while if benefits for long term,, it is capital, e.g. purchase of Plant, Furniture, etc., 3. Recoverable :, Amount spent is recoverable in short term, it is revenue, if it, is recoverable in long term, it is capital e.g. sale of goods is, revenue, sale of assets is capital receipts., 4. Recurring - Non-recurring :, Any recurring receipts / payments are recurring in nature,, then it is revenue, if such receipts are non-recurring, it may be, capital expenditure e.g. issue of shares is capital receipts and, interest received is revenue income.
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100, 5. Effect on Funds and Profits :, Revenue receipts and revenue payments affects profits, whereas capital receipts increases funds, capital payments or, expenditure increases assets., 6. Treatment in Final Accounts :, Revenue receipts or payments are shown in Income, Statement, capital expenditure or receipts are shown in the Balance, Sheet., 7. Materially of amount :, Huge or small amount doesn’t indicate whether it is capital or, revenue., 8. Treatment by other party :, Treatment by other party to transaction is not relevant. E.g., furniture sold by furniture manufactures is revenue receipts for him,, it is capital expenditure for buyer as it is assets purchased, thus,, there are no clear cut tests / rules, whether it is capital or revenue,, it can be decided upon nature of transactions / nature of business /, ultimately nature of receipts or payments., , 7.3, , EXPENDITURE, , 7.3.1 Meaning:, As per guidance notes issued by I.C.A.I. in relation to, Financial Statements, “Expenditure means incurring a liability or, disbursement of cash or transfer of property for the purpose of, obtaining goods, services or assets” Expenditure does not only, involve outflow of resources, but also giving rise to liability or, transfer of property. Such expenses may be Capital or Revenue, expenditure, depends up benefits that firm gets i.e. short term or, long term. An expenditure whether it is Capital or Revenue is, dependent on various factors, such as:, 7.3.2, , Benefit of expenditure:, In case benefit of it is available for short period i.e. less than, 12 months, it is revenue expenditure. Expenditure is for longer, period i.e. more than one year, it is capital expenditure., 7.3.3, , Recurring or non-recurring:, Revenue expenditure is reoccurring, is payable again and, again, i.e. rent, wages, salaries etc. It is considered as period cost., However, capital expenditure is not payable as per period, it is, incurred only when Fixed Assets are purchased.
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101, 7.3.4 Decreases Cost of production / increased earning, capacity, Expenses on increasing earning capacity are treated as, capital expenditure whereas expenses incurred for keeping assets, in working condition are revenue expenditure., , 7.4, , CAPITAL EXPENDITURE, , 7.4.1 Meaning:, Capital Expenditure means an expenditure carring probable, future benefit [Guidance Notes - I.C.A.I.] Eric. Kohler has defined, Capital expenditure as “expenditure intended to benefit future, periods, an addition to fixed assets. The term is generally restricted, to expenditure that add to Fixed Assets units or those have effects, of increasing earning capacity, efficiency, life span or economy of, an existing assets.”, In short, Capital Expenditure means:, i), Expenditure incurred for acquisition of Fixed Assets., ii), Expenditure incurred in connection to acquisition of Fixed, Assets., iii), Expenditure which results in increases earning capacity of, business., iv), Expenditure which decreases cost of operation., Balance in capital expenditure being an asset is carried, forward to subsequent period; still it is fully depreciated or disposed, off. Depreciation is charged annually either on book value or cost of, Fixed Assets., 7.4.2, , Characteristics / Tests:, If expenditure has any of the following features, then it is, treated as Capital Expenditure., 1. Long Term Benefits :, The benefits of capital expenditure can be enjoyed for long, periods and future period of time e.g. purchased of Plant &, Machinery., Any expenditure incurred in connection with acquisition of, fixed assets, e.g. Custom duty paid on machinery imported,, installation cost of machinery., 2. Investing Activity :, Such expenditure pertains to investing activity. Capital, expenditure helps to set up and develop a business. It creates and, increases earning capacity of the business. It gives birth to a new, source of income. It leads to acquisition of new asset. Examples
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102, are Fixed Assets like Machinery, Furniture & Fixtures, Computer,, etc., 3. Recoverable :, Money spent on capital expenditure can be recovered, though income generated by the Assets itself or even by selling the, assets at the end of its economic life or at the time of replacement, of assets., 4. Non-recurring :, Capital expenditure is non-recurring in nature, i.e. it need not, be incurred again and again. If a firm takes Building on rent, it is, payable every month, but if it purchased Building, it does not, purchase another building for many years., 5. Effect on Funds and Profits :, Capital expenditure decreases funds in current year as, money goes out of business. But it may increase profits in future, from income derived by using such assets. Investment purchased, is capital expenditure, income earned from investment is Revenue, Receipt., 6. Increases in performance of existing Assets :, Normally amount spent is large, but not necessarily, e.g., Calculator purchased, it is shown in the Balance Sheet as assets at, book value [cost less depreciation]., 7.4.3 Examples of Capital Expenditure:, Purchase of any Fixed Asset for use in the business, as per, AS-10, cost of fixed asset includes :, a. Cost of purchase of Fixed Assets., b. Custom duty, taxes, cusses on cost., c. Freight paid for transportation to factory site., d. Professional charges paid in connection with acquisition of, Fixed Assets, Installation of assets e.g. Legal charges paid, for preparing documents, project report, conducting, feasibility study, market surveys, negotiations for, Collaboration etc., e. Office and administrative expenditure connected with, project., f. Interest on loan taken for purchase of Fixed Assets till it is, put to use., g. Any expenditure incurred during construction period., h. Cost of an addition or extension to an existing asset., i. Cost of development of Wasting Assets., j. Cost of acquisition of an Intangible Assets.
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103, , 7.5, , REVENUE EXPENDITURE, , 7.5.1, , Meaning:, , 1. REVENUE EXPENDITURE, Revenue expenditure means expenditure incurred for, carrying out the day to day business activities and from which no, future benefits expected. [Guidance Notes - ICAI]., Eric Kohler has defined revenue expenditure as, “Expenditure charged against operations, a term used to contrast, with capital expenditure”., Any expenditure which is not capital expenditure is Revenue, Expenditure. The items of expenditure having immediate or shortterm benefices less than 12 months are treated as Revenue, Expenditure., 2. COST, Cost means amount of expenditure incurred on a specific article,, product or activity [Guidance notes ICAI]. Thus, cost may be the, cost of an asset or cost of goods or cost of services., 3. Expenses, Expenses means:, a) A cost relating to the operation during the accounting period., b) A cost relating to the income earned during the accounting, period., c) A cost whose benefits do not extend beyond the accounting, period., d) An expired cost i.e. that portion of expenditure from which no, further benefits are expected. [Guidance Notes ICAI]., e) Expenditure incurred to maintain assets in working condition., f) Expenditure of revenue nature incurred after the plant starts, commercial production. [AS-10]., g) Research and development cost written off., In short, Revenue expenses means operating costs,, matching costs, period cost, product cost and expired costs, incurred during the accounting year., 7.5.2, , Characteristics / Test:, , If expenditure have any of the following characteristics or, tests, it should be treated as Revenue Expenditure:
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104, 1. Business Activity :, The expenditure that pertain to business activity is recorded, as revenue expenditure, as it helps to run a business and earn, income. Examples are purchase of goods, fees paid etc., 2. Maintain Assets :, Expenditure that helps to maintains fixed assets in working, condition is treated as revenue expenditure. e.g. repairs,, maintenance., 3. Not Recoverable :, Money spent on revenue expenditure is not irretrievably, gone. It can be recovered hence expired costs and revenue losses, are treated as revenue expenditure., 4. Recurring :, Revenue expenditure is recurring in nature. A same type of, expenditure is incurred again and again. e.g. salaries paid, rent,, traveling expenses, audit fees., 5. Reduces Funds and Profits :, Revenue expenditure reduces both funds and profits of the, current year. As money goes out, the funds available with the, concern are reduced. And as the money goes out irretrievably (i.e., never to comes back), it reduces the profits of the concern., 7.5.3, , Disclosure in final accounts:, Revenue expenditure pertains to current year is shown as, expenditure in the Profit & Loss A/C. However, part of the, expenses, if pertains to next year, is shown in the Balance Sheet as, prepaid expenditure, on the assets side. Revenue expenditure, incurred but not paid is taken in Profit & Loss A/C and it is shown in, the Balance Sheet as liabilities., 7.5.4 Examples:, 1. Cost relating to business activities during the accounting year is, treated as revenue expenditure i.e., , Cost of production [purchases of goods, wages paid., manufacturer expenses etc.], , Cost of administration [salaries, rent, printing & stationery,, audit fees etc.], , Selling & Distribution cost [commission, traveling expenses,, advertisement, etc.], , Cost of raising finance [interest on loans, debentures, interest, and cash discount, etc.]
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105, 2. Cost relating to income earned during the same accounting, period are treated as revenue expenditure e.g. carriage, freight,, buying expenses, interest on loans., , , Costs whose benefits do not extend beyond the accounting year, are treated as revenue expenditure i.e. white washing factory,, loose tools and packing materials., , , , Expired Costs: Expenditure from which no future benefits, expected is treated as revenue expenditures e.g. Depreciation, on Fixed Assets, when any asset is sold at loss, book value, represents loss on sale of assets, it is treated as expired cost &, written off as expired cost, debited to Profit and Loss A/C., , , , Revenue Loss: is treated as revenue expenditure e.g. goods, destroyed by fire, bad debts and unsalable goods written off., Revenue losses arises in respect of business activities [trading, or / and manufacturing] or in respect to current assets such as, stock, cash lost, debtors etc., , , , Revenue expenditure incurred after the plant has begun, commercial production is treated as expenses. AS - 10., , , , Expenditure on repairs which maintains the standard of, performance of an existing fixed assets and machinery spares, consumed are treated as revenue expenditure . A.S.-10., , , , According to A.S.8, any Research & Development costs, incurred but it is not certain whether it will give rise to any, benefit in future can be treated as revenue expenditure., , 7.6, , No., , DISTINCTIONS BETWEEN CAPITAL, EXPENDITURE AND REVENUE EXPENDITURE, Capital Expenditure, , Revenue Expenditure, , 1., , Its benefit extends for more It benefits only for current, than one accounting year ., accounting year [12 months], , 2., , It is incurred for acquisition of It is incurred for earning, fixed assets ., revenue., , 3., , It may be incurred to improve It maintained fixed assets in, the existing fixed assets held working condition., by the concern., , 4., , It increases revenue earning It does not change revenue, capacity., earning capacity.
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106, 5., , It benefits more than one It benefits only in the same, accounting year., accounting year., , 6., , It decreases funds, but It decreases funds as well, benefits for longer period., as profits of business., , 7., , It may decreases cost of It decreases, production., current year., , 8., , It is shown on assets side of It is shown as expense in, Balance Sheet., Revenue A/C., , 9., , Examples = goodwill, plant & Examples = purchases of, machinery, land, building, goods, wages, salaries,, furniture & fixtures, railway legal fees, rents. Insurance,, sidings etc., carriage, interest, selling, expenses, commission. etc., , profits, , of, , CHECK YOUR PROGRESS, 1. Fill in the blanks, a. Revenue expenditure is shown on ------------- side of Profit &, Loss A/C., b. -------------- expenditure is incurred for acquisition of Fixed, Assets., c. -------------- expenditure benefits only in same accounting, year., d. Purchase of goods is the example of -----------------expenditure., e. Goodwill is the---------------------------expenditure., f. Cost relating to income earned during the --------- accounting, period are treated as revenue expenditure., g. Expenditure from which no future benefits expected is, treated as --------------expenditures., h. Goods destroyed by fire is a ------------------------- expenditure., i., , Expenditure pertains to investing / financing activity is -------expenditure., , j., , Custom duty, taxes, cusses on cost is a ----------expenditure., , k. Expenditure which results in increase in earning capacity of, business is ---------------------- expenditure, l., , Expenditure which decreases cost of operation is -------------expenditure.
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107, 2. Enlist the tests for treating the expenditure as Revenue., 3. Define the following terms:, a. Revenue expenditure, b. Capital expenditure, c. Cost, d. Expenditure, , 7.7, , DEFERRED REVENUE EXPENDITURE, , 7.7.1, , Meaning:, Deferred Revenue Expenditure is that of revenue, expenditure which is carried forward on the presumption that it will, benefit over subsequent periods., Guidance note issued by ICAI “Deferred Revenue, Expenditure is that part of expenditure for which payment has been, made or a liability incurred but which is carried forward on, presumption that it will benefit over a subsequent period or, periods”., They are of a Quasi Capital Expenditure. Any heavy revenue, expenditure which is incurred in one year but it is likely to benefit, more than one accounting year, are considered as deferred, revenue expenditure. To defer means to postpone. Deferred, Revenue Expenditure has mixed nature and has same features of, both revenue and capital expenditure., 7.7.2, , Medium term Benefits:, The Deferred Revenue Expenditure has medium term, benefits, may be 3 to 4 years, therefore, cost of expenditure is, divided in say 3 to 4, or 5 years, the part of Deferred Revenue, Expenditure benefit for current year debited to Profit & Loss A/C,, remaining balance carried to subsequent years till It is fully written, off. e.g. Discount allowed Rs.1,00,000 on issue of Debentures,, Debenture, likely to be redeemed after 10 years. The benefits of, issue of Debentures are for 10 years. Every year 1,00,000/10 =, Rs.10,000 shall be written off, balance in Discount on issue of, Debentures carried forward. After ten year, there will be no balance, in that account., 7.7.3 Nature of Expenses :, Deferred Revenue Expenditure should be Revenue, Expenditure by nature in the first instance, for example,, advertisement. But its matching with revenue may be deferred, considering the benefit to be accrued in future.
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108, 7.7.4 Revenue Expenses, Deferred Revenue Expenditure &, Prepaid Expenditure:, A thin line of difference exists between revenue expenses,, deferred revenue expenditure and prepaid expenses. Revenue, Expenditure is short time expenses, benefits of all these are, excused in the same accounting year. In some cases, part of, Revenue Expenses is treated as Deferred Revenue Expenditure, and is carried forward on the presumption that it will benefit over, subsequent period or periods. e.g. heavy advertisement for new, product launch in the market, such expenses may be assumed, it is, going to benefit for 3 to 5 years, hence it can be treated as, Deferred Revenue Expenditure. The benefits available from prepaid, expenses can be precisely [not presumption] estimated but that is, not so in case of Deferred Revenue Expenditure. e.g. Insurance, premium paid for the year ended 30th June 2018 Rs. 24,000/Accounting year ended 31st March 2018. In this case three months, premium pertains to subsequent period, = 24000/12*3 = Rs. 6000., Amount is ascertained and carried forwards according as prepaid, insurance Rs. 6000/-., , 7.8, , CAPITAL RECEIPTS, , 7.8.1, , Meaning:, Receipts means an amount received by a concern either, during its business activity [supply of goods or services] or during, its financing [obtaining money as capital or loan or sale of assets]., Receipt arising out of business activity is known as revenue, receipts, wherever receipts arising out of financing activity are, known as capital receipts or liability., Capital receipts means an amount received by a concern in, the course of financing activity [obtaining money as capital or loan, or sale of Assets]. A concern need money to carry on its business, activities and investing activities. The money is obtained either from, the owner or loans or sales of assets or sales of investment. Capital, receipts are non-recurring in nature., , , Capital means the amount invested in the concern by its, owners, it to be refunded only when the concern finally stops its, business and is closed down., , , , Liability means amounts received as loan basis from outsiders, e.g. from Bank, financial institution., , , , Capital receipts are recognized on accrual basis as soon as the, rights of receipts are established. Capital receipts are not, credited to Profit & Loss A/C, it is shown as the liability or it may, reduce from Fixed Asset. However, it may be credited to Profit &, Loss A/C to the profit realized on sale of asset.
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109, 7.8.2, , Characteristics / Tests:, If receipts have any of the following features, then it should, be treated as Capital Receipts:, , , Financing Activity:, Receipts which arises from financingl activities are, concerned as Capital Receipts. It provides funds to acquire, new fixed assets. e.g. capital introduced, loan taken from, sale of assets, etc., , , , Non-recurring:, Capital receipts are always non-recurring in nature. Such, amounts are not received again and again. These are long, term commitments., , , , Returnable:, Money received as loan is returnable, as per various terms, agreed upon. Capital introduced is paid back to owner when, business is closed down., , , , Effect on fund and profits:, Capital receipts increases fund available to business in the, year of receipts, as money comes in the business. But it may, decreases profits in future as one has to pay interest on, loan. However, in long term, it will increase profits of the firm., e.g. Say you are borrowing @ 12%; return on investment to, firm say 18% and then extra 6% increases return to owner,, without additional capital. This is possible only when returns, are higher from the business., , 7.8.3, , Disclosure in Final Accounts:, Capital receipts are shown in Balance Sheet on liability side., Capital receipts from sale of fixed assets are deducted from, concerned fixed assets., 7.8.4, a), b), c), d), , Example:, Additional capital introduced by the owner Rs. 1,50,000., Loan of Rs. 5,00,000 taken from H.D.F.C. Bank., Investment costing Rs. 75,000 sold., Grants from government received Rs.1,75,000, construction of building., , 7.9, , REVENUE RECEIPTS, , for, , 7.9.1 Meaning:, Revenue receipts are those items of income, which are, received or accrued in ordinary course of business. Revenue, receipts means receipts from customers for sale of goods or
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110, rendering services or for use of funds or use of assets., [Guidance Notes - I.C.A.I.] Revenue receipts are recurring, in nature; this gives rise to Gross Income regularly so long, as the business continues., , , Income means revenue earned during the particular, accounting year., , 7.9.2, , Characteristics / Tests:, If receipts have any of the following features, then it should, be treated as Revenue Receipts:, a) Business Activity:, Receipts in course of business activities are recorded as, Revenue Receipts e.g. Sale of goods, interest received, dividend, received, discount earned, etc., b) Recurring:, Revenue Receipts are recurring in nature. Same types of, receipts are received again and again on regular basis, periodically, received in gap of two or three months, like interest on loan given., c) Not Returnable:, Revenue Receipts are not returnable / refundable. It needs, not be paid back as concern has supplied goods or rendered, services to customers. Amounts received for sale of goods or, rendering reverses, in normal case, money is not to be refunded to, customers back. Legal ownership is with seller and need not to be, paid back., d) Increase in funds and profits:, Revenue receipts increases both funds and profits of the, current year. As money received in the from of income, it increases, profits and it is not to be refunded. It increases funds available at, disposals with the concern., 7.9.3, , Disclosure in final accounts:, Revenue receipts pertaining to current year are credited to, Profit & Loss A/C. Revenue receipts relating to future period shown, in the Balance Sheet as received in advance, on liability side. [as, income received in advance]. However income is different than, receipts. Income excludes revenues relating to the further period,, received in advance & includes income earned in current year but, not received [income receivable] and income received in earlier, years for current year.
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111, 7.9.4 Examples:, Sales of goods:, Goods means the commodities in which the concern deals., Sales of goods whether manufactured or purchased are revenue, income., Revenue is said to be arise from sale of goods when sale is, complete and the buyer has no legal right to return the goods or, ask for refund. If at the time of receipts, sale is not complete or, buyer has right to ask for refund, [sale on approval, goods sent on, consignment] then it is treated as advance and the receipt is based, on advance and not as revenue. Only when the sale is complete,, such advance is to be treated as revenue., Rendering of Services:, Services means ‘AID TO TRADE’, such as marketing,, financing, administration, distribution, transport etc. Receipts are, taken as revenue when services are provided., , , Interest :, Interest is taken as income on loan given by the concern., Amount received when such loan itself is returned, then it is, capital receipt., , , , Dividend :, Receipt is treated as dividend when it is in the form of a reward, from investment in shares. Amount is received on sales of such, shares themselves are treated as capital receipts., , , , Royalty :, Receipt is treated as royalty when it is received for used of, assets such as know-how, patents, trademarks and copyrights., Amount received on outright sales of such patents etc. are, capital receipts., , , , Insurance claim :, Compensation received from insurance company for loss of, current assets e.g. loss of goods, loss of cash due to theft etc.,, are treated as revenue receipts., , 7.9.5 GOVERNMENT GRANTS, Grants received from Government are of two types. Grants, received for capital expenditure is capital receipt e.g. for road, construction, for Equipments to be purchased. However, grant, received to re-imbrue or compensate for specified revenue, expenditure or revenue losses are revenue receipts. [e.g. salary, grant, rent, power grant] are treated as Revenue Receipts [A.S. 15 on Government Grants]. In brief, any receipt is recurring &
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112, benefits are likely to be lost for not more than 12 months, are, Revenue Receipts., , 7.10 DISTINCTIONS BETWEEN CAPITAL RECEIPTS, AND REVENUE RECEIPTS, No., , Capital Receipts, , Revenue Receipts, , 1., , It is non-recurring in nature., , 2., , It arises from financial / It arises, investing activity., activity., , 3., , Capital receipts which are They are not repaid in, liabilities are to be repaid as normal course of business., per terms., , 4., , They are not gains to the They are, concern., concern., , 5., , They appear, Sheet., , 6., , Capital, receipts, are, recognized on accrual basis, but not matched with capital, expenditure., , Revenue, receipts, are, matched with Revenue, expenditure at the end of, accounting year., , 7., , Examples of capital receipts, are capital brought in by, owner, loan taken, sale of, fixed assets and sale of, investment., , Examples, of, revenue, receipts are sale of goods,, rent, received,, interest, received, discount earned,, income from investment etc., , 8., , Capital receipts may be In increases profits as well, capital profit, it increases as funds of business, funds available., concern., , in, , It is recurring in nature., from, , gains, , Balance They appear, Statement., , in, , business, , to, , the, , Income, , CHECK YOUR PROGRESS, 1. Fill in the blanks, a. Commission received is --------------receipt., b. Rent received by sub-letting premises is -------------receipt., c. Sale proceeds on sale of old car is -------------receipt., d. Sale of furniture by furniture dealer is -------------receipt., e. --------------- means assets held for short period., f. Capital of owner of business is shown on -------------- side of, balance sheet., g. ------------- assets does not have physical identity., h. Grants received from Government for capital expenditure is, a--------------------------receipt.
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113, i. Grant received for road construction is a ------------receipt., j. Grant received for re-imbrues or compensate for specified, revenue expenditure or revenue losses are-------------receipts., k. Sales of goods whether manufactured or purchased are -----income., l. Revenue receipts pertaining to current year are ------------ to, Profit & Loss a/c., m. Revenue receipts relating to ---------- period shown in the, balance sheet as received in advance, on-------- side., n. Deferred revenue expenditure should be ----------expenditure, by nature in the first instance., o. Discount on issue of debenture is a ----------------expenditure., 2. Define the following terms:, a. Revenue receipts, b. Capital receipts, c. Deferred revenue expenditure, 3. What is the difference between income and receipt., , 7.11 DEFERRED REVENUE INCOME, 7.11.1 Meaning:, Deferred Revenue Income means income received in, advance before it is earned, which is carried forward to subsequent, period to which it relates [Guidance note - ICAI] such income is, received in advance. Such items of income is shown as ‘Income, received in advance’ on the liability side of Balance Sheet., 7.11.2 Examples:, Club annual membership fees received in advance from, some members is to be treated as income received in advance, to, be carried forward to the period it belongs., Educational institution fees may be collected for entire, course, say three years, two years fees received is income, received in advance., Grants received from Government for acquiring depreciable, assets are treated as deferred income. Proportionate amount of, grant basined on useful life of asset [i.e. total grant divided by the, useful life of assets] is taken as income every year and credited to, Profit & Loss A/C. [A.S. - 15 on Government Grants - I.C.A.I.]
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114, , 7.12 REVENUE PROFIT AND CAPITAL PROFIT, Business activities give rise to revenue profit whereas, investing and financing activities give rise to capital profit. Revenue, profit / operating profit mean the net profit arising from the normal, operations / operating activities of the concern. Net operating profit, means excess of gross operating income over total operating, expenditure during the particular period. Capital profit arises when, assets or investment sold at higher price than cost. Shares are, issued by the company at higher price than face value / nominal, value, extra amount received is credited to Securities Premium A/C, and not to Profit and Loss A/C. In case of sale of Fixed Assets,, difference between sale proceeds and cost is capital profit,, difference between cost and book value is revenue profit. e.g. Plant, costing Rs. 7,50,000/- book value on date of sale Rs. 4,50,000/[due to depreciation], sold for 9,00,000/Capital profit = 9,00,000 - 7,50,000= Rs. 1,50,000 [sale proceeds cost], Revenue profit = 7,50,000 - 4,50,000 = Rs. 3,00,000 [cost - book, value], , 7.13 REVENUE LOSS AND CAPITAL LOSS, Revenue due to business activity is revenue loss, e.g. loss, on sale of goods, bad debts, goods lost by theft. Such revenue, losses are expired cost and debited to Profit & Loss A/C. On the, other hand, losses due to investing and financing activity is capital, loss. Capital loss due to investing activity is debited to Profit and, Loss A/C as expired cost with no future benefits whereas losses, due to capital, financing i.e. discount on issue of shares is carried, forward as ‘fictitious assets’ shown in the Balance Sheet under the, heading “Miscellaneous Expenditure”., , 7.14 EFFECT OF WRONG TREATMENT ON PROFIT, We believe that to erris human, to ignore its effect will cost, on someone, who may blame accountant., Any error in classification of payments / receipts will affect, final accounts. Every receipts and payments are classified into, either Revenue or Capital. Revenue expenditure & incomes are, transferred to Profit & Loss A/C to ascertain net profit or loss for the, period. Capital expenditure and capital receipts are shown in the, balance sheet. Balance shown in the balance sheet are carried, forward to subsequent period. Thus, any error in classification will, effect on accuracy of entire final accounts. Effect of such error can, be as under:-
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115, 1. Revenue Expenditure is shown as Capital Expenditure:, Revenue expenditure wrongly capitalized will increase profits, of this year and assets are overvalued, depreciation part in, subsequent year shall decrease profits of all subsequent years e.g., Repairs to Machinery Rs. 60.000 wrongly debited to Machinery, A/C. Since it is wrongly capitalized, expenditure not debited to Profit, & Loss A/C profit shall be shown at higher amount and also at, higher amount, in subsequent year, due to higher depreciation, it, will reduce profits., 2. Capital Expenditure is shown as Revenue Expenditure :, As capital expenditure is debited to Profit & Loss A/C, Profit, & Loss A/C will show lower profit and Balance Sheet shows lower, assets. It will affect profits / loss in subsequent years also, as, depreciation shall not be charged, as entire amount is already, debited to Profit & Loss A/C e.g. Furniture purchased for, Rs.51,000, wrongly recorded in purchase day book. In this case,, gross profit as well as net profit reduced by Rs. 51,000/- .Furniture, is not added to furniture in Balance Sheet. So, Balance Sheet, shows fixed assets lower by Rs.51,000 if this type of error results in, to Window Dressing., 3. Capital Receipts are shown as Revenue Receipts:, The Profit & Loss A/C shows higher profits and the Balance, Sheet shows lower liabilities or higher assets. e.g. Sale of old, assets for Rs. 25,000 recorded in Sales Day Book. In this case, as, sales are shown at higher amount, Gross Profit, Net Profit shall be, higher, since it is not deducted from assets, they are shown at, higher amount by Rs. 25,000. Profit or loss on sale of assets are, also not accounted. Deposit received from customers’ Rs. 27,000,, wrongly credited to interest A/C, profit shown by Profit & Loss A/C, will be higher and liabilities are shown lower by Rs. 27,000., 4. Revenue Receipts are shown as Capital Receipts:, The Profit & Loss A/C shows lower profit and the Balance, Sheet shows higher liabilities, or lower assets e.g. Commission, received Rs. 71,000, from Z & Co. credited to Z & Co., income is, shown less and Z & Co. as liability., Sale of goods wrongly credited to Furniture A/C, sales is, shown lower results in lower income and Furniture is reduced by, the same amount, assets are shown at lower amount.
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116, , 7.15 ILLUSTRATION, Illustration 1:, State with reason whether following are capital or revenue, expenditure:, i), Rs.12,000, paid for removable of stock to new site., ii), Purchase of NOKIA mobile phone Rs.5,000 for office work., iii), Expenses incurred in connection with obtaining a licence for, starting the factory for Rs.27,000., iv), Legal fees to acquire property Rs.10,000., v), The amount spent for replacement of work out part of, machine Rs.50,000., vi), Money spent to reduce working expenses Rs.25,000., vii), Ring & Pistons of an engine were changed at cost of, Rs.10,000 to get fuel efficiency., Solution :, i), , Rs.12,000, paid for removable of stock to new site is, revenue expenditure. This is neither bring enduring benefit, nor enhance the value of the asset., , ii), , Purchase of NOKIA mobile phone Rs.5,000 is capital, expenditure; as it is incurred for acquisition of fixed assets., , iii), , Money paid Rs. 27,000 for obtaining license to start a factory, is a capital expenditure. This is an item of expenditure, incurred to acquire the right to carry on business., , iv), , Legal fees to acquire property Rs.10,000 are part of cost of, that property. It is incurred to possess the ownership rights, of the property and hence it is a capital expenditure., , v), , The amount spent for replacement of work out part of, machine Rs.50,000 is revenue expenditure since it is part, of its maintenance cost. If was incurred to keep machine in, working condition., , vi), , Money spent on reducing working expenses Rs.25,000 is, capital expenditure, as it generates long term benefit to the, entity. It is part of intangible fixed assets. if is incurred for, any specific assets then it is also capital expenditure. It, should be capitalized., , vii), , Rs.10,000 spent in changing rings and pistons of an engine, to get fuel efficiency is capital expenditure. This is an, expenditure on improvement of fixed assets. It results in, increasing profit earning capacity of the business by cost, reduction.
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117, Illustration 2 :, State whether the following expenditure is a capital, revenue, or deferred revenue expenditure. Give reasons :, 1. Legal expenses incurred in connection with issue of capital., 2. Cost of replacement of a defective part of the machinery., 3. Expenditure incurred in preparing a project report., 4. Expenditure for training employees for better running of, machinery., 5. Expenditure incurred for repairing cinema screen., Solution:, 1. Deferred revenue expenditure: Legal expenses incurred in, connection with issue of capital are not treated as revenue, expenditure because the funds from issue of shares will benefit, the concern for many years, it is not treated as capital, expenditure because it does not create any real asset. Hence, it, is treated as deferred revenue expenditure and written off over, certain number of years., 2. Revenue expenditure: As replacement of a defective part will, help to maintain the machinery in working condition., 3. Capital expenditure: If the project is implemented; as, according to Accounting Standard 10, all expenditure till a, project commences is capitalized. However, if the project is, given up or not implemented and the amount is small, it will be, written off as revenue expenditure (as expired costs which will, bring no benefit in future); if the project is not implemented and, the amount is heavy, it will be treated as deferred revenue, expenditure., 4. Revenue expenditure: As expenditure for training employees, for better running of machinery is cost of administration related, to normal business activities incurred in order to earn income, during the year., 5. Revenue expenditure: As expenditure incurred for repairing, cinema screen is a cost incurred to maintain an existing asset in, working condition., Illustration 3:, State, with reasons, whether you would consider the, following as capital expenditure or revenue expenditure :, 1. Amount spent on uniform of workers., 2. White-washing of the factory building.
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118, 3. Cost of stores consumed in manufacturing machinery for, installation in own factory., 4. Wages paid for construction of the building extension., 5. Import duty on raw material purchased., (June 1980, adapted), Solution :, 1. Revenue expenditure: As amount spent on uniform of workers, is an administration cost related to normal business activities., 2. Revenue expenditure: As white-washing of the factory of, building is a cost of maintaining an asset in working condition., 3. Capital expenditure: As cost of stores consumed in, manufacturing machinery for installation in own factory is a, direct cost incurred for manufacturing an asset which is to be, capitalized as per Accounting Standard 10., 4. Capital expenditure: As wages paid for construction of an, extension to an existing asset is a direct cost incurred for, acquiring an asset which is to be capitalized as per Accounting, Standard 10., 5. Revenue expenditure: As import duty on raw material, purchased is a direct product cost related to normal business, activities incurred in order to earn income during the year., Illustration 4:, State with reasons, whether you would consider the following as, capital expenditure or revenue expenditure., 1. Raw material costing $ 2,000/- was imported when 1 dollar was, worth Rs. 40; when payment was actually made the foreign, exchange was purchased at the rate of 1 dollar equal to Rs. 42., 2. Premium paid in connection with acquisition of leasehold, premises., 3. Renovation of factory canteen., 4. Fees paid for renewal of licence for factory., (April 1984 adapted), Solution :, 1. Revenue Expenditure: As due to change in exchange rate, raw, material cost, which is a direct product cost, has gone up. Cost, of raw materials = 2000 × 40 = `80,000. it is purchased of, goods. However, extra amount paid 2000 × (42 - 40) = 4,000
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119, shall be treated as loss due to exchange fluctuation is also, revenue expenditure, should be debited to profit & loss a/c., 2. Capital expenditure: As premium paid in connection with, acquisition of leasehold premises is a direct cost incurred in, connection with the acquisition of an asset to be added to the, cost of the asset [Accounting Standard 10]., 3. Revenue expenditure: As renovation of factory canteen helps, to maintain the asset in working condition., 4. Revenue expenditure: As fees for renewal of factory licence is, a recurring expenditure incurred in the course of normal, business activities., Illustration 5:, Electric Engineers Private Limited removed their factory to a, more suitable premises in Navi Mumbai. State with reasons the, accounting treatment for the following items:, 1. A sum of Rs.99,500 was spent for dismantling, removing and reinstalling plant, machinery and fixtures., 2. The removal of stock from the old factory to the new at a cost of, Rs.1,000., 3. Plant and Machinery which stood in the books at `1,50,000, included a machine at a book value of Rs. 1,50,000 included a, machine at a book value of Rs. 3,400. This being obsolete, was, sold off at Rs. 900 and was replaced by a new machine which, cost Rs. 4,800., 4. The freight and cartage on the new machine amounted to `300, and erection charges Rs.550., 5. The furniture appeared in the books at Rs.15,000. Of these,, some portion of the book value at Rs.3,000 was discarded and, sold at Rs.1,200. New furniture of the book value of `2,400 was, acquired., 6. A sum of Rs.2,200 was spent on painting the new factory, (Oct. 1981, adapted), Solution:, 1. Deferred revenue expenditure: Cost of dismantling, removing, and re-installing plant etc. is not treated as revenue expenditure, because it is not a normal operating cost. If it is not treated as, capital expenditure because it does not create any real asset.
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120, Hence it is treated as deferred revenue expenditure and written, off over certain number of years., 2. Revenue expenditure: As removal of stock from the old factory, to the new is a normal operating cost related to a current asset, (stocks) and not capital asset., 3. When a machine costing Rs.3,400 is sold for Rs.900 received, on sale of machinery is treated as capital receipt; and the book, value of the machine becomes Rs.2,500. As the machine has, been sold at its book value represents an ‘expired cost’ with no, future benefits i.e. loss on sale of asset which is to be written off, by debit to the Profit and Loss Account. Cost of new machine, (Rs.4,800) will be treated as Capital expenditure., 4. Capital expenditure: As freight and cartage on the new, machine as well as the erection cost is a direct cost of bringing, an asset to a condition where it can be put to use, which is, capitalized as per Accounting Standard 10., 5. Loss on sale of old furniture (Rs.3,000 - Rs. 1,200) is written off, as expired cost by debit to the Profit and Loss Account; cost of, new furniture (Rs.2,400) will be treated as Capital expenditure., 6. Capital expenditure: painting the new factory is a direct cost till, an asset is first put to use, which is capitalized as per, Accounting Standard 10., Illustration 6:, State with reasons whether the following are Capital or, Revenue Expenditure:, 1. Freight and cartage on new machine Rs.150, and erection, charges Rs.200., 2. Fixtures of the book value of Rs.1,500 was sold off at Rs.600, and fixtures of the value of Rs.10,000 was acquired, cartage on, purchase Rs.50., 3. A sum of Rs.100 was spent on painting the factory., 4. Rs.5,150 spent on repairs before using a second-hand car, purchased recently to put it in useable condition., (FY, March 1995, adapted), Solution :, 1. Capital expenditure: Freight and cartage on new machine and, erection charges are capitalized as all costs till an asset is, installed are added to its cost as per Accounting Standard 10., 2. When fixtures are sold at Rs.600.Amount received on sale are, treated as Capital receipt and credited to Fixtures A/C; the, book value of the fixtures indicating Loss on sale of old fixtures
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121, (1,500-600) is treated as an expense (expired cost) and written, off by debit to the Profit and Loss Account cost of new fixtures, (Rs.10,000) and cartage (Rs.50) will be treated as Capital, expenditure., 3. Revenue expenditure: As painting the factory helps to maintain, the asset in good working condition., 4. Capital expenditure: Repairs before using a second-hand car, purchased recently to put it in useable condition are capitalized, as per Accounting Standard 10 which states that all direct costs, of bringing the asset to its working condition for its intended use, form part of the cost of the asset., Illustration 7:, State with reasons whether the following items relating to a, sugar mill company are capital or revenue:, 1. A motor truck costing Rs.15,000 and standing in the books at, Rs.7,250 was sold for Rs.12,000., 2. Rs.20,000 received from the issue of further shares, the, expenses of the issue being Rs. 2,500., 3. Rs.75,000 being cost of land purchased for agricultural farm and, `450 paid for land revenue., 4. Rs.1,50,000 paid for excise duty on sugar manufactures., 5. Rs.50,000 invested in a government loan, interest received, Rs.4,500, 6. Rs.60,000 spent on construction of railway siding., (FY, March 1996; adapted)., Solution :, 1. Capital receipt: As Rs.12,000 is received from sale of a capital, asset. The profit on sale of asset (Rs.12,000 - Rs. 7,250) will be, credited to the profit and loss account as an extraordinary item, of income on sale of motor truck., 2. Capital receipt: (Rs.20,000) : As amount has been received, from issue of shares in the course of financing activity of the, company. Rs.2,500 spent as expenses on issue of shares will, be treated as deferred revenue expenditure. It is not treated as, revenue expenditure because it is not a normal operating cost. It, is a nonrecurring expenditure. It is not treated as capital, expenditure because it does not create any real asset. Hence it, is treated as deferred revenue real asset. Hence, it is treated as, deferred revenue expenditure and written off over certain, number of years.
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122, 3. Rs.75,000 will be treated as capital expenditure as agricultural, land is a capital asset; Rs.450 paid for land revenue is revenue, expenditure in the course of normal operations of business., 4. Revenue expenditure: Excise duty on sugar manufactured is, the cost incurred during the course of normal business, operations incurred in order to earn income. It is recurring, expenses payable on manufacture of excisable goods., 5. Capital expenditure: Purchase of government loan is an, investment which will be returned on due date. Interest received, Rs.4,500, being income revenue income to be credit to Profit &, Loss A/C., 6. Capital expenditure: As cost of construction of railway siding is, for acquisition of a capital asset., Illustration 8 :, State which of the following items are capital, revenue and, deferred revenues. Explain with reasons., 1. Expenditure incurred on overhauling machinery., 2. Taxes paid., 3. Wages paid to the workers for election of a new machinery., 4. Cost of goodwill., 5. Heavy expenditure incurred on advertisements., 6. Cost of construction of a building., 7. Machinery costing Rs.10,000 sold for Rs.12,000, 8. Purchased machinery for Rs.15,000., (FY, October 1996; adapted), Solution :, 1. Revenue expenditure: As expenditure incurred on overhauling, machinery helps to maintain the machinery in working condition., 2. Revenue expenditure: If taxes are on goods purchased e.g., sales tax (Income tax is treated as drawings), goods, manufactured, then excise duty has to pay., 3. Capital expenditure: Wages paid to workers for erection of a, new machinery are capitalized as all costs till an asset is, installed are added to its cost as per Accounting Standard 10., 4. Capital expenditure: As cost of goodwill is an acquisition of, capital (intangible) asset., 5. Deferred revenue expenditure: If the heavy expenditure, incurred on advertisements is going to benefit for a number of, years.
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123, 6. Capital expenditure: As cost of construction of a building helps, to create a capital asset., 7. Capital receipt: As the amount of Rs.10,000 is received on sale, of fixed asset. Profit on sale (Rs.2,000) is credited to the Profit &, Loss A/c as an extra-ordinary item of income., 8. Capital expenditure: As it is an acquisition of a fixed asset., Illustration 9:, State whether the following expenditure is a capital, revenue, or deferred revenue expenditure. Give reasons:, 1. Legal expenses incurred in connection with issue of Equity, Shares of the company., 2. Cost of replacement of a defective part of the machinery., 3. Expenditure incurred in preparing a project report., 4. Expenditure for training employees for better running of, machinery., 5. Purchase of machinery for sale., 6. Daily wages paid to office peon., (FY, April, 1996, adapted), Solution:, 1. Deferred revenue expenditure: Legal expenses incurred in, connection with issue of equity shares are not treated as, revenue expenditure because the funds received from issue of, shares will benefit the concern for many years. It is not treated, as capital expenditure because it does not create any real, asset. Hence, it is treated as Deferred Revenue Expenditure, and written off over certain number of years., 2. Revenue expenditure: As replacement of a defective part will, help to maintain the machinery in working condition., 3. Capital expenditure: If the project is implemented; as, according to Accounting Standard 10, all expenditure till a, project commences is capitalized. However, if the project is, given up or not implemented and the amount is small, it will be, written off as revenue expenditure (as expired costs which will, bring no benefit in future); if the project is not implemented and, the amount is heavy, it will be treated as Deferred Revenue, Expenditure., 4. Revenue expenditure: As expenditure for training employees, for better running of machinery is cost of administration related, to normal business activities incurred in order to earn income, during the year.
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124, 5. Revenue expenditure: As expenditure incurred for purchase of, machinery for sale is a direct product cost related to normal, business activities incurred in order to earn income during the, year., 6. Revenue expenditure: As daily wages paid to office peon is, cost of administration related to normal business activities, incurred in order to earn income during the year., Illustration 10:, State whether the following expenditure is a capital, revenue, or deferred revenue expenditure. Give reasons:, 1. Payment for purchase of goods., 2. Payment for purchase of stationery., 3. Payment for purchase of a car., 4. Payment for heavy inaugural expenses., 5. Partial refund of capital to a partner., 6. Payment of a loan taken earlier., 7. Payment of salaries., 8. Wages for erection or machinery., (FY, October, 1996 adapted), Solution :, 1. Revenue expenditure: As expenditure incurred for purchase of, goods is a direct product cost related to normal business, activities incurred in order to earn income during the year., 2. Revenue expenditure: As purchase of stationary is cost of, administration related to normal business activities incurred in, order to earn income during the year., 3. Capital expenditure: As purchase of a car helps to create a, capital asset., 4. Deferred revenue expenditure: Heavy inaugural expenses are, not treated as revenue expenditure because these will benefit, the concern for many years. These are not treated as capital, expenditure because these expenses do not create any real, asset. Hence these are treated as deferred revenue expenditure, and written off over certain number of years., 5. Capital expenditure: As partial refund of capital to a partner, reduces the liabilities of the concern., 6. Capital expenditure: As payment of a loan taken earlier, reduces the liabilities of the concern.
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125, 7. Revenue expenditure: As salaries is cost of administration, related to normal business activities incurred in order to earn, income during the year., 8. Capital expenditure: As wages for erection of machinery is a, direct cost incurred for acquiring an asset which is to be, capitalized as per Accounting Standard 10., Illustration 11. :, State, with reasons, whether you would consider the, following as capital expenditure or revenue expenditure:, 1. Stock of Rs.25,000 was destroyed by fire of which Rs.15,000, was received from the Insurance Company., 2. The concern spent Rs.1,00,000 on heavy advertisement, campaign to introduce a new product in the market., 3. Cost of dismantling a plant from a particular locality and, reinstalling the same in another locality., 4. Cost of transporting newly purchased furniture., 5. Amount spent by factory in overhauling its plant which has, enhanced the life of the plant by five years., 6. Travelling expenses for a trip abroad for purchase of capital, goods., 7. Amount spent on replacement of defective part of an old plant., 8. Cost of Goodwill purchased., (FY, May 1998, adapted), Solution :, 1. Revenue loss / expenditure: Of net amount of Rs.10,000 as, loss of stock by fire is related to loss of current assets (stocks), and not capital assets. Insurance claim received is revenue, receipts., 2. Deferred revenue expenditure: Expenses on heavy, advertisement campaign to introduce a new product in the, market are not treated as revenue expenditure because these, will benefit the concern for many years. These are not treated, as capital expenditure because these expenses do not create, any real asset. Hence these are treated as deferred revenue, expenditure and written off over certain number of years., 3. Deferred revenue expenditure: Cost of dismantling a plant, from a particular locality and reinstalling the same in another, locality is not treated as revenue expenditure because it will, benefit the concern for many years. It is no treated as capital
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126, expenditure because it does not create any real asset. Hence, it, is treated as deferred revenue expenditure and written off over, certain number of years., 4. Capital expenditure: As cost of transporting newly purchased, furniture is a direct cost incurred for acquiring an asset which is, to be capitalized as per Accounting Standard 10., 5. Capital expenditure: Amount spent by factory in overhauling its, plant which has enhanced the life of the plant by five years is an, expenditure which helps to improve the standard of, performance (working life) of an existing asset and is to be, capitalized as per Accounting Standard 10., 6. Capital expenditure: As traveling expenses for a trip abroad for, purchase of capital goods is a direct cost incurred for acquiring, an asset which is to be capitalized as per Accounting Standard, 10., 7. Revenue expenditure: As amount spent on replacement of, defective part of an old plant will help to maintain the plant in, working condition., 8. Capital expenditure: As cost of Goodwill purchased is a direct, cost incurred for acquiring an asset which is to be capitalized, as per Accounting Standard 10., Illustration 12:, State, with reasons, whether you would consider the, following as capital expenditure or revenue expenditure:, 1. Professional fees paid in connection with acquisition of, leasehold premises., 2. Cost of registration and documentation of a newly formed, company., 3. Compensation paid to a retrenched employee for loss of, employment., 4. Expenditure incurred on purchase of cloth for uniform of, employees., 5. Payment of import duty on purchase of raw materials., (FY, November 1998, adapted), Solution:, 1. Capital expenditure: As professional fees paid in connection, with acquisition of leasehold premises is a direct cost incurred in, connection with the acquisition of an asset to be added to the, cost of that asset [Accounting Standard 10].
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127, 2. Deferred revenue expenditure: Cost of registration and, documentation of a newly formed company is not treated as, revenue expenditure because it will benefit the concern for, many years. It is not treated as capital expenditure because it, does not create any real asset. Hence it is treated as deferred, revenue expenditure and written off over certain numbers of, years. This type of expenses may be group known as, preliminary expenses., 3. Revenue expenditure: As compensation paid to a retrenched, employee for loss of employment is an administrative, expenditure incurred in the course of normal business activities., However, if the amount is heavy, it may be treated as Deferred, Revenue Expenditure, as it is a non-recurring expenditure, not, in the normal course of business which benefits the business for, many years by way of reduction in salary., 4. Revenue expenditure: As purchase of cloth for uniform of, employees is an administrative expenditure incurred in the, course of normal business activities., 5. Revenue expenditure: As payment of import duty on purchase, of raw materials is a direct product cost incurred in the course of, normal business activities in order to earn income. It should be, added to cost of material purchased., Illustration 13 :, Saraswati Sisters removed their factory to their New Mumbai, premises. They carried out the following transactions:1. Cost of dismantling, transporting and re-installing the plant, Rs.50,500., 2. An old plant having depreciated value of Rs.60,000 was sold for, Rs.55,000., 3. A new machine was purchased for Rs.2,00,000 and installed at, the cost of Rs.35,000., Apportion these into capital and revenue., (IDE March 2000, adapted), Solution :, 1. Deferred revenue expenditure: Cost of dismantling,, transporting and re-installing plant etc. is not treated as revenue, expenditure because it is not a normal operating cost. It is not, treated as capital expenditure because it does not create any, real asset. Hence it is treated as deferred revenue expenditure, and written off over certain number of years.
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128, 2. Capital receipt: As the machine has been sold, its book value, represents an ‘expired cost’ with no future benefits i.e. loss on, sale of asset which is to be written off. Rs.55,000 is treated as, capital receipt., 3. Capital expenditure: Cost of new machine (Rs.2,00,000) will, be treated as capital expenditure. Installation cost (Rs.35,000) is, a direct cost of bringing an asset to a condition where it can be, put to use which is capitalized as per Accounting Standard 10., Therefore, cost of machinery shall be Rs.2,35,000., , 7.16 EXERCISES, 1. Write short notes on, a) Capital Expenditure, b) Deferred Revenue Expenditure, c) Capital Profit, d) Revenue Expenditure, e) Revenue Profit., 2. Distinguish between, a) Capital expenditure & revenue expenditure., b) Revenue expenditure & deferred revenue expenses., c) Revenue receipts & income., d) Revenue profits & capital profit., e) Revenue receipt & capital receipt., 3. Practical problems, Exercise 1 : S. Jaggi sells and services typewriters. State which of, the following are capital expenditure and which are revenue, expenditure, giving reasons for your answer., a. Purchase of a typewriter for office use., b. Purchase of typewriters for re-sale., c. Traveling expenses to service typewriters., d. Purchase of spare parts to service typewriters., e. Wages of mechanic, f. Wages of office staff., g. Telephone charges., h. Purchase of tools for servicing work., [Ans. Capital - (a), (h); Revenue - other], Exercise 2: Indicate - briefly giving your reasons in each case which of the following represent capital receipts, capital, expenditure, revenue income, revenue expenditure.
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129, a. Interest on bank overdraft., b. Purchase of typewriter for re-sale by the Office Supplies Co., c. Purchase of typewriter for office use by the Sonali Social, Club., d. Sale of a delivery van by Office Supplies Co., e. Receipt of commission by a firm of brokers., [Ans. CR - (d); CE - (c); RI - (e); RE - (a), (b)], , Exercise 3: State which of the following are Capital Expenditure, and which are Revenue Expenditure, giving reasons in each case., i), , Payment by cheque for carriage on purchases., , ii), , Purchase of packing material for distribution of goods from, the Calcutta Paper Mill Ltd., , iii), , Purchase of duplicator for use in own office from Gulab &, Co., , iv), , The firm acquired a private car from B. Raha, one of the, partners of the firm., [Ans. RE - (i) & (ii); CE - (iii) & (iv)], , Exercise 4: During the year 2017 A. Ashar had the following, transactions :1. Purchased a new motor van Rs.17,500 from B.G. Traders Ltd., on credit., 2. Paid cheque Rs.740 to Office Furnishing Ltd. being Rs.650 for a, new office desk and Rs.90 for repair of an existing desk., 3. Paid Rs.1,420 by cheque for repairs and improvements to, premises. Rs.1,000 of this amount is to be capitalized., 4. Purchased additional premises for Rs.30,000 which was paid by, cheque., State the total amount of capital expenditure involved in the above, transactions., [Ans. Capital expenditure - Rs. 49,150], , Exercise 5: State with reasons whether the following are Capital or, Revenue expenditure:, 1. Expenses incurred in connection with obtaining a licence for, starting the factory were Rs. 8,000., 2. Rs.1,500 paid for removal of stock to a new site., 3. Rings and Pistons of an engine were changed at a cost of Rs., 4,000 to get fuel efficiency.
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130, 4. Rs. 2,500 spent as lawyer’s fee to defend a suit claiming that, the firm’s factory site belonged to the plaintiff. The suit was not, successful., 5. Rs. 8,000 were spent on advertising the introduction of a new, product in the market, the benefit of which will be effective, during four years., 6. A factory shed was constructed at a cost of Rs.1,20,000. A sum, of Rs.7,000 had been incurred in the construction of temporary, huts for storing building material., [Ans. : CE - (i), (iii), (vi), RE - (ii), (iv); DRE - (v)], , 4. Objectives type Questions:, Multiple Choice Questions:, 1) Amount received from insurance company on account of, machinery damaged completely by fire., a) Capital Receipts, b) Revenue Receipt, c) Revenue Expenditure, d) Capital Expenditure, 2) Subsidy of Rs.20,000 received from Government by a, manufacturing concern., a) Capital Receipt, b) Capital Expenditure, c) Deferred Revenue income, d) Revenue Receipts, 3) Grant Rs.5,00,000 received from Government for construction, of Building., a) Revenue income, b) Capital Income, c) Capital Receipts, d) Non of the above, 4) Amount received from I.F.C.I. as a medium term loan for, working capital., a) Deferred Revenue income, b) Capital Receipt, c) Revenue Receipts, d) Capital Profit, 5) Painting of office premises Rs.---1,00,000 once in five year., a) Revenue Expenditure, b) Revenue loss, c) Deferred Revenue Expenditure d) Capital Expenditure, Ans. : 1 - a, 2 - d, 3 - c, 4 - b, 5 - c, Multiple Choice Questions:, Pick up the correct answer from the following choices:, 1) Amount received from S.B.I. as a term loan., a) Revenue Receipt, b) Capital Receipt, b) Capital Loss, d) Non of above
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131, 2) Dividend on shares received, a) Deferred Revenue Income, c) Revenue Income, , b) Revenue expenses, d) Capital Gain, , 3) Insurance claim received for loss of stock by fire., a) Revenue Loss, b) Capital Loss, c) Revenue Receipt, d) Capital Receipt, 4) Subsidy of Rs.10,000 received from Government for purchase, of computer., a) Capital Receipt, b) Revenue Receipt, c) Capital Loss, d) Liability payable, 5) Audit fees paid to Chartered Accountant., a) Revenue Expenditure, b) Capital Expenditure, c) Capital Loss, d) Revenue Receipts, 6) Legal fees paid to lawyer to defend civil suit., a) Capital Expenditure, b) Revenue expenditure, c) Deferred Revenue expenditure d) Non of the above, 7) Travelling expenses of the director on trips abroad for purchase, of machinery., a) Revenue expenditure, b) Capital Expenditure, c) Revenue Loss, d) All of the above, Ans. : 1 - b, 2 - c, 3 - c, 4 - a, 5 - a, 6 - b, 7 - b, Multiple Choice Questions:, Pick up the correct answer from the following choices :, 1) A bad debts recovered during the year., a) Capital receipt, b) Revenue Receipt, b) Revenue loss, d) Capital expenditure, 2) Sale of old plant & machinery at loss., a) Capital loss, b) Capital gain, c) Capital Receipt, d) Revenue receipt, 3) Heavy advertisement expenditure to launch a new product., a) Revenue Expenditure, b) Capital expenditure, c) Deferred Revenue Expenditure d) Revenue loss, 4) Annual white-washing expenses., a) Capital Expenditure, b) Revenue Expenditure, c) Revenue loss, d) Deferred Revenue expenditure
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132, 5) Goods withdrawn by proprietor for own use., a) Capital Gain, b) Capital loss, c) Capital Receipt, d) Non of the above, 6) Stationery purchased for office use., a) Revenue expenditure, b) Capital expenditure, c) Revenue loss, d) Capital loss, 7) Amount spend on the overhauling of old machinery purchased., a) Capital expenditure, b) Revenue expenditure, c) Deferred revenue expenditure, d) Capital loss, 8) Placed an order for purchase of plant., a) Capital expenditure, b) Revenue expenditure, c) Revenue loss, d) None of the above, Ans. : 1 - b, 2 - c, 3 - c, 4 - b, 5 - d, 6 - a, 7 - a, 8 - d, Match the following columns :, 1), 2), 3), 4), 5), , Column A, Capital work-in-progress, Raw material purchased, Heavy advertisement, Sale of old furniture, Purchase of shares, , a), b), c), d), e), f), g), , Column B, Deferred revenue expenditure, Capital Receipt, Investment, Revenue expenditure, Drawing, Capital expenditure, Deferred revenue income, , Ans. : 1 - g, 2 - d, 3 - a, 4 - b, 5- c, Match the following columns :, a), b), c), d), e), f), , Column A, Capital receipt, Revenue expenditure decrease, Current assets, Bills payable, An Expenditure from which no, future benefit is expected, Capital introduced by the, proprietor, , i), ii), iii), iv), v), , Column B, Profit for current year, Sundry debtors, Current liability, Revenue expenditure, Non-recurring nature, , vi) Capital receipt, vii) Fixed Assets, viii) Fictitious assets, , Ans. : a - v, b- i, c- ii, d- iii, e- iv, f - vi
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133, State with reasons whether the following statements are True, or False., i) Legal fees paid to acquire a property is capital expenditure., ii) Expenses incurred on the repairs & white washing for the first, time on purchase of an old building are revenue expenditure., iii) Amount spent for replacement of worn out part of machine is, revenue expenditure, iv) Expenditure means payment made by business to obtain some, benefit., v) Capital expenditure is recurring in nature., vi) Intangible asset is an asset which has a physical identify., vii) Revenue expenditure reduces profit & funds for the year., Ans. : True : i, ii, iv, vii, False : iii, v, vi, State with reasons whether the following statements are True, or False., a) Carriage paid for purchases of machinery is capital expenditure., b) Repairs to furniture Rs.500 is capital expenditure., c) A petrol car engine was replaced by a diesel engine is revenue, expenditure., d) Purchase of 10% Govt. loan is capital expenditure., e) Custom duty paid on import of raw materials is revenue, expenditure., f) A sum of Rs.45,000 was spent on painting of office building, once in five years is revenue expenditure., Ans. : True : a, d, e,, False : b, c, f., , ,
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134, , Unit-8, FINAL ACCOUNTS OF MANUFACTURING, CONCERN [PROPRIETARY FIRM], UNIT STRUCTURE, 8.0, 8.1, 8.2, 8.3, 8.4, 8.5, 8.6, 8.7, 8.8, , Objectives, Introduction, Manufacturing Account, Trading Account of A Manufacturer, Profit & Loss Account, Balance Sheet, Specimen Forms, Adjustments, Exercise, , 8.0, , OBJECTIVES, , After studying the unit, students will be able to:, Understand the meaning, purpose, form and items of, Manufacturing A/C., Understand the form and items of Trading A/C and Profit &, Loss A/C., Know the meaning and form of Balance sheet., Draw the specimen forms of final accounts., Understand the meaning, types and closing entries for, adjustments., , 8.1, , INTRODUCTION, , All business transactions are recorded in books of accounts., The primary function of accounting is to accumulate accounting, data in a manual that the amount of profit or loss suffered during, the period can be determined along with status of the business in, financial terms. Final Accounts are prospered for this purpose. Final, Accounts are also known as Financial Statements. Preparation of, Final Accounts is last phase of the accounting process., The accounting process starts from recording all business, transactions in set of books. At the end of accounting year, a
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135, statement is proposed listing all balances namely Debit & Credit., This statement is called Trial Balance. The total of debit and credit, balances must tally with each other., This chapter deals with preparation of Final Accounts of, manufacturing concern carried on by sole proprietor. Sole, proprietor concern means business is camped and headed by one, person only., Final Accounts of Manufacturers include Manufacturing A/C,, Trading A/C, Profit & Loss A/C and Balance Sheet. Normally Final, Accounts are prepared for a period of 12 months, called as, Accounting Year, Calendar Year (ending on 31st December) or, Financial Year / Govt Year (ending on 31st March) or it many any, other year ended (Diwali)., The purpose of preparing Manufacturing A/C is to ascertain, cost of goods produced during the period. Manufacturing A/C is, part of Final Account, it addition to Trading A/C and Profit & Loss, A/C. Costs of finished goods produced are then transferred to, Trading Account. Trading and Profit & Loss A/C is prepared to find, out gross profit and net profit/loss of the year. These accounts, measure the result of business operations. It is essential to match, revenues of an accounting period with costs assignable in earning, the said revenues. This process is known as “The Matching, Concept” which leads to the preparation of Final Accounts. Balance, Sheet is prepared to show the financial position of the business at, the end of accounting year., Once all the adjustment entries are passed, the Trial, Balance contains a ready list of the closing balances of all ledger, accounts. The Trial Balance can now be directly used for preparing, the Final Accounts i.e. the Profit & Loss Account and the Balance, Sheet. In case of a Manufacturer, the Profit & Loss Account is, divided into: (a) Manufacturing Account, (b) Trading Account and, (c) Profit & Loss Account. In case of a trader, the Profit & Loss, Account is divided into: (a) Trading Account, and (b) Profit & Loss, Account. Each account in the Trial Balance must be shown in either, the Profit & Loss Account or the Balance Sheet., , 8.2, , MANUFACTURING ACCOUNT, , 8.2.1 Meaning:, A manufacturer sells finished goods manufactured by, himself in his factory; while a trader sells goods purchased by him, from the manufacturer. The manufacturer purchases raw materials, and converts them into finished goods by means of machinery and
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136, labour in the factory. So, it is necessary for a manufacturer to, spend on wages to workers, on the manufacturing process, on the, factory etc. The manufacturer, therefore, prepares a “Manufacturing, Account” to find out his cost of finished goods manufactured., Manufacturing A/C means an account showing the summary of the, cost of the manufacturing activity during the accounting year., 8.2.2, , Purposes, , The manufacturing account serves the following purposes., i) It shows total cost of finished goods manufactured., ii) It also shows cost of raw material consumed., iii) It also provide details of appropriate i.e. direct and indirect, manufacturing cost., iv) Comparison of cost of finished goods as per Manufacturing, Account and as per cost records kept by Costing Department., v) Finished goods manufactured may be transferred to Trading, at market price. In such care production profit can be, ascertained., 8.2.3 FORM, Manufacturing Account is a ledger account. Its title is written, as Manufacturing Account for the year ended ….. It is divided into, two equal sides Debit and Credit, (see Worksheet 6.5 for specimen, Manufacturing Account.), 8.2.4 ITEMS, A Manufacturing Account contains the following items:, 1. Opening Stock of WIP:, The opening stock of Work-in-process (WIP) is shown as the, first item on the debit side of the Manufacturing Account. Workin-process means raw materials not yet fully converted into, finished goods, also known as partly finished goods. The value, of Work-in-Process is made up of the cost of raw material and, the manufacturing expenses incurred for processing., 2. Raw Materials:, Next, the consumption of raw materials (also called Rs.direct, materials’) is shown as follows:, Opening stock of raw materials., Add : Purchase of raw materials, Add : Direct Purchase Expenses, (Carriage inwards, freight inwards, octroi, customs duties), Less : Purchase returns of raw materials, Less : Closing stock of raw materials, = Consumption of raw materials
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137, Direct purchase expenses means all expenses incurred in, connection with purchase of raw materials e.g. transportation,, loading and unloading, coolie charges, insurance etc. Goods may, be purchased locally or imported from other countries. Local, purchases involve expenses of Carriage inward, Freight inward,, Coolie charges and cartage etc. Imported goods involves imports, expenses of dock dues, customs duties, insurance etc. These, expenses increase the cost of purchased raw materials., a) Carriage Inward: Carriage expenses means expenses for, transporting goods. These are also known as freight, cartage,, coolie and cartage etc. The expenses for transporting the goods, purchased from the supplier to manufacturer’s premises, known, as Carriage inward. Freight inward etc. are debited to the, Manufacturing Account. The expenses on transporting the, goods sold from manufacturer’s premises to the customer,, known as Carriage outward, Freight outward, are debited to the, Profit & Loss A/C. The expenses on transporting new machinery, etc. purchased are debited to the Machinery A/C. i.e. that, expenses are capitalized., b) Octroi Duty: Octroi duties mean the taxes paid to a Municipality, on goods brought within the municipal area from outside. Octroi, on purchase of goods is debited to the Manufacturing Account., Octroi on machinery purchased is debited to the Machinery A/C., c) Dock Dues, Custom Duties: Dock dues mean the expenses of, unloading the goods in a port. Custom duties means the taxes, paid to the Government; on goods imported from other, countries, also known as import duties. Freight, insurance, dock, dues and customs duties on imports of Raw Materials are, debited to the Manufacturing Account. However, if goods are, sold to other countries (exported), expenses on such exports, (freight, dock dues for loading the goods on ship, export duties, etc.) should be debited to the Profit & Loss Account, since they, are selling expenses. Dock dues and custom duties on, machinery imported are debited to the Machinery A/C., (3) Wages: These include the wages paid to workers directly, engaged in production, also known as direct or productive, wages or direct labour costs. (A combined item of Wages and, Salaries appearing in the trial balance is shown in the, Manufacturing Account, while a combined item of Salaries and, Wages is shown in the Profit & Loss Account)., (4) Manufacturing Expenses: These include the expenses directly, connected to manufacture such as royalty, hire charges of, special machinery, design expenses etc. While royalty for using, know-how connected with manufacturing process is taken to
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138, Manufacturing Account, royalty for use of trade mark is a selling, expense shown in the Profit and Loss Account., (5) Factory Expenses : These include all expenses incurred at the, factory such as (a) stores, oil, grease (b) salary to supervisors, (c) power and fuel (d) repairs and maintenance of factory, building and machinery (e) depreciation of factory assets such, as factory building and machinery (f) rent, rates and taxes,, insurance, lighting of factory building and so on., (6) Closing Stock of WIP: The value of closing stock of work-inprocess is shown on the credit side of the Manufacturing, Account., [Note: Alternatively, instead of showing opening WIP on debit and, closing WIP on credit, the difference between the opening and, closing stocks of WIP is calculated first. If opening stock is more, than closing stock, the difference (opening stock of WIP – closing, stock of WIP) is shown on the debit side of the Manufacturing A/C;, if closing stock is more than opening stock (closing stock of WIP –, opening stock of WIP), the difference is shown on the credit side of, the Manufacturing A/C].”, (7) Sale of Scrap: Sale of scrap is shown on the credit side of the, Manufacturing Account., (8) Cost of Production: The cost of production of goods is found, out by balancing the Manufacturing Account. The Manufacturing, Account is balanced like a ledger account. We take the totals of, both the debit and credit sides of the Manufacturing A/C. In a, Manufacturing A/C, the debit side will always be bigger than the, credit side. This indicates the Net Cost of Production of the, concern. Thus, Gross cost of production Less WIP (Closing), and Sales of scrap = Net cost of production. We write the, amount of cost of production on the credit side of the, Manufacturing A/C and carry it down to the debit side of the, Trading Account. The cost of production (also known as cost of, manufacture or cost of goods produced is transferred to the, Trading Account in order to find out the Gross Profit or Gross, Loss on sale of finished goods., 8.2.5, , CLOSING ENTRIES:, , The following worksheet shows entries to be passed to, transfer the closing balances of the Goods Accounts and other, Manufacturing Expenses Accounts, to the Manufacturing Account:
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139, WORKSHEET 1: CLOSING ENTRIES, (MANUFACTURING A/C), No., (1), , Entries, , Amount, , Transfer Debit Balances :, , Dr., , Manufacturing Account, , (2), , Dr., , X, , To Opening Stock of WIP A/c, , X, , To Raw Material Purchases A/c, , X, , To Direct Purchase Expenses A/c, , X, , To Wages A/c, , X, , To Manufacturing Expenses A/c, , X, , To Factory Expenses A/c, , X, , Closing Stock of WIP :, Closing Stock of WIP A/c, , Dr., , X, , To Manufacturing Account, (3), , X, , Sales of Scrap :, Sales of Scrap A/c, , Dr., , X, , To Manufacturing Account, (4), , X, , Transfer Cost of Production to Trading, A/c., Trading Account, , Dr., , X, , To Manufacturing Account, 8.2.6, , Cr., , X, , TRANSFER AT PRICE HIGHER-THAN-COST:, , 1) Transfer at Sales Price or Cost + Fixed %: We have already, seen how manufacturing account is prepared when the, manufactured items are transferred at cost to the Trading, account. However, the items produced by the manufacturing, section may be transferred to the Trading A/C at a price higher, than the cost i.e. (i) at cost plus a mark-up (e.g. cost + 25%); or, (ii) at selling price., 2) Entries for Transfer: If the goods are transferred at a higherthan-cost price, the transfer to the Trading A/C will be credited, to the Manufacturing Account at the transfer value (i.e. loaded, price or selling price) and not at cost of manufacturing. The, excess of transfer price over the cost of manufacturing will, indicate the manufacturing profit. If, cost of manufacturing is, more than the transfer price it shows as manufacturing loss.
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140, 3) Closing Stock of Finished Good at Transfer Value: If some, of the manufactured goods remain unsold and form part of the, closing stock of finished goods at the year-end, such closing, stock will be valued at the transfer price in Trading A/C., If the transfers to the Trading Account were made at cost price,, the closing stocks would also be valued at cost and no further, adjustment is needed., If all the goods transferred at higher-than-cost have been sold, it, means that the anticipated profits have been actually earned, and no further adjustment need be made., However, if any of the finished goods transferred to the Trading, Account at loaded price or selling price are in stock, the value of, the stock needs to be adjusted. Thus, if the cost is Rs.100 and, the goods are transferred at Rs.120, the profit element (Rs.20), is included in the closing stock. Otherwise, it will amount to, taking credit for anticipated or unrealised profit which is against, the accounting principle of “conservatism.” Unrealised profit, included should be considered as Stock Reserve., 4) Stock Reserve: The unrealised profit in closing stock is, eliminated by creating a stock reserve in respect of the stock of, manufactured goods. The amount of stock reserve is calculated, by the following formula:, Stock reserve =, , Transfer Value of Stock, , Profit Included in Transfer Price, Transfer Price, , 5) Entry for Stock Reserve: The creation of the reserve is made, by the concern in the General Profit and Loss Account as, follows:, Profit of Loss A/c., To Stock Reserve A/c., , Dr., , (Being the reserve created for unrealised profit included in, closing stock), 6) Balance Sheet: The relevant part of the Balance Sheet will, appear as follows:
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141, Balance Sheet as at…., Assets, Current Assets :, Closing Stock (Transfer Value) xx x y, Less : Stock Reserve, (xx), , Rs., , XX, XX, , 7), , Next Year: In the beginning of the next year, the above entry, is reversed as follows:, Stock Reserve A/c., Dr., To Profit & Loss A/c., , 8.3, , TRADING ACCOUNT OF A MANUFACTURER, , 8.3.1, , ITEMS, , 1) Opening Stock of Finished Goods: The opening stock of, Finished Goods (FG) is shown as the first item on the debit side, of the Trading Account., 2) Cost of Finished Goods manufactured: Next, the Cost of, goods manufactured transferred from the Manufacturing, Account is shown on debit side of the Trading Account., 3) Sales of Finished Goods: The net sales of finished goods, (sales less returns) are shown on the credit side of the Trading, Account., 4) Other Out Going of Finished Goods : Sometimes, the Trial, Balance or it may be given by way of adjustment may contain, Other Goods Accounts such as Goods Lost by Fire A/c, Goods, Withdrawn by Proprietor, Goods Distributed as Free Samples,, etc. These accounts record the cost of finished goods lost,, withdrawn or distributed. Since goods go out, these accounts, are shown on credit side. These balances are transferred on the, credit of the Trading Account., 5) Closing Stock of Finished Goods: The closing stock of, Finished Goods is shown as the next last item on the credit side, of the Trading Account., 6) Gross Profit or Gross Loss: The final result is found out by, balancing the Trading Account. The Trading Account is, balanced like a ledger account. We take the totals of both the, debit and credit sides of the Trading A/c. If the credit side is, higher, it indicates that the value of sales is more than the cost, of goods manufactured & sold. This is called the Gross Profit
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142, earned by the business. Thus, Income From Goods Sold Less, Cost of Goods Sold = Gross Profit. We write the amount of, Gross Profit on the debit side and carry it down on credit side of, the Profit and Loss Account. If the debit side is higher, it, indicates that the cost of manufacture is more than the value of, sales. This is called Gross Loss. Gross Loss = Cost of Goods, Sold Less Sales. We write the amount of Gross Loss on the, credit side of the Trading A/c and carry it down to the debit side, of the Profit and Loss Account. The Gross Profit or Gross Loss, is transferred to the Profit and Loss Account in order to find out, the Net Profit or Net Loss after deducting other indirect, expenses. Thus, Gross Profit Less Expenses = Net Profit. In, case expenses are more than Gross Profit, then it amounts, to Net Loss., 8.3.2, , Closing Entries:, The following worksheet shows entries to be passed to, transfer the closing balances of the Sales Accounts and other, Accounts, to the Trading Account:, WORKSHEET 2: CLOSING ENTRIES (TRADING A/C), A/o., Entries, (1) Transfer Debit Balances :, Trading Account, Dr., To Opening Stock of Finished Goods A/c, To Returns Inwards A/c, (2) Transfer Credit Balances :, Sales of Finished Goods A/c., Dr., Finished Goods Lost/Taken/Distributed A/c, (at cost), Dr., To Trading A/c, (3) Closing Stock of Finished Goods, Closing Stock of Finished Goods A/c Dr., To Trading Account, (4) Transfer Gross Profit or Gross Loss to, Profit & Loss A/c:, (i) Gross Profit :, Trading Account, Dr., To Profit & Loss A/c, (ii) Gross Loss :, Profit & Loss A/c, Dr., To Trading Account, , Amount, Dr., Cr., X, X, X, X, X, X, X, X, X, , X, X, X, X
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143, , 8.4, , PROFIT & LOSS ACCOUNT, , 8.4.1, , Meaning, , Closing balances of all nominal accounts, relating to the, remaining income and expenses are transferred to Profit & Loss, A/c. Debit side of the Profit & Loss A/c shows expenses like, Administrative Expenses, Selling Expenses, Financial Expenses,, Depreciation and other Unusual Expenses and Losses. Credit side, of the Profit & Loss A/c shows Other Business Incomes and Gains., The balance of the Profit & Loss A/c shows the result of business, operations during the year. The net profit or net loss shown by the, Profit & Loss A/c is transferred to the Capital Account of the, proprietor., 8.4.2, , FORM, , Profit & Loss Account is a ledger account. Its title, is written, as “Profit & Loss Account for year ended….. “ It is divided into two, equal sides: Debit and Credit as per the specimen shown in, Worksheet 7., 8.4.3, , ITEMS, The following items normally appear in a Profit & Loss, Account., (1) Gross Profit or Gross Loss b/d : The Gross profit b/d from the, Trading Account is the first item on the credit side of the Profit &, Loss Account. If there is Gross loss, it is the first item shown on, the debit side of the Profit & Loss Account., (2) Administrative Expenses: Administrative expenses are the, expenses incurred to plan, organize, administer and control the, business. Examples are (a) Salaries to office staff, (b) Rent,, rates, insurance, lighting of office, (c) Printing, telephones, telex,, postage, (d) Depreciation and repairs of office equipments,, building, furniture, vehicles, (e) Legal charges, Audit charges,, Bank charges etc., (3) Selling and Distribution Expenses: Selling expenses are the, expenses incurred to create and increase demand for goods., Distribution expenses are the expenses incurred from the time, goods sold leave the trader’s premises till the goods reach the, customer. Examples are (a)Packing materials (b) Salaries of, Sales and Distribution staff (c) Traveling, Conveyance (d), Commission or discount on sales (Advertisement or showroom, expenses (f) Warehouse or sales office rent, rates, insurance,, lighting etc. (g) Freight outward, carriage outwards, expenses, on exports (h) Depreciation and repairs or delivery van, vehicles, etc.
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144, (4) Finance & Interest Expenses: Finance expenses are the, expenses incurred to obtain loans, bank charges and cash, discount to debtors etc. The other item shown under this head is, interest paid on loans., (5) Losses: Losses include amounts lost by the business by way of, Goods lost by fire, Goods distributed as free samples, Bad, debts, Loss on sale of fixed assets etc. These are debited to the, Profit & Loss Account., (6) Other Income : Other income includes amounts received by, way of interest on loans given, dividends received on amounts, invested in shares, rent received from premises given on rent,, discount received, commission received, Profit on sale of fixed, assets and so on. All these amounts/incomes are credited to the, Profit & Loss Account., (7) Gains: Gains includes amounts received by the business by, way of recovery of bad debts, subsidies or grants received etc., These are credited to the Profit & Loss Account., (8) Appropriations: Appropriations mean amounts transferred out, of net profits for payment of income-tax or creating a reserve, (e.g. reserve for contingencies). These appear on the debit side, of the Profit & Loss A/c. Income Tax is considered as personal, expenses. Therefore, it should be treated as Drawings., 9) Net Profit or Net Loss: The net profit or the net loss is found, out by balancing the Profit & Loss Account. The Profit & Loss, Account is balanced like a ledger account. We take the totals of, both the debit and credit sides of the Profit & Loss Account. If, the credit side is higher, it indicates that the Total Income is, more than the Total Expenses. This is called the Net Profit, earned by the business. Thus, Income Less Expenses = Net, Profit. In the next step, the amounts of income tax or transfer to, Reserves etc. (known as Rs. appropriations’ out of profits) are, debited to the Profit and Loss Account. Appropriations can be, made only after ascertaining the amount of net profits (as the, amount of income-tax depends upon the amount of net profits)., Then, write the amount of Net Profit on the debit side and, transfer it to the credit of the Capital Account., If the debit side is higher, it indicates that the Expenses are, more than Income. This is called Net Loss. Thus, Expenses Less, Income = Net Loss. In case of net losses, there can be no, appropriations (e.g. no income-tax is payable if there is a net loss)., We write the amount of Net Loss on the credit side of the Profit &, Loss Account A/c and transfer it to the debit of the Capital Account., The Net Profit or Net Loss belongs to the owner and hence is
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145, transferred to the Capital Account. The net profit is a reward to the, owner for his money invested in the business, for his efforts in, running the business and for the risks taken by him., 8.4.4, , Closing Entries:, , The following work-sheet shows entries to be passed to, transfer the closing balances of the Nominal Accounts to the Profit, & Loss Account:, WORKSHEET 4: CLOSING ENTRIES (P & L A/C), No., (1), , Entries, Transfer Debit Balances :, Profit & Loss Account, , (2), , Amount, Dr., Dr., , X, , To Various Expense Accounts, , X, , To Various Losses Accounts, , X, , Transfer Credit Balances :, Various Income Accounts, , Dr., , X, , Various Gains Accounts, , Dr., , X, , To Profit & Loss Account, (3), , X, , Appropriations :, Profit & Loss Account, , (4), , Cr., , Dr., , X, , To Income-tax (Drawings), , X, , To Reserve (e.g. Contingency Reserve) A/c, , X, , Transfer Net Profit or Net Loss to Capital A/c, (i) Net Profit:, Profit & Loss Account, , Dr., , X, , To Capital A/c, , X, , (ii) Net Loss :, Capital A/c, To profit & Loss A/c, CHECK YOUR PROGRESS, 1. Define the following terms, a. Appropriations, b. Finance expenses, c. Selling and distribution expenses, d. Administration expenses, , X, X
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146, e. Manufacturing A/c, f. Direct Expenses, g. Stock reserve., 2. Fill in the blanks:, a. If the debit side of the Profit and Loss A/c is higher, it, indicates ----------------., b. Gross loss is shown on the ----------------side of the P &L A/c., c. --------- side of the Profit & Loss A/c shows Expenses., d. The Income From Goods Sold Less Cost of Goods Sold = --------------------., e. Manufacturing Account is prepared to find out cost of ---------., f. Opening and closing balances of finished goods are shown, on the ----------------------- A/c., 3. Enlist the items to be shown on the debit side of the, Manufacturing A/c., 4. Give the formula for calculating the consumption of raw, materials., , 8.5, , BALANCE SHEET, , 8.5.1, , Meaning, , From the Trial Balance, all Nominal (manufacturing, Expenses) Accounts are transferred to the manufacturing and, Trading Account and all the Nominal Accounts of Income and, Expenses are transferred to the Profit & Loss Account. At this, stage, only the Real Accounts pertaining to Assets and the, Personal Accounts of debtors, creditors and liabilities remain in the, Trial Balance. All these remaining accounts are shown in a, statement known as the Balance Sheet. Balance Sheet is a, statement containing the list of all Real and Personal Accounts as, on a particular day, normally the year end. The Real Accounts and, Personal Accounts are classified in the Balance Sheet into Assets, and Liabilities. Debtors are included under Assets and Creditors, and Capital Account are shown under liabilities. Hence, Balance, Sheet also means a statement of assets and liabilities of the, business as on the last day of the accounting year. Balance Sheet,, thus, shows the financial position of the business i.e. what it, owns and what it owes., Balance Sheet is not an account; it is a statement. As its, name suggests, it is a Sheet of Balances, remaining after the, Manufacturing, Trading and Profit & Loss Account is prepared., While preparing a Balance Sheet, no closing entries are passed, as, the balances are not transferred from the Trial Balance, but only, listed in the Balance Sheet. Various Assets & External Liabilities, may be transferred to Capital Account by passing following entries.
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147, Date, 31.3 1], , Particulars, Capital A/c, , L. F., Dr., , Dr., Rs., , Cr., Rs., , X, , To Fixed Assets A/c, , X, , To Current Assets, , X, , [Being various assets transferred, to capital A/c], 2], , Loans A/c, , Dr., , X, , Sundry creditors A/c, , Dr., , X, , Bills Payable A/c, , Dr., , X, , Other Sunday Liabilities A/c Dr., , X, , To Capital A/c, , X, , After passing above entries at the end of the year, all, accounts are closed., In next year above entries are revised, to open books of, Accounts., The balances appearing in the Balance Sheet are carried, forward as the opening balances of these accounts in the ledger of, the next year. A Balance Sheet need not be balanced; its totals, must always tallied. The Total Assets must always be equal to the, Total Liabilities., 8.5.2 Form:, The title is written as Balance Sheet as on… Balance Sheet, is not an Account, hence the words DR. and CR. are not required., Balance Sheet is vertically divided into two side: Left Hand Side, and Right Hand Side. Left hand side of the Balance Sheet shows, Liabilities like Capital, Reserves, Loans, Creditors for goods,, outstanding expenses etc. Right hand side of the Balance Sheet, shows Assets e.g. Fixed Assets (Gross Cost Less Depreciation),, Investments, Current Assets like pre-paid expenses, advances,, debtors, stock, cash bank etc. (See Worksheet 8.), 8.5.3 Order:, The Various items of assets and liabilities are listed in the, order of permanence of the items. On the Assets side, the, permanent or the long term items i.e. the Fixed Assets are shown, first, followed by short term assets i.e. the current assets. On the, Liabilities side, the long term liabilities i.e. Capital and Loans are
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148, shown first, followed by short term liabilities i.e. current liabilities. In, case, the items are shown in order of liquidity, the assets and, liabilities are shown in the reverse order, i.e. short term items are, shown first, followed by long term items., 8.5.4 Items:, (1) Fixed Assets: Fixed Assets are items like Goodwill, Land,, machinery, building and trucks etc, which benefit the business for a, long term. Fixed assets are not normally sold: Fixed Assets may be, tangible or intangible. Tangible Assets are items like machinery,, building etc. which physically exist (tangible means that which can, be touched). Intangible Assets are invisible items like Goodwill,, Patent, and Trade Marks etc. which do not physically exist, but do, benefit the business over a long period of time. Goodwill means the, reputation of a concern which attracts more and more customers to, it., enables to earn more super profit on Capital employed. Patent, means a legal right of an inventor or of a new product to exclusively, use or sell such product. Trade Mark is a registered name or, symbol of a product which can be used only by the owner of the, trade mark., (2) Investments: Investments includes items like Shares,, Debentures and Savings certificates etc. which earn interest or, dividends., (3) Fictitious Assets: Fictitious Assets include items like Deferred, Revenue Expenses, Preliminary Expenses etc. Deferred Revenue, Expenses is defined as the expenses which are carried forward as, their benefit is also available in subsequent years. To defer means, to carry forward. For example, if advertising expenses of, Rs.1,00,000 incurred in 2012 are expected to benefit the business, for 5 years, the entire amount of Rs.1,00,000 is not debited to the, Profit & Loss Account in 2012. Only 1/5th amount (Rs.20,000) is, debited to the Profit & Loss Account every year for 5 years from, 2012 to 2016. The amount not yet written off at the year end will be, shown as Deferred Advertising Expenses on the Asset side in the, Balance Sheet., (4) Current Assets: Current Assets are items like cash, debtors,, stock etc. which remain in the business only for a short time [less, than 12 months]. Current assets are constantly changed into cash., Thus, goods are sold and cash is received, debtors pay their dues, and cash is received and so on. Current Assets also includes, Pre-paid Expenses and Income Receivable., (5) Capital: Capital means the amount due to the owner of the, business. Capital is shown on liabilities side of the Balance Sheet, as follows:
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149, Capital A/c b/d (opening balance), Add: Net Profits for the year, Less: Net Loss for the Year, Less: Drawings, = Closing Balance of Capital, (6) Reserves: Reserve means part of profits “reserved” for future, use. It is an amount set aside out of profits to meet any unknown, sudden liability in future. Out of Net Profits, some amount is, transferred first to the Reserve, only if it is asked the only part of, profit to be transferred to reserve and only the balance is, transferred to the Capital Account., (7) Loans: Loans include Bank Loans and the amounts borrowed, from others on which interest is paid., (8) Current Liabilities: Current Liabilities are short term liabilities., These include creditors for goods, outstanding expenses, various, provisions for expenses, income received in advance, Bank over, draft. Current liabilities are payable within 12 months., CHECK YOUR PROGRESS, 1. Fill in the blanks:, a. A Balance Sheet need not be balanced; its totals must, always -------------------., b. Balance Sheet is not an Account, it is a -----------------------., c. Left hand side of the Balance Sheet shows ----------------., d. Right hand side of the Balance Sheet shows --------------., e. Goodwill and patents are --------------------assets., f. Deferred Revenue Expenses is a ----------------------asset., g. Balance Sheet is a statement containing the list of all --------and ----------- Accounts., h. Current assets are constantly changed into -----------------., i. Current liabilities are payable within ----------months., j. The items which earn interest or dividends are termed as ---., 2. Enlist the items shown on the assets side of the Balance Sheet., 3. Define the following terms:, a. Balance Sheet, b. Current Assets, c. Tangible Assets, d. Intangible Assets, e. Capital, f. Current Liabilities
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150, , 8.6, , SPECIMEN FORMS:, , 8.6.1 Specimen Form of Manufacturing Account, Dr., , Manufacturing Account for the year ended…, Rs., Rs., Particulars, Particulars, , To Work-in-process, (Opening), To Raw materials, consumed:, Opening Stock, Add : Purchase, Add : Purchase expenses, - Carriage Inward, - Octroi duty, - Dock dues, - Custom duties, Less : Purchase Returns, Less : Closing stock of, materials, To Direct Wages, To Direct manufacturing, expenses, To Royalty related to, manufacture, To Hire of special, machinery, To Design Expenses, To Direct factory, expenses, To Stores, oil, grease, To Salary to supervisors, To Power and fuel, To Repairs of factory, assets, To Deprecation on factory, assets, To Rent, lighting of, factory building, Total, , xxx, , xxx, xxx, , Cr., Rs., , By Work-in-process, (Closing), By Sales of scrap, , xxxx, , By Trading Account, (Cost of production, tfd Bal.), , xxxx, , xxxx, , xxx, xxx, xxx, xxx, (xxx), (xxx) xxxx, xxxx, , xxx, xxx, xxx, , xxxx, , xxx, xxx, xxx, xxx, xxx, xxx, , xxxx, xxxx Total, , xxxx
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151, 8.6.2 Trading Account for the year ended ….., Dr., Particulars, To Opening stock (FG), , Rs., , Rs., , Particulars, , xxxx, , By Sales, , xxxx, , Less:Return inwards xxxx xxxx, xxxx, By Goods lost or, destroyed, , To Manufacturing, Account (cost of, , Cr., xxxx, , Production tfd.), , By Goods taken by, proprietor, , xxxx, , To Purchase of FG, , By Goods given as free, sample, , xxxx, , By Closing stock (FG), , xxxx, , By Gross loss c/d, , xxxx, , Total, , xxxx, , To Gross profit c/d, , Total, , xxxx, , xxxx, , 8.6.3 WORKSHEET 7: PROFIT & LOSS ACCOUNT, Profit & Loss Account for the year ended……, Dr., Particulars, To Gross Loss, b/d, To Administrative, Expenses, To Rent, insurance &, repairs, To Office salaries, To Postage, telephones,, Telex etc., To Printing & stationery, To Fees (legal/audit etc.), To Sundry/general, Expenses, To Selling & Distribution, Expenses, To Salesmen’s salaries,, Commission, etc,, To Traveling, , Rs., xxxx, , Particular, , Cr., Rs., , xxxx, , By Gross Profit b/d, xxxx, Other Income or Gains, By Commission received xxxx, , xxxx, , By Discount received, , xxxx, , xxxx, xxxx, xxxx, xxxx, , By Provision for discount, From creditors, By Interest on loans, Given to outsiders, By Income (dividend) on, Investments, By Profit on sale of fixed, Assets, By Net loss tfd. to capital, , xxxx, , xxxx, xxxx, xxxx, xxxx, xxxx, xxxx, xxxx, , xxxx, xxxx, xxxx
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152, , To Carriage outwards,, Freight, duties, To Warehousing charges, To Packing expenses, To Royalties on sale, To advertising & sales, Promotion expenses, To Goods given as free, Samples, To Financial Expenses &, Interest, To Interest & bank, charges, To Bad debts & provision, for Bad debts, To Discount given, To provision for discount, on Debtors, , xxxx, xxxx, xxxx, xxxx, , xxxx, xxxxx, xxxx, xxxx, , xxxx, , Depreciation, To Depreciation on :, - Building, - Motor vehicles/delivery, vans, - Office equipments, To Unusual Expenses or, Losses, To Goods lost or, destroyed, (Cost less insurance, claim), To Loss on sale of fixed, Assets, To Appropriations, To Reserves, To Net profit tdf. to, Capital ….., , xxxx, , Total, , xxxx, , xxxx, , xx, Total, , xxxx
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153, 8.6.4 WORKSHEET 8: BALANCE SHEET :, There may be either Net Profit or Net Loss., Balance Sheet as at ………., Rs., , Liabilities, , Rs., , Assets, , Capital A count :, , Fixed Assets, , Balance b/d (opening) x, , Goodwill, , xxxx, , Land, , xxxx, , Add : Fresh capital, , x, , Plants & machinery xx, , Add : Net profit for the x, , Less : Depreciation x, , Brought in, Years, Less : Drawing, , xxxx, xx, , Premises/Building, , x, xxxx, , Less : Loss during the, Year, , xx, , - Less Depreciation x, xxxx, , Reserves, , Vehicles, , General Reserve, , xx, , Loans, , -Less : Depreciation xx, , Loans from bank, , xx, , Bank overdraft, , xx, , xxxx, xxxx, , Furniture & fittings, , xx, , Current Liabilities, Sundry creditors, , - Less Depreciation xx, , xxx, , Less : Provision for xx, , Investments, , xxxx, , Discount, , Investment in, , xxxx, , Shares/bonds, , xxxx, , Outstanding expense xx, , Current Assets, , xxxx, , Income received in, , Closing Stock, , xxxx, , Bills payable, , Advance, , xx, , xx, , xx xxx, , Debtors, , xx, , xxxx, , - Less; Prov, for bad x, , xxxx, , Debts, , x, , - Recoverable, , x, , - Less : Prov, for, Discounts, - Relisable, , xx, xx
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154, Loans and advance, , xx, , Given, , xx, , Bills receivable, , xx, , Prepaid expenses, , xx, , Cash at bank, , xx, , Cash in hand, Fictitious assets, Deferred expenses, Not written off, , xx, , Capital account debit, Balance, Total, , xxxx, , 8.7, , ADJUSTMENTS:, , 8.7.1, , Meaning:, , Total, , xx, , xxx, xxxx, , The trial Balance prepared indicates summery of all actual, transactions recorded in the Book of Accounts. The trial balance, ignores items not yet recorded in the books of accounts. e.g., closing stock, outstanding expenses, prepaid expenses,, Depreciation, bad about etc. unless & until these items are not give, true and fair view of business operations and financial position., These items must be recorded in books of accounts. The book, balances need to be adjusted from all items which pertains for the, period but not recorded in books. Adjustments mean recording, such items relating the current year but not appearing in the Trial, Balance., 8.7.2 Accounting:, Adjustment entries are passed in the journal proper at the, end of the year. Entries are passed by following rules of debit &, credit, then they are posted into the ledger. It should be noted that, each adjustment has two effects in the final Accounts., Adjustments may be given below the Trial Balance, or may, be given in the Trial Balance, called implied adjustment,
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155, Adjustment, , Journal Entries, , Manufacturing, Trading, Profit & Loss A/c., , Balance Sheet, , 1) Closing Stock, (Goods, Purchased but, remain unsold). ., a. Raw Material., , i. Stock of Raw, Material A/c Dr, To Raw Material, Consumed., , Debit from Raw Show as “Stock of, material, Raw Material on, Purchases, or debit Asset Side”, side, of, Manufacturing A/c., , b. Work in, Progress, , ii. Stock of work, Credit side of mfg Show as “Stock of, in progress A/c Dr A/c Show on credit W.I.P on Asset, side of Trading A/c. Side., To Trading A/c, Show as “Stock of, Finished Goods”, on Asset Side., , c. Finished, Goods., , iii. Stock of, Finished Goods, A/c Dr. To, Trading A/c., , -, , All stock may be, as under Stock of, Raw Material, Stock W.I.P. Stock, of Finished Goods, , 2), Prepaid Prepaid, Expenses, Expenses A/c. Dr, To Expenses., A/c., , Deduct from the, conserved Expense, on debit side., , Show as “Prepaid, Expenses” on, asset side., , 3) Outstanding Expense A/c Dr, expense related To outstanding, to current year expenses A/c, but not record /, paid., , Add to concerned, exp. on debit side., , Show on, “outstanding exp.”, on liabilities side., , 4) Income, Receivable, , Income, Add to Concerned, Receivable A/c Dr income on credit, side., To Income A/c., , Show “income, Receivable” on, asset side., , 5) Income, Received in, advance income, Received but not, accrued. i.e., relates to, subsequent year., , Income A/c Dr., To Income, Received in, allowance A/c., , Deduct from, concerned income, on credit side., , Show as |income, received in, advance” as on, liabilities side, , 6) Depreciation, , Depreciation A/c, Dr., To Fixed Asset, A/c, , Depreciation on, factory Assets debit, to mfg. a/c, Depreciation on, other asset debit to, profit & A/c., , Deduct, Depreciation from, Concerned Asset, on asset side. OR, Add to provision, for depreciation, A/c
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156, 7) Goods, destroyed Lost &, Stolen., a), Uninsured, goods. Good lost, , Loss by Fire/Theft, A/c. Dr. To, trading A/c. or, To purchases, A/c., , 8), Unrecorded Sundry debtors, Sales., A/c Dr To Sales, A.c., , a)” Loss by fire”, debit A/c profit &, loss A/c., , -, , b) Credit Cost of, goods lost to, trading A/c., Add to sales on, Credit side of, trading a/c., , Add to Sunday, debtors on assets, side., , Deduct from Sales, Credit side of, Trading A/c., , Deduct from, Sunday Debtor on, Asset Side., , 10) Unrecorded Purchase A/c Dr, Purchases:, To Supplier A/c., Goods Purchase, but not recorded, in Purchase day, book., , Add to Purchase on, debit side of mfg., A/c Or Trading A/c., , Add to Sunday, Creditors on the, Liabilities Side., , 11) Unrecorded Supplier A/c Dr., Purchase return. To Purchase, Goods retuned Return A/c, to suppliers but, debit note not, prepaid, preceded., , Deduct from, Purchase on debit, side of mfg. A/c Or, Trading A/c.., , Deduct from, Sunday Creditors, on the liabilities, side., , 12) Goods, distributed as, free sample., , Deceit to P & L A/c, as Advertisement, A/c, Credit to Trading, A/c as goods, distributed as free, samples., , -, , 13], Good Drawings A/c Dr., withdrew, by To Trading A/c., owner, for, personal use, , Credit to Trading, A/c as personal use, goods withdrawn, for own use., , Deduct from, capital on, Liabilities Side, , 14] Interest on, Loan outstanding, , Added to interest, on debit side Profit, & Loss A/C., , Add to Loon, as, interest, outstanding on, Liabilities Side., , 9), Unrecorded, Sales, (return), Good Returned, by Customer but, Credit not, is not, Prepared., Recorded., , Sales Return A/c, Dr., To Sundry, Debtor., , Free samples A/c, Dr, To Trading A/c., , Interest A/c Dr., To Loon A/c
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157, , 15) Good Sold, on approve not, yet approved., Goods sold on, Sales or Return, basis Customer, save right to, return goods, , a)For consolation, of Sales, a) at sales Price, Sales A/c Dr To, Customer, b) For stock with, Customer at cost., Stock on approval, A/c Dr, To Trading A/c., , a) Deduct from, Sales on Trading, A/c Credit Side., b) Credit to Trading, A/c on stock with, customer i.e. add to, closing stock., , a) Deduct from, Sunday Debtor on, asset side., b) Add to Closing, Stock on asset, side., , 16)Baddebts, /Further bad, debit to be, written off, , Bad debts A/c Dr, To Sunday, Debtors., , Add Bad depts. on, debit side of Profit, & Loss A/c. [as new, bad debts], , Deduct from, Sunday debtors an, Assets Side., , 17) Provision for, Bad Debts/, doubtful debts:, Provision made, for future out of, present credit, sales., , Profit & Loss Ac, Dr., To R.D.D. A/c, , Profit & loss A/c, Debit Side, To new BDD x (Adj), + Bad debts x (Trial, Bal), + New Bad debts, , Asset Side Sundry, Debtors x –, Further / New Bod, debts)x) x – New, R.d.d. X = x (x), final Balance after, all other, adjustment tilting, to Sunday, Debtors., , x, (adj), x, -Old R.D.D, , x, x, , (T.Bal), 18) Reserves for, Discount on, Debtors:, Provision made, for Discount on, Debtors:, , Discount A/c Dr, To R.F.D.C. A/c, , When old R.D.D is, more than required, should be credited, to profit & loss A/c., Add to discount on, the debit side of the, Profit & Loss A/c., , Deduct, from, Sunday debtors on, Asset side, after, adjustment, as, R.D.D., , 19) Reserve for, discount on, Creditors:, , Reserve for, discount on, Creditors A/c Dr, To Discount A/c., , Add it discount on, Credit side of the, Profit & Loss A/c., , Deduct from, sundry Creditors, on Liabilities Side., , 8.7.3 HIDDEN ADJUSTMENT/TEMPLED ADJUSTMENT., Sometimes information about adjustments is given in the trial, balance. These adjustments should be considered while preparing, final accounts., For example, Trial balance shows the following information.
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158, Trial Balance as on 31st December 2012., No., , Particulars, , Rs., , Rs., , 1, , Rent (11 months), , 22,000, , 2, , Insurance (For the Year 31.3.13), , 12,000, , 3, , 10% Govt Bonds (30-06-12), , 4, , Interest on Govt Bonds, , 5, , 12% Investment (Face value Rs., 1,00,000), , 6, , Interest on investment, , 7, , 18% Bank Loan (01.10.12), , 8, , Advertisement (3 years), , 30,000., , 9, , Building Rent (3/4 Factory), , 60,000, , 1,00,000, -, , 2,500., , 1.12.000, -, , 9,000., 2,00,000, , Solution: Explanation:, 1) Rent Paid for 11 months Rs. 22,000. It implies that Rent for one, month is outstanding., = 22,000 / 11 = Rs. 2,000., Add to Rent on Debit side of P & L A/c, Show in the Balance Sheet, Liabilities, 2) Insurance Premium Paid for the year ended 31/03/13. Trial, Balance as on 31/12/12., Therefore, 3 months insurance is paid in advanced Prepaid, Insurance = 12,000 x 3/12 = Rs. 3,000/-., Less from insurance on P & L A/c. Debit Side and write on Asset, side of Balance Sheet., 3 and 4: 10% Govt Bonds Purchased on 30-06-12; Interest on, Bonds for SDC months = 1,00,000 x 10% x, , 6, = Rs. 5,000/-. Out of, 12, , Rs.5,000, Rs.2,500 are only received. Balance interest, Rs.2,500/- still not received. It is outstanding. Income on date of, Balance Sheet. Add to interest on credit side of P & L. A/c. and, show on asset side of Balance sheet as Interest Account bat not, received., 5 and 6: 12% Investment face value of Rs.1,00,000 Purchase for, Rs.1,12,000. Interest on this investment received Rs.9,000 only., Interest should be always calculated on face value., Interest for the year = 1,00,000 x 12%, = Rs.12,000/-.
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159, Out of this, Rs.9,000/- only received. Balance Rs.3,000 still, receivable. Add to credit side of P & L A/c to income and show on, assets side of Balance sheet as Interest Receivable., 7. 18% Bank Loan taken on 1st Oct. 12., Therefore, 3 months interest due to be provided, Outstanding Interest = 2,00,000 x 18% x 3/12, = Rs. 9,000/-., Add to interest on Debit side of P & L A/c and add to Bank Loan on, Liabilities Side of Balance Sheet., 8. Advertisement Rs.30,000 paid for 3 years., Two years advertisement 3,00,000 x, , 2, = Rs. 20,000 is prepaid., 3, , Prepaid Advertisement Rs.20,000, deduction from, Advertisement on debit side of P & L A/c show on Assets Side of, Balance Sheet, as a Prepaid Insurance., 9. Building Rent Rs.60,000., , 3, 3, Offices. Therefore, 60,000 x, = Rs.45,000 should be, 4, 4, 1, debited to the Manufacturing A/c. balance (i.e. ) Rs.15,000 to be, 4, debited to Profit & Loss A/c., Journal Entries, No, 1, 2, 3-4, 5-6, 7, 8, 9, , Particulars, Rent A/c., Dr., To Outstanding Rent A/c, Prepaid Insurance A/c, Dr., To insurance A/c, Interest Receivable A/c, Dr., To interest. A/c, Interest Receivable A/c, Dr., To Interest A/c., Interest A/c., Dr., To 18% Bank Loan. A/c, Prepaid Advertisement A/c Dr., To Advertisement A/c, Manufacturing A/c, Dr., Profit & Loss A/c, Dr., To Building Rent A/c., , J.H., , Rs., 2000, , Rs., 2000, , 3000, 3000, 2500, 2500, 3000, 3000, 9000, 9000, 20,000, 20,000, 45,000, 15,000, 60,000.
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160, , 8.8, , EXERCISES, , 1. Write Short note on, a. Manufacturing A/c, b. Work in Progress., c. Transfer of Goods at price higher than cost., d. Stock Reserve, e. Trading A/c, f. Current Assets, 2. Explain goods sold on sales or return basis., 3. Why Manufacturing A/c is prepared., 4. Explain how to calculate Raw Material consumed., 5. Objective Type Questions:, a. Multiple Choice Question, 1., , Debit Balance of Manufacturing A/c show:, a) Gross Profit, b) Gross Loss,, c) Net Loss, d) None of above., , 2., , Carriage inward shown in Trial Balance debited to:, a) Manufacturing A/c b) Profit & Loss A/c, c) Capital A/c, d) Selling & Distribution exp., , 3., , Raw Material Consumed is transferred to:, a) Trading A/c, b) Purchase A/c, c) Manufacturing A/c d) Balance Sheet., , 4., , Sale of scrap is credited to:, a) Manufacturing A/c., c) Raw Material Consumer, , b) Cash/Bank A/c, d) Trading A/c., , 5., , Credit Balance in Trading A/c shows., a) Net Loss, b) Cost of Goods sold, c) Gross Profit, d) Gross Loss., , 6., , Carriage on machinery purchased debited to:, a) Manufacturing A/c b) Trading A/c, c) Plant & Machinery A/c, d) Trading A/c, , 7., , Prepaid Insurance shown in the Trial Balance is shown in :, a) Profit & Loss A/c, b) Liability side of Balance Sheet, c) Asset Side of Balance Sheet, d) Deducted insurance on Dr. side of Profit & Loss A/c.
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161, 8., , Consumption of Raw Materials shown to:, a) Credit Side of Trading A/c, b) Credit side of Profit a Loss A/c, c) Debit Side of Manufacturing A/c, d) Purchases A/c, , 9., , Stock of Raw Material given in Trial Balance is shown on:, a) Debit Side of Manufacturing A/c, b) Credit side of manufacturing A/c, c) Asset gives of the balance sheet, , 10. Opening work-in-progress appearing in the trial balance is, shown on:, a) Debit Side of manufacturing A/c, b) Trading A/c., c) Credit side of manufacturing A/c, d) Asses side of Balance sheet, e) Non-of the above., 11. Depreciation of Factory Building is shown under., a) Trading A/c, b) Profit & Loss A/c., c) Manufacturing A/c d) All of the above., 12. Trade Mark is:, a) Current Assets, c) Intangible Asset, , b) Fixed Asses, d) Movable properties, , 13. Opening Stock of Raw Materials is :, a) Added to purchase of finished Goods., b) Deducted from Raw Material Consumed., c) Added to purchase of Raw Materials., d) None of the above., 14. Reserve for Discount on creditors shows :, a) Credit Balance, b) Debit Balance, c) Nil Balance, d) Non of above, 15. Manufacturing A/c balance always shows., a) Gross Profit, b) Net Profit, c) Cost of production d) Cost of sales., 16. Goodwill is:, a) Current Assets, c) Fixed Assets, , b) Fictitious Assets, d) Terrible Assets, , 17. Trade Discount shall be shown:, a) Debit Side of Mfg. A/c, b) Deducted from purchases, c) Debit side of p & L A/c. d) None of the above, Ans. 1-d, 2-a, 3-c, 4-a, 5-c, 6-c, 7-c, 8-c, 9-a, 10-a, 11-c, 12-c, 13-c,, 14-a, 15-c, 16-b, 17-d.
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162, b. Fill in The Blanks., 1) Debit balance of Manufacturing A/c indicates _______., 2) Plant & machinery is a --------------- asset., 3) Income received in advance is shown on _______ side of, Balance Sheet., 4) Income Tax Paid is transferred to ________ A/c., 5) Goods distributed as free samples is credited to _____ A/c., 6) Goods withdrawn by proprietor is credited to ______ A./c., 7) Commission paid is credited to ______ A/c., 8) _______ shows the finical position of business., 9) Manufacturing A/c is prepared only by ______., 10) Debit balance of Profit & Loss A/c shows ________., 11) Net Profit is transferred to ________ A/c., 12) Prepaid Insurance is credited to ______ A/c., 13) Depreciation on office equipments is credited to _______ A/c., 14) Bad debt written off is credited to _____ A/c., 15) _______ note is prepared for sales return of goods., 16) Gross Profit, 25% on cost is equal to _____ % on sales., 17) Bank Overdraft is shown on ______ side of Balance Sheet., 18) Stock of Stationery is shown on ______ side of Balance Sheet., 19) Carriage paid on furniture purchased is debited to _______ A/c., 20) Debit balance of Manufacturing A/c is transferred to ____ A/c., 21) Carriage outward paid is credited to _______ A/c., 22) Opening stock of work in progress is debited to _______ A/c., 23) Recovery of bad debts is credited _______ A/c., 24) Octroi paid on plant purchased is debited to ________ A/c., Ans., 1) Cost of production,, 4) Drawings,, 7) Cash A/c Bank A/c,, 10) Net Loss, 13) Office Equipment, 16)20%, 19) Furniture, 22) Manufacturing, , 2)Fixed,, 3) Liabilities,, 5) Trading A/c,, 6) Trading A/c, 8) Balance Sheet, 9) Manufacturer, 11) Capital A/c, 12) Insurance A/c,, 14) Sundry debtors 15) Credit Note, 17) Liabilities, 18) Assets, 20) Trading, 21) Cash / Bank A/c,, 23) P & L, 24) Plant
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163, c. Match the following Columns:, 1), COLUMN A, , COLUMN B, , a) Purchase of Raw Material, , i) Credit Balance, , b) Bank Overdraft, , ii) Assets side of Balance Sheet., , c) Outstanding Wages, , iii) Manufacturing A/c, , d) Prepaid Insurance, , iv) Capital A/c, , e) Goodwill, , v) Liabilities side, vi) Intangible Assts, , Ans. a) - iii, b)- i, , c)v, , d)- ii, , e)- vi, , 2), COLUMN C, , COLUMN D, , i) Income due but not received, , a) Bills Payable, , ii) Current Liabilities, , b) Manufacturing A/c, , iii) Tallied Balance sheet, , c) Carriage paid on Good sold, , iv) Carriage Inward, , d) Capital A/c, , v) Drawings, , e) Profit Loss A/c, f) Asset side of Balance Sheet, j) Arithmetical accountancy, , Ans. i) f, ii) – a, iii) – j, iv) b, v) –d, , 3), COLUMN E, , COLUMN F, , i) Raw Material consumed, , a) Profit & Loss A/c Credit Side, , ii) Profit on Sale of Assets, , b) Added to income., , iii) Accrued Income, , c) Tangible Assets, , iv) Furniture, , d) Manufacturing A/c, , v) Outstanding Expenses in Trial e) Profit & Loss A/c Debit Side, Balance, f) Liabilities Side, g) Fixed Asset, Ans. i) – d, ii) – a, iii) – b, iv) – g, v) – f
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164, d. State Whether the following statements are True or False :1) Trial Balance shows financial position of the concern., 2) Goodwill written off is credited to Trading A/c, 3) Credit balance of Profit & Loss A/c is net profit, 4) Interest on capital is credited to Drawing A/c, 5) The Drawing A/c always shows debit balance., 6) Income received in advance is asset., 7)Provision for Depreciation is also known as Accumulated, Depreciation., 8) Interest on Drawings is debited to Profit and Loss A/c., 9) Stock is always valued at cost., 10) Prepaid expenses in Trial balance is shown on Assets side of, the Balance Sheet., 11) Withdrawal of cash by the proprietor is credited to Cash A/c., 12) Trading A/c shows Net Profit or Net Loss., 13) All income and expenses are shown in the Balance Sheet., 14) Balance Sheet is always prepared for the year ended., 15) Carriage Outwards is credited to Trading A/c., 16) Capital A/c of proprietor is always shown on Asset Side of, Balance Sheet., 17) Manufacturing A/c is prepared to find out Gross Profit., 18) Interest on investment is calculated on Face Value of the, investment., Ans. False: 1,2, 4, 6, 7, 9, 12, 13, 14, 15, 16, 17, True: 3, 5, 8, 10, 11, 18, ,
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165, , Unit-9, FINAL ACCOUNTS II, UNIT STRUCTURE, 9.0, 9.1, 9.2, , Objectives, Solved Problems, Exercise, , 9.0 OBJECTIVES, After studying the unit students will be able to solve the, practical problems on final accounts., , 9.1, , SOLVED PROBLEMS, , Illustration 1: (Mfg. & Tr. A/c), From the following particulars, prepare a Manufacturing, Account and a Trading Account for the year ended 31-3-2018., Particulars, Raw Materials, (1-4-2012), Work –in-Progress, (1-4-2012), Finished Goods, (1-4-2012, Purchase of Raw, Materials, Direct Wages, Indirect Wages, Sales, Returns Inward, Depreciation on, Factory Assets, Purchase of, Finished Goods, , Rs., , Particulars, , Rs., , 12,000 Carriage Inwards, , 1,000, , 8,000 Returns Outward, , 2,000, , 9,000 Royalty on, Production, , 1,000, , 80,000 Purchase of Finished, goods, 10,000 Carriage Outwards, 8,000 Fuel and Power, 1,74,000 Repairs, and, Maintenance, 5,000 Raw Materials (31-32013), 4,000 Work-in-Progress, (31-3-2013), 37,000 Finished Goods (313-2013), , 8,000, 500, 2,500, 1,500, 6,000, 2,500, 5,000
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166, Adjustments:, (i) Outstanding Direct Wages amounted to Rs. 3,000; (ii) Prepaid, Fuel and Power amounted to Rs.500., Manufacturing Account, For the year ended 31-3-2018, Dr, Particulars, , Rs., , To Work-in-Progress, (Opening, To Raw Materials, consumed :, Opening Stock, , Add : Purchase, Add : Carriage, Inward, Less : Returns, outward, Less : Closing Stock, To Direct Wages, Add : Outstanding, To Manufacturing, Expenses :, - Royalty on, Production, To factory Expenses, :, - Indirect Wages, - Depreciation on, Factory Assets, - Fuel and Power, 2,500, Less : Prepaid 500, Repairs, and, maintenance, , Rs., , Particulars, , 8,000 By Work-inProgress, (Closing), By Trading A/c, 12,000, , Cr, Rs., 2,500, , 1,20,000, , (Cost of, Production, transferred), , 80,000, 1,000, 93,000, 2,000, 91,000, 6,000, 10,000, 3,000, , 85,000, 13,000, , 1,000, , 8,000, 4,000, , 2,000, 1,500, , 15,500, 1,22,500, , 1,22,500
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167, Trading Account, For the year ended 31-3-2018, Dr, , Cr, Particulars, , To Opening stock, (FG), To Manufacturing, A/c (Cost of, Production tfd.), To Purchase (FG), To Gross Profit c/d, (tfd. To P & L A/C), , Rs., , Rs., , Particulars, , 9,000 By Sales, , Rs., , 1,74,000, , 1,20,000 Less : Returns, Inward, , 5,000 1,69,000, , 37,000 By Closing, 8,000 Stock (FG), 1,74,000, , 5,000, , 1,74,000, , Note: The concern is a manufacturer as well as a trader. Hence the, Trading a/c shows purchase of finished goods (for re-sale) and, closing stock of such goods held for re-sale., Illustration 2: (Mfg. Tr., P & L A/c + Adjustments), The following information is given to you from the books of a, manufacturer in respect of the year ending 31st March, 2018., Particulars, Stock of Raw, Material (1-4-2017), , Rs., , Particulars, , 25,000 Electricity &, Telephone, , Freight Inward, , 8,500 Selling Expenses, , Freight Outward, , 6,000 Miscellaneous, Expenses, , Rs., 6,000, 6,000, 14,000, , Direct Wages, , 18,000 Stock of Finished, Goods : (31-3-2018), , 30,000, , Indirect Wages, , 14,000 Provision for Doubtful, Debts, , 8,500, , 4,80,000 Depreciation on Plant, and Machinery, , 4,000, , Sales, Stationery, , 1,500 Depreciation of, Office, , Traveling Expenses, , 5,000 Furniture and, Equipments, , Salaries (H.O.), , 26,000 Repairs to Plant and, Machinery, , 3,000, 4,650
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168, , Factory Expenses, , 26,000 Sale of Scrap, , 3,700, , Interest on Loan, paid, , 1,800 Purchase of Raw, Materials, , 2,50,000, , Returns-Inward, , 5,000 Coal Consumed, , 9,000, , Returns-outward, , 3,500 Work-in-progress, (1-4-2017), , 7,000, , Power and fuel, , 8,000 Bank Interest, received, , 2,600, , Adjustments necessary for the following:, (a) Finished goods worth Rs.5,000 were distributed as free, samples., (b) A loan was obtained on 1st October, 2017 for Rs. 50,000, carrying interest 10% p.a., (c) Bad debts to be written off Rs..750 and provision for doubtful, debts to be maintained Rs.7,000., (d) Electricity and Telephone to be apportioned as Factory 3/5th, and Office 2/5th., (e) A fire occurred destroying finished goods worth Rs.15,000., Insurance Company admitted a claim of Rs.12,000 not yet, received., (f) Stock on 31-3-2018 stationery in hand Rs.150, Raw Materials, Rs.22,000.Work-in-Progress, Rs.4,000,, Finished, Goods, Rs.40,000., You are required to prepare the Manufacturing Account and, Trading Account and Profit and Loss Account for the year ended on, 31st March 2018., (ICWA adapted)
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169, Solution:, Manufacturing Account, For the year ended 31-3-2018, Dr., , Cr., Particulars, , Rs., , To Work-in Progress, (Opening), , Rs., , 7,000 By Work-in, Progress, (Closing), , To Raw Materials, Consumed :, Opening Stock, Add : Purchases, Add : Carriage, Inwards, , Particulars, , By Sale of scrap, 25,000, , By Trading A/c, , 2,50,000, , (Cost of, production tfd.), , Rs., 4,000, , 3,700, 3,44,550, , 8,500, 2,83,500, , Less : Returns, outward (-), , 3,500, 2,80,000, , Less : Closing Stock, , 22,000, , To Wages, , 2,58,000, 18,000, , To Factory, Expenses :, Wages indirect, , 14,000, , Factory expenses, , 26,000, , Power and fuel, , 8,000, , Coal consumed, , 9,000, , Electricity and, telephone, , 3,600, , (3/5 x 6,000), Depreciation on, Machinery, , 4,000, , Repairs to Plant, , 4,650, , 69,250, 3,52,250, , 3,52,250
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170, Trading and Profit & Loss Account, For the Year ended 31-3-2018, Dr., , Cr., Rs., , Particulars, To Opening, Stock (FG), , Rs., , Particulars, , 30,000 By Sales, , To, Manufacturing, A/c, , 3,44,550 Less :, Returns, , (Cost of, production, efd.), , By Goods, distributed, as, 98,450 Free, samples, , To Gross Profit, c/d, , To Electricity &, Telephone, , To Interest on, loan, , 1,800, , Add, Outstanding, , :, , 700, , [(50,000 x 6/1, 2 x 10% 1,800], , 700, , 4,13,000, , 5,000, , By Closing, Stock (FG), , 40,000, 4,73,000, 98,450, , 2,400 By Bank, Interest, received, , 2,600, , 1,500, 150, , 5,000, , 15,000, , By Provision, for doubtful, , Less : Stockin-hand, , 4,18,000, , 26,000 By Gross, Profit b/d, , (2/5x6,000), To Stationery, , Rs., , By Goods, destroyed, by fire, , 4,73,000, To Salaries, , Rs., , Debts not, required, 1,350 (8,500-7507,000), , 2,500, , To, Traveling, expenses, , 5,000, , To, Selling, expenses, , 6,000, , To, Fright, outward, , 6,000, , 750
Page 178 :
171, To, Miscellaneous, expenses, , 14,000, , To Loss by fire, , 15,000, , Less : Claim, admitted by, Insurance Co., , 12,000, , 3,000, , To, Depreciation, Office, Furniture, &, Equipments, , 3,000, , To, Advertisement, s, , 5,000, , (free samples), To Net profit, tfd. To Capital, A/c., , 27,550, , 1,01,800, , 1,01,800, , Illustration 3:, Vinayaka’s Trial Balance as on 31st March 2012 is as follows:, Particulars, , Dr. Rs., , Opening, Stock, - Raw, Materials, , 2,50,000, , - Work-inProgress, , 80,000, , - Finished, Goods, , Cr., Rs., , Particulars, , Dr. Rs., , Printing and, Stationery, , 5,200, , Bank Charges, , 2,500, , Traveling, Expenses, , 10,000, , 2,20,000, , Discount, , 3,300, , Purchases, , 2,15,000, , Sales Return, , Buildings, , 1,50,000, , Advertisement, , Cr. Rs., , 11,000, 5,500, , Plant, & 3,60,000, Machinery, , Sales, , 7,80,000, , Furniture, , 40,000, , Capital, , 8,50,000, , Trade Mark, , 30,000, , Sundry, Creditors, , 52,000
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172, Wages, , 83,000, , Sundry, Debtors, , 82,500, , Factory, Taxes, , 4,000, , Discount, , Motive, Power, , 9,000, , Miscellaneous, Expenses, , Factory, Insurance, , 5,000, , Bills Payable, , 2,500, 5,500, 34,000, , Salary to, Office Staff, , 11,000, , Bill, Receivable, , 16,000, , Office Rent, , 10,500, , Corporation, Bank, , 98,000, , Carriage, Inward, , 2,500, , Cash on hand, , 9,000, 17,18,500 17,18,500, , Adjustments:, Closing Stock:, , Rs., , Raw Materials, , 85,000, , Work-in-Progress, , 30,000, , Finished Goods, , 2,05,000, , (2), , Factory taxes prepaid, , Rs.2,000, , (3), , Depreciation: Furniture 10%, , (1), , Plant & Machinery 15%, Trade Mark 20%, Building 5%, Prepare Manufacturing, Trading and Profit & Loss Account for the, financial year 2017-18 and Balance Sheet as on 31-3-2018., (IDE, Mar. 2000, adapted)
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173, Solution:, VINAYAK, Manufacturing & Trading Account, For the year ended 31-3-2018, Dr., Particulars, , Cr., Rs., , To Work-inprocess, (Opng.), , Rs., , 2,50,000, , Add :, Purchase, , 2,15,000, , - Carriage, Inward, , 2,500, 4,67,500, , Less : Closing, stock, , Rs., , Rs., , 80,000 By Workin-process, (CI.), , 30,000, , By Trading, Account, (Cost of, production, tfd.), , 5,85,500, , To Raw, materials, consumed:, Opening, Stock, , Particulars, , 85,000 3,82,500, , To Direct, Wages, , 83,000, , To Direct, factory, expenses, - Factory, Taxes, , 4,000, , Less :, Prepaid taxes, , 2,000, , 2,000, , To Motive, Power, , 9,000, , - Factory, Insurance, , 5,000, , To, Depreciation, Plant &, Machinery, (15%), , 54,000, , 6,15,500, , 6,15,000
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174, , To Opening, stock (FG), , 2,20,000 By Sales, , To, Manufacturing, Account, , Less :, Return, Inwards, , (Cost of, production, tfd.)., , 5,85,500 By Closing, stock (FG), , To Gross, profit c/d, , 1,68,500, , 7,80,000, 11,000 7,69,000, , 9,74,000, , 2,05,000, , 9,74,000, , Profit & Loss Account, For the year ended 31-3-2018, Dr, , Cr, Particulars, , Rs., , Rs., , Particulars, , To Salaries to, Office Staff, , 11,000 By Gross Profit, B/d, , To Office Rent, , 10,500 By Discount, Received, , To Printing &, stationery, , 5,200, , To Bank charges, , 2,500, , To Traveling, Expenses, , Rs., 1,68,500, 2,500, , 10,000, , To Miscellaneous, Expenses, , 5,500, , To Advertisement, , 5,500, , To Discount, , 3,300, , To Depreciation on, - Tr. Mark (20%), , 6,000, , - Building (5%), , 7,500, , - Furniture (10%), , 4,000, , To Net profit tfd., To capital, , 17,500, 1,00,000, 1,71,000, , 1,71,000
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175, Balance Sheet As At 31-3-2018, Liabilities, , Rs., , Rs., , Capital, Account :, , Assets, , Rs., , Rs., , Fixed Assets :, , Balance, b/d, (opening), , 8,50,000, , Building, , Add:-Net, profit for, the years, , 1,00,000, , 9,50,000 Less: Depreciation, @5%, , -7,500, , Plant & machinery, , 3,60,000, , Current, Liabilities :, , 1,50,000, , Sundry, Creditors, , 52,000 Less : Depreciation, @15%, , 54,000, , Bills, Payable, , 34,000 Furniture, , 40,000, , Less : Depreciation, @10%, Trade Mark, Less : Depreciation, @20%, , 4,000, , 1,42,500, , 3,06,000, , 36,000, , 30,000, 6,000, , 24,000, , Current Assets :, Closing Stock :, - Raw Materials, , 85,000, , - Work-in-Progress, , 30,000, , - Finished Goods, , 3,20,000, , Debtors, , 82,500, , Bills receivable, , 16,000, , Prepaid taxes, , 2,000, , Corporation Bank, Cash in hand, 10,36,000, , 2,05,000, , 98,000, 9,000, 10,36,000
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176, Illustration 4:, Amar Chemicals has the following Ledger Balance as on 31st, March 2018., Particulars, Goodwill, Factory, Shed, Machinery, , Dr. Rs., 50,000, 20,000, , Cr. Rs., , Particulars, Net Sales, Miscellaneous, Income, 1,30,000, Bad Debts, Reserve, Furniture, 8,000, Purchase of, Materials, Investments, 10,000, Freight on, Materials, Capital, 1,95,000 Factory Power, Bank Loan, 3,00,000 Salaries and, Wages, Creditors, 1,50,000 - Factory, Debtors, 1,35,000, - Office, Stock on, Repairs and, Renewals, 1-4-2018, - Materials, 1,30,000, Rent and Taxes, -Work-in7,500, Insurance, Progress, -Finished, 82,500, General, Goods, Expenses, , Dr. Rs., , Cr. Rs., 11,00,000, 4,000, 5,000, , 8,60,000, 50,000, 15,000, , 1,50,000, 65,000, 2,500, 16,500, 3,900, 18,100, 17,54,000 17,54,000, , The following additional information is available:, (1)Closing Stock: Materials Rs.2,10,000; Work-in-Progress, Rs.12,500 and Finished Goods Rs.2,07,500., (2) Depreciation to be provided at 2.5% on Factory Shed, 10%, on Machinery and 15% on Furniture., (3) Repairs and rent and taxes are to be apportioned between, Factory and Office in the ratio of 3: 2., (4) Reserve for bad and doubtful debts are to be provided at 4% on, debtors., (5) Insurance Premium covers a period of one month in advance.
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177, You are required to prepare Manufacturing, Trading, and Profit and, Loss Account for the year ended 31st March 2018 and Balance, Sheet as on that date., (Mumbai, Nov. 1998, adapted), , Solution:, AMAR CHEMICALS, Manufacturing & Trading Account, For the year ended 31-03-2018, Dr, Particulars, , Cr, Rs., , To Work-inprocess(Opng.), To Raw, materials, consumed :, Opening Stock, Add : Purchase, Add : Freight on, Materials, , Rs., , Particulars, , 7,500 By Work-inprocess (CI.), By Trading, Account, (Cost of, Production, efd.), , 1,30,000, 8,60,000, 50,000, , Rs., 12,500, 10,14,900, , 10,40,000, Less: Closing, stock, , 2,10,000, , 8,30,000, , To Direct, factory, expenses, - Factory Power, - Salary &, wages, , 15,000, 1,50,000, , - Repairs etc., (3/5), , 1,500, , - Rent & Taxes, (3/5), , 9,900, , - Depreciation, on factory, assets, Factory shed, - Machinery, , 500, 13,000, , 1,89,900, 10,27,400, , 10,27,400
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178, , To Opening, stock (FG), To, Manufacturing, , 82,500 By Sales, , 11,00,000, , 10,14,900 By Closing, stock (FG), , 2,07,500, , Account (cost of, Production tfd.), To Gross profit, c/d, , 2,10,100, 13,07,500, , 13,07,500, , Profit & Loss Account, For the year ended 31-03-2018, Dr, , Cr, Particulars, , Rs., , To Office Salary & Wages, , Rs., , Particulars, , 65,000 By Gross profit b/d, , To Repairs & Renewals, (2/5), , 1,000 By Miscellaneous, Income, , To Rent & Taxes (2/5), , 6,600, , To Insurance, Less : Prepaid, (3,900 x 1/12), , 2,10,100, 4,000, , 3,900, 325, , To General Expenses, , 3,575, 18,100, , To Depreciation on, Furniture, , 1,200, , To Reserve for Doubtful, Debts, , 5,400, , Less : Old RDD, , 5,000, , To Net profit tfd. To capital, , Rs., , 400, 1,18,225, 2,14,100, , 2,14,100
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179, Balance Sheet, As At 31-03-18, Liabilities, , Rs., , Rs., , Capital, Account :, , Assets, , 1,95,000, , Add : Net, profit for the, year, , 1,18,225 3,13,225 Machinery, , Goodwill, , Loans :, , Less :, Depreciation, @10%, 3,00,000 Factory, Shed, , Current, Liabilities :, Sundry, creditors, , Rs., , Fixed, Assets :, , Balance b/d, (opening), , Loans from, bank, , Rs., , Less :, Depreciation, @2.5%, 1,50,000 Furniture, Less, Depreciation, @15%, , 50,000, 1,30,000, , 13,000 1,17,000, , 20,000, 500, , 19,500, , 8,000, 1,200, , Investment, , 6,800, , 10,000, , Current, Assets :, Closing, Stock, - Raw, material, - Work-inprocess, , 7,63,225, , 2,10,000, 12,500, , - Finished, goods, , 2,07,500 4,30,000, , Debtors, Less : Prov., for bad, debts, Prepaid, insurance, , 1,35,000, 5,400, 1,29,600, 325, , 7,63,225
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180, Illustration 5:, Following is the Trial Balance of Mrs. Rashmi as on 31-3-2018, Particulars, Capital/Drawings, , Dr. Rs., 40,000, , Opening Stock, , Cr. Rs., , Particulars, , 8,00,000 Printing and, Stationery, , 64,600, 3,01,000, , 50,800, , Bills, Receivable, , * Work in, progress, , 25,800, , Bills, Payable, , 1,00,000, , 2,18,000, , Sundry, Debtors, and, Creditors, , 6,00,000, , 22,24,000, , Plant and, Machinery, , 16,00,000, , Wages, , 79,200, , Motor Car, , 6,00,000, , Power and Fuel, , 48,500, , Returns, , * Factory Rent, , 25,000, , Interest @, 14% on, Investments, , Carnage, outward, , 34,700, , Investments, (1-4-2011), , Purchase of, Raw Materials, , 48,74,000 Bad Debts, Ins. Durance, Premium, Discount, , 51,000, , 5,000, , Cr. Rs., , 41,400, , Office Rent, , * Raw Materials, , * Finished goods, , Dr. Rs., , 24,000, , 4,00,000, , 30,000, 22,000, , 2,00,000, 10,000, , Provision, for Bad and, Cr., 19,000 Doubtful, debts, Life, Insurance, Premium, paid, , 6,000, 8,000, , 62,51,000 62,51,000
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181, a) Closing Stock, Raw Materials, Work in Progress, Finished Goods, , Cost Price, 90,000, 90,000, 4,00,000, , Market Price, 1,00,000, 50,000, 3,60,000, , b) Depreciate Plant & Machinery @ 15% p.a. and Motor Car @, 20% p.a., c) General Insurance prepaid was Rs.9,000., d) Provide for outstanding factory rent Rs.13,000., e) Finished goods costing Rs.20,000 and Raw materials costing, Rs.30,000 were destroyed by fire. Insurance Company, admitted claim of Rs.15,000 for finished goods and Rs.20,000, for Raw Materials by the date of Balance Sheet., f) Write off Rs. 20,000 as Bad debts., g) Create provision for doubtful debts and provision for discount, on debtors @ 5% and 2% respectively., h) On 30-3-2018 goods costing Rs.40,000 were purchased on, credit (included in closing stock) which remained unrecorded., i) Purchase include Rs.80,000 in respect of Plant and, Machinery purchased on 1-10-2011., j) Proprietor had withdrawn goods at sale price of Rs.30,000, which included profit element of 20% on cost., This amount was recorded through sales register and was wrongly, debited to Mrs. Rama’s (Debtor) Account. Being the Accountant of, Mrs. Rashmi, you are required to prepare Manufacturing, Trading, and Profit and Loss Account for year ended 31st March, 2018 and, Balance Sheet as at the date., (Oct. 1996)
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182, Solution:, Dr. Mrs. RASHMI, Manufacturing Account, For the year ended 31-03-2018, Dr., , Cr., Particulars, , Rs., , To Work-inProgress, (Opening), , Rs., , Add : Purchases, , Rs., , 25,800 By Work-inProgress, (Closing), , 50,000, , By Trading, A/c (Cost of, production, transferred), , 24,72,300, , To Raw Materials, consumed :, , Opening Stock, , Particulars, , 50,800, 22,24,000, , Add : Unrecorded, purchases, , 40,000, , Less : Purchases, Returns, , 30,000, , Less : Machinery, Purchased, , 80,000, , Less : Destroyed, by fire, , 30,000, , Less : Closing, Stock, , 90,000 20,84,800, , To Wages, , 79,200, , To Factory, Expenses., Factory Rent, , 25,000, , Add : Outstanding, , 13,000, 38,000, , Power and Fuel, Depreciation :, Plant & Machinery, , 48,500, 2,46,000, , 3,32,500, 25,22,300, , 25,22,300
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183, Trading and Profit and Loss Account, For the year ended 31-3-2018, Dr., , Cr., Particulars, , Rs., , Rs., , To Opening stock, (FG), , 2,18,000, , To Manufacturing, A/c, , 24,72,300, , Particulars, , Rs., , By Sales, , 48,74,000, , Less : Sales, returns, , 24,000, , (Cost of Production, tfd.), , Rs., , 48,50,000, , To Gross profit c/d, , 25,34,700, , Less : Goods, for personal, use, , 30,000, , By Goods for, personal use, (cost), , 25,000, , By Goods, destroyed by, fire, , 20,000, , By Closing, stock (FG), , 3,60,000, , 52,25,000, To Carriage, Outwards, , 34,700, , To Discount Allowed, , 5,000, , To Printing and, Stationery, , 41,400, , To Insurance, , 51,000, , Less : Prepaid, , 9,000, , To Office Rent, , 48,20,000, , 52,25,000, By Gross, Profit b/d, , 25,34,700, , By Discount, Received, , 19,000, , By Interest on, Investments, , 22,000, , Add : Interest, Receivable, , 6,000, , 28,000, , 42,000, 64,600, , To Bad Debts, , 10,000, , Add : Further Bad, Debts, , 20,000, , Add : New R.D.D., , 27,500, , Less : Old R.D.D., , 6,000, , To Provision for, discount on debtors, , 51,500, 10,450, , To Depreciation on, car (20% x 6,00,000), , 1,20,000, , To Loss by Fire :, - Raw Materials, - Finished Goods, To Net profit tfd. To, capital, , 10,000, 5,000, , 15,000, 21,97,050, 25,81,700, , 25,81,700
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184, Balance Sheet, As at 31-03-2018, Liabilities, , Rs., , Capita /, Account :, Balance b/d, (opening), Add : Net, Profit, , Rs., , Assets, , 8,00,000, , Plant and, Machinery, , 16,00,000, , 21,97,050, , Add : New, Machinery, , 80,000, , 73,000, , Current, Liabilities :, , Add :, Unrecorded, Purchase, Outstanding, Rent, , 16,80,000, 29,24,050 Less :, Depreciation, [WN1], Motor Car, , Bills Payable, , Sundry, Creditors, , Rs., , Fixed Assets :, , 29,97,050, Less :, Drawing, [WN3], , Rs., , 1,00,000 Less :, Depreciation @, 20%, 4,00,000, 40,000, , 2,46,000, , 14,34,000, , 6,00,000, 1,20,000, , 4,80,000, , Investments :, 4,40,000 Investment, (1-4-2017), , 2,00,000, , 13,000 Current Assets :, Closing Stock :, - Raw Materials, , 90,000, , - Work in, Progress, , 50,000, , - Finished, Goods, , 3,60,000, , Debtors, , 6,00,000, , Less : Goods for, own use, , 30,000, 5,70,000, , Less : Further, Bad Debts, , 20,000, 5,50,000, , 5,00,000
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185, , Less : Prov. for, doubtful debts, (5/100x5,50,000), , 27,500, 5,22,500, , Less : Prov. for, Discount on, Debtors (2/100 x, 5,22,500), , 10,450, , 5,12,050, , Insurance Claim, :, - for Raw, Materials, , 20,000, , - for Finished, Goods, , 15,000, , Bills Receivable, , 35,000, 3,01,000, , Interest, Receivable, [WN2], , 6,000, , Prepaid, Insurance, , 9,000, , 34,77,050, , 34,77050, , Working Notes:, 1. Depreciation of Plant and Machinery, Depreciation on Rs. 16,00,000 for, Full year @ 15%, Depreciation on Rs. 80,000 for 6 months, (80,000 x 15/100 x 6/12), , 2. Interest Receivable on Investments, Total Interest on Investments, (2,00,000 x 14/100), Less: Interest actually received, Balance Interest receivable, 3. Total Drawings made, Drawings as per Trial Balance, Add: Goods withdrawn for personal use, Add: Life Insurance paid as per, Trial Balance, Total Drawings, , Rs., 2,40,000, 6,000, 2,46,000, Rs., 28,000, 22,000, 6,000, Rs., 40,000, 25,000, 8,000, 73,000
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186, Illustration 6:, The Trial Balance Mr. Lakhamichand is as below, Prepare final, accounts for the year ended 31-12-2017., Debit Balances, Cash in hand, Machinery, Drawings, Factory, Power, and Fuel, Office Salaries, Carriage outwards, , Rs., , Credit Balances, , 1,000 Capital Account, 30,000 Sales, 2,500 R.D.D., 450 Sundry Creditors, , Rs., 41,860, 1,38,780, 560, 8,800, , 6,225, 500, , Manufacturing, wages, , 9,300, , Furniture and, Fixture, , 3,400, , Opening Stock :, - Finished goods, , 4,000, , - Work-in-progress, , 7,250, , - Raw Materials, , 2,800, , Carriage Inwards, , 1,000, , Rent (Factory ¾), , 4,000, , Sundry Debtors, , 21,600, , Advertisement, , 775, , Printing &, Stationery, , 1,200, , Factory Insurance, , 1,280, , Purchase of Raw, Material, , 82,950, , Balance at Bank, , 8,530, , Discount Allowed, , 610, , Miscellaneous, Expenses, , 630, 1,90,000, , 1,90,000
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187, Adjustments:, (1)Closing Stock: Finished Goods Rs.6,500, Raw Materials Rs.750, and Work-in-progress Rs.4,750., (2) A Motor car purchased on 1-10-2017 for Rs.10,000 has been, included in purchases., (3) Depreciate Machinery at 15% p.a., Motor Car at 20% p.a.,, Furniture and Fixtures at 15% p.a., (4) Provision for R.D.D. should be maintained at 10% of the, debtors., (5) Provision for unrealised Rent in respect of portion of the office, sub-let at Rs.120 p.m. from 1-10-2017 has to be made., (April 96, adapted), , Solution:, LAKHAMICHAND, Manufacturing Account, For the year ended 31-12-2017, Dr., , Cr., Particulars, , Rs., , To Work-inProgress, (Opening), , Rs., , Add : Purchases, Add : Carriage, Inwards, , 4,750, , To Trading, A/c, (Cost of, production, transferred), , 97,030, , 2,800, , 82,950, 1,000, 86,750, , Less : Motor Car, Purchase, Less : Closing, Stock, To Manufacturing, Wages, , 10,000, 750, , Rs., , 7,250 By Work-inProgress, (Closing), , To Raw Materials, consumed :, Opening Stock, , Particulars, , 76,000, 9,300
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188, , To Factory, Expenses :, Rent, [3/4 x 4,000], , 3,000, , Insurance, , 1,280, , Power and Fuel, , 450, , Depreciation on, Plant, , 4,500, , 9,230, 1,01,780, , 1,01,780, , Trading Account, For the year ended 31-12-2017, Dr., , Cr., Rs., , Particulars, To Opening stock, (FG), , Particulars, , 4,000 By Sales, , Rs., 1,38,780, , To Manufacturing A/c, (Cost of Production, tfd.), , 97,030 By Closing stock, (FG), , To Gross profit c/d, , 44,250, 1,45,280, , 6,500, , 1,45,280, , Profit and Loss Account, For the year ended 31-12-2017, Dr., , Cr., Particulars, , To Office Salaries, To Carriage, Outwards, To Office Rent (1/4 x, 4,000), To Advertisement, To Printing and, Stationery, To Discount Allowed, , Rs., , Rs., , Particulars, , 6,225 By Gross, Profit b/d, 500 By Rent, Accrued, 1,000, 775, 1,200, 610, , Rs., 44,250, 360
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189, , To Miscellaneous, Expenses, , 630, , To Prov. for Bad &, Doubtful Debts, New R.D.D., , 2,160, , Less : Old R.D.D., , 560, , 1,600, , To Depreciation :, - on Motor Car, , 500, , (10,000x20/100x3/12), - on Furniture &, Fixtures, , 510, , 1,010, , (3,400 x 15/100), To Net profit tfd. To, capital, , 31,060, 44,610, , 44,610, , Balance Sheet, As at 31-12-2017, Liabilities, , Rs., , Capital, Account :, , Rs., , Assets, , Rs., , Fixed Assets :, , Balance b/d, (opening), , 41,860, , Plant and Machinery, , Add : Net profit, , 31,060, , Less : Depreciation @, 15%, , 72,920, , Motor Car, , Less :, Drawings, , Rs., , 2,500, , 70,420 Less : Depreciation @, 20% (for 3 months), , 30,000, 4,500, , 25,500, , 10,000, 500, , 9,500, , Current, Liabilities :, Sundry, creditors, , 8,800 Furniture & Fixtures, Less : Depreciation @, 15%, Current Assets :, Closing Stock :, , 3,400, 510, , 2,890
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190, - Raw Materials, , 750, , - Work in Progress, , 4,750, , - Finished Goods, , 6,500, , Debtors, , 12,000, , 21,600, , Less : New R.D.D., , 2,160, , 19,440, , Rent Accrued, , //, , 360, , Balance at Bank, , 8,530, , Cash in Hand, , 1,000, , 79,220, , 79,220, , Illustration 7:, The following balances are extracted from the ledger accounts of, Mr. Bharat as on 31st December, 2017., Dr. Rs., , Particulars, Mr., Bharat’s, , Cr. Rs., , Particulars, , 1,40,000 Wages, , Capital, , Salaries, , Plant and, Machinery, , 45,000, , Expenses, 20,000, , Finished, goods, , 5,000, , Cr. Rs., , 30,000, 22,000, , Trade, , Opening, Stock, Raw, Materials, , Dr. Rs., , 9,000, , Rent, , 12,000, , Consignment, (Mr. X) A/c., , 33,000, , Purchases, and Sales, , 3,74,000 4,60,000 Cash, , Debtors, and, Creditors, , 1,35,000, , 5,000, , 90,000, , 6,90,000 6,90,000, Adjustments:, (1) Opening stock of finished goods include stock of stationery, of Rs.200., (2) Closing stock of raw materials Rs. 10,000, closing stock of, finished goods Rs.20,000 (including stock of stationery, Rs. 100.)
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191, (3) Trade expenses include payment of stationery of Rs.2,000., (4) Closing creditors include creditors for stationery of Rs.500 for, credit purchases., (5) Mr. Bharat sent goods costing Rs.33,000 to Mr. X (consignee), who sold two third of the quantity for Rs.35,000. The consignee, has incurred expenses of Rs.2,000 and is entitled for, commission of 5% on sales., (6) Sales include a sum of Rs.32,000 received on sale of all goods, received on behalf of Mr. Y (consignor). Mr. Bharat is entitled to, a commission of 10% on these sales for which no entries were, passed. The expenses of Rs.1,000 for sale on behalf of Mr. Y, are debited to trade expenses (the expenses should be incurred, by Mr. Y), (7) Provide 10% depreciation on plant and machinery., Prepare manufacturing account, trading account and profit, and loss account for the year ended 31st December, 2017 and, the Balance Sheet on that date., (March 95, adapted) 2012., MR. BHARAT, Manufacturing Account, For the year ended 31-12-2017, Dr., Cr., Particulars, , Rs., , Rs., , To Raw Materials, consumed, Opening Stock, Add : Purchases, , 20,000, , Particulars, , Rs., , By Trading A/c, (Cost of, production tfd.), , 4,18,000, , 3,74,000, 3,94,000, , Less : Purchases, of Stationery, Less : Closing, Stock, To Wages, , (500), (10,000) 3,83,500, 30,000, , To Factory, Expenses :, To Depreciation, on Machinery, , 4,500, 4,18,000, , 4,18,000
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192, Trading Account, For the year ended 31-12-2017, Dr., Particulars, To Opening, stock (FG), Less : Stock, of Stationery, To, Manufacturing, A/c Cost of, Production, To Gross, profit c/d, , Cr., Rs., , Rs., , 5,000, 200, , Rs., , Particulars, By Sales, , Rs., , 4,60,000, , 4,800 Less, :, Consignment, Sales [Y], , 32,000, , 4,18,000, , 38,100 [35,000, 33,000], , –, , 2,000 4,30,000, , By Closing, stock, Finished, Goods, Less, Closing, stock of, , 20,000, :, , Stationery, , 100, 19,900, , Add : Unsold, Goods of, Consignment, [X], 4,60,900, , 11,000, , 30,900, , 4,60,900
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193, Profit and Loss Account, For the year ended 31-12-2017, Dr., , Cr,, Particulars, , Rs., , To Office Salaries, To Trade, Expenses, , Rs., , Particulars, , 22,000 By Gross, Profit b/d, 9,000, , Less : Payment for, Stationery, , (2,000), , Less : Expense of, Consignor Y, , (1,000), , Rs., 38,100, , By, Commission, from, Consignor, , 3,200, , By Net Loss, tfd. To Capital, , 5,050, , 6,000, , To Stationery, Consumed, Opening stock, Add : Stationery, Add : Credit, Purchase, , 200, 2,000, 500, 2,700, , Less : Closing, Stock, To Rent, To Commission to, Consignee, , (100), , 2,600, 12,000, 1,750, , (5% x 35,000), To Expenses, incurred by X, , 2,000, 46,350, , 46,350
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194, Balance Sheet, As on 31-12-2017, Liabilities, , Rs., , Rs., , Capital / Account :, Balance b/d, (opening), Add : Net profit, , Assets, , Rs., , Rs., , Fixed Assets :, 1,40,000, , Plant and, Machinery, , 5,050 1,34,950 Less :, Depreciation, @ 10%, , 45,000, 4,500, , 40,500, , Current Liabilities, Sundry creditors, Less : Creditors for, Stationary, , 90,000, 500, , Creditors for, stationary, Due to Y, , 89,500, 500 Current, Assets :, , 32,000, , Less: Commission, (10%), , 3,200, , Less : Expenses of, consignor Y, included in trade, , 1,000, , Closing Stock, :, - Raw, Materials, 27,800 - Finished, Goods 19,900, Add : Unsold, goods (x), 11,000, - Stock of, stationary, , 10,000, , 30,900, , 100, , Debtors, , 41,000, 1,35,000, , Consignment, A/c Mr. X, , 33,000, , Add : sales of, X, , 2,000, 35,000, , Less :, Expenses, , 2,000, , Less :, Expenses, , 2,000, , Less:, Commission, (5%), , 1,750, , Cash in hand, 2,52,750, , 31,250, , 5,000, 2,52,750
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195, , 9.2, , EXERCISE, , Illustration 1, From the following details for the year ended 31st March 2018, prepare Manufacturing, Trading and Profit & Loss Account of M/s, Razavi Traders:, Rs., , Particulars, Opening stock:, , Rs., , Particulars, Electric and water charges, , 4,000, , Raw Material, , 60,000 Wages, , 1,40,000, , Work in progress, , 50,000 Salary of works manager, , 6,000, , Finished goods, , 75,000 Office salaries, , 5,000, , Purchase of raw materials, , 3,20,000 Advertisement, , 2,000, , Sales, , 6,25,000 Deprecation, , Purchase returns, , 5,000 - on Plant, , 3,000, , Sales returns, , 4,000 - on Factory Shed, , 1,000, , Carriage inward, , 1,500 - on Office Furniture, , Carriage outward, , 1,000 Closing Stock, , Duty and clearing charges, , 2,000 - Raw material, , 40,500, , Factory rent, , 3,000 - Work in progress, , 60,000, , Office rent, , 2,000 - Finished goods, , 55,000, , 6,00, , Illustration 2, From the following Trial Balance and additional information of Miss., Shabana, prepare Manufacturing, Trading and Profit and Loss A/c, for the year ended 31st March, 2018 and Balance Sheet as on that, date., Trial Balance, As on 31st March, 2018, Particulars, Bank Overdraft, Advertising, Audit Fees, Bad Debts, Bills of Exchange, Goodwill, Commission received, Discount received, , Dr. Rs., 18,400, 10,500, 1,600, 20,350, 50,000, , Cr. Rs., 49,000, , 20,000, 1,000, 2,000
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196, Drawings, Land and Building, General Expenses, Insurance, Interest on Bank Overdraft, Investment in Shares, Plant and Machinery, Capital, Purchases, R.D.D., Return Inwards, Return Outwards, Debtors, Wages, Creditors, Opening Stock, Sales, Salaries, , 2,650, 40,000, 12,350, 3,150, 2,000, 56,000, 1,00,000, 2,70,000, 2,10,320, 1,000, 1,280, 3,320, 81,750, 30,250, 65,000, 40,000, 3,21,280, 52,000, 7,32,600, , 7,32,600, , The following further information is available:, (1)Closing Stock on 31st March, 2018 is Rs.87,000., (2) Outstanding Wages Rs.2,500., (3)Insurance is prepaid to the extent of Rs.650., (4) Depreciate Plant and Machinery @10% p.a. and Land and, Building@5% p.a., (5) Write off Rs.1,750 for Bad debts. Provide 5% for Doubtful Debts, on debtors., (Ans.: G/P – Rs. 1,27,250, N/P Rs. – 14,150, Balance sheet total4,18,000.)
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197, Illustration 3:, From the following particulars presented by Mazumdar Bros,, prepare a Manufacturing Account for the year ended 31-03-2012., Particulars, , Rs., , Opening Stock :, , Particulars, Carriage Inward, , Rs., 1,000, , - Raw Materials, , 3,000 Hire of Special Plant, , 2,000, , - Work-in-Progress, , 4,000 Factory Rent, , 4,000, , - Finished Goods, , 8,000 Repairs to Plant, , 2,000, , Closing Stock :, , Repairs to Factory, , 1,000, , - Raw Materials, , 1,000 Supervisor’s Salary, , 8,000, , - Work-in-Progress, , 5,000 Factory Wages, , 1,000, , - Finished Goods, , 4,000 Royalties on, production, , 2,000, , Purchase of Raw, Materials, , 40,000 Works Manager’s, Salary, , 6,000, , Wages of workers, , 20,000 Salary of Works Staff, , 3,000, , Light, Gas etc., (Factory), , 2,000, , , ,
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198, , Unit-10, DEPARTMENTAL ACCOUNTS I, UNIT STRUCTURE, 10.0 Objectives, 10.1 Introduction, 10.2 Branch Accounts and Departmental Accounts, 10.3 Departmental Accounting, 10.4 Basis of Allocation, 10.5 Inter Department Transfers of Goods / Services, 10.6 Closing Stock at Transfer Value, 10.7 Stock Reserve, 10.8 Departmental Final Accounts, 10.9 Proforma of Departmental Accounts, 10.10 Exercise, , 10.0 OBJECTIVES, After studying the unit students will be able to:, Distinguish between Branch and Departmental Store., Know the purpose of Departmental Store., Understand the accounting procedure of Departmental Store., Explain the Basis of allocation of common expenditure and, common income among different departments, Understand the accounting procedure for Inter-Departmental, Transfers of Goods., Calculate the value of closing stock and preparation of Stock, Reserve A/c., Prepare Departmental Final Accounts., , 10.1 INTRODUCTION, A large business concern may be divided into different, segments; each segment is known as department. All departments, operate under one roof. The division into various departments may
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199, be on basis of functions, processes or products or may be any, combination of above as it may be suitable to the organisation., Management is usually interested in finding out the working results, of each department to ascertain their relative efficiencies., Departmental Accounts are of great help to the management as, information for taking various types of decisions. Management can, compare result of one department with other departments., Company may intra or inters departmental comparison, may, be again that of same departments in the previous periods. This will, help them to formulae sound policy of expansion/diversion/merger, even if required, may be closing down a particular unprofitable, departments., , 10.2 BRANCH ACCOUNTS AND DEPARTMENTAL, ACCOUNTS, A business may be expanded having number of branches as, well as having number of departments under one roof. A large, business may have various departmental stores at different places., e.g. Big Bazaar has departmental stores at various places, like in, Mumbai, Pune, Navi Mumbai, Surat, and so on ., Distinguish between Branch & Departmental Store, No., , Branch, , Departmental Store, , 1., , Located at different places,, may be in different countries., , Departmental stores are, always located under one, roof., , 2., , Normally branches are, opened by manufacturer to, avoid middleman’s chain., , Normally concerns purchase, different types of goods, directly from manufactures,, sales to end users., , 3., , Branches sale one type of, goods manufactured by, them., , Departmental Stores, purchase goods from different, manufactures & sales under, one roof., , 4., , Branches may be domestic, [in same country] &/ or, foreign branches., , Departments are located at, one place, under one roof, only., , 5., , Since the branches located, at different places, the, problem of allocation of, common expanses does not, arises., , Common expenses are, always allocated in some, ratio.
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200, 6., , Accounting treatments, depends upon types of, branches, i.e. dependent, branch or impendent branch., , The departments are located, under one roof, all accounting, records are maintained by, head office., , 7., , Reconciliation may be, required for cash & goods in, transit., , Question of such, reconciliation doesn’t arise,, as all departments are at, same place., , 8., , In case of foreign branch,, question of conversion of, foreign currency in Head, Office currency arises., , This problem does not arise, in Departmental Accounting., , 10.3 DEPARTMENTAL ACCOUNTING, 10.3.1 Purpose:, In Departmental Accounting, if only a single Profit & Loss, Account is prepared for the entire business, then profit / loss of, each department cannot be ascertained. In Departmental, Accounting, each department is treated as separate entity for the, purpose of recording and reporting. In same premises, a separate, Account Department records all transactions of all departments., Books of Accounts are so designed, so it is possible to prepare, separate Trading A/c, Profit & Loss A/c for each department. The, working of one department can be compared with another, department. It facilities infra / inter comparison for same period with, that of same department in the previous periods. This helps, management to formulate sound policy for expansion, merger of, departments, closing of loss making departments. Preparation of, separate accounts serves the following purposes :, a) Gross Profit or Loss, Net Profit or Loss of each department, can be ascertained., b) Running cost of each department can be calculated., c) Corrective timely measures for inefficient department can be, taken., d) It helps to fix branch manager’s commission on basis on, profit., e) Departmental transfers can be recorded at transfer price /, selling price., f) Stock reserve, unrealized profit on goods transferred can be, calculated., g) Assist the management for controlling the business more, efficiently, intelligently.
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201, h) Wastage of material, money, human recourses can easily, detect., i) A separate stock records can be maintained department, wise for controlling stock., j) Department managers responsibly can be fixed and called, for various reporting., k) Department budget can be prepared., 10.3.2 Books of Accounts:, For preparation of Profit & Loss A/c of each department, it is, necessary that separate sets of Books of Accounts should be, maintained for each department. Instead of that Accounts, Department maintains various Subsidiary Books in columnar form,, it will also be necessary to devise a basis for allocation of common, expenses among the departments. Normally, each department, records its sales & maintains stock records. Daily cash collection in, department is transferred to main cashier or deposited in Bank., Stocks are physically verified periodically., 10.3.3 Divisions of Subsidiary Books:, Subsidiary Registers are designed in such a way to record, transactions of each department in same register; separate, columns are made for each department in same subsidiary book,, such as purchase Journal, Sales Journal, Return Inwards, Return, Outwards, etc., Specimen of Departmental ------- Journal, [Purchases, Purchases Returns, Sales, Sales Returns etc.], Date Serial Name L.F., No., , Total Rs, , Total, Rs, , Depts. Dept. Dept. Dept. Ref., I, II, III, IV, , xxxxx x, , x, , x, , x, , Direct Expenses / Sales etc. can be recovered in department, e.g., cash sales; cash is to be deposited with main cashier on same day., , 10.4 BASIS OF ALLOCATION, Allocation, departments:, , of, , common, , expenditure, , among, , different, , Expenses incurred specially for each department are, recorded separately and charged directly thereto, e.g. Salaries paid, to staff working in the particular dept.
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202, 10.4.1 Common expenses:, The benefits of which is shared by all the departments and which, are capable of precise allocation are distributed among the, department concerned on equitable basis considered suitable in the, circumstances of the case., 10.4.2 Common indirect expenses:, Common indirect expenses are the expenses which cannot, be directly identified with particular departments, however, departments are benefited. Such expenses which are not capable, of accurate measurement are dealt with as shown in the chart., The following table gives suitable basis for allocation of such, expenses., Item of Expenses / Income, , Basis of Allocation, , 1., , Rent and Rate, , Floor space occupied by each, department, , 2., , Lighting, , On the basis of actual, consumption, if actual is not, available on the number of, electric points or Power of, Lamps used or area covered, , 3., , Advertisement, , Sales, , 4., , Sales Commission, , Sales, , 5., , Discount Allowed to, Customers, , Sales, , 6., , Bad debts, , Actual of each department or, on sales, , 7., , Electric Power for Machines, , On the H.P. of equipments or, number of machines in each, department and the number of, working hours., , 8., , Works Manager’s Salary, , Time spent by him for each, department, , 9., , Depreciation, , Value of assets employed by, each department, , 10. Air-conditioning, , Space occupied, , 11. Insurance :, i) Stock, , Value of stocks held in each, of the departments
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203, , ii) Buildings, , Floor space occupied or, capital value of the assets, insured, , 12. Staff Welfare, , No. of employees in each of, the department, , 13. Printing and Stationery, , Turnover of the departments, , 14. Freight, a) Inward, , Net purchases of each of the, department, , b) Outward, , Net sales of each of the, department, , 15. Repairs to Building, , On the basis of space, occupied by each department, , 16. Heating, , On the basis of points, lamps, used or area, , 17. Discount Earned, , Sales ratio, , 18. Commission Received, , Sales ratio, , 19. Discount Received, , On the basis of purchases, , 20. Delivery Van Expenses, , On the basis of sales., , 21. Traveling Expenses, , On the basis of sales., , 22. Administration Expenses, , On the basis of time devoted, , 23. Postage, Telephone, Printing, and Stationery, , Sales following the rule “What, the traffic will bear”., , 24. Workmen’s Compensation, , Wages incurred by each, department., , 25. PF and ESI Contribution, , Wages, , 26. Canteen Subsidy, Medical, Benefits, , Number of workers, , 27. Store Expenses, Expenses, On Purchase, Direct, Expenses On Purchases,, Octroi Expenses, , Material consumed or Net, Purchases of each, department, , 28. All Production, Factory, Expenses, , Either on cost of material, consumed or wages of each, dept., , 29. Selling and Distribution Exp., , Sales ratio or k.g. or units sold, by each dept.
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204, 10.4.3 Non Allocable Expenses / Uncommon Expenses / Gains, The other common expenses which can’t be identified or, allocable on suitable basis., The financial or accounting expenses or losses / income e.g., interest/ loss on sale of investment., Examples - Interest on loans and advances, legal fees, loss, on sale of any asset, income tax, audit fees, loss by fire., All these expenses should be debited to General Profit and, Loss Account., Normal income may be as a whole, which can’t be allocated, to particular department. However, some income on basis of, purchases (discount earned) or sales e.g. discount allowed,, commission received etc., , CHECK YOUR PROGRESS, 1. Define the terms:, a. Department, b. Branch, c. Non Allocable Expenses, d. Common Expenses, e. Common Indirect Expenses, 2. Give the examples of uncommon expenses., 3. Give suitable basis for allocation of the following expenses:, a. Factory Expenses, b. Canteen Subsidy, c. Delivery Van Expenses, d. Commission Received, e. Discount Received, f. Works Manager’s Salary, g. Air Conditioning, h. Bad Debts, , 10.5 INTER DEPARTMENT TRANSFERS OF GOODS /, SERVICES, Usually department supply goods / services to one another., These transactions should be separately recorded and changed to, the department benefiting these by & credited to the department, providing it. Total of such benefits should be disclosed in the, Departmental Trading, Profit & Loss A/c, to distinguish them from, other items of income or expenses.
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205, The departmental transfer may be:, 1), At cost, 2), At cost plus profit (loading) (transfer value), 3), At selling price (transfer value = sale value), 10.5.1 Transfer at cost:, Usually goods are transferred at cost on the assumption that, departmental stores as a whole one entity profit / loss earned or, suffered only when goods are sold to outsides / external parties., 10.5.2 Transfer at cost plus profit:, Goods may be transferred at cost plus profit [transfer value /, loaded price] so that both departments are in a position to ascertain, profit / loss accurately., 10.5.3 Transfer at selling price:, In such case departmental transfers are recorded at usual, selling price. Each department records such transfers as its goods, are sold to outsiders. In such a case, each department is in position, to account for profit or losses accurately, due to this, profit or loss of, one department would not be affected due to efficiencies or, inefficiency of another department., 10.5.4 Accounting for transfer of goods or services:, Receiving department should be debited at transfer price, and department transferring goods / services should be credited at, same value. [Transfer Price / Selling Price]., , 10.6 CLOSING STOCK AT TRANSFER VALUE, When one department transfers goods, at transfer price, [may be at cost plus profit or selling price], is included profit, charged by another department. In case, at the end of accounting, year, part of goods remains unsold i.e. closing stock valued at cost, to receiving department which includes profit charged by, transferring department. Profits are always accounted only when, realized. Therefore, value of stock needs to be adjusted by creating, stock reserve., , 10.7 STOCK RESERVE, The unrealized profit included in closing stock of receiving, department is eliminated by creating stock reserve. Stock reserve is, calculated as under:
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206, Stock Reserve =, Transferred value of closing stock ×, , Profit included in transfer price, Transfer price, , Entry for unrealized profit, is passed by concern in the, General Profit & Loss A/c as under :, General Profit & Loss A/C, To Stock Reserve A/C, , Dr., , The amount of stock reserve is deducted from value of stock in the, Balance Sheet., In the beginning of the next year, entry passed for stock, reserve is reversed., Stock Reserve A/C, Dr., To General Profit & Loss A/C, E.g. Goods costing Rs.20,000 transferred by A department to Z, department at Rs.24,000. Half of goods remained unsold at the end, of the year., For recording transfer:, i), , Department Z’s Trading A/c, To Department A’s Trading A/c, , ii), , Stock of Department Z, Stock A/c, Dr., To Department Z’s Trading A/c, , iii), , General Profit & Loss A/c, To Stock Reserve A/c, , Dr., , Dr. 24,000, 24,000, , 12,000, 12,000, 2,000, 2,000, , 10.8 DEPARTMENTAL FINAL ACCOUNTS, The Departmental Final Accounts contain:, , , , , Departmental Trading A/c, Departmental Profit & Loss A/c, General Profit & Loss A/c, , Departmental Profit & Loss A/c is prepared in columnar form, at the end of the year. The respective columns indicate the gross, profit & net profit or net loss from each department as well as total.
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207, The net profit or loss of the respective department will be carried to, General Profit & Loss A/c where in expenses and incomes, which, are not allocated to the various departments, are debited or, credited. The balance of this account is transferred to Balance, Sheet. However, the Balance Sheet is in usual form and not in the, columnar form., , 10.9 PROFORMA OF DEPARTMENTAL ACCOUNTS, Departmental Trading A/c, For the year ended, Particulars, , Basis Dept. Dept. Total, A, B, , To Opening, Stock, , A, , xxx, , xxx, , xxxx, , By Sales, , To Purchase, , A, , xxx, , xxx, , xxxx, , Less :, Returns, , xxx, , xxx, , xxxx, , By, Transferred, to Dept. A, , Less:, Purchase, Returns, , Particulars, , Basis Dept. Dept. Total, A, B, A, , xxx, , xxx, , xxxx, , xxx, , xxx, , xxxx, , A, , xxx, , xxx, , xxxx, , To Received, from Dept. B, , A, , xxx, , xxx, , xxxx, , By Cost of, Goods Lost, , A, , xxx, , xxx, , xxxx, , To Purchase, Expenses, , A, , xxx, , xxx, , xxxx, , By Cost of, Goods, Damaged, , A, , xxx, , xxx, , xxxx, , To Direct, Wages, , A, , xxx, , xxx, , xxxx, , By Closing, Stocks, , A, , xxx, , xxx, , xxxx, , To Lighting,, Power, , xxx, , xxx, , xxxx, , To Repairs, Workshop, Cost, , xxx, , xxx, , xxxx, , To Stores, Dept. Cost, , xxx, , xxx, , xxxx, , To Other, Factory, Expenses, , xxx, , xxx, , xxxx, , To Gross, Profits c/d, , xxx, , xxx, , xxxx, , By Gross, loss c/d, , xxx, , xxx, , xxxx, , xxx, , xxx, , xxxx, , Total, , xxx, , xxx, , xxxx, , Total, , Rs, , Rs
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208, Profit & Loss A/c, For the year ended, Particulars, , Basis Dept. Dept. Total Particulars, A, B, , Basis Dept. Dept. Total, A, B, , To Gross, Loss b/d, , xxx, , xxx, , xxxx, , By Gross, Profit b/d, , xxx, , xxx, , xxxx, , To, Salesman’s, Salaries, Commission, , xxx, , xxx, , xxxx, , By, Discount, Received, , xxx, , xxx, , xxxx, , To Traveling, Expenses, , xxx, , xxx, , xxxx, , To Carriage, Outwards, , xxx, , xxx, , xxxx, , To Ware, Housing, Charges, , xxx, , xxx, , xxxx, , To Packing, Expenses, , xxx, , xxx, , xxxx, , To, Advertising, , xxx, , xxx, , xxxx, , To Other, Selling, Expenses, , xxx, , xxx, , xxxx, , To Other, Distribution, Expenses, , xxx, , xxx, , xxxx, , To Bad, Debts /, Discount, , xxx, , xxx, , xxxx, , To Rent,, Taxes, Repairs, , xxx, , xxx, , xxxx, , To Staff, Welfare, , xxx, , xxx, , xxxx, , To Canteen, Expenses, , xxx, , xxx, , xxxx, , To, Contribution, to PF, ESIS, , xxx, , xxx, , xxxx, , To Insurance, , xxx, , xxx, , xxxx
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209, - Assets, , xxx, , xxx, , xxxx, , - Stocks, , xxx, , xxx, , xxxx, , - Workmen, , xxx, , xxx, , xxxx, , To Officer, Salaries, , xxx, , xxx, , xxxx, , To Postage, Telephones, , xxx, , xxx, , xxxx, , To Printing, and, Stationary, , xxx, , xxx, , xxxx, , To Other, Admin /, Office, Expenses, , xxx, , xxx, , xxxx, , To, Depreciation, on Assets, , xxx, , xxx, , xxxx, , To Net Profit, Ltd., , xxx, , xxx, , xxxx, , By Net, Loss Ltd., , xxx, , xxx, , xxxx, , To Gen., Profit & Loss, A/C, , xxx, , xxx, , xxxx, , By Gen., Profit &, Loss A/C, , xxx, , xxx, , xxxx, , xxx, , xxx, , xxxx, , Total, , xxx, , xxx, , xxxx, , Total, , Rs, , General Profit and Loss Account, For the year ended, Particulars, , Amounts, Rs., , To Net Loss from, Depts., , Particulars, , Amounts, Rs., , By Net Profits tfd. From, Deptts., , - Department A, , Xxxx, , - Department A, , Xxxx, , - Department B, , Xxxx, , - Department B, , Xxxx, , To Stock Reserve, (Opening Stock), , Xxxx, , By Interest on Loans, Given, , Xxxx, , - Department A, , Xxxx, , By Dividends on Shares, Received, , Xxxx, , - Department B, , Xxxx, , By Profits on Sale of, Assets, , Xxxx
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210, To General Admin., Expenses, , Xxxx, , By Stock Reserve (on, Closing Stock), , To Audit / Legal, Fees, , Xxxx, , - Department A, , Xxxx, , - Department B, , \\1h00, Xxxx, , Xxxx, To Interest and, Bank Charges Paid, , To Depreciation, (General Assets), , Xxxx, , To Loss on Goods, Destroyed /, Damaged, , Xxxx, , To Loss on Sale of, Fixed Assets, , Xxxx, , To Income Tax, , Xxxx, , To Transfer to, Reserves, , Xxxx, , To Net Profit tfd. to, Capital, , Xxxx, , But Net Loss tfd. to, Capital, , xxxx, , Total, , xxxx, , Total, , xxxx, , Balance Sheet, As on, Liabilities, , Amounts, Rs., , Assets, , Amounts, Rs., , Capital :, , x, , Buildings, , x, , Add : Net Profit, , x, , Furniture, , x, , x, , Closing Stock, , x, , x, , Less: Drawings, , x, , Loans, , x, , Less Profit on Inter, Departmental Goods, , Sundry Creditors, , x, , Sundry Debtors, , x, , Bills Payable, , x, , Bill Receivable, , x, , Outstanding Expenses, , x, , Bank Balance, , x, , Cash on hand, , x, , Total, , xxx, , Total, , x, , xxx
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211, , 10.10, A), , EXERCISE, Theory Questions, , 1. What is meant by Departmental Accounts?, 2. What are the advantages of Departmental Accounts?, 3. What difficulties are faced in the preparation of Departmental, Profit & Loss Account?, 4. What are the different methods of allocating expenses, among the departments?, B), , Objective Questions, a. Test your understanding by selecting the most appropriate, alternative:, , 1. Repairs and maintenance charges relating to Plant & Machinery, are apportioned over different departments according to :, a) The number of machines in each department., b) Book value of machines., c) Area occupied by each machine., 2. Lighting charges are apportioned over the departments on the, basis of :, a) Number of light points., b) Cost of machines., c) Sales., 3. Items of expenses not connected with any department are :, a) Charged to departments on the basis of total sales., b) Charged to the General Profit & Loss Account., c) Charged to departments on the basis of fixed assets, employed., 4. Cost of electric power should be apportioned over different, departments according to :, a) H.P. of motors, b) No. of light points., c) Cost of machines., 5. Supervision charges should be apportioned over the different, departments on the basis of :, a) Time devoted for supervision., b) Area occupied by each department., c) Sales of each department.
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212, 6. Which of the following is divided in the ratio of number of, employees?, a) Rent, b) Repairs, c) Wages, d) Carriage, 7. Following entry is passed in journal means :, Stock Reverse A/c Dr., To General Profit & Loss A/c., a) Unrealized profit on closing stock, b) Loss on sale of goods by department., c) Unrealized profit on opening stock., d) Profit on sale of goods., 8. Which of the following allocated in the sales ratio :, a) Discount allowed, b) Advertisement, c) Commission, d) All the above, 9. Credit balance in Departmental Trading A/c means, a) Gross Loss, b) Gross Profit, c) Net Profit, d) Non of the above, 10. Which of the following not debited to Department Trading A/c., a) Loss due to fire, b) Purchases, c) Carriage, d) Opening Stock, 11. Which of the following not debited to department Trading, Profit, & Loss A/c., a) Abnormal gain, b) Abnormal loss, c) Income tax, d) All of the above, 12. Canteen subsidy is allocated on the basis of each department., a) Sales, b) Purchases, c) No. of workers, d) Value of assets in canteen, 13. Air - conditioning is allocated on the basis of each department., a) Purchases, b) Sales, c) Area occupied, d) No. of employees, 14. Postage is allocated on the basis of each department., a) Purchases, b) No. of employees, c) Value of stock, d) Sales
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213, 15. Which of the following debited to General Profit and Loss A/c., a) Wages, b) Closing stock reserve, c) Opening stock reserve, d) Net loss, 16. Debit balance in General Profit & Loss A/c means :, a) Net loss, b) Net profit, c) Departments profit transferred, d) All of the above, Answer: 1-b, 2-a, 3-b, 4-a, 5-a, 6 - C, 7 - C, 8 - d, 9 - b, 10 - a,, 11 - d, 12 - c, 13 - c, 14 - d, 15 - b, 16-a., b) State whether True or False, 1), , Carriage outwards debited to Departmental Trading A/c., , 2), , Distribution expenses are allocated to Department on the, basis of sales of each department., , 3), , Audit fees is credited to General Profit & Loss A/c., , 4), , Management expenses debited to al& Loss A/c., , 5), , Insurance of stock is allocated in the ratio of value of stock in, each department., , 6), , Net loss appears on the debit side of Departmental Profit &, Loss A/c., , 7), , Bad debts recovery is debited to General Profit And Loss A/c., , 8), , Return inwards deducted from purchases of each department., , 9), , Rent of building is allocated on the basis of sales of each, department., , 10), , All expenses are allocated on the basis of sales of each, department., , 11), , Goods transferred by department must be recorded at cost., , 12), , Stock reserve is reduced from stock in the Balance Sheet., , 13), , Departmental gross profit is credited to Departmental Profit &, Loss A/c., , 14), , Depreciation is to be apportioned on the basis of value of, assets in each department., , 15), , If purchases & sales are double in Department A as, compared to Department B, gross profit is also double in, Department A as compared to Department B., , 16), , Cost of insurance of stock is allocated in the ratio of, employees employed in each department., , 17), , Each department is treated as separate entity for the purpose, of preparing Trading, Profit & Loss A/c.
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214, 18), , Loss due to fire in department is debited to general profit &, loss a/c., , 19), , Legal expenses incurred by a department is debited to, General Profit & Loss A/c., , Answer:, False: 1, 3, 6, 7, 8, 9, 10, 11, 15, 16, True: 2, 4, 5, 12, 13, 14, 15, 17, 18, 19, c), , Fill in the blanks:, , 1), , Income Tax paid is debited to --------------- A/c., , 2), , Closing stock reserve is credited to --------------- A/c., , 3), , Power is allocated on the basis of ------------ of each, department., , 4), , Depreciation is allocated on the basis of ------------ of each, department., , 5), , Legal charges should be debited to -------------- A/c., , 6), , Goods transferred by A Department to B Department credited, to -------------- Department Trading A/c., , 7), , Depreciation on delivery van should be allocated on basis of, -------- of each department., , 8), , Goods transferred by Z department to K Ltd. should be, credited to -------------- Department Trading A/c., , 9), , Stock Reserve is not required if goods are transferred at ------., , 10), , Income from investment should be credited to --------------- a/c., , 11), , Contribution to P.F. is allocated on the basis of ---------- of, each department., , 12), , Profit of a department is credited to ------------- A/c., , 13), , For transferring opening stock reserve ------------- A/c is, credited., , Answer:, 1) Drawing, 2) Stock Reserve, 3) No. of electric points,, 4) value of assets, 5) General Profit & Loss A/c, 6) A dept.,, 7) Sales, 8) Z dept., 9) cost, 10) General Profit & Loss A/c,, 11) Wages or Salaries, 12) General Profit & Loss, 13) Stock, Reserve.
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215, d) Match the following:, I), Column A, Common Expenses, , Column B, Basis of Allocation, , A) Rent, , 1) No. of employees in each, department, , B) Cost of stores, , 2) Value of plant, department, , C) Depreciation on plant, , 3) Floor area of each department, , D) Labour welfare, , 4) Purchase of each department, , in, , each, , 5) Material consumed by each, department, Answer: I)A - 3, B - 5, C - 2, D - 1, , II), Column A, , Column B, , 1) Stock Reserve, , a) General Profit & Loss A/c, , 2) Loss due to fire, , b) Debit to A Dept. Trading A/c, , 3) Transfer of goods from A, Dept. to K Dept., , c) Debited to Dept. Trading A/c, , 4) Selling expenses, , d) Sales of each department, e) Deduct from stock in Balance, Sheet, f) Debit to K Dept. Trading A/c, , Answer: II) 1 - e, 2 - a, 3 - e, 4 - d, , III), Column A, , Column B, , A) Insurance of machinery, , 1) Wages, , B) Power, , 2) On the basis of credit sales, , C) E.S.I. contribution, , 3) General Profit & Loss A/c, , D) Discount received, , 4) W.D.V. of machinery, , E) Audit fees, , 5) H.P. of machinery, 6) On the basis, purchases, , Answer: A – 4, B – 5, C – 1, D – 6, E - 3, , of, , credit
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216, IV), Column A, , Column B, , Common Expenses, , Basis of Allocation, , i) Repairs to Building, , 1) Space, occupied, Department, , by, , each, , ii) Bad debts, , 2) Purchases of each Department, , iii) Carriage inwards, , 3) Sales of each Department, , iv) Medical benefits, , 4) Stock of each Department, 5) Sales Return of each department, 6) Purchases of each dept., 7) No. of workers, , Answer: I - 1, ii - 3, iii - 2, iv - 7, , V), Column A, , Column B, , Common Expenses, , Basis of Allocation, , 1) Manager salaries, , a) On basis of sales of each dept., , 2) Building Insurance, , b) Actual of each dept., , 3) Traveling expenses, , c) On the basis of time devoted, , 4) Discount received, , d) Floor space occupied, e) On basis of purchases of each dept., , Answer: 1 - c, 2 - d, 3 - a, 4 - e, , VI), Column A, , Column B, , Common Expenses, , Basis of Allocation, , 1) Depreciation of Delivery a) On the basis of points in each, Van, dept., 2) Lighting, , b) On the basis of purchases of, each dept., , 3) Works manager’s, salaries, , c) On the basis of sales of each, dept., , 4) Purchase manager’s, salary, , d) Value of stock purchased by, each dept., e) Time spent by him for each, dept., , Answers: 1 -c, 2 - a, 3 - e, 4- b, ,
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217, , Unit-11, DEPARTMENTAL ACCOUNTS II, UNIT STRUCTURE, 11.0 Objectives, 11.1 Solved Problems, 11.2 Exercise, , 11.0 OBJECTIVES, After studying the unit students will be able to prepare the, Departmental final accounts, , 11.1 SOLVED PROBLEMS, Illustration 1, Mr. Ramkrushna is the proprietor of Venus; a shop selling, books and toys for the purpose of his accounts. He wishes the, business to be divided into two departments: Department R: Books,, Department V: Toys., The following balances have been extracted from his books, as at 31st March 2018., Name of the Account, , Amount, (Rs), , Sales : Department R, , 3,00,000, , : Department V, , 2,00,000, , Stock : Department R, , 5,000, , : Department V, , 4,000, , Purchases : Department R, , 2,36,000, , : Department V, , 1,64,000, , Salesmen : Department R, , 20,000, , : Department V, , 15,000, , Book delivery wages, General office salaries, , 3,000, 15,000
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218, Rates, , 2,600, , Fire insurance - building, , 1,000, , Heating & lighting, , 2,400, , Repairs to premises, , 500, , Telephone, , 500, , Cleaning, , 600, , Audit Fees, , 2,400, , General office expenses, , 1,200, , Discount Allowed, , 5,000, , Discount Received, , 2,000, , Stock (closing) Department R, , 6,000, , Department V, , 3,000, , The floor area occupied Department R one fifth Department V four fifth. Prepare Trading and Profit and Loss Account for the year, ended 31st March 2018 apportioning the overhead expenses, where, necessary to show the Departmental Profit or Loss. Show clearly, the basis on which the expenses are apportioned., Solutions : 1, Venus Trading, Trading and Profit and Loss Account, For the year ended 31st March 2018, Particulars, To Opening stock, To Purchases, To Gross Profit c/d., , To Salaries, , Dept. R, (Rs), 5,000, 2,36,000, , Dept. V, (Rs), , 4,000 By Sales, 1,64,000 By Closing Stock, , 65,000, , 35,000, , 3,06,000, , 2,03,000, , 10,000, , Particulars, , 15,000 By Gross profit, b/d, , To Delivery Wages, , 3,000, , -- By Dis. Received, , To Gen Office, Salaries, , 9,000, , 6,000, , To Rates, , 520, , 2,080, , To Fire Insurance, , 200, , 800, , Dept. R, (Rs), , Dept. V, (Rs), , 3,00,000, , 2,00,000, , 6,000, , 3,000, , 3,06,000, , 2,03,000, , 65,000, , 35,000, , 1,180, , 820
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219, To Lighting &, Heating, , 480, , 1,920, , To Repairs to, Premises, , 100, , 400, , To Telephone, , 300, , 200, , To Cleaning, , 120, , 480, , 1,440, , 960, , 720, , 480, , To Dis. Allow, , 3,000, , 2,000, , To Net profit, , 37,300, , 5,500, , 66,180, , 35,820, , To Audit Fees, To General Office, Exp., , 66,180, , 35,820, , Working Notes:, 1), Sales ratio: 3: 2, 2), Purchase ratio: 59: 41, 3), Floor space ratio: 1: 4, Illustration No. 2, From the following particulars of Kirti Enginer’s prepare a, departmental Trading and Profit and loss account for their two, departments viz. Cars Department and Dolls Department for the, year ended 31st March 2018:, Particulars, , Cars, , Dolls, , Opening stock, , 50,000, , 1,50,000, , Wages, , 30,000, , 60,000, , Sales, , 9,00,000, , 1,80,000, , Closing stock, , 1,20,000, , 60,000, , Other Information :, Raw materials consumed (Cars), , 3,60,000, , Stores consumed, , 90,000, , Advertising, , 15,000, , Packing expenses (Dolls), , 6,000, , Office expenses, , 48,000, , Depreciation on factory equipment, , 32,000, , Building, , 16,000
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220, Additional Information :, a) Dolls making does not require any equipment, b) Only 1/8 of the total area of building is occupied by dolls, Department., c) Office expenses are to be allocated in ratio of 5:1., d) Value of materials used by Dolls department is Rs. 20,000, out raw materials consumed., Kirti Engineers, Trading and Profit and Loss Account, For the year ended 31st March 2018, Particulars, , Cars, (Rs.), , Dolls, (Rs.), , Particulars, , Cars, (Rs.), , Dolls, (Rs.), , To Opening, Stock, , 1,50,000, , 50,000 By Sales, , 9,00,000 1,80,000, , To Raw Material, , 3,40,000, , 20,000 By Closing, Stock, , 1,20,000, , To Stores, , 85,000, , 5,000, , To Wages, , 60,000, , 30,000, , To Gross Profit, c/d, , 3,85,000 1,35,000, 10,20,000 2,40,000, , To Packing Exp., , --, , 6,000 By, Gross, Profit b/d, , To, Advertisement, , 12,500, , 2,500, , To Office Exp., , 40,000, , 8,000, , To Dep. On, Factory, Equipment, , 32,000, , --, , Building, , 14,000, , 2,000, , To Net Profit, , 60,000, , 10,20,000 2,40,000, 3,85,000 1,35,000, , 2,86,500 1,16,500, 3,85,000 1,35,000, , 3,85,000 1,35,000, , Notes :, 1), Stores are allocated in proportion of raw materials consumed, it. 17:1., 2), Sales Ration 5:1.
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221, Illustration 3: (Transfer of goods at cost), The following figures are extracted from the books of M/s, Krishna. For the year ended 31st December 2017., Particulars, , Department, P, Rs, , Q, Rs, , R, Rs, , Purchases, , 4,40,000, , 5,20,000, , 1,10,000, , Sales, , 6,10,000, , 9,25,000, , 3,20,000, , Return Inward, , 10,000, , 25,000, , 20,000, , Return Outward, , 40,000, , 20,000, , 10,000, , 8,000, , 5,000, , 7,000, , Stock on 01.01.2017, , 45,000, , 35,000, , 40,000, , Stock on 31.12.2017, , 65,000, , 20,000, , 10,000, , Wages, , Other Information’s :, Goods transferred from P to Q Rs.10,000 and to R Rs.8,000., Goods transferred from R to P Rs.5,000 and to Q Rs.6,000., Goods transferred from Q to P Rs.6,500 and to R Rs.5,600., Telephone charges Rs.15,800 to be apportioned in the ratio, of 3:1:1 among departments P, Q and R respectively., 5. Rent Rs.24,000 to be divided as ¼, 2/4 and ¼ among, Departments P, Q and R respectively., 6. Other Expenses, Discount allowed Rs.18,000, Bad debts Rs.15,000, Income tax Rs.58,000, Legal expenses Rs.24,000, Insurance of goods Rs.8,600, 1., 2., 3., 4., , You should allocate aforesaid expenses as you deem best, indicating the basis of allocation. All working should form a part of, your answer., Prepare Departmental Trading and Profit and Loss account., In columnar form and General Profit and Loss accountant for the, year ended 31st December, 2017.
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222, M/s Krishna, Departmental Trading and Profit & Loss Account, For the year ended 31.12.2017, Particulars, , Departments, P (Rs.), , To Opening, Stock, , Particulars, , Q (Rs.), , Departments, , R (Rs.), , P (Rs.), , Q (Rs.), , R (Rs.), , 45,000, , 35,000, , 40,000, , By, Sales, (Net), , 6,00,000, , 9,00,000, , 3,00,000, , To, Purchases, (Net), , 4,00,000, , 5,00,000, , 1,00,000, , By Closing, stock, , 65,000, , 20,000, , 10,000, , To Wages, , 8,000, , 5,000, , 7,000, , By Transfer, , 18,000, , --, , --, , To Transfer, , --, , 10,000, , 8,000, , By Transfer, , --, , --, , 11,000, , To Transfer, , 5,000, , 6,000, , --, , By Transfer, , --, , 12,100, , --, , To Transfer, , 6,500, , --, , 5,600, , 2,18,500, , 3,76,100, , 1,60,400, , 6,83,000, , 9,32,100, , 3,21,000, , 6,83,000, , 9,32,100, , 3,21,000, , To, Telephone, , 9,480, , 3,160, , 3,160, , 2,18,500, , 3,76,100, , 1,60,400, , To Rent, , 6,000, , 12,000, , 6,000, , To Discount, , 6,000, , 9,000, , 3,000, , To Bad debts, , 5,000, , 7,500, , 2,500, , To Insurance, , 3,440, , 4,300, , 860, , To Net Profit, , 1,88,580, , 3,40,140, , 1,44,880, , 2,18,500, , 3,76,100, , 1,60,400, , 2,18,500, , 3,76,100, , 1,60,400, , To Gross, Profit c/d, , By Gross, Profit b/d, , General P & L Account, For the year ended 31.12.2017, Particulars, , Rs., , Particulars, , Rs., , To Legal Expenses, , 24,000 By Net Profit b/d, , To Income Tax, , 58,000 P, , 1,88,580, , 5,91,600 Q, , 3,40,140, , -- R, , 1,44,880, , To Net Profit c/d, To B/S, , 6,73,600, Notes :, 1. Purchases and Sales are recorded at Net., 2. Telephone charges are apportioned in the ratio 3:1:1., , 6,73,600
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223, 3. Discount allowed and Bad debts are apportioned in the ratio of, Sales 2:3:1., 4. Insurance on goods is assumed to be on purchases & hence, allocated in the ratio of purchases 4:5:1., Alliteratively, it may be assumed to be on stock and, allocated in the ratio of closing stock 65:20:10., Illustration No. 4 (Inter department transfer at selling Price), Following are the particulars of Dilip Kumar for the year ended 31st, March 2018., Particulars, , Dept. A, , Dept. B, , Rs., , Rs., , 20,000, , 14,000, , Sales, , 1,44,000, , 1,88,000, , Purchases, , 1,40,000, , 1,80,000, , Transfer to other Department, , 16,000, , 12,000, , Transfer to other Department, , 12,000, , 16,000, , Opening Stock, , 1. Closing stock of ‘B’ department is Rs.30,000. In which goods, worth Rs.8,000 are such which were transferred by A, department., 2. Closing Stock of A department is Rs.32,000 in which goods, worth Rs.12,000 are such, which were transferred by B, department., 3. Opening Stock of A department includes goods of Rs.1,600, which were transferred by B department. Gross Profit of B, department in the last year was 10%., 4. Opening stock of B department includes goods of Rs.3,200, which was transferred by A department. Gross Profit of A, department in the last year was 25%., Prepare Department Trading and Profit & Loss Account and, General Profit & Loss Account of Dilip Kumar from the above, particulars.
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224, Solution :, Dilip Kumar, Departmental Trading and Profit & Loss Account, For the year ended 31.03.2018, Particulars, To Opening Stock, To Purchase, , Dept. P, , Dept. Q, , Rs., , Rs., , 20,000, , Particulars, , 14,000 By Sales, , Dept. P, , Dept. Q, , Rs., , Rs., , 1,44,000 1,88,000, , 1,40,000 1,80,000 By Transfer, , To Transfer, , 12,000, , 16,000 By Closing, Stock, , To Gross Profit, b/d, , 20,000, , 20,000, , 1,92,000 2,30,000, , 16,000, , 12,000, , 32,000, , 30,000, , 1,92,000 2,30,000, , General Profit & Loss Account, For the year ended 31.03.2018, Particulars, , Rs., , To Stock Reserve, , Particulars, , Rs., , By Gross Profit, b/d, , Department (A) W.N.1, , 1,040 Department A, , 20,000, , Department (B) W.N.2, , 200 Department B, , 20,000, , To Net Profit c/d, , 38,760, 40,000, , 40,000, , Working Note No. (1), Total Sales of Dept. B = (1,88,000 + 12,000) = 2,00,000, 20,000 100, Gross Profit Ratio of Dept. B =, , 10%, 2,00,000 1, 12,000 10, 1200, 100, 1, Stock Reserve of Department A on opening stock is, Opening stock of Department A includes goods of Rs. 1,600, From Department B, Gross profit of last year is 10%, Stock reserve on opening stock of department A =, 16,00 10, 160, 100, 1, Net Stock Reserve = 1200 - 160 = 1040, , Stock Reserve of Department A is
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225, Working Note No. (2), Total Sales of department A (Rs. 1,44,000 + 16, 000 = 1,60,000, 20,000 100, Gross profit Ratio of Dept A, , 12.50%, 1,60,000 1, Stock Reserve of department A, 8,000 12.5, On closing stock, 1000, 100, 3,200 25, On opening stock, 800, 100, 1, Net stock Reserve = 1,000 - 800 = 200, Illustration 5:, Ram Krishna Motors has three departments i.e. Jeep, Car, and Servicing. The Department Jeep and Department Car sell, spare parts and occupy a showroom. The servicing department, uses a garage., From the following particulars, prepare, a) Departmental Trading, Profit & Loss A/c, b) General Profit and Loss Account, Particulars, , Department, Jeep, Rs., , Car, Rs., , 70,000, , 25,000, , --, , Purchases, , 1,75,000, , 35,000, , --, , Sales, , 3,00,000, , 1,00,000, , 50,000, , Wages, , 10,000, , 5,000, , 7,000, , Closing Stock, , 40,000, , 8,000, , --, , 2,000, , 3,000, , --, , Opening Stock, , Discount allowed, , Other Expenses :, Show room Expenses, Lighting Expenses, Transfer from Jeep to Servicing at cost, Transfer from Car to Servicing at cost, Directors fees, Bad debts, Income from Investment, Depreciation on Garage Equipment, Depreciation on showroom Furniture, , Servicing, Rs., , Rs., 11,000, 6,000, 18,000, 5,000, 2,000, 1,800, 1,500, 4,000, 2,000
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226, Additional Information:, 1. Show-room rent for one month is out-standing Rs. 1,000., 2. The departments using show room share the space and, furniture equally., 3. 50% of light bill is to be charged to servicing department and the, balance equally to other departments., 4. Allocate the above expenses as you deem best indicating the, base of allocation., Solution :, Ram Krishna Motors, Departmental Trading and Profit & Loss A/c, For the year ended, Particulars, , Departments, P (Rs.), , To opening, stock, , Q (Rs.), , Particulars, R (Rs.), , Departments, P (Rs.), , Q (Rs.), , R (Rs.), , 70,000, , 25,000, , --, , By, Sales, (Net), , 3,00,000, , 1,00,000, , 50,000, , To, Purchases, , 1,75,000, , 35,000, , --, , By Transfer, , 18,000, , 5,000, , --, , To Wages, , 10,000, , 5,000, , 7,000, , By Stock, , 40,000, , 8,000, , ---, , --, , --, , 23,000, , 1,03,000, , 48,000, , 20,000, , 3,58,000, , 1,13,000, , 50,000, , 3,58,000, , 1,13,000, , 50,000, , To, Showroom, , 5,500, , 5,500, , --, , 1,03,000, , 48,000, , 20,000, , To lighting, , 1,500, , 1,500, , 3,000, , To Bad-debts, , 1,200, , 400, , 200, , To Deep on, G., , --, , --, , 4,000, , 1,000, , 1,000, , --, , To o/s. Rent, , 500, , 500, , --, , To Discount, , 2,000, , 3,000, , --, , To Net Profit, , 91,300, , 36,100, , 12,800, , 1,03,000, , 48,000, , 20,000, , 1,03,000, , 48,000, , 20,000, , To Transfer, To, Gross, Profit c/d, , To Dep, Fur, , on, , By, Gross, Profit b/d
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227, General Profit & Loss Account, For the year ended, Particulars, , Rs., , Particulars, , To Directors fees, , 2,000 By Income from, Investment, , Rs., 1,500, , By Net Profit :, To N.P. c/d to B/s, , 1,39,700 Jeep, , 91,300, , Car, , 36,100, , Servicing, , 12,800, , 1,41,700, , 1,41,700, , Illustration 6:, A firm has two departments X and Y. From the following, figures prepare the Departmental Trading and Profit and Loss, Account for the year ended 31st December 2017., Particulars, , Opening Stock, , Departments, X, Y, Rs., Rs., 40,000, , 50,000, , Purchase, , 1,50,000, , 1,00,000, , Sales, , 2,50,000, , 1,50,000, , 16,800, , 12,000, , Salaries, Particulars, , Rs., , General Salaries, , 20,000, , Carriage Inward, , 20,000, , Carriage Outward, , 16,000, , Advertising, , 12,000, , Rent and Rates, , 18,000, , Interest on Bank Loan, , 5,000, , Lighting, , 2,400, , Discount Received, , 3,000, , Insurance, , 2,000
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228, Area occupied by the two departments is in the ratio of 2:1., General salaries are to be allocated equally. Insurance premium is, for a comprehensive policy, allocation being inconvenient. Closing, Stocks were : X Rs. 36,000, Y Rs. 40,000., (April 2003, adapted), Solution :, Departmental Trading and Profit & Loss Account, For the year ended 31-12-2017, Particulars, , To, Opening, Stock, To Purchase, , Dept. X, , Dept. Y, , Particulars, , Rs., , Rs., , 40,000, , 50,000 By Sales, , 1,50,000, , 1,00,000 By Closing, Stock, , To Carriage, Inward (3:2), , 12,000, , 8,000, , To Gross Profit, c/d, , 84,000, , 32,000, , 2,86,000, , 1,90,000, , Dept. X, , Dept. Y, , Rs., , Rs., , 2,50,000, , 1,50,000, , 36,000, , 40,000, , 2,86,000, , 1,90,000, , To Salaries, , 16,800, , 12,000 By, Gross, Profit b/d, , 84,000, , 32,000, , To General, Salaries (1:1), , 10,000, , 10,000 By Discount, Received, (3:2), , 1,800, , 1,200, , To Carriage, Outward (5:3), , 10,000, , To Advertising, (5:3), , 7,500, , 4,500, , To Rent &, Rates (2:1), , 12,000, , 6,000, , To Lighting, (2:1), , 1,600, , 800, , 27,900, , --, , 85,800, , 39,300, , To Net Profit, c/d, , 6,000 By Net Loss, c/d, , 6,100, , 85,800, , 39,300
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229, General Profit & Loss Account, Particulars, , Rs. Particulars, , Rs., , To Net Loss b/d, (Department Y), , 6,100 By Net Profit b/d, (Department X), , To Interest on Bank Loan, , 5,000, , To Insurance, , 2,000, , To Profit transferred to, Capital A/c, , 27,900, , 14,800, , (Balance Figure), 27,900, , 27,900, , Working Notes :, 1) Purchase Ratio (PR) :, , 2) Sales Ratio (SR) :, , Department X, , Department Y, , 1,50,000, , 1,00,000, , 3, , 2, , Department X, , Department Y, , 2,50,000, , 1,50,000, , 5, , 3, , Illustration 7, From the following information of Mr. Apte a proprietor, having three departments X, Y and Z prepare Departmental, Trading and Profit & Loss A/c for the year ended 31st December, 2017 and Balance Sheet on that date., Trial Balance as on 31st December 2017, Particulars, , Debit Rs., , Mr. Apte’s Capital, , Credit Rs., 1,00,000, , Stock :, X, , 20,000, , Y, , 15,000, , Z, , 10,000
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230, , Purchases :, X, , 90,000, , Y, , 70,000, , Z, , 50,000, , Sales, X, , 1,00,000, , Y, , 75,000, , Z, , 50,000, , Salaries, , 25,000, , Rent & Rates, , 5,000, , Selling & Distribution Expenses, , 9,000, , Land & Building, , 25,000, , Furniture & Fixtures, , 10,000, , Cash in Hand, , 5,000, , Cash at Bank, , 10,000, , Sundry Debtors, , 25,000, , Sundry Creditors, , 44,000, 3,69,000, , 3,69,000, , Other Information :, 1. Stock in Trade as on 31st December,, Rs. 35,000, Y Rs. 25,000 and Z Rs. 20,000., , 2017, , was, , X, , 2. Salaries are to be allocated in the ratio of 40%, 30%, 30%, amongst all the departments., 3. The floor space occupied by each department is in the, proportion of 40%, 30% and 30%., 4. Selling and distribution expenses are to be allocated on the, basis of sales of each department., (IDE - November 2010, April 2005, adapted)
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231, Solution :, Departmental Trading and Profit & Loss Account, For the year ended 31-12-2017, Dr., , Cr., , Particulars, , To, Stock, , Basis, , Opening, , To Purchase, , Dept. X, , Dept. Y, , Dept. Z, , Total, , Rs., , Rs., , Rs., , Rs., , Given, , 20,000, , 15,000, , 10,000, , 45,000, , Given, , 90,000, , 70,000, , 50,000, , 2,10,000, , 25,000, , 15,000, , 10,000, , 50,000, , 1,35,000, , 1,00,000, , 70,000, , 3,05,000, , To Gross Profit, , To Salaries, , 4:3:3, , 10,000, , 7,500, , 7,500, , 25,000, , To Rent & Rates, , 4:3:3, , 2,000, , 1,500, , 1,500, , 5,000, , To Selling, Distribution, , Sales, , 4,000, , 3,000, , 2,000, , 9,000, , 9,000, , 3,000, , -, , 12,000, , 25,000, , 15,000, , 11,000, , 51,000, , &, , To Net Profit c/d, , Departmental Trading and Profit & Loss Account, For the year ending 31-12-2017, Dr., Particulars, , Cr., Basic, , Dept. X, , Dept. Y, , Dept. Z, , Total, , Rs., , Rs., , Rs., , Rs., , By Sales, , Given, , 1,00,000, , 75,000, , 50,000, , 2,25,000, , By, Closing, Stock, , Given, , 35,000, , 25,000, , 20,000, , 80,000, , 1,35,000, , 1,00,000, , 70,000, , 3,05,000, , 25,000, , 15,000, , 10,000, , 50,000, , 1,000, , 1,000, , 11,000, , 51,000, , By, Gross, Profit b/d, By Net Loss, b/d, , 25,000, , 15,000
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232, Balance Sheet, As on 31-12-2017, Particulars, , Basic, , Mr. Apte’s Capital, , Dept. X, , 1,00,000, , Add : Net Profit, , 11,000, , Sundry Creditors, , Assets, , Rs., , Land & Building, , 25,000, , 1,11,000 Furniture & Fixtures, 44,000 Sundry Debtors, , 10,000, 25,000, , Closing Stock, , 80,000, , Cash at Bank, , 10,000, , Cash in Hand, , 5,000, , 1,55,000, , 1,55,000, , Illustration 8:, Tailors Ltd. have two departments, A and B. The latter, department gets all its requirements from the A department at the, usual selling price. On 31st December 2017 the following was the, trial balance :, Particulars, , Debit Rs., , Share Capital, , Credit Rs., 1,00,000, , Stock (A Department), , 40,000, , Stock (B Department), , 2,500, , Purchases : A, , 5,50,000, , Purchases : B, , 5,000, , Sales A, , 6,25,000, , Sales B, , 75,000, , Transfer of Goods to B Department, , 25,000, , Director’s Fees and Remuneration, , 15,000, , Wages and Salaries : A, , 10,000, , Wages and Salaries : B, , 20,000, , Rent and Rates (3/4 to A), , 4,000, , Lighting ¾ to B), , 1,000, , Depreciation : B, , 2,500, , Depreciation : A, , 500, , Office Expenses, , 1,500, , Furniture and Fittings, , 10,000, , 25,000
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233, Office Salaries, , 8,000, , Equipment, , 25,000, , Carriage Inwards (A), , 33,000, , Investment, , 50,000, , Income from Investments, , 5,000, , Cash at Bank, , 27,000, , -, , 8,30,000, , 8,30,000, , Closing stock of A on hand was Rs. 48,000 and that in B, amounted to Rs. 3,750. It is desired to ascertain profit or loss on, strict accountancy principles., Solution :, Trading and Profit & Loss A/c, For the year ended 31st December 2017, Particulars, , Dept. X Dept. Y Particulars, Rs., Rs., Opening, 40,000, 2,500 By Sales, , To, Stock, To Purchase, , 5,50,000, , To Transfer of, Goods From, Dept. (A), To Carriage, Inwards, To Wages &, Salaries, To Gross, Profit c/d, , --, , 25,000, , --, , 48,000, , 3,750, , 78,750, 6,98,000, 1,000 By, Gross, 65,000, Profit b/d, 750, , 78,750, 26,250, , 33,000, , --, , 10,000, , 20,000, , 65,000, , 26,250, , 6,98,000, &, 3,000, , To Rent, Rates (3:1), To, Lighting, (1:3), To, Depreciation, To Net Profit, c/d, , 5,000 By Transfer, of Goods to, Dept. (B), 25,000 By Closing, Stock, , 250, , Dept. X Dept. Y, Rs., Rs., 6,25,000, 75,000, , 500, , 2,500, , 61,250, , 22,000, , 65,000, , 26,250, , 65,000, , 26,250
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234, General Profit & Loss Account, For the year ended 31st December 2017, Particulars, To Director’s Fees &, Remuneration, , Amt., Rs., , Particulars, , Amt., Rs., , 15,000 By Net Profit b/d, Department (A) 61,250, , To Office Salaries, , 8,000 Department (B) 22,000, , To Office Expenses, , 1,500 By Income from Investment, , To Stock Reserve A/c, To Net Profit c/fd, , 83,250, 5,000, , 375, 63,375, 88,250, , 88,250, , Balance Sheet, As on 31st December 2017, Liabilities, Share Capital, Profit & Loss A/c, , Amt., Rs., , Assets, , Amt., Rs., , 1,00,000 Furniture & Fittings, , 10,000, , 63,375 Equipment, , 25,000, , Investments, , 50,000, , Stock, Department (A), , 48,000, , Department (B), , 3,750, 51,750, , Less : Stock Reserve 375, , 51,375, , Cash at Bank, , 27,000, , 1,63,375, , 1,63,375, , Working Note :, The gross profit of department (A) is Rs. 65,000 and its sales, (including transfers) amount to Rs. 6,50,000., 65,000, × 100 = 10%, 6,50,000, Stock Reserve = 10% on 3,750 = 375, Gross Profit Rate =
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235, , 11.2 EXERCISE, Practical Exercises:, 1. Trading, Profit & Loss A/c of the Modern Electronics Ltd. for the, year ended 31st March 2018 is presented in the following form., Trial Balance, As on 31st March 2018, Particulars, , Amt., , Particulars, , Rs., , Amt., Rs., , To Purchases :, , By Sales, , T.Vs(A), , 2,81,400 T.Vs(A), , 2,71,200, , Refrigerators (B), , 1,81,200 Refrigerators (B), , 2,00,000, , Spare Parts (C), , 1,00,000 Spare Parts and, Receipts from servicing, (C) Department, , To Spare parts, received by (C), Department from, (A) Department, , 28,800 By Transfer from, Department (A) to, Department (C), , To Indirect Wages, & Salaries, , 96,000, , To Rent, , 21,600 By Closing stock :, , To Office, Expenses, , 22,000 T.Vs (A), , To Net Profit, , 69,000 Refrigerators (B), -- Spare Parts (C), 8,00,000, , 50,000, , 28,800, , 1,20,200, 40,600, 89,200, 8,00,000, , Prepare Departmental Accounts for each of the three, Departments A, B and C after taking into consideration the, following information:, a) T.Vs and Refrigerators are sold at the showroom and, repairing and servicing jobs are carried out at the workshop., b) Salaries and wages comprise as follows :, Showroom ¾ and workshop ¼, It was decided to allocate showroom salaries and wages in, the ratio of 1:2 between Departments A and B.
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236, c) The workshop rent is Rs. 500 per month. The rent of the, showroom is to be divided equally between Departments A, and B as both the Departments occupy equal floor space., d) Allocate office expenses on the basis of turnover of each, department., e) Inter-departmental transfers take place at cost to transferor, department., [Ans. Gross Profit - A : Rs. 1,38,800: B : Rs. 59,400, C : Rs. 10,400,, Net Profit - A : Rs. 95,553, B : Rs. 4,842, C : Rs. 21,711], , 2. Dadar Departmental Stores has three departments X, Y and Z., The following particulars regarding the three departments are, given :Particulars, , Opening Stock, , X, , Y, , Z, , Rs., , Rs., , Rs., , 30,000, , 30,000, , 60,000, , Purchases, , 1,00,000, , 60,000 2,00,000, , Sales, , 4,00,000, , 3,00,000 3,00,000, , Closing Stock, , 20,000, , 40,000, , 40,000, , The following expenses were also incurred:, Particulars, , Amt., Rs., , Rent and Taxes, , 18,000, , General Expenses, , 24,000, , Discount Allowed, , 30,000, , Sales Promotion Expenses, , 40,000, , Salesman’s Salary, , 10,000, , Discount Received, , 15,000, , Commission Received, , 10,000, , a) Goods worth Rs. 8,000 were transferred from Department X, to Department Y., b) Allocate general expenses, rent and taxes equally among, the three departments.
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237, c) Commission received is to be divided in the ratio of 4:3:3, respectively., Prepare Departmental Trading and Profit & Loss Account., (M.U. November 1998), 3. The following Trail Balance for the year ended 31st March 2018, was extracted from the books of Shri Mukesh., Trial Balance, As on 31st March 2018, Particulars, , Debit, , Credit, , Rs., , Rs., , Capital on 1.4.2017, Drawings Account, , 50,000, 10,000, , Stock on 1.4.2017, Radios, , 45,000, , Watches, , 21,000, , Sales :, Radios, , 2,94,000, , Watches, , 1,46,000, , Purchases :, Radios, , 2,25,000, , Watches, , 1,15,000, , Salaries, , 12,600, , Publicity Expenses, , 8,900, , Rent, Rates and Taxes, , 3,200, , Commission, Sundry Expenses, , 10,600, 5,000, , Furniture and Fixtures, , 12,400, , 4% Govt. of India Loan, , 10,000, , Sundry Debtors, , 16,800, , Sundry Creditors, , 8,800, , Interest, , 400, , Reserve for Bad and Doubtful Debts, , 800, , Cash Balance, , 4,500, 5,00,000, , 5,00,000
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238, Prepare the Departmental Trading and Profit & Loss Account, for the year ended 31st March, 2018 after taking into account the, following :, a) Stock as on 31st March, 2018 was : Radios : Rs. 30,000, Watches Rs. 24,000, b) An amount of Rs.1,200 out of sundry debtors has to be, written off as bad debts and the provision for doubtful debts, has to be increased thereafter to 10% of the debts, outstanding., c) The expenses outstanding as on 31st March, 2018 are, Publicity Rs.1,300, Salaries Rs.1,200 and Commission, Rs.1,700., d) Provide 10% depreciation on furniture & fixtures., e) Revenue items to be allocated in ratio 2:1 between Radio, and Watches., (Answer: Net Profit - Radio - 22,467 Watches – 18,233), , 4. From the following particulars given by M/s Tins and Toys,, prepare a Departmental Trading and Profit & Loss Account for, their two departments, viz. Tins Dept. and Toys Dept. for the, year ended 31st March, 2018., Particulars, , Rs., , Opening Stock Toys, , 5,000, , Tins, , 15,000, , Raw Material consumed (Tins), , 36,000, , Stores consumed, , 9,000, , Wages : Tins, , 6,000, , Toys, , 3,000, , Advertisement, , 1,500, , Packing Expenses (Toys), , 600, , Office Expenses, , 4,800, , Depreciation : Factory Equipment, , 3,200, , Building, Sales :, , 1,600, , Tins, , 90,000, , Toys, , 18,000, , Closing Stock : Toys, , 6,000, , Tins, , 12,000
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239, You are also given the following additional information :, a) Toys are made of end bits of sheets of raw material used by, Tins Department. The value of such material used during the, year by Toys Department Rs. 2,000., b) Toy-making does not require any equipment., c) Only one-eighth of the total area of building is occupied by, Toys Department., [Ans. Net Profit - Toys : Rs. 11,650, Tins : Rs. 28,650], , 5. Following information is available from the books of Trupti, Departmental Stores for the year., Account heads, , Departments, , Total, , A, , B, , C, , Rs., , Rs., , Rs., , Rs., , Purchases, , 1,00,000, , 1,50,000, , 4,00,000, , 6,50,000, , Sales, , 3,05,000, , 6,10,000, , 9,15,000 18,30,000, , 5,000, , 10,000, , 15,000, , 30,000, , Returns outwards, , 10,000, , 5,000, , 15,000, , 30,000, , Opening stock, , 25,000, , 35,000, , 50,000, , 1,10,000, , Closing stock, , 40,000, , 25,000, , 20,000, , 85,000, , Returns inwards, , Wages, , 90,000, , Postage, , 1,500, , Salaries, , 3,000, , Office expenses, , 4,500, , Rent, Discount allowed, Professional, charges, Bad debts, Interest, Insurance, , 12,000, 9,000, 12,000, 6,500, 31,500, 3,400
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240, Additional Information :, 1), Departmental transfers :, i), Department A to B Rs. 5,000 and to C Rs. 10,000., ii), Department B to C Rs. 5,000 and to A Rs. 2,500., iii), Department C to A Rs. 3,500 and to B Rs. 4,500., 2), , Allocation of expenses., i), Postage, salaries, office expenses and professional, charges : Equally, ii), Rent A - 1, B - 1, C - 2, iii), Insurance A - 8, B - 5, C - 4, iv), Wages and interest A - 2, B - 3, C - 4., , You are required to prepare Departmental Trading and Profit, and Loss Account for the year., [Ans. Gross profit A Rs. 2,14,000 B Rs. 4,13,000; C Rs. 4,38,000 Net, profit A Rs. 1,92,817; B Rs. 3,86,333; C Rs. 4,02,450], ,
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241, , Unit-12, HIRE PURCHASE - I, Unit Structure :, , 12.0, 12.1, 12.2, 12.3, , Objectives, Introduction, Meaning of Hire-Purchase Transaction, Difference between Installment Payment and Hire-Purchase, System, 12.4 Calculation of Interest, 12.5 Interest Included in Amount of Installment, 12.6 When Interest is not included in Installments, 12.7 Rate of Interest is not given, 12.8 Calculation of Depreciation, 12.9 Accounting Methods, 12.10 Full Cash Price Method (Credit Purchase/Sale Method), 12.11 Practical Problems, 12.12 Exercises, , 12.0 OBJECTIVES, After studying the unit students will be able to:, , , , , , , , Know the meaning of Hire purchase., Distinguish between Installment system and Hire purchase, system., Calculate interest under different conditions., Calculate depreciation under Hire purchase system., Journalise the hire purchase transactions., Understand the accounting procedure., , 12.1 INTRODUCTION, All big business houses and multinationals make sales, on cash basis as well as on credit basis. When the goods are, sold the purchaser may either make the full payment at one time, (cash basis) or may defer the payment (credit basis). The credit
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242, sales are very important and essential for the growth of business., The sale proceeds under credit sales are not immediately collected, but are collected in monthly, quarterly or yearly installments. When, the price of an article is paid by installments, the total amount, paid is higher than the actual cash price of the article. The, excess price is the charge for interest and the risk involved. This, arrangement of making the payment in installments is beneficial to, both the seller and the buyer. There are two systems of deferred, payments, namely, (i) Hire Purchase System, and (ii) Installment, Payment System. Hire-purchase system is the most secured and, effective tool of collecting the proceeds of a credit sale. Under, this system, the goods are delivered to the purchaser at the, time of agreement before the payment of installments but the title, on the goods is transferred after the payment of all, installments as per the hire-purchase agreement., , 12.2 MEANING OF HIRE-PURCHASE TRANSACTION, 12.2.1 Meaning, Hire-purchase is a credit purchase of an asset by the, hire-purchaser from the hire- vendor. The asset is delivered in the, possession of the purchaser at the time of commencement of the, agreement. The price under hire-purchase system is paid in, installments. The installments may be annual, six monthly,, quarterly, etc. The installment includes the part of the outstanding, cash price and the interest on the outstanding cash price from the, date of the last installment paid to the due date of the installment., The hire-purchaser becomes the owner of the goods after the, payment of all installments as per the agreement. The hirepurchaser has a right to use the goods as a bailer and terminate, the agreement at any time in the capacity of a hirer., 12.2.2 Default in the payment of any installment:, Hire-purchase means a transaction where the goods are, sold by hire-vendor to the purchaser under the hire-purchase, agreement. If there is a default in the payment of any, installment, the hire vendor will take away the goods from the, possession of the purchaser without refunding him any amount., The payment of every installment is treated as the payment, of hire charges by the purchaser to the hire vendor till the, payment of the last installment. After the payment of the last, installment, the amount of various installments paid is appropriated, towards the payment of the price of the goods sold and the, ownership or the goods is transferred to the purchaser. Hire, vendor continues to be the owner of the goods till the payment of, last installment.
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243, 12.2.3 Hire-Purchase Agreement, A hire purchase agreement is one under which the buyer, takes delivery of goods, promising to pay the price in certain, number of installments and until full payment is made, to treat the, payment as hire charges for using the said goods. In fact, a hire, purchase agreement stipulates that (i) the delivery of goods will be, given by the owner of goods to the hire purchaser; (ii), payment will be made in installments, (iii) each installment will, be treated as hire charge so that if default in respect of payment, of even the last installment is made, the seller will be entitled to, take away the goods without compensating, the hire purchaser in, any form, and (iv) if all installments are paid and the other, conditions are fulfilled, the ownership of the goods will pass to the, buyer. Hire-purchase agreement means a contract between the, hire vendor and the hire purchaser regarding the sale of goods, under certain conditions., Usually every hire-purchase agreement shall contain the, following terms., 1. Date of hire-purchase: The date on which the hire-purchase, agreement will commence., 2. Description of the goods: The description of the goods that, will be delivered to the hire-purchaser at the commencement of the, agreement., 3. Hire-Purchaser: A Person who gets the possession of the, asset/goods from the owner under a hire-purchase agreement. He, is the buyer (Hire-Purchaser) of the goods., 4. Hire-Vendor: A Person who sells goods under a hire-purchase, agreement., 5. Cash price of the goods: Cash price means the price at which, goods may be purchased against cash payment., 6. Hire-purchase price: Hire purchase price means the total, amount which is payable by the hire-purchaser under the, agreement., 7. Down payment: The down payment means the amount which, is required to be paid by hire-purchaser to the hire vendor at the, time of commencement of hire-purchase agreement., 8. Rate of interest: The rate of interest is the interest charged, by the hire vendor on the outstanding amount of the cash price, due to the hire-purchaser.
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244, 9. Installments: The number of installments to be paid by the, hire-purchaser along with the amount of each installment and the, date of payment of each installment. The installment paid by the, purchaser is also called as “Hire”., , 12.3 DIFFERENCE BETWEEN INSTALLMENT, PAYMENT AND HIRE-PURCHASE SYSTEM, Installment payment transaction is a system of purchase, and sale of goods in which title of goods is immediately transferred, to the purchaser at the time of sale of goods and the sale price, of the goods is paid in installments. The followings are the, differences between Hire-purchase system and Installment, payment system:, Hire-purchase system, , Installment payment system, , 1.The transfer of ownership, takes place after the payment, of all installments., , 1.The ownership is transferred, immediately at the time of, agreement., , 2. Hire-purchase agreement is, like a contract of hire though, later on it may become a, purchase after the payment of, last installment., , 2.The agreement is like, contract of credit purchase., , 3.The vendor has a right to, take back goods from the, possession of the hirepurchaser., , 3.The vendor has no right to, take back the goods from the, possession of the purchaser; he, can simply sue for the balance, due., 4.The provisions of Sale of, Goods Act apply to the, transaction., , 4.The provisions of the HirePurchase Act apply to the, transaction., CHECK YOUR PROGRESS, , 1. Enlist the terms included in the Hire Purchase Agreement., 2. Define the terms:, a. Hire Purchase, b. Hire Purchaser, c. Hire Vendor, d. Installment, e. Hire Purchase Agreement, f. Down Payment, , a
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245, 3. Fill in the blanks, a. A contract for sale of goods may be either a sale or an, ................... to sell., b. Under a hire purchase agreement payments are made in ..., ..,..........., c. Each installment payment is treated as..................., d. A hirer has the right to .................. the agreement before, payment of the last installment by paying the seller the agreed, amount., Answers: i) agreement, ii) installment,, iii) hire charges iv) terminate, 4. State whether the following statements are True or False:, a. If the hirer fails to pay the last installment, the amounts paid, earlier are considered as hire charges., b. Under hire-purchase system the purchaser becomes the, owner of the goods immediately after the down payment., c. Under hire-purchase system the buyer does not charge the, depreciation on the asset till he becomes the owner., d. Interest is calculated on the hire purchase price at the given rate, of interest., Answers: True - (i). False - (ii), (iii), (iv)., , 12.4 CALCULATION OF INTEREST, Interest is to be calculated on the outstanding balance, except down payment. The calculation of interest is made under, three conditions:, 1. Rate of Interest given and Interest included in amount of, installment:, 2. Rate of Interest given and Interest is not included in, installments:, 3. Rate of interest not given:, , 12.5 INTEREST, INSTALLMENT, , INCLUDED, , IN, , AMOUNT, , OF, , In case if hire-purchase price i.e. payment made in the, form of down payment and all installments is more than the cash, price, it is regarded that the interest is included in installments., Following steps should be followed for calculating the amount, of interest on each installment., i) Calculate the outstanding cash price at the time of first, installment by subtracting Down Payment from the Cash Price.
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246, ii) Calculate interest on the outstanding cash price at the time of, first installment by applying the given rate of interest, the mode of, installment must be considered (whether the installment is annual,, half-yearly or quarterly)., iii) Calculate the amount of cash price included in the first, installment by subtracting the amount of interest as calculated, in step (ii) from the amount of the first installment., iv) Calculate the outstanding cash price at the time of second, installment by Subtracting the amount of cash price of the first, installment from the outstanding Cash price at the time of first, installment i.e., (i) - (iii)., v) Calculate interest on the second installment by applying the rate, of interest to the outstanding cash price at the time of second, installment. It is explained in the following example., Example : On 1st January, 2009, Mr. A purchased from M/s B &, Co. one 'Motor Car' under hire-purchase system, Rs.10,000 being, paid on delivery and the balance in three annual installments of, Rs.10,000 each payable on 31st December each year. The cash, price of the motor car is Rs. 37,250 and vendors charge interest @, 5% per annum on yearly balances. Find out the amount of, cash price and interest included in each installment., Calculation of, , Date, , Calculation, , Cash, Price, (Rs.), , 1/1/2009, , Cash Price, , 37250, , 1/1/2009, 1/1/2009, , Less Down Payment paid, Outstanding cash price, , 10000, 27250, , 31/12/09, , Add Interest@5%, , 1363, , 31/12/09, , Total Amount Due, , 28613, , 31/12/09, , Less Installment paid, , 10000, , 31/12/09, , Outstanding cash price, , 18613, , 31/12/10, , Add Interest@5%, , 931, , 31/12/10, , Total Amount Due, , 19544, , 31/12/10, , Less Installment paid, , 10000, , 31/12/10, , Outstanding cash price, , 9544, , 31/12/11, 31/12/11, 31/12/11, , *Add Interest@5%, (Bal fig), Total Amount Due, , 456, 10000, , Installment paid, , 10000, , Cash, price, paid, (Rs.), , Interest, (Rs.), , Installment, (Rs.), , 10000, , 0, , 10000, , 8637, , 1363, , 10000, , 9069, , 931, , 10000, , 9544, , 456, , 10000
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247, CHECK YOUR PROGRESS, 1. A Ltd. purchased a machine on hire purchase from Z Ltd, on, January 1, 2009, paying Rs.8,000 immediately and agreeing to, pay three annual installments of Rs.8,000 each on December, 31, every year. The cash price of the machine is Rs.29,800 and, the vendors charge interest @ 5% per annum. Calculate the, amount of interest paid by the buyer to the seller every year., Answers: Interest for 1, , st, , nd, rd, Year: 1090, 2, Year: 745, 3 Year: 365, , 12.6 WHEN INTEREST, INSTALLMENTS, , IS, , NOT, , INCLUDED, , IN, , When the total amount paid in the form of down payment, and all installments is exactly equal to the cash price, it is, regarded that the interest, is not included in installments. It means, that interest is payable in addition to the agreed amount of, installment. It is explained in the following example., Example: On 1st January, 2009, Mr. A purchased from M/s B &, Co. one 'Motor Car' under hire-purchase system, the cash price, being Rs.37,250. Rs.10,000 being paid on delivery and the, balance in three equal annual installments payable on 31st, December every year. In addition to it, interest at 5% per annum, was also payable to vendors on outstanding balances. Find out, the amount of cash-price and interest included in each installment., Calculation of Interest, , Date, , Calculation, , Cash, Price, (Rs.), , 1/1/2009, , Cash Price, , 37250, , 1/1/2009, , Less Down Payment paid, , 10000, , 1/1/2009, , Outstanding cash price, , 27250, , 31/12/09, , Add Interest@5%, , 1363, , 31/12/09, , Total Amount Due, , 28613, , 31/12/09, , Less Installment paid, , 10446, , 31/12/09, , Outstanding cash price, , 18167, , 31/12/10, , Add Interest@5%, , 908, , 31/12/10, , Total Amount Due, , 19075, , 31/12/10, , Less Installment paid, , 9991, , 31/12/10, , Outstanding cash price, , 9084, , 31/12/11, , *Add Interest@5%(Bal fig), , Cash, Price, paid, (Rs.), , Interest, (Rs.), , Installment, (Rs.), , 10000, , 0, , 10000, , 9083, , 1363, , 10446, , 9083, , 908, , 9991, , 9084, , 454, , 9538, , 454, 31/12/11, , Total Amount Due, , 9538, , 31/12/11, , Total Amount Paid, , 9538
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248, CHECK YOUR PROGRESS, 1. A Ltd purchased machinery on hire purchase basis from B, ltd on the following terms: Cash price Rs.79,250, Cash Down, Payment 25% and Balance to be discharged in 3 equal, installments together with interest @10% p.a. to be paid at, the end of each year. Compute the payment of interest and, installment to be made each year, st, nd, rd, Answers: Interest for 1 Year: 5,944, 2, Year: 3,962, 3, Year: 1,981,, st, nd, rd, Installment for 1 Year: 25,757, 2, Year: 23,775, 3 Year: 21,792, , 12.7 RATE OF INTEREST IS NOT GIVEN, When rate of interest is not given, there can be two situations., 1. When cash price and the amounts of installments are given and, the amount of each installment is same., 2. When cash price and the amounts of installments are given and, the amount of each installment is not same., 12.7.1 When Rate of Interest is not given and installments are, of same amount:, When cash price and the amounts of installments are given and the, amount of each installment is same., Example: On 1st January, 2009, Mr. A purchased from M/s B &, Co. one 'Motor Car' under hire-purchase system, Rs.10,000 being, paid on delivery and the balance in three annual installments of, Rs. 10,000 each payable on 31st December every year. The, cash price of the motor car is Rs.37,250. Find out the amount of, cash price and interest included in each installment., *Add Interest@5%, 477, Bal fig(Amount Due-Amount Paid), 456, Consider balancing figure while calculating last installment, The total interest of Rs 2,750 is to be apportioned among the 1st,, 2nd and 3rd installment in the ratio of 3:2:1.(since there are three, installments 3/6, 2/6, and 1/6 respectively), (1)Share of 1st installment in the Interest= 2,750x3/6 = Rs1,375, (2)Share of 2nd installment in the Interest= 2,750x2/6 = Rs.917, (3)Share of 3rd installment in the interest= 2,750x1/6 = Rs.458
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249, CHECK YOUR PROGRESS, 1. A purchased a machine for down payment of Rs.20,000 and, 3 annual installments of Rs.20,000 each. Cash price is, Rs.74,500. Find out the amount of cash-price and interest, included in each installment., nd, rd, Year: 2,750, 2, Year: 1,833, 3, Year:, st, nd, 917, Cash Price included for 1 Year: 17,250, 2, Year: 18,167,, rd, 3 Year: 19,083, Answers: Interest for 1, , st, , 12.7.2 When Rate of Interest not given and Installments given, of different amounts, When cash price and amounts of installments are given but the, amount of each installment is not equal:, Example: Cash price of a machine is Rs.1,25,000 on 1st, January, 2009. Its hire- purchase price is Rs.1,50,000. This hire, purchase price is paid in the following manner: Rs.30,000 on 1st, January, 2009, Rs. 35,000 at the end of the first year, Rs.40,000, at the end of second year; Rs. 45,000 at the end of third year., Calculate interest and cash price included in each installment., Step 1: Calculation of Interest, Hire Purchase Price, Less: Cash Price, Total Interest, , 1,50,000, 1,25,000, 25,000, , Step 2: Apportionment of Interest, Total Interest of Rs.25,000 is to be apportioned among the three, installments in the following manner:, At the end of Year, 1, Outstanding Hire 120000, Purchase Price, *Interest, 12000, , 2, 85000, , 3, 45000, , T, 250000, , 8500, , 4500, , 25000, , * Interest = Outstanding Hire Purchase Price before, Installment* Total Interest /Total of Outstanding Hire, Purchase Price for all installments
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250, Interest at the end of year 1 =120000* 25000, 250000, , = Rs.12000, , Interest at the end of year 2 = 8500 * 25000, 250000, , = Rs.8500, , Interest at the end of year 3 = 45000* 25000, 250000, , = Rs.4500, , CHECK YOUR PROGRESS, 1. MTC purchased a taxi on hire purchase terms. The cash, price was Rs.87,092., Payments were to be made as under, On 1.1.2009, On 31.12.2009, On 31.12.2010, On 31.12.2011, Calculate interest and cash price, , Rs.20,000 (down Payment), Rs.35,000, Rs.25,000, Rs.20,000, included in each installment., , nd, rd, Year: 7122, 2, Year: 4006, 3, Year:, st, nd, rd, 1780, Cash Price included for 1 Year: 27878, 2, Year: 20994, 3, Year: 18220, Answers: Interest for 1, , st, , 12.8 CALCULATION OF DEPRECIATION, Under Hire-Purchase system, the ownership is not, transferred to the buyer. Hence, there is a dispute about charging, of the depreciation on the asset. However, from practical point of, view, depreciation on asset should be charged at a certain rate on, the cash price of the asset acquired. The logic behind provision of, depreciation on asset is, 1. Asset is used by the buyer, 2. Asset is to be shown at its real value, 3. The Hire-purchaser is going to be owner after the payment of, last installment, Depreciation should be provided as a matter of policy in the, books of the buyer. Depreciation should be charged on asset every, year on the cash price under straight line or reducing balance, method.
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251, , 12.9 ACCOUNTING METHODS, The method of accounting for hire-purchase transactions, depends on the value of sales. Hire purchase accounting, methods for goods of small sales value may be Debtors Method, or Stock and Debtors Method. If the goods have substantial, sales value then the accounting methods as per AS 10, which, deals with the valuation of the Fixed Assets, Assets acquired on, hire-purchase terms, are to be recorded at their cash- price. The, interest has to be written off as an expense. The accounting, entries can be passed by the buyer in any of the three methods, 1. Asset Accrual Method (Actual Cash Price Method), 2. Interest Suspense Method, 3. Full Cash Price Method, Assets taken on Hire purchase basis should be considered, like ordinary purchase., , 12.10 FULL CASH PRICE METHOD, (CREDIT PURCHASE / SALE METHOD), Under Full Cash Price Method, the Hire-Purchaser is, considered as the owner of the asset, the asset is recorded at, full cash price on the basis of the substance over form. The full, cash price of the asset is debited to the Asset account and, credited to the Hire-Vendor account. Interest account is debited, and the Hire-Vendor account is credited with the interest on the, outstanding balance. When the installment is paid, the HireVendor A/c is debited and the Bank A/c is credited .At the time of, the preparation of the final accounts, Interest is transferred to, Profit & Loss Account and Asset is shown in the Balance Sheet, at the cost less depreciation. The balance due to Hire- Vendor is, shown in the Balance Sheet as a Liability.
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252, , , BOOKS OF HIRE PURCHASER, , 13.10.1 Journal Entries in the books of Hire-Purchaser:, 1., , For buying assets (entering, agreement) on hire purchase: A, Full Cash Price, Asset A/c, Dr., To Hire-Vendor A/c, , 2., , For paying the down, payment, to, vendor:, Vendor A/c, Dr, To Cash/ Bank A/c, , Down Payment, , 3., , When Interest is Due on, unpaid installments:, Interest A/c, Dr., To Hire Vendor A/c, , Interest on outstanding, balance, , 4., , For Installment Payment, ( Interest payment will, be also included in it):, Vendor A/c, Dr, To Cash/ Bank A/c, , Amount of Installment, , 5., , For charging Depreciation:, Depreciation A/c Dr., To Asset A/c, , Calculated on Cash Price, , 6., , For transferring Interest and, Depreciation to Profit and, Loss Account:, Profit and Loss A/c Dr., To Interest A/c, To Depreciation A/c, , (Repeat entry Nos. 3, 4, 5, and 6 in subsequent years), However, a firm may maintain a Provision for Depreciation A/c, instead of charging depreciation to asset on Hire-purchase A/c, in, such case the journal entry is, Profit and Loss A/c, Dr., To Provision for Depreciation for Asset on Hire-Purchase A/c, (Being the asset on hire-purchase is shown on its historical cost).
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253, 12.10.2 Disclosure in Balance Sheet, Balance Sheet of Hire-Purchaser, Liabilities, Hire-Purchase, Balance in HireLess :Instalment, Instalment not yet, , , Rs., xxxx, xxxx, xxxx, , Ass, Fixed Assets:et, Asset(at cash Price), Less Depreciation, , Rs., xxxx, xxxx, xxxx, , BOOKS OF HIRE VENDOR, , 12.10.3, 1., , Journal Entries in the books of Vendor:, For selling on hire purchase:, Hire-Purchaser A/c, Dr., To Hire Sales A/c, , Full Cash Price, , 2., , For receiving the down payment:, Cash/ Bank, Dr, To Hire-Purchaser A/c, , Down Payment, , 3., , For Interest receivable, Hire-Purchaser A/c, Dr, To Interest A/c, , Interest on outstanding, balance, , 4., , For Installment Received, Amount of Installment, ( Interest receipt will, be also included in it):, Cash/ Bank A/c Dr., To Hire-Purchaser A/c, 5., For transferring Interest to, Profit and Loss Account:, Interest A/c Dr., To Profit and Loss A/c, (Repeat entry Nos. 3, 4, and 5, in subsequent years), 12.10.4, , Disclosure in Balance Sheet, , Liabilities, , Balance Sheet of Hire-Vendor, Rs., Asset, Hire-Purchase Debtors, Balance in Hire- Purchaser, , Rs., xx
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254, , 12.11, , EXERCISE, , 1. Explain the meaning of Hire-Purchase System., 2. Write notes on:, (a) Hire-Purchase Price (b) Cash Price (c) Initial Payment, 3. Objective Questions, , , MULTIPLE CHOICE QUESTIONS, , 1. Hire Purchase Price means the total amount payable by the hirer,, made up of --------(a) the cash price of the article and the interest, (b) the cash price of the article less interest, (c) the cash price of the article and the down payment, (d) the installments and the interest, 2. Each Hire Purchase installment amount is made up of --------(a). part payment towards cash price only, (b). part payment towards interest only, (c). part payment towards cash price plus interest, (d).none of the above, 3. Under ---------method, entries are made as if asset is purchased, for full price on credit on the date of Hire Purchase agreement, itself., (a). Actual Cash Price, (b). Full Cash Price, (c). Asset Accrual, (d).None of the above, 4. The Hire Purchaser can record the asset under Full Cash Price, Method at its --------(a). Hire Purchase Price, (b). Cash price, (c).None of the above, 5. Interest in the Hire Purchase transaction, is charged on the -------- cash price, (a). Outstanding, (b). Full cash price, (c).None of the above, 6. Under Hire –Purchase system buyer becomes the owner of, goods --------(a). immediately after the receipt of goods, (b). immediately after the down payment
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255, (c). immediately after the payment of the last installment, (d).None of the above, 7. Under Hire –Purchase agreement the buyer agrees to pay -------(a). Cash price only., (b). Interest only, (c). Cash Price and Interest, , 8. The last installment paid under Hire –Purchase comprises --------(a). Cash price only., (b). Interest only, (c). Cash Price and Interest, Answers:1.-(a), 2. -(c), 3.- (b). 4. - (b), 5.-(a), 6. -(c), 7. -(c), 8 -(c)., , , FILL IN THE BLANKS, , 1., is the purchase price payable if full payment is, made immediately., 2., means the total amount payable by the hirer,, made up of the cash price of the article and interest., 3., is the initial amount payable at the time of, signing the agreement., 4. As soon as, payment is made, the hirer, possession of the article and can start using it immediately, , gets, , 5. Each Hire Purchase installment amount is made up of part, payment towards plus interest, 6. Each Hire Purchase installment amount is made up of part, payment towards cash price plus, 7. Under the Hire –Purchase system, depreciation is provided on, price, 8. Under the Hire –Purchase system, depreciation is provided by, the, 9. If the Hire –Purchaser makes a down payment on signing the, contract, it will not include any amount of, 10. Depreciation is to be calculated on the full, same is not affected by the extent of payment made., , as the
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256, Answers: 1. - Cash Price - 2. - Hire Purchase Price, 3. – Down, Payment, 4. -Down, 5. - Cash Price 6. - Interest, 7. –Full Cash, 8. Hire –Purchaser, 9. –Interest, 10. - Cash Price, , , , STATE WHETHER TRUE OR FALSE, , 1. Actual Cash Price Method is also known as Interest Suspense, Method., 2. Full Cash Price Method is also known as Asset Accrual Method., 3. Asset Accrual Method is also known as Credit Purchase Method., 4. Actual Cash Price Method is also known as Credit Purchase, Method., 5. The hire-purchaser has the right to terminate the agreement at, any time before the property passes., 6. If the amount of each installment is equal, the total interest can, be allocated to different installments by the fixed installment, method., 7. Under the Hire –Purchase system, the buyer has the option to, return the goods., 8. When assets are acquired under the hire purchase system,, depreciation need not be provided as the vendor still continues, to be the legal owner of the asset., 9. Hire Purchase Price is equal to Cash Price, 10. Under the Hire –Purchase system, the interest is paid by the, vendor to the hirer., 11. Cash Price is the purchase price payable if full payment is, made immediately., 12. Hire Purchase Price is the initial amount payable at the time of, signing the agreement., Answers: TRUE: (5) (6) (7) (11), FALSE: (1) (2) (3) (4) (8) (9) (10) (12), , , , ,
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257, , Unit-13, HIRE PURCHASE - II, Unit Structure :, 13.0 Objectives, 13.1 Solved Problems, 13.2 Exercises, , 13.0, , OBJECTIVES, , After studying the unit students will be able to the practical, problems on Hire purchase system., , 13.1, , SOLVED PROBLEMS, , Illustration 1., Raj Textiles Ltd. purchased Motor Car on hire-purchase, system. According to the terms, Rs. 30000 was payable on, delivery on 1st January, 2005: and the balance by 4 annual, installments of Rs.30000 each on 31st December. Krishna Motor, Ltd who sold the Motor Car charged 5 % p.a. interest on the, yearly balances. The cash value of the Car on delivery was, 1,36,338. Depreciation @ 20% on diminishing balances was, written off in each year. Show Journal Entries in the books of Raj, Textiles Ltd
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258, Journal Entries, In the books of Raj Textiles Ltd., Date, , Particulars, , 1/1/05, , Motor Car A/c Dr., To Krishna Motor Ltd A/c, (Being total cash price due to the hire-vendor, for purchase of Motor Lorries), , 136338, , Krishna Motor Ltd A/c Dr, To Cash/ bank, A/c, (Being down payment paid), Interest A/c Dr., To Krishna Motor Ltd A/c, (Being Interest due on unpaid Cash Price), , 30000, , Krishna Motor Ltd A/c Dr, To Cash/ bank, A/c, (Being Installment, Depreciation A/c Dr., To Motor Car A/c, (Being Depreciation charged), , 30000, , Profit and Loss A/c Dr., To Interest A/c, To Depreciation A/c, (Being Interest and Depreciation transferred, to profit and loss account), , 32585, , 1/01/05, , 31/12/05, , 31/12/05, , 31/12/05, , 31/12/05, , 31/12/06, , 31/12/06, , 31/12/06, , 31/12/06, , 31/12/07, , Interest A/c Dr., To Krishna Motor Ltd A/c, (Being Interest due on unpaid Cash Price), , Debit(Rs.) Credit(Rs.), 136338, , 30000, , 5317, 5317, , 12000, 27268, 27268, , 5317, 27268, , 4083, 4083, , Krishna Motor Ltd A/c Dr, To Cash/ bank, A/c, (Being Installment paid), , 30000, , Depreciation A/c Dr., To Motor Car A/c, (Being Depreciation charged), , 21814, , Profit and Loss A/c Dr., To Interest A/c, To Depreciation A/c, (Being Interest and Depreciation transferred, to profit and loss account), , 25897, , Interest A/c Dr., To Krishna Motor Ltd A/c, (Being Interest due on unpaid Cash Price), , 30000, , 21814, , 4083, 21814, , 2787, 2787
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259, 31/12/07, , 31/12/07, , 31/12/07, , Krishna Motor Ltd A/c Dr, To Cash/ bank, A/c, (Being Installment paid), , 30000, 30000, , Depreciation A/c Dr., To Motor Car, A/c, (Being, Depreciation, charged), Profit and Loss A/c Dr., , 17451, 17451, 20238, 2787, 17451, , To Interest A/c, To Depreciation A/c, (Being Interest and Depreciation transferred, to profit and loss account), 31/12/08, , 31/12/08, , 31/12/08, , 31/12/08, , Interest A/c Dr., To Krishna Motor Ltd A/c, (Being Interest due on unpaid Cash Price), , 1426, 1426, , Krishna Motor Ltd A/c, Dr, To Cash/ bank, A/c, Depreciation A/c Dr., To Motor Car, A/c, (Being Depreciation charged), Profit and Loss A/c Dr., To Interest A/c, To Depreciation A/c, (Being Interest and Depreciation transferred, to profit and loss account), , 30000, 30000, 13961, 13961, , 15387, 1426, 13961, , Working Note: 1. Calculation of Interest, Date(1), , 1/1/2005, 31/12/2005, 31/12/2006, 31/12/2007, 31/12/2008, , Opening, Cash, Price, (Rs.), (2), 136338, 106338, 81655, 55738, 28525, Total, , Cash, Price, paid(Rs.), (3)=(5-4), 30000, 24683, 25917, 27213, 28574, 136387, , Inter, est, (Rs., ), @5, % (4), 0, 5317, 4083, 2787, 1426, 13613, , Instalme, Closing, nt, Cash Price (Rs.), (6)=(2)-(3), (Rs, .), (5), Given, 30000, 106338, 30000, 81655, 30000, 55738, 30000, 28525, 30000, 0, 150000
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260, Working Note: 2., Calculation of Depreciation, Calculation of Depreciation, Date, 1/1/2005, 31/12/05, 31/12/05, 31/12/06, 31/12/06, 31/12/07, 31/12/07, 31/12/08, , Calculatio, Cash Price n, , less Depreciation, Book-Value, less Depreciation, Book-Value, less Depreciation, Book-Value, less Depreciation, 31/12/08 Book-Value, , (Rs.), 136338, 27268, 109070, 21814, 87256, 17451, 69805, 13961, 55844, , Illustration 2., Rama Company purchased Machinery from XY Trading Ltd. on 1st, January, 2009 on hire-purchase system. The cash price of the, Machinery was Rs.3,00,000 which was payable as under:, On 01-01-2009, Rs.1,00,000, On 31-12-2009, Rs.80,000, On 31-12-2010, RS.80,000, On 31-12-2011, RS.80,000, The purchasing company decided to write off depreciation @, 20% of the cost price each year. You are required to give the, necessary journal entries in the books of both the parties for three, years. Also show the calculation of interest, depreciation and the, installment., Journal Entries, In the books of Rama Company, Date, , Particulars, , 1/1/09, , Machinery A/c Dr., To XY Trading Ltd A/c, (Being total cash price due to the hire-vendor, for purchase of Truck), , 300000, , XY Trading Ltd A/c Dr, To Cash/ bank A/c, (Being Down Payment paid), , 100000, , Interest A/c Dr., To XY Trading Ltd A/c, (Being Interest due on unpaid Cash Price), , 20000, , 1/1/09, , 31/12/09, , Debit(Rs.) Credit(Rs.), 300000, , 100000, , 20000
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261, 31/12/09, , 31/12/09, , 31/12/09, , 31/12/10, , 31/12/10, , 31/12/10, , 31/12/10, , 31/12/11, , 31/12/11, , 31/12/11, , 31/12/11, , XY Trading Ltd A/c Dr, To Cash/ bank A/c, (Being Installment paid), , 80000, , Depreciation A/c Dr., To Machinery A/c, (Being Depreciation charged), , 60000, , Profit and Loss A/c Dr., To Interest A/c, To Depreciation A/c, (Being Interest and Depreciation transferred to, profit and loss account), , 80000, , Interest A/c Dr., To XY Trading Ltd A/c, (Being Interest due on unpaid Cash Price), , 13333, , XY Trading Ltd A/c Dr, To Cash/ bank A/c, (Being Installment paid), , 80000, , Depreciation A/c Dr., To Machinery A/c, (Being Depreciation charged), , 60000, , Profit and Loss A/c Dr., To Interest A/c, To Depreciation A/c, (Being Interest and Depreciation transferred to, profit and loss account), , 73333, , Interest A/c Dr., To XY Trading Ltd A/c, (Being Interest due on unpaid Cash Price), , 80000, , 60000, , 20000, 60000, , 13333, , 80000, , 60000, , 13333, 60000, , 6667, 6667, , XY Trading Ltd A/c Dr, To Cash/ bank A/c, (Being Installment paid), , 80000, , Depreciation A/c Dr., To Machinery A/c, (Being Depreciation charged), , 60000, , Profit and Loss A/c Dr., To Interest A/c, To Depreciation A/c, (Being Interest and Depreciation transferred to, profit and loss account), , 66667, , 80000, , 60000, , 6667, 60000
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262, Journal Entries, In the books of XY Trading Ltd A/c, Date, 1/1/09, , 1/1/09, , 31/12/09, 31/12/09, , Particulars, Rama Company A/c Dr., To Sales A/c, (Being total cash price due from the, hire- Purchaser for sale of Truck), Cash/ bank A/c Dr, To AB Transport Company A/c, (Being Down Payment Received ), Rama Company A/c Dr., To Interest A/c, (Being, Interest, due on unpaid Cash Price), Cash/, bank, A/c Dr, , Debit(Rs.), 300000, , 300000, , 100000, 100000, 20000, 20000, 80000, 80000, , To AB Transport Company A/c, (Being Installment Received), 31/12/09, , 31/12/10, , 31/12/10, , 31/12/10, , 31/12/11, , 31/12/11, , 31/12/11, , Interest A/c, Dr., To Profit and Loss A/c, (Being Interest transferred to profit and loss, account), , 20000, , Rama Company A/c Dr., To Interest A/c, (Being Interest due on unpaid Cash Price), , 13333, , Cash/ bank A/c Dr, To AB Transport Company A/c, (Being Installment Received), , 80000, , Interest A/c, Dr., To Profit and Loss A/c, (Being Interest transferred to profit and, loss account), Rama Company A/c Dr., To Interest A/c, (Being Interest due on unpaid Cash Price), , 13333, , Cash/ bank A/c Dr, To AB Transport Company A/c, (Being Installment Received), , 80000, , Interest A/c, Dr., To Profit and Loss A/c, (Being Interest transferred to profit and loss A/c), , Credit(Rs.), , 20000, , 13333, , 80000, , 13333, , 6667, 6667, , 80000, 6667, , Working Note: 1. Calculation of Interest, Step 1: Calculation of Total Interest:, Hire-purchase Price = 1,00,000 + (80,000 x 3) = Rs.3,40,000, Less: Cash Price, - Rs.3,00,000, Total Interest =, Rs.40,000, , 6667
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263, Step 2: Apportionment of Interest:, The total interest of Rs 40,000 is to be apportioned among the, 1st, 2nd, and 3rd installment in the ratio of 3:2:1.(since there are, three installments3/6,2/6, and 1/6 respectively), (1)Share of Interest in the 1st installment = 40000x3/6 = Rs.20,000, (2)Share of Interest in the 2nd installment = 40000x2/6 = Rs.13,333, (3)Share of interest in the 3rd installment = 40000x1/6 = Rs.6,667, Working Note: 2. Calculation of Depreciation, Cost of Machinery, = Rs. 300000, Less Depreciation (@ 20% of the cost price)=, 60000(300000*20/100), Illustration 3., Ramsons purchased two printing machines from King Printers on, Hire-purchase basis on 1st July ,2007 .The terms of the contract, were as follows:i) The cash price of the each printing machine was Rs.75,000, ii) Rs.15,000 was paid on the signing of the contract on 1stJuly 2007, ii)The balance was paid in installments of Rs. 20,000 plus interest, at 15% per annum, iv)The installments were paid on 31st December every year, commencing from 31st December 2007. King Printers charged, depreciation at 10% per annum under S.L.M. system. They closed, their books on 31st December. Show in books of Ramsons, necessary account.
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264, In books of Ramsons, King Printers A/c, Date, 01/07/2007, 31/12/2007, 31/12/2007, , Particulars, To Cash A/c, To Cash A/c, To Balance, , 31/12/2008 To Cash A/c, 31/12/2008 To Balance, 31/12/2009 To Cash A/c, , RS., Date, Particulars, RS., 30000 01/07/2007 By Machine, 150000, 49000 31/12/2007 By Interest A/c 9000, 80000, 159000, 159000, 52000 01/01/2008 By Balance b/d 80000, 40000, 92000, 46000, , 31/12/2008 By Interest A/c, , 12000, 92000, 01/01/2009 By Balance b/d 40000, 31/12/2009 By Interest A/c, , 46000, , 6000, 46000, , Interest A/c, Date, Particulars, 31/12/07 To King Printers A/c, , 31/12/08 To King Printers A/c, , RS., 9000, 9000, , Date, Particulars, 31/12/07 By Profit & Loss A/c, , 12000, , 12000, 31/12/08 By Profit & Loss A/c, , 12000, 31/12/09 To King Printers A/c, , RS., 9000, 9000, , 12000, , 6000, 6000, , 31/12/09, , By Profit & Loss A/c, , 6000, 6000, , Machine A/c, Date, Particulars, RS., Date, Particulars, 1/7/2007 To King Printers A/c 150000 31/12/2007 By Depreciation A/c, 31/12/2007 By Balance c/d, 1/1/2008 To Balance b/d, , 1/1/2009 To Balance b/d, , 75000, , RS., 7500, 142500, 150000, , 142500 31/12/2008 By Depreciation A/c, 31/12/2008 By Balance c/d, , 15000, 127500, , 142500, , 142500, , 127500 31/12/2009 By Depreciation A/c, 31/12/2009 By Balance c/d, , 15000, 112500, , 127500, , 127500
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265, Depreciation A/c, Date, Particulars, 31/12/2007 To Machine A/c--1, 31/12/2008 To Machine A/c--2, 31/12/2009 To Machine A/c--3, , RS., 7500, 7500, , Date, Particulars, 31/12/2007 By Profit &Loss A/c, , RS, ., 7500, 7500, , 15000 31/12/2008 By Profit &Loss A/c, 15000, 15000 31/12/2009 By Profit &Loss A/c, 15000, , 15000, 15000, 15000, 15000, , Working Note: 1, Calculation of Depreciation, Date, 1/7/2001, 31/12/01, 31/12/01, 31/12/02, 31/12/02, 31/12/02, 31/12/02, , Calculation, , (Rs.), , Cash Price, less Depreciation for 6 months-----------1, Book-Value, less Depreciation-----------------------------2, Book-Value, less Depreciation-----------------------------3, Book-Value, , 150000, 7500, 142500, 15000, 127500, 15000, 112500, , Working Note: 2, Calculation of Interest, Calculation, 1/7/2007, 1/7/2007, 31/12/07, 31/12/07, 31/12/07, 31/12/07, 31/12/07, 31/12/08, 31/12/08, 31/12/08, 31/12/08, 31/12/09, 31/12/09, 31/12/09, , Cash Price, Less Down Payment, paid, Outstanding cash price, Add Interest@ 15%, Total Amount Due, Less Instalment paid, Outstanding cash price, Add Interest@ 15%, Total Amount Due, Less Instalment paid, Outstanding cash price, Add Interest@ 15%, Total Amount Due, Total Amount Paid, , Cash, Price, (Rs.), , Cash, Price, paid, (Rs.), , Interest, (Rs.), , Instalment, (Rs.), , 30000, , 0, , 30000, , 40000, , 9000, , 49000, , 40000, , 12000, , 52000, , 40000, , 6000, , 46000, , 150000, 30000, 120000, 9000, 129000, 49000, 80000, 12000, 92000, 52000, 40000, 6000, 46000, 46000
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266, Illustration 4., On 1st January, 2003 Kavita Ltd. purchased Machinery on HirePurchase System from Jaya Traders for Rs. 26,000. They paid, Rs. 2000 on signing the contract and four half –yearly, installments of Rs. 6,000 plus interest at 20% per annum each, on 30th June and 31st December every year thereafter., Depreciation was written off at rate of 10% per annum on the, diminishing balance system., i) Prepare Ledger accounts in the books of Kavita Ltd and Jaya, Traders for the years 2003-2004; and, ii) Disclose the relevant items in Balance sheet of Kavita Ltd and, Jaya Traders as on 31st December 2003, In books of Kavita Ltd. Industries Ltd, Jaya Traders A/c, Date, 01/01/2003, 30/06/2003, 31/12/2003, 31/12/2003, , Particulars, To Cash A/c, To Cash A/c, To Cash A/c, To Balance, , 30/06/2004 To Cash A/c, 31/12/2004 To Cash A/c, , RS., Date, Particulars, 2000 01/01/2003 By Plant A/c, 8400 30/06/2003 By Interest A/c, 7800 31/12/2003 By Interest A/c, 12000, 30200, , RS., 26000, 2400, 1800, 30200, , 7200, 6600, , 01/01/2004 By Balance, 12000, 30/06/2004 By Interest A/c 1200, 31/12/2004 By Interest A/c 600, 13800, 13800, , Interest A/c, Date, Particulars, 30/06/2003 To Jaya Traders A/c, 31/12/2003 To Jaya Traders A/c, 30/06/2004 To Jaya Traders A/c, 31/12/2004 To Jaya Traders A/c, , RS., , Date, Particulars, RS., 2400 31/12/2003 By Profit &Loss A/c 4200, 1800, 4200, , 4200, , 1200 31/12/2004 By Profit &Loss A/c, 600, , 1800, , 1800, , 1800
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267, Machinery A/c, Date, Particulars, RS., Date, Particulars, 1/1/2002 To Jaya Traders A/c 26000 31/12/2002 By Depreciation A/c, 31/12/2002 By Balance c/d, , RS., 2600, 23400, , 26000, , 26000, , 23400 31/12/2003 By Depreciation A/c, 31/12/2003 By Balance c/d, , 2340, 21060, , 23400, , 23400, , 1/1/2003 To Balance b/d, , Depreciation A/c, Date, Particulars, 31/12/2003 To Machinery A/c, , RS., 2600, , Date, Particulars, 31/12/2003 By Profit &Loss A/c, , RS., 2600, , 31/12/2004 To Machinery A/c, , 2340, , 31/12/2004 By Profit &Loss A/c, , 2340, , An Extract of Balance sheet of Kavita Ltd. as on 31st, December 2003, , Liabilities, , Rs., , Hire-Purchase Creditors, Balance in Jaya Traders, , Asset, , Rs., , Fixed Assets:, 12000 Machinery (at cash Price) 26000, Less Depreciation, 2600, 23400, , In books of Jaya Traders, Kavita Ltd. A/c, Date, 01/01/2003, 30/06/2003, 31/12/2003, , Particulars, To Sales A/c, To Interest A/c, To Interest A/c, , RS., 26000, 2400, 1800, , Date, 01/01/200, 30/06/200, 31/12/200, 31/12/200, , Particulars, By cash A/c, By cash A/c, By cash A/c, By Balance, , 30200, 01/01/2004 To Balance b/d, 30/06/2004 To Interest A/c, 31/12/2004 To Interest A/c, , 12000, 1200, 600, 13800, , 30/06/200 By cash A/c, 31/12/200 By cash A/c, , RS., 2000, 8400, 7800, 12000, 10400, 7200, 6600, 13800
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268, Interest A/c, Date, Particulars, 31/12/2003 To Profit &, LossA/c, , RS., Date, Particulars, 4200 30/06/2003 By Kavita Ltd., A/cKavita Ltd., 31/12/2003 By, A/c, 4200, , RS., 2400, 1800, 4200, , 31/12/2004 To Profit &, , 1800 30/06/2004 By Kavita Ltd., 31/12/2004 By Kavita Ltd., 1800, , 1200, 600, 1800, , An Extract of Balance sheet of Jaya Traders as on 31st December, 2003, , Liabilities, , Rs., , Asset, , Rs., , Hire-Purchase Debtors, Kavita Ltd A/c, , 12000, , Working Note: 1, Calculation of, Date, , Calculation, , Cash, Price, (Rs.), , 01/01/2003, 01/01/2003, 01/01/2003, 30/06/2002, 30/06/2002, 30/06/2002, 30/06/2002, 31/12/2003, 31/12/2003, 31/12/2003, , Cash Price, Less Down Payment paid, Outstanding cash price, Add Interest@ 20%*, Total Amount Due, Less Instalment paid, Outstanding cash price, Add Interest@20%*, Total Amount Due, Less Instalment paid, , 26000, 2000, 24000, 2400, 26400, 8400, 18000, 1800, 19800, 7800, , 31/12/2003, 30/06/2004, 30/06/2004, 30/06/2004, 30/06/2004, 31/12/2004, 31/12/2004, 31/12/2004, , Outstanding cash price, Add Interest@20%*, Total Amount Due, Less Instalment paid, Outstanding cash price, Add Interest@20%*, Total Amount Due, Less Instalment paid, , 12000, 1200, 13200, 7200, 6000, 600, 6600, 6600, , *Interest calculated for 6 months, , Cash, Price, paid, (Rs.), , Interest Instalment, (Rs.), (Rs.), , 2000, , 0, , 2000, , 6000, , 2400, , 8400, , 6000, , 1800, , 7800, , 6000, , 1200, , 7200, , 6000, , 600, , 6600
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269, Illustration 5., Farhan Industries Ltd. acquired a plant at Cash Price of Rs., 75,000, delivered on 1st January 2002, on the following hire, purchase terms:, 1) An initial payment of Rs. 20,000 payable on delivery: and, 2) Four half –yearly installments of Rs. 15,000 each commencing, from 30th June, 2002., In arriving at these terms the plant manufacturer computed, interest at 7% per annum. Farhan Industries Ltd decided to write, off depreciation @ 10% of the cost price each year. You are, required to show the accounts in the books of Farhan Industries, Ltd for the years ending on 31st December 2002 and 31st, December 2003, necessary to record the above transactions, In books of Farhan Industries Ltd, Vendors A/c, Date, 01/01/2002, 30/06/2002, 31/12/2002, 31/12/2002, , Particulars, To Cash A/c, To Cash A/c, To Cash A/c, To Balance, , 30/06/2003 To Cash A/c, 31/12/2003 To Cash A/c, , RS., Date, Particulars, RS., 20000 01/01/2002 By Plant A/c, 75000, 15000 30/06/2002 By Interest A/c 1925, 15000 31/12/2002 By Interest A/c 1467, 28392, 78392, 78392, 15000 01/01/2003 By Balance, 15000 30/06/2003 By Interest A/c, 31/12/2003 By Interest A/c, 30000, , 28392, 994, 614, 30000, , Interest A/c, Date, Particulars, 30/06/2002 To Vendors A/c, 31/12/2002 To Vendors A/c, 30/06/2003 To Vendors A/c, 31/12/2003 To Vendors A/c, , RS., , Date, Particulars, RS., 1925 31/12/2002 By Profit &Loss A/c 3392, 1467, 3392, , 3392, , 994 31/12/2003 By Profit &Loss A/c, 614, 1608, , 1608, 1608
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270, Plant A/c, Date, Particulars, 01/01/2002 To Vendors A/c, , RS., Date, Particulars, RS., 75000 31/12/2002 By Depreciation A/c 7500, 31/12/2002 By Balance c/d, 67500, 75000, , 75000, , 67500 31/12/2003 By Depreciation A/c 7500, 31/12/2003 By Balance c/d, 60000, , 1/1/2003 To Balance b/d, , 67500, , 67500, , Depreciation A/c, Date, 31/12/2002, , Particulars, RS., To Plant A/c 7500, , Date, 31/12/2002, , Particulars, By Profit &Loss A/c, , RS., 7500, , 31/12/2003, , To Plant A/c 7500, , 31/12/2003, , By Profit &Loss A/c, , 7500, , Working Note: 1. Calculation of Interest, Opening, Cash, Price, (Rs.), (2), , Cash, Price, paid(Rs.), (3)=(5-4), , Interest, (Rs.), @5%, (4), , Instalment, (Rs.), (5) Given, , 1/1/2002, , 75000, , 20000, , 0, , 20000, , 5500, , 31/6/2002, , 55000, , 13075, , 1925, , 15000, , 31/12/2002, , 41925, , 13533, , 1467, , 15000, , 4192, 5, 2839, , 31/06/2003, 31/12/2003, , 28392, 14386, , 14006, 14386, , 994, 614*, , 15000, 15000, , 2, 1438, 60, , Total, , 75000, , 5000, , 80000, , Date, (1), , *Balancing Figure, Illustration 6., Bombay Trading Company purchased on 1st January, 2005 a, machine on Installment purchase system. The cash price of the, machine was Rs. 15,450 payment was to be made as under:, 1. On 1st January, 2005 (on signing the contract), Rs. 3,000, 2. On 31st December, 2005, Rs. 7,500, 3. On 31st December, 2006, Rs. 4,500, 4. On 31st December, 2007, Rs. 3,000, , Closing, Cash Price, (Rs.) (6)=(2)-(3)
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271, Bombay Trading Company charged depreciation at, 10% p.a. under diminishing balance method; you are required, to prepare necessary accounts in the books of Bombay, Trading Company., In books of Bombay Trading Company, Hire-Vendor A/c, Date, 01/01/2005, 31/12/2005, 31/12/2005, , Particulars, To Cash A/c, To Cash A/c, To Balance, , RS., Date, Particulars, RS., 3000 01/01/2005 By Machine, 15450, 7500 31/12/2005 A/c, By Interest A/c 1500, 6450, 16950, 16950, , 31/12/2006 To Cash A/c, 31/12/2006 To Balance, , 4500, 2700, 7200, , 01/01/2006 By Balance b/d 6450, 31/12/2006 By Interest A/c 750, 7200, , 31/12/2007 To Cash A/c, , 23000 01/01/2007 By Balance b/d 2700, 31/12/2007 By Interest A/c 300, 3000, 3000, , Interest A/c, Date, Particulars, 31/12/05 To Hire-Vendor A/c, , RS., 1500, 1500, , 31/12/06 To Hire-Vendor A/c, , 750, 750, , 31/12/07 To Hire-Vendor A/c, , 300, 300, , Date, Particulars, RS., 31/12/05 By Profit & Loss A/c 1500, 1500, 31/12/06 By Profit & Loss A/c 750, 750, 31/12/07 By Profit & Loss A/c 300, 300, , Machine A/c, Date, Particulars, 1/1/2005 To Hire-Vendor A/c, , RS., Date, Particulars, RS., 15450 31/12/2005 By Depreciation A/c 1545, 31/12/2005 By Balance c/d, 13905, 75000, , 1/1/2006 To Balance b/d, , 13905 31/12/2006 By Depreciation A/c 1391, 31/12/2006 By Balance c/d, 12514, 13905, , 1/1/2007 To Balance b/d, , 75000, , 13905, , 12514 31/12/2007 By Depreciation A/c 1251, 31/12/2007 By Balance c/d, 11263, 12514, , 12514
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272, Depreciation A/c, Date, Particulars, 31/12/2005 To Machine A/c, , RS., 1545, 1545, 1391, 1391, 1251, 1251, , 31/12/2006 To Machine A/c, 31/12/2007 To Machine A/c, , Date, Particulars, 31/12/2005 By Profit &Loss A/c, 31/12/2006 By Profit &Loss A/c, 31/12/2007 By Profit &Loss A/c, , Working Note: 1. Calculation of Interest, Step 1: Calculation of Total Interest:, Hire-purchase Price = Rs.18000, Less: Cash Price - Rs.15450, Total Interest =, Rs.2550, Step 2: Apportionment of Interest, Total Interest of Rs.2550 is to be apportioned among the three, installments in the following manner:, At the end of Year, 2005, Outstanding Hire 15000, Purchase Price, , 2006, 7500, , *Interest, , 750, , * Interest, , 1500, , 2007, 3000, , Total, 25500, , 300, , 2550, , = Outstanding Hire Purchase Price before, Installment* Total Interest, , Total of Outstanding Hire Purchase Price for all installments, Interest at the end of year 1 =15000* 2550 = 1500, 25500, rest at the end of year 2 =, , 7500 * 2550, 25500, Interest at the end of year 3 = 3000* 2550, 25500, , =, =, , 750, 300, , RS, ., 1545, 1545, 1391, 1391, 1251, 1251
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273, Working Note: 2. Calculation of Depreciation, Date, 1/1/2005, 31/12/05, 31/12/05, 31/12/06, 31/12/06, 31/12/07, 31/12/07, , Calculation, Cash Price, less Depreciation, Book-Value, less Depreciation, Book-Value, less Depreciation, Book-Value, , (Rs.), 15450, 1545, 13905, 1391, 12515, 1251, 11263, , Illustration 7., Doshi Roadways purchased t wo trucks f rom Tata Ltd. on, hire-purchase system on 1st January, 2006. The cash price of, each truck was Rs. 125,000. Payment was made as follows:, 1.1.2006: RS 30,000 per truck., 31.12.2006: RS 45,000 per truck., 31.12.2007: RS 40,000 per truck., 31.12.2008: RS 35,000 per truck., Depreciation at 20% per annum on original cost is charged., You are required to: Calculate interest per year; and show the, necessary accounts in the books of Doshi Roadways., In books of Doshi Roadways, Tata Ltd A/c, Date, 01/01/2006, 31/12/2006, 31/12/2006, , Particulars, To Cash A/c, To Cash A/c, To Balance, , RS., Date, Particulars, RS., 60000 01/01/2006 By Truck A/c 250000, 90000 31/12/2006 By Interest A/c 26087, 126087, 276087, 276087, , 31/12/2007 To Cash A/c, 31/12/2007 To Balance, , 80000 01/01/2007 By Balance, 126087, 62391 31/12/2007 By Interest A/c 16304, 142391, 142391, , 31/12/2008 To Cash A/c, , 70000 01/01/2008 By Balance, 31/12/2008 By Interest A/c, 70000, , 62391, 7609, 70000
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274, Interest A/c, Date, Particulars, 31/12/06 To Tata Ltd. A/c, 31/12/07 To Tata Ltd. A/c, 31/12/08 To Tata Ltd. A/c, , RS., Date, Particulars, RS., 26087 31/12/06 By Profit & Loss A/c 26087, 26087, 26087, 16304 31/12/07 By Profit & Loss A/c 16304, 16304, 16304, 31/12/08, 7609, By Profit & Loss A/c 7609, 7609, 7609, , Truck A/c, Date, Particulars, 1/1/2006 To Tata Ltd. A/c, , RS., Date, Particulars, RS., 250000 31/12/2006 By Depreciation A/c 25000, 31/12/2006 By Balance c/d, 225000, 250000, , 250000, , 225000 31/12/2007 By Depreciation A/c 25000, 31/12/2007 By Balance c/d, 200000, , 1/1/2007 To Balance b/d, , 225000, , 225000, 31/12/2008, By, Depreciation, A/c, 200000, 25000, 31/12/2008 By Balance c/d, 175000, , 1/1/2008 To Balance b/d, , 200000, , 200000, , Depreciation A/c, Date, 31/12/2006, 31/12/2007, 31/12/2008, , Particulars, To Truck A/c, To Truck A/c, To Truck A/c, , RS., Date, Particulars, 25000 31/12/2006 By Profit &Loss A/c, 25000 31/12/2007 By Profit &Loss A/c, 25000 31/12/2008 By Profit &Loss A/c, , Working Note: 1. Calculation of Interest, Step 1: Calculation of Total Interest:, Hire-purchase Price = Rs. 300000, Less: Cash Price - Rs. 250000, Total Interest =, Rs. 50000, Step 2: Apportionment of Interest, Total Interest of Rs.2550 is to be apportioned among the three, installments in the following manner:, , RS, ., 25000, 25000, 25000
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275, At the end of Year, , 2005, , 2006, , 2007, , Total, , Outstanding Hire, Purchase Price, *Interest, , 240000, , 150000, , 70000, , 460000, , 16304, , 7609, , 50000, , 26087, , * Interest = Outstanding Hire Purchase Price before, Installment* Total Interest, Total of Outstanding Hire Purchase Price for, all installments, Interest at the end of year 1 =, , Interest at the end of year 2 =, , 240000* 50000, 460000, 150000* 50000, 460000, , Interest at the end of year 3 = 70000* 50000, 460000, , =, , 26087, , =, , 16304, , =7609, , Working Note: 2. Calculation of Depreciation, Cost of Truck= Rs. 125000, ., , Less Depreciation (@ 20% of the cost price), ( 125000*20/100), , = Rs.25000, , Illustration 8., Priya Trading purchased a machine on 1.1.2010 on hire purchase, system from Rita Traders. The necessary details are given below:, Cash Price, Amount paid on signing the agreement, First Annual Installment, Second Annual installment, Last annual installment, Rate of Interest, , Rs.60000, Rs.20000, Rs.18000, Rs.16000, Rs.13860, 10% p.a., , Depreciation at 20% on cash price of machine by reducing, installment method is charged. Calculate interest per year; and, show the necessary accounts in the books of Rita Traders.
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276, In books of Rita Traders, Priya Trading A/c, Date, Particulars, RS., Date, 01/01/2010 To Sales A/c, 60000 01/01/2010, 31/12/2010 To Interest A/c, 4000 31/12/2010, 31/12/2010, 64000, , Particulars, By cash A/c, By cash A/c, By Balance, , RS., 20000, 18000, 26000, 64000, , 01/01/2011 To Balance b/d 26000 31/12/2011 By cash A/c, 31/12/2011 To Interest A/c 2600 31/12/2011 By Balance, , 16000, 12600, , 28600, , 28600, , 01/01/2012 To Balance, 12600 31/12/2012 By cash A/c, 31/12/2012 To Interest A/c, 1260, 13860, , 13860, 13860, , Interest A/c, Date, 31/12/2010, , Particulars, , RS., Date, Particulars RS., 4000, To Profit & Loss 4000 31/12/2010 By Priya, Trading A/c, A/c, 4000, 4000, , 31/12/2011 To Profit & Loss 2600 31/12/2011 By Priya, A/c, Trading A/c, 2600, 31/12/2012, , 2600, 2600, , To Profit & Loss 1260 31/12/2012 By Priya, Trading A/c, A/c, 1260, , 1260, 1260, , Working Note: 1. Calculation of Interest, Date(1), , 1/1/2010, 31/12/2010, 31/12/2011, 31/12/2012, , Opening, Cash, Price, (Rs.)(2), 60000, 40000, 26000, 12600, , Cash, Price, paid, (Rs.), 20000, 14000, 13400, 12600, , Interest Installment, (Rs.), (Rs.) (5), @10%(4), Given, 0, 4000, 2600, 1260, , 20000, 18000, 16000, 13860, , Closing, Cash, Price, (Rs.), 40000, 26000, 12600, 0, , 13.2 EXERCISE, 1. Raja Transport Ltd. purchased a Motor car on 1st January,, 2005, on hire-purchase basis from Meenakshi Motors Ltd. The, cash –price of the Motor car was Rs.74,500. Under the agreement,
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277, a sum of Rs.20,000 was payable initially on 1st January, 2005:, and the balance in three annual installments of Rs. 20,000 each, falling due from 1st April, 2005. The financial year of the Raja, Transport Ltd. end on the 31st March. The company charges, interest at 5% p.a. and depreciation at 10% p.a on cash price of, the Motor-car on diminishing balance method. Prepare Motor-car, Account, Meenakshi’s Motors Ltd Account and Interest Account in, the books of Raja Transport Ltd., st, Answers: Interest for 3 months till 1 April, 2005: Rs. 681, Interest, st, for year ending 31 March, 2006: Rs. 1759, Interest for year ending, st, 31 March, 2007: Rs. 847., , 2. On 1.1.2002 Mr. Singh purchases machinery on Hire purchase, system. The hire purchase agreement provided an initial down, payment of Rs.1,500; the balance is to be paid in 4 equal halfyearly installments of Rs.2,000 each. Cash price is Rs.8,934. Rate, of interest per annum is 6% and the rate of depreciation is 10% on, original cost. Pass journal entries in the books of Mr. Singh from, 1.1.2002 to 31.12.2003, Answers: Interest for half year ending 30/06/02: 223, Interest for, half year ending 31/12/02: 170, Interest for half year ending, 30/06/03: 115, Interest for half year ending 31/12/03: 58., , 3. X Company Ltd. purchased a machine from Y Machines Ltd., on hire-purchase basis, the cash price being Rs.55,850, Rs.15,000 was paid on the signing of the contract and the, balance in three annual installments of Rs.15,000 each on, 31st March each year. Interest is charged at 5% per annum., Depreciation was written off at rate of 10% per annum on the, diminishing balance system. Give journal entries in the books of X, Company Ltd. whose accounting year ends on 31st March, each year, under Full Cash Price Method., st, nd, rd, Answers: Interest for 1 Year: 2043, 2, Year: 1395, 3 Year: 714., , 4. M/s Asha Refrigeration Ltd. supplied Refrigerators to Ashok, Hotel on the installment system, on 1st July, 2004. The cash price, of Refrigerator was Rs. 22,350. Under Installment system, it was, agreed to pay Rs.6,000 on that date and Rs.6,000 annually for, three years. Depreciation was to be written off the asset 10% p.a., Show the relevant Ledger account in the books of both the parties, for three years., st, nd, rd, Answers: Interest for 1 Year: 825, 2, Year: 550, 3 Year: 275.
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278, 5. On 1st April, 2008 Modern Traders Ltd. took delivery of one, Truck from GEM Motors Ltd. on Hire-Purchase Agreement,, payable in three equal installments of Rs.60,000 each on 31st, March, 2009, 2010, 2011. The cash value of the Truck on, delivery was Rs.1,63,400. Vendor charges interest at 5% per, annum on the yearly balances. The purchaser wrote off, depreciation @ 25 per cent on the diminishing value method for, each year. Pass the necessary Journal entries to record the above, transactions in the books of both the parties., Answers:, 2852., , Interest for 1, , st, , nd, rd, Year: 8170, 2, Year: 5579, 3, Year:, , , ,
