MODULE : C Special Accounts

CA R.C. Joshi ,

FCA,CAIIB,LL.B. B.Com(Hons.)

Special Accounts: In brief we would cover the following

• Bank Reconciliation Trial Balance Capital & Revenue Expenditure Inventory Valuation Bills of Exchange Consignment

• Joint Venture Leasing & Hire Purchase

Module – C Special Accounts

• Accounts for no-Trading Organisations

• Depreciation Accounting

• Accounting From incomplete records

(Single Entry System

Ratio Analysis

Bank Reconciliation

• Every trader/business maintains Bank Account. However when you compare the balance on a particular day (generally at the end of month )on comparison the Bank Balance as per Books maintained by Business & that reflected by Bank Statement may not be matching most of the times. A few reasons are listed below :

BR : Difference in CB & PB

• Bank Reconciliation Statement is a state• All Cheques Issued may not have been

Presented in Bank• All Cheques deposited may not been

Credited in Bank Account• Interest & Bank Charges effected by Bank • Standing Instruction given to Bank not

reflected in Businessman’s Books

BR : Difference in CB & PB

• For eg. Tel. Bills , Electric Bills & Insurance Premia (debited by Bank )

• Standing Instruction for Credits may be FD Interest, Dividends etc.

• Dishounour of Cheques deposited as also those issued by Business

• Direct Credit in Bank by Business.• Thus Bank Reconciliation is a statement

prepared to explian the difference between the balance as as per the ash Book & Bank Pass Book/Statement.

BR

• It is a STATEMENT(not an Account) prepared by Customer.

• Overcasting the deposit side of Cash Book increases the Bank Balance as per Cash book. Bank shows as Deposits & withdrawals what is called for Receipts & Payments by Businessman in his Cash Book.

Bank A/C as per Cash Book for Dec

Dec Dr. Dec Cr. 1 To Opening Bal. 15000 • 8 To A & Co 200 5 By X & Co. 400

5 By Y & Co. 500• 10 By Cash (C)(withd.) 2000• 20 To Cash ( C ) Dep. 1000 • 30 By MTNL 800

30 To B & Co. 700 30 By Z & Co. 900

31 By Bal C/d. 12300 ----------------- ---------------------------- 16900 16900

Bank Statement Withdrawals Deposits Balance

1 Dec Opening Bal. 15000 Cr.• 7 X & Co. 400

7 Y & Co. 5008 A & Co. 200 14300 Cr.

• 10 Cash 2000• 20 Cash 1000 13300 Cr.• 31 By Charges 100

31 By Dividend 200 13400Cr.

Bank Reconciliation as on 31st December

• Rs• Bank Balance as per Cash Book as on 31st Dec 12300

Add: Chequ issued but not presented • MTNL Rs.800+ Z & Co. Rs.900 = Rs.1700 • Dividend Credited not effected in CB Rs. 200 1900

------ ------- 14200

• Less : Cheque Deposited but not credited Rs. 700 Bank Chgs. Debited not effected in CB Rs.100 800

• Ans: bank Bal. as per Bank Statement 13400

•

BR Statement (When we start with Bank Bal. as per Bank Statement

• Rs• Bank Balance as per Cash Book as on 31st Dec 13400

Add: Cheque Deposited but not credited Rs. 700 Bank Chgs. Debited not effected in CB Rs.100 800– - 14200

• Less :Chequ issued but not presentedMTNL Rs.800+ Z & Co. Rs.900 = Rs.1700

• Dividend Credited not effected in CB Rs. 200 1900

• Ans: bank Bal. as per Bank Statement 12300

Select the appropriate • 1.Dr. Bal. as per Pass Book means ______ (Overdraft, Favourable

Balance, neither of the two)

• 2. Cheque deposited it is recorded on________side (of Cash Book) & when dishonoured it is recorded on _______ side of the CASH BOOK. (Debit, Credit)

• 3.Debit Bal. in the Cash Book shows (Overdraft, Favourable Balance, neither of the two)

• 4. Insurance premia paid by the Bank is ________ (debited/Credited) by the Bank.

• 5.Direct Deposit by the Customer is first recorded in (Cash Book, Pass Book).

Answers

• 1. Overdraft 2. Debit, Credit

• 3. Favourable 4. Debited

• 5. Pass Book.

BR :Match the following

• Column : A Column:B 1.Cash Book Dr. Side 1. Deposits 2. Cash Book Cr. Side 2. Withdrawals 3. Pass Book Dr. side 3. Receipts 4. Pass Book Cr. Side 4. Payments 5. Dr. Bal. in Pass book 5. Overdraft as per Pass Book.

Answers

• 1(3)

• 2(4)

• 3(2)4(1)

• 5(5)

TRIAL BALANCE

• Rectification of Errors

• Trial Balance is a list or abstract of balances from Books(ledger, Cash Book, journal) to determine posted Debits/Credits and to establish a basic summary for financial statements. It may be prepared monthly, quarterly & half yearly.

Disagreement of a Trial Balance

• Type of errors

Errors of principle(No effect on trail

balance )Clerical Errors

OMMISSION COMMISSION

Compensatory

Complete(No effect on TB) Partial(After TB)

Errors

• Compensating Errors: One effect nullifies the wrong effect on another

• Error of Commission: A clerical error committed while posting, totaling or balancing of an Account

• Error of Principles : An error arising out of non-observance of Accounting Principles One Sided Error: An error which affects only one

side of Account

Errors

• Two Sided Errors : An error affecting two sides

• Rectifying Entry : An entry passed to rectify the error.

• Suspense Account: An Account opened to tally trial balance temporarily.

Example-1

• Goods purchased from Sohanlal wrongly entered into Sales Register at Rs.500.

• Correct Entry( That should have been) Purchases A/c. Dr. 500

• To Sohanlal Cr.Rs.500Wrong Entry Passed Sohanlal A/c. Dr. 500 To Sales Cr. 500

Example-1

• Rectification Entry Sales A/c. Dr.500

• Purchase A/c. Dr.500 To Sohanlal Cr. Rs.1000

• (Being purchase of goods wrongly recorded in Sales Register now rectified.)

Example -2

• Salary Paid to Vijay, Accountant wrongly recorded to his Personal A/c. Rs.1000

• Correct Entry Salary A/c. Dr. 1000

To Cash Cr. Rs.1000Wrongly Passed as : Vijay A/c. Dr. 1000 To Cash Cr. Rs. 1000

Example-2

• Rectification entry Salary A/c. Dr. 1000 To Vijay A/c. Cr. 1000(Being Salary paid wrongly debited to personal A/c now rectified).

Example-3

• Wages paid for installation of Machinery Rs.500 were debited to Wages A/c.Rs.500Correct Entry Machinery A/c. Dr. 500 To cash Rs.500Wrongly passed as : Wages A/c. Dr. 500 To Machinery Rs.500

Example-3

• Rectification Entry Machinery A/c. Dr. Rs.500

• To cash Rs.500( Being wages paid for Installation of Machinery is wrongly debited to Wages A/c. now rectified).

Example-4

• Rent paid Rs.200 wrongly debited to Postage A/c. Correct Entry: Rent A/c. Dr. Rs. 500 Cash A/c. Cr. Rs.500Entry wrongly passed as : Postage A/c. Dr. Rs. 500 Cash A/c. Cr. Rs.500

Example-4

• Rectification Entry

• Rent A/c. Dr. Rs. 500 To Postage A/c. Cr. Rs.500(Being Payment of Rent wrongly debited to Postage A/c. now rectified).

Match the following

• Column: A Column : B 1.Trial Balance 1. Diff. in Trial Bal. 2. Net Trial Bal. 2. Always shows Dr. bal. 3. Gross Trial Bal. 3. Always shows Cr. Bal. 4. Suspense A/c. 4. Generally shows Dr. Bal. 5. Real A/c. 5. Statement of balances of ledger A/cs 6. Dr. or Cr. Balances 7. Ledger A/c. 8. Debit & credit totals Ans: 1(6), 2(5), 3(8), 4(1), 5(2)

Fill in the Blanks

1.Errors which cancel out the effects of one another are called _________ Errors 2. Mistakes involving wrong recording or posting are called Errors of ________3. Difference in Trial Balance is transferred to ____________Account.

4. When a transaction is not recorded it is an error of _________.

Answers

1. Compensatory Errors 2. Commission

3. Suspense A/c. 4. Ommission

12.

• Chapter :12

• Capital & Revenue Expenditure

CAPITAL EXPENDITURE & REVENUE EXPENDITURE

• From the Trial Balance we can observe that some items directly appear in Balance Sheet while a some other items are charged to P&L A/c. Items which directly appear are generally CAPITAL while those charged to P & L are REVENUE. How this is classified?

The Basis

1. Nature of the Expenses2. Effect on revenue Earning Capacity3. Benefit from the Expenditure

1.NATURE : Tests : Whether recurring in ordinary course of business : Salary, Electricity Bill, Tel Charges, Raw purchased etc.

Applicability of Materiality Concept : An Wall Clock costing Rs.500/- having long useful life & it is non-recurring. However Materiality Concept it allowed to be charged as REVENUE.

Building, Plant & Machinery, Motor Cars are examples of CAPITAL Expenditure

Effecting on Revenue Earning Capacity

The expense which help to generate income/revenue in the current year are revenue in nature and should be matched against the earned in the current year. If the expenditure helps to generate revenue for more than one accounting year is generally called purchase of plant.

State whether expenditure is Revenue/Capital/ Deferred Revenue

1.Freight paid on a Machine for bringing it to factory.

2.The shifting of stock from old works to new site.

3.The overhauling expenses of Machine

4.The Legal expenses incurred in connection with raising of Debentures issue.

5 Purchase of Machinery.

6. Labour Welfare Expenses

True or False

1.A revenue expenditure of one party may be Capital receipt for the other party.

2.Receipts from Sale of machinery is revenue receipt.

3.The distinction between & revenue expenditure can not be definite. It depends on the facts & circumstances of each case.

4.Legal charges paid for purchase of land are

True or False

Capital Expenditure but legal charges paid in the ordinary course of business is revenue expenditure.

• 5. Wages paid in the Ordinary Course of business are revenue expenditure but wages paid for erection of machinery are capital expenditure.

6.Debenture receipts are revenue receipts.

Answers to True or False

• 1. True

• 2. False

• 3. True

• 4. True

• 5. True

• 6. False

13.

• INVENTORY VALUATION

Objective

• The main objective for accounting for INVENTORIES is to ascertain income through matching appropriate costs t for receipts as well as conversion of raw materials into semi-finished & finished products.

• As per Accounting Standard-2 the inventory may be for sale in the ordinary course of business

• In the process of production for such sale• The production for goods or services for sale

including maintenance, supplies and consumables other than machinery & spares.

13. Inventory Valuation

• Cost of the goods is worked out as follows: • Op. Stock+ Purchases-Closing Stock

= Cost of Goods • VALUATION METHODS :• (A) FIFO-FIRST IN FIRST OUT. • (B) LIFO-LAST IN FIRST OUT • ©AVERAGE COST• (D) BASE STOCK• (E) ADJUSTING SELLING PRICES

Find out Stock Value under 3 methods : (page:249),April ,2009

Date Recepits L.F Units Rate Issued Date Units1 Op. Stock 500 8 3 300 2 Purchases 600 10 5 400 4 Purchases 100 10.20 7 4006 Purchase 200 10.50

Stock verification on 3rd April reveals loss of 1o units. Show the stock of Cost of goods sold & valuation of stock as on 7th april,2009 under FIFO,LIFO & Weighted Average Cost Method.

FIFO

• April,09 Receipts Issue Balance 1. 500*8=4000

• 2 . 600*10=6000 500*8=4000 600*10=6000

• 3. 300*8=2400 10(Loss)*8=80 190*8=1520 600*10=6000

• 4. 100*10.20=1020 190*8=1520 600*10=6000

• 5 190*8=1520 210*10=2100 390*10= 3900

100*10.20=1020

FIFO(page no: 250)

• April,09 Receipts Issue* Balance 6. 200*10.50=2100 390*10= 3900 100*10.20=1020 200*10.50=2100

• 7. 390*10=3900 10*10.20=102 90*10.20= 918 200*10.50=2100Closing Stock under FIFO Method :290 units Rs.3018Cost of Goods Sold : 1100 units Rs.10022 Loss of Units : 10 units Rs.80

LIFO• April,09 Receipts Issue Balance

1. 500*8=4000• 2 . 600*10=6000 500*8=4000

600*10=6000• 3. 300*10= 3000

10(Loss)*10=100 500*8=4000 290*10=2900

• 4. 100*10.20=1020 500*8= 4000 290*10=2900 100*10.20=1020

• 5 100*10.20= 1020 290*10= 2900 490*10= 3929

LIFO

• April,09 Receipts Issue Balance 6 200*10.50= 2100 490*8=3920 200*1050=2100

• 7 400 Units 200*10.50=2100 200*8=1600 10,800 290*8=2320Closing Stock under LIFO 290 units Rs.2320Cost of Goods Sold 1100 units Rs.10700Loss of Units 10units Rs.100

Average Weighted Cost

• April,09 Receipts Issue Balance 1. 500*8=40002. 1100*9.09=10000

3. 300 10 loss 310-9.09=2819 790*9.09= 71814 100*10.20=1020 890*9.21=8201

• 5 400*9.21=4513 490*9.21=4513

• 6. 200*10.50=2100 690*9.58=66137 400*9.58=3835 290*9.58=2778

• Stock: units 290*9.58= Rs.2778

• Cost of Goods Sold 1100 units=10251

• Loss of units 10*9.09 = Rs.91.

Base Stock Method

• Base Stock Method : It is assumed holding of minimum quantity (base stock) with a particular price & the quantity in excess thereof are dealt with some other basis. Adjusted Selling Price:

Methods

• Periodic Inventory Perpetual Inventory

• Implications of FIFO & LIFO Methods in rising methods & falling Prices.

• RequirementsIn rising Market , FIFO just like LIFO in falling Market will reflect lowest cost so higher profits.

Select the correct answer

1.The test of objectivity & verifiability is satisfied by valuing stock at (a)Historical Cost (b)Current replacement Price (C ) Net realisable value.

2. The ascertainment of value of stock from accounting records is known as (a) Continuous Stock taking (b) Periodic Inventory © Perpetual Inventory

3. Historical Cost Concepts are reduced to net realisable value of ( (a) Consistency (b) Conservatism © realisation

4. The cost of formulae recommended by Accounting Standard 2 for valuation of inventories are (a) FIFO or Weighted Average (b) Standard Costs ( C ) LIFO or latest purchase Price

5. In retail business widely follwed method of inventoery is(a) FIFO (b) Weighted © adjusted selling prices

Answers

• 1-a

• 2-c

• 3-b

• 4-a

• 5-c

Fill in the Blanks • 1. The inventory valuation is subjective because it depends

on the _________________followed by the accountant• 2. Historical value is reduced to net realisable value due to

the accounting convention of ____________.• 3. Net realisable value is the estimated selling price in the

ordinary course of business less costs of of _______________and less costs necessary to make the ______.

• 4. The ascertainment of the costs at the end by physically counting the stock is known as _________.

• 5. The basis of inventory valuation should not be changed frequently because its violates the accounting principle of ____________.

Answers to fill in the Blanks

• 1. Accounting Policies 2. Conservatism 3. Completion, Sale 4. Periodic Inventory 5. Consistency

14.

• BILLS OF EXCHANGE

Bills of Exchange

• The main journal is divided into a number of journals. So there are Bills Receivable & Bills Payable journals. Types of Instruments of Credit :

• Promissory Note• Bills Of Exchange : It is an instrument in writing Signed by

the maker containing an unconditional order to pay a certain sum of money to a person named in the instrument or to his order to the bearer on a certain fixed future date or demand.

• (se. 5 of NI Act)

Bills of Ex.

• A Sells goods worth Rs.10000 to B On Credit.A draws the Bill for Rs.10000. It is accepted by B & returned to A. Show the entries to be passed in the books of A & B respectively under the different circumstances (a) if A retains the Bill & presents on maturity(b) If A discounts the bill before the due date for Rs.9800. © A sends the Bill to his Bank for Collections.(d ) If A endorses the bill to C his Creditor

Answer

• Here ‘A’ is the drawer, Bill means Bills of Exchange & it is Bills Receivable for Drawer & Bills Payable for Drawee.

• (a) B.R. A/c. Dr. 10000 To B Cr. 10000(b) Cash A/c. Dr. 9800 Discount 200 To B. R. Cr. 10000

Bills of Ex.

• ( C ) Bank for Bills Collection A/c. Dr. 10000 To Bills Receivable A/c. cr. 10000(d) When the Bill is endorsed to C C A/c Dr. 10000 To Bills Receivable 10000 (being endorsement of Bill of C

Bills of Ex.

• In the Books of B A’s A/c Dr. 10000 To Bills Payable A/c. Cr. 10000

Entries on due date under the following Circumstances

• (a) if A retains the Bill & presents on maturity(b) If A discounts the bill before the due date for Rs.9800. © A sends the Bill to his Bank for Collections.(d ) If A endorses the bill to C his Creditor.

• (a)Cash A/c. Dr. 10000 To B R. A/c. Cr. 10000(b) No entry as Bank will take step on due date

Bills of Ex.

• ( c). Here Bank collects the money from Drawee remits to A. Cash or Bank A/c. Dr. 10000 To Bank for Bills Collection Cr. 10000(d) When endorsed Bill is met. No entry in B’s Books. In B’s Books :

• Bills Payable A/c. Dr. 10000 To Cash/ Bank Cr. 10000

Dishonouring of BillBooks of A

• a) Dishonour of retained Bill.B’s A/c. Dr. 10100 To BR A/c. Cr. 10000 To Cash 100(b) Discounted Bill Dishonoured- BR A/c/ Dr. 10000 Noting Charges Dr. 100 To Cash A/c. Cr. 10100 B’s A/c. Dr. 10100 To BR A/c. Cr. 10000 To Cash 100

Dishonouring of BillBooks of A

• (a) Dishonour of retained Bill.B’s A/c. Dr. 10100 To BR A/c. Cr. 10000 To Cash 100(b) Discounted Bill Dishonoured- BR A/c/ Dr. 10000 Noting Charges Dr. 100 To Cash A/c. Cr. 10100 B’s A/c. Dr. 10100 To BR A/c. Cr. 10000 To Cash 100

Bills Sent for collection

• BR A/c/ Dr. 10000 Noting Charges A/c 100 To Cash A/c. Cr. 100 To Bills for collection 10000 B’s A/c. Dr. 10100 To BR A/c. Cr. 10000 To Noting Charges 100

When endorsed Bill is dishonoured

• BR A/c Dr. 10000 Noting Charges A/c Dr. 100 To C 10100

• B’s A/c Dr. 10100 To BR 10000 To Noting Charges 100In B’s Books Bills Payable 10000Noting Charges A/c Dr. 100 To Bills Payable 10100

On retirement

• In A’s Books

• Cash A/c Dr. Rs.9500Rebate A/c Rs. 500 To Bills Receivable Rs.10000In B’s Books

Bills Payable A/c. Dr. Rs.10000 To Cash A/c. Cr Rs.9500 To Rebate Cr. Rs.500

When Bills is renewed B by paying Rs.4000.

• Bill is renewed for a period of 3 months for which pays 3 months interest at 10% p.a.

• First old bill is to be cancelled B’s A/c Dr. Rs. 10000

• To Bills Receivable A/c. Cr. Rs.10000• Cash A/c Dr. Rs.4000

Bills Receivable A/c Rs.6150 To Interest A/c Rs.150 To B’s A/c Rs.10000

Renewal in B’s books

• First old bill is to be cancelled Bills Payable A/c Dr. Rs.10000

• To A’s A/c. Cr. Rs.10000

• A’s A/c Dr. Rs.10000

Interest A/c. Dr. Rs. 150 To Cash A/c. Cr. Rs. 4000 To B’s A/c Rs.6150

Accommodation Bills

• These bills are drawn without consideration & objective is to accomdate one party. The rest of things are same as Bills receivable (with exception to sharing of discount in the manner they share Proceeds from Bills).

State whether the following statements are true or false

• 1. A bill of exchange is a negotiable instrument.• 2. A bill of exchange need not to be dated.• 3. A bill of exchange must be accepted by the drawer.• 4. Drawer is a person to whom the bill is endorsed.• 5. Amount of bill is paid to the payee.• 6. Drawee after acceptance becomes acceptor.• 7. A bill of exchange must be in writing.• 8. A bill of exchange may be drawn for payment in kind.• 9. Drawer has the right to discount the bill.• 10. There are three parties to a bill of exchange..

Answers 1 to 10

• 1.True 2. False 3. True

• 4. False 5. True

• 6. True 7. True 8 False

• 9. False 10True

State whether the following statements are true or false

• 11. There are two parties to a promissory note.• 12. Drawee is the maker of the bill exchange.• 13. Debtor is the maker of a promissory note.• 14. A bill of exchange is a conditional order.• 15. A bill of exchange must be properly stamped.• 16. The maker of a promissory note must sign it.• 17. Mere acknowledgement of debt is not a promise.• 18. A bill of exchange which arises out of trading

relationship of two persons is called a trade bill.• 19. Acceptance is voluntary for a bill of exchange.• 20. In general acceptance , the drawer agrees with some

of the conditions of the bill.

Answers to True or False

• 11. True 12. False

• 13 True 14 False 15 True 16 True 17 True •

18. True 19 False 20 False

BE: Fill in the Blanks

1.When goods are sold on credit seller, becomes a ________ and buyer becomes a _________.

2. Negotiable Instrument can be ________ from one person to another.

3. A bill of exchange must be properly _________

4. A bill of exchange must be signed by the ________.5. A Bills of exchange is accepted by the _________

•

Answers to fill in the blanks

• Ans1. Creditor, Debtor 2. transferred 3. Stamped 4. Maker 5. drawee.

Consignment Account

• 15. Consignment Account

15.CONSIGNMENT ACCOUNT

• A consignment is the dispatch of goods buy its owner to its agent for the purpose of selling. It this Principal (Owner) is a Consignor, Agent is a Consignee. The goods so sent are called Consignment Outward & for Agent it is Consignment Inward.

15.CONSIGNMENT ACCOUNT

• Since transfer of goods to Agent is not a sales the invoice prepared is called Pro forma invoice. And the Statement prepared by Agent Showing sale of goods received on Consignment .Unsold stock or damaged stock, expenses incurred & his commission is called ACCOUNT Sale.

• Commission:• ORDINARY &• DEL CREDRE.

Ordinary Commission is paid on total Sales. Losses or bad debts are borne by Consignee

Consignment Ex. (page 281)

• Jyotimal of Kolkata consigned 50 cases Cotton Goods costing

• Rs.2000 each to Ziauddin of Decca. Jyotimal paid follwing expenses : Carriage Rs.2500. Freight Rs.19000 & loading Charges Rs.3500.

• Ziauddin sales 30 cases at Rs.3500 each and incurs the following exp. Landing Charges Rs.3000. Warehousing & Storage Rs.5000 & selling Rs.4000. It is found that 2 cases have been lost in transit. Ziauddin is entitled to a commission of 10% on gross sales. Draw the necessary ledger accounts in the books of Jyotimal.

15.CONSIGNMENT ACCOUNT(pg. no:281)

Consignment A/c To Goods Sent on Cons. Rs. 100000 By Ziauddin(Sales) 105000 (50*2000) Rs. 30*3500 To Bank:carriage 2500 By Goods lost in Transit 5000 Freight 19000 (2*2000=4000+1000)

Loading Chgs. 3500 25000 To Ziauddin Loading 3000 By Good lost in transit 7500

Warehousing 5000 Selling 4000 12000 To Ziauddin (Commission) 10500 To P & L A/c 8500 By Closing Stock 38500

156000 156000

Ziauddin’s A/c

To Consignment 105000 By Consignment Exp 12000 By Consignment-Comm.10500 .______ By Bank 82500 105000 105000

Cl. Stock; 50*2000 = Rs.30000 In transit 3*2000+1500=7500

Add; Prop. Exp.Consignor

15*500 Rs. 7500Consinee: Non recurring:

On 15 cases for warehousing45cases 3000 for 15 cases1000 .________

38500

15.Indicate the Correct Answer. 1. When goods are sent on Consignment debit is given to (a)

Consignee’s A/c (b) Consignment Account(( C ) Sales A/c.2. The relationship between Consignor & Consignee is that of (a) Principal & Agent() buyer & Seller( C ) debtor & Creditor. 3. A loss which is natural & unavoidable is called

(a) abnormal (b) normal ( c) Contingent 4. A loss arising due to pilferage, theft, fine etc. is

(a) Normal (b) abnormal ( c) Contingent5. Abnormal loss of stock after adjusting for recovery of insurance claim is transferred to (a) Trading A/c. (b) P& L A/c( c)Capital A/c. 6. Consignee’s A/c is a (a) Nominal A/c.(b) Personal A/c. (C ) Real A/c.

7. Del Credre Commission is calculated on (a) Cash Sales (b) Credit Sales ( C ) total Sales.

15.Answers to Indicate the Correct Answer

• 1 ( b) 2(a)3( b) 4 (b)5 (b) 6 ( b)

• 7( C )

16. Joint Venture

• JV

JV

• It is an agreement between two or more parties. The agreement is made to carry on a specific job

• The agreement is over as soon as venture is completed

JV Example (pg.288) A & B entered into a JV sharing P & L in the ratio of 3:2

They opened a Joint Bank A/c. where A deposited Rs.5000 & B deposited Rs.40000. A purchased goods for Rs.30000 & incurred Rs.5000 for expenses out of the Joint Bank & he also supplied materials from his stock for Rs.3000. He sold the entire goods for Rs.50000 & deposited entire amount into the joint Bank a/c.

B purchased goods for Rs.25000 & incurred Rs.3000 for various expenses out of the joint Bank A/c. He sold all the goods for Rs.44000 except for goods valued at Rs.2000 which he took for his own use. The proceeds were also deposited in joint Bank a/c. Pl. prepare JV A/c, Joint Bank A/c & C-Venturer’s A/c.

Joint Venture A/c. (pg.288)

To Joint Bank By Joint Bank A/c Pur. 30000 Sale Proceeds 50000 Exp. 5000 35000 Sale Proceeds 44000 To A’s Capital 3000 To Joint Bank A/c By B’s A/c- Goods Taken 2000 Pur 25000 Exp. 3000 28000 To Profit Trd. A 18000 B 12000 30000 96000 96000

Joint Bank A/c

To A (Contri) 50000 By JV (goods & Exp) 35000 To B(contribution) 40000 By JV 28000To JV(Sale Proceeds)50000 By A-Final Pay 71000 To JV- Sale Proceeds 44000 By-B –Final Pay 50000 184000 184000 CO-VENTURERS A/c

A B A B

To JV 2000 By JV A/c 50000 40000 To JV Bank A/c 71000 50000 By JV 3000 - By JV-Proft 18000 12000 ------- ------ ------- ----------

71000 52000 71000 52000

16 JV: Fill in the blanks

1. In JV the association of persons is of a _______ nature.

2. JV may also be called as a ______ partnership. 3. The co-venturers enter into a ________ with each other.

4. The co-venturers agree to share ______ or _________arising out of business. 5. The persons entering into JV are called __________.

Ans: Temporary 2. Temporary/restricted 3. Contract 4. Profit/Loss 5. Co venturers

16.JV Match

• (1) JV (a) Personal(2) Co-ventures A/c (b) Nominal A/c (3) Goods Supplied on JV A/c ( C )Real(4 ) Joint Bank A/c (d) Personal (5) Cr. Bal. in JV A/c. (e) Profit on JV (6) JV ends (f) Completion of Venture

JV Answers

• 1((b) 2 (a) 3 © 4 (h) 5 ( e) 6 ( f)

17.

• 17.LEASING & HIRE PURCHASE

17.LEASING & HIRE PURCHASE

• Leasing is a contract between two parties,whereby the owner of an

assets transfers his rights of use to some other party on payment of a fixed periodical rent. So there are Lessor, Lessee, Lease Deed, Lease Rent terms use. Types : 1. Finance or Capital lease. 2. Operating Lease 3. Services Lease and 4. Leveraged Lease.

• FINANCE or CAPITAL LEASE: This is fairly for a long time. i.e. Primary Period+ Secondary Period. During Primary period Lessor charges Lease Rent in a manner covering Cost of the Machine plus interest thereon. In secondary period he charges Nominal rent.

Operating Lease

• Operating lease is a lease which is not ‘Finance’ or a ‘Capital’ lease .It does not transfer any of the rewards and the risk of ownership of the leased property to the lessee. The contract is, usually, cancelable and of lower maturity period than in case of financial lease. Normally, the period of lease is much less compared to the economic life of the asset.

Dist. Fin. Lease & Op. Lease.

Fin. Lease may give option to Any lease where lessor takes risk at nominal price. Lessor takes a risk Long term Short term Lessor incurs maintenace Lessee incurs maintenance With intention of becoming owner No such intention On Liability side Dues less down On Asset side Dep. is Prov. payment appears reduced on yearly payment the instalments

Operating Lease

• Leasing of telephones, vehicles, computers, etc., are some of the examples of the operating lease. The lease period is normally for a short period and may stretch from a day to about three years

Service Lease

• This takes care of Services & not Capital outlay. Assets generally remains with the Lessee.

• Leveraged Lease : In this type there are three parties. Financier apart from Lessor & Lessee.

Accounting Treatment in case of Finance Lease:

• 1. Under Fixed Assets Head would appear Sub-Head as Assets

given on Lease along with Dep.

• Bank A/c. Dr.

• To Lease Rent

• Lease Rent A/c Dr. To P & L A/c.

Hire Purchase & Instalment Sale

• Hire Purchase has two Components instalments & Interest. Distinction: HP & Instalment 1. Ownership

2. On Default in Repayment 3. Buyer’s right to terminatye Contract

• 4. Buyer’s right to dispose off goods

5. Loss of Goods

17Lease

• 1. In a lease agreement there are ___ parties. 2. The user of the assets is known as_______3. In higher purchase transactions the buyer Pays the price in _______.

• 4. In higher purchase , the ownership of goods passes to the buyer on payment of _______ instalment.

• 5.The ownership of goods passes to the buyer immediately in ________system. • 6. Under Hire Purchase , buyer is called____ while

seller is called ______.

Answers

• 1.two 2. Lessee. 3. Installment 4. Last

• 5. instalment

• 5. Hire Purchaser & Hire Vendor

18.

• ACCOUNTS OF NON- TRADING ORGANISATION

18.

• Non- Trading Organisations are also required to maintain the following books of accounts like Cash Book, General Ledger, Journal , Membership Register, Donations Register, Property Register & Others depending on the type for eg. Students Register in case School. Final Accounts consist of 1.Receipts & Payment A/c2. Income & Expenditure A/c.

• 3. Balance sheet.

18

• Receipts & Payment A/c. : This shows actual amounts (Cash & cheques) received and paid for the whole year.

• Income & Expenditure A/c ; It is similar to P&L A/c. that Businessman prepares.

• Balance Sheet : It is same as B/S in Business. Capital here referred to as Capital Fund or General Fund.

Diff. Rec. & Payments & I & E A/c.

• Receipts & Payments Income & Exp. 1. Classification : Real A/c. 1. Nominal A/c.

2. Contents:Summary of actual receipts & Payments 2.It contains I & E of a period

3. Items included: Capital & Revenue 3. Only Revenue

4. Op. & Cl. Bal.: Cash & Bank 4. No op. or Cl. Bal but In R & P. Ends with deficit & Surplus.

Choose the Correct Answer

(a)The I & E account is prepared on the basis of :• (i) Mercantile system of Accounting• (ii) Cash System of Accounting

(iii) Hybrid System of Accounting (b) Amount received towards endowment fund is:

• (i) Revenue Receipt(ii) Capital Receipt (iii) Deferred Revenue Receipt.

Non Trading Accounts

• ( C ) The debit balance in the Income & Expenditure Account indicates : (i) the excess of income over expenditure (ii) the excess of expenditure over income (iii) the excess of Cash receipts over Cash Payments

• (d) Which of the following items should not be entered in the receipts & payments accounts of a Club : (i) Subscriptions received (ii) Sale of Machinery ( iii) Loss on sale of Furniture.

Answers

• a(i) Mercantile system of Accounting

• b(ii) Capital Receipt

• c(ii) the excess of expenditure over income

• d( iii) Loss on sale of Furniture.

Non- Trading Accounts

(e) Subscriptions receivable at the beginning & at the end of the year are Rs.2000 & Rs.3000 respectively. Income & Expenditure shows subscriptions at Rs.20000. The amount shown as subscriptions in Receipts & Payments (a) 19000 (b)23000 & (c ) Rs.22000.

Ans: Subscriptions Received During the year (? say X )Less : Subscriptions received for Previous year 2000 Less : Sub. Received in advance nil

Add: Outstanding subscription for Current year 3000 Subscriptions taken to I & E A/c. 20000 Therefore X = Rs.20000+ Rs.2000- Rs.3000 =Rs.19000 Ans.

Match the following

• A B1.Receipts & Payment A/c. (a) No intention of earning it Profit 2. I & E A/c. (b) Excess of expenditure over Income 3. Deficit (C) In & Exp. For the year 4. Non- Trading Organization (d) Actual Receipts & Payments in Cash

• 1 (d ) 2 ( C) 3 (b) 4 (a)

19.

• Depreciation Accounting

Depreciation

• (i) is a part Operating Cost (ii) It is reduction in the value of assets (iii) The decrease in the value of its assets is due to its use caused by wear & tear or obsolescence (iv) decrease in the value of assets in gradual & Continuous.

• Dep. Helps us to arrive at correct profit.

Accounting Entries

• Depreciation A/c Dr. To Asset A/c. Cr.

• ALTERNATIVELY

• Depreciation A/c Dr

• To Prov. For dep. A/c. Cr.

Methods of Depreciation

• Straight Line : Cost Price – Scrap Value Est. Life of assets (no. of yrs)

• W. D.V: Here Depreciation provided on the book value which appears after writing down depreciation periodically.

• Here the Value of asset would never become Zero whil in case of Straightline the value of asset become zero.

WDV Dep. Method:

Machinery Account 1/4/05To Bank 100000 31/3/06 By Dep 10000

.______ 31/3/06 By Bal C/d 90000 100000 100000

1/4/06 To Bal B/d 90000 31/3/07 By Depreciation 9000 ______. 31/3/07 By Bal C/d 81000 90000 90000 1/4/07 To Bal /d 81000 31/3/08 By Depreciation 8100 _______ 31/3/08 By Bal C/d 72900 81000 810001/4/08 To Bal B/d 72900 31/3/09 By Dep. 7290 .______ 31/3/09 By Bal C/d 65610 72900 72900

1/4/09 To Bal B/d 65610

Sinking Fund

• Sinking Fund Method (For Providing Dep.)

Dep. A/c Dr. To Sinking Fund A/c Cr ( For Making Investment )

• Sinking Fund Investment A/c. To Bank A/c. Cr.

SF method

• Next year Bank A/c. Dr.

To Int. on Sink. Fund Invest. A/c.Cr. Dep. A/c. To Sinking Fund A/c.

Int. on Sink. Fund Invest. A/c. Dr. To Sinking Fund A/c. Sinking Fund A/c. Dr.

To Bank A/c.

In the year of Replacement

(Sale of Investments)

i) Bank A/c. Dr.

To sinking Fund investment A/c.

(Profit on sale of Investments)

ii)Sinking Fund Inv. A/c. Dr. To Sinking Fund A/c)iii)Sinking Fund A/c. Dr. To Sinking Fund Inv. A/c.(Loss) iv)Dep. A/c. Dr. To Sinking Fund A/c (Dep. For the year )

SF Method

(Sale of old asset)

V. Sinking Fund A/c. Dr.

To Asset A/c vi) Sinking Fund A/c. To Asset A/c. (Tr. Of sinking fund to Asset)

(Pur. Of new asset) vii) New Asset A/c. To Bank A/c.

Example

Rs.35000 is spent by way of overhauling on a 2nd hand Motor car Purchased at Rs.80000 on 1/4/06. The car on which straight line method depreciation is provided is sold for Rs.65000 on 39/6/2009. Pl. show the entries & Motor Car showing profit or loss on sale of car.

Car

1/4/2003: By Car A/c. Dr. Rs.80000 To Bank A/c. 80000(being the purchase cost of 2nd hand car) By Car A/c Dr. 35000 To Bank A/c 35000(Being the overhauling cost capitalised ). 31/3/04 By Dep. A/c Dr. 11500 To Motor Car 11500 By P & L A/c. Dr. 11500 To Dep. 11500

Car

31-3-05 By Dep. 11500 To Motor Car A/c. 11500

• By P & L A/c. Dr. 11500 To Dep. 11500

31-3-06 By Dep. 11500 To Motor Car A/c. 11500

• By P & L A/c. Dr. 11500 To Dep. 11500

30/06/2009 By Cash A/c Dr. 65000 By Dep. A/c 2875 By Loss on Sale Car 12625

To Motor Car 80500

Motor Car A/c 1/4/03 To Bank 80000 31/3/04 By Dep 11500 1/4/03 To Bank 35000 31/3/04 By Bal C/d 103500

115000 115000

1/4/04 To Op. Bal 103500 31/3/05 By Dep 11500 31/3/05 By Bal C/d. 92000 103500 103500

1/4/05 To Op. Bal 92000 31/3/06 By Dep 11500 31/3/06 By bal c/d 80500

92000

1/4/06 To Op. Bal 80500 30/6/06 By Dep. 2875 30/6/06 By Bank 65000

30/6/06 By Loss on sale of car 12625

80500 80500

20. Accounting from incomplete records

• Single Entry System

20. Accounting from incomplete Records (Single Entry System)

• Single entry system arises out of incomplete information & the Accountant has to construct Accounts based on the drawing figures from available information.

• Computation of PROFITS : (i) Net Worth Method : This involves adjustment for drawings & adjustment for capital Introduced.

• Sales & Purchase Policy

Eg. Sales proportions/ Cash/ Credit sales Credit Policy: Closing debtors represent 2 months Credit Sales

and Creditors represent 2 months Purchases. Price Policy: Selling Price at a certain % of Sales.

Single Entry System

• Conversion Method : This method requires more details like collections from debtors, Payment to creditors etc. to give a true picture.

• For e.g. For a Firm the Debtors at the beginning of the year are Rs.1lakh. Closing debtors are 20% more. Payment made to creditors during year Rs.70000. Here we are required to find out the credit purchase made during the year. We can the figure y constructing Creditors Account as under :

Creditors Account

• Dr. Cr. 1-April By Op. Bal 1,00,000 31/12 To Bank 70000 31/12 By Purchases 9000031/03 To Cl. Bal 120000 (Balancing figure) ---------- -------------

• 1900000 190000In single entry problems sales/debtors may be given by ratio or /% or the number of times or in a algebra type where we have to find out value of X.

RATIO ANALYSIS

• Ch. 21.

21. RATIO ANALYSIS

• Accounting ratios are relationship expressed in mathematical terms between accounting figures which for meaningful purpose.

• Classification: P & L Ratios

• Balance Sheet Ratios

• Composite or Inter-Statement Ratios.

Functional Classification

• Profitability

• Turnover/Activity Ratios Financial/Solvency Ratios

• Financial Ratios may be further classified as Short Term Ratios/Liquidity Ratios

or Long Term/ Solvency Ratios

PROFITABILITY RATIOS Return on Capital Employed

• EBIT * 100 Capital Employed Earnings before Interest & Tax

• Op. Profit means profit from the Operations of the Company plus Int(Long term) & Tax

• Capital Employed = Share Capital+ Reserves & Surplus+ Long Term loans –( Non- business assets + Fictitious assets)

• Proper calculation gives us Return on Capital Employed

Earnings Per Share (EPS)

• EPS = Net Profit after tax & Pref. Dividend

No. of Equity Shares

This shows whether equity Capital of Co. is properly used or not

Company’s capacity to pay Dividend.

EPS helps us at estimating Market Price of the Company

Price Earning (P/E Ratio)

• Market Price of per Equity Share

EPS

Helps to decide whether to buy Share of a Company.

Gross Profit Ratio

• Gross Profit* 100Net Sales

• It helps in Price decision & Profit from Op. before Charging all other expenses.

Net Profit Ratio

• Net Operating Profit * 100

Net sales

Solvency Ratios

Long Term Solvency Ratios • Fixed Assets Ratios : Fixed Assets

Long Term Funds • The ratio should not be more than one. • If it is less than one then it indicates part of the Working

Capital Financed through Long term Funds i.e. we may call Core Working Capital

Debt- Equity Ratio :

• i) DE Ratio : Total Long Term Debt Total Long Term Funds

• Ii) DE Ratio : Total Long Term Debt Shareholders Funds Debt Service Coverage Ratio= Cash Profit available for debt service

• Interest+ Instalment

Short Term Solvency Ratio

• i) Current Ratio = Current Assets Current Liabilities ideal ratio: 2.Acceptable to Bank 1.33

• ii) Liquidity Ratio/Acid Test or Quick Ratio: Liquid Assets Current Liability

Turnover Ratios

• Stock Turnover Ratio = Cost of goods Sold during the year

Average Inventory Debtors Turn over Ratios (Debtors Velocity) = Credit Sales Average Accounts Receivable

Debtors Collection Period = Months or days in a year Debtors turnover or Accounts receivable Average Monthly or daily Credit sales

• Fixed Assets Turnover Ratio =

• Cost of Goods Sold Net Fixed Assets

Calculate the following ratios for YE March2000 & 2001

a) Return on Capital Employed (b) Current Ratio © Debt Equity Ratio (d) Fixed Assets Turnover Ratio

(e) Inventory Turnover Ratio (f) Earning Per Share Balance Sheets as at 31st March Rs. Lakhs Liabilities 1999 2000 2001 Sh. Capital:Shares of Rs.10 each 800 1000 1000 Reserves & surplus 700 800 1000 Secured Term Loans 800 2000 2400 Cash Credits from bank 800 1000 1500 Sundry Creditors 1200 900 1100

4300 5700 7000

Balance Sheets as at 31st March Rs. Lakhs Assets 1999 2000 2001

Fixed Assets: Gross Block 2800 3000 4000 Less : Dep 920 1400 2000 Net Block 1880 1600 2000

Current Assets: Stock 1520 2400 2800 Debtors 480 500 900 Other Current Assets 420 1200 1300

2420 4100 5000

Total Assets 4300 5700 7000

EBIT * 100 Capital Employed

EBIT=Earnings before Interest & Tax

RoC For March,2000

Ret. On Cap. Emp= Total Cap. Employed for March,1999 isRs. 2300+Rs. 3800 for Mar,2000.So Av. Cap. Employed is Rs.6100 /2=

3050 lakhs. EBIT is Rs.1020. So RoC 1020*100= 33.34%

3050 RoC for March,2001 Total Cap. Employed for March,2000 is Rs. 3800+Rs. 4400 for Mar,2001.So Av. Cap. Employed is Rs.8200 /2= 4100 lakhs. EBIT is Rs.1800. So So 1800*100= 43.90% 4100

• Current Ratio = Current Assets Current Liabilities

2000 2001

• 4100 =2.16 5000 =1.92

1900 2600

Debt Equity Ratio = Total Long Term Debt

Total Long Term Funds

2000 2400 1800 200

Fixed Assets Turnover Ratio = Cost of goods Sold during the year

Average Net Fixed Assets • We may take sales when Cost of goods figures are not available

• 4800 =2.76 7200 =4 1740 1800

• Average Fixed Assets for March,2000 = 1880+1600=3480/2=1740 • Average Fixed Assets for March,2001 = 1600+2000=3600/2=1800

Stock Turnover Ratio = Cost of goods Sold during the year

Average Inventory• We may take sales when Cost of goods figures are not available

• Sales 4800 =9.8 7200 = 10.29 Av Inv. 490 700

• EPS = Net Profit after tax & Pref. Dividend

No. of Equity Shares Net Profit after Tax for 2000 = Rs.300 Lakhs = Rs.3 =EPS

While no. of Eq. shares are 100 Lakhs Net Profit after Tax for 2001 = Rs.600 Lakhs = Rs. 6 =EPS

While no. of Eq. shares are 100 Lakhs

Thank You

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