BBA110 CU - Sem 2 -Bcom-BBA- Advance Accounting-converted

To Consignee xxxx xxxx (Being payment to consignee) 11. Entry for Goods sent consignment Dr. xxxx Balance in a/c Goods sent a/c To Trading a/c (Being balance transferred to trading account) 12.Entry for Consignment stock a/c Dr. xxxx the closing stock To Consignment a/c (Being closing stock transferred) Q. Ram sent on 1st April 2016 to Sham goods costing Rs. 100000 and spent Rs. 2000 on packing etc. On 3rd April 2016 Sham received the goods and sent his acceptance to Ram and given Rs.60000 as advance. Sham spent Rs.2000 on freight and cartage, Rs.1000 on godown rent and 600 on insurance. On 201 CU IDOL SELF LEARNING MATERIAL (SLM)

31st Dec 2016, he sends his account sales (along with the amount due to Sham) showing that the sale is of 4/5 of the goods for Rs.110000. The terms of the consignment entitle Sham to a commission of 10 %. One of the customers turned insolvent and could not pay Rs.1200 due to him. Show the necessary general entries in the books of the consignor. Also, prepare ledger accounts. Ans. Journal entries in the books of consignor Date Particulars Amount (Dr.) Amount (Cr.) 2016 April 1 Consignment to Sham a/c Dr. 100000 To Goods send on consignment 100000 a/c (Being goods sent on the consignment basis) April 1 Consignment to Sham a/c Dr. 2000 202 CU IDOL SELF LEARNING MATERIAL (SLM)

To Cash/Bank a/c 2000 (Being expenses on consignment) April 3 Bank a/c Dr. 60000 To Sham 60000 (Being receipt of advance) Dec 31 Sham a/c Dr. 110000 To Consignment a/c 110000 (Being sale of goods) Dec 31 Dr. 6800 Consignment to Sham a/c 203 CU IDOL SELF LEARNING MATERIAL (SLM)

(4000+1000+600+1200) To Sham a/c 6800 11000 (Being expenses incurred by 32200 Sham ) Dec 31 Consignment to Sham (10%on Dr. 11000 110000) Sham a/c (Being commission recorded) Dec 31 Bank a/c Dr. 32200 To Sham (Being receipt of amount) 204 CU IDOL SELF LEARNING MATERIAL (SLM)

Dec 31 Consignment Stock a/c Dr. 21200 (working note 1) To Consignment to Sham a/c 21200 (Being unsold stock recorded) Dec 31 Consignment to Sham a/c Dr. 11400 To Profit and loss a/c 11400 (Being profit) Dec 31 Goods sent on consignment a/c Dr. 100000 To Trading a/c 100000 (Being balance transferred 205 CU IDOL SELF LEARNING MATERIAL (SLM)

to trading account) Ledgers Accounts Consignment to Sham A/c Date Particulars Amount Date Particulars Amount April To goods sent on 100000 By 110000 1 consignment a/c Dec Sham(sale 31 proceeds) April To Bank(expenses) 2000 By stock on 1 Dec consignment 21200 31 a/c Dec To Sham(expenses 6800 31 &bad debts) Dec To 11000 31 Sham(commission) To P&L 11400 Dec 206 CU IDOL SELF LEARNING MATERIAL (SLM)

31 131200 131200 Amount Goods sent on consignment A/c Date Particulars Amount Date Particulars Dec To Trading 100000 Dec By consignment to 10000 31 a/c 31 Sham a/c 100000 100000 Stock on consignment A/c Date Particulars Amoun Date Particulars Amount t Dec To consignment 21200 Dec By Balance 31 to Sham a/c 21200 31 c/d Sham A/c 207 CU IDOL SELF LEARNING MATERIAL (SLM)

Date Particulars Amount Date Particulars Amount To 110000 May 60000 Dec By Bank consignment 3 31 to Sham a/c Dec By consignment to 6800 31 sham a/c Dec By consignment to 11000 31 sham a/c Dec By Bank (Bal. 32200 31 Received) 110000 110000 SUMMARY Consignment account is prepared to ascertain the profit earned or loss incurred by the consignor on a specific consignment. This account can be viewed as a combined trading and profit and loss account prepared specifically for consignment business. 208 CU IDOL SELF LEARNING MATERIAL (SLM)

The nature of the consignment account is nominal which means it is drawn up to show the results of the consignment business for a specific period. Consignment accounting is a term used to refer to an arrangement whereby goods are sent by their owner (consignor) to an agent (consignee) who holds and sells the goods on behalf of the owner for a commission. It is important to understand that the agent never owns the goods. Both the owner and the agent maintain their own records, and the consignment accounting will be different for each party. The main points relating to consignment accounting and goods on consignment are best seen by way of an example. Suppose a consignor (owner) agrees to consign goods to a consignee (agent) to sell by consignment. The consignor will purchase the goods and pay for them to the transported to the consignee. The consignee in return for a commission of 10%, will arrange for the goods to be distributed and sold KEY WORDS • Commission:The term commission as used in connection with consignment denotes the remuneration of the consignee for selling the goods of the consignor. This commission is generally calculated at a rate percentage on the gross proceeds of the sales • Del Credere Commission:The del credere commission is an extra commission allowed to the consignee on his guaranteeing the realization of the debts in full, in connection with the credit sale of goods on consignment. Goods may be sold by the consignee either for cash or on credit. When they are sold on credit, the consignee may guarantee that they will be duly paid for and that he will be liable to indemnify the consignor for all bad debts. In such cases; the consignor pays the consignee an extra commission for this guarantee. The extra commission is called del credere commission. • Advance against Consignment:Usually the consignee is asked to accept a bill of exchange to cover part of the value of goods. This is a guarantee by the consignee that when sales are affected, he will make the necessary payment. Of course, instead of a bill of exchange, the agent may remit a sum of money to the principle as an advance. This advance or the amount of the bill of exchange will be adjusted when the goods are sold. • Pro forma Invoice:When the consignor sends the goods to the consignee, he forwards a statement showing the particulars such as quantity, quality, price of goods etc. This statement is called the Pro forma invoice. But in case of regular sale, an invoice is prepared and sent along with the goods. It implies that a sale has taken place. 209 CU IDOL SELF LEARNING MATERIAL (SLM)

• Account Sale:An account sale is a statement prepared and sent by the consignee to the consignor at periodical intervals, dealing there in the goods sold, price realized, expenses incurred, commission payable to and the net amount due from the consignee. LEARNING ACTIVITY 1. Williams of Madras consigned 300 chests of tea at Rs 2,000 per chest to Johnson of New Delhi paying freight Rs 4,000 and other expenses Rs 2,000. Johnson sold 250 chests at Rs 2.500 per chest and 25 chest at Rs 2 200 per chest for cash. Johnson spent for freight and octroi Rs 3,000 and other expenses Rs 1,000. He remitted the amount due to Williams after deducting his commission at 5% (normal), 2 ½ % (Overriding) and + 1/2% (del credere commission to be given on total sales). Johnson found that one customer to whom credit was allowed paid only Rs 4,800 against Rs 5,000 in full settlement. Other customers paid the amount due. Pass journal entries in the books of both parties and prepare ledger accounts. 2. Explain the difference between a consignment and a sale. UNIT END QUESTIONS A. Descriptive Type Questions Short Questions 1. Outline accounting procedure of consignor. 2. List the Journal entries in the books of consignee. Long Questions 1. On 1st July, 2006 Radio House of Delhi consigned 200 Radios to Banerjee Bros. of the Calcutta. The cost of each radio was Rs. 400. Radio House paid Rs. 5,000 for freight and insurance. On 7 July, 2006 Banerjee Bros. accepted a 3 months bill drawn upon them by Radio House for Rs. 50,000, Banerjee Bros. paid Rs. 2,200 as rent and Rs. 1,300 for advertisement and up to 31st December, 2006 (on which date Radio House close their books) they sold 180 radios at Rs. 500 210 CU IDOL SELF LEARNING MATERIAL (SLM)

each. Banerjee Bros. were entitled to a commission of 5% on sales. Give Journal entries and prepare necessary accounts to record the above transactions in the books of the parties. 2. Arun sends goods on consignment to Seema. The terms are that Seema will receive 10% commission on the price (which is cost plus 25%) and 20% of any price realised above the invoice price. Seema will meet his expenses himself, goods to be sent freight paid. Arun sent goods whose cost was Rs. 16,000 and spent Rs. 1,500 on freight, forwarding, etc. Seema accepted a bill for Rs. 16,000 immediately on receiving the consignment. His expenses were Rs. 200 as rent and Rs. 100 as insurance. Seema sold ¾ of the goods for Rs. 19,500. Part of the sales were on credit and one customer failed to pay Rs. 400. Give Consignment Account and Seema’s Account in the books of Arun and Arun's Account in the books of Seema. 3. Chetana sent 10 Refrigerators costing Rs. 10,000 each to Meena for consignment sale. Packaging expenses incurred Rs. 1,000. Chetana sent railway receipt, starting Rs. 1000 to be paid by Meena. One Refrigerator became useless of fire in transit. Insurance company sanctioned claim of Rs. 9600 for this. Meena has to pay Rs. 1000 for freight. Meena sold remaining Refrigerators @ Rs. 12,000 each. Consignment Commission is to be paid @ 5% of sales. Prepare Consignment Account and Consignee’s Account. 4. On May 1, 2020, Mr. John of Alberta sends 5,000 boxes of coffee to James of Ontario on consignment basis. Each coffee box costs $100. John pays truck freight $500 and insurance $250. After dispatching the goods to James, John immediately draws a bill of exchange for $200,000 on James who duly accepts the same and returns to John. On November 30, 2020, James forwards an account sales to John which reveals the following information: • Sale of 3,000 boxes @ $120 per box • Sale of 2,000 boxes @ $125 per box • Carriage $300 • warehouse rent $375 • 10% commission on gross sales proceeds $61,000 James encloses with the account sales a check for the balance due. Assume that the bill of exchange drawn by John is duly met by James. Also assume that the John closes his books on December 31 each year. Required: Prepare journal entries in the books of Mr. John (the consignor) and also draw necessary ledger accounts. 211 CU IDOL SELF LEARNING MATERIAL (SLM)

5. M/s Chand & Company of Calcutta consign goods costing Rs 25,000 to their agent Ramlal, on which they pay freight, insurance and other charges of Rs 1,500 drawing on him at 90 days Bill for Rs 20,000. They discount the Bill with a bank at a discount of Rs 150. After 3 months they receive from their agent an Account Sales informing that the entire consignment had been sold for Rs 35,000 that expenses amounting to Rs 700 have been incurred and showing as a deduction they agreed commission of 2% on the amount realized. A draft on the Bank was enclosed for the balance due. Show the journal entries and important ledger accounts in the books of both the parties. B. Multiple Choice Questions 1. In the books of consignor the balance of the consignment stock account would be shown: a) As an asset in the balance sheet. b) As liability in the balance sheet. c) On the credit side of trading account. d) On the debit side of consignment account. 2. In the books of consignee the sale of goods is credited to: a) consignor’s account b) sales account c) consignee’s account d) None of these 3. In the books of consignee the expenses incurred by him on consignment are debited to: a) consignor’s account b) cash account c) consignment account d) None of these 4. In the books of consignee, on despatch of goods by the consignor the entrywould be: a) No entry b) Consignment account [Dr.]--------------To goods sent on consignment account [Cr.] c) consignment account [Dr.]----------To consignor account [Cr.] d) None of these 212 CU IDOL SELF LEARNING MATERIAL (SLM)

5. In the books of consignor the balance of the consignment stock would be shown: a) as an asset in the balance sheet. b) as liability in the balance sheet. c) On the credit side of the trading account. d) None of these 6. Consignee A/c is the nature of: a) Personal A/c b) Nominal A/c c) Real A/c d) None of these 7. Normal losses are due to: a) Unavoidable b) Avoidable factor c) Contingent d) None of these 8. In consignee book, the acceptance of bill of exchange by consignee will be debited to: a) Consignor A/c b) Trading A/c c) Balance payable A/c d) Consignee A/c 9. In the books of consignor, the balance in the goods sent on consignment account is shown in ----- a) On the credit side of trading A/c. b) On the credit side of consignment A/c c) On the liability side of balance sheet. d) On the asset side to balance sheet. 10. The consignor is: a) Principal b) Agent c) Debtor d) None of these 213 CU IDOL SELF LEARNING MATERIAL (SLM)

Answer 8. a 9.a 10.a 1.a 2. a 3. a 4. a 5. a 6. a 7.a REFERENCES • Anthony, R.N. and Reece, J.S. (1988). Accounting Principle. New York: Richard Irwin Inc. • Gupta RK. and Radha swamy, M. (2004). Financial Accounting. New Delhi: Sultan Chand and Sons • Anthony, R.N. and Reece, J.S. (1988). Accounting Principle. New York: Richard Irwin Inc. • Gupta RK. and Radha swamy, M. (2004). Financial Accounting. New Delhi: Sultan Chand and Sons • Monga J. R, Ahuja Girish, and Sehgal Ashok. (2014). Financial Accounting. Noida: Mayur Paper Back. • Accounting Game: Basic Accounting Fresh from the Lemonade Stand- (Sourcebooks, 1 November 1998) • Double entry book keeping and adjustments: by Toye Adelaja 214 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT-9 CONSIGNMENT ACCOUNT III Structure Learning Objective Introduction Treatment of Abnormal and Normal Loss. Normal and Abnormal Loss Journal Entries Summary Key words Learning Activity Unit -End Questions References LEARNING OBJECTIVES After studying this unit, you will be able to: • State treatment of abnormal loss • Describe Normal loss INTRODUCTION Consignment is a specialised kind of transaction between consignor and consignee, whereby consignor sends goods to consignee to be sold by the latter on behalf of the former for a mutually agreed commission. The goods consigned to the agent cannot be treated as sales at the time of the consignment; they are treated as sales only when those are sold by the consignee. In a consignment transaction, the consignor sends goods to the consignee and makes a bill called Proforma Invoice. TREATMENT OF ABNORMAL AND NORMAL LOSS In accounting, Consignment can be defined as the act of sending the goods by the manufacturers or producers to their agents for the purpose of sale. The person who sends the goods is Consignor (the manufacturer or producer) and the agent who receives the goods is Consignee. During the consignment, normal and abnormal loss may occur. We will discuss it here. Normal and Abnormal Loss Goods sent on consignment does not become the property of consignee as he has not bought them. The ownership of goods remains with the consignor until they are sold, so the goods appear as inventory in the books of the consignor, not theconsignee. 215 CU IDOL SELF LEARNING MATERIAL (SLM)

The consignee tries to sell the goods according to the instructions of the consignor. When the goods are sold he will deduct his expenses, commission,etc., from the sale proceeds and remits the balance to the consignor. If the goods are destroyed, consignee will not be responsible. Its burden will fall on the consignor. There are two types of losses that can occur in consignment: 1] Normal Loss The normal loss means a loss which is inherited and cannot be avoided. It should also be considered while valuing the closing stock. To ascertain the cost per unit after the normal loss, we use the following formula: For example: If a certain amount of oranges are consigned, some of them will be destroyed in loading and unloading whereas some of them will not be in a state to be sold. Suppose, 10,000 oranges were sent to the consignee at ₹30 per kg and freight of ₹60,000. It is known that there would be a normal loss of 10%. Cost per kg= 300000+60000 =₹40 9000 ������.������ 10000−10 If the unsold quantity is 500 its value will be (500X40 = 20000) Note: No entry is recorded for normal loss in the books. 2] Abnormal Loss Some losses are accidental or can be caused by carelessness. Example: by theft or loss by fire, flood, earthquake, war, accidents in transit, etc. Such losses are more or less abnormal. Suppose a part of goods is stolen, now this will reduce the value of stock and therefore profit on consignment. Now the best thing is to find out the cost of goods that are lost. After finding out the value, consignment a/c is credited and abnormal a/c is debited and then transferred to profit and loss a/c, so as to arrive at correct profit or loss of consignment. 216 CU IDOL SELF LEARNING MATERIAL (SLM)

Some businessmen also take an insurance policy in respect of goods sent or received. Such a policy is obtained only in respect of abnormal loss caused to goods. Journal Entries 1. When the loss is irrecoverable: Date Particulars Amount Amount (Dr) (Cr) 1. Abnormal loss a/c Dr. xxx To Consignment a/c xxx (Being value of abnormal loss) 2 Profit and Loss A/c Dr xxx To Abnormal loss xxx (Being loss transferred) 217 2. When the loss is insured and is recoverable: (a) When full amount is recoverable CU IDOL SELF LEARNING MATERIAL (SLM)

Date Particulars Amount (Dr) Amount (Cr) 1. Abnormal loss a/c Dr. xxx To Consignment a/c xxx (Being abnormal loss valued) 2. Insurance company a/c Dr. xxx To Abnormal loss a/c xxx (Being abnormal loss transferred to insurance co.) (b) When the loss is partly recoverable Date Particulars Amount (Dr) Amount 218 CU IDOL SELF LEARNING MATERIAL (SLM)

(Cr) 1. Abnormal loss a/c Dr. xxx To Consignment a/c xxx (Being abnormal loss valued) 2. Insurance company a/c Dr. xxx Profit & loss a/c xxx To Abnormal loss a/c xxx (Being loss partly recoverable by insurance co. and the balance transferred to profit and loss a/c) Q. On 1st June 2018, Mr. A sent a consignment of 5,000kg of sugar, costing Rs 50 per kg to an agent Mr. B on a commission of 5% on gross sales. Expenses incurred by Mr. A are freight and insurance of Rs 219 CU IDOL SELF LEARNING MATERIAL (SLM)

1,000 and Dock charges and sundry expenses of Rs 400. Expenses incurred by Mr. B, are godown rent and insurance of Rs 400 and miscellaneous expenses of Rs 700. Some packages containing 1000kg of sugar were damaged in transit and the contents had to be destroyed on landing as having become unfit for sale. 3,500kg of sugar was sold at Rs 60 per kg and on 30th June 2018, the date of closing accounts, the balance of the consignment remained unsold in the stock. You are required to make consignment account and Mr. B’s account in the books of Mr. A, showing the amount due from Mr. B on 30th June 2018. Ans. In the books of Mr. A Consignment A/C Date Particulars Amount Date Particulars Amoun t 1.06.18 To Goods 2,50,000 30.06.1 By Mr.B a/c- 2,10,00 sent on 8 sale 0 consignment (Rs 3,500 x Rs 60) To Bank a/c 1400 By profit and 50,280 loss a/c (Loss in 220 CU IDOL SELF LEARNING MATERIAL (SLM)

transit) 30.06.1 To Mr.B a/c 11,600 By 25,140 8 consignment stock a/c To profit 22,420 and loss a/c 2,85,420 2,85,42 Mr. B’s A/c 0 Date Particulars Amount Date Particulars Amoun t 30.06.18 To 2,10,000 30.06. By 11,600 consignment 18 consignment a/c a/c 2,10,000 2,10,00 221 CU IDOL SELF LEARNING MATERIAL (SLM)

0 Working note: Rs. Calculation of unsold stock and lost in transit: 2,50,000 Cost of 5,000 kg @ Rs 50 Add: non-recurring expenses: 14,00 Cost for 5,000 kg 2,51,400 SUMMARY The esteem recorded within the proforma receipt may be the real fetched to the consignor or genuine fetched to the consignor additionally mark-up. The objective of consignor in making accounts relating to dispatch are to find out the results of dispatch and to form last settlement with the proctor. To realize this, he plans dispatch account and proctor account. The proctor makes accounts relating to dispatch relating to dispatch to impact the settlement with the consignor and to perceive his commission privilege as proctor. The consignor (he is the owner/ principal) sends goods to consignee (he is the agent situated at some other place) for sale. Consignee sales the goods for and on behalf of 222 CU IDOL SELF LEARNING MATERIAL (SLM)

the consignor. Profit or loss belongs to consignor. Consignee gets his expenses reimbursed from consignor & also some commission for this service. For the consignor, purpose of this accounting is to separately ascertain profit/loss of consignment business. This will help him to take appropriate decisions with regard to this business. Consignee does the business for and on behalf of consignor and on the terms and conditions as instructed (directed) by the consignor. Consignment becomes handy when a person wants to expand his business at other locations as well but where neither direct sale is possible nor he wants to open a branch. KEY WORDS • Ownership: Ownership of goods need to be transferred from seller to buyer in case of sale, but ownership of goods remains with the consignor, till the goods are sold by the consignee. • Risk: In case of a consignment, normally, risk remains with the consignor in the event of goods being lost or destroyed. • Relationship: The relation between a seller and a buyer will be of debtor and creditor in case where goods are sold on credit basis. On the other hand, the relationship between a consignor and a consignee is that of principal and agent. • Goods Return: Usually, the sold goods cannot be returned back; however, if there is any manufacturing defect or any other technical fault, seller is obliged to take them back. On the other hand, consignee may return the unsold stock of goods to consignor anytime. LEARNING ACTIVITY 1. On 1st January 2010, Z & Co. of New York consigned 100 cases of dry milk to T & Co. of Chicago. The goods were charged at a Performa invoice value of $10,000 including a profit of 25% on cost. On the same date the consignor paid $600 for freight and insurance. On 1st July, the consignee paid clearing charges $1,000, carriage $200. On 1st August consignee sold 80 cases for $10,500 and sent a remittance for the balance due to the consignor after deducting commission at the rate of 5% on gross sale proceeds. Required: prepare consignment account and T & Co. account in the books of Z & Co. 2. X of Calcutta sent on 15th January, 2006, a consignment of 500 toys bicycles costing Rs. 100 each. Expenses of Rs. 700 met by the consignor. Y of Bombay spent Rs. 1,500 for clearance and the selling expenses were Rs. 10 per bicycle. Y sold, on 4th April 2006, 300 pieces @ Rs. 160 per piece and again on 20th June 1999, 150 pieces @ Rs. 172. Y was entitled to a 223 CU IDOL SELF LEARNING MATERIAL (SLM)

commission of Rs. 25 per piece sold plus one fourth of the amount by which the gross proceeds less total commission thereon exceeded a sum calculated at the rate of Rs. 125 per piece sold. Y sent the amount due to X on 30th June 2006. You are required to show the Consignment Account and Y’s Account in the books of X. UNIT END QUESTIONS A. Descriptive Type Questions Short Questions 1. What is abnormal loss? 2. Explain normal loss Long Questions 1. On 1st June 2018, Mr. A sent a consignment of 5,000kg of sugar, costing Rs 50 per kg to an agent Mr. B on a commission of 5% on gross sales. Expenses incurred by Mr. A are freight andinsurance of Rs 1,000 and Dock charges and sundry expenses of Rs 400. Expenses incurred by Mr. B, are godown rent and insurance of Rs 400 and miscellaneous expenses of Rs 700. Some packages containing 1000kg of sugar were damaged in transit and the contents had to be destroyed on landing as having become unfit for sale. 3,500kg of sugar was sold at Rs 60 per kg and on 30th June 2018, the date of closing accounts, the balance of the consignment remained unsold in the stock. You are required to make consignment account and Mr. B’s account in the books of Mr. A, showing the amount due from Mr. B on 30th June 2018. 2. On 1st Jan 2018, Alok sent a consignment of 6,000 kg of rice, costing ₹ 50 per kg to an agent Balaon commission at 5% on gross sales. Alok incurs freight and insurance of ₹1500 regarding the goods. He also incurs Dock charges and sundry expenses of ₹500. Bala incurs expenses of godown rent and insurance of ₹500 and miscellaneous expenses of ₹800. Some packages containing 800 kg of rice got damaged in transit and became unfit for sale. 4000 kg of rice was sold at ₹70 per kg. 224 CU IDOL SELF LEARNING MATERIAL (SLM)

Prepare consignment account and Bala’s account in the books of Alok showing the amount due from Bala on 31st Jan 2018. 3. Goods consigned 500 kg @ Rs 20 per kg. Freight and Carriage paid by the consignor Rs 4,000. Consignee sold 300 kg @ Rs 35 per kg and incurred Rs 1,000 as unloading expenses, Rs 2,000 as godown rent and Rs 1,000 as selling expenses. Normal loss due to leakage is 50 kg. Show how the loss and unsold stock will be treated in the books of the consignor: B. Multiple Choice Questions 1. The abnormal loss is debited to following accounts;- a) General Profit and Loss A/c b) Consignment c) Consignee d) Insurance company 2. The abnormal loss of Rs 80,000 occurred in consignment business, the insurance company accepted 60% claim. The abnormal loss is – a) Rs 32,000 b) Rs 40,000 c) Rs 80,000 d) None of these 3. On the dispatch of goods, the entry in the books of consignee would be: a) No entry b) Consignment A/c debit and consignee A/c credit c) Consignment A/c will be debited and goods sent on consignment A/c will be credited. d) None of these 4. In the books of consignor the abnormal loss should be credited to: - 225 a) Consignment A/c b) Profit & loss A/c c) Trading A/c d) Consignees A/c CU IDOL SELF LEARNING MATERIAL (SLM)

5. In accounting consignment means. a) Goods sent by its owner to his agent for the purpose by sale b) Goods sent by its owner to his agent. c) Goods forwarded by a person to another. d) Goods forwarded from one place to another. 6. Goods sent on consignment should be debited by consignor to: a) Consignment A/c b) Goods sent on consignment A/c c) Consignees A/c d) Consignors A/c 7. In the books of consignor the balance of the consignment stock account would be shown: a) As an asset in the balance sheet. b) As liability in the balance sheet. c) On the credit side of trading account. d) On the debit side of consignment account. 8. In the books of consignee the sale of goods is credited to: a) consignor’s account b) Sales account c) Consignee’s account d) None of these 9. In the books of consignee the expenses incurred by him on consignment are debited to: a) consignor’s account b) cash account c) consignment account d) None of these 10. Normal losses are due to: a) Unavoidable b) Avoidable factor c) Contingent d) None of these Answer 226 CU IDOL SELF LEARNING MATERIAL (SLM)

1.a 2. a 3. a 4. a 5. a 6. a 7.a 8. a 9.a 10.a REFERENCES • Gupta RK. and Radha swamy, M. (2004). Financial Accounting. New Delhi: Sultan Chand and Sons • Monga J. R, Ahuja Girish, and Sehgal Ashok. (2014). Financial Accounting. Noida: Mayur Paper Back. • Anthony, R.N. and Reece, J.S. (1988). Accounting Principle. New York: Richard Irwin Inc. • Gupta RK. and Radhaswamy, M. (2004). Financial Accounting. New Delhi: Sultan Chand and Sons • Monga J. R, Ahuja Girish, and Sehgal Ashok. (2014). Financial Accounting. Noida: Mayur Paper Back. • Accounting in a nutshell: accounting for non-specialist: by Janet Walker • Accounting all-in-one for dummies UNIT-10 CONSIGNMENT ACCOUNT IV Structure Learning Objective Introduction Calculation of Commission i.e. Del Credre and Valuation of Unsold Goods. Entries related to credit sales Example – consignment accounting with and without del credere commission Valuation of Unsold goods Summary Key words Learning Activity Unit -End Questions References LEARNING OBJECTIVES After studying this unit, you will be able to: • State meaning Del- Credre Commission • Illustrate calculation of Del Credre Commission 227 CU IDOL SELF LEARNING MATERIAL (SLM)

• Describe Valuation of Unsold Goods INTRODUCTION Consignment occurs when goods are sent by their owner (the consignor) to an agent (the consignee), who undertakes to sell the goods. The consignor continues to own the goods until they are sold, so the goods appear as inventory in the accounting records of the consignor, not the consignee. CALCULATION OF COMMISSION I.E. DEL CREDRE AND VALUATION OF UNSOLD GOODS. Calculation of Commission i.e. Del Credre Del credere commission is related to credit sales. It is a type of commission which a consignor offers to the consignee who guarantees the collection of payment from credit customers. It is different from the consignee’s ordinary commission and works like a credit insurance to consignor in the event a customer becomes insolvent or fails to make payment due to some other reason. In consignment account, del credere commission appears on the debit side along with the ordinary commission allowed to the consignee. Calculation of del credere commission Del credere commission is paid to the consignee in addition to his ordinary commission. It is usually computed at a certain pre-agreed percentage of total gross sale proceeds. For example, the cash sales are $5,000 and credit sales are $2,500. If an ordinary commission of 10% and a del credere commission of 5% are allowed to consignee, the two types of commission would be computed separately as follows: Ordinary commission = ($5,000 + $2,500) × 0.1 = $750 Del credere commission = ($5,000 + $2,500) × 0.05 = $375 The computation of del credere commission is similar to the computation of ordinary commission. However, the consignor and consignee may sign a separate agreement regarding the calculation and payment of del credere commission. 228 CU IDOL SELF LEARNING MATERIAL (SLM)

Entries related to credit sales 229 (1). When a del credere commission is not given to consignee Entries in the books of consignor: (1). At the time of credit sales: Consignment debtor’s A/C [Dr] Consignment A/C [Cr] (2). At the time of collection of debtors: Cash/Bank A/C [Dr]….Collection by consignor Consignee A/C [Dr]…..Collection by consignee Consignment debtors A/C [Cr] (3). Entry for bad debts/discount allowed: Bad debts/Discount allowed A/C [Dr] Consignment debtors A/C [Cr] (4). At the time of closing bad debts/discount allowed account: Consignment A/C [Dr] Bad debts/Discount allowed A/C [Dr] Entries in the books of consignee (1). At the time of credit sales: No entry (2). At the time of collection of debtors: Cash/Bank A/C [Dr] Consignor A/C [Cr] (3) Entry for bad debts: No entry (2). When a del credere commission is given to consignee CU IDOL SELF LEARNING MATERIAL (SLM)

Entries in the books of consignor (1). When credit sales are made Consignee A/C [Dr] Consignment A/C [Cr] (2). Entry for bad debts: No entry – when del credere commission is allowed to the consignee, the consignor has nothing to do with bad debts. (3). For consignee’s ordinary and del credere commission: Consignment A/C [Dr] Consignee A/C [Cr] Entries in the books of consignee (1). When credit sales are made: Consignment debtors [Dr] Consignor A/C [Cr] (2). At the time of collection of debtors: Cash/Bank [Dr] Consignment debtors [Cr] (3). Entry for bad debts: Bad debts A/C [Dr] Consignment debtors A/C [Cr] (4). Entry for closing bad debts account Consignee adjusts the amount of bad debts against his commission from consignment. The bad debts are debited to the commission received account. At the end of the year, the net balance of commission received account is transferred to the profit and loss account. This is done by means of the following two journal entries: 230 CU IDOL SELF LEARNING MATERIAL (SLM)

i. The following entry closes the bad debts account to commission received account: Commission received A/C [Dr] Bad debts A/C [Cr] ii. The following entry closes the commission received account to profit and loss account: Profit and loss A/C [Dr] Commission received A/C [Cr] Example – consignment accounting with and without del credere commission On 1st October 2020, Kim of Manchester consigned goods costing $50,000 to Harry of Bristol. Kim paid $120 as railway freight and $150 as insurance. On 31 December 2020, an account sales was received from Harry showing that all the goods were sold for $75,000 – out of which, $20,000 were sold on credit. Harry paid $115 as carriage and $125 as storage expenses. A credit customer who purchased goods for $2,500 did not make payment and the debt proved bad. All other payments were successfully collected by Harry. The Harry was entitled to an ordinary commission of 10% on gross sale proceeds. A cross check was enclosed with the account sales for the balance amount. Required: 1. Draw up necessary ledger accounts in the books of Kim and Harry using above information. 2. Disregard the requirement 1 and refer to the original information. Draw up necessary ledger accounts in the books of Kim and Harry assuming the Harry is given a 5% del credere commission (in addition to his ordinary commission). Other things remaining the same. Solution 1. Where no del credere commission is given to Harry: In the books of Kim (the consignor) 231 CU IDOL SELF LEARNING MATERIAL (SLM)

In the books of Harry (the consignee) 232 CU IDOL SELF LEARNING MATERIAL (SLM)

2. Where a del credere commission is given to Harry In the books of Kim (the consignor) 233 CU IDOL SELF LEARNING MATERIAL (SLM)

In the books of Harry (the consignee) 234 CU IDOL SELF LEARNING MATERIAL (SLM)

Valuation of Unsold goods If all the goods are not sold by the Consignee within the accounting period, then the unsold stock is brought into account by the Consignor. As usual, the unsold stock in the hands of the consignee should be valued on cost price or market price whichever is less. Here the cost means the cost at the moment when the goods reached the Consignee’s godown. The cost includes by adding proportionate non-recurring expenses incurred by the consignor as well as the consignee. Formula: Calculation of Value of Unsold Stock: 235 It is calculated as follows: CU IDOL SELF LEARNING MATERIAL (SLM)

(a) The proportionate Cost Price and (b) Proportionate direct expenses i.e. the expenses incurred by the Consignor and Consignee till the goods reached the godown of the Consignee. Expenses incurred by the Consignee after the goods have been brought to the shop/godown are not considered. Correct profit or loss can be ascertained by the proper valuation of unsold stock which is credited to Consignment Account. Value of unsold stock = Cost Price of Closing Stock + Proportionate non-Recurring Expenses Three Accounts Maintained by Consignor: The Consignor usually maintains three accounts: 1. Consignment Account: It is a nominal account. It is in fact a Special Trading and Profit and Loss Account. The balance, in this Account, represents either profit or loss on consignment which is finally transferred to General Profit and Loss Account. 2. Consignee’s Personal Account: It is a personal account. It is mainly prepared to ascertain the amount due from the Consignee. 3. Goods Sent on Consignment Account: It is a real account. It is closed by transferring its balance to Purchase Account or sometimes credit side of Trading Account. Illustration: Mr. Ram Manohar of Bombay sent 100 bicycles, which cost Rs 900 each, to Gopal of Madras on consignment basis. Ram Manohar paid freight of Rs 1,200, Cartage Rs 300 and Insurance Rs 400. In Madras, Gopal has spent Rs 100 as cartage, loading and unloading Rs 50. The bicycles have been kept in a godown at a rent of Rs 100 p.m. At the end of accounting period, 20 bicycles remained unsold. The selling price of the bicycle is Rs 1,000 at Madras. What should be the value of stock unsold? 236 CU IDOL SELF LEARNING MATERIAL (SLM)

SUMMARY Now-a-days it is quite common that manufacturers or wholesale dealers despatch goods to their agents at home and abroad to increase their sales. The knowledge of the agent of the local conditions where he resides proves useful in increasing the sales. Moreover it is very expensive for the manufactures to sell the goods directly either in home market or in foreign market. Therefore, different agents are appointed for different places. KEY WORDS • Proforma Invoice: When the consignor sends the goods to the consignee, he forwards a statement showing the particulars of goods such as quality, quantity, price, markings, packing etc. and this statement is called the Proforma Invoice. But in case of regular sale, an invoice is prepared and sent along with the goods. It implies that a sale has taken place. • Recurring and Non-recurring Expenses:Consignor and consignee have to incur some expenses for dispatching and selling the goods. These expenses of consignment are of two types: Non-Recurring Expenses and Recurring Expenses. • Non-recurring Expenses: Non-recurring expenses are incurred for bringing the goods from the place of the consignor to the place of the consignee. Hence, all the expenses incurred till the goods reach the godown of the consignee are non-recurring expenses. These expenses are incurred only once on a particular consignment. It will increase the value of goods. These expenses are paid by the consignor or by the consignee on behalf of the consignor. 237 CU IDOL SELF LEARNING MATERIAL (SLM)

The abovementioned expenses do not occur again like the recurring expenses. These expenses are met on the whole consignment. These expenses are added to the cost of the consignment so as to arrive at the cost price of goods at the point of sale. Again these are taken into consideration when the value of closing stock and abnormal losses are calculated. • Recurring Expenses: These expenses are incurred after the goods have been received at consignee’s godown. These expenses are incurred quite often and of recurring in nature. These expenses occur regularly at fixed intervals. Generally these expenses are incurred after the goods have reached the place of business by consignee. They are met by the consignor or consignee. These expenses do not increase the value of goods. • Advance: Sometimes, consignor may ask the consignee to pay an advance for the part of the value of goods consigned. Consignee may send the advance in the form of a draft or cheque. If the consignee is not in a position to advance money, a Bill may be drawn on consignee. Consignor discounts the Bill and gets the money.The amount of discount on the Bill may be debited to Consignment Account or debited to Discount Account. Advance given by the consignee will be deducted from the sale proceeds. • Account Sales: Periodically or when the goods consigned are sold by the consignee, the consignee will send to the consignor a statement, which is called Account Sales, showing the amount received by way of sale of goods, expenses incurred, commission charged, advance payment and balance due to the consignor and the stock still in hand.From the Account Sales, the consignor closes his entries in the books regarding the consignment for that year. He can ascertain the profit or loss resulting from the transactions. 238 CU IDOL SELF LEARNING MATERIAL (SLM)

• Commission: Consignor pays commission to Consignee for selling his goods. Commission is generally calculated at fixed percentage of total sales as per terms laid down by the Consignor. These commissions may be simple, or ordinary, special or overriding and Del credere. Ordinary commission is calculated as per terms laid down by the consignor.Generally it is calculated on the basis of total sales. Special commission is paid to give further incentive for increasing the sales. Overriding commission is paid to consignee when he overrides the specified amount of sales. The commission is also calculated on total sales. • Del Credere:The consignee is not expected to sell the goods on credit. However, the consignee has the right to sell the goods on credit, if consignor permits him to do so. Again if consignee makes credit sales and if there incurs any loss by way of bad debts then such loss should be borne by the consignor.To avoid such a loss, extra commission is given to the consignee, who is responsible for any bad debts. This extra commission is called Del Credere commission. It is given for taking risk in credit sales.In such cases, consignor receives the gross sale proceeds, whether recovered or not. This is generally calculated on total sales. Sometimes, del credere commission is restricted to credit sales only. In that case it is calculated only on credit sales. LEARNING ACTIVITY 1. Chetana sent 10 Refrigerators costing Rs. 10,000 each to Meena for consignment sale. Packaging expenses incurred Rs. 1,000. Chetana sent railway receipt, starting Rs. 1000 to be paid by Meena. One Refrigerator became useless of fire in transit. Insurance company sanctioned claim of Rs. 9600 for this. Meena has to pay Rs. 1000 for freight. Meena sold remaining Refrigerators @ Rs. 12,000 each. Consignment Commission is to be paid @ 5% of sales. Prepare Consignment Account and Consignee’s Account 2. H. Ltd. forwarded on 1st December, 2011, 50 pressure cookers to Kale of Mumbai to be sold on behalf of H. Ltd. The cost of one pressure cooker was Rs 1,200 but the invoice price was Rs 1,600. H. Ltd. incurred Rs 2,000 on freight and insurance. Kale received the consignment on 14th December, 2011 and accepted a 3 months’ draft drawn upon him by H. Ltd. for Rs 40,000. Kale paid Rs 1,050 as rent and Rs 250 as insurance and by 31st March had disposed of 40 pressure cookers at Rs 1,640 each. Kale is entitled to a commission of 5 per cent on sales including a del credere commission of 1%. Kale sold 10 pressure cookers son credit and was not able to recover sale proceeds of one pressure cooker because of insolvency of the debtor. You are required to: 239 CU IDOL SELF LEARNING MATERIAL (SLM)

(i) Prepare all the ledger accounts in the books of H Ltd; and (ii) Pass journal entries for all the transactions relating of consignment. UNIT END QUESTIONS A. Descriptive Type Questions 1. What is loading? 2. What is loading? How do you compute it? Give examples 3. The Kochi Consignment Account in the books of Remi of Kottayam showed a debit balance of Rs 1,500 representing the cost of 10 pieces of fancy goods on 1st April, 2011. The invoice value of each piece was Rs 175. On 1st May, 2011 Ranaji sent a further consignment to Cochin of 40 pieces, costing Rs 160 each, invoiced proforma at Rs 180 each. The freight and other charges amounted to Rs 210. On 21st March, 2012, the Kochi Agent sent an Account Sales showing that 8 pieces from the old stock realised Rs 140 each and 25 pieces from the second consignment realised Rs 200 each and 15 pieces remained in stock unsold. Two pieces from the old stock, being unsaleable at Kochi, were returned to Mumbai, for which the Kochi Agent sent a separate debit note for Rs 30, being expenses incurred by him as packing and freight. The Kochi Agent is entitled to a selling commission of 10 per cent which covers all our-of-pocket expenses in respect of the consignment Show the necessary account in the books of the consignor, supposing that he closes his accounts on 31st March. 4. Why goods are sent to consignee at invoice price? What adjustment entries are recorded in the books of the consignor to find profit on consignment when goods are invoiced at proforma prices? 5. The Swastik Oil Mills, Mumbai consigned 5,000 kg of castor oil to Dass of Kolkata on 1st January, 2012. The cost of the oil was Rs 460 per kg. The Swastik Oil Mills paid Rs 2, 00,000 for packing, freight and insurance. During transit 125 kg were accidentally destroyed for which the insurers paid, directly to the consignors, Rs 45,000 in full settlement of the claim. Dass took delivery of the consignment on the 10th January. On 31st March, 2012 Dass reported that 3,750 kg were sold at Rs 600, the expenses being on godown rent Rs 30,000, on advertisement Rs 40,000 and on salesmen’s salaries Rs 64,000. Dass is entitled to a commission of 3 per cent plus 114 per cent delcredere. A party which had bought 500 kg was able to pay only 80% of the amount due from it. Dass reported a loss of 50 kg, due to leakage. Assuming that Dass paid the amount due by bank draft, show the accounts in the books of both the parties. Books of accounts are closed by the parties on 31st March. 240 CU IDOL SELF LEARNING MATERIAL (SLM)

B. Multiple Choice Questions 1. Del – creder commission is calculated on: a) Credit sales & Cash sales b) Cash sales c) Total sale d) None of these 2. If market price of closing stock is also known while preparing Consignment account – a) Closing stock is to be valued at cost or market price, whichever is lower b) Closing stock is to be valued at cost or market price, whichever is higher c) Closing stock will be valued at market price d) Closing stock will be valued at cost 3. When Consignment account is prepared at Invoice price, the profit element included in the closing stock valued at invoice price shall be a) Debited to ‘Consignment Stock Reserve account’ b) Credited to ‘Consignment Stock Reserve account’ c) Debited to ‘Consignee account’ d) Debited to ‘Goods sent on consignment account’ 4. In case of ‘del-credere’ commission being allowed to consignee, any bad-debt in consignment business, following entry will be passed; a) Commission account shall be debited b) Consignor’s account shall be credited c) Debtor’s account shall be debited d) Consignor’s account shall be debited 5. Which of the following items is not included in the ‘Account Sale?’ 241 a) Claim paid by insurance company b) Advance against consignment paid to consignee c) Expenses of consignment incurred by consignee d) Goods sold by consignee Answer CU IDOL SELF LEARNING MATERIAL (SLM)

1.a 2. a 3. a 4. a 5. a REFERENCES • Monga J. R, Ahuja Girish, and Sehgal Ashok. (2014). Financial Accounting. Noida: Mayur Paper Back. • Shukla, M.C. Grewal T.S. and Gupta, S.C. (2016). Advanced Accounts. New Delhi: S. Chand & Co. • R.K. Mittal, M.R. Bansal. (2018). Advanced Financial Accounting.NewDelhi: VK Publications. • Anthony, R.N. and Reece, J.S. (1988). Accounting Principle. New York: Richard Irwin Inc. • Gupta RK. and Radha swamy, M. (2004). Financial Accounting. New Delhi: Sultan Chand and Sons 242 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT-11 DEPARTMENTAL ACCOUNTING Structure Learning Objective Introduction Meaning Significance Easy to comparing the performance of each departments Easy to evaluate departmental growth 11.3.4 Decision making Methods Separate Set of Books for each Department Accounting in Columnar Books Form Allocation of Department Expenses Summary Key words Learning Activity Unit -End Questions References LEARNING ACTIVITY After studying this unit, you will be able to: • State methods of departmental accounting • Describe Departmental Accounting INTRODUCTION Departmental Accounting refers to maintaining accounts for one or more branches or departments of the company. Revenues and expenses of the department are recorded and reported separately. The departmental accounts are then consolidated into accounts of the head office to prepare financial statements of the company. MEANING Where a big business with diverse trading activities is conducted under the same roof the same is usually divided into several departments and each department deals with a particular kind of goods or 243 CU IDOL SELF LEARNING MATERIAL (SLM)

service. For example, a textile merchant may trade in cotton, woollen and jute fabrics. The overall performance for this type of business depends, however, on departmental efficiency. As a result, it is desirable to maintain accounts in such a manner that the result of each individual department can be known—together with the result as a whole. The system of accounting which is followed for this; purpose is known as Departmental Accounting. This system of accounting actually helps the proprietors to: (i) Compare the results among the different departments together with the previous results thereof, (ii) Formulate policy in order to extend or to develop the enterprise in the proper line; and (iii) Reward the departmental managers on the basis of departmental results. SIGNIFICANCE Preparation of Departmental accounts is helpful to the business in the following respects: Easy to comparing the performance of each departments Departmental accounts enable the businesses to compare the performance of one department with another department. It also helps an organisation to rank departments using their earning values. The overall profit on sales, namely RM 490,000 on a turnover of RM 2,730,000 is probably quite satisfactory; yet in the absence of departmental accounting the loss incurred by Department C and D would not be revealed. Easy to evaluate departmental growth Departmental accounting helps an organisation to evaluate each departmental growth separately on the basis of trading results over period of time. An endeavour may be made to push up the sales of the department which is earning maximum profit. 11.3.4 Decision making Departmental accounting makes it simpler for management to make conclusions if they are having more than one product, they can actually forecast the future performance of a product. Most of the time decision includes some questions such as whether a product is profitable or not, if the product is not profitable whether they should continue to produce that product or just eliminate it, what would be consequences of eliminating a product. Here is a further interpretation using illustration 2. 244 CU IDOL SELF LEARNING MATERIAL (SLM)

Management can actually decide whether they should continue to produce these five products based on their growth over a period of time. Let say product D as this product is continuously making loss since 2009, it became easier for management to decide whether they should produce product D or they should eliminate this product. Furthermore they can rank the product based on their profits. For example Product B is the most profitable product. METHODS OF DEPARTMENTAL ACCOUNTING. There are two methods of keeping Departmental Accounts − • Separate Set of Books for each department • Accounting in Columnar Books form Separate Set of Books for each Department Under this method of accounting, each department is treated as a separate unit and separate set of books are maintained for each unit. Financial results of each unit are combined at the end of accounting year to know the overall result of the store. Due to high cost, this method of accounting is followed only by very big business houses or where to do so is compulsory as per the law. Insurance business is one of the best examples, where to follow this system is compulsory. Accounting in Columnar Books Form Small trading unit generally uses this system of accounting, where accounts of all departments are maintained together by central accounts department in the columnar books form. Under this method, sale, purchase, stock, expenses, etc. are maintained in a columnar form. It is necessary that to prepare a departmental Trading and Profit and Loss Account, preparation of subsidiary books of accounts having different columns for the different department is required. Purchase Book, Purchase Return Book, Sale Book, Sales return books etc. are the examples of the subsidiary books. Specimen of a Sale Book is given below − Sales Book Date Particulars L.F. Department A Department B Department C Department D 245 CU IDOL SELF LEARNING MATERIAL (SLM)

A Trading account in columnar form is prepared to know the department wise gross profit of the concern. Function wise classification may also be done in a business unit like Production department, Finance department, Purchase department, Sale department, etc. Allocation of Department Expenses • Some expenses, which are specially incurred for a particular department may be charged directly to the respective department. For example, hiring charges of the transport for delivery of goods to customer may be charged to the selling and distribution department. • Some of the expenses may be allocated according to their uses. For example, electricity expenses may be divided according to the sub meter of each department. Following are the examples of some expenses, which are not directly related to any particular department may be divide as − • Cartage Freight Inward Account − Above expenses may be divided according to purchase of each department. • Depreciation − Depreciation may be divided according to the value of assets employed in each department. • Repairs and Renewal Charges − Repair and renewal of the assets may be divided according to the value of the assets used by each department. • Managerial Salary − Managerial salary should be divided according to the time spent by the manager in each department. • Building Repair, Rents & Taxes, Building Insurance, etc. − All the expenses related to the building should be divided according to the floor space occupied by each department. • Selling and Distribution Expenses − All the expenses relating to selling and distribution expenses should be divided according to the sales of each department, such as freight outward, travelling expenses of sales personals, salary and commission paid to salesmen, after sales services expenses, discount and bad debts, etc. • Insurance of Plant & Machinery − The value of such Plant & Machinery in each department is the basis of the insurance. • Employee/worker Insurance − Charges of a group insurance should be divided according to the direct wage expenses of each department. • Power & Fuel − Power & fuel will be allocated according to the working hours and power of the machine (i.e. Hours worked x Horse power). 246 CU IDOL SELF LEARNING MATERIAL (SLM)

SUMMARY A departmental accounting system is an accounting information system that records the activities and financial information about the department. Managers can use the financial information from the departmental accounting system to tell how profitable and efficient each department is. Departmental Accounting refers to maintaining accounts for one or more branches or departments of the company. Revenues and expenses of the department are recorded and reported separately. The departmental accounts are then consolidated into accounts of the head office to prepare financial statements of the company.Larger corporations can’t be properly accounted for with one single, centralized accounting system. That is why the corporation is divided into many different departments like the shipping and receiving department, sales department, and manufacturing department. Many companies also departmentalize based on products. KEY WORDS • Credit note: A document sent to a customer of a business cancelling the customer's debt to the business, usually because the customer has returned defective goods or has received inadequate service. • customers: collection period Average number of days credit taken by customers. • Gross: Before making deductions. • inventory Stocks :inventory Stocks of goods held for manufacture or for resale • profit: Calculated as revenue minus expenses LEARNING ACTIVITY 1. When goods are transferred from one department to another department at market price, unrealised profit in the unsold goods must be transferred to stock reserve account. 2. When one department transfer goods to another department, the journal entry to be passed: receiving department account debited and supplying department credited. 247 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT END QUESTIONS A. Descriptive Type Questions Short Questions 1. What are the objectives of departmental accounting? 2. State advantages of Departmental Accounting 3. Outline the significance of Departmental accounting Long Questions 1. Explain the methods of departmental accounts 2. List down departmental accounting methods 3. Describe Departmental Accounting 4. What is unrealised profit? Show how it is worked out and accounted for. B. Multiple Choice Questions 1. In departmental accounts expenses like director fees, interest is transferred to -----------. a) General P & L account b) trading account c) balance sheet d) P & L Appropriation account. 2. The departmental accounting enables a business firm to maximize ------------ a) profit b) losses c) cash d) assets. 3. The departmental accounts expenses like director fees, interest is transferred to a) General P&L account b) Trading Account c) Balance sheet d) P&L appropriation account 248 CU IDOL SELF LEARNING MATERIAL (SLM)

4. The cost, which consist of inter-departmental cost allocations plus cost ofsupport department areclassified as a) Complete reciprocal costs b) artificial costs c) operating cost d) flexible operating cost 5. The method, which allocates cost of support department for operating departments byrecognizing all the mutual services provided is classified as a) Reciprocal method b) step down method c) direct method d) indirect method 4. Expenses which cannot be apportioned to department must be shown in the a) P & L account. b) trading account c) balance sheet d) P & L Appropriation account 5. When goods are transferred from one department to other department, they are called a) inter-departmental transfers. b) outer-departmental transfers. c) not a transfer. d) regular transfer 6. In departmental accounts expenses like director fees, interest is transferred to -------- --. a) general P & L account b) trading account. c) balance sheet d) P & L Appropriation account 7. The departmental accounting enables a business firm to maximize ----------- 249 a) profit. b) Losses CU IDOL SELF LEARNING MATERIAL (SLM)

c) Cash d) Assets 8. The departmental accounts expenses like director fees, interest is transferred to a) General p&L account b) Trading Account c) Balance sheet d) P&L appropriation account Answer 1.a, 2. a, 3. a, 4. a, 5. a 6. a 7. a 8. a 9. a 10.a REFERENCES • Shukla, M.C. Grewal T.S. and Gupta, S.C. (2016). Advanced Accounts. New Delhi: S. Chand & Co. • R.K. Mittal, M.R. Bansal. (2018). Advanced Financial Accounting. New Delhi: VK Publications. • Hanif, M. &Mukherjee, A. (2015). Corporate Accounting. South West: Thomson. • Tulsian, P.C. (2014). Corporate Accounting. New Delhi: Tata McGraw-Hill Education. • Batra G.C., Modern trends in Accounting Research –New Horizons in Auditing and Contemporary Accounting, Deep and Deep Publication, New Delhi, 2007 Edition. 250 CU IDOL SELF LEARNING MATERIAL (SLM)