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

UNIT-12 DEPARTMENTAL ACCOUNTING Structure Learning Objective Introduction Basis of Allocation for Common Expenditure among different departments Inter-department transfers Summary Key words Learning Activity Unit -End Questions References LEARNING OBJECTIVES After studying this unit, you will be able to: • State basis of allocation for common expenditure among different departments • Describe Inter- department transfer INTRODUCTION Departmental Accounting is basically keeping the separate book of accounts of the individual department.If a business consists of several independent activities or divided into several departments for carrying out its functions, its management is usually interested in finding out the working results of each department to ascertain their relative efficiencies. This can be made possible only if departmental accounts are prepared.Departmental accounts are of great help and assistance to the management as the information for controlling the business more intelligently and effectively. BASIS OF ALLOCATION FOR COMMON EXPENDITURE AMONG DIFFERENT DEPARTMENTS Normally, all direct expenses are charged to the respective departments, in case of indirect or general expenses, proper allocation among the departments must be made in order to ascertain the profit and loss made by each department. Each department is charged with proper business expenses. If the basis for such allocation is not specially mentioned, then the following procedure may be followed. 251 CU IDOL SELF LEARNING MATERIAL (SLM)

Some expenses cannot be apportioned and no basis of apportionment is practicable. For instance, interest on Loan, Income Tax, Salary to General Manager, Share Transfer expenses, Bank charges, Audit fees etc. Here these expenses can safely be transferred to General Profit and Loss Account. Similarly, income of general nature such as Interest on Calls-in-arrears, Interest on Investment, fees on share transfer etc. credited to General Profit and Loss Account. The Departmental Trading Account shows the Gross Profit or Loss and Departmental Profit and Loss Account shows the Net Profit or Loss earned or suffered by each department. Illustration 1: The proprietor of a large retail store wished to ascertain approximately the net profit of the X, Y and Z departments separately for the three months ended 31st March 2006. It is found impracticable actually to take stock on that date, but an adequate system of departmental accounting is in use, and the normal rates of gross profit for the three departments concerned are respectively 40%, 30% and 20% on turnover before charging the direct expenses. The indirect expenses are charged in proportion to departmental turnover. The following are the figures for the departments: 252 CU IDOL SELF LEARNING MATERIAL (SLM)

The total indirect expenses for the period (including those relating to other departments) were Rs. 5,400 on the total turnover of Rs. 1, 08,000. Prepare a statement showing the approximate net profit, making a stock reserve of 10% for each department on the estimated value on 31-3-2006 Illustration 2: From the following particulars you are required to prepare Trading and Profit and Loss Accounts for the year ended 31st December 2005, showing the gross and net profits of each department. Apportion the general expenses of the business on the basis of turnover. Also prepare the Balance Sheet. 253 CU IDOL SELF LEARNING MATERIAL (SLM)

Stock in hand Dec. 31, 2005 Dept. A Rs 30.000 and B Rs 20,500. Total sales are Rs 1.20.000 i.e., Dept. A Rs 80.000 and B Rs 40.000. Proportion of general or indirect expenses chargeable to A 2/3 and B 1/3. (B.Com. Madurai. MS. Bharathiar) Solution: 254 CU IDOL SELF LEARNING MATERIAL (SLM)

Illustration 3: Department C – 2,496 units @ Rs 25 each 255 The rate of Gross Profit is the same in each case. Prepare Departmental Trading Account. Solution: CU IDOL SELF LEARNING MATERIAL (SLM)

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INTER-DEPARTMENT TRANSFERS Goods are often supplied from one Department to another – Inter-Departmental transfer. Such transfer must be credited to Supplying Department and debited to Receiving Department. If the trans- fers are made at cost price, then it can be treated as mere transfer. No further adjustment is needed. However, if the transfers of goods are made at selling price, then a profit is earned by the supplying department of the same organisation. When the goods, transferred from one department to another, still remain unsold with the transferee department, at the end of the accounting period, there arises a necessity to eliminate the unrealised profit on such stock on hand. This is because, so much of issuing department’s profit (notional) remain unrealised from the viewpoint of the firm as a whole. The reserve will be equal to the profit included in respect of unsold goods at the end of closing. The entry is: General Profit and Loss Account Dr. To Stock Reserve In certain cases, the transferee department may have some stock in the beginning of the accounting period, against which stock reserve was already created in the previous year, will also be transferred to General Profit and Loss Account by means of Journal entry: Stock Reserve Account Dr. To General Profit and Loss Account Alternatively, a single journal entry can be passed for the unrealised profit on the basis of the difference between unrealised profit included in opening and closing stock. Illustration 1: A firm has two departments — Piece goods and readymade dresses. All goods purchased by the readymade department from Piece goods department are charged at the usual selling price. From the following particulars prepare departmental trading and profit and loss accounts for the year ended Dec. 31, 2005: 257 CU IDOL SELF LEARNING MATERIAL (SLM)

The stocks in the readymade department are considered as consisting of 75% cloth supplied from Piece goods dept. and 25% expenses and cloths from outside. The Piece goods department earned gross profit in 2004 at the same rate as in 2005. General expenses of the business as a whole in 2005 amounted to Rs 45,000. Solution: Illustration 2: 258 CU IDOL SELF LEARNING MATERIAL (SLM)

From the following balances extracted from the books of a firm, prepare Departmental Trading and General Profit and Loss Account for the year ended 31st December 2005 and a Balance Sheet as on that date after adjusting the unrealised departmental profits, if any. Additional information: 1. Closing stock of Dept. A – Rs 13,000 including goods from Dept. B Rs 4,000 at cost to Dept. A. 2. Closing stock of Dept. B – Rs 26,000-including goods from Dept. ARs 9,000 at cost to Dept. B. 3. Sales Dept. A includes transfer of goods to Dept. B of the value of Rs 20,000 and sales of Dept. B includes transfer of goods to Dept. A of the value of Rs 30,000 both at market price to transferor departments. 4. Opening stock of Dept. A and Dept. B includes goods to the value of Rs 1,000 and Rs 1,500 taken from Dept. B and Dept. A respectively at cost price to transferor departments. 5. Depreciate land and buildings by 5% and furniture by 10% p.a. Solution: 259 CU IDOL SELF LEARNING MATERIAL (SLM)

N.B. There is no need for any adjustment for opening stock which includes inter-departmental transfers. This is because goods have been valued at cost to the transferor department and not to transferee departments. 260 CU IDOL SELF LEARNING MATERIAL (SLM)

Illustration 3: A company has two departments viz. Piece goods and Tailoring. All goods purchased by the Tailoring Department from Piece goods Department are sold at normal market prices, same as prices charged to outside customers. From the following particulars prepare Departmental Trading and Profit and Loss Account and a Balance Sheet as on 31st March 2005. Depreciate Machinery by 10%. The general unallocated expenses are to be apportioned in the ratio of Piece goods -3 and Tailoring -2. 261 CU IDOL SELF LEARNING MATERIAL (SLM)

Solution: Calculation of Provision for Unrealised Profit: The composition of the Closing Stock of Tailoring Department is not given The Tailoring Department possesses stock of Rs 14,000. There is no doubt that the stock consists of goods from Piece goods and Outside It can be assumed that the stock consist of both types of goods i.e. from Piece goods and Outside in the ratio of their purchases. Therefore, the value of goods of Piece goods Department included in the closing stock of Tailoring Department can be calculated as under: 262 CU IDOL SELF LEARNING MATERIAL (SLM)

Illustration 4: 263 CU IDOL SELF LEARNING MATERIAL (SLM)

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Note: All expenses are divided in Sales Ratio, as per instruction given. 265 Sales Ratio = A – Rs. 50.000, B – Rs. 30,000 C – Rs. 20,000 or 5: 3: 2 CU IDOL SELF LEARNING MATERIAL (SLM)

Illustration 5: From the under-mentioned information and instructions, prepare Departmental Trading and Profit and Loss Account in columnar form of the three Departments of the Outfitters Ltd. Goods were transferred as follows (all at cost): Tailoring to Ladies wear Rs 389 and Outfitting Rs 6.679; Ladies wear to Tailoring Rs 5,315; Outfitting to Tailoring Rs 4,271 and to Ladies Wear Rs 5,801. Apportion equally: Stationery Rs 921; Postage Rs663; General charges Rs39.627. Insurance Rs 1,785 and Depreciation Rs 5.460. Allocate the following further expenditure as you think best and append notes stating the basis selected for each item. Establishment Rs 63,395; Bad Debts Rs 19,823; Advertising Rs 7,293 and Income Tax Rs 11,028. Rent and taxes Rs 45,437 is to be split up in proportion to space occupied i.e. Tailoring 4; Ladies Wear 2; Outfitting 3 and others 2. Approximate apportionment is all that is necessary: charge any odd balance to Outfitting Department. 266 CU IDOL SELF LEARNING MATERIAL (SLM)

Sales Ratio: 4,00,173 : 1,50,826 : 3,50,972 or 400 : 150 : 350 : or 8 : 3 : 7 Rent and Taxes of other space divided equally. Income Tax has been divided on the ratio of profit before tax: that is Rs 44,776: 17.802: 1.13.874 or 45: 18: 11. 267 CU IDOL SELF LEARNING MATERIAL (SLM)

SUMMARY Departmental stores have many types of stores under a single roof, for example one departmental store may have a cosmetic store, shoe store, stationery store, readymade departmental store, grocery stores, medicines, and many more. It is essential to know the profit and loss account of each departmental store at the end of the accounting year. However, it can be done by maintaining the department wise Trading & Profit and Loss account. Departmental accounting is a system of accounting which maintains a separate book of account for every department or branch of a business enterprise. It is one where accounts are prepared and maintained for different departments of an organization on an individual basis for evaluating their results in a fair manner. These individual books of account are then consolidated together with accounts of head office for preparation of financial statements of business. Departmental accounting aims at recording all the expenses and revenues of each department in a separate book of accounts. It enables in measuring the profitability of every branch and detect if any department is underperforming than their capability. Such accounting information system is suitable for organization operating in diversified range of activities. Departmental accounting is an efficient tool for monitoring the expenses and performance of business where several products are produced by different branches under same roof. For example, a textile industry may be producing many fabrics such as woollen, cotton and jute. KEY WORDS • Purchase order: A form that a company's purchasing department sends to avendor describing the items ordered and the quantity, price, terms, and shipping date • Purchase requisition: A formal written request for a purchase that a company's credit office (requesting department) sends to the purchasing department. • Queue time: The time a product spends waiting to be worked on once it enters a new operation or department. • Decentralized organization: An organization that has several divisions or operating segments; operating control of each segment's activities is the responsibility ofthe segment's manager. • Expenditure: A payment or an obligation to make future payment for an asset or a service. 268 CU IDOL SELF LEARNING MATERIAL (SLM)

LEARNING ACTIVITY 1. What are the allocations of expenses in departmental accounting? 2. Journal entries in inter departmental transfer UNIT END QUESTIONS A. Descriptive Type Questions 1. Explain the basis of allocation of common expenses among various departments 2. How are inter- departmental transfer of goods treated in departmental accounts? 3. Why goods are marked on invoice price by the head office while sending goods to the branch? 4. Sunrise Ltd. has two departments X and Y. From the following particulars, prepare departmental trading accounts and general profit and loss account for the year ending 31st March. 2012: Purchased goods have been transferred mutually at their respective departmental purchase cost and finished goods at departmental market price and that 20% of the closing finished stock with each department represents finished goods received from the other department. 269 CU IDOL SELF LEARNING MATERIAL (SLM)

5. A firm has two departments, Timber and Furniture. Furniture was made by thefirms itself out of timber supplied by the Timber Department. The trading and Profit and Loss Accounts for the year 1992 is as follows: The Stocks in the Furniture Department may be considered as consisting of 75 percent of timber and 25 percent other expenses. Timber Department earned gross profit at the rate of 20 percent in 1991. General expenses of the business as a whole came to Rs. 1,00,000. B. Multiple Choice Questions 1. In departmental accounting, where separate books are kept for each Department, it is commonly referred to as- a) Independent accounting- b) columnar accounting- c) Consolidated accounting- d) single entry system 2. Departmental Accounting facilitates a) All of these b) comparison of trading results c) intelligent planning and control d) evaluating departmental performance 3. Such items of expenditure and income which cannot be reasonably allocated to anyparticular department are taken in a) General Profit and Loss Account- b) Debtors book c) Creditors book 270 CU IDOL SELF LEARNING MATERIAL (SLM)

d) Balance sheet 4. When the accounts of all departments are maintained together, in columnar form, it is known as --- --- a) Columnar form b) Single entry c) Independent form d) Unitary method 5. How many methods are there in recording departmental transactions? a) 2 b) 3 c) 1 d) 4 6. The cost, which consist of inter departmental cost allocations plus cost of support department are classified as a) Complete reciprocal costs b) artificial costs c) operating cost d) flexible operating cost 7. The method, which allocates cost of support department for operating departments by recognizing all the mutual services provided is classified as a) Reciprocal method b) step down method c) direct method d) indirect method 8. The method, which allocates cost of support department, to operating and support departments is known as a) Step Down method b) direct method c) indirect method 271 CU IDOL SELF LEARNING MATERIAL (SLM)

d) None of these 9. The method used to allocate costs of reciprocal support departments include a) All of these b) step down method c) Reciprocal method d) Indirect Method 10. The method which allocate the cost of support department to only operating department is called a) direct method b) step down method c) Reciprocal method d) Indirect Method Answer 9. a. 10.a 1.a 2. a 3. a 4. a 5. a 6. a. 7. a. 8.a REFERENCES • Anthony, R.N. and Reece, J.S. (1988). Accounting Principle. New York: Richard Irwin Inc. • R.K. Mittal, M.R. Bansal. (2018). Advanced Financial Accounting. New Delhi: VK Publications • 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. • Shukla, M.C. Grewal T.S. and Gupta, S.C. (2016). Advanced Accounts. New Delhi: S. Chand & Co. • James, C. (2014). Financial Management. New Delhi: Prentice-Hall. • Khan, M.Y. & Jain, P.K. (2012). Financial Management. New Delhi: Tata McGraw Hill. 272 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT-13 VOYAGE ACCOUNTING Structure Learning Objective Introduction Meaning Treatment of Special items in income and expenses used in Voyage. Summary Key words Learning Activity Unit -End Questions References LEARNING OBJECTIVES After studying this unit, you will be able to: • Describe voyage accounts • State treatment of special items in income and expenses used in Voyage INTRODUCTION Voyage Account is an account which is prepared by the shipping companies. This account is prepared to get a complete record of the profits earned and loss incurred on the particular voyage undertaken by the shipping company. It records both inward and outward journey. It is prepared separately for each voyage. MEANING The method of accounting followed by shipping companies is known as voyage accounting. Shipping companies prepare their accounts periodically and also prepare the results of each voyage separately. Shipping companies carry goods from one place to another. Some companies carry passengers also in addition to goods from one place to another place. In order to ascertain the result of operating a ship’s voyage, Voyage Account is prepared. The Voyage Account is a revenue account. It is important to note that there is no difference in the manner of preparing accounts period-wise and voyage-wise. All expenses connected with the voyage, such as port charges, wages and salaries of the crew, captain and other staff, transhipment, agency fees, provisions, loading and unloading charges, bunker and 273 CU IDOL SELF LEARNING MATERIAL (SLM)

harbour wages, freight and insurance, insurance of the ship on a time policy according to duration of voyage, depreciation arising as a result of the journey, address commission paid to brokers for freight for the ship, commission to captain on net profit etc. are debited to concerned Voyage Account. All incomes such as freight on cargo carried, passage money, primate etc. are credited. TREATMENT OF SPECIAL ITEMS IN INCOME AND EXPENSES USED IN VOYAGE. Income Following are the main sources of income of a Voyage − • Freight − Freight charges are the main income collected against the transportation of the goods. • Passage Money − Passage money is collected from the passengers, in case it is passengers’ vessel. • Primage − Primage is an additional freight in the form of surcharge on the freight. Expenses Following are the various ways of expenses of a vessel − • Brokerage & Commission − Brokerage and commission is calculated on the freight charges including primage and it is paid to the charters agent. Address commission is payable to the brokers on procurements of freight from the different parties. • Insurance − The insurance charges on proportionate basis might be debited from the voyage account. For example, if insurance is for one year and journey of voyage is for three month, insurance charges will be debited from the voyage account on 14th14th ratio. • Stores − Stores, which are purchased for voyage are debited from the voyage account on consumption basis i.e. opening stock + purchases – closing stock. • Depreciation − Depreciation on ship is charged from the voyage account in the proportion of the period of a journey. • Bunker Cost − Cost of water, coal, diesel, fuel, etc. used for the purpose of voyage is called bunker cost and may debited from the voyage account. • Port Charges − Port authorities charge fees for allowing ships to use port for the loading/unloading the cargo. This fee amount is debited from the voyage account. 274 CU IDOL SELF LEARNING MATERIAL (SLM)

• Stevedoring Charges − Loading and unloading of cargo called stevedoring charges and should be debited from the voyage account. Pro-forma In the books of M/s Titanic Shipping Company Voyage Account For the period ending 31-12-2014 Particulars Amount Particulars Amount To Coal By Freight Xx Opening Stockxx By Primage Xx Add: Purchasesxx xxxx Less: Closing Stockxx To Port Charges xx To Captain Expenses xx To Harbor Wages xx To Address Commission xx To Brokerage xx To Insurance Premium xx To Salary & Wages xx To Stores xx To Deprecation xx To Provision for Incomplete xx Voyage xx 275 CU IDOL SELF LEARNING MATERIAL (SLM)

To Net Profit xx (trf. To Profit & Loss A/c) XXXX Illustration 1: XXXX 276 CU IDOL SELF LEARNING MATERIAL (SLM)

S. S. Jaihind commenced a voyage on 1. 10. 2010 from Mumbai to London and back. The voyage was completed on 30. 11. 2010. It carried a consignment of Jute on its outward journey and of Plant on its return journey. The ship was insured and the annual premium was Rs. 15,000. Prepare a Voyage Account from the following particulars: Address commission 5% on outward and 4% on Inward freight Primage is 5% on freight. The manager is entitled to 5% commission on the profit earned after charging such commission. Stores and Coal on hand were valued at Rs. 2,000 on 30. 11. 2010. Illustration 2: 277 S. S. Himalaya set on voyage from Calcutta to Mumbai. CU IDOL SELF LEARNING MATERIAL (SLM)

On 31st December, on which date the accounts are to be closed, the return voyage had not been completed. The details for the entire voyage to Mumbai and back to Calcutta completed after 31st December were: Illustration 3: S S Jalaksha voyaged from Visakhapatnam for Calcutta of 1st February. 1998. On 31st March, 1998 when the accounts of the company are closed. S. S. Jalaksha was on her way back to Visakhapatnam from Calcutta on Voyage No. 707, having covered half of the return voyage. 278 CU IDOL SELF LEARNING MATERIAL (SLM)

The following details of expenses and incomes for the entire voyage to and from Calcutta are furnished: Primage is at 10% on freight charges. Address commission is at 5% on freight charges and primage. Only Rs 3 00,000 freight was available on return journey to Visakhapatnam. Three-fourths of the total voyage including return journey is complete on 31st 1998. Of the total expenses, expenses unconnected with freight shall be carried forward as “in process” for the balance of the journey. As freight is actually earned only on completion of a voyage, you have to carry forward the freight in respect of the return journey as well as all incidental incomes. Prepare voyage account for the period 1st February, 1998 to 31st March 1998. 279 CU IDOL SELF LEARNING MATERIAL (SLM)

Illustration 4: Great India Shipping Company Ltd- of Mumbai acquired a new ship M. V. Samudra at a cost of Ks. 37, 50,000. The ship was ready for service on 1st April 2012. An Insurance policy was taken out at 2 /o p.a. on the ship, freight was insured at Rs. 10,000 p.a. During 3 months ended 30th June 2012 the ship completed one round trip to Calcutta and was half through the second trip (single way) to Calcutta. The ship carried the following cargo: To Calcutta 9,000 tons @ Rs. 300 per ton (2 trips) From Calcutta 10,000 tons @ Rs. 270 per ton (2 trips) To Calcutta 12,000 tons @ Rs. 250 per ton (1 trip) 5% Commission Was Paid to agents in addition to 1% address commission. The expenses were as follows: 280 CU IDOL SELF LEARNING MATERIAL (SLM)

Illustration 5: S. S. Kanishka sailed from Calcutta port on 1. 2. 2010 and arrived at Chennai port on 31. 3. 2010 via Visakhapatnam port on Voyage No. 403. The following goods were loaded: 1,000 M. T. and 200 M. T. at Calcutta port for Chennai port and Visakhapatnam port, respectively. Another 500 M.T. were loaded at Visakhapatnam for Chennai. The freight charges were: 281 CU IDOL SELF LEARNING MATERIAL (SLM)

Calcutta port to Chennai port Rs. 600 per M. T. Calcutta port to Visakhapatnam port Rs. 500 per M. T. Visakhapatnam to Chennai port Rs. 400 per M. T. The freight is subject to 10% primage, 5% Address Commission and 2½% brokerage. The freight was insured at ½%. The hull was insured for the voyage at 1%. Depreciation was provided at 3% p.a. The cost of the ship is Rs. 1 crore. The following were the expenses incurred at different ports: Stores purchased for the voyage amounted to Rs. 50,000. Opening stock of stores was Rs. 40,000 and Closing Stock was estimated at Rs. 30,000. Stock of Coal at close was estimated at Rs. 30,000 as against stock of Rs. 10,000 at the beginning. The ship will not come back to Calcutta port in the near future as part of the Voyage programme. Salaries and Wages amounted to Rs. 80,000 p.m. Prepare Voyage No 403 Account. 282 CU IDOL SELF LEARNING MATERIAL (SLM)

Illustration 6: M. V. Indian Express is regularly employed on cargo trade between India and East Africa. She sets on her voyage on 1st July 2000 and arrived at her destination on 14th August 2000. You are requested to prepare a Voyage Account bearing in mind the following particulars: (i) The vessel was purchased in 2005 for Rs. 100 lakh and at the time of purchase had 16 yearsof working life left (Depreciation on ship is charged on straight line basis). (ii) Standing cost per day excluding recovery of depreciation is Rs. 22,000. (iii) The vessel consumes daily 14 tonnes offuel oil, 2 tonnes of diesel and 15 tonnes of fresh water. The cost of these are Rs. 1,000, Rs. 1,350 and Rs. 20 per tonne, respectively. (iv) The vessel carried the under-mentioned cargo: 283 CU IDOL SELF LEARNING MATERIAL (SLM)

4,000 tonnes on which freight of Rs. 375 per tonne was charged and 3,500 tonnes on which the rate of freight was Rs. 190 per tonne. Both the rates are to be enhanced by a surcharge of 20% over the basic rates. (v) Freight brokers were due a brokerage of 2½% (vi) Port Charges at the loading and discharging ports were Rs. 40,000 and Rs. 85,000, respectively. Illustration 7: M. V. Indian Glory owned by the Hindustan Shipping Co. Ltd., is on the Mumbai-London lines trade. Her daily Standing Charges (fixed costs) are Rs. 45,000. In the period between 1st July and 31st December 2012, the ship had finished one round voyage to London and on the date when the books of accounts of the company were closed at the end of the year, the vessel was on her way to London, having sailed out of Bombay after midnight of 21st December. Loading for London commenced on 1.12. 2012. Freight earned: From the following details, prepare a Voyage Account: (a) Completed Voyage Bombay to London: (i) 20,000 tonnes textiles at Rs. 280 per tonne. (ii) 10,000 tonnes copra at Rs. 340 per tonne. 284 CU IDOL SELF LEARNING MATERIAL (SLM)

On textile, a surcharge of 10% was also recovered. London to Bombay: 30,000 tonnes of urea at Rs. 300 per tonne. (b) Unfinished Voyage: 30,000 tonnes of general cargo at Rs. 240 per tonne plus surcharge of 5%. Expenses: (a) Stevedoring expenses: (i) At Rs. 20 per tonne at Mumbai for general cargo and Rs. 25 per tonne for textile and copra. (ii) At London on a uniform rate of £ 1 per tonne. (b) Fuel consumption: (i) On sailing days — 30 tonnes of fuel oil per day, 5 tonnes of diesel per day. (ii) On days in port — 10 tonnes of fuel oil per day, 5 tonnes of diesel per day. (iii) Cost per tonne — Fuel oil Rs. 1,400 per tonne, Diesel Rs. 2,500 per tonne. (c) Port Dues = at London £ 2,000 at Bombay Rs. 2,40,000 (inclusive of Rs. 60,000 for the incomplete voyage). (d) Sundry Stores: Rs. 60,000. (e) During the period, the vessel was in Mumbai port for 70 days and in London port for 40 days, (f) Conversion rate per £ 1 could be adopted at Rs. 20. 285 CU IDOL SELF LEARNING MATERIAL (SLM)

Illustration 8: Hind Shipping Ltd., owns a tramp steamer by name M. V. Jalabharati which was chartered on a voyage on 1st March 2012, on the following terms: (i) Mumbai to Basra with general cargo at Rs. 550 per tonne. The charter stipulates for an address commission to charterers at 2% of the freight payable on raising the bill of lading together with brokerage of 5% to the charterer’s agent, one-third of which is repayable to ship. (ii) Basra to Dubai with fertilisers at Rs. 240 per tonne. Address commission of 2% on freight payable to charterers and a brokerage of 1% is payable to agents on signing the charter. The steamer is issued with Lloyds on an annual premium of Rs. 6, 60,000. The master of the steamer is entitledto 1% of the net profits of each voyage after charging such commission. Further details are: 286 Repairs and Renewals: at Bombay Rs. 38,000 and at Basra Rs. 20,000. CU IDOL SELF LEARNING MATERIAL (SLM)

Stores, Supplies and Provisions: at Bombay Rs. 1,60,000, at Basra Rs. 1,40,000 and at Dubai Rs. 90,000, out of which Rs. 40,000 was in stock at conclusion of voyage. Consumption of Bunker : Fuel oil 6 tonnes a day, diesel 2 tonnes a day and fresh water 25 tonnes a day while the steamer is in port and fuel oil 15 tonnes a day, diesel 2 tonnes a day and fresh water 25 tonnes a day while sailing. Fuel oil, diesel and fresh water cost Rs. 1,200, Rs. 2,500 and Rs. 50 per tonne, respectively. Stevedoring charges: at Bombay Rs. 20 per tonne, at Basra Rs. 15 per tonne for loading and Rs. 20 per tonne for discharging, and at Dubai Rs. 12 per tonne, load discharge. Captain’s Expenses: at Basra Rs. 16,000 and at Dubai Rs. 20,000. Port Charges: at Bombay Rs. 70,000, at Basra Rs. 60,000 and at Dubai Rs. 54,000. The steamer loaded the following cargo: At Bombay general cargo-8,000 tonnes, out of which 6,000 tonnes were to be discharged at Basra, and the rest at Dubai. The freight from Mumbai to Dubai was fixed at Rs. 600 per tonne. At Basra—Fertilisers for discharge at Dubai—6,000 tonnes. The ship completed the voyage on 30th April, 2012. Number of sailing days as per ship’s log came to 16. Prepare a Voyage Account bearing in mind that the company has to provide towards special survey repairs of the ship Rs. 24 lakh every year. 287 CU IDOL SELF LEARNING MATERIAL (SLM)

SUMMARY To know the financial results of a marine business, voyage accounting is prepared. Voyage account is similar to a Profit and Loss account; all expenses are debited to Voyage account and all incomes are credited to Voyage account. Voyage account is prepared to ascertain the profit or Loss of voyage. It covers both inward and outward travelling. It is very important that separate Voyage account should be prepared for each vessel. Voyage Account is an account which is prepared by the shipping companies. This account is prepared to get a complete record of the profits earned and loss incurred on the particular voyage undertaken by the shipping company. It records both inward and outward journey. It is prepared separately for each voyage. 288 CU IDOL SELF LEARNING MATERIAL (SLM)

KEY WORDS • Brokerage and Address Commission: Brokerage and Commission payable to broker for procuring freight for the ship which is calculated on a certain percentage of freight inclusive of primage, and address commission is paid to the charterer which is debited to Voyage Account. • Primage: Percentage on freight collected for the ship-owner previously and which is retained with the ship-owner for ensuring safe carriage of cargo. It is an income of the shipping company since it is a part offreight. • Passage Money: Fare collected from the passengers travelled in addition to the fare’ collected for merchandise. • Port Charges: Charges paid to port authorities for allowing the ship using the port for loading or unloading purposes. • Bunkers Cost: Amount spent on account of fuel, coal, diesel and fresh water and refers to actually coal bin of the ship. Generally, voyage profit represents the excess of voyage incomes earned over the expenses incurred for this purpose. But if, however, the voyage is in progress, the incomes and expenses relating to the unfinished voyage are carried forward to the next year. LEARNING ACTIVITY 1. India Shipping Company of Bombay had a ship by name Bharat, whose written down value as on 1st July 2005 was Rs 24 lakhs. The ship was insured for Rs. 30 lakhs at 1% for voyage policy of hull. The ship made a trip to Sydney and returned to Madras during the period 1st July 2005 to 30th Sept. 2005. The particulars relating to the voyage are given below: 1. Expenses incurred: 2. Stevedoring at the rate of Rs. 3 per tonne. 3. Depreciation was charged on the written down value of the ship at the rate of 10% p.a. 4. The freight was insured at 1%. 5. The particulars of the freight consisted of the following: 289 CU IDOL SELF LEARNING MATERIAL (SLM)

(a) Leather goods 1,100 tonnes at the rate of Rs. 120 per tonne. (b) Cotton 500 tonnes at the rate of Rs. 150 per tonne. (c) Sugar 1,700 tonnes at the rate of Rs. 100 per tonne. 6. In addition to primage @ 10%, the brokerage payable was @ 5%. Prepare Voyage Account for the three months. 2. Discuss the nature, necessity and method of preparing Voyage accounts. Your answer should illustrate and explain special items in voyage accounts. Store consumed $ Freight $ Coal consumed 90000 Depreciation 7000 Port charges 15000 Salaries of crew 6000 Insurance of ship 3000 Insurance of freight 8000 Address commission 10000 Fuel 5000 5% 1050 290 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT END QUESTIONS A. Descriptive Type Questions 1. What are the Main Expenses and Incomes of Voyage? 2. SS Himalaya set out on a voyage from Calcutta to Bombay, On December 31the accounts are to be closed, the return voyage had not been completed. The details for the entire Voyage to Bombay and back to Calcutta completed after December 31 were: Freight Rs. 400000Coal consumed Rs. 70000Salaries Consumed Rs. 30000Port charges Rs.15000Salaries of crew Rs. 40000Depreciation Rs.40000Insurance of ship Rs. 20000Insurance of freight Rs.8000Address commission 5% Only Rs.150000 freight was available on the return journey. Prepare Voyage Accounts accordingly. 3. A ship was chattered from Lagos to Accra on 31st December. The accounts were closed after the arrival of the ship. The details for the voyage to Accra and back were: $40000 freight was received on return with 10% primage. 4. What is voyage account and how to preparedit? 5. Explain different items of expenses and incomes to be included in voyage account. B. Multiple Choice Questions 1. Profit or loss on voyage account is transferred to a) Profit and loss account of shipping company b) Balance sheet c) Trail balance d) None of these 2. The balance of suspense account will show in a) Profit and loss account debit side b) Balance sheet c) Trial balance d) Income and expenditure account 3. Which of the following errors will not affect the trial balance a) Wrong balancing of an account b) Wrong totalling of an account c) Writing an amount in wrong account but on the correct side d) None of these 291 CU IDOL SELF LEARNING MATERIAL (SLM)

4. Bad debts written off previously, if recovered subsequently 292 a) Credited to profit and loss account b) Debited to profit and loss account c) Credited to bad debts recovered account d) Credited to debtor’s account 5. Under double account system, profit is disclosed in a) Net revenue account b) Capital account c) Revenue account d) Receipts and expenditure on capital account 6. Profit or loss on voyage account is transferred to a) Profit and loss account of shipping company b) Balance sheet c) Trail balance d) None of these 7.The policy which ensures the subject matter for a specific voyage is called a) Voyage policy b) Routine policy c) Freight policy d) None of these 8. The policy which insures the regular matter for a specific period is called a) Floating policy b) Routine policy c) Freight policy d) None of these 9.Where no document of title of goods are enclosed to the bill, it is called CU IDOL SELF LEARNING MATERIAL (SLM)

a) Clean bill b) Demand bill c) Trade bill d) None of these 10. Cheque is payable on a) Demand b) Usance c) After sight d) fixed future date Answers 6. a 7. a 8. a 9. a 10. a 1. a 2. b 3. c 4. a 5. c REFERENCES • Monga, J.R. (2005). Financial Accounting: Concepts and Applications. New Delhi: Mayoor Paper Backs. • Shukla, M.C., Grewal, T.S., and Gupta, S.C. (2007). Advanced Accounts. New Delhi: S. Chand & Co. • 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 • Singh, S. K. (2012). Corporate Accounting. Blackwell, Parts III and IV. • Ross, S. M. (2014). Mathematical Finance, Cambridge University Press, unit 1-8 293 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT-14 ROYALTY ACCOUNTING Structure Learning Objective Introduction Meaning Basic Terms used in Royalty Accounting Difference between Rent and Royalty. Summary Key words Learning Activity Unit -End Questions References LEARNING OBJECTIVES After studying this unit, you will be able to: • State royalty account • Describe Basic terms used in Royalty Accounting • Explain difference between rent and royalty INTRODUCTION Royalty is payable by a user to the owner of the property or something on which an owner has some special rights. A royalty agreement is prepared between the owner and the user of such property or rights. If payment is made to purchase the right or property that will be treated as capital expenditure instead of a Royalty. Payment made by the lessee on account of a royalty is normal business expenditure and will be debited to the Royalty account. It is a nominal account and at the end of the accounting year, balance of Royalty account need to be transferred to the normal Trading and Profit & Loss account. Royalty, based on the production or output, will strictly go to the Manufacturing or Production account. In case, where the Royalty is payable on sale basis, it will be part of the selling expenses. MEANING Royalty is nothing but a periodical payment made by the user of the asset to the owner or the creator of such an asset for its use. In other words, the owner/author of the asset such as mine, patent, book, 294 CU IDOL SELF LEARNING MATERIAL (SLM)

artistic work etc. may allow the third party like licensee, publisher etc to use its creation in exchange of a consideration. Thus, such a payment made by the user to the owner is known as Royalty. Furthermore, the consideration paid in lieu of using the asset of the owner is determined in terms of the number of items produced or sold. BASIC TERMS USED IN ROYALTY ACCOUNTING Minimum Rent As mentioned above, the lessor enters into a contact or an agreement with the lessee for the payment of royalty. This royalty is determined on the basis of number of goods produced or quantum of goods sold. Now, there can be cases when the number of goods produced or sold are nil or relatively low. In such a case, the lessor would receive no or little royalty directly impacting lessor’s royalty income. In other words, when there is no or little production or sale, the lessor would be at a loss since no or less amount of royalty would be received from the lessee. This is despite lessee using the asset. To get rid of such a situation, the lessor requires a minimum amount of payment to be paid by the lessee irrespective of the number of goods produced or sold by the lessee. That is, lessee is required to pay minimum amount to the lessor. This is despite the fact that the actual royalty amount, which is calculated based on the items produced or sold, is less than the minimum rent to be paid. Such a guaranteed minimum amount so received by the lessor is called the minimum rent. Minimum rent is fixed at the time when the lessor enters into an agreement with the lessee. It is a term included in the contract in the interest of the landlord as it assures minimum rent even in cases of lower sales or output. Therefore, the lessee pays minimum rent or the actual royalty amount, whichever is higher. Since, the amount of minimum rent to be paid is fixed, it is also known as Fixed Rent or Dead Rent. This can however vary depending upon the terms of the agreement. Example 295 CU IDOL SELF LEARNING MATERIAL (SLM)

For example, say the output produced by Mine A is 4,000 tons. The royalty to be paid by the lessee is Rs 100 per ton and the minimum rent in the agreement is Rs 5 Lakhs. As per production, the actual royalty amount to be paid comes at Rs 4 Lakhs. Since the actual royalty amount is less than the minimum rent, the lessee is required to pay minimum rent of Rs 5 Lakhs to the Lessor. Short Workings or Redeemable Dead Rent Short Workings is nothing but the amount by which the minimum rent is more than the actual royalty. In other words, short workings are the difference between minimum rent and actual royalty. In the example above, the Short Workings amount to Rs 1 Lakh (5 Lakh – 4 Lakh). It must be noted that Short Workings comes into picture only when the clause of minimum rent is included in the agreement. Excess Working Excess Working is nothing but the amount by which Actual Royalty is more than the minimum rent. Say for instance, in the example above, the output produced is 6000 tons. Accordingly, excess working comes out to be Rs 2 Lakhs (6 Lakh – 4 Lakh). Recoupment of Short Workings Typically, the agreement entered by the lessor and the lessee under Royalty Accounting provides for a provision. This provision allows carry forward of short workings in order to adjust the same in future. Therefore, in the following years Short Workings is adjusted against the excess royalty amount. Such a process of adjusting Short Working capital is known as recoupment of Short Workings. In other words, the clause of recoupment in Royalty Agreement provides the right to the lessee to recover excess payment made by him to the lessor for complying with the clause of minimum rent in the previous years. Furthermore, a time period is stipulated in the agreement. Such a period lays down the number of years during which Short Workings can be recouped or recovered by the lessee. This time period can be fixed or fluctuating. In cases where the lessee fails to recover the Short Workings within the stipulated time, the Short Workings lapse and is debited to the P&L Account for the period in which the recoupment lapses. 296 CU IDOL SELF LEARNING MATERIAL (SLM)

Fixed Right Fixed Right means that the lessee can recover short working from the lessor within a particular time period from the date of lease of the asset. For instance, as per fixed right, say the lessee can recover Short Workings within 2 years from the date of lease. In case he fails to do so, the recoupment lapses or ends. Fluctuating Right Under Fluctuating Right, the lessee can recover Short Workings for any period during the subsequent period or periods. For instance, Short Workings of the previous year can be recovered in the subsequent year. Strike and Lockout There can be cases where a strike or a lockout takes place during the period of the Royalty Contract. Thus, the Royalty Agreement can provide for a provision that the minimum rent would be reduced proportionately in case a strike or a lockout takes place. DIFFERENCE BETWEEN RENT AND ROYALTY The following are some the difference between Royalty and Rent: •The term Royalty refers to the payment made for exclusive use for both tangible and intangible assets whereas Rent refers to the payment made towards use of tangible assets only. •The payment of Royalty is made on the basis of output or sale, whereas Rent is paid for a specific period. •The payment of Royalty varies as per sales or output whereas Rent is always fixed •The parties involved in Royalty are known as lessee, lessor, patent holder, patentee, publisher author etc whereas there are only two parties involved in Rent landlord and tenant. •In case of Royalty agreement there is a clause of making minimum payment whereas in case of Rent there is nothing like minimum rent. The term Minimum Rent is also referred as fixed rent, dead rent, flat rent, contract rent and rock rent. SUMMARY In terms of accounting, royalty is what a lessee pays to a lessor for the use of any rights, copyrights, franchises or any such asset. It is the system of sharing of revenues between the lessee and the lessor. 297 CU IDOL SELF LEARNING MATERIAL (SLM)

Royalty is payable by a user to the owner of the property or something on which an owner has some special rights. A royalty agreement is prepared between the owner and the user of such property or rights. If payment is made to purchase the right or property that will be treated as capital expenditure instead of a Royalty. Payment made by the lessee on account of a royalty is normal business expenditure and will be debited to the Royalty account. It is a nominal account and at the end of the accounting year, balance of Royalty account need to be transferred to the normal Trading and Profit & Loss account. Royalty, based on the production or output, will strictly go to the Manufacturing or Production account. In case, where the Royalty is payable on sale basis, it will be part of the selling expenses. KEY WORDS • Royalty: A periodic payment, which may be based on a sale or output is called Royalty. Royalty is payable by the lessee of a mine to the lessor, by publisher of the book to the author for the book, by the manufacturer to the patentee, etc. • Landlord: Landlords are the persons who have the legal rights on mine or quarry or patent right or copybook rights. • Tenet: An Author or publisher; lessee or patentor who takes out rights (usually commercial or personal rights) from the owner on lease against the consideration is called tenet. • Minimum Rent: According to the lease agreement, minimum rent, fixed rent, or dead rent is a type of guarantee made by the lessee to the lessor, in case of shortage of output or production or sale. It means, lessor will receive a minimum fix rent irrespective of the reason/s of the shortage of production. LEARNING ACTIVITY 1. What are the types of royalties? 2. Explain redeemable dead rent UNIT END QUESTIONS 298 A. Descriptive Type Questions CU IDOL SELF LEARNING MATERIAL (SLM)

Short Questions 299 1. State meaning of royalty account. 2. Who all are the parties involved in royalty accounts? 3. What is rent? Long Questions 1. Describe Basic terms used in Royalty Accounting. 2. Explain difference between rent and royalty. 3. Explain minimum rent 4. Explain recoupment of short working B. Multiple Choice Questions 1) What is Royalty? a) A payment is made for use of fixed asset. b) A fixed payment for use of fixed Assets. c) A payment paid by owner. d) None of these 2) Mining Royalties is based on --------- a) Production b) Sales c) Purchases d) A & B Both 3) Patent Royalties is based on -------- a) Production b) Sales c) Purchases d) A & B Both CU IDOL SELF LEARNING MATERIAL (SLM)

4) Copyright Royalties based on-------- 300 a) Sales b) Production c) Purchases d) A & B Both 5) What is minimum Rent? a) Payment for use of land which is fixed. b) It is payment for use of land on the basis of output. c) A payment paid by owner. d) None of these 6) Minimum Rent is also called? a) Dead Rent b) Rock Rent c) Fixed Rent d) All of these 7. The balance of royalty payable account is transferred to— a) Production account. b) Royalties suspense account c) Profit and loss account d) All of these 8. Royalty earned by the lessee is credited to a) Royalty receivable account b) Profit and loss account c) Balance Sheet d) All of the above CU IDOL SELF LEARNING MATERIAL (SLM)