BBA108_Financial and Management Accounting(Draft 2)-converted-converted

UNIVEESITY INSTITUTE OF Discover. Learn. Empower. DISTANCE & ONLINE LEARNING BBA FINANCIAL AND MANAGEMENTACCOUNTING www.cuchd.in

BACHELOR OF BUSINESS ADMINISTRATION SEMESTER-II FINANCIAL AND MANAGEMENT ACCOUNTING BBA108

CHANDIGARH UNIVERSITY Institute of Distance and Online Learning Course Development Committee Prof. (Dr.) R.S.Bawa Pro Chancellor, Chandigarh University, Gharuan, Punjab Advisors Prof. (Dr.) Bharat Bhushan, Director – IGNOU Prof. (Dr.) Majulika Srivastava, Director – CIQA, IGNOU Programme Coordinators & Editing Team Master of Business Administration (MBA) Bachelor of Business Administration (BBA) Coordinator – Dr. Rupali Arora Coordinator – Dr. Simran Jewandah Master of Computer Applications (MCA) Bachelor of Computer Applications (BCA) Coordinator – Dr. Raju Kumar Coordinator – Dr. Manisha Malhotra Master of Commerce (M.Com.) Bachelor of Commerce (B.Com.) Coordinator – Dr. Aman Jindal Coordinator – Dr. Minakshi Garg Master of Arts (Psychology) Bachelor of Science (Travel &Tourism Management) Coordinator – Dr. Samerjeet Kaur Coordinator – Dr. Shikha Sharma Master of Arts (English) Bachelor of Arts (General) Coordinator – Dr. Ashita Chadha Coordinator – Ms. Neeraj Gohlan Academic and Administrative Management Prof. (Dr.) R. M. Bhagat Prof. (Dr.) S.S. Sehgal Executive Director – Sciences Registrar Prof. (Dr.) Manaswini Acharya Prof. (Dr.) Gurpreet Singh Executive Director – Liberal Arts Director – IDOL © No part of this publication should be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording and/or otherwise without the prior written permission of the authors and the publisher. SLM SPECIALLY PREPARED FOR CU IDOL STUDENTS Printed and Published by: TeamLease Edtech Limited www.teamleaseedtech.com CONTACT NO:- 01133002345 For: CHANDIGARH UNIVERSITY Institute of Distance and Online Learning





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CONTENT Unit-1 Financial Accounting .................................................................................................. 5 Unit -2 Consignement Account- I......................................................................................... 13 Unit -3 Consignemnt Account- II ..................................................................................................... 33 Unit-4 Departmental Accounting -I ..................................................................................... 48 Unit-5 Departmental Accounting – II ............................................................................................. 55 Unit-6 Voyage Accounting .................................................................................................... 76 Unit-7 Royalty Accounts ....................................................................................................... 98 Unit-8 Managerial Accounting ........................................................................................... 110 Unit-9 Managerial Accounting ........................................................................................... 119 Unit-10 Methods And Problems of Transfer Pricing ....................................................... 131 4 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT-1 FINANCIAL ACCOUNTING Structure Learning Objective Introduction GAAP Principles: Concepts & conventions of financial accounting What is GAAP? Accounting Concepts Accounting Conventions Summary Key words Learning Activity Unit -End Questions References LEARNING OBJECTIVE After studying this unit, you will be able to: • Explain GAAP Principles • Describe Accounting concepts • List accounting conventions INTRODUCTION Financial Accounting is a branch of accounting that records a company’s financial transactions. By using standardised rules, the transactions are recorded, summarised and then presented in a financial report or financial statement, for example - an income statement or a balance sheet which is used by the company for its management purpose and for the company’s external users such as investors, suppliers, banks, etc. for making decisions. Meaning Financial accounting skills is nothing but an ability of any individual to keep record of all the financial transactions of business which has resulted from operations of the business. This is done by recoding, summarizing and resenting all the data in the form of financial reports or statements, using standardized guidelines. 5 CU IDOL SELF LEARNING MATERIAL (SLM)

The financial performance of a company’s operations in financial period is summarised in financial statements like balance sheet, income statement and cash flow statement. Definition Financial accounting is the area of accounting that focuses on providing external users with useful information. In other words, financial accounting is a way of reporting business activity and financial information to investors, creditors, and other people outside the business organization. Importance The importance of financial accounting is as follows: • Effective communication: Financial accounting helps in communicating the health and overall wellbeing of the company with the help of financial statement to external parties like suppliers, bankers, leasing companies, etc who are not part of the company but require all this information to analyse the progress of the company and compare it with their expectations. • Communicate information internally. A company’s finance team or its employees who are interested in stock-based compensation etc. constitute the internal users of the information generated by financial accounting practices. The reports generated with the help of financial accounting skills are helpful for this purpose as well. • Comparison through analysis. Since financial accounting requires the use of standardized guidelines, the financial statements generated by all companies are comparable, providing a standard method of analysis. GAAP PRINCIPLES: CONCEPTS & CONVENTIONS OF FINANCIAL ACCOUNTING What is GAAP? GAAP (Generally Accepted Accounting Principles) is a set of commonly followed accounting rules and standards for financial reporting. Every organisation follows GAAP as it is a common set of accounting rules and standards that dictate how financial statements should be prepared. GAAP allows investors to easily assess companies since it is common and consistent in every organisation and one can easily compare between two different organisations by reviewing their financial statements. Thus GAAP encompasses: • Basic accounting principles/guidelines 6 CU IDOL SELF LEARNING MATERIAL (SLM)

• Accounting Standards usually issued by the premier accounting body of the country • Industry-specific accounting practices to cover unusual scenarios In India, financial statements are prepared on the basis of accounting standards issued by the Institute of Chartered Accountants of India (ICAI) and the law laid down in the respective applicable acts (for example, Schedule III to Companies Act, 2013 should be compulsorily followed by all companies). The ICAI also releases guidance notes from time to time on various topics to help in the accounting process and provide clarity. While the basic accounting principles may not directly form part of the accounting standards and the related laws, they are assumed and expected to be universally followed. Accounting Concepts • Separate Business Entity Concept The business unit is separate from its owner is the meaning of entity. Therefore, under this concept sole trading concern and sole proprietor are treated as two different entities. According to the concept only business transactions are recorded in the books of the business. Proprietor's personal transactions are not recorded in the business books of accounts. The business entity concept specifies that each business is regarded as having an existence separate from its owner and any personal or private financial transactions of the owner should be neglected. • Money Measurement Concept According to this concept, only accounting transaction that can be expressed in terms of money should be recorded by the business in the books of accounts. The money measurement concept only records transactions that are indicated in terms of monetary value. Any aspects of business that cannot be recorded in monetary terms, such as, the customer base, the location of the firm; is not included in the accounts. • Dual Aspect Concept As per dual aspect concept, every transaction affects two accounts. One account must be debit and the other account must be credit. The concept of duality recognises that every business has two aspects for each transaction – represented by debit and credit entries in accounts. The duality principle ensures all aspects of transaction accounted in the financial statements. • Going Concern Concept 7 CU IDOL SELF LEARNING MATERIAL (SLM)

It is the basic assumption that business will continue for a quite long time, it will go on and on and will not be closed down or stopped for a quite long time. The concept of duality recognises that every business has two aspects for each transaction – represented by debit and credit entries in accounts. The duality principle ensures all aspects of transaction accounted in the financial statements. • Accounting Period Concept It is the period for which financial statements are prepared. Each business chooses a specific time period to complete a cycle of the accounting process. The accounting period concept determines that each business selects a set time period to complete a cycle of accounting process, either, quarterly, monthly or annually as per the calendar year. • Cost Concept An asset is recorded in the books at the value of its price which has been paid at the time of its purchase and the cost paid will be the base for all further accounting. The accounting period concept determines that each business selects a set time period to complete a cycle of accounting process, either, quarterly, monthly or annually as per the calendar year. • The Matching Concept The matching concept is an accounting practice followed by which organisations recognize revenues along with their associated expenses in the same accounting period. Organisations report revenues, that is, along with the expenses that brought them into the business. The accruals (matching) concept specifies that revenues and costs should be matched to the same accounting period. This matching concept results into financial statements making adjustments for accruals, prepayments and closing inventory. • Accrual Concept According to accrual concept a business should record revenues only when they are earned and not when they are received in cash, likewise, record expenses when they are incurred and not when they are paid. • Realization Concept According to this concept, income is recorded only when it is realized i.e. either it is received or earned. Likewise, revenues are recorded only when sales are affected or the services are rendered. The realisation concept defines that revenue should only be documented in the books of accounts when cash has been received or when a receipt has been issued. 8 CU IDOL SELF LEARNING MATERIAL (SLM)

Accounting Conventions There are four main accounting conventions designed to assist accountants: • Conservatism: This convention indicates the business to anticipate incomes and gains but provide expenses and losses into account. The conservatism policy of ‘play safe’ look after consideration of uncertainties in business transactions. While recording the business transactions, the accountant has to expect no profit but provide for all possible losses. Following this, the income statement might show lower income and the Balance Sheet may overstate the liabilities and understate the assets. Basically, this method of recording is directing the accountant 'to play safe' while writing the accounts. • Consistency: The convention of consistency states that same accounting principles should be used by the accountant for preparing financial statements year after year. The principle adopted for accounting should be consistent or continuous throughout the business unless and until the circumstances demand a change. This convention states to consistently follow the accounting policies in a particular manner that should be continued using for the future financial statements (changes made possible only in special circumstances). It should result into direct comparison of year-on-year figures by applying the same policies. • Full disclosure: This convention declares to present the financial statement in a manner that fairly discloses all the material information to the users so that it can benefit them in proceeding rational decisions. Convention of disclosure states that all material and relevant items relating to financial statements should be fully disclosed. Full disclosure means that there should be full, fair and sufficient disclosure of accounting information in the books of accounts. It means disclosure of such information that is of importance to owners, investors and the creditors. • Materiality: According to convention of materiality, only those transactions, important facts and items should be recorded and disclosed in the financial statements which are useful and which have value on the determination of financial condition of the firm. Unimportant items should either be left out or attached with some other item or can be shown as foot notes. This convention implies not to take account of items that are insignificant or may result to be misleading. The ‘materiality’ convention is an exclusion to ‘disclosure’ convention that states to only record and disclose items in the financial statement having an important economic effect. SUMMARY The Financial Accounting being the main crux for any business operations, plays a significant role in every aspect in maintaining, creating and sustaining the firm. Books of accounts helps the proprietor to know its businesses assets and liabilities, profits and losses, 9 CU IDOL SELF LEARNING MATERIAL (SLM)

and all the expenses and revenues. Also, the different accounting regulations, principles, concepts and conventions used in order to prepare the company's financial statements help the proprietor know its company's financial position and growth in the market. From all the aspects, maintaining accounts in business is vital for its smooth function. KEY WORDS • Accounting conventions: a general principle for recording and preparing transactions and financial statements • Accrual accounting: Recording transactions within the periods in which they happen, or maybe within the periods in which cash is gotten or paid; all the methods that bookkeepers utilize to apply the coordinating run the show • Accounting : An information system that measures, processes, and communicates financial information about an economic entity • Accrual : The acknowledgment of an cost or income that has emerged but has not however been recorded • Generally accepted accounting principles (GAAP): The conventions, rules, and procedures that define accepted accounting practice at a particular time. • Money measure : The recording of all business transactions in terms of money • Matching rule: the principle that revenues must be assigned to the accounting period in which the goods are sold or the services performed, and expenses must be assigned to the accounting period in which they are used to produce revenue. LEARNING ACTIVITY 1. What is the criteria for including cash flow statement under Indian GAAP? 2. What is the importance of documentation when it comes to accounting? UNIT-END QUESTIONS A. Descriptive Type Questions 1. Apply GAAP to nearby retail store? 2. On which assumption are financial statements prepared under Indian GAAP for FMCG sector? 3. Describe convention of materiality for stationery shop? 10 CU IDOL SELF LEARNING MATERIAL (SLM)

4. Identify a money measurement concept for a restaurant? 5. Discuss accounting period concept for a business start-up? B. Multiple Choice Questions: 1. Identify business entity separate from personnel affair of the owner is? a. Objectivity principle b. Stable currency principle c. Entity principle d. Matching principle 2. According to money measurement concept, will be recorded in the books of accounts? a. Moral of workers b. Cost of Machinery c. Manager’s ability to manage business operations d. Quality control in the business 3. The currency remains more or less stable and rate of inflation is almost zero is? a. Objectivity principle b. Stable dollar principle c. Dual aspect concept d. Matching principle 4. principle specifies that cost or expenses should be recorded at the same time as the revenue to which they correspond? a. Prudence Principle b. Matching Principle c. Going Concern Principle d. Consistency Principle 5. A business is treated, as an entity is its own right, separate from its owner is called? a. Dual aspect concept b. Money measurement concepts 11 CU IDOL SELF LEARNING MATERIAL (SLM)

c. Matching concept d. Separate entity concept Answer: 1. c 2. b 3. b 4. b 5. d 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 • 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. New Delhi: VK Publications. 12 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT -2 CONSIGNEMENT ACCOUNT- I Structure Learning Objective Introduction Concept Accounting Procedure Treatment of normal and abnormal Loss Del-credere Commission Difference between Proforma Invoice and Account Sales Valuation of Unsold Stock. Summary Key words 2.10.Learning Activity 2.11.Unit -End Questions 2.12.References LEARNING OBJECTIVE After studying this unit, you will be able to: • Explain accounting procedure of consignment accounting • Outline the difference between proforma invoice and account sales • State valuation of unsold stock • Identify Del-Credere Commission INTRODUCTION Consignment accounting is an arrangement whereby the owner of the goods (consignor) sends to goods to an agent (consignee) for a commission; However, the ownership of the goods remains with the owner itself. CONCEPT Due to increasing size of market, it is quite obvious that manufacturers or whole sellers cannot approach directly to every customer around the state or nation. To overcome this limitation, manufacturers normally appoint reliable agents at every desired location to reach the customers directly. He makes an agreement with local traders who can sell goods on his behalf on commission basis. 13 CU IDOL SELF LEARNING MATERIAL (SLM)

Meaning and Features of Consignment Consignment is a process where in order to ship, transfer or sales of goods, owner consigns/handovers goods to his agent/ salesman. The nature and scope of a consignment are as follows: • Here, the ownership of the goods remains with manufacturer or wholesaler who consign goods to his agent for sale. The sale is on commission basis and the possession of the goods are transferred and not the ownership. • The consignee is not responsible for any loss or destruction of goods as ownership of the goods is with the manufacturer (consignor). • The profit/loss goes to owner as the risk is owned by the owner of the goods. • Consignee gets compensation of expenses incurred by him and commission on sale of goods made by him, because sale that proceeds, belongs to owner (consignor). Why is Consignment not a Sale? Following are the reasons that explain why consignment is not a sale − • 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 is beard by the consignor in the event of goods 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 – Ordinarily, the sold goods cannot be returned back; be that as it may, on the off chance that there's any fabricating imperfection or any other specialized blame, seller is obliged to require them back. On the other hand, consignee may return the unsold stock of goods to consignor anytime. Important Terms Pro-forma Invoice Invoice suggests that the sale has taken place, but pro-forma invoice is not an invoice. Proforma invoice is a statement prepared by the consignor of goods showing quantity, quality, and price of the goods. Such pro-forma invoice is issued by the consignor to consignee regarding the goods before the sale actually takes place. 14 CU IDOL SELF LEARNING MATERIAL (SLM)

Account Sale Account sale is a statement showing goods which are received, sold, any expenses incurred and commission on the sale of goods and remittances made. It is remitted by the consignee to the consignor of goods on a periodic basis. Commission There are three types of commission payable to consignee on sale of the goods − • Simple Commission − This is usually a fixed percentage on the total sale, calculated on mutually agreed terms. • Over-riding Commission – In case of an extra-ordinary sale of the goods, a particular sum is payable to consignee within the shape as a motivating force is called overriding commission. Over-riding commission is additionally calculated on the total sales. • Del-credere Commission − “An agreement by which an agent or factor, in consideration of an additional premium or commission (called a del credere commission), engages, when he sells goods on credit, to insure, warrant, or guarantee to his principal the solvency of the purchaser, the engagement of the factor being to pay the debt himself if it is not punctually discharged by the buyer when it becomes due.” C. & G. Merriam Co. A del credere commission is paid by the consignor to his consigner for taking extra risk of recuperation of obligations from the agent on an account of credit sales made by him (agent) on consignor's sake. Direct Expenses Expenses, which increases the cost of the goods and are of non-recurring nature and incurred till the goods reach the warehouse of consignee may called direct expenses. Indirect Expenses The examples of indirect expenses are warehouse rent, storage charges, advertisement expenses, salaries, etc. The difference between direct and indirect expenses are important at the time of valuation of the unsold closing stock. Advance Amount paid in advance by a consignee to consigner as security called as advance. Valuation of unsold Consignment 15 CU IDOL SELF LEARNING MATERIAL (SLM)

Valuation of unsold stock will be done like a closing stock of a Trading concern and should be valued at the cost or the market price whichever is low. This stock will be valued at − • Proportionate cost price and • Proportionate direct expenses. Here, proportionate direct expenses mean — all expenses incurred by the consignor and the expenses of consignee, which are incurred by him till the goods reach the warehouse. Invoicing Goods higher than Cost Under this method, goods are charged at the cost + profit and the pro-forma invoice also shows this higher price of such goods. The actual profit can be determined at the end of an accounting period by crediting consignment account with excess price so charged. Value of the stock will also be adjusted to the extent of profit element. Main reason to adopt this policy by consignor is − • To hide actual profit from consignee. • It is easy to value stock at consignor’s warehouse in this case. • In this case, consignor usually directs consignee to sale goods on invoice price only. It prevents different sale price to different customers. ACCOUNTING PROCEDURE Journal Entries Recorded in the Books of Consignee The consignee receives the goods from the Consignor. It is a goods coming in consignment to the Consignee. An inward consignment is the receipt of goods by the Consignee from the Consignor for the purpose of sale on commission basis. Consignee is not the owner of the goods. Journal Entries in the books of Consignee Date Particulars Amount Amount 1. On the sale Cash /Bank/ Debtor’s A/c Dr. xx of goods 16 CU IDOL SELF LEARNING MATERIAL (SLM)

To Consignor’s A/c xx (Being goods received on consignment sold) 2. For advance Consignor’s A/c Dr. xx to the Consignor To Bank/ Bills Payable A/c xx (Being advance paid to the consignor) 3. For Consignor’s A/c Dr. xx expenses incurred and commission earned To Bank A/c xx 17 CU IDOL SELF LEARNING MATERIAL (SLM)

(Being consignor’s account debited for expenses incurred in relation to the consignment and commission earned) 4. For Bad Bad Debts A/c Dr. xx debts xx To Customer’s A/c (Being bad debts recorded) 5. For writing off bad debts a. The del- Consignor’s A/c Dr. xx credere commission is not allowed Too Bad Debts A/c xx 18 CU IDOL SELF LEARNING MATERIAL (SLM)

(Being bad debts written off as borne by the consignor) b. The del Commission A/c Dr. xx credere commission is allowed Too Bad Debts A/c xx (Being bad debts written off from the commission) Journal entries in the books of Consignor Amount (Dr.) Amount (Cr.) Date Particulars 1.Entry for Consignment a/c Dr. xxxx sending goods To Goods send on xxxx consignment a/c 19 CU IDOL SELF LEARNING MATERIAL (SLM)

(Being goods sent on the consignment basis) 2.Entry for Consignment a/c consignor’s Dr. xxxx expenses To Cash/Bank a/c xxxx xxxx (Being expenses for consignment) 20 3.Entry for consignee’s Consignment a/c Dr. xxxx expenses To Consignee a/c (Being expenses for consignment by consignee) 4.Entry for advance given by Cash/Bank/B.R. a/c Dr. xxxx consignee CU IDOL SELF LEARNING MATERIAL (SLM)

To Consignee a/c xxxx xxxx (Being receipt of xxxx advance) 5.Entry for sales Consignee a/c Dr. xxxx To Consignment a/c (Being sale of goods) 6.Entry for Consignment a/c Dr. xxxx commission To Consignee (Being commission recorded) 7.Entry for No Entry collection from debtors 8.Entry for Bad Debts 21 CU IDOL SELF LEARNING MATERIAL (SLM)

(a)In the presence No entry of Del-credre commission (b) In the absence Consignment a/c of Del-credre commission Dr. xxxx To Consignee a/c xxxx xxxx (Being bad debts xxxx recorded) 9.Entry for the Consignment a/c Dr. xxxx final profit To Profit and loss a/c (Being transfer of profit to P&L a/c) 10.Entry for final Bank a/c Dr. xxxx remittance To Consignee 22 CU IDOL SELF LEARNING MATERIAL (SLM)

(Being payment to consignee) 11. Entry for Goods sent Dr. xxxx Balance in Goods consignment a/c sent a/c To Trading a/c xxxx (Being balance transferred to trading account) 12.Entry for the Consignment stock Dr. xxxx closing stock a/c To Consignment a/c (Being closing stock transferred) TREATMENT OF NORMAL AND ABNORMAL LOSS There may be two types of losses as explained below − Normal Loss − Normal loss is not separably shown in consignment account and this may occur due to characteristics of goods like evaporation, drying up of goods, etc. but included in the cost of goods sold and the closing stock by inflating the rate per unit. To calculate the value of unsold stock, following formula is used. 23 CU IDOL SELF LEARNING MATERIAL (SLM)

Abnormal Loss − An abnormal loss may occur due to any accidental reason. It is credited to the consignment account to calculate actual profitability. Valuation of closing stock is done on the same basis as explained earlier i.e. proportionate cost + proportionate direct expenses. DEL-CREDERE COMMISSION Del credere commission is related to credit sales. Del-credere commission is offered by consignor to consignee who gives guarantee to collect payment form the customers in case of credit sales. 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 over and above to his ordinary commission. It is usually calculated at a certain pre-agreed percentage of total gross sale proceeds. For example, the cash sales are $10,000 and credit sales are $5000. 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 = ($10,000 + $5000) × 0.1 = $1500 Del credere commission = ($10000 + $5000) × 0.05 = $750 The calculation of del credere commission is very similar to the calculation of normal commission. However, the consignor and consignee sign a separate agreement for the calculation and payment of del credere commission. Entries related to credit sales 24 (1). When a del credere commission is not given to consignee CU IDOL SELF LEARNING MATERIAL (SLM)

Entries in the books of consignor: 25 (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 Entries in the books of consignor (1). When credit sales are made CU IDOL SELF LEARNING MATERIAL (SLM)

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: i. The following entry closes the bad debts account to commission received account: Commission received A/C [Dr] Bad debts A/C [Cr] 26 CU IDOL SELF LEARNING MATERIAL (SLM)

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] DIFFERENCE BETWEEN PROFORMA INVOICE AND ACCOUNT SALES BASIS FOR PROFORMA INVOICE INVOICE COMPARISON Meaning Proforma invoice gives Invoice is a commercial instrument information about the particular which gives information about the goods to be delivered to the products or services provided by agent/buyer. seller to buyer Kind of Quotation Bill Time of issue Before to the placement of order. Before payment is made. Acceptance Creation of sale Confirmation of sale Objective To help the buyer in taking To inform the buyer, the actual decisions, regarding whether to amount due for payment. place an order or not. Posting in account No entry is made, as the invoice An entry is made in the books of book is not a true invoice. accounts. 27 CU IDOL SELF LEARNING MATERIAL (SLM)

VALUATION OF UNSOLD STOCK. The unsold goods laying with consignee is valued at cost price or market price whichever is less. If the goods are unsold by consignee in a particular accounting period, then it would buy into account by the consignor. Here the cost means the cost at the moment when the goods reached the Consignee’s warehouse. 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: It is calculated as follows: (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. SUMMARY 28 CU IDOL SELF LEARNING MATERIAL (SLM)

Consignment accounting may be a term won’t to talk to a rendezvous whereby goods are sent by their owner (consignor) to Associate in Nursing agent (consignee) United Nations agency holds and sells the products on behalf of the owner for a commission. it's necessary to know that the agent never owns the goods. KEY WORDS • Consignment Merchandise: that its owner (the consignor) places on the premises of another company (the consignee) with the understanding that payment is expected only when the merchandise is sold and that unsold items may be returned to the consignor. • Invoice : A form that a vendor sends to a purchaser describing the goods delivered and the quantity, price, and terms of payment • Net loss : When the expenses are more than revenue in case of the difference between expenses and revenues • Net sales: the gross proceeds from sales of merchandise (gross sales) less sales returns and allowances and any discounts allowed. Often called sales. • Profit The increase in stockholders' equity that results from business operations. LEARNING ACTIVITY 1. 2,000 Motors were consigned by ABC Ltd., of Patna to BCD Ltd of Delhi at an invoice cost of $300 each. ABC Ltd., paid freight $20,000 and insurance $3000. During transit 200 motors were completely destroyed. BCD Ltd took delivery of the remaining motors and paid $28,800 as duty. BCD Ltd sent a bank draft to ABC Ltd., for $100,000 as an advance payment and later sent an account sale showing that 1600 motors were sold at $440 each. Expenses incurred by BCD Ltd on warehouse rent and promotion etc., amounted to $4,000. BCD Ltd is entitled to commission of 5%. Required: Prepare consignment account and BCD Ltd.’s account in the books of ABC Ltd., assuming that nothing has been recovered from the insurance company due to defect in the policy. 2. Ram of Pune sends 200 Xerox machines on consignment to Sham of Nasik. The cost of each machine is $260 but the invoice price is at the rate of $320 each. Ram spends $800 on packing and despatch. Sham receives the consignment and immediately accepts Ram’s draft for $16000. Subsequently, Sham informs Ram that 160 machines have been sold at $350 each. Expenses paid by Sham are; freight $1200, warehouse rent $100, and insurance $200. Shay is entitled to a commission of 6 per cent on sales and 1-1/2 percent 29 CU IDOL SELF LEARNING MATERIAL (SLM)

as del credere commission. Give journal entries in the books of Ram. Also prepare necessary ledger accounts: UNIT -END QUESTIONS A. Descriptive questions 1. Explain the difference between Proforma Invoice and Account Sales 2. Riya candy Factory of Noida, consigned to Mr. Shah of Delhi 800 bags of candy at $50 per bag. They also paid cartage, freight, etc. $500. The consignor drew on consignee as an advance against the consignment at 3 months for $12,000 which they discounted at their bank at 5 percent. The consignee sold off the goods and rendered an account sales showing that the goods realized $24,000, out of which he deducted his charges amounting to $160 and his commission at 5 percent. Required: Make journal entries in respect of the above transactions in the books of consignor as well as the consignee 3. 2,000 toys consigned by Tanya of Patna to Tanu of Ramnagar at an invoice cost of Rs 300 each. Roy & Co. paid freight Rs 20,000 and insurance Rs 3000. During the voyage 200 toys were totally damaged by fire and had to be thrown overboard. Tanu took delivery of the remaining toys and paid Rs 28800 as customs duty. Tanu sent a bankdraft to Riya. for Rs 100,000 as advance payment and later sent an account sale showing that 1600 toys had been sold at Rs 440 each. Expenses incurred by Tanu on godown rent and promotion, etc., amounted to Rs 4,000 Tanu was entitled to commission of 5 per cent. One of the credit customers could not pay for 10 toys. Prepare the Consignment Account, Tanu’s account and Profit and Loss Account in the books of Riya, assuming that nothing has been recovered from the insurers due to a defect in the policy. Tanu settled his account immediately. 4. Define 'Consignment'. What is the difference between a consignment and a sale of goods? 5. What do you understand by invoice price'? Give reasons for consigning the goods it the invoice price. B. Multiple Choice Questions: 1. Consignee A/c is the nature of: a. Personal A/c b. Nominal A/c c. Real A/c d. None of these 2. Normal losses are due to: 30 CU IDOL SELF LEARNING MATERIAL (SLM)

a. Unavoidable b. Avoidable factor c. Contingent d. None of these 3. 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 4. 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. 5. The consignor is: a. Principal b. Agent c. Debtor d. None of these Answer 1.a 2.a 3.a 4.a 5.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 • Monga J. R, Ahuja Girish, and Sehgal Ashok. (2014). Financial Accounting. Noida: Mayur Paper Back. 31 CU IDOL SELF LEARNING MATERIAL (SLM)

• 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. . 32 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT -3 CONSIGNEMNT ACCOUNT- II Structure Learning Objective Introduction Del-credere Commission Difference between Proforma Invoice and Account Sales Valuation of Unsold Stock Summary Key words Learning Activity Unit -End Questions References LEARNING OBJECTIVE After studying this unit, you will be able to: • Explain Del-credere Commission • State valuation of unsold stock • Analyse difference between proforma invoice and account sales INTRODUCTION Consignment is procedure to send goods to an agent i.e. consignee by the owner of the goods i.e. consignor to sale on commission basis. However, the ownership of the goods remains with consignor. The risk associated with the goods will be beard by consignor. Let us study the consignment account in detail. DEL-CREDERE COMMISSION The commission given by the consignor to over and above ordinary commission to consignee is called Del-Credere commission. This commission is paid by the consignor to consignee to take responsibility of bad debts. This commission is generally calculated on total sales. Illustration 1: 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. 33 CU IDOL SELF LEARNING MATERIAL (SLM)

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. Solution: 34 CU IDOL SELF LEARNING MATERIAL (SLM)

Note: Discounting charges on Bill may also be transferred to Finance charges account and then it may be transferred to Profit and Loss Account. Goods sent on Consignment are closed by transferring to Purchase Account or Trading Account. 35 CU IDOL SELF LEARNING MATERIAL (SLM)

Illustration 2: 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, 36 CU IDOL SELF LEARNING MATERIAL (SLM)

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 usingabove 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) 37 CU IDOL SELF LEARNING MATERIAL (SLM)

In the books of Harry (the consignee) 38 CU IDOL SELF LEARNING MATERIAL (SLM)

2. Where a del credere commission is given to Harry In the books of Kim (the consignor) 39 CU IDOL SELF LEARNING MATERIAL (SLM)

In the books of Harry (the consignee) 40 CU IDOL SELF LEARNING MATERIAL (SLM)

DIFFERENCE BETWEEN PROFORMA INVOICE AND ACCOUNT SALES 1. A document similar to the normal invoice, which provides information to the agent regarding the particulars of the goods to be delivered, is known as proforma invoice. On the other hand, invoice refers to a commercial instrument delivered to the buyer containing the details of products or services provided by the seller. 2. Proforma invoice is a kind of quotation, containing a commitment by the seller to supply goods at the specified rate and date. Conversely, Invoice is a sort of bill, displaying the amount due to the buyer. 3. Proforma invoice is used for the creation of sales, whereas invoice is used for confirmation of sale. 41 CU IDOL SELF LEARNING MATERIAL (SLM)

4. Proforma invoice is provided by the seller, on the request of the buyer before the placement of the order. As opposed to invoice, which is issued by the seller to the buyer to request payment of goods delivered. 5. As proforma invoice is a dummy invoice and used for the purpose of creating sales, therefore no entry is made in the books of accounts for the financial transaction. Unlike invoice, which is a true invoice and as it results in a financial transaction, hence so it serves as a basis for accounting entry to be made in the books of both the parties. 6. The basic objective of pro forma invoice is to help the buyer in taking decisions, regarding whether to place an order or not. Unlike, an invoice is raised by a seller to request payment from the buyer. VALUATION OF UNSOLD STOCK The goods consign by consignor to consignee remains unsold, the valuation of unsold goods become necessary. Generally, stock lying with consignee is valued at cost or at market price whichever is less. In an accounting period, if all the goods are not sold by the Consignee, then the unsold stock is brought into account by the Consignor. The cost of unsold stock or closing stock should be valued at cost to the consignor plus proportionate non-recurring expenses incurred by the consignor and consignee. The consignment stock account is an asset and will be shown in the balance sheet. Calculation of Value of Unsold Stock: It is calculated as follows: (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. The following method should be carefully considered while valuing unsold stock: Cost Price of Goods Consigned… ....................................... XXX Add: Expenses incurred by consignor: • Freight ................................................................................................ XXX 42 • Carriage............................................................................................. XXX • Insurance on goods dispatch ................................................. XXX • Docks dues ......................................................................................... XXX • Export/Import duties .................................................................... XXX CU IDOL SELF LEARNING MATERIAL (SLM)

• Loading and unloading charges ............................................. XXX Add: Consignee’s expenses: • Unloading charges .....................................................................XXX • Landing charges ......................................................................... XXX • Import duty ....................................................................................XXX • Octroi ................................................................................................XXX • Godown rent etc......................................................................... XXX • Total Cost ....................................................................................... XXX Cost of unsold stock = (Total Cost/Total Quantity) X Unsold Quantity Alternative Method, The cost of stock implies the value at which goods are consigned by the consignor to the consignee. Cost of Unsold Stock = (Cost of goods sold + Proportionate of all expenses/Total Quantity) X unsold stock. The value of stock includes all the expenses incurred before bringing it into usable condition. Value of unsold stock = Cost Price of Closing Stock + Proportionate non-Recurring Expenses. Illustration: Mr. Raja of Bhutan sent 100 bicycles, which cost Rs 900 each, to Ganga of Haryana on consignment basis. Raja paid freight of Rs 1,200, Cartage Rs 300 and Insurance Rs 400. In Haryana, Ganga 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 Haryana. What should be the value of stock unsold? 43 CU IDOL SELF LEARNING MATERIAL (SLM)

SUMMARY Consignment account is prepared to find out the profit 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. 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. KEY WORDS • Commission: In consignment, commission is nothing but remuneration paid by the consignor to consignee for the sale of goods. The rate percentage is predetermined on gross sales • Del Credere Commission: It is a special commission given by the consignor to the consignee. When of commission is given, the consignee undertakes upon himself the risk of any .bad debts arising out of the credit So this Del Credere commission in the form of insurance premium against the risk of bed debts. • 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: It is an invoice which has particulars of goods send by consignor to consignee like quantity, quality, price of goods etc. 44 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. Chetan sent 20 Television costing Rs. 20,000 each to Mona for consignment sale. Packaging expenses incurred Rs. 2,000. Chetan sent railway receipt, starting Rs. 2000 to be paid by Mona. One Television became useless of fire in transit. Insurance company sanctioned claim of Rs. 19200 for this. Mona has to pay Rs. 2000 for freight. Mona sold remaining Television @ Rs. 24,000 each. Consignment Commission is to be paid @ 5% of sales. Prepare Consignment Account and Consignee’s Account 2. Explain the difference between a consignment and a sale. UNIT END QUESTIONS A. Descriptive Questions 1. What is Del-Credere Commission? 2. How to calculate Del-Credere Commission? 3. The Kerla Consignment Account in the books of Ramya of Kota showed a debit balance of Rs 3000 representing the cost of 20 pieces of fancy goods on 1st March, 2019. The invoice value of each piece was Rs 350. On 1st April, 2019 Ranaji sent a further consignment to Kerla of 80 pieces, costing Rs 320 each, invoiced proforma at Rs 360 each. The freight and other charges amounted to Rs 420. On 21st February, 2020, the Kerla Agent sent an Account Sales showing that 16 pieces from the old stock realised Rs 280 each and 50 pieces from the second consignment realised Rs 400 each and 30 pieces remained in stock unsold. Two pieces from the old stock, being unsaleable at Kerla, were returned to Mumbai, for which the Kerla Agent sent a separate debit note for Rs 60, being expenses incurred by him as packing and freight. The Kerla 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. 45 CU IDOL SELF LEARNING MATERIAL (SLM)

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 Balaji Wafers, Rajkot consigned 10,000 kg of wafers to Gopal Wafers of Jamnagar on 1st January, 2019. The cost of the oil was Rs 920 per kg. The Balaji Wafers paid Rs 4, 00,000 for packing, freight and insurance. During transit 250 kg were accidentally destroyed for which the insurers paid, directly to the consignors, Rs 90,000 in full settlement of the claim. Gopal took delivery of the consignment on the 10th January. On 31st March, 2019 Gopal reported that 7500 kg were sold at Rs 1200, the expenses being on godown rent Rs 60,000, on advertisement Rs 80,000 and on salesmen’s salaries Rs 128,000. Gopal is entitled to a commission of 3 per cent plus 228 per cent delcredere. A party which had bought 1000 kg was able to pay only 80% of the amount due from it. Gopal reported a loss of 100 kg, due to leakage. Assuming that Gopal 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. B. Multiple Choice Questions: 1. 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. 2. 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 3. 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. 4. In the books of consignee the sale of goods is credited to: a. consignor’s account 46 CU IDOL SELF LEARNING MATERIAL (SLM)

b. Sales account c. Consignee’s account d. None of these 5. 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 Answer: 1. a 2.a 3.a 4.a 5.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 • 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. New Delhi: VK Publications. 47 CU IDOL SELF LEARNING MATERIAL (SLM)