BBA108_Financial and Management Accounting(Draft 2)-converted

The executives can really choose whether they should keep on delivering these five items dependent on their development throughout some undefined time frame. Let say Product A as this item is consistently making loss since 2009, it got simpler for the management to choose whether they should produce product A or they ought to dispense with this item. Moreover, they can rank the product dependent on their profit. For instance, Product B is the most beneficial item. METHODS OF DEPARTMENTAL ACCOUNTING. There are two methods of keeping Departmental Accounts − • Separate Set of Books for each department • Accounting in Columnar Books form Separate Set of Books for each Department Under this method for accounting, every department is treated as a different unit and separate arrangement of books are kept up for every unit. Financial results of every unit are joined toward the end of accounting year to know the general results of the store. Because of high expense, this method of accounting is followed simply by large business houses or where to do so is mandatory according to the law. Insurance business is perhaps the best example, where to follow this system is mandatory. Accounting in Columnar Books Form Small business unit for the most part utilizes this arrangement of accounting, where records of all department are kept up together by central accounts department in the columnar books structure. Under this method, sale, purchase, stock, expenses, etc. are maintained in a columnar form. It is essential that to set up a departmental Trading and Profit and Loss Account, arrangement of subsidiary books of records having various columns for the different department is required. Purchase Book, Purchase Return Book, Sale Book, Sales return books etc. are the examples of the subsidiary books. Specimen of a Sale Book is given below − Sales Book 50 CU IDOL SELF LEARNING MATERIAL (SLM)

Date Particulars L.F. Department A Department Department Department D B C A Trading account in columnar form is set up to know the department wise gross profit of the concern. Function wise classification may also be done in a business unit like Production department, Finance department, Purchase department, Sale department, etc. Allocation of Department Expenses • Some expenses, which are exceptionally incurred for a particular department might be charged directly to the separate department. For example, employing charges of the vehicle for delivery of goods to customer may be charged to the selling and distribution department. • Some of the expenses may be allocated according to their uses. For example, electricity expenses may be divided according to the sub meter of each department. Following are the examples of some expenses, which are not directly related to any particular department may be divide as − • Cartage Freight Inward Account − Above expenses may be divided according to purchase of each department. • Depreciation − Depreciation may be divided according to the value of assets employed in each department. • Repairs and Renewal Charges − Repair and renewal of the assets may be divided according to the value of the assets used by each department. • Managerial Salary − Managerial salary should be divided according to the time spent by the manager in each department. • Building Repair, Rents & Taxes, Building Insurance, etc. − All the expenses related to the building should be divided according to the floor space occupied by each department. • Selling and Distribution Expenses − All the expenses relating to selling and distribution expenses should be divided according to the sales of each department, such as freight outward, travelling expenses of sales personals, salary and 51 CU IDOL SELF LEARNING MATERIAL (SLM)

commission paid to salesmen, after sales services expenses, discount and bad debts, etc. • Insurance of Plant & Machinery − The value of such Plant & Machinery in each department is the basis of the insurance. • Employee/worker Insurance − Charges of a group insurance should be divided according to the direct wage expenses of each department. • Power & Fuel − Power & fuel will be allocated according to the working hours and power of the machine (i.e. Hours worked x Horse power). SUMMARY A departmental accounting system is an accounting information system that records the activities and financial information about the department. Managers can use the financial information from the departmental accounting system to tell how profitable and efficient each department is. KEY WORDS • Credit note: A document sent to a customer of a business cancelling the customer's debt to the business, usually because the customer has returned defective goods or has received inadequate service. • Customers' collection period: Average number of days credit taken by customers. • Gross: Before making deductions. • Inventory: Stocks of goods held for manufacture or for resale • Profit: Calculated as revenue minus expenses LEARNING ACTIVITY 1. When goods are transferred from one department to another department at market price, unrealised profit in the unsold goods must be transferred to stock reserve account. 2. When one department transfer goods to another department, the journal entry to bepassed: receiving department account debited and supplying department credited. 52 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT END QUESTIONS A. Descriptive questions 1. Identify is unrealised profit? Show how it is worked out and accounted for. 2. State are the objectives of departmental accounting at Reliance Industry? 3. Analyse are the advantages of Departmental Accounting at Tata Motors? 4. Evaluate is the significance of Departmental accounting at HCL? 5. Illustrate are the methods of departmental accounts? B. Multiple Choice Questions: 1. In departmental accounts expenses like director fees, interest is transferred to ---------- a. general P & L account. b. trading account. c. balance sheet. d. P & L Appropriation account. 2. The departmental accounting enables a business firm to maximize ----------- a. profit. b. losses. c. cash. d. assets. 3. The departmental accounts expenses like director fees, interest is transferred to a. General P&L account b. Trading Account c. Balance sheet d. P&L appropriation account 4. The cost, which consist of interdepartmental cost allocations plus cost of support department are classified as a. Complete reciprocal costs b. artificial costs c. operating cost d. flexible operating cost 53 CU IDOL SELF LEARNING MATERIAL (SLM)

5. 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 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. 54 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT-5 DEPARTMENTAL ACCOUNTING – II 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 OBJECTIVE After studying this unit, you will be able to: • State the basis of allocation for common expenditure among different departments • Describe Inter Department transfer INTRODUCTION Departmental Accounting is essentially keeping the different book of records of the individual department. In the event that a business comprises of a few independent activities or divided into different departments for doing its functions, its management is generally keen on discovering the working results of every department to find out their relative efficiencies. This can be made possible just if departmental records are prepared. Departmental records are of incredible assistance and help to the management as the data for controlling the business all the more insightfully and viably. BASIS OF ALLOCATION FOR COMMON EXPENDITURE AMONG DIFFERENT DEPARTMENTS Ordinarily, all direct expenses are charged to the individual department, 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 Every office is accused of legitimate operational expense. If the basis for such allocation is not specially mentioned, then the following procedure may be followed. 55 CU IDOL SELF LEARNING MATERIAL (SLM)

Figure 5.1 Basis of Allocation for Common Expenditure Among Different Departments A few costs can't be allotted and no premise of apportionment is practicable. For instance, interest on Loan, Income Tax, Salary to General Manager, Share Transfer expenses, Bank charges, Audit fees and so on. Here these expenses can securely be transferred to General Profit and Loss Account. Also, 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 acquired or endured by every department. Illustration 1: The owner of a large retail store desired to ascertain approximately the net profit of the X, Y and Z departments separately for the three months ended 31st March 2019. 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 56 CU IDOL SELF LEARNING MATERIAL (SLM)

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: 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- 3-2019 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. 57 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: 58 CU IDOL SELF LEARNING MATERIAL (SLM)

Illustration 3: Department C – 2,496 units @ Rs 25 each. The rate of Gross Profit is the same in each case. Prepare Departmental Trading Account. Solution: 59 CU IDOL SELF LEARNING MATERIAL (SLM)

INTER-DEPARTMENT TRANSFERS Products are regularly supplied starting with one Department then onto the next – Inter- Departmental exchange. Such transfer must be credited to Supplying Department and charged to Receiving Department. On the off chance that the transfers are made at cost price, at that point it tends to be treated as mere transfer. No further change is required. 60 CU IDOL SELF LEARNING MATERIAL (SLM)

However, on the off chance that the transfer of products are made at selling price, at that point a profit is acquired by the supplying department of a same organisation. At the point when the goods, transferred from one department to another, still stay unsold with the transferee department, toward the end of the accounting, there emerges a need 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: 61 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: 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. 62 CU IDOL SELF LEARNING MATERIAL (SLM)

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: 63 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. 64 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. 65 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: 66 CU IDOL SELF LEARNING MATERIAL (SLM)

Illustration 4: 67 CU IDOL SELF LEARNING MATERIAL (SLM)

68 CU IDOL SELF LEARNING MATERIAL (SLM)

Note: All expenses are divided in Sales Ratio, as per instruction given. 69 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 Rs 39.627. 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. 70 CU IDOL SELF LEARNING MATERIAL (SLM)

Approximate apportionment is all that is necessary: charge any odd balance to Outfitting Department. 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. 71 CU IDOL SELF LEARNING MATERIAL (SLM)

SUMMARY Departmental stores have numerous sorts of stores under a single rooftop, for instance one departmental store may have a cosmetic store, shoe store, writing material store, readymade departmental store, markets, drugs, and some more. It is important to know the profit and loss record of each departmental store toward the end of the accounting year. Be that as it may, it tends to be finished by keeping up the department wise Trading and Profit and Loss account. KEY WORDS • Purchase order: A form that a company's purchasing department sends to a vendor 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 of the segment's manager. • Expenditure: A payment or an obligation to make future payment for an asset or a service. LEARNING ACTIVITY 1. What are the allocations of expenses in departmental accounting? 2. Journal entries in inter departmental transfer UNIT END QUESTIONS A. Descriptive Questions 1. Analyse the basis of allocation of common expenses among various departments at Dabur 2. Illustrate are inter- departmental transfer of goods treated in departmental accounts? 72 CU IDOL SELF LEARNING MATERIAL (SLM)

3. Why goods are marked on invoice price by the head office while sending goods to the branch? 4. Sun pharma 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. 5. A firm has two departments, Timber and Furniture. Furniture was made by the firm 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. 73 CU IDOL SELF LEARNING MATERIAL (SLM)

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 any particular department are taken in a. General Profit and Loss Account b. debtors book c. creditors book 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 Answer 1.a 2.a 3.a 4.a 5.a 74 CU IDOL SELF LEARNING MATERIAL (SLM)

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. 75 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT-6 VOYAGE ACCOUNTING Structure Learning Objective Introduction Treatment of special items of income & expense used in voyage Voyage in progress (Incomplete Voyage). Summary Key words Learning Activity Unit -End Questions References LEARNING OBJECTIVE After studying this unit, you will be able to: • State the treatment of special items of income & expenses used in voyage • Describe Voyage in progress INTRODUCTION Voyage Account is a record which is set up by the shipping companies. This account is set up to get a total account of the profits acquired and loss incurred about on the specific voyage embraced by the shipping companies. It records both inward and outward journey. It is arranged independently for each voyage. The technique for accounting followed by shipping companies is known as voyage accounting. Shipping companies is known as voyage accounting set up their records intermittently and furthermore set up the after effects of each voyage independently. Shipping companies convey goods starting with one spot then onto the next. A few organizations convey passengers additionally notwithstanding goods starting with one spot then onto the next spot. So as to learn the consequence of working a ship’s voyage, Voyage Account is created. The Voyage Account is an income account. It is essential to take note of that there is no distinction in the way of getting ready records 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, 76 CU IDOL SELF LEARNING MATERIAL (SLM)

bunker and 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, for example, cargo on load conveyed, entry cash, primate and so on are credited. TREATMENT OF SPECIAL ITEMS OF INCOME & EXPENSE 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. 77 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 Stock By Primage Xx Add: Purchases XX xx 78 xxxx xx Less: Closing Stock xx xx To Port Charges xx To Captain Expenses xx To Harbour Wages xx To Address Commission xx To Brokerage xx To Insurance Premium xx To Salary & Wages xx To Stores To Deprecation To Provision for Incomplete Voyage CU IDOL SELF LEARNING MATERIAL (SLM)

To Net Profit xx (trf. To Profit & Loss A/c) XXXX Illustration 1: XXXX 79 CU IDOL SELF LEARNING MATERIAL (SLM)

S Ltd. starts a voyage on 1. 10. 2010 from Delhi to New York 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: 80 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 Jahid 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 81 CU IDOL SELF LEARNING MATERIAL (SLM)

back to Visakhapatnam from Calcutta on Voyage No. 707, having covered half of the return voyage. 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. 82 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. 83 CU IDOL SELF LEARNING MATERIAL (SLM)

The expenses were as follows: 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. 84 CU IDOL SELF LEARNING MATERIAL (SLM)

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: 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. 85 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 years of working life left (Depreciation on ship is charged on straight line basis). (i) Standing cost per day excluding recovery of depreciation is Rs. 22,000. (ii) The vessel consumes daily 14 tonnes of fuel 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: 86 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. 87 CU IDOL SELF LEARNING MATERIAL (SLM)

(ii) 10,000 tonnes copra at Rs. 340 per tonne. 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. 88 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. (i) 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 entitled to 1% of the net profits of each voyage after charging such commission. Further details are: 89 CU IDOL SELF LEARNING MATERIAL (SLM)

Repairs and Renewals: at Bombay Rs. 38,000 and at Basra Rs. 20,000. 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. 90 CU IDOL SELF LEARNING MATERIAL (SLM)

91 CU IDOL SELF LEARNING MATERIAL (SLM)

VOYAGE IN PROGRESS (INCOMPLETE VOYAGE). At the end of the accounting year where voyage is not completed and is still in progress, following accounting treatments are required − Freight Received Total freight received credited to the voyage account and the provision for incomplete voyage is debited from the voyage account. Provision is created for the voyage-in-progress in proportion of the incomplete journey. Expenses 92 CU IDOL SELF LEARNING MATERIAL (SLM)

To complete matching concept, an income as well as expenses related to the incomplete voyage might be carried forward to the next accounting year on the respective account. Provision for the income earned should be debited from the voyage account and provision for the expenses should also be credited to the voyage account. Basis of the expenses to be carried forward is as hereunder − • Expenses which are related to the freight, need to be carried forward in a proportion to return freight. For example, if total freight is Rs. 5000,000 out of which return freight is Rs. 2400,000 and total expenses are Rs. 1000,000, then expenses to be carried forward to the next accounting year — will be Rs. 480,000. =2400,0005000,000×1000,000=2400,0005000,000×1000,000 • In case of the standing expenses, if return journey is incomplete, ½ of the standing charges to be carried forward. • In case where return journey is halfway back and the total expenses of voyage given 1212 of the total expenses to be carried forward. • When the return journey is halfway back and the expenses till date are given 13rd13rd of the expense are to be carried forward. • When one round of the trip is completed and on his half way back for single way and total expenses of voyage are given, then 13rd13rd expenses are to be carried forward. • When one round trip is completed and on his half way back for single way and expenses till date are given, then 15th15th expenses are to be carried forward. SUMMARY To know the financial after effects of a marine business, voyage account is readied. Voyage account is like a Profit and Loss account; all expenses are debited to Voyage record and all income are credited to Voyage account. Voyage account is set up to learn the profit or Loss of voyage. It covers both inward and outward voyaging. It is significant that different Voyage record ought to be ready for every vessel. KEY WORDS • Brokerage and Address Commission: Brokerage and Commission payable to broker for getting cargo for the ship which is determined on a specific percentage of cargo comprehensive of primage, and address commission is paid to the charterer which is charged to Voyage Account. 93 CU IDOL SELF LEARNING MATERIAL (SLM)

• 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. Hikal Shipping Company of Pune had a ship by name Vikrant, whose written down value as on 1st July 2005 was Rs. 48 lakhs. The ship was insured for Rs. 60 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: (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. 94 CU IDOL SELF LEARNING MATERIAL (SLM)

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. UNIT END QUESTIONS A. Descriptive Type question 1. What are the Main Expenses and Incomes of Voyage? 2. KK Ltd set out on a voyage from Bhutan to Chhattisgarh, On December 31the accounts are to be closed, the return voyage had not been completed. The details for the entire Voyage to Chhattisgarh and back to Bhutan completed after December 31 were: Freight Rs. 800000 Coal consumed Rs. 140000 Salaries Consumed Rs. 60000 Port charges Rs.30000 Salaries of crew Rs. 80000 Depreciation Rs.80000 Insurance of ship Rs. 40000 Insurance of freight Rs. 16000 Address commission 5% Only Rs.300000 freight was available on the return journey. Prepare Voyage Accounts 3. A ship was chattered from London to Canada on 31st December. The accounts were closed after the arrival of the ship. The details for the voyage to Canada and back were: $$ Store consumed 14000 Freight 180000 Coal consumed 30000 Depreciation 12000 Port charges 6000 Salaries of crew 16000 95 CU IDOL SELF LEARNING MATERIAL (SLM)

Insurance of ship 20000 Insurance of freight 10000 Address commission 5% Fuel 2100 $80000 freight was received on return with 10% primage. 4. What is voyage account and how to papered it? 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 4. Bad debts written off previously, if recovered subsequently 96 a. Credited to profit and loss account b. Debited to profit and loss account c. Credited to bad debts recovered account d. Credited to debtors account CU IDOL SELF LEARNING MATERIAL (SLM)

5. Under double account system, profit is disclosed in 5. c a. Net revenue account b. Capital account c. Revenue account d. Receipts and expenditure on capital account Answer 1. a 2. b 3. c 4. 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. 97 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT-7 ROYALTY ACCOUNTS Structure Learning Objective Introduction Terms used in Royalty agreements distinction between rent and royalty accounting entries in the books of lessee Stoppage of work due Summary Key words Learning Activity Unit -End Questions References LEARNING OBJECTIVE After studying this unit, you will be able to: • Explain royalty account • List distinction between rent and royalty • Describe terms used in royalty agreements INTRODUCTION Royalty is payable by a client to the proprietor of the property or something on which a proprietor has some unique rights. A royalty arrangement is set up between the proprietor and the client of such property or rights. In the event that instalment is made to buy the privilege or property that will be treated as capital expenditure rather than a Royalty. Installment made by the tenant on account of a royalty is normal business expenditure and will be debited to the Royalty account. It is a nominal account and toward the end of the accounting period, balance of Royalty account should be transferred to the normal Trading and Profit and Loss account. Royalty, in light of the creation or yield, will carefully go to the Manufacturing or Production account. On the off chance that, where the Royalty is payable at a sale basis, it will be essential for the selling costs. TERMS USED IN ROYALTY AGREEMENTS Minimum Rent 98 CU IDOL SELF LEARNING MATERIAL (SLM)

As mention, the lessor goes into a contact or an agreement with the lessee for the instalment or payment of royalty. This royalty is resolute on the basis of number of goods produced or quantum of goods sold. Presently, there can be situations when the quantity of goods produced or sold are invalid or moderately low. In such a case, the lessor would get no or little royalty legitimately affecting lessor's royalty income. As such, when there is no or little production or sale, the lessor would be at a loss since no or production or sale would be gotten from the lessee. This is notwithstanding lessee using the asset. To dispose of such a circumstance, the lessor requires a base measure of payment to be paid by the lessee regardless of the quantity of goods produced or sold by the lessee. That is, lessee is needed to pay least minimum to the lessor. This is in spite of the way that the actual royalty amount, which is determined dependent on the things 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. Example For example, say the output produced by Mine X is 8,000 tons. The royalty to be paid by the lessee is Rs 200 per ton and the minimum rent in the agreement is Rs 10 Lakhs. As per production, the actual royalty amount to be paid comes at Rs 8 Lakhs. Since the actual royalty amount is less than the minimum rent, the lessee is required to pay minimum rent of Rs 10 Lakhs to the Lessor. Short Workings or Redeemable Dead Rent Short Workings is only the sum by which the minimum rent is more than the actual royalty. All in all, short workings are the distinction between minimum rent and actual royalty. 99 CU IDOL SELF LEARNING MATERIAL (SLM)