MCM604_Advanced Financial Accounting

Joint Venture 193 5. X and Y entered into a joint venture of underwriting the subscription at par of the entire share capital of the Copper Mines Ltd. Consisting of ` 80,000 equity shares of 10 each and to pay all expenses upto allotment. The profits were to be shared by them in the ratio of 3 : 2. The consideration in return for this agreement was the allotment of 9,600 other shares of ` 10 each to be issued to them as fully paid X provided the funds for registration fees ` 9,600, advertising expenses ` 8,800, expenses on printing and distribution of prospects ` 6,000 and other printing and stationery expenses ` 1,600. Y contributed towards payment of office rent ` 2,400, legal charges ` 11,000, salary to clerical staff ` 7,200 and other petty disbursements ` 1,400. The prospectus was issued and applications fell short of the issue by 12,000 shares. X took these over on joint account and paid for the same in full. The venturers received the 9,600 fully paid shares as underwriting commission. They sold the entire holding ` 12.50 less 50 paise brokerage per share. The net proceeds were received by X for 12,000 shares and Y for 9,600 shares. Write out the necessary accounts in the books of both the parties showing the adjustment. Ans: Profit and Loss A/c: ` 91,200. 6. Rajesh, Satish and Mahesh entered into a joint venture according to which Rajesh and Satish purchase goods and send the same to Mahesh who is a marketer. Mahesh would sell the goods for a commission of 10% Rajesh and Satish agreed to share the remaining profit in the ratio of 3 : 2. Rajesh purchased goods for ` 1,00,000 and sent them to Mahesh incurring an expenditure of ` 4,000. Satish purchased goods for ` 60,000 and sent the same to mahesh by incurring an expenditure of ` 3,000. Mahesh exported all the goods and realized ` 2,00,000, by paying ` 1,000 as insurance premium. He also received ` 8,000 as insurance compensation for some goods destroyed. Mahesh paid the balance of cash to Rajesh and Satish. Prepare: (a) Memorandum Joint Venture Account and (b) Co-venturers Accounts. Ans: Profit on joint venture: ` 20,000, Paid to Rajesh: ` 12,000, Satish: ` 8,000 CU IDOL SELF LEARNING MATERIAL (SLM)

194 Advanced Financial Accounting B. Multiple Choice/Objective Type Questions 1. Every co-venture records all the transactions in his books in connection with the __________. [a] Partnership [b] Joint venture [c] Sole proprietorship [d] None 2. Which method in accounting treatment helps a lot of clerical work? [a] Method 1 [b] Method 2 [c] Method 3 [d] None Answers 1. [b], 2. [b] 11.11 References 1. Arulanandam and Raman, Advanced Accountancy, Himalaya Publication House Pvt. Ltd., Edition 2018. 2. Dr. Vishwanathan Reddy and Jayaram Kanzal, Corporate Accounting, Himalaya Publication House Pvt. Ltd., Edition 2019. 3. Dr. S.N. Maheswari, Financial Accounting, Vikas Publication, Edition 2017. 4. S.P. Jain and K.L. Narang, Financial Accounting, Kalyani Publication, Edition 2018. 5. Reddy, K.R. (2000), “Accounting Standards and Gaps in Practices in India”, Management Accountant, ICWAI, April. 6. http://www.mca.gov.in/MinistryV2/accountingstandards1.html 7. https://www.icaew.com/technical/by-country/north-america/us/accounting-in-us/us-gaap 8. https://www.ifrs.org/issued-standards/list-of-standards/ 9. http://www.accountingnotes.net/final-accounts/final-accounts-of-the-companies-with- solutions-accounting 10. http://www.accountingnotes.net/amalgamation/external-reconstruction-and-amalgamation ˆˆˆ CU IDOL SELF LEARNING MATERIAL (SLM)

Consignment Accounts 195 UNIT 12 CONSIGNMENTACCOUNTS Structure: 12.0 Learning Objectives 12.1 Introduction 12.2 Meaning of Consignment 12.3 Features of Consignment Account 12.4 Consignee’s Commission 12.5 Account Sales 12.6 Distinction between Joint Venture and Consignment Accounting 12.7 Treatment in the Books of Consignor and Consignee 12.8 Practical Problems on Consignment Account 12.9 Summary 12.10 Key Words/Abbreviations 12.11 LearningActivity 12.12 Unit End Questions (MCQs and Descriptive) 12.13 References CU IDOL SELF LEARNING MATERIAL (SLM)

196 Advanced Financial Accounting 12.0 Learning Objectives After studying this unit, you will be able to: z Learn the concept of Consignment Accounts z Understand the meaning and features of consignee’s commission z Learn the concept of account sales z Distinguish between Joint Venture and Consignment z Understand the accounting treatment in the books of consignor and consignee 12.1 Introduction A wholesaler or a manufacturer may sell their commodities to another trader for resale purpose in an establishment market. In order to increase the trade or marketing activities the manufacturers or the wholesalers may send, their commodities to a new market where a trader, who is aware of the local market conditions, agrees to sell the products in the market at the former’s risk. The sender of the goods is called the consignor and recipient the consignee. The relationship that exists between the consignor and the consignee is that of a principal and an Agent. Consignee receives the commodities and sells on behalf of the consignor and the expenses incurred by the consignee in connection with the particular consignment is to be reimbursed by the consignor irrespective of the sale being made by the consignee. 12.2 Meaning of Consignment The goods despatched by the consignor to the consignee to be sold by the latter at the end risk of the former are known as consignment. 12.3 Features of Consignment Account 1. The possession of the goods transfers from one party to another. 2. The consignor is responsible for all the risks, expenses and damages associated with the consigned goods. CU IDOL SELF LEARNING MATERIAL (SLM)

Consignment Accounts 197 3. The relation of the persons in the consignment is that of consignor and the consignee and not of the buyer and seller. 4. Only the possession of the goods is with the consignee and not the ownership. 5. Profit or loss on the sale of the goods belongs to the consignor. The consignor sends Pro-forma Invoice. While the consignee sends Account Sales, Account Sales include the details regarding the goods, sales, expenses, commission, advances, and balances due. ADVANTAGES AND DISADVANTAGES CONSIGNMENT Advantages: Advantages for Consignor (a) Increased sales and margin if the consignor is assigning the responsibility of the goods to a skilled and experienced consignee. (b) Since the ownership is with the consignor, he may at any time reclaim those goods in the case of any default from the consignee’s end. (c) Inventory holding costs are lessened as the goods are sent to the consignee and are in his possession. (d) If the sellers want to increase their sales and do not have time to promote their product or look after the customers, they prefer hiring an agent to look after the same. (e) If the consignee is well versed with the buyers, market, product, etc., he may sell the product very fast. Hence, this would lead to product expansion, better market share, increased sales, etc. Advantages for Consignee (a) The consignee has to pay for only those goods that are sold. (b) The consignee sometimes does not have to pay for some expenses if it agreed as per the agreement. CU IDOL SELF LEARNING MATERIAL (SLM)

198 Advanced Financial Accounting (c) If the consignee is well versed with the product, he may sell the goods faster thereby increasing his share of revenue. (d) In the case of huge demand, he may earn higher revenue. As he need not incur any expense of the shipping, also not to worry about the lead time. Disadvantages: Disadvantages for Consignor (a) Since the consignee is not the owner and does not face any monetary risk, he may not take this agreement seriously. Hence, he may not promote sales. (b) Sometimes, the consignor pays huge shipping charges by shipping a large amount of inventory instead of paying for smaller inventories to the consignee. However, the goods may or may not sell. So, if the goods do not sell, he suffers a huge loss as he remains to be the owner and they still have to count it as a part of his cost assessment. (c) The consignor has to keep waiting for the payment creating uncertainty in regards to when and how much will be receipt of the sales proceeds from the consignee. So, until there is a sale of all or some of the goods, the consignor has to wait for the payment leading to an imbalance in cash flows. (d) If the consignor sells the product directly into the market, he may earn comparatively higher revenue by removing the excess profit margin of the consignee. Disadvantages for Consignee (a) If the consignee carries a bad reputation in a particular market, he may not be able to sell the goods so easily. (b) The biggest con for the consignee is that he incurs a holding cost for that inventory either in his godown or in his store. That inventory may or may not sell. So, in the case of unsold goods, he suffers a loss. (c) If the consignee repeatedly fails to sell the goods in time, he may either be discarded as an agent or would receive a lesser commission. CU IDOL SELF LEARNING MATERIAL (SLM)

Consignment Accounts 199 12.4 Consignee’s Commission Consignee is entitled to receive a remuneration over and above the actual expenses incurred by him for the services rendered by him to the consignor. The remuneration which is termed commission, is usually calculated upon the total value of goods sold by the consignee. An additional commission called del credere commission, is paid where the consignee agrees to meet any loss which the consignor may suffer by reason of bad debts. This del credere commission is calculated on the total sales made by the consignee unless the terms and conditions stipulate that the commission is to be calculated only for the credit sales made by the consignee. 12.5 Account Sales The consignee sends a statement to his consignor about the details of goods received sales, expenses incurred, commission charged and remittances made with the resultant balance due by him. This statement is known as “Account Sales”. 12.6 Distinction between Joint Venture and Consignment Accounting Consignment Joint Venture 1. It refers to a principal (seller) sending goods 1. It is a temporary partnership between two to his agent (buyer) for sale to third parties. or more parties. 2. The parties to a consignment agreement 2. The participants in a joint venture are are known as consignor and consignee. called co-ventures. 3. The relationship between consignor and 3. The relationship between co-ventures is like that consignee is a principal-agent relation. of partners in a partnership. 4. The consignor and consignee do not share 4. Co-ventures share the profits and losses profits; the consignee receives a commission. of the joint venture in their agreed 5. The consignor and consignee do not enjoy 5. The co-ventures enjoy equal rights in a equal rights. The consignor has the rights of joint venture. a principal and the consignee those of an agent. CU IDOL SELF LEARNING MATERIAL (SLM)

200 Advanced Financial Accounting 6. The consignee’s powers are limited. The 6. Co-ventures have unlimited powers with consignee is the agent who follows respect to the joint venture. instructions from the consignor. 7. The consignor is the owner of the business 7. The co-ventures are the co-owners of the activity – the goods. joint venture. 8. There is only one method of maintaining 8. The co-ventures maintain the accounts as the accounts of the consignment. specified in the joint venture agreement. 12.7 Treatment in the Books of Consignor and Consignee Specimen of an Account Sales Account Sales of 20 bales of woollen goods received from and sold on account of Mohan & Co. Bangalore by India Silk House, Mumbai. Particulars ` `` 20 bales of woollen goods @ ` 2,400 Less: Octroi 48,000 Freight 600 Godown Rent Advertisement 1,800 Commission at 10% 600 Less: Draft accepted against consignment Balance due, Bank draft enclosed 1,200 4,200 E. & O.E. 4,800 9,000 Mumbai 12th July, 2019 39,000 6,000 33,000 (For) India Silk House, Signed . . . . . . CU IDOL SELF LEARNING MATERIAL (SLM)

Consignment Accounts 201 Accounting Treatment In the Books of the CONSIGNOR In the Books of the CONSIGNEE 1. When goods are consigned: Debit Consignment A/c No Entry Credit Goods sent on Consignment A/c 2. Expenses incurred by the Consignor: Debit Consignment A/c No Entry Credit Bank/Cash A/c 3. Expenses incurred by the Consignee: Debit Consignment A/c Debit Consignor’s A/c Credit Consignee’s A/c Credit Bank/Cash A/c 4. When a bill is received: Debit Bills Receivable A/c Debit Consignor’s A/c Credit Consignee’s A/c Credit Bills Payable A/c 5. When the bill is discounted: Debit Bank/Cash A/c Debit Discount A/c No Entry Credit Bills Receivable A/c 6. When the Goods are sold by the Consignee: Debit Consignee’s A/c Debit Cash/Bank/Consignors Debtors Credit Consignment A/c Credit Consignor’s A/c CU IDOL SELF LEARNING MATERIAL (SLM)

202 Advanced Financial Accounting 7. For the commission due to the Consignee: Debit Consignment A/c Debit Consignor’s A/c Credit Consignee’s A/c Credit Commission A/c 8. For the cash received from the Consignee: Debit Cash/Bank A/c Debit Consignor’s A/c Credit Consignee’s A/c Credit Cash/Bank A/c 9. For the Bad Debts suffered by the Consignee: (a) When the Del-credere Commission is allowed: No Entry Debit Bad Debts A/c Credit Consignor’s Debtor’s A/c and Debit Commission A/c Credit Bad Debts A/c (b) When the Del-credere Commission is not allowed: Debit Consignment A/c Debit Consignor’s A/c Credit Consignee’s A/c Credit Consignor’s Debtor’s A/c 10. For the stock lying with the consignee at the end: Debit Consignment Stock A/c No Entry Credit Consignment A/c The above entry will be reversed in the next year, by treating the stock as opening for that year. 11. For closing the goods sent on Consignment A/c: Debit Goods Sent on Consignment A/c Credit Trading A/c — if the Consignor has the manufacturing activity OR Credit Purchase A/c — if the Consignor has Trading activity, No Entry CU IDOL SELF LEARNING MATERIAL (SLM)

Consignment Accounts 203 12. For transferring the profit or loss made on the consignment: For Profit — Debit Consignment A/c Credit Profit and Loss A/c For Loss — Debit Profit and Loss A/c Credit Consignment A/c 12.8 Practical Problems on Consignment Account Illustration - 1 ABS India Company of Chennai consigned 100 tape-recorders to National Company of Hyderabad. The cost of each tape-recorder was ` 500. The consignors paid Insurance ` 500, Freight ` 800. Account sales was received from National Company showing gross sale proceeds of 80 units at ` 600 each. The expenses paid and deducted by them were: Carriage 20 Establishment expenses 130 Commission @ 5% 2,400 2,550 Show journal entries and important Ledger Accounts in the books of both the parties. Solution: In the Books of Central India Company Journal Date Particulars LF ` ` Consignment to Hyderabad A/c Dr. 50,000 To Goods Sent on Consignment 50,000 (Being 100 tape recorders consigned to National Company, Hyderabad) CU IDOL SELF LEARNING MATERIAL (SLM)

204 Advanced Financial Accounting Consignment to Hyderabad A/c Dr. 1,300 To Cash A/c 1,300 (Being freight and insurance paid for the Consignment) Consignment to Hyderabad A/c Dr. 150 150 To National Company A/c (Expenses paid by National Company) National Company A/c Dr. 48,000 48,000 To Consignment to Hyderabad A/c (Being proceeds received by National Company due to sale of tape recorders) Consignment to Hyderabad A/c Dr. 2,400 To National Company 2,400 (Being commission due to National Company) Stock on Consignment A/c Dr. 10,264 10,264 To Consignment to Hyderabad A/c (Being stock at the end lying with National Company) Bank A/c Dr. 45,450 45,450 To National Company (Being amount received from National Company) Dr. Consignment to Hyderabad Account Cr. Particulars ` Particulars ` To Goods Sent on Consignment A/c 50,000 By National Company (Sales) 48,000 To Cash By Stock on Consignment A/c 10,264 Insurance 500 Freight 800 CU IDOL SELF LEARNING MATERIAL (SLM)

Consignment Accounts 205 To National Company (Carriage) 20 To Estate Expenses 130 To Commission 2,400 To Profit and Loss A/c - Profit 4,414 58,264 58,264 Cr. Dr. Goods Sent on Consignment Account Particulars ` Particulars ` To Purchase A/c 50,000 By Consignment to Hyderabad A/c 50,000 Dr. Particulars 50,000 50,000 To Consignment to National Company Account Cr. Hyderabad A/c – Sales ` Particulars ` 48,000 By Consignment to Hyderabad A/c: 20 Carriage Estate Expenses 130 Commission 2,400 Bank – Balance received 45,450 48,000 48,000 Notes: Valuation of unsold stock 20 tape recorders @ ` 500 10,000 Proportionate Expenses incurred by the Consignor 1300 × 20 260 100 Proportionate Non-recurring Expenses (Carriage) 20 4 10,264 incurred by the Consignee × 20 100 CU IDOL SELF LEARNING MATERIAL (SLM)

206 Advanced Financial Accounting In the Books of National Company Journal Date Particulars L.F. ` ` Central India Company A/c Dr. 150 150 To Cash (Being the expenses incurred on the consignment received) Bank A/c Dr. 48,000 48,000 To Central India Company A/c (Being sale of 80 tape recorders received on consignment) Central India Company A/c Dr. 2,400 To Commission 2,400 (Being commission due on gross sale proceeds) Central India Company A/c Dr. 45,450 To Bank 45,450 (Being balance remitted) Dr. Central India Company Account Cr. Particulars ` Particulars ` To Cash Carriage and Establishment By Bank – Sales 48,000 Expenses paid Commission 150 Bank 2,400 45,450 48,000 48,000 Illustration - 2 Lubrizols Ltd. of Mumbai consigned 1,000 barrels of Lubricant oil costing ` 800 per barrel to Central Oil Company, Calcutta on 1st January, 2013. Lubrizols Ltd. paid ` 50,000 as freight and CU IDOL SELF LEARNING MATERIAL (SLM)

Consignment Accounts 207 insurance. 25 barrels were destroyed on 7th January, 2013 in transit. The insurance claim was settled at ` 15,000 and was paid directly to consignors. Central Oil Company took delivery of the consignment on 19th January, 2013, and accepted a bill drawn upon them by Lubrizols Ltd. for ` 5,00,000 for 3 months on 31st March, 2013. Central Oil Company reported as follows: (i) 750 barrels were sold at ` 1,200 per barrel. (ii) The other expenses were: Unloading ` 2,500 Godown Rent ` 10,000 Wages ` 50,000 Printing etc. ` 21,300 (iii) 25 barrels of oil were lost due to leakage which is considered to be a normal loss. Central Oil Company is entitled to a commission of 5% on all the sales effected by them. Central Oil Company paid the amount due in respect of the consignment on 31st March itself. Show the consignment account, the account of Central Oil Company and the loss in transit account as they will appear in the books of Lubrizols Ltd. Solution: In the Books of Lubrizols Ltd., Mumbai Cr. Dr. Consignment to Calcutta Account Date Particulars ` Date Particulars ` 2013 2013 Jan. 1 To Goods Sent on Consignment 8,00,000 Jan. 7 By Abnormal Loss 21,250 To Bank – Freight & insurance 50,000 By Central Oil Co. – Sales 9,00,000 To Central Oil Co. – Expenses 83,800 By Stock on Consignment 1,75,000 To Central Oil Co. – Comm 45,000 To Profit and Loss A/c – Profit 1,17,450 10,96,250 10,96,250 CU IDOL SELF LEARNING MATERIAL (SLM)

208 Advanced Financial Accounting Dr. Goods Sent on Consignment Account Cr. Date Particulars ` Date Particulars ` To Trading Account 8,00,000 By Consignment to Calcutta A/c 8,00,000 8,00,000 8,00,000 Dr. Abnormal Loss Account Cr. Date Particulars ` Date Particulars ` To Consignment A/c 21,250 By Bank A/c 15,000 By Profit and Loss A/c 6,250 21,250 21,250 Dr. Central Oil Company Account Cr. Date Particulars ` Date Particulars ` To Consignment A/c - Sales 9,00,000 By Bills Receivable 5,00,000 By Consignment Exp. 83,800 By Consignment - Commission 45,000 By Bank A/c 2,71,200 9,00,000 9,00,000 Notes: Calculation of Abnormal Loss and Valuation of Unsold Stock Quantity Value No. of Barrels ` 1,000 8,00,000 Expenses incurred by the Consignor 50,000 1,000 8,50,000 Less: 25 Abnormal Loss 8 ,5 0 ,0 0 0× 2 5 21,250 1,000 8,28,750 975 CU IDOL SELF LEARNING MATERIAL (SLM)

Consignment Accounts 209 Add: Nonrecurring Expenses incurred by the Consignee 2,500 975 8,31,250 Less: 25 Normal Loss — 950 8,31,250 Stock at the end (950 – 750) = 200 barrels Value of the Unsold Stock = 8,31,250 5 200 = 1,75,000 950 2. As the consignees were entitled for direct expenses incurred by them, godown rent and insurance premiums (Indirect Expenses) incurred by them have not been considered. Invoicing Goods Higher than Cost Sometimes, consignor may not like to reveal the cost of the goods consigned. So, he invoices the goods in such a manner to earn the expected margin on sales. The consignee is at the option either to sell the products at the invoice price or above the invoice price. While recording the transactions, the entries are passed at invoice price. In order to arrive at the true profit the loading is eliminated on the goods sent and a stock reserve is created on the stock lying with the consignee. The entries are as follows: Entries in the Books of Consignor When the goods are consigned: Debit Consignment A/c At Invoice Price Credit Goods sent on Consignment A/c For unsold stock lying with the consignee: Debit Stock on Consignment A/c At invoice price plus proportionate Credit Consignment A/c non-recurring expenses CU IDOL SELF LEARNING MATERIAL (SLM)

210 Advanced Financial Accounting To remove the load on goods sent on consignment: Debit Goods sent on Consignment A/c Difference between the invoice price and cost Credit Consignment A/c To remove the load on unsold stock: Debit Consignment A/c Difference between the invoice price and cost Credit Stock Reserve A/c (excluding expenses) for the number of units unsold The closing stock and stock reserve will be carried forward to the next year and will be closed by transfer to the Consignment Account as opening stock and opening stock reserve. Illustration - 3 Johar of Jaipur sends goods on consignment to Pawan of Patna. The terms are that Pawan will receive 10% commission (including del credere) on the invoice price (which is cost plus 25%) and 20% of any price realised above invoice price. Johar sent goods for ` 90,000 at invoice price and spent ` 6,740 on freight, forwarding charges, etc. Pawan accepted a bill for 2 months for ` 72,000 immediately on receiving consignment. His expenses were ` 1,200 as rent and ` 150 as insurance. Pawan sold 3/4ths of goods for ` 87,750. One customer failed to pay ` 1,800. This amount could not be realised. Pawan met his acceptance and remitted the amount due to Johar. Give Journal entries to record the above transactions in the books of Johar and of Pawan. Give the important Ledger accounts in the books of Johar. CU IDOL SELF LEARNING MATERIAL (SLM)

Consignment Accounts 211 Solution: In the Books of Johar Journal Date Particulars LF ` ` Consignment to Patna A/c Dr. 90,000 To Goods Sent on Consignment A/c Dr. 6,740 90,000 (Being goods invoiced at ` 90,000) 6,740 Consignment to Patna A/c To Bank A/c (Being freight and forwarding charges paid on the consignment) Bills Receivable A/c Dr. 72,000 To Pawan A/c 72,000 (Being the bills of exchange accepted by Pawan) Consignment to Patna A/c Dr. 1,350 To Pawan A/c 1,350 (Being expenses incurred by Pawan in connection with the consignment) Pawan A/c Dr. 87,750 87,750 To Consignment to Patna A/c (Being sales made by Pawan 3/4ths of the goods consigned) Consignment to Patna A/c Dr. 10,800 To Pawan A/c 10,800 (Being commission due to Pawan – see Note 1) CU IDOL SELF LEARNING MATERIAL (SLM)

212 Advanced Financial Accounting Stock on Consignment A/c Dr. 24,185 24,185 To Consignment A/c (Being stock at the end lying with Pawan, valued at invoice price) Goods Sent on Consignment A/c Dr. 18,000 18,000 To Consignment to Patna A/c (Being the loading reversed, i.e., 1/5th of ` 90,000) Consignment to Patna A/c Dr. 4,500 To Stock Reserve A/c 4,500 (The excess over the cost for the 1/4th of the consignment, i.e., 90,000 5 1/4 = 22,500: 1/5th created as reserve) Bank A/c Dr. 72,000 72,000 To Bills Receivable A/c (The amount received on honouring the bills by Pawan) Bank A/c Dr. 3,600 To Pawan A/c 3,600 (Balance amount received from Pawan) Dr. Consignment to Patna Account Cr. Particulars ` Particulars ` To Goods Sent on Consignment A/c 90,000 By Pawan’s A/c – Sale Proceeds 87,750 To Bank A/c – Expenses 6,740 By Stock on Consignment A/c 24,185 To Pawan’s A/c – Expenses To Pawan’s A/c – Commission 1,350 By Goods Sent on Consignment A/c 18,000 To Stock Reserve A/c To Profit and Loss A/c – Profit 10,800 4,500 16,545 1,29,935 1,29,935 CU IDOL SELF LEARNING MATERIAL (SLM)

Consignment Accounts 213 Dr. Goods Sent on Consignment Account Cr. Particulars ` Particulars ` 90,000 To Consignment to Patna A/c – 18,000 By Consignment to Patna A/c 90,000 Difference between cost and invoice Cr. To Purchase A/c 72,000 90,000 Dr. Pawan’s Account Particulars ` Particulars ` To Consignment A/c – Sales 87,750 By Bills Receivable A/c 72,000 1,350 By Consignment A/c – Expenses 10,800 By Consignment A/c – Commission 3,600 By Bank A/c – Balance received 87,750 87,750 Working Note: 1. Calculation of Commission: Commission `` Sales made by Pawan 3/4ths of the invoiced value – 90,000 5 3/4 87,750 Excess over invoice value 67,500 —10% 6,750 2. Calculation of Unsold Stock: 1/4th of invoice value ` 90,000 20,250 — 20% 4,050 1/4th of Consignor’s Expenses ` 6,740 10,800 22,500 1,685 24,185 CU IDOL SELF LEARNING MATERIAL (SLM)

214 Advanced Financial Accounting Date In the Books of Pawan Journal Particulars LF ` ` Johar’s A/c Dr. 72,000 72,000 To Bills Payable A/c (Being the bills accepted drawn by the consignor) Johar’s A/c Dr. 1,350 To Cash A/c 1,350 (Being the expenses incurred in connection with the consignment) Bank A/c Dr. 85,950 1,800 Consignor Debtor A/c Dr. To Johar’s A/c 87,750 (Being the consignment sold for cash and credit) Johar’s A/c Dr. 10,800 To Commission A/c 10,800 (Being commission calculated as per agreement) Commission A/c Dr. 1,800 To Consignment Debtor A/c 1,800 (Being the amount written off as bad, transferred to commission due to the receipt of del credere commission) Bills Payable A/c Dr. 72,000 To Bank A/c 72,000 (Being the bill accepted met on the due date) Johar’s A/c Dr. 3,600 To Bank A/c 3,600 (Being the balance due to Johar paid) CU IDOL SELF LEARNING MATERIAL (SLM)

Consignment Accounts 215 Dr. Johar’s Account Cr. Particulars ` Particulars ` To Bills Payable A/c 72,000 By Bank & Consignment Debtor A/c 87,750 To Cash Expenses A/c 1,350 To Commission A/c 10,800 To Bank A/c 3,600 87,750 87,750 12.9 Summary The goods dispatched by the consignor to the consignee to be sold by the latter at the end risk of the former are known as consignment. The consignor sends Pro-forma Invoice. While the consignee sends Account Sales. Account Sales include the details regarding the goods, sales, expenses, commission, advances, and balances due. Consignee is entitled to receive a remuneration over and above the actual expenses incurred by him for the services rendered by him to the consignor. The remuneration which is termed commission, is usually calculated upon the total value of goods sold by the consignee. The consignee sends a statement to his consignor about the details of goods received sales, expenses incurred, commission charged and remittances made with the resultant balance due by him. This statement is known as “Account Sales”. The biggest con for the consignee is that he incurs a holding cost for that inventory either in his godown or in his store. That inventory may or may not sell. So, in the case of unsold goods, he suffers a loss. The consignee is at the option either to sell the products at the invoice price or above the invoice price. While recording the transactions, the entries are passed at invoice price. Account Sales include the details regarding the goods, sales, expenses, commission, advances, and balances due. CU IDOL SELF LEARNING MATERIAL (SLM)

216 Advanced Financial Accounting 12.10 Key Words/Abbreviations z Consignee: Consignee receives the commodities and sells on behalf of the consignor. z Consignor: The consignor is responsible for all the risks. z Account Sales: The consignee sends a statement to his consignor about the details of goods received sales. 12.11 Learning Activity 1. What is the meaning of consignment? Explain its features. _________________________________________________________________ _________________________________________________________________ 2. Explain the accounting treatment of Consignment Accounts. _________________________________________________________________ _________________________________________________________________ 3. Explain the concept of Account of Sales. _________________________________________________________________ _________________________________________________________________ 12.12 Unit End Questions (MCQs and Descriptive) A. Descriptive Type Questions 1. Explain the advantages of consignment. 2. Explain the disadvantages of consignment. 3. Distinction between Consignment and Joint Venture 4. Lokesh of Mysore sends 2000 kgs of oil at ` 120 kgs to Nataraj at Hubli. The consignor spends ` 11,000 on cartage, insurance and freight. CU IDOL SELF LEARNING MATERIAL (SLM)

Consignment Accounts 217 On the way, 100 kgs of oil was lost (normal loss) due to leakage and evaporation. Nataraj took delivery of the consignment and spent ` 9,000 on octroi and carriage. His selling expenses were ` 7,000 on 1700 kgs of oil sold. Determine the value of stock Ans: Stock: 27,368.42 5. Mr. Nandish of Mysore consigned 500 kgs of oil at ` 30 per kg to Mr. Satish. He paid ` 4,000 as carriage and freight charges. Mr. Satish also paid ` 1,000 towards unloading charges ` 2,000 as godown rent and ` 1,500 as selling expenses. Normal loss due to leakage is 40 kgs. of oil in transit. Satish sold 320 kgs. of oil at ` 55 per kg. and 19 kgs of oil at ` 60 per kg. Calculate value of unsold stock Ans: Unsold stock: 121 6. A bill for `24,000 was received from Sadanand as advance. Sadanand paid `1,200 for unloading; `600 for cartage and `600 for advertisement. He returned 40 defective goods to Sundar. He sold remaining goods for ` 1,28,000. He is entitled to a commission of 6% on gross sales. He settled his account through a bank draft. Sundar of Madras consigned to Sadanand of Bangalore 600 goods costing ` 180 per good to be sold on consignment. Pass Journal Entries in the books of Sadanand. Ans: Bank account: 93,920 7. Krishna Murthy of Bengaluru sent a consignment of 2,000 articles to his agent Sri Raghavan of Tumkur at an invoice price of ` 20 per article. Railway charges, cartage and insurance amounted to 10% of the total invoice price. Raghavan sold 1,500 articles at ` 30 each and sent an account sales enclosing a bank draft CU IDOL SELF LEARNING MATERIAL (SLM)

218 Advanced Financial Accounting fro the balance after deducting (i) his advance of ` 5,000, (ii) his expenses ` 500 and (iii) his commission at 10% on gross sales. 100 articles were lost in transit and the insurance company admitted the claim for ` 1,100. Show the Consignment Account and Consignee’s Account in the books of the Consignor. Ans: Abnormal loss: 2,200, Closing stock: 8,800. 8. Bhaskar consigns, 1200 units of a product costing ` 300 each to Chandan. He incurs ` 6,000 for carriage expenses. 60 units of the product are stolen in transit. Chandan receives the remaining goods, and sells 1,020 units at ` 460 per unit. Expenses incurred by him amounted to ` 4,260, the entire amount being non-recurring. He reports a normal loss of 24 units. Find the value of abnormal loss and closing stock. Ans: Abnormal loss: 18,213, Closing stock: 36,000 B. Multiple Choice/Objective Type Questions 1. Which account has the equal rights for all? [a] Consignment [b] Joint Venture [c] Partnership [d] None 2. The __________has to pay for only those goods that are sold. [a] Consignee [b] Consignor [c] Both [a] and [b] [d] None Answers 1. [b], 2. [a] CU IDOL SELF LEARNING MATERIAL (SLM)

Consignment Accounts 219 12.13 References 1. Arulanandam and Raman, Advanced Accountancy, Himalaya Publication House Pvt. Ltd., Edition 2018. 2. Dr. Vishwanathan Reddy and Jayaram Kanzal, Corporate Accounting, Himalaya Publication House Pvt. Ltd., Edition 2019. 3. Dr. S.N. Maheswari, Financial Accounting, Vikas Publication, Edition 2017. 4. S.P. Jain and K.L. Narang, Financial Accounting, Kalyani Publication, Edition 2018. 5. Reddy, K.R. (2000), “Accounting Standards and Gaps in Practices in India”, Management Accountant, ICWAI, April. 6. http://www.mca.gov.in/MinistryV2/accountingstandards1.html 7. https://www.icaew.com/technical/by-country/north-america/us/accounting-in-us/us-gaap 8. https://www.ifrs.org/issued-standards/list-of-standards/ 9. http://www.accountingnotes.net/final-accounts/final-accounts-of-the-companies-with- solutions-accounting 10. http://www.accountingnotes.net/amalgamation/external-reconstruction-and-amalgamation ˆˆˆ CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 13 VOYAGE ACCOUNTS Structure: 13.0 Learning Objectives 13.1 Introduction 13.2 Meaning ofVoyageAccounting 13.3 Accounting Treatment in Case of Complete Voyage 13.4 Accounting Treatment in Case of Incomplete Voyage 13.5 Practical Problems on VoyageAccount 13.6 Summary 13.7 Key Words/Abbreviations 13.8 LearningActivity 13.9 Unit End Questions (MCQs and Descriptive) 13.10 References 13.0 Learning Objectives After studying this unit, you will be able to: z Discuss about Voyage Accounts z Understand the meaning of Voyage Accounts z Learn the accounting treatment in case of complete voyage and incomplete voyage

Voyage Accounts 221 13.1 Introduction It is usual for the shipping companies to keep separate Voyage Accounts for ascertaining the profit or loss on each voyage of a ship. The Voyage Account so prepared is similar to the Profit and Loss Account. A voyage cover both the outward and return journey of the vessel. All expenses connected with the voyage such as stores, wages, insurance, port charges, commission, etc., are debited to this account while all earning in the form of freight, passage money, etc. are credited. In order to ascertain the result of operating a ship’s voyage, Voyage Account is prepared. The Voyage Account is a revenue account. It is important to note that there is no difference in the manner of preparing accounts period-wise and voyage-wise. 13.2 Meaning of Voyage Accounting The method of accounting followed by shipping companies is known as voyage accounting. Shipping companies prepare their accounts periodically and also prepare the results of each voyage separately. Shipping companies carry goods from one place to another. Some companies carry passengers also in addition to goods from one place to another place. 13.3 Accounting Treatment in Case of Complete Voyage Accounting Entries – Debit and Credit: Voyage Account is debited usually with the following items: 1. Bunker Cost: This is the expenditure incurred on fuel oil, diesel, coal and fresh water used during the voyage. Nowadays, oil and diesel are used in place of coal. The bin or storing place of coal is referred to as bunker. Hence the name bunker costs. 2. Port Charges: Port is used by the shipping companies for loading and unloading of goods and parking of ships. Hence, the charges paid for these purposes are known as port charges. 3. Depreciation: Depreciation of the ship for the period of voyage is calculated and charged to the Voyage Account. CU IDOL SELF LEARNING MATERIAL (SLM)

222 Advanced Financial Accounting 4. Insurance: Insurance premium of cargo must be entirely debited to the concerned Voyage Account whereas the insurance charges of the ship are charged proportionately to each voyage on the basis of time of voyage. 5. Address Commission and Brokerage: This is payable to the brokers and agents who help the shipping company in procurement of cargo, i.e., freight or business. This is calculated at a certain per cent of the freight earned including the primage or surcharge and debited to Voyage Account. Address commission is payable to the Charterer whereas brokerage is payable to the agent of the charterer. 6. Stevedoring Charges: The expenses which are incurred in loading of goods on the ships and unloading of goods from the ships are known as stevedoring charges. 7. Port Charges: These are the charges paid to port authorities for allowing the ship to use the port either for loading or unloading the cargo. 8. Salaries and wages of the crew, captain and other staff. 9. Harbour charges. 10. Manager’s commission, if any. Voyage Account is credited usually with the following items: 1. Freight: The amount which is charged by the shipping companies for taking goods or cargo from one place to another is called freight. It is an income. 2. Primage: It is additional freight just like surcharge on freight originally collected for the captain of the ship. Nowadays, it is treated as income of the shipping company. 3. Passage Money: Fare collected from the passengers travelled in addition to the fare collected for merchandise. 4. Closing Stocks of Stores, Provisions, Coal, Fuel, etc.: 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. CU IDOL SELF LEARNING MATERIAL (SLM)

Voyage Accounts 223 Excess of credit side of Voyage Account over its debit side is profit on the voyage. Excess of debit side of Voyage Account over its credit side is loss on the voyage. This profit or loss is transferred to General Profit and Loss Account of the shipping company. 13.4 Accounting Treatment in Case of Incomplete Voyage Voyage Accounting is done in case of Shipping Companies. To know the results of the marine business, voyage accounts are prepared. It is prepared to know the profit or losses on each voyage or shipment undertaken by the shipping company. Sometimes, the accounting year of shipping company has come to an end, but the voyage is still in progress. That voyage is termed as Incomplete Voyage. Accounting for Incomplete Voyage is done on the basis of matching concept. It means expenses of current year are compared with the incomes of current year. So, the amount related to incomplete voyage must be carried forward to the next year. z The expenses on incomplete voyage are shown as ‘VOYAGE IN PROGRESS’ on Credit side. z The incomes on incomplete voyage are shown as ‘PROVISION FOR VOYAGE IN PROGRESS’ on Debit side. Under this, voyage account is prepared as follows: 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 xxx Opening Stock xx By Primage xxx Add: Purchases xx Less: Closing Stock xx xxx To Port Charges xxx CU IDOL SELF LEARNING MATERIAL (SLM)

224 Advanced Financial Accounting To Captain Expenses xxx To Harbor Wages xxx To Address Commission xxx To Brokerage xxx To Insurance Premium xxx To Salary and Wages xxx To Stores xxx To Deprecation xxx To Provision for Incomplete Voyage xxx To Net Profit xxx (trf. to Profit & Loss A/c) xxxx xxxx The description of the items is as follows: Address commission: This is the commission which is paid to the agents who book the freight for the shipping companies. It is calculated as a percentage of freight and primage. Address Commission= (Freight + Primage) * Rate/100 Port Charges: The charges which are paid to the port authorities to use the port for loading and unloading the cargo from the ship. Insurance: Expenses of premium paid to Insurance Company for the insurance of ship and freight are also debited to Voyage Account, but its premium is paid for a year. It should be adjusted according to the period of voyage. Depreciation: Depreciation is the decrease in the value of the ship due to its use during the voyage. It is a non-cash expense and posted on the debit side of the Voyage Account. CU IDOL SELF LEARNING MATERIAL (SLM)

Voyage Accounts 225 Stores: Stock of store is purchased during the year for the use during the period of voyage. Stores consumed is calculated as: (Opening Stock + Net Purchases – Closing Stock) Stevedoring: Stevedoring are the charges of loading and unloading of the cargo on and from the ship. It is calculated usually on the unit basis. Example: If the stevedoring charges are ` 2 and units loaded are 1,000, then stevedoring is 10,000 * 2 = ` 20,000. Freight: Freight is the amount earned by the shipping companies on the cargo delievered. Freight is of two types: z Freight Inward: Earned on return journey. z Freight Outward: Earned on outgoing journey. Primage: Primage is also known as surcharge. It is the additional freight collected as a percentage of the amount of the freight. It is calculated as: Primage = Freight * Rate/100 Passage Money: The ships also carry some passengers along with the cargo on every voyage. The amount charged from the passengers on board is known as passage money. ASCERTAINMENT IN DIFFERENT CASES The different cases are as follows: CASE 1: The expenses which are related to freight need to be carried forward in a proportion to return freight inward. It is calculated as: (Return Freight/Total Freight * Expenses) EXAMPLE: If the freight is ` 25,00,000 out of which return freight is ` 12,00,000 and the total expenses to be 5,00,000 to be carried forward to the next accounting year, will be 2,40,000: (12,00,000/25,00,000 * 5,00,000) CU IDOL SELF LEARNING MATERIAL (SLM)

226 Advanced Financial Accounting CASE 2: In case of standing expenses, if return journey is incomplete, ½ of the standing charges is to be carried forward. CASE 3: In case when return journey is halfway back and the expenses of the voyage is given, ½ of total expenses is to be carried forward. CASE 4: When the return journey is halfway back and the expenses till date are given, 1/3rd of the expenses is to be carried forward. CASE 5: When one round of trip is complete and on his half way back for single way and total expenses of voyage are given, 1/3rd expenses are to be carried forward. CASE 6: When one round trip is completed and on his half way back for single way and expenses till date are given, 1/5th of expenses are to be carried forward. 13.6 Summary It is usual for the shipping companies to keep separate Voyage Accounts for ascertaining the profit or loss on each voyage of a ship. The Voyage Account so prepared is similar to the Profit and Loss Account. A voyage cover both the outward and return journey of the vessel. All expenses connected with the voyage such as stores, wages, insurance, port charges, commission, etc. are debited to this account while all earning in the form of freight, passage money, etc. are credited. The method of accounting followed by shipping companies is known as voyage accounting. Shipping companies prepare their accounts periodically and also prepare the results of each voyage separately. Shipping companies carry goods from one place to another. Voyage Accounting is done in case of Shipping Companies. To know the results of the marine business, voyage accounts are prepared. It is prepared to know the profit or losses on each voyage or shipment undertaken by the shipping company. Expenses of premium paid to Insurance Company for the insurance of ship and freight are also debited to Voyage Account. But its premium is paid for a year. It should be adjusted according to the period of voyage. CU IDOL SELF LEARNING MATERIAL (SLM)

Voyage Accounts 227 The ships also carry some passengers along with the cargo on every voyage. The amount charged from the passengers on board is known as passage money. 13.7 Key Words/Abbreviations z Voyage Accounting: The method of accounting followed by shipping companies is known as voyage accounting. z Bunker Cost: The expenditure incurred on fuel oil, diesel, coal and fresh water used during the voyage. z Freight: The amount which is charged by the shipping companies z Passage Money: Fare collected from the passengers travelled in addition to the fare collected for merchandise. 13.8 Learning Activity 1. What is the meaning of Voyage Accounting? Explain the accounting treatment of Voyage Accounting. _________________________________________________________________ _________________________________________________________________ 2. Explain the ascertainment in different class. _________________________________________________________________ _________________________________________________________________ 13.9 Unit End Questions (MCQs and Descriptive) A. Descriptive Type Questions 1. Explain the accounting entries in case of Complete Voyage. 2. Explain the accounting entries in case of Incomplete Voyage. CU IDOL SELF LEARNING MATERIAL (SLM)

228 Advanced Financial Accounting B. Multiple Choice/Objective Type Questions 1. Expenses connected with the voyage such as stores, wages, insurance, [a] Stores [b] Wages [c] Insurance [d] All of the above 2. ______ is the expenditure incurred on fuel. [a] Bunker cost [b] Port Charges [c] Harbor Charges [d] None 3. Primage = [a] Freight/100 [b] (Freight + Primage) * Rate/100 [c] Freight * Rate/100 [d] None Answers 1. (d), 2. (a), 3. (c) 13.10 References 1. Arulanandam and Raman, Advanced Accountancy, Himalaya Publication House Pvt. Ltd., Edition 2018. 2. Dr. Vishwanathan Reddy and Jayaram Kanzal, Corporate Accounting, Himalaya Publication House Pvt. Ltd., Edition 2019. 3. Dr. S.N. Maheswari, Financial Accounting, Vikas Publication, Edition 2017. 4. S.P. Jain and K.L. Narang, Financial Accounting, Kalyani Publication, Edition 2018. 5. Reddy, K.R. (2000), “Accounting Standards and Gaps in Practices in India”, Management Accountant, ICWAI, April. 6. http://www.mca.gov.in/MinistryV2/accountingstandards1.html 7. https://www.icaew.com/technical/by-country/north-america/us/accounting-in-us/us-gaap 8. https://www.ifrs.org/issued-standards/list-of-standards/ 9. http://www.accountingnotes.net/final-accounts/final-accounts-of-the-companies-with- solutions-accounting 10. http://www.accountingnotes.net/amalgamation/external-reconstruction-and-amalgamation CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 14 DEPARTMENTALACCOUNTS Structure: 14.0 Learning Objectives 14.1 Introduction 14.2 Meaning of DepartmentalAccounts 14.3 Objectives of DepartmentalAccounting 14.4 Advantages of Preparing DepartmentalAccounts 14.5 Methods of DepartmentalAccounting 14.6 Inter-departmental Transactions 14.7 Bases ofApportionment of Joint Expenses to Departments 14.8 Practical Problems on Department Account 14.9 Summary 14.10 Key Words/Abbreviations 14.11 LearningActivity 14.12 Unit End Questions (MCQs and Descriptive) 14.13 References 14.0 Learning Objectives After studying this unit, you will be able to: z Learn the concept of Departmental Accounts z Understand the meaning and objects of Departmental Accounts

230 Advanced Financial Accounting z Discuss the advantages of Departmental Accounts z Understand the accounting procedure in Departmental Accounts z Learn the concept of Apportionment of Expenses and Incomes z Learn the concept of Interdepartmental transfers z Know the provision for unrealized profit 14.1 Introduction Departmental Accounts are accounts relating to each of the several departments or divisions of a business and are prepared when it is desired to know the trading result of each department or class of goods separately. The chief point of distinction is that while a branch represents the business unit of an organisation located at different point of the city or state, departments are divisions of the business located under the same roof. 14.2 Meaning of Departmental Accounts Departmental Accounts are prepared to ascertain at any time the earning capacity of each department and to detect any leakage or shortcomings in the efficiency of the department. Departmental Accounts are nothing more than as many trading and profit and loss accounts as many there are departments. 14.3 Objectives of Departmental Accounting The objectives of departmental accounting are: (i) Ascertainment of operating efficiency of each department. (ii) To know the trading result of each of the various department individually. (iii) To compare the trading results of one department with those of other departments. 14.4 Advantages of Preparing Departmental Accounts (i) To make sure whether the department makes a profit or incurs a loss. (ii) To compare the results with those of other departments and take corrective action. CU IDOL SELF LEARNING MATERIAL (SLM)

Departmental Accounts 231 (iii) To formulating policy to expand business on proper lines. (iv) Rewarding departmental managers properly on the basis of the results. 14.5 Methods of Departmental Accounting A departmental organisation can record its transactions in two ways/methods. (1) Unitary Method/Independent Method (2) Tabular/Columnar Method. 1. Unitary Method Under this method the accounts of each department are kept separately (of course, the results of various departments are finally combined together in one common or general profit and loss account). This system is called unitary method. This method is expensive. This method is generally, followed when the size of the concern is very large. 2. Columnar Method Under this method, separate amount columns are maintained in the books of accounts for each of the departments and also for the total. At the end of accounting year, Columnar Trading and Profit and Loss Account is prepared with separate amount columns for each of the department and also for the total. However, as regards the Balance Sheet, only a consolidated Balance Sheet is prepared. 14.6 Inter-Departmental Transactions In case of departmental organisation, it is common for one department to supply or transfer of goods to another department. Like transfer of goods between two departments, services also may be exchanged between departments. The transfer of goods and exchange of services between the departments are called inter-departmental transactions/inter-departmental transfers. When one Department supplies goods to another department, the transaction should be considered as a sale for the supplying or transfer or department and purchase for the receiving or transferee department. As such, the supplying department should be credited and receiving department account should be debited with the value of goods supplied. CU IDOL SELF LEARNING MATERIAL (SLM)

232 Advanced Financial Accounting Similarly, when one department renders service to another department, the department rendering the service should be credited and the department receiving the service should be debited with the value of service rendered. 14.7 Bases of Apportionment of Joint Expenses to Departments In apportioning/allocating the expenses, the following points should be kept in mind. (a) Those expenses which are specifically incurred for a particular department should be charged to that department. (b) Those expenses which are generally incurred but can be charged to specific departments, must be done so. (c) Such expenses which cannot be directly related to a particular department shall be apportioned on a reasonable basis. Usual basis of apportionment of various expenses is indicated below: Expenses Basis 1. Rent and Taxes Floor space occupied by each department 2. Lighting Number of light points/area occupied 3. Power Meter reading/Number of hours of usage of machines 4. Depreciation Value of assets 5. Repairs to building Area occupied 6. Repairs to Machinery Value of machinery 7. Insurance Value of subject matter 8. Selling expenses Turnover 9. Welfare expenses Number of employees in each department 10. Workmen’s compensation Wages CU IDOL SELF LEARNING MATERIAL (SLM)

Departmental Accounts 233 14.8 Practical Problems on Department Account Illustration - 1 With the help of information given below, ascertain the purchases of each department. Department Number of units purchased A 1,000 units B 2,000 units C 2,400 units At a total cost of ` 1,00,000 The units were sold by each department as: Department A of ` 20 each Department B of ` 22.50 each Department C of ` 25.00 each The rate of GP is same in each case. Solution: Note: It has been assumed that there was no closing stock and all the units that were purchased were sold. Total Sales A = 1,000 × 20 = 20,000 B = 2,000 × 22.5 = 45,000 C = 2,400 × 25 = 60,000 1,25,000 Total purchase cost = 1,00,000 Gross Profit = 25,000 (1,25,000 – 1,00,000) 25, 000 Rate of Gross Profit = 1, 25,000 × 100 = 20% on sales CU IDOL SELF LEARNING MATERIAL (SLM)

234 Advanced Financial Accounting Since Gross Profit is same, Cost of Purchase for A = (20,000 – 20% of 20,000) = 16,000 Cost of Purchase for B = (45,000 – 20% of 45,000) = 36,000 Cost of Purchase for C = (60,000 – 20% of 60,000) = 48,000 Illustration - 2 Distribute the following expenses to the departments of a business on an appropriate basis: Particulars ` Advertisement expenses 25,000 Rent 12,000 Electric lighting charges 7,000 Salaries paid 2,00,000 Depreciation 9,000 The following information is available regarding the departments. Particulars Departments Sales (in `) A BC Floor Area (in sq. mts.) 10,00,000 Number of light points 10,00,000 5,00,000 Number of employees 600 Values of assets (in `) 10 400 200 5,00,000 15 10 9 65 2,00,000 2,00,000 CU IDOL SELF LEARNING MATERIAL (SLM)

Departmental Accounts 235 Solution: Statement Showing the Distribution of Expenses among the Departments Particulars of Basis of Total Departments Expenses Appointment A BC Advertisement expenses Sales 2:2:1 25,000 10,000 10,000 5,000 Rent Area 3:2:1 12,000 6,000 4,000 2,000 Electric lighting charges Light points 2:3:2 7,000 2,000 3,000 2,000 Salaries paid Employees 9:6:5 2,00,000 90,000 60,000 50,000 Depreciation Value of Assets 5:2:2 9,000 5,000 2,000 2,000 Total 2,53,000 1,13,000 79,000 61,000 Illustration - 3 A firm has two departments A and B during the trading period ending 31.3.2016. A B Total ``` Opening stock 5,000 7,000 12,000 Purchases 42,000 52,000 94,000 CU IDOL SELF LEARNING MATERIAL (SLM)

236 Advanced Financial Accounting Sales 80,000 93,000 1,73,000 Purchases Returns 2,000 2,000 4,000 Sales Returns 2,000 2,000 4,000 Carriage-in-wards – – 4,500 Power – – 6,000 Wages – – 11,000 Closing stock of Dept. A 2,000 and B 9,000 and wages are allocated in the ratio of 5 : 6 and the number of units consumed by Dept. A and Dept. B are in the ratio of 1 : 2. Prepare departmental trading account in the columnar form. Solution: Departmental Trading Account for the year ended 31.03.2016 Particulars A B Total Particulars AB Total To Opening 5,000 7,000 12,000 By Sales 80,000 93,000 1,73,0000 stock To Purchases 42,000 52,000 94,000 By Purchase 2,000 2,000 4,000 returns To Sales return 2,000 2,000 4,000 By Closing stock 2,000 9,000 11,000 To Carriage 2,010 2,490 4,500 inwards To Gross profit 32,990 40,510 73,500 84,000 1,04,000 1,88,000 84,000 1,04,000 1,88,000 CU IDOL SELF LEARNING MATERIAL (SLM)

Departmental Accounts 237 14.9 Summary Departmental Accounts are accounts relating to each of the several departments or divisions of a business and are prepared when it is desired to know the trading result of each department or class of goods separately. Departmental Accounts are prepared to ascertain at any time the earning capacity of each department and to detect any leakage or shortcomings in the efficiency of the department. Departmental Accounts are nothing more than as many trading and profit and loss accounts as many there are departments. Unitary method the accounts of each department are kept separately (of course, the results of various departments are finally combined together in one common or general profit and loss account). Columnar method, separate amount columns are maintained in the books of accounts for each of the departments and also for the total. At the end of accounting year, Columnar Trading and Profit and Loss Account is prepared with separate amount columns for each of the department and also for the total. In case of departmental organization, it is common for one department to supply or transfer of goods to another department. Like transfer of goods between two departments, services also may be exchanged between departments. The transfer of goods and exchange of services between the departments are called inter-departmental transactions/Inter-departmental transfers. 14.10 Key Words/Abbreviations z Unitary Method: This method is generally, followed when the size of the concern is very large. z Columnar Method: As regards the Balance Sheet, only a consolidated Balance Sheet is prepared. z Inter-departmental Transactions: The department rendering the service should be credited CU IDOL SELF LEARNING MATERIAL (SLM)

238 Advanced Financial Accounting 14.11 Learning Activity 1. Explain Accounting Methods in case of Departmental Accounting. _________________________________________________________________ _________________________________________________________________ 2. What are Inter-departmental Transactions? How they are treated in Departmental Accounts? _________________________________________________________________ _________________________________________________________________ 3. Mention the bases of apportionment of Joint Expenses to Departments. _________________________________________________________________ _________________________________________________________________ 14.12 Unit End Questions (MCQs and Descriptive) A. Descriptive Type Questions 1. What are ‘Departmental Accounts’? Why are they prepared? 2. What are the different methods employed in departmental accounting? 3. Why are Departmental Accounts prepared? 4. What are the objectives of departmental accounting? 5. Explain the bases of apportionment of joint expenses to departmental accounting. CU IDOL SELF LEARNING MATERIAL (SLM)

Departmental Accounts 239 B. Multiple Choice/Objective Type Questions 1. Which method is expensive? [a] Unitary Method [b] Columnar Method [c] Both [a] and [b] [d] None 2. The expenses on Insurance is based on __________. [a] Value of Assets [b] Area occupied [c] Value of Machinery [d] Value of subject matter Answers 1. [c], 2. [d] 14.13 References 1. Arulanandam and Raman, Advanced Accountancy, Himalaya Publication House Pvt. Ltd., Edition 2018. 2. Dr. Vishwanathan Reddy and Jayaram Kanzal, Corporate Accounting, Himalaya Publication House Pvt. Ltd., Edition 2019 3. Dr. S.N. Maheswari, Financial Accounting, Vikas Publication, Edition 2017. 4. S.P. Jain and K.L. Narang, Financial Accounting, Kalyani Publication, Edition 2018. 5. Reddy, K.R. (2000), “Accounting Standards and Gaps in Practices in India”, Management Accountant, ICWAI, April. 6. http://www.mca.gov.in/MinistryV2/accountingstandards1.html 7. https://www.icaew.com/technical/by-country/north-america/us/accounting-in-us/us-gaap 8. https://www.ifrs.org/issued-standards/list-of-standards/ 9. http://www.accountingnotes.net/final-accounts/final-accounts-of-the-companies-with- solutions-accounting ˆˆˆ CU IDOL SELF LEARNING MATERIAL (SLM)

Branch Accounts 240 UNIT 15 BRANCH ACCOUNTS Structure: 15.0 Learning Objectives 15.1 Introduction 15.2 Features of BranchesAccount 15.3 Objectives of BranchAccount 15.4 Types of Branches 15.5 Dependent Branches 15.6 Practical Problems on BranchAccount 15.7 Independent Branch 15.8 Practical Problems on Independent BranchAccount 15.8 Summary 15.9 Key Words/Abbreviations 15.11 LearningActivity 15.12 Unit End Questions (MCQs and Descriptive) 15.13 References CU IDOL SELF LEARNING MATERIAL (SLM)

Branch Accounts 241 15.0 Learning Objectives After studying this chapter, you will be able to: z Learn the concept of Branch Accounts z Discuss the objectives of Branch Accounts z Explain the types of branches z Describe the features of Dependent and Independent Branches 15.1 Introduction Instead of locating all the departments under the same roof, a large scale business concern may explore the possibility of the business by opening a number of sections, divisions or establishments in different parts of the country. Such divisions or establishments are known as branches. In the case of a branch type of organisation, the parent establishment, known as the head office, extends the scope of its operations beyond its own place by opening a number of divisions. Expansion of a business unit may result in opening of new branches in various centres under the control of the Head Office, or opening of different departments under the same roof and under the same management. In the former case, it is known as Branch business and in the latter case, departmental business. Multiple shops or chain stores are examples of retail business. Not only selling but even manufacturing and other activities may also be organised in the form of a branch business. A company may have manufacturing units in different places. Bank and insurance companies have a network of branches throughout the country. Even professional persons like Chartered Accountants establish branches of their own in different centres. It is desirable to ascertain the profit or loss of each branch or department so that if any of them is not earning the required profit, necessary steps may be taken for improving it or closing it. 15.2 Features of Branches Account The main features of dependent branches are: (a) These branches are generally not allowed to make purchases independently. They are supplied with necessary goods by the H.O. CU IDOL SELF LEARNING MATERIAL (SLM)

Branch Accounts 242 (b) Goods supplied to them by the H.O. may be either at the cost price or at invoice price. (c) All the regular expenses of these branches, such as rent of shop, salary of the staff, advertisement, etc. are paid by the H.O. by cheques. Only petty expenses are paid by branches. (d) Sales are required to be made by these branches either only for cash or for cash and on credit, in accordance with the instructions issued by the H.O. (e) These branches are required to deposit their cash sale proceeds and cash collected by them from Debtors into local banks to the credit of H.O. or send them directly to H.O. periodically. (f) These branches do not keep complete set of books. They keep only a few books, such as cash book, petty cash book etc. (g) As these branches do not keep full set of accounts, their accounts are maintained in the books of H.O. The dependent branches may be classified into the following types on the basis of accounting treatment: (i) Branch selling for cash only: This type of branch gets the supplies only from the Head Office, sells only for cash, remits the cash collected to the Head Office immediately or deposits the proceeds into a bank account opened in the name of the Head Office; the Head Office meets all the expenses of the branch by making the necessary remittances. (ii) Branch selling for cash and credit: Similar to the previous case but the branch is permitted to sell or cash and credit. (iii) Branch supplied with goods at invoice price: Same as the above two types but with the difference that goods are invoiced by the Head Office to the branch at a loaded price, i.e., selling price. 15.3 Objectives of Branch Account The objects/purposes of keeping branch accounts are: (i) To ascertain the profit/loss of each branch separately. CU IDOL SELF LEARNING MATERIAL (SLM)