II SEM BCOM STUDY MATERIAL ADVANCED FINANCIAL ACCOUNTING. Prepared By SHENBAGAVALLI SAYANTANI BANERJEE

Transcription

1 NEW HORIZON COLLEGE MARATHALLI, BANGALORE (Affiliated to Bangalore University) A Recipient of Prestigious Rajyotsava State Award 2012 conferred by the Government of Karnataka II SEM BCOM STUDY MATERIAL ADVANCED FINANCIAL ACCOUNTING Prepared By SHENBAGAVALLI SAYANTANI BANERJEE Ring Road, Bellandur Post, Near Marathalli, Bangalore Tel : Fax : principalnhc.edu@gmail.com Web :

2 1

3 Table of Contents Page no Accounting Standards... 4 Insurance Claims Consignment Accounts Accounting for Joint Venture Branch Accounts

4 3

5 Chapter 1: Accounting Standards Introduction An accounting standard is a guideline for financial accounting, such as how a firm prepares and presents its business income and expense, assets and liabilities. The Generally Accepted Accounting Principles is comprised of a large group of individual accounting standards. GAAP standards apply to financial reporting in the United States and may be eventually phased out in favor of the International Accounting Standards. The Need and Importance of Accounting Standards Accounting standards in the United States appear in the form of the generally accepted accounting principles, a set of standards, guidelines and procedures that are used when accounting for the affairs of most governmental and non-governmental bodies. The interpretation of numbers and the wherewithal to place them in the proper context are at the heart of accounting. Standards exist to ensure that accounting decisions are made in a unified and reasonable way. Comparability Paramount to the role of accounting standards is the universality that it brings to financial record keeping. Governmental organizations must follow accounting procedures that are the same as their counterparts, and non-governmental organizations must do the same. The result is that it is easy to compare the financial standing of similar entities. All comparisons within groups are a matter of comparing "apples to apples." This helps both external and internal observers weigh the state of an entity in the context of other comparable entities. For instance, the financial standing of a town can be measured against a neighboring town with the assumption that the pertinent numbers have been reached in a similar fashion. Transparency Accounting standards are designed to enforce transparency in organizations. The principles, procedures and standards that make up the generally accepted accounting principles were chosen with the purpose of ensuring that organizations lean in the direction of openness when deciding how to provide information to observers. This kind of transparency is especially important in the case of public entities, such as governments or publicly traded companies. Standards limit the freedom and flexibility of entities to use clever accounting to move items around or even to hide them. Relevance Standards work to help entities provide the most relevant information in the most reasonable way possible. In this way, an organization guided by accounting standards will generate the kind of financial information that observers are most interested in examining. Entities ultimately should provide information in a way that most fairly and clearly represents the current financial standing of the operation. The standards make it more difficult for organizations to misdirect observers and to fool them with data that does not have sufficient relevancy. 4

6 Audiences Ultimately, the importance of accounting standards lies in the value that it brings to financial documents for the various audiences that view and make critical decisions based on it. An absence of accounting standards would make the work of investors, regulators, taxpayers, reporters and others more difficult and more risky. For instance, without standards, an investor who has studied the financial statements of a large publicly traded company would not know whether to trust the findings on those statements. Standards mean that taxpayers can see how their tax dollars are being spent, and regulators can ensure that laws are followed An Overview of Indian Accounting Standards Preparation and presentation of financial statements based on accounting standards usually known as Indian GAAP has emerged as an effective way of harmonizing different accounting practices followed in India. Besides other benefits, financial statements prepared on the basis of these standards are considered to present a true and fair view of financial results of the enterprises. In this article, the various aspects of accounting standards like the advantages, scope, procedure, compliance, etc., are discussed, along with their contents and applicability. An enterprise needs to take care that its financial statements are prepared in accordance with the accounting standards. If the organization is operating globally, statements of various US GAAP are also to be taken care of. These accounting standards are applicable only to the items that are material in nature. Any deviation from these accounting standards requires a disclosure in the financial statement along with the impact thereof. Each business entity prepares financial statements to depict its performance in monetary terms as either profits or losses. These financial statements are used by various people. While preparing these statements, there are diverse methods available to an entity for recording such business transactions. Even the preparations of financial statements are not governed by a practice of uniformity for recording transactions by different business entities. These accounting standards have been prepared with a view to harmonize the various accounting practices used in India to prepare financial statements. These standards are also known as Indian Generally Accepted Accounting Principles (GAAP). The Institute of Chartered Accountants of India (ICAI) being the body responsible for framing accounting standards in India constituted the Accounting Standards Board (ASB) in the year The reason behind framing the ASB was to harmonize the diverse accounting policies and practices that are being used in India. These accounting standards have assumed increased importance after the 1990s, as globalization throws new challenges to enterprises by exposing them to the best. One of them is that management not only needs to be honest, but also open and transparent to the shareholders, the government and stakeholders. Accounting Standard 2 ( AS 2 ) (VALUATION OF INVENTORIES) This accounting standard is very helpful to calculate the value of inventories. ASB comprise all stocks which is purchased for sale or production in inventories. Value of stock is not fixed by single formula but this standard provides following guidelines for calculating the value of inventories. 5

7 1st stock must be valued on cost or net realizable value which is lower. 2nd Every company is free to use FIFO, LIFO or weighted average method for proper calculation of the value of inventories. 3rd Cost of inventories = cost of raw material + cost of direct labour + cost of direct expenses 4 th Companies are also free to use standard cost method or retail cost method for calculating the value of inventories. 5th Inventories does not encompass the value of tools which is used for repair of machinery Accounting Standard 3 ( AS 3) (CASH FLOW STATEMENT) Accounting standard three which is revised in 1997 states that cash flow statement is a necessary statement under this standard for banks, financial institute or any institute whose annual turnover is more than Rs. 50 crores or any institute who has borrowed money more than Rs. 10 crores. This standard does not provide the Proforma of cash flow statement but deeply explain the two way of making this statement. Direct method Under this method, cash flow statement is made by inflow and outflow of cash in operating, investing and financial activities. Indirect method It is different from direct method. Under this method cash from operating activities is calculated on the basis of net profit after different adjustments of non cash and non operating items like depreciation, interest, dividend paid and also adjusting net changes in working capital. All other part of cash flow from investing and financial activities are as same as direct method. Accounting Standard 6 DEPRECIATION ACCOUNTING Depreciation is a measure of the wearing out, consumption or other loss of value of a depreciable asset arising from use, passage of time or obsolescence through technology and market changes. Depreciation is allocated so as to charge a fair proportion of the depreciable amount in each accounting period during the expected useful life of the asset. The depreciable amount of a depreciable asset should be allocated on a systematic basis to each accounting period during the useful life of the asset. Depreciable assets are assets which [1] Are expected to be used during more than one accounting period; and [2] Have a limited useful life; and [3] Are held by an enterprise for use in the production or supply or for administrative purposes Depreciable amount of a depreciable asset is its historical cost, or other amount substituted for historical cost less the estimated residual value. 6

8 Useful life is the period over which a depreciable asset is expected to be used by the enterprise. The useful life of a depreciable asset is shorter than its physical life. There are two method of depreciation: Straight Line Method (SLM) Written Down Value Method (WDVM) Note: A combination of more than one method may be used. The depreciation method selected should be applied consistently from period to period. The change in method of depreciation should be made only if; The adoption of the new method is required by statute; or For compliance with an accounting standard; or If it is considered that change would result in a more appropriate preparation of financial statement; or When there is change in method of depreciation, depreciation should be recalculated in accordance with the new method from the date of the assets coming into use. The deficiency or surplus arising from such recomputation should be adjusted in the year of change through profit and loss account. Such change should be treated as a change in accounting policy and its effect should be quantified and disclosed. This accounting standard is not applied on the following items. Forests and plantations Wasting assets Research and development expenditure Goodwill Live stock Disclosure requirements 1. The historical cost 2. Total depreciation for each class charged during the period 3. The related accumulated depreciation 4. Depreciation method used ( Accounting policy) 5. Depreciation rates if they are different from those prescribed by the statute governing the enterprise Accounting Standard 10 ACCOUNTING FOR FIXED ASSET Definitions: Fixed Asset is an asset held with the intention of being used for the purpose of producing or providing goods or services and is not held for sale in the normal course of business. (It is expected to be used for more than one accounting period. 7

9 The cost of fixed asset includes: Purchase price 1. Import Duties and other non-refundable taxes 2. Direct cost incurred to bring the asset to its working condition 3. Installation cost 4. Professional fees like fees of architects 5. General overhead of enterprise when these expenses are specifically attributable to acquisition/preparation of fixed assets 6. Any expenses before the commercial production, including cost of test run and experimental production 7. Any expenses before the asset is ready for use not put to use 8. Loss on deferred payment arising out of foreign currency liability 9. Price adjustment, changes in duties and similar factors The cost of fixed asset is deducted with: Trade discounts and rebates Sale proceeds of test run production Amount of government grants received/receivable against fixed assets (See AS- 12) Gain on deferred payment arising out of foreign currency liability Similarly, historical cost of self constructed fixed assets will include: All cost which are directly related to the specific asset All costs that are attributable to the construction activity should be allocated to fixed assets Any internal profit included in the cost should be eliminated. Any expenses incurred on asset between date of ready for use and put to use is either charged to P&L A/c or treated as deferred revenue expenditure to be amortised in 3-5 years after commencement of production. When fixed asset is acquired in exchange for another asset, the cost of the asset acquired should be recorded - Either at, fair market value - Or at, the net book value of the assets given up For this purpose, fair market value may be determined by reference either to the asset given up or to the asset acquired, whichever is more clearly evident. Fixed asset acquired in exchange for shares or other securities should be recorded at FMV of assets given up or asset acquired, whichever is more clearly evident. (I.e. the option of recording the asset at net book value of asset given up is closed) Fair market value is the price that would be agreed to in an open and unrestricted market between knowledgeable and willing parties dealing at arm s length distance. Subsequent expenditures related to an item of fixed asset should be added to its book value only if they increase the future benefits from the existing asset beyond its previously assessed standard of performance. Material items retired from active use and held for disposal should be stated at the lower of their net book value and net realizable value and shown separately. Fixed assets should be eliminated 8

10 from the financial statements on disposal or when no further benefit is expected from its use and disposal. Profit/loss on such disposal or writing off is recognized in the profit and loss account. REVALUATION When the fixed assets are revalued, these assets are shown at revalued price. Revaluation of fixed assets should be restricted to the net recoverable amount of fixed asset. When a fixed asset is revalued, an entire class of assets should be revalued or selection of assets for revaluation should be made on a systematic basis. That basis must be disclosed. Disclosure: Gross and net book value of fixed assets at the beginning and end of period showing additions and disposals Revalued amounts substituted for historical costs of fixed assets, the method adopted to compute the same and whether an external valuer was involved. ACCOUNTING STANDARD - 14 ACCOUNTING FOR AMALGAMATIONS PURPOSE Accounting for amalgamations, Treatment of any resultant goodwill or reserves. It does not deal with acquisition by one company of another company in consideration for payment in cash or by issue of shares Conditions for nature of merger All the assets and liabilities are transferred; Shareholders holding not less than 90% of the face value of the equity shares of the transferor company become shareholders of transferee company; The consideration is discharged by the issue of equity shares in the transferee company; The business of the Transferor Company is intended to be carried on; & No adjustment to be made to the book values of the assets and liabilities Methods followed nature of merger Pooling of Interests method Purchase method POOLING OF INTERESTS METHOD The assets, liabilities and reserves are recorded at their existing carrying amounts. Uniform set of accounting policies is adopted. The difference between the share capital issued and the share capital of the transferor company should be adjusted in reserves. PURCHASE METHOD The assets & liabilities are recorded either at existing carrying values or by allocating the consideration on the basis of Fair values on the date of amalgamation. The reserves of the transferor company, other than the statutory reserves, should not be included in the financial statements of the transferee company Purchase method consideration Securities Cash Other assets In determining the value of the consideration, an assessment is made of the fair value of its elements. 9

11 Purchase method If Consideration > Net Asset value= GOODWILL Consideration < Net Asset value =CAPITAL RESERVE DISCLOSURES FIRST YEAR - Both natures of amalgamation names and general nature of business of the amalgamating companies; effective date of amalgamation for accounting purposes; the method of accounting used to reflect the amalgamation; and particulars of the scheme sanctioned under a statute Disclosures from second year Pooling of Interests method (a) description and number of shares issued, (b) the amount of any difference between the consideration and the value of net assets acquired Purchase method (a) a description of the consideration paid or payable; (b) any difference between the consideration and the value of net assets acquired. ACCOUNTING STANDARD 20:-Earnings per share:- Objectives: -To set principles for the determination & presentation of EPS. -To improve comparison of performance amongst enterprises for the same period and amongst different accounting periods for the same enterprise. Applicability Enterprises whose equity shares or potential equity share are listed on Recognized Stock Exchange,Other enterprises which disclose earnings per share in financial statements. In the case of consolidated financial statements it should be determined & presented based on consolidated information Presentation Requirements (Disclosures) An enterprise should present on the face of P&L Account. Basic EPS wrt equity shares Diluted EPS wrt potential equity shares Potential equity share: A financial instrument or contract that entitles or may entitle, its holder to equity share e.g.convertible debentures or preference shares,share warrants or options ESOP,Disclosure to be made for all periods presented both the amounts to be disclosed with equal prominence. The information is to be presented even if the amount disclosed are negative (a loss per share) Basic EPS = Net profit or loss for the period attributable to equity shareholders(a)/ Weighted average no of equity share outstanding (B). (A) = Net profit or loss for the period after deducting preference dividend & attributable tax (CDT) thereon. 10

12 (B) = Number of equity shares outstanding at the beginning of the period, adjusted by the shares bought back or issued during the period multiplied by the time weighting factor. Time weighting factor is the number of days for which the specific shares are outstanding as a proportion to total number of days in the period Diluted EPS= Diluted net profit or loss for the period attributable to equity shareholders / the weighted average no of equity shares including shares issued on conversion of all the dilutive potential equity shares outstanding during the period. ACCOUNTING STANDARD 21Consolidated financial statements OBJECTIVE To formulate principles and procedures for preparation and presentation of consolidated financial statements Scope applicable to following enterprises Group of enterprises under the control of a parent. Investments in subsidiaries Excluded cases Amalgamations Investments in associates Investments in joint ventures. DEFINITIONS CONTROL: More than one-half of the voting power of an enterprise; or Control of the composition of the Board of Directors in the case of a company so as to obtain economic benefits from its activities. Composition of consolidated financial statements Consolidated balance sheet, Consolidated statement of profit and loss, Notes, additional statements and explanatory material that outline an essential part thereof NOTE: The consolidated financial statements are presented, to the extent possible, in the same format as adopted by the parent for its separate financial statements. SCOPE OF CONSOLIDATED FINANCIAL STATEMENTS The consolidated financial statements are compiled on the basis of financial statements of parent and all enterprises that are controlled by the parent. The consolidated financial statement of a parent organization should encompass all the subsidiaries, both domestic and foreign companies. However, the parent shall not include its subsidiaries when: 1. Control is intended to be for a short-term & the subsidiary is acquired with a view to its subsequent disposal in the near future; or 2. it operates under severe long-term restrictions, which significantly impair its ability to transfer funds to the parent. 11

13 Consolidation procedures basic procedure The financial statements of the parent and its subsidiaries should be combined on a one-to-one basis by grouping together the like items of assets, liabilities, income and expenses. Consolidation procedures other procedure The holding company should eliminate its cost of investment in each of its subsidiaries If cost of investment > holding s share in equity Goodwill If cost of investment < holding s share in equity capital reserve consolidation procedures Minority interests in the net income should be identified and adjusted against the income of the group in order to arrive at the net income attributable to the owners of the parent; and Minority interests in the net assets should be identified and presented in the consolidated balance sheet separately from liabilities and the equity of the parent's shareholders Disclosures The consolidated financial statements should disclose by way of a note - all subsidiaries including the name, country of incorporation or residence, proportion of ownership interest Intragroup balances and transactions and resulting unrealized profits should be wholly discarded. The financial statements used in the consolidation should be drawn up to the same reporting date. The consolidated financial statements should disclose the following wherever applicable: a. the nature of the relationship between the parent and a subsidiary, b. the impact of the acquisition and disposal of subsidiaries on the financial position c. the names of the subsidiary of which reporting date is different from that of the parent and the difference in reporting dates. Minority interests should be presented in the consolidated balance sheet separately from liabilities and the equity of the parent's shareholders. Consolidated financial statements should be prepared using uniform accounting policies. In case such uniform accounting policies cannot be incorporated in preparation of consolidated financial statements the same shall be disclosed 12

14 Chapter 2: Insurance Claims Introduction The stock kept in every business is subject to risk by loss of fire. To protect itself against such loss the business takes up a fire insurance policy by paying premium. The chapter aims at computing the loss of stock by fire(based on closing stock on the date of fire), which can thus be claimed as compensation from the insurance company. The following steps may be followed to start with: 1) % of Gross profit on sales- this can be computed from the gross profit and sales figure of the trading account for the year prior to the year of fire GP * 100 Sales 2) Memorandum trading account- this trading account must be prepared from the beginning of the year of fire up to the date of fire. The GP must be calculated based on the same % as above and the balancing figure of this account will be the closing stock. 3) Calculation of claim- The final claim to be lodged with the insurance company must be calculated on the basis of the closing stock in the memorandum trading account as ; Claim = Closing stock- Salvage+ fire fighting expenses. Note: Salvage refers to goods saved from fire, Fire fighting expenses are incurred to save goods from fire. Example 1: (simple problem) The premises of a trader caught fire on and the stock was damaged. The following information is available: Stock on Rs Purchase return Rs Stock on Rs Sales return Rs Purchases for 2011 Rs wages Rs Sales for 2011 Rs Purchases from to is Rs Sales from to is Rs Additional information: 13

15 1) Purchases of 2012 includes Rs10000 worth of goods distributed as free samples for advertisement and promotion 2) In 2012, a clerk misappropriated unrecorded cash sales Rs )Stock worth Rs could be salvaged; fire fighting expenses incurred to save the goods was Rs Prepare a statement of claim to be submitted to the insurance co. Solution: Trading account for the year ended Particulars Rs. Particulars Rs. To, opening stock By,Sales To, purchases returns Returns To wages To, Gross profit By, closing stock Workings: % gross profit on sales = *100 =20% Memorandum Trading Account from to Particulars Rs Particulars Rs To, opening stock By sales To purchases Goods given as +unrecorded cash sale 4000 free sample To gross profit (495000* 20%) By, closing stock (bal.fig) Statement of Claim Value of closing stock on date of fire -Salvage Rs Rs Rs Fire fighting expenses Rs Total claim Rs

16 Average Clause It refers to a clause in the insurance agreement to discourage the under insurance of stock or any other asset. This clause is applicable when the value of insurance policy is less than the value of clasing stock on the date of fire.the claim can be computed as: Claim= Stock destroyed by fire* Policy value Stock on date of fire. EXAMPLE 2: (problem with average clause) A fire occurred in the premises of M/s unlucky on from where goods worth Rs only could be saved. Goods worth Rs were also saved in damaged condition. From the following information calculate the claim to be submitted to the insurance company on a policy of Rs Stock on Rs Purchases for 2011 Rs Stock on Rs Sales for 2011 Rs Purchases from to Sales from to Rs Rs Carriage inward during 2011 Rs Carriage inward during 2012 Rs Carriage outward during 2012 Rs A fire also broke out on 20 th December 2011 and destroyed stock worth Rs The firm had a practice of valuing stock at cost less than 10%.However the policy was changed and the stock on was valued at 10% above cost. 15

17 Solution: Trading Account for the year ended Particulars Rs. Particulars Rs. To opening stock ( x 100 ) 90 To purchases To carriage inward To Gross profit (bal.fig) 3,20,000 18,76,000 2,00,000 4,64,000 By Sales By closing stock ( x 100 ) 110 By stock destroyed by fire 23,20,000 4,40,000 1,00,000 28,60,000 28,60,000 Workings: % Gross profit on sales = x 100 =20% Memorandum Trading Account from to Particulars Rs Particulars Rs To opening stock To purchases To carriage inward To Gross profit ( x 20 %) By Sales By Closing stock (bal.fig) Stock destroyed by fire is ---- Closing stock - Salvage of goods In good condition In damaged condition Rs Rs Rs Rs Amount of claim = Policy value x Stock destroyed by fire Stock on date of fire = x =RS

18 Abnormal Line of Goods Goods which cannot be sold at the normal price or which has a slow rate of turnover (due to obsolescence or damage) are called as abnormal goods. It is important to note that the rate of gross profit on sales is calculated only on the basis of normal goods. Hence a separate column is prepared in the trading and memorandum trading account for the abnormal line of goods. EXAMPLE:3 (problem with abnormal line of goods) On 30 th September 2012,the stock of Armstrong Ltd.was lost in fire. Calculate amount of claim from the following available information. Stock at cost on Rs Stock at cost on Rs Purchases less returns for year ended Rs Sales less returns for year ended Rs Purchases less returns upto Rs Sales less returns upto Rs In valuing the stock on due to obsolescence, 50% of the stock originally costing Rs.6000 had been written off. In May 2012, 3/4 th of the stock had been sold at 90% of the original cost and it is expected that the balance of the abnormal goods will also realize the same price. Subject to the above the gross profit remained same throughout. Stock salvaged was Rs Solution: Trading Account for the year ended Particulars Rs Particulars Rs To opening stock To purchases By Sales By closing stock To gross profit Written off Workings: % gross profit on sales = x 100 = 25%

19 Memorandum Trading Account from to Particulars Normal Abnorma Total Particulars Normal Abnormal Total l To opening stock To purchases By Sales (6000x ¾ x90 %) By gross profit ( x 25%) By gross loss By closing stock (6000 x ¼ x 90%) Note: The gross loss on abnormal stock has come as balancing figure. Calculation of amount of claim: Important points for the chapter Closing stock on date of fire Rs Less: Salvage Rs Amount of claim Rs Trading account for the year prior to the year of fire need not be prepared if the % gross profit on sales is already provided in the question. 2. Average clause can be applied only when the insurance policy value is given in the question. 3. Average clause is not applicable if there is no under insurance (even if policy value is given in the question). 4. Sale of abnormal goods is separate from sale of normal goods, so the % gross profit on sales is not applicable to the sale of abnormal goods. 5. Stock destroyed by fire (for the purpose of average clause) is the stock on the date of fire stock saved from fire ie.salvage. 6. If the gross profits % of several previous years are provided in the question then the average of such %gross profits must be calculated to be applied in the memorandum trading account. 18

20 Chapter 3: Consignment Accounts Consignment is an agreement under which a manufacturer or a wholesaler sends goods to an agent for the purpose of sale at far off places on his behalf on commission basis. It is an effort to increase sale by widening the market. The person who sends the goods for the purpose of sale is called the consignor. The person receiving the goods is called the consignee. The consignor pays commission to the consignee for selling his goods on behalf of him. There are 3 types of commission namely ordinary, del-credere (for bearing the risk of bad debts) and over-riding commission (for selling goods above a certain price). The relationship between the consignor and the consignee is that of principle and agent. Accounting for consignment: In consignment, books of accounts are maintained by the consignor and the consignee. In the books of the consignor the following accounts are prepared- 1)Consignment account 2) Consignee account 3)Goods sent on consignment account In the books of the consignee the following accounts are prepared- 1)Consignor account 2) Commission account Unsold Stock: Goods send on consignment may not be sold completely and remain with the consignee and can be valued as : Cost of unsold units Add: non-recurring expenses of consignor Add: non-recurring expenses of consignee xxxxx xxxxx xxxxx EXAMPLE :1(simple problem) A sent goods worth Rs to B and paid Rs.1200 for packing and Rs.800 for insurance. B took delivery of the goods and paid Rs.2000 for freight, Rs.400 for cartage, Rs.600 for godown rent, Rs.400 for selling expenses and Rs.800 for insurance. B sold ¾ th of the goods for Rs Pass journal entries in the books of the consignor. 19

21 Solution: Journal entries in the books of A (consignor) Date Particulars L/ F 1. Consignment a/c Dr. To, Goods sent on consignment a/c (Being goods sent on consignment) Dr. (Rs) Cr.(Rs) Consignment A/c To, Bank a/c (Being expenses paid by consignor) Dr Consignment a/c Dr. To, B a/c (Being expenses paid by consignee) B a/c To, Consignment a/c (Being goods sold by consignee) Dr Consignment Stock a/c Dr. To, Consignment a/c (Being totalcost of unsold stock) (WN) Consignment a/c To, P/L a/c (Being profit on consignment ) Dr Working Note (WN): Valuation of closing stock Rs. Cost of unsold stock (10000 x ¼) 2500 Add: non-recurring expenses of Consignor (2000 x ¼) 500 Add: non-recurring expenses of Consignee ( ) x ¼ 600 Total cost of unsold stock

22 Note: Godown rent, insurance (of consignee) and selling expenses are not non-recurring expenses, hence excluded in the valuation of unsold stock. Normal Loss and Abnormal Loss: When goods consigned are lost due to normal but unavoidable reasons like leakage,evaporation etc. such losses are called normal loss. There is no separate entry for normal loss, it is adjusted in the valuation of closing stock. When goods are lost due to unexpected or accidental causes like fire,theft,accident in transit etc. such losses are called abnormal loss. There is separate entry in the consignment account for abnormal loss and is valued similar to unsold stock. Goods consigned at Invoice Price Often in order to prevent from revealing the true profit on consignment to the consignee, the consignor sends goods at an inflated price.this price which is above the cost price is called the invoice price and is given as a % of profit on the cost price. Hence the invoice = cost price + profit (also called load). When goods are sent at invoice price, all entries are made at invoice price.but to identify the true profit on consignment, the consignor must enter the load on the opposite side. Hence goods sent on consignment and unsold stock are calculated and entered at invoice price and the loading on those items are entered on the opposite side. However abnormal loss is always calculated at cost price (unless otherwise mentioned to be calculated at invoice price). EXAMPLE: 2 ( for consignment at invoice price) Mani Batteries, Bengaluru consigned 1500 batteries costing Rs.5000 each to Rani Batteries, Mangalore at invoice price of cost plus 25% The consignor paid Rs for freight and Rs for insurance.during transit 10 batteries were damaged and the insurance co. accepted a claim of Rs The consignee received the goods and an advance B/R of Rs was sent to consignor. Rani Batteries sold 800 batteries for and 450 batteries on They also paid Rs for godown rent and Rs for advertisement. The consignee is entitled to an ordinary commission of 5% on all sales and del-credere commission of 2% on credit sales. Assuming that the balance due to the consignor was remitted by a bank draft, prepare ledger accounts in the books of the consignor. 21

23 Solution: In the Books of Mani Batteries, Bengaluru. Consignment to Mangalore Account Particulars Rs. Particulars Rs. To, goods sent on consignment By,Rani Batteries a/c (total a/c (at invoice price) To, Bank a/c (expenses of the consignor) To, Rani Batteries a/c (exp of the consignee) sales) By, goods sent on consignment a/c (load on goods sent) By, Abnormal loss a/c (at cost price) By, consignment stock a/c To,Rani Batteries a/c (total (unsold stock at invoice price) )commission To, stock reserve (load on unsold stock) To, P/L a/c (profit on consignment) Goods sent on consignment Account Particulars Rs. Particulars Rs. To, goods sent on consignment By, consignment to Mangalore a/c To,trading a/c (bal.fig) a/c Rani Batteries Account Particulars Rs. Particulars Rs. To, consignment to Mangalore a/c By, bill receivable a/c (advance payment) By,Consignment (exp of consignee) By, Consignment a/c(commission) By, bank a/c (final settlement

24 Abnormal Loss Account Particulars Rs. Particulars Rs. To, Consignment to Mangalore By,Insurance Co.(claim on a/c abnormal loss) By,P/L a/c Workings: 1. Per unit cost of goods sent Rs.5000 Add: load/profit (5000 x 25%) Rs.1250 Invoice price of goods sent Rs Valuation of Abnormal Loss Cost of abnormal units lost in transit (5000 x 10) Rs Add: non-recurring exp of consignor (105000x10 ) Rs Add: : non-recurring exp of consignee nil (as goods lost in transit have not reached consignee) Rs Valuation of Unsold Stock No. of unsold units is 1500 (sent) 10 (lost in transit) (sold) = 240 units Invoice price of unsold units (6250 x 240) Rs Add: non- recurring ex of consignor (105000x240 ) Rs Add: non recurring exp of consignee nil ( all expenses of consignee are recurring in nature ) Abnormal loss has been calculated at cost price; alternatively it could be shown in invoice price and the load on the opposite.

25 5. In case the insurance company pays the claim amount, the entry will be shown through bank a/c in abnormal loss account instead of insurance co. a/c. EXAMPLE:3 (normal loss, abnormal loss and unsold stock) Mohan of Chennai consigned 2000 kg of chemicals to Deepak of Hyderabad costing Rs.300 per Kg.He paid Rs as freight and Rs.5000 as insurance.10 kg was lost by leakage and 150 Kg was accidentally destroyed in transit. Deepak received the goods and paid Rs for unloading and Rs.8000 for godown rent.he sold 1600 abnormal loss and unsold stock. Solution: Valuation of abnormal loss: Cost of abnormal loss units (150 x 300) Rs Add: non-recurring exp of consignor (25000x150) Rs Add: non-recurring exp of consignee nil Rs Valuation of unsold stock: Units of unsold stock is 2000 (sent) 10 (normal loss) 150 (abnormal loss) 1600 (sold) =240 Kg. Qty Cost (Rs.) Total goods sent Add: non-recurring exp of consignor Less: Abnormal loss Add: non-recurring exp of consignee Less: Normal loss So, Value of closing stock = x 240 = Rs

26 Chapter: 4 Accounting for Joint Venture A joint venture is a short term business jointly undertaken by two or more persons who share the profits and losses in an agreed ratio. The parties who enter into this business are called joint venturers or co-venturers. Temporary partnership business like construction of a building, underwriting of shares etc are generally done in this way. Accounting for Joint Venture: The accounting for joint ventures are generally done in 2 methods: 1. By maintaining separate set of books here the following accounts must be prepared: a)joint Bank account b)joint Venture Account c)co-venturers Account 2. By not maintaining separate set of books i)when each coventurer keep record of all transactions a) Joint venture A/C b) Co-venturer A/C ii) when each coventurer keep record of own transactions only. a)memorandum Joint venture A/C b)joint venture with Co-venturer A/C. EXAMPLE :1 (problem with separate set of books) Ravindra and Nagendra started a joint venture each depositing Rs into a joint bank account. They decided to share profits and losses equally. They purchased goods on cash for Rs and on credit for Rs The joint venture expenses amounted to Rs The cash sales and credit sales amounted to Rs and Rs respectively. The entire dues to the creditors was paid and the dues from the debtors were collected.the coventurers accounts were also settled. Prepare ledger accounts when separate set of books are maintained. Solution: Joint Venture Account Particulars Rs. Particulars Rs. To, joint bank a/c-cash By, joint Bank-cash sales purchase By, debtors credit sales To, creditors a/c-credit purchase To, joint bank a/c-exp To, Profit on venture Ravindra Nagendra

27 Joint Bank Account Particulars Rs. Particulars Rs. To, Ravindra a/c By, joint venture-cash To Nagendra a/c purchases To, joint venture a/c-cash sales To, debtors a/c- amt collected By,creditors-cash paid By, joint venture-exp By,Ravindra a/c By, Nagendra a/c Co- Venturer s Account Particulars Ravi Naga Particulars Ravi Naga To, joint bank a/c (final setlmt) By, joint bank a/c By, joint venture a/c profits When no separate set of books are maintained: In this method each co venturer prepares a) joint venture a/c and b) co venture a/c. In the joint venture a/c the own profits are recorded as P/L a/c and the profit of the co venture is recorded as personal a/c However when each co venturer keeps record of own transactions only, then a Memorandum joint venture account is prepared where all venture expenses are debited and all venture income are credited. The balance in this account is the profit or loss on joint venture and is transferred to the co venturers in the agreed ratio. EXAMPLE:2 ( when no separate set of books are maintained) A, B and C entered into a joint venture to share profits and losses as 1/2, 1/3 and 1/6.No separate set of books is maintained. Amounts contributed and received by different venturers are as follows: 26

28 A B C Cost of materials Expenses Sale proceeds received Stock taken over Prepare (a) Memorandum Joint Venture A/C (b) Joint venture with co venturer A/C in the books of all parties Solution: Memorandum Joint Venture Account Particulars Rs. Particulars Rs. To, A- materials -expenses To, B materials By, A sales -Stock taken over By,B sales Expenses Stock taken over 3000 To, C materials 5000 By, C sales Expenses Stock taken over 5000 To, profit transferred A B C In the books of A Joint Venture with B and C Account Particulars Rs. Particulars Rs. To, Purchase a/c To, Bank a/c expenses To, P/L a/c (profit) By, Bank a/c sales By, stock taken over By, Bank a/c (final settlement)

29 In the books of B Joint Venture with A and C Account Particulars Rs. Particulars Rs. To, Purchase a/c To, Bank a/c expenses To, P/L a/c (profit) By, Bank a/c sales By, stock taken over By, Bank a/c (final settlement) In the books of C Joint Venture with A and B Account Particulars Rs. Particulars Rs. To, purchases a/c To, Bank a/c- expenses By, Bank a/c sales By, stock taken over To, P/L a/c (profit) To, Bank a/c (final settlement) EXAMPLE 3 Arun and Varun entered into Joint Venture for dealing in second hand cars. It was agreed that Arun should buy cars and Varun should recondition them. A commission of 5% should be allowed for both and P/L to be shared equally. Arun purchased 7 cars for Rs and Paid Rs.210 for insurance and Rs.130 for advertising.varun contributed Rs.8000 for the purchase money and paid Rs.1140 for repairs and charged Rs.100 for garage rent. Arun sold 2 cars for Rs.6600 and Varun sold 4 cars for Rs Arun took over the remaining cars at Rs.2500 and the venture was closed. Show the ledger accounts of the venture in the books of each party. Solution: To Bank (cost of cars) To Bank (insurance and adver) To Varun (repairs and garage) To Commission (5%) To Varun (5%) To Profit and Loss Account To Varun Account In the Books of Arun Joint Venture Account RS By Bank( sale of cars) By Varun( sale of cars) By unsold stock (car taken over) RS

30 Varun Account Rs To Joint Venture (sales) By Bank (money received) By Joint Venture(Repairs, garage) By Joint venture (comm.) By Joint venture (share of profit) By Bank (final settlement) Rs In the Books of Varun Joint Venture Account To Arun (cost of cars) To Arun (insurance and adv) To Bank (repairs and garage) To Arun (comm.) To commission (5%) To profit and Loss account To Arun account Rs By Arun account (sales) By bank account (sales) By Arun account (cars taken over) Rs Arun Account To Bank account(money sent) To Joint Venture Account (sales) To Joint Venture Account (car taken over) To Bank (final settlement) Rs By Joint Venture (cost of cars) By Joint Venture (ins and adv) By Joint Venture (commission) By Joint Venture (share of profit) Rs

31 Chapter 5 :BRANCH ACCOUNTS INTRODUCTION Required large manufacturing and trading operate at different places in the same country as well as in foreign countries through their own establishment for promoting sales. The system of operating at several places through one s own establishment is called branch organization. The parent or the main establishment located at the main place of activity and which exercises control over the other establishment is called head office. OBJECTIVES OF BRANCH ACCOUNTING: (1) To ascertain the profit and loss of each branch separately. (2) To ascertain the real financial position of each branch. (3) To exercise proper control over each branch. (4) To ascertain and to meet the goods and cash requirement. (5) To assess the progress and performances of each branch. (6) To calculate the commission payable to branch manager when their commission is band on the profit of their respective branches. (7) To ascertain whether branches should be expanded or closed. Dependent branch Features of dependent branches: (1) Goods are supplied by the H O the branches have no right to purchase directly. (2) H O can supply goods either at cost price or invoice price. (3) Sales are required to be made by these branches either only for cash or credit in accordance with the instruction issued by the H O. (4) All regular expenses of branch like sent, salary, adu etc. paid by H O are paid by cheque but petty cash expenses like postages, telegrams are paid by the branch even this petty expenses are paid by the branch out of the petty cash sent by the H O. (5) The branch is required to deposit the cash sale proceeds and collected from debtors must be sent by the head office. (6) The branch does not maintain complete set of books, they maintained only:- (1) Cash book (2) Petty cash book (3) Memorandum stock book (4) Sales book (5) Total debtors book. 30

32 (7) Branch do not maintain complete set of accounts therefore head office necessary accounts of branch on the bases of stock statement, cash statement, petty cash statement. A statement of debtors sent to the branch to the head office. Accounting Methods of Dependent Branch Journal entries of branches under debtors system: (1) Head office treats the branch office as a debtor (2) At the end of the accounting period head office prepares a branch account to ascertain the profits and loss of the branch. (3) The assets and liabilities of the branch at the beginning of the accounting year are treated as given by the head office and those at the end of the year treated as return by the branch. The goods are supplied by the head office branch at a cost price. 1. If there are opening balance of branch stock, branch debtors, and branch petty cash. Branch A/C To branch stock A/c To branch debtors A/C To branch petty cash A/C 2. When the head office supply the goods to the branch Branch A/C To goods sent to branch A/C 3. When the head office sent cheque to the branch for meeting the branch expenses. Branch A/C To bank A/C 4. When head office receives the remittances of the cash scales, proceeds, and cash collected from the branch debtors. Bank A/C To branch A/C Dr Dr Dr Dr 31

33 5. When the goods are returned by the branch to the head office. Goods sent to branch A/C To branch A/C 6. When the closing balance of the branch stock branch debtors and branch petty cash. Branch stock A/C Dr Dr Branch Drs A/C Branch petty cash A/C To branch A/C 7. (a)if there is net profit. Branch A/C To general P/L A/C (b) If there is a loss. General P/L A/C To branch A/C Format of the branch ledger Format of the branch A/C in books of the head office. Dr Dr Dr Dr Dr Cr To opening assets ( with the Value of the assets at the branch at the beginning of the year) XXX By opening liabilities (liabilities values at the beginning of the year) XXX To goods sent to the branch (cost price of the goods sent by the head office to the branch) XXX By bank (Remittances made by the branch Like collections funds, cash sales and other receipts) XXX To bank (amount of branch expanses met by the head office) XXX By goods sent to branch (Cost price of the goods returned by the branch) XXX 32

34 To closing liabilities(value of liabilities at the branch at the end of the accounting period) XXX By closing assets (value of the assets at the branch at the end of the period) XXX To general P/C A/C XXX By general P/C A/C XXX 1. When branch is authorized to sell only for cash. An ltd with its head office in Bangalore as a branch at Mysore. You are given the full particulars relating to Mysore branch for the year ending 30/06/04. Stock at branch on 01/07/03 Rs 32,600. Petty cash branch on 01/07/03 Rs 110. Goods sent to branch Rs 45,600. Goods returned by the branch - Rs 3900 Cash sales at branch - Rs Cash sent to branch expenses: Salary - Rs 12,800 Rent - Rs 3,000 Petty cash - Rs 2,600 Total expenses - Rs 18,400 Stock at branch on 30/06/04-37,100, Prepare Branch Accounts: In the books of A Ltd Bangalore Mysore branch A/C for the year ended 30/06/04. To op. Stock at branch To open petty cash 110 To goods sent to branch By Bank (Cash sales) By goods sent to branch