BUSINESS ACCOUNTING: UNIT I BRANCH ACCOUNTS DEPARTMENTAL ACCOUNTS The word branch is any subordinate division of a business, subsidiary shop, office

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1 BUSINESS ACCOUNTING: UNIT I BRANCH ACCOUNTS DEPARTMENTAL ACCOUNTS The word branch is any subordinate division of a business, subsidiary shop, office etc. Business is carried out in different areas scattered over a large territory. OBJECTS OF BRANCH ACCOUNTS 1. To Ascertain the profit or loss of the branches 2. To have a better control over the branches by the head office 3. To know the financial position of the branches 4. To enable the head office to know the requirements of goods and cash of each branch 5. To provide suggestions for improvements 6. To formulate further programmes and policies relating to the branches. TYPES OF BRANCHES It can be classified as follows: 1. Home branches 2. Foreign branches Home Branches can be divided in to two. 1. Dependent branch: These branches are inland branches wholly dependent on the head office for all their requirements. These branches do not maintain their own set of books, and all the records of the branch are maintained by the head office. Features of a dependent branch: 1. It do not maintain its books of accounts 2. Goods are supplied by head office to the branch. 3. Branch receives the goods and sells them as per the direction of the head office. 4. All the expenses of branches are paid directly by the head office. 5. The head office provides petty cash to the branch to meet some petty expenses, so only simple petty cash book is maintained at the branch and 6. The branch remits cash to the head office which are from the sale proceeds and collection from debtors in case of credit sales. ACCOUNTING SYSTEM: 1. Debtors system: This system is adopted in case of branches of small size. Under this system a branch account is opened separately for each branch in the books of head office. 2. Stock and Debtors system: Profit or loss of a branch can be found out by preparing branch account which has been discussed earlier, but there is another method for the same purpose. This method is known as stock and debtors method. The following accounts are kept in the head office books relating to a branch under this system. 1. Branch Stock Account. 2.Branch Debtors Account, 3. Branch Expenses Account. 4. Branch Adjustment account 5. Branch profit and loss account and 6.Goods sent to the branch account. 3. Wholesale Branch System: Manufacturers may sell goods to the consumers either through the wholesalers and approved stockiest or through their branches. In order to know whether self retailing through branch is more profitable than wholesaling, it is necessary to make distinction between profit due to wholesale and profit due to retail business of the branch. 4. Final account system: The head office can also ascertain the profit or loss of a dependent branch by preparing branch trading and profit and loss of a dependent branch by preparing branch trading and profit and loss account at cost. 2. INDEPENDENT BRANCHES: Independent branch means a branch which maintains its own set of books and has freedom to operate independently. If a branch is big and carries on manufacturing operations also, it is allowed to operate freely within the framework of head office policies. It prepares its trial balance, trading and profit and loss account as well as balance sheet. The copies of the final statements are sent to the head office, which turn incorporates the same in their 1

2 books. The trial balance has two additional accounts, they are 1. Remittance account and 2. Goods from the head office account. 2. FOREIGH BRANCH: The head office its branch in foreign country, these branches is called foreign branch. The foreign branch keeps their accounts not in the home currency but in the respective foreign currency when head office receives their trial balance, the values will be expressed in foreign currency, now the same has to be converted into home currency. DEPARTMENTAL ACCOUNTS An organization may produce or buy and sell several products or perform different services under the same roof or from the same premises. The modern practice is to divide the organization into independent departments, each of which may deal in a particular class or goods or render a specialized type of service. Need for Departmental accounting:1. To have comparative results of departments, 2.To assesses the stock position of each department. 3. To analyze the result of each department and to draw up a trend for the future and 4. To decide upon whether to go for expansion or discontinuation or to take cost control measures. ADVANTAGES OF DEPARTMENTAL ACCOUNTING: 1. Ascertainment of profit or loss, 2. Comparative performance, 3.Rewarding personnel, 4.Remedial measures, 5.Expansion and diversification and Policy formulation. DISTINCTION BETWEEN DEPARTMENTS AND BRANCHES: 1. Location, 2.Growth, 3.Accounting and 4.International operations. METHODS AND TECHNIQUES OF DEPARTMENTAL ACCOUNTING: 1. Preparation of trading and profit and loss account, 2.Maintenance of Records, 3. Departmentalization of expenses (a) Direct expenses and (b) Indirect expenses (i) Expenses which cannot be apportioned and (ii) Expenses which can be apportioned, 4. Inter-departmental transfers,(a) Interdepartmental transfer at cost and (b) Interdepartmental transfer at selling price or loaded price. UNIT II HIRE PURCHASE ACCOUNTS ROYALTY ACCOUNTS Hire purchase and instalment systems are responsible for bringing high value durable goods like cars, televisions into the reach of middle class and lower middle class people. Hire purchase is the system under which the property is acquired by payment made instalments, during the period of which the title in the property remains with the hire vendor. The payment prior to the final are regarded as being purely in respect of hire, and the title of the property does not pass to the hire-purchase until such final payment or some other consideration provided for in the contract has been fulfilled. Contents of Hire Purchase Agreement: (i) the hire purchase price of the goods for which the agreement is made, (ii) the cash price of the goods, that is to say that the price at which the goods may be purchased for cash, (iii) the date on which the agreement is considered to be commenced or have commenced, (iv) the number of instalments in which the hire purchase price has to be paid, (v) the amount to be paid in these instalments, (vi) the mode of determining the date on which it is to be paid, to which person and which place it is to be paid, and (vii) the manner in which the goods in the agreement can be identified. Important Terms in Hire Purchases System: (i)hirer: The buyer of the goods on hire purchase basis. (ii)hire Vendor: The seller of the goods on hire purchase basis. (iii)cash Price: This is the retail price of the articles at which they can be purchased immediately for cash. (iv)hire purchase price: This is the total amount payable by the buyer, in agreed instalments for the goods purchased. This price includes cash price and interest. 2

3 (v)interest: This is the additional amount apart from the cash price payable by the buyer as compensation for postponed payments. (vi)hire or Instalment: This is the amount payable by the buyer periodically. The instalments may be equal or different depending on agreement. (vii)down payment: This is the advance payable by buyer while signing the hire purchase agreement. It is also a part of the hire purchase price. Characteristics or features of a Hire Purchase System: (i)it is like credit purchase; here the purchase price is paid or payable in instalments (ii)goods are delivered by the hire vendor to the Hirer and the latter gets the possession on signing an agreement. (iii)after the possession, the hirer has the right to use the goods. (iv)the hire vendor or the seller has the ownership of such goods delivered until the last payment of instalment is paid. (v)the Hirer becomes the owner only after the payment of last instalment towards the goods is paid off. (vi)till the last payment is made, it is the duty of the hirer to keep the goods in good condition and maintenance as if it is his own goods. (vii)the owner is responsible to make some normal repairs up to the date of last instalment. (viii)hirer has the right of even to terminate the agreement at any time and has the option to return the goods before the last instalment. (ix)hire vendor can repossess the goods, in case of default in making the payment of instalment, but such possession should be legal. ROYALTY: It is an amount payable by one person to another for the use of asset or right or monopoly. It is a periodical payment in the nature of rent made to a person for the right to use certain property such as mine, patent, copyright. When a person (lessor) having an exclusive right of some kind, surrenders it to another person (lessee) in exchange for a certain amount calculated with reference to output or units produced or sold, such an amount is known royalty. Royalty is a revenue income to the lessor in the nature of Nominal account. It is credited to Royalty Receivable account and transferred to profit and loss account at the time of closing the accounts. Methods of recoupment: (i)fixed recoupment: In this type of recoupment, the lessee may be allowed the privilege within a fixed number of years initially. (ii)flexible recoupment: In this method or recoupment, any particular years short workings may be allowed to be recovered in the subsequent two or three years, This method gives the tenant or lessee a permanent privilege. Sub-lease: When the terms of the original lease gives powers to the lessee to sub-let a part of the land or right to another person, this privilege is known as sublease. UNIT III ADMISSION, RETIREMENT OF A PARTNER, DEATH OF A PARTNER. It is define as the relationship between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Essential of partnership: (i)there must be an agreement entered into between two or more persons. (ii)the object of the agreement must be to share the profits of a business. (iii)the business must be carried on by all or any of the persons concerned acting for all. (iv)it is formed to carry on a lawful business and (v)it is an association of two or more persons. Types of Partners: 3

4 1. Active partner: Such partners are actively engaged in the business. 2. Sleeping partner: Such partner who does not take part in the conduct of the business. 3. Nominal Partner: He is lends his name to the firm without any actual interest in terms of investing capital. 4. Partner in profit only: This partner agree to pay profit alone, he does not take risk of sharing losses. 5. Partner by Estoppels: Such partner becomes partner by words spoken or words written or by represents himself or permits to be represented to be a partner in the firm. 6. Sub partner: If a partner agrees to give his share of profits to an outsider, such outsider who gets the share in profit of the firm is called as sub-partner. Partnership Deed: It is an outcome of an agreement created orally or in writing between two or more persons. It is not essential that agreement must be in writing, but to avoid any disputes between the parties in future. Contents of the Partnership deed: 1. The name of the firm 2. Name and address of the partners 3. Nature of the partnership business 4. The period of the business if any 5. The commencement of business 6. Capital contributed by each partner 7. Nature of the capital i.e., Fixed or Fluctuating 8. The proportion of sharing the profits or losses 9. Amount and period of drawings 10. Interest rate on capital, drawings 11. Commission salary, allowance etc., payable to partners, if any 12. Valuation method of goodwill and its treatments on admission, retirement or death or partners. 13. Procedure by which a partner s account has to be settled and mode of payment. 14. Rights and duties of partners. 15. Under what situation the firm stands dissolved and 16. The ways of keeping accounts, their audit etc. Rules applicable in the absence of partnership deed: 1. Profit sharing ratio: Profits and losses are to be shared equally among the partners. 2. Interest on Loan: On any loan advanced by a partner he is entitled to interest on the dame at 6% p.a. 3. Interest on Capital: No interest is to be allowed on capitals. 4. Salary to partners: Partners are not entitled for any salary or other remuneration. 5. Interest on Drawings: No interest is to charged on drawings. When a new person is admitted as partner one or more of the following accounting adjustments become necessary: 1. Adjustment in the profit sharing ratio 2. Adjustment for goodwill 3. Adjustment for evaluation of assets and liabilities 4. Adjustment of reserves and other accumulated profits 5. Adjustment for capital Meaning of Goodwill: It is nothing more than the probability that the old customers will resort to the old place. The attractive force which brings in customers, The benefit of a good name, reputation in connection of a business. Factors affecting the value of goodwill: 1. Quality, 2. Location or site, 3. Competition, 4. Capacity of management, 5. Capital required, 6. Nature of business, 7. Types of customers and 8.Time. 4

5 Types of goodwill: (a) Purchased or acquired goodwill: Making the payment in cash or kind. It usually happens when a firm acquires the business of a sole trader or another partnership firm. (b) Self generated goodwill: It arises from a number of positive features of a firm like high profits, business connections, regular clients, valuable brands, any intangible benefits to the firm etc. Retirement & Death of a partner: According to section 32 (1) of the Indian partnership act 1932, a partner may retire from the firm. i. With the consent of all the partners ii. Where the partnership is at will by giving notice in writing to all other partners of his intention to retire. iii. In accordance with an express agreement by the partners. Death of a partner: Death of a partner dissolves the partnership but the surviving partners usually carry on the business by purchasing the deceased partners share. Under these circumstances, similar situation arises as at the time of retirement of a partner, but the difference is retirement may be planned one, death is a permanent retirement. Accounting treatment at the time of death of a partner; 1. Revaluation of Assets and Liabilities 2. Transfer all the reserves, profit and loss and accumulated losses to all the partners capital account. 3. Share of goodwill 4. Capital to his credit 5. Disposal of a deceased partners share. Unit IV DISSOLUTION OR FIRM PIECE MEAL DISTRIBUTION Dissolution means discontinuance. It means closing down the undertaking or suspending permanently the activities of a partnership business. D Stands for Death of a partner I stands for Incapacity S Stands for Shares (transfer) S Stands for Serious misconduct of partnership O Stands for object of the firm (Completion) L Stands for Lunacy of a partner U Stands for Unexpected losses of a firm T Stands for Term of the expiry of a Partnership I stands for Insolvency of all the partners O Stands for unlawful object N Stands for Notice given by partners Modes of Dissolution: 1. Compulsory Dissolution: In certain cases in which a firm becomes illegal and stands dissolved. The following are such cases (i) If all the partners except one or all of them are declared insolvent. (ii) When the number of partners exceeds 20 (iii) When a citizen of an enemy country becomes a partner (iv) When the business of the firm is opposed to public interest (v) If the business of the firm is opposed to public interest. 2. Dissolution by Agreement: A Partnership firm can be dissolved at any time by mutual consent of all the partners. 3. Dissolution by notice: Any partner can dissolve the partnership by giving notice in writing to all other partners if the partnership is at will. 5

6 4. Dissolution by court: A court can order the dissolution of the partnership firm in the following cases: (i) When a partner transfers/sells his share to a third party without the consent of other partners (ii) When a partner becomes of unsound mind (iii) When a partner gets disabled permanently (iv) When a partner is found guilty of misconduct (v) When the firm cannot be carried on except with losses. 5. Dissolution on happening of certain events: A firm may also get dissolved in the following cases. (i) On the expiry of the period for which it was formed (ii) On the death of a partner (iii) On the completion of the venture agreed upon. Settlement of accounts: 1. Payment of losses, (b) Distribution of assets, (c) payment of firm s debts and personal debts and (d) in settling the accounts of a firm after its dissolution. PIECEMEAL DISTRIBUTION: While solving various problems on dissolution of a partnership firm, it has been assumed that all the assets are realized immediately on the date of dissolution and all liabilities are paid off on the same date. But in actual practice, it seldom happens, the assets are sold gradually to realize the best price for term When assets are realized gradually, the following order of payment is adopted: (i) Payment to creditors and other external liabilities (ii) Payment of partners loan ratably (iii) If any amount remains after making above payments, this is utilized in payment of capitals to the partners. While making payment to partners, the following two methods may be adopted: (i) Proportionate capital/surplus capital method (ii) Maximum loss method. UNIT V INSURANCE CLAIMS FOR LOSS OF STOCK AND PROFITS INSOLVENCY ACCOUNTS STATEMENT OF AFFAIRS INSLOVENCY OF INDIVIDUAL ONLY. Fire in the business premises of any firm, can damage a number of assets like stock, buildings, furniture, fixtures, machinery etc. Insurance companies investigate any claim made through experienced assessors. They evaluate the causes for fire and the actual loss through the damage. Based on the assessor s report, insurance company settles the claim made against it for loss due to fire. TYPES OF FIRE INSURANCE POLICIES 1. Loss of stock claims: Business units who have insured their godown or store against the risk of loss of stock by fire are eligible to lodge loss of stock claims when a fire causes loss of their stock. Salvage: Fire may destroy some items of stock completely. Some other portion of stock may be damaged and some items of stock may not affected at all. The damaged stock and undamaged stock are separately valued and are called salvage value or stock salvaged. 2. Loss of Profits: Insurance policies taken for loss of profits are also called consequential policies. Claim can be made for loss of gross profit which is the total of net profit and insured standing charges and also any increase in the cost of working which is consequential. Important terms: 1. Indemnity period, 2.Affected Period, 3. Turnovers (a) Affected period turnover, (b) Standard Turnover. (c) Accounting year turnover, (d) annual turnover and (e) Saved turnover. 4. Standing charges, 5. Insured standing charges, 6. 6

7 Uninsured standing charges, 7.Short sales, 8.Saving in standing charges and 9.Special circumstances clause. INSOLVENCY ACCOUTS: Insolvent is one who is not able to pay his debts as and when they are due. 7