CYA2A ADVANCED FINANCIAL ACCOUNTING UNIT I - V 1
UNIT - I Branch Accounts Dependent Branches Stock & Debtors System 2
Branch Accounts Meaning - It is an Establishment or a subordinate division of business which carry on either the same activity or a substantially the same activity cariied on by the Head office. The main place of establishment (i.e) the parent establishment called HeadOffice The various division situated at different places is called Branch Office 3
CPZ2A/CPG2A/ CPW2A/CPC2A Advanced Financial Accounting 4 OBJECTIVES OF BRANCH ACCOUNTS TM Help in controlling branches Helps in finding the actual financial position of each & every branch Helps in ascertaining the Profit or loss of each branch Helps in assessing the Cash and Goods requirement of each branch. Help in ascertaining the exact expenses and incomes by seeing the Branch accounts Helps in providing suggestions on Do s & Don ts in branches. Branch
Types of branches Dependent branch Independent branch Foreign branch 5
The Records of these Branches are maintained by head office. These types of branches that are operated by orders, which are executed by the head office Expenses incurred at the branch have to be maintained by them. 6
Books of accounts : Methods of accounting petty cash book Debtors system Stock and debtors system stock register Final account system customer's accounts Wholesale branch system 7
This system is adopted in case of branches of small size. This account is nominal account in nature. Here the head office maintains account of each branch to know about profit and loss of each branch. Goods are despatched at any of these : cost Invoice price Cost + fixed % of loading 8
Branch Account (in the books of head office) To balance b/d (assets in the beginning) Stock Debtors Petty cash Furniture Prepaid expenses To Goods sent to branch A/c To bank (expenses paid by H.O.) To balance c/d (closing balance of Liabilities Accounts if any) Creditors Outstanding expenses To General P & L A/c (Branch Profit) (bal fig) By balance c/d(opening balance of liabilities accounts if any creditors Outstanding expenses By Bank cash sales cash collected from debtors By Goods sent to branch A/c (returns to H.O) By Balance c/d (closing balance of assets) Prepaid expenses Stock Debtors Petty cash Furniture( at depreciated value) By General P & L A/c (Branch Loss ) (bal fig) 9
Debit side Sale (credit) Credit side Cash received Discount Goods returned Bad debts Allowances Balance If cost is 100, but the HO has sent goods to branch at 120 then there is profit of 20 added in the cost. This 20 has to be adjusted. This is called stock reserve. 10
In this system the head office keeps separate accounts relating to various types of transaction at the branch instead of one branch. Following accounts are kept in the head office books relating to a branch under this system Branch Stock A/c Branch Debtors A/c Branch Adjustment A/c Branch Expenses A/c Goods Sent to Branch A/c 11
This account deals with all goods received, returned and sold by the branch. This account gives the surplus or shortage of stock and the closing stock @ the branch, is usually prepared at invoice price. Debit side Credit side Opening balance Goods sent to Branch Goods Returned by Drs Cash account Debtors a/c Goods returns by branch Goods Spoiled, lost (in weight, pilferage, loss in transit) Balance c/d 12
This account records all the transaction relating to branch debtors Ascertain either the closing balance of debtors or credit sales. Debit side Stock account (B/f denoting total credit sales ) Cash received Credit side Branch adjustment a/c ( Bad debts etc.) 13
When goods sent to branch at cost price, then this a/c need not to be prepared. When the goods are supplied to branch at invoice price, It is prepared to ascertain the gross profit made by the branch. Debit side Credit side Stock reserve Branch stock a/c Profit element of stock shortages, Defectives, loss on transit, pilferage element of stock surplus Value of loss in weight (P & L) (full amount) Goods sent to branch a/c Loading on goods sent to Branch Gross profit (balancing figure ) 14
Prepared to ascertain the net profit made by the branch. Prepared to find out the net value of goods sent to the branch. Balance of this account is transferred to either purchase account or trading account depending on the Branch P& L 15
Departmental Accounts Basis for Allocation of Expenses Inter departmental transfer Treatment of Expenses 16
Meaning TM DEPARTMENTS Division of organization in to independent departments, each of which may deal in a particular class of goods or render a specified type of services under the same roof or from the same premises. DEPARTMENTAL ACCOUNTING The owners or the management may desire to ascertain the trading results of each department and the overall result of the organisation and the method of obtaining such results is known as departmental accounting 17
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P & L A/c Trading & P/L A/c is prepared Maintenance of Records Firms with Huge Turnover will maintain separate Subsidiary Books Closing Stock can be ascertained at the time of stock taking Departmentalisation of Expenses Direct Expenses Indirect Expenses Expenses which can be apportioned Expenses which cannot apportioned Inter Departmental Transfers @ Cost Price @ Selling Price or Loaded Price 19
S.N Expenses Basis of Apportionment 1 Selling expenses like sales commission, salesmen s salaries, advertising, bad debts, carriage outwards etc. 2 Rent and rates, repairs, maintenance of premises, building insurance, depreciation etc. 3 Depreciation of fixed assets like furniture, fixtures, machinery, fire insurance, repairs on such assets. Sales ratio or ratio of sales quantity Floor area or space occupied by each department Value of each asset possessed by different departments. 4 lighting Light points or floor area 5 Power Consumption as per meter Or horse power 6 Carriage inward Purchase value 7 workmen s amenities, and welfare expenses Workmen s compensation insurance, ESI,PF etc. payable to employer No. of workers Wages of each department 8 Factory manager s salary Time devoted to each dept 9 Premium for loss of profits insurance Profit of each dept in the previous year 20
Departmental Accounts 21
Hire Purchase & Instalment Default & Repossession Stock & Debtors System Instalment purchase system 22
Definition Hire Purchase System According to the Hire Purchase Act 1972 Section 2(c) Hire purchase agreement is an agreement under which goods are let on hire and under which the hirer has an option to purchase them in accordance with the terms of the agreement and includes an agreement under which - Possession of goods is delivered by the owner & amount in periodical instalments. The property is passed only on the payment of the last of such instalments. Such person has a right to terminate the agreement at any time before the property so passes. 23
HP System - Important TM terms Hire vendor or Owner Cash Price Hire purchas e Price Hirer Interest Down Payment Hire or Instalment 24
HP System - Features TM The hirer gets possession of the goods on signing the agreement and has the right to use them. The ownership continues to be with the seller or hire vendor. The buyer gets ownership on payment of the last instalment. The hirer has the duty to keep the goods in good condition. Each instalment is treated as hire charges. 25
HP System - Features The hirer has the option to return the goods before the last instalment is paid The hire vendor can repossess the goods if the buyer fails to pay any instalment on the due date. If goods are repossessed, the value of goods on that date and the instalment paid are added and the total hire purchase price is reduced. The balance is payable by the hire vendor to the hirer. 26
Instalment purchase system TM An agreement is entered into by the seller and buyer. Down payment is paid and possession as well as ownership in the goods is transferred to the buyer. If buyer fails to pay any instalment, the seller cannot repossess the goods. He can only sue the buyer in a court for recovery of the dues. 27
Distinction between TM HP & IP System Nature of agreement Transfer of ownership Name of the parties Relationship Risk of loss Right of sale Repossession of goods Termination of agreement Instalment Governing 28
Calculation of TM Interest The hire purchase price is always greater than the cash price. Calculations under the following circumstances: When the rate of interest, the cash price and the instalments are given When the rate of interest is not given When the total cash price is not given When the instalment price is not given When cash price is calculated by annuity method 29
Default & Repossession TM Default If the hire purchaser fails to make payment of any instalment, it is called default. Repossession The hire vendor has the right to take away the goods sold on hire purchase in the event of default made by the hire purchaser. The hire vendor can repair or recondition the repossessed goods and sell them to anyone else. 30
Repossession - Types TM Complete Repossession Partial Repossession The hire vendor may take away all the goods on which there is default of instalment. Hire vendor may take away only a portion of the goods on which there is default of instalment. 31
Computation of Profit - TM Methods Debtors Method Stock and debtors Method HP System 32
Admission of a Partner Retirement of a Partner Death of a Partner 33
Definition According to Section 4 of the Indian Partnership Act 1932, partnership is defined 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. There must be an agreement entered into between two or more persons. The object of the agreement must be to share the profits of a business. Features The business must be carried on by all or any of the persons concerned acting for all. It is formed to carry on a lawful business. It is an association of two or more persons Introduction to Partnership 34
Admission According to Sec 31(1) of the Indian Partnership Act 1932, a new partner can be admitted only with the consent of all the existing partners. The existing partnership agreement comes to an end and a new agreement comes into effect. Whenever a partner is admitted into the partnership firm, he acquires two rights- The right to share in the assets of the partnership The right to share in the profits of the business 35
Necessary Adjustments Admission Adjustment in the profit sharing ratio Adjustment for goodwill & Adjustment of capital Necessary Adjustments Adjustment for revaluation of assets and liabilities Adjustment of reserves and other accumulated profits. 36
Calculation of Sacrificing TM Ratio Old partners have to surrender some of their old shares in favour of the new partner. The surrender of share by old partners is made in certain ratio. This ratio is called sacrificing ratio. Sacrificing Ratio = Old Ratio New Ratio 37
Goodwill - Meaning TM It can be described as a value of all favourable attributes relating to a business enterprise. Goodwill is nothing more than the probability that the old customers will resort to the old place. It is the value of the reputation of the firm in respect of profits expected in future over and above the normal rate of profits. 38
Methods of valuation of goodwill Average profit method or certain number of year s purchase of average profits. Avg Profit = Total Profits No. of Years Super Profit Method Normal Profit = Capital employed x Normal rate of return Capitalisation Method Cap. Val of profit = Profit(Adjusted) ------------------------ x 100 Normal rate of return Goodwill = Average Profit x No. of Year s Purchase Super Profit = Average profit Normal Profit Goodwill = Super Profit x No. of years of purchase Value of G/w = Capitalised value of profit Net tangible asset Net Tangible Assets = Total assets except goodwill liabilities to outsiders 39
Treatment for Goodwill Admission of a Partner Inferred or Hidden Goodwill Memorandum Revaluation Method Treatment for Goodwill on the Admission of a Partner Premium Method Revaluation Method 40
Retirement of a Partner According to Sec 32(1) of the Indian Partnership Act 1932, a partner may retire from the firm With the consent of all the partners In accordance with an express agreement by the partners Where the partnership is at will by giving notice in writing to all the other partners of his intention to retire. 41
Necessary Adjustments Retirement Adjustment regarding profit sharing ratio Retirement Necessary Adjustments Adjustment for goodwill & Revaluation of Assets and Liabilities Adjustments regarding Reserves and other undistributed profits and losses Payment to the retiring partner. 42
Gaining Ratio After retirement, the remaining partners share profits in the ratio between them as before the retirement of the partner. The remaining partners will gain additionally from the old ratio. Gaining Ratio = New Ratio - Old Ratio 43
Retiring Partner - Payment Payment to the Retiring Partner Payment in Instalments Payment in Lump sum Payment by Annuity 44
Death of a Partner TM Death of a partner dissolves the partnership but the surviving partners generally carry on the business by purchasing the deceased partners share. In the event of death, the legal representative of the deceased partner will be entitled to get from the firm, the amount due on account of the following will be credited: Capital standing to the credit of the deceased partner on the date of his death Share of goodwill 45
Death of a Partner Share in the profit of the firm earned from the beginning of the year to the date of death. Profit on revaluation of assets and liabilities Share of accumulated profits and losses Share of the proceeds of the Joint Life Policy. Interest on capital from the beginning of the year to the date of death. Salary due 46
Deceased Partner s Capital a/c Deceased partner s cap a/c is debited with the following amount Drawings Interest on drawings from the beginning of the year to the date of death. Loss on revaluation of assets and liabilities Loss in the business from the beginning of the accounting year till the date of death. 47
Mode of Payment - Retirement Lump sum Payment Method Annuity Method Mode of Payment Instalment Payment Method 48
Joint Life Policy Joint Life Policy is taken on the life of all the partners or individual policies on the lives of all the partners. Annually a sum of money known as premium is paid to the LIC of India. The company will pay the amount of the policy on the death of any one of the partners. In case of individual policies, the deceased partner has a right to share the amount not only received from LIC but also the surrender values of other partners, policies at the time of death. Surrender value is the value which is payable immediately to the insured on surrendering all rights of the policy to the corporation. 49
Methods of treatment TM with JLP When premium paid is treated as an expense (without maintaining a JLP account) The premium paid is treated as an asset. (maintaining a JLP A/c at its surrender value) When premium paid is treated as an asset and reserve is maintained 50
Dissolution of a Partnership Insolvency of a partner Gradual Realisation of Assets & Piecemeal Distribution. 51
Meaning It refers to the complete breakdown of a partnership and partners do not continue the firm. The dissolution of partnership between all partners of a firm is called the dissolution of the firm. The assets are disposed off, liabilities are paid off and whatever remains is paid to the partners in settlement of their accounts. 52
Modes of dissolution TM Dissolution by Agreement Compulsory Dissolution Dissolution on happening of certain events Dissolution by Notice Dissolution by Court 53
Garner Vs. Murray Rule TM 54
Settlement of accounts Settlement Payment of Losses Distribution of assets Payment of firm s debts and personal debts 55
Insolvency of a partner TM When a partner becomes insolvent,whatever amount he can bring from his private estate into the firm will be credited to his capital account. The amount which is irrecoverable is a loss to the firm. Loss or deficiency of an insolvent partner has to be borne by the solvent partners. The rule Garner Vs Murray is applicable in case of insolvency of one or more partners but not all the partners. All the solvent partners should bring cash equal to their share of the loss on realisation. The deficiency of the insolvent partner must be borne by the solvent partners in the ratio of their capital then standing. 56
Insolvency of all partners TM When all the partners become insolvent, the loss on account of insolvency of the partners will have to be borne by the creditors. only sundry assets are transferred to realisation account. The external liabilities (creditors, bills payable bank O/D etc) are not to be transferred to realisation account but separate account may be prepared. Creditors are paid all cash available together with the amount received from the private estate of the partners, after meeting the expenses on realisation. Any balance remaining unpaid to the creditors will be transferred to a Deficiency Account. The amount not paid by the partners will also be transferred to the deficiency A/c. The deficiency account shall automatically closed and the books will thus be closed. 57
Piecemeal distribution TM The assets are sold gradually to realize the best price for them. The liabilities are paid off gradually depending upon amount realised from the sale of assets. when the partners are not able to get their capital immediately, they will have to suffer a lot due to financial problem. So they should be paid as and when the firm has funds left with it after payment of all outside liabilities. 58
Order of payment when assets are realised Payment to creditors and other external liabilities Payment of partners loan rateably. If any amount remains after making payments, this is utilised in payment of capital to the partners. 59
Methods of payments Methods of payments Proportionate Capital Method Maximum Loss Method 60