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ADVANCED FINANCIAL ACCOUNTING - I
SEMESTER - III, ACADEMIC YEAR 2020- 2021
UNIT CONTENT PAGE Nr
I BRANCH ACCOUNTING 02
II CONTRACT ACCOUNT 06
III HIRE PURCHASE AND INSTALLMENT SYSTEM 10
IV ROYALTY ACCOUNT 16
V INSOLVENCY ACCOUNTS 22
ADVANCED FINANCIAL ACCOUNTING - I
SEMESTER - III, ACADEMIC YEAR 2020- 2021
UNIT- I
BRANCH ACCOUNT
Meaning Large business concerns,in order to expand its business, divide the Business into many Sections or divisions.These sections or divisionsare established in different places of the same town or different partsof the country.These various divisions of business established in Different places are called “branches”. Objectives:
- To ascertain the financial results
- To create accountability among branches
- To measure individual financial position and performance
- To exercise proper control
- To suggest measures for improving efficiency Types of branches:
- Dependent branches
- Independent branches
- Foreign branches
- Format of branch account Particulars Amount Particulars Amount To balance b/d (all assets) Stock, debtors Furniture, petty cash To goods sent to branch To bank(all expenses) To balance c/d (cl.bal.of liabilities) To general profit &loss (profit) xxx xxx xxx xxx xxx By balance b/d all liabilities) Creditors By cash remittances Cash sales Cash from debtors By goods return By balance c/d (closing balance of Assets) By general profit & loss (loss) xxx xxx xxx xxx xxx xx Problem: New Delhi Company has a branch at Chennai. Write up branch account in the books of head office from the following particulars. ➢ Stock on 1.1.2001 10, ➢ Goods sent to branch 50, ➢ Expenses of branch 3, ➢ Petty expenses of branch 1, ➢ Goods sold by the branch 1,00, ➢ Stock on 31.12.2001 12,
ADVANCED FINANCIAL ACCOUNTING - I
SEMESTER - III, ACADEMIC YEAR 2020- 2021
- Canteen Expenses
- LaborWelfare Carriage Inward
- Discount Received No.of Employees Purchase of each Department Purchase of Each Department Distinction between Department and Branch Points of Difference Department Branch Location Book Keeping and Accounting Allocation of Common Expenses Scope of Organization Growth International Trade Foreign Currency Conversion Same Premises Centralized Allocated in proportion to the usage by departments Confined to local business Does not arise Different locations Head office consolidated Separate branch does not confront with this situation Paves way for geographic expansion Scope for International trade and conversion of foreign currently to India is necessary to ascertain the profitability Problem: Ascertainment of Cost of Units Model: The following purchase were made by a firm having three department Dept A - 1000 Units Dept B - 2000 Units Dept C - 2400 Units Stock on 1st^ January were Dept A - 120 Units Dept B - 80 Units Dept C - 152 Units Stock were Dept A-1020 Units at Rs.20 each Dept B - 1920 Units at Rs.22.50 each Dept C - 2496 Units at Rs 25 each The rate of gross profit is name in each case. Prepare Department Trading Account. Department Trading Account Dr. Cr. Particulars A B C particulars A B C To Op. Stock Rs. 1, Rs. 1, Rs. 3,040 By Sales Rs. 20, Rs. 43, Rs. 62, To Purchases 16,000 36,000 48,000 By cl.stock 1,600 28,80 1, To Gross Profit
ADVANCED FINANCIAL ACCOUNTING - I
SEMESTER - III, ACADEMIC YEAR 2020- 2021
Workings:
- Calculation of closing stock (in units) Closing stock =Opening Stock + Purchases - Sales Dept A =120 + 1000 – 1020 = 100 units DeptB =80 + 2000 – 1920 = 160 units DeptC =152 + 2400 - 2496 = 56 units 2. calculation of rate of gross profit: Assuming that all Purchases are sold Then the sale proceeds will be Dept A =1000 units at Rs. 20 = Rs. 20, Dept B =2000 units at Rs.22.50 =Rs. 45, Dept C =2400 units at Rs. 25 = Rs.60. Total Sales 1,25, Less: total cost of purchase 1,00, Gross profit 25, Rate of Gross Profit =Gross profit x100/sales =25000 x100/ =20% on sales 3. Calculation of cost price Cost Price =selling price – Profit Dept A =20 – 20/100 x 20 =20 – 4 = Rs. 16 Dept B = 22.50 – 20/100 x 22. =22.50 – 4.50 =Rs. 18 Dept C =25 – 20/100 x 25 =25 – 5 =Rs. 20 Note: opening stock, closing stock and Purchases are valued at cost price of each department. From the following details prepare department trading account Particulars Dept. A Rs. Dept. B Rs. Opening Stock 4500 4200 Total Purchase 13500 10800 Total Sales 21000 18000 Closing Stock 5400 2400 Credits Purchases 8500 5300 Credits Sales 2500 3000 DEPARTMENTAL TRADING AC Particulars A B Particulars A B To opening stock 4500 4200 By sales 2100 1800 To purchase 13500 5400 By closing stock
To gross profit 8400 5400 26400 20400 26400 20400
ADVANCED FINANCIAL ACCOUNTING - I
SEMESTER - III, ACADEMIC YEAR 2020- 2021
Work uncertified It is possible that some part of the work completed at the end of the period remain “unapproved”. Such a work is called work done but not certified or worksuncertified. Profit on Incomplete contract
1. Work completed less than ¼ No profit to be transferred to P&L a/c 2. Work completed more than ¼ but less than ½ 1/3 of the notional profit to be transferred to P&L a/c. Formula, Profit= notional profit1/3 cash received/work certified 3. Work completed more than ½ 2/3 of the notional profit to be transferred to P&L a/c. Formula, Profit=notional profit2/3cash received/work certified Farm a/cling Farm refers to the land that is used for growing food crops and keeping animals. Arminincludes agriculture, horticulture, animalhusbandry,poultry,dairy,sericulture etc. Farm accounting is intended to keep a record of the farming activities. It explains how the farm books should be keep and how the profit and loss arising from the farming operations should be ascertained. Format of crop a/c Crop Account Particulars Amount Particulars Amount To Opening Stock *** By Sales *** Purchase *** Closing Stock *** Crop Expenses *** Wages Crop (Contra) *** Cattle Expenses *** By drawing Live Stock Expenses *** Own Consumption consumed by live stock
” Wages – Cash *** Wages – Crop (Contra) *** Depn. Mach *** Profit/Loss a/c (bal.fig)
Problem: From the following information, prepare ‘crop Account’ to ascertain the profit made by the crop division of the farm. Opening stock: Rs. Wheat 5, Seeds 1, Fertilizers 1, Purchases: seeds 600
ADVANCED FINANCIAL ACCOUNTING - I
SEMESTER - III, ACADEMIC YEAR 2020- 2021
Fertilizers 900 Wages:paid in cash 6, Paid in kind – wheat 4, Sale of wheat 35, Wheat consumed by proprietor 1, Depreciation of farm machinery 2, Closing Stocks: Wheat 4, Seeds 700 Fertilizers 800 Solutions: Dr Cr Rs. Crop Account Particulars Amount Particulars Amount To opening stock: Wheat 5000 Seeds 1000 Fertilizers 1500 To purchases: Seeds 600 Fertilizers 900 To wages: In cash 6800 In kind (c) 4600 To Depreciation: Machinery To profit (bal.fig).. Rs. 7500 1, 11, 2, 24, 47, By Sale of wheat By Wages in kind (c) By Drawings: Own consumption BY closing stock: Wheat 4000 Seeds 700 Fertilizers 800 Rs. 35, 4, 1, 5, 47, Problem: From the following information given below prepare a ‘cattle Account’ to ascertain the profit made by the cattle division. No value(Rs.) Opening stock of livestock 50 90, Closing stock of livestock 60 1,10, Purchases of cattle during the year 110 2,05, Sale of cattle during the year 95 2,12, Sale of slaughtered cattle 6 12, Sale of carcasses 4 1000 Cattle food 18, Wages of rearing 4,
ADVANCED FINANCIAL ACCOUNTING - I
SEMESTER - III, ACADEMIC YEAR 2020- 2021
UNIT - III
HIRE PURCHASE SYSTEM AND INSTALLMENT SYSTEM
Meaning It is an agreement under which the goods are let on hire and the Hirer has a option either to hire or to purchase them in accordance with the terms of the agreement. The title of the goods transfers only at the end of the last installment and any time before that the hirer Can terminate the contract.
- It contains,
- Hire Purchase Price
- Cash Price
- Rate of Interest
- Down payment
- No of installments
- Amount per installments Installment system Meaning It is similar to hire purchase,except in terms of transfer ofownership. Theownership of the goods transfer to the buyeron payment of down payment. In the event of default, theseller cannot repossess the asset, but can only sue for recovery of amount. Distinction between Hire Purchase and Installment System Hire purchase Installment System Agreement for hire Agreement for sale Ownership is transferred on final payment. Immediate transfer of ownership Relationship is like a bailer and bailed Relationship is like a debtor and creditor The contract can be terminated in the middle The contract cannot be terminated It is governed by Hire Purchase It is governed by Sale of Goods Journal Entries as follows,
ADVANCED FINANCIAL ACCOUNTING - I
SEMESTER - III, ACADEMIC YEAR 2020- 2021
Sl.No Particulars Debit Credit 1 For asset purchased on hire purchase system Asset A/c To hire vendor A/c) Dr 2 For payment of down payment Hire vendor a/c To Bank a/c All the end of the year Dr
- For interest included in first instatement Interest a/c To Hire Vender a/c Dr
- For payment of first installment Hire Vendor a/c To Bank a/c Dr
- For depreciation: Depreciation a/c To Asset a/c Dr
- For closing depreciation and interest account Profit and loss a/c To Depreciation a/c “Interest a/c Dr In the subsequent years entries 3-6 are repeated
- For asset purchased on hire purchase system. No entry
- For down payment due Asset a/c To Hire Vendor a/c Dr
- For down payment paid Hire Vendor a/c To Bank a/c Dr
- For first installment due Asset a/c Interest a/c To Hire Vendor a/c Dr
- For first installment paid: Hire Vendor a/c To Bank a/c Dr
- For depreciation: Depreciation a/c To asset a/c Dr
ADVANCED FINANCIAL ACCOUNTING - I
SEMESTER - III, ACADEMIC YEAR 2020- 2021
Problem Mr.P purchased 4 cars for rs.14000 each on 1.1.2012 under hire Purchase system. The hire purchase price for all the 4 cars was Rs.60000 to be paid as Rs.15000 down payment and 3 equal annual Installments of rs.15000 each at the end the year. Interest is charged at 5% p.a. The buyer depreciates the car at 10%p.a. on Straight line method. Prepare ledger a/cs a) in the books of P under method 1&2. b)In the books of hire vendor .P .purchased 4 cars for Rs. 14000 each on 1.1.92 under the hire purchase system. The hire purchase price for all the 4 cars was Rs.60,000 to be paid as Rs.15,000 down payment and 3 equal installments of Rs.15000 each at the end of each year. Interest is charged at 5% P.a. The buyer depreciates the car at 10% P.a on straight line method. From the above particulars give journal entries and relevant ledger accounts (i) in the books of P under method (1) & (2)(ii)in the books of hire vendor. Solution: Table showing calculation of interest Particulars (1) Total cash price (2) Installment Paid (3)(4+5) Interest Paid (4) Cash price Paid (5) Cash price Less: Down payment Less:1stInstallment Less:2ndInstallment Less: 3rdinstallment
(410000x5/100) 1403 (28050x5/100) 547 (15000- 14453)
TOTAL NIL 60000 4000 56,
ADVANCED FINANCIAL ACCOUNTING - I
SEMESTER - III, ACADEMIC YEAR 2020- 2021
Journal entries in the books of p Method: 1.1.92 1.cars a/c To Hire vendor a/c (Being cars purchased on Hire Purchase) Dr 56000 56000 2.Hire vendor a/c To Bank a/c (Being down payment made) Dr 15000 15000 31.12.92 3.Interest q/c To Hire Vendor a/c (Being the interest payable) Dr 2050 2050
- Hire Vendor a/c (being the Is installment paid) Dr 15000 15000 5.Depreciation a/c To cars a/c (Being depreciation provided) Dr 5600 5600 6.profit and loss a/c To Interest a/c To Depreciation a/c (Being interest and depreciation transferred) Dr 7650 2050 5600 31.12.93 Interest a/c To Hire Vendor a/c (Being the Interest Payable) Dr 1403 1403 Hire Vendor a/c To Bank a/c (Being 2ndinstallment paid) Dr 15000 15000 Depreciation a/c To cars a/c (Being depreciation provided) Dr 5600 5600 Profit and loss a/c To Interest a/c To Depreciation a/c (Being interest and dep. Transferred) Dr 7003 1403 5600 31.02.94 Interest a/c To Hire Vendor a/c (Being the interest payable) Dr 547 547 Hire Vendor a/c To Bank a/c (Being 3rdinstallment paid) Dr 15000 15000 Depreciation a/c To cars a/c (Being depreciation provided) Dr 5600 5600 Profit and loss a/c To Interest a/c Dr 6147 547
ADVANCED FINANCIAL ACCOUNTING - I
SEMESTER - III, ACADEMIC YEAR 2020- 2021
UNIT - IV
ROYALTY A/C
It is concerned with the assets, both tangible and intangible in nature. Assets likeland,buildings,mines,copyrights,patents, trademarks etc.The owner of the asset may allow the other party right to use the asset against some consideration. Such considerationis calculatedwith reference to the quantity produced or sold. This payment to the owner by the user of the asset is termed as Royalty. A lessor is a person who owns the assets and agrees to allow the other person to use his asset for a certain sum. Minimum Rent It is fixed in order to safeguard the interest of the landlord. It is also known as Dead Rent or Rock rent or Fixed rent. Short working If the actual royalty is less than the minimum rent, the difference isknown as Shortworking.Recoupment of short working.The lesser has the right to recover the short workings in near future. The right to recover the short workings is known as recoupment of short workings strike and Lock Out. The royalty agreement may contain a clause for reduction in the minimum rent, in the happening of a certain event. In case of Strike orLock Out, the minimum rent may be proportionately reduced.
ADVANCED FINANCIAL ACCOUNTING - I
SEMESTER - III, ACADEMIC YEAR 2020- 2021
Journal entries in the books of lessee Particulars Debit Credit
- For royalty payable a) When there are no short workings Royalty a/c To landlords a/c dr. xxx xxx b)When there are short workings i)If minimum rent a/c need not be shown Royalty a/c Shortworkinga/c To landlord a/c dr. xxx dr. xxx Xxx b)When there are short workings i)If minimum rent a/c need not be shown Royalty a/c Shortworkinga/c To landlord a/c ii)If minimum rent a/c is required Minimum rent a/c To landlord a/c dr.xxx Xxx Royalty a/c Shortworking a/c To minimum rent a/c dr. xxx dr. xxx Xxx 2)For payment of cash a)When there is no recoupment of short workings Landlord a/c To cash a/c dr.xxx Xxx b)when there is recoupment of short workings Land lord a/c To cash a/c To Shortworking a/c dr. xxx xxx xxx 3)For transferring royalty at the end of the year Production a/c Or Profit &Loss a/c To royalty a/c dr. xxx dr. xxx Xxx 4)If there are short workings written off Profit &loss a/c To short workings a/c Journal entries in the books of landlord(lessor) dr.xxx xxx 1)for royalty receivable a)If there are no short workings Lessee a/c To royalty receivable a/c dr. xxx xxx
ADVANCED FINANCIAL ACCOUNTING - I
SEMESTER - III, ACADEMIC YEAR 2020- 2021
recoupment of short workings over the first three year of the royalty agreement .From the following details
- Minimum Rent a/c
- Royalties a/c
- Short workings a/c and
- Mr. Goods a/c Year No. of copies printed Closing 1993 1994 1995 1996
Solution: Calculation of number of copies sold: Number of copies sold = copies printed + opening stock – closing stock 1993 = 2000 + NIL - 100 = 1900 copies 1994 = 3000 + 100 - 200 = 2900 copies 1995 = 4000 + 200 - 400 = 3800 copies 1996 = 5000 + 400 - 500 = 4900 copies Table showing Calculations Year Minimum Rent Royalty @ 50 per Copy Short Workings Short working Recouped Short Working Unrecouped Transfer .to P&L a/c Amount Payable 1993 1994 1995 1996 Rs. 150000 150000 150000 150000 Rs. 95000 145000 190000 245000 Rs. 55000 5000
Rs.
20000
Rs. 150000 150000 150000 245000 Solution: In the Books of publishes Journal Entries Date Particulars Debit credit 1993
- Minimum Rent a/c To Mr. Good a/c (Being Minimum Rent Payable) Dr Rs. 150000 Rs. 150000
- Mr. Good a/c To Short workings a/c To Bank Dr 190000 400000 150000
- Profit& Loss a/c To Royalty a/c (Being royalty amount transferred to P&L Dr 190000 190000
ADVANCED FINANCIAL ACCOUNTING - I
SEMESTER - III, ACADEMIC YEAR 2020- 2021
a/c)
- Profit & Loss a/c To Short workings a/c (Being unrecouped SW transferred to P&L a/c) Dr 20000 20000 1996
- Royalty a/c To Mr. Good a/c (Being royalty payable) Dr 245000 245000 2 Mr.Good a/c To Bank a/c (Being royalty paid) Dr 245000 245000
- Profit & loss a/c To royalty a/c (Being royalty paid transferred to P &L a/c) Dr 245000 245000 Ledger Accounts Dr Minimum Rent Account Cr 1993 To Mr. Good a/c 150000 Rs. 1993 Rs. By Royalty a/c 95000 By Shortworkings 55000 150000 150000 1994 To Mr. Good a/c 150000 1994 By Royalty a/c 145000 By Shortworkings 5000 150000 150000 Dr Royalty Account Cr 1993 1994 1995 1996 To minimum Rent a/c To minimum Rent a/c To Mr.Good a/c To Mr.Good a/c Rs. 95000 95000 145000 145000 190000 190000 245000 245000
By Profit& loss a/c By profit& loss a/c By profit & loss a/c By profit & loss a/c Rs. 95000 95000 145000 145000 190000 190000 245000 245000 Dr short workings Account Cr 1993 1994 To Minimum Rent To Balance b/d To Minimum Rent Rs. 55000 55000 55000 5000
By Balance c/d By Balance c/d Rs. 55000 55000 60000
