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Typology: Lecture notes
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Total Debtors Account: The Total Debtors Account is a substitute account prepared in the Nominal Ledger for the accounts of the individual customers, but with total figures. A proforma of a Total Debtors Account is shown below:
In the Nominal Ledger Total Debtors Account
Jan. 1 To Balance b/d To Credit Sales To Bills receivable dishonoured To Sundry charge debited to customers
Rs.
Dec.31 By Cash received from Drs. By Bills Receivable received By Sales Return By Allowance to customers By Bad Debts w/off By Balance c/d
Rs.
The balace shown by the Total Debtors Account on any date should agree with the total of the debit in Debtors Ledger, at that date. If not, there is some mistake either in the Total Debtors Account or the individual accounts. Total Creditors Account: It is nothing but a summary of the individual creditors accounts prepared in the General Ledger. A proforma of the Total Creditors Account is given below:
In the Nominal Ledger Total Creditors Account
Dec 31 To Cash paid To Bills payable accepted To Purchase Return To Discount Received To Balance c/d
Rs.
Jan. 1 Dec.
By Balance b/d By Credit Purchase By Bills Payable dishonoured
Rs.
The Credit Balance of the Total Creditors Account on any date should agree with the total of the credit balance in the individual creditors accounts as found in the Creditors Ledger. If so it may be concluded that there is no mistake in the total creditors account or in the individual creditors accounts.
Illustration 3 From the following information prepare (1) Total Debtors ‘Account and (2) Total Creditors’ Account. Rs. Jan 1, 1998: Balance of Sundry Debtors 32, Balance of Sundry Creditors 37, June 30, 1998: Credit Purchase 9, Credit Sales 19, Cash Sales 1, Cash Purchase 1, Paid to Creditors 19,
Discount allowed by them 650 Cash received from debtors 15, Discount allowed to them 400 Bills payable accepted 3, Bills receivable received 6, Returns Inward 1, Returns Outward 1, Rebate allowed to debtors 550 Rebate allowed to creditors 300 Provision for doubtful debts 320 Bad debts 900 Bills receivable dishonoured 750 Bad debts previously written off now recovered 500
In the Nominal Ledger Total Debtors Account 1998 Jan. 1 June 30 June 30
To Balance b/d To Sales (Credit) To B/R Dishonoured
To Balance b/d
Rs. 32, 19, 750
June 30 ,, ,, ,, ,, ,, ,,
By Cash received By Discount allowed By B/R received By Returns Inward By Rebate allowed By Bad debts By Balance c/d
Rs. 15, 400 6, 1, 550 900 27, 52350 52, July 1 27,
Total Creditor’s Account 1998 June 30 ‘’ ‘’ ‘’ ‘’ ‘’
To Cash paid To Discount received To B/P accepted To Returns outward To Rebate received To Balance c/d
Rs. 19, 650 3, 1, 300 21,
Jan. June 30
July 1
By Balance b/d By Purchase (Cr.)
By Balance c/d
Rs. 37, 9,
Note: Cash Sales, Cash Purchases, Provision for Bad Debts and Bad Debts recovered will not appear in the Total Debtors Account since the Debtors or Creditors accounts are not affected by them.
Creditors Ledger Adjustment Account 1998 Jan. 31 To General Ledger To Adjustment Account To Purchases Return To Cash paid To Discount Received To B/P accepted To Allowance received To Balance c/d
Rs.
Jan.1 By Balance b/d By General Ledger By Adjustment A/c By Credit Purchases By B/P dishonoured
Rs. 54,
In the Debtors Ledger General Ledger Adjustment Account 1998 Jan.31 To Drs. Ledger Adjustment Account: To Sales returns To Cash received To Bad Debts To Discount Allowed To B/R received To Balance c/d
Rs.
Jan. Jan.
Feb.
By Balance c/d By Drs. Ledger Adjustment Account: By Credit Sales By Sundry charges By B/R dishonoured
By Balance b/d
Rs. 45,
In the Creditors Ledger General Ledger Adjustment A/c 1998 Jan. Jan.
Feb.
To Balance b/d Crs. Ledger Adjustment To Credit Purchases To B/P dishonoured
To Balance b/d
Rs. 54,
20, 3,
Jan. 31 By Crs. Ledger Adjustment Account: By Purchase returns By Cash paid By Discount Received By B/P accepted By Allowance received By Balance c/d
Rs.
Illustration 5
From the following balances prepare the necessary Adjustment Accounts in the Nominal Ledger:
Rs. Jan.1 1998 Balance of Sundry Debtors 40,000(Dr.) ‘’ Balance of Sundry Debtors 2,000(Cr.) ‘’ Balance of Sundry Creditors 37,000(Cr.) ‘’ Balance of Sundry Creditors 1,000(Dr.) Transactions for January: Cash and cheque received 1,40, Cash paid to creditors 1,20, Credit Sales as per sales book 2,00, Credit Purchases 1,50, Discount allowed 6, Discount received 3, Bad Debts written off 3. Bills Receivable received 20, Bills Payable accepted 5, Bills Receivable discounted 2, Transfer from Debtor’s Ledger to Creditors Ledger 1, Transfer from Creditor’s ledger to Debtors Ledger 1, Dec.31 Balance of Debtors 6,000(Cr.) ‘’ Balance of Creditors 2,500(Dr.)
Solution
In the General Ledger
Debtors Ledger Adjustment Account
1998 Jan. Jan.
Feb.
To Balance b/d To General Ledger Adjustment A/c To Sales To Balance c/d
To Balance b/d
Rs. 40,
2,00, 6,
Jan. 1 Jan.
By Balance b/d By General Ledger Adjustment A/c By Cash & Bank By Discount allowed By Bad Debts By B/R received By Transfer to Crs. By Ledger By Transfer from Crs. Ledger By Balance c/d
Rs. 2,
Hire Purchase and Instalment System
Hire purchase and instalment systems are considered as a special system, since they are combination of purchase and sale. These systems are considered as a revolution in bringing durable goods of high value to middle and lower middle class people, which were once available only to the rich and upper class people. These two systems have made the market expend.
17.1 Hire Purchase System
Goods which are purchased under hire purchase system are not immediately bought, but the purchaser has to pay the price in instalments. Goods are immediately delivered but ownership of the goods comes only when the last payment is paid and all the terms and conditions of the contract are fulfilled. Till then the goods are treated as on Hire. It is clear that Hire purchase is a trading system of retail business which agrees to sell the goods on the condition that the buyer pays the purchase price along with interest for a deferred fixed number of instalments. As the good are not legally sold out the ownership of the goods are not transferred along with the delivery of goods.
According to the Hire Purchase Act 1972- Section 2(c) “Hire purchase Agreement means an agreement under which goods are let on hire and under which the hire has an option to purchase them in accordance with the terms of the Agreement and includes an agreement under which
(i) Possession of goods is delivered by the owner thereof to a person on condition that such person pays the agreed amount in periodical instalments, (ii) The property of the goods is to pass on to such person on the payment of the last of such instalment and (iii) Such person has a right to terminate the Agreement at anytime before the property so passes.”
17.4 Important Terms in Hire Purchases system
(i) Hirer- Hirer is a person who buys or in this case who obtains the possession of the goods from the owner as per the Hire purchase Agreement.
(ii) Hirer Vendor- Hirer vendor or the owner is a person who lets or who has delivered or delivers the goods to hirer under an agreement. Hire vendor is the seller of the goods on the hire purchase system.
(iii) Cash Price- The cash price is the price of the goods which can be purchased by cash or the retail price, if not purchased under hire purchase system.
(iv) Hire Purchase Price- It is the total amount payable by the hirer under the hire purchase agreement, in the agreed number of instalments for the purchase of goods. Hire purchase price is the total of cash price and interest.
Hire purchase price=Cash price+Interest
(v) Interest- Interest is the amount which is payable in addition to the actual cash price of the goods. It is the amount paid bythe buyer for the delayed and postponed payment.
(vi) HireInstalment- It is the amount payable periodically by the hirer or the buyer, instalment may be an equal amount or different amounts which are based on the agreement.
(vii) Down Payment or intial amount- The amount is a lump-sum out of the total Hire purchase price, payable to the vendor in advance while the agreement is signed, which does not carry any interest on it.
17.6Accounting Treatment of Hire Purchase System
The records in hire purchase system depend on the value of goods that are delivered. High value goods like Machinery, trucks etc, have a different treatment from those having small value having many individual customers like televisions, refrigerators, washing machine, motor cycles etc.,
Accounting Treatment for High Value Goods
The high value goods with less number of customers for whom individual ledgers can be maintained by the hire-vendor. At the same time the Hire also maintain the assetA/c.
For such high value goods, two methods of records can be maintained.
(i) First method - Capitalising only the portion of cash price paid or asset accrual method. (ii) Second method - Capitalising the full cash price or credit purchase with interest method.
Before recording the transactions in Hire purchase system, one has to be clear regarding the calculation of interest, hire purchase price and cash price of the Hire purchase Agreement. Interest calculation are common for both the methods, which has to be calculated before passing journal entries.
Hire purchase price – As already explained, Hire purchase price includes cash price and interest. Hire purchase price = Cash price + Interest Cash price = Hire purchase price – Interest Interest = Hire purchase price – Cash price Cash price = Cost price + Profit therefore, Hire purchase price = Cost price + Profit + Interest.
To solve the problems, one should make sure that all the three information are available i.e., cash price, interest and hire purchase price.
Second method:
In this method the full case price is capitalised. The hire purchaser debits the Asset account A/c with full case price and credits the higher vendor A/c. this method assumes that the assets are consider to be acquired immediately when the position is taken. The purchaser enters into an agreement with the intention of fulfilling it.
Journal entries
In the books of Hire purchaser or Hirer
Date of signing 1. For the cash price of Asset purchased the agreement Asset A/c Dr. To Hire vendor’s A/c (Total cash price)
,, 2. For down Payment paid Hire vendor’s A/c Dr. To Cash
Date of the 3. For Interest payable on the 1st^ Instalment 1 st^ Instalment Interest A/c Dr. To Hire vendor’s A/c
,, 4. For payment of 1st^ Instalment Hire vendor’s A/c Dr. To Cash A/c
Date of closing 5. For providing the depreciation the accounts Depreciation A/c Dr. To Asset A/c
,, 6. For transferring Interest and depreciation to P & L A/c Profit & loss A/c Dr. To Interest A/c To Depreciation A/c
Note: Entries no: 3,4,5 & 6 are to be repeated for 2nd^ year and subsequent years till the last instalment is paid off.
In the books of Hire vendor
Journal entries in hire vendor books are common for both the methods.
Journal Entries In the Books of Hire vendor
1. For goods sold on hire purchase Hire purchaser A/c Dr. (Total cash price) To Hire sales A/c 2. For receipt of down payment Cash A/c Dr. To Hire purchaser A/c 3. For Interest receivable on 1st^ Instalment Hire Purchase A/c Dr. To Interest A/c 4. For receipt of 1st^ Instalment Cash A/c Dr. To Hire purchaser A/c 5. For transferring interest to P & L A/c Interest A/c Dr. To P & L A/c
Note: Entries 3, 4 & 5 are to be repeated for 2nd^ year and subsequent years till the last instalment is received.
As already discussed on hire purchase price and cash price, we know that Interest amount (total) is the difference between hire purchase price and cash price. Hire purchase price is an higher amount than cash price since the interest payable is included. Interest is paid by the hire purchaser for the delayed payments that he makes. Interest receivable is the main source of income in hire purchase business. The seller gets Interest amount for the sacrifice he makes by receiving the amount after certain period but delivering the goods immediately. Total Interest = Hire purchase price – Cash price Each Instalment amount includes cash paid towards the total amount and Interest due for that period Instalment amount = Cash price paid + Interest for the period
While calculating the interest make sure that the Instalment amount and cash price paid for the period are ascertained.
2. When the rate of interest and total cash price are given and Instalment amount is not given: As in the first situation of calculating interest here also interest is calculated on the outstanding balance of total cash price. In the previous method, Instalment was given and cash rice paid of each Instalment was calculated. But here cash price paid is given and Instalment amount for each period has to be calculated. In this situation, Interest is calculated with a certain percentage till the last Instalment.
Illustration 2 Sharma purchased a machine on hire purchase system on 1.4.2008. The cash price of the machine was Rs.2,10,000. According to the agreement, Rs.60,000 to be paid on delivery. The balance to be paid in four Instalments of Rs. 37,500 each annually plus Interest. Interest is charged @ 20%p.a. Calculate the Interest.
Solution Table Showing Calculation of Interest
Particulars Total Cash price
Interest @ 20% p.a.
**Instalment (cash price
Cash price Paid (given) Total cash price (-)down payment
(-)I Instalment
(-)II Instalment
(-)III Instalment
(-)IV Instalment
Nill 75,000^ 2,85,000^ 2,10,
This method can be identified with the help of the following calculation.
Total amount payable Rs. Down payment 60, Instalment amount (37500 x 4) 1, 50, 2, 10, (-)Total cash price 2, 10, __ -___
If the total cash price and total amount payable are equal, it means that interest is not included in the payable amount. Therefore Rs. 37,500 each for 4 years given is the cash price paid. So instalment amount has to be found out (i.e., cash price paid(given) + Interest)
3. When the rate of Interest and Instalment amount are given but the total cash price is not given.
In this situation, the total cash price is not given, but the amount of instalment is given in which Interest is also included. The rate of interest is also given. While computing the amount of interest, it can be seen that interest goes on decreasing from first year to subsequent years. Calculation of interest can be started from the last year to the first year. To find the total cash price, last year’s cash price paid is added to the Instalment of previous year. For example if there are three years for which interest has to be calculated, then third year’s cash price paid is added to the instalment of the second year, and adding the cash price of the third year and second year with the first year’s instalment. Since interest is included in the instalment, interest can be found by this formula:
, if 5%it will be
Illustration 3
Mr. Robert purchased a motorcycle on hire purchase system on 1.4.2008. As per the agreement he has to pay Rs.3,600 down and Rs.5,100 at the end of the first year, Rs. 4,800 at the end of second year and Rs.16,500 at the end of the third and final year. Interest is charge @ 10%p.a. You are required to calculate Interest and the total cash price.
Calculation of total interest
Total amount payable(15000 4) 60,
(-)Total cash price 52,
Total interest 8,
Total Interest of Rs. 8,000 is to be divided on the outstanding Instalment ratio for the four years.
Illustration 6
On 1.1.2006 Sujatha bought a machine from Chirtra & Co on hire purchase system Rs. 1,20,000 was the cash price, Rs. 30,000 down payment and at the end of 1 year Rs. 34,500, II year Rs. 33000 and III year Rs. 31,500 was payable. The vendor charged interest @ 5% and depreciation is provided @ 10% annually. Journalise the entries in the books of both the parties.
Solution I Table Showing the Calculation of Interest Particulars Total cash Price
Interest @5%
Instainment (given)
Cash price Paid (Instalment -Interest) Total cash price (-)Down payment
I Instalment
II Instalment
III Instalment
II Journal Entries in the Books of Sujatha
Date Particulars 2006 2007 2008 Debits Rs
Credit Rs
Debits Rs
Credits Rs
Debits Rs
Credits Rs Jan 1
“
Dec 31
“
“
“
Machinery A/c Dr To Chitra&Co A/c [Total cash price]
1,20, 1,20,000 - - - - Chitra & Co A/c Dr To Cash A/c [Down payment]
30, 30,000 - - - - Interest A/c Dr To Chitra & Co A/c [Instalment amount paid]
4, 4,
3, 3,
1, 1,
Chitra & Co A/c Dr To Cash A/c [Instalment amount paid]
34, 34,
33, 33,
31, 31,
Depreciation A/c Dr To Machine A/c [Depreciation charge] P & L A/c Dr To Interest A/c To Depreciation [transferred to p & L A/c]
12,
16,
12,
4, 12,
10,
13,
10,
3, 10,
9,
11,
9,
1, 9,
III Journal Entries in the Books of Chitra & Co
Date Particulars 2006 2007 2008 Debits Rs
Credit Rs
Debits Rs
Credits Rs
Debits Rs
Credits Rs Jan 1
“
Dec 31
“
Sujatha A/c Dr To Hire sales A/c [Total Cash price]
1,20, 1,20,000 - - - -
Cash A/c Dr To Sujatha A/c [Down Payment]
30, 30,000 - - - -
Sujatha A/c Dr To Interest A/c [Interest due]
4, 4,
3, 3,
1, 1,
Cash A/c Dr To Sujatha A/c [Instalment received]
34, 34,
33, 33,
31, 31,
Interest A/c Dr To P & L A/c [transferred to p & L A/c]
4, 4,
3, 3,
1, 1,
