387 16CCCCM3 2020052106465881

BUSINESS
ACCOUNTING
For B.Com. Semester II, BHARATHIDASAN UNIVERSITY
Dr. P.RAMAR
SYLLABUS
SEMESTER - II
BHARATHIDASAN UNIVERSITY
UNIT – I
Branch accounts – (Excluding foreign branches) – Departmental accounts.
UNIT – II
Hire purchase accounts & Instalment purchase System
UNIT – III
Self balancing and sectional balancing ledgers – Royalty accounts
UNIT – IV
Fire insurance claims for loss of stock and profits – Accounting for sale or
return.
UNIT – V
Insolvency accounts – Statement of Affairs – Insolvency of individual only

CONTENTS
UNIT – I
BRANCH ACCOUNTS 1-19

DEPARTMENTAL ACCOUNTS 20-27
UNIT – II
HIRE PURCHASE ACCOUNTS AND INSTALMENT

PURCHASE SYSTEM 28-34
UNIT – III
SELF BALANCING AND SECTIONAL BALANCING 35-43

ROYALTY ACCOUNTS 44-49
UNIT – IV
FIRE INSURANCE CLAIMS FOR LOSS OF STOCK AND PROFITS
ACCOUNTING FOR SALE OR RETURN 50-59
UNIT – V
INSOLVENCY ACCOUNTS 60-64

BUSINESS ACCOUNTING Dr. P.RAMAR
UNIT – I BRANCH ACCOUNT

Introduction
A branch can be described as any establishment carrying on either the same or
substantially the same activity as that carried on by head office of the company. It must also
be noted that the concept of a branch means existence of a head office for there can be no
branch without a head office - the principal place of business. From the accounting point of
view, branches may be classified as follows:
Classification of Branches
Inland Branches Foreign Branches
Dependent Branches for which whole

Independent Branches which maintain
accounting records are kept at Head
independent accounting records
Office
Distinction Between Branch Accounts And Departmental

Accounts
Basis of distinction Branch Accounts Departmental Accounts

1. Maintenance Branch accounts may be Departmental accounts are
of accounts maintained either at maintained at one place only.
branch or at head office.
2. Allocation of No allocation problem Common expenses are
common arises since the expenses distributed among the
expenses in respect of each branch departments concerned on some
can be identified. equitable basis considered
suitable in the case.
3. Reconciliation Reconciliation of head No such problem arises.
office and branch accounts
is necessary in case of
independent branches at
the end of the accounting
year.
4. Conversion At the time of finalization No such problem arises in
of foreign of accounts, conversion of departmental accounts.
currency figures of foreign branch is
figures necessary.
1
Dependent Branches
When the business policies and the administration of a branch are wholly controlled
by the head office and its accounts also are maintained by it the branch is described as
Dependant branch. Branch accounts, in such a case, are maintained at the head office out of
reports and returns received from the branch. Some of the significant types of branches that
are operated in this manner are described below:
(a) A branch set up merely for booking orders that are executed by the head office.
Such a branch only transmits orders to the head office;
(b) A branch established at a commercial centre for the sale of goods (wholesale)
supplied by the head office, and under its direction all collections are made by
the H.O.; and
(c) A branch for the retail sale of goods, supplied by the head office.
Accounting in the case of first two types is simple. Only a record of expenses
incurred at the branch has to be maintained. But however a retail branch is
essentially a sale agency that principally sells goods supplied by the head office for
cash and, if so authorized, also on credit to approved customers. Generally, cash
collected is deposited into a local bank to the credit of the head office and the head
office issues cheques thereon for meeting the expenses of the branch. In addition,
the Branch Manager is provided with a ‘float’ for petty expenses which is replenished
from time to time on an imprest basis. If, however, the branch also sells certain
lines of goods, directly purchased by it, the branch retains a part of the sale
proceeds to pay for the goods so purchased.
Methods of Charging Goods to Branches

Goods may be invoiced to branches (1) at cost; or (2) at selling price; or (3) in
case of retail branches, at wholesale price.
Selling price method is adopted where the goods would be sold at a fixed
price by the branch. It is suitable for dealers in tea, petrol, vanaspati ghee, etc. In
this way, greater control can be exercised over the working of a branch in as
much as that the branch balance in the head office books would always be
composed of the value of unsold stock at the branch and remittances or goods in
transit. The arbitrary price method is usually adopted if the selling price is not
known or when it is not considered desirable to disclose to the branch manager
the profit made by the branch.
2
Accounting for Dependent Branches
Dependent branch does not maintain a complete record of its transactions. The
Head office may maintain accounts of dependent branches in any of the following
methods:
Methods of maintaining
accounts of Dependent
Branches
Goods invoiced at cost Goods invoiced at

or selling price wholesale price
Trading and profit

Stock and and loss account Whole sale
Debtors Method Debtors Method branches method
method (final
Accounts method
When goods are invoiced at cost: If goods are invoiced to the branch at cost, the
trading results of branch can be ascertained by following any of the three methods: (i)
Debtors Method, (ii)Stock and Debtors method, (iii) Trading and Profit and Loss Account
(Final Accounts) Method.
For finding out the trading results of branch, it is assumed that the branch is an entity
separate from the head office. On the basis, a Branch Account is stated in the head
office books to which the price of goods or services provided or expenses paid out
are debited and correspondingly, the value of benefits and cash received from the
branch are credited.
Debtor’s method:
This method of accounting is suitable for small sized branches. Under this method,
separate branch account is maintained for each branch to compute profit or loss made
by each branch. The opening balance of stock, debtors (if any), petty cash (if any), are
debited to the Branch Account; the cost of goods sent to branch as well as expenses of
the branch paid by the head office, e.g., salaries, rent, insurance, etc., are also debited to
it. Conversely, amounts remitted by the branch and the cost of goods returned by the
branch are credited. At the end of the year, the value of unsold stock, the total of
customers’ balances outstanding and that of petty cash are brought into the branch
account on the credit side and then the branch account will reveal profit or loss; Debit
‘balance’ will be the loss suffered by the working of the branch and vice versa. If the
branch is allowed to make small purchases of goods locally as well as to incur expenses
out of its cash receipts, it will be necessary for the branch to supply to the head office a
copy of the Cash Account, showing details of cash collections and disbursements. To
illustrate the various entries which are made in the Branch Account, the proforma of a
Branch Account is shown below:
3
Branch Account
To Balance By Bank A/c (Cash

b/d Stock remitted) By Return to
Debtors H.O.
By Balance c/d
Petty Cash Cash
To Goods sent to Debtors
Branch To Bank A/c Petty Cash
Salaries Fixed
Rent Assets
Sundry Expenses Prepaid Expenses
To Profit & Loss A/c— By Profit and Loss A/c—
Profit (if credit side Loss (if debit side is
is larger)
larger)
Note:
1. Having credited the Branch Account by the actual cash received from debtors, it
would be wrong to debit the Branch Account, in respect of discount or
allowances to debtors.
2. The accuracy of the trading results as disclosed by the Branch Account, so
maintained, if considered necessary, can be proved by preparing a Memorandum
Branch Trading and Profit & Loss Account, in the usual way, from the balances of
various items of income and expenses contained in the Branch Account.
Stock and Debtors method
If it is desired to exercise a more detailed control over the working of a branch, the
accounts of the branch are maintained under what is described as the Stock and
Debtors Method. According to this method, the following accounts are maintained
by the Head Office:
Account Purpose
1. Branch Stock Account (or Branch Ascertainment of shortage or surplus
Trading Account)
2. Branch Profit and Loss Account Calculation of net profit or loss
3. Branch Debtors Account Ascertainment of closing balance of
debtors
4. Branch Expenses Account Ascertainment of total expenses
incurred
5. Goods sent to Branch Account Ascertainment of cost of goods sent to
branch
If the branch is also allowed to purchase goods locally and to incur expenses out of
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its cash collections, it would be necessary to maintain (i) a Branch Cash Account, and
(ii) an independent record of branch assets.
The manner in which entries are recorded in the above method is shown below:
Transaction Account debited Account credited

(a) Cost of goods sent to the Branch Stock A/c Goods sent to Branch A/c
Branch
(b) Remittances for expenses Branch Cash A/c (H.O.) Cash A/c
(c) Any assets (e.g. furniture) Br Asset (Furniture) A/c (i) (H.O.) Cash A/c or
provided by H.O. (ii) Creditors A/c

(d) Cost of goods returned by (iii) (H.O.) Furniture A/c
Goods sent to Branch A/c Branch Stock A/c
the branch
(e) Cash Sales at the Branch Branch Cash A/c Branch Stock A/c
(f) Credit Sales at the Branch Branch Debtors A/c Branch Stock A/c
(g) Return of goods by debtors Branch Stock A/c Branch Debtors A/c
to the Branch
(h) Branch Cash A/c Branch Debtors A/c
Cash paid by debtors
(i) Branch Expenses A/c Branch Debtors A/c
Discount & allowance to
debtors, bad debts
(j) (H.O.) Cash A/c Branch Cash A/c
Remittances to H.O. Branch Expenses A/c (H.O.) Cash A/c
(k)
Expenses met by H.O.
(l) Closing Stock: Credit the Branch Stock Account with the value of closing stock at
cost. It will be carried down as opening balance (debit) for the next accounting
period. The Balance of the Branch Stock Account, (after adjustment therein the
value of closing stock), if in credit, will represent the gross profit on sales and
vice versa.
Other Steps
(m) Transfer Balance of Branch Stock Account to the Branch Profit and Loss Account.
(n) Transfer Balance of Branch Expenses Account to the debit of Branch Profit &
Loss Account.
(o) The balance in the Branch P&L A/c will be transferred to the (H.O.) Profit &
Loss Account.
The credit balance in the Goods sent to Branch Account is afterwards transferred to
the Head Office Purchase Account or Trading Account (in case of manufacturing
concerns), it being the value of goods transferred to the Branch.
Branch Trading and Profit and Loss Account (Final Accounts Method)
5
In this method, Trading and Profit and Loss accounts are prepared considering
each branch as a separate entity. The main advantage of this method is that, it is
easy to prepare and understand. It also gives complete information of all
transactions which are ignored in the other methods. It should be noted that Branch
Trading and Profit and Loss account is merely a memorandum account and
therefore, the entries made there in do not have double entry effect.
When goods are invoiced at selling price: It would be obvious that if
Branch Account is debited with the sales price of goods and subsequent to the
debit being raised there is a change in the sale price, the amount of debit either has
to be increased or reduced on a consideration of the quantity of unsold stock that
was there at the branch at the time the change took place. Such an adjustment will be
necessary as often as the change in sale price occurs.
Moreover the amount of anticipatory profit, included in the value of unsold
stock with the branch at the close of the year will have to be eliminated before
the accounts of the branch are incorporated with that of the head office. This will
be done by creating a reserve.
It may also be necessary to adjust the value of closing stock on account of the
physical losses of stock due to either pilferage or wastages which may have occurred
during the year. The last mentioned adjustments are made by debiting the cost of the
goods to Goods Lost Account and the amount of loading (included in the lost goods),
to the Branch Adjustment Account. The three different methods that are usually
adopted for maintaining accounts on this basis are described below:
Stock and Debtors Method
Under this method, when goods are invoiced at selling price, one additional
account i.e. ‘Branch Adjustment account’ is also prepared in addition to all the
accounts which are maintained on cost basis.
When goods are invoiced at selling price, the following points should be kept in mind
underthis method:
(i) Journal Entries:
` Transaction Accounts debited Accounts credited

(a) Sale price of the Branch Stock A/c (i) Goods sent to
goods sent from (at selling price) Branches
H.O. to the Branch A/c with cost of the
goods sent.
(ii) Branch Adjustment
A/c
(with the loading i.e.,
Difference between
the selling and cost
price).
6
(b) Return of goods Goods sent to Branch

(i) Branch Stock A/c
A/c
By the Branch to H.O. (with the cost of
goods returned).
(ii) Branch Adjustment A/c
(with the loading)
(c) Cash sales at the Cash/Bank A/c Branch Stock A/c
Branch
(d) Credit Sales at the Branch Debtors A/c Branch Stock A/c
Branch
(e) Goods returned to Branch Stock A/c Branch Debtors A/c
Branch by customers (at selling price)
(f) Goods lost in (i) Goods Lost in Transit A/c Branch Stock A/c
Transit or stolen or Goods Stolen A/c
(with cost of the goods)
(ii) Branch Adjustment A/c
(with the loading)
(ii) Closing Stock
The balance in the Branch Stock Account at the close of the year normally should be
equal to the unsold stock at the Branch valued at sale price. But quite often the value
of stock actually held at the branch is either more or less than the balance of the
Branch Stock Account. In that event it will be necessary that the balance in the
Branch Stock Account is increased or reduced by debit or credit to Goods Lost
Account (at cost price of goods) and Branch Adjustment Account (with the loading).
The Stock Account at selling price, thus reveals loss of stock (or surplus) and serves
as a check on the branch in this respect.
The discrepancy in the amount of balance in the Branch Stock Account and the
value of stock actually in hand, valued at sale price, may be the result of one or more of
the under-mentioned factors:
➢ An error in applying the percentage of loading.
➢ Goods having been sold either below or above the established selling price.
➢ A Commission to adjust returns or allowances.
➢ Physical loss of stock due to natural causes or pilferage.
➢ Errors in Stock-taking.
If on the other hand, a part of the sale proceeds has been misappropriated, then the
adjusting entry would be:
Dr. Cr.
Loss by theft A/c Dr. XX
Branch Adjustment A/c Dr. XX
To Branch Stock A/c XX
7
Rebates and allowances allowed to customers are adjusted by debiting the

amounts of such allowances to Branch Adjustment Account and crediting Branch
Stock Account. But, if the gross amount of sale has been debited to Branch debtors
Account, this account would be credited instead of Branch Stock Account, since the
last mentioned account would have already received credit for the full value.
In the Goods Sent to Branch Account, the cost of the goods sent out to a branch
for sale is credited by debiting Branch Stock Account. Conversely, the cost of goods
returned by the branch is debited to this account. As such the balance in the
account at the end of the year will be the cost of goods sent to the branch;
therefore, it will be transferred either to the Trading Account or to Purchases
Account of the head office.
The amount of profit anticipated on sale of goods sent to the branch is credited to
the Branch Adjustment Account and conversely, the amount of profit not realized
in respect of goods returned by the branch to head office or that in respect to stock
remaining unsold with the branch at the close of the year is debited. The balance in
this account, at the end of year thus will consist of the amount of Gross Profit earned
on sale by the branch. On that account, it will be transferred to the Branch Profit and
Loss Account.
(iii) Elimination of unrealised profit in the closing stock: The balance in the Branch
Stock account would be at the sale price; therefore it would be necessary to
eliminate the element of profit included in such closing stock. This is done by
creating a reserve against unrealised profit, by debiting the Branch Adjustment
Account and crediting Stock Reserve Account with an amount equal to the
difference in the cost and selling price of unsold stock. Sometimes instead of
opening a separate account in respect of the reserve, the amount of the difference is
credited to Branch Stock Account. In that case, the credited balance of such a
reserve is also carried forward separately, along with the debit balance in the Branch
Stock Account; the difference between the two would be the value of stock at cost.
In either case, the credit balance will be deducted out of the value of closing stock
for the purpose of disclosure in the balance sheet, so that the stock is shown at cost.
An Alternative method: Where the gross profit of each branch is not required
to be ascertained separately, although the selling price is uniform, the amount of
goods sent to the branch is recorded only in two accounts namely - Branch Stock
Account and Goods Sent to Branch A/c.
In this method, at the end of the year the Branch Stock Account is closed by
transfer of the balance representing the value of closing stock, at sale price, to the
Goods Sent to Branch Account. This has the effect of altogether eliminating from
the books the value of stock at the branch. The balance of Goods sent to Branch
Account is afterwards transferred to the Trading Account representing the net sale
price of goods sold at the branch. In that case, the value of closing stock at the branch
at cost will be subsequently introduced in the Trading Account together with that
of closing stock at the head office.
8
Debtors Method
Under this method, the principal accounts that will be maintained are:
The Branch Account;
The Goods Sent to Branch Account; and
The Stock Reserve Account.
Entries in these accounts will be made in the following manner:
Transaction Account debited Account credited

(a) Goods sent to Branch at Branch A/c Goods Sent to
selling price Branch A/c
(b) ‘Loading being the Goods Sent to Branch Branch A/c
difference between selling A/c
price and cost of goods
(c) Returns to H.O. at selling Branch A/c
price Goods Sent to Branch
(d) ‘Loading’ in respect of A/c Branch A/c Goods Sent to
goods returned to H.O. Branch A/c
(e) ‘Loading’ included in the Branch A/c
Stock Reserve A/c
opening stock to reduce it
(f) Closing stock at selling price Branch Stock Branch A/c
(g) A/c Branch Stock Reserve A/c
‘Loading’ included in closing
A/c
stock to reduce it to cost
It will be observed that entries in the Branch Account in respect of goods sent to a
branch or returned by it, as well as those for the opening and closing stock, will be
at selling price. In consequence, the Branch Account is maintained at selling price.
Hence the Branch Account will not correctly show the trading profit of the Branch
unless these amounts are adjusted to cost. Such an adjustment is effected by
making contra entries in ‘Goods Sent to Branch A/c’ and ‘Stock Reserve Account’. In
respect of closing stock at branch for the purpose of disclosure in the Balance Sheet,
the credit balance in the ‘Stock Reserve Account’ at the end of the year will be
deducted from the value of the closing stock, so as to reduce it to close; it will be
carried forward as a separate balance to the following year, for being transferred
to the credit of the Branch Account.
Goods invoiced at wholesale price to retail branches:
Under this method, the Head Office (particularly, the manufacturing concern)
supplies goods to its retail branches at wholesale price which is cost plus wholesale
profit. The profit attributable to such branches is the difference between the sale
proceeds of goods at the shops and the wholesale price of the goods sold. For the
purpose, it is assumed that the manufacturer would always be able to sell the goods
on wholesale terms and thereby realizes profit equal to the difference between the
9
wholesale price and the cost. Many concerns, therefore, invoice goods to such
shops at wholesale price and determine profit or loss on sale of goods on this
basis. Accordingly, Branch Stock Account or the Trading Account is debited with:
(a) the value of opening stock at the Branch; and
(b) price of goods sent during the year at wholesale
price. It is credited by:
(a) sales effected at the shop; and
(b) closing stock of goods valued at wholesale price.
The value of goods lost due to accident, theft etc. also is credited to the Branch Stock
Account or Trading Account calculated at the wholesale price. At this stage, the
Branch Stock or Trading Account will reveal the amount of gross profit (or loss). It is
transferred to the Branch Profit and Loss Account. On further being debited with the
expenses incurred at the shop and the wholesale price of goods lost, the Branch
Profit and Loss Account will disclose the net profit (or loss) at the shop.
Since the closing stock at the branch has to be valued at wholesale price, it
would be necessary to create a stock reserve equal to the difference between its
wholesale price and its cost (to the head office) by debiting the amount in the Head
Office Profit and Loss Account. This Stock Reserve is carried down to the next year
and then transferred to the credit of the (Head Office) Profit and Loss Account.
Accounting for Independent Branches
When the size of the business is big, it is desirable that the branch maintains
complete records of its transactions. These branches are called independent
branches and each independent branch maintains comprehensive account books for
recording their transactions; therefore a separate trial balance of each branch can be
prepared. The head office maintains one ledger account for each such branch,
wherein all transactions between the head office and the branches are recorded.
Salient features of accounting system of an independent branch are as follows:
1. Branch maintains its entire books of account under double entry system.
2. Branch opens in its books a Head Office account to record all transactions that
take place between Head Office and branch. The Head Office maintains a Branch
account to record these transactions.
3. Branch prepares its Trial Balance, Trading and profit and loss Account at the end
of the accounting period and sends copies of these statements to Head Office for
incorporation.
4. After receiving the final statements from branch, Head Office reconciles between
the two
– Branch account in Head Office books and Head Office account in Branch books.
5. Head office passes necessary journal entries to incorporate branch trial
balance in its books.
10
The Head Office Account in branch books and Branch Account in head office books
are maintained respectively.
Transactions Head office books Branch books

(i) Dispatch of to Branch A/c Dr. Goods received. from H.O. Dr.
goods branch by To Good sent to A/c To Head Office A/c
Branch A/c
H.O.
(ii) When goods are Goods sent to Branch Dr. Head Office A/c Dr.
returned by the A/c To Branch To Goods recd. from H.O.
Branch to H.O. A/c A/c
(iii) Branch Expenses No Entry Expenses A/c Dr.
are paid by the To Cash A/c
Branch
(iv) Branch Expenses Branch A/c Dr. Expenses A/c Dr.
paid by H.O. To Bank To Head Office A/c
(v) Outside purchases No Entry Purchases A/c Dr.
made by the Branch To Bank (or) Crs. A/c
(vi) Sales effected by No Entry Cash or Debtors A/c Dr.
the Branch To Sales
(vii) Collection from Cash or Bank A/c Dr. Head office A/c Dr.
Debtors of the To Branch A/c To Sundry Drs. A/c
Branch recd. by H.O.
(viii Payment by H.O. fo Branch A/c Dr. Purchase (or) Sundry Creditors A/c
) purchase made Dr.
Branch r To Bank
by To Head Office
(ix) Purchase of Asset No Entry Sundry Assets Dr.
by Branch To Bank (or) Liability
(x) Asset purchased by Branch Asset Dr. Head office Dr.
the Branch but Asset A/c To Branch To Bank (or) Liability
A/c retained at H.O. A/c
books
(xi) Depreciation on (x) Branch A/c Dr. Depreciation A/c Dr.
above To Branch Asset To Head Office A/c
(xii) Remittance of funds Branch A/c Dr. Bank A/c Dr.
by H.O. to Branch To Bank To Head Office
(xiii) Remittance of funds Reverse entry of(xii Reverse entry of (xii) above
by Branch to H.O. above )
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(xiv) Transfer of goods (Recipient) Branch Dr. Supplying Branch H.O. A/c Dr.
from one Branch to A/c To Goods Received
another branch To Supplying from H.O. A/c
Branch A/c Recipient Branch
Dr.
Goods Received from H.O.
A/c To Head Office A/c
The final result of these adjustments will be that so far as the Head Office is
concerned, the branch will be looked upon either as a debtor or creditor, as a
debtor if the amount of its assets is in excess of its liabilities and as a creditor if the
position is reverse.
A debit balance in the Branch Account should always be equal to the net assets
at the branch. The important thing to remember, when independent sets of accounts
are maintained, is that the branch and head office books are connected with each
other only through the medium of the Branch and the Head Office Account which
are converse of each other.; also when accounts of the branch and head office are
consolidated both the Branch and Head Office Accounts will be eliminated.
Adjustment and Reconciliation of Branch and Head Office Accounts
If the branch and the head office accounts, converse of each other, do not tally, these
must be reconciled before the preparation of the final accounts of the concern as a
whole.
However, there will be no entry in Head office books being the point where the event
has been recorded in full, hence no further entries in Head office books.
Reasons for Disagreement: Following are the possible reasons for the disagreement
between Branch A/c in Head office books and Head office A/c in Branch books on the closing
date:
➢ Goods dispatched by the Head office not received by the branch. These goods
may be in transit or loss in transit.
➢ Goods returned by the branch to Head Office may have been received by the
H.O. Again, these goods may be in transit or lost in transit.
➢ Amount remitted by Head office to branch or vice versa remaining in transit on the
closing date.
➢ Receipt of income or payment or expenses relating to the Branch transacted
by the head office or vice versa, hence not recorded at the respective ends
wherein they are normally to be recorded.
(1) Inter-Branch Transactions
Inter-branch transactions are usually adjusted as if they were entered into only with
the head office. It is a very convenient method of treating such transaction especially
where the number of branches are large. .
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2) Fixed Assets
Often the accounts of fixed assets of a branch are kept in the head office books;
in such a case, at the end of the year, the amount of depreciation on the assets is
debited to the branch concerned by recording the following entry:
Branch Account Dr.
To Branch Asset Account
The branch will pass the following entry:

Depreciation Account Dr.
To Head Office Account
(2) Head office Expenses charged to Branch
Usually the head office has to devote considerable time in attending to the affairs
of the branch; on that account, it may decide to raise a charge against the branch in
respect of the cost of such time. In such a case the amount is debited to the branch
as ‘Expenses’ and is credited to appropriate revenue head such as Salaries Accounts,
General Charges Account, Entertainment Account etc. The branch credits the H.O.
Account and debits Expenses Account.
Foreign Branches
Foreign branches generally maintain independent and complete record of business
transacted by them in currency of the country in which they operate. Thus problems of
incorporating balances of foreign branches relate mainly to translation of foreign
currency into Indian rupees. This is because exchange rate of Indian rupee is not stable
in relation to foreign currencies due to international demand and supply effects on
various currencies. The accounting principles which apply to inland branches also apply
to a foreign branch after converting the trial balance of the foreign branch in the Indian
currency.
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Problems
1. From the following particulars prepare branch account for the year ended 31.12.2015.
Rs.
Stock on 31.12.2014 2300
Goods sent to branch 45000
Cash sent to branch for Rent 1800
Salaries 5000
Other expenses 1600
Cash received from the branch 60000
Stock on 31.12.2015 5800
Petty cash 31.12.2015 30
2. TVS & Co. of Madurai operates a branch at Madras. From the following particulars,
prepare the branch account as it would appear in the books of Head office.
Rs.
Stock in trade at the branch 1.1.2010 11200
Cash sent to branch:
Rent 7200
Salaries 8600
Other expenses 2200
Cash sent by branch 172000
Stock in trade at branch on 31.12.2010 7600
Cash in hand at the branch on 31.12.2010 100
3. The following information relates to Madurai Branch
Rs.
Stock on 1.1.94 11200
Branch debtors on 1.1.94 6300
Cash sent to branch for:
Rent 1500
Salaries 3000
Petty cash 600
Sales at branch
Cash 25000
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Credit 39000
Cash received from debtors 41200
Stock on 31.12.94 13600
Prepare Branch Account for the year 1994.
4. Raj metal company opened a branch at Chennai as on 1.1.99. From the following
particulars, prepare the Chennai Branch account for the year 2000.
1999 2000
Rs. Rs.
Goods sent to branch 15000 45000
Cash sent to branch for:
Rent 1800 1800
Salaries 3000 5000
Other expenses 1200 1600
Cash received from the branch 24000 60000
Stock on 31st December 2300 5800
Petty cash in hand on 31st December 40 50
5. From the following particulars relating to Hyderabad branch for the year ended
31.12.90. Prepare Branch Account in the head office books
Rs.
Stock at the branch on 1.1.90 15000
Debtors at the branch on 1.1.90 30000
Petty cash at the branch on 1.1.90 300
Goods sent to branch during 1990 252000
Cash sales 1990 60000
Received from Debtors 210000
Credit sales during 1990 228000
Cheques sent to branch during 1990
For salaries 9000
For rent and rates 1500
For petty cash 1100
Stock at the branch on 31.12.90 25000
Petty cash on 31.12.90 200
Goods returned by the branch 2000
Debtors on 31.12.90 48000
6. The following are the details of a dependent Kovai branch established by Salem Head
15
office for the year ending 31.3.2005.

Rs.
Goods sent to BO at cost 50000
Goods returned by BO at cost 3000
Expenses paid by HO 10000
Remittances received from BO 45000
Received from debtors by the BO 42500
Cash sales 2500
Credit sales 51000
Closing stock with BO 17000
Branch debtors (31.3.2005) 7700
Discount allowed to customers by branch 1800
Prepare branch account in the books of Head office to find out profit or loss.
7. A Calcutta head office has a branch at Patna to which goods are sent at cost plus 25%.
From the following particulars prepare branch account in the head office books.
Rs.
Stock on 1.1.2009 invoice price 1250
Stock on 31.12.2009 invoice price 1500
Debtors 1.1.2009 700
Debtors 31.12.2009 900
Cash sales for the year 5400
Credit sales for the year 3500
Goods send to branch 9100
Cash received from Calcutta
Rent 400
Wages 340
Sundry Expenses 80
8. A Namakkal head office has a branch at Erode to which goods are invoiced at cost plus
20% from the details, prepare branch a/c in the head office books.
Rs.
Cash sales 110400
Credit sales 96000
16
Debtors on 1.1.2006 24000

Stock on 1.1.2006 7680
Stock on 31.12.2006 13440
9. Raga of Trichy has a branch at Madras. Goods are sent by head office at invoice price
which is at the profit of 20% on cost price. All expenses of the branch are paid by head
office. From the following particulars prepare branch account in the HO books. Show
the goods at invoice price.
Rs.
Opening balances:
Stock at invoice price 11000
Debtors 1700
Petty cash 100
Goods sent to branch at invoice price 20000
Expenses paid by head office:
Rent 600
Wages 200
Salary 900
Remittance made to head office:
Cash sales 2650
Cash collected from debtors 21000
Goods returned by branch at invoice price 400
Balanced at end:
Stock at invoice price 13000
Debtors 2000
Petty cash 25
10. From the following information, prepare branch account in the books of H.O. on
31.12.2005. All the expenses and goods are sent by H.O. The goods are invoiced at 25%
above cost.
Rs.
Stock on 31.12.2005 90000
Stock on 1.1.2005 60000
Debtors 1.1.2005 40000
Debtors 31.12.2005 60000
Cash sent to HO (cash sales) 150000
Cash sent to HO (Cash collected from debtors) 160000
17

Rent 9000
Goods returned by branch 6000
Sale of gunny bags 200
11. Tip top co., Delhi has a branch at Calcutta. It invoices goods to branch at selling price
which is cost plus 33 1/3. From the following particulars prepare branch a/c. show also
branch debtors account and goods sent to branch account in the books of Tip to co.,
Delhi.
Rs.
Stock on 1st January 2001 (invoice price) 15000
Debtors on 1st Jan. 2001 11400
Goods invoiced to branch during the year at invoice price 67000
Sale at branch
Cash 31000
Credit 37400
Discount allowed to customers 300
Cheque sent to branch
Salaries 5000
Sundry expenses 1700
Stock on 31.12.2001 at invoice price 13400
12. From the following particulars prepare a branch account showing the profit or loss at
the branch.
Rs.
Opening stock at the branch 15000
Goods sent to the branch 45000
Sales 60000
Salaries 5000
Other expenses 2000
Closing stock could not be ascertained but it is known that the branch usually sells at
cost plus 20%. The branch manager is entitled to a commission of 5% on the profit of
the branch before charging such commission.
13. The Calcutta commercial company invoice goods to its Jamshedpur Branch at cost. The
head office paid all the branch expenses from its bank except petty cash expenses which
18
were paid by the branch. From the following details relating to the branch prepare.
a. Branch stock A/c b. Branch Debtors A/c
c. Branch Expenses A/c d. Branch P&L A/c
Rs.
Stock (opening) 21000
Debtors (opening) 37800
Petty cash (opening) 600
Goods sent from HO 78000
Goods returned to HO 3000
Cash sales 52500
Advertisement 2400
Stock (closing) 19500
Discount to customers 4200
Bad debts 1800
Goods returned by customer to branch 1500
Salaries and wages 18600
Rent and rates 3600
Debtors (closing) 29400
Petty cash (closing) 300
Credit sales 85200
Allowance to customers 600
14. A head office invoice goods to its branch at cost plus 50%. Branch remits all cash
received to the head office and all expenses are met by the HO. From the following
particulars, prepare the necessary accounts on the stock and debtors system to show the
profit or loss at the branch.
Rs. Rs.
Stock on 1.1.09 invoice price 27900 Goods returned by debtors 3600
Debtors on 1.1.09 20400 Goods returned to HO by 4500

branch
Goods invoiced to the branch at 153000 Shortage of stock 1350
invoice price
Cash sales 75000 Discount allowed 600
Credit sales 93000 Expenses at the branch 16200
Cash collected from debtors 91200 Bad debts 600
19
DEPARTMENTAL ACCOUNTS
Introduction
If a business consists of several independent activities, or is divided into several
departments, for carrying on separate functions, its management is usually interested in
finding out the working results of each department to ascertain their relative efficiencies.
This can be made possible only if departmental accounts are prepared. Departmental
accounts are of great help and assistance to the managements as information for
controlling the business more intelligently and effectively, since thereby all types of waste
either of material or of money are readily detected; also attention is drawn to inadequacies
or inefficiencies in the working of departments or units into which the business may be
divided.
Advantages of Departmental Accounting
The main advantages of departmental accounting are as follows:
1. Evaluation of performance: The performance of each department can be
evaluated separately on the basis of trading results. An endeavour may be
made to push up the sales of that department which is earning maximum
profit.
2. Growth potential of each department: The growth potential of a
department as compared to others can be evaluated.
3. Justification of capital outlay: It helps the management to determine the
justification of capital outlay in each department.
4. Judgement of efficiency: It helps to calculate stock turnover ratio of each
department separately, and thus the efficiency of each department can be
revealed.
5. Planning and control: Availability of separate cost and profit figures for
each department facilitates better control. Thus effective planning and
control can be achieved on the basis of departmental accounting information.
Methods of Departmental Accounting
Basically, an organization usually divides the work in various departments, which is
done on the principle of division of labour. This can improve efficiency of each and
every department of the organization. Each department prepares its separate accounts
to judge its individual performance.
There are two methods of keeping departmental accounts:
Accounts of all departments are kept in one book only: To prepare such
accounts, it will be necessary first, for the income and expenditure of department
to be separately recorded in subsidiary books and then for them to be accumulated
under separate heads in a ledger or ledgers. This may be done by having columnar
subsidiary books and a columnar ledger. Under this system, the gross profit of
individual department can be determined accurately.
Separate set of books are kept for each department: A separate set of books may
20
be kept for each department, including complete stock accounts of goods received
from or transferred to other departments or as also sales.
Nevertheless, even when separate sets of books are maintained for different
departments, it will also be necessary to devise a basis for allocation of common
expenses among the different departments, if an organisation is interested in
Basis of Allocation of Common Expenditure among different

Departments
determining the separate departmental net profit in addition to the gross profit.
Expenses should be allocated among different departments on a rational basis while
preparing departmental accounts.
Individual Identifiable Expenses: Expenses incurred specially for a particular
department are charged directly thereto, e.g., insurance charges of stock held by a
department.
Common Expenses: Common expenses, the benefit of which is shared by all the
departments and which are capable of precise allocation are distributed among
the departments concerned on some equitable basis considered suitable
Allocation of Expenses
S.No. Expenses Basis
1. Rent, rates and taxes, repairs and Floor area occupied by each department
maintenance, insurance of building (if given) other wise on time basis
2. Lighting and Heating expenses (eg. Consumption of energy by each
energy expenses) department
3. Selling expenses, e.g., discount, bad Sales of each department
debts, selling commission, freight
outward, travelling sales manager’s
salary and other costs
4. Carriage inward/ Discount received Purchases of each department
5. Wages/Salaries Time devoted to each department
6. Depreciation, insurance , repairs and Value of assets of each department
maintenance of capital assets otherwise on time basis
7. Administrative and other expenses, Time basis or equally among all
e.g., salaries of managers, directors, departments
common advertisement expenses,
etc.
8. Labour welfare expenses Number of employees in each
department
9. PF/ESI contributions Wages and salaries of each department
21
Types of Departments
There are two types of departments.
Independent Departments: Departments which work independently of each other
and have negligible inter department transfer are called Independent Departments.
Dependent Departments: Departments which transfer goods from one department to
another department for further processing are called dependent departments. Here,
the output of one department becomes the input for the other department. These
transfers may be done at cost or some pre-decided selling price. The price at which
this is done is known as transfer price. In these departments unloading is required if
the transfer price is having profit element.
Inter-departmental Transfers
Whenever goods or services are provided by one department to another, their cost
should be separately recorded and charged to the department benefiting thereby
and credited to that providing it. The totals of such benefits should be disclosed in
the departmental Profit and Loss Accounts, to distinguish them from other items of
expenditure.
Basis of Inter-Departmental Transfers: Goods and services may be charged by one
department to another usually on either of the following three bases:
(i) Cost,
(ii) Ruling market price,
(iii) Cost plus agreed percentage of profit.
Elimination of Unrealized Profit: When profit is added in the inter-departmental
transfers the loading included in the unsold stock at the end of the year is to be
excluded before final accounts are prepared so as to eliminate any anticipatory profit
included therein.
Stock Reserve: Unrealized profit included in unsold inventory at the end of
accounting period is eliminated by creating an appropriate stock reserve by
debiting the combined Profit and Loss Account. The amount of stock reserve will be
calculated as:
Transfer price of unsold stock *Profit included in
transfer price Transfer price
Journal Entry: At the end of the accounting year, the following journal entry will be
passed for elimination of unrealized profit (creation of stock reserve):
Profit and Loss Account Dr.

To Stock Reserve
(Being a provision made for unrealized profit included in closing inventory)
22
In the beginning of the next accounting year, the aforesaid journal entry will be
reversed as under:
Stock Reserve Dr.
To Profit and Loss Account
(Being provision for unrealized profit reversed.)
Disclosure in Balance Sheet: The unsold closing inventory acquired from another
department will appear on the assets side of the balance sheet as under:
(An extract of the assets side of the balance
sheet)
Current assets xxx
Inventory xxx
Less: Stock reserve xxx
xxx
7. Memorandum Stock and Memorandum Mark up Account Method
Under this method, goods supplied to each department are debited to a

Memorandum Departmental Stock account at cost plus a ‘mark up’ (loading) to give
the normal selling price of the goods. The sale proceeds of the department are credited
in Memorandum Departmental Stock account and amount of ‘Mark up’ is credited
to the Departmental Mark up Account. When it is necessary to reduce the selling
price below the normal selling price, i.e., cost plus mark up, the reduction (mark
down) is entered in the Memorandum Stock account as well as in the Mark up
account. This method helps to achieve effective control of stock movements of
various departments.
Problems
1. From the following details, prepare departmental trading accounts.
Dept. A Dept. B
Rs. Rs.
Opening stock 9000 8400
Total purchases 27000 21600
Total sales 42000 36000
Closing Stock 10800 4800
Credit purchases 17000 10600
Credit sales 5000 6000
23
2. Prepare departmental trading, profit and loss account for the year ended
31.12.2014.
Dept. A Dept. B
Rs. Rs.
Stock (January) 40000 -
Purchases from outside 200000 20000
Wages 10000 1000
Transfer from department A - 50000
Stock at cost to department (December) 30000 10000
Sales to outsiders 200000 71000
The stock of B represents goods sent by a at 25% on above cost.
Administrative expenses Rs.15000 is to be should among departments as per
ratio 4:1.
3. A firm has two departments A and B. B department purchased all goods from
A at its selling price. From the following information, prepare trading and
profit and loss account for the year ended 31.12.2005
Dept. A Dept. B
Rs. Rs.
Stock as on 1.1.2015 100000 25000
Purchases 1000000 7500
Sales 11000000 225000
Transfer to B department - 30000
Stock as on 31.12.2015 100000 3000
Expenses:
Manufacturing -
Selling 10000 3000
The stock on B department consists 75% stock on A . The gross profit of A
department in 2004 is the same rates for 2004 is the same rate for 2005 also.
General expenses for 2005 is Rs.45000
4. From the following, prepare departmental trading and profit and loss account
for the year ended 31st December 2000, apportioning expenses on a suitable
basis.
Stock on 1.1.2000 : Dept. A -5400, Dept. B - 4900
Purchases : Dept. A – 9800 Dept. B – 7350
Sales : Dept. A – 16200 Dept. B – 13250
Closing stock : Dept. A – 2748 Dept. B – 2401
Wages : Dept. A – 1340 Dept. B – 240
Carriage inward : Rs.469
Discount allowed : Rs. 441
Discount Received : Rs.133
Advertisement : Rs.783
5. The following purchases were made by a business house having three
24
departments.
Dept. A - 1000 units
Dept. B – 2000 units at a total cost of Rs.1,00,000
Dept. C – 2400 units
Stock on 1st January were:

Dept. A - 120 units
Dept. B - 80 units
Dept. C - 152 units
Sales 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 same of each case. Prepare departmental trading
accounts.
6. The following purchases were made by a business house having three
departments.
Dept. A - 200 units
Dept. B – 1400 units at a total cost of Rs.1500
Dept. C – 400 units
Stock in the beginning
Dept. A - 100units
Dept. B - 400 units
Dept. C - 60 units
Sales were:
Dept. A - 180 units at Rs.15each
Dept. B - 1500 units at Rs.18 each
Dept. C - 450 units at Rs.6 each
The rate of gross profit is same of each case. Prepare departmental trading
accounts.
7. A firm had two departments, cloth and readymade garments. The garments
were made by the firm itself out of cloth supplied by the cloth department at
its usual selling price. From the following figures, prepare departmental
trading and profit and loss account for the year ended 31.3.2004.
Cloth Dept. Readymade Dept.
Opening stock on 1.4.2003 300000 50000

Purchases 2000000 15000
Sales 2200000 450000
Transfer to readymade garments dept 300000 -
Expenses - 60000
Selling 20000 6000
Stock on 31.3.2004 200000 60000
The stock in the readymade garments departments may be considered as
consisting of 75% cloth and 25% other expenses. The cloth department
25
earned gross profit @ 15% in 1992-93. General expenses of the business as a

whole came to Rs.110000.
8. Prepare departmental Trading and profit and loss account.

Cloth Dept. Readymade Dept.
Rs. Rs.
Purchases 592000 552000
Wages expenses 2000 8000
Sales 800000 640000
Closing stock 142400 124800
Rs.
Carriage inwards 22880
General Expenses 92800
Rent 48000
Advertising 64800
Selling expenses 57600
Discount Received 11400
Other information:
1. Goods transferred from cloth department to readymade department
Rs.40000
2. Area of the two departments are in the ratio of 3:2
3. General expenses are to be divided equally between the 2 departments.
9. The Trading and profit and loss account of a concern having three
departments is as follows for the year ending 31.3.2013
Rs. Rs.
Purchases: Sales:
Television (A) 140700 Televisions (A) 150000
Radios (B) 90600 Radios (B) 100000
Spare parts for Service 64400 Receipts for servicing 25000
(C) (C)
Salaries and wages 48000 Closing Stock:
Rent 10800 Televisions (A) 60100
Sundry Expenses 11000 Radios (B) 20300
Profit 34500 Spare parts (C) 44600
400000 400000
Prepare departmental accounts for the departments A, B and C taking into

accounts the following information:
a) TV and Radio are sold in the shop and servicing is done in the workshop.
b) Salaries and wages comprise the following
Shop – ¾ ; Workshop ¼
It was decided to allocate shop salaries, wages in the ratio 1:2 between A
and B
c) Workshop rent is Rs.500 per month. Rent of the shop is divided equally
26
between A and B
d) Sundry expenses are to be distributed on the basis of turnover of the each
department.
10. ABC firm has two departments, X and Y. Y department manufactured out of
goods supplied by the X Department at its usual selling price. From the
following, prepare departmental trading, profit and loss account for the year
ending 31.12.91.
X Dept. Y Dept.
Purchases 2900000 20000
Sales 3500000 700000
Transfer to Y dept 450000 -
Manufacturing Expenses - 140000
Closing Stock 100000 48000
General expenses for both the departments were Rs.120000. The stock in the
Y Department may be considered as consisting of 66 2/3% of X department
goods and 33 1/3% of other expenses. The X department earned profit @18%
in 1990.
27
UNIT – 2 HIRE PURCHASE AND INSTALMENT
Introduction
With an increasing demand for better life, the consumption of goods has been
on the expanding scale, but, this has not been backed up by adequate purchasing
power, transform in to effectual demand, i.e., actual sale at set or settled prices. This
has created the market for what is called hire purchase.
Nature of Hire Purchase
Under the hire purchase system the hire purchaser gets possession of the
goods at the outset and can use it, while buying for it in instalments over a
specific period of time as per the agreement. However, the ownership of the
goods remains with the hire vendor until the hire purchaser has paid all the
instalments. Each installment paid by the hire purchaser is treated as hire
charges for using an asset. In case he fails to pay any of the instalments the hire
vendor will take back his goods without compensating the buyer, i.e., the hire
vendor is not going to pay back a part or whole of the amount received through
instalments till the date of default from the buyer.
Special Features of Hire Purchase
1. Possession: The hire vendor transfers only possession of the goods to the
hire purchaser immediately after the contract for hire purchase is made.
2. Instalments: The goods are delivered by the hire vendor on the
condition that a hire purchaser should pay the amount in periodical
instalments.
3. Down Payment: The hire purchaser generally makes a down payment i.e., an
amount on signing the agreement.
4. Constituents of Hire purchase instalments: Each installment consists
partly of a finance charge (interest) and partly of a capital payment.
5. Ownership: The property in goods is to pass to the hire purchaser on the
payment of the last installment and exercising the option conferred upon him
under the agreement.
6. Repossession: In case of default in respect of payment of even the last
installment, the hire vendor has the right to take the goods back without
making any compensation.
Terms used in Hire Purchase
1. Hire Vendor: Hire vendor is a person who delivers the goods along with its
possession to the hire purchaser under an hire purchase agreement.
2. Hire Purchaser: Hire purchaser is a person who obtains the goods and rights
28
to use the same from hire vendor under an hire purchase agreement.
3. Cash Price: Cash price is the amount to be paid by the buyer on outright
purchase in cash.
4. Down Payment: Down payment is the initial payment made to the hire
vendor by the hire purchaser at the time of entering in to hire purchase
agreement.
5. Hire Purchase Installment: Hire purchase installment is the amount
which the hire purchaser has to pay after a regular interval up to certain
period as specified in the agreement to obtain the ownership of the asset
purchased under a hire purchase agreement. It comprises of principal
amount and the interest on the unpaid amount.
6. Hire purchase price: It means the total sum pay able by the hire
purchaser to obtain the ownership of the asset purchased under hire
purchase agreement. It comprises of cash price and interest on outstanding
balances.
Distinction between hire purchase and instalment system
Basis Hire purchase system Instalment system
Nature of It is an agreement of It is an agreement of sale
agreement hiring with option to
buy
Transfer of Ownership is Ownership is transferred on
ownership transferred on signing of the agreement
payment of final
installment
Names of the The buyer is called The parties involved are called
parties hirer and sellers as buyer and seller
owner or hire vendor
Relationship The relationship of The relationship between the
hirer and hire vendor buyer and seller is that of a
is that at bailor and debtor and creditor till last
bailee instalment is paid.
Repossession of The hire vendor can Seller cannot repossess the
goods repossess the goods if goods.
installment is not paid
Termination of The hirer can The agreement cannot be
agreement terminate the terminated.
agreement by
returning the goods
29
Accounting Record
Transactions Buyer books Vendor books
(i) When an asset is purchase Asset account Dr. Hire Purchaser A/c Dr.
To Hire vendor
on HP To hire sales a/c
(ii) For cash down payment on Hire vendor a/c Dr. Cash/Bank a/c Dr.
delivery To cash/Bank a/c To Hire purchaser a/c
(iii) For interest Due at the en d Interest a/c Dr. Hire Purchaser’s a/c Dr.
of the year To Hire Vendor a/c To interest a/c
(iv) For the payment of First Hire vendor a/c Dr. Cash/Bank a/c Dr.
installment To Bank a/c To Hire Purchaser’s a/c
(v) For Depreciation charge Depreciation a/c Dr. No Entry
To Asset a/c
(vi) For transfer of interest and Profit and Loss a/c Dr. Interest a/c Dr.
depreciation to profit and To Interest a/c To Profit and
loss a/c To Depreciation a/c Loss a/c
Note: 1. Entries (iii),(iv), (v) and (vi) will be replaced in subsequent years in
Buyers books.
2. Entries (iii) to (v) will be replaced in subsequent years in vendors
books.
Default and Repossession
Default: If the hire purchaser fails to make payment of any
installment, it is called default. Unless he regularizes the matter, the hire
vendor can take back the goods into his passion after 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 reposed goods and sell them to
anyone else.
Type of repossession
a. Complete repossession: The hire vendor may take away all the goods on
which there is default of interest.
b. Partial repossession: The hire vendor may take away only a portion of
the goods on which there is a default of instalments.
Calculation of interest:
a. When the rate of interest, the cash price and the instalments are given.
Under this method, the interest is to be calculated on the
outstanding balance of the cash price at the stipulated rate. When
interest is component is deducted from installment, the balance
represents the amount paid in reduction of cash.
30
b. When total cash price and instalments are given but rate of interest is
not given.
When the rate of interest is not given, the interest included in each
installment will be calculated on the basis of the hire purchase price
outstanding in the beginning of each year.
c. When rate of interest and instalments are given, but total cash price is
not given.
When the amount of each installment which includes interest is
given and rate of interest is also given, cash price is found out in the
following manner.
a. First of all find out cash price of the last installment.
Amount of installment X Rate of interest/100+Rate of interest
b. Cash price of the last installment + amount of Prior installment)
X Rate of interest/100+Rate of interest
c. The same process may be repeated for earlier instalments.
d. When rate of interest and total cash price are given but the installment
price is not given.
In this method is also, the interest is to be calculated on the
outstanding balance of the cash price at the stipulated rate. Then cash
price paid is deducted from the total cash price and interest is calculated
for the next period falling between the dates payment of first installment
and second installment.
e. Calculation of cash price by annuity method:
When in place of cash price, hire purchase price and annuity rate
are given, the cash price is calculated by multiplying the amount of
installment with the annuity factor given and adding down payment to
the product.
Installment purchase system
Meaning
Under installment purchase system, the property in goods passes to
the purchaser immediately on signing the contract. In short, sale is outright but
payment is made by different instalments. The amount of installment and the
interest payable are determined at the time of signing the contract.
Problems:
1. ‘S’ purchased a machine on 1.1.14 on hire purchase system. The cash
price of the machine is Rs.22350, payable Rs.6000 on signing the
agreement and the balance in three equal annual instalments of Rs.6000
at the end of each year. Vendor charges interest at 5% p.a. You are
31
required to calculate the interest included in each installment.

2. On 1.1.08, X purchased machinery on Hire purchase system. The
payment is to be made Rs.4000 down and Rs.4000 annually for three
years. The cash price of the machinery is Rs.14900 and the rate of
interest is 5%. Calculate the interest in each year’s instalment.
3. Kannan purchases a vehicle from X company on 1.1.98 paying Rs.10000
as advance and agrees to pay Rs.10000 every year for three years. The
cash price is Rs.37250. X company charged interest @5% p.a. Calculate
the interest in each year’s instalment.
4. X purchased a typewriter on hire purchase system. As per terms, he is
required to pay Rs.800 down; Rs.400 at the end of the first year, Rs.300
at the end of the second year and Rs.700 at the end of the third year.
Interest is charged 5% p.a. Calculate the total cash price of the
typewriter and the amount of interest payable on each instalments.
5. Mr. Ravi purchased 4 cars on hire purchase system paying Rs.15,000
down payment. The balance to be paid on 3 equal instalments of
Rs.15000 plus interest. Interest on due is 5% p.a. cash price was
Rs.60,000. Calculate interest for the year.
6. X purchases a car on hire purchase system. The total cost price of the
car is Rs.15980 payable Rs.4000 down and three instalments of Rs.6000,
Rs.5000 and Rs.2000 payable at the end of first, second and third year
respectively. Interest is charged at 5% p.a. You are required to calculate
interest paid by the buyer.
7. On 1.1.2006, Govind purchased machinery under hire purchase system.
The down payment was Rs.60,000 and the balance is payable in three
annual instalments of Rs.60,000 each. Interest is charged at 10% p.a.
Calculate cash price.
8. Mr. M purchases a car under HP system. The terms of assessment were:
Cash down Rs.12000; Five annual instalments of Rs.7700 each, the first
to commence at the end of twelve months from date of cash down
payment; interest at 10% p.a. is charged by the seller. You are required
to calculate interest paid by the buyer to the seller each year and also
the cash price of the car.
9. X purchase a readiogram on hire purchase system. He agreed to pay
Rs.800 down. Rs.400 at the end of 1st year. Rs.300 at the end of second
year and Rs.700 at the end of third year. Interest is charges at 5% p.a.
calculate the cash price of the radiogram and interest paid with each
instalment.
10. Mr.N purchased a VCR on hire purchase system on April 1, 1999. As per
the terms, he is required to pay Rs.8000 down; i.e., on April 1, 1999,
Rs.7000 on March 31,2000; Rs.7000 on March 31, 2001 and Rs.6000 on
32
March 31,2002. Interest is charged at 20% per annum. You are

required to calculate total cash price of the VCR and interest paid with
cash instalment.
11. Mr. X purchased a machine on hire purchase system Rs.3000 being paid
on delivery and the balance in five instaments of Rs.6000 each, payable
annually on 31st December. The cash price of the machine was
Rs.30,000. Calculate the amount of interest for each year.
12. On 1.1.12. Mr. H bought some trucks under hire purchase system for
Rs.51000 payable by three equal instalments combining principal and
interest. The latter being a normal rate of 5% per annum. Calculate the
cash price. (The Present value of an annuity of one rupee for three years
at 5% is Rs.2.72325).
13. A purchase a machine under hire purchase system by annual instalment
of Rs.10000 over a period of 5 years . The seller charges interest at 4%
p.a. on yearly balances. Calculate the cash price as per annuity table
value Re.1 for 5 year at 4% is 4.45818.
14. The Madras company purchased a machine from Bombay company on
instalment system on 1.1.92. paying cash Rs.6000 and agreeing to pay
three further instalments of Rs.6000 each on 31st December of every
year. The cash price of machinery is Rs.22350. Bombay company
charges interest @ 5% p.a. and Madras company writes of depreciation
@ 10% p.a. on reducing balance method. Show ledger accounts in the
books of Madras Company.
15. Mr. P. purchased 4 car of Rs.14,000 each on 1.1.2012 under hire
purchase system. 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 instalments 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 show the ledger accounts in the
books of hire vendor a/c.
16. On 1.1.2012 D & Co., purchased a machine on hire purchases basis. The
total amount payable being Rs.42700. payment was to be made
Rs.12,000 on that date and balance in three half yearly instalment of
Rs.11400, Rs.10900 and Rs.8400 commencing from 30th June 2012. The
vendor charged interest @10% p.a. calculate on half yearly rests. D &
Co,, close their books annually on 30th June and provide depreciation @
10% p.a. on reducing balance method. Determine the cash price of the
machine and show the relevant accounts in the books of D & Co.
17. K purchased a truck for Rs.160000 under hire purchase system. The
spot cash was Rs.40,000 and the annual end instalments were I
Rs.46000; II Rs.44000 and III Rs.42000. Interest was charged @5%. K
depreciates the truck @ 10% p.a. on diminishing balance method. K
33
having paid down payment and I instalment could not pay the second
instalment. The seller took possession of truck and after spending
Rs.4000 on repairs, sold it Rs.91500. show the ledger accounts of both
parties.
18. Delhi Transport Ltd purchased 3 trucks costing Rs.40,000 each from
Bombay motors under hire purchase system. Payment to be made
Rs.30,000 down and the balance in three equal instalments together
with interest at 5%. Delhi transport writes off depreciation at 20%
diminishing balance method. It paid the first instalment but could not
pay the next. Give the ledger accounts of both parties, if the vendor took
over all the assets back. It paid Rs.5,800 for renovation and sold for
Rs.70000.
19. On 1.1.90 National Transport Company purchased from Metro motors
five trucks costing Rs.40000 each on hire purchase system. It was
agreed that Rs.50000 should be paid immediately and the balance in
three instalments of Rs.60000 each at the end of each year. The Metro
Motor charges interest @ 10% p.a. The buyer depreciates trucks at 20%
on the diminishing balance method. The buyer has paid cash down and
two instalments but failed to pay the last instalment. Consequently, the
Methro Motors repossessed three trucks against the amount due. The
trucks repossessed were valued on the basis of 30% written down value.
The trucks repossessed were sold by Metro Motors for Rs.60000 after
necessary repairs amounting to Rs.10000. Open the necessary ledger
account in the books of both the parties.
20. Transport Ltd., purchases 3 buses costing Rs.75000 each. Under hire
purchase system, payment was to be made as Rs.45000 down and the
balance as 3 equal instalments together with interest 12% p.a. Transport
ltd wrote off depreciation @ 20% on written down value method if paid
the first instalment but could not pay the next. The seller, therefore left
one bus and taking the remaining after charging depreciation at 30% on
straight line method. Show the necessary ledger accounts of both
parties.
21. Mr. Palani purchased 4 cars of Rs.14000 each by hire purchase system.
The HP price for all the 4 cars was Rs.60000 to be paid Rs.15000 down
payment and three instalments of Rs.15000 each at the end of each year.
Interest is charged at 5% p.a. Buyer depreciates cars at 10% p.a. on the
Straight line method.
After having paid the down payment and the first instalment, the
buyer could not pay the second instalment and the seller took
possession of three cars at an agreed value to be calculated after
depreciating cars at 20% p.a. on WDV method. One car was left with the
buyer. Seller, after spending Rs.1200 on repairs sold all the 3 cars to X
for Rs.35000. Open ledger accounts in the books of both parties.
34
UNIT - III
SELF BALANCING LEDGERS
MEANING
Self Balancing Ledger System implies a system of ledger keeping
which classifies ledgers as per nature of transactions, namely, Sales ledger,
Bought ledger, General ledger, etc. and also makes them to balance
independently. With rise in the number of transactions the size of the
ledger becomes hefty due to large number of accounts. This creates
problem in detection of errors. To overcome this, the system of multiple
ledgers is deployed. It involves splitting of single ledger. Generally three
ledgers, namely debtor ledger, creditor ledger and main ledger (containing
remaining accounts) are prepared. In this Unit we shall discuss the self
balancing ledger system and its advantages. Also we shall illustrate system.
Advantages of Self Balancing System
When a number of ledgers are kept by a concern and if their balances do
not tally, the accountant would have to face great difficulty in tracing book-
keeping errors, responsible for the non-agreement of the Trial Balance. In
order to reduce to a minimum the trouble and time involved in locating the
errors, sometimes the system of self-balancing or sectional balancing of
ledger is employed.
Quite often the debit and credit entries relating to a transaction are posted in
different ledgers e.g. when goods are sold on credit, the Sales Account will be
credited in the General Ledger but the corresponding debit will be made in
the customer's account in the Personal Ledger. In such a case for
ascertaining the correctness of the posting in either of the ledgers it will be
necessary to take out balances in both the ledgers; thus a mistake in one
ledger will require checking of the balances in the others as well.
Such a position would be avoided if every ledger is made independent of
the other by the converse aspect of entries in each ledger being posted in
totals to the Control Account set up in the ledger itself. If this is done the
correctness of individual balances in each ledger would be verified
extracting its balances and agreeing them with the balances of the
Control Account. A ledger that has a Control Account set up in it, is referred
to as a self balancing ledger. It connotes that it is capable of being balanced
independently, the balance in the Control Account being equal to that of
the individual balance.
The advantages of this system are:
(i) It fixes the responsibility of the ledger keeper, as to the balancing of the
ledger or ledger under his/her charge and the person responsible for
the mistake can be called upon to work overtime to locate it. Errors are
localised.
35
(ii) It enables preparation of interim accounts without personal ledgers

having to be balanced.
(iii) The figures of total debtors or creditors is readily available.
(iv) It is instrumental in strengthening the internal check.
Sectional Balancing
A really simple way to prove the accuracy of say, the Sales Ledger would
be to maintain a Total Debtors account in the General Ledger. It would
mean that whereas accounts of Individual customer would be maintained
in the Sales Ledger, in the General Ledger the Total Debtors account would
be posted by the (monthly) totals of various transactions with total credit
sales, total amount received from credit customers, total discount allowed
to them, total returns inwards, total bills receivable received; etc. The
balance in the Total Debtors Account should be equal to the total of
balances shown by the accounts of individual customers. If it is so, the
Total Debtors Account as well as individual customers' account may be
taken as correct. A difference would show that there is some error
somewhere.
In the same way, the accuracy of individual supplier account may be
checked by comparing total of their balances with the balance in the Total
Creditors Account. The double entry would be complete in the General
Ledger itself. For instance, for credit sales– Total Debtors Account would be
debited and Sales Account credited. For goods returned to suppliers– Total
Creditors Account would be debited and Return Outward Account credited.
The "total accounts" are also known as adjustment accounts or control
accounts since they prove the accuracy of the subsidiary (Sales or Bought)
ledgers.
Various Ledgers to be Maintained in Self-balancing Ledger System
In the Sales or Bought ledgers double entry is not completed as in the
system outlined above, a separate trial balance cannot be taken out from
these ledgers. If these ledgers are maintained in such a way as to offer
separate trial balances, the system would be known as "Self-balancing". In
such a case "General Ledger Adjustment Account" is prepared in each of
the subsidiary ledgers. The General ledger would have:
(i) Bought Ledger Adjustment Account
(in reality, Total Creditors Account) and
(ii) Sales Ledger Adjustment
Account (in reality, Total
Debtors Account)
These accounts are known as Control Accounts. The system on which
entries are made in the adjustment account is described below:
36
Bought Ledger
For recording a purchase it will be observed that the initial entry made is to
the debit of the Purchases Account in the General Ledger and to credit the
Supplier's Account in the Bought Ledger. If it is desired to make the General
and Bought Ledger self-balancing a further entry would be made debiting
the General Ledger Adjustment account in the Bought Ledger, and crediting
the Bought Ledger Adjustment Account in the General Ledger with the total
of purchases.
Again, if part of the materials purchased is returned and the balance due is
paid the entries made would be; debit the personal account of the
Supplier in the Bought Ledger with the value of goods returned as well as
the amount paid and credit Return Outwards Account in the General
Ledger with the value of goods returned and Bank Account with the amount
paid. Further, in consonance with the system of self-balancing an additional
entry should be made crediting the General Ledger Adjustment Account in
the Bought Ledger and debiting the Bought Ledger Adjustment Account in
the General Ledger with the aforementioned amount.
Similarly entries can be made in case of bills payable, discount in price etc.
It should be particularly noted that the balance in the Bought Ledger
Adjustment Account in the General Ledger will be equal to that in the
General Ledger Adjustment Account in the Bought Ledger but on the
opposite side. Also, the Bought Ledger Adjustment Account shall self-
balance the General Ledger.
If there are several Bought Ledgers in use each such ledger will have a
General Ledger Adjustment Account and, in the General Ledger there will
be Bought Ledger Adjustment Account separately for each of these
ledgers.
Sales Ledger
For recording a credit sale, it will be observed that the original entry made
is to debit the customer's account in the Sales Ledger and to credit the Sales
Account in the General Ledger. But to self-balance the General and Sales
Ledgers a further entry is made, debiting the Sales Ledgers Adjustment A/c
in the General Ledger and crediting the General Ledger Adjustment Account
in the Sales Ledger with the total of sales.
Again, when a part of the goods sold is received back and the balance
realised, the entries made are to debit the Sales Return account with the
value of goods returned as well as Bank Account with the amount collected,
and credit their total to personal account of the customer in the Sales
Ledger. Further to self-balance the ledgers an additional entry is made to
debit the General Ledger Adjustment Account in the Sales Ledger and credit
the Sales Ledger Adjustment Account in the General Ledger with the
aforementioned amounts.
37
General Ledger
As stated above, each time an entry is made in the Bought and Sales Ledger
for self-balancing, the contra effect of the entries is shown in the Bought
Ledger or Sales Ledger Adjustment Account set up in the General Ledger.
The accounts represent the Total Debtors and Creditors Accounts in a
summarised form and thus serve to self-balance the General Ledger. As a
result no additional entries are required to make the General Ledger self-
balancing.
It may be mentioned that in regard to several other accounts, which do not
relate either to customers or suppliers, no additional entry is necessary
under the self-balancing scheme since, both aspects of every transaction
already exist in one or other of the accounts contained in the General
Ledger such as cash sales, discounting of bills, recovery of bad debts
written off, creating provision for bad debts etc.
Rectification of Errors under Sectional Balancing System

Rectification of errors before opening Suspense Account
If the error affects the accounts of Debtors or Creditors without affecting
their total, it is rectified by adjusting the accounts of Debtors or Creditors
itself. However, if it affects the totals of Debtors or Creditors, the
additional entries are to be made in the main ledger through Total Debtors
and Total Creditors Account. The same is discussed with the following
examples:
1. If goods sold to X and wrongly posted in the account of Y, The trial
balance of main ledger will tally. This error can be rectified in Debtors’
ledgers by debiting X’s account and crediting Y’s account.
2. If goods sold to X are not recorded in the Sales Book, it means under
reporting of Sales. It means sectional balancing entry will be passed
with lower amount of sales and Total debtors. The error can be rectified
by debiting the total debtors account and crediting the sales account in
the main ledger.
3. If goods sold to X are omitted to be recorded in his account only in the
debtors ledger, main ledger will tally. This error is rectified by debiting
X’s account by writing “to error in omitting to record sales”.
4. If goods sold to X are recorded in the debtors ledger and sales account
is properly credited at the end of the period, but omitted to debit the
total debtors account. The error can be rectified by writing in debit side
of total debtors account “To error in omitting to record sales”.
Rectification of errors under Self Balancing system
The rectification of errors will be done in the usual manner as in single
ledger system but there is one difference that is, whenever the totals of
38
Debtors or Creditors are affected, rectification will be done by making

additional self balancing entries. In this case, rectification of errors in the
above examples will be done as follows:
1. For rectification of errors in Debtors ledger - X’s account will be
debited and Y’s account will be credited.
2. The rectification of error will be made by crediting sales account by
writing ‘By error in omitting the sales’ and additional entry of self
balancing with the same amount will be made, namely,
Debtor Ledger Adjustment A/c Dr (In main ledger)
To General Ledger Adjustment A/c (In debtors ledger)
3. The error is rectified by debiting X’s account by writing ‘To error in
omitting to record sales.’
4 This can be rectified by self balancing entry with the same
amount, namely, Debtor Ledger Adjustment A/c Dr (In
main ledger)
To General Ledger Adjustment A/c (In debtors ledger)
Rectification of errors after opening suspense account
The method of rectification of error will be same under sectional and self
balancing system, with the exception that the entries which were corrected
unilaterally will be corrected through suspense account. In the above
examples rectification of error will be done as follows :
Under Sectional Balancing System-
1. Same as above
2. Same as above
3. Same as above
4. Total Debtors A/c Dr. (In main
ledger)
To Suspense A/c (In main
ledger)
Under Self Balancing system-
1. Same as above
2. (a) Suspense A/c Dr. (In Debtors
ledger)
To Sales A/c
(b) Debtors ledger Adjustment A/c Dr. (In main
ledger)
To General Ledger (In Debtors
Adjustment A/c Ledger)
39
3. X’s A/c Dr. (In Debtors

Ledger)
To Suspense A/c (In Debtors
Ledger)
4. (a) Debtors ledger Adjustment A/c Dr. (In main
ledger)
To Suspense A/c (In main
ledger)
(b) Suspense A/c Dr. (In Debtors
ledger)
Ruling of Subsidiary Books
Whenever there are several Bought or Sales Ledgers in use, various books
of original entry, e.g., Purchases Books, Sales Books, Cash Book and Journal
are suitably ruled in a manner that they readily show the monthly total of
the transactions posted in various ledgers, on the basis of which the self-
balancing entries, can be recorded.
Secret Account
At time it may be considered necessary to keep the operation of certain
accounts, e.g., partners' capitals, loans, deposits etc., secret from members
of the staff except the senior officials. In such a case, these accounts would
be segregated into a Private Ledger and posting will be made in the ledger
by a confidential clerk, under the direct supervision of the Chief
Accountant. Also a General Ledger Adjustment Account will be set up in the
Private Ledger and a Private Ledger Adjustment Account in the General
Ledger. In this way, though the individual entries in the accounts kept in the
Private Ledger will be revealed to the accounting staff, their total effect will
be kept secret. In case individual accounts also are desired to be kept secret
separate Cash Book and Bank Account would be maintained; this would
ensure complete secrecy.
When such a system is first started, the assets and other debit balances are
transferred to the Private Ledger by crediting the respective accounts in the
General Ledger and the Private Ledger Adjustment Account is debited with
their total. The opposite are the entries made when credit balances are
transferred. Also, if it is desired to transfer a part of the Bank Balance to
Private Bank Account, Bank Account is credited and the Private Ledger
Adjustment Account is debited. From the Private Bank Account, partners
will be able to draw amounts required by them and to pay interest on
deposits and loans at whatever rates they may please without the fact being
disclosed to the staff.
When accounts are closed at the end of the year, the revenue accounts are
closed off by transfer of the Private Ledger Adjustment Account and
corresponding entries are made in the Private Ledger by debit or credit to
40
the General Ledger Adjustment Account. Afterwards all the balances so

transferred, along with those already in the Private Ledger, are transferred
to the Profit & Loss Account in the Private Ledger. In this way, complete
secrecy is maintained regarding the operation of accounts in the Private
Ledger; also the amount of profit made by the concern is not disclosed to
the staff.
PROBLEMS
1. Dinesh & Co. have three ledgers in use viz, a Debtors Ledger, a Creditors
Ledger and a Normal Ledger which are all kept on the system of self-
balancing. From the following particulars prepare the adjustments
account that would appear in each of these ledgers.
2011 Rs.
Jan. 1 Balance of Sundry Debtors 16,000
Balance of Sundry Creditors 18,500
Jan. 31 Credit Purchases 4,500
Credit Sales 9,800
Cash Sales 1,500
Paid to Creditors 9,875
Discount allowed by them 325
Cash received from debtors 7,800
Allowed them discount 200
Bills payable accepted 1,500
Bills receivable received 3,000
Returns inwards 875
Returns outwards 600
Rebates allowed to debtors 275
Rebates allowed to creditors 150
Provision for Doubtful Debts 320
Bad Debts 450
Bills Receivable dishonoured 375
2. From the following particulars as extracted from the books of Messrs
Kulkarni Brothers, who keep a Debtors' Ledger, a Creditors Ledger and
a General Ledger on the self-balancing system, show how the General
Ledger Adjustment Account will appear in the Debtor's Ledger and the
creditors' Ledger.
Rs.
Debtors' Balance on 1st January, 2010 91,500
Creditors, Balance on 1st January, 2010 1,09,800
Transactions for the year 2010 :
Credit purchases 41,000
Credit sales 45,400
Returns Inwards 800
Returns Outwards 1,200
Cash received from customers 51,000
Discount allowed to customers 900
41
Cash paid to creditors 61,400

Discount received 1,340
Acceptances received 17,000
Acceptances given 24,000
Bills Receivable dishonoured 2,400
Bills Payable dishonoured 6,000
Bad debts written off 5,000
Sundry charges debited to customers 690
Allowances from creditors 550
Transfer from Debtors Ledger 1,290
3. M. Govind keeps self-balancing ledgers. Record the following transactions
in the General Ledger Adjustment Account in the Sales Ledger :
1.4.2010 Received Rs. 475 from Mr. X in full settlement. He was allowed
a discount of Rs.25.
2.4.2010 Received Rs.2,000 from Mr. Y towards his dues in full.
3.4.2010 Goods supplied to Mr. T. Rs.700 and received Rs.300 after
adjustment of the advance of Rs.400.
4.4.2010 Bad debts recovered from Mr. Q ` 1,000.
5.4.2010 Goods sold to the following :
Mr. A Rs. 1,000
Mr. B Rs.1,500
Mr. C Rs. 2,000
15.4.2010 Mr. P paid ` 750 towards dues. Balance thereafter due was ` 250.
25.4.2010 Amount received from the following :
Mr. A Rs. 750
Mr. B Rs. 1,000
Mr. C Rs. 2,000
30.4.2010 Advance received from Mr. R for supply Rs. 2,000.
4. From the following particulars, prepare the relevant adjustment account
as would appear in the General Ledger of Mr. Vasu for the month of March,
2011:
1 Purchase from Mr. X Rs. 2,000
2 Paid Rs.1,600 after adjusting the initial advance in full to Mr. X.
3 Paid Rs.1,000 to Mr. R towards the purchases made in February in
full.
13 Paid advance to Mr. Y Rs.3,000
14 Purchased goods from Mr. A Rs.4,000
25 Returned goods worth Rs.500 to Mr. A.
26 Settled the balance due to A at a discount of 10 per cent.
27 Goods purchased from Mr. Y Rs.2,500 against advance paid on 13th.
42
28 Received at bank the advance from Mr. P paid on 28 February, 2011,

Rs. 2,000.
29 Purchased from B Rs.2,000.
30 Goods returned to Q Rs.750. The goods were originally purchased
for cash in February..
5. The following particulars are obtained from books of a Self Ltd. for the
year ended 31st March, 2011. You are required to prepare the Total
Debtors Account and Total Creditors Account.
` Rs.
Cash Sales 25,000 Bills Receivable 2,500
dishonoured
Credit Purchases 2,80,000 Return Inward 8,500
Collection from Debtors 4,25,000 Payments to creditors 1,62,000
Bills Receivable drawn 20,000 Discount allowed 3,000
Discount Received 2,500 Debtors’ cheque returned 7,500
dishonoured
Cash Purchases 12,000 Credit Sales 4,90,000
Bills Payable paid 6,500 Bills Receivables collected 10,000
Recovery of Bad Debts 1,500 Return outward 3,700
Bills Receivable discounted 8,000 Bills Receivable endorsed 7,900
with Bank to creditors
Interest charged on 1,200 Overpayments refunded 600
overdue by suppliers
Customer’s Accounts
Endorsed Bills Receivable 5,500 Bad Debts 1,000
dishonoured (noting
charges Rs.75) Opening Balances
Bills Payable accepted 16,000 Sundry Debtors 78,000
Sundry Creditors 85,000
43
ROYALTY ACCOUNTS
Meaning:
Royalty is an amount payable by one person to another for the use
of an asset or right or monopoly. It is periodical payment in the nature of rent
made to a person for the right to use certain property such as mine, patent,
copy right.
When an 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 as royalty.
Minimum rent or Dead rent or Fixed Rent
This is guaranteed minimum amount payable by the lessees to the
landlord irrespective of the actual output or sales of the lessee. It is the
minimum amount which the lessee had to pay each period even when the mine
is not worked at all or when the output for the period is below a certain
quantity provided for in the agreement.
Shortworkings
Excess of minimum rent over actual rent royalty paid to the
landlord is known as shortworkings.
Recoupment of shortworkings
The landlord permits the tenant to recoup the shorworkings in a
specific period in future only out of the surplus royalties. The right over to
recover short working as per agreed terms is known as recoupment of
shortworkings.
Method of recoupment
The right of recoupment can be fixed or flexible.
a) Fixed recoupment: In this type of recoupment, the lessee may be
allowed the privilege within a fixed number of years initially.
b) Flexible recoupment: In this method of recoupment, any particular
year’s shortworkings may be allowed to be recovered in the subsequent
two or three years.
Shortworkings lapsed or written off
This is the amount of shortworkings unrecovered by the lessee
within the agreed period of recoupment. It is a loss to the lessee and gain to the
lessor.
44
Journal entries:
In the books of Lessee or Tenant
Particulars Debit Credit
I. For royalty payable
a. When there are no shortworkings
Royalty A/c Dr.
To Landlord’s A/c
b. When there are shortworkings:
i) If minimum rent account need not
be shown:
Royalty A/c Dr.
Shortworkings A/c Dr.
To Landlord’s A/c
ii) If minimum rent account is
required:
Minimum Rent A/c Dr.
To Landlord’s A/c
Royalty A/c Dr.
To Landlord’s A/c
II. For payment of cash:
a. When there is no recoupment of
shortworkings:
Landlord’s A/c Dr.
To cash A/c
b. When there is recoupment of shortworkings:
Landlord’s A/c Dr.
To cash A/c
III. For transferring royalty at the end of the

year
Production or Profit and loss A/c Dr.
To Royalty A/c
45
IV. If there are shortworking written off

Profit and Loss A/c Dr.
To Shortworkings A/c
In the books of Landlord or Lessor

Particulars Debit Credit
I. For royalty Receivable
c. If there are no shortworkings
Tenant’s A/c Dr.
To Royalty Receivable A/c
d. If there are shortworkings:
Tenant’s A/c Dr.
To Royalty Receivable A/c
To Shortworkings A/c
II. For receiving cash:

c. If there is no recoupment of
shortworkings:
Cash A/c Dr.
To Tenant’s A/c
d. If there is recoupment of shortworkings:
Cash A/c Dr.
To Tenant’s A/c
III. For transferring royalty Receivable
Royalty Receivable A/c Dr.
To Profit and loss A/c
IV. If there is shortworking written off

Royalty Receivable A/c Dr.
To Profit and Loss A/c
46
Problems
1. A company leased a colliery on 1.1.2002 with a minimum rent of
Rs.20000. the royalty was at Rs.1.50 per ton, with a power to recoup the
shortworing over first 3 years. The output were 2002 – 9000 tones,
2003 – 12000 tones, 2004 – 16000 tones, 2005 – 20000 tones. Pass the
journal entries of lessee.
2. K ltd., took from P ltd., a lease of a colliery for a period of 25 years from
01.04.2006 on a royalty of Rs.25 per tone of coal extracted with a dead
rent of Rs.220000 a year which power to recoup short workings during
the first five years of the lease. The company close its books of account
on 31st March every year. The output in the first five years of the lease
was as follows:
Year I II III IV V
Output (ton) 2000 3600 9000 15000 20000
Pass journal entries for the transactions relating to royalties for the 5
years in the books of K ltd.
3. Ram tiles ltd., leased a land on 1.1.2012 for 4 years the details are:
Minimum rent Rs.20,000
Royalty rate – Rs.1.50 per ton
Recovery of short working – the first three years of lease
Output: 2012 – 9000 tons; 12000 tons, 16000 tons, and 20000 tons.
Prepare ledger account of Ram ltd.
4. Akilan took a lease of mine for a period of 20 years. Royalty payable is
Re.1 per ton subject to a minimum rent of Rs.12000 p.a. The
shortworkings are recoupable during the first three years of the lease.
The output was 1994-nil; 1995 – 4000 ton, 1996 – 20000 ton and 1997 -
40000 ton. Prepare an analytical table and necessary ledger accounts of
Akilan.
5. Kovai Mine Company took from Akila a lease of a mine for a period of 25
years from 1.1.2000 on a royalty of Rs.5 per ton of mineral got with a
minimum rent of Rs.20000 and power to recoup short worings during
the first five years of the lease. The annual outputs were as follows.
2000 – 2000 tons; 2001 – 3000 tons; 2002 – 4000 tons; 2003 – 4500
tons; 2004 – 5000 tons.
Pass journal entries in the books of Kovai Mines Company.
6. Udaya tiles ltd., leased a land on 1.1.2002 for 4 years the details are:
Minimum rent Rs.8000 p.a. Royalty rate – Rs.0.50 per ton
Recovery of short working – next year only
47
Year 2002 2003 2004 2005

Output (tons) 2000 10000 20000 32000
Prepare ledger account of udaya ltd.
7. A owned the patent of a safety lock. B acquired the right to manufacture
and sell locks for seven years on the following terms.
B to pay Raja a royalty of Rs.5 for each lock sold with a minimum
annual payment of Rs.50000. Accounts are to settled on 31st December.
Year 2010 2011 2012 2013
Numbers 8000 9000 11000 18000
You are required to prepare necessary ledger accounts in the books of B which
are closed annually on 31st December.
8. A colliery worked coal under a lease which provided for the payment of
royalties at 50 paise per tone with a minimum rent of Rs.17000 per
annum. Each year’s excess of minimum rent over the actual royalties
were recoverable during the subsequent three years.
The lease however stipulated that if in any year the normal rent was not
attained due to strike, the minimum rent was to be regarded as have
been reduced proportionately having regard the length of the stoppage.
The output was as follows
Year 2001 2002 2003 2004 2005 2006
Output 4000 28000 38000 46000 30000 50000

(ton)
During the year 2005, there were stoppages due to strike lasting three
months. Give necessary ledger accounts in the books of the colliery for
each of the above years.
9. Raj took a colliery on lease. The dead rent was Rs.1500 a year, merging
into a royalty for 35 paise per tone of caol raised, which the right to
recover shortworkings out of royalties of two subsequent years from the
period in which the shortworkings arose. The output realized was:
Year I II III IV V
Output 2000 3000 5000 3000 2000
(ton)
Give necessary ledger accounts for each of the five years in the books of
Raj.
10. Ravi took a colliery on lease. The dead rent was Rs.750 a year, merging
into a royalty of 35 paise per tone of coal raised with the right to recover
48
shortworkings out of royalties of two subsequent years from the period

in which the short working arose. The out put raised were
Year I II III IV V
Output 1000 1500 2500 1500 1000
(ton)
Give the necessary ledger accounts for each of the five years in the books
of Ravi.
11. A company took a least of mine from the company for a period 30 years
from 1st January 1990 upon the terms of royalty of 50 paise per tone
upon the output with a minimum rent of Rs.10000 in the first year and
then increase every year by Rs.1000, till it reaches Rs.13,000, when it
becomes fixed for all the coming years. A company was granted the
right of recouping shortworkings of any 3 years in the subsequent years
and not afterwards. The following was the production of the first 5
years.
Year 2011 2012 2013 2014 2015
Output (ton) 3000 18000 24000 30000 32000
Show journal entries in the books of A company. Assume there is no

minimum rent.
49
UNIT – 4
FIRE INSURANCE CLAIM FOR LOSS OF STOCK AND LOSS OF PROFIT
Meaning of Fire
For purposes of insurance, fire means:
1. Fire (whether resulting from explosion or otherwise) not occasioned or
happening through:
(a) Its own spontaneous fomentation or heating or its undergoing any
process involving the application of heat;
(b) Earthquake, subterraneous fire, riot, civil commotion, war,
invasion act of foreign enemy, hostilities (whether war be declared
or not), civil war, rebellion, revolution, insurrection, military or
usurped power.
2. Lightning.
3. Explosion, not occasioned or happening through any of the perils
specified in 1 (a) above.
(i) of boilers used for domestic purposes only;
(ii) of any other boilers or economisers on the premises;
(iii) in a building not being any part of any gas works or gas for
domestic purposes or used for lighting or heating the building.
Claim for Loss of Stock
Fire insurance being a contract of indemnity, a claim can be lodged only

for the actual amount of the loss, not exceeding the insured value. In
dealing with problems requiring determination of the claim the following
point must be noted:
a. Total Loss: If the goods are totally destroyed, the amount of claim is
equal to the actual loss, provided the goods are fully insured. However,
in case of under insurance (i.e. insurable value of stock insured is more
than the sum insured),the amount of claim is restricted to the policy
amount.
b. Partial Loss: If the goods are partially destroyed, the amount of claim
is equal to the actual loss provided the goods are fully insured.
However in case of under insurance, the amount of claim will depend
upon the nature of insurance policy as follows:
I) Without Average clause:- Claim is equal to the lower of actual loss
or the sum insured.
II) With Average Clause:- Amount of claim for loss of stock is
50
proportionately Reduced, considering the ratio of policy amount (i.e.

insured amount) to the value of stock as on the date of fire (i.e
insurable amount) as shown below:
Amount of claim = Loss of stock x sum insured / Insurable amount (Total
Cost)
Amount of claim in
case of
Total Loss( Goods Partial Loss (Goods
fully destroyed) partially destroyed)
Actual loss (provided the Actual loss (provided the

goods are fully insured) goods are fully insured)
Relevant points
(i) Where stock records are maintained and such records are not
destroyed by fire, the value of the stock as at the date of the fire can be
easily arrived at.
(ii) Where either stock records are not available or where they are
destroyed by the fire the value of stock at the date of the fire has to
be estimated. The usual method of arriving at this value is to build
up a Trading Account as from the date of last accounting year. After
allowing for the usual gross profit, the figure of closing stock on the
date of the fire can be ascertained as the balancing item.
Memorandum trading account
Particulars Amount Particulars Amount
To opening stock xxx By sales xxx
To purchase xxx By stock on the date xxx
of fire (BF)
To Gross profit (sales xxx
X GP ratio)
xxx xxx
Gross profit (GP) Ratio = Gross profit /sales *100
(iii) Where books of account are destroyed, the task of building up the
Trading Account becomes difficult. In that case information is obtained
from the customers and suppliers have to be circularised to ascertain
the amount of sales and purchases.
(iv) After the insurance company makes payment for total loss, it has the
same right which the insured had over the damaged stock. .
(v) Frequently salvaged stock can be made saleable after it is
reconditioned. In that case, the cost of such stock must be credited to
the Trading Account and debited to a salvaged
51
(vi) stock account. The expenses on reconditioning must be debited and the
sales credited to this account, the final balance being transferred to the
Profit & Loss Account.
(vii)
Loss of Stock
Amount of loss of stock is calculated as under:
Value of stock on the date of fire XXX
Less:- Value of Salvaged stock XXX
Amount of loss of stock XXXX
Claim for Loss of Profit
When a fire occurs, apart from the direct loss on account of stock or other
assets destroyed, there is also a consequential loss because, for some time,
the business is disorganized or has to be discontinued, and during that
period, the standing expenses of the business like rent, salaries etc.
continue. Moreover, there is loss of profits which the business would have
earned during the period. This loss can be insured against by a "Loss of
Profit" or "Consequential Loss" policy; there must be a separate policy in
respect of the consequential loss but claim will be admitted in respect of
the policy unless the claim on account of fire is also admitted under other
policies.
The Loss of Profit Policy normally covers the following items:
(1) Loss of net profit
(2) Standing charges.
(3) Any increased cost of working e.g., renting of temporary premises.
In every business, there is some standard by which its activity or progress
can be accurately judged: it may be sales affected or the quantity of goods
(or services) produced. To measure the loss suffered by a firm due to fire,
it is necessary to set up some standard expressed in such units to
represents the volume of work. There should be a direct relation between
the amount of standard and the amount of profit raised. A comparison
between the amount of the standard before and after the fire will give a
reliable indication of the loss of profit sustained. The most satisfactory unit
of measuring the prosperity (and therefore profits) is usually turnover:
A claim for loss of profits can be established only if :
(i) the insured’s premises, or the property therein, are destroyed or
damaged by the peril defined in the policy; and
(ii) the insured’s business carried on the premises is interrupted or
52
interfered with as a result of such damage.

A claim for loss of profits cannot arise if the claim for loss of property as a
result of the fire is not also admitted. This is very convenient as it avoids
independent investigation into loss of property for purposes of loss of
profits policy. It is possible that the business of the insured may suffer
because of fire in the neighbourhood, not causing damage to the property
of the insured, say by closing the street for some time. Such eventualities
may be covered by agreement with the insurer on payment of extra
premium. If fire does not affect the volume of business, there can be no
claim for loss of profits.
Also, it does not follow that if there is a large property claim, there will be
necessarily a large claim for loss of profit or vice versa.
Terms Defined
The following terms should be noted:
Gross Profit is the sum produced by adding to the Net Profit the amount
of the Insured Standing Charges, or, if there be no Net profit, the amount
of the Insured Standing Charges less such a proportion of any net
trading loss as the amount of the Insured Standing Charges bears to all the
standing charges of the business.
Net Profit is the net trading profit (exclusive of all capital) receipts and
accretion and all outlay properly (chargeable to capital) resulting from the
business of the Insured at the premises after due provision has been
made for all standing and other charges including depreciation.
Insured Standing Charges: Interest on Debentures, Mortgage Loans and
Bank Overdrafts, Rent, Rates and Taxes (other than taxes which form part
of net profit) Salaries of Permanent Staff and Wages to Skilled Employees,
Boarding and Lodging of resident Directors and/or Manager, Directors’
Fees, Unspecified Standing Charges [not exceeding 5% (five per cent) of
the amount recoverable in respect of Specified Standing Charges].
Conditions included in a Loss of Profit Insurance Policy
Insurance policies covering loss of profit contain the following conditions
usually:
Rate of Gross Profit: The rate of Gross Profit earned on turnover during
the financial year immediately before the date of damage.
Annual Turnover: The turnover during the twelve months immediately
before the damage.
Standard Turnover: The turnover during that period in the twelve
months immediately before the date of damage which corresponds with
the Indemnity Period.
To which such adjustment shall be made as may be necessary to provide
53
for the trend of the business and for variations in or special circumstances
affecting the business either before or after the damage or which would
have affected the business had the damage not occurred, so that the
figures thus adjusted shall represent, as nearly as may be reasonably
practicable the results which but for the damage would have been
obtained during the relative period after damage.
Indemnity Period: The period beginning with the occurrence of the
damage and ending not later than twelve months thereafter during which
the results of the business shall be affected in consequence of the damage.
Memo 1: If during the indemnity period goods shall be sold or services
shall be rendered elsewhere than at the premises for the benefit of the
business either by the insured or by others on the Insured’s behalf, the
money paid or payable in respect of such sales or service shall be brought
into account in arriving at the turnover during the indemnity period.
Memo 2: If any standing charges of the business be not insured by this
policy then in computing the amount recoverable hereunder as increase
in cost of workings that proportion only of the additional expenditure
shall be brought into account which the sum of the Net Profit and the
insured Standing Charges bear to the sum of the Net Profit and all standing
charges.
Memo 3: This insurance does not cover loss occasioned by or happening
through or in consequence of destruction of or damage to a dynamo motor,
transformer, rectifier or any part of an electrical installation resulting
from electric currents however arising.
(i) The word ‘turnover’ used above may be replaced by any other term
denoting the basis for arriving at the loss of profit e.g., output.
(ii) Insured standing charges may include additional items, by agreement
with the insurer.
(iii) Net profit means profit before income tax based on profit.
(iv) Depending upon the nature of business, the indemnity period may
extend beyond 12 months (it may be as long as 6 years). Indemnity
period shall not be confused with the period of insurance which
cannot be more than one year.
The insurance for Loss of Profit is limited to loss of gross profit due to :
(i) Reduction in turnover, and
(ii) Increase in the cost of working.
54
Computation of claims for loss of profits:

Step : 1 Claim for reduction in turnover:
Rs.
Standard turnover xxx
Add: Increase for trend Or Less: decrease for trend xxx
xxx
Less: Affected period turnover xxx
Short sales xxx
Gross profit ratio = Net profit + Insured Standing Charges
--------------------------------------------------- x 100
Accounting year turnover
Claim for reduction in Turnover = Short sales x GP ratio
Step – 2 Claim for increased cost of working
Rs.
a) Actual increased cost of working xxx
b) if all standing charges are not insured:
Net profit + Insured charges
xxx
X 100
NP + all insurable standing charges
c) saved turnover x GP ration xxx
Amount to be claimed for increased cost of working xxx
(lowest of A, B, and C)
Step – 3 Total claims for loss of profits
Rs.
Claims for reduction in Turnover (Step – I) xxx
Add: Claim for increased cost of working (Step – 2) xxx
xxx
Less: saving in standing charges xxx
Total claim for loss of profits xxx
Step – 4
Rs.
Annual turnover xxx
Add: increase for trend or Less: decrease for trend xxx
Adjusted annual turnover xxx
55
Claim to be made: Total claim X Policy amount / GP on adj. annual sales

ACCOUNT FOR SALE OR RETURN
Meaning
The transactions which involve customers’ approval for rejection of goods
after physical delivery are called sale on approval or sale or return
transactions.
Purpose
1. Traders can increase their turnover, particularly in the case of slow
moving goods.
2. Valued customers or bulk buyers can be provided with the opportunity of
inspecting the goods at their own place conveniently before approval or
rejection.
Method of recoding or sale or return transactions
I. When the transaction are few and rare:
a. When goods are sent on approval:
Customer’s A/c Dr
To Sales A/c
b. When customer intimate approval:
No further entry in needed
c. When customer returns the goods, fully or partly, for the goods
returned.
Sales A/c Dr
To Customer’s A/c
d. At the end of the accounting year (regarding goods sent for which
specified time is not yet finished)
i. For reversing the original entry:
Sales A/c Dr
To Customer’s A/c
ii. For taking goods with the customers into stock at their cost.
Stock with customer’s A/c Dr
To Trading A/c
II. When the transactions are frequent:
a. A sale or return day book is opened on memorandum basis to show
the goods sent, approval, rejected and balance.
b. When goods are sent, they are recorded sales value in the goods
sent column, because actual sale has not resulted
56
c. When goods are approved, the sales value of the goods is recorded
in the goods approved column. Immediately customers’ accounts
are debited in the regular ledger.
d. When goods are rejected the sale value of the goods is recorded in
the goods returned column.
e. Balance of goods is recorded in the balance column. This column
shows the sale value of goods with customers.
Problems:
1. A fire occurred at the premises of a trader on 31.5.2014 destroying a great
part of his goods. His stock at 1.1.2014 was Rs.60000, the value of stock
salvaged was Rs.13500. The gross profit on sale was 30% and sales
amounted to Rs.153000 from January to date of Fire. While for the same
period the purchases amounted to Rs.103500. prepare a statement of
claim.
2. Fire occurred on 8.9.2010 in the godown of Mr.Akilan. Ascertain the claim
to be lodged.
Rs.
Stock 1.9.2010 220000
From 1.9.2010 to the date of fire
Purchases 182000
Other expenses 18000
Sales 240000
Rate of Gross profit is 25% on cost.
3. A fire occurred on Sep.30,2016 in the godown of Mr.Anand. From the
following figures ascertain the claim to be ledged.
Rs.
Stock 1.1.2016 17000
Purchased from 1.1.16 to date of fire 170000
Wages 17000
Sales from 1.1.2016 to date of fire 200000
The rate of Gross Profit is 25% on cost
The salvaged stock was value at 4000
4. Fire occurred in the premises of ABC on 10 th May 2016. In order to make
to claim on their fire policies in respect of the stock, they ask your advice
and you are able to obtain the following information.
2013 2014 2015 2016
Rs. Rs. Rs. Rs.
Opening Stock 16000 15000 16000 18000
57
Purchases 41000 47200 56600 78000

Sales 60000 66000 78000 99000
Closing stock 15000 16000 18000 ?
The stock salvaged was Rs.3800 compute the amount of claim.
5. A fire occurred in the premises of Mr. D on 15th August 2015. A large
part of the stock was destroyed and Rs.7,500 was realized for the
salvage. For the period from 1st Jan 2015 to 15th August 2015. The
following information is available.
a. Purchase amounted to Rs.42500
b. Sales amounted to Rs.45000
c. Stock on hand on 1st January 2015 was Rs.20000 at cost price
d. Goods costing Rs.2500 were taken by D for his personal use.
The previous accounts reveal that the rate of gross profit was 33
1/3% on sale. The insurance policy was Rs.25000 and included
an average clause. Prepare the statement of claim to be made on

the insurance company.
6. Fire occurred in the premises on 1.1.2005 and the books and records
were showed. From the following information, calculate the insurance
claim.
Rs.
Purchases for the year ending 30.6.2004 60000
Sales for the year ending 30.6.2004 90000
Purchases from 1.7.2004 to 31.12.2004 35000
Sales from 1.7.2004 to 31.12.2004 50000
Stock as on 30.6.2004 28000
Stock as on 30.6.2003 40000
7. A fire occurred in the business premises of Raja on 19.7.2005. From the
following particulars ascertain the loss of stock and prepare a claim for
insurance.
Rs.
Stock on 1.1.2005 36720
Stock on 31.12.2005 32400
Sales for 2005 216000
Purchases for 2005 146400
Purchases from 1.1.2005 to 19.7.2005 176400
Sales from 1.1.2005 to 19.7.2005 180000
58
The stock was always undervalued at 10% of cost. The stock saved
from fire was worth Rs.21600. The amount of the policy was Rs.75600.
There was an average clause in the policy.
8. From the following particulars, prepare a claim for loss of profit under
the consequential loss policy.
Date of fire – 30th June 2002
Period of indemnity six months
Rs.
Sum insured 40000
Turnover for the year ended 30th June 2002 200000
Net profit for the amounting year ending 31st 12500
March
Standing charges for the accounting year ending 28500
31st March 2002
Turnover for the year ending 31st March 2002 198000
Turnover for the indemnity period from 1.7.2002 56000
to 31.12.2002
The turnover of the year 2002-2003 had shown a tendency of
increase of 10% over the turnover of the preceding year.
9. From the following particulars. Prepare loss of profit claim under
consequential loss policy.
Date of fire - 30.6.1991
Period of indemnity - 6 months
Sum assured - Rs.40000
Sales upto 30.6.91 -Rs. 200000
Net profit for the accounting period ending 31.3.1991 Rs.12500;
standing charges for the same period Rs.28500 and sales Rs.198000.
Sales 1.7.91 to 31.12.91 - Rs.56000
Sales 1.7.90 to 31.12.90 - Rs.110000
Sales forecast is 10% higher than the previous year.
59
UNIT – 5
INSOLVENCY ACCOUNTS
Meaning of insolvent:
Insolvent is one who is not able to pay his debts as and when they are due.
Insolvency accounts
Upon being adjudicated the insolvent has to submit
1. Statement of Affairs
2. A Deficiency account
Statement of affairs
The form of the statement of affairs prescribed by rule made under the
Presidency Towns Insolvency Act.
Specimen of Statement of Affairs
Gross Liabilities Expecte Assets Estimate
liabilities d to d to
(Rs.) rank produce
xxx Un secured creditors as Property as per list xxx
per list - A –E
xxx Fully secured creditors as xxx Cash in hand
per List – B Cash at bank
Less: Estimated value of xxx Investments
security xxx Stock
Less: Amount carried Machinery
down to list - C xxx Book Debts as per xxx
Surplus as per Contra xxx List – F:
Good
Doubtful
Bad
Bills of Exchange as xxx
per List – G
Surplus from xxx
securities in the
hands of secured
creditors as per
contra
xxx Partly secured creditors Deficiency as xxx
as per List – C xxx explained in List – H
Less: Estimated value of xxx (B.F.)
security xxx
xxx Preferential creditors as xxx
per list D
Less: Deducted as per xxx
Contra xxx
xxx xxx
60
Deficiency Account – list H

Particulars Rs. Rs. Particulars Rs. Rs.
Excess of assets over xxx Excess of liabilities over xxx
liabilities (Capital) assets on
Net profit from carrying from xxx Net loss from carrying on xxx
– to --- after deducting usual business from – to the date
trade expenses of adjudication
Income or profit from other xxx Bad debts as per list – F xxx
sources
Deficiency as per Statement xxx Expenses incurred since----- xxx
of Affairs other than usual business
expenses
Other losses (Loss on xxx
realization of assets)
xxx xxx
Unsecured creditors: All creditors who have no specific asset as security are
shows under this list. They include the following:
1. Sundry creditors, bills payable, bank overdraft.
2. Wife’s loan
3. Private liabilities
4. Contingent liabilities
5. Outstanding expenses
Fully secured creditors:
These creditors have securities whose realizable value is more than the
loan and outstanding interest.
Partly secured creditors

The creditors whose loan is more than the realizable value of their security
are termed as partly secured. The balance of their loan is shown in the second
column.
Preferential creditors
These are creditors who must be fully paid, though they have no specific
security.
The following are the preferential creditors
Provincial
Presidency Towns
Creditors Insolvency Act
insolvency Act, 1909
1920
Amount due to
Government, State, Fully preferential Fully preferential
Central, Local, etc.,
Salaries 4 months salary or Rs.300 Rs.20 flat for each
61
whichever is less for each person is

person is preferential preferential
4 months wages or Rs.100 Rs.20 flat for each
Wages whichever is less for each person is
person is preferential preferential
One month’s rent whatever is
Rent payable -
the amount is preferential
Difference between statement of affairs and balance sheet

1. A balance sheet shows assets at book values, while statement of affairs
shows assets at book values, as well as realizable value.
2. A balance sheet shows fictitious assets such as goodwill, prepaid expenses
while a statement of affairs does not show such items.
3. A balance sheet gives information about capital, profit or loss, drawings
and interest on capital whereas statement of affairs excluded all such
items.
4. A statement of affairs shows the amount which the insolvent debtor is not
able to pay to his creditors while a balance sheet does not show such a
figure.
5. In a statement of affairs, creditors are classified as unsecured, fully
secured, partly secured and preferential creditors. No such classification is
usually found in a balance sheet.
6. A balance sheet shows assets and liabilities of a business as a going
concern whereas statement of affairs is prepared on the liquidation of the
business of an insolvent.
Problems:
1. What are the preferential creditors in the following liabilities of insolvent
B according to Presidency Towns Insolvency Act and Provincial Insolvency
Act?
Rs.
3 month’s salary for 10 clerks 3600
One month wages for 12 labourers 1600
Sales tax 400
3 months rent of landlord 600
Income tax 1000
Wages of four servants 1400
Salaries 1000
Municipal tax 400
62
Wages 6000
2. Compare the provincial insolvency act from the following:
Rs.
Salary of clerk 200
Wages of labours 240
Sales tax 400
Salaries 1000
Income tax 1000
Wages of servants 80
Municipal tax 400
Wages 6000
3. What are the preferential creditors in the following liabilities of insolvent
Gobal according to Presidency Towns Insolvency Act and Provincial
Insolvency Act? Also mark the preferential creditors.
Rs.
Salaries 1000
Sales tax 300
One month wage of 10 labourers 1200
Income tax 700
Rent for 3 months 900
Municipal tax 250
4 clerks 2 months salaries 1500
Wages of 3 servants 900
4. From the following details, prepare statement of affairs and deficiency
account of X as on 31.3.2011.
Rs.
Cash 2300
Stock in trade 10000
Debtors – good 70000
Debtors – doubtful 18000
Debtors – bad 15000
Furniture 5640
Investment in share 5000
Unsecured creditors (including Rs.10000 of his wife) 130000
63
Secured creditors 25000

Value of securities held by secured creditors 35000
Preferential creditors for rent taxes 1900
Assume, stock in trade realize – Rs.6660; furniture – Rs.2820; Investment
in shares the book value; and bad and doubtful debts – Rs.6000.
5. Mr. X is insolvent. He supplies to you the following information as on
31.12.2002.
Rs.
Cash in hand 1000
Creditors for goods 525000
Salary due to clerks 7000
Taxes due to government 21000
Bank loan secured by lien on stock of the book value of 175000
Rs..350000
Furniture (Expected to realize Rs.35000) 70000
Stock (Expected to realize 60%) 525000
Book debts (good) 70000
Book debts (doubtful, expected to realize 40%) 175000
Bills receivable (Rs.52500 bad) 87500
Bills discounted (Rs.35000 bad) 105000
Loan from Mrs.X 175000
Mr. X started business six years ago with a capital of Rs.437500. He drew
Rs.87500 each year for private purposes but did not maintain proper books of
accounts. Mrs. X gave up her jewellery value at Rs.70000 to the receiver.
2 marks and 5 marks

1. What is meant by head office?
2. State any four advantages of departmental accounting.
3. Define instalment system
4. What is cash price?
5. Write a note on creditor’s ledger
6. What are the methods of sectional balancing system?
7. Calculation of amount of Claim. A) stock on the date of fire Rs.36625 B)
64
Stock salvages stock Rs.5000

8. What is meant by royalty?
9. Who are preferential creditors?
10. What is the meaning of insolvent?
11. State the important terms used in Royalty accounts. (5)
12. What are the procedure of sale or return transaction? (5)
13. What are the points to note for preparation of statement of affairs? (5)
14. What you mean by dependent branch?
15. Write note on invoice price.
16. Comment on short workings
17. What is the formula for amount of claim?
18. Define average clause.
19. What are allocations of departmental expenses? (5)
20. What is hire purchase system? Briefly, explain the some important terms
in the hire purchase system. (10)
21. What is meant by independent branch?
22. What are the types of expenses?
23. Write a short on cash price and down payment.
24. What is meant by minimum rent?
25. What is meant by insolvency?
26. What are the bases for the allocation of expenses to different departments
of an organization? (5)
27. What is average clause? Explain its significance (5)
28. What are the purposes of branch account?
29. What is sub-lease?
30. What is statement of affairs?
31. Explain the meaning of “Landlord” and “Lease” (5)
32. Briefly explain the different types of branches (10)
33. Give short note on cash in transit
34. State the differences between hire purchase and installment purchase.
(10)
35. What is the importance of fire insurance?
36. Write a short note on affected period in fire insurance
37. What are the objectives of branch accounts? (5)
65
38. What is instalment purchase system? What are its characteristics? (5)
39. What are the types of insurance policies? (5)
40. Explain the procedure to ascertain stock on the date of fire. (10)
41. What is branch?
42. What is hire purchase price?
43. Write short note on indemnity period in fire insurance.
44. Explain the features of Hire purchase system. (5)
45. What are the difference between branches and departments (5)
46. Explain the importance of fire insurance (5)
47. What is retail sale branch?
48. What are departmental accounts?
49. What do you mean by recoupment of short workings?
50. What do you mean by short sales?
51. What is statement of affairs?
52. What is wholesale branch?
53. What is partial repossession?
54. What do you mean by deficiency account?
55. What are incorporation entries of independent branch?
56. What is list H under insolvency account?
57. What is sectional balancing?
58. What is general ledger adjustment account?
59. Explain the advantages of self balancing ledger system (5)
60. What is transfer?
61. What is sectional balancing? How does it differ from self balancing system
(10)
62. What is sale or return?
63. Explain the features of a sale or return transactions
64. What are the purposes of sending goods on approval basis to customers?
(5)
65. Explain the different methods of recording the transactions of goods sent
on sale or return basis. (10)
66

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BUSINESS

Branch accounts – (Excluding foreign branches) – Departmental accounts.

Hire purchase accounts & Instalment purchase System

Self balancing and sectional balancing ledgers – Royalty accounts

Insolvency accounts – Statement of Affairs – Insolvency of individual only

BRANCH ACCOUNTS 1-19

HIRE PURCHASE ACCOUNTS AND INSTALMENT

SELF BALANCING AND SECTIONAL BALANCING 35-43

INSOLVENCY ACCOUNTS 60-64

UNIT – I BRANCH ACCOUNT

Inland Branches Foreign Branches

Dependent Branches for which whole

Distinction Between Branch Accounts And Departmental

Basis of distinction Branch Accounts Departmental Accounts

Methods of Charging Goods to Branches

Accounting for Dependent Branches

Goods invoiced at cost Goods invoiced at

Trading and profit

To Balance By Bank A/c (Cash

Transaction Account debited Account credited

provided by H.O. (ii) Creditors A/c

` Transaction Accounts debited Accounts credited

(b) Return of goods Goods sent to Branch

Rebates and allowances allowed to customers are adjusted by debiting the

Transaction Account debited Account credited

Transactions Head office books Branch books

Adjustment and Reconciliation of Branch and Head Office Accounts

The branch will pass the following entry:

office for the year ending 31.3.2005.

Debtors on 1.1.2006 24000

Goods sent to branch 360000

Debtors on 1.1.09 20400 Goods returned to HO by 4500

Basis of Allocation of Common Expenditure among different

Profit and Loss Account Dr.

7. Memorandum Stock and Memorandum Mark up Account Method

Under this method, goods supplied to each department are debited to a

5. The following purchases were made by a business house having three

Stock on 1st January were:

Opening stock on 1.4.2003 300000 50000

earned gross profit @ 15% in 1992-93. General expenses of the business as a

8. Prepare departmental Trading and profit and loss account.

Prepare departmental accounts for the departments A, B and C taking into

UNIT – 2 HIRE PURCHASE AND INSTALMENT

required to calculate the interest included in each installment.

March 31,2002. Interest is charged at 20% per annum. You are

(ii) It enables preparation of interim accounts without personal ledgers

Rectification of Errors under Sectional Balancing System

Debtors or Creditors are affected, rectification will be done by making

3. X’s A/c Dr. (In Debtors

the General Ledger Adjustment Account. Afterwards all the balances so

Cash paid to creditors 61,400

28 Received at bank the advance from Mr. P paid on 28 February, 2011,

III. For transferring royalty at the end of the

IV. If there are shortworking written off

In the books of Landlord or Lessor

II. For receiving cash:

IV. If there is shortworking written off

Year 2002 2003 2004 2005

Output 4000 28000 38000 46000 30000 50000