ACCOUNTANCY PART-II

Q.1.

What journal entries are made in the books of the Head Office to incorporate the trial
balance of an independent branch?

Ans: The Head Office, keeps all its records separately and independently on Double Entry
System. Dependent Branches are those with little power and depend on Head Office for
their supplies and expenses..
Independent Branch keeps a complete set of books. Such Branch gets goods from Head
Office and from outside parties. It has its own Bank Account. Thus, the Branch keeps frill
system of accounting.
It prepares its own Trial Balance, Trading and Profit and Loss Account and Balance Sheet.
Copies of these statements are sent to Head Office for incorporating in the Head Office
Books.
The books contain an Account called Head Office Account or Head Office Current
Account which is credited with everything received from the Head Office and debited
with everything sent to Head Office. That is, all transactions relating to Head Office are
recorded in this Account. The Head Office Current Account is thus a Proprietorship
Account (i.e. Capital Account).
Independent Branches are those which make purchases from outside, get goods from Head
Office, supply goods to Head Office and fix the selling price by itself Thus an independent
Branch enjoys a good amount of freedom
Q.2. What is Hire-Purchase System? State its characteristics. Differentiate between HirePurchase System and Credit Sale.
Ans: Under hire purchase system, the purchaser gets the possession of the goods without paying the full
price for them. He makes the part payment at the time of purchase and the balance is paid in easy
installments periodically. The important ingredient of this system is that the buyer becomes the
owner of the goods only after full and final payment of all the installments, till then he hires the
goods and every installment is treated as hiring charges paid by him.
Both hire purchase and installment sale are popular methods of financing goods. These methods are
different to each other in terms of their option to purchase, right of termination, and transfer of ownership.
Hire purchase is defined as an arrangement between hirer (buyer or User) and seller of an asset whereby
the seller allows the hirer to use the asset against a regular payment of installment for purchase price. The
buyer also has option to purchase the goods on payment of all the installments. Whereas installment

purchase is defined as another method of financing the capital goods / assets whereby the goods are
purchased by the buyer but the payment is made in smaller installments.
1. Time of Purchase and Ownership: In case of hire purchase, the act of purchasing takes place only when whole payment is
made to the financing company. It means after making payment of the last hire charges / installment only, the goods are
considered purchased or if the buyer or hirer prepays in lump sum in between the agreed period for purchasing the goods.
2. Option / Right to Terminate: The hirer, in case of hire purchase agreement, has an option / right to terminate the agreement
and return the goods whereas there is no such right or option available to the buyer in case of installment purchase.
3. Installment / Hire Charges: The monthly or period payment in installment purchase is termed as installment whereas in
hire purchase arrangement, it is called hire charges.
4. Risk, Repair and Maintenance related to Asset: In hire purchase, all the risks are born by the financing company till the
last payment by hirer because it is the official owner of the asset till that time.
5. Right to Sell or Transfer: The right to sell or transfer is always exercised by the owner of the assets.
6. Default of Installment / Hire Charges: When a hirer defaults in the payment of hire charges, the financier has the right to
forfeit the money paid till that date and take back the possession of the goods.

Q.4.

Discuss the methods of treatment of goodwill at the time of retirement of

a partner.

Ans:
Accounting Procedure Regarding Partnership Accounts on Retirement or Death!
The retirement of a partner extinguishes his interest in the Partnership firm and this leads to
dissolution of the firm or reconstitution of the Partnership. A partner, who goes out of a
firm, is called retiring partner or outgoing partner. Causes for the retirement may be that a
retiring partner may be too old or he may have better opportunity in a different line or he
may dislike the co-partners attitude or any other reasons.
The following are the ways in which a partner can retire:
1. With the consent of all the other partners,
2. In accordance with an express agreement among the partners,
3. By giving a written notice of intention to retire to all the other partners where partnership
is at will.
Various Adjustments on Retirement:
When a partner retires his share in the properties of the firm has to be ascertained and paid
off. Certain adjustments have to be made in order to ascertain the amount he is to get from
the firm.
These adjustments are very similar to those which we saw in connection with admission of
a partner. When a partner retires from the business, it becomes necessary to prepare the
accounts so as to ascertain the amount payable to him.
When a partner retires, the following adjustments must be made:

1. Adjustment of accumulated reserves and undistributed profit and losses.

2. Revaluation of assets and liabilities.
3. Adjustment for goodwill of the firm.
4. Calculation of new profit and loss sharing ratio.
5. Calculation of the amount due to retiring partner and the mode of payment.
We shall discuss these points.
Adjustment of Accumulated Reserves and Undistributed Profits and Losses:
Any reserves or undistributed profits appearing on the liability side of the Balance Sheet, at
the time of retirement, are past profits, which are created to strengthen the financial
position of the firm the retiring partner has a right over such profits. Therefore, it is
necessary to divide the accumulated reserve or undistributed profit among all the partners
in their old profit or loss sharing ratio. When the distribution is over, they do not appear in
the Balance Sheet.
The journal entries are:
General Reserve Account Dr.
Profit and Loss Account Dr.
To All Partners Capital Account

Q.8.

Write short note on Cash in Transit.

Ans. Cash that is in between two entities. A transfer has been initiated, but not
completed leaving the cash in transit. One of the parties involved may take out a cash
in transit policy, which insures that they will receive their money should something
occur. CASH IN TRANSIT is cash being transferred from one business to another or between
two parts of the same business. If it is not recorded as an asset in either an adjusting entry
may be necessary.
AT RISK is the exposure to the danger of economic loss; frequently used in the context of
claiming tax deductions. For example, a person can claim a tax deduction in a limited
partnership if the taxpayer can show it is at risk of never realizing a profit and of losing its
initial investment.
One of the more common examples of cash-in-transit has to do with the way that deposits are
posted and made available to the account holders. Many banks require that deposits be
received by a certain time of day in order to be posted as received on that same day. This
means that if bank rules and regulations state that only deposits received in hand by 2:00 p.m.
are posted the same business day, a deposit that is tendered at 3:00 p.m. will not actually be
posted and made available to the account holder until the following business day. In fact, the
deposit will show up on the account statement as a deposit for that following business day
rather than the actual date of the deposit.

Q.9.

How do you compute the cost of goods sold?

Ans. When using the periodic method of inventory, Cost of Goods Sold is calculated
using the following equation:
Beginning Inventory + Inventory Purchases End Inventory = Cost of Goods Sold
This equation makes perfect sense when you look at it piece by piece.
Beginning inventory, plus the amount of inventory purchased over the period gives you the
total amount of inventory that could have been sold (sometimes known, understandably, as
Cost of Goods Available for Sale).
We then assume that, if an item isnt in inventory at the end of the period, it must have been
sold.
the calculation of CoGS is a bit more complex out in the real world. For example, if a
business is dealing with changing per-unit inventory costs, assumptions have to be made as
to which ones were sold.
The three most used methods are known as

First-In, First-Out (FIFO)

Under the First-In, First-Out method of calculating CoGS, we assume that the oldest
units of inventory are always sold first. So in the above example, wed assume that
Maggie sold all of her $3 shirts before selling any of her $3.50 shirts.

Last-In, First-Out (LIFO)

Under the Last-In, First-Out method, the opposite assumption is made. That is, we
assume that all of the newest inventory is sold before any older units of inventory are
sold. So, in the above example, wed assume that Maggie sold all of her $3.50 shirts
before selling any of her $3 shirts.

Average Cost
The average cost method is just what it sounds like. It uses the beginning inventory
balance and the purchases over the period to determine an average cost per unit. That
average cost per unit is then used to determine both the CoGS and the ending
inventory balance.