B.Com. (Hons.

) CBCS
Semester - I
FINANCIAL ACCOUNTING
PAPER BCH-1.2
SHIV DAS & SONS
Publishers & Book-Sellers
SECTION A: THEORY
UNIT I. ACCOUNTING AS AN INFORMATION SYSTEM
Chapter 1. Accounting Theory
Chapter 2. Accounting Concepts & Accounting
Conventions
Chapter 3. Accounting Standards and IFRS
Chapter 4. Accounting Process
UNIT II. BUSINESS INCOME
Chapter 5. Measurement of Business Income
Chapter 6. Revenue Concepts
Chapter 7. Depreciation
Chapter 8. Inventory Valuations
Chapter 9. Preparation of Financial Statements
For Not For Profit Organizations
UNIT III. ACCOUNTING FOR HIRE PURCHASE & INSTALMENT SYSTEMS
Chapter 10. Hire Purchase Systems
UNIT IV. ACCOUNTING FOR INLAND BRANCHES
Chapter 11. Concept of Dependent Branches
UNIT V. ACCOUNTING FOR DISSOLUTION OF THE PARTNERSHIP FIRM
Chapter 12. Accounting for Dissolution of the Partnership Firm
SECTION B: PRACTICAL PROBLEMS (And their solutions)
UNIT I. Accounting Process
UNIT II. A. Depreciation
B. Inventory Valuation
C. Income And Expenditure Account
UNIT III. Accounting For Hire Purchase & Instalment System
UNIT IV. Accounting For Inland Branches
UNIT V. Accounting For Dissolution of The Partnership Firm
University Question Papers
onwards
 SYLLABUS
B.Com. (Hons.) Semester - 1
PAPER BCH-1.2: FINANCIAL ACCOUNTING
Duration: 3 hours
Objective. To acquire conceptual knowledge of financial accounting and to provide
knowledge about the techniques for preparing accounts in different business organizations.
Unit I:
(a) Theoretical Framework. Accounting as an information system, the users of financial
accounting information and their needs. Qualitative characteristics of accounting information.
Functions, advantages and limitations of accounting. Branches of accounting. Basics of
accounting; cash basis and accrual basis.
The nature of financial accounting principles — Basic concepts and conventions; entity,
money measurement, going concern, cost, realization, accruals, periodicity, consistency,
prudence (conservatism), materiality and full disclosures.
Financial accounting standards: Concept, benefits, procedure for issuing accounting standards
in India. International Financial Reporting Standards (IFRS); Need and procedures,
Convergence to IFRS.
Distinction between Indian Accounting Standards (IND ASs) and Accounting Standards
(AS).
(b) Accounting Process. From recording of a business transaction to preparation of trial
balance including adjustments: Capital and Revenue Expenditures & Receipts. Preparation of
Profit & Loss Account and Balance Sheet (Sole Proprietorship only).
(c) Computerized Accounting Systems Practical Lab Computerized Accounting Systems.
Computerized Accounts by using any popular accounting software: Creating a Company;
Configure and Features settings; Creating Accounting Ledgers and Groups; Creating Stock
items and Groups; Vouchers Entry; Generating Reports-Cash Book, Ledger Accounts, Trial
Balance, Profit and Loss Account, Balance Sheet, Funds Flow Statement, Cash Flow
Statement, Selecting and shutting a Company; Backup and Restore data of a Company.
Unit II:
(a) Business Income. Measurement of business income-Net income; the accounting period,
the continuity doctrine and matching concept, Objectives of income measurement.
Revenue: Concept, Revenue recognition principles, Recognition of expenses.
The nature of depreciation. The accounting concept of depreciation. Factors in the
measurement of depreciation. Methods of computing depreciation: Straight line method and
diminishing balance method; Disposal of depreciable assets — change of method.
Inventories: Meaning, significance of inventory valuation, Inventory Record System; periodic
and perpetual Methods; FIFO, LIFO and Weighted Average.
(b) Preparation of financial statements of not for profit organization.
Unit III. Accounting for Hire Purchase and Installment System
Calculation of interest, partial and full repossession, Hire Purchase trading (total cash price
basis), stock and debtors system. Concepts of operating and financial lease.
Unit IV. Accounting for Inland Branches
Concept of dependent branches; accounting aspects; debtors system, stock and debtors
system, branch final accounts system and wholesale basis system, Independent branches,
Concept — Accounting treatment: important adjustment entries and preparation of
consolidated profit and loss account and balance sheet.
Unit V. Accounting for Dissolution of the Partnership Firm
Accounting for Dissolution of the Partnership Firm including Insolvency of partners, sale in a
limited company and piecemeal distribution.
Note:
(i) The relevant Indian Accounting Standards in line with the IFRS for all the above topics
should be covered.
(ii) Any revision of relevant Indian Accounting Standard would become applicable
immediately.
(iii) There shall be 4 Credit Hours for Lectures + one Credit hour (Two Practical per week
per batch) for Practical Lab + one credit hour for Tutorials (per group).
(iv) Examination Scheme for Computerised Accounting System — Practical for 20 marks.
The practical examination will be for 1 hour.
(v) Theory Exam shall carry 80 marks.
 UNIT
I
Accounting As An Information System
Chapter 1. ACCOUNTING THEORY
Q. 1. Define accounting and explain the functions of accounting.
Ans. Meaning of Accounting. Accounting may be defined as the process of collecting,
recording, summarising and communicating financial information.
Definition of Accounting. American Institute of Certified Public Accountants (AICPA)
defined accounting in 1961 as follows:
"Accounting B the art of recording, classifying and summarising, in a significant manner,
and in terms of money, transactions and events which are, in part at least, of a financial
character, and interpreting the results thereof."
From the above the following attributes of accounting emerge:
(i) Identifying the financial transactions and events.
(a) It is the art of recording business transactions.
(iii) It is the art of classifying business transactions.
(iv) The transactions or events of business must be recorded in monetary terms. (v) It is the
art of summarising financial transactions.
(vi) It is an art of analysis and interpretation of these transactions.
(vii) The result of such analysis must be communicated to the persons who are to make
decisions or form judgement.
Functions of Accounting: Financial accounting performs the following functions:
1. Keeping Systematic records. Business transactions are properly recorded, classified and
summarised into financial statements — Income Statement (i.e., Profit & Loss Account) and
Balance Sheet.
2. Calculation of Profit or Loss. At the end of the accounting period, the income statement,
i.e., Profit & Loss Account is prepared to calculate net profit or loss. This is done to know the
results of the operations of the enterprise.
3. Ascertainment of financial position. 'Position statement, i.e., Balance Sheet is prepared as
at last date of the accounting period to know the financial position of an organisation.
4. Communicating accounting information to the users. Accounting is used to provide
financial information in respect of net profit/net loss, assets, liabilities etc., to the interested
parties.
5. Meeting legal needs. The provision of various laws such as Companies Act, Income tax
and Sales tax Act require the submission of various statements, i.e., annual accounts, income
tax returns, returns for sales tax purpose and so on. Accounting system aims at fulfilling the
requirement of law.
6. Protect business assets. Accounting keeps proper records of various assets and thus
enables the management to exercise proper control over them.
7. Accounting assists the management in the task of planning, control and coordination of
business activities.
Q. 2. Distinguish between 'Book-keeping' and 'Accounting'.
Ans. Book-keeping. Book-keeping is a part of accounting. It is concerned with the recording
of business transactions in a systematic manner and classifying them in the ledger. It is
mechanical and repetitive in nature.
Accounting. Accounting may be defined as the process of collecting, recording, summarising
and communicating financial information.
Accounting is based on a careful and efficient book-keeping. In fact the process of
accounting begins where that of book-keeping ends.
Distinction between Book-keeping and Accounting
Basis of Distinction Book-keeping Accounting
1. Scope Book-keeping involves: In addition to Bookkeeping,
accounting is concerned with:
• identifying the transactions; summarizing the classified
• measuring the identified transactions, analysis and
transactions; interpretation of summarized
results and communicating the
• recording the measured interpreted information to the
transactions; and interested parties.
• classifying the recorded
transactions.
2. Stages Book-keeping is the primary Accounting is the secondary
stage. stage. It begins where book-
keeping ends.
3. Objective To maintain systematic To ascertain financial
records of financial results. performance (Net Profit/ Net
Loss) and financial position
and to communicate
financial information to various
users.
4. Knowledge level The book-keeper is not required The accountant must have
to have higher level of higher level of knowledge than
knowledge than that of an that of book-keeper.
accountant.
5. Who performs Book-keeping work is Accounting work is performed
performed by junior staff. by senior staff.
6. Nature of Job The job of book-keeper is often The role of an accountant is
 routine and clerical in nature. analytical in nature.
Q. 3. Write a short note on: Cash basis and Accrual basis of accounting. Ans. Basis of
Accounting. For recording business transactions, there are two basis of accounting which are
widely accepted:
1. Cash Basis of Accounting
2. Accrual Basis of Accounting
1. Cash Basis of Accounting. Under this basis of accounting actual cash receipt and actual
cash payments are recorded. Credit transactions are not recorded at all. Income is merely the
difference between the cash receipts and cash payments. Outstanding expenses, prepaid
expenses, accrued income and income received in advance are not adjusted while calculating
net profit.
Cash basis of accounting is very simple as there is no need of adjusting outstanding expenses,
prepaid expenses, accrued income and income received in advance.
The main disadvantage of cash basis of accounting is that it does not give a true and fair view
of the results of the operations of the enterprise.
2. Accrual Basis of Accounting. Under accrual basis of accounting net income for a period
is the result of the revenue realised in the period and the cost expired during the year. Accrual
basis of accounting is a method of recording transactions by which revenue, costs, assets and
liabilities are reflected in the accounts for the period in which they occur.
The accrual basis of accounting is widely used. Although this basis is not simple but it gives a
true and fair view of the results of the operation's of the business and of financial position of
the business. It is recognised by the Companies Act.
Q. 4. Distinguish between Cash and Accrual Basis of Accounting.
Ans. Distinction between Cash and Accrual Basis of Accounting
Cash Basis of Accounting Accrual Basis of Accounting
(i) In this: case only cash transactions are In this case both cash and credit transactions
recorded. are recorded.
(ii) Under this basis there is no outstanding or Under this basis there may be outstanding
prepaid expenses and income accrued or expenses, prepaid expenses, accrued
income received in advance in the Balance income and income received in advance in
Sheet. the
Balance Sheet.
(iii) Income statement will show lower Income statement will show relatively
income in case there are items of prepaid higher income if there are items of
expenses and accrued income. prepaid expenses and accrued income.
(iv) Income statement will show relatively Income statement will show relatively
higher income if there are items of lower income if there are items of
outstanding expenses and income received in outstanding expenses and income received
advance. in advance.
(v) This basis of accounting is simple because This basis of accounting is technical
it does not require any technical knowledge. because it involves the adjustments of
accounts for preparing the final accounts.
(vi) It is not a reliable basis of It is a reliable basis of accounting because
it makes a complete record of all cash and
accounting because accurate profit or loss can credit transactions. It ascertains correct
not be ascertained under this basis. profit or loss.
(vii) This basis is not recognised under the This basis is recognised under the
Companies Act, 2013. Companies Act, 2013.
(viii) Under this method an accountant has Under this basis an accountant has the
no such option to follow alternative method option of following alternative method of
of depreciation or valuation of inventory. depreciation (i.e., SLM or DBM) or method
of valuation of inventory (i.e., LIFO or
FIFO etc.)
Q. 5. Write a note on: Accounting as an information system.
Ans. Accounting as an Information system. According to American Accounting
Association,
"Accounting is the process of identifying, measuring and communicating economic
information to permit informed judgements and decisions by users of information."
As an information system, accounting collects data and communicates economic information
about the organisation to a wide variety of users whose decisions and actions are related to its
performance. Accounting process begins with the identification of- transactions and ends
with the preparation of financial statements. Every step in the process of accounting generates
information. Generation of information is not an end in itself. It is a means to facilitate the
dissemination of information among different user groups. Such information enables the
interested parties to take appropriate decisions.
Accounting is often called the language of business. The basic function of language is to
serve as a means of communication. Accounting serves this function. It communicates the
results of business operations to various parties who have a stake in the business viz., the
proprietor, creditors, investors, government and other agencies. The accounting is, therefore,
also an information system.
Accounting information system should be such that the financial statements and reports can
be prepared not only at the end of the accounting year but also on quarterly and monthly basis
as the information may be timely communicated. Accounting information system should be
designed to meet the requirements of both internal and external users.
Q. 6. Who are the various users of accounting information?
Explain their information needs.
Ans. Users of Accounting Information and their Needs. There are a number of groups who
have a vested interest in the accounting information of the business. They may be internal
users (e.g., owners, management, employees etc.) or external users. Users need accounting
information to know the liquidity, solvency and profitability of the enterprise. Following are
some of the users who use the accounting information:
Users Need for Information
1. Owners/ They are interested to know the financial position of a concern, rate
of return on the capital employed, proper' and effective utilisation
Proprietors and of available resources.
partners
2. Creditors and other Since they have provided the funds, they are interested to get their
Lending Institutions funds as well as interest thereon when due. As such, they are
naturally interested to know the profitability and short-term
solvency of the business.
3. Management Management needs information to review the firm's (i) short-term
& long-term solvency, (ii) profitability (iii) effective utilization of
available resources; and take necessary action to run the business
effectively.
4. Potential Investors Before investing their funds they need accounting information to
know past and present profitability of the business, because their
(those who want to investment should always be in safe hands. In other words, they
invest) need information to judge prospects of an enterprise and to decide
whether they should buy the shares of the enterprise,
5. Employees They are interested in information about the earning capacity of the
business since their salary, bonus, profit-sharing, welfare and social
measures depend upon the profitability of the business.
6. Tax Authorities Tax authorities need information to access the tax liabilities of an
enterprise.
7. Government and Government and their agencies are interested in the allocation of
their agencies resources and therefore, the activities of the enterprise. They also
require information for controlling the activities of the enterprise,
determine taxation policies etc.
Q. 7. Write a short note on the importance of classifying business expenditure into
revenue expenditure, capital expenditure and deferred revenue expenditure.
Ans. The two financial statements — Profit & Loss Account and Balance Sheet are related
with each other. Both the statements are prepared from the balances appearing in the trial
balance. All items appearing in trial balance which are of revenue nature are transferred to
Profit and Loss Account and all items of capital nature are taken to the balance sheet. For
calculating and correcting the profits for the accounting period, the 'principle of matching of
revenue and expenses' is to be applied.
If there is an incorrect classification of any item in capital and revenue items, the profit or
loss figure as shown by Profit and Loss Account will be wrong. The Balance sheet will not
present a true and fair view of the financial affairs on a particular date. In other words, if
there is an incorrect classification of item into revenue items and capital items, financial
statements will not disclose the true and fair view of the financial position and income of the
period.
Sometimes some expenditure is incurred which by nature is revenue expenditure, but its
benefits are likely to be derived over a number of years. Such expenditure is called a deferred
revenue expenditure. Such expenses cannot be transferred to Profit and Loss Account of a
particular year and are deferred over a number of years so that profit of a particular year is
not unduly affected.
In short, deferred revenue expenditure is a type of revenue expenditure which is incurred
during the accounting period but is applicable either wholly or in part to future periods.
Examples of deferred revenue expenses are as under.
(i) Preliminary expenses
(ii) Brokerage on Issue of shares and debentures
(iii) Heavy amounts of advertisement
(iv) Research and Development expenses.
Q. 8. Explain the advantages and limitations of Financial Accounting.
Ans. Advantages of Financial Accounting:
(i) Replacement of Memory. All financial transactions are recorded in a systematic manner
in the books of accounts so that there is no need to rely on memory. Human memory is
limited by its very nature.
Accounting helps to overcome this limitation.
(ii) Preparation of financial statements. Systematic records enable the accountants to
prepare the Financial Statements
— Profit & Loss Account to ascertain profit or loss during a particular accounting period and
Balance Sheet to state the financial position of the business on a particular date.
(iii) Comparative Study. Systematic maintenance of business records enables the accountant
to compare profit of one year with that of earlier years to know the significant facts about the
change.
(iv) Acts as Legal Evidence. Proper books of accounts maintained in a systematic manner
act as legal evidence in case of disputes.
(v) Facilitates Raising loans. Accounting facilitates raising loans from lenders by providing
them required financial information.
(vi) Facilitates the Ascertainment of Value of Business. Accounting facilitates the
ascertainment of the value of business in case of transfer of business to another entity.
(vii) Assistance to Management. Accounting assists the management in taking managerial
decisions. For example, Projected Cash Flow Statement facilitates the management to know
about future receipts and payments and to take decisions regarding anticipated surplus or
shortage of funds.
(viii) Settlement of taxation liability. Accounting facilitates the settlement of tax liability
with the authorities by maintaining proper books of accounts in a systematic manner.
(ix) Facilitates control over Assets. Accounting facilitates control over assets by providing
information regarding Cash Balance, Bank Balance, Stock Debtors, Fixed Assets etc.
Limitations of Financial Accounting:
(i) Records only monetary transactions. Financial Accounting records only those
transactions which can be measured in monetary terms. It has no place for recording non-
monetary or non-financial transactions, though these matters also have a significant role in
affecting the soundness of the business.
(ii) No consideration of price level changes. Accounting accepts the cost concept and hence
does not consider the change in the price level from time to time. This is a very serious
limitation of Financial Accounting.
(iii) No realistic information. Accounting information may not be realistic as accounting
statements are prepared by following basic concepts and conventions. For example, Going
Concern Concept gives us an idea that the business will continue and assets are to be
recorded at cost but the book value, which the asset is showing, may not be actually
realisable.
(iv) Window dressing in Balance Sheet. When an accountant resorts to 'window dressing' in
the Balance Sheet, the Balance Sheet cannot exhibit the true and fair view of the state of
affairs of the business.
(v) Personal bias of accounting affects the accounting statements. Accounting statements
are influenced by the personal judgement of the accountant. He may select any method of
depreciation, valuation of stock, and treatment of deferred revenue expenditure. Such
judgement is based on integrity and competence of the accountant, and will affect the
preparation of accounting statements.
Q. 9. What are the branches of accounting?
Or
What are the sub-fields of accounting?
Ans. Accounting can be classified into the following categories:
(i) Financial Accounting. This branch of accounting is concerned with the recording,
classifying and summarising the business transactions in such a way that operating results for
a particular period and financial position on a particular date can be ascertained. In other
words, it is primarily concerned with the presentation and preparation of Financial
Statements.
(ii) Cost Accounting. It is the process of accounting and controlling the cost of a product,
operation or function. The purpose of this branch of accounting is to ascertain the cost, to
control the cost and to communicate information for decision-making.
(iii) Management Accounting. It relates to the use of accounting data collected with the help
of financial accounting and cost accounting for the purpose of policy formulation, planning,
control and decisionmaking by the management.
(iv) Social Responsibility Accounting. It is concerned with the social responsibility aspect
of a business. Management is held responsible for what it contributes to the social well-being
and progress. It is the process of identifying, measuring and communicating the social effects
of business decisions to permit informed judgement and decisions by the users of information.
(v) Tax Accounting. This branch of accounting is related to the taxation field such as
income-tax, sales-tax, VAT etc. An accountant is required to be fully aware of various tax
legislations.
Q. 10. Write a short note on: Generally Accepted Accounting Principles. Ans. Generally
Accepted Accounting Principles (GAAP). A principle may be defined as a rule of action or
guide to action. Accounting principles are broad guidelines and rules of action to be adopted
by accountants for the preparation of accounts.
Generally Accepted Accounting Principles may be defined as those rules of action or conduct
which are derived from experience and practice and when they prove useful, they become
accepted as accounting principles.
According to the American Institute of Certified Public Accountants (AICPA), the principles
which have substantial authoritative support become a part of GAAP.
Accounting is the language of business. To make the language convey the same meaning to
all people, accountants all over the world have developed certain rules, procedures and
conventions, which show a consensus view by the profession of good accounting practices
and procedures and are generally referred to as Generally Accepted Accounting Principles
(GAAP). Accounting Statements are prepared in conformity with these principles for
providing more reliability.
Essential features of GAAPs. The general acceptance of accounting principles depends upon
how well they meet the following three criteria:
• Usefulness (relevance), i.e., meaningful to the users;
• Objectivity, i.e., supported and supplemented by the basic facts or data; and
• Feasibility, i.e., practicable or feasible to attain.
Thus, Generally Accepted Accounting Principles (GAAPs) are the set of laws, rules,
guidelines or concepts used in recording accounting transactions.
Q. 11. State giving reasons in brief, whether each of the following statement is 'TRUE' or
'FALSE':
(i) Book Keeping and Accounting are synonymous terms.
(ii) Accounting, as a language, is used to communicate financial information to Government
only.
(iii) Accounts help in determining the tax liability.
(iv) Accounting is only an art and not a science.
(v) Accounting information can be presented for non-monetary events also.
(vi) Revenue is recognised at the point where cash is received in case of accural basis of
accounting.
Ans. (i) False. Book-Keeping and Accounting are not synonymous terms. Book-Keeping is a
part of accounting. Accounting starts where book-keeping ends.
(ii) False. Accounting is done not only by the Government. It is required for all entities-
business or non-business where finances are involved.
(iii) True. Accounting helps in the calculation of profits which are subject to tax liability.
(iv) False. Accounting is both a science and an art. Accounting is a science because it has to
follow certain generally accepted accounting principles or rules while recording the
transactions. Actual recording of transactions is an art.
(v) False. Non-monetary events cannot be recorded because accounting is essentially a
money-based discipline.
(vi) False. Revenue is usually recognised at the time of sale of goods in case of accrual basis
of accounting.
 Chapter 2
ACCOUNTING CONCCPTS & ACCOUNTING CONVCNTIONS
If accounting has to serve its purpose of communicating the results of a business to the
outside world, it should be based on certain uniform and scientifically laid down principles.
Accounting principles may be defined as those rules of conduct or procedure which are
adopted by the accountants universally, while recording the accounting transactions.
Accounting principles can be classified into two categories:
(i) Accounting concepts, and
(ii) Accounting conventions
Q. 1. Explain various Accounting concepts in brief.
Ans. Accounting concepts. Accounting concepts mean and include those basic assumptions
or conditions upon which the science of accounting is based.
The following are the important accounting concepts:
1. Accounting Business Entity Concept. In accounting, a business is treated as a separate
entity that is distinct from its owner(s), and all other persons associated with it. For example,
in case of a proprietary firm, though the legal entity of the business and its proprietor is the
same, for the purpose of accounting, they are to be treated as separate from each other. If this
concept is not followed, the financial status and operating results of a business entity cannot
be ascertained.
In other words, this concept requires that for accounting purposes, a distinction should be
made between (a) personal transactions and business transactions, and (b) transactions of one
business entity and those of another business entity.
While recording financial transactions in accounting, the material point is how these affect
the business entity and not how these affect the persons who own and manage the business or
someone who is otherwise associated with the business.
This concept applies to all forms of business organisations, whether it is a sole trade,
partnership or a company.
2. Money Measurement Concept. Money measurement concept means that only those facts or
transactions which can be expressed in monetary terms, are recorded in the books of
accounts. Events which cannot be expressed in terms of money do not find a place in the
account books. For example, salary paid to a manager is recorded in the account books but
his competence which cannot be expressed in monetary terms is not recorded in the books of
accounts.
This concept is very significant in the field of accounting. This concept restricts the scope of
accounting as it does not record the fact that there is a strike in the factory or the Production
Manager is not on speaking terms with the Sales Manager. Accounting, therefore, does not
give a complete account of the happenings in a business unit. Money provides a common
denominator for measuring, but it does not take care of inflation which takes place with the
passage of time. Due to inflationary tendencies, the preparation of accounts and statements on
the basis of historical costs has made the statements thoroughly unreliable and irrelevant for
judging the true financial position of the business. In spite of this, this concept is still
followed by the accountants in general.
3. Going Concern Concept. According to this concept, unless there is good evidence to the
contrary, it is assumed that the business will continue in future for at least a reasonably long
period of time. Business events and transactions are recorded from this point of view. On the
basis of this assumption, fixed assets are recorded at actual cost and are depreciated year by
year regardless of the fact that the market value is greater than the book value of such assets.
According to E.K. Kolher, "The going concern concept is a concept basic to accounting of
importance in the valuation of intangible assets and the depreciation of tangible and
intangible assets." Continuity to activity is to be true of all forms of business organisation.
This concept has the following implications in accounting:
(i) Distinction between capital expenditure and revenue expenditure is made.
(ii) Assets are classified as current assets and fixed assets. Similarly, liabilities are classified
into current liabilities and long-term liabilities.
(iii) Cost of the depreciable asset is allocated over the useful life of the asset in a systematic
way.
(iv) Outstanding expenses, prepaid expenses, accrued income and income received in
advance are taken into consideration.
4. Dual Aspect. Assets are the economic resources of an organisation. There are two types of
claims against the assets. Liabilities are the claims of the creditors or outsiders against the
assets and capital is the claim of the owners against the assets. All the assets of the business
are claimed by creditors or outsiders and owners. Therefore, we can express the relationship
between assets, liabilities and capital in the form of an accounting equation as follows:
Assets = Liabilities + Capital Or Capital = Assets - Liabilities
Hence, the total of the assets will always be equal to the total of liabilities.
According to the dual aspect, every transaction has a two-fold effect. Accounting system is
designed in such a way that both aspects, i.e., change in assets and change in liabilities and
capital, each transaction is recorded. In other words, every transaction has a two-fold effect.
One aspect is debited and the other is credited.
This system of recording is known as the double entry system of accounting.
The concept is very useful in recording business transactions. If it is ignored, accounting
records will not show true financial position of the business.
5. Accounting Period Concept. According to the going concern concept, the life of the
business is assumed to be indefinite and will continue for a long period. But the proprietor of
the business cannot wait for such a long period to study the financial position and measure
the income of the business. He is interested to know the progress of the business from time to
time. Hence, the accountants choose some shorter period to measure the income (profit) of or
progress of the business. The time interval chosen is called the accounting period which is
usually one year for external reporting. Thus according to the accounting period concept,
financial statements should be prepared at regular intervals to provide information about
financial position and performance of an organisation.
The accounting period may be calender year (1st January to 31st December) or financial year
(1st April to 31st March).
This concept facilitates the preparation of financial statements.
6. Cost Concept or Concept of Historical Cost. According to this concept, an asset is
recorded at its cost in the books of accounts, i.e., the price which is paid at the time of
accruing it. If an asset is purchased or acquired, its cost price is the
only source by which the basis for all subsequent accounting in relation to the same can be
made. The asset, when it is acquired, is originally recorded at its cost price and gradually
reduced by way of depreciation. The market value of an asset may change with the passage of
time, but for accounting purposes it continues to be shown in the books at its book value i.e.
the cost of acquisition minus depreciation provided upto date. This concept is closely related
to the going concern concept.
This concept has the advantage of bringing objectivity in the accounts. Information given in
the financial statements is not influenced by the personal bias or judgement of those who
furnish such statements. But this concept also suffers from one limitation. The historical cost
concept ignores the effect of excessive inflation in the present economy, and thus becomes
irrelevant for the purpose of valuation of assets. Since there are a number of practical
difficulties, the historical cost concept still serves as a fair and adequate basis for the
valuation of assets.
7. Realisation Concept or Revenue Recognition. According to this concept, revenue is
considered as earned on the date when it is realised. Revenue is generally recognised when a
sale is made or service is provided. Sale is considered to be made at the point when the
property in goods passes to the buyer and he becomes legally liable to pay.
This can be well understood with the help of the following example:
X places an order with Y for supply of certain goods yet to be manufactured. After receiving
the order, Y purchases raw materials, employs workers, produces the goods and delivers them
to X. X makes payment on receipt of goods. In this case, the sale will be presumed to have
been made not at the time of receipt of the order for the goods but at the time when goods are
delivered to X.
In short, revenue is recognised at the point of sale or rendering service.
Exceptions. There are certain exceptions to this concept:
(i) Hire purchase. In case of hire purchase, the ownership of the goods passes to the buyer
only when the last instalment is paid, but sales are presumed to have been made to the extent
of instalments received and instalments outstanding (i.e., instalment due but not received).
(ii) Long-term service or construction contracts. In case of contract accounts, though the
contractor is liable to pay only when the whole contract is completed as per terms of the
contract, the profit is estimated on the basis of work certified year after year as per certain
accepted accounting norms. (iii) Gold mining. In case of gold mining revenue is recognised
at the point of production itself.
8. Accrual Concept. The essence of the accrual concept is that 'Revenue is recognised when
it is realised, that is when sale is completed or services are given it is immaterial whether
cash is received or not.' Similarly, expenses are recognised within the accounting period in
which they help in earning the revenue, whether cash is paid or not. Thus, according to this
concept, we record all expenses and incomes related to a particular accounting period
whether actual cash has been paid or received or not, so as to ascertain correct profit or loss
for an accounting period and to show the true and fair financial position of the business at the
end of the accounting period. Therefore as a result of the accrual concept, outstanding
expenses and outstanding incomes are taken into consideration while preparing final accounts
of a business entity. The accrual principle is one of the consequences of accounting period
postulate.
9. Matching Concept. This concept is based on the accounting period concept. The most
important objective of accounting is to ascertain the profit of a business periodically. The
determination of profit of particular period is essentially a process of matching the revenue
recognised during the period and the cost to be allocated to the period to earn revenue. It is,
thus, a process of matching revenue and expired cost, the residual amount being the net
profit or net loss of the period. Revenue is considered to be earned on the date at which it is
realised i.e., on the date when the goods are delivered or services rendered to the customer.
Like revenue, all costs incurred during the period are not taken, but only costs related to the
accounting period are taken. The price of fixed assets is not taken but only the depreciation
on fixed assets related to the accounting period is taken. Prepaid expenses are excluded from
the total cost but outstanding expenses are added to the total cost to arrive at the costs
attached to the period. Costs are matched with revenues and usually not vice versa. This
concept should be followed while preparing financial statements to have a true and fair view
of the profitability and financial position of a business entity.
10. Objective Evidence Concept. According to this concept, there must be objective
evidence of transactions which are capable of verification. In other words, entries which are
recorded in financial accounting from transactions must be supported by documentary
evidence such as vouchers, invoices, cash memos etc. Similarly the information reported in
financial statements must be based upon objectively determined evidence.
Q. 2. Explain various Accounting Conventions in brief.
Ans. Accounting Conventions. The term conventions denote circumstances or traditions
which guide the accountants while preparing accounting statements.
Concepts and conventions are often used interchangeably. The basic difference between them
is that concepts are concerned with maintenance of accounts whereas conventions are
applicable while preparing financial statements i.e., Profit & Loss Account and Balance
Sheet.
The following are the important accounting conventions:
1. Convention of Consistency. This doctrine implies that accounting rules, practices and
conventions should be continuously observed and applied. In other words, these should not
be changed from year to year or from one year to another. The comparison of one accounting
period with the other is possible when the convention of consistency is followed. For
example, the principles of valuing stock at cost or market price, whichever is lower, should be
followed every year for making proper comparison, i.e., the method adopted should be
consistent for the year. According to AS-1, consistency is a fundamental assumption and it is
assumed that accounting policies are consistent from one period to another. Where this
assumption is not followed, the fact should be disclosed together with reasons.
It is to be noted that consistency does not mean non-flexibility. It should permit introduction
of improved technique of accounting.
The convention of consistency helps in the following manner:
(i) It helps to eliminate the personal bias of an accountant since he is not allowed to change
any accounting method or principle as per his own opinion and desire from one year to
another.
(ii) It also helps to prepare a periodical financial statement which is more dependable, reliable
and comparable.
2. Convention of Full Disclosure. Apart from legal requirements, full disclosure of all
significant information should be made in the financial statements. For example, the basis of
valuation of fixed assets, investments and stock should be clearly stated in the Balance Sheet.
In other words, accounting statements should be honestly prepared. There should be full, fair
and adequate disclosure. This convention is so important that the Companies Act makes
ample provisions for the disclosure of essential information so that significant information
may not be left out to be disclosed.
This convention does not express that the trade secrets or other necessary information should
also be disclosed. It should reveal simply the full disclosure of all essential or significant
material information to the users of financial statements. The principle of full disclosure gains
more significance in case of a joint stock company because of separation of management and
ownership.
3. Convention of Materiality. Convention of Materiality implies that the transactions and
events that have immaterial or insignificant effects should not be recorded and reported in the
Financial statements. An information is considered to be material if the knowledge of this
information is significant to the users of accounting reports. What is material or immaterial
depends upon the circumstances and discretion of an accountant. The materiality of an event
or transaction can be decided in terms of its impact on the financial position, results of
operations, change in the financial position of an organisation and on evaluation or decisions
made by users. Thus materiality places a restriction on what should be disclosed. It is a
modifying principle as it modifies the principle of full disclosure.
4. Convention of Conservatism or Prudence. It refers to the policy of 'Playing safe'. As per
this convention, all prospective losses are taken into consideration but not all prospective
profits. In other words 'anticipate no profit but provide for all possible losses.' However, this
convention is being criticised on the ground that it goes not only against the convention of
full disclosure but also against the concept of matching costs and revenues. It encourages
creation of secret reserves by making excess provision for depreciation, bad and doubtful
debts etc.
The valuation of stock at the end of the period at 'market price or cost price', whichever is
less, provisions for doubtful debts and depreciation are based on the convention of
conservatism.
Q. 3. Explain the relevance of disclosure principle in accounting. [2009
Ans. Relevance of disclosure principle. The relevance of disclosure principle in accounting
is that the financial statements namely the Balance Sheet and Profit & Loss Account must
give true and fair view of the financial position and operating results of a business firm.
While preparing financial statements, it should be ensured that significant facts or
informations are not omitted. Disclosure should be full, fair and adequate. It would increase
the relevance and reliability of a financial statement. It is an obligation, in Company Law,
that a company has to disclose all relevant information and results of trading to its
shareholders. Generally, disclosure is required when:
• alternate polices are available (LIFO, FIFO, average cost etc. for inventory valuation)
• principle peculiar to a particular industry (revenue is recognised before completion of a job,
in case of long-term contracts); and
• unusual or innovative application of accounting principles (valuation of live stock-on herd
basis, in case of a dairy firm).
Q. 4. State giving reasons in brief, whether each of the following statements is 'TRUE'
or 'FALSE':
(i) Cost concept relates only to the income statements.
(ii) Consistency convention emphasizes that : "Anticipate no profits but
provide for all losses."
(iii) Since the life of the firm is assumed to be indefinite the going concern concept provides
that income statement should be prepared only when it (the firm) is dissolved.
(iv) Money measurement concept assumes a stability in the value of money.
(v) Accounting records the qualitative aspects of the business unit.
(vi) Lower of cost or market value rule should be followed only in the valuation of fixed
assets.
(vii) Accrual concept implies accounting on cash basis.
(viii) Separate entity is considered to be separate and apart from its (business) owner(s).
(ix) In accounting, all business transactions are recorded according to dual concept.
(x) Revenues should be recorded as early as possible and expenses as late as possible.
(xi) Prudence results in over-statement of profits.
Ans. (i) False. The cost concept is applicable to both the income statement in
connection with the expenses and balance sheet in respect of assets.
(ii) False. This statement is relevant for the convention of conservatism and not convention
of consistency.
(iii) False. Since going concern concept assumes continuity of business enterprise, income
statement has to be prepared at the end of each accounting period.
(iv) True. Money measurement concept assumes a stability in the value of money.
(v) False. Accounting has nothing to do with the qualitative aspect. Only those transactions
which are capable of being expressed in terms of money are included in the accounting
records.
(vi) False. Lower of cost or market value rule is applicable to the valuation of stock and not
the fixed assets.
(vii) False. Accrual concept implies accounting on "accrual basis."
(viii) True. In this way the private activities of the owner(s) would not be mixed up with their
business activities.
(ix) True. The double entry book-keeping system requires that each debit must have a
corresponding equal credit.
(x) False. The conservatism convention requires that revenues should be recorded in the
books of accounts when they are realised. But expenses should be recorded even when they
are anticipated.
(xi) False. Prudence does not result in overstatement of profits. On the other hand, it
decreases the amount of profit.
 Chapter 3
ACCOUNTING STANDARD AND IFRS
Q. 1. What is meant by Accounting Standards?
State briefly the merits of issuing Accounting Standards.
Ans. Accounting Standards (ASs). Codified forms of the GAAPs are called Accounting
Standards. Accounting Standards are defined as "Codified or Written statements of
accounting rules and guidelines or practices necessary for the preparation of the uniform
and consistent financial statements." Accounting Standards can alternatively be defined as
the structural framework within which financial statementspted for treatment of various items
in accounting. Accounting Standards aim to improve the credibility and reliability of the
financial statements.
In the words of T.P. Ghosh, "Accounting standards arc the policy documents issued by the
recognised expert accounting body relating to various aspects of measurement, treatment and
disclosure of accounting transactions and events".
Thus, accounting standards provide a framework for the preparation of the financial
statements.
Objectives of Accounting Standards. The objective of accounting standards is to
standardise accounting policies and practices with a view to eliminate, to the extent possible,
the non-comparability of financial statements.
Advantages or Merits of Accounting Standards:
(i) Basis of Accounting. Accounting standards provide the basis on which accounts should
be prepared.
(ii) Disclosure. Accounting standards promote better understanding of accounting statements,
the disclosure of significant accounting policies and the manner in which accounting policies
are disclosed in the statements.
(iii) Reduction of effect of diverse accounting policies and practices.
Accounting standards eliminate or reduce the effect of diverse accounting policies and
practices and make the financial statements more meaningful and comparable.
(iv) Enhancement of Creditability and reliability of financial statements. Accounting
standards provide uniform guidelines for recognition, meosurement, treatment, preparation
and presentation of financial statements. They enhance the creditability and reliability of
financial statements and also help in enhancing transparency.
(v) Ensure Comparability. Financial statements of different enteprises can be compared if
they are prepared on uniform rules and guidelines.
(vi) Facilitate informed decision making. Accounting standards facilitate informed decision
making in lending and investment and thereby minimise the risk of financial distress.
Q. 2. Explain the procedure for issuing Accounting Standards (AS) in India. Ans. The
Institute of Chartered Accountants of India (1CAI) recognised the need to harmonize the
diverse accounting policies and practices at present in use in India and constituted an
Accounting Standards Board (ASB) on 21st April, 1977.
Procedure for Issuing Accounting Standards in India. Following is the procedure adopted
by the Accounting Standards Board (ASB) for issuing accounting standards in India:
(i) ASB shall determine the broad area in which Accounting Standards need
to be formulated and list them according to their priority.
(ii) In the preparation of Accounting Standards, ASB will be assisted by Study Groups and
provisions will be made for .wide participation by the members of ICAI and others. ASB will
also hold a dialogue with the representatives of the Government, Public Sector Undertakings,
industry and other organisations for getting their views.
(iii) On the basis of the work of the study groups and the dialogue with the organisation
referred to above, an exposure draft of the proposed standard will be prepared and issued for
comments by members of the institute and the public at large.
(iv) After taking into consideration the comments received, the exposure draft is finalised by
the ASB and submitted to the council of the Institute. (v) The council considers the final draft
and on approval of the council, an accounting standard is issued under the authority of the
council of ICAI.
(vi) National Advisory Committee of Accounting Standards may recommend it, with or
without modification, to the Ministry of Corporate Affairs for notifying the accounting
standard.
Q. 3. Discuss AS-1 relating to disclosure of accounting policies.
Ans. AS-1: Disclosure of Accounting Policies. AS-1 deals with the disclosure of significant
accounting policies followed in preparing and presenting financial statements.
The following are the salient features of AS-1:
(i) Meaning of Accounting Policies. Accounting policies are the specific accounting
principles and methods of applying those principles adopted by an enterprise in preparing and
presenting financial statements.
(ii) Areas where different Accounting Policies are followed. Different accounting policies
are followed by an enterprise while charging depreciation (e.g., Straight Line Method,
Reducing Balance Method etc.) or valuing inventories (e.g., LIFO, FIFO, Weighted Average
Method etc.).
(iii) Disclosure of Accounting Policies:
• Disclose all significant accounting policies adopted in the preparation and presentation of
financial statements at one place.
• Any change in the accounting policies which has a material effect in the current period or
which is reasonably expected to have a material effect in later periods should be disclosed.
(iv) Consideration in the selection of Accounting Policies:
• The primary consideration in the selection of accounting policies by an enterprise is that the
financial statements prepared and presented on the basis of such accounting policies should
result in a true and fair view of the financial position and performance.
• The basic consideration governing the selection and application of accounting policies
should be prudence, substance over form and materiality.
Prudence. Prudence means making provisions for all expected liabilities and losses but
anticipated profits are not recognised until realised.
Materiality. Financial statements should disclose all material items. Substance over form.
The accounting treatment and presentation in financial statements of transactions and events
should be governed by their substance and not merely by the legal form.
(v) Disclosure of Fundamental Accounting Assumptions. The following have been
generally accepted as fundamental accounting assumptions.
• Going Concern. Unless otherwise stated, the users of financial statements assume that the
enterprise is a going concern, and it will continue operation for a fairly long period in future.
• Consistency. Unless otherwise stated, the users of financial statements assume that there is
no change in the accounting policies from one period to another.
• Accrual. Unless otherwise stated, the users of financial statements assume that the financial
statements have been prepared on accrual basis.
If a fundamental accounting assumption is not followed, the fact should be disclosed.
Q. 4. Explain the International Financial Reporting Standards (IFRSs).
Ans. International Financial Reporting Standards (IFRSs). These are the Accounting
Standards which are accepted globally. Now these standards are framed and brought out by
the International Accounting Standards Board (IASB). This Board was established in the
year 2001 and the "International Accounting Standards Committee" (IASC) established
long back in the year 1973 was dissolved in the year 2001. All the Accounting Standards
issued by the IASC are called International Accounting Standards (lASs) and all these
were adopted by the IASB, i.e., Board of IASC.
But all the earlier lASs still continue to be called as LASs, though some of these have been
adopted as IFRSs. Not only this, the IASB has formulated and adopted IFRSs on certain
subjects for which there were no IASs earlier. In all till date, as many as forty one (41) IASs
have been issued. Some of these have been deleted or cancelled and some have been changed
to IFRSs with new numbers allotted to them (Nine).
What is IFRS?
It means a principle based Accounting Standard (AS) drafted in comparatively simple and
clear language than most of our ASs. Our ASs are rule based.
Why IFRSs?
In today's world of globalisation, corporate entities operate and raise funds globally. Now
many of our companies have become multi-national corporations (MNCs). There was a time
(pre-economic reforms) when India was averse to MNCs but now the situation is quite
different. Our economy or country now needs to converge our own ASs with IFRSs. This is
to make our financial statements internationally comparable, transparent and uniform.
Benefits of Convergence with IFRSs.
Adoption or convergence with IFRSs helps the economy, investors, industry and the
accounting professionals in the following way:
(i) Benefits to Economy. Convergence with IFRSs benefits the economy by increasing the
pace of growth of its global business. It encourages foreign direct investment and more
foreign capital flow to the country. It increases the capital formation and thereby leads to
higher economic growth.
(ii) Benefits to Corporates. The convergence of our ASs with IFRSs is to give our
corporates benefits such as
• access to the global capital markets;
• availability of relatively low cost funds available in foreign countries;
• increased uniformity in the Accounting Standards;
• better or improved quality of financial reporting; and
• avoidance of frauds.
(iii) Benefits to Investors. They are interested to get relevant, reliable, timely and
comparable financial information from enterprises - domestic or foreign. Financial statements
prepared using common set of accounting standards such as IFRSs would help them to
understand investment opportunities in a better way.
(iv) Benefits to Industry. Financial Statements based on global accounting standards will be
more transparent and thus create more confidence in the minds of investors. This will help the
industry to raise capital from markets at lower cost. The task of maintaining different set of
financial statements would be eliminated by adoption of IFRSs.
(v) Benefits to accounting professionals. This convergence of accounting practices would
foster the globalisation of the accounting profession. This will make easier for professionals
in one country to work in other countries.
(vi) Comparability. Common accounting standards such as IFRSs improve comparability of
financial statements of a company at the national as well as international level.
Q. 5. Distinguish between Indian Accounting Standards (IND ASs) and Accounting
Standards (ASs).
Ans. IFRS adoption means adopting the 1FRS (International Financial Reporting Standards)
and IFRS Convergence means formulating Indian Accounting Standards more or less in line
with IFRS. The main points between Ind ASs and ASs are as follows:
(i) Ind ASs are of regularity nature. ASs are in the nature of guidance notes. In other words,
ASs are rule based whereas Ind ASs are principle based.
(ii) Ind ASs emphasize on the substance of the transaction, irrespective of the legal form.
ASs, barring some exceptions, are based on legal rules. For example, preference shares are
classified as equity under ASs, whereas they are classified as liability under Ind ASs.
(iii) Ind ASs, barring exceptions, require fair value of assets and liabilities, whereas in case of
ASs, there is no equivalent standard. Accounting Standards follow the old age concept of
historical concept.
(iv) ASs are based on international Accounting Standards (IASs) formulated by International
Accounting Standard Board (IASB). But bid ASs are based on Standards issued by
International Financial Reporting Standard Board.
(v) ASs are drafted in technical language with more than one option as in the case of ASs-2
(Accounting Standard on Inventory Valuation). But Ind ASs are drafted in a lucid (simple
and clear) language.
(vi) ASs are issued under the authority of the council of ICAI while the Ind ASs require the
notification from Ministry of Corporate Affairs for date of issue of various Ind ASs.
(vii) ASs do not ensure uniformity in accounting information. But Ind Ass would ensure the
importance and quality of financial reporting.
(viii) ASs are treated with trust and reliance by the international investors. But Ind ASs based
on 1FRS would lead to increased trust and reliance because IFRS is considered as standard
reporting system or method for the preparation of credible financial statements.
Q. 6. State giving reasons in brief, whether each of the following statement is 'TRUE' or
'FALSE':
(i) Accounting standards are issued by the Institute of Cost and Works Accountants of
India.
(ii) "IFRSs coverage" means Indian Accounting Standards converged with
IFRSs.
(iii) Accounting standards in India are mandatory.
(iv) TCA1 is the premier body of Accounting in our country.
(v) Accounting standards and accounting concepts are one and the same thing.
Ans. (i) False. In India accounting standards are formulated by Accounting Standards Board
and then issued by the Council of the Institute of Chartered Accountants of India.
(ii) True. IFRS coverage means Indian Accounting Standards are more or less in line with
IFRS.
(iii) True. According to the Institute of Chartered Accountants of India, accounting standards
issued by it shall be mandatory from the respective dates mentioned in the Accounting
Standard(s). Moreover Section 211 of the Companies Act provides that every profit and loss
account and balance sheet shall comply with the accounting standards.
(iv) True. ICAI is the premier body of accounting.
(v) False. Accounting concepts are general statements and are not intended to develop
solution to specific issues in financial accounting. On the other hand, accounting standards
aim at providing solutions to specific issues inventory valuation, depreciation of fixed assets
etc.
 Chapter 4
ACCOUNTING PROCESS
Q. 1. Write a short note on Accounting Process.
Ans. Accounting Process or Accounting cycle refers to the sequence of accounting
procedures used to record, classify and summarise the business transactions.
Following are the steps involved in accounting process:
(i) Recording. Recording the financial transactions in the primary book, i.e., Journal is the
first step. It is also called Journalising. Journal may be subdivided into Cash Book, Purchase
Book, Sales Book, Purchase Return Book, Sales Return Book, Bills Receivable Book, Bills
Payable Book and Journal Proper.
(ii) Classifying. Transactions recorded in the Journal are classified into various accounts in
the secondary book called Ledger. In other words, transactions recorded in the Journal are
transferred to the respective accounts opened in the Ledger. This process in known as
Posting.
(iii) Summarising. After preparing ledger, the accounts are balanced and list of all the
accounts with their balance is prepared. The list prepared is called Trial Balance.
(iv) Preparing final accounts. It is the last step of accounting process. It includes preparing
Trading and Profit & Loss Account and Balance Sheet. These are also called Income
statement and Position statement respectively.
Q. 2. What is Double Entry System?
What are its advantages?
Ans. Every business transaction has two aspects, viz (i) receiving of value and (ii) giving of
value. To have a complete record of a business transaction, both these aspects must be
recorded in the books of accounts. Therefore, two entries are required to be made. These two
entries are made in the two accounts — on the debit side of one account and on the credit side
of another account. In other words, for every debit there is a corresponding credit and every
debit has a corresponding credit. The recording of the two fold effect in the books is known
as "Double Entry System". The Double Entry system is so named since it records both the
aspects of a transaction. We may define the double entry system as: "The double entry system
is that system which records both the aspects of a transaction".
For example, when trader A purchases goods worth Rs. 20,000 from B on credit, two
accounts are affected at the same time which are (1) Purchase Account and (2) B's Account.
Goods when purchased are coming into the business and so Purchase Account is to be
debited. This account is receiving the benefit. On the other hand, B's Account will be credited
because he is supplying the goods, thus giving the benefit.
Advantages of Double Entry System:
(i) Complete record of transactions. It maintains a complex record of all business
transactions.
(ii) A check on Arithmetical accuracy of accounts. It helps to prepare a trial balance and
thereby to test the arithmetical accuracy of the books.
(iii) Ascertainment of financial results. The profit earned or loss suffered during a period
can be ascertained by preparation of Profit & Loss Account.
(iv) Ascertainment of financial position. It helps to ascertain the exact financial position of
the business at the end of the accounting period, through preparation of the Balance Sheet.
(iii) Details about every account. This system permits accounts to be kept in as much detail
as necessary and, therefore, offers significant information regarding every account.
(vii) Less possibility of fraud. As the system contains checks and counter checks, mistakes
can be avoided and frauds can be easily detected.
Q. 3. Explain the classification of Accounts with examples.
Ans. Modern Classification or based on Accounting equation. In this approach accounts
are classified as follows:
(i) Asset Accounts. Assets indicate the resources which the firm enjoys. These accounts may
be in the form of cash, cash at bank, stock of goods, debtors, land, building, machinery etc.
(ii) Liability Accounts. Liabilities indicate the amounts which the firm owes to outsiders.
These accounts include creditors, bills payable, overdraft, loan etc.
(iii) Capital Accounts. Capital indicates the amount which the proprietor can claim against
the firm. This account includes capital (proprietorship) and drawings accounts.
(iv) Expenses Accounts. Expenses indicate the amounts which have been spent or even lost
in carrying on business operations. These accounts include rent, salaries, wages, interest,
discount, commission etc.
(p) Revenue Accounts. Revenues indicate the amounts which, as a result of operations, are
earned by the firm. These accounts include sales, rent received, interest received etc.
Traditional classification of accounts. In this approach accounts may be classified as under:
1. Personal Accounts. These accounts are related to persons, debtors, or creditors. Examples
of these accounts are: Ram's Account, Shyam's Account, Satish & Co's Account etc.
2. Real Accounts. These accounts relate to the tangible or intangible real assets. Tangible—
Land Account, Intangible—Goodwill Account.
3. Nominal Accounts. These accounts relate to Expenses, losses, profits & gains. Expenses:
Purchase Account, Loss: Loss by fire Account Profits & Gains: Sales Account, Discount
received Account.
Q. 4. Give the rules of debit and credit with examples.
Ans. Rules of Debit and Credit are as follows:
(i) For any asset account. Debit means increase and credit means decrease. When there is an
increase in the amount of an asset its account is debited and if there is a decrease in the
amount of the asset concerned, its account will be credited. For example, a business concern
purchases furniture for Rs. 25,000 the furniture account will be debited by Rs. 25,000 as the
asset is increased by the same amount. (ii) For any liability account. Debit means decrease
and credit means increase. If there is an increase in the amount of liability, its account is
credited and if there is a decrease in the amount of the liability concerned, its account will be
debited. For example, a business concern borrows Rs. 50,000 from Ram. Ram's account will
be credited since Rs. 50,000 are now owed to him. If later, the business concern repays the
loan, Ram's account will be debited as the liability is decreased.
(iii) For capital account. Debit means decrease and credit means increase. If there is an
increase in the amount of capital, its account is credited and if there is a decrease in the
amount of capital, the capital account is debited. For example, the proprietor of the business
concern contributes additional capital Rs. 20,000. The capital account will be credited by Rs.
2Q,000. If he withdraws Rs. 8,000 from business, the capital account will be debited by this
amount because the amount of capital is decreased. (iv) For any revenue account. Debit
means decrease and credit means increase. Thus, if revenue increases it is credited and if
revenue decreases, it is debited. By an increase in revenue, the proprietor's capital also
increases. Therefore, the rule regarding capital account is also applicable here. For example,
if goods worth Rs. 2,000 are sold, it results in an increase in revenue, therefore revenue
account will be credited.
(v) For any expense account. Debit means increase and credit means decrease. If there is an
increase in the expense then it will be debited and if there is a decrease in expense, it will be
credited. The expense results in a decrease in capital. A decrease in capital is also recorded
on the debit side. For example, if Rs. 10,000 is paid for salary, this amount will be recorded
on the debit side of salary account, because it reduces the capital.
Rules given above are being summarised below:
(i) Increases in assets are debits; decreases are credits.
(ii) Increases in liabilities are credits; decreases are debits.
(iii) Increases in owner's capital are credits; decreases are debits.
(iv) Increases in expenses are debits; decreases are credits.
(v) Increases in revenue are credits; decreases are debits.
The above rules may be stated as follows:
(i) Debit the receiver and Credit the giver or Debit the debtor and Credit the creditor.
(ii) Debit what comes in and Credit what goes out.
(iii) Debit all expenses and losses and Credit all gains and incomes.
Q. 5. State briefly the subsidiary books, normally used in the Double Entry System.
Ans. The following subsidiary books are used in Double Entry System:
(i) Purchase Book. Purchase book is used to record credit purchase of goods only.
(ii) Sales Book. It is used to record credit sale of goods only.
(iii) Returns Outward Book. It is used to record all goods returned by the trader to his
supplier. This book is also called Purchase Return Book.
(iv) Returns Inward Book. It is used to record all goods returned to us by our customers.
This book is also called Sales Return Book.
(v) Bills Receivable Book. It is used to record Bills Receivable received by us.
(vi) Bills Payable Book. It is used to record bills accepted by us.
(vii) Cash Book. It is used to record Cash transactions only i.e., cash received and paid.
(viii) Journal Proper. Journal proper is used to record all transactions for which there is no
special subsidiary book. This book records opening entry, closing entry, adjusting entry,
credit purchase and sale of assets, entries of dishonour etc.
Q. 6. What is ledger?
How would you post the journal into ledger.
Ans. The book in which all the accounts are kept is called a 'ledger'. A ledger may be in a
bound or loose-leaf form. It is the principal book of accounting.
Ledger plays very important functions in accounting. When a Balance Sheet is prepared, the
balances of Assets, Liabilities and Capital Accounts are takan from the Ledger. When Profit
& Loss Account is prepared, the balances of expenses and revenue accounts are taken from
the Ledger. In this way, it performs many important functions.
Posting the entries into Ledger. Posting is the process whereby the debits and credits of the
journal entries are entered into the Ledger. The Journal indicates the accounts to be debited
and credited and also the amounts involved. The following are the rules for posting
transactions:
(i) The debit side of the journal entry is posted to the debit side of the Ledger account. In
particulars column reference is given of that fact which is put on the credit side of the journal
entry.
(ii) The credit side of the journal entry is posted on the credit side of the account. In
particulars column reference is given of that fact which is put on the debit side of the journal
entry.
It is a convention that the word 'To' is affixed in the particulars column on the debit side and
the word By' is affixed on the credit side. It is merely a custom to write these words.
Example, Consider the following journal entry.
S. No. Particulars L.F Dr. (Rs.) Cr.(Rs.)
.
2015 Fumiture Account To D. Saran & Dr. 10,000 10,000
Mar. 16 Co.
In the above case, the amount of Rs. 10,000 will be debited to the Furniture Account and
credited to D. Saran & Co. In the Furniture Account in the particulars column we shall write
"To D. Saran & Co." In the account of D. Saran & Co. will be written;
"By Furniture Account." The two accounts will appear as follows:
Dr. Furniture Account Cr.
Date Particulars L.F. (Rs.) Date Particulars L.F. (Rs.)
2015 To D. Saran & Co. 10,00
Mar 16 0
Dr. __________M/S D. Saran & Co. Cr.
Date Particulars L.F. (Rs.) Date Particulars L.F. (Rs.)
2015 By Furniture A/c 10,000
Mar.
16
Q 7. What is a Trial Balance. What are the objectives of preparing a trial balance.
Ans. Trial Balance is a statement which shows names and balances of all the accounts in the
ledger and the cash and bank balances. It is not an account. It is prepared an a specific date
by taking the balances of various accounts as on that date.
The format of the trial balance is given below:
S. No. Partial, L.F Dr. (Rs.) Cr.(Rs.)
.
Total — —
If all transactions are correctly recorded in the ledger and the balances are correctly
ascertained, the total of the 'Debit Column' and 'Credit Column' will be same. In this case, the
trial balance is said to agree.
Objectives of Preparing Trial Balance. The main objectives of preparing a trial balances
are as follows:
(i) To cheque the arithmetical accuracy of the books of accounts.
(ii) To help in detecting the errors.
(iii) To facilitate the preparation of financial statements i.e., Trading and Profit & Loss
Account and Balance Sheet.
Q. 8. Explain the limitations of trial balance.
Or, Explain the errors which are not disclosed by trial balances.
Ans. It is true that the agreement of trial balance is not a conclusive proof of the accuracy of
the books of accounts since certain types of errors are not disclosed by the trial balance. The
following types of errors are not disclosed by the trial balance:
(i) Errors of principle, i.e., errors which arise due to incorrect application of the principles of
accounting.
(ii) Compensating errors, i.e., group of errors which are committed in such a way that one
mistake is compensated by the other or others and the trial balance still agrees.
(iii) Errors of complete omission, i.e., an entry has not at all been posted in the ledger.
(iv) Posting correct amount and on the correct side but in the wrong account.
(v) Recording wrong amount in the books of original entry i.e., journal.
(vi) Recording both aspects of a transaction twice in the books of accounts.
Q. 9. Mention the errors which are disclosed by trial balance.
Ans. Following errors are disclosed by trial balances:
(i) Wrong balancing of an account.
(ii) Posting an account on the wrong side.
(iii) Wrong totalling of the subsidiary books.
(iv) Wrong posting i.e., recording the wrong amount.
(v) Omitting to post an amount from a subsidiary.
(vi) Omitting to post the totals of subsidiary books into ledger.
(vii) Omitting to enter the cash book balance in the trial balance.
(viii) Omitting to record the balance of an account in the trial balance.
(ix) Entering a balance in the wrong column of the trial balance.
(x) Totalling the trial balance wrongly.
Q. 10. Write a short note on: Suspense Account.
Ans. A suspense account is an account in which the amount of difference in trial balance is
put till such time that errors are located and rectified. If the debit side of trial balance is more
than the credit side, then the difference is put on the credit side of the suspense account. If the
credit side of trial balance is more than the debit side then the difference is put on the debit
side of the suspense account. Debit balance in the suspense account is shown on the assets
side of the balance sheet, while the credit balance is shown on the liabilities side. After
opening this account, one-sided errors are rectified by passing journal entry through suspense
account. Posting of these entries is made in the suspense account when all the errors leading
to disagreement of the trial balance are rectified and the suspense account is automatically
closed.
Q. 11. What are final accounts?
How are they prepared?
Ans. Final Accounts. After the preparation of a Trial Balance the next level of work is the
preparation of Final Accounts also known as Financial Accounts. The preparation of final
accounts involves the following:
1. Preparation of a Trading Account;
2. Preparation of a Profit & Loss Account;
3. Preparation of a Balance Sheet.
1. Trading Account. Preparation of Trading Account is the first stage in the process of the
preparation of final accounts. It is prepared to find out gross profit or gross loss. Gross Profit
or Gross Loss is the difference between the 'Cost of goods sold' and 'Sales'. If the sales are
more than cost of goods sold , the difference between the two is Gross Profit. On the other
hand, if the cost of goods sold is more than the sales, the difference is Gross Loss. Opening
stock, Purchases, Direct Expenses are entered on the debit side of the Trading Account and
items shown on the right side namely, Sales and Closing Stock are entered on the credit side
of the Trading Account. If the total of the credit side is more than that of the debit side, the
difference is Gross Profit which is entered on the debit side of the Trading Account. If the
total of the debit side is more than that of the credit side, the difference is Gross Loss which is
entered on the credit side of the Trading Account. Gross Profit or Gross Loss will be
transferred to Profit and Loss Account.
2. Profit & Loss Account. Gross Profit or Gross Loss is taken to Profit & Loss Account. All
the remaining expenses and losses which have not been entered into Trading Account are
shown on the debit side. Income and gains, other than sales, will be shown on the credit side.
The difference between the two sides is either net profit or net loss which is taken to the
capital account of the proprietor. Net Profit is added to the Capital and Net Loss is deducted
from the Capital.
3. Balance Sheet. Balance sheet may be defined as 'A statement which sets out the assets and
liabilities of a firm as at a certain date. It is true only on that date and not later. All assets and
liabilities are shown in the Balance Sheet. On the right hand side are shown the various assets
and on the left hand side are shown the liabilities and capital of the firm. Balance Sheet is
prepared to ascertain the financial position of the business at the end of the financial year.
Q. 12.What are the qualitative characteristics of accounting information?
Ans. Qualitative characteristics of Accounting information. Accounting information must
possess some qualitative characteristics. These are the attributes that make the information
provided in financial statement useful to users.
The four main qualitative characteristics are:
1. Reliability. Accounting information must be reliable. It should be free from bias and
personal influence or judgement. However, it is not possible to record all transactions in this
manner. For example, an entry for the provision for doubtful debts, In this case, a provision is
made for debts that are considered doubtful for recovery but the exact amount of bad debts
can never be determined in advance.
2. Relevance. Accounting information must be relevant to the user. Information is relevant if
it meets the needs of the user in decision making. For example, dividend paid by a company
in the previous year is relevant information for the investors. This is because it provides a
basis for forecasting dividends in future years and also provides a review of the past
performance of the company. Thus, the accountants must study the needs of the various users
and determine which information is relevant to the existing and potential decision makers.
3. Uderstandability. Accounting information must be presented is a manner for the users to
understand. It is assumed that the users have a basic knowledge of business transactions and
they devote time and effort in analysing the financial statements. However, the accountant
has a basic responsibility to describe business transactions clearly and concisely.
4. Comparability. Accounting information is more useful when it is comparable with similar
information for the same enterprise in different periods. It is also useful when similar
information across different enterprises during the same period can be compared.
Comparability is therefore a useful quality of accounting information. To achieve
comparability, consistency and disclosure of accounting policies are necessary.
Q. 13. Distinguish between Capital Expenditure and Revenue Expenditure. Ans. Capital
Expenditure and Revenue Expenditure:
(i) Capital expenditure relates to the acquisition of fixed assets and revenue expenditure
relates to the acquisition of current assets.
(ii) Capital expenditure is meant for enduring profit i.e., for more than one accounting period.
Revenue expenditure is meant for current accounting period only.
(iii) Capital expenditure is of non-recurring nature while revenue expenditure is of recurring
nature.
(to) Capital expenditure helps to increase the earning capacity of the business or to reduce the
operating cost. Revenue expenditure is incurred to maintain the existing earning capacity of
the business.
(v) Capital expenditure is capitalised while revenue expenditure is transferred to the Trading
or Profit & Loss Account. In other words, capital expenditure is entered into the Balance
Sheet and revenue expenditure is entered into the Trading and Profit & Loss Account.
(vi) Capital expenditure is not matched against capital receipts. Revenue expenditure is
matched against revenue receipts.
(vii) Capital expenditure may be incurred before the commencement of the business.
Revenue expenditure is incurred only after the commencement of business.
Q. 14. Write a short note on: Deferred Revenue Expenditure. How is it different from
Capital Expenditure?
Ans. Deferred Revenue Expenditure. Deferred revenue expenditure is revenue expenditure
by nature but it is not treated as revenue expenditure on the grounds that its benefit is not
fully exhausted in the accounting period in which it is incurred. The Guidance Note on
"Terms used in Financial Statements', issued by the Institute of Chartered Accountants of
India, (1CAI), defines "deferred revenue expenditure as those expenditures for which
payment has been made or a liability incurred but which is carried forward on the
presumption that it will benefit over a subsequent period or periods."
Deferred revenue expenditure is for the time being deferred from being charged against
revenue or to income. The unwritten off portion of the deferred revenue expenditure is shown
on the assets side of the Balance Sheet under the head "Miscellaneous Expenditure".
The examples of deferred revenue expenditure include cost of heavy advertisement campaign
to launch a new product or to explore a new market, and research and development
expenditure.
Q. 15. Write a short note on: Capital Receipts and Revenue Receipts.
Ans. Capital Receipts. Receipts of a non-recurring nature and meant for some specific
purpose are known as capital receipts. They are shown in the Balance Sheet. Capital
receipts are in the form of contribution from owner, loans and proceeds from sale of fixed
assets of the business.
Revenue Receipts. Receipts that are obtained in the course of normal business activities are
known as revenue receipts. Cash from sale of goods, rent received, commission received etc.,
are regarded as revenue receipts. They are shown in the Profit & Loss Account.
Q. 16. Distinguish between Prepaid Expenses and Deferred Revenue Expenditure.
Ans. Both prepaid expenses and deferred revenue expenditure are of revenue nature but the
nature of benefit to be available from these are different. The benefits from prepaid expenses
can be precisely estimated but that is not so in case of deferred revenue expenditure. Heavy
advertising to launch a new product is deferred expenditure, the benefit from it will be over
the next three to five years but we cannot say precisely how long.
On the other hand, insurance premium paid say for the year ending 30 th June, 2015, when an
accounting year ends on 31st March, 2015, will be an example of prepaid expense to the
extent of premium relating to three months i.e., from 1st April, 2015 to 30th June, 2015.
Moreover, deferred revenue expenses are considered fictitious assets but prepaid expenses
are considered as current assets.
Q. 17. What is meant by Grouping and Marshalling in connection with the Balance
Sheet of a business@@ How are these done?
Ans. Balance Sheet is a statement of the financial position of a firm at a given date. This
given date is the date of close of the financial year. Balance Sheet has two sides: the Assets
side and the Liabilities side. It is not an account but is only a statement. This is done by
Grouping and Marshalling of the various items in the Balance Sheet. The term "Grouping"
means putting together various items of the same or common nature under one heading.
However "Marshalling" means or refers to the order in which the various assets and
liabilities are stated in the Balance Sheet. This may be done according to either of the two
methods:
(i) Liquidity order (ii) Permanence order
Under the liquidity order method, assets are arranged in the order of liquidity i.e., most liquid
assets (such as Cash, Bank) are shown or listed first and the least liquid asset is shown in the
last. Similarly liabilities are also arranged in order of the urgency of payment. Under the
permanence order of placement of items in the Balance Sheet, this very order is almost
reversed.
According to the liquidity order, the form of Balance Sheet would be like this:
Liabilities Assets

Bank Overdraft Cash

Bills Payable Bank
Creditors Bills Receivable
Outstanding Expenses Debtors
Incomes Received in Advance Inventories
Long-term Liabilities (e.g. Bank Loans) Prepaid Expenses (if any)
Borrowings (e.g. Debentures etc.) Accrued Incomes
Capital Investments
Plant and Machinery
Buildings
 Furniture
Land
Deferred Revenue expenditures (if any)
Treatment of Various Adjustments
Adjustment Adjustment Entry Treatment in Treatment in Treatment in
Trading A/c Profit & Loss Balance Sheet
A/c
1. Closing Stock Closing Stock A/c Dr. Shown on the Shown on the
credit side assets side
To Trading A/c
2, Outstanding Expenses A/c Dr. Added to the Added to the Shown on the
Expenses respective respective liabilities side
expense on expense on
the debit side the debit side
Deducted Deducted
from the res- from the
pective respective
expense on expense on
the debit side the debit side
To Outstanding
Expenses A/c

3. Prepaid or Prepaid Expenses A/c Dr. Shown on the

unexpired assets side

expenses To Expenses A/c

4. Accrued Accrued Income A/c Dr. Added to the Shown on the

Income (Income respective assets side
income on the
credit side
Deducted
from the
respective
income on the
credit side
Shown on the
debit side
earned but not To Income A/c
received)

5. Unearned Income A/c Dr. Shown on the

Income (Income liabilities side

received in To Unearned Income

advance) A/c

6. Depreciation Depreciation A/c Dr. Deducted

from the
concerned
asset on the
assets side
To Asset A/c

7. Interest on Interest on Capital A/c Dr. Shown on the Added to the

Capital debit side capital on the
liabilities side
To Capital A/c

8. Interest on Drawings A/c Dr. Shown on the Added to the

Drawings credit side drawings and
then deducted
from capital
Added to the
loan on the
liabilities side
To Interest on
Drawings A/c

9. Interest on Interest on Loan A/c Dr. Shown on the

Loan debit side

(taken from To Loan A/c

someone)

10. Additional Bad-Debts A/c Dr. Added to Deducted

(further) Bad Bad-debts from debtors
(given in Trial on the assets
Balance) on side
the debit side
debts To Sundry Debtors
A/c

11. Provision for Profit & Loss A/c Dr. Added to Deducted
Doubtful Debts Bad-debts on from sundry
the debit side debtors on the
assets side
To Provision for
Doubtful Debts A/c

' Adjustment Adjustment Entry Treatment in Treatment in Treatment in

Trading A/c Profit & Loss Balance Sheet
A/c
12. Provision for Profit & Loss A/c Dr Shown on the Deducted
Discount on . debit side from Debtors
on
Debtors To Provision for as a separate the assets side
Discount on Debtors item
A/c
13. Abnormal Insurance Company A/c Dr Total amount Amount not Amount
loss of stock . of loss is recovered recovered
from from
Profit & Loss A/c Dr deducted the insurance the insurance
. from company is company is
purchases
To Purchases A/c on the debit shown on the shown on the
side debit side assets side
14. Charity in the Charity A/c Dr Deducted Shown on the
form of goods . from debit side
purchases
To Purchases A/c on the debit
side
15. Goods Free samples A/c Dr -do- Shown on the
distributed as . debit side
free
samples To Purchases A/c
16. Drawings in Drawings A/c Dr -do- Deducted
goods . from capital
on
• To Purchases A/c the liabilities
side
17. Manager's Manager's Commission Dr Shown on the Shown on the
Commission A/c . debit side liabilities
To Outstanding side
Commission A/c
18. Sale of goods (i) Sales A/c Dr Deducted Deducted
on approval . from sales on from debtors
on
basis To Debtors A/c the credit side the assets side
(Sale value of goods)
(ii) Closing stock A/c Dr Added to Added to
. closing stock closing stock
on on
To Trading A/c the credit side the assets side
(Cost price of goods)
19. Goods sold Debtors A/c Dr Added to Added to
but omitted . sales on the Debtors on
the
to be recorded To Sales A/c credit side assets side
20. Goods Purchases A/c Dr Added to Added to
purchased but . purchases on Creditors on
the
omitted to be To Creditors A/c the debit side liabilities side
recorded
 UNIT
II
Business Income
Chapter 5: MEASUREMENT OF BUSINESS INCOME
Q. 1. What is meant by Business Income and Economic Income@@ How is it
measured@@ Outline its features.
Ans. Business Income, in accounting, we are mainly concerned with Business Income; a
term which is synonymous with the term Business Profit. It can be defined as the excess of
revenue over expenditure incurred by the business over a period.
"The Net Income for the period is the excess of revenues realised during the period by a
specific accounting entity over the cost expired (included losses) during the same period."
-Smith
"The Realised Net Income of an enterprise measures its effectiveness as an operative unit and
is the change in its net assets arising out of (a) the excess or deficiency of revenue compared
with related expired cost and (b) other gains or losses to the enterprise from sales, exchange
or other conversion of assets." —American Accounting Association
As per American Accounting Association, the term Business Income includes realised net
income and not income alone. It means, income will be considered to be Business Income
only when it has been actually realised. Notional Income such as appreciation in the market
value of the assets of the firm cannot be taken as Business Income unless the assets have
really been disposed off.
In short, the computation of income involves, matching the expired cost or expense with the
revenue.
Net Income or Profit = Revenues - Expenses
Procedure for measurement of Business Income. The following steps are needed for
measurement of business income:
Step 1. Determination of accounting period. For measurement of income, the determination
of accounting period is the first step. Now-a-days most of the business enterprises in India
maintain accounts on financial year basis i.e., April 1st to March 31st as their accounting
period.
Step 2. Recognition of revenue. The second step in the measurement of business income is
identification of revenue relating to the accounting period Revenue is recognised on the basis
of realisation concept.
Step 3. Recognition of expenses and matching price. The third step in the measurement of
income is identification of expenses and matching of cost with revenue. An expense is
incurred when goods or services are consumed in the process of earning revenue. An expense
is recognised in the period in which associated revenue is recognised. Matching principle
requires that the revenue and expenses are recognised for an accounting period on a certain
basis. It may be (i) cash basis; (ii) accrual basis or (iii) hybrid basis. Matching of cost with
revenue on accrual basis is the most appropriate basis.
Features of Business Income:
(i) Business Income is based on the actual transactions entered into by the firm, primarily
revenue arising from the sale of goods/or services minus the costs necessary to achieve these
sales.
(ii) It is based on accounting period convention in the sense that it refers to the financial
performance of the business firm for a given period.
(iii) Business Income is based on the revenue principle.
(iv) It requires the measurement of expense in terms of historical cost.
(v) Accounting Income is based on Matching Principle.
(vi) It ignores unrealised gain/losses in the value of fixed assets.
(vii) Business Income is ex-post income. Ex-post income is the excess of the value of the
capital for the current period over that of the base period with reference to future expected
returns on current period basis.
Economic Income. Accountants and economists agree as to what income is, but they differ in
their approach to measurement of income. According to economists, the term 'Income' means
"the current flow of goods and services over a period of time." For example, if an economist
says that the national income of India during 2015-16 was Rs. 1,20,000 crores, he means,
goods and services worth Rs. 1,20,000 crores were produced during 2015-16. An economist
is mainly concerned with individual (per capita) or National Income.
The economic concept of income is based on Hick's definition of income as, "The amount
which a man can consume during a period and still remain as well off at the end of the period
as he was at the beginning." The emphasis is clearly on the words "as well off". Unlike
Business Income,. Economic Income is measured in real terms by eliminating the effect of
the changing value of money due to inflation or deflation. Moreover, Economic Income
results from the change in the value of assets and capital at the beginning and at the end of
the period rather than from the matching of revenues and expenses. That is why, the income
measured by economists is referred to as "Capital Maintenance Concept of Income". In short,
the basis of definition of Economic Income is consumption in the given period plus change in
the value of capital.
Which concept is more useful?
While determining the income of an individual or a society, an economist considers the real
income which, of course, is subject to high degree of subjectivity of value. On the other hand,
an accountant is mainly concerned with the monetary income, i.e., income earned by a
business capable of being expressed in monetary terms. Thus, an accountant is more exact in
the computation of income as compared to economists. An accountant's approach towards
measurement of income is practical and serves the purpose. In other words, the concept of
Accounting Income is more useful as compared to Economic Income.
Q. 2. What are the objectives of Income Measurement?
Ans. Objectives of Business Income Measurement. The following are the objectives of
business income measurement:
(i) Net Income or profit is calculated for assessing the overall performance or efficiency of
the business.
(ii) Profitability of the capital projects can be ascertained with the help of net income, a
project yielding higher return is favoured. Thus, net income reporting is a helpful technique.
(iii) The future course of the business can be predicted on the basis of previous years' income
figure.
(iv) Determination of net income lays emphasis on the need to distinguish between invested
capital and profit. This distinction is helpful in paying dividend out of income only and not
out of capital. Without the information of profit, it is possible that dividends may be paid out
of capital, which is not desirable. Dividends should always be paid out of revenue profits.
(v) Income tax is levied on individuals on the basis of their income. Similarly income
tax/corporate tax is levied on joint stock companies on the income earned by them. Therefore,
net income or profit earned by business firms acts as a basis for ascertaining the tax liability.
(vi) In evaluating the use of scarce resources, the use of income figure is a very helpful guide.
The activities which give more profit on scarce resources are to be preferred to increase the
wealth of the business.
(vii) The employees of business enterprises are interested in the amount of net profit earned
by the enterprise. If the enterprise earned more income then they can also legitimately
demand higher remuneration in the form of salaries, wages, bonus etc.
Q. 3. State whether each of the following statements is 'TRUE' or FALSE': (i) Net
income or profit is the amount accruing to the owners.
(ii) In the process of determination of net income it is the revenue that is matched with
the expenses.
(iii) The concept of accounting income strictly follows all the conventions of accounting.
(iv) The business income also includes the personal income of the proprietor of the
business.
(v) In case of inflationary condition, charging of depreciation on original cost of the
fixed asset will result in over-statement of business income. Ans. (i) True
(ii) False
(iii) False
(iv) False
(v) True
 Chapter 6
REVENUE CONCEPTS, REVENUE RECOGNITION PRINCIPLES RECOGNITION
OF EXPENSES
Revenue Recognition Concept. Accounting Standard 9 deals with the recognition of
revenue items in the Profit and Loss Account of an enterprise. It lays down the conditions to
recognise revenue from various transactions. Revenue from sales or service transactions
should be recognised only when (/') the seller of goods has transferred the property in the
goods for a certain price to the buyer, and (ii) no significant uncertainty exists regarding the
amount of consideration. In a transaction involving the rendering of services, performance
should be measured either under the completed service contract method or under the
proportionate completion method. An enterprise should underline the circumstances in which
revenue recognition has been postponed due to the effect of uncertainties. It is considered as
revenue of the period in which it is properly recognised.
Measurement of Expenses. For measurement of expenses we must know as to when an
expense in recognised. Expense is give recognition in the period in which is:
(i) a direct identification or association with the revenue of the period, as in case of sale of
goods delivered to customers;
(ii) as an indirect association with the revenue of the period as in the case of office salaries or
rent, or
(iii) a measurable expiration of asset cost even though not associated with the production or
revenue for the current period, as in case of loss by fire or theft.
Business Income is the outcome of excess of revenue of over related expired cost (expenses).
It involves matching of cost with revenue.
Q. 1. Explain the salient features of AS-9 as to revenue recognition.
Ans. Revenue Recognition: Salient Features of AS-9. The following are the salient features
of Accounting Standard-9:
(i) Applicability. AS-9 explains how or when the revenue is to be recognised so far as it
affects the profit and loss account of an enterprise. This AS only deals with matters relating
to revenue which arise in the ordinary course of the business activities of an enterprise and
includes only:
• sale of goods;
• rendering of services; and
• use by others of enterprise resources against payments such as interests, royalties etc.
(ii) Non-Applicability. AS-9 does not deal with the following:
• Revenue arising from construction contracts.
• Revenue arising from hire purchase, lease agreement.
• Revenue arising from government grants and other similar subsidies.
• Revenue of insurance companies arising from insurance contracts.
(iii) Definition and Measure of Revenue. Revenue is the gross inflow of cash receivables or
other consideration arising in the course of ordinary
activities of an enterprise from the sale of goods, from the rendering of services, and from the
use by others of enterprise resources yielding interest, royalties and dividends.
Revenue is measured by the charges made to customers or clients for goods supplied and
services rendered to them and by the charges and rewards arising from the use of resouices by
them. In an agency relationship, the revenue is the amount of commission and not the gross
inflow of cash receivables or other consideration.
(iv) The following items are not included in the term 'Revenue' for the purpose of AS-9:
• Realised gains resulting from the disposal of, and unrealised gains resulting from the
holding of non-current assets e.g., appreciation in the value of fixed assets;
• Unrealised holding gains resulting from the change in value of current assets, and the
natural increases in herds and agricultural and forest products;
• Realised or unrealised gains resulting from changes in foreign exchange rates and
adjustments arising on the translation of foreign currency financial statements;
• Realised gains resulting from the discharge of an obligation at less than its carrying amount;
• Unrealised gains resulting from the restatement of the carrying amount of an obligation.
(v) Timing of Revenue Recognition. Revenue recognition means identifying the revenue for
a particular accounting period. It is mainly concerned with the recognition of revenue in the
statement of profit and loss of an enterprise.
• Sale of Goods. Revenue from sale of goods is recognised when all the following conditions
have been satisfied:
— The seller of goods has transferred to the buyer the property in the goods for a price.
— All significant risks and rewards of ownership have been transferred to the buyers.
— The seller retains no effective control of the goods transferred to a degree usually
associated with ownership.
— No significant uncertainty exists regarding the amount of the consideration that will be
derived from the sale of the goods.
• Rendering of Services. Revenue from service transactions should be recognized when:
— No significant uncertainly exists regarding the amount of consideration that will be
derived from rendering the service.
— At the time of performance it is reasonable to expect ultimate collection.
• Use of Enterprise Resources. Revenue arising from the use by others of enterprise
resources yielding interest, royalties and dividend. These revenues are recognised on the
following bases:
Item Basis of Recognising Revenue
(i) Interest On a time proportion basis.
(ii) Royalties On accrual basis as per the terms of agreement.
(iii) Dividend When the declaring company declares dividend.
Notes. 1. Revenue arising from the use by others of enterprise resources yielding interest
royalties and dividends should only be recognised when no significant uncertainity as to
measurability or collection exists.
2. When interest, royalties and dividends from foreign countries require exchange permission
and uncertainity in remittance is anticipated, revenue recognition may need to be postponed.
(vi) Amount of Revenue. The amount of revenue arising on a transaction is usually
determined by agreement between the parties involved in the transaction. The amount of
revenue depends on (a) its measurability and (b) its ultimate collection.
(viii) Disclosure Requirements. In addition to the disclosure required by Accounting
Standard-1 on Disclosure of Accounting Policies (AS-1), an enterprise also has to disclose
the circumstances in which revenue recognition has been postponed pending the resolution of
significant uncertainities.
Q. 2. Comment in brief on any two of the following naming the principles of accounting
on which these statements are based:
(i) Balance Sheet is not a valuation statement.
(ii) Advance received from a supplier is not taken as income or sales.
(iii) Calibre or quality of management team is not directly disclosed on the Balance
Sheet.
Ans. (i) A Balance Sheet is not a valuation statement. Since a business enterprise is
assumed to be a going concern. The values of the assets in the balance sheet are not based on
market value but on the basis of original cost less depreciation to the date. Hence, balance
sheet is not a valuation statement.
(ii) In accounting, we are mainly concerned with Business Income, a term which is
synonymous with the term Business Profit. It can be defined as the excess of revenue over
expenditure incurred by the business over a period. In the words of Smith, "The Net Income
for the period is the excess of revenue realised during the period by a specific accounting
entity over the cost expired (included losses) during the same period."
Advance received from a supplier is not taken as income or sales as per Accrual Concept.
According to this concept revenue must be recognised in that period in which it was realised
and cost must be matched with the revenue of that period in which the benefit of that cost has
been utilised. Advance received from a supplier is 'guarantee money' for proper supply of
goods. Such advance is a liability for a business which must be returned after the supply of
goods.
(iii) According to Money Measurement Concept, only those transactions which are capable
of being expressed in terms of money are included in the accounting records. In other words,
the information which can not be expressed in terms of money is not included in accounting
records. Due to this concept calibre or quality of the management team is not directly
disclosed on the Balance Sheet.
 Chapter 7
DEPACCIATION
Q. 1. Define Depreciation. What are the contributory factors for decline in the value of fixed
assets.
Ans. Depreciation means a fall in the value of a fixed asset because of usage or with efflux of
time or due to obsolescence or accident. Every fixed asset loses its value, once it is put to use.
"The permanent and continuing diminution in the quality or value of an asset."
— Pickles
"Depreciation may be defined as a measure of the exhaustion of the effective life of an asset
from any cause during a given period." — Spicer and Pegler
In short, depreciation is a permanent, continuing and gradual shrinkage in the book value of a
fixed asset.
Here, it is important to note that depreciation is charged on all tangible fixed assets except
land. The reason is that unlike other fixed assets like machinery and furniture, land does not
have a finite economic life.
Contributing Factors for decline in value of fixed assets or Causes of depreciation. The main
causes of depreciation are:
(i) Use of asset. Constant use of asset leads to its wear and tear and thus fall in value.
(ii) Efflux of time. Some assets e.g., lease, have a definite life period. On the expiry of the life
period, the asset will cease to exist. Other assets, like plant and machinery may not have a
definite life; in their case the life is estimated.
(iii) Obsolescence. If a better machine comes in the market, old machines may have to be
scrapped even though they are capable of being used. It is a reduction in the usefulness of the
asset.
(iv) Accident. An asset may reduce in value because of some accident.
Q. 2. Give features of depreciation. Also explain the factors determining the amount of
Depreciation.
Ans. An analysis of the definitions given above highlights the characteristics of depreciation
as follows:
(i) It is related to depreciable fixed assets only.
(ii) It is a fall in the book value of depreciable fixed assets.
(iii) It is a charge against profit for a particular accounting period.
(iv) It is a process of systematic allocation of cost and not valuation of fixed assets.
(v) It is a permanent decrease in the book value of an asset.
(vi) It is a continuous decrease in the book value of an asset.
(vii) The fall in the book value of an asset is due to the use of asset in business operations,
effluxion of time, obsolescence, expiration of legal rights or any other cause.
Factors Affecting the amount of Depreciation. The amount of depreciation depends on
following three factors:
(i) Cost of Asset. Cost of an asset includes the price paid for acquiring the asset plus all other
incidental costs necessary to put the asset into working condition. The incidental charges
include legal charges, freight, installation charges, transit insurance etc.
(ii) Residual or Scrap Value. This is the estimated value of a fixed asset at the end of its
useful life. This is the amount which is expected to be received when the asset is sold,
because it is no more useful to the business unit. It is very difficult to estimate the scrap value
of an asset at the time of its acquisition. The purpose of estimating scrap value is to ascertain
the net cost of the asset (acquisition cost-scrap value).
(iii) Useful or Economic Life of Asset. According to AS-6 (Revised), useful or economic
life of a depreciable asset implies either the period over which a depreciable asset is expected
to be used by the enterprise or the number of production or similar units expected to be
obtained from the use of the asset by the enterprise.
Q. 3. Write a short note on the purpose of providing depreciation. Or, What is the need
or objective of charging depreciation?
Ans. Purpose of Providing Depreciation/Need or Objective of Charging Depreciation.
The following are the objectives of providing depreciation:
(i) To Ascertain the True Profit and Loss. To find out net profit or net loss of an
accounting period, we add the revenue of that period and deduct all expenses incurred in that
period for earning those revenues. One such expense is the portion of the cost of the fixed
assets that has expired during the year (i.e., depreciation). Unless depreciation is charged, the
true profit or loss of a particular period cannot be ascertained.
(ii) To ascertain a True and Fair view of Financial Position of the Business, the assets
must be valued correctly in the Balance Sheet. Unless depreciation is charged, the assets may
be overstated and Balance Sheet would not present a true and fair view of the financial
position of a business.
(iii) To Ascertain the True Cost of Production. Depreciation should be taken into
consideration for calculating the cost of production. If it is not done, the cost records would
not give a true and fair view of the cost of production.
(iv) To provide funds for replacement of asset. If depreciation is not provided, the profit of
the concern will be overstated and may be distributed among shareholders as dividend. After
the end of the working life of the asset, there will be no provision or funds at the disposal of
the concern and the concern has to borrow for acquiring new assets. For the replacement of
assets, depreciation must be provided.
(v) To comply with the legal requirements. In case of companies, it is compulsory to
charge depreciation on fixed assets before it declares dividend [Section 205 (i) of the
Companies Act, 2013].
(vi) To Ascertain Profit or loss on sale. A fixed asset is to be sold at the end of its useful life
or may be even before. If no depreciation is provided, the written down value of the asset
cannot be ascertained. In effect, the profit or loss on sale of asset cannot be determined.
(vii) To Avoid Overpayment of Income tax. Depreciation is a deductible expense for tax
purposes. If depreciation is not charged, profit would be overstated and hence more tax
liability.
(viii) To Allocate the Cost of Fixed Asset. The main objective of depreciation is to allocate
the depreciable cost of a fixed asset over its estimated useful life so that the cost can be
charged to Profit & Loss Account of the said periods.
Q. 4. 'Depreciation accounting is a process of allocation and not of valuation.
Explain.
Ans. Depreciation accounting treats the original cost of the asset as deferred expenses and the
original cost of the asset is therefore charged against the income of various accounting
periods by allocating it over its useful life in a systematic manner.
The following points may be emphasised to explain depreciation accounting: (i) It is
concerned with allocation of depreciable amount (i.e., cost less residual value) of an asset
over its estimated useful life in a systematic manner.
(ii) Depreciation is used on cost of the asset and not on the market value of the asset. Thus it
is a process of allocation of cost, not of valuation of assets.
(iii) Portion of depreciation amount, which is allocated to an accounting year and is charged
to Profit & Loss Account of that year, is called depreciation. Depreciation is a measure of fall
in the value of an asset during an accounting year.
(iv) Depreciation does not provide funds for replacing the asset when its useful life ends.
(v) Depreciation accounting is not concerned with the decline in the value of current assets
like inventories.
(vi) Land is not subject to depreciation.
Q. 5. Explain the meaning, advantages & disadvantages and suitability of straight line
and diminishing balance methods of depreciation.
Ans. (A) Straight Line Method or Fixed Percentage on Original Cost Method. This is the
easiest and most popular method of calculating depreciation. This method provides equal
periodic depreciation charges over the expected useful life of the asset. Under this method of
calculating annual depreciation, it is necessary to divide the original cost of assets (minus its
residual value, if any) by the estimated useful life (number of years) of the asset. This is the
annual amount of depreciation —the same amount each year.
The amount and rate of depreciation is calculated as follows:
Amount of Depreciation = Original Cost - Estimated Scrap Value/Estimated Useful Lire
Rate of Depreciation in (%) = Amount of Depreciation/Original Cost x 100
Example. A firm bought a machine for Rs. 3,60,000 and Rs. 40,000 is spent on its
installation. On 1st April, 2013, its life was estimated to be 5 years. Its break-up value at the
end of the period was Rs. 20,000. Find out the amount of depreciation and rate of
depreciation.
Sol. Determination of the Amount of Depreciation:
Depreciation = Cost - Estimated scrap value/Number of years of expected useful life
Annual Depreciate = (Rs..3,60.000 + Rs. 40,000) - Rs. 20,000/5 = Rs. 75,000
Rate of Depreciation = Annual Depreciation/Cost x 100
= 76,000/4,00,000 x 100 = 19%
Advantages:
(i) This method is simple and easy to understand.
(ii) It can reduce the book value of the asset equal to its residual value at the expiry of its
useful life.
Disadvantages:
(i) It ignores the fact that the efficiency of the asset falls and repairs and maintenance charges
increase with the passage of time. In other words, the amount of depreciation remains
constant year after year whereas the amount of repairs and renewals goes on increasing as the
asset grows older, as a result of which, the amount of total charge (i.e., depreciation plus
repairs and renewals) in later years is more as compared to that in earlier years.
(ii) It does not take into consideration the interest on capital invested in the asset.
(iii) It does not provide funds for replacement of assets.
(iv) It becomes difficult to calculate the depreciation on additions made during the year.
Suitability. This method is most appropriate when an asset is used uniformly from period to
period, as in the case with furniture. It is also applicable when the life of an asset is affected
primarily by the lapse of time rather than by the degree of use, for example, lease, copyrights,
patents rights etc.
(B) Diminishing Balance or Written Down Value Method. Under this method,
depreciation is charged at a fixed percentage every year on the reducing balance of the asset.
Therefore, the amount of depreciation goes on diminishing year after year. The rate of
depreciation under this method can be calculated by applying the following formula:
 S
r  1  n  100
 C

where r denotes the rate of depreciation,, n is the number of years, S is the residual value, and
C is the cost of the asset.
Example. A business unit purchases a new machine for Rs. 10,000 on 1.4.2012. The useful
life of the asset is estimated to be 4 years. The estimated scrap value, after 4 years is Rs.
2,000. We assume that the financial year is the accounting year (1 st April... to 31st March...).
The rate of depreciation is calculated as under:
 2,000 
r  1   100  33.33
 10,000 

Advantages:
(i) This method puts an equal burden for use of the asset on each subsequent year.
(ii) The method is simple to understand and easy to follow.
(iii) This method is recognised by the income tax authorities in India.
Disadvantages:
(i) The value of the asset cannot be brought down to zero under this method.
(ii) The determination of rate of depreciation is difficult under this method as compared to the
straight line method.
Suitability. This method is suitable for those assets where the amount of repairs and
renewables are expected to be more in later years as compared to earlier years and for those
assets where the possibility of obsolescence is more.
Thus, the method is suitable for plant and machinery, building, computers etc.
Q. 6. Distinguish between Straight Line method and Diminishing Balance method of
depreciation.
Ans. Distinction between Straight Line and
Diminishing Balance Method of Depreciation
Points of Difference Straight Line Method (SIM) Diminishing Balance Method
(DBM)
1. Amount of The amount of depreciation The amount of depreciation
Depreciation remains constant. goes on decreasing year after
year.
2. Calculation of Depreciation is calculated at a Depreciation is calculated at a
Depreciation fixed percentage on the original fixed percentage on the original
cost of the asset. cost (in first year) and on
written down value (in
subsequent years).
3. Book Value The book value of the asset The book value of the asset
becomes zero or equal to its does not become zero.
scrap value.
4. Suitability This method is suitable for those This method is suitable for
assets in relation to which: (a) those assets in relation to
repair charges are less (b) the which: (a) the amount of repair
possibility of obsolescence is and renewal goes on increasing
less. as the assets grow older and (b)
the possibility of obsolescence
is more.
5. Calculation — easy It is easy to calculate the rate of It is difficult to calculate the
or difficult depreciation. rate of depreciation atleast in
comparison to SLM.
6. Tax Purposes This method is not applicable This method is applicable for
for income tax purposes. income tax purposes.
Q. 7. Explain the practical steps in recording a change in method of Depreciation with
Retrospective Effect.
Ans. Practical Steps involved in Recording a Change in the Method of Depreciation with
Retrospective Effect:
Step 1 : Calculate the total depreciation already provided on the existing assets (i.e.,
excluding the assets disposed off or discarded) from the back date (i.e., from the date of the
asset coming into use to the date of decision to change the method of charging depreciation)
under the existing method.
Step 2 : Calculate the total depreciation on the existing asset from the back date under the
new method and rate till date (i.e., from the date of the asset coming into use to the date of
decision to change the method).
Step 3 : Calculate the difference between the total depreciation under existing method (as per
Step 1) and under the new method (Step 2).
Step 4 : Adjust the short depreciation (excess of Step 2 over step 1) by debiting Profit & Loss
Account and Crediting the Asset Account/ Provision for Depreciation Account.
Or
Adjust the excess depreciation (Excess of Step 1 over Step 2) by debiting Asset Account/
Provision for Depreciation Account and Crediting Profit & Loss Account)
Step 5 : Charge depreciation from the current accounting year and onwards by adopting new
method.
Q. 8. Explain the salient features of Accounting Standard-6 (AS-6) relating to
Depreciation Accounting.
Ans. Salient features of Accounting Standard-6 (AS-6) relating to Depreciation Accounting:
(i) AS-6 deals with depreciation accounting and applies to all depreciable assets, except the
following items to which special considerations apply:
• forests, plantations and similar regenerative natural resources;
• wasting assets including expenditure on the exploration for and extraction of minerals, oils,
natural gas and similar non-regenerative resources;
• expenditure on research and development;
• goodwill; and
• live stock.
AS-6 does not apply to land unless it has limited useful life for the enterprise.
(ii) Meaning of Depreciation. 'Depreciation' is a measure of the wearing out, consumption or
other loss of value of a depreciable asset arising from use, effluxion of time or obsolescence
through technology and market changes.
Depreciation is allocated so as to charge a fair proportion of the depreciable amount in each
accounting period during the expected useful life of the asset.
Depreciation includes the amortisation of assets whose useful life is predetermined.
(iii) Meaning of Depreciable Assets. 'Depreciable assets' are assets which
• are expected to be used during more than one accounting period;
• have a limited useful life; and
• are held by an enterprise for use in the production or supply of goods and services, for rental
to others, or for administrative purposes and not for the purpose of sale in the ordinary course
of business.
(iv) Depreciable Amount 'Depreciable amount' of a depreciable asset is its historical cost, or
other amount substituted for historical cost in the financial statements less the estimated
residual value.
(v) Three factors which determine the amount of depreciation. Assessment of depreciation
and the amount to be charged in rerpect thereof in an accounting period are usually based on
the following three factors:
• historical cost i.e., (money outlay) or other amount substituted for the historical cost of the
depreciable asset when the asset has been revalued;
• expected useful life of the depreciable asset; and
• estimated residual value of the depreciable asset.
(vi) Change in Cost and Revaluation:
• In case of change in cost of the asset, revised unamortised depreciable amount is to be
allocated over the remaining useful life.
• In case of revaluation, depreciation over remaining useful life is to be based on the revalued
amount.
(vii) Change in method of Depreciation. The depreciation method selected should be applied
consistently from period to period. A change from one method of providing depreciation to
another should be made only if the method is required {n) by statute or (b) for compliance
with an Accounting Standard or (c) if it is considered that the change would result in a more
appropriate presentation of financial statements of the enterprise.
When the method of depreciation is changed, depreciation is recalculated in accordance with
the new method from the date of the asset coming into use. The surplus or deficiency arising
from retrospective le computation of depreciation in accordance with the new method should
be adjusted into the Profit and Loss Account.
Change in depreciation amount due to change in method is to be given retrospective effect
but in all other cases (like change in cost, life, revaluation etc.) change in depreciation is
given prospective effect.
(viii) Disclosure Requirements. AS-6 requires the disclosure of following facts:
• Total cost of each class of assets.
• Total depreciation for the period of each class of assets.
• Accumulated depreciation of each class of assets.
• Depreciation method used.
• Depreciation rate or the useful life of the asset, if these are different from the principal rates
specified in the statute governing the enterprise.
• If any depreciable asset is disposed of, discarded, demolished or destroyed, the net surplus
or deficiency, if material should be disclosed separately.
 Chapter 8
INVENTORY VALUATION
Q. 1. Explain the significance of inventory valuation.
Ans. Meaning of Inventory. Any stock that a firm keeps to meet its future requirement of
production and sales is called 'inventory'. The basic reason for holding inventory is to keep
production activities unhampered.
The principal types of inventories are—{i) Raw material; (ii) Work-in-progress; and (iii)
Finished goods.
Raw materials. Raw materials are the items that are yet to be used in the production process.
Work-in-progress. Work in progress means the items that have been introduced in the
production process, but are yet to be completed.
Finished goods. Finished goods are the goods produced but which have not yet been sold to
the customers.
The nature of inventory depends upon the type of activity carried on. In case of a
manufacturing firm, inventory will generally include all type of inventories mentioned above,
while in case of a trading concern, it is stock-in-trade owned by it for sale to customers in the
normal course of business. Inventory needs effective control as it is one of the largest assets
of a business.
Significance of Inventory Valuation. The significance of inventory valuation is as follows:
(i) Proper determination of profit. The proper determination of profit depends upon the
correct valuation of inventory. If the ending inventory (closing stock) is valued at a lower
figure, profit is understated and if it is overvalued, profit is overstated. This shows that proper
method of valuation of inventory should be followed.
(ii) True Financial Position. Balance Sheet shows the financial position of the enterprise.
Inventory is a very important item of current asset. If inventory is not properly valued, the
Balance Sheet will not give a true and fair view of the financial position of the enterprise.
(iii) Financial Analysis. Inventory figures are required for financial analysis. For example,
for calculating current ratio and stock turnover ratio, inventory figures are required.
(iv) Sufficient inventory for production sale process. Adequate inventory is essential for the
'production sale' process of the enterprise as insufficient inventory hampers production and
fails to support sales. Inventory is purchased for sale and realised again from resale. The fact
of realising profit from resale of inventory makes it compulsory for a concern to follow a
proper method of inventory valuation.
(v) Compliance with rules and statutes. AS-2 requires that the financial statements should
disclose:
• accounting policies adopted in measuring inventories including the cost formula used; and
• total carrying amount of inventories; and
• classification of amount of inventories.
The Companies Act, 2013 requires that each class of inventory should be disclosed separately
alongwith the mode of valuation of raw materials, work-in-progress and finished goods.
Q. 2. Explain FIFO and LIFO methods of inventory valuation.
Ans. FIFO (First In First Out Method). This method assumes that goods received are issued
in the order in which they are received which means stock of goods is left out of the recent
purchases. In other words, it is based on the assumption that costs should be charged to
revenues in the order in which they are incurred. It means that units received first are
assumed to be sold first.
Under this method, first item purchased is assumed to be sold first. Thus the sales are
assumed to be made in the order in which goods are purchased or produced. This assumption
is made for the purpose of assigning costs and not for the purpose of the physical flow of
goods. The physical flow of goods therefore need not necessarily coincide with the pattern of
cost flow assumption. As the oldest stock Is assumed to be sold first or issued first, the
closing inventory represents the most recently purchased or produced items, cost of goods
sold represents the cost of items out of opening inventory and out of earlier purchases.
Advantages:
(i) Closing inventory is recorded at cost and, therefore, there is no unrealised holding gain or
loss,
(ii) Inventory costs are charged to products in the order in which these costs are incurred.
(iii) Closing inventory represents the most recently purchased or produced goods.
(iv) In periods of falling prices, lower income is reported since old costs (which are higher
than the current costs) are matched with current revenue. As a result, income tax liability is
reduced.
Disadvantages:
(i) In a period of fluctuating prices, the cost of an issue does not represent current market
price.
(ii) In periods of rising prices, higher income is reported since old costs (which are lower than
the current costs) are matched with current revenue. As a result, income tax liability is
increased.
(iii) Inventory gains and losses resulting from price change of the stock held cannot be
separated from the operating results (i.e., income from normal operations).
LIFO (Last In First Out Method). Under this method, goods issued are valued at the price
paid for the latest lot of goods in hand which means stock of goods in hand is valued at the
price paid for the earlier lot of goods. In other words, LIFO method assigns costs to goods
sold on the basis that goods that have been purchased recently are sold first. So cost of goods
sold is based on the price of recently purchased goods. Under this method, it is assumed that
last units purchased are first units sold. In other words, it is assumed that the sales are made
out of latest lot of goods purchased.
Advantages:
(i) Like FIFO method, LIFO method is simple to operate and is useful when
transactions are not too many and the prices are fairly steady.
(ii) There is better matching of cost with revenue in income statement.
(iii) It is based on actual cost.
Disadvantages:
(i) The stock in hand is valued at a price which does not reflect current market price.
Consequently, closing stock will be overstated or understated in the Balance Sheet.
(ii) Like FIFO method, LIFO method may lead to clerical errors as every time an issue is
made, the store ledger clerk will have to go through his record to ascertain the price to be
charged.
Q. 3. Compare the FIFO and LIFO methods of stock valuation with special reference to
their effect on pricing of issue of goods, valuation of Closing Stock and profits during a
period of rising prices.
Ans. Distinction between FIFO and LIFO methods
Points of Difference FIFO LIFO
1. Pricing of issue of Issue of goods is priced on the Issue of goods is priced on the
goods basis of earliest costs. basis of recent or latest costs.
2. Cost of ending The more recent costs are The earliest unit costs are
inventory assigned to the unsold items. taken into consideration for
valuing items of closing stock.
3. Profits during the This method shows a higher This method gives lowest
rising prices taxable income in the period of income and consequently
rising prices. As a result, lowest income tax in the
income tax liability is periods of rising prices.
increased.
Under inflationary conditions, LIFO method is recommended though physical movements
should always be according to FIFO method.
Q. 4. Write a short note on: Weighted Average Cost method of inventory valuation.
Ans. Weighted Average Cost Method. Under perpetual system, weighted average cost is
Calculated after each purchase by dividing the total cost of inventory (stock) in hand by the
total quantity of inventory in hand. Following formula is used to ascertain the weighted
average cost:
Weighted Average Cost per unit (perpetual) = Total cost of inventory in hand(after each
purchase)/Total number or units of inventory(after each purchase)
This rate is applied until a new lot is purchased and then a new rate is calculated. Under
periodic system, weighted average cost is calculated at the end of a specified period by
dividing the total cost of opening stock and purchase by the quantity of opening stock and
purchase during that period. The following formula is used for this:
Weighted Average Cost Per Unit (periodic) = Opening inventory in rupees + Purchases in
rupees/Opening inventory in units + Purchase in units
Or
Weighted Average Cost Per Unit (periodic) = Total cost of goods available for sale during the
period/No. of units available for sale during the period
Advantages:
(i) This method evens out the effect of fluctuations in prices on ending inventory.
(ii) This method is considered more scientific as inventory is valued at one rate.
Disadvantages:
(i) This method will not give current cost since it will always be influenced by price paid
previously.
(ii) Comparison of costs for the purpose of measuring efficiency is vitiated.
Q. 5. Distinguish between Periodic and Perpetual System of Inventory Valuation.
Ans. Periodic Inventory System. It is a method of recording inventory at the end of the
accounting year after making a physical verification of the quantity in hand. In this system,
inventory is ascertained by physical counting of the stock at the end of the year. All the items
of inventory are weighed, measured or counted, then listed and priced for getting the value of
inventory on the date. Thus inventory is valued by means of annual stock taking. It does not
require record keeping.
In this system Cost of Goods Sold is calculated as a residual figure as follows:
Cost of Goods Sold - Opening Inventory + Purchases - Closing Inventory Perpetual Inventory
System. It is a method of recording inventory balances after each receipt (purchase) and
issue. In order to ensure accuracy of perpetual inventory records, physical stocks should be
checked and compared with recorded balances. The discrepancies, if any, should be
investigated.
The Closing Inventory is calculated as a residual figure as follows:
Closing Inventory = Opening Inventory + Purchases - Cost of Goods Sold
Distinction between Periodic and Perpetual System of Inventory Valuation
Periodic System Perpetual System
(i) It is based on physical verification. It is based on regular consumption.
(ii) It provides periodic information about It provides continuous information about
stock and cost of sales. stock and cost of sales.
(iii) It directly determines stock and takes It directly determines cost of sales and takes
cost of goods sold as a Residual Figure. stock as Balancing Figure.
(iv) Under this system, cost of sales includes In perpetual system, inventory includes lost
lost goods. goods.
(v) It is a simple and less expensive method. It is a costlier method.
(vi) Inventory control is not possible under Inventory control can be exercised under this
this system. system.
(vii) it requires closure of business for Stock can be determined without affecting
counting of stock. the operation of business.
Q. 6. Explain briefly the salient features of Accounting Standard-2 (AS-2) as
recommended by the ICAI relating to inventory valuation.
Ans. Accounting Standard-2. The Institute of Chartered Accountants of India revised
Accounting Standard-2 (AS-2) Valuation of Inventories in July 1999. This revised Standard
comes into effect in respect of accounting periods commencing on or after 1st April, 1999 and
is mandatory in nature.
The salient features of AS-2 (Revised) are given as under:
1. The Standard begins with the definitions of inventories and net realisable value.
2. Meaning of Inventory. Inventories are assets that are: (a) held for sale in the ordinary
course of business e.g., finished goods (b) in the process of production for such sale e.g.,
work-in-progress or (c) in the form of materials or supplies to be consumed in the production
process or in the rendering of services e.g., raw materials.
Inventory = Finished Goods + Work-in-Progress + Raw Materials
3. Net realisable value is the estimated selling price in the ordinary course of business less the
estimated costs of completion and the estimated cost necessary to make the sale. The
Standard provides that the acceptable basis for inventory valuation or measurement of
inventories is cost or net realisable value whichever is lower or less.
4. Cost formula. AS-2 (Revised) mentions various formulae for determining the historical
cost such as (a) Specific Identification of Cost, (b) First-In-First-Out (FIFO) and (c)
Weighted Average Cost.
5. Techniques for the measurement of cost. Standard cost method or the retail method may
be used for convenience if the results approximate the actual cost.
6. Inventory valuation below cost. The net realisable value may be used for valuing
inventories that are damaged or that have become wholly or partially obsolete or if the selling
price has declined. The practice of writing down inventories below cost to net realisable
value is consistent with the view that assets should not be carried in excess of amounts
expected to be realised from their sale or use. However, materials and other supplies held for
use in the production of inventories are not written down below cost if the finished products
in which they will be used, are expected to be sold at or above cost. But when there has been
a decline in the price of materials and it is estimated that the cost of the finished products will
exceed net realisable value, the materials are written down to net realisable value. In such
circumstances, the replacement cost of materials may be the best available measure of their
net realisable value.
7. Disclosure in the Financial Statements. The Financial Statements should disclose
• Accounting Policies adopted in measuring inventories including Cost Formula used;
• Classification of inventories like finished goods, work-in-progress, raw materials, spare
parts and its carrying amount.
8. Non-Applicability. AS-2 does not apply to the following inventories:
• Work-in-progress arising under construction contracts;
• Work-in-progress arising in the ordinary course of business of service products;
• Shares, debentures and other financial instruments held as stock-in-trade; and
• Producer's inventories of livestock, agriculture and forest products.
 Chapter 9
PREPRRATION OF FINANCIAL STATEMENTS OF NOT FOR PROFIT
ORGRN1SRTIONS
Q. 1. What is the accounting process adopted by Non-profit organisations@@ Explain.
Ans. Non-Profit Organisations (NPOs) and the Accounting Process. Nonprofit
Organisations are always non-business organisations. These organisations are not doing any
business or trading.
These organizations maintain only one subsidiary book i.e., Cash Book. Other subsidiary
books namely:
— Purchases Book
— Sales Book
— Purchase Returns Book
— Sales Returns Book
— Bills Receivable Book
— Bills Payable Book
are all not needed by these organizations since there is no trading or business done by them.
Even the Cash Book of these NPOs should rather be a multi-column Cash Book or at least
have two separate columns, i.e., cash and bank columns to record their transactions through
cash or bank. The Cash Book is a very important or rather the only book maintained by these
organizations.
It is from this detailed Cash Book that these organisations prepare a summary of Cash Book
at the end of the year and it is this summary of Cash Book which is called Receipts and
Payments A/c which is also one of their final accounts. In most cases, it is this Receipts and
Payments A/c which becomes the starting point for the preparation of other final accounts,
namely the Income and Expenditure A/c and also the Balance Sheet.
Thus, only two stages are involved in the process of accounting of NPOs:
• One is the preparation of Cash Book.
• Other is the preparation of Receipts and Payments A/c and also the Income & Expenditure
A/c and Balance Sheet at the end of the year.
Q. 2. Differentiate between Receipts and Payments A/c and Income and Expenditure
A/c.
Ans. Distinction between Receipts and Payments Account and
Income and Expenditure Account
Point of Distinction Receipts and Payments Account Income and Expenditure
Account
1. Nature of Account It is a statement of cash It is another name of Profit &
transactions for a period. (Real Loss Account of non-trading
 Account) concerns viz. hospitals, clubs,
societies, educational
institutions etc. (Nominal
Account)
2. Commencement It commences with opening It does not begin with any
balance of cash in hand and at opening balance.
bank.
3. Closing Balance This shows cash in hand or at There is no closing balance but
bank at the end of the the difference between the two
accounting year. sides shows either surplus or
deficit.
4. Basic Structure It is basically a summary of It is exactly a Profit & Loss
Cash Book. A/c, only the name is changed
as NPOs are non-profit entities
and are just allergic to the use
of the. words profit or loss.
Hence they use Income and
Expenditure Account.
5. Capital and All items whether of capital or Only revenue items are taken
Revenue items revenue nature are shown in this into consideration while
account. preparing this account i.e.,
capital items are totally
excluded.
6. Period All receipts and payments Only current period's income
whether relating to the current and expenditure are taken into
period, succeeding or preceding consideration while preparing
periods are taken into this account i.e., income and
consideration. expenditure relating to
succeeding or preceding
periods are excluded.
7. Balance Sheet It is not necessary to prepare The Balance Sheet must be
Balance Sheet alongwith this prepared in order to
account. accommodate real and personal
accounts alongwith this
account.
8. Adjustments No adjustments are required to In order to find out the true
be made at the end of the year. income or expenditure of the
current year, all adjustments
(i.e., outstanding expenses,
prepaid expenses, income
received in advance) are made
at the end.
9. System of It is based on cash system. It is based on accrual system.
Accountancy
Q. 3. How will you treat 'donations and legacies' in the financial statements of the Non-
Profit Organisations (NPOs)@@ Explain.
Ans. Legacies in principle are similar to Donations. The only difference between these two is
that donations are gifts received by the NPOs from donors who are also living persons
whereas legacies are gifts received by the NPOs from donors through their wills and the
amount reaches or comes to the NPO after the death of the donors. Generally legacies
received by NPOs may be a relatively bigger amount.
However treatment of both legacies and donations depends on the purpose for which these
are given by the donors. Such purpose may be general or specific. If donations or legacies
(whatever way or mode the moneys are received) are given without mentioning any specific
purpose, then the same may be treated as general income of the NPO and just credited to the
Income and Expenditure A/c. Money so received may be used by the NPO for any purpose.
However, if the amount is given to the NPO by the donor stating that it should be used for
only a specific purpose mentioned, then the amount should not be treated as general income
and not credited in the Income and Expenditure A/c. The amount so received should then be
credited in the Balance Sheet under a special fund created for that special purpose. For
example, if the donor has specified that money given to the NPO should be used for
construction of a building, then it should be credited to the Building Fund A/c and put in the
Balance Sheet, or if the money is received by the NPO with obligation to be used for say a
'tournament then it should be credited in the Balance Sheet under Tournament Fund.
Legacies received by the NPOs are usually for some specific purposes only. Hence, legacies
received are not credited in the Income and Expenditure A/c as general incomes but are
shown in the Balance Sheet as a liability credited to the specific funds.
Q. 4. Explain the procedure of preparing Income and Expenditure A/c from the
Receipts and Payments Account.
Ans. Conversion of Receipts and Payments Account into an Income and Expenditure
Account. When it is desired to convert a Receipts and Payments Account into an Income and
Expenditure Account, the following steps are taken:
— Leave the opening and closing balance of cash and bank given in the Receipts "and
Payments Account.
— Take only revenue items of income and expenditure and leave all those items which are of
capital nature.
— Make all adjustments for outstanding and prepaid expenses, accrued income, income
received in advance, provision for depreciation or bad debts etc.
— Take items only for the current period i.e., items relating to the preceding and succeeding
periods are to be ignored.
Following Table I shows how to calculate Revenue Income which will appear in the income
side of the Income and Expenditure Account:
Table I: Ascertain the Revenue Income (e.g., subscription) for the current accounting
period
Rs. Rs.
A. Revenue Receipts as per Cash Book during the current year XXX
B. Add: Outstanding Income at the end of the current year XXX
Advance Income in the beginning of current year XXX XXX
C. Less: Outstanding Income in the beginning of the current year XXX
Advance Income at the end of the current year XXX XXX
D. Revenue Income for the current year (A + B - C) XXX
Table II: Ascertain 'Revenue Expenses' (e.g., Salaries) for the current accounting period
as under and show on the debit side of Income and
Expenditure Account
Rs. Rs.
A. Revenue Payments as per Cash Book (Receipts and Payments
A/c)
During the current year XXX
B. Add: (i) Outstanding Expenses at the end of current year XXX
(ii) Prepaid Expenses in the beginning of current year XXX XXX
C. Less: (i) Outstanding Expenses in the beginning of current year XXX
(ii) Prepaid Expenses at the end of current year XXX XXX
D. Revenue expenses for the current year (A + B - C) XXX
After taking above steps, now calculate the difference between the total of debit side
(Expenditure Side) and the total of credit side (Income Side). If the total of credit side
exceeds the total of debit side, difference will be Surplus (i.e. excess of Income over
Expenditure) and it will appear on the debit side. If the total of debit side exceeds the total of
credit side, it will show Deficit (i.e. excess of Expenditure over Income) which will appear on
the credit side of Income & Expenditure Account.
 UNIT
III
Accounting for Hire Purchase and Instalment Systems
Chapter 10: HIRE PURCHASE & INSTALMENT SYSTEMS
Q. 1. What is Hire Purchase System@@ What are its characteristics?
Ans. Hire Purchase System is a special system of purchase and sale of goods. In this system
the purchaser pays the price of the goods in instalments, these instalments may be monthly,
quarterly or yearly etc. Goods are delivered to the purchaser at the time of Hire Purchase
Agreement* but the purchaser will become the owner of goods only on the payment of the
last instalment. All the instalments paid are treated as hire till the last instalment is paid off.
The purchaser is called as Hire Purchaser and the seller is known as Hire Vendor.
"Under the Hire-Purchase system, goods are delivered to a person who agrees to pay the
owner by equal periodical instalments, such instalments are to be treated as hire of these
goods until a certain fixed amount has been paid, when these goods become the property of
the hirer." — J.R. Batliboi
*Hire Purchase Agreement [Section 2 (i)]. Hire purchase agreement means an agreement
under which goods are let on hire and under which the hirer has an option to purchase them
in accordance with the terms of the agreement and includes the agreement under which:
(i) Possession of goods is delivered by the owner thereof to a person on the condition that
such person pays the agreed amount in periodical instalments.
(ii) The property in the goods is to pass to such a person on the payment of the last
instalment; and
(iii) Such a person has a right to terminate the agreement at any time before the property so
passes.
Every Hire Purchase Agreement shall be in writing and signed by all the parties thereto.
Characteristics of Hire Purchase System. Following are the main features of Hire Purchase
System:
(i) There is an agreement between the seller and the purchaser.
(ii) Goods are delivered by the seller to the buyer at the time of commencement of the
agreement.
(iii) Buyer agrees to pay hire purchase price (i.e., cash price + interest) in instalments.
(iv) Instalments paid are treated as hire charges till the last instalment is paid.
(v) After the payment of the last instalment, ownership is transferred in the name of the
buyer.
(vi) In the case of default in the payment by the buyer, the seller has got a right to repossess
the goods, as ownership lies with the seller till the payment of last instalment.
Transactions with above mentioned features are called hire purchase transactions because of
hire cum purchase nature of these transactions.
ACCOUNTS FOR HIRE PURCHASE TRANSACTIONS
Terms Used in Hire Purchase Agreement:
(i) Hire Purchaser. He is the buyer in a hire purchase agreement.
(ii) Hire Vendor. He is the seller in a hire purchase agreement.
(ii) Cash Price. It is the amount to be paid for outright purchase in cash.
(iv) Down Payment It is the amount of initial payment payable by the hire purchaser at the
time of entering into a hire purchase agreement.
(v) Hire Purchase Price. It is the total amount payable by the hire purchaser to the hire
vendor for goods purchased under the hire purchase system.
Q. 2. Distinguish Between Hire Purchase System and Instalment Payment System.
Ans. Distinction between
Hire Purchase System and Instalment Payment System
Basis Hire Purchase System Instalment Payment System
1. Nature of Contract It is an agreement of hiring. It is an agreement of sale.
2. Passing of Title The title of the goods is passed The title of goods passes
(Ownership) on to the buyer after the immediately (i.e., at the time of
payment of the final instalment. signing the agreement) as in the
case of usual sale.
3. Right of Seller If the buyer fails to pay any of The seller cannot repossess the
the instalments, the goods can goods. He can sue the buyer for
be repossessed the amount due.
by the seller.
4. Right of Disposal The buyer cannot hire out, sell, The buyer can hire out, sell,
transfer, destroy, pledge the transfer, destroy, pledge the
goods. goods and the bonafide
purchaser can get a good title to
the goods.
5. Option to Return The buyer may return the Except for seller's default the
Goods goods without further payment, goods cannot be returned.
except for accrued instalments.
6. Forfeiture of Amount In case of default, the total In case of default, the total
Received amount of instalmens paid is amount of instalments paid by
forefeited and considered as the buyer cannot be forfeited.
hire charges.
Q. 3. Write a Short Note on Default and Repossession in Hire Purchase.
Ans. Default and Repossession in Hire Purchase. In Hire Purchase agreement, the hire
purchaser has an obligation to pay upto the last instalment so that the ownership of goods
passes on to him. If the hire purchaser makes default in the payment of any instalment, the
vendor has a right to repossess the goods sold on hire purchase and forfeit whatever amount
he has already received considering it as a hire charge.
There are two possibilities in repossession of goods —
• when the vendor takes back the complete repossession of asset i.e., Full Repossession, and
• when the vendor takes repossession of only a part of the asset sold to the hire purchaser i.e.,
Partial Repossession.
Accounting Treatment:
I. Full Repossession. All entries till the date of default are passed in the usual manner. The
additional treatment is as follows:
In the Books of Hire Purchaser. In case of full repossession, the hire purchaser closes the
Hire Vendor's Account and transfers the balance to Asset's Account. The Asset's Account
is also closed by transferring the balance in Profit & Loss Account.
(i) For Closing Hire Vendor's Account:
Hire Vendor's A/c Dr. Amt. due
To Asset A/c Amt. due
(ii) For Closing Asset's Account:
(a) If the Book value of the Asset exceeds the amount due to Hire vendor:
Profit & Loss A/c Dr.
To Asset A/c
(with the balance left in the Asset A/c)
(b) If the book amount to Hire-vendor exceeds the book value of the Asset:
Asset A/c Dr.
To Profit & Loss A/c
In the Books of Hire Vendor. The hire vendor closes the Hire Purchaser's Account and
transfers the balance to Goods Repossessed Account, (with the revalued amount of goods
repossessed). (i) On Repossession of Goods:
Goods Repossessed A/c Dr. Revalued amt.
To Hire Purchaser's A/c Revalued amt.
(ii) For amount spent on reconditioning of Goods Repossessed:
Goods Repossessed A/c Dr.
To Cash A/c or Bank A/c
(iii) For Sale of Goods Repossessed:
Cash A/c or Bank A/c Dr.
To Goods Repossessed A/c
(iv) For Loss on Sale of Goods Repossessed:
Profit & Loss A/c Dr.
To Goods Repossessed A/c
Note: In case of profit, a reverse entry will be passed.
II. Partial Repossession. All entries till the date of default are passed in the usual manner.
The additional treatment is as follows:
In the Books of Hire Vendor
(i) On Repossession of Goods at an agreed value:
Goods Repossessed A/c Dr. Agreed value
To Hire Purchaser's A/c Agreed value
Note: Entries 2, 3, 4 will be the same as in the case of Full Repossession.
In the Books of Hire Purchaser
(i) For transfer of the agreed value of Goods Repossessed:
Hire Vendor A/c Dr.
To Asset A/c
(ii) For transfer of loss on default:
Profit & Loss A/c Dr.
To Assets A/c
IMPORTANT.
(i) Loss on default = Book Value of Goods Repossessed as on the date of repossession -
Agreed value of Goods Repossessed (ii) In case of profit on default, reverse of the above
entry will be passed.
Q. 4. Explain the Hire Purchase Trading Account or Debtors method of calculating
profit in the books of hire vendor in case of goods of small value.
Ans. Hire Purchase Trading Account Method. Under this method, Hire Purchase Trading
Account is prepared to ascertain the profit earned or loss suffered by the hire vendor. Hire
purchase trading account can be prepared at cost price or at hire purchase price. In case of
hire purchase price, entries for removal of loading need to be passed.
Accounting Entries for Preparing Hire Purchase Trading Account:
(i) For goods sold on hire purchase:
Hire Purchase Trading A/c HP Price
To Goods Sold on Hire Purchase A/c HP Price
(ii) On Receipt of instalments:
Cash A/c Dr.
To Hire Purchase Trading A/c
(iii) For instalments due at the end of the year but not received:
Instalments Due or H.P. Debtors A/c Dr.
To Hire Purchase Trading A/c
Note: For Opening balance of instalments due, a reverse entry will be passed.
(iv) For goods repossessed due to non-payment of instalments:
Goods Repossessed A/c Dr. " With the estimated
To Hire Purchase Trading A/c value of goods received
(v) For goods lying with customers in respect of which instalments are not due:
Hire Purchase Stock A/c Dr. HP Price
To Hire Purchase Trading A/c HP Price
Note: For Opening stock of such goods reverse entry will be passed.
(vi) To remove the loading in hire purchase sales:
Goods Sold on Hire Purchase A/c Dr.
To Hire Purchase Trading A/c For loading only
(vii) To remove the loading in Closing stock:
Hire Purchase Trading A/c For loading only
To Stock Reserve A/c
Note: For removing the loading in opening stock, reverse entry will be passed.
(viii) Hire Purchase Trading Account is now complete and will show profit or loss which
will be closed by transfer to Profit and Loss Account:
(a) If Profit
Hire Purchase Trading A/c Dr.
To Profit & Loss A/c
(b) If Loss
Profit & Loss A/c Dr.
To Hire Purchase Trading A/c
At the beginning of the next year, Instalment Due Account, Hire Purchase Stock Account
and Stock Reserve Account will be closed by transfer to the Hire Purchase Trading
Account.
Dr. Hire Purchase Trading Account (HPP Basis) Cr.
Particulars ? Particulars Rs.

To Balance b/d: XXX By Stock Reserve XXX

Hire Purchase Stock (at HPP) (Load on opening stock)
Hire Purchase Debtors XXX By Goods sold on Hire Purchase XXX
To Goods Sold on Hire Purchase XXX (Load on goods sold)
(HPP)
To Stock Reserve (Load on stock XXX By Cash/Bank A/c xxx
with customer at the end)
(Down Payment + Instalment
Received)
To Hire Purchase Expenses A/c XXX By Goods Repossessed
To Profit on Hire Purchase (at realisable value) XXX
(Transfer to Profit & Loss A/c) XXX By Balance c/d:
Hire Purchase Stock (HPP) xxx
Hire Purchase Debtors xxx
XXX xxx
Q. 5. Explain the Stock and Debtors System of Calculating Profit in the books of Hire
Vendor in case of goods of small value.
Ans. Stock and Debtors Method. Under this method instead of preparing Hire Purchase
Trading Account, the following accounts are prepared as part of books of the hire vendor to
ascertain the profit earned or loss incurred on sale of goods of small value on hire purchase:
(i) Stock at Shop Account
(ii) Hire Purchase Stock Account
(iii) Hire Purchase Debtors Account
(iv) Goods Sold on Hire Purchase Account
(v) Shop Stock Account
(vi) Hire Purchase Adjustment Account
(vii) Stock Reserve Account
Following entries are passed in the books of the hire vendor relating to hire purchase
transactions:
(i) For goods purchased for Shop Stock:
Shop Stock A/c Dr. Cost price
To Purchases A/c
(ii) For goods sold on hire purchase:
Hire Purchase Stock A/c Dr. At sale price
To Goods Sold on Hire Purchase A/c
(iii) For total instalments which become due:
Hire Purchase Debtors A/c Dr. Hire Purchase Price
To Hire Purchase Stock A/c
(iv) For Cash received from Debtors:
Cash A/c Dr.
To Hire Purchase Debtors A/c
(v) When Goods are repossessed on default and loss is transferred to Hire
Purchase Adjustment A/c:
Goods Repossessed A/c Dr. For realisable value
Hire Purchase Adjustment A/c Dr. Loss
To Hire Purchase Debtors A/c Instalments due and
not received in cash
To Hire Purchase Stock A/c For instalments not
yet due
To Hire Purchase Adjustment A/c Profit on Repossession
(vi) For transfer of Goods Sold on Hire Purchase:
Goods Sold on Hire Purchase A/c Dr.
To Hire Purchase Adjustment A/c For Loading
To Trading A/c Cost Price
(vii) For Reserve on Closing stock:
Hire Purchase Adjustment A/c Dr. For Loading
To Stock Reserve A/c
(viii) For Reserve on Opening stock:
Stock Reserve A/c For Loading
To Hire Purchase Adjustment A/c
(ix) For profit or loss on hire purchase:
(a) If Profit
Hire Purchase Adjustment A/c Dr.
To Profit & Loss A/c
(b) If Loss
Profit & Loss A/c Dr.
To Hire Purchase Adjustment A/c
Q. 6. What is lease@@ Explain the types of lease.
Ans. In a Lease agreement there are two parties: (i) Lessor and (ii) Lessee. Lessor is the party
who transfers the rights over an asset and Lessee is the other party who gets the rights to use
the asset without assuming ownership. So in a lease agreement the lessor conveys to the
lessee the right to use the asset for an agreed period of time. This is so' done in return for
payment or a series of payments or both. Leases are usually for a long-term and also are non-
cancellable in nature. In many cities in India e.g., land is sold by the land owning or
developing agency e.g., D.D.A. etc. on hold basis. Sometimes, leases are for a specific time
whereas sometimes these are without any time limit or constraint, say perpetual.
Such leases are of two types:
(i) Finance lease or (ii) Operating lease
Finance lease is one whereby the lesser transfers all the rights and obligations connected
with the asset to the other party namely the lessee involving all the rewards as well as risks
attached with the ownership of the asset.
Operating lease is one which is not finance lease. In finance lease, the agreement is for a
relatively longer period or for most of the useful life of the asset whereas in operating lease
the rights are transferred only for a relatively shorter period. Even the responsibility to
maintain the asset still remains that of the lessor. Operating lease agreement usually is
revocable also in nature as compared to the finance lease.
Difference between Operating lease and Financial Lease
Operating Lease Financial Lease
(i) Shorter duration with no relation to the Normally coinciding with economic useful
economic life of the asset. life of the asset.
(ii) Can be revoked. Normally non-revocable.
(iii) Lessee protected against the risk of Lessee not protected against the risk of
obsolescence. obsolescence.
(iv) Cost of repairs and maintenance of asset Lessee normally bears such expenses.
are borne by the lessor.
(v) Least' rentals are not sufficient to cover Lease rentals are normally equal to cost of
the cost of asset. asset to the lessor plus a reasonable return on
investment made by the lessor in the asset.
 UNIT
IV
Accounting for Inland Branches
Chapter 11: Concept of Dependent Branches
Q. 1. Write a Short Note on Dependent and Independent Branches.
Ans. Dependent Branch. When the policies and administration of a branch are totally
controlled by the head office, who also maintains its accounts, the branch is called a
Dependent Branch.
Following are the features of a dependent-branch:
(i) A dependent branch does not maintain its own set of books. The Head
Office maintains a record of all the transactions.
(ii) Generally, all goods are supplied to the Branch by the Head Office. Sometimes the branch
may be allowed to make purchases from the local parties for which the payments are made
directly by the Head Office.
(iii) Goods are generally sold by such branches in cash. Such branches can sell goods on
credit with the permission of the Head Office.
(iv) The amount collected from Cash Sales or Debtors is either remitted to the Head Office
immediately or deposited into the account of the Head Office in some local bank.
(v) All major expenses of the branch are paid as far as possible by the Head Office.
(vi) For meeting Petty Expenses, the Branch manager is provided with cash, which is
reimbursed by the Head Office from time to time on an imprest system or otherwise.
Independent Branch. When the size of the branch is very large, their functions become
complex. In such a situation, it is desirable or practical for each branch to establish its own
double entry book-keeping system quite separate from those of the head office. Under this
system of branch accounting, the branches are treated as separate, independent units. These
type of branches are known as Independent Branches. The features of an independent branch
may be listed as under: (i) An independent branch may be a home branch or a foreign branch.
(ii) An independent branch enjoys more autonomy and powers than a dependent branch.
(iii) An independent branch is allowed to make purchases in the open market.
(iv) An independent branch maintains full system of accounting. It records all the transactions
in its own books, extracts its own trial balance and these are sent to the head office. Head
Office incorporates all Branch accounts in its books so that a consolidated Profit & Loss
Account and Balance Sheet can be prepared for the business as a whole.
Q. 2. Distinguish between a Dependent Branch and an Independent Branch.
Ans. Distinction between a
Dependent Branch and an Independent Branch
Dependent Branch Independent Branch
(i) A dependent branch is one whose policies The branch which maintains a complete
and administration are totally controlled by record of its transactions is said to be an
the Head Office and the Head Office main- independent one.
tains the accounts of the branch.
(ii) A dependent branch operates as a Independent branch is that branch which also
distribution centre only. Such branches sell purchases goods from the market besides
only those goods which are received from the getting the goods from the Head Office. It
Head Office and are not allowed to make can also supply goods to the Head Office,
purchases in the open market except with the pay expenses from the cash realised and
express permission of the Head Office. deposit cash in its own account.
(iii) These branches send monthly or These branches keep all their records
quarterly reports to the Head Office. separately and independently.
(iv) The record of all transactions relating to Such branches keep complete set of Double
branch is maintained by the Head Office. Entry books and prepare their own Trial
Balance, Trading and Profit & Loss Account
and Balance Sheet.
Q. 3. Discuss Debtors System of accounting in branch accounts.
Ans. Debtors System. This system of accounting is applied when a branch is small in size.
Under this system, a Branch Account is opened for each branch in the Head Office ledger.
All transactions are recorded in this account. The Branch Account is prepared in such a way
that it discloses the profit or loss of the branch. Branch Account is a Nominal Account in
nature. The Head office may send goods to branch either at "Cost Price" or "Selling Price"
(also called invoice price) and accordingly it may prepare "Branch Account" in its books
adopting "Cost Price approach" or "Invoice Price approach".
Following items are to be ignored while preparing Branch Account under this method:
(i) Bad debts, discount allowed, Credit sales, Sales returns by customers to branch. Cash
received by Branch from Branch Debtors etc., since the debtors at the end appear at the
adjusted figure.
(a) Depreciation and Profit/Loss on sale of fixed assets since fixed assets at the end appear at
the adjusted figure.
(iii) Abnormal Losses since stock at the end appears at the adjusted figure.
(iv) Expenses met by Branch out of cash, since either reduced cash balance at the end is
decreased or the liability at the end is increased.
(v) Purchase of Goods/Fixed Assets by Branch since book value of Goods/ Fixed Assets at
the end is increased and either the amount of remittances is reduced or the Creditors at the
end are increased.
(vi) Sale of Goods/Fixed Assets by Branch since book value of Goods/Fixed Assets at the end
is decreased and either the amount of remittances is increased or the Debtors at the end are
increased.
(vii) Petty Cash Expenses paid by the Branch. The Branch Account is debited with the
opening balance of Petty Cash and the amount of Petty Cash sent by the head office and is
credited with the closing Petty Cash. For calculating closing Petty Cash, all expenses paid by
the branch are taken into consideration. Therefore it should be ignored for preparation of
Branch Account. When the petty cash is maintained on Imprest System, the expenses met by
the branch are to be shown in the same manner as the branch expenses met by the Head
Office. In such a case, petty cash balance at the end appears as the same amount at which it
appears in the beginning.
Format of Branch Account. A format of Branch Account (Cost Price Approach) is given
below:
Dr. Branch Account Cr.
Particulars Rs. Particulars Rs.
To Balance b/d (Opening By Balance b/d
Balances):
Stock XXX (Opening Balance of Liabilities):
Debtors XXX Creditors XXX
Petty Cash XXX Outstanding Expenses XXX
Fixed Assets XXX By Bank (remittances to HO):
Prepaid Expenses XXX by Branch XXX
To Goods sent to Branch A/c: by Branch Debtors directly to HO XXX
Goods sent by HO XXX By Goods Sent to Branch A/c:
Goods sent by other Branches XXX Returned by Branch XXX
To Bank (Remittances by HO) XXX Returned by Branch Debtors directly XXX
to HO
To Balance c/ld Sent to other Branches XXX
(Closing Balance of Liabilities) By Balance c/d: Stock XXX
Creditors XXX Debors XXX
Outstanding Expenses XXX Petty Cash XXX
To Net Profit t/f to General Fixed Assets XXX
Profit & Loss A/c {Balancing XXX Prepaid Expenses XXX
Figure)"
By Net Loss t/f to General
Prorit & Loss N0{Balancing XXX
Figure)*
XXX XXX
* Only one figure shall appear.
Invoice Price. Sometimes, the head office does not want to reveal the cost of the goods to the
branch and therefore, invoices goods at a price which is higher than the Cost Price (CP). Such
price is known as Invoice Price (IP). The difference between the Invoice Price (IP) and the
Cost Price (CP) is called Loading.
How to Eliminate/Remove Loading. When goods are sent at invoice price, for ascertaining
correct profit/loss on Branch, the items recorded at invoice price should be brought down to
cost price level. For this purpose, the loading included in the various items should be
eliminated by passing the following adjusting entries:
(i) For Loading on Opening Stock
Stock Reserve A/c Dr.
To Branch A/c
(ii) For Loading on (Net) Goods Sent to Branch (i.e., Goods sent to Branch less Returns by
Branch or Branch customers to HO):
Goods Sent to Branch A/c Dr.
To Branch A/c
(iii) For Loading on Closing Stock
Branch A/c Dr.
To Stock Reserve A/c
Calculation of Loading. For calculating loading, the following procedure is adopted:
Suppose goods are invoiced at cost plus 25%. If the cost is Rs. 100, profit will be Rs. 25,
selling price therefore, is Rs. 125. The ratio of profit to selling price is 25/125 = 1/5.
Adjustment for the difference or excess price in value between the invoice price and the cost
price, therefore, will be made on the basis of l/5 th of the invoice price.
If the percentage is given on sale price, e.g., it is 25% on sale price. In this case the sale
price is then supposed to be Rs. 100 and the profit will be Rs. 25. Therefore cost will be Rs.
100 - Rs. 25 = Rs. 75. So the percentage on cost will be 25/75 or 33 1/3% or 1/3 rd of cost.
Q. 4. Discuss 'Stock and Debtors Method' under Branch Accounting.
Ans. Stock and Debtors System. Stock and Debtors system is generally used when the
goods are sent to the branch at an invoice price and the size of the branch is large. Under this
system the Head Office usually maintains the following accounts:
Accounts Purpose
(i) Branch Stock Account at Invoice Price To ascertain any shortage or surplus
(ii) Goods Sent to Branch Account To ascertain the net cost of Goods sent to
Branch
(iii) Branch Debtors Account To ascertain the closing Debtors
(iv) Branch Expenses Account To ascertain the total expenses incurred at the
branch
(v) Branch Adjustment Account To ascertain Gross Profit/Gross Loss
(vi) Branch Profit & Loss Account To ascertain Net Profit/Net Loss
(vii) Branch Cash Account To record all Cash transactions of the Branch.
(viii) Branch Fixed Assets Account To record all transactions relating to Branch
fixed assets.
The ruling of Branch Stock Account, Branch Adjustment Account, Branch Expenses
Account, Branch Profit & Loss Account, Branch Debtors Account and Goods sent to Branch
Account are given below:
Dr. A. Branch Stock Account (at Invoice Price) Cr.
Particulars Rs. Particulars Rs.
To Balance b/d XXX By Branch Cash A/c (Cash Sales) XXX
To Goods Sent to Branch A/c XXX By Branch Debtors A/c (Credit XXX
Sales)
To Branch Debtors A/c By Goods Sent to Branch A/c
(Return by Customers to Branch) XXX (Returns to HO) XXX
To Goods Sent to Branch A/c By Goods Sent to Branch A/c
(t/f of goods from other Branch) XXX (t/f of Goods to other Branch) XXX
To Branch Adjustment A/c By Branch Adjustment A/c (Load on
[Excess of Selling Price over Abnormal Loss due to fire, theft etc.) XXX
Invoice Price (i.e.. Surplus)] XXX By Branch Profit & Loss A/c (Cost
of
Abnormal Loss due to fire etc.) XXX
By Branch Adjustment A/c (Normal XXX
Loss)
By Balance c/d: In hand XXX
In transit XXX
XXX XXX
Dr. B. Branch Adjustment Account_______ Cr.
Particulars Rs. Particulars Rs.
To Branch Stock A/c (Load on By Stock Reserve A/c
Abnormal Loss due to fire, etc.) XXX (Loading on opening stock) XXX
To Branch Stock A/c (Normal Loss) XXX By Goods Sent to Branch A/c
To Stock Reserve A/c (Load on Net Goods Sent) XXX
(Load on Closing Stock) XXX By Branch Stock A/c [Excess of
selling
To Gross Profit t/f to Branch price over invoice price (Surplus)] XXX
Profit & Loss A/c XXX
XXX XXX
Dr. C. Branch Expenses Account Cr.
Particulars Rs. Particulars Rs.
To Salaries XXX By Branch Profit & Loss A/c XXX
To Rent XXX
To Petty Expenses XXX
To Bad Debts XXX
To Discount XXX
To Depreciation XXX
XXX XXX
Dr. D. Branch Profit & Loss Account Cr.
Particulars Rs. Particulars Rs.
To Branch Stock A/c By Branch Adjustment A/c (Gross XXX
Profit)
(Cost of Abnormal Loss) XXX By Branch Cash A/c (Insurance XXX
claim)
To Branch Expenses XXX By Net Loss t/f* to General Profit & XXX
Loss A/c
To Net Profit t/f* to General Profit XXX
& Loss A/c
XXX XXX
*Either Net profit or Net Loss, only one figure shall appear.
Dr. E. Branch Debtors Account Cr.
Particulars Rs. Particulars Rs.
To Balance b/d XXX By Branch Cash A/c (Collection) XXX
To Branch Stock A/c (Credit Sales) xxx By Bills Receivable A/c xxx
To Bills Receivable A/c By Branch Expenses A/c:
(B/R dishonoured) XXX — Discount Allowed xxx
— Bad Debts xxx
By Branch Stock A/c (Return) xxx
By Balance c/d xxx
xxx xxx
 UNIT
V
Accounting for Dissolution of The Partnership Firm
Chapter 12: Recounting for Dissolution of the Partnership Firm
Q. 1. What is 'Dissolution of a firm@@ Explain the modes of Dissolution of firm. Ans.
Dissolution of partnership between all the partners of a firm is called the 'dissolution of the
firm'. Thus, dissolution of a firm means complete closure of business of the firm due to any
reason. On dissolution of a firm, all the assets are disposed off and liabilities are paid off. The
remaining balance, if any, is paid to the partners in settlement of their capital accounts.
Modes of Dissolution of Firm. Following are the modes of dissolution of partnership firms:
(i) Dissolution by Agreement. A firm may be dissolved with the consent of all the partners.
(ii) Compulsory Dissolution.
• On the insolvency of all the partners or all except one partner.
• On business becoming unlawful.
(iii) Contingent Dissolution: Subject to contract between the partners, a firm is dissolved
• by the expiry of the term for which the firm was formed, or
• by the completion of the venture for which the firm was formed, or
• by the death of a partner, or
• by the adjudication of a partner as insolvent.
(iv) Dissolution by Notice. In case of partnership at will, the firm may be dissolved by any
partner giving notice in writing to other partners of his intention to dissolve the firm.
(v) Dissolution by Court. A court may dissolve a firm on any of the following grounds:
• Insanity of a partner.
• Permanent incapacity of a partner.
• Misconduct of a partner.
• Persistent breach of agreement by a partner.
• Transfer of interest by a partner.
• Continued losses.
• Any other ground on which court is satisfied that it would be just and equitable to dissolve
the firm.
Q. 2. Distinguish between Dissolution of Partnership and Dissolution of firm. Ans.
Distinction between
Dissolution of Partnership and Dissolution of firm
Dissolution of Partnership Dissolution of Firm
(i) A partnership is dissolved when a new A firm is dissolved by the partners mutually
partner is admitted or an old partner retires or or by the court.
dies or there is a change in the profit-sharing
ratio.
(ii) The dissolution of partnership does not The dissolution of firm means the termination
necessarily mean the termination of the of partnership business.
business of the partnership.
(iii) The dissolution of partnership will lead The dissolution of firm will lead to disposal
to revaluation of assets and liabilities. of partnership assets and settlement
liabilities.
(iv) The dissolution of a partnership will The dissolution of a firm will not create a
create a new partnership. new partnership.
Q. 3. Distinguish between Revaluation Account and Realisation Account.
Ans. Distinction between
Revaluation account and Realisation account
Revaluation Account Realisation Account
(i) It is prepared whenever assets and It is prepared at the time of dissolution of the
liabilities are required to be revalued. For firm.
example, at the time of admission, retirement,
death of a partner or change in the profit-
sharing ratio.
(ii) It is the recording of an asset or a liability It is used to record the closing transactions,
at its current value. It is a process of placing a showing profit or loss on realisation of assets
different valuation on an asset or a liability and settlement of liabilities.
from its book value.
(iii) It is prepared to determine the profit or It is prepared to determine the profit or loss
loss on revaluation of assets and liabilities. on realisation of assets and liabilities.
(iv) The profit/loss on revaluation is The profit/loss on realisation is transferred to
transferred to Old Partners' Capital in the All Partners' Capital Accounts in the profit-
profit-sharing ratio. sharing ratio.
Q. 4. Distinguish between Private Debts and Firm's Debts.
Ans. Distinction between Private Debts and Firm's Debts
Private Debts Finn's Debts
(i) It arises from private transactions of the It arises from the firm's transactions.
partners.
(ii) The partner is liable to pay his private All partners are liable to pay firm's debts
debts personally. jointly and severally.
(iii) The private property of any partner shall The property of the firm shall be applied first
be applied first in the payment of his private for the payment of firm's debts.
debts.
(iv) Excess of private estate over private Excess of firm's estate over firm's debts can
debts can be utilised for payment of firm's be utilised for payment of partner's private
debts. debts in proportion to his share of profit.
Q. 5. Explain the provisions of Section 48 of the Indian Partnership Act, 1932 dealing
with settlement of accounts of the partners.
Ans. Settlement of Accounts on Dissolution of Firm (Section 48). The provisions of
Section 48 relating to settlement of accounts at the time of dissolution of firm are given
below:
(i) Treatment of losses. If the assets of the firm are insufficient to discharge the debts and
liabilities of the firm, the partners shall bear deficiency in the proportion in which they were
entitled to share profits. Thus, losses including deficiencies of capital are to be paid in the
following manner:
• First of all, out of profits,
• Next, out of capital, and
• Lastly, if necessary, by the partners individually in their profit-sharing ratio.
(ii) Application of assets. The assets of the firm (including any sum contributed by the
partners to make up for the deficiency) will be applied for settling the debts of the firm, in the
following order:
• First, in paying off the debts due of the firm to third parties;
• Then, in paying to each partner rateably any advance or loans given by him;
• Then, in paying the capital contributed by the partners;
• The surplus, if any, shall be divided among the partners in their profit-sharing ratio.
Q. 6. How would you treat unrecorded asset and unrecorded liability at the time of
dissolution of firm?
Ans. Accounting treatment of unrecorded assets and unrecorded liabilities: Unrecorded
Assets. Assets, which are owned by the firm but not appearing in the Balance Sheet of the
firm, are called Unrecorded Assets. These assets may have a market value and thus either can
be sold or be taken by a partner or by a creditor in settlement of his outstanding amount.
Following entry is passed for it:
Cash/Bank A/c ...Dr. (if sold for cash)
Partner's Capital A/c ...Dr. (if taken by a partner)
To Realisation A/c
Note: If the asset is taken by a creditor, no entry is passed.
Unrecorded Liabilities. Liabilities which do not appear in the Balance Sheet of the firm, but
are payable by the firm, are known as Unrecorded Liabilities. Such a liability may either be
paid in cash or undertaken by a partner to be paid by him. Following entry is passed:
Realisation A/c ...Dr.
To Cash/Bank A/c (if paid in cash)
To Partner's Capital A/c (if partner has agreed to pay)
Note: Unrecorded Assets and Unrecorded Liabilities are not transferred to Realisation
Account, since there is no account for such assets and liabilities.
Q. 7. Explain the rule in Garner vs. Murray. [2022
Ans. Rule of Garner vs. Murray. If a partner's capital account shows a debit balance on the
dissolution of the firm, he is to pay the debit balance to the firm to settle his account. But if
such a partner is insolvent i.e., unable to satisfy his debt to the firm, then his deficiency,
which he is not able to bring in, will be borne by the other solvent partners in accordance
with the decision in Garner vs. Murray.
Following is the gist of the Judgement given by Justice Joyce in the case of Garner vs.
Murray:
1. The realisation profit or loss will be divided amongst all the solvent and insolvent partners
in their profit sharing ratio, as it is like a trading loss of the business.
2. The solvent partners will bring their shares of realisation in cash. In other words, the
solvent partners should bring in cash equal to their share of loss on realisation.
3. In absence of any agreement to the contrary, the solvent partners will bear the deficiency of
the insolvent partner (i.e., the amount which the insolvent partner is not able to bring) in
proportion to their capitals (i) If the capitals are fixed, in the fixed capital ratio, (ii) If the
capitals are fluctuating, the loss due to insolvency is divided among the other solvent partners
in the ratio of capital balance arrived at after transferring any transferable balances appearing
in the Balance Sheet (i.e., Profit & Loss Account, General Reserve, Capital Reserve etc.) but
before adjusting the profit or loss on realisation, (iii) If a partner's capital account shows a
debit balance on the date of dissolution of the firm, he need not share the capital loss of the
insolvent partners which stood before the dissolution of the firm.
Q. 8. How is the insolvency of a partner treated in accounts@@ Explain.
Ans. Insolvency of a partner means that a partner is unable to pay his/her debts to the firm. At
the end of the dissolution of the firm and settlement of accounts of all liabilities in order as
required u/s 48 of the Partnership Act, 1932, if there remains a debit balance in the Capital
Account of a partner, then it means that the firm has to receive money from that partner. This
balance is to be checked after transferring the profit or loss to the firm on account of
realisation amongst all the partners in their Profit Sharing Ratio. If a partner has a debit
balance in his capital account, it means that the partner has to pay to the firm.
Suppose, that a particular partner is unable to pay his debts to the firm, then he/ she is
assumed to be 'insolvent' at least so from commercial point of view whether or not he/she
has been adjudged 'insolvent' legally.
In such a case, rule of the famous case "Garner vs. Murray" is applied. The loss arising to
the firm because of non-payment of his/her dues or debts to the film is to be transferred to the
Capital Accounts of all the other partners in the ratio of the balances in their Capital
Accounts which stood just before the dissolution process had started.
These balances in the Capital Accounts of the other partners are to be checked after
transferring all the divisible balances appearing in the Balance Sheet, e.g.. Profit and Loss
Account, General Reserves, Capital Reserves, or Accumulated past losses etc. but before
adjusting the profit or loss on the Realisation Account.
If in the Capital Account of any partner there was a "Debit" Balance just before the
dissolution process starts, then he/she need not share any loss arising to the firm because of
insolvency of a partner.
This rule of Garner vs. Murray case (though an English case of old times) is applied in
present times because the basis suggested is very just and equitable. So this loss should not
be shared by other solvent partners in their Profit Sharing Ratio unless it is so laid down in
their Partnership Deed.
Some people are of the view that in India the decision in Garner vs. Murray does not apply.
But there is nothing in the Indian Partnership Act, 1932 which goes against the rule laid down
in Garner vs. Murray case. Therefore, it would be safe to follow it till an Indian court gives
a definite decision contrary to the decision given in Garner vs. Murray.
IMPORTANT NOTE.
If an examination problem states that the rule in Garner vs. Murrary is to be followed, the
solvent partners should bring in cash in proportion of their respective shares of Loss on
Realisation. If no mention is made of Garner vs. Murray decision in the problem to be solved,
the solvent partners may not be required to do so. But the other ruling given in Garner vs.
Murray must be followed, that is, the solvent partners should bear the loss arising due to the
insolvency of a partner in proportion to the balances in their Capital Accounts which stood
before the dissolution of the firm or before adjusting profit or loss on Realisation Account in
their Capital Accounts.
Q. 9. What is meant by Piecemeal Distribution of cash@@ Explain maximum loss
method of piecemeal distribution with the help of an example. [2024
Ans. Piecemeal Distribution of Cash. The assumption of realisation of all the assets and the
payments of all the liabilities as on the date of dissolution is far away from practice. In actual
practice, assets are realised gradually and liabilities are paid gradually depending upon the
amount realised from the sale of assets. Available cash is used in this order: (i) Payments for
realisation expenses; (ii) Payments to external liabilities, that is, other than partners' loans or
capital. When cash is gradually collected, the external liabilities are paid pro rata; (iii) Once
all the liabilities due to outsiders are paid off in full, the amount due to a partner as loan is to
be paid. Where loans are due to more than one partner, the payment, if not sufficient, has to
be made pro rata, i.e., rateably. (iv) When firm's creditors and loans of the partners have been
paid in full, any balance of cash
remaining will be applied in paying the partners the amounts owed to them, i.e., the sum total
of their Capitals and Current Accounts, so far as possible.
Maximum loss method of piecemeal distribution. In this method, it is assumed that every
instalment realised is a final realisation, i.e., the remaining assets will realise nothing.
Following procedure is used for distribution of cash among the partners (after the payment of
outside liabilities and partners' loans):
For Example: Refer to Q. 2, Unit V (Practicals), Page P-107.
Step 1: Calculate the adjusted capital of the partners after making adjustments for
accumulated profits/reserves/losses, transfer of balance of Current Accounts etc.
Step 2: Calculate the maximum loss assuming that the remaining assets are worthless.
Maximum Loss = Total of Balances of Capital Accounts of Partners - Cash available
Step 3: Distribute the maximum loss among the partners in their profit-sharing ratio.
Step 4: Calculate the balance of Capital Accounts of the partners after distributing maximum
loss.
Step 5: If balances of Capital Accounts of all partners (Step 4) show +ve balances (i.e., Cr.
Bal.), distribute the available cash among the partners equal to their respective capital
balances.
If balance of a Capital Account of any partner (Step 4) shows a -ve balance (i.e., debit
balance), transfer the same to the Capital Accounts of other partners (having Cr. balances), in
the ratio of their capitals just before dissolution assuming the partner having -ve balance as
insolvent. Repeat this process till the -ve balance is abolished.
Step 6. Go to Step 2 on next realisation and repeat the process till the final realisation.
Q. 10. Explain the proportionate method of piecemeal distribution.
Ans. Proportionate Capital method of Piecemeal Distribution. According to this method,
a partner, who has contributed more than his proportionate share of capital, is paid first in
priority to the other partners. For identifying the partner who is to be paid first, the partner's
capital, who has contributed the least, is taken as the base.
Suppose there are three partners—X, Y and Z sharing profits in the ratio of 2 : 2 : 1 and
having capitals of Rs. 3,00,000, Rs. 2,00,000 and Rs. 1,70,000 respectively. Dividing the
capital of each partner by the respective proportion of their share in the profit, we find that Y
has contributed the minimum capital i.e., Rs. 1,00,000 per share. On the basis of this
minimum, the capital should have been X Rs. 2,00,000, Y Rs. 2,00,000 and Z Rs. 1,00,000.
Hence both X and Z have surplus capital of Rs. 1,00,000 and Rs. 70,000 respectively.
Dividing the surplus of X and Z by their respective proportion of share in profit, we find that
X's surplus is the minimum, i.e., Rs. 50,000 (i.e., n,00,000/ 2) per share, and on this basis, Z
has an absolute surplus of Rs. 20,000 (i.e., Rs. 70,000 - Rs. 50,000). Hence, the priority of
payment will be first Rs. 20,000 to Z, next Rs. (1,00,000 + 50,000) or, Rs. 1,50,000 to X and
Z in the ratio of 2 :1 and any amount realised over Rs.(20,000 + 1,50,000) or. Rs. 1,70,000 to
X, Y and Z in profit sharing ratio of 2 : 2 :1.
Q. 11. Explain the accounting procedure involved in the sale of the business of a
partnership firm to company.
Ans. Accounting procedure involved in the sale of the business of a partnership firm to a
company.
(i) Sometimes, a partnership firm may desire to expand its business. Hence, it may convert
itself into a company.
(ii) Sometimes the business of a firm may be acquired or taken over by an existing company.
(iii) In either case, the firm is dissolved.
(iv) Firm's accounts are settled using Realisation Account.
(v) In either case, generally the entire business of the firm is sold or transferred to the
company.
(vi) Purchase Consideration (PC) is calculated as:
Agreed Value of all Assets including Goodwill and Cash/Bank Balance - Agreed Value of all
Liabilities except Partners' Capitals or Funds
(vii) Purchase Consideration is payable by the issue of shares or debentures of the company
on making due the purchase consideration, the Purchasing company's Account should be
debited and Realisation Account should be credited. On receipt of purchase consideration.
Cash Account/Equity or Preference shares of Purchasing Co. should be debited at their issue
price and Purchasing Company's Account should be credited.
(viii) In the absence of an agreement as to the division shares or debentures among the
partners. Shares or debentures are ultimately divided amongst partners in the ratio of their
final claims.
Q. 12. State with reasons whether the following statements are 'TRUE' or 'FALSE'.
(i) If the business carried on by a Partnership Firm becomes illegal, it stands dissolved.
(ii) A partner's loan is transferred to Realisation Account.
(iii) Assets, when realised are credited to Realisation Account.
(iv) Any amount realised from the sale of unrecorded asset is credited to Realisation
Account.
(v) Any solvent partner with even a debit balance on the date of dissolution has to bear
the deficiency of the insolvent partner.
(vi) Employees Provident fund is transferred to the capital accounts of the partners in
their profit sharing ratio.
(vii) At the time of dissolution, a partner's private estate is first used to pay off the firm's
debts.
(viii) The Garner vs. Murray rule is applied to settle the claims of the customers' dues.
(ix) Realisation Account and Revaluation Account are the same.
(x) Goodwill at the time of dissolution is treated like any other asset and is closed by
transferring it to realisation account.
(xi) On dissolution, cash balance in hand is transferred to Realisation Account.
Ans. (i) True. A partnership firm is compulsorily dissolved when its business becomes
illegal as per Section 41 of the Partnership Act.
(ii) False. A partner's loan is not transferred to Realisation Account. It is paid separately.
(iii) True. Assets, when realised are credited to Realisation Account.
(iv) True. In case of any unrecorded assets, cash realised from the sale of such assets is
credited to Realisation Account.
(v) False. According to Garner vs. Murray rule, the deficiency in the capital account of an
insolvent partner shall be borne by the solvent partners in the ratio of their capitals on the
date of dissolution. Debit balance in the capital account means non-existence of capital.
(vi) False. It is a liability. Therefore, it is transferred to Realisation Account.
(vii) False. Partner's private estate is used to pay the partner's private liability first.
(viii) False. Garner vs. Murray rule is applied to settle the deficiency in the capital account of
the insolvent partner by the solvent partners in the absence of any agreement to this respect.
(ix) False. Realisation Account is prepared on dissolution of the firm for recording sale of
assets and payment of liabilities. Revaluation Account is made at the time of admission, death
or retirement of a partner to update the value of assets and liabilities.
(x) True. Goodwill at the time of dissolution is treated like any other asset and is closed by
transferring it to Realisation Account.
(xi) False. On dissolution, cash balance in hand is transferred to Cash Account.
 UNIT
I
Accounting Process
Q. 1. From the following Trial Balance of Shri Ganesh prepare Trading and Profit &
Loss Account for the year ending 31st December, 2012 and Balance Sheet as on that date
after taking into consideration the adjustments given at the end of the Trial Balance:
[2008
Trial Balance as on 31-12-12
Particulars Dr. (Rs.) Cr.(Rs.)
Sales — 7,40,000
Purchase (adjusted) 6,99,200 —
Wages 900 —
Capital A/c — 48,500
National Insurance 300 —
Carriage In 400 —
Carriage Out 500 —
Lighting 600 —
Rates and Insurance (including premium of Rs. 300 p.a. paid upto 400 —
30-6-2012)
Stock on 31-12-2012 61,250 —
Cash in hand and at Bank 1,750 —
Discount earned — 600
Building 30,000 —
Discount allowed 100 —
Debtors and Creditors 6,000 20,000
Furniture 8,000 —
Dividends received — 300
8,09,400 8,09,400
Adjustments:
(i) National Insurance balance also includes employees contribution Rs. 150.
Wages are shown 'net' after deducting national insurance contribution borne by the
employees,
(ii) Owing to the nature of employment, some employees are housed in the building of the
business. The rental value of such portion is assessed at Rs. 500 p.a.
(iii) Sales as shown in the trial balance include the sale of old furniture (effected half way
through the year) realising Rs. 200. The book value of the furniture at the commencement of
the period was Rs. 300. The depreciation has been written off at 20% p.a.
(iv) The manager is to get a commission of 1/5th on the net profits after charging his
commission but before considering income from dividend.
(v) Depreciate building by 5%.
Sol. Trading and Profit & Loss Account of Shri Ganesh
Dr. for the year ended 31st December, 2012 Cr.
Particulars Rs. Particulars Rs.
To Purchases (Adjusted) 6,99,200 By Sales 7,40,000
To Wages 900 Less: Sale of furniture 200 7,39,800
Add: Employees' contribution
to National Insurance 150
Add: Rental value of building*-, 1,550
500
To Carriage in 400
To Gross Profit c/d 38,650
7,39,800 7,39,800
To National Insurance 150 By Gross Profit b/d 38,650
(Employer's contribution) By Discount earned 600
To Carriage out 500 By Dividend received 300
To Rates & Insurance 400 By Rental value of building
Less: Prepaid 150 250 occupied by employees 500
To Lighting 600
To Discount allowed 100
To Loss on Sale of fumiture*2 70
To Depreciation:
(i) Building 1,500
(ii) Furniture 1,570 3,070
To Manager's Commission*3 5,835
To Net Profit 29,475
40,050 40,050
Balance Sheet of Shri Ganesh
as on 31st December, 2012
Liabilities Rs. Assets Rs.
Sundry Creditors 20,000 Cash in hand and at Bank 1,750
Manager's Commission due 5,835 Sundry Debtors 6,000
Capital 48,500 Closing Stock 61,250
-Add: Net Profit 29,475 77,975 Prepaid Insurance 150
Furniture 8,000
Less: Book value of furniture
sold 300
7,700
Less: Depreciation 1,540 6,160
Building 30,000
Less: Depreciation 1,500 28,500
1,03,810 1,03,810
Working notes:
*1 Employees' contribution to National Insurance and rental value of building occupied by
workers are part of gross wages!
*2 Calculation of depreciation on furniture and loss on sale of furniture: Rs.
(a) Furniture sold: Book Value at the beginning 300
Less: Depreciation for 6 months [Rs. 300 * 20/100 x 6/12] 30
Less: Selling Price 270
200
Loss on Sale of furniture 70
(b) Furniture in hand [Rs. 8,000 - Rs. 300 (Book Value of furniture sold)] 7,700
Depreciation 20% of Rs. 7,700 1,540
Add: 6 months depreciation on furniture sold (a) 30
Total Depreciation on furniture 1,570
*3 Calculation of Manager's Commission:
Net Profit before dividend income
= Rs.[38,650 + 600 + 500 - 150 - 500 - 250 - 600 - 100 - 70 - 3,070] = Rs. 35,010
Manager's commission = Rs. 35,010 x 20/120 = Rs. 5,835
Q. 2. The following is the Trial Balance of a Trader as on 31 st March, 2013:
Particulars Dr. (Rs.) Cr. (Rs.)
Cash in hand 5,000 —
Land and Building 80,000 —
Plant and Machinery 50,000 —
Debtors and Creditors 25.000 40,000
Stock on 1-4-2012 10,000 —
15% Investment on 1-4-2012 20,000 —
Purchases and Sales 95,000 1,90,000
Bank Overdraft — 20,000
Wages 28,000 —
Salaries 16,000 —
Rent, Rates and Taxes 15,000 —
Bad Debts 6,000 —
Drawings 5,000 —
Bills Receivable and Bills Payable 15,000 21,000
Carriage Inwards 6,000 —
Customs Duty on Purchases 16,000 —
Fire Insurance Premium 4,000 —
Advertisement 30,000 —
Provision for Doubtful Debts — 2,000
Interest on Investments — 2,000
Sundry Expenses 11,000 —
Furniture 20,000 —
Value Added Tax — 25,000
Capital — 1,57,000
 4,57,000 4,57,000
Additional Information:
(i) Stock on 31st March, 2013 was valued at Rs. 40,000.
(ii) Included in debtors are Rs. 8,000 due from Ram and included in creditors are Rs. 6,000
due to Ram.
(iii) Bills Receivables include a bill of Rs. 5,000 received from Mohan, which has been
dishonoured.
(iv) Sales include Rs. 5,000 for the goods sold on approval basis. Approval was not received
till 31st March. Goods are sold at a profit of 25% on cost.
(v) Wages include Rs. 5,000 spent on erection of machinery on 1-4-2012.
(vi) Create a provision for doubtful debts at 5% on debtors.
(vii) Prepaid rates and taxes amounted to Rs. 2,000.
(vii) Depreciate machinery by 10%.
Prepare Trading and Profit & Loss Account for the year ended 31 st March, 2013 and a
Balance Sheet as on that date. [2009
Sol.
Trading and Profit & Loss Account
Dr. for the year ended 31st March, 2013 Cr.
Particulars Rs. Particulars Rs.
To Opening Stock 10,000 By Sales 1,90,000
To Purchases 95,000 Less: On approval 5,000 1,85,000
Add: Customs Duty 16,000 1,11,000 By Closing Stock 40,000
To Wages 28,000 Add: Stock with Customers
Less: For Machine 5,000 23,000 at cost (5,000 x 100/125) 4,000 44,000
To Carriage Inwards 6,000
To Gross Profit c/d 79,000
2,29,000 2,29,000
To Salaries ' 16,000 By Gross Profit b/d 79,000
To Rent, Rates & Taxes 15,000 By Interest on Investments 2,000
Less: Prepaid 2,000 13,000 -Add: Accrued Interest 1,000 3,000
To Bad Debts 6,000 By Provision for Doubtful
Debts2,000
To Fire Insurance 4,000 Less: New Provision for
Premium
To Advertisement 30,000 Doubtful Debts 950 1,050
To Sundry Expenses 11,000 By Net Loss transferred to
To Depreciation on Capital Account 2,450
Machinery
10/100 [Rs. 50,000 + Rs. 5,500
5,000]
85,500 85,500
Balance Sheet
as on 31st March, 2013
Liabilities Rs. Assets Rs.
Bank Overdraft 20,000 Land & Building 80,000
Bills Payable 21,000 Plant and Machinery 50,000
Creditors 40,000 Add: Installation Cost 5,000
Less: Common debts 6,000 34,000 55,000
Value Added Tax 25,000 Less: Depreciation 5,500 49,500
Capital •1,57,00 Furniture 20,000
0
Less: Drawings 5,000 15% Investments 20,000
1,52,000 Prepaid, rates and taxes 2,000
Less: Net Loss 2,450 1,49,550 Bill Receivable 15,000
Less: Dishonoured 5,000 10,000
Accrued Interest 1,000
Debtors 25,000
Less: Sale on approval (5,000)
Less: Common Debts (6,000)
Add: B/R Dishonoured 5,000
19,000
Less: Provision for
Doubtful Debts 950 18,050
 Closing Stock
Rs.(40,000 + 4,000) 44,000
Cash in hand 5,000
2,49,550 2,49,550
Q. 3. Given below is the Trial Balance of Mr. Ramesh as on 31st Dec, 2012:
Particulars Dr. (Rs.) Cr. (Rs.)
Land and Building 1,20,000 —
Office Machinery 70,000 —
Furniture and Fittings 20,000 —
Stock on 1-1-2012 16,000 —
Purchases and Sales 90,000 2,20,000
Salaries 20,000 —
Bad Debts 10,000 —
Debtors and Creditors 35,000 40,000
Sales Tax 10,000 —
Rent. Rates and Taxes 15,000 —
Advertisement 18,000 —
Drawings 5,000 —
Loan to Ashok @ 16% p.a. on 1-7-2012 20,000 —
Wages 33,000 —
Interest on Loan to Ashok — 1,000
Bills Receivable 10,000 —
Trade Mark 8,000 —
Discount 1,000 —
Wages Payable — 2,000
Capital — 1,98,000
Bank Overdraft — 40,000
5,01,000 5,01,000
Additional Information:
(i) The value of Stock on 3i-12-2012, Rs. 30,000.
(ii) Sales include Rs. 5,000 for the goods sold on approval to Hemant. Goods are sold at a
profit of 25% on cost. Approval was not received till 31 st Dec.
(iii) Furniture purchased during the year for Rs. 5,000 was wrongly debited to Purchase
Book.
(iv) A cheque of Rs. 8,000 received from customers was deposited in the bank in the last
week of December. It was reported to have been dishonoured.
(v) Free samples worth Rs. 4,000 were distributed during the year.
(vi) Write off further bad debts Rs. 2,000. Also create a provision for doubtful debts at 10%
on debtors.
(vii) Depreciate furniture by 10% and office machinery by 5%.
Prepare Trading and Profit & Loss Account for the year ended 31st December, 2012 and
a Balance Sheet as on that date. [2020
Sol. Trading and Profit & Loss Account of Mr. Ramesh
Dr. for the year ended 31sf December, 2012 Cr.
Particulars Rs. Particulars Rs.
To Opening Stock 16,000 By Sales 2,20,000
To Purchases 90,000 Less: Sale on approval 5,000
Less: Transf. to Furniture A/c 2,15,000
5,000
85,000 Less: Sales Tax 10,000 2,05,000
Less: Free Samples 4,000 81,000 By Closing Stock 30,000
To Wages 33,000 By Stock with Customers (at 4,000
cost)
To Gross Profit c/d 1,09,000
2,39.000 2,39,000
To Salaries 20,000 By Gross Profit b/d 1,09,000
To Bad Debts 10,000 By Interest on Loan to
Arid: Further Bad Debts 2,000 Ashok 1,000
Add: Provision for Doubtful Add: Accrued Interest 600 1,600
Debts (New) 3,600 15,600
To Rent, Rates and Taxes 15,000
To Advertisement 18,000
To Discount 1,000
To Free Samples 4,000
To Depreciation on Furniture 2,500
To Dep. OR Office Machinery 3,500
To Net Profit trsf. to Capita! A/c 31,000
1,10,600 1,10,600
Balance Sheet of Mr. Ramesh
as on 32s' December, 2012
Liabilities Rs. Assets Rs.
Capital 1,98,000 Land & Building 1,20,000
Add: Net Profit 31,000 Office Machinery 70,000
2,29,000 Less: Depreciation 3,500 66,500
Less: Drawings 5,000 2,24,000 Furniture & Fittings 20,000
Creditors 40,000 Add: Trsf. from 5,000
Purchase
Wages Payable 2,000 25,000
Bank Overdraft 40,000 Less: Depreciation 2,500 22,500
Add: Dishonour of 8,000 48,000 Loan to Ashok 20,000
Cheque
Bills Receivable 10,000
Trade Mark 8,000
Debtors 35,000
Less: Sale on Approval 5,000
30,000
Less: Further Bad Debts 2,000
28,000
Add: Cheque 8,000
Dishonoured
36,000
Less: Provision for
Doubtful Debts 3,600 32,400
Accrued Interest 600
 Closing Stock 30,000
Stock with Customers 4,000
3,14,000 3,14,000
Q. 4. From the following Trial Balance and additional information, prepare Trading and
Profit & Loss Account of Mr. Mukul for the year ended 31 st March, 2013 and Balance Sheet
as at that date: [2011
Particulars Dr. (Rs.) Cr. (Rs.)
Capital / Drawings 10,000 1,70,000
Plant and Machinery 1,10,000 —
Sales / Purchases 84,000 1,65,000
Returns 5,000 4,000
Bad debts / Bad debts Recovered 5,000 26,450
Freight inwards 5,000 —
Freight outwards 7,000 —
Discount 2,000 1,000
Commission 4,000 3,000
Rent 3,000 4,000
Interest 2,500 3,000
Office and Administrative Expenses 6,000 —
Selling and Distribution Expenses 10,000 —
Creditors/Debtors 2,15,000 2,02,000
Bills Payable/Bills Receivable 10,000 5,600
Loan 20,000 50,000
Investments 50,000 —
Opening Stock 54,000 —
Cash in hand 5,000 —
Cash at Dena Bank 45,550 —
Bank overdraft at Canara Bank — 20,000
Wages and Salaries 1,000 —
6,54,050 6,54,050
Additional Information:
(i) Closing Stock at market price as at 31st March, 2013 was Rs. 61,500.
However, its cost was Rs. 80,000.
(ii) Provide for depreciation on Plant and Machinery @ 10% p.a.
(iii) Provide interest on capital @ 6% p.a. and an additional capital of Rs. 10,000 was
introduced on 1st Oct. 2012.
(iv) Charge interest on drawings @ 9% p.a.
(v) Goods costing Rs. 10,000 were destroyed due to fire on 30th March, 2013. The Insurance
Company accepted claim to the extent of 60% only and paid the claim money on 10 th April,
2013.
(vi) Goods worth Rs. 10,000 were sent to a customer on approval basis and have been
accounted for in the books as actual sale. These goods remained unapproved on 31 st March,
2013. The cost of such goods was Rs. 8,000.
(vii) Received credit purchase invoice of Rs. 10,500 on 27th March 2013 and recorded in the
books but the goods were not received till the end of the accounting year.
(viii) Manager is entitled to a commission on 5% of net profit after charging the commission.
Sol. Trading and Profit & Loss Account
Dr. for the year ended 32 s' March, 2013 Cr.
Particulars Rs. Particulars Rs.
To Opening Stock 54,000 By Sales A/c 1,65,000
To Purchases 84,000 Less: Returns 5,000
Less: Returns 4,000 Less: Goods on approval 10,000 1,50,000
Less: Loss by fire 10,000 70,000 By Closing Stock*1 61,500
To Freight inwards 5,000 Add: With the Customer*2 8,000
To Wages and Salaries 1,000 Add: Goods in-transit*1 10,500 80,000
To Gross Profit b/f 1,00.000
2,30,000 2,30,000
To Bad Debts 5,000 By Gross Profit 1,00,000
To Freight outwards 7.000 By Bad Debts recovered 26,450
To Discount 2,000 By Discount received 1,000
b/f 14.000 1,2.7,450
To Commission 4,000 By Commission received 3,000
To Rent 3,000 By Rent received 4,000
To Interest 2.5C0 By Interest received 3.000
To Office & Administrative 6,000 By Interest on Drawings*4 450
Expenses
To Selling & Distribution 10.000 [Rs. 10,000 x 9/10 x 6/12]
Expenses
To Depreciation: Plant & 11,000
Machinery
To Interest on Capital:
[Rs. 1.60,000 x 6/100] 9,600
[Rs. 10,000 x 6/110 x 6/12] + 9,900
300
To Goods Lost due to Fire A/c
10,000
Less: Claim accepted 6,000 4,000
To Manager's Commission*5 3,500
To Net Profit 70,000
1,37,900 1,37,900
Balance Sheet
as on 31st March, 2013
Liabilities Rs. Assets Rs.
Capital 1,70.00 Plant & Machinery 1,10,00
0 0
Add: Net Profit 70,000 Less: Depreciation 11,000 99,000
Add: Interest on Capital 9,900 Debtors 2,15,00
0
2,49,90 Less: Goods sent on 10,000 2,05,000
0 app.
Less: Drawings 10,000 Bills Receivable 10,000
Less: Interest on 450 2,39,450 Loan 20,000
Drawings
Creditors 2,02,000 Investments 50,000
Bills Payable 5,600 Cash in hand 5,000
Loan 50,000 Cash at Dena Bank 45,550
Bank overdraft at 20,000 Closing Stock 61,500
Canara Bank
Manager's Commission 3,500 Add: Goods with 8,000
Outstanding CustomerRs.
Add: Goods in-transit 10;500 80,000
Insurance Claim Due 6,000
5,20,550 5,20,550
Working notes:
*1 Closing Stock is valued @ Rs. 61,500 as per Principle of Cost or Market Price, whichever
is lower.
*2 Goods with customers (not yet approved as sale) are treated as unsold and included in
Closing Stock @ cost Rs. 8,000.
*3 Credit purchase invoice of fl0,500 recorded in the books is alright but as goods were not
received till the end of the year. Hence, the same are treated as part of Closing Stock (Goods
in-transit).
*4 Interest on Drawings @ 9% p.a. is charged for 6 months (average basis).
*5 Manager's Commission is 5/100 (profit before commission)
Assume Commission is 'C. Profit before commission = Rs.[1,37,900 - 64,400] = Rs. 73,500
Hence C = 5/100(Rs. 73,500 - C)  20 C = Rs. 73,500 - C
 21 C = Rs. 73,500  C = Rs. 73,500 + 21 = Rs. 3,500

Q. 5. The following is the Trial Balance of Ms. AJIT Traders as on 31 st March, 2013:
[2011 Sem
Particulars Dr.(Rs.) Cr. (Rs.)
Drawings and Capitals 19,000 65,690
Stock 1st April 2012 46,800 —
. Purchases and Sales 3,21,700 3,89,600
Returns 8,600 5,800
Debtors and Creditors 24,000 14,800
Discount 1,800 4,110
Bank Loan @ 14% p.a. — 20,000
Carriage Inward 19,600
Rent and Taxes 9,300
Salaries & Wages 4,000
Printing & Stationery 8,700
Interest on Bank Loan 1,100
Travelling Expenses 870
Postage & Telephone 2,000
Insurance 6,400
General Expenses 12,750
Furniture 5.000
Cash Balance 380
Bank Balance 8,000
5,00,000 5,00,000
Adjustments:
(i) Closing Stock on 31-3-2013 was Rs. 78,600.
(ii) Credit purchases of Rs. 400 have not been entered in the Books.
(iii) Printing and Stationery amounting to Rs. 3,600 is to be carried forward.
(iv) Interest on Bank Loan shall be provided for whole year.
(v) Personal purchases of proprietor amounting to Rs. 600 have been recorded in Purchase
Day Book.
(vi) Depreciate furniture by 10%.
(vii) Provision for Bad & Doubtful Debts to be created @ 5% on Debtors and 2% for
Discount on Debtors.
(viii) Included among Debtors Rs. 3,000 due from him and included among Creditors Rs.
1,000 due to him.
Prepare Trading, Profit & Loss A/c for the year ending 31 st March, 2013 and a Balance
Sheet as on that date.
Sol.
Trading and Profit & Loss A/c of Ms. AJ1T Traders
Dr. for the year ended 3Vl March, 2013 Cr.
Particulars Rs. Particulars Rs.
To Opening Stock 46,800 By Sales 3.89,600
To Purchases 3,21,700 Less: Sale Returns 8,600 3,81,000
Less: Purchase Returns 5,800 By Closing Stock 78,600
3,15,900
Add: Omitted 400
3,16,300
Less: Charged from Mr. Ajit 600 3,15,700
To Carriage Inward 19,600
To Gross Profit (trans, to P&L 77,500
A/c)
4,59,600 4,59,600
To Discount allowed 1.800 By Gross Profit
To Rent & Taxes 9,300 (From Trading A/c) 77,500
To Salaries & Wages 4,000 By Discount Received 4.110
To Printing & Stationery 8,700
Less: Unused 3,600 5,100
To Interest on Bank Loan 1,100
Add: Unpaid 2,800
n/f 23,000 81,610
To Travelling Expenses 870
To Postage & Telephone 2,000
To Insurance 6,400
To General Expenses 12,750
To Dep. on Furniture 500
To Prov. for Doubtful Debts*2
(5/100 x Rs. 23,000) 1,150
To Prov. for Discount on
Debtors
2/100 [Rs. 23,000 - Rs. 1.150] 437
To Net Profit 34,503
81,610 . 81,610
 Balance Sheet of Ms. AJIT Traders
as on 31st March, 2013
Liabilities Rs. Assets Rs.
Capital of Mr. Ajit 65,690 Debtors 24,00
0
Less: P. Purchases 600 Less: Common Dr./Cr. 1,000
Less: Drawinqs 19,000 19,600 Less: Prov. for Doubtful 1,150
Debtst2
46,090 Less: Prov. for Discount 437 21,413
Add: Net Profit 34,503 80,593 Furniture 5,000
Creditors*, 14,800 Less: Depreciation 500 4,500
Add: Purchase Omitted 400 Cash in hand 380
15,200 Bank balance 8,000
Less: Common Dr/Cr. 1,000 14,200 Stationery unused 3,600
Bank Loan 20,000 Closing Stock 78,600
Interest on bank loan unpaid 1,700
1,16,493 1,16,493
Working notes:
*1 Rs. 600 Personal Purchases are and will remain included in Creditors.
*2 Provision for doubtful debts (5%) is created on net Debtors, i.e., (Rs. 24,000 - Rs. 1,000) =
Rs. 23,0O0.
*3 Provision for discount (2%) is calculated on net realisable amount of debtors, i.e.,
Rs. 23,000 - Rs. 1,150 = Rs. 21,850.
Q. 6. From the following Trial Balance of Sachin as on 31 st March, 2011 you are
required to prepare a Trading and Profit & Loss Account for the year ended 31 st
March, 2011 and a Balance Sheet as on that date, after making the necessary
adjustments as mentioned hereunder: [2022
Particulars Dr. Cr.(Rs.)
(Rs.)
Sachin's Capital Account — 1,60,000
Sachin's Drawings 24,000 —
Furniture and Fixtures 8,000 —
P'3nt and Machinery 60,000 —
Patents (Ten years from 01-04-2010) 40,000 —
Stock on 01-04-2010 40,000 —
Purchases 1,70,000 —
Salaries 14,800 —
Wages 30,000 —
Sundry Debtors 20,400 —
Sales — 2,64.000
Cash in hand 13,250 —
Land 28,350 —
Loan from Kapil (@ 6% on 01-10-2011) — 20,000
Postage and Fax 3,000 —
Rent, Rates and Taxes 7,200 —
Bad Debts 800 —
Sundry Creditors — 24,000
Discount — 1,200
Carriage Inwards 400 —
Interest on Loan 300 —
Insurance 1,600 —
Travelling Expenses 1,000 —
Sundry Expenses 600 —
Cash at Bank 20,500 —
Bank Overdraft — 15,000
4,84,20 4,84,200
0
Adjustments:
(i) Stork on 31-03-2011 is valued Rs. 30,000.
(ii) A new machine was installed on 01-04-2010 for Rs. 3,000. No entry in this respect was
passed in the books. Wages Rs. 1,000 paid for installation of the machine were debited to
wages account.
(iii) Of the sundry debtors Rs. 200 are bad and to be written off. You are required to maintain
a provision for doubtful debts @ 5% on debtors and a provision for discount on debtors @
2%.
(iv) Goods costing Rs. 2,000 were given away as free samples for publicity.
(v) Depreciate plant and machinery at 20% and furniture and fixtures at
10%.
(vi) Goods costing Rs. 1,000 were sent to a customer for Rs. 1,200 on 27th March, 2011 on
sale or return basis. This was recorded as actual sale.
Sol.
Trading and Profit & Loss Account
Dr. for the year ended 31st March, 2011 Cr.
Particulars Rs. Particulars Rs.
To Opening Stock 40,000 By Sales 2,64,00
0
To Purchases 1,70,000 Less: Goods sent on
Less: Free Samples 2,000 1,68,000 approval basis 1,200 2,62,800
To Carriage Inwards 400 By Closing Stock 30,000
To Wages 30,000 Add: Stock with
Less: Installation Charges 1,000 29,000 customer at cost 1,000 31,000
To Gross Profit c/d 56,400
2,93,800 2,93,800
To Salaries 14,800 By Gross Profit b/d 56,400
To Postage and Fax 3,000 By Discount Received 1,200
To Rent, Rates and Taxes 7,200
To Insurance 1,600
To Travelling Expenses 1,000
To Sundry Expenses 600
To Interest on Loan 300
Add: Accrued Interest 300 600
To Advertisement (Free Sample) 2,000
b/f 30,800 57,600
To Bad Debts 800
Add: Further Bad Debts 200
1,000
Add: New Provision for
Doubtful Debts 950 1,950
To Provision for Discount on 361
Debtors
To Depreciation:
Plant and Machinery:
Old 12,000
New 800
Furniture. 800
Patents 4,000 17,600
To Net Profit transferred
to Capital Account 6,889
57,600 57,600
Balance Sheet of Sachin
as on 31st March, 2011
Liabilities Rs. Assets Rs.
Capital 1,60,000 Cash ,n Hand 13,250
Add: Net Profit 6,889 Cash at Bank 20,500
1.66,889 Closing Stock 30,000
Less: Drawings 24,000 1,42,869 Add: On Approval 1,000 31,000
Loan from Kapil 20,000 Sundry Debtors 20,400
Add: Accrued Interest 300 20,300 Less: On Approval 1,200
Sundry Creditors 24,000 19,200
Creditors for 3,000 Less: Bad Debts 200
Machinery
Bank overdraft 15,000 19,000
Less: Provision for
Doubtful Debts 950
18,050
Less: Provision for
 Discount on Debtors 361 17,689
Furniture and Fixture 8,000
Less: Depreciation 800 7,200
Plant and Machinery 60,000
Add: New Machinery 4,000
(3,000 + 1,000) 64,000
Less: Depreciation
(12,000 + 800) 12,800 51,200
Patents 40,000
Less: Written off 4,000 36,000
Land 28,350
2,05,189 2,05,189
Q. 7. From the following balances taken from the ledger of Ms. Jenny on 31 st March, 2013,
prepare the Trading and Profit & Loss Account for the year ended 31 st March, 2013 and the
Balance Sheet as on that date: [2013
Particulars Rs. Particulars Rs.
Sundry creditors 19,000 Bad debts 100
Building 15,000 Loan from John 2,500
Income-tax 1,025 Sundry Debtors 9,500
Loose Tools 1,000 Investments 6,500
Cash at Bank 16,200 Bad debts reserve 1,600
Sundry Expenses 1,990 Rent and Rates 850
Bank Interest (Credit) 75 Furniture 3,000
Purchases 1,57,000 Stock (1.4.2012) 27,350
Wages 10,000 Capital 47,390
Carriage Inwards 1,120 Discount allowed 630
Sales 1,85,000 Dividend Income 535
Motor Van 12,500 Drawings 2,000
Cash in hand 335 Bills payable 10,000
Adjustments:
(i) Write off further Rs. 300 as bad debts out of Sundry Debtors and create a reserve for bad
debts at 20% on debtors.
(ii) Dividend accrued on investments is Rs. 135, Rates paid in advance Rs. 100 and wages
owing Rs. 450.
(iii) On 31-3-2013, stock was valued at Rs. 15,000 and loose tools were valued at Rs. 800.
(iv) Write off 5% for depreciation on building and 40% on motor van.
(v) In case of profits, manager is entitled to a commission of 5% on net profits.
(vi) Provide for interest at 12% per annum due on loan taken from John on 1-6-2012.
Sol.
Trading and Profit & Loss Account
Dr. for the year ending 31st March, 2013 Cr.
Particulars Rs. Particulars Rs.
To Opening Stock 27,350 By Sales 1,85,000
To Purchases 1,57,000 By Closing Stock 15,000
To Wages 10,000
Add: Outstanding Wages 450 10,450
To Carriage Inwards 1,120
To Gross Profit c/d 4,080 i
2,00,000 2,00,000
To Sundry expense 1,990 By Gross Profit b/d 4,080
To Bad Debts 100 By Bank Interest 75
Add: Further Bad debts 300 By Dividend Income 535
Prov. for Doubtful Debt (New) Add: Dividend accrued
1,840
2,240 on Investment 135 670
Less: Bad Debts Reserve 1,600 640 By Net Loss transferred to 5,385
Capital A/c
To Rent and Rates 850
Less: Rates paid in advance 100 750
To Discount allowed 630
To Interest on Loan [Rs. 2.500 250
12/100 x 10/12]
To Depreciation on:
Building 750
Motor Van 5,000
Loose tools 200 5,950
10,210 10,210
Balance Sheet of Mr. Maneet
as at 31st March 2013
Liabilities Rs. Assets Rs.
Sundry Creditors 19,000 Cash in hand 335
Bills Payable 10,000 Cash at Bank 16,200
Loan from John 2,500 Sundry debtors 9,500
Outstanding Wages 450 Less: Further Bad 300
debts
Interest on Loan 250 9,200
Capital 47,390 Less: Reserve for
Less: Drawings 2,000 Doubtful Debts 1,840 7,360
Less: Income-tax 1,025 Closing Stock 15.000
44,365 Investments 6,500
Less: Net Loss 5,385 38,980 Furniture 3,000
Building 15,000
Less: Depreciation 750 14,250
Motor Van 12,500
Less: Depreciation 5,000 7,500
Accrued Dividend 135
Prepaid Rates 100
Loose Tools 800
71,180 71,180

Q. 8. From the following trial balance and information, prepare Trading and Profit &
Loss Account of Mr. Rishabh for the year ended 31 st March, 2013 and a Balance Sheet
as on that date: [2014
Particulars Dr. (Rs.) Cr, (Rs.)
Capital •- 1,00,000
Drawings 12,000 —
Land and Building 90,000 —
Plant and Machinery 20,000 —
Furniture 5,000 —
Sales — 1,40,000
Returns outward — 6,000
Debtors 18,400 —
Loan from Gajanand on 1-7-2012 @ 6% p.a — 30,000
Purchases 80,000 —
Returns inward 5,000 —
Carriage 10,000 —
Sundry expenses 600 —.
Printing and Stationery 500 —
Insurance expenses 1,000 —
Provision for bad and doubtful debts — 1,000
Provision for discount on debtors — 380
Bad debts 400 —
Opening Stock on 1-4-2012 21,300 —
Salaries and Wages 18,500 —
Creditors — 12,000
Trade expenses 800 —
Cash at Bank 4,600 —
Cash in hand 1,280 —
2,89,380 2,89,380
Additional information:
(i) Value of Closing Stock on 31-3-2013 was Rs. 27,300.
(ii) Fire occurred on 23rd March, 2013 and Rs. 10,000 worth of general goods were destroyed.
The insurance company accepted claim for Rs. 6,000 only and paid the claim money on 10 th
April, 2013.
(iii) Bad debts amounting to Rs. 400 are to be written off. Provisions for bad and doubtful
debts is to be made at 5% and for discount at 2% on debtors. Make a provision of 2% on
Creditors for discount.
(iv) Received Rs. 6,000 worth of goods on 27th March, 2013 but the Invoice of purchases was
not recorded in Purchase Book.
(v) Rishabh took away good worth Rs. 2,000 for personal use but no record was made
thereof.
(vi) Charge depreciation at 2% on land & building, 20% on plant & machinery and 5% on
furniture.
(vii) Insurance prepaid amounts to Rs. 200.
Sol.
Trading and Profit & Loss Account of Mr. Shyam Lal
Dr. for the year ended 31st March, 2013 Cr.
Particulars Rs. Particulars Rs.
To Opening Stock 21,300 By Sales 1,40,000
To Purchases 80,000 Less: Returns Inward 5,000 1,35,000
Less: Returns Outward 6,000 By Loss due to fire 10,000
74,000 By Closing Stock 27,300
Less: Drawinqs 2,000
72,000
Add: Omitted 6,000 78,000
To Carriage 10,000
To Gross Profit c/d 63,000
1,72,300 1,72,300
To Interest on Loan Outstanding By Gross Profit b/d 63,000
Rs.[30,000 x 6/100 x 9/12] 1,350 By Provision for Discount
To Sundry Expenses 600 on Debtors (Old) 380
To Printing & Stationery 500 Less: Provision for Discount
To Insurance 1,000 on Debtors (New) 342 38
Less: Prepaid 200 800 By Provision for Discount
To Salaries and Wages 18,500 on Creditors* 360
To Trade Expenses 800
To Loss due to fire 10,000
Less: Insurance claim 6,000 4,000
To Depreciation on:
Land & Building 1,800
Plant & Machinery 4,000
Furniture 250 6,050
To Provision for Bad & Doubtful
Debts
(New) 5/100 Rs.[18,400 - 400]
900
Add: Bad Debts 400
Add: Further Bad Debts 400
1,700
Less: Provision for Bad &
Doubtful Debts 1,000 700
To Net Profit trans, to Capital 30,098
A/c
63,398 63,398
Balance Sheet of Mr. Shyam Lai
as on 31st March, 2013
Liabilities Rs. Assets Rs.
Creditors 12,000 Cash in hand 1,280
Add: Omitted Purchases 6,000 Cash at Bank 4,600
18,000 Prepaid Insurance 200
Less: Prov. for Discount 360 17,640 Closing Stock 27,300
Loan from Gajanand @ 30,000 Insurance Company (claim due) 6,000
6%
Interest accrued on Loan 1,350 Debtors 18,400
Capital 1,00,00 Less: Further Bad 400
0 Debts
Add: Net Profit 30,098 18,000
 1,30,09 Less: Prov. for 900
8 Doubtful Debts
Less: Drawings 17,100
Rs.[12,000 + 2,000] 14,000 1,16,098 Less: Prov. for 342 16,753
Discount
Furniture 5,000
Less: Depreciation 250 4,750
Land & Building 90,000
Less: Depreciation 1,800 88,200
Plant & Machinery 20,000
Less: Depreciation 4,000 16,000
1,65,088 1,65,088
*Note: Making provision for discount on creditors is against the Convention of
Conservatism. As per this Convention expected profit should be ignored.
Q. 9. The following is the Trial Balance of Mr. Lai as at 31 st March, 2013:
Particulars Dr. (Rs.) Cr. (Rs.)
Lai's Capital — 86,690
Opening Stock 46,800 —
Purchases and Sales 3,21,700 3,89600
Returns 8,600 5,800
Freight and Carriage 18,600 —
Rent and Taxes 5,700 —
Salaries and wages 9,300 —
Sundry Debtors and Creditors 24,000 14,800
Bank Loan @ 6% p.a. — 20,000
Bank Interest on Loan 900 —
Printing and Advertising 14,600 —
Miscellaneous Income — 250
Cash at Bank 8,000 —
Discount 1,800 4,190
Furniture and Fittings 5,000 —
General Expenses 11,450 —
Insurance 1,300 —
Postage and Telegrams 2,330 —
Cash in hand 380 —
Travelling Expenses 870 —
Drawings 40,000 —
5,21,330 5,21,330
The following adjustments should be made:
(i) Included amongst the Debtors is Rs. 3,000 due from Anand and included among the
creditors Rs. 1,000 due to him.
(ii) Provision for Bad and Doubtful Debts to be created at 5% and Reserve for Discount @
2% on Sundry Debtors.
(iii) Depreciate Furniture and Fittings by 10%.
(iv) Personal Purchases amounting to Rs. 600 had been included in the Purchases Day Book.
(v) Interest on Bank Loan shall be provided for the whole year.
(vi) One quarter of the amount of Printing and Advertising is to be carried forward to next
year.
(vii) Credit purchase invoice amounting to Rs. 400 had been omitted from the books.
(viii) Stock on 31st March, 2013 was Rs. 78,600.
Prepare Trading and Profit & Loss Account for the year ended 31 st March, 2013 and
Balance Sheet as on that date. [2014 Nov.
Sol.
Trading ye and Profit & Loss Account of Mr. Lal
Dr. for the ar ended 31st March 2013 Cr.
Particulars Rs. Particulars Rs.
To Opening Stock 46,800 By Sales 3,89,600
To Purchases 3.21,700 Less: Returns Inward 8,600 3,81,000
Less: Returns Outward 5,800 By Closing Stock 78,600
3,15,900
Less: Drawings 600
3,15,300
Add: Omitted Invoice 400 3,15,700
To Freight and Carriage 18,600
To Gross Profit transferred to
Profit & Loss Account 78,500
4,59,600 4,59,600
To Rent and taxes 5,700 By Gross Profit 78,500
To Salaries and Wages 9,300 By Miscellaneous Income 250
To Interest on Bank Loan 900 By Discount 4.190
Add: Outstanding 300 1,200
To Printing & Advertising
14,600
Less: C/f to next year 3,650 10,950
To Discount 1,800
To General Expenses 11,450
To Insurance 1,300
To Postage and Telegram 2,330
To Travelling Expenses 870
To Depreciation on:
Furniture & Fittings 500
To Provision for Bad & Doubtful
Debts 5% of Rs.[24.000-1.000] 1,150
To Provision for Discount
2% of Rs.[24,000-1.000-1,150] 437
To Net Profit transferred to
Capital Account 35,953
82,940 82,940
Balance Sheet of Mr. Lai
as .on 31st March, 2013
Liabilities Rs. Assets Rs.
Lai's Capital 86,690 Cash at Bank 8,000
Less: Drawing 40,000 Cash in hand 380
46,690 Sundry Debtors 24,000
Less: Personal 600 Less: Common debt 1,000
Purchase
46,090 23,000
Add: Net Profit 35,953 82,043 Less: Provision for 1,150
Doubtful Debts
Sundry Creditors 14,800 21,850
Less: Common Debt 1,000 Less: Provision for 437 21,413
Discount
13,800 Closing Stock 78,600
Add: Omitted Invoice 400 14,200 Printing and Stationary 3,650
Bank Loan 20,000 Furniture & Fittings 5,000
Outstanding Interest on k Loan 300 Less: Depreciation 500 4,500
Bar
1,16,543 1,16,543
Q. 10. Mr. Ajay, a shopkeeper, had prepared the following trial balance from his ledger as on
31st March, 2015:
Particulars Dr. (Rs.) Cr. (Rs.)
Purchases and Sales 6,20,000 8,30,000
Cash in Hand 4,200 —
Cash at Bank 24,000 —
Stock of Goods on 1-4-2014 1,00,000 —
Capital A/c — 5,77,200
Drawings 8,000 —
Salaries 64,000 —
Postage and Telephones 23,000 —
Salesmen's Commission 70,000 —
Insurance 18,000 —
Advertising 34,000 —
Furniture 44,000 —
Printing and Stationery 6,000 —
Motor Car 96,000 —
Bad Debts 4,000 —
Cash Discount 8,000 —
General Expenses 60,000 —
Carriage Inwards 20,000 —
Carriage Outwards 44,000 —
Wages 40,000 —
Debtors and Creditors 2,00,000 80,000
14,87,200 14,87,200
You are required to prepare Trading and Profit & Loss Account for the year ended 31 st
March 2015 and Balance Sheet as on that dale. You are also given the following
information:
(i) Stock on 31-03-2015 wasRs. 1,45,000.
(ii) Mr. Ajay had withdrawn goods worthRs. 5,000 during the year.
(iii) Purchases include purchase of furniture worthRs. 10,000.
(iv) Debtors are bad to the extent of Rs. 5,000.
(v) Creditors include a balance of Rs. 4,000 to the credit of Mr. Vijay in respect of which it
has been decided and settled with the party to pay only Rs. 1,000.
(vi) Sales include goods worth Rs. 15,000 sent to Siksham on approval and remaining unsold
as on 31-3-2015. The cost of the goods was Rs. 10,000.
(vii) Provision for Bad Debts is to be created at 5% on Sundry Debtors. (viii) Depreciate
Furniture by 15% and Motor Car by 20%.
(ix) The salesmen are entitled to a commission of 10% on total sales. [2025
Sol.
Trading and Profit & Loss Account
Dr. for the year ended 31s1 March, 2015 Cr.
Particulars Rs. Particulars Rs.

To Opening Stock 1,00,000 By Sales 8,30,000

To Purchase 6,20,00 Less: Goods sent on
0
Less: Drawings (5,000) approval basis (15,000) 8,15,000
Less: Furniture (10,000 6,05,000 By Closing stock 1,45,000
)
To Carriage Inwards 20,000 Add. Stock on app. (Cost) 10,000 1,55,000
To Wages 40,000
To Gross Profit c/d 2,05,000
9,70,000 9,70,000
To Salaries 64,000 By Gross Profit b/d 2,05,000
To Postage & 23,000 By Discount received (Mr. vijay) 3,000
Telephones
To Salesmen's 70,000 By Net Loss (Transfered to
commission
Add: Outstanding 11,500 81,500 Capital Account) 1,75,800
To Insurance 18,000
To Advertising 34,000
To Printing & Stationery 6,000
To Bad Debts 4,000
Add: Further bad debts 5,000 9,000
To Cash discount 8,000
To General Expenses 60,000
To Carriage outwards 44,000
To Provisions for Bad 9,000
debts
To Depreciation on:
Furniture 8,100
Motor car 19,200 27,300
3,83,800 3,83,800
Balance Sheet
as on 31st March, 2015
Liabilities Assets Rs.
Capital 5,77,200 Cash in Hand Rs.(4,200 - 1,000) 3,200
Less: Drawings (Cash) (8,000) Cash at Bank 24,000
Less: Drawings (Goods) (5,000) Furniture 44,000
Less: Net Loss (1,75,800) 3.88,400 Add: Purchases 10,000
Creditors 80,000 Less: Depreciation (8.100) 45,900
Less: Paid during the year 76,000 Motor Car 96,000
(4,000)
Outstanding Salesmen's 11,500 Less: Depreciation (19,200) 76,800
Commission
Debtors 2,00,000
Less: Further Bad (5,000)
debts
Less: Good sent on
approval basis (15,000)
1,80,000
Less: Provision for bts 1,71,000
Bad De (9,000)
Closing stock 1,45.000
Add: Stock on 10,000 1,55.000
Approval
4,75,900 4,75,900
 UNIT
II
A. Depreciation
Q. 1. ABC Ltd. purchased on 1 st Jan., 1998 second hand plant for Rs. 30,000 and
immediately spent Rs. 20,000 in overhauling it. On 1 st July, 1998 additional machinery of a
cost of Rs. 25,000 was purchased. On 1 st July, 2000, the plant purchased on 1 st Jan., 1998
became obsolete and was sold for Rs. 10,000. On that date new machinery was purchased at
cost of Rs. 60,000.
Depreciation was provided at 10% p.a. on the original cost of the asset. In 2001 the company
changed this method of providing depreciation to 15% p.a. W.D.V. with retrospective effect.
Show Plant and Machinery A/c and provision for Depreciation A/c for the years 1998-2001.
[2008
Sol. Note-(Ml -Machine 1; M2-Machine 2; M3-Machine 3.)
Dr. Plant and Machinery Account Cr.
Date Particulars Rs. Date Particulars Rs.
1998 1998
Jan. 1 To Bank A/c (M1) (Cost) 30,000 Dec. 31 By Balance c/d
Jan. 1 To Bank A/c 20,000 M1 (Machine 1) 50,00
0
(Overhauling exp.) M2 (Machine 2) 25,00 75,000
0
July 1 To Bank A/c 25,000
(M2)
75,000 75,000
1999 1999
Jan. 1 To Balance b/d Dec. 31 By Balance c/d
M1 50,000 M1 50,00
0
M2 25,000 75,000 M2 25,00 75,000
0
75,000 75,000
2000 2000
Jan. 1 To Balance b/d July 1 By Bank A/c (Sale of 10,000
M1)
 M1 50,000 By Profit & Loss A/c*1 27,500
M2 25,000 75,000 By Provision for Dep. 12,500
A/c
July 1 To Bank A/c: M3 60,000 Dec. 31 By Balance c/d
(Machine 3)
M2 25,00
0
M3 60,00 85,000
0
1,35,000 1,35,000
2001 2001
Jan. 1 To Balance b/d Dec. 31 By Balance c/d
M2 25,000 M2 25,00
0
M3 60,000 85,000 M3 60,00 85,000
0
85,000 85,000
Dr. Provision for Depreciation Account Cr.
Date Particulars Rs. Date Particulars Rs.
1998 1998
Dec. To Balance c/d Dec. 31 By Depreciation A/c
31
M1 (Machine 1) 5,000 M1 [Rs. 50,000 x 5,000
10/100]
M2 (Machine 2) 1,250 M2 [Rs. 25,000 x 10/100 1,250
x 6/12]
6,250 6,250
1999 1999
Jan. 1 To Balance c/d Jan. 1 By Balance b/d
M1 [Rs. 5,000 + Rs. 10,000 M1 5,000
5,000]
M2 [Rs. 1,250+ Rs. 3,750 M2 1,250 6,250
2,500]
Dec. 31 By Depreciation A/c
 M1 [750.000 x 10/100] 5,000
M2 [725,000 x 10/100] 2,500
13,750 13,750
2000 2000
July 1 To Plant & Machinery Jan. 1 By Balance b/d
A/c
(M1) [Rs. 10.000 + Rs. 12,500 M1 10,000
2,500]
Dec. To Balance c/d M2 3,750 13,750
31
M2 [Rs. 3,750 + 6,250 July 1 By Depreciation A/c*, 2,500
Rs. 2,500 (M1)
M3 3,000 Dec. 31 By Depreciation A/c
M2 [Rs. 25,000 x 2,500
10/100]
M3 [Rs. 60,000 x 6/12 x 3,000
10/100]
21,750 21,750
2001 2001
Dec. To Balance c/d Jan. 1 By Balance b/d
31
M2 10,79 M2 6,250
8
M3 12,82 23,623 M3 3,000 9,250
5
Dec. 31 By Deprication A/c*2 3,542
(Additional)
By Depreciation A/c*3
M2 . 2,506
M3 8,325
23,623 23,623

Working notes:
1 Calculation of Profit/Loss on Sale of Machine 1 on 1-7-2000: Rs.
Value on 1-1-1998 50,000
Less; Depreciation for 1998 5,000
Value on 1-1-1999 45,000
Less: Depredation for 1999 5,000
Value on 1-1-2000 40,000
Less: Depreciation for 2000 (1/2 year) 2,500
37,500
Less: Sales Value on 1-7-2000 10,000
Loss on sale of Machine 1 27,500

*2 Calculation of Excess/Short Depreciation of Machine 2 and

Machine 3:
M2(7) M3 (7) Total (7)
A. Depreciation on the original cost (SLM) basis @ 10% 6,250 3,000 9,250
p.a.
B. Depreciation on W.D.V @ 15% for: 1998 1,875* - 1,875
1999 3,469* - 3,469
2000 2,948* 4,500 7,448
8,292 4,500 12,792
C. Additional Depreciation to be adjusted (B - A) i.e., Rs. 2,792 - Rs. 9,250 = Rs. 3,542
For Machine 2 = Rs. 8,292 - Rs. 6,250 = Rs. 2,042
For Machine 3 = Rs. 4,500 - Rs. 3,000 = Rs. 1,500
* Depreciation for 1998 = Rs. 25,000 x 2/100 x 5/12 = 1,875
Depreciation for 1999 = 15/100 (25,000 - 1,875) = Rs. 3,469
Depreciation for 2000 = ,5/100 (25,000 - 1,875 - 3,469) = Rs. 2,948
** Depreciation on Machine 2 for 2000 = Rs. 60,000 x 15/100 x 6/12 = Rs. 4,500
*1 Calculation of Depreciation on Machine 2 and Machine 3 for current year.
Machine 2 Machine 3
Rs. Rs.
A. Cost 25,000 60,000
B. Less: Depreciation (as per*2) 8,292 4.500
C. W.D.V. on 1.1.2001 16,708 55,500
D. Less: Depreciation for 2001 @ 15% p.a. 2,506 8,325
14,202 47,175
Q. 2. M/s S.S. Traders commenced business on 1st January, 2005, when they purchased
machinery of Rs. 7,00,000. They adopted a policy of
(i) charging depreciation at 15% p.a. on diminishing balance basis, and
(ii) charging full year's depreciation on additions made during the year.
Over the year, the purchases of machinery have been:
Date ?
1-8-2006 1,50,000
30-9-2008 2,00,000
On 1st January, 2008, it was decided to change the method of depreciation and rate of
depreciation to 10% on straight line basis with retrospective effect from 1-1-2005, the
adjustment being made in the accounts for the year ending 31 st December, 2008.
Prepare Machinery Account and Provision for Depreciation Account for the year 2008.
[2009
Sol. Dr. Machinery Account Cr.
Date Particulars Rs. Date Particulars Rs.
2008 2008
Jan. 1 To Balance b/d*1 8,50,000 Dec. 31 By Balance c/d 10,50,000
Sep. To Bank A/c (M3) 2,00,000
30
10,50,000 10,50,000
Dr. Provision for Depreciation Account
Date Particulars Rs. Date Particulars Rs.
2008 2008
Dec. To Profit & Loss A/c Jan. 1 By Balance b/d*2 3,11,738
31 (Excess
Depreciation written 71,738
back)*3
Dec. To Balance c/d 3,45,000 Dec. 31 By Depreciation A/c 1,05,000
31
 4,16,738 4,16,738
Working notes:
Dr. Machinery Account Cr.
Date Particulars Rs. Date Particulars Rs.
2005 2005
Jan. 1 To Bank A/c (M1) 7,00,000 Dec. 31 By Balance c/d 7,00,000
2006 2006
Jan. 1 To Balance b/d 7,00,000 Dec. 31 By Balance c/d 8,50,000
Aug. 1 To Bank A/c(M2) 1.50,000
8,50,000 8,50,000
2007 2007
Jan. 1 To Balance b/d 8,50,000 Dec. 31 By Balance c/d 8,50.000
Dr. *2Provisi Deprec Cr.
on for iation
A/c

Date Particulars Rs. Date Particulars Rs.

2005 2005
Dec. To Balance c/d 1.05,000 Dec. 31 By Depreciation A/c
31
(M1) [7,00,000 x 15/100] 1,05,000
1,05,000 1,05,000
2006 2006
Dec. To Balance c/d Jan. 1 By Balance b/d 1,05,000
31
M1 (1,05.000 + 89.250) Dec. 31 By Depreciation A/c
1,94,250 •(M1) 5,95,000x 15/100
M2 (22.500) 22.500 2,16,750 89,250
(M2) 1,50,000x 15/100
22,500 1,11,750
2,16,750 2,16,750
2008 2007
Dec. To Balance c/r 3,11.738 Jan. 1 By Balance b/d 2,16,750
31
Dec. 31 By Depreciation A/c
(M1) 5,05,750 x 15/100
75,863
(M2) 127500x 15/100
19.125 94,988
3,11,738 3,11,738
*3 Calculation of difference in the amount of depreciation with effect from 1.1.2005.
Year W.D.V. S.LM.(10%)
(15%)
Rs. Rs.
2005 1,05,000 70,000
2006 1,11,750 85,000
2007 94,988 85,000
3,11,738 2,40,000
Excess depreciation already charged and to be written back on 31.12.2008
= Rs. 3,11,738 - Rs. 2,40,000 = Rs. 71,738
*t Depreciation for 2008 as per S.L.M.
Machinery bought on 1.1.05 (M,) = Rs. 7,00,000 @ 10% Rs. 70,000
Machinery bought on 1.8.06 (M2) = Rs. 1,50,000 @ 10% Rs. 15,000
Machinery bought on 30.9.08 (M,) = Rs. 2,00,000 @ 10% Rs. 20,000
Total Depreciation Rs. 1,05,000
Q. 3. Mayur Traders, which depreciates its machinery at 10% p.a. according to
Diminishing balance method, had on 1-1-2009 Rs. 4,86,000 balance in Machinery
Account. Part of the machinery purchased on 1-1-2007 for Rs. 60,000 was sold for Rs.
40,000 on 1st July, 2009 and a new machinery at a cost of Rs. 70,000 was purchased and
installed on the same date, installation charges being Rs. 5,000.
Mayur Traders wanted to change its method of depreciation on 1-1-2009 from
Diminishing balance method to Straight line method with effect from 1-1-2007. The rate
of depreciation remains the same as before.
Show Machinery Account for the year 2009. Also show your workings clearly. [2010
Sol.
Dr. Machinery Account Cr.
Date Particulars Rs. Date Particulars Rs.
01-01-09 To Balance b/d 4,86,000 01-07- By Bank A/c 40,000
09
01-07-09 To Bank A/c By Depreciation A/c 3,000
Rs.(70,000 + 5000) 75,000 (on machine sold)
By Profit & Loss A/c 5,600
(Loss on Sale)*1
31-12- By Profit & Loss A/c 5,400
09
• (Additional
Depreciation)*2
By Depreciation A/c*3 57,750
By Balance c/d 4,49,250
5,61,000 5,61,000

*1 Calculation of Loss on Sale of Machinery: Rs.

Cost of Machinery sold as on 01-01-07 60,000
Less: Depreciation for 2007 6,000
Book Value on 01-01-2008 54,000
Less: Depreciation for 2008 5,400
Book Value on 01-01-2009 48,600
Less: Depreciation for half year upto 1st July, 2009 as per SLM
[760,000 x 10/100 x 6/12] 3,000
Book Value on the date of Sale (01-07-09) 45,600
Less: Realised Value 40,000
Loss on Sale of Machinery 5,600
*2 Calculation of Additional Depreciation:
Cost of Machinery on 01-01-2007 = Rs. 4,86,000 x 100/81 = Rs. 6,00,000
Book Value on 01-01-2007, excluding the machinery sold = Rs.(6,00,000 - 60,000)
= Rs. 5,40,000
Calculation of Depreciation under Straight Line Method (SLM) and Diminishing
Balance Method or Written-down Value (WDV) Method:
WDV SIM
(Rs.) (Rs.)
Book value on 01-01-2007 excluding the machinery sold 5,40,000 5,40,000
Rs.(6,00,000 - 60,000)
Less: Depreciation for 2007 54,000 54,000
Book value on 01-01-2008 4,86,000 4,86,000
Less: Depreciation for 2008 48,600 54,000
Book value on 01-01-2009 4,37,400 4,32,000

Depreciation for 2 years (2008 & 2009) by SLM (Rs. 54,000 + Rs. 54,000) ?
1,08,000
Depreciation for 2 years (2008 & 2009) by WDV (754,000 + Rs. 48,600) 1,02,600

Additional depreciation to be charged due to change in method:

Charged to Profit & Loss A/c 5,400
*3 Depreciation charged for 2009:
On Rs. 5,40,000 @ 10% on SLM 54,000
On machinery purchased on 1st July 2009 for 6 months @ 10% p.a.
(Rs. 75,000 x 10/100 x 6/12) 3,750
57,750
Q. 4. ABC Ltd. purchased on 1st October, 2004, a machinery for Rs. 4,50,000 and spent Rs.
10,000 on freight and transit insurance. On 25th December, 2004, it further spent Rs. 40,000
on its erection. The machinery was put to use on 1-1-2005. On 1st July 2005, it purchased
another machinery for Rs. 1,00,000. During the year 2006, it spent Rs. 10,000 for repairs on
1-4-2006.
However, on 1-4-2007, a part of the machinery, purchased on 1-10-2004, costing Rs.
2,00,000 was sold for Rs. 1,50,000. On 1-10-2007 it purchased another machinery for Rs.
3,00,000.
On 1st July, 2008, however, machinery purchased on 1st July, 2005 was sold for Rs.
65,000. Depreciation was charged by the firm @ 10% p.a. by written down value
method. During the year 2008, ABC Ltd. decided to change the method of providing
depreciation and adopted the Straight Line Method of charging depreciation @ 10%
p.a. Prepare Machinery Account as per the provisions of AS-6 upto the year ending 31-
12-2008. [2012
Sol. Dr. Machinery Account Cr.
Date Particulars Rs. Date Particulars Rs.
01-10-04 To Bank A/c(M1) 4,50,000 31-12- By Depreciation A/c Nil
04
To Bank A/c (Freight 31-12- By Balance c/d—M1 5,00,000
04
& Insurance)—M1 10,000
25-12-04 To Bank A/c (Erection) 40,000
(M1)
5,00,000 5,00,000
01-01-05 To Balance b/d (M1) 5,00,000 31-12- By Depreciation A/c
05
01-07-05 To Bank A/c (M2) 1,00,000 M1 [Rs. 5,00,000 x 50,000
10/100]
M2[Rs. 1,00,000 x 5,000
10/100 x 6/12]
By Balance c/d
M1 [Rs. 5,00,000 - 4,50,000
50,000]
M2[Rs. 1,00,000 - 95,000
5,000]
6,00,000 6,00,000
01-01-06 To Balance b/d 31-12- By Depreciation A/c
06
M1 4,50,000 M1 45,000
M2 95,000 M2 9,500
By Balance c/d
M1[Rs. 4,50,000-Rs. 4,05,000
45,000]
M2 [Rs. 95,000 - Rs. 85,500
9,500]
5,45,000 5,45,000
01-01-07 To Balance b/d 31-03- By Depreciation A/c 4,050
07 M1(a)*1
M1 4,05,000 By Bank A/c (Sale) M1 1,50,000
 (a)
M2 85,500 By Loss on Sale
of Machine A/c*2 7,950
01-10-07 To Bank A/c (M3) 3,00,000 31-12- By Depreciation A/c 24,300
07 M1(b)*3
M2 8,550
M3 [Rs. 1,00,000 x 7,500
10/100 x 3/12]
31-12- By Balance c/d
07
M1(b) [Rs. 2,43,000 - 2,18,700
Rs. 4.300]
M2[Rs. 85,500-Rs. 76,950
8,550]
M3 [Rs. 3,00,000 - Rs. 2,92,500
7,500]
7,90,500 7,90,500
01-01-08 To Balance b/d 01-07- By Depreciation A/c
08
M1(b) 2,18,700 M2 (for 6 months)*4 3,848
M2 76,950 By Bank A/c (M2 Sale) 65,000
M3 2.92,500 By Loss on Machine
sold A/c*5 8,102
31-12- By Profit & Loss A/c*3 8,700
08

b/f 5,88,150 85,650

By Depreciation A/c
M1(b) 30,000
M2 (Sold) Nil
M3 30,000
By Balance c/d
M1(b) 1,80,000
 M2 Nil
M3 2,62,500
5,88,150 5,88,150
Working notes:
*1 Total cost of machine purchased on 01-10-04 was Rs. 5,00,000 and part costing 72,00,000
(two fifth) Ml(a) was sold on 01-04-07.
Hence depreciation on the part is Rs. 4,05,000 x10/100 x 2/5 x 3/12 i.e., Rs. 4,050 for 3
months.
*2 Depreciated value of this part of machine on 01-01-07 is Rs. 4,05,000 x 2/5 , i.e., Rs.
1,62,000
Depreciated value of this part of machine on the date of its sale (i.e., 01-04-2007) is
Rs.(1,62,000 - 4,050) = Rs. 1,57,950. Hence loss on its sale is Rs.(1,57,950 - 1,50,000) = Rs.
7,950.
*3 Difference of depreciation charged during 2008 due to change of method (Effect of
Retrospective change) is calculated as under:
WDV (Rs.) (10% p.a.) SIM (Rs.) (10% p.a.)
Machinery M1(b)
Original cost Rs. 3,00,000 (2005) 30,000 30,000
Value in 2006 (72,70,000) 27,000 30,000
Value in 2007 (72,43,000) 24,300 30,000
Machinery M3 81,300 90,000
Original cost Rs. 3,00,000 (2007) 7,500 7.500
Total Depreciation 88,800 97,500
Difference to be charged as additional depreciation is Rs.(97,500 - 88,800) = Rs. 8,700 and it
is only in respect of Machinery Ml(b). It is to be charged to Profit & Loss A/c of 2008.
*4 Depreciation on Machinery M2 is charged as per w.d.v. method @ 10% p.a. for 6 months,
i.e., Rs. 76,950 x 10/100 x6/12 = Rs. 3,848
*5 Loss on sale of Machinery (M2) = 76,950 - [3,848 + 65,000] = Rs. 8,102
Q. 5. A firm purchased on 1st January, 2008, certain machinery for Rs. 3,88,000 and
spent Rs. 12,000 on its creation. On 1st July, 2008 additional machinery costing Rs.
2,00,000 was purchased. On 1st July, 2010, the machine purchased on 1st January, 2008,
having become obsolete was auctioned for Rs. 2,00,000 and on the same date a new
machine was purchased for Rs. 3,00,000.
Depreciation was provided for annually on 31st December @ 10% P.A. on original cost
of the machinery. No depreciation need be provided when machinery is sold/auctioned.
In 2011, however, the firm changed the method of providing depreciation and adopted
the method of writing off 15% P.A. on written down value method with retrospective
effect.
Prepare Machinery Account for the years 2008 to 2011. [2012
Sol. Dr. Machinery Account Or.
Date Particulars Rs. Date Particulars Rs.
2008 To Bank A/c 2008
(I)
Jan. 1 Rs.[3,88,000 +12,000] 4,00,000 Dec. 31 By Depreciation A/c:
July 1 To Bank A/c 2,00,000 I 40,000
(II)
II (6 month) 10,000 50,000
Dec. 31 By Balance c/d:
I 3,60,00
0
II 1,90,00 5,50,000
0
6,00,000 6,00,000
2009 To Balance 2009
b/d:
Jan. 1 I 3,60,000 Dec. 31 By Depreciation A/c:
II 1,90,000 5,50,000 I 40,000
II 20,000 60,000
Dec. 31 By Balance c/d:
I 3,20,00
0
II 1,70,00 4,90,000
0
5.50,000 5,50,000
2010 2010
Jan. 1 To Balance July 1 By Bank A/c (1) (Sale) 2,00,000
b/d:
I 3,20,000 By Loss on sale of 1,20,000
machine
 II 1,70,000 4,90,000 Dec. 31 By Depreciation A/c:
July 1 To Bank A/c 3,00,000 II 20,000
(III)
III (6 months) 15,000 35,000
By Balance c/d:
II 1,50,00
0
IIII 2,85,00 4,35,000
0
7,90,000 7,90,000
2011 2011
Jan. 1 To Balance Dec. 31 By Profit & Loss A/c
b/d:
II 1,50,000 (Extra Depreciation)*1
III 2,85,000 4.35,000 Dec. 31 II 16,338
III 7,500 23,838
Dec. 31 By Depreciation A/c:
II 20,049
• III 41,625 61,674
Dec. 31 By Balance c/d: 1,13,61
II 3
III 2,35,87 3,49,488
5
4,35,000 4,35,000
Working notes: *1 Calculation of Additional Depreciation because of change in method:
Machine II Machine III
SIM 10% (Rs.) WDV 15% SLM 10% (Rs.) WDV 15% (Rs.)
(Rs.)
Cost Price 2,00,000 2,00,000 Cost 3,00,000 3,00,000
Less: Dep.(2008) 10,000 15.000 less: Dep. (2010) 15.000 22,500
1,90,000 1,85,000 2,85,000 2.77,500
Additional Depreciation
required:
Less: Dep. (2009) 20.000 27.750 Rs. 2,85,000 - Rs. 2,77,500 =
Rs. 7,500
1,70,000 1,57,250 Dep. for 2011 = 15% of Rs. 2,77,500 = Rs.
41,625
Less: Dep. (2010) 20,000 23,588
1,50,000 1.33.662
Additional Pep. required = 1,50,000 - 1,33,662
= Rs. 16,338
Depreciation for 2011 = 15% of Rs. 1,33,662 - Rs. 20,049
Q. 6. A company acquired the following assets as under:
(i) On 01-01-2009 a plant costing Rs. 75,000 and having estimated life of 15 years.
(ii) On 01-04-2009 a plant costing Rs. 37,500 and with an estimated life of 10 years.
(iii) On 01-07-2010 a plant costing Rs. 30,000 and its estimated life 8 years.
(iv) On 01-05-2011 a plant costing Rs. 50,000 having an estimated life of 6 years.
On 01-07-2011 a part of the plant costing Rs. 15,000 on 01-01-2009 was sold for Rs.
8,400. Residual value of each of the plant acquired is 10% of its original cost. Company
charges depreciation on Straight Line Method and closes its books of accounts on 31 st
December each years.
Prepare Plant Account for the years 2009, 2010 and 2011. [2012 Nov.
Sol.
Working notes:
*, Annual Depreciation = Cost - Residual value/Useful life
(i) Depreciation on Plant No. 1 = 75,000 - 7,500/15 = Rs. 4,500 p.a.
(ii) Depreciation on Plant No. 2 = 37 500 - 3 750/10 = Rs. 3,375 p.a,
(iii) Depreciation on Plant No. 3 = 30 000- 3 000/8 = Rs. 3,375 p.a.
(iv) Depreciation on Plant No. 4 = 50 000 - 5 000/6 = Rs. 7,500 p.a.
*2 Loss on Sale of (Part) Plant No. 1 = Cost - Depreciation charged till the date of Sale
= Rs. 15,000 - Depreciation [@ Rs. 900 p.a. for 2 1/2 years, i.e., Rs. 2,250]
Written down value = Rs. 15,000 - Rs. 2,250 = Rs. 12,750
Less: Sale proceeds Rs. 8,400
Loss on Sale of Plant No. 1 (Part) Rs. 4,350
Dr. Plant Account Cr.
Date Particulars Date Particulars Rs.
2009 2009 .
Jan. 1 To Bank A/c (Plant I) 75,000 Dec. 31 By Depreciation A/c 7,031
April 1 To Bank A/c (Plant II) 37,500 Rs. 4,500 + (Rs. 3,375 x
9/12)
Dec. 31 By Balance c/d 1,05,469
1,12,500 1,12,500
2010 2010
Jan. 1 To Balance b/d 1,05,469 Dec. 31 By Depreciation A/c
July 1 To Bank A/c (Plant III) 30,000 I 4,500
II 3,375
III (3,375 x 6/12) 1,688 9,563
Dec. 31 By Balance c/d 1,25,906
1,35,469 1,35,469
2011 2011
Jan. 1 To Balance b/d 1,25,906 July 1 By Bank A/c (Sale) 8,400
May 1 To Bank A/c (Plant IV) 50,000 July 1 By Depreciation A/c (I) 450
By Profit & Loss A/c*2 4,350
(Loss on Sale)
Dec. 31 By Depreciation A/c*3 15,350
By Balance c/d 1,47,356
1,75,906 1,75,906

Working notes:
*3 Depreciation for the year 2011 has been worked out as follows: Rs.
On Ist Plant on 4/5th of Rs. 4,500 (Out of Rs. 75,000 worth, Rs. 15,000 sold 3,600
away)
On IInd Plant 3,375
On IIIrd Plant 3,375
On IVth Plant (only for 8 months) 5,000
15,350
Q. 7. On 1st April, 2008, a new plant was purchased for Rs. 80,000 and a further sum of Rs.
4,000 was spent on its installation. On 1 st October, 2010, another plant was acquired for Rs.
50,000. Due to an accident on 3rd January, 2011, the first plant was totally destroyed and was
sold for Rs. 2,000 only. On 21 st January, 2012, a second-hand plant was purchased for Rs.
60,000 and a further sum of Rs. 10,000 was spent for bringing the same to use from 15 th
March 2012. Depreciation has been provided @10% on straight line basis. It was a practice to
provide depreciation for full year on all acquisitions made at any time during any year and to
ignore depreciation on any item sold and disposed off during the year. None of the assets
were insured. The accounts are closed annually on 31 st March. It is now decided to follow the
rate of 20% on diminishing balance method with retrospective effect in respect of the existing
items of plant and to make the necessary adjustment entry on 1 st April, 2012.
You are required to make: (i) Plant Account (ii) Provision for Depreciation Account (iii)
Journal Entries, where necessary. Show all the working notes.
[2013
Sol. Dr. Plant Account Cr.
Date Particulars Rs. Date Particulars Rs.
2008 2009
April 1 To Bank A/c 80,000 Mar. 31 By Balance c/d 84,000
To Bank A/c 4,000
84,000 84,000
2009 2010
April 1 To Balance b/d 84,000 Mar. 31 By Balance c/d 84,000
84,000 84,000
2010 2011
April 1 To Balance b/d 84,000 Jan. 3 By Bank A/c 2,000
Oct. 1 To Bank A/c 50,000 Jan. 3 By Provision for Dep. 16,800
A/c
Jan. 3 By Profit & Loss A/c 65,200
(Loss)
Mar. 31 By Balance c/d 50,000
1,34,000 1,34,000
2011 2012
April 1 To Balance b/d 50,000 Mar. 31 By Balance c/d 1,20,000
2012
Jan. 21 To Bank A/c 60,000
 To Bank A/c 10,000
1,20,000 1,20,000
Dr. Provision for Depreciation Account Cr.
Date Particulars Rs. Date Particulars Rs.
2009 2009
Mar. 31 To Balance c/d (M1) 8,400 Mar. 31 By Depreciation A/c . 8,400
2010 2009
Mar. 31 To Balance c/d 16,800 April 1 By Balance b/d 8,400
2010
Mar. 31 By Depreciation A/c 8,400
16,800 16,800
2011 2010
Jan. 3 To Plant A/c 16,800 April 1 By Balance b/d 16,800
2011
Mar. 31 To Balance c/d 5,000 Mar. 31 By Depreciation A/c 5,000
21,800 21,800
2012 2011
Mar. 31 To Balance b/d 17,000 April 1 By Balance b/d 5,000
2012
Mar. 31 By Depreciation A/c 12,000
17,000 17,000
2012
April 1 By Balance b/d 17,000
By Depreciation A/c
(Additional)* 15,000
January Entry
Date Particulars LP, Dr. (Rs.) Cr. (Rs.)
2012 Depreciation A/c* Dr. 15,000
Apr. To Provision for Depreciation A/c 15,000
1
 (Being the provision for additional depreciation made due
to
change in the rate and method with retrospective effect)
* Difference in Depreciation now to be charged @20% on Diminishing Balance Method
Plant Purchased Original Cost Depreciation Total
(Rs.) 2010-22 2011-12 (Rs.)
2010-11 50,000 10,000 8,000 18,000
2011-12 70,000 — 14,000 14,000
10,000 22,000 32,000
Provision already made 5,000 12,000 17,000
Additional Depreciation 5,000 10,000 15,000
required
Q. 8. Metropol Ltd. acquired a machine for Rs. 5,40,000 on 1stApril, 2010. Depreciation
was to be charged at 20% on Straight Line Method. During 2012-13 a modification was made
to improve its technical reliability at a cost of Rs. 50,000 which it was considered would
extend the useful life of the machine for two years. At the same time an important component
of the machine was replaced at a capital cost of Rs. 10,000 because of excessive wear and
tear. Routine maintenance during the said accounting period cost Rs. 7,500. Show the
Machine Account and Provision for Depreciation on Machine Accountc and charges to Profit
& Loss Account for the year ending 31 st March, 2013 only. [2023 Nov.
Sol.
Dr. Machinery Account Cr.
Date Particulars Rs. Date Particulars Rs.
01-04- To Balance b/d 5,40,000 31-03- By Balance c/d 6,00,000
12 13
2012- To Bank A/c 50,000
13
To Bank A/c 10,000
6,00,000 6,00,000
Dr. Provision for Depreciation Account Cr.
Date Particulars Rs. Date Particulars Rs.
31-03- To Balance c/d 2,92,800 01-04- By Balance b/d*3 [2 2,16,000
13 12 years]
31-03- By Depreciation A/c*4 76,800
13
 2,92,800 2,92,800
Dr. An extract of Profit & Loss Account Cr.
Date Particulars Rs. Date Particulars Rs.
To Repair & maintenance 7,500
To Depreciation on Machinery 76,800
Working notes:
*1 The amount spent on routine maintenance is of revenue nature and not of capital nature
and
hence is not debited to Machinery Account.
*2 The unamortised depreciable amount (i.e., Rs. 5,40,000 - Rs. 2,16,000 + Rs. 50,000 + Rs.
10,000) has been
charged over the revised remaining useful life (i.e., 5 years).
*3 Depreciation for 2 years ending 31 st March, 2011 and 2012 = Rs. 5,40,000 x 20/100 x 2 =
Rs. 2,16,000
*4 Depreciation for 2012-13 on Rs.[5,4000 - 2,16000] + Rs. 50,000 + Rs. 10,000 = Rs.
3,84,000 x 20/100 = Rs. 76,800
Q. 9. XYZ Ltd. purchased on 1st Jan., 2009, certain machinery for Rs. 1,94,000 and spent Rs.
6,000 on its erection. On 1st July 2009, additional machinery costing Rs. 1,00,000 was
purchased. On 1st July 2011, the machinery purchased on 1 st Jan. 2009 was auctioned for Rs.
1,00,000 and on the same date, new machinery was purchased at a cost of Rs. 1,50,000.
Depreciation was provided annually on 31 st Dec. @ of 10% p.a. on the original cost. No
depreciation need be charged during the year of sale of machinery for that part of the year
when the machine was used. In 2013, however the company has changed the method of
depreciation to written down value method @ of 15% p.a. from the straight line method.
Show the machinery account for the period from 2009 to 2013. [2024
Sol.
Dr. Machinery Account Cr.
Date Particulars Rs. Date Particulars Rs.
2009 2009
Jan. 1 To Bank A/c Dec. 31 By Depreciation A/c:
(Purchase Price Machine 1,94,000 Machine I 20,000
I)
Jan. 1 To Bank A/c (Erection 6,000 Machine II 5,000 25,000
Exp.)
July 1 To Bank A/c (Purchase By Balance c/d:
Price
 Machine II) 1,00,000 Machine I 1,80,00
0
Machine II 95,000 2,75,000
3,00,000 3,00,000
2010 2010
Jan. 1 To Balance b/d: Dec. 31 By Depreciation A/c:
Machine I 1,80,00 Machine I 20,000
0
Machine II 95,000 2,75,000 Machine II 10,000 30,000
By Balance c/d:
Machine I 1,60,00
0
Machine II 85,000 2,45,000
2,75,000 2,75,000
2011 2011
Jan. 1 To Balance b/d: July 1 By Bank A/c (Machine 1,00,000
I)
Machine I 160,000 July 1 By Loss on sale of
Machine A/c
Machine II 85,000 2,45,000 Rs.(1,60,000- 1,00,000) 60,000
July 1 To Bank A/c (Purchase 1,50,000 Dec. 31 By Depreciation A/c:
Price
Machine III) Machine II 10,000
Machine III 7,500 17,500

b/f 3,95,000 1,77,500

Dec. 31 By Balance c/d:
Machine II 75,000
Machine III 1,42,50 2,17,500
0
3,95,000 3,95,000
2012 2012
Jan. 1 To Balance b/d: Dec. 31 By Depreciation A/c:
 Machine II 75,000 Machine II 10,000
Machine III 1,42,500 2,17,500 Machine III 15,000 25,000
Dec. 31 By Balance c/d:
Machine II 65,000
Machine III 1,27,50 1,92,500
0
2,17,500 2,17,500
2013 2013
Jan. 1 To Balance b/d: Dec. 31 By Depreciation A/c 17,756
Machine II 65,000 Additional Dep. due
Machine III 1,27,500 1,92,500 to change of method*,
Dec. 31 By Depreciation A/c
Machine II 8,521
Machine III 17,691 26,212
Dec. 31 By Balance c/d
Machine II
Rs.[56,806 -
8,521)48,285
Machine III
Rs.[1,17,938- 17,691]
1,00,24 1,48,532
7
1,92,500 1,92,500
Working notes: % Calculation of Depreciation or Surplus Depreciation:
Year Straight Line Method (Dep. on Written Down Value method (New
original cost (Old method) method)
Machine 11 (Rs.) Machine HI (Rs.) Machine II (Rs.) Machine III (Rs.)
2009 5,000 - 7,500 -
2010 10,000 - 13,875 -
2011 10,000 7,500 11,794 11,250
2012 10,000 15,000 10,025 20,812
 35,000 22,500 43,194 32,062
Depreciation is higher as per the new method.
Deficiency of depreciation = Rs.(43,194+32,062) - Rs.(35,000+22,500) = Rs. 75,256 - Rs.
57,500 = Rs. 17,756
Depreciation as per written down value method has been calculated as follows:
Particulars Machine II (Rs.) Machine III
(Rs.)
Cost 1,00,000 1,50,000
Depreciation for 2009 of 6 months at 15% 7,500 -
W.D.V. as on 1.1.2010 92,500
Depreciation for 2010 at 15% 13,875 -
W.D.V. as on 1.1.2011 78,625
Depreciation for 2011 at 15% 11,794 11,250
W.D.V. as pm 1.1.2012 66,831 1,38,750
Depreciation for 2012 10,025 20,812
W.D.V. as on 1.1.2013 56,806 1,17,938
Depreciation for 2013 8,521 17,691
48,285 1,00,247
Q. 10. Ram Ltd. which depreciates its machinery @ 10% p.a. on Diminishing Balance
Method, had on 1st Jan., 2013, Rs. 9,72,000 on the debit side of Machinery
Account. During the year 2013 machinery purchased on 1 st Jan., 2011 for Rs. 80,000 was
sold for Rs. 45,000 on 1st July, 2013 and a new machinery at a cost of Rs. 1,50,000 was
purchased and installed on the same date, installation charges being Rs. 8,000. The company
wanted to change the method of Depreciation from Diminishing Balance Method to Straight
Line Method with effect from 1st January, 2011. Difference of depreciation up 31 st December,
2013 to be adjusted. The rate of depreciation remains the same as before. Show Machinery
Account for the year 2013. [2014 Nov.
Sol. Dr. Machinery Account Or.
Date Particulars Rs. Date Particulars Rs.
01.01.1 To Balance b/d 9,72,000 01.07.1 By By Bank A/c (Sale) 45,000
3 3
01.07.1 To Bank A/c 1,50,000 01.07.1 By Depreciation A/c
3 (Machinery) 3
01.07.1 To Bank A/c 8,000 (on machinery sold) 3,240
3 (Installation)
01.07.1 By Loss on sale of 16,560
3 Machinery*,
31.12.1 By Profit & Loss A/c
3
(Dep. for prior 11,200
period)*2&3
31.12.1 By Depreciation A/c 1,19,900
3
31.12.1 By Balance c/d 9,34,100
3
11,30,000 11,30,000

Working notes:
*1 Calculation of Profit or Loss on sale of machinery on 1.7.2013 Rs.
Book Value on 1.1.2011 80,000
Less: Depreciation for 2011 (31.12.2011) 8,000
Written down value (W.D.V.) on 1.1.2012 72,000
Less: Depreciation for 2012 (31.12.2012) 7,200
W.D.V. on 1.1.2013 64,800
Less: Depreciation for 2013 (30.06.2013) 3,240
Book value on 1.7 201 61,560
Less: Sale value on 1.7.2013 45,000
Loss on Sale of Machinery 16,560
*2 Calculation of Book value of machinery after sale (9,72,000 - 64,800) on 7
1.1.2011
Let the Book value on 1.1.2011 100
Less: Depreciation for 2011 10
W.D.V. on 1.1.2012 90
Less: Depreciation for 2012 9
Book value on 1.1.2013 81
Hence, value of machine on 1.1.2011 = Rs. 9,07,200 x 100/81 = Rs. 11,20,000
*3 Calculation of Additional Depreciation as per SLM on Rs. 11,20,000
Depreciation @ 10% 2011 2012
On Rs. 11,20,000 (SLM) 1,12,000 + 1,12,000 = 2,24,000
On Rs. 11,20,000 (WDV) 1,12,000 + 1,00,800 = 2,12,800
Additional Depreciation to be charged = f 11,200
*4 Depreciation for 2013
On Rs. 11,20,000 for 1 year = Rs. 1,12,000
On Rs. 1,58,000 (New Machine) for 1/2 year = Rs. 7,900 Rs. 1,19,900
Q. 11. The Plant and Machinery Account of Noya Ltd. had a debit balance of Rs. 1,47,390 on
April 1, 2014. The company was incorporated in April, 2011 and has been following the
practice of charging full year's depreciation every year on Diminishing Balance System @
15%. In 2014 it was, however, decided to change the method from Diminishing Balance to
Straight Line with retrospective effect from April, 2011 and to give effect the change while
preparing the final accounts for the year ending 31st March, 2014, the rate of depreciation
remaining same as before. In 2014-15, new machinery was purchased at a cost of Rs. 50,000.
All the other machines were acquired in 2011-12.
Show the Plant and Machinery Account from 2011-12 to 2014-15. [2015
Sol. Working notes:
1. Calculation of Purchase Price (Cost): Rs.
Let Cost of machinery 100
Less: Depreciation (2012) (15)
85
Less: Depreciation (2013) (12.75)
72.25
Less: Depreciation (2014) (10.8375)
61.4125
Purchase Price = Rs. 1,47,390/61,4125 x 100 = Rs. 2,40,000

2. Calculation of Depreciation: SLM (Rs.) DBM

(Rs.)
Cost 2,40,000 2,40,000
Less: Depreciation (15%) (2012) (36,000) (36,000)
2,04,000 2,04,000
Less: Depreciation (15%) (2013) 136,000) (30,600)
 1,68,000 1,73,400
Less: Depreciation (15%) (2014) (36,000) (26,010)
Value as on 01.04.2014 1,32,000 1,47,390
So, addihonal depreciation due to Change in method - Rs.(1,47,390 - 1,32,000) - Rs. 15,390
Depreciation to be charged during 2014-15:
On Old Machinery = Rs. 36,000
On New Machinery = Rs. 7,500, i.e., (50,000 x 15/100)
Total Depreciation for 2014-15 = Rs.(36,000 + 7,500) = Rs. 43,500
Dr. Plant & Machinery Account Cr.
Date Particulars Rs. Date Particulars Rs.
2011 2012
Apr. 1 To Bank A/c 2,40,000 Mar. By Depreciation A/c 36,000
31
By Balance c/d 2,04,000
2,40,000 2,40,000
2012 2013
April 1 To Balance b/d 2,04,000 Mar. By Depreciation A/c 30,600
31
By Balance c/d 1,73,400
2,04,000 2,04,000
2013 2014
April 1 To Balance b/d 1,73,400 Mar. By Depreciation A/c 26,010
31
By Balance c/d 1,47,390
1,73,400 1,73,400
2014 2015
April 1 To Balance b/d 1,47,390 Mar. By Profit & Loss A/c
31
To Bank A/c 50,000 (Additional 15,390
Depreciation'
By Depreciation A/c 43,500
By Balance c/d 1,38,500
1,97,390 1,97,390
 UNIT
II
B. Inventory Valuation
Q. 1. From the following information find out the value of stock as on 31-3-2007
according to AS-2: [2008
(i) Cost of physical stock on 31-3-2007 was Rs. 2,00,000.
(ii) Cost of stock held as consignee was Rs. 40,000.
(iii) Stock was expected to realise the normal selling price of 150% of cost except for the
following goods:
(1) Goods costing Rs. 10,000 were damaged and an expenditure of 10% of normal selling
price was necessary to realise the cost.
(2) Goods costing Rs. 20,000 were damaged beyond repair and were expected to realise Rs.
5,000 only.
Sol.
Valuation of Stock
as on 31-3-2007
Rs.
Physical Stock as on 31-3-2007 2,00,000
Less: Stock held as consignee 40,000
Cost of Stock 1,60,000
Less: Reduction in value due to valuation at below cost:
(i) Repairable Damaged Goods (10% of 150% of Rs. 10,000) 1,500
(ii) Non-Repairable Damaged Goods (Rs. 20,000 - Rs. 5,000) 15,000 16,500
Value of Stock 1,43,500
Q. 2. A company started its business on 1st January, 2008. It purchased and used raw
material during the year 2008 as stated below: [2009
January 10 800 kgs @ Rs. 62 per kg
February 28 1,200 kgs @ Rs. 57 per kg
March 10 Issued 1,000 kgs
March 26 Issued 500 kgs
May 20 900 kgs @ Rs. 65 per kg
June 28 Issued 600 kgs
Calculate the value of closing stock of raw materials on June 30 according to
(i) Last in First out basis, and
(ii) Weighted average basis, using perpetual inventory system.
Sol. (i) Valuation of Closing Stock of Raw Materials (LIFO)
Date Receipts Issues Balan
ce
Units Rate Value Units Rate Value Units Rate Value
2008 kgs (Rs.) (Rs.) kgs (Rs.) (Rs.) kgs (Rs.) (Rs.)
Jan. 10 800 62 49,600 — — — 800 62 49,600
— — —, — — — 800 62 49,600
Feb. 28 1,200 57 68,400 — — — 1,200 57 68,400
Mar. 10 — — — 1,000 57 57,000 800 62 49,600
— — — — — — 200 57 11,400
Mar. 26 — — — 200 57 11,400 — — —
— — — 300 62 18,600 500 62 31,000
May 20 900 65 58,500 — — — 500 62 31,000
— — — — — — 900 65 58,500
— — — — — — 500 62 31,000
June 28 — — — 600 65 39,000 300 65 19,500
Value of Closing Stock = Rs. 31,000 + Rs. 19,500 = Rs. 50,500
(ii) Valuation of Closing Stock of Raw Materials (Weighted Average)
Date Receipts Issues Balan
ce
Units Rate Value Units Rate Value Units Rate Value
2008 kgs (Rs.) (Rs.) kgs (Rs.) (Rs.) kgs (Rs.) (Rs.)
Jan. 10 800 62 49,600 — — — 800 62 49,600
Feb. 28 1,200 57 68,400 — — — 2,000* 59" 1,18,000
Mar. 10 — — — 1,000 59 59,000 1,000 59 59,000
Mar. 26 — — — 500 59 29,500 500 59 29,500
May 20 900 65 58,500 — — — 1,400 62.86 88,004
June 28 — — — 600 62.86 37,716 800 62.86 50,288
Value of Closing Stock = Rs. 50,288
* Total Units = 800 + 1,200 = 2,000 kgs
** Weighed average = Rs. 1,18,000/2,000 units = Rs. 59
Q. 3. The following are the details of material of Sai Mills: [2010
01-01-2009 Opening Stock 100 units @ Rs. 25 per unit
01-01-2009 Purchases 200 units @ Rs. 30 per unit
15-01-2009 Issued for consumption 100 units
01-02-2009 Purchases 400 units @ Rs. 40 per unit
15-02-2009 Issued for consumption 200 units
20-02-2009 Issued for consumption 200 units
01-03-2009 Purchases 300 units @ Rs. 50 per unit
15-03-2009 Issued for consumption 200 units
Find out the cost of closing stock as on 31-3-2009 according to:
(i) First in first out basis, and
(ii) Weighted average price basis, using perpetual inventory system. Also calculate cost
of closing inventory on LIFO basis under periodic system.
Sol, (i)
Stores Ledger (FIFO: Perpetual)
Date Receipts Issues Balan
ce
Units Rate Value Units Rate Value Units Rate Value
(Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)
01-01-09 — — — — — — 100 25 2,500
01-01-09 200 30 6,000 — — — 100 25 2,500
— — — — — — 200 30 6,000
15-01-09 100 25 2,600 200 30 6,000
01-02-09 400 40 16,000 — — — 200 30 6,000
— — — — — — 400 40 16,000
15-02-09 — — — 200 30 6,000 400 40 16,000
20-02-09 — — — 200 40 8,000 200 40 8,000
01-03-09 300 50 15,000 — — — 200 40 8,000
 — — — — — — 300 50 15,000
15-03-09 — — — 200 40 8,000 300 50 15,000
Value of Closing Stock: 300 units @ Rs. 50 = Rs. 15,000
(ii) Stores Ledger (Weighted Average: Perpetual)
Date Receipts Issues Balanc
e
Units Rate Value UnitRs. Rate Value Units Rate Value
(Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)
01-01-09 — — — — — — 100 25 2,500
01-01-09 200 30 6,000 300 28.33* 8,500
15-01-09 — — — 100 28.33 2,833 200 28.33 5,667
01-02-09 400 40 16,000 — — — 600 36.11 21,667
15-02-09 — — — 200 36.11 7,222 400 36.11 14,445
20-02-09 — — — 200 36.11 7,222 200 36.11 7,223
01-03-09 300 50 15,000 — — — 500 44.45 22,223
15-03-09 — — — 200 44.45 8,890 300 44.45 13,333
* Issue Price (Weighted Average) = Rs. 8,500/300 = Rs. 28.33
Value of Closing Stock: 300 units @ Rs. 44.45 = Rs. 13,333
Value of Closing Inventories on LIFO basis under periodic system:
Stock of materials (units) = (Op. Stock + Purchases) - (Issued for consumption)
= (100 + 200 + 400 + 300) - (100 + 200 + 200 + 200)
= 1,000 - 700 = 300 units
Cost of Closing Inventory (material) = 100 units @ Rs. 25 = Rs. 2,500
= 200 units @ Rs. 30 = Rs. 6,000
Rs. 8,500
Q. 4. The following are the details of material in respect of a certain item of M/s Ajay &
Company: [2011
1-1-2008 Purchases 600 units @ Rs. 20 each
1-2-2008 Purchases 200 units @ Rs. 24 each
15-2-2008 Sales 200 units @ Rs. 30 each
1-4-2008 Purchases 300 units @ Rs. 30 each
15-4-2008 Sales 400 units @ Rs. 40 each
1-6-2008 Purchases 300 units @ Rs. 40 each
15-6-2008 Sales 350 units @ Rs. 50 each
Find out the cost of closing stock as on 30-6-2008 according to:
(i) First-in-first-out basis, and
(ii) Weighted average price basis, using perpetual inventory system.
Sol. (i) Store Ledger FIFO Basis
Purchases (In) Saks (Out) Slock
Date Units Rate Amount Units Rate Amount Units Rate Amount
(Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)
01-01-08 600 20 12,000 — 600 20 12,000
01-02-08 200 24 4,800 -- 600 20 12,000
200 24 4,800
15-02-08 — 200 20 4,000 400 20 8,000
200 24 4,800
01-04-08 300 30 9,000 — 400 20 8,000
200 24 4,800
300 30 9,000
15-04-08 — 400 20 8,000 200 24 4,800
300 30 9,000
01-06-08 300 40 12,000 200 24 4,800
300 30 9,000
300 40 12,000
15-06-08 — 200 24 4,800 150 30 4,500
150 30 4,500 300 40 12,000
16,500*
(ii) Weighted Average Cost Basis
Purchases (In) Sales (Out) Stock
Date Units Rate Amount Units Rate Amount Units Rate Amount
(Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)
01-01-08 600 20 12,000 — 600 20 12,000
01-02-08 200 24 4,800 — 600 20 12.000
200 24 4,800
800 21 16,800
15-02-08 — 200 21 4,200 600 21 12,600
01-04-08 300 30 9,000 — 600 21 12,600
300 30 9,000
900 24 2f,600
15-04-08 — 400 24 9,600 500 24 12,000
01-06-08 300 40 12,000 — 500 24 12,000
300 40 12,000
BOO 30 24,000
15-06-08 — 350 30 10,500 450 30 13,500*
* Value of Closing Stock.
Q. 5. From the following information calculate cost of sales, gross profit, and value of closing
stock for the month of January, 2012, according to FIFO, LIFO and weighted average
method. [2012
Date Particulars No. of Units Rate per Unit (Rs.)
01-01- 2012 Opening Stock 500 8
05-01-2012 Purchased 800 9
14-01-2012 Purchased 700 9
21-01-2012 Purchased 1000 10
23-01-2012 Purchased 500 9
During January 2012 Sold 2900 17

Sol. Opening Stock of Material 500 units

Add: Purchase of Material [800 + 700 + 1000 + 500J 3,000 units
3,500 units
Less: Quantity of Material sold 2,900 units
Closing Stock of Material 600 units
1. FIFO Method:
Cost of Closing Stock = (500 x Rs. 9) + (100 x Rs. 10) = Rs. 4,500 + Rs. 1,000 = Rs. 5,500
Cost of Goods sold = (500 x Rs. 8) + (800 x Rs. 9) + (700 x Rs. 9) + (900 x Rs. 10)
= Rs. 4,000 + Rs. 7,200 + Rs. 6,300 + Rs. 9,000 = Rs. 26,500 ...(i)
Sales Value = 2,900 x Rs. 7 - Rs. 49,300 ...(ii)
Gross Profit - Rs. 49,300 - Rs. 26,500 - Rs. 5,500 = Rs. 7,300
2. UFO Method:
Cost of Closing Stock = (500 x Rs. 8) + (100 x Rs. 9) = Rs. 4,000 + Rs. 900 = Rs. 4,900
Cost of Goods sold = (500 x Rs. 9) + (1,000 x Rs. 10) + (700 x Rs. 9) + (700 x Rs. 9)
= Rs. 4,500 + Rs. 10,000 + Rs. 6,300 + Rs. 6,300 - Rs. 27,100 ...(i) Sales Value = 2,900 x Rs.
17 = Rs. 49,300 ...(ii)
Gross Profit = Rs. 49,300 - Rs. 27,100 - Rs. 4,900 = Rs. 17,300
3. Weighted Average Method:
Cost of Total Goods = (500 x Rs. 8) + (800 x Rs. 9) + (700 x Rs. 9) + (1,000 x Rs. 10) + (500
x Rs. 9)
= Rs. 4,000 + Rs. 7,200 + Rs. 6,300 + Rs. 10,000 + Rs. 4,500 = Rs. 32,000
Total Quantity of Material = [500 + 800 + 700 + 1,000 + 500] = 3,500 units
Weighted Average Price = Rs. 32,000/3,500 = Rs. 9.14 per unit
Cost of Closing Stock = 600 x Rs. 9.14 = Rs. 5,484
Cost of Goods sold = 2,900 x Rs. 9.14 = Rs. 26,506 ...(i)
Sales Value = 2,900 x Rs. 17 = Rs. 49,300 ...(ii)
Gross Profit = Rs. 49,300 - Rs. 26,506 - Rs. 5,484 = Rs. 17,310
Q. 6. Nidhi Ltd. gives following details of raw material:
Oct. 01, 2012 Opening Stock 100 units @ 25 per unit
Oct. 01, 2012 Purchases 200 units @ 30 per unit
Oct. 03, 2012 Issued for Consumption 100 units
Oct. 05, 2012 Purchases 400 units @ 40 per unit
Oct. 10, 2012 Issued for Consumption 200 units
Oct. 15, 2012 Issued for Consumption 200 units
Oct. 21, 2012 Purchases 300 units @ 50 per unit
Oct. 28, 2012 Issued for Consumption 150 units
Oct. 31, 2012 *Wastage of raw material 50 units
Find the value of Closing Stock using perpetual inventory system under following
methods:
(i) First In First Out
(ii) Weighted Average Price [2012 Sem
Sol. Stores Ledger-FIFO Method
Date Receip Issues Balan
ts ce
Units Rate Amount Units Rate Amount Units Rate Amount
2022 (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)
Oct. 1 100 25 2,500
Oct. 1 200 30 6,000 — ~ — 100 25 2,500
200 30 6,000
Oct. 3 — — — 100 25 2,500 200 30 6,000
Oct. 5 400 40 16,000 — — — 200 30 6,000
— — — 400 40 16,000
Oct. 10 — — — 200 30 6,000 400 40 16,000
Oct. 15 — — — 200 40 8,000 200 40 8,000
Oct. 21 300 50 15,000 — — — 200 40 8,000
300 50 15,000
Oct. 28 — — — 150 40 6,000 50 40 2,000
300 50 15,000
Oct. 31 50 40 2,000 300 50 15,000
(wastag — —
e)
Closing Inventory = Rs. 15,000
Stores Ledger—Weighted Average Price
Date Receip Issues Balan
ts ce
Units Rate Amount Units Rate Amount Units Rate Amount
2012 (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)
Oct. 1 100 25 2,500
Oct. 1 200 30 6,000 — — — 300 28.33 8,500
Oct. 3 — — — 100 28.33 2,833 200 28.33 5,667
Oct. 5 400 40 16,000 — — — 600 36.11 21,667
Oct. 10 — — — 200 36.11 7,222 400 36.11 14,445
Oct. 15 — — — 200 36.11 7,222 200 36.11 7,223
Oct. 21 300 50 15,000 — — — 500 44.45 22,225
Oct. 28 — — — 150 44.45 6,668 300 44.45 13,335
Oct. 31 — — — 50 44.45 2,222 350 44.45 15,557
Q. 7. At the beginning of January, 2013, Amit Limited had in stock 200 units @ Rs. 25 per
unit. Further information for the month of January is as follows:
January 2013
2 Purchases : 400 units @ Rs. 30 per unit
5 Sales : 300 units @ Rs. 40 per unit
10 Purchases : 500 units @ Rs. 35 per unit
15 Sales : 200 units @ Rs. 40 per unit
20 Sales : 200 units @ Rs. 42 per unit
25 Purchases : 600 units @ Rs. 36 per unit
28 Sales : 300 units @ Rs. 42 per unit
Calculate the cost of closing inventory and gross profit by FIFO method under:
(i) Perpetual system of inventory
(ii) Periodic system of inventory [2013
Sol. (i) Perpetual System of Inventory
_____________________Stock Ledger-FIFO Method
Date Receiv Issued Balan
ed ce
Units Rate Amount Units Rate Amount Units Rate Amount
2013 (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)
Jan. 1 200 25 5,000
Jan. 2 400 30 12,000 — — — 200 25 5,000
400 30 12,000
Jan. 5 — — — 200 25 5,000
 100 30 3,000 300 30 9,000
Jan. 10 500 35 17,500 — — — 300 30 9,000
500 35 17,500
Jan.15 -- — — 200 30 6,000 100 30 3,000
500 35 17,500
Jan. 20 -- — — 100 30 3,000
100 35 3,500 400 35 14,000
Jan. 25 600 36 21,600 — — — 400 35 14,000
600 36 21,600
Jan. 28 — — — 300 35 10,500 100 35 3,500
51,100 31,000 600 36 2f,600
Thus Closing Inventory under FIFO method is Rs. 25,100, i.e., (Rs. 3,500 + Rs. 21,600).
It consists 100 units @ Rs. 35 and 600 units @ Rs. 36.
(ii) Periodic System of Inventory. Since FIFO method of pricing issues or cost
determination is followed, the closing entry of 700 units consists of most recent purchases.
Most recent purchases are: 600 units out of the latest purchase @ Rs. 36 and remaining 100
units would be priced out of the second last purchase @ Rs. 35. Therefore, the cost of
Closing Inventory would be as follows:
600 units @ Rs. 36 Rs. 21,600
100 units @ Rs. 35 Rs. 3,500
Closing Inventory Rs. 25,100
It should be noted that closing inventory would be the same under both the systems.
Calculation of Gross Profit:
Perpetual Inventory System Sales = 300 x Rs. 40 + 200 x Rs. 40 + 200 x Rs. 42 + 300 x Rs.
42
= Rs. 41,000
Cost of Goods sold = Rs. 5,000 + Rs. 3,000 + Rs. 6,000 + Rs. 3,000 + Rs. 3,500 + Rs. 10,500
= Rs. 31,000
Gross Profit = Sales - Cost of Goods sold
= Rs. 41,000 - Rs. 31,000 = Rs. 10,000
Periodic Inventory System
Sales = Rs. 41,000
Cost of Goods sold = Opening inventory + Purchases - Closing inventory
= Rs. 5,000 + Rs. 51,100 - Rs. 25,100 = Rs. 31,000
Gross Profit = Sales - Cost of Goods sold
= Rs. 41,000 - Rs. 31,000 = Rs. 10,000
Q. 8. From the following data calculate the value of Closing Stock according to FIFO
using: [2013 Nov.
(i) Periodic Inventory System
(ii) Perpetual Inventory System
Opening Stock October 1 400 Units @ Rs. 750 each
Purchases October 5 600 Units @ Rs. 8 each
October 15 500 Units @ Rs. 9 each
October 25 400 Units @ Rs. 8.50 each
October 30 300 Units @ Rs. 9.50 each
Issues October 3 300 Units
October 10 500 Units
October 17 400 Units
October 26 500 Units
October 31 200 Units
Sol. (i) Value of Closing Stock (FIFO) — Periodic Inventory System:
Units (Rs.)
Opening Inventory (400 units @ Rs. 7.50) 400 3,000
Add: Purchases [Rs. 4,800 + Rs. 4,500 + Rs. 3,400 + Rs. 2,850] 15,550
[600 + 500 + 400 + 300] 1,800 18,550
2,200
Less: Cost of Goods sold [Rs. 2,250 + Rs. 3,950 + Rs. 3,400 + Rs. 15,700
4.400 + Rs. 1,700]
[300 + 500 + 400 + 500 + 200] 1,900
Closing Inventory [300 Units @ Rs. 9.50] 300 2,850
(ii)
Stock Ledger Sheet (FIFO)
Date Receiv Issued Balan
 ed ce
Units Rate Amount Units Rate Amount Units Rate Amount
(Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)
Oct. 1 — — — — — — 400 7.50 3,000
Oct. 3 — — — 300 7.50 2,250 100 7.50 750
Oct. 5 600 8.00 4,800 — — — 100 7.50 750
600 8.on 4,800
Oct. 10 — — — 100 7.501 — — — —
— — — 400 8.00 3,950 200 8.00 1,600
Oct. 15 500 9.00 4,500 — — — 200 8.00 1,600
— — — — — — 500 9.00 4,500
Oct. 17 — — — 200 8.001 — — — —
— — — 200 9.001 3,400 300 9.00 2,700
Oct. 25 400 8.50 3,400 — — — 300 9.00 2,700
— — — — — — 400 8.50 3,400
Oct. 26 — — — 300 9.00 — — — —
— — — 200 8.50 4,400 200 8.50 1,700
Oct. 30 300 9.50 2,850 — — — 200 8.50 1,700
— — — — — — 300 9.50 2,850
Oct. 31 — — — 200 8.50 1,700 300 9.50 2,850
Q. 9. From the following information calculate cost of sales, gross profit, and value of
Closing Stock for the month of January, 2012, according to FIFO, LIFO and weighted
average method.
Date Particulars No. of Units Rate per unit
01-01-2012 Opening Stock 500 Rs. 8
05-01-2012 Purchased 800 Rs. 9
14-01-2012 Purchased 700 Rs. 9
21-01-2012 Purchased 1,000 Rs. 10
23-01-2012 Purchased 500 Rs. 9
During Jan. 2012 Sold 2,900 Rs. 17
Sol. Inventory Valuation
 FIFO LIFO WAC
Closing Stock 500 x Rs. 9 =Rs. 4,500 500 x Rs. 8 = Rs.
3,500 - 2,900 4,000
= 600 units 100 x Rs. 10=Rs. 100 x Rs. 9 = Rs. 900 Rs. 32,000*1/3,500 x 600
1,000
Rs. 5,500 Rs. 4,900 Rs. 5,486
Cost of Goods sold = Opening Stock + Purchases - Closing Stock
FIFO = Rs. 4,000 + Rs. 28,000*2 - Rs. 5,500 = Rs. 26,500
LIFO = Rs. 4,000 + Rs. 28,000 - Rs. 4,900 = Rs. 27,100
WAC = Rs. 4,000 + Rs. 28,000 - Rs. 5,486 = Rs. 26,514
Gross Profit - Sales - Cost of Goods sold
FIFO = Rs. 49,300*3 - Rs. 26,500 = Rs. 22,800
LIFO = Rs. 49,300 - Rs. 27,100 = Rs. 22,200
WAC = Rs. 49,300 - Rs. 26,514 = Rs. 22,786
Working notes:
*1 Total cost of 3,500 units
= (500 x Rs. 8) + (800 x Rs. 9) + (700 x Rs. 9) + (1,000 x Rs. 10) + (500 x Rs. 9)
= = Rs. 4,000 + Rs. 7,200 + Rs. 6.300 + Rs. 10,000 + Rs. 4,500 - Rs. 32,000
*2 Purchases = (800 x Rs. 9) + (700 x Rs. 9) + (1,000 x Rs. 10) + (500 x Rs. 9)
= Rs. 7,200 + Rs. 6,300 + Rs. 10,000 + Rs. 4,500 - Rs. 28,000

*3 Safes - 2 900 x Rs. 17 = Rs. 49,300

 UNIT
II
C. Income & Expenditure Account
Q. 1. Show what amount will appear in Income & Expenditure A/c for the year ending
31-3-08 and Balance Sheet as at that date in each of the following cases: [2008
Case (i)- Prize Fund as at 31-3-2007 Rs. 12,000. Donations for prizes received during the
year 2007-08 Rs. 2,800; Prizes awarded Rs. 2,000; 10% prize fund investments as at 31-3-
2007 Rs. 12,000. Interest received on prize fund investments Rs. 600.
Case (ii) — Stock of stationery on 31-3-07 Rs. 3,000. Creditors of stationery on 31-3-07 Rs.
2,000; advance paid for stationery carried forward from 2006-07 Rs. 200; Amount paid for
stationery during the year 2007-08 Rs. 10,800, Stock of stationery on 31-3-08 Rs. 500,
creditors for stationery on 31-3-08 Rs. 1,300 and advance paid for stationery on 31-3-08 Rs.
300.
Case (iii) — Subscription outstanding as on 31-3-07 Rs. 2,000, subscription
received in advance on 31-3-07 Rs. 3,000. Amount of subscription received during 2007-08
Rs. 35,000 out of which Rs. 1,500 related to 2006-07 and Rs. 800 related to 2008-09. On 31-
3-08 subscription outstanding for 2007-08 amounted to Rs. 1,300.
Sol. Case (i) Balance Sheet (only Relevant Items)
as at 31st March, 2008
Liabilities Rs. Assets Rs.
Prize fund 12,000 Prize fund investments 12,000
Add: Donations for Prizes 2,800 Accrued interest on prize fund* 600
Interest received on prize
fund
investments 600
Accrued interest* 600
16,000
Less: Prizes awarded 2,000 14,000

Working notes: Rs.

* Yearly interest on prize fund investment [10% of Rs. 12,000] 1,200
Less: Interest received during the year 600
Accrued interest but not received 600
Case (ii)
 Dr. Creditors for Stationery Account Cr.
Particulars Rs. Particulars Rs.
To Balance b/d 200 By Balance b/d 2,000
To Bank A/c 10,800 By Stock of Stationery A/c
To Balance c/d 1,300 (Credit Purchases)* (Bal. Fig.) 10,000
By Balance c/d 300
12,300 12,300
Dr. Stock of Stationery Account Cr.
Particulars Rs. Particulars Rs.
To Balance b/d 3,000 By Income & Expenditure A/c
To Creditors for Stock of (Stationery consumed) (Bal. Fig.) 12,500
Stationery (Transfer)' 10,000 By Balance c/d 500
13,000 13,000
An extract of Income and Expenditure Account
Dr. for the Year ending on 31st March, 2008 Cr.
Expenditure Rs. Income Rs.
To Stationery Consumed 12,500
An extract of Balance Sheet as at 31st March 2008
Liabilities Rs. Assets Rs.
Creditors for Stationery 1,300 Advance for Stationery 300
Stock of Stationery 500
Case (iii)
Dr. Subscription Account Cr.
Particulars Rs. Particulars Rs.
To Outstanding Subscription A/c 2,000 By Advance Subscription A/c 3,000
To Income & Expenditure A/c By Bank A/c 35,000
(Balancing Figure) 37,000 By Outstanding Subscription A/c
To Advance Subscription 800 2006-07(2,000-1,500) 500
(2008-09) 2007-08 1,300 1,800
39,800 39,800
 An extract of Income and Expenditure Account
for the year ended 31st March, 2008
Expenditure Rs. Income Rs.
By Subscription A/c 37,000
An extract of Balance Sheet as at 31st March, 2008
Liabilities Rs. Assets Rs.
Subscription Received Subscription
Outstanding
in Advance 800 2006-07 500
2007-08 1,300 1,800
Q. 2. The following is the Receipts and Payments Account of a Sports Club for the year
ended 31st December, 2008: [2009
Receipts Rs. Payments Rs.
To Balance b/d 7,500 By Salaries 14,000
To Subscriptions (including Rs. By Match Expenses 28,000
2,000
for the year 2007) 40,000 By 12% Investment on 1-1-2008 40,000
To Donations 15,000 By Sports Materials 15,000
To Life Membership Fees 35,000 By Printing & Stationery 12,000
To Sale of Furniture at book 5,000 By Honorarium 5,000
value
To Entrance Fees 10,000 By Furniture 15,000
To Int. on 10% Investments for 20,000 By Magazines & Journals 10,000
full year
To Match Fund 40,000 By Books 35,000
To Donation for Building Fund 45,000 By Municipal Taxes 6,000
To Sale of Newspapers 2,500 By Balance c/d 40,000
2,20,000 2,20,000
Additional information:
(i) The position of the Club on January 1, 2008 was as follows :
Subscriptions due - Rs. 3,000
Furniture - Rs. 10,000
Books - Rs. 20,000
Building - Rs. 1,25,000
Stock of Sports Materials - Rs. 4,500
Creditors for Printing - Rs. 2,500
(ii) The Club has 1,000 members each paying an annual subscription of Rs. 50. 20 members
paid their subscription in advance in 2007. In the year 2008, subscription was received in
advance from 15 members.
(iii) Municipal Taxes paid every year on 1st April.
(iv) One member donated a Billiard Table worth Rs. 50,000.
(v) Books were worth Rs. 46,000 on 31st December, 2008 and stock of sports
materials on that date amounted to Rs. 4,000.
(vi) 12% investments include Rs. 30,000 invested from donations received for building fund.
Prepare Income and Expenditure Account for the year ended 31 st December, 2008 and a
Balance Sheet as on that date.
Sol. Income and Expenditure Account
Dr. for the year ended 31st December, 2008 Cr.
Expenditure Rs. Income Rs.
To Salaries 14,000 By Subscriptions 40,000
To Sports Materials: Add: Advance Received
Opening Stock 4,500 (2007) 1,000
Add: Purchases 15,00 Outstanding
0
19,50 (2008) 11,750*1 12,750
0
Less: Closing Stock 4,000 15,500 52,750
To Printing & Stationery 12,00 Less: Outstanding
0
Less: Outstanding for 2,500 9,500 (2007) 2,000
2007
To Honorarium 5,000 Received in Advance
To Magazines and 10,000 (2008) 750 2,750 50,000
Journals
To Depreciation on Books By Donations 15,000
[20,000 + 35,000 - 46,000 ] 9,000 By Interest on 10% Investments 20,000
To Municipal taxes 6,000 By Sale of Newspapers (Old) 2,500
Add: Prepaid (2007) 1,500 By Accrued Interest on 12%
7,500 Investment [10,000 x 12/100]*2 1,200
Less: Prepaid (2008) 1,500 6,000
To Surplus (i.e., excess of
Income over Expenditure) 19,700
88,700 88,700
Balance Sheet as on 31st December, 2008
Liabilities Rs. Assets Rs.
Subscriptions Received in 750 Building 1,25,000
Advance
Match Fund 40.000 Furniture 10,000
Less: Match Expenses 28,000 12,000 Addition 15,000
Donation for Billiard 50,000 25,000
Table
Donation for Building 45,000 Less: Sold 5,000 20,000
Fund
Add: Accrued interest 3,600 48,600 Books (20,000 + 35,000 - 9,000) 46,000
(Rs. 30,000 x 12/100) Stock of Sports 4,000
Materials
Capital Fund*3 3,68,00 10% Investments 2,00,000
0
Add: Surplus 19,700 12% Investment 40,000
Life Membership Fees 35,000 Accrued Interest on 12% 4,800
Investment
Entrance Fees 10,000 4,32,700 Billiard Table 50,000
Prepaid Municipal 1,500
Taxes
Subscriptions
Outstanding
2007 (3000 - 2000) 1,000
2008 11,750 12,750
 Cash in hand 40,000
5,44,050 5,44,050
Working notes:
*1 Dr. Subscription Account (2008) Cr.
Particulars Rs. Particulars Rs.
To Subscriptions Due A/c 3,000 By Subscriptions Received in
To Income & Expenditure A/c 50,000 Advance A/c (20 "50), 2007 1,000
(1000x50)
To Subscriptions Received in By Receipts & Payments A/c 40,000
Advance
(50 x 15)*2 2008 750 By Subscnptions Due:
2007 (3,000 - 2,000) 1,000
2008 (Balancing figure) 11,750
53,750 53,750

12% investment on 1.1.2008:Rs.40,000

[Include Rs.30,000 investment [Remaining investment (Rs.40,000-
From donation received for building. Rs.30,000=Rs.10,000)is general investment
So intrest of this (Rs.30,000%12/100= (10,000*12/100=Rs.1,200) is treated as
Rs.3,600)Should be credited to income and credited to income & expenditure
building fund] A/c]
Balance sheet as on 31 december,2007
Liabilities Rs. Assets Rs.
Creditors for Printing 2,500 Cash in hand 7,500
Subscriptions Received in Prepaid Municipal Taxes 1,500
Advance
(20 x 50) 1,000 Subscriptions Outstanding 3,000
Capital Fund {Balancing figure) 3,68,000 Furniture 10,000
Books 20,000
Building 1,25,000
10% Investments (Rs. 20,000 x 2,00,000
 100/10)
Stock of Sports Material 4,500
3,71,500 3,71,500
Q. 3. From the following Income and Expenditure Account of Mayur Club for the year ended
31st December, 2009, prepare Receipts and Payments Account for the year ended 31 st
December, 2009 and a Balance Sheet as on that date: [2020
Income and Expenditure Account
for the year ended 31-12-2009
Expenditure Rs. Income Rs.
To Salaries 48,000 By Subscriptions 1,56,000
To Stationery 3,200 By Donations 16,000
To Postage & Telephone 6,400 By Billiard Room Collections 14,000
To Rates and Taxes 12,000 By Entrance Fees 24,000
To Repairs 16,000 By Interest from Investments 5,400
To Table Tennis Balls 2,400
To Printing of Magazines 4,000
To Electricity Charges 12,000
To Billiard Room Expenses 6,000
To Upkeep of Ground 18,800
To Depreciation on Assets 4,000 .
To Excess of Income over 82,600
Expenditure
2,15,400 2,15,400
Additional Information:
11.2009 (Rs.) 32.22.2009 (Rs.)
Fixed Assets 96,000 64,000
Investments 54,000 94,000
Cash at Bank 3,600 Rs.
Subscriptions Outstanding 6,000 10,000
Subscriptions received in advance 12,000 20,000
Expenses Outstanding: Stationery 1,200 800
Telephone 600 400
Electricity 1,400 600
Sol. Receipts and Payments Account
for the year ended 32s' December, 2009
Receipt Rs. Payment Rs.
To Balance b/d: Cash at Bank 3,600 By Salaries 48,000
To Subscriptions 1,56,000 By Stationery 3,200
Add: Subscriptions O/s Add: Outstanding (2008) 1,200
(2008) 6,000 4,400
Subscriptions received Less: Outstanding (2009) 800 3,600
in advance (2009) 20,000 26,000 By Postage & Telephone 6,400
1,82,000 Add: Outstanding (2008) 600
Less: Subscriptions O/s 7,000
(2009) 10,000 Less: Outstanding (2009) 400 6,600
Subscriptions received By Rates & Taxes 12,000
in advance (2009) 12,000 1,60,000 By Repairs 16,000
22,000
To Donations 16,000 By Table Tennis Balls 2,400
To Billiard Room Collections 14,000 By Printing of Magazines 4,000
To Entrance Fees 24,000 By Electricity Charges 12,00
0
To Interest from Investments 5,400 Add: Outstanding (2008) 1,400
To Sale of Fixed Assets*2 28,000 13,40
0
Less: Outstanding (2009) 600 12,800
By Billiard Room 6,000
Expenses
By Upkeep of Ground 18,800
By Investments 40,000
By Balance c/d: Cash at 80,800
Bank
 2,51,000 2,51,000
Balance Sheet as on 31st December 2009
Liabilities Rs. Assess Rs.
Capital Fund*, 1,44,40 Fixed Assets 64,000
0
Add: Surplus 82,600 2,27,000 Investments 54,000
Subscriptions received in advance 20,000 Add: Addition 40,000 94,000
Creditors for Stationery 800 Cash at Bank 80,800
Telephone Bill 400 Subscriptions 10,000
Outstanding Outstanding
Electricity Bill 600
Outstanding
2,48,800 2,48,800
Working notes:
*1 Calculation of Capital Fund as on 1-1-2009:
________________________________Balance Sheet as on 1-1-09
liabilities Rs. Assets Rs.
Subscription received in 12,000 Fixed Assets 96,000
advance
Expenses Outstanding: Investments 54,000
Stationery 1,200 Cash at Bank 3,600
Telephone 600 Subscriptions Outstanding 6,000
Electricity 1,400 3,200
Capital Fund (Bal. figure) 1,44,400
1,59,600 1,59,600
*2 Dr. Fixed Assets Account Cr.
Particulars Rs. Particulars Rs.
To Balance b/d 96,000 By Depreciation A/c 4,000
By Bank A/c (Sale) (Bal. figure) 28,000
By Balance c/d 64,000
96,000 96,000
Q. 4. Prepare Income and Expenditure Account of Lions Club for the year ending 31 st
March 2009 and a Balance Sheet as on that date from the following:
[2012
Receipts and Payments Account
for the year ending 31-3-2009
Receipts Rs. Payments Rs.
To Balance b/d: By Salary:
Cash 20,000 Secretary 60,000
Bank 1,20,000 1,40,000 Staff 50,000 1,10,000
To Subscription: By Canteen expenses 1,20,000
2007-08 5,000 By Miscellaneous 25,000
Expenses
2008-09 55,000 By Construction of 1,50,000
building
2009-10 4,000 64,000 By Balance c/d:
To Interest from Bank 10,000 Cash 13,000
To Sale of Old 20,000 Bank 40,000 53,000
Furniture
To Sale of Newspapers 4,000
To Canteen Collections 1,20,000
To Donation for 1,00,000
Building
4,58,000 4,58,000

Additional Information: 31-03-08 (Rs.) 31-03-09 (Rs.)

(i) Subscription outstanding as on 10,000 6,000
(ii) Subscription in advance as on 2,000 4,000
(iii) Salary of staff outstanding 10,000 20,000
(iv) Canteen expenses prepaid 10,000 15,000
(v) Furniture at book-value 1,40,000 —
(vi) Buildings (under construction) 1,50,000 4,00,000
(vii) Fixed Deposits with Bank 1,00,000 1,00,000
(viii) Building fund 2,00,000 —
Book value of furniture sold during the year was Rs. 15,000 and depreciation on
furniture is charged @ 10% p.a. on closing balance.
Sol.
Dr. Income and Expenditure Account Cr.
Expenditure Rs. Income Rs.
To Salary: By Subscriptions 55,000
Secretary 60,000 Add: Reed, last year 2,000
Staff 50,000 Add: Outstanding*1 1,000 58,000
Less: Paid for last year (10,000) By Interest from Bank 10,000
Add: O/s for current year 20,000 60,000 By Sale of Newspapers 4,000
To Canteen Expenses 1,20,000 By Canteen Collections 1,20,000
Add: Paid last year 10,000 By Profit on Sale of
Less: Prepaid C/year (15,000) 1,15,000 Old Furniture 20.000
To Miscellaneous Expenses 25.000 Less: Book Value 15,000 5,000
To Depreciation on furniture 12,500 By Excess of Expenses over
Income
(Deficit) 75,500
2,72,500 2,72,500
Workings notes: Balance Sheet
as on 31-03-2008
Liabilities Rs. Assets Rs.
Capital Fund (Balancing figure) 3,38,000 Cash 20,000
Subscriptions received in 2,000 Bank 1,20,000
Advance
Salary (Staff) outstanding 10,000 Subscriptions outstanding 10,000
Building Fund 2,00,000 Canteen Expenses Prepaid 10,000
Furniture 1,40,000
Buildings (Under construction) 1,50,000
Bank Fixed Deposits 1,00,000
5.50.000 5.50.000
Balance Sheet
as on 31-03-2009
Liabilities Rs. Assets Rs.
Capital Fund Furniture 1.40,00
0
as on 01-04-08 3,38,000 Less: Sale (15,000)
Less: Deficit 75,500 2.62,500 1,25,00
0
Building Fund Less: Depreciation (12,500) 1,12,500
Opening Balance 2,00,000 Buildings (under construction). 4,00,000
Add: Donation received 1,00,000 3,00,000 Bank Fixed Deposits 1,00,000
Buildings (under construction*2 1,00,000 Cash 13,000
unpaid
Subscriptions received in 4,000 Bank 40,000
advance
Salaries Outstanding A/c 20,000 Subscriptions Due:
2007-08 5,000
2008-09*! 1,000 6,000
Canteen Expenses 15,000
Prepaid
6,86,500 6,86,500

Working note:
*1 Subscriptions outstanding for 2008-09 Rs.
= (Sub. o/s on 31 03-09) - (Sub. o/s on 31-03-08 - Reed, for 2007-08)
= Rs. 6,000 - (10.000 - 5,000) = Rs.(6,000 - 5,000) - Rs. 1,000
*2 Building (under construction) Rs.
Closing Balance 4,00,000
Less: Opening Balance 1,50,000
2,50,000
Less: Payments made during the year 1,50,000
Buildings (under construction): Unpaid 1,00,000
Q. 5. The following particulars relate to Ganeev Sports Club: [2011 Nov.
Income and Expenditure Account
Dr. for the year ending on 31st March, 2011 Cr.
Expenditure Rs. Income Rs.
To Secretary's Salary 15,000 By Entrance Fees 1,05,000
To Printing and Stationery 22,000 By Subscriptions 1,56,000
To Advertising 16,000 By Rent 28,000
To Audit Fees 5,000 By Interest on Investments 12,000
To Fire Insurance 10,000
To Depreciation:
Sports Equipments 90,000
Furniture 5,000
To Surplus 1,38,000
3,01,000 3,01,000
Receipts and Payments Account
for the year ending on 31st March, 2011
Receipts Rs. Payments Rs.
To Balance b/d 42,000 By Secretary's Salary 10,000
To Entrance Fee: By Printing and Stationery 26,000
2010 10,000 By Advertising 16,000
2011 1,00,000 By Fire Insurance 12,000
To Subscriptions: By 12% Investments
2010 6,000 (Purchased on 1-10-2011) 2,00,000
2011 1,50,000 By Furniture 20,000
2012 4,000 By Balance c/d 58,000
To Rent received 24.000
To Interest received 6,000
3,42,000 3,42,000
The assets as on 31st March, 2010 included Club Grounds and Pavilion Rs. 4,40,000, Sports
Equipments Rs. 2,50,000 and Furniture and Fixtures Rs. 40,000. Subscriptions in arrear on
that date were Rs. 8,000. Subscriptions received in advance on that date were Rs. 2,000.
Creditors for Printing and Stationery on that date were Rs. 5,000.
Prepare the Balance Sheet as on 31-3-2010 and 31-3-2011.
Sol. Balance Sheet of Ganeev Sports Club
Dr. as on 31st March, 2010 Cr.
Liabilities Rs. Assets Rs.
Subscriptions Received in 2,000 Clubs Grounds & Pavilion 4,40,000
Advance
Printing and Stationery 5,000 Sports Equipments 2,50,000
Outstanding
Capital Fund (Balancing Figure) 7,83,000 Furniture & Fixtures 40,000
Subscriptions in Arrear 8,000
Entrance Fee (Receivable as
per Receipts & Payments A/c) 10,000
Cash in hand (Opening Bal. as
per Receipts & Payments A/c) 42,000
7,90,000 7,90,000
Balance Sheet of Ganeev Sports Club
as on 31st March, 2011
Liabilities Rs. Assets Rs.
Expenses Unpaid Cash in Hand (As per R&P A/c) 58,000
(i) Secretary's Salary 1,000 Subscriptions in Arrears
(ii) Printing & Stationery 5,000 for 2009-10 2,000
(iii) Audit Fees 5,000 for 2010-11 4,000 6,000
Subscriptions Received in Entrance Fees Receivable 5,000
Advance 4,000 Rent Receivable 4,000
Capital Fund Interest on Investments 6,000
Receivable
As on 1-4-10 7,83,000 Fire Insurance Prepaid 2,000
Add: Surplus 1,38,000 9,21,000 12% Investments 2,00,000
Sports Equipments 2,50,00
0
 Less: Depreciation 90,000 1,60,000
Furniture & Fixtures as 40,000
on 1-4-10
Add: New 20,000
60,000
Less: Depreciation 5,000 55,000
Clubs Grounds & Pavilion 4,40,000
9,36,000 9,36,000
Q. 6. The following is Income and Expenditure Account of Delhi Club for the year
ended 31st March, 2012: [2012
Income and Expenditure Account
for the year ended 31st March, 2012
Expenditure Rs. Income Rs.
Salaries 39,000 Subscriptions 1,36,000
Rent 9,000 Donations 10,000
Printing 1,500
Insurance 1,000
Audit Fees 1,500
Games and Sports 7,000
Subscription Written off 700
Miscellaneous Expenses 29,000
Loss on Sale of Furniture 5,000
Depreciation on: Sports 12,000
equipment
Furniture 6,200
Excess of Income over 34,100
Expenditure
1,46,000 1,46,000

Additional Information: 31-03-11 (Rs.) 31-03-12 (Rs.)

Subscription in Arrears 5,200 7,400
Advance Subscription 2,000 3,000
Outstanding Exp: Rent 1,000 1,600
Salaries 2,400 700
Audit Fees 1,000 1,500
Sports Equipment less Depreciation 50,000 48,000
Furniture less Depreciation 60,000 55,800
Prepaid Insurance — 300
Book value of Furniture sold is Rs. 14,000. Entrance fee capitalized Rs. 8,000. On 1st
April 2011, there was no cash in hand but bank overdraft was Rs. 30,000. On 31st
March, 2012, cash in hand amounted to Rs. 1,700 and the rest was bank balance.
Prepare Receipt and Payment Account of the club for the year ended 31 st March, 2012.
Sol. Receipts and Payments Account of Delhi Club
for the year ended 31st March, 2012
Receipt Rs. Payments Rs.
To Subscription^ 1,34,100 By Balance b/d: Bank overdraft 30,000
To Donations 10,000 By Salary 39,000
To Sale of Furniture 9,000 Add: Opening Outstanding 2,400
To Entrance fee 8,000 41,400
Less: Closing Outstanding 700 40,700
By Rent 9,000
Add: Opening Outstanding 1,000
10,000
Less: Closing 1,600 8,400
By Insurance 1,000
Add: Closing Prepaid 300 1,300
By Printing 1,500
By Audit Fees 1,500
Add: Opening Outstanding 1,000
2,500
Less: Closing Outstanding 1,500 1,000
By Games & Sports 7,000
 By Mislleaneous Expenses 29,000
By Sports eguipment*2 10,000
By Furniture*3 16.000
By Balance c/d:
Cash 1,700
Bank (Balancing figure) 14,500 16,200
1,61,100 1,61,100
Working notes:
*1 Dr. Subscription Account Cr.
Particulars Rs. Particulars Rs.
To Balance b/d (Opening 5,200 By Balance b/d (Opening 2,000
Arrears) Advance)
To Income & Expenditure A/c 1,36,000 By Income & Expenditure A/c 700
(written off)
To Balance c/d By Bank A/c (Balancing figure) 1,34,100
(Advance at the end) 3,000 By Balance c/d (Closing Arrears) 7,400
1,44,200 1,44,200
*2
Dr. Sports Equipment Account Cr.

Particulars Rs. Particulars Rs.

To Balance b/d 50.000 By Depreciation A/c 12,000
To Bank A/c (Purchase—Bal. 10,000 By Balance c/d 48,000
figure)
60.000 60,000
*3
Dr. Furniture Account Cr.
Particulars Rs. Particulars Rs.
To Balance b/d 60,000 By Depreciation A/c 6,200
To Bank A/c (Purchase-Bal. 16,000 By Bank A/c (Sale) 9,000
figure)
 By Income & Expenditure A/c 5,000
(Loss on Sale)
By Balance c/d 55,800
76,000- 76,000
Q. 7. Given below is the Receipts and Payments Account of Resident Welfare
Association Sports Club for the year ending 31-12-2012.________[2013
Receipts Rs. Payments Rs.
Balance b/d 2,100 Purchase of sports material 7,000
Subscription (including Rs. 1,400 Stationery 5,700
for 2011 and Rs. 1,500 for 2013) 18,000 Honorarium 3.000
Life membership fees 9,000 Upkeep of ground 2,600
Legacies 2,000 Salaries 7,000
Entrance fees 4,000 Telephone charges 2,000
Donations for building fund 18,000 Refreshments 1,400
Hire of club hall 5,000 Tournament expenses 6,000
Sale of old bats and balls 500 Miscellaneous expenses 1,000
Sale of old furniture 700 10% Investment (on 1-7-2006) 12,000
Furniture (part payment) 5,000
Balance c/d 6,600
Total 59,300 Total 59,300

Additional Information:
1-1-12 31-22-12
(Rs.) (Rs.)
Subscription due 1,400 2,400
Subscription received in advance — 1,500
Audit fees outstanding — 1,000
Creditors for stationery 600 500
Stock of stationery - 800
Stock of sports material 1,100 1,500
Building 40,000 40,000
Furniture was sold on 1-1-2012 at its book value. On the same date furniture for Rs. 8,000
was purchased. Depreciation is to be charged at 10% p.a. on furniture.
Prepare Income and Expenditure Account for the year ended 31-12-2012 and Balance
Sheet as on that date.
Sol. Income and Expenditure Account
for the year ended 31st Dec. 2012
Expenditure Rs. Income Rs.
To Sports material consumed*1 6,600 By Subscriptions*3 17,500
To Stationery*2 4,800 By Hire of Club hall 5,000
To Honorarium 3,000 By Sale of old Bats & Balls 500
To Upkeep of ground 2,600 By Accrued Interst on
To Salaries 7,000 Investment*4 600
To Telephone charges 2,000 By Deficit (Balancing figure) 12,600
To Refreshments 1,400
To Tournament expenses 6,000
To Miscellaneous expenses 1,000
To Outstanding Audit fee 1,000
To Depreciation on furniture 800
36,200 36,200
Balance Sheet
as on 31st December, 2012
Liabilities Rs. Assets Rs.
Subscription received in advance 1,500 Cash in hand 6,600
Audit fees Outstanding 1,000 Subscription due 2,400
Creditors for Stationery 500 Stock of Stationery 800
Creditors for Furniture 3,000 Stock of Sports material 1,500
Entrance Fees 4,000 Building 40,000
Life membership fees 9,000 Furniture 8,000
Legacies 2,000 Less Depreciation 800 7,200
Donation for building fund 18,000 Accrued Interest on Investment 600
Capital fund*5 44,700 10% Investment 12,000
Less: Deficit 12,600 32,100
71,100 71,100

Working notes: *1 Rs.

Purchase of Sport material 7,000
Add: Opening Stock 1,100
8,100
less: dosing Stock 1,500
Sport material consumed 6,600
*2 Rs.
Payment for Stationery 5,700
Less Creditors for last year 600
5,100
Add: Creditors for current 500
5,600
Stock 800
4,800
*3 Dr. Subscription Account Cr.
Particulars Rs. Particulars Rs.
To Balance b/d 1,400 By Balance b/d
To Income & Expenditure A/c 17,500 By Bank A/c 18,000
(Bal. fig.)
To Balance c/d By Balance c/d 2.400
(Received in advance for 2013) 1,500
20,400 20,400
*4 Accrued Interest on Investment = Rs. 12,000 x 10/100| x 6/12 = Rs. 600
*5 Balance Sheet
Dr. as on 1st January, 2012 Cr.
Particulars Rs. Particulars Rs.
Creditors for Stationery 600 Subscription due 1,400
Capital Fund Stock of Sports Materials 1,100
(Balancing figure) 44,700 Buildings 40,000
Furniture 700
Cash 2,100
45.300 45.300
Q. 8. Income and Expenditure Account of a Hospital as on 31 st December, 2013 is given
to you: [2014
Expenditure Rs. Income Rs.
Salaries 2,35,000 Subscriptions 2,20,000
Diet Expenses 20,000 Donations 40,000
Rent and Rates 5,000 Interest on Investment
Insurance 2,000 for full year @ 5% p.a. 90,000
Office Expenses 8,000 Miscellaneous Receipts 6,000
Surgery and Dispensary Expenses 10,000
Depreciation: Building 37,500
Furniture 1,200
Instruments 8,000 46,700
Surplus of Income over 29,300
Expenditure
3,56,000 3,56,000
The other informations supplied to you are as under:
31.12.2012 (Rs.) 31.12.2013 (Rs.)
Cash in hand 2,000 1,500
Cash at Bank 54,000 ?
Building 7,50,000 ?
Furniture 20,000 ?
Instruments 35,000 ?
Subscriptions outstanding 15,000 45,000
Subscriptions received in advance 6,000 8,000
Salaries outstanding 18,000 20,000
Instruments purchased during the year were Rs. 5,000.
You are required to prepare the Receipts and Payments Account of the Hospital for the
year ended December, 2013 and the Balance Sheet as on that date. Submit your
workings clearly.
Sol. Receipts and Payments Account of Charitable Hospital
for the year ending on 31st December 2013
Receipts Rs. Rs. Payments Rs. Rs.
Balance b/d: Cash 2,000 Salaries 2,35,000
Bank 54,000 56,000 Add: Outstanding 18,000
(2012)
Subscriptions 2,20,00 2,53,000
0
Add: Outstanding (2012) 15,000 Less: Outstanding 20,000 2,33,000
(2013)
2,35,00 Diet Expenses 20,000
0
Less: Outstanding (2013) 45,000 Rent and Rates 5,000
1,90,00 Insurance 2,000
0
Add: Advance (2013) 8,000 Office Expenses 8,000
1,98,00 Surgery and Dispensary 10,000
0 expenses
Less: Advance (2012) 6,000 1,92,000 Instruments 5,000

b/f 2,46,000 b/f 2,83,000

Donations 40,000 Balance c/d:
Interest on Investments 90,000 Cash 1,500
Miscellaneous Receipts 6,000 Bank (Balancing figure) 99,500
3,84,000 3,84,000
Balance Sheet
as on 3P' December 2013
Liabilities Rs. Rs. Assets Rs. Rs.
Capital Fund* 26.52,00 Building 7,50,000
0
Add: Surplus 29,300 26,81,300 Less: Depreciation 37,500 7,12,500
Subscriptions Received in 8,000 Furniture 20,000
Advance
Outstanding Salary 20,000 Less: Depreciation 1,200 18,800
Instruments 35,000
Add: Purchases 5,000
40,000
Less: Depreciation 8,000 32.000
Investments 18,00,000
Subscriptions outstanding 45,000
Cash in hand 1,500
Cash at Bank 99,500
27,09,300 27,09,300
* Calculation of Opening Capital Fund:
Balance Sheet
Dr. as on 31st December 2012 Cr.
Liabilities Rs. Assets Rs.
Subscriptions Cash in hand 2,000
Received in Advance 6,000 Cash at Bank 54,000
Salaries Outstanding 18,000 Building 7,50,000
Capital Fund 26,52,000 Furniture 20,000
(Balancing figure) Instruments 35,000
Subscriptions outstanding 15,000
Investment [Rs. 90,000 x 100/5] 18,00,000
26,76,000 2,76,000
Q. 9. The following is the Receipts and Payments Account of a Charitable Trust for the year
ending 31st March, 2013: [2014 Nov.
Receipts and Payments Account
Receipts Rs. Payment Rs.
To Balance b/d: By Capital Payments:
Cash 10,000 Investments 1,00,000
Bank 1,40,000 Furniture 40,000
To Capital funds: Clinical Equipment 50,000
Donation for Clinic Fund 60,000 By Revenue Payments:
To Revenue Receipts: Salaries 62,000
Interest 3,00,000 Medicines 1,40,000
Rent 1,20,000 Scholarships 1,00,000
Sundries 30,000 Printing etc. 8,000
Travelling 10,000
By Balance c/d: Cash 16,000
Bank 1,34,000
6,60.000 6,60,000
Trust fund originally consisted of:
Building valued at Rs. 15,00,000, 9% Government Securities Rs. 32,00,000 (Nominal Value
Rs. 35,00,000) and Bank balance Rs. 1,00,000.
Bank Interest receivable at the end of year was Rs. 25,000. Interest accrued on investments
on 1-4-2012 was Rs. 35,000 and on 31-3-2013 Rs. 50,000. The Trust owed suppliers of
medicines Rs. 12,000 and Rs. 8,000 on 1-4-2012 and 31-3-2013 respectively. Furniture stood
in the books at Rs. 30,000 on 1-4-2012.
You are required to prepare final accounts of the Trust for the year ending 31 st March,
2013 after providing 2 1/2% depreciation on the book value of the building and 20% on
other assets.
Sol. Income and Expenditure Account
for the year ended 31st March, 2013
Expenditure Rs. Rs. Income Rs. Rs.
To Salaries A/c 62,000 By Interest A/c 3,00,000
To Medicines 1,40,0 Add: Bank Interest Receivable
00 25,000
Add: Current year 0/s 8,000 Less: Accrued Previous year
(35,000)
1,48,0 Add: Accrued Current year 3,40,000
 00 50,000
Less: Previous year 0/s 12,000 1,36,000 By Rent 1,20,000
To Scholarships 1,00,000 By Sundries 30,000
To Printing etc. 8,000
To Travelling 10,000
To Depreciation on:
Building @ 2 1/2% 37,500
Furniture @ 20% 14,000
Clinical equipment 10,000 61,500
To Surplus—Excess of Income
over expenditure 1,12,500
4,90,000 4,90,000
Balance Sheet
as on 31st March, 2013
Liabilities Rs. Rs. Assets Rs.
Rs.
Trust Fund 48,00,000 Cash 16,000
Add: Donations 60,000 48,60,000 Bank 1.34,000
Revenue Fund 1,03,000 Bank Interest Accrued 25.000
Add: Surplus 1.12,500 2,15,500 Accrued Interest on Investment 50,000
Suppliers for medicines 8,000 9% Government securities
(Face value - Rs. 35,00,000) 32,00,000
New Investments 1,00,000
Furniture 30,000
Add: New 40,000
70,000
Less: Depreciation 14,000 56,000
Clinical Equipment 50,000
Less: Depreciation 10,000 40,000
Building 15,00,0
 00
Less: Depreciation 37,500 . 14,62.500
50,83,500 50,83.500
Balance Sheet
as on 1st April, 2012
Liabilities Rs. Rs. Assets Rs. Rs.
Suppliers of medicines 12,000 Cash 10,000
Trust Fund* 48,00,000 Bank 1,40,000
Revenue Fund (Balancing figure) 1,03,000 Accrued Interest on Investment 35,000
Investment at cost 32,00,000
Furniture 30,000
Building 15.00,000
49,15,000 49,15,000
Note: Alternatively Trust fund and Revenue Fund may be treated as Capital fund. Since
Capital and Revenue items are shown separately in Receipts and Payments Account the same
have been treated separately. Trust fund as given is Rs. 48,00,000 which consists of:
Building Rs. 15,00,000
9% Government Securities Rs. 32,00,000
Bank BalanceRs. 1,00,000
Q. 10. The following is the Receipts and Payments Account of Ekta Women's Welfare
Club for the year ended December 31, 2014: [2015
Receipts Rs. Payments Rs.
Balance b/d 7,250 Salary 12,500
Subscriptions 81,750 Stationery 1,700
Donations 3,000 Electricity Charges 9,550
Grant from Government 15,000 Insurance 7,500
Sale of Newspapers 300 Equipments 30,000
Proceeds of Charity Show 16,500 Petty Expenses 500
Interest on investments @ 10% Expenses on Charity Show 12,900
for full year 7,000 Newspapers 1,000
Sundry Income 400 Lecturers' Fee 16,500
 Honorarium to Secretary 12,000
Balance c/d 27,050
1,31,200 1,31,200
Additional Information:
1.1.2014 (Rs.) 31.12.2014 (Rs.)
Outstanding Salaries 1,200 1,800
Insurance Prepaid 700 300
Subscriptions Outstanding 3,750 2.500
Subscription Received in Advance 1,750 1,000
Electricity Charges Outstanding — 1,250
Stock of Stationery 2,250 700
Equipments 25,600 50,200
Building 1,20,000 1.14,000
Prepare:
(a) Income and Expenditure Account for the year ended December 31, 2014 and
(b) Balance Sheet as on that date.
Income & Expenditure Account
Dr. for the year ended 31st December, 2014 Cr.
Expenditure Rs. Income Rs.
To Salary 12,500 By Subscription 81,75
0
Less: O/s Salary (2013) (1,200 Add: Advance (2013) 1,750
)
Add: O/s Salary (2014) 1,800 13,100 Less: Outstanding (2013) (3,75
0)
To Stationery 1,700 Add: Outstanding (2014) 2,500
Add: Stationery (2013) 2,250 Less: Advance (2015) (1,00 81,250
0)
Less: Stationery (2014) (700) 3,250 By Donations 3,000
To Electricity charges 9,550 By Grant from Government 15,000
Add: Outstanding (2014) 1,250 10,800 By Sale of Newspapers 300
To Insurance 7,500 By Proceeds of Charity Show 16,500
Add: Prepaid (2013) 700 By Interest on Investment 7,000
Less: Prepaid (2014) (300) 7,900 By Sundry Income 400
To Depreciation on*:
Equipments 5,400
Building 6,000 11,400
To Petty Expenses 500
To Expenses on Charity Show 12,900
To Newspapers 1,000
To Lecturers' fee 16,500
To Honorarium to Secretary 12,000
To Surplus 34,100
1,23,450 1,23,450
Balance Sheet
as on 1st January, 2014
Liabilities Rs. Assets Rs.
Capital fund (Balancing figure) 2,26,600 Cash 7,250
Outstanding Salaries 1,200 Insurance Prepaid 700
Advance Subscription 1,750 Outstanding Subscription 3,750
Stock of Stationery 2,250
Equipments 25,600
Building 1,20,000
Investments (7,000 x 100/10) 70,000
2,29,550 2,29,550
Balance Sheet
as on 31st December, 2014
Liabilities (Rs.) Assets (Rs.)
Capital fund 2,26,600 Cash 27,050
Add: Surplus 34,100 2,60,700 Insurance Prepaid 300
Outstanding Salaries 1,800 Outstanding Subscription 2,500
Advance Subscription 1,000 Stock of Stationery 700
Electricity charges outstanding 1,250 Equipments 50,200
Building 1,14,000
Investments 70,000
2,64,750 2,64,750
Working notes: *Depreciation = Opening Value of Asset + Purchased during the year -
Closing value Equipment - Rs.(25,600 + 30,000 - 50,200) = Rs. 5,400
Building = Rs.(1,20,000 + NIL - 1,14,000) = Rs. 6,000
 UNIT
III
Accounting for Hire Purchase and Instalment System
Q. 1. X Ltd. purchased 2 machines costing Rs. 80,000 each from Y Ltd. on 1st Jan. 2010 on
hire purchase system. The terms were:
Payment on delivery Rs. 20,000 for each machine; Balance in 3 equal instalments together
with interest at 10% p.a. to be paid at the end of each year.
X Ltd. writes off 25% depreciation each year on the diminishing balance method. X Ltd. paid
the instalments due on 31.12.10 and on 31.12.11 but could not pay the final instalment. Y
Ltd. repossessed one machine adjusting its value against the amount due. The repossession
was done on the basis of 30% p.a. depreciation on the Diminishing Balance Method. The
vendor spent Rs. 8,560 for the repairs and overhauling of the machine and sold it for Rs.
40,000.
Pass Journal entries in the books of Y Ltd. and prepare Ledger Accounts in the books of 'X'
Ltd. [2008
Sol. Ledger of X Ltd.
Dr. Machinery Account Cr.
Date Particulars Rs. Date Particulars Rs.
2010 2010
Jan. 1 To Y Ltd. 1,60,000 Dec. 31 By Depreciation A/c 40,000
[Rs. 1,60,000 x 25/100]
By Balance c/d 1,20,000
1,60,000 1,60,000
2011 2011
Jan. 1 To Balance b/d 1,20.000 Dec. 31 By Depreciation A/c 30,000
[Rs. 1,20,000 x 25100]
By Balance c/d 90,000
1,20,000 1,20,000
2012 2012
Jan. 1 To Balance b/d 90,000 Dec. 31 By Depreciation A/c 22,500
[Rs. 90,000 x 25/100]
By Y Ltd. (Machine 27,440
seized)*1
 By Profit & Loss A/c 6,310
(Loss
on machine seized)
By Balance c/d
(W.D.V. of
one machine still in
possession) 33,750
90,000 90,000
Dr. Y Ltd. Cr.
Date Particulars Rs. Date Particulars Rs.
2010 2010
Jan. 1 To Bank A/c 40,000 Jan. 1 By Machines A/c 1,60,000
Dec. 31 To Bank A/c 52,000 Dec. 31 By Interest A/c 12,000
To Balance c/d 80,000 [10% of Rs. 1,20,000]
1.72,000 1,72,000
2011 2011
Dec. 31 To Bank A/c 48,000 Jan. 1 By Balance b/d 80,000
Rs.[40,000 + 8,000] Dec. 31 By Interest A/c 8,000
To Balance c/d 40,000 [10% of Rs. 80,000]
88,000 88,000
2012 2012
Dec. 31 To Machine A/c*1 27,440 Jan. 1 By Balance b/d 40,000
To Balance c/d 16,560 By Interest A/c 4,000
[10% of Rs. 40,000]
44,000 44,000
In the Books of Y Ltd.
Sol.
Journal Entries
Date Particulars L.F. Dr. Cr.
(Rs.) (Rs.)
2010
Jan. 1 X Ltd. Dr. 1,60,000
To Hire Purchase Sales A/c 1,60,000
(Being the goods sold on hire purchase)
Jan. 1 Bank A/c Dr. 40,000
To X Ltd. 40,000
(Being the receipt of down payment)
Dec. 31 X Ltd. Dr. 12,000
To Interest A/c 12,000
(Being the interest charged @ 10% on Rs.
1,20,000)
Dec. 31 Bank A/c (Rs. 40,000 + Rs. 12,000) Dr. 52,000
To X Ltd. 52,000
(Being the first instalment received alongwith
interest)
Dec. 31 Interest A/c Dr. 12,000
To Profit & Loss A/c 12,000
(Being the transfer of interest)
2011
Dec. 31 X Ltd. Dr. 8,000
To Interest A/c 8,000
(Being the interest charged @ 10% on Rs.
80,000)
Dec. 31 Bank A/c [Rs. 40,000 + Rs. 8,000] Dr. 48,000
To X Ltd. 48,000
(Being the second instalment received alongwith
interest)
Dec. 31 Interest A/c Dr. 8,000
To Profit & Loss A/c 8,000
(Being the transfer of interest)
2012
Dec. 31 X Ltd. Dr. 4,000
To Interest A/c 4.000
(Being the interest charged @ 10% on Rs.
40,000)
Dec. 31 Goods Repossessed A/c*1 Dr. 27,440
To X Ltd. 27,440
(Being one machine repossessed on default)
Dec. 31 Goods Repossessed A/c Dr. 8,560
To Bank A/c 8,560
(Being expenses incurred on the repair and
overhauling
of the machine repossessed)
Bank A/c Dr. 40,000
To Goods Repossessed A/c 40,000
(Being repossessed machine sold)
Goods Repossessed A/c Dr. 4,000
To Profit & Loss A/c 4,000
(Being Profit*2 on sale of goods
repossessed)
Working notes:
*1 Value of one machine on repossession:
2020 (Rs.) 2011 (Rs.) 2012 (Rs.)
Cost/W.D.V in the beginning 80,000 56.000 39,200
Depreciation for the year @ 30% 24,000 16,800 11,760
56,000 39,200 27,440
*2 Goods Repossessed Account
Particulars Rs. Particulars Rs.
To Y Ltd 27.440 By Bank A/c 40,000
To Bank A/c (expenses) 8.560
To Profit & Loss A/c (Profit on 4,000
Sale)
40,000 40,000
Q. 2. Jain and Co. have a hire purchase department. Goods are sold on hire purchase at cost
plus 33 1/3%. From the following particulars prepare Shop Stock Account, H.P. Debtors
Account, H.P. Stock Account and H.P. Adjustment Account: [2008
1-4-12 Rs.
Stock out with H.P. customers at S.P. 4,000
Stock at shop at cost 500
Instalments due 300
1-4-12 to 31-3-13
Cash received from customers 8,000
Goods repossessed (instalment due Rs. 2,000) valued at 500
(this has been included at the end at Rs. 500)
31-3-13
Instalments due (customers paying) 500
Stock at shop at cost (including goods repossessed) 1,200
Stock out with H.P. customers at S.P. 4,600
Verify your results by preparing Hire Purchase Trading Account.
Sol.
Dr. Shop Stock Account Cr.
Particulars Rs. Particulars Rs.
To Balance b/d 500 By Cost of Goods Sold A/c* 8,100
To Purchases A/c (Balancing 8,300 [Rs. 10,800 x 3/4]
figure)
By Balance c/d [Rs. 1,200 - Rs. 700
500]
8,800 8,800
*Note: Balancing figure of Hire Purchase Stock Account Rs. 10,800.
Dr. Hire Purchase (H.P.) Debtors Account Cr.
Particulars Rs. Particulars Rs.
To Balance b/d 300 By Cash A/c 8,000
To Hire Purchase Stock A/c 10,200 By Repossessed Stock 500
(Balancing figure) By Hire Purchase Adjustment A/c 1,500
By Balance c/d 500
10,500 10,500
Dr. Hire Purchase (H.P.) Stock Account Cr.
Particulars Rs. Particulars Rs.
To Balance b/d 4,000 By Hire Purchase Debtors A/c 10,200
To Goods sold on H.P. (Bal. 10,800 By Balance c/d 4,600
figure)
14,800 14,800
Dr. Hire Purchase (H.P.) Adjustment Account Cr.
Particulars Rs. Particulars Rs.
To Stock Reserve A/c 1,150 By Stock Reserve A/c (Opening 1,000
Stock)
(Closing H.P. Stock) [74,600 x [Rs. 4,000 x 1/4]
1/4]
To H.P. Debtors A/c 1,500 By Goods sold on H.P. Stock A/c 2,700
To Profit & Loss A/c (Profit) 1,050 [Rs. 10,800 x 1/4]
3,700 3,700
Verification:
Dr. Hire Purchase Trading Account Cr.
Particulars Rs. Particulars Rs.
To H.P. Stock A/c 4,000 By Cash A/c 8,000
To Instalment Due 300 By Repossessed Stock 500
To Goods sold on H.P. A/c 10,800 By Hire Purchase Stock A/c 4,600
To Stock Reserve*3 [74,600 x 1,150 By Instalment Due 500
1/4]
To Profit & Loss A/c (Profit) 1,050 By Stock Reserve*4 [74,000 x 1,000
1/4]
By Goods sold on H.P. A/c*2 2,700
[710,800 x 1/4]
 17,300 17,300
Working notes:
*1 Goods are sold at a profit of 33 1/3% on cost. It means, if the cost is Rs. 100, then profit is
Rs. 33.33
and hire purchase price = Rs. 100 + Rs. 33.33 = Rs. 133.33.
Therefore, loading on Hire Purchase Price = Rs. 33.33/Rs. 133.33 = 1/4
*2 Loading on goods sold on Hire Purchase = 1/4 of Rs. 10,800 = Rs. 2,700
*3 Loading on Closing Balance of Hire Purchase Stock = 1/4 of Rs. 4,600 = Rs. 1,150
*4 Loading on Opening Balance of Hire Purchase Stock = 1/4 of Rs. 4,000 = Rs. 1,000
Q. 3. Mayur Eleciricals Ltd. sells TV sets and Music systems on hire purchase basis. From
the following particulars prepare Hire Purchase Trading Account and Goods Repossessed
Account to find out the profit (show your workings clearly): [2009
T.V. Sets Music Systems
Cost Rs. 16,200 Rs. 6,000
Cash Price Rs. 8,900 Rs. 7,200
Down Payment Rs. 2,700 Rs. 1,200

Monthly Instalments Rs. 1,800 Rs. 600

Number of Instalments 10 12
During the year ended 31 st December, 2013, the company sold 200 TV sets and 240 Music
systems on hire purchase basis. 4 TV sets on which only 3 instalments each could be
collected and 8 Music systems on which only 5 instalments each could be collected were
repossessed for non-payment of other instalments. These were valued at 50% of their costs
and after spending Rs. 6,000 for their reconditioning, they were sold for Rs. 84,000. Other
instalments collected and due (customers still paying) were respectively as follows:
T.V. Sets 540 and 40
Music systems 800 and 60
Sol. Working notes:
*1 Cost and H.P. Price of goods sold on hire purchase: Cost (Rs.)
T.V Sets 200 x Rs. 16,200 32,40,000
Music Systems 240 x Rs. 6,000 14,40,000
46,80,000
H.P. Price (Rs.)
T.V. Sets 200 x Rs. 20,700* 41,40,000
Music Systems 240 x Rs. 8,400** 20,16,000
61,56,000

* Rs. 2,700 + (Rs. 1,800 x 10) = Rs. 20,700

** Rs. 1,200 + (Rs. 600 x 12) = Rs. 8,400
*2 Loading on goods sold on H.P. = Rs. 61,56,000 - Rs. 46,80,000 = Rs.
14,76,000
*3 Cash collection on:
T.V. Sets Rs.
Down Payment Rs. 2,700 x 200 5,40,000
Instalments Rs. 1,800 x 540 9,72,000
On goods repossessed Rs. 1,800 x 4 x 3 21,600
15,33,600

Music Systems (Rs.)

Down Payment Rs. 1,200 x 240 2,88,000
Instalments Rs. 600 x 800 4,80,000
On goods repossessed Rs. 600 x 8 x 5 24,000
7,92,000

*4 Instalments not yet due on: (Rs.)

TV Sets
Total number of Instalments 196 x 10 1,960
Less: No. of Instalments collected + Due (540 + 40) 580
1,380
Amount due 1,380 @ Rs. 1,800 = Rs. 24,84,000
Music Systems
Total number of Instalments 232 x 12 2,784
Less: No. of Instalments Collected + Due (800 + 60) 860
1,924
Amount due 1,924 @ Rs. 600 = Rs. 11,54,400
Total Amount due = Rs. 24,84,000 + Rs. 11,54,400 = Rs. 36,38,400

*5 (0 Stock Reserve on T.V. Sets: (Rs.)

Hire Purchase Price 20,700
Less: Cost Price 16,200
Profit per Set 4,500
Stock Reserve = Rs. 4,500/Rs. 20,700 x Rs. 24,84,000 = Rs. 5,40,000

(ii) Stock Reserve on Music Systems: (Rs.)

Hire Purchase Price 8,400
Less: Cost Price 6,000
Profit per Set 2,400
Stock Reserve = Rs. 2,400/Rs. 8,400 x Rs. 2,4001I,54,400 = Rs.
3,29,829
Total Stock Reserve = Rs. 5,40,000 + Rs. 3,29,829 = Rs. 8,69,829

*6 Value of Goods Repossessed: (Rs.)

T.V. Sets: Cost of 4 Sets Rs. 16,200 x 4 64,800
Music Systems: Cost of 8 Sets Rs. 6,000 x 8 48,000
1,12,800
Valuation of Goods Repossessed = 50% of Rs. 1,12,800 = Rs. 56,400
Dr. Hire purchase Trading Account Cr.
Particulars Rs. Particulars Rs.
To Goods sold on Hire 61,56,000 By Goods sold on Hire 14,76.000
Purchase A/c Purchase A/c (Loading)
To Stock Reserve A/c 8,69.829 By Cash A/c:
(Loading) T.V. sets 15,33,600
To Profit & Loss A/c 5,78,571 Music systems 7,92,000 23,25,600
By Goods Repossessed A/c 56.400
By Stock with Customers A/c 36,38,400
By Instalments Due:
 T.V. Sets [40 x Rs. 1800] 72,000
Music systems [60 x Rs. 600] 36,000
76,04,400 76,04,400
Dr. Goods Repossessed Account Cr.
Particulars Rs. Particulars Rs.
To Hire Purchase Trading A/c 56,400 By Cash A/c 84,000
To Cash A/c (expenses incurred) 6,000 (Sale proceeds)
To Profit & Loss (Profit on Sale 21,600
of Goods Repossessed)
84,000 84,000
Total Profit = Rs. 5,78,571 + Rs. 2l,600 = Rs. 6,00,171
Q. 4. X Co. Ltd. purchased on 01.01.2011 from M/s R.V. Traders four machines having cash
price Rs. 80,000 each on hire purchase basis. The payment was to be made as follows:
10% of cash price down, and
25% of cash price at the end of each of the following four years.
X Co. Ltd. paid the first instalment but failed to pay the second instalment due on
31.12.2012. M/s R.V. Traders repossessed three machines leaving remaining one machine
with the buyer. The value of three machines was taken at cost less depreciation @ 20 p.a. on
reducing balance method. M/s X Co. Ltd. charges depreciation at 10% p.a. on reducing
balance method on 31st Dec. of each year.
M/s R.V. Traders spent Rs. 42,000 on overhauling of the machines repossessed and sold two
of the repossessed machines for Rs. 1,20,000. Prepare necessary Ledger Accounts in the
books of both the parties. [2020
Sol.
Books of X Co. Ltd.
Dr. M/s R.V. Traders
Date Particulars Rs. Date Particulars Rs.
2011 2011
Jan. 1 To Bank A/c 32.000 Jan. 1 By Machinery A/c 3,202,000
Dec. 31 To Bank A/c 80.000 Dec. 31 By Interest A/c*1 12,800
Dec. 31 To Balance c/d 2,20,800
3,32,800 3,32,800
2012 2012
Dec. 31 To Machines A/c*2 1,53,600 Jan. 1 By Balance b/d 2,20.800
Dec. 31 To Balance c/d 76,800 Dec. 31 By Interest A/c*1 9,600
2,30,400 2,30.400
Dr. Machinery Account Cr.
Date Particulars Rs. Date Particulars Rs.
2011 2011
Jan. 1 To RV Traders A/c 3.20,000 Dec. 31 By Depreciation A/c 32,000
Dec. 31 By Balance c/d 2.88.000
3,20,000 3,20,000
2012 2012
Jan. 1 To Balance b/d 2,88,000 Dec. 31 By Depreciation A/c 28,800
By R.V. Traders A/c*2 t,53,600
By Profit & Loss A/c*4 40,800
(Loss on default)
Dec. 31 By Balance c/d*3 64.800
2,88,000 2,88,000
Books of M/s. R.V. Traders
Dr. X Co. Ltd. Account Cr.
Date Particulars Rs. Date Particulars Rs.
2011 2011
Jan. 1 To Hire Purchase A/c 3,20,000 Jan. 1 By Bank A/c 32,000
Dec. 31 To Interest A/c 12,800 Dec. 31 By Bank A/c 80.000
Dec. 31 By Balance c/d 2.20,800
3,32,800 3,32,800
2012 2012
Jan. 1 To Balance b/d 2,20,800 Dec. 31 By Goods Repossessed 1,53,600
A/c*2
Dec. 31 To Interest A/c 9,600 Dec. 31 By Balance c/d 76.800
2,30,400 2,30,400
 Dr. Goods Repossessed Account Cr.
Date Particulars Rs. Date Particulars Rs.
2012 2012
Dec. 31 To R.V, Traders 1,53,600 Dec. 31 By Bank A/c 1,20,000
To Bank A/c 42.000 By Profit & Loss A/c*5
(Loss on Sale of
goods repossessed) 10,400
By Balance c/d*6 65,200
1,95,600 1,95,600
Working notes:
*1 Calculation of Interest
Total Cash Price of 4 machines = Rs. 80,000 x 4 = Rs. 3,20,000
Down Payment (10% of Cash Price) = Rs. 32,000
Four Instalments (25% of Cash Price) = Rs. 80,000 each
Hence Total Hire Purchase Price = Rs. 32,000 + Rs. 3,20,000 = Rs. 3,52,000
and Total Interest = Rs. 3,52,000 (Hire Purchase Price) - Rs. 3,20,000 (Cash Price) = Rs.
32,000
Interest on each instalment is calculated as follows:
Hire Purchase Price Outstanding at the beginning of each year:
Rs. 3,20,000 (1st Year), Rs. 2,40,000 (2nd Year), Rs. 1,60,000 (3rd Year), Rs. 80,000 (4th
Year).
Ratio 4:3:2:1
1st Year's interest - Rs. 32,000 x 4/10 = Rs. 12,800;
2nd Year's interest = Rs. 32,000 x 3/10 = Rs. 9,600;
3rd Year's interest = Rs. 32,000 x 2/10 = Rs. 6,400;
4th Year's interest = Rs. 32,000 x 1/10 = Rs. 3,200.
*2 Value of three Machines Repossessed: Rs.
Cost of Machines (Rs. 80,000 x 3) 2,40,000
Less: Depreciation @ 20%: 1st year 48,000
1,92,000
Less: Depreciation @ 20%: 2nd year 38,400
 1,53,600
*3 Value of one Machine left with the buyer:
Cost of Machine 80,000
Less: Depreciation @ 10%: 1st year 8,000
72,000
Less: Depreciation @ 10%: 2nd year 7,200
64,800
*4 Calculation of Loss on default:
Book Value of three machines on the date of default
[3/4 (Rs. 2,88,000 - Rs. 28,800)] Or 3/4 (Rs. 2,59,200) 1,94,400
Agreed Value of three machines taken away by the seller*2 1,53,600
Loss on default 40,800
*5 Calculation of Loss on Sale of Goods repossessed:
(i) Value of 3 machines repossessed (71,53,600 + Rs. 42,000) 1,95,600
(ii) Value of 2 machines repossessed (Rs. 1,95,600 x 2/3) 1,30,400
Less: Sale of 2 machines repossessed 1,20,000
Loss on Sale of 2 machines 10,400
*6 Value of one machine in Stock = Rs. 1,95,600/3 = Rs. 65,200
Q. 5. Deepak purchased four second-hand cars on hire purchase system. Cash price being Rs.
52,500 each. The hire purchase price for all the four cars was Rs. 2,40,000. The payment was
to be made Rs. 60,000 on signing the agreement and three instalments of Rs. 60,000 each at
the end of each of the three years. Deepak charges depreciation @ 10% p.a. on Straight Line
Method.
Deepak paid the down payment and first instalment but could not pay the second instalment.
The vendor, after negotiations, took back three cars. These cars were taken back after
depreciating them @ 20% p.a. on Written Down Value method. One car was left with the
purchaser.
The vendor spent Rs. 3,600 on repairs and sold two of these cars for Rs. 80,000.
Show necessary Ledger Accounts in the books of both the parties. [2011
Sol.
Table Showing Interest and
Cash Price Payments
 Cash Price (Rs.) interest (Rs.) Hire Purchase Price (Rs.)
Down Payment 60,000 Nil 60,000
1st Instalment 45,000 15,000 60,000
2nd Instalment 50,000 10,000 60,000
3rd Instalment 55,000 5,000 60,000
2,10,000 30,000 2,40,000
Total interest is allocated over three years in the ratio of 3 : 2 :1.
Three years are marked as Y1, Y2, and Y3
Books of Hire Purchaser (Deepak)
Dr. Hire Vendor's Account Cr.
Date Particulars Rs. Date Particulars Rs.
01-04- To Bank A/c (Down 60,000 01-04-Y1 By Cars A/c 2,10,000
Y1 payment]
31-03- To Bank A/c (1st 60.000 31-03-Y2 By Interest A/c 15,000
Y2 Instalment)
31-03- To Balance c/d 1,05,000
Y2
2,25,000 2,25,000
31-03- To Cars A/c*1 1,00,800 01-04-Y2 By Balance b/d 1,05,000
Y2 (Repossession;
31-03- To Balance c/d 14,200 31-03-Y3 By Interest A/c 10,000
Y3
1,15,000 1,15,000
Dr. Cars Account (Asset) Cr.
Date Particulars Rs. Date Particulars Rs.
01-04-Y1 To Hire Vendor's A/c 2,10,000 31-03-Y2 By Depreciation A/c 21,000
(Cash Price of cars) (10% SLM)
By Balance c/d 1,89,000
2,10,000 2,10,000
01-04-Y2 To Balance b/d 1,89.000 31-03-Y3 By Depreciation A/c 21,000
(10% SLM on all cars)
By Hire Vendor's A/c*, 1,00,800
 (Repossessed)
By Loss on Cars
Repossessed A/c*3 25,200
By Balance c/d 42,000
(one car)*3
1,89,000 1,89,000
Books of Hire Vendor
Dr. Hire Purchaser's Account Deepak) Cr.
Date Particulars Rs. Date Particulars Rs.
01-04-Y1 To Sales A/c 2,10,000 01-04-Y1 By Bank A/c (Down 60,000
Payment)
31-03-Y2 To Interest A/c 15,000 31-03-Y2 By Bank A/c (1 st 60,000
Instalment)
31-03-Y2 By Balance c/d 1,05,000
2,25.000 2,25,000
01-04-Y2 To Balance b/d 1,05,000 01-04-Y2 By Goods Repossessed 1,00,800
A/c
31-03-Y3 To Interest A/c 10,000 (3 cars)
31-03-Y3 By Balance c/d*2 14,200
1,15,000 1,15,000
Dr. Goods Repossessed Account Cr.
Date Particulars Rs. Date Particulars Rs.
31-03-Y2 To Hire Purchaser's A/c 1,00,800 By Bank A/c 80,000
(Deepak) (Sale of two cars)
To Bank A/c (Repairs) 3,600 By Balance c/d 34,800
To Profit on Goods 10,400 (one car) 1/3 of
Repossessed A/c Rs.[1,00,800+3,600]
1,14,800 1,14,800

Working notes:
*1 Value of Goods repossessed (Three cars) with the Vendor is calculated as: Rs.
Cost of 3 cars (@ Rs. 52,500) 1,57,500
Less: Depreciation (@ 20% p.a. w.d.v. for 2 years): I Year (31,500)
II Year (25,200)
7,00,800

*2 Balance Rs. 14,200 is yet to be received from the Hire Purchaser.

*3 Value of the car/s with the Hire Purchaser/Hire Vendor. One car Three cars
(Rs.) (Rs.)
Cost Price 52,500 1,57,500
. Less: Depreciation @ 10% p.a. (SLM) I Year (5,250) (15,750)
II Year (5,250) (15,750)
42,000 1,26,000
Loss to Hire Purchaser on Repossession = (Rs. 1,26,000 - Rs. 1,00,800) = Rs. 25,200
*4 Profit on Goods repossessed resold (two cars) Rs. 10,400 is to be transferred to Profit &
Loss
Account at the end of the year.
Q. 6. X Sells goods on hire purchase basis also. He fixes hire purchase price by adding
50% to the cost of goods to him. The following are the figures relating to the hire
purchase business for the year 2012: [2011 Sem
Balance on Hire purchase Stock Account on 1st January, 2012 1,20,000
Balance on Hire purchase Debtors Account on 1st January, 2012 3,000
Selling Price of the goods sold on Hire purchase basis during the year 9,06,000
Cash received from customers 9,24,000
Total amount of instalments that fell due during the year 2012 9,27,000
One customer to whom goods had been sold for Rs. 12,000 paid only three
instalments of Rs. 1,000 each. On his failure to pay the monthly instalment of
11,000 due on 4th Dec. 2012, the goods were repossessed on 27-12-2012 after
legal notice. Prepare Hire Purchase Trading Account for the year ended 31-12-
2012. Also verify your answer by preparing Hire Purchase Adjustment Account.
Sol.
Hire Purchase Trading Account
Dr. (In Hire Vendor's Books) Cr.
Date Particulars Rs. Date Particulars Rs.
01-01- To Balance b/f 01-01- By Balance b/f
12 12
HP. Stock A/c 1,20,000 H.P. Stock Res. A/c 40,000
H.P. Debtors A/c 3,000 31*12- By Goods sold on H.P.
12 A/c
31-12- To Goods sold on H.P. (RP of Goods sold) 3,02,000
12 A/c
(HPP) 9,06,000 By Goods Repossessed
A/c
To Balance c/f (value)* 6,000
HP. Stock Reserve A/c 30,333 By Bank A/c 9,24,000
(RP)
To P&L A/c (Net Profit) 3,08,667 By Balance c/f
H.P. Stock A/c (HPP) 91,000
H.P. Debtors A/c 5,000
13,68,000 13,68,000
Dr. Hire Purchase Stock Account Cr.
Date Particulars Rs. Date Particulars Rs.
2012 2012
Jan. 1 To Balance b/f 1,20,000 Jan. 1 By HP Debtors A/c 9,27,000
To Goods sent on HP A/c 9,06,000 By HP Debtors A/c 8,000
(HPP)
By Balance of 91,000
10,26,000 10,26,000
Dr. Hire Purchase Debtors Account Cr.
Date Particulars Rs. Date Particulars Rs.
2012 2012
Jan. 1 To Balance b/f 3,000 Jan. 1 By Bank A/c 9,24,000
To H.P. Stock A/c 9,27,000 By Goods Repossessed 6,000
A/c*1
To HP. Stock A/c (CP of 8,000 By Bad Debts 3,000
Goods
 Repossessed) By Balance c/f 5,000
9,38,000 9,38,000
Dr. Hire Purchase Adjustment Account Cr.
Particulars Rs. Particulars Amt. (Rs.)
To H.P. Stock Res A/c (RP of HP 30,333 By HP Stock A/c 40,000
Stock A/c at the end) 1/3 x (RP of Opening Stock)
91,000)
To Gross Profit (Balancing 3,11,667 By Goods sold on HP A/c (RP of
figure)
Goods sold on HP during the 3,02,000
year)
3,42.000 3,42,000
Dr. Hire Purchase Profit & Loss Account Cr.
Particulars Rs. Particulars Rs.
To Bad Debts 3,000 By HP Adjustment A/c (GP) 3,11,667
To Net Profit (Balancing figure) 3,08,667
3,11,667 3,11,667
Working notes:
x
*1 Value of Goods Repossessed is cost price of Amount due or remaining unpaid, i.e., 2/3
Rs. 9,000 = Rs. 6,000. It should not be more than this as per LCM Principle.
Q. 7. X Sells goods on hire purchase basis, the price being cost plus 50%. From the
following information calculate profit by preparing Ledger Accounts on Stock and
debtor system for the year ended 31st March, 2012. [2022
April 1st 2012 Rs.
Stock at the shop at cost 1,08,000
Stock on hire at selling price 54,000
Instalment due at beginning 30,000
Received from customers 3,60,000
Goods Repossessed (Instalment due Rs. 12,000) 3,000
Instalment due at the end 54,000
Closing Stock at shop including goods repossessed 1,23,000
Purchases made during the year 3,60,000
Sol.
Dr. Shop Stock Account Cr.
Particulars Rs. Particulars Rs.
To Balance b/d 1,08,000 By Goods sold on HP A/c 3,48,000
To Purchases A/c 3,60,000 (Cost Price) {Balancing figure)
By Balance c/d 1,23,000
Less: Goods Reposs. 3,000 1,20,000
4,68,000 4,68,000
Dr. Hire Purchase Stock Account Cr.
Particulars Rs. Particulars Rs.
To Balance b/d 54,000 By Hire Purchase Debtors A/c 3,96,000
To Goods sold on Hire Purchase 5,22,000 By Balance c/d f,80,000
A/c
Rs.[3,48,000 + 50%] {Balancing figure)
5,76,000 5,76,000
Dr. Hire Purchase Debtors Account Cr.
Particulars Rs. Particulars Rs.
To Balance b/d 30,000 By Bank A/c 3,60,000
To Hire Purchase Stock A/c 3,96,000 By Goods "Repossessed A/c 12,000
{Balancing figure) By Balance c/d 54,000
4,26,000 4,26,000
Dr. Hire Purchase Adjustment Account Cr.
Particulars Rs. Particulars Rs.
To Stock Reserve A/c (Closing) 60,000 By Stock Reserve A/c (Opening) 18,000
[Rs. 1,80,000 x 50/150] [Rs. 54,000 x 50/150]
To Goods Repossessed A/c 9,000 By Goods Sold on H.P A/c 1,74,000
(Loss on Repossession) (Load) [Rs. 5,22,000 x 50/150]
To Profit on Hire Purchase 1,23,000
1,92,000 1,92,000
Q. 8. X purchased 5 trucks on 1st Oct., 2011, the cash price of each truck being Rs. 11 lakh. X
was to pay 20% of the cash price at the time of delivery and 25% of cash price at the end of
each of the subsequent four half yearly periods beginning from 31 st March, 2012.
On X's failure to pay the instalment due on 30th September, 2012, it was agreed that X could
keep three trucks, on the condition that value of two trucks would be adjusted against the
amount due, the trucks being valued at cost less 25% depreciation.
Show the necessary ledger accounts in the books of X, assuming that his books are closed on
31st March each year and he charges depreciation @15% on original cost of trucks. [2013
Sol. In X's Ledger
Dr. Trucks on Hire Account Cr.
Date Particulars Rs. Date Particulars Rs.
01-10- To Hire Vendor A/c 55,00,000 31-03- By Depreciation A/c 4,12,500
11 12
(Rs. 55,00,000 x 6/12 x
15/100)
31-03- By Balance c/d 50,87,500
12
55,00,000 55,00,000

01-04- To Balance b/d 50,87,500 30-09- By Depreciation A/c*2 1,65,000

12 12
30-09- By Hire Vendor A/c*3 16,50,000
12
30-09- By Loss on Default*4 2,20,000
12
(to be trans, to
Profit & Loss A/c)
31-03- By Depreciation A/c 4,95,000
13
(for full year
on 3 trucks)
[Rs. 33,00,000 x
15/100]
By Balance c/d 25,57,500
50,87,500 50,87,500
Dr. Hire Vendor's Account Cr.
Date Particulars Rs. Date Particulars Rs.
01-10- To Bank A/c 11,00,000 01-10- By Trucks on Hire A/c 55,00,000
11 11
31-03- To Bank A/c 13,75,000 31-03- By Interest A/c *1 4,40,000
12 12
31-03- To Balance c/d 34,65,000
12
59,40,000 59,40,000
30-09- To Trucks on Hire A/c 16,50,000 01-04- By Balance b/d 34,65,000
12 12
31-09- To Balance c/d 21,45,000 30-09- By Interest A/c*1 3,30,000
12 12
37,95,000 37,95,000
Working notes:
*1 Calculation of Interest:
Cash Price = Rs. 11,00,000 x 5 = Rs. 55,00,000
Down Payment = 20% of Rs. 55,00,000 = Rs. 11,00,000
Instalment = 25% of Rs. 55,00,000 = Rs. 13,75,000
Hire Purchase Price = Down Payment + Total Instalments
= Rs. 11,00,000 + Rs. 55,00,000 = Rs. 66,00,000
Total Interest = Hire Purchase Price - Cash Price
= Rs. 66,00,000 - Rs. 55,00,000 = Rs. 11,00,000
Interest for the first six months (four instalments) = Rs. 11,00,000 x 4/10 = Rs. 4,40,000
Interest for the second six months (three instalments)= Rs. 11,00,000 x 3/10 = Rs. 3,30,000
Interest for the third six months (two instalments) = Rs. 11,00,000 x 2/10 = Rs. 2,20,000
Interest for the fourth six months (one instalment) = Rs. 11,00,000 x 1/10 = Rs. 1,10,000
*2 Calculation of Depeciation on two trucks taken away after 6 months:
= Rs. 22,00,000 x 6/12 x 15/100 = Rs. 1,65,000
*3 Calculation of agreed value of two trucks repossessed:
= Rs. 22,00,000 (Cash Price) - 25% of Rs. 22,00,000 = Rs. 16,50,000
*4 Calculation of loss on default: Rs.
Cost of two trucks repossessed 22,00,000
Less: Depreciation at 15% (or one year 3,30,000
Book Value on 30-9-2012 18,70,000
Loss on default (Rs. 18,70,000 - Rs. 16,50,000) = Rs. 2,20,000
Q. 9. Saksham Ltd. sold three cars for a total cash price of Rs. 9,00,000 on hire purchase
basis to Mr. Vardaan on 1st January, 2010. The terms of agreement provided for Rs. 2,70,000
as cash down and the balance of the cash price in three equal instalments together with
interest at 10% p.a. The instalments were payable at the end of each year. Mr. Vardaan paid
the first instalment on time but failed to pay thereafter. On his failure to pay the second
instalment, Saksham Ltd. repossessed two cars and valued them at 50% of the cash price. Mr.
Vardaan charges 25% p.a. depreciation on written down value method. Prepare necessary
Ledger Accounts in the books of both the parties. [2014
Sol.
In the Books of Mr. Vardaan
Dr. Saksham Ltd.'s Account Cr.
Date Particulars Rs. Date Particulars Rs.
01.01.201 To Bank A/c 2,70,000 01.01.201 By Cars A/c 9,00,000
0 0
31.12.201 To Bank A/c 2,73,000 31.12.201 By Interest A/c 63,000
0 0
Rs.P.10.000 + [10%ofRs. 6,30,000]
63,000]
To Balance c/d 4,20,000
9,63,000 9,63,000
31.12.201 To Cars A/c 3,00,000 01.01.201 By Balance b/d 4,20,000
1 1
31.12.201 To Balance c/d 1,62,000 31.12.201 By Interest A/c 42,000
1 1
4,62,000 4,62,000
01.01.201 By Balance b/d 1,62,000
2
Dr. Cars Account Cr.
Date . .... Particulars Rs. Date Particulars Rs.
01.01.201 To Saksham Ltd. 9,00,000 31.12.201 By Depreciation A/c 2,25,000
0 0
By Balance c/d 6,75,000
9,00,000 9,00,000
01.01.201 To Balance b/d 6,75,000 31.12.201 By Depreciation A/c 1,68,750
1 1
By Saksham Ltd.*1 3,00,000
By P&LA/c 37,500
(Bal. figure-Loss)
By Balance c/d*2 1,68,750
6,75,000 6,75,000

Working notes:
*1 Calculation of the value of the two cars Repossessed: (Rs.)
Cash Price of two cars 6,00,000
Value of two cars repossessed @ 50% of Rs. 6,00,000 3,00,000
*2 Calculation of the value of one car left with Mr. Vardaan:
Cash Price 3,00,000
Less: Depreciation @ 25% for 2010 75,000
2,25,000
Less: Depreciation @ 25% for 2011 56,250
1,68,750
In the Books of Saksham Ltd.
Dr. Mr. Vardaan's Account Cr.
Date Particulars Rs. Date Particulars Rs.
01.01.201 To Hire Sales A/c 9,00,000 01.01.201 By BankA/c 2,70,000
0 0
31.12.201 To Interest A/c 63,000 31.12.201 By BankA/c 2,73,000
0 0
31.12.201 By Balance c/d 4,20,000
0
9,63,000 9,63,000
01.01.201 To Balance b/d 4,20,000 31.12.201 By Goods Rep. A/c 3,00,000
1 1
31.12.201 To Interest A/c 42,000 31.12.201 By Balance c/d 1,62,000
1 1
 4,62,000 4,62,000
01.01.201 To Balance b/d 1,62,000
2
Q. 10. A Ltd. sells goods on hire purchase at cost plus 60%. From the following information
calculate profit or loss for the year ending 31 st March, 2013 under Stock and Debtors system:
[2024 Nov.
2012 Rs.
April 1 Instalments Not Due 1,60,000
2013
March 31 Goods sold on hire purchase at hire purchase price 8,00,000
Cash received during the year 5,60,000
Goods repossessed (instalments due Rs. 20,000) valued 3,000
at Goods with hire purchase customers 3,60,000
Sol. Let the cost be = 100
Hire Purchase Price = 100 + 60 = 160
Loading = 60/160
Dr. Instalments Not Due Account Cr.
Particulars Rs. Particulars Rs.
To Balance b/d 1,60,000 By Instalments Due A/c 9,40,000
To Shop Stock A/c By Balance c/d (Balancing figure) 20,000
Rs.[8,00,000 - 3,00,000]* 5,00,000
To Hire Purchase Adjustment A/c
[Rs. 8,00.000 x 60/160] 3,00,000
9,60,000 9,60,000
= Rs. 8,00,000 x 60/160 = Rs. 3,00,000
Dr. Instalments Due Account Cr.
Particulars Rs. Particulars Rs.
To Instalments Not Due A/c 9,40,000 By Cash A/c 5,60,000
By Goods Repossessed A/c 3,000
By H.P. Adjustment A/c 17,000
By Balance c/d 3,60,000
 9,40,000 9,40,000
Dr. Hire Purchase Adjustment Account Cr.
Particulars Rs. Particulars Rs.
To Instalment Due A/c 17,000 By Stock Reserve A/c (Opening)
To Stock Reserve (Closing) Rs. 1,60,000 x 60/160] 60,000
[Rs. 20,000 x 60/160] 7,500 By Instalment Not Due A/c 3,00,000
To General Profit & Loss A/c
(Balancing figure) 3,35,500
3,60,000 3,60,000
Q. 11. Vikrant sells goods on hire purchase at cost plus 60%. From the following
particulars for the year ending on 31-12-2014, prepare: [2015
(i) Hire Purchase Debtors Account
(ii) Hire Purchase Stock Account
(iii) Shop Stock Account and
(iv) Hire Purchase Adjustment Account
1-1-2014 Rs.
Stock with hire purchase customers at selling price 12,000
Stock at the shop at cost 5,000
Instalments overdue 8,000

31-22-2024
Stock at the shop at cost (including goods repossessed Rs. 400) 2,000
Total instalments that fell due during the year 1,89,440
Cash received from customers
(including down payments of Rs. 1 5,440) 1,75,440
Goods repossessed (instalment due Rs. 500) 400
Purchases during the year 1,20,000
Hire expenses 3,400
Sol. Dr. Hire Purchase Debtors Account Cr.
Particulars Rs. Particulars Rs.
To Balance b/d 8,000 By Cash A/c 1,75,440
To Hire Purchase Stock A/c 1,89,440 By Goods Repossessed 500
By Balance c/d (Balancing figure) 21,500
1,97,440 1,97,440
Dr. Hire Purchase Stock Account (at HPP) Cr.
Particulars Rs. Particulars Rs.
To Balance b/d 12,000 By Hire Purchase Debtors A/c 1,89,440
To Goods sold on Hire Purchase By Balance c/d (Balancing figure) 20,000
A/c
[Rs. 1,23,400 x 160/100] 1,97,440
2,09,440 2,09,440
Dr._______ Stock at Shop Account (at Cost) Cr.
Particulars Rs. Particulars Rs.
To Balance b/d 5,000 By Goods sold on Hire Purchase
A/c
To Purchases A/c 1,20,000 (Balancing figure) 1,23,400
By Balance c/d Rs.(2,000 - 400) 1,600
(Excluding goods repossessed)
1,25,000 1,25,000
Dr. Hire Purchase Adjustment Account Cr.
Particulars Rs. Particulars Rs.
To Balance b/d 5,000 By Stock Reserve A/c 4,500
To Goods Repossessed A/c 100 [Rs. 12,000 x 10/160]
(Loss on repossession of goods) By Goods sold on Hire Purchase
A/c
(Rs. 500 - 400) [Rs. 1,97,440 x 60/160] 74,040
To Hire Expenses A/c 3,400
To Stock Reserve A/c
[Rs. 20,000 x 60/160] 7,500
To Profit & Loss A/c (Profit)- 62,540
78,540 78,540
 UNIT
IV
Accounting for Inland Branches
Q. 1. The following is the Trial Balance of Kolkata Branch as on 31 st Mar., 2008:
Particulars Dr. (Rs.) cr.(Rs.)
Mumbai Head Office A/c 32,400
Stock on 14-2007 60,000 —
Purchases 1,78,000 --
Goods received from HO 90,000 —
Sales — 3,80,000
Goods supplied to HO — 60,000
Salaries 15,000 —
Debtors 37,000 —
Creditors — 18,500
Rent 9,600 —
Office expenses 4,700 —
Cash and Bank balance 17,800 —
Furniture 14,000 —
4,58,500 4,58,500
Closing stock was valued at Rs. 27,000. The Branch Account in the books of Head Office
stood at Rs. 4,600 (Debit Balance) on 31-3-08. On 28th March, 2008 the Head Office
forwarded goods to the value of Rs. 25,000 to the branch where they were received on 3 rd
April 2008. Required in the books of HO:
(i) Branch Trading and Profit & Loss Account.
(ii) Journal entries to incorporate the above Trial Balance; and
(iii) Kolkata Branch Account. [2008
Sol. (i) Branch Trading and Profit & Loss Account
Dr. for the year ended 31st March 2008 Cr.
Particulars Rs. Particulars Rs.
To Branch A/c By Kolkata Branch
A/c:
Stock 60,000 Sales 3,80,000
Purchases 1.78,000 Goods Supplied to HO
60,000
Goods from HO 90,000 3,28,000 Closing Stock 27,000 4,67,000
To Branch P & A/c (Gross Profit) 1,39,000
4,67,000 4,67,000
To Branch A/c: By Branch Trading 1,39,000
A/c
Salaries 15,000 (Gross Profit)
Rent 9,600
Office Expenses 4,700 29,300
To General P & L A/c (Net Profit) 1,09,700
1,39,000 1,39,000
(ii) Journal Entries
Date Particulars L.F. Dr. (Rs.) Cr. (Rs.)
Goods-in-transit A/c Dr. 25,000
To Kolkata Branch A/c 25,000
(Being adjustment of goods-in transit)
Cash-in-transit A/c Dr. 12,000
To Kolkata Branch A/c* 12,000
(Being adjustment of remittance-in-transit)
Kolkata Branch Trading A/c Dr. 3,28,000
To Kolkata Branch A/c 3,28,000
[Stock Rs. 60,000 + Purchases Rs. 1,78,000 +
Goods Received
from HO Rs. 90,000]
(Being incorporation of debit items of Trading
Account)
Kolkata Branch A/c Dr. 4,67,000
To Kolkata Branch Trading A/c 4,67,000
[Sales Rs. 3,80,000 + Goods supplied to H.O.
 Rs. 60,000
+ Closing Stock Rs. 27,000]
(Being incorporation of credit items of Trading
Account)
Kolkata Branch Trading A/c Dr. 1,39,000
To Kolkata Branch Profit & Loss A/c 1,39,000
(Being transfer of Gross Profit to Profit & Loss
Account
Kolkata Branch Profit & Loss A/c Dr. 29,300
To Kolkata Branch A/c 29,300
[Salaries Rs. 15,000 + Rent Rs. 9,600 + Office
Expenses Rs. 4,700]
(Being the debit items of Profit & Loss Account
incorporated'
Kolkata Branch Profit & Loss A/c Dr. 1,09,700
To General Profit & Loss A/c . 1,09,700
(Being transfer of branch profit to General Profit &
Loss A/c)
Kolkata Branch Debtors A/c Dr. 37,000
Kolkata Branch Cash A/c Dr. 17,800
Kolkata Branch Furniture A/c Dr. 14,000
Kolkata Branch Stock A/c Dr. 27,000
To Kolkata Branch A/c 95,800
(Being incorporation of branch assets)
Kolkata Branch A/c Dr. 18,500
To Kolkata Branch Creditors A/c 18,500
(Being incorporation of branch creditors)
Dr. Kolkata Branch Account Cr.
Particulars Rs. Particulars Rs.
To Balance b/d 4,600 By Goods in transit 25,000
To Branch Trading A/c 4,67,000 By Cash in transit 12,000
To Branch Liabilities (creditors) 18,500 By Branch Trading A/c 3,28,000
 By Branch Profit & Loss A/c 29,300
By Branch Assets A/c 95,800
4,90,100 4,90,100
Working notes:
* While attempting a question on an Independent Branch, the students are advised to check
whether the balance as shown by the Head Office Account in Branch books and the Branch
Account in the Head Office books reconcile with each other or not. In the present question,
there
is a difference of Rs. 37,000 [i.e., Dr. Balance of Head Office Account of Rs. 32,400 (in the
books of Branch) + Dr. Balance of Branch Account Rs. 4,600 (in the books of Head Office)].
The difference is due to Goods-in-transit and Cash-in-transit. Goods-in-transit is Rs. 25,000
(given). So, Cash-in-transit will be Rs. 37,000 - Rs. 25,000 x Rs. 12,000.
Q. 2. From the following figures for a year relating to the Delhi branch of a H.O. which
invoices goods to its branch at cost plus 100%, prepare: [2008
(i) Branch Account;
(ii) Branch Stock Account;
(iii) Branch Debtors Account; and
(iv) Branch Adjustment and Profit & Loss Account.
Transactions during the year: Rs.
Goods invoiced to branch 1,00,000
Goods received by branch 1,10,000
Cash sent for expenses 25,000
Actual expenses at branch 28,000
Cash expenses at branch 27,000
Sales (at invoice price) 1,40,000
Cash received from debtors 1,25,000
Discount allowed to branch debtors 5,000
Goods returned by branch debtors direct to H.O. 20,000
Closing balances:
Branch Stock 30,000
Branch Debtors 20,000
Sol. Dr. (i) Branch Account Cr.
Particulars Rs. Particulars Rs.
To Branch Stock By Stock Reserve
(See Branch Stock A/c) 60,000 (Loading on Opening Stock) 30,000
To Branch Debtors By Goods-in-transit (Loading
on
(See Branch Debtors A/c) 30,000 opening Goods-in-transit) 5,000
To Goods-in-transit*, 10,000 By Cash remitted to H0*2 1,23,000
To Goods sent to Branch A/c 1.00,000 By Goods sent to Branch A/c
To Cash A/c (Cash for expenses) 25,000 (Loading on Goods sent
To Goods sent to Branch A/c to Branch) 50,000
(Loading
on goods returned by debtors to 10,000 By Goods sent to Branch A/c 20,000
HO)
To Stock Reserve By Balance c/d:
(Loading on Closing Stock) 15,000 Branch Stock 30,000
To Balance c/d: Branch Debtors 20,000
Outstanding Expenses*3 1,000
To Profit transferred to General
Profit & Loss A/c (Balancing 27,000
fig.)
2,78,000 2,78,000
Dr. (ii) Branch Stock Account Cr.
Particulars Rs. Particulars Rs.
To Balance b/d (Opening Stock) By Sales A/c 1,40,000
(Balancing figure) 60,000 By Balance c/d 30,000
To Goods-in-transit*t 10,000
To Goods sent to Branch A/c 1,00,000
1,70,000 1,70,000
Dr. (iii) Branch Debtors Account Cr.
Particulars Rs. Particulars Rs.
To Balance b/d By Cash A/c 1,25,000
{Balancing figure) 30,000 By Discount Allowed 5,000
To Sales (credit) 1,40,000 By Goods Returned 20,000
By Balance c/d 20,000
1,70,000 1,70,000
Dr. (iv) Branch Adjustment and Profit & Loss Account Cr.
Particulars Rs. Particulars Rs.
To Stock Reserve (Rs. 30,000 x 15,000 By Stock Reserve A/c (Rs. 30,000
1/2) 60,000 x 1/2)
To Goods sent to Branch A/c By Goods sent to Branch A/c
(Goods returned by branch (Rs. 1,00,000 x 1/2) 50,000
debtors
direct to H.O.) (Rs. 20,000 x 1/2) 10,000 By Goods-in-transit (Loading)
To Gross Profit c/d (Balancing 60,000 (Rs. 10,000 x 1/2) 5,000
figure)
85,000 85,000
To Branch Expenses 28,000 By Gross Profit b/d 60,000
To Discount 5,000
To Net Profit (Balancing figure) 27,000
60,000 60,000
Working notes:
*1 Calculation of Goods-in-transit:
Since, goods received by branch Rs. 1,10,000 are more than the goods sent to them by H.O.,
i.e.,
Rs. 1,00,000, the difference Rs. 10,000 is Goods-in-transit in the beginning of the year.
*2 Calculation of Cash remitted to H.O.:
Cash remitted to H.O. is cash received from debtors (Rs. 1,25,000)
Less: extra spent on branch expenses (Rs. 2,000), i.e., Rs. 1,23,000.
*3 Calculation of Closing outstanding expenses:
Since actual expenses at branch (Rs. 28,000) are more than the expenses paid (Rs. 27,000),
the
difference is outstanding expenses at the end of the year, i.e., Rs. 1,000.
Q. 3. Mayur Stores Ltd. with their Head Office in Delhi, invoiced goods to its branch at
Noida at 20% less than the list price which is cost plus 100% with instructions that cash
sales were to be made at invoice price and credit sales at list price. From the following
particulars, prepare Branch Stock Account, Branch Debtors Account, Branch Expenses
Account, Branch Adjustment Account and Branch Profit & Loss Account for the year
ended 31st December, 2008: [2009
Rs.
Branch Stock on 1-1-2008 at cost to Branch 40,000
Branch Debtors on 1-1-2008 30,000
Goods received from HO at invoice price 3,60,000
Cash sales 90,000
Credit sales 3,00,000
Cash received from Debtors 2,40,000
Goods in Transit 40,000
Branch Expenses 40,000
Bad Debts 2,000
Loss of Goods by fire at invoice price 2,400
Transfer of goods to Faridabad Branch at IP 6,000
Pilferage at IP (Normal) 1,000
Remittance to Head Office 3,30,000
Insurance claim admitted against loss by fire 1,200
Debtors on 31-12-2008 88,000
Stock on 31-12-2008 at Invoice Price 60,000
Sol. Dr. Branch Debtors' Account Cr.
Particulars Rs. Particulars Rs.
To Balance b/d 30,000 By Branch Cash A/c 2,40,000
To Branch Stock A/c (Credit 3,00,000 By Branch Expenses A/c (Bad 2,000
Sales) Debts)
By Balance c/d 88,000
3,30,000 3,30,000
Dr. Branch Expenditure Account Cr.
Particulars Rs. Particulars Rs.
To Bank A/c 40,000 By Branch Profit & Loss A/c 42,000
To Branch Debtors A/c (Bad 2,000
Debts)
42,000 42,000
Dr. Noida Branch Stock Account Cr.
Particulars Rs. Particulars Rs.
To Balance c/d 40,000 By Branch Cash A/c (Sales) 90,000
To Goods sent to Branch A/c By Branch Debtors A/c (Credit 3,00,000
Sales)
(Rs. 3.60.000 + Rs. 40,000) 4,00,000 By Loss by fire:
To Branch Adjustment A/c Branch Adjustment A/c
(Excess profit on Credit 60,000 (2,400 * 60/160) 900
Sales)*,
Branch Profit & Loss A/c
(2,400 - 900) 1,500
By Faridabad Branch A/c 6,000
(Transfer)
By Branch Adjustment A/c
(Normal Loss) 1,000
By Shortage (Balancing figure)
Branch Adjustment A/c
(600 x 60/160) 225
Branch Profit & Loss A/c
(600 - 225) 375
By Balance c/d:
In hand 60,000
In Transit 40,000 1,00,000
5,00,000 5,00,000
Dr. Branch Adjustment Account Cr.
Particulars Rs. Particulars Rs.
To Branch Stock A/c 900 By Stock Reserve A/c 15,000
To Goods Sent to Branch A/c 2,250 (40,000 x 60/160)
(Faridabad) (Rs. 6,000 x 60/160) By Goods sent to Branch A/c 1,50,000
To Branch Debtors A/c 1,000 (4,00,000 x 60/160)
To Branch Adjustment A/c 225 By Branch Stock A/c 60,000
To Stock Reserve A/c 37,500
(1.00,000 x 60/160)
To Gross Profit c/d 1,83,125
2,25,000 2,25,000
Dr. Branch Profit and Loss Account Cr.
Particulars Rs. Particulars Rs.
To Branch Stock A/c 375 By Gross Profit b/d 1,83,125
To Branch Stock A/c 1,500 By Bank A/c
To Branch Expenses A/c 42,000 (Insurance Claim) 1,200
To Profit & Loss A/c 1,40,450
1,84,325 1,84,325
Working notes:
*1 Cost = Rs. 100 List Price - Rs. 200
Invoice Price = Rs. 200 - 20/100 X 200 = Rs. 160
Loading on Invoice Price = Profit/Invoice Price = 60/160
Surplus on Sale of goods on Credit @ 20% = 20/100 X 3,00,000 = Rs. 60,000
Q. 4. X Ltd. with its Head Office in Delhi, invoiced goods to its Chandigarh branch at
20% less than the catalogue price which is cost plus 50%, with instructions that cash
sales were to be made at invoice price and credit sales at catalogue price. From the
following particulars available from the branch, prepare Branch Account for the year
ended 31st December, 2008: [2009
Rs.
Stock on 1-1-2008 at IP 48,000
Goods received from HO at invoice price 5,28,000
Debtors on 1-1-2008 40,000
Cash sales 1,84,000
Credit sales 4,00,000
Cash received from customers 3,42,540
Discount allowed to customers 53,460
Branch Expenses 25,000
Remittance to Head Office 4,80,000
Debtors on 31-12-2008 44,000
Cash in hand on 31-12-2008 23,000
Closing Stock on 31-12-2008 60,000
It was reported that a part of stock at the branch was lost by fire during the year whose value
is to be ascertained. It is decided to provide for discount on debtors @ 15%.
Sol.
Dr. Chandigarh Branch Account Cr.
Particulars Rs. Particulars Rs.
To Balance b/d: By Cash A/c (Remittance to HO) 4,80,000
Stock 48,000 By Stock Reserve A/c
Debtors 40,000 (M8.000 x 20/120) 8,000
Cash*, 1,460 89,460 By Goods Sent to Branch A/c
To Goods sent to Branch A/c 5,28,000 (Rs. 5,28,000 x 20/120) 88,000
To Provision for Discount on By Balance c/d:
Debtors
(15% of Rs. 44,000) 6,600 Stock 60,000
To Stock Reserve A/c (60,000 x 10,000 Debtors 44,000
20/120)
To Profit & Loss A/c Profit 68,940 Cash 23,000 1,27,000
7,03,000 7,03,000
Working notes:
Dr. Chandigarh Branch Account Cr.
Particulars Rs. Particulars Rs.
To Balance b/d (Balancing 1,460 By HO A/c 4,80,000
figure)
To Sales A/c 1,84,000 By Branch Expenses A/c 25,000
To Debtors 3,42,540 By Balance c/d 23,000
5,28,000 5,28,000
Q. 5. X Co. Ltd. Mumbai invoices goods to its Delhi Branch at cost plus 25%. All
expenses of the branch are met by Head Office and cash collected by the branch is sent
to Head Office. From the following information, prepare Branch Account and Goods
sent to Branch A/c in the books of Head Office: [2010
Branch Stock at invoice price on 1-1-09 Rs.
20,000
Branch Debtors on 1-1-09 25,000
Branch Furniture on 1-1-09 40,000
Petty Cash on 1-1-09 3,000
Salary due for December, 2008 4,000
Goods sent to branch during the year (including goods in transit) 2,00,000
Goods returned by Branch to Head Office 5,000
Goods returned by customers to Branch 4,000
Loss of goods in transit at IP (not insured) 10,000
Cash Sales 70,000
Cash received from customers 90,000
Goods spoiled at IP (normal) 4,000
Bad Debts 1,000
Discount allowed 2,000
Petty expenses incurred by Branch 2,000
Cheque received from Head Office for Rs.
Salaries @ Rs. 4,000 p.m. 48,000
Rent 10,000
Petty Cash 3,000
Delivery Van 50,000 1,11,000
Branch Debtors on 31-12-09 30,000
Branch Stock on 31-12-09 Rs.
Depreciate furniture and delivery van @ 10%.
Sol. In the Books of Head Office
Dr. Branch Account Cr.
Particulars Rs. Particulars Rs.
To Balance b/d: By Balance b/d: Salary due 4,000
Stock 20,000 By Goods Sent to Branch A/c
Debtors 25,000 (Goods returned by Branch) 5,000
Furniture 40,000 By Goods Sent to Branch A/c
Petty Cash 3,000 (Loading: Rs. 2,00,000 x 25/125) 40,000
To Goods Sent to Branch A/c 2,00,000 By Stock Reserve (Loading)
To Bank A/c (Expenses) (Rs. 20,000 x 25/125) 4,000
Salaries 48,000 By Bank A/c (Remittances):
Rent 10,000 Cash Sales 70,000
Petty Cash 3,000 Cash received
Delivery Van 50,000 1,11,000 from customers 90,000 1,60,000

b/f 3.09,000 2,13,000

By Balance c/d:
To Goods Sent to Branch Delivery Van 45,000
(Loading)
(Rs. 5,000 x 25/125) 1,000 Debtors 30,000
To Stock Reserve (Loading) Stock*, 33,000
(Rs. 33,000 x 25/125) 6,600 Furniture (Rs. 40,000 - Rs. 4,000) 36,000
To Balance c/d: Petty Cash
Outstanding Salary 4,000 (Rs. 3,000 + Rs. 3,000 - Rs. 4,000
2,000)
By Net Loss transferred to
General Profit & Loss A/c 49,600
4,10,600 4,10,600
Dr. Goods Sent to Branch Account Cr.
Particulars Rs. Particulars Rs.
To Branch Stock A/c 5,000 By Branch Stock A/c 2,00,000
To Branch Adjustment A/c 39,000
(Loading)
(Net) (Rs. 1,95,000 x 25/125)
To Purchases A/c 1,56,000
2,00,000 2,00,000
Working notes:
*1 Dr. Branch Stock Account (IF) Cr.
Particulars Rs. Particulars Rs.
To Balance b/d 20,000 By Goods Sent to Branch A/c 5,000
To Goods Sent to Branch 2,00,000 (Return by branch)
To Sales Return 4,000 3y Loss of Goods in transit 10,000
By Cash Sales 70,000
By Branch Debtors A/c (Cr. 1,02,000
Sales)
By Branch Adjustment A/c 4.000
(Normal loss)
By Balance c/d (Balancing 33,000
figure)
2,24,000 2,24,000
*2 Dr. Branch Debtors Account Cr.
Particulars Rs. Particulars Rs.
To Balance b/d 25,000 By Sales Return 4,000
To Credit Sales {Balancing 1,02,000 By Cash A/c 90,000
figure)
By Bad Debts 1,000
By Discount Allowed 2,000
By Balance c/d 30,000
1,27,000 1.27,000
Q. 6. A Head Office invoices goods to its branch at 20% less than the list price. The list
price is made up by adding 100% to cost price. Goods are sold to customers at list price
both by H.O. and Branch. From the following particulars, prepare Trading and Profit
& Loss Accounts for the year ended 31st March, 2010 to show profit made by Head
Office and Branch on Wholesale Basis: [2020
Head Office Branch
Rs. Rs.
Opening Stock at Cost (at invoice price for branch) 60,000 24,000
Purchases 6,00,000 —
Goods sent to Branch at invoice price — 1,44,000
Sales 9,00,000 1,20,000
Expenses 1,30,000 6,000
Sol. Trading and Profit & Loss Account
Dr. for the year ended 31st March, 2010 Cr.
Particulars HO (Rs.) Branch Particulars HO(Rs.) Branch
(Rs.) (Rs.)
To Opening Stock 60,000 24,000 By Sales 9,00,000 1,20,000
To Purchases 6,00,000 — By Goods Sent to 1,44,000 —
Branch
To Goods Sent to — 1,44,000 By Closing Stock* 1,20,000 72,000
Branch
To Gross Profit c/d 5,04,000 24,000
11,64,00 1,92,000 11,64,00 1,92,000
0 0
To Expenses 1,30,000 6,000 By Gross Profit b/d 5,04,000 24,000
To Stock Reserve By Stock Reserve
(Rs. 72,000 x 60/160) 27,000 — (Rs. 24,000 x 60/160) 9.00C —
To Net Profit 3,56,000 18,000
5,13,000 24,000 5,13,000 24,000

Working notes:
* Let Cost Price = Rs. 100 List Price = Rs. 200
(???) Invoice Price = 20% less than the list price, i.e., Rs. 200 - 20% of Rs. 200 =
Rs. 160
(i) Calculation of Closing Stock at Head Office: Rs.
Rs.
ling Stock 60,000
Add: Purchases 6,00,000
6,60,000
Cost of Goods Sold (9,00,000 x 100/200) 4,50,000
of Goods sent to Branch (1,44,000 x 100/160) 90,000 5,40,000
Closing Stock 1,20,000
(if) Calculation of Closing Stock at Branch:
Opening Stock at Invoice Price 24,000
Add: Goods received from Head Office 1,44,000
1,68,000
Invoice Price of Goods sold [1,20,000 x 160/200] 96,000
Closing Stock 72,000
Q. 7. M/s XYZ Ltd. has branches at Delhi and Agra and goods are invoiced at cost plus
a profit of 20% on sales. The following information is available of the transactions at
Delhi branch for the year ending 319t March, 2011: [2011
01-04-2010 (Rs.) 31-03-2011 (Rs.)
Stock at Invoice Price 40,000 —
Debtors 12,000 11,000
Petty Cash 150 250
Transactions during 2010-11: Rs.
Goods sent to branch at cost to HO 3,36,000
Goods returned by branch to HO 15,000
Cash Sales 1,05,000
Credit Sales 1,80,000
Normal Loss at IP 350
Goods pilfered at IP 3,000
Goods lost by fire at IP 4,000
Insurance Co. paid to HO for loss by fire at Delhi 3,000
Cash sent for petty expenses 32,000
Bad debts at Delhi branch 400
Goods transferred to Agra branch under instructions from HO at IP 12,000
Insurance charges paid by HO 200
Goods returned by Debtors 500
Note: Goods transferred to Agra branch were in transit (given above) on 31st March, 2011.
Prepare:
(i) Branch Stock Account; (ii) Branch Adjustment Account;
(iii) Branch Profit & Loss Account; (iv) Stock Reserve Account; and
(v) Branch Debtors Account
Sol. IP = CP + RP => 100 = 80 + 20
Dr. Branch Stock Account Cr.
Particulars Rs. Particulars Rs.
To Balance b/f 40,000 By Goods sent to Branch A/c 15,000
(IP)
To Goods sent to Branch A/c (IP) By Branch Cash A/c (Cash 1,05,000
Sales)
(Rs. 3,36,000 x 100/80) 4,20,000 By Branch Debtors (Credit 1,80,000
Sales)
To Branch Debtors A/c By Branch Adj. A/c (Normal 350
Loss)
(Sales Returns) 500 By Branch Adjustment A/c
(Loading on Goods pilfered)
(Rs. 3,C00 x 20/100) 600
By Branch P & L A/c
(Cost of Goods Pilfered) 2,400
By Branch Adjustment A/c
(Loading
on Goods destroyed by fire) 800
By Branch Profit & Loss A/c
(CP)
(Goods destroyed by fire) 3,200
By Goods sent to Branch A/c
(IP)
(Goods transferred to Agra) 12,000
By Balance c/f (Closing stock at 1,41,150
Branch)
4,60,500 4,60,500
Dr. Branch Debtors Account Cr.
Particulars Rs. Particulars Rs.
To Balance b/f 12,000 By Branch Expenses (Bad Debts) 400
To Branch Stock A/c 1,80,000 By Branch Stock A/c 500
(Credit Sales) (Returns by Debtors)
By Branch Cash A/c (Received
from Debtors) (Balancing figure) 1,80,100
By Balance c/f 11,000
1,92,000 1,92,000
Dr. Branch Adjustment Account Cr.
Particulars Rs. Particulars Rs.
To Goods sent to Branch A/c 3,000 5y Branch Stock Reserve A/c 8,000
(Loading on goods returned) By Goods sent to Branch A/c
(IP)
To Branch Stock A/c (Normal 350 (Rs. 4,20,000 x 1/5) 84,000
Loss)
To Branch Stock A/c
(Loading on Goods pilfered) 600
To Branch Stock A/c
(Loading on Goods lost by fire) 800
To Branch Stock A/c
(Loading on Goods tmsf. to 2,400
Agra)
To Branch Stock Reserve A/c 28,230
(Loading on Closing Stock)
To Gross Profit tmsf. to P & L 56,620
A/c
92,000 92,000
Dr. Branch Profit & Loss Account Cr.
Particulars Rs. Particulars Rs.
To Branch Stock A/c By Gross Profit
(Goods pilfered at Cost) 2,400 (Per Branch Adjustment A/c) 56,620
To Branch Stock A/c
Cost Price of loss by fire 3,200
Less: Claim 3,000 200
To Bad Debts 400
To Insurance Charges A/c 200
To Branch Expenses A/c
(Per Branch Petty Cash A/c)*, 31,900
To Net Profit 21,520
56,620 56,620
Dr. Branch Stock Reserve Account Cr.
Date Particulars Rs. Date Particulars Rs.
01-04- To Branch Adjustment 8,000 01-04- By Balance b/f 8,000
10 A/c 10
31-03- To Balance c/d 28,230 31-03- By Branch Adjustment 28,230
11 11 A/c
Workings notes:
Dr. Branch Petty Cash Account Cr.
Particulars Rs. Particulars Rs.
To Balance b/f 150 By Branch Expenses (transferred
To HO A/c (Cash Received) 32,000 to Branch P&L A/c) (Bat figure) 31,900
By Balance c/f 250
32,150 32,150
Dr. Branch Cash Account Cr.
Particulars Rs. Particulars Rs.
To Branch Stock A/c (Cash 1.05,000 By Remittance to HO*2 2,85,100
Sales)
To Branch Debtors 1,80,100
2,85,100 2,85,100
Working notes:
*1 Branch expenses are Rs. 31,900 the balancing figure of Branch Petty Cash Account.
*2 Branch should have remitted all the cash received to the H.O., i.e., Rs. 2,85,100.
*3 Branch Petty Cash Account and Branch Cash Account are only in working narrations as
these accounts have no meaning for the HO.
Q. 8. From the following details relating to Delhi branch for the year ending March 31 8t,
2011, prepare Branch Account and Goods sent to Branch Account in the books of Head
Office. Show your workings clearly: [2011
Stock on 1-4-2010 Rs. 25,000
Debtors on 1-4-2010 Rs. 10,000
Furniture on 1-4-2010 Rs. 6,000
Petty Cash on 1-4-2010 Rs. 1,000
Insurance prepaid on 1-4-2010 Rs. 300
Salaries outstanding on 1-4-2010 Rs. 4,000
Goods sent during the year 2010-11 Rs. 2,00,000
Cash sales during the year Rs. 2,70,000
Total Salt- Rs. 3,50,000
Cash received from Debtors Rs. 65,000
Cash paid by Debtors direct to HO Rs. 5,000
Goods returned by branch Rs. 2,000
Goods returned by Debtors Rs. 1,600

Cash sent to Branch for expenses:

Rent (Rs. 800 p.m.) 9,600
Salary (Rs. 4,000 p.m.) 48,000
Petty Cash 2,000
Insurance (upto June 2011) 1,200 60,800
Petty Cash Expenses 2,200
Discount allowed to Debtors 500
Stock on 31-3-2011 15,000
Depreciation on furniture at 10% p.a.
Goods costing Rs. 2,500 were damaged in transit and a sum of Rs. 2,000 was recovered
by branch from the insurance company in full settlement of the claim.
Sol.
In the Books of Head Office
 Dr. Branch Account Cr.
Particulars Rs. Particulars Rs.
To Balance b/f: By Balances b/f: Salaries 4,000
outstanding
Stock 25,000 By Bank A/c:
Debtors 10,000 Cash Sales 2,70,000
Furniture 6,000 Collection from Debtors 65,000
Petty Cash 1,000 Paid by Debtors directly to HO 5,000
Insurance Prepaid 300 Received from Insurance Co. 2,000
To Goods sent to Branch A/c 2,00,000 By Goods sent to Branch A/c
To Bank A/c: (Returns) 2,000
Rent 9,600 By Balances c/f:
Salary 48,000 Stock 15,000
Petty Cash 2,000 Debtors*1 18,500
Insurance 1,200 60,800 Furniture*3 5,400
To Balances c/d: Petty Cash*2 800
Salaries outstanding A/c*5 4,000 Insurance Prepaid*4 300
To Profit & Loss A/c (Net profit
of
Branch transf. to General P&L 80,900
A/c)
3,88,000 3,88,000
Working notes:
*1 Dr. Branch Debtors Account Cr.
Particulars Rs. Particulars Rs.
To Balance b/f 10,000 By Branch Cash A/c
To Sales (Credit) 80,000 (Received from Debtors) 65,000
By Head Office 5,000
By Sales Return 1,000
By Discount A/c 500
By Balance elf (Balancing 18,500
 figure)
90,000 90,000
*2 Dr. Branch Petty Cash Account Cr.
Particulars Rs. Particulars Rs.
To Balance b/f 1,000 By Branch Petty Expenses 2,200
To Head Office 2,000 By Balance c/f*2 800
3,000 3,000
*3 Furniture balance on 31-03-2011 is Rs. 6,000 - Rs. 600 - Rs. 5,400.
*4 Insurance is prepaid on 31-03-2011 for 3 months, i.e., 1/4 x Rs. 1,200 or Rs. 300.
*5 Outstanding Salaries Rs. 4,000 remain o/s as only Rs. 48,000 (Rs. 4,000 x 12) were paid
during the year.
Q. 9. Linken Ltd. has its branches in Ambala and Ludhiana to whom goods are invoiced
at cost plus 25%. The following information is available of the transactions at Ambala
Branch for the year ending 31st March, 2009:[2011 Nov.
Balance at 1st April, 2008 Rs.
Stock at invoice price 20,000
Debtors 6,000
Petty Cash 475
Transactions during 2008-09
Goods sent to branch at invoice price 2,40,000
Goods returned to HO at invoice price 7,500
Cash Sales 60,000
Credit Sales (Sold at cost + 50%) 90,000
Normal loss at invoice price 300
Goods pilfered at invoice price 1,500
Goods lost in fire at invoice price 3,000
Insurance Co. paid to HO for loss by fire at Ambala 2,000
Cash sent for petty expenses 16,000
Goods transferred to Ludhiana branch under instructions
from HO at invoice price 6,000
Insurance charges paid by HO 1,000
Goods returned by debtors 500
Cash received from debtors 89,500
Balance on 31st March, 2009
Petty cash Rs. 425, Debtors Rs. 5,500, Stock ?
Prepare:
(i) Branch Stock Account; (ii) Branch Adjustment Account;
(iii) Branch Profit & Loss Account; (iv) Branch Debtors Account;
(v) Goods sent to Branch Account.
Sol. Invoice Price (IP) = Cash Price (CP) + Reserve Price
125 = 100 + 25
Dr. Branch Stock Account Cr.
Date Particulars Rs. Date Particulars Rs.
01-04- To Balance b/f 20,000 By Goods sent to Branch
08 A/c
(IP) (Goods returned to 7,500
HO)
By Branch Cash A/c
(Cash Sales) 60,000
31-03- To Goods sent to Branch 31-03- By Branch Debtors A/c
09 A/c 09
(IP) 2,40,000 (Credit Sales) 90,000
To Branch Debtors A/c By Branch Adjustment
A/c
(Sales Returns) 500 (Normal Loss) (60 + 300
240)
To Branch Adjustment By Branch P&L A/c
A/c (Cost
(Excess Price)*1 14,917 Price of Goods Lost)*2 3,600
By Branch Adj. A/c
(Reseive
Price of Goods Lost)*2 900
By Goods sent to Branch
A/c
 (IP) (Goods transferred
to
Ludhiana Branch) 6,000
By Balance c/f 1,07,117
2,75,417 2,75,417
Dr. Branch Debtors Account Cr.
Particulars Rs. Particulars Rs.
To Balance 6,000 By Branch A/c (Cash received
To Branch Stock A/c from Debtors by Branch) 89,500
(Credit Sales) 90,000 By Branch Stock A/c (Sales 500
Returns)
By Discount A/c (Balancing 500
figure)
By Balance c/f (Given) 5,500
96,000 96,000
Dr. Branch Adjustment Account Cr.
Particulars Rs. Particulars Rs.
To Goods sent to Branch A/c By Branch Stock Reserve A/c
(RP of Goods returned to HO) (Reserve Price of Opening Stock)
(7,500 x 1/5) 1,500 (20,000 x 1/5) 4,000
To Branch Stock A/c By Goods sent to Branch A/c
(RP a.id Cost of Normal Loss) 300 (RP of Goods sent to Branch)
To Branch Adjustment A/c (2,40,000 x 1/5) 48,000
(Reserve Price of Goods Lost) 900 By Branch Stock A/c (Excess 14,917
Price)*,
To Goods sent to Branch A/c
(RP of Goods transferred to
Ludhiana Branch) (6,000 x 1/5) 1,200
To Branch Stock Reserve A/c
(Reserve Price of Closing Stock) 21,423
To Branch P & L A/c (Gross 41,594
Profit)
66,917 66,917
Dr. Branch Profit & Loss Account Cr.
Particulars Rs. Particulars Rs.
To Goods Lost A/c By Branch Adjustment A/c
Pilfered (CP) 1,200 (Gross Profits) 41,594
Fire (CP) 2,400
3.600
Less: Insurance 2,000 1,600
To Discount A/c 500
To Petty Expenses
Rs.(475 + 16,000 -425) 16,050
To Insurance Charges 1,000
To Net Profit 22,444
41,594 41,594
Working notes:
*l Excess Price = Sales Price (Credit Sales) - Invoice Price. EP is the balancing figure of
Branch
Stock Account.
Branch Stock Account is maintained at invoice price in order to find out shortage or surplus
of
goods. Since credit sales are at cost +50%, which is more than invoice price, the difference
between selling price and invoice price (i.e., cost + 25%) is additional gross profit earned and
is
transferred to Branch Adjustment Account in full.
Net Credit Sales = Rs. 90,000 - Rs. 500 (Sales Return) = Rs. 89,500
Invoice price of these goods = Rs. 89,500 x 125/150----- = Rs. 74,583
Additional Gross Profit (Excess Price) = Rs. 89,500 - Rs. 74,583 = Rs. 14,917
*2 Goods Lost includes both Goods Pilfered as well as Goods Lost by Fire.
DR. Goods Sent to (Ambala) Branch Cr.
Particulars Rs. Particulars Rs.
To Bank A/c 48,000 By Branch Stock A/c (IP) 2,40,000
To Branch Stock A/c (IP)- 7,500 By Branch Adjustment A/c (RP) 1,500
To Ludhiana Branch Stock A/c 6,000 By Branch (Ambala) Adjustment 1,200
(IP) A/c
To Trading A/c (Deducted for 1,81,200
Purchase A/c)
2,42,700 2,42,700
Q. 10. Hari Traders invoices goods to its branch at Delhi at cost. Goods are generally
sold by the branch at a profit of 10% of cost. From the following information, prepare
Branch Account to find out the profit & loss of the branch and also necessary working
notes. [2011 Nov.
Opening Balances: Branch Stock Rs. 5,000
Branch Debtors Rs. 7,500
Branch Furniture Rs. 4,000
Branch Salary outstanding Rs. 2,500
Transactions during the year: Rs.
Goods sent to Branch 50,000
Goods received by Branch 47,500
Cash sent to Branch for Expenses 12,500
Actual Branch Expenses (including Branch Salary outstanding) 14,500
Cash Sales 25,000
Credit Sales 30,000
Cash received from debtors 27,500
Discount 3,000
Cash sent to branch for direct purchases from local market 10,000
Cost of direct purchases 12,500
Closing balances: Branch Stock Rs.
Branch Debtors Rs.
Branch Cash 250
Cash remitted by the branch to HO Rs. 2,750 was not received till close of the
accounting period by HO. Provide 10% depreciation on Furniture.
Sol. Dr. Branch Account (in HO Books) Cr.
Date Particulars Rs. Date Particulars Rs.
01-4- To Balance b/f: 01-4- By Balance b/f:
CY CY
Branch Stock 5.000 Salaries O/s A/c 2,500
Branch Debtors 7,500
Branch Furniture 4,000
31-3- To Goods sent to Branch 50,000 31-3- By Bank A/c*3 (Cash
CY A/c CY received
To Bank A/c (Cash sent) 12,500 from Branch) 45,000
To Bank A/c (For 10,000 By Balances c/f:
purchases)
Branch Stock A/c*1 17,500
Branch Debtors A/c*2 7,000
Branch Petty Cash A/c 250
Br. Cash in Transit (CIT) 2,750
Branch Furniture A/c
Rs.(4,000 - 400) 3,600
By P&L A/c (Branch 10,400
Loss)
89,000 89,000

Working notes:
*1 Unsold Stock at the Branch at the end of the year is calculated as Rs.
Opening Stock at Branch 5,000
Add: Goods from HO 50,000
Add: Goods Locally Purchased 12,500
67,500
Less: Cost Price of Goods Sold @ Branch (10/11 x 55,000) 50,000
Unsold Stock at the end (Cost Price) 17,500
*2 Dr. Branch Debtors Account Cr.
Particulars Rs. Particulars Rs.
To Balance b/f 7,500 By Branch Cash A/c 27,500
To Branch Credit Sales 30,000 By Discount A/c 3,000
By Balance c/f *2 (Balancing 7,000
figure)
37,500 37,500
*3 Dr. Branch Cash Account Cr.
Particulars Rs. Particulars Rs.
To HO A/c 12,500 By Branch Expenses 14,500
To Branch Cash Sales 25,000 By Branch Purchases (Local) 12.500
To Branch Debtors 27,500 By HO A/c (Remitted to HO) 45,000
(Bal. fig.)*3
To HO A/c (Cash for Local 10,000 By Balances c/f: Cash at Branch 250
Purchases)
Cash in Transit 2,750
75,000 75,000
Note: Narrations in these accounts in the Workings are just given for explanation. These are
not part of Double Entry System.
Q. 11. S.K. Brothers has a branch at Delhi. Goods are invoiced at a profit of 20% on
sales. The following information is available of the transactions at Delhi Branch for the
year ending 31st March, 2012: [2012
Balance as on 01-04-2011: Branch stock at invoice price Rs. 50,000
Branch Debtors Rs. 34,000
Branch Cash Rs. 8,000
Balance as on 31-03-2012: Branch stock at invoice price Rs.
Branch Debtors Rs. 47,840
Branch Cash Rs. 18,000
Transactions during 2011-12:
Good invoiced to Branch Rs.
6,50,000
Goods received by the Branch Rs.
6,00,000
Goods returned by Branch to HO Rs. 25,000
Credit sales at Branch Rs.
 3,50,000
Cash sales at Branch Rs.
2,05,000
Normal loss at Branch Rs. 10,000
Goods lost by fire at Branch Rs. 15,000
Cash remitted to HO Rs.
Cash received from branch debtor Rs.
3,14,600
Bills receivable received from Branch debtors Rs. 20,000
Amount received by the Branch on discounting of the above bills Rs. 19,600
Cash sent to Branch for expenses Rs. 72,000
Actual cash expenses at Branch Rs. 71,800
Cash discount allowed to customers Rs. 1,560
Make a provision for Bad and Doubtful debts @ 5% on Debtors.
Prepare: (i) Branch Stock Account; (ii) Branch Debtors Account;
(iii) Branch Expenses Account; (iv) Branch Cash Account;
(v) Branch Adjustment Account; {vi) Branch Profit & Loss Account.
Sol. Dr. Branch Stock Account Cr.
Particulars Rs. Particulars Rs.
To Balance b/d 50,000 By Goods sent to Branch A/c 25,000
(Return;
To Goods sent to Branch A/c 6.50,000 By Branch Debtors A/c (Credit 3,50,000
Sales)
[76,00,000 + Rs. 50,000] By Branch Cash A/c (Cash 2,05,000
Sales)
By Branch Adj. A/c (Normal 10,000
Loss)
By Abnormal Loss:
Branch Adj. A/c 3,000
Branch P&LA/c 12,000 15,000
By Balance c/d: Rs.(45,000 + 95,000
50,000)
7,00,000 7,00,000
 Dr. Branch Debtors Cr.
Particulars Rs. Particulars Rs.
To Balance b/d 34,000 By Branch Cash A/c 3,14,600
To Branch Stock A/c 3,50,000 By Bills Receivable A/c 20,000
(Credit Sales) By Discount Allowed A/c 1,560
By Balance c/d 47,840
3,84,000 3,84,000
Dr. Branch Expenses Account Cr.
Particulars Rs. Particulars Rs.
To Branch Cash A/c 71.800 By Branch Profit & Loss A/c 71,800
Dr. Branch Cash Account Cr.
Particulars Rs. Particulars Rs.
To Balance b/d 8,000 By Branch Expenses A/c 71,800
To Branch Stock A/c (Cash 2,05,000 By Cash A/c (Sent to HO) 5,29,400
Sales)
To Branch Debtors A/c 3,14,600 By Balance c/d 18,000
To B/R (Discounted) 19,600
To Cash A/c (From HO) 72,000
6,19,200 6,19,200
Dr. Branch Adjustment Account Cr.
Particulars Rs. Particulars Rs.
To Branch Stock A/c (Normal 10,000 By Stock Reserve 10,000
loss)
To Branch Stock A/c (Abnormal 3,000 By Goods sent to Branch 1,30,000
Loss)
To Goods sent to Branch 5,000
To Stock Reserve 19,000
To Branch P&L A/c (Gross 1,03,000
Profit)
1,40,000 1,40,000
Dr. Branch Profit & Loss Account Cr.
Particulars Rs. Particulars Rs.
To Branch Exp. A/c 71,800 By Branch Adjustments A/c 1,03,000
To Branch Debtors A/c 1,560 (Gross Profit)
(Discount)
To Discount on B/R 400
To Branch Stock A/c (Abnormal 12,000
Loss)
To Provision for Bad & Doubtful
Debts
(Rs. 47,840 x 5/100] 2,392
To Net Profit c/d 14,848
1,03,000 1,03,000
Q. 12. M/s Virat & Company with their Head Office at Delhi, have a branch at Noida.
They supply goods to its branch at selling price less 20%. The company as well as the
branch sells goods to consumers at a profit of 100% on cost. M/s Virat & Co. also sells
goods to their approved dealers at the same price at which they are invoicing to their
branch at Noida. From the following particulars, prepare Trading and Profit & Loss
Account of the Head Office and of the Branch for the year ending 31st March, 2012:
[2022
Head Office (Rs.) Branch (Rs.)
Stock at beginning 1,50,000 8,000
Purchases during the year 12,80,000 —
Goods sent to Branch 2,00,000 —
Goods received from HO — 2,00,000
Goods sold to approved Dealers 3,00,000 —
Goods sold to customers 6,00,000 1,80,000
Expenses 50,000 15,000
Sol. Head Office Trading and Profit & Loss Account
Dr. for the year ending March 31, 2012 Cr.
Particulars Rs. Particulars Rs.
To Opening Stock 1,50,000 By Goods sent to Branch 2,00,000
To Purchases 12,80,000 By Sales: to Approved dealers 3,00,000
To Gross Profit c/d 4,87,500 to Customers 6,00.000
 By Closing Stock *1 8,17,500
19,17,000 19,17,000
To Expenses 50,000 By Gross Profit b/d 4,87,500
To Stock Reserve for unrealised By Stock Reserve for unrealised
profit (Rs. 64,000 x 60/160) 24,000 profit (Rs. 8,000 x 60/160) 3,000
To Net Profit 4,16,500
4,90,500 4,90,500
Branch Trading and Profit & Loss Account
Dr. for the year ending March 31, 2012 Cr.
Particulars Rs. Particulars Rs.
To Opening Stock 8,000 By Sales 1,80,000
To Goods received from HO 2,00,000 By Closing Stock*2 64,000
To Gross Profit c/d 36,000
2,44,000 2,44,000
To Expenses 15,000 By Gross Profit b/d 36,000
To Net Profit c/d 21,000
36,000 36,000

Working notes:
*l Calculation of Closing Stock at Head Office Rs.
Opening Stock 1,50,000
Add: Purchases 12,80,000
14,30,000
Less: Cost of Goods sold to approved Dealers [Rs. 3,00,000 x 1,87,500
100/160]
Cost of Goods sent to Branch [Rs. 2,00,000 x 100/160) 1,25,000
Cost of Goods sold to Customer [Rs. 6,00,000 x 100/200] 3,00,000
(6,12,500)
Closing Stock at Head Office 8,17,500

*2 Calculation of Closing Stock at Branch Rs.

Opening Stock at invoice price 8,000
Add: Goods received from HO 2,00,000
2,08,000
Less: Cost to Branch (invoice price) of goods sold by Branch (1,80,000 x 1,44,000
160/200)
Closing Stock of Branch 64,000
Q. 13. Delhi Head Office supplies goods to its branch at Noida at invoice price which is
cost plus 50%. All cash received by the branch is remitted to Delhi and all branch
expenses are paid by the Head Office. From the following particulars related to Noida
branch for the year 2012 prepare: [2023
(a) Branch Stock Account {b) Branch Debtors Account
(c) Branch Expenses Account and
{d) Branch Adjustment Account in the books of Head Office so as to find out the gross
profit and net profit made by the branch: ?
Stock with Branch on 1-1-2012 (Invoice Price) 1,20,000
Branch Debtors on 1-1-2012 24,000
Petty Cash Balance on 1-1-2012 200
Goods received from HO 3,72,000
Goods returned by debtors direct to HO 6,000
Allowances to Customers off Selling Price 4,000
Cash Sales 2,08,000
Credit Sales 1,74,000
Cash received from debtors 1,80,000
Discount allowed to debtors 4,800

Expenses paid by HO in Cash: Rent Rs. 4,800

Salaries Rs. 48,000
Petty Cash Rs. 2,000 54,800
Stock with Branch on 31-12-2012 1,08,000
Petty Cash Balance on 31-12-2012 200
Sol. In the books of Head Office
Dr. Branch Stock Account Cr.
Particulars Rs. Particulars Rs.
To Balance b/d 1.20,000 By Branch Cash A/c (Cash 2,08,000
Sales)
To Goods sent to Branch A/c 3,72,000 By Branch Debtors A/c (Credit 1,74,000
Sales)
To Branch Debtors A/c 6,000 By Goods sent to Branch A/c
(Returned by Debtors to HO) (Returned by Debtors to HO) 6,000
To Branch Adjustment A/c By Branch Adjustment A/c
(Allowance
(Trading surplus) (Balancing 2,000 to Customers off-selling price
fig.)
already adjusted) 4,000
By Balance c/d 1,08,000
5,00,000 5,00,000
Dr. Branch Debtors Account Cr.
Particulars Rs. Particulars Rs.
To Balance b/d 24,000 By Branch Cash A/c 1,80,000
To Branch Stock A/c (Credit 174,000 By Branch Expenses A/c (Dis. 4,800
Sales) allowed)
By Branch Stock A/c (Goods
returned
to HO by Debtors) 6,000
By Balance c/d 7,200
1,98,000 1,98,000
Dr. Branch Expenses Account Cr.
Particulars Rs. Particulars Rs.
To Cash A/c: By Branch Adjustment A/c
Rent 4,800 (Profit & Loss A/c portion) 59,600
Salaries 48,000
Petty Cash 2,000 54,800
To Branch Debtors A/c 4,800
(Discount)
 59,600 59,600
Dr. Branch Adjustment Account Cr.
Particulars Rs. Particulars Rs.
To Goods sent to Branch A/c By Stock Reserve A/c (Opening
Load (Rs. 6,000 x 50/150) 2,000 Load) (Rs. 1,20,000 x 50/150) 40,000
To Branch Stock A/c By Goods sent to Branch A/c
(Decrease in gross profit due to Load (Rs. 3,72,000 x 50/150) 1,24,000
sale of goods at less than invoice By Branch Stock A/c 2,000
price by giving allowance to (Trading surplus assumed to be
customers at the time of sale) 4,000 due to sale at a higher price
To Stock Reserve A/c—Closing 36,000 than IP)
(Rs. 1,08,000 x 50/150)
To Gross Profit c/d 1,24,000
1,66,000 1,66,000
To Branch Expenses A/c 59,600 By Gross Profit c/d 1,24,000
(including Discount)
To Net Profit trans, to General 64,400
P&L A/c
1,24,000 1,24,000
Working notes:
*1 Allowance to customers off-selling price already adjusted while invoicing has been treated
as an item affecting gross profit. Therefore, it has been transferred to the debit side of first
part of the Branch Adjustment Account.
*2 Returns of goods by branch debtors directly to the Head Office has been divided into two
parts: namely (»') Sales Return, and (ii) Return of Goods by Branch to the Head Office. The
entries have been passed accordingly. Alternatively, a direct entry can be passed without
affecting Branch Stock Account by Debiting Goods sent to Branch Account and Crediting
Branch Debtors Account.
Q. 14. Vaani Co. Delhi has a branch at Kolkata. It invoices goods to the branch at
selling price which is cost plus 33 1/3%. From the following particulars, prepare Branch
Account at invoice price. Show also Branch Debtors Account and Goods sent to Branch
Account in the books of Vaani Co. Delhi. [2024
Stock on 1st April, 2013 (invoice price) Rs.
15,000
Debtors on 1st April, 2013 Rs.
11,400
Goods invoiced to branch during the year at IP Rs.
67,000
Sale at branch: Cash Rs. 31,000
Credit Rs. 37,400 Rs.
68,400
Cash received from debtors Rs.
40,000
Discount allowed to customers Rs. 300
Bad debts written off Rs. 250
Cheque sent to branch: Salaries Rs. 5,000
Sundry expenses Rs. 1,700 Rs. 6,700
Stock on 31st March, 2014 (invoice price) Rs.
13,400
Sol.
In the Books of Vaani Co.
Kolkata Branch Account
Particulars Rs. Particulars Rs.
To Balance b/d: Stock 15,000 By Stock Reserve A/c
Debtors 11,400 (Loading Opening Stock) 3,750
To Goods sent to Branch A/c 67,000 By Goods sent to Branch A/c 16,750
(Loading)
To Bank A/c: (Expenses) By Bank A/c: (Remittance
received
Salaries 5,000 from Branch)
Sundry Expenses 1,700 6,700 Cash Sales 31,000
To Stock Reserve A/c 3,350 Cash received from Dr. 40,000 71,000
(Loading on Closing Stock) By Balance c/d: Stock 13,400
To Net Profit trans to General 9,700 Debtors 8,250 21,650
P&L A/c
1,13,150 1,13,150
Dr. Goods sent to Branch Account Cr.
Particulars Rs. Particulars Rs.
To Branch A/c (Loading) 16,750 By Branch A/c 67,000
To Purchase A/c (Cost of
goods sent to Branch) 50,250
67,000 67,000
Dr. Branch Debtors Account Cr.
Particulars Rs. Particulars Rs.
To Balance b/d 11,400 By Cash A/c 40,000
To Credit Sales 37,400 By Discount Allowed 300
By Bad Debts 250
By Balance c/d 8,250
48,800 48,800
Working notes:
Invoice Price = Cost + Profit = 100 + 100/3 = 400/3
Rate of Profit at Invoice Price = 100/3 x 3/400 = 1/4
Q. 15. A company with its Head Office at Delhi has a Branch at Agra. Goods are
invoiced to the branch at cost plus 33 1/3% which is the selling price. The following
information is given in respect of the branch for the year ended 31 st March, 2014: [2014
Goods sent to branch during the year at invoice price Rs. 4,80,000
Stock on 1st April, 2013 (invoice price) Rs. 24,000
Cash Sales Rs. 1,80,000
Returns from customers Rs. 6,000
Branch expenses paid for cash Rs. 53,500
Branch debtors balance (1-4-2013) Rs. 30,000
Discount allowed Rs. 1,000
Bad debts Rs. 1,500
Stock on 31st March, 2014 (invoice price) Rs. 48,000
Branch debtors balance (31-3-2014) Rs. 36,500
Collections from Debtors Rs. 2,70,000
Branch debtors' cheque returned dishonoured Rs. 5,000
You are required to ascertain the Profit made by the Branch by preparing the necessary
accounts under the Branch Adjustment Method.
Sol.
In the Books of Head Office
Dr. Branch Stock Account Cr.
Particulars Rs. Particulars Rs.
To Balance b/d 24,000 By Branch Cash A/c (Cash 1,80,000
Sales)
To Goods sent to Branch 4,80,000 By Branch Debtors (Credit 2,80.000
Sales)
To Branch Debtors (Sales 6,000 By Shortage (Balancing figure)
Return)
Branch Adjustment A/c
(Loading) 500
By Adjustment A/c (Cost) 1,500 2,000
By Balance c/d 48,000
5,10,000 5,10,000
Dr. Branch Debtors Account Cr.
Particulars Rs. Particulars Rs.
To Balance b/d 30,000 By Returns Inwards 6,000
To Credit Sales (Bal. figure) 2,80,000 By Discount Allowed A/c 1,000
To Cheque dishonoured 5,000 By Bad Debts 1,500
By Cash A/c 2,70,000
By Balance c/d 36,500
3,15,000 3,15,000
Dr. Branch Adjustment Account Cr.
Particulars Rs. Particulars Rs.
To Stock Reserve (Vi of Rs. 12,000 By Stock Reserve (Vi of Rs. 6,000
48,000) 24,000)
To Branch Stock (Shortage) By Goods Sent to Branch
(Vi of Rs. 2,000) (Loading) 500 (1/4 of Rs. 4,80,000) 1,20,000
To Gross Profit c/d 1,13,500
 1,26,000 1,26,000
To Branch Expenses A/c 53,500 By Gross Profit b/d 1,13,500
To Branch Debtors:
Discount Allowed 1,000
Bad Debts 1,500 2,500
To Branch Stock A/c (Shortage 1,500
Cost)
To Net Profit transferred to
General Profit & Loss A/c 56,000 •
1,13,500 1,13,500
Working notes:
Invoice Price = Cost + Profit = 100 + 100/3 = 400/3
Rate of Profit at Invoice Price = 100/3 x 3/400 = 1/4
Q. 16. KP Ltd. invoices goods to its Kanpur Branch at 20% less than list price which is
cost plus 100% with instructions that cash sales are to be made at invoice price and
credit sales at catalogue price (i.e. list price).
From the following particulars for the year ended 31st March, 2013, prepare Kanpur
Branch and Goods sent to Branch accounts: [2024 Nov.
Branch Stock as on 1-4-2012 at invoice price Rs. 60,000
Branch Debtors on 1-4-2012 Rs. 15,000
Goods sent to Branch during the year at invoice price Rs. 3,00,000
Branch expenses paid by HO Rs. 18,000
Goods returned by Branch to HO at invoice price Rs. 36,000
Cash Sale Rs. 1,70,000
Credit Sale Rs. 1,20,000
Goods returned by credit customers Rs. 20,000
Normal loss at invoice price Rs. 6,000
Loss by fire at invoice price Rs. 12,ooo
Claim accepted by insurance company Rs. 8,000
Branch Bad debts Rs. 7,000
Cash received from debtors Rs. 80,000
Discount allowed Rs. 3,000
Branch stock at invoice price as on 31-3-2013 Rs. 56,000
Branch debtors on 31-3-2013 Rs.
Sol. Note: Let the Cost = Rs. 100
then, List price = Rs. 100 + 100% = Rs. 200
and. Invoice price = 200 - 20% = 200 - 40 = Rs. 160
Load on Invoice Price = Profit/Invoice Price = 60/160
Kanpur Branch Account
Particulars Rs. Particulars Rs.
To Balance b/d: By Balance b/d:
Branch Stock 60.000 Stock Reserve (Rs. 60,000 x 22,500
60/160)
Branch Debtors 15,000 By Goods sent to Branch
(Loading)
To Goods sent to Branch 3,00,000 (Rs. 3,00,000 x 60/160) 1,12,500
To Cash (Expenses) 18,000 By Goods sent to Branch 36,000
To Goods sent to Branch By Branch Cash*2 2,50,000
(Loading)
(Rs. 36.000 * 60/160) 13,500 By Balance c/d:
To General Profit & Loss A/c 82,500 Insurance Company 8,000
To Balance c/d: Branch Stock 56,000
Stock Reserve (Rs. 56,000 x 21,000 Branch Debtors^ 25,000
60/160)
5,10,000 5,10,000
Dr. Goods sent to Branch Account Cr.
Particulars Rs. Particulars Rs.
To Kanpur Branch A/c 1,12,500 By Kanpur Branch A/c 3,00,000
To Kanpur Branch A/c 36,000 By Kanpur Branch A/c 13,500
To Purchase (Balancing figure) 1,65,000
3,13,500 3,13,500
Working notes:
 *1 Dr. Branch Debtors Account Cr.
Particulars Rs. Particulars Rs.
To Balance b/d 15.000 By Branch Stock (Return) 20,000
To Sales (Branch Stock) 1,20,000 By Bad Debts 7,000
By Discount 3.00C
By Branch Cash A/c 80,000
By Balance c/d (Balancing 25,000
Figure)
1,35,000 1,35,000
*2 Dr. Branch Cash Account Cr.
Particulars Rs. Particulars Rs.
To Sales (Branch Stock) 1,70,000 By Cash Remittance (Balancing 2,50,000
figure)
To Branch Debtors 80,000
2,50,000 2,50,000
Q. 17. The following is the Trial Balance of Allahabad Branch as at 31 st March, 2013: 2024
Nov.
Particulars Dr. (Rs.) Cr. (Rs.)
Delhi Head Office 64,000 —
Stock (1-4-2012) 1,10,000 —
Purchases 3,78,000 —
Goods received from HO 1,60,000 —
Sales — 8,28,000
Goods returned to HO — 30,000
Salaries 35,000 —
Debtors 71,000 —
Creditors — 42,000
Rent 11,000 —
Office Expenses 34,500 —
Cash in hand and at Bank 8,500 —
Furniture 12,000 —
Machinery 16,000 —
9,00,000 9,00,000
Closing stock was valued at Rs. 38,000. The Branch Account in the Head Office books stood
at Rs. 6,000 (Debit balance) on 31 st March, 2013. The difference in balances of H.O. and
Branch was caused by goods in transit.
You are required to prepare Trading and Profit and Loss Account and pass journal entries to
incorporate the Trial Balance of the Branch in the books of Head Office.
Sol. Goods in Transit = Rs. 64,000 (Dr.) H.O. A/c + Rs. 6,000 (Dr.) Branch A/c
= Rs. 70,000
Trading and Profit & Loss Account
for the year ended 31-3-2013
Particulars Rs. Particulars Rs.
To Branch A/c: By Branch A/c:
Opening Stock 1,10,000 Sales 8,28,000
Purchases 3,78,000 Goods Returned 30,000
To Goods sent to Branch Closing Stock 38,000
(1,60,000 + 70,000) 2,30,000 7,18,000 Goods-in-transit 70.000 9,66,000
To Branch Profit and Loss A/c 2,48,000
9,66,000 9,66,000
To Branch A/c: By Branch Trading 2,48,000
A/c
Salaries 35,000
Rent 11,000 -
Office Expenses 34,500 80,500
To General Profit and Loss A/c 1,67,500
2,48,000 2,48,000
Dr. Branch Account Cr.
Particulars Rs. Particulars Rs.
To Balance b/d 6,000 By Branch Trading A/c 7,18,000
To Branch Trading A/c 9,66,000 By Branch Profit and Loss A/c 80,500
To Branch Creditors A/c 42,000 By Branch Assets (Sundries) A/c 2,15,500
 10,14,000 10,14,000
In the Books of Head Office Journal Entries
Date Particulars L.F. Dr. (Rs.) Cr. (Rs.)
Branch Trading A/c Dr. 7,18,000
To Branch A/c 7,18,000
(Being incorporation of opening stock Rs. 1,10,000;
Purchases
73,78,000 and Goods sent to Branch Rs.
2,30,000)
Branch A/c Dr. 9,66,000
To Branch Trading A/c 9.66,000
(Being incorporation of Sales Rs. 8,28,000; Goods
returned
Rs. 30,000, Closing Stock Rs. 38,000 & Goods-in-
transit Rs. 70,000)
Branch Trading A/c Dr. 2,48,000
To Branch Profit & Loss A/c 2,48,000
(Being the entry for transfer of gross profit)
Branch Profit & Loss A/c Dr. 80,500
To Branch A/c 80,500
(Being incorporation of Salary Rs. 35,000;
Rent Rs. 11,000
and Office Expenses Rs. 34,500)
Branch Profit & Loss A/c Dr 1,67,500
To General Profit & Loss A/c 1,67,500
(Being the transfer of branch net profit)
Goods-in-transit A/c Dr. 70,000
Debtors A/c Dr. 71,000
Cash in hand/Bank Dr. 8,500
Furniture A/c Dr. 12,000
Machinery A/c Dr. 16,000
 Closing Stock Dr. 38,000
To Branch A/c 2,15,500
(Being the incorporation of Branch Assets)
Branch A/c DR. 42,000
To Creditors A/c 42,000
(Being the incorporation of branch liabilities)
In the Books of Branch Journal
Date Particulars L.F. Dr. (Rs.) Cr. (Rs.)
Goods-in-transit A/c Dr. 70,000
To Head Office A/c 70,000
Q. 18. (a) Vaani Music System invoices goods to its Faridabad branch at cost plus 20%.
During the accounting year 2014-15, Vaani Music System invoiced goods amounting Rs.
15,000 were damaged in transit and insurance company admitted the claim of Rs.
15,000. Show the treatment of loss in the books of Head Office under:
(i) Debtors System
(ii) Stock and Debtors System [2015
(b) Saksham Ltd. has its branch at Mumbai to which goods are invoiced at cost plus
20%. Prepare Branch Account in the books of the head office after taking into
consideration the following information:
Opening Stock at Branch Rs. 72,000
Cash Sales at Branch Rs. 52,500
Credit Sales at Branch Rs. 1,23,000
Collections from Branch debtors Rs. 1,13,700
Goods received from head office Rs. 90,000
Branch Expenses:
Paid by Head Office Rs. 9,000
Paid by Branch Rs. 18,000
Expenses unpaid Rs. 4,200
Closing Stock at Branch Rs. 54,000
Closing Balance of Bills Receivable at Branch Rs. 3,000
Closing Balance of Branch debtors Rs. 24,480
Goods sent from head office to Branch remaining in
transit on closing day Rs. 10,800
Sol, (a)
Working note:
Selling price (Invoice Price) = Cost + 20%
Let the Cost of good be Rs. 100
Then Selling Price, 100 + 20 = Rs. 120
20% Profit on Invoice Price = 20/120 = 1/6
In the Books of Head Office Journal of Faridabad Branch
(i) Debtors System
S.No. Particulars L.F. Dr. (Rs.) Cr. (Rs.)
1 Abnormal Loss A/c Dr. 15,000
To Branch A/c 15,000
(Being goods damaged in transit)
2 Insurance claim A/c Dr. 15,000
To Abnormal Loss A/c 15,000
(Being ciaim received from Insurance
company)
(ii) Stock & Debtors System
S.No. Particulars L.F. Dr. (Rs.) Cr. (Rs.)
1 Abnormal Loss A/c Dr. 15,000
To Branch Stock A/c 15,000
(Being goods damaged in transit)
2 Branch Adjustment A/c (Rs. 15,000 * 1/6) Dr. 2,500
Branch Profit & Loss A/c (Cost) Dr. 12,500
To Abnormal Loss A/c 15,000
(Being Abnormal loss adjusted)
3 Insurance Claim A/c Dr. 15,000
To Branch Profit & Loss A/c 15,000
(Being claim received from Insurance
company)
(b) In the books of Head Office
 Dr. Mumbai Branch Account Cr.
Particulars Rs. Particulars Rs.
To Balance b/d By Stock Reserve A/c (Rs.
72,000x1/6)
Stock 72,000 (Opening Stock Load) 12,000
Debtors 18,180 90,180 By Goods sent to Branch (Load)
To Goods sent to Branch (Rs. 1,00.800 x 1/6) 16,800
(Including Rs. 10,800 in transit) 1,00,800 By Cash A/c (Remittance):
To Bank A/c (Expenses paid by 9,000 Cash Sales 52,500
HO)
To Stock Reserve A/c Less: Expenses paid by
Rs.(54,000 + 10,800) x 1/6 10,800 Branch (18,000)
To Balance c/d (Expenses 4,200 Collection from Debtors 1,48,200
unpaid) 1,13,700
To Profit & Loss A/c (Profit) 54,300 By Balance c/d:
Stock 54,000
Goods in transit 10,800 64,800
By Bills Receivable 3,000
By Debtors 24,480
2,69,280 2,69,280
Dr. Memorandum Branch Debtors Account Cr.
Particulars Rs. Particulars Rs.
To Balance b/d (Balancing 18,180 By Cash A/c 1,13,700
figure)
To Credit Sales A/c 1,23,000 By Bills Receivable 3,000
By Balance c/d 24,480
1,41,180 1,41,180
Q. 19. Nitin Bros, has a branch at Allahabad. Goods are invoiced at cost plus 25%.
From the following particulars, prepare Branch Adjustment and Profit and Loss
Account and Branch Account for the year ended 31 st March 2015:
Balances as on April 1, 2014: Branch Stock (Invoice Price) Rs. 12,500
Branch Debtors Rs. 8,500
Branch Cash Rs. 2,000
Balances as on March 31, 2015: Branch Stock (Invoice Price) Rs. 29,925
Branch Debtors Rs. 11,960
Branch Cash Rs. 4,500

Transactions during 2014-15:

Goods invoiced to Branch 1,62,500
Goods returned by Branch to Head Office 6,250
Cash remitted to Head Office Rs.
Credit Sales at Branch 87,500
Cash sales at Branch 51,250
Cash received from Debtors of branch 78,650
Bills Receivable received from debtors at branch 5,000
Amount received by branch on discounting of the above mentioned bills 4,900
Cash sent to branch for expenses 18,000
Actual cash expenses at branch 17,950
Shortage of stock at branch (Invoice Price) 75
Cash discount allowed to branch customers 390
Make a provision for bad and doubtful debts ® 5% of the debtors.
Sol. In the books of Head Office
Dr. Allahabad Branch Adjustment Account Cr.
Particulars Rs. Particulars Rs.
To Stock A/c Reserve (Load on By Stock Reserve A/c (Load on
Closing stock) (Rs. 29,925 x 1/5) 5,985 Opening stock) (Rs. 12,500 x 2,500
1/5)
To Goods sent to Branch A/c By Goods sent to Branch A/c
(Load on Returned goods) (Load) (Rs. 1,62,500 x 1/5) 32,500
(Rs. 6,250 x 1/5) 1,250
To Shortage (Load) (775 x 1/5) 15
To Gross Profit transf. to P&L 27,750
A/c
 35,000 35,000
Dr. Allahabad Branch Profit & Loss Account Cr.
Particulars Rs. Particulars Rs.
To Discount (Bills Receivable) 100 By Gross Profit b/d 27,750
To Expenses (Actual) 17.950
To Shortage (Cost) 60
To Discount allowed 390
To Provision for Bad Debts
(Rs. 119,60 x 5/100) 598
To Net Profit 8,652
27,750 27,750
Working notes:
Dr. Allahabad Branch Cash Account Cr.
Particulars Rs. Particulars Rs.
To Balance b/d 2,000 By Expenses (Actual) 17,950
To Sales 51.250 By HO (Remittance) (Balancing 1,32,350
figure)
To Debtors 78,650 By Balance c/d 4,500
To Bills Receivable 4.900
To Branch (for expenses) 18,000
1,54,800 1,54,800
Selling price (Invoice Price) = Cost + 25%. Let the cost of good be = Rs. 100. Therefore, then
Selling price 100 + 25 = 125. 25% Profit on Invoice Price = 25/125 = 1/5
In the books of Head Office
Dr. Allahabad Branch Account Cr.
Particulars Rs. Particulars Rs.
To Balance b/d: By Stock Reserve A/c (Load)
Stock 12,500 (Rs. 12,500 x 1/5) 2,500
Debtors 8,500 By Goods sent to Branch (Load)
Cash 2,000 23,000 (Rs. 1,62.500 x 1/5) 32,500
To Goods sent to Branch 1,62,500 By Cash A/c (Remittance) 1,32,350
To Goods sent to Branch By Goods sent to Branch 6,250
(Returns)
(Return load) (6.25C x 1/5) 1,250 By Balance c/d:
To Cash (sent by Branch for exp.) 18,000 Stock 29,925
To Stock Reserve A/c (Load on Debtors 11,960
closing stock) (Rs. 29,925 x 1/5) 5,985 Prov. for Bad Debts (598)
To Profit & Loss A/c (Profit) 8,652 Cash 4,500 45,787
2,19,387 2.19.387
Notes: There is no need to make Memorandum Debtors Account because the Opening &
Closing Balance of Debtors is given.
 UNIT
V
Accounting for Dissolution of The Partnership Firm
Q. 1. A, B and C are partners in a firm sharing profits and losses in the ratio of 2 : 2 :1.
They decided to dissolve and appoint B to realise the assets and distribute the proceeds
for which he is to receive as his remuneration 5% of the amounts ultimately paid to A
and C but in lieu of this he is to bear all expenses of realisation. The Balance Sheet of
the firm on the date of dissolution is as under: [2008
Liabilities Rs. Assets Rs.
Creditors 1,317 Debtors 4,229
A's Capital 3,960 Less: Provision 211 4,018
B's Capital 2,970 Stock 1,872
Cash 290
Other assets 1,710
C (overdrawn) 357
8,247 8,247
B informs of the following realisations:
Debtors Rs. 3,462, Stock Rs. 1.444, Goodwill Rs. 50 and Other assets Rs. 914.
Creditors which were not recorded in books are now paid Rs. 100.
The expenses of realisation amount to Rs. 310. C is able to contribute only Rs. 100 beyond
which he expresses his inability. Commission payable to B is to be treated as business
expenses.
Close the books of the firm.
Sol. Dr. Realisation Account Cr.
Particulars Rs. Particulars Rs.
To Sundry Assets: By Creditors 1,317
Debtors 4,229 By Provision for Doubtful Debts 211
Stock 1.872 By Cash A/c:
Others 1,710 7,811 Debtors 3,462
To Cash A/c (Creditors paid) 1,417 Stock 1,444
[Rs. 1,317 + Rs. 100] Goodwill 50
To B's Capital A/c*, 140 Other Assets 914 5,870
(Commission)
By Loss to Capital A/c:
A 788
B 788
394 1,970
9,368 9,368
Dr. Cash Account Cr.
Particulars Rs. Particulars Rs.
To Balance b/d 290 By Realisation A/c (creditors) 1,417
To Realisation A/c (Assets) 5,870 By A's Capital A/c*1 2,800
To C's Capital A/c 100 By B's Capital A/c 2,043
6,260 6,260
Dr. Partners' Capital Accounts Cr.
Particulars A B C Particulars A B C
Rs. Rs. Rs. Rs. Rs. Rs.
To Balance b/d — — 357 By Balance b/d 3,960 2,970 —
To Realisation A/c 788 788 394 By Cash A/c — — 100
To C's Capital 372 279 — By Realisation — 140 —
A/c*2 A/c
To Cash A/c 2,800 2,043 — (Commission)
By A's Capital — — 372
A/c
By B's Capital — — 279
A/c
3,960 3,110 751 3,960 3,110 751
Working notes:
*1 Calculation of Commission Payable to B:
(a) B's Commission is 5% of amounts ultimately paid to A and C, therefore the actual
expenses
on Realisation are to be ignored.
Here ultimately nothing is being paid to C, hence B's commission is to be 5% of the amount
finally paid to A.
Let B's commission be denoted by 'x'.
We can find the realisation loss before taking into account B's commission. It is Rs. 1,830 as
shown in the following Realisation Account:
Dr. Realisation Account Cr.
Particulars Rs. Rs. Particulars Rs. Rs.
To Sundry Assets: By Creditors 1,317
Debtors 4,229 By Provision for Doubtful Debts 211
Stock 1,872 By Cash A/c:
Others 1,710 7,811 Debtors 3,46
2
To Cash A/c (Creditors Paid) Stock 1,44
4
(Rs. 1,317 + Rs. 100) 1,417 Goodwill 50
Other Assets 914 5,870
By Loss (before B's 1,830
Commission)
(Balancing figure)
9,228 9,228
Loss after B's commission = Rs. 1,830 + (x)
A's Share of this loss = 2/5 [Rs. 1/830 + (x)] or Rs. 732 + (2x/5)
B's Share of this loss = 2/5 [Rs. 1/830 + (x)] or Rs. 732 + (2x/5)
C's Share of this loss = 1/5 [Rs. 1,830 + (x)] or Rs. 366 + (x/5)
(b) Calculation of loss because of C's insolvency (inability)
C's overdrawn Balance Rs. 357
Add: C's Share of loss Rs. 366 + (x/5)
= Rs. 723 + (x/5)
Less: C's Contribution Rs. 100
= Rs. 623 + (x/5)
Loss borne by A and B in their Capital Ratio,
i.e., Rs. 3,960 : Rs. 2,970 or 4 : 3 (Garner VS. Murray)
A's Share in this loss (deficiency) = 4/7 of Cs insolvency (inability), i.e., 4/7[+ 623 + (x/5)]
Thus, amount finally paid to A is as under:
A's Capital = Rs. 3,960
Less: Realisation loss = Rs. 732 + (2x/5)
Less: C's Loss (deficiency) = 4/7 [+ 623 + (x/5)
B's Commission, i.e., (x) is: x = 5/100 [Rs. 3,960 - (Rs. 732 + 2x/5) - 4/7 (Rs. 623 + x/5)]
or x = 1/20 [Rs. 3,960 - Rs. 732 - 2x/5 - 2,492/7 - 4x/35]
or X = 1/20 [Rs. 1,38,600 - Rs. 25,620 - 14x - Rs. 12,460 - 4x/35]
or 20x = Rs. 1,00,520 -18x/35 or 700x = Rs. 1,00,520 - 18x
or 718x = Rs. 1,00,520 or 'x' = Rs. 140 (B's commission)
which is otherwise also 5% of Rs. 2,800 finally paid to A.
*2 A's share in C's loss (deficiency) = 4/7 [Rs. 623 + (140/5)] = Rs. 372
B's share in Cs loss (deficiency) = 3/7 [Rs. 623 + (140/5)] = Rs. 279
Q. 2. Ram, Shyam and Mohan are in partnership sharing profits and losses in the ratio of 3 : 2
:1 respectively. They decided to dissolve the business on 31-12-2006 on which date their
Balance Sheet was as follows: [2008
Liabilities Rs. Assets Rs.
Capital A/cs: Land & Building 30,810
Ram 35,700 Motor Car 5,160
Shyam 8,680 Investments 1,080
Mohan 10,100 54,480 Stock 19,530
General Reserve 6,000 Debtors 11,280
Mohan's Loan A/c 3,000 Cash 5,940
Creditors 10,320
73,800 73,800
The assets were realised as follows and it was agreed that cash should be distributed as and
when received:
2007 Rs.
15th January 10,380
20th February 27,900
23rd March 3,600
15th April Mohan took over investments at a value of 1,260
27th April 19,200
Dissolution expenses were originally estimated at Rs. 2,700 but actual amount spent on 23rd
March, 2007 was Rs. 1,920. The creditors were settled for Rs. 10,080.
You are required to prepare a statement showing distribution of cash amongst the partners on
piecemeal basis using maximum loss method.
Sol.
Note:
* Partners' Capital should be considered after adjustment of General Reserve:
A B C
Rs. Rs. Rs.
Capital Balance (as on 31-12-2006) 35,700 8,680 10,100
Add: Reserve Fund Rs. 6,000 3,000 2,000 1,000
38,700 10,680 11,100
Detailed Statement of distribution of Cash among Partners
Details Creditor Mohan' Ram's Shyam's Mohan's
s s Loan
Capital Capital Capital
Rs. Rs. Rs.
Balance on 1.1.2008 10,320 3,000 38,700 10,680 11,100
Cash in hand 5,940
Less: Provision for expenses 2,700
Cash paid to creditors 3,240 3,240
Balance due 7,080 3,000 38,700 10,680 11,100
Realisation on 15.1.2008 10380
Paid to Creditors 6,840
Paid to Mohan's loan 3,000 6,840 3,000
240 X 38,700 10,680 11,100
Discount allowed by creditors 240
Balance due X X 38,700 10,680 11,100
Maximum loss:
= Rs.(38,700 + 10,680 + 11,100 - 540) = Rs.
59,940
Distribute among partners in profit sharing
ratio (3:2:1) 29,970 19,980 9,990
8,730 (9,300) 1,110
Shyam's Capital deficiency be allocated
between
Ram and Mohan in their Capital Ratio (129 : (7,227) 9,300 (2,073)
37)
1,503 X (963)
Mohan's Capital deficiency be borne by Ram (963) X 963
540 X X
Balance cash available be paid to Ram 540
Balance due on 20.2.2008 38,160 10,680 11,100
Maximum Loss: Rs.(59,940 - 27,900) = Rs.
32,040
Distribute among partners in Profit Sharing
Ratio
(3:2:1) 16,020 10,680 5,340
Sharing Ratio 22,140 X 5,760
Balance at credit and available cash paid 22,140 X 5,760
Balance due on 23.3.2008 16,020 10,680 5,340
Maximum loss: = Rs.(32,040 - 3,600) = Rs.
28,440
Distribute among partners in Profit Sharing 14,220 9,480 4,740
Ratio
Sharing Ratio 1,800 1,200 600
Balance at credit and available cash paid 1,800 1,200 600
Balance due on 29.3.2008 14,220 9,480 4,740
Maximum Loss = Rs.(28,440 - 780) = Rs.
27,660
Distribute among all partners in Profit
Sharing Ratio (3:2:1) 13,830 9,220 4,610

Sharing Ratio 390 260 130

Balance at credit and available cash paid 390 260 130
Balance due on 15.4.2008 13,830 9,220 4,610
Investments taken over by Mohan at Rs. 1,260 1,260
Balance due on 27.4.2008 13,830 9,220 3,350
Cash Rs. 6,300 paid to Ram and Shyam in
the ratio of value of Investments 3,780 2,520
Balance Due 10,050 6,700 3,350
Maximum Loss: Rs. 20,100 - Rs.(19,200 -
6,300]
= Rs. 7,200
Distribute among all partners in Profit
Sharing Ratio (3:2:1) 3,600 2,400 1,200
Balance at credit and available cash paid 6,450 4,300 2,150
Balance still unpaid (Deficiency) 3,600 2,400 1,200
* Since the method of distribution cash among partners is not specified, the question can also
be solved by Proportionate Capital Method.
Alternate Solution Proportionate or Surplus Capital Method Determination of Surplus
Capital
Details Ram Shyam Mohan
Rs. Rs. Rs.
Capital Claim (Including General Reserve) 38,700 10,680 11,100
Profit sharing ratio 3 2 1
Capital in the profit sharing ratio taking Shyam's Capital as base,
being the
minimum per unit of profit LB., 3:2:1 16,020 10,680 5,340
Surplus Claim 22,680 X 5,760
Between Ram and Mohan, Mohan's Capital is lesser. Taking
Mohan's
Capital as base, proportionate Capital of Ram and Mohan 17,280 X 5,760
Ultimate Surplus Capital to be paid first 5,400 X X
Next Rs. 23,040 (i.e. Rs. 17,280 and Rs. 5,760) to be paid in the ratio of 3 :0 :1.
All other realisations will be paid in the ratio of 3 : 2 : 1.
Statement showing the distribution of Proceeds of Realisation (According to
Proportionate Capital Method)
Details Creditors Loan Ram Shyam Mohan
Rs. Rs. Rs. Rs. Rs.
A. Balance Due (including General Reserve) 10,320 3,000 38,700 10,680 11,100
B. Paid to Creditors (Rs. 5,940 - Rs. 2,700) 3,240
C. Balance Due (A - B) 7,080 3,000 38,700 10.680 11,100
D. Amount paid on 15th January 6,840 3,000 540
240 X 38,160 10,680 11,100
E. Less written off 240 X
F. Balance Due (D - E) X X 38,160 10.680 11,100
G. (i) Amount paid on 20th February out of cash
realised Rs. 27,900, Rs. 4,860 be paid first to
Ram
so that Ram and Mohan's Capitals are in
their Profit Sharing Ratio 4,860
33,300 10,680 11,100
(ii) Balance Rs. 23,040 (Rs. 27,900 - Rs. 4,860)
to be paid
to Ram & Mohan in their Profit Sharing Ratio 17,280 5,760
3:1
H. Balance Due (F - G) 16,020 10,680 5,340
I. Amount paid on 23rd March - Cash realised
Rs. 3,600
be paid to partners in the ratio of 3 : 2 :1 1,800 1,200 600
J. Balance Due (H -1) 14,220 9,480 4,740
K. Amount paid on 28 th March (being excess
over the
estimated expenses Rs. 780) in the ratio of 3 : 2 390 260 130
:1
L. Balance Due (J - K) 13,830 9,220 4,610
M. Investment taken over by Mohan 1,260
N. Balance Due (L - M) 13,830 9.220 3,350
Out of cash realised Rs. 9,200, Rs. 6.300*1 be
paid to Ram
& Shyam in the ratio of value of investment i.e.
3 : 2, so that all partners' capitals become in their
Profit Sharing Ratio 3,780 2,520
10,050 6,700 3,350
Remaining cash Rs. 12,900 to be paid to partners
in
their Profit Sharing Ratio 6,450 4,300 2,150
Final Loss to Partners 3,600 2,400 1,200
Working notes:
*1 Value of Investment taken over by Mohan = Rs. 1,260
Mohan's share = 1/6
Total amount to be adjusted = Rs. 1,260 x 6 = Rs. 7,560
Out of this, investment worth Rs. 1,260 is taken over by Mohan Remaining amount Rs. 6,300
(i.e., Rs. 7,560 - Rs. 1,260) to be paid to Ram and Shyam in their profit sharing ratio 3 : 2.
Q. 3. A, B and C were partners sharing profits and losses in the ratio of 3 : 2 :1. On 31 st
March, 2013, their Balance Sheet was as follows:
Liabilities Rs. Assets Rs.
Sundry Creditors 30,000 Cash at Bank 9,500
Bills Payable 5,000 Stock 15,500
As Loan 6,000 Sundry Debtors 32,000
Reserve Fund 12,000 Furniture 5,000
Profit & Loss A/c 6,000 Plant 21,000
Capital Accounts: A's Drawings 4,000
A 20,000 B's Drawings 1,000
B 15,000 C's Capital A/c 6,000
94,000 94,000
The firm was dissolved on that date. Assets realised as follows:
Stock-Rs. 12,200; Debtors -Rs. 30,100 and Furniture realised -Rs. 4,200. Plant was taken
over by A at Rs. 18,000. A contingent liability for bill discounted is settled at Rs. 600.
Realisation expenses amounted to Rs. 600. C is isolvent and only Rs. 1,900 could be
recovered from his private estate. Prepare necessary Ledger Accounts to close the books
of the firm. Apply Garner vs. Murray.
Sol. Dr. Realisation Account Or.
Particulars Rs. Particulars Rs.
To Stock A/c 15,500 By Creditors 30,000
To Sundry Debtors A/c 32,000 By Bills Payable 5,000
To Furniture A/c 5,000 By Bank A/c:
To Plant A/c 21,000 Stock 12,200
To Bank A/c: Debtors 30,100
Furniture 4,200 46,500
By As Capital A/c 18,000
(Plant)

b/f 73,500 99,500

Sundry Creditors 30,000 By Loss (Rs. 10,200) transferred
to:
Bills Payable 5,000 A's Capital A/c 5,100
Contingent Liability 600 B's Capital A/c 3,400
Expenses on Realisation 600 36,200 C's Capital A/c 1,700 10,200
1,09,700 1,09,700
Dr. A's Loan Account Cr.
Particulars Rs. Particulars Rs.
To Bank A/c 6,000 By Balance b/d 6,000
Dr. C's Capital Account Cr
Particulars Rs. Particulars Rs.
To Balance b/d 6,000 By Reserve Fund 2,000
To Realisation A/c (Loss) 1,700 By Profit & Loss A/c 1,000
By Bank A/c 1.900
By A's Capital A/c*1 1,556
By B's Capital A/c*1 1,244
7,700 7,700
Dr. A's Capital Account Cr.
Particulars Rs. Particulars Rs.
To Drawing A/c 4,000 By Balance b/d 20,000
To Realisation A/c 18,000 By Reserve Fund 6,000
To Realisation A/c (Loss) 5,100 By Profit & Loss A/c 3,000
To C's Capital A/c 1,556 By Bank A/c 5,100
To Bank A/c 5,444
34,100 34,100
Dr. B's Capital Account Cr
Particulars Rs. Particulars Rs.
To Drawing A/c 1,000 By Balance b/d 15,000
To Realisation A/c (Loss) 3,400 By Reserve Fund 4,000
To C's Capital A/c 1,244 By Profit & Loss A/c 2,000
To Bank A/c 18,756 By Bank A/c 3,400
24,400 24,400
Dr. Bank Account Cr.
Particulars Rs. Particulars Rs.
To Balance b/d 9,500 By Realisation A/c (Creditors) 36,200
To Realisation A/c 46,500 By A's Loan A/c 6,000
To A's Capital A/c 5,100 By A's Capital A/c 5,444
To B's Capital A/c 3,400 By B's Capital A/c 18.756
To C's Capital A/c 1,900
66,400 66,400
Working notes: *1, Capital deficiency of C = Rs. 2,800.
Capital deficiency of C will be borne by A and C in the ratio of their Capital which stood
before the date of dissolution, i.e.. 5 : 4 calculated as follows:
A(Rs.) B(Rs.)
Balance b/d 20,000 15,000
Reserve Fund 6,000 4,000
Profit & Loss A/c 3,000 2,000
29,000 21,000
Less: Drawings 4,000 1,000
Capital 25,000 20,000
Q. 4. AB Ltd. was formed to acquire the business of A and B who share profits in the
ratio of 3 : 2 respectively. The Balance Sheet of A and B as on 31 st December, 2008 was
as under: [2009
Liabilities Rs. Assets Rs.
Capital Accounts: Land & Building 40,000
A 64,000 Machinery 20,000
B 40,000 Stock 24,000
Mrs. A's Loan 3,200 Debtors 23,200
Bills Payable 7,200 Bills Receivable 6,400
Sundry Creditors 21,600 Investments 4,800
Cash at Bank 9,600
Goodwill 8,000
1,36,000 1,36,000
It was agreed by the company to take over the assets at book value with the exception of land
and building, stock and goodwill which are taken over at Rs. 45,000, Rs. 20,000 and Rs.
28,800 respectively. The investments were retained by the firm and sold for Rs. 4,000. The
firm discharged the loan of Mrs. A. The company took over the remaining liabilities. The
purchase consideration was discharged by issuing 10,000 equity shares of Rs. 10 each in AB
Ltd. and the balance was paid in cash. Close the books of the firm assuming that shares are
distributed amongst partners in their profit sharing ratio.
Sol. Dr. Realisation Account Cr.
Particulars Rs. Particulars Rs.
To Land & Building 40,000 By Bills Payable A/c 7,200
To Machinery 20,000 By Sundry Creditors 21,600
To Stock 24,000 By AB Ltd.
To Debtors 23,200 (Purchase consideration)*, 1,24,200
To Bills Receivable 6,400 By Bank A/c (Investment) 4,000
To Investments 4,800
To Cash at Bank 9,600
To Goodwill 8,000
To Profit (Rs. 21,000) transferred to
A's Capital A/c 12,600
B's Capital A/c 8.400 21,000
1,57,000 1,57,000
Dr. AB Ltd. Account Cr.3
Particulars Rs. Particulars Rs.
To Realisation A/c 1,24,200 By Shares in AB Ltd. 1,00,000
By Bank A/c 24,200
1,24,200 1,24,200
Dr. Shares in AB Ltd. Account Cr.
Particulars Rs. Particulars Rs.
To AB Ltd. 1,00,000 By A's Capital A/c 60,000
By B's Capital A/c 40,000
1,00,000 1,00,000

Dr. Mrs. A's Loan AccountCr.

Particulars Rs. Particulars Rs.
To Bank A/c 3,200 By Balance b/d 3,200
3,200 3,200

Dr. Partners' Capital Accounts Cr.

Particulars A B Particulars A B
To Shares in AB Ltd. 60,000 40,000 By Balance b/d 64,000 40,000
To Bank A/c 16,600 8,400 By Realisation A/c 12,600 8,400
76,600 48,400 76,600 48,400

Dr. Bank Account Cr.

Particulars Rs. Particulars Rs.
To Balance b/d 9,600 By Realisation A/c 9,600
To AB Ltd. 24,200 By Mrs. A's Loan 3,200
To Realisation A/c 4.000 By A's Capital A/c 16,600
By B's Capital A/c 8,400
 37,800 37,800
Working notes:
*1 Calculation of Purchase Consideration
Rs.
Land & Building 45,000
Stock 20,000
Machinery 20,000
Debtors 23,200
Bills Receivable 6,400
Bank 9,600
Goodwill 28,800
1,53,000
Less: Bills Payable 7,200
Creditors 21,600 28,800
1,24,200
Q. 5. A, B and C shared profits and losses in the ratio of 5 : 3 : 2 respectively. On 31 st
March, 2013 their Balance Sheet was as follows: [2020
Liabilities Rs. Assets Rs.
A Capital A/c 60,000 Furniture 22,000
B's Capital A/c 40,000, Stock 96,000
C's Capital A/c 20,000 Cash 2,000
Creditors 60,000 Profit & Loss A/c 80,000
Bank Loan 20,000
2,00,000 2,00,000
The bank had a charge on all the assets.
Furniture realised Rs. 6,000 and stock was sold for Rs. 50,000. B's private estate realised Rs.
12,000 and his private liabilities were Rs. 10,000. C was unable to contribute anything. A
paid one-third of what was due from him on his own account.
Prepare Realisation Account, Cash Account and Partners' Capital Accounts, passing all
matters relating to realisation of assets and payment of liabilities through Realisation
Account.
Sol.
Working notes: Suppose A will contribute x amount.
Dr. Memorandum Realisation Account Cr.
Particulars Rs. Particulars Rs.
To Sundry Assets: By Creditors 60,000
Furniture 22,000 By Bank Loan 20,000
Stock 96,000 1,18,000 By Cash A/c (Assets 56.000
Realised)
To Cash A/c (Bank 20,000 By Loss:
Loan)
To Cash A/c (Creditors) 40.000 +x A 21,000 + %
B 12,600+ 3x/10
C 8,400 + 2*/10 42,000 + x
1.78,000 + 1,78,000+ x
x
Dr. Memorandum Cash Account _ Cr.
Particulars Rs. Particulars Rs.
To Balance b/d 2,000 By Realisation A/c
To Realisation A/c 56,000 (Bank Loan) 20.000
To B's Capital A/c Rs.[12,000 - 2,000 By Realisation A/c (Creditors) 40,000*%
10,000]
To As Capital A/c X (Balancing figure)
60,000 +x 60,000+x
Dr. Memorandum A's Capital Account Cr.
Particulars Rs. Particulars Rs.
To Profit & Loss A/c (Loss) 40,000 By Balance b/d 60,000
To Realisation A/c (Loss) 21,000 + By Balance c/d 1,000 + x/2
5x/10
61.000 + 61,000 + x/2
5x/10

A contributed 1/3 of (1,000 + x/2) (1,000/3 + x/6) = x

 2,000 + x = 6x  5x = Rs. 2,000
 x = Rs. 400 Amount contributed by A = Rs. 400
 Dr. Realisation Account Cr.
Particulars Rs. Particulars Rs.
To Sundry Assets: By Creditors 60,000
Furniture 22,000 By Bank Loan 20,000
Stock 96,000 1,18,000 By Cash A/c:
To Cash A/c (Bank 20.000 Furniture 6,000
Loan)
To Cash A/c (Creditors) 40.400 Stock 50,000 56,000
By Loss transferred to:
A's Capital A/c 21,200
B's Capital A/c 12,720
C's Capital A/c 8,480 42,400
1,78,400 1,78,400
Dr. Capital Accounts of Partners Cr.
Particulars A B C Particulars A B C
(Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)
To Realisation A/c By Balance b/d 60,000 40,000 20,000
(Loss) 21,200 12,720 8,480 By Cash 400 2,000 —
To Profit & Loss A/c 40,000 24,000 16,000 By Deficiency 800 — 4,480
A/c
To Deficiency A/c — 5,280 —
61,200 42,000 24,480 61,200 42,000 24,480
Dr. Deficiency Account Cr.
Particulars Rs. Particulars Rs.
To A's Capital A/c 800 By B's Capital A/c 5,280
To C's Capital A/c 4,480
5,280 5,280
Q. 6. A, B and C were partners sharing profits and losses in the ratio of 4 ; 3 :1. Their
Balance Sheet as on 31st March, 2013 was as follows: [2010
Liabilities Rs. Assets Rs.
A's Capital A/c 1,05,000 Building 90,000
B's Capital A/c 45,000 Machinery 30,000
C's Capital A/c 75,000 Stock 82,500
Bank Loan (Secured) 13,500 Debtors 90,000
Creditors 39,000
A's Loan 15,000
2,92,500 2,92,500
They decided to dissolve the business. The assets were realised gradually and the net
amounts were distributed immediately as follows:
2013 Rs. Rs.
May 30 33,000 Expenses paid 3,000
July 30 25,200 Expenses paid 2,200
Sept. 30 57,000 Expenses paid 4,500
Nov. 30 68,000 Expenses paid 8,000
Dec. 31 1,08,000 Expenses paid 10,000
Show the distribution of cash among partners using maximum possible loss method.
Sol. Statement of Distribution of Cash
Bank Creditor A's Loan A's Capital B's C's Capital
Loan s Capital
Rs. Rs. Rs. Rs. Rs. Rs.
Balance as per Balance
Sheet 13,500 39,000 15,000 1,05,000 45,000 75,000
30-05-2013
Net Cash Realised
[33,000 - 3,000] = Rs.
30,000
Bank Loan &
Creditors paid Rs. 13,500 16,500 — — — —
30,000
Balance Due — 22.500 15,000 1,05,000 45,000 75,000
30-07-2013
Net Cash Realised
[25,200 - 2,200] = Rs.
23,000
Paid to Crs.
& A's Loan Rs. 23,000 22,500 500
Balance Due — 14,500 1,05,000 45,000 75,000
30-09-2013
Net Cash Realised
[57,000-4,500] = Rs.
52,500
Paid A's Loan Rs.
14,500
Cash available Rs. 14,500
33,000

Maximum Loss
(Rs. 2,25,000* - Rs.
38,C90)
= Rs. 1,87,000
Distributed among A, B
&C
in the ratio of 4 : 3 :1 (93,500) (70,125) (23,375)
— 11,500 (25,125) 51,625
B's deficiency borne by
A&
C in their Capital Ratio (14,655) 25,125 (10,470)
7:5
(3,155) —, 41,155
As Deficiency to be
borne by C 3,155 (3,155)
Amount Paid to C — — 38,000
Balance Due 1,05,000 45,000 37,000
30-11-2013
Net Cash Realised
[68,000-8,000] = Rs.
60,000
Maximum Loss
(Rs. 1,87,000-Rs.
60,000)
= Rs. 1,27,000
Distributed among
Partners
in the ratio of 4 : 3 :1 (63,500) (47,625) (15,875)
41,500 (2,625) 21,125
B's deficiency to be
borne by A& C in
Capital Ratio, i.e., 7: 5 (1,532) 2,625 (1,093)
Amf. paid to A&C 39,968 — 20,032
Balance Due 65,032 45,000 16,968
01-12-2013
Net Cash Realised
[Rs. 1,08,000 - Rs.
10,000]
= Rs. 98,000
Maximum Loss
(Rs. 1,27,000 - Rs.
98.000)
=Rs. 29,000
Distributed among
partners
in the ratio of 4 : 3 :1 (14,500) (10,875) (3,625)
Paid to A,B&C 50,532 34,125 13,343
Balance unpaid or
Final Loss 14,500 10,875 3,625
(Balance Due - Amount
Paid)
* Rs. 1,05,000 (A's Capital) + Rs. 45,000 (B's Capital) + Rs. 75,000 (Cs Capital) - Rs.
2,25,000
Q. 7. A and B were partners sharing profits and losses in proportion of 3/5 and 2/5
respectively. Their Balance Sheet as on 31st December, 2013 was as under:
Liabilities Rs. Assets Rs.
Bills Payable 3,500 Cash 4,500
Sundry Creditors 6,400 Book Debtors 7,500
Reserve Fund 15,000 Investments 4,000
Capitals: Stock 31,000
A 70,260 Plant & Machinery 50,000
B 46,840 1,17,100 Freehold Premises 45,000
1,42,000 1,42,000
AB Limited was formed with an authorised capital of Rs. 5,00,000 divided into 25,000
equity shares of Rs. 10 each and 25,000 preference shares of Rs. 10 each to acquire the
going concern of A and B upon the following terms:
(i) The company took over all assets except investments. It valued the stock and plant and
machinery at 10 per cent less than the book value and the freehold premises at 20 per cent
more than the book value.
(ii) The liabilities were to be discharged by the company.
(iii) The goodwill of the firm was to be valued at 2 years' purchase of the average profits of 3
years. The working results of the firm showed that it had made profits of Rs. 15,000 in 2010,
Rs. 18,000 in 2011 and Rs. 2l,000 in 2012 after setting aside Rs. 5,000 to reserve fund every
year.
(iv) The purchase price was agreed upon to be paid Rs. 53,000 in fully paid equity shares, Rs.
50,000 in fully paid preference shares, Rs. 30,000 in debentures and the balance in cash.
(v) The partners sold the investments and realised Rs. 4,100.
You are required to prepare in the books of the firm of A and B:
(i) Realisation Account;
(ii) Capital Accounts of the partners; and
(iii) Cash Account,
assuming that shares and debentures are to be distributed in profit sharing ratio, the
final settlement being made in Cash. [2011
Sol. Goodwill = Average profits of last 3 years x 2
Average Profits of last 3 years (Pre-Reserves)
= Rs.[(15,000 + 18,000 + 21,000) + Rs. 15,000 (Reserves)] + 3 .
= Rs. 69,000 - 3 = Rs. 23,000
/. Goodwill = Rs. 23,000 x 2 = Rs. 46,000
Purchase Consideration is calculated as Rs. Rs.
Cash* 4,500
Book Debtors 7,500
Stock (Rs. 31,000 - Rs. 3,100) 27,900
Plant & Machinery (Rs. 50,000 - Rs. 5,000) 45,000
Freehold Premises (Rs. 45,000 + 20% of Rs. 45,000) 54,000
Goodwill 46,000 1,84,900
Less: Bills Payable 3,500
Creditors 6,400 9,900
1,75,000

Working Note:
* Cash is included as company is formed to acquire the Going Concern of A and B.
Above purchase price Rs. 1,75,000 is payable as under: Rs. Rs.
(i) Equity Shares (5,300 @ Rs. 10) 53,000
(ii) Preference Shares (5,000 @ Rs. 10) 50,000
(iii) Debentures 30,000
(iv) Cash (Balance) 42,000 1,75,000
Q. 8. A, B and C were partners sharing profits and losses in the ratio of 3 : 2 :1. On 31 st
December, 2008, their Balance Sheet was as follows: [2011
Balance Sheet
Liabilities Rs. Assets Rs.
Sundry Creditors 30,000 Cash at Bank 9,500
Bills Payable 5,000 Stock 15,500
A's Loan 6,000 Sundry Debtors 32,000
Reserve fund 12,000 Furniture 5,000
Profit & Loss A/c 6,000 Plant 21,000
Capital Accounts:, Drawings Account:
A 20,000 A 4,000
B 15,000 B 1,000
C's Capital 6,000
94,000 94,000
The firm was dissolved on that date. Stock realised Rs. 12,200, Debtors Rs. 30,000 and
Furniture Rs. 4,200. Plant is taken over by A at Rs. 18,000. A contingent liability for bills
discounted materialised to the extent of Rs. 600. Realisation expenses amounted to Rs. 600. C
is insolvent, but his private estate paid Rs. 1,900.
Prepare Realisation Account, Capital Accounts and Bank Account. Apply Garner vs.
Murray rule.
Sol.
Books of Firm
Dr. Realisation Account Cr.
Particulars Rs. Particulars Rs.
To Sundry Assets: By Liabilities:
(per Balance Sheet) (per Balance Sheet)
Stock 15,500 S. Creditors 30,000
Sundry Debtors 32,000 Bills Payable 5,000
Furniture 5,000 A's Loan*2 6,000 41,000
Plant 21,000 73,500 By Bank A/c:
To Bank A/c: Stock 12,200
Sundry Creditors 30,000 Sundry Debtors 30,000
Bills Payable 5,000 Furniture 4,200 46,400
Contingent Liability 600 By A's Capital A/c (Plant) 18,000
Realisation Expenses 600 By Loss on Realisation
transferred to:
A's Loan 6,000 42,200 A's Capital A/c 5,150
B's Capital A/c 3,433
C's Capital A/c 1,717 10,300
1,15,700 1,15,700
Dr. Bank Account Cr.
Particulars Rs. Particulars Rs.
To Balance b/f 9,500 By Realisation A/c:
To Realisation A/c: Sundry Creditors 30,000
Stock 12,200 Bills Payable 5,000
Sundry Debtors 30,000 Contingent Liability 600
Furniture 4,200 46,400 Realisation Expenses 600
To C's Capital A/c 1,900 A's Loan 6,000 42,200
By A's Capital A/c 285
By B's Capital A/c 15,315
57,800 57,800

Dr. A's Capital Account Cr.

Particulars Rs. Particulars Rs.
To Drawings A/c 4,000 By Balance b/f 20,000
4,000 By Reserve Fund 6,000
To Realisation A/c (Plant taken) 18,000 By Profit & Loss A/c 3,000
To Realisation A/c (Loss) 5,150 29,000
To C's Capital A/c 1,565
(Share of C's Capital Deficiency)
To Bank A/c (Balancing figure) 285
29,000 29,000

Dr. B's Capital Account Cr.

Particulars Rs. Particulars Rs.
To Drawings A/c 1,000 By Balance b/f 15,000
1,000 By Reserve Fund 4,000
To Realisation A/c (Loss) 3,433 By Profit & Loss A/c 2,000
To C's Capital A/c 1,252 21,000
(Share of C's Capital Deficiency)
To Bank A/c (Balancing figure) 15,315
21,000 21,000
 Dr. C's Capital Account Cr.
Particulars Rs. Particulars Rs.
To Balance b/f 6,000 By Reserve Fund 2,000
To Realisation A/c (Loss) 1,717 By Profit & Loss A/c 1,000
By Bank A/c 1,900
. By A's Capital A/c*1 [ 5/9 x Rs. 1,565
2,817]
0 By B's Capital A/c*1 [4/9 x Rs. 1,252
2,817]
7,717 7,717
Working notes:
*1 For applying rule of Garner vs. Murray, effective capitals of A and B before the start of
dissolution are Rs. 25,000 and Rs. 20,000 (Above dotted lines in Capital Accounts).
Therefore they contribute for C's deficiency in the ratio 5:4.
*2 A's Loan has been treated through Realisation Account as a liability of the Firm.
Q. 9. Khanak and Nitya were carrying on business. Their Balance Sheet as on 31 st March,
2011 was as follows: [2011
Liabilities Rs. Assets Rs.
Creditors 65,500 Plant & Machinery 1,82,000
Bank Overdraft 30,000 Furniture 15,000
Bills Payable 12,500 Leasehold Premises 34,500
Capital: Joint Life Policy 9,500
Khanak 1,50,000 Stock 54,000
Nitya 1,48,000 Book Debts 73,000
Profit & Loss A/c 26,000
Drawings:
Khanak 9,000
Nitya 3,000
4,06,000 4,06,000
The business was carried on till 30th September, 2011. The partners withdrew in amounts half
the amount of profits made during the period of six months (April-September, 2011) after
depreciating leasehold premises and plant and machinery by 10% p.a. and furniture by 5%
p.a. Meanwhile, creditors were reduced by Rs. 10,000. On 30th September, 2011 stock was
valued at Rs. 63,400. Bills payable and bank overdraft were reduced by Rs. 2,300 and Rs.
15,000 respectively. Book debts were valued at Rs. 65,000, the Joint Life Policy was realised
for Rs. 9,500 and the amount was utilised to reduce the bank overdraft. Other items remained
as on 31st March, 2011.
On 30th September, 2011 the firm sold the business to Jalaj Ltd. Goodwill was estimated at
Rs. 1,08,000 and other assets were valued on the basis of Balance Sheet as on 30 th September,
2011. The purchase consideration was paid in fully paid equity shares of Rs. 10 each.
Prepare relevant Ledger Accounts in the books of partnership firm.
Sol.
Revised Balance Sheet of Firm
Dr. as on 30-01-2011 Cr.
Liabilities Rs. Assets Rs.
Creditors 65,500 Plant & Machinery 1,82,000
(10,000) 55,500 Less: Depreciation 9,100 1,72,900
Bank Overdraft 30,000 Furniture 15,000
(15,000) Less: Depreciation 375 14,625
(Joint Life Policy) (9,500) 5,500
Bills Payable 12,500 Leasehold Premises 34,500
(2,300) 10,200 Less: Depreciation 1,725 32,775
Capitals of partners*1 2,77,500 Stock in hand 63,400
(Balancing figure) Book Debts 65,000
3,48,700 3,48,700
New Accounts on Firm's Dissolution are as under:
Dr. Realisation Account Cr.
Particulars Rs. Particulars Rs.
To Sundry Assets By Sundry Liabilities:
(as per above Revised (as per above Revised
Balance Sheet) 3,48,700 Balance Sheet)
To Profit on Realisation Creditors 55,500
transferred to:
Khanak's Capital A/c 54,000 Bank Overdraft 5,500
Nitya's Capital A/c 54,000 Bills Payable 10,200 71,200
 By Jalaj Ltd.*3
(Purchase Consideration) 3,85,500
4,56,700 4,56,700
Dr. Jalaj Ltd. Account Cr.
Particulars Rs. Particulars Rs.
To Realisation A/c 3,85,500 By Shares of Jalaj Ltd. 3,85,500
3,85,500 3,85,500
Dr. Partners' Capital Accounts*2 Cr.
Date Particular* Khunak Nitya Date Particulars Khanak Nitya
(Rs.) (Rs.) (Rs.) (Rs.)
To P&LA/c 01-4-11 By Balance b/f 1,50,000 1,48,000
1,50,000 1,48,000
(Loss as per 30-9-11 By Profits
Balance Sheet) 13,000 13,000 (6 months') 17,500 17,500
13,000 13,000
To Drawings 9,000 3,000 By Realisation 54,000 54,000
A/c A/c
To Drawings 8,750 8,750 30-9-11
A/c
To Shares of
Jalaj
Ltd. 1,90,750 1,94,750
2,21,500 2,19,500 2,21,500 2,19,500
Working notes:
*1 Capitals of Partners on 31-03-2011 was
Opening Capitals of Partners - P&L A/c (Dr. Bal.) - Drawings of Partners,
i.e.. Rs.(1,50,000 + 1,48,000) - Rs. 26,000 - Rs. 12,000, i.e., Rs. 2,60,000
Profit made during 6 months were Rs. 2,77,500 - Rs. 2,60,000 = Rs. 17,500 x 2 or Rs. 35,000
as half of profits have already been withdrawn.
*2 Capital Accounts of two partners have been shown above from 01-04-2011. Portion above
dotted lines states position as on 31-3-2011 or 01-4-2011 and below dotted lines shows the
position for the next 6 months.
*3 Purchase Consideration payable by M/s Jalaj Ltd. is calculated under: (Rs.) (Rs.)
Value of all the assets as per Revised Balance Sheet 3,48,700
Add: Value of Goodwill 1,08,000 4,56,700
Less: Liabilities (Total) 71,200
Purchase Consideration 3,85,500
Q. 10. Bini, Mini and Tini are partners sharing profits and losses in the ratio of 4 : 3 : 2.
Their Balance Sheet as on 31st March, 2011 stood as follows:
Liabilities Rs. Assets Rs.
Creditors 20,000 Cash 2,000
Bank Overdraft Debtors 18,000
(Secured against stock) 15,000 Less: Provision 1,000 17,000
Loan (Secured against 25,000 Stock 25,000
Machinery)
Capitals: Machinery 40,000
Bini 20,000 Profit & Loss A/c 9,000
Mini 10,000
Tini 3,000
93,000 93,000
The firm was dissolved. Stock was taken over by the Banker and it realised Rs. 20,00Q. Bank
paid back Rs. 4,000 after recovering its overdraft and interest due thereon. Machinery was
disposed off for Rs. 24,000 and debtors realised Rs. 14,000 only. Loan was fully paid off
along with interest due Rs. 1,000. There was an unrecorded asset valuing Rs. 5,000 which
was taken over by a creditor at Rs. 2,000. Expenses amounted to Rs. 300 which were paid by
Bini. Tini became insolvent. Tini's private liabilities amounted Rs. 1,000 while his private
estate realised Rs. 1,950.
Prepare necessary Ledger Accounts to close the books of the firm.
[2022
Sol.
Dr. Realisation Account Cr.
Particulars Rs. Particulars Rs.
To Sundry Assets: By Sundry Liabilities:
(Per Balance Sheet) (Per Balance Sheet)
Debtors 18,000 Provision for D. Debtors 1,000
Stock 25,000 Creditors 20,000
Machinery 40,000 83,000 Bank Overdraft 15,000
To Bank/Cash A/c: Loan 25,000 61,000
Bank Overdraft + Interest By Bank/Cash A/c:
Rs.(15,000 + 1,000) 16,000 Stock 20,000
Loans Rs.(25,000 + 1,000) 26,000 Machinery 24,000
Creditors 18,000 Debtors 14,000
To Creditors (C) 2,000 By Unrecorded Asset (C) 2,000
To Bini's Capital A/c (Expenses) 300 By Loss transferred to: Bini 10,800
Mini 8,100
Tini 5,400
1,45,300 1,45,300
Dr. Bank/Cash Account Cr.
Particulars Rs. Particulars Rs.
To Balance b/f 2,000 By Realisation A/c:
To Realisation A/c: Bank Overdraft + Interest 16,000
Stock 20,000 Loan Rs.(25,000 + 1,000) 26,000
Machinery 24,000 Creditors 18,000
Debtors 14,000 By Bini's Capital A/c 3,100
To Tini's Capital A/c 950
To Mini's Capital A/c 2,150
63,100 63,100
Dr. Bini's Capital Account Cr.
Particulars Rs. Particulars Rs.
To Profit & Loss A/c (Dr.) (4/9) 4,000 By Balance b/f 20,000
To Realisation A/c (4/9) 10,800 By Realisation A/c
To Tini's Capital A/c 2,400 (Expenses paid) 300
To Cash A/c (Final payment) 3,100
20,300 20,300
Dr. Mini's Capital Account Cr.
Particulars Rs. Particulars Rs.
To Profit & Loss A/c (Dr.) (3/9) 3,000 By Balance b/f 10,000
To Realisation A/c (3/9) 8,100 By Cash A/c (Final payment) 2,150
To Tini's Capital A/c 1,050
12,150 12,150
Tini's Capital Account
Particulars Rs. Particulars Rs.
To Profit & Loss A/c (Dr.) (2/9) 2,000 By Balance b/f 3,000
To Realisation A/c (2/9) 5,400 By Cash A/c 950
By Bini's Capital A/c (16/23) 2,400
By Mini's Capital A/c (7/23) 1,050
7,400 7,400
Loss arising because of Tini's insolvency = Rs. 7,400 - Rs. 3,950 = Rs. 3,450 is shared by
Bird and Mini in the ratio of their capitals just before dissolution, i.e., Rs. 16,000: Rs. 7,000.
Hence, Bini's share Rs. 3,450 x 16/23 = Rs. 2,400
Mini's share Rs. 3,450 x 7/23 = Rs. 1,050 (Garner vs. Murray rule)
No need for partners to bring in cash for their shares of Realisation Losses.
Q. 11. X, Y and Z are three partners in a firm, sharing profits and losses in the ratio of 5
: 3 : 2. The Balance Sheet of the firm as on 31-03-2013 was as under:
Liabilities Rs. Assets Rs.
Creditors 1.60,000 Building 3,20,000
Bills Payable 80,000 Furniture 40,000
Bank Loan 80,000 Investments 1,20,000
Capitals: X 2,40,000 Profit & Loss Account 3,20,000
Y 1,60,000
Z 80,000
8,00,000 8,00,000
The Bank loan was secured by charge on the building. Assets realised as under: Building Rs.
1,60,000; Furniture Rs. 16,000 and Investments Rs. 54,000. [2012
Y's private estate realised Rs. 48,000 and his private liabilities are Rs. 40,000. Z was
insolvent. X could just contribute 1/3 of what was finally due from his own account. Record
all matters relating to realisation of assets only through realisation account. Prepare necessary
ledger accounts in the books of the firm.
Sol.
Dr. Realisation Account Cr.
Particulars Rs. Particulars Rs.
To Building A/c 3,20,000 By Bank A/c (Assets realised) 2,30,000
To Furniture A/c 40,000 By Loss to Capital Accounts:
To Investment A/c 1,20,000 X 1,25,000
Y 75,000
Z 50,000 2,50,000
4,80,000 4,80,000

Dr. Bank Loan Account Cr.

particulars Rs. Particulars Rs.
To Bank A/c 80,000 By Balance b/d 80,000
80,000 80,000

Dr. Creditors and Bills Payable Account Cr.

Particulars Rs. Particulars Rs.
To Bank A/c 1,73,000 By Balance A/c:
To Deficiency A/c (Bal. figure) 67,000 Creditors 1,60,000
Bills Payable 80,000 2,40,000
2,40,000 2,40,000

Dr. Bank Account Cr.

Particulars Rs. Particulars Rs.
To Realisation A/c 2,30,000 By Bank Loan A/c 80,000
To X's Capital A/c 15,000 By Creditors and B/P A/c
To Y's Capital A/c 8,000 (Proportionately) (Bal. figure) 1,73,000
2,53,000 2,53,000
Dr. Capital Accounts of Partners Cr.
Particulars X Y Z Particulars X Y Z
 (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)
To Profit & Loss 1,60,000 96,000 64,000 By Balance b/d 2,40,000 1,60,00 80,000
A/c 0
To Realisation A/c 1,25,000 75,000 50,000 By Bank A/c — 8,000 —
By Bank A/c
(Rs. 45,000 x 1/3) . 15,000 — —
By Deficiency 30,000 3,000 34,000
A/c
2,85,000 1,71,00 1,14,00 2,85,000 1,71,00 1,14,00
0 0 0 0
Dr. Deficiency Account Cr.
Particulars Rs. Particulars Rs.
To X's Capital A/c 30,000 By Creditors and Bills Payable 67,000
A/c
To Y's Capital A/c 3,000
To Z's Capital A/c 34,000
67,000 67,000
Q. 12. X, Y, Z carry on business in partnership sharing profits and losses in the ratio 4 :
3 :1. On 31st March, 2012, they agreed to sell their business to AB Ltd. Their position on
that date was as follows: [2022
Liabilities Rs. Assets Rs.
X's Capital 2,00,000 Freehold premises 2,40,000
Y's Capital 1,50,000 Machinery 2,10,000
Z's Capital 1,30,000 Stock 1,15,000
Loan on Mortgage 80,000 Bood Debts 75,000
Sundry Creditors 90,000 Cash 10,000
6,50,000 6,50,000
The company took the following assets at the valuation shown:
(Rs.) (Rs.)
Freehold Property 3,05,000 Book Debts 70,000
Machinery 1,59,000 Goodwill 50,000
Stock 1,10,000
The company agreed to pay the creditors Rs. 88,500. The company paid Rs. 3,35,000 in
shares and the balance in cash. Expenses on realisation amounted to Rs. 1,500. Prepare
relevant ledger accounts in the books of the firm.
Sol.
Calculation of purchase consideration:
Assets taken over Rs. Discharge of purchase Rs.
consideration
Freehold Premises 3,05,000 Shares 3,35,000
Machinery 1,59,000 Cash Rs.(6,05,500 - 3,35,000) 2,70,500
Stock 1,10,000
Book Debts 70,000
Goodwill 50,000
6,94,000
Less: Creditors takenover 88,500
6,05,500 6,05,500
Dr. Realisation Account Cr.
Particulars Rs. Particulars Rs.
To Freehold Premises 2,40,000 By Loan on Mortgage A/c 80,000
To Machinery 2,10,000 By Sundry Creditors A/c 90,000
To Stock 1,15,000 By AB Ltd. A/c 6,05,500
To Book Debts 75,000
To Cash A/c (Expenses) 1,500
To Bank A/c (Loan on Mortgage) 80,000
To Capital Accounts:
(Profit on Realisation)
X 27,000
Y 20,250
Z 6.750 54,000
7,75,500 7,75,500
Dr. Capital Accounts of Partners Cr.
Particulars X Y Z Particulars X Y Z
 (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)
To Shares in AB 1,42,41 1.06,80 85,790 By Balance c/d 2,00,000 1,50,00 1,30,00
Ltd.*1 0 0 0 0
To Bank A/c (Bal. 84,590 63,450 50,960 By Realisation
fig.) A/c
(Profit) 27,000 20,250 6,750
2,27,00 1,70,25 1,36,75 2,27,000 1,70,25 1,36,75
0 0 0 0 0
Dr. Cash and Bank Account Cr.
Particulars Rs. Particulars Rs.
To Balance b/d 10,000 By Realisation A/c 1,500
To AB Ltd. 2,70,500 By Realisation A/c 80,000
By Capital A/cs:
X 84,590
Y 63,450
Z 50,960 1,99,000
2,80,500 2,80,500
Dr. AB Ltd. Account Cr.
Particulars Rs. Particulars Rs.
To Realisation A/c 6,05,500 By Shares in AB Ltd. A/c 3,35,000
By Bank A/c 2,70,500
6,05,500 6,05,500
Working notes:
*1 Distribution of Shares among partners:
Final claims: X = Rs. 2,27,000
Y = Rs. 1,70,250
Z = Rs. 1,36,750
Number of shares: X = 33,500 x 2,27,000/5,34,000 = 14,241 (App.) = Rs. 1,42,410
Y = 33,500 x 1,70,250/5,34,000 = 10,680 (App.) = Rs. 1,06,800
Z = 33,500 x 1,36,750/5,34,000 = 8,579 (App.) = Rs. 85,790
Q. 13. A, B and C had the following Balance Sheet on 31-03-11: [2013
Liabilities Rs. Assets Rs.
Trade Creditors 40,000 Fixed Assets 40,000
Loan from Mrs. A 15,000 Debtors 25,000
(with a charge on stock) Stock 20,000
Loan from A 10,000 Profit & Loss A/c 30,000
Capital Accounts:
A 20,000
B 20,000
C 10,000
1,15,000 1,15,000
The firm was dissolved. Stock realised 50% and fixed assets and debtors realised Rs. 30,000
in all. The positive position of the partners was as under:
Private Estate Private Liabilities
(Rs.) (Rs.)
A 10,000 15,000
B 8,000 6,000
C was able to pay 50 paise in the rupee of what was payable on his own account to the firm.
The partners shared profits and losses in the ratio of 4 : 3 : 3 for A, B and C respectively. The
loss on realisation is to be determined after considering the amount finally paid to the
creditors.
You are required to close the books of the firm by preparing the necessary ledger
accounts.
Sol.
Working notes:
*1 Let us assume that contribution by C = Rs. x
Dr. Provisional Realisation Account Cr.
Particulars Rs. Particulars Rs.
To Fixed Assets 40,000 By Trade Creditors 40,000
To Debtors 25,000 By Mrs. As Loan A/c 15,000
To Stock 20,000 By Bank A/c:
To Bank A/c (Mrs. As Loan) 10,000 Stock 10,000
To Bank A/c (Mrs. As Loan and 32,000 + x Fixed Assets & Debtors 40,000
Creditors) 30,000
By Loss:
A 12,800 + 4x/10
B 9,600 + 3x/10
C 9,600 + 3x/10 32,000 + x
1,27,000 + 1,27,000 +
x x
*2 Dr. Provisional C's Capital Account Cr.
Particulars Rs. Particulars Rs.
To Profit & Loss A/c 9,000 By Balance b/d 10,000
To Realisation A/c 9,600 + By Final Balance before Cash
3x/10
Contribution 8,600 +
3x/10
18,600 + 18,600 +
3x/10 3x/10
*3 Dr. Provisional Bank Account Cr.
Particulars Rs. Particulars Rs.
To Realisation A/c 40,000 By Realisation A/c 10,000
To B's Capital A/c (Rs. 8,000 - 2,000 By Realisation A/c 32,000 + x
Rs. 6,000)
To C's Capital A/c X
42,000 + x 42,000 + x

C has contributed 1/2, of (Rs. 8,600 + 3x/10) Loss on Realisation:

X = 1/2(Rs. 8,600 + 3x/10) = 8,600/2 + 3x/20 A +Rs. 12,800 + 4x/10 = Rs. 14,823
x = Rs. 4300 + 3x/20 B Rs. 9,600 + 3x/10 = Rs. 11,118
Multiplying both sides by 20, we get C Rs. 9,600 + 3x/10 = Rs. 11,118
20x = 86,000 + 3x
17x = Rs. 86,000 x = Rs. 5,059
In the books of the firm of A, B and C
Dr. Realisation Account Cr.
Particulars Rs. Particulars Rs.
To Fixed Assets 40,000 By Trade Creditors 40,000
To Debtors 25,000 By Loan from Mrs. A 15,000
To Stock 20,000 By Bank A/c:
To Bank A/c: Stock 10,000
Mrs. A's Loan 10,000 Fixed Assets &
Creditors & Balance of Debtors 30,000 40,000
Mrs. A's Loan Rs.(40,000 + By Capital Accounts:
5.000)
(Balancing figure) 37,059 (Loss on Realisation*3
A's Capital A/c 14,823
B's Capital A/c 11,118
C's Capital A/c 11,118 37,059
1,32,059 1,32,059

Dr. Bank Account Cr.

Particulars Rs. Particulars Rs.
To Realisation A/c 40,000 By Realisation A/c 10,000
To B's Capital A/c 2,000 (Mrs. A's Loan)
To C's Capital A/c 5,059 By Realisation A/c 37,059
(Creditors & Mrs. A's Loan)
47,059 47,059

Dr. A's Capital Account Cr.

Particulars Rs. Particulars Rs.
To Profit & Loss A/c 12,000 By Balance b/d 20,000
To Realisation A/c (Loss) 14,823 By A's Loan 10,000
To Deficiency A/c 3,177
30,000 30,000

Dr. B's Capital Account Cr.

Particulars Rs. Particulars Rs.
To Profit & Loss A/c 9,000 By Balance b/d 20,000
To Realisation A/c (Loss) 11,118 By Bank A/c 2,000
To Deficiency A/c 1,882
22,000 22,000

Dr. C's Capital Account Cr.

Particulars Rs. Particulars Rs.
To Profit & Loss A/c 9,000 By Balance b/d 10,000
To Realisation A/c (Loss) 11,118 By BankA/c 5,059
By Deficiency A/c 5,059
20,118 20,118

Dr. Deficiency Account Cr.

Particulars Rs. Particulars Rs.
To C's Capital A/c 5,059 By A's Capital A/c 3,177
By B's Capital A/c 1,882
5,059 5,059
Q. 14. A, B, C and D are partners in a firm sharing profits and losses in the ratio of 4 :1:
2 : 3. The following is their Balance Sheet as at 31st March, 2014:
Liabilities Rs. Assets Rs.
Sundry Creditors 3,00,000 Sundry Debtors 3,50,000
Capital A/c: Less: Provision for bad debts 50,000
A 7,00,000 3,00,000
D 3,00,000 Stock 2,00,000
Cash in hand 1,40,000
Other Assets 3,10,000
Capital A/c:
B 2,00,000
C 1,50,000 3,50,000
13,00,000 13,00,000
The firm is dissolved on the following terms:
(i) A is to take over sundry debtors at 80% of book value.
(ii) D is to take over Stock at 95% of the book value.
(iii) C is to discharge Sundry Creditors.
(iv) Other assets realize Rs. 3,00,000 and expenses of realisation come to Rs. 30,000.
(v) B is found insolvent and Rs. 21,900 is realized from his estate.
Prepare Realisation Account and Capital Accounts of the partners. Show also
the Cash Account. The loss arising out of capital deficiency may be distributed
following the decision in Garner vs. Murray case. [2024
Sol.
Dr. Realisation Account Cr.
Particulars Rs. Particulars Rs.
To Sundry Debtors A/c 3,50,000 By Provison for Bad Debts 50,000
To Stock 2,00,000 By Sundry Creditors 3,00,000
To Other Assets 3,10,000 By A's Capital A/c
(Debtors)
To C's Capital A/c (Creditors) 3,00,000 (80% of Rs. 3,50,000) 2,80,000
To Cash A/c By D's Capital A/c
(Realisation Expenses) 30,000 (Stock 95% of Rs. 2,00,000) 1,90,000
By Cash A/c
(Other Assets) 3,00,000
By Loss on Realisation
transferred to:
A's Capital A/c 28,000
B's Capital A/c 7,000
C's Capital A/c 14,000
D's Capital A/c 21,000 70,000
11,90,000 11,90,000

Dr. Partners' Capital Accounts Cr.

Particulars A(Rs.) B(Rs. c(Rs.) D(Rs.) Particulars A(Rs.) B(Rs.) C(Rs. D(Rs.)
 ) )
To Balance — 2,00,0 1,50,0 — By Balance 7,00,0 — — 3,00,00
b/d 00 00 b/d 00 0
To Realisation 2,80.0 — — — By — — 3,00,0 —
A/c 00 Realisation 00
A/c
To Realisation — —. 1,90,0 By Cash A/c 28,000 — 14,00 21,000
A/c 00 0
To Realisation By Balance — 2,07,0 — —
A/c c/d 00
(Loss) 28,000 7,000 14,00 21.000
0
To Balance 4,20,0 — 1,50,0 1,10,0
c/d 00 00 00
7,28,0 2,07,0 3,14,0 3,21,0 7,28,0 2,07,0 3,14,0 3,21,00
00 00 00 00 00 00 00 0
To Balance — 2,07,0 — — By Balance 4,20,0 — 1,50,0 1,10,00
b/d 00 b/d 00 00 0
To B's Capital 1,29,5 — — 55,530 By Cash A/c — 21,900 — —
A/c 70
To Cash A/c 2,90,4 — 1,500 54,470 By As Capital — 1,29,5 — —
30 00 A/c 70
By D's Capital — 55,530 — —
A/c
4,20,0 2,07,0 1,50,0 1,10,0 4,20,0 2,07,0 1,50,0 1,10,00
00 00 00 00 00 00 00 0

Dr. Cash Account Cr.

Particulars Rs. Particulars Rs.
To Balance b/d 1,40,000 By Realisation A/c (Expenses) 30,000
To Realisation A/c (Other 3,00,000 By A's Capital A/c (Final 2,90,430
Assets) Payment)
To B's Capital A/c 21,900 By C's Capital A/c (Final 1,50,000
Payment)
To A's Capital A/c 28,000 By D's Capital A/c (Final 54,470
Payment)
To C's Capital A/c 14,000
To D's Capital A/c 21,000
5,24,900 5,24,900
Notes: B's deficiency will be borne by A and D in the ratio of 7 : 3. C will not bear any
portion of the deficiency as at the time of dissolution there was debit balance in his Capital
Account
A's share of deficiency = 1,85/100 x 7/10 = Rs. 1,29,570; D's share of deficiency = l,85,100 x
3/10 = Rs. 55,530
Q. 15. Humpty and Dumpty carrying on business in partnership and sharing profits
and losses in the ratio 2 :1 had the following balances to the credit of their accounts in
the books of their firm as on 31st December, 2011. [2013
Humpty Rs. 3,45,000
Dumpty Rs. 1,80,000
A statement of affairs prepared on 31st December 2012 disclosed the following position
of the business:
Particulars Rs. Particulars Rs.
Sundry Creditors: Cash in hand 67,500
For goods 1,95,000 Cash at Bank 45,000
For expenses 39,000 Sundry Debtors 2,55,000
Stock 3,30,000
Furniture 42,000
During the year, Humpty had drawn Rs. 99,000 from the firm. He had also taken for his
personal use, goods worth Rs. 12,000. He had sold some goods of the business for Rs. 27,000
and retained the money himself. He had personally paid to some of the employees of the firm
Rs. 49,500 towards their salaries which he was entitled to be reimbursed. Dumpty had
withdrawn Rs. 37,500 in cash, had also taken for his personal use goods worth Rs. 7,500. He
had paid towards some expenses of the firm for Rs. 24,000 from his private estate.
Prepare a statement showing profit of the firm for the year ending 31 st December, 2012
as well as Balance Sheet of the firm as on that date.
Sol. Humpty and Dumpty Statement of Profit & Loss
for the year ended 31st December, 2012
Particulars Rs. Rs.
Net Assets as on 31st Dec. 2012 [Rs. 67,500 + Rs. 45,000
+
Rs. 2,55,000 + Rs. 3,30,000 + Rs. 42,000 - Rs. 1,95.000 - 5,05,500
Rs. 39,000]
Add: Drawings of Humpty:
Cash withdrawn 99,000
Goods for personal use 12,000
Sale proceeds retained 27,000 1,38,000
Add: Drawings of Dumpty:
Cash withdrawn 37,500
Goods for personal use 7,500 45,000 1,83,000
Less: Additional Capital introduced by: 6,88,500
Humpty (Payment to employees) 49,500
Dumpty (Payment of expenses) 24,000 73,500
Less: Net Assets on 31st December, 2011: 6,15,000
Humpty's Capital 3,45,000
Dumpty's Capital 1,80,000 5,25,000
Net Profit (Balancing figure): 90,000
Humpty's Share 60,000
Dumpty's Share 30,000
Balance Sheet of Humpty and Dumpty
as on 31st Dec. 2012
Liabilities Rs. Assets Rs.
Capital Accounts: Cash in hand 67,500
Humpty 3,45,000 Cash at Bank 45,000
Net Profit 60,000 Sundry Debtors 2,55,000
Additional Capital 49,500 Stock 3,30,000
4,54,500 Furniture 42,000
Less: Drawings 1,38,000 3,16,500
Dumpty 1,80,000
Net Profit 30,000
Additional Capital 24,000
2,34,000
Less: Drawings 45,000 1,89,000
Creditors: For goods 1,95,000
For expenses 39,000 2,34,000
7,39,500 7,39,500
Q. 16. A, B and C had the following Balance Sheet on 31-3-2013: [2014 Nov.
Liabilities Rs. Assets Rs.
Trade Creditors 4,00,000 Fixed Assets 4,00,000
Loan from Mrs. A Debtors 2,40,000
(with a charge on stock) 1,50,000 Stock 2,00,000
Loan from A 1,00,000 Cash at Bank 10,000
Capital A/c: Profit & Loss A/c 3,00,000
A 2,00,000
B 2,00,000
C 1,00,000
11,50,000 11,50,000
The firm was dissolved. Stock realised 50% and fixed assets and debtors realised Rs.
3,00,000 in all. The private position of the partners was as under:
Particulars Private Assets (Rs.) Private Liabilities (Rs.)
A 1,50,000 1,00,000
B 60,000 80,000
C was able to pay 50 paise in the rupee of what was payable on his own account to the firm.
The partners shared profit and losses in the ratio of 4 : 3 : 3 for A, B and C respectively. The
loss on realisation is to be determined after considering the amount finally paid to the
creditors. You are required to close the books of the firm preparing the necessary ledger
accounts.
Sol.
Dr. Memorandum Realisation Account Cr.
Particulars Rs. Particulars Rs.
To Fixed Assets 4,00,000 By Trade Creditors 4,00,000
To Debtors 2,40,000 By Loan from Mrs. A 1,50,000
To Stock 2,00,000 By Bank (1,00,000+ 3,00,000) 4,00,000
To Bank (Mrs. A) 1,00,000 By Realisation Loss: 3,50,000 +x
To Bank (Mrs. A & Creditors)* 3,60,000 +
x
13,00,000 13,00,000 +
+x x
* 10,000 (Original balance) + 4,00,000 (Sale of Assets) + 50,000 (As Contribution) -
1,00,000
(Loan of Mrs. A paid) + x (notional contribution by C) Rs. 3,60,000 + x
Share of C in the loss = 3/10 of (3,50,000 + x) = Rs. 1,05,000 + (3/10)x
Dr. Memorandum C's Capital Account Cr.
Particulars Rs. Particulars Rs.
To Profit & Loss Ac 90,000 By Balance b/d 1,00,000
To Realisation Ac (Share of 1,05,000+ By C's Deficiency 95,000 +
Loss) 3x/10 3x/10
1,95,000 + 1,95,000+
3x/10 3x/10
C's contribution = 50% (95,000 + 3/10). Equating it to * and solving,
we get 1/2 (95,000 + 3/10x) - x x = Rs. 55,882
Now we solve the problem accordingly.
Dr. Realisation Account Cr.
Particulars Rs. Particulars Rs.
To Fixed Assets 4,00,000 By Trade Creditors 4,00,000
To Debtors 2,40,000 By Loan from Mrs. A 1,50,000
To Stock 2,00,000 By Bank A/c:
To Bank A/c (Mrs. A's loan) 1,00,000 Stock 1,00,000
To Bank A/c (Mrs. A and 4,15,882 Fixed Assets 3,00,000 4,00,000
Creditors)
By Loss transferred to:
A's Capital A/c 1,62,353
B's Capital A/c 1,21,765
C's Capital A/c 1,21,764 4,05,882
13,55,882 13,55,882
Dr. Bank Account Cr.
Particulars Rs. Particulars Rs.
To Balance b/d 10,000 By Realisation A/c (Mrs. A) 1,00,000
To Realisation A/c 4,00,000 By Realisation A/c
To A's Capital A/c 50,000 (Mrs. A Trade Creditors) 4,15,882
To C's Capital A/c 55,882
5,15,882 5,15,882

Dr. A's Capital Account Cr.

Particulars Rs. Particulars Rs.
To Profit & Loss A/c 1,20,000 By Balance b/d 2,00,000
To Realisation A/c 1,62,353 By A's Loan A/c 1,00,000
To Deficiency A/c 67,647 By Bank A/c 50,000
3,50,000 3,50,000

Dr. B's Capital Account Cr.

Particulars Particulars Rs.
To Profit & Loss A/c 90,000 By Balance b/d 2,00,000
To Realisation A/c 1,21,765 By Deficiency A/c 11,765
2,11,765 2,11,765

Dr. C's Capital Account Cr.

Particulars Rs. Particulars Rs.
To Profit & Loss A/c 90,000 By Balance b/d 1,00,000
To Realisation A/c 1,21,764 By Bank A/c 55,882
By Deficiency A/c 55,882
2,11,764 2,11,764

Dr Deficiency Account Cr.

Particulars Rs. Particulars Rs.
To B's Capital A/c 11,765 By A's Capital A/c 67,647
To C's Capital A/c 55,882
 67,647 67,647
Q. 17. The Balance Sheet of A, B and C who were sharing profits and losses in the ratio of 2 :
2 :1, was as follows on 31st March, 2013: [2014 Nov.
Liabilities Rs. Assets Rs.
Sundry Creditors 12,00,000 Cash 10,000
Bank Loan (with charge on 5,00,000 Stock 6,00,000
stock)
A's Capital 3,00,000 Other Assets 10,90,000
B's Capital 2,00,000 Goodwill 3,00,000
C's Capital 2,00,000
22,00,000 22,00,000
Stock realised ^5,20,000 and other assets was sold for Rs. 9,00,000. Expenses on realisation
amounted to Rs. 30,000. Assuming all partners are insolvent, prepare necessary Ledger
Accounts to close the books of the firm.
Sol. Dr. Realisation Account Cr.
Particulars Rs. Particulars Rs.
To Stock 6,00,000 By Sundry Creditors 12,00,000
To Other Assets 10,90,000 By Bank Loan 5,00,000
To Goodwill 3,00,000 By Cash A/c:
To Cash A/c (Expenses) 30,000 Stock 5,20,000
To Cash A/c (Bank Loan & 14,00,000 Other Assets 9,00,000 14,20,000
Creditors)
By Loss transferred to:
A's Capital A/c 1,20,000
B's Capital A/c 1,20,000
C's Capital A/c 60,000 3,00,000
34,20,000 34,20,000

Dr. Cash Account Cr.

Particulars Rs. Particulars Rs.
To Balance b/d 10,000 By Realisation A/c (Expenses) 30,000
To Realisation A/c 14,20,000 By Realisation A/c
 (Bank Loan & Creditors) 14,00,000
14,30,000 14,30,000

Dr. A's Capital Account Cr.

Particulars Rs. Particulars Rs.
To Realisation A/c (Loss) 1,20,000 By Balance b/d 3,00,000
To Deficiency A/c 1,80,000
3,00,000 3,00,000

Dr. B's Capital Account Cr.

Particulars Rs. Particulars Rs.
To Realisation A/c 1,20,000 By Balance b/d 2,00,000
To Deficiency A/c 80,000
2,00,000 2,00,000

Dr. C's Capital Account Cr.

Particulars Rs. Particulars Rs.
To Balance b/d 2,00,000 By Deficiency A/c 2,60,000
To Realisation A/c 60,000
2,60,000 2,60,000

Dr. Deficiency Account Cr.

Particulars Rs. Particulars Rs.
To C's Capital A/c 2,60,000 By A's Capital A/c 1,80,000
By B's Capital A/c 80,000
2,60,000 2,60,000
Q. 18. A, B and C share profits and losses in the proportion of 4/10/ 5/10 and 1/10. Their
Balance Sheet as on 31st December, 2014 was as follows: [2015
Liabilities Rs. Assets Rs.
A's Capital A/c 15,000 Cash 3,000
B's Capital A/c 12,000 Other Assets 56,000
C's Capital A/c 3,000
A's Loan 6,000
B's Loan 3,000
Reserve Fund 6,000
Creditors 10,000
Contingent Reserve 4,000
59,000 59,000
The partnership is dissolved and the assets realised are as follows:
Rs.
First Realisation 10,000
Second Realisation 20,000
Third Realisation 17,000
On the date of dissolution, there was a contingent liability of Rs. 1,000 against the firm which
was settled at Rs. 700 at the time of second realisation. Realisation
expenses were estimated at Rs. 2,000 but actually came at Rs. 1,500. C took stock worth Rs.
500 at the time of third realisation.
Prepare a statement showing how the distribution should be made. 15
Sol. Note:
Partners' Capital should be considered after adjustment of the following:
A (Rs.) B (Rs.) C (Rs.)
Capital Balance on 31-12-14 15,000 12,000 3,000
Add: Reserve Fund (4:5:1) 2,400 3,000 600
Contingent Reserve (Rs. 4,000) 1,600 2,000 400
19,000 17,000 4,000
Statement Showing Piecemeal Distribution of Cash
Particulars Loans Capitals
(Rs.) Creditors A B A B c
Balance in 31.12.2014 10,000 6,000 3,000 19,000 17,000 4,000
Cash in hand 3,000
Add: First Realisation 10,000
 13,000
Less: Provision for 2,000
Expenses
11,000
Less: Contingent liability 1,000 10,000
6,000 3,000 19,000 17,000 4,000
Second Realisation 20,000
Less/Loan Paid 9,000 6,000 3,000
11,000 19,000 17,000 4,000
Add: Contingent liability 300
11,300
Maximum loss 28,700 11,480 14,350 2,870
Rs.(40,000-11,300)(4:5 :1)
Paid to Partners 11,300 7,520 2,650 1,130
Balance 11,480 14,350 2,870
Third Realisation 17,000
Add: Frov. for Expenses 17,500
500
Maximum Loss 11,200 4,480 5,600 1,120
Rs. (28,700 - 17,500) (4 :
5 : 1)
Paid to Partners 17,500 7,000 8,750 1,750
Loss to. Partners 4,480 5,600 ^ 1,120
Notes: *1 In the above question method for solving the question is not specified. Here
Maximum Possible Loss method is used but the students can also use Capitalization method.
*2 The first Realisation Amount is Rs. 10,000 + Rs. 3,000 (Available Cash) - Rs. 2,000
(Realisation Expenses) - Rs. 1,000(Contingent Liability).
Q. 19. A, B and C are three partners in a firm with profit sharing ratio of 5 : 3 : 2. The
Balance Sheet of the firm was as under on 31st March, 2015:
Liabilities Rs. Assets Rs.
Creditors 40,000 Buildings 80,000
Bills Payable 20,000 Furniture 10,000
Bank Loan 20,000 Investments 30,000
Capitals: A 60,000 Profit and Loss Account 80,000
B 40,000
C 20,000
2,00,000 2,00,000

The bank loan was secured by charge on the buildings.

Assets realised as under: Rs.
Buildings 40,000
Furniture 4,000
Investments 14,000
B's private estate realised Rs. 12,000 and his private liabilities are Rs. 10,000. C was
insolvent. A could just contribute 1/3rd of what was finally due from him on his own account.
Show the ledger accounts closing the books of the firm assuming creditors etc. are paid
through Realisation Account. 15
Sol. Let A's Contribution = x
Dr. Memorandum Realisation Account Cr.
Particulars Rs. Particulars Rs.
To Building's 80,000 By Creditors 40,000
To Furniture 10,000 By Bills Payable 20,000
To Investments 30,000 By Bank Loan 20,000
To Cash (Bank Loan) 20,000 By Cash (Asset Realised) 58,000
To Cash (Creditors & Bills 40.000 + x By Loss 42,000 + x
Payable)
1,80,000 + 1,80,000 +
x x
Dr. Memorandum A's Capital Account Cr.
Particulars Rs. Particulars Rs.
To Profit & Loss A/c 40,000 By Balance b/d 60,000
To Realisation A/c 21,000+ x/2 By Deficiency A/c 1,000 + x/2
61,000 + x/2 61,000 + x/2
A will contribute 1/3rd of finally due amount,
So, 1/3(l,000 + x/2) =x
1,000/2 + x/6 = x
=> 2,000 + x/6 = x
=> 6x = 2,000 + x => 5x = 2,000
=> x= 2,000/5 = Rs. 400
Dr. Realisation Account Cr.
s Rs. Particulars Rs.
To Buildings 80,000 By Creditors 40,000
To Furniture 10,000 By Bills Payable 20,000
To Investments 30,000 By Bank Loan 20,000
To Cash (Bank Loan) 20,000 By Cash (Assets 58,000
Realised):
To Cash (Creditors & Bills 40,400 By Loss transferred to:
Payable)
A's Capital A/c 21,200
B's Capital A/c 12,720
C's Capital A/c 8,480 42,400
1,80,400 1,80,400

Dr Partners' Capital Accounts Cr.

Particulars A B C Particulars A B C
(Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)
To Profit & Loss 40,000 24,000 16,000 By Balance b/d 60,000 40,000 20,000
A/c
To Realisation A/c By Cash A/c 400 2,000 —
(Loss) 21,200 12,720 8,480 By Deficiency 800 — 4,480
A/c
To Deficiency A/c — 5,280 —
61,200 42,000 24,480 61,200 42,000 24,480

Dr. Deficiency Account Cr.

Particulars Rs. Particulars Rs.
To A's Capital A/c 800 By B's Capital 5,280
A/c
To C's Capital A/c 4,480
5,280 5,280
 2008
Name of the Paper : Financial Accounting
Name of the Course : B.Com. (Hons.)
Time: Part A- 2 1/2 hours Maximum marks Part A: 45 For students of
Part B-30 minutes Part B: 10 regular College
Maximum marks Part A: 61 For students
Part B: 14 of SOL
This question paper has two parts. Part A is compulsory for all examinees. Part B is meant
only for those examinees who have not offered computerised accounts (applicable for
students of regular colleges). Students of SOL have to attempt Part A and Part B.
Part A and Part B are to be answered on separate answer-books,
PART A
Q. 1. Comment in brief on any two of the following naming the principles of
accounting on which these statements are based:

(i) Balance Sheet is not a valuation statement.

(ii) Advance received from a supplier is not taken as income or sales.
(iii) Calibre or quality of management team is not directly disclosed on the
Balance Sheet. 5
Ans. See Q. 2, Chapter 6. [Page T-36
Q. 2. (a) Explain 'accounting income' and 'economic income'. Which concept
is more useful and why Rs.
(b) ABC Ltd. purchased on 1st January, 1998 second hand plant for Rs. 30,000 and
immediately spent Rs. 20,000 in overhauling it. On 1st July, 1998 additional machinery
of a cost of Rs. 25,000 was purchased. On 1st July, 2000, the plant purchased on 1st
January, 1998 became obsolete and was sold for Rs. 10,000. On that date new
machinery was purchased at cost of Rs. 60,000. Depreciation was provided at 10%
p.a. on the original cost of the, asset. In 2001 the company changed this method of
providing depreciation to 15% p.a. WDV with retrospective effect.
Show Plant and Machinery Account and provision for Depreciation Account
for the years 1998-2001. 10
Ans. (a) See Q. 1, Chapter 5. [Page T-31
(b) See Q.1, Unit II, A. Depreciation. [Page P-20
Or
(a) Compare and contrast LIFO and FIFO methods of Inventory Valuation.
(b) From the following information find out the value of stock as on 31-3-2007
according to AS-2:
(i) Cost of physical stock on 31-3-2007 was Rs. 2,00,000.

(ii) Cost of stock held as consignee was Rs. 40,000.

(iii) Stock was expected to realise the normal selling price of 150% of cost except for
the following goods:

1. Goods costing Rs. 10,000 were damaged and an expenditure of 10% of normal selling
price was necessary to realise the cost.
2. Goods costing Rs. 20,000 were damaged beyond repair and were expected to realise Rs.
5,O0O only. 6,8
Ans. (a) See Q. 3, Chapter 8. [Page T-46
(b) See Q. 1, Unit II, B. Inventory Valuation. [Page P-35
Q. 3. From the following Trial Balance of Shri Ganesh prepare Trading and
Profit & Loss Account for the year ending 31 st December, 2012 and Balance
Sheet as on that date after taking into consideration the adjustments given at
the end of the Trial Balance:
Trial Balance as on 31-12-12

Particulars Dr. (Rs.) cr. (Rs.)

Sales — 7,40,000

Purchase (adjusted) 6,99,200 —

Wages 900 —

Capital A/c — 48,500

National Insurance 300 —

Carriage In 400 —

Carriage Out 500 —

Lighting 600 —

Rates and Insurance (including premium of Rs. 300 p.a. paid upto 400 —
30-6-2012)
Stock on 31-12-2012 61,250 —

Cash in hand and at Bank 1,750 —

Discount earned — 600

Building 30,000 —

Discount allowed 100 —

Debtors and Creditors 6,000 20,000

Furniture 8,000 —
Dividends received — 300

8,09,400 8,09,400

Adjustments:
(i) National Insurance balance also includes employees contribution Rs. 150. Wages are
shown 'net' after deducting national insurance contribution borne by the employees.
(ii) Owing to the nature of employment, some employees are housed in the building of the
business. The rental value of such portion is assessed at Rs. 500 p.a.
(iii) Sales as shown in the trial balance include the sale of old furniture, (effected half way
through the year) realising Rs. 200. The book value of the furniture at the commencement of
the period was Rs. 300. The depreciation has been written off at 20% p.a.

(iv) The manager is to get a commission of l/5 th on the net profits after charging his
commission but before considering income from dividend.
(v) Depreciate building by 5%.
Sol. See Q. 1, Unit I, Accounting Process. [Page P-1
Or
(a) Distinguish between Income & Expenditure Account and Receipts & Payments
Account.
(b) Show what amount will appear in Income & Expenditure Account for the year
ending 31-3-08 and Balance Sheet as at that date in each of the following cases:

Case (i)— Prize Fund as at 31-3-2007 Rs. 12,000. Donations for prizes received during the
year 2007-08 Rs. 2,800; Prizes awarded Rs. 2,000; 10% prize

fund investments as at 31-3-2007 Rs. 12,000. Interest received on prize

fund investments Rs. 600.

Case (ii) — Stock of stationery on 31-3-07 Rs. 3,000. Creditors of stationery on

31-3-07 Rs. 2,000; advance paid for stationery carried forward from
2006-07 Rs. 200; Amount paid for stationery during the year

2007-08 Rs. 10,800, Stock of stationery on 31-3-08 Rs. 500, creditors for
stationery on 31-3-08 Rs. 1,300 and advance paid for stationery on 31-
3-08 Rs. 300.
Case (iii) — Subscription outstanding as on 31-3-07 Rs. 2,000, subscription received
in advance on 31-3-07 Rs. 3,000. Amount of subscription received
during 2007-08 Rs. 35,000 out of which Rs. 1,500 related to 2006-07 and
Rs. 800 related to 2008-09. On 31-3-08 subscription outstanding for

2007-08 amounted to Rs. 1,300. 5,9

Ans. (a) See Q. 2, Chapter 9. [Page T-49
(b) See Q. 1, Unit II, C. Income & Expenditure Account. [Page P-44
Q. 4. X Ltd. purchased 2 machines costing Rs. 80,000 each from Y Ltd. on 1st
January, 2004 on the hire purchase system. The terms were:
Payment on delivery Rs. 20,000 for each machine; Balance in 3 equal instalments
together with interest at 10% p.a. to be paid at the end of each year. X Ltd. writes off
25% depreciation each year on the diminishing balance method. X Ltd. paid the
instalments due on 31-12-2004 and on 31-12-2005 but could not pay the final
instalment. Y Ltd. repossessed one machine adjusting its value against the amount
due. The repossession was done on the basis of 30% p.a. depreciation on the
diminishing balance method. The vendor spent Rs. 8,560 for the repairs and
overhauling of the machine and sold it for Rs. 40,000. Pass journal entries in the
books of Y Ltd. and prepare ledger accounts in the books of X Ltd. 14
Sol. See Q. 1, Unit III, Accounting for Hire Purchase and Instalment System.
[Page P-61
Or
Jain and Co. have a hire purchase department. Goods are sold on hire
purchase at cost plus 33 1/3%. From the following particulars prepare Shop
Stock Account, HP Debtors Account, HP Stock Account and HP Adjustment
Account:

1-4-04: Stock out with HP customers at SP Rs. 4,000

Stock at shop at cost Rs. 500

Instalments due Rs. 300

1-4-04 to 31-3-05

Cash received from customers 8,000

Goods repossessed (instalments due Rs. 2,000) valued at 500

(this has been included at the end at Rs. 500)

31-3-05: Instalments due (customers paying) 500

Stock at shop at cost (including goods repossessed) 1,200

Stock out with HP customers at SP 4,600

Verify your results by preparing Hire Purchase Trading Account. 14
Sol. See Q. 2, Unit III, Accounting for Hire Purchase and Instalment System.
[Page P-63
Q. 5. The following is the Trial Balance of Kolkata Branch as on 31 Mar., 2008:

Particulars Dr. (Rs.) Cr. (Rs.)

Mumbai Head Office A/c 32,400 —

Stock on 1-4-2007 60,000 —

Purchases 1,78,000 —

Goods received from HO 90,000 —

Sales — 3,80,000

Goods supplied to HO — 60,000

Salaries 15,000 —

Debtors 37,000 —

Creditors — 18,500

Rent 9,600 —

Office expenses 4,700 —

Cash and Bank balance 17,800 —

Furniture 14,000 —

4,58,500 4,58,500

Closing stock was valued at Rs. 27,000. The Branch Account in the books of Head
Office stood at 74,600 (Debit Balance) on 31-3-08. On 28th March, 2008 the Head Office
forwarded goods to the value of 725,000 to the branch where they were received on 3 rd
April 2008. Required in the books of HO:
(i) Branch Trading and Profit & Loss Account
(ii) Journal entries to incorporate the above Trial Balance; and
(iii) Kolkata Branch Account. 14
Sol. See Q. 1, Unit IV, Accounting for Inland Branches. [Page P-77
Or
From the following figures for a year relating to the Delhi branch of a HO which
invoices goods to its branch at cost plus 100%, prepare:
(i) Branch Account;
(ii) Branch Stock Account;
(iii) Branch Debtors Account; and
(iv) Branch Adjustment and Profit & Loss Account.

Transactions during the year: Rs.

Goods invoiced to branch 1,00,000

Goods received by branch 1,10,000

Cash sent for expenses 25,000

Actual expenses at branch 28,000

Cash expenses at branch 27,000

Sales (at invoice price) 1,40,000

Cash received from debtors 1,25,000

Discount allowed to branch debtors 5,000

Goods returned by branch debtors direct to HO 20,000

Closing balances:

Branch Stock 30,000

Branch Debtors 20,000

Sol. See Q. 2, Unit IV, Accounting for Inland Branches. [Page P-79
PART'B'
Q. 6. A, B and C are partners in a firm sharing profits and losses in the ratio of 2:2:1.
They decided to dissolve and appoint B to realise the assets and distribute the
proceeds for which he is to receive as his remuneration 5% of the amounts ultimately
paid to A and C but in lieu of this he is to bear all expenses of realisation. The Balance
Sheet of the firm on the date of dissolution is as under:

Liabilities Rs. Assets Rs.

Creditors 1,317 Debtors 4,229

A's Capital 3,960 Less: Provision 211 4,018

B's Capital 2,970 Stock 1,872

Cash 290

Other assets 1,710

C (overdrawn) 357

8,247 8,247

B informs of the following realisations:

Debtors Rs. 3,462, Stock Rs. 1,444, Goodwill Rs. 50 and Other assets Rs. 914.
Creditors which were not recorded in books are now paid Rs. 100.
The expenses of realisation amount to Rs. 310. C is able to contribute only Rs. 100 beyond
which he expresses his inability. Commission payable to B is to be treated as business
expenses.
Close the books of the firm.
Sol. See Q. 1, Unit V, Accounting for Dissolution of the Partnership Firm.
[PageP-105
Or
Ram, Shyam and Mohan are in partnership sharing profits and losses in the ratio of 3
: 2 : 1 respectively. They decided to dissolve the business on 31-12-2006 on which
date their Balance Sheet was as follows: [2008

Liabilities Rs. Assets Rs.

Capital A/cs: Ram 35,700 Motor Car 5,160

Shyam 8,680 Investments 1,080

Mohan 10,100 54,480 Stock 19,530

General Reserve 6,000 Debtors 11,280

Mohan's Loan A/c 3,000 Cash 5,940

Creditors 10,320

. 73,800 73,800

The assets were realised as follows and it was agreed that cash should be distributed
as and when received:
15th Jan. 2007 Rs. 10,380
20th February, 2007 Rs. 27,900
23rd March, 2007 Rs. 3,600
15th April, 2007 Mohan took over investments at a value of Rs. 1,260
27th April, 2007 Rs. 19,200
Dissolution expenses were originally estimated at Rs. 2,700 but actual amount spent
on 23rd March, 2007 was Rs. 1,920. The creditors were settled for n0,080. You are
required to prepare a statement showing distribution of cash amongst the partners on
piecemeal basis using maximum loss method.
Sol. See Q. 2, Unit V, Accounting for Dissolution of the Partnership Firm.
[PageP-107
 2009
Name of the Paper : Financial Accounting
Name of the Course : B.Com. (Hons.)

Time: Part A-2 1/2 hours Maximum marks Part A: 45 For students of Part B-30 minutes Part
B: 10 regular College Maximum marks Part A: 61 For students
Part B: 14 of SOL
This question paper has two parts. Part A is compulsory for all examinees. Part B is meant
only for those examinees who have not offered computerised accounts (applicable for
students of regular colleges). Students of SOL have to attempt Part A and Part B.
Part A and Part B are to be answered on separate answer-books.
PART A
Q. 1. State with reasons whether the following statements are True or False: (i)
Expenses incurred to keep the machine in working condition is a capital expenditure.
(ii) Accrual concept implies accounting on cash basis.
(iii) Depreciation cannot be provided in case of loss in a financial year.
(iv) Prudence is a concept to recognise unrealised profits and not losses.
(v) The receipts and payments account records receipts and payments of revenue nature
only.
Ans. (i) False. Expenses incurred to keep the machine in working condition is a revenue
expenditure because there is no increase in the capacity of the machine to produce more.
(ii) False. According to accrual concept, revenues are credited to the period in which they
are earned whether they have been actually received or not. Similarly, expenses are
charged to the period to which they relate whether they have been actually paid or not. In
other words, this concept recognises revenues and expenses as they are earned or incurred
respectively ignoring the date of receipt or payment. Hence it is not accounting on cash
basis.
(iii) False. Depreciation expense is a charge against the profit and not an item of
appropriation. Hence it must be debited to the Profit & Loss Account whether the firm makes
profit or incurs loss.
(iv) False. Prudence concept is expressed, as "Recognise all losses and anticipate no
gains". In other words, prudence means anticipate all losses but record profits only when
they are realised.
(v) False. Receipts and Payments Account records all types of receipts and payments
whether they are of capital nature or revenue nature.
Q. 2. (a) Distinguish between capital expenditure and revenue expenditure.
(b) \M/s S.S. Traders commenced business on 1 st January, 2005, when they
purchased machinery of Rs. 7,00,000. They adopted a policy of
(i) charging depreciation at 15% p.a. on diminishing balance basis, and (ii) charging full
year's depreciation on additions made during the year. Over the year, the purchases of
machinery have been: 10
Date Rs.

1-8-2006 1,50,000
30-9-2008 2,00,000
On 1st January, 2008, it was decided to change the method of depreciation and rate of
depreciation to 10% on straight line basis with retrospective effect from 1-1-2005, the
adjustment being made in the accounts for the year ending 31 st December, 2008.
Prepare Machinery Account and Provision for Depreciation Account for the year 2008.
Ans. (a) See Q. 13, Chapter 4. [Page T-26
(b) See Q. 2, Unit II, A. Depreciation. [Page P-22
Or
(a) Distinguish between periodic and perpetual system of inventory valuation. 4
(b) A company started its business on 1 st January, 2008. It purchased and used raw
material during the year 2008 as stated below:

January 10 800 kgs @Rs. 62 per kg.

February 28 1,200 kgs @Rs. 57 per kg.
March 10 Issued 1,000 kgs.
March 26 Issued 500 kgs.
May 20 900 kgs @Rs. 65 per kg
June 28 Issued 600 kgs.
Calculate the value of closing stock of raw materials on June 30 according to (i) Last
in First out basis, and
(ii) Weighted average basis, using perpetual inventory system. 10
Ans. (a) See Q. 5, Chapter 8. [Page T-47
(b) See Q. 2, Unit II, B. Inventory Valuation. [Page P-35
Q. 3. Explain the relevance of disclosure principle in accounting. 4
Ans. See Q. 3, Chapter 2. [PageT-13
Or
The following is the Trial Balance of a trader as on 31 st March, 2008:

Particulars Dr. (Rs.) Cr. (Rs.)

Cash in hand 5,000 —

Land and Building 80,000 —

Plant and Machinery 50,000 —

Debtors and Creditors 25,000 40,000

Stock on 1-4-2012 10,000 —

15% Investment on 1-4-2012 20,000 —

Purchases and Sales 95,000 1,90,000

Bank Overdraft — 20,000

Wages 28,000 —

Salaries 16,000 —

Rent, Rates and Taxes 15,000 —

Bad Debts 6,000 —

Drawings 5,000 —

Bills Receivable and Bills Payable 15,000 21,000

Carriage Inwards 6,000 —

Customs Duty on Purchases 16,000 —

Fire Insurance Premium 4,000 —

Advertisement 30,000 —
Provision for Doubtful Debts — 2,000

Interest on Investments — 2,000

Sundry Expenses 11,000 —

Furniture 20,000 —

Value Added Tax — 25,000

Capital — 1,57,000
4,57,000 4,57,000

Additional Information:
(i) Stock on 31st March, 2013 was valued at Rs. 40,000.

(ii) Included in debtors are Rs. 8,000 due from Ram and included in creditors
are Rs. 6,000 due to Ram.
(iii) Bills Receivables include a bill of Rs. 5,000 received from Mohan, which has

been dishonoured.
(iv) Sales include Rs. 5,000 for the goods sold on approval basis. Approval was
not received till 31st March. Goods are sold at a profit of 25% on cost.
(v) Wages include Rs. 5,000 spent on erection of machinery on 1-4-2012.

(vi) Create a provision for doubtful debts at 5% on debtors.

(vii) Prepaid rates and taxes amounted to Rs. 2,000.

(vii) Depreciate machinery by 10%.

Prepare Trading and Profit & Loss Account for the year ended 31 st March, 2013 and a
Balance Sheet as on that date.
Sol. See Q. 2, Unit I, Accounting Process. [Page P-3
Q. 4. Mayur Electricals Ltd. sells TV sets and Music systems on hire purchase basis.
From the following particulars prepare Hire Purchase Trading Account and Goods
Repossessed Account to find out the profit (show your workings clearly):

T.V. Sets Music Systems

Cost Rs. 16,200 Rs. 6,000

Cash Price Rs. 18,900 Rs. 7,200

Down Payment Rs. 2,700 Rs. 1,200

Monthly Instalments Rs. 1,800 Rs. 600

Number of Instalments 10 12
During the year ended 31st December, 2013, the company sold 200 TV sets and 240
Music systems on hire purchase basis. 4 TV sets on which only 3 instalments each
could be collected and 8 Music systems on which only 5 instalments each could be
collected were repossessed for non-payment of other instalments. These were valued
at 50% of their costs and after spending Rs. 6,000 for their reconditioning, they were
sold for Rs. 84,000. Other instalments collected and due (customers still paying) were
respectively as follows: T.V. Sets 540 and 40
Music systems 800 and 60
Sol. See Q. 3, Unit III, Accounting for Hire Purchase and Instalment System.
[PageP-65
Or
The following is the Receipts and Payments Account of a Sports Club for the year
ended 31st December, 2008:

Receipts Rs. Payments Rs.

To Balance b/d 7,500 By Salaries 14,000

To Subscriptions (including By Match Expenses 28,000

Rs. 2,000 for the year 2007) 40,000 By 12% Investment on 1-1-2008 40,000

To Donations 15,000 By Sports Materials 15,000

To Life Membership Fees 35,000 By Printing & Stationery 12,000

To Sale of Furniture at book 5,000 By Honorarium 5,000

value

To Entrance Fees 10,000 By Furniture 15,000

To Interest on 10% Investments 20,000 By Magazines & Journals 10,000
for full year

To Match Fund 40,000 By Books 35,000

To Donation for Building Fund 45,000 By Municipal Taxes 6,000

To Sale of Newspapers 2,500 By Balance c/d 40,000

2,20,000 • 2,20,000
Additional information:
(i) The position of the Club on January 1, 2008 was as follows:
Subscriptions due -Rs. 3,000
Furniture -Rs. 10,000
Books -Rs. 20,000

Building -Rs. 1,25,000

Stock of Sports Materials -Rs. 4,500
Creditors for Printing -Rs. 2,500
(ii) The Club has 1,000 members each paying an annual subscription of Rs. 50. 20 members
paid their subscription in advance in 2007. In the year 2008, subscription was received in
advance from 15 members.
(iii) Municipal Taxes paid every year on 1st April.
(iv) One member donated a Billiard Table worth Rs. 50,000.
(v) Books were worth Rs. 46,000 on 31st December, 2008 and stock of sports materials on
that date amounted to Rs. 4,000.

(vi) 12% investments include Rs. 30,000 invested from donations received for building fund.
Prepare Income and Expenditure Account for the year ended 31 st December, 2008 and
a Balance Sheet as on that date.
Sol. See Q. 2, Unit II, C. Income & Expenditure Account. [Page P-45
Q. 5. Mayur Stores Ltd. with their Head Office in Delhi, invoiced goods to its branch at
Noida at 20% less than the list price which is cost plus 100% with instructions that
cash sales were to be made at invoice price and credit sales at list price. From the
following particulars, prepare Branch Stock Account, Branch Debtors Account,
Branch Expenses Account, Branch Adjustment Account and Branch Profit & Loss
Account for the year ended 31st December, 2008:

Branch Stock on 1-1-2008 at cost to Branch Rs.

40,000

Branch Debtors on 1-1-2008 30,000

Goods received from HO at invoice price 3,60,000

Cash sales 90,000

Credit sales 3,00,000

Cash received from Debtors 2,40,000

Goods in Transit 40,000

Branch Expenses 40,000

Bad Debts 2,000

Loss of Goods by fire at invoice price 2,400

Transfer of goods to Faridabad Branch at LP. 6,000

Pilferage at LP. (Normal) 1,000

Remittance to Head Office 3,30,000

Insurance claim admitted against loss by fire 1,200

Debtors on 31-12-2008 88,000

Stock on 31-12-2003 at invoice price 60,000

Sol. See Q. 3, Unit IV, Accounting for Inland Branches. [Page P-80
Or
X Ltd. with its Head Office in Delhi, invoiced goods to its Chandigarh branch at 20%
less than the catalogue price which is cost plus 50%, with instructions that cash sales
were to be made at invoice price and credit sales at catalogue price. From the
following particulars available from the branch, prepare Branch Account for the year
ended 31st December, 2008:Rs.

Stock on 1-1-2008 at IP 48,000

Goods received from HO at invoice price 5,28,000

Debtors on 1-1-2008 40,000

Cash sales 1,84,000

Credit sales 4,00,000

Cash received from customers 3,42,540

Discount allowed to customers 53,460

Branch Expenses 25,000

Remittance to Head Office 4,80,000

Debtors on 31-12-2008 44,000

Cash in hand on 31-12-2008 23,000

Closing Stock on 31-12-2008 60,000

It was reported that a part of stock at the branch was lost by fire during the year
whose value is to be ascertained. It is decided to provide for discount on debtors @
15%.
Sol. See Q. 4, Unit IV, Accounting for Inland Branches. [Page P-82
PART 'B'
Q. 6. (a) What is gradual distribution of Cash Rs. 4
(b) A, B and C were partners sharing profits and losses in the ratio of 3 : 2:1. On 31 st
March, 2013, their Balance Sheet was as follows:

Liabilities Rs. Assets Rs.

Sundry Creditors 30,000 Cash at Bank 9,500

Bills Payable 5,000 Stock 15,500

A's Loan 6,000 Sundry Debtors 32,000

Reserve Fund 12,000 Furniture 5,000

Profit & Loss A/c 6,000 Plant 21,000

Capital Accounts: A's Drawings 4,000

A 20,000 B's Drawings 1,000

B 15,000 C's Capital A/c 6,000

94,000 94,000
The firm was dissolved on that date. Assets realised as follows:

Stock -Rs. 12,200; Debtors -Rs. 30,100 and Furniture realised -Rs. 4,200. Plant was taken
over by A at Rs. 18,000. A contingent liability for bill discounted is settled at Rs. 600.
Realisation expenses amounted to Rs. 600. C is isolvent and only Rs. 1,900 could be
recovered from his private estate.
Prepare necessary Ledger Accounts to close the books of the firm. Apply Garner vs.
Murray.
Ans. (a) See Q. 9, Chapter 12. [Page T-69
(b) See Q. 3, Unit V, Accounting for Dissolution of the Partnership Firm.

[Page P-110
Or
AB Ltd. was formed to acquire the business of A and 6 who share profits in the ratio
of 3 : 2 respectively. The Balance Sheet of A and B as on 31 st December, 2008 was as
under:

Liabilities Rs. Assets Rs.

Capital Accounts: Land & Building 40,000

A 64,000 Machinery 20,000

B 40,000 Stock 24,000

Mrs. A's Loan 3,200 Debtors 23,200

Bills Payable 7,200 Bills Receivable 6,400

Sundry Creditors 21,600 Investments 4,800

Cash at Bank 9,600

Goodwill 8,000

1,36,000 1,36,000

It was agreed by the company to take over the assets at book value with the exception of
land and building, stock and goodwill which are taken over at Rs. 45,000, Rs. 20,000 and
Rs. 28,800 respectively. The investments were retained by the firm and sold for Rs. 4,000.
The firm discharged the loan of Mrs. A. The company took over the remaining liabilities. The
purchase consideration was discharged by issuing 10,000 equity shares of Rs. 10 each in
AB Ltd. and the balance was paid in cash. Close the books of the firm assuming that shares
are distributed amongst partners in their profit sharing ratio.
Sol. See Q. 4, Unit V, Accounting for Dissolution of The Partnership Firm.
[PageP-112
 2010
Name of the Paper : Financial Accounting
Name of the Course : B.Com. (Hons.)

Time: Part A - 2 1/2 hours Maximum marks

Part A: 45 For students of Part B-30 minutes Part B; 10 regular College
Maximum marks Part A: 61 For students
Part B: 14 of SOL
This question paper has two parts. Part A is compulsory for all examinees. Part B is meant
only for those examinees who have not offered computerised accounts (applicable for
students of regular colleges). Students of SOL have to attempt Part A and Part B.
Part A and Part B are to be answered on separate answer-books.
PART A
Q. 1. State with .easons whether the following statements are True or False:

(i) A business entity can keep its accounts on accrual basis of accounting.
(ii) Legal Fees paid to acquire a property is capital expenditure.
(iii) Higher depreciation will not affect cash profit of the business.
(iv) Receipts and Payments Account highlights total income and expenditure.
(v) Deferred revenue expenditure is current year's revenue expenditure to be paid in later
years.
Ans. (i) True. Accrual basis of accounting involves recognition of revenues and costs as
they are earned (revenues) and become payable (costs) irrespective of actual receipts and
payments. This basis of accounting gives a complete picture of the financial transactions of
the business as it makes a record of all transactions related to a period. Therefore, a
business entity can keep its account on accrual basis of accounting.
(ii) True. Legal fees paid to acquire a property is part of the cost of that property. It is
incurred to acquire the ownership right of the property and hence a capital expenditure.
(iii) True. Depreciation is not a cash expenditure and as such, the amount of

depreciation does not affect cash profit of the business.

(iv) False. Receipts and Payments Account is a classified summary of cash receipts and
cash payments for an accounting period together with the cash and bank balances at the
beginning and end of the accounting period.
(v) False. Deferred revenue expenditure is that expenditure for which payment has been
made or liability incurred but which is carried forward on the presumption that it will be of
benefit over a subsequent number of years/periods, e.g., heavy advertisement expenses.
Q. 2. (a) Define depreciation. What are the contributory factors for decline in the value
of fixed assets. 4
(b) Mayur Traders, which depreciates its machinery at 10% p.a. according to
Diminishing balance method, had on 1-1-2009 Rs. 4,86,000 balance in Machinery
Account. Part of the machinery purchased on 1-1-2007 for Rs. 60,000 was sold for Rs.
40,000 on 1st July, 2009 and a new machinery at a cost of Rs. 70,000 was purchased
and installed on the same date, installation charges being Rs. 5,000.
Mayur Traders wanted to change its method of depreciation on 1-1-2009 from
Diminishing balance method to Straight line method with effect from 1-1-2007. The
rate of depreciation remains the same as before.
Show Machinery Account for the year 2009. Also show your workings
clearly. 10
Ans. (a) See Q. 1, Chapter 7. [Page T-37
(b) See Q. 3, Unit II, A. Depreciation. [Page P-23
Or
The following are the details of material of Sai Mills:
1-1-2009 Opening Stock 100 units @Rs. 25 per unit
1-1-2009 Purchases 200 units @Rs. 30 per unit
15-1-2009 Issued for consumption . 100 units
1-2-2009 Purchases 400 units @Rs. 40 per unit
15-2-2009 Issued for consumption 200 units
20-2-2009 Issued for consumption 200 units
1-3-2009 Purchases 300 units @Rs. 50 per unit
15-3-2009 Issued for consumption 200 units
Find out the cost of closing stock as on 31-3-2009 according to:
(i) First in first out basis, and
(ii) Weighted average price basis, using perpetual inventory system. Also calculate
cost of closing inventory on LIFO basis under periodic system.
Sol. See Q. 3, Unit II, B. Inventory Valuation. [Page P-36

Q. 3. (a) What is a contingent liability Rs. Give three examples of contingent liabilities.
4
(b) Given below is the Trial Balance of Mr. Ramesh as on 31 st December, 2009:

Particulars Dr. (Rs.) Cr. (Rs.)

Land and Building 1,20,000 —

Office Machinery 70,000 —

Furniture and Fittings 20,000 —

Stock on 1-1-2012 16,000 —

Purchases and Sales 90,000 2,20,000

Salaries 20,000 —

Bad Debts 10,000 —

Debtors and Creditors 35,000 40,000

Sales Tax 10,000 —

Rent, Rates and Taxes 15,000 —

Advertisement 18,000 —

Drawings 5,000 —

Loan to Ashok@16%p.a. on 1-7-2012 20,000 —

Wages 33,000 —

Interest on Loan to Ashok — 1,000

Bills Receivable 10,000 —

Trade Mark 8,000 —

Discount 1,000 —
Wages Payable — 2,000
Capital — 1,98,000

Bank Overdraft — 40,000

5,01,000 5,01,000-

Additional Information:
(i) The value of Stock on 31-12-2009, Rs. 30,000.
(ii) Sales include Rs. 5,000 for the goods sold on approval to Hemant. Goods are sold at a
profit of 25% on cost. Approval was not received till 31 st December.
(iii) Furniture purchased during the year for Rs. 5,000 was wrongly debited to

Purchase Book.
(iv) A cheque of Rs. 8,000 received from customers was deposited in the bank in
the last week of December. It was reported to have been dishonoured.
(v) Free samples worth Rs. 4,000 were distributed during the year.

(vi) Write off further bad debts Rs. 2,000. Also create a provision for doubtful
debts at 10% on debtors.
(vii) Depreciate furniture by 10% and office machinery by 5%.
Prepare Trading and Profit & Loss Account for the year ended 31 st December, 2009
and a Balance Sheet as on that date.
Ans. (a) Contingent liability refers to an obligation to pay on the happening or not
happening of an uncertain event. It is not an actual liability and therefore, it is not provided
for in the Balance Sheet. These liabilities appear as footnotes to the Balance Sheet.
Examples:
(i) Claims against company which are not accepted by the company.
(ii) Liability for the amount uncalled on partly-paid shares.
(iii) Arrears of fixed cumulative dividends.
(iv) Liability for bills discounted.
(b) See Q. 3, Unit I, Accounting Process. [Page P-5
Q. 4. X Co. Ltd. purchased on 1-1-2008 from M/s R.V. Traders four machines having
cash price Rs. 80,000 each on hire purchase basis. The payment was to be made as
follows:
10% of cash price down, and
25% of cash price at the end of each of the following four years.
X Co. Ltd. paid the first instalment but failed to pay the second instalment due on 31-
12-2009. M/s R.V. Traders repossessed three machines leaving remaining one
machine with the buyer. The value of three machines was taken at cost less
depreciation @ 20% p.a. on reducing balance method. M/s X Co. Ltd. charges
depreciation at 10% p.a. on reducing balance method on 31 st Dec. of each year.
M/s R.V. Traders spent Rs. 42,000 on overhauling of the machines repossessed and
sold two of the repossessed machines for Rs. 1,20,000.
Prepare necessary Ledger Accounts in the books of both the parties. 14
Sol. See Q. 4, Unit III, Accounting for Hire Purchase and Instalment System.
[PageP-66
Or
From the following Income and Expenditure Account of Mayur Club for the year ended
31st December, 2009. Prepare Receipts and Payments Account for the year ended 31 st
December, 2009 and a Balance Sheet as on that date:
Income and Expenditure Account

for the year ended 31-12-2009

Expenditure Rs. Income Rs.

To Salaries 48,000 By Subscriptions 1,56,000

To Stationery 3,200 By Donations 16,000

To Postage & Telephone 6,400 By Billiard Room Collections 14,000

To Rates and Taxes 12,000 By Entrance Fees 24,000

To Repairs 16,000 By Interest from Investments 5,400

To Table Tennis Balls 2,400

To Printing of Magazines 4,000

To Electricity Charges 12,000

To Billiard Room Expenses 6,000

To Upkeep of Ground 18,800

To Depreciation on Assets 4,000

To Excess of Income over 82,600

Expenditure

2,15,400 2,15,400

Additional Information:

7.7.2009 (Rs.) .37.72.2009 (Rs.)

Fixed Assets 96,000 64,000

Investments 54,000 94,000

Cash at Bank 3,600 Rs.

Subscriptions Outstanding 6,000 10,000

Subscriptions received in advance 12,000 20,000

Expenses Outstanding: Stationery 1,200 800

Telephone 600 400f

Electricity 1,400 600

Sol. See Q. 3, Unit II, C. Income & Expenditure. [Page P-47
Q. 5. X Co. Ltd. Mumbai invoices goods to its Delhi Branch at cost plus 25%.
All expenses of the branch are met by Head Office and cash collected by the
branch is sent to Head Office. From the following information, prepare Branch
Account and Goods sent to Branch Account in the books of Head Office:

Rs.

Branch Stock at invoice price on 1-1-09 20,000

Branch Debtors on 1-1-09 25,000

Branch Furniture on 1-1-09 40,000

Petty Cash on 1-1-09 3,000

Salary due for December, 2008 4,000

Goods sent to branch during the year (including goods in transit) 2,00,000
Goods returned by Branch to Head Office 5,000
Goods returned by customers to Branch 4,000

Loss of goods in transit at IP (not insured) 10,000

Cash Sales 70,000

Cash received from customers 90,000

Goods spoiled at IP (normal) 4,000

Bad Debts 1,000

Discount allowed 2,000-

Petty expenses incurred by Branch 2,000

Cheque received from Head Office for: Rs.

Salaries @ f 4,000 p.m. 48,000

Rent 10,000
Petty Cash 3,000

Delivery Van 50,000 1,11,000

Branch Debtors on 31-12-09 30,000

Branch Stock on 31-12-09 Rs.

Depreciate furniture and delivery Van @ 10%. 14

Sol. See Q. 5, Unit IV, Accounting for Inland Branches. [Page P-83
Or
(a) Distinguish between Hire purchase system and Instalment system. 4
(b) A Head Office invoices goods to its branch at 20% less than the list price. The list
price is made up by adding 100% to cost price. Goods are sold to customers at list
price both by Head Office and Branch. From the following particulars, prepare Trading
and Profit & Loss Accounts for the year ended 31 st March, 2010 to show profit made
by Head Office and Branch on Wholesale Basis:

Head Office Branch (Rs.)

(Rs.)

Opening Stock at Cost (at invoice price for branch) 60,000 24,000

Purchases 6,00,000 —

Goods sent to Branch at invoice price — 1,44,000

Sales 9,00,000 1,20,000

Expenses 1,30,000 6,000

Sol. (a) See Q. 2, Chapter 10. [Page T-54

(b) See Q. 6, Unit IV, Accounting for Inland Branches. [Page P-84
PART 'B'
Q. 6. A, B and C shared profits and losses in the ratio of 5 : 3 : 2 respectively. On 31 st
March, 2013 their Balance Sheet was as follows:

Liabilities Rs. Assets Rs.

A' Capital A/c 60,000 Furniture 22,000

B's Capital A/c 40,000 Stock 96,000

C's Capital A/c 20,000 Cash 2,000

Creditors 60,000 Profit & Loss A/c 80,000

Bank Loan 20,000

2,00,000 2,00,000

The bank had a charge on all the assets. Furniture realised Rs. 6,000 and stock was sold for
Rs. 50,000. B's private estate realised Rs. 12,000 and his private liabilities were Rs. 10,000.
C was unable to contribute anything. A paid one-third of what was due from him on his own
account.
Prepare Realisation Account, Cash Account and Partners' Capital Accounts, passing
all matters relating to realisation of assets and payment of liabilities through
Realisation Account.
Sol. See Q. 5, Unit V, Accounting for Dissolution of the Partnership Firm.

[PageP-113
Or
(a) Explain the rule of Garner vs. Murray. 4
(b) A, B and C were partners sharing profits and losses in the ratio of 4:3:1. Their
Balance Sheet as on 31st March, 2013 was as follows: [2010

Liabilities Rs. Assets Rs.

A's Capital A/c 1,05,000 Building 90,000

B's Capital A/c 45,000 Machinery 30,000

C's Capital A/c 75,000 Stock 82,500

Bank Loan (Secured) 13,500 Debtors 90,000

Creditors 39,000

A's Loan 15,000

2,92,500 2,92,500

They decided to dissolve the business. The assets were realised gradually and the net
amounts were distributed immediately as follows:

2013 Rs. Rs.

May 30 33,000 Expenses paid 3,000

July 30 25,200 Expenses paid 2,200

Sept. 30 57,000 Expenses paid 4,500

Nov. 30 68,000 Expenses paid 8,000

Dec. 31 1,08,000 Expenses paid 10,000

Show the distribution of cash among partners using maximum possible loss method.
Sol. (a) See Q. 7, Chapter 12, [Page T-68
(b) See Q. 6, Unit V, Accounting for Dissolution of the Partnership Firm.
[Page P-115
 2011
Name of the Paper : Financial Accounting
Name of the Course : B.Com. (Hons.)

Time: Part A - 2 1/2 hours Maximum marks

Part A: 45 For students of
Part B-30 minutes Part B: 10 regular College
Maximum marks Part A: 61 For students
Part B: 14 of SOL
This question paper has two parts. Part A is compulsory for all examinees. Part B is
meant only for those examinees who have not offered computerised accounts (applicable
for students of regular colleges). Students of SOL have to attempt Part A and Part B.
Part A and Part B are to be answered on separate answer-books.
PART A
Q. 1. State with reasons whether the following statements are True or False:
(i) Depreciation is decrease in the market value of a fixed asset.
(ii) Revenue and income are one and the same thing.
(iii) According to accrual concept revenues are recognised only when cash is
actually received.
(iv) Assets 'represent expired costs while expenses are unexpired costs.
(v) Outstanding rent account is a personal account.
Ans. (i) False. Depreciation is a fall in the book value of depreciable fixed asset.
Depreciation is not the result of fluctuations in the value of fixed assets, the fluctuation
(increase/decrease in the market value) is concerned with the market price of the fixed asset
whereas depreciation is concerned with the historical cost.
(ii) False. 'Revenue' and 'Income' are not one and the same thing. Revenue means the
gross inflow of cash receivables or any other form of consideration. It may arise in the
course of ordinary activities of the business. It is measured by the charge made to the
customers of the business for goods supplied or services rendered to them. 'Income',
however, means surplus of revenue over cost. Income belongs to the owners of the
business. This surplus arises as a result of matching all the revenues of a particular period
with all the expenses of the same period.
(iii) False. According to accrual concept revenues are recognised or taken into account
when sale process is just completed whether cash is received or not.
It is so even if the claims to cash are acquired, e.g., debtors or bills receivable.
(iv) False. Assets rather represent unexpired costs and not expired ones. Such unexpired
costs are then treated as expenditure in the coming years or future by way of depreciation,
the depleting value of the assets.
(v) True. 'Outstanding Rent Account' is a personal liability. It is a representative personal
account and it represents an amount payable to the landlord and it is a Liability Account. It
carries only a credit balance.
Q. 2. ABC Ltd. purchased on 1st October, 2004, a machinery for Rs. 4,50,000 and spent
Rs. 10,000 on freight and transit insurance. On 25 th December, 2004, it further spent
Rs. 40,000 on its erection. The machinery was put to use on 1-1-2005.
On 1st July 2005, it purchased another machinery for Rs. 1,00,000. During the year
2006, it spent Rs. 10,000 for repairs on 1-4-2006.

However, on 1-4-2007, a part of the machinery, purchased on 1-10-2004, costing Rs.

2,00,000 was sold for Rs. 1,50,000. On 1-10-2007 it purchased another machinery for
Rs. 3,00,000.
On 1st July, 2008, however, machinery purchased on 1 st July, 2005 was sold for Rs.
65,000. Depreciation was charged by the firm @10% p.a. by written down value
method. During the year 2008, ABC Ltd. decided to change the method of providing
depreciation and adopted the Straight Line Method of charging depreciation @ 10%
p.a. Prepare Machinery Account as per the provisions of AS-6 upto the year ending
31-12-2008.
Sol. See Q. 4, Unit II, A. Depreciation. [Page P-24
Or
(a) What is meant by accounting standards Rs. State briefly the merits of issuing
accounting standards. 4
(b) The following are the details of material in respect of a certain item of M/s Ajay &
Company: 10
1-1-2008 Purchases 600 units @Rs. 20 each
1-2-2008 Purchases 200 units @Rs. 24 each

15-2-2008 Sales 200 units @Rs. 30 each

1-4-2008 Purchases 300 units @Rs. 30 each
15-4-2008 Sales 400 units @Rs. 40 each
1-6-2008 Purchases 300 units @Rs. 40 each

15-6-2008 Sales 350 units @Rs. 50 each

Find out the cost of closing stock as on 30-6-2008 according to:
(i) First-in-first-out basis, and
(ii) Weighted average price basis, using perpetual inventory system.
Sol. (a) See Q. 1, Chapter 3. [Page T-15
(b) See Q. 4, Unit II, C. Inventory Valuation. [Page P-37
Q. 3. From the following Trial Balance and additional information, prepare Trading and
Profit & Loss Account of Mr. Mukul for the year ended 31 st March, 2013 and Balance
Sheet as at that date:
Particulars Dr. (Rs.) Cr. (Rs.)

Capital / Drawings 10,000 1,70.000

Plant and Machinery 1,10,000 —

Sales / Purchases 84,000 1,65,000

Returns 5,000 4,000

Bad debts / Bad debts Recovered 5,000 26,450

Freight inwards 5,000 —

Freight outwards 7,000 —

Discount 2,000 1,000

Commission 4,000 3,000

Rent 3,000 4,000

Interest 2,500 3,000

Office and Administrative Expenses 6,000 —

Selling and Distribution Expenses 10,000 —
Creditors/Debtors 2,15,000 2,02,000

Bills Payable/Bills Receivable 10,000 5,600

Loan 20,000 50,000

Investments 50,000 —
Opening Stock 54,000 —

Cash in hand 5,000 _.

Cash at Dena Bank 45,550 —

Bank overdraft at Canara Bank .— 20,000

Wages and Salaries 1,000 _

6,54,050 6,54,050

Additional Information:
(i) Closing Stock at market price as at 31 st March, 2013 was Rs. 61,500.

However, its cost was Rs. 80,000.

(ii) Provide for depreciation on Plant and Machinery @ 10% p.a.
(iii) Provide interest on capital @ 6% p.a. and an additional capital of Rs. 10,000 was
introduced on 1st Oct. 2012.
(iv) Charge interest on drawings @ 9% p.a.
(v) Goods costing Rs. 10,000 were destroyed due to fire on 30th March, 2013. The Insurance
Company accepted claim to the extent of 60% only and paid the claim money on 10 th April,
2013.
(vi) Goods worth Rs. 10,000 were sent to a customer on approval basis and have been
accounted for in the books as actual sale'. These goods remained unapproved on 31 st
March, 2013. The cost of such goods was Rs. 8,000.

(vii) Received credit purchase invoice of Rs. 10,500 on 27th March 2013 and recorded in the
books but the goods were not received till the end of the accounting year.
(viii) Manager is entitled to a commission on 5% of net profit after charging the commission.
Sol. See Q. 4, Unit I, Accounting Process. [Page P-6
Q. 4. Deepak purchased four second-hand cars on hire-purchase system. Cash price
being Rs. 52,500 each. The hire purchase price for all the four cars was Rs. 2,40,000.
The payment was to be made Rs. 60,000 on signing the agreement and three
instalments of Rs. 60,000 each at the end of each of the three years. Deepak charges
depreciation @ 10% p.a. on Straight Line Method.
Deepak paid the down payment and first instalment but could not pay the second
instalment. The vendor, after negotiations, took back three cars. These cars were
taken back after depreciating them @ 20% p.a. on written down value method. One car
was left with the purchaser.
The vendor spent Rs. 3,600 on repairs and sold two of these cars for Rs. 80,000.
Show necessary ledger accounts in the books of both the parties. 14
Sol. See Q. 5, Unit III, Accounting for Hire Purchase and Instalment System.
[PageP-68
Or
Prepare Income and Expenditure Account of Lions Club for the year ending 31 st March
2009 and a Balance Sheet as on that date from the following:
Receipts and Payments Account
for the year ending 31-3-2009

Receipts Rs. Payments Rs.

To Balance b/d: By Salary:

Cash 20,000 Secretary 60,000

Bank 1,20,000 1,40,000 Staff 50,000 1,10,000

To Subscription: By Canteen expenses 1,20,000

2007-08 5,000 By Miscellaneous 25,000

Expenses

2008-09 55,000 By Construction of 1,50,000

building

2009-10 4,000 64,000 By Balance c/d:

To Interest, from Bank 10,000 Cash 13,000

To Sale of Old Furniture 20,000 Bank 40,000 53,000

To Sale of Newspapers 4,000

To Canteen Collections 1,20,000,

To Donation for 1,00,000

Building
4,58,000 4,58,000

Additional Information: 31-03-08 (Rs.) 31-03-09 (Rs.)

(i) Subscription outstanding as on 10,000 6,000

(ii) Subscription in advance as on 2,000 4,000

(III) Salary of staff outstanding 10,000 20,000

(iv) Canteen expenses prepaid 10,000 15,000

(v) Furniture at book-value 1,40,000 —

(vi) Buildings (under construction) 1,50,000 4,00,000

(vii) Fixed Deposits with Bank 1,00,000 1,00,000

(viii) Building fund 2,00,000 —

Book value of furniture sold during the year was Rs. 15,000 and depreciation on
furniture is charged @ 10% p.a. on closing balance.
Sol. See Q. 4, Unit II, C. Income & Expenditure Account. [Page P-49
Q. 5. M/s XYZ Ltd. has branches at Delhi and Agra and goods are invoiced at
cost plus a profit of 20% on sales. The following information is available of the
transactions at Delhi branch for the year ending 31 st March, 2011:

01-04-2010 (Rs.) 31-03-2011 (Rs.)

Stock at Invoice Price 40,000 —

Debtors 12,000 11,000

Petty Cash 150 250

Transactions during 2010-11: Rs.

Goods sent to branch at cost to HO 3,36,000

Goods returned by branch to HO 15,000

Cash Sales 1,05,000

Credit Sales 1,80,000

Normal Loss at IP 350

Goods pilfered at IP 3,000

Goods lost by fire at IP 4,000

Insurance Co. paid to HO for loss by fire at Delhi 3,000

Cash sent for petty expenses 32,000

Bad debts at Delhi branch 400

Goods transferred to Agra branch under instructions from HO at IP 12,000

Insurance charges paid by HO 200

Goods returned by Debtors 500

Note: Goods transferred to Agra branch were in transit (given above) on 31st
March, 2011.

Prepare:
(i) Branch Stock Account; (ii) Branch Adjustment Account;
(iii) Branch Profit & Loss Account; (iv) Stock Reserve Account; and
(v) Branch Debtors Account
Sol. See Q. 7, Unit IV, Accounting for Inland Branches. [Page P-85
Or
From the following details relating to Delhi branch for the year ending March 31 st, 2011,
prepare Branch Account and Goods sent to Branch Account in the books of Head Office.
Show your workings clearly:Rs.

Stock on 1-4-2010 25,000

Debtors on 1-4-2010 10,000

Furniture on 1-4-2010 6,000

Petty Cash on 1-4-2010 1,000

Insurance prepaid on 1-4-2010 300

Salaries outstanding on 1-4-2010 4,000

Goods sent during the year 2010-11 2,00,000

Cash sales during the year 2,70,000

Total Sales 3,50,000

Cash received from Debtors 65,000

Cash paid by Debtors direct to HO 5,000

Goods returned by branch 2,000

Goods returned by Debtors 1,000

Cash sent to Branch for expenses:

Rent (Rs. 800 p.m.) 9,600

Salary (Rs. 4,000 p.m.) 48,000

Petty Cash 2,000

Insurance (upto June 2011) 1,200 60,800

Petty Cash Expenses 2,200

Discount allowed to Debtors 500

Stock on 31-3-2011 15,000

Depreciation on furniture at 10% p.a.

Goods costing Rs. 2,500 were damaged in transit and a sum of Rs. 2,000 was recovered by
branch from the insurance company in full settlement of the claim.
Sol. See Q. 8, Unit IV, Accounting for Inland Branches. [Page P-87
PART B
Q. 6. A and B were partners sharing profits and losses in proportion of 3/5 and 2/5
respectively. Their Balance Sheet as on 31 st December, 2013 was as under:

Liabilities Rs. Assets Rs.

Bills Payable 3,500 Cash 4,500

Sundry Creditors 6,400 Book Debtors 7,500

Reserve Fund 15,000 Investments 4,000

Capitals: Stock 31,000

A 70,260 Plant & Machinery 50,000

B 46,840 1,17,100 Freehold Premises 45,000

1,42,000 1,42,000

AB Limited was formed with an authorised capital of Rs. 5,00,000 divided into 25,000
equity shares of Rs. 10 each and 25,000 preference shares of Rs. 10 each to acquire
the going concern of A and B upon the following terms:

(i) The company took over all assets except investments. It valued the stock and plant and
machinery at 10 per cent less than the book value and the freehold premises at 20 per cent
more than the book value.
(ii) The liabilities were to be discharged by the company.
(iii) The goodwill of the firm was to be valued at 2 years' purchase of the average profits of 3
years. The working results of the firm showed that it had made profits of Rs. 15,000 in 2010,
Rs. 18,000 in 2011 and Rs. 21,000 in 2012 after setting aside Rs. 5,000 to reserve fund
every year.
(iv) The purchase price was agreed upon to be paid Rs. 53,000 in fully paid equity shares,
Rs. 50,000 in fully paid preference shares, Rs. 30,000 in debentures and the balance in
cash.
(v) The partners sold the investments and realised Rs. 4,100.
You are required to prepare in the books of the firm of A and B:
(i) Realisation Account;
(ii) Capital Accounts of the partners; and
(iii) Cash Account,
Assuming that shares and debentures are to be distributed in profit sharing ratio, the
final settlement being made in Cash.
Sol. See Q. 7, Unit V, Accounting for Dissolution of the Partnership Firm.

[Page P-116
Or
A, B and C were partners sharing profits and losses in the ratio of 3 : 2 : 1. On 31 st
December, 2008, their Balance Sheet was as follows:
Balance Sheet

Liabilities Rs. Assets Rs.

Sundry Creditors 30,000 Cash at Bank 9,500

Bills Payable 5,000 Stock 15,500

A's Loan 6,000 Sundry Debtors 32,000

Reserve fund 12,000 Furniture 5,000

Profit & Loss A/c 6,000 Plant 21,000

Capital Accounts: Drawings Account:

A 20,000 A 4,000

B 15,000 B 1,000

C's Capital 6,000

94,000 94,000

The firm was dissolved on that date. Stock realised Rs. 12,200, Debtors Rs. 30,000 and
Furniture Rs. 4,200. Plant is taken over by A at Rs. 18,000. A contingent liability for bills
discounted materialised to the extent of Rs. 600. Realisation expenses amounted to Rs.
600. C is insolvent, but his private estate paid Rs. 1,900.
Prepare Realisation Account, Capital Accounts and Bank Account. Apply Garner vs.
Murray rule. 14
Sol. See Q. 8, Unit V, Accounting for Dissolution of the Partnership Firm.
[Page P-117
 2012
Name of the Paper : Financial Accounting
Name of the Course : B.Com. (Hons.)

Time: Part A - 2 1/2 hours Maximum marks Part A: 45 For students of

Part B-30 minutes Part B: 10 regular College
Maximum marks Part A: 61 For students
Part B: 14 of SOL
This question paper has two parts. Part A is compulsory for all examinees. Part B is
meant only for those examinees who have not offered computerised accounts (applicable
for students of regular colleges). Students of SOL have to attempt Part A and Part B.
Part A and Part B are to be answered on separate answer-books.
PART A
Q. 1. State with reasons whether the following statements are True or False:
(i) Accounting is concerned only with identifying and recording of economic events.
(ii) Receipts & Payments Account is a summary of all capital receipts and payments.
(iii) Providing depreciation ensures sufficient cash for asset replacement.
(iv) Under stock and debtors system/Branch Account is a nominal account.
(v) The gain from sale of capital assets need not be added to revenue to ascertain the net
profit of the business.
Ans. (i) False. Accounting is also concerned with classifying and summarising the financial
transactions and interpreting the results thereof.
(ii) False. Receipts and Payments Account is a summary of all cash/bank receipts and
payments whether of capital or revenue in nature.
(iii) False. Providing depreciation does not ensure sufficient cash for asset replacement
especially under inflationary conditions.
(iv) False. Under debtor system, Branch Account is a nominal account.
(v) True. The profit on sale of capital assets should not be added to ascertain the true net
profit of a business because it is not as a result of normal business operations.
Q. 2 .From the following Trial Balance of Sachin as on 31 st March, 2011 you are
required to prepare a Trading and Profit & Loss Account for the year ended 31 st
March, 2011 and a Balance Sheet as on that date, after making the necessary
adjustments as mentioned hereunder:

Particulars Dr. (Rs.) cr. (Rs.)

Sachin's Capital Account — 1,60,000

Sachin's Drawings 24,000 —

Furniture and Fixtures 8,000 —

Plant and Machinery 60,000 —

Patents (Ten years from 01-04-2010) 40,000 —

Stock on 01-04-2010 40,000 —

Purchases 1,70,000 —

Salaries 14,800 —

Wages 30,000 "—

Sundry Debtors 20,400 —

Sales — 2,64,000

Cash in hand 13,250 —

Land — 28,350

Loan from Kapil (@ 6% on 01 -10-2011) — 20,000

Postage and Fax 3,000 —

Rent, Rates and Taxes 7,200 —
Bad Debts 800 —

Sundry Creditors — 24,000

Discount — 1,200
Carriage Inwards 400 —

Interest on Loan 300 —

Insurance 1,600 —
Travelling Expenses 1,000 —

Sundry Expenses 600 —

Cash at Bank 20,500 —

Bank Overdraft — 15,000

4,84,200 4,84,200

Adjustments:
(i) Stock on 31-03-2011 is valued Rs. 30,000.

(ii) A new machine was installed on 01-04-2010 for Rs. 3,000. No entry in this respect was
passed in the books. Wages Rs. 1,000 paid for installation of the machine were debited to
wages account.
(iii) Of the sundry debtors Rs. 200 are bad and to be written off. You are required to maintain
a provision for doubtful debts @ 5% on debtors and a provision for discount on debtors @
2%.
(iv) Goods costing Rs. 2,000 were given away as free samples for publicity.

(v) Depreciate plant and machinery ac 20% and furniture and fixtures at
10%.
(vi) Goods costing Rs. 1,000 were sent to a customer for Rs. 1,200 on 27th March, 2011 on
sale or return basis. This was recorded as actual sale.
Sol. See Q. 6, Unit I, Accounting Process. [Page P-10
Q. 3. (a) Explain the concept of Deferred Revenue expenditure by giving suitable
examples. How is it different from capital expenditure Rs. 4
(b) A firm purchased on 1st January, 2008, certain machinery for Rs. 3,88,000 and
spent Rs. 12,000 on its creation. On 1 st July, 2008 additional machinery costing Rs.
2,00,000 was purchased. On 1 st July, 2010, the machine purchased on 1st January,
2008, having become obsolete was auctioned for Rs. 2,00,000 and on the same date a
new machine was purchased for Rs. 3,00,000.
Depreciation was provided for annually on 31 st December @ 10% P.A. on original cost
of the machinery. No depreciation need be provided when machinery is
sold/auctioned. In 2011, however, the firm changed the method of providing
depreciation and adopted the method of writing off 15% P.A. on written down value
method with retrospective effect. 10
Prepare Machinery Account for the years 2008 to 2011.
Sol. (a) See Q. 14, Chapter 4. [Page T-26
(b) See Q. 5, Unit II, A. Depreciation. [Page P-26
Or
(a) Define the term revenue and state the conditions that should be satisfied for
revenue recognition in sale of goods transactions. 4
(b) From the following information calculate cost of sales, gross profit, and value of
closing stock for the month of January, 2012, according to FIFO, LIFO and weighted
average method. 10

Date Particulars No. of Units Rate per Unit

Rs. (Rs.)

01-0 1- 2012 Opening Stock 500 8

05-01-2012 Purchased 800 9

14-01-2012 Purchased 700 9

21-01-2012 Purchased 1000 10

23-01-2012 Purchased 500 9

During January 2012 Sold 2900 17
Sol. (a) Revenue in business is the gross income received by an entity from its normal
business activities before any expenses have been deducted. A business generates revenue
when it exchanges its goods or services with its customers in return for money or other
assets. A business incurs expenses by exchanging its assets for the goods and service
activities that are needed to generate that revenue. A business makes a profit if its revenues
exceed its expenses. However, if the costs of generating the revenue (expensed assets and
service activities) are greater than the revenue received, then the business makes a loss.
Revenue recognition in sale of goods transactions. See Q. l(Point 7), Chapter 2.
[Page T-11
(b) See Q. 5, Unit II, B. Inventory Valuation. [Page P-38
Q. 4. The following is Income and Expenditure Account of Delhi Club for the year
ended 31st March, 2012:
Income and Expenditure Account for the year ended 31st March, 2012

Expenditure Rs. Income Rs.

Salaries 39,000 Subscriptions 1,36,000

Rent 9,000 Donations 10,000

Printing 1,500
Insurance 1,000

Audit Fees 1,500

Games and Sports 7,000

Subscription Written off 700

Miscellaneous Expenses 29,000

Loss on Sale of Furniture 5,000

Depreciation on: Sports 12,000
equipment

Furniture 6,200

Excess of Income over 34,100

Expenditure
1,46,000 1,46,000

Additional Information: 31-03-11 31-03-12

(Rs.) (Rs.)

Subscription in Arrears 5,200 7,400

Advance Subscription 2,000 3,000

Outstanding Exp: Rent 1,000 1,600

Salaries 2,400 700

Audit Fees 1,000 1,500

Sports Equipment less Depreciation 50,000 48,000

Furniture less Depreciation 60,000 55,800

Prepaid Insurance — 300

Book value of Furniture sold is Rs. 14,000. Entrance fee capitalized Rs. 8,000. On 1st
April 2011, there was no cash in hand but bank overdraft was Rs. 30,000. On 31st
March, 2012, cash in hand amounted to Rs. 1,700 and the rest was bank balance.
Prepare Receipt and Payment Account of the club for the year ended 31 st March, 2012.
Sol. See Q. 6, Unit II, C. Income & Expenditure Account. [Page P-52
Or
(a) Distinguish between Operating lease and Financial lease. 4
(b) X sells goods at hire-purchase basis, the price being cost plus 50%. From the
following information calculate profit by preparing Ledger Accounts on stock and
debtor system for the year ended 31st March, 2012. 10

April 1st, 2011 Rs.

Stock at the shop at cost 1,08,000

Stock on hire at selling price 54,000

Installment due at beginning 30,000

Cash received from customers 3,60,000

Goods Repossessed (Installment due Rs. 12,000) 3,000

Installment due at the end 54,000

Closing stock at shop including goods Repossessed 1,23,000

Purchases made during the year 3,60,000

Sol. (a) See Q. 6, Chapter 10. [Page T-58
(b) See Q. 7, Unit III, Accounting for Hire Purchase and Instalment System.
[PageP-71
Q. 5. S.K. Brothers' has a branch at Delhi. Goods are invoiced at a profit of
20% on sales. The following information is available of the transactions at
Delhi Branch for the year ending 31st March, 2012:
Balance as on 01-04-2011 Rs.

Branch stock at invoice price 50,000

Branch Debtors 34,000

Branch Cash 8,000

Balance as on 31-03-2012:
Branch stock at invoice price Rs.

Branch Debtors 47,840

Branch Cash 18,000

Transactions during 2011-2012

Good invoiced to Branch 6,50,000

Goods received by the Branch 6,00,000

Goods returned by Branch to HO 25,000

Credit sales at Branch 3,50,000

Cash sales at Branch 2,05,000

Normal loss at Branch 10,000

Goods lost by fire at Branch 15,000

Cash remitted to HO Rs.

Cash received from branch debtor 3,14,600

Bills receivable received from Branch debtors 20,000
Amount received by the Branch on discounting of the above bills 19,600

Cash sent to Branch for expenses 72,000

Actual cash expenses at Branch 71,800
Cash discount allowed to customers 1,560
Make a provision for Bad and Doubtful debts @ 5% on Debtors.
Prepare:
(i) Branch Stock Account; (ii) Branch Debtors Account;
(iii) Branch Expenses Account; (iv) Branch Cash Account;
(v) Branch Adjustment Account; (vi) Branch Profit and Loss Account.
Sol. See Q. 11, Unit IV, Accounting for Inland Branches. [Page P-92
Or
(a) Distinguish between a 'dependent branch' and 'independent branch'.
(b) M/s Virat & Company with their Head Office at Delhi, have a branch at Noida. They
supply goods to its branch at selling price less 20%. The company as well as the
branch sells goods to consumers at a profit of 100% on cost. M/s Virat & Co. also
sells goods to their approved dealers at the same price at which they are invoicing to
their branch at Noida. From the following particulars, prepare Trading and Profit &
Loss Account of the Head Office and of the Branch for the year ending 31st March,
2012:

Head Office (Rs.) Branch (Rs.)

Stock at beginning 1,50,000 8,000

Purchases during the year 12,80,000 —

Goods sent to Branch 2,00,000 --

Goods received from HO — 2,00,000

Goods sold to approved Dealers 3,00,000 —

Goods sold to customers 6,00,000 1,80,000

Expenses 50,000 15,000

Ans. (a) See Q. 2,, Chapter 11. [Page T-60
(b) See Q. 12, Unit IV, Accounting for Inland Branches. [Page P-94
PART B
Q. 5. X, Y and Z are three partners in a firm, sharing profits and losses in the ratio of 5
: 3 : 2. The Balance Sheet of the firm as on 31-03-2013 was as under:

Liabilities Rs. Assets Rs.

Creditors 1,60,000 Building 3,20,000

Bills Payable 80,000 Furniture 40,000

Bank Loan 80,000 Investments 1,20,000

Capitals: X 2,40,000 Profit & Loss Account 3,20,000

Y 1,60,000

Z 80,000

8,00,000 8,00,000
The Bank loan was secured by charge on the building. Assets realised as under:
Building Rs. 1,60,000; Furniture Rs. 16,000 and Investments Rs. 54,000.

Y's private estate realised Rs. 48,000 and his private liabilities are Rs. 40,000. Z was
insolvent. X could just contribute 1/3 of what was finally due from his own account.
Record all matters relating to realisation of assets only through realisation account.
Prepare necessary ledger accounts in the books of the firm.
Sol. See Q. 11, Unit V, Accounting for Dissolution of the Partnership Firm.
[Page P-123
Or
(a) Explain the rule in Garner vs. Murray.
(b) X, Y, Z carry on business in partnership sharing profits and losses in the ratio 4 : 3
:1. On 31st March, 2012, they agreed to sell their business to AB Ltd. Their position on
that date was as follows:

Liabilities Rs. Assets Rs.

X's Capital 2,00,000 Freehold premises 2,40,000

Y's Capital 1,50,000 Machinery 2,10,000

Z's Capital 1,30,000 Stock 1,15,000

Loan on Mortgage 80,000 Bood Debts 75,000

Sundry Creditors 90,000 Cash 10,000

6,50,000 6,50„000
The company took the following assets at the valuation shown:

(Rs.) (Rs.)

Freehold Property 3,05,000 Book Debts 70,000

Machinery 1,59,000 Goodwill .50,000

Stock 1,10,000

The company agreed to pay the creditors Rs. 88,500. The company paid Rs. 3,35,000
in shares and the balance in cash. Expenses on realisation amounted to Rs. 1,500.
Prepare relevant ledger accounts in the books of the firm. 10
Sol. (a) See Q. 7, Chapter 12. [Page T-68
(b) See Q. 12, Unit V, Accounting for Dissolution of the Partnership firm.

[PageP-124
 2013
Name of the Paper : Financial Accounting
Name of the Course : B.Com. (Hons.)

Time allowed: Maximum marks: 75

Section A - 2 1/2 hours Section A - 55
Section B - 30 minutes Section B - 20
This Question Paper has 2 parts.
Section A and Section B are to be answered on separate Answer-books.
SECTION A
Q.1. (a) Write a note on significance of accounting standards in the changing
global economic and business environment. 6
(b) Differentiate between Cash and Accrual basis of accounting. 5
Ans. (a) See Q. 1, Chapter 3. [Page T-15
(b) See Q. 4, Chapter 1. [Page T-3
Q. 2. From the following balances taken from the ledger of Ms. Jenny on 31 st
March, 2013, prepare the Trading and Profit & Loss Account for the year ended
31st March, 2013 and the Balance Sheet as on that date:

Particulars Rs. Particulars Rs.

Sundry creditors 19,000 Bad debts 100

Building 15,000 Loan from John 2,500

Income-tax 1,025 Sundry Debtors 9,500

Loose Tools 1,000 Investments 6,500

Cash at Bank 16,200 Bad debts reserve 1,600

Sundry Expenses 1,990 Rent and Rates 850

Bank Interest (Credit) 75 Furniture 3,000

Purchases 1,57,000 Stock (1.4.2012) 27,350

Wages 10,000 Capital 47,390

Carriage Inwards 1,120 Discount allowed 630

Sales 1,85,000 Dividend Income 535

Motor Van 12,500 Drawings 2,000

Cash in hand 335 Bills payable 10,000

Adjustments:
(i) Write off further Rs. 300 as bad debts out of Sundry Debtors and create a

reserve for bad debts at 20% on debtors.

(ii) Dividend accrued on investments is Rs. 135. Rates paid in advance Rs. 100 and
wages owing Rs. 450.
(iii) On 31-3-2013, stock was valued at Rs. 15,000 and loose tools were valued at

Rs. 800.
(iv) Write off 5% for depreciation on building and 40% on motor van.
(v) In case of profits, manager is entitled to a commission of 5% on net
profits.
(vi) Provide for interest at 12% per annum due on loan taken from John on 1-6-2012.
Sol. See Q. 7, Unit I, Accounting Process. [Page P-12
Or
Given below is the Receipts and Payments Account of Resident Welfare Association
Sports Club for the year ending 31-12-2012.

Receipts Rs. Payments Rs.

Balance b/d 2,100 Purchase of sports material 7,000

Subscription (including Rs. 1,400 Stationery 5,700

for 2011 and Rs. 1,500 for 2013) 18,000 Honorarium 3,000

Life membership fees 9,000 Upkeep of ground 2,600

Legacies 2,000 Salaries 7,000

Entrance fees 4,000 Telephone charges 2,000

Donations for building fund 18,000 Refreshments 1,400

Hire of club hall 5,000 Tournament expenses 6,000

Sale of old bats and balls 500 Miscellaneous expenses 1,000

Sale of old furniture 700 10% Investment (on 1-7-2006) 12,000

Furniture (part payment) 5,000

Balance c/d 6,600

Total 59,300 Total 59,300

Additional Information: 2.1,2012 31.12.2012

Rs. Rs.

Subscription due 1,400 2,400

Subscription received in advance — 1,500

Audit fees outstanding — 1,000

Creditors for stationery 600 500

Stock of stationery — 800

Stock of sports material 1,100 1,500

Building 40,000 40,000

Furniture was sold on 1-1-2012 at its book value. On the same date furniture for Rs. 8,000
was purchased. Depreciation is to be charged at 10% p.a. on furniture.
Prepare Income and Expenditure Account for the year ended 31-12-2012 and Balance
Sheet as on that date.
Sol. See Q. 7, Unit II, C. Income & Expenditure Account. [Page P-54
Q. 3. Delhi Head Office supplies goods to its branch at Noida at invoice price which is
cost plus 50%. All cash received by the branch is remitted to Delhi and all branch
expenses are paid by the Head Office. From the following particulars related to Noida
branch for the year 2012 prepare:
(a) Branch Stock Account
(b) Branch Debtors Account
(c) Branch Expenses Account and
(d) Branch Adjustment Account in the books of Head Office so as to find out the
gross profit and net profit made by the branch: 11

Rs.

Stock with Branch on 1-1-2012 (Invoice Price) 1,20,000

Branch Debtors on 1-1-2012 24,000

Petty Cash Balance on 1-1-2012 200

Goods received from HO 3,72,000

Goods returned by debtors direct to HO 6,000

Allowances to Customers off Selling Price 4,000

Cash Sales 2,08,000

Credit Sales 1,74,000

Cash received from debtors 1,80,000

Discount allowed to debtors 4,800

Expenses paid by HO in Cash: Rent Rs. 4,800

Salaries Rs.
48,000
Petty Cash Rs. 2,000 54,800

Stock with Branch on 31-12-2012 1,08,000

Petty Cash Balance on 31-12-2012 200

Sol. See Q. 13, Unit IV, Accounting for Inland Branches. [Page P--95
Or
You are required to prepare:
(a) Trading and Profit and Loss Account of Kolkata Branch of Suparna Limited for the year
ending 31st March 2013
(b) Journal Entries in the books of Suparna Limited necessary to incorporate the accounts of
Kolkata Branch
(c) Kolkata branch account in the books of Suparna Limited. The following is the Trial
Balance of Kolkata Branch as on 31-3-2013:

Particulars Dr. (Rs.) Cr. (Rs.)

Mumbai Head Office A/c 32,400 —

Stock on 1-4-2007 60,000 —

Purchases 1,78,000 —

Goods received from HO 90,000 —

Sales — 3,80,000

Goods supplied to HO — 60,000

Salaries 15,000 —-

Debtors 37,000 —

Creditors — 18,500
Rent 9,600 —

Office expenses 4,700 —

Cash and Bank balance 17,800 —

Furniture 14,000 —
4,58,500 4,58,500

Closing Stock was valued at Rs. 27,000. The Kolkata branch account in the books of Head
Office stood at Rs. 4,600 (Debit balance) on 31st March, 2013. On 28th March, 2013, the
Head Office forwarded goods to the value of Rs. 25,000 to the Kolkata branch where they
were received on 3rd April, 2013. 11
Sol. See Q. 1, Unit IV, Accounting for Inland Branches. [Page P-77
Q. 4. X purchased 5 trucks on 1 st October, 2011, the cash price of each truck being Rs. 11
lakh. X was to pay 20% of the cash price at the time of delivery and 25% of cash price at the
end of each of the subsequent four half yearly periods beginning from 31 st March, 2012.
On X's failure to pay the instalment due on 30 th September, 2012, it was agreed that X could
keep three trucks, on the condition that value of two trucks would be adjusted against the
amount due, the trucks being valued at cost less 25% depreciation.
Show the necessary ledger accounts in the books of X, assuming that his books are closed
on 31st March each year and he charges depreciation @15% on original cost of trucks. 11
Sol. See Q. 8, Unit III, Accounting for Hire Purchases and Instalment System.
[Page P-72
Or
(a) State the differences between Hire Purchase and Instalment System. 3
(b) Humpty and Dumpty carrying on business in partnership and sharing profits and
losses in the ratio 2 :1 had the following balances to the credit of their accounts in the
books of their firm as on 31st December, 2011.
Humpty Rs. 3,45,000

Dumpty Rs. 1,80,000

A statement of affairs prepared on 31st December 2012 disclosed the following
position of the business:

Particulars Rs. Particulars Rs.

Sundry Creditors: Cash in hand 67,500

For goods 1,95,000 Cash at Bank 45,000

For expenses 39,000 Sundry Debtors 2,55,000

Stock 3,30,000

Furniture 42,000

During the year, Humpty had drawn Rs. 99,000 from the firm. He had also taken for his
personal use, goods worth Rs. 12,000. He had sold some goods of the business for Rs.
27,000 and retained the money himself. He had personally paid to some of the employees of
the firm Rs. 49,500 towards their salaries which he was entitled to be reimbursed.
Dumpty had withdrawn Rs. 37,500 in cash, had also taken for his personal use goods worth
Rs. 7,500. he had paid towards some expenses of the firm for Rs. 24,000 from his private
estate.
Prepare a statement showing profit of the firm for the year ending 31 st December, 2012
as well as Balance Sheet of the firm as on that date. 8
Sol. (a) See Q. 2, Chapter 10. [Page T-54
(b) See Q. 15, Unit V, Accounting for Dissolution of the Partnership Firm.
[PageP-129
Q. 5. On 1st April, 2008, a new plant was purchased for Rs. 80,000 and a further sum of
Rs. 4,000 was spent on its installation. On 1 st October, 2010, another plant was
acquired for Rs. 50,000. Due to an accident on 3 rd January, 2011, the first plant was
totally destroyed and was sold for Rs. 2,000 only. On 21st January, 2012, a second-
hand plant was purchased for Rs. 60,000 and a further sum of Rs. 10,000 was spent
for bringing the same to use from 15th March 2012. Depreciation has been provided
@10% on straight line basis. It was a practice to provide depreciation for full year on
all acquisitions made at any time during any year and to ignore depreciation on any
item sold and disposed off during the year. None of the assets were insured. The
accounts are closed annually on 31 st March. It is now decided to follow the rate of 20%
on diminishing balance method with retrospective effect in respect of the existing
items of plant and to make the necessary adjustment entry on 1st April, 2012.
You are required to make: (i) Plant Account (ii) Provision for Depreciation Account (iii)
Journal Entries, where necessary. Show all the working notes. 11
Sol. See Q. 7, Unit II, A. Depreciation. [Page P-29
Or
(a) Write short notes on:
(i) AS-2 (ii) AS-6 (2.5 x 2)
(b) At the beginning of January, 2013, Amit Limited had in stock 200 units @Rs. 25 per
unit. Further information for the month of January is as follows:
January 2013
2 Purchases 400 units @Rs. 30 per unit
5 Sales 300 units @Rs. 40 per unit
10 Purchases 500 units @Rs. 35 per unit
15 Sales 200 units @Rs. 40 per unit
20 Sales 200 units @Rs. 42 per unit
25 Purchases 600 units @Rs. 36 per unit
28 Sales 300 units @Rs. 42 per unit
Calculate the cost of closing inventory and gross profit by FIFO method under:
(i) Perpetual system of inventory
(ii) Periodic system of inventory 6
Sol. (a) (i) AS-2. See Q. 6, Chapter 8. [Page T-48
(ii) AS-6. See Q. 8, Chapter 7. [Page T-42
(b) See Q. 7, Unit II, B. Inventory Valuation. [Page P-40
SECTION-B
Q. 6. A, B and C had the following Balance Sheet on 31-03-11:

Liabilities Rs. Assets Rs.

Trade Creditors 40,000 Fixed Assets 40,000

Loan from Mrs. A 15,000 Debtors 25,000

(with a charge on stock) Stock 20,000

Loan from A 10,000 Profit & Loss A/c 30,000

Capital Accounts:

A 20,000

B 20,000

C 10,000
1,15,000 1,15,000

The firm was dissolved. Stock realised 50% and fixed assets and debtors realised Rs.
30,000 in all. The positive position of the partners was as under:

Private Estate Private Liabilities

(Rs.) (Rs.)

A 10,000 15,000
B 8,000 6,000

C was able to pay 50 paise in the rupee of what was payable on his own account to the firm.
The partners shared profits and losses in the ratio of 4 : 3 : 3 for A, B and C respectively.
The loss on realisation is to be determined after considering the amount finally paid to the
creditors.
You are required to close the books of the firm by preparing the necessary ledger
accounts.
Sol. See Q. 13, Unit V, Accounting for Dissolution of the Partnership Firm.
[PageP-126
Or
(a) Ram, Shyam and Mohan are in partnership sharing profits and losses in the ratio of 3 : 2
:1 respectively. They decided to dissolve the business on 31-12-2006 on which date their
Balance Sheet was as follows:

Liabilities Rs. Assets Rs.

Capital A/cs: Land & Building 30,810

Ram 35,700 Motor Car 5,160

Shyam 8,680 Investments 1,080

Mohan 10,100 54,480 Stock 19,530

General Reserve 6,000 Debtors 11,280

Mohan's Loan A/c 3,000 Cash 5,940

Creditors 10,320
73,800 73,800
The assets were realised as follows and it was agreed that cash should be distributed as
and when received:
2007 Rs.

15th January 10,380

20th February 27,900

23rd March 3,600

15th April Mohan took over investments at a value of 1,260

27th April 19,200

Dissolution expenses were originally estimated at Rs. 2,700 but actual amount spent on 23rd
March, 2007 was Rs. 1,920. The creditors were settled for Rs. 10,080.
You are required to prepare a statement showing distribution of cash amongst the partners
on piece-meal basis using maximum loss method.
(b) Briefly explain the rule laid in Garner vs. Murray case. 5
Ans. (a) See Q. 2, Unit V, Accounting for Dissolution of the Partnership Firm.
[Page P-107
(b) See Q. 7, Chapter 12. [Page T-68
 2014
Name of the Paper : Financial Accounting
Name of the Course : B.Com. (Hons.)

Time allowed: Maximum marks: 75

Section A - 2 1/2 hours Section A - 55
Section B - 30 minutes Section B - 20
Attempt All questions. Use of simple calculator is allowed.
Workings shall form part of your answer.
SECTION-A
Q. 1. State with reasons whether the following statements are True or False:
(i) Advance taken from a customer is taken as income or sales.
(ii) Periodic inventory gives a continuous balance of stock in hand.
(iii) Depreciation has to be provided even in case of loss in a financial year.
(iv) IFRS have been issued by Institute of Chartered Accountants of India
(ICAI).
(v) Credit sale of machinery should be recorded in the sales book.
(vi) Heavy advertising expenditure to introduce a new product is revenue expenditure.
(vii) Income is a source of capital.
Ans. (i) False. Advance taken from a customer is a 'guarantee money' for proper supply of
goods. Such advance is a liability for a business which must be returned or adjusted after
the supply of goods, i.e., sale.
(ii) False. As the name implies, we can get inventory balance only on a particular date
periodically.
(iii) True. Depreciation is a charge against the profit and not an appropriation of profit. So
depreciation has to be provided even in case of loss in a financial year.
(iv) False. IFRS have been issued by 'International Accounting Standards
Board (IASB).
(v) False. Credit sale of machinery should be recorded in Journal proper.
(vi) False. Such expenditure is not revenue expenditure because the firm will get benefit for
more than one year. Hence it is of the nature of deferred revenue expenditure. It is also not
Capital expenditure because no real asset is created by such heavy expenditure.
(vii) True. The part of Income which is retained becomes a source of Capital.
Q. 2. From the following trial balance and information, prepare Trading and Profit &
Loss Account of Mr. Rishabh for the year ended 31 st March, 2013 and a Balance Sheet
as on that date:
Particulars Dr. (Rs.) Cr. (Rs.)

Capital — 1,00,000

Drawings 12,000 —

Land and Building 90,000 —

Plant and Machinery 20,000 —

Furniture 5,000 —
Sales — 1,40,000

Returns outward — 6,000

Debtors 18,400 —

Loan from Gajanand on 1-7-2012 @ 6% p.a. — 30,000

Purchases 80,000 —

Returns inward 5,000 —

Carriage 10,000 —
Sundry expenses 600 —
Printing and Stationery 500 —

Insurance expenses 1,000 —

Provision for bad and doubtful debts — 1,000

Provision for discount on debtors — 380
Bad debts 400 —

Opening Stock on 1-4-2012 21,300 —

Salaries and Wages 18,500 —

Creditors — 12,000
Trade expenses 800 —

Cash at Bank 4,600 —

Cash in hand 1,280 —

2,89,380 2,89,380

Additional information:
(i) Value of Closing Stock on 31-3-2013 was Rs. 27,300.
(ii) Fire occurred on 23rd March, 2013 and Rs. 10,000 worth of general goods were
destroyed. The insurance company accepted claim for Rs. 6,000 only and paid the claim
money on 10th April, 2013.
(iii) Bad debts amounting to Rs. 400 are to be written off. Provisions for bad and doubtful
debts is to be made at 5% and for discount at 2% on debtors. Make a provision of 2% on
Creditors for discount.
(iv) Received Rs. 6,000 worth of goods on 27 th March, 2013 but the Invoice of purchases
was not recorded in Purchase Book.
(v) Rishabh took away good worth Rs. 2,000 for personal use but no record was made
thereof.
(vi) Charge depreciation at 2% on land and building, 20% on plant and machinery and 5% on
furniture.
(vii) Insurance prepaid amounts to Rs. 200.
Sol. See Q. 8, Unit I, Accounting Process. [Page P-14
Or
Income and Expenditure Account of a Hospital as on 31 st December, 2013 is given to
you:

Expenditure Rs. Income Rs.

Salaries 2,35,000 Subscriptions 2,20,000

Diet Expenses 20,000 Donations 40,000

Rent and Rates 5,000 Interest on Investment

Insurance 2,000 for full year @ 5% p.a. 90,000

Office Expenses 8,000 Miscellaneous Receipts 6,000

Surgery and Dispensary 10,000

Expenses
Depreciation: Building 37,500

Furniture 1,200
Instruments 8,000 46,700

Surplus of Income over 29,300

Expenditure
3,56,000 3,56,000

The other informations supplied to you are as under:

31.12.2012 (Rs.) 31.12.2013 (Rs.)

Cash in hand 2,000 1,500

Cash at Bank 54,000 Rs.

Building 7,50,000 Rs.

Furniture 20,000 Rs.

Instruments 35,000 Rs.

Subscriptions outstanding 15,000 45,000

Subscriptions received in advance 6,000 8,000

Salaries outstanding 18,000 20,000

Instruments purchased during the year were Rs. 5,000.

You are required to prepare the Receipts and Payments Account of the Hospital for the year
ended December, 2013 and the Balance Sheet as on that date. Submit your workings
clearly. 12
Sol. See Q. 8, Unit II, C. Income & Expenditure Account. [Page P-56
Q. 3. XYZ Ltd. purchased on 1 st Jan., 2009, certain machinery for Rs. 1,94,000 and spent
Rs. 6,000 on its erection. On 1st July 2009, additional machinery costing Rs. 1,00,000 was
purchased. On 1st July 2011, the machinery purchased on 1 st Jan. 2009 was auctioned for
Rs. 1,00,000 and on the same date, new machinery was purchased at a cost of Rs.
1,50,000. Depreciation was provided annually on 31 st Dec. @ of 10% p.a. on the original
cost. No depreciation need be charged during the year of sale of machinery for that part of
the year when the machine was used. In 2013, however the company has changed the
method of depreciation to written down value method @ of 15% p.a. from the straight line
method. Show the Machinery Account for the period from 2009 to 2013. 12
Sol. See Q. 9, Unit II, A. Depreciation. [Page P-31
Q. 4. (a) How will you deal with loss of stock under Stock and Debtors System Rs.
(b) Vaani Co. Delhi has a branch at Kolkata. It invoices goods to the branch at selling price
which is cost plus 33 1/3%. From the following particulars, prepare Branch Account at
invoice price. Show also Branch Debtors Account and Goods sent to Branch Account in the
books of Vaani Co. Delhi: 3+9=12

Stock on 1st April, 2013 (invoice price) Rs.

15,000

Debtors on 1st April, 2013 m,400

Goods invoiced to branch during the year at IP Rs.

67,000

Sale at branch: Cash Rs.

31,000

Credit Rs. Rs.

37,400 68,400

Cash received from debtors Rs.

40,000

Discount allowed to customers Rs. 300

Bad debts written off Rs. 250

Cheque sent to branch: Salaries Rs. 5,000

Sundry expenses Rs. 1,700 Rs. 6,700

Stock on 31st March, 2014 (invoice price) . Rs.

13,400
Sol. (a) Loss of Stock under Stock and Debtors System. Under this system following Journal
entries shall be passed for normal and abnormal loss of stock:
1. To record abnormal loss of stock (due to abnormal factors like fire, flood, theft etc.)

Branch Adjustment A/c Dr. (Loading)

Branch Profit & Loss A/c Dr. (Cost)

To Branch Stock A/c (Invoice Price)
2. To record normal loss of stock (due to the inherent nature of the product)

Branch Adjustment A/c Dr. (Invoice Price)

To Branch Stock A/c (Invoice Price)
(b) See Q. 14, Unit IV, Accounting for Inland Branches. [Page P-96
Or
A company with its Head Office at Delhi has a Branch at Agra. Goods are invoiced to
the branch at cost plus 33 1/3% which is the selling price. The following information is
given in respect of the branch for the year ended 31 st March, 2014:

Goods sent to branch during the year at invoice price Rs. 4,80,000

Stock on 1st April, 2013 (invoice price) Rs. 24,000

Cash Sales Rs. 1,80,000

Returns from customers Rs. 6,000

Branch expenses paid for cash Rs. 53,500

Branch debtors balance (1-4-2013) Rs. 30,000

Discount allowed Rs. 1,000

Bad debts Rs. 1,500

Stock on 31st March, 2014 (invoice price) Rs. 48,000

Branch debtors balance (31-3-2014) Rs. 36,500

Collections from Debtors Rs. 2,70,000

Branch debtors' cheque returned dishonoured Rs. 5,000

You are required to ascertain the Profit made by the Branch by preparing the
necessary accounts under the Branch Adjustment Method. 12
Sol. See Q. 15, Unit IV, Accounting for Inland Branches. [Page P-97
Q. 5. (a) Discuss briefly the perpetual and periodical systems of stock taking.
3
(b) From the following data, calculate the value of closing inventory according to FIFO
and Weighted Average Method on March 31, 2014 using perpetual inventory system: 9
March 1 Stock in hand 400 units @Rs. 7.50 each
Purchases:
March 5 600 units @Rs. 8 each
March 15 500 units @Rs. 9 each
March 25 400 units @Rs. 8.50 each
March 30 300 units @Rs. 9.50 each
Issues:
March 3 300 units
March 10 500 units
March 17 400 units
March 26 500 units
March 31 100 units
March 31 100 units (shortage)
Sol. (a) See Q. 5, Chapter 7. [Page T-47
(b) See Q. 8, Unit II, C. Inventory Valuation. [Page P-42
Or
(a) What is Hire Purchase Trading Account Rs. How is it prepared Rs. 3
(b) Saksham Ltd. sold three cars for a total cash price of Rs. 9,00,000 on hire-
purchase basis to Mr. Vardaan on 1 st January, 2010. The terms of agreement provided
for Rs. 2,70,000 as cash down and the balance of the cash price in three equal
instalments together with interest at 10% p.a. The instalments were payable at the end
of each year. Mr. Vardaan paid the first instalment on time but failed to pay thereafter.
On his failure to pay the second instalment, Saksham Ltd. repossessed two cars and
valued them at 50% of the cash price. Mr. Vardaan charges 25% p.a. depreciation on
written down value method. Prepare necessary Ledger Accounts in the books of both
the parties. 9
Sol. (a) See Q. 4, Chapter 10. [Page T-56
(b) See Q. 9, Unit III, Accounting for Hire Purchase and Instalment System.

[PageP-73
SECTION B
Q. 5. A, B, C and D are partners in a firm sharing profits and losses in the ratio of 4 :1 :
2 : 3. The following is their Balance Sheet as at 31 st March, 2014:

Liabilities Rs. Assets Rs.

Sundry Creditors 3,00,000 Sundry Debtors 3,50,000

Capital A/c: Less: Provision for bad debts 50,000

A 7,00,000 3,00,000
D 3,00,000 Stock 2,00,000

Cash in hand 1,40,000

Other Assets 3,10,000

Capital A/c:

B 2,00,000

C 1,50,000 3,50,000

" 13,00,000 13,00,000

The firm is dissolved on the following terms:

(i) A is to take over sundry debtors at 80% of book value.
(ii) D is to take over Stock at 95% of the book value.
(iii) C is to discharge Sundry Creditors.
(iv) Other assets realize Rs. 3,00,000 and expenses of realisation come to Rs. 30,000.
(v) B is found insolvent and Rs. 21,900 is realized from his estate.
Prepare Realisation Account and Capital Accounts of the partners. Show also the
Cash Account. The loss arising out of capital deficiency may be distributed following
the decision in Garner vs. Murray case. 20
Sol. See Q. 14, Unit V, Accounting for Dissolution of the Partnership Firm.
[PageP-128
Or
(a) Explain the Garner vs. Murray Rule with the help of an example. 10
(b) What is meant by Piecemeal Distribution of cash Rs. Explain maximum loss
method of piecemeal distribution with the help of an example. 10
Ans. (a) See Q. 7, Chapter 12. [Page T-68
(b) See Q. 9, Chapter 12. [Page P-69
 2014 (NOVEMBER)
Name of the Paper : Financial Accounting
Name of the Course : B.Com. (Hons.)

Time Part A: 2 1/2 hours Maximum marks: Part A-55

Time Part B: 30 minutes Maximum marks: Part B-20
This question paper has 2 Parts, Part A is compulsory for all examinees
Part B is meant only for those who have not offered Computerised Accounts.
Part A and Part B are to be answered on separate answer books.
Attempt All questions. Show your working notes clearly.
PART-A
Q. 1. Mention any seven of disclosures as per AS-L 7
Ans. Seven areas of disclosure as per AS-I are:
(i) Method of charging depreciation.
(ii) Valuation of inventories.
(iii) Valuation of investment and fixed assets.
(ii) Treatment of expenditure during construction.
(v) Treatment of goodwill.
(vi) Treatment of contingent liabilities.
(vii) Conversion of foreign currency items.
Or
"Revenue is recognised when sale is made or when services are rendered." Explain.
State three exceptions to the general rule.
Ans. Revenue is the gross inflow of cash, receivables or other consideration arising in the
course of ordinary activities of an enterprise from the sale of goods, rendering of services
and from the use by others of enterprise's resources yielding interest, royalties and
dividends.
The definition of revenue recognition is concerned with the "timing" of revenue, as well as
the amount of revenue as per agreement between parties involved.
If uncertainty exists regarding the amount, it influences the timing of the revenue.
Exceptions: The following items are not included within the definition of revenue for the
purpose of AS-9:
(a) Realised gain from disposal/unrealised gain from holding non-current assets;
(b) Unrealised gain from the change in the value of current assets;
(c) Realised/unrealised gain from change in the value of foreign exchange r.ate;
(d) Realised gain from discharging an obligation at less than carrying amount;
(e) Unrealised gain resulting from restatement of the carrying amount of an obligation.
Q. 2. The following is the Trial Balance of Mr. Lai as at 31 st March, 2013:

Particulars Dr. (Rs.) Cr. (Rs.)

Lai's Capital — 86,690

Opening Stock 46,800 —

Purchases and Sales 3,21,700 3,89,600

Returns 8,600 5,800

Freight and Carriage 18,600 —

Rent and Taxes 5,700 —

Salaries and wages 9,300 —

Sundry Debtors and Creditors 24,000 14,800

Bank Loan @ 6% p.a. — 20,000

Bank Interest on Loan 900 —

Printing and Advertising 14,600 —

Miscellaneous Income — 250

Cash at Bank 8,000 —

Discount 1,800 4,190

Furniture and Fittings 5,000 —

General Expenses 11,450, —

Insurance 1,300 —

Postage and Telegrams 2,330 —

Cash in hand 380 —

Travelling Expenses 870 —

Drawings 40,000 —
5,21,330 5,21,330

The following adjustments should be made:

(i) Included amongst the Debtors is Rs. 3,000 due from Anand and included among the
creditors Rs. 1,000 due to him.
(ii) Provision for Bad and Doubtful Debts to be created at 5% and Reserve for Discount @
2% on Sundry Debtors.
(iii) Depreciate Furniture and Fittings by 10%.
(iv) Personal Purchases amounting to Rs. 600 had been included in the Purchases Day
Book.
(v) Interest on Bank Loan shall be provided for the whole year.
(vi) One quarter of the amount of Printing and Advertising is to be carried forward to next
year.
(vii) Credit purchase invoice amounting to Rs. 400 had been omitted from the books.

(viii) Stock on 31st March, 2013 was Rs. 78,600.

Prepare Trading and Profit & Loss Account for the year ended 31st March, 2013 and
Balance Sheet as on that date. 12
Sol. See Q. 9, Unit I, Accounting Process. [Page P-16
Q. 3. Ram Ltd. which depreciates its machinery @ 10% p.a. on Diminishing Balance
Method, had on 1st January, 2013, 79,72,000 on the debit side of Machinery Account.
During the year 2013 machinery purchased on 1 st January, 2011 for Rs. 80,000 was
sold for Rs. 45,000 on 1st July, 2013 and a new machinery at a cost of Rs. 1,50,000 was
purchased and installed on the same date, installation charges being Rs. 8,000. The
company wanted to change the method of Depreciation from Diminishing Balance
Method to Straight Line Method with effect from 1 st January, 2011. Difference of
depreciation up 31st December, 2013
to be adjusted. The rate of depreciation remains the same as before. Show
Machinery Account for the year 2013. 12
Sol. See Q. 10, Unit II, A. Depreciation. [Page P-32
Or
(a) The following are the details of materials of Sai Mills: 8

01-01-2013 Opening Stock 100 Units @Rs. 25 per unit

01-01-2013 Purchases 200 Units @Rs. 30 per unit
15-01-2013 Issued for consumption 100 Units
01-02-2013 Purchases 400 Units @Rs. 40 per unit

15-02-2013 Issued for consumption 200 Units

20-02-2013 Issued for consumption 200 Units
01-03-2013 Purchases 300 Units @Rs. 50 per unit
15-03-2013 Issued for consumption 200 Units
Find out the cost of closing stock as on 31-3-2013 according to:
(i) First in first out basis, and
(ii) Weighted average price basis, using perpetual inventory system. Also, calculate cost of
closing inventory on LIFO basis under periodic system.
(b) Explain the disclosure requirement of Accounting Standard-6 regarding
depreciation. 4
Ans. (a) See Q. 3, Unit II, B. Inventory Valuation. [Page P-36
(b) Disclosure requirements of AS-6 regarding depreciation:
Para 28. The following information should be disclosed in the financial statements: (i) The
historical cost or other amount substituted for historical cost of each
class of depreciable assets;
(ii) Total depreciation for the period for each class of assets; and
(iii) The related accumulated depreciation.
Para 29. The following information should also be disclosed in the financial statements
along with the disclosure of other accounting policies:
(i) Depreciation methods used; and
(ii) Depreciation rates or the useful lives of the assets, if they are different
from the principal rates specified in the statute governing the enterprise.
Q. 4. KP Ltd. invoices goods to its Kanpur Branch at 20% less than list price
which is cost plus 100% with instructions that cash sales are to be made at
invoice price and credit sales at catalogue price (i.e., list price).
From the following particulars for the year ended 31 st March, 2013, prepare Kanpur
Branch and Goods sent to Branch accounts: 12

Branch Stock as on 1-4-2012 at invoice price Rs. 60,000

Branch Debtors on 1-4-2012 Rs. 15,000

Goods sent to Branch during the year at invoice price Rs. 3,00,000

Branch expenses paid by HO Rs. 18,000

Goods returned by Branch to HO at invoice price Rs. 36,000

Cash Sale Rs. 1,70,000

Credit Sale Rs. 1,20,000

Goods returned by credit customers Rs. 20,000

Normal loss at invoice price Rs. 6,000

Loss by fire at invoice price Rs. 12,000

Claim accepted by insurance company Rs. 8,000

Branch Bad debts Rs. 7,000

Cash received from debtors Rs. 80,000

Discount allowed Rs. 3,000

Branch stock at invoice price as on 31-3-2013 Rs. 56,000

Branch debtors on 31-3-2013 Rs.

Sol. See Q. 16, Unit IV, Accounting for Inland Branches. [Page P-98
Or
The following is the Trial Balance of Allahabad Branch as at 31 st March, 2013:

Particulars Dr. (Rs.) Cr. (Rs.)

Delhi Head Office 64,000 —

Stock (1-4-2012) 1,10,000 —

Purchases 3,78,000 —

Goods received from HO 1,60,000 _

Sales — 8,28,000

Goods returned to HO — 30,000

Salaries 35,000 --

Debtors 71,000 _

Creditors ._ 42,000

Rent 11,000 —
Office Expenses 34,500 _

Cash in hand and at Bank 8,500 —

Furniture 12,000 —
Machinery 16,000 —

9,00,000 9,00,000

Closing stock was valued at Rs. 38,000. The Branch Account in the Head Office books
stood at Rs. 6,000 (Debit balance) on 31 st March, 2013. The difference in balances of HO
and Branch was caused by goods in transit.
You are required to prepare Trading and Profit and Loss Account and pass journal
entries to incorporate the Trial Balance of the Branch in the books of Head Office. 12
Sol. See Q. 17, Unit IV, Accounting for Inland Branches. [Page P-100
Q. 5. (a) Distinguish between Operating Lease and Financial Lease. 4
(b) A Ltd. sells goods on hire purchase at cost plus 60%. From the following
information calculate profit or loss for the year ending 31 st March, 2013 under Stock
and Debtors system: 8

2012 Rs.

April 1 Instalments Not Due 1,60,000

2013

March 31 Goods sold on hire purchase at hire purchase price 8,00,000

Cash received during the year 5,60,000

Goods repossessed (instalments due Rs. 20,000) valued at ' 3,000

Goods with hire purchase customers 3,60,000

Sol. (a) See Q. 6, Chapter 10. . [Page T-59
(b) See Q. 10, Unit III, Accounting for Hire Purchase and Instalment System.
[PageP-74
Or
The following is the Receipts and Payments Account of a Charitable Trust for the year
ending 31st March, 2013:
Receipts and Payments Account

Receipts Rs. Payment Rs.

To Balance b/d: By Capital Payments:

Cash 10,000 Investments 1,00,000

Bank 1,40,000 Furniture 40,000

To Capital funds: Clinical Equipment 50,000

Donation for Clinic Fund 60,000 By Revenue Payments:

To Revenue Receipts: Salaries 62,000

Interest 3,00,000 Medicines 1,40,000

Rent 1,20,000 Scholarships 1,00,000

Sundries 30,000 Printing etc. 8,000

Travelling 10,000

By Balance c/d: Cash 16,000

Bank 1,34,000
6,60,000 6,60,000

Trust fund originally consisted of:

Building valued at Rs. 15,00,000, 9% Government Securities Rs. 32,00,000 (Nominal Value
Rs. 35,00,000) and Bank balance Rs. 1,00,000.

Bank, Interest receivable at the end of year was Rs. 25,000. Interest accrued on investments
on 1-4-2012 was Rs. 35,000 and on 31-3-2013 Rs. 50,000. the Trust owed suppliers of
medicines Rs. 12,00Q and Rs. 8,000 on 1-4-2012 and 31-3-2013 respectively. Furniture
stood in the books at Rs. 30,000 on 1-4-2012.
You are required to prepare final accounts of the Trust for the year ending 31 st March,
2013 after providing 2 1/2% depreciation on the book value of the building and 20% on
other assets. 12
Sol. See Q. 9, Unit II, C. Income & Expenditure Account. [Page P-57
PART B
Q. 1. (a) Explain the basis of distribution of non-cash consideration (Shares and
Debentures) among the partners in case of sale of partnership firm to a limited
company. 5
(b) A, B and C had the following Balance Sheet on 31-3-2013:

Liabilities Rs. Assets Rs.

Trade Creditors 4,00,000 Fixed Assets 4,00,000

Loan from Mrs. A Debtors 2,40,000

(With a charge on stock) 1,50,000 Stock 2,00,000

Loan from A 1,00,000 Cash at Bank 10,000

Capital A/c: "Profit & Loss A/c 3,00,000

A 2,00,000

B 2,00,000

C 1,00,000
11,50,000 11,50,000

The firm was dissolved. Stock realised 50% and fixed assets and debtors realised Rs.
3,00,000 in all. The private position of the partners was as under:
Particulars Private Assets (Rs.) Private Liabilities (Rs.)

A 1,50,000 1,00,000

B 60,000 80,000
C was able to pay 50 paise in the rupee of what was payable on his own account to the firm.
The partners shared profit and losses in the ratio of 4 : 3 : 3 for A, B and C respectively. The
loss on realisation is to be determined after considering the amount finally paid to the
creditors. You are required to close the books of the firm preparing the necessary ledger
accounts.
Ans. (a) Distribution of non-cash consideration (Shares and Debentures) among the
partners in case of sale of partnership firm to a limited company. Partners can specify the
ratio in which shares/debentures are to be shared by them in their partnership agreement.
However if the partnership deed is silent on this point, such shares and debentures are
distributed in the ratio of final balances appearing in the capital accounts (i.e., in the ratio of
capitals standing after making all adjustments like transfer of profit/loss on realisation,
accumulated profits/ reserves/ losses) of partners at the time of final settlement of accounts.
Sometimes division of shares among partners is done in such a way as to preserve the
rights as previously existed between them, that is, to maintain the same profit sharing ratio
even after they have parted ways.
(b) See Q. 16, Unit V, Accounting for Dissolution of the Partnership Firm.
[PageP-130
Or
The Balance Sheet of A, B and C who were sharing profits and losses in the ratio of 2
: 2 :1, was as follows on 31st March, 2013:

Liabilities Rs. Assets Rs.

Sundry Creditors 12,00,000 Cash 10,000

Bank Loan (with charge on 5,00,000 Stock 6,00,000

stock)

A's Capital 3,00,000 Other Assets 10,90,000

B's Capital 2,00,000 Goodwill 3,00,000

C's Capital 2,00,000

22,00,000 22,00.000

Stock realised Rs. 5,20,000 and other assets was sold for Rs. 9,00,000. Expenses on
realisation amounted to Rs. 30,000.
Assuming all partners are insolvent, prepare necessary Ledger Accounts to close the
books of the firm. 15
Sol. See Q. 17, Unit V, Accounting for Dissolution of the Partnership Firm.
[Page P-132
 2015
Name of the Paper : Financial Accounting
Name of the Course : B.Com. (Hons.)

Time Part A: 2 18/2 hours Maximum marks: Part A-55

Time Part B: 30 minutes Maximum marks: Part B-20
PART A
Q. 1. State with reason whether the following statements are True or False:
(i) Going concern, consistency and accrual are the fundamental accounting assumptions.
(ii) Assets represent expired costs whereas expenses are unexpired costs.
(iii) The illness of proprietor, even if it results in losses to the firm, cannot be recorded in
accounts.
(iv) AS-2 is related to recognition of the revenue and expenses.
(v) Depreciation is a process of allocation and not of valuation.
(vi) Heavy advertising to introduce a new product is capital expenditure.
(vii) IFRS are issued by Institute of Chartered Accountants of India after consulting central
government. 7
Ans. (i) True. These three are the main fundamental accounting assumptions.
(ii) False. Assets rather represent unexpired costs and not expired ones. Such unexpired
costs are then treated as expenditure in the coming years by way of depreciation.
(iii) False. The proprietor's illness will not be recorded but the losses to the firm will be
recorded in accounts.
(iv) False. AS-2 is related to Cost and Net Realisable Value (NRV).
(v) True. Depreciation is the process of allocating the cost of a fixed asset (less scrap value)
over its estimated useful life.
(vi) False. It is not a Capital Expenditure. It is a deferred revenue expenditure because no
real asset is created by such heavy expenditure.
(vii) False. IFRS have been issued by "International Accounting Standards Board" (IASB).
Q. 2. Mr. Ajay, a shopkeeper, had prepared the following trial balance from
his ledger as on 31st March, 2015: 12

Particulars Dr. (Rs.) Cr. (Rs.)

Purchases and Sales 6,20,000 8,30,000

Gash in Hand 4,200 —

Cash at Bank 24,000 __

Stock of Goods on 1-4-2014 1,00,000 —

Capital A/c — 5,77,200

Drawings 8,000 —

Salaries 64,000 —

Postage and Telephones 23,000 _

Salesmen's Commission 70,000 —

Insurance 18,000 —

Advertising 34,000 —

Furniture 44,000 —

Printing and Stationery 6,050 —

Motor Car 96,000 —

Bad Debts 4,000 —

Cash Discount 8,000 —

General Expenses 60,000 —

Carriage Inwards 20,000 —
Carriage Outwards 44,000 —

Wages 40,000 —

Debtors and Creditors 2,00,000 80,000

14,87,200 14,87,200

You are required to prepare Trading and Profit & Loss Account for the year ended 31 st
March, 2015 and Balance Sheet as on that date. You are also given the following
information:
(i) Stock on 31-03-2015 was Rs. 1,45,000.
(ii) Mr. Ajay had withdrawn goods worth Rs. 5,000 during the year.
(iii) Purchases include purchase of furniture worth Rs. 10,000.

(iv) Debtors are bad to the extent of Rs. 5,000.

(v) Creditors include a balance of Rs. 4,000 to the credit of Mr. Vijay in respect of which it
has been decided and settled with the party to pay only Rs. 1,000.
(vi) Sales include goods worth Rs. 15,000 sent to Saksham on approval and remaining
unsold as on 31-3-2015. The cost of the goods was Rs. 10,000.

(vii) Provision for Bad Debts is to be created at 5% on Sundry Debtors.

iviii) Depreciate Furniture by 15% and Motor Car by 20%.
(ix) The salesmen are entitled to a commission of 10% on total sales.
Sol. See Q. 10, Unit I, Accounting Process. [Page P-18
Or
The following is the Receipt and Payment Account of Ekta Women's Welfare Club for the
year ended December 31, 2014:
Receipts and Payments Account

Receipts Rs. Payments Rs.

Balance b/d 7,250 Salary 12,500

Subscriptions 81,750 Stationery 1,700

Donations 3,000 Electricity Charges 9,550

Grant from Government 15,000 Insurance 7,500

Sale of Newspapers 300 Equipments 30,000

Proceeds of Charity Show 16,500 Petty Expenses 500

Interest on Investments @ 10% Expenses on Charity Show 12,900

for full year 7,000 Newspapers 1,000

Sundry Income 400 Lecturers' Fee 16,500
Honorarium to Secretary 12,000

Balance c/d 27,050

1,31,200 1,31,200

Additional Information:
2.1.2014 (Rs.) 31.12.2014
(Rs.)

Outstanding Salaries 1,200 1,800

Insurance Prepaid 700 300

Subscriptions Outstanding 3,750 2,500

Subscription Received in Advance 1,750 1,000

Electricity Charges Outstanding — 1,250

Stock of Stationery 2.250 700

Equipments 25,600 50,200

Building 1,20,000 1,14,000

Prepare:
(a) Income and Expenditure Account for the year ended Dec. 31, 2014 and
(b) Balance Sheet as on that date 12
Sol. See Q. 10, Unit II, C. Income & Expenditure Account. [Page P-59 Q. 3. (a) Write a
short note on the importance of classifying business
expenditure into revenue expenditure capital expenditure and deferred revenue
expenditure. 4
Ans. (a) The importance of classification of business expenditure into revenue, capital
and deferred expenditure are:
(i) Classification of items is necessary to determine which item should appear in which
financial statement. Revenue items will be shown in Profit & Loss Account, Capital items and
Deferred revenue items will appear in the Balance Sheet.
(ii) Determination of Net Profit requires matching of revenue expenditure and revenue
income.
Profit = Revenue Receipts - Revenue Expenses
Therefore, classification is necessary to adhere to. matching principle.
(iii) To enable true and fair view of financial statements.
(iv) Classification is necessary as per the provisions of the Law.
(v) To show correct financial results.
Or
The Plant and Machinery Account of Noya Ltd. had a debit balance of Rs. 1,47,390 on
April 1, 2014. The company was incorporated in April, 2011 and has been following
the practice of charging full year's depreciation every year on Diminishing Balance
System @ 15%. In 2014 it was, however, decided to change the method from
Diminishing Balance to Straight Line with retrospective effect from April, 2011 and to
give effect the change while preparing the final accounts for the year ending 31st
March, 2014, the rate of depreciation remaining same as before.
In 2010-11, new machinery was purchased at a cost of Rs. 50,000. All the other
machines were acquired in 2011-12.
Show the Plant and Machinery Account from 2011-12 to 2014-15. 12
Sol. See Q. 11, Unit II, A. Depreciation. [Page P-33
Q. 4. (a) Vaani Music System invoices goods to its Faridabad branch at cost plus 20%.
During the accounting year 2014-15, Vaani Music System invoiced goods amounting
Rs. 15,000 were damaged in transit and insurance company admitted the claim of Rs.
15,000. Show the treatment of loss in the books of Head Office under:
(i) Debtors System
(ii) Stock and Debtors System.
(b) Saksham Ltd. has its branch at Mumbai to which goods are invoiced at cost plus
20%. Prepare Branch Account in the books of the head office after taking into
consideration the following information:
Opening Stock at Branch Rs. 72,000

Cash Sales at Branch Rs. 52,500

Credit Sales at Branch Rs. 1,23,000

Collections from Branch debtors Rs. 1,13,700

Goods received from head office Rs. 90,000

Branch Expenses:

Paid by Head Office Rs. 9,000

Paid by Branch Rs. 18,000

Expenses unpaid Rs. 4,200

Closing Stock at Branch Rs. 54,000

Closing Balance of Bills Receivable at Branch Rs. 3,000

Closing Balance of Branch debtors Rs. 24,480

Goods sent from head office to Branch remaining in

transit on closing day Rs. 10,8oo

Ans. (a) See Q. 18, Unit IV, Accounting for Inland Branches. [Page P-101
(b) See Q. 18, Unit IV, Accounting for Inland Branches. [Page P-101
Or
Nitin Bros, has a branch at Allahabad. Goods are invoiced at cost plus 25%. From the
following particulars, prepare Branch Adjustment and Profit and Loss Account and
Branch Account for the year ended 31 st March 2015:
Balances as on April 1, 2014: Branch Stock (Invoice Price) Rs. 12,500

Branch Debtors Rs. 8,500

Branch Cash Rs. 2,0Q0

Balances as on March 31, 2015: Branch Stock (Invoice Price) Rs. 29,925

Branch Debtors Rs. 11,960

Branch Cash Rs. 4,500

Transactions during 2014-15: .,

Goods invoiced to Branch 1,62,500

Goods returned by Branch to Head Office 6,250

Cash remitted to Head Office Rs.

Credit Sales at Branch 87,500

Cash sales at Branch 51,250

Cash received from Debtors of branch 78,650

Bills Receivable received from debtors at branch 5,000

Amount received by branch on discounting of the above mentioned bills 4,900

Cash sent to branch for expenses 18,000

Actual cash expenses at branch 17,950

Shortage of stock at branch (Invoice Price) 75

Cash discount allowed to branch customers 390

Make a provision for bad and doubtful debts @ 5% of the debtors.
Sol. See Q. 19, Unit IV, Accounting for Inland Branches. [Page P-103
Q. 5. (a) Distinguish between Hire Purchase System and Instalment Purchase System.
4
(b) Vikrant sells goods on hire purchase at cost plus 60%. From the following
particulars for the year ending on 31-12-2014, prepare:
(i) Hire Purchase Debtors Account
(ii) Hire Purchase Stock Account
(iii) Shop Stock Account and
(iv) Hire Purchase Adjustment Account
1-1-2014: Rs.

Stock with hire purchase customers at selling price 12,000

Stock at the shop at cost 5,000

Instalments overdue 8,000
31-12-2014:

Stock at the shop at cost (including goods repossessed Rs. 400) 2,000

Total instalments that fell due during the year 1,89,440

Cash received from customers

(including down payments of Rs. 15,440) 1,75,440

Goods repossessed (instalment due . Rs. 500) 400

Purchases during the year 1,20,000

Hire expenses 3,400

Am. (a) See Q. 2, Chapter 10. [Page T-54
(b) See Q. 11, Unit III, Accounting for Hire Purchase and Instalment System.
[PageP-75
Or
(a) Distinguish between periodic and perpetual inventory system. 4
(b) The following are the details of material of VK Mills: 8
01-01-2015 Opening Stock 100 Units @Rs. 25 p.u.

01-01-2015 Purchases 200 Units @Rs. 30 p.u.

15-01-2015 Issue 100 Units

01-02-2015 Purchases 400 Units @Rs. 40 p.u.

15-02-2015 Issue 200 Units

19-02-2015 Issue 200 Units

01-03-2015 Purchases 300 Units @Rs. 50 p.u.

15-03-2015 Issue 150 Units

The storekeeper reported that 50 units of material were spoiled due to rainy water.
Using perpetual inventory system find out the cost of closing stock as on 31-3-2015
according to:
(i) First in First out basis, and
(ii) Weighted average price basis.
Sol. (a) See Q. 6, Chapter 10. [Page T-58
(b) See Q. 7, Unit III, Accounting for Hire Purchase and Instalment System.
[PageP-71
 PART B
Q. 6. (a) Critically examine the applicability of Garner vs. Murray Rule in India. (b) A, B
and C share profits and losses in the proportion of 4/10, 5/10 and 1/10. Their Balance
Sheet as on 31st December, 2014 was as follows:

Liabilities Rs. Assets Rs.

A's Capital A/c 15,000 Cash 3,000

B's Capital A/c 12,000 Other Assets 56,000

C's Capital A/c 3,000

A's Loan 6,000

B's Loan 3,000

Reserve Fund 6,000

Creditors 10,000

Contingent Reserve 4,000

59,000 59,000
The partnership is dissolved and the assets realised are as follows:

First Realisation 10,000

Second Realisation 20,000

Third Realisation 17,000

On the date of dissolution, there was a contingent liability of Rs. 1,000 against the
firm which was settled at Rs. 700 at the time of second realisation. Realisation
expenses were estimated at Rs. 2,000 but actually came at Rs. 1,500. C took stock
worth Rs. 500 at the time of third realisation.
Prepare a statement showing how the distribution should be made. 11
Ans. (a) See Q. 7, Chapter 12. [Page T-68
(b) See Q. 18, Unit V, Accounting for Dissolution of the Partnership Firm.
[Page P-133
Or
(a) Write a note on piecemeal distribution of cash. 5
(b) A, B and C are three partners in a firm with profit sharing ratio of 5:3:2. The
Balance Sheet of the firm was as under on 31 st March, 2015:

Liabilities Rs. Assets Rs.

Creditors 40,000 Buildings 80,000

Bills Payable 20,000 Furniture 10,000

Bank Loan 20,000 Investments 30,000

Capitals: A 60,000 Profit and Loss Account 80,000

B 40,000

C 20,000

2,00,000 2,00,000
The bank loan was secured by charge on the buildings.
Assets realised as under:
Rs.

Buildings 40,000

Furniture 4,000

Investments 14,000
B's private estate realised Rs. 12,000 and his private liabilities are Rs. 10,000. C was
insolvent A could just contribute l/3rd of what Was finally due from him on his own account.
Show the ledger accounts closing the books of the firm assuming creditors etc. are
paid through Realisation Account. 11
Ans. (a) See Q. 9, Chapter 12. [Page T-69
(b) See Q. 19, Unit V, Accounting for Dissolution of the Partnership Firm.
[Page P-134
 2015 (NOVEMBER)
Name of the Paper : Financial Accounting
Name of the Course : B.Com. (Hons.)

Duration: 3 hours Maximum marks: 55

Attempt all questions. Show your working notes clearly.
Q. 1. State with reasons whether the following statements are True or False: 5
(a) Accrual concept implies accounting on cash basis.
(b) Prudence is a concept to recognize unrealised profits and not losses.'
(c) Any expenditure which is unreasonably large is capital expenditure.
(d) Heavy advertising expenditure to introduce a new product is revenue expenditure.
(e) All assets and liabilities not taken over by the vendee company are transferred to capital
accounts of the partners.
Ans. (a) False. Accrual concept implies that revenues are credited to the period in which
they are earned whether they have actually been received or not. Similarly, expenses are
charged to the period to which they relate to whether they have been actually paid or not.
(b) False. Prudence (conservatism) concept says that "Anticipate no profit, but provide for
all possible losses".
(c) False. Any expenditure which is unreasonably large is not capital expenditure as the
amount of expenditure is usually not the criterion for deciding whether the expenditure is of
capital nature or revenue nature. The decision depends on the nature of the expenditure.
(d) False. Heavy advertising expenditure to introduce a new product is deferred revenue
expenditure and not a revenue expenditure.
(e) False. The Assets and liabilities not taken over by the vendee (purchasing) company are
sold and settled with the capitals of partners respectively unless the partners agree to accept
(take over) them.
Q. 2. (a) Explain: (i) The depreciable cost and (ii) Two reasons if or charging
depreciation on tangible fixed assets. 2

(b) Ajay purchased on 1st Jan., 2012, certain machinery for Rs. 1,94,000 and spent Rs.
6,000 on its erection. On 1st July, 2012 additional machinery costing Rs. 1,00,000 was
purchased. On 1st July, 2014 the machinery purchased on 1 st Jan 2012 having become
obsolete was auctioned for Rs. 1,00,000 and on the same date new machinery was
purchased at a cost of Rs. 1,50,000. Depreciation was provided annually on 31 st Dec.
at the rate of 15% p.a. on the WDV of the machinery. No depreciation need to be
provided when a machinery is sold or auctioned, for that part of the year in which sale
or auction took place. But for the rest of the machinery, depreciation is provided on
time basis. In 2015, however, Ajay changed this method of providing depreciation and
adopted the method of writing off 10% p.a. on the original cost of the machinery with
effect from 1 Jan., 2012. 8
Show machinery account for the accounting years 2012 to 2015.
Sol. (a) (i) The depreciable cost means the total cost of the asset minus the salvage or
residual value. In other words, it is the cost which is charged to revenue of the firm over the
useful life of the asset.
(ii) Reasons for charging depreciation on tangible fixed assets:
(a) Allocate cost of tangible fixed asset over the useful life of the asset.
(b) To ascertain the true and fair profit or loss.
(c) To show true and fair view of the financial position.
(b)
Dr. Machinery Account Cr.

Date Particulars Rs. Date Particulars Rs.

2012 2012
Jan. 1 To Bank A/c (M1) 1,94,000 Dec. By Depreciation A/c
(Purchase) 31

M1 30,000
Jan. 1 To Bank A/c 6,000 (Rs. 2,00,000 x 15/100)

(Erection Expenses) M2 7,500

July 1 To Bank A/c (M2) 1,00,000 (Rs. 1,00,000 x 15/100 x 37,500

(Purchase) 6/12)

By Balance c/d

M1 1,70,000

M2 92,500 2,62,500
3,00,000 3,00,000

2013 2013

Jan. 1 To Balance b/d Dec. By Depreciation A/c:

31

M1 1,70,000 M1 25,500

M2 92,500 2,62,500 (Rs. 1,70,000 x 15/100)

M2 13,875

(RS. 92,500 X 15/100) 39,375

By Balance c/d

M1 1,44,500

M2 78,625 2,23,125

2,62,500 2,62,500

2014 2014

Jan. 1 To Balance b/d July 1 By Bank A/c (Sale) 1,00,000

 M1 1,44,500 July 1 By Loss on Sale of

M2 78,625 2,23,125 Dec. Machinery A/c*, 44,500

31

July 1 To Bank A/c (M3) 1,50,000 By Depreciation A/c:

(Purchase)

M2 11,794

(Rs. 78,625 x 15/100)

M3 11,250 23,044
(Rs. 1,50,000 x 15/100 x
6/12)

By Balance c/d

M2 66,831

M3 1,38,750 2,05,581

3,73,125 3,73,125

2015 2015
Jan. 1 To Balance b/d Dec. By Depreciation A/c*3:
31

M2 66,831 M2 10,000

M3 1,38,750 2,05,581 M3 15,000 25,000

July 1 To Profits Loss A/c (Dep. By Balance c/d

reciation written back)*2 11,919 M2 65,000

M3 1,27,500 1,92,500
2,17,500 2,17,500

Working notes:
* 1Loss on Ml:Rs. 1,45,000 (Opening Balance on 01.01.14) -Rs. 1,00,000 =Rs. 45,000.
*2 Calculation of deficiency or surplus depreciation:

Year Depreciation on the W.D.V, of the Depreciation on the original Cost

machinery (Old Method) (SLM) (New Method)
Machine 2 (Rs.) Machine 3 (Rs.) Machine 2 (Rs.) Machine 3 (Rs.)

2012 7,500 (6 months) — 5,000 (6 months) —

2013 13,875 10,000 —

2014 11,794 11,250 (6 40,000 7,500 (6 months)

months)1

33,169 11,250 25,000 7,500

Depreciation is lower as per new method
Surplus of depreciation =Rs. 33,169 +Rs. ll,250 -Rs. 25,000 -Rs. 7,500 =Rs. 11,919
*3 Calculation of depreciation charged an at 3L12.2015: Depreciation = Original Cost x
Rate/100 On Machine 2 =Rs. 1,00,000 x 10/100 =Rs. 10,000; On Machine 3 =Rs. 1,50,000
x 10/100 =Rs. 15,000 Total Depreciation = H0,000 +Rs. 15,000 =Rs. 25,000

Or
(a) Distinguish between perpetual and periodical system of inventory valuation.
(b) The following are the details of raw material of Shyam Ltd.

1-1-2015 Opening Stock Nil

1-1-2015 Purchases 100 units @Rs. 30 per unit

15-1-2015 Issued for consumption 50 units

1-2-2015 Purchases 200 units @Rs. 40 per unit

15-2-2015 Issued for Consumption 100 units

20-2-2015 Issued for Consumption 100 units

1-3-2015 Purchases 150 units @Rs. 50 per unit

15-3-2015 Loss by fire 100 units

Find out the value of stock as on 31-3-2015 if the company follows perpetual inventory
method on FIFO basis and on LIFO basis. 2,8
Ans. (a) Difference between Perpetual and Periodical system of inventory valuation. See Q.
5, Chapter 8. [Page T-47
(b) Stores Ledger (FIFO): Perpetual Inventory Method

Date Receipt issues Balance

s

2015 Units Rate Value Units Rate Value Units Rate Value
(Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)

Jan. 1 100 30 3,000 — — — 100 30 3,000

Jan. 15 — — — 50 30 1,500 50 30 1,500

Feb. 1 200 40 8,000 — — — 50 30 1,500

200 40 8,000

Feb. 15 — — — 50 30 1,500

—, — — 50 40 , 2,000 150 40 6,000

Feb. 20 — — — 100 40 4,000 50 40 2,000

March 1 150 50 7,500 — — — 50 40 2,000

150 50 7,500
March 15 LOSS by 3 50 40 2,000
Fir

50 50 2,500 100 50 5,000

Closing 100 50 5,000
Stock

Stores Ledger (LIFO): Perpetual Inventory Method

Date Receipt Issues Balance

s

2015 Units Rate(Rs Value Units Rate Value Units Rate(Rs Value
.) (Rs.) (Rs.) (Rs.) .) (Rs.)

01-01-15 100 30 3,000 — 100 30 3,000

15-01-15 — — — 50 30 1,500 50 30 1,500

01-02-15 200 40 8,000 — — — 50 30 1,500

200 40 8,000
15-02-15 100 40 4,000 — — — 50 30 1,500

100 40 4,000

20-02-15 — — — 100 40 4,000 50 30 1,500

01-03-15 150 50 7,500 — — — 50 30 1,500
1
150 50 7,500
15-03-15 LOSS by 3 100 50 5,000 50 30 1,500
Fir

50 50 2,500
Closing 4,000
Stock

Q. 3. Following is the Income & Expenditure Account of the Rohini Sports Club for the year
ended 31-3-2015:
You are required to prepare: (i) Receipts and Payments account for the year ended 31-3-
2015 and (ii) Balance Sheet as on the date. 10
Income & Expenditure Account for the year ended 31-3-15

Expenditure Rs. Income Rs.

Salaries 24,000 Subscription 72,000

Rent 10,800 Entrance Fees 8,000

Rates and Taxes 600 Surplus on publication of 4,500
brochure

Postage and Telephone 720 Profit on sales of old sports 1,200

 assets

Affiliation fees to lawn tennis 1,200 Interest on 5% investment 600

federation

Sports materials 15,750 Miscellaneous income 225

Electricity Charges 1,200
Repairs & Maintenance of tennis 9,600
court

Depreciation on assets at 10% of

book value at the end of the year 4,800

Surplus 17,855
86,525 86,525

The following further information is made available:

31-3-2014 (Rs.) 31-3-2015 (Rs.)

1. Sundry Assets (including sports goods) 44,000 Rs.

2. Bank Balance 4,800 Rs.

3. Subscriptions in arrear 4,750 3,500

4. Subscriptions received in advance 1,400 2,600

5. 5% Investments 12,000 12,000

6, Expenses outstanding:

(a) Salaries 600 1,200

((b) Rent 900 1,800

(c) Rates and Taxes Nil 600

' (d) Tennis court maintenance 780 320

7. Outstanding for purchases of sports material 1,400 . 2,950

8. Prize fund 4,600 3,250

9. The book value as on 1-4-2014 of sports goods sold during the year was Rs. 4,000.
10. Prize fund is separately maintained—all receipts being credited to it separately and
expenditure met out of the fund directly. During the year credits to the account amounted to
Rs. 2,800.

11. Interest received this year was only for two quarters.
12. The club was admitted as a member of the lawn tennis federation on 1-10-2014, when it
paid subscription till 30-9-2015.
13. Advertisement charges in brochure yet to be collected Rs. 450.
14. A fixed deposit of Rs. 25,000 was made on 31-3-2015.
Sol. Rohini Sports Club
Receipts and Payments Account for the year ended 31 st March, 2015

Receipts Rs. Payments Rs.

To Balance b/d 4,800 By Salaries 24,000

To Subscription*1 74,450 Add: Outstanding (31-03-14) 600

To Entrance Fees 8,000 24,600

To Brochure Receipts Surplus 4,050 Less: Outstanding (31 -03-15) 23,400

1,200

(Rs. 4,500 -Rs. 450) By Rent Rs. (10,800 + 900 - 9,900

1,800)

To Old Sports materials 5,200 By Postage & Telephone 720

(Rs. 4,000 + n,200) By Affiliation fees (Rs. 1,200 2,400

+Rs. 1,200)

To Interest on Investment 300 By Purchase of sports materials 14,200

(Rs. 600 -Rs. 2) (Rs. 15,750+Rs. 1,400-Rs.
2,950)

To Miscellaneous Income 225 By Electricity Charges 1,200

To Prize fund Receipts 2,800 By Repairs & Maintenance of 10,060

tennis

court P.600 +Rs. 780 -Rs. 320)

By Sundry Assets*2 8,000

By Prize Fund

(Rs. 4,600 +Rs. 2,800 -Rs. 4,150

3,250)

By Fixed Deposit 25,000

By Balance c/d (Balancing 795

figure)

99,825 99,825

Balance Sheet
as on 31st March, 2015

Liabilities Rs. Assets Rs.

Subscription received in advance 2,600 Sundry Assets 48,000

Outstanding for Less: Depreciation 4,800 43,200

Salaries 1,200 Cash at Bank (from R & P A/c) 795

Rent 1,800 Subscription outstanding 3,500

Rates.+ Taxes 600 5% Investments 12,000

Tennis court maintenance 320 Interest on Investment (Accrued) 300

Purchase of sports material 6,870. Advertisement charges 450

2,950 receivable

Prize Fund 3,250 Advance Affiliation fees paid 1,200

Capital fund*3 55,870 Fixed deposit 25,000

Add: Surplus 17,855 73,725

86,445 86,445

Working notes: Rs. Rs.

*j Subscription as per Income and Expenditure Account 72,000

Add: Subscription in arrears (Opening) 4,750
Subscription received in advance (Closing) 2,600

79,350

Less: Received in advance (Opening) 1,400

Subscription in arrears (Closing) 3,500 4,900
Subscription received during the year 74,450

*2 Calculation of Sundry Assets purchased during the year: Rs.

Sale Price of assets realised (Rs. 4,000 +Rs. 1,200) 5,200

Add: Value of Sundry Assets at the end (Rs. 4,800 * 100/10) 48,000

53,200

Less: Opening balance of Sundry Assets 44,000

Less: Profit on sale of old sports assets 1,200 45,200

Sundry Assets Purchased during the year 8,000

*3 Calculation of Opening Capital Fund:

Balance Sheet
as at 31st March, 2014
liabilities Rs. Assets Rs.

Creditors for sports material 1,400 Subscriptions in arrear 4,750

Outstanding expenses Rs. (600 + 2,280 Bank Balance 4,800
900 + 780)*
Subscriptions Received in 1,400 Sundry Assets 44,000
advance

Prize Fund 4,600 5% Investments 12,000

Capital Fund (Balancing figures) 55,870

65,550 65,550

Or
(a) What is a contingent liability Rs. Give three examples of contingent liabilities. 2
(b) The following Trial Balance has been prepared from the books of Mr. S, as on 31-3-
15 after making necessary adjustments for depreciation of fixed assets, outstanding
and accrued items and placing the difference under suspense account. Dr. Trial
Balance Cr.

Particulars Rs. Particulars Rs.

Machinery 1,70,000 Sundry Creditors 82,000

Furniture 49,500 Capital A/c 2,45,750 •
Sundry Debtors 38,000 Outstanding expenses:

Drawings 28,000 Salaries 1,500

Travelling Expenses 6,500 Printing 600

Insurance 1,500 Audit Fees 1,000

Audit fees 1,000 Bank Interest 1,200

Salaries 49,000 Discount 1,800

Rent 5,000 Sales less returns 6,80,000

"Cash in hand 7,800

Cash at Bank 18,500

Stock in trade on (1-4-2014) 80,000

Prepaid insurance 250

Miscellaneous Expenses 21,200

Discount 1,200
Printing and Stationery 1,500

Purchases less returns 4,60,000

Depreciation: On machinery 30,000

On furniture 5,500

Suspense A/c 39,400

10,13,850 10,13,850
On a subsequent scrutiny the following mistakes were noticed:
1. A new machinery was purchased for Rs. 50,000 but the amount was wrongly posted to
furniture account as Rs. 5,000.

2. Cash received from debtors Rs. 5,600 was omitted to be posted in the ledger.
3. Goods withdrawn by the proprietor for personal use but no entry was passed Rs. 5,000.
4. Sales included Rs. 30,000 as goods sold for cash on behalf of Mr. T who allowed 15%
commission on such sales for which effect is to be given.
5. Closing Stock on physical verification amounted to Rs. 47,500.

6. Depreciation on machinery and furniture has been provided @ 15% and 10% respectively
on reducing balance system.
Full year's depreciation is provided on addition.
You are requested to prepare Trading and Profit & Loss Account for the year ended
31-3-2015 and Balance Sheet as on that date so as to represent a true and correct
picture. 8
Sol. (a) Contingent liability and its examples.
See Q. 3(a), 2010. [Page P-13
(b) Trading and Profit & Loss Account
Dr. for the year ended 31st March, 2015 Cr.
Particulars Rs. Particulars Rs.

To Opening Stock 80,000 By Net Sales: 6,80,000

To Net Purchases 4,60,000 Less: Goods sent on

Less: Drawings 5,000 4,55,000 behalf of T 30,000 6,50,000*3

To Gross Profit c/d 1,62,500 By Closing Stock 47,500

6,97,500 6,97,500

To Travelling Expenses 6,500 By Gross Profit b/d 62,500

To Insurance 1,500 By Bank interest 1,200

To Audit Fees 1,000 By Discount received 1,800

To Salaries 49,000 By Commission on sale on
behalf of T

To Rent 5,000 (Rs. 30,000 x 15/100) 4,500

To Miscellaneous Expenses 21,200

To Discount allowed 1,200

To Printing and Stationery 1,500 .

To Depreciation on:
Machinery*1

(30,000 + 7,500) 37,500

Furniture*2 (5,500 - 500)

i.e., 10% on Rs. 50,000 ' 5,000 42,500

To Net Profit transferred to Capital 40,600

A/c

1,70,000 1,70,000

Balance Sheet of Mr. S

as on 31st March, 2015
Liabilities Rs. Assets Rs.

Sundry Creditors 82,000 Machinery*1 2,50,000

Capital 2,45,750 Less: Depreciation 37,500 2,12,500

Add: Net Profit 40,600 Furniture*2 50,000

2,86,350 Less: Depreciation 5,000 45,000

Less: Drawings Sundry Debtors*3 32,400

(Rs. 28,000 +Rs. 33,000 2,53,350 Cash in hand 7,800

5,000)

Cast)'at Bank 18,500

Outstanding Expenses: Stock , 47,500

Salaries 1,500 Prepaid Insurance 250

Printing 600

Audit fees 1,000 3,100

T's A/c (Amount

Payable)

(Rs. 30,000 -Rs. 25,500

4,500)

3,63,950 3,63,950
Adjustment Entries for Rectification of Errors

Date Particulars. Rs. L.F. Dr, (Rs.) Cr. (Rs.)

(i) Machinery A/c Dr. 50,000

To Furniture A/c 5,000

To Suspense A/c 45,000

 (ii) Suspense A/c Dr. 5,600

To Sundry Debtors 5,600

(iii) Drawings A/c Dr. 5,000

To Purchase A/c 5,000

(iv) Sales A/c Dr. 30,000

To T's A/c 25,500

To Commission A/c 4,500

Suspense Account

Particulars Rs. Particulars Rs.

To Balance b/d 39,400 By Machinery A/c 45,000

To Sundry Debtors 5,600

45,000 45,000

Working notes: (Rs.)

*j Machinery A/c: Balance as per Trial Balance 1,70,000

Add: Amount of Depreciation charged as per Trial Balance 30,000

2,00,000

Add: New Machinery Purchased during the year 50,000

2,50,000

Less: Depreciation @ 15% 37,500

2,12,500

*2 Furniture A/c: Balance as per Trial Balance 49,500

Add: Depreciation as per Trial Balance 5,500

55,000
Less: Wrong Debit 5,000

50,000

Less: Depreciation @ 10% 5,000

45,000

*3 Sundry Debtors: Balance as per Trial Balance 38,000

Less: Amount received but not posted in the ledger 5,600

32,400
Q. 4. (a) Distinguish between financial lease and operating lease. 2
(b) A Ltd. purchased on 1st Jan., 2014 from M/s SK Traders four machines having cash
price of 78,00,000 each on hire purchase basis. The payment was to be made as
follows —
10% of cash price down.
25% of cash price at the end of each of the following four years.
A Ltd. paid the first instalment but failed to pay the second instalment due on 31 st
Dec, 2015. M/s SK Traders repossessed three machines leaving remaining one
machine with the buyer. The value of three machines was taken at cost less
depreciation @ 20% p.a. on reducing balance method. A Ltd. charges depreciation @
10% p.a. on reducing balance method on 31 st Dec. every year. M/s SK Traders spent
Rs. 4,20,000 on overhauling of machines repossessed and sold two of the
repossessed machines for 712,00,000.
Prepare necessary accounts in the books of both the parties. 8
Sol. (a) Difference between financial lease and operating lease. See Q. 6, Unit III. [Page T-
59
(b) Calculation of Interest: Total Hire Purchase Price: 7
10% of Down payment of Rs. 32,00,000 (Rs. 8,00,000 x 4) 3,20,000
Add: 4 Instalments of Cash price 32,00,000 35,20,000
Less: Cash Price (Rs. 8,00,000 x 4) 32,00,000
Interest 3,20,000
Since there are four equal instalments payable at the end of each of the four years, the ratio
is 4 : 3 : 2 :1.
Interest on:
1st instalment =Rs. 3,20,000 x 4/10 =Rs. 1,28,000; 2nd instalment =Rs. 3,20,000 x 3/10
=Rs. 96,000

3rd instalment =Rs. 3,20,000 x 2/10 =Rs. 64,000; 4th instalment =Rs. 3,20,000 x 1/10 =Rs.
32,000
In the Books of A Ltd.
Dr. Machines on Hire Purchase Account Cr.

Dale Particulars Rs. Date Particulars Rs.

01-01-14 To M/s S.K. Traders 32,00,000 31-12-14 By Depreciation A/c 3,20,000

(Rs. 8,00,000 x 4) [10% of Rs. 32,00,000]

By Balance c/d 28,80,000

32,00,000 32,00,000
01-01-15 To Balance b/d 28,80,000 31-12-15 By Depreciation A/c 2,88,000

[10% of Rs. 28,80,000]

 By S.K. Traders*2 15,36,000

By Profit & Loss A/c 4,08,000

(Loss
on default) (Bal. fig.)

By Balance c/d*4 6,48,000

28,80,000 28,80,000

Dr. M/s S.K. Traders Cr.

Date Particulars Rs. Date Particulars Rs.

01-01-14 To Bank A/c 3,20,000 01-01-14 By Machines on Hire

31-12-14 To Bank A/c 8,00,000 Purchase A/c 32,00,000

31-12-14 To Balance c/d 22,08,000 31.12.14 By Interest A/c 1,28,000

33,28,000 33,28,000

31-12-15 To Machines on Hire 01-01-15 By Balance b/d 22,08,000

Purchase A/c*2 15,36,000 31-12-15 By Interest A/c 96,000

To Balance c/d 7,68,000

23,04,000 23,04,000

In the Books of S.K. Traders (Vendor)

Dr. A Ltd. Account Cr.

Date Particulars Rs. Date Particulars Rs.

1.1.14 To Hire Purchase Sales 32,00,000 1.1.14 By Bank A/c 3,20,000

A/c

31.12.14 To Interest A/c 1,28,000 31.12.14 By Bank A/c 8,00,000

31.12.14 By Balance c/d 22,08,000

33,28,000 33,28,000

1.1,15 To Balance b/d 22,08,000 31.12.15 By Machines

Repossessed A/c 15,36,000

31.12.15 To Interest A/c 96,000 31.12.15 By Balance c/d 7,68,000

23,04,000 23,04,000

Dr. Machines Repossessed Account Cr.

Date Particulars Rs. Date Particulars Rs.

31.12.15 To A Ltd. 15.36.000 31.12.15 By Bank A/c (Sale) 12.00.000

To Bank A/c 4,20,000 By Loss on. sale of

Machines

Repossessed A/c to be

transferred to P&L A/c 1.04,000*1

By Balance c/d*2 6,52,000

19,56,000 19,56,000

Working notes:

*1 Calculation of loss on sale of Machines repossessed: (Rs.)

Total Value of Machines repossessed 19,56,000

Value of Machines repossessed sold =Rs. 19,56,000 x 2/3 13,04,000

Less; Sale Price 12,00,000

Loss on Sale 1,04,000

*2 Closing balance of one Machine repossessed =Rs. 19,56,000 x 1/3 =Rs.

6,52,000

*3 Value of 3 Machines repossessed: Cash price of three machines (Rs. 24,00,000

8,00,000 x 3)

Less: Depreciation @ 20% p.a. (2014) 4,80,000

19,20,000

Less: Depreciation @ 20% p.a. (2015) 3,84,000

15,36,000

*4 Value of machine left with A Ltd.: Cost price of one machine 8,00,000

Less: Depreciation @ 10% p.a. (2014) 80,000

7,20,000

Less: Depreciation @ 10% p.a. (2015) 72,000

6,48,000

Or
(a) Distinguish between Hire Purchase System and Instalment Purchase System.
(b) R.C. Sales Corporation has a hire purchase department. Goods are sold on hire
purchase at cost plus 25%. From the following particulars, prepare the ledger accounts by
Stock and Debtors Method: 2,8

Rs.
Stock with hire purchase customers at selling price on 1-4-2014 15.000

Instalments due (Customers paying) on 1-4-2014 1,800

Sales on hire purchase basis during the year ended 31-3-2015 at selling price 96,500

Cash received during the year 98,300

Goods repossessed (instalment due Rs. 2,000) valued at 1.700

Instalment due (customers still paying) on 31-3-2015 1,100

Ans. (a) See Q. 2, Unit III. [Page T-54
(b) Dr. Hire Purchase Debtors Account Cr.

Dale Particulars Rs. Date Particulars Rs.

01-04- To Balance b/d 1,800 31-03- By Cash A/c 98,300

14 15

31-03- To Stock with HP 31-03- By Goods Repossessed 2,000

15 Customers 15 A/c
A/c (Bal. figure 99,600 31-03- By Balance c/d 1,100
Transfer) 15
1,01,400 1,01,400

Dr. Stock With HP Customers Account Cr.

Date Particulars Rs. Date Particulars Rs.

01-04- To Balance b/d 15,000 31-03- By Hire Purchases 99,600

14 15 Debtors A/c
31-03- To Goods sold on HP 96,500 By Balance c/d 11,900
15 A/c

1,11,500 1,11,500

Dr. Hire Purchase Adjustment Account Cr.

Particulars Rs. Particulars Rs.

To Stock Reserve A/c 2,380 By Stock Reserve A/c 3,000

(Load:Rs. 11,900x 1/5) (Load:Rs. 15,000 x 1/5)

To Goods Repossessed A/c 300 By Goods sold on HP A/c 19,300

(2,000-1,700) (Load:Rs. 96,500 « 1/5)

To Profit & Loss A/c (Profit on 79,620

HP)

22,300 22,300
Calculation of Profit Margin (load) on Hire Purchase Price:
Suppose Cost Rs. 100 Profit margin =Rs. 25/Rs. 125 = 1/5
Add: Profit Rs. 25
Hire Purchase Price Rs. 125
Q. 5. (a) Distinguish between a "Dependent Branch" and an "Independent Branch". 2
(b) T Ltd. has two Branches at Delhi and at Bombay. Goods are invoiced to branches at cost
plus 50%. Goods are transferred by/to another branch at its cost. Following information is
available of the transactions of Delhi Branch for the year ended 31-3-2015: 8

1. Opening stock at LP. 2,67,000

2. Goods sent to branch (including goods invoiced at Rs. 15,000 to branch on

31st

March, 2015 but not received by branch before the dose of the financial year) 7.83,000

3. Goods received from Bombay Branch 6.000

4. Goods transferred to Bombay Branch 51,000

5. Goods returned by branch to H.O. 11,700

6. Goods returned by credit customers to branch 5,700

7. Goods returned by credit customers directly to H.O. 1.200

8. Agreed allowance to customers off the selling price (already taken into 1,000
account while invoicing)
9. Normal loss due to wastage and deterioration of stock (at stock) 1,000

10. Loss in transit (at invoice price)Rs. 6,600 against which a sum of Rs. 4.000
was from insurance company in full settlement of the claim

11. Cash sales Rs. 32,000 and credit sales Rs. 7,29,400

12. Branch expenses (including insurance charges)Rs. 50.000

13. Bad debts Rs. 1.000 and discount allowed to customers Rs. 500

Prepare Branch Stock Account, Branch Adjustment Account and Branch Profit & Loss
Account, if the closing stock at branch at its cost as per physical verification amounted to Rs.
2,00,000.
Sol. (a) Difference between a Dependent Branch and an Independent Branch. See Q. 2, Unit
IV. [Page T-61
(b) Dr. Delhi Branch Stock Account Or.

Particulars Rs. Particulars Rs.

To Balance b/d 2,67,000 By Goods sent to Branch A/c 51,000

To Goods sent to Branch A/c 7,83,000 (Transfer to Bombay Branch)

To Goods sent to Branch A/c 6,000 By Goods sent to Branch A/c 11,700
(Transfer from Bombay (Returns to H.O.)
Branch)

To Branch Debtors A/c 5,700 By Branch Profit & Loss A/c 4,400

(Returns to Branch) (Cost of Loss-in-transit)

By Branch Adjustment A/c 2,200

(Load on loss-in-transit)

By Branch Cash A/c (Cash Sales) 32,000

By Branch Debtors A/c (Credit Sales) 7,29,400

By Branch Adjustment A/c (Normal 1,500

Loss) [Rs. 1.000 + 50%of Rs. 1,000]

By Branch Adjustment A/c

(agreement
allowance allowed) 1,000

bf 10,61,700 8,33,200

By Branch Profit & Loss A/c

(Cost of shortage) 9,000

By Branch Adjustment A/c

(Load on Shortage) 4,500 13,500

By Balance c/d:

In hand 2,00,000

In transit 15,000
10,61,700 10,61,700
Working notes: Journal Entry for return of goods by Debtors direct to the Head Office:

Goods sent to Branch A/c Dr.

To Branch Debtors A/c .
Alternatively, the following two entries may be passed when goods are returned by Debtors
direct to the Head Office:
(a) Branch Stock A/c Dr.
To Branch Debtors A/c
(b) Goods sent to Branch A/c Dr.
To Branch Stock A/c
Dr. Delhi Branch Adjustment Account Cr.
Particulars Rs. Particulars Rs.

To Branch Stock 2,200 By Stock Reserve A/c 89,000

(Load on loss-in-transit) (Load on opening stock:

To Branch Stock A/c (Normal 1,500 1/3 of Rs. 2,67,000)

Loss)

To Branch Stock A/c 1,000 By Goods sent to Branch A/c 2,41,700

(Agreed Allowance) . (Load on Net Goods sent)

To Branch Stock A/c (Load on 4,500 [(Rs. 7,83,000 +Rs. 6,000-Rs.

shortage) 11,700
To Stock Reserve A/c (Load on 71,667 -Rs. 51,000-Rs. 1,200)x 50/150]

Closing Stock) (1/3 of Rs.

2,15,000)

To Gross Profit transfer to

Branch

Profit & Loss A/c 2,49,833

3,30,700 3,30,700

Dr. Delhi Branch Profit and Loss Account Cr.

Particulars Rs. Particulars Rs.

To Branch Expenses A/c 50,000 By Branch Adjustment A/c 2,49,833

To Discount allowed 500 (Gross Profit)

To Net Profit transferred to General By Insurance Claim 4,000

Profit & Loss A/c 1,88,93
3
To Branch Stock A/c (Cost of 9,000
shortage)

To Branch Stock A/c 4,400

(Cost of Loss-in-transit)
To Bad Debts 1,000

2,53,83 2,53,833
3

Or
(a) Explain the procedure of incorporating the Branch Trial Balance in H.O. Books. 2
(b) C Enterprises with their H.O. at Raj as than has a branch at Delhi. The goods are
supplied to branch at 25% less than the list price which is cost plus 100% of cost. The Head
Office also supplies goods to its dealers at the same price at which they are supplying to its
branch at Delhi. 8
From the following particulars. Prepare Trading and Profit & Loss Account of the H.O.
and that of its Branch:

Head Office (Rs.) Delhi Branch (Rs.)

Opening Stock 60,000 33,000

Purchase during the year 45,00,000 —

Goods sent to Branch 18,70,000 —

Goods received from H.O. — 18,70,000

Goods sold to dealers 25,10,000 —

Goods sold to customers at list price 32,00,000 24,00,000

Sol. (a) Procedure of incorporating the Branch Trial Balance in H.O. Books.

The process by which a consolidated or combined Balance Sheet of the whole business
prepared is known as incorporation of branch trial balance in the books of head office. There
are two methods of incorporation of branch trial balance in the books of head office—(Rs.)
First Method (Detailed Incorporation); (ii) Second Method (Abridged Incorporation).
(b) Supply price = 25% less of cost plus 100% of cost = 100 + 100 - 25% = 250
C Enterprises
Dr. Head Office Trading Account Cr.

Particulars Rs. Particulars Rs.

To Opening Stock. 60,000 By Goods sent to Branch A/c 18,70,000

To Purchases 45,00,000 By Goods sold to Dealers 25,10,000
To Gross Profit 30,60,000 By Goods sold to customers 32,00,000

By Stock at the end*. 40,000

76,20,000 76,20,000

Dr. Delhi Branch Trading Account Cr.

Particulars Rs. Particulars Rs.

To Opening Stock 33,000 By Sales A/c 24,00,000

To Goods received from Head 18,70,000 By Closing Stock*2 1,03,000

Office

To Gross Profit 6,00,000

25,03,000 25,03,000
Dr. Profit and Loss Account Cr.

Particulars Rs. Particulars Rs.

To Stock Reserve (Provision for By Gross Profit b/d 30,60,000
un-

realised profit on Closing Stock By Stock Reserve A/c

at bank: 1/3rd of Rs. 1,03,000) 34,333 (Provision for unrealised profit on

To Net Profit transferred to Opening stock at branch: 1/3 of

General

Profit & Loss A/c 30,36,667 Rs. 33,000) 11,000

30,71,000 30,71,000

Working notes:
*1 Calculation of Closing Stock at head office: (Rs.)

Opening Stock 60,000

Aid: Purchases 45,00,000
45,60,000
Less: Cost of Goods Supplied to dealers and branch:
10
%50 x Rs. 43,80,000 (i.e., 18,70,000 + 25,10,000) 29,20,000

16,40,000

Less: Cost of goods sold to customers: 100/200 x Rs. 32,00,000 16,00,000

Closing Stock at Head Office 40,000

*2 Calculation of Closing Stock of Branch (Invoice Price): (Rs.)

Invoice price of goods available for sale Rs. (33,000 + 18,70,000) 19,03,000

Less: Cost of Goods sold: 150/200 x Rs. 24,00,000 18s00,000

Closing stock at Invoice Price 1,03,000

Q. 6. (a) What is Gradual (Piecemeal) distribution of cash Rs. 2

(b) R, Z and T shared profits and losses in the ratio of 5 : 3 : 2 respectively.
On 31st March, 2015, their balance sheet was as follows: 8
Liabilities Rs. Assets Rs.

Trade Creditors 30,000 Furniture 11,000

Bank Loan 10,000 Stock 48,000

Capital A/cs: R 30,000 Cash 1,000

Z 20,000 Profit & Loss A/c 40,000

T 10,000
 1,00,000 1,00,000

The Bank had a charge on all assets. Furniture realised Rs. 3,000 while the entire stock was
sold for Rs. 25,000. Z's private estate realised Rs. 6,000. His private creditors were Rs.
5,000. T was unable to contribute anything. R paid one-third of what was due from him on
his own account (before considering the one-third payment by him in his capital accounts).
Prepare Realisation A/c, Cash Account, Partners' Capital A/c, passing all matters relating to
realisation of assets and payment of liabilities through the Realisation Account. Clearly show
calculation regarding cash brought in by R.
Or
Sol. (a) Gradual (Piecemeal) distribution of Cash. See Q. 9, Unit V. [Page P-69
(b) Dr. Realisation Account Cr.

Particulars Rs. Particulars Rs.

To Furniture 11,000 By Creditors 30,000

To Stock 48,000 By Bank Loan 10,000

To Cash (Bank Loan) 10,000 By Cash A/c (Asset Realised): 3,000

Furniture
To Cash (Creditors)* 20,200 Stock 25,000
By Loss on Realisation
transferred to:
R's Capital A/c* 10,600

Z's Capital A/c* 6,360

T's Capital A/c* 4,240 21,200

89,200 89,200

Dr. Capital Accounts of Partners Cr.

Particulars R(Rs.) Z (Rs.) T (Rs.) Particulars R (Rs.) Z (Rs.) T (Rs.)

To Profit & Loss 20,000 12,000 8,000 By Balance b/d 30,000 20,000 10,000
A/c

To Realisation A/c 10,600 6,360 4,240 By Cash A/c 200 1,000 —

To R's Capital A/c — 400 — By Z's Capital A/c 400 — 2,240

To T's Capital A/c — 2,240 —

30,600 21,000 12,240 30,600 21,000 12,240

Dr. Cash Account Cr.

Particulars Rs. Particulars Rs.

To Balance b/d 1,000 By Realisation A/c (Bank loan) 10,000

To Realisation A/c (Assets 28,000 By Realisation A/c (Trade 20,200

realised) creditors)

To Z's Capital A/c 1,000

To R's Capital A/c 200

30,200 30,200

* Working notes: Calculation of the amount to be contributed by R:

Let the amount to be contributed by R be x.
(i) Dr. Memorandum Cash Account Cr

Particulars Rs. Particulars Rs.

To Balance b/d 1,000 By Realisation A/c

To Realisation A/c (Assets) 28,0.00 (Bank Loan) 10,000

To Z's Capital A/c 1,000 By Realisation A/c (Creditors) 20,000 +x

To R's Capital A/c X (Balancing figure)

30,000 +x 30,000 +x

(ii) Dr. Memorandum Realisation Account Cr.

Particulars Rs. Particulars Rs.

To Sundry Assets 59,000 By Sundry Liabilities 40,000

To Cash A/c (Bank Loan) 10,000 By Cash (Assets) 28,000
To Cash A/c (Creditors) 20,000+ x By Loss: R 10,500 + 5x/10

Z 6,300 + 3x/10

T 4,200 + 2x/10 21,000+x

89,000+x 89,000 +x

(iii) Dr. Memorandum R's Capital Account Cr.

Particulars Rs. Particulars Rs.

To Profit & Loss A/c (Loss) 20,000 By Balance b/d 30,000

To Realisation A/c (Loss) 10,500+ By Balance due 500 + 5x/10
5x/10

30,500 + 30,500 +
5x/10 5x/10

Thus, x = 1/3 of (500 + 5 x/10)  3x = 500 + 5x/100  30x = 5,000 + 5x  25x = 5,000
x = 5,000/25 =Rs. 200.

Or
(a) Briefly explain the Garner vs. Murray Rule. 2
(b) A partnership was dissolved on 30 th June 2015. Its Balance Sheet on the date of
dissolution was as follows: 8
Liabilities Rs. Assets Rs.

Capitals: Cash 5,400

R 38,000 Sundry Assets 94,600

S 24,000

M 18,000

Loan Account of S 5,000

Sundry Creditors 15,000

1,00,000 1,00,000
The assets were realised in instalments and payment was made on the proportionate capital
basis. Creditors were paid Rs. 14,500 in full settlement of their account. Expenses of
realisation were estimated to be Rs. 2,700 but actual amount spent on this account was Rs.
2,000. This amount was paid on 15 th Sep., 2015. Draw up a statement showing distribution
of cash which was realised as follows:

On 5th July, 2015 Rs. 12.600

On 30th August, 2015 Rs. 30,000

On 15th September, 2015 Rs. 40,000

The partners shared profits and losses in the ratio 2:2:1. Give working notes.
Sol. (a) Garner vs. Murray Rule. See Q. 7, Unit V. [Page P-68
(b) Statement showing priority and amount of payment of partners (Proportionate
Capital):

2 :2 :1

R (Rs.) S (Rs.) M (Rs.)

Capital 38,000 24,000 18,000

Taking S's Capital as base 24,000 24,000 12,000

Excess capital 14,000 — 6,000

Taking M's Capital as base 12,000 - 6,000

Excess Capital 2,000 - -

Statement Showing Distribution of Cash

Particulars Sundry Loan from R's S's M's Capital

Creditors s (Rs.) Capital Capital (Rs.)
(Rs.) (Rs.) (Rs.)

2015, July 1 15,000 5,000 ' 38,000 24,000 18,000

Cash in hand (Rs. 5,400 -
Rs. 2,700)

For expenses 2,700

Balance to be paid 12,300

July 5: Realisation Rs.

12,600

Cash Paid & availed

discount

from creditors 11,800 800

4,200
Aug. 30: Realisation Rs.
30,000

Cash Paid 4,200

Balance available
Rs. (30,000 - 4,200) =Rs.
25,800

Cash Paid (Excess capital) 14,000 — 6,000

Balance available
Rs. (25,800 -20,000) 24,000 24,000 12,000

Cash paid Rs. 5,800 in the 2,320 2,320 1,160

profit

sharing profit 21,680 21,680 10,840 •

Sep. 15

Realisation 40,000
Add: Surplus from

Exp. Provision

Rs. (2,700 - 2,000) 700

Total Cash available 40,700

Paid to partners 16,280 16,280 8,140

Loss to be borne by Partners

in

the ratio of 2 : 2 :1 5,400 5,400 2,700

Working notes:
The Statement of Priority payment must be prepared before any cash is paid to partners.
The basis should be that partner's capital who has contributed the least in proportion of his
share of profit. In the question S has contributed the least of all (Profit-sharing wise). That is
why S's Capital has been taken as the basis. But this has resulted in excess of two partners'
(R & M) Capital. Hence further exercise is made to determine the first priority payment,
which is that of Rs. 2,000.

Thus, it is clear that R should be paid Rs. 2,000 first.

Secondly, R and M should be paid in 2 : 1 ratio to the extent of Rs. 12,000 and Rs. 6,000
respectively. Once this excess Capital of Rs. 14,000 (Rs. 2,000 +Rs. 12,000) in case of R
and Rs. 6,000 in case of M is paid, the balance and subsequent instalments will continue to
be paid in profit sharing ratio which is 2:2:1.
Lastly, the unsatisfied balance left will be in the profit sharing ratio (2:2:1) which is the loss to
the partners on account of realisation.