CPZ2A/CPG2A/CPW2A - shasuncollege.edu.in · ACCOUNTING 1 CPZ2A/CPG2A/ CPW2A/ CYA2C/CPC2A –...

CPZ2A/CPG2A/CPW2A/ CPC2A

ADVANCED FINANCIAL ACCOUNTING

1 CPZ2A/CPG2A/ CPW2A/ CYA2C/CPC2A – Advanced Financial Accounting

TM

UNIT - I

Branch Accounts

Dependent Branches

Stock & Debtors System

Distinction Between Whole Sale &

RetailProfit

Independent Branches


TM

Meaning - It is an Establishment or a subordinate division of business

which carry on either the same activity or a substantially the same

activity cariied on by the Head office.

The main place of establishment (i.e) the parent establishment

called HeadOffice

The various division situated at different places is

called Branch Office

Branch Accounts


TM

OBJECTIVES OF BRANCH ACCOUNTS Help in controlling branches

Helps in finding the actual financial position of each & every branch

Helps in ascertaining the Profit or loss of each branch

Helps in assessing the Cash and Goods requirement of each branch.

Help in ascertaining the exact expenses and incomes by seeing the Branch

accounts

Helps in providing suggestions on Do’s & Don’ts in branches.

Branch

4 CPZ2A/CPG2A/ CPW2A/CPC2A – Advanced Financial Accounting

CPZ2A/CPG2A/ CPW2A/ CYA2C/CPC2A – Advanced Financial Accounting

https://www.youtube.com/watch?v=_Gx_1ygl4CU&t=168s

TM

Types of branches

Dependent branch

Independent branch

Foreign branch


TM

The Records of these Branches are maintained by head office.

These types of branches that are operated by orders, which are

executed by the head office

Expenses incurred at the branch have to be maintained by them.


TM

Books of accounts :

Methods of accounting

petty cash book

stock register

customer's accounts

Stock and debtors system

Debtors system

Final account system

Wholesale branch system


TM

This system is adopted in case of branches of small size.

This account is nominal account in nature.

Here the head office maintains account of each branch to know

about profit and loss of each branch.

Goods are despatched at any of these :

cost

Invoice price

Cost + fixed % of loading


TM


Branch Account (in the books of head office)

To balance b/d (assets in the beginning) By balance c/d(Opening balance of liabilities accounts if any

Stock creditors

Debtors Outstanding expenses

Petty cash By Bank

Furniture cash sales

Prepaid expenses cash collected from debtors

To Goods sent to branch A/c By Goods sent to branch A/c (returns to H.O)

To bank (expenses paid by H.O.) By Balance c/d (closing balance of assets)

To balance c/d (closing balance of Liabilities Accounts if any) Prepaid expenses

Creditors Stock

Outstanding expenses Debtors

To General P & L A/c (Branch Profit) (bal fig) Petty cash

Furniture( at depreciated value)

By General P & L A/c (Branch Loss ) (bal fig)

TM

• Debit side • Credit side

Sale (credit) Cash received

Discount

Goods returned

Bad debts

Allowances

Balance

If cost is 100, but the HO has sent goods to branch at 120 then

there is profit of 20 added in the cost. This 20 has to be adjusted.

This is called stock reserve.


TM

In this system the head office keeps separate accounts relating to

various types of transaction at the branch instead of one branch.

Following accounts are kept in the head office books relating to a

branch under this system

Branch Stock A/c

Branch Debtors A/c

Branch Adjustment A/c

Branch Expenses A/c

Goods Sent to Branch A/c


TM

This account deals with all goods received, returned and sold by the branch.

This account gives the surplus or shortage of stock and the closing stock @

the branch, is usually prepared at invoice price.


Opening balance Cash account

Goods sent to Branch Debtors a/c

Goods Returned by Drs Goods returns by branch

Goods Spoiled, lost (in weight, pilferage, loss in transit)

Balance c/d


TM

This account records all the transaction relating to branch debtors

Ascertain either the closing balance of debtors or credit sales.


Stock account (B/f denoting total credit sales )

Cash received

Branch adjustment a/c ( Bad debts etc.)


TM

When goods sent to branch at cost price, then this a/c need not to be prepared.

When the goods are supplied to branch at invoice price ,

It is prepared to ascertain the gross profit made by the branch.


Stock reserve Goods sent to branch a/c

Branch stock a/c Loading on goods sent to Branch

Profit element of stock shortages, Defectives, loss on transit, pilferage element of stock surplus

Value of loss in weight (P & L) (full amount)

Gross profit (balancing figure )


TM

Prepared to ascertain the net profit made by the branch.

Prepared to find out the net value of goods sent to the branch.

Balance of this account is transferred to either purchase account or

trading account depending on the

Branch P& L


https://youtu.be/_Gx_1ygl4CU

TM

Departmental Accounts

Basis for Allocation of Expenses

Inter departmental transfer

Treatment of Expenses


TM

Meaning – DEPARTMENTS

Division of organization in to independent departments, each of which

may deal in a particular class of goods or render a specified type of

services under the same roof or from the same premises.

DEPARTMENTAL ACCOUNTING

The owners or the management may desire to ascertain the trading results of

each department and the overall result of the organisation and the method of

obtaining such results is known as departmental accounting


TM


TM

• Trading & P/L A/c is prepared

P & L A/c

• Firms with Huge Turnover will maintain separate Subsidiary Books

• Closing Stock can be ascertained at the time of stock taking

Maintenance of Records

• Direct Expenses • Indirect Expenses

Expenses which can be apportioned Expenses which cannot apportioned

Departmentalisation of Expenses

• @ Cost Price • @ Selling Price or Loaded Price Inter Departmental

Transfers


TM

S.N Expenses Basis of Apportionment

1 Selling expenses like sales commission, salesmen’s salaries, advertising, bad debts, carriage outwards etc.

Sales ratio or ratio of sales quantity

2 Rent and rates, repairs , maintenance of premises, building insurance, depreciation etc.

Floor area or space occupied by each department

3 Depreciation of fixed assets like furniture, fixtures, machinery, fire insurance, repairs on such assets.

Value of each asset possessed by different departments.

4 lighting

Light points or floor area

5 Power

Consumption as per meter Or horse power

6 Carriage inward

Purchase value

7 workmen’s amenities, and welfare expenses Workmen’s

compensation insurance, ESI,PF etc. payable to employer

No. of workers Wages of each department

8 Factory manager’s salary

Time devoted to each dept

9 Premium for loss of profits insurance

Profit of each dept in the previous year


TM


Departmental Accounts

https://www.youtube.com/watch?v=_Gx_1ygl4CU

TM

Hire Purchase & Instalment

Default & Repossession

Stock & Debtors System

Hire Purchase Trading Account

Instalment purchase system


TM

Definition – Hire Purchase System • According to the Hire Purchase Act 1972 Section 2(c) “ Hire purchase

agreement is 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 an agreement under which -

• Possession of goods is delivered by the owner & amount in periodical

instalments.

• The property is passed only on the payment of the last of such instalments.

• Such person has a right to terminate the agreement at any time before the

property so passes.”


TM

HP System - Important terms

Cash Price

Hire purchase Price

Interest

Hire or Instalment

Down Payment

Hirer

Hire vendor

or Owner


TM HP System - Features The hirer gets possession of the goods on signing the agreement and

has the right to use them.

The ownership continues to be with the seller or hire vendor. The buyer

gets ownership on payment of the last instalment.

The hirer has the duty to keep the goods in good condition.

Each instalment is treated as hire charges.


TM

The hirer has the option to return the goods before the last instalment is

paid

The hire vendor can repossess the goods if the buyer fails to pay any

instalment on the due date.

If goods are repossessed, the value of goods on that date and the

instalment paid are added and the total hire purchase price is reduced.

The balance is payable by the hire vendor to the hirer.

HP System - Features


TM Instalment purchase system

An agreement is entered into by the seller and buyer.

Down payment is paid and possession as well as ownership

in the goods is transferred to the buyer.

If buyer fails to pay any instalment, the seller cannot

repossess the goods.

He can only sue the buyer in a court for recovery of the dues.


TM

Distinction between HP & IP System

Nature of agreement

Transfer of ownership

Name of the parties

Relationship

Risk of loss

Right of sale

Repossession of goods

Termination of agreement

Instalment

Governing


TM

Calculation of Interest

The hire purchase price is always greater than the cash price. Calculations

under the following circumstances:

When the rate of interest, the cash price and the instalments are given

When the rate of interest is not given

When the total cash price is not given

When the instalment price is not given

When cash price is calculated by annuity method


TM

Default & Repossession Default ◦ If the hire purchaser fails to make payment of any instalment, it is

called default. Repossession

The hire vendor has the right to take away the goods sold on hire

purchase in the event of default made by the hire purchaser.

The hire vendor can repair or recondition the repossessed goods

and sell them to anyone else.


TM Repossession - Types

Complete Repossession

The hire vendor may take away all the goods on

which there is default of instalment.

Partial Repossession

Hire vendor may take away only a portion of

the goods on which there is default of

instalment.


TM Computation of Profit - Methods

Debtors Method

Stock and debtors Method


HP System

https://www.youtube.com/watch?v=VznrCKE3qOQ

TM

Admission of a Partner

Retirement of a Partner

Death of a Partner


TM Definition • According to Section 4 of the Indian Partnership Act 1932, partnership is

defined as - “ The relationship between persons who have agreed to share the profits of a business carried on by all or any of them acting for all”.

There must be an agreement entered into between two or more

persons.

The object of the agreement must be to share the profits of a

business.

The business must be carried on by all or any of the persons concerned

acting for all.

It is formed to carry on a lawful business.

It is an association of two or more persons

Features


Introduction to Partnership

https://www.youtube.com/watch?v=y-r_NP-OWGc

https://www.youtube.com/watch?v=y-r_NP-OWGc

TM

Admission • According to Sec 31(1) of the Indian Partnership Act 1932, a new

partner can be admitted only with the consent of all the existing partners.

• The existing partnership agreement comes to an end and a new agreement comes into effect.

Whenever a partner is admitted into the partnership firm, he acquires two rights-

The right to share in the assets of the partnership

The right to share in the profits of the business


TM

Adjustment in the profit sharing ratio

Adjustment for goodwill &

Adjustment of capital

Adjustment for revaluation of assets

and liabilities

Adjustment of reserves and other accumulated

profits.

Necessary Adjustments


Necessary Adjustments – Admission

TM

Calculation of Sacrificing Ratio

• Old partners have to surrender some of their old shares in favour of

the new partner.

• The surrender of share by old partners is made in certain ratio.

• This ratio is called sacrificing ratio.

Sacrificing Ratio = Old Ratio – New Ratio


TM Goodwill - Meaning

It can be described as a value of all favourable attributes relating to

a business enterprise. Goodwill is nothing more than the probability

that the old customers will resort to the old place.

It is the value of the reputation of the firm in respect of profits

expected in future over and above the normal rate of profits.


TM

Methods of valuation of goodwill

Average profit method or certain number of year’s

purchase of average profits.

Avg Profit = Total Profits No. of Years

Goodwill = Average

Profit x No. of Year’s

Purchase

Super Profit Method

Normal Profit =

Capital employed x

Normal rate of return

Super Profit = Average

profit – Normal Profit

Goodwill = Super Profit

x No. of years of

purchase

Capitalisation Method

Cap. Val of profit = Profit(Adjusted) ------------------------ x 100 Normal rate of return

Value of G/w = Capitalised value of profit

–

Net tangible asset

Net Tangible Assets = Total assets except goodwill – liabilities

to outsiders


TM

Treatment for Goodwill

on the Admission

of a Partner

Inferred or

Hidden Goodwill

Premium Method

Revaluation Method

Memorandum Revaluation

Method


Treatment for Goodwill Admission of a Partner

TM

Retirement of a Partner

• According to Sec 32(1) of the Indian Partnership Act 1932, a partner

may retire from the firm

– With the consent of all the partners

– In accordance with an express agreement by the partners

– Where the partnership is at will by giving notice in writing to all

the other partners of his intention to retire.


TM

Adjustment regarding profit sharing ratio

Adjustment for goodwill &

Revaluation of Assets and Liabilities

Adjustments regarding Reserves and other

undistributed profits and losses

Payment to the retiring partner.

Retirement Necessary

Adjustments


Necessary Adjustments – Retirement

TM

Gaining Ratio

• After retirement , the remaining partners share profits in the ratio between them as before the retirement of the partner.

• The remaining partners will gain additionally from the old ratio.

• Gaining Ratio = New Ratio - Old Ratio


TM

Payment to the Retiring Partner

Payment in Instalments

Payment in Lump sum

Payment by Annuity


Retiring Partner - Payment

TM Death of a Partner • Death of a partner dissolves the partnership but the surviving

partners generally carry on the business by purchasing the

deceased partners share.

• In the event of death, the legal representative of the deceased

partner will be entitled to get from the firm, the amount due on

account of the following will be credited:

– Capital standing to the credit of the deceased partner on the date

of his death

– Share of goodwill


TM

– Share in the profit of the firm earned from the beginning of the year to

the date of death.

– Profit on revaluation of assets and liabilities

– Share of accumulated profits and losses

– Share of the proceeds of the Joint Life Policy.

– Interest on capital from the beginning of the year to the date of death.

– Salary due


Death of a Partner

TM

Deceased partner’s cap a/c is debited with the following amount

Drawings

Interest on drawings from the beginning of the year to

the date of death.

Loss on revaluation of assets and liabilities

Loss in the business from the beginning of the

accounting year till the date of death.


Deceased Partner’s Capital a/c

TM

Mode of Payment

Lump sum Payment Method

Instalment Payment Method

Annuity Method


Mode of Payment - Retirement

TM

Joint Life Policy

Joint Life Policy is taken on the life of all the partners or individual

policies on the lives of all the partners.

Annually a sum of money known as premium is paid to the LIC of India.

The company will pay the amount of the policy on the death of any one

of the partners. In case of individual policies, the deceased partner has

a right to share the amount not only received from LIC but also the

surrender values of other partners, policies at the time of death.

Surrender value is the value which is payable immediately to the

insured on surrendering all rights of the policy to the corporation.

49

CPZ2A/CPG2A/ CPW2A/ CYA2C/CPC2A – Advanced Financial Accounting

TM Methods of treatment with JLP

When premium paid is treated as an expense (without maintaining a JLP account)

The premium paid is treated as an asset. (maintaining a JLP A/c at its surrender value)

When premium paid is treated as an asset and reserve is maintained


TM

Dissolution of a Partnership

Insolvency of a partner

Gradual Realisation of

Assets & Piecemeal

Distribution.


TM

Meaning • It refers to the complete breakdown of a partnership and partners do

not continue the firm.

• The dissolution of partnership between all partners of a firm is called

the dissolution of the firm.

• The assets are disposed off, liabilities are paid off and whatever

remains is paid to the partners in settlement of their accounts.


TM

Modes of dissolution Dissolution by

Agreement

Compulsory Dissolution

Dissolution on happening of certain events

Dissolution by Notice

Dissolution by Court


TM

Garner Vs. Murray Rule


TM

Settlement of accounts

Settlement

Payment of Losses

Distribution of assets

Payment of firm’s debts and personal debts


TM

Insolvency of a partner – When a partner becomes insolvent ,Whatever amount he can bring from his

private estate into the firm will be credited to his capital account.

– The amount which is irrecoverable is a loss to the firm.

– Loss or deficiency of an insolvent partner has to be borne by the solvent partners.

– The rule Garner Vs Murray is applicable in case of insolvency of one or more

partners but not all the partners.

– All the solvent partners should bring cash equal to their share of the loss on

realisation.

– The deficiency of the insolvent partner must be borne by the solvent partners in

the ratio of their capital then standing.


TM

Insolvency of all partners When all the partners become insolvent, the loss on account of insolvency of

the partners will have to be borne by the creditors.

only sundry assets are transferred to realisation account.

The external liabilities (creditors, bills payable bank O/D etc) are not to be

transferred to realisation account but separate account may be prepared.

Creditors are paid all cash available together with the amount received from

the private estate of the partners, after meeting the expenses on realisation.

Any balance remaining unpaid to the creditors will be transferred to a

‘Deficiency Account’.

The amount not paid by the partners will also be transferred to the deficiency A/c.

The deficiency account shall automatically closed and the books will thus be

closed.


TM Piecemeal distribution

The assets are sold gradually to realize the best price for them.

The liabilities are paid off gradually depending upon amount

realised from the sale of assets.

when the partners are not able to get their capital immediately,

they will have to suffer a lot due to financial problem.

So they should be paid as and when the firm has funds left with it

after payment of all outside liabilities.


TM

Order of payment when assets are realised

If any amount remains after making payments, this is utilised in payment of capital to the partners.

Payment of partners loan rateably.

Payment to creditors and other external liabilities


TM


Methods of payments

Maximum Loss Method

Proportionate Capital Method

Methods of payments

CPZ2A/CPG2A/CPW2A - shasuncollege.edu.in · ACCOUNTING 1 CPZ2A/CPG2A/ CPW2A/ CYA2C/CPC2A –...

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