FINANCIALACCOUNTING

B.Com/BBA
II Semester

CORE COURSE

(2011 ADMISSION ONWARDS)

UNIVERSITY OF CALICUT
SCHOOL OF DISTANCE EDUCATION
Calicut University, P.O. Malappuram, Kerala, India-673 635

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UNIVERSITY OF CALICUT
SCHOOL OF DISTANCE EDUCATION

CORE COURSE

B.Com/BBA
II SEMETER

FINANCIAL ACCOUNTING

Prepared by: Udaya Kumar.O.K.

Associate Professor,
Dept. of Commerce,
Govt. College Madappally.

Scrutinised by: Dr. K. Venugopalan

Associate Professor,
Dept. of Commerce,
Govt. College Madappally.

Layout & Settings: Computer Section, SDE

Reserved

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CONTENTS PAGES

Module I 05 13
Module 2 14 71
Module 3 72 86
Module 4 87 115
Module 5 116 133

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Module 1
INTRODUCTION TO ACCOUNTING

Meaning and Definition of Accounting

Accounting has rightly been termed as the language of the business. It records, classifies, analyses
and communicates all the business transactions that have taken place during a particular period. It is a
system of recording and reporting business transactions in financial terms, to interested parties.
According to American Institute of Certified Public Accounts Accounting is the art of recording,
classifying and summarizing in a significant manner in terms of money, transactions and events
which are , in part at least, of a financial character and interpreting the results there of. Thus
accounting is the art of recording, classifying, summarizing, analyzing and interpreting the financial
transactions and communicating the results thereof to the interested person.
Features or characteristics or nature of Accounting
Following are the features of accounting:-

(1) Accounting is an art.

(2) Accounting is a science.
(3) Recording of business transactions.
(4) Classifying business transactions.
(5) Summarizing the classified data
(6) Analysis and interpret the summarized data
(7) Communicating information to the interested parties.
(8) Records transaction and events which are financial character.
Objectives of Accounting or functions of accounting
The following are the main objectives:
1. To keep systematic records.
2. To ascertain the operational profit or loss.
3. To ascertain the financial position of the business.
4. To make information available to various users.
5. To protect business properties.
6. To facilitate rational decision making.
7. To ascertain the cost of production and selling price.
8. To control expenditure of business.
9. To satisfy the requirements of law.
10.To calculate the amount due to and due from others.
Importance of accounting (Uses or advantages)

Accounting brings the following advantages:

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1. It serves as a historical record.

2. It facilitates the preparation of financial statements.
3. It supplies information to interested persons
4. It helps the management in taking important business decisions.
5. It facilitates comparative study of the performance of business over different periods.
6. It provides evidence in case of disputes.
7. It helps to forecast the future.
8. It provides information for judging the efficiency of business
9. It is useful in getting loans.
10. It helps in valuation of good will.
11. It helps in controlling expenses.
12. It helps in controlling employees.
13. It helps in prevention and detection of errors and frauds.

Scope of Financial accounting

Following activities are included within the framework of financial accounting:

(1) Book-keeping
(2) Financial Statements
(3) Analysis and interpretation of financial statements.
(4) Financial reporting
(5) Accounting principles
(6) Accounting standards.

Limitations of Accounting
Accounting suffers from the following limitations:

1. It is historical in nature.
2. Transactions of non-monetary nature will not be recorded in accounting.
3. Information recorded in accounts is influenced by the personal judgment of the accountant.
4. In accounting valueless assets are also shown.
5. In accounting price changes are not considered.
6. It is not an exact science.
7. Use of different accounting methods reduces the reliability of accounts.
8. Account records show only actual cost figures.
Accounting Concepts or principles
Accounting concepts are those assumptions, principles or conditions on which the accounting system
is based. Principles are set of rules to be followed in accounting. The following are important
accounting concepts or principles :

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1. Business Entity Concepts: According to these concepts, a business is treated as separate

Entity distinct from its owner. This means that in accounting the business and owner must be
treated separately. Thus, when one person invests amount in to the business, it will be deemed
to the liability of the business. The concept of separate entity is applicable to all form of
business.
2. Going concern concepts: According to this, it is assumed that business will exist for a long
time. There is no intention t o liquidate the business in the immediate future.

3. Money measurement concepts: Accounting records only those transactions which are
expressed in monetary terms. Transactions which cannot be expressed in money do not find
place in the books of accounts.
4. Cost Concepts: According to this concept, all transactions are recorded in the books of
accounts at actual price involved.
5. Dual aspect Concepts: according to this concept, every transaction has two aspects. These
two aspects are receiving aspect and giving aspect. These two aspects have to be recorded.
The basis of this principle is that for every debit, there is an equal and corresponding credit.
6. Realization Concept: According to this principle revenue is said to be realized when goods
or services are sold to be a customer. It emphasizes the fact that the mere receipt of an order
for goods or services cannot be taken for the realization of revenue. So advanced payment
received from a customer cannot be considered as revenue earned.
7. Matching Concept: According to this concept, cost of a business of a particular period is
compared with the revenue of that period in order to ascertain net profit or net loss.
8. Accounting period Concept: According to this assumption, the life of a business is divided
in to different periods for preparing financial statements. Generally business concern adopt
twelve months period for measuring the income of the concern. This time interval is known
as accounting period.
Accounting conventions
Accounting conventions are the customs and traditions which guide the accountant while
preparing accounting statements. Some of the accounting conventions are:-

(1) Convention of consistency: - This convention follows that the basis followed in several
accounting periods should be consistent. This means the methods adopted in one accounting
year should not be changed in another year. Then only comparison of results is possible.
(2) Convention of conservatism: - This is a convention of playing safe, which is followed while
preparing the financial statements. The idea of this convention is to consider all possible losses and
to ignore all probable profits.
(3) Convention of Materiality: - Materiality means relevance or importance or significance. It is
generally accepted in the accounting circle that the accounting statements and records must
reveal all material facts.

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(4) Convention of full disclosure: - The accounting convention of full disclosure implies that
accounts must be honestly prepared and all material information must be disclosed therein.

Accounting standards
Accounting standards are considered as a guide for maintaining and preparing accounts. They are
the rules that ensure uniformity of preparation, presentation and reporting of accounting
information.
Accounting standards may be defined as the accounting principles and rules which are to be
followed for various accounting treatments while preparing financial statements on uniform basis
and which will reveal the same meaning to all the interested groups.
Need for accounting standards (Objects of Accounting standards):

The need for accounting standards arises from limitations of financial statements. The need for
accounting standards arises due to the following reasons.
1. To communicate uniform results to external users as well as internal users for decision
making.
2. To serve as a tools for information systems catering the needs of management, owners ,
creditors , Government etc.
3. To facilitate inter firm, intra firm comparison.
4. To make the financial statement more reliable comparable and understandable.
Accounting standard Board of India ( ASB)
The institute of Chartered Accountant of India, set up, Accounting Standard Board. The
primary duty of ASB is to formulate the accounting standard for India. During the formulation
of accounting standards, the ASB considered the applicable laws, usage, customs and the
business environment existing in our country. The ASB will give due consideration to
International Accounting Standards (IASs) issued by the International Accounting Standard
Committee and tries to integrate them to the extent possible.
The body consists of the following members: Company Law Board, CBDT, Central Board
of Excise and Customs, SEBI, Comptroller and Auditor General of accounts, UGC,
Educational and Professional institutions, and councils of the institutes and representatives of
Industry.
The following are the objectives and functions of the ASB:
(1) To suggest areas in which accounting standards need to be developed.
(2) To formulate accounting standards.
(3) To review the accounting standards at periodical intervals.
(4) To provide guidance on accounting standards.
(5) To carry out other functions relating to accounting standards.
Accounting Standards in India
ASB of India has issued 32 accounting standards so far. They are as follows

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As1: Disclosure of accounting policies

As2: Valuation of inventories
As3: Cash flow statements
As4: Contingencies and events occurring after the B/S date
As5: Prior period and extra ordinary items and change in accounting policies
As6: Depreciation accounting
As7: Accounting for construction contracts
As8: Accounting for research and development
As9: Revenue recognition
As10: Accounting for fixed assets
As11: Accounting for effects of changes in foreign exchange rates
As12: Accounting for govt. grants
As13: Accounting for investments
As14: Accounting for amalgamation
As15; Accounting for retirement benefits in the financial statements of employers
As16: Borrowing cost
As17: Segment reporting
As18: Related party disclosures
As19: Leases
As20: Earning per share
As21: Consolidated financial statement
As22: Taxes on income
As23: Accounting for investment in associates in consolidated financial statement
As24: Discontinuing operations
As25: Interim financial reporting
As26: Intangible assets
As27: Financial reporting of interest in joint ventures
As28: Impairment of assets.
As29: Provisions, contingent liabilities and contingent assets
As30: Financial instruments-recognition and measurements
As31: Financial instruments-presentation
As32: Financial instruments disclosure
Accounting process
Accounting process begins when a financial transactions takes place. Firstly day to day
transactions are recorded in the journal or subsidiary books. From the journal the transactions
move further to ledger. Here entries are posted in the appropriate accounts, and then accounts
are balanced to get the effect of debit and credit. These balance moves to a statement called
trial balance. From the trial balance, we can prepare trading and profit and loss accounts and
balance sheet. The different stages through which the transactions move from journal to final
accounts are collectively known as accounting cycles or accounting process.

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Journal and ledger

A book of original entry in which transactions are recorded in the order of their occurrence is
called journal. Journal is a primary record of business transactions. Recording of transactions
in the journal is known as journalizing and recorded transactions are called journal entries
Ledger is a book, which contains various accounts it is said to be secondary books of account.
It is a collection of all accounts debited or credited in journal. Ledger is defined as, a book in
which all the personal, real, and nominal accounts of business are kept for permanent records
so that up to date statement of an account can be easily known.
Rules of accounting
Accounts are classified in to three namely real accounts, personal accounts and nominal
accounts. There are separate rules for each type of accounts they are as follows
1. Real accounts
An account relating to an asset or property is called real account.cash, furniture, plant and
machinery etc are examples of real accounts the debit, credit rule applicable to real account is:
Debit what comes in
Credit what goes out
2. Personal accounts

It includes the account of person with whom the business deals. These accounts are classified
in to three categories
a) Natural personal accounts the term natural persons mean persons who are creation of
god. For e.g.;-Rajas accounts, Gupthas accounts etc
b) Artificial personal accounts-these accounts includes accounts of corporate bodies or
institutions
b) Representative personal account-these are accounts which represents certain person or
group of persons. For example salary due, rent outstanding etc
the rule of personal account is
Debit the receiver
Credit the giver

3) Nominal accounts

Accounts relating to expenses and losses and incomes and gains are called nominal accounts.
Salary accounts, commission account etc are examples.
Debit all expenses and losses
Credit all incomes and gains

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Posting
The term posting means transferring the debit and credit items from the journal to their
respective accounts in the ledger. It is the process of recording the transaction from journal to
ledger.
The following rules should be observed while posting transactions in the ledger from the
journal:

a) separate account should be opened in the ledger for posting transactions relating
to different accounts recorded in the journal
b) The concerned account, which has been debited in the journal should also be debited in
the ledger
c) The concerned account, which has been credited in the journal should
also be credited in the ledger

SUB-DIVISION OF JOURNAL

The journal is sub-divided into many subsidiary books called special journals. The
journal in which transaction of a similar nature is recorded is known as special journal
or day book.
The special journals are ruled differently on the basis of the nature of transactions to
be recorded. Transactions that cannot be recorded in any of the special journals are
recorded in a journal called journal proper or miscellaneous journal.

Advantages of Special Journals

1. Division of work: since there are so many subsidiary books, the accounting work
may be divided amongst a number of clerks.
2. Specialization: when the same work is allotted to a period of time he acquires full
knowledge of it and becomes efficient thus the accounting works will be done more
efficiently.
3. Save in time: the trader can save time and labor by avoiding repetitions
4. Availability of information: since separate subsidiary book is kept for each class
of transactions, information relating to that will be readily available.
5. Facility in checking: checking is facilitated in subsidiary books which will prevent
errors and frauds

Important special journals

The journal is sub divided in to the following subsidiary books

1. CASH BOOK: For recording all cash transactions
2. PURCHASES BOOK: For recording credit purchases of goods

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3. SALES BOOK: For recording credit sales

4. PURCHASE RETURNS BOOKS. For recording the goods returned by the trader
to the suppliers
5. SALES RETURNS BOOK: For recording the goods returned to the trader by his
customer
6. BILLS RECIEVABLE BOOKS: For recording all bills received by the trader
from his customer
7. BILLS PAYABLE BOOK: For recording all the bills given (accepted)to suppliers
8. JOURNAL PROPER: For all transactions that do not find a place in any of the
above books
TRIAL BALANCE
Trial balance is a statement containing the various ledger balances on a particular date.
This statement is prepared to check the correctness of ledger posting and balancing of
accounts. If the total of the debit balances is equal to the credit balances. It is implied
that posting and balancing of accounts are correct
Features of trial balance
1. It is prepared on a specific date
2. It is not a part of double entry and not an account
3. It is a statement of balance of all accounts or totals of ledger accounts
4. Total of the debit and credit columns of the trial balance must tally
5. If the debit and credit columns are equal it is presumed that accounts are
arithmetically accurate
6. Difference in the debit and credit columns indicate that some mistakes have
been committed
7. Tallying of trial balance is not a conclusive proof of accuracy of books of
accounts;
it serves to prove only the arithmetical accuracy of books

Objectives of trial balance

The following are the objectives of preparing trial; balance

1. To ascertain the arithmetical accuracy of the ledger accounts
2. To help in locating errors
3. To help in the preparation of final accounts

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Specimen of trial balance is given below

Trial Balance as on .
Account Debit Credit
code Name of the account
Amount(Rs) Amount(Rs)
Cash in hand Xxx
Cash at bank Xxx
Sundry debtors Xxx
Sundry creditors Xxx
Sales Xxx
Sales returns Xxx
Purchases Xxx
Purchase returns xxx
Drawing xxx
Capital xxx
Bills receivable xxx
Bills payable xxx
Stock of goods xxx
Bank loan/overdraft Xxx
Carriage inwards xxx
Carriage outwards xxx
Rent paid xxx
Interest paid xxx
Salary paid xxx
Discount received Xxx
Commission received xxx
Plant and machinery xxx
Buildings xxx
Furniture xxx
Vehicles xxx
Goodwill xxx
Provisions Xxx
Outstanding expenses xxx
Prepaid expenses xxx
Accrued income xxx
Pre received income Xxx
Reserve accounts Xxx
Advance from customers xxx

XXXX xxxx

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Module 2
CAPITAL AND REVENUE

All accounting items are broadly classified into capital and revenue items. Capital
items are further classified into capital expenditure and capital receipts similarly all
revenue items are sub divided revenue expenditure and revenue receipts.
Classification of income
Income can be classified into two categories namely capital income and revenue
income.
Capital income:

The term capital income means an income which does not grow out of or pertain to the
running of the business proper. It is synonymous to the term capital gain. For e.g.: if a
building costing20000 purchased by a business for its use is sold for Rs 25000,Rs
5000 will be taken as capital profit. Capital profit transferred to the capital reserve and
is shown in the balance sheet on the liabilities side.
Revenue income:
Revenue income means an income, which arises out of and in the course of the regular
business transactions of a concern. For eg: in the course of ramming the business, the
profit is made on sales of goods, income is received from letting out the business
property, dividend received on business investment etc is revenue income.
Classification of expenditure
Expenditure can be classified into three categories.
1. Capital expenditure: It means an expenditure, which has been incurred for the
purpose of obtaining a long term advantage. It consists of expenditure the benefit of
which is not fully consumed in one accounting period, but spreads over several
accounting periods. It is nonrecurring in nature. In short expenditure incurred for
increasing earning capacity of a business is known as capital expenditure. Examples:
purchase of plant and machinery, expenses in connection with acquisition of asset like
duty freight, installation charges etc.It is shown on the asset side of the balance sheet.
2. Revenue expenditure: An expenditure that arises out of and in the course of regular
business transactions of a concern is termed as revenue expenditure. It includes the
money spend on day to day operations of business for current and immediate use. It is
repetitive in nature. Its benefit will be realized in the current year itself. Wages, legal
expenses, transport charges, freight and carriage etc are some of the revenue expenses.
it is charged to the trading and profit and loss account.
3. Deferred revenue expenditure: It is that class of revenue expenditure which is
incurred during a particular year but benefit of which may extend to a number of
years. The whole amount of such expenditure cannot be treated as the expenditure of
the year in which it is incurred. Therefore a portion of such expenditure is charged

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every year to profit and loss account and remaining portion is shown on the asset
side of the balance sheet.
Classification of receipts:
It can be classified into two categories.
1. Capital receipts: it consists of payments made by the shareholders or proprietor of
the business or receipts from the sale of fixed assets. Sale of machinery or furniture is
capital receipt.
2. Revenue receipt: all incomes or receipts that are received by a business in the
ordinary conduct of activities are called revenue receipts. Sale of goods, interest and
rent received etc are examples.

FINALACCOUNTSOFASOLETRADER

Final account means accounts. Which are prepared at the final stage to give the financial position of
the business It consists of trading account profit and loss account and balance sheet.
TRADING ACCOUNT
Trading account gives the overall result of trading, that is purchasing and selling of goods.
The result of trading accounting may be gross profit or gross loss. If the sale proceeds exceed the cost
of goods sold the difference is gross profit. Opening stock, purchases, direct expenses, are debited
and sales and closing stock are credited to this account.
Specimen of Trading account is given below:
Trading account for the year ended..
Toopeningstock xxx BySalesxxxx
Topurchasesxxxx Lessreturnsxx
Lessreturnsxxx xxxx
xxxx Byclosingstock xxx
ToDirectexpenses: Bygrossloss(ifloss) xxx
Carriageinward xxx
Freight xxx
Octroi xxx
Dockdues xxx
Exciseduty xxx
Royalty xxx
Motivepower xx
Coal,gas,water xxx
Factoryexpenses xxx
ToGrossProfit(ifprofit) xxx

xxxxx xxxxx

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PROFITANDLOSSACCOUNT
Profitandlossaccountispreparedtoascertainthenetprofitornetlossofthebusinessfor
an accounting period. The amount of gross profit is shown on the credit side. Indirect expenses,
operatingexpensesandlossesareshownonthedebitsideofthisaccountandallincomesandgains
areshownonthecreditside.Ifcreditsideismorethandebitside,thedifferenceisnetprofit.
ASpecimenofProfitandLossaccountisgivenbelow:
ProfitandLossaccountfortheyearended.
ToGrosslossb/d Xxxx Bygrossprofitb/d Xxx
Tosalaries Xxx Byrentreceived Xxx
Torent,rates&taxes Xxx Bydiscountreceived Xxx
Toprinting&stationary Xxx Bycommissionreceived Xxx
ToPostage Xxx Byinterest Xxx
Toauditfees Xxx Byotherincomes(ifany) xxx
ToGeneralexpenses Xxx ByNetloss(ifloss)
Torepair Xxx
TofireInsurancepremium Xxx
Tolegalexpenses Xxx
Toofficeexpenses Xxx
Tointerestonloan Xxx
Tobaddebts Xxx
Todiscountallowed Xxx
Tocommission Xxx
Toadvertising Xxx
Totravellingexpenses Xxx
Todepreciation Xxx
Tosundryexpenses Xxx
Toestablishmentexpenses Xxx
Tolossonsaleofassets Xxx
Tocarriageoutward Xxx
Tonetprofit xxx

xxxx xxxx

MANUFACTURING ACCOUNT

Manufacturing account is an account prepared by manufacturing concerns to ascertain cost of

goods manufactured during a period. All the expenses relating to manufacturing activity are debited.
The total represents cost of manufactures, which is transferred to trading account. A specimen of
manufacturing account is given below:

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Manufacturingaccountfortheyearended.

ToopeningWorkinprogress Xxxx Byclosingworkinprogress Xxxx

ToRawmaterialconsumed: Bysaleofscrap Xxx

Openingstockofrawmaterialxxx Bycostofgoodsmanufactured xxxx

Addpurchase(lessreturn)xxx (balance,transferto

Lessclosingstockofrawmaterialxx tradingaccount)

Xxxx

Todirectwages Xxx

Tocarriageinward Xxx

Tofreight Xxx

Tofactoryexpenses Xxx

Toworksmanagerssalary Xxx

Toconsumablestores Xxx

Todepreciationofplant Xxx

Torepairsofplant Xxx

Tocoal,gas,water Xxx

Tomotivepower Xxx

xxxx xxxxx

BALANCESHEET
Balance sheet is a statement showing the assets and liabilities of a business on a particular
date. It reveals the financial position of a business. Hence it is also known as position statement. In
the words of Francis R Stead, balance sheet is a screen picture of financial position of a going
business at a certain moment.

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SpecimenofBalanceSheetisgivenbelow:
BalanceSheetasat

Liabilities Assets
Currentliabilities: CurrentAssets:
Billspayable xxxx Cashinhand xxxx
Creditors xxxx Cashatbank xxxx
Bankoverdraft xxxx Debtors xxxx
Outstandingexpenses xx Billsreceivable xxxx
Incomereceivedinadvance xx Marketablesecurities xxxx
Prepaidexpenses xxx
Longtermliabilities: Accruedincomes xxx
Loan xxx Closingstock xxx
Capitalxxxx Longterminvestments
AddNetprofitxxx Fixedassets: xxxx
Furniture
xxxxx Vehicles xxx
Lessdrawingsxxx Patent xxx
xxxxx Loosetools xxx
Plant xxx
Landandbuilding xxxx
Goodwill xxxx
xxx
xxxxx xxxxx

OPENINGCLOSINGANDADJUSTINGENTRIES

Opening entries are passed at the beginning of an accounting period. When a businessman
starts business with cash and other form of assets, it becomes essential to open the necessary ledger
accounts. This is made by passing entries through journal proper.

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At the end of every accounting period, all revenue items are closed by transferring to trading
and profit and loss account, such entries are known as closing entries. Thus closing are those entries
passed at the end of the accounting year to close the accounts relating to incomes, expense, gains and
losses.
In the mercantile system of accounting, various adjustments had to be made to accounts of
incomes and expenses, so as to show correct figure for the current year. These entries are passed for
adjusting the incomes, expenses etc are called adjusting entries
When a sum of money from one account to another account has to transferred it is done by a
means of an entry called transfer entry.

TREATMENTOFCERTAINITEMS

CLOSINGSTOCK
If it is given in the adjustment it is shown on the credit side of the trading account and also shown on
the assets side of the balance sheet. If it is given in the trial balance, It should be shown only in the
balance sheet.
OUTSTANDING EXPENSES:
These are those expenses which remains unpaid at the end of the accounting period. If it is given in
the adjustment, it should be added to the concerned expenses on the debit side of the trading account
or profit or loss account and it should also be shown in the balance sheet as liability. If it is given in
the trial balance, it should be shown in the balance sheet as liabilities.
PREPAID EXPENSES
Prepaid expenses are payments made in the current year but related to the next accounting
year. Prepaid expenses are also known as expenses paid in advance or unexpired expenses. If it is
given in the adjustment, it should deducted from the concerned expenses on the debit side of trading
accounting or profit and loss account and it should also be shown on the asset side of balance sheet. If
it is given in the trial balance, it should be taken only in the balance sheet as asset
ACCRUED INCOME

This is the income earned but not received by the end of the accounting year. This is also
known as outstanding incomes. If it is given in the adjustment, it should be added to the concerned
income on the credit side of the profit and loss account and it should also be shown on the asset side
of balance sheet .If it is given in the trial balance, it should be shown only in the balance sheet on the
asset side
INCOME RECEIVED IN ADVANCE
It means income which has been received by business before it been earned by the business. It
relate to the next accounting period. It is also known as unearned income or income received in
advance. If it is given in the adjustment its should be deducted from the concerned income on the
credit side of the profit and loss account and it should also be shown on the liability side of balance
sheet. If it is given in the trial balance it should be shown only in the balance sheet on the liability
side.

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DEPRECIATION
If it is given in the adjustment, it should be shown on the debit side of the profit and loss
account and deducted from concerned asset on the balance sheet. If it is given in trial balance,
depreciation should be taken only on the debit side of profit and loss account.
BAD DEBTS
When an amount due from debtors is found irrecoverable it is called bad debt .it is a loss the
business. If it is given in the adjustment it should be taken on the debit side of the profit and loss
account by adding to the bad debt already given in the trial balance and it should also be deducted
from debtors on the asset side.
PROVISION FOR BAD DEBTS
The provision given in the trial balance is the provision created in last year; it is taken on
credit side of profit and loss account. If there is bad debt and provision required are given, it should
be adjusted against the opening provisions. The treatment is as follows.

Bad debt (given in the trial balance xxxx

Add: further bad debt (given in the adjustment) xxx
Provision required (given in the adjustment) xxx
-------
xxxx
Less existing provision (given in the trial balance) xxx
--------
Amount shown on the debit side of the P&L account xxx
---------
If the existing provision is more than the bad debt and new provisions, then the balance should be
shown on the credit side of profit and loss account. Bad debts and new provisions given in the
adjustments are also deducted from the debtors account on the asset side of the balance sheet.

LOSS OF STOCK BY FIRE

In case goods are not insured the total loss should be shown on the credit side of the
trading account. The same amount should be shown on the debit side of the profit and loss account. If
goods are insured and insurance company admitted the claim, the total loss should be credited to the
trading account, amount claim not admitted by the insurance company is debited to P&L account and
claim admitted is shown on the asset side of balance sheet.
MANAGERS COMMISSION
Commission is shown on the debit side of P&L account. It should also be shown on
the liability side of the balance sheet (if it is given in the adjustment). It is calculated as follows.
a) Fixedpercentageofnetprofitbeforechargingsuchcommission
Commissioniscalculatedasfollows
Netprofitxrateofcommission
100
b) Fixedpercentageofnetprofitafterchargingsuchcommission

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Commissioniscalculatedasfollows
Netprofitxrateofcommission

100+rateofcommission
Illustration1:
Mr.A,whoisasoletrader.followingisthetrialbalanceason31dec2011
Cashatbank61,590sales9,36,200
Cashinhand11,80012%bankloan80,000
Drawings20,000capital1,60,000
Billreceivable39,600billspayable5200
Salary44,000discountreceived2400
Sundrycreditors1,26,200
InvestmentIncomefrominvestment1980
(MarketvalueRs28000)24,000Purchasereturn7,400
Stockon1120111,27,360
Landandbuilding80,000
Travellingexpenses13,800
Motorvan32.000
Furniture16,000
Telegram1,600
Sundrydebtors1,28,000
Discountallowed3,600
Sundryexpense37,240
Stationary3,200
Bankloaninterest6,000
Establishment9,190
Advertisement2,000
Salesreturn5,000
Purchase6,53,400

13,19,38013,19,380
Additionalinformation
1.Closingstockisvaluedat2,40,000
2.Maintainareserveof10%ofdebtorsasreservefordebtors
3.Provideareserveof5%onsundrydebtorsasreservefordiscountand5%onsundrycreditors
4.StockworthRs20,000destroyedbyfireon25112011inrespectofwhichtheinsurance
companyadmittedtheclaimonlyRs15,000
5.Themanagerofthebusinessisentitledtogetacommissionof10%ofnetprofitaftercalculating
suchcommission
6.Chargedepreciation2.5%onlandandbuilding,10%onfurniture,20%onmotorvan

7.Salarypaidinadvance3000.

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Prepareatradingandprofitandlossaccounton31Dec2011.andbalancesheetonthatdate.

Tradingandprofitandlossaccountfortheyearended31Dec2011

particulars amount particulars Amount
Openingstock 1,27,360 Sales936200
Purchase653400 Lessreturn5000 931200
Lessreturn7400 6,46,000 Lossofstockonfire 20000
Grossprofit 4,17,480 Closingstock 240000

1191200 1191200

Salary44000 Grossprofitb\d 417840
Lessprepaid3000 Incomefrominvestment 1980
Establishmentexpenses 41,000 Discountreceived 2400
stationary 9190 Reserveordiscountoncreditors 6310
Telegram 3200
Travellingexpenses 1600
Sundryexpenses 13800
Lossbyfire 37,240
Interestonbankloan6000 5000
Addoutstanding3600
Advertisement 9600
Discount 2000
Provisionfordoubtfuldebts 3600
provisionfordiscount 12,800
depreciation 5760

landandbuilding2000
furniture1600 10,000
motorvan6400 24,885
managerscommission 2,48,855
netprofit 428530
428530

Workingnote:

Netprofitafterchargingcommission=2,73,740

Commission2,73,740X10/110=24,885

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Balancesheetasat31stDecember2011

Liabilities Assets
Sundrycreditors1,26,200 Cashinhand 11,800
Lessprovision63,10 Cashatbank 61,590
1,19,890 Billsreceivable 39,600
Billspayable 5,200 Sundrydebtors1,28,000
Interestonbankloan 3,600 Lessprovision12,800
Commissionpayable 24,885
Bankloan 80,000 1,15,200
Capital1,60,000 Lessprovision
Addnetprofit2,48,855 Fordiscount5,760
1,09,440
4,08,855 Closingstock 2,40,000
Lessdrawings20,000 Salaryprepaid 3,000
3,88,855 Insuranceclaim 15,000
Investment 24,000
Furniture16,000
Lessdepreciation1,600
14,400
MotorVan32,000
Lessdepreciation6,400
25,600
Landandbuilding80,000
Lessdepreciation2,000
78,000

6,22,430 6,22,430

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Illustration2

ThefollowingbalancesareextractedfromthebooksofaccountsofRamanon31dec2011
Purchases40000sales70185
Purchasesreturn1410stock(1111)5730
Capital50500drawing8800
Baddebts700baddebtreserve(1111)1620
Carriageinwards1155officeexpenses670
Postageandstationary330billsreceivable620
Discount(Cr)115wages3140
Salesreturn2120rentreceived1050
Building13000cashinhand1105
Cashatbank6200salary4500
Officefurniture1800postage410
Commissionpaid435sundrycreditors9490
Sundrydebtors31035sundryexpenses8470
Building(new)3500 ratesandinsurance 650

Preparetradingandprofitandlossaccountfortheyearended31dec2011andprepare
balancesheetonthatdateconsideringthefollowing:
1) InsuranceunexpiredRs120
2) Provideinterestoncapital@5%
3) RentnotreceivedRs100
4) [email protected]%,new@2%andofficefurniture@5%
5) WriteofffurtherbaddebtsRs285
6) Increasetheprovisionforbaddebts@6%ondebtors
7) SalaryoutstandingRs285
8) Stockon31122009valued@Rs7145

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Solution
Trading&profitandlossaccountofRaman
Fortheyearending31dec2011

particulars amount particulars amount
Toopeningstock 5730 Bysales70185
Purchases40000 Lessreturns2120 68065
Lessreturns1410 38590 Byclosingstock 7145
Towages 3140
Tocarriageinwards 1155
Togrossprofit 26595


Tosalaries4500Add 75210 75210
outstanding285
Bygrossprofit 26595
Bydiscount 115
Toratesandinsurance650 Rent1050
Lessprepaid120 Addoutstanding100 1150
530
Toofficeexpenses 670
Toprintingandstationary 330
Topostage 410
Tosundryexpenses 8470
Todepreciation
Building(old)325
New70
Officefurniture90
To provision for bad and doubtful 485
debts:
Baddebts700
Additionalbaddebt285
Addnewprovision1845

2830
Lessexistingprovision1620 1210

Tocommission 435
Tointerestoncapital 2525
To net profit transferred to balance
sheet 8010

27860

27860

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Balancesheet
Ason31dec2011

Sundrycreditors 9490 Cashinhand 1105

Capital50500 Cashatbank 6200

Addnetprofit8010 Billsreceivable 620

58510 Sundrydebtors31035

Addinterestoncapital2525 Lessbaddebts285

61035 30750

Lessdrawings8800 52235 Lessnewprovision1845 28905

Outstandingsalary 285 Closingstock 7145

Officefurniture1800

Lessdepreciation90 1710

Interestaccrued 100

Unexpiredinsurance 120

Buildings:

Old130000

New3500

16500

Lesstotaldepreciation395 16105

62010 62010

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Illustration3
From the following trial balance of Mr. Arthur on 31 Dec 1987, prepare trading and profit and
loss account for the year ending 31st December 1987, and a balance sheet on that date:

Arthursdrawings 10550 Arthurscapital 119400

Billsreceivable 9500 loan@6%p.a 20000
Plantandmachinery 28800 commissionreceived 5640
Sundrydebtors(includingMadanfor sales 356430
DishonoredchequeRs1000) 62000 Sundrycreditors 59630
Wages(manufacturing) 40970
Returninwards 2780
Purchases 256590
Rentandtaxes 5620
Stockon1stJan11987 89680
Salaries 11000
Travellingexpenses 1880
Insurance 400
Cash 530
Bank 18970
Repairsandrenewals 3370
Interestonloan 1000
Interestanddiscount 4870
Baddebts 3520
Fixturesandfittings 8970

561100561100
======= ========
The following adjustments are to be made:
a) Stock in trade in hands on 31 Dec 1987 Rs 128960
b) Write off half of Madans cheque
c) Create a provision of 5% on debtors.
d) Manufacturing wages include Rs 1200 for erection of new machinery

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e) Depreciateplantandmachineryby5%andfurnitureandfixturesby10%p.a
f) CommissionnotearnedbutreceivedamountstoRs600
Tradingandprofitandlossaccountfor31stDec1987
Rs Rs
Tostock 89680 Bysales355430
Topurchases 256590 Lessreturns2780 353650
Towages40970
Lessplantandmachine1200 39770 Bystock 128960

Grossprofit 96570
482610 482610
5620
Rentandtaxes 11000 Grossprofit 96570
Salaries Commission5640
1880 Lessnotearned600
Travellingexpenses 400
Insurance 3370
Repairs 5040
Interestonloan1000
Addoutstanding200
1200
Interestanddiscount 4870
Baddebts3620
Adddishonoredcheque
OfMadan500 4120
Provisionforbaddebt
(5%on61000) 3050

Depreciation
Plant1500
Fixtures897
2397

Netprofittransferred 63703
Tocapitalaccount

101610
101610

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BalancesheetofMr.Arthur

Rs Rs
Arthurscapital: Plant30000
Balance119400 Lessdepreciation1500 28500
Addprofit63703
Fixturesandfittings8970
Lessdrawings10550 Lessdepreciation897 8073
172553
Loan 20000 Closingstock 128960
Creditors 59630 Billsreceivable 9500
Outstandingcreditors: Debtors62,000
Forinterestonloan200 LeeDishonor(50%)500
Forcommissionreceived Lessprovision3050 58450
inadvance600 800 18970
Bank 530
Cash
252983 252983

Illustration4
ThefollowingisthetrialbalanceofMr.Ramlalasat31stDec2011
Dr Cr
Ramlalscapital 86690
st
Stockason1 Jan2011 46800
Sales 389600
Returninwards 8600
Purchases 321700
Returnoutwards 5800
Freightandcarriage 18600
Rentandtaxes 5700
Salaryandwages 9300
Sundrydebtors 24000
Sundrycreditors 14800
Bankloan@6%p.a 20000
Bankinterest 9000
Printingandadvertisement 14600
Miscincome 250

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Cashatbank 8000
Discountearned 4190
Furnitureandfittings 5000
Discountallowed 1800
Generalexpenses 11450
Insurance 1300
Postageandtelegram 2330
Cashinhand 380
Travellingexpenses 870
Drawings 40000

521330 521330
====== ======
The following adjustment should also be made:
a) Included amongst the debtors is Rs 3000 due from Abraham and included amongst creditors
Rs 1000 due to him
b) Provision for bad and doubtful debts be created at 5% and reserve for discount 2% on sundry
debtors
c) Depreciation on furniture and fittings at 10%.shall be written off
d) Personal purchases amounting to Rs 600 has been included in the purchase day book
e) Interest on bank loan shall be provided for the whole year
f) A quarter of the amount of printing and advertising is to be carried forward to the next year.
g) Credit purchase invoice amounting to Rs 400 had been omitted from the books
h) Stock on 31-12-2011 was Rs 78600
Prepare trading and profit and loss account for the year ended 31-12-1987 and balance
sheet as on 31 Dec 2011

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Solution
TradingandprofitandlossaccountofSriRamlal.
Rs Rs
Openingstock 46800 Bysales389600
Purchases321700 Lessreturns8600
Addomittedinvoice400 381000
Byclosingstock 78600
322100
Lessreturns5800

316300
Lessdrawings600
315700
Tofreightandcarriage 18600
Grossprofitc/d 78500
459600 459600

Rentandtaxes 5700
Salaryandwages 9300 Grossprofitb/d 78500
Bankinterest900 Miscincome 250
Adddue300 1200 Discount 4190

Printingandadvertising14600
Lessprepaid36500 10950

Discountallowed 1800
Generalexpenses 11450
Insurance 1300
Postageandtelegram 2330
Travellingexpenses 870
Provisionforbaddebts 1150
Reservefordiscountondebtors 437
Depreciationonfurniture 500
Netprofit 35953

82940 82940

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Balancesheetason31Dec2011
Rs Rs

Capital86690 Furnitureandfittings5000

Addnetprofit35953 Lessdepreciation500

4500

122643 Sundrydebtors24000

Lessdrawings: LessamountduefromA1000

Cash40000 Lessreserveforbaddebtors1150

Goods600

82043 21850

40600

Sundrycreditors14800 Lessreservefordiscount437 21413

LessamountduetoA600

14200 Stock 78600

Bankloan 20000 Printingandstationary 3650

Bankinterestdue 300 Cashinhand 380

Cashatbank 8000

116543 116543

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ACCOUNTS FOR NON PROFIT CONCERN

Nonprofit organization or non trading organization are those organizations which are established not
for earning profits but for promoting art, culture, sports, education etc. Medical institution, Charitable
trusts, welfare societies, educational institutions etc are examples of non trading organizations
The final accounts of non trading organizations include the following:
1) Receipts and payment account
2) Income and expenditure account
3) Balance sheet
1) Receipts and payment account
Receipts and payment account is a summary of all cash transactions for a
particular period. It is prepared from the cashbook at the end of the year. It contains of all cash
receipts and payments. It does not include outstanding items. The features of receipts and payment
accounts are follows
1) It is a real account
2) It is a classified summary of cashbook
3) It starts with opening cash and bank balance and ends with the closing cash and bank balances
4) All receipts and payment s are included in this items
5) The receipts are entered on the debit side and payments are entered on the credit side
6) It does not show the profits or losses during the period
2) Income and expenditure account
It is a revenue account prepared by a nonprofit organization to ascertain surplus
or deficit for a particular period. It is a nominal account. In this account only revenue receipts and
revenue expenses are recorded. All revenue expenses of the current year are recorded on the debit
side and revenue incomes of the current year are recorded on the credit side, the difference
between incomes and expenditure represents surplus or deficit.
3) Balance sheet
A balance sheet contains of assets and liabilities. Assets or capital expenditure,
outstanding incomes prepaid expenses etc are shown on the asset side. Capital receipts or
liabilities, capital fund, outstanding expenses, incomes received in advance are shown on the
liability side of the balance sheet, generally surplus is shown by adding it to the capital fund.
Difference between receipts and payment account and income and expenditure account

1) The receipts and payment account is only classified summary of the cashbook. It is in the
nature of real account. On the other hand income and expenditure account is equal to the
profit and loss account of trading concerns and in the nature of nominal accounts.
2) The receipts and payment account is generally begins with the opening cash balance. But the
income and expenditure account does not begins with any such balances

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3) Receipts and payment account contains both capital and revenue items but income and
expenditure contains revenue items only
4) Receipts and payment account may contain income and expenditure not only current period
but also of the previous period .but income and expenditure accounts deals with current period
items
5) In the receipts and payment account, receipts are shown on the debit side and payment are
shown on the credit side in the income and expenditure account, income are shown on the
credit side and expenses are shown on the debit side
6) Receipts and payment account is prepared on cash basis but income and expenditure account
is prepared on accrual basis
Treatment of some items
1) Subscription
It is a recurring income for nonprofit organizations. This is one of the main sources of revenue.
This is shown on the credit side of income and expenditure account. Adjustment should be made to
show the correct income for the period.
Subscription received for certain specific purpose like subscription for tournament fund,
subscription for construction of pavilion etc should be capitalized (that is shown on the liability side
of the balance sheet)
2) Donations
The amount received from a person, firm or company by way of gift is called a donation.
Donations may be specific donation or general donations.
Specific donations: if the donations are for a specific purpose, example donation for building,
donation for library, donation for furniture etc it must be treated as capital receipts and should be
shown on the liability side of the balance sheet. The expenditure incurred on this account should be
deducted and the balance should be shown until it is completely used up.
a) General donations: when the donations are given for a general purpose, it is the amount
which will determine whether it is a capital or revenue receipts. Donation of a comparatively
small amount must be treated as income. But if the amount of such donation is big , it must be
treated as capital receipts and it should be shown on the liability side of the balance sheet.
3) Grants
Grant received from central, state or local bodies for routine expenses are treated as income.
Grant for specific purpose such as constructions of buildings, purchase of x-ray equipments
etc is capitalized

4) Legacy
It is the amount received by the nonprofit organizations as per the will of a deceased person. It
is a capital receipt and is shown on the liability side of the balance sheet, but if the amount is small it
may be treated as income and may be shown on the credit side income and expenditure account
In the absence of any specific information legacy must be preferably be capitalized.

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5) Endowment fund
The fund meant for permanent means of support is known as endowment fund. It is a
capital receipt
6) Entrance fees
This is the amount of fee collected on the admission of members. Accountants differ
on the treatment of entrance fees. Many feel that since the amount is collected only
once and as it is of non recurring in nature it should be capitalized and taken to the
liability side of the balance sheet but others argue that though it is paid is each
members only once, the clerk or institution receives fairly regularly every year because
of regular entrance of members. So it should be shown as an income in the credit side
of income and expenditure account. In the absence of specific instruction in the
question, students may treat it any way but they must append a note justifying the
choice made
7) Sale of old assets
The amount realized from the sales of old assets should be treated as capital receipts
and should be credited to asset account. But loss or profit on its sales should be treated
as revenue and is taken to income and expenditure account
8) Sale of newspapers and periodicals etc
The amount received on selling newspapers, periodicals, etc should be treated as
income and is credited to income and expenditure account
9) Expenditure stock items
Items like stationery sports ,materials like bats balls etc are called expenditure stock
items .the value of that type of items which remains unused should be deducted from
the total amount spent so that only the amount actually used up is debited to income
and expenditure account . Treatment is as follows:
Stock of stationery (opening) xx
Add purchase during the year xx
-----------
xxx
Less stock of stationery (closing) xx balance sheet (asset
side}
-------------
Stationery item used during the year xxx (debited in the I and E
account)
10) Sale of scraps, grass etc
These are treated as revenue receipts and shown on the income side
11) Life membership fee
Life membership may, sometime, be granted to members on their making a lump sum
payment in lieu of annual subscription. As the service has to be rendered for a long
time without further payment, it must be treated as capital receipts and should be
capitalized.

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12) Payment of honorarium

Amount paid to a person for the specific service rendered by him is called honorarium.
For example payment made to singers ,dancers etc is shown on the expenditure side
13) Special purpose fund
If there is any special purpose fund example tournament fund, charity fund, prize fund,
endowment fund etc. and there are certain items of expenses and incomes relating to
that fund. Then income and expenses should not be shown in the income and
expenditure account but income should be added to the fund and expenses deducted
from such fund on the liability side of the balance sheet
Illustration 1
Following is the receipts and payments accounts of majestic club. Calicut for the year ending 31st
December, 2003

Receipts Amount Payments Amount

Balance b/d 2100 Rent 9500

Subscriptions 56800 Salaries 25000

Interest 400 Sundry expenses 3500

Donation(general purpose) 6000 Investment purchased 25000

Donation for building fund 55000 Newspapers 800

Misc receipts 620 Sports equipment(30-06-2003) 30000

Sale of grass 200 Balance c/d 27320

121120 121120

Subscription outstanding at the end of the year 2002 were Rs 4500 and at the end of the year
2003 were Rs 6500.salary outstanding at the end of 2002 and at the end of 2003 were Rs 2500 and
3000 respectively
On 31st December 2002 the club had investments worth Rs 15000, furniture Rs 12000 and
sports equipment valued at Rs 40000
Prepare income and expenditure account for the year ended 31 Dec 2003 and a balance
sheetasonthatdateafterdepreciatingfurnitureby10%andsportsequipmentby20%

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Solution
Balance sheet as on 31st Dec 2002
Rs Rs
Salary outstanding 2500 Cash in hand 2100
Subscriptions outstanding 4500
Investment 15000
Capital fund (balancing figure) 71100 Furniture 12000
Sports equipment 40000
73600 73600
Incomeandexpenditureaccountfortheyearended31stDecember2003
Expenditure Amount Income Amount
Rent 9500 Subscriptions:
Salaries25000 Received56800
Addoutstanding3000 Addoutstanding20036500

28000 63300
Lessoutstanding20022500 25500 Lessoutstanding20024500
Sundryexpenses 3500 58800
Newspaper 800 Interest 400
Depreciation: Donation 6000
Furniture1200 Miscreceipts 620
Sports equipment 12200 Saleofgrass 200
11000

Excessofincomeover 14520
expenditure
66020 66020

Balancesheetason31stDec2003
Liabilities Rs Assets Rs
Salaryoutstanding 3000 Cashinhand 27320
Donationforbuildingfund 55000 Subscriptionoutstanding 6500
Capitalfund71100 Investments15000
Addsurplus14520 85620 Addaddition25000 40000

furniture12000
lessdepreciation1200 10800

Sportsequipment40000
Addaddition30000

70000
Lessdepreciation11000 59000

143620 143620

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Illustration2

From the following receipts and payment account of an institution and further information supplied
prepare an income and expenditure account for the year ended 31st December 2003 and a balance
sheet as on that date
Receiptsandpaymentaccount

Receipts Rs Payment Rs
Balance112003 10000 Expenses
Subscription: 20021200
2002200 20032000
20032100 3200
2004150 Costofleaseonland 4000
2450 Interestpaid 400
Entrancefees 800 Refreshment 2000
balanceason31122003
Lockerrent 700 8350

Incomefromrefreshments 4000
17950 17950

Balancesheetason31stDecember2002
Liability Rs Assets Rs
Fund 32000 Building 30000
Subscriptionsreceived Outstandingdebtors
Advance 600 Forsubscriptions 380
Outstandingexpenses 1400 Forlockerrent 240
Loan 5000 Cashinhand 10000
Incomeandexpenditureaccount 1620
40620 40620

Adjustments
1) Expenses due but not paid
2) Subscription due but not received Rs 800
3) Salary due but not paid Rs 200
4) Depreciation on building Rs 2000
5) The entrance fees is to be capitalized

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Solution
Income and expenditure account
For the year ended 31stb December 2003
Expenditure Rs Income Rs
Expenses(2003)2000 Subscription(2003)2100
Addoutstanding500 Addsubscriptionreceived
2500 In2002for2003600
Interestpaid 400 Addoutstanding(2003)
Salaryoutstanding 200
Refreshmentexpenses 2000 800 3500
Depreciationonbuilding 2000
Excessofincomeoverexpenditure Lockerrent700
(surplus) 860 Lessoutstandingfor2002240 460

Incomefromrefreshments 4000
7960 7960

Balancesheet
Ason31stDecember2003
Liabilities Rs Assets Rs
Capitalfund32000 Building30000
Addentrancefees800 Lessdepreciation2000
32800 28000
Subscriptionreceived Leaseholdland 4000
Inadvance 150 Outstandingdebtors
Outstandingexpenses Forsubscription:
For2002200 Fortheyear2002:180
For2003500 700 Fortheyear2003800 980

Outstandingsalary 200 Cashinhand 8350
Loan 5000
Incomeandexpenditure
Account
Balance1620
addsurplus(2003)860
2480
41330 41330

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Illustration3
Given below are the balance sheet as on 1st January 2011 and receipt and payment accounts for the
year ending 31-2dec 2011 of a club. You are required to prepare income and expenditure account for
the year ended 31 Dec 2011 and the balance sheet on that date.
Balancesheetasat1stJan2011
Rs
Rs
Subscriptionsreceivedinadvance 350
Cashinhand 1500
Sportsmaterialbilloutstanding 1200
Sportsmaterial 3000
Creditors 500
Stationerystock 200
Tournamentfund 700
Salarypaidinadvance 800
Capitalfund 26500 Subscriptiondue 700
Fixeddeposit(tournamentfund)@5% 700
Furniture 2450
Building 20000
29350 29350

Receiptsandpaymentaccountfortheyearended31stDec2011
Rs Rs
Balance 1500 Salariestostaff 8540
Subscription Honorarium 560
2010200 Electricityandpowerand 5650
20117300 Watercharges 2220
2012500 8000 Printingandstationery 520
Entrancefees 400 Entertainment 5080
Saleofsportsmaterial 150 Rent,rates,tax 400
Donationforbuilding 10000 Sundrycreditorsfor2010 1070
Subscriptionfortournament 2500 Sportsmaterial 400
Receiptsfrom Extensionofbuilding 6700
Billiardroom 3400 Tournamentexpenses 2300
Cardroom 2000 Balance 3860
Tenniscourt 5450
Swimmingpool 15000

Notes:
Half of the entrance fees shall be capitalized
1) Interest on fixed deposit is available on 31st Dec each year
2) Subscription in arrears on Dec 31,2001.Rs.150
3) Stock of stationary on 31st Dec. Rs100

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Solution Income and Expenditure account

Expenditure Rs Income Rs
Salaries8540 Subscription7300
Addadvancepaidin2000800 Addreceivedinlastyear350
9340 Addoutstandingthisyear150
Honorarium 560 7800
Electricity 5650 Entrancefees 200
Watercharges 2220 Saleofsportsmaterial 150
Printingstationary520 Billiardroomfees 3400
Addopening200 Cardroomfees 2000
Lessclosing100 Tenniscourtfees 5450
620 Swimmingpoolfees 15000
Entertainment 5080
Rent,rates,taxes 1070
Sportsmaterial6700
Lesslastyear1200
Addopening3000
8500
Surplus 960
34000 34000

Balancesheetason31Dec2001
Liabilities Rs Assets Rs
Subscriptioninadvance 500 Cashinhand 3860
Creditorsfor2000 100 Fixeddeposit 700
Buildingfund 10000 Interestaccrued 35
Tournamentfund: Subscriptiondue:
Openingbalance700 2000500
Addreceivedthisyear2500 2001150
Addinterestonfixeddeposit35 650
Stockofstationary 100
3235 Building20000
Lessexpenses2300 Addextension11500
935 31500
Capitalfund Furniture 2450
Openingbalance26600
Addentrancefee200
Surplus960
27760
39295 39295

Illustration4
FollowingisthereceiptandpaymentaccountofKennedyclubfortheyearending31stDec.2011

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Receiptandpaymentsaccount
Drcr
Receipt Payment Rs. Rs.
Balanceb/d 2500 Salaries 800
Subscriptions 5500 Rent 900
donation 650 Postage&telegram 150
Stationary 90
investment 4000
Sundryexpenses 350
Balancec/d:
Cashatbank 1650
Cashinhand 710
8650 8650
Youarerequiredtoprepareanincome&expenditureaccountaftermakingfollowingadjustments:
1. Subscriptions outstanding at 31st December, 2011 amounted to Rs. 500. Subscriptions
receivedincludeRs.200for2012
2. Salariesunpaidat1stJanuary,2011Rs.150andat31stDecember,2011Rs.100
3. RentwasprepaidtotheextentofRs.75at31stDecember,2011
4. Onehalfofthedonationsshouldbecapitalized
Solution
Kennedyclub
Income&expenditureaccount
Fortheyearended31stDecember,2011
Dr.
Cr.
expenditure Rs. Income Rs
Salaries800 Subscriptions5500
Lessrelatingto2010150 Lessrelatingto2010200

650 5300
Add:outstanding100 Add:outstanding500
750 5800
Rent900 Donation() 325
Less:prepaid75
825
Postage&telegram 150
Stationary 90
Sundryexpense 350
Excessofincomeover
expenditure(surplus) 3960
6125 6125

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Illustration 5

From the following particulars, calculate the subscription amount to be credited to the
income and expenditure account for the year ending 31st December .2011
Rs
Subscriptions received in 2011 16500
Subscriptions outstanding on 1st January, 2011 900
Subscriptions outstanding on31st December, 2011 1300
Subscriptions received in advance on 1st January, 2011 750
Subscriptions received in advance on on31st December 2011 540
Solution Rs.

Subscriptions received in 2011 16500

Add: outstanding on31st December, 2011 1300
,, received in advance on 1st January, 2011
(i.e., received during 2010. For 2011) 750
---------
18550
Less: outstanding on 1st January, 2011 900
: received in advance on on31st December 2011
(i.e., received in 2010. For 2011 540 1440
-------- --------

Amount to be credited to income and expenditure account 17,110

----------
Illustration 6
From the given particulars ascertain the amount to be credited to income and expenditure
account for the year ending 31st December, 2011
Rs.
Subscription received during the year 9350
st
Subscription outstanding on 1 Jan. 2011 Rs. 900
Of which Rs. 810 were received in 2011
Subscription received in advance on 1st Jan. 2011 350
st
Subscription received in advance on31 Dec. 2011 150
st
Subscription outstanding on 31 Dec. 2011 250
Solution
Subscription received during 2011 9350
Add: outstanding Subscriptions for the current year (2011) 250

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: Subscription received in advance as at the beginning

Oftheyear(i.e.,receivedin2010,for2011)350

9950
Less:Subscriptionreceivedinadvanceasattheendofthe
Year(i.e.,receivedin2010,for2011)150
Less:Subscriptionoutstandingfor2010,receivedin2011810960

Amounttobecreditedtoincomeandexpenditureaccount8990
=======

Illustration7
From the following particulars, arrive at the amount of salaries to be debited to the income and
expenditureaccountfortheyearending31stmarch,2011
Rs.
Salarypaidduringtheyear1800
Salaryunpaidon31stmarch2011550
Salaryunpaidon1stApril2010740
Salaryprepaidon1stApril2010 430
st
Salaryprepaidon31 march2011570
Solution
Salarypaidduringtheyear1800
Add:Salaryunpaidon31stmarch2011550
,,,,:Salaryprepaidon1stApril2010 430

2780
st
Less:Salaryprepaidon31 march2011570
:Salaryunpaidon1stApril2010740

1310

Salarytobedebitedtoincome&expenditureaccount1470
=======

ACCOUNTING FROM INCOMPLETE RECORDS-SINGLE ENTRY SYSTEM

Single entry system is a system of accounting, which does not follow the double entry system.
Under this system, accounts relating to debtors and creditors are maintained. Kohler defines single
entry system as a system of book keeping which as a rule only records of cash and personal accounts
are maintained, it is always incomplete double entry varying with circumstances

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Features of single entry system

1) Maintenance of personal accounts
2) Maintenance of cashbook
3) Dependence on original vouchers
4) It does not follow strict double entry system
5) No uniformity. The system may differ from firm to firm.
6) Suitability. The system suitable in case of small firms, partnership firm etc
Merits
1) It is simple method of accounting
2) It is economically
3) It is suitable for small enterprises
4) It is possible to record transactions quickly

Demerits
1) Arithmetical accuracy cannot be checked
2) Nominal accounts are not maintained
3) It does not record of all assets and liability
4) Financial position of business cannot be judged
5) True profit cannot be ascertained
6) It is not suitable to limited companies
7) It is not acceptable to income tax authorities

Computation of profit
The profit or loss in case of a business maintaining accounts according to single entry
system can be computed by two methods namely, statement of affairs method and conversion
method.
Statementofaffairsmethodornetworthmethod

According to this method, the profit or loss made by the business is computed by comparing
the capital of the business on two different dates. The following procedure is followed

1) Astatementofaffairsatthebeginningoftheyearispreparedtoascertaincapitalatthe
beginning.
2) Closingstatementofaffairsispreparedtoascertaincapitalattheend
3) Profitisascertainedby
Capitalattheendxxx
Add:drawingsxx

xxxx
Lessfurthercapitalintroducedxx

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xxxx
Lesscapitalatthebeginningxxx

Profitmadeduringtheyearxx
========

Illustration1

Akeepshisbooksbysingleentrysystem.Hispositionon1stJan2011wasasfollows

CashatbankRs5000MachineryandplantRs6500
CashinhandRs1000 BillsreceivableRs2600
StockRs7000 creditorsRs2500
SundrydebtorsRs8400 BillspayableRs4000

On31stDec2011hispositionwasasunder

CashatbankRs4300MachineryandplantRs6500
CashinhandRs1700 BillsreceivableRs3200
StockRs9000 CreditorsRs1600
SundrydebtorsRs6000 BillspayableRs3200
DuringtheyearaintroducedfurthercapitalofRs2000,andhisdrawingswereRs.800per
month
Depreciatemachineryandplantby5%andcreateareserveforbadanddoubtfuldebtsat
5%.from the above information prepare a statement showing the profit and loss made by
himfortheyearended31stDec2011

Solution
Statementofaffairsason1stJan2011
Liabilities Rs Assets Rs
Creditors 2500 Bank 5000
Billspayable 4000 Cashinhand 1000
Capital(balance) 24000 Stock 7000
Debtors 8400
Machinery 6500
Billsreceivable 2600

30500 30500

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Statementofaffairsason31dec2011
Liabilities Rs Assets Rs
Creditors 1600 Bank 4300
Billspayable 3200 Cashinhand 1700
Capital(balance) 25275 Stock 9000
Debtors(60005%) 5700
Machinery(65005%) 6175
Billsreceivable 3200

30075 30075

Statementofprofitfortheyearended31stDec2011

Capitalason31stDec2011 25275
Add:drawings(800x12) 9600
34875
Less:furthercapitalintroduced 2000
32875
Lesscapitalason112011 24000
Profitmadeduring2011 887

Illustration 2
Sri C Sharma commenced business on 1-jan-2003 with a capital of Rs 25000: Rs 20000 brought in
cash and the balance in the form of machinery. On 1st October 2003 he introduced Rs 10000 in the
business for which Rs 6000 were borrowed from his wife during the year. He withdraw at the rate of
Rs 500 a month his position on 31st Dec 2003 was as follows
ASSETS
Stock of goods Rs 12500: sundry debtors Rs 10500: machinery Rs 6000: cash at bank Rs
3000: cash in hand Rs 500: bills receivable: Rs 3800 and furniture Rs 10000
LIABILITIES
Sundry creditors Rs 8500: loan from wife Rs 6000: bills payable Rs 1500
Ascertain his profit for the year ended 31 Dec 2003

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Solution STATEMENTOFAFFAIRS

Asat31122003

liabilities Rs asset Rs
Sundrycreditors 8500 Stock 12500
Loanfromwife 6000 Sundrydebtors 10500
Billspayable 1500 Machinery 6000
Capital(balancingfigure) 30300 Cashatbank 3000
Cashinhand 500
Billsreceivable 3800
Furniture 10000

46300 46300

Statementofprofitorlossfortheyearended31122003

Rs
Capitalattheend(31122003)
30300
Adddrawingsduringtheyear
6000

36300

4000
Lessadditionalcapitalintroduced
32300
Lesscapitalatthebeginning(112003)
25000
Profitearnedduringtheyear(2003)
7000

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Illustration3

SriShankarkeepshisbooksonsingleentryandfollowinginfoisdisclosedfromhisrecords

31122002(Rs) 31122003(Rs)
Balanceatbank (Cr)2500 5500
Sundrydebtors 14000 21000
Furniture 29000 27500
Stockintrade 15000 20000
Investments 6000 6000
Cashinhand 200 500
Sundrycreditors 25000 29000
Billspayable 1000 600
Loanfromteapankaj . 4000

Sri V Shankar transferred Rs 300 per month from the business to his private bank account by
way of drawings. In addition, he withdraws Rs 6000 for his daughters marriage and Rs 500 for
charitable purpose. He also withdraws goods worth Rs 2500 for domestic purpose.
In august 2003 he had received a lottery price of Rs 6000 of which he invested Rs 3000 in to
the business. He sold some private property for Rs 8000 and processed were utilized for the business
He wants his furniture to be depreciated at 10% per annum and a reserve for doubtful debts be
created at 6%.he had not paid 2 months salary to his accountant at the rate of 400 per month and 2
months rent of the shop was unpaid amounting to Rs 500.interest earned but not received by him was
Rs 2100.prepare a statement of profit and loss for the year ending 31-12-2003.
Solution

To calculate the opening capital, the statement of affairs as at 31-dec-2002 is prepared thus:
Statement of affairs as at 31-12-2002

Liabilities Rs Assets Rs
Bankoverdraft 2500 Sundrydebtors 14000
Sundrycreditors 25000 Furniture 29000
Billspayable 1000 Stockintrade 15000
Capital(bal.fig) 35700 Investment 6000
Cashinhand 200
64200 64200

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Similarly, a statement of affairs at Dec 31, 2003 will show the closing capital, thus:

Statementofaffairsasat31122003

Liabilities Rs Assets Rs
Sundrycreditors 29000 Cashatbank 5500
Billpayable 600 Sundrydebtors 21000
LoanfromT.Pankaj 4000 Furniture 27500
Capital(bal.fig) 46900 Stockintrade 20000
Investment 6000
Cashinhand 500
80500 80500

Then arrive at the Profit or loss made by him during the year, a statement of profit or loss
isprepared,thus:

Rs Rs
Capitalattheend(31122003) 46900
Adddrawingduringtheperiod 12600
59500
11000
Lessadditionalcapitalintroduced
48500
Lesscapitalatthebeginning(31122002) 35700
Profitsubjecttoadjustments 12800
Lessdepreciationonfurnitureof10% 2750
ReserveforDoubtfuldebtsat6% 1260
Outstandingsalary 800
Outstandingrent 500 5310
7490
Addinterestearnedbutnotreceived
2100
Netprofit,transferredtocapital
9590

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CONVERSION METHOD
Conversion of single entry in to double entry involves the complete process of
journalizing, posting, balancing and preparation of trial balance. Then final accounts are to be
prepared .if any information is missing, it should be ascertained by preparing the relevant accounts
before preparation of final accounts

Following steps are taken

1) Prepare statement of accounts in the beginning so as to ascertain capital in the beginning

2) Prepare cashbooks, cashbook reveals missing figure cash or bank balance at the beginning or
at the end as the case may be. Sometimes cashbook reveals the amount of sundry expenses or
drawings or cash purchases(if credit side is shorter than debit) or cash sales or sundry incomes
or capital introduced(if debit side is shorter than credit side)
3) Then prepare I(1)total debtors account (2) total creditors account,(3) bills receivable account
(4) bills payable account(these accounts help in finding out credit sales, credit purchases,
debtors or credit balances
4) After preparing these accounts, calculate total sales by adding credit sales and cash sales total
purchases by adding cash purchases and credit purchases
5) Information relating to nominal accounts can be ascertained from the cashbook. Real accounts
and amounts outstanding are given by way of information. These accounts can be completed
6) After these it will be possible to prepare final accounts in the usual manner

Specimen
TOTAL DEBTORS ACCOUNT

Rs Rs
Openingbalanceofcreditors Xxx Cashreceivedfromdebtors Xxx
Creditsales Xxx Billsreceivablereceived Xxx
Billsreceivabledishonored Xxx Discountallowed Xxx
Allowancesclaimed Xxx
Returninwards Xxx
Baddebts Xxx
Transferto/fromcreditors Xxx
Closingbalanceofdebtors Xxx
xxx Xxx

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TOTALCREDITORSACCOUNT

Rs Rs
Cashpaidtocreditors Xxx Openingbalancesofcreditors Xxx
Billspayableaccepted Xxx Creditpurchases Xxx
Discountreceived Xxx Billspayabledishonored Xxx
Allowancesreceived Xxx
Returnoutwards Xxx
Transferto/fromdebtors Xxx
Closingbalanceofcreditors Xxx Xxxx
xxxx

BILLSRECIEVABLEACCOUNT

Rs Rs
Openingbalance Xxx Cash Xxx
Sundrydebtors Xxx (realizationofbill)
(B/Rreceived) Sundrydebtors xxx
(billreturneddishonored)
xxxx Closingbalance Xxx

Xxxx

BILLSPAYABLEACCOUNTS
Rs Rs
Cashpaid Xxx Openingbalance Xxx
(onaccountofbillspayable) Sundrycreditors Xxx
Sundrycreditors Xxx (billsaccepted)
(B/Pdishonored) Xxxx
Closingbalance Xxx
xxxx

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Illustration4
Ascertaincreditsalesandpurchasesfromthefollowingfigures

DebtorsRscreditors Rs

Openingbalances10800openingbalances5900
Cashreceived 36850 cashpaid 24800
Discountallowed 2000 discountreceived450
Baddebtswrittenoff 450 returns 540
Returns 800 billspayableissued 2860
Billsreceivablereceived 8400 closingbalances6200
Billsreceivabledishonored 600
Closingbalance 8700

Solution
Totaldebtorsaccount

Rs Rs
Balanceb/d 10800 Cash 36850
Billsreceivable(dishonored) 600 Discountallowed 2000
Creditsales(balancingfigure) 45800 Baddebts 450
Returns 800
Billsreceivable 8400
Balancec/d 8700
57200 57200

Totalcreditorsaccounts
Rs Rs
Cash 24800 Balanceb/d 5900
Discountreceived 450 Creditpurchases
Returns 540 (balancingfigure) 28950
Billspayable 2860
Balancec/d 6200
34850 34850

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Illustration5

From the following particulars extracted from the books of a trader kept under the single
entry system you are asked to find out the figure for credit sales and credit purchases by
preparing the total debtors account and total creditors account show also the bill receivable
account and bills payable account.

Balance,1stJan2011 Rs
Totaldebtors 18700
Totalcreditors 8500
Billsreceivable 1400
Billspayable 900
Cashreceivedfromcustomers 46500
Cashpaidtocreditors 24720
Discountallowedtocustomers 1450
Discountreceivedfromsuppliers 950
Baddebtswrittenoff 850
Returnstosuppliers 435
Returnsfromcustomers 945
Cashreceivedagainstbillsreceivable 4660
Cashpaidagainstbillspayable 2230
Baddebtspreviouslywrittenoff,nowreceived 450
Billsreceivabledishonored 500
Balance31stDecember,2011
Totaldebtors 17800
Totalcreditors 9400
Billsreceivable 350
Billspayable 1050

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Solution
Billsreceivableaccount

Rs Rs
Balanceb/d 1400 Cash 4660
Sundrydebtors 4110 Sundrydebtors 500
(balancingfigure) (billsdishonored) 350
5510 Balancec/d 5510

Balanceb/d 350

Billspayableaccount
Rs Rs
Cash 2230 Balanceb/d 900
Balancec/d 1050 Sundrycreditors 2380
3280 (balancingfigure) 3280

Balanceb/d 1050

Totaldebtorsaccount
Rs Rs
Balanceb/d 18700 Cash 46500
Billsreceivable 500 Discount 1450
(dishonored) Baddebts 850
Salescredit 52455 Returns 945
(balancingfigure Billsreceivable 4110
Balancec/d 17800
71655 71655

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Totalcreditorsaccount

Rs Rs

Cash 24720 Balanceb/d 8500

Discount 950 Purchasescredit 29385

Returns 435 (balancingfigure)

Billspayable 2380
9400
Balancec/d
37885
37885

Balanceb/d 940

Illustration6

Fromthefollowingdataascertaintotalsales
Rs
Balance of debtors on 1-1-2011 24000
Sales returns 10000
Cash received from customers 90000
Discount allowed t them 6000
B/R received 34000
Bad debts 3000
B/R dishonored 7000
Balance of debtors as on 31-12-2011 20000
Cash sales 50000

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Totaldebtorsaccount

Rs Rs

Balanceb/d 24000 Cash 90000

B/R(dishonored) 7000 Discount 6000

B/R
Sales(creditbalancingfigure) 132000 34000
Baddebts
3000
Salesreturns
10000
Balancec/d
20000

163000 163000

Totalsales=132000+50000=182000

Illustration7

Fromthefollowing,ascertaintotalpurchases:
Rs
Balancesofcreditorson112011 14000
Cashpaidtocreditors 10000
B/Pgiven 10000
Discountallowedbythem 500
Returnoutward 3000
Creditorsason31122011 25000
Cashpurchases 10000

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Solution
Totalcreditorsaccount
Rs Rs

Cash 10000 Balanceb/d 14000

B/P 10000 Purchases(creditbalances) 34500

Discount 500

Returns 3000

Balanceb/d 25000

48500 48500

Totalpurchases=34500+10000=44500

Illustration 8
A commenced as a business as a cloth merchant on 1-1-2011 with a capital of rs 10000.on the same
date he purchased furniture and fitting for cash 3000
From the following particulars obtained from his books kept by single entry, you are required
prepare trading and profit and loss account for the year ending 31st December 2011 and a balance
sheet on that date:
Sales(inclusiveofcashRs7000) 17000
Purchases(inclusiveofcashRs4000) 15000
Asdrawings 1200
Salarytostaff 2000
Baddebtswrittenoff 500
Businessexpenses 700
A took cloth worth Rs 500 from the shop for private use and paid Rs 200 to his
son, but omitted to record these transactions in his books on 31st December 2011.his sundry debtors
were Rs 5200.and sundry creditors Rs 3600.stock in hand on 31st Dec 2011 was Rs 6500

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Astrading&profitandlossaccountfortheyearending31stDec2011
Rs
purchases15000 Sales 17000
lessdrawings500 14500 Closingstock 6500

Grossprofitc/d 9000
23500 23500
2000 9000
Salaries 500 Grossprofitb/d
Baddebts 700
Businessexpenses 5800
Netprofit 9000 9000

Asbalancesheetason31December2011

Rs Rs
Sundrycreditors 3600 Cash 2800
Capital10000 Sundrydebtors 5200
Lessdrawings1900 Closingstock 6500
Furniture 3000
81000
Addnetprofit5800
13900

17500 17500

Workingnotes:
Sundrydebtorsaccount
Rs Rs
Salescredit 10000 Cash(balancingfigure) 4300
Baddebt 500
Balancec/d 5200

10000 10000

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Sundrycreditorsaccount
Rs Rs

cash(balancingfigure) 7400 Purchasescredit 11000

balancec/d 3600

11000 11000

Cashaccount
Rs Rs
Capital 10000 Furniture 3000
Sales 7000 Purchases 4000
Debtors 4300 Drawings(1200+200) 1400
Salaries 2000
Businessexpenses 700
Creditors 7400
Balancec/d(balance) 2800

21300 21300

Illustration9
Sunil keeps his books on single entry system. From the following information provided by
him prepare a trading and profit and loss account for the year ended 31st December 2011 and a
balance sheet on that date

Particular 31122010 31122011

Furniture 10000 12000
Stock 6000 3000
Sundrydebtors 12000 13000
Prepaidexpenses . 500
Sundrycreditors 5000 .
Outstandingexpenses 1400 2200
cash 2400 800

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Receiptsandpaymentaccountduringtheyearwasasfollows
Receivedfromdebtors 40500
Paidtocreditors 19000
Carriageinwards 4500
Drawings 10000
Sundryexpenses 12500
Furniturepurchased 2000
Otherinformation
Therewereconsiderableamountofcashsales.Creditpurchasesduringthe
yearamountedtoRs24000.createaprovisionof10%ondebtorsfordoubtfuldebts.
CASHBOOK
Receipts Rs Payments Rs
Balanceb/d 2400 Creditors 19000
Debtors 40500 Carriageinwards 4500
Sales(balancingfigure) 5900 Drawings 10000
Sundryexpenses 12500
Furniture 2000
Balancec/d 800

48800 48800
Balanceb/d 800

Totaldebtorsaccount
Rs Rs
Balanceb/d 12000 Cash 40500
Sales(balancingfigure) 41500 Balanceb/d 13000
53500 53500
Balanceb/d 13000
Totalcreditorsaccount
Rs Rs
Cash 19000 Balanceb/d 5000
Balancec/d 10000 Purchases 24000
29000 29000
Balanceb/d 10000

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Balancesheetason31122010
Liabilities Rs Assets Rs
Outstandingexpenses 1400 Cash 2400
Sundrycreditors 5000 Debtors 12000
Capital(balancingfigure) 24000 Furniture 10000
Stock 6000
30400 30400

Tradingandprofitandlossaccount
Fortheyearended31stDecember2011

Rs Rs
Openingstock 6000 Sales:
Cash5900
Credit41500
Purchases 24000 47400
Carriageinwards 4500 Closingstock 3000
Grossprofitc/d 15900
50400 50400
Sundryexpenses12500 Grossprofitb/d 15900
Lessprepaid500

12000
Lessoutstanding20101400

10600
Addoutstanding20112200 12800

Provisionfordoubtfuldebts 1300
Netprofittransferredtocapital 1800
15900 15900

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Balancesheetasat31December2011

Liabilities Rs Assets Rs

Sundrycreditors 10000 Furniture 12000

Outstandingexpenses 2200 Stock 3000

Capital(opening)24000 Sundrydebtors13000

Addnetprofit1800 Lessprovisionfor

Doubtfuldebts1300

25800 11700

Lessdrawings10000 Prepaidexpenses 500

15800 Cash 800

28000 28000

Illustration10
Fromthefollowingdata,ascertaintotalsales.
Balancesofdebtorson112011Rs.24000
Salesreturn10000
Cashreceivedfromthecustomers90000
Discountallowedtothem6000
B/Rreceived34000
Baddebts3000
B/Rdishonored7000
Balanceofdebtorson3112201120000
Cashsales50000

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Solution
TotalDebtorsA/c
Tobalanceb/d 24000 Bycash 90000
,,B/R(dishonored) 7000 ,,Discount 6000
,,creditsales(Bal.fig.) 132000 ,,B/R 34000
,,Baddebts 3000
,,salesreturns 10000
,,balancec/d 20000

163000 163000

Totalsales=132000+50000=182000
Illustration 11
A, B and C were in partnership and towards the end of 2011 most of their records were
destroyed by fire. The balance sheet as on 31st Dec. 2010 was as follows
Rs Rs
Creditors 5500 Cash 2400
Capital Debtors 3600
A4500 Stock 6500
B3000 Machinery 1440
C1500 Fixtures&fitting 600
9000 AdvancePayments 35
CurrentAccounts CurrentAccount(C) 170
A145
B100
245
14745 14745


The partners drawings during 2011 have been provided at A Rs.1400; B Rs. 1000 and C
Rs.650; on 31st Dec. 2011, the cash was Rs.3200, Debtors Rs.4045 stock Rs. 5900, Advance
payment Rs. 25 and creditors Rs.6040. machinery is to be depreciated by 10% per annum and
fixtures and fitting at 7.5%, 5% interest is to be allowed on capital. The partners share profits
in the proportion of , 1/3 and 1/6.

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You are required to prepare a statement showing the net trading profit for the year 2011
and the division of the same between partners, together with the balance sheet as on 31st
Dec.2011
Solution
StatementofaffairsofM/sA,BANDC
Ason31stDec2011
Liabilities Rs Assets Rs

Creditors 6040 Cashinhand 3200

Capital: Debtors 4025

A4500 Advancepayment 25

B3000 Stocks 5900

C1500 Fixturesandfitting600

9000 Less:7.5%dep.45

555

Machinery1440

Less:depreciation144

1296

Combined current account of

AB&C
39

15040 15040

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StatementofprofitandlossofA,BandC
Fortheyearended31stDec2011
Rs Rs
CombinedcurrentaccountsofA,B&Con31122011(Dr) 39
Add:Drawing:
A 1400 .
B 1000
C 650 3050

LESS:combinedcurrentaccountsofA,BandCon112011 3011
A(Cr) 145
B(Cr) 100
245
C(Dr) 170 75

Profitmadeduringtheyearbeforeallowinginterestoncapital 2936
Less:interestoncapital(5%) 255
A(4500X5/100) 150
B(3000X5/100) 75
C(1500X5/100) 450


2486
Netprofitmadeduringtheyear
Shareofprofit
1243
Asshare=2486x=
828
Bsshare=2486x1/3=
415
Csshare=2486x1/6=

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BalancesheetofM/sA,BandCasat31stDec.2011

liabilities Rs Assets Rs
Creditors 6040 Cash 3200
Capital: Debtors 4025
A4500 Advancepayment 25
B3000 Stock 5900
C1500 9000 Fixtures&fitting600
Less:depreciation45 555
AsCurrentsA/c
ason11.11145 Machinery1440
Add:profit1243 Less:depreciation144
Add:interest225 1296
CscurrentA/c
1613 ason1111170
Lessdrawing1400 add:drawing650
213
BscurrentA/c: 820
Ason1111100 Less:interest75
Add:profit150
Add:interest828 745
Less:profit415
1078 330
Less:drawing1000

78

15331 15331

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Illustration12
Mrs. SAJINA keeps her books of accounts under single entry system. From the
following prepare Trading and profit & loss account for the year ended 31-03-2011 together
with balance sheet as on that dates
Cash book analysis shows the followings:-
Interest charges 100 balance at bank on 31-03-2011 2425
Personal withdrawals 2000 cash in hand as on 31-03-2011 75
Staff salaries 8500 received from debtors 25000
Other business exp. 7900 cash sales 15000
Payments to creditors 15000
Further details available are:
As on 1-4-2010 as on 31-3-2011

Stock in hand 9000 10220

Creditors 8000 5500
Debtors 22000 30000
Furniture 1000 1000
Office premises 15000 15000
Provide 5% interest on Xs capital balance as on 1-4-2010. Provide Rs. 1500 for
D/D, 5% depreciation on all fixed assets. 5% group commission to staff has to be provided for
on N/P after meeting all expenses and the commission.
Solution
Tradingandprofitandlossa/cfortheyearended31032011
Rs. Rs.
Openingstock 9000 Sales 48000
Purchase 12500 Closingstock 10220
Grossprofitc/d 36720
58220 58220
======= ======
Interest 100 Grossprofitb/d 36720
Salaries 8500
Expenses 7900
Provisionfordoubtfuldebts 1500
Interestoncapital 1750
Depreciation:
Furniture 50
Officepremises 750
Groupcommission 770
Netprofitc/d 15400
36720 36720

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BalancesheetasonMarch312011

Liabilities Rs Assets Rs
Capital35000 Premises15000
Add:interest1750 Less:depreciation750
Add:netprofit15400 14250
Furniture1000
52150 Less:depreciation50
Less:Drawing2000 50150 950
Stockonhand 10220
Creditors 5500 Debtors30000
Groupcommission 770 Less:prov.ForD/D1500
28500
Cashinbank 2425
Cashinhand 75
56420 56420

Workingnote:

(1)
CASHBOOK
2009 Rs. 2008 Rs.
March Todebtors 25000 March By Balance b/d 4000
31 Sales 15000 31 (balance)

2009 Interest 100
March Drawing 2000
31 salaries
8500
expenses 7900
creditors 15000
balancec/d:
bank 2425
cashinhand 75
40000 40000

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(2)StatementofaffairsasatApril1.2010
Liabilities Rs. Assets Rs
Capital(balance) 35000 Stockinhand 9000
Bankoverdraft 4000 Debtors 22000
Creditors 8000 Furniture 1000
Officepremises 15000
47000 47000
(3)
TotalDebtorsAccount
Rs Rs
Openingbalance 22000 Cash 25000
Creditsales(bal.fig) 33000 Closingbalance 30000
55000 55000

Totalsales=cashsales+creditsales
=Rs.15000+33000=48000
(4)
Totalcreditorsaccount
Cash 15000 Openingbalance 8000
Closingbalance 5500 Purchase 12500
20500 20500

(5)
GrossprofitRs.36720
Less:allexpensesexceptcommission20550

Netprofitbeforecommission16170
Commission16170x5/105770

Netprofitaftercommission15400
=======

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Trialbalance

debtors Rs. Creditors Rs.

Openingstock 9000 Creditors 5500
Debtors 30000 Cashsales 15000
Furniture 1000 Creditsales 33000
Premises 15000 capital 35000
Interestcharges 100
Drawing 2000
Staffsalaries 8500
Businessexpense 7900
Purchase 12500
Cashinhand 75
Cashatbank 2425
88500 88500

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Module 3
HIRE PURCHASE AND INSTALLAMENT SYSTEM
Hire Purchase system
It is a system of purchase under which the buyers enters into agreement with the seller to pay
the price in installments. The buyer gets the possession of goods immediately on paying the down
payment but does not get ownership. He becomes the owner only after the last installment is paid.
Under this system the buyer fails to pay any installment, the seller has the right to tack back the
goods.
Difference between hire purchase and sale
The main difference between hire purchase agreement and sale are given below:
1. Under the sales ownership is transferred at the time of purchase. But under hire purchase
ownership is transferred only after payment of the last installment
2. In the case of sale payment of price is generally made in lump sum. In the case of hire
purchase payment of price is always made installment
3. In the case of sales buyer can dispose of the goods in any way he likes. But a buyer under hire
purchase agreement has no such right before he becomes the owner on payment of the
installment.
4. In the case of sale on credit the seller can sue the buyer for the payment of the price
outstanding. Bur a seller under hire purchase system can take back the goods in case of default
by the buyer in payment of any installment
5. In case of sale, the buyers position is like that of an owner. But the position of an under hire
purchase is like that of a bailee in respect of the goods until he becomes the owner.
6. In case of sale on immediate cash, the price does not include any interest. But under hire
purchase the installment includes interest.
Accounting for hire purchase transactions
In the books of hire purchaser
There two methods for making entries of the hire purchase transactions in the books of hire
purchaser.
1) When asset is recorded at full cash price and
2) When asset is recorded at the cash price actually paid
When asset is recorded at full cash price
Under this method the asset is recorded at the full price. Thus this method treats the hire
purchaser as owner of the asset.
Accounting entries in the books hire purchaser as follows:
1) When the asset is acquired on hire purchase
Asset account Dr.
To hire vendor a/c (cash price)

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2) When down payment is made

Hire vendor a/c Dr.
To cash a/c
3) When interest becomes due
Interest a/c Dr.
To hire vendor a/c
4) When installment is paid
Hire vendor a/c Dr.
To cash
5) When depreciation is charged on asset
Depreciation a/c Dr.
To asset
6) For closing interest
P & L a/c Dr.
To interest
7) For closing depreciation
P & L a/c Dr.
To Depreciation a/c
In the books of hire vendor
Accounting entries are as follows:
1) When the asset is sold
Hire purchase a/c Dr.
To hire purchase sales a/c
2) When down payment received
Cash a/c Dr.
To hire purchase a/c
3) When interest become due
Hire purchase a/c Dr.
To interest
4) When installment received
Cash A/c Dr.
To hire purchaser
5) For closing interest
Interest a/c Dr.
To P & L a/c

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Illustration1

On 1st Jan. 2008 A Ltd purchased from B Ltd .five tracks under hire purchase system. Rs
50000beingpaidondeliveryandthebalanceinfiveinstallmentsofRs75000eachpayable
annuallyon31stDec.thevendorcharges5%p.ainterestonyearlybalances.Thecashprice
offivetruckswasRs.375000
Show how this transaction should be recorded in the books of A ltd, if A Ltd
writesoffdepreciationat10%p.aonthewrittendownvalue.
InthebooksofALtd
Trucksaccount
2008 ToBLtd 375000 2008 Bydepreciation 37500
Jan1 Dec31 Bybalancec/d 337500
375000 375000
Tobalanceb/d 337500 33750
Bydepreciation 303750
2009 337500 Dec31 Bybalancec/d
337500
Jan1 balanceb/d

337500 30380
2010 Bydepreciation
273370
Jan1 Dec31 Bybalancec/d
303750 303750
balanceb/d

2011 303750 Bydepreciation 27340
Jan1 Dec31 Bybalancec/d 246030
balanceb/d 273370 273370
24600
273370 Dec31 Bydepreciation 241430
246030 Bybalancec/d
2012 balanceb/d
Jan1 246030 246030

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BLtd
2008 Jan1 Bytrucks 375000
Jan1
Tocash 50000
Dec31
Tocash 75000 Dec31 Byinterest 16250

Tobalanceb/d 266250

391250

391250 266250
2009
Tocash 75000 Jan1 Bybalanceb/d 13310
Dec31
st
Tobalancec/d 204560 31 Byinterest
279560
Dec.




2010 279560 204560

Tocash Bybalanceb/d
Dec31 75000 Jan1 10230
Tobalancec/d Byinterest
139790 31st

Dec

214790 214790

2011 Jan1
75000 139790
Tocash Bybalanceb/d
Dec31 31st
71780 6990
Tobalancec/d Dec Byinterest



146780 146780

Jan1
2012
Tocash 75000 31st Bybalanceb/d 71780
Dec31
Dec
Byinterest 3220

75000 75000

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Interestaccount

2000Dec31 ToBLtd. 16250 31stDec ByP&La/c 16250

st
2000Dec31 ToBLtd. 13310 31 Dec ByP&La/c 13310
]

10230 10230
2000Dec31 ToBLtd. 31stDec ByP&La/c

2000Dec31 ToBLtd. 6990 st
31 Dec ByP&La/c 6990

st
2000Dec31 ToBLtd. 3220 31 Dec ByP&La/c 3220


CALCULATIONOFINTEREST
1. Calculation of interest when cash price and rate of interest and amount of installment are
given total interest is the difference between hire purchase price and cash price. Interest
for each year is calculated on the amount of outstanding cash price
2. Calculation of interest when cash price and amount of installment are given. In the case ,
total interest apportioned to each year on the ratio of installment price outstanding
3. When rate of interest and installment are given but total cash price is not given. In this
method, interest is calculated from the last year firstly and then previous year and at last
fist year. For this purpose. Rate of interest must be converted on cash to on installment.
Illustration2
X purchased a radiogram on HP system. He is required to pay Rs 800/- down, Rs. 400/-
at the end of first year and Rs. 300/- at the end of second year and Rs.700/- at the end of third year.
Interest is charged at 5% p. a. calculate cash price and interest of each installment

year installment Interestpaid Cashprice

1styeardownpayment 800 Nointerest 800
Firstyearend
400 400+254+667*5/105=63 337

Secondyear
300 330+667*5/105=46 254

667
Thirdyearend 700 700*5/105=33 2058

Default and re possession
When hire purchaser is not able to make the payment in time, then default is committed by
him and the owner takes back the possession of goods. There are two possibilities:

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1) When seller takes back the possession of complete goods

2) When seller takes possession of only part of the total assets sold

When seller takes back the possession of complete goods

In the case accounting treatment is as follows:

In the books of purchaser:

1) All entries are passed as usual up to the date of default.

2) Buyer closes the account of seller by passing the entry:
Hire vendor account Dr
To assets account
3) Any balance left in asset account is closed by transferring to P & L account.
In the books of seller
1) All entries are passed as usual up to the date of default.
2) Seller closes the purchaser account by passing:
Re possessed goods account Dr.
To hire purchaser
3) Re possessed goods account or goods returned account is debited with all expenses
incurred and re sale price is credited and if any balance, it is transferred to P & L
account.

When seller takes possession of the total assets sold

In the case accounting entries are similar to those of complete repossession. The
additional precautions to be taken are:

1) Both the buyer and seller do not closes sellers account and buyers account in their
respective books. The entry for repossession is passed with the agreed value of assets
taken by the vendor.
2) The buyer finds out the value of asset still left with him using the normal rate of
depreciation. This account shows the balance of asset, which is left, to him
3) Aftercreditingtheassetaccountwiththevalueofassettakenawaybythesellerand
after keeping the balance of asset left, the difference by the asset account is
transferredtoP&Laccount

Illustration3
A Machinery is sold on hire purchase. The terms of payment is four annual installment of Rs.6000
at the end of each year commencing from the date of agreement. Interest is charged @ 20% and is
included in the annual payment of Rs. 6000

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Show machinery account and hire vendors account in the books of the purchaser who
defaulted in the payment of the third yearly payment where upon the vendors re-possessed the
machinery. The purchaser provides depreciation on the machinery @ 10% p. a on written down value
method. All workings should form part of your answer
Solution
CALCULATIONOFCASHPRICE

No. of Amount due after Amount of Total Interest Opening

install- payment of installment installment amount 20/120 Balance
ment

Rs. Rs. Rs. Rs. Rs.

1
6000 6000 1000 5000
2
5000 6000 11000 1833 9167
3
9167 6000 15167 2528 12639
4
12639 6000 18639 3106 15533

CashpriceofthemachineryisRs.15533

MACHINERYACCOUNT

YEAR Rs. YEAR Rs.

I Tohirevendors 15533 I Bydepreciationa/c 1553
Bybalancec/d 13980
15533 15533

II Balanceb/d 13980 II Bydepreciationa/c 1398
Bybalancec/d 12582
13980 13980

III Balanceb/d III Bydepreciationa/c
12582 1258

Byhirevendora/c
11000

Byprofit&lossa/c
324
(lossindefault
12582 12582

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HIREVENDORA/C

YEAR Rs. YEAR Rs.

I Tobanka/c 6000 I Bymachinerya/c 15533

Tobalancec/d 12639 Byinteresta/c 3106

18639 18639

II Tobanka/c 6000 II Bybalanceb/d 12639

Tobalancec/d 9167 Byinteresta/c 2528
15167 15167

11000 9167
III ToMachinerya/c III Bybalanceb/d
1833
(transfer) Byinteresta/c
11000 11000

Illustration4

PpurchasedatruckonhirepurchasesystemforRs.56000paymenttobemade,Rs15000downand
3 installments of Rs.15000. each at the end of each year. Rate of interest is charged at 5% per
annum.Thebuyerisdepreciatingtheassetat10%p.aonwrittendownvaluemethod.

Becauseoffinancialdifficulties,Pafterhavingpaiddownpaymentandfirstinstallmentattheendof
thefirstyearcouldnotpaysecondinstallmentandsellerstookpossessionofthetrucksellersafter
expandingRs.357onrepairsoftheassetsolditawayfor30110.

Openledgeraccountsinthebooksofbothpartiestorecordtransactions.

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Solution

INTHEBOOKSOFP
TRUCKACCOUNT
Year1 Rs. YearI Rs.
Jan1 Tohirevendor 56000 Dec31 Bydepreciation@10% 5600
Bybalancec/d
50400
56000 56000
II Bydepreciation
Jan1 Tobalanceb/d 50400 II hirevendor 5040
Dec31 P&LA/c 29453
(balancingfigure) 15907

50400 50400

HIREVENDOR
YearI Rs. YearI Rs.
JAN1 Tobanka/c 15000 Jan1 Bytrucka/c 56000
Dec31 Tobanka/c 15000 Byinterest 2050
balancec/d 28050
58050 58050

II II
Dec31 Totrucka/c 29453 Jan1 Bybalanceb/d 28050
Dec31 Byinteresta/c 1403
29453 29453

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INTHEBOOKSOFHIREVENDOR
PsACCOUNT
YearI Rs. YearI Rs.
Jan1 Tohiresalesa/c 56000 Jan1 ByBanka/c 15000
Dec31 ByBanka/c 15000
Dec Tointeresta/c 2050 ,, Bybalancec/d 28050
31
58050 58050

II Tobalanceb/d 28050 II
Jan1 Bygoodsrepossesseda/c 29453
Byinteresta/c 1403 Dec31
Dec
31 29453 29453

GOODSREPIOSSESSEDA/C
YearII Rs. Year Rs.
Dec31 ToP 29453 II
Tocash(expenses) 357 Dec31 Bysales 30110
,,,, P&La/c 300

30110 30110


P&LACCOUNT
Rs.

GoodsrepossessedA/c 300

Illustration 5
Roman transport co. purchased five trucks from Ramos Auto Ltd., on the January, 2011 on hire
purchase system. The cash price of each truck is Rs. 120000. The mode of payments was as follows:

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(i) 15% of cash price down

(ii) 25% of cash price at the end of each year for 4 year

Roman transport co. writes off 15% depreciation annually on diminishing balance. The payment due
to 31st December 2011 could not be made. Ramos Auto Ltd. agree to leave three Trucks with the
buyer on the conditions that the value of the other two Trucks would be adjusted against the amount
due, the trucks being valued at cost less 25% depreciation on diminishing balance.

Show the necessary accounts in the books of Roman Transport co.

Solution
TNTHEBOOKSOFROMANTRANSPORTCO.

TRUCKACCOUNT

2011 Rs. 2011 Rs.

Jan1 ToRamonsAutoLtd. 600000 Dec31 ByDepreciationA/c 90000
Bybalancec/d 510000
600000 600000
2012
Jan1 Tobalanceb/d 510000 2012 ByDepreciationA/c 76500
Dec31 ,,RamosAutoLtd 135000
Profit&lossA/c
(lossondefault)
(bal.fig) 38400

Bybalancec/d 260100
510000 510000


2013
260000
Jan1 ToBalanceb/d

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RAMOSAUTOLTD.ACCOUNT
2011 Rs. 2011 Rs.

Jan1 Tobank(15%of600000) 90000 Jan1 ByTrucka/c 600000

Tobanka/c Dec31 Byinteresta/c 36000

Dec31 Tobalancea/c 150000

396000

636000 636000

2012 Totrucka/c 2012

Dec31 Tobalancec/d 135000 Jan1 Bybalanceb/d 396000

,,,, 288000

Byinterest 27000

423000 423000

Workingnote:
Calculationofvalueof2TruckstakenupRamosAutoLtd.
Rs.
Costof2Trucks240000
Less:depreciation@25%for201160000

180000
Less:depreciation@25%for201245000

Valueon31122012135000

Calculationofvalueof3trucksretainedbyRomanTransportCo.
Costof3trucks360000
Less:depreciation@15%for201154000

306000
Less:depreciation@15%for201245900

260100

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Illustration 6

P purchased 4 cars of Rs. 14000 each on hire purchase system the hire purchase price for all the 4
cars was Rs. 60000 to be paid Rs. 15000 down and 3 installment of Rs. 15000 each at the end of each
year interest is charged @ 5% p.a, buyer depreciates cars @10% p.a on straight line method.
After having paid down payment and first installment, buyer could not pay 2nd installment and
seller took possession of three cars at an agreed value to be calculated after depreciating cars at 20%
p.a on written down value method one car was left with the buyer
Seller after spending Rs. 1200 on repairs sold away all the three cars to X for Rs. 35000 open ledger
accounts in the books of both parties

Solution

Calculationofvalueofassettakenbytheseller
Numberofcarstakenbytheseller=3
Costprice3x14000=42000
Less:depreciation:
Firstyear8400
Secondyear6720
15120

Valueofassetstaken26880
=========
Valueofcarleftwithbuyer
Numberofcar=1
Costprice=14000
Less:depreciation:
Firstyear1400
Secondyear1400
2800

Valueofassetleft11200
=========

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InthebooksofP
Assetaccount

1styear Bydepreciation 5600

Tohirevendor 56000 Bybalancec/d 50400
56000 56000
Secondyear
Tobalanceb/d 50400 Bydepreciation 5600
Byhirevendor 26880
ByP&Laccount 6720
Bybalancec/d 11200
50400 50400

Hirevendoraccount
Firstyear
Tocashaccount 15000 ByAssetsaccount 56000
Tocash 15000 Byinterestaccount 2050
Tobalancec/d 28050

58050 58050

Toasset 26880 Bybalanceb/d 26880
Tobalancec/d 2573 Byinterest 1403

29453 29453

nthebooksofseller
Psaccount
Firstyear Bycasha/c 15000
Tosalesaccount 56000 Bycasha/c 15000
Tointerest 2050 Bybalancec/d 28050
58050 58050
Secondyear
Tobalancec/d 28050 Byrepossessedstock 26880
Tointerest 1403 Bybalancec/d 2573
29453 29453

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Repossessedstockaccount

ToPsaccount 26880 Bycash 35000

Tocash 1200
ToP&Laccount 6920
35000 35000

INSTALMENT SYSTEM
It is a system of a sale in which the price of the article is paid in installments along with interest on
unpaid balances. Under this system the buyer gets the possession and ownership of the goods at the
time of signing agreements.

Difference between hire purchase and installment system

1) Hire purchase is agreements of hiring where as an installment system is an agreement of sale.

2) In the case of hire purchase system the ownership in the goods sold passes to the buyer only
on payment of the last installment. But in the case of installment system ownership passes to
the buyer immediately at the time of sale
3) If the buyer fails to pay any installment, the hire vendor can possess the goods. But in
installment system, the seller cannot possess the goods
4) The buyer can return goods sold to the seller, in the case of hire purchase. But in the
installment system, goods once sold cannot be returned
5) In the case of hire purchase system, the buyer cannot hire, sell, transfer or pledge the goods
until the full amount is paid. In the installment system, the buyer can hire sell, transfer or
pledge the goods before the payment of last installment
6) The risk of bad debt is relatively less in hire purchase transactions, but the risk of bad debt is
relatively more in installment system

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Module 4
DEPARTMENTAL ACCOUNTS
Departmental accounts are accounts relating to different department of a business and are used to
ascertain the trading results of each department separately. Such accounts disclose not only the profits
of each of the department but also the profits of the whole business.

OBJECTIVES OF DEPARTMENTAL ACCOUNTS

The main objectives of departmental accounts are:

(1) To know the trading result of the various departments.

(2) To compare the trading result of one department with those of other departments.

(3) T o reward the departmental managers on the basis of the trading results.

(4) To help the management to formulate the business policies for the various departments.

(5) To help the business in formulating proper policies relating to the expansion of the business.

Advantages of Department Accounts

The main advantages of Departmental accounting are as follows:

(1) It provides an idea about the affairs of each department.

(2) It helps to evaluate the performance of each department.

(3) It helps to reward the Departmental mangers and staff on the basis of performance.

(4) It facilitates control over the working of each department.

(5) It helps to compare the result of one department with those of other departments.

(6) It helps the management to formulate the right business policies for the various departments.

(7) It will help in the preparation of departmental budgets.

(8) It helps to calculate stock turnover ratio of each department.

Accounting Procedure

A departmental organization can record its transactions in two ways:

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(1) Unitary method: - Under this method, the accounts of each department are kept
separately. The results of the various departments are finally combined together in one general
P & L account.
(2) Tabular or columnar method:- Under this method, the accounts of each department are
kept in columnar form with a separate column for each department and also with a separate
column for the total. The tabular method is more popular and is adopted by almost all the
departmental undertaking.
Under this method, at the end of the accounting year, Trading and P & L account
(columnar) is prepared with separate amount column for each of the department and also for
the total. The trading and P & L of a departmental organization kept in the columnar basis is
called Departmental Trading and P & L account. In trading account, opening stock, purchases,
direct expenses and Gross profit are debited and sales and closing stock credited. Indirect
expenses have to be apportioned between the departments and debited to the P&L account.
Allocation of expense:-

Expenses incurred for a particular department should be directly charged to that

department. But common expenses should be apportioned to the different department on
suitable basis. Following basis for apportionment may be adopted:
(1) Expenses on purchase:- Such as freight, carriage in wards, discount received, import
duty, octopi etc should be apportioned in the ratio of net purchases ( excluding inter
departmental purchases) of each department.
(2) Expenses on sales:- Such as selling commission, bad debts, discount allowed, reserve for
bad debts , reserve for discount on debtors, sales tax, carriage outwards, advertisement
etc, he subject should be apportioned in the ratio of net sales ( excluding
interdepartmental sales) of each department.
(3) Expenses on building:- These should be apportioned on the basis of area or floor space
occupied by each of the departments.
(4) Expenses on machines:- Such as depreciation, repairs etc should be apportioned on the
basis of the value of machines used in each department. In the absence of information,
these expenses should be apportioned on the basis space occupied by machines in each
department.
(5) Lighting and heating- These expenses should be apportioned on the basis of meter
readings of the various departments. In the absence of meter readings, they should be
apportioned on the basis of light points of each department. In the absence of light points,
these expenses should be apportioned on the basis of the space occupied by each
department.
(6) Insurance premium:- It should be apportioned on the basis of the value of the subject
matter insured. For example, insurance premium on stocks insured should be apportioned
on the basis of stocks held by each department.
(7) Labour welfare expenses: - Such as recreation expenses, canteen expenses etc should be
apportioned on the basis of the number of workers working in each department.

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(8) Workmens compensation insurance:- This expenses should be apportioned in the ratio
of wages of each department.
(9) Other expenses:- Such as interest on capital, interest on debentures, general mangers
salary, audit fee, directors fee, bank charges, legal charges, sundry office expenses etc
can be allocated on any appropriate basis, say, on the basis of sales or cost of sales or
quantity of goods sold or equally. Alternatively, these expenses need not be allocated.
They can be charged to General Profit and Loss account the following.
Allocation of incomes

Common incomes should be allocated among different departments on the following basis:

(1) Discount received and reserve for discount on creditors:- They should be allocated on
the Basis of net purchases of each department.

(2) Commission earned on sales:- It should be allocated on the basis of net sales of each
department.

(3) Other incomes: - Such as dividend received, transfer fees etc can be allocated equally.
Alternatively, they can be credited to General P & L account.

Inter departmental transfers

Transfer of goods or services by one department to another department are called inter
departmental transfers.

When one department transfers goods to another department, the transaction should be
considered as a sale for the supplying department and a purchase for the receiving department.
As such, the supplying department should be credited and the receiving department should be
debited with the value of goods supplied. Similarly, when one department renders service to
another department, the department rendering the service should be credited and the
department receiving the service should be debited with the value of service rendered.

Goods may be transferred either at cost price or at selling price. If goods are transferred at
selling price by the transferor department and such goods are unsold at the end of the
accounting year by the transferee department, then profit charged on such unsold goods by the
transferor department is treated as unrealized profit and it should be debited to the general
profit and loss account as stock reserve. In the balance sheet stock reserve should be deducted
from closing stock. If unrealized profit is contained in the opening stock, such reserve should
be credited to the general profit and loss account.

Illustration 1

The following trial balance for the year ended 31-mar-1990 was extracted from the books of
Sir Bhikam Singh

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Dr(Rs) Cr(Rs)
Capitalon141989 50000
10000
Drawingsaccount

Stockon141989:
45000
Radios
21000
Watches
294000
Sales:
146000
Radios
Watches
Purchases: 225000
Radios 115000
Watches 12600
Salaries 8900
Publicityexpenses 3200
Rentratesandtaxes 10600

Commission 5000
12400
Miscexpenses
16800
Furnitureandfixturessundrydebtors
10000 8800
4%GovtofIndialoan
400
Sundrycreditors
800
Interest

Provisionforbadanddoubtfuldebts 4500
Cashbalance
500000
500000

Prepare the departmental P&L account for the year ended 31-march 1990 after taking in to
account the following
1) The stock as on 31 march 1990 was radios :Rs 30000,watches:24000
2) An amount of Rs 1200 out of sundry debtors has to be written off as bad and doubtful
debts has to be increased thereafter to 10% of the debts outstanding.
3) The following expenses are outstanding as on 31 march 1990
Publicity:Rs1300,salaries:Rs1200,commission:Rs1700
4) Provide10%depreciationonfurnitureandfixtures
5) RevenueItemstobeallocatedintheratioof2:1asbetweenradiosandwatches

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Solution
DEPARTMENTALPROFITANDLOSSACCOUNTFortheyearended31march1990
RADIOS WATCHES TOTAL RADIOS WATCHES TOTAL

Openingstock 45000 21000 66000
Purchases 225000 115000 340000 Bysales 394000 146000 404000
Grossprofitc/d 54000 34000 88000 Closingstock 30000 24000 54000

324000 170000 494000 324000 170000 494000



9200 4600 13800
Salaries
6800 3400 10200 54000 34000 88000
Publicity Grossprofitb/d

Rentratesandtaxes
2133 1067 3200 267 133 400
Commission Interest

Miscexpenses
8200 4100 12300
Depreciation on 3333 1667 5000
furniture

Baddebts
827 413 1240
Provision for bad
anddoubtfuldebts 800 400 1200

Netprofit 507 253 760
22467 18233 40700

54267 34133 88400 54267 34133 88400

Illustration2
M/s Gulati and sons has two departments cloths and readymade clothes. Readymade clothes are
manufactured by the firm itself out of clothes supplied by the cloth dept at its usual selling rate .from
the following figures prepare dept trading and P&L account and general P&L account for the year
ending 31 Dec 1989.
Clothdept Readymadecloth
(Rs) dept(Rs)

Openingstockon111989 360000 60000

Purchases 2900000 20000
Sales 3500000 700000
Transfertoreadymadeclothdept 450000
Manufacturingexpenses 140000
Closingstockon31121989 100000 48000

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General expenses incurred for both the dept were 100000, 120000.the stocks in the
readymade cloth depts. May be considered as consisting of 66 2/3 % cloth and 33 1/3 % other
expenses. The cloth dept earned profit at the rate of 18% in 1988.
Solution
Departmentaltradingandprofitandlossaccountfortheyearending31121989
Cloth Readymade Cloth Readymade
clothes clothes
Openingstock 36000 60000 Sales 3500000 700000
Purchases 2900000 20000 Transfer to
Transferfromclothdept readymadedept 450000
Manufacturingexpenses 450000 Closingstock 100000 48000
Grossprofit
140000
790000 78000
4050000 748000 4050000 748000

Grossprofitb/d
General
expenses(3500000:700000) 100000 20000 790000 78000
Dept profit transferred to
general profit and loss 690000 58000
account
790000 78000 790000 78000

Generalprofitandlossaccountfortheyearending31121989
Rs Rs

Stockreserve(closing) 6400 Profit:

clothdept 690000
Netprofit 748800 Readymadedept 58000
Stockreserve(opening) 7200
755200 755200

Working note
GP ratio: cloth dept = 790000 / 3950000 x 100 = 20%
Stock reserve closing = 48000 x 2/3 x 20% = 6400
Stock reserve opening= 60000 x 2/3 x 18% = 7200

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Illustration3

X ltd has two departments A&B.from the following particulars prepare the consolidated trading
account & departmental trading accounts for the year ending 31st December 2009

ARs BRs
Openingstock(atcost) 20000 12000
Purchase 92000 68000
Sales 140000 112000
Wages 12000 8000
Carriage 2000 2000
ClosingStock:
(i)purchasegoods 4500 6000
ii)FinishedGoods 24000 14000
Purchasedgoodstransferred:
ByBtoA 10000
ByAtoB 8000
Finishedgoodstransferred:
ByBtoA 35000
ByAtoB 40000
Returnoffinishedgoods:
ByBtoA 10000
ByAtoB 7000

You are informed that purchased goods have transferred mutually at their respective departmental
purchase cost and finished goods at departmental market price and that 25% of the finished stock
(Closing) at each department represented finished goods received from the other department.

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Solution
TradingaccountfortheyearendingDecember312009

ARs. BRs. Total ARs. BRs. Total

Toopeningstock 20000 12000 32000 Bysales 140000 112000 252000
purchases 92000 68000 160000 transfer of
purchased
carriage 2000 2000 4000 8000 10000
goods
wages 12000 8000 20000

transfer of 7000 10000
return of
purchasegoods
10000 8000 finishedgoods
Transfer of

purchasegoods
35000 40000 Transfer of
return of
finishedgoods 40000 35000
finishedgoods
10000 70000
Grossprofit
(before 42500 42000 84500 closingstock:
adjustment for Purchased 4500 6000 10500
transferofstock) goods



Finishedgoods
24000 14000 38000
TostockRes. ByG/P
223500 187000 300500 223500 187000 300500
Netprofit
875 1800 2675 42500 42000 84500

41625 40200 81825

42500 42000 84500 42500 42000 84500

Workingnote:
Interdepartmentalstock:A24000X25/100=6000
B14000X25/100=3500
G/Pratio:B42000/(112000+350007000)x100=30%
StockreserveB=6000x30/100=1800
G/PratioA=42000/(140000+4000010000)X100=25%

StockreserveA=3500x25/100=875

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Illustration4

Shari Gangram sells two products manufactured in his own factory. The goods are made in
two departments A & B for which separate sets of account are maintained. Some of the manufactured
goods of department A are used as a raw material by Department B and vice versa.
From the following particulars, you are required to ascertain the total cost of goods
manufactured in department A & B:

Departt.A Departt.B

TotalUnitsmanufactured 1000000 500000

TotalCostofmanufacture Rs.10000 Rs.5000

DepartmentAtransferred250000unitstodepartmentBandthelettertransferred100000
unitstotheformer

Solution
SupposeaisthecostofdepartmentAandbthetotalcostofdepartmentB

a=Rs10000+1/5b

b=Rs5000+1/4a

a=Rs10000+1/5(5000+1/4a)

=10000+1000+1/20a

a1/20a=11000
19a=11000x20
a=(11000X20)/19=11579
b=5000+1/4a
=5000+1/4(11579)
=5000+2895
=Rs7895
Totalcostofgoodsmanufactured
Depts.A Depts.B
Costasdetermined 11579 7895
Less:transferredtothedepartment 2895 1579
(1/4&1/5)

8684 6316
======== ==========

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Illustration5
Thefollowingpurchasesweremadebyabusinesshousehavingthreedepartments:
DepartmentA1000units
DepartmentB2000unitsatatotalcostofRs100000
DepartmentC2400units
Stockson1stJanuarywere:
DepartmentA120units,departmentB80unitsanddepartmentC152units
Thesaleswere:
DepartmentA1020units@Rs20each
[email protected]
DepartmentC2496units@Rs25each
Therateofgrossprofitistheinsameineachcase.Preparedepartmentaltradingaccount
Solution
Inordertodeterminetherateofgrossprofit,itisassumedthatallunitspurchasedhavebeensold
away.
Sales:Deptt.A1000units@Rs20each20000
[email protected]
Deptt.C2400units@Rs25each60000

Totalsales125000
Less:costofpurchase100000

Grossprofit25000

Grossprofitasapercentage=25000/125000x100=20%
CostpriceofunitspurchasedforeachDepartmentcannowbeascertainedasfollows:

Sellingpricegrossprofitcost

Deptt.ARs20Rs.416
Deptt.BRs.22.50Rs.4.5018
Deptt.CRs.25Rs.520
Unitsofclosingstockopeningstock+purchasessales
Deptt.A120+10001020=100
Deptt.B80+20001920=160
Deptt.C152+24002496=56

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Departmentaltradingaccountcannowbepreparedasfollows:

Deptt DepttB DepttC Deptt DepttB Deptt

A A C

Toopeningstock 1920 1440 3040 Bysales 20400 43200 62400

Topurchase 16000 36000 48000

Togrossprofit 4080 8640 12480 Byclosingstock 1600 2880 1120

22000 46080 63520 22000 46080 63520

Illustration6

From the following balances extracted from the books of B.N Pai prepare departmental trading and
general P&L account for the year ended 31st October 2011 and balance sheet as on that date after
adjusting the unrealized departmental profits if any:

Dr. Cr.
Rs Rs
1.capital 300000
2.landandbuilding 125000
3.furniture 25000
4.openingstock DeptA 30000
DeptB 40000
5.purchase DeptA 1000000
DeptB 1500000
6.sales DeptA 2000000
DeptB 3200000
7.generalexpenses 1400000
8.sundrydebtors 200000
9.sundrycreditors 100000
10.drawings 280000
11.cash&bank 1000000

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Additionalinformation

1) Closing stock dept A Rs 130000 including goods from dept B Rs 40000 at cost to dept A
Dept B Rs 260000 including goods from dept A Rs 90000 at cost to Dept B
2) Sales of dept A includes transfer of goods to Dept B of the value of Rs 200000 and sales of
dept B includes transfer of goods to dept A of the value of Rs. 300000 both at market price to
transferor dept.
3) Opening stock of dept A & dept B includes goods of the value of Rs 10000 and Rs 15000
taken from Dept B & Dept A respectively at cost to transferor Dept.
4) Depreciation land & building by 5% and furniture by 10% p.a.
Solution
BalancesheetofB.N.Pai
Asat31stOctober2011

Capital: Land & buildings :
Asperlastbalancesheet125000
Asperlastbalancesheet300000
Less:depreciation
Add:profitfortheyear1557750
fortheyear6250


1837750 118750
Furniture:
Less:drawing280000
Asperlastbalancesheet25000
1557750
Less:depreciationfor
Sundrycreditors 100000
Theyear2500


22500
Stockintrade390000

Less:stockreserve73500


316500
Sundrydebtors
200000
Cashandbankbalance
1000000



1657750 1657750

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DepartmentaltradingaccountandgeneralP&LaccountofB.N.Pai.
DepttA DepttB Total DepttA DepttB Total
Rs. Rs. Rs. Rs. Rs
Openingstock 30000 40000 70000 Sales 1800000 2900000 4700000
Purchase 700000 1300000 200000 Transfers 200000 300000
Transfers 300000 200000
Grossprofitc/d 1100000 1920000 3020900 Closing 130000 260000 390000
2130000 3460000 5090000 stock 2130000 3460000 5090000

Generalexpenses 1400000
Depreciation: 6250
Land&buildings 2500 Gross
Furniture 8750 profit 1100000
b/d 1920000
DepttA
Reserveonclosingstock: DepttB
Trans.FromdepttA
Trans.FromdepttB
49500

24000
73500

Netprofittransferredto
capitala/c
1537750
3020000 3020000

BRANCHACCOUNTS
A branch is a segment of a business. It is a chain of shops functioning in different localities under the
control of the head office. The system of operating business at several places through ones own
establishment s is called branch organization. Branch accounts are accounts relating to different
branches and are used to ascertain the trading result of each branch separately.
Need or objectives of branch account
The various objects of maintaining branch account are:-
(1) To ascertain profit or loss of each branch.
(2) To ascertain the financial position of each branch.
(3) To help in controlling branches.
(4) To assess the progress and performance of each branch.
(5) To ascertain the requirements of stock and cash for each branch.
(6) To ascertain whether the branch should be expanded or closed.

Types of branches
Branches may be divided into
(1) Dependent branches ( branch not keeping full system of accounting)
(2) Independent branches ( branch keeping full system of accounting)
(3) Foreignbranches.

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Dependentbranches
Dependent branches are branches, which dont maintain its own set of books. All records have
to be maintained by the head office. The following are the features of such a branch:
1) These branches sells only such goods, which are supplied by the head office
2) The head pays all branch expenses
3) The branch manager out of petty cash book pays some petty expenses.
4) Such banks are instructed to deposit daily cash proceeds in to bank account opened in the
name of head office
5) Sales are generally made on cash basis but some branches are authorized to make credit sales
also.
6) Branches keep only some memorandum records
7) There are four methods of accounting for dependent branches namely
a. Debtors system
b. Stock and debtors system
c. Final account system
d. Wholesale branch system
DEBTORSSYSTEM
Underthismethod,headofficeopensonlyoneaccountforeachbranchcalledbranch
account.Itspurposeistoascertaintheprofitorlossmadebyeachbranch.Suchbranchaccountis
nominalinnature

Accountingentriesare
1) Torecordopeningbalancesofbranchesassets
BranchaccountDr
Tobranchstocka/c
Tobranchdebtorsa/c
Tobranchpettycash
Tobranchotherassets
2) Torecordopeningbalancesofbranchliabilities
Branchliabilitiesa/cDr
ToBranchaccount
3) Whengoodssenttothebranch
Brancha/cDr
Togoodssenttobrancha/c
4) Forexpensespaidbyheadoffice
Brancha/cDr
Tobanka/c
5) Forremittancesentbythebranch
Banka/cDr
Tobrancha/c
6) Forthebranchassetsatclose
Branchasseta/cDr
Tobrancha/c

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7) Forthebranchliabilitiesatclose
Brancha/cDr
Tobranchliabilities
8) Fortransferofprofitofthebranch
Brancha/cDr
Togeneralprofitandlossa/c
Specimenofabranchaccountisgivenbelow

BranchAccount
Tobalance:(openingassets) Bybalance:(openingliabilities)
Stock xxxx Creditors xxx
Debtors xxxx Outstandingexpenses xxx
Pettycash xxxx Bybank(remittanceieamount xxxx
Fixedassets xxxx of cash sales + amount received
fromdebtors)
Prepaidexpenses xxx
Bygoodssenttobranch(returns
Togoodssenttobranch xxxxx bybranch)
Tobank: Bybalance:(closingassets) xxx
Forexpensesxxxx Stock
Pettycashxxx Debtors xxx
xxxx pettycash
xxx
Tobalance:(closing fixedassets xxx
Liabilities) prepaidexpenses xxx
Creditors xxxx

Outstandingexpenses xxxx

ToGeneralP&L(ifprofit) xxxx


xxxx xxxx

Treatment of items in branch account

(1) Branch expenses paid by branch from out of petty cash: - These need not be shown in the
branch account. The opening balance of petty cash will appear on the debit side of profit and
loss account. The cheque sent by the head office to the branch for petty expenses will also
appear on the debit side. The closing balance of petty cash (i.e. opening+ amount sent by head
office- petty expenses) will appear on the credit side.

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If petty cash is maintained on the imp rest system, actual expenses incurred will be
reimbursed and appear on the debit side of branch account as to bank account
(2) Depreciation on fixed assets: - It is not shown in the branch account. The asset is shown on
the credit side after deducting the amount of depreciation.
(3) Bad debts, discount allowed etc: - These need not be shown in the branch account but appear
on the credit side of debtors account.
(4) Sales returns from branch debtors: - it will not appear on the branch account but appear on the
credit side of debtors account.
(5) Purchase of fixed assets by the branch: - The fixed assets purchased by the branch should be
treated as closing branch fixed asset and should be credited to the branch account. If it is
purchased for cash, it should also be deducted from the remittance on the credit side of the
branch account. If it is purchased on credit, it should also be treated as a closing branch
liability and appear on the credit side of branch account.
(6) Sale of fixed assets: - The effect of this is to reduce the value of branch assets at close and
increase the remittance from the branch in case the sale is for cash. If the sale is for credit it
will increase the debtors balance instead of increase in remittance.
Illustration 1
The Vijayalakshmi Trading Company Ltd Bangalore has a branch at Mangalore. The head
office pays all expenses except petty expenses which were met by the branch. All cash received
by the branch was remitted to the head office daily. The following are the transactions between
head office and branch during the year ending 31st December 2011.
Rs
Stockatbranch1stJanuary2011 7,000
st
Branchdebtorson1 January2011 2,000
st
Pettycashon1 January2011 200
Goodssenttobranchduringtheyear 30,000
Cashsales 40,000
Creditsales20,000
Cashreceivedfromthedebtors 16,000
Goodsreturnedbythebranch1,000
Returnsfromcustomers 1,500
Chequesenttobranchforexpenses:
Salary3,000
Rent1000
Pettycash5004,500
Stockatbranchon31stDecember2011 4,000
st
Branchdebtorson31 December20114,500
Pettycashatbranchon31stDecember2011 300
PreparetheMangaloreBranchaccountintheBangaloreofficebooks.

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Solution:
Mangalorebranchaccount

Tobranchstock 7,000 Bygoodssenttobranch(returns) 1,000

Tobranchdebtors 2,000
Tobranchpettycash 200 Bybank(remittance) 56,000
Togoodssenttobranch 30,000 Bybranchstock 4,000
Tobank: Bybranchdebtors 4,500
Salary3,000 Bybranchpettycash 300
Rent1,000
Pettycash500
4,500
Togeneralprofitand
Lossaccount 22,100

65,800
65,800

Illustration2
Active Associates, Mysore, is having its branch in Mercara. Goods are invoiced to branch at cost.
Branch has been instructed to send all cash daily to the head office. All expenses of the branch are
paid by the head office except petty expenses, which are met by the branch. From the following
particulars prepare branch account in the books of Active Associates, Mysore.

Balanceson1stJanuary2011: Rs.
Stockinhandatbranch 12,000
Sundrydebtorsatbranch 9,000
Pettycashinhandatbranch 400
Officefurnitureatbranch 1,200
Outstandingsalariesofthebranch 200
Insuranceofthebranchprepaidupto31stMarch2011200
Transactionsduringtheyearended31stDecember2011:
Goodssenttobranch 64,000
Goodsreturnedbythebranch 800

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Goodsreturnedbycustomers 480
Cashreceivedfromdebtors 30,000
Cashsales 50,000
CreditSales 30,000
Discountallowedtodebtors300
Paymentforthebranchmadebytheheadoffice:
Salaries 2,000
Rentpaid 1,800
st
Insuranceforoneyearpaidupto1 April2012800
Pettyexpensespaidbythebranch 280
st
Balanceson31 December2011:
Stockatbranch 10,000
Rentstillowing 100
Writeoff10%depreciationonofficefurniture.
MercaraBranchaccount

Tobranchstock 12,000 Byoutstandingsalaries(opening) 200

Tobranchdebtors 9,000 Bygoodssenttobranch(returns) 800
Tobranchpettycash 400 Bybank(remittance)(50000+30000) 80,000
Tobranchfurniture 1,200 Bybranchstock(closing) 10,000
Tobranchprepaid 200 Bybranchdebtors(closing) 8,220
Insurance Bybranchpettycash(closing)
Togoodssenttobranch 64,000 (400280) 120
Tobank: Bybranchfurniture(closing) 1080
Salaries2,000 Bybranchprepaidinsurance
Rent1,800 (closing)800x3/12 200
Insurance800 4,600
To outstanding rent 100
(closing) 9,120
Togeneralprofit&loss
1,00,620 1,00,620

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Branchdebtorsaccount
Tobalance(opening) 9,000 Bycash 30,000
Tosales(credit) 30,000 Byreturns 480
Bydiscount 300
Bybalance(closing) 8,220
39,000 39,000
INVOICEPRICEMETHOD
Sometimes the head office may send goods at a price higher than the cost price. This inflated
price is generally termed as invoice price. The difference between the invoice and the cost price is the
loading. In this case three additional entries are also to be passed in addition to the usual entries..
1) To remove loading on opening stock
Stock reserve account Dr
To branch account
2) To remove loading in goods sent to branch
Goods sent to branch a/c Dr
To branch a/c
3) To remove loading on closing stock
Branch account Dr
To stock reserve
Illustration3
The Bundy shoes limited are having its branch at Ajmer. Goods are invoiced to branch
at shoes at 20% profit on sale. Branch has been instructed to send all cash daily to the head office. All
expenses are paid by the head office, except petty expenses. Which are met by the branch manager
.from the following particulars prepare branch accounts in the books of Bundy shoes ltd
Stockon1stJan2004(invoiceprice) 15000
SundrydebtorsonJan1st 9000
st
Cashinhandon1 Jan 400
Officefurnitureon1stJan 1200
Goodsinvoicedfromtheheadoffice(invoiceprice) 80000
Goodsreturnedtoheadoffice 1000
Goodsreturnedbydebtors 400
Cashreceivedfromdebtors 30000
Cashsales 50000
Creditsales 30000
Discountallowedtodebtors 30
Expensespaidbytheheadoffice
Rent 1200
Salary 2400
Stationery 300
Pettyexpensespaidbythemanager 280
Depreciationistobeprovidedonbranchfurniture
At10%p.a
Stockon31stDecember2004atinvoiceprice 14000

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Branchaccount

Rs Rs
Tobalance By bank remittances(cash sales+
amountreceivedfromdebtors)
Stock 15000 80000
Debtors 9000 Bybalance:
Stock
Cash 400 14000
Debtors
Furniture 1200 8490
Togoodssenttobranch80000 Cash
120
Lessreturns1000 Furniture 1080
79000
Stockreserve
3000
Tobank Goodssenttobranch 15800
Rent1200
Salary2400
Stationary300 3900
ToStockreserve 2800
Toprofit
11190

122490 122490


Debtorsaccount

Rs Rs
Tobalanceb/d 9000 Bycash 30000
Tosalescredit 30000 Byreturns 480
Bydiscount 30
Bybalanceb/d 8490

39000
39000

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Illustration4:AheadofficeinMumbaisendsgoodstoitsbranchatBangaloremarked20%above
cost.FromthefollowingparticularsshowhowtheBangalorebranchaccountwillappearinthehead
officebooks.

Balanceson1stJuly2011atthebranch: RS
Stockatinvoiceprice 3,600
Debtors
6,000
Pettycash
60
Goodssuppliedtothebranch 60,000
Remittancefromthebranch:
Cashsales 12,000
Amountreceivedfromdebtors42,000 54,000
Chequesenttothebranch:
Salary1,800
Rentandtaxes300
Pettycash 220 2,320
st
Stockatbranchon31 December2011 6,000
st
Debtorsatbranchon31 December20119,000
Pettycashatthebranchon31stDecember201140
Mangalorebranchaccount

To branch stock account 3,600 Bybank(remittance) 54,000

(opening) 6,000 Bybranchstock(closing) 6,000
To branch debtors 60
Bybranchdebtors(closing) 9,600
(opening) 60,000 Bybranchpettycash(closing) 40
To branch petty cash By stock reserve (loading on 600
(opening) openingstock)3600x20/120
Togoodssenttobranch Bygoodssenttobranch(loadingon
Tobank
2,320 goodssent)60000x20/120 10,000
Salary1800
1,000
Rent300
Pettycash220
7,260
Tostockreserve(loading
on closing stock)
6000x20/120 80,240 80,240
Togeneralprofitandloss

Note: petty expenses met by the petty cashier = 220

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Stock and debtors system

In case of this system, the head office maintenance a number of accounts for branch
transactions in place of in branch account. The various accounts are:
1) Branch stock account
2) Branch debtors account
3) Branch expenses account
4) Branchadjustmentaccount
5) Branchprofitandlossaccount
6) Branchcashaccount
7) Branchfixedassetaccount
8) Goodssenttobranchaccount

Accountingentriesareasfollows:

1) Whengoodssenttobranchatinvoiceprice
Branchstocka/cDr
Togoodssenttobrancha/c
2) Forcashsales
Casha/cDr
Tobranchstocka/c
3) Forcreditsales
Branchdebtorsa/cDr
Tobranchstock
4) Forbaddebtsandallowancesallowedtodebtors
Casha/cDr
Tobranchdebtors
5) Cashpaidbybranchdebtorsandremittedtoheadoffice
Casha/cDr
Tobranchdebtors
6) Forremovingloadingongoodssent
Goodssenttobrancha/c
Tobranchadjustmenta/c
7) Forremovingloadingonclosingstock
Branchadjustmenta/cDr
Tostockreservea/c
8) Expensespaidbyheadoffice
Branchexpensesa/cDr
Tocasha/c

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9) Transferbranchexpenses
Branchadjustmenta/cDr
Tobranchexpensesa/c
10) Fornetprofitdisclosedbybranchadjustment
Branchadjustmenta/c Dr
Togeneralprofitandlossa/c
Illustration5
A opened as branch in Bangalore on 1st January 2004.goods were invoiced at selling price
which is cost plus 25%.from the following particulars relating to the year 2004.you atre required to
prepare accounts under stock and debtors system
Goodssenttobranch 300000
Sales:
Cash 100000
Credit 140000
Goodsreturnedbycustomer 3000
Cashreceivedfromcustomer80000
Discountallowed 1000
Cashremittedtobranch
Rent 1500
Branchsalaries 6000
Sundryexpenses 1000
Defectivegoodswrittenoff 1000
Goodsreturnedbybranch 12000
Stockattheend 50000
Branchstocka/c
Rs Rs
Togoodssenttobranch 300000 Bybranchcasha/c
Tobranchdebtorsgoodsreturned 3000 Cashsales 100000
Bybranchdebtors
Creditsales 140000
Bygoodssenttobranch
Returned 12000
Bybranchadjustmenta/c
Defective 1000
Bybalancec/d 50000
303000 303000

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Branchdebtorsa/c

Rs Rs
Tobranchstock Bybranchstock
Creditsales 1400000 Cashreceived 80000
Bybranchstock
Returnsfromdebtors 3000
Branchexpenses 1000
Balancec/d 56000
140000 140000

Branchexpensesaccount
Rs Rs
Tocash: Branchadjustment
Salaries 6000 Transfer 9500
Rent 1500
Sundryexpenses 1000
Branchdebtors 1000
9500 9500

Branchadjustmentaccount
Rs Rs
Branchexpenseaccount 9500 Goodssenttobranch
Branchstock 1000 loading 60000
Stockreserve
Loading 10000
Togoodssenttobranch
Loadinginreturns 2400
Branchp/laccount 37100
60000 60000

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Goodssenttobranchaccount
Rs Rs
Tobranchstock 12000 Branchstock 300000
Branchadjustment 60000 Branchadjustment 2400
Tradinga/ctransfer 230400
302400 302400

Final Account system:-

Under this system head office opens
(1) Branch trading and profit and loss account
(2) Branch account. It is personal account in nature.
Illustration 6: A merchant at Mangalore has a branch at Mysore to which he charges goods at
cost plus 25%. The Mysore branch keeps its own sales ledger and transmits all cash received to the
head office every day. All expenses are paid from the head office.
The transactions for the branch were as follows:
Stockon112011 22,000
Debtorson112011 200
Pettycashon112011 200
Sales(cash) 5,300
Goodssenttobranch 40,000
Collectiononledgeraccount 42,000
GoodsreturnedtoHeadoffice 600
Baddebts 600
Allowancetocustomers 500
Returnsinward 1,000
Chequessenttobranch:
Rent 1,200
Wages 400
Salaryandotherexpenses 1,800
Stock31122011 26,000
Debtorson31122011 4,000
Pettycash31122011includingmiscellaneousincomeofRs50notremitted250
Preparebranchtradingandprofitandlossaccountfortheyearended3112
2011andalsopreparethebranchaccount.

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Solution
MysorebranchTradingandProfitandLossaccountfortheyearended31122011

To opening stock at cost 17,600 Bysales:

22000x100/125 Creditsales47,900
Cashsales5300
Togoodssuppliedbythehead
office at cost 40000x100/125 Lessreturns1,000 52,200
32000 Closingstockatcost 20,800
31,520 26,000x25/125
Lessreturnsatcost480
400
Towages
23,480
Togrossprofit 73,000 73000



1,800 Bygrossprofit 23,480

1,200
Tosalaries Bymiscellaneousincome 50
600
Torent
500
Tobaddebts
19,430
Toallowance

Tonetprofit
23530 23530

Branchdebtorsaccount
Tobalance(opening) 200 Bycash 42,000
To sales (Credit, balancing 47,900 Bysalesreturn 1000
figure) Bydiscount 600
Byallowance 500
Bybalance(closing) 4,000

48,100

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Mysorebranchaccount(personalaccount)

Tobranchstock(opening) 17,600 Bygoodssenttobranch 480

Tobranchdebtors(opening) 200 Bybank

Tobranchpettycash(opening) 200 By balance (balancing 47,300

figure)
Togoodssenttobranch 32,000 25,050

Tobank 3,400

Togeneralprofitandloss 19,430

72,830 72,830

Whole sale branch system

This system is adopted when the head office supplies goods to the branch at a price which it
supplies to wholesalers. Thus under this system, branch is treated at par with wholesale branch.

Illustration7

A head office invoices goods to its branches at 20% less than the list price which is
cost+100%.goods are sold to customers at list price .from the following particulars ascertain the
profit made by the head office and branch.

Headoffice Branch
Stockinthebeginning(atinvoicepriceforbranch) 30000 1600
Purchasesduringtheyear 256000
Goodssenttobranch 40000
Sales 180000 36000
Expenses 32000 5000

Solution
Letcostpricebe 100
Listprice(retailprice)100+100% 200
Invoiceprice(20020%) 160

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Tradingaccount
Head Branch Head Branch
Office(Rs) (Rs) office(Rs) (Rs)
Tostock 30000 1600 Bysales 180000 36000
Purchases 256000 Goodssenttobranch 40000
GoodsfromHO 40000 Closingstock 171000 12800
Grossprofit 105000 7200
391000 48800 391000 48800
Expenses 32000 5000 Grossprofit 105000 7200
Stock Stockreserve(opening)
reserve(closing) 1600x40/160
3200 400
12800x40/160
70200 2200
Netprofit
105400 7200 105400 7200

Workingnote:

1.CalculationofclosingstockatHO Rs
Openingstockatcost 30000
Addpurchases 256000

286000
Lesscostofgoodssold(18000x100/200) 90000

196000
Lesscostofgoodssenttobranch(40000x100/160) 25000

ClosingstockatHO 171000
========
2.Calculationofclosingstockatbranch Rs
Openingstockatinvoiceprice 1600
AddgoodsreceivedfromHOatinvoiceprice 40000

41600
Lessgoodssoldatbranch(36000x160/200) 28800

Closingstockatbranchatinvoiceprice 12800
=========

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INDEPENDENT BRANCHES
Independent branch means a branch which maintains its own set of books. In this
system, branches are treated as separate independent units.
Features of such branches may be summarized as below
1) They keep a full system of accounting and trial balance can be extracted from the ledger
2) In the branch books, there will be a head of accounts and in the books of head office there will
be a branch account
3) The branch does not confine its trading to the goods sent by the head office
4) There is no need for the branch to remit all cash. It can retain the cash out of which it can
make the payment
Accounting entries are as follows:
Transaction Headofficebooks Branchbooks
Brancha/cDr: Goodsreceivedfrom
To goods sent to headofficea/cDr:
Goodssuppliedbyheadoffice branch Toheadofficea/c

Brancha/cDr: Banka/cDr:
Cashremittancefromheadofficetobranch Tobank Toheadoffice
Banka/cDr: Headofficea/cDr:
Cashremittancefrombranchtoheadoffice Tobrancha/c Tobanka/c
Remittanceintransit
Remittancesentbybranchbutnotreceivedbyhead a/cDr:
office Toheadofficea/c
Branchasseta/cDr: Headofficea/cDr:
Assetpurchasedbythebranchbutasseta/cistobe Tobranch Tobank/liability
keptinheadoffice

Brancha/cDr: Depreciationa/cDr:
Depreciationwithrespecttotheaboveasset Topbranchasset Toheadoffice
Brancha/cDr: Head office
Headofficeexpenseschargeabletobranch ToP&La/c expensesa/cDr:
Toheadoffice
Receiving branch a/c Receivingbranch:
Dr: Goods from head
Tosupplyingbranch officea/cDr:
Toheadoffice
Interbranchtransactions
Supplyingbranch:
Headofficea/cDr:
To goods sent to
headoffice

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Module5
ACCOUNTINGFORHOTELS
Meaning and Definition of Hotels
A hotel simply refers to an establishment that provides rooms and meals. A hotel may be
defined as a place that offers accommodation, food, and beverages at a cost that enables it to make a
profit. Hotels provide accommodation, meals and refreshments, for irregular periods of time for those
who may reserve their accommodation either in advance or on the premises. In broad terms, hotels
provide facilities to meet the needs of the modern traveler.
In short, hotel is an establishment that provides lodging usually on a short term basis. Today
hotels provide much more than just accommodation and meals. It often provides a number of services
such as restaurant, swimming pool, or child care; some hotels have conference and meeting rooms.
Services are provided to guests based on their needs. Now the hotel industry is referred to as
hospitality industry.
Features of Hotel Business
The chief features of hotel business are as follows:
1. Hotels provide accommodation and food items to guests.
2. Some hotels maintain bars. They offer drinks to customers.
3. Some hotels may have on their premises a beauty parlor, a hair dressing saloon, a jewelers shop, a
book stall, a newspaper stand etc.
4. There are some hotels that provide various professional and technical services.
5. Most hotels provide credit facility to customers. No guest is required to pay room rent in advance
or to pay for the other services and facilities at the time when the services are rendered to him.
Sometimes an advance is required to be paid. At the time of departure the balance is paid
6. In hotels, there are large numbers of stereo type transactions.

Departments of a Hotel
All departments of a hotel may be classified into two-revenue departments and non-revenue
departments.
Revenue Earning Departments
Revenue earning departments are operational departments that sell services or products to guests.
A hotel has two major revenue earning departments. They are: (i) Accommodations, and (ii) food and
beverage.
Accommodations
Accommodation department is responsible for the sale of rooms.. These departments are
responsible for maintaining and selling the rooms in a hotel. In most hotels, these are the departments
that directly or indirectly generate more revenue than any other department. This is because the sale
of rooms constitutes a minimum of 50 per cent of the total revenue of a hotel. The various
departments that support the room divisions department are:

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Front office department: It is an operational department. It is the office when the guest is
received, provided information, his luggage is handled, his accounts are settled on departure, and his
complaints, problems and suggestions are looked after. It is responsible for welcoming and
registering guests, allotting those rooms, and helping guests checking out.
Housekeeping department: This department is responsible for the cleanliness, maintenance and
the aesthetic standard of the hotel. Housekeeping includes the servicing of guest rooms. This includes
cleaning bedrooms, staircases, public areas and floral arrangements, first aid to guests etc.
Maintenance department: This department is responsible for all kinds of maintenance, repair
and engineering work on equipment, machines, fixtures and fittings. It undertakes the supply of air-
conditioning, lighting, mechanical, electrical, carpentry and civil works of the hotel. Maintenance
department is also known as engineering department.
Laundry: This is a critical department that launders the large volume of bed lines, restaurant lines,
staff uniforms and guest garments. Large hotels may have an in-house laundry to control the
movement of linen and uniform which are considered to be the precious assets of the hotel. Smaller
hotels may outsource this activity to local laundries. The laundry is headed by laundry manager.
Food and Beverage (F & B) Department
The food and beverage department is another major revenue producing department. It is the key
to the success of a hotel. The F & B department includes the restaurants, bars, coffee shops, banquets,
room service, kitchen and bakery.. The various departments that come under the F & B may be
discussed below in brief. :
Restaurant : A restaurant is a commercial establishment committed to the sale of food and
beverage. A restaurant may be a licensed part of a hotel operation, whereby the sales of the restaurant
contributes to the sales performance of the hotel, or a franchised operation, when the hotel leases
space. In this case the hotel has no share in the profits of the restaurant operations. Restaurants are
equipped with tables, chairs, crockery, cutlery, linen and decor. In addition to the basic purpose,
restaurants may provide other facilities such as bar, entertainment, children party facilities, home
delivery services, take-away services, outdoor catering etc.
Room Service: Room service is a food service operation. It provides food and beverage to guests
staying in the hotel rooms. The room service is located in the kitchen and has an order-takers desk.
Guests may order their food and beverage directly from their rooms to the room service order-taker
who will pass on the order to the service team. The service team co-ordinates with the kitchen or bar
for the preparation of the item.
Bars : The bar dispenses wines, liquor, spirits, juices, cigars and cigarettes. Restaurant food service
professionals will co-ordinate with the bar for a guests beverage orders.
Banquets : The banquets department is a major revenue area within food and beverage department.
It is headed by a banquet manager. He organizes and looks after large parties like dinners for
hundreds of guests, conventions, marriage receptions and other functions.
Kitchens : A kitchen is the place where food is prepared. Large hotels have independent sections to
deal with various aspects of food preparation due to the large volume of activity. Kitchen personnel
co-ordinate closely with restaurants, room service, bars and banquets for the supply of food orders.
Chef-de-cuisine is the head of the kitchen. He is responsible for planning, organizing and controlling
the kitchen operations.

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Kitchen stewarding : This department is primarily concerned with the storage, maintenance,
cleanliness, and issue of cutlery, crockery, hollowware, chinaware and glassware to the restaurants
and kitchens. It is responsible for the cleanliness of kitchens and the washing of pots and pans.
Minor Revenue Earning Departments
There are certain departments which earn smaller revenue. Such departments are as follows:
Health club and recreation: People are getting increasingly health and physical fitness
conscious. Hence some hotels maintain gymnasiums for men and women and swimming pool.
Similarly, some hotels provide tennis courts, squash courts, and many other recreation facilities.
Delicatessen : This department sells in-house butchery products.
Patisseries. : It sells bakery products.
Beauty Salon : This provides hair dressing service and beauty care.
Flower Shop : This is the retail outlet of the flowers and ferns from the gardens of the hotel.
Health food counter : This is usually found at the health club. The counter provides health foods
and diet foods that support a health regimen created by a dietician.
Non-Revenue Departments (Staff Departments)
Non-revenue departments or staff departments are those that support the revenue departments in
their efforts. In fact, non-revenue departments are supporting departments. They help to generate
revenue indirectly by playing a supporting role to revenue earning departments. These departments
may be discussed as below :
Finance and accounts department : This department comprises of two sections - finance and
accounts. The finance section is responsible for raising funds and generating profits through
innovative investments and funding. This is headed by financial controller. He is assisted by financial
analysts. The accounts section monitors the revenues and expenditures of the hotel. The functions of
accounting section include hotel, etc.
This department is headed by the human resource manager.
Sales and marketing department : This department is concerned with finding customers. It
advertises in various media such as television, newspapers, trade magazines. etc. It organizes
promotions to attract guests in different seasons and festivals. A team of sales personnel go out into
the market and sell the property to corporate houses, travel agent, tour operators and airlines for more
business. This department is headed by the sales and marketing manager.
Purchase department : This department is led by the purchase manager. The main
responsibilities of the purchase department is to procure all the departmental inventories. In most
hotels, the central stores is part of the purchase department.
Security department : The security department is responsible for safeguarding the assets and
employees of the hotel. It is also responsible for establishing a safe environment for guests. It is
concerned with implementing safety programmers.
Revenues and Expenditures of a Hotel
Now let us examine the major heads of revenues and expenses of a hotel.

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Revenues of a Hotel : The major heads of revenue (primary or principal sources of revenue) of a
hotel may be outlined as below:
1. Revenue earned from selling rooms (i-e room rent). The income head is Accommodation or
Rentals.
2. Revenue earned from selling foods and beverages including wines, liquors etc. The income head
is Income from meals and Refreshments.
3. Income from letting out banquet hall for marriage parties etc. , and conference rooms for holding
meetings, seminars, conferences etc.
4. Income from other sources (minor sources) such as laundry, telephone services, health club
facilities, swimming pool, variety shows etc.
A big hotel may grant licenses to outsiders in consideration of license fees to run various shops
in the shopping centre on the premises of the hotel itself. In the shopping centre there may be shops
selling jewellery, handicrafts, fancy garments, medicines, book etc. Usually in such a hotel, there is a
beauty parlor as well as a hair dressing saloon run by outsiders under license from the hotel. In such
cases, the hotel earns an additional revenue in the form of license free.
Some hotels levy service charges at specified rates on room rent and price charged for food
items, beverages etc. served to the guests. Thus service charge is a source of revenue for the hotel.
Expenditures of a Hotel: A hotel incurs the following expenditures (major heads of
expenditures):
1. Purchase of provisions, stores and wine.
2. Kitchen and bar expenses.
3. Remunerations to staff (or employee remuneration and welfare expense)
4. Electricity, fuel and water.
4. Entertainment expenses.
5. Advertisement and publicity expenses.
6. Repairs, renewals and replacements.
7. Administrative and general expenses.
8. Room occupying expenses, etc.
Working Papers
Working papers consists of collections of data, computations, memoranda, preliminary drafts of
financial statements and other useful papers used by accountants. With the help of the data collected
from the various departments of a hotel, computations, memoranda, preliminary drafts of financial
statements etc., the final financial statements can be easily prepared. In short, working papers are
sheets of paper containing accounting data, calculations etc. which assist the accountants in the
preparation of financial statements.
Working papers are not part of the formal accounting records. The accountant prepares them for
his use. He keeps them with himself. These are not meant for use by the owners or managers. A type
of working paper commonly used by accountants is the work sheet. A worksheet is a columnar sheet
of paper used to summaries information needed to prepare financial statements and to record
adjusting and closing entries. It is also an informal device for assembling the required information in
one place.

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Advantages of Working Papers

1. Working papers assist accountants in organizing the information required for the formal financial
statements, so that no important information is omitted.
2. Working papers provide evidence of supporting computation and are useful in explaining to
auditors the basis of the figures appearing in the financial statements.
3. Working paper is an information device for assembling the required information at one place.
This helps to prepare financial statements somewhat easily.
4. Working papers help to assure the accountant that potential errors will be discovered.
5. Working papers are particularly useful in hotels and restaurants where there are numerous
accounts and adjusting entries.
Preparation of Final Accounts
After transactions are recorded in the subsidiary books, entries are posted in the appropriate
ledger accounts. After extracting the balances in the ledger accounts a trial balance is prepared at the
end of the accounting year to check the arithmetical accuracy. From the trial balance final accounts
are prepared in the usual manner. The final accounts consist of Profit and Loss Account and Balance
Sheet.
Illustration 1
The following is the trial balance of Ashoka Hotel on 31st March 2009. You are required to
prepare the hotels trading and profit and loss accounting for the year ending 31st March 2009 and a
balance sheet as on that date.
Debits Rs. Credits Rs.
Cashatbank 40,000 Capital 2,00,000
Provisionsandotherpurchases 1,10,000Apartmentsandattendance 1,25,000
Stocks 10,000 Mealsandrefreshments 1,45,000
Kitchenequipment 40,000
Printingandstationery 5,000 Bankinterest 5,000
Postageandtelephone 4,500 Sundryrevenuereceipts 15,000
Wagesandsalaries 50,000 Discountsreceived 3,000
Fuelandlight 9,500 Sundrycreditors 12,000
Repairsandrenewals 2,500
Restaurantfurniture 22,500
Advertising 5,000
Chinaandutensils 15,000
Sundrydebtors 20.000
Drawings 15,000
Baddebts 4,500
Rates 1,500
Building 1,50,000
5,05,000 5,05,000

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Preparefinalaccountsaftermakingthefollowingadjustments:
(1)AsumofRs.6,000representingaccommodationRs.2800andmealsRs.3,200tobechargedto
proprietor.
(2)AsumofRs.12,000representingaccommodationRs.3,000andmealsRs.9,000tobechargedto
staffwhoareprovidedwithfreeboardingandlodging.
(3)AccruedwagesandsalariesamounttoRs.4,000.
(4)Providedepreciationasfollows:
(a)Buildings5%.
(b)Kitchenequipment10%.
(c)RestaurantfurnitureRs.1,500.
(d)ChinaandutensilswererevaluedatRs.12,500.
Solution
PROFITANDLOSSACCOUNT
fortheyearended31032009
Rs. Rs.
ToProvisionsetc. 1,10,000 ByApartmentsetc.(seenote) 1,30,800
Wagesandsalaries50,000 Meals(seenote) 1,57,200
Add:Freefood 12,000 Bankinterest 5,000
Add:Outstanding 4,000 66,000 Sundryrevenuereceipts 15,000
Fuelandlight 9,500 Discountsreceived 3,000
Advertising 5,000
Baddebts 4,500
Rates 1,500
Repairsandrenewals 2,500
Printingandstationary 5,000
Postageandtelephone 4,500
Depreciation:
Buildings 7,500
Kitchenequipment4,000
Restaurantfurniture1,500
Chinaetc 2,500 15,500
Netprofittransferredto
capitalA/c. 87,000
3,11,000 3,11,000

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BalanceSheetAsat31032009
Rs. Rs.
WagesandSalaries CashatBank 40,000
accrued 4,000 Sundrydebtors 20,000
Sundrycreditors 12,000 Stocks 10,000
Capital 2,00,000 Chinaandutensils 12,500
Less:Drawings Kitchenequipments 40,000
Cash15,000 Less:Depreciation 4,000 36,000
Food6,000 21,000 Restaurantfurniture22,500
1,79,000 Less:Depreciation 1,500 21,000
Add:Profits 87,0002,66,000 Building 1,50,000
Less:Depreciation 7,5001,42,500
2,82,000 2,82,000
WorkingNote:
(1) DrawingsshouldbedebitedwithRs.6,000.AccommodationshouldbecreditwithRs.2,800and
MealsshouldbecreditedwithRs.3,200.
(2) Rs. 12,000 should be debited to wages and salaries. Rs. 3,000 should be credited to
accommodationandRs.9,000shouldbecreditedtomeals.
(3) TheamounttobeshownintheP/LA/c.undertheheadaccommodationiscalculatedasfollows
:
AmountasT/B= Rs.1,25,000
Chargedtoproprietor Rs.2,800
Chargedtostaff Rs.3,000
Total 1,30,800
(4)TheamounttobeshownintheP/LA/c.undertheheadmealsiscalculatedasbelow:
AmountasperT/B Rs.1,45,000
Chargedtoproprietor Rs.3,200
Chargedtostaff Rs.9,000
Total 1,57,200

RoomRate
Room rate simply refers to room rent. It is the charge fixed by the hotel for accommodation
providedtotheguests.Itistherateatwhichtheguestsarechargedfortheroomsletouttothem.
Ahotelearnsmaximumamountofrevenuefromtheroomrent.Hence,theroomratemustbe
fixedjudiciously.Whiledeterminingtheroomrate,certainfactorsneedtobeconsidered.Someof
themare:(a)availabilityofroomsinthehotel,(b)locationofthehotel,(c)locationoftheparticular
room,(d)availabilityofvariousfacilities,(e)occupancyrate,(f)typeofbuilding(g)estimatedcostof
operation,(h)expectedrateofreturnoninvestment,etc.

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CalculationofRoomRate
The average room rate is calculated by applying the following formula:
Average Room Rate = Estimated cost of operation + Expected rate of return on investment
Total number of available rooms that can be let out
The above formula gives the average room rate. But the same rate is not charged for all the rooms
in a hotel.

BasesofChargingRoomRates

Therearedifferentbasesofchargingroomrates.Therearethreemainmethodsofcharging
roomrates.Theyare:(a)24hoursstaysystem,(b)nightstaysystemand(c)checkoutsystem.
(a) 24 hours stay system: Under this system, a guest is charged a fixed
amount for a stay of every 24 hours or part thereof from the time of his occupying the room in
the hotel. This means he has to pay this fixed amount even if he stays only for a few hours.

Illustration2

Mr. Lal occupied a room in the Sagar Hotel, Trissur on 15 th January 2010. He came at 8 a.m. for
accommodation only at a Rent of Rs. 800 per day for every 24 hours or part thereof.
Compute the amount payable by Mr. Lal under each of the following conditions assuming that
service charge levied by the hotel @ 10%
(a) If he checks out at 4.00 p.m. on 15-01-2010
(b) If he checks out at 7.00 a.m. on 16-01-2010
(c) If he checks out at 1.00 p.m. on 16-01-2010
(d) If he checks out at 8.00 p.m. on 17-01-2010
Solution
(a) AmountpayablebyMr.Lal Rs.
[email protected] 800
Add:ServiceCharge@10% 80
880
(b) AmountPayablebyMr.Lal
[email protected] 800
(Hestayedfor23hours,hehadtopayoneday'sminimumrent)
Add:[email protected]% 80
880
(c) AmountPayablebyMr.Lal
[email protected] 1,600
(Hestayedfor29hours,i.e.,onedayfulland5hourspartthereof.
Sohehadtopay2days'rent)
Add:ServiceCharges@10% 160
1,760

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(d) AmountPayablebyMr.Lal
[email protected] 2400
(Hestayedfor2daysand12hoursi.e.,2days'chargeand
12hourspartthereof,sohehadtopay3days'rent)
Add:ServiceCharges@10% 240
2640
(b) Night stay system : Under this system, the guest has to pay the room
rentforeverynightspentinthehotel.Normallyheshouldvacatetheroombeforedinnerof
thenextday.Incasehefails,hehastopaychargesforanothernight.Similarly,theguesthas
topayroomrentforonenightevenifhedoesnotstayevenasinglenight.

Illustration3
Mr.Rajuoccupiedahotel,HotelSamudra,atKovalam.Hecametothehotelat10p.m.on22nd
[email protected].
ComputetheamountpayablebyMr.Rajuundereachofthefollowingconditionsassumingthat
theservicechargeswere@10%leviedbythehotel:
(a) Ifhechecksoutat11.00a.m.on23rdMarch2010
(b)Ifhechecksoutat8.00p.m.on23rdMarch2010
(c)Ifhechecksoutat4.00p.m.on24thMarch2010
(d)Ifhechecksoutat9.00p.m.on25thMarch2010
Solution Rs.
(a) AmountPayablebyMr.Raju
[email protected] 1,000
(Hespendjustonenightonlyandvacatedat11a.m.So,charges
foronenighttobeleveied)
Add:ServiceCharges@10% 100
1100
(b) AmountPayablebyMr.Raju
[email protected] 1000
(Hespent1nightandhevacatedthehotelbeforedinner)
Add:ServiceCharges@10% 100
1100
(c) AmountPayablebyMr.Raju
[email protected] 2000
(Hespent2nightsi.e.,23rdand24thnight)
Add:ServiceCharges@10% 200
2200

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(d) AmountPayablebyMr.Raju
[email protected] 3,000
(Hespent3nightsi.e.,23rd,24th&25th,beforedinnerof
26thheleftthehotel)
Add:ServiceCharges@10% 300
3300
(c) CheckoutSystem:Underthissystem,acheckouttimeisfixedbythehotelauthoritiesbytaking
into consideration the timings of buses, trains or flights. Generally, 12 noon is taken as checkout
time. One full days charge is levied from one checkin time to the following checkout time.
Naturally, if any guest occupies more than the checkout time, he has to pay another day's room
rent.Generally,thecheckintimeandcheckouttimearethesame.Thissystemiswidelyadopted
byhotelsinIndia.
Note:CheckoutisanAmericantermadoptedbyhotelsinIndia.Itmeansdepartureofaguestfrom
ahotel.Thus,checkinmeansthearrivalofaguestinahotel.
Illustration4
Mr.AarrivesinMumbaiandchecksintoaroominafivestarhotelat4p.m.on1stJune2009at
Rs. 500 per day plus 10% for service charges on EuropeanPlan. Checkout time in the hotel is 12
noon.
CalculatetheamountpayablebyMr.Aineachofthefollowingcircumstances:
(i) IfMr.Achecksoutat10p.m.onthesameday
(ii) IfMr.Achecksoutat9a.m.on2ndJune2009
(iii)IfMr.Achecksoutat6p.m.on2ndJune2009
(iv)IfMr.Achecksoutat4a.m.on3rdJune2009
ShowalsotheamountpayablebyMr.Aifthechargeswereleviable@Rs.500forastayofevery
24hoursorpartthereofplusservicechargesat10%

Solution

Basedon12NoonCheckoutTime
Particulars No.of Rate Amount Service Total
days Charges Amount
@10% payable
Rs. Rs. Rs. Rs.

Checkoutat10p.m.onthesameday 1 500 500 50 550

"""9a.m.on2ndJune 1 500 500 50 550
"""6p.m.""" 2 500 1,000 100 1,100
"""4a.m.""" 3 500 1,500 150 1,650

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Basedon24hourCheckoutTime
Checkoutat10p.m.onthesameday 1 500 500 50 550
"""9a.m.""" 1 500 500 50 550
"""6p.m.on2ndJune 2 500 1,000 100 1,100
"""4a.m.""" 2 500 1,000 100 1,100
OperatingRatios
Generally hotels compute some operating ratios for measuring the efficiency in operation. These
are physical ratios and not monetary ratios. Some of the important ratios may be discussed below :
1. Room occupancy rate : It is the ratio of the number of rooms occupied by the guests to the total
number of lettable rooms available. It is usually expressed as a percentage. It is calculated as below :
No. of rooms occupied x 100
Room occupancy rate =
No. of lettable rooms available
Thus, the room occupancy rate shows the percentage of lettable rooms which are generating
revenue for the hotel. The higher the rate, the better it is for the hotel and vice versa.
The Federation of Hotels and Restaurants Association of India requires monthly occupancy rate
from its member hotels. However, a hotel may calculate its room occupancy rate daily, weekly, and
bimonthly, quarterly, or yearly etc. as well
Illustration 5
A five-star hotel has 660 rooms in all, out of which 52 rooms are used for operational purposes and
8 rooms are used by the departmental managers.
If 480 rooms are occupied by the guests on any day, calculate the room occupancy rate.
Solution
No. of Rooms occupied x 100
Room Occupancy Rate =
No. of Rooms available for letting-out
No. of rooms available for letting-out is calculated as below :
660 - 52 - 8 = 600
480 x 100 = 80%
600
If we are asked to calculate the room occupancy rate for a particular day, first the number of rooms
occupied by the guests brought forward from the previous day is taken up. Then the number of rooms
in which the guests check-in during the day is added to this figure. From this figure (total) the number
of rooms from which the guests check-out during the day is deducted. The resultant figure is the
occupancy of rooms for the day.
Illustration 6
The check out time of the Imperial Hotel is 11 a.m. On 4th July, 2009 the Visitors Ledger of the
hotel shows that immediately after 11 a.m. there are 93 rooms in which guests are staying . Till 11
a.m. on 5th July, 2009 guests from 23 rooms check out while in 27 rooms new guests check in.
Calculate the room occupancy of rooms for 4 th July, 2009

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Solution
Calculation of Occupancy of Rooms on 4th July 2009
Number of rooms occupied, brought forward = 93
Add : Number of rooms in which new guests checked in during the day = 27
120
Less:Numberofroomsfromwhichguestscheckedoutduringtheday= 23
Occupancyofroomsason4thJuly,2009 97
2. Bed occupancy rate : In most of the hotels, there are single-bedded rooms, double bedded rooms
and family rooms. Hence, total number of beds are more than the total number of lettable rooms. In
this case, bed occupancy rate is more important than room occupancy rate. The bed occupancy rate
refers to the ratio of beds occupied by the guests in a hotel to the total number of beds available in the
hotel. It is expressed as a percentage. It is calculated as below :
No.ofbedsoccupied x100
Bedoccupancyrate=
No.oftotalbedsavailable
Illustration7
A five star hotel in Mumbai has 350 rooms out of which 250 rooms are single-bed rooms and 100
rooms are double-bed rooms. On 15th October 2009, 180 single-bed rooms and 60 double-bed rooms
are occupied by the guests. Calculate the bed occupancy rate for the day.
Solution
No.ofbedsinthesingleroom=250x1 =250
No.ofbedsinthedoubleroom=100x2 =200
Totalnumberofroomsinthehotel 450
TotalNo.ofbedsoccupiedbytheguests=180+(60x2)=300
300x100=662/3%
Bedoccupancyrate=
450
3. Double occupancy rate : This is the ratio of double rooms occupied by the guests to the total
rooms occupied by the guests. It is calculated by using the following formula :

TotalNo.ofguestsNo.ofroomsoccupiedx100
Doubleoccupancyrate=
No.ofroomsoccupied
Whenwedeductnumberofroomsoccupiedfromthetotalnumberofguests,wegetthenumber
ofdoubleroomsoccupied.Thusthisratioshowstheproportionofdoubleroomsoccupiedbythe
guestsoutofthetotalroomsoccupied.
Illustration8
In Pamila Hotel, there are in all 170 lettable rooms. The hotel has single bed rooms as well as
double bed rooms. On 17th June, 2009, 160 rooms were occupied by 210 guests. Calculate the
doubleoccupancyratefortheday

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Solution
Totalno.ofguestsNo.ofroomsoccupiedx100
DoubleOccupancyRate=
No.ofroomsoccupied
=210160x10031.25%
160
Note:Thismayverifiedontheassumptionthat50doubleroomswereoccupiedbytheguests(100
guests)and110singleroomswereoccupiedbytheguests(110guests).Thusoutoftotalnumberof
roomsoccupied(160),theproportionofdoubleroomsoccupiedis31.25%(i.e.,50/160x100).Total
numberofdoubleroomsoccupiedisequaltototalnumberguestsminusno.ofguests.Itisinthis
waywegettheno.ofdoubleroomsoccupied.
Illustration9
On31stMarch,2010thefollowingbalancesappearedinthebooksoftheAlfaHotelsLtd.
Rs. Rs.
Interestondebentures 60,000 12%Mortgagedebentures5,00,000
RatesandTaxes 18,000 Sharecapital 40,00,000
Stockofprovisionson1.04.09 2,50,000 Generalreserve 5,00,000
Purchaseofprovisions 25,00,000 Unclaimeddividends 15,000
SalariesandWages 7,50,000 Provisionofbaddebts 50,000
ProvidentandContribution 30,000 Tradecreditors 2,50,000
Miscellaneousexpenses 50,000 Expensesowing 80,000
Directorsfees 24,000 Visitor'screditbalances 10,000
Managingdirector'ssalary 2,15,000 Staffprovidentfund7,50,000
Land 15,00,000 Incomefromboardingand
Buildings 50,00,000 lodging 51,00,000
Furnitureandfittings 15,00,000 Miscellaneousreceipts 65,000
Linen,crockery,glassware, Depreciationamount:
cutleryandutensils 3,20,000 Buildings 20,00,000
Sundrydebtors 3,50,000 Furnitureetc 10,00,000
Prepaidexpenses 25,000 Linen,crockeryetc 1,80,000
Advanceagainstpurchase P/LAccount 81,000
ofbuildings 15,00,000
Cashinhand 15,000
Balanceatbank 4,74,000
1,45,81,000 1,45,81,000
Aftertakingthefollowinginformationalsointoaccount,preparethecompany'sbalancesheetas
on31stMarch,2010anditsprofitandlossamountfortheyearended:

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(i) Stockofprovisionson31stMarch,2010wasvaluedatRs.3,00,000.
(ii) Provide Rs. 1,00,000 for depreciation of furniture and fittings; Rs. 20,000 for depreciation of
linen,crockery,glassware,etc.
(iii)Makeaprovisionfortaxation@35%
(iv)Thedirectorsdecidetorecommendadividend@10%onthepaidupcapitalofthecompany.
Makeaprovisionfordividendtax@10%oftheproposeddividendandtransfertheremaining
balanceinprofitandlossaccounttogeneralreserve.
(vi)The entire paid up share capital of the company consists of fully paid equity shares of Rs. 10
each.
Solution
AlfaHotelsLtd.
ProfitandLossAccount
fortheyearended31stMarch,2010
Rs. Rs.
ToStockofProvisions ByIncomefromBoarding
on1stApril,2009 2,50,000 andLodging 51,00,000
ToPurchasesofProvisions25,00,000 ByMiscellaneousReceipts65,000
ToSalariesandwages 7,50,000 ByStocksofProvisionson
ToProvidentFindContribution30,000 31stMarch,20103,00,000
ToRatesandTaxes 18,000
ToMiscellaneousExpenses 50,000
ToInterestonDebentures 60,000
ToDirectors'Fees 24,000
ToManagingDirector'sSalary2,15,000
ToDepreciationon:
FurnitureandFittings 1,00,000
Linen,Crockeryetc 20,000
ToProvisionforTaxation
@35% 5,06,800
ToNetProfitfortheyearc/d9,41,200
54,65,000 54,65,000
ToProposedDividend 4,00,000 ByBalanceb/f 81,000
ToProvisionfor ByNetProfitfortheyearb/d9,41,200
DividendTax@10% 40,000
ToGeneralReserveTransfer5,82,200
10,22,200 10,22,200

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BalanceSheetofAlfaHotelsLtd.ason31stMarch,2010
Liabilities Rs. Rs. Assets Rs.
ShareCapital FixedAssets
Authorized ? Land,cost 15,00,000
Issuedandsubscribed: Buildings,cost 50,00,000
4,00,000EquitySharesof Less:Depreciation20,00,00030,00,000
Rs.10each,fullypaidup 40,00,000 Furnitureand
ReservesandSurplus Fittings,cost 15,00,000
GeneralReserve: Less:Depreciation11,00,0004,00,000
Balanceasperlast Linen,Crocker
balancesheet 5,00,000 Glasswareetc.cost3,20,000
Add:Amount LessDepreciation2,00,000 1,20,000
addedthisyear5,82,200 10,82,200 CurrentAssets,
SecuredLoans LoansandAdvances
12%MortgageDebentures 5,00,000 (A)CurrentAssets
Stocks 3,00,000
CurrentLiabilities&Prov. Debtors 3,50,000
(A)CurrentLiabilities Less:Provisionfor
TradeCreditors 2,50,000 BadDebts 50,000 3,00,000
Visitors'CreditBalances 10,000 Cashinhand 15,000
Expensesowing 80,000 BalanceatBank 4,74,000
UnclaimedDividends 15,000 (B)LoansandAdvances
(B)Provisions PrepaidExpenses 25,000
ProvisionforTaxation 5,06,800 Advancesagainst
ProposedDividend 4,00,000purchaseofbuildings 15,00,000
DividendTax 40,000
StaffProvidentFund 7,50,000
76,34,000 76,34,000
Note: Since the hotel is a company, Balance Sheet has been prepared in the prescribed format given
in the Companies Act, 1956.

Illustration 10

Mr. A occupies a room in a hotel at 10 a.m. on 1st September 2009 on European Plan @ Rs. 1500
for a stay of every 24 hours or a part thereof. Calculate the amount payable by Mr. A in each one of
the following circumstances assuming that service charge is also payable @ 10%.
(a) If Mr. P checks out at 8 p.m. on 1st September 2009
(b) If Mr. P checks out at 8 a.m. on 2nd September 2009

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(c) If Mr. P checks out at 2 p.m. on 2nd September 2009

(d)IfMr.Pchecksoutat11p.m.on3rdSeptember2009
Solution
(a) AmountpayablebyMr.A Rs.
[email protected](Minimumguaranteed) 1500
Add:Servicecharges@10% 150
1650
(b) AmountpayablebyMr.A
[email protected] 1500
(Becausehisstayhasnotexceeded24hours)
Add:Servicecharge@10% 150
1650
(c) AmountpayablebyMr.A
[email protected] 3000
(Becausehisstayhasexceeded24hours)
Add:Servicecharge@10% 300
3300
(d) AmountpayablebyMr.,A
[email protected] 4500
(Stayhasexceeded48hoursbuthasnotexceeded72hours)
Add:Servicecharge@10% 450
4950
Illustration11
ShriPrabhuarrivesatawaysidehotelat2p.m.on15thFebruary2010,andaroomisletoutto
him on European Plan @ Rs. 400 for every night spent plus 10% service charge. Calculate the
amountpayablebyhimineachofthefollowingcircumstances:
(a) Ifhechecksoutat7p.m.on15thFebruary2010
(b)Ifhechecksoutat8a.m.on16thFebruary2010
(c)Ifhechecksoutat6p.m.on16thFebruary2010,and
(d)Ifhechecksoutat10a.m.on17thFebruary2010
Solution
AmountpayablebyMr.Prabhu Rs.
(a) [email protected] 400
(Hehastopaychargeforonenighteventhoughhehasnot
Spentasinglenight)
Add:Servicecharge@10% 40
440
(b) [email protected] 400

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(hehasspentonenightinthehotel)
Add:Servicecharge@10% 40
440
(c) [email protected] 400
(Hehasspentonlyonenightbecausehechecksout
Beforedinnerthenextday)
Add:Servicecharge@10% 40
440
(d) [email protected] 800
(Hehasspent2nights)
Add:Servicecharge@10% 80
880
Illustration12
The check out time of a hotel is 11 a.m. In that hotel, a guest checks in at 2 p.m. on 23rd
November2009hiringaroomonEuropeanPlan@Rs.2000perdayplusservicecharge@10%.You
arerequiredtocalculatetheamountpayablebyhimineachoneofthefollowingcases.
(a) Theguestchecksoutat8a.m.on24thNovember2009
(b)Theguestchecksoutat11a.m.on24thNovember2009
(c) Theguestchecksoutat2p.m.on24thNovember2009
(d)Theguestchecksoutat10a.m.on25thNovember2009
Solution
Fixedcheckouttimeis11a.m.andchecksintimeis2p.m.on23rdNovember09
(a) Checkoutat8a.m.onthenextday
Theguestwillbechargedforoneday Rs.
(Becausehehasnotstayedbeyondthecheckouttime
Followingthecheckintime) 2000
Add:Servicecharge@10% 200
2200
(b) Checkoutat11a.m.onthenextday
Theguestwillbechargedforoneday
(Becauseheleavesthehotelatthecheckouttimefollowing
thecheckintime) 2000
Add:Servicecharge@10% 200
2200
(c) Checkoutat2p.m.onthenextday
Theguestwillbechargedfortwodays 4000
(becausehehasstayedforonefulldayandapart)
Add:Servicecharges@10% 400

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4400
(d) Checkoutat10a.m.on25thNov.2009
Theguestwillbechargedfor2days
(hehasnotstayedbeyondthefixedcheckouttime) 4000
Add:Servicecharges@10% 400
4400
Illustration13
TheCochinHotelhas179roomsinall,outofwhich15roomsareusedforoperationalpurposes
and4roomsareoccupiedbythegeneralmanagerandthedepartmentalmanagers.If136rooms
areoccupiedbytheguestson27March2010,calculatetheroomoccupancyratefortheday.
Solution
Totalnumberofroomsinthehotel = 179
Numberoflettableroomsinthehotel =Total number of rooms number of rooms
usedforoperationalpurposesnumberofroomsoccupied
bythemanagersofthehotel
= 179154=160
Numberofroomsoccupiedbytheguests=136
Numberofroomsoccupiedbytheguestsx100
RoomOccupancyRate=
Numberoflettableroomsinthehotel
=136x100=85%
160

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