Unit – 5
Double Account System
The double account system is a method of presenting the annual final accounts / annual financial statements of public utility undertakings, like Railways, electricity, gas, water supply, tramways, etc. These undertakings are usually incorporated under special acts and as a result the form of accounts is prescribed by special statute.
Please note that, in India, the accounts of all industrial undertakings, other than Railways and Electric Supply Companies,are prepared as per the Companies Act, 2013.
OBJECTS:
The object of this system is not to show the financial position at a particular date, but to disclose how the capital is being raised and the application of the same, in the acquisition of different fixed assets.
FEATURES:
The main features of double account system are -
1. A public utility undertaking needs a large amount of capital which is invested to purchase fixed assets. So, for fixed assets, fixed liabilities, current assets and current liabilities are to be separately dealt with. Fixed Assets and Fixed Liabilities are recorded in Receipts and Expenditure on Capital Account. Similarly, Current Assets and Current Liabilities are recorded in the General Balance Sheet.
2. Revenue Account is prepared instead of Profit and Loss Account and Net Revenue Account is prepared instead of Profit and Loss Appropriation Account.
3. Normally, no adjustment of assets is made in the Capital Account.
4. Depreciation is not deducted from the Asset, but the same is shown as a liability by way of Fund and as such fixed assets are recorded at book value.
ADVANTAGES and DISADVANTAGES:
The advantages of double account system are -
1. As depreciation fund is compulsorily created and invested in outside the business, it helps to replace an asset without affecting the liquid resources like Cash of the business.
2. The Capital Account helps us to understand the sources of capital in various forms and its utilization in the form of various fixed assets. Thus it can easily be understood by an ordinary person.
Disadvantages of double account system are –
1. Capital Account incorporates the value of an asset, irrespective of its remaining age; which may be very short too. Those assets may realise only scrap value although these are shown at a higher value.
2. Proper distinction between Revenue Expenditure and Capital Expenditure is not possible under the system.
Q 1) Prepare Receipts and Expenditure on Capital A/c, Revenue A/c, Net Revenue A/c and Balance Sheet from the following Trial Balance. Call of Rs. 20 per share was payable on 30th September, 2011 and arrears are subject to interest @ 15% p.a. Provide Depreciation on Building @ 5%, Machinery @ 15%, Mains 20%, Transformers @ 10% and Meters and Electrical Instrument @15%.
Trial Balance in the books of Dynamo Electric Lighting Co. Ltd as on 31.3.12
Amount on 31.3.2011 | Particulars | Debit | Credit |
20,00,000 15,00,000 6,00,000
9,30,000 4,00,000 6,00,000 5,00,000 1,00,000 50,000 30,000 1,60,000 25,000 | Authorised Capital 50,000 Shares of Rs. 100 each Subscribed Capital 25,000 Shares of Rs. 100 each 14% Debentures Provision for Depreciation Calls in Arrears Freehold Land Buildings Machinery at Station Mains Transformers Meters Electric Instruments General Stores (Cables, Mains, Meters) Office Furniture Coal and Fuel Oil, Waste and Engine room stores Coal, Oil and Waste in Stock Wages at Station Repairs and Replacement Rates and Taxes Salaries of Secretary and Manager Director’s Fees Stationery, Printing and Advertising Law and Incidental Expenses Sale by Meter Sale by Contract Meter Rents Sundry Creditors Sundry Debtors Cash in Hand and at Bank Contingencies Reserve |
- - - 1,00,000 9,30,000 5,00,000 10,00,000 8,00,000 2,00,000 1,50,000 40,000 2,35,000 25,000 1,90,000 75,000 10,000 3,00,000 50,000 30,000 1,50,000 1,00,000 60,000 30,000 - - - - 5,50,000 8,30,000 - |
25,00,000 15,00,000 6,00,000
9,75,000 5,00,000 30,000 1,00,000
1,50,000 |
|
| 63,55,000 | 63,55,000 |
Solution: Receipts and Expenditure on Capital A/c for the year ended 31st March, 2012
Expenditure | Expenses Upto 31.3.11 | Expenses During the Year | Total | Receipts | Receipts Upto 31.3.11 | Receipts During the Year | Total |
To Freehold Land To Building To Machinery at Station To Mains To Transformers To Meters To General Stores To Electrical Instruments To Office Furniture TOTAL To Balance of Capital Account |
9,30,000 4,00,000
6,00,000 5,00,000
1,00,000 50,000
1,60,000
30,000
25,000 27,95,000
- |
1,00,000
4,00,000 3,00,000
1,00,000 1,00,000
75,000
10,000
10,85,000
- |
9,30,000 5,00,000
10,00,000 8,00,000
2,00,000 1,50,000
2,35,000
40,000
25,000 38,80,000
20,000 | By Share Capital
By 14% Debentures |
20,00,000
15,00,000 |
4,00,000 (NOTE 1)
- |
24,00,000
15,00,000 |
| 27,95,000 | 10,85,000 | 39,00,000 |
| 27,95,000 | 10,85,000 | 39,00,000 |
NOTE 1 – Calls in Arrears have been deducted
Revenue Account for the year ended 31st March, 2012
A. Generation To Coal and Fuel To Oil, Waste And Engine room Stores To Wages at Station To Repairs and Replacement
B. Distribution
C. Public Lamps
D. Rent, Rates and Taxes To Rates and Taxes
E. Management Expenses To Director’s Fee To Secretary’s And Manager’s Salaries To Stationery, Printing and Advertising To Law and Incidental Charges
G. Depreciation (NOTE 2) Depreciation on Buildings Machinery Mains Transformers Meters Electrical Instruments
To Balance c/d to. Net Revenue A/c |
1,90,000
75,000
3,00,000
50,000
1,00,000
1,50,000
60,000
30,000
22,500 1,20,000 65,000 30,000 15,000
5,250
|
6,15,000
-
-
30,000
3,40,000
2,57,500
2,62,250 | By Sale of Energy For Lighting Purposes By Sale of Energy For Power Purposes By Sale of Energy By Contract By Meter Rent |
|
9,75,000
5,00,000 30,000 |
|
| 15,05,000 |
|
|
|
NOTE 2: Depreciation on Additions is charged for 6 months.
Net Revenue Account
Particulars | Amount | Particulars | Amount |
To Outstanding Interest on Debentures To Transfer to Contingencies Reserve To Balance c/d |
2,10,000
19,400 40,350 | By Balance from Last account By Balance brought From Revenue A/c By Interest due on Calls in Arrears (on 1,00,000 @ 15% For 6 months) |
-
2,62,250
7,500 |
| 2,69,750 |
| 2,69,750 |
General Balance Sheet
Liabilities | Amount | Assets | Amount |
Capital A/c: Amount Received Sundry Creditors onOpen Accounts Contingencies Reserve
Net Revenue A/c – Balance Provision for Depreciation: Balance as per last Balance Sheet 6,00,000 Addition during the Year 2,57,750 Outstanding Interest on Debentures | 39,00,000
1,00,000 1,69,400
40,350
8,57,750
2,10,000 | Capital A/c: Amount expended For Works Stores in Hand Sundry Debtors
Interest Due on Calls in Arrears Cash in Hand and Cash at Bank |
38,80,000 10,000 5,50,000
7,500 8,30,000 |
|
|
|
|
Depreciation:
Depreciation means the reduction in the value of an asset due to its use, leading its wear and tear, or due to obsolescence or due to general market trend. The prescribed rules state that the amount of depreciation of a depreciable asset must be allocated in every accounting period throughout the life of the asset.
Depreciable assets are those assets that are used for the purpose of business which can be depreciated. That is, the value of the asset is considered as a business expense over the useful life of the asset. A company can depreciate most of the tangible assets like Building, Machinery, Vehicles, Furniture and Fixtures, Computers and Equipment and intangible assets like Patents, Copyrights and Computer Software.
Purposes of Providing Depreciation:
NOTE: The methods of Depreciation are explained later in 3.3 of this Chapter.
Reserves:
Different types of Reserves:
There are broadly three types of Reserves – Capital Reserves, Revenue Reserves ad Statutory Reserves.
Capital Reserve:
A capital reserve is taken out of the capital profit and is not shared as a dividend to the shareholder. This reserve cannot be created out of the profit earned from the core operation.
Few examples of capital reserves are:
1) Cash received by selling current assets
2) Premium earned on the issue of share and debentures
3) Excess on revaluation of assets and liabilities
Revenue Reserve:
Revenue reserve is a portion of profit owned by the company and is kept aside for the use of other multiple purposes. This reserve is recorded in the profit and loss account and can be used the following way:
1) Dividend to shareholder
2) Expand the business
3) Stabilise the dividend rate
In other words, Revenue reserves are portions of profits earned by a company’s normal operations which are then set aside.
Revenue reserves are divided into two types:
1) General Reserve and
2) Specific Reserve
Provisions:
A provision is an amount that is set aside from a company’s profits, usually to cover an expected liability; the specific amount of the same might be unknown at present times.
In other words, a provision should not be understood as a form of savings, instead, it is recognition of an upcoming liability, in advance.
Types of Provisions in Accounting:
The most common type of provision is a provision for bad debt. A provision for bad debt is one that has been calculated to cover the debts during an accounting period that is not ‘expected’ to be paid.
The Other common kinds of provisions in accounting include:
Provision for depreciation, Provision for bad and doubtful debts, Provision for taxation, Provision for discount on debtors, Provision for repairs and renewals, etc.
Accounting Treatment for Depreciation:
Treatment of Depreciation is dealt in another section, before solving practical questions.
Accounting Treatment for Reserves:
The accounting treatment of all types of reserves is similar.For creating a reserve, the following journal entry is passed:
Capital A/c Dr.
To ___________ Reserve A/c
Accounting Treatment for Provisions:
The accounting treatment of all types of provisions is similar.For creating a provision for doubtful debts, the following journal entry is passed:
Profit and Loss A/c Dr.
To Provision for _________ A/c
To conclude, certain expenses/losses which are related to the current accounting period but amount of which is not known with certainty at present, because they are not yet incurred.
Methods:
Depreciation is allowable as expense in Income Tax Act, 1961 on basis of block of assets on Written Down Value (WDV) method. Depreciation on Straight Line Method (SLM) is not allowed.
Companies Act prescribes two methods for calculating depreciation:
- Straight Line Method (SLM) and
- Written Down Value Method (WDV)
Straight Line Method (SLM):
Straight line basis is calculated by dividing the difference between an asset's cost and its expected salvage value by the number of years it is expected to be used.
In other words, to calculate depreciation on straight line basis, company take the purchase price of an asset and then subtract the salvage value, its estimated sell on value when it is no longer expected to be needed. The resulting figure is then divided by the total number of years the asset is expected to be useful, referred to as the useful life.
Symbolically, the formula is –
Depreciation on Straight Line Basis = Purchase Price of Asset - Salvage Value
Estimated Useful Life of Asset
Written Down Value Method (WDV):
Under this method, the depreciation is calculated at a certain fixed percentage each year on the decreasing book value commonly known as WDV of the asset
WDV is calculated as Book value less Depreciation.
It is also known as Reducing Balance or Reducing Instalment Method or Diminishing Balance Method.
Q 1) On April 1, 2010, Bajrang Marbles purchased a machine for Rs. 2,80,000 and spent Rs. 10,000 for its carriage and Rs. 10,000 on its installation. Its working life is estimated at 10 years and scrap value Rs. 20,000.
Prepare Machinery A/c and Depreciation A/c for first 2 years by providing Depreciation on SLM basis.
Solution:
WN 1 - Cost of the asset = Purchase Price + Expenses which were incurred to bring the asset at such place of its use (Transport) + Expenses incurred to bring it into its present condition to use it
Therefore, Cost = 2,80,000 + 10,000 +10,000 = 3,00,000
WN 2 - Depreciation = [Cost – Residual Value (Scrap)] / Life (in years)
Therefore, Depreciation = (3,00,000 – 20000) / 10 = 28,000/-
In the Books of Bajrang Marbles
Machinery A/c
Date | Particulars | JF | Amount | Date | Particulars | JF | Amount |
2010-11 Apr 1 |
To Bank A/c To Bank A/c To Bank A/c |
|
2,80,000 10,000 10,000 | 2010-11 Mar 31
Mar 31 |
By Depreciation
By Balance c/d |
|
28,000
2,72,000 |
|
|
| 3,00,000 |
|
|
| 3,00,000 |
2011-12 Apr 1 |
To Balance b/d |
|
2,72,000 |
2011-12 Mar 31 Mar 31 |
By Depreciation By Balance c/d |
|
28,000 2,44,000 |
|
|
| 2,72,000 |
|
|
| 2,72,000 |
Depreciation A/c
Date | Particulars | JF | Amount | Date | Particulars | JF | Amount |
2010-11 Mar 31 |
To Machinery A/c |
|
28,000 | 2010-11 Mar 31 |
By Profit and Loss A/c
|
|
28,000
|
|
|
| 28,000 |
|
|
| 28,000 |
2011-12 Mar 31 |
To Machinery A/c |
|
28,000 |
2011-12 Mar 31
|
By Profit and Loss A/c |
|
28,000
|
|
|
| 28,000 |
|
|
| 28,000 |
Q 2) P and Sons, Patna made Furniture on 1st Oct, 2015. They spent 72,000 on Materials and 32,000 on Wages. Estimated life of the asset is 10 years and scrap value would be Rs. 24,000. They sold entire furniture for Rs. 80,000 on 1st Oct, 2017. Show Furniture A/c for first 3 years and Depreciation A/c for only 3rd year.
Solution: In the Books of P and Sons
Furniture A/c
Date | Particulars | JF | Amount | Date | Particulars | JF | Amount |
2015-16 Oct 1 |
To Bank A/c (72000 + 32000) |
|
1,04,000 | 2015-16 Mar 31
Mar 31 |
By Depreciation
By Balance c/d |
|
4,000
1,00,000 |
|
|
| 1,04,000 |
|
|
| 1,04,000 |
2016-17 Apr 1 |
To Balance b/d |
|
1,00,000 |
2016-17 Mar 31 Mar 31 |
By Depreciation By Balance c/d |
|
8,000 92,000 |
|
|
| 1,00,000 |
|
|
| 1,00,000 |
2017-18 Apr 1
|
To Balance b/d
|
|
92,000 | 2017-18 Oct 31
Oct 31 Oct 31 |
By Depreciation A/c By Bank A/c To Loss on Sale of Asset A/c |
|
4,000
80,000
8,000 |
|
|
| 92,000 |
|
|
| 92,000 |
Depreciation A/c
Date | Particulars | JF | Amount | Date | Particulars | JF | Amount |
2017-18 Oct 31 |
To Machinery A/c
|
|
4,000 | 2017-18 Mar 31 |
By Profit and Loss A/c
|
|
4,000
|
|
|
| 4,000 |
|
|
| 4,000 |
NOTE FOR STUDENTS: (NOT TO MENTION IN EXAM)
Profit on Sale is debited in Asset A/c; while Loss is credited.
Depreciation though charged at the sale of the asset, it will be transferred to Profit and Loss A/c only at the end of the year.
Q 3) Sangam Trading Company, Darbhanga purchased Vehicle on 1st April 2016 costing 85000 and spent 5000 on its registration. On 30th September 2016 additional vehicle is purchased for 10000.
On 31st March 2018 a Vehicle was sold for 12000; the original cost of which was Rs. 20000 on 1st April 2016.
Prepare Vehicle A/c for the year 2016-17, 2017-18 and 2018-19assuming that vehicle is depreciated at 10% per annum on diminishing balance method on 31st March every year.
Solution: In the books of Sangam Trading Co.
Vehicle A/c
Date | Particulars | JF | Amount | Date | Particulars | JF | Amount |
2016-17 Apr 1
Sep 1 |
To Bank A/c (85,000+5,000) To Bank A/c |
|
90,000
10,000 | 2016-17 Mar 31
Mar 31 |
By Depreciation A/c (9,000+500) By Balance c/d |
|
9,500
90,500 |
|
|
| 1,00,000 |
|
|
| 1,00,000 |
2017-18 Apr 1 |
To Balance b/d |
|
90,500 |
2017-18 Mar 31
Mar 31
Mar 31
Mar 31
Mar 31 |
By Depreciation A/c (on asset sold) By Bank A/c (asset sold) By Loss on Sale of Vehicle A/c By Depreciation A/c (Assets hold) By Balance c/d |
|
1,800
12,000
4,200
7,250
65,250 |
|
|
| 90,500 |
|
|
| 90,500 |
2018-19 Apr 1
|
To Balance b/d
|
|
65,250 | 2018-19 Mar 31
Mar 31 |
By Depreciation A/c
By Balance c/d |
|
6,525
58,725 |
|
|
| 65,250 |
|
|
| 65,250 |
W.N. 1)
Particulars | Asset 1 | Asset 2 | Asset 3 | Total |
2016-17 1. Cost Date of Purchase 2. Depreciation |
20,000 1.4.16 2,000 (20,000 x 10/100) |
70,000 1.4.16 7,000 (70,000 x 10/100) |
10,000 30.9.16 500 (10,000 x 10/100 x 6/12) |
9,500 |
2017-18 3. Op. Balance - WDV on 1.4.17 (1 – 2) 4. Depreciation |
18,000
1,800 |
63,000
6,300 |
9,500
950 |
9,050 |
2018-19 5. Op. Balance - WDV on 1.4.18 (3 – 4) (-) Sold for LOSS ON SALE 6. Depreciation |
16,200
12,000 4,200 NIL (asset sold) |
56,700
5,670 |
8,550
855 |
6,525 |