3.1 Hire Purchase System Installment Payment System | unit 3 hire purchase system

UNIT III

Branch accounts and Departmental accounts

3.1 Hire Purchase System, Installment Payment System

Meaning of Hire Purchase System

If you purchase a TV for cash, you pay, say, Rs. 15,000. But if you wish to make the payment by instalments of say, Rs. 3,000 each, every year, you may be required to pay four instalments, that is Rs. 20,000 in all. The extra amount of Rs. 3,000 is for interest. If you choose the latter mode of the payment, you should debit Rs. 5,000 to interest and treat the TV as valued at Rs. 15,000 (and not at Rs. 20,000). In case payment is to be made by instalments, there may be two kinds of arrangements. Each instalment may be treated as a ‘hire’ the purchaser becoming the owner only if he pays all the instalments. In other words, property does not pass to him even if one instalment remains unpaid. The seller will have the right to take away the goods in case of default in respect of any instalment. This is known as ‘Hire Purchase’ system.

The other arrangement may be that property passes immediately on the signing of the contract. The seller will not have the right to repossess the goods in case an instalment is not paid. His right will be to sue the purchaser for the money due. This is known as the Instalment System.

Interest

Interest: In either case (hire purchase or instalment) interest must be separated from the principal sum due. Since payments continue over two or more financial year’s interest must be calculated for each year separately. Usually information is available regarding cash price and the rate of interest. Calculation of interest then becomes easy. Just prepare the account of one of the parties on ordinary lines and charge interest on the balance due. Suppose on 1st January, 2000 A purchases from B machinery whose cash price is Rs. 15,000; Rs. 5,000 is to be paid down, that is on signing of the contract, and Rs.4,000 is to be paid at the end of each year for 3 years. Rate of interest is 10% p.a. If we prepare B’s account (on a memorandum basis) in A’s books, we shall know the interest for each year.

A’s Books

Dr.			B’s Account		Cr.
		Rs.			Rs.
2000			2000
Jan.1	To Cash	5,000	Jan.1	By Machinery A/c	15,000
Dec.31	To Cash	4,000	Dec.31	By Interest A/c	1,000
’’	To balance c/d	7,000		(10% on Rs. 10,000)
		16,000			16,000
2001			2001
Dec.31	To Cash	4,000	Jan.1	By Balance b/d	7,000
	To Balance c/d	3,700	Dec.31	By Interest A/c
				(10% on Rs. 7,000)	700
		7,700			7,700
2002			2002
Dec.31	To Cash	4,000	Jan.1	By Balance b/d	3,700
			Dec.31	By Interest A/c*	300
		4,000			4,000

* As it is the last year of installment, interest amount will be the difference between the Outstanding balance and the actual amount of installment. [Students should note that if you calculate interest for the last year as per the given percentage on the O/S amount (3700 x 10%=370), total amount payable becomes (3700+370=4070) which is greater than the installment paid. So there will be again Rs. 70 payable even after the last installment being paid.]

If the rate of interest is not given, the interest for each year will be in proportion to amount outstanding in each year. In the example given above, the total sum payable is Rs. 17,000 out of which Rs. 5,000 is paid immediately. This leaves Rs. 12,000 as outstanding throughout the first year at the end of which Rs. 4,000 is paid. In the second year Rs. 8,000 is outstanding and in the third year Rs. 4,000 is due. The total interest is Rs. 2,000. i.e., Rs. 17,000. minus Rs. 15,000. The interest should be apportioned over the 3 years in the ratio of amounts outstanding, that Rs. 12,000; Rs. 8,000 and Rs. 4,000 or in the ratio of 3 : 2 :1. The interest for the first year is Rs.1,000 : for the second year it is Rs.670 and for the third year it is Rs.333. Note that the amount cannot be the same as worked out when the rate of interest is given.

To ascertain Cash Price, rate of interest and instalments being given. Sometimes the cash price is not given. Since the asset cannot be debited with more than the cash price, it must be ascertained. The process is to take the last year first and separate interest from principal out of the total sum due. In the example given above, Rs. 4,000 is due at the end of 2002. The rate of interest is 10%. If in the beginning of 2001 Rs.100 was due, Rs.10 would be added making Rs.110 as due at the end of 2002. Thus, out of the sum due at the end of the year, one-eleventh is interest; rest is principal. We can proceed year by year like this.

Thus: —

	Rs.
Amount due on 31-12-2001	4,000
Interest @ 1/11	364
Amount due on 1-1-2002 or 31-12-2001	3,636
Paid on 31-12-2001	4,000
Total amount due on 31-12-2001	7,636
Interest @ 1/11	694
Amount due on 1-1-96 or 31-12-2000	6,942
Paid on 31-12-2000	4,000
Total amount due on 31-12-2000	10,942
Interest @ 1/11	995
Amount due on 1-1-2000	9,947
Paid Cash down on 1-1-2000	5,000
Cash Price	14,947
The interest for three years is Rs.995, Rs.694 and Rs.364 respectively.

Entries in Book: Actual Cash Price Paid Method

This method follows a technical approach and does not treat the hire purchaser as owner until he makes the payment of last instalment. Under this method, the asset is recorded at the cash price actually paid.

* In the last year, the interest is equal to the difference between the amount due and the opening balance. It is not calculated in the usual way.

Journal Entries Under Actual Cash Price Paid Method

The various accounting entries in the books of the hire purchaser and hire vendor are shown below-

Journal Entries Under Actual Cash Price Paid Method

	Case	In the Books of Hire Purchaser		In the Books of Hire Vendor		Amount with which debited or credited

A.	On making down payment due	Asset A/c To Hire Vendor’s A/c	Dr.	Hire Purchaser’s A/c Dr. To Hire Purchase Sales A/c		(With the amount of down payment)
B.	On making Down Payment	Hire Vendor’s A/c To Bank A/c	Dr.	Bank A/c To Hire Purchaser’s A/c	Dr.	(With the amount of down payment)
C.	On making principal part of the instalment due	Asset A/c To Hire Vendor’s A/c	Dr.	Hire Purchaser’s A/c To Hire Purchase Sales A/c	Dr.	(With the amount of principal part of the instalment)
D.	On making interest due on unpaid balance	Interest A/c To Hire Vendor’s A/c	Dr.	Hire Purchaser’s A/c To Interest A/c	Dr.	(With the interest due on unpaid balance)
E.	On making payment of instalment	To Hire Vendor’s A/c To Bank A/c	Dr.	Bank A/c To Hire Purchaser’s A/c	Dr.	(With the amount of instalment)
F.	On providing Depreciation	Depreciation A/c To Asset A/c	Dr.	No Entry		(With the amount of (depreciation)
G.	On closure of Depreciation A/c	Profit & Loss A/c To Depreciation A/c	Dr.	No entry		(With the amount of depreciation)
H.	On closure of Interest A/c	Profit & Loss A/c To Interest A/c	Dr.	Interest A/c To Profit & Loss A/c	Dr.	(With the amount of interests)

Note: Depreciation is charged on full cash price of the asset and Interest is calculated on total outstanding balance.

Disclosure in Balance Sheet Under Actual Cash Price Paid Method

At the end each accounting period, the relevant accounts appear in the Balance Sheet as shown below:

Disclosure In Balance Sheet Under Actual Cash Price Paid Method

Balance Sheet of Hire Purchaser			Balance Sheet of Hire Vendor
Liabilities	Rs. Assets	Rs.	Liabilities	Rs. Assets	Rs.
	Fixed Assets :
	Asset (at actual cash)			No disclosure is
	price paid)	xxx		required
	Less : Depreciation till date	xxx
		xxx

Hire Purchase: Books of the Vendor

Books of the Vendor: The vendor follows no special method for recording sales on hire purchase, especially in case of sale of large items. He debits the purchaser with the cash price and credits him with the amount received. Every year the interest due is debited. We illustrate this below.

Illustration-1

Based on particulars given below calculate Interest under the hire purchase system

X & Co.—purchaser Y & Co.-Seller Date of purchase—Jan. 1, 1999

cash price—Rs. 74,500.

Installments Rs. 20,000 on signing of the agreement. Rest in three instalments of Rs. 20,000 each. Rate of Interest—5%. Depreciation 10% on the diminishing Balance.

2. All particulars as above except that the rate of interest is not given.

3. All particulars as in (1.) above except that the cash price is not given.

Solution :

Calculation of Interest
		Rs.
Jan.1, 1999	Cash Price	74,500
	Less-Cash down	20,000
	Balance Due	54,500
	Interest @ 5% for 1999	2,725
Dec.31, 1999	Total	57,225
	Amount paid	20,000
Jan.1, 2000	Balance Due	37,225
	Interest for 2000 @ 5%	1,861
Dec.31, 2000	Total	39,086
	Amount paid	20,000
Jan.1,2001	Balance due 2001	19,086
	Interest for (balancing figure) 2001	914
Jan.1,2002	Amount paid	20,000

2. Calculation of interest when the rate of interest is not given :

Hire Purchase Price				80,000
Cash Price				74,500
Total interest				5,500

Year	Amount Outstanding	Ratio	Interest	Rs.
1	60,000	3	3/6 x 5,500	2,750
2	40,000	2	2/6 x 5,500	1,833
3	20,000	1	1/6 x 5,500	917

3. Calculation of cash price, rate of interest being given:

Instalment	Amount due at the end of the year (after payment of Installment)	Instalment paid	Total amount due at the end of the Year (before payment of instalment)		Interest @ 1/21	Principal due in the beginning
	Rs.	Rs.		Rs.	Rs.	Rs.
3	Nil	20,000		20,000	952	19,408
2	19,048	20,000		39,048	1,859	37,189
1	37,189	20,000		57,189	2,723	54,466
					5,534

Cash Price: 54,466 + cash down, Rs. 20,000 or Rs. 74,466.

Illustration-2

Y & Co. sold machinery whose cash price is Rs. 74,500. to X and Co., on hire purchase basis on 1st January, 2000. Payment was to be made as Rs. 20,000 down and Rs. 20,000 every year for three years. Rate of interest was 5% & Co. charged depreciation @ 10% p.a. on the diminishing balance. Give ledger accounts in the books of Y & Co.

Ledger of Y & Co.
Dr.			X & Co.		Cr.
		Rs.			Rs.
2000			2000
Jan.1	To Sales	74,500	Jan.1	By Cash	20,000
Dec.31	To Interest A/c		Dec.31	By Cash	20,000
	(5% on Rs. 54,500)	2,725		By Balance c/d	37,225
		77,225			77,225
2001			2001
Jan.1	To Balance b/d	37,225	Dec.31	By Cash	20,000
Dec.31	To Interest A/c	1,861		By Balance c/d	19,086
		39,086			39,086
2002			2002
Jan.1	To Balance b/d	19,086	Dec.31	By Cash	20,000
Dec.31	To Interest A/c	914
		20,000			20,000

Dr.	Sales Account			Cr.
		2000
		Jan. 1	By X & Co.	Rs. 15,000.
Interest Account
Dr.				Cr.
2000		2000
Dec.31 to P & L A/c	2,725	Dec.31	By X & Co.	2,725
2001		2001
Dec.31 to P & L A/c	1,861	Dec.31	By X & Co.	1,861
2002		2002
Dec.31 to P & L A/c	914	Dec.31	By X & Co.	914

Hire Purchase: Books of Purchaser

Books of Purchaser—First Method. The purchaser can also follow the system adopted by the vendor and make entries like ordinary purchase of an asset. Only, he should credit the vendor with interest due every year and debit him with cash as and when paid. The above given example can be worked out in the following way (ledger accounts.) :—

Dr.		Machinery account			Cr.
		Rs.			Rs.
2000			2000
Jan.1	To Y & Co.	74,500	Dec.31	By Depreciation A/c	7,450
				By Balance c/d	67,050
		74,500			74,500
2001			2001
Jan.1	To Balance b/d	67,050	Dec.31	By Depreciation A/c	6,705
				By Balance c/d	60,345
		67,050			67,050
2002			2002
Jan.1	To Balance b/d	60,345	Dec.31	By Depreciation A/c	6,035
				By Balance c/d	54,310
		60,345			60,345
2003
Jan.1	To Balance b/d	54,310

Y & Co. A/c
2000		Rs.	2000		Rs.
Jan.31	To bank A/c	20,000	Jan.1	By Machinery A/c	74,500
Dec.31	To Bank A/c	20,000	Dec.31	By Interest A/c	2,725
’’	To Balance c/d	37,225
		77,225			77,225
2001			2001
Dec.31	To Bank A/c	20,000	Jan.1	By Balance b/d	37,225
’’	To balance c/d	19,086	Dec.31	By Interest A/c	1,861
		39,086			39,086
2002 Dec.31	To Bank A/c	20,000	2002 Jan.1	By Balance b/d	19,086
			Dec.31	By Interest A/c	914
		20,000			20,000

The student should prepare accounts relating to Interest and Depreciation.

Second Method. Under the second method, entries are passed only when payment is due or made. At this time, the vendor is credited with the amount due. Interest for the period is debited to interest Account and the balance (principal) is debited to the Asset Account. On payment, of course, the vendor is debited and Cash (or Bank) credited. The two entries are:

Debit Asset Account, Debit Interest Account, Credit (hire) Vendor

Debit (Hire) Vendor, Credit Cash or (Bank)

Depreciation has to be charged according to the cash price of the asset

We give below the journal entries and ledger accounts in the books of X & Co., the purchaser, in the example given above.

Journal of X & Co.

			Debit (Rs)	Credit (Rs)
2000
Jan.1	Machinery Account	Dr.	20,000
	To Y & Co.		20,000
	(Amount due to Y & Co. as down payment for purchase of machinery on hire purchase basis.)

Jan.1	Y & Co.	Dr.	20,000
	To Bank Account		20,000
	(Payment made to Y & Co. down)

Dec.31	Machinery Account	Dr.	17,275
	Interest Account	Dr.	2,725
	To Y & Co.		20,000
	(The amount due to Y & Co. under the hire purchase Contract for interest (and debited as such) and the balance treated as payment for machinery)

Dec.31	Y & Co.	Dr.	20,000
	To Bank A/c		20,000
	(Payment made to Y & Co.)

Dec.31	Depreciation Account	Dr.	7,450
	To Machinery Account		7,450
	(Depreciation for 1st year-10% on Rs.74,500)

Dec 31	Profit & Loss Account	Dr.	10,175
	To Interest Account		2,725
	To Depreciation Account		7,450
	(Being interest and depreciation transferred to P/L A/c)
2001
Dec.31	Machinery Account	Dr.	18,139
	Interest Account	Dr.	1,861
	To Y & Co.		20,000
	(Amount due to Y & Co. for interest the balance charged to Machinery A/c.)

Dec.31	Y & Co.	Dr.	20,000
	To Bank Account		20,000
	(Payment made to Y & Co.)

Dec. 31	Depreciation	Dr.	6,705
	To Machinery Account		6,705
	(Depreciation for the second year 10% on Rs. 67,050; i.e. Rs. 74,500 - Rs. 7,450).

Dec 31	Profit & Loss Account	Dr.	8,566
	To Interest Account		1,861
	To Depreciation Account		6,705
	(Being interest and depreciation transferred to P/L A/c)
2002
Dec.31	Machinery Account	Dr.	19,086
	Interest Account	Dr.	914
	To Y & Co.		20,000
	(Amount due to Y & Co. in respect of interest and the principal sum.)

Dec.31	Y & Co.	Dr.	20,000
	To Bank Account		20,000
	(Payment made to Y & Co.)

Dec.31	Depreciation Account	Dr.	6,035
	To Machinery Account		6,035
	(Depreciation @ 10% of the diminishing balance charged for the third years).

Dec 31	Profit & Loss Account	Dr.	6,949
	To Interest Account		914
	To Depreciation Account		6,035
	(Being interest and depreciation transferred to P/L A/c)

Ledger Accounts
Dr.		Machinery Account			Cr.
2000		Rs.	2000		Rs.
Jan.1	To Y & Co.	20,000	Dec.31	By Depreciation	7,450
Dec.31	To Y & Co.		Dec.31	By Balance c/d	29,825
	(20,000—2,725)	17,275
		37,275			37,275
2001			2001
Jan.1	To balance b/d	29,825	Dec.31	By Depreciation A/c	6,705
Dec.31	To Y & Co.		Dec.31	By Balance c/d	41,259
	(20,000—1,861)	18,139
		47,964			47,964
2002			2002
Jan.1	To Balance b/d	41,259	Dec.31	By Depreciation A/c	6,035
Dec.31	To Y & Co.	19,086	Dec.31	By Balance c/d	54,310
		60,345			60,345
2003
Jan.1	To Balance b/d	54,310

Dr.		Interest Account			Cr.
2000		Rs.	2000		Rs.
Dec.31	To Y & Co.	2,725	Dec.31	By P & L A/c	2,725
2001			2001
Dec.31	To Y & Co.	1,861	Dec.31	By P & L A/c	1,861
2002			2002
Dec.31	To Y & Co.	914	Dec.31	By P & L A/c	914

Dr.			Y & Co.			Cr.
2000		Rs.		2000		Rs.
Jan.1	To Bank A/c	20,000	Jan.1	By Machinery A/c		20,000
Dec.31	To Bank A/c	20,000	Dec.31	By Sundries—
				Machinery	17,275
				Interest	2,725	20,000
		40,000			40,000
2001			2001
Dec.31	To Bank A/c	20,000	Dec.31	By Machinery A/c		18,139
				By Interest A/c	1,861
		20,000			20,000
2002			2002
Dec.31	To Bank A/c	20,000	Dec.31	By Machinery A/c		19,086
				By Interest A/c	914
		20,000			20,000

Depreciation Account

2000		Rs.	2000		Rs.
Dec.31	To Machinery A/c	7,450	Dec.31	By P & L A/c	7,450
2001		2001
Dec.31	To machinery A/c	6,705	Dec.31	By P & L A/c	6,705
2002		2002
Dec.31	To Machinery A/c	6,035	Dec.31	By P & L A/c	6,035

Summary

Hire Purchase: Property does not pass to him even if one instalment remains unpaid. The seller will have the right to take away the goods in case of default in respect of any instalment. This is known as ‘Hire Purchase’ system. The other arrangement may be that property passes immediately on the signing of the contract. The seller will not have the right to repossess the goods in case an instalment is not paid. His right will be to sue the purchaser for the money due. This is known as the Instalment System.

Entries In Books : Actual Cash Price Paid Method : This method follows a technical approach and does not treat the hire purchaser as owner until he makes the payment of last instalment. Under this method, the asset is recorded at the cash price actually paid.

Books of the Vendor. The vendor follows no special method for recording sales on hire purchase, specially in case of sale of large items. He debits the purchaser with the cash price and credits him with the amount received. Every year the interest due is debited.

Books of Purchaser

-First Method. The purchaser can also follow the system adopted by the vendor and make entries like ordinary purchase of an asset. Only, he should credit the vendor with interest due every year and debit him with cash as and when paid. The above given example can be worked out in the following way (ledger accounts.) :—

-Second Method. Under the second method, entries are passed only when payment is due or made. At this time, the vendor is credited with the amount due. Interest for the period is debited to interest Account and the balance (principal) is debited to the Asset Account. On payment, of course, the vendor is debited and Cash (or Bank) credited.

Key takeaways:

Employment purchase contracts are not considered an extension of credit.

Employment purchase contracts do not transfer ownership to the purchaser until all payments have been made.

Employment purchase contracts have usually proven to cost more in the long run than purchasing the item in full.

A down payment is a payment made as part of a large purchase in the early stages of financing.

The higher the down payment, the less interest you pay for the rest of the loan.

Lenders may require different amounts of down payment (from 3.5% to 50% in the US), depending on the borrower and purchase.

Cash accounting is simple and easy. Transactions are only recorded when money goes in and out of the account.

Cash accounting does not work well for large or high inventory companies as it can obscure the true financial position.

An alternative to cash accounting is accrual accounting, where transactions are recorded when they are profitable and incurred, regardless of the exchange of cash.

The balance sheet is a financial statement that reports a company's assets, liabilities, and shareholders' equity.

The balance sheet is one of the three main financial statements used to evaluate a business (the income statement and the cash flow statement are the other two).

The balance sheet is a snapshot that shows the financial position (owned and borrowed) of the company as of the issue date.

Fundamental analysts use the balance sheet in combination with other financial statements to calculate financial ratios.

Hire purchase agreements are not seen as an extension of credit.

In a hire purchase agreement, ownership is not transferred to the purchaser until all payments are made.

Hire purchase agreements usually prove to be more expensive in the long run than purchasing an item outright.

SOLVED EXAMPLES

Q.1. (Cash Price, Rate of Interest and Amount of Installments are given)

Om Ltd. purchased a machine on hire purchase basis from Kumar Machinery Co. Ltd. on

the following terms:

Cash price Rs. 80,000.

Down payment at the time of signing the agreement on 1.1.2011 Rs. 21,622.

5 annual instalments of Rs. 15,400, the first to commence at the end of twelve months from the date of down payment.

Rate of interest is 10% p.a.

You are required to calculate the total interest and interest included in cash instalment.

Solution:

Calculation of interest

	Total (Rs.)	Interest in each instalment (1)	Cash price in each instalment (2)
Cash Price Less: Down Payment Balance due after down payment Interest/Cash Price of 1st instalment Less: Cash price of 1st instalment Balance due after 1st instalment Interest/cash price of 2nd instalment Less: Cash price of 2nd instalment Balance due after 2nd instalment Interest/Cash price of 3rd instalment Less: Cash price of 3rd instalment Balance due after 3rd instalment Interest/Cash price of 4th instalment Less: Cash price of 4th instalment Balance due after 4th instalment Interest/Cash price of 5th instalment Less: Cash price of 5th instalment Total	80,000 (21,622) 58,378 - (9,562) 48,816 - (10,518) 38,298 - (11,570) 26,728 - (12,728) 14,000 - (14,000) Nil	Nil Rs. 58,378 x10/100 = Rs. 5,838 Rs. 48,816 x 10/100 = Rs. 4,882 Rs. 38,298x10/100 = Rs. 3,830 Rs. 26,728 x10/100 = Rs. 2,672 Rs. 14,000 x10/100 =Rs. 1,400 Rs. 18,622	Rs. 21,622 Rs. 15,400 – Rs. 5,838 = Rs. 9,562 Rs. 15,400 - Rs. 4,882 = Rs. 10,518 Rs. 15,400 - Rs. 3,830 = Rs. 11,570 Rs. 15,400 - Rs. 2,672 = Rs. 12,728 Rs. 15400 – Rs. 1,400 = 14,000 Rs. 80,000

Total interest can also be calculated as follow:

(Down payment + instalments) – Cash Price = Rs. [21,622+(15400 x 5)] – Rs. 80,000 = Rs. 18,622

Q.2. (Cash Price and Amount of Installments are given; Rate of Interest is not given)

Happy Valley Florists Ltd. acquired a delivery van on hire purchase on 01.04.2011 from Ganesh Enterprises. The terms were as follows:

Particulars	Amount (Rs.)
Hire Purchase Price	180,000
Down Payment	30,000
1st installment payable after 1 year	50,000
2nd installment after 2 years	50,000
3rd installment after 3 years	30,000
4th installment after 4 years	20,000

Cash price of van Rs. 1,50,000. You are required to calculate Total Interest and Interest included in each instalment.

Solution: Calculation of total Interest and Interest included in each installment Hire Purchase Price (HPP) = Down Payment + instalments = 30,000 + 50,000 + 50,000 + 30,000 + 20,000 = 1,80,000

Total Interest = 1,80,000 – 1,50,000 = 30,000

Computation of IRR (considering two guessed rates of 6% and 12%)

Year	Cash Flow	DF @6%	PV	DF @12%	PV
0	30,000	1.00	30,000	1.00	30,000
1	50,000	0.94	47,000	0.89	44,500
2	50,000	0.89	44,500	0.80	40,000
3	30,000	0.84	25,200	0.71	21,300
4	20,000	0.79	15,800	0.64	12,800
		NPV	1,62,500	NPV	1,48,600

Interest rate implicit on lease is computed below by interpolation:

Interest rate implicit on lease= 6% + 1,62,500-1,50,000 x (12-6) = 11.39%

1,62,500-1,48,600

Thus, repayment schedule and interest would be as under:

Installment no.	Principal at beginning	Interest included in each installment	Gross amount	Installment	Principal at end
Cash down	1,50,000		1,50,000	30,000	1,20,000
1	1,20,000	13,668	1,33,668	50,000	83,668
2	83,668	9,530	93,198	50,000	43,198
3	43,198	4,920	48,118	30,000	18,118
4	18,118	2,064	20,182	20,000	182*
		30,182*
* the difference is on account of approximations.

On January 1, 2011 HP M/s acquired a Pick-up Van on hire purchase from FM M/s. The terms of the contract were as follows:

The cash price of the van was Rs. 1,00,000.

Rs. 40,000 were to be paid on signing of the contract.

The balance was to be paid in annual instalments of Rs. 20,000 plus interest.

Interest chargeable on the outstanding balance was 6% p.a.

Depreciation at 10% p.a. is to be written-off using the straight-line method.

You are required to:

Give Journal Entries and show the relevant accounts in the books of HP M/s from January 1, 2011 to December 31, 2013; and

Show the relevant items in the Balance Sheet of the purchaser as on December 31, 2011 to 2013.

Solution:

Journal Entries in the books of HP M/s

Date	Particulars		Dr.	Cr.
2011			Rs.	Rs.
Jan. 31	Pick-up Van A/c To FM M/S A/c (Being the purchase of a pick-up van on hire purchase from FM M/s)	Dr.	1,00,000
				1,00,000
“	FM M/S A/c To Bank A/c (Being the amount paid on signing the H.P. contract)	Dr.	40,000
				40,000
Dec. 31	Interest A/c To FM M/s A/c (Being the interest payable @ 6% on Rs. 60,000)	Dr.	3,600
				3,600
“	FM M/s A/c (Rs. 20,000+Rs. 3,600) To Bank A/c (Being the payment of 1st instalment along with interest)	Dr.	23,600
				23,600
“	Depreciation A/c To Pick-up Van A/c (Being the depreciation charged @ 10% p.a. on Rs. 1,00,000)	Dr.	10,000
				10,000

“	Profit & Loss A/c To Depreciation A/c To Interest A/c (Being the depreciation and interest transferred to Profit and Loss Account)	Dr.	13,600
				10,000 3,600
2012 Dec. 31	Interest A/c To FM M/s A/c (Being the interest payable @ 6% on Rs. 40,000)	Dr.	2,400	2,400
“	FM M/s A/c (Rs. 20,000 + Rs. 2,400) To Bank A/c (Being the payment of 2nd instalment along with interest)	Dr.	22,400
				22,400
“	Depreciation A/c To Pick-up Van A/c (Being the depreciation charged @ 10% p.a.)	Dr.	10,000
				10,000
“	Profit & Loss A/c To Depreciation A/c To Interest A/c (Being the depreciation and interest charged to Profit and Loss Account)	Dr.	12,400
				10,000 2,400
2013 Dec. 31	Interest A/c To FM M/s A/c (Being the interest payable @ 6% on Rs. 20,000)	Dr.	1,200	1,200
“	FM M/s A/c (Rs. 20,000 + Rs. 1,200) To Bank A/c (Being the payment of final instalment along with interest)	Dr.	21,200
				21,200
“	Depreciation A/c To Pick-up Van A/c (Being the depreciation charged @ 10% p.a. on Rs. 1,00,000)	Dr.	10,000
				10,000
“	Profit & Loss A/c To Depreciation A/c To Interest A/c (Being the interest and depreciation charged to Profit and Loss Account)	Dr.	11,200
				10,000 1,200

Ledgers in the books of HP M/s

Pick-up Van Account

Date	Particulars	Rs.	Date	Particulars	Rs.
1.1.2011	To FM M/s A/c	1,00,000	31.12.2011	By Depreciation A/c	10,000
			31.12.2011	By Balance c/d	90,000
		1,00,000			1,00,000
1.1.2012	To Balance b/d	90,000	31.12.2012	By Depreciation A/c	10,000
			31.12.2012	By Balance c/d	80,000
		90,000			90,000
1.1.2013	To Balance b/d	80,000	31.12.2013	By Depreciation A/c	10,000
			31.12.2013	By Balance c/d	70,000
		80,000			80,000

FM M/s Account

Date	Particulars	Rs.	Date	Particulars	Rs.
1.1.2011	To Bank A/c	40,000	1.1.2011	By Pick-up Van A/c	1,00,000
31.12.2011	To Bank A/c	23,600	31.12.2011	By Interest c/d	3,600
31.12.2011	To Balance c/d	40,000
		1,03,600			1,03,600
31.12.2012	To Bank A/c	22,400	1.1.2012	By Balance b/d	40,000
31.12.2012	To Balance c/d	20,000	31.12.2012	By Interest A/c	2,400
		42,400			42,400
31.12.2013	To Bank A/c	21,200	1.1.2013	By Balance b/d	20,000
			31.12.2013	By Interest A/c	1,200
		21,200			21,200

Depreciation Account

Date	Particulars	Rs.	Date	Particulars	Rs.
31.12.2011	To Pick-up Van A/c	10,000	31.12.2011	By Profit & Loss A/c	10,000
31.12.2012	To Pick-up Van A/c	10,000	31.12.2012	By Profit & Loss A/c	10,000
31.12.2013	To Pick-up Van A/c	10,000	31.12.2013	By Profit & Loss A/c	10,000

Interest Account

Date	Particulars	Rs.	Date	Particulars	Rs.
31.12.2011	To FM M/s A/c	3,600	31.12.2011	By Profit & Loss A/c	3,600
31.12.2012	To FM M/s A/c	2,400	31.12.2012	By Profit & Loss A/c	2,400
31.12.2013	To FM M/s A/c	1,200	31.12.2013	By Profit & Loss A/c	1,200

Balance Sheet of HP M/s as at 31st December, 2011

Liabilities	Rs.	Assets	Rs.
FM M/s	40,000	Pick-up Van	90,000

Balance Sheet of HP M/s as at 31st December, 2012

Liabilities	Rs.	Assets	Rs.
FM M/s	20,000	Pick-up Van	80,000

Balance Sheet of HP M/s as at 31st December, 2013

Liabilities	Rs.	Assets	Rs.
		Pick-up Van	70,000

Q.3. 1st January, 2000 Mr. A purchases from Mr. B machinery whose cash price is Rs. 15,000; Rs. 5,000 is to be paid down, that is on signing of the contract, and Rs. 4,000 is to be paid at the end of each year for 3 years. Rate of interest is 10% p.a. Prepare B’s account in the books of Mr. A

Solution:

A’s Books

Dr.			B’s Account		Cr.
		Rs.			Rs.
2000			2000
Jan.1	To Cash	5,000	Jan.1	By Machinery A/c	15,000
Dec.31	To Cash	4,000	Dec.31	By Interest A/c	1,000
’’	To balance c/d	7,000		(10% on Rs. 10,000)
		16,000			16,000
2001			2001
Dec.31	To Cash	4,000	Jan.1	By Balance b/d	7,000
	To Balance c/d	3,700	Dec.31	By Interest A/c
				(10% on Rs. 7,000)	700
		7,700			7,700
2002			2002
Dec.31	To Cash	4,000	Jan.1	By Balance b/d	3,700
			Dec.31	By Interest A/c*	300
		4,000			4,000

Q.4. Based on particulars given below calculate Interest under the hire purchase system

X & Co.—purchaser Y & Co.-Seller Date of purchase—Jan. 1, 1999, Cash price—Rs. 74,500.

Installments Rs. 20,000 on signing of the agreement. Rest in three instalments of Rs. 20,000 each. Rate of Interest—5%. Depreciation 10% on the diminishing Balance.

Solution:

Calculation of Interest
		Rs.
Jan.1, 1999	Cash Price	74,500
	Less-Cash down	20,000
	Balance Due	54,500
	Interest @ 5% for 1999	2,725
Dec.31, 1999	Total	57,225
	Amount paid	20,000
Jan.1, 2000	Balance Due	37,225
	Interest for 2000 @ 5%	1,861
Dec.31, 2000	Total	39,086
	Amount paid	20,000
Jan.1,2001	Balance due 2001	19,086
	Interest for (balancing figure) 2001	914
Jan.1,2002	Amount paid	20,000

Q.5. Based on particulars given below calculate Interest under the hire purchase system

X & Co.—purchaser Y & Co.-Seller Date of purchase—Jan. 1, 1999, Cash price—Rs. 74,500.

Installments Rs. 20,000 on signing of the agreement. Rest in three instalments of Rs. 20,000 each. Depreciation 10% on the diminishing Balance.

Solution:

Calculation of interest when the rate of interest is not given:

Hire Purchase Price				80,000
Cash Price				74,500
Total interest				5,500

Year	Amount Outstanding	Ratio	Interest	Rs.
1	60,000	3	3/6 x 5,500	2,750
2	40,000	2	2/6 x 5,500	1,833
3	20,000	1	1/6 x 5,500	917

Q.6. Based on particulars given below calculate Interest under the hire purchase system

X & Co.—purchaser Y & Co.-Seller Date of purchase—Jan. 1, 1999, Installments Rs. 20,000 on signing of the agreement. Rest in three instalments of Rs. 20,000 each. Rate of Interest—5%. Depreciation 10% on the diminishing Balance.

Solution:

Calculation of cash price, rate of interest being given:

Instalment	Amount due at the end of the year (after payment of Installment)	Instalment paid	Total amount due at the end of the Year (before payment of instalment)		Interest @ 1/21	Principal due in the beginning
	Rs.	Rs.		Rs.	Rs.	Rs.
3	Nil	20,000		20,000	952	19,408
2	19,048	20,000		39,048	1,859	37,189
1	37,189	20,000		57,189	2,723	54,466
					5,534

Cash Price: 54,466 + cash down, Rs. 20,000 or Rs. 74,466.

Q.7. Y & Co. sold machinery whose cash price is Rs. 74,500. to X and Co., on hire purchase basis on 1st January, 2000. Payment was to be made as Rs. 20,000 down and Rs. 20,000 every year for three years. Rate of interest was 5% & Co. charged depreciation @ 10% p.a. on the diminishing balance. Give ledger accounts in the books of Y & Co.

Solution:

Ledger of Y & Co.
Dr.			X & Co.		Cr.
		Rs.			Rs.
2000			2000
Jan.1	To Sales	74,500	Jan.1	By Cash	20,000
Dec.31	To Interest A/c		Dec.31	By Cash	20,000
	(5% on Rs. 54,500)	2,725		By Balance c/d	37,225
		77,225			77,225
2001			2001
Jan.1	To Balance b/d	37,225	Dec.31	By Cash	20,000
Dec.31	To Interest A/c	1,861		By Balance c/d	19,086
		39,086			39,086
2002			2002
Jan.1	To Balance b/d	19,086	Dec.31	By Cash	20,000
Dec.31	To Interest A/c	914
		20,000			20,000

Dr.	Sales Account			Cr.
		2000
		Jan. 1	By X & Co.	Rs. 15,000.
Interest Account
Dr.				Cr.
2000		2000
Dec.31 to P & L A/c	2,725	Dec.31	By X & Co.	2,725
2001		2001
Dec.31 to P & L A/c	1,861	Dec.31	By X & Co.	1,861
2002		2002
Dec.31 to P & L A/c	914	Dec.31	By X & Co.	914

Q.8. Y & Co. sold machinery whose cash price is Rs. 74,500. to X and Co., on hire purchase basis on 1st January, 2000. Payment was to be made as Rs. 20,000 down and Rs. 20,000 every year for three years. Rate of interest was 5% & Co. charged depreciation @ 10% p.a. on the diminishing balance. Give Journal Entries & ledger accounts in the books of X & Co.

Solution:

Journal of X & Co.

							Debit (Rs)		Credit (Rs)
2000
Jan.1		Machinery Account				Dr.	20,000
		To Y & Co.					20,000
		(Amount due to Y & Co. as down payment for purchase of machinery on hire purchase basis.)

Jan.1		Y & Co.				Dr.	20,000
		To Bank Account					20,000
		(Payment made to Y & Co. down)

Dec.31		Machinery Account				Dr.	17,275
		Interest Account				Dr.	2,725
		To Y & Co.					20,000
		(The amount due to Y & Co. under the hire purchase Contract for interest (and debited as such) and the balance treated as payment for machinery)

Dec.31		Y & Co.				Dr.	20,000
		To Bank A/c					20,000
		(Payment made to Y & Co.)

Dec.31		Depreciation Account				Dr.	7,450
		To Machinery Account					7,450
		(Depreciation for 1st year-10% on Rs. 74,500)

Dec 31		Profit & Loss Account				Dr.	10,175
		To Interest Account					2,725
		To Depreciation Account					7,450
		(Being interest and depreciation transferred to P/L A/c)
2001
Dec.31		Machinery Account				Dr.	18,139
		Interest Account				Dr.	1,861
		To Y & Co.					20,000
		(Amount due to Y & Co. for interest the balance charged to Machinery A/c.)

Dec.31		Y & Co.				Dr.	20,000
		To Bank Account					20,000
		(Payment made to Y & Co.)

Dec. 31		Depreciation				Dr.	6,705
		To Machinery Account					6,705
		(Depreciation for the second year 10% on Rs. 67,050; i.e. Rs. 74,500 - Rs. 7,450).

Dec 31		Profit & Loss Account				Dr.	8,566
		To Interest Account					1,861
		To Depreciation Account					6,705
		(Being interest and depreciation transferred to P/L A/c)
2002
Dec.31		Machinery Account				Dr.	19,086
		Interest Account				Dr.	914
		To Y & Co.					20,000
		(Amount due to Y & Co. in respect of interest and the principal sum.)

Dec.31		Y & Co.				Dr.	20,000
		To Bank Account					20,000
		(Payment made to Y & Co.)

Dec.31		Depreciation Account				Dr.	6,035
		To Machinery Account					6,035
		(Depreciation @ 10% of the diminishing balance charged for the third years).

Dec 31		Profit & Loss Account				Dr.	6,949
		To Interest Account					914
		To Depreciation Account					6,035
		(Being interest and depreciation transferred to P/L A/c)
	Ledger Accounts
	Dr.		Machinery Account					Cr.
	2000		Rs.	2000				Rs.
	Jan.1	To Y & Co.	20,000	Dec.31	By Depreciation			7,450
	Dec.31	To Y & Co.		Dec.31	By Balance c/d			29,825
		(20,000—2,725)	17,275
			37,275					37,275
	2001			2001
	Jan.1	To balance b/d	29,825	Dec.31	By Depreciation A/c			6,705
	Dec.31	To Y & Co.		Dec.31	By Balance c/d			41,259
		(20,000—1,861)	18,139
			47,964					47,964
	2002			2002
	Jan.1	To Balance b/d	41,259	Dec.31	By Depreciation A/c			6,035
	Dec.31	To Y & Co.	19,086	Dec.31	By Balance c/d			54,310
			60,345					60,345
	2003
	Jan.1	To Balance b/d	54,310

Dr.		Interest Account			Cr.
2000		Rs.	2000		Rs.
Dec.31	To Y & Co.	2,725	Dec.31	By P & L A/c	2,725
2001			2001
Dec.31	To Y & Co.	1,861	Dec.31	By P & L A/c	1,861
2002			2002
Dec.31	To Y & Co.	914	Dec.31	By P & L A/c	914

Dr.			Y & Co.			Cr.
2000		Rs.		2000		Rs.
Jan.1	To Bank A/c	20,000	Jan.1	By Machinery A/c		20,000
Dec.31	To Bank A/c	20,000	Dec.31	By Sundries—
				Machinery	17,275
				Interest	2,725	20,000
		40,000			40,000
2001			2001
Dec.31	To Bank A/c	20,000	Dec.31	By Machinery A/c		18,139
				By Interest A/c	1,861
		20,000			20,000
2002			2002
Dec.31	To Bank A/c	20,000	Dec.31	By Machinery A/c		19,086
				By Interest A/c	914
		20,000			20,000

Depreciation Account

2000		Rs.	2000		Rs.
Dec.31	To Machinery A/c	7,450	Dec.31	By P & L A/c	7,450
2001		2001
Dec.31	To machinery A/c	6,705	Dec.31	By P & L A/c	6,705
2002		2002
Dec.31	To Machinery A/c	6,035	Dec.31	By P & L A/c	6,035

3.2 Accounting for Branches

INTRODUCTION: -

A branch may be defined as section of an enterprise, geographically separated from the rest of the business, controlled by head office, and generally carrying on the same activities as of the enterprise. As a business grow, it may open up branches in different towns and cities in order to market its product/services over a large territory and thus increase its profit.

For example, Bata shoe Co. Ltd has branches in various cities all over the country. The same example holds good for a commercial bank also.

As per the provision of Companies Act, branch office in relation to a company means-

Any establishment described as a branch by the company; or

Any establishment carrying on either the same or substantially the same activity as that carried on by the head office of the company; or

Any establishment engaged in any production, processing or manufacture.

It should be mentioned that a branch is not a separate legal entity it is simply a segment of a business. From an accounting standpoint, a branch is a clearly identifiable profit centre. In order to exercise greater control over the branches it is necessary to ascertain profit or loss made by such branches separately. Apart from this, specialised accounting techni9have to be adopted for controlling various branches activities and for their smooth running both at the branch level and at the head office level. The system of accounting varies between different enterprises in accordance with their type of activities, methods of operation and the preference of their managements.

NEED FOR BRANCH ACCOUNTING

a) Ascertain the profitability of each branch separately for particular accounting period.

b) Ascertain the financial position of each branch separately at the end of that accounting period.

c) Assess the progress and performance of each branch

d) Incorporate the profit or loss made by the branch and its assets and liabilities in the firm's final accounts

e) Ascertain the requirements of cash and stock for each branch,

f) Ascertain whether the branch should expended or closed

TYPES OF BRANCHES

From accounting point of view, the branches can be divided into the following main cases:

1) HOME BRANCHES: -

Dependent Branches (Where the head office maintains all the accounts)

Independent Branches (Where the branch keeps its own accounts)

2) FOREIGN BRANCHES: -

They almost invariably trade independently and record their transaction in foreign currency.

Dependent Branches

When the policies and administration of a branch are totally controlled by the head office, who also maintains its accounts, the branch is called as dependent branch.

Independent Branches

Independent Branches are those which make purchases from outside, get goods from Head Office, supply goods to Head Office and fix the selling price by itself Thus an independent Branch enjoys a good amount of freedom like an American Son.

ACCOUNTING SYSTEM OF BRANCHES

The accounting arrangement of a branch depends upon its size, the type of activities, the methods of operation and the degree of control to be exercised by the head office. There are three main system of accounting for branches transaction, viz.

Debtors System

Stock and Debtors System

Final Account system

This system of accounting is suitable for the small- size branches. Under this, a Branch Account is opened for each branch in the head office ledger. All the transaction relating to that branch is recorded in this account. The branch account is prepared in such a way that it discloses the profit or loss of the branch.

Head office may send goods to branch either at "cost price" or "selling price".

Cost price method: - under this method at the beginning of the year the branch Account is debited with the opening balances of asset such as stock, petty cash, furniture, prepaid expenses, etc. lying with the branch. Similarly, it is credited with the opening balance of liabilities of the branch such as, creditors, ots salary, rent, etc.

The branch is then debited with the amount of goods sent to the branch and other amounts remitted to meet various expenses such as, salaries, rent, rates, taxes, etc. Likewise, the branch account is credited with the return of goods by the branch and receipts from branches. At the year end, Branch Account is debited with the closing values of liabilities and credited with the closing values of assets. The difference between the two sides represents profit or loss for the branch for a particular period.

DEBTORS METHOD

Journal entries

1) For goods sent to branch

Branch A/c _______Dr.

To Goods Sent to Branch A/c

(Being goods sent to branch)

2) For goods returned by the branch

Goods Sent to Branch A/c _______Dr.

To Branch A/c

(Being goods returned by the branch)

3) For amount sent to branch for expenses

Branch A/c _______ Dr.

To Bank A/c

(Being cheque sent to branch for expenses)

4) For amount received from branch

Bank A/c _______ Dr.

To Branch A/c

(Being cash or cheque received from branch)

5) For closing goods sent to branch account

Goods Sent to Branch Alc Dr.

To Purchase A/c

(Being balance transferred to Trading Account)

6) For closing balances of assets at the branch

Branch Assets A/c ________ Dr. (Individually)

To Branch A/c

(Being closing balances of assets brought into account)

7) For closing balances of Liabilities at the branch

Branch A/c ________Dr.

To Branch Liabilities A/c (Individually)

(Being closing balances of liabilities brought into account)

8) For transferring Profit or Loss to General Profit and Loss Account

If Profit

Branch A/c _______ Dr.

To General Profit and Loss A/c

(Being branch profit transferred to General P & L A/c)

If Loss

General Profit and Loss A/c ________ Dr.

To Branch A/c

(Being branch loss transferred to General P & L A/c)

The closing balances of branch assets and liabilities are shown in the Balance Sheet

of the head office. At the beginning of the next year, the entire numbers 6 and 7 are

reversed so as to show opening balances in the Branch Account.

STOCK AND DEBTORS METHOD:

Under this method accounts relating to branch are maintained in a more comprehensive and detailed manner as compared to Debtors method. This method keeps a better control stock. Under this method separate accounts are prepared for various accounting function

This accounting procedure under this method depends upon the policy of head office with regard to pricing of goods send to branch. Head office may adopt one of the following methods for invoicing goods to branch.

At cost price to head office.

At selling price of the branch.

At cost price plus fixed margin of profit. In this case branch may sell goods at higher or lower than the invoice price.

When goods have been invoiced to branch at cost price.

In this case following accounts are prepared.

a) Branch Stock Account .

b) Goods sent to Branch Account.

c) Branch Debtors Account .

d) Branch Expenses Account.

e) Branch Profit & Loss Account .

f) Branch Cash Account .

I) When goods are sent to the branch (at invoice price)

Branch Stock A/c _____ Dr.

To Goods Sent to Branch A/c

2) When goods are returned by the branch to the H.O. (at invoice price)

Goods Sent to Branch A/c _______ Dr.

To Branch Stock A/c

3) When sales are made by the branch

For Cash Sales

Cash A/c _______ Dr.

To Branch Stock A/c

For Credit Sales

Branch Debtors A/c _______ Dr.

To Branch Stock A/c

4) When Cash is Received from Debtors

Cash A/c ______ Dr.

To Branch Debtors A/c

5) For Sales Returns

Branch Stock A/c ________ Dr.

To Branch Debtors A/c

6) For discount allowed, bad debts, etc.

Branch Expenses A/c ________ Dr.

To Branch Debtors A/c

7) For Shortage of Stock

Branch Adjustment A/c ________ Dr.(with amount of loading)

Branch P & L A/c ________ Dr. (with cost of shortage)

To Branch Stock A/c

For surplus at branch, the reverse entry will be passed.

8) For Branch Expenses paid in Cash

Branch Expenses A/c ______ Dr.

To Cash A/c

9) For Closing Branch Expenses Account

Branch P&L A/c ______ Dr.

To Branch Expenses A/c

10) For Adjustment of Loading on the Opening Stock

Stock Reserve A/c ______ Dr.

To Branch Adjustment A/c

11) For Adjustment of Loading on the Closing Stock

Branch Adjustment A/c ______ Dr.

To Stock Reserve A/c

12) For Adjustment Loading Goods sent to Branch

Goods Sent to Branch A/c ________ Dr.

To Branch Adjustment A/c

13) For Transfer of Gross Profit

Branch Adjustment A/c _______ Dr.

To Branch P & L A/c

Examples

Q.1 (AT COST)

Suri is having his Head office at Mumbai and Branch Office at Nasik. Prepare the branch Account in the books of the Head Office from the following transaction with the branch:

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
Opening Balance at Branch:		Amounts remitted to the Branch for :
- Petty Cash	1,000	- Petty Cash Expenses	4,000
- Stock	39,500	- Salary	12,000
- Debtors	21,000	- Rent and Taxes	3,500
Goods Supplied to Branch during the year	3,10,000	Closing balances ay Branch:
Amounts remitted by the branch		- Petty	950
- Cash Sales	1,13,200	- Debtors	53,000
- Realisation from Debtors	2,30,300	- Stock	26,500

SOLUTION: -

IN THE BOOKS OF H.O.

Dr. NASIK BRANCH ACCOUNT. Cr.

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
To Balance b/d		By Bank (Remittance):
Branch petty cash	1,000	- Petty Cash Expenses	4,000
Branch Stock	39,500	- Salary	12,000
Branch Debtors	21,000	- Rent and Taxes	3,500
To Goods sent to Branch	3,10,000	Closing balance at Branch
To cash remitted for:		- Petty Cash	950
Petty Cash Expenses	4,000	- Debtors	53,000
Salary	12,000	- Stock	26,500
Rent	3,500
To General P&L (Bal Fig)	32,950
TOTAL	4,23,950	TOTAL	4,23,950

Q.2 (INVOICE PRICE)

D of Delhi have a branch at Madras. Goods are sent by the Head Office at Invoice Price which is at the Profit of 25% on Cost Price. All the Expenses of the branch are paid by the Head Office. From the following particulars, prepare Branch Account in Head Office Books

BALANCES	OPENING	CLOSING
Stock at invoice	11,000	13,000
Debtors	1,700	2,000
Petty Cash	100	25
TOTAL	12,800	15,025

Goods sent to branch at invoice price Rs. 20,000.

Expenses made by head office: -Rent Rs.600, Wages Rs.200, Salaries Rs.900

Remittance made to Head Office: - Cash Sales Rs. 2,650, Cash collected from debtors Rs. 21,000

Goods Returned by Branch at Invoice Price Rs.400

SOLUTION: -

IN THE BOOKS OF HEAD OFFICE

Dr. MADRAS BRANCH A/c. Cr.

PARTICULARS	AMOUNT	AMOUNT	PARTICULARS	AMOUNT	AMOUNT
To Balance b/d			By Stock Reserve A/c b/d(Load on OP. Stock 11,000 X 25/125)		2,200
Stock (IP)		11,000	By Bank
Debtors		1,700	Cash Sales	2,650
Petty Cash		100	Cash collected from Debtors	21,000	23,650
To Goods sent to Branch (IP)		20,000	By Goods sent to branch (Returns at IP)		400
To Bank (Expenses):			By Goods sent to branch (19,600 X 25/125; net Loading)		3,920
Rent	600		By Balance c/d
Wages	200		Stock (IP)	13,000
Salaries	900	1,700	Debtors	2,000
To Stock Reserve A/c c/d(Load on Cl. Stock 13,000 X 25/125)		2,600	Petty Cash	25	15,025
To Net Profit tfd to general P&L (Bal Fig)		8,095
TOTAL		45,195	TOTAL		45,195

Note: Goods are sent by Head Office at @ 25% on Cost Price.

So, Cost + Profit = Invoice Price

100 + 25 = 125

Profit charged by Head Office is 1/5 or 20% of Invoice Price.

Q.3 (INVOICE PRICE)

One M.P. Head Office has a branch at Berhampur to which goods are invoiced at cost plus 20% .from the following particulars prepare the Branch Account in the Head Office Books :

PARTICULARS	AMOUNT
Goods sent to Branch at invoice Price	2,11,872
Total Sales	2,06,400
Cash Sales	1,10,400
Cash received from Branch Debtors	88,000
Branch Debtors at commencement	24,000
Branch Stock at commencement at Invoice price	7,680
Branch Stock at Close of the period at Invoice Price	13,440

SOLUTION: -

IN THE BOOKS OF M.P. HEAD OFFICE

Dr. BERHAMPUR BRANCH ACCOUNT. Cr.

PARTICULARS	AMOUNT	AMOUNT	PARTICULARS	AMOUNT	AMOUNT
To Balance b/d			By Stock Reserve A/c b/d(Load on OP. Stock)		1,280
Stock (IP)		7,680	By Bank
Debtors		24,000	Cash Sales	1,10,400
To Goods sent to Branch (IP)		2,11,872	Cash collected from Debtors	88,000	1,98,400
To Stock Reserve A/c c/d(Load on Cl. Stock)		2,240	By Goods sent to branch (2,11,872 X 20/120; net Loading)		35,312
To Net Profit tfd to general P&L (Bal Fig)		34,640	By Balance c/d
			Stock (IP)	13,440
			Debtors	32,000	45,440



TOTAL		2,80,432	TOTAL		2,80,432

Working Note:

Dr. BERHAMPUR BRANCH DEBTORS ACCOUNT. Cr.

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
To Balance b/d	24,000	By Cash	88,000
To Credit Sales	96,000	By balance c/d (balancing figure)	32,000
TOTAL	1,20,000	TOTAL	1,20,000

(2)

Total Sales =2,06,400

Less: - Cash Sales =1,10,400

Credit Sales =96,000

(3)

Goods are sent by Head Office at @ 20% on Cost Price.

So, Cost + Profit = Invoice Price

100 + 20 = 120

Profit charged by Head Office is 1/6 of Invoice Price.

Q.4 (AT COST)

The Canada commercial company invoiced goods to its Jaipur Branch at cost. The head office paid all the branch expenses from its bank except petty cash expenses which were Paid by the branch. From the following details relating to the branch, prepare

(1): Branch Stock A/c

(2)Branch Debtors A/c

(3)Branch Expenses A/c

(4)Branch P&L A/c

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
Stock (Opening)	21,000	Discount to Customer	4,200
Debtors (Opening)	37,800	Bad Debts	1,800
Petty Cash(Opening)	600	Goods returned by customers to branch	1,500
Goods sent to H.O.	78,000	Salaries	18,600
Goods returned to H.O.	3,000	Rent	3,600
Cash Sales	52,500	Debtors(Closing)	29,400
Advertisement	2,400	Petty Cash (Closing)	300
Cash received from debtors	85,500	Credit Sales	85,200
Stock(Closing)	19,500
Allowances to Customer	600

SOLUTION: -

Dr. BRANCH STOCK A/c. Cr.

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
To Balance b/d	21,000	By Branch Cash	52,500
To Goods sent to sent Branch	78,000	By Goods sent to Branch	3,000
To Branch Debtors	1,500	By Branch Debtors	85,200
To Branch P&L (Transfer)	59,700	By Balance c/d	19,500
TOTAL	1,60,200	TOTAL	1,60,200

Dr. BRANCH DEBTORS A/c. Cr.

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
To Balance b/d	37,800	By Branch Cash	85,500
To Branch Stock (Credit Sales)	85,200	By Branch expenses Bad Debts 1,800 Allowances 600 Discount 4,200	6,600
		By Branch Stock (Returns)	1,500
		By Balance c/d	29,400
TOTAL	1,23,000	TOTAL	1,23,000

Dr. BRANCH EXPENSES A/c. Cr.

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
To Branch Debtors	6,600	By Branch P&L	31,500
To Bank Advertisement 2,400 Salaries 18,600 Rent 3,600	24,600
To Petty Expenses (600-300)	300

TOTAL	31,500	TOTAL	31,500

Dr. BRANCH PROFIT & LOSS A/c. Cr.

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
To Branch Expenses	31,500	By Branch Stock	59,700
To General P&L (Bal Fig)	28,200
TOTAL	59,700	TOTAL	59,700

Q.5 (AT COST)

The following are the details of ‘Indore Branch’ for the year 2018

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
Opening stock	6,000	Salaries	2,000
Opening Petty Cash	500	Rent	1,500
Opening Debtors	8,000	Closing Stock	8,000
Goods sent to Branch	24,000	Cash sent to Branch	2,200
Goods returned by Branch	800	Discount Allowed	100
Remittance from Branch	33,500	Bad Debts	150
Returns from Debtors	2,000	Commission Paid	750
Collection from Debtors	34,000	Closing Petty Cash	450
Cash Sales	1,500	Closing Debtors	9,000

Prepare: (1) Branch Stock A/c (2) Branch Debtors A/c (3) Branch Expenses A/c

(4) Branch P&L A/c (5) Branch Cash (6) Goods sent to Branch A/c

SOLUTION: -

Dr. BRANCH STOCK A/c. Cr.

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
To Balance b/d	6,000	By Branch Cash (Cash Sales)	1,500
To Goods sent to sent Branch	24,000	By Goods sent to Branch	800
To Branch Debtors(Return Inwards)	2,000	By Branch Debtors(Credit Sales)	37,250
To Branch P&L (Transfer)	15,550	By Balance c/d	8,000
TOTAL	47,550	TOTAL	47,550

Dr. BRANCH DEBTORS A/c. Cr.

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
To Balance b/d	8,000	By Branch Cash (Received from Debtors)	34,000
To Branch Stock (Credit Sales) (Bal Fig)	37,250	Branch expenses Bad Debts 150 Discount 100	250
		By Branch Stock (Returns)	2,000
		By Balance c/d	9,000
TOTAL	45,250	TOTAL	45,250

Dr. BRANCH CASH A/c. Cr.

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
To Balance (Petty Cash)	500	By Branch Expenses Salaries 2,000 Rent 1,500 Commission 750	4,250
To Bank (Remittance)	2,200	By Bank (Remittance from Branch)	33,500
To Branch stock (Cash Sales)	1,500	By Balance (Petty Cash)	450
To Branch Debtors (Received)	34,000

TOTAL	38,200	TOTAL	38,200

Dr. BRANCH EXPENSES A/c. Cr.

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
To Branch Debtors	6,600	By Branch P&L	31,500
To Bank Advertisement 2,400 Salaries 18,600 Rent 3,600	24,600
To Petty Expenses (600-300)	300

TOTAL	31,500	TOTAL	31,500

Dr. BRANCH EXPENSES A/c. Cr.

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
To Branch Debtors	250	By Branch P&L (Balance Transferred)	4,500
To Branch Cash	4,250


TOTAL	4,500	TOTAL	4,500

Dr. GOODS SENT TO BRANCH A/c. Cr.

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
To Branch Stock	800	By Branch Stock	24,000
To Purchase	23,200


TOTAL	24,000	TOTAL	24,000

Dr. BRANCH PROFIT & LOSS A/c. Cr.

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
To Branch Expenses	4,500	By Branch Stock (Gross Profit)	15,550
To General P&L (Bal Fig)	11,050
TOTAL	15,550	TOTAL	15,550

Q.6 Mumbai Textile Mills Ltd. Has branch at Agra. Goods are invoiced to branch at cost plus 50%. Branch remits all cash received to the head office and all expenses are met by head office. From the following particulars, prepare the necessary accounts under the Stock and Debtors system to Show the Profit Earned at the Branch:

PARTICULARS	AMOUNT
Stock on the 1st April,2013 (Invoice Price)	93,000
Debtors on 1st April,2013	68,000
Goods Invoiced to Branch (Cost)	3,40,000
Sales at Branch:
Cash	2,50,100
Credit	3,10,000
Cash Collected from Debtors	3,04,000
Goods Returned by Debtors	12,000
Goods Returned by Branch to head office	1,500
Shortage of Stock	4,500
Discount Allowed to Customer	2,000
Expenses at Branch	54,000

SOLUTION: -

Dr. BRANCH STOCK A/c. Cr.

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
To Balance b/d	93,000	By Branch Cash (Cash Sales)	2,50,100
To Goods sent to sent Branch (3,40,000 X 150%)	5,10,000	By Branch Debtors(Credit Sales)	3,10,000
To Branch Debtors	12,000	By Goods sent to Branch	1,500
		By Branch Adjustment (Shortage)	4,500
		By Balance c/d	48,900
TOTAL	6,15,000	TOTAL	6,15,000

Dr. BRANCH ADJUSTMENT A/c. Cr.

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
To Branch Stock(Shortage)	4,500	By Stock Reserve(Loading on Opening Stock)	31,000
To Goods Sent to Branch	500	By Goods Sent to Branch	1,70,000
To Gross Profit c/d	1,79,700
To Stock Reserve(Loading on Closing Stock)	16,300
TOTAL	2,01,000	TOTAL	2,01,000

Dr. BRANCH PROFIT & LOSS A/c. Cr.

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
To Branch Expenses	54,000	By Branch Stock (Gross Profit)	1,79,700
To Discount	2,000
To General P&L (Bal Fig)	1,23,700
TOTAL	1,79,700	TOTAL	1,79,700

Dr. GOODS SENT TO BRANCH A/c. Cr.

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
To Branch Stock	1,500	By Branch Stock	5,10,000
To Branch Adjustment	1,70,000	By Branch Adjustment	500
To Trading A/c(Bal Fig)	3,39,000

TOTAL	5,10,500	TOTAL	5,10,500

Dr. BRANCH DEBTORS A/c. Cr.

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
To Balance b/d	68,000	By Branch Cash (Received from Debtors)	3,04,000
		By Branch expenses (Discount)	2,000
To Branch Stock (Credit Sales)	3,10,000	By Branch Stock (Returns)	12,000
		By Balance c/d	60,000
TOTAL	3,78,000	TOTAL	3,78,000

Dr. BRANCH CASH A/c. Cr.

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
To Sales	2,50,100	By Head Office Cash	5,54,100
To Debtors	3,04,000	(Sent to HO)
TOTAL	5,54,100	TOTAL	5,54,100

Q.7. A Ltd. has a branch in Calcutta. Goods are invoiced at cost plus 25%.
Opening Balance	2002
Stock	3,200
Debtors	1,300
Goods sent to Branch (Invoice price)	75,000
Sales at Calcutta
Cash Sales	32,000
Credit Sales	38,000
Cash collected from Debtors	33,400
Discount allowed	400
Bad Debts written off	250
Cash sent to Branch for expenses	5,500
Stock at end	7,900

SOLUTION: -

BRANCH STOCK A/C
To Balance b/d	3,200	To Cash Sales	32,000
To Goods Sent to Branch A/c		By Branch Debtors	38,000
	75,000	By Branch Adjustment A/c	300
		By Balance c/d	7,900
	78,200		78,200
GOODS SENT TO BRANCH A/C
To br. Adjustment A/c (loading)	15,000	By Br. Stock A/c	75,000
To Trading A/c (Transfer)	60,000
	75,000		75,000

BRANCH STOCK RESERVE A/C

To Br. Adjustment A/c			640	By Balance b/d		640
To balance c/d			1,580	By Branch Adj. A/c		1,580
			2,220			2,220
BRANCH DEBTORS A/C
To Balance b/d			1,300	By Cash		33,400
To Branch Stock (Cr. Sales)			38,000	By Branch Exp. A/c
				Discount	400
				Bad Debts	250	650
				By Bal. c/d		5,250
			39,300			39,300
BRANCH ADJUSTMENT A/C
To Branch Stock Reserve
(closing stock) A/c			1,580	By Stock Reserve (opening stock)		640
To br. Stock A/c (shortage)			300
To Br. Exp. A/c			7,150	By Goods sent to br. A/c		15,000
To P & L A/c			6,610
			15,640			15,640
BRANCH EXPENSES A/C
To Cash			6,500	By Branch Adjustment A/c		7,150
To branch Dr. s A/c
	Discount	400
	Bad Debts	250	650
			7,150			7,150

Independent branches: concept-accounting treatment: important adjustment entries and preparation of consolidated profit and loss account and balance sheet.

Steps to maintain an independent branch account

The independent branch, like the headquarters, keeps all records individually and independently in the double-entry bookkeeping system. Dependents have little power, rely on headquarters for supplies and expenses, and are like a minor son.

An independent branch is a branch that purchases from outside, receives goods from the head office, supplies the goods to the head office, and fixes the selling price on its own. Therefore, an independent branch enjoys considerable freedom like an American son.

Features of independent branches:

1. The Independent Branch holds a complete set of books. Such branches receive goods from headquarters and external parties. I have my own bank account. Therefore, the branch maintains an accounting frill system.

2. Create your own trial balance, transaction and income statement and balance sheet. A copy of these statements is sent to headquarters for inclusion in the headquarters books.

3. The books contain accounts called "head office accounts" or "head office checking accounts". This account will be credited with everything received from headquarters and debited with everything sent to headquarters. That is, all transactions related to headquarters are recorded in this account. Therefore, the checking account at the head office is the account of the sole proprietor (that is, the capital account).

Despite their independence, branches cannot function without resources, and resources are provided by headquarters, especially in the early stages. Therefore, the investment by the headquarters from the perspective of the headquarters account is essentially a personal account.

Similarly, the head office opens a "branch checking" account on the books. It is also the executive account between the branch and the headquarters, which includes all transactions between the branch and the headquarters.

The feature is that the head office current balance of the branch books and the branch current balance of the head office books are mutually maintained.

The balance of these accounts on any date is equal to the difference between the assets and liabilities of the branch on that day. The branch recurring balance of the head office book and the head office recurring balance of the branch book show the same but opposite balances on a particular date.

4. There may be inter-branch transactions. That is, goods are transferred from one branch to another at the same headquarters. We'll talk about such entries later.

5. When the head office receives the account and statement, the head office checks the balance. The balance is displayed in the head office accounts in the branch books and in the branch accounts in the head office books. The difference will be adjusted. This is treated individually.

Accounting journals for regular transactions

Inter-branch transactions:

If the head office has multiple branches, transactions may take place between them, and such transactions are called inter-branch transactions. A branch does not need to have an account at another branch. Inter-branch transactions are treated as transactions with the head office.

The entries are:

Inter-Branch Transactions

Example

Journal of A and B Branch

Solution:

Journal of A and B Branch

Journal of C Branch and Head Office

Items in transit:

Generally, the balance of the branch's checking in the head office's books is the same as the balance of the head's checking in the branch's books. The balances of these current accounts must be the same, but on the opposite side of both books.

The difference occurs in the following situations:

1. If the branch sends goods or cash to the head office, the branch will enter it in the head office account. However, the same is recorded in the headquarters books only upon receipt of goods or cash. For example, goods or cash sent by a branch just before the end of a fiscal year may not reach headquarters in the same fiscal year.

Therefore, the branch accounts are not credited in the head office books, but the head office accounts are debited in the branch books at the same time. Therefore, there is a difference between the two books.

2. Similarly, the head office may send cash or goods to the branch office. When you submit them, the branch checking account will be debited to the headquarters books. If the item is not received by the branch book, the corresponding entry will not be passed to the branch book.

In this way, goods or cash sent from the head office to the branch office or from the branch office to the head office and not received by the recipient are called in transit.

1. If the goods or cash sent by the branch is in transit, the following entry will be passed.

Goods or cash sent from the branch are in transit

The above entries will remain on the books for a short period of time or until the cash or goods in transit arrive. If the recipient receives the goods or cash in transit, the shipping account will be closed because you need to cancel the entry.

Goods or Cash sent by the Branch are in transit

Incorporation of branch trial balances into head office books:

If a branch is dependent, it is relatively easy to incorporate the branch results because the accounting for such a branch is done at the headquarters itself. Profit is transferred from the branch account under the debtor system or the branch adjustment account under the stock debtor system to the general profit and loss account. An independent branch with its own accounting system creates a trial balance and sends a copy to the headquarters.

After receiving the trial balance from the branch, the head office passes a built-in entry to prepare the balance sheet combined with the branch's transactions and income statement. With the help of the branch trial balance, the head office records in a book about the branch. This process is known as the integration of branch trial balances.

There are two ways:

Incorporation of all items into the trial balance:

The item is divided into two parts.

Items related to trading and income statement

Items related to the balance sheet.

After passing the above six journals, Headquarters creates branch transactions and P & L accounts.

Closing entries if head office wants

Items related to the balance sheet

After passing all eight of these entries, the total debit of the branch accounts equals the total of the crediting branch accounts, so the branch accounts in the head office books are automatically balanced. That is, if branch assets and liabilities are included, the branch accounts in the head office books created and incorporated after adjustment do not leave a balance.

If the assets and liabilities of the branch are not included, the branch accounts in the head office books created by the above method will leave a closing balance equal to the net assets (assets minus liabilities) as of the closing date.

2. Incorporation of branch net income / loss, liabilities and assets:

Instead of transferring all items, the branch can create transactions and profit and loss accounts and transfer only net income or net loss to headquarters with or without assets and liabilities.

If assets and liabilities are transferred, the headquarters will not leave a balance. However, if assets and liabilities are not transferred, the head office account will have a balance equal to net worth. However, at the time the consolidated balance sheet was created, this account was replaced by branch assets and liabilities.

Example:

The Chennai company has two branches in Mysore and Bangalore. Headquarters and branches will close their books on December 31st.

The next adjustment is not yet enabled, so you need to enter the next adjustment entry.

A remittance of 4.500 rupees sent to the head office by Mysore on December 30 received by the head office on January 5th.

2. A product worth 2,000 rupees shipped from the Bangalore branch on December 27 and received by the Mysore branch on December 30 based on instructions from the head office.

3. The depreciation of the assets of the Mysore branch is Rs 1,100 and the account for such assets is maintained by the head office.

4. A product worth Rs 9,000 shipped from the head office to the Mysore branch on December 30 was received by that branch on January 7.

Display the entry in the head office book.

Solution:

Solution

Example

Mangalore's headquarters had branches in Putter and Udupi. Assuming the book was closed on March 31, 2006, enter an entry in the book at headquarters to correct or adjust the following:

(1) Expenses, Rupees 4,800, will be charged for work done by the head office on behalf of the Udupi branch.

(2) Puttur Branch paid Rs. Salary for visiting headquarters staff is 3,600. The branch credited the amount to the payroll account.

(3) Depreciation at an annual rate of 10% Rs will be charged to Puttur furniture. 10,000, that account is at headquarters.

(4) Products that cost Rs. Headquarters purchased 2,400 from D'Souza Brothers, paid by Puttur Branch.

(5) Remittance of rupees. The 3,750 created at headquarters from the Udupi branch on March 28, 2006 was received at headquarters on April 1, 2006. (B.Com, Mangalore)

Solution:

Journal Entries of Mangalore Head Office

Example

Eve Ltd in Calcutta and Delhi branches. You need to prepare your trading and P & L accounts and your consolidated balance sheet. After incorporating the assets and liabilities, create a journal to include the Delhi branch account in the headquarters and the branch account in the headquarters books.

Trial Balance

Journal of Head Office

Eve Ltd. Branch Account

Balance Sheet of Eve Limited

Example

National Industries Ltd. Accounts

Departmental accounts

Introduction

Departmental Accounting refers to maintaining accounts for one or more branches or departments of the company. Revenues and expenses of the department are recorded and reported separately. The departmental accounts are then consolidated into accounts of the head office to prepare financial statements of the company.

The departmental stores are the example of large-scale retail selling just under a single roof. Different departments involve in different goods to be sold out. To calculate the net result of the whole organization, full-fledged trading, and profit, and loss account are to prepare. But to evaluate individual department, it will be creditworthy to prepare individual trading and profit and loss account.

For example, a textile mill which is having head office and factory. Separate accounts are maintained for production facilities and then the final results are sent to the head office which then incorporates by the head office in their accounts. Maintenance of separate accounts for each branch of a bank or financial institution also falls under the category of departmental accounting. The bank then prepares its financial statement after consolidating accounts of all branches.

A departmental accounting system is an accounting information system that records the activities and financial information about the department. Departmental Accounting is a vital one for large prosperous business organizations. It controls wastage & misusing, compensates the employee in terms of profit and commission, compares performance and progress of year to year or department to department or similar type of firm to firm.

Meaning & Concept of Departmental Accounting

Meaning of Departmental Accounting:

Where a big business with diverse trading activities conduct under the same roof the same usually divide into several departments and each department deals with a particular kind of goods or service. For example, a textile merchant may trade in cotton, woollen and jute fabrics. The overall performance for this type of business depends, however, on departmental efficiency.

As a result, it is desirable to maintain accounts in such a manner that the result of each department can be known—together with the result as a whole. The system of accounting follows for this; the purpose knows as Departmental Accounts. This system of accounting helps the proprietors to:

Compare the results among the different departments together with the previous results thereof,

Formulate policy to extend or to develop the enterprise in the proper line; and

Reward the departmental managers based on departmental results.

The Concept of Departmental Accounting:

Departmentalization enables big firms to determine the areas needing special attention to the achievement of overall objectives. The units or departments needing more funds and more attention than others and the one(s) contributing more toward goal attainment could be identified with good departmentalization. The purpose is basically to find out the performance and capability of the units or departments to make adjustments for the achievement of the firm’s objectives.

Each unit, department or subsidiary gives the free use of some of the assets of the firm and some responsibilities which can be profit-making, revenue generation or cost control. As expenses incur by the firm on behalf of all its departments, indirect expenses are to apportion to the departments, if each department is to present a financial statement or if the statement is to prepare by the company on a departmental basis.

Departmental accounting is about the preparation of final accounts taking into consideration divisional performance before the overall performance. With that system of accounting, companies that departmentalize can easily conclude as they are very well’ performing units, averagely or moderately performing units. Departmental accounting aims at separating the several activities of a business to compare results and to assist the proprietors/owners in formulating policies.

Objectives of Departmental Accounting:

The main objectives of departmental accounting are:

To check out an interdepartmental performance.

To evaluate the performance of the department with the previous period result.

The gross profit of each department can ascertain.

Unprofitable departments will reveal.

The result of operations can use to determine the remuneration of managers of each department.

The progress of each department can monitor for appropriate actions to take.

To help the owner formulating the right policy for the future.

To assist the management in deciding to drop or add a department.

It helps in determining the commission of the department manager when it links to profit achieved by their department.

It can help the management in deciding which department should develop more and which should close to maximize the profitability of the whole company.

To provide detail information about the entire organization, and.

To assist management for cost control.

It also helps in allocating costs to various departments and therefore helps in better control of the cost of the departments of the company.

For a company that is dealing with multiple products, it is much easier to control and monitor several departments based on the products they sell rather than controlling it as one single business.

Methods & Techniques of Departmental Accounting

Departmental accounts are prepared in such a manner that all desired information is available and departmental profit can correctly make.

There are two methods:

Where the individual set of books maintains, and.

Where all departmental accounts maintain columnar- wise collectively.

They are as explained below:

Where Individual Set of Books are maintained:

Under this method, the accounts of each department independently maintain. The departmental results of all the departments collect and take into consideration to find out the net result of the organization.

Where All Departmental Accounts are maintained Columnar-Wise Collectively:

A Departmental Trading and Profit and Loss Account open for each department in a columnar form together with a separate column for ‘Total’ to ascertain the individual result of the different departments and also as a whole. But the Balance Sheet prepares in a combining form.

And to incorporate the purchase and sale of goods, the subsidiary books and also the nominal accounts into the ledger must be ruled out with extra columns for each department in arriving at the desired departmental figures to prepare departmental final accounts. If there is a larger volume of cash purchase and cash sales, the Cash Book also must maintain separate columns for cash purchases and cash sales of various departments.

Advantages of Departmental Accounting

The most significant advantages of departmental accounts are:

Individual results of each department can know which helps to compare the performances among all the departments, i.e., the trading results can compare.

Departmental accounts help to understand or locate the success, failure, rates of profit, etc.

It helps the management to make a proper plan of action, policies to increase profit after analyzing the results of the operation of various departments.

Departmental accounting helps us to understand which department should be expanded further or which one should close down as per the results of the operation.

It also helps to encourage a healthy competitive spirit among the various departments which, ultimately, helps to increase profits of the firm as a whole.

For additions or alterations of various departments, departmental accounts help a lot as it supplies the necessary information.

As detailed information about the firm is available from departmental accounting the users of accounting information, particularly, the auditors and investors widely benefit.

Since departmental accounting presents separate departmental results, the Performance, of a successful department encourages the management, employees and increases the motivation of the staff as a whole.

The percentage of gross profit on sales and stock turnover ratio of each department helps to make a comparative study among all departments.

Principles of Departmental Accounting

Preparation of final accounts of a departmentalized business requires the following:

That the gross profit or loss and the net profit or loss of each department determine separately before taking. The totals to the appropriate account or the balance sheet of the business, and.

That there should be some bases of apportioning gains and expenses to the departments or units of the business. And, that should be done as fair and equitable as possible.

Sometimes control accounts have to resort to determine the creditors’ or debtors’ value to the business. In any case, as the departmental values show the total figures, for the business as a whole, are, to sum up.

Basis of Allocation of Common Expenditure among different Departments

Expenses should be allocated among different departments on a rational basis while preparing departmental accounts.

Individual Identifiable Expenses: Expenses incurred specially for a particular department are charged directly thereto, e.g., insurance charges of stock held by the department.

Common Expenses: Common expenses, the benefit of which is shared by all the departments and which are capable of precise allocation are distributed among the departments concerned on some equitable basis considered suitable in the circumstances of the case.

Allocation of Expenses

Sr No	Expenses	Basis of Allocation
1.	Rent, rates and taxes, repairs and maintenance, insurance of building	Floor area occupied by each department (if given) otherwise on time basis
2.	Lighting and Heating expenses (e.g., energy expenses)	Consumption of energy by each department
3.	Selling expenses, e.g., discount, bad debts, selling commission, freight outward, travelling sales manager’s salary and other costs	Sales of each department
4.	Carriage inward/ Discount received	Purchases of each department
5.	Wages/Salaries	Time devoted to each department
6.	Depreciation, insurance, repairs and maintenance of capital assets	Value of assets of each department otherwise on time basis
7.	Administrative and other expenses, e.g., salaries of managers, directors, common advertisement expenses,	Time basis or equally among all departments
8.	Labour welfare expenses	Number of employees in each department
9.	PF/ESI contributions	Wages and salaries of each department

Note: There are certain expenses and income, most being of financial nature, which cannot be apportioned on a suitable basis; therefore they are recognised in the combined Profit and Loss Account, for example, interest on loan, profit/loss on sale of investment, etc.

Appropriateness of some of the apportionment methods – key points:

It can be a very subjective process.

The best way to apportion costs base on the greatest benefit- i.e. the department who gets the greatest benefit from the cost must take the greatest amount of the cost.

This makes the apportionment process very time consuming and expensive.

The more appropriate basis may be for depreciation to base on the book value of assets in each department.

Insurance of the assets based on the book value of the assets.

Types of Departments

There are two types of departments: Dependent and Independent Departments.

Independent Departments

Departments which work independently of each other and have negligible inter- department transfers are called Independent Departments.

Dependent Departments

Departments which transfer goods from one department to another department for further processing are called dependent departments. Here, the output of one department becomes the input for the other department. These transfers may be done at cost or some pre-decided selling price. The price at which this is done is known as transfer price. In these departments, unloading is required if the transfer price is having a profit element. The method of eliminating unrealised profit will be discussed later.

Inter Departmental Transfers

Whenever goods or services are provided by one department to another, their cost should be separately recorded and charged to the department benefiting thereby and credited to that providing the goods or services. The totals of such benefits (inter-departmental transfers) should be disclosed in the departmental Profit and Loss Account, to distinguish them from other items of expenditure.

Basis of Inter-Departmental Transfers

Goods and services may be charged by one department to another usually on any of the following three bases:

Cost,

Current market price,

Cost plus agreed percentage of profit.

Elimination of Unrealised Profit

When profit is added in the inter-departmental transfers the loading included in the unsold inventory at the end of the year is to be excluded before final accounts are prepared so as to eliminate any anticipatory (internal) profit included therein.

Stock Reserve

Unrealised profit included in unsold stock at the end of accounting period is eliminated by creating an appropriate stock reserve by debiting the combined Profit and Loss Account. The amount of stock reserve will be calculated as:

Transfer price of unsold stock × Profit included in transfer price

Transfer price

Journal Entry

At the end of the accounting year, the following journal entry will be passed for elimination of unrealised profit (creation of stock reserve):

Profit and Loss Account Dr.

To Stock Reserve

(Being a provision made for unrealised profit included in closing stock)

In the beginning of the next accounting year, the aforesaid journal entry will be reversed as under:

Stock Reserve Dr.

To Profit and Loss Account

(Being provision for unrealised profit reversed.)

Disclosure in Balance Sheet

The unsold closing stock acquired from another department will appear on the assets side of the balance sheet as under:

(An extract of the assets side of the balance sheet)

Current assets xxx

Stock xxx

Less: Stock reserve xxx

Xxx

Key Takeaways-

Branch accounting is a bookkeeping system that maintains a separate account for each branch or location of an organization.

Technically, branch accounts are temporary or nominal ledger accounts that last for a specified period of time.

Branch accounting improves accountability and control because you can closely track profitability and efficiency by location.

Branch accounting has a long history, dating back to 14th century Venetian banks.

Types of Lease (Finance Lease and Operating Lease)

What is a lease?

A lease is a contract that allows an asset / asset owner to use the asset / asset in exchange for something, usually money or other asset, by another party. The two most common types of leases in accounting are operating leases and finance (capital leases) leases. This step-by-step guide covers all the basics of lease accounting.

Benefits of leasing

Leasing has many advantages that can be used to attract customers.

Payment schedules are more flexible than loan contracts.

After-tax costs are lower because the tax rates are different for lenders and borrowers.

The lease includes financing 100% of the value of the asset.

For operating leases, the company creates expenses instead of debt, allowing the company to obtain funding. This is often referred to as "off-balance sheet financing."

Disadvantages of leasing

One of the major drawbacks of leasing is the cost of the agency. In a lease, the lessor transfers all rights to the lessee for a specific period of time, causing moral hazard problems. The lessee who manages the asset is not the owner of the asset, so the lessee may not be able to pay attention to it as if it were his own asset. This separation between asset ownership (lessor) and asset management (lessee) is called the agency cost of the lease. This is an important concept in lease accounting.

What is a finance lease?

Finance leasing is a way of providing finance. In effect, a leasing company (lessor or owner) buys asset for a user (usually called an employer or lessee) and rents them to them for an agreed period of time.

Finance leases are a statement of Standard Accounting Practice 21.

"Practically all risks and rewards of ownership of an asset to a lessee."

This basically means that the lessee is in much the same position as if he had bought the asset.

The lessor charges rent as compensation for hiring the property to the lessee. The lessor retains ownership of the asset, while the lessee uses the asset exclusively (if the terms of the lease are complied with).

The lessee pays a rent that covers the original cost of the asset during the initial or major period of the lease. You are obliged to pay all of these rents, including balloon payments at the end of the contract. When all of this is paid, the lender will recover the investment in the asset.

The customer promises to pay these rents during this period and technically the finance lease is defined as non-cancellable, although it may be possible to terminate early. At the end of the lease

What happens at the end of the primary finance lease term is different and depends on the actual contract, but the possible options are:

The lessee acts on behalf of the lessor and sells the asset to a third party.

Assets will be returned to the lessor for sale.

Customer enters secondary lease term.

When an asset is sold, the customer may be given a rent rebate equivalent to the majority of the sale price (minus disposal costs), as agreed in the lease agreement.

If the asset is held, the lease enters the second period.

Secondary rentals can be much lower than primary rentals (“pepper cone” rentals). Alternatively, the same rental may continue to be leased monthly.

Finance lease example

Finance leases are commonly used to finance vehicles, especially hard-working commercial vehicles. The company wants the benefits of leasing, but does not want the responsibility to return the vehicle to the lender in good condition.

Besides commercial vehicles, finance leases can be used for many other assets. An example is shown below.

The Health Club was considering investing in new gym equipment. The total loan amount is £ 20,000 and the contract is set to pay for 60 months without deposits. Importantly, the balloon payment was set to £ 0. This means that the client (or most likely a gym user!) Is free to sweat the device, knowing that they are not responsible when concluding the contract. After 60 months the option is to sell the equipment – keep the money made or enter the peppercorn (secondary) rental period in a relatively small amount.

Operating lease

In contrast to finance leases, operating leases do not transfer virtually all risks and rewards of ownership to the lessee. It usually runs for less than the full economic life of the asset, and the lessor expects the asset to have resale value (known as residual value) at the end of the lease term.

This residual value is predicted at the beginning of the lease and the lessor bears the risk of whether the asset will achieve this residual value at the end of the contract.

Operating leases are common when assets such as aircraft, vehicles, construction plants, and machinery have residual value. Customers can use the asset for the agreed term in exchange for rent payment. These payments do not cover the full cost of the asset as in the case of a finance lease.

The operating lease may include other services included in the contract. Vehicle maintenance contract.

Ownership of the asset remains with the lessor and the asset is returned at the end of the lease when the leasing company rehires it under another contract or sells it to release the residual value. Alternatively, the lessee may continue to rent the asset at the fair market rent agreed at that time.

Accounting rules are currently under consideration, but at this time operating leases are off-balance sheet arrangements and finance leases are on the balance sheet. For accounting under international accounting standards, IFRS 16 will bring operating leases to the balance sheet. Learn more about IFRS16.

A common form of operating lease in the vehicle sector is contract employment. This is the most common way to fund company cars and is growing steadily.

Why choose one sort of lease over the other?

This is a complex question, and each asset investment needs to be considered individually to see which type of financing is most beneficial to the organization. However, there are two important considerations. The type and lifetime of the asset, and the way the leased asset is reflected within the organization's account.

Asset type and lifespan

As mentioned above, it is important to remember that in operating leases the risks and rewards of owning an asset remain with the lessor, and in finance leases these are primarily transferred to the lessee.

Very generally, if an asset has a relatively short service life within the business, an operating lease may be a more commonly selected option before it needs to be replaced or upgraded. This is because the asset is likely to hold a significant portion of its value at the end of the contract, thus lowering the rent during the lease term. This is priced to the overall cost of the contract, as the lessor bears the risk in terms of the residual value of the asset.

This “cost of risk” can be significantly reduced for assets that can affect their condition at the time of return to the lessor and therefore have a high degree of certainty in estimating the residual value. Asset types to which this applies include automobiles, commercial vehicles, and IT equipment.

If an asset is likely to have a longer useful life in the business, its residual value consideration is less important as it is likely to be a much smaller percentage of its original value. This may mean that the lessee is willing to take this risk internally rather than paying the lessor. Here, finance leasing is a more obvious choice.

Because the rent paid on a finance lease pays off all or most of the capital, it is often possible to set a secondary lease period and maintain the use of the asset at a significantly reduced cost.

Accounting for finance and operating leases

The treatment of the two different lease types depends on the accounting standards that your organization complies with.

For organizations reporting to International Financial Reporting Standards (IFRS), the introduction of IFRS 16 from 1 January 2019 requires that both operating and finance leases be reflected in the company's balance sheet and income statement. Means. Prior to this, operating leases were treated as "off-balance sheet" items.

Today, most SMEs comply with UK GAAP, which is generally accepted in the UK. Changes in leasing treatment are filtered to companies applying UK GAAP only when converting to the IFRS / FRS 101 Reduction Disclosure Framework instead of FRS 102. The expectation from the FRC is that the earliest adoption in the UK could be 2022/23. But until then, it will monitor and monitor international impact.

For companies that currently need to reflect operating leases in their accounts, the impact is as follows:

Balance Sheet – The lessee must show the “right to use” the asset as an asset and the obligation to pay the lease payments.

As a responsibility.

Income Statement – The lessee displays the depreciation of the asset and the interest on the lease liability. Depreciation is usually done on a straight-line basis.

For companies unaffected by these changes, the ability to raise funds while keeping their assets off-balance sheet can be a factor in deciding whether to choose an operating lease or a finance lease.

Annual investment allowance

Many organizations seek to maximize the benefits of corporate tax by using the Annual Investment Allowance (AIA) when acquiring new assets. These allowances provide the organization with an immediate tax deduction for 100% of the cost of newly acquired assets. Since January 1, 2019, the allowance has increased to £ 1 million annually.

However, to be eligible for this remedy, the asset must be "purchased" rather than "leased". That is, assets financed on both operational and finance leases are not eligible for AIA, but assets acquired using financing methods such as contract purchases and employment purchases.

Financial Leasing and Operating Leasing – Key Differences

As you can see, there are some differences between financial and operating leases. Let's look at the important differences between them –

A financial lease is a type of lease that allows the lessor to use the former asset instead of a long-term, recurring payment. An operating lease, on the other hand, is a type of lease that allows the lessee to use the former asset in exchange for short-term recurring payments.

Financial leases are leases that need to be recorded under the accounting system. Operating leases, on the other hand, are a concept that does not need to be recorded in any accounting system. For this reason, operating leases are also known as "off-balance sheet leases."

In a financial lease, ownership is transferred to the lessee. In an operating lease, ownership isn't transferred to the lessee.

Contracts based on financial leases are called loan contracts / contracts. Contracts based on operating leases are called rental contracts / contracts.

Once both parties have signed the contract, it is generally not possible to cancel the financial lease. Even after an agreement between the parties, the operating lease can only be revoked during the initial period.

Financial leasing provides tax credits for depreciation and financing costs. Operating leases provide tax credits for rent payments.

Financial leases offer asset purchase options at the end of the contract period. With operating leases, there are no such offers.

Key takeaways:

A lease is a contract that allows an asset / asset owner to use the asset / asset in exchange for something, usually money or other asset, by another party.

The two most common types of leases in accounting are operating leases and finance (capital leases) leases.

One of the major drawbacks of leasing is the cost of the agency. In a lease, the lessor transfers all rights to the lessee for a specific period of time, causing moral hazard problems

Finance leases are a statement of Standard Accounting Practice 21.

The lessor charges rent as compensation for hiring the property to the lessee.

The lessor retains ownership of the asset, while the lessee uses the asset exclusively (if the terms of the lease are complied with).

Finance leases are commonly used to finance vehicles, especially hard-working commercial vehicles.

Operating leases are common when assets such as aircraft, vehicles, construction plants, and machinery have residual value.

Financial leasing provides tax credits for depreciation and financing costs. Operating leases provide tax credits for rent payments.

Financial leases are leases that need to be recorded under the accounting system. Operating leases, on the other hand, are a concept that does not need to be recorded in any accounting system.

3.3 Finance Lease (Hire Purchase and installment) (Theory).

Meaning of Hire Purchase System

Installment system

The installment system is almost the same as the employment purchase system. The main difference between the two is that in the installment payment system, the buyer takes ownership as soon as the contract with the seller is signed. If he fails to pay in instalments, the seller can only get the article back with the help of the court.

Rental purchase and installment payment systems promote active sales of durable consumer goods. Products such as motorcycles, TVs, radios, refrigerators, bicycles and furniture are sold in large quantities through rental purchase and installment payment systems.

The products sold in these systems

Durable,

High quality,

fashionable

Standardization; and

High price.

Benefits of Employment Purchase and Installment Systems

1. Rental purchase and installment payment schemes allow buyers to purchase items that are out of reach.

2. It also allows businesses to find buyers for their products. Companies are not always able to find a cash party for products that are inherently expensive.

3. It expands the market.

4. Middlemen are excluded

5. It helped financial companies develop their business. Today's financial companies are widely funding several articles under the job purchase and installment payment system.

6. The price will be stable.

7. By renting and selling convenient items and luxury items in installments, people's living standards will improve.

8. Sellers can increase their sales. In addition, rental purchases and installment sales are more profitable.

9. Nowadays, most business houses offer many offers, like free gifts, exclusively for rental purchase customers.

Disadvantages of employment purchase and installment payment system

1. Employment purchase and installment payment systems tempt buyers to purchase products that go beyond their means. So it will be a luxury.

2. The buyer pays a very high price for the article under such a scheme. This is because he has to pay interest on his unpaid balance.

3. The need for time is a savings. Plans like buying jobs waste people.

4. Employment purchase price is higher than cash price. Interest is charged to the purchaser of the employment purchase system. Interest rates are often high.

5. If the buyer fails to pay, the goods sold in the rental purchase system will be reclaimed by the rental vendor. Buyers incur huge losses on seized goods.

6. Employment purchases and installment transactions are tedious. You need to conclude a contract and give a guarantee. More legal proceedings are to be passed.

7. The default rate under the employment purchase and installment payment system is higher. This is because only people with inadequate means buy under this system.

8. The purchaser must carry out some legal proceedings. He may have to find a guarantor. The contract must be prepared and signed by both the seller and the buyer, and it must be witnessed. The ownership document remains with the vendor / financial company until the employer liquidates the membership fee.

Summary

Entries in Books:

Actual Cash Price Paid Method: This method follows a technical approach and does not treat the hire purchaser as owner until he makes the payment of last instalment. Under this method, the asset is recorded at the cash price actually paid.

Books of the Vendor- The vendor follows no special method for recording sales on hire purchase, especially in case of sale of large items. He debits the purchaser with the cash price and credits him with the amount received. Every year the interest due is debited.

Books of Purchaser

First Method - The purchaser can also follow the system adopted by the vendor and make entries like ordinary purchase of an asset. Only, he should credit the vendor with interest due every year and debit him with cash as and when paid. The above given example can be worked out in the following way (ledger accounts.)

Second Method - Under the second method, entries are passed only when payment is due or made. At this time, the vendor is credited with the amount due. Interest for the period is debited to interest Account and the balance (principal) is debited to the Asset Account. On payment, of course, the vendor is debited and Cash (or Bank) credited.