Study Note 2

Study Note – 2 Accounting For Specia l Transactions
STUDY NOTE – 2
ACCOUNTING FOR SPECIAL TRANSACTIONS
Name of Chapters
1. Bills of Exchange
2. Consignment Accounting
3. Joint Venture Accounts
4. Insurance Claim (Loss of Stock and Loss of Profit)
CHAPTER – 1
BILLS OF EXCHANGE
INTRODUCTION
Business activity involves exchange of goods or services for money. A business transaction gets
‘closed’ if the exchange is settled immediately. When goods are purchased and paid for in cash the
settlement is instant.
Most of the settlements are not on cash basis, where payment for goods or services is deferred. Such
deferred payments are done through instruments like cheques, pay order, letter of credit, promissory note,
bills of exchange, hundies etc.
In case of credit transaction, the supplier normally gets a promise from the customer that he will
settle the payment at a future date as agreed. It could either be a promissory note or bill of exchange.
The promissory note is written by the customer as an undertaking to pay the money, whereas the bill
of exchange is a note drawn by the seller and accepted by the buyers.
In India, the negotiable instrument Act 1981 governs the provisions for bill of exchange. As per this
act, the bill of exchange is defined as “an instrument in writing containing an unconditional order signed by
the maker, directing a certain person to pay a certain some of money only to the order of the certain person
to the bearer of the instrument.”
Based on this definition the following features of a bill of exchange are noticed:
(a) It is an instrument in writing.
(b) It contains an unconditional order.
(c) It is signed by the maker.
(d) It is drawn on a specific person
(e) There is an order to pay a specific sum of money.
(f) It must be dated.
(g) It specifies to whom the payment is to be made e.g. to the maker or to person mentioned
by him or to the bearer.
SPECIMEN OF BILL OF EXCHANGE:

Stamp Address of Drawer
Date
Three months after date pay to a sum of Rs. 50000 (fifty thousand only) far the value received
To be accepted
(B’s signature & stamp)
A
(Drawer)
PARTIES TO BILL OF EXCHANGE

(a) Drawer: He is a person who draws the bill. Typically, he is the seller or a creditor.
(b) Drawee: He is the person on whom the bill is drawn. Normally, he is the buyer or debtor. He has to
pay the amount of the bill to the drawer on the due date.
(c) Payee: he is the person to whom the amount of bill is payable. He may be the drawer himself or the
creditor of the drawer.
(d) Endorsee: He is the person in whose favour the bill is endorsed by the drawer. He is usually the
creditor of the drawer.
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EXAMPLE
Suppose, ‘A’ sells goods to ‘B’ for Rs. 100000. ‘A’ draws a bill on ‘B’ who accepts the same to
pay this amount after 90 days. Here ‘A’ is the drawer and ‘B’ is the drawee. If ‘A’ specific that the
amount will be paid to ‘C’, then ‘C’ will be the payee.
HOLDER AND HOLDER IN DUE COURSE

Holder
According to Sec 8 of the Negotiable Instrument Act a Holder is “Any person entitled in his own
name to the possession thereof and to receive or recover the amount due thereon from the parties thereon”. It
indicates the person who is legally entitled to receive the money due on the instrument is called the ‘Holder’.
Holder in Due Course
According to Sec 9 of the Negotiable Instruments Act, the holder in due course is a particular kind of
holder.
(a) He / she has obtained the instrument for valuable consideration.
(b) He / she became the holder of the instrument before the maturity of the instrument.
(c) He / she must acquire the instrument bona fide and having no cause to believe that, any defect
existed in the title of the person from whom he derived his title.
Promissory Note
As per Indian Negotiable Instrument Act, a ‘Promissory Note’ is “an instrument in writing (not
being a bank note or a currency note) containing an unconditional undertaking signed by the maker to pay a
certain sum of money to or to the order of a certain person.” The person to whom the amount is payable is
called Promisee or Payee.
A SPECIMEN OF PROMISSORY NOTE

Rs. 15000 12.03.2012
J – 49, B. N. Marg
New Delhi
I promise to pay Mr. R. K. Nandy after 3 months on order, the sum of Rs. 15000 (Rupees Fifteen Thousand
Only) for value Received.
Place:
Date: 16/03/2012 Sd/-
A. Chakraborty
16.03.2012
ESSENTIAL FEATURES OF PROMISSORY NOTE

Essential Features of Promissory Note are as follows:
(a) It is a written document and adequately signed by the maker of promisor.
(b) It must contain an undertaking or promise to pay a definite amount given in both figures and
wards.
(c) The amount is payable either on demand or on the maturity of a fixed period.
(d) The amount is payable either to a prescribed person or to his / her order. The person to whom
the amount should be payable is known promise or payee
DIFFERENCE BETWEEN BILLS OF EXCHANGE AND PROMISSORY NOTE

The differences between these two items are as under:
Bills of Exchange Promissory Note
It is drawn by the seller. It is drawn by the purchaser.
It involves an order to make payment. It involves a promise to make payment.
It consists of three parties, viz the drawer, the It consist of two parties, namely the promisor (or
acceptor and the payee. maker) and promisor (or payee)
To be effective, it must be accepted. It does not need acceptance.

Drawer and the payee can be the same person. Maker and payee cannot be the same person.
Acceptor is required to make payment on due date. Drawer or maker is required to make payment on
In case of any default, drawer is liable to pay the due date.
amount to payee.
TENURE, DAYS OF GRACE AND DATE OF MATURITY OR DUE DATE OF BILLS
TENURE
The bill is payable at sight, on demand after sight, after date etc. the period between the date of
drawing of the bill and the period it becomes due is called Tenure of the Bill.
DAYS OF GRACE
In case the bill is payable on demand, it becomes due immediately on presentation for payment. In
the same way if the bill is not payable on demand becomes due on the third day from the date of maturity.
These three days are called Days of Grace. For example, if a bill is drawn on 01.04.2012 for 4 months, the
due date or date of maturity will be 4.08.2012. the same can be computed as under:
Date of Drawing 01.04.2012
Add: Period / Tenure 4 months
01.08.2012
Add: Days of Grace 3
Due Date / Date of Maturity 4.08.2012
DATE OF MATURITY
Date of Maturity is also known as Due Date. The date on which the amount of the bill becomes
payable is called ‘Due Date’ or ‘Date of Maturity’. To compute due date, three days (called Grace period)
are included to the date of maturity of the period of the bill.
TYPES OF BILLS OF EXCHANGE

(1) Trade Bill: this bill is drawn to settle a trade transaction.
(2) Accommodation bill: This bill is used without a trade transaction and is for mutual benefit.
EXAMPLE
If Mr. X is in need of money, he draws a bill on his friend Mr. Y who accepts it. This bill is then
discounted with bank (bank will pay money before due date) and the money is shared between X
and Y. on the due date, Y will pay to the bank and X will pay Y his share. Law generally does
not recognise such bills.
METHODS OF ACCOUNTING
1. Trade of Bill
(a) When the drawer retains the bill till maturity

Situation Drawer’s books Drawee’s books
B/R A/c Dr. Drawer A/c Dr.
Drawing of a bill
To Drawee A/c To B/P A/c
Bank A/c Dr. B/P A/c Dr.
Payment on due date
To B/R A/c To Bank A/c
DISCOUNTING OF BILLS
If the holder of a bill receivable cannot wait till the date of maturity of the bill and needs cash before
the date due, then he can get the bill discounted from the bank. At the time of discounting it, the bank pays
cash after deducting the discount from the value of the bill.

The discount which is to be deducted depends upon the rate of interest and the remaining period of
the bill and is calculated as follows:
Discount = Amount of the bill x Remaining period to maturity x Rate of interest.
FOR EXAMPLE,
if a bill of Rs. 10000 due for payment on 15.03.2012 is discounted on 15.01.2012 at 24% p.a.
the amount of discount is calculated as under:
Amount of bill = Rs. 10000
Rate of interest = 24%
Remaining period of the bill = 2 months
Discount = Rs. 10000 x 2 / 12 x 24 / 100 = Rs. 400
Cash received on discounting = Rs. (20000 – 400) = Rs. 19600
Discount is an expenses for the holder receiving the payment and gain to the bank.
(b) When the drawer discounts the bill with bank before maturity
Situation Drawer’s Book Drawee’s Books
Drawing of a bill
Bank A/c Dr.
Discounting with bank Discount A/c Dr. No entry
To B/R A/c
B/P A/c Dr.
Payment due date No entry
To Bank A/c
When the drawer endorses the bill to a person before maturity

Situations Drawer’s books Drawee’s books Endorsee’s book
Drawing of a bill B/R A/c Dr. Drawer A/c Dr. Not Applicable
Endorsement Endorsee A/c Dr. B/R A/c Dr.
No entry
To B/R A/c To Drawer A/c
Payment B/P A/c Dr. Bank A/c Dr.
No entry
To Bank A/c To B/R A/c
(c) When the drawer sends the bill to bank for collection before maturity
Situations Drawer’s books Drawee’s books
Drawing of a bill B/R A/c Dr. Drawer A/c Dr.
Sending for collection Bill for collection Dr.
No entry
To B/R A/c
Payment on due date Bank A/c Dr. B/P A/c Dr.
Collection charges A/c Dr. To Bank A/c
To bill for collection
DISHONOUR OF BILL
Dishonour of a bill means that the acceptor refuses to honour his commitment on due date and for
this payment of the bill on presentation does not take place. At the time of dishonour of a bill, original
relationship between the parties is restored, that is, the drawee again becomes the debtor of the drawer in his
books and drawer is treated then as a creditor in the books of drawee.
Moreover the drawer to provide a legal evidence of dishonour, the fact of dishonour is to be noted
on the bill by ‘Notary Public’. The fact of dishonour which he is recording is called ‘noting’ and the amount
charged by him for his services are called ‘noting charges’. These charges are to be paid by the holder of the
bill on the date of default. Actually the acceptor of the bill is liable for the dishonour, the noting charges paid
by the holder are to be reimbursed by the acceptor.

(a) When the drawer retains the bill till maturity
Drawer’s books Drawee’s books
Drawee A/c Dr. B/P A/c Dr.
To B/R A/c Noting Charges A/c Dr.
To Bank A/c To Drawer A/c
(for noting charges)
(b) When the drawer discounts the bill with bank before maturity
Drawer’s Book Drawee’s Books
To Bank A/c Noting charges A/c Dr.
(bill + noting charges) To Drawer A/c
(c) When the drawer endorses the bill to a person before maturity
Drawer’s books Drawee’s books Endorsee’s book
Drawee A/c Dr. B/P A/c Dr. Drawer A/c Dr.
To Endorsee A/c Noting Charges A/c Dr. To B/R A/c
(bill + noting charges) To Drawee A/c To Bank A/c
(noting charges)
(d) When the drawer sends the bill to bank for collection before maturity
Drawer’s books Drawee’s books
To Bill for collection A/c Noting charges A/c Dr.
To Bank A/c To Drawer A/c
(Bill & noting charges)
1. RENEWAL OF BILLS
Sometimes the drawee of a bill is not able to meet the bill on due date. He may request the drawer to
draw a new bill for the amount due. Sometimes he pays a certain amount out and accepts a first bill for the
balance for which he has to pay a certain amount of interest which is either paid in cash or is included with
the fresh bill. This bill is known as Renewal of Bills. That the amount of the new bill will be face value of
the original bill minus cash payment, if any. Plus interest for the renewed period.
Entries in the books of Drawer and Drawee are shown below:
Transactions Entries in the books of Drawer Entries in the books of Drawee
Bills payable A/c Dr.
For dishonour of Bills Usual Entry
To Drawer A/c
Drawee A/c Dr. Interest A/c Dr.
For interest on renewed period
To Interest A/c To Drawer A/c
Cash A/c Dr. Interest A/c Dr.
If interest is paid in cash
To Interest A/c To Cash A/c
Bills Receivable A/c Dr. Drawer A/c Dr.
For fresh bill
To Drawee A/c To Bills payable A/c
2. RETIREMENT OF BILL
Sometimes the drawee pays the bill before the date of maturity. Under the circumstances, the drawer
allows certain amount of rebate or discount which is calculated on certain percentage p.a. basis. The rebate is
calculated from the date of payment to the date of maturity.
Entries in the books of drawer and drawee are given below:
Transaction Entries in the books of drawer Entries in the books of drawer
When the bills is drawn Bills receivable A/c Dr. Drawer A/c Dr.
To Drawer A/c To Bills payable A/c
When the bill is retired Bank / Cash A/c Dr. Bills payable A/c Dr.
Rebate Allowed A/c Dr. To cash / Bank A/c
To bills receivable A/c To rebate received A/c

3. ACCOMMODATION BILL OF EXCHANGE
The basis for accommodation bill is not a trade transaction. It is drawn to accommodate the financial
requirements of drawer or even a drawee. This transaction presupposes trust and understanding between the
parties to the transaction. The drawer normally discounts this bill with the bank. The amount received from
bank is either retained by the drawer for himself or shared between the drawer and the drawee. On the date
of maturity, the drawee settles the bill with bank by effecting payment. The drawer will pay the drawee
either full amount of the bill or his share. Accounting entries for accommodation bill are:
Situations Drawer’s books Drawee’s books
Drawing of a bill
Bank A/c Dr.
Discounting with bank Discount A/c Dr. No Entry
To B/R A/c
Payment on due date
To Bank A/c To Bank A/c
4. INSOLVENCY OF DRAWEE (ACCEPTOR)
Insolvency of acceptor means that he cannot pay the amount owned by him. Therefore, an
insolvency of the acceptor, bill will be treated as dishonoured and entries for dishonour of bill will be passed
in the books of respective parties. Later on, when some amount is realized from the property or estate of the
insolvent acceptor, entry for cash received is passed and the balance of amount due from the insolvent
acceptor is treated as bad debts. In the books of acceptor the amount not paid is transferred to deficiency
account (or profit and loss account).
PRACTICAL PROBLEMS
Illustration 1.
On 1.4.2017 A draws a bill on B for Rs.1,00,000 3 months after date. B accepts the bills signs on it and
returns to A. Pass necessary journal entries in the books of A and B in each of the following cases:
1. The bill is hold by A till maturity.
2. The bill is discounted with bank on 4.4.2017 at a discount of 6 % p.a.
3. The bill is endorsed to C to make a final settlement of a due of Rs.1,05,000 on 1.4.2017.
Illustration 2
Sagar purchased goods worth Rs. 1,000 from Ravi for which the latter drew a bill on the former, payable
after one month. Sagar accepted it and returned it to Ravi. Ravi endorsed it to Kamal, and Kamal to Amal.
Amal discounted the bill with State Bank of India at 6% p.a. On maturity, the bill was dishonoured, noting
charge being Rs. 10.
Show the entries in the books of all the parties including the books of State Bank of India.
Illustration 3
Sunil owed Anil Rs. 80,000. Anil draws a bill on Sunil for that amount for 3 months on 1st April. Sunil
accepts it and returns it to Anil. On 15th April, Anil discounts it with Citi Bank at a discount of 12% p.a. On
the due date the bill was dishonoured, the bank paid noting charges of Rs. 100. Anil settles the bank's claim
along with noting charges in cash. Sunil accepted another bill for 3 months for the amount due plus interest
of Rs. 3,000 on 1st July. Before the new bill became due, Sunil retires the bill with a rebate of Rs. 500.
Show journal entries in books of Anil.
Illustration 4
On 1st April Mr. Bala draws a bill of Rs. 1,20,000 on Mr. Lala for the amount due for 4 months. On getting
acceptance, on 5th April, Bala endorses it to Mr. Kala in full settlement of his claim of Rs.1,40,000 by
paying the difference in cash. Lala approached Bala on 25th July saying that he needed to renew the bill for
a further period of 4 months at an interest of 12% p.a. which Bala accepted. A fresh bill including interest
was accepted by Lala on 1st August. Bala settled his liability to Kala by cheque. This was duly settled on the
due date. Pass journal entries in the books of Bala and Lala. Also show Bills Receivables A/c and bills
Payable A/c.

Illustration 5
Pass journal entries in the books of Hema for the following transactions:
(i) Hema's acceptance to Nanda for Rs. 5,000 renewed for 3 month with interest at 10% p.a.
(ii) Nalini's acceptance to Hema was for Rs. 10,000 was retired one month before due date at a
discount of 12% p.a.
(iii) Discounted Natasha's acceptance to Hema for Rs. 4,000 with the bank for Rs. 3,920
(iv) Neela requests Hema to renew her acceptance for Rs. 3,500 for 3 months. Hema accepted on the
condition that interest of Rs. 100 was paid in cash which Neela did.
(v) Received an acceptance from Geeta for Rs. 1,200 and it was endorsed to Seeta in full settlement
of her claim.
Illustration 6
X bought goods from Y for Rs. 4,000. Y draws a bill on 1.1.2013 for 3 months which was accepted by X for
this purpose. On 1.3.2013, X arranged to retire the bill at a rebate of 12% p.a. Show the entries in the books
of X and Y.
Illustration 7
Following information is given to you by Govind from his books:
On 1st April 2012 he had with him bills of Rs. 1,50,000 accepted by his customers and Rs. 1,00,000 worth
accommodation bills accepted by his friends. He had accepted bills worth Rs. 90,000 for his suppliers and
Rs. 75,000 worth accommodation bills for his friends.
During the year the following transactions took place:
(i) He raised bills of Rs. 3,75,000 which were accepted by his customers.
(ii) He accepted bills of Rs. 2,25,000 for his suppliers.
(iii) He accepted accommodation bills of Rs. 60,000 for his friends.
(iv) His friend accepted accommodation bills of Rs. 1,25,000 for him.
(v) He honoured on due dates trade bills of Rs. 1,75,000 and accommodation bills of Rs. 85,000.
(vi) He received payments on due dates for trade bills of Rs.4,00,000 and accommodation bills of
Rs. 1,50,000.
(vii) He endorsed bills of Rs. 25,000 to his suppliers, which were honoured by the acceptors.
(viii) His customers endorsed bills of Rs. 30,000 to him which he accepted in favour of his suppliers.
(ix) Accommodation bills were settled on the due dates and money was paid and received duly.
Prepare Bills Receivable A/c and Bills Payable A/c for both trade and accommodation bills.
Illustration 8
Vijay draws a bill for Rs. 60,000 and Anand accepts the same for mutual accommodation of both of them to
the extent of Vijay 2/3rd and Anand 1/3rd. Vijay discounts it with bank for Rs. 56,400 and remits 1/3rd
share to Anand. Before the due date, Anand draws another bill for Rs. 84,000 on Vijay in order to provide
funds to meet the first bill on same sharing basis. The second bill is discounted at Rs. 81,600. With these
proceeds, the first bill is settled and Rs. 14,400 were remitted to Vijay. Before the due date of the second
bill, Vijay becomes insolvent and Anand receives a dividend of only 50 paise in a rupee in full satisfaction.
Pass journal entries in the books of Vijay.
Illustration 9
Rahim, for mutual accommodation, draws a bill for Rs. 3,000 on Ratan. Rahim discounted it for Rs. 2,925.
He remits Rs. 975 to Ratan. On the due date, Rahim is unable to remit his dues to Ratan to enable him to
meet the bill. He, however, accepts a bill for Rs. 3,750 which Ratan discounts for Rs. 3,625. Ratan sends Rs.
175 to Rahim after discounting the above bill. Rahim becomes insolvent and a dividend of 80 paise in the
rupee is received from his estate.
Pass the necessary journal entries in the books of both the parties.

SOLUTIONS
Solution: 1
Working notes:
1. The bill is discounted with bank for 6% p.a . so the amount of discount will be = 100000 x 6/100 x 3/12 =
6000 x 3/12 = Rs.1,500.
Calculation is made for 3 months because the bill is for three months and is discounted with the bank exactly
before three months before maturity.
2. Amount due to C was for Rs. 1,05,000. However the bill is given for Rs. 1,00,000 to make full and final
settlement. Therefore Mr. A has received Rs. 5,000 as discount.
Important: Students must not confuse with discount received and discount on bills.
Journal
BOOKS OF A BOOKS OF B
Date Particulars Debit Credit Date Particulars Debit Credit
1.4.2017 Billls Receivable A/c 1,00,000 1.4.2017 A 1,00,000
To B A/c 1,00,000 To Bills Payable 1,00,000
(for the bill drawn) (for the bill
drawn)
Situation 1 Situation 1
4.7.2017 Cash A/c 1,00,000 4.7.2017 Bills payable A/c 1,00,000
To Billls Receivable A/c 1,00,000 To Cash A/c 1,00,000
Amount received at Amount paid at
maturity maturity
4.4.2017 Bank A/c 98,500 NO ENTRY IS REQUIRED
Discount on bill A/c 1,500
To Bills receivable A/c 1,00,000
Bill discounted with bank
1.4.2017 To C A/c 1,05,000 NO ENTRY IS REQUIRED
To Bills Receivable A/c 1,00,000
To Discount received A/c 5,000
The bill is endorsed to C
AT MATURITY
4.7.2017 NO ENTRY 4.7.2017 Bills payable A/c 1,00,000
To Bank A/c 1,00,000
Amount paid at
maturity
NO ENTRY 4.7.2017 Bills payable A/c 1,00,000
Amount paid at
maturity

Solution: 2
In the books of Ravi Journal Entries
Date Particulars Dr. Cr.
Sagar A/c Dr. 1,000
To, Sales A/c 1,000
(Goods sold to Sagar)
Bills Receivable A/c Dr. 1,000
To, Sagar A/c 1,000
(Bills drawn and accepted by Sagar for 1 month)
Kamal A/c Dr. 1,000
To, Bills Receivable A/c 1,000
(Bill endorsed to Kamal)
Sagar A/c Dr. 1,010
To, Kamal A/c 1,010
(Bill endorsed to Kamal dishonoured by Sagar including noting charge of Rs. 10)
In the books of Sagar Journal Entries

Purchase A/c Dr. 1,000
To, Ravi A/c 1,000
(Goods purchased from Ravi)
Ravi A/c Dr. 1,000
To, Bills Payable A/c 1,000
(Bill accepted for 1 month)
Bill Payable A/c Dr. 1,000
Noting Charge A/c Dr. 10
To, Ravi A/c 1,010
(Bill dishonoured at maturity, noting charge being Rs. 10)
In the books of Kamal

Journal Entries
To, Ravi A/c 1,000
(Bill received from Ravi)
Amal A/c Dr. 1,000
(Bill received from Ravi endorsed to Amal)
Ravi A/c Dr. 1,010
To, Amal A/c 1,010
(Bill endorsed to Amal dishonoured on maturity, noting charge being Rs. 10.)
In the books of Amal Journal Entries

To, Kamal A/c 1,000
(Bill received from Kamal.)
Bank A/c Dr. 995
Discount A/c Dr. 5
(Bill received from Kamal discounted by the Bank at 6% p.a.)
Kamal A/c Dr. 1,010
To, Bank A/c 1,010
(Bill received from Kamal dishonoured, noting charge being Rs. 10.)

In the books of State Bank of India
Journal Entries
Bill Discounted A/c Dr. 1,000
To, Amal's Current A/c 995
To, Discount A/c 5
(Amal's bill discounted which is due after 1 month.)
Amal's Current A/c Dr. 1,010
To, Bills Discounted A/c 1,000
To, Cash A/c 10
(Bill received from Amal dishonoured at maturity, noting charge being Rs. 10.)
Solution: 3
Journal entries in the books of Anil
April, 1 Bills Receivables A/c Dr 80,000
To, Sunil's A/c 80,000
(Being acceptance by Sunil)
April, 15 Bank A/c Dr 78,000
Discount A/c Dr 2,000
To, Bills Receivables A/c 80,000
(Being discounting of the bill @ 12% p.a. & discounting charges for 2.5
months)
June, 30 Sunil's A/c Dr 80,100
To, Bank A/c 80,100
(Being dishonour of the bill & noting charges paid by bank)
June, 30 Bank A/c Dr 80,100
To, Cash 80,100
(Being cash paid to bank)
July, 1 Sunil's A/c Dr 3,000
To, Interest 3,000
(Being interest due from Sunil)
July, 1 Bills Receivables A/c Dr 83,100
To, Sunil's A/c 83,100
(Being new acceptance by Sunil for Rs. 80,100 & interest of Rs. 3,000)
July, 1 Bank A/c Dr 82,600
Rebate A/c Dr 500
(Being the amount received on retirement of the bill)
Solution: 4
Journal entries in the Books of Bala
April 1 Bills Receivables A/c Dr. 1,20,000
To, Lala's A/c 1,20,000
(Being acceptance by Lala)
April 5 Kala's A/c Dr. 1,40,000
To, Cash A/c 20,000
To, Bills Receivables A/c 1,20,000
(Being bill endorsed to Kala & cash payment made to him)
July 25 Lala's A/c Dr. 1,20,000
To, Kala's A/c 1,20,000
(Being cancellation of bill for renewal)
July 25 Lala's A/c Dr. 4,800
To, Interest A/c 4,800
(Being interest due from Lala)

July 25 Kala's A/c Dr. 1,20,000
To, Bank A/c 1,20,000
(Being claim of Mr. Kala settled)
August, 1 Bills Receivables A/c Dr. 1,24,800
To Lala's A/c 1,24,800
(Being acceptance by Lala with interest)
Nov. 31 Bank A/c Dr. 1,24,800
To Bills Receivables A/c 1,24,800
(Being payment received on due date)
Bills Receivable Account

Date Particulars Amount Date Particulars Amount
April, 1 To Lala A/c 1,20,000 August, 5 By Kala A/c 1,20,000
August, 1 To Lala A/c 1,24,800 Nov. 30 By Bank A/c 1,24,800
2,44,800 2,44,800
Journal entries in the Books of Lala

April, 1 Bala's A/c Dr. 1,20,000
To Bills Payable A/c 1,20,000
(Being acceptance of Bala's bill)
July, 25 Bills Payable A/c Dr. 1,20,000
To Bala's A/c 1,20,000
(Being cancellation of the bill for renewal)
August,1 Interest A/c Dr. 4,800
To Bala's A/c 4,800
(being interest due to Bala)
August,1 Bala's A/c Dr. 1,24,800
To Bills Payable A/c 1,24,800
(Being Bala's bill accepted with interest)
Nov. 30 Bills Payable A/c Dr. 1,24,800
(Being settlement of the bill due)
Bills Payable Account

July, 25 To Bala A/c 1,20,000 April, 1 By Bala A/c 1,20,000
Nov. 30 To Bank A/c 1,24,800 August, 1 By Bala A/c 1,24,800
2,44,800 2,44,800
Solution: 5
In the Books of Hema Journal Entries
Particulars Debit Credit
(i) Bills Payable A/c Dr. 5,000
To, Nanda's A/c 5,000
(Being cancellation of Nanda's bill for renewal)
Interest A/c Dr. 125 125
To, Nanda's A/c
(Being interest due to Nanda)
Nanda's A/c Dr. 5,125 5,125
To, Bills Payable A/c
(Being acceptance given for new bill)
(ii) Bank A/c Dr. 9,900
Discount A/c Dr. 100
(Being Nalini's acceptance retired at discount)
(iii) Bank A/c Dr. 3,920
Discount A/c Dr. 80
(Being Natasha's acceptance discounted)
(iv) Neela's A/c Dr. 3,500
(Being Neela's acceptance cancelled for renewal)
Cash A/c Dr. 100 100
To, Interest A/c
(Being interest received from Neela in cash)
Bills Receivable A/c Dr. 3,500 3,500
To, Neela's A/c
(Being Neela acceptance for new bill)
(v) Bills Receivable A/c Dr. 1,200
To, Geeta A/c 1,200
Geeta A/c Dr. 1,200
Solution: 6
In the books of Y Journal
Date Particulars Dr. (Rs.) Cr. (Rs.)
2013 Jan 1 X A/c Dr. 4,000
To, Sales A/c 4,000
(Goods sold to X)
Jan 1 Bills Receivable A/c Dr. 4,000
To, X A/c 4,000
(Bills drawn for 3 months)
March 1 Cash A/c Dr. 3,954
Rebate Allowed A/c Dr. 46
(Bills retired under a rebate of 12% p.a.)
Rebate = Rs. 4,000 x 12/100 x 35/365 (1st March to 4th April) = Rs. 46.
In the books of X
Journal
Date Particulars Dr. (Rs.) Cr. (Rs.)
2013 Jan 1 Purchase A/c Dr. 4,000
To, Y A/c 4,000
(Goods purchased from Y)
Jan 1 Y A/c Dr. 4,000
(Bills accepted for 3 months)
March 1 Bills Payable A/c Dr. 4,000
To, Cash A/c 3,956
To, Rebate Received A/c 46
(Bills retired under a rebate of 12% p.a.)

Solution: 7
Bills Receivable Account
Date Particulars Amount (Rs.) Date Particulars Amount (Rs.)
1.4.2012 To Balance b/d 1,50,000 31.3.2013 By Bank A/c 4,00,000
31.3.2013 To Debtors A/c 3,75,000 31.3.2013 By Suppliers A/c 25,000
31.3.2013 By Balance c/d 1,00,000
5,25,000 5,25,000
Bills Payable Account

31.3.2013 To, Bank A/c 1,75,000 1.4.2012 By Balance b/d 90,000
31.3.2013 To, Debtors A/c 30,000 31.3.2013 By Suppliers A/c 2,25,000
31.3.2013 To, Balance c/d 1,10,000
3,15,000 3,15,000
Accommodation Bills Receivable Account

1.4.2012 To, Balance b/d 1,00,000 31.3.2013 By, Bank A/c 1,50,000
31.3.2013 To, Friends A/c (acceptors) 1,25,000 31.3.2013 By, Balance c/d 75,000
2,25,000 2,25,000
Accommodation Bills Payable Account

31.3.2013 To, Bank A/c 85,000 1.4.2012 By, Balance b/d 75,000
31.3.2013 To, Balance c/d 50,000 31.3.2013 By, Friends A/c (drawers) 60,000
1,35,000 1,35,000
Friends (acceptors of bills) Account

31.3.2013 To, Bank A/c 1,50,000 1.4.2012 By, Balance b/d 1,00,000
31.3.2013 To, Balance c/d 75,000 31.3.2013 By, Accommodation B/R A/c 1,25,000
2,25,000 2,25,000
Friends (drawers of bills) Account

1.4.2012 To, Balance b/d 75,000 31.3.2013 By, Bank A/c 85,000
31.3.2013 To, Accommodation B/P A/c 60,000 31.3.2013 By, Balance c/d 50,000
1,35,000 1,35,000
Solution: 8
In case of accommodation bills, the proceeds of discounting are shared by parties as agreed. The discounting
charges are also shared in agreed proportion. Here, the ratio between Vijay and Anand is given as two-thirds
and one-third. The first bill of Rs. 60,000 is discounted at Rs. 56,400 which means the discounting charges
are Rs. 3,600. The share of each one is:
1st Bill 2nd Bill
Proceeds Discount Proceeds Discount
Vijay (2/3rd) 37,600 2,400 54,400 1,600
Anand (1/3rd) 18,800 1,200 27,200 800
Total 56,400 3,600 81,600 2,400
Further, as Vijay has become insolvent, the amount due to Anand is settled at 50% of total. To calculate this
amount, it's necessary to post all transactions to Anand's account and arrive at the balance.

In the Books of Vijay
Journal Entries
To, Anand's A/c 60,000
(Being bill drawn on Anand)
Bank A/c Dr. 56,400
Discount A/c Dr. 3,600
(Being discounting of bill)
Anand's A/c Dr. 20,000
To, Bank A/c 18,800
To, Discount A/c 1,200
(Being 1/3rd proceeds paid to Anand)
To, Bills payable A/c 84,000
(being acceptance of bill)
Bank A/c Dr. 14,400
Discount A/c Dr. 1,600
(Being proceeds of discounting 2nd bill)
Bills Payable A/c Dr. 84,000
(Being dishonour of bill)
To, Bank A/c 28,000
To, Deficiency A/c 28,000
(Being payment of 50% & balance proved to be bad)
Anand's Account
Particulars Amount Particulars Amount
To, Bank A/c 18,800 By B/R A/c 60,000
To, Discount A/c 1,200 By Bank A/c 14,400
To, B/P A/c 84,000 By Discount A/c 1,600
By B/P A/c 84,000
To, Bank A/c 28,000
To, Deficiency A/c 28,000
1,60,000 1,60,000
Solution: 9
In the books of Rahim
Journal Entries
To, Ratan A/c 3,000
(Bill drawn for mutual accommodation and accepted by Ratan.)
Bank A/c Dr. 2,925
Discount A/c Dr. 75
(Bill discounted by the bank.)
Ratan A/c Dr. 1,000
To, Bank A/c 975
To Discount A/c 25
(1/3 Proceeds remitted to Ratan.)
Ratan A/c Dr. 3,750
(Bill accepted.)
Bank A/c Dr. 175 75
To, Ratan A/c
(Proceeds received from Ratan including discount charges.)
To, Ratan A/c 3,750
(Bill dishonored since e became insolvent.)
Ratan A/c Dr. 2,250*
To Bank A/c 1,800
To Deficiency A/c 450
(Cash paid to Ratan @ 80 paise in the rupee and balance transferred
to deficiency account.)
* This amount can be ascertained by preparing Ratan's Account in Rahim's book.
In the books of Ratan

Journal Entries
Rahim A/c Dr. 3,000
(Bill accepted for mutual accommodation)
Bank A/c Dr. 975
Discount A/c Dr. 25
To, Rahim A/c 1,000
(1/3 proceeds received from Rahim including discount)
To, Rahim A/c 3,750
(Bill drawn and accepted by Rahim)
Bank A/c Dr. 3,625
(Bill discounted)
Rahim A/c Dr. 250
To, Bank A/c 175
To Discount A/c 75
(Proceeds remitted to Rahim including discount)
Rahim A/c Dr. 3,750
To, Bank A/c 3,750
(Bill honoured at maturity)
To, Bank A/c 3,000
(Bill honoured at maturity)
Bank A/c Dr. 1,800
Bad Debt A/c Dr. 450
To, Rahim A/c 2,250
(Amount realised from the official liquidator of Rahim @ 80 paise in the rupee
and the balance proved bad)
Note:
Sharing discount:
After discounting of the 1st bills, Rahim received Rs. 2,000 (including discount)
Add: Amount remitted by Ratan (after discounting of the 2nd bill). Rs. 175
Total benefit received by Rahim. Rs. 2,175
Now,
After discounting of the 2nd bill Ratan received Rs. 3,625 (Net)
.-. Proportion of Rahim to Ratan = x 125 = Rs. 75
.-. Rahim is to bear = Rs. 75 of discounting charges, and the balance by Ratan.

CHAPTER – 2
CONSIGNMENT ACCOUNTING
INTRODUCTION
The sales activity of any business can be organized in different ways. With the customers spread all
over, the business entity cannot afford to have only minimum selling points nor can it have its own resources
to have the outlets all over.
The business volumes cannot be limited in any case. The core competence of a manufacturing
company is to produce a good quality product. It creates a network of its own outlets, dealers, commission
agents, institutions etc to distribute its products efficiently and effectively. Thus the selling may be handled
directly through own salesmen or indirectly through agents.
In case of direct selling, the company usually has depots all over. The stocks are transferred to these
depots and from their finally sold to ultimate customers. This involves huge expenses and problems of
maintaining the same on a permanent basis.
Hence, the firm could appoint agents to whom stocks will be given. These agents distribute the
products to ultimate customers and receive commission from the manufacturer. One such way of indirect
selling is selling through consignment agents. The relationship between consignor and consignee is that of
Principal-Agent relationship.
MAIN TERMS OF CONSIGNMENT TRADE

Consignment – The transfer of goods by one person to another for the purpose of sale on commission basis
is called consignment.
Consignor – The person who sends goods to agents e.g. a manufacturer or wholesaler is called consignor.
Consignee – The person (agent) to whom goods are sent for selling is called consignee.
Ordinary Commission – This is a fee payable by consignor to consignee for sale of goods when the
consignee does not guarantee the collection of money from ultimate customer. The % of such commission is
generally lower and calculated as a fixed percentage on sales.
Del Credre Commission – This is additional commission payable to the consignee for taking over
additional responsibility of collecting money from customers. In case, the customers do not pay, the
consignee takes over the loss of bad debts in his books. Although it’s paid for taking over risk of bad debts
that arise out of credit sales only, this commission is calculated on total sales and not on credit sales.
Account Sales – This is a periodical statement prepared by consignee to be sent to the consignor giving
details of all sales (cash and credit), expenses incurred and commission due for sales, goods destroyed-in-
transit or in godown and deducting the amount of advance remitted by him.
OPERATING CYCLE OF CONSIGNMENT ARRANGEMENT

1. Goods are sent by consignor to the consignee.
2. Consignee may pay some advance or accept a bill of exchange.
3. Consignee will incur expenses for selling the goods.
4. Consignee maintains records of all cash and credit sale.
5. Consignee prepares a summary of results called as Account sales.
6. Consignor pays commission to the consignee.
Sometimes, the consignor may send the goods at a price higher than cost so that the consignee gets no
knowledge of the real cost of goods which is confidential for the consignor.
ACCOUNTING FOR CONSIGNMENT BUSINESS
The consignor and consignee keep their own books of accounts. The consignor may send goods to
many consignees. Also, a consignee may act as agent for many consignors.
Situations Consignor’s books Consignee’s books
On sending goods Consignment A/c Dr No Entry
To Goods Sent on Consignment
On expenses for sending goods Consignment A/c Dr No Entry
To Cash/ Bank A/c
On consignee accepting bill of Bill Receivables A/c Dr Consignor’s Personal A/c Dr
exchange To Consignee’s Personal A/c To Bills Payable A/c
On expenses incurred by consignee Consignment A/c Dr Consignor’s Personal A/c Dr
To Consignee’s Personal A/c To Cash/ Bank A/c
On consignee reporting sales Consignee’s Personal A/c Dr Cash/ Bank A/c Dr
To Consignment A/c To Consignor’s Personal A/c
For commission Consignment A/c Dr Consignor’s Personal A/c Dr
To Consignee’s Personal A/c To Commission A/c
On closing stock Stock on Consignment A/c Dr No Entry
To Consignment A/c
The Consignment Account in the books of consignor will ultimately show the net profit or loss on account
of consignment business. It must be noted that a separate consignment account must be opened for different
agents. This will enable him to know profit or loss on each consignment.
CREDIT SALES ACCOUNTING IN BOOKS OF CONSIGNOR

In case consignee sales goods on cash and credit both, the responsibility of collection from
customers may be either with consignee or consignor. The risk of non-collection is usually borne by the
consignor.
If consignor want this to be transferred on the consignee, additional commission in the form of ‘Del
Credre’ commission is payable. It may be noted that in case of credit sales, the personal accounts of debtors
are to be maintained by the consignor and not the consignee. The entry for credit sales will be:
Consignment Debtors A/c Dr
To Consignment A/c
DEL CREDERE COMMISSION AND BAD DEBTS

Sometimes the consignor allows an extra commission to the consignee in order to cover the risk of
collection from customer, which is known as Del Credere Commission. In this case, if debt is found to be
irrecoverable the same will be borne by the consignee. There will be no effect in the books of consignor. In
short, credit sales will be treated as cash sales to consignor. If no Del credere commission is given by the
consignor to the consignee, the amount of Bad debts must be borne by the consignor.
ENTRIES IN THE BOOKS OF CONSIGNOR

(a) When Del Credere Commission is given
(i) For Credit Sales –
Consignee’s Personal A/c Dr.
To, Consignment A/c
(ii) For Bad Debts –
No Entry
(iii) For Del Credere Commission —
Consignment A/c Dr.
To, Consignee’s Personal A/c
(b) When Del Credere Commission is not given

Consignment Debtors A/c Dr.
To, Consignment A/c
Consignment A/c Dr.
To, Consignment Debtors A/c
(iii) (a) For realization of Cash —
Cash A/c Dr.
To, Consignment Debtors A/c if collected by Consignor
(b) Consignee’s Personal A/c Dr.
To, Consignment Debtors A/c if collected by Consignee

ENTRIES IN THE BOOKS OF CONSIGNEE
(a) When Del Credere Commission is given
Consignment Debtors A/c Dr.
To, Consignor A/c
Bad Debts A/c Dr.
(iii) For realization of cash from cash from Debtors —
Cash/ Bank A/c Dr.
(iv) For Closing Bad Debts A/c-
Commission Received A/c Dr.
To, Bad Debts A/c
(b) When Del Credere Commission is not given –

There will be no entry against a bad debts entry in the books of consignee.
VALUATION OF STOCK
Unsold stock on consignment should properly valued; otherwise final accounts cannot be prepared.
Usually, unsold stock on consignment is value at cost price plus proportionate expenses of the consignor
plus proportionate non recurring expenses of consignee.
Alternatively, total cost of goods plus total expenses incurred by the consignor plus total non
recurring expenses of the consignee are to be added and stock should valued on the basis of proportionate
unsold goods.
But it must be remember while valuing stock on consignment, the usual principle for valuation of
stock, that stock should be valued at cost price or market price whichever is less, will be applied.
The entry will be:
Stock on Consignment A/c Dr.
To, Consignment A/c
CALCULATION OF UNSOLD STOCK

Cost / value of -------- items of Rs. ---- each = xxx
Add: proportionate expenses of consignor = xxx
(Expenses of consignor / total unit consigned x no. of units unsold)
Add: proportionate direct expenses of consignee = xxx
(Proportionate direct expenses of consignee / total units received x
No of units unsold)
= xxx
LOSSES ON CONSIGNMENT
There are two types of losses which may arise in case of a consignment transaction, viz.
(a) Normal Loss, and
(b) Abnormal Loss
(a) Normal Loss – Normal Losses arise as a result of natural causes, e.g. evaporation, leakage, breakage
etc., and they are inherent in nature. Since normal loss is a charge against gross profit no additional
adjustment is required for this purpose.
When valuation of unsold stock is made in case of consignment account the quantity of such loss
(not the amount) should be deducted from the total quantity of the goods received by the consignee in good
condition. Thus,
Value of closing stock will be = Total Value of goods sent / Total quantity of goods received by consignee
in good condition x Unsold quantity of goods.
Note: in the case of normal loss only quantity of goods is reduced but the value of goods remain the same.
(b) Abnormal Losses - Abnormal Losses arises as a result of negligence/ accident etc., e.g., theft, fire etc.
Before ascertaining the result of the consignment, value of abnormal loss should be adjusted. The method of
calculation is similar to the method of calculating unsold stock. Sometimes insurance company admits the
claim in part or in full. The same should also be adjusted against such abnormal loss.

TREATMENT OF ABNORMAL LOSS
(i) For abnormal Loss –
Abnormal Loss A/c Dr
To Consignment A/c
(ii) If goods are insured and admitted or covered by Insurance Company.
Insurance Co./Bank A/c Dr
To Abnormal Loss A/c
(iii) If goods are not insured:
Profit & Loss A/c Dr
(iv) For the balance (i.e. which is not covered/ admitted by Insurance Co.):
Profit & Loss A/c Dr
INVOICE PRICE METHOD

Generally, the method is used where the consignor does not want to disclose the real price of the goods
which are sent to the consignee for a number of reasons. For this purpose, he sends goods at invoice price. It
means, certain amount of profit is added to the cost price of goods. Profit/ Loading is calculated after
charging certain percentage either on Cost or Sale/ Invoice price.
Naturally, for finalization of accounts, such loading should be adjusted accordingly.
ADVANCE FROM CONSIGNEE AS SECURITY MONEY:

Usually the consignor takes certain some of money as advance by way of cash/draft/bill etc from the
consignee against the goods that are sent for sale to the consignee. The so called advance money is
automatically adjusted against the total dues in order to determine the net amount payable.
If the advance money is not treated as security money, then the entire amount of advance money
may be adjusted even if a part of goods are sold.
But if the advance money is treated as security money, in that case, the proportionate amount of
such advance money will be carried forward. The entries in the books of both consignee and consignor will
be:
In the books of Consignor In the books of Consignee
Cash/ Draft/Bill Receivable A/c Dr. Consignor A/c Dr.
To, Consignee’s Personal A/c To, Cash/ Draft/B/P A/c
PRACTICAL PROBLEMS
Illustration 10
X Ltd. of Gujrat purchased 5,000 sarees @ Rs. 100 per saree. Out of these 3,000 sarees were sent on
consignment to
Y Ltd. of Kolkata at the selling price of Rs. 150 per saree. The consignors paid Rs. 5,000 for packing and
freight.
Y Ltd. sold 2,500 sarees @ Rs. 160 per saree and incurred Rs. 500 for selling expenses and remitted Rs.
2,50,000 to Gujrat on account. They are entitled to a commission of 5% on total sales plus a further of 25%
commission on any surplus price realized over Rs. 150 per saree.
1,500 sarees were sold at Gujrat @ Rs. 110 per saree.
Owing to fall in market price, the value of stock of saree in hand is to be reduced by 5%. Your are required
to prepare (i) Consignment Account, and (ii) Y Ltd. Account.
Illustration 11
From the following particulars ascertain the value of unsold stock on Consignment.
Goods sent (1,000 kgs.) Rs. 20,000
Consignor's expenses Rs. 4,000
Consignees non-recurring expenses Rs. 3,000
Sold (800 kgs.) Rs. 40,000
Loss due to natural wastage (100 kgs.)

Illustration 12
5,000 shirts were consigned by Raizada & Co. of Delhi to Zing of Tokyo at cost of Rs. 375 each. Raizada &
Co. paid freight Rs. 50,000 and Insurance Rs. 7,500.
During the transit 500 shirts were totally damaged by fire. Zing took delivery of the remaining shirts and
paid Rs. 72,000 on custom duty.
Zing had sent a bank draft to Raizada & Co. for Rs. 2,50,000 as advance payment. 4,000 shirts were sold by
him at Rs. 500 each. Expenses incurred by Zing on godown rent and advertisement etc. amounted to Rs.
10,000. He is entitled to a commission of 5%
One of the customer to whom the goods were sold on credit could not pay the cost of 25 shirts.
Prepare the Consignment Account and the Account of Zing in the books of Raizada & Co. Zing settled his
account immediately. Nothing was recovered from the insurer for the damaged goods.
Illustration 13
Lubrizols Ltd. of Mumbai consigned 1,000 barrels of lubricant oil costing Rs. 800 per barrel to Central Oil
Co. of Kolkata on 1.1.2013. Lubrizols Ltd. paid Rs. 50,000 as freight and insurance. 25 barrels were
destroyed on 7.1.2013 in transit. The insurance claim was settled at Rs. 15,000 and was paid directly to the
consignor.
Central Oil took delivery of the consignment on 19.1.2013 and accepted a bill drawn upon them by
Lubrizols Ltd., for Rs. 5,00,000 for 3 months. On 31.3.2013 Central Oil reported as follows:
(i) 750 barrels were sold as Rs. 1,200 per barrel.
(ii) The other expenses were:
(Rs.)
Clearing charges 11,250
Godown Rent 10,000
Wages 30,000
Printing, Stationery, Advertisement 20,000
25 barrels of oil were lost due to leakage which is considered to be normal loss.
Central Oil Co. is entitled to a commission of 5% on all the sales affected by them. Central Oil Company
paid the amount due in respect of the consignment on 31st March itself.
Show the Consignment Account, the Account of Central Oil Co., and the Lost -in-Transit Account as they
will appear in the books of Lubrizols Ltd.
Illustration 14
Mr. X, the consignor, consigned goods to Mr. Y 100 Radio sets valued Rs. 50,000. This was made by adding
25% on cost. Mr. X paid Rs. 5,000 for freight and insurance. 20 sets are lost - in- transit for which Mr. X
recorded Rs. 5,000 from the Insurance company.
Mr. Y received remaining goods in good condition. He incurred Rs. 4,000 for freight and miscellaneous
expenses and Rs. 3,000 for godown rent. He sold 60 sets for Rs. 50,000. Show the necessary ledger account
in the books of Mr. X assuming that Mr. Y was entitled to an ordinary Commission of 10% on sales and 5%
Del Credere Commission on sales. He also reported that Rs. 1,000 were provide bad .
Illustration 15
On 1.7.2012, Mantu of Chennai consigned goods of the value of Rs. 50,000 to Pandey of Patna. This was
made by adding 25% on cost. Mantu paid Rs. 2,500 for freight and Rs. 1,500 for insurance.
During transit 10 th of the goods was totally destroyed by fire and a sum of Rs. 2,400 was realised from the
insurance company. On arrival of the goods, Pandey paid Rs. 1,800 as carriage to godown. During the year
ended 30th June 2013, Pandey paid Rs. 3,600 for godown rent and Rs. 1,900 for selling expenses.
9 th of the remaining goods was again destroyed by fire in godown and nothing was recorded from 91
the insurance company. On 1.6.2013, Pandey sold half (2 ) the original goods for Rs. 30,000 and charged
a commission of 5% on sales as on 30.6.2013, Pandey sent a bank draft to Mantu for the amount so far due
from him.
You are required to prepare the following ledger accounts in the books of Mantu of Chennai for the year
ended 30.6.2013.
(a) Consignment to Patna Account; (b) Goods Destroyed by Fire Account; and (c) Personal Account of
Pandey.

Illustration 16
Shri Babubhai oil mills of Baroda sent 10000 kg of oil to M/s Gupta & Sons in Delhi. The cost of oil is Rs.
40 per kg. Babubhai paid Rs. 5,000 as freight and Rs. 2,500 as insurance. In transit 250 kg of oil was
accidently destroyed for which insurance company paid Rs. 450 in full settlement to Babubhai.
M/s Gupta & Sons took delivery of the balance. Later they reported that 7500 kg was sold @ Rs. 60 per kg.
Expenses incurred by them were rent Rs. 2,000, advertisement Rs. 5,000 and salaries Rs. 5000. M/s Gupta &
Sons are entitled to commission of 3% and Del Credre commission of 1.5%. One customer who purchased
1000 kg paid only 80% of the amount due. M/s Gupta & Sons also reported loss of 100 kg due to leakage.
The final amount due was settled. Prepare necessary ledger accounts in the books of Babubhai.
Illustration 17
Sangita Machine Corporation sent 200 sewing machines to Rita agencies. It spent Rs. 7500 on packing. The
cost of each machine was Rs. 2,000, but it was invoiced at 20% above cost. 20 machines were lost in transit
& insurance company accepted claim of Rs. 20,000 only.
Rita agencies paid freight of Rs. 9,000, carriage Rs. 3,600, Octroi Rs. 1,800 and rent Rs. 1800. They sold
150 machines at Rs. 3,500 per machine. They were entitled to commission of 5% on invoice price and
additional 20% of any excess realized on invoice price and 2% Del Credre commission. They accepted a bill
drawn by Sangita Machine Corporation for Rs. 3,00,000 and remitted the balance by demand draft along
with account sale. Draw up necessary ledger accounts in the books of Sangita Machine Corporation and Rita
Agencies.
Illustration 18
Ram of Patna consigns to Shyam of Delhi for sale at invoice price or over. Shyam is entitled to a
commission @ 5% on invoice price and 25% of any surplus price realized. Ram draws on Shyam at 90 days
sight for 80% of the invoice price as security money. Shyam remits the balance of proceeds after sales,
deducting his commission by sight draft.
Goods consigned by Ram to Shyam costing Rs. 20,900 including freight and were invoiced at Rs. 28,400.
Sales made by Shyam were Rs. 26,760 and goods in his hand unsold at 31st Dec, represented an invoice
price of Rs. 6,920. (Original cost including freight Rs. 5,220). Sight draft received by Ram from Shyam upto
31st Dec was Rs. 6,280. Others were in- transit.
Prepare necessary Ledger Accounts in the books of Ram.
Illustration 19
R of Ranchi consigned goods costing Rs. 1,60,000 to B of Bombay. The terms of the consignment were:
(a) Consignee to get a commission of 5 per cent on cash sales and 4 per cent on credit sales.
(b) Any goods taken by the consignee himself or goods lost through consignee's negligence, shall be valued
at cost plus 12% per cent and no commission will be allowed on them.
The expenses incurred by the consignor were: Carriage and freight Rs. 6,720 and Insurance Rs. 3,440. The
consignor received Rs. 50,000 as advance against the consignment. Account Sales together with a draft for
the balance due was received by the consignor showing the following position:
Goods costing Rs. 1,28,000 were sold for cash at Rs. 1,40,000 and on credit at Rs. 1,08,000. Goods costing
Rs. 8,000 were taken by B and goods costing Rs. 4,000 were lost through B's negligence. The expenses
incurred by B were: Advertisement Rs. 1,720; other selling expenses Rs. 1,080.
Show the ledger accounts in the books of R.

SOLUTIONS
Solution: 10
(i) In the books of X Ltd.
Consignment Account
To Goods Sent on 3,00,000 By Y Ltd. A/c 4,00,000
Consignment A/c —sale proceeds
(300 x Rs.100) (2,500 x Rs.160)
To Bank A/c 5,000 By Stock on Consignment A/c 45,125
—paying freight (W.N. 1)
To Y Ltd A/c
—selling expenses 500
—commissions (W.N. 2) 26,250
To Profit and Loss A/c
—profit on consignment transferred 1,13,375
4,45,125 4,45,125
Y Ltd. A/c
To Consignment A/c 4,00,000 By Bank A/c — advance 2,50,000
—sale proceeds By Consignment A/c — selling expenses 500
— commissions 26,250
by Balance c/d 1,23,250
4,00,000 4,00,000
Workings:
1. Valuation of unsold stock
(Rs.)
Total cost (500 x Rs.100)(without considering expenses) 50,000
Less: Reduction in price @5% 2,500
47,500
Less: Y Ltd.'s commission @5% 2,375
45,125
2. Computation of Commissions
(Rs.)
Total sales @Rs.160 per saree (2,500 x Rs.160) 4,00,000
Less: In excess of Rs.150 per saree 3,75,000
Surplus price realised 25,000
Commission to be calculated as under:
On total sales @5% (Rs.4,00,000 x 5%) 20,000
Add: 25% on Rs.25,000 6,250
26,250
1500 sarees which were sold @ Rs. 110 is not related to consignment account.
Losses on Consignment
There are two types of losses which may arise in case of a consignment transaction, viz.
(a) Normal Loss, and (b) Abnormal Loss
(a) Normal Loss - Normal Losses arise as a result of natural causes, e.g. evaporation, leakage, breakage etc.,
and they are inherent in nature. Since normal loss is a charge against gross profit no additional adjustment is
required for this purpose. Moreover, as the same is a part of cost of goods, when valuation of unsold stock is
made in case of consignment account the quantity of such loss (not the amount) should be deducted from the
total quantity of the goods received by the consignee in good condition. Thus,
Value of closing stock will be = Total Value of goods sent x

Solution: 11
Value of unsold stock Rs.
Total cost of goods sent 20,000
Add : Consignor's expenses 4,000
Add : Non-recurring expenses 3,000
Cost of (1,000 kgs - 100 kgs) = 900 kgs. 27,000
.'. Value of unsold stock (1,000 - 800 - 100) = 100 kgs. will be = Rs. 27,000 x = Rs. 3,000
Solution: 12
In the books of Raizada & Co.
Consignment Account
To, Goods Sent on Consignment A/c 18,75,000 By, Zing A/c 19,87,500
(5,000 x Rs. 375) - Sale proceeds (3,975 x Rs. 500)
To, Bank A/c By, Consignment Debtors A/c
- Freight 50,000 - Credit Sales (25 x Rs. 500) 12,500
- Insurance 7,500 57,500 By, Abnormal Loss A/c (W.N. 1) 1,93,250
To, Zing A/c By, Stock on Consignment A/c 2,01,250
- Custom Duty 72,000 (W.N.2)
- Godown Rent, Advertisement etc 10,000
- Commissions @5% on total Sales 1,82,000
(4,000x500x5%) 1,00,000
- Bad Debts 12,500
To, Profit and Loss A/c
- Profit on Consignment transferred 2,67,500
23,94,500 23,94,500
Zing Account
To, Consignment A/c By, Bank Draft A/c
Sale Proceeds 19,87,500 Advance 2,50,000
By, Consignment A/c
Expenses & Com. 1,82,000
By, Bank A/c
Final Settlement 15,55,500
19,87,500 19,87,500
Abnormal Loss Account

To, Consignment A/c 1,93,250 By, Profit and Loss A/c 1,93,250
1,93,250 1,93,250
Workings:
1. Valuation of goods Lost-in-transit and unsold Stock:
(Rs.)
Total Cost 18,75,000
Add: Consignor's Expenses 57,500
C.P. of 5,000 Shirts 19,32,500
Less: Lost-in-transit
( ) (1,93,250)
Add: Non-recurring Ex. of Consignee 72,000
C.P. of 4,500 Shirt 18,11,250

2. Value of unsold Stock = = Rs. 2,01,250
Note:
Since Del Credere Commission is not given by the consignor to the consignee, amount of bad debt is to be
charged against Consignment Account.
Simultaneous Normal Loss and Abnormal Loss
Solution: 13
In the books of Lubrizols Ltd.
Consignment to Kolkata Account
Date Particulars Amount Amount Date Particulars Amount
2013 2013
Jan. 1 To Goods sent on Consignment A/c 8,00,000 Jan. 7 By, Abnormal Loss A/c 21,250
(1,000 x Rs. 800) Mar.31 By, Central Oil Co. A/c 9,00,000
Mar.31 To, Bank A/c - Expenses 50,000 Sale proceeds
To, Central Oil Co. A/c (750 x Rs. 1,200)
Freight 11,250 By, Stock on 1,76,842
Godown Rent 10,000 Consignment A/c
Wages 30,000
Printing etc. 20,000 71,250
To, Central Oil Co. A/c
Commissions @5% 45,000
To, Profit on Consignment A/c
(Transferred to Profit & Loss A/c) 1,31,842
10,98,092 10,98,092
Central Oil Co. Ltd. Account

2013 To, Consignment to Kolkata A/c 9,00,000 2013 By, Bills Receivable A/c 5,00,000
Mar.31 -Sale Proceeds Jan.7 By, Consignment to Kolkata A/c 71,250
Mar.31 - Expenses 45,000
- Commission 2,83,750
By, Bank (amount due)
9,00,000 9,00,000

2013 To, Consignment to Kolkata A/c 21,250 2013 By Bank-Insurance Claim A/c 15,000
Jan. 7 Jan.7 By, Profit and Loss A/c (bal. fig.) 6,250
Mar.31
21,250 21,250
Workings:
Valuation of Goods Lost-in-transit and Unsold Stock:
Total Cost (1,000 x Rs. 800) Rs. 8,00,00
Add: Consignor's Expenses Rs. 50,000
Value of 1,000 barrels Rs. 8,50,000
Less: Lost-in-transit 25 x Rs. 21,250
Add: Non-recurring expenses of Consignee Rs. 11250
Value of (1,000 - 25 - 25) = 950 Kg. Rs. 8,40,000

Solution: 14
In the books of Mr. X
Consignment Account
To, Goods Sent on Consignment A/c 50,000 By, Goods Sent on Consignment A/c 10,000
(Loading) (Rs. 50,000x25/125)
To, Bank A/c - Expenses 5,000 By, Y A/c - Sale Proceeds 50,000
To, Y A/c By, Abnormal Loss A/c 11,000
- Freight and Misc. Expenses 4,000
- Godown Rent 3,000
To, Abnormal Loss A/c (Loading) 2,000 By, Stock on Consignment A/c 12,000
To, Stock surplus A/c 2,000
To, Y A/c
- Commission (ordinary) @ 10% 5,000
- Del credere Commission @ 5% 2,500
To, Profit and Loss A/c
- Profit on Consignment A/c 9,500
83,000 83,000
Y Account
To, Consignment A/c - Sale proceeds 50,000 By, Consignment A/c
- Expenses 7,000
- Commission 7,500
By, Balance c/d 35,500
50,000 50,000

To, Consignment A/c 11,000 By, Consignment A/c (Loading) 2,000
By, Bank A/c - Insurance Claim 5,000
By, Profit and Loss A/c 4,000
- Loss transferred
11,000 11,000
Workings:
(1) Calculation of Loading: I.P. Load C.P.
125 25 100
50,000 = Rs. 40,000
.-. Loading = Rs.(50,000 - 40,000) = Rs. 10,000
Loading Per Set = Rs. 10,000 - 100 = Rs. 100
(2) Valuation of Goods Lost - in - transit and Unsold stock
Total Invoice Price 50,000
Invoice Price of 100 sets 55,000
Less: Lost In Transit 11,000
44,000
Add: Non recurring Expenses of Mr. Y 4,000
I. P. of 80 sets 48,000
-. For Unsold Stock of (100 - 20 -60) = 20 sets = Rs. 12,000
(3) Loading on Abnormal Loss = 20 x Rs. 100 = Rs. 2,000
(4) Stock surplus = 20 sets x Rs. 100 = Rs. 2,000
(5) Since Del Credere Commission is given there will not be any entry for bad debts.

Solution: 15
In the books of Mantu of Chennai
Consignment to Patna Account
To Goods Sent on Consignment A/c 50,000 By, Goods Sent on Consignment A/c 10,000
To, Bank A/c - Loading
Freight 2,500
Insurance 1,500 4,000 By, Pandey A/c 30,000
To, Pandey A/c Sale Proceeds
Carriage Inward 1,800 By, Goods Destroyed by Fire A/c 11,000
Godown Rent 3,600 By, Stock on Consignment A/c 16,800
Selling Expenses 1,900 7,300
To, Pandey A/c
Commission (5% on Rs. 30,000) 1,500
To, Goods Destroyed by Fire A/c 2,000
Loading
To, Stock Suspense A/c 3,000
Loading on unsold stock
67,800 67,800
Note: There is no normal Profit or Loss on Consignment.
Goods Destroyed by Fire Account

To, Consignment to Patna A/c By, Consignment to Patna A/c 2,000
In transit 5,400 Loading
In Godown 5,600
By, Bank A/c - Insurance claim 2,400
By, Profit & Loss A/c 6,600
11,000 11,000
Pandey Account
To, Consignment to Patna A/c By, Consignment to Patna A/c
Sale proceeds 30,000 Expense 7,000
Commission 1,500
By, Draft A/c 21,200
30,000 30,000
Working:
Valuation of goods destroyed by fire and unsold stock
Particulars Amount
Invoice Price of Goods sent 50,000
54,000
Less: Lost-in-Transit (1/10 x Rs. 54,000) 5,400
Goods received (9/10 of Rs. 54,000) 48,600
Add: Non- recurring expenses of Pandey 1,800
50,400
Less: Value of goods destroyed by fire in godown (1/9th of Rs. 50,400) 5,600
Value of 8/10 44,800
Goods available for sale -( =
Goods sold : Unsold goods =

: Value of unsold stock = Rs. 44,800 x = Rs. 16,800
Loading on goods destroyed = Rs. 10,000 x = Rs. 2,000

Loading on unsold stock = Rs. 10,000 x = Rs. 3,000.
Solution: 16
In the Books of Shri Babubhai
Consignment to Delhi Account
To, Goods Sent on Consignment A/c 4,00,000 By, M/s Gupta & Sons' A/c (sales) 4,50,000
To, Bank A/c (Freight and Insurance) 7,500 By, Abnormal Loss A/c 10,188
To, M/s Gupta & Sons' A/c : By, Consignment Stock A/c 86,849
Expenses 12,000
Commission 20,250
To P & L A/c (Balancing figure) 1,07,287
5,47,037 547,037
M/s Gupta & Sons' Account

To, Consignment A/c 4,50,000 By, Consignment A/c (expenses) 12,000
By, Consignment A/c (commission) 20,250
By, Bank A/c 4,17,750
4,50,000 450,000
Calculation of Abnormal Loss: 250 kg of oil lost in transit

Cost of 250 kg @ 40/kg 10,000
Proportionate expenses of Babubhai (250/10000*7500) 188 10,188
Calculation of closing stock Kg
Oil consigned to Delhi 10,000
Less: Lost in transit (250)
Less: Normal loss due to leakage (100)
Less: Quantity sold (7,500)
Stock in hand 2,150
Rs.
Basic cost of stock consigned @ Rs. 40 400,000
Less : Cost of abnormal loss (10,188)
Cost of stock after normal loss of 100kg 389,812
Thus cost of 2150 kg (3,89,812/9,650*2150) 86,849
Calculation of commission 13,500
Ordinary @ 3% on 4,50,000 Del Credre @ 1.5% on 4,50,000 6,750
20,250
As the consignee has paid Del Credre Commission, the responsibility of bad debts is his. Hence no entry is
needed to be passed in the books of consignor.
Solution: 17
Books of Sangita Machine Corporation
Consignment to Rita Agencies Account
To, Goods Sent on Consignment A/c 4,80,000 By Goods Sent on Consignment A/c (loading) 80,000
To, Bank A/c (Packing Expenses) 7,500 By Abnormal Loss A/c 48,750
To Rita Agencies A/c By Consignment Stock A/c 75,525
Freight 9,000 By Rita Agencies' A/c (sales 150 @ 3500) 5,25,000
Carriage 3,600
Octroi 1,800

Rent 1,800
Commission 61,500
To Abnormal loss A/c (load removed) 8,000
To Stock Reserve A/c 12,000
To P & L A/c 1,44,075
7,29,275 7,29,275
Rita Agencies Account

To Consignment A/c 5,25,000 By Consignment A/c (expenses) 16,200
By Consignment A/c (commission) 61,500
By Bills Receivable A/c 3,00,000
By Bank A/c (balancing figure) 1,47,300
5,25,000 5,25,000
Calculation of abnormal loss 20 machines lost in transit

Cost of 20 machines @ Rs. 2400 Rs. 48,000
Proportionate expenses of Babubhai (20/200*7500) Rs. 750
Rs. 48,750
Calculation of Closing Stock

Rs.
Invoice value of 30 machines @ 2400 72,000
Add : Consignor's proportionate expenses 1,125
Add : Consignee's proportionate expenses 2,400
75,525
Stock reserve 30 machines @ Rs.400 12,000
Calculation of Commission
Invoice price of machines sold Rs.
(2400*150) 360,000
Commission @ 5% on this 18,000 (a)
Excess over invoice value
(5,25,000-3,60,000) 165,000
Commission @ 20% on this 33,000 (b)
Del Credre Commission @ 2% on 5,25,000 10,500 (c)
Total Commission (a+b+c) 61,500
Books of Rita Agencies

Sangita Machine Corporation Account
To, Cash A/c (expenses) 16,200 By, Consignment A/c (sales) 5,25,000
To, Commission A/c 61,500
To, Bills Payable A/c 3,00,000
To, Bank A/c (balancing figure) 1,47,300
5,25,000 5,25,000

Solution: 18
In the books of Ram
Consignment to Delhi Account
To, Goods Sent on Consignment A/c 28,400 By, Goods Sent on Consignment A/c 7,500
To, Y A/c - Commission 2,394 (Loading) Rs. (28,400- 20,900)
To, Stock Reserve A/c 1,700 By, Shyam A/c - Sale proceeds 26,760
Rs. (6,920 - 5,220) By, Stock on Consignment A/c 6,920
To, Profit and Loss A/c- 8,686
Profit on consignment transferred
41,180 41,180
Shyam Account
To, Consignment to Delhi A/c 26,760 By, Bills Receivable A/c 22,720
To, Balance c/d (Rs. 6,920 x 80%) 5,536 By, Consignment to Delhi A/c 2,394
- commission
By, Draft A/c 6,280
By, Draft- in- Transit A/c 902
32,296 32,296
Goods sent on Consignment Account

To, Consignment to Delhi A/c 7,500 By, Consignment to Delhi A/c 28,400
To, Trading A/c (bal.fig) 20,900
28,400 28,400
Workings:
Calculation of Commission: Rs.
Invoice value of goods 28,400
Less: Unsold stock 6,920
Invoice value of goods sold 21,480
Total sale proceeds 26,760
Less: Invoice value of goods sold 21,480
Surplus price 5,280
Commission @ 5% on Rs. 21,480 1,074
Add: @ 25% on Rs. 5,280 1,320
2,394
Solution: 19
Books of R
Consignment to Bombay Account
To Goods Sent on Consignment A/c 1,60,000 By B:
To Bank—Expenses : Cash sales 1,40,000
Carriage and freight 6,720 Goods taken over:
Insurance 3,440 8,000+ 12% % 9,000
To B A/c : Goods Lost: 4,000 + 12/% 4,500
Advertisement 1,720 By Consignment Debtors A/c
Selling expenses 1,080 — Credit sales 1,08,000
Commission on: By Consignment Stock A/c 21,270
Cash sales 7,000 (W.N. 1)
Credit sales 4,320
To Profit on Consignment transferred to P/L A/c 98,490
2,82,770 2,82,770
Working Note:
1.
Valuation of unsold stock Rs.
Cost price of goods sent 1,60,000
Add: Expenses : 6,720 + 3,440 10,160
1,70,160
Value of unsold stock: x Rs. 1,70,160 = Rs. 21,270
B (Consignee) Account
To Consignment to Bombay A/c : By Bank—advance 50,000
Cash sales 1,40,000 By Consignment to Bombay A/c :
Goods taken over 9,000 Advertisement 1,720
Goods lost 4,500 Selling expenses 1,080
Commission 11,320
By Bank—remittance 89,380
1,53,500 1,53,500
Consignment Debtors Account

To Consignment to Bombay A/c 1,08,000 By Balance c/f 1,08,000
1,08,000 1,08,000
Goods Sent on Consignment Account

To Trading A/c - transfer 1,60,000 By Consignment to Bombay A/c 1,60,000
1,60,000 1,60,000

CHAPTER – 3
JOINT VENTURE ACCOUNTS
INTRODUCTION
Joint Venture is a temporary form of business organization. There are certain business activities or
projects that may involve higher risks; higher investments and even they demand multi-skills. In such cases,
an individual person may not be able to muster all resources. Hence two or more people having requisite
skill sets come together to form a temporary partnership. This is called a Joint Venture. There is a
Memorandum of Undertaking (MOU) signed for this purpose.
Types of business activities for which Joint Ventures (JV) are formed could be:
- Construction of dams, bridges, roads etc
- Buying & selling of goods for a particular season
- Producing a film
- Purchasing land selling plots
- Underwriting of shares of a company
The basic features of a Joint Venture business are:

(i) It is done for a specific purpose and hence has a limited duration.
(ii) The partners are called co-venturers.
(iii) The profit or loss on joint venture is shared between the co-venturers in the agreed
ratio.
(iv) The co-venturers may or may not contribute initial capital.
(v) The JV is dissolved once the purpose of the business is over.
(vi) The accounts of the co-venturers are settled immediately on dissolution.
(vii) A joint venture has no name.
ACCOUNTING ENTRIES
There may be three ways of maintaining the books of account for the joint venture business. They are:
(a) Where separate books of accounts are maintained
(b) Where the records are maintained in the books of joint venturers
(i) Recording of all transactions
(ii) Recording of own transactions (Memorandum Joint Venture)
(a) When Separate Sets of Books are Maintained
As the business duration is short, the books of accounts are not very comprehensive. The basic
purpose is to know profit or loss on account of the joint venture. There are three accounts.
(1) Joint Venture Account (like a normal P & L A/c) is opened which records all transactions related
to the activities carried out. The net result of this a/c will be either profit or loss.
(2) Joint Venturer’s Accounts to record transaction related to co-venturers, are maintained.
(3) Joint Bank Account to record cash/bank transactions is maintained. This could take a form of cash
book with cash and bank column. It will record, the initial contributions made by each co-venturer,
proceeds of sales, expenses and distribution of net balances among co-venturers on dissolution of
the venture.
Name of Accounts
Joint Venture Account Joint Venturer’s Account Joint Bank Account

Journal Entries
No. Transaction Entry
1 Contribution of co-venturers Joint Bank A/c Dr.
To, Co-Venturers A/c
2 Goods sent by co-venturer out of his own stock Joint Venture A/c Dr.
3 Expenses paid by co-venturers Joint Venture A/c Dr.
4 Materials purchased out of joint venture funds Joint Venture A/c Dr.
To Joint Bank A/c
5 For expenses out of joint bank A/c Joint Venture A/c Dr.
To Joint Bank A/c
6 For goods sold for cash Joint Bank A/c Dr.
To Joint Venture A/c
Joint Bank A/c Dr.
7 Contract / sale price received in form of shares / cash Shares A/c Dr.
8 Commission / salary to co-venturers Joint Venture A/c Dr.
To Co-Venturers A/c
9 Unsold goods taken over by co-venturers Co-Venturers A/c Dr.
10 Shares taken over by co-venturers Co-Venturers A/c Dr.
To Shares
11 If shares are sold in open market Joint Bank A/c Dr.
To Shares
12 For profit on joint venture Joint Venture A/c Dr.
To Co-Venturers A/c
13 For loss on joint venture Co-Venturers A/c Dr.
14 For final distribution of funds Co-Venturers A/c Dr.
To Joint Bank A/c
Where the records are maintained in the books of joint venturers

Recording of all transactions
The co-venturers may decide not to keep separate books of account for the venture if it is for a very
short period of time. In this case, all co-venturers will have account for the transactions in their own books.
Here no Joint Bank A/c is opened and the co-venturers do not contribute in cash. Goods are supplied by
them from out of their stocks and expenses for the venture are also settled the same way. Each co-venturer
will prepare a Joint Venture A/c and the other Co-Venturer’s A/c in his books.
Naturally, the profit or loss is separately calculated by each co-venturer. Each co-venturer will take
into A/c all transactions i.e. done by himself and by his co-venturer as well.
The accounting entries are:
In books of Co-venturer A In books of co-venturer B
When goods are supplied and expenses paid by A
Joint Venture A/c Dr. Joint Venture A/c Dr.
To, Goods A/c To, A’s A/c
To, Cash / Bank A/c
When goods are supplied by B and expenses paid by B
To, B’s A/c To, Goods A/c
To, Cash / Bank A/c
When advance is given by A to B or bill accepted by A
B’s A/c Dr. Cash / Bank A/c Dr.
To, Cash / Bank A/c B/R A/c Dr.
To, B/P A/c To, A’s A/c
When sale proceeds are received by A
Cash / Bank A/c Dr. A’s A/c Dr.
To, Joint Venture A/c To, Joint Venture A/c
When sale proceeds are received by B
B’s A/c Dr. Cash / Bank A/c Dr.
For unsold goods taken over by A
Goods A/c Dr. A’s A/c Dr.
To Joint Venture A/c To Joint Venture A/c
For unsold goods taken over by B
B’s A/c Dr. Goods A/c Dr.
For profit on joint venture business
To, B’s A/c To, A’s A/c
To, P & L A/c To, P & L A/c
For loss on joint venture business
B’s A/c Dr. A’s A/c Dr.
P & L A/c Dr. P & L A/c Dr.
After closure the business of joint venture, the co-venturer who has received surplus cash will remit it to the
other co-venturer.
Recording of own transactions (Memorandum Joint Venture)

When all the parties keep accounts, the method adopted for recording the transactions relating to
joint venture, is called Memorandum Joint venture method. Here each Co-Venturer records only those joint
venture transactions which are affected by him with the help of a personal account designed as ‘Joint
Venture with……….(Name of the other Co-Venturer)……Account’. It is debited with the amount of
purchases/supplies made and expenses incurred by the Venturer.
Each Co-Venturer sends a periodic statement of joint venture transactions effected by him only, to the other
Co-Venturer and on receipt of the aforesaid statement, each Co-Venturer prepares Memorandum Joint
Venture Account in order to ascertain the profit/loss on Joint Venture transactions.
Since this account is in fact, not a part and parcel of double entry system the word ‘memorandum’ is prefixed.
Journal Entries: The journal entries which may be required at any point of time, are summarized below:
1. (a) On receipt of any amount/Bills Receivable from other Co- Venturer:
Cash/Bank/Bills Receivable A/c Dr.
To, Joint Venture with …………..A/c
1.(b) On discounting Bills Receivable: (with net proceeds)
Bank A/c Dr. (with discount)
Joint Venture with …………..A/c Dr. (with total)
To, Bills Receivable A/c
2. On purchase of goods: (with total)
Joint Venture with …………..A/c Dr. (with cash purchase)
To, Cash/Bank A/c (with credit purchase)
To, Supplier’s A/c
3. On making payment to supplier (with total)
Supplier’s A/c Dr. (with payment made)
To, Cash/Bank/Bills Payable A/c (with discount received)
4. On supply of goods out of own stock: (if supplies at cost)
Joint Venture with …………..A/c Dr. (if supplies at profit)
To, Purchases/Goods sent on Joint Venture A/c
To, Sales A/c
5. On payment of expenses: (with total)
Joint Venture with …………..A/c Dr. (with cash expenses)
To, Cash/Bank A/c (with outstanding expenses)
To, Creditor’s A/c

6. On sale of goods: (with cash sales)
Cash/Bank A/c Dr. (with credit sales)
Customer’s A/c Dr. (with total)
7. On receiving payment from a customer: (with the payment received)
Cash/Bank A/c Dr. (discount allowed/bad debt)
Joint Venture with …………..A/c Dr. (with total)
To, Customer’s A/c
8. On taking away of unsold goods:
Goods sent on Joint Venture A/c Dr.
9. On considering some commission/salary to the Co-Venturer:

Joint Venture with …………..A/c Dr.
To, Commission/Salary A/c
10. On recording the share of Profit/Loss:
(a) When profit-
To, Profit & Loss A/c
(b) When loss-
Profit & Loss A/c Dr.
11. On settlement of balance of Joint Venture with ……..A/c:
(a) When there is a debit balance:
Cash/Bank A/c Dr.
(b) When there is a credit balance:
To Cash / Bank A/c
PRACTICAL PROBLEMS
Illustration 20
Prabir and Mihir doing business separately as building contractors undertake jointly to build a skyscraper for
a newly started public limited company for a contract price of Rs. 1,00,00,000 payable as Rs. 80,00,000 in
cash and the balance by way of fully paid equity shares of the new company. A Bank A/c was opened for
this purpose in which Prabir paid Rs. 25,00,000 and Mihir Rs. 15,00,000. The profit sharing ratio was agreed
as 2:1 between Prabir and Mihir. The transactions were:
(a) Advance received from the company Rs. 50,00,000
(b) Wages to contractors Rs. 10,00,000
(c) Bought materials Rs. 60,00,000
(d) Material supplied by Prabir Rs. 10,00,000
(e) Material supplied by Mihir Rs. 15,00,000
(f) Architect's fees paid from Joint Bank account Rs. 21,00,000
The contract was completed and the price was duly paid. The joint venture was duly closed by Prabir taking
all the shares at Rs. 18,00,000 and Mihir taking over the balance material for Rs. 3,00,000. Prepare the Joint
Venture A/c, Joint Bank A/c. Co-venturer's A/cs and Shares A/c.
Illustration 21
P and Q entered into a joint venture for underwriting the subscription at par of 25,000 shares of Rs. 10 each
of a Joint Stock Company. They agreed to share profits or losses in the ratio of 3/5 and /5 respectively. The
consideration for guaranteeing the subscription was 250 other shares of Rs. 10 each fully paid to be issued to
them.
The public took up 24,000 of the shares and the remaining shares of the guaranteed issue were taken up by P
and Q who provide cash equally. The entire shareholding of the venture was then sold through other brokers,

60% at a price of Rs. 9.50 less brokerage 50 paisa per share, 20% at a price of Rs. 9.75 less brokerage 50
paisa per share and the balance were taken over by P and Q equally at Rs. 9.00 per share.
Prepare a Joint Venture Account, the Joint Bank Account, and Capital Accounts of P and Q.
Illustration 22
John and Smith entered into a joint venture business to buy and sale garments to share profits or losses in the
ratio of 5:3. John supplied 400 bales of shirting at Rs. 500 each and also paid Rs. 18,000 as carriage &
insurance. Smith supplied 500 bales of suiting at Rs. 480 each and paid Rs. 22,000 as advertisement &
carriage. John paid Rs. 50,000 as advance to Smith.
John sold 500 bales of suiting at Rs. 600 each for cash and also all 400 bales of shirting at Rs. 650 each for
cash. John is entitles for commission of 2.5% on total sales plus an allowance of Rs. 2,000 for looking after
business. The joint venture was closed and the claims were settled.
Prepare Joint Venture A/c and Smith's A/c in the books of John and John's A/c in the books of Smith.
Illustration 23
M and N decided to work in partnership with the following scheme, agreeing to share profits as under:
M — 3/4th share. N — 1/4th share.
They guaranteed the subscription at par of 10,00,000 shares of Rs. 1 each in U Ltd. And to pay all expenses
up to allotment in consideration of U. Ltd. issuing to them 50,000 other shares of Rs. 1 each fully paid
together with a commission @ 5% in cash which will be taken by M and N in 3 : 2.
M and N introduced cash as follows:
M— Stamp Charges, etc., 4,000
Advertising Charges 3,000
Printing Charges 3,000
N— Rent 2,000
Solicitor's Charges 3,000
Application fell short of the 10,00,000 shares by 30,000 shares and N introduced Rs. 30,000 for the purchase
of those shares.
The guarantee having been fulfilled, U Ltd. handed over to the venturers 50,000 shares and also paid the
commission in cash. All their holdings were subsequently sold by the venturer N receiving Rs. 18,000 and
M Rs. 50,000.
Write-up necessary accounts in the books of both the parties on the presumption that Memorandum Joint
Venture Account is opened for the purpose.
Illustration 24
Sahani and Sahu entered into a joint venture to sale 800 bags of food grains. The business risks are to be
shared in the ratio of 3:2 between them. Sahani supplied 400 bags at Rs. 800 per bag and paid freight Rs.
8,000 and insurance Rs. 2,000. Sahu sent 400 bags at Rs. 1,000 per bag. He paid Rs. 2,500 as freight,
Insurance Rs. 8,000 and sundry expenses as Rs. 500. Sahani paid Rs. 50,000 as advance to Sahu.
They appointed Sandeep as agent for sale of grains. Sandeep sold all bags at Rs. 1,200 per bag. He deducted
Rs. 21,000 as his expenses and commission of 5% on sales. He remitted Rs. 6,00,000 by cheque to Sahani
and the balance to Sahu by way of a bill of exchange. The co-venturers settled their accounts. Prepare Joint
Venture A/c Sahu's A/c and Sandeep's A/c in the books of Mr. Sahani.
Illustration 25
Daga of Kolkata sent to Lodha of Kanpur goods costing Rs. 40,000 on consignment at a commission of 5%
on gross sales. The packaging and forwarding charges incurred by consignor amounted to Rs. 4,000. The
consignee paid freight and carriage of Rs. 1,000 at Kanpur. Three-fourth of the goods were sold for Rs.
48,000. Then the consignee remitted the amount due from him to consignor along with the account sale, but
he desired to return the goods still lying unsold with him as he was not agreeable to continue the
arrangement of consignment. He was then persuaded to continue on joint venture basis sharing profit or loss
as Daga 3/5th and Lodha 2/5th.
Daga then supplied another lot of goods of Rs. 20,000 and Lodha sold out all the goods in his hand for Rs.
50,000 (gross). Daga paid expenses Rs. 2,000 and Lodha Rs. 1,700 for the second lot of goods.
Show necessary Ledger A/c in the books of both parties. No final settlement of balance due is yet made.

Illustration 26
Satish and Sunit made a JV to underwrite the subscription at par of the equity share capital of Soft Systems
Ltd. consisting of 100,000 shares of Rs. 10 each. They agreed to pay all expenses up to the allotment of
shares. They agreed to share profits or losses in the ratio of 3:2. The consideration in return for this
underwriting was allotment of 12,000 other shares of Rs. 10 each at par to be issued to them fully paid.
Satish provided for Rs. 12,000 registration fees, Rs. 11,000 advertisement, Rs. 7,500 for printing &
distributing prospectus and Rs. 2,000 for printing & stationery. Sunit paid Rs. 3,000 office rent, Rs. 13,750
as legal charges, and Rs. 9,000 salary of clerks. The issue fell short by 15,000 shares. Satish took these over
on joint A/c by paying for the same in full. He sold the entire holding at Rs. 12 (net). Sunit sold the 12,000
shares allotted as consideration at the same price.
Prepare necessary ledger accounts in the books of both parties.

SOLUTIONS
Solution: 20
Joint Venture Account
To, Joint Bank A/c - wages 10,00,000 By, Joint Bank A/c - advance 50,00,000
To, Joint Bank A/c - material 60,00,000 By, Joint Bank A/c - balance price 30,00,000
To, Joint Banks A/c - Architect 21,00,000 By, Shares A/c - received 20,00,000
To, Prabir A/c - material 10,00,000 By, Mihir A/c - stock taken 3,00,000
To, Mihir A/c - material 15,00,000 By, Prabir A/c - 2/3rd loss 10,00,000
To, Shares A/c - loss 2,00,000 By, Mihir A/c - 1/3rd loss 5,00,000
1,18,00,000 1,18,00,000
Joint Bank Account

To, Prabir A/c 25,00,000 By, Joint Venture A/c - wages 10,00,000
To, Mihir A/c 15,00,000 By, Joint Venture A/c - materials 60,00,000
To, Joint Venture A/c - advance 50,00,000 By, Joint Venture A/c - Architect 21,00,000
To, Joint Venture A/c - balance 30,00,000 By, Prabir A/c - balance paid 7,00,000
By, Mihir A/c - balance paid 22,00,000
1,20,00,000 1,20,00,000
Prabir's Account
To, Shares A/c - taken 18,00,000 By, Joint Bank A/c 25,00,000
To, Joint Venture A/c - loss 10,00,000
To, Joint Bank A/c - Balance paid 7,00,000 By, Joint Venture A/c - material 10,00,000
35,00,000 35,00,000
Mihir's Account
To, Joint Venture A/c - stock taken 300,000 By, Joint Bank A/c 15,00,000
To, Joint Venture A/c - Loss 500,000
To, Joint Bank A/c - Balance paid 22,00,000 By, Joint Venture - material 15,00,000
30,00,000 30,00,000
Shares Account
To, Joint Venture A/c 20,00,000 By, Prabir A/c 18,00,000
By, Joint Venture A/c - loss 2,00,000
20,00,000 20,00,000
Solution: 21
In the books of P and Q
Particular Amount Particular Amount
To, Joint Bank A/c 10,000 By, Joint Bank A/c 9,063
Cost of 1,000 shares @ Rs. 10 Sale proceeds of shares
By, P's Capital A/c 1,125
To, Capital A/c Shares taken
- Profit on Venture : By, Q's Capital A/c 1,125
- P-788 Shares taken
- Q-525 1,313
11,313 11,313

Joint Bank Account
Particular Amount Particular Amount
To, P's Capital A/c 5,000 By, Joint Venture A/c 10,000
To, Q's Capital A/c 5,000 (Cost of shares)
To, Joint Venture A/c 9,063 By, P's Capital A/c 4,663
By, Q's Capital A/c 4,400
19,063 19,063
Capital Account
P Q P Q
Particular Particular
Amount Amount Amount Amount
To, Joint Venture A/c 1,125 1,125 By Joint Book A/c
- Shares taken (Cost of shares) 5,000 5,000
To Joint Bank A/c 4,663 By Joint Venture Profit A/c 788
- Final Payment 4,400 By Joint Venture Profit A/c 525
5,788 5,525 5,788 5,525
Working:
Cost of 1,000 shares @ Rs. 10 = Rs. 10,000 to be contributed by P and Q equally, i.e., Rs. 5,000 each
Calculation of sale proceeds:
Share purchased 1,000
Taken as Com. 250
1,250
60% of 1,250 = 750 x Rs. 9 (i.e. Rs. 9.50 - .50) = Rs. 6,750
20% of 1,250 = 250 x Rs. 9.25 (i.e. Rs. 9.75 - .50) = Rs. 2,313
80% = Rs. 9,063
20% of 1,250 = 250 x Rs. 9 = Rs. 2,250 to be taken by P and Q equally, i.e. Rs. 1,125 each.
Solution: 22
Books of John
To, Goods A/c - shirting (400x500) 2,00,000 By, Cash A/c - sales
To, Bank A/c - carriage & insurance 18,000 shirting (500 x 600) 3,00,000
To, Smith A/c - suiting (500x480) 2,40,000 suiting (400 x 650) 2,60,000
To, Smith A/c - advt & Carriage 22,000
To, Commission A/c - 2.5% 14,000
To, Allowance A/c 2,000
To, P & L A/c (5/8th share) 40,000
To, Smith A/c (3/8th share) 24,000
5,60,000 5,60,000
Smith's Account
To, Cash A/c - advance 50,000 By, Joint Venture A/c - suiting 2,40,000
To, Cash A/c - balance paid 2,36,000 By, Joint Venture A/c - expenses 22,000
By, Joint Venture A/c - profit 24,000
2,86,000 2,86,000
Books of Smith
John's Account
To, Joint Venture A/c - sales 5,60,000 By, Cash A/c - advance 50,000
By, Joint Venture A/c - shirting 2,00,000
By, Joint Venture A/c - expenses 18,000

By, Joint Venture A/c - commission 14,000
By, Joint Venture A/c - Allowance 2,000
By, Cash A/c - balance paid 2,36,000
5,60,000 5,60,000
Solution: 23
Memorandum Joint Venture Account
Amount Amount Amount Amount
Particulars Particulars
(Rs.) (Rs.) (Rs.) (Rs.)
To, N : Cost or Shares 30,000 By M : Commission (3/5) 30,000
To, M : N : Commission (2/5) 20,000
Stamp Charges etc, 4,000 By M : Sale Proceeds 50,000
Advertising Charges 3,000 N : Sale Proceeds 18,000
Printing Charges 3,000 10,000
To, N :
Rent 2,000
Solicitor's Charges 3,000 5,000
To, Profit on Venture :
To, M — 3/4 54,750
To, N — 1/4 18,250 73,000
1,18,000 1,18,000
In the books of M
Joint Venture with N
To, Bank : Stamp, Adv. and 10,000 By, Bank : Commission 30,000
Printing Charges By, Bank : Sale Proceeds 50,000
To, Share of Profit 54,750
To, Bank (Remittance) 15,250
80,000 80,000
In the books of N
Joint Venture with M
To, Bank : Cost of Shares 30,000 By, Bank : Commission 20,000
To, Bank : Rent and Solicitor's Charges 5,000 By, Bank : Sale Proceeds 18,000
To, Share of Profit 18,250 By, Bank (Remittance) 15,250
53,250 53,250
Solution: 243
Books of Sahani
To, Food grains A/c (400*800) 3,20,000 By, Sandeep A/c - sales (800*1200) 9,60,000
To, Bank A/c - freight & insurance 10,000
To, Sahu A/c -food grains(400*1000) 4,00,000
To, Sahu A/c - expenses 11,000
To, Sandeep A/c - expenses 21,000
To, Sandeep A/c - commission 5% 48,000
To, Profit & Loss A/c 3/5th share 90,000
To, Sahu A/c 2/5th share 60,000
9,60,000 9,60,000

Sahu's Account (Co-venturer)
To, Bank A/c - advance 50,000 By, Joint Venture A/c - grains 4,00,000
To, Sandeep A/c - bill 2,91,000 By, Joint Venture A/c - expenses 11,000
To, Bank A/c - final balance 1,30,000 By, Joint Venture A/c - profit share 60,000
4,71,000 4,71,000
Sandeep's Account (Agent)

To, Joint Venture A/c - sales 9,60,000 By, Joint Venture A/c - expenses 21,000
By, Joint Venture A/c - commission 48,000
By, Bank A/c - cheque received 6,00,000
By, Sahu A/c - Bill 2,91,000
9,60,000 9,60,000
Solution: 25
Books of Daga
Consignment to Lodha Account
To, Goods Sent on Consignment A/c 40,000 By, Lodha's A/c (sales) 48,000
To, Bank A/c (packing & dispatching) 4,000 By, Joint Venture with Lodha A/c
To, Lodha's A/c : (stock transferred on conversion to JV) 11,250
Freight & Carriage 1,000
Commission 2,400
To, P & L A/c 11,850
59,250 59,250
Lodha's Account
To Consignment A/c - sales 48,000 By, Consignment A/c- expenses 1,000
By, Consignment A/c - commission 2,400
By, Cash A/c 44,600
48,000 48,000
Joint Venture with Lodha Account

To, Consignment to Lodha A/c 11,250 By, Balance c/d 42,280
To, Goods A/c 20,000
To, Bank A/c - expenses 2,000
To, P & L A/c (profit) 9,030
42,280 42,280
Books of Lodha
Daga's Account (as consignor)
To, Cash A/c- expenses 1,000 By, Bank A/c - sales 48,000
To, Commission A/c 2,400
To, Bank A/c - remittance 44,600
48,000 48,000
Joint Venture with Daga Account

To, Cash A/c - expenses 1,700 By, Bank A/c - sales 50,000
To, P & L A/c (profit) 6,020
To, Balance c/d 42,280
50,000 50,000
Working note:
Memorandum Joint Venture Account
To, Daga A/c - goods 11,250 By, Lodha A/c - sales 50,000
To, Daga A/c- goods 20,000
To, Daga A/c- expenses 2,000
To, Lodha A/c- expenses 1,700
To, Net Profit :
Daga 3/5th Share 9,030
Lodha 2/5th share 6,020
50,000 50,000
Solution: 26
Books of Satish
To, Bank A/c - expenses : By, Bank A/c- sales
Registration Fees 12,000 15000 shares @ 12 1,80,000
Advertising 11,000 By, Sunit's A/c - sales
Prospectus Printing 7,500 12000 shares @ 12 1,44,000
Printing & Stationery 2,000
To, Sunit's A/c - expenses :
Office rent 3,000
Legal charges 13,750
Salary 9,000
To, Bank A/c - 15,000 shares @ Rs. 10 1,50,000
To, P & L A/c (3/5th share) 69,450
To, Sunit A/c (2/5th share) 46,300
3,24,000 3,24,000
Sunit's Account
By, Bank A/c - balance paid 71,950
1,44,000 1,44,000
Books of Sunit Satish's Account
To, Bank A/c - balance paid 71,950 By, Joint Venture A/c - cost of shares 1,50,000
2,51,950 2,51,950

CHAPTER – 4
INSURANCE CLAIM (LOSS OF STOCK AND LOSS OF PROFIT)
INTRODUCTION
Business enterprises gets insured against the loss of stock on the happening of certain events such as fire,
flood, theft, earthquake etc. insurance being a contract of indemnity, the claim for loss is restricted to the
actual loss of assets.
Insurance claim can be studied under two parts as under:
 Claim for loss of stock
 Claim for loss of profit
CLAIM FOR LOSS OF STOCK
Fire insurance being a contract of indemnity, a claim can be lodged only for the actual amount of the
loss, not exceeding the insured value.
(a) Total Loss: if the goods are totally destroyed the amount of claim is equal to the actual loss,
provided the goods are fully insured.
(b) Partial Loss: If the goods are partially destroyed the amount of claim is equal to the actual loss
provided the goods are fully insured. However in case of under insurance the amount of claim
will depend upon the nature of insurance policy as follows:
(i) Without Average clause: Claim is equal to the lower of actual loss of the sum insured.
(ii) With Average Clause: Amount of claim for loss of stock is proportionately reduced,
considering the ratio of policy amount (i.e. insured amount) to the value of stock as on the date
of fire (i.e. insurable amount)
HOW TO COMPUTE CLAIMS FOR LOSS OF STOCK
Whatever method of valuation of stock is followed, accurate value of stock immediately before the
date of fire must be ascertained correctly, since the insurance company will consider only the actual loss of
stock which was destroyed by fire. Actual loss of stock can be determined after deducting the salvage value
of stock from the total value of stock destroyed at the date of fire. Thus, we are to compute the total value of
stock immediately before the fire and actual loss of stock (i.e., after deducting salvage value). Total cost can
be determined as:
Particulars Amount
Opening Stock (at cost) ***
Add: Purchase (Less Return) ***
Less: Cost of goods sold (upto the date of fire)
***
***
Value of stock (at the date of fire) ***
For ascertainment of actual value of closing stock immediately before the fire, we are to prepare a
Memorandum Trading Account as under:
Memorandum Trading Account (from the 1st day of current year to the date of fire)
To, Opening Stock *** By, Sales (less returns) ***
To, Purchase (less returns) *** By, Closing Stock (Bal. figure) ***
To, Other expenses (which usually appear in the ***
debit side of Trading Account, e.g., wages,
carriage inwards, etc.)
To, Gross profit (percentage on Sales) ***
But, if the rate of gross profit on sales is not given, we are to prepare last years’ Trading Account just to
know the rate of gross profit on sales. The logic behind this principles that the same rate of gross profit has
been earned by the firm.
AVERAGE CLAUSE
Average clause will only arise in case of under insurance of stock, i.e., goods are insured for a lesser
value or less than the actual stocks just to save some amount of premium by the insured. Even the stocks are
under-insured.
If average clause is applied, the loss will be borne by the insurance company and the insured
proportionately. In other words, the insured will bear to the extent of the stock which were not insured and
the insurance company will bear/compensate the insured portion of stocks.
Amount of claim = Amount of Policy / Value of stocks at the date of fire x Actual loss.
For example
Value of stock at the date of fire amounted to Rs. 50,000, which was issued for Rs. 40,000. Loss as a result
of firms comes to Rs. 10,000. Calculate the amount of claim.
Solution:
Amount of Claim = Amount of Policy / Value of stocks at the date of fire × Actual Loss
= (Rs. 40,000/ Rs. 50,000) × Rs. 10,000
= Rs. 8,000
CLAIM FOR LOSS OF PROFIT

When a fire occurs, apart from the direct loss on account of stock or other assets destroyed, there is
also a consequential loss because, for sometime, the business is disorganised or has to be discontinued, and
during that period, the standing expenses of the business like rent, salaries etc. continue. Moreover, there is
loss of profits which the business would have earned during the period. This loss can be insured against by a
“Loss of Profit” or “consequential Loss” policy.
The loss of Profit Policy normally covers the following items:
1. Loss of net profit.
2. Standing charges
3. Any increased cost of working e.g. renting of temporary premises
CERTAIN IMPORTANT TERMS

Standing Charges
Standing charges or fixed overhead charges are to be paid even if there is a reduction in turnover or
stoppage of work which include; Rent, Rates and Taxes; Salaries to payment Staffs; Depreciation of fixed
Assets, Director’s Remuneration; Sundry standing charges which are restricted to 5% of the total of
specified insured standing charges. Under loss of profit insurance, gross profit means net profit + insured
standing charges.
Indemnity Period
“The period commences at the date of damage and ends not later than the stated number of months
thereafter.
Indemnity
Indemnity is the difference between the actual profit earned after the damage and that which should have
been earned had no damage occurred.
Increased Cost of Working
This includes any additional expenditure necessarily incurred for the purpose of avoiding the reduction in
turnover which would have taken place during the period of immediately as a result of the damage i.e.,
unreasonable expenditures should be excluded.
Standard Turnover
The turnover during that period in the twelve months immediately preceding the date of the damage which
corresponds with the indemnity period.
Annual Turnover
It is the period of 12 months immediately before the date of damage.
Reduction in Turnover in Short-sales
When actual turnover during the period of interruption is found to be less than the standard turnover, it is
known as short-sales or reduction in turnover. In short, it is the difference between standard turnover and
actual turnover.
Saving Insured Standing Charges
Usually, during the period of indemnity a provision should be made for a savings in insured standing charges
which should be deducted.
Procedure for calculation of claim
Step – I: Determine the amount of short sales and ascertain the amount of gross profit on short sales
applying gross profit ratio.
Step – II: Determine the increased cost of working and added to it
Step – III: Subtract the amount of saving in insured standing charges.
Step – IV: In order to find out the amount of claims, apply the principle of Average clause.

PRACTICAL PROBLEMS
Illustration 27
A fire occurred on 15th September 2013 in the premises of Sen & Co. from the following figures, calculate
the amount of claim to be lodged with the insurance company for loss of stock.
Particulars Amount
Stock at cost on 1.1.2012 40,000
Stock at cost on 1.1.2013 60,000
Purchases in 2012 80,000
Purchase from 1.1.2012 to 15.9.2013 1,76,000
Sales in 2012 1,20,000
Sales from 1.1.2013 to 15.9.2013 2,10,000
During the current year cost of purchase has risen by 10% above last years' level. Selling prices have gone
up by 5%. Salvage value of stock after fire was Rs. 4,000.
Illustration 28
Mr. X's godown was destroyed by fire on 1.6.2013 when the goods in stock were insured for Rs. 60,000. The
following particulars are given:
Balance Sheet (Extract) as at 31st December 2012
Amount Amount
Liabilities Asset
Rs. Rs.
Creditor for goods 20,000 Stock (including goods held by agent Rs. 2,000) 36,000
Debtors 70,000
Transactions upto 31st May, 2013 include:

Amount Amount
Rs. Rs.
Cash Received from Debtors 3,40,000 Cash paid to Creditors 2,20,000
Bad Debt written off 3,500 Discount Received
Balance on 31.5.2013: 1,000
Debtors 70,000
Creditors 30,000
Additional information
(i) Debtors on 31.5.2013, included an amount owing from the agent from sales to date Rs. 4,000
less 10% commission and his expenses amounting to Rs. 100 on 31.5.2013 - the agent still held
the said goods valued at Rs. 3,600 (at selling price).
(ii) Sales (total) for the periods include Rs. 1,600 for goods which have the selling price reduced by
50% and also Rs. 6,000 reduced by 25%.
(iii) The normal mark up is 50% on cost and except the above, all sales can be assumed to be at the
full selling price.
(iv) All the goods were destroyed and there was no salvage value of the goods. Calculate the amount
of claim.
Illustration 29
X Ltd. has taken out a fire policy of Rs. 1,60,000 covering its stock. A fire occurred on 31st March, 2013.
The following particulars are available :
Rs.
Stock as on 31.12.2012 60,000
Purchases to the date of fire 2,60,000
Sales to the date of fire 1,80,000
Carriage Inwards 1,600
Commission on purchase to be paid @ 2%
Gross Profit Ratio @ 50% on cost
You are asked to ascertain (i) total loss of stock; (ii) amount of claim to be made against the Insurance
Company assuming that the policy was subject to average clause. Stock salvage amounted to Rs. 41,360.

Illustration 30
A fire occurred in the premises of Sri. G. Vekatesh on 1.4.2013 and a considerable part of the stock was
destroyed. The stock salvaged was Rs. 28,000. Sri Venkatesh had taken a fire insurance policy for Rs.
17,10,000 to cover the loss of stock by fire.
You are required to ascertain the insurance claim which the company should claim from the insurance
company for the loss of stock by fire. The following particulars are available:
Rs. Rs.
Purchases for the year 2012 9,38,000 Stock on 1.1.12 1,44,000
Sales for the year 2012 11,60,000 Stock on 31.12.2012 2,42,000
Purchases from 1.1.13 to 1.4.13 1,82,000 Wages paid during 2012 1,00,000
Sales from 1.1.13-1.4.13 24,00,000 Wages paid 1.1.13-1.4.13 1,80,000
Sri Venkatesh had in June 2012 consigned goods worth Rs. 50,000, which unfortunately were lost in an
accident. Since there was no insurance cover taken, the loss had to be borne by him full.
Stocks at the end of each year for and till the end of calendar year 2011 had been valued at cost less 10%.
From 2012, however there was a change in the valuation of closing stock which was ascertained by adding
10% to its costs.
Illustration 31
On 1.4.2013, godown of Y Ltd. was destroyed by fire. The records of the company revealed the following
particulars:
Rs.
Stock on 1.1.2012 75,000
Stock on 31.12.2012 80,000
Purchases during 2012 3,10,000
Sales during 2012 4,00,000
Purchase from 1.1.2013 to the date of fire 75,000
Sales from 1.1.2013 to the date of fire 1,00,000
In valuing Closing Stock of 2012, Rs. 5,000 was written off whose cost was Rs. 4,800. Part of this stock was
sold in 2013 at a loss of Rs. 400, at Rs. 2,400. Stock salvaged was Rs. 5,000. The godown and the cost of
which was fully insured.
Indicate from above amount of claim to be made against the insurance company.
Illustration 32
On 30.09.2013 the stock of Harshvardhan was lost in a fire accident. From the available records the
following information is made available to you to enable you to prepare a statement of claim of the insurer:
Amount Amount
Rs. Rs.
Stock at cost on 1.4.2012 75,000 Sales less returns for the year ended 31.3.2013 6,30,000
Stock at cost on 31.3.2013 1,04,000 Purchase less returns up to 30.09.2013 2,90,000
Purchases less returns for the year 5,07,500 Sales less returns up to 30.09.2013 3,68,100
ended 31.3.2013
In valuing the stock on 31.03.2013 due to obsolescence 50% of the value of the stock which originally cost
Rs. 12,000 had been written-off. In May 2013, %th of these stocks had been sold at 90% of original cost and
it is now expected that the balance of the obsolete stock would also realize the same price, subject to the
above, G.P had remained uniform throughout stock to the value of Rs. 14,400 was salvaged.
Illustration 33
From the following particulars prepare a claim for loss of profits under the Consequential Loss Policy. Date
of Fire: June 30, 2013
Period of indemnity: Six Months
Particulars Amount
Sum Insured 25,000
Turnover for the year ended June 30, 2013 1,00,000
Net Profit for the accounting year ending March 31, 2013 6,250
Standing charges for the accounting year ending March 31, 2013 14,250
Turn Over for the year ending March 31, 2013 99,000

Turn Over for the indemnity period from 1.7.13 - 31.12.13 28,000
Turn Over for the period from 1.7.12 - 31.12.12 55,000
The turnover of the year 12-13 had shown a tendency of increase of 10% over the turnover of the preceding
year.
Illustration 34
There was a serious fire in the premises of M/s ABC on 1.9.2013. Their business activities were interrupted
until 31st December, 2013, when normal trading conditions were re-established. M/s. ABC are insured under
the loss or profit policy for Rs. 42,000 the period of indemnity being six months. You are able to ascertain
the following information.
(i) The net profit for the year ended 31st December, 2012 was Rs. 20,000
(ii) The annual insurable standing charges amounted to Rs. 30,000, of which Rs. 2,000 were not
included in the definition of insured standing charges under the policy.
(iii) The additional cost of working in order to investigate the damage caused by the fire amounted to
Rs. 600 and but for the expenditure the business would have had to shut down.
(iv) The savings in insured standing charges in consequence of the fire amounted to Rs. 1,500.
(v) The turnover for the period for four months ended April 30, August 31, December 31, in each of
the years 2012 and 2013 was as follows:
Amount Amount Amount
Year
Rs. Rs. Rs.
2012 65,000 80,000 95,000
2013 70,000 80,000 15,000
You are required to compute the relevant claim under the terms of the loss of profit policy.
Illustration 35
A fire occurred on 1st July, 2012 in the premises of A. Ltd. and business was practically disorganized up to
30th November 2012. From the books of account, the following information was extracted:
Sl. No. Particulars Amount
1. Actual turnover from 1st July 2013 to November, 2013 1,20,000
2. Turnover from 1st July to 30th November, 2012 4,00,000
3. Net Profit for the last financial year 1,80,000
4. Insured Standing Charges for the last financial year 1,20,000
5. Turnover for the last financial year 10,00,000
6. Turnover for the year ending 30th June, 2013 11,00,000
7. Total Standing Charges for the year 1,44,000
The company incurred additional expenses amounting to Rs. 18,000 which reduced the loss in turnover.
There was also a savings during the indemnity period of Rs. 4,972.
The company holds a 'Loss of Profit' policy for Rs. 3,30,000 having an indemnity period for 6 months. There
has been a considerable increase in trade and it has been agreed that an adjustment of 20% be made in
respect of upward trend in turnover.
Compute claim under 'Loss of Profit Insurance’.

SOLUTIONS
Solution: 27
Memorandum Trading Account for the period from 1.1.2013 to 15.9.2013
Particulars Current Year Last Year Particulars Current Year Last Year
To Opening Stock 60,000 60,000 By, Sales 2,10,000 2,00,000
To Purchase 1,76,000 1,60,000 By, Closing Stock 1,32,000 1,20,000
To Gross Profit 1,06,000 1,00,000
(bal. fig.) (50% of Sales)
3,42,000 3,20,000 3,42,000 3,20,000
Working:
1. Value of Closing Stock
Stock at last years' level 60,000
Add: 10% increase in cost of purchase 6,000
66,000
Amount of Claim
Closing Stock 1,32,000
Less: Stock Salvaged 4,000
Actual Value of Stock last 1,28,000
Actual Value of Stock Loss
Accounting for Special Transactions
Trading Account (for ascertaining rate of Gross Profit) For the year ended 31.12.2012
To, Opening Stock 40,000 By, Sales (less returns) 1,20,000
To, Purchase (less returns) 80,000 By, Closing Stock 60,000
To, Gross profit (bal. fig.) 60,000
1,80,000 1,80,000
.-. Percentage of gross profit on sales = (Gross Profit/Sales) x100
= (Rs. 60,000/ Rs. 1,20,000) x 100 = 50%
Solution: 28
In the Books of Mr. X
Debtors Account
2013 Jan 1 To Balance b/d 70,000 2013 May By Cash Received 3,40,000
May 31 To Sales (bal. fig.) 3,40,000 31 By Bad Debts 3,5001
By Balance c/d 66,500
4,10,000 4,10,000
Creditors Account
2013 2013
May, 31 To Cash paid 2,20,000 Jan. 1 By Balance b/d 20,000
To Discount Received 1,000 2013
To Balance c/d 30,000 May 31 By Purchase (bal. fig) 2,31,000
2,51,000 2,51,000
Godown Stock Account

2012 To Balance b/d 34,000 2012 By Cost of Goods Sold 2,29,0662
May, 31 (Rs. 36,000 - Rs. 2,000) 2,31,000 May By Stock at Agents 3,0673
31. By Stock Destroyed by fire 32,867
(bal. fig)
To Purchase from the Creditors) 2,65,000 2,65,000
Thus, amount of claim which will be lodged for Rs. 32,867.

Workings:
1. Bad Debts
Particulars Amount
Sales 4,000
Less: Commission @10% 400
Expenses 100 500
3,500
2. Cost of Goods Sold
Sales Normal Selling Price Cost (2/3 of Selling Price)
1,600 3,200 2,133
6,000 8,000[6,000 x (100/75)] 5,333
3,32,400 (bal. fig.) - 2,21,600
3,40,000 2,29,066
3. Stock at Agent
Sales (Rs.) Cost (Rs.)
4,000 2,667 (Rs. 4,000 x 2/3)
2,400 (Rs. 3,600 x 2/3)
5,067
Less: Agents' hand at the beginning 2,000
3,067
Solution: 29
In the books of X Ltd.
Memorandum Trading Account
for the period ended 31st March, 2013
Particulars Rs. Rs. Particulars Rs.
To, Opening Stock 60,000 By, Sales 1,80,000
To Purchase 2,60,000 By Closing Stock 2,06,800
Add: Carriage Inward 1,600 (bal. figure)
Add: Com. on Purchase 5,200 2,66,800
To Gross Profit 60,000
(@ 50% on cost or 33 % on sale)
3,86,800 3,86,800
Note: Carriage Inward and Com. on Purchase are direct expenses and hence, these are added to purchases.
Loss of Stock:
Stock at the date of fire 2,06,800
Loss of Stock 1,65,400
Amount of claim applying Average Clause
Amount of Claim = Actual Loss x
= Rs. 1,65,440 x (Rs. 1,60,000/ Rs. 2,06,800) = Rs. 1,28,000

Solution: 30
In order to find the rate of gross profit on sales for the year 2012, the following Trading Account is to be
prepared for the same year as:
Trading Account For the year ended 31st Dec. 2012
To, Opening Stock 1,60,000 By, Sales 11,60,000
1,44,000 x (100/90) By, Stock lost by Accident 50,000
To, Purchases 9,38,000 By, Closing Stock (2,42,000 x100/110) 2,20,000
To, Wages 1,00,000
To, Profit & Loss A/c (G.P. transferred) 2,32,000
14,30,000 14,30,000
Rate of Gross Profit on Sales = 2,32,000/11,60,000 x 100 = 20%

Trading A/c for the period (from 1.1.13-1.4.13)
Amount Amount
Rs. Rs.
To, Opening Stock 2,20,000 By, Sales 2,40,000
To, Purchases 1,82,000 By, Closing Stock 2,28,000
To, Wages 18,000
To, Profit & Loss A/c (G.P. @20% of sales) 48,000
4,68,000 4,68,000
Amount of Claim = Stock destroyed - Salvaged
= Rs. 2,28,000 - Rs. 28,000
= Rs. 2,00,000
As the policy amount is less than the value of stock destroyed, average clause is applicable. Here, the
amount of claim will be:
Net Claim = Loss of Stock x (Amount of Policy / Stock at the date of fire)
= 2,00,000 x (1,71,000 / 2,28,000) = 1,50,000/-
Solution: 31
(a) For ascertaining the rate of Gross Profit
In the books of X Ltd.
Trading Account
for the year ended 31.12.2012
Particulars Rs. Rs. Particulars Rs. Rs.
To Opening Stock 75,000 By Sales 4,00,000
To Purchases 3,10,000 By Closing Stock 80,000
Less: Purchase of Abnormal items 4,800 3,05,200 Add: Loss on value of 200 80,200
of goods abnormal items
To Gross Profit (bal. fig.) 1,00,000 (Rs.5,000 - Rs.4,800)
4,80,200 4,80,200
Percentage of Gross Profit on sales = x100 = 25%

for the period ended 31st March, 2013
Particulars Rs. Particulars Rs. Rs.
To, Opening Stock 80,200 By, Sales 1,00,000
To Purchases 75,000 Less: Sale of abnormal Stock 2,000 98,000
(Rs. 2,400 - Rs. 400)
To Gross Profit (@25% on Rs. 98,000) 24,500
By Closing Stock
(bal. fig.) 81,700
1,79,700 1,79,700
Alternative approach
In a combined form
Trading Account
for the year ended 31st December, 2013
Normal Abnormal Normal Abnormal
Particulars Items Rs. Items Total Particulars Items Rs. Items Total
To Opening Stock 75,000 --- 75,000 By Sales 4,00,000 — 4,00,000
To Purchase 3,05,200 4,800 3,10,000 By Closing Stock 80,200 (-) 200 80,000
To Gross Profit @ 1,00,000 — 1,00,000 By Gross Loss — 5,000 5,000
25% on sales
4,80,200 4,800 4,85,000 4,80,200 4,800 4,85,000

for 3 months ending 31st March, 2013
Particulars Total Particulars Total
Items Items Items Items
To Opening Stock 80,200 (-) 200 80,000 By Sales 98,000 2,000 1,00,000
To Purchase 75,000 4,600 75,000 By Closing Stock 81,700 2,4001 84,100
(bal. fig)
To Gross Profit 24,500 29,100
1,79,700 4,400 1,84,100 1,79,700 4,400 1,84,100
1. 50% of Rs. 4,800 i.e., remaining abnormal stocks are valued at cost.
Amount of Claim Rs.
Value of Stock at the date of fire 84,100
79,100
Solution: 32
for the period ended 30.09.2013
Particulars Items Items Total Particulars Items Items Total
Rs. Rs. Rs. Rs. Rs. Rs.
To Opening Stock 98,000 6,000 1,04,000 By Sales 3,60,000 8,100 3,68,100
To Purchase 2,90,000 --- 2,90,000 (Less returns)
(Less: Returns) By Closing
To Gross Profit 90,000 4,800 94,800 Stock 1,18,000 2,700 1,20,700
(25% on Normal Sales)
4,78,000 10,800 4,88,800 4,78,000 10,800 4,88,800
Amount of Claim Rs.
Stock at the date of fire 1,20,700
1,06,300
Workings:
Trading Account
for the year ended 31.03.2013
Amount Amount
Rs. Rs.
To Opening Stock 75,000 By Sales (Less: Returns) 6,30,000
To Purchase (Less: Returns) 5,07,500 By Closing Stock 1,10,0001
To Gross Profit 1,57,500
7,40,000 7,40,000
So, Percentage of Gross Profit on sales = x 100 = 25%
1. Closing Stock
Amount
Particulars
Rs.
Closing Stock 1,04,000
Add: Stock Written off 6,000
1,10,000
2. Sale of Abnormal Items of goods

Rs. 12,000 x x (90/100) = Rs. 8,100
3. Closing Stock of Abnormal Items

Rs. 12,000 x x (90/100) = Rs. 2,700

Solution: 33
Short Sales
Particulars Amount
Standard Turnover (from 1.7.12 - 31-12-12) 55,000
Add: 10% increase in 12-13 5,500
60,500
Less: Actual Sales 28,000
Short Sales 32,500
Rate of gross Profit on Sales
= (Net Profit + Insured Standing Charges) / Sales x 100 = 20.70%
Gross Claim
Particulars Amount
Gross Profit on short sales = 32,500 x 20.70% 6,730
Add : Increased Cost of Workings NIL
6,730
Less: Saving in Standing Charges NIL
Amount of Gross Claim 6,730
Solution: 34
Short Sales
Particulars Amount (Rs.)
Standard Turnover (four months ended 31st December, 2012 95,000
Less: Actual Sales (four months ended 31 st December, 2013) 15,000
Short Sales 80,000
Reduction of Gross Profit

G. P. Ratio = x 100
= [ Rs. 20,000 + Rs. 28,000/ Rs. 2,40,000) x 100] = 20%

.-. Reduction in gross profit in short sales = Rs. 80,000 x 20% = Rs. 16,000
Additional cost of working for mitigating damage Rs. 600
Accounting for Special Transactions
As all standing charges are not insured, amount admissible for additional expenses
= x Additional Expenses
= = x Rs. Rs. 600 = Rs. 576
Total Claim
Particulars Amount
Gross Profit on short sales 16,000
Add: Additional cost of workings 576
16,576
Less: Savings in Standing Charges 1,500
Gross Claim 15,076
Applying Average Clause
Net Claim = x Gross Claim = = x Rs. 15,076 = Rs. 12,922

st
* Gross Profit on Annual Turnover = Sales for 12 months ended 31 August, 2012 is Rs. 2,45,000
= Rs. 2,45,000 x 20% = Rs. 49,000

Solution: 35
Particulars Amount
Short Sales:
Standard Turnover (from 1.7.2012 to 30.11.2012) 4,00,000
Add: Increase @ 20% 80,000
4,80,000
Less: Actual Sales during indemnity period (i.e., from 1.7.2013 to 30.11.2013) 1,20,000
3,60,000
.-. Gross Profit @30% on Short Sales (Rs. 3,60,000 x 30%) = 1,08,000
Additional Expenses:
Least of the following:
(a) Actual amount 18,000
(b) Gross Profit on additional sales @30% 36,000
(c) x Additional Expenses 16,972 16,972
= x Rs. 18,000 = 16,972 1,24,972

Less: Saving in Expenses 4,972
1,20,000
Net Claim = Amount of Claim x (Amount of Policy/G.P. on Annual Adjusted Turnover
= Rs. 1,20,000 x (Rs. 3,30,000/ Rs. 3,96,000) = Rs. 1,00,000
Note:
1. Rate of Gross Profit: x 100 = 30%

QUESTIONS:
1. Babai sold goods to Kachari for Rs. 90,000 on 1st April, 2014 for which the later accepted three bills of
Rs. 30,000 each due respectively in 1,2 and 3 months. The first bill is retained by Babai and is duly met. The
second bill was discounted (discount being Rs. 600) and is met in due course. The third bill is also
discounted (discount being Rs. 900) and is dishonoured, the Noting charges being Rs. 150.
New arrangements were duly made whereby Kachari pays Cash Rs. 10,150 and accepted and new bill due in
2 months for the balance of the amount with interest at 15% p.a. The bill is retained, on due date the same is
dishonoured, noting charges being X 180. Kachari declared insolvent on 15th Sept. 2014 and 35 paise in a
rupee were received from his estate.
Required:
Pass Journal entries in the Books of Babai.
[Answer: Total of Journal Entries — Rs. 2,82,660. Interest on renewal of bills — [Rs. 20,000 x 15% x
2/12] = Rs. 500.], Received from estate – Rs. 20,680 x 0.35 = Rs. 7,238.]
2. Gouru and Gyani were friends and in need of funds. On 1st April, 2015 Gouru drew a bill for Rs. 2,00,000
for three months on Gyani. On 04.04.2015 Gouru got the bill discounted at 15% per annum and remitted half
of the proceeds to Gyani. On the due date, Gyani could not meet the bill, instead, Gouru accepted Gyani's
bill for Rs. 1,20,000 on 4th July, 2015 for two months. This was discounted by Gyani at 15% per annum and
out this Rs. 19,500 was paid to Gouru after deducting Rs. 500 discounting charges. Due to financial crisis,
Gouru became insolvent and the bill drawn on his was dishonoured and his estate paid 40%.
• Days of grace for discount purposes may be ignored.
Required:
(i) Give Journal Entries and
(ii) Prepare Gyani's Account - in the books of Gouru.
[Answer: Total of Journal Entries — Rs.8,80,000,Amount transferred to Deficiency A/c - Rs.1,20,000
x 60% = Rs.72,000.]
3. On 15th December, 2014 the premises of Nagar Ltd. were destroyed by fire, but sufficient records were
saved from which the following particulars were ascertained:
Rs.
Stock at cost on 1st April, 2013 2,20,500
st
Stock at cost on 31 March, 2014 2,38,800
Purchases less returns, year ended 31st March, 2014 11,94,000
Sales less returns, year ended 31st March, 2014 14,61,000
st th
Purchases less returns, 1 April, 2014 to 15 December, 2014 10,15,000
Sales less returns, 1st April, 2014 to 15th December, 2014 11,62,000
st
In valuing stock for Balance Sheet as at 31 March, 2014 Rs. 6,900 had been written off for certain stock
which was a poor selling line, having cost of Rs. 20,700. A portion of these goods were sold in June, 2014 at
a loss of Rs. 750 on the original cost of Rs. 10,350. The remainder of this stock was now estimated to be
worth the original cost. Subject to the above exception, gross profit had remained at a uniform rate
throughout. The stock salvaged was Rs. 17,500. The stock was insured for Rs. 2,50,000.
Required: Calculate the amount of claim to be lodged with the Insurance company for Loss of Stock.
[Answer: Rate of Gross Profit 20%, Amount of Claim — Rs.2,36,679]
4. Mr. Naitik sends goods to the value of Rs. 9,37,500 at cost to Mr. Jatin on consignment basis to be sold at
5% commission on sales on 01.01.2015. Jatin accepted a bill of Rs. 2,50,000 drawn by Naitik for 4 months
on the same date. Naitik discounted the bill with his banker @ 15% p.a. on 04.02.2015. Naitik incurred Rs.
75,000 by way of freight and other expenses, whereas expenses of Jatin were Rs. 50,000 out of which 60%
were non-recurring. Jatin sent the final balance of Rs. 7,68,750 to Naitik on 31.03.2015 along with account
sales. The Gross Profit margin is 25% on Sales and 10% of Goods Remained unsold with Jatin.
You are required to prepare:
(i) Consignment Account and
(ii) Jatin Account - in the books of Mr. Naitik.
[Answer: Amount transferred to General P& L A/c — Rs.1.10.500, Amount of goods sold on
consignment — (Rs.9,37,500/0.90)x0.90 = Rs.11,25,000
Or , (Rs.8,43,750/0.75)x0.90 =Rs.11,25,000]
5. X and Y entered into a joint venture for purchase and sale of some household items. They agreed to share
profits and losses in the ratio of their respective contributions. X contributed Rs. 10,000 in cash and Y Rs.
13,000.
The whole amount was placed in a Joint Bank Account. Goods were purchased by X for Rs. 10,000 and
expenses paid by Y amounted to Rs. 2,000. They also purchased goods for Rs. 15,000 through the Joint
Bank Account. The expenses on purchase and sale of the articles amounted to Rs. 6,000 (including those met
by Y). Goods costing Rs. 20,000 were sold for Rs. 45,000 and the balance were lost by fire.
Prepare Joint Venture Account, Joint Bank Account and the Ventures' Accounts closing the venture.
[Profit on Joint venture: X - Rs.8,000; Y - Rs.6,000.]
6. Jiban and Mitrik decided to work in joint venture with the following scheme, agreeing to share profits in
the ratio of 2/3 and 1/3:
They guaranteed the subscription at par of 50 lakhs shares of Rs. 10 each in Rainbow Ltd. and to pay all
expenses up to allotment in consideration of RAINBOW LTD. issuing to them 3,00,000 other shares of Rs.
10 each fully paid together with a commission @ 5% in cash which will be taken by Jiban and Mitrik in 3 :
2. Co-ventures introduced cash as follows:
JIBAN Stamp charges, etc. Rs. 1,65,000
Advertising charges Rs. 1,35,000
Car expenses Rs. 1,54,000
Printing charges Rs. 1,88,000
MITRIK Rent Rs. 1,30,000
Solicitor's charges Rs. 80,000
Application fell short of the 50 lakhs shares by 1,20,000 shares and Mitrik introduced Rs. 12,00,000 for the
purchase of those shares.
The guarantee having been fulfilled, Rainbow Ltd. handed over to the ventures 3,00,000 shares and also paid
the Commission in cash. All their holdings were subsequently sold by the venture Mitrik receiving Rs.
12,50,000 and Jiban Rs. 25,00,000.
You are required to prepare the:
(i) Memorandum Joint Venture Account and
(ii) Joint Venture Account with Mitrik - in the Books of JIBAN.
[Answer: Share of Profit on Joint Venture: Jiban —Rs.27,98,667, Mitrik —Rs.13,99,333.]

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Study Note – 2 Accounting For Specia l Transactions

SPECIMEN OF BILL OF EXCHANGE:

PARTIES TO BILL OF EXCHANGE

HOLDER AND HOLDER IN DUE COURSE

A SPECIMEN OF PROMISSORY NOTE

ESSENTIAL FEATURES OF PROMISSORY NOTE

DIFFERENCE BETWEEN BILLS OF EXCHANGE AND PROMISSORY NOTE

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TENURE, DAYS OF GRACE AND DATE OF MATURITY OR DUE DATE OF BILLS

TYPES OF BILLS OF EXCHANGE

(a) When the drawer retains the bill till maturity

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When the drawer endorses the bill to a person before maturity

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In the books of Sagar Journal Entries

In the books of Kamal

In the books of Amal Journal Entries

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Bills Receivable Account

Journal entries in the Books of Lala

Bills Payable Account

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Bills Payable Account

Accommodation Bills Receivable Account

Accommodation Bills Payable Account

Friends (acceptors of bills) Account

Friends (drawers of bills) Account

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In the books of Ratan

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MAIN TERMS OF CONSIGNMENT TRADE

OPERATING CYCLE OF CONSIGNMENT ARRANGEMENT

CREDIT SALES ACCOUNTING IN BOOKS OF CONSIGNOR

DEL CREDERE COMMISSION AND BAD DEBTS

ENTRIES IN THE BOOKS OF CONSIGNOR

(b) When Del Credere Commission is not given

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(b) When Del Credere Commission is not given –

CALCULATION OF UNSOLD STOCK

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INVOICE PRICE METHOD

ADVANCE FROM CONSIGNEE AS SECURITY MONEY:

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Abnormal Loss Account

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Central Oil Co. Ltd. Account

Abnormal Loss Account

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Abnormal Loss Account

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