FA WB Final

FINANCIAL
ACCOUNTING - II
Semester – II
Student Workbook
Edition: 2018
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Edition: 2018
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INDEX
Sl. No. Module Page No.
1 Syllabus 01-02
2 Reference Books 03
3 Module - 1 04-25
4 Module - 2 26-71
5 Module - 3 72-97
6 Module - 4 98-130
7 Module - 5 131-147
Model Question Paper 148-151

SEMESTER II
FINANCIAL ACCOUNTING -II
Objective
To familiarize the students with concepts and applications of accounting principles to
select business firms.
Module-1: Conversion of Single Entry System into Double Entry System 14 Hours
 Introduction
 Need for conversion
 Preparation of statement of affairs-Cash book-Total debtors account- Total creditors
account-Bills receivable account-Bills payable account-Trading & P/L account- Balance
sheet.
Module – 2: Branch Accounts 20 Hours

 Introduction
 Meaning – objectives, types of branches - Methods of accounting for Dependent
branches in the books of Head Office
 Debtors System(problems) - Stock and debtors system (problems)
 Final account system(theory)
 Wholesale Branch (theory)
 Independent branch - Transaction entries-Incorporation entries -Reconciliation entries
(8 Entry method)
Module-3: Departmental Accounts 4 Hours

 Introduction
 objectives of departmental accounts
 advantages of departmental accounts
 methods of maintaining departmental accounts
 steps and procedures in preparation of departmental final accounts
 special adjustments in departmental final accounts
 problems
Module-4: Consignment Accounts 12 Hours

 Consignments – Features
 Proforma invoice
 Account sale
 Delcredere Commission
 Accounting treatment in the books of the consignor and the consignee
 Valuation of consignment stock - Normal and abnormal loss
 Invoice of goods at a price higher than cost price.
Module-5: Insurance Claims 10 Hours

 Introduction
1
 Need
 Loss of stock
 Calculation of Cost of goods sold
 Calculation of G/P ratio
 Preparation of statement to ascertain value of stock on the date of fire
 Treatment of salvage
 Valuation of stocks on the date of fire
 Treatment of average clause
 Treatment of Abnormal items.
2
Books for Reference
Reference Books:
1. Dr. S.N. Maheswari , Financial Accounting, VIkas Publishers – 2010
2. B.S Raman, Financial Accounting – United Publishers – 1994 – 4th Edition
3. Grewal and Gupta, Advanced Accounting – S Chand – 2008
4. Radhaswamy and R.L. Gupta, Advanced Accounting – Sultan Chand & Sons – 2008
5. S.Kr. Paul, Advanced Accounting – New Central Book Agency – 2003
6. Dr.S.M.Shukla and Dr.S.P. Gupta – S Chand & Co. Ltd. – 2002
7. P.C. Tulasian, Pearson Editions, Introduction to Accounting – Pearson Education –
2009
8. Jain &Narang, Financial Accounting – Kalyani Publishers – 2004
3
Module 1
Conversion of Single Entry System into Double Entry System
Structure
1.1 Introduction to Single entry system
1.2 Types of Single entry System
1.3 Merits and Demerits of Single entry System
1.4 Difference between Single entry and Double entry system
1.5 Ascertainment of profit or loss under single entry system
1.5.1 Net assets method or net worth method
1.5.2 Conversion Method
1.6 Steps in conversion method / Preparation of statement of affairs, memorandum of
trading accounting and other ledger accounts
1.7 Summary
1.8 Terminal Questions and Answers
Learning objectives
• To understand the meaning of single entry system
• To understand why single entry system should be converted to Double entry system
• To learn step by step the process of Conversion method
• To realize the importance of Double entry system.
• To prepare Statement of Affairs, necessary ledger accounts like Debtors,
Creditors, Bills Receivable, Bills Payable, Cash, Trading & Profit/ loss and Balance Sheet.
• To find the missing information by preparing the above statements and ledgers.
• To prepare final accounts of the business.
1.1 Introduction to Single entry system:
The term single entry system refers to a method of keeping books of accounts, where the
rules of double entry system are not followed. In this method of book keeping only limited
number of books are maintained. Usually, business men whose business transactions are
less in number adopt this method of accounting. This method is actually a crude double
entry system.
Meaning of Single entry System
According to double entry principles, every business transaction has two aspects i.e. debit
aspect and credit aspect. In double entry we record both aspects of the transaction. But in
single entry system, both aspects are recorded for some transactions, only one aspect is
recorded for some transactions and for some transactions, both aspects are not recorded.
Since only one aspect of a transaction is recorded, this system is called as single entry
system.
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In this method not all subsidiary books are maintained. Only those subsidiary books which
the businessmen think important would be maintained. It can therefore be concluded, that
this method is an unscientific method and unsystematic way of Book keeping.
1.2 Types of Single entry System:
The single entry system is classified into the following categories:

1. Pure Single entry :
It is a system under which only Personal accounts are maintained i.e., accounts of Debtors
and Creditors are maintained, but no other subsidiary books are maintained.
2. Simple Single entry System:
It is a system under which along with personal accounts of debtors and creditors, cash
book is also maintained.
3. Quasi Single entry System:
It is a system under which in addition to personal accounts (of debtors and creditors) and
cash book, some important subsidiary books are also maintained.
1.3 Merits and Demerits of Single entry System:
Merits:
1. Simple and Easy
Single entry system is simple to understand and easy to maintain as it has no fixed set of
principles to follow while recording financial transactions.
2. Economy
Single entry system is an economical system of recording financial transactions. It does not
require hiring skilled accounting personnel to record financial transactions of the business.
Further, it does not require large number of books to record the limited number of financial
transactions.
3. Easy To Calculate Profit

Under single entry system, the amount of profit can be determined easily. The amount of
profit or loss of the period can be determined by making comparison between the
amounts of closing capital and opening capital.
4. Suitable For Small Business

The single entry system is simple, easy, and economical system. It is suitable for small
businesses because they cannot afford the cost of double entry system. Besides, small
businesses are not required to maintain their books of accounts under double entry
system.
Demerits:
1. No arithmetical accuracy: In single entry system, both aspects of a transaction are not
recorded; hence the arithmetical accuracy cannot be tested by preparing a trail balance.
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2. Profit and loss account cannot be ascertained: In single entry system nominal accounts
are not maintained; hence it is not possible to prepare profit and loss a/c and ascertain the
accurate profit or loss.
3. Difficult to ascertain the financial position: under single entry system, Real accounts
are not maintained; hence Balance sheet cannot be prepared to ascertain the financial
position of the business.
4. Encourages misappropriation of cash: Under single entry system, complete

accounting records are not maintained; hence it encourages misappropriation and
embezzlement of cash.
5. Rectification of errors is difficult: under single entry system, rectification entries

cannot be passed, since it does not record both aspects of every transaction.
6. Comparison is difficult: there are no standards for single entry system. Hence the
accounting results of two businesses cannot be compared.
7. Accounts prepared on the basis of Single entry System do not inspire confidence to the
outsiders (creditors, bankers, prospective investors) owing to the lack of arithmetical
accuracy.
8. It is difficult to ascertain the value of business; especially the value of goodwill, if the
Proprietor wishes to sell the business.
9. It is difficult to determine the taxable income, since profit and loss account cannot be
prepared. Income tax authorities do not accept single entry system.
10. It is difficult to settle financial disputes, since authentic information is not available.
1.4 Difference between Single entry and Double entry system:
Sl. No. Basis of Difference Double entry system Single entry system
In some cases both and in other
Both aspects of a
1 Both aspects cases only one aspect is
transaction are recorded
recorded.
All personal, real and
Only personal accounts and cash
2 Accounts nominal accounts are
accounts are prepared.
prepared.
3 Trial balance It can be prepared It cannot be prepared.
Trading & profit and loss Trading & profit and loss a/c
4 Profit and loss a/c a/c can be prepared to cannot be prepared to find profit
find out the profit or loss. or loss.
Balance sheet can be Balance sheet cannot be
5 Financial position
prepared to know the prepared to know the financial
6
financial position position
6 Method Scientific method unscientific method
7 Reliability Most reliable Not reliable
Suitable for all types of Suitable only for sole trading &
8 Utility
business organizations. partnership firms.
1.5 Ascertainment of profit or loss under single entry system:
Under single entry system the profit or loss can be ascertained in the following two
methods:
i. Statement of affairs method or net worth method
ii. Conversion method.
1.5.1 Net assets method or net worth method:

In this method profit or loss is ascertained by comparing the capital at the beginning and at
the end of the year. For calculating capitals of the business at the beginning as well as at the
end of the year, statement of affairs at the beginning and statement of affairs at the end are
prepared. Statement of affairs is a statement (like a balance sheet), which lists out assets
and liabilities of the business on a particular date. The balancing figure in this statement of
affairs would be capital (assets – liabilities = capital). The capital calculated from the
statement of affairs is adjusted to calculate profit or loss.
Differences between Statement of affairs and Balance sheet

Statement of affairs Balance sheet
1. It is prepared under single entry system of 1. It is prepared under double entry system of
book keeping. book keeping.
2. It is prepared to ascertain the capital 2. It is prepared to know the financial position
as on a particular date. of a concern as on a particular date.
3. It is prepared on the basis of estimated 3. It is prepared only from the balances of
values of assets and liabilities. ledger accounts i.e. from actual values.
Self-Assessment Questions
1. Under Simple Single entry System along with personal accounts --------------- account is
also maintained. (Ref-1.5)
2. As both aspects of a transaction are not recorded, ------------------------ cannot be tested by
means of trail balance. (Ref-1.5)
3. Under single entry system --------------------------account cannot be prepared to ascertain
gross profit and net profit. (Ref-1.5)
4. Net assets method is also called --------------------------. (Ref-1.5.1)
5. The excess of assets over liabilities will represent --------------- at that period. (Ref 1.5)
1.5.2 Conversion Method:

Single entry system does not provide all information required to prepare trial balance and
final account of a business. Therefore, when the firm decides to convert its books of
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account from single entry into double entry system, it is necessary to find out all missing
information.
In order to find out the missing information, the following ledger accounts and statements
are prepared:
a) Opening statement of affairs
b) Total debtors account
c) Bills receivable account
d) Total creditors account
e) Bills payable account
f) Cash or bank account
After all the missing information is ascertained, trading profit and loss account and balance
sheet would be prepared. Since in this method single entry system is converted into a
double entry system, this method is called conversion method.
1.6 Steps in conversion method / Preparation of statement of affairs, memorandum

of trading accounting and other ledger accounts:
There are two major steps involved in the conversion method. In the first step all the
missing information are ascertained. In the second step, using the information ascertained
in the first step, trading profit and loss account and balance sheet would be prepared.
First Step - Ascertaining missing information.

1. Prepare an opening Statement of Affairs
Preparation of an opening Statement of Affairs helps in ascertaining the Capital at the
beginning, or an asset or a liability (missing information). The available information is
entered in the statement of affairs. The balancing figure in the Statement of Affairs would
be the missing information i.e. the capital at the beginning or an asset or a liability.
Statement of affairs as on ------------------

Liabilities Amount Assets Amount
Sundry creditors xxx Land & building xxx
Bills payable xxx Machinery xxx
Bank overdraft xxx Furniture xxx
Outstanding expenses xxx Stock xxx
Capital at the beginning xxx Debtors xxx
(balancing figure) Bills receivable xxx
Cash at bank xxx
Cash in hand xxx
Pre-paid expenses xxx
xxx xxx
8
2. Preparation of Bills receivable and Bills payable account
To find out opening or closing balances of bills receivable and bills payable or bills
receivable received from debtors and bills payable issued to creditors or to find out any
other missing information, the following two accounts are to be prepared.
Bills receivable Account

Dr. Cr.
Particulars Amount Particulars Amount
To Balance b/d xxx By Cash a/c (payment xxx
To Sundry debtors a/c xxx received on B/R during xxx
(B/R received this year ) the year)
By Debtors a/c ( B/R dis-
honoured)
By Balance c/d xxx
xxx xxx
Bills payable Account

Dr. Cr.
To Cash a/c ( paid on B/P during xxx By Balance b/d xxx
the year) xxx By Sundry creditors a/c xxx
To Sundry creditors a/c (B/P (B/P issued this year)
dishonoured)
To Balance c/d xxx
xxx xxx
3. Preparation of Debtors and Creditors account

Debtors account and creditors accounts are prepared to find out credit sales and credit
purchases. When all the available information is entered in these accounts, the balancing
figure would be credit sales or credit purchases.
Total debtors account

Dr. Cr.
To balance b/d xxx By Cash/bank a/c xxx
To Bills receivable a/c xxx (collected from debtors)
(dis-honoured) By Bills receivable a/c xxx
To Credit sales (b/f) xxx (received during the
year) xxx
By Discount allowed xxx
By Sales return xxx
By Bad debts xxx
By Allowances to debtors xxx
By Balance c/d
xxx xxx
9
Total Creditors Account
To Cash/bank (paid to crs ) xxx By Balance b/d xxx
To Bills payable a/c xxx By Bills payable xxx
(issued to creditors during (dishonoured) xxx
the year) By Credit purchases(b/f)
To purchase returns xxx
To Discount received xxx
To Allowances and rebates xxx
To Balance c/d xxx
xxx xxx
But sometimes the credit sales and credit purchases will be given in the question. In such a
case the balancing figure would be the opening or closing balances depending on the
nature of balance (Debit or Credit).
4. Preparation of Cash/Bank account.

The cash or bank account should be prepared to find out the missing information. The
available information should be first entered into this account and the balancing figure
would be either the opening balance of cash or closing balance of cash. Sometimes opening
and closing balances of cash would be given already in the problem, in such a case the
balancing figure would be any of the following:
a) Cash paid to creditors
b) Drawings
c) Cash purchases
d) Cash received from debtors
e) Cash sales
f) Additional capital introduced
g) Paid for Expenses
Step 2 – Preparation of final accounts under Double entry system:
1. Preparation of Memorandum Trading Account

This account is prepared like in double entry system. If all the information required to
prepare trading account is available, this account is prepared in the usual manner to find
out gross profit. But if any information required is missing, then this account is prepared to
find out the missing information. The missing information can be any of the following:
a) Opening stock
b) Closing stock
c) Purchases
d) Sales
e) Direct expenses
We can ascertain opening and closing stock when rate of Gross profit is given by using the
following formulae:
10
Opening stock = (cost of goods sold* + closing stock) – purchases
Closing stock = (opening stock + purchases) – cost of goods sold*

*Cost of goods sold = Sales- gross profit.
Dr Memorandum Trading Account Cr

To opening stock xxx By sales (less returns) xxx
To purchases (less returns) xxx By Closing stock xxx
To wages
To Freight xxx
To Power, Gas & Water xxx
To Gross profit c/d xxx
xxx
xxx xxx
2. Preparation of Memorandum Profit and Loss Account

This account is prepared to find out the net profit. This profit and loss account is prepared
like in double entry system. All the expenses are debited and all the incomes are credited.
The balancing figure is either net profit or net loss.
Profit and loss account

To salaries xxx By Gross profit b/d xxx
To Rent xxx By Sundry incomes xxx
To bad debts xxx
To office expenses xxx
To other expenses xxx
To Net profit c/d xxx
xxx xxx
3. Preparation of Balance Sheet

Balance sheet is prepared after trading and profit & loss account. This statement is
prepared like in double entry system. It is a statement of assets and liabilities.
Points to be noted:
a) The rate of profit can be given either on cost or on sales. Based on the information given
in the problem, the rate of profit has to be converted. Hence the following conversion table
would be useful.
Conversion Table
On cost On sales ( selling
price)
33.33% (1/3) 25% (1/4)
25% (1/4) 20% (1/5)
20% (1/5) 16.67% (1/6)
11
b) If the above standard conversion table is not useful due to the fixed rate options, the
following method can be used to convert the rate of profit.
i) If the profit rate is given as 20% on sales and need to be converted into profit rate
on cost:
Assume sales to be 100; then,
Sales 100
Less: Profit (20% on sales) 20
Cost 80
Now the profit rate on cost is (20/80) x 100 = 25%
ii) If the profit rate is given as 20% on cost and need to be converted into profit rate
on sales:
Assume cost to be 100, then;
Cost 100
Add: profit (20% on cost) 20
Sales (selling price) 120
Now the profit rate on selling price is (20/120) x 100 = 16.67%
Illustrations
1.Mr. Sudhir, a sole trader wishes to convert his accounting system to double entry. For the
year 2000, his opening capital was 60,000. The cash details which he had maintained as on
31/12/2000 are as follows
Cash Account
To Balance b/d 10,000 By cash purchases 15,000
To Sales a/c (cash sales) 40,000 By wages a/c 20,000
To Debtors a/c (collection from 60,000 By paid to creditors 28,000
debtors)
To capital a/c (additional 10,000 By paid on bills payable 14,000
capital)
To Bills Receivable a/c 20,000 By salaries a/c 8,000
(realised)
By general charges 4,000
By Drawings 15,000
By investments made 10,000
By Balance c/d 26,000
1,40,000 1,40,000
12
The other particulars regarding the assets and liabilities:
Particulars As on 1.1. 2000 As on 31.12. 2000
Plant 20,000 20,000
Furniture 2,000 2,000
Bills payable 8,000 10,000
Bills receivable 9,000 13,000
Debtors 22,000 25,000
Creditors 15,000 16,000
Stock 20,000 15,000
While drafting Profit and Loss account provide depreciation at 10% on plant and on
furniture at 6%. Interest on capital is to be allowed at 5% and interest on additional capital
shall be allowed at rate of 2.5%. Convert this system by drafting the final accounts.
Solution:
Opening statement of affairs of Sudhir as on 1.1.2000

Capital 60000 Plant 20000
B/P 8000 Furniture 2000
Creditors 15000 B/R 9000
Debtors 22000
Stock 20000
Cash 10000
83000 83000
Bills receivable a/c

Dr. Cr.
To balance b/d 9000 By cash 20000
To debtors a/c ( B/R received) 24000 By balance c/d 13000
(b/f )
33000 33000
Debtors a/c
Dr. Cr.
To balance b/d 22,000 By cash (collection) 60,000
To credit sales (b/f ) 87,000 By B/R a/c ( B/R received) 24,000
By balance c/d 25,000
1,09,000 1,09,000
Bills payable a/c

Dr. Cr.
To cash 14000 By balance b/d 8000
To balance c/d 10000 By creditors a/c( issued to 16000
13
creditors) (b/f )
24000 24000
Creditors a/c
Dr. Cr.
To cash 28000 By balance b/d 15000
To B/P a/c (issued to creditors) 16000 By credit purchases (b/f) 45000
To balance c/d 16000
60000 60000
Trading and P/L a/c of Sudhir for the year ending 31.12.2000
Dr. Cr.
To opening stock 20,000
To purchases By sales
Credit Credit
45000 87000
Cash 60,000 Cash 127000
15000 40000
To wages 20,000 By closing stock 15000
To gross profit (b/f) 42,000
142,000 142000
To salaries 8,000 By gross profit 42000
To general charges 4,000
To depreciation
Plant
2000
Furniture
120
2120
To interest on capital
Opening
3000
Additional 3250
250
To net profit (b/f) 24630
42000 42000
Balance sheet of Sudhir as on 31.12.2000

B/P 10000 Plant
20000
Creditors 16000 Less: Dep.
2000
14
Capital: 18000
Opening B/R 13,000
60,000
Add: Addl. Cap. Furniture
10,000 2000
Less: Dep. 1880
70,000 120
Less: Drawings Debtors 25000
15,000
Closing stock 15000
55,000
+Interest on capital Cash balance 26000
3,250
+ Net Profit 82,880 Investments 10000
24,630
108,880 108,880
Self-assessment questions
State whether the following statements are true or false;
1. Trial balance can be prepared in case the books are maintained according to single entry
system.
2. Real and nominal accounts are maintained if books are kept according to single entry
system.
3. Capital at the beginning of the accounting year is ascertained by preparing cash account.
4. The figure of credit sale is ascertained by preparing total debtors’ account.
5. If rate of gross profit is 25% on cost, it will be 20% on sales.
[Ans.(1)false(2)false(3)false(4)true(5)true]
2. A trader requests you to convert his accounting system to a double entry.
a) Opening Assets and Liabilities

Furniture 10,000
Stock 50,000
Debtors 15,000
Cash 40,000
Creditors 15,000
b) Transactions for the year:

Cash collected from Debtors 50,000
Cash purchases 15,000
Office expenses 5,000
Cash realised on Bills receivable 5,000
15
Cash paid on Bills payable 4,000
Cash sales 40,000
Salary 12,000
Interest on Investment 1,000
Personal Expense 6,000
c) Personal scooter for Rs 10000 and Rs. 4,000 was invested in business.
d) The closing balances were:

Stock 50,000
Creditors 30,000
Debtors 25,000
Investments 20,000
Cash 6,000
Bills Receivable 6,000
e) The trader informs that he has paid Rs. 200 towards his son’s school fees, from the
business cash but included in office expense, and also has taken stock worth Rs.1000 for
domestic use.
Solution:
In the books of a Trader

Statement of Affairs in the beginning of year
Liabilities Rs. Assets Rs.
Creditors 15,000 Furniture 10,000
Capital (b/f) 1,00,000 Stock 50,000
Debtors 15,000
Cash 40,000
1,15,000 1,15,000
Cash Account
Dr. Cr.
Particulars Rs. Particulars Rs.
To Balance b/d 40,000 By Purchases 15,000
To Debtors 50,000 By Office expenses [5,000- 4,800
200]
To Bills Receivable 5,000 By Bills payable 4,000
To Interest on 1,000 By Salary 12,000
Investment
To Additional capital 4,000 By Drawings [6,000+200] 6,200
To Sales 40,000 By Investments made 20,000
By paid to Creditors (b/f) 72,000
1,40,000 1,40,000
16
Bills Receivable Account
Dr. Cr.
To Balance b/d - By Cash 5,000
To Debtors (b/f ) 11,000 By Balance c/d 6,000
11,000 11,000
Debtors Account
Dr. Cr.
To Balance b/d 15,000 By Bills Receivable 11,000
(received)
To Credit sales (b/f) 71,000 By Cash (collection) 50,000
86,000 86,000
Bills Payable
Dr. Cr.
To Cash (paid on B/P) 4,000 By Balance b/d -
To Balance c/d - By Creditors a/c (issued) 4,000
4,000 4,000
Creditors Account
Dr. Cr.
To Cash (paid to creditors) 72,000 By Balance b/d 15,000
To Bills payable (issued to crs) 4,000 By Credit purchases (b/f) 91,000
To Balance c/d 30,000
1,06,000 1,06,000
Trading, Profit and Loss A/c for year ending.

Dr. Cr.
Particulars Amt Amt Particulars Amt Amt
To Opening Stock 50,000 By Sales
To Purchases Cash 40,000
Cash 15,000 Credit 71,000 1,11,000
Credit 91,000 By Closing Stock
50,000
1,06,000
(-) Drawings 1,000 1,05,000
To Gross Profit 6,000
1,61,000 1,61,000
To Office expenses 4,800 By Gross Profit b/d
17
6,000
To Salary 12,000 By Interest on 1,000
Investment
By Net Loss 9,800
16,800 16,800
Balance Sheet as at the end of the year

Creditors 30,000 Cash 6,000
Balance payable - Bills 6,000
Receivable
Capital 1,00,000 Debtors 25,000
(+) additional capital Stock 50,000
4,000
1,04,000 Investment 20,000
Furniture 10,000
7,200
96,800
87,000
9,800
1,17,000 1,17,000
1.7 Summary:
 Single entry system is an unscientific and unsystematic way of Book keeping.

Conversion is the method of finding missing information when we intend to convert
single entry system to double entry.
 The statements and accounts to be prepared to find missing information are Debtors
a/c, Creditors a/c, Bills receivable a/c, Bills payable a/c, Cash/ Bank a/c, Trading & P/L
a/c and Balance sheet
1.8 Terminal Questions and Answers:
Section A – 2 marks questions

1. What do you mean by accounts from incomplete records?
2. What do you mean by pure single entry?
3. State two drawbacks of single entry system.
4. State two merits of Single entry system.
5. Give two differences between statement of affairs and balance sheet.
6. What is net worth method?
7. What is Conversion method?
8. What is Simple single entry system?
9. What is quasi single entry system?
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10. Calculate sales when cost of goods sold is Rs.5,40,000 and the rate of gross profit on
sale is 25%. (Ans: Rs.7,20,000)
11. From the information given below, calculate required items:

a) Capital at the beginning of the year:
Capital at the end of the year 70,000; drawings during the year 10,000; capital introduced
during the year 5,000; profit during the year 20,000.
b) Sales:
Cost of goods sold 5,40,000; rate of profit 25% on sales.
c) Purchases:
Cost of goods sold 8,00,000 ; opening stock 1,00,000; closing stock 1,20,000.
d) Cost of goods sold

Sales 8,40,000; the rate of gross profit on cost is 20%.
[Ans.(a)55,000(b)7,20,000(c)8,20,000(d)7,00,000]
Section B – 4marks questions

1. Distinguish between Single entry and Double entry system.
2. What are the Steps to convert Single entry books into Double entry books?
3. What is meant by Statement of Affairs? How does it differ from balance sheet?
4. Ascertain the opening stock when

Purchases Rs.1,20,000
Wages Rs.40,000
Sales Rs.2,00,000
Closing stock Rs.30,000
Percentage of GP on Sales is 25% (ans: Rs.20,000)
5. Calculate total sales:

Stock at the beginning of the year was 18,000;
Purchases 92,000;
Stock at the end of the year was 15,200;
Rate of gross profit on sales 1/5.
[Ans: credit sales (or) total sales= Rs.1,18,500]
6. Calculate the missing information from the following:

Purchases during the year 52,000
Sales during the year 88,000
Closing stock 6,000
Wages 1,000
Indirect wages 3,000
Rate of gross profit on cost 1/3
Return outwards 2,000
Return inwards 8,000.
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[ans.15,000]
7. Ascertain credit purchases and credit sales from the following:

Sundry debtors on 1-1-05 14,000
Sundry debtors on 31-12-05 10,000
Sundry creditors on 1-1-05 8,000
Sundry creditors on 31-12-05 9,500
Cash received from debtors 6,400
Cash paid to creditors 2,000
Discount allowed 400
Discount received 200
Bills received from debtors 2,500
Acceptance given to creditors 5,800
Bad debts 300
Bills receivable dishonored 400
[Ans. Cr.sales 5,200; Cr.purchases 9,500]
Section C – 10marks questions:

1. Mr. Vasu carries on a small business but he does not maintain books of accounts. He
banks all receipts and makes all payments by cheques. The following are the particulars
obtained from the records. Receipts and payments for year ended 31st March,2010.
Receipts Amount Payments Amount
Cash from debtors 35,250 Furniture 1,250
Cash sales 8,250 Drawings 3,000
Additional capital 5,000 Wages 13,450
Salaries 2,650
Rent 2,400
Sundry expenses 5,200
Paid to creditors 15,250
Assets & liabilities As on 1.4.2009 As on 31.3.2010

Furniture 15,000 15,500
Sundry debtors 7,500 12,250
Stock 12,500 6,250
Bank 1,250 ?
Sundry creditors 5,050 4,800
Provide reserve for doubtful debts Rs.500/-

From the above particulars prepare Trading & P/L account for the year ending 31st
March 2010 and also the Balance sheet as on that date.

[Ans- Capital=31,200; Credit sales=40,000; Credit purchases=15,000; G/P= 13,550; N/
P=2,050; B/S=40,050]
20
2. Suraj Singh carries on a grocery business and does not keep his books on a double entry
basis. The following particulars have been extracted from his books:
Particulars 1.4.2008 31.3.2009
Plant & machinery 18,000 18,000
Stock 8,000 7,000
Debtors 2,000 3,000
Creditors 5,000 4,660
Cash 4,000 ?
Analysis of his cash book for the year ending 31.3.2004 showed the following:
Wages 6,000
Advertising 1,150
Rent and rates 2,500
Carriage inwards 2,460
Cash paid to creditors 64,340
Drawings 3,120
During the financial year 2008-09, Suraj Singh had taken from his business for his own
consumption goods which amounted to Rs.780.
Purchases returns during the year were 2,000 and sales returns were Rs.1000.
Depreciate machinery by 5%.
Prepare final accounts.
[Ans- Capital=27,000; Credit sales= 84,500; Credit purchases=66,000; Cash c/d=4,430; G/

p=10,820; N/P=3,770; B/S=31,530]
3. Mr. Gopal Krishnan commenced business on 1.4.2010 with Rs.15,000 of his own capital
and Rs.10,000 borrowed from his friend Mr.Nandgopal. He purchased a building for
Rs.10,000; Furniture Rs.2,000; Machinery Rs.8,000 and deposited Rs.2,500 in a bank as
Fixed Deposit at 10% interest. The balance of cash was retained as working capital. The
following is the cash transactions during the year:
Collection from debtors 15,000

Cash sales 20,000
Payment to creditors 6,000
Purchase of Motor cycle 3,000
Purchase of cycle for his son 500
Salary 1,500
Business expenses 2,000
Mr.Nandgopal’s loan was repaid with interest at 6% on 31.3.2011.

On 31.3.2011 his position was as follows:
21
Debtors -12,500
Creditors -17,500
Bills receivable-5,000
Bills payable-2,500
There was no record of closing stock but in this type of business the gross profit is 50% on
sales. During the year purchase returns were Rs.1000; Sales returns were Rs.2000; bad
debts Rs.500 ; outstanding salaries Rs.250 and prepaid business expenses Rs.50. Prepare
final accounts.
[Ans- Credit sales=35,000; Credit purchases=27,000; Cash c/d=3,900; Closing stock=9,500;
N/P=21,950; B/S=53,700]
4. Mr. Kumar who did not maintain his books on proper double entry system
requests you to convert the system into double entry system with the following
information for 1996.
Rs. Rs.
Opening Stock 10,000Cash Sales 8,000
Opening creditors1 4,000Cash received from Debtors 64,000
Opening cash 6,000Cash paid to crs 36,000
Furniture (op. Balance) 2,000Cash purchase 4,000
Salaries 6,800Credit purchase 60,000
Rent 2,400Closing stock 8,000
Other Expenses 4,800Closing debtors 24,000
Drawings 8,000
Discount allowed to debtors Rs. 2000. Donation given to prime minister’s relief fund is Rs.
2,000. The organization does not permit for any donation or contribution. Create and
maintain 2% as reserve for bad debts. He informs you that he always sells his goods at
1/3rd on cost (1/3rd profit on cost) Finalize the accounts ignoring depreciation.
[Ans- Opening Debtors =10,000; Closing cash= 14,000; Closing creditors=28,000; Credit
sales=80,000; N/P= 5,520; B/S= 47,520]
5. Mr. Ram Kumar keeps his books by single entry and the position of his business as on 1st
January 1991 is as follows:
Capital Rs.70,000; Sundry Creditors Rs.10,000; Bills Payable Rs.7,000; Free hold premises
Rs.50,000; Stock Rs.25,000; Debtors Rs.15,000; Furniture Rs.2,000; Bills receivable
Rs.5,000.
His transactions during the year were as follows;
Receipts Rs. Payments Rs.

Sundry debtors & bills 15,000 Bank o/d (as on 1-1-91) 10,000
receivable Drawings 23,000
Cash sales 80,000 Expenses 5,000
Payments to Creditors &
Bills Payable 20,000
22
Balance:
Cash in hand 2,000
Cash at Bank 35,000
95,000 95,000
You are asked to prepare a trading and profit and loss account for the year ended 31-12-
1991 and a B/S as on that date.
The following additional information is supplied. Closing Stock Rs. 30,000; Closing Debtors
Rs. 20,000; Bills receivable Rs. 5,000; No addition has been made during the year to
freehold premises and furniture but they are to be depreciated as under: Freehold
premises 10% and Furniture 15%.
A bad and doubtful debts provision at 2.5% is to be raised against closing debtors. These
were balances of bills payable account Rs.3,000, and creditors account Rs. 4,000.
Expenses to the extent of Rs. 200 were outstanding.
[Ans-Credit sales=Rs.20,000; Credit purchases= Rs.10,000; G/P= Rs.95,000; N/P=

Rs.84,000; B/S= Rs.1,38,200]
Self-study problems
4 marks
1. From the following information calculate total sales
Particulars Amount
B/R in the beginning 16,200
Debtors in the beginning 65,750
B/R endorsed during the year 41,250
Cash received from Debtors 1,32,000
Bad debts written off 5,500
Returns inwards 17,000
B/R dishonoured 3,200
B/R at the end 13,800
Debtors at the end 53,500
Cash sales (as per cash book) 81,400
[Ans-Total sales-Rs.2,62,500; Credit sales Rs.1,81,100]
2. From the following information calculate total purchases
Particulars Amount
Opening balance of B/P 3,600
Opening Balance of Creditors 4,800
Closing Balance of B/P 5,000
Closing balance of creditors 2,300
Cash paid to creditors during the year 15,100
B/p discharged during the year 4,200
23
[Ans- Total purchases-Rs.34,400; Credit purchases Rs.22,400]
10 marks
1. T. Ramachandra who keeps his books by Single Entry instructs you to prepare Trading
and Profit and Loss Account of his business for the year ended 31st March 2002 and a
Balance Sheet as at that date.
On 1st April, 2001, he had stock worth Rs. 27,000, Creditors on open accounts Rs. 24,000,
Debtors Rs. 60,000, Business Premises Rs. 45,000 and Office Furniture Rs. 3,000.
Upon analysis his Cash Book for the year, you find the following:
Rs. Rs.
Bank overdraft on 1st April, 2001 12,000Interest on Overdraft 500
Received from Debtors 75,000Paid Salaries and Wages 9,000
Received from Cash Sales 20,000Paid General Charges 750
Paid to Creditors 44,000Rent and Taxes 1,200
Paid for Cash Purchases 12,000Drawn for Personal use 1,000
Rs. 3,000, Creditors Rs. 20,000, Bills Payable Rs. 4,000, Business Premises Rs. 45,000 and
Furniture Rs. 3,000. He also owed Rs. 400 for expenses.
You are to charge 5% depreciation on Furniture and Premises. Provide Rs. 4,800 for
Doubtful Debts and allow 5% interest on opening capital.
[Ans: G/P – Rs. 63,500, N/P - Rs.38,000, B/S – Rs. 1,65,350]
2. Mr. Young keeps his books on Single Entry System. From the following, prepare Trading
and Profit and Loss Account for the year ended 31st march 2002, together with Balance
Sheet as on that date:
2002 Rs. 2001 Rs.
Mar 31 To Debtors 25,000 Apr 1 2002 By Bank Overdraft 4,000
Mar 31 To Sales 15,000 Mar 31 By Interest 100
Mar 31 By Drawings 2,000
Mar 31 By Salaries 8,500
Mar 31 By Expenses 7,900
Mar 31 By Creditors 15,000
Mar 31 By Balance c/d
Bank 2,425
Cash 75
40,000 40,000
24
Further details available are:
1-4-2001 31-3-2002
Rs. Rs.
Stock in hand 9,000 10,220
Debtors 22,000 30,000
Office Premises 15,000 15,000
Provide 5 percent interest on Young’s Capital balance as on 1-4-2001. Provide Rs. 1,500 for
doubtful debts. 5 percent depreciation on fixed assets, 5 percent group commission as
incentive to staff has to be provided for on net profit after meeting all expenses and the
commission.
[Ans: G/P – Rs. 36,720, N/P – Rs. 15,400, B/S – Rs. 56,420]
25
Module 2
Branch Accounts
Structure
2.1 Introduction
2.2 Definition of a Branch & Objectives of branch accounting
2.3 Types of Branches
2.4 Dependent Branches or Branches not keeping full system of accounting
2.5 Debtors system
2.6 Stock and Debtors system
2.7 Final Accounts System
2.8 Independent Branches
2.9 Summary
2.10 Terminal questions
2.11 Terminal Answers
Learning objectives
 To understand the meaning, objectives and types of Branch Accounting.
 To understand the difference between Debtors system and Final account system.
 To learn the accounting procedure of Stock & Debtors system.
 To understand the meaning & accounting treatment of independent branches.
 To understand the differences in the profits of branches in its own books and in the
books of the head office.
 To learn to incorporate Trial Balance of branch in Head Office Books.
2.1 Introduction:
When a business organization wishes to increase its sales, it has to make its product
available over a large territory. For this purpose it may open its sales outlets in different
parts of the same city or in different parts of the country or worldwide. Such sales outlets
are called as Branches. It is important to know about profits or losses of each branch. If any
branch is not yielding the desired result, steps can be taken to improve the state of affairs.
Therefore, it is necessary to maintain accounts in such a manner that the profits gained or
losses incurred at any branch are easily known.
2.2 Definition of a Branch & Objectives of branch accounting:
Section 2 (9) of the Companies Act, 1956 defines a Branch as

a) Any establishment described as a branch by a company;
b) Any establishment carrying on either the same or substantially the same activity as that
carried on by the head office of the company; or
c) Any establishment engaged in any production, processing or manufacturing but does not
include any establishment specified in the central government’s order under section 8.
26
Objectives of branch accounting
Following are some of the important objectives of Branch accounting:

a) To know the profit or loss of each Branch separately.
b) To know the financial position of each Branch on a particular date.
c) To know the cash and goods requirements of various Branches.
d) To evaluate the progress and performance of each Branch.
e) To calculate commission to paid to the branch managers, if it is based on the profits
of the Branch.
f) To give concrete suggestions for the improvement in the working of the various
Branches.
g) To meet the requirements of specific enactments as all Branches of a joint stock
company must keep accounts for auditing.
h) To exercise proper control over each branch.
2.3 Types of Branches:
For accounting, Branches are classified into following categories:
I. Domestic Branches - refer to the branches located in the same country in which the
head office is located. Domestic branches are further classified into the following types:
1. Dependent Branches or Branches not keeping full system of accounting:

They refer to the branches which are under the control of head office for its administration.
The accounts of such branches are maintained by the head office. Dependent branches may
be further classified into two categories-
a) Fully controlled branches
27
b) Partly controlled branches
a) Fully controlled branches are those which have no power in decision making. These
branches are not permitted to make any purchase. They have to depend on the supplies of
the head office. Such branches cannot retain any amount collected from its debtors or from
any other source. The amount collected must be completely remitted to the head office. The
expenses of such branches are totally paid by the head office.
b) Partly controlled branches are those which are given some limited powers in decision-
making. These branches are given certain amount of flexibility in its operations. They can
make any purchase on their own, at times of need and emergency, they need not wait for
the supplies of the head office. They can retain the collections and meet some expenses.
The balance of collections after meeting expenses must be remitted to the head office.
2. Independent Branches or Branches keeping full system of accounting:

It refers to the branches which operate like a separate entity, though legally it is not a
separate entity. These branches maintain a complete accounting system. The head office
would only incorporate the results of such branches at the end of the accounting period, in
its books.
II. Foreign Branches- Refer to the branches located outside the country in which the head
office is located.
2.4 Dependent Branches or Branches not keeping full system of accounting:
It is a Branch that is fully dependent on the Head office for all its operations. Following are
the main features of such Branches
a) All the goods to be sold by such Branches are supplied by the head office. Thus the
Branch itself cannot make its own purchases, except in case of emergency and
with the express consent of the head office.
b) The goods supplied by the head office to the Branch are invoiced either at cost price or
at invoice price.
c) All expenses of the Branch, such as rent, salary, advertising etc., are paid by the
head office.
d) For petty expenses, the Branch manager is given an imprest petty cash amount out
of which he makes all petty payments and records the same in a petty cash book
under imprest system.
e) On a daily basis, Collections from cash sales and debtors are to be remitted to the local
Bank, where the H.O. account is maintained.
f) The Branch manager must sell the goods on cash basis only. However, in special
circumstances, with the permission of the H.O he may sell the goods on credit.
g) Branch does not maintain full set of books of accounts under double entry, instead it
maintains some memorandum books such as stock statement, sales statement, etc.
Since, such Branches do not maintain books of accounts; the head office maintains the
books of accounts of the Branch. The system to be adopted for accounting at the head office
28
depends on the size of the Branch and the degree of control to be exercised by the head
office.
The following are the methods by which the head office maintains the accounts of the
Branch.
a. Debtors system.
b. Stock and Debtors system
c. Final Account system.
d. Wholesale Branch system.
2.5 Debtors system:
Under this system, the head office treats the branch as a debtor. At the end of the
accounting period the head office prepares a separate account for each of the Branch which
is called Branch account to ascertain the profit or loss of the branch. It is nominal in nature
and is prepared in the head office books only. The assets and liabilities of the branch at the
beginning of the accounting year are treated as given by the head office to the branch and
assets and liabilities at the end of the year are treated as returned by the branch to the
head office.
The branch account in the books of head office can be prepared in two methods, based on
the pricing of the goods sent to the branch. The head office can send goods to the branches
in two ways. In the first way the head office can send goods to the branch at cost. In the
second way the head office can send goods to the branch at a price higher than cost price
(cost + profit). Such inflated price is called as invoice price.
As mentioned above the head office would maintain the branch account in any of the
following methods;
A. Cost Price Method- Under this method head office sends goods to branches at cost
price.
B. Invoice Price Method- Under this method head office sends goods to branches at
inflated price or invoice price or loaded price.
A. Cost Price Method

We will now discuss accounting treatment under Cost price method.
Following are the transactions and the corresponding journal entries.
1 For opening balance of Branch assets

Branch a/c (individually) Dr xxx
To Branch Assets a/c xxx
2 For opening balance of Branch liabilities

Branch Liabilities a/c (individually) Dr xxx
To Branch a/c xxx
29
3 When goods are sent to Branch
Branch Dr xxx
To Goods sent to Branch a/c xxx
4 For goods returned by the Branch to head office

Goods sent to Branch a/c Dr xxx
To Branch a/c xxx
5 For transferring the balance of the ‘goods sent to Branch a/c’

Goods sent to Branch a/c Dr xxx
To Purchase a/c xxx
(OR)
Goods sent to branch a/c Dr xxx
To Trading a/c xxx
6 For Branch expenses paid by the head office through cheques

Branch a/c Dr xxx
To Bank a/c xxx
7 Entry for the remittances from branch (cash sales, collection from debtors etc.)
Bank a/c Dr xxx
To Branch a/c xxx
8 For closing balance of Branch assets
Branch Assets a/c Dr xxx
To Branch a/c xxx
9 For closing balance of Branch liabilities

Branch a/c Dr xxx
To Branch liabilities a/c xxx
10 Entry for profits earned (b/f)

Branch a/c Dr xxx
To General Profit and Loss a/c xxx
11 For Branch loss (b/f)

General Profit and Loss a/c Dr xxx
To Branch a/c xxx
Proforma of Branch Account

In the books of the Head office
Branch account for the year ended……..
Dr Cr
Particulars Rs Particulars Rs
To opening balance of assets xxx By opening balance of liabilities xxx
30
To Goods sent to Branch
a/c By Bank a/c(remittances) xxx
xxx xxx (cash sales, collections from
less: returned to H.O xxx debtors etc.)
xxx By Closing assets xxx
To Bank a/c(expenses)
xxx By General profit & loss a/c (b/f) xxx
To closing balance of ( in case of loss)
liabilities xxx
To General profit & loss
a/c (b/f )
(in case of profit)
xxx xxx
Treatment of certain Branch transactions
1. Branch expenses paid by the Branch manager out of petty cash:

This will not be taken directly in the Branch a/c. The expenses so paid will be deducted
from the closing balance of the petty cash and the reduced balance will be shown on the
credit side of the Branch a/c.
2. Depreciation on the Branch fixed assets:

The depreciation amount is not be directly debited to the Branch a/c, but while showing
the closing balance of fixed assets, the net value (opening balance – depreciation) of the
assets would be shown.
3. Credit sales, bad debts, sales returns and discount allowed to Branch customers:
None of these items will be taken in the Branch a/c. However all these items will be taken
in the Branch debtors a/c, which in turn will affect the opening and closing balances of the
debtors. Only the opening and closing balances of debtors will appear in the Branch a/c.
4. Purchase of fixed assets by the Branch:

The branch may purchase fixed asset during the accounting year. This transaction can be
treated in the following two ways, depending on who pays for the purchase of fixed asset.
a) if the fixed assets are purchased by the branch by using the funds available with it,
then the amount utilised for the purchase would be deducted from the cash
remitted to head office and the asset purchased shall be shown on the credit side of
branch account along with the closing balance of other assets.
b) if the fixed assets are purchased by branch by using funds sent from the head office
for that purpose, then the amount sent by the head office for the purchase of asset
shall be shown on the debit side of branch account and the value of asset purchased
shall be shown on the credit side along with the closing balance of other assets.
31
5. Goods in transit:
This will not affect the Branch account and can totally be ignored while preparing the
Branch account.
6. Sale of fixed assets by the Branch:

In case the branch sells any fixed asset, the amount realised from the sale would be added
to the amount of cash remitted to head office and the asset sold will not appear in the
closing balance of assets on the credit side.
Illustration
Mohan Traders of Delhi, have a Branch at Bombay. From the following particulars relating
to the Branch for the year ending 31-3-2002, prepare Branch a/c in the books of the head
office.
Balances on 1-4-2001 Cash paid by debtors direct to 2,000
Head office
Stock at Branch 10,000 Discount allowed to debtors 100
Branch debtors 4,000 Goods returned by Branch 1,000
Petty cash Goods returned by debtors 2,000
500
Furniture 2,000 Cash sent to Branch
Prepaid insurance 150 For rent 2,100
Salaries outstanding 200 For salaries (Rs.200 per month) 2,400
Transactions during the year Petty cash 1,000
Goods sent to Branch 80,000 For insurance (Annual up to30- 600
6-2002)
Cash sales 1,30,000 Stock of goods on 31-3-2002 5,000

Credit sales 40,000 Petty expenses paid by the 700
Branch
Cash received from debtors 35,000 Sale of furniture on 1-10- 400
2001(Book value of furniture on
1-10-2001 was Rs.475)
Goods costing Rs 2,500 were damaged in transit and a sum of Rs.2,000 was recovered from
the insurance company in full settlement of the claim. Provide depreciation on Furniture at
10%.
Solution:
32
In the books of Mohan Traders
Bombay Branch a/c for the year ended 31st March, 2002.
Dr Cr
To Branch Stock 10,000 By Outstanding Salaries 200
To Branch Debtors 4,000 By Bank A/C
To Branch Petty Cash 500 Cash Sales
To Branch Furniture 2,000 1,30,000
To Prepaid Insurance 150 Cash from Debtors
To Goods Sent to Branch A/C 35,000
Debtors paid directly
80,000 79,000 to Head Office
Less: goods returned 2,000
1,000 Insurance Claim 1,69,400
To Bank A/C paid
Rent 2,000 5,000
2,100 Sale of Furniture
Salaries 6,100 400 4,900
2,400
Petty Cash 200 To Branch Stock 800
1,000 To Branch Debtors
Insurance 79,850 To Branch Petty Cash 1,350
600 To Branch Furniture**
To Outstanding Salaries To Prepaid Insurance 150
(2400/12)* [(600/12)= 50 x 3]
To General Profit
(Balancing figure)
1,81,800 1,81,800
Working Note:
* Since there was already an outstanding salary(200) at the beginning of the year, that
would be paid first out of cash received from head office. With the remaining amount the
branch could pay only 11 month’s salary. Hence the last month’s salary is shown as
outstanding.
* In the same way insurance is prepaid for three months at the beginning. Hence when
payment is made for a year during the year, three months insurance would be prepaid for
the next year.
i) Memorandum Debtors Account

Dr Cr
To Balance b/d 4,000 By cash a/c (collection from 35,000
debtors)
33
To Credit Sales 40,000
By Head Office a/c 2,000
(debtors directly paid to
H.O)
By Discount Allowed 100
By Sales return 2,000
By Balance c/d (B/f ) 4,900

44,000 44,000
ii) Memorandum Petty Cash A/C

Petty Cash a/c
Dr Cr
To Balance b/d 500 By Petty Expenses 700
To Head Office 1,000 By Balance c/d (B/f ) 800
1,500 1,500
iii) Calculation of Book value of Furniture on 1-4-2001 which was sold on 1-10-2001.
Book value of furniture (sold) as on 1.10.2001(after providing depreciation
For six months) (1.4.01 to 1.10.01) 475
Add: depreciation for six months [(475 /95) x 5] 25

book value of the furniture (sold) on 1.4.01 500
Alternatively:
book value of furniture as on 1.4.01 =[ (475/95) x 100]
= 500
** Calculation of Closing Balance of Furniture.

Opening balance 2,000
Less: Furniture Sold 500
Book value of remaining furniture 1,500
Less: Depreciation @
10% p.a 150
1,350
1) State whether the following statements are true or false.

i) Under Debtors System branch account discloses profit or loss of the branch.
ii) Under Debtor System branch account is credited with opening balances of branch
assets.
34
[Ans- i) True ii) False]
2) All goods to be sold by Dependent Branches are -------------- by the head office.
(ref-2.4)
3) All expenses of the Dependent Branch, such as rent, salary, advertising etc., are incurred
by the --------------.(ref-2.4)
d) To record opening balance of Branch liabilities under Debtors system in the books of the
head office is
Branch liabilities a/c Dr xxx
To --------------- a/c xxx (ref 2.5)
B. Invoice Price Method

Sometimes the Head Office may dispatch the goods to the Branch at a price higher than the
cost price in order to conceal the actual cost of the goods. Such price is called invoice price
or selling price or loaded price. It is at that price the Branch manager is required to sell the
goods. Such procedure is followed to achieve the following objective:
 Branch manager will not be aware of the cost and profit involved in the goods. This
ensures that the Branch manager will not start a parallel competing business of his
own.
 To have an effective stock control.
However, while ascertaining the results of the branch at the end of the year such load i.e,
the difference between the invoice price or inflated price and the cost price must be
adjusted.
Following are the adjusting entries in the books of the head office to offset the effect
of loading included in opening and closing stock and goods sent to the branch:
For the adjustment of loading* involved in opening stock at the Branch

Stock reserve a/c…. Dr
To Branch a/c
For the adjustment of loading involved in goods sent to the Branch

Goods sent to Branch a/c………. Dr
To Branch a/c
For the adjustment of loading involved in closing stock

Branch a/c……….. Dr
To Stock reserve a/c
*loading is the difference between invoice price and cost price.
Proforma of Branch A/C (invoice price method)
35
In the Books of the Head Office
The Branch account for the year ended
Dr Cr
To opening balance of assets xxx By opening balance of liabilities xxx
To Goods sent to Branch a/c By Stock reserve(load included in xxx

xxx xxx opening stock)*
Less: goods returned
xxx xxx By Goods sent to Branch a/c(load
included on goods sent to xxx
To Bank a/c(expenses paid by H.O) xxx branch)*
To Stock reserve(load included in xxx By Bank a/c

closing stock)* xxx (remittances to H.O) xxx
To closing balance of liabilities
To General P/L (b/f ) By Closing balance of assets
(in case of profit) xxx
By General P/L a/c(b/f )
(in case of loss) xxx
xxx xxx
*Note 1: when goods are sent by head office to the branch at invoice price, there will be
three adjustments:
1) Adjustment of load involved in opening stock
2) Adjustment of load involved in goods sent to branch
3) Adjustment of load involved in closing stock
For removing (adjusting) loading involved in the above three items, the adjustment entries
are passed on the opposite side of the original entry. For instance to remove loading
involved in opening stock the adjustment entry would be passed on the credit side
(opening stock is entered on the debit side). For opening and closing stock the adjustment
entry would be written as stock reserve. But for goods sent to branch the adjustment entry
would be written as goods sent to branch account (since it is not a stock of goods).
* Note 2: for removing loading the profit rate on selling price must be used. If the profit
rate is given on cost, then it must be converted into profit rate on selling price by using the
method described in chapter I.
Illustrations:
The Delhi gas Co, Delhi has a sales branch in Faridabad and charge all goods sent to the
branch at cost price plus 33.333% percent. It is arranged that all cash received by the
36
branch is to be paid daily to the head office. From the following particulars, prepare branch
account in the books of head office for the year ended 31st December 2007:
Rs. Rs.
Stock on 1 January 2007
st 12,000expenses paid by H.O:
rent rates and taxes 3,200
salaries and wages 4,800
Goods sent to branch 82,000debtors on 31.12.2007 1,600
Goods returned to H.O 2,000stock on 31.12.2007 14,800
Debtors on 1.1.2007 1,500
Cash sent to head office 77,100
Solution:
Conversion of profit rate on cost to profit rate on selling price

33.333% (1/3) on cost equals to 25% (1/4) on selling price.
In the books of head office

Faridabad branch a/c
To branch stock 12,000 By bank a/c (remitted to H.O) 77,100
To branch debtors 1,500 By stock reserve (opening stock)
[(12,000 x 25)/100] 3,000
To goods sent to branch By goods sent to Branch a/c 20,000
82,000 80,000 (loading on goods sent to
Less: returned to H.O branch)
2,000 [(80,000 x 25)/100]
To bank a/c
Rent rates and taxes By branch stock 14,800
3,200 8,000
Salaries and wages
4,800
To stock reserve (closing stock) 3,700 By branch debtors 1,600
[(14,800 x 25) /100]
To general profit & loss a/c 11,300
(profit transferred) (b/f)
1,16,500 1,16,500
2.6 Stock and Debtors system:
Apart from the methods discussed earlier there is yet another method of calculating profit
and loss of a branch which is popularly known as Stock and Debtors system or Analytical
Method. It is an elaborate method of keeping branch accounts and is considered very useful
when the branch’s turnover is sufficiently large and a greater degree of control is sought to
be exercised by the head office over the branch.
37
According to this system, instead of opening one branch account, (as in case of debtors
system) separate accounts are opened for various transactions at the branch. Under
debtors system all the branch transactions are recorded in one single account i.e Branch
Account. Hence the debtors system is called as synthetic method. But in stock and debtor
system, branch transactions are classified in to number of categories based on their nature
and then recorded in different accounts. The head office can send goods at either cost price
or at invoice price.
When goods are sent to the branch at cost price

When the goods are sent to the branch at cost price the following accounts need to be
opened.
1. Branch stock a/c
2. Branch Debtors a/c
3. Goods sent to branch a/c
4. Branch cash a/c
5. Branch expenses a/c
6. Branch P/L a/c
7. Branch petty cash a/c
1. Branch stock account:

This account records all the transactions relating to stock of goods. In other words, this
account records opening stock of goods, goods received from H.O, goods sold and closing
stock. Branch stock account is a real account and all the transactions that would increase
branch stock shall be entered on the debit side of this account. All the transactions that
would decrease the branch stock shall be entered on the credit side. The balance in this
account represents gross profit or gross loss and it is transferred to branch profit and loss
account.
2. Branch debtors account:

This account records all the transactions relating branch debtors. It records opening
balance of debtors, credit sales made, amount collected from debtors and closing balance of
debtors. This account is also a real account. In other words, all transactions that would
increase the amount debtors shall be entered on debit side and all transactions that would
decrease the amount of debtors shall be entered on the credit side.
3. Goods sent to Branch account:

This account is prepared by the head office to calculate the amount of goods sent to a
particular branch in an accounting year. The goods sent to the branch is entered on the
credit side. At the end of the accounting year, the balance in this account shall be
transferred to purchases account in case of trading concern and to the trading account in
case of a manufacturing account.
4. Branch cash account:

This account is maintained for recording all cash transactions relating to the branch.
Branch cash account is considered essential when the branch is allowed to utilise the cash
available with it.
38
5. Branch expenses account:
This account is maintained to record all the expenses of the branch. It is a nominal account
and hence all expenses are debited to this account. At the end of the accounting year, the
balance in this account is transferred to branch profit and loss account.
6. Branch profit and loss account:

This account is prepared to ascertain the net profit or loss made by any branch. The gross
profit or gross loss from branch stock account is transferred to this account. The total
expenses and losses are shown on the debit side of this account. The balance at the end of
the accounting year is net profit or loss.
7. Branch Petty cash account:

This account is opened when the branch is making some petty payments. This account is
debited with the opening balance of petty cash and cash received from the head office for
petty cash. All the petty payments made by the branch are shown on the credit side. The
balance in this account represents the amount of petty cash available.
When the goods are sent by head office at cost price, following are the journal entries
to be passed in the books of head office
Transaction Debit Credit

1. Goods sent to branch Branch stock a/c Goods sent to branch a/c
2. Goods returned by branch Goods sent to branch a/c Branch stock a/c
3. Cash sales made by branch Branch cash a/c Branch stock a/c
4. Credit sales made by the branch Branch debtors a/c Branch stock a/c
5. Returns from debtors of branch Branch stock a/c Branch debtors a/c
6. Bad debts & discount allowed Branch expenses a/c Branch debtors a/c
7. Cash collection from branch
debtors Branch cash a/c Branch debtors a/c
8. Branch expenses paid by H.O Branch expenses a/c Cash a/c (general)
9. Transfer of branch expenses to
branch profit and loss account Branch P/L a/c Branch expenses a/c
10. Surplus of goods in branch stock
a/c Branch stock a/c Branch profit and loss a/c
11. Shortage of goods in branch Branch profit and loss a/c Branch stock a/c
stock a/c
12. Transfer of gross profit* Branch stock a/c Branch profit and loss a/c
13. Transfer of branch net profit* Branch P/L a/c General P/L a/c
* In case of gross loss and net loss the reverse entry shall be passed.
Important points
1. Apart from the above accounts, the head office must maintain separate accounts for each
fixed asset at the branch.
39
2. Depreciation on Branch fixed assets must be recorded by passing the following journal
entry-
Branch expenses a/c
To Branch fixed asset a/c
3. While closing the ledger accounts at the end of the accounting period, preferably the
following order must be followed-
• Goods sent to Branch a/c
• Branch Debtors a/c
• Branch Cash a/c
• Branch Expenses a/c
• Branch Stock a/c
• Branch Profit and Loss a/c
Illustrations:
1. Messers Guru traders, Trichy has a branch at Chennai. The goods were sent by the head
office to the branch at cost. The following are the particulars relating to the Chennai
branch.
Rs. Rs.
Stock at branch on 1.1.2007 40,000Cash sent to branch for:
Debtors at branch on 1.1.2007 1,000Salaries
3,000
Goods sent to branch 2,40,000Freight
11,000
Goods returned to H.O 2,000other expenses 20,000
6,000
Sales: stock at branch on 31.12.2007 44,400
Cash 1,25,000
Credit 1,74,000
Cash collected from debtors 1,56,000Debtors on 31.12.2007 10,000
Discount allowed 4,000
Goods damaged (Abnormal 400
loss)
Goods returned by debtors to 5,000
branch
Ascertain the profit or loss for Chennai branch for the year ending 31.12.2007 by preparing
ledger accounts under stock and debtor system.
Solution:

Branch stock account
Dr. Cr.
To balance b/d 40,000 By branch cash a/c
40
(cash sales) 1,25,000
To goods sent to branch By branch debtors a/c 1,74,000
2,40,000 2,38,000 (credit sale)
2,000
To branch debtors a/c 5,000 By branch profit & loss a/c 400
(goods returned by debtors) (Abnormal loss of goods)
To branch profit & loss a/c (G.P) 60,800 By balance c/d 44,400
3,43,800 343,800
Branch Debtors account

Dr. Cr.
To balance b/d 1,000 By branch cash a/c (collection 1,56,000
from debtors)
To branch stock a/c (credit sale) 1,74,000 By branch expenses a/c 4,000
(discount)
By branch stock a/c (sales 5,000
returns)
1,75,000 1,75,000
Branch cash account

Dr. Cr.
To branch stock a/c (cash sales) 1,25,000 By branch expenses a/c 20,000
(expenses paid by branch)
To branch debtors a/c 1,56,000 By general cash a/c ( cash 2,81,000
(collection from debtors) remitted to H.O) (b/f)
To general cash a/c 20,000
(cash sent by H.O)
3,01,000 3,01,000
Branch expenses account

Dr. Cr.
To branch debtors a/c 4,000 By branch profit & loss a/c 24,000
(transferred )
To salaries 3,000
To freight 11,000
To other expenses 6,000
24,000 24,000
41
Goods sent to branch account
Dr. Cr.
To purchases a/c 2,38,000 By branch stock a/c 2,38,000
2,38,000 2,38,000
Branch profit and loss account

Dr. Cr.
To branch stock a/c (Abnormal 400 By branch stock account a/c 60,800
loss) (gross profit)
To branch expenses a/c 24,000
To general profit & loss a/c (net 36,400
profit)
60,800 60,800
When the goods are sent by the head office at invoice price:
The stock and debtor system as discussed above is very much useful and appropriate. The
various accounts to be opened in the books of the head office is given below:
1. Branch stock account

2. Branch debtors account
3. Branch cash account
4. Branch petty cash account
5. Branch expenses account
6. Branch adjustment account or branch stock adjustment account
7. Branch profit and loss account.
The above mentioned accounts are prepared in the same way as in the case of cost price
method, except the following accounts:
1. Branch stock account:

It is prepared in the same way as that when goods are sent at cost price, except that all
entries are made at invoice price. The balance in this account, after posting all relevant
entries should be equal to closing stock at branch. If the balance is not equal to the closing
stock, then it shall be treated as either shortage or surplus. The profit or the load included
in such surplus or shortage should be transferred to branch adjustment account, while the
cost of such surplus or shortage should be transferred to branch profit and loss account.
2. Branch adjustment account:

This account is prepared for ascertaining the amount of gross profit earned by the branch.
The loading involved in opening stock, closing stock and goods sent to branch are
eliminated by passing adjustment entries in this account. The balance in this account
represents gross profit or loss which is transferred to branch profit and loss account.
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3. Goods sent to branch account:
This account is credited with the value of goods sent to branch at invoice price. after
adjusting the loading involved in goods sent to branch, the balance in this account is
transferred to purchases account.
4. Stock reserve account or suspense account:

This account is prepared to adjust the loads included in opening and closing stock of goods.
The balance in this account is carried to the next accounting period.
When the goods are sent by the head office at invoice price, following journal entries
need to be passed:
Transactions during accounting year Journal entry
Goods sent by head office to branch Branch Stock a/c Dr
To Goods sent to Branch a/c
Goods returned by head office to branch Goods sent to Branch a/c Dr
To Branch a/c
Cash sales made by branch Branch Cash a/c Dr
To Branch Stock a/c
Credit sales made by the branch Branch Debtors a/c Dr
To Branch Stock a/c
Goods distributed as samples by branch Branch expenses a/c Dr
To Branch Stock a/c
Collection from debtors Branch Cash a/c Dr
To Branch Debtors a/c
Sales returns at branch Branch Stock a/c Dr
Bad debts Branch expenses a/c Dr
Branch expenses met by head office Branch expenses a/c Dr
To Cash/ bank a/c
Remittance made to head office General Cash/ bank a/c Dr
To Branch Cash a/c
Expenses met by branch Branch expenses a/c Dr
To Branch Cash a/c
Apart from the regular entries as mentioned above, the following adjusting entries are also
to be passed:
1. Entry for abnormal loss or shortage of goods
Branch adjustment a/c Dr. [with loading]
Branch p& l a/c Dr. [with cost]
To branch stock a/c [with invoice price]
Note: reverse entry shall be passed for surplus in stock.
43
2. For adjustment of excess price (loading) of opening stock
Stock reserve a/c Dr.
To branch adjustment a/c
3. For adjustment of loading in closing stock

Branch adjustment a/c Dr.
To Stock reserve a/c
4. For adjustment of loading involved in goods sent to branch

Goods sent to branch a/c Dr.
Branch adjustment a/c
5. For transfer of balance of branch adjustment account (for gross profit)

Branch adjustment a/c Dr.
To branch profit and loss a/c
Note: for gross loss, reverse entry would be passed.
6. For the transfer of profit or loss to general profit and loss account.
(a) In case of profit:
Branch profit and loss a/c Dr.
To general profit & loss a/c
(b) In case of loss:
General profit and loss a/c Dr.
To branch profit and loss a/c
7. For transferring the goods sent to branch account

Goods sent to branch a/c Dr.
To purchases or Trading a/c
Important points:
1. For removing loading involved in opening stock, closing stock and on goods sent to
branch adjustment entries are to be made in branch adjustment account. in case of opening
stock, stock reserve adjustment entry shall be made on the credit side in branch
adjustment account. In case of closing stock, stock reserve adjustment entry shall be made
on the debit side of branch adjustment account. In case of goods sent to branch, the
adjustment entry is to be passed on the credit side of stock adjustment account.
2. While calculating stock reserve always profit rate on invoice price must be used. If the
profit rate is given on cost, then it must be converted in to profit rate on invoice price.
3. Apart from the above accounts, the head office must maintain separate accounts for each
fixed asset at the branch.
entry-
44
Branch expenses a/c
To Branch fixed asset a/c
5. While closing the ledger accounts at the end of the accounting period, preferably the
following order must be followed-
• Goods sent to Branch a/c
• Branch Debtors a/c
• Branch Cash a/c
• Branch Expenses a/c
• Branch Stock a/c
• Branch Stock Adjustment a/c.
• Branch Profit and Loss a/c
Illustrations
The shoe trading company invoices goods to Bangalore branch at cost plus 25%. Both cash
and credit sales are affected by the branch. Branch expenses are paid direct H.O. The
following are the details of the transactions for the year ended 31st march 2004.
Goods sent to branch 40,000

Goods returned by branch 1,000
Stock at branch on 1-4-03 10,000
Credit sales 22,000
Cash sales 21,600
Debtors at branch on 1-4-03 7,600
Cash received from Debtors 23,200
Bad debts 600
Returns from Debtors 400
Rent, rates etc. 480
Salaries and wages 1,600
Sundry expenses 240
Record the above transactions in head office ledger on stock and Debtors system. The stock
items, goods returned to H.O, good supplied by H.O are at invoice price.
Solution:
Branch Stock Account
Dr Cr
To Balance b/d 10,000 By Branch Cash A/c 21,600
(Cash Sales)
To Goods sent to Branch a/c 39,000 By Branch Debtors a/c 22,000
40,000 (credit sales)
45
1,000
To Branch Debtors A/c 400 By Balance c/d 8,000
(Sales Returns)
To Branch Stock Adj A/c 440
[(2200×20)/100] (surplus –
loading)
To Branch P.&L.A/c 1,760
[(2200 x 80)/100]
51,600 51,600
Branch Debtors Account

Dr Cr
To Balance b/d 7,600 By Branch Cash A/c 23,200
(collection from debtors)
To Branch Stock A/c 22,000 By Branch Stock A/c (Sales 400
(credit sales) Return)
By Branch Expenses A/c: 920
(Discount + Bad Debts)
29,600 29,600
Branch Expenses Account

Dr Cr
Particulars Rs. Rs. Particulars Rs. Rs.
To Branch Cash A/c By Branch P/L a/c 3,240
(transferred )
Rent, Rates etc. 480
Salaries & Wages 1,600
Sundry Expenses 240 2,320
To Branch Debtors A/c 920
3,240 3,240
Dr Branch Stock Adjustment Account Cr

To Stock reserve ( closing stock) 1,600 By Stock reserve ( opening 2,000
stock)
To Branch P/L a/c (G/P) 8,640 By goods sent to Branch a/c 7,800
( loading )
By Branch Stock a/c (surplus- 440
loading)
10,240 10,240
46
Branch Profit & Loss Account
Dr. Cr.
To branch expenses a/c 3,240 By Branch Stock Adjustment 8,640
A/c (G/P)
To General P/L.A/c (Profit) 7,160 By Branch Stock A/c 1,760
( surplus stock – cost)
10,400 10,400
Goods Sent to Branch Account

Dr. Cr.
To Branch Stock Adj. A/c 7,800 By Branch Stock 39,000
To Purchase A/c (b.f. ) 31,200
39,000 39,000
l
Self- Assessment questions
entry-
Branch ------------------ a/c
To Branch fixed asset a/c. (ref-2.6)
2. When we balance a Branch Stock a/c , the difference is treated as ------------ or gross loss.
(Ref-2.6)
3. To adjust load in the goods sent, the journal entry is

Goods sent to Branch a/c Dr
To ------------------------------ a/c. (ref-2.6)
2.7 Final Accounts System:
Under this system the Head office prepares a Memorandum Branch Trading & P/L a/c at
cost price to ascertain the results of the Branch. In this account all expenses whether paid
by the head office or the branch is debited to Trading & P/La/c. The P/L as disclosed by
this account is exactly same as that of the branch account prepared according to Debtors
system.
It should be further noted that the Branch Trading & P/L a/c is only a Memorandum a/c
not forming part of the full accounting system. If the branch a/c is also prepared, in
addition to the branch Trading and P/L a/c, then such a branch account will be treated as
personal account not considered in the nature of a nominal account as under the Debtors
system. The branch account which will be equal to net worth or net assets available at
branch at the end of the accounting period.
47
The working of this system will be clear from the following:
Memorandum Trading and Profit & loss account
To opening stock at xxx By Sales of the branch (cash xxx
branch &
To Goods sent to xxx credit)
branch(less returns) ‘’Closing stock at branch xxx
To Purchases(made by the xxx ‘’ Gross loss b/d (b/f) xxx
branch directly cash
& credit )
To Direct expenses of the xxx
branch
To Gross profit c/d (b/f) xxx xxx
To Gross loss b/d xxx By Gross profit c/d

‘’ Expenses of the branch xxx xxx
‘’ Bad debts
‘’ Depreciation on fixed xxx
assets xxx
‘’ General p/l (b/f)
xxx
xxx xxx
a) The P/L as disclosed by Memorandum Trading account is exactly --------------- as that of
the branch account prepared according to Debtors system. (Ref-2.7)
b) The branch account under Final account system will be equal to --------------- available at
branch at the end of the accounting period. (Ref-2.7)
Wholesale and Retail profit at Branch
Sometimes the head office also sells goods at retail or list price besides sending goods to
the branches at wholesale prices. The difference between the retail price and wholesale
price will be the profit gained by the branch. Suppose the cost price of an article bought by
the head office is Rs.100 and it is supplied to the branches at Rs.160 at wholesale price then
both the head office and the branches sell goods at Rs.200. Profit of the branch will be Rs.40
(i.e.,200-160) and not Rs.100 (i.e.,200-100).
The goods sent by the head office to the branches at wholesale price are sold then there
will be no problem in accounting. If some goods remain unsold at the end of the accounting
year, then the unsold goods at the branches must be reduced to cost price by making a
stock reserve for unrealized profit for the difference between the wholesale and cost price
and will be debited to the head office profit and loss a/c , as previously the head office must
have earned profit while sending goods to the branches.
48
2.8 Independent Branches:
They are those branches that maintain full set of books of accounts. The Branch receives
goods from the head office and is allowed to purchase goods on its own from local market.
It may also supply goods to the head office. It is also allowed to maintain the cash receipts
from sale of goods and receipts from debtors in its own account and meet all its expenses
out of this amount. Whenever there is surplus cash the same will be deposited by the
Branch in the head office account.
Accounting treatment of Independent branches:

Such Branches maintain complete set of double entry books in the ordinary manner. At the
end of the financial year it prepares its own trial balance, trading and P&L account and
Balance sheet. The special feature of such Branches is that, they maintain head office
account in their books and the head office in turn will maintain Branch account. The entries
in these two accounts are similar in nature but opposite in direction.
I. Transaction entries
Transaction In the books of the head In the books of the
Office Branch
Goods sent by H.O to branch Branch a/c Dr Goods received from
To goods sent to branch H.O a/c Dr
a/c To H.O a/c
Goods returned by branch to Goods sent to branch a/c H.O a/c Dr
H.O Dr To Goods received
To Branch a/c from H.O a/c
Branch expenses paid by H.O Branch a/c Dr Expenses a/c Dr
To Bank a/c To H.O a/c
H.O expenses paid by branch Expenses a/c Dr H.O a/c Dr
To Branch a/c To Cash/bank a/c
Collections from branch Bank a/c Dr H.O a/c Dr
debtors by H.O To Branch a/c To Debtors a/c
Collections from H.O debtors Branch a/c Dr Bank a/c Dr
by branch To Debtors a/c To H.O a/c
Payment of branch creditors Branch a/c Dr Creditors a/c Dr
by H.O To Bank a/c To H.O a/c
Payment of H.O creditors by Creditors a/c Dr H.O a/c Dr
Branch To Branch a/c To Bank a/c
Remittance of money by Bank a/c Dr H.O a/c Dr
branch to H.O To Branch a/c To Bank a/c
Remittance of money by H.O Branch a/c Dr Bank a/c Dr
to branch To Bank a/c To H.O a/c
Purchase of asset by branch Branch asset a/c Dr H.O a/c Dr
for which accounts are To Branch a/c To Bank a/c
maintained by H.O
Depreciation on branch Branch a/c Dr Depreciation a/c Dr
49
asset the account of which is To Branch asset a/c To H.O a/c
maintained by H.O
Transfer of goods from one Receiving Branch a/c In the books of
branch to another branch Dr Receiving branch
To Supplying Branch a/c Goods received from
H.O a/c
Dr
To H.O a/c
In the books of
Supplying branch
H.O a/c
Dr
To Goods received
from H.O a/c
Charging branch for the Branch a/c Dr Expenses a/c Dr
efforts and time of H.O To Service charges To H.O a/c
II. Incorporation entries

At the end of the accounting period, branch prepares final accounts in the usual manner
and the results of the same would be incorporated in the books of the head office. For the
above reason, the head office a/c in the books of the branch will be treated as Capital
account and the profits or losses of the branch would be transferred to that account.
In the books of the head office, the following entries will be passed to incorporate the
branch results:
For incorporating profits made by the branch:

Branch a/c Dr
To General P/L a/c
For incorporating losses made by the branch:

General P/L a/c Dr
To Branch a/c
Further for accounting, the assets and liabilities of the branch will be shown as returned to
head office. The entries passed by the head office towards that are-
For incorporating the assets returned by the branch:

(Individual) Branch assets a/c Dr
To branch a/c
For incorporating the liabilities returned by the branch:

Branch a/c Dr
50
To (Individual) Branch liabilities a/c
III. Adjusting or Reconciliation entries

The head office account in the Branch books and the Branch account in the books of the
head office should show the same balance at any given point of time. At the end of the year
when the Branch prepares the trial balance and final account, a copy of it is sent to the head
office for incorporating the same in the books of the head office. At this point of time the
head office account in the branch books may show a different balance from the balance
shown by the Branch account in the books of the head office. This calls for reconciliation of
the two accounts by passing certain adjusting entries which are discussed in the following
paragraphs
1. Cash in transit
When Branch remits cash to the head office just before the end of the accounting year, the
entry will be made in the books of Branch by debiting the head office account. There will
not be corresponding entry in the books of the head office since it would not have received
the cash. As such there will be difference in the head office account and the Branch account.
To reconcile this, an entry has to be passed either in the books of the head office or in the
books of the Branch as mentioned below:
a) In the books of head office

Cash in transit a/c Dr
To Branch a/c
(OR)
b) In the books of Branch

Cash in transit a/c Dr
To head office a/c
Note: The cash in transit will appear on the asset of the Balance Sheet
2. Goods in transit
Similar to cash in transit, there may be goods in transit as well at the end of a financial year
which will result in difference between the head office account and the Branch account. To
reconcile the following entry will be passed
In the books of the head office

Goods in transit a/c Dr
To Branch a/c
3. Purchase of Branch fixed assets:
The ledger accounts for the branch fixed assets are maintained by the head office.
Depending on the source of payment for the purchase of fixed assets, the following entries
will be passed:
a) If payment is made by the Branch
51
Branch fixed assets a/c Dr
To Branch a/c
In the books of the Branch

Head office a/c Dr
To cash (or) Bank a/c
b) If payment is made by the Head Office

Branch fixed assets a/c Dr
To Bank a/c
No entry is required in the books of the Branch.
4. Depreciation of fixed assets:

As the Branch fixed asset accounts are maintained in the books of the head office, the entry
relating to depreciation should also be passed through the head office account.
Following entry is required to be passed.

Branch a/c Dr
To Branch fixed assets a/c

P&L a/c Dr
To Head office a/c
5. Expenses incurred by the head office and charged to the Branch:

Sometimes the head office may render some administrative or technical services to the
Branch. Then a portion of such expenses will be charged to the respective Branches.
Following is the entry for the same.
Branch a/c Dr
To Relevant expenses or P&L a/c

Relevant expenses or P&L a/c Dr
To Head office a/c
6. Inter-Branch transactions:
If the head office has many Branches and there is a possibility that some Branch may
supply goods or send cash to the other Branch, such transactions among the Branches are
called inter Branch transactions. For example Calcutta Branch transfers some goods to
Pune Branch valued Rs.16,000, the entries are:
i. In the books of Calcutta Branch:

Head office a/c Dr
52
To Goods received from H.O a/c
ii. In the books of Pune Branch:

Goods received from H.O a/c
To Head office a/c
iii. In the books of Head office:

Pune Branch a/c
To Calcutta Branch a/c
7. Cash paid by branch on behalf of Head office:

If the branch has paid some cash (say for purchases made by Head office) on behalf of the
head office, then the following entries will be passed in the books of the head office and the
branch:
Head office books Branch books
Purchases a/c Dr Head office a/c Dr
To branch a/c To cash a/c
8. Cash collected by Branch on behalf of the head office

If the branch has collected some cash on behalf of the head office (say for amount due from
debtors of the head office) then the following journal entries will be passed in the books of
the head office and the branch:
Head office books Branch books
Branch a/c Dr Cash a/c Dr
To Debtors a/c To head office
a/c
9. If a bill is drawn by one branch on another branch:

If a bill is drawn by Agra branch on Mumbai branch and the head office is at Delhi, then the
following entries will be passed

Agra branch a/c Dr
To Bills payable
Bills receivable a/c Dr

To Mumbai branch
In the books of Agra branch

Bills receivable a/c Dr
To H.O a/c
In the books of Mumbai branch

H.O a/c Dr
To Bills payable a/c
53
1. ---------------- branches maintain a full set of books of accounts.
2. The journal entry for incorporating profits made by the branch:

---------------- a/c Dr
To General P/L a/c
3. In the books of Branch, the cash in transit will appear on the ---------- of the Balance
sheet.
Incorporation of Branch Trial balance in the Head office books

At the end of the financial year the branch sends its trial balance together with the Trading
and P&L account with the balance sheet to the head office. On receiving these statements
the head office will proceed to incorporate this trial balance into its own books. Such
incorporation is required because the Head office and its various branches are under one
organization and thus the Head office prepares one combined balance sheet for the benefit
of the shareholders and others. The process by which the consolidated balance sheet of the
branches and the head office is done (of the entire business) is known as Incorporation of
Branch Trial balance
For incorporating the branch trial balance, in the books of the head office, two methods
that can be adopted
a. First Method:
In this method branch trading and P&L are prepared to incorporate all revenue items. The
assets, liabilities and profit are incorporated through the branch a/c in order to prepare the
consolidated balance sheet. Following entries are required to be passed in the books of the
head office.
1. For the debit side items of trading account such as opening stock, net purchases and all
direct expenses.
Branch trading a/c Dr
To Branch a/c
2. For the credit side items of trading a/c such as net sales and closing stock.
Branch a/c Dr
To Branch trading a/c
3. For the transfer of gross profit or gross loss

For gross profit
Branch trading a/c Dr.
To Branch P/L a/c
For gross loss

Branch P&L a/c Dr
To Branch trading a/c
54
4. For the total of various items shown on the debit side of the P&L a/c
Branch P&L a/c Dr
To Branch a/c
5. For total of various items which appear on the credit side of P&L a/c.
Branch a/c Dr
To Branch P&L a/c
6. For transfer of net profit or loss to the general P&L a/c

In case of net profits
Branch P&L a/c Dr
To General P&L a/c
In case of net loss

General P&L a/c Dr
To Branch P&L a/c
7. For total of various branch assets

Branch assets (individually) a/c Dr
To Branch a/c
8. For total of various branch liabilities

Branch a/c Dr
To Branch liabilities (individually) a/c
b. Second method:
In this method branch trading and profit and loss accounts is prepared as a memorandum
account and entry for transferring the net profit (net loss) is passed in the books of the
head office. No entry is passed for incorporating branch assets and liabilities in the books of
the head office, with the result that branch account in the books of head office will show a
balance equal to net worth (i.e. total assets – total liabilities).
Illustrations
A Chennai head office has an independent branch at Ahmadabad. From the following
particulars give the journal entries to incorporate the branch trial balance into head office
books and also prepare Ahmedabad branch account.
Ahmedabad Branch
Trial Balance as on 31st December 2000
Dr.(Rs) Cr.(Rs)
Stock on 1st January 2000 8,200
Purchases 18,800
Wages 6,550
Manufacturing expenses 3,400
55
Rent 1,700
Salaries 5,500
Debtors 4,000
General expenses 2,000
Goods received from head office 7,200
Cash at bank 750
Creditors 2,700
Sales 34,950
Head office a/c 14,000
Discount 6,150
Purchases returns
300
Total 58,100 58,100
a) Closing stock at the branch is Rs.14, 250
b) Branch fixed assets maintained in the books of head office were: Machinery
Rs.25,000; Furniture Rs.1,000. Depreciation is to be charged at 10% on Machinery and
15% on Furniture
c) Rent due was Rs.150
d) A remittance of Rs.4,000 made by the branch on 28th December 2000, was received by
the head office on 6th January 2001
e) The Ahmadabad branch account in the books of head office showed a debit balance of
Rs.18,000 as on 31.12.2000.
Solution:
In the books of the Head Office:
Transaction entry
1. Ahmedabad Branch A/c [25,000× 10/100] & Dr 2,650
[15,000×15/100]
To Ahmedabad Branch fixed asset A/c 2,650
[Being depreciation charged on branches fixed assets]
Adjustment entry
1. Cash in transit A/c Dr 4,000
To Ahmedabad Branch A/c 4,000
[Being Cash in transit recorded]
Incorporation entries:
1. Ahmedabad Branch Trading A/c Dr 43,850
To Ahmedabad Branch A/c
[8,200+(18,800-300)+6550+3400+7200] 43,850
[Being opening stock, net purchases goods
received
from head office, wages & manufacturing expenses
56
debited to branch trading A/c]
2. Ahmedabad Branch A/c Dr 49,200
To Ahmedabad Branch trading A/c
[34,950+14,250]
[Being sales closing stock credited to branch 49,200
trading
A/c]
3. Branch trading A/c Dr 5,350
To Ahmedabad Branch P/L A/c [43,850- 5,350
49,200 =5,350]
[Being Gross profit transferred to branch P/L A/c]
4. Ahmedabad Branch P/L A/c Dr 12,000
To Ahmedabad Branch A/c 12,000
[1,700+150+5,500+2,000+2,650]
[Being rent, o/s rent, salaries, general expenses &
depreciation debited to branch P/L A/c]
To Ahmedabad Branch P/L A/c 6,150
[Being discount, earned credited to branch P/L
A/c]
6. General P/L A/c Dr 500
To Ahmedabad Branch P/LA/c 500
[12,000 Dr-11500 cr = loss 500 cr]
[Being net loss transferred to general P/L A/c]
7. Debtors A/c Dr 4,000
Stock A/c Dr 14,250
Cash at bank A/c Dr
To Ahmedabad Branch A/c 750
[Being all assets incorporated] 19,000
To Creditors A/c 2,700
To Outstanding rent A/c 150
[Being all liabilities incorporated]
Ahmedabad Branch A/c

Dr. Cr.
To Balance b/d By Cash in transit A/c 4,000
18,000
To Ahmedabad Branch Trading By Ahmedabad Branch 43,850
A/c 49,200 Trading A/c
To Ahmedabad Branch P/L A/c 12,000
6,150
To Creditors 2,700 By sundry assets 19,000
To Rent due [O/s rent] 150
57
To Ahmedabad Branch fixed asset 2,650
A/c
78,850 78,850
2.9 Summary
 Branches are any establishment carrying on either the same or substantially the same
activity as that carried on by the head office of the company. They may be referred to as
sales outlets. Dependent Branches do not keep full system of accounting. They are
dependent on the Head office for all its operations. Debtors System is a method where
the head office maintains a separate account for each of the Branch.
 Final account system is a system where the Head office prepares a Memorandum
Branch Trading & P/L a/c at cost price to ascertain the accounting results of the Branch.
Stock and debtors system is a system where a separate ledger for each branch has to
be maintained in the head office for keeping accounts, such as Branch Stock, Branch
Debtors, Goods sent to Branch, Branch Expenses, Branch asset, etc., Branch cash or
Petty cash account has to be maintained if the branch is permitted to use the available
cash for making payments.
 Wholesale and Retail profit at Branch is a method where head office sells goods at
retail or list price and sends goods to branches at wholesale prices.
 Independent Branches are branches on whose activities, the head office does not
impose many restrictions. They maintain all books of accounts. At the end of the
accounting period, branch prepares final accounts, in the usual manner & the results of
the same would be incorporated in the books of the head office. At this point of time
the head office account in the trial balance sent by Branch may show a different balance
than the one shown by the Branch account in the books of the head office. This calls for
reconciliation of the two accounts by passing certain adjusting entries.
Section A - 2marks questions
1. What do you mean by loading?

2. What is stock reserve account?
3. Why are goods sent by the head office to the branch at invoice price?
4. The Bangalore head office sends goods to its Hubli branch at a profit of 20% on cost.
If Bangalore head office sends it for Rs.1,20,000. Calculate the cost price.
5. Distinguish between cost price and loaded price.
6. Give a list of main types of branches from accounting point of view.
7. What is Final Account System of Branch accounting?
8. State whether the following statements are true or false.
a) Bad debts are debited to branch profit and loss account.
b) Gross loss appears in the debit side of branch trading account.
58
9. Give journal entry for shortage of stock?
10. Why is Branch Stock Adjustment a/c prepared?
11. What is whole sale price?
12. What is retail price?
13. Give the meaning of goods-in-transit.
14. What do you mean by inter branch transaction?
15. What do you understand by independent branches?
Section B – 4 marks questions
1. Nilgiri ltd, Madras has a branch at Bangalore. From the following pass entries in the
books of the head office.
Rs.
Cash sent to branch 800
Cash sales at branch 7,000
The branch was advised to sell goods only for cash.
There was no stock of unsold goods at the end.
2. Mantons ltd Bangalore opened a branch at Hubli on 1st May 2009. From the following
prepare the branch account for the period ended 30th April 2010. Goods sent to branch
Rs.16,000
Cash remittance to branch:
Salaries 2,000
Office rent 480
Other expenses 320
Cash sales affected by the branch, remitted to head office immediately 22,000
Stock of unsold goods on 30-04-2010 2,000
[Ans -Profit -5,200]
3. India traders, Mumbai opened a branch at Baroda on 1st Jan 2001. The following
information is available in respect of the branch for the year 2001.
Rs.
Cash sales at branch 50,000
Credit sales at branch 60,000
Salaries of the branch staff paid by head office 15,000
Office expenses of the branch paid by head office 12,000
Cash remittance to branch towards petty cash 6,000
Petty cash at branch on 31-12-2001 500
Prepare branch account to show the profit or loss for the year 2001
[Ans-Profit - 29,500, Cash received from debtors- 55,000]
59
4. Aswathi Gas Company, Delhi has a branch in Faridabad and charges all goods sent to the
branch at cost price plus 25%. It has made arrangements in such a way that all the cash
received by the branch is to be paid daily to the head account. From the following prepare
branch account for the year ending 31-12-2001
Rs.
Stock on 01-01-2001 12,000
Goods sent to branch, less returns 80,000
Debtors on 01-01-2001 1,500
Cash sent to head office 77,100
Rent, rates and taxes 3,200
Debtors on 31-12-2001 1,600
Stock on 31-12-2001 14,800
[Ans-Profit is 7,440]
5. Explain the accounting procedure for branch on the basis of Final Account System and
how it is different as compared to Debtors System. (ref-2.7 & 2.5)
6. Briefly explain Stock and Debtors system and how it is different from Debtors system.
(ref-2.5 & 2.6)
7. With respect to Branch accounts, how will you deal with the following matters?
a) Remittance-in-transit
b) Depreciation of branch fixed assets
c) Goods-in-transit. (ref-2.5)
8. State the reasons for the difference between the balances of branch account in the books
of the head office and the head office account in the books of the branch. How would you
reconcile the balances of the two accounts? (ref 2.9.4)
9. Write journal entries in the books of the head office and the branch as on 31-12- 2003.
(a) The head office had sent goods on 28-12-2003 worth Rs.1,000 to the branch. The
goods were received by the branch on 3-1-2004.
(b) On 27-12-2003, the branch had remitted rs.750 to the head office and the amount
was received on 1-1-2004.
(c) Depreciation on branch assets was Rs.400. The a/c of these assets was kept in the
books of the Head office.
(d) A clerk of the branch had rendered services worth Rs.600 in the head office (his
salary was paid by the branch).
10. A head office in Mumbai has a branch in Calcutta. The company closes it’s a/c on 31 st
December every year. What adjustment entries are required to be passed in the books of
both the head office and the Calcutta branch considering the following details?
(a) a remittance of Rs 5,000 by the Calcutta branch on 22-12-2003 is received by the
head office on 5-1-2004.
60
(b) Goods worth 10,000 sent by the head office on 20-12-2003 reaches the branch on
6-1-2004.
(c) Depreciation at 10% per year is to be provided on Machinery in Calcutta costing
Rs.70,000. The A/c of which is in the books of the Head office.
(d) The Calcutta branch paid Rs.100 dividend to a local share holder on behalf of the
head office.
Section C - 10 Marks questions
1. From the following particulars relating to Delhi branch for the year ending 31st march
2008, prepare branch account in the books of the head office:
Balances as on 1.4.2007

Stock at the branch 15,000Credit sales during 2007 -08 2,28,000
Debtors at the branch 30,000Cheque sent to branch during
the year for:
Salaries
9,000
Rent & Taxes 11,600
1,500
Petty Cash
1,100
Petty cash at branch 300Balances as on 31.3.2008:
Stock at the branch 25,000
Goods sent to branch 2,52,000Petty cash 200
Remittance from branch: Debtors 48,000
Cash sales
60,000
Received from Debtors 2,70,000
2,10,000
Goods returned by the branch 2,000
[Ans: profit Rs.36,300]
2. From the following particulars relating to Patiala branch for the year ending December
31, 2007 prepare branch account in the books of head office:
Balances as on 1.1.2007
Stock at branch 40,000Goods sent to branch during the 2,80,000
year
Branch debtors 14,000Cash sales during the year 3,30,000
Petty cash at branch 1,500Credit sales during the year 1,83,000
Furniture at branch 12,000cash received from debtors 1,35,000
Prepaid fire insurance 1,150Cash paid by branch debtors 22,000
61
directly to H.O
Salaries outstanding 2,100goods returned by branch 4,000
Discount allowed to debtors 1,100goods returned by debtors 7,000
Cash sent to branch for Stock on 31.12.2007 38,000
expenses:
Rent Petty expenses paid by the 2,850
12,000 branch
Salaries
5,400
Petty cash
4,000
Annual insurance
Upto 31.3.08 1,600 23,000
Provide depreciation on furniture at 10% p.a.
[Ans: debtors at the end Rs.31,900; petty cash at the end Rs.2,650; profit Rs.2,05,200]
3. Jain Bros operate a retail Branch at Bangalore. The head office at Madras makes all the
purchases. The Goods sent to the Branch are charged at cost price. All cash received by the
Branch is remitted to the head office. Branch petty expenses are paid out of an imprest
amount, which is reimbursed by the head office from time to time. From the following
particulars you are required to prepare Branch a/c in the books of the head office.
Balances on 1-4-2001: Petty expenses paid out of 700
imprest amount
Stock at cost 8,000 Cash sales during the year 70,000
Petty cash 800 Goods sent to Branch 50,000
Plant 10,000 Stock at cost on 31-3-2002 7,000
Expenses paid by the H.O. 5,000 Sale of plant on October 800
2001(book value of plant
on the date of sale Rs.900)
It is required to write off the plant at 20% p.a.
[Ans-Profit11, 300]
4. Pleasant Stores has a branch at Anand. Goods are invoiced to the branch at 20% profit on
invoice price; the branch has been instructed to send all the cash to the head office every
day. All expenses are incurred by the head office except petty expenses which are met by
the branch manager. From the following particulars you are required to draw up branch
account as it would appear in the books of head office.
Stock on January 1,2007(invoice price) 15,000

Debtors on January 1,2007 9,000
Cash in hand on January 1,2007 400
62
Office furniture on January 1,2007 1,200
Goods supplied by the head office (invoice 80,000
price)
Goods returned to head office 1,000
Goods returned by debtors 480
Cash sales 50,000
Credit sales 30,000
Expenses paid by head office:
Rent
1,200
Salary 3,900
2,400
Stationery 300
Petty expenses paid by branch manager 280
Stock on 31.12.2007 (invoice price) 14,000
Provide depreciation on furniture at 10%
[Ans- Cash received from debtors is 30,000; Profit is 10,920]
5. Albert and Co of Delhi has a branch at Chennai. Goods are sent by the head office at
invoice price which is at 20% on invoice price. All expenses are paid by head office. From
the following particulars, prepare branch account, stock reserve account in the books of
head office:

Opening balances: Goods returned by branch 300
Stock at branch (IP) 11,000Credit sales 22,800
Petty cash 100Balance at the end:
Goods sent to branch 20,000stock at invoice price 13,000
Expenses paid by H.O: debtors at the end 2,000
Rent 600petty cash (miscellaneous 125
income Rs.25 included)
Wages 200Bad debts 300
Salary 900Allowances to customers 500
Remittances to H.O: Goods returned by customers 700
Cash Sales 2,650
Collection from Debtors 21,000
[Ans: opening balance of debtors Rs.1,700; profit rs.8,115]
6. The head office of a company invoices goods to its Mangalore Branch at cost plus 20%.
The Mangalore Branch also purchases goods independently from local market for which
the head office makes payments. All the cash collected by the Branch is banked on the same
day to the credit of the head office and all expenses are directly paid by the head office
63
except for petty expenses, for which head office makes the payments from time to time,
maintains petty cash account.
From the following particulars details show the Branch account as maintained in the head
office books, reflecting the Branch profit for the year ended 31-3-2002
Petty cash balance: on 2,000 Sundry debtors on 31-3- 24,000
1-4-2001 2002
Petty cash balance: on 1,850 Goods sent to Branch at 60,000
31-3-2002 invoice price
Cash received from 1,25,000 Transfer from H.O for 2,500
Debtors petty expenses
Stock on 1-4-2001: Bad debts 1,000 1,000
Transferred from H.O at Discounts to customers 2,000 2,000
invoice price 24,000
Directly purchased by Branch expenses 30,000 30,000
Branch 40,000
16,000
Cash sales 45,000 Stock on 31-3-2002:
Credit sales 130000 Transferred from
Direct purchases 45000 H.O at invoice price
18,000
Directly purchased
by Branch
12,000
Returns from customers 3,000
[Ans-Profit-32,350; Debtors opening balance-25,000]
7. Record the following transactions concerning the Delhi Branch for the year ended
December 31, 2007 in the books of head office. The head office uses stock and debtor
system for recording the transactions.
Rs Rs
Stock at branch (1.1.2007) 16,000 Cash remitted to the branch for 8,000
expenses
Debtors at branch (1.1.2007) 9,000 Cash collected from debtors 57,000
Goods sent to the branch 88,000 Discount allowed to debtors 1,100
Cash sales 30,000 Stock at branch (31.12.2007) 30,400
Credit sales 60,000
[Ans: gross profit Rs.16,400; net profit Rs.7,300; cash remitted to H.O 87,000]
8. Issac industries have its head office in Salem. It supplies goods to its Bangalore branch at
cost. All cash received by the branch need to be remitted to H.O. All expenses of the branch
64
are paid by head office. From the following particulars calculate the profit earned by the
branch using stock and debtors system.
Rs Rs
Stock with branch on 1.1.2007 40,000Discount allowed to debtors 2,400
Branch debtors on 1.1.2007 12,000Expenses (cash paid by H.O)
Petty cash balance on 1.1.2007 100 Rent
2,400
Goods received from head office 1,24,000 Salaries
24,000
Credit sales less returns 84,000 Petty Cash 27,400
1,000
Allowances to customers 2,000cash sales 1,04,000
Cash received from debtors 90,000stock with branch (31.12.2007) 36,000
petty cash balance (31.12.2007) 100
[Ans: gross profit Rs.60,000; Net profit Rs.28,200]
9. Times Enterprises opened a branch in Shimoga on 1st Jan 2010.Goods were supplied at
selling price which was cost plus 25%. From the following particulars relating to the year
2010, you are required to prepare various accounts under Stock and Debtors system.
Goods sent to branch 1,50,000

Cash sales 50,000
Credit sales 70,000
Goods returned by debtors 1,500
Discount allowed
500
Rent, rates & insurance
750
Salaries 3,000
Sundry expenses
500
Defective goods written off
500
Stock at the end 25,000
[Ans- G/P=23,700; N/P=18,550; Closing Debtors=28,000]
10. Poona Stores opened a branch in Bangalore to which goods are supplied at selling
price, being 25%profit on sales. From the following information prepare the necessary
ledger accounts in the books of the Head office under Stock & Debtors system.
Goods sent from Head office at invoice price 1,68,000

Goods returned at invoice price 18,000
65
Branch expenses paid by Head office 10,000
Expenses paid by the Branch 2,000
Cash sales 80,000
Credit sales 40,000
Cash received by branch from branch debtors 32,000
Discount allowed to branch from branch debtors
1,600
Goods returned by customers 2,000
Defective goods written off 1,400
Cash remitted by the branch to head office 1,10,000
[Ans-Closing stock=30,600; Closing debtors=4,400; Net profit=14,850]
11. Following is the Trial balance of Bangalore branch as on 31-12-2003
Particulars Debit Credit

Furniture 2,800 -
Cash 3,560 -
Office expenses 940 -
Debtors & creditors 7,400 3,700
Salaries 3,000 -
Rent 1,920 -
Goods supplied to head office - 12,000
Sales - 76,000
Goods received from Head office 16,000 -
Purchases 37,600 -
Stock on 1-1-2003 12,000 -
Head office A/c 6,480 -
Total 91,700 91,700
Closing stock was valued at 2,700.
The branch A/c in the books of the head office as on 31-12-2003 stood at Rs.920 (Dr).
Goods worth Rs.5,000 sent by head office to branch and remittance of Rs.2,400 sent to the
head office by the branch were in transit.
You are required to incorporate the above trial balance of the branch in the books of the
head office and prepare Bangalore branch A/c.
[Ans- G/P=25,100; N/P=19,240; total of branch account Rs.95,320]
12. The following balances are extracted from the books of the branch.
Stock on 1-1-2004 98,500

Head office (cr) 1,05,000
Debtors 37,500
Purchases 86,250
Goods received from H.O 1,06,250
66
Goods returned to H.O
5,000
Sales 2,40,000
Creditors 15,000
Wages 20,000
Salaries
5,250
Carriage & Freight 3,000
Rent & Rates 3,000
Other expenses 750
Cash in hand 875
Cash at Bank 3,625
Stock on 31-12-2004 1,06,500
The H.O sent goods worth Rs.18,750 to the branch on 30-12-2004. But the branch received
the same on 7-1-2005. The branch remitted to the head office Rs.11,250 on 27-12-2004,
but the money was received by the head office on 2-1-2005. The branch a/c in the books of
H.O showed a Dr. balance of Rs.1,35,000 on 31-12-2004.
Branch Plant & Machinery A/c appeared in the H.O books at Rs.60,000 on 31-12-2004,
which was to be depreciated by 5%. Give the necessary Journal entries to incorporate the
branch Trial balance in the H.O books and also prepare Bangalore branch A/c.
[Ans- G/P=37,500; N/P=25,500]
Section A – 2 Marks
1. Refer 2.5
2. Refer 2.6
3. Refer 2.5
4. Ans-1,00,000
5. Refer 2.5
6. Refer 2.3
7. Refer 2.7
8. a)True; b) False
Student Practice Problems: (4 marks)

1. Supply of Goods at Cost Price Method:
Nilgiri Ltd., Chennai, opened a new branch at Bengaluru. From the following figures
relating to the branch, write necessary entries in the books of the company and prepare
Branch Account to ascertain the profit earned there.
67
Goods sent to Branch 5,000
Cash sent to Branch 800
Cash sales at Branch 7,000
The Branch was advised to sell goods only for cash. There was no stock of unsold goods at
the end with the Branch.
[Ans: Branch Profit: ₹ 1,200]
2. Mantons Ltd., Bengaluru, opened a Branch at Hubli on 1st May, 2014. From the following
particulars, prepare Branch Account and find out the profit or loss made by the Branch for
the period ending 30th April, 2015.
Goods sent to Branch 16,000
Cash remittance to Branch for:
Salaries 2,000
Office Rent 480
Other Expenses 320 2,800
Cash sales effected by the Branch (Remitted to H.O. immediately) 22,000
Stock unsold goods on 30.4.2015 2,000
[Ans: Profit: ₹ 5,200]
3. From the following particulars relating to Surpur Branch for the year ending 31.3.2015.
prepare Branch Account, Goods sent to Branch Account and Branch Debtors Account in the
books of Head Office:
Stock on 1.4.2014 8,900
Branch debtors on 1.4.2014 4,700
Branch petty cash on 1.4.2014 20
Cash sales 15,800
Credit sales 40,400
Cash sent to branch for expenses:
Rent 2,000
Salaries 6,000
Petty cash 1,000
Stock at branch on 31.3.2015 5,400
Petty cash at branch on 31.32015 30
Goods returned by branch 800
[Ans: Branch Profit: ₹ 16,110, Closing debtors: ₹ 7,200]
4. From the following particulars relating to patna for the year ending 31st March, 2015.
Prepare accounts in the Head Office Books:
Stock at Branch on 1st April, 2015 17,800

Branch Debtors on 1st April, 2015 9,400
Petty Cash at Branch on 1st April, 2015 40
Goods sent to Branch during the year 56,800
Cash Sales during the year 31,600
68
Credit Sales during the year 80,800
Cash received from Debtors 75,800
Goods returned by the Branch 1,600
Cash sent to branch for expenses:
Rent 4,000
Salaries 12,000
Petty cash 2,000 18,000
Stock at Branch on 31st March, 2015 10,800
Petty Cash at Branch on 31st March, 2015 60
[Ans: Closing Debtors: ₹ 14,400 and Profit ₹ 32,220]
Student Practice Problems: (10 Marks)

1. From the following information, prepare the Branch Account in the Books of the Head
Office and the daily collection of the branch are remitted to Head Office:
Stock 31.3.2015 1,25,000
Stock on 1.4.2014 75,000
Debtors on 1.4.2014 50,000
Debtors on 31.3.2015 70,000
Goods sent to Branch 3,00,000
Cash Sales remitted to Head Office 1,00,000
Goods collected from Debtors and remitted to H.O 1,40,000
Cash returned from branch 30,000
Cash sent to branch for : Salary 8,000
Rent 2,000 10,000
Petty cash on 1.4.2014 100
Discount allowed to customers 5,000
[Ans: Branch profit: ₹ 30,000, Credit sales: ₹ 1,65,000]
2. The Union Stores Ltd., invoiced goods to its Surat Branch at cost. The branch maintained
its sales ledger and remits all cash received daily to the Head Office. The branch expenses
are being paid by the Head Office. The branch expenses are being paid by the Head Office
by cheques.
From the following details relating to the branch show the branch account in the books of
the Head Office.
Debtors (1.4.2014) 31,100
Debtors (31.3.2015) 16,550
Stock (1.4.2014) 7,500
Stock (31.3.2015) 6,950
Goods received from H.O. 25,400
Goods received to H.O. 350
Cash sales and Credit sales 46,770
Allowance to Debtors 60
Rent, rates, etc. 900
Wages and Salaries 3,000
69
General trade expenses 650
Returns from customers 290
Discount allowed to customers 1,200
Bad debts 300
[Ans: Net profit: ₹ 14,480, Cash sales: ₹ 16,580(i.e., credit sales: 30,190]
3. From the following information ascertain the credit sales to the branch customers and
prepare Branch Account in the books of the Head Office for the year ending 31.3.2015.
All the expenses are paid by the Head Office and daily collections of the Branch are
remitted to the Head Office.
Stock on 1.4.2014 7,5000
Stock on 31.3.2015 1,25,00
Debtors on 31.3.2015 70,000
Debtors on 1.4.2014 50,000
Goods invoice to Branch 3,50,000
Cash Sales remitted to H.O. 1,50,000
Cash collected from Debtors 1,40,000
Goods returned to H.O. 25,000
Salary 8,000
Rent 2,000
The Head Office charges goods to the Branch at 25% above cost. 4,050
[Ans: Profit: ₹ 80,050]
4. BK Ltd., Belagavi invoiced goods to its Gadag Branch at cost plus 25%. The branch is
allowed to effect both the cash and credit sales. Branch expenses are paid directly from
Head Office and all the cash received being remitted to Head Office Account by the branch
regularly. The following are the Transactions for the year ending 31.3.2015.
Goods sent to branch at invoice price 40,000
Returns to Head Office at invoice price 800
Credit sales for the year 30,000
Cash sales for the year 18,700
Debtors on 1.4.2014 5,200
Cash received on ledger accounts 28,500
Discount allowed to customers 300
Bad Debts written off 500
Returns from customers 700
Rent and rates 600
Sundry expenses 300
Prepare Gadag Branch Account, Branch Debtors Account for the year ending 31.3.2015.
[Ans: Closing debtors ₹ 5,200, General P/L ₹ 12,140]
70
5. Bharat Traders opened a branch at Ballari on 1.4.2014. goods are invoiced to the branch
at cost plus 20% which is the selling price. Following are the branch transactions during
the year:
Goods supplied to the branch 45,000
Sales at branch:
Cash sales 13,000
Credit sales 25,000
Cash sent to branch for expenses 5,000
Closing stock at branch 8,400
Prepare the branch account in the books of Head Office.
[Ans: Branch Profit: ₹ 4,600]
6. From the following information, ascertain sales to the customers of the Branch on credit
and prepare the Branch Account in the books of the Head Office for the year ending 31 st
March 2015. All expenses are paid by the H.O.
₹ ₹
Stock on 31.3.2015 90,000Goods invoiced to Branch 3,60,000
Stock on 1.4.2014 60,000Rent 3,000
Debtors on 1.4.2014 40,000Salary 6,000
Debtors on 31.3.2015 60,000Goods returned to Head Office 6,000
Cash sales remitted to H.O 1,50,000Petty cash on 1.4.2014 100
Cash collected from debtors and 1,60,000Petty cash on 31.3.2015 50
remitted to Head Office. Sales of Gunny bags 200
Goods are invoiced by Head Office at 20 per cent above cost.
[Ans: Profit: ₹ 51,150]
7. The Deccan Traders, have their branch in Mumbai to which goods are supplied at selling
price being 30% above the cost. The Mumbai Branch keeps its own Debtors ‘Ledger and
remits all cash collections to the Head Office. The Branch expenses are paid by the Head
Office.
From the following details, find out the amount of credit sales and prepare the Branch
Account in the books of the Head Office.
₹ ₹
Stock on 1.4.2014 52,000Goods invoiced to Branch 3,90,000
Stock on 31.3.2015 65,000Rent, rates, etc. 12,000
Sundry Debtors on 1.4.2014 35,000Salaries 24,000
Sundry Debtors on 31.3.2015 48,000Sundry Expenses 6,000
Cash remittance to Head Office for 2,21,000Petty cash on 31.3.2015 50
cash sales Petty cash on 31.3.2015 100
Cash remittance to H.O. for cash 1,43,000Goods returned to H.O. 2,600
collection from Debtors Misc. Income 100
[Ans: Profit: ₹ 47,150];
71
Module 3
Departmental Accounts
Structure:
3.1 Introduction & Meaning of Departmental Accounts
3.2 Objectives of departmental accounts
3.3 Advantages of Departmental accounts
3.4 Difference between Branches and Departments
3.5 Accounting treatment for a Departmental organization
3.6 Steps involved in Preparation of Departmental Final accounts
3.7 Basis of Apportionment
3.8 Special adjustments which affect the Balance sheet
3.9 Illustrations
3.10 Summary
3.11 Self-Assessment Questions
3.12 Terminal Questions
Learning objectives:
 To introduce the students to the concept of departmental accounts.

 To understand how the basis of allocation of expenses are done in a department.
 To learn the preparation of final accounts in a department.
3.1 Introduction & Meaning of Departmental Accounts:
A big concern dealing in different kinds of goods or services is, usually divided into a
number of departments. A concern having a number of departments, each specializing in
a particular line of activity, is called departmental organization or departmental
undertaking. Departmental stores selling different items of goods, insurance companies
carrying on different types of insurance business, etc. are examples of departmental
undertakings.
Meaning of Departmental accounts:
A departmental undertaking, carrying on different lines of activities with a number of

departments, is naturally interested in knowing not only the trading results (i.e. the profit)
of the whole organization, but also the trading result of each of the various departments
individually.
To attain this objective, a departmental organization keeps its books of accounts in such a
manner that not only the profit of the whole business is indicated but also the profit for
each of the various departments is indicated individually. Such accounts are called
departmental accounts.
3.2 Objectives of departmental accounts:
72
a. To get an analytical idea about the affairs of each department.
b. To know the trading result of each of the various departments individually.
c. To ascertain the stock turnover ratio of each department.
d. To compare the trading results of one department with those of other departments.
e. To reward the departmental managers on the basis of the trading results shown by the
respective departments.
f. To evaluate the performance of each department on the basis of its trading results.
g. To help the management to formulate the right business policies for the various
departments on the basis of their relative efficiency or inefficiency.
h. To facilitate managerial control over the working of each department.
3.3 Advantages of Departmental accounts:
a) Ascertainment of profit: Gross profit and net profit can be ascertained for each
department separately on a reliable basis.
b) Comparative performance: The results of different departments can be compared in

terms of profit, expenses, inventories, percentage of growth, and return on investment etc.
c) Appraisal of personnel: Individuals responsible for improved results or decline in

performance can be identified. This is useful in implementing incentive system.
d) Remedial services: Areas of poor performance can be identified for implementing

remedial measures. If situation arises, decisions to discontinue some products or closing a
department may be taken accurately.
e) Expansion and diversification: Decisions to expand and diversify to profitable line

becomes easier.
f) Policy formulation: Management policies towards inventories, extending credit,

additional investment etc. are facilitated.
3.4 Difference between Branches and Departments:
Sl No Basis Departments Branches

1. Location All the departments are located Branches are located in different
within single premises. geographical areas, physically
separated from the head office
and one another.
2. Growth Departments are confined to Branches cater to a wider market
local business and can grow and can expand and grow
vertically within the same roof. geographically.
3. Accounting All the accounting records are Branches keep records of their
centralized and maintained operations separately. The head
within the same premises for all office consolidates the
73
departments. Accounts of all the branches.
4 International Departments are confined to a Branches can be started
operations single place unless similar anywhere in the world. So, there
organizations are opened can be local foreign branches.
elsewhere.
3.5 Accounting treatment for a Departmental organization:
Maintenance of accounts for each department individually can be done in two different
ways; viz.,
a) Singular Method: When separate books of accounts are maintained for each
department, the system is called singular method
b) Columnar Method: When common books of accounts are maintained for all
departments, showing details of each department in a columnar form is called columnar
method.
3.6 Steps involved in Preparation of Departmental Final accounts:
Figure 1: Showing the Steps involved in Preparation of Departmental accounts:
Step 1: Preparation of Departmental Trading Account:

The following details are required for the preparation of Departmental trading account.
They are:
a) Opening stock of each department;
b) Purchases and Purchase returns of each department;
74
c) Sales and Sales returns of each department;
d) Direct expenses like wages, carriage inwards, power, water, brokerage and commission
on purchases.
e) Closing stock of each department.
The details of opening stock, purchases, purchase returns, sales, sales returns and closing
stock of each department would be available from accounting records. However, the details
regarding direct expenses may be available individually for each department or the total
amount of expenditure incurred without individual break-up may be available. Where
the details of department-wise break-up of direct expenses are not available, they must be
apportioned for each department on a suitable basis.
On preparation of Departmental Trading Account, the gross profit or gross loss of each
department can be ascertained. The gross profit or gross loss of each departmental profit
and loss account.
Step 2: Preparation of Departmental Profit and loss account:
The profit and loss accounts are prepared in columnar form to find the net profit of each
department. The indirect expenses like rent, rates and taxes, depreciation, salaries etc.
incurred are to be apportioned equally between the departments.
Step 3: Preparation of General Profit and loss account:
A general profit and loss account is prepared to find out the overall profit or loss of the
firm. The expenses which have no connection with the departments or those who have no
reasonable basis for apportionment is shown in the general profit and loss account. Any
forced divisions of such expenses will discomfort the results of the departments
unnecessarily. For example: Debentures interest, Income-tax, Dividends paid, Directors’
fees, bank charges, legal expenses.
Step 4: Preparation of Profit and loss Appropriation Account:
The preparation of profit and loss appropriation account is prepared if the organization is a
corporate entity. The consolidated profit or loss arrived at is transferred to the balance
sheet.
Step 5: Preparation of Consolidated Balance sheet:
The last step in preparation of departmental final accounts is the preparation of a

consolidated balance sheet.
In order to prepare the consolidated balance sheet,

i) Assets of the undertaking which is available in accounting records.
ii) Liabilities of the undertaking which would be available in the accounting records.
iii) Capital or capitals
75
However while showing this in balance sheet it is advisable to show the department wise
break up if available.
3.7 Basis of Apportionment:
Sl. No Expenses Basis of Apportionment

Direct Expenses:
Carriage inwards
Freight charges Ratio of Net Purchases*1
Import Duty, Octroi etc. on purchases
1 Power Charges Ratio of meter reading of each department
or ratio of floor space occupied by each
department
Water Charges Ratio of meter reading of each department.
Indirect Expenses: Ratio of net sales*2

Discount allowed No. of Workers on each department.
Sales Commission
Sales Tax
Carriage outwards
Salesman’s salary and commission
After Sales services
Advertisement expenses
Bad Debts
Reserve for bad debts
Rent and Rates
2 Recreation /Labor welfare/ Canteen
expenses
Repairs and insurance of building Ratio of floor space occupied by each
Air conditioner expenses department
Lighting and electricity Ratio of number of light points/ Ratio of
floor space occupied by each department
Depreciation on machinery Ratio of value of machinery/ Ratio of floor
Repairs of machinery space occupied by each department
Insurance Premium Ratio of value of subject matter
Workmen’s Compensation insurance Ratio of number of workers in each
Canteen expenses department
Discount Received Ratio of net purchases of each department
3 Reserve for discount on creditors
Commission received on sales Ratio on net sales
76
Note:
1) Net Purchases= [Gross purchases-Purchase Returns]
2) Net Sales= [Gross Sales-Sales Returns]
3.8 Special adjustments which affect the Balance sheet:
i) Inter-departmental transfers
ii) Stock Reserve
i) Inter-departmental transfers:
Goods may be transferred from one department to another. Similarly, services of one
department may be used by another department. In such cases, the transfer may be made
at cost price or at invoice price/selling price.
a) Inter-Departmental transfer at cost price:

For the department which receives the transfer, it is like a purchase or expenditure. The
trading account of the receiving department is debited with the value of transfer.
For the department which makes the transfer, it is like a sale or an income. The trading
account of transferring department must be credited with the amount of transfer. No
further adjustment has to be done in relation to transfer.
b) Inter-Departmental transfer at invoice price/selling price/loaded price:

When goods or services are transferred at a price above cost, the receiving department
must be debited with the amount of transfer in the departmental trading account with the
same amount.
In case of services rendered no further adjustment is needed. If goods are transferred and
all the goods transferred are sold, then also no adjustment is required.
ii) Stock Reserve:

If a part of the goods transferred is still in the closing stock of the receiving department at
the time of finalization of accounts, provision must be made for unrealised profit in the
stock of the receiving department.
3.9 Illustrations:
Illustration 1:
A firm has two departments X and Y. During the trading period ending 31/3/2013 the
requisite figures were:
77
Particulars Department X Department Y Total
Opening Stock 6,500 5,500 12,000
Purchases 4 2,000 52,000 94,000
Sales 80,000 93,000 1,73,000
Purchase Returns 2,000 2,000 4,000
Closing Stock 6,000 4,000 10,000
Sales Returns 2,000 2,000 4,000
Wages 5,000 5,000 10,000
Carriage Inwards - - 4,500
Discount received - - 1,800
Carriage Outwards - - 1,300
Salaries 12,000 13,000 25,000
General Salaries - - 13,000
Rent,Rates,Taxes - - 10,000
Discount allowed - - 1,300
Sundry Expenses - 3,900
Prepare Trading and Profit and loss account assuming:

1) Rent, rates and taxes are pertaining to business premises which are occupied by the two
departments equally.
2) Provide depreciation at 10% is to be charged on Building costing Rs.1, 20,000.
Solution:
Trading and Profit and Loss A/c for the year ended 31/3/2013
Dr
Cr
Particulars X(Rs) Y(Rs) Total Particulars X(Rs) Y(Rs) Total
To Opening Stock 6,500 5,500 12,000 By Sales (WN 1) By 78,000 91,000 1,69,000
To purchases (WN1) 40,000 50,000 90,000 Closing Stock 6,000 4,000 10,000
To Carriage Inwards 2,000 2,500 4,500
To Wages 5,000 5,000 10,000
To Gross Profit (Bal 30,500 32,000 62,500
Fig)
84,000 95,000 1,79,000 84,000 95,000 1,79,000
To Salaries 10,000 13,000 23,000 By Gross Profit c/d 30,500 32,000 62,500
To General Salaries 6,000 7,000 13,000 By Discount
To Carriage Outwards 600 700 1,300 Received 1,600 2,000 3,600
To Rent, Rates and
taxes 5000 5000 10,000
To Discount allowed 600 700 1,300
To Depreciation on 8,000 4,000 12,000
Building
To Sundry Expenses 1,800 2,100 3,900
To Net Profit (Bal Fig.) 100 1,500 1,600
32,100 34,000 66,100 32,100 34,000 66,100
78
Working Notes:
1) Calculation of Net Purchases and Net Sales
Particulars X Y
Purchases 42,000 52,000
Less: Purchase Returns 2,000 2,000
Net Purchases 40,000 50,000
Sales 80,000 93,000
Less: Sales Returns 2,000 2,000
Net Sales 78,000 91,000
2) Calculation of Apportionment of Direct and Indirect expenses and indirect income

Particulars X Y
Carriage Inwards (Ratio of Net Purchases)(4:5) 4 5
4,500   2,000 4,500   2,500
9 9
General Salaries(Ratio of Net Sales)(6:7) 6 7
13,000   6,000 13,000   7,000
13 13
Carriage Outwards(Ratio of Net Sales)(6:7) 6 7
1,300   600 1,300   700
13 13
Rent, Rates and Taxes 10,000 10,000
 5,000  5,000
2 2
Discount allowed(Ratio of Net Sales) 6 7
1,300   600 1,300   700
13 13
Discount Received(Ratio of Net Purchases) 4 5
3,600   1,600 3,600   2,000
9 9
Depreciation on Building (2:1) 1, 20, 000  10 %  12, 000 2 1
12,000   8,000 12,000   4,000
3 3
Sundry Expenses(Ratio of Net Sales)(6:7) 6 7
3,900   1,800 3,900   2,100
13 13
Illustration 2: (Inter departmental transfers at cost)
A firm has two departments P and Q. From the following figures, prepare the
Departmental Trading and Profit and Loss Account and Balance Sheet for the year ended
31st March 2012:
Debits Rs Credits Rs
Opening Stock: Transfer to P 5,000
P 15,000 Sales: P 1,00,000
Q 20,000 Q 60,000
Carriage: Inwards 3,000 Sundry Creditors 15,000
5,000 Capital 30,000
Outwards 10,000 Loan 30,000
Advertising 6,000
Salaries: P 7,000
Q 12,000
General Salaries 9,000
79
Rent and rates 900
Lighting 15,000
Fixtures 20,000
Sundry Debtors 1,600
Bad Debts 60,000
Purchases: P 40,000
Q 6,500
Bank Balance 4,000
Bank Interest 5,000
Transfer from Y
2,40,000 2,40,000
Area occupied by the two departments is in the ratio of 2:1. General salaries are to be
divided in the ratio of 5:3. The closing stocks were: P Rs.14,000 and Q Rs.15,000.
Depreciation of fixtures is 10% to be allocated in the ratio of space occupied. All other
expenses are apportioned in the sales ratio.
Solution:
Departmental Trading and Profit and Loss A/c for the year ended 31 March 2012
Dr.
Cr.
Particulars P Q Total Particulars P Q Total
To Op. Stock 15,000 20,000 35,000 By Sales 1,00,000 60,000 1,60,000
To Purchases A/c 60,000 40,000 1,00,000 By Closing Stock 14,000 15,000 29,000
To transfer 5,000 ------- 5,000 By Transfer ------ 5,000 5,000
To Carriage inwards 1,800 1,200 3,000
(Note 1)
To gross profit c/d 32,200 18,800 51,000
1,14,000 80,000 1,94,000 1,14,000 80,000 1,94,000
To Carriage Outwards By gross profit b/d 32,200 18,800 51,000
(Note 2) By net loss 1,775 4,225 6,000
To advertising (5:3) 3,125 1,875 5,000
To Salaries 6,250 3,750 10,000
To General Salaries 6,000 7,000 13,000
(5:3)
To rent and rates (2:1) 7,500 4,500 12,000
To Lighting (2:1)
To Bad Debts (5:3) 6,000 3,000 9,000
To Bank Interest (5:3) 600 300 900
To Depreciation (2:1) 1,000 600 1,600
2,500 1,500 4,000
1,000 500 1,500
33,975 23,025 57,000 33,975 23,025 57,000

Note:
80
1. Carriage inwards to be apportioned in ratio of purchases i.e. 3:2 (60,000 : 40,000)
2. Carriage outwards to be apportioned in ratio of sales i.e. 5:3 (1,00,000 : 60,000)
Balance sheet as at 31.03.2012

Liabilities Rs. Rs Assets Rs. Rs.
Capital 30,000 Fixtures 15,000
Less: Net loss 6000 24,000 Less: Depreciation 1,500 13,500
Sundry creditors 15,000 Sundry Debtors 20,000
Loan 30,000 Bank Balance 6,500
Closing Stock:
P 14,000
Q 15,000
69,000 69,000
Illustration 3: (Problem on preparation of Trading and Profit and Loss A/c, General
Profit and Loss A/c and Balance Sheet.)
From the following particulars, prepare a Departmental trading and Loss Account and a
Balance Sheet as at 31st March 2011.
Rs.
Capital account 30,000
Sales:
Department A 70,000
Department B 30,000
Sundry Creditors 13,500
Stock on 1.4.2010:
Department A 3,400
Department B 1,100
General reserve 750
Furniture and Fittings 1,080
Rent, Rates and Insurance 1,800
Cash in hand 2,500
Cash at bank 7,050
Marine insurance 2,400
Purchases, Duty etc.:
Department A 43,000
Department B 25,000
Office Salaries 17,220
Printing and Stationery 2,700
Postage and Telegrams 600
Exchange and Discount (Dr.) 1,500
Investments 6,900
81
Apportion the expenses in proportion to the turnover of each department
Closing Stock:
Department A: 4,000
Department B: 1,680
Provide Depreciation on Furniture 10%. Provision for Doubtful debts Rs.300 and 2% on
debtors for discount Increase General Reserve by Rs.3,000. Allocate provision for bad
debts also in the ratio of 7:3.
Solution:
Departmental Trading and Profit and Loss Account for the year ended 31.03.2011
Particulars A B Total Particulars A B Total
To Op. Stock 3,400 1,100 4,500 By Sales 70,000 30,000 1,00,000
To Purchases A/c 43,000 25,000 68,000 By Closing Stock 4,000 1,680 5,680
To Marine Insurance 1,680 720 2,400
(Sales Ratio i.e. 7:3)
To gross profit c/d 25,920 4,860 30,780
74,000 31,680 1,05,680 74,000 31,680 1,05,680
To Rent , rates and By gross profit b/d 25,920 4,860 30,780
Insurance 1,260 540 1,800 By Net loss c/d ----- 2,574 2,574
(Sales Ratio i.e. 7:3)
To Printing and
Stationery 1,890 810 2,700
To Postage and
Telegrams 420 180 600
To exchange and
discount 1,050 450 1,500
To Depreciation on 76 32 108
furniture (WN 1)
To provision for
doubtful debts (7:3) 210 90 300
To reserve for
discount and transfers 388 166 554
(WN 2)
To office salaries 12054 5166 17220
To Net Profit c/d 8572 ------ 8572
25,920 7,434 33,354 25,920 7,434 33,354
General Profit and Loss Account

To Net Loss of B b/d 2,574 By Net Profit of A b/d 8,572
To Transfer to General Reserve 3,000
To balance b/d 2,998
8,572 8,572
82
Balance Sheet as at 31st March 2011
Liabilities Rs. Rs Assets Rs. Rs.
Capital 30,000 Sundry Debtors 28,000
General reserve 750 Less: Reserve for
Add: Net loss 3,000 3,750 Doubtful Debtors 300
Sundry creditors 13,500 27,700
Loan 2,998 Less: Reserve for
Debtors 554 27,146
Furniture and Fittings
Less: Depreciation 1,080
108 972
Cash 2,500
Bank 7,050
Investment 6,900
Closing Stock:
A 4,000
B 1,680 5,680
50,248 50,248
Working Note:
1. Calculation of depreciation:
10
1,080 
100 =108.
This was apportioned between two departments in proportion to the turnover i.e. (7:3)
7
108   76
Department A 10
3
108   32
Department B 10
2. Calculation of reserve for debtors:

Debtors 28,000
Less: Reserve for Doubtful Debts 300
27,700
 Reserve for Discount and transfers = 27,000 × 2% = 554
This is proportioned in the ratio of 7:3

7 3
554   388 554   166
Department A: 10 Department B: 10
3.10 Summary:
83
 A departmental undertaking, carrying on different lines of activities with a number of
departments, is naturally interested in knowing not only the trading results (i.e. the
profit) of the whole organization, but also the trading result of each of the various
departments individually
 Accounting treatment for a Departmental organization: Maintenance of accounts for
each department individually can be done in two different ways; viz.,
 Singular Method: When separate books of accounts are maintained for each
department ,the system is called singular method
 Columnar Method: When common books of accounts are maintained for all
departments, showing details of each department in a columnar form is called
columnar method.
 Steps involved in Preparation of Departmental Final accounts:
 Step 1: Preparation of Departmental Trading Account
 Step 2: Preparation of Departmental Profit and loss account
 Step 3: Preparation of General Profit and loss account
 Step 4: Preparation of Profit and loss Appropriation Account
 Step 5: Preparation of Consolidated Balance sheet
 Inter-departmental transfers: Goods may be transferred from one department to
another. Similarly, services of one department may be used by another department. In
such cases, the transfer may be made at cost price or at invoice price/selling price.
 Inter-Departmental transfer at cost price: For the department which receives the
transfer, it is like a purchase or expenditure. The trading account of the receiving
department is debited with the value of transfer.
 Inter-Departmental transfer at invoice price/selling price/loaded price: When
goods or services are transferred at a price above cost, the receiving department must
be debited with the amount of transfer in the departmental trading account with the
same amount.
 Stock Reserve: If a part of the goods transferred is still in the closing stock of the
receiving department at the time of finalization of accounts, provision must be made for
unrealized profit in the stock of the receiving department.
3.11 Self-Assessment Questions:
Self-assessment Questions:
1. Repairs to Machinery is apportioned according to __________
2. Stock reserve is the difference between ____________.
3. Accounting records are _____________ maintained in all departments.
4. Under departmental accounts, carriage expenses should be divided in the ratio of
______________.
5. A business is divided into various sections, each section is called ____________.
6. In departmental account loading is calculated on _______________.
7. If the rate of gross profit of the different department is same, the cost price4 of these
departments will in the ratio of their respective sales prices. (True/False)
8. Stock reserve for unrealized profit and interdepartmental transfer of goods is charged
to general Profit and loss A/c. (True/False)
84
Answers for Self-Assessment Questions:
1. Value of machinery
2. Cost price and profit
3. Centrally
4. Purchase Ratio
5. Department
6. Opening stock and closing stock
7. True
8. True
3.12 Terminal Questions:
Section A (2 Marks Questions):
1. Give the meaning of Departmental account.

2. Mention two different treatments of departmental accounts.
3. What is meant by inter departmental transfers?
4. Give the meaning of stock reserve:
5. In the departmental accounts what are the bases for distributing the following expenses:
a. Rent paid
b. Carriage inwards
6. State under which bases of apportionment of the following expenses in case of
Departmental Accounting.
a. Depreciation of Machinery
b. Advertising Expenses.
Section B (4 Marks Questions):
1. What are the objectives of departmental accounts?

2. Write down the advantages of departmental accounts
3. Give the differences between Branches and Departments
4. Briefly explain the steps to be followed in preparation of departmental final accounts.
Section C (10 marks Practical Problems):
1. The following Trial Balance for the year ended 31st March 2013 was extracted from the
books of Goutham Traders.
Particulars Dr. Cr.
Capital --------- 75,000
Drawings 15,000 -------
Stock on 1.4.2012
TV 67,500 -------
Mobile Phones 31,500 -------
Sales:
TV ------- 4,41,000
Mobile Phones ------- 2,19,000
85
Purchases:
TV 3,37,500 --------
Mobile Phones 1,72,500 --------
Salaries 18,900
Advertisement 13,350
Rent, Rates and Taxes 4,800
Commission 15,900
General Expenses 7,500
Furniture 18,600
4% Govt Securities 15,000
Sundry Creditors ------- 13,200
Interest ------- 600
Provision for bad debts ------- 1,200
Cash and Bank Balance 6,750 -------
Prepare the Departmental Trading and Profit and Loss Account for the year ended 31st
March 2013 and a Balance Sheet as on that date after taking into account the following.
a) TV Stock as on 31st March 2013 was:
TV Rs.45, 000
Mobile Phones Rs.36, 000
b) An amount of Rs.1,800 from debtors has to be written off as bad and the
provision for doubtful debts has to be increased thereafter to 10% of the debtors.
c) The following expenses are outstanding as on 31st March 2012 – advertisement
Rs.1,950; salaries Rs.1, 800 and commission Rs.2,550.
d) Provide 10% depreciation on furniture.
e) Revenue items to be allocated in the ratio of 2:1 between T.V and Mobiles Phones.
Ignore fraction of a rupee in calculations.
[Ans: Gross Profit: TV – 81,000; Mobile Phones – 51,000
Net Profit: TV – 33,700; Mobile Phones – 27,350
Balance Sheet Total – 1,40,550]
2. From the following particulars, prepare the Departmental trading and profit and loss
account:
Departments
Particulars
P (Rs.) Q (Rs.) R (Rs.)
Stock (1.4.2010) 41,280 33,975 93,721
Stock (31.3.2011) 32,840 43,828 81,626
Purchases 2,10,342 75,296 1,39,109
Purchases Returns 14,382 5,629 1,823
Sales 4,00,173 1,54,085 3,62,189
Sales Returns Nil 3,259 11,217
Wages 72,823 30,084 24,613
Goods were transferred at cost price as follows:
From P department to Q department Rs.389 and to R department Rs.6, 679
From Q department to P department Rs.5, 315
86
From R department to P department Rs.4,271 and to R department Rs.5,801.
The following expenses should be distributed on suitable bases.

Office expenses Rs.63,395; Bad debts Rs.19,823; Advertising Rs.7,293 (Basis of sales) and
income Tax Rs.11,028 (Basis of profit before deducting Income Tax); Stationery Rs.921;
Postage Rs.663; General Expenses Rs.39,627; Insurance Rs.1,785 and Depreciation
Rs.5,460 should be distributed to all the departments equally.
Rent Rs.45, 437 is to be distributed on the basis of space occupied, i.e. P department 4; Q
Department 2; R department 3 and other space 2. The rent of other space should be
distributed on the departments equally.
Show the working relating to inter – departmental transfers of goods.
[Ans: Gross Profit: Department P – 1, 20,432

Department Q – 60,053
Department R – 1, 80,371
Net Profit: Department P – 44,776
Department Q – 17,800
Department R – 1, 13,876]
3. From the particulars prepare Departmental Trading and Profit and Loss Account and
Balance Sheet in the books of Sowjanya Traders.
Department
Particulars Department A
B
Stock on 1.4.2010 17,400 14,700
Purchases 35,000 30,000
Sales 60,000 40,000
Wages 8,200 2,700
Rent, Taxes and Insurance 9,390
Sundry Expenses 3,600
Salaries 3,000
Lighting and Heating 2,100
Advertising 3,680
Carriage Inwards 2,340
Furniture 3,000
Plant and Machinery 21,000
Sundry Creditors 30,650
Capital 47,660
Drawings 4,500
Cash 10,070
Additional Information:
a) Internal Transfer of goods from Department A to Department B at cost price Rs.420.
87
b) Rent, taxes and insurance; sundry expenses; lighting and heating; salaries and carriage
inwards to be distributed in the ratio of 2/3 and 1/3 to A and B.
c) Advertising to be apportioned equally.
d) Discounts allowed and received to be apportioned as per sales and purchases (ignoring
transfers).
e) Depreciation at 10% p.a. on furniture and plant and machinery to charged ¾ to A
Department and ¼ to B department.
f) Services rendered by B Department to A Department included in wages of B Department
Rs.500
g) Stock on 31.3.2011 were
Department A Rs.16,740
Department B Rs.12,050
[Ans: Gross Profit: Department A – 14,500

Department B – 3,950
Net Loss: Department A – 2,182
Department B – 5,108
Balance Sheet Total – 66,520]
4. Following figures are extracted from the books of Necessary Stores Ltd.
Departments
Particular
X Y Z
Purchase 2,00,000 3,00,000 8,00,000
Return outwards 20,000 10,000 30,000
Sales 6,10,000 12,20,000 18,30,000
Return in awards 10,000 20,000 30,000
Wages 40,000 60,000 80,000
Stock on 1.04.2010 50,000 70,000 10,000
Stock on 31.03.2011 80,000 50,000 40,000
a) Goods transferred from X Dept to Y Dept 10,000
to Z Dept 20,000
b) Goods transferred from Y Dept to X Dept 5,000
to Z Dept 10,000
c) Goods transferred from Z Dept to X Dept 7,000
to Y Dept 9,000
Following Expenses are to be allocated equally:

Telephone charges Rs.3,000; Insurance Charges Rs.6,000; Office Expenses Rs.9,000; Rent
Rs.24,000 to be divided in proportion of space i.e. X – ¼, Y – ¼ and Z – ½
Other Expenses were discount allowed Rs.18,000; Legal Expenses Rs.2,000; Bad Debts
Account Rs.15,000; Income Tax Rs.38,000; Interest on Capital Rs.5,000; Interest on
Debentures Rs.16,000; Director’s fee Rs.3,000; General Manager’s Salary Rs.10,000; Audit
fee Rs.12,000; Bank Charges Rs.9,000
Prepare Departmental Trading & Profit and Loss A/c

88
[Ans: Gross Profit – Dept X - Rs.4,28,000;
Dept Y – Rs.8,26,000;
Dept Z – Rs. 9,66,000
Net Profit – Dept X – Rs. 4,10,500
Dept Y – Rs.8,03,000
Dept Z – Rs.9,31,500
General P & L A/c Balance to be transferred to Capital A/c – Rs.20,50,000]
5. From the following information prepare the departmental trading and profit and loss
account for the year ending 31.03.20013
Departments
Particulars
A B C
Purchases 1,00,000 1,50,000 4,00,000
Returns outwards 10,000 5,000 15,000
Sales 3,05,000 6,10,000 9,15,000
Returns inwards 5,000 10,000 15,000
Wages 20,000 30,000 40,000
Opening Stock 25,000 35,000 5,000
Closing Stock 40,000 25,000 20,000
(a) Inter Departmental transfers:
From A to B: Rs.5,000 and to C: Rs.10,000
From B to A: Rs.2,500 and to C: Rs.5,000
From C to A: Rs.3,500 and to B: Rs.4,500
(b) The following expenses are to be allocated equally:

Telephone Rs.1,500; Insurance Rs.3,000 and Salaries Rs.4,500
(c) Rent Rs.12,000 to be divided among the departments A, B and C in the ratio of 1:1:2.
(d) Other expenses:

Discount Rs.9,000; Bad debts Rs.6,000; Income Tax Rs.30,000 and Legal Charges Rs.10,000;
Income tax and legal expenses cannot conveniently be allocated.
[Ans: Gross Profit: Department A – 2,14,000

Department B – 4,13,000
Department C – 4,83,000
Net Profit: Department A – 2,05,500
Department B – 4,02,000
Department C – 4,66,500
Net Profit of General P & L A/c Rs.10,34,000]
Hint: Income tax and legal expenses are directly charged to general P & L A/c.
6. Mr. Suresh Requests you to prepare the columnar trading and profit and loss A/c. It is
not possible to ascertain the value of closing stock but the stores charges gross profit
uniformly at 40% and 30% to Radio department and Watch department respectively.
89
Radio Watch
Opening Stock 30,000 28,000
Sales 1,40,000 1,20,000
Purchases 90,000 72,000
Office Expenses 18,300 28,400
Selling Expenses 10,400 9,200
Provide stock reserve at 7% on the closing stock of each department.

[Ans: Gross Profit: RadioDepartment-56,000(40%of1,40,000)
Watch Department – 36,000 (30% of 1,20,000)
Net Profit: Radio Department – 24,780
Net Loss: Watch Department – 2,720
Closing Stock: Radio Department – 36,000
Watch Department – 16,000]
Hint: Stock reserve at 7% of stock, to be debited to P & L A/c.
account (in columnar form) for the year ending 30.09.1999:
Particulars Departments
X Y Z
Department Wise:
Stock on 1.10.1998 17,000 14,500 6,800
Stock on 30.9.1999 16,740 12,050 13,000
Purchases 35,000 30,000 25,000
Sales 60,000 50,000 40,000
Common for Departments:
Salaries 10,500
Rent 9,000
Discount Allowed 2,400
Discount earned 3,600
Managers’ Salary 15,000
Inter Departmental transfer of goods:

X to Y Rs.4,800; X to Z Rs.1,400 and Y to Z Rs.3,200
Cost of service rendered by department: X to Z Rs.1,600
Other Information:
i. Departments X and Y are on the first floor occupying equal area and department Z is on
the ground floor.
ii. Salaries are for ground floor 1/3 and for first floor 2/3
iii. Number of employees on the first floor: X:4 and Y:3
iv. The rent of department Z is Rs.400 per month.
[Ans: Gross Profit X Rs.26,740; Y Rs.12,350 and Z Rs.13,600.
Net Profit X Rs.17,680; Y Rs.2,650 and Net Loss Z Rs.940]
90
Student practice Problem- 4 Marks
1. Apportion the following expenses in an appropriate manner:

(1) Carriage inwards
(2) Power charges
(3) rent
(4) Commission on sales
(5) Canteen expenses
(6) Workmen’s compensation insurance
2. Mixed goods were purchased for Rs.1,00,000 and later they were assorted into three
categories X,Y,Z as follows:
X 1,000 – Selling price Rs.20 each
Y 2,000 – Selling price Rs.22.50 each
Z 2,400 – Selling price Rs.25 each
All categories yield the same rate of profit. Calculate the purchase price of each
category.
3. List the proper bases for apportionment of five common expenses.

a. Repairs to machines
b. Bad debts
c. Discount allowed
d. Managing director’s salary and commission
e. Income tax
4. With the help of the information given below, ascertain the purchases of each
department.
Dept. No of units purchased
X 400
Y 2,800 at a total cost of Rs.10, 200
Z 800
The units were sold by each dept. as:
X- Department at Rs.15 per unit
Y- Department at Rs.18 per unit and
Z- Department at Rs.6 per unit
The rate of gross profit is same in each case.
5. A firm has two departments A and B. during the trading period ending 31.3.2015
A B C
Rs Rs Rs
Opening stock 5,000 7,000 12,000
Purchases 42,000 52,000 94,000
sales 80,000 93,000 1,73,000
Purchase returns 2,000 2,000 4,000
Sales returns 2,000 2,000 4,000
91
Carriage in wards - - 4,500
Power - - 6,000
wages - - 11,000
Closing stock of dept. A 2,000 AND 9,000 and wages are allocated in the ratio of 5:6 and the
number of units consumed by Dept. A and Dept.B are in the ratio of 1:2. Prepare
departmental trading account in the columnar form.
6. Distribute the following expenses to the departments of a business on an appropriate

basis:
Particulars Rupees
Advertisement expenses 25,000
Rent 12,000
Electric lighting charges 7,000
Salaries paid 2,00,000
depreciation 9,000
Particulars Departments
A B C
Sales in Rs. 10,00,000 10,00,000 5,00,000
Floor area in 600 400 200
sq.mts
No of light points 10 15 10
No. of employees 9 6 5
Values of assets in 5,00,000 2,00,000 2,00,000
Rs.
7. From the following particulars of M/S Niharika enterprises, prepare a departmental

trading A/c.
Particulars Rupees
Stock on 1 January:
st
Dept.A 5,000
Dept.B 7,000
Purchases during the year:
Dept.A 60,000
Dept.B 50,000
sales during the year:
Dept.A 80,000
Dept.B 75,000
wages 31,000
power 7,750
Apportion the expenses in proportion to the turnover of each department
92
8. A firm has two departments A and B. During the trading period ending 31-3-2015.
Particulars Dept. A Dept. B Total
Opening stock 5,000 7,000 12,000

Purchases 42,000 52,000 94,000
Sales 80,000 93,000 1,73,000
Purchase 2,000 2,000 4,000
returns
Sales returns 2,000 2,000 4,000
Carriage - - 4,500
inwards
Power - - 6,000
Wages - - 11,000
Closing stock of 2,000 9,000 11,000
depts.
9. From the following particulars prepare the trading and profit and loss account for three
departments in columnar form showing the gross and net profits:
Particulars Dept.A Dept.B Dept.C
Opening stock 1,78,200 56,000 12,500

Closing stock 1,93,600 47,100 31,600
Sales 11,17,400 5,61,300 4,85,100
Wages 2,74,000 1,32,800 91,500
Purchases 4,04,100 1,53,700 1,25,600
salaries 94,500 57,200 41,600
Amt Amt
Management salaries 1,20,000 Rent and taxes 1,46,000
Insurance 21,000 General expenses 87,000
Postage and telegrams 11,000 Printing and stationery 26,000
depreciation 74,000 advertisement 45,000
Bad debts: A: 27,600 B: 14,300, C: 22,400
(Ans: Gross profit A:4,54,700 B:2,65,900 C:2,87,100

Net profit A: 67,600 B: 35,400 C: 1, 17,100)
93
Note: the common expenses are allocated in the given ratio of 5:3:2 (i.e,1/2,3/10 and 1/5)
Student practice Problem 10 Marks:
account for the year ending 31.3.2011.
Department
Particulars
A B
Opening Stock 11,800 14,200
Purchases 75,900 50,000
Sales 1,00,000 80,000
Purchase Returns 900 -----
Wages 9,000 8,000
Rent and rates 6,000
Salaries 11,600
Advertising 8,100
General Expenses 5,400
Insurance premium 600
The following additional information is also available:
1. The departments A and B have occupied space in the ratio of 2:1
2. The closing stock of department A was Rs.21,000 and B Rs.15,000
3. Salaries to be allocated equally between the departments A and B
[Ans: Gross profit: Department A – 23,700; Department B - 21,800

Net Profit: Department A – 4,450; Department B – 6,350]
2. From the following particulars prepare the departmental trading and profit and loss
account for the year ending 31.3.2011:
Trial Balance as at 31.03.2011

Name of the Accounts Dr. Cr.
Plant 40,700 ----
Purchases: Department R 19,500 ----
Department S 14,800 ----
Wages: Department R 3,800 ----
Department S 1,900 ----
Insurance 400 ----
Motor Vehicles 10,000 ----
Sundry Expenses 2,800 ----
Discount 500 ----
Sales: Department R ---- 55,000
Department S ---- 50,000
Bills Payable ---- 1,000
94
Sundry Creditors ---- 8,000
Opening Stock: Department R 8,000 ----
7,000 ----
Department S 400 ----
Vehicle Expenses 20,000 ----
Sundry Debtors 700 ----
Bad Debts 800 ----
Postage and Telegrams 2,000 ----
Carriage on sales 8,000 ----
Salaries 2,000 ----
Furniture 4,000 ----
Stationery ----- 60,000
Capital 6,700 ----
Cash in hand 20,000 ----
Land and Buildings
1,74,000 1,74,000
Apportion all the revenue expenses equally between both the departments. Depreciate
plant at 10% and furniture by 5%. Stock on 31.12.2000 was Department A: Rs.9, 000 and
Department B: Rs.7, 000.
[Ans: Gross Profit: Department R – 32,700
Department S– 33,300
Net Profit: Department R – 20,815
Department S – 21,415
Balance Sheet Total – 1, 11,230]
3. A business is carried out in three separate departments. Indirect expenses are to be

apportioned in the ratio of 3:2:1 to A, B and C respectively. From the following prepare the
columnar trading and profit and loss a/c of the three departments.
Dept A Dept B Dept C

Opening stock 1,800 500 100
Closing stock 2,000 500 300
Sales 11,000 5,600 4,900
Wages 2,700 1,300 900
Purchases 4,000 1,500 1,200
Salaries 900 600 400
Rent and taxes Rs.1, 200; insurance Rs.480; postage Rs.150;
Bad debts:
Dept A-Rs.270
Dept B-Rs.140
Dept C-Rs.220
Depreciation Rs.600 and Printing Rs.300
4. A super market carries on its business through five departments A, B, C, D, and E.

(a) The following information for the year 2014-15 is now made available to you:
95
Salaries
Rs.18, 000
Rent, rates and taxes
Rs.4, 500
Insurance
Rs.2, 700
Miscellaneous expenses
Rs.5, 400
All these expenses are chargeable to each department in proportion to the cost of
goods sold in the respective departments.
(b) The following balances as at 31 march 2015 were ascertained:
A B C D E
Opening stock 15,000 9,000 22,500 12,000 13,500
Purchases 1,08,000 90,000 30,000 78,000 90,000
Sales 1,44,000 93,000 45,500 96,000 1,01,000
Closing stock 36,000 12,000 9,000 3,000 16,500
Prepare the profit and loss account to show the final result of each department and
also the combined results with respective percentage on sales.
5. Wholesale traders Ltd. Deal in 3 departments of merchandise. The balances of accounts

as at 31.3.2015 are as follows:
Particulars Amt Particulars Amt
Share capital: Salaries 54,000
50000 shares of Rs.10 each 5,00,000 Carriage 12,600
6% debentures 3,00,000 Travelling expenses 6,300
Stock 1.4.2010: Advertisement 8,100
Dept. i 70,000 Printing and stationery 13,500
Dept. ii 40,000 Rates and taxes 1,800
Dept. iii 60,000 General charges 36,900
Purchases: Debenture interest upto 9,000
Dept. i 14,10,000 30.9.2014
Dept. ii 7,00,000 Sundry creditors 1,01,000
Dept. iii 10,50,000 Bills receivable 2,80,000
Sales: Sundry debtors 2,66,000
Dept. i 18,60,000 Bills payable 30,000
Dept. ii 9,15,000 General reserve 1,45,000
Dept. iii 13,80,000 Goodwill 90,000
Wages: Land and buildings 1,80,000
Dept. i 2,80,000 Profit and loss account (Cr.) 24,000
Dept. ii 1,30000
Dept. iii 2,10,000
Motor lorries 1,30,000
Furniture and fixtures 72,000
bank 1,44,800
96
Adjustments:
Bad debts Rs.2,000; Bills receivable-Bad Rs.1,600; Closing stock: Dept. i-60,000, Dept. ii-
50,000,Dept. iii-65,000; depreciate land and buildings by 2 ½%; furniture and fixtures by
10%; Motor lorries by 20%; allocate depreciation on motor lorries in the ratio 2:1:1 and
other expenses in the ratio of the total of opening stock and purchases of each department.
Prepare a departmental profit and loss a/c in a columnar form for the year ending 31
march 2015 and the balance sheet on that date in the prescribed form.
6. From the following information prepare the departmental trading and profit and
loss account for the year 31.3.2011
Particulars Dept.X Dept.Y Total
Opening stock 6,000 5,000 11,000

Purchases 62,000 31,000 93,000
Sales 1,01,500 76,000 1,77,500
Return outwards 2,000 1,000 3,000
Wages 4,000 7,500 11,500
Return inwards 1,500 1,000 2,500
Salary to office staff 25,000
Rent and taxes 4,500
Carriage outwards 1,400
General expenses 4200
Other information:
a. Office staff appointed: Dept. X: 8 persons and Dept.Y: 12 persons
b. Area occupied: Dept. X:400 sq.ft and Dept.Y:800 sq.ft
c. Depreciation on machinery worth Rs.50, 000 and furniture worth Rs. 15,000 at 20%
to be distributed between the departments equally.
d. Stock of goods on 31.3.2011: Dept. X: 8,000 and Dept.Y: 4,000
e. Inter departmental transfers: Dept X to Dept Y: Rs.10, 000 which is not included in
the above information.
f. Exclude the inter departmental transfers for the calculation of ratio.
(Ans: Gross profit: Dept x: Rs.48, 000 Dept Y: Rs.26, 500

Net profit: Dept x: Rs.28, 967 Dept Y: Rs.1, 433)
97
Module - 4
Consignment Accounts
Structure:
4.1 Introduction & Meaning of Consignment
4.2 Features of Consignment
4.3 Distinction between Sale and Consignment
4.4 Proforma Invoice
4.5 Account Sales
4.6 Types of Commission.
4.7 Self-assessment questions
4.8 Accounting treatment in the books of the consignor
4.9 Accounting treatment in the books of the consignee
4.10 Valuation of Stock
4.11 Methods of preparing Consignment Account
4.11.1 Cost price method
4.11.2 Invoice Price method
4.12 Treatment of discount
4.13 Self-Assessment questions
4.14 Accounting for consignment under different situations
4.15 Summary
4.16 Terminal Questions
Learning objectives:
• To understand the meaning & features of consignment, consignor and consignee.
• To know the meaning of account sales.
• To learn about del credere commission.
• To learn the accounting treatment of consignments.
• To solve problems under Cost price method.
• To learn to calculate Normal loss & abnormal loss.
• To learn to adjust load under invoice price method
4.1 Introduction & Meaning:
The increasing size of the market is making more and more difficult for the manufacturer
or wholesaler to come in direct contact with the customers living in distant places. This has
made imperative for him to enter into an agreement with a reliable local trader who can
sell goods on his behalf and at an agreed amount of commission.
Consignment
Consignment is the process of sending of goods by one person to another person for the
purpose of sale on commission basis at the sole risk of the sender. The person who sends
98
the goods to be sold on his behalf is called the Consignor whereas the person to whom the
goods are sent is called Consignee.
4.2 Features of consignment:
1. Consignment of goods is not a sale. It is a mere transfer of possession of goods.

2. The relationship between the consignor and the consignee is that of Principal and
Agent. The consignee is not responsible for any loss or destruction of goods.
3. The consignee does not become the debtor of the consignor until he has sold the whole
or a portion of the consignment.
4. Bad debts are to be usually borne by the consignor unless the consignee expressly
assumes the liability for such losses. In such cases he is known as del credere agent and
receives an extra rate of commission known as del credere commission.
5. The consignor has to pay all the expenses incurred by the consignee in taking the
delivery of the goods when they reach the consignees place and also the storage charges
and other expenses until the goods are sold.
6. The consignee is paid commission which is generally based on total value of sales
affected by him.
7. The unsold portion of the goods sent on consignment must appear on the assets side of
the consignor’s balance sheet as stock on consignment.
8. Consignment is distinguished from goods on sale/return. In the former the person
receiving the goods is the agent but in the latter he is only an optional purchaser.
9. Consignee is liable for the payment of sale proceeds after deducting his commission and
the expenses incurred by him.
10. It is customary for the consignee to give an advance to the consignor in the form of cash
or bill of exchange. This advance is adjusted against the sale of goods.
4.3 Distinction between Sale and Consignment:
Sale Consignment
1. Ownership in goods is transferred to Ownership in the goods remains with
the buyer along with the transfer of the consignor until the time they are
goods sold by consignee.
2. Goods once sold cannot be returned to Unsold goods on consignment are the
the seller except when they are property of the consignor and can be
defective or the seller agrees to take returned to him.
these back
3. When goods are sold on credit, the The relationship between the
buyer becomes the debtor of the seller. consignor and consignee is that of a
The relationship between the buyer and principal and agent.
the seller is that of debtor and creditor.
4. When the goods are lost after the When goods are lost on consignment,
delivery to the buyer, it is the buyer it is the consignor who will bear the
who will bear the loss. loss.
5. The expenses incurred by the buyer are Expenses of the consignee to receive
99
to be borne by the buyer himself after the goods is borne by the consignor.
the delivery of the goods.
4.4 Proforma Invoice:
Along with the goods, a statement is usually forwarded by the consignor to the consignee,
giving description of the goods consigned, the weight, quantity, price and other details.
Such a statement is known as proforma invoice. It is like ordinary invoice which is used at
the time of normal buying and selling transactions.
4.5 Account sales:
This is a statement prepared by the consignee to be sent to the consignor. This statement is
prepared to calculate the amount to be paid by consignee to the consignor for the goods
sold by him. The statement of account sales shall contain the following:
a. The gross proceeds of the goods sold by him.
b. The charges or expenses incurred by him.
c. His commission.
d. The net amount due to the consignor and the mode of remittance that is cash, check or
B/R.
Specimen of account sales of 200 radio sets received from & sold on a/c of T & Co:
Rs. Rs.
150 radio sets at Rs 750/radio 1,12,500
50 radio sets at Rs.1,000/radio 50,000 1,62,500
Less: Expenses
Freight 750
Insurance 300
Rent 550 1,600
Commission @10% 16,250 17,850
1,44,650
Less: Advance Paid 50,000
Balance due remitted as cheque 94,650
4.6 Types of commission:
100
a) Simple commission is calculated as per terms laid down by the consignor. Usually this
is a fixed percentage of total sales.
b) Over riding commission is an extra commission given to consignee, in case the sales
exceed a specified amount. It is also calculated on total sales.
c) Del credere commission is a commission given to consignee if bad debts are to be

borne by the consignee. In such cases he is known as del credere agent and receives an
extra rate of commission known as del credere commission.
4.7 Self-assessment questions:
1. The relationship between the consignor and the consignee is that of Principal and ---------
-----. (ref-4.1)
2. The unsold portion of the goods sent on consignment must appear on the assets side of
the --------------- balance sheet as stock on consignment. (ref-4.3)
3. --------------- commission is an extra commission given to consignee, in case the sales

exceed a specified amount.(ref-4.6)
4.8 Accounting treatment in the books of consignor:
1. On dispatch of goods to consignee

Consignment a/c Dr.
To goods sent on consignment a/c
2. For expenses incurred by consignor in respect of goods consigned:

Consignment a/c Dr.
To cash /bank a/c
3. a ) For acceptance given by the consignee

B/R a/c Dr.
To consignee a/c
b) If consignee pays cash as advance:

Cash /bank a/c Dr.
To consignee a/c
4. When goods are sold by consignee:

Consignee a/c Dr.
To Consignment a/c
5. For expenses incurred by consignee:

Consignment a/c Dr.
To consignee a/c
101
6. For commission payable:
Consignment a/c Dr.
To consignee a/c
7. For closing stock with the consignee

Stock on Consignment a/c Dr.
To Consignment a/c
8. For transfer of profit or loss:

a) In case of profit
Consignment a/c Dr.
To P/L a/c
b) In case of loss
P/L a/c Dr.
To Consignment a/c
9. For cash received from consignee:

Cash/bank a/c Dr.
To consignee a/c
Format of consignment account:

In the books of consignor
Dr Consignment Account Cr
To Goods sent on consignment xxx By Consignee a/c[sales] xxx
To Cash / Bank A/c [expenses] xxx By Stock on Consignment xxx
[ Closing Stock]
To Consignee a/c [expenses] xxx By Profit & Loss A/c [Loss] xxx
To Consignee a/c[Commission] xxx xxx
To Profit & Loss A/c [ Profit] xxx xxx
xxx xxx
Dr Consignee Account
Cr
To Consignee [Sales] xxx By B/R / Cash / Bank A/c xxx
xxx By Consignment a/c [Expenses xxx
paid by him]
xxx By Consignment /c[commission] xxx
xxx By Cash / Bank A/c[b/f ] xxx
xxx xxx
102
4.9 Accounting treatment in the books of the consignee:
1. For advance made to consignor

Consignor a/c Dr.
To Bank/ Bills payable a/c
2. For payment of expenses in respect of consignment

Consignor a/c Dr.
To cash/bank a/c
3. For cash sale of goods

Bank a/c Dr.
To consignor a/c
4. For credit sale

Consignment Debtors a/c Dr.
To consignor a/c
5. For commission earned by him

Consignor a/c Dr.
To commission a/c
6. For bad debts when no del credere commission is paid

Consignor a/c Dr.
To consignment Debtors a/c
7. Bad debts arising when he is entitled to del credere commission

Bad debts a/c Dr.
To consignment Debtors a/c
8. For payment to consignor

Consignor a/c Dr.
To cash/bank a/c
On the last date of the accounting year, if there is any balance (debit/credit) in the
Consignor’s a/c it should be shown in the balance sheet under sundry debtors or sundry
creditors depending upon to the nature of the balance. The student should note that he
consignee will not make any entry in respect of stock on consignment. Similarly he will not
ascertain any profit or loss in respect of goods sold by him on behalf of the consignor.
However, the commission received should be transferred to P/L a/c at the year end.
4.10 Valuation of Stock:
When the consignor closes his books of account for the accounting year, he may find that
some of the goods sent on consignment would not have been sold by the consignee and still
103
lying with the consignee. These goods must be valued and brought into account just like the
closing stock for preparation of the Trading account.
The unsold stock remaining with the consignee has to be valued at cost (plus ratable share
of non-recurring expenses) or market price whichever is lower. Non-recurring expenses
are the expenses which are incurred to bring the goods to the godown of the consignee.
For example packing and forwarding charges, railway freight, octroi duty, insurance in
transit, cartage of goods from railway station to the godown of the consignee, etc. But
expenses incurred thereafter for example godown rent, insurance chargers to cover risk of
loss while goods are in the godown, salesman salary, advertising expenses, etc., are not
considered for determining cost of goods remaining unsold. Cost of stock is not affected
whether a particular expense is paid by the consignor or the consignee. However, if the
question does not give details of various expenses incurred, it should be assumed that
expenses paid by the consignor are of non-recurring nature whereas those paid by the
consignee are not so.
However, if it is assumed that the unsold stock will realize less than the cost then the net
realizable value (i.e., realizable value minus estimated expense including consignee’s
commission) is considered. If the net realizable value is found to be less than cost then the
stock must be written down accordingly since it is based on the principle of conservatism
i.e., anticipated losses must be provided in the books.
4.11 Methods of preparing Consignment account:
There are different methods of preparing Consignment account. The methods depend on
the basis on which goods consigned. They are:
a) Cost price method
b) Invoice price method
4.11.1 Cost price method:

Under this method, the consignor sends goods at cost price. While preparing consignment
account goods sent, closing stock are recorded at cost price. This consignment account is a
nominal account. All the expenses incurred are entered on the debit side and all the
incomes are entered on the credit side. The balancing figure is either profit or loss on
consignment.
1. ----------------- expenses are not considered for determining cost of goods remaining
unsold.
2. If it is assumed that the unsold stock will realize less than the cost then the
------------------value is to be considered for the purpose.
3. Under cost price method, goods sent on consignment are recorded at ----------------- in
104
Consignment a/c.
Loss of goods on Consignment:

A part of the goods sent on consignment may be lost or destroyed or damaged either in
transit or in the consignee’s go-down. Such loss may be either normal loss or abnormal
loss.
a) Normal loss:
Any loss which is unavoidable, inherent and due to natural causes such as evaporation,
leakage, drying, etc. is known as normal loss. No effort either by the consignor or the
consignee can prevent this loss. Since normal loss is a part of the cost of the goods no
additional adjustment is required for this purpose. While calculating the value of stock on
consignment, the cost is inflated to cover the normal loss. This is done by appropriating the
cost on the basis of actual quantity available for sale.
Thus, value of stock on consignment:

Cost of goods consigned X Unsold quantity
Actual quantity available for sale
For example: Suppose 1,000 tonnes of limestone is consigned at 20 per tonne, freight
thereon being Rs.4,000. If the quantity sold is 600 tonnes and that unsold is 350 tonnes, it
means that there is a normal of loss 50 tonnes.
Value of 350 tonnes will be= 20,000 + 4000 X 350

950
= Rs 8,842.10
b) Abnormal loss:
Abnormal loss of stock in consignment is caused by theft, accident, fire, pilferage, abnormal
breakage, carelessness, etc. It is calculated just the same way as the valuation of stock on
consignment after taking into consideration the proportionate expenses incurred on it and
is credited to consignment account and debited to profit and loss account. In case the stock
is insured, consignment account is credited with the full cost of the goods so lost and
abnormal loss account is debited. Any amount realized on account of damaged goods
should be credited to abnormal loss account.
The amount of claim receivable from the insurance company is debited to insurance
company account and credited to abnormal loss account and the balance of abnormal loss
is debited to P/L a/c. Later, when the amount is received from the insurance company, cash
account is debited and insurance company a/c is credited.
The journal entries will be as follows:
i) If not covered by Insurance company (full amount transferred to P/L a/c)
105
a) Abnormal loss a/c Dr.
To Consignment a/c
b) P/L a/c Dr
To Consignment a/c
ii) a) If covered by Insurance company

Abnormal loss a/c Dr
To Consignment a/c
b) For amount receivable from the Insurance company and balance loss
transferred to P/L a/c:
Bank a/c Dr. (amount received)

P/L a/c Dr. (balance amount)
To Abnormal loss a/c
The amount of the loss is ascertained like the value of closing stock except that expenses
incurred only after the loss had taken place have to be ignored while calculating the cost of
the loss because no part of such expenses can be said to have been incurred on the lost
goods.
For example: Suppose 100 kgs of a commodity is sent, cost being Rs 200 per kg and the
consignor spending Rs 600 in the form of freight, further, suppose 5 kgs of the commodity
is badly damaged due to poor packaging and is disposed off at the railway station itself
then the consignee brings the balance of the goods to his godown paying cartage of Rs 50.
Now Consignment a/c will be credited with Rs.1,030, i.e.,

Cost of goods lost (5 kg x 200) 1,000
Add: proportionate expenses:
[(600/100) x 5] 30
Value of abnormal loss 1,030
Note: No part of cartage Rs 50 will be included.
4.11.2 Invoice price method:

Sometimes, the consignor does not prefer to disclose the real profit that is earned on
consignment for many reasons. For this purpose, the consignor sends goods at proforma
invoice price to the consignee which is fixed after adding certain percentage of profit on
cost or on sale/invoice price so that the consignee will not be able to know the profit which
is earned by the consignor in the transaction.
If there is any unsold stock or any abnormal loss then it has to be valued at invoice price.
Hence, in order to ascertain the true profit or loss on a consignment proper adjustment has
to be made to eliminate such loading and bring down the items to cost level. In the above
106
case Consignment account and goods sent on Consignment are prepared at invoice price of
the goods.
Following adjustment entries are made in the books of Consignor:
a) For adjusting the load included in goods sent on Consignment

Goods sent on Consignment a/c Dr
To Consignment a/c
b) For adjusting the load included in closing stock
Consignment a/c Dr
To Consignment Stock reserve a/c
4.12 Treatment of Discount:
When B/R is received by the consignor from the consignee and consignor discounts it, then
the discount of this B/R should not be recorded in consignment a/c, because it is not an
expenditure of consignment. Here, consignor does not want to wait up to the date of
maturity of the bill, hence he discounts it. Hence, this discount is charged to P/L a/c and not
to Consignment a/c.
4.13 Accounting for consignment under different situations:
1. Valuation of unsold goods at Consignee’s Godown:
The following data are furnished by Mr. Mukul and you are required to calculate the value
of unsold stock on consignment for the period:
450 cases of goods were sent by the consignor @ Rs.2400 per case and out of that 90 cases
remain unsold.
The consignor incurred the following expenses:

Packing charges Rs.8500; Freight and insurance Rs.12500; Loading charges Rs.6000.
The consignee incurred the following expenses:

Unloading charges Rs.4000; Carriage to godown Rs.18500; and Godown charges Rs.9000.
Solution:
Valuation of unsold goods at Consignee’s godown:
Rs.
90 Cases @ Rs.2400 per case 2,16,000
Add: The Consignor’s proportionate expenses for 90 cases: [27,000/450×90] 5,400
=(Rs.8500+Rs.12500+Rs.6000 paid for 450 cases)
Add: The Consignee’s proportionate expenses for 90 cases: [22,500/450×90] 4,500
=(Rs.4000+Rs.18500=Rs.22,500 non-recurring expenses paid 450 cases)
2,25,900
107
2. Valuation of unsold goods at Consignee’s godown and when the market Price is
given:
From the following data, calculate the value of unsold stock:

The consignor sent 250 case of goods to the consignee @ Rs.220 per case and out of that 30
cases remain unsold. The consignor incurred Rs.3,100 towards its freight, packaging and
insurance. The consignee incurred Rs.800 for unloading, Rs.900 for carriage to godown,
and Rs.850 for godown charges. The consignee is entitled to a commission of 10% on
gross sales. The consignee informed that market price of the goods came down to Rs.230
per case.
Solution:
Valuation of unsold goods at Consignee’s godown:

Rs.
30 Cases @ Rs.220 per case 6,600
Add: The Consignor’s proportionate expenses for 90 cases: [3100/250×30] 372
Add: The Consignee’s proportionate expenses for 90 cases: [1,700/250×30] 204
7,176
Market price of 30 cases @ Rs.230 6,900
Less: Consignee’s commission @ 10% 690
6,210
As market price after charging the consignee’s commission is less than the cost of the
goods, then market price is to be considered as the value of unsold stock, i.e. Rs.6,210.
3. Valuation of unsold goods at Consignee’s Godown and when the market Price
comes Down Below the cost
Mr.Ashok sent goods costing Rs. 32,000 for 400 cases to Mr.Kumaran of Chennai on
consignment basis, and the agreement provides that Mr.Kumaran is entitled to commission
of 10% in all sales including 2% as del credere commission and is to bear all selling
expenses. Mr.Ashok paid Rs,1,600 for carriage to port, Rs.2,100 for freignt and insurance
and Rs.300 towards loading charges. On arrival at Chennai, Mr.Kumaran remitted a draft
of Rs.15,000 to Mr.Ashok and incurred clearing charges amounting to Rs.900, inward
carriage amounting to Rs.1,100 and unloading charges amounting to Rs.210.
Mr.Kumaran sold 320 cases @ Rs.140 per case, but informed Robin that owing to arrival of
a new product, the market price of the consigned goods came down to Rs.91 per case. He
incurred other expenses-Rs.600 for selling and Rs.450 for godown rent and insurance.
Mr.Kumaran sent the balance amount due by a draft in full settlement of his A/c. Give
necessary ledger accounts in the books of Mr.Ashok
Solution:
108
In the books of Mr.Ashok
Dr. Consignment to Chennai Account Cr.
Amount Amount
Date Particulars Rs. Date Particulars Rs.
(Rs.) (Rs.)
To Goods Sent On 32,000 By Mr.Kumaran 44,800
Consignment A/c A/c (Sales)
To Bank A/c (expenses By Stock on 6,552
paid): Consignment A/c
Freight and insurance 2,100 (Note-1)
Cartage 1,600
Loading charges 4,000
300
To Mr.Kumaran A/c
(consignee)
Unloading Charges
Clearing Charges 210
Inward charges
Godown Rent & 900
insurance 1,100 7,140
Commission
450
4,480
To Profit and Loss A/c 8,212
(Profit on consignment
transferred)
51,352 51,352
Dr. Mr.Kumaran’s A/c Cr.

Amount( Amount(R
Date Particulars Date Particulars
Rs.) s.)
To Consignment to 44,800 By Bank A/c 15,000
Chennai A/c
By Consignment to Chennai A/c
Unloading Charges
210
Clearing Charges
900
Inwards carriage
1,100
Godown rent and insurance
450
Commission 4,480 7,140
By Bank A/c (Balancing figure) 22,660
44,800 44,800
109
Working Notes:
1. Valuation of Stock with Consignee

Rs.
Cost of 80 cases Rs.32,000/400×80 6,400
Add: Consignor’s Proportionate expenses=(4,000/400×80) 800
Add: Consignee’s Proportionate expenses=(210+900+1,100)/400×80 442
7,642
Rs.
Market price of 80 Cases @ Rs.91 7,280
Less: Consignee’s Commission 725
Net realizable value 6,552
The value of unsold goods according to the cost is Rs.7, 642 but market price of the said
goods after charging consignee’s commission, is Rs.6, 552. As, market price is less than
the cost, it is to be considered as the value of unsold stock.
4. Valuation of unsold goods at Consignee’s Godown and when there is no Normal

Loss:
On 1.1.2013 Gokuldas Bros. of Ranchi consigned 12,000 kg. of oil to Saxena of Kolkatta @
Rs.12 per Kg. They spent Rs.4,800 for cartage, insurance and freight for sending the
goods.
Saxena submitted the Account Sales which shows that 10,500 kg of oil @ Rs.17 per keg was
sold, octroi and carriage to godown Rs.690, selling expenses Rs.460 and consignee’s
commission at 10% on gross sales.
The consignee reported that 50 kg of oil was lost due to leakage and it was considered as
normal loss. Assuming that Saxena remits the balance by bank draft on 30.12.2013.
Prepare the Consignment Account and the Consignee’s Account in the books of the
consignor.
Solution:
In the Books of Gokuldas Bros.
Dr. Consignment To Kolkatta Account Cr.
Amount Amount
(Rs.) (Rs.)
2013 1,44,000 2013
Apr.1 To Goods Sent on Dec.31 By Saxena A/c 1,78,500
Consignment A/c (Sales)
To Bank A/c 4,800 By Stock on 18,139
(expenses paid) Consignment A/c
(Note 1)
Dec To Saxena A/c Or
110
31 (Consignee) Stock with consignee
Octroi and carriage 690 A/c
Selling Expenses 460
To Profit and Loss
A/c
(Profit on 28,839
Consignment
transferred)
1,96,639 1,96,639
Dr. Saxena’s A/c Cr.

Amount Amount
Date Particulars Date Particulars
(Rs.) (Rs.)
2013 2013
Dec.31 To Consignment 1,78,500 Dec.31 By Consignment to Chennai A/c
to Kolkata A/c Octroi and carriage 690
Selling Expenses 480
Commission 17,850
19,000
By Bank A/c (Balancing figure) 1,59,500
178500 178500
Working Notes:

Rs.
Cost of goods =12,000 kg× Rs.12 1,44,000
Add: Consignor’s expenses 4,800
Add: Consignee’s expenses 690
Total cost of 12,000 kg of oil 1,49,490
50 kg oil was lost due to leakage and it was considered as normal loss.
Hence, total cost of 12,000 kg of oil is to be considered as the total cost of 11,950 kg.
Value of unsold stock of 1,450(11,950-10,500) kg of oil=1,49,490/11,950×1,450 = 18,139
5. For Cash and Credit Sales: Cash Realized from Debtors, Bad Debts Occurred and
When Del Credere Commission is Not Given:
MMS Ltd. Consigned 5,000 kg of goods to its Chandapur agent Pasha Brothers costing @ Rs.
12 per kg. The agreement provides that Pasha Brothers will receive 10% ordinary
commission on gross sales. MMS Ltd. incurred the following expenses:
Packing charges: Rs.1, 700, Freight and Insurance: Rs.1,400 and Loading: Rs.400. Pasha
Brothers sold 3,800 kg of goods @ Rs.19 per kg (including credit sales of Rs. 20,900).
111
Rs.17,600 cash was realized from debtors, and Rs.460 of the debtors proves bad debt due
to insolvency. The goods are sold at the risk of the consignor as per the agreement.
Pasha Brothers incurred the following expenses:
Unloading charges: Rs.150, Sundry expenses: 650, Carriage to godown: Rs.350 and selling
and advertisement: Rs.600
Pasha Brothers sent a draft in settlement of its account with the account sale.
Show necessary ledger accounts in the books of MMS Ltd. and Pasha Brothers.
Solution:
In the Books of MMS Ltd.
Dr. Consignment to Chandapur Account Cr.
Date Particulars Rs. Rs. Date Particulars Rs. Rs.
To Goods Sent on 60,000 By Pasha Bros. A/c (Cash
Consignment A/c Sales) [(3,800×Rs.19)- 51,300
20,900]
To Bank A/c (expenses By Consignment Debtors 20,900
paid) A/c
Freight and 1,400 (For credit sales) 15,360
insurance 1,700 Stock on Consignment
Packing Charges 400 3,500 A/c (Note 1)
Loading Charges
To Pasha Bros. A/c
(Consignee)
Unloading Charges 150
Carriage to godown 350
Sundry expenses 650
Selling and
advertisement 600
To Consignment
Debtors A/c 460
To Profit and Loss A/c 14,630
(Profit on Consignment
transferred)
87,560 87,560
Dr. Pasha Bros. A/c Cr.

To Consignment to By Consignment to
Chandapur A/c 51,300 Chandapur A/c
To Consignment Unloading Charges
Debtors A/c 17,600 150
112
Carriage to godown
350
650
Selling & advertisement
600
Commission
7,220
68,900 68,900
Dr. Consignment Debtors A/c Cr.

To Consignment to 20,900 By Bank A/c 17,600
Chandapur A/c By Consignment to Chandapur 460
A/c (bad debts written off)
20,900 20,900
Dr. Goods sent on Consignment A/c Cr.

To Purchases A/c 60,000 By Consignment to Chandapur A/c 60,000
(Transferred)
60,000 60,000
Dr. Stock on Consignment A/c Cr.

To Consignment to 15,360 By Balance c/d 15,360
Chandapur A/c
15,360 15,360
In the Books of Pasha Bros.

Dr. MMS Ltd A/c Cr.
To Bank / Cash A/c (expenses By Bank / Cash A/c (Cash Sales) 51,300
paid) By Bank / Cash A/c
Unloading Charges (Cash realized from debtors) 17,600
150
Carriage to godown
350 1,750
650 59,930
Selling & advertisement
600
To Commission received A/c
113
To Bank A/c (Balancing Figure)
68,900 68,900
Dr. Commission Received A/c Cr.

To Profit & Loss A/c 7,220 By MMS Ltd. A/c 7,220
(transferred)
7,220 7,220
Working Notes:

Rs.
Cost of 1,200 kg of goods @ Rs.12 per kg=1,200kg× Rs.12 14,400
Add: Consignor’s expenses=3,500/5,000×1,200 840
Add: Consignee’s expenses=(150+350)/5,000×1,200 120
Total cost of 12,000 kg of oil 15,360
6. For Cash and Credit Sales: Cash Realized from the Debtors is Not Given, Del Credere
Commission is given. But Bad Debts Occurred:
Shudh & Co. of Chandighad consigned 300 boxes of goods to Sunil Brothers of Srilanka @
Rs.250 per box and drew a bill of Rs.18,000 on them payable after 3 months. Shudh & Co.
paid the following expenses:
Rs.
Freight 2,900
Carriage to Port 1,500
Insurance 2,500
Packing 5,000
11,900
Sunil Brothers received the consignment and duly accepted the bill. The bill was
discounted by Shudh & Co. at 5% immediately.
The account sales received from Sunil Brothers show that it was able to sell 260 boxes @
Rs.375 per box and incurred the following expenses:
Import and custom duties: Rs.2,000, Dock charges: Rs.500. Octroi and carriage to
warehouse Rs.500, Warehouse charges: Rs.1,000, Selling and advertisement: Rs.1,200
A debtor of Rs.750 became bankrupt and nothing shall be realized from his estate. Sunil
Brothers is entitled to commission of 12% on gross sales including 2% del credere
commission.
114
Sunil Brothers settled the balance due for the consignment by a draft.
Show consignment A/c, and Consignee’s A/c in the books of Shudh & Co. and necessary
entries in the books of Sunil Brothers.
Solution:
In the Books of Shudh & Co.
Dr. Consignment To Srilanka Account Cr.
To Goods Sent on 75,000 By Sunil Bros.A/c 97,500
Consignment A/c
To Bank A/c (expenses By Stock on Consignment A/c 11,987
paid) (Note 3)
Freight 2,900
Carriage to Port 1,500
Insurance 2,500
Packing 5,000 11,900
To Sunil Bros. A/c
(Consignee)
Import and Customs Duties 2,000
Dock Charges
Octroi and Carriage 500
Ware house charges 500
Selling and advertisement 1,000
1,200 5,200
To Sunil Bros.A/c
(Consignee) 460
Commission (12% of 11,700
97,500)
To Profit and Loss A/c
transferred) 5,227
1,09,487 1,09,487
Dr. Sunil Bros. A/c Cr.

To Consignment 97,500 By Bills Receivables A/c 18,000
to Srilanka A/c By Consignment to Srilanka A/c
(Expenses paid by Consignee) 5,200
By Consignment to Srilanka A/c
Commission (12% of 97,500) 11,700
97,500 97,500
115
Working Notes:
1. As 2% del credere commission is allowed to the consignee, bad debt is not be considered
here. It is consignee’s personal loss
2. Discount charges on discounted bills receivable are also not considered here. These
are financial charges and not related to any expenditure incurred on consignment.
3. Valuation of stock with consignee Rs.
Cost of goods sent 40 boxes×Rs.250= 10,000
Add: Consignor’s proportionate expenses=11,900/300×40 1587
Add: Consignee’s proportionate expenses=(2,000+500+500)/300×40 400
Total cost 11,987
In the Books of Sunil Bros.

Dr. Shudh & Co. A/c Cr.
To Bills Payable A/c 18,000 By Consignment 97,500
To Cash A/c 5,200 Debtors A/c
(Expenses paid by the
Consignee)
To Commission received A/c 11,700
Commission (12% of 97,500)
To Bank A/c (Balancing Figure) 62,600
97,500 97,500
7. For Cash and Credit Sales: When Del Credere Commission is given on Sales and Bad
Debts Occurred:
Rao and Co. of Bangalore consigned goods costing Rs.44,000 to M.K. Brothers of Punjab and
paid Rs.750 for insurance, Rs.900 for freight and Rs.800 for packaging. M.K. Brothers
accepted a bill for Rs.12,000 drawn by Rao and Co. at 3 months, and it was retained by the
drawer till the maturity and was duly honoured.
M.K Brothers informed that they sold three-fourths of the goods as follows:
Cash Sales Rs.29,000
Credit Sales Rs.18,000
Cash realized from Debtors amounting to Rs.14,800 and of the debtors amounting to
Rs.600 proves bad. M.K.Brothers paid Rs.900 for clearing charges, insurance and godown
charges Rs.750 and Rs.500 for selling expenses. M.K Brothers was entitled to ordinary
commission of 9% and del credere commission of 4% on gross sales. It settled its
accounts duly by a draft.
You are required to show necessary ledger accounts in the books of Rao and Co. and M.K.
Brothers.
116
Solution:
In the Books of Rao and Co.
Dr. Consignment To Punjab Account Cr.
To Goods Sent on 44,000 By M.K. Bros..A/c
Consignment A/c Cash Sales 29,000
Credit Sales 18,000 47,000
To Cash A/c (expenses By Stock on Consignment A/c 11,838
paid) (Note 2)
Freight 900
Insurance 750
Packing 800 2,450
To M.K. Bros. A/c
(Consignee)
Clearing Charges 900
Insurance & godown
charges 750
Selling Expenses 500 2,150
To M.K. Bros.A/c (Consignee)
Ord.Commission 9%
Del credere 4% 4,230
To Profit and Loss A/c 1,880 6,110
(Profit on Consignment 4,128
transferred)
58,838 58,838
Dr. M.K. Bros. A/c Cr.

To Consignment 47,000 By Bills Receivables A/c 12,000
to Punjab A/c By Consignment to Assam A/c 2,150
(Expenses paid by Consignee)
By Consignment to Assam A/c 6,110
Commission (13% of 47,000)
47,000 47,000
In the Books of M.K. Bros.

Dr. Rao and Co. A/c Cr.
To Bills Payable A/c 12,000 By Bank A/c (Cash Sales) 29,000
To Cash A/c 2,150 By Consignment Debtors A/c 18,000
(Expenses paid by the Consignee) (Credit Sales)
To Ord. Commission Received A/c
To Del Credere Commission A/c 4,230
To Bank A/c (Balancing Figure)
117
1,880
26,740
47,000 47,000
Dr. Consignment Debtors A/c Cr.

To Rao and Co 18,000 By Bank /Cash A/c 14,800
By Del Credere Commission A/c (bad 600
debts)
18,000 18,000
Dr. Ord.Commission Received A/c Cr.

To Profit & Loss A/c 4,230 By Rao and Co. A/c 4,230
(Transferred)
4,230 4,230
Dr. Del Credere Commission A/c Cr.

To Consignment Debtors A/c 600 By Rao and Co. A/c 1,880
(Bad Debts)
To Profit & Loss A/c 1,280
(Transferred)
1,880 1,880
Working Notes:
1. As 4% del credere commission is allowed to the consignee, bad debt is not be considered
in the consignor’s book. It is consignee’s personal loss.
2. Valuation of stock with consignee

Rs.
Cost of goods =44,000×1/4 11,000
Add: Consignor’s proportionate expenses=2,450×1/4 613
Add: Consignee’s proportionate non-recurring 900×1/4 225
Total Cost 11,838
8. When there is Loss of Goods in Transit (totally) and Some Goods are Also Lost
Totally at Consignee’s Godown:
On 1 July 2012, Mahesh of Mumbai consigned goods to the value of Rs.50,000 to Prajwal of
New Delhi. This was made by adding 25% of the cost. Mahesh paid Rs.2,000 for freight
and 2,000 for insurance. During transit 1/10th of the goods was totally destroyed by fire
and a sum of Rs.2,500 was realized from the insurance company.
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On arrival of the goods, Prajwal paid Rs.1,800 carriage to godown. During the year end
30 June, 2013, Prajwal paid Rs.3,400 for godown rent and Rs.2,000 for selling expenses.
1/9th of the remaining goods was again destroyed by fire in godown and nothing was
recovered from insurance company. Up to 30 June, 2013, Prajwal sold half of the original
goods for Rs.30,000 and charged a commission of 5% on sales. On 30 June, 2013, Prajwal
sent a bank draft to Mahesh for the amount so for due from him.
You are required to prepare Consignment Account in the books of Mahesh of Mumbai for
the year ended 30 June, 2013.
Solution:
In the Books of Mr.Mahesh
Dr. Consignment To Delhi Account Cr.
2012 2012
July.1 To Goods Sent on 50,000 July.1 By Bank A/c (From 2,500
Consignment A/c Insurance Co.)
To Bank A/c 2013
(expenses paid) June.30 By Prajwal’s A/c (Sales) 30,000
Freight 2000 By Profit & Loss A/c (Note 1) 1,900
Insurance 2000 4,000 (Goods in Transit)
2013 To Prajwal’s A/c By Goods Sent on 10,000
June.30 (consignee) Consignment A/c
Selling expenses 2,000 (Load)
Godown Rent 3,400 By Stock with Consignee A/c 16,800
Carriage to godown 1,800 (Note 3)
To Stock Reserve A/c 3,100 By Profit & Loss A/c (Note 4,600
(Load) 4)(Goods lost in Godown)
65,800 65,800
Working Notes:
1. Here all abnormal losses are calculated at cost. Hence, loading portion is eliminated
from the invoice price.
2. Calculation of goods lost in transit

Rs.
1/10 of consignment totally lost, i.e.50,000×1/10 5,000
Less: Load 5,000×25/125 1,000
Cost of goods lost 4,000
Add: Consignor’s proportionate expenses=(4,000×1/10) 400
4,400
Less: Insurance Claim Realized 2,500
Abnormal loss (to be transferred to Profit and Loss A/c) 1,900
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3. Valuation of stock with consignee
Rs.
Invoice price of goods sent 50,000
Less: Invoice price of goods lost(5,000+5,000) 10,000
40,000
Less: Goods sold: ½ of original goods, i.e 50% of goods sent by 25,000
the consignee
Goods remain unsold=15,000/50,000×100=30% of goods sent 15,000
Add: Consignors proportionate expenses=4000×30/100 1,200
Add: Consignees proportionate 600
expenses=(1800×15,00/45,000)
16,800
Load of unsold goods=25/125×15,000 3,000
4. Valuation of goods destroyed by fire in godown of the consignee

Rs.
Goods received by the consignee=(90% of Rs.50,000) 45,000
Goods destroyed by fire in godown of the consignee= 5,000
1/9×45,000
Less: Load 5,000×25/125 1,000
Cost of goods lost by fire in godown 4,000

[1/9th of remaining goods=1/10 of original goods sent by the
consignee]
Add: Consignor’s proportionate expenses=4,000×1/10 400
Add: Consignee’s proportionate non-recurring 200
expenses=1,800×1/9
4,600
9. When there is Both Normal Loss and Abnormal Loss of Goods:
Mr. Kumar of Goa consigned 12,000 kg of oil @ Rs.20 per kg packed in 2 kg tins agent N at
Daman and paid the following expenses towards the consignment:
Freight and insurance: Rs.3,800, Loading and carriage to railway yard:Rs.600
The consignment was duly received by N, but it reported that 1,000 tins were lost by fire in
transit. The railway company admitted Rs.18,000 finally for the said loss, and it was duly
realized by the consignor.
N sold 9,600 kg of oil @ Rs.39 per kg and incurred Rs.650 for inward carriage, Rs.120 for
unloading charges, Rs.560 for selling and other expenses. It is entitled to a commission of
10% on gross sales including 2% as del credere commission. It is also reported that 50
kg of oil was lost due to leakage, which was considered as normal loss, and also informed
that Rs.1,200 could not be realized and became a bad debt. It paid the amount due in
respect of the consignment by a draft together with account sale.
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You are required to give (i) Consignment Account, (ii) Consignee’s Account, (iii) Goods lost
in Transit Account in the books of Mr.Kumar
Solution:
In the Books of Mr. Kumar
Dr. Consignment To Daman Account Cr.
To Goods Sent on By N A/c (Sales) 3,74,400
Consignment A/c 2,40,000 By Goods Lost in
To Bank A/c (expenses Transit A/c 40,733
paid) 3,800 By Consingment Stock
Freight & insurance 600 4,400 A/c 7,191
Loading & Carriage
To N A/c
Inward Carriage 650
Unloading charges 120
Selling Other Expenses 560 1,330
To N A/c
8% Ordinary Commission 29,552
2% del credere Commission 7,488 37,440
139154
4,22,324 4,22,324
Dr. N A/c Cr.

To Consignment to Daman A/c 3,74,400 By Consignment to Daman A/c 1,330
(Sales) (Expenses) 2,150
By Consignment to Daman A/c
Commission 37,440
By Bank A/c (Balancing figure) 3,33,480
3,74,400 3,74,400
Dr. Goods-lost-in-Transit A/c Cr.

To Consignment to 40,733 By Bank A/c (Realized from Railway 18,000
Daman A/c Company)
By Profit & Loss A/c: 22,733
Abnormal Loss
40,733 40,733
Working Notes:
1. Valuation of goods lost in transit
Rs.
Cost 12,000 kg of oil @ Rs.20 per kg 2,40,000
121
Add: Freight and Insurance 3,800
Add: Loading and carriage 600
2,44,400
Total cost of 12,000 kg=ARs.2,44,400
So value of 1,000 tins, i.e 2,000 kg
=2,44,400/12,000×2,000=Rs.40,733
2. Valuation of Unsold Goods

Rs.
Total cost of 12,000 kg before loss 2,44,000
Less: Value of goods lost in transit 40,733
Cost of 10,000 kg before normal loss 2,03,667
Add: Unloading Charge and inward Carriage 770
Total cost of 10,000 kg 2,04,337
Since 50 kg of oil was lost due to leakage, which was considered as normal loss, the actual
quantity available for sale = (10,000-50)kg=9,950 kg. Hence, the total cost of 10,000 kg
of oil will now be considered as the cost of 9,950 kg\Unsold stock= (9,950-9,600)kg=350
kg. Hence, the value of unsold stock = 2,04,437 / 9,950 × 350 = Rs.7,191.25 = Rs.7,191.
10. Goods invoiced at Pro Forma Invoice Price:
Murthy of Tilak Nagar consigned goods costing Rs.2,00,000 to his agent Karthy of Ram
Nagar. The invoice was made pro forma so as to show a profit of 25% on cost. Murthy
paid freight and insurance Rs.5,000. Karthy sold part of the consignment for Rs.1,76,000
at a uniform price of 10% over invoice price and spent Rs.3,000 as warehousing charges
and Rs.4,000 as selling expenses. Karthy is entitled to a commission of 5% on sales and
20% of the net profit after charging commission on sales. Draw up the consignment
accounts in the books of Murthy.
Solution:
Dr. Consignment To Ram Nagar Account Cr.
To Goods Sent on 2,50,000 By Karthy A/c (Sales) 1,76,000
Consignment A/c By Stock on Consignment A/c 91,800
To Bank A/c (expenses paid, 5,000 (Note 1)
freight and insurance) By Goods Sent on Consignment 50,000
To Karthy’s A/c (consignee): A/c (load=25/125×2,50,000)
Warehousing Charges
3,000
Selling expenses 15,800
4,000 18,000
Commision 8,800
To Stock Reserve A/c 29,000
122
(Load=25/125×90,000)
To Profit before consignee’s
share of profit
3,17,800 3,17,800
To Karthy A/c (Consignee) 5,800 By Profit before Consignee’s 29,000
Share of profit share of profit
(20/100×29,000) 23,200
To Profit & Loss A/c
Transferred)
29,000 29,000
Working Note:
1. Calculation of stock with the consignee
Rs.
Invoice price of the goods sent to Consignee 2,50,000
Less: Invoice price of the goods sold=100/110×1,76,000 1,80,000
Invoice price of the unsold goods 90,000
Add: Consignor’s proportionate expenses= 5,000×90,000/2,50,000 1,800
Add: Consignee’s proportionate non-recurring expenses Nil
91,800
11. When Goods are sold by the Consignee at a Special Price with Special
Commission:
KK Dress Makers of Hyderabad consigned 400 bales of cotton goods to Mr.Manpreet of

Punjab on 1 November 2012. The cost price was Rs.600 per bale but the consignment
invoice was made out a figure to show a gross profit at 20% on invoice price.
Mr.Manpreet reported on 31.1.2013, that he had sold 3/4th of the consignment at a profit of
25% on sales and he incurred Rs.2,500 by way of freight and landing charges, etc. and also
Rs.1,500 by way of godown rent, etc. exclusive of his commission. The consignor spent
Rs.1,200 earlier as expenses in dispatching the goods. Mr.Manpreet was entitled to a
commission of 5% on sales and 20% on the net proceeds as bonus, after charging both the
commission and the bonus. On 1.2.2013 Mr. Manpreet sent a Bank draft for the amount
so far due from him.
Show the consignment accounts in the books of the consignor and ascertain the profit on
consignment up to 31.12.2013
Solution:
Dr. Consignment To Ram Nagar
Account Cr.
2012 2013
Nov.1 To Goods Sent on 3,00,000 Jan.31 By Mr.Manpreet’s A/c (Sales) 2,40,000
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Consignment A/c [(300×600)/75×100
[(400×Rs.600)×100/80] By Goods Sent on Consignment 60,000
To Bank A/c (expenses 1,200 A/c (load=25/100×3,00,000)
2013 paid) By Stock with Consignee A/c 75,925
Jan.31 To Mr.Manpreet’s A/c (Note 1)
(consignee):
Freight and landing 4,000
2,500
Godown Rent 1,500
To Mr.Manpreet’s A/c
(consignee): 49,333
Commission 15,000
12,000
Bonus
37,333
To Stock Reserve A/c
(Load=90,000×1/4)
(Profit on
Consignment
Transferred)
3,75,925 3,75,925
Working Note:
1. Calculation of stock with the consignee Rs.
Invoice price of 100 bales=3,00,000×1/4 75,000
Add: Consignor’s proportionate expenses= 1,200×1/4 300
Add: Consignee’s proportionate non-recurring expenses=2,500×1/4 625
75,925
2. Calculation of consignee’s bonus
Consignee’s bonus=20% of the net proceeds as bonus, after charging both commission and
bonus. It is assumed here that net proceds means sales less consignee’s expenses.
Hence, the consignee’s bonus=20/120 of (Sales-Consignee’s expenses-Commission), i.e.
20/120×(2,40,000-4,000-12,000) =Rs.37,333.
12. Goods are Returned by the Consignee and also Goods Damaged in Transit:
On 1 Apr 2011, Mr.Joshi of Bangalore consigned 2,000 kg of tea costing Rs.60 per kg to Mr.
Roy of Kolkata. Mr.Joshi incurred the following expenses:
Freight: Rs.2,000; Insurance: Rs.400, Sundry expenses: Rs.600
During the year ended on Mar 31st, 2012, Mr. Roy incurred the following expenses.
Freight: Rs.600; Godown Rent: Rs.500, Carriage to Godown: Rs.1,000
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On December 1, 2011 Mr. Roy sold 1,200 kg of tea for cash at a profit of 25% on sales. On
December 15, 2011, Mr. Roy returned 150 kg of tea, which was of poor quality, to Mr.Joshi
and paid return freight and carriage of Rs.250. Out of the remaining tea, 200 kg being
partially damaged was valued at 30% less than the cost. Mr. Roy charged his commission
at 5% and remitted the balance so far due from him to Mr.Joshi on March 31,2013.
Mr.Joshi closed his books every year on March 31.
You are required to prepare the following accounts in the books of Mr.Joshi:
a) Consignment to Kolkata A/c
b) Goods sent to Consignment A/c
c) Personal A/c of Mr. Roy
Solution:
In the Books of Mr. Joshi
Dr. Consignment To Kolkata Account Cr.
Date Particulars Rs Date Particulars Rs.
2011 2011
Apr.1 To Goods Sent on 1,20,000 Dec.1 By Mr.Roy A/c (Sales) 96,000
Consignment A/c [(1,200×60)/75×100]
To Bank A/c By Goods sent on consignment A/c 9,000
(expenses paid) (Goods returned by consignee)
Sundry expenses By Profit & Loss A/c (Note 1)
Freight & Insurance (Abnormal Loss due to
damage in transit) 4,420
By stock with consignee
600
2,400 3,000
Dec.15 To Mr.Roy A/c 250 A/c (Note 3)
(consignee) Good quality goods 27,900
(Return freight and Damaged goods 7,980
carriage) 35,880
2012
March.31 To Mr.Roy A/c
(consignee)
Freight 600
Godown Rent 500
Carriage to
Godown 1,000
(Profit on
Consignment
transferred)
1,45,300 1,45,300
125
Dr. Mr.Naik Account Cr.
2011 2011
Dec.1 To consignment 96,000 Dec.15 By consignment to Kolkata A/c (Return
Kolkata A/c Freight and carriage) 250
2012
March.31 By consignment to Kolkata A/c
Freight
600
Godown Rent
500
Carriage to Godown 1,000 6,900
Commission 88,850
4,800
By Bank A/c (Bal.Fig)
96,000 96,000
Dr. Goods Sent on Consignment Account Cr.

2011 2011
Dec.15 To consignment Kolkata 9,000 Dec.15 By consignment to Kolkata
A/c A/c 1,20,000
2012
Mar.31 To Purchases A/c 1,11,000
(transferred)
1,20,000 1,20,000
Working Notes:
1. Freight paid by the consignee is not considered as direct/non-recurring expenses
2. Calculation of goods damaged in transit

Rs.
200 kg. @ Rs.60 12,000
Add: Consignor’s proportionate expenses=3,000×(200/2000) 300
Add: Consignee’s proportionate non-recurring
expenses=[1,000×(200/2,000)] 100
12,400
Less: Estimated value [30% less than the cost, i.e Rs.(60-18)=Rs.42]
(200 kg.×Rs.42)= 8,400
Less: Consignee’s commission (5% of 8,400) 7,980
420
Abnormal loss (to be transferred to Profit and Loss A/c 4,420
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3. Valuation of Stock with Consignee Rs.
Cost 450 Kg.good quality goods @ Rs.60= 27,000
Add: Consignor’s proportionate expenses=3,000×(450/2000) 675
Add: Consignee’s proportionate non-recurring expenses=[1,000×(450/2,000)] 225
27,900
Total value of unsold stock:

Cost of 450 Kg. good quality goods= 27,900
Value of 200 Kg.damaged goods (Note 2)= 7,980
35,880
4.15 Summary:
 Consignment is the process of sending of goods by one person to another person for the
purpose of sale on commission basis at the sole risk of the sender. Overriding
commission is an extra commission given to consignee, in case the sales exceed a
specified amount. Del credere commission is a commission given to consignee if bad
debts are to be borne by the consignor.
 The unsold stock remained with the consignee has to be valued at cost plus rate able
share of non-recurring expenses or market price whichever is lower. Normal loss is part
of the cost of the goods so while calculating the value of stock on consignment, the cost
is inflated to cover the normal loss.
 Abnormal loss is calculated after taking into consideration the proportionate expenses
incurred on it and is credited to consignment account and debited to profit and loss
account. Under Invoice price method, unsold stock or any abnormal loss is to be valued
at invoice price. Hence to ascertain the profit or loss on a consignment adjustment has
to be made to eliminate such loading and bring down the items to cost level.
4.16 Terminal questions:
Section A – 2 marks questions

1. What do you mean by consignment?
2. Who is a Consignor?
3. Who is a Consignee?
4. What do you mean by Account sales?
5. What is Del credere commission?
6. What is the meaning of Cost price method?
7. What is Normal loss?
8. What is abnormal loss?
9. What is invoice price method?
Section B – 4 marks questions

1. Distinguish between Consignment and sale.
2. Explain the accounting treatment in the books of Consignor.
127
3. Explain the accounting treatment in the books of Consignee.
4. X of Mumbai consigned 74 bales of goods at Rs 100 per bale to Y of Kanpur on 1st Feb,
2004. 2.5% commission is allowed on sales. X incurred following expenses in connection
with consignment:
X received two months acceptance of Rs 1,000 from Y. Y spent Rs 20 for carriage and Rs.7
for unloading goods. Y sold 30 bales at Rs.120 per bale, 24 bales at Rs 125 per bale and 20
bales at Rs.130 per bale.
Prepare account sales
[Ans-Balance due= Rs 7,943]
5. Explain how unsold stock is valued which is sent to consignee.

6. Explain the process of calculation of Normal loss.
7. Explain how abnormal loss is calculated.
8. Explain how load is adjusted under invoice price method.
9. A consigned to B 100 cases of Tea costing Rs 100 per case. He paid Rs 1,000 as freight
and cartage. B could take delivery of only 90 cases since 10 cases were lost in transit. He
paid Rs.200 as unloading and carriage charges. At the end of the year he reported that he
has sold away 80 cases at Rs.150 per case.
You are required to calculate

a) The value of abnormal loss
b) The value of closing stock
[Ans: Abnormal loss = Rs 1,100; Closing stock = Rs 1,122]
Section C – 10 Marks Questions
1. On 1st January 2003, Mr. Yogesh of Mumbai consigned 500 toys at the rate of Rs
350 to Mr.Abeer of Agra and incurred following expense on consignment:
Cartage - Rs 500, Freight - Rs 2,000 and Insurance - Rs 2,500. The expenses incurred by
Mr.Abeer were cartage Rs 1,500, unloading Rs 1,000 and Rs 2,500 for godown rent. On 31st
December 2003, an account sale was received from Abeer showing 450 toys were sold at
Rs 1,000 per toy and 50 toys remained unsold. As per agreement 5% commission on sales
will be payable to Abeer.
Prepare Consignment a/c showing valuation of Consignment stock.
[Ans- Closing stock= Rs 18,250;P/L a/c= Rs 2,83,250]
2. Karim informed the following particulars of his transactions relating to goods consigned
to Kashim for the year ended 31.12.2003:
Goods sent (10,000 kg) Rs 1,00,000
Karim’s expenses Rs 10,000
Kashim’s Expenses:
Freight & insurance Rs 2,000
Selling expenses Rs 5,000
Sold goods (8,000 kgs) Rs.1,12,000
128
Loss due to natural wastage (100 kg)
Commission at 5% on gross sales.
You are required to prepare Consignment a/c and show the detailed calculation of unsold
goods in the books of Karim.
[Ans- Closing stock= Rs.21,495; P/L a/c= Rs.10,895]
3. A & Co. of Calcutta sent on consignment account goods to B & Co. of Bombay at an
invoice price of Rs 29,675 and paid for freight Rs 762, cartage Rs 232 and insurance Rs
700. Half the goods were sold by agents for Rs 17,500, subject to agents commission
of Rs 875, storage expenses Rs 200 and other selling expenses of Rs 350. 1/4th of the
consignment was lost by fire and a claim of Rs 5000 was recovered.
Prepare necessary accounts in the books of A & Co.
The consignor received a two months bill of exchange from the agents in satisfaction of the
dues.
[Ans: Total abnormal loss =Rs 7,843; Net abnormal loss = Rs 2,843; P/L a/c = Rs 392]
4. A Consigned goods to B at an invoice price of Rs 6,000 which was 20% above cost price.
A incurred Rs 120 on freight and Rs 80 on insurance. He received an acceptance from his
agent of Rs 2000 which was discounted with his bank at Rs 1,950. The agent sold 3/4th of
the goods at Rs 5,200 and his sales expenses Rs 175 and commission Rs 300. The agent
paid the due amount through two months bill.
Open necessary accounts in the books of both the parties.
[Ans: Closing stock is = Rs 1,550; P/L a/c is = Rs 825; B’s a/c(final settlement through
B/R)= 2,725 ]
5. On 1st Sep 2006 goods of the value Rs 2,64,000 were consigned by Shri Champalal of
Bangalore to his agent Shri Mahindra of Cochin at proforma invoice price of 20% profit on
cost price. Shri Champalal paid insurance and other forwarding charges on consignment
amounting to Rs 10,000. Shri Mahindra was allowed Rs 2,000 being establishment cost. He
was entitled to 5% commission on gross sales and an additional 3% delcredere commission
on credit sales only. Shri Mahindra made an expense of Rs 2,040 as landing charges. 3/4th
of the goods were sold at 33 1/3% profits on cost, half of which were credit sales. One half
of the balance of goods was destroyed by fire and a claim lodged for Rs 28,000 was settled
at discount of 10%. The balance of goods was in stock.
Prepare a consignment account.
[Ans: Total commission =Rs 17,160; Closing stock = Rs 41,105; Total abnormal loss =
Rs 41,105;]
6. On 1st September 1998 goods which cost X rs.33000 were consigned by him to his agent
Y at a proforma price which was 20% over cost. X paid insurance and freight charges
amounting to rs. 1250. Y was allowed Rs. 3000 per annum towards establishment cost, 5%
commission on gross sales and 3% del credere commission. He is also allowed 5% extra
commission on the profit on such consignment sales after charging such commission. Y
incurred an expense of Rs.255 as landing charges. 3/4th of goods were sold at 33 1/3%
profit on cost, half of which were on credit, half of the balance of goods were damaged and
claim on insurance company was made for Rs.4400 which was settled at a discount of 10%.
129
You are required to prepare consignment account and abnormal loss account in the books
of X for the year ending 31st Dec 1998.
(Ans. Profit Rs.3315, Closing stock Rs.5138, Commission Rs.2640, Extra commission
Rs.166)
Self-study problems
10 marks
1. S oil mills, Bombay consigned 5,000 Kg of oil to D of Calcutta from 1st Jan 2000. The cost
of the oil was Rs.46/kg. S mills paid Rs.20,000 for packing, freight & insurance. During
transit 125kgs was accidentally destroyed for which insurers paid directly to consigners
Rs.4,500 in full settlement of the claim. D took delivery of the consignment on 10th Jan. On
31st March 2000, D reported that 3,750kgs was sold at Rs.60. The expenses being on
godown rent Rs.3,000, on advertisement Rs.4,000 and on salesman salaries Rs.6,400. D is
entitled to a commission of 3% plus 1.5% del credere. A party which had bought 500 kg
was able to pay only 80% of the amount due from it. D reported a loss of 50 kg due to
leakage.
Assuming that D paid the amount due by bank draft, prepare consignment a/c, abnormal
loss a/c D’s a/c in the books of X and S’s a/c, commission and bad debts a/c in the books of
D assuming that accounts are closed by both the parties on 31st March.
(Ans. Profit Rs.12,032, Commission Rs. 10,125, closing stock Rs. 54,307, final
settlement amount Rs.2,01,475).
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Module 5
FIRE INSURANCE CLAIMS
Structure
5.1 Introduction
5.2 Meaning of Insurance policy
5.3 Accounting Provisions
5.4 Accounting procedure for calculating claim of loss of stock
5.5 Self-assessment questions
5.6 Illustrations
5.7 Meaning of Abnormal Line of Goods
5.9 Treatment of Abnormal Line of Goods
5.8 Illustrations
5.9 Self-Assessment Questions
5.10 Summary
Learning objectives
• To learn the meaning of fire insurance policy.

• To understand the need of insurance a policy
• To know the various losses which arise due to fire to a business unit
• To learn to calculate the loss of stock on date of fire
• To learn to calculate the claim amount
• To understand the meaning of abnormal line of goods
• To learn to account for abnormal line of goods
• To calculate stock on date of fire if it includes abnormal line of goods
5.1 Introduction:
Every business unit has to keep a sufficient quantity of stock in the business premises for
meeting the requirements of sales or manufacturing the goods. The stock kept in the
business premises is subject to risk of loss by fire. For protecting itself against such loss, a
business unit takes fire insurance policy covering the loss of stock by fire.
5.2 Meaning of Insurance policy:
We shall now discuss the meaning of certain terms used in this unit. Insurance policy is a
contract of indemnity, under which, the Insurance Company will agree to compensate the
policyholder, on the occurrence of a fire accident, in exchange for a consideration called
“premium”. The policyholder also referred to as the ‘insured’ will have an insurable interest
in the property. Insurable interest means that if the property is damaged the person having
an insurable interest will suffer from monetary loss.
The insurance company is called as the “insurer” and the policyholder is called as the
“insured”.
131
Fire Insurance Policies can be taken on stock in trade, assets of the business and loss of
profits.
5.3 Accounting Provisions:
The accounting provisions relating to the loss suffered on account of fire accident are
classified into two types
(a) Loss of stock

(b) Loss of profit.
This chapter focuses on claim for loss of stock only.
5.4 Accounting procedure for calculating claim of loss of stock:
Step- 1: Preparation of Trading Account:
A trading account is prepared for the preceding year of fire accident to ascertain the
amount of gross profit. This step is necessary when the ratio of gross profit is not given.
Step-2: Ascertainment of rate of gross profit.

Rate of gross profit = Gross Profit X 100
Sales
Step-3: Preparation of Memorandum Trading Account:
Memorandum Trading Account is nothing but Trading Account, prepared
to ascertain the stock on the date of fire accident.
Memorandum Trading Account

To opening stock XXX By Sales up to the date of XXX
To purchases up to date of Fire XXX
fire XXX By Stock on date of fire (b/f )
To expenses on purchases XXX
To direct expenses ,if XXX
any(wages, water etc)
To Gross Profit XXX
XXX XXX
Of the above – opening stock, purchases, direct expenses and sales up to the date of fire
would be available. But profit should be ascertained on the basis of the rate of gross profit
in any of the following manner:
a) The rate of gross profit may be given in the problem

b) Rates of gross profit of past few years could be given
132
c) Gross profit and sales figures of past few years could be given
d) Trading account items of last year could be given.
Based on the information given, the normal rate of gross profit on sales must be calculated.
Using this rate, gross profit for the period up to fire accident must be calculated.
Incorporating the profit in Memorandum Trading Account, stock on date of fire accident
must be calculated.
Step-4: Ascertainment of “Actual amount of loss”:
Particulars Amount
Stock on date of fire XXX
Less: Goods saved or salvaged goods or salvage XXX
xxx
Add: Expenses incurred for extinguishing fire, if
any xxx
Actual amount of loss XXX
The term Salvage refers to the value of the stock saved from fire.
Step-5: Ascertainment of “Claim amount”:

Claim amount depends on the extent of insurance on the value of goods:
a) When stock is fully insured or over insured, the amount of claim will be the same as
amount of loss.
b) When the stock is under – insured: Under-insurance is an instance where the insurance
cover is taken for a lesser value. Some traders may resort to under insurance with the
intention of paying a lesser premium.
i) if the entire stock is destroyed; the policy amount would be the amount of claim
ii) if only portion of goods are destroyed Average clause must be applicable as stated
below:
Amount of claim= policy amount X Actual loss of stock

Stock on
the date of fire
5.5 Self-assessment questions:
1. Insurance policy is a contract of indemnity, under which, the Insurance Company will
agree to compensate the policyholder, on the occurrence of a fire accident, in exchange for
a consideration called ----------------. (ref-1.2)
2. Fire Insurance Policies can be taken on ---------- in trade, assets of the business and loss
of profits. (ref-1.2)
133
3. Memorandum Trading Account is nothing but Trading Account, prepared to ascertain the
stock on date of --------- accident. (ref-1.4)
5.6 Illustrations:
The premises of Mercantile Traders caught fire on 1-11-02 and their stock was damaged.
the following information is available.
Stock on 31.12.01 1,32,720

Stock on 31-12-2000 96,140
Purchases from 1-1-02 up to the date of fire 3,48,270
Purchases up to 31-12-01 4,52,580
Sales up to 31-12-01 5,20,000
Sales from 1-1-02 up to date of fire 4,91,000
Further information:
2. In May 02, goods costing Rs. 2. 10,000 were given away for advertising purposes, no
entry being made in books.
3. During 02, a clerk had misappropriated unrecorded cash sales of Rs.4, 000
4. The rate of gross profit is constant over the years.

5. Value of the stock salvaged was Rs.13, 000 and the expenses incurred to extinguish fire
were Rs 800.
Solution
Trading Account for the year ended 31-12-01

To opening stock 96,140 By sales 5,20,000
To purchases 4,52,580 By closing stock 1,32,720
To Gross Profit(b/f) 1,04,000
6,52,720 6,52,720
104000
Gross profit rate =  100
520000
=20%
134
Memorandum Trading Account from 1-1-02 to 1-11-02

To opening stock 1,32,720 By Sales up to the date of
To purchases up to date of fire fire
4,91,000
3,48,270 Add-unrecorded sales 4,95,000
Less- Goods used for 3,38,270 74,990
Advertising 99,000 4,000
10,000 By Stock on date of fire(b/f )
To Gross Profit (20% on sales)
5,69,990 5,69,990
Ascertainment of “Actual Amount of Loss”:
Particulars Amount
Stock on date of fire 74,990
Less: Goods saved or salvaged goods or salvage 13,000
Add: Extinguishing fire expenses 61,990
800
Actual amount of loss 62,790
The problem does not provide any information about the policy amount. Hence, the
amount of claim will be the same as actual amount of loss.
Therefore the amount of claim is 62,790.
5.7 Meaning of Abnormal Line of Goods:
Abnormal goods refer to stocks in trade, which would have lost the quality because of
various reasons like physical damage, passing of time, change in fashion etc. These goods
cannot be sold at normal price. They have slow rate of turnover. Hence they are called as
slow moving goods.
5.8 Treatment of Abnormal Line of Goods:
For calculation, the value of abnormal goods will be separated from the normal goods.
The gross profit is always calculated on the sales made in relation to the normal goods.
Step- 1: Preparation of last year Trading Account:

While preparing last year’s trading account, value of abnormal value of goods included in
opening stock, purchases, sales and closing stock must be deducted from the respective
item and then the amount of gross profit is to be ascertained on the normal goods.
135
Step-2: Ascertainment of rate of gross profit.
Rate of gross profit = Gross profit on sale of Normal Goods X 100
Sales of Normal Goods
Step-3: Preparation of Memorandum Trading Account:

While preparing Memorandum Trading Account two separate columns have to be provided
for Normal goods and Abnormal goods.
Based on the information given, gross profit can be calculated on normal goods by applying
rate of gross profit on normal goods.
This would give us the result of closing stock which will be the stock of normal goods on
date of fire accident. In the abnormal goods column profit/loss from the sales of abnormal
goods is ascertained and closing stock of abnormal goods is calculated on date of fire.
Step-4: Ascertainment of “Actual amount of loss”:
Particulars Amount
Stock of normal goods on date of fire XXX
Add-Stock of abnormal goods on date of fire XXX
xxx
Less: Goods saved or salvaged goods or salvage XXX
Add: Expenses incurred for extinguishing fire, if any XXX
Actual amount of loss XXX
The term Salvage refers to the value of the stock saved from fire.
Step-5: Ascertainment of “Claim amount”:

There would not be any difference in calculation of amount of claim, on account of
existence of abnormal goods. Calculation of claim is based on the extent of insurance.
5.9 Illustrations:
On 15th June 05, a fire accident destroyed, the Godown of a business, following information
is available.
• Stock @ cost on 1-1-04 Rs. 73,500
• Stock @ cost on 31-12-04 Rs. 79,600
• Net purchases for 2004 were Rs. 3,98,000
• Net sales for 2004 Rs. 4,87,000
• Purchases till the date of fire were 1,62,000 and sales till that date were Rs. 2,31,200
At the end of the year 2004, stock worth Rs 2,300, was written off from closing stock
because of poor selling line, which had a cost of Rs. 6,900.
A portion of this stock was sold in Feb 2005 at a loss of Rs 250, on the original cost of Rs
136
3,450. The balance of the stock is worth the cost.
Subject to the above exception the rate of GP has remained constant, salvage was Rs
5,800. Find out the claim.
Solution
Trading Account for the year ended 31-12-04

To opening stock 73,500 By sales 4,87,000
To purchases 3,98,000 By closing stock
Normal goods
To Gross Profit(b/f) 97,400 75,000 81,900*
Abnormal Goods
6,900
5,68,900 5,68,900
*the value of goods already written off is added back to closing stock and then closing stock
is divided into normal and abnormal stock.
Gross profit rate =[(97,400/ 4,87,000) x100]

=20%
Memorandum Trading Account from 1-1-08 to 27-6-08
Particulars Normal Abnorm Total Particulars Normal Abnorm Total

goods al goods al
goods goods
To opening stock 75,000 6,900 81,900 By sales* 2,28,000 3,200 2,31,200
To purchases 1,62,000 1,62,000 By loss on 250 250
45,600 sale
To gross profit 45,600 54,600 3450 58,050
(20% on By stock on
2,28,000) date of
fire (b/f )
2,82,600 6,900 2,89,500 2,82,600 6,900 2,89,500
*from the total sale the sale of abnormal goods are subtracted to find out the sale of normal
goods. The sale of abnormal goods (3,450 – 250) Rs.3,200.
137
Ascertainment of “Actual Amount of Loss”:
Particulars Amount
Stock on date of fire 58,050
Less: Goods saved or salvaged goods or salvage 5,800
Actual amount of loss 52,250
The problem does not provide any information about the policy amount. Hence, the
amount of claim will be the same as actual amount of loss.
Therefore amount of claim is 52,250.
5.10 Self-Assessment Questions:
a) Fill in the blanks

1. The average clause in a loss of stock policy discourages -----------------.
2. The average clause in case of a loss of stock policy is applied when the value of stock on
date of fire is more than the ---------------.
3. Claim to be lodged when average clause is applicable= Value of stock destroyed
X Value of policy ---------------.
4. Memorandum Trading a/c is prepared to find out the value of ----------- on date
of fire.
Ans. (1) under insurance of stock (2) amount of policy taken 3) value of stock on date of
fire (4) stock.
d) Select the correct answer
1. The objective of inserting average clause in loss of stock policy is to:

(j) Discourage full insurance of stock
(b) Encourage full insurance of stock.
2. A plant & machinery worth Rs 15, 00, 000 was insured for 8, 00,000. It was completely
destroyed by fire. The loss to be admitted by the insurance company would be:
(a) 15, 00,000
(b) 8, 00,000.
Ans. (1) b (2) b.
5.11 Summary:
Insurance policy is a contract of indemnity, under which, the Insurance Company will agree
to compensate the policyholder, on the occurrence of a fire accident, in exchange for a
consideration called “premium”. Memorandum Trading Account is prepared to ascertain
138
the stock on date of fire accident. Claim amount depends on the extent of insurance on the
value of goods.
Abnormal goods refer to such stock in trade, which would have lost the quality for reasons
like physical damage, passing of time, change in fashion etc. These goods cannot be sold at
normal price nor has slow rate of turnover. The gross profit or gross loss must be
calculated on the sales of normal goods and abnormal goods separately.
5.12 Terminal questions:
Short answers (2marks)

1. Who is an insurer? (ref-5.2)
2. What do you mean by ‘insured’? (ref-5.2)
3. What do you mean by Gross profit ratio? (ref-5.4)
4. What do you understand by under-insurance? (ref-5.5)
5 What is an Average clause in fire insurance claim? (ref-5.5)
6. Loss of stock by fire-Rs 2,00,000. Amount of policy-1,71,000 , Total value of stock -
2,28,000. Calculate the amount of fire claim by applying average clause.
Ans. (1,50,000)
7 What are abnormal goods in the context of fire insurance claim? (Ref- 5.8)
Long answers (4marks)

1. Explain the steps involved in calculating in calculating the claim for loss of stock. (ref-
5.4)
2. State the accounting treatment and procedure for calculating claim for loss of
stock, when abnormal goods are part of stock. (Ref- 5.9)
3. A trader took out a fire insurance policy containing an average clause covering his stock
of Rs.15,000. His practice was to base his selling price at cost plus 331/3%. He closes his
books on 30th June every year.
On 31.3.2016 a fire occurred at his premises and destroyed his stock. The salvaged stock
was RS.6, 000. During the period of 9 months preceding the fire, his purchases amounted to
Rs.61,000 and sales of Rs.84,000. His stock on 1.7.2016 was valued at Rs.20,
000.(Ans:Rs.10,000)
4. Explain the various steps you will take for ascertaining the amount of claim under a loss
of profit policy.
5. Write down the format of memorandum trading account and explain its importance.
6. On 30th June 1996 accidental fire destroyed a major part in the stock of godown of Jay
associates. Stock costing Rs 30,000 could be salvaged but not their stores ledger. A fire
insurance was in force under which the sum insured was Rs 3,50,000. From the available
records the following information are obtained-
Total sales invoice during the period April-June amounted to Rs30,20,000. An analysis
showed that goods of value of 3,00,000 had been returned by the customers before the date
of fire.
Opening stock on 1/4/96 was Rs 2,20,000 including the stock value of Rs 20,00 being lower
of cost and net value subsequently realized.
Purchase between 1/4/96 and 30/6/96 were Rs 21,00,000
139
Normal Gross profit were 33.33% on sales.
A sum of Rs 30,000 was incurred by way of fire fighting expenses on the day of fire.
Prepare a statement showing the insurance claims recoverable.
[Ans: Insurance claim is 1,50,000]
6. Balu Traders have taken a fire policy of ₹4,80,000 covering its stock in Trade. A fire
occurs on 31-06-2014 and stock was destroyed with the exception of the value of ₹
1,24,080.
Following particulars are available from the books of accounts of the firm:
Stock on 01-04-2014 1,80,000
Purchases to the date of fire 7,80,000
Sales to the date of fire 5,40,000
Carriage Inwards 24,000
Commission paid on purchases 2%
Rate of Gross Profit on Cost 50%
The Policy was subject to average clause. You are required to calculate
i) Total loss of stock
ii) Amount of claim to be lodged with the Insurance Company.
iii) Loss suffered due to under insurance.
[Ans: Actual Loss: 5,15,520, Amount of Claim: 3,86,882, Loss due to under Insurance:
1,28,638]
7. A fire occurred in the premises of Agni on 25th November 2014 when a large part of the
stock was destroyed. Salvaged was ₹ 15,000. Agni gives you the following information for
the period April 1, 2014 to November 25, 2014.
a) Purchases: ₹85,000, b)Sales: ₹90,000 c)Goods costing ₹5,000 were taken by Agni for
personal use, d)Cost price of stock on 1st April, 2014 was ₹ 40,000.
Over the past few years, Agni has been selling goods at a consistent profit margin of 33
1/3%. The Insurance Policy was for ₹ 50,000. It included an average clause.
Agni asks you to prepare a statement of claim to be made to the Insurance Company.
[Ans: Claim: ₹ 37,500]
Exercise (10m)
1. On 20th July 2002, the godown and business premises of a merchant were affected by
fire and from accounting records salvaged; the following information is made available to
you:
Stock of goods at cost on 1st April 2001 1,00,000

Stock of goods at 10% lower than cost as on 31st March 2002 1,08,000
Purchase of goods for the year from 1st April, 2001 to 31st March 4,20,000
2002
Sales from the same period 6,00,000
Purchases less returns for the period 1st April, 2002 to 20th July 1,40,000
2002
Sales less returns for the above period 3,10,000
140
Sales up to 20th July 2002 included Rs 40,000 for which goods had not been dispatched.
Purchases up to 20th July 2002 did not include Rs 20,000 for which purchase invoices had
not been received from suppliers, though goods have been received at the godown.
Goods salvaged from the accident were worth Rs 12,000 and these were handed over to
the insured. Ascertain the value of claim for the loss of goods.
Ans: [G/P rate = 33.33% ; Stock on date of fire= 1,00,000 ; Actual loss= 88,000 ; Claim
amount = 88,000]
2. A fire occurred in the premises of Sri. Ramesh on 1-04-96 and a considerable part of the
stock was destroyed. The stock salvaged was Rs 1,12,000. Sri Ramesh had taken a fire
insurance policy for Rs 6,84,000 to cover the loss of stock by fire. You are required to
ascertain the insurance claim due from the insurance company for the loss of stock by
fire. The following particulars are available:
Purchases for the year ended 1995 37,52,000

Sales for the year ended 1995 46,40,000
Purchases from 1-1-1996 to 1-4-1996 7,28,000
Sales from 1-1-1996 to 1-4-1996 9,60,000
Stock on 1-1-1995 5,76,000
Stock on 31-12-1995 9,68,000
Wages paid during the year 1995 4,00,000
Wages paid during 1-1-1996 to 1-4-1996 72,000
Ramesh had consigned goods worth Rs 2,00,000 in June 1995, which were lost in accident.
As there was no insurance the loss was borne by him in full. Stock at the end of each year
for and till the end of calendar year 1994 had been valued at cost less 10%. From 1995
however there was a change in the valuation of closing stock which was ascertained by
adding 10% to its cost.
[Ans. G/P=20%, Stock on date of fire=9,12,000, Actual loss=8,00,000,
Total claim= 6,00,000]
3. Fire occurred in the premises of Sita Gita on 1st April, 2007 and a considerable part was
destroyed. The stock salvaged was Rs 56,000. A fire insurance policy for Rs 3,42,000 was
taken 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 the
fire from the following particulars:
Purchases for the year 2006 18,76,000

Sales for the year 2006 23,20,000
Purchases form 1st Jan, 2007 to 1st April 2007 3,64,000
Sales form 1st Jan, 2007 to 1st April 2007 4,80,00
Stock on 1st Jan, 2006 2,88,000
Stock on 31st Dec 2006 4,84,000
Wages paid during the year 2006 2,00,000
Wages paid during 1st Jan 2007 to 1st April, 36,000
2007
141
Fire also broke out on 21st December 2006 and destroyed stock of the estimated cost of
1,00,000.
There was a practice in the concern to value the stock at cost less 10 %, but all of a sudden
this practice was changed and stock on 31st December 2006 was valued at cost plus 10%.
[Ans: G/P -20%, Stock on date of fire-4,56,000 , Actual loss-4,00,000 , Insurance claim
-3,00,000]
4. On 1st October 2008, the godown of Natrayan was destroyed by fire. The record of the
business revealed the following:
Stock as on 1st April, 2007 9,50,000

Stock as on 31.3.2008 8,00,000
Purchases for the year ended 31.3.2008 31,00,000
Sales for the year ended 31.3.2008 40,00,000
Purchases from 1.4.2008 to the date of fire 7,50,000
Sales from 1.4.2008 to the date of fire 10,00,000
While valuing stock on 31.3.2008, a sum of Rs.10,000 was written off on the goods, cost of
which was Rs.48,000. A part of this stock was sold in june, 2008 at a loss of Rs.4,000 on the
original cost of Rs.24,000. The remainder of this stock was now estimated to be worth the
original cost. Subject to the above exception, gross profit remained at a uniform rate
throughout.
Stock salvaged was worth Rs.50,000. The godown was fully insured. Calculate the
amount of the insurance claim for the loss.
[Ans: Gross profit rate 19%; claim to be lodged Rs.6,92,200]
5. On 30th September 2004, the stock of Fred Perry 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:
Stock at cost on 1-4-2003 37,500

Stock at cost on 31-3-2004 52,000
Purchases less returns for the year ended 31-3-2004 2,53,750
Sales less returns for the year ended 31-3-2004 3,15,000
Purchases less returns up to 30-9-2004 1,45,000
Sales less returns up to 30-9-2004 1,84,050
In valuing the stock on 31-3-2004, due to obsolescence 50% of the value of the stock
which originally cost Rs.6,000 had been written off. In May 2004, 3/4th of this stock had
been sold at 90% of the original cost and it is now expected that the balance of the
obsolete stock would also realize the same price. Subject to the above, gross profit had
remained uniform throughout.
Stock to the value of Rs. 7,200 was salvaged.
[Ans-Stock on date of fire- Normal=59,000; Abnormal=1,350; Claim= 53,150]
142
6. On July 1, 06 a fire broke out in the Godown of Mr. Paani which destroyed all the stocks.
Calculate the amount of insurance claim for Stock from the following details:
Sales in 2004 2,00,000

Gross Profit in 2004 60,000
Sales in 2005 3,00,000
Gross Profit in 2005 60,000
Stock as on 1-1-2006 2,70,000
Purchases from 1-1-2006 to 30-06-2006 4,00,000
Sales from 1-1-2006 to 30-6-2006 7,20,000
Stock as on 31-12-2005 had been undervalued by 10%.

Stock taking conducted in March 06 had revealed that Stocks costing Rs. 80,000 were lying
in a damaged condition. 50% of these Stocks had been sold in May 2006 at 50% of cost and
the balance was expected to be sold at 40% of cost.
[Ans. Stock on date of fire 1,30, 000 + 16,000 = 1,46,000, Claim amount = 1,46,000]
7. Malcolm owns a retail stationery shop which was partly destroyed by fire on 27th
June 2005. The stock was insured for 13,000.
The balance sheet drawn on 31st December, 2004 included the following items:
Stock 12,500
Creditors 3,500
On examination of the books of account for the subsequent period up to the date of the fire,
the following particulars were obtained.
Sales 88,800
Payments to creditors for goods 75,000
Creditors as on 27-6-2005 1,800

A physical check of stock after the fire showed that items undamaged were 7,000 worth.
The normal rate of gross profit is 25% on cost but the stock on 31st December,2004
included items of discontinued line totaling 3,800 which were all sold during the next two
months at cost.
You are required to compute the amount of claim to be made to the insurer.
[Ans- Stock on date of fire- Normal=14,000; Abnormal=nil; Claim= 6,500]
8. On 15th April, 2014, a fire occurred in the godowns of a trader and almost the entire
stock, which was fully insured, was destroyed. The salvage was taken at the agreed
valuation of ₹ 7,500. From last year’s records, the following details were obtained:
₹
Opening Stock on 1 April, 2014
st 1,20,000
Purchases less returns, upto 14th April, 2014 5,10,000
Sales less returns upto 14 April, 2014
th 5,80,000
143
Gross profits on sales during the last five years were 30%, 31%, 32%, 30% and 32%.
The salvaged stock was renovated and made fit for sale at a cost of ₹ 4,000. A part of this
stock was sold at ₹ 13,000 and the balance was valued at ₹2,000.
Workout the Fire Insurance claims and shows the Salvaged Stock Account.
[Ans: Amount of claim: ₹2,22,300]
Student Practice problems: (4marks)

1. A large portion of the records and stock of a trading concern was lost due to a fire
accident on 15.7.2014. Later, goods worth ₹8,000 and some records were salvaged from
the fire. The following details are available from these records:
Period 2009-10 2010-11 2011-12 2012-13 2013-14
Sales (₹) 8,60,000 7,10,000 6,00,000 5,50,000 4,80,000
Gross Profit 2,15,000 2,13,000 2,00,000 1,87,000 1,60,000
On 31.3.2014, the stock was valued at ₹97,000. From 1.4.2014 to the date of fire, purchases,
sales and wages were ₹75,000, ₹1,59,000 and ₹30,000 respectively.
Prepare a statement of claim to be submitted to the Insurance Company.
[Ans: Gross Profit: 31.132%, Claim: ₹84,500]
2. a fire broke at in the shop of Mr. water on 15.10.2014. Calculate the loss from fire and the
claim to be lodged with the General Insurance Company.
Stock on 1.4.2013 3,06,000
Purchases for 2013-2014. 12,20,000
Sales for 2013-14 18,00,000
Stock on 31.03.2014. 2,70,000
Purchases from 1.4.2014 to date of fire 14,70,000
Sales from 1.4.2014 to date of fire 15,00,000
Mr. Water always used to value stock on hand at 90% of cost price. Goods salvaged was
₹1,80,000. The fire policy value was ₹ 6,30,000 subject to average clause.
[Rate of Gross Profit: 30%, Claim: ₹ 4,72,500]
Student Practice Problems: (10 marks)

1. On 1st July 2014, a fire destroyed the stock of a business firm. From the records which
were saved, the following information was obtained:
Stock ₹
On 1.4.2013 45,000
On 1.4.2014 55,000
Purchases
For the year 2013-14 1,29,250
For 3 months upto 1.7.2014 60,000
Sales
For the year ended 31.03.2014 1,70,000
Upto the date of fire 1,00,000
Manufacturing Expenses
For the year 2013-14 21,000
3 months upto 1.7.2014 ?
144
In May 2014, goods valued at a cost price of ₹500 were distributed as samples.
Manufacturing expenses were normally found to be constant per month. The salvaged
stock was estimated at ₹ 7,000. Prepare a statement showing the amount of claim.
[Ans: Gross profit on sales: 17.5%, Amount of Claim: ₹ 30,250]
2. Determine the amount of claims to be lodge by M/s. Tridev and Company from the
following details. A company had taken a fire insurance policy for ₹ 1,20,000 covering its
stock and the policy was subject to average clause.
2013-14 1.4.2014 to 15.6.2014
Sales 11,43,000 6,69,500
Purchases 7,89,500 3,94,000
Wages and Salaries 1,37,400 68,900
Sales Returns 54,500 15,800
Purchases Returns 27,400 9,600
Carriage Inwards 27,400 9,600
Date of fire 15.6.2014, stock on 1.4.2013 was ₹ 1,28,700, stock on 31.3.2014 was ₹1,89,000,
Stock salvaged ₹ 19,310, stocks had always been valued at 10% below cost.
[Ans: Amount of claim: ₹ 1,05,191]
3. On 15.9.2014 the premises and stock of a firm was destroyed but the accounting records
were saved from which the following particulars were available.
Stock on 1.4.2013 - ₹ 1,47,000
Stock on 31.03.2014 was ₹ 1,63,800
Purchases for the year 2013-14 was ₹ 7,96,000
Sales for the year 2013-14 - ₹ 9,74,000
Purchases from 1.4.2014 to 15.9.2014 was ₹ 3,24,000
Sales from 1.4.2014 to 15.9.2014 was ₹ 22,000. Stock salvaged was ₹60,600, Amount of
policy was taken for ₹ 60,000, There is an average clause in the policy. Show the amount of
claim.
[Ans: Gross Profit: 20%, Amount of Claim: ₹ 29,155]
4. On 20th July, 2014, the godown and business premises of a merchant were affected by
fire and from accounting records salvaged; the following information is made available to
you:
Stock of goods at cost on 1st April, 2013 1,00,000
Stock of goods at 10% lower than cost as on 31 March, 2014
st 1,08,000
Purchase of goods for the year from 1st April, 2013 to 31st March, 2014 4,20,000
Sales for the above period 6,00,000
Purchases less returns for the period from 1 April, 2014 to 20 July, 2014
st th 1,40,000
Sales less returns for the above period 3,10,000
Sales upto 20 July, 2014 included ₹40,000 for which goods had not been dispatched.
th
Purchases upto 20th july, 2014 did not include ₹20,000 for which purchase invoices had not
been received from suppliers, though goods have been received at the godown.
Goods salvaged from the accident were worth ₹ 12,000 and these were handed over to the
insured. Ascertain the value of claim for loss of goods/stock.
145
[Ans: Gross Profit: 33.33%, Actual Loss of Stock: 88,000]
5. On 1st July, 2014, the stock of Mr. Ramesh was destroyed by fire but sufficient records
were saved from which following particulars were ascertained:
Stock at cost – 1st April,2013 73,500

Stock at cost – 31 March, 2014
st 79,600
Purchases-year ended 31st March, 2014 3,98,000
Sales – year ended 31st March, 2014 4,87,000
Purchases – 1.4.2014 to 30.6.2014 1,62,000
Sales – 1.4.2014 to 30.6.2014 2,31,200
In valuing the stock for the Balance Sheet at 31st March, 2014, ₹ 2,300 had been written off
on certain stock which was a poor selling line having the cost ₹6,900. A portion of these
goods were sold in June 2014 at a loss of ₹ 250 on original cost of ₹ 3,450. The remainder of
this stock was now estimated to be worth its original cost. Subject to the above exception,
gross profit had remained at a uniform rate throughout the year.
The value of stock salvaged was ₹ 5,800. The policy was for ₹ 50,000 and was subject to the
average clause. Workout the amount of the claim of loss by fire.
6. The premises of a company were destroyed by fire on 15.9.2014. The records however
were saved where from the following particulars were available:
Stock on 1.4.2013, ₹ 30,000
Purchases less returns on 31.3.2014, ₹ 2,00,000.
Stock on 31.3.2014, ₹ 40,000
Sales less returns on 31.3.2014, ₹ 2,50,000
Purchases less returns from 1.4.2014 to 15.9.2014, ₹ 85,000.
Sales returns from 1.4.2014 to 15.09.2014, ₹ 1,20,000.
₹ 2,500 has been written off as certain stock which has a poor selling line, while valuing the
stocks for balance sheet as at 31st March 2014. The cost of such stock was ₹ 4,000. A
portion of this stock was sold in June 2014 at a loss of ₹ 500 of the original cost of ₹ 2,000.
The balance of this stock was now estimated to be worth the original cost. The stock saved
was ₹ 5,000. You are required to ascertain the amount of claims to be lodged with the
Insurance Company.
7. On 19th August, 2014, the premises of Alpha Ltd., were destroyed by fire, but sufficient
records were saved, wherefrom the following particulars were ascertained:
Stock at cost on 1.4.2013 36,750
Stock at cost on 31.3.2014 39,800
Purchases less returns during 2013-14 1,99,000
Sales less returns during 2013-14 2,43,500
Purchases less returns from 1.4.2014 to 19.8.2014 81,000
Sales less returns from 1.4.2014 to 19.8.2014 1,15,000
146
In valuing the stock for the Balance Sheet as at 31st March, 2014, ₹ 1,150 was written off
certain stock which was poor selling line, having cost ₹ 3,450. A portion of these goods
were sold in June 2014 at a loss of ₹ 125 on the original cost of ₹ 1,725. The remainder of
this stock was now estimated to be worth the original cost. Subject to the above exception,
gross profit has remained uniform rate throughout. The stock salvaged was ₹ 2,900. Show
the amount of claim for stock destroyed by fire.
[Ans: Gross Profit Ratio: 20%, Claim: ₹ 26,125)
8. A fire destroyed the stock of a firm on October 1, 2014. The business records were saved
and from them, the following particulars were ascertained:
Stock at cost on April 1, 2013 88,600
Stock at cost on March 31, 2014 75,100
Purchases for the year ending 31.3.2014 2,07,700
Sales for the year ending 31.3.2014 3,05,000
Purchases from April 2014 to September 30, 2014 1,18,000
Sales for the above period 1,78,143
In valuing stock on 31 March, 2014 ₹ 1,600 had been written off a particular line of goods
st
which had originally cost ₹ 3,600 and which was sold in June 2014 for ₹ 3,500. Except this
transaction the ratio of Gross Profit remained unchanged throughout.
The value of stock salvaged from the fire was ₹ 10,210. You are required to find the amount
of the claim to be presented to the Insurance Company in respect of the loss of stock.
[Ans: Gross Profit Ratio: 28%, Claim: ₹ 55,147]
147
II Semester B Com
Time 3 Hours Financial Accounting II Max Marks: 70
Section - A
a. Answer any 8 questions from the below : 8*2=16
 Why is single entry system called as unscientific method of book-keeping?
 What do you mean by Double Entry System?
 The Bangalore head office sends goods to its Hubli branch at a profit of 20% on cost.
If Bangalore head office sends it for 1,20,000. Calculate the cost price.
 Give the meaning of goods-in-transit.
 Why goods are sent to consignee at invoice price?
 Who are consignee and consignor?
 Distinguish between overriding commission and del credere commission?
 What do you mean by Gross profit ratio?
 Loss of stock by fire-Rs.4,00,000. Amount of policy- Rs.3,50,000, Total value of stock
Rs.4,60,000. Calculate the amount of fire claim by applying average clause.
 What is meant by inter departmental transfers?
 State under which bases of apportionment of the following expenses in case of
Departmental Accounting.
a. Depreciation of Machinery
b. Advertising Expenses.
Section - B
b. Answer any 6 questions from the below: 6*4=24
(i) From the following facts you are required to calculate total purchases:
Rs.
Opening Balance of Bills Payable 5,000
Opening Balance of Creditors 6,000
Closing Balance of Bills Payable 7,000
Closing Balance of Creditors 4,000
Cash paid to Creditors during the year 30,200
Bills Payable (honoured) during the year 8,900
(ii) State the differences between Statement of affairs and Balance Sheet.
(iii) Write journal entries for the following in the books of head office and branch
as on 31.12.2004
1. The head office had sent goods on 28.12.2004 worth 500 to the branch. The
goods were received by the branch on 3.1.2005
2. On 27.12.2004, the branch had remitted Rs.375 to the head office and the
amount was received on 1.4.2005
3. Depreciation on branch assets was 200. The account of these assets was kept in
the books of the head office
4. A clerk of the branch had rendered services worth 300 in the head office ( his
salary was paid by the branch)
148
(iv) The following data are furnished by Mr. Mukul and you are required to
calculate the value of unsold stock on consignment for the period;
450 cases of goods were sent by the consignor @ Rs. 240 per case and out of that 90
cases remain unsold. The consignor incurred the following expenses – packing
charges Rs. 850; freight and insurance Rs. 1250; landing charges Rs.600. the
consignee incurred following expenses – unloading charges Rs. 400; carriage to
godown Rs. 1850; godown charges Rs. 900
(v) A fire accident occurred in the premises of Hot Furnace Traders on 23rd April 03.
The purchases made till the date of fire were Rs.45,000 and sales were Rs.60,000.
The trader makes a profit of 15% on sales. The stock as on 1-1-03 was Rs.10,000.
Calculate the stock on date of fire.
(vi) Give the differences between Branches and Departments
(vii) Y consigns goods to X valued at 8000 cost price. Expenses incurred by Y are
freight 40, insurance 100, cartage 20. Commission is allowed at 5% on sales. An
advance of 5000 is made by the consignee. X incurs the unloading charge 80, cartage
inward 40, advertising 200 and cash sales amounted to 7600. At balance date one-
quarter of the goods are unsold. Prepare consignment account.
(viii) Joseph company, Delhi has a branch in Faridabad & charges all goods sent to
the branch at cost price plus 25%. It has made arrangements in such a way that all
the cash received by the branch is to be paid daily to the end of head office a/c. from
the following prepare branch account for the year 31.12.2001
Stock on 1.1.2001 6,000
Goods sent to branch, less returns 40,000
Debtors on 1.1.2001- 750
Rent, rates & taxes 1,600
Salaries 2,400
Debtors on 31.12.2001- 800
Stock on 31.12.2001 -7400
Cash sent to head office – 38,550
Section - C
c. Answer any 3 questions from the below: 3*10=30
 Poona opened a branch in Bangalore to which goods are supplied at selling price,
being 25% profit on sales. Prepare ledger accounts under S & Drs system
Goods sent at invoice price – 1,68,000
Goods returned from branch – 18,000
Branch expenses paid by the head office – 10,000
Expenses paid by branch – 2,000
Cash sales – 80,000
Credit sales – 40,000
Cash received by branch from branch debtors – 32,000
Discount allowed to branch from branch debtors – 1,600
Goods returned by customers – 2,000
Defective goods written off 1,400
Cash remitted by the branch to H.O – 1,10,000
149
 Manish does not maintain proper books of accounts. From the following incomplete
information, prepare Trading and Profit & Loss a/c for the year ended 31.12.1986
and the Balance Sheet as on that date.
01.01.1986 31.12.1986
Debtors 18,000 25,000
Stock 9,800 13,200
Cash on hand 5,000 ?
Analysis of other transactions are:

Rs.
Cash collected from Debtors 60,800
Cash paid to Creditors 44,000
Salaries 12,000
Rent 1,500
Office expenses 1,800
Drawings 3,000
Fresh capital introduced 2,000
Cash sales 1,500
Return inward 1,000
Bad debts 200
 R consigned 10000 kgs of goods at Rs. 20 per kg. He spent Rs. 5 per kg as freight and
insurance for sending the goods to his agent D. 400kgs of ghee was lost due to
leakage which is considered to be abnormal loss. Rs. 8500 was paid to consignor by
insurance company as insurance claim. D sold 7500kgs at Rs. 40 per kg. D spent
32000 on advertisement and he is entitled to 5% commission on sales. Prepare
consignment, consignee and abnormal loss account in consignor’s books.
 On 1st October 2008, the godown of Natrayan was destroyed by fire. The record of
the business revealed the following:
Particulars Rs.
Stock as on 1st April, 2007 9,50,000
Stock as on 31.3.2008 8,00,000
Purchases for the year ended 31.3.2008 31,00,000
Sales for the year ended 31.3.2008 40,00,000
Purchases from 1.4.2008 to the date of fire 7,50,000
Sales from 1.4.2008 to the date of fire 10,00,000
150
While valuing stock on 31.3.2008, a sum of Rs.10,000 was written off on the goods, cost of
which was Rs.48,000. A part of this stock was sold in June, 2008 at a loss of Rs.4,000 on the
original cost of Rs.24,000. The remainder of this stock was now estimated to be worth the
original cost. Subject to the above exception, gross profit remained at a uniform rate
throughout.
Stock salvaged was worth Rs.50,000. The godown was fully insured. Calculate the amount
of the insurance claim for the loss.
 Following figures are extracted from the books of Raj Ltd
Departments
Particular
X Y Z
Purchase 1,00,000 1,50,000 4,00,000
Return outwards 10,000 5,000 15,000
Sales 30,5,000 6,10,000 91,5,000
Return in awards 5,000 10,000 15,000
Wages 20,000 30,000 40,000
Stock on 1.04.2010 25,000 35,000 5,000
Stock on 31.03.2011 40,000 25,000 20,000
a) Goods transferred from X Dept to Y Dept 5,000
to Z Dept 10,000
b) Goods transferred from Y Dept to X Dept 2500
to Z Dept 5,000
c) Goods transferred from Z Dept to A Dept 3500
to Y Dept 4500
Following Expenses are to be allocated equally:

Telephone charges Rs.1500; Insurance Charges Rs.3,000; Office Expenses Rs.4500;
Rent Rs.12,000 to be divided in proportion of space i.e. X – ¼, Y – ¼ and Z – ½
Other Expenses were discount allowed Rs.9,000; Legal Expenses Rs.1,000; Bad Debts
Account Rs.7500; Income Tax Rs.19,000; Interest on Capital Rs.2500; Interest on
Debentures Rs.8,000; Director’s fee Rs.1500; General Manager’s Salary Rs.5,000; Audit fee
Rs.6,000; Bank Charges Rs.4500
Prepare Departmental Trading & Profit and Loss A/c
*****
151

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FINANCIAL

The workbook is developed for the students of JAIN UNIVERSITY

For Internal Circulation Only

THE WORKBOOK IS ONLY A DIRECTIVE FOR STUDENTS AND NOT

School of Commerce Studies,

Published Printed by:

Center for Virtual Learning & Innovation,

Sl. No. Module Page No.

Model Question Paper 148-151

Module – 2: Branch Accounts 20 Hours

Module-3: Departmental Accounts 4 Hours

Module-4: Consignment Accounts 12 Hours

Module-5: Insurance Claims 10 Hours

1.1 Introduction to Single entry system:

Meaning of Single entry System

1.2 Types of Single entry System:

The single entry system is classified into the following categories:

1.3 Merits and Demerits of Single entry System:

3. Easy To Calculate Profit

4. Suitable For Small Business

4. Encourages misappropriation of cash: Under single entry system, complete

5. Rectification of errors is difficult: under single entry system, rectification entries

1.4 Difference between Single entry and Double entry system:

1.5 Ascertainment of profit or loss under single entry system:

1.5.1 Net assets method or net worth method:

Differences between Statement of affairs and Balance sheet

1.5.2 Conversion Method:

1.6 Steps in conversion method / Preparation of statement of affairs, memorandum

First Step - Ascertaining missing information.

Statement of affairs as on ------------------

Bills receivable Account

Bills payable Account

3. Preparation of Debtors and Creditors account

Total debtors account

4. Preparation of Cash/Bank account.

Step 2 – Preparation of final accounts under Double entry system:

1. Preparation of Memorandum Trading Account

Closing stock = (opening stock + purchases) – cost of goods sold*

Dr Memorandum Trading Account Cr

2. Preparation of Memorandum Profit and Loss Account

Profit and loss account

3. Preparation of Balance Sheet

Now the profit rate on cost is (20/80) x 100 = 25%

Assume cost to be 100, then;

Liabilities Amount Assets Amount

Bills receivable a/c

Bills payable a/c

Balance sheet of Sudhir as on 31.12.2000

2. A trader requests you to convert his accounting system to a double entry.

a) Opening Assets and Liabilities

b) Transactions for the year:

d) The closing balances were:

In the books of a Trader

Trading, Profit and Loss A/c for year ending.

Balance Sheet as at the end of the year

 Single entry system is an unscientific and unsystematic way of Book keeping.

1.8 Terminal Questions and Answers:

Section A – 2 marks questions

11. From the information given below, calculate required items:

d) Cost of goods sold