Untitled

CHAPTER 1
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

SHORT ANSWER TYPE QUESTIONS (5 MARKS)
Ques. 1 What do you mean by Accounting policy?
Ans: Accounting Policy: Specific accounting principles and methods of applying those principles while
preparing and presenting financial statements is known as accounting policy. Examples of Accounting
Policies are:
a. Charging of Depreciation
b. Valuation of Inventories
c. Valuation of Goodwill
d. Valuation of Investments
Ques. 2 What do you mean by Accounting Principle?
Ans: Accounting principle can be defined as a general law of rule adopted as a guide to action. Accounting
principles refer, to certain rules, procedures and conventions which represent a consensus view by those
indulging in good accounting practices and procedures. To be more reliable, accounting statements are prepared
in conformity with these principles. Accounting principles can be classifies in two categories:
(a) Accounting Concepts
(b) Accounting Conventions
FEATURES OF ACCOUNTING PRINCIPLES

Following are the features or characteristics of accounting principles:
(1) Understandability: The accounting principles should be simple and easily understandable by all.
Accounting information should be presented in such a way so that a person with reasonable knowledge
of business can understand it easily.
(2) Objectivity: Accounting information is presented in a neutral way. In other words, it should not be
biased towards a particular group or vested interest.
(3) Realiability: Accounting information which is presented is truthful, accurate and complete and
capable of being verified.
(4) Application: Application of accounting principle is most important without which it has no value.
Ques.3 What do you mean by accounting concepts?
Ans. Accounting Concepts: Accounting concepts are those general guidelines or rules or principles which an
accountant should follow while recording business transactions and preparing accounts. These are basic
assumptions or conditions, which form the foundation of accounting principles. It is an assumption and not the
fact. The main objective of accounting concept is to maintain uniformity and consistency in accounting records.
Examples of accounting concepts are:
• Business Entity Concept
• Money Measurement Concept
• Going Concern Concept
• Accounting Period Concept
• Cost Concept
• Dual aspect Concept
• Realization Concept
• Accrual Concept
• Matching Concept
Ques.4 What do you mean by accounting conventions?
Ans Accounting Conventions:
Accounting conventions refer to the custom or traditions which are generally followed in the preparation
of accounting reports and statements. Accounting conventions have developed over the years through the
regular and consistent practice of the accountants all over the world. The main objective of accounting
conventions is to make financial statements more meaningful or useful.
Examples of accounting conventions are:
• Convention of consistency
• Convention of full disclosure
• Convention of materiality
• Convention of conservatism
Ques.5 Distinguish between accounting concepts and accounting conventions.

Ans Accounting Concepts: Accounting concepts are those general guidelines or rules or principles which an
accountant should follow while recording business transactions and preparing accounts. These are basic
assumptions or conditions, which form the foundation of accounting principles. It is an assumption and not the
fact The main objective of accounting concept is to maintain uniformity and consistency in accounting records.
Accounting Conventions:
Accounting conventions refer to the custom or traditions which are generally followed in the preparation
of accounting reports and statements. Accounting conventions have developed over the years through the
regular and consistent practice of the accountants all over the world. The main objective of accounting
conventions is to make financial statements more meaningful or useful.
Basis Accounting Concepts Accounting Conventions

1. Meaning Accounting concepts are the Accounting conventions refer to
general guidelines or rules or the custom or traditions which
principles which an accountant are generally followed in the
should follow while recording preparation of accounting
business transactions and reports and statements.
preparing accounts.
2. Examples Examples of accounting Examples of accounting
concepts are: conventions are:
• Business Entity Concept • Convention of consistency
• Money Measurement • Convention of full
Concept disclosure
• Going Concern Concept • Convention of materiality
• Accounting Period • Convention of
Concept conservatism
• Cost Concept
• Accrual Concept
3. Based on Accounting concepts are based Accounting conventions are

on assumptions. based on general agreement.
4. Objective The main objective of The main objective of
accounting concepts is to accounting conventions is to
maintain uniformity and make financial statements more
consistency in accounting meaningful.
records.
5. Recognition Accounting concepts are more Accounting conventions are
or less recognized by law. generally accepted practices
based upon customs or usage.
6. Personal biasness Little scope for personal More scope for personal
biasness in the adoption of biasness in the adoption of
accounting concepts. accounting conventions.
LONG ANSWER TYPE QUESTIONS (15 MARKS)

Ques.6 What do you mean by Accounting concept and Accounting Conventions? Explain in detail
various accounting concepts.
Ans: Meaning of Accounting Concepts: Accounting concepts are those general guidelines or rules or
principles which an accountant should follow while recording business transactions and preparing accounts.
These are basic assumptions or conditions, which form the foundation of accounting principles. It is an
assumption and not the fact The main objective of accounting concept is to maintain uniformity and consistency
in accounting records.
Examples of accounting concepts are:
• Business Entity Concept
• Money Measurement Concept
• Going Concern Concept
• Accounting Period Concept
• Cost Concept
• Accrual Concept
1. Business Entity Concept

In accounting we assume that a business enterprise is separate from its owner. This is called Business Entity
Concept. The owner is treated as a creditor for his investment in the business. This concept is also known as
concept of enterprise. According to this concept, The business and personal transaction of its owner are
separated. Thus, all transactions are recorded in the books of accounts from the business point of view and not
from the owner’s point of view. E.g. , when the owner invest money in the business, it is recorded as liability of
the business to the owner. Similarly, when the owner takes away from the business cash or the goods for his
personal use, it is not treated as business expense but treating as his drawing. The assumption of accounting
entity is applicable to all types of business. In case of sole proprietorship and partnership firm, though the sole
proprietor or the partners are not considered as separate entities in the eyes of law, but for accounting purpose,
they are considered as separate entities.
Table No. 1
2. Money Measurement Concept

According to this concept, only those events or transactions are recorded in the books of the business which are
capable of being expressed in terms of money. In other words, events or transactions which cannot be expressed
in terms of money are not recorded in the books of accounts.
For example: Health of Director, capability of workers, honesty of employees etc. all are non monetary
transactions, hence do not find place in accounting.
The following points highlight the significance of money measurement concept:
(1) This concept guides accountants what to record and what not to record.
(2) It helps in recording business transactions uniformly.
(3) It makes it easier to understand the accounts prepared by a business enterprise.
(4) It facilitates both inter firm as well as intra firm comparison of business performance.
3. Going Concern Concept

According to this concept, it is assumed that the business will exist for a long time in the future and transactions
are, therefore, recorded in the books of the business from this point of view. The financial statements are also
prepared on the assumption that an enterprise will continue to exist for a long period in the future. All business
transactions are, thus , recorded in the books of the enterprise on the assumption that it is the going concern.
For example: It is on the basis of this assumption that we first record the purchase of fixed asset at their original
cost and then provide depreciation on these assets on a year to year basis.
Another example of this assumption is that a record is made for outstanding expenses and prepaid expenses
while preparing the financial statements
4. Accounting period concept
According to this concept, it is necessary for a business to keep accounts in such a manner that its results are
known at frequent intervals. Generally business concerns adopt 12 months periods for measuring the results of
the concerns. This time interval is called accounting period.at the end of each accounting period an income
statement and a balance sheet are prepared. The income statement discloses profit or loss made by the business
during the accounting period while the balance sheet reveals the financial position of the business as at the last
day of the accounting period.
5. Dual Aspect Concept
Dual aspect concept is the basic principle of accounting. It provides the basis for recording all business
transactions in the books of accounts. According to this concept, every business transaction has a dual effect,
i.e. it affects two accounts in their respective opposite sides. Thus, every transaction should be recorded at two
places. It means, both the aspects of the transaction must be identified and recorded in the books of accounts.
For example, Furniture purchased for cash has two aspects which are (i) Receiving of Furniture (ii) Giving of
cash. These two aspects are to be recorded.
Dual aspect concept is commonly expressed in terms of the following accounting equation:
Assets= Liabilities + Capital
The above accounting equation states that the assets of a business are always equal to the claims of owners and
the outsiders.
6. Accrual Concept
Accrual concept implies that the business events or transactions are recorded when they occur and not when the
related payments are received or made. In other words, all incomes and expenses are recorded on accrual basis.
Thus, income is recognized when sales are made or services are rendered regardless of when it is actually
received. Similarly, expenses are recognized in the accounting period in which these are incurred regardless of
when the cash for the same is actually paid.
7. Matching Concept
Matching concept is one of the fundamental accounting concepts followed by accountants worldwide.
According to this concept the net profit or loss of a firm can be ascertained by matching revenue of the business
with its costs. This concept requires that in any period when revenue is recognized, the expense incurred in
generating that revenue should also be recognized. In other words, the expenses should be matched to and
charged against the revenue in the same accounting period as the revenues are recognized. Some expenses can
be related directly and specifically to a particular revenue. Examples of such expenses are cost of goods sold,
sales commission, delivery expenses etc. But, in actual practice, there are lot of expenses which cannot be
matched directly to a particular revenue. Examples of such expenses are salaries, rent, depreciation etc. In such
a case, the matching is done on a time basis.
ACCOUNTING CONVENTIONS
Accounting conventions refer to the custom or traditions which are generally followed in the preparation of
accounting reports and statements. Accounting conventions have developed over the years through the regular
and consistent practice of the accountants all over the world. The main objective of accounting conventions is to
make financial statements more meaningful or useful.
Table No.2
Examples of accounting conventions are:
• Convention of consistency
• Convention of full disclosure
• Convention of materiality
• Convention of conservatism
1. Convention of Consistency
The convention of consistency states that the accounting policies or practices used in one accounting period
should be the same as are used for in other periods. In other words, the accounting policies or practices should
remain constant and should not be changed from one period to another. For example, if fixed assets are
depreciated on straight line basis in one year, it should not be depreciated by any other method in the next year
or years. Consistency is an important assumption of accounting as it facilitates better comparability of financial
statements.
2. Convention of Full Disclosure

The convention of full disclosure implies that all accounting statements should be honestly prepared and all
material information should be disclosed therein. All information which is of material interest to proprietors,
creditors and investors should be fully disclosed in accounting statements. The Companies Act, 1956 has made
ample provisions for the disclosure of essential information in company accounts. It has prescribed the forms in
which financial statements are to be prepared. The contents of Balance Sheet and Statement of Profit and Loss
Account are designed in such a way that there is no chance of any material information being left out.
3. Convention of Conservatism
The convention of conservatism provides guidance for recording transactions in the books of accounts. This
convention suggests that a firm should follow the policy of ‘playing safe’ while recognizing any profit or gain.
This convention is based on the principle that ‘Anticipate no profit, but provide for all probable losses’. The
main objective of this convention is to show the actual profit. Profit should not be overstated as it may lead to
distribution of dividends out of capital. Thus, this convention clearly states that profit should not be recognized
until it is actually earned. But if the business anticipates any loss in the near future, provision should be made in
the books of accounts for the same. For example, valuing closing stock at cost or market price whichever is less,
making provision for doubtful debts and discount on debtors, making provision against fluctuation in the price
of investments showing joint life policy at surrender value as against the amount paid; amortization of
intangible assets like goodwill, patents, etc.
4. Convention of Materiality
The convention of materiality implies that, to make financial statements more useful, only material facts or
information should be disclosed therein. The question that arises here is what is a material fact? Material fact is
that the knowledge of which would influence the decision of its user. Materiality, to a large extent, depends on
the nature of the transaction and the amount involved in it.
American Accounting Association (AAA) defines the term materiality as under:
‘An item should be regarded as material if there is reason to believe that knowledge of it would influence the
decision of informed investor’.
It should be noted that an item material for one concern may be immaterial for another. And similarly, an item
material on one year may not be material in the next year. It is now agreed that material information known
after the date of Balance Sheet should also be disclosed.
Some of the examples of material information to be disclosed are:
• Likely fall in the value of investments
• Likely fall in the value of inventories
• Likely fall in the markets due to increased competition
• Likely increase in wage bill under recently concluded agreement, etc.
CHAPTER 2
INDIAN ACCOUNTING STANDARDS AND IFRS
LONG ANSWER TYPE QUESTIONS(15 MARKS)
Ques 1. What do you mean by Accounting Standards? Explain the nature , objectives and utility of
Accounting Standards?
Ans: ACCOUNTAING STANDARDS : Accounting standards are set of accounting rules and guidelines
issued by the accounting body of a country such as The Institute Of Chartered Accountants of India. Accounting
Standards are the norms of accounting used for recording and reporting purposes. These are the written policy
documents issued by the Government or professional body covering various aspects of recognition,
measurements, valuation, treatment and disclosures of accounting transactions and events.
“Accounting Standards are the policy documents issued by the recognized expert accountancy body relating to
various aspects of measurements, treatment and disclosures of accounting transactions and events.”
CHARACTERISTICS OF ACCOUNTAING STANDARDS
1. Accounting standards are the guidelines that provide a framework so that credible financial statements
can be prepared.
2. Accounting standards aim at bringing uniformity an accounting policies and practices.
3. Accounting Standards ensure transparency, consistency and comparability.
4. Accounting Standards are prepared keeping in view the business environment and laws of the country.
5. Accounting standards are mandatory in nature.
6. Accounting standards have also been made flexible, that is to say, where alternative accounting practices
are acceptable, an enterprise is free to adopt any of the practices with a suitable disclosures.
OBJECTIVES OF ACCOUNTING STANDARDS
1. TO PROVIDE MEANINGFUL INFORMATION: The main objective of Accounting Standards is

to provide meaningful information to various users of financial statements.
2. TO BRING STANDARDIZATION: Accounting standards bring standardization in the preparation
and presentation of financial statements. It also lays down the standards on which accounts have to
be prepared.
3. TO HARMONIZE THE DIVERSE ACCOUNTING POLICIES AND PROCEDURES:
Accounting Standards are evolved to bridge the gap between various accounting procedures. They
intend to bring uniformity in accounting policies and practices.
4. TO ENHANCE CREDIBILITY: Accounting Standards enhance the credibility and comparability
of the financial statements.
5. TO PROVIDE GUIDANCE: Accounting standards provide guidance and direction for maintaining
accounting records and also for the preparation and presentation of financial statements.
6. TO BRING TRANSPARENCY: Accounting Standards also aim at bringing transparency,
accountability and reliability so that a true and fair view of the financial position can be presented.
BENEFITS OF ACCOUNTING STATNDARDS

1. Accounting standards provide the norms for maintain accounting records and preparing financial
statements.
2. Accounting standards ensure uniformity in the preparation and presentations of financial statements
by removing the effect of diversed accounting practices.
3. Accounting standards create a sence of confidence among the users of accounting information,
4. Accounting standards helps auditors in auditing the accounts.
5. Accounting standards enhance the value of accounting information
6. Comparison with other business is made easy. In the absence of accounting standards , the
profitability and financial position of one entity cannot be compared
7. Accounting standards reduce the chances of fraud and manipulation of accounts and as the accounts
are prepared and presented on the basis of applicable accounting standards.
8. Accounting standards reduce the confusion of investors as they can easily make their investment
decisions by comparing the profitability and financial position of different companies.
Ques. 2 Give the list of IND-AS

Ans: List of Indian Accounting Standards (Ind As)
1) Ind AS- 101 First-time Adoption of Indian Accounting Standards
2) Ind AS- 102 Share-based Payment
3) Ind AS-103 Business Combinations
4) Ind AS- 104 Insurance Contracts
5) Ind AS- 105 Non-current Assets Held for Sale and Discontinued Operations
6) Ind AS- 106 Exploration for and Evaluation of Mineral Resources
7) Ind AS-107 Financial Instruments: Disclosures
8) Ind AS- 108 Operating Segments
9) Ind AS- 109 Financial Instruments
10) Ind AS- 110 Consolidated Financial Statements
11) Ind AS- 111 Joint Arrangements
12) Ind AS- 112 Disclosure of Interests in Other Entities
13) Ind AS- 113 Fair Value Measurement
14) Ind AS- 114 Regulatory Deferral Accounts
15) Ind AS- 115 Revenue from Contracts with Customers
16) Ind AS -1 Presentation of Financial Statements
17) Ind AS -2 Inventories
18) Ind AS -7 Statement of Cash Flows
19) IndAS-8 Accounting Policies, Changes in Accounting Estimates and Errors
20) Ind AS -10 Events after the Reporting Period
21) Ind AS-11 Construction Contracts
22) Ind AS -12 Income Taxes
23) Ind AS -16 Property, Plant and Equipment
24) Ind AS -17 Leases
25) Ind AS- 18 Revenue
26) Ind AS-19 Employee Benefits
27) Ind AS-20 Accounting for Government Grants and Disclosure of Government Assistance
28) Ind AS- 21 The Effects of Changes in Foreign Exchange Rates
29) Ind AS- 23 Borrowing Costs
30) Ind AS- 24 Related Party Disclosures
31) Ind AS- 27 Separate Financial Statements
32) Ind AS- 28 Investments in Associates and Joint Ventures
33) Ind AS- 29 Financial Reporting in Hyperinflationary Economies
34) Ind AS- 32 Financial Instruments: Presentation
35) Ind AS- 33 Earnings per Share
36) Ind AS- 34 Interim Financial Reporting
37) Ind AS- 36 Impairment of Assets
38) Ind AS- 37 Provisions, Contingent Liabilities and Contingent Assets
39) Ind AS- 38 Intangible Assets
40) Ind AS- 40 Investment Property
41) Ind AS- 41 Agriculture
Ques 3. Give a detail note on IFRSs?

Ans: INTERNATIONAL FINANCIAL REPORTING STANDARDS:
They are a set of financial reporting standards issued by the International Accounting Standards
Board and are recognized under the brand name IFRSs. IFRSs' is a trade mark of the International
Accounting Standards Committee Foundation. IFRSs comprise of:
a. International Financial Reporting Standards
b. International Accounting Standards
c. Interpretations originated by the International Financial Reporting Interpretations Committee
(IFRIC) and
d. Interpretations issued by the former Standing Interpretations Committee (SIC)
Broadly, IFRS consist of,
• International Financial Reporting Standard (IFRS)
• International Accounting Standard (IAS)
• International Financial Reporting Interpretation committee (IFRIC) Interpretations
• Standard Interpretation Committee (SIC) Interpretation
The International Accounting Standards Board (IASB) emphasizes on developing standards
based on sound, clearly stated principles, from which interpretation is necessary (sometimes referred to
as principles-based standards). This contrasts with sets of standards, like U. S. generally accepted
accounting principles (GAAP), the national accounting standards of the United States, which contain
significantly more application guidance. According to one school of thought, since IFRS are primarily
principles-based standards, the IFRS approach lays emphasis on the business or the economic purpose
of a transaction and the underlying rights and obligations instead of providing prescriptive rules (or
guidance). IFRS provides guidance in the form of principles.
Objective of IFRS
The main Objective of IFRS is to provide a single platform for international accounting by
developing a single set of high quality, understandable and globally enforceable standards. The
accurate adoption of IFRSs will bring more transparency and a higher degree of comparability, which
will be highly beneficial for the organizations.
GLOBAL CONVERGENCE OF ACCOUNTING STANDARDS

The last decade has witnessed a sea change in the global economic scenario. The rapid
globalisation of business and the dramatic increase in cross- border investing and fund raising are
among the important factors that have put a tremendous pressure for the adoption of a single set of high
quality accounting standards world –wide. The emergence of transnational corporations in search of
money, not only for fuelling growth, but to sustain ongoing activities has necessitated raising of capital
from all parts of the world, cutting across frontiers. Each country has its own set of rules and
regulations for accounting and financial reporting. Therefore, when an enterprise decides to raise
capital from the markets other than the country in which it is located, the rules and regulations of that
other country will apply and this in turn will require that the enterprise is in a position to understand the
differences between the rules governing financial reporting in the foreign country as compared to its
own country of origin.
International analysts and investors would like to compare financial statements based on similar
accounting standards, and this has led to the growing support for an internationally accepted set of
accounting standards for cross border filings. The harmonization of financial reporting around the
world will help to raise confidence of investors generally in the information they are using to make
their decision and assess their risks.
A strong need was felt by legislation to bring about uniformity, rationalization,
comparability, transparency and adaptability in financial statements. The better way for getting rid
of problems faced by different methods of standards is to have a single set of global standards, of the
highest quality, set in the interest of public.
The convergence of financial reporting and accounting standards is a valuable process that
contributes to the free flow of global investment and achieves substantial benefits for all capital
market stakeholders.
• It improves the ability of investors to compare investments on a global basis and thus lowers their
risk of errors of judgment.
• It facilitates accounting and reporting for companies with global operations and eliminates some
costly requirements say reinstatement of financial statements.
• It has the potential to create a new standard of accountability and greater transparency, which are
values of great significance to all market participants including regulators.
• It reduces operational challenges for accounting firms and focuses their value and expertise
standard setters and other stakeholders to improve the reporting model.
In a financial reporting context, convergence is the process of harmonising accounting standards
issued by different regulatory bodies. The objective is to produce a common set of high quality
accounting standards to enhance the consistency, comparability and efficiency of financial statements.
It is a step towards developing a universally accepted common language to communicate financial
information. Convergence in some form has been taking place for several decades, and efforts today
include projects that aim to reduce the differences between accounting standards. IASB is working with
accounting standard setters around the world to end the inconsistencies in financial reporting
requirements that exist among countries.
NEED OF CONVERGENCE WITH IFRSs IN INDIA
India today has become an international economic force. Indian companies have surpassed in
several sectors of the industry that includes, ITES, software, pharmaceutical, auto spare part to name a
few. And to stay as a leader in the international market India opted the changes it need to interface
Indian stakeholders', the international stakeholders' and comply with the financial reporting in a
language that is understandable to all of them. In response to the need several Indian companies have
already been providing their financial statements as per US GAAP and/or IFRS on voluntary basis.
But, however this is becoming more of a necessity then just being a best practice. In the coming years,
critical decisions will need to be made regarding the use of global accounting standards in India.
Market participants will be called upon to determine whether achieving a uniform set of high-quality
global accounting standards is feasible, what sort of investments would be required to achieve that
outcome, and whether it is a desirable goal in the first place. This dialogue will be critical to the future
of financial reporting and of fundamental importance to the long-term strength and stability of the
global capital market.
Moreover, the use of different accounting frameworks in different countries, which require
inconsistent treatment and presentation of the same underlying economic transactions, creates
confusion for users of financial statements. This leads to inefficiency in capital markets across the
world. Therefore, increasing complexity of business transactions and globalisation of capital markets
call for a single set of high quality accounting standards.
IFRS ADOPTION PROCEDURE AND IMPLEMENTATION IN INDIA

In 1949, Indian Government to streamline accounting practice in the country established Institute
of Chartered Accountants of India by passing ICAI Act1949. In 1977, Accounting Standard Board was
constituted by ICAI with a view to harmonize the diverse accounting policies and practices in India.
The other objectives of the Board are:
• To conceive and suggest new areas in which Accounting Standards are needed
• Formulation of Accounting Standards
• Examine how far IAS and IFRS can be adapted while formulating the accounting standards and
to adapt the same
• Revise them regularly as and when necessary among others.
In 2006 a task force was set up ICAI. The objective of the task force was to lay down a road
map for convergence of IFRS in India. Based on the recommendation made by the task force and on
the basis of outcome of discussions and public opinions on IFRS adoption procedure, a 3 step process
was laid down by the Accounting Professional in India. This three steps IFRS adoption Procedure can
be summarized as follow:
Step-1- IFRS Impact Assessment
In this step the firm will begin with the assessment of the impact of IFRS adoption on Accounting
and reporting issues, on systems and processes and on business of the firm. The firm will then identify
the key conversion dates and accordingly an IFRS training plan will be laid down. Once the training
plan is in place they will have to identify the key Financial Reporting Standard that will apply to the
firm and also the differences among current financial reporting standards being followed by the firm
and IFRS. The firm will also identify the loopholes in the existing systems and processes.
Step-2- Preparations for IFRS Implementation

This step will carry out the activities required for IFRS implementation process. It will begin with
documentation of IFRS Accounting Manual. The firm will then revamp the internal reporting system
and processes. IFRS 1 which deals with first time adoption of IFRS will be followed to Guide through
the first time IFRS adopting procedure. To make the convergence process smooth, some exemptions
are available under IFRS 1. These exemptions are identified and applied to ensure that the IFRS is
applied correctly and consistently, control systems are designed and put in place.
Step-3 Implementation
This step involves actual implementation of IFRS. The first activity carried out in this phase is to
prepare an opening Balance sheet at the date of transition to IFRS. A proper understanding of the
impact of the transition from Indian Accounting Standards to IFRS is to be developed. This will follow
the complete application of IFRS as and when required.
The Council of the ICAI, at its meeting, held on March 20-22, 2014, has finalised the roadmap for
convergence. As per this roadmap, the first set of accounting standards i.e. converged accounting
standards (Ind AS) shall be applied to the following specified class of companies for preparing their
first Indian Accounting Standards (Ind AS) consolidated financial statements for the accounting period
st
beginning on or after April 1, 2016, with comparatives for the year ending 31 March 2016 or
thereafter.
The specified class of companies include,
(a) Whose equity and/or debt securities are listed or are in the process of listing company stock
exchange in India or Outside India or
(b) Companies other than those covered in (a) above, having net worth of Rs. 500 crore or more
(c) Holding, Subsidiary, Joint Venture or associate companies covered under (a) or (b) above.
However, the standalone financial statements will continue to be prepared as per the existing notified
Accounting Standards which would be upgraded over a period of time. For the purpose of calculating
net worth, reference should be made to the definition under Companies act, 2013.
In Budget 2014 speech, The Honourable Finance Minister, Arun Jaitley, has welcomed the IFRS by
proposing that Indian companies will have to adopt the new Indian Accounting Standards (Ind AS)
voluntarily from fiscal year 2015-16 and on mandatory basis from 2016-17. The Honourable Finance
Minister said, “There is an urgent need to converge the current Indian Accounting Standards with the
International Financial Reporting Standards (IFRS).”
Financial Year Mandatorily applicable to
2016 – 17 Companies (listed and unlisted) whose net worth is equal to or

greater than Rs. 500 crore
2017 -18 Unlisted companies whose net worth is equal to or greater than
Rs. 250 crore and all listed companies
2018 -19 onwards When a company’s net worth becomes greater than Rs. 250 crore
2015 -16 or later Entities, not under the mandatory roadmap, may later voluntarily
adopt Ind AS
Ques. What are benefits of convergence with IFRS? And what are obstacles behind it?
Ans: CONVERGENCE WITH IFRSs IN INDIA
India today has become an international economic force. Indian companies have surpassed in
several sectors of the industry that includes, ITES, software, pharmaceutical, auto spare part to name a
few. And to stay as a leader in the international market India opted the changes it need to interface
Indian stakeholders', the international stakeholders' and comply with the financial reporting in a
language that is understandable to all of them. In response to the need several Indian companies have
already been providing their financial statements as per US GAAP and/or IFRS on voluntary basis.
But, however this is becoming more of a necessity then just being a best practice. In the coming years,
critical decisions will need to be made regarding the use of global accounting standards in India.
Market participants will be called upon to determine whether achieving a uniform set of high-quality
global accounting standards is feasible, what sort of investments would be required to achieve that
outcome, and whether it is a desirable goal in the first place. This dialogue will be critical to the future
of financial reporting and of fundamental importance to the long-term strength and stability of the
global capital market.
Moreover, the use of different accounting frameworks in different countries, which require
inconsistent treatment and presentation of the same underlying economic transactions, creates
confusion for users of financial statements. This leads to inefficiency in capital markets across the
world. Therefore, increasing complexity of business transactions and globalisation of capital markets
call for a single set of high quality accounting standards.
BENEFITS OF CONVERGENCE WITH IFRSs
While converting to IFRS is a complex process, these standards have important and positive
implications for organizations and individuals that adopt them. The economy, investors, industry and
accounting professionals all stand to gain from the convergence.
Table no.4
(i) The Economy: The convergence will lead to an increasing the growth of international business
of the economy. The economy will grow due to the proper maintenance of efficient capital
markets and hence will lead to greater capital formation. It encourages international investors
to invest and thereby leads to more foreign capital flows to the country.
(ii) Investors: The investors want the information that is more relevant, reliable, timely and
comparable across the jurisdictions at the time of investing outside their country. As opposed
to financial statements prepared using a different set of national accounting standards, the
financial statements prepared using a common set of accounting standards help investors
better understand investment opportunities. Global investors have to incur more cost in terms
of the time and efforts to convert the financial statements so that they can confidently
compare the various opportunities available to him. Investors' confidence would be strong if
accounting standards used are globally accepted.
(iii) The accounting professionals: If same accounting practices prevail throughout the world,
the accounting professionals get wide range of opportunities in any part of the world. They
are able to advise the clients on financial reporting to fulfil the compliance of any regulatory
body of any country of the world.
(iv) The industry: If the industry is able to create confidence in the minds of foreign investors
that their financial statements comply with globally accepted accounting standards, it can
raise capital from foreign markets at lower cost. With a huge diversity in accounting
standards from country to country, enterprises face multiple problems in winning the
confidence of investors and creating reputation in the markets.
(v) The corporate world. Convergence with IFRS would raise the reputation and relationship of
the Indian corporate world with the international financial community. Moreover, the
corporate houses back in India would be benefited because achievement of higher level of
consistency between the internal and external reporting and better access to international
market. Convergence with IFRS improves the risk rating and makes the corporate world
more competitive globally as their comparability with the international competitors’
increases.
OBSTACLES IN CONVERGENCE WITH IFRS

Looking at the various benefits, the policy makers in India have now realized the need to follow
IFRS. There are a number of challenges that India is likely to face while dealing with convergence with
IFRS. In fact convergence with IFRS is not just a technical exercise but also involves an overall change
in not only the perspective but also the very objective of accounting in the country. The researcher
points out certain key areas that require close attention while dealing with conversion from Indian
GAAP to IFRS. It has to be realized that this conversion is not just the any technical exercise. Even
after the later gets introduced, the preparers, users and auditors will continue to encounter practical
implementation challenges.
1. Variations in GAAP and IFRS: The entire set of financial statements will undergo vast changes on
the adoption of IFRS. The differences are wide and very deep routed. Bringing awareness about IFRS
and its impact is a challenging task.
2. Training and Development: One of the foremost challenges is lack of training facilities and
academic courses on IFRS. There is a need to impart education and training on application of IFRS.
Table no.5
3. Legal and regulatory considerations: Currently the financial reporting requirements are regulated
by various regulatory authorities and their provisions override other laws and provisions. So, the
biggest challenge is to maintain consistency with the legal and regulatory framework of India.
4. Taxation: IFRS adoption will not only affect most of the items in the financial statements but the tax
liabilities would also undergo a vast change. In present scenario, Indian Tax laws do not recognize the
Accounting Standards. To entertain immediate change in the Indian tax law is a major challenge.
5. Fair value Measurement: IFRS uses fair value as a measurement base for majority of transactions.
This can lead to lot of flexibility and subjectivity to the financial statements. The valuation experts
have to put in lot of hard work in valuation of fair value.
6. Re-negotiation of Contract: The contracts would have to be re-negotiated which is also a big
challenge. This is because the financial results under IFRS are likely to be very different from those
under the Indian GAAP. The contracts would have to be re-negotiated which is also a big challenge.
7. Reporting systems: The corporate houses have to ensure to make necessary amendments to suit the
reporting requirements of IFRS. The IT system should be designed to undertake new requirements with
regards to fixed assets, segment disclosures and related party transactions.
8. Compatibility with other Laws and Acts: Compatibility of IFRSs with other Laws and Acts in the
country like Companies Act, 1956 is a big challenge. Further revisions in IFRSs will also make the
convergence process more complex as with every revision in IFRSs, revision may be required in the
existing Law / Act.
9. IT Security: As financial accounting and reporting systems are modified and strengthened to deliver
the information in accordance with IFRS, entities need to enhance their Information System (IT)
Security in order to minimize the risk of business interpretations particularly to address potential
frauds, cyber terrorism and data corruption.
To spread the positive framework regarding the implementation of IFRS and smooth
convergence, the ICAI and regulatory bodies have taken several measures. The need is to have a
systematic approach to make the corporate entities and the investors to prepare them to adopt the
standards. Corporate houses need to gear themselves for continuous updation. Ensuring a qualitative
corporate financial reporting depends on effective control and enforcement mechanism. The corporate
management should ensure the compliance of IFRS with Financial Statements. Auditors and
Accountants should prepare and audit Financial Statements in accordance with IFRS. The regulators
and law makers must implement efficient monitoring system of regulatory compliance with IFRS.
CHAPTER 3
FINANCIAL STATEMENTS
Q.1 Distinguish between Balance Sheet and Trial Balance.

Ans. Following are the main distinctions between Trial Balance and Balance Sheet.
Basic of Distinction Trial Balance Balance Sheet
(i) Contents It includes debit and credit balances It is a statement of assets and
taken from the ledger. liabilities.
(ii) Purposes preparation The purpose of Trial balance is to test It is prepared to ascertain the
the arithmetical accuracy of books of financial position of the
accounts. organization during the
accounting period
(iii) Types of Balances It includes Balances of all types of Balance sheets records only
accounts i.e. personal, real and real and personal accounts.
nominal accounts
(iv) When prepared It is usually prepared at regular It is usually prepared at the end
intervals during an accounting year. of the year after the preparation
of trading and Profit and Loss
Account.
(v) Use It is prepared for internal use. It is prepared for use of various
parties i.e.,such as
Management, creditor,
shareholders,govt. etc.
Q. 2. Balance sheet is not an account, it is only the list of Balances. Explain

Ans. With the help of following points we can explain that Balance sheet is not an account, it is only the
List of balances:
(i) While preparing an account, transactions are recorded with word 'To' on debit side items and 'By' on
credit side items but while preparing Balance Sheet 'To' and 'By' words are not used.
(ii) Accounts are prepared in ledger and followed by a Trial Balance, on the other hand Balance sheets is
prepared after preparation of Trading and Profit and Loss Account.
(iii) Difference of debit and credit side of an account represents the closing balance of the account,
whereas total of two sides of Balance sheet i.e. Assets and liabilities is same.
(iv) Account has two sides Left side of an account is debit side and right side is credit side, on the other
hand left side of Balance sheet is the liability side and right side of Balance Sheet is the asset side.
(v) Transactions are recorded in an account on regular basis, whereas Balance Sheet is prepared at the
end of the year.
(vi) The objective of preparing Account is to see the net balance of account, which may be debit or
credit, whereas Balance sheet is prepared to see the Financial Position of the business.
(vii) Accounts may be Real, Nominal and personal or all of these, Balance sheet contains only Real and
Personal accounts.
(viii) Account most often having opening balance on the debit side or credit side. Balance sheet never
has opening balance.
Long answer type questions
1. What adjustments are usually necessary at the time of preparing final accounts ? Explain with the
help of journal entries.
Ans: While preparing the Final accounts sometimes few transactions may have been omitted for recording
and these transactiions remain unrecorded. But in order to find out the true position of the business it’s
essential to consider each and every transaction. So few adjustments are required in order to record these
transactions. Some important items which need due adjustments at the time of preparing financial
statements are explained below:
(a) Closing Stock
If some goods are still left unsold at the end of the year, that stock must be recorded in the financial
statement. It must be noted that stock should be valued at cost or market price whichever is less.
Following Closing stock could be lying with the firm:
Raw material
Work in progress
Finished goods
Adjustment Entry
Closing Stock A/c Dr.

To Trading A/c
(Being Closing stock credited to trading account)
Treatment: Closing stock will be appeared on the credit side of the Trading account and Assets side of
the Balance sheet.
(i)
TRADING ACCOUNT
By Closing Stock
(ii)
BALANCE SHEET
Liabilities Assets
Current Assets
Closing stock
(b) Outstanding/Accrued/Due Expenses
Expenses which are incurred during the current year but payment has not been paid yet are called
outstanding expenses. on the basis of accounting concept all expenses incurred during the current year
whether payment made or not should become the part of accounts.
Adjustment Entry
Expenses A/c Dr.

To outstanding Expenses A/c
(Being expenses incurred but not yet paid)
Treatment: Outstanding expenses will appear on the debit side of the Trading & Profit and loss account
and Liability side of the Balance sheet.
(i)
TRADING AND PROFIT & LOSS ACCOUNT
To Expenses
ADD- Outstanding Expense
(ii)
BALANCE SHEET
Liabilities Assets
Outstanding Expenses
(c) Prepaid/Advance Expenses

Prepaid expenses are those expenses which are related to future year but has been paid in advance in the
current year. Though only current year expenses should become the part of the accounts any future
expenses needs to be excluded. These are the few examples of expected prepaid expenses: Rent,
Insurance, Taxes, and Salaries etc. Following adjustment is required to be made.
Adjustment Entry
Prepaid Expenses A/c Dr.

To Expenses A/c
(Being expenses paid in advance)
Treatment: Prepaid expenses will be deducted from the debit side of the Trading & Profit and loss
account and will also appear on the Assets side of the Balance sheet.
(i)
TRADING AND PROFIT & LOSS ACCOUNT
To Expenses
LESS- Prepaid Expense
(ii)
BALANCE SHEET
Liabilities Assets
Prepaid Expenses
(d) Accrued/Outstanding Incomes

It refers to those incomes which have been earned during the current year but has not yet received the
payment for the same till the end of the accounting year. These incomes needs to be consider in the
account books.
Adjustment Entry
Accrued Income A/c Dr.

To Income A/c
(Being Income earned but not yet received)
Treatment: Accrued income will be added to the credit side of the Profit and loss account and will also
appear on the Assets side of the Balance sheet.
(i)
PROFIT & LOSS ACCOUNT
By Income
ADD- Accrued Income
(ii)
BALANCE SHEET
Liabilities Assets
Accrued Income
(e) Income Received in Advance

Sometimes we may have received an income in advance, actually the income has been related to the
future year but payment has been received in the current year in advance. So such income is actually
related to future year.
Adjustment Entry
Income A/c Dr.

To Income received in Advance
(Being Income received in advance)
Treatment: Advance income will be deducted from the credit side of the Profit and loss account and
will also appear on the Liability side of the Balance sheet.
(i)
By Income
LESS- Advance Income
(ii)
BALANCE SHEET
Liabilities Assets
Advance Income
(f) Depreciation
When the value of fixed assets has been reduced due to their regular use or time factor its called
depreciation. In order to find out the true picture of the business depreciation must be the part of the
Account books, it also helps in finding out the true value of Fixed Assets.
Adjustment Entry
Depreciation A/c Dr.
To Asset A/c
(Being depreciation charged on Asset)
Treatment: Depreciation will appear on the debit side of the Profit and loss account and will also appear
on the Assets side of the Balance sheet by way of deduction from the concerned fixed asset.
(i)
To Depreciation
(ii)
BALANCE SHEET
Liabilities Assets
Fixed Asset
LESS-Depreciation
(g) Provision for bad and doubtful debts

It is the normal feature of the business to sell goods on credit also but debts prove irrecoverable, which
means the amount due towards the debtors become bad wholly or partially every year. So Firm creates the
provision for bad and doubtful debts in advance every year on the basis of past experience.
Adjustment Entry
Profit & loss A/c Dr.

To Provision for bad/Doubtful Debts
(Provision for bad debts charged to P/L Account)
Treatment: Provision for bad debts appearing in the additional information will be debited to profit and
loss account and will also appear on the assets side of balance sheet by way of deduction from debtors.
Whereas old provision appearing in trial balance will be deducted from the debit side of profit and loss
account.
(i)
To Bad debts
ADD- New Provision for bad
debts
Less- old Provision for bad
debts
(ii)
BALANCE SHEET
Liabilities Assets
Current Asset
Debtors
LESS- New Provision for bad
debts
(h) Interest on Capital

Interest on capital if provided under the agreement must be the part of the final account so it must be
debited to the profit and loss account accordingly.
Adjustment Entry
Interest on Capital A/c Dr.

To Capital A/c
(Interest on capital credited to capital account)
Treatment: Interest on capital will be debited to profit and loss account and will be added to the capital
in Liability side of Balance sheet.
(i)
To Interest on Capital
(ii)
BALANCE SHEET
Liabilities Assets
Capital
ADD- Interest on Capital
(i) Interest on Drawings

Interest on drawings if to be charged from the partner for drawings made by him must be the part of the
final account so it must be credited to the profit and loss account accordingly.
Adjustment Entry
Capital A/c Dr.
To Interest on drawings A/c
(Interest on drawing debited to capital account)
Treatment: Interest on drawings will be credited to profit and loss account and will be deducted from
the capital in Liability side of Balance sheet.
(i)
By Interest on Drawings
(ii)
BALANCE SHEET
Liabilities Assets
Capital
LESS- Interest on Drawings
(j) Manager’s Commission

Sometimes manager is entitled to commission which is based on certain percentage on the profits earned
by the firm. Such commission payable to the manager will be the part of the final account.
Adjustment Entry
Manager’s Commission A/c Dr.

To Outstanding Commission A/c
(Being commission to manager becomes due)
Treatment: Manager’s commission will appear on the debit side of the profit and loss account and will
also appear on the Liability side of the balance sheet.
(i)
To Manager’s Commission
(ii)
BALANCE SHEET
Liabilities Assets
Outstanding Commission
CHAPTER 4
BRANCH ACCOUNTING
SHORT ANSWER TYPE QUESTIONS (5 MARKS)
Ques. 1 What are the objectives or need of branch accounting?
Ans. The main objectives of keeping the branch accounts acceptable to all business are:
(i) To know profit or loss: The main objective of branch accounting is to know the profit or loss of
each branch.
(ii) To know financial position: This is also the main objective of branch accounting to know financial
position of various branches on a particular date.
(iii) To know the cash and goods requirements: Another objective of branch accounting is to know
the cash and goods requirements of the various branches
(iv) To evaluate the progress and performance: Another objective of branch accounting is to evaluate
the progress and performance of each branch.
(v) To calculate commission To calculate commission for payment to the managers, is also the
objective of branch accounting.
(vi) To give suggestions for the improvement in the working: Another objective of branch accounting
is to give suggestions for the improvement in the working of the various branches.
Ques.2 What are the advantages of branch accounting?
Ans. The advantages of keeping the branch accounts are:
(i) Helps to find out profit or loss: The branch accounting helps to find out the profit or loss of each
branch.
(ii) Helps To know financial position: Through branch accounting it is possible to know financial
position of various branches on a particular date.
(iii) Helps To know the cash and goods requirements: Through branch accounting it is possible to
know the cash and goods requirements of the various branches
(iv) Evaluation of the progress and performance: Branch accounting helps to evaluate the progress
and performance of each branch.
(v) Calculation of commission: Branch accounting helps in calculating commission for payment to the
managers.
(vi) Suggestions for the improvement in the working: Branch accounting helps in giving suggestions
for the improvement in the working of the various branches.
Ques. 3 Differentiate Dependent and Independent Branch.

Ans. Following are the main differences between the independent and dependent branch :
Basis Independent Branch Dependent Branch
1. Accounting System Independent Branch keeps full The accounts are maintained at the
system of accounting. Head office. At branch only cash
registers, Debtors register are
maintained.
2. Sale of Goods These branches sell goods received These branches sell only those
from head office as well as from goods which are supplied by the
the purchases made by them head office.
independently.
3. Payment of expenses Expense of regular nature are met All branch expenses of regular
by Independent Branches. nature like salary, rent etc.
normally paid directly by the head
office.
4. Remittance of cash Independent branches are not All daily collection from sales and
required to remit all daily debtors will be deposited in head
collection of cash to head office. office account in some local bank
or remitted to head office.
5. Trial Balance Independent branches extract Trial Trial Balance is not required to be
Balance from the ledger extracted.
maintained at Branch level.
6. Reconciliation Reconciliation between Branch There is no need for such

Account in the books of Head reconciliation.
office and Head office Account in
the books of Branch is must before
finalizing the accounts.
7. Preparation of Final Under Independent branch, Debtors system, Final Account

Accounts Trading and Profit and Loss System and Stock and Debtors
Account is prepared. System are followed to prepare
final accounts.
Question 4: How does branch and departmental accounts differ?

Answer: Distinction between Branch Accounts and Departmental Accounts:
Basis Branch Accounts Departmental Accounts
1. Objective The main objective of keeping The main objective of keeping
branch accounts is to find out the departmental accounts is to find out
profitability of each branch. the profitability of each department.
2. Keeping of In case of a branch, all important In case of department all accounting
accounting accounting records are kept at the records are kept at one place.
records head office except in the case of an
independent branch.
3. Allocation of The problem of allocation of The problem of allocation of
common common expenses among different common expenses among different
expenses branches does not arise departments arises
4. Conversion of In case of foreign branches, the In case of departments, the problem
foreign problem of conversion of foreign of conversion of foreign currency
currency currency in to home currency arises into home currency does not arise
5. Reconciliation Reconciliation of head office and There is no need for such
of accounts branch accounts is required at the reconciliation.
end of the accounting year in the
case of independent branch.
6. Location Branches can be inland or foreign. Departments are always inland.

7. Establishment Branch of a concern is established All departments of a Business
of at different place in the same town remain generally under one roof.
Departments or at different town.
8. Growth Branches can expand and grow Departments can grow vertically
geographically. within the same roof.
9. Operation of Branches can be started anywhere Departments are confined to a single
Organisations in the world. So there can be local place.
and foreign branches.
LONG ANSWER TYPE QUESTIONS (15 MARKS)

Ques. What is the procedure for Incorporation of Branch Trial Balance in the books of Head Office?
Ans: As Head office and its various branches work under one organization so it is necessity that one combined
Balance Sheet and Profit and loss Account should be prepared. The process by which it is done is known as
Incorporation of the Branch Trial Balance. For Incorporating various items of Trial Balance, following
procedure is followed:
1. For total of debit side of items of Trading Account such as Opening stock, net purchases, direct expenses
Date Particulars L.F. Debit Credit
Branch Trading Account Dr. xxx
To Branch Account xxx
(Being total of opening stock, net purchases and direct expenses
transferred to debit side of Branch Trading Account)
2. For total of credit side of items of Trading Account such as net sales and closing stock
Branch Account Dr. xxx
To Branch Trading Account xxx
(Being total of net sales and closing stock transferred to credit side
Trading Account )
3. For transfer of Gross Profit

Branch Trading Account Dr. xxx
To Branch Profit and Loss Account xxx
(Being Gross Profit transferred)
4. For transfer of Gross Loss

Branch Profit and Loss Account xxx
To Branch Trading Account xxx
(Being Gross Loss transferred)
5. For transfer of Indirect expenses and losses

To Branch Account xxx
(Being Indirect expenses transferred to Branch Profit and Loss
Account)
6. For transfer of Indirect incomes and gains

Branch Account Dr. xxx
(Being Indirect incomes and gains transferred to Branch Profit and
Loss Account)
7. For transfer of net profit

To General Profit and Loss Account xxx
(Being net profit transferred to General Profit and Loss Account)
8. For transfer of net loss

General Profit and Loss Account Dr. xxx
(Being net loss transferred to General Profit and Loss Account)
9. For transfer of balance of branch assets to books of Head office

Branch assets (Individually) A/c Dr. xxx
To Branch A/c xxx
(Being balances of branch assets transferred to books of Head
office)
10. For transfer of balance of branch liabilities to books of Head office
Branch A/c Dr. xxx
To Branch Liabilities (Individually) xxx
(Being balances of branch liabilities transferred to books of Head
office)
In the books of Head Office

Branch Account
Date Particulars Amount Date Particulars Amount
To Balance b/d By Branch Trading A/c
To Branch Trading A/c (Opening stock, Purchases and
(Sales and closing stock) direct expenses)
To Branch P&L A/c (Indirect By Branch P&L A/c(indirect
incomes) expenses and losses)
To Branch Liabilities By Branch Assets
Ques. Write a note on Independent Branch or Branch keeping full system of Accounting.
Ans: Independent branch or Branch keeping Full system of Accounting
Independent branch or Branch keeping Full system of Accounting are those branches which follow
double entry system of accounting. Such type of branches prepare their own Trial Balance, Trading and Profit
and Loss Account and balance Sheet.
Independent branches Purchase goods from Head Office as well as from open market. Even such branches
supply goods to Head Office. Amount realized by such branches from sales and debtors is deposited in their
own account. In spite of all this, such branches are owned by Head Office, so profit or loss earned by such
branches belongs to Head Office.
Independent branches open Head office account in their books. Head office A/c is debited with-
cash sent to head office, goods supplied to Head office, payment made to Head Office. Head office Account is
credited with cash received from Head Office, goods received from Head Office, depreciation on fixed assets
etc. Similarly Head Office will also open branch accpont in his books for each brnch separately. Accounting
under Independent branches is done in following manner:
1. For Purchase of Branch fixed Assets
(a) If Payment is made by the branch (In the Books of Head Office)
Branch Fixed Assets A/c Dr.
To Branch A/c
(Being payment made by Branch for purchase of fixed asset for
Branch)
(b) If Payment is made by the branch (In the Books of Branch)

Head Office A/c Dr.
To Cash A/c
(Being payment made by Branch for purchase of fixed asset for
Branch)
(c) If Payment is made by the Head Office (In the Books of Head Office)
Branch Fixed Assets A/c Dr.
To Bank A/c
(Being payment made by Head Office for purchase of fixed asset
for Branch)
(d) If Payment is made by the Head Office (In the Books of Branch)
NO ENTRY
2. For charging depreciation on fixed assets

(In the Books of Head Office)
Branch A/c Dr.
To Branch Fixed Assets A/c
(Being depreciation charged on Branch Fixed Asset)
(In the Books of Branch)

Profit and Loss A/c Dr.
To Head Office A/c
(Being depreciation charged on Branch Fixed Asset)
3. For service rendered by Head office to Branch or expenses incurred by Head Office
Branch A/c Dr.
To Profit and Loss A/c
(Being charge for services rendered by head Office to Branch)

Profit and Loss A/c Dr.
To Head Office A/c
(Being charge for services rendered by head Office to Branch)
4. Cash remitted by branch but cash is in transit

Cash In Transit A/c Dr.
To Head Office A/c
(Being cash sent but not received by Head office)
OR
Cash In Transit A/c Dr.
To Branch A/c
(Being cash remitted by branch but not received by Head office)
5. For Goods sent be Head office but Goods still in transit

Goods In Transit A/c Dr.
To Branch A/c
(Being goods sent by Head office but not received by Branch)
6. For goods supplied by Branch 1 to Branch 2

Branch 1 A/c Dr.
To Branch 2
(Being goods supplied by Branch 1 to Branch 2)
(In the Books of Supplier Branch)

Head office a/c Dr.
To Goods supplied to other branches A/c
(In the Books of Receiver Branch)

Goods received from other Branches A/c Dr.
To Head office A/c
7. For cash paid by Branch on behalf of Head Office

Purchases A/c Dr.
To Branch A/c
(Being cash paid by Branch on behalf of Head office for
purchases)

Head Office A/c Dr.
To Cash A/c
(Being cash paid by Branch on behalf of Head office for
purchases)
8. For cash collected by Branch on behalf of Head Office

Branch A/c Dr.
To Calls In Arrears A/c
(Being cash collected by Branch on behalf of Head Office)

Cash A/c Dr.
To Head Office A/C
(Being cash collected by Branch on behalf of Head Office)
9. For Bill drawn by one Branch on another

Branch 1 A/c Dr.
To Bills Payable A/c
(Being bill drawn by branch 1 on another branch)

Bill Receivable A/c Dr.
To Branch 2
(Being bill drawn by branch 1 on another branch)
(In the books of Drawer Branch)

Bills Receivable A/c Dr.
To Head Office A/c
(Being bill drawn on another branch)
(In the Books of Drawee Branch)

Head Office A/c Dr.
To Bills Payable A/c
(Being bill drawn by another branch)
CHAPTER 5
DEPARTMENTAL ACCOUNTING
LONG ANSWER TYPE QUESTIONS ( 15 MARKS)
Ques. 1. What is the meaning of Departmental Accounts? What are the Objectives and Advantages of
preparing Departmental Accounts? Explain the basis for the Apportionment of indirect expenses in
Departmental accounts.
Answer
INTRODUCTION
When a trader deals in different types of products or carries different activities under one roof, he normally split
up his business into a number of divisions. Each such division is called a ‘Department’. Or we can say, when a
business is divided in parts on the basis of its different activities then such divisions are called as departments
For example, a Readymade Garments shop may have separate department for ladies, gents and kids. Likewise a
departmental store may have separate departments for selling different items like textiles, crockery, stationery,
medicines, cosmetics etc.
MEANING
Departmental accounts refers to the preparation of separate Trading and Profit and Loss account. At the end of
accounting year, it is desire of every businessman to find out the profit or loss of each department separately. In
order to find out the profit or loss of each department separately, the department accounts are prepared. When a
business is divided in parts on the basis of its different activities then such divisions are called as departments.
Normally departments are situated under a common roof. For example a business sells different types of goods
under one roof, it is generally split up into number of departments. When a business is divided into different
departments, then information about operating result of each department is required. For this purpose
departmental accounts are maintained. The method of departmental accounting depends upon the need to
identify the different expenses and revenue of each department so that profit of each may ascertained accurately.
The method of maintenance of departmental accounting must be such that it may provide maximum information
and simple to understand and operate.
OBJECTIVES OF PREPARING DEPARTMENT ACCOUNTS

The main objectives of departmental accounts are as under:-
(i) To Compare the results – year wise : The main objective of department accounts is to compare the
result of each department with its previous year's result.
(ii) To Compare the results- Department wise: The another objective of department accounts is to
compare the result of each department with other departments of the same concern.
Table no.6
(iii) To compare the expenses: To compare various expenses of each department with the previous period
or with other departments of the same concern.
(iv) To Formulate the policy: To help the business man in formulating policy to expand the business on
proper lines so as to optimize the profits of the concern.
(v) To Identify weak areas: It is the objective of Departmental Accounts to identify weak ares for cost
control and improvement of efficiency.
(vi) To generate information : Another objective of Departmental Accounts is to generate information
which may be helpful for planning, control, evaluation of performance eof each department and for
taking various managerial decisions.
(vii) To Reward or penalise: To reward or penalise the departmental managers and employees on the
basis of results shown by their respective departments.
(viii) To allow departmental managers commission: To allow departmental managers commission on
the basis of profit of concerned department.
(ix) To reveal movement of stock: It is the objective of the Departmental accounts to show the efficient
of each department by calculating stock turnover ratio of each department to reveal the fast or slow
movement of various items of stock.
(x) To Justify proper use of capital: It is the objective of the Departmental accounts to determine the
justification of proper use of capital invested in each department. By calculating return on
investment ratio of each department, we can adjudge the proper utilization of capital invested in
each department.
ADVANTAGES OF DEPARTMENTAL ACCOUNTING

Following are the various advantages of departmental Accounting:
1. Determination of Separate Profit or Loss: It helps in determining separately the profit or loss made by
each department.
2. Comparison of performance: The businessman can compare the performance of one department with
that of another.
Table no.7
3. Helpful in decision making: It helps the management in taking various decisions like: which
departments are to be closed and which departments are to be expanded?
4. Increasing the profitability: The inter-department comparison of the results of various departments
may result in increasing the overall profitability of the business.
5. Reward: It helps in proper rewarding of the departments managers and staff on the basis of results
shown by their respective departments.
6. Push up sales: Special efforts may be made by the trader for pushing up the sales of that department
which is yielding maximum profit.
7. Analysis of performance: It helps to analyse, the performance and efficiency of each department by
calculating separately various ratios for each department. These ratios may include: Gross profit ratio,
Net Profit Ratio, Operating ratio, Stock turnover ratio etc.
8. Justification: It helps the management to determine the justification of capital employed in each
department.
9. Comparison of expenses of departments: It facilitates the comparison of various expenses incurred by
each department in the current year with the corresponding figures in the previous year.
APPORTIONMENT OF DEPARTMENT EXPENSES

While preparing Separate Trading and Profit and Loss Account for each department there is need of
some suitable basis for distribution of Indirect expenses. In this regard , the following basis of distribution of
expenses over various departments may be adopted.
(i) Direct Expenses. The expenses which are directly related to department are called as direct expenses
like Wages paid to workers of purchase department are charged to Purchase Department.
(ii) Indirect Expenses. These expenses which are not direct are called as Indirect expenses. In other
words, expenses which are common for the concern as a whole. These expenses include office and
Administration expenses, selling and Distribution expenses, Financial expenses. Such expenses are
distributed among the departments on some suitable basis. These expenses can be distributed as
follows:
1. Expenses related to sales: Expenses related to sale like -Selling expenses, Advertisement, Travelling
Salesman's salary, Carriage outward, Freight outwards, Discount allowed, Bad debts, Travelling
Salesman's commission, Provision for bad debts, Provision for discount on debtors, Packing expenses,
Sales depot expenses, After sales service expenses, Sales manager’s salary are apportioned on the basis
of net sales of each department.
2. Depreciation: Depreciation, Insurance, Repairs and renewal of fixed assets are apportioned in the ratio
of value of fixed assets possessed by each department.
3. Expenses relating to building: Expenses relating to building such as: rent, sales, taxes, air conditioning
expenses, insurance of building are apportioned in the ratio of Area or floor space occupied by the
departments.
4. Expenses related to Lighting or electricity: Expenses relating to Lighting or electricity charges are
apportioned in the ratio of number of light points used in each department
5. Power expenses: Power expenses are apportioned in the ratio of Kilowatt Hours or (Horse Power of
machine x Machine Hours)
6. Insurance of Stock: Expenses of Insurance of stock are apportioned in the ratio of Average stock
carried by each department.
7. Labour welfare expenses: Labour welfare expenses such as: Canteen expenses, Time keeping
expenses, Employees entertainment expense, are apportioned in the ratio of number of workers
employed in each department
8. Work manager salary: Work manager salary is apportioned In the ratio of time spent in each
department
9. Carriage and Freight Inward : Carriage inward and freight inward Octroi duty, Clearing
charges, Import duty are apportioned In the ratio of purchases made by each department
10. Expenses related to Wages: Expenses directly related to wages such as: Group/Workers Insurance
Premium, Premium for workmen’s compensation, Employer’s contribution towards E.S.I are
apportioned in Direct wages ratio.
APPORTIONMENT OF COMMON EXPENSES
Types of Expenses Basis of Apportionment
(1) Expenses related to sale like In the ratio of Net sales of respective
-Selling expenses, Advertisement department.
-Travelling Salesman's salary

-Carriage/Freight outward
-Discount allowed
-Bad debts,
-Travelling Salesman's commission
-Provision for bad debts,
-Provision for discount on debtors
-Packing expenses,
-Sales depot expenses
-After sales service expenses
-Sales manager’s salary
(2) Depreciation, In the ratio of value of fixed assets

-Insurance, possessed by each department.
-Repairs and renewal of fixed assets.
(3) Expenses relating to building such as: Area or floor space occupied by the
- rent, sales, taxes, air conditioning expenses, departments.
-insurance of building.
(4) Lighting or electricity charges. Number of light points used in each

department.
(5) Power expenses Kilowatt Hours or (Horse Power of

machine x Machine Hours)
(6) Insurance Premium on Stock Average stock carried by each

department
(7) Labour welfare expenses such as: Number of workers employed in

-Canteen expenses each department
-Time keeping expenses

-Employees entertainment expenses
(8) Works manager's salary In the ratio of time spent in each

department.
(9) Carriage inward, Octroi duty, In the ratio of purchases made by

Clearing charges,Import duty. each department.
(10) Expenses directly related to wages such as: Direct wages ratio.
-Group/Workers Insurance Premium
-Premium for workmen’s compensation
-Employer’s contribution towards E.S.I
(III) Expenses not related to any department: There are certain expenses which does not relate to any
department but they belong to the business as whole. Such expenses are charged to General Profit and Loss
Account.
SHORT ANSWER TYPE QUESTIONS ( 5 MARKS)

Ques. 2. Give accounting treatment for Inter Department Transfer.
Ans: Inter-departmental transfer refers to transfer of goods or services, employment of staff by one department
to another department. As each department is treated as a separate profit centre, so it is necessary to
have a separate records for such inter departmental transfers. Generally a weekly or monthly
Departmental Transfer Analysis sheet is prepared to record all inter –departmental transfers.
When one department transfer goods to another department or provides some service to another
department, the following entry should be passed:
----- Receiving Department A/c Dr.
To Supplying Department
(Being goods or service transferred by one department to
another)
(a) If transfer took place at cost Price: Usually goods supplied by one department to another department
at cost price. In such case, the transfer of goods will be recorded in Trading Account. It will be recorded
on the debt side of transferee department (i.e. receiver department) and on the credit side of transferor
department (i.e. giver department) and no other adjustment is required.It can be shown with the help of
an example. E.G. Goods transferred from Department A to Department B will be treated as under:
Departmental trading and Profit and Loss Account
For the year ended 31-03-20__
Particulars Deptt. A Deptt. B Particulars Deptt. A Deptt. B
To Department A XXX By Department B XXX
(Transfer) (Transfer)
(b) If transfer took place at Invoice Price/Selling Price: Sometimes goods or services are transferred
from one department to another department at selling price and there are also unsold goods at the end of
the period. A department cannot earn anything by selling the goods to another department. So unrealized
profit in the unsold goods must be debited to the department who supplied the goods to another
department in the form of stock reserve. Such reserves are to be made both for opening and closing
stocks by passing following entries. The transaction for transfer of goods will be recorded in the same
manner as in case of goods transfer to cost but in this case transfer will be recorded with selling price in
trading account.
(1) For closing stock
----- General profit And Loss A/c Dr.
To Provision for Unrealised Profit on Stock
(Being Provision made for Unrealised profit on closing
stock)
(11) At the beginning of the next year
----- Provision for Unrealised Profit on Stock A/c Dr
To General profit And Loss A/c
(Being Provision made for Unrealised profit on stock
transferred)
CALCULATION OF PROVISION FOR UNREALIZED PROFIT ON STOCK

(1) Receiving department must ascertain the unrealized profit in stock. Such profit included in the closing
stock must be debited and profit in opening stock must be credited to General profit and Loss Account as
closing or opening stock reserves respectively.
(2) Closing stock reserve must be reduced from the closing stock of the receiving department in the Balance
Sheet.
(3) Adjustment of stock reserve is made in the General profit and Loss Account .
(4) If profit added by transferring department is not given separately, then closing stock reserve must be
found on the basis of gross profit on sales and transfer of the transferring department.
(5) If receiving department stock includes some other stock purchased from outside, then stock reserve is to
be made only on the transferred stock.
Unrealized Profit= Gross Profit rate * Stock amount*Transferred portion of goods
Where G.P Rate= Gross Profit/(Sales +Department transfer) *100
Transferred Portion of goods= Transfers/(Purchase + Department Transfers)
Question 3. Explain methods of keeping Departmental Accounts.
Answer: The accounting system which is adopted for a departmental organization depends upon the need to
identify the different expenses and revenues of each department so that profit of each department may be
ascertained accurately. It must be designed in such a manner so that it may provide maximum information and it
is simple to understand and operate. Following are the two methods of keeping Departmental Accounts.
(i) Where separate set of books are maintained for each department: This method of accounting is
followed in very large organization or where the maintenance of separate books for each department is
compulsory as per some law of the land. E.g. General Insurance Companies in India are required to have
separate books of accounts for each type of business, i.e. Fire, Marine, Accident, etc. under this method each
department is treated as a separate unit and accounts are kept interdependently. Trading results of each
department are combined at the end of the year to get trading results of the orgamisations as awhole. This
method is costly in operation.. This is generally employed in large business such as large stores, insurance
companies, etc.
(ii) Where accounts of all departments are maintained together in columnar books: Under this
method the entire book keeping records are maintainedby a central accounts department. This method of
accounting is followed by small organization. A department generally does not maintain a full double entry
book keeping sytem but records are kept an analytical or columnar books relating to purchase, sales, stock,
return inwards, retiurm outwards and direct excpenses. Examples of departments are : Mobile set, LCD, Ipad
can be different departments
Question 4: Give the list of expenses which cannot be allocated over different departments.
Answer Expenses which cannot be allocated over different departments should be debited to Combined
Income Account (General Profit and Loss Account). Profits of all departments should be brought down
in one total on credit side of Combined Income Account (General Profit and Loss Account) and such
expenses should be debited in Combined Income Account (General Profit and Loss Account). The
examples of such expenses are as follows:
a) Audit fees b) Directors fees
c) Interest on Bank loan d) Interest on debentures
e) General Manager’s salary F) Loss on sale of Investments etc.
f) Share transfer fee
GENERAL PROFIT AND LOSS ACCOUNT
st
For the year ended 31 March, 20__
To Audit fees XXX By Departmental Net Profit
To Directors fees transferred from Departmental Profit
To Interest on Bank loan XXX and Loss Account:
To Interest on debentures - Department A XXX XXX
To General Manager’s salary XXX - Department B XXX
To Loss on sale of Investments
To Share transfer fees XXX
To Net Profit transferred to
Balance Sheet XXX
XXX
XXX
XXX
XXX XXX
Question 5: How does branch and departmental accounts differ?

Answer: Distinction between Branch Accounts and Departmental Accounts:
Basis Branch Accounts Departmental Accounts
10. Objective The main objective of keeping The main objective of keeping
branch accounts is to find out the departmental accounts is to find out
profitability of each branch. the profitability of each department.
11. Keeping of In case of a branch, all important In case of department all
accounting records accounting records are kept at the accounting records are kept at one
head office except in the case of an place.
independent branch.
12. Allocation of The problem of allocation of The problem of allocation of
common expenses common expenses among different common expenses among different
branches does not arise departments arises
13. Conversion of In case of foreign branches, the In case of departments, the problem
foreign currency problem of conversion of foreign of conversion of foreign currency
currency in to home currency arises into home currency does not arise
14. Reconciliation of Reconciliation of head office and There is no need for such
accounts branch accounts is required at the reconciliation.
end of the accounting year in the
case of independent branch.
15. Location Branches can be inland or Departments are always inland.

foreign.
16. Establishment of Branch of a concern is All departments of a Business
Departments established at different place in remain generally under one roof.
the same town or at different
town.
17. Growth Branches can expand and grow Departments can grow vertically
geographically. within the same roof.
18. Operation of Branches can be started Departments are confined to a
Organisations anywhere in the world. So there single place.
can be local and foreign
branches.
CHAPTER 6
CONSIGNMENT
Ques. 1. What is Consignment ?
Ans: It is an agreement between two parties where one party being owner of the goods want to sell their goods
through the other party as it is not possible by the owner/manufacturer to sell the goods himself. Consignment
generally takes place where owner or manufacturer of goods want to cover large number of markets and it is not
possible to open stores and sales center at every place due to financial and other constraints so it becomes very
handy for the owner of goods to appoint various agents at different markets who takes the responsibility to sell
the goods on behalf of the owner in consideration of commission. There are following parties in Consignment
Consignor :- The person who sends the goods to the agent to be sold by him on commission basis
is called the consignor.
Consignee :- The person to whom the goods are sent for sale on commission basis is called the
consignee.
Ques. 2. Explain various Types of Commission charged by the consignee.
Ans: In the Contract of Consignment Consignee charges certain amount of Commission from the consignor
in consideration to the sales done by him. There are following types of commission which can be
charged by the consignee.
(a) Normal commission:- It is also called ordinary commission, this commission given normally on
total sale at certain percentage. i.e. Consignee is entitled to get normal commission @ 5 % on total sales
amounted to Rs. 1,00,000. So the Normal commission payable will be Rs. 5,000.
(b) Del-credere commission:- In order to escape from the risk of bad debts due to credit sales
by the consignee, consignor sometimes offer del credere commission to the Consignee in return
Consignee takes the responsibility to bear any loss if any due to non-recovery of any amount due
towards the debtors (Credit sales). It is to note that if Del credere commission is not existing any bad
debts incurred due to credit sales by consignee will be born by the consignor and those will also appear
on the debit side of the consignment account. So the only way to prevent that loss is to shift it towards
consignee by paying him del credere commission in addition to Normal commission. It is generally
calculated on gross sale unless given in the question to be calculated on credit sale. If a consignor allows
del credere commission to the consignee, then bad debts will be borne by the consignee.
Moreover, it will also make the consignee careful on choosing customers for credit sales.
(c) Over-riding/ Special commission :- In order to motivate the consignee to earn maximum possible
profits for the Consignor, special commission is offered by the consignor. It is generally calculated on
the surplus sale price earned by the consignee in excess of the normal selling price as instructed by the
consignor. Sometimes extra commission is given by consignor to the consignee for working hard to
push a new line of product in the market or earn extra benefit for the consignor.
Example:- Consignee is instructed to sell 100 units @ Rs. 50 each in case any surplus price realized in
excess of that he is entitled to extra commission of 25 % of the amount in excess of the normal selling
price. Consignee sold all the goods at Rs. 60 each. So the surplus realized is Rs. 10 per unit, total surplus
is 100 Unit * Rs.10 = Rs. 1000. Hence special commission payable is 25% of Rs. 1,000 that is Rs. 250.
Ques.3. What is Performa invoice.

Ans: Performa Invoice is a document containing the information regarding the goods sent by the consignor to
the consignee. It is prepared by the consignor and sent to the consignee along the consignment. It shows
the full disclosure of the goods sent to the consignee. It is prepared only once at the time of sending the
goods by the consignor. Following are the contents of the Performa invoice:
Information Contained in Performa Invoice:-
Name of the Consignor and Consignee
Address
Type of Goods carrying
Quantity, Color, Weight, Quality and other relevant Information regarding Goods.
Ques. 4. Explain various expenses incurred by the consignee.
Ans. Consignee's direct/non-recurring expenses :- Consignee's direct expenses include all those expenses
which are incurred by consignee from Shipment to the warehouse.
Consignee's direct expenses include carriage, cartage, freight, Octroi, clearing charges, unloading
expenses, landing charges, Dock charges, Import duty, Insurance in passage.
Consignee's Indirect/recurring expenses :- Those expenses which had been incurred by consignee on goods
after reaching to his godown are called as Indirect expenses.
Consignee's indirect expenses include godown rent, insurance, wages, salaries carriage outward,
commission and brokerage, labour, charges, printing and stationery, bad debt, discount, selling expenses,
general expenses etc.
Ques. 5. Explain Accounting Treatment of Normal and Abnormal Loss.
Ans: Normal Loss :- It is that loss which is due to the nature of the goods consigned. Such loss may arise due
to loading and unloading or nature of goods like evaporation, leakage, dusting, spoilage etc.
(Total cost of goods sent + consignor's
Value of unsold stock = ´ Unsold Qty.
expenses + consgnee's direct expenses)
(Qty. Sent – Normal Loss)
Example: 100 units consigned @ rs. 50 each, consignor incurred Rs. 1000 as expenses. 10 units lost being
Normal loss. 70 units were sold @ Rs. 4,900.
Value of Consignment Stock
20 Units @ 50 = 1,000
ADD- Proportionate Expenses
1,000 * 20/90 = 222
Consignment Stock =1,222
Treatment of Abnormal Loss: Such loss is an avoidable loss because it does not arise due to
nature of the goods. Such loss may arise due to bad luck i.e., by fire, loss by accident, theft of
goods etc. Abnormal loss may during transit (i.e. from consignor's godown to a particular place)
or in the godown of consignee. Abnormal loss will be valued as follows.
Example :- 500 units @ Rs. 100 each sent on consignment. Consignor incurred Rs. 500 as expenses. 50 units
lost by fire during the transit.
Treatment of Abnormal loss :
Cost 50 * Rs. 100 = 5,000
Add- Proportionate expenses of Consignor
Rs. 500 * 50 units/ 500 units = 50
Abnormal loss = 5,050
Ques. 6. What is Account Sales

Ans: Consignee in the end of each accounting year prepares the record of consignment regarding goods
received by him during that period, various expenses incurred by him, commission charged and sales
made by him etc. He is supposed to send the full information regarding the last financial year to the
consignor. This statement shows the following information.
• Quantity and Quality of goods sold
• The gross sale realized
• Expenses made by the consignee
• Commission due to consignee
• Advance made by consignee to consignor
• Stock at the End with Consignee
• Balance amount sent by consignee to consignor
Ques. 7. Distinguish between Invoice and Performa Invoice

Ans:
Basis Invoice Performa Invoice
1. Who Prepared? Invoice is prepared by seller at Performa Invoice is prepared
the time of sale. by consignor at the time of
goods sent on consignment
basis.
2. Relationship Relationship between seller and In this case relationship
buyer is of creditors and between consignor and
debtors. consignee is of principal and
agent.
3. Liability for payment On receiving the goods buyer is On receiving the goods
liable to make the payment to consignee is not liable to make
seller payment. But he is liable only
after sale made by consignee.
4. Mention of sale value In Invoice seller does not In case of performa invoice,
mention the selling price on consignor mention the selling
which goods are to be sold by price on which goods are to be
buyer. sold by consignee.
Ques.8. Differentiate between consignment and Sales.

Ans:
Basis of Difference Consignment Sales
1. Ownership Ownership on goods sent on In case of sales, ownership

consignment stays with the transferred to the buyer at the
consignor. time of sale.
2. Risk All types of risks and losses are With the transfer of ownership
to be borne by the consignor on the risks of loss of such goods
goods sent. is also transferred to the buyer
3. Relationship The relationship between The relationship between buyer

consignor and consignee is that and seller are like debtors and
of Principal and Agent. creditors.
4. Expenses Expenses incurred by the Expenses incurred by buyer for

consignee for taking goods are taking goods to its place are to
to be borne by consignors be borne by buyer himself
5. Return of goods Unsold goods with the Unsold stock lying with buyer
consignee may be returned cannot be called back by seller.
back to consignor.
6. Commission In case of consignment In case of sales commission (if
commission is given to given) payable to third party
consignee to whom goods has i.e. selling agent.
been transferred
7. Account Sales It is the duty of consignee to No such statement is required

send periodical statement of to be sent by buyer to the seller.
sales made through a document
called as account sales, to the
consignor.
8. Closing stock as an asset In case of consignment closing In case closing stock with the
stock with the consignee will buyer will be treated as asset of
be shown as asset of consignor buyer.
9. Provision of law Consignment transactions are Sales transactions are regulated

governed and regulated by the by the provisions of the Sale of
provision of law of agency. Goods Act.
LONG ANSWER TYPE QUESTIONS

Ques.1. What is Consignment. Explain Accounting Treatment of Consignment transactions in the books
of Consignor and Consignee.
Ans: It is an agreement between two parties where one party being owner of the goods want to sell their goods
through the other party as it is not possible by the owner/manufacturer to sell the goods himself. Consignment
generally takes place where owner or manufacturer of goods want to cover large number of markets and it is not
possible to open stores and sales center at every place due to financial and other constraints so it becomes very
handy for the owner of goods to appoint various agents at different markets who takes the responsibility to sell
the goods on behalf of the owner in consideration of commission. There are following parties in Consignment
Consignor :- The person who sends the goods to the agent to be sold by him on commission basis
is called the consignor.
Consignee :- The person to whom the goods are sent for sale on commission basis is called the
consignee.
JOURNAL ENTRIES IN BOOKS OF CONSIGNOR

Consignor's Book
(a) For goods sent on consignment basis
Consignment A/c Dr.
Consignee A/c Dr.
To Goods sent on Consignment A/c
To Output GST
(Being goods sent on consignment by consignor with GST)
(b) For Expenses paid by consignor
Consignment A/c Dr.
Input GST (if any) Dr.
To Cash/Bank A/c
(Being expenses incurred by the consignor)
(c) For expenses paid by consignee
Consignment A/c Dr.
To Consignee's A/c
(Being expenses incurred by consignee in consignment)
(d) For advance received from consignee
Cash/Bank/ B/R A/c Dr.
To Consignee's A/c
(Being advance payment made byconsignee)
(e) For Goods sold by consignee
Consignee's A/c Dr.
To Consignment A/c
(Being Goods sold by the consignee)
(f) For Commission due to consignee
Consignment A/c Dr.
To Consignee's A/c
(Being Commission payable to the consignee)
(g) For transfer of bad debts
(i) If del-credere commission. not given
Consignment A/c Dr.
To Consignee's A/c
(Being bad debts incurred)
(ii) If del-credre commission given
No Entry
(h) For Goods taken over by Consignee
Consignee A/c Dr.
To Consignment A/c
(Being stock taken over by consignee himself)
(i) For Closing stock with consignee
Stock on consignment A/c Dr.
To Consignment A/c
(Being Consignment stock in the end)
(j) For Profit on consignment:
Consignment A/c Dr.
(Being profit on consignment in the end)
(k) For transfer of goods sent on consignment A/c
Goods sent on consignment A/c Dr.
To Trading A/c
(Being goods transferred to trading account)
(l) For unloading of goods sent (in case Goods sent on Invoice price)
Goods sent on consignment A/c Dr. (Unloading)
To Consignment A/c
(Being unloading of goods sent on invoice price)
(m) For unloading of Unsold stock (in case Goods sent on Invoice price)
Consignment A/c Dr. (Unloading)
To Stock Reserve
(Being unloading of unsold stock at invoice price)
(n) For Payment of GST
Output GST Dr.
To Input GST
To Bank A/c (if payable)
(Being Gst set off and balance amount payable if any)
CONSIGNEE'S BOOK
(a) For goods Received on consignment basis
Input GST Dr.
To Consignor A/c
(Being credit on GST taken on the goods consigned)
(b) For expenses paid by consignee
Consignor's A/c Dr.
To Cash/Bank A/c
(Being expenses on consignment incurred by consignee)
(c) For advance payment to consignor
Consignor's A/c Dr.
To Cash/Bank/B/P A/c
(Being consignee paid advance payment to consignor)
(d) For Goods sold by consignee
Cash A/c Dr. (Cash sales)
Consignor's customer A/c Dr. (Credit sales)
To Consignor's
To Output GST A/c
(Being sales made by the consignee)
(e) For Commission due to consignee
Consignor's A/c Dr.
To Commission A/c
To Output GST
(Being commission on sales due)
(f) For cash collected by consignee from customers
Cash/Bank A/c Dr.
Bad Debts A/c Dr.
To Customer’s A/c
(Being payment received from debtors and bad debts incurred)
(g) For transfer of bad debts
(i) If del-credere commission. not given
Consignor's A/c Dr.
To Consignment Debtor’s A/c
(Being bad debts to be borne by consignor)
(ii) If del-credere commission is given
Bad Debts A/c Dr.
To Consignment Debtor’s A/c
(Being Bad debts charged against commission)
(h) Remittance sent to the Consignor in Final Settlement
Consignor’s A/c Dr.
To Bills Payable/ Bank A/c
(Being payment of the balance due to the consignor)
(i) Payment of GST
Output GST A/c Dr.
To Input GST A/c
To Bank A/c
(Being GST setoff and balance paid to Government)
CHAPTER 7
JOINT VENTURE
Ques.1 What is Joint Venture?
Ans: Meaning of Joint Venture
Joint venture is a temporary partnership between two or more persons without the use of the firm name
but for a particular venture/objective or for a limited period. When such venture/objective is completed, Joint
Venture comes to an end. The parties in joint venture are known as Co-venturers. Co-venturers agree to
contribute capital and to share profit/loss on Joint Venture. In other words, under joint venture, two or more
persons agree to undertake a particular venture and to share the profit or loss thereof in an agreed ratio.
Examples of such a business is construction of building, underwriting of shares or debentures, distribution of
goods, sale of goods etc.
Characteristics of Joint Venture: Following are the characteristics of joint venture:
(a) Temporary Partnership: It is a temporary partnership and comes to an end after the completion of a
particular venture.
(b) Specific: The partnership is for a specific venture, so it is a particular partnership.
(c) No firm name: To partnership is without the use of a firm name.
(d) Purpose: The main purpose of a joint venture is to make profit and to distribute that profit among all
partners.
(e) Aggrement: Joint venture is an agreement between two or more co-venturers.
Ques.2 Distinguish between consignment and joint venture.

Ans.
Basis Consignment Joint Venture
1. Parties Consignor and consignee. Co-venturers.

2. Profits/Losses Whole the profit or loss belongs Profit or loss on joint venture is divided
consignor. amongst co-venturers in their profit
sharing ratio.
3. Relationship Principal and agent Relationship among co-venturers is is

between parties that of owners.
4. Going Concern Consignment always goes for ever Upon completion of objective for which
from year to year. it was started, joint venture comes to an
end.
5. Capital In case consignment whole capital In joint venture, co-venturers have to

contribution is contributed by consignor. contribute.
6. Account Sales An Account sale is sent by the No Account sale is sent by one-co-
consignee to consignor. venturer to another co-venturers.
7. Ownership consignor is the pwner in In joint venture co-venturers are the

consignment,. owner of goods.
8. Risk or loss of All risks of loss of goods are of All the co-venturers are liable for risks
Goods consignor. of loss of goods.
9. Scope Consignment is limited to the sale Joint venture is related to any type of
of goods. businesse.g. construction, underwriting
of public issue, sale of goods etc.
10. Number of In case consignment there are two In case of joint venture there may be
persons persons i.e. consignor and two or more persons.
consignee.
11. Number of Only one method Four methods.

Methods of
Recording
Accounting
Transactions
Q.3 Make comparison of joint venture and consignment, joint venture and partnership.
Ans. Difference between joint venture and partnership
Basis Joint Venture Partnership
1. Parties The parties in Joint venture are Parties of partnership are called
known as co-venturers. as partners.
2. Continuity Upon completion of objective It does not end upon

for which it was started, joint completion of particular
venture comes to an end. objective
3. Name of the firm No name of firm. The partnership firm has its
own name.
4. Liability of members Limited to the venture Unlimited.

concerned.
5. Applicability of law There is no act or law Partnership firm is governed by

governing to joint venture. Indian Partnership Act. 1932.
6. Registration A joint venture cannot be a A partnership firm can be a

registered firm registered firm.
7. Number of members Minimum limit is 2 and there is Minimum limit is 2 and

no maximum limit for number maximum limit is 10 for
of co-venturers. Banking business and 20 for
any other business in case of
partnership firm.
8. Finalisation of Accounts The accounts of joint venture The accounts of partnership

are finalized on the completion firm are finalized at the end of
of the venture or closing date of each accounting year
the accounting year whichever
is earlier.
Ques.3 What is Memorandum Joint Venture Account?

Ans. Memorandum Joint Venture Account is a nominal account. As nominal account means an account which
deals with expenses and incomes, Memorandum Joint Venture Account also states profit or loss. Under
Memorandum Joint venture Account, transactions like, purchase, goods ,assets purchased or supplied, expenses
incurred are recorded on the debit side. On the credit side transactionslike sale, incomes and stock or assets
taken over by co-venturers are recorded. The difference between two sides of this account is either profit or
loss. The profit or loss so calculated is divided among co-venturers in their profit sharing ratio. Since it is a
memorandum account so it does not form part of double entry system. This account is separately opened and
not opened in the books of any co-venturer
Each co-venturer opened an account named as 'Joint Venture with other co-venturers Account' in
his books. In this account only those transactions are recorded which are affected by him.
Table No.8
Q.4 Explain different methods of recording the transactions of relating to joint venture.
Ans. There are four different ways by which transactions of joint venture can be recorded.
1) When a separate set of books is maintained for Joint Venture
2) When separate set of books is not maintained for Joint Venture (Means each co-venture opens Joint
Venture Account and personal Account of other co-venturer)
3) When one of the co-venturer records the transactions of Joint Venture
4) When Joint venture transaction s are recorded through Memorandum Joint Venture Account
Method 1
When Separate set of books are maintained for joint venture
Under this method, separate books are maintained for recording transactions of Joint Venture. All transactions
regarding joint venture are recorded in the books of joint enture and not in the books of any co-venturer.
Accounting under this method is similar to Partnership accounts. This method is followed when co-venturers
are in same place. In this system, following accounts are to be opened in separate set of books.
(a) Joint venture account (to now the profit or loss on such venture)
(b) Joint Bank Account.
(c) Capital accounts for each of the co-venturer to show their investment in the joint venture.
Accounting entries
1. For the amount contributed by co-venturers.
Joint Bank A/c Dr. (with total amount)
To Co-venturer 's Personal A/c
(Being amount contributed by co-venturers)
2. For cash purchase of goods or other assets

Joint Venture A/c Dr.
To Joint Bank A/c
(Being goods purchased)
3. For credit purchase of goods or other assets

To Seller’s A/c
(Being goods purchased on credit)
4. For goods or other assets supplied by co-venturer

Joint Venture A/c
To Co-venturer's Personal A/c
(Being goods /assets supplied by co-venturer from
own personal account)
5. For Expenses paid on Joint Venture out of joint bank

To Joint Bank A/c
(Being expenses incurred from joint bank)
6. For Expenses on Joint Venture are paid by co-venturer

(Being expenses incurred by co-venturer from their own personal
account)
7. For sale of goods/Receipt of Contract Price or Commission

Joint Bank A/c Dr.
OR
Shares/Debentures Account Dr.
OR
Co-venturer's Personal A/c Dr.
(if received by co-venturer)
OR
Purchaser’s Account Dr.
(If sold on credit)
To Joint Venture A/c
(Being purchase consideration recieved)
8A. For shares/debentures taken over by a co-venturer

Joint venture Account Dr.
To Shares/Debentures Account
(Being loss on shares taken by co-venturer )
8B. For shares/debentures taken over by a co-venturer
Shares/Debentures Account Dr.
To Joint venture Account
(Being profit on shares taken by co-venturer )
9. For balance of stock taken by co-venturer

(Being stock taken by co-venturer)
10. For Profit on jont venture distributed to co-venturers.

(Being profit of joint venture distributed among co-
venturers)
11. For Loss on joint venture distributed to co-venturers.

(Being loss of joint venture distributed among co-
venturers)
12. For final payment to co-venturers.

Co-venturers Personal A/c Dr.
To Joint Bank A/c
(Being final payment made to co-venturer)
Method 2.
When all transactions recorded by one-coventurer
This method is followed , when buying and selling is done by only one-co-venturer. Other co-venturers only
contribute the amount. So all the transactions relating to joint venture are recorded by one co-venturer as follow:
JOURNAL ENTRIES
1. For contribution supplied by the other co-venturers

Cash/Bank B/R A/c Dr.
(Being amount received from other co-venturers)
2. For goods purchased for the joint venture.

To Cash A/c (If purchased for cash)
To Supplier’s account (if purchased on credit)
(Being goods purchased for joint venture)
3. For goods supplied by the other co-venturer and self.

Joint-venturer A/c Dr.
To Purchases A/c (if goods supplied by self)
(if supplied by other co-venturers)
(Being goods supplied for Joint Venture by co-venturers)
4. For expenses on joint venture

To Cash A/c
(Being joint venture expenses incurred )
5. For goods sold on joint venture A/c

Cash A/c (if sold by self) Dr.
Co-venturer's Personal A/c(If sold by other co-venturer) Dr.
(Being goods sold)
6. For stock taken by co-venturers

Purchases A/c (if taken by self) Dr.
Co-venturer's Personal A/c (if taken by other co-venturers) Dr.

(Being stock taken by co-venturers)
7. For Profit on joint venture

Joint Venture A/c Dr,
To Profit & Loss A/c (share of profit for self)
To Co-venturers Personal A/c
(share of profit of other co-ventuers)
(Being profit made on Joint venture)
8. For loss on joint venture

Profit & Loss A/c (share of profit for self) Dr.

(Being loss made on Joint venture)
9. For setting the accounts of the venturers

To Cash/Bank A/c
(Being accounts of coventurers settled)
Method 3.
When Separate set of books is not maintained for Joint Venture transactions
Under this method, separate set of books is not maintained for Joint Venture transactions. Each co-
venturers record all the transactions of the joint venture. For example, if there are two co-venturers X and Y.
Then X will record all the transactions which are effected by self as well by Y and vice-versa y will record all
the transactions which are effected by self and by X. In the Books of X, Joint Venture Account and personal
account of Y will be opened. In this books of y joint venture account and X's account will be opened.
JOURNAL ENTRIES
1. For contribution supplied by the other co-venturers

Cash/Bank B/R A/c Dr.
(Being amount received from other co-venturers)
2. For goods purchased for the joint venture by self.

To Cash A/c (If purchased for cash)
To Supplier’s account (if purchased on credit)
(Being goods purchased for joint venture)
3. For goods supplied by the other co-venturer and self.

Joint-venturer A/c Dr.
(Being goods supplied for Joint Venture by co-venturers)

To Cash A/c
(Being joint venture expenses incurred )
5. For goods sold on joint venture A/c

Cash A/c (if sold by self) Dr.
Co-venturer's Personal A/c(If sold by other co-venturer) Dr.
(Being goods sold)
6. For stock taken by co-venturers

Purchases A/c (if taken by self) Dr.
Co-venturer's Personal A/c (if taken by other co-venturers) Dr.

(Being stock taken by co-venturers)
7. For Profit on joint venture

Joint Venture A/c Dr,
To Profit & Loss A/c (share of profit for self)
To Co-venturers Personal A/c
(Being profit made on Joint venture)
8. For loss on joint venture

Profit & Loss A/c (share of profit for self) Dr.

(Being loss made on Joint venture)
9. For setting the accounts of the venturers

To Cash/Bank A/c
(Being accounts of coventurers settled)
10. For remittance received by co-venturer by Bills Receivable

In The Books Of Drawer
Bills Recievable A/c Dr.
To other coventurers
(Being acceptance recieved)

Bank A/c Dr.
Discount A/c Dr
To Bills Recievable A/c
(Being bill discounted)

Joint venture A/c Dr.
To Discount A/c
(Being transfer of discount)
In The Books of Acceptor

Other coventurers A/c Dr.
To Bills payable A/c
(Being acceptance given )

To other coventurers
(Being transfer of discount)
Method 4. When co-venturers record only their own transactions in their books or Memorandum
Joint venture Method.
Under this method, For computation of profit or loss on joint venture a separate Memorandum Joint
Venture A/c is to be opened in which all transactions effected by co-venturersare recorded. The Memorandum
Joint Venture ccount can be compared with Profit and Loss Account as all expenses and debited and and all
incomes are credited to this account. The balance of Memorandum Joint Venture A/c shows the profit or loss
which is distributed to co-venturers in their profit sharing ratio. Each co-venturer opens a personal account
called Joint Venture with ________A/c. A co-venturer records only those transactions which are related to him,
such as goods given for venture, expenses incurred for venture, sales made for venture and goods taken over
from venture etc. For example there are two co-venturers X & Y, then in the books of X, joint venture with Y's
A/c will be opened and in the books of Y, joint venture with X's A/c will be opened.
Journal Entries in the Books of Co-venturer
1. For goods purchased for joint venture
Joint venture with ______________ A/c Dr.
To Cash/Bank A/c
(Beings goods purchased for joint venture)
2. For goods supplied from own stock

Joint Venture with____________A/c Dr.
To Purchases A/c
(Being goods supplied from own stock for joint venture)
3. For cash sent or bill accepted in favour of co-venturer

Joint Venture with _____________ A/c Dr.
To Cash/Bank/Bills Payable A/c
(Being cash or cheque sent or Bills Payable accepted)
4. For cash recieved or bill recievable drawn on co-venturer

Cash/Bank/Bills Revceivable A/c Dr.
To Joint Venture with _____________
A/c
(Being cash recieved or bill recievable drawn on co-
venturer)
4A. For discounting the bill received

Bank A/c (Actual amount
realized) Dr.
Joint Venture with …. A/c (Amont of discount)
Dr. To Bill Receivable (Total amount of
bill)
(Being Bills revievable discounted)

Joint Venture with … A/c Dr.
To Cash A/c
(Being expenses incurred on Joint Venture)
6. For sales effected by co-venturer (self)

Cash/Bank A/c Dr.
To Joint Venture with… A/c
(Being sales made )
7. For commission receivable on joint venture.

Joint Venture with …. A/c Dr.
To Commission A/c
(Being commission received)
8. For unsold stock taken over

Purchases A/c Dr.
To Joint Venture with… A/c
(Being unsold stock taken by co-venturer)
9. For Share of Profit

Joint Venture with… A/c
(Being own share of profit on Joint Venture)
10. For Share of Loss

Profit and Loss /c
To Joint Venture with _________A/c
(Being own share of Loss on Joint Venture)
11. For Final settlement paid to other co-venturer

Joint Venture with________ A/c Dr.
To Cash/Bank A/c
(Being final settlement paid to other Co-venturer)
12. For Final settlement received from other co-venturer
Cash/Bank A/c Dr.
To Joint Venture with________A/c
(Being final settlement received from other Co-venturer)
CHAPTER 9
PARTNERSHIP ACCOUNTS- DISSOLUTION, INSOLVENCY, AND
PIECEMEAL DISTRIBUTION
Q.1 Explain Garner V/s Murray Rule.
Ans. If a partner's capital account shows a debit balance on the dissolution of the firm then, he is to pay
debit balance to the firm to settle his account. But if such a partner is unable to pay anything to the firm, then
such partner is called insolvent. Such type of deficiency (loss) is a capital loss so it should be borne by other
partners. Deficiency of insolvent partner in such a case will be borne by solvent partner as per Garner V/s
Murray Rule.
A per Garner V/s Murray Rule solvent partners should bring in cash equal to their share of loss
on realisation. Deficiency (i.e., insolvent partner unable to satisfy his debt to the firm) of insolvent partner will
be borne by other partners in proportion to their capitals.
While determining the capital ratio of solvent partners, distinction should be observed between fixed and
fluctuating capital. In such case capital ratio will be calculated as follows:
(i) When capitals are fixed : In this case fixed capitals of solvent partners will be taken as the base of
calculation of capital ratio. That means there is no need to adjust accumulated profits or losses, interest
on capitals, drawings etc. and deficiency of the insolvent partner will be borne by the solvent partners in
proportion to their agreed fixed capital.
(ii) When capitals are fluctuating : In this case all adjustments relating to accumulated profits or
losses, reserves. interest on capital and drawings will be made in partners capital accounts. The capitals thus
arrived will be taken as base to borne the deficiency of the insolvent partner by the solvent partners.
Important Points:
(a) Loss on realisation is not to be considered while ascertaining the capital ratio of the solvent partners.
(b) If after all adjustment, the capital of a solvent partner shows debit balance, then capital of such partner
will not be considered while calculating capital ratio.
Q.2. What is Realisation Account? How does it differ from Revaluation Account?
Ans. Realisation Account is a nominal account. It is prepared in order to realize the assets of the firm
and the company so realized is utilised for the payment of liabilities of the firm. The main purpose of preparing
this account is to find out the profit or loss on realisation of assets and payment of liabilities. If there are any
expenses incurred by the firm in realizing the assets of the firm, they are debited to this account. The profit or
loss arises in such account will be transferred to partners capital accounts in their profit sharing ratio.
Revaluation Account is also a nominal account. It is prepared at the time of admission, retirement, death of the
partner etc. It records increase or decrease in the value of assets and liabilities. It is prepared to find out profit or
loss on revaluation of assets and liabilities. It records only those assets and liabilities which are revalued. Profit
or Loss on Revaluation transferred to old partners.
DIFFERENCE BETWEEN REVALUATION ACCOUNT AND REALISATION
ACCOUNT
Basis Realisation Account Revaluation Account
1. Preparation It is prepared at the time of It is prepared at the time of
dissolution of the firm. admission, retirement, death of
the partner etc.
2. Value of Assets and It records the book value and It records increase or decrease
Liabilities the realized value of assets and in the value of assets and
liabilities. liabilities.
3. Objective It is prepared to find out It is prepared to find out profit
profit/loss on realization of or loss on revaluation of assets
assets and liabilities on and liabilities.
dissolution of firm.
4. Scope It records all assets and It records only those assets and
liabilities. liabilities which are revalued.
5. Transfer of Profit/Loss Profit or Loss on Realisation Profit or Loss on Revaluation
transferred to all partners transferred to old partners.
Q.3. What do you mean by dissolution of partnership and dissolution of firm? Discuss the various
modes of dissolution of a firm.
Ans. Dissolution of Partnership. According to the Indian Partnership Act 1932, "the Dissolution of
partnership means a reconstitution of the firm due to admission of a new partner, retirement or death or
insolvency of a partner." For example X and Y were two partner in a firm and new partner Z is
admitted, the partnership between X and Y comes to an end and a new partnership between X, Y and Z
comes into existence. Hence, in dissolution of partnership, the firm continues its business in a
reconstituted form.
Dissolution of Firm. According to section 39 of the Indian Partnership Act 1932, "the dissolution of
partnership between all the partners is called the Dissolution of firm." In case of the dissolution of a
firm, the business paid off.
DISTINCTION BETWEEN DISSOLUTION OF PARTNERSHIP AND DISSOLUTION

OF FIRM
Basis Distinction Dissolution of Partnership Dissolution of a firm
1. Meaning Relationship among partners It means fully break down of

renewed but the business is not business and the partnership of
terminated. all partners comes to an end.
2. State of Business It does not affect continuity of Business is discontinued..

the business.
3. Mode of dissolution It is voluntary and is dissolved It may be both voluntary and

by mutual agreement.. compulsory..
4. Assets and Liabilities In this case asset and liabilities In this case, assets are sold and
are revalued realized and liabilities are paid
off.
5. Balance Sheet A balance sheet of new firm is No Balance sheet can be

to be prepared. prepared.
Ques. 4 Explain various modes of dissolution of firm.

Ans: MODES OF DISSOLUTION OF A FIRM
As per, Indian Partnership Act, 1932 following arevarious ways in which a firm may be dissolved:
(i) Dissolution by agreement. A firm is dissolved when all the partners agree that it should be
dissolved. Or we can say, it can also be dissolved by the mutual consent of all the partners.
(ii) Compulsory Dissolution. A partnership firm will have to be compulsory dissolved In the following
cases :
(a) When all the partners except one become insolvent
(b) When all the partners become insolvent.
(c) When the business becomes illegal.
(d) Where number of partners exceeded from maximum limit.
(iii) Dissolution on the happening of Contingencies. A firm is dissolved on the happening of the
following contingencies:
(a) By the expiry of the period of duration of the firm.
(b) By the completion of the objective for whch the firm was constituted.
(c) By the death of a partner
(d) By the adjudication of a partner as insolvent.
(iv) Dissolution by the court. Following are the cases, when a court, on a suit by a partner, will
intervene and may order for the dissolution of the firm:
(a) Insanity of a partners means when a partner becomes of unsound mind.
(b) Incompetent to work i.e. when a partner becomes incompetent to perform his duties.
(c) When a partner is found guilty of misconduct in carrying the business.
(d) When a partner commits breach of agreement.
(e) On any other grounds, which the court thinks just and equitable.
.
LONG ANSWER TYPE QUESTIONS
Q.1 Write shot notes on: Piecemeal Distribution
Ans. Piecemeal Distribution: In dissolution of firm, in all numericals we assume that all the assets are
realized immediately on the date of dissolution and liabilities are paid accordingly and accounts are settled
among the partners at the same time.But this assumption is not realistic.
Since assets are realized and cash is collected gradually over a long period. Such a process takes long
time. So creditors, other outside liabilities and capitals also paid gradually. On a gradual realisation of assets,
the cash realised is distributed to partners as and when cash is available.
SEQUENCE OF DISTRIBUTION
1. First of all, expenses on realisation are paid.
2. After payment of expenses of realization, payment is made to secured creditors upto the amount
realised from the sale of asset given to them as security. If some balance amount still payable to them,
then these are treated like unsecured creditors.
3. Afterwards, payment is made to unsecured creditors.
4. After the creditors have been paid off the amount due to partners as loan should be paid. When the
loans are due to more than one partner, the cash available should be paid in proportion to the loan
amount due.
5. After the payment of outside liabilities and loans due to the partners, the capitals of the partners are
paid. Partners capitals consist of balance in capital and current accounts and share in the undistributed
profits ans reserves.
METHODS OF DISTRIBUTION OF CASH AMONG PARTNERS
There are two methods to distribute cash among partners on dissolution of firmi.e.
(i) Proportionate Capital Surplus Capital Method
(ii) Maximum Loss Method
(i) Proportionate OR Surplus/Higher Relative Capital Method.
1st of all, it is checked, whether capital of partners is in profit sharing ratio or not. If capitals are in
profit sharing ratio, then at each realization of assets, amount is distributed to them in their capital
ratio.
If capitals are not in profit sharing ratio, then out of cash available after making payment
to outsiders and loans to partners is paid. Because cash available with the firm can not be distributed
to all partners unless their capitals are in profit sharing ratio. So, calculations are made to find out
which partner’s capital is not in profit sharing ratio. The partner whose capital is more than his
proportionate capital is paid first so that capitals of all partners can be brought is profit sharing ratio.
A partner who has contributed more capital with reference to his profit sharing ratio is first paid.
The capital of all partners is thus brought at par with their profit sharing ratio. Thereafter, available
cash will be distributed among partners in their profit sharing ratio.
We can say, under piecemeal distribution, for distribution of cash available after paying off
outsiders liabilities and partner’s loan, capitals of partners are brought to their profit sharing ratio.
Accordingly capitals are paid. If there is some unpaid balance to capital account, it will be equal to loss
on realisation which is to be divided among partners in their profit sharing ratio.
(ii) Maximum Loss Method. Under this method, the amount available for distribution is compared with
the total amount of of capitals standing to partners and difference between the two is maximum loss. At
the time of realization it is assumed that it is the final realization, and there will be no relaisation in
future from other assets. This maximum loss or notional loss is divided among the partners in their profit
sharing ratio. The share of maximum loss is deducted from the balance of capital amount. If after
deduction, it is positive , then it is paid. But, if the share of notional loss of a partner is more than his
capital balance then that partners is treated as insolvent. Such negative balance is called deficiency. Such
deficiency shall be debited to other partners according to Garner Vs. Murray rule i.e. in their capital
ratio. Such process is repeated at the time of each realization till all assets are disposed off.
Ques.2 Give Accounting Entries on dissolution of firm.
OR
What is the procedure to be followed on dissolution of firm?
Ans: On dissolution of the firm, following procedure is followed:
A. Realisation of Assets: All tangible and intangible assets are realized in cash and some assets are taken
by partners.
B. Payment of Realisation Expenses: Expenses incurred on disposal of assets are met by the firm.
Sometimes partners agree to bear such expenses.
C. Payment of Liabilities to outside parties: Liabilities of outsiders like creditors, bills payable,
outstanding loans, etc are paid.
D. Payment of Partner’s Loans: After the payment of outsiders, partners loans are paid.
E. Distribution of cash and assets among partners: After payment to outsiders, loans of partners and
expenses, if some cash or assets are available, these are distributed among partners.
Journal Entries to be passed on dissolution
1. For transfer of assets ( Except Fictitious assets like Advertisement suspense, Profit and Loss A/c
(dr.)- Loss and Current account ) to Realisation Account
Realisation Account Dr.
To Assets Account (individually at Book Value)
(Being transfer of assets at Book Value to realization A/c)
2. Fictitious assets like Advertisement suspense, Profit and Loss A/c (dr.)- Loss and Current account of
partners are not transferred to realization account. Such are transferred to capital account of partners by
passing following journal entry:
Capital Accounts (In old ratio) Dr.
To Advertisement suspense
To Profit and Loss A/c (loss)
To Current account
(Being Profit and Loss-Loss, Advertisement suspense ,
Current account transferred to capital accounts)
3. For transfer of liabilities

Various Liabilities Dr.
To Realisation Account (individually at book value)
(Being transfer of liabilities at Book Value to realization A/c)
4. For transfer of Provision and Reserves and Funds

Provision for Doubtful Debts/Discount/Depreciation A/c Dr.
Employees Provident Fund A/c Dr.
Investment Fluctuation Reserves/Fund A/c Dr.
Workmen Compensation Reserves A/c Dr.
(Upto Amount of Liability for workmen Compensation)
To Realisation A/c
(Being reserves and funds transferred to Realisation A/c)
5. Transfer of Accumulated Profits/ Reserves to Capital Accounts

Reserves A/c Dr.
Profit and Loss (Profits) A/c Dr.
To Partners Capital A/c
(Being transfer of reserves and profits to partners capital
accounts)
6. For Realisation of assets ( earlier recorded or not)

Cash/Bank A/c Dr.
To Realisation A/c
(Being Assets realized in cash)
7. For asset taken by partner

Partner’s capital A/c Dr.
To Realisation A/c
(Being Asset taken by partner)
8. For expenses on realization

Realisation A/c Dr.
To Cash/Bank A/c (if paid by the firm)
To Partner’s Capital A/c (if paid by the partner)
(Being expenses on realization paid)
9. For settlement of liabilities ( earlier recorded or not)

Realisation A/c Dr.
To Cash/Bank
(Being liabilities paid)
10. For liabilities taken by partner ( earlier recorded or not)

Realisation A/c Dr.
To Partner’s capital A/c
(Being liabilities taken by partner)
Note: When an asset is taken by a creditor, there will no entry for this
transaction.
11 For payment of partner’s Loan
Partner’s Loan A/c Dr.
To Cash/Bank
(Being partner’s loan paid)
12. For profit on Realisation (When credit side of realization account is

greater than debit side)
Realisation A/c Dr.
To Partner’s capital A/c
(Being Profit on realization transferred to capital a/c)
13. For loss on Realisation (When debit side of realization account is

greater than credit side)
Partner’s capital A/c Dr.
To Realisation A/c
(Being Profit on realization transferred to capital a/c)
14. For closing capital accounts

Partner’s Capital A/c Dr.
To Cash/Bank
(Being capital account of partners closed by making
payment)
Note: Entry no. 14 will be revesed if amount id brought by partner.

Untitled

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Untitled

Uploaded by

Copyright:

Available Formats

CHAPTER 1

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

FEATURES OF ACCOUNTING PRINCIPLES

Ques.5 Distinguish between accounting concepts and accounting conventions.

Basis Accounting Concepts Accounting Conventions

3. Based on Accounting concepts are based Accounting conventions are

LONG ANSWER TYPE QUESTIONS (15 MARKS)

1. Business Entity Concept

2. Money Measurement Concept

3. Going Concern Concept

2. Convention of Full Disclosure

OBJECTIVES OF ACCOUNTING STANDARDS

1. TO PROVIDE MEANINGFUL INFORMATION: The main objective of Accounting Standards is

BENEFITS OF ACCOUNTING STATNDARDS

Ques. 2 Give the list of IND-AS

Ques 3. Give a detail note on IFRSs?

GLOBAL CONVERGENCE OF ACCOUNTING STANDARDS

IFRS ADOPTION PROCEDURE AND IMPLEMENTATION IN INDIA

Step-2- Preparations for IFRS Implementation

Financial Year Mandatorily applicable to

2016 – 17 Companies (listed and unlisted) whose net worth is equal to or

OBSTACLES IN CONVERGENCE WITH IFRS

Q.1 Distinguish between Balance Sheet and Trial Balance.

Q. 2. Balance sheet is not an account, it is only the list of Balances. Explain

Closing Stock A/c Dr.

Expenses A/c Dr.

(c) Prepaid/Advance Expenses

Prepaid Expenses A/c Dr.

(d) Accrued/Outstanding Incomes

Accrued Income A/c Dr.

(e) Income Received in Advance

Income A/c Dr.

(g) Provision for bad and doubtful debts

Profit & loss A/c Dr.

(h) Interest on Capital

Interest on Capital A/c Dr.

(i) Interest on Drawings

(j) Manager’s Commission

Manager’s Commission A/c Dr.

Ques. 3 Differentiate Dependent and Independent Branch.

6. Reconciliation Reconciliation between Branch There is no need for such

7. Preparation of Final Under Independent branch, Debtors system, Final Account

Question 4: How does branch and departmental accounts differ?

6. Location Branches can be inland or foreign. Departments are always inland.

LONG ANSWER TYPE QUESTIONS (15 MARKS)

3. For transfer of Gross Profit

4. For transfer of Gross Loss

5. For transfer of Indirect expenses and losses

6. For transfer of Indirect incomes and gains

7. For transfer of net profit

8. For transfer of net loss

9. For transfer of balance of branch assets to books of Head office

In the books of Head Office

(b) If Payment is made by the branch (In the Books of Branch)

2. For charging depreciation on fixed assets

(In the Books of Branch)

(In the Books of Branch)

4. Cash remitted by branch but cash is in transit

5. For Goods sent be Head office but Goods still in transit

6. For goods supplied by Branch 1 to Branch 2

(In the Books of Supplier Branch)

(In the Books of Receiver Branch)

7. For cash paid by Branch on behalf of Head Office