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COCEDUCATION.COM DEPRECIATION ACCOUNTING REVISION CA/CMA Santosh kumar
ACCOUNTING OF DEPRECIATION REVISION

Important for 1-mark questions/ MCQs/ Theory based question: -
1. Eric Kohler defined depreciation as “the lost usefulness, expired utility, the diminution in
service yield.”
2. Depreciation means gradual decrease in the value of an asset due to normal wear and tear,
obsolescence (effluxion of time or introduction of technology in the market etc.).
3. “Depreciation accounting is a system of accounting which aims to distribute the cost or

other basic value of tangible capital assets less salvage, over the estimated useful life of the
unit in a systematic and rational manner. It is a process of allocation, not of valuation.
4. Certain Useful Terms:

Amortization - Intangible assets such as goodwill, trademarks and patents are written off
over a number of accounting periods covering their estimated useful lives. This periodic write
off is known as Amortization and that is quite similar to depreciation of tangible assets. The
term amortization is also used for writing off leasehold premises.
Depletion - This method is especially suited to mines, oil wells, quarries, sandpits and similar
assets of a wasting character. Depletion can be distinguishable from depreciation in physical
shrinkage or lessening of an estimated available quantity and the latter implying a reduction in
the service capacity of an asset.
Obsolescence – The term ‘Obsolescence’ refers to loss of usefulness arising from such factors
as technological changes, improvement in production methods, change in market demand for
the product output of the asset or service or legal or medical or other restrictions.
Dilapidation - In one sentence Dilapidation means a state of deterioration due to old age or
long use. This term refers to damage done to a building or other property during tenancy.
Causes of Depreciation:-
Internal Causes: -
(i) Wear and tear: Plant & machinery, furniture, motor vehicles etc. suffer from loss of utility due to
vibration, chemical reaction, negligent handling, rusting etc.
(ii) Depletion (or exhaustion): The utility or resources of wasting assets (like mines etc.) decreases
with regular extractions.
External or Economic Causes:
(i) Obsolescence: Innovation of better substitutes, change in market demand, imposition of legal
restrictions may result into discarding an asset.
(ii) Inadequacy: Changes in the scale of production or volume of activities may lead to discarding
an asset.
Time element: With the passage of time some intangible fixed assets like lease, patents,
copy-rights etc., lose their value or effectiveness, whether used or not. The word
“amortization” is a better term to speak for the gradual fall in their values.
Abnormal occurrences: An accident, fire or natural calamity can damage the service potential
of an asset partly or fully. As a result, the effectiveness of the asset is affected and reduced
COCEDUCATION.COM For Enquiry No. 9999631597, 7303445575, 8448322142

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Characteristics of Depreciation: - The Characteristics of Depreciation are: -
(i) It is a charge against profit.
(ii) It indicates diminution in service potential.
(iii) It is an estimated loss of the value of an asset. It is not an actual loss.
(iv) It depends upon different assumptions, like effective life and residual value of an asset.
(v) It is a process of allocation and not of valuation.
(vi) It arises mainly from an internal cause like wear and tear or depletion of an asset. But it is
treated as any expense charged against profit like rent, salary, etc., which arise due to an
external transaction.
(vii) Depreciation on any particular asset is restricted to the working life of the asset.
(viii) It is charged on tangible fixed assets. It is not charged on any current asset.
For allocating the costs of intangible fixed assets like goodwill. etc., a certain amount of their total
costs may be charged against periodic revenues. This is known as amortization.
Objective and Necessity for Providing Depreciation: -
(i) Correct calculation of cost of production:

(ii) Correct calculation of profits:
(iii)Correct disclosure of fixed assets at reasonable value:
(iv) Provision of replacement cost: Depreciation is a non-cash expense. But net profit is calculated
after charging it. Through annual depreciation cash resources are saved and accumulated to provide
replacement cost at the end of the useful life of an asset.
(v) Maintenance of capital: A significant portion of capital has to be invested for purchasing fixed
assets. The values of such assets are gradually reduced due to their regular use and passage of
time. Depreciation on the assets is treated as an expired cost and it is matched against revenue. It
is charged against profits. If it is not charged the profits will remain inflated. This will cause capital
erosion.
(vi) Compliance with technical and legal requirements: Depreciation has to be charged to comply
with the relevant provisions of the Companies Act and Income Tax Act.
Methods of Charging Depreciation: -
Based on Capital/Source of Fund: -

(i) Sinking Fund Method
(ii)Annuity Method
(iii)Insurance Policy Meth

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Based on Time: -
(i) Fixed Installment Method

(ii) Reducing Balance Method
(iii) Sum of Years’ Digit Method.
(iv) Double Declining Method
Based on Uses: -
(i) Working Hours Method
(ii) Mileage Method
(iii) Depletion Service Hours Method
(iv) Unit method
Based on Price: -
(i) Revaluation Method
(ii) Repairs Provision Method
Method of Providing Depreciation: - There are mainly three methods of charging depreciation as per AS 10.
I. Straight Line Method: -
II. Reducing Balance Method/ diminishing value method/ written down method.
III. Unit of production method (sum of unit’s method) – In this method depreciation is charged on
the basis of expected use or unit of production.
Change in method of charging depreciation; -
➢ According to Accounting Standard 10 issued by ICAI, the depreciation method selected

should be applied consistently, to provide comparability of the results of operations of the
enterprise from period to period.
➢ A change from one method of providing depreciation to another method should be
treated as change in accounting estimate.
➢ When such a change in the method of depreciation should apply on all assets existing in the
group with prospective effect only.
Note: - According to AS-6, change in method of depreciation is applied on all existing assets with
retrospective effect.
Important note: -
1. Depreciation is charged on all depreciable asset on its depreciable value on its depreciable life.
2. All first-time expenses incurred till asset has been put in a running condition are added to the cost
of the asset. For example, commission / brokerage on purchase, Taxes on purchase, carriage/freight on
transportation of such asset, insurance in transit etc.
3. Cost of asset does not include interest paid in instalments, if purchased on credit basis.
4. We start charging depreciation from the date on which asset has been put in a running condition.

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Practice question 1. On 1st April 2022, COC EDUCATION Pvt ltd purchased a machine for ₹2,00,000. On
1st October 2022, a new machine was purchased for ₹1,00,000. On 1st April 2023, Company purchased
another machine for ₹50,000 and on the same date first machine was sold for ₹1,10,000.
On 31st March.2024, a new machine was purchased for ₹1,50,000. On 1st May 2024, second machine
became obsolete and sold for ₹30,000. Rate of deprecation 10% p.a. on WDV. Accounts are closed
on 31st March every Year.
On 31st March 2025, company decided to change the method of charging depreciation from WDV to
SLM @ 15% P.A. Prepare machinery A/c for 4 years.
Machinery account
Date Particulars Amount (₹) Date Particulars Amount (₹)
1.4.21 To bank account (M1) 2,00,000 31.3.22 By depreciation a/c
1.10.21 To bank account (M2) 1,00,000 M1- 20,000
M2- 5,000 25,000
31.3.22 By balance C/d
M1- 1,80,000
M2- 95,000 2,75,000
3,00,000 3,00,000
1-4-22 To balance b/d 2,75,000 1-4-22 By depreciation Nil
By bank account 1,10,000
1-4-22 To bank account (M3) 50,000 By profit & loss a/c 70,000
31-3-23 By depreciation a/c
31-3-23 To bank account (M4) 1,50,000 M2- 9,500
M3- 5,000
M4- nil 14,500
31-3-23 By balance C/d
M2- 85,500
M3- 45,000
M4- 1,50,000 2,80,500
4,75,000 4,75,000
1-4-23 To balance b/d 2,80,500 1-5-23 By depreciation 713
By bank account 30,000
By profit & loss a/c 54,787
31-3-24 By depreciation a/c
M3- 4,500
M4- 15,000 19,500
By balance C/d
M3- 40,500
M4- 1,35,000 1,75,500
2,80,500 2,80,500
1-4-24 To balance b/d 1,75,500 31-3-25 By depreciation a/c
M3- 7,500
M4- 22,500 30,000
By balance C/d
M3- 33,000
M4- 1,12,500 1,45,500
1,75,500 1,75,500

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Working notes 1: Computation of profit & loss on sale of M1:

Book value of M2 as on 1-4-23 1,80,000
Less: depreciation up to date of sale (NIL)
Book value of the asset on the date of sale 1,80,000
Less: sold for (1,10,000)
Loss on sale 70,000
Working notes 2: Computation of profit & loss on sale of M2:

Book value of M2 as on 1-4-23 85,500
𝟏𝟎 𝟏 (713)
Less: depreciation up to date of sale (85,500 X 𝟏𝟎𝟎 X 𝟏𝟐)
Book value of the asset on the date of sale 84,787
Less: sold for (30,000)
Loss on sale 54,787
Practice question 2. On 1st April 2020 a firm purchased machinery for ₹2,00,000. On 1st October in the
same accounting year, additional machinery costing ₹1,00,000 was purchased. On 1st October 2021,
the machinery purchased on 1st April, 2020 having become obsolete, was sold for ₹90,000. On 1st
October 2022, new machinery was purchased for ₹2,50,000 while the machinery purchased on 1st
October 2020 was sold for ₹85,000 on the same day.
The firm provides depreciation on its machinery @ 10% per annum on original cost on 31 st March
every year. Show machinery Account, Provision for Depreciation Account for the Period of three
years ending 31st March, 2023.
Solution:
Machinery account

1-4-20 To bank account(M1) 2,00,000 31-3-21 By balance c/d
1-10-20 To bank account (M2) 1,00,000 M1- 2,00,000
M2- 1,00,000 3,00,000
3,00,000 3,00,000
1-4-21 To balance c/d 3,00,000 1-10-21 By machine sold a/c 2,00,000
(M1)
31-3-22 By balance c/d(M2) 1,00,000
3,00,000 3,00,000
1-4-22 To balance b/d 1,00,000 1-10-22 By machine sold a/c 1,00,000
(M2)
1-10-22 To bank account(M3) 2,50,000 31-3-23 By balance c/d(M3) 2,50,000

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Provision for depreciation account

31-3-21 By depreciation
M1 20,000
31-3-21 To balance c/d 25,000 M2 5,000 25,000
25,000 25,000
1-4-21 By balance b/d
1-10-21 To machine sold a/c (M1) 30,000 M1 20,000
M2 5,000 25,000
1-10-21 By depreciation (M1) 10,000

31-3-22 To balance c/d (M2) 15,000
45,000 45,000
1-4-22 By balance b/d (M2) 15,000

32,500
Machine sold (M1) account

1-10-21 To machine account 2,00,000 1-10-21 By prov. for dep 30,000
By bank account 90,000
By profit & loss a/c 80,000

2,00,000 2,00,000
Machine sold (M2) account

1-10-22 To machine account 1,00,000 1-10-21 By prov. for dep 20,000
By profit & loss a/c 5,000 By bank account 85,000

1,05,000 1,05,000
IMPORTANT NOTE 1: Must revise question 11 and 16 from my book.
Note 2. If rate of depreciation is not given in question, we charge depreciation on the basis of their
scrap value and their life.

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Practice question 3: M/s. Hot and Cold commenced business on 01.07.2017. When they purchased a
new machinery at a cost of ₹ 8,00,000. On 01.01.2019 they purchased another machinery for ₹6,00,000
and again on 01.10.2021 machinery costing ₹15,00,000 was purchased. They adopted a method of
charging depreciation @ 20% p.a. on diminishing balance basis.
On 01.07.2021, they changed the method of providing depreciation and adopted the method of
writing off the Machinery Account at 15% p.a. under straight line method with retrospective effect
from 01.07.2017, the adjustment being made in the accounts for the year ended 30.06.2020.
The depreciation has been charged on time basis. You are required to calculate the difference in
depreciation to be adjusted in the Machinery on 01.07.2021, and show the Machinery Account for the
year ended 30.06.2022.
Solution: - In the books of M/s Hot and Cold

Machinery Account
Date Particular Amount (₹) Date Particular Amount (₹)
01.07.21 To, Balance b/d 6,73,280 30.06.22 By Depreciation A/c 3,78,750
To, Profit and Loss A/c 21,720 By Balance c/d 18,16,250
(Depreciation
Overcharged)
01.10.21 To, Bank A/c (Purchase) 15,00,000

21,95,000 21,95,000
Working Notes 1: Statement of Depreciation:
Date Particulars Machine -1 (₹) Machine -2 (₹) Total

depreciation (₹)
01.07.2017 Book Value 8,00,000
30.06.2018 Depreciation @ 20% 1,60,000 1,60,000
01.07.2018 W.D.V. 6,40,000
01.01.2019 Bank (Purchase) 6,00,000
30.06.2019 Depreciation @ 20% 1,28,000 60,000 1,88,000
01.07.2019 W.D.V. 5,12,000 5,40,000
30.06.2020 Depreciation @ 20% 1,02,400 1,08,000 2,10,400
01.07.2020 W.D.V. 4,09,600 4,32,000
30.06.2021 Depreciation @ 20% 81,920 86,400 1,68,320
01.07.2021 W.D.V. 3,27,680 3,45,600
6,73,280 7,26,720
2. Now depreciation under Straight Line Method: -
On ₹8,00,000 @ 15% = ₹1,20,000 × 4 years (from 01.07.2017 to 30.06.2021) ₹4,80,000

On ₹6,00,000 @ 15% = ₹90,000 × 2.5 years (from 01.01.2019 to 30.06.2021) ₹2,25,000
₹7,05,000

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3. Depreciation Overcharged:
Depreciation overcharged = Reducing Balance Basis – Straight Line Basis
= ₹ (7,26,720 – 7,05,000) = ₹21,720
4. Depreciation for the year: -
On 14,00,000 @ 15% for the year ₹2,10,000

On 15,00,000 @ 15% for the 9 months ₹1,68,750
₹3,78,750
SUM OF YEAR’S DIGIT METHOD
Practice question 4:
Cost of machine= ₹2,00,000

Scrap value of machine = ₹50,000
Estimated life of asset = 5 years
th
Calculate depreciation by sum of year’s digit method for the first year and 4 year.
Annuity method: -
st
Practice question 5: A lease is purchased on 1 Jan. 2002 for 4 years at a cost of ₹20,000. It is proposed
to depreciate the lease by annuity method charging 5% interest. A reference to the annuity table shows
that to depreciate Re.1 by annuity method over 4 years charging 5% interest, one must write off a sum
of ₹ 0. 282012.calculate amount of depreciation to be charged each year by annuity method.
Answer: To write off ₹20000, one has to write off every year ₹5640.24 (i.e., ₹0.282012 x ₹ 20,000)

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COCEDUCATION.COM RECTIFICATION OF ERRORS CA/CMA Santosh kumar
RECTIFICATION OF ERRORS REVISION

Important for MCQ/ 1 mark question/ theory questions: -
➢ Unintentional omission or commission of amounts and accounts in the process of recording

the transactions are commonly known as errors.
➢ To check the arithmetic accuracy of the journal and ledger accounts, trial balance is
prepared.
Illustrative cases of errors and their nature: -
Wrong Entry in primary recordings i.e., subsidiary books, Journal Proper and Cash Book may occur.
Wrong casting(totaling) of subsidiary books: Subsidiary books are totaled periodically and posted
to the appropriate ledger accounts. There may arise totaling errors.
Wrong posting from subsidiary books: In this case, the wrong amount may be posted to the
ledger account or the amount may posted to the wrong side or to the wrong account.
Wrong casting(totaling) of ledger balances: Subsidiary Book, any ledger account balance may be
casted wrongly.
Types of errors: Basically, errors are of two types: -
Errors of principle: When a transaction is recorded in contravention of accounting principles, like

treating the purchase of an asset as an expense, it is an error of principle. In this case there is no
effect on the trial balance since the amounts are placed on the correct side, though in a wrong
account.
Clerical errors: These errors arise because of mistake committed in the ordinary course of the
accounting work.
These are of three types:
Errors of Omission: If a transaction is completely or partially omitted from the books of account, it
will be a case of omission.
Errors of Commission: If an amount is posted in the wrong account or it is written on the wrong
side or the totals are wrong or a wrong balance is struck, it will be a case of “errors of
commission.”
Compensating Errors: If the effect of errors committed cancel out, the errors will be called
compensating errors. The trial balance will agree.
Stages of errors: Errors may occur at any of the following stages of the accounting process:

AT THE STAGE OF RECORDING THE TRANSACTIONS IN JOURNAL: -

Following types of errors may happen at this stage: -
(i) Errors of principle,
(ii)Errors of omission,
(iii) Errors of commission.
AT THE STAGE OF POSTING THE ENTRIES IN LEDGER:
Errors of omission: -
(a) Partial omission,
(b) Complete omission.
(ii) Errors of commission: -

(a) Posting to wrong account,
(b) Posting on the wrong side,
(c) Posting of wrong amount.
AT THE STAGE OF BALANCING THE LEDGER ACCOUNTS: -
(a) Wrong Totalling of accounts,

(b) Wrong Balancing of accounts.
AT THE STAGE OF PREPARING THE TRIAL BALANCE: -
(i) Errors of omission,

(ii) Errors of commission:
(iii) Taking wrong account,
(iv) Taking wrong amount,
(v) Taking to the wrong side.
Distinction between Error of Principal and Error of Omission (most imp.): -
ERRORS OF PRINCIPAL ERRORS OF COMMISSION

• This Errors does not affect Trail Balance • This error may affect Trail Balance
• This Error is due to Wrong classification of • This error is due to complete omission of a
Capital and Revenue expenditure or Personal transaction or partial omission.
and Nominal Account. • This is a error may or may not affect profit of
• This is not a clerical error. the business.
• This error affects profit of the business • This error may or may not affect value of
• This error will affect value of asset or liability. assets or liability.

RECTIFICATION OF ERROR --- An error can be detected at any one of the following stages:
(i) Before preparation of Trial Balance.
(ii)After Trial Balance but before the final accounts are drawn.
(iii) After final accounts, i.e., in the next accounting period.
SUSPENSE ACCOUNT: - If the difference in the trial balance is not quickly located, it is usual to put the
difference to suspense account in order to make the trial balance balanced.
• If the debit side is short, the suspense account will be debited saying
“To differences in trial balance” and
Similarly, the suspense account will be credited if the credit side is short.
• The difference in trial balance is due to type of mistakes which affect only one account, such as
wrong posting of an account, mistake in totaling a subsidiary book etc. Such types of mistakes are
only reflected in suspense account.
Let’s practice some practical questions:
Practice question 1.
I. Goods worth ₹500 taken by proprietor for personal use had not been recorded at all.
II. ₹1,148 paid for repairs of motor car was debited to motor car account as ₹148.
III. The returns inward book for March,2023 had been cast ₹1000 short.
IV. While carrying forward the total of sales book from one page to the next, the amount was
written as ₹1,76,658 instead of ₹1,67,568.
V. A bad debt of ₹1,560 had not been written off and provision for doubtful debts should have been
maintained at 10% of Trade receivables which are shown in the trial balance at ₹23,390 with a credit
provision for bad debts at ₹2,320.
VI. Bad debts aggregating ₹505 written off during the year in the Sales Ledger but were not recorded in
the general ledger.
VII. A vehicle bought originally for ₹7,000 four years ago and depreciated to ₹1,200 had been sold for
₹1,500 in the beginning of the year but no entries, other than in the bank account had been passed
through the books.

Practice question 2. How would you rectify the following errors in the book of Rama & Co. if rectification is
required before preparing trial balance?
(i) The total to the Purchases Book has been undercast by ₹100.
(ii) The Returns Inward Book has been undercast by ₹50.
(iii)A sum of ₹250 written off as depreciation on Machinery has not been debited to
Depreciation Account.
(iv)A payment of ₹75 for salaries (to Mohan) has been posted twice to Salaries Account.
Solution: (i) The Purchases Account should receive another debit of ₹100 since it was debited short
previously: “To Under casting of Purchases Book for the month of --- ₹100.”
(ii) Due to this error the Returns Inward Account has been posted short by ₹50: the correct entry
will be: “To Under casting of Returns Inward Book for the month of --- ₹50.”
(iii) The omission of the debit to the Depreciation Account will be rectified by the entry:
“To Omission of posting of ₹250”.
(iv) The excess debit will be removed by a credit in the Salaries Account by the entry:
“By double posting on ₹75”.

COCEDUCATION.COM CONSIGNMENT ACCOUNTING REVISION CA/CMA Santosh kumar
CONSIGNMENT ACCOUNT REVISION
Important points for 1-mark questions or MCQ or theory-based question: -
i. Consignment Sale: - Where one person in firm sends goods to another person or firm on the basis
that the goods will be sold on and at the risk of the former, it is called consignment sale.
ii. The party who sends the goods is called consignor or principal and the party to whom goods are
sent is called consignee or agent.
iii. The relationship between the consignor and the consignee is that of principal and agent.
iv. Account Sales: - After sale of goods, consignee sends a statement to consignor. This statement is
called account sales. In this statement gross value, expenses and commission of consignee, advance
paid by consignee and net amount due by consignee are shown.
v. Performa invoice: - it is prepared by consignor for the consignee stating details regarding goods sent on
consignment i.e., quantity, rate, value etc.
vi. Operating cycle of consignment arrangement: -
a. Goods are sent by consignor to the consignee.

b. Consignee may pay some advance or accept a bills of exchange
c. Consignee will incur expenses for selling the goods.
d. Consignee maintains records of all cash and credit sales.
e. Consignee prepares a summary of results called as account sales.
f. Consignor pays commission to the consignee.
Vii. Accounting for consignment business in the Books of consignor: -To know the profit and the loss made
on a consignment separately a consignment account is opened.
A consignment account is a nominal account and is in the nature of a special type of a trading and profit and
loss account which show profit or loss made on the particular consignment.
Viii. Valuation of Closing Stock: - The goods lying unsold with the Consignee at the end of the accounting
year is usually valued at cost. In this case cost means, cost at which goods sent on consignment plus all non-
recurring (non-selling) expenses incurred till the goods reach the premises of the consignee.
Such expenses include packing freight, cartage, insurance in transit, octroi, import duty, customs charges,
packing, loading & unloading charges.
But expenses incurred after the goods have reached the consignee godown are not treated as part of the
Cost of purchase for valuing stock on hand, i.e., expenses like godown rent, godown insurance, sales
expenses etc. are not included in the value of stock.

IX. Distinction between consignment and sale: -

Consignment Sale
• Ownership of goods is not transferred to • Ownership of goods is transferred to the buyer.
consignee.
• Buyer is liable for losses.
• Consignee is not liable for losses.
• Buyer meets his own expenses.
• All expenses are born by consignor.
• The document sent on sale of goods is called
• The document sent along with goods sent to 'Invoice'.
consignee is called 'Performa invoice".
• Buyer becomes debtor immediately on receipt
• Consignee does not become debtor on receipt of goods.
of goods. He becomes debtor on sale of goods.
• Buyer does not receive any commission. He
• Consignee receives commission on sale of goods. earns profit on sale of goods.
X. Distinction between Abnormal Loss And Normal Loss: -

Abnormal Loss Normal Loss
• Abnormal loss occurs due to accident natural • Normal loss occurs due to inherent characteristic
calamities or negligence. of goods, e.g. normal leakage, evaporation etc.
• This loss does not affect Gross Profit. • This loss effect Gross Profit.
• Accounting entry is made for such loss. • No accounting entry is made for such loss. This
is automatically absorbed in Gross profit.
• This loss can be insured against various
contingencies. • This loss cannot be insured.
• This loss is not certain. This depends on the • This loss is almost certain. This occurs during
happening of certain event. transit or storage due to inherent characteristic
of goods.
xi. Journal entries in the book of consignor and consignee: -
Situations Consignor’ book Consignee’s book
i. On sending goods. Consignment account Dr. No entry
To goods sent on consignment a/c
ii. on expenses incurred by Consignment account Dr. No entry
consignor on sending goods. To bank/cash/ creditors for exp. a/c
iii. on expenses incurred by Consignment account Dr. Consignor account Dr.
consignee. To consignee account To cash/bank/creditor for
expense
iv. on consignee reporting sales. Consignee account Dr. Cash/bank/consignment
To Consignment account debtor Dr.
To consignor account
v. for commission due. Consignment account Dr. Consignor account Dr.
To consignee account To commission account
vi. for bad debts:- Commission account Dr.
a. if del-credere commission No entry To bad debts account
allowed.

b. if del-credere commission is Consignment account Dr. No entry

not allowed. To consignee account
vii. for closing the consignment For profit:
account. Consignment account Dr. No entry
To general profit and loss account
Note: Reverse entry in case of loss.

viii. for advances received from Cash/bank/ B/R A/c Dr. Consignor account Dr.
consignee. To consignee account To Cash/bank/ B/P A/c
ix. for closing the goods sent on Goods sent on consignment a/c Dr. No entry
consignment account. To trading/purchases account
Practice question 1. 20,000 units of commodity ‘X’ were consigned by Ram of Delhi at an invoice cost of
₹100 each to Mohan of Mumbai. Ram paid freight ₹12,000, Insurance ₹8000. Mohan received the
consignment and incurred the following expenses: -
Clearing charges = ₹5,000

Freight to the godown = ₹7,000
Rent of godown = ₹3,000
Insurance = ₹2,000
Advertisement = ₹12,000
Loading and unloading charges = ₹3,000
Mohan sold 80% of the goods @ ₹250 each. He was entitled to a commission of 5% on sales.
Prepare consignment account and Mohan account in the book of Ram.
Solution: In the book of Consignor

Consignment account
Particulars Amount Particulars Amount
To goods sent on consignment 20,00,000 By Mohan account(sales) 40,00,000
(16,000 X 250)
To bank account: -
Freight 12,000 20,000
Insurance 8,000
By stock on consignment 4,07,000
To Mohan account: (4000 units)
Clearing charges 5,000
Freight 7,000
Rent of godown 3,000
Insurance of godown 2,000
Advertisement 12,000 32,000
Load& unload 3,000
To Mohan account (commission) 2,00,000
To profit on consignment trf. to 2,15,500
P& L account
44,07,000 44,07,000

Mohan account
To consignment a/c (sale) 40,00,000 By consignment a/c (expenses) 32,000
By consignment a/c (commission) 2,00,000
By bank account (bal. fig) 37,68,000
40,00,000 40,00,000
Working notes:
Computation of value of closing stock:
Particulars Units Amount
Purchase price of goods sent on consignment 20,000 20,00,000
Add: expenses incurred by the consignor 20,000
20,000 20,20,000
Add: expenses incurred by the consignee 15,000
Total cost of goods sent on consignment 20,000 20,35,000
Value of closing stock (20,35,000 X 4,000/20,000) 4,07,000
vii. Types of commission:
a. Ordinary Commission: Ordinary commission is a commission which consignee gets as his remuneration
from the consignor for the sales made on behalf of the consignor.
b. Over ridding commission. It is allowed to increase sales volume/ sales price. It is calculated as per
instruction given in question.
c. Del – Credere Commission: - The additional commission for which the consignee guarantees debt is
called del- credere commission. This commission save consignor from loss of bad debts only. The agent
is responsible for bad debts but not for loss due to a dispute between the buyer and the seller.
The del-credere commission is payable on total sales and not merely on credit sales.

Concept of losses in consignment account: -
Practice question 2. 5,000 units of commodity ‘X’ were consigned by Monu to Sonu @ ₹40 each. Monu
incurred ₹20,000 on sending the goods to consignee.
Sonu received the consignment and sent an account sale showing that 70% of goods received were sold @
₹100 each. He also informed that 10% of the consignment lost due to fire in his godown. Insurance company
admitted the claim for ₹12,000.
He incurred ₹20,000 as selling and ₹8,000 as non-selling expenses.

He was entitled to general commission @ 5% and del-credere commission of 10%. Actual loss due to bad
debts are 4,000, Prepare consignment Account and Sonu Account in the book of Monu.
Solution: - In the book of Monu (Consignor)
Consignment account
To goods sent on consignment 2,00,000 By Sonu account(sales) 1,40,000
(3,500 X 40)
To bank account: 20,000
To Sonu account: By abnormal loss (godown) 22,800
Selling expense 20,000 (500 units)
Non-selling 8,000 28,000
By stock on consignment 45,600
To Sonu account (commission) (1,000 units)
General – 7,000
Del-credere- 14,000 21,000
By Loss on consignment trf 60,600
to P& L account
2,69,000 2,69,000
Sonu account
To consignment a/c (sale) 1,40,000 By consignment a/c (expenses) 28,000
By consignment a/c (commission) 21,000
By bank account (bal fig) 91,000
1,40,000 1,40,000
Abnormal loss account:
To consignment a/c 22,800 By Insurance company A/c 12,000
By profit & loss account 10,800
22,800 22,800
Working notes: - Computation of value of closing stock:

5,000 2,20,000
Less: value of abnormal loss (2,28,000 X 500/5000) (500) (22,800)
Balance 4,500 2,05,200
Value of closing stock (2,05,200 X 1,000/4,500) 45,600

Practice question 3. 5,000 units of commodity X were consigned by Mohanlal to Sohan lal @ ₹40 each.
Mohanlal incurred ₹20,000 on sending the goods to consignee. During transit 10% of the consignments
were lost due to fire. Insurance company admitted the claim for ₹12,000. Sohan lal received the remaining
consignment and sent an account sale showing that 70% of goods received were sold @ ₹100 each. He
incurred ₹20,000 as selling and ₹8,000 as non-selling expenses. He was entitled to commission @ 5%.
Calculate value of abnormal loss and closing stock.
Answer: -
Computation of value of abnormal loss and closing stock: -
Balance 5,000 2,20,000
Less: abnormal loss (in transit) (500) (22,000)
Balance 4,500 1,98,000

Balance 4,500 2,06,000
Value of closing stock 2,06,000 X 1,000/4,500 45,778
Practice Question 4. 5,000 units of commodity ‘X’ were consigned by Monu to Sonu @ ₹40 each. Monu
incurred ₹20,000 on sending the goods to consignee.
Sonu received the consignment and sent an account sale showing that 70% of goods received were sold
@ ₹100 each. He also informed that 10% of the consignment lost due to unavoidable reasons in his godown.
He incurred ₹20,000 as selling and ₹8,000 as non-selling expenses.

He was entitled to general commission @ 5% and del-credere commission of 10%. Calculate value of normal
loss and closing stock.
Answer: - Computation of value of closing stock and normal loss: -
Particulars Units Amount (₹)
5,000 2,20,000
Less: value of normal loss (500) nil
Balance 4,500 2,28,000
Value of closing stock 2,28,000 X 1,000/4,500 50,667
Note: if normal loss and abnormal losses occur at the same time, then:-
………………………………………………………………………………………………………………………………………………………………
………………………………………………………………………………………………………………………………………………………………

Concept of advance against security / security given: -
Concept of invoice price in consignment account: -
(1) If goods have been sent at invoice price (loaded price), then firstly all information related to goods are
recorded at invoice price and then reverse entry will be passed with load amount to make them equal to
cost price.
(2) value of abnormal losses will always been recorded at cost price. It does not matter whether goods have
been sent at cost price or invoice price.
Treatment of Discount charges on bills receivable discounted by Consignor: -

There are two alternative treatments for the aforesaid discount:
• If discount is treated as "consignment expenses" it is debited to consignment account.
• If discount is treated as "financial charges', it is debited to profit and loss account.
Note:- if not mentioned, we should assume it as financial charges and a proper note should be given
along with your answer.

Practice question 5: On 1st January 2023, goods cost price of which was ₹66,000 were consigned by Ram
Dhan of Delhi to Agent Haldi Ram of Dadri at a Performa invoice price of 20% above cost. Haldi Ram
paid freight and other forwarding charges amounting to ₹2,000. He was allowed ₹1,000 per month
towards establishment cost; 5% commission on gross sales and 3% del credere commission. Haldi Ram
paid ₹500 as rent of godown for 3 months ended 31st March 2023. Three fourth of the goods were sold
for ₹66,000 half of which were credit sales. Half of the balance of the goods was stolen, but the stock
being insured, a claim lodged for ₹7,000 was settled for ₹6,900. Write up the consignment account,
consignee's account and stock lost on consignment account as on 31st March 2023 in the books of Ram Dhan.
Solution: Consignment to Dadri Account
To Goods Sent on Consignment Account By Haldi Ram' A/c (Sales): -

(66,000+13,200) Cash Sales 33,000
79,200 Credit Sales 33,000 66,000
To Haldi Ram (Expenses): -
Freight and other
By Goods Sent on Consignment 13,200
forwarding charges 2,000
(Load)
Establishment cost 3,000
(1,000x3) By Abnormal Loss 8,500
(Goods stolen)
Godown Rent 500
5,500
To Haldi Ram (Commission): -
By Consignment Stock A/c 10,150
(5% on Rs. 66,000) 3,300
(3% on Rs. 66,000) 1,980 5,280 (At Invoice Price)
To Stock Reserve Account 1,650
To Profit and Loss Account 6,220

97,850 97,850
Working notes: -
(i) Total goods sent = 1
Goods sold proportion = ¾
𝟑 𝟏
Balance goods = 1- 𝟒 = 𝟒
𝟏 𝟏 𝟏
(ii) Abnormal loss = 𝟒 𝑿 𝟐
=𝟖
𝟏 𝟏 𝟏
(iii) Proportion of stock on consignment = 𝟒 − 𝟖
= 𝟖
(iv) Computation of value of loss and stock:
Particulars Units Amount (₹)
Purchase price of goods sent on consignment 1 66,000
Add: expenses incurred by the consignor nil
Balance 1 66,000
Total cost of goods sent on consignment 1 68,000
Less: value of abnormal loss 1/8 (8,500)
Balance 7/8 59,500
Value of closing stock (cost) 8,500
Load (13,200 X 1/8) 1,650
Invoice price of closing stock 10,150

Practice question 6. X of Mumbai sends out certain goods at cost +25%. Invoice value of the goods is
₹2,00,000. 4/5thof the goods were sold by consignee at ₹1,76,000. Commission 2% up to invoice value and
10% ofany surplus above invoice. The amount of commission will be.
ACCOUNTING IN THE BOOK OF CONSIGNEE:

COCEDUCATION.COM BILLS OF EXCHANGE REVISION CA/CMA Santosh kumar
BILLS OF EXCHANGE REVISION

According to Section 5 of Negotiable instrument Act 1881, A Bill of Exchange has been defined as:
“an instrument in writing containing an unconditional order signed by the maker directing certain
person to pay a certain sum of money only to or to the order of a certain person or to the bearer
of the instrument”.
Essential features of bill of exchange are as follows: -

i. It must be in writing.
ii. It must be dated.
iii. It must contain an order to pay a certain sum of money.
iv. The promise to pay must be unconditional.
v.The money must be payable to a definite person or to his order to the bearer.
vi.The draft must be accepted for payment by the party to whom the order is made.
vii.It should be properly stamped.
viii. Payment must be in legal currency of the country.
NOTE: The party which makes the order is known as the drawer. The party which accepts the order is known
as the acceptor (drawee) and the party to whom the amount has to be paid is known as the payee. The drawer
and the payee can/may be the same.
Classification of Bills of Exchange:
(i) Documentary Bill - In this, the bill of exchange is supported by the relevant documents that confirm
the genuineness of sale or transaction that took place between the seller and buyer.
(ii) Clean Bill - This bill does not have any proof of a document, so the interest is comparatively higher
than the other bills.
(iii) Demand Bill - This bill is payable when it demanded. The bill does not have a fixed date of
payment,therefore, the bill has to be cleared whenever presented.
(iv) Usance Bill - It is a time-bound bill which means the payment has to be made within the given time
period.
(v) Inland Bill - An Inland bill is payable only in one country and not in any other foreign country. This bill
is opposite to the foreign bill.
(vi) Foreign Bill - A bill that can be paid outside India is termed as a foreign bill. Two examples of a foreign
billare an export bill and import bill.
(vii) Trade Bill - This kind of bill is specially related only to trade.
(viii) Accommodation Bill - A bill that is sponsored, drawn, accepted without any condition is known as
an accommodation bill.
(ix) Supply Bill - The bill that is withdrawn by the supplier or contractor from the government department
is known as the supply bill.
Promissory Notes: - A promissory note is an instrument in writing, not being a bank note or
currency note containing an unconditional undertaking signed by the maker to pay a certain
sum of money only to or to the order of a certain person. Under Section 31(2) of the Reserve Bank
of India Act a promissory note cannot be made payable to bearer.
COCEDUCATION.COM For enquiry: 9999631597, 7303445575, 8448322142

It has following feature or characteristics: -

i. It must be in writing.
ii. It must contain a clear promise to pay. Mere acknowledgement of a debt is not a promissory note.
iii. The promise to pay must be unconditional “I promise to pay ₹50,000 as soon as I can” is not an
unconditional promise.
iv.The promiser or maker must sign the promissory note.
v. The maker must be a certain person.
vi. The payee (the person to whom the payment is promised) must also be certain.
vii.The sum payable must be certain. “I promise to pay ₹50,000 plus all fine” is not certain.
viii. Payment must be in legal currency of the country.
ix. It should not be made payable to the bearer.
x.It should be properly stamped.
xi. It does not require any acceptance.
Parties to Bill of Exchange: The parties involved in transaction that uses bill of exchange as a mode of
settlement are:
(a) Drawer: He is a person who draws the bill. Typically, he is the seller or a creditor.
(b) Drawee: He is the person on whom the bill is drawn. Normally, he is the buyer or debtor. He has to pay
the amount of the bill to the drawer on the due date.
(c) Payee: He is the person to whom the amount of bill is payable. He may be the drawer himself or the
creditor of the drawer.
(d) Endorsee: He is the person in whose favour the bill is endorsed by the drawer. He is usually the creditor
of the drawer.
(e) Drawee in case of need: Sometimes the name of another person is mentioned as the person who will
accept the bill if the original drawee does not accept it: such a person is called the ‘Drawee in case of need.’
Difference between bills of exchange and promissory note

Bill of Exchange Promissory Note
i. A bill contains an unconditional order to pay. A promissory note contains only a
promise to pay certain sum of money.
ii.There are generally 3 parties (Drawer, There are 2 parties (Maker and Payee) in
Drawee and Payee) in bill of exchange. promissory note.
iii.A bill is paid by Acceptor. A promissory note is paid by Maker.
iv.A bill is drawn by Creditor. A promissory note is made by Debtor.
v.The drawer and payee may be same person In promissory note maker and payee
in case of bill of exchange. cannot be same person.
vi. In a bill of exchange the liability of drawer In a promissory note the liability of a
is secondary and conditional. maker is primary and absolute.
viii.In a bill of exchange, notice of dishonour Notice of dishonour is not required in case
must be given. of promissory note.
Term of bill: The term of bill of exchange may be of any duration. Usually, the term does not
exceed 90 days from the date of the bill.

Date of maturity of the bill: - The date which comes after adding three days to the expiry date of a
bill, is called the date of maturity. Every promissory note or bill of exchange gets matured on the
third day after the day on which it is expressed to be payable, except when it is expressed to be
payable:
i. on demand,
ii. at sight, or
iii. on presentment
How to calculate due date of the bill: -

Case Due Date
(a) When the bill is made payable on a (a) That specific date will be the due date.
specific date.
(b) When the bill is made payable at a (b) That date on which the term of the bill shall
stated number of months(s) after date. expire ( plus 3 days of grace period) will be the
due date.
(c) When the bill is made payable at a (c) That date which comes after adding stated
stated number of days after date. number of days to the date of bill, shall be the due
date.
Note: The date of Bill is excluded.

(d) When the due date is a public (d) The preceding business day will be the due
holiday. date.
(e) When the due date is an (e) The next following normal day will be the
emergency/due unforeseen holiday. date.
IMPORTANT POINT FOR REVISION: -

i. Grace period of 3 days are allowed for calculating due date of bill (except in case of ‘at sight, on
demand, on presentation of bill’.
ii. While calculating due date of bill, date of bill drawn is excluded.
iii. When date of bill drawn and date of acceptance of bill are different, then bill can be classified into
2 parts: -
a. After sight bill
b. After date bill

REVISION OF JOURNAL ENTRIES IN CASE BILL IS HONOURED ON DUE DATE: -
Transactions In the book of drawer(x) In the book of drawee (y)

1.Goods sold Y account Dr Purchase account Dr
To sales account To X Account
2.Bill drawn Bills receivable account Dr X Account Dr
To Y account To B/P account
3a. Bill kept till maturity No entry No entry
3b. Bill is discounted Bank account Dr No entry

Discount account Dr
To bills receivable account
3c. Bill endorsed Creditor account Dr No entry

3d. Bill sent for collection Bill sent for collection account Dr No entry
4a. bill kept till maturity and Cash/bank a/c Dr B/P A/c Dr
honoured To bills receivable account To cash/bank account
4b. bill discounted/ No entry B/P A/c Dr

endorsed and honoured on To cash/bank account
due date
4c. bill sent for collection Bank a/c Dr B/P A/c Dr
and honouredon due date To bill sent for collection account To cash/bank account
Bank charges a/c Dr

To bank account
IF BILL IS DIS-HONOURED ON THE DUE DATE: -

Kept till maturity Discounted endorsed Sent for collection
In the book of Y account Dr Y account Dr Y account Dr Y account Dr
drawer(X) To B/R account To bank account To creditor A/C To bill sent for
To cash account collection A/C
To bank account
In the book of Bills payable A/c Dr Bills payable A/c Dr Bills payable A/c Dr Bills payable A/c Dr
drawee (Y) Noting charges Dr Noting charges Dr Noting charges Dr Noting charges Dr
To X account To X account To X account To X account
Transactions In the book of drawer (X) In the book of drawee (Y)

Interest accrued Y account Dr Interest account Dr
To interest account To X account
Final settlement in case of dish. Cash account Dr X account Dr
Bad debts account Dr To cash account
To Y account To deficiency account

Practice question 1. On 1st April 2023, COC Ltd sold goods costing ₹35,000 for ₹50,000 to Alok. COC received
₹10,000 immediately in cash and for the balance amount, received his acceptance payable after 3 months.
On 4th May 2023, COC discounted bill with his bank at discount of 12%P.A.
On the due date of the bill, Alok was not able to pay the bill and hence the bill was dishonored. Noting
charges paid ₹500.
After negotiation, On 10th July, Alok agreed to pay 40% of the dues immediately and to accept a new bill for
the balance amount for 1 month.
On the due date of renewed bill, Alok became insolvent and only 80% of the amount could be received as
first and final dividend.
Make journal entries in the book of both the parties.
Solution: Journal entries in the book of both the parties: -

Date COC Alok
1st April Alok account Dr 50,000 Purchase account Dr
To sales account 50,000 To COC account
(Being sales made)
Cash account Dr 10,000 COC account Dr 10,000
To Alok account 10,000 To cash account 10,000
1st April Bills receivable account Dr 40,000 COC Account Dr
To Alok account 40,000 To Bills payable account
(Being bill drawn)
4th May Bank account Dr 39,200
Discount account Dr 800 No entry
To bills receivable account 40,000
(Being bill drawn)
4th July Alok account Dr 40,500 Bills payable account Dr 40,500
To bank account 40,500 To COC account 40,500
(Being bill dishonored)
10th July Cash account Dr 16,200 COC Account Dr 16,200
To Alok account 16,200 To cash account 16,200
(Being 40% amount received)
10th July Bills receivable account Dr 24,300 COC Account Dr 24,300
To Alok account 24,300 To Bills payable account 24,300
(Being new bill drawn)
13th August Alok account Dr 24,300 Bills payable account Dr
To bills receivable account 24,300 To COC account
(Being new bill dishonored)
13th August Cash account Dr 19,440 COC account Dr 24,300
Bad debt account Dr 4,860 To cash account 19,440
To Alok account 24,300 To deficiency account 4,860

Practice Question 2. Journalise the following transactions in the book of Katrak.
(i) Katrak’s Acceptance to Basu for ₹ 2,500 discharged by a cash payment of ₹ 1,000 and new bill for the
balance plus ₹ 50 for interest.
(ii) G. Gupta’s Acceptance for ₹ 4,000 which was endorsed by Katrak to M. Mehta was dishonoured. Mehta
paid ₹ 20 noting charges. Bill withdrawn against cheque.
(iii) D. Dalal retires a bill for ₹ 2,000 drawn on him by Katrak for ₹ 10 discount.
(iv) Katrak’s acceptance to Patel for ₹ 5,000 discharged by Patel by giving Mody’s Acceptance to Katrak for a
similar amount.
Answer: Book of K. Katrak-- Journal Entries

Particular ₹ ₹
(i) Bills Payable Account (old) Dr. 2,500
Interest Account Dr. 50
To Cash A/c 1,000
To Bills Payable Account (new) 1,550
(Bills Payable to Basu discharged by cash payment of ₹ 1,000
and a new bill for ₹ 1,550 including ₹ 50 as interest)
(ii) (a) G. Gupta Dr. 4,020
To M. Mehta 4020
(G. Gupta’s acceptance for ₹ 4,000 endorsed to M. Mehta
Dishonoured, ₹ 20 paid by M. Mehta as noting charges)
(b) M. Mehta Dr. 4,020

To Bank Account 4,020
(Payment to M. Mehta on withdrawal of bill earlier received
from Mr. G. Gupta)
(iii) Bank Payable Account Dr. 1990
Discount Account Dr. 10
To Bills Receivable account 2,000
(Payment received from D. Dalal against his acceptance for
₹ 2,000. Allowed him a discount of ₹ 10)
(iv) Bills Payable Account Dr. 5,000
To Bills Receivable Account 5,000
(Bills Received from Mody endorsed to Patel in settlement
of bills Payable issued to him earlier)

Practice Question 3. Pass journal entries in the books of Hema for the following transactions:
(i) Hema’s acceptance to Nanda for ₹5,000 renewed for 3 months with interest at 10% p.a.
(ii) Nalini’s acceptance to Hema was for ₹10,000 was retired one month before due date at a discount
of 12% p.a.
(iii) Discounted Natasha’s acceptance to Hema for ₹4,000 with the bank for ₹3,920
(iv) Neela requests Hema to renew her acceptance for ₹3,500 for 3 months. Hema accepted on the condition
that interest of ₹100 was paid in cash which Neela did.
(v)Received an acceptance from Geeta for ₹1,200 and it was endorsed to Seeta in full settlement of her claim.
(ICMAI Study material)
Answer:
Particulars L. Debit (₹) Credit (₹)
F
(i) Bills Payable A/c Dr. 5,000
To, Nanda’s A/c 5,000
(Being cancellation of Nanda’s bill for renewal)
Interest A/c Dr. 125
To, Nanda’s A/c 125
(Being interest due to Nanda)
Nanda’s A/c Dr. 5,125
To, Bills Payable A/c 5,125
(Being acceptance given for new bill)
(ii) Bank A/c Dr. 9,900
Discount A/c Dr. 100
To, Bills Receivable A/c 10,000
(Being Nalini’s acceptance retired at discount)
(iii) Bank A/c Dr. 3,920
Discount A/c Dr. 80
(Being Natasha’s acceptance discounted)
(iv) Neela’s A/c Dr. 3,500

To, Bills Receivables A/c 3,500
(Being Neela’s acceptance cancelled for renewal)
Cash A/c Dr. 100
To, Interest A/c 100
(Being interest received from Neela in cash)
Bills Receivable A/c Dr. 3,500
To, Neela’s A/c 3,500
(Being Neela acceptance for new bill)
(v) Bills Receivable A/c Dr. 1,200
To, Geeta A/c 1,200
Geeta A/c Dr. 1,200

Practice question 4. (Based on mutual accommodation)

st
Bose and Mitra were in need of funds. On 1 May, 2023 Bose accepted Mitra’s draft for ₹6,000 at 3 months.
Mitra got it discounted at 6%p.a. and remitted 1/3 of the proceeds to Bose. On the due date Mitra was
not able to send the amount instead he accepted to Bose’s bill for ₹4,500 at two months. Bose got it
discounted for ₹4,420. Out of this ₹280 were sent to Mitra. Before the maturity of the renewed bill,
Mitra became insolvent and only 60% was realized from his estate. Give Journal entries in the books of
Bose and Mitra.
Solution: Journal entries in the book of Bose and Mitra:
Date Mitra Bose
1st May Bills receivable account Dr 6,000 Mitra account Dr 6,000
To Bose account 6,000 To Bills payable account 6,000
(Being bill drawn)
4th May Bank account Dr 5,910
Discount account Dr 90 XXXX
To Bills receivable account 6,000
(Being bill discounted)
th
4 May Bose account Dr 2,000 Cash account Dr 1,970
To cash account 1,970 Discount account Dr 30
To discount account 30 To Mitra account 2,000
(Being 1/3 amount remitted)
3rd Bose account Dr 4,500 Bills receivable account Dr 4,500
August To bills payable account 4,500 Mitra account 4,500
(Being new bill accepted) (Being new bill drawn)
Bank account Dr 4,420
XXXX Discount account Dr 80
To Bills receivable account 4,500
(Being new bill discounted)
Bills payable account Dr 6,000
XXXX To cash account 6,000
(Being first bill met)
4th Cash account Dr 280 Mitra account Dr 357
August Discount account Dr 77 To Cash account 280
To Bose account 357 To Discount account 77
(being cash remitted)
6th Oct Bills payable account Dr 4,500 Mitra account Dr 4,500
To Bose account 4,500 To Bank account 4,500
th
6 Oct Bose account Dr 4,357 Cash account Dr 2,614
To cash account 2,614 Bad debts account Dr 1,743
To deficiency account 1,743 To Mitra account 4,357
(Being final settlement made)

COCEDUCATION.COM JOINT VENTURE REVISION CA/CMA Santosh kumar
JOINT VENTURE ACCOUNTING REVISION
IMPORTANT POINTS FOR 1 MARK QUESTIONS:
1. When two or more persons join together for a specific business, it is called Joint Venture. It is a case of a
partnership (without firm name) coming into existence for limited purpose.
2. It is temporary and no liability attached to any party after the transaction or the particular series oftransaction
is complete. The partners in this case are called "Co-venturers'.
3. Maintenance of Accounts: -There are three methods of maintaining account with respect to joint Venture
Transactions:
(I) when Separate Set of Books are maintained.
(II) When no separate set books of account are maintained.
(III) Memorandum joint venture method.
Let’s start practice of above methods:
(I) when Separate Set of Books are maintained: -- Main accounts prepared under the method are:
(a) Joint Bank account: it’s a personal account.
(b) Joint Venture Account: it’s a nominal account. It shows profit or loss on joint venture.
(c) Personal Account of co-venturers: - (showing investment, entitlements, receipts drawing by co-ventures)
Practice question 1. COC and DLF entered into a Joint Venture to construct a building for the contract price of
₹10,00,000. They deposited ₹3,00,000 and ₹2,00,000 in a Joint Bank.
Following payments were made on account of Joint Venture: -

Raw materials = ₹1,40,000
Wages = ₹60,000
Administration Exp. = ₹20,000
Joint venture was completed and contract price was received. Profit sharing ratio was 3:2.
Prepare necessary accounts.
Solution: -
Joint venture account
Particulars Amount (₹) Particulars Amount (₹)

Joint bank account

(₹) (₹)
CO-Venturer account
Particulars COC (₹) DLF (₹) Particulars COC (₹) DLF (₹)

Practice question 2. Surya, Prakash and Aakash Jointly undertake to erect a theatre building for D Ltd. at
a price of ₹5,00,000 to be paid as to ₹4,00,000 in cash and ₹1,00,000 in Debentures of the Company. They
contribute: Surya ₹60,000, Prakash ₹75,000 and Aakash ₹40,000. These amounts are deposited in a Joint
Bank Account
Surya gets the plans prepared and pays Rs 7,000 architects' fees. Prakash brings into the venture a concrete
mixer of the value of ₹25,000 and Aakash brings into the venture a motor truck of the book value of ₹20,000
They buy a plant for ₹24,000. Materials worth ₹2,40,000 are purchased for cash and a sum of ₹1,95,000 is
paid for wages.
On completion of the venture, Surya takes over unused materials to the value of ₹14,000. Prakash takes
back the concrete mixer at a valuation of ₹12,000, and Aakash takes the motor truck at ₹8,000. The plant
is sold as scrap for ₹6,000. When the contract price was fully received, Surya took over the Debentures at
a valuation of ₹80,000.
Show the Joint Venture Account, the Joint Bank Account and the account of the ventures, after the final
distribution and the settlement of accounts.
Solution: - Joint venture account

By Surya account (material) 14,000
To Surya account (architect fees) 7,000
By Prakash account (mixer) 12,000
To Prakash account (mixer) 25,000
By Aakash account (Truck) 8,000
To Aakash account (Truck) 20,000
By Joint bank account (plant) 6,000
To Joint bank account: -
Plant 24,000 By Joint bank account: 4,00,000
Material 2,40,000 (Contract price)
Wages 1,95,000 4,59,000
By debentures in D Ltd 1,00,000
To debentures in D Ltd 20,000
To profit on joint venture: -

Surya 3,000
Prakash 3,000
Aakash 3,000 9,000
5,40,000 5,40,000

CO-venturer account
Particulars Surya Prakash Aakash Particulars Surya Prakash Aakash
(₹) (₹) (₹) (₹) (₹) (₹)
To joint venture 14,000 12,000 8,000 By joint bank account 60,000 75,000 40,000
To deb. In D ltd 80,000 By joint venture A/c 7,000 25,000 20,000
By joint venture A/c 3,000 3,000 3,000
To joint bank A/c 91,000 55,000 By joint bank (bal. fig) 24,000
(bal. fig)
94,000 1,03,000 63,000 94,000 1,03,000 63,000
Joint bank account

(₹) (₹)
To Surya account 60,000 By joint venture A/c 4,59,000
To Prakash account 75,000 By Prakash account 91,000
To Aakash account 40,000 By Aakash account 55,000
To joint venture A/c 6,000
To joint venture A/c 4,00,000
To Surya account 24,000

6,05,000 6,05,000

(II) When Separate Set of Books are not maintained: -

• Under this approach each Co-venturer maintains joint venture A/c and Personal A/c of the other co-venturer.
• In this method, no separate joint bank is opened.
• Joint venture account contains all expenses, cost of goods, sales etc.
• Balance of Joint venture account shows profit or loss.
• This method is generally followed when volume of transactions are very less.
Format of joint venture account in the book of A (Other party B)

To bank account: - By bank account: - xxxx
(Expenses incurred by A) xxxx (Sales made by A)
To purchase / goods: - By purchase / goods: - xxxx
(Material supplied by A) xxxx (Material withdrawn by A)
xxxx
To B account: - By B account: -
(Expenses incurred/ material xxxx (Material withdrawn by B/ sales
supplied by B) made by B)
To profit on joint venture: - xxxx

Profit & loss account (share of A)
To B’s account (Share of B)
xxxx
xxxx xxxx

Practice question 3. Ram and Mohan entered into joint venture to buy and sell new year gifts. Ram purchased goods
costing ₹4,00,000 and paid freight of ₹24,000. He sent 70% of the goods to Mohan to be sold for mutual benefit.
Mohan received the goods and incurred ₹20,000 on rent, ₹14,000 on advertisement. Ram and Mohan made sales of
₹3,00,000 and ₹4,80,000 respectively. Unused goods costing ₹16,000 were withdrawn by Mohan at an agreed value
of ₹19,000. Earlier Ram had received an advance of ₹1,00,000 from Mohan on account of Joint venture. Prepare
necessary accounts in the book of Ram.
Answer: In the book of Ram

To Bank account: - By bank account :(sales) 3,00,000
Material 4,00,000 4,24,000
Freight 24,000 By Mohan account: (sales)
4,80,000
To Mohan account: -
Rent 20,000 34,000
Advertisement 14,000 By Mohan account: -
(material withdrawn) 19,000
Profit & loss account 1,70,500
To Mohan’s account 1,70,500 3,41,000
7,99,000 7,99,000

Mohan account
By Joint venture 34,000
To Joint venture 4,80,000
By Joint venture 1,70,500
To joint venture 19,000
By bank account (Advance) 1,00,000
By ( bal. fig) 1,94,500

4,99,000 4,99,000

Important note 1: no entry is made for transferring goods from one co-venturer to other co-venturer.
Note 2. Journal entry for asset supplied by Ram:
Note 3. Journal entry for asset supplied by Mohan:

Practice question 4. Manjit and Ranjit entered into Joint Venture agreement to share the profits and Losses
in the ratio of 2: 1. Manjit supplied goods worth ₹60,000 to Ranjit incurring expenses amounting to ₹2,000
for freight and insurance. During transit Goods costing ₹5,000 became damaged and a sum of ₹3,000 was
recovered from the Insurance Company. Ranjit reported that 90% of the remaining goods were sold at a
profit of 30 % on their original cost.
Towards the end of the venture, a fire occurred and as a result the balance stock lying unsold with Ranjit
was damaged. The goods were not insured and Ranjit agreed to compensate 80% of the aggregate of the
original cost of such goods and proportionate expenses incurred. A part from joint venture share of profits,
Ranjit was also entitled under the agreement to a commission of 5% of net profits of joint venture after
charging such commission. Selling expenses incurred by Ranjit totaled ₹1,000. Ranjit had earlier remitted
to an advance of ₹10,000, Ranjit duly paid the balance due to Manjit by draft.
PREPARE in Manjit's books, (i) Joint Venture A/c (ii) Ranjit's A/c.
Solution: In the book of Manjit:


To goods/ purchase account 60,000 By bank account :(insurance claim) 3,000
To Bank account: - 2,000 By Ranjit account :(sales) 64,350
(Freight and insurance)
By Ranjit account: (compensation) 4,547
To Ranjit account: (commission) 424
To Ranjit account: (selling expense)
1,000
Profit & loss account 5,649
To Ranjit’s account 2,824 8,473
71,897 71,897

Ranjit account

By Bank account (advance) 10,000
To Joint venture 64,350
By Joint venture 424
To joint venture 4,547
By bank account (bal. fig) 54,649
68,897 68,897
Working notes: -
(1) Computation of commission to Ranjit: -
Profit before commission = ₹8,897
𝟓
Commission = 8,897 X 𝟏𝟎𝟓
= ₹424

Practice question 5. COC and HDFC Bank entered into a Joint venture to underwrite 5,00,000 equity shares
of ₹10 each of a new issue of Alaska Ltd. Alaska Ltd. agrees to allot them as fully paid 4,000 shares in the
company in connection with the venture. The following expenses are incurred: -
COC - Printing and stationary ₹5,000
Postage ₹1,000
Advertisement ₹3,000
HDFC Bank - Postage ₹750

Solicitors’ fees ₹3,500
The public subscription was for 4,80,000 shares only and the short subscription was financed by Co-
Venturers in the ratio of 3:1. Alaska Ltd paid the consideration to Co-Venturers.
COC sold 60% of their total holding @ ₹12 per share and HDFC Bank sold 30% of their holding @ ₹15
per share. Remaining shares were taken over by HDFC bank at ₹14 per share. At the end of joint venture,
they settled their account among themselves. Prepare necessary accounts in the books of COC.
Solution: - Joint venture account

(₹) (₹)
To Bank account: - By bank account 1,72,800
Printing & stationary 5,000 By HDFC account: -
Postage 1,000 Sales 1,08,000
Advertisement 3,000 9,000 Drawings 33,600 1,41,600
To HDFC account: -
Postage 750
Solicitor fees 3,500 4,250
To bank account 1,50,000
To HDFC Account 50,000
To HDFC’s account 50,575 1,01,150
3,14,000 3,14,000

HDFC Account
To Joint venture 1,41,600
By bank account (bal. fig) 36,775

1,41,600 1,41,600

(III) Memorandum joint venture Method: Under this method joint ventures accounts are prepared on
memorandum basis in the books of each co-venturer just to find out the profit or loss but not as part of ledger. Each
co- venturer prepares following accounts.
(a) Memorandum Joint Venture Account: nominal account. It is prepared to calculate profit or loss
during theyear. Entries in Memorandum Joint Venture Account are not made through journal entries.
(b) Joint Venture with other Co-venturer A/c (i.e., Personal Account of other co-venturer)

Practice question 6.
Avinash and Srikant entered into joint venture to construct a building for COC Pvt ltd for the contract price
of ₹12,00,000 payable in cash. Avinash purchased material costing ₹6,00,000 and paid freight of ₹20,000. He
had also supplied machine worth ₹2,00,000 to the joint venture. Srikant also paid ₹60,000 as rent and
₹20,000 as advertisement. Avinash drew upon Srikant a bill for ₹2,50,000 which was duly accepted by
Srikant. The bill was discounted with bank for ₹2,42,000. Goods costing ₹15,000 lost in transit against which
insurance company paid ₹8,000 to Avinash in full settlement. Some of goods were lost due to Avinash
negligence for which he agreed to compensate joint venture a sum of ₹28,000. At the end of joint venture
machine was taken by Avinash at an agreed value of ₹1,30,000. Prepare necessary accounts in the book of
both the parties assuming that profit sharing ratio was 3:2 and contract price was received by Avinash.
Solution: In the book of Avinash

Joint venture with Shrikant account
To bank account 6,20,000 By Bills receivable account 2,50,000
To machine account 2,00,000 By bank account (claim) 8,000
To discount account 8,000 By profit & loss account 28,000
To profit & loss account 2,74,800 By machine account 1,30,000
To bank account 5,13,200 By bank account (sale) 12,00,000
16,16,000 16,16,000

In the book of Srikant

Joint venture with Avinash account
To bank account 80,000 By bank account (bal fig) 5,13,200
To bills payable account 2,50,000
To profit & loss account 1,83,200
5,13,200 5,13,200
Memorandum joint venture account

Avinash: - By Avinash: -
Expenses 6,20,000 Claim 8,000
Machine 2,00,000 Compensation 28,000
Discount 8,000 8,28,000 Machine 1,30,000
Sale 12,00,000 13,66,000
Srikant: - 80,000
Expenses By Srikant: nil
Profit on joint venture: -
Avinash 2,74,800 4,58,000
Srikant 1,83,200
13,66,000 13,66,000

Practice question 7. (Conversion of JV into Consignment)

A and B enter into a joint venture and agreed to share profits and losses equally. It is also agreed between
them that A should make purchases for the joint venture at Ahmedabad, where he resides and consign the
same to B at Mumbai. Accordingly, A purchased goods worth ₹62,000 and sent them to Mumbai and in so
doing he had to pay ₹1,300 for insurance and ₹3,700 for carriage, freight and other expenses.
B reported after some time that he had sold some goods for ₹60,000 and the remaining goods could not be
sold on account of bad market conditions. A and B then handed over the unsold goods to local merchant, C,
at Mumbai, who agreed to sale the goods on their behalf. C was to be paid all the expenses in that connection
and was to be allowed a commission at the rate of2 1/2% on the sale price of the goods sold.
C, after some time, sent to B a cheque for ₹4,500 after deducting expenses ₹375 and commission. The sale
price of goods sold by C was ₹5,000. C returned the unsold goods to B. A and B then decided to close the joint
venture, B taking up the balance of the goods unsold which had cost ₹25,000 at a discount of 8%. B sent a
statement of account to A showing the following payments made by him: Carriage. ₹1,600; Office expenses
₹2,800; Insurance ₹2,500, Office and Godown rent ₹1,500; Brokerage, ₹3,600. He also sent a cheque for
₹70,000 to A.
You are required to prepare the necessary accounts in A's ledger showing his share of profit or loss on the
joint venture and the amount due to or by B.
Solution: - In the book of A
To Bank account: - By B’s account(sale) 60,000
Material 62,000
Insurance 1,300 By C’s account :(sales) 5,000
Carriage 3,700 67,000
By B account: - 23,000
(₹25,000 – 8% of ₹25000)
To C’s account: -
Expenses 375
Commission 125 500
To B’s account: -
Carriage 1,600
Office expense 2,800
Insurance 2,500
Rent 1,500
Brokerage 3,600 12,000

To B’s account 4,250 8,500
88,000 88,000

B’s Account
To C’s account 4,500 By bank account (advance) 70,000
To Joint venture 60,000 By Joint venture 12,000
To Joint venture 23,000 By Joint venture 4,250
By balance c/d (bal. fig) 1,250
87,500 87,500
C’s Account
To Joint venture 5,000 By Joint venture 500
By B’s account (bal. fig) 4,500

5,000 5,000

IMPORTANT POINTS TO BE KEPT IN MIND WHILE SOLVING PRACTICAL QUESTIONS: -
• All expenditures (expense/asset) are treated as an expense.
• All receiving’s are treated as income.
• Drawings/ insurance claim received are also treated as income.
• No treatment of goods lost fire fire/theft/normal loss.
• If joint venture is not ended by the end of given time period, then closing stock is required to be
computed at its cost.
• No entry is made for transferring goods from one co-venturer to another.
• Commission/ salary/ interest payable to any co-venturer should also be treated as an expense of
joint venture.
• If any compensation agreed to be paid by any co-venturer due to his fault/negligence is treated
as income of the joint venture.
• In case of 2nd and 3rd method, advance received in cash/Bills receivable is not treated as
expense/income in joint venture. But discounting charges should be treated as expense in thejoint
venture.

NPO revision
19 May 2022 11:41
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FINANCIAL STATEMENTS OF PROFIT MAKING ORGANISATIONS
(NON-MANUFACTURING ENTITIES & MANUFACTURING ENTITIES)
FINAL ACCOUNTS OF NON-MANUFACTURING ENTITIES:-

Introduction:-
Non-Manufacturing entities are trading entities which are engaged in the purchase and sale of goods at profit without changing
form of goods.These entities do not process the goods.
- Profit is obtained by preparing Income statement (i.e trading A/c and profit and loss).
- Financial position of enterprises can be known by preparing Position statement (Balance Sheet).
(a) INCOME STATEMENT:-This statement is prepared at the close of year.

Income statement is divided into two parts for non-manufacturing concerns.
Trading Account and profit & loss account.
(b) POSITION STATEMENT:-Position statement mainly consist Balance sheet which shows assets, and liabilities and capital of
business.
Items to be shown on the Assets side of a Balance Sheet:
• Fixed Assets:- Fixed assets are those assets that are not meant to be sold but are meant to be utilised in the firm's business.
Examples are machinery, patents, buildings and goodwill. Fixed assets can be further classified in to tangible, intangible, wasting
and fictitious assets.
Tangible Assets • Those fixed assets which can be seen and touched.
Intangible Fixed • Those fixed assets which can nether seen nor been touched e.g.. Goodwill,
Assets Patents. Trade Mark.
Wasting assets • Those fixed assets, which are consumed during the course of time A mine,
for example, will be useless when it has been fully exploited. Such assets
are often called wasting assets.
Fictitious assets • Those assets, which has no value. An example is preliminary expenses.
• Investment:— an expenditure incurred on assets to earn interest, dividend, income, rent or other benefit
• Current Assets:— Those assets which are held:—
❖ In the form of cash
❖ For their conversion into cash e.g. stock of finished goods, debtors, Bills Receivable, Accrued income.
❖ For their consumption in the production of goods or rendering of services e.g. stock of raw materials, WIP.
Item to be shown on the Liabilities side of a Balance Sheet :- The credit balances of those ledger accounts which
have not been closed till the preparation of the Trading and Profit and Loss account, are shown on the 'Liabilities side of the Balance
Sheet.
(a) Liabilities: - It is the claim of outsiders on the assets of business. Usually the following items are included in liabilities:--
i) Long-term liability:-- Those that will be paid after one year.

ii) Current Liability: —— Those that must be settled within one year.
(b) Capital: - Capital is the excess of assets over liabilities. It is the claim of owner in total assets of the business. It refers to the
amount invested in an enterprise by the proprietor or partners, which is increased by the amount of profit earned and
is decreased by the losses incurred and the amount withdrawn whether in the form of cash or kind.
ARRANGEMENT / MARSHALLING OF ASSETS AND LIABILITIES :
The term ‘Marshalling' refers to the order in which the various assets and liabilities are shown in the Balance Sheet. The assets and
liabilities can be shown either in the order of liquidity or in the order of permanency.
Assets: - Assets can be put down in a Balance Sheet, in two ways - either in the order of liquidity or in the order of permanence.
i) Liquidity: - It means the ease with which the assets may be converted into cash; those assets which are most difficult to
convert them in cash are written last.
ii) Permanence: Assets that are to be used permanently in the business and are not meant to be sold are written first. Assets
that are most liquid such as cash in hand are written last.
The various assets is grouped in the two order will appear as follows:-
In order of Liquidity In order of Permanence
Cash in hand Goodwill
Cash at Hand Patents
Investments Furniture
Sundry debtors Machinery
Stock of finished goods Land & building
Stock of raw material Prepaid exp,
Stock of WIP Stock of finished goods
Prepaid Exp. Stock of raw material
Land & Buildings Sundry debtors
Machinery Investment
Furniture Cash in hand
Patents Cash at bank
Some assets cannot be easily classified. For example, investment can be easily sold but desire may be to keep them. Investment
may, therefore, be both liquid and semi-permanent according to the intention of the firm.
Liabilities:- Liabilities can also be grouped in two ways — either in order to urgency of permanent or in reverse order. One way is
to first show the capital, then long term liabilities and last of all short term liabilities like amounts due to supplier of goods or bills
payable. The other way is to start with short term liabilities and then show long term liabilities and last of all capital.
Floating Assets:—Floating assets are those assets which are meant to be converted in cash at earliest opportunity. Examples are
cash, sundry debtors, stock of goods etc. The term floating is derived from the fact that such assets constantly change in value
through transactions that are entered into. The figure total debtors for instance changes from day to day. Those assets are also
known as circulating assets.
FINAL ACCOUNT OF MANUFACTURING ENTITIES
MANUFACTURING ACCOUNT:- In a case where the cost of manufacturing goods is to be ascertained, the Manufacturing Account is
prepared. The main feature of a Manufacturing Account are the following :—
 It is debited with all expenses that are incurred in manufacturing of goods. In this account, besides such
expenses as freight on purchases of raw materials, customs duty, wages, rent and lighting of factory building, we must
also debit the manufacturing account with repairs to plant and machinery. depreciation on machinery, loose tools, etc.
 In this account, we have to show the value of materials consumed instead of showing figures of opening stock, purchases
and closing stock separately.
➢ Raw Material consumed:
Opening Stock of Raw material *****
Add: Purchases of Raw Material *****
Less: Closing Stock of Raw Material ***** *****
Note:- Opening and Closing Stocks of finished goods are not entered in Manufacturing Account,
 The opening stock of work-in- progress is debited and closing stock of work-in-progress is credited.
 In the course of manufacturing some waste material always emerges. when they are sold, the amount realized credited to
Manufacturing Account.
 The Balance in Manufacturing Account (i.e. the difference between the debit and credit sides) is the cost of the goods
produced during the period. This is transferred to the debit side of the Trading Account.
IMPORTANT POINTS FOR REVISION:
i. Treatment of prepaid expenses, advance income, outstanding expenses, accrued income.
ii. Treatment of normal and abnormal losses.
iii. Manager’s commission.
iv. Goods used for free sample, advertisement, personal use etc
v. Goods sent on approval basis.
vi. Provision for doubtful debts and provision for discount – (personal account in nature)
vii. Under/over valuation of stock of last year.
viii. Treatment of salary/ interest to owner.
ix. Concept of Adjusted purchase.
Example 1. Prepare bad debts account, provision for bad debts account, profit & loss account and balance sheet.
01.01.2012 Provision for bad debts 5,000
31-12-2012 Bad debts written off 3,000
Sundry debtors 1,25,000
31-12-2013 Bad debts written off 2,500
Sundry debtors 1,00,000
Provision for doubtful debts to be provided for @ 5% for 2012 and 2.5% for 2013.
MCQ BASED QUESTIONS- PRACTICE SESSION 1
1. The purpose of preparing final accounts is to ascertain .

(a) Profit or loss
(b) Capital
(c) The value of assets
(d) Profit or loss and financial position
2. If the manager is entitled to a commission of 5% on profits before deduction this commission, he will get a
commission of on a profit of 8400 before commission..
(a) 400
(b) 442.11
(c) 420
(d) None of these
3. The balance of the petty cash is

(a) An expense
(b) An income
(c) An asset
(d) A liability
4. Fixed assets are

(a) Kept in the business for use over a long time for earning income
(b) Meant for resale
(c) Meant for conversion into cash as quickly as possible
(d) All of the above
5. The manufacturing account is prepared

(a) To ascertain the profit or loss on the goods produced
(b) To ascertain the cost of the manufactured goods
(c) To show the sale proceeds from the goods produced during the year
(d) Both (b) and (c)
6. A company wishes to earn a 20% profit margin on selling price. Which of the following is the
profit mark up on cost, which will achieve the required profit margin?
(a)33%
(b) 25%
(c) 20%
(d) None of the above
7. At the time of preparation of financial accounts, bad debts recovered account will be transferred to
(a) Debtors A/c
(b) Profit & Loss A/c
(c) Profit & loss Adjustment A/c
(d) Profit & loss Appropriation A/c
8. Depreciation appearing in the Trial Balance should be

(a) Debited to P & L A/c
(b) Shown as liability in balance sheet
(c) Reduced from related asset in balance sheet
(d) Both (a) and (c) above
9. Gross profit is equal to

(a) Sales – Cost of goods sold
(b) Sales – Closing stock + purchase
(c) Opening stock + Purchases – Closing stock
10. The profit and loss Account shows the

(a) Financial results of the concern for a period
(b) Financial position of the concern on particular date
(c) Financial results of the concern on a particular date
(d) Cost of goods sold during the period
11. Which of the following is not a financial statement?

(a) Profit and loss account
(b) Balance sheet
(c) cash flow statement
(d) Trial balance
12. Based on which of the following concepts, share capital is shown on the liabilities side of a balance sheet?
(a) Business entity concept
(b) Money measurement concept
(c) Going concern concept
(d) Matching concept
13. Closing stock appearing in the trial balance is shown in –

(a) Trading A/c and Balance sheet (b) Profit and Loss a/c
(c) Balance Sheet only (d) Trading A/c only
14. Consider the following data and identify the amount which will be deducted from sundry debtors in Balance sheet:
Bad debts (from trial balance)= 1,600, Provision for doubtful debts (old) 1200
Current year’s provision (new) 800.
(a) 400 (b) 800 (c) 2,000 (d) 2,400
15. Inventory is
(a) Included in the category of fixed assets (b) An investment
(c) A part of current assets (d) An intangible fixed asset.
16. For goods distributed as free samples in the market, the journal entry will be
(a) Drawing Dr. To Purchase A/c
(b) Sales A/c Dr. To Cash A/c
(c) Advertisement A/c Dr. To Purchase A/c
(d) No entry
17. At the time of finalization of Financial statements, Bad debts written off are to be transferred to
(a) Provisions
(b) Reserves
(c) Capital A/c
(d) Profit and Loss A/c
18. General Manager gets 6% commission on net profit after charging such commission. Gross profit Rs. 1,20,000 and
other indirect expenses other than manager's commission are Rs. 14,000. Commission amount will be:
(a) Rs. 6,000
(b) Rs. 8000
(c) Rs. 7,500
19. Discount received Rs.2,000 Provision for discount on creditors(old) = Rs. 3200. It is desired to make a provision of
Rs.2200 on creditors. Find out the amount to be transferred to Profit & Loss A/c:
a) Rs. 1000 b) Rs. 7000 c) Rs. 2,000 d) Rs. 1600
20. Amount recovered from debtor, which was earlier written off as bad debt is debited to Cash A/c and credited to
A/c:
(a) Bad Debts
(b) Bad debts recovered
(c) Debtors
(d) Sales
Answer:-1.(d) 2.(c) 3.(c) 4.(a) 5.(b) 6.(b) 7.(b) 8.(a) 9.(a) 10.(a)
11.(d) 12.(a) 13.(c) 14.(b) 15.(c) 16.(c) 17.(d) 18.(a) 19.(a) 20.(b)
MCQ BASED QUESTION- PRACTICE SESSION 2
1. (i) The balance of the petty cash is
(a) an expense, (b) income, (c) an asset. (d) liability
(ii) Fixed assets are
(a) kept in the business for use over a long time for earning income
(b) meant for resale
(c) meant for conversion into cash as quickly as possible
(d) All of the above
(iii) Goodwill is
(a) a current asset (b) an intangible fixed asset
(c) a tangible fixed asset (d) an investment,
(iv) Stock is
(a) included in the category of fixed assets

(b) an investment.
(c) a part of current assets
(d) an intangible fixed asset
(v) The manufacturing account is prepared:
(a) to ascertain the profit or loss on the goods produced
(b) to ascertain the cost of the manufactured goods
(c) to show the sale proceeds from the goods produced during the year
(d) both (b) and (c).
2. (i) A new firm commenced business on 1st January, 2006 and purchased goods costing Rs. 90,000 during
the year. A sum of Rs. 6,000 was spent on freight inwards. At the end of the year the cost of goods still
unsold was Rs. 12,000. Sales during the year Rs. 1,20,000. What is the gross profit earned by the firm?
(a) Rs. 36,000 (b) Rs. 30,000 (c) Rs. 42,000 (d) Rs. 38,000
(ii) From the following figures ascertain the gross profit:
Rs.
Opening Stock (1.1.2012) 25,000
Goods Purchased during 2012 1,30,000
Freight and packing on above 5,000
Closing Stock (31.12.2012) 15,000
Sales 1,90,000
Selling expenses on sales 9,000
(a) Rs.36,000 (b) Rs. 45,000 (c) Rs. 50,000 (d) Rs.59,000
(iii) A prepayment of insurance premium will appear in the Balance Sheet and in the Insurance Account
respectively as:
(a) a liability and a debit balance. (b) an asset and a debit balance.
(c) an asset and a credit balance. (d) None of the above
(iv) Under-statement of closing work in progress in the period will
(a) Understate cost of goods manufactured in that period.

(b) Overstate current assets.
(c) Overstate gross profit from sales in that period.
(d) Understate net income in that period.
[Ans : 2 : (i)-(a), (ii)-(b), (iii)-(c), (iv)-(d)
3. (i) If sales revenues are Rs. 4,00,000; cost of goods sold is Rs. 3,10,000 and operating expenses are
Rs.60,000, the gross profit is
(a) Rs. 30,000. (b) Rs. 90,000. (c) Rs. 3,40,000. (d) Rs. 60,000
(ii) Sales are equal to
(a) Cost of goods sold - Gross profit. (b) Cost of goods sold + Gross profit.
(c) Gross profit - Cost of goods sold. (d) Cost of goods sold + Net profit.
(iii)A Company wishes to earn a 20% profit margin on selling price. Which of the following is the profit mark
up on cost, which will achieve the required profit margin?
(a) 33%. (b) 25%. (c) 20%. (d) None of the above.
(iv) If sales are Rs. 2,000 and the rate of gross profit on cost of goods sold is 25%, then the cost of goods sold
will be
Rs. 2,000. (b) Rs. 1,500. (c) Rs. 1,600. (d) None of the above.
(v) Sales for the year ended 31st March, 2005 amounted to Rs. 10,00,000. Sales included goods sold to Mr. A
for Rs. 50,000 at a profit of 20% on cost. Such goods are still lying in the godown at the buyer's risk.
Therefore, such goods should be treated as part of
(a) Sales. (b) Closing stock, (c) Goods in transit, (d) Sales return.
4. (i) The capital of a sole trader would change as a result of:
(a) a creditor being paid his account by cheque.

(b) raw materials being purchased on credit.
(c) fixed assets being purchased on credit.
(d) wages being paid in cash.
(a) Rs. 1,200. (b) Rs. 1,600. (c) Rs. 1,300. (d) Rs. 1,500.
(ii) Rent paid on 1 October, 2020 for the year to 30 September, 2021 was Rs. 1,200 and rent paid on 1
October, 2021 for the year to 30 September, 2022 was Rs. 1,600. Rent payable, as shown in the profit
and loss account for the year ended 31 December 2021, would be:
(iii) A decrease in the provision for doubtful debts would result in:
(a) an increase in liabilities. (b) a decrease in working capital.
(c) a decrease in net profit. (d) an increase in net profit.
5. Rs. Rs.
Opening Stock 20,000 Carriage on sales 3,000
Closing Stock 18,000 Rent of Office 5,000
Purchases 85,800 Sales 1,40,700
Carriage on purchases 2,300
(i) Gross profit will be
(a) Rs. 50,000 (b) Rs. 47,600 (c) Rs. 42,600 (d) Rs. 50,600
(ii) Net profit will be
(a) Rs. 42,600 (b)Rs. 50,600 (c) Rs. 45,600 (d) Rs. 47,600
6. The Zed Company, a whole seller estimates the following sales for the indicated months:
June July August
2021 2021 2021
Rs. Rs. Rs.
Opening stock 4,08,000 4,34,400 4,60,800
Credit Sales 15,00,000 16,00,000 17,00,000
Cash Sales 2,00,000 2,10,000 2,20,000
Total Sales 17,00,000 18,10,000 19,20,000
Selling price is 125% of the purchase price.
(i) The cost of goods sold for the month of June, 2021 is:
(a) Rs. 15,20,000 (b) Rs. 14,02,500 (c) Rs. 12,75,000 (d) Rs. 13,60,000
(ii) Stock purchased in July, 2021 is :
(a) Rs. 16,05,000 (b) Rs. 14,74,400 (c) Rs. 14,40,000 (d) Rs. 13,82,500
7. Considering the following information, answer the question given below:
1st January 31st December
Stock of raw materials 17,400 18,100
Work-in-progress 11,200 11,400
Stock of finished goods 41,500 40,700
During the year manufacturing overhead expenses amounted to Rs. 61,100, manufacturing wages to Rs.
40,400 and purchase of raw materials to Rs. 91,900. There were no other direct expenses.
(i) The cost of raw materials consumed, issued and used were:
(a) Rs. 1,09,300 (b) Rs. 91,200 (c) Rs. 91,900 (d) Rs. 92,600.
(ii) The manufacturing cost of finished goods produced were:
(a) Rs. 1,31,600 (b) Rs. 1,93,300 (c) Rs. 1,91,900 (d) Rs. 1,92,500.
(iii) The manufacturing cost of finished goods sold was:
(a) Rs. 1,91,700 (b) Rs. 1,92,500 (c) Rs. 1,94,000 (d) Rs. 1,93,300.
8. Match the following items from column A with column B
S. No. Column A Column B
1. Capital is the difference between (a) cost of good sold from sales
2. Gross profit is ascertained by deducting (b) cost of goods produced.
3. Wages paid for erecting machines are (c) Assets and liabilities
4. The manufacturing account is prepared: (d) debited to machinery account
ANSWERS
1. (i)c, (ii)a, (iii)b, (iv)c, (v)b 2. (i)a, (ii)b, (iii)c, (iv)d 3. (i)b, (ii)b, (iii)b, (iv)c, (v)a
4. (i)d, (ii)c, (iii)d 5.(i)-d, (ii)-a 6.(i)-d, (ii)-b 7.(i)-b, (ii)-d (iii)-d 8. 1-c; 2-a; 3-d; 4-b

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ACCOUNTING OF DEPRECIATION REVISION

3. “Depreciation accounting is a system of accounting which aims to distribute the cost or

4. Certain Useful Terms:

External or Economic Causes:

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Characteristics of Depreciation: - The Characteristics of Depreciation are: -

(i) It is a charge against profit.

(ii) It indicates diminution in service potential.

(iii) It is an estimated loss of the value of an asset. It is not an actual loss.

(v) It is a process of allocation and not of valuation.

Objective and Necessity for Providing Depreciation: -

(i) Correct calculation of cost of production:

Methods of Charging Depreciation: -

Based on Capital/Source of Fund: -

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(i) Fixed Installment Method

I. Straight Line Method: -

Change in method of charging depreciation; -

➢ According to Accounting Standard 10 issued by ICAI, the depreciation method selected

COCEDUCATION.COM For Enquiry No. 9999631597, 7303445575, 8448322142

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Working notes 1: Computation of profit & loss on sale of M1:

Working notes 2: Computation of profit & loss on sale of M2:

Date Particulars Amount (₹) Date Particulars Amount (₹)

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Provision for depreciation account

31-3-22 By depreciation (M2) 10,000

1-10-22 By depreciation (M2) 5,000

31-3-23 By depreciation (M3) 12,500

Machine sold (M1) account

By bank account 90,000

By profit & loss a/c 80,000

Machine sold (M2) account

By profit & loss a/c 5,000 By bank account 85,000

IMPORTANT NOTE 1: Must revise question 11 and 16 from my book.

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Solution: - In the books of M/s Hot and Cold

01.10.21 To, Bank A/c (Purchase) 15,00,000

Working Notes 1: Statement of Depreciation:

Date Particulars Machine -1 (₹) Machine -2 (₹) Total

2. Now depreciation under Straight Line Method: -

On ₹8,00,000 @ 15% = ₹1,20,000 × 4 years (from 01.07.2017 to 30.06.2021) ₹4,80,000

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4. Depreciation for the year: -

On 14,00,000 @ 15% for the year ₹2,10,000

SUM OF YEAR’S DIGIT METHOD

Cost of machine= ₹2,00,000

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Illustrative cases of errors and their nature: -

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