Post on 21-Feb-2023
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UNIT-II
BRANCH ACCOUNTS
Meaning:
The dictionary meaning of the word ‘branch’ is any subordinate of a business,
subsidiary shop, office etc. according to the provision contained in section 29 of the
companies Act 1956, it would appear that a branch is any establishment carrying on either the
some or substantially the same activity as that carried on by head office of the company. It
must also be noted that the concept of a branch means existence of a head office for there can
be branch without a head office – principle place of business.
Objects of Branch Accounts:
The following are the main objects of maintaining branch accounts:
(i) Profit or loss of each branch can be found out.
(ii) They help in controlling branches.
(iii) Actual financial position of the business can be found out on the basis of head
office and branch accounting records.
(iv) Branch requirement of goods and cash can be estimated.
(v) Suggestions for increasing the efficiency of the branch can be sent on the basis of
branch Accounts.
(vi) They help in complying with the requirements of law because according to
Companies Act 1956, maintenance of accounting record of branches by companies
is essential.
Types of Branches:
Form the Accounting point of view, branches may be classified as follows:
(i) Dependent Branch
(ii) Independent branch
1. Dependent Branch / Branch not keeping full system of accounting/ branches of which
accounts are kept in the head office.
The term ‘Dependent Branch’ means a branch which does not maintains its own set of
books. All records have to be maintained by the head office. When the business policies and
the administration of a branch are wholly controlled by the head office, its accounts also are
maintained by it. Branch accounts, in such a case, are written up at the head office out of
report and returns received from the branch. Some of the significant types of branches that are
operated in this manner are described below:
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(a) A branch set up merely for booking orders which are executed by the head office,
such a branch only transmits orders to the head office.
(b) A branch established at a commercial centre for the sale of goods supplied by the head
office and under its direction all collections are made by the H.O and
(c) A branch for the retail sale of goods, supplied by the head office.
Accounting in the case of first two types is simple, only records of expenses incurred
at the branch have to be maintained. But it is not so in the case of the third type. A retail
branch is essentially a sales agency that principally sells goods supplied by the head office for
cash and, if so authorized, also on credit to approved customers.
Accounting in respect of Dependent Branches:
In case of a dependent branch, the head office may keep accounts of the branch
according to any of the following systems:
(i) Debtors systems
(ii) Stock and Debtors system.
(iii) Wholesale branch system
(iv) Final Accounting system
All these systems are now explained one by one in detail.
Debtors system (synthetic method)
This system is adopted in case for branches of small size. Under this system, a branch
account is opened separately for each branch in the books of head office. This account is
nominal account in nature. The opening balance of stock, debtors, patty cash are debited to
the branch account. The cost of goods sent to branches as well as expenses of the branch paid
by the head office like salaries, rent, insurance etc., and closing balance of liabilities if any
are also debited to it. Conversely, the opening balance of liabilities if any, cash remitted by
the branch and cost of goods returned by the branch are credited. At the end of the year. The
values of unsold stock, the total customers balance outstanding and that of petty cash are
brought in to the branch account on the credit side. The branch account reveals profit or loss.
If the branch account shows a credit balance, it is branch profit and if debit balance is shown,
it is branch loss. If branch is allowed to make small purchases of goods locally as well as to
incur expenses, details of such expenditure will be furnished by the branch to the head office.
On the other hand, purchases are made out of cash receipts, it will also be necessary for the
branch to supply to the head office a copy of the cash account. To illustrate the various
entries which are made in the branch account the proforma of a branch is shown below.
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(A) When goods are invoiced at cost
Branch account (in the books of head office)
Rs rs Rs rs
To balance b/d
(assets in the
beginning)
stock
debtors
petty cash
furniture
prepaid expenses
To Goods sent to
Branch A/c
To Bank
(expenses paid
by H.O)
to balance c/d
(closing
balance of
liabilities a/c if
any)
Creditors
Outstanding expenses
To General P & L A/c
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
By balance
b/d
(opening bal
of liabilities
a/c if any)
Creditors
Outstanding
expenses
By bank:
Cash sales
Cash
collected from
Debtors
By goods sent
to branch A/c
(return to
H.O)
by balance c/d
(closing bal.
Of assets)
stock
debtors
petty cash
furniture
(at
depreciated
value prepaid
xx
xx
__
xx
xx
__
xx
xx
xx
xx
xx
xx
4
(branch profit) (bal.fig)
*(branch profit) (bal. fig)
exp)
by General
P&L A/c
(branch loss)*
(bal.fig)
xx
xx
__
xx
The following journal entries are passed in the books of head office to record branch
transaction:
(i) When goods are sent to branch
Branch A/c Dr.
To goods sent to branch A/c.
Note : Reverse entry for goods returned to head office.
(ii) When cheque or draft is sent for branch expenses
Branch A/c Dr
To bank A/c
(iii) When cheque or draft id received as remittance from branch:
Bank A/c Dr.
To Branch A/c
For closing balance of assets
Branch Account A/c Dr.
To Branch A/c
(iv) For opening balance of assets
Branch A/c Dr
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To Branch Asset A/c
(v) For closing balance of liabilities:
Branch A/c Dr
To Branch Asset A/c
For opening balance of liabilities
Branch liabilities A/c Dr
To Branch A/c
(vi) For transferring the balance of goods sent to branch A/c:
Goods sent to branch A/c Dr.
To purchases A/c (trading concern)
To trading A/c (manufacturing concern)
(vii) For branch profit:
Branch A/c Dr.
To General profit and loss A/c
Note: Reverse entry for loss.
II stock and Debtors system (analytical method)
Profit or loss a branch can be found out by preparing branch account which has been
discussed earlier, but there is another method for the same purpose. This method is known as
stock and debtors methods. If it is desired to exercise a more detailed control over the working
of a branch, the accounts of the branch are maintained under what is described as the stock
and debtors methods. In these methods, the head office keeps separate accounts relating to
various types of transactions at the branch instead of one branch account. The following
accounts are kept in the office books relating to a branch under this system.
(i) Branch stock account.
(ii) Branch Debtors account.
(iii) Branch Expenses account
(iv) Branch Adjustment account (required only when the goods are sent at invoice
price)
(v) Branch Profit and Loss account
(vi) Goods sent to the Branch account
A brief description of each of these accounts is given below:
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(i) Branch stock account:
This account deals with all goods received, returned and sold by the branch.
The account helps the office in maintaining an effective control over the branch stock. It is
debited with (a) opening stock (b) good sent to branch (c) goods spoiled and goods lost like
loss in weight, pilferage, loss in transit (d) goods returned to head office by branch (e) closing
stock. It given information about shortage or surplus of stock of stock and the closing stock at
the branch.
(ii) Branch Debtors Account
This account is prepared to record all the transactions relating to branch debtors and
ascertain either the closing balance of debtors or credit sales.
(iii) Branch Expenses Account:
This account is prepared to disclose branch expenses, losses on account of discount on
debtors, allowances, bad debts and other charges etc., incurred at the branch. All expenses
incurred by branch are recorded in the debit side of this account and balance of this account is
transferred to branch profit and loss account.
(iv)Branch adjustment account
When the goods are sent to branch at cost price, this account need not be prepared.
Instead when the goods are supplied to branch at invoice price, it must be prepared to
ascertain gross profit made by the branch. This account is debited with (a) closing stock
reserve (b) profit element of stock shortages, defectives, loss on transit and pilferage and (c)
value of loss in weight (full amount). It is credited with (d) stock reserve on the opening
stock (e) loading on goods sent to branch and (f) the profit element of stock surplus. Business
of this account indicates gross profit or gross loss which is transferred to branch profit and
loss account.
(v) Branch profit and loss account:
This account is prepared to ascertain the net profit made by the branch. It is debited
with (a)the balance of branch expenses account (b) cost of goods lost due to shortage or
defectives, loss in transit, and pilferage. It is credited with (a)gross profit as shown in branch
adjustment account (b) cost of surplus if any revealed by the branch stock account and (c)
amount recoverable from insurance company for any losses of stock. Balance of this account
indicates net profit or net loss which is transferred to General profit and loss Account.
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(iv) Goods sent to Branch Account:
This account is prepared to find out the net value of goods sent to the branch. Goods
sent to branch and goods returned by the branch and loading included in them if any are
recorded in thid account. Balance of this account is transferred to either purchase account or
trading account depending on whether the firm is trading concern or a manufacturing concern
respectively.
JOURNAL ENTRIES
The following journal entries are required for various types of transactions under
this method.
(i) When goods are sent to branch.
Branch stock A/c Dr.
To goods sent to branch A/c
Note :
Reverse entry will be passed for goods returned by branch to head office.
(ii) When sales are made by the branch
(a) For cash sales
Cash A/c Dr.
To branch stock A/c
(b) For credit sales
Branch debtors A/c Dr.
To branch stock A/c
Note ;
Reverse entry will be passed for goods returned by customers
(iii) When cash is received from debtors
Cash A/c Dr.
To branch stock A/c
(iv) For discount allowed allowances and bad debts.
Branch expenses A/c Dr.
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To branch debtors a/c
(v) For branch expenses paid in cash
Branch expenses A/c Dr.
To cash / bank a/c
(vi) For closing branch expenses account
Branch P & L A/c Dr.
To branch expenses A/c
The following additional adjustment entries are to be passed when the goods are sent
at invoice price.
(vii) For the difference between the invoice price and cost price of the opening stock.
Stock reserve A/c Dr.
To branch adjustment A/c
(viii) For the difference between the invoice price and cost price of the closing stock.
Branch adjustment A/c Dr.
To stock reserve A/c
(ix) For the different between selling price and cost of the goods sent to branch less
returns:
Goods sent to branch A/c Dr.
To branch adjustment A/c
(x) For insurance claim received
Insurance claim A/c Dr.
To branch P & L A/c
(xi) For any shortage in the branch stock account
(a) loading on such shortage
Branch adjustment A/c Dr.
To branch stock A/c
(b ) cost of such shortage
Branch profit and loss A/c Dr.
To branch stock A/c
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(xii) For any surplus in the branch stock account
(a) Loading on such surplus
Branch stock A/c Dr.
To branch adjustment A/c
(b) Cost of such surplus
Branch stock A/c Dr
To branch profit and loss A/c
(xiii) For gross profit made by the branch:
Branch adjustment A/c Dr.
To branch P & L A/c
Note: Reverse entry for gross loss
(xiv) For net profit disclosed by branch P & L A/c
Branch P & L A/c Dr.
To General P & L A/c
Note : Reverse entry for net loss
(xv) For closing goods sent to branch A/c
Goods sent to branch a/c Dr.
To purchases or trading a/c
III Wholesale Branch System
(Goods invoiced at wholesale price to retail branches)
Manufacturers may sell goods to the consumers either through the wholesale and
approved stockiest or though their branches. In order to know whether self – retailing through
branch is more profitable than wholesaling it is necessary to make distinction between profit
due to wholesale and profit due to retail business of the branch. Wholesale price is always less
than retail price. Let us assume that the cost price is Rs.100, wholesale price is Rs.115 and
retail price is Rs.125. in this case, branch has made a profit of Rs. 25 i.e., 125-100: but the fact
is that real profit of the branch is only Rs.10 i.e 125 -115, because by selling to wholesalers
Rs.15 profit would have been made by head office contribution of branch is only Rs.10. hence
when head office wants to know retail profit of the branch, it charges the branch with
wholesale price.
(i) The value of opening stock at the branch and
10
(ii) Price of goods sent during the year at wholesale price it is credited with:
(iii) Sales effected at the branch:
(iv) Closing stock of goods valued at wholesale price.
(Iv) Final Accounts System:
The head office can also ascertain in the profit or loss of a dependent branch by
preparing branch trading and profit and loss account at cost. In such cases, the head office
may also maintain a branch account. The branch account so prepared is personal account in
nature as different from the branch account prepared by head office in case of debtors system
which is of the particular period represents the net assets at the branch.
INDEPENDENT BRANCHES
(where the branch trades independently of the head office)
or
(Branch keeping full system of accounting)
Independent branch means a branch which maintains its own set of books and has
freedom to operate independently. If a branch is big and carries on manufacturing operations
also, it is allowed to operate freely within the frame work of head office policies. Therefore
for all practical purpose, the branch acts as an independent unit. The branch receives goods
from head office and also purchases from outside. The branch manager is not required to
remit the daily cash receipts, as he would require some working capital to pay for his
purchases and also to defray local expenses. Remittance are made by the branch in round
sums as and when convenient, i.e., cash may be sent to head office if there is a surplus or if
the office is in need of funds. Similarly, the branch is supplied with funds for the purpose of
carrying on business.
Incorporation of branch Trial Balance in Head office Books
For the benefit of the shareholders and the outsides, the consolidated final accounts of
the head office and its branch have to be prepared. The process by which the consolidated
balance sheet will be prepared is known as incorporation of branch trial balance. In other
words, the branch sends its trial balance (together with its trading and profit & loss A/c and
balance sheet, if these are prepared by the branch) to the head office for incorporation in head
office books. On receipt of the trial balance form the branch at the time of balancing, the head
office will incorporate the figures there of at the time of balancing, the head office will
incorporate the figures there of in its own books by means of the following entries, in order to
ascertain the separate trading result of each branch as also the combined result of the business
as a whole.
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(i) For debit side items of trading A/c (total of opening stock, net purchases and
direct expense)
Branch Trading A/c Dr.
To branch A/c
(ii) For credit side items of trading A/c (total of net sales and closing stock)
Branch A/c Dr.
To branch Trading A/c
(iii) For transfer of gross profit or gross loss
(a) For Gross profit
Branch Trading A/c Dr.
To branch P & L A/c
(b) For gross loss
Branch P & L A/c Dr.
To branch Trading A/c
(iv) For various expenses and losses (i.e, salaries, rent depreciation and discount
allowed etc.) which appear on the debit side of P & L A/c.
Branch P & L A/c Dr.
To branch A/c
(v) For various incomes and gains (e.g. discount earned) which appear on the credit
side of P & L A/c.
Branch A/c Dr.
To Branch P & L A/c
(vi) For transfer of net profit or net loss:
(a) For net Profit
Branch P & L A/c Dr.
To General P & L A/c
(b) For net loss
General P & L A/c Dr.
To branch P & L A/c
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(vii) For total of various branch assets (i.e branch debtors, branch stock, cash in hand at
branch, cash in transit etc. )
Branch Assets A/c Dr.
To branch A/c.
(viii) For total of various branch liabilities (i.e., branch creditors baranch Expenses
outstanding etc.)
Branch a/c Dr.
To branch liabilities A/c .
Branch Account
(a) When goods are sent to branch at cost price
Illustration 1
LOYAL shone company opened a branch at Madras on 1.1.2002. From the following
particulars, prepare the Madras Branch Acoount for the year 2002 and 2003.
2002 2003
Goods sent to Madras Branch
Cash sent to Branch for
Rent
Salaries
Other expenses
Cash received from the branch
Stock on 31st December
Petty cash in hand on 31st December
15,000
1,800
3,000
1,200
24,000
2,300
40
45,000
1,800
5,000
1,600
60,000
5,800
30
Solution;
Madras Branch A/c for 2002
Rs. Rs.
Jan. 1 To Balance b/d
To Goods sent to Branch
To Bank :
Rent : 1,800
Salaries : 3,000
Other expenses : 1,200
Nil
15,000
6,000
By Bank
By balance c/d
Stock
Petty cash
24,000
2,300
40
13
_______
To General P & LA/c (Profit)
5,340
26,340
26,340
Madras Branch A/c for 2003
Rs Rs
Jan 1 To Balance b/d
Stock 2,300
Petty cash 40
To Goods sent to branch
To Bank
Rent : 1,800
Salaries : 5,000
Other expenses : 1,600
________
To General P & L a/c
2,340
45,000
8,400
10,090
65,830
By Bank
By balance c/d
Stock
Petty cash
60,000
5,800
30
65,830
Illustration 2
From the following particulars prepare a branch account showing the profit or
loss at the branch.
Rs.
Opening stock at the branch
Goods sent to the branch
Sales
Salaries
Other expenses
15,000
45,000
60,000
5,000
2,000
Closing stock could not be ascertained but it is know that the branch usually sells at
cost plus 20%. The branch manager is entitled to a commission of 5% on the profit
of the branch before charging such commission.
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Solution
Working Note:
Computation closing stock
Rs.
Opening stock
Add: Goods sent to Branch
Less: Cost of goods Sold
[sales * 100/120=
[60,000*100/120]]
15,000
45,000
60,000
50,000
10,000
In the books of Head office
Branch A/c
Rs Rs
To opening stock
To goods sent to branch
To bank (salaries)
Other expenses
To Manager’s commission
[3,000*5%]
To Net profit – transferred to
General P & L A/c
15,000
45,000
5,000
2,000
150
2,850
70,000
By Branch Cash (sales)
By closing stock
60,000
10,000
70,000
15
Illustration 3
A head office invoices goods to its branch at cost price. The balance is
permitted to incur petty expenses and maintain petty cash balance of Rs. 1,000
on the imprest system. It is also permitted to buy furniture of the value of
Rs.2,000.
Stock 1.1.93
Debtors “
Petty cash “
Creditors ‘
Rent upto 31.3.93
Goods sent to branch
Credit sales
Cash sales
Cash received from debtors
Allowances
Discount
Bad debt
Cash purchase by the branch
Payments to creditors
Closing balance of creditors A/c
Rent for on year
Salaries
Insurance paid upto 31.3.94
Furniture
Petty expenses
Stock on 31.12.93
Rs.
41,000
12,500
1,000
10,000
250
75,000
40,000
75,000
45,000
50
100
150
12,500
45,000
27,500
1,200
6,000
750
2,000
1,00,000
Prepare branch A/c in the Books of Head Office.
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1993 Rs. 1993 Rs.
Jn 1 To bal b/d
Stock
Debtors
Petty cash
Creditors
Rent prepaid
To Goods sent to
Branch
To Bank
Rent 1,200
Salaries 6,000
Insurance 750
To Petty expenses
41,000
12,500
1,000
10,000
250
75,000
7,950
250
1,80,937.50
Jan1 By Balance b/d
Creditors
By Bank
Cash remitted to
H.O
By Balance c/d
Stock
Debtors
Petty cash
Furniture
Rent prepaid
[1200*3/12]
Insurance prepaid
[750*3/12]
10,000
60,250
1,00,000
7,200
1,000
2,000
300
187.50
1,80,937.50
Working Note:
Branch Debtors A/c
Rs Rs
To balance b/d 12,500
40,000
52,500
Branch cash
By Allowances
By Discount
By Bad debt
By balance c/d (bal. fig)
45,000
50
100
150
7,200
52,500
Branch Cash A/c
Rs Rs
To Sales (cash)
To debtors
12,500
40,000
1,20,000
By branch petty cash
By purchases
By creditors
By furniture
By Remittance to H.O
(bal.fig)
250
12,500
45,000
2,000
60,250
1,20,000
17
Branch petty cash A/c
Rs Rs
To balance b/d
To branch cash (bal.fig)
1,000
250
1,250
By Expenses
By Balance c/d
250
1,000
1,250
Illustration 4
A Madras head office has a branch at Salem to which goods ae invoiced at cost plus20%.
From the following particulars, prepare branch A/c in the head office books;
Rs.
Goods sent to branch
Total sales
Cash sales
Cash received from branch debtors
Branch debtors on 1.1.96
Branch stock on 1.1.96
Branch stock on 31-12.96
2,11,872
2,06,400
1,10,400
88,000
24,000
7,680
13,440
solution :
Salem Branch A/c for the year ended 31.12.96
Rs Rs
To balance b/d
Stock
Debtors
To Goods sent to branch
To stock reserve
[13,440*20/120]
To profit –transferred to
general P&L a/c
7,680
24,000
2,11,872
2,240
34,640
2,80,432
By Bank
Cash sales 1,10,400
Cash received 88,000
________
By stock reserve
[7,680*20/120]
By Goods sent to branch
Loading
[2,11,872 *20/120]
By balance c/d
Stock
Debtors
1,98,400
1,280
35,312
13,440
32,000
2,80,432
18
working Note :
calculating of closing debtors
Branch Debtors A/c
Rs Rs
To balance b/d
To sales – credit
24,000
96,000
1,20,000
By Branch cash
By balance c/d (bal.fig)
88,000
32,000
1,20,000
Illustration 5
A madras merchant has a branch at pudukkottai to which goods are sent at cost plus 25%.
The branch keeps its own sales ledger and remits all cash received to the head office every day.
All expenses are paid from the head office. The transactions for the branch were as follows:
Rs.
Stock 1.1.94 at I.P
Debtors 1.1.94
Petty cash 1.1.94
Cash sales
Credit sales
Goods sent to branch at I.P
Goods returned to head office
Bad debts
Allowances to customers
Return inwards
Cheques sent to branch:
Rent
Wages
Salary
Stock 31.12.94 at I.P
Debtors 31.12.94 at I.P
Petty cash31.12.94
(including miscellaneous income Rs. 25 not remitted)
Collection from debtors
11,000
100
100
2,650
23,950
20,000
300
300
250
500
600
200
900
13,000.
2,000
125
21,000
Solution:
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Branch Trading And Profit & Loss A/C For The Year Ending 31.12.94
Rs Rs
To opening stock (at cost)
(11,000-2,200)
To goods sent to 16,000
Branch (at cost)
Less: return to H.O 240
(300-60) _____
To wages
To Gross profit c/d (bal,fig)
To Bad debts
To Allowances to customers
To Rent
To Salaries
To net profit c/d
8,800
15,760
200
11,740
36,500
300
250
600
900
9,715
11,765
By sales :
Cash 2,650
Credit 23,950
________
26,600
Less: Return 500
________
By closing stock (at cost)
(13,000 – 2,600)
By Gross Profit b/d
By miscellaneous income
26,100
10,400
36,500
11,740
25
11,765
Branch A/c (personal A/c)
Rs Rs
To Balance b/d
Stock
Debtors
Petty cash
To Goods sent to branch at cost
To Bank
To profit
8,800
100
100
16,000
1,700
9,715
36,415
By Bank:
Cash sales 2,650
Cash received
From debtors 21,000
__________
By Goods sent to branch at cost
(return)
By Balance c/d
[10,400+2,000+125] bal.fig
23,650
240
12,525
36,415
20
WHOLESALE BRANCH SYSTEM
Illustration 1
A head office sends goods to its branch at 20% less the list price. Goods are sold to
customers at cost plus 100%. From the following particulars ascertain the profit made at the
head office and the branch on wholesale basis.
Head office
Rs.
Branch
Rs
Purchases
Goods sent to branch (invoice price)
Sales
2,00,000
80,000
1,70,000
-
-
80 ,000
solution :
Trading and Profit & Loss A/c
H.O
Rs.
Branch
Rs.
H.O
Rs.
Branch
Rs.
To purchases
To Goods received
From H.O
To Gross profit c/d
To stock Reserve
(closing stock)
[16,000×60/160]
To Net profit c/d
2,00,000
-
1,15,000
3,15,000
6,000
1,09,000
1,15,000
-
80,000
16,000
96,000
-
16,000
16,000
By sales
By Goods sent to
branch
By closing stock
By Gross profit b/d
1,70,000
80,000
65,000
3,15,000
1,15,000
1,15,000
80,000
16,000
96,000
16,000
16,000
Working Note:
Calculated of closing stock
Value of closing stock at H.O Rs. Rs.
Purchases
Less: cost of goods sold
[1,70,00/2 × 100]
Less: cost Goods sent to Branch
[80,000/160 × 100]
85,000
50,000
2,00,000
1.35,000
21
Closing stock
Value of closing stock at Branch
Goods received from H.O
Less: cost of good sold
[80,000/200 ×160]
Closing stock
65,000
80,000
64,000
16,000
Note;
H.O cost price Whole sale Rate I,e. Rate at ehich list price 200(100+100)
Goods supplied to branch
160(200-200 ×20%)
STOCK AND DEBTOR SYSTEM
(A) When Goods are sent at cost price
Illustration 1
The calculate commercial company invoiced goods to its Jamshedpur branch at cost. The hed
office paid all the branch expenses from its bank except petty cash expenses. Which were paid
by the branch. From the following details relating to the Branch, prepare.
1. Branch stock A/c
2. Branch Debtors a/c
3. Branch Expenses A/c
4. Branch P & L A/c
22
Rs
Stock
Debtors
Petty cash
Goods sent to branch
Goods returned to head office
Cash sales
Advertisement
Cash received from debtors
Stock (closing)
Allowances to customers
Discount to customers
Bad debts
Goods returned by customers to branch
Salaries & wages
Rent & rates
Debtors ( closing )
Petty cash (closing)
Credit sales
21,000
37,800
600
78,000
3,000
52,500
2,400
85,500
19,500
600
4,200
1,800
1,500
18,600
3,600
29,400
300
85,200
Solution :
Branch stock A/c
Rs Rs
To balance b/d
To Goods sent to branch
To branch Debtors
To branch profit & Loss A/c
21,000
78,000
1,500
59,700
1,60,200
By cash
By Goods sent to branch
By branch Debtors
By Balance c/d
52,500
3,000
85,200
19,500
1,60,200
Branch Debtors A/c
Rs Rs
To balance b/d
To branch stock A/c
37,800
85,200
1,23,000
By cash
By branch Expenses
[bad, allowances, discount]
By branch stock (return)
By balance c/d
85,500
6,600
1,500
29,400
1,23,000
23
Branch Expenses A/c
Rs Rs
To branch Debtors A/c
To Bank (advt, salaries &
wages, rent & Rates)
To petty expenses
6,600
24,600
300
31,500
By branch P&L A/c (transfer) 31,500
31,500
Branch Profit & Loss A/c
Rs Rs
To branch Expense A/c
To general P&L A/c (pofit)
(bal.fig)
31,500
28,200
59,700
By branch stock A/c 59,700
59,700
INDEPENDENT BRANCHES
(a) Adjustment journal entries
Illustration 1
Shoe what entries would be passed by head office to record the following transactions in
the books on 31st December, the date of annul closing?
1. Goods amounting Rs.1,500 transferred from Chennai branch to trichy branch under
instructions from head office.
2. Depreciation of Rs,1,000 on Chennai branch fixed assets when such account is are
opened in the head office books.
3. A remittance of Rs. 9,000 made by the trichy branch to head office on 26th December
and received by the head office on 4th January.
4. Goods amounting to Rs. 15,000 sent by head office to trichy brabch o 20th December
and received by the latter on 15th January.
Journal entries I the books of head office
Rs Rs
Dec 31
1
Trichy Branch A/c Dr.
To Chennai Branch A/c
1,500
1,500
24
2
3
4
[Being goods transferred from Chennai branch to trichy
branch as per instructions]
Chennai Branch A/c Dr.
To Chennai branch fixed asset A/c
[Being depreciation written off on Chennai branch fixed
assets]
The head office will not pass any entry until intimation is
received. When information about it is received the
following entry is passed.
Cash in transit A/c Dr.
To Trichy branch A/c
Goods in transit A/c
To Trichy Branch A/c
[being the entry to adjust the goods sent to Trichy branch on
20th dec. but not received by the branch till 31st dec.]
1,000
9,000
15,000
1,000
9,000
15,000
(b) Independent of Branches Trial Balance
Illustration 2
Rs Rs
Cash in hand
Opening stock
Debtors
Goods from head office
Furniture
Purchases
Wages
Salaries
Trade expenses
9,000
18,000
30,000
1,20,000
6,000
1,80,000
9,000
12,000
6,000
Head office A/c
Sales
creditors
90,000
2,70,000
30,000
3,90,000 3,90,000
Closing stock Rs. 90,000. Pass the necessary journal entries to incorporate branch
trial balance in head office books and also branch trading A/c and P&L A/c and branch A/c
in head office books.
Solution :
In the books of head office
25
Journal Entries
Rs. Rs.
Madras branch Trading A/c Dr
To Madras Branch A/c
[Being incorporation of opening stock, purchases, goods
from H.O and wages]
Madras branch A/c Dr
To Madras branch Trading A/c
[Being incorporation of sales and closing stock]
Madras branch Trading A/c Dr
To Madras Branch P & LA/c
[Being transfer of gross profit]
Madras Branch P & LA/c Dr.
To Madras Branch A/c
[Being incorporation of salaries & trade expenses]
Madras Branch P & LA/c Dr.
To General P & L A/c
[Being transfer of net profit ]
Madras branch Furniture A/c Dr
Madras branch Debtors A/c Dr
Madras branch Cash A/c Dr
Madras branch Stock A/c Dr
To Madras branch A/c
[Being incorporation of various assets from branch trial
balance]
Madras branch A/c Dr
To Madras Branch A/c
[Being incorporation of creditors from branch Trial
balance]
3,27,000
3,60,000
33,000
18,000
15,000
6,000
30,000
9,000
90,000
30,000
3,27,000
3,60,000
33,000
18,000
15,000
1,35,000
30,000
26
Madras branch Trading and P & L A/c for the year ended 31.12.1990
Rs Rs
To Madras branch A/c
Stock 18,000
Purchases 1,80,000
Good from
H.O 1,20,000
Wages 9,000
_______
To Madras Branch
P&LA/c(Gross profit)
To Madras branch A/c
Salaries 12,000
Trade Expenses 6,000
_____
To General P&L A/c
[net profit ]
3,27,000
33,000
3,60,000
18,000
15,000
33,000
By madras Branch A/c
Sales 2,70,000
Stock 90,000
______
By Madras Branch
trading A/c (Gross profit)
3,60,000
3,60,000
33,000
33,000
Madras branch A/c
Rs Rs
To balance b/d(H.O A/c)
To madras branch creditors A/c
To madras branch Trading A/c
90,000
30,000
3,60,000
4,80,000
By Madras Br. Trading A/c
By Madras branch P&L A/c
By Madras branch Furniture A/c
By Madras branch Debtors A/c
By Madras branch cash A/c
By Madras branch stock A/c
3,27,000
18,000
6,000
30,000
9,000
90,000
4,80,000
27
Illustration 3
The head office of a business and its branch keep their own books and cash
prepares it own profit & loss A/c. the following ar the balance appearing on the two sets of
the books as on 31st Dec. 1994 after ascertainment of profit and after making all
adjustment except those referred to below:
Dr.
Rs.
Cr.
Rs.
Dr.
Rs.
Dr.
Rs.
Capital
Fixedassets
Stock
Debtors &
Creditors
Cash profit
& Loss
Branch A/c
Head office
A/c
-
36,000
34,200
7,820
10,740
-
29,860
-
1,18,620
1,00,000
-
-
3,960
-
14,660
-
---
1,18,620
-
16,000
10,740
4,840
1,420
-
-
--
33,000
--
-
-
1,920
-
3,060
-
28,020
33,000
Set out the balance sheet of the business as on 31st December 1994 and the journal entries
necessary to record adjustments dealing with the following:
1. On 31st December, the branch had sent a cheque for Rs. 1,000 to the head office, not
received by them nor credited to the branch till next month.
2. Goods valued at Rs.440 had been forwarded by the head office to the branch and invoiced
on 30th December, 1994 but were not received by the branch nor dealt with in their books
till next month.
3. It was agreed that the branch should be charged with Rs.300 for administrative service,
rendered by the head office during the year.
4. Stock stolen in transit from he head office to the branch and charged to the branch by the
head office but not credited to the head office in the branch books as the branch manager
declined to admit any liability Rs,400.
5. Depreciation of branch assets, of which accounts are maintained by the head office, not
provided for Rs.250
6. The balance of profit shown by the branch is to transferred to the head office books.
28
Solution :
Calculation of adjusted net profit
Head office
Rs.
Branch
Rs.
Profit as given in trial balance
Administrative service charge
Depreciation of branch assets
Stock stolen in transit (abnormal loss)
14,660
300
14,960
Nil
14,960
(-) 400
14,560
3,060
(-) 300
2,760
(-)250
2,510
-
2,510
In the books of branch
Journal entries
Dr
Rs.
Cr.
Rs.
31.12.94 Profit & Loss A/c Dr.
To head office A/c
[Being share of head office administrative services
to be borne by branch]
Profit & Loss A/c Dr.
To head office A/c
[Being depreciation on branch assets maintained in
H.O books]
Profit & Loss A/c Dr.
To head office A/c
[Being adjusted profit transferred to H.O A/c]
300
250
2,510
300
250
2,510
29
HIRE PURCASES AND INSTALMENT PURCHASES SYSTEM
Hire purchases and installment system are responsible for bringing high valuable good like
cas, television into the reach of middle class and lower class people. These systems have
revolutionized the world of commerce.
Hire purchase system:
Definition:
Accounting to the Hire purchase Act 1972 section 2 (c)”Hire purchase is an agreement
under which goods are let on hire and under which hirer has an option to purchase them in
accordance with the terms of the terms and includes an agreement under which
(i) Possession of goods is delivered by the owner thereof to a person on condition that such
person pays the agreed amount in periodical installments.
(ii) The property in the goods is to pass to such person on the payment of the last of such
installments.
(iii) Such person has a right to terminate the agreement at any time before the property so
passes”
As per section 4 of the Hire purchases Act 1972, every hire purchases agreement state:
(a) The hire purchases price of the goods to which the agreement relates.
(b) The cash price of the goods, that is to say, the price at which the goods may be purchased
by the hirer for cash.
(c) The date on which the agreement shall be deemed to have commenced.
(d) The number of installments by which the hire purchases price is to be paid, the amount of
each of those installments and the date or the mode of determining the date, upon which it is
payable and the person to whom and the place where it is payable.
(e) The goods to which the agreement relates, the manner sufficient to identify them.
Important terms in the hire purchases system
1. Cash price :
This is the retail price of the articles at which they can be puraches immediately for cash.
2.Hire purchases price:
This is the total amount payable by the buyer, in agreed instalments for the goods
purchased. This price includes cash price and interest.
3. Interest:
This is the additional amount apart from the cash price payable by the buyer as
compensation for postponed payments.
30
4. Hire or Installment:
This is the amount payable by the buyer periodically. The installments may be equal or
different, depending on agreement.
5. Down payment:
This is the advance payable by the buyer while signing the hire purchases
agreement. It is also a part of the hire purchase price.
6. Hirer:
The buyer of the goods on hire purchase basis.
7. Hire vendor or owner:
The seller of the goods on hire purchase basis.
Main features of Hire purchase system.
1. The hirer or buyer gets possession of the goods on signing the hire purchase
agreement and he has right to use them.
2. The ownership of the goods continues to be with the seller or hire vendor. The buyer
gets ownership of the goods on payment of the last installment.
3. The hirer has the duty to keep the good in good condition and take reasonable
precautions for their safety till the last installment is paid.
4. Each installment is treated as hire charges.
5. The hirer has the option to return the goods before the last installment is paid.
Installment purchases system or deferred installment system:
In installment purchases system also, an agreement is entered into by the seller
and buyer. An advance or down payment is paid and possession as well as ownership in
the goods is transferred to the buyer. The buyer agrees to pay the balance of amount due
in a specified number of installment along with agreed rate of interest. If buyer fails to
pay any installment, the seller cannot repossess the goods. He can sue the buyer in a
court for recovery of the dues.
31
Distinction between Hire purchases and Installment system
Basis Hire purchases
system
Installment
system
Nature of
agreement
Transfer of
ownership
Right of loss
Right of sale
Instalment
It is an agreement
of hiring with
option to buy.
Ownership is
transferred on
payment of final
instlments.
The hirer is not
responsible for
any loss of the
goods if he has
taken reasonable
precautions.
The hire cannot
sell the goods till
he gets ownership.
Each instalments
include hire
charge and part
payments of the
cash price
It is an
agreements of
sales.
Ownership is
transferred on
signing of the
agreement.
The buyer is
responsible for
loss of goods
because he is the
owner.
The buyer has
the right to sell
the goods even
before
instalments are
paid.
Each instalment
includes interest
and part
payment of cash
price.
Calculation of interest
The hire purchase price is always greater than the cash price. It includes cost payable over and
above the price of the goods to compensate the seller sacrifice he has made by agreeing to receive the
price by instalments and risk that he there by undertakes. Interest is the charge for the facility to pay
price for the goods by instalments after they have been delivered. The rate of is generally higher than
that is payable in respect of an advance or a loan it
32
also includes higher than that is payable in respect of an advance or a loan it also includes a charge
to cover the risk that the hirer may fail to pay any instalments and in such an event, the goods may
have to be taken back possession in whatever condition they are at that time.
Interest included in each instalment can be ascertained by making necessary calculations
under the following circumstances:
(i) When the rate of interest, the cash price and the instalments are given
(ii) When the rate of interest is not given
(iii) When the total cash price is not given.
(iv) When the instalment price is not given.
(v) When cash price is calculated by annuity method.
(i)When the rate of interest, the cash price and the instalments are given:
Under this method, the interest is to be calculated on the outstanding balance of the cash
price at the stipulated rate. When interest component is deducted from instalment, the balance
represents the amount paid in reduction of cash price. This amount is deducted from the cash price
to facilitate the calculation of interest for the next period.
(ii)When total cash price and instalment are given but rate of interest is not given:
when the rate of interest is not given, the interest included in each instalment will be
calculated on the basis of the hire purchases price outstanding in the beginning of each year. The
following is the process of ascertaining interest included in various instalments.
Method 1: When the amount and period of instalments are not uniform [Product method]
Hire purchases price - cash price = Total Interest.
Hire purchases price – first instalment = first balance..
First balance – second instalment = second balance.
Second balance - third instalment = Third balance.
Same method can be used for further instalments.
(i) Hire purchase price × period first instalment. = A
(ii) first balance period × of second instalment. = B
(iii) second balance × period of third instalment =C
(iv) third balance × period of fourth instalment = D
A,B,C and D have to be totaled and interest included in each instalment is found as
follows:
33
Interest included in I instalment : total interest × _______A____
A+B+C+D
B
Interest included in II instalment : total interest × ___________
A+B+C+D
C
Interest included in III instalment : total interest × _________
A+B+C+D
D
Interest included in IV installment: total interest × ___________
A+B+C+D
Method 2: When the amount and period of installments are uniform
Hire purchases price - cash price = total interest.
Assuming total interest is Rs.800 and numbers of installments are four, interest
included in each installment is calculated in the following manner:
installments No. Of
outstanding
installments
Ratio
of
interest
Interest
1st
installments
2st
installments
3st
installments
4st
installments
4
3
2
1
10
4/10
3/10
2/10
1/10
800×4/10
Rs. 320
800×3/10
Rs. 240.
800×2/10
Rs. 160
800×1/10
Rs.80
34
(iii)When rate of interest and installments are given but total cash prices is not given.
When the amount of each installment which includes interest is given and rate of interest is
also given, cash price is found out in the following manner:
Rate of interest
(a) First of last installment × __________________
100 + Rate of interest
= Interest included in the last instalment.
(iv) When rate of interest ad total cash price are given but the instalment price is not given.
In this method is also, the interest is to be calculated on the outstanding balance of the ash
price at the stipulated rate. Then cash price paid is deducted from the total cash price and interest is
calculated for the next period falling between the dates of payment of first instalment and second
instalment. This process is repeated till the payment of last instalment. The instalment price is
calculated by adding interest with cash price of each instalment.
(v)calculation of cash price by Annuity method:
when in place of cash price, hire purchase price and annuity rate are given, the annuity factor
given and adding down payment to the product. Then interest is calculated.
Default and Repossession
Repossession
The hire vendor has the right away the goods sold on hire purchase in the event of default
made by the hire purchaser. As per hire purchases Act 1972 goods of small value ot even goods of
higher value when only certain number of instalments are paid, can be repossessed without court’s
permission. A court order is needed to repossess good on which larger number of instalments than
specified are paid.
Types of repossession
(a) complete Repossession :
The hire vendor may take away all the goods on which there is default of instalment.
(b)partial Repossession:
The hire vendor may take away only a portion of the goods on which there is default of
instilments.
Accounting treatment varies in the books of both the hire vendor and hire purchaser for
each of the types of repossession.
(a)Complete repossession of goods:
35
When complete repossession of goods takes place, the ledger account in the books of hire
purchaser and hire vendor are fully closed as far as the hire purchases transaction is concerned.
Books of Hire vendor
1. on the date of default of instalment, entry for interest is passed. The hire purchaser’s account is
closed. Any balance is transferred to repossessed goods account.
2.Hire vendor’s account is to be closed and any balance is transferred to the asset account.
(b)Partial repossession
The hire purchaser might have depreciated the asset as per his assessment of he rate of
depreciation. The hire vendor revalues the hirer who may agree to make some payment in future.
Books of Hire vendor
1. entry for interest upto the date of default is passed.
2. repossessed goods as per hire vendor’s valuation are credited to hire purchaser’s
account and debited to ‘Repossessed good A/c.
3. the hire purchasers account is balanced and balance is carried down.
4. Repossessed goods may be repaired and sold later on.
Books of Hire purchaser:
1. Entries for interest and depreciation on the asset are passed upto date.
2. Hire vendor’s A/c is debited and asset A/c is credited with the value of asset taken away as
per hire vendor’s valuation.
3. The asset account is balanced. Any balance is loss due to repossession and is transferred to
profit and Loss Account.
2. Accounting treatment for goods of small sales value
(hire purchases trading account)
When numerous sales of small value are made in addition to normal sales, the hire vendor
follows an alternative method of recording transactions. This method, known as ‘ stock method’,
avoid the maintenance of a separate account for each individual customer and also the tedious
method of calculating interest in each case.
(i) Stock of goods with customers:
This is also termed as Hire purchase stock. Stock with the customer, instalmetns not yet due,
or amount of instalments unpaid and not due. These are the total amount of those instalments in
respect to goods sold on hire purchases which are to be received in the next accounting period.
36
(ii)Purchases (Goods sold during the year)
The term “Purchase” is used when the business is run independently. But if the business is
run as a department, the information relating rlating to purchase made by the department is given
under the term ‘Goods sold during the year.
(iii)Cash Received
It refers to the total amount received from the customers during the accounting year in the
form of down payment and amount of instalments. It is shown on the credit side of hire purchase
trading account.
(iv)Total instalments due but unpaid
It refers to the total sum of instalments which have become due during the accounting year
but has not been paid by the customers. This is also termed as ‘Hire purchase Debtors’ ‘Instalment
due’, ‘ customers paying’.
(v)Stock
It is shown on the debit side of hire purchase trading account, but when business is run as a
department , this information is not required.
Methods of computation of profit
The profit made by the vendor on hire-purchase transactions in case of goods of small value,
can be calculated by any one of the following methods:
(i)Debtors method (ii)Stock and Debtors method
(i)Debtors method
Under this method, the profit or loss made on goods sold on hire purchase can be found out
by preparing hire purchase hire purchase trading account. The specimen ruling of the hire purchase
trading account is as under:
37
Hire purchase trading account
To stock at shop (opening)
To stock out with customers
(at cost)
To Instalmetn due but unpaid
(opening)
To purchases or cost of goods
sold during the year
To profit (bal.fig)
xxx
xxx
xxxx
xxx
xxx
xxx
By cash received from
customers
By Goods repossessed
By instalment due and
unpaid (closing)
By stock out with
customers(at cost )
By stock at shop (closing)
By Loss (bal.fig)
xxx
xxx
xxxx
xxx
xxx
xxx
Note:
1. If stock out with customers is given at hire purchase price in the question, then either stock
reserve equal to the excess of hire purchase price over cost price should be shown on cresit side
(from opening stock) and debit side (for closing stock) or it should be reduced to cost price.
2. Stock at shop should not be shown in hire purchase trading account when business is run as a
department.
(ii)Stock and Debtors method:
The profit made on hire pur5chase transaction can also be calculated according to stock and
debtors systems. Under this method, the following ledger accounts are to be opened.
1. Hire purchase stock account
2. stock at shop account
3. hire purchases debtors account.
4. goods on hire purchase account
5. hire purchase adjustment account
The following journal entries are to be passed if this method is followed.
(i) When goods are purchases for shop stock :
Stock at shop A/c Dr.(cost price)
38
To purchases A/c
(ii) When goods are sold on hire purchases
Hire purchases stock A/c Dr. (at sale price)
To goods sold on H.P A/c
(iii) For total instalments which become due
Hire purchases debtors A/c Dr.
To hire purchase stock A/c
(iv) When cash is received from debtors
Cash account Dr.
To Hire purchases debtors A/c
(v) For transfer of goods sold on H.P
Goods sold on H.P A/c
To H.P adjustment A/c
To Trading account
(vi) When goods are repossessed on default and loss is transferred to H.P
adjustment A/c
Goods repossessed A/c Dr(for realizable value)
H.P adjustment A/c Dr.(loss)
To Hire purchases debtors A/c (installment due and not received in cash)
To hire purchases stock A/c (for installment not yet due)
To H.P adjustment A/c (profit on repossession)
(vii) For loading in opening stock with customers
Stock reserve A/c Dr.
To H.P adjustment A/c
(viii) For loading in closing stock with customers
H.P adjustment A/c Dr
To Stock reserve A/c
(ix) For loading in goods sold (sent) on hire purchase
Goods sold on H.P A/c Dr
To H.P adjustment A/c
(x) For transfer of profit on hire purchase
39
H.P adjustment A/c Dr
To profit and loss A/c
In case of loss, the entry will be reversed.
Accounting Under Instalment purchase system
In continuation of what is given on page on 18.2, under instalmetn purchase system, the
property in goods passes to the purchaser immediately on signing the contract. In short, sale is
outright but payment is made by different instalments. The amount of instalment and the interest
payable are determined at the time of signing the contract. The seller delivers the goods to the buyer
immediately after signing the contract.
Accounting Treatment - books of buyer
The following journal entries are to be passed in the books of the buyer:
First year:
1. when an asset is purchased:
Asset A/c Dr.(with cash price)
Interest suspense A/c Dr.(with total amount of interest
for all the years)
to vendor’s A/c (with total instalment purchase price)
2. When the Down payment is made:
Vendor’s A/c Dr.
To Bank/cash A/c
3. For interest due at the end of the year
Interest A/c Dr.
To Interest suspense A/c
4. For the payment of Instalments:
Vendor’s A/c Dr
To bank A/c
5. For Depreciation
Depreciation A/c Dr.
To Asset A/c
6. For transferring Depreciation and interest A/c
Profit & Loss A/c Dr.
40
To Interest A/c
To Depreciation A/c
Note:
Entries (3), (4), (5) and (6) will be repeated in subsequent years.
1. When goods are sold :
Buyer’s A/c Dr. (with total price)
To Sales A/c (with cash price)
To interest suspense A/c (with total interest for all the years)
2. on receipt of down payment
bank A/c Dr.
To buyer’s A/c
3. For interest due on instalments at the end of the year
Interest suspense A/c Dr.
To interest A/c
4. For receipt of the amount of instalment
Bank A/c Dr.
To Buyer’sA/c
5. For transferring interest A/c
Interest A/c Dr.
To profit & Loss A/c
Note :
Entries from (3) to (5) will be repeated in subsequent years.
Illustrations1:
Solution:
Table Showing Calculation of Interest
Particular Total cash
Price
(2)
Rs.
Installment
(3)
Rs.
Interest
Paid
(4)
Rs.
Cash price
Paid
5
(3-4)
Rs.
Cash price
Down payment
14,900
.00
41
1st installment
2nd inst
3rd inst
4,000.
00
10,900.00
3,455.00
7,445.00
3,627.75
3,817.25
3,817.25
4,000
4,000
4,000
4,000
-
545
[10,900
*5%]
372.25
[7,445*
5%]
182.75
[4,000-
3,817.2
5]
4,000.00
3,455.00
3,627.75
3,817.25
Illustrations2:
Mr. X purchased a machine on hire purchases system Rs.3, 000 being paid on delivery and the
balance in five instilment of Rs. 6,000 each, payable annually on 31st December. The cash price of
the machine was Rs.30, 000. Calculate the amount of interest for each year.
Solution:
Rs.
1st year = amount outstanding for interest after down
payment
2nd year = amount outstanding for interest after 1st
installment
3rd year = amount outstanding for interest after 2nd
installment
4th year = amount outstanding for interest after 3rd
installment
5th year = amount outstanding for interest after 4th
installment
30,000
24,000
18,000
12,000
6,000
Ratio of outstanding = 5 : 4 : 3 : 2 : 1
Hire purchase price = total of all installments
Total interest = hire purchases price - cash price
42
= 33,000-30,000 = 3,000.
Installment outstanding = 30,000:24,000:18,000:12,000:6,000
= 5 : 4 : 3 : 2 : 1
Installments No. Of
outstanding
installments
Ratio of
interest
Interest
Rs.
1st
installment
2nd
installment
3rd
installment
4th
installment
5th
instalment
5
4
3
2
1
5/15
4/15
3/15
2/15
1/15
3,000*5/15
=1,000
3,000*4/15
=800
3,000*3/15
=600
3,000*2/15
=400
3,000*1/15
=200
When cash price is not given
Illustration 3
X purchased a typewritten on hire purchases system. As per terms he is required to pay Rs.800
down. Rs.400 at the end of the first year Rs.300 at the end of the second year and Rs.700 at the end
the third year. Interest is charged at 5% p.a Calculate the total cash price of the typewritten and the
amount of interest payable on cash installment.
Solution:
Each installment paid includes interest for the period. The rate of interest on cash price must be
converted to rate of interest on installment.
We assume the cash price as Rs.100
Interest @ 5% on Rs.100 for one year 5
Installment paid at the end of the year 105
Interest on installment price 5/105 as a ratio.
43
The following table is used to arrive at the cash price of the type writer.
Year
(1)
Installment
(2)
Interest paid
(3)
Cashprice
paid. 4(2-
3)
Rs.
3rd year
2nd year
1st year
down
payment
700
300
400
800
2,200
________
700×5/105 =33
(300+667)
×5/105=46
(400+254+667)
×5/105 = 46
Nil
142
____________
667
254
337
800
2,058
Interest : 1year Rs.63 : II year Rs.46 iii year Rs. 33
The total cash price : Rs. 2,058
When installments amount are not given but cash price and rate of interest are given:
Illustration 4
X purchases a machine under hire purchases system. According to the terms of the
agreement rs.40, 000 was to be paid on signing of the contract. The balance was to be paid in four
annual installments of Rs.25, 000 each plus interest. The cash price was Rs. 1, 40,000. Interest is
chargeable on outstanding balance at 20% per annum. Calculate interest for each year and the
installment amount.
Solution:
Table showing calculation of interest
Date of payment
(1)
Total cash price
Rs. (2)
Install. Paid
Rs.
(3)=(4+5)
Interest paid rs. (4) Cash price
paid rs.(5)
44
Down
payment
1st instal
2nd instal
3rd install
4th instal
1,40,000
40,000
1,00,000
25,000
75,000
25,000
50,000
25,000
25,000
25,000
Nil
40,000
45,000
40,000
35,000
30,000
1,90,000
(1,00,000×20%)
=20,000
(75,000×20%)
=15,000
(50,000 × 20%)
=10,000
(25,000 × 20%)
=5,000
50,000
40,000
25,000
25,000
25,000
25,000
1,40,000
Calculation of cash price by annuity method:
Illustration 5
On 1.1.90 X bought some trucks under hire – purchase system for Rs. 51,000 payable by three equal
installments combining principal and interest, the latter being normal rate of 5% per annum. Calculate
the cash price.(The present value of an annuity of one rupee for three years at 5% is Rs.2.72325)
Solution:
Calculation of cash price
Present value of annuity of Rs. 1paid for three years @ 5% = 2.72325(annuity factor)
Instalment = 51,000/3 = 17,000
Present value of annuity = instalment × Annuity factor
= 17,000 × 2.72325 = 46,295.25
cash price is Rs.46,295.25
Illustration 6
Sunder sells goods on H.P. system at cost plus 60% from the following prepare
Hire – purchases Trading A/c.
45
Rs
Jan 1 Goods out on H.P system at H.P price
Dec 31 Installments not due and unpaid
Installments due and unpaid
The following transactions book place during the year:
a) goods sole on H.P price
b) cash received from customers at H.P price
c) Goods received back on default valued at
(installment due Rs.4000)
32,000
72,000
4,000
1,60,000
1,12,000
800
Solution :
Rs. Rs.
To Goods out
on H.P (op.
stock)
To Goods sold
during the year
To stock
Reserve
[72,000
×60/100]
To P & L A/c
32,000
1,60,000
27,000
41,800
2,60,800
By cash
By Goods
Repossessed
By instalments due
[closing debtors]
by Stock
Reserve
[32,000 /160×
60]
by instalment not due and
unpaid [closing stock]
By loading on Goods sold
[1,60,000 × 60/160]
1,12,000
800
4,000
12,000
12,000
72,000
60,000
2,60,800
46
Illustration 7
Stock and Debtors Method:
Krishna sells product on H.P. terms, the price being cost plus 33 1/3 %. From the following
particular for the year ended 31.12.95, prepare the necessary account stock on stock – debtors
system to reveal the profit earned.
Rs
1.1.95
31.12.95
Stock out on hie at H.P price
Stock in hand at shop
Instalments due (customers still paying)
Stock out on hie at H.P price
Stock in hand at shop
Instalments due (customers still paying)
Cash received during the year
16,00,000
2,00,000
1,20,000
18,40,000
2,80,000
2,00,000
32,00,000
Solution :
H .P Debtors A/C (Installments due A/c)
Rs rs
To balance b/d
To H.P .stock A/c
1,20,000
32,80,000
34,00,000
By cash
By balance c/d
32,00,000
2,00,000
34,00,000
H.P stock A/c (stock out with customers A/c)
Rs Rs
To balance b/d
To Goods sold on H.P (bal.fig)
16,00,000
35,20,000
51,20,000
By H .P Debtors A/C
By balance c/d
32,80,000
18,40,000
51,20,000
Shop stock A/C
47
Rs Rs
To balance b/d
To purchases (bal.fig)
2,00,000
27,20,000
29,20,000
By H .P Debtors A/C
(cost of goods sold)
[35,20,000 /4× 3]
by balance c/d
26,40,000
2,80,000
29,20,000
H.P Adjustment A/c
Rs Rs
To stock Reserve
[18,40,000×1/4 ]
To P & L A/c
4,60,000
8,20,000
29,20,000
By stock Reserve
[1,60,000 × 1/4]
By H.P stock [35,20,000 ×
1/4]
4,00,000
8,80,000
29,20,000
Stock Reserve A/c
Rs Rs
To H.P Adjustment A/c
To Balance c/d
4,00,000
4,00,000
29,20,000
By Balance b/d
By H.P Adjustments A/c
4,00,000
4,60,000
29,20,000
Illustration: 8
Knight purchases a truck for Rs. 1, 60,000 from S. Waugh on 1.1.93 payment to be
made Rs. 40,000 down and Rs. 46,000 at the end of first year. Rs. 44,000 at the end of second
year and Rs. 42,000at the end of third year. Interest was charged at 5%. Knight depreciates the
truck at 10% per annum on written down value method.
Knight, after having paid down payment and first installment at the end of the first year,
could not pay spending Rs. 4,000 on repairs of the asset, sold it away for Rs.91, 500.
Give journal entries and ledger accounts in the books of both the parties.
48
Calculation of Interest
No .of installment Total cash price
paid Rs.
Inst. paid Interest paid Net Cash
price paid
Rs.
Down
1st inst.
2nd inst.
3rd inst.
1,60,000
40,000
1,20,000
40,000
80,000
40,000
40,000
40,000
Nil
40,000
46,000
44,000
42,000
1,72,000
-
[1,20,000 × 5%] 6000
[80,000 × 5%] 4000
[42,000 -40,000] 2000
____
12,000
40,000
40,000
40,000
40,000
1,60,000
Ledger Account in the books of S. Waugh Knight A/c
Rs Rs
1.1.93
31.12.93
1.1.94
31.12.94
To Hire sales
To interest
To balance b/d
To interest
1,60,000
6,000
1,66,000
80,000
4,000
84,000
1.1.93
31.12.93
31.12.94
By Bank (down
payment)
By Bank (1st )
By balance c/d
By Repossessed
Stock A/c(bal.fig)
(transfer)
40,000
46,000
80,000
1,66,000
84,000
84,000
Repossessed Stock A/c
Rs Rs
31.12.94
31.12.94
To cash A/c
To Knight A/c
To P & L A/C
(bal.fig) (Profit on
sale)
4,000
84,000
3,500
91,500
31.12.94 By Cash 91,500
91,500
49
Ledger A/c’s in the books of Knight Truck A/c
Rs Rs
1.1.93
1.1.94
To Hire vender A/c
To balance b/d
1,60,000
1,60,000
1,44,000
1,44,000
31.12.93
31.12.93
By Depreciation
A/c
By balance c/d
By Depreciation
A/c
By S. Waugh A/c
By P & L A/c
(bal.fig)
16,000
1,44,000
1,60,000
14,400
84,000
45,600
1,44,000
S .Waugh A/c
Rs Rs
1.1.93
31.12.93
31.12.94
To Bank A/c
To Bank A/c (1st)
To balance c/d
To Track A/c
(bal.fig) (transfer)
40,000
40,000
40,000
1,66,000
84,000
84,000
1.1.93
31.12.93
1.1.94
31.12.94
By Truck A/c
By Interest A/c
By balance b/d
By Interest A/c
1,60,000
6,000
1,66,000
80,000
4,000
84,000