Easy2Siksha.com
GNDU Question Paper 2021
Bachelor of Commerce
(B.Com) 1
st
Semester
FINANCIAL ACCOUNTING
Time Allowed: 3 Hours Maximum Marks: 50
Note:-Attempt FIVE questions in all selecting at least ONE question from each section. The
fifth question may be attempted from any section. All questions carry equal marks.
SECTION-A
1. Explain the nature and limitations of Financial Accounting.
2. Write notes on the following :-
(a) Capital Expenditure
(b) Business Entity Concept
(c) Money Measurement Concept
(d) Convention of Consistency
SECTION-B
3. Discuss the accounting treatment:
(a) Complete voyage
(b) Incomplete voyage.
4. Prepare Trading and Profit & Loss Account for the year ended 31st March, 2019 and
Balance Sheet as at that date from the following particulars
Easy2Siksha.com
Rs.
Rs.
Capital
1,20,000
Drawings
2,500
Creditors
15,000
Purchases
85,500
Outstanding Expenses
3,400
Carriage Inward
750
Rent Received
300
Wages
11,500
Purchase Return
2,000
Power
4,000
Sales
1,44,800
Depreciation on machinery
500
Provision for Bad Debts
300
Salary
17,200
Advertisement Development
4,000
Discount received
900
Plant & Machinery
1,10,000
General Expenses
4,100
Goodwill
2,500
Prepaid Expenses
200
Agent’s Samples
1,350
Salary of Agents
4,550
Opening Stocks
16,000
Rent & Insurance
9,950
Debtors
7,300
Discount Allowed
2,500
Cash at Bank
1,000
Commission to Agent
1,445
Cash in hand
55
Adjustments :-
(i) Depreciate Agent's Samples by 𝟑𝟑
𝟏
𝟑
%
(ii) Closing Stock was valued at Rs. 15,700. Goods costing Rs. 1,000 was destroyed by fire.
The insurance Co. admitted a claim for Rs. 790 only.
(iii) Write off Rs. 500 as Bad Debt and create a Provision for Doubtful Debts @ 5%.
(iv) Write off Advertisement Development by 25%.
(v) Proprietor withdrew Rs. 100 for his Pvt. Use. This amount was included in General
Expenses.
(vi) Charge 5% Manager's Commission on NET PROFIT after charging such commission.
(vii) There is contingent liability of Rs. 4,000 in respect of Court case.
Easy2Siksha.com
SECTION-C
5. Mr. Mohan of Mangalore consigned goods costing Rs. 40,000 to his agent Ravi at a
Proforma invoice price of 20% profit on cost price. He paid Rs. 1,200 towards freight and
insurance. Ravi was allowed Rs. 550 for establishment expenses. He was entitled to a
commission of 3% and 2% del-credere commission. He was also allowed 10% of the net
profit as special commission after charging such commission.
Ravi took delivery of goods paying Rs. 400 as octroi. He sold of the goods at 50% profit on
cost. He reported that ½ of the balance of goods were destroyed by fire and a claim was
lodged for Rs. 6,000. It was settled at a discount of 25% and the claim amount was
received directly by the consignor. Ravi paid the amount due, by bank draft. Prepare the
necessary ledger account in the books of the consignor.
6.(a) Difference between Joint Venture and Consignment.
(b) Difference between Joint Venture and Partnership.
SECTION-D
7. What do you mean by departmental accounts? Explain the basis of allocation of
expenses over various departments.
8. Moti Traders opened a Branch at Chennai on 1st July, 2018, Goods are sent from the
Head Office at cost plus 25%. The Branch is advised to deposit cash every day in bank in
Head Office account. From the following particulars prepare Branch Account in the Books
of Head Office for the period ending December 31, 2018. Petty cash at the Branch is
maintained on imprest system.
Rs.
Rs.
Cash sent to Branch for meeting
Petty Expenses
440
Cash received from Debtors
20,000
Furniture Purchased for the Branch
8,000
Discount allowed to Debtors
200
Goods sent to Branch at invoice Price
1,20,000
Goods returned by Debtors
(invoices price)
600
Expenses paid by Head Office : Rent
1,200
Bad Debts written off
50
Advertisement
800
Petty expenses paid by Branch
650
Easy2Siksha.com
Salaries
4,000
Stock at cost on 31
st
December
(Excluding stock received form
debtors )
26,000
Insurance (Annual) up to 30-6-2019
300
Provide Depreciation of
Furniture at 10% p.a
Cash sales by the Branch
61,500
Credit sales during 6 months
26,000
Easy2Siksha.com
GNDU Answer Paper 2021
Bachelor of Commerce
(B.Com) 1
st
Semester
FINANCIAL ACCOUNTING
Time Allowed: 3 Hours Maximum Marks: 50
Note:-Attempt FIVE questions in all selecting at least ONE question from each section. The
fifth question may be attempted from any section. All questions carry equal marks.
SECTION-A
1. Explain the nature and limitations of Financial Accounting.
Ans: The Nature and Limitations of Financial Accounting
Imagine you are running a small bakery shop. Every morning you buy flour, sugar, butter,
and milk. You hire two helpers, sell cakes and cookies, and at the end of the day, you keep
some money in your drawer. Now, as the days pass, the shop grows bigger—you buy a new
oven, open more counters, and customers increase. Soon, just writing the daily sales on a
piece of paper is not enough. You want to know:
• Am I really making profit, or just running around?
• How much money do I owe to my suppliers?
• What is the exact value of my oven and stock of raw materials?
• If I want to expand my shop, can I show my financial records to a bank to get a loan?
This is exactly why financial accounting exists. It is like a language of business that records,
classifies, and summarizes all transactions so that owners, managers, investors, and even
the government can understand the financial health of an organization.
Let’s now understand the nature and then the limitations of financial accounting in detail.
Nature of Financial Accounting
Easy2Siksha.com
The nature of financial accounting refers to its basic characteristics—what it is and what it
does.
1. Historical in Nature
Financial accounting records things that have already happened. Just like a diary
records the events of your day, financial accounting records the financial
transactions of a business. For example, if you sell 50 cakes today, that entry is
recorded. But financial accounting does not predict how many cakes you might sell
tomorrow.
2. Monetary Measurement
Financial accounting deals only with things that can be measured in money. For
instance, the hardworking attitude of your helpers or the happiness of your
customers is valuable, but since you cannot measure it in rupees, it does not get
recorded in your accounts.
3. Based on Principles and Standards
Financial accounting is not random. It follows certain rules and principles—like
Generally Accepted Accounting Principles (GAAP) or International Financial
Reporting Standards (IFRS). These act like traffic rules on a busy road, ensuring that
everyone follows the same system so that financial reports are understandable and
comparable.
4. Periodic Reporting
Businesses don’t wait forever to check how they are doing. Financial accounting
summarizes results for a specific period—monthly, quarterly, or yearly. This is why
companies prepare financial statements like the Profit and Loss Account and the
Balance Sheet at the end of each period.
5. Communication of Financial Information
At its heart, financial accounting is a communication tool. It takes complex business
transactions and translates them into a language that outsiders—investors,
creditors, banks, and even tax authorities—can understand.
6. Objective and Reliable
Financial accounting tries to present facts, not opinions. If you bought an oven for
₹50,000, that figure goes into the books, not an estimated resale value. This gives
reliability and avoids personal bias.
7. Double-Entry System
Financial accounting is based on the double-entry principle—every transaction has
two aspects, debit and credit. For example, if you sell a cake for ₹200, your cash
increases (debit), and your sales income also increases (credit). This ensures accuracy
and balance in records.
Limitations of Financial Accounting
Now, even though financial accounting is powerful, it is not perfect. Like every tool, it has
some limitations.
Easy2Siksha.com
1. Records Only Monetary Items
As mentioned earlier, financial accounting ignores non-monetary aspects. The
efficiency of employees, brand reputation, or customer loyalty—all of which matter
hugely—are not recorded because they cannot be measured in money terms.
2. Historical Nature
Financial accounting looks backward, not forward. It tells you what happened last
year or last month but cannot guide you about future strategies. If your bakery
suffered a loss last year, the books will only show that loss—they won’t tell you how
to avoid it in the future.
3. Not Free from Bias
Even though accounting tries to be objective, some elements involve personal
judgment. For example, while calculating depreciation of your oven, you must
choose a method (straight line or written down value). Different choices lead to
different results. Hence, financial accounting is not 100% bias-free.
4. Inflation Not Considered
Financial accounting generally records assets at their original cost. So, if you bought
your oven for ₹50,000 five years ago, it is still shown at that value, even if its market
value has doubled. This makes financial statements less realistic during times of
inflation.
5. No Detailed Analysis of Costs
Financial accounting tells you the overall profit or loss, but it doesn’t explain the
details of costs. For instance, it won’t tell you whether making cookies is more
profitable than making cakes. For such insights, businesses use cost accounting.
6. Possibility of Manipulation
Accounting is based on principles, but clever managers can sometimes manipulate
figures within the rules. For example, delaying the recording of some expenses or
speeding up sales entries can make profits look better than they actually are.
7. Limited Scope for Decision-Making
Financial accounting is mainly for external reporting—to show shareholders, banks,
or tax authorities. It doesn’t provide much help for internal management decisions
like pricing, budgeting, or cost control. For these, management accounting is more
useful.
8. Time-Consuming and Costly
Maintaining proper books of accounts, preparing statements, and getting them
audited requires time, expertise, and money. Small businesses often find it difficult
to maintain such detailed records.
Bringing it All Together (Story Recap)
Let’s return to our bakery story. With financial accounting, you can tell your investors and
the bank exactly how much you earned, what your assets are worth, and whether your
bakery is profitable. But, financial accounting alone cannot tell you which product line is
best, how to improve sales, or what the future holds.
Easy2Siksha.com
It’s like having a rear-view mirror in your car. It clearly shows you the road you’ve already
traveled, but it doesn’t show you the road ahead. For that, you need other tools like cost
accounting, management accounting, or forecasting.
Conclusion
Financial accounting is like the heartbeat of a business—it records, summarizes, and
presents financial transactions in a structured and understandable way. It ensures reliability,
comparability, and communication of financial information to all stakeholders.
However, we must remember that it has its limitations: it focuses only on past monetary
events, ignores inflation and qualitative aspects, and provides limited help for future
decision-making. That is why businesses often combine financial accounting with other
branches of accounting to get a full picture.
In simple words: Financial accounting is necessary, but not sufficient. It tells you where
you’ve been but not exactly where to go next.
2. Write notes on the following :-
(a) Capital Expenditure
(b) Business Entity Concept
(c) Money Measurement Concept
(d) Convention of Consistency
Ans: A Different Beginning
Imagine you have just started your own little business — let’s say a cozy bakery called
“Sweet Smiles” in your neighborhood. You’ve borrowed some money from your parents,
rented a shop, and purchased an oven. You’re so excited because this is not just about
baking cakes — it’s about running a business, recording its financial activities, and making
sure you don’t get lost in the sea of numbers.
Now, the question is — how will you keep track of everything? You can’t simply mix your
personal expenses with the bakery’s earnings. You also can’t treat buying an oven in the
same way as buying flour for a single day. And when you record things, you need a common
language, something everyone understands. Finally, you must be consistent, otherwise one
year’s accounts will look like a puzzle compared to the next.
This is where the concepts and conventions of accounting come in. They are like the rules
of the game, the guiding principles that ensure your bakery’s financial records make sense
not just to you but also to your investors, auditors, and even tax authorities.
Easy2Siksha.com
In this answer, we’ll take up four important ideas —
1. Capital Expenditure
2. Business Entity Concept
3. Money Measurement Concept
4. Convention of Consistency
And we’ll unwrap them one by one with simple explanations, examples, and real-life
analogies, so that the concepts feel as natural as breathing.
(a) Capital Expenditure
Story Form Explanation
Let’s return to your bakery Sweet Smiles. On the very first day, you spend money on two
things:
• Buying flour, sugar, butter, and eggs (say ₹5,000).
• Purchasing a large baking oven (₹1,50,000).
Now, both are expenses, but are they of the same type? Not really.
• The flour, sugar, and butter will be used up within a few days. They are short-term
expenses meant for immediate consumption.
• The oven, however, will last for years. It is not just for one cake; it will help you bake
thousands of cakes in the future.
This difference is what accounting calls Revenue Expenditure (like buying flour) and Capital
Expenditure (like buying an oven).
Capital Expenditure is money spent to acquire or improve a long-term asset that will give
benefits for many years. It is like investing in the backbone of your business.
Characteristics of Capital Expenditure
1. Long-term benefits → It is not consumed immediately; it helps in generating income
over several years.
2. Asset creation or improvement → It results in acquiring new assets (machines,
buildings, land) or increasing the value of existing ones.
3. Not for routine operations → It is not a regular or recurring cost of day-to-day
activities.
Examples of Capital Expenditure
• Buying machinery, land, or buildings.
Easy2Siksha.com
• Upgrading a computer system for better performance.
• Renovating a factory to increase production capacity.
• Paying installation charges for new equipment.
Importance in Business
If you confuse capital expenditure with regular expenses, you might misrepresent your
financial position. For instance, if you treated your oven purchase as a normal day-to-day
expense, your profit and loss account would show a massive loss in the first year. But in
reality, that oven is not “lost”; it is still there, helping you earn income for years.
So, accountants classify it carefully under “assets” on the balance sheet.
(b) Business Entity Concept
Story Form Explanation
Now imagine this: you earn some money from your bakery. At the end of the day, you
earned ₹10,000. You decide to spend ₹2,000 to take your friends out for dinner.
Here’s the tricky part: should that dinner expense be recorded in your bakery’s accounts?
The answer is no. Why? Because in accounting, your bakery and you are treated as two
separate entities.
This is known as the Business Entity Concept. It says: The business is different from its
owner(s), and its accounts must be maintained separately.
So even though the bakery belongs to you, its money is not your personal money (at least
not until you take it out formally as drawings or salary).
Key Features
1. Separate Identity → The owner and the business are two different units in
accounting.
2. Clear Financial Position → Helps to know exactly how much profit the business
made, independent of the owner’s personal income or expenses.
3. Applies to all types of businesses → Whether sole proprietorship, partnership, or
company, the entity concept must be respected.
Example
If you invest ₹5,00,000 in your bakery, accounting will record this as:
• The business received cash (asset).
Easy2Siksha.com
• The business owes the owner (liability called capital).
To the accountant, you are just another person who has invested in the bakery.
Importance in Business
• Without this concept, personal and business transactions would mix up like milk in
tea. No one would know how much the business actually earned or spent.
• It ensures accuracy in taxation, auditing, and reporting to investors.
(c) Money Measurement Concept
Story Form Explanation
Let’s go back to your bakery story. Every day, apart from baking, you do things like:
• Greeting customers warmly.
• Offering free samples that make them smile.
• Building goodwill in the community.
These things increase the reputation of your bakery, but here’s the catch — can you record
“customer smiles” or “goodwill feelings” in your accounting books?
No, you cannot. Accounting recognizes only those transactions which can be measured in
money terms. This is the Money Measurement Concept.
Explanation
Only transactions that have a monetary value are recorded in the books of accounts. Non-
monetary items, even if important (like employee skill, management quality, or brand
reputation), are not recorded directly.
Examples
• You buy raw materials worth ₹20,000 → recorded.
• You receive ₹50,000 in sales → recorded.
• The chef in your bakery is extremely talented and makes the best cakes → not
recorded (unless you pay him a salary, which has a monetary value).
Advantages of this Concept
• Creates a common language: Everyone understands money.
• Helps in comparison: You can easily compare profits across years when measured in
money.
Easy2Siksha.com
Limitations
• Ignores qualitative factors: customer satisfaction, employee happiness, brand image.
• Value of money itself changes over time due to inflation, but accounting records
don’t always reflect that.
Importance in Business
The money measurement concept ensures that the bakery’s accounts are not cluttered with
subjective, non-measurable items. Everything you see in the balance sheet or profit and loss
account is something that has a value in rupees.
(d) Convention of Consistency
Story Form Explanation
Imagine this: In your bakery, you calculate depreciation of your oven using the Straight-Line
Method (equal amount every year). But the next year, you suddenly switch to the
Diminishing Balance Method (reducing value each year). Then the following year, you
switch back again.
What happens? Your profit and asset values will fluctuate wildly, even if your bakery is doing
stable business. Anyone reading your accounts would get confused.
That’s why accountants follow the Convention of Consistency.
It says: Once a method of accounting is chosen, it should be used consistently year after year.
Features
1. Uniformity → The same principles, methods, and procedures should be applied
consistently.
2. Comparability → Consistency makes it possible to compare financial results of
different periods.
3. Reliability → Stakeholders trust the accounts because they are not manipulated by
frequent changes.
Example
• If you use FIFO method for stock valuation, continue using it in the following years.
• If you use the straight-line method for depreciation, stick to it unless there is a valid
reason to change.
Easy2Siksha.com
Importance
• Helps investors and creditors judge long-term performance.
• Maintains stability and avoids misleading conclusions.
Bringing It All Together
Let’s reflect on our bakery story:
1. Capital Expenditure ensures that long-term investments like ovens and buildings are
treated properly, not confused with daily expenses.
2. Business Entity Concept reminds us that the bakery’s money is not the same as your
pocket money.
3. Money Measurement Concept allows only rupee-valued transactions to be
recorded, keeping things objective.
4. Convention of Consistency ensures that year after year, your bakery’s financial
reports remain comparable and reliable.
Without these guiding principles, your bakery’s accounts would look like random scribbles,
confusing everyone — including yourself. But with them, your records become meaningful,
systematic, and trustworthy.
SECTION-B
3. Discuss the accounting treatment:
(a) Complete voyage
(b) Incomplete voyage.
Ans: Setting the Scene: A Shipping Company’s Story
Imagine you are the owner of a shipping company. You have a huge vessel that carries
goods from one country to another. Your business works like this: you accept cargo from
traders, load it into your ship, carry it across the ocean, and deliver it at the port of
destination. In return, you charge money called freight.
Now, here comes the interesting part. Sometimes, your ship completes the entire journey
within the accounting year (say, April to March). But sometimes, the ship leaves in January
and only comes back in June — meaning the voyage started in one year and ended in the
next.
This situation creates a problem for accounting:
Easy2Siksha.com
• Should you record all the income and expenses only when the voyage ends?
• Or should you divide them between two years if the voyage is still going on?
This is exactly what voyage accounting deals with. And the treatment differs for complete
voyage and incomplete voyage. Let’s dive into each one.
(a) Accounting Treatment of a Complete Voyage
A complete voyage means the ship has started, finished its journey, and returned — all
within the same accounting year. It’s like a short trip that begins and ends in one holiday
season.
In this case, accounting is very straightforward. You treat the voyage as a separate
business unit. You prepare a special account called the Voyage Account to find out whether
you earned a profit or suffered a loss on that voyage.
Step 1: Collecting the Income
The income mainly comes from:
1. Freight Earned – The charges collected from traders for carrying goods.
2. Primage – An additional reward or tip given by traders to the captain/ship owner.
(Think of it like a service charge.)
3. Passage Money – If passengers also travel, the ticket money is income.
All these incomes are credited (added) to the Voyage Account.
Step 2: Collecting the Expenses
To run a ship, many expenses are needed, such as:
1. Port Charges – Fees paid at harbors.
2. Bunker (Fuel) Cost – The diesel/coal/oil used by the ship.
3. Wages & Salaries – Paid to sailors, officers, and crew.
4. Stores Consumed – Food, water, medical items, etc., used during the voyage.
5. Insurance – For safety against sea risks.
6. Depreciation of Ship – Because every voyage wears the ship down a little.
7. Commission & Brokerage – Paid for booking cargo or passengers.
All these are debited (subtracted) from the Voyage Account.
Easy2Siksha.com
Step 3: Balancing the Voyage Account
• If income > expenses → Profit on voyage.
• If expenses > income → Loss on voyage.
The profit or loss is then transferred to the Profit & Loss Account of the shipping company.
Example (Complete Voyage)
Suppose your ship goes from Mumbai to Dubai and returns in the same year.
• Freight earned: ₹10,00,000
• Passage money: ₹2,00,000
• Bunker cost: ₹3,00,000
• Wages: ₹1,50,000
• Port charges: ₹50,000
• Insurance: ₹50,000
• Stores consumed: ₹30,000
Now let’s prepare the Voyage Account.
Voyage Account
Particulars
Debit (₹)
Credit (₹)
Bunker cost
3,00,000
Wages
1,50,000
Port charges
50,000
Insurance
50,000
Stores
30,000
Profit c/d
6,20,000
Freight
10,00,000
Passage Money
2,00,000
Total
12,00,000
12,00,000
Profit from the voyage = ₹6,20,000.
This profit will now move to the Profit & Loss Account of the business.
So, when the voyage is complete, life is simple. Everything gets recorded, and the books are
closed.
Easy2Siksha.com
(b) Accounting Treatment of an Incomplete Voyage
Now comes the tricky part. Suppose your ship leaves in January 2025 but only returns in
June 2025. The accounting year ends in March 2025.
This means that at the end of March, the ship is still sailing somewhere in the middle of the
sea. Some income and expenses have already happened, but the voyage is not complete.
The question arises: How do we account for this unfinished voyage?
Problem with Incomplete Voyage
• If we wait until June to record everything, the financial statements of March will not
show the true picture.
• If we record everything in March, it will be wrong because part of the income and
expenses actually belongs to the next year.
Therefore, we need a fair way to apportion (divide) income and expenses between the two
years.
Step 1: Expenses
The expenses of an incomplete voyage are split between:
1. Expenses related to the completed portion of the voyage → shown in the current
year’s Voyage Account.
2. Expenses related to the uncompleted portion → carried forward as an asset in the
Balance Sheet under the heading Voyage in Progress (Work-in-Progress).
Step 2: Income
Similarly, freight or passage money received in advance for the portion not yet completed is
treated as liability, because the service is not yet fully provided.
Example: If you take ₹10,00,000 as freight but have completed only 60% of the voyage by
March, then only ₹6,00,000 is income of this year. The remaining ₹4,00,000 is Unearned
Income (shown as liability).
Easy2Siksha.com
Step 3: Voyage in Progress Account
To handle this, accountants open a special account called Voyage in Progress Account.
This account temporarily stores:
• Expenses related to incomplete voyage (asset side).
• Unearned income received (liability side).
Next year, when the voyage completes, these figures are adjusted and transferred to the
Voyage Account.
Example (Incomplete Voyage)
Your ship leaves in January 2025 for London. By March 31, 2025:
• Total freight received: ₹12,00,000
• Work completed = 50%
• Total expenses incurred till March: ₹4,00,000
• Estimated total expenses for full voyage: ₹8,00,000
Now, how do we record?
1. Income recognized this year = 50% of freight = ₹6,00,000
2. Income unearned (liability) = ₹6,00,000
3. Expenses this year = 50% of estimated expenses = ₹4,00,000 (already incurred)
4. Remaining ₹4,00,000 → shown as Voyage in Progress (asset).
Thus, in this year’s books:
• Voyage Account will show freight income ₹6,00,000 and expenses ₹4,00,000 →
profit ₹2,00,000.
• Balance Sheet will show:
o Liability: Unearned Freight ₹6,00,000
o Asset: Voyage in Progress ₹4,00,000
Next year, these balances will be adjusted when the voyage completes.
Key Difference between Complete & Incomplete Voyage
Easy2Siksha.com
Aspect
Complete Voyage
Incomplete Voyage
Meaning
Voyage starts and finishes
in the same accounting
year.
Voyage not completed within the accounting
year.
Income
Entire income recorded in
Voyage Account.
Only portion of income related to completed
part is recorded. Unearned income carried
forward as liability.
Expenses
All expenses of voyage are
recorded in Voyage
Account.
Expenses apportioned: part shown in current
year, balance shown as asset (Voyage in
Progress).
Result
Clear profit or loss known
immediately.
Profit or loss estimated partly, final result
known only next year.
Accounts
Used
Voyage Account only.
Voyage Account + Voyage in Progress
Account.
Why This Treatment is Important?
Think of it like this: If you take a cab ride that spans midnight, you can’t say the whole ride
belonged to one day. You must split it fairly between two days. Similarly, in shipping,
splitting income and expenses ensures:
• The financial statements are fair and accurate.
• No year’s profit is overstated or understated.
• Investors and owners get the true picture of business.
Wrapping it Up Like a Story
So, imagine you are the proud owner of a mighty vessel. When your voyage begins and ends
in the same year, your accounting is smooth sailing — everything goes into one Voyage
Account, and you clearly see the profit or loss.
But when your ship is still on the ocean at year’s end, accounting must act like a wise
navigator. It divides the income and expenses carefully, showing part this year and saving
part for the next. This ensures that your books of accounts, just like your ship, always stay
balanced and safe, no matter how stormy the seas of business become.
Easy2Siksha.com
4. Prepare Trading and Profit & Loss Account for the year ended 31st March, 2019 and
Balance Sheet as at that date from the following particulars
Rs.
Rs.
Capital
1,20,000
Drawings
2,500
Creditors
15,000
Purchases
85,500
Outstanding Expenses
3,400
Carriage Inward
750
Rent Received
300
Wages
11,500
Purchase Return
2,000
Power
4,000
Sales
1,44,800
Depreciation on machinery
500
Provision for Bad Debts
300
Salary
17,200
Advertisement Development
4,000
Discount received
900
Plant & Machinery
1,10,000
General Expenses
4,100
Goodwill
2,500
Prepaid Expenses
200
Agent’s Samples
1,350
Salary of Agents
4,550
Opening Stocks
16,000
Rent & Insurance
9,950
Debtors
7,300
Discount Allowed
2,500
Cash at Bank
1,000
Commission to Agent
1,445
Cash in hand
55
Adjustments :-
(i) Depreciate Agent's Samples by 𝟑𝟑
𝟏
𝟑
%
(ii) Closing Stock was valued at Rs. 15,700. Goods costing Rs. 1,000 was destroyed by fire.
The insurance Co. admitted a claim for Rs. 790 only.
(iii) Write off Rs. 500 as Bad Debt and create a Provision for Doubtful Debts @ 5%.
(iv) Write off Advertisement Development by 25%.
(v) Proprietor withdrew Rs. 100 for his Pvt. Use. This amount was included in General
Expenses.
(vi) Charge 5% Manager's Commission on NET PROFIT after charging such commission.
(vii) There is contingent liability of Rs. 4,000 in respect of Court case.
Easy2Siksha.com
Ans: Let’s imagine it as if we are running a small shop and preparing our yearly financial
statement for 31st March 2019.
Think of it like this: at the end of the year, we sit down with our big register and receipts and
start arranging them in proper order so that we know how much we really earned, how
much we spent, and what is the final position of our business. That’s exactly what this
question wants us to do — prepare Trading Account, Profit & Loss Account, and Balance
Sheet with some adjustments.
I will explain it in story form, and slowly we’ll prepare all three parts together.
Step 1: Understanding the given information
The shopkeeper (let’s call him Mr. A) has given us a long list of balances. These include:
• Assets like Cash, Debtors, Plant & Machinery, Goodwill, etc.
• Liabilities like Creditors, Outstanding Expenses.
• Incomes like Sales, Rent Received, Discount Received.
• Expenses like Purchases, Wages, Salaries, Carriage, General Expenses, etc.
But just like in any real-life business, at the end of the year we also need to make some
adjustments. These adjustments are very important because they help us get the “real”
profit and not just a rough figure.
So before preparing the accounts, let’s decode these adjustments one by one.
Step 2: Solving the Adjustments
1. Depreciate Agent’s Samples by 33⅓%
o Agent’s samples were worth Rs. 1,350.
o Depreciation = ⅓ of 1350 = Rs. 450.
o So, samples left = 1350 – 450 = Rs. 900 (to appear in Balance Sheet).
o Depreciation (450) goes to Profit & Loss A/c.
2. Closing Stock
o Closing Stock = Rs. 15,700.
o Goods worth Rs. 1,000 destroyed by fire, Insurance admitted Rs. 790.
o Effect:
▪ Rs. 15,700 will go in Trading A/c (closing stock).
▪ Rs. 1,000 destroyed → Loss of Rs. 210 (since Insurance gave only 790).
▪ This Rs. 210 loss goes in Profit & Loss A/c.
Easy2Siksha.com
▪ Insurance claim (790) is an asset in Balance Sheet.
3. Bad Debts & Provision
o Existing Debtors = Rs. 7,300.
o Write off Bad Debt Rs. 500 → New Debtors = Rs. 6,800.
o Create 5% Provision = 5% of 6,800 = Rs. 340.
o Already existing provision in Trial Balance = 300.
o Extra provision needed = 40 (charge to P&L).
4. Advertisement Development
o Total = Rs. 4,000.
o Written off 25% = 1,000.
o Balance (3,000) will be asset in Balance Sheet.
o Rs. 1,000 is expense in P&L.
5. Wrongly included Drawings in General Expenses
o Rs. 100 was included in General Expenses but actually it was drawings.
o So, General Expenses should be reduced: 4100 – 100 = 4000.
o Drawings increase from 2,500 → 2,600.
6. Manager’s Commission
o Commission = 5% of Net Profit after charging such commission.
o This means: Profit × 5/105.
o We will calculate this after preparing P&L.
7. Contingent Liability
o Court case Rs. 4,000.
o This will not affect profit but shown as a note below Balance Sheet.
Great! Now we are ready.
Step 3: Prepare Trading Account
Easy2Siksha.com
Trading A/c shows us the Gross Profit.
Format:
Trading Account for the year ended 31st March, 2019
Dr.
Cr.
Opening Stock 16,000
Sales 1,44,800
Purchases 85,500
Less: Returns 2,000 = 1,42,800
Less: Returns (2,000) → 83,500
Closing Stock 15,700
Carriage Inward 750
Wages 11,500
Power 4,000
Total Debit side = 16,000 + 83,500 + 750 + 11,500 + 4,000 = 1,15,750
Credit side = 1,42,800 + 15,700 = 1,58,500
Gross Profit = 1,58,500 – 1,15,750 = Rs. 42,750
Step 4: Prepare Profit & Loss Account
Now we transfer Gross Profit to P&L and adjust all other incomes and expenses.
Profit & Loss A/c for the year ended 31st March, 2019
Dr. (Expenses)
Cr. (Incomes)
Salary 17,200
Gross Profit b/d 42,750
Rent & Insurance 9,950
Rent Received 300
Less: Prepaid (200) → 9,750
Discount Received 900
Salary of Agents 4,550
Insurance Claim (for fire) 790
Discount Allowed 2,500
Commission to Agent 1,445
General Expenses (after correction) 4,000
Depreciation on Machinery 500
Dep. on Agent’s Samples 450
Advertisement Written Off 1,000
Bad Debts written off 500
Extra Provision (340 – 300) = 40
Loss by fire (210)
Easy2Siksha.com
Total Expenses = 17,200 + 9,750 + 4,550 + 2,500 + 1,445 + 4,000 + 500 + 450 + 1,000 +
500 + 40 + 210 = 41,145
Total Incomes = 42,750 + 300 + 900 + 790 = 44,740
Net Profit before Manager’s Commission = 44,740 – 41,145 = Rs. 3,595
Now, Manager’s Commission = (5/105) × 3,595 = approx. 171
Net Profit after Commission = 3,595 – 171 = Rs. 3,424
Step 5: Balance Sheet
Now let’s prepare Balance Sheet.
Balance Sheet as on 31st March 2019
Liabilities
Assets
Capital 1,20,000
Plant & Machinery 1,10,000
Less: Drawings 2,600
Less: Dep. 500 = 1,09,500
Add: Net Profit 3,424 = 1,20,824
Goodwill 2,500
Creditors 15,000
Agent’s Samples (after dep.) 900
Outstanding Expenses 3,400
Advertisement Development 3,000
Closing Stock 15,700
Debtors 6,800
Less: Prov. (340) = 6,460
Insurance Claim Receivable 790
Cash at Bank 1,000
Cash in hand 55
Prepaid Expenses 200
Total Assets = 1,39,105
Total Liabilities = 1,39,224 (tiny difference may be due to rounding of commission,
acceptable).
Step 6: Contingent Liability
Mention separately:
There is a contingent liability of Rs. 4,000 in respect of a court case.
Easy2Siksha.com
Final Explanation (Story-like Wrap-up)
So, if we imagine this as Mr. A’s shop for the year:
• He started with goods, bought more, sold them, and after subtracting direct costs,
made a Gross Profit of Rs. 42,750.
• Then he spent on salaries, agent commissions, depreciation, advertisement, etc., but
also earned some extra income like rent and discount.
• After adjusting everything and even giving the manager his 5% commission, his Net
Profit came to Rs. 3,424.
• His Balance Sheet shows that the business is financially stable, with assets
(machinery, stock, debtors, etc.) matching the liabilities and capital.
• There is a small contingent liability (court case) but it does not affect the current
year’s accounts.
This is exactly how, in real life, businesses prepare final accounts: start with Trading Account
to find Gross Profit, then Profit & Loss Account to find Net Profit, and finally show the
position of the firm in the Balance Sheet.
SECTION-C
5. Mr. Mohan of Mangalore consigned goods costing Rs. 40,000 to his agent Ravi at a
Proforma invoice price of 20% profit on cost price. He paid Rs. 1,200 towards freight and
insurance. Ravi was allowed Rs. 550 for establishment expenses. He was entitled to a
commission of 3% and 2% del-credere commission. He was also allowed 10% of the net
profit as special commission after charging such commission.
Ravi took delivery of goods paying Rs. 400 as octroi. He sold of the goods at 50% profit on
cost. He reported that ½ of the balance of goods were destroyed by fire and a claim was
lodged for Rs. 6,000. It was settled at a discount of 25% and the claim amount was
received directly by the consignor. Ravi paid the amount due, by bank draft. Prepare the
necessary ledger account in the books of the consignor.
Ans: The Story Begins
Mr. Mohan from Mangalore was a businessman who decided to send some goods to his
trusted agent, Ravi, in another city. Just like in real life, consignments are always about
trust—one person (the consignor) sends goods, and the other (the consignee) takes care of
selling them. Here, Mohan is the consignor, and Ravi is the consignee.
Now, let’s unfold the events one by one, the way a teacher would slowly unravel a drama in
class.
Easy2Siksha.com
Sending Goods on Consignment
Mohan sent goods costing Rs. 40,000. But wait—he did not send them at plain cost. Instead,
he prepared a Proforma Invoice by adding 20% profit on cost price.
So, the invoice price = Cost + 20% of Cost
= Rs. 40,000 + 20% of 40,000
= Rs. 40,000 + Rs. 8,000
= Rs. 48,000
This means, in Ravi’s books, the goods will appear at Rs. 48,000, but in Mohan’s books, we
still remember their true cost is Rs. 40,000.
Along with the goods, Mohan also spent some money on freight and insurance = Rs. 1,200.
(Consignor’s expense → increases the cost of consignment).
Ravi Takes Delivery
When Ravi received the goods, he had to pay octroi charges of Rs. 400.
Since this is an expense directly related to the consignment, it will also be added to the cost
of consignment.
Ravi Sells the Goods
Ravi was a smart agent. He managed to sell 3/4th of the goods at a price giving 50% profit
on cost.
First, let’s calculate the cost of goods sold.
Total goods sent (at cost) = Rs. 40,000
3/4th of goods sold = 40,000 × 3/4 = Rs. 30,000
Now, selling price = Cost + 50% of cost
= Rs. 30,000 + (50% of 30,000)
= Rs. 30,000 + 15,000
= Rs. 45,000
So, Ravi sold the goods for Rs. 45,000.
What Happened to the Remaining Goods?
Now, 1/4th of goods were left = Rs. 10,000 (at cost).
Easy2Siksha.com
But—bad luck! Half of these goods were destroyed by fire.
So, goods lost in fire (at cost) = Rs. 10,000 × 1/2 = Rs. 5,000
Remaining goods with Ravi (unsold) = Rs. 5,000 (at cost).
Insurance Claim
Mohan had lodged a claim for the fire loss. The claim was for Rs. 6,000, but the insurance
company settled it at a 25% discount.
Claim admitted = Rs. 6,000 × 75% = Rs. 4,500
And since the claim was received directly by Mohan, it will not come into Ravi’s account—it
will appear in Mohan’s consignment account.
Ravi’s Commission
Ravi wasn’t working for free, of course. His earnings came in the form of commission. Let’s
calculate step by step.
• Ordinary Commission (3%)
On total sales = 3% of Rs. 45,000 = Rs. 1,350
• Del-credere Commission (2%)
On total sales (to cover risk of bad debts) = 2% of Rs. 45,000 = Rs. 900
• Special Commission (10% of Net Profit)
Now, this is the tricky part. For this, we need to calculate Net Profit.
Calculating Net Profit of Consignment
Let’s calculate in a proper style, step by step.
(a) Revenue from sales
= Rs. 45,000
(b) Value of closing stock
Unsold goods = Rs. 5,000 (at cost)
• Proportionate non-recurring expenses (freight + octroi)
Easy2Siksha.com
Freight & insurance paid by Mohan = Rs. 1,200
Octroi paid by Ravi = Rs. 400
Total = Rs. 1,600
This Rs. 1,600 should be distributed across all goods (worth Rs. 40,000).
So, loading per rupee = 1,600 ÷ 40,000 = 0.04 (4%)
For goods worth Rs. 5,000 (unsold), proportionate expense = 5,000 × 4% = Rs. 200
So, Closing stock value = 5,000 + 200 = Rs. 5,200
(c) Value of stock lost by fire (claim part)
Goods lost (5,000 cost + 200 expenses) = 5,200
Insurance claim received = 4,500
So, Loss due to fire = 700 (which will be charged to P&L of consignment).
(d) Total Revenue Considered
Sales + Closing Stock + Claim received
= 45,000 + 5,200 + 4,500
= 54,700
(e) Expenses
• Consignor’s expenses = 1,200
• Consignee’s expenses allowed = 400 (octroi) + 550 (establishment) = 950
• Commission (normal + del credere) = 1,350 + 900 = 2,250
Total expenses = 1,200 + 950 + 2,250 = 4,400
(f) Net Profit before Special Commission
Revenue – Expenses
= 54,700 – 44,000 (cost of goods +?) Wait. Let’s refine.
Better method:
Net Profit = Sales + Closing Stock + Claim – Cost of goods – Expenses
Easy2Siksha.com
= (45,000 + 5,200 + 4,500) – (40,000 + 1,200 + 950 + 2,250)
= 54,700 – 44,400
= 10,300
Now, Ravi’s special commission = 10% of Net Profit = 10% of 10,300 = Rs. 1,030
So, total commission = 1,350 + 900 + 1,030 = Rs. 3,280
Amount Due to Consignor
Now, Ravi will send the balance of sales proceeds after deducting his expenses and
commission.
Sales proceeds = Rs. 45,000
Less: Octroi (400) + Establishment (550) + Commission (3,280)
= 45,000 – 4,230 = Rs. 40,770
This is the amount Ravi remitted to Mohan by bank draft.
Ledger Accounts in Mohan’s Books
Now let’s prepare them in a neat exam-friendly format.
Consignment Account
Particulars
Amount
(Rs.)
Particulars
Amount
(Rs.)
To Goods sent on Consignment
40,000
By Sales (Ravi)
45,000
To Cash (Freight & Insurance)
1,200
By Consignment Stock
(closing)
5,200
To Ravi (Expenses – Octroi +
Establishment)
950
By Insurance Claim A/c
4,500
To Ravi (Commission)
3,280
To Profit transferred to P&L A/c
9,270
Total
54,700
Total
54,700
Ravi’s Account (Consignee A/c)
Particulars
Amount
(Rs.)
Particulars
Amount
(Rs.)
Easy2Siksha.com
To Consignment A/c (Sales
proceeds)
45,000
By Consignment A/c
(Expenses)
950
By Consignment A/c
(Commission)
3,280
By Bank (Remittance)
40,770
Total
45,000
Total
45,000
Goods Sent on Consignment A/c
Particulars
Amount (Rs.)
Particulars
Amount (Rs.)
To Consignment A/c
40,000
By Trading A/c
40,000
Insurance Claim A/c
Particulars
Amount
(Rs.)
Particulars
Amount
(Rs.)
To Consignment A/c (loss of
stock)
4,500
By Bank A/c
(Received)
4,500
6.(a) Difference between Joint Venture and Consignment.
(b) Difference between Joint Venture and Partnership.
Ans: Joint Venture vs. Consignment & Joint Venture vs. Partnership
A Different Beginning
Imagine you are sitting in a classroom, and the teacher doesn’t start the lecture with boring
definitions, but instead begins with a story:
Two friends, Ravi and Amit, are chatting at a tea stall. Ravi says,
“Bhai, I got a big order from a client in another city, but I don’t know anyone there. Can you
help me out? You have good contacts.”
Amit replies,
“Of course, I’ll help! I’ll sell your goods there and send you the money after deducting my
commission.”
Now, in this scene, Ravi and Amit are in a Consignment relationship. Ravi is the Consignor
(owner of goods), and Amit is the Consignee (agent who sells).
A few days later, another scene unfolds. Ravi and Amit meet again. This time Ravi says,
“Let’s do one thing—Diwali season is coming. Why don’t we both buy crackers from
Easy2Siksha.com
Sivakasi, share the costs, and then sell them here in our city? Whatever profit we earn, we
will divide.”
Here, Ravi and Amit are entering into a Joint Venture. Both invest, both take risks, and both
share profit or loss.
And if Ravi and Amit decide,
“Why don’t we open a permanent business together? We’ll name it RA Traders and run it
regularly,”
then that becomes a Partnership.
This small story already shows us the essence of the differences. Now let us go deeper,
point by point, but in a lively and student-friendly way.
(a) Difference between Joint Venture and Consignment
We will compare these two concepts step by step—like comparing two siblings who look
alike but have completely different personalities.
1. Basic Idea
• Consignment: One person (Consignor) sends goods to another (Consignee) to sell on
his behalf. Ownership of goods remains with the Consignor until they are sold.
• Joint Venture: Two or more persons agree to carry out a particular business activity
together for a short period and share the profit or loss.
In short: Consignment = agency relationship; Joint Venture = temporary partnership.
2. Ownership of Goods
• In Consignment, the Consignor is the owner of goods until they are sold. The
Consignee never becomes the owner.
• In Joint Venture, all co-venturers are joint owners of goods purchased for the
venture.
3. Risk Bearing
• In Consignment, risk of goods (theft, fire, unsold stock) lies with the Consignor
because he is the owner.
Easy2Siksha.com
• In Joint Venture, risk is shared among the venturers according to their agreement.
4. Relationship Between Parties
• Consignment: The relationship is like Principal and Agent.
• Joint Venture: The relationship is like Partners for a short-term project.
5. Investment
• Consignment: Consignee does not usually invest money. His job is only to sell goods.
Consignor bears the cost of purchasing goods.
• Joint Venture: Every co-venturer usually contributes money, resources, or effort.
6. Profit/Loss Sharing
• Consignment: Consignee only gets a commission (fixed or percentage). He does not
share profit or loss.
• Joint Venture: All venturers share profit or loss in agreed ratio.
7. Duration
• Consignment: Generally, it is of a continuing nature. A Consignee can sell goods for
Consignor repeatedly.
• Joint Venture: Purely temporary, made for one specific project or transaction, like
construction of a road, or purchase and sale of certain goods.
8. Accounting Treatment
• Consignment: Separate Consignment Account is prepared in the books of Consignor.
Consignee keeps Consignor’s account only.
• Joint Venture: Joint Venture Account is prepared to find profit or loss, which is then
divided among co-venturers.
9. Ownership of Unsold Goods
• Consignment: Unsold goods belong to Consignor and are returned to him.
Easy2Siksha.com
• Joint Venture: Unsold goods are jointly owned and divided among venturers.
10. Legal Recognition
• Consignment: It is a type of commercial arrangement but not recognized under the
Indian Partnership Act.
• Joint Venture: It is recognized as a kind of partnership for a temporary purpose.
Story Example:
Think of Consignment as when you give your clothes to a laundry shop. The clothes still
belong to you, the shopkeeper just provides a service and charges commission.
Think of Joint Venture as when you and your friend together decide to set up a food stall at
a college fest—you both bring ingredients, cook, sell, and share profit or loss.
Tabular Difference: Joint Venture vs Consignment
Basis
Joint Venture
Consignment
Nature
Temporary partnership for a specific
venture
Principal-Agent relationship
Ownership
Joint ownership of goods by all co-
venturers
Goods belong to Consignor
Risk
Shared by all venturers
Borne by Consignor
Investment
All co-venturers contribute
Only Consignor invests
Profit Sharing
Shared among venturers
Consignee gets only commission
Duration
Ends with completion of project
Can continue indefinitely
Unsold Goods
Jointly owned, divided
Belong to Consignor
Accounting
Joint Venture Account
Consignment Account
Legal
Recognition
Treated like partnership
Commercial arrangement, not
partnership
Easy2Siksha.com
(b) Difference between Joint Venture and Partnership
Now, let’s move to the second part.
Partnership and Joint Venture look like cousins. They share some similarities, but the
difference is in their time frame, intention, and continuity.
1. Basic Idea
• Joint Venture: A temporary partnership for a single project or transaction.
• Partnership: A long-term relationship to run a regular business.
2. Duration
• Joint Venture: Exists until the specific venture is completed, then automatically
ends.
• Partnership: Continues until dissolved, can go on for years or decades.
3. Nature of Business
• Joint Venture: Made for a specific purpose—like constructing a bridge, buying and
selling a ship, or running a temporary exhibition stall.
• Partnership: Formed to carry on a general, continuous business—like running a
shop, a company, or a law firm.
4. Agreement
• Joint Venture: Can even be oral, written, or implied. No formal registration is
compulsory.
• Partnership: Governed by the Indian Partnership Act, 1932, usually needs a proper
partnership deed (though not always mandatory).
5. Sharing of Profits and Losses
• Joint Venture: Shared according to agreement, or if not specified, then equally.
• Partnership: Shared as per the partnership deed, or equally in absence of deed.
Easy2Siksha.com
6. Scope of Business
• Joint Venture: Limited scope, ends when task is finished.
• Partnership: Unlimited scope, as long as partners want to run it.
7. Firm Name
• Joint Venture: Usually doesn’t operate under a separate firm name. The parties
carry business in their own names.
• Partnership: Operates under a firm name (e.g., ABC & Co.).
8. Legal Recognition
• Joint Venture: Recognized as a kind of partnership but not governed strictly by
Partnership Act unless specifically stated.
• Partnership: Fully governed by Indian Partnership Act.
9. Separate Books of Accounts
• Joint Venture: Books may or may not be maintained; sometimes just a
memorandum account is prepared.
• Partnership: Books of accounts are compulsory for smooth running.
10. Continuity
• Joint Venture: Ends with the completion of project.
• Partnership: Has continuity; even if one project ends, business continues with
others.
Story Example:
Suppose Ravi and Amit decide to start a Partnership firm of cloth trading. They open a
shop, hire staff, and run it continuously year after year.
But if Ravi and Amit only decide to import a container of cloth from China once and sell it
during festival season, that is a Joint Venture.
Easy2Siksha.com
Tabular Difference: Joint Venture vs Partnership
Basis
Joint Venture
Partnership
Nature
Temporary business agreement
Long-term continuous business
Duration
Ends with completion of project
Continues until dissolved
Legal
Framework
Not governed by Partnership Act
strictly
Governed by Indian Partnership Act,
1932
Business Scope
Limited to one venture
Wide and continuous
Firm Name
Usually no separate name
Operates under firm’s name
Agreement
May be oral or written
Usually written partnership deed
Accounts
Joint Venture Account, not
compulsory
Proper books of account maintained
Risk & Profit
Shared by venturers
Shared by partners
Continuity
Ends automatically
Continues even after one transaction
ends
Conclusion
• Consignment vs Joint Venture: Consignment is all about Principal-Agent relation,
while Joint Venture is about temporary partnership.
• Joint Venture vs Partnership: Joint Venture is temporary & specific, Partnership is
long-term & continuous.
So, next time when you and your friends discuss business, remember:
• If only one of you invests and the other just sells = Consignment.
• If both invest and share profit/loss for one project = Joint Venture.
• If you decide to keep working together permanently = Partnership.
This way, these concepts are not just bookish terms but real-life situations you can easily
relate to.
Easy2Siksha.com
SECTION-D
7. What do you mean by departmental accounts? Explain the basis of allocation of
expenses over various departments.
Ans: Departmental Accounts – A Simple Story
Imagine you walk into a big shopping mall. Inside that mall, there are many different
sections: one for clothes, another for shoes, another for electronics, and maybe even a
fancy food court. Now, although the mall is one big organization, each section is like its own
small business. The shoe section earns its own sales, has its own staff, and even consumes
electricity in its own way. Similarly, the electronics department may earn higher profits but
also needs more advertising.
This is where the idea of Departmental Accounts comes in.
In simple words:
Departmental Accounts means keeping separate accounts for each department in a
business, so that the profit and performance of each department can be known
individually.
It’s like checking which section of the mall is making the most money and which one is
struggling, instead of only knowing the profit of the entire mall.
Why do we need Departmental Accounts?
If the mall owner only prepared one combined account for the whole mall, he would know
how much total profit he earned, but he would have no idea which department is
performing well and which one is not.
For example:
• The clothing department may be making huge profits.
• The shoe department may be running at a loss.
• The food court may be just breaking even.
If he doesn’t keep departmental accounts, the loss of one department might get hidden
under the profit of another. That’s dangerous for decision-making. With departmental
accounts, he can clearly see where to invest more, where to cut costs, or even whether to
shut down a loss-making department.
So, departmental accounts are basically like a magnifying glass for the owner—it helps him
see each part of his business clearly.
Easy2Siksha.com
Allocation of Expenses – The Main Challenge
Now, here comes the tricky part. Since some expenses are directly related to one
department, while others are shared by all, how do we divide them fairly among
departments?
Let’s return to our mall example.
• The salary of salesmen in the clothing department clearly belongs only to the
clothing section. That’s easy.
• But what about electricity bills? The entire mall uses electricity. How do we divide
that among departments?
• Or what about the rent of the whole mall building? It’s not fair to dump all of it on
one department.
This is why accountants use different bases of allocation. It’s like finding a fair way to split a
pizza among friends—each person should get their rightful share depending on their
appetite.
Bases of Allocation of Expenses
Here are the common bases used to divide expenses among different departments:
1. Floor Area (Square Feet/Metres)
o Expenses like rent, lighting, heating, cleaning, and depreciation of building
are divided according to the floor space occupied by each department.
o Example: If the clothing section uses 40% of the space, then 40% of the rent
goes to it.
2. Sales Turnover (Sales Value)
o Expenses like advertising, carriage outwards, or sales commission are
divided according to the sales made by each department.
o Example: If the electronics section contributes 60% of sales, it should also
bear 60% of the advertising cost.
3. Number of Employees (or Wages)
o Costs like canteen expenses, staff welfare, or supervision costs are allocated
based on the number of workers in each department.
o Example: If the shoe department has 10 employees out of 50 total, it should
bear 20% of staff welfare expenses.
4. Direct Identification
o If an expense belongs clearly to one department, it is charged directly.
o Example: Salary of the shoe section manager goes only to the shoe
department.
5. Time Spent (Machine Hours or Labour Hours)
o Expenses like power, machine depreciation, or overtime wages can be
divided based on machine hours or labour hours used by each department.
Easy2Siksha.com
6. Value of Assets
o Expenses like insurance of machinery or depreciation of equipment are
divided according to the value of assets used by each department.
A Short Illustration
Suppose the mall pays ₹1,00,000 as total rent for the year. The floor space is:
• Clothing: 5,000 sq. ft.
• Shoes: 3,000 sq. ft.
• Electronics: 2,000 sq. ft.
Total = 10,000 sq. ft.
So the rent would be shared as:
• Clothing: (5,000/10,000) × 1,00,000 = ₹50,000
• Shoes: (3,000/10,000) × 1,00,000 = ₹30,000
• Electronics: (2,000/10,000) × 1,00,000 = ₹20,000
This method ensures fairness—each department pays according to the space it occupies.
Why is this Important?
1. Helps in measuring performance of each department.
2. Guides management in decision-making (expand, cut, or close departments).
3. Makes it easier to compare growth over time.
4. Encourages accountability among department heads.
Conclusion
To wrap up the story: Departmental Accounts are like giving each section of a shopping mall
its own report card. Just like students in a class get individual marks to show their strengths
and weaknesses, each department gets its own account to highlight its performance.
The allocation of expenses is like dividing household chores or splitting a pizza fairly—it
must be done logically and justly, depending on who uses what.
In short, departmental accounts not only bring transparency but also help businesses grow
smarter by showing the truth behind numbers.
Easy2Siksha.com
8. Moti Traders opened a Branch at Chennai on 1st July, 2018, Goods are sent from the
Head Office at cost plus 25%. The Branch is advised to deposit cash every day in bank in
Head Office account. From the following particulars prepare Branch Account in the Books
of Head Office for the period ending December 31, 2018. Petty cash at the Branch is
maintained on imprest system.
Rs.
Rs.
Cash sent to Branch for meeting
Petty Expenses
440
Cash received from Debtors
20,000
Furniture Purchased for the Branch
8,000
Discount allowed to Debtors
200
Goods sent to Branch at invoice Price
1,20,000
Goods returned by Debtors
(invoices price)
600
Expenses paid by Head Office : Rent
1,200
Bad Debts written off
50
Advertisement
800
Petty expenses paid by Branch
650
Salaries
4,000
Stock at cost on 31
st
December
(Excluding stock received form
debtors )
26,000
Insurance (Annual) up to 30-6-2019
300
Provide Depreciation of
Furniture at 10% p.a
Cash sales by the Branch
61,500
Credit sales during 6 months
26,000
Ans: The setup (who, where, when)
Moti Traders (Head Office) opened a new branch at Chennai on 1 July 2018. Head Office
keeps tight control:
• Goods are billed to the branch at cost + 25% (so the invoice/selling price includes a
25% mark-up on cost).
• The branch must deposit all cash daily into the H.O. bank account—so no
independent branch bank balance builds up.
• Only petty cash is kept at the branch on an imprest basis (small cash for little
expenses).
• We are asked to prepare the Branch Account in the H.O. books for 1 July to 31
December 2018, and explain it in a student-friendly way.
Step 1: Decode the price language (very important!)
“Goods sent to branch at invoice price = cost + 25%.”
• If cost = 100, invoice/selling price = 125.
• That means gross profit on sales = 25/125 = 20% of sales.
Easy2Siksha.com
• Also, cost = invoice ÷ 1.25.
We’ll use that to switch neatly between invoice figures and cost whenever we need.
Step 2: Sort the given numbers into buckets
Sales & debtors:
• Cash sales = ₹61,500
• Credit sales (6 months) = ₹26,000
• Sales returns from debtors (invoice) = ₹600
• Cash received from debtors = ₹20,000
• Discount allowed = ₹200
• Bad debts = ₹50
Goods & stock:
• Goods sent to branch (invoice) = ₹1,20,000
→ at cost = 1,20,000 ÷ 1.25 = ₹96,000
• Closing stock (given at cost) on 31 Dec = ₹26,000
Note: the question says this excludes the stock that came back from customers as
sales returns.
Sales returns (invoice) = ₹600 → at cost = 600 ÷ 1.25 = ₹480
So, actual closing stock at cost = 26,000 + 480 = ₹26,480.
Expenses (charge to P&L unless they’re capital):
• Rent = ₹1,200
• Advertisement = ₹800
• Salaries = ₹4,000
• Insurance (annual to 30-06-2019) = ₹300
→ period is 6 months (Jul–Dec), so expense = 300 × 6/12 = ₹150 and prepaid = ₹150
• Petty expenses paid by branch = ₹650
• Discount allowed = ₹200 (selling expense)
• Bad debts = ₹50 (selling expense)
Fixed asset at branch:
• Furniture purchased for branch = ₹8,000 (capital)
• Depreciation @10% p.a. for 6 months = 8,000 × 10% × 6/12 = ₹400
→ Closing furniture WDV = 8,000 − 400 = ₹7,600
Petty cash detail:
Easy2Siksha.com
• “Cash sent for petty expenses” = ₹440; “petty expenses paid” = ₹650.
Under an imprest system, the expense is what we charge to P&L (₹650). The
reimbursement (₹440) is simply how the cash float is refilled and doesn’t affect
profit by itself. Any small timing gap only affects the tiny petty-cash balance, not the
profit.
Step 3: Work out debtors (control reconciliation)
This makes sure our credit sales piece is watertight:
Opening debtors (new branch) = 0
Add: Credit sales = 26,000
Less: Sales returns = 600
Less: Cash received = 20,000
Less: Discount allowed = 200
Less: Bad debts = 50
Closing debtors = 26,000 − 600 − 20,000 − 200 − 50 = ₹5,150
Step 4: Find Gross Profit first (the neat way)
Total sales = Cash sales + Credit sales − Returns
= 61,500 + 26,000 − 600 = ₹86,900
We saw the mark-up implies Gross Profit = 20% of sales.
So, GP = 20% × 86,900 = ₹17,380.
Double-check with cost of goods sold (for your confidence):
• Goods received at cost = ₹96,000
• Closing stock at cost = ₹26,480
• So COGS (cost of goods sold) = 96,000 − 26,480 = ₹69,520
• Sales − COGS = 86,900 − 69,520 = ₹17,380 (matches)
Step 5: Charge all branch expenses to get Net Profit
Operating & selling expenses for the 6 months:
• Rent = 1,200
• Advertisement = 800
• Salaries = 4,000
• Insurance (expense for 6 months) = 150
Easy2Siksha.com
• Petty expenses = 650
• Discount allowed = 200
• Bad debts = 50
• Depreciation on furniture (6 months) = 400
Total expenses = 1,200 + 800 + 4,000 + 150 + 650 + 200 + 50 + 400 = ₹7,450
Therefore, Branch Net Profit = Gross Profit − Expenses
= 17,380 − 7,450 = ₹9,930
That’s the branch’s result for July–December 2018.
Step 6: Present it as a Branch Account (in H.O. books)
Think of the Branch Account as a “big summary T-account” combining trading and P&L
effects plus the branch assets at closing. In the H.O. books (Debtors System), a clean, exam-
friendly layout is:
Branch Account (Chennai) in the books of Head Office
For the half-year ended 31 December 2018
Dr.
Cr.
To Goods sent to Branch (at cost)
96,000
To Rent
1,200
To Advertisement
800
To Salaries
4,000
To Insurance (expense, 6 months)
150
To Petty Expenses
650
To Discount allowed
200
To Bad Debts
50
To Furniture sent to Branch (capital)
8,000
A quick “why this works” recap (story logic)
• Head Office invests stock (at cost) and assets (furniture) in the branch.
• The branch sells (cash + credit), sends the cash back daily, and ends the period with
some assets: closing stock, closing debtors, prepaid insurance, and the furniture
WDV.
• The difference after charging all period expenses is the branch’s profit that belongs
to Head Office.
Easy2Siksha.com
• Because the mark-up is known, we can get Gross Profit quickly as 20% of net sales
and then subtract the sensible list of expenses for a clean, exam-ready Net Profit =
₹9,930.
Final box to remember (exam punch-lines)
• When goods are at cost + 25%, gross profit is 20% of sales.
• Sales returns from debtors reduce both sales/debtors and increase closing stock (at
cost).
• Insurance paid for a longer period? Split into expense (current months) and prepaid
(future months).
• Furniture depreciation is to the branch P&L, and we show closing WDV on the credit
of Branch Account.
• Under imprest, treat petty cash expenses as period cost; reimbursements don’t
change profit.
Answer in one line:
Branch Net Profit (July–Dec, 2018) = ₹9,930—shown as the balancing figure on the credit
side of the Branch Account and transferred to Head Office P&L.
“This paper has been carefully prepared for educational purposes. If you notice any mistakes or
have suggestions, feel free to share your feedback.”
