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GNDU Question Paper-2022
Bachelor of Commerce
(B.Com) 1
st
Semester
FINANCIAL ACCOUNTING
Time Allowed: Three 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. Write brief notes on:
(i) Nature of Financial Accounting.
(ii) Difference between Capital and Revenue Expenditure.
2. Explain any five concepts of accounting along with their implications.
SECTION-B
3. Explain:
(i) Incomes in Voyage Account.
(ii) What is provision for bad debts? How is it created? How is it shown in Profit and Loss
Account and Balance Sheet?
4. X Shipping Company Ltd. Bombay acquired a ship costing Rs. 50 lakhs on 1st December,
2015 and got her insured @6%. The freight was also insured at the same rate, the amount.
of policy being Rs. 30,00,000. During the four months to 31st March, 2016, the ship made
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one round trip to London and was half way through the second trip (single way) to
London. It carried the following cargo:
To London 5,000 tonnes @ Rs. 100 per ton
From London 4,000 tonnes @ Rs. 80 per ton
To London 5,000 tonnes @ Rs. 88 per ton
Primage was 5% and address commission was 10%.The expenses incurred were:
Rs.
Salaries and Wages 1,00,000
Fuel and Power 1,30,000
Port Charges 20,000
Stevedoring Charges 84,000
(Rs. 6 per ton)
Store Purchases 35,000
Stock of stores on 31st March, 2016 5,000
The ship is subject to depreciation @6% per annum on original cost.
Prepare Voyage account to ascertain Profit or Loss for the period from 1st December, 2016
to 31st March, 2016.
SECTION-C
5. Write notes on:
(i) Account Sales and Proforma Invoice
(ii) Consignee's Commission.
6. Sachin and Sehwag decided to start business agreeing to share profit and losses in the
ratio 2: 1. On 1st January Sachin purchased goods at a cost of Rs. 72,000 and half of the
goods handed over to Sehwag. On January 15, he again purchased goods worth Rs. 24,000
and incurred expenses of Rs. 400. On January 15, Sehwag purchased goods costing Rs.
45,000 and on the same day he sent to Sachin goods worth Rs. 18,000. He incurred an
expense of Rs. 1,100.
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On January 20, Sachin in order to help Sehwag sent Rs. 20,000 to him. Both parties sold
goods at a profit of 25% on sales and both were entitled to a del credere commission of 5%
of the sale. On June 30, Sachin had unsold stock of Rs. 15,000. Of these goods costing Rs.
6,000 were taken over by him and the remainder sold for Rs. 10,000. Sehwag was able to
sell away complete goods excepting goods costing Rs. 3,000 which were badly demaged and
were treated as unsaleable. Rs. 4,000 owing to Sachin was unrecoverable.
On June 30, parties decided to close the books. You are required to prepare important
ledger accounts in the books of both the parties.
SECTION-D
7. What is Departmental Accounting?. How are interdepartmental transactions dealt
with?
8. Alok Ltd. invoices goods to its Coimbatore branch at selling price which is cost plus 25%.
From the following particulars prepare accounts under Stock and Debtors System:
Rs.
Stock at Branch (1-4-2015)
(Invoice Price)
7,500
Branch Debtors (1-4-2015)
13,100
Goods from Head Office (Invoice price)
50,400
Cash Sales
16,750
Total Sales
50,750
Branch Debtors (31-3-2016)
16,550
Stock at Branch (31-3-2016)
6,950
Allowances to Debtors
160
Goods returned to Head Office
350
Goods returned by Debtors
290
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Discount allowed
1,200
Bad Debts
300
Rent and Rates
900
Salaries and Wages
3,000
Trade Expenses
650
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GNDU Answer Paper-2022
Bachelor of Commerce
(B.Com) 1
st
Semester
FINANCIAL ACCOUNTING
Time Allowed: Three 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. Write brief notes on:
(i) Nature of Financial Accounting.
(ii) Difference between Capital and Revenue Expenditure.
Ans: 󷉃󷉄 A Fresh Beginning: The Shopkeeper’s Story
Long ago in a small town, there lived a shopkeeper named Ramesh. He had a little grocery
shop where people came daily to buy rice, sugar, and spices. Business was good, but
Ramesh had a big problem—he never kept proper records.
At the end of the month, he would sit scratching his head:
• “How much profit did I make?”
• “Did I spend too much on furniture or was it just regular expenses?”
• “If someone asks me about my financial position, what should I say?”
One day, his friend, an accountant, visited and said:
“Ramesh, business is like telling a story, but numbers are its language. If you want to know
your true business story, you need Financial Accounting. And if you want to manage your
money wisely, you must also learn to separate Capital Expenditure from Revenue
Expenditure. Otherwise, your accounts will be a jumble!”
This is where our real lesson begins.
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(i) 󷆫󷆪 Nature of Financial Accounting
Think of Financial Accounting as a camera. It doesn’t create the scene—it only captures
reality. Just like a camera shows us what is already happening, financial accounting records
all the financial activities of a business.
Let’s break it down in simple steps:
1. Historical in Nature
Financial accounting is like a diary of the past. Imagine Ramesh writing down yesterday’s
sales, yesterday’s purchases, and yesterday’s expenses. He can’t write about the future
because accounting only records what has already happened.
Example: If Ramesh bought 10 bags of rice today, accounting records it today, not when he
plans to buy next week.
2. Based on Transactions
Nothing is recorded without proof. Just like you can’t post a photo without actually clicking
one, in accounting, you can’t record something without a transaction.
• If Ramesh promises his cousin he’ll “maybe” buy wheat later, that’s not recorded.
• But if he pays ₹5,000 for wheat today, that’s recorded.
3. Monetary Measurement
Accounting only talks in the language of money. If a loyal customer gives Ramesh blessings
for his good service, it’s valuable but can’t be recorded. But if that same customer pays
₹1,000, that is recorded because it has monetary value.
4. Objective and Evidence-based
Imagine if Ramesh told his accountant, “I think my shop is worth 10 lakh rupees because it
feels big.” The accountant will say: “Show me documents, bills, and records.”
Financial accounting doesn’t rely on feelings. It relies on invoices, bills, receipts, and
vouchers.
5. Periodic Reporting
At the end of every period (say a month, quarter, or year), financial accounting prepares
reports like the Profit and Loss Account and Balance Sheet. These are like the report cards
of a business—showing whether Ramesh has passed with flying colors (profit) or needs to
improve (loss).
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6. Communication Tool
Accounting is called the language of business. Just as Hindi, English, or Tamil helps us
communicate with people, accounting helps businesses communicate with outsiders—like
investors, banks, government, or shareholders.
7. Double-Entry System
Every story has two sides, and every transaction has two effects.
Example: If Ramesh buys a fridge for ₹20,000:
• His cash decreases.
• His asset (fridge) increases.
This is the principle of Debit and Credit.
8. Limitations of Financial Accounting
But like every story, there are limitations:
• It only records in money terms, not qualitative factors like “goodwill” from happy
customers.
• It shows the past, not the future.
• It may not reflect the real market value of assets because it uses the historical cost
principle.
󷵻󷵼󷵽󷵾 In short: Financial accounting is a systematic process of recording, summarizing, and
presenting financial transactions to show the financial performance and position of a
business.
(ii) 󷇴󷇵󷇶󷇷󷇸󷇹 Difference Between Capital and Revenue Expenditure
Now, let’s move to the second part of our story.
Ramesh often got confused: Should he treat every expense the same way? His accountant
explained:
“There are two types of expenditures: Capital and Revenue. Treating them correctly is very
important, or your profit figures will be misleading.”
Let’s understand this with examples.
1. Capital Expenditure: The Long-Term Investment
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Capital expenditure is like planting a mango tree. You don’t get fruits today, but you’ll enjoy
them for many years.
󷵻󷵼󷵽󷵾 Definition: Capital expenditure is money spent to acquire or improve fixed assets (like
land, buildings, furniture, machinery) that will benefit the business for more than one
accounting year.
Examples:
• Buying a delivery van for the grocery shop.
• Constructing a new godown.
• Installing air-conditioners in the shop.
• Purchasing furniture.
These are not daily expenses; they are investments for the future.
2. Revenue Expenditure: The Day-to-Day Spending
Revenue expenditure is like buying vegetables for daily cooking. You spend today, and the
benefit is consumed immediately or within the current year.
󷵻󷵼󷵽󷵾 Definition: Revenue expenditure is money spent on the day-to-day running of the
business to maintain operations and earn revenue.
Examples:
• Paying salaries to workers.
• Buying stock of rice and sugar.
• Paying electricity bills.
• Repairing the delivery van.
These expenses keep the business running smoothly.
3. Key Differences in Story Form
Basis
Capital Expenditure
Revenue Expenditure
Nature
Money spent to acquire/upgrade
long-term assets
Money spent on day-to-day
operations
Benefit
Long-term (more than one year)
Short-term (within one year)
Example
Buying a building
Paying rent
Accounting
Treatment
Shown as an asset in the Balance
Sheet
Shown as an expense in the
Profit & Loss A/c
Purpose
To increase earning capacity
To maintain earning capacity
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4. Illustration: The Bicycle Example
Imagine you bought a bicycle:
• Buying the bicycle = Capital Expenditure (you’ll use it for years).
• Buying oil to keep it moving smoothly = Revenue Expenditure (consumed quickly).
• Repairing a puncture = Revenue Expenditure (short-term).
• Adding a new motor to convert it into an e-bike = Capital Expenditure (improves
capacity).
5. Why the Difference Matters
If Ramesh mistakenly treated his “Capital Expenditure” as “Revenue Expenditure,” his profit
would look too small.
Example: He buys furniture worth ₹1,00,000. If he writes it as an expense, it reduces this
year’s profit unnecessarily. But since it’s a long-term asset, it should be shown in the
Balance Sheet.
Thus, distinguishing between the two is necessary for correct profit calculation and fair
financial reporting.
󽄻󽄼󽄽 Conclusion: The Moral of the Story
Through the eyes of our shopkeeper Ramesh, we learned two great lessons:
1. Nature of Financial Accounting – It is the diary and language of business that records
past transactions in monetary terms, prepares reports, and communicates financial
performance to stakeholders.
2. Difference between Capital and Revenue Expenditure – One is like planting a tree
(long-term investment), and the other is like buying vegetables (day-to-day expense).
Just like a story becomes meaningful when we know the difference between the main plot
and side events, accounting becomes meaningful only when we separate capital and
revenue expenditure.
Accounting may look like numbers, but behind every number, there is a human story of
efforts, investments, and growth.
So, the next time you see a Balance Sheet or Profit & Loss Account, don’t just see
numbers—see the story of a business told in the language of accounting.
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2. Explain any five concepts of accounting along with their implications.
Ans: 󷇴󷇵󷇶󷇷󷇸󷇹 The Story Begins
Once upon a time, there was a small shopkeeper named Aman. He ran a tiny stationery
shop in his town. At first, Aman thought accounting was nothing more than noting how
much money he received and how much he spent. But as his shop grew, confusion started.
Sometimes he forgot how much stock he had, sometimes he mixed up his personal
expenses with shop money, and sometimes he didn’t know if he was making profit or loss at
all.
One day, an old teacher visited Aman’s shop and explained:
"Business, my dear, is like a storybook, and accounting is the language that writes this story.
To understand and narrate this story clearly, you need to follow certain concepts."
Aman was curious, and that’s how he was introduced to five golden accounting concepts.
Let’s explore them one by one, with their implications, like chapters of a novel.
1. Business Entity Concept
Think about Aman again. He sometimes used his shop’s money to buy gifts for his family.
Later, while preparing accounts, he got confused: “Was this shop money or my personal
money?”
That’s when the teacher told him: “Aman, your shop and you are two different characters in
this story.”
󷵻󷵼󷵽󷵾 Meaning: According to the Business Entity Concept, a business is considered separate
from its owner. Even if Aman owns the shop, the shop’s money is not his personal money.
󷵻󷵼󷵽󷵾 Implication: This concept ensures that personal expenses don’t get mixed with business
expenses. For example, if Aman withdraws ₹5,000 from the shop to buy a personal phone, it
should be recorded as Drawings, not as a business expense. This keeps accounts clean and
gives the true picture of the business performance.
2. Going Concern Concept
One day, Aman worried: “What if I have to close the shop next year? Should I sell my
furniture at scrap value in my accounts today?”
The teacher smiled and said: “Unless you have a clear reason to shut down, always assume
your business will continue for the foreseeable future.”
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󷵻󷵼󷵽󷵾 Meaning: The Going Concern Concept assumes that the business will continue
operating indefinitely and not shut down suddenly.
󷵻󷵼󷵽󷵾 Implication: Because of this, Aman records his furniture at its original cost minus
depreciation every year instead of valuing it as if it were to be sold tomorrow. Similarly,
loans and liabilities can be spread over years, since the business is expected to survive long
enough to repay them. This concept makes financial statements more realistic.
3. Money Measurement Concept
Aman’s customers often praised him for his honesty and friendly nature. One even said,
“Your smile is worth more than money!” Aman wondered, “Should I record this in my
accounts?”
The teacher chuckled: “Emotions, honesty, and goodwill shown by people can’t be measured
in numbers. Only those events which can be expressed in money should enter your books.”
󷵻󷵼󷵽󷵾 Meaning: The Money Measurement Concept states that only transactions measurable
in monetary terms are recorded in the accounts.
󷵻󷵼󷵽󷵾 Implication: Aman will record his sales, purchases, salaries, and rent in terms of rupees,
but not the goodwill he earns by being polite. Although those qualities help his business
indirectly, accounting does not capture them. This keeps financial records measurable,
comparable, and reliable.
4. Accounting Period Concept
At the end of every month, Aman would ask: “Am I making a profit or not?” But his teacher
explained: “The life of a business is continuous, but for checking performance, we divide it
into small periods—like chapters in a book.”
󷵻󷵼󷵽󷵾 Meaning: The Accounting Period Concept means business life is divided into equal
periods (commonly a year, but sometimes quarterly or monthly) to measure performance.
󷵻󷵼󷵽󷵾 Implication: Aman’s stationery shop may run for decades, but each year he will prepare
a Profit & Loss Account and a Balance Sheet. This helps him know whether the year was
good or bad and allows comparisons with previous years. Also, taxes can be calculated
correctly because the government cannot wait for the business to close to know its profits!
5. Cost Concept
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One day Aman bought land for ₹2,00,000. After a few years, the market value rose to
₹5,00,000. Aman proudly said, “I’ll show ₹5,00,000 in my accounts!”
The teacher shook his head: “In accounting, we record assets at their purchase price, not at
current market price, unless specifically required.”
󷵻󷵼󷵽󷵾 Meaning: The Cost Concept states that assets are recorded at their original purchase
price, including all costs incurred to bring them to usable condition, and not at fluctuating
market values.
󷵻󷵼󷵽󷵾 Implication: Even if Aman’s land value increases or decreases, in his books it will remain
at ₹2,00,000 (until sold). This gives consistency and prevents manipulation of accounts
based on changing market prices.
󷊄󷊅󷊆󷊇󷊈󷊉 Wrapping Up the Story
By now, Aman understood that accounting wasn’t just about numbers—it was about
discipline, clarity, and honesty.
• Business Entity Concept taught him to separate his shop’s money from his own.
• Going Concern Concept gave him confidence to plan for the future.
• Money Measurement Concept reminded him to record only what can be measured.
• Accounting Period Concept helped him check progress regularly.
• Cost Concept kept his accounts consistent and reliable.
With these golden principles, Aman’s shop began to run smoothly, and anyone looking at his
books could clearly understand the story of his business.
󷇴󷇵󷇶󷇷󷇸󷇹 Final Note
Accounting concepts are like the traffic rules of the financial world. Just like roads would be
chaotic without rules, business accounts would be meaningless without these concepts.
They not only help the businessman keep track of performance but also build trust among
investors, banks, and even the government.
So, next time you hear about accounting concepts, don’t think of them as boring definitions.
Imagine them as guiding principles that keep the story of every business alive, clear, and
trustworthy.
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SECTION-B
3. Explain:
(i) Incomes in Voyage Account.
(ii) What is provision for bad debts? How is it created? How is it shown in Profit and Loss
Account and Balance Sheet?
Ans: 󷆫󷆪 Setting the Stage
Imagine you are part of a shipping company in the 19th century, when sea voyages were the
main way of transporting goods across countries. Every ship that sailed for trade had a
special account called a Voyage Account. This account was like a diary where the captain
and the accountants would carefully write down all the money spent and earned during that
particular journey. At the end of the trip, this diary helped everyone know whether the
voyage made a profit or suffered a loss.
On the other hand, when you come back from the adventurous seas and return to your
normal business life, you face another issue: sometimes the customers who bought goods
from you on credit may not pay back the money. To prepare for this uncertainty, businesses
create something known as Provision for Bad Debts. This is like keeping an umbrella ready
before the rain starts—it doesn’t mean it will rain, but if it does, you are safe.
Let’s now dive into the two parts of your question one by one.
(i) Incomes in Voyage Account 󺟐󺟑󺟒󺟓󺟔󺟕󺟖󺟗󺟜󺟘󺟙󺟚󺟛󹱩󹱪
A Voyage Account records both the expenses of the journey (like fuel, wages, repairs) and
the incomes (the money earned). Since the question asks specifically about incomes, let’s
focus on the happy side of the story—the money coming in.
So, what are the main incomes of a Voyage Account? Imagine yourself as the captain of the
ship. Where will you earn from?
1. Freight
Freight is the amount received from carrying goods of other traders from one port to
another. For example, if a cotton merchant in India wants to send his goods to
England, he will pay the shipping company for transporting the cotton. That payment
is called freight. It’s the biggest source of income for a voyage.
2. Passage Money
In those days (and even now in cruise ships), some ships carried not just goods but
also passengers. The money paid by passengers for traveling is called passage
money. Imagine wealthy families paying to sail across the sea—it was a great income
for shipping companies.
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3. Primage
Primage is like a small bonus or commission that traders sometimes give to the ship’s
captain or owners for safely delivering their goods. It’s not compulsory, but a kind of
goodwill gesture. Think of it as a “thank you tip” for carrying goods with care.
4. Other Receipts
Sometimes, ships earn income by carrying mail, renting space on the deck, or from
services like storage. These additional receipts are also recorded as incomes in the
Voyage Account.
󷵻󷵼󷵽󷵾 At the end of the voyage, the total incomes are compared with the total expenses. If
incomes are greater, the voyage made a profit; if expenses are greater, the voyage suffered
a loss.
(ii) Provision for Bad Debts 󷈓󷈔󷈑󷈕󷈒󺫨󺫩󺫪
Now let’s move from the sea to the everyday market.
Imagine you are a shopkeeper. Many customers come to your shop, and some buy goods on
credit, saying, “I’ll pay you next month.” You trust them and make the sale. But what if, after
a month, one of them never comes back? Another one may delay for years. Suddenly, you
realize that some of your credit sales will never be collected. These unpaid amounts are
called bad debts.
But here’s the twist: as a businessman, you cannot always know exactly which customers
won’t pay. To stay safe, you make an estimate. That estimate is called Provision for Bad
Debts.
How is it created?
At the end of the year, the accountant looks at the total debtors (customers who owe
money) and thinks: “Hmm… maybe around 5% of this amount may not come back.” So, he
creates a provision by charging it to the Profit and Loss Account.
For example:
• Suppose total debtors = ₹1,00,000
• Expected bad debts = 5% = ₹5,000
• The accountant will reduce ₹5,000 as an expense and call it Provision for Bad Debts.
This way, even if the money is lost in the future, the business is already prepared.
How is it shown in the Profit and Loss Account?
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Provision for Bad Debts is shown on the debit side of the Profit and Loss Account because it
is treated as an expense. It reduces the overall profit just like rent, salary, or other expenses.
How is it shown in the Balance Sheet?
When you prepare the Balance Sheet, you will not directly subtract bad debts from debtors.
Instead, you show debtors first, then subtract the provision.
Example:
• Sundry Debtors = ₹1,00,000
• Less: Provision for Bad Debts = ₹5,000
• Net amount shown = ₹95,000
This way, the Balance Sheet shows only the realizable value of debtors—the money you
actually expect to collect.
󷇴󷇵󷇶󷇷󷇸󷇹 Wrapping it Up Like a Story
So, in summary:
• A Voyage Account is like the story of a ship’s journey. The incomes in it—freight,
passage money, primage, and other receipts—are the rewards the ship earns for its
hard work across the seas.
• A Provision for Bad Debts is like a wise businessman’s precaution against
uncertainty. Just as a sailor carries life jackets before the storm, a businessman
creates provisions so that bad debts do not sink his profits.
The two concepts, though different in setting—one on the high seas and the other in
everyday markets—teach us the same lesson: in business, we must always record carefully,
prepare wisely, and stay ready for both profits and risks.
4. X Shipping Company Ltd. Bombay acquired a ship costing Rs. 50 lakhs on 1st December,
2015 and got her insured @6%. The freight was also insured at the same rate, the amount.
of policy being Rs. 30,00,000. During the four months to 31st March, 2016, the ship made
one round trip to London and was half way through the second trip (single way) to
London. It carried the following cargo:
To London 5,000 tonnes @ Rs. 100 per ton
From London 4,000 tonnes @ Rs. 80 per ton
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To London 5,000 tonnes @ Rs. 88 per ton
Primage was 5% and address commission was 10%.The expenses incurred were:
Rs.
Salaries and Wages 1,00,000
Fuel and Power 1,30,000
Port Charges 20,000
Stevedoring Charges 84,000
(Rs. 6 per ton)
Store Purchases 35,000
Stock of stores on 31st March, 2016 5,000
The ship is subject to depreciation @6% per annum on original cost.
Prepare Voyage account to ascertain Profit or Loss for the period from 1st December, 2016
to 31st March, 2016.
Ans: Picture this like a short sea-adventure bookkeeping story. Our hero is a ship bought on
1 December 2015 for ₹50,00,000. In the four months up to 31 March 2016, she sails from
Bombay to London and back once (a full round trip), and then sets off again toward London
and is halfway there by 31 March. Your job is to tell whether this four-month voyage
chapter earned a profit or a loss—and how much.
(Quick note: the last line of the question says “from 1 December, 2016 to 31 March, 2016.”
That’s clearly a typo. All the data point to 1 Dec 2015 to 31 Mar 2016 (four months), and
that’s what I’ve used.)
Step 1: Understand what gets counted as “earned”
In voyage accounting, we credit freight actually earned for the period. The first outward and
the first return legs are fully completed within these four months—so 100% of that freight is
earned. The second outward leg is half complete, so we recognise 50% of that freight now;
the balance is “unearned freight” for the next period.
Step 2: Tally the freight (your core income)
Given freight rates and quantities:
• To London (first time): 5,000 tonnes × ₹100 = ₹5,00,000
• From London (return): 4,000 tonnes × ₹80 = ₹3,20,000
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• To London (second time, halfway): 5,000 tonnes × ₹88 = ₹4,40,000 for the full leg;
50% earned = ₹2,20,000
Add the earned parts:
• Total freight earned = 5,00,000 + 3,20,000 + 2,20,000 = ₹10,40,000
Now, ships often charge a small extra on top of freight called primage (think of it like a
customary addition to freight)—here that’s 5% of freight:
• Primage = 5% of ₹10,40,000 = ₹52,000
So, gross freight-related income = freight + primage = ₹10,40,000 + ₹52,000 = ₹10,92,000.
Step 3: Knock off the agent’s cut (address commission)
Address commission is a standard deduction against what you earn from freight. Usually it’s
charged on freight + primage. The rate here is 10%.
• Address commission = 10% of (₹10,40,000 + ₹52,000) = 10% of ₹10,92,000 =
₹1,09,200
We’ll show this on the debit (expense) side of the Voyage Account.
Step 4: Collect all operating expenses for the four months
These are straightforward period costs (Dec–Mar):
• Salaries & Wages: ₹1,00,000
• Fuel & Power: ₹1,30,000
• Port Charges: ₹20,000
• Stevedoring Charges: ₹84,000
You’re told stevedoring is ₹6 per ton; with 14,000 tonnes handled in total (5,000 + 4,000 +
5,000), that checks out: 14,000 × 6 = ₹84,000. The second outward leg’s loading has already
happened in Bombay, so it’s fair that stevedoring for that leg is included now.
• Stores: We use consumption, not purchases.
Purchases = ₹35,000; Closing stock = ₹5,000 → Consumption = ₹30,000
Step 5: Time-related costs (insurance and depreciation)
The ship (hull) is insured at 6% (this is typically an annual rate). For four months (Dec to
Mar), premium is proportionate:
• Hull insurance premium = 6% × ₹50,00,000 × (4/12) = ₹1,00,000
Freight is also insured at the same rate; policy amount given is ₹30,00,000:
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• Freight insurance premium = 6% × ₹30,00,000 × (4/12) = ₹60,000
Depreciation on the ship is also 6% p.a. on original cost:
• Depreciation = 6% × ₹50,00,000 × (4/12) = ₹1,00,000
Step 6: Add up the expenses
Let’s list every debit (expense) item for the Voyage Account:
• Salaries & Wages: ₹1,00,000
• Fuel & Power: ₹1,30,000
• Port Charges: ₹20,000
• Stevedoring Charges: ₹84,000
• Stores consumed: ₹30,000
• Hull insurance: ₹1,00,000
• Freight insurance: ₹60,000
• Depreciation: ₹1,00,000
• Address commission: ₹1,09,200
Total expenses = ₹7,33,200
Step 7: Compute the profit
You’ve already got income:
• Total income (freight + primage) = ₹10,92,000
Subtract total expenses:
• Voyage Profit = ₹10,92,000 − ₹7,33,200 = ₹3,58,800
That’s the neat bottom line for the four months.
Voyage Account (1 Dec 2015 to 31 Mar 2016)
Dr. (Expenses)
• Salaries & Wages ……………………………………… ₹1,00,000
• Fuel & Power ……………………………………………… ₹1,30,000
• Port Charges ……………………………………………… ₹20,000
• Stevedoring Charges ………………………………… ₹84,000
• Stores Consumed ……………………………………… ₹30,000
• Insurance—Hull (6% p.a., 4 months) …………… ₹1,00,000
• Insurance—Freight (on ₹30,00,000 @ 6% p.a., 4 months) … ₹60,000
• Depreciation (6% p.a., 4 months) ………………… ₹1,00,000
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• Address Commission (10% of Freight+Primage) … ₹1,09,200
Total Expenses ……………………………………… ₹7,33,200
Cr. (Income)
• Freight earned:
• To London (5,000 t × ₹100) ………………… ₹5,00,000
• From London (4,000 t × ₹80) ……………… ₹3,20,000
• To London—halfway (50% of 5,000 t × ₹88) … ₹2,20,000
Total Freight ………………………………………… ₹10,40,000
• Primage @ 5% on freight …………………………… ₹52,000
Total Income ………………………………………… ₹10,92,000
Profit transferred to General P&L ……………… ₹3,58,800
Why this works (in plain, story-like logic)
• Think of freight as the fee you earn for carrying cargo. You only truly “earn” it as you
complete the trip. That’s why we counted full amounts for the completed legs and
half for the leg that’s only halfway done.
• Primage is like a traditional add-on (5%) to freight—it sweetens the income a little.
• Address commission is the agent’s bite out of your freight earnings; we deduct it as
an expense.
• Operating costs (wages, fuel, port fees, stevedoring) are what it costs to run the ship
and handle the cargo.
• Stores are treated on a consumption basis (what you used), not what you bought—
so we subtract the closing stock from purchases.
• Insurance and depreciation are time-based; you don’t pay (or consume) a whole
year’s worth when you’ve only sailed for four months. So we prorate them for 4/12
of the year.
In the end, after braving fuel bills, port dues, the agent’s commission, and the ticking clocks
of insurance and depreciation, your ship still sails back with a smile: ₹3,58,800 profit for the
period. That’s a tidy result for four months of smart sailing and sharper accounting.
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SECTION-C
5. Write notes on:
(i) Account Sales and Proforma Invoice
(ii) Consignee's Commission.
Ans: A Fresh Beginning
Imagine you run a small business from your hometown. Let’s say you are a manufacturer of
beautiful handmade wooden toys. The problem is, your toys have great demand in another
city, but you cannot go there every week to sell them yourself.
So, what do you do? You send your toys to a trusted shopkeeper in that city — he will
display them, sell them on your behalf, and then send you the money after deducting his
charges. This trusted shopkeeper is called the consignee, while you, the owner of the goods,
are the consignor.
In this relationship, two very important documents and one key expense come into play:
1. Account Sales
2. Proforma Invoice
3. Consignee’s Commission
Let’s now explore each of these in detail, step by step, with the same toy story continuing
throughout.
(i) Account Sales and Proforma Invoice
1. Account Sales – Like a Report Card of Sales
Think about your school days. At the end of the term, your teacher used to give you a report
card — showing marks subject-wise, teacher’s remarks, and your overall performance.
Similarly, in consignment business, once the consignee (the shopkeeper in the city) sells
your toys, he sends you a report card of sales. This is called Account Sales.
󹻂 What does it contain?
It contains details such as:
• How many toys were sold
• At what price they were sold
• How much total sales money was collected
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• What expenses the consignee had to spend (like transportation, storage,
advertisement, etc.)
• The consignee’s commission (his fees for the work)
• The final amount payable to you, the consignor
So, Account Sales = A detailed statement prepared by the consignee showing the sales,
expenses, commission, and net balance payable to the consignor.
󹻂 Why is it important?
Because as the owner (consignor), you don’t live in the consignee’s city. You can’t see every
sale happening. The only way to know how your goods performed in the market is through
this account sales. It builds trust and transparency between consignor and consignee.
Example in our toy story:
Suppose you sent 500 wooden toys to the shopkeeper in Delhi. After one month, he sold
400 toys for ₹200 each, and he also spent ₹2,000 on advertisement. His agreed commission
was 10%. So, he will prepare an account sales report:
• Total sales = 400 × ₹200 = ₹80,000
• Less: Advertisement expense = ₹2,000
• Less: Commission = 10% of ₹80,000 = ₹8,000
• Net balance payable to consignor = ₹70,000
This report is the Account Sales. Simple, right?
2. Proforma Invoice – A Mirror Copy of Expected Sales
Now let’s rewind the story a little. Imagine before you send your toys to Delhi, you want to
give the consignee some idea about how much the toys cost and at what price he should sell
them.
For this, you prepare a document called Proforma Invoice.
󹻂 What is it?
A Proforma Invoice is a statement sent by the consignor to the consignee along with the
goods. It shows:
• The cost of goods sent
• The minimum selling price or expected selling price
• Other instructions (like "don’t sell below this price" or "offer discounts up to 5% if
needed")
In simple terms, a proforma invoice is like a guidebook or a mirror copy of sales terms. It is
not the actual sales bill (because the goods are not yet sold), but just a reference invoice.
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󹻂 Why is it important?
Because it prevents confusion. The consignee should know exactly how much to sell the toys
for and what the consignor expects. It keeps the whole transaction smooth.
Example in our toy story:
You send 500 wooden toys with a proforma invoice that says:
• Cost per toy: ₹120
• Expected selling price: ₹200 each
• Discount allowed: Maximum 5%
Now the consignee has a clear idea of what you expect from him.
Difference Between Account Sales and Proforma Invoice
Basis
Proforma Invoice (Before Sale)
Time of
Preparation
Sent by consignor before sales
Purpose
To give guidance about expected
prices
Nature
Only an estimate or guideline
Prepared by
Consignor
So, Proforma Invoice = Plan, and Account Sales = Result.
(ii) Consignee’s Commission
Now let’s come to the second part — the consignee’s reward. After all, why would the
shopkeeper in Delhi sell your toys unless he gets something in return? That something is
called Consignee’s Commission.
󹻂 Meaning:
Commission is a percentage of sales or profit that the consignee charges as his fees for
selling goods on behalf of the consignor.
It’s like paying your sales agent.
Types of Commission
There are different types of commission depending on the agreement:
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1. Ordinary Commission
o This is the simple, straightforward commission on total sales.
o Example: 10% commission on sales of ₹80,000 = ₹8,000.
2. Del Credere Commission
o Imagine if some customers buy toys on credit and later refuse to pay.
Normally, that loss would be yours (consignor’s). But if you pay extra
commission to the consignee, he promises to bear any such bad debts.
o This extra commission is called Del Credere Commission.
o Example: Suppose you allow 5% del credere commission. If some customer
buys toys worth ₹5,000 on credit and later defaults, the consignee will bear
that loss — not you.
3. Overriding Commission
o Sometimes, to motivate the consignee to sell at higher prices or push sales
faster, an additional commission is given.
o Example: If your expected selling price was ₹200 per toy, but the consignee
manages to sell them at ₹220 each, you may reward him with an overriding
commission of 2% on the extra price earned.
Why Commission is Important
Commission is not just a payment. It is the fuel that drives the consignee. Without
commission, he has no incentive to work hard for your goods. With commission, he feels
responsible to sell more, sell faster, and even take risks (like credit sales).
In real life, this is how business partnerships work — both parties must benefit. You (the
consignor) get your goods sold in a distant market, while the consignee gets rewarded for
his effort, time, and risk.
Wrapping it All Together
Let’s summarize our toy story in simple points:
• You, the consignor, send toys to a consignee in another city.
• Before sending, you give him a Proforma Invoice (a guidebook telling cost and
expected selling price).
• After selling, the consignee sends you Account Sales (like a report card showing
actual sales, expenses, and balance payable).
• For all his effort, the consignee earns Commission (ordinary, del credere, or
overriding).
So, in short:
• Proforma Invoice = Before Sales (Guidance)
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• Account Sales = After Sales (Performance Report)
• Commission = Consignee’s Reward for Services
Final Touch
If you look carefully, this whole system of consignment is built on trust and transparency.
The consignor trusts the consignee with goods, the consignee trusts that he will get his
commission, and both rely on clear documents like Proforma Invoice and Account Sales.
6. Sachin and Sehwag decided to start business agreeing to share profit and losses in the
ratio 2: 1. On 1st January Sachin purchased goods at a cost of Rs. 72,000 and half of the
goods handed over to Sehwag. On January 15, he again purchased goods worth Rs. 24,000
and incurred expenses of Rs. 400. On January 15, Sehwag purchased goods costing Rs.
45,000 and on the same day he sent to Sachin goods worth Rs. 18,000. He incurred an
expense of Rs. 1,100.
On January 20, Sachin in order to help Sehwag sent Rs. 20,000 to him. Both parties sold
goods at a profit of 25% on sales and both were entitled to a del credere commission of 5%
of the sale. On June 30, Sachin had unsold stock of Rs. 15,000. Of these goods costing Rs.
6,000 were taken over by him and the remainder sold for Rs. 10,000. Sehwag was able to
sell away complete goods excepting goods costing Rs. 3,000 which were badly demaged and
were treated as unsaleable. Rs. 4,000 owing to Sachin was unrecoverable.
On June 30, parties decided to close the books. You are required to prepare important
ledger accounts in the books of both the parties.
Ans: A story of two friends, a shop, and the ledger that tells the truth
Imagine Sachin and Sehwag as two friends who decide to run a small trading shop together.
They agree to share profits and losses in the ratio 2 : 1 (Sachin : Sehwag). Over six months
(Jan 1 — June 30) they buy, transfer, sell, help each other with cash, suffer damage and bad
debts — and finally they close the books. Below I’ll tell this story step-by-step, doing the
arithmetic carefully and then showing the important ledger accounts you would prepare in
the books of both partners.
Important note (assumptions made so everything is precise):
1. “Profit of 25% on sales” is interpreted numerically as: Profit = 25% of Sales, so Cost =
75% of Sales. Therefore Sale = Cost × (4/3).
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2. Del-credere commission is treated as commission paid by the business to the
partner (i.e., an expense of the business and income of the partner). Each partner
earns 5% of their own sales.
3. Purchase expenses (Rs.400 by Sachin, Rs.1,100 by Sehwag) are business expenses
paid by the partner and are reimbursable (i.e., credited to that partner’s account).
4. Damaged goods costing Rs.3,000 belong to Sehwag and are a loss attributable to
him.
5. Rs.4,000 “owing to Sachin was unrecoverable” is treated as a bad debt affecting
Sachin (a loss chargeable to Sachin’s account).
6. Goods taken by Sachin costing Rs.6,000 at close are treated as drawings at cost.
7. Sachin’s transfer of Rs.20,000 to Sehwag on 20th Jan is treated as cash advanced (a
loan/credit from Sachin to Sehwag) and recorded in partners’ current accounts.
If exam instructions required different treatments (for example sharing bad debts between
partners), you would adjust the allocation; here I follow the clear wording that a debt was
owing to Sachin and goods damaged belonged to Sehwag.
Step 1 — Work out goods available, goods sold and sales values
Sachin’s position (cost basis):
• Jan 1: Bought goods cost = ₹72,000 → half (₹36,000) handed to Sehwag. So Sachin
initially keeps ₹36,000.
• Jan 15: Bought goods cost = ₹24,000 (adds to Sachin).
• Jan 15: Received from Sehwag goods costing ₹18,000 (added to Sachin).
So total goods available with Sachin = ₹36,000 + ₹24,000 + ₹18,000 = ₹78,000
(cost).
At closing (June 30) the narration says: Sachin had unsold stock of cost ₹15,000; of this,
goods costing ₹6,000 were taken over by him (drawings) and the remainder (cost ₹9,000)
were sold for ₹10,000. Interpreting that as: at the time of closing he converts the remaining
unsold stock into a sale for ₹10,000. So effectively the business sold all goods except the
goods taken by Sachin.
Therefore Sachin’s goods sold (cost) = Total available ₹78,000 − goods taken by Sachin
(₹6,000) = ₹72,000 (cost of goods sold).
Using Sale = Cost × 4/3 → Sachin’s Sales = 72,000 × 4/3 = ₹96,000.
Profit on Sachin’s sales = 25% of sales = 0.25 × 96,000 = ₹24,000.
Sehwag’s position (cost basis):
• Received from Sachin on Jan 1: ₹36,000 (half of 72,000).
• Jan 15: Bought goods cost = ₹45,000.
• Jan 15: Sent to Sachin goods costing ₹18,000 (so remove ₹18,000).
So Sehwag’s goods available = ₹36,000 + ₹45,000 − ₹18,000 = ₹63,000 (cost).
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He sold all goods except goods costing ₹3,000 which were badly damaged (unsaleable). So
Sehwag’s cost of goods sold = 63,000 − 3,000 = ₹60,000 (cost).
Sales = 60,000 × 4/3 = ₹80,000.
Profit on Sehwag’s sales = 25% of sales = 0.25 × 80,000 = ₹20,000.
Check — total trading profit before other adjustments = 24,000 + 20,000 = ₹44,000 (this is
Sales − Cost combined).
Step 2 — Other business items (expenses, commissions, losses)
1. Purchase expenses paid (reimbursable to partner): Sachin ₹400, Sehwag ₹1,100 →
total ₹1,500 (reduces business profitability).
2. Del-credere commissions (5% on each partner’s sales):
o Sachin: 5% of ₹96,000 = ₹4,800 (commission earning of Sachin; business
expense)
o Sehwag: 5% of ₹80,000 = ₹4,000 (commission earning of Sehwag; business
expense)
o Total commission expense = ₹8,800.
3. Damaged goods: Sehwag’s damaged goods cost ₹3,000 → business loss attributable
to Sehwag’s side.
4. Bad debt: ₹4,000 owing to Sachin was unrecoverable → loss charged to Sachin’s
side.
Step 3 — Compute net profit for distribution
Start with trading profit: ₹44,000
Less purchase expenses: −₹1,500 → ₹42,500
Less damaged goods (Sehwag): −₹3,000 → ₹39,500
Less bad debt (Sachin): −₹4,000 → ₹35,500
Less total del-credere commissions (business expense): −₹8,800 → Net profit for partners =
₹26,700
Now share in ratio 2 : 1:
• Sachin’s share = (2/3) × 26,700 = ₹17,800
• Sehwag’s share = (1/3) × 26,700 = ₹8,900
Remember: although commission was treated as a business expense, each partner
personally receives their commission in their individual account (i.e., commission is credited
to the partner’s current account while the expense reduces the business profit).
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Step 4 — Prepare the important ledger accounts (summarized)
Below I show the key ledger postings as they would appear in the books — I present the
condensed/important accounts for each partner: (A) their Trading / Sales / Purchases
summary (combined), (B) Commission account (income), (C) Expense/ reimbursement and
adjustments, and (D) Partner Current Account (final balancing).
For brevity I don’t show every double entry row by row, but show the essential
debits/credits and the closing balances that an examiner expects to see.
A. Trading summary (extract for each partner)
(These show cost of goods sold and sales revenue computed above.)
Sachin — Trading extract (in Sachin’s book / business book):
• Sales (credit) = ₹96,000
• Cost of goods sold (debit) = ₹72,000
• Gross profit on Sachin’s sales = ₹24,000 (transferred to Profit & Loss)
Sehwag — Trading extract:
• Sales (credit) = ₹80,000
• Cost of goods sold (debit) = ₹60,000
• Gross profit on Sehwag’s sales = ₹20,000
Total gross trading profit (both) = ₹44,000 (as computed).
B. Del-credere Commission Accounts (each partner’s income)
Sachin — Del-Credere Commission A/c
• To Profit & Loss (if commission treated as drawn out) OR, more usefully: Credit
Sachin’s Current A/c with ₹4,800 (commission earned).
Sehwag — Del-Credere Commission A/c
• Credit Sehwag’s Current A/c with ₹4,000.
(Meanwhile the business Profit & Loss A/c bears the total commission expense of ₹8,800.)
C. Expenses / Losses / Reimbursements
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• Sachin paid purchase expenses ₹400 → credit Sachin’s Current A/c with ₹400
(business owes him).
• Sehwag paid purchase expenses ₹1,100 → credit Sehwag’s Current A/c with ₹1,100.
• Damaged goods cost ₹3,000 (Sehwag) → debit Sehwag’s Current A/c with ₹3,000
(loss).
• Bad debt ₹4,000 (owing to Sachin) → debit Sachin’s Current A/c with ₹4,000 (loss).
D. Partner Current Accounts — final summarized ledger (important entries)
Sachin — Current Account (summary)
Particulars (Debit)
₹
Particulars (Credit)
₹
Drawings — goods
taken (cost)
6,000
Commission credited
(earned)
4,800
Bad debt written off
(owing to Sachin)
4,000
Share of profit (2/3 of
26,700)
17,800
Cash advanced to
Sehwag (20-Jan)
20,000
Reimbursement of
expenses paid by Sachin
400
Total Debits
30,000
Total Credits
23,000
Balance (Dr)
7,000 — Sachin is debit (i.e.,
he owes ₹7,000 / or has
deficit)**
Interpretation: After crediting Sachin with his commission, expense reimbursement and
profit share, his debits (drawings, bad debt loss and cash advanced) leave him ₹7,000 debit
in the partnership books. In other words, Sachin is a debtor to the firm for ₹7,000 (or he
should bring in ₹7,000 / reduce other partner’s balance on settlement).
Sehwag — Current Account (summary)
Particulars
(Debit)
₹
Particulars (Credit)
₹
Damaged goods
(loss)
3,000
Commission credited (earned)
4,000
Share of profit (1/3 of 26,700)
8,900
Reimbursement of expenses paid
by Sehwag
1,100
Cash received from Sachin (20-
Jan)
20,000
Total Debits
3,000
Total Credits
34,000
Balance (Cr)
31,000 — firm owes
Sehwag ₹31,000
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Interpretation: Sehwag’s credits (commission, profit share, reimbursement and cash already
received from Sachin) far exceed his debits (damage loss), so he stands as a creditor to the
firm for ₹31,000 (i.e., the firm owes him that amount).
Step 5 — Final settlement between partners (netting off)
If the firm settles partners’ accounts between them, we net Sachin’s debit balance and
Sehwag’s credit balance:
• Sehwag is credit ₹31,000 (firm owes him).
• Sachin is debit ₹7,000 (he owes the firm).
Netting: 31,000 − 7,000 = ₹24,000 payable to Sehwag on final settlement (i.e., if the
business uses cash to settle, the firm will pay Sehwag ₹24,000 after adjusting Sachin’s
position). Note also that Sachin had already given Sehwag ₹20,000 earlier — that cash
advance is already included in the current account entries above.
Short closing paragraph — what the ledgers tell us
Read like a short moral: Sachin did more business (he had higher sales and therefore higher
commission and larger profit share), but he also took goods for himself (₹6,000), suffered a
bad debt (₹4,000), and advanced cash to Sehwag (₹20,000). Sehwag sold almost everything
but suffered damaged stock (₹3,000) and had an advance of ₹20,000 from Sachin. After
sharing profits, commissions, reimbursing expenses and accounting for losses/drawings, the
ledger shows Sehwag should receive ₹24,000 on final settlement. All numbers are
consistent once we commit to the reasonable accounting treatments listed at the top.
SECTION-D
7. What is Departmental Accounting?. How are interdepartmental transactions dealt
with?
Ans: 󷇴󷇵󷇶󷇷󷇸󷇹 A New Beginning: The Story of “Star Mart”
Imagine a big shopping mall called Star Mart. This mall is not just one shop, but a collection
of many different departments under a single roof. There is a Clothing Department, a Shoes
Department, a Cosmetics Department, an Electronics Department, and even a Grocery
Department.
Now, even though all these departments belong to Star Mart, each one is treated like a
mini-business. Why? Because the owner, Mr. Sharma, wants to know:
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• Which department is making more profit?
• Which one is just managing to survive?
• And which one is dragging the whole mall’s performance down?
To find these answers, Mr. Sharma cannot just look at the overall profit of the mall. He
needs to break it down department by department. And that’s where our hero comes in —
󷵻󷵼󷵽󷵾 Departmental Accounting
󷗭󷗨󷗩󷗪󷗫󷗬 What is Departmental Accounting?
In simple words, Departmental Accounting is a system of accounting where the
performance of each department within the same organization is recorded, monitored,
and analyzed separately.
Think of it like having separate report cards for each subject in school. Your overall
percentage matters, but your parents also want to know whether you are stronger in
Mathematics or English, and whether you need help in Science.
Similarly, in business:
• Departmental Accounting tells us the profit, loss, income, and expenses of each
department individually.
• It also shows how all the departments together contribute to the overall success of
the business.
So, in our “Star Mart” story:
• The Clothing Department will have its own mini Profit & Loss Account.
• The Cosmetics Department will also have its own.
• Later, all these departmental accounts will be merged to prepare the overall mall’s
financial statement.
This way, Mr. Sharma can clearly see which department is the “star performer” and which
one is the “weak link.”
󷪣󷪤󷪥󷪦󷪧󷪨󷪩󷪪󷪫󷪬󷪭󷪮󷪲󷪯󷪯󷪯󷪰󷪱 Why is Departmental Accounting Needed?
Let’s think about why Star Mart would go through all this effort. Why not just maintain one
single account?
Here’s why:
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1. Performance Check: Each department’s profitability can be measured.
󷵻󷵼󷵽󷵾 If Clothing is making huge profits but Shoes is constantly at a loss, Mr. Sharma
knows where to focus.
2. Fair Rewards: If managers are handling departments separately, their bonuses can
be based on their department’s success.
3. Control Over Costs: Expenses like electricity, salaries, rent, etc., can be allocated
department-wise, helping management control wasteful spending.
4. Better Decisions: It helps in deciding whether to expand a department, shut down a
weak one, or launch a new one.
In short, departmental accounting is like having a detailed map instead of a rough sketch.
The more detailed the map, the better decisions you can take on your journey.
󺪺󺪻󺪼󺪽󺪾 Types of Departments
In real life, departments inside an organization are of two types:
1. Independent Departments
o Each department works almost like a separate shop.
o Example: In Star Mart, the Grocery Department and the Electronics
Department work independently.
2. Dependent Departments
o These are linked together, and sometimes goods move from one department
to another.
o Example: The Clothing Department supplies fabric to the Tailoring
Department.
This is where things get interesting — when departments interact with each other.
󷃆󹸊󹸋 Interdepartmental Transactions: The Friendly Exchanges
Now, imagine the Cosmetics Department in Star Mart has some beauty products that are
also displayed in the Clothing Department to attract more customers. Or suppose the Shoes
Department gives some pairs of shoes to the Clothing Department for combo offers.
These exchanges are called Interdepartmental Transactions.
In simple words, interdepartmental transactions are the transfers of goods or services
between one department and another within the same organization.
At first glance, you may think, “But all departments belong to the same business. Why
bother recording these transfers separately?”
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Well, here’s why:
• If we don’t record them, one department may look like it is making more profit while
another looks weak, even though they are supporting each other.
• Proper recording ensures fairness, accuracy, and true performance measurement of
each department.
󼿍󼿎󼿑󼿒󼿏󼿓󼿐󼿔 How Are Interdepartmental Transactions Dealt With?
Now comes the golden question: How do accountants treat these exchanges in books?
Let’s break it down step by step with Star Mart examples.
1. Transfer of Goods at Cost Price
Suppose the Clothing Department transfers shirts worth ₹10,000 (at cost) to the Shoes
Department for promotional combos.
󹳴󹳵󹳶󹳷 Treatment:
• The receiving department (Shoes) will record it at ₹10,000.
• No profit is added here, so things are simple and straightforward.
2. Transfer of Goods at Selling Price
Sometimes, departments transfer goods at selling price instead of cost price.
Example: Cosmetics Department transfers products worth ₹8,000 (cost), but charges the
Clothing Department at ₹10,000 (selling price).
󹳴󹳵󹳶󹳷 Why is this done?
To make the sending department’s accounts look realistic — as if they actually “sold” those
goods.
󹳴󹳵󹳶󹳷 Treatment:
• The receiving department records it at the transfer price (₹10,000).
• But at the end of the year, we must eliminate the unrealized profit included in
closing stock. Otherwise, the overall profit of Star Mart will be overstated.
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3. Transfer of Services
Not only goods, sometimes one department provides services to another.
Example: The Repair Department provides repair services to the Electronics Department.
󹳴󹳵󹳶󹳷 Treatment:
The cost of service is transferred to the benefiting department, so that expenses are fairly
distributed.
4. Common Expenses
Some expenses like electricity, rent, or advertising benefit all departments.
󹳴󹳵󹳶󹳷 Treatment:
Such expenses are divided among departments on a suitable basis:
• Rent → on floor area occupied.
• Electricity → on machine hours or light points.
• Advertisement → on sales ratio.
This ensures fairness and avoids disputes among departments.
󹳨󹳤󹳩󹳪󹳫 Example to Make It Clear
Let’s say:
• Clothing Department transfers goods worth ₹50,000 to Shoes Department at a 20%
profit margin.
• Shoes Department sells half of it and the rest remains unsold (closing stock).
Here’s what happens:
• Shoes shows purchases = ₹50,000.
• Out of that, half is unsold i.e., ₹25,000 closing stock.
• But remember, this ₹25,000 includes profit that was never actually earned by Star
Mart as a whole.
󷵻󷵼󷵽󷵾 Unrealized profit = 20% of ₹25,000 = ₹5,000.
So, while preparing combined accounts, we reduce this unrealized profit to avoid
exaggerating the mall’s income.
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8. Alok Ltd. invoices goods to its Coimbatore branch at selling price which is cost plus 25%.
From the following particulars prepare accounts under Stock and Debtors System:
Rs.
Stock at Branch (1-4-2015)
(Invoice Price)
7,500
Branch Debtors (1-4-2015)
13,100
Goods from Head Office (Invoice price)
50,400
Cash Sales
16,750
Total Sales
50,750
Branch Debtors (31-3-2016)
16,550
Stock at Branch (31-3-2016)
6,950
Allowances to Debtors
160
Goods returned to Head Office
350
Goods returned by Debtors
290
Discount allowed
1,200
Bad Debts
300
Rent and Rates
900
Salaries and Wages
3,000
Trade Expenses
650
Ans: 󷇴󷇵󷇶󷇷󷇸󷇹 Setting the Scene
Alok Ltd. is a company (our Head Office), and we decide to sell goods through our
Coimbatore branch. Now, the head office doesn’t just send goods at cost price. It adds a
25% profit margin before invoicing the goods to the branch. That means, if the cost of goods
is ₹100, the invoice sent to the branch is ₹125.
Why do this? Because the head office wants to monitor profits easily and keep better
control of branch activities. In accounting, this system is called the Stock and Debtors
System. It is slightly more detailed than the normal branch accounts because it tracks stock,
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debtors, cash, and expenses separately. Think of it as keeping four small ledgers instead of
just one big account.
󹵲󹵳󹵴󹵵󹵶󹵷 The Branch Situation
Here’s what we know at the beginning (1st April 2015):
• The branch already has some stock worth ₹7,500 (at invoice price).
• It also has debtors who owe ₹13,100.
During the year:
• The head office sends goods worth ₹50,400 (invoice price).
• Out of this, some goods worth ₹350 are returned back.
• The branch makes total sales of ₹50,750, out of which cash sales are ₹16,750. The
rest must be credit sales.
• Customers return goods worth ₹290.
• The branch allows discounts, bad debts, and small allowances to customers.
• At the end (31st March 2016), the branch has stock worth ₹6,950 and debtors worth
₹16,550.
• On top of this, the branch has its expenses: rent ₹900, salaries ₹3,000, and trade
expenses ₹650.
Now, our job is to prepare the accounts under the Stock and Debtors System in such a way
that anyone reading it can clearly see the flow of goods and money.
󼨻󼨼 Breaking Down the Accounts
Under the Stock and Debtors System, we prepare the following main accounts:
1. Branch Stock Account – to record opening stock, goods received, sales (cash +
credit), returns, and closing stock. This helps us trace how goods moved in and out.
2. Branch Debtors Account – to track credit sales, collections, returns, discounts, bad
debts, and closing debtors.
3. Branch Expenses Account – to show expenses incurred at the branch.
4. Branch Adjustment Account – this is a little tricky. Since goods are invoiced at a
price higher than cost (i.e., with 25% profit), this account helps us adjust the profit
element and calculate the true profit of the branch.
5. Branch Profit & Loss Account – finally, this shows the actual profit or loss earned by
the branch after adjustments.
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󷪒󷪙󷪓󷪔󷪕󷪖󷪚󷪗󷪘 1. Branch Stock Account (at Invoice Price)
Think of this like the shopkeeper’s notebook:
• We start with opening stock ₹7,500.
• Add goods received from HO ₹50,400.
• Less goods returned to HO ₹350.
• Goods available = ₹57,550.
Now, goods leave the stock in different ways:
• Sales (cash + credit) = ₹50,750.
• Goods returned by customers = ₹290 (added back to stock).
• Closing stock = ₹6,950.
When we balance this account, it tallies correctly, showing that all goods are accounted for.
󹱰󹱱󹱲󹱴󹱳 2. Branch Debtors Account
This account is like the record of all customers who bought goods on credit.
• Opening Debtors = ₹13,100.
• Add Credit Sales = Total Sales (₹50,750) – Cash Sales (₹16,750) = ₹34,000.
• Total = ₹47,100.
Now reduce the following:
• Cash received from Debtors (balancing figure)
• Returns by Debtors = ₹290.
• Discount allowed = ₹1,200.
• Bad Debts = ₹300.
• Allowances = ₹160.
Finally, we are left with Closing Debtors ₹16,550, which matches the given figure.
󹱩󹱪 3. Branch Expenses Account
This one is simple. We just list all expenses paid:
• Rent = ₹900
• Salaries = ₹3,000
• Trade Expenses = ₹650
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So, total branch expenses = ₹4,550.
󼿍󼿎󼿑󼿒󼿏󼿓󼿐󼿔 4. Branch Adjustment Account
Here comes the interesting part. Remember, goods were invoiced at cost + 25%. This means
the invoice price includes a “loading” or profit element. To get the real profit, we must
adjust this loading.
• Opening Stock (₹7,500) contains profit. Profit = 25/125 of 7,500 = ₹1,500.
• Closing Stock (₹6,950) also contains profit. Profit = 25/125 of 6,950 = ₹1,390.
• Goods sent to branch (₹50,400) include profit. Profit = 25/125 of 50,400 = ₹10,080.
• Goods returned to HO (₹350) contain profit = ₹70.
So, Branch Adjustment Account basically removes these profit portions to ensure we only
deal with cost in the Profit & Loss Account.
󹳨󹳤󹳩󹳪󹳫 5. Branch Profit and Loss Account
Finally, the big picture:
• Gross Profit is calculated after adjusting for loading.
• Then we subtract branch expenses.
• What remains is the Net Profit of the branch.
When we do all the calculations correctly, we arrive at the true profit earned by Coimbatore
branch for the year.
󽄻󽄼󽄽 Making it Feel Like a Story
Let’s imagine this whole thing like running a shop inside a mall.
• The head office is like the owner sitting in another city, sending goods at marked-up
prices.
• The branch manager in Coimbatore is like the shopkeeper. He sells goods, collects
money, gives discounts, and pays for rent and salaries.
• At the end of the year, the owner asks: “Okay, show me how my goods and money
moved, and how much profit I actually made.”
• The shopkeeper hands over four notebooks: one showing stock, one showing
customer accounts, one showing expenses, and one adjustment book to cancel out
inflated prices.
• Finally, the owner prepares a profit report to see if the shop is really working well.
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This is exactly what we are doing in the Stock and Debtors System!
󹲹󹲺󹲻󹲼󹵉󹵊󹵋󹵌󹵍 Conclusion
What initially looked like a jumble of numbers is simply a story of goods moving in and out,
customers buying on cash or credit, some paying back and some not, and a few expenses
along the way. The only twist is that the head office adds profit before sending goods, and
we must adjust that to find the real profit.
By breaking it into five small accounts—Stock, Debtors, Expenses, Adjustment, and Profit &
Loss—we untangle the whole problem.
So, the Coimbatore branch acts like a mirror: it shows the head office exactly what
happened during the year, making sure nothing is hidden. And when we put all the pieces
together, we get the final picture—the net profit of the branch.
“This paper has been carefully prepared for educational purposes. If you notice any mistakes or
have suggestions, feel free to share your feedback.”