Inventory Valuation Method – Last In First Out Method

Last In First Out Method (LIFO) 

This method is based on the assumption that last item of materials/goods purchased are the first to be issued/sold. Thus, according to this method, inventory consists of items purchased at the earliest cost.

Illustration 4,3. Calculate the value of the inventory of January 31 from the following data using (i) periodic inventory system and (ii) perpetual inventory system.

Advantages: The method has the following advantages:

1. It takes into account the current market conditions while valuing materials issued to different jobs or calculating the cost of goods sold.

2. The method is based on cost and, therefore, no unrealised profit or loss is made on account of use of this method.

The method is most suitable for materials which are of a bulky and non-perishable type. 

Admission of Partner – Adjustment for Goodwill

Adjustment for Goodwill

Since the new partner gets a share in the profits of the rum, he should compensate the old partners for sharing the earning of the firm on account of the reputation or goodwill earned by the partnership firm so fan The problem of goodwill on admission of a new partner can be dealt in two different ways:

1. When the goodwill account already appears in the books.

2. When the goodwill account is not appearing in the books at the time of admission of a partner.

If the goodwill account is already appearing in the books. There can be three situations:

The goodwill account is appearing at a proper value. In such an event no adjustment will be required for goodwill.

A and B are sharing profits in the ratio 3 : 2. They admit a new partner C with 1/5 share in the profits. At the time of admission of C, goodwill is appearing in the firm’s books at Ps 10,000 and it is agreed by all partners (including C) that it is properly valued. Should C pay anything for goodwill?

Solution: 

Since goodwill is already appearing in the books, it shows that the old partners have already got credit to their capital accounts with the value of goodwill. Moreover, it is properly valued and hence C will not be required to pay anything for goodwill nor any further adjustment will be required.

(ii) The goodwill account is to be revalued. In such an event entry will be made only with the difference. The amount of over or under-valued goodwill is debited or credited to the old partners in the old ratio and credited or debited to goodwill account.

Joint Venture and Partnership

JOINT VENTURE AND PARTNERSHIP

According to the Indian Partnership Act. “Partnership is the relations between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.” Thus, both in joint venture and partnership there is some business activ,ity whose profit (or loss) is agreed to be shared by two or more than two persons. As a matter of fact in law, a joint venture is treated as a partnership. Of course, a partnership covers or is meant to cover a long period whereas ajoint venture is only for a limited purpose sought to be achieved in a short period. On account of this reason, joint venture is also sometimes termed as a temporary partnership’ or ‘partnership for a specific venture’ or ‘particular partnership’.

Joint Venture and Consignment

The following are the points of distinction between joint venture and consignment:

(1) .Relalionslnp: In case of a consignment transaction, the relationship between the consignor and the consignee is that of a principal and an agent. While in case of joint venture, the relationship amongst various venturers is that of partners, i.e., mutual agency. Each venturer is a principal as well as an agent for the other venturer.

(II) Sharing of profits: In case of consignment, the consignee gets only a commission on the goods sold by him on behalf of the consignor while in case of joint venture each venturer gets a share in the profits of the venture,

(iii) Transfer of risk: tn case of consignment, till the goods are sold the risk continues to be of consignor while ajoint venture is a temporary partnership hence the risk continues of all venturers.

Fundamentals of Accounting – Petty Cash Book

Petty Cash Book 

Payments in cash of small amounts like traveling expenses, postage, carriage etc. are petty cash expenses. These petty cash expenses are recorded in the petty cash book. The petty cash book is maintained by \separate cashier known as petty cashier. It is also called the Imprest System of maintaining petty cash. The petty cashier is given a certain sum of money at the beginning of the fixed period (e.g. a monthly fortnight) which is called float. The amount of float is so fixed that it may be adequate to meet petty expenses of the
prescribed period. The balance in the petty cash book shows cash lying with the petty cashier.

The advantages of the imprest system are as follows:

— It saves the time of the chief cashier.

— Petty cashier is not allowed to keep idle cash with him if the float is found to be more than adequate; its amount will be immediately reduced. This reduces the chances of misuse of cash by the petty cashier.

— As the sum of float is small, it does not provoke the person in charge of it or others in the office to misappropriate it.

— The record of petty cash is checked by the cashier periodically, so that a mistake if committed is soon rectified.

— It enables a great saving to be effected in the posting of small items to the ledger accounts.

— The system trains young staff to handle money responsibilities.

Methods of valuation of Inventories

METHODS OF VALUATION OF INVENTORIES

According to International Accounting Standard: 2 (lAS: 2), the inventories should be valued at the lower of “historical cost” and “net realisable value”.

Historical Cost

Historical cost of inventories is the aggregate of costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.

Thus Historical cost includes not only the price paid for acquisition of inventories but also all costs incurred for bringing and making them fit for jise in production or for sale e.g. transportation costs, duties paid, insurance-in-transit, manufacturing expenses,wages paid or manufacturing expenses incurred for converting raw materials into finished products etc. Selling expenses such an advertisement expenses r storage costs should not be included.

A major objective of accounting for inventories is the proper determination of income thmugh the process of matching appropriate costs against revenues. It requires assigning of proper costs to inventory as well as goods sold.

However, it should be noted that assigning of such costs need not conform to the physical flow of goods.

The various methods for assigning historical costs to inventory and goods sold are being explained below.

Consignment Accounting – Important Terms

I. Proforma invoice. It is a statement prepared by the consignor stating quantity, quality and price of goods. It is sent with goods despatched to consignee.

A proforma invoice is different from Invoice.

Invoice implies that a sale has taken place. It is a statement describing the goods despatched to the buyer and showing the total amount due by him to the seller. A proforma invoice is simply a statement of information in the form of invoice to apprise the party, who has not bought the goods but shall be having their possession, or dealing with them, of certain essential particulars of the goods. Such an invoice is sent by the intending seller to his agent or the intending buyer before the sale actually takes place. It does not show that the person to whom it is sent is indebted to the sender.

2. Account sales. It is a periodical statement rendered by the Consignee to the Consignor containing details of goods received, sales made, expenses incurred, commission charged, remittances made and balance due by him to the consignor. The following is a specimen of an Account Sales.

Partnership Accounting – Accounting Problems on Admission of a New Partner

ACCOUNTING PROBLEMS

The accounting problems on admission of a new partner can be put as follows:

(i) Adjustment in the profit sharing ratio.

(ii) Adjustment for goodwill.

(iii) Adjustment for revaluation of assets and liabilities.

(iv) Adjustment for reserves and other accumulated profits.

(v) Adjustment for capital.

Each of the above problems are being discussed in the following pages.

Adjustment in the Profit Sharing Ratio

A newly admitted partner will be entitled to share the profits or bear the losses with the other partners. Hence the profit sharing ratio of the partners will change. There can be two situations.

The new partner may be given a certain proportion of the total profit or required to bear a certain proportion of the total loss and the old partners continue to share the balance of profit or bear the balance of loss in the old ratio in between themselves.

Partnership Accounting – Accounting Problems On Partners Retirement

Accounting Problems 

The accounting problems in the event of retirement of a partner can be put as follows:

(i) Adjustment for Goodwill,

(ii) Revaluation of assets  and liabilities.

(iii) Adjustment regarding Reserves and other undistributed profits.

(iv) Adjustments regarding profit sharing ratios.

(v) Payment to the retiring partner.

1. Goodwill. The retiring partner will be entitled to his share of goodwill in the (inn. The problem of goodwill can be dealt in the following two different ways:

(a) Where goodwill account is already appearing in the books:

In such a case if goodwill is properly valued, no further adjustment will be needed. The amount has already been credited to all the partners including the retiring partner.

(b) Where goodwill account is not appearing in lire book. 

Steps for preparing statement of affairs in Single Entry System

Steps for preparing statement of affairs. The following steps may be taken for preparing the Statement of Affairs.

(i) In most cases in single entry system, a cash book is maintained. In case, this has been done, the cash and the bank balances can be taken from the cash book. In the absence of a proper cash book, cash balance may have to be found out by preparing a receipts and payments account on the basis of information collected from the proprietor of the business and the statement of accounts which might have been received or sent by the proprietor from/to his debtors and creditors. Information regarding other business expenses can be collected from the salaries register of his employees, petty cash book if any maintained by him, etc., and the actual cash balance available with the business. The balance at the bank can be verified from the bank pass book or Statement of Account from the Bank.

(ii) A list of sundry debtors and creditors should be prepared. This may not be difficult because in mostcases, a record of personal accounts is maintained under the single entry system.

(iii) The value of the fixed assets like building, plant, furniture. etc., should be ascertained from vouchers or other documents available with the business. A reasonable charge for depreciation should also be made and the assets should be shown in the Statement of Affairs after charging depreciation.

(iv) A physical verification of the stock should be taken and the value of the stock in hand should be ascertaIned on the basis of the different invoices received from suppliers from time to time in respect of the goods purchased.

(v) The amount of outstanding expenses and the accrued income should also be determined. Last year’s figures about these items may be of considerable help in this respect.

(iv) The excess of assets over liabilities should be found out and this will denote the net worth or the capital of the business on the date on which the Statement of Affairs has been prepared.

Accountancy Class 11 – Rectifying Journal Entries

1. Its 540 received from M. Mehta was posted to the debit of his account. 

The amount of M. Mehta should have been credited by P.s 540. It has been debited. In order to set the matters right, it is necessary to credit his account by Ps 1,080 (i.e., to cancel unnecessary debit of P.s 540 and to give him credit of Ps 540).

2. Rs 100 being Purchases Returns was posted to the debit of Purchases Account.

The Purchases Returns Account should have been credited by a sum of P.s 100 on account of return of the goods. It has not been at all credited. It has, therefore, been credited by Es 100. The Purchases Account should not have been at all debited. It has, therefore, been credited by P.s 100. Suspense Account has been debited by Rs 200, since no other account is available and it must have been credited earlier on account of these errors.

3. Discount Rs 200 received, entered in the cash book was not posted to the Ledger. 

The amount of discount received is credited to the Discount Account. It has not been done, Discount Account, has therefore, been credited now, Suspense Account has been debited because it must have been credited earlier on account of this error.

4. Its 574 paid for repairs to motor-car was debited to the motor-car account as Rs 574.

Repairs to motorcar is a revenue expenditure. It should has been debited 10 the Repairs Account. 11 has not been done. The Repairs Account has, therefore, been debited by P.s 574. Motor Car Account has been unnecessarily debited by Rs 174. It should, therefore, be credited by this amount. The difference has been put to the Suspense Account. 

Difference between Marginal costing and Absorption Costing

Marginal costing Vs Absorption Costing 

Absorption Costing 

  • All costs fixed and variable are included for ascertaining the cost 
  • Different unit costs are obtained at different levels of output because of fixed expenses remaining same
  • Difference between sales and total cost is profit
  • A portion of fixed cost is carried forward to the next Period because closing stock of working progress and finished goods is valued at cost of Production which is inclusive of fixed cost. In this way cost of a Particular period cost should be charged to the period concerned and should not be carried over to the next period
  • The apportionment of fixed expenses on an particular Y basis gives rise to over or under absorption of overheads which ultimately makes the product – cost inaccurable and unreliable.
  • Absorption costing is not very helpful in taking managerial decisions such as whether to accept the export order or not whether to buy or manufacture, the minimum price to be charged during the depression etc