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 

Pricing of Goods Sent on Consigmnent

Pricing of Goods Sent on Consigmnent 

Goods can be consigned to the consigneç either (1) at cost or (ii) at invoice price.

At cost. In case of this method the goods are charged to the consignment at cost price to the consignor. The proforma invoice is also prepared at this price. For example if the goods costing Rs 10,000 are purchased by A and 80 per cent of such goods are sent by him on consignment to Bombay, proforma invoice will show the value of goods as Rs 8,000 and the Consignment to Bombay account will also be charged with this price. The consignee may be given the direction regarding the price at which he should sell the goods (see illustration 1.2.).

At invoice price, In case of this method the goods are charged to the,consignment at a price higher than cost The proforma invoice also shows the value of goods at such higher price. The excess of invoice price over the actual cost, represents the profit which the consignor intends to make on the goods consigned. For example, if in the above case the goods are consigned at a profit of 25 per cent on cost (or 20 per cent on invoice price), the consignment account will be charged with Rs 10,000 (i.e., Ps 8,000 + Rs 2,000) for the value of goods sent on consignment However, in order to find out the profit, at the end of the accounting period, the consignment account will be given credit with the excess price so charged. In this case, the credit to the consignment account will be of Rs 2,000. Thus, in fact, consignment account has been charged only with the cost (i.e., Ps 10,000— Ps 2,000) of the goods sent on consignment as has been done in the first case. Suitable adjustment for profit clement included in the stock with the consignee has also to be made

Standard Costing Limitations

Standard Costing Limitations

Difficult to set up reliable standards:

It is difficult to set up reliable and workable standards. Unless the standards are correctly fixed, the control the study of variances will not be effective

Expensive :

Revision of standards in the light of changed circumstances, become expensive. If the standards are not revised they become out dated.’Such standards are not reliable

Difference between Marginal costing and Absorption Costing

High degree of technical skill :

establishment of standards may be costly and may require high degree of technical skill

Fixing responsibilities is a difficult task:

For fixing responsibilities for an adverse variance, the controllable and uncontrollable periods of the variances should be segregated. This is a difficult task.

Cost Accounting Basics : Historical Costing and Standard Costing

Adverse psychological effects:

Sometimes, standards create adverse psychological effects. If the standard is set a high level, its non-achievement will lead to frustration and resistance. This acts as a discourgement rather than an incentive for better efficiency.

Unsuitable :

Due to unsuitably for jobbing type of industry, fixation of standards for each job becomes difficult and expensive. Non suitable for small industries Inslallalion ofstandard costing is an expensive affair. Hence small business concerns do nol show much interest in installing standard costing

Single Entry System Disadvantages

The system suffers from several disadvantages:

(i) Arithmetical accuracy cannot be checked. In case of Double Entry System

Book-keeping Trial Balance is prepared to check the arithmetical accuracy of the books of accounts. This is possible because every transaction is recorded at two places. In case of Single Entry System, this is not done. Hence, Trial Balance cannot be prepared and the

-arithmetical accuracy of the books of accounts cannot be checked. This increases the possibility of more frauds and misappropriations as compared to the Double Entry System of Book-keeping.

(ii) True profits cannot be known. In the absence of complete information for sales, purchases and other expenses, it is notpossible to draw the Profit and Loss Account. Hence, the true profit or loss made or suffered by the business cannot be known.

(iii) Financial position of the business cannot be judged. In the absence of true figure of profit and correct information about the assets and liabilities of the busiiless, the Balance Sheet cannot be drawn up to give a correct picture of the financial position of the business on a particular date.

(iv) Makes planning and decision-making difficult. The system does not provide accurate figures about the performance of the business and its financial position. For example, separate figure of gross profit, net profit and sales are not available. Thus, the ratio of gross profit to sales or net profit to sales cannot be found out. Similarly in the absence of any information about the cost of goods sold, the proportion of differeut elements of cost of sales cannot be found out. In the absence of such information, it becomes difficult for the proprietor of the business to know the reasons of his improving or deteriorating profitability and financial position. Thus, he is not in a position to compare, plan and take sound decision for the prosperity of the business. Moreover, it may be difficult for him to find the real value of his business in the event of his deciding to sell the business.

Admission of Partner – Adjustment for Revaluation of Assets and Liabilities

When assets and liabilities have to appear in the books at the revised values.

In such a case a Profit and Loss Adjustment Account or Revaluation Account is opened in the books. The following entries are to be passed.

(i) For increase in the value of an asset or decrease in the value of a liability: 

Asset/Liability A/c  Dr.

To P. & L. AdjustnientA/c

(ii) For decrease in the value of an asset or increase in the value of a liability. 

P. & L. Adjustment A/c Dr.

To Asset/Liability A/c

(iii) The profit on revaluation will be transferred to old partners’ capital accounts in the old profit sharing ratio. 

P. & L. Adjustment A/c  Dr.

To Old Partners Capital A/cs. (Individually)

In the event of loss, the entry will be reversed.

When assets and liabilities have to appear at old values in the books 

A Memorandum Profit and Loss Adjustment Account will be opened in the books. The increase in the value of assets or decrease in the value of liabilities will be credited to this account. The decrease in the value of assets or increase in the value of liabilities will be debited to this account. However only two entries will be passed:

(i) For credited in the profit on revaluation to old partners’ accounts: 

Memorandum P. & L. Adjustment A/c Dr.

To Old Partners’ Capital Accounts (in old ratio)

In case of loss the entry will be reversed.

(ii) For writing off the profit on revaluation to all partners’ capital accounts (including the new partner): 

Partners’ Capital Accounts (in the new ratio) Dr.

To Memorandum P& L. Adjustments A/c

In case of loss the entry will be reversed.

Depreciation Accounting – Features of Depreciation

BASIC FEATURES OF DEPRECIATION 

1. The term depreciation is used only in respect of fixed assets. Of course, the current assets may also lose their value. Loss on account of fall in their value is taken caie of by valuing them for Balance Sheet purposes “at cost or market price whichever is less”.

2. Depreciation is a charge against profits. This means that true profit of the business cannot be ascertained withQut charging depreciation.

3. Depreciation is different from maintenance. Maintenance expenses are incurred for keeping the machine in a slate of efficiency. However, any degree of maintenance cannot assure that the asset will never reach a state of scrap. Of course, good maintenance delays this stage but it cannot absolutely prevent it.

4. All fixed assets, with certain possible exceptions e.g.,land, and antiques etc., suffer depreciation although the process i’nay be invisible or gradual.

 

What is the relation between the two species?

Composition of the nuclei of two atomic species ‘X’ and ‘Y’ are given as under
                       X    Y
Protons         6      6
Electrons      6      8
Give the mass numbers of X and Y. What is the relation between the two species?
Mass number of X = 6 + 6 = 12
Mass number of Y 6 + 8 = 14
Atomic number of  X = 6
Atomic number of  Y = 6
X and Y are isotopes, since both the elements contain equal number of atomic number and different mass number.

Accountiug for Fixed Assets and Goodwill in case of Death of a Partner

AS 10 : Accountiug for Fixed Assets and Goodwill: It has already been stated while discussing treatment of goodwill in the preceding chapter, that goodwill account should be raised in the books only when it is paid for and not self-generated by the firm. Hence, the following treatment for goodwill should be preferred in case of retirement, death, change in profit sharing ratio or amalgamation of firms.

(i) Goodwill on Retirement: Death of a Partner: In the case of retirement of a partner, the continuing partners will gain in tenns of profit sharing ratio. Hence, the continuing partners have to share the burden ofthe share of goodwill of the retiring partner in their gaining ratio. In this case the retiring partner’s capital account should be credited with his share of goodwill and the continuing partners’ capital accounts should be debited with the amount in their gaining ratio. Alternatively, the total value ofhe goodwill may be raised by debiting the goodwill account and crediting all the partners’ capital account in the old profits sharing ratio. The goodwill may then be written off debiting the capital accounts of the remaining partners in the new ratio and crediting the goodwill account.

Accountancy Class 11 – Suspense Account

SUSPENSE ACCOUNT 

The accountant should take the above mentioned steps one after the other to locate the difference in the totals of the Trial Balance. In case, he is not in a position to locate the difference and he is in a hurry to close the books of accounts, he may transfer the difference to an accountknown as “Suspense Account”. Thus, Suspense Account is an account tjwhich the difference in the Thai Balance has been put temporarily. On locating the errors in the beginning or during the course of the next year, suitable accounting entries are passed (as explained later) and the Suspense Account is closed. However, it should be noted that Suspense Account should be opened by the accountant only when he has failed to locate the errors in spite of his best efforts. It should not be by way of a normal practice, because the very existence of the Suspense Account creates doubt about the authenticity of the books of accounts. The result shown by the books qf accounts may not be trusted by the proprietors, tax officials and other government authorities in such a case. This may create complications for the business.

Consignment Accounting – Valuation of Unsold stock

VALUATION OF UNSOLD STOCK

Where all the goods have not been sold, it becomes necessary to value the unsold goods.

Such goods are similar to closing stock in case of a Trading Account This stock should be valued at a price which will include:

(i) proportionate cost price and

(ii) proportionate direct expenses, i.e., proportionate expenses incurred both by the consignor and the consignee till the goods reach the godown of the consignee.

It should be noted that direct expenses will include all expenses incurred by the consignor while only such expenses of the consignee which are incurred by him till goods reach his godown. Examples of such expenses are: carriage charges, freight, octroi, import duty etc., paid by the consignee. Expenses like godown rent, selling expenses, insurance of the godown etc. paid by the consignee, should be excluded.

Moreover, the fundamental principle of accounting regarding valuation of stock should also be taken into consideration i.e., stock should be valued at cost or market price whichever is less. Cost price stands for cost + proportionate direct expenses.

Thtorlal Note. In case in an examination question, the details regarding expenses incurred by the consignee have not been given (e.g. the question states “expenses incurred by the consignee are Rs 2,000” or “the consignee paid Rs .2,000 as cartage, godown rent, insurance etc.”), the student are advised to consider only proportionate expenses incurred by the Consignor, while valuing the unsold stock).