CBSE xi Accountancy – Equation for Preparing Trading Account

TRADING  ACCOUNT 

Trading Account gives the overall result of trading. i.e., purchasing and selling of goods. In other words, it explains whether purchasing of goods and selling them has prbved to be ,rofitable for the business or not. It takes into account on the one hand the cost of goods sold and on the other the value for which they have been sold away. In case the sales value is higher than the cost of goods sold, there will be a profit, while in a reverse case, there will be a loss. The profit disclosed by the Trading Account is termed as Gross Profit. Similarly the loss disclosed by the Trading Account is termed as Gross Loss.

Equation for Preparing Trading Account

On the basis of the Illustrations given in the preceding pages, the following equation can be derived for preparing Trading Account

Gross Profit = Sales — Cost of goods sold

Cost of goods sold = Opening Stock + Purchases + Direct Expenses –  Closing Stock Therefore, Gross Profit = Sales –  (Opening Stock  + Purchases + Direct Expenses –  Closing stock) Or Gross Profit = (Sales i- Closing Stock) –  (Opening Stock + Purchases + Direct Expense)

The term “Direct Expenses” include those expenses which have been incurred in purchasing the goods, bringing them to the business premises aud making them fit for sale. Examples of such expenses are carriage charges, octroi, import duty, expenses for seasoning the goods, etc.

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.

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. 

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.

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. 

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.

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. 

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

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.