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.

 

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).

Single Entry System – Conversion Method

CONVERSION METHOD 

The Net Worth Method explained in the preceding pages does not provide a clear picture of the operational results of a business. It does not give information about sales, purchases, gross profit, operating expenses etc. of the business. As a result, a meaningful analysis of the financial statements cannot be done nor effective steps can be taken to improve the financial position of the business. It will, therefore, be better to collect all, such information ffom the books of accounts, and other sources which are necessary for preparing Trial Balance of the business. This is done by preparing a Total Debtors Account, aTotal Creditors Account, a Bills Receivable Account and a Bills Payable Account and Receipts and Payments Account etc., on the basis of double entry. Accounts relating to different expenses, incomes, fixed assets and fixed liabilities and outstandings are also prepared with the help of Receipts & Payments Accounts and additional information available. Thus, the closing balances of different accounts are found out and a Trial Balance prepared. Final accounts can then be prepared in the usual way. Such a method of collection information as per the requirements of the double entry system of book keeping, is termed as Conversion Method.

Depreciation Accounting – Depletion method

Depletion method.

This is also known as productive output method. this method the charge for depreciation in respect of the use of an based on the following factors:

According to asset will be

(i) Total amount paid.

(ii) Total estimated quantities of the output available.

(iii) The actual quantity taken out during the accounting year.

The method is suitable in case of mines, queries, etc., where it is possible to make an estimate of the total output likely to he available. Depreciation is calculated per unit of output The amount of depreciation to be charged in a particular year is computed by multiplying the units of output with the rate of depreciation per unit of output. For example, if a mine is purchased for Rs 20,000 and it is estimated that the total quantity of mineral in the mine in 40,000 tonnes, the rate of depreciation per tonne would amount to 50 paise per tonne (Rs 20,000/4Q000 tonnes). In ease output in a year amounts to 10,000 tonnes, the amount of depreciation to be charged to the Profit and Loss Account would Rs 5,000 (i.e., 10,000 tonnes x Re 0.50).

The method has the advantage of correlating the amount of depreciation with the productive use of the asset. However, it requires making of a reasonably correct estimate of the output likely to be there. In the absenèe of correct estimate, the amount charged by way of depreciation will not be correct.

Accountancy Class 11 Notes – Classification of Expenditure

Classification of Expenditure:

Expenditure can be classified into three categories:

1. Capital Expenditure. It means an expenditure which has been incurred for the purpose of obtaining a long-term advantage for the business. Such expenditure is either incurred for acquisition of an asset (tangible or intangible) which can later be sold and converted into cash or which result in increasing the earning capacity of the business or which affords some other advantage to the business. In ether words, such an expenditure does not grow out or pertain to the running of the business proper.

Following are some of the examples of Capital expenditure:

(i) Expenditure incurred in increasing the quality of fixed assets, e.g., purchase Of additional furniture, plant, building for permanent use in the business.

(ii) Expenditure incurred in increasing the quantity of a fixed asset, e.g., expenditure incurred for increasing the useful tile or capacity or efficiency of a fixed asset. 

Accounting Standard 10: Accounting for Fixed Assets and Goodwill

According to AS 10 Goodwill should be recorded in the books only when some consideration in money or money’s worth has been paid for it. In other words no goodwill account should be raised in case of internally generated goodwill.

When the new partner brings a portion of the required amount of goodwill.  In such a case, the amount brought in by the new partner should be shared by the old partners in the sacrificing ratio nd the portion of amount of goodwill not brought in by the new partner thould be adjusted through the capital accounts of partners by debiting new partner’s capital account with the amount and crediting the old partners’ capital accounts in their sacrificing ratio.

Where the new partner privately pays the amount of goodwill to old partners: In this case, no entry should be passed in the books of the firm. The amount to be paid to each partner should be calculated as per the profit-sacrificing ratio.

Important Points Regarding Manufacturing Account

Important Points Regarding Manufacturing Account

1. Stocks. In case of a manufacturer, there can be stocks of three types:

 Stock of raw materials. It includes stock of raw materials or finished components which might have been purchased by the manufactrn-er for using them in the products manufactured by him but still lying unsold.

Stock of work-in-process. This is also tenned as stock of work-in-progress. It includes goods in semi-finished form.

Stock of finished goods. It includes stock of those goods which have been completely processed and are lying unsold at the end of a period with the manufacturer. It also includes stock of those finished goods which might have been purchased by a manufacturer-cum-trader from outside parties, but still lying unsold with him at the end of the accounting period.

2. Raw materials consumed. It is customary to show in the Manufacturing Account, the value of raw materials consumed for manufacturng goods during a particular period.

3.Carriage inwards, etc. The expenses incurred for bringing the raw materials to the factory or the octroi or customs duty paid by the manufacturer on the raw materials purchased or imported by him will also be charged to Manufacturing Account.

4.Cost of production. The Manufacturing Account gives the cost of manufacturing the goods during a particular period. This is comuted by deducting from the total of the dedit side of the Manufacturing Account, the total of the various items appearing on the credit side of the Manufacturing Account as shown in the proforma of the Manufacturing Account given earlier in the chapter.

5. Sale of scrap. In manufacturing operations, certain scrap is unavoidable, it may or may not have any sales value. In order to calculate the true cost of manufacturing the goods, it is necessary that the money realised on account of sale of scrap (or realisable value of the scrap in case it has not been sold) should be considered. The amount of scrap is, therefore, credited to the Manufacturing Account.

Depreciation Accounting – Causes of Depreciation

CAUSES OF DEPRECIATION

The causes of depreciation are as follows:

1. Wear and tear. Assets get worn or torn out on account of constant use as is the case with plant and machinery, furniture and fixtures- used in a factory.

2. Exhaustion. An asset may get exhausted through working. This is the case with mineral mines, oil wells etc. On account of continuous extraction of minerals or oil, a stage comes when the mine or well gets completely exhausted and nothing is left.

3. Obsolescence. Some assets are discarded before they are worn out because of changed conditions. For example, an old machine which is still workable may have to be replaced by a new machine because of the latter being more efficient and economical. Such a loss on account of new inventions or changed fashions is termed as loss on account of obsolescence.

4. Etfiux of time. Certain assets get decreased in their value with the passage of time.  This is true in case of assets like leasehold properties, patents or copy rights.

5. Accidents. An asset may meet an accident and, therefore, it may get depreciated in its value. On the basis of the above causes, it can be said that depreciation is the decrease or depletion in the value of an asset due to wear and tear, lapse of time, obsolescence, exhaustion and accidents.

 

Partnership Deed

PARTNERSHIP DEED

Partnership is created by an agreement. It is not necessary that the agreement should be in writing. It may be oral but to avoid future disputes it is always better to have it in writing. The document in writing containing the important terms of partnership as agreed by the partners between themselves is called the Deed of Partnership. It should be properly drafted and stamped according to the provisidns of The Stamp Act.

Contents of the deed.

The deed usually contains the Following information:

1. Name of the firm.

2. Names of partners.

3. Nature and place of the business of the finn.

4. Date of commencement of partnership.

5. Duration of the firm.

6. Capital employed or to be employed by different partners.

7. Rules regarding operation of bank accounts.

8. Ratios in which profits and losses are to be shared.

9. How the business is to be managed?

10. Rules to be followed in case of admission, retirement, expulsion etc., of a partner.

11. Salaries etc., if payable to partners.