STUDY MATERIAL FOR B.COM ADVANCED FINANCIAL ACCOUNTING …

STUDY MATERIAL FOR B.COM ADVANCED FINANCIAL ACCOUNTING - I

SEMESTER -III, ACADEMIC YEAR 2020-2021

Page 1 of 25

UNIT CONTENT PAGE Nr

I BRANCH ACCOUNTING 02

II CONTRACT ACCOUNT 06

III HIRE PURCHASE AND INSTALLMENT SYSTEM 10

IV ROYALTY ACCOUNT 16

V INSOLVENCY ACCOUNTS 22



Page 2 of 25

UNIT- I BRANCH ACCOUNT

Meaning Large business concerns,in order to expand its business, divide the Business into many

Sections or divisions.These sections or divisionsare established in different places of the same town or different partsof the country.These various divisions of business established in Different places are called “branches”. Objectives:

1. To ascertain the financial results 2. To create accountability among branches 3. To measure individual financial position and performance 4. To exercise proper control 5. To suggest measures for improving efficiency

Types of branches:

1. Dependent branches 2. Independent branches 3. Foreign branches 4. Format of branch account

Particulars Amount Particulars Amount

To balance b/d (all assets) Stock, debtors Furniture, petty cash To goods sent to branch To bank(all expenses) To balance c/d (cl.bal.of liabilities) To general profit &loss (profit)

xxx xxx xxx xxx xxx

By balance b/d all liabilities) Creditors By cash remittances Cash sales Cash from debtors By goods return By balance c/d (closing balance of Assets) By general profit & loss (loss)

xxx xxx xxx xxx xxx xx

Problem:

New Delhi Company has a branch at Chennai. Write up branch account in the books of head office from the following particulars.

➢ Stock on 1.1.2001 10,000 ➢ Goods sent to branch 50,000 ➢ Expenses of branch 3,000 ➢ Petty expenses of branch 1,000 ➢ Goods sold by the branch 1,00,000 ➢ Stock on 31.12.2001 12,000



Page 3 of 25

Solution:

In the books of NewDelhi company (Head Office) Chennai Branch a/c

Dr Cr

Particulars particulars

To balance b/d: Stock To goods sent to branch To cash: Expenses 3000 Petty expenses 1000 To Genera; P &L a/c

10,000 50,000 4,000 48,000 1,12,000

By Cash remittance: Cash sales By Balance c/d: Stock

1,00,000 12,000 1,12,000

Departmental Accounts:

A trader may deal with more than one type of products less than one roof. Under this situation,the whole business is divided into departments based on the type of products and separate accounts are prepared for each department,it is known as departmental accounts. Basis of allocation of expenses:

Basis of Allocation of Expenses

Common Expenses Basis of Allocation

Sales Related Expenses

• Travelling salesman commission

• Salary of Salesman

• Bad Debts

• Selling expenses

• Carriage outwards

• Discount of Debtors

• Sales Managers Salary Premises related Expenses

• Building Rent & Rates

• Air Conditioning & Heating

• Building Insurance

• Depreciation of Building Lighting Insurance of Stock Plant & Machinery Related

• Insurance

• Depreciation

• Repairs & Renewal Power Employee Related

• Group Insurance

• Salaries

Sales Ratio (Or) Turnover of Each Department Floor Area occupied Number of lights Points In the absence of Light points Floor Area Value of Stock Value of Plant & Machinery Horse Power of Machine



Page 4 of 25

• Canteen Expenses

• LaborWelfare Carriage Inward

• Discount Received

No.of Employees Purchase of each Department Purchase of Each Department

Distinction between Department and Branch

Points of Difference Department Branch

Location Book Keeping and Accounting Allocation of Common Expenses Scope of Organization Growth International Trade Foreign Currency Conversion

Same Premises Centralized Allocated in proportion to the usage by departments Confined to local business Does not arise

Different locations Head office consolidated Separate branch does not confront with this situation Paves way for geographic expansion Scope for International trade and conversion of foreign currently to India is necessary to ascertain the profitability

Problem: Ascertainment of Cost of Units Model: The following purchase were made by a firm having three department Dept A - 1000 Units Dept B - 2000 Units Dept C - 2400 Units Stock on 1st January were Dept A - 120 Units Dept B - 80 Units Dept C - 152 Units Stock were Dept A-1020 Units at Rs.20 each Dept B - 1920 Units at Rs.22.50 each Dept C - 2496 Units at Rs 25 each The rate of gross profit is name in each case. Prepare Department Trading Account. Department Trading Account Dr. Cr.

Particulars A B C particulars A B C

To Op. Stock

Rs. 1,920

Rs. 1,440

Rs. 3,040

By Sales

Rs. 20,400

Rs. 43,200

Rs. 62,400

To Purchases 16,000 36,000 48,000 By cl.stock 1,600 28,80 1,120

To Gross Profit

4,080 8,640 12,480

22,000 46,080 63,520 22,000 46,080 63,520



Page 5 of 25

Workings: 1. Calculation of closing stock (in units)

Closing stock =Opening Stock + Purchases - Sales Dept A =120 + 1000 – 1020 = 100 units DeptB =80 + 2000 – 1920 = 160 units DeptC =152 + 2400 -2496 = 56 units

2. calculation of rate of gross profit: Assuming that all Purchases are sold Then the sale proceeds will be

Dept A =1000 units at Rs. 20 = Rs. 20,000 Dept B =2000 units at Rs.22.50 =Rs. 45,000

Dept C =2400 units at Rs.25 = Rs.60.000 Total Sales 1,25,000 Less: total cost of purchase 1,00,000 Gross profit 25,000

Rate of Gross Profit =Gross profit x100/sales

=25000 x100/125000

=20% on sales 3. Calculation of cost price

Cost Price =selling price – Profit Dept A =20 – 20/100 x 20 =20 – 4 = Rs.16 Dept B = 22.50 – 20/100 x 22.50 =22.50 – 4.50 =Rs. 18 Dept C =25 – 20/100 x 25 =25 – 5 =Rs.20 Note: opening stock, closing stock and Purchases are valued at cost price of each department. From the following details prepare department trading account

Particulars Dept. A Rs.

Dept. B Rs.

Opening Stock 4500 4200

Total Purchase 13500 10800

Total Sales 21000 18000

Closing Stock 5400 2400

Credits Purchases 8500 5300

Credits Sales 2500 3000

DEPARTMENTAL TRADING AC

Particulars A B Particulars A B

To opening stock 4500 4200 By sales 2100 1800

To purchase 13500 5400 By closing

stock 5400 2400

To gross profit 8400 5400

26400 20400 26400 20400



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UNIT- II CONTRACT ACCOUNT

Meaning

It refers to an agreement between two parties on undertaking andexecution of particular Work or job. For e.g. construction of building,laying of road,installation of plant etc. Format of contract a/c Format Contract Account


To Materials *** By work in progress ***

To Labour *** Work certified ***

To Direct Expenses *** Work Uncertified ***

Indirect Expenses *** Materials at close ***

Notional Profit *** Plant at close ***

Bala Fig *** By profit & Loss a/c ***

Mat, Plant Lost & Damage ***

*** ***

To Profit & Loss A/c *** By Notional Profit ***

To Reserve ***

*** ***

Important terms in contract a/c Material:

It is the matter from which a thing is or can be made. Materials purchased for contract, issued from stores and transferred fromother contracts are debited to contract a/c.The surplus material orunused materials are to be sold at the end of the accounting period.Plantis a place where industrial or manufacturing processtakes place. When the plant, machinery or tools are used exclusively for a particular contract,the contract a/c is debited with its full value. Labour

It is practical work, especially when it involves hard physical effort. The cost of labor to the contract is debited to the contract/c under the head of wages.

Indirect expenses

Sometimes the contractor has more than one contract in process ata time.For that he may have a common office,common staff, common transport to carry men and materials etc. These expenses are called indirect expenses.

Work certified

Usually the contracted pays the contract price to the contractor only on the completion of contract. The agreement between the Contractor and contracted provides for part payments from time to time depending upon the work completed, must be approved by the Contra tee’sengineer, such approved work is called as work certified.



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Work uncertified It is possible that some part of the work completed at the end of the period remain

“unapproved”. Such a work is called work done but not certified or worksuncertified. Profit on Incomplete contract

1. Work completed less than ¼ No profit to be transferred to P&L a/c

2. Work completed more than ¼ but less than ½ 1/3 of the notional profit to be transferred to P&L a/c. Formula, Profit= notional profit*1/3 *cash received/work certified

3. Work completed more than ½ 2/3 of the notional profit to be transferred to P&L a/c. Formula, Profit=notional profit*2/3*cash received/work certified Farm a/cling Farm refers to the land that is used for growing food crops and keeping animals. Arminincludes agriculture, horticulture, animalhusbandry,poultry,dairy,sericulture etc. Farm accounting is intended to keep a record of the farming activities. It explains how the farm books should be keep and how the profit and loss arising from the farming operations should be ascertained. Format of crop a/c

Crop Account


To Opening Stock *** By Sales ***

Purchase *** Closing Stock ***

Crop Expenses *** Wages Crop (Contra) ***

Cattle Expenses *** By drawing

Live Stock Expenses *** Own Consumption consumed by live stock

***

” Wages – Cash ***

Wages – Crop (Contra) ***

Depn. Mach ***

Profit/Loss a/c (bal.fig)

***

*** ***

Problem:

From the following information, prepare ‘crop Account’ to ascertain the profit made by the crop division of the farm. Opening stock: Rs. Wheat 5,000 Seeds 1,000 Fertilizers 1,500 Purchases: seeds 600



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Fertilizers 900 Wages:paid in cash 6,800

Paid in kind – wheat 4,600 Sale of wheat 35,400 Wheat consumed by proprietor 1,600 Depreciation of farm machinery 2,000 Closing Stocks: Wheat 4,000 Seeds 700 Fertilizers 800 Solutions: Dr Cr Rs. Crop Account


To opening stock: Wheat 5000 Seeds 1000 Fertilizers 1500 To purchases: Seeds 600 Fertilizers 900 To wages: In cash 6800 In kind (c) 4600 To Depreciation: Machinery To profit (bal.fig)..

Rs. 7500 1,500 11,400 2,000 24,700 47,100

By Sale of wheat By Wages in kind (c) By Drawings: Own consumption BY closing stock: Wheat 4000 Seeds 700 Fertilizers 800

Rs. 35,400 4,600 1,600 5,500 47,100

Problem: From the following information given below prepare a ‘cattle Account’ to ascertain the

profit made by the cattle division. No value(Rs.) Opening stock of livestock 50 90,000 Closing stock of livestock 60 1,10,000 Purchases of cattle during the year 110 2,05,000 Sale of cattle during the year 95 2,12,000 Sale of slaughtered cattle 6 12,000 Sale of carcasses 4 1000 Cattle food 18,000 Wages of rearing 4,500



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Slaughter house expenses 500 Crop worth Rs. 5000 grown in the farm was used for feeding the cattle. Out of the

cattleborn, two died and their carcasses realized Rs.100.

Solution: Dr Cattle Account Cr

Particulars No.s Amount Particulars No.s Amount

Rs. Rs.

To opening By sale of cattle 95 2,12,000

Stock 50 90,000 Sale of slaught.

To purchase 110 2,05,000 Cattle 6 12,000

To calves born (bal.flg) 7 - By sale of carcasses 4 1,000

To cattle food 18,000 By sale of carcasses

To crop account Of calves 2 100

-cattle feeding 5.000 By closing stock 60 1,10,000

To wages for rearing 4,500

T0 slaughter

House expenses 500

To profit (bal.fig). 12,100

167 3,35,100 167 3,35,100



Page 10 of 25

UNIT - III HIRE PURCHASE SYSTEM AND INSTALLMENT SYSTEM

Meaning It is an agreement under which the goods are let on hire and the Hirer has a option

either to hire or to purchase them in accordance with the terms of the agreement. The title of the goods transfers only at the end of the last installment and any time before that the hirerCan terminate the contract.

1. It contains, 2. Hire Purchase Price 3. Cash Price 4. Rate of Interest 5. Down payment 6. No of installments 7. Amount per installments

Installment system Meaning

It is similar to hire purchase,except in terms of transfer ofownership. Theownership of the goods transfer to the buyeron payment of down payment. In the event of default, theseller cannot repossess the asset, but can only sue for recovery of amount.

Distinction between Hire Purchase and Installment System

Hire purchase Installment System

Agreement for hire Agreement for sale

Ownership is transferred on final payment.

Immediate transfer of ownership

Relationship is like a bailer and bailed Relationship is like a debtor and creditor

The contract can be terminated in the middle

The contract cannot be terminated

It is governed by Hire Purchase It is governed by Sale of Goods

Journal Entries as follows,



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Sl.No Particulars Debit Credit

1 For asset purchased on hire purchase system Asset A/c To hire vendor A/c)

Dr

2 For payment of down payment Hire vendor a/c

To Bank a/c All the end of the year

Dr

3. For interest included in first instatement Interest a/c

To Hire Vender a/c

Dr

4. For payment of first installment Hire Vendor a/c

To Bank a/c

Dr

5. For depreciation: Depreciation a/c

To Asset a/c

Dr

6. For closing depreciation and interest account

Profit and loss a/c To Depreciation a/c

“Interest a/c

Dr

In the subsequent years entries 3-6 are repeated

7. For asset purchased on hire purchase system.

No entry

8. For down payment due Asset a/c

To Hire Vendor a/c

Dr

9. For down payment paid Hire Vendor a/c

To Bank a/c

Dr

10. For first installment due Asset a/c

Interest a/c To Hire Vendor a/c

Dr

11. For first installment paid: Hire Vendor a/c

To Bank a/c

Dr

12. For depreciation: Depreciation a/c

To asset a/c

Dr



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1. When goods are sold on hire purchase system. Hire Purchaser‘s A/C To Hire Purchase Sales a/c

Dr

2. When down payment is received. Bank a/c To Hire Purchaser ‘s a/c At the end of year

Dr

3. For interest included in first installment. Hire Purchaser ‘s a/c To interest a/c

Dr

4. For receiving the amount of installment: Bank a/c To Hire Purchaser ‘s a/c

Dr

5. For transferring the interest account: Interest a/c To Profit and Loss a/c

Dr

NOTE: Entries 3 – 5 are repeated for every installment.

Important terms

• Cash price This means the price at which the goods may be purchased by the hirerfor cash.

• Hire purchase price It is the total amount payable by the buyer. It includes cash price and interest amount.

Interest

It means the difference of cash price and hire purchase price.

• Down payment It is an initial payment payable by the buyer, at the time of purchasing asset.

• Hirer The buyer of the asset on hire purchase basis

• Hire vendor The seller of the asset on hire purchase basis

7. Installment It is the amount payable by the buyer periodically.



Page 13 of 25

Problem

Mr.P purchased 4 cars for rs.14000 each on 1.1.2012 under hire Purchase system. The hire purchase price for all the 4 cars was Rs.60000 to be paid as Rs.15000 down payment and 3 equal annual Installments of rs.15000 each at the end the year. Interest is charged at 5% p.a. The buyer depreciates the car at 10%p.a. on Straight line method. Prepare ledger a/cs a) in the books of P under method 1&2. b)In the books of hire vendor .P .purchased 4 cars for Rs. 14000 each on 1.1.92 under the hire purchase system. The hire purchase price for all the 4 cars was Rs.60,000 to be paid as Rs.15,000 down payment and 3 equal installments of Rs.15000 each at the end of each year. Interest is charged at 5% P.a. The buyer depreciates the car at 10% P.a on straight line method. From the above particulars give journal entries and relevant ledger accounts (i) in the books of P under method (1) & (2)(ii)in the books of hire vendor.

Solution:

Table showing calculation of interest

Particulars (1)

Total cash price (2)

Installment Paid (3)(4+5)

Interest Paid (4)

Cash price Paid (5)

Cash price Less: Down payment Less:1stInstallment Less:2ndInstallment Less: 3rdinstallment

56,000 15,000 41,000 12,950 28,050 13,597 14,453 14,453

15000 15000 15000 15000

- 2050 (410000x5/100) 1403 (28050x5/100) 547 (15000- 14453)

15,000 12,950 13,597 14,453

TOTAL NIL 60000 4000 56,000



Page 14 of 25

Journal entries in the books of p Method:1

1.1.92 1.cars a/c To Hire vendor a/c (Being cars purchased on Hire Purchase)

Dr 56000 56000

2.Hire vendor a/c To Bank a/c (Being down payment made)

Dr 15000

15000

31.12.92 3.Interest q/c To Hire Vendor a/c (Being the interest payable)

Dr 2050 2050

4. Hire Vendor a/c (being the Is installment paid)

Dr 15000 15000

5.Depreciation a/c To cars a/c (Being depreciation provided)

Dr 5600 5600

6.profit and loss a/c To Interest a/c To Depreciation a/c (Being interest and depreciation transferred)

Dr 7650 2050 5600

31.12.93 Interest a/c To Hire Vendor a/c (Being the Interest Payable)

Dr 1403 1403

Hire Vendor a/c To Bank a/c (Being 2ndinstallment paid)

Dr 15000

15000

Depreciation a/c To cars a/c (Being depreciation provided)

Dr 5600 5600

Profit and loss a/c To Interest a/c To Depreciation a/c (Being interest and dep. Transferred)

Dr 7003 1403 5600

31.02.94 Interest a/c To Hire Vendor a/c (Being the interest payable)

Dr 547 547

Hire Vendor a/c To Bank a/c (Being 3rdinstallment paid)

Dr 15000 15000

Depreciation a/c To cars a/c (Being depreciation provided)

Dr 5600 5600

Profit and loss a/c To Interest a/c

Dr 6147 547



Page 15 of 25

To Depreciation a/c (Being int and dep. Transferred)

5600

Dr cars a/c Cr

1.1.92 To Hire Vendor 56.000 31.12.92 By Depreciation 5,600

31.12.92 By Balance c/d 50,400

56,000 56,000

1.1.93 To Balance b/d 50,400 31.12.93 By depreciation 5,600

31.12.93 By Balance c/d 44,800

50,400 50,400

1.1.94 To Balance b/d 44,800 31.12.94 By Depreciation 5,600

31.12.94 By Balance c/d 39,200

44,800 44,800

1.1.95 To Balance b/d 39,200



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UNIT - IV ROYALTY A/C

It is concerned with the assets, both tangible and intangible in nature. Assets

likeland,buildings,mines,copyrights,patents, trademarks etc.The owner of the asset may allow the other party right to use the asset against some consideration. Such considerationis calculatedwith reference to the quantity produced or sold. This payment to the owner by the user of the asset is termed as Royalty.

A lessor is a person who owns the assets and agrees to allow the other person to use his asset for a certain sum. Minimum Rent It is fixed in order to safeguard the interest of the landlord. It is also known as Dead Rent or Rock rent or Fixed rent. Short working

If the actual royalty is less than the minimum rent, the difference isknown as Shortworking.Recoupment of short working.The lesser has the right to recover the short workings in near future. The right to recover the short workings is known as recoupment of short workings strike and Lock Out. The royalty agreement may contain a clause for reduction in the minimum rent, in the happening of a certain event. In case of Strike orLock Out, the minimum rent may be proportionately reduced.



Page 17 of 25

Journal entries in the books of lessee

Particulars Debit Credit

1) For royalty payable a) When there are no short workings

Royalty a/c To landlords a/c

dr. xxx

xxx

b)When there are short workings i)If minimum rent a/c need not be shown Royalty a/c Shortworkinga/c To landlord a/c

dr. xxx dr. xxx

Xxx

b)When there are short workings i)If minimum rent a/c need not be shown Royalty a/c Shortworkinga/c To landlord a/c

ii)If minimum rent a/c is required Minimum rent a/c To landlord a/c

dr.xxx

Xxx

Royalty a/c Shortworking a/c To minimum rent a/c

dr. xxx dr. xxx

Xxx

2)For payment of cash a)When there is no recoupment of short workings Landlord a/c To cash a/c

dr.xxx

Xxx

b)when there is recoupment of short workings Land lord a/c

To cash a/c To Shortworking a/c

dr. xxx xxx

xxx

3)For transferring royalty at the end of the year Production a/c Or Profit &Loss a/c To royalty a/c

dr. xxx dr. xxx

Xxx

4)If there are short workings written off Profit &loss a/c To short workings a/c Journal entries in the books of landlord(lessor)

dr.xxx

xxx

1)for royalty receivable a)If there are no short workings Lessee a/c To royalty receivable a/c

dr. xxx

xxx



Page 18 of 25

To short working a/c

xxx

2)for receiving cash a)If there is no recoupment of short workings Cash a/c

To lessee a/c

dr. xxx xxx

b)If there is recoupment of short workings Cash a/c Short workings a/c

To lessee a/c

dr. xxx dr. xxx

Xxx

3)for transferring royalty receivable a)If there is no lapse of short workings Royalty receivable a/c To Profit &Loss a/c

dr. xxx xxx

b)If there is short workings written off Royalty receivable a/c Short workings a/c

To profit loss a/c

dr. xxx dr. xxx

Xxx

Problem

Mr. Good wrote a book and got it published with a publishers on the term that royalties will be paid @rs.50 per copy sold subject to a minimum rent of rs.150000 with a right of recoupment of short workings over the first three year of the royalty agreement. Prepare

i. Minimum rent a/c ii. Royalty a/c

iii. Short working a/c iv. Mr. Good a/c

Short workings Account Cr

Rs. Rs.

1996 To Engineer a/c 4000 1996 By Balance c/d 4000

4000 4000

1997 To Balance b/d 4000 1997 By Balance c/d 6000

To Engineer a/c 2000

6000 6000

1998 To Balance b/d 6000 1998 By Engineer a/c 1600

By Profit & Loss a/c 2400

By Balance c/d 2000

6000 6000

1999 To Balance b/d 2000 1999 By Engineer a/c 2000

2000 2000

Illustration: 5 (Minimum Rent a/c Maintained)

Mr. Good wrote a book and got it published with a publisher on the term that royalties will be paid R.50. Per copy sold subject to a minimum rent of 150000 with a right of



Page 19 of 25

recoupment of short workings over the first three year of the royalty agreement .From the following details

1. Minimum Rent a/c 2. Royalties a/c 3. Short workings a/c and 4. Mr. Goods a/c

Year No. of copies printed Closing

1993 1994 1995 1996

2000 3000 4000 5000

100 200 400 500

Solution: Calculation of number of copies sold: Number of copies sold = copies printed + opening stock – closing stock 1993 = 2000 + NIL - 100 = 1900 copies 1994 = 3000 + 100 - 200 = 2900 copies 1995 = 4000 + 200 - 400 = 3800 copies

1996 = 5000 + 400 - 500 = 4900 copies Table showing Calculations

Year Minimum Rent

Royalty @ 50 per Copy

Short Workings

Short working

Recouped

Short Working

Unrecouped Transfer .to

P&L a/c

Amount Payable

1993 1994 1995 1996

Rs. 150000 150000 150000 150000

Rs. 95000

145000 190000 245000

Rs. 55000 5000

- -

Rs. - -

40000 -

Rs. - -

20000 -

Rs. 150000 150000 150000 245000

Solution:

In the Books of publishes Journal Entries

Date Particulars Debit credit

1993 1.

Minimum Rent a/c To Mr. Good a/c (Being Minimum Rent Payable)

Dr

Rs. 150000

Rs. 150000

2. Mr. Good a/c To Short workings a/c To Bank

Dr 190000 400000 150000

3. Profit& Loss a/c To Royalty a/c (Being royalty amount transferred to P&L

Dr 190000 190000



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a/c)

4. Profit & Loss a/c To Short workings a/c (Being unrecouped SW transferred to P&L a/c)

Dr 20000 20000

1996 1.

Royalty a/c To Mr. Good a/c (Being royalty payable)

Dr

245000

245000

2

Mr.Good a/c To Bank a/c (Being royalty paid)

Dr 245000 245000

3. Profit & loss a/c To royalty a/c (Being royalty paid transferred to P &L a/c)

Dr 245000 245000

Ledger Accounts Dr Minimum Rent Account Cr

1993

To Mr. Good a/c

150000

Rs. 1993

Rs.

By Royalty a/c 95000

By Shortworkings 55000

150000 150000

1994 To Mr. Good a/c 150000 1994 By Royalty a/c 145000

By Shortworkings 5000

150000 150000

Dr Royalty Account Cr

1993 1994 1995 1996

To minimum Rent a/c To minimum Rent a/c To Mr.Good a/c To Mr.Good a/c

Rs. 95000 95000 145000 145000 190000 190000 245000 245000

1993 1994 1995 1996

By Profit& loss a/c By profit& loss a/c By profit & loss a/c By profit & loss a/c

Rs. 95000 95000 145000 145000 190000 190000 245000 245000

Dr short workings Account Cr

1993 1994

To Minimum Rent To Balance b/d To Minimum Rent

Rs. 55000 55000 55000 5000

1993 1994

By Balance c/d By Balance c/d

Rs. 55000 55000 60000



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1995

To Balance b/d

60000 60000 60000

1995

By Mr. Good By Profit & loss a/c

60000 40000 20000 60000



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UNIT -V INSOLVENCY A/C

The term “Insolvency” refers to the state of inability of a personto pay his debts when

they fall due. A person whose liabilities exceed his assets is called “insolvent” or “bankrupt”.In India there are two laws which deal with insolvency. They are

a. The Presidency Towns Insolvency Act1909 b. The Provincial Insolvency Act,1920

The Presidency Towns Insolvency act is applicable to thePresidency towns –

Mumbai,Kolkata, andChennai The provincial Insolvency act applies to the rest of India. Format of statement of affairs STATEMENT OF AFFAIRS

Gross Liability

Liabilities Expected to Rank

Assets Book Value

Estimated to Produce

*** Unsecured creditors as per List -A

*** Properties as per list E

*** ***

*** Fully secured creditors as per List-B

*** i)Cash at Bank ii) cash in Hand iii) cash with solicitors iv) Machinery vi) Fixtures&fitting vii) Furniture’s viii) Life Polities ix) other properties Book Debt

*** *** *** *** *** *** *** *** *** ***

*** *** *** *** *** *** *** *** *** ***

Less Estimated value of securities **** ****

Less Amount

Carried to List C ****

Balance to Contra ****

***

Partly secured creditors As per List C Less Estimated Value of securities ***

****

As per list-F a) Good b) Doubtful e) Bad

*** *** ***

*** *** ***

***

Preferential creditors as per list D **** less Deducted as per contra paid in full ***

---

Bills of Exchange as per List G a) B/R estimated to produce

*** ***

Add Surplus from securities with fully secured creditors (as per contra) ***

***

Less Creditors for preferential debt ***



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*** *** ***

Deficiency as per List H ***

*** ***

List A: Unsecured creditors

These creditors are those who do not hold any asset of the insolvents security .It includes,

1. trade creditors 2. unsecured loan 3. bank overdraft 4. bill payable 5. *wife’s loan

List B: Fully secured creditors

These creditors hold securities to the full extent for their loan given to the insolvent person.List C, Partly secured creditors. These creditors who hold securities which are insufficient to meet the entire debts .List D, Preferential creditors,these creditors are those unsecured creditors who are entitled to be paid in full before the other creditors can be paid. List E,Properties other than properties given as securities are shown in this list, for e.g. cash in hand, cash at bank, machinery, furniture etc.List F Book debts

It refers to debtors, under the heading of “good”, “bad”and“Doubtful”List G Bill ReceivableBill receivable are listed under this heading. List H Deficiency, The difference of the two sides of the statement of affairs shows either a “deficiency “or “surplus”. Format of Deficiency a/c Deficiency Account

Excess of assets over liabilities

*** Excess of liabilities over assets ***

Net Profit *** Net loss *** Income/profit from other sources (Salary commission, etc)

Bad debts as per List F

Interest on capital *** Expenses incurred other than usual business expenses ie household expenses. ***

Deficiency as per statement of Affairs

*** Drawing ***

*** Other losses Speculation loss Realization loss

*** ***

*** ***

List C: Partly Secured Creditor



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Those creditor who hold securities which are insufficient to meet the entire debts are called partly secured creditors. List D: Preferential Creditors:

These creditors are those unsecured creditors who are entitled to be paid in full before the other creditors can be paid. These creditors are given preference in payment over all other unsecured creditors. List E: Properties List F: Book Debts List G: Bill of Exchange List H: Deficiency a/c

Problem Following is the trial Balance of Mr. Kumar of Chennai who commenced business on 1.1.01

Debit Rs. Credit Rs.

Cash Stock Debtors (all good) Furniture Investment in shares Valve of securities held by – secured creditors Loss (2001) Drawings (uoto Dec.2001)

230 666 13.000 282 500 3,500 2,500 6,916 27,594

Creditors (unsecured) Secured Creditors Preferential Claims for Rent, rates and taxes Capital Profit (1999,2000)

18,000 2,500 190 1,350 5,554 27,594

You are required to prepare statement of affairs of Mr. Kumar and his Deficiency Account on 31- 12 – 2001. (M.S University April 2006)



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Solution: STATEMENT OF AFFAIRS OF KUMAR

As on 31 Dec 2001

Gross Liabilities

Liabilities Expected To Rank

Assets Book Values

Estimated To produce

Rs. 18,000 2500 190

Unsecured creditors As per List- A Fully secured creditors As per List –B 2500 Less valve of sec.3500 Surplus to contra1000 Partly secured CRs. As per list – C Preferential creditors As per List _D 190 Less Deducted As per contra 190

Rs.

---------- ----------

18,000

Properties as per List – E Cash Stock Furniture Investment in Shares Book Debts as per list – F Good Bills of Exchange As per List - G Add surplus as Per contra Less preferential Creditors Deducted as Per contra Deficiency As per List - H

Rs.

230 666 282

500

13.000 ---------

Rs.

230 666 282

500

13.000 ---------

14,678

1000 15.678

190 15,488

2,512

18,000

Deficiency Account

Excess of assets over Liabilities Trade Profit (5554- 2500) Defiency as per List – H

Rs.

1,350 3,054 2,512 6,916

Drawings

Rs. 6,916

6,916

Documents

STUDY MATERIAL FOR B.COM ADVANCED FINANCIAL ACCOUNTING …