Difference Between Hire Purchase And Installment System

1. Nature Of Contract
Hire Purchase System: It is a hiring goods agreement.
Installment System: It is an agreement of sale.

2. Ownership
Hire Purchase System: Ownership of goods is transferred after the payment of final installment.
Installment System: Ownership of the goods passes to the buyer just signing the agreement.

3. Right
Hire Purchase System: The buyer can not sell, destroy or transfer the goods.
Installment System: The buyer can sell, destroy or mortgage or transfer as his/her wish.

4. Risk
Hire Purchase System: All the risks are borne by the vendor before the payment of final installment.
Installment System: All the risks are to be borne by the buyer from the date of agreement.

5. Right Of Return
Hire Purchase System: The buyer can return the goods before making the final installment.
Installment System: The buyer can not return the goods to the seller.

6. Repair And Maintenance
Hire Purchase System: The liability of repair and maintenance lies with the seller provided that the buyer takes the utmost good care.
Installment System: The buyer is responsible for repair and maintenance.

7. Forfeiture Of Installment Paid
Hire Purchase System: In case of default in payment of installment, paid installment will be forfeited and treated as hire charges.
Installment System: The act of forfeiture can not be activated.

Concept And Features Of Installment Purchase System

Concept Of Installment System
An installment system is just like a credit purchase and hire purchase system of selling and buying goods. Like hire purchase, in installment system an agreement is made between buyer and seller to purchase and sell of goods. The buyer makes certain down payment at the time of signing agreement and the balance is paying in installment over a period of time.
An installment system is a credit sale in which payments are made in installments over a period of time. In this system, the buyer gets the possession as well as ownership of the goods right at the time of signing the agreement. During the course of paying the installment, if the buyer makes default in paying the installment, the vendor cannot responses the goods. In that case, the vendor can sue the buyer for recovery of dues. Like in hire purchase even the paid installments also can not be forfeited in case of default in paying installment.
Thus, it can be said that installment system is a kind of credit sale where installments are entertained over the period and default in such payment cannot responses the goods and in that case, the vendor can only sue the buyer for the recovery of amount due.

Features Of Installment Purchase System
The following are the features of installment purchase system:
1. Installment purchase system is just like an outright credit sale of goods.

2. The buyer makes the payment in different installment over a period of time as agrees upon in the agreement.

3. Under installment purchase system, the buyer gets the immediate possession as well as the ownership of goods.

4. The seller can not responses the good if the buyer made default in the payment of installment but he/she can sue against the buyer for the recovery of amount due.

5. In case of default in the payment of installment, the total amount of installments already paid by the buyer can not be forfeited.

6. Under installment system, the buyer can sell or mortgage the goods even before clearing all the installments.

7. Risk of goods/assets are to be borne by the buyer just after signing the agreement.

8. The buyer of the goods under installment purchase system has no right to return the goods to the seller.

Accounting Treatment Of Hire Purchase System Or Methods Of Recording Hire Purchase Transactions

Journal Entries In The Books Of Hire Purchaser

There are two methods of recording hire purchase transactions in the books of the hire purchaser:

i. When the asset is recorded in full cash price-:full cash price method

ii. When the asset is recorded at cash price actually paid in each installment-: Actual cash price method.

1. For the purchase of asset:

First Method

Asset A/C (full cash price)...........Dr.

To vendor A/C

Second Method

No entry

2. For the payment made for 'down payment'

First Method

Vendor A/C.............Dr.

To bank A/C

Second Method

Asset A/C............Dr.

To Bank A/C

3. For installment due

First Method

Interest A/C............Dr.

To vendor A/C

Second Method

Asset A/C (part of cash value)............Dr.

To Interest A/C

4. For the payment of installment (both method)

Vendor A/C............Dr.

To Bank A/C

5. For charging depreciation( on the basis of cash value) (both methods)

Depreciation A/C...................Dr.

To Asset A/C

6. For transfer of interest and depreciation(both methods)

Profit and loss A/C............Dr.

To depreciation A/C

To interest A/C

Note: entries 3,4,5 and 6 will be repeated year after year until the final installment is paid.

Journal Entries In The Books Of Vendor

1. For selling goods on hire purchase

Hire purchase A/C...........Dr.(full cash price)

To sales/hire purchase sales A/C

2. For receiving down payment

Cash/bank A/C.................Dr.

To hire purchaser A/C

3. For installment due

Hire purchaser A/C............Dr.

To Interest A/C

4. For receiving the installment

Cash/bank A/C .............Dr.

To hire purchaser A/C

5. For transferring interest

Interest A/C............Dr.

To profit and loss A/C.

Note: * Depreciation will not charge by hire vendor.

* Entries 3,4 and 5 will be repeated year after year until the first installment is paid.

Important Terminologies Of Accounting For Hire Purchase System

1. Hire seller/Hire vendor/Owner
A person who sells the goods to the buyer under hire purchase system is known as hire seller.

2. Hirer/Hire purchaser/Hire buyer
The person who purchase goods from hire vendor or who obtains the goods from an owner under hire purchase agreement is known as hirer.

3. Cash price/Cash value
It is a value of goods at which the goods may be purchased by the hirer for cash.

4. Down Payment
The initial cash payment made by the hire purchaser to the vendor at the time of signing the hire purchase agreement is referred as down payment.

5. Hire Purchase Price
The hire purchase price includes the cash price and interest to be paid on the future installment. It is the total sum payable by the hirer to the vendor.

6. Hire Purchase Charge
The difference between the hire purchase price and the cash price as stated in the hire purchase agreement is known as hire purchase charge.

Concept Of Hire Purchase System

Purchase and sale of goods under a hire purchase system is different from cash sale and credit sale. In case of cash sale, the buyer pays the lump sum to the seller and immediately ownership is passed along with the goods. While in credit sale the payment is made in future. In these both cases the ownership and possession of goods pass on the buyer. However, hire purchase system is a special system of purchase and sale.
In hire purchase system, the buyer acquires the property by promising to pay necessary installment payment of monthly, quarterly, half yearly or any other period. The period of payment has to be fixed while, signing the hire sell agreement. Though, the buyer acquires the asset under hire purchase system after signing the agreement, the title of ownership remains with vendor until the buyer squares up his/her entire liability. When the buyer pays the final installment and any other obligation according to hire purchase agreement, only then the title of ownership of the goods would be transferred to hirer. If the hirer makes default in the payment of any installment, the hire vendor has the right to re-possess the goods. When the vendor re-possesses the goods due to the default of payment of installment, in this case the amount already paid so far by the hirer will be forfeited.
The hire purchase price of goods is normally higher than the cash down price of article because it includes interest as well as cash price. Under hire purchase system, the vendor is responsible to repair the goods which are in the possession of buyer provided that the buyer takes the utmost proper care of the goods acquired. The risk is also borne by the vendor until the payment of last installment. The buyer has the right to return the goods to the vendor, if they are not according to the terms and condition of hire purchase agreement.

Accounting Treatment Of Royalty In The Books Of Lessor

Accounting Entries In The Books Of Lessor:

A. When Royalty Is Less Than The Minimum Rent:

Without maintaining minimum rent account:

1. For the actual royalties:
Lessee's A/C...................Dr.
To Royalties A/C
To Shortworking A/c

2. For due amount received:
Bank A/C...............Dr.
To Lessee A/C

3. For royalties transferred:
Royalties A/C...........Dr.
To profit and loss A/C

With maintaining minimum rent account:

1. For minimum rent receivable:
Minimum rent A/c......................Dr.
To royalties A/C
To Shortworking A/C

2. For minimum rent due:
Lessee's A/C................Dr.
To minimum rent A/c

3. For due amount received:
Bank A/C....................Dr.
To Lessee's A/C

4. For Royalties transferred:
Profit and loss A/C...............Dr.
To Royalties A/C

B. When Royalty Is Less Than Minimum Rent:

1. For royalties due:
Lessee's A/C....................Dr.
To Royalty A/C

2. For shortworking recouped and royalty received:
Bank A/C...................Dr.
Shortworking A/C....Dr.
To Lessee's A/C

3. For royalty and unrecouped shortworking transferred:
Royalties A/C...............Dr.
Shortworking A/C........Dr.
To profit and loss A/C

C. When Royalty Is Equal To The Minimum Rent:

1. For the actual royalties:
Royalties A/C............Dr.
To landlord A/C

2. For the amount paid:
Landlord A/C...........Dr.
To Bank A/C

3. For transferring royalties:
Profit and loss A/C..........Dr.
To Royalties A/C

Accounting Treatment Of Royalty In The Books Of Lessee

Accounting Entries In The Book Of Lessee:

A. When the royalty is less than minimum rent:
Without maintaining minimum rent:

1. For minimum rent payable:
Royalties A/C.....................Dr.
Shortworking A/C.............Dr.
To landlord A/C

2. For minimum rent paid:
Landlord A/C.....................Dr.
To bank A/C

3. For royalties transferred to profit and loss account:
Profit and loss A/C............Dr.
To Royalties A/C

With maintaining minimum rent:

1. For royalties and shortworking raised:
Royalties A/C........................Dr.
To Shortworking A/C...........Dr.
To Royalties

2. For minimum rent payable:
Minimum rent A/C.............Dr.
To landlord A/C

3. For amount paid to landlord:
Landlord A/C......................Dr.
To bank A/C

4. For royalties transferred to profit and loss account:
Profit and loss A/C.............Dr.
To royalties A/C

B. When Royalty Is More Than Minimum Rent:

1. For the actual royalties:
Royalties A/C...................Dr.
To landlord A/C

2. For the amount paid and shortworking recouped:
Landlord A/C.................Dr.
To bank A/C
To Shortworking A/C

3. For transferring royalties and unrecouped shortworking:
Profit and loss A/C............Dr.
To royalties A/C
To Shortworking A/C

C. When Royalty Is Equal To The Minimum Rent:

1. For royalties due from lessee:
Lessee's A/C.................Dr.
To royalty A/C

2. For amount of royalty received:
Bank A/C.....................Dr.
To lessee's A/C

3. For royalties transferred:
Royalties A/C............Dr.
To profit and loss A/C

Meaning Of The Terms Used In Accounting For Royalties

Before proceeding to the accounting treatment of royalty, it is better to understand the following terms:

1. Minimum Rent

Minimum rent is also known as dead rent, fixed rent, flat rent, rock rent and contract rent. A minimum sum guaranteed to the lessor by the lessee in order to make the lessor receive a minimum amount in any particular period, whether he derived any benefit or not, out of the right is known as minimum rent. It is a pre-determined rent and being disclosed in the royalty agreement where both parties have their consent. But if the production or sale is more than the minimum quantities previously agreed upon, then the royalty will be paid for the actual production. In other words, when the royalty is less than the minimum rent, the lessee pays the minimum rent, but when the royalty exceeds the minimum rent, royalty is payable.

2. Redeemable Dead Rent/Shortworking

Shortworking is that amount by which the minimum rent exceeds actual royalty. In other words, whenever the minimum rent is more than the actual royalty, the difference is called redeemable dead rent. Suppose, if a mine owner agreed to let the mine to a lessee for $ 20,000 for extraction of 1,000 kg. of coal and lessee actually produced only 600kg. of coal. Then $ 8,000(i.e. $20 X 400kg.) is known as shortworking. Shortworking is also called 'royalty suspense' by lessor.

3. Surplus

If the actual royalty exceeds minimum rent, it is known as surplus. In the above example, suppose the output for a particular period is 1,500 kg. then $ 10,000 ($ 20 X 500) is referred as surplus.

4. Recoupment Of Shortwirking

Generally, a royalty agreement contains a provision for carrying forward of shortworking with a view to adjust in the future in. In the subsequent years, such shortworking is adjusted against the surplus royalty. This process of adjustment is called recoupment of shortworking.

5. Strike And Lock Out

Strike is the outcome of labor force unrest in the work and it is being called by the labor unions. On the other hand, lock out is the right of the owner of the assets fulfilling legal necessities to close down the working site.But the result of both the cases show the production stoppage. In such event, the actual production could be badly affected and may not be sufficient to pay the minimum rent. Under such condition, the lessor may accept royalty on the basis of actual output. The provision to this effect must be presented in the royalty agreement.

Concept And Meaning Of Royalty

The term royalty is concerned with the assets of tangible or intangible in nature. The assets like land, building, mines, copyright, patent, trademark etc. are attracted with royalty. Royalty is a periodical payment to be paid by the user of the assets of the above nature. It is a sum payable for enjoying the benefits of certain rights vested with the other person. The person who makes payment and uses the assets is known as 'Lessee'. And the person who surrenders the right and receives the royalty is known as 'Lessor'.

The 'Lessor' is the owner of assets. Author of a book, holder of patent, land lord of mine etc. are the examples of Lessor. The lessee acquires the right to use the lessor's property. For it, the lessee pays a certain amount to the lessor, which is termed as royalty. Publisher, patent user, trade mark user, licencee etc are the examples of lessee.

Royalty payable is an ordinary business expenditure for the lessee and royalty receivable is an income for the lessor. It can be paid either on the basis of unit sold or on the basis of output. If it is paid on the basis of the unit sold, it is transferred to profit and loss account. Royalties paid on the basis if output is transferred to the production account. If nothing is specified, royalties paid is transferred to profit and loss account.

A royalty is generally, paid to the owner of the right under the following cases:

1. When the government or local authority allows some person to collect forest products like honey, herbs, clay etc. from the forest, the government or local authority is the owner or lessor and the person who collects is the lessee.

2. When the owner of mines like coal, copper, stone allows other party to extract materials from land.

3. When the right of owner like copyright, patent right, trade mark, exclusive right of design are licenses to some other party.

Accounting Treatment Of Containers

For accounting purpose, the containers can be divided into two types: (a) Non-returnable containers and (b) Returnable containers.

a) Non-returnable Containers
The accounting for non-returnable containers can be exercised under the following two conditions:
i. When separate charge is made
ii. When separate charge is not made

i. When separate charge is made
A separate charge for container could be made even though the containers are non-returnable. To record such transaction, a container account is opened debiting opening stock of containers, purchases and credited with the amount charged to customers and closing stock of containers. The separate charge made to the customer is recorded in Sales Day Book in a separate column. Since the separate charge made to customers for the containers is higher than the cost of the containers, the container stock account will therefore, shows the profit or loss on the containers for the period.

ii. When no separate charge is made
The containers like tube of tooth paste, wrapper of chocolate, lubricants are not returnable in nature. Therefore, the manufacturer or seller includes the cost of such containers in the selling price of the goods. Hence, in this case, a container stock account is opened debiting opening opening stock of empties, purchases and credited with closing stock. The difference between the debit total of container stock account with the credit total is the cost of containers consumed. The cost of containers consumed could be transferred to profit and loss account as distribution expenses or charged to trading or manufacturing account.

b) Returnable Containers
When containers are returnable, there are two alternatives for accounting treatment:
i. When no separate charge is made
ii. When separate charge is made

i. When no separate charge is made
The packages, tins, boxes, bottles etc. are necessary for packaging goods. While selling such types of well packed goods, a provision could be made with the customers for the returns of such type of containers. The provision of repair and maintenance is also necessary to make the container moveable regularly. When no separate charge is made even for returnable container, it is being expected that the customer will return the container within a specified period. If the customer returns the containers on time his account will be credited with the value less than the original cost of the container. This is carried out for maintaining the provision of depreciation.

ii. When separate charge is made
When separate charge is made for returnable container, there are various methods to deal with the situation. But widely used methods are as follows:
1. With opening containers stock and trading account
- Containers stock account
- Containers trading and profit and loss account
- Containers reserve/suspense/deposit account
2. Without opening containers stock account separately
- Containers trading and profit and loss account
- Containers reserve/suspense/provision account

Terms Used In Containers Account

1. Cost Price
The purchasing price or the manufacturing cost of the containers is referred as cost price.

2. Charged Out Price
A particular amount can be charged to the customers for the container, which is known as charged out price.

3. Returnable Price
When a customer returns the returnable containers in good condition within a stipulated time, he/she will be refunded a certain amount which can be termed as returnable or refundable price.

4. Hire Charge
The difference between charged out price and returnable price is known as hire charge.
Hire Charge = Charged out price- Returnable price

5. Containers Retained (Sold)
The containers are sent to the customers with terms and conditions. If the customer fails to return the containers within the stipulated time, it will be treated as sold or retained by customers.

6. Returnable Containers
The containers lying with the customers on the closing date of the accounting period is known as returnable containers. For becoming returnable containers, the time limit of return should nor be expired on the closing date.

Concept Of Accounting For Container And Objectives Of Keeping Separate Accounts For Containers

Meaning And Concept Of Containers Account
The word containers may be substituted for drums, boxes, packages, cases, crates, bottles, barrels, empties and cask in different and appropriate situation. The modern business can not be separated with containers. Products need suitable containers before they are sold to the customers. Normally, there are two types of containers viz. primary which is the part of the product and secondary which is need for distribution of goods to the customers.
When the containers are of primary nature its cost is included in the cost of production and there is no need to be returned by the customers. Therefore, no separate treatment is needed for such containers. But when the cost of the container is a significant portion of total cost, the charge of container is normally excluded in the price of product to allow the seller to compete with other competitors. The usual practice for such containers is that they are returnable in nature and are return by the customers with terms and conditions, a major portion of charge already taken from the customers, will be refunded to the customers. Therefore, the difference between the charged out price for containers and the refunded price is known as 'Hire charges'.

Objectives Of Keeping Separate Accounts For Containers
Containers require investment. Hence, a separate account should be maintained for containers. The separate account is not necessary fir non-returnable containers. But for returnable containers the separate account is necessary for the following reasons.

1. The separate account is necessary for controlling over the movement of containers. Time to time it needs reconciliation and the regular incoming and outgoing of containers must be recorded.

2. For an ascertainment of profit or loss arising out of containers also, the separate accounting is necessary.

Concept And Journal Entry For Inter-departmental Transfers

Since the departments are just under the single roof and involved in exchanging their goods or employment staff or performance of services among the different departments, which is known as inter-departmental transfer. The journal entry for inter-departmental transfer would be as follows:
Receiving Department..............Dr.
To Supplying Department

If the goods are transferred at cost price, there will not be any serious consideration. It is because the supplying department will record in its books as a sale at cost price and the receiving department records as a purchase at a cost price. But it needs due consideration if the supplying department supplies goods or services to receiving department at purchase cost plus certain percentage of margin. The receiving department after receiving goods at cost price plus margin from supplying department, if unable to sell them totally at the end of accounting period, then in this condition a provision for unrealized profit or stock reserve has to be affected for the unsold stock with the help of following entry:
General profit and loss A/C...........Dr.
To stock reserve A/C

Similarly, if the receiving department holds the goods which are transferred at selling price in its opening stock, the following entry is made:
Stock reserve A/C....................Dr.
To general profit and loss A/C

It is a common practice that calculated rate of gross profit is applied to closing stock and given rate of gross profit is applied in the opening stock to calculate unrealized profit. The rate of gross profit can be ascertained as follows:

a) % of gross profit = (Gross profit/Sales + Departmental transfers) X 100
b) Transferred portion of goods = (Departmental transfers/Purchase+departmental transfers)
c) Unrealized profit= Gross profit rate X Total amount of stock X Transferred portion of goods.

Difference Between Branch And Department

Followings are the main differences between branch and department:

1. Branches are separated from the main organization. Departments are attached with the main organization under a single roof.

2. Branches are the outcome of tough competition and expansion of business. Departments are the result of fast human life.

3. Branches are geographically separated. Departments are not separated rather existed under a same roof.

4. Branches are of different types like dependent, independent and foreign. There is no such classification in department because all are common under the same roof.

5. Allocation of branch common expenses does not arise. Allocation of departmental common expenses is a tough job.

6. To find out the net result of the organization, the reconciliation of different branch account is a main job.In departmental accounting, no reconciliation is necessary because there is a central account division.

Allocation Of Expenses In Departmental Accounting

The expenses which can be specially incurred for a particular departments like salary to salesman, can be charged directly to the department, but the expenses which could not be allocated precisely to a particular department may be divided among the different departments are as follows:

1. Sales Of Each Department
* Salesman's commission
* Discount allowed
* Bad debts
* Carriage Outwards
* Advertisement
* Packing expenses
* Provision for discount on debtors
* Traveling salesman's salary and commission

2. Purchase Of Each Department
* Discount received
* Provision for discount on creditors
* Carriage Inward
* Freight
* Duty


3. Area Of Floor Space Of Each Department
* Rent
* Rates and taxes
* Repair and maintenance Of building
* Insurance on building
* Air conditioning expenses
* Heating

4. Value Of Assets In Each Department
* Depreciation Of Machinery
* Repairs and maintenance of plant
* Insurance premium

5. Number Of Workers
* Workmen's compensation insurance
* Canteen expenses
* Labor welfare expenses
* Time keeping
* Personnel office
* Supervision

6. Direct Wages
* Compensation to workers
* Holiday pay
* Provident fund contribution
* Group insurance premium

7. Number Of Light Points
* Lighting expenses

8. Horse Power Of Machine And /Or Production Hours
* Electric Power

9. Time Devoted By Him For Each Department
* Work manager's salary

Accounting Procedure In Departmental Accounts

Normally, there are two methods of departmental accounting. They are:

1. Separate Unit Method

2. Analytical Method

1. Separate Unit Method

This method is suitable if the organization is very large in size and operation. In this method, each department maintains and prepares books of account separately. The principle 'one department one account' is followed in this method. At the end of the accounting period, all the departmental accounts are combined together to calculate the result of the organization as a whole. This method is not suitable for a small organization.

2. Analytical Method

Separate unit method has different limitations such as overlapping of accounts, waste of time, expansiveness etc. Due to these limitations, the departmental organizations followed analytical method, which is also known as columnar method of accounting. This method is very simple to maintain. When the size of the departmental organization is small, the entire book keeping system for the business as a whole is generally kept by a central accounts department. An independent and individual department just maintains the records like purchase book, sales book, purchase return book, sales return book etc. A typical columnar subsidiary book is maintained by central account department.

Concept And Objectives Of Departmental Accounting

Concept Of Departmental Accounting

Modern life is very mechanical specially in big cities. The citizens of such cities expect all the goods and services just under a single roof. Contemplating the need of the consumers, the business men are also providing the expected service to the consumer just under a roof by opening large scale departmental stores. The departmental stores are the example of large scale retail selling just under a single roof. Different departments are involved for different goods to be sold out. To calculate the net result of the whole organization, a full fledged trading and profit and loss account is to be prepared. But to evaluate individual department, it will be credit worthy to prepare individual trading and profit and loss account. Such individual accounts will help to evaluate and control the different departments.

Objectives Of Departmental Accounting

The main objectives of departmental accounting are:

1. to check out interdepartmental performance

2. To evaluate the performance of the department with previous period result.

3. To help the owner for formulating right policy for future.

4. To assist the management for making decision to drop or add a department

5. To provide detail information of the entire organization

6. To assist management for cost control

Accounting Treatment Of Goods In Transit And Cash In Transit In Accounting For Branch

Accounting Treatment Of Goods In Transit

Normally, the head office sends goods to the branch and it is immediately recorded by head office in its books. But, the branch will record it when the goods are physically received by the branch. Similarly, sometimes the branch returns goods to the head office and is immediately recorded by branch. But the return of goods will be recorded by head office when the returned goods is duly received by them. Therefore, the goods which are on the way to branch/head office are called 'goods in transit'.

Adjustment entry will have to be passed to incorporate the goods in transit in the books of head office. It is because all in transit items are normally detected by head office after receiving the trial balance or the copy of final account. Goods in transit will appear on the assets side of head office balance sheet.

The entry for goods in transit is:

Goods in transit A/C.........Dr.

To Branch A/C

Accounting Treatment Of Cash In Transit

All the branches send cash at regular interval to head office. But, at the end of accounting period, some cash sent by the branch are still in transit. Therefore, to record such transit is cash in the books of head office, the entry will be:

Cash in transit A/C............Dr.

To branch A/C

Treatment Of Normal Loss And Abnormal Loss In Accounting For Branch

Accounting Treatment Of Normal Loss

The normal loss is a loss of natural phenomena. It is an unavoidable loss. Some examples of normal loss are evaporation, shrinkage, leakage, shortage, drying etc. No entry is required for normal loss. So the total cost of goods sent to branch becomes the goods received and normal loss unit is the difference between total number of goods sent and physically received units.

Accounting Treatment Of Abnormal Loss

The loss of goods sent by the head office to branch which is caused by avoidable abnormal condition or carelessness is called the abnormal loss, for example loss of goods by theft, fire, riots, accident etc. The abnormal loss should be charged to profit and loss account. It is calculated as under:

A. Cost of goods sent.........................................................................XXX

B. Add: Non-recurring expenses up to point of loss............................XXX

Total cost of goods sent (A+B) ............................XXX

Abnormal Loss = (Total cost of goods sent/Total units of goods sent) X Loss Unit

Journal entries for abnormal loss

a. If there is no insurance coverage for the goods sent to branch:

Abnormal loss A/C ...............Dr.

To branch A/c

General profit and loss A/C............Dr.

To Abnormal loss A/C

b. If there is a policy coverage for the goods sent to branch:

Abnormal loss A/C ..................Dr.

To branch A/C

Bank A/C..................Dr.

General profit and loss A/C..........Dr.

To Abnormal loss A/c

Accounting Records Of Independent Branch

1. For goods supplied by head office to branch:

Branch book:

Goods supplied by head office A/C.........Dr.

To Head office A/C

(Being receipt of goods)

Head office book:

Branch A/C..............Dr.

To goods supplied to branch A/C

(Being goods sent to branch)

2. For cash remitted by head office to branch:

Branch book:

Cash A/C..............Dr.

To head office A/C

( Being cash received)

Head office book:

Branch A/C .................Dr.

To cash A/C

(Being cash sent to branch)

3. For goods returned by branch:

Branch book:

Head office A/C............Dr.

To goods supplied to head office A/C

(Being goods return to head office)

Head office book:

Goods supplied from branch A/C............Dr.

To Branch A/C

(Being goods returned from branch)

4. For cash remitted by branch to head office:

Branch book:

Head office A/C.............Dr.

To cash

(Being cash sent to head office)

Head office book:

Cash A/C.................Dr.

To Branch A/C

(Being cash received from branch)

5. For assets purchased by branch on behalf of head office:

Branch book:

Head office A/C ..................Dr.

To cash A/C

(Being purchase of assets)

Head office book:

Branch assets A/C.............Dr.

To branch A/C

(Being assets purchased by branch)

6. For depreciation charged:

Branch book:

Depreciation A/C ...............Dr.

To Head office A/C

(Being depreciation on branch fixed assets)

Head Office book:

Branch A/C...................Dr.

To branch assets A/C

(Being depreciation of branch fixed assets)

7. For expenses incurred by head office

Branch book

Expenses A/C..............Dr.

To head office A/C

(Being expenses incurred by head office)

Head office book:

Branch A/C......................Dr.

To profit and loss A/C

(Being expenses incurred for branch)

Concept And Meaning Of Branch And Types Of Branches

Concept And Meaning Of Branch

The recent process of globalization and its development hit all the nations of the world for their rapid development of trade, commerce and industries. Branch, therefore, is the result of rapid growth of business in the world. Since, there is an international access to the trade and commerce, business undertakings are opening their establishment nationally and internationally in the different parts of the world. Whatever the business undertaking opened by the organization, they are normally a segment of the original business undertaking. Therefore, a branch can be defined as a segment of an enterprise normally controlled by head office being located in different geographical position. In practice, the branches are playing a vital role to put the original establishment in the existence.

Types Of Branches

Branches may be classified as under from the accounting point of view:

1. Inland Branches

2. Foreign Branches

1. Inland Branches

The branches opened in the different parts of the nation, where the original undertaking being registered are called inland branches. These types of branches are also called home branches or national branches. There are two types of inland branches, which are:

a) Dependent branch

b) Independent branch

a). Dependent Branch

Dependent branches are the branches that do not keep their records but all the records are maintained by head office. They are not authorized to act solely without the prior permission of the head office. All the plans, policies, rules and regulations of these branches are totally formulated and executed by the head office. In other words, all the functions of dependent branch are totally controlled by head office.

Under dependent branch, two types of branches are included, which is termed as service branch and retail branch.

* Service Branch: All the branches which are booking or executing orders on behalf of head office are called service branches. These are the branches which are busy in execution all the orders for the sake of head office.

* Retail Branch: Retail branches are also dependent branches, but they are concerned with the head office for selling goods, produced by the head office itself or purchased from outside in a bulky position and are sent to the retail selling branches for selling them out as like.

b). Independent Branch

The branches that can keep their accounts themselves and sell goods that are sent by the head office as well as those purchased by themselves are known as independent branches. These are the branches which can sell the goods to head office too. They can pay their own expenses and can deposit their collection in their own name in the bank. These branches record separately

and independently all the transactions which are even recorded by the head office.

2. Foreign Branches

Because of the rapid development of trade, commerce and industries and with the growing tough competition, the business enterprises are opening their branches abroad in order to capture the potential market and accelerate their business globally. Therefore, the branches established abroad is called foreign branch. The accounting procedure of foreign branch is just like an independent branch except in the following cases:

- Exchange rate and conversion of foreign currency into home currency

- Effects of foreign exchange rate are to be incorporated in the books of head office.

Methods Of Keeping Joint Venture Account

Mainly there are two ways of keeping joint venture account. Those are 1. Without keeping separate separate set of books, 2. With keeping separate set of books.

1. Without Keeping Separate Set Of Books

A separate set of books for joint venture transaction is not made under this method. in this method, every co-ventures record all the transactions in his books in connection with the joint venture. Tow types of accounts are maintained under this method namely joint venture account and co-venture's account. There are again three variations.

i. Each co-venture records his own transactions as well as the transactions of the other co-venture and also opening other co-venture's account for final settlement.

ii. Only one co-venture records the account

iii. Each co-venture records his own transactions only, which is known as memorandum joint venture method.

Each co-venture will open two principal accounts under this method. Those are Joint venture account and personal accounts of the co-venture.

Joint Venture Account

This account is prepared to ascertain the profit or loss on joint venture. Hence, it can be treated as nominal account. Goods purchased, goods supplied by the co-ventures, expenses incurred etc. are debited and sale proceeds, unsold stock, stock taken over by co-venture etc. are credited to joint venture account. The final balance of joint venture account shows profit or loss which is transferred to co-ventures' account according to their profit sharing ratio.

Personal Account Of Co-venture

The co-venture's account is debited with goods and sales proceeds taken over, remittance share of profit. Similarly, the personal account is credited with cash, goods supplied by the co-ventures.

2. With Keeping Separate Set Of Books

When the size of the venture is considerably large, then a separate set of books of accounts may be maintained. Under this system, accounts are maintained just like in the case of partnership. While preparing the accounts, the principle of double entry must be followed. Under this method, the following ledgers are maintained.

i. Joint Venture Account

ii. Joint Bank Account

iii. Co-venture's Account

Joint Venture Account

The joint venture account is very unique one where all the purchases, procurement related expenses, selling and distribution expenses as well as expenses related to the joint ventures are being debited like trading and profit and loss account. No any separate account of purchases, wages or any other expenses are opened. The goods supplied by co-ventures etc. are also debited to it. Likewise, sale proceeds, closing stock, goods taken over by co-ventures are credited to joint venture account. If the joint venture account shows credit balance, it means profit and if it shows debit balance, it is loss and transferred to co-ventures personal account.

Joint Bank Account

It is just like a cash book. It records all the cash and bank transactions. It is opened with the contribution of cash made by co-ventures. The investment made by then are deposited into a bank account and will operate this in their joint name. Any receipts of cash and any expenses related to venture are recorded in their account. The joint bank account is closed by transferring balance to the personal account of co-ventures.

Co-ventures Account

Like the capital accounts in partnership, co-venture account is opened in joint venture. it is credited with the investment of each co-venture and debited with the drawings made by them. The profits of the venture is credited and loss of venture is debited. This account comes to end by cash payment from joint bank account.

Difference Between Joint Venture And Partnership

The differences between joint venture and partnership are stated below:

1. Parties

Joint venture: The participant in joint venture is known as co-ventures.

Partnership: The participant in partnership is known as partners.

2. Nature

Joint venture: It is temporary in nature and is terminated as soon as the venture is completed.

Partnership: It is a going concern business.

3. Name

Joint venture: It does not need any single name to carry on the activity.

Partnership: It always bears a first name.

4. Profit

Joint venture: Profits are ascertained after the completion of each venture.

Partnership: Profits are ascertained annually.

5. Basis Of Account

Joint venture: Cash basis account is followed.

Partnership: Accrual basis of account is followed.

Difference Between Joint Venture And Consignment

The main differences between joint venture and consignment are as under:

1. Nature

Joint venture: It is a temporary partnership business without a firm name.

Consignment: It is an extension of business by principal through agent.

2. Parties

Joint venture: The parties involving in joint venture are known as co-ventures.

Consignment: Consignor and consignee are involving parties in the consignment.

3. Relation

Joint venture: The relation between co-ventures is just like the partners in partnership firm.

Consignment: The relation between the consignor and consignee is 'principal and agent'.

4. Sharing Profit

Joint venture: The profits ans losses of joint venture are shared among the co-ventures in their agreed proportion.

Consignment: The profits and losses are not shared between the consignor and consignee. Consignee gets only the commission.

5. Rights

Joint venture: The co-ventures in a joint venture have equal rights.

Consignment: In consignment, the consignor enjoys principal's right whereas consignee enjoys the right of agent.

6. Exchange Of Information

Joint venture: The co-ventures exchange the required information among them regularly.

Consignment: The consignee prepares an account sale which contains a details of business activities carried on and is being sent to the consignor.

7. Ownership

Joint Venture: All the co-ventures are the owners of the joint venture.

Consignment: The consignor is the owner of the business.

8. Method Of Maintaining Accounts

Joint venture: There are different methods of maintaining accounts in joint venture.As per agreement the co-ventures maintain their account.

Consignment: In consignment, there is only one method of maintaining account.

9. Basis Of Account

Joint venture: Cash basis of accounting is applicable in joint venture.

Consignment: Actual basis is adopted in consignment.

10. Continuity

Joint venture: As soon as the particular venture is completed, the joint venture is terminated.

Consignment: The continuity of business exists according to the willingness of both consignor and consignee.

Concept And Features Of Joint Ventures

Concept Of Joint Ventures

A temporary kind of business activity carried on by more than on individual with a view to earning profit in a pre-agreed manner without giving a firm name to the business is known as joint venture.It is a temporary partnership between two or more persons for completing a particular adventure. The relationship between them is ceased as soon as that particular venture is completed.

The persons who enters into the joint venture agreement are called co-ventures. The joint venture agreement will be automatically terminated after completing the venture. The profits or losses are shared between the co-ventures according to their pre-agreed agreement. In the absence of agreement , the profits or losses are shared equally among themselves.

Features Of Joint Ventures

1. Joint venture is a special partnership without a firm name.

2. Joint venture does not follow the accounting concept 'going concern'.

3. The members of joint venture are known as co-ventures.

4. Joint venture is a temporary business activity.

5. In joint venture, profits ans losses are shared in agreed proportion. If there is no agreement regarding the distribution of profit, they will share profit equally.

6. Joint venture is an agreement for polling of capital and business abilities to be employed in some profitable venture.

7. At the end of venture, all the assets are liquidated and liabilities are paid off: if necessary the assets and liabilities could be shared by co-ventures.

8. Joint venture always follows cash basis of account

Accounting treatment In The Books OF Consignor When Goods Consigned At Invoice Price

Whenever a consignor sends goods to consignee at a price higher than the cost price, that is known as invoice price method. It is done if the consignor does not want to disclose the real profit to the consignee. The consignee will not be able to know the cost price if the goods are consigned at above price. Hence, he cannot find out profit or loss being made by the consignor on these goods.

For the goods consigned at invoice price, the entries in the books of both consignor and consignee will be same. But the following changes and adjustment entries are required in the books of the consignor for eliminating loading charge in goods sent, goods returned, unsold goods and abnormal loss.

1. For goods sent on consignment

Consignment to.................. A/C..........Dr.(invoice price)

To goods sent on consignment A/C

2. For loading goods sent on consignment

Goods sent on consignment A/C........Dr.(loading amount)

To consignment to......A/C

3. For abnormal loss

Abnormal loss A/C...............Dr.(invoice price)

To consignment to........A/C

4. For loading on abnormal loss

Consignment to......A/C.............Dr.(loading amount)

To abnormal loss A/C

5. For unsold stock

Consignment stock A/C.............Dr.(invoice price)

To consignment to........A/C

6. For loading on unsold stock

Consignment to..........A/C.......Dr. (loading amount)

To consignment stock reserve A/C

7. For goods return by consignee

Goods sent on consignment A/C.............Dr. (invoice price)

To consignment to.....A/C

8. For loading on goods returned

Consignment to.........A/C ........Dr.(loading amount)

To goods sent on consignment A/C

Loss Of Goods On Consignment

The goods are consigned from one place to another. After receiving the goods by consignee, the goods are stored by the consignee before selling them to customers. It is natural that some loss to the goods may take place within that period. The goods may be lost, destroyed or damaged either in transit or in consignee's store. Such loss can be divided into two parts.

1. Normal Loss

The loss which is caused by unavoidable reasons is known as normal loss. For examples shrinkage, evaporation, leakage and pilferage. Such losses form part of cost of goods and no additional adjustment is required for this purpose. The normal loss is borne by goods units. The quantity of such loss is to be deducted from the total quantity sent by the consignor. The following formula may be used for the valuation of unsold stock.

Value of closing stock= (Total value of goods sent/Net quantity received by consignee) X unsold quantity

Net quantity received = Goods consigned quantity - Normal loss quantity.

2. Abnormal Loss

The loss which could be avoided by proper planning and care are abnormal loss. They are like theft, riots, accidents, fire, earthquake etc. These losses could occur in transit or in consignee's store and solely to be borne by consignor.

The abnormal loss should be adjusted before ascertaining the result of the consignment. The valuation of abnormal loss is done on the same basis as the unsold stock is valued. The journal entries for abnormal loss in different cases are as under:

If goods are not insured

For recording abnormal loss:

Abnormal loss A/C ...........Dr.

To consignment A/C

For abnormal loss transferred:

Profit and loss A/C........Dr.

To abnormal loss A/C

If goods are insured and claim admitted in full

Bank/Consignee's/Insurance company A/C...........Dr.

To consignment A/C

If goods are insured and claim admitted in partial

Profit and loss A/C...........Dr.(Net loss amount)

Insurance Co./bank/consignee's A/c.......Dr.(Claim admitted)

To consignment A/c (total loss amount)

The following method should be followed while valuing abnormal loss:

A) Goods sent on consignment(at cost price)...............$ XXX

B) Add: Non-recurring expenses:

Consignor's expenses...................................................$ XXX

Consignee's expenses...................................................$ XXX

Total cost before abnormal loss A+B.............................$ XXX

Value of abnormal loss = (Total cost/Total units consigned) X abnormal loss units.

Valuation Of Unsold Stock In Accounting For Consignment Of Goods

The stock lying in the hands of consignee at the end of accounting year is valued at cost or market price whichever is less. The cost of unsold stock or closing stock should be valued at cost to the consignor plus proportionate non-recurring expenses incurred by the consignor and consignee.

The following method should be carefully considered while valuing unsold stock:

Cost Price Of Goods Consigned.................................XXX

Add: Expenses incurred by consignor:

Freight.........................................................................XXX

Carriage.......................................................................XXX

Insurance on goods dispatch......................................XXX

Docks dues....................................................................XXX

Export/Import duties....................................................XXX

Loading and unloading charges...................................XXX

Add: Consignee's expenses:

Unloading charges.....................................................XXX

Landing charges........................................................XXX

Import duty................................................................XXX

Octroi.........................................................................XXX

Godown rent etc........................................................XXX

Total Cost..................................................................XXX

Cost of unsold stock = (Total Cost/Total Quantity) X Unsold Quantity

Alternative Method,

Cost Of Unsold Stock

= (Cost of goods sold+Proportionate of all expenses/Total Quantity) X unsold stock

Journal Entries In The Books Of Consignee

Consignment is not a sale. Hence, the consignee does not treat the consignor as his creditor. The consignee does not make any entry for the goods consigned by the consignor and received by consignee, because the goods do not belong him. Following is the procedure for recording transactions in the books of consignee.

1. For remitting advance

Consignor's A/c...................Dr.

To cash/bank/bills payable A/c

2. For bills met on due date

Bills payable A/C ................Dr.

To Bank A/c

3. For incurring expenses

Consignor's A/C.....................Dr.

To Cash/bank A/c

4. For making cash sale

Bank/Cash A/C................Dr.

To consignor's A/c

5. For credit sale

Consignment debtor's A/C............Dr.

To consignor's A/c

6. For charging commission

Consignor's A/c ...........Dr.

To commission A/c

7. For collection of debt

Bank A/C ..................Dr.

To consignment debtor's A/c

8. For final settlement of account with consignor

Consignor's A/C.............Dr.

To cash or bank A/c

Accounting Treatment Of Consignment Or Accounts Maintained BY The Consignor

A consignment account is a combined form of trading and profit and loss account solely to the concerned consignment. It can be treated as nominal account. An independent consignment account for each and consignment to the name of place or consignee is to be prepared in order to ascertain the profit or loss from that consignment.

In order to keep complete record of consignment transactions, the consignor maintains the following accounts:

* Consignment Account

* Consignee's Account

* Goods sent on consignment Account

The following entries are made in the books of the consignor for goods sent at proforma invoice price or cost price:

1. For the goods sent on consignment

Consignment to .........A/C......................Dr.

To Goods sent on consignment A/c

2. For the expenses incurred by consignor

Consignment to.........A/C..............Dr.

To Bank A/C

3. For the advance received from consignee

Bank/Cash/Bills receivable A/C............Dr.

To Consignee's A/C

4. For the bills discounted

Bank A/C...................Dr.

To Bills receivable

5. For discount on bills transferred to profit and loss account

Profit and loss A/C...................Dr.

To Discount A/c

6. For expenses paid by consignee

Consignment to..............A/c.................Dr.

To Consignee's A/c

7. For the goods sold by consignee

Consignee's A/c.................Dr.

To consignment to.................A/c

8. For the commission due to consignee

Consignment to .................A/C

To consignee's A/C

9. For closing stock with consignee

Consignment stock A/C...........Dr.

To consignment to.......A/c

10. For profit or loss on consignment

For profit earned on consignment

Consignment to........A/C..................Dr.

To Profit and loss A/C

For loss on consignment

Profit and loss A/C.....................Dr.

To consignment to.............A/C

11. For final settlement of account with consignee

Bank A/c...............Dr.

To Consignee's A/c

12.For goods sent on consignment transferred to trading account(by a manufacturing company) or purchase account(by a trader)

Goods sent to consignment A/C..............Dr.

To trading/ purchase A/C

Concept And Types Of Commission In Consignment

Commission

Commission of the consignee is calculated on gross sale made by the consignee. It is a reward to the consignee by the consignor for selling the goods of former. The rate of commission is fixed considering the prevailing market practices and with due agreement between the consignor and consignee.Sometimes goods consigned with insurance coverage may be damaged and the compensation is realized from the insurance company. The compensation received from the insurance company could be treated as sales but no commission is allowed to the consignee on such a realized compensation amount.

Types Of Commission

1. Ordinary Commission/Simple Commission

The commission charged by the consignee on the gross sale proceeds is known as ordinary or simple commission. It is calculated at fixed percentage of total sales.

Commission = Gross sales X Fixed rate percent of commission

2. Del-credere

This type of commission is an additional commission for a endeavor of magnifying sales in the form of credit.It is calculated at a certain predetermined rate of gross sales.

3. Special/Extra/Over-riding Commission

In normal practice, if a consignee sell the goods at the price higher than the normal selling price, he will entitled a commission for excess amount realized over the normal selling price. The commission provided on the excess amount realized over the normal selling price is known as special commission.

Types Of Consignment Expenses

The various expenses are required for goods sent by consignor to consignee. Similarly, the expenses are also required for storing and selling activity performed by the consignee. These expenses are of two types:

1. Non-recurring Expenses
The expenses incurred between the period of goods sent by consignor to receive by the consignee is known as non-recurring expenses. In other words, all expenses incurred till the goods reach to the consignee are non-recurring expenses. Examples of non-recurring expenses are as follows:

Expenses of the consignor
* Packing
* Carriage
* Docks dues
* Landing Charge
* Freight
* Insurance

Expenses of the consignee
* Unloading charge
* Dock dues
* Import duty

Non-recurring expenses must be included in the cost of the consignment. For arriving at the consignment, these expenses are added. These expenses are also taken into consideration while calculating the value of unsold stock or closing stock with the consignee.

2. Recurring Expenses
The expenses paid by the consignee after receiving the consigned goods are known as recurring expenses. These expenses are of recurring nature and do not increase the value of goods. Though the recurring expenses are met by consignor or consignee, these expenses should be borne by the consignor. Some examples of recurring expenses are as follows:

Expenses of the consignor
* Bank charges
* Expenses incurred on damaged
* Goods received back

Expenses of the consignee
* Storage charge
* Insurance
* Brokerage
* Advertising
* Salary to salesmen
* Expenses on goods return
* Goods damaged
* Commission on sales

Important Terms Used In Accounting For Consignment Of Goods

1. Consignment
The dispatch or transfer of goods to an agent for the purpose of sale on behalf and risk of principal is known as consignment

2. Consignor
The owner or principal who sends the goods to agent is known as consignor.

3. Consignee
The agent to whom the goods are sent is known as consignee.

4. Consignment Outward And Consignment Inward
The goods sent by consignor to the consignee is consignment outward. The same goods will be consignment inward for the consignee.

5. Pro-forma Invoice
It is an invoice prepared by the consignor and sent to the consignee detailing the weight or quantity and the price at which the goods are to be sold. It is an evidence of consigned goods indicating the price at or above the consignee will have to sell the goods. Though it seems as a sales invoice in format, it is quite different from it. A sales invoice is a document sent by a seller to buyer which charges the buyer with the value of goods.

6. Account Sales
The consignee has to inform its consignor about sale and expenses incurred by him for selling activity. For this purpose, the consignee has to prepare a statement which is known as account sale. An account sale is a statement of sales and other expenses incurred by the consignee while performing sale. It can be taken as a base of consignor's books of account for recording sales and expenses incurred by the consignee for selling the consigned goods.

Difference Between Consignment And Sales

Consignment can not be treated as sales of goods. It is different from sales. The difference between consignment and sales are as follows:

1. Ownership
Consignment: The ownership of the goods remains with the consignor until sales is effected by the consignee.
Sales: The ownership of the goods immediately transferred to the buyer when sale is effected.

2. Relationship
Consignment: The relationship between the consignor and consignee are of principal and agent. Their relation ship are continued till terminated.
Sales: The relationship between the two parties are that of seller and buyer and they terminated as soon as payment is made and goods are delivered.

3. Expenses
Consignment: The expenses incurred by the consignee to execute sale and the expenses incurred by consignor to send the goods to the consignee, both are borne by the consignor.
Sales: Any expenses incurred after the sale is not borne by the seller.

4. Risk
Consignment: The risk of goods under consignment is always with the consignor.
Sales: When the sale is made the risk is transferred to the buyer.

5. Return Of Goods
Consignment: Consignee can return goods to the consignor since those are properties of consignor.
Sales: A buyer can not return goods unless the goods are found defective or damaged or the seller agrees to.

6. Statement
Consignment: For giving details about the goods sold and expenses incurred by him, consignee sends the account sales to consignor.
Sales: The buyer need not submit any account sales to the seller.

7. Stock
Consignment: The unsold stock with the consignee will be treated as a stock of the consignor.
Sales: In case of sale, the buyer's unsold stock do not attract the seller.

8. Commission
Consignment: Commission is the main consideration of consignment. The consignee performs the selling activity only for commission.
Sales: Profit is the main consideration of sales.