3rd sem Advanced Financial accounting Notes Module 1 PDF

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Advanced Financial Accounting Notes – Third semester B.com CBCSS

Module 1: PARTNERSHIP ACCOUNTS Meaning A partnership is a formal arrangement by two or more parties to manage and operate a business and share its profits. Features of Partnership 1. Number of persons: The minimum Number of persons required to form a partnership is two 2. Agreement : There must be an agreement between partners, the agreement may be written or oral 3. Business: The partnership is formed for the purpose of carrying on some business 4. Sharing of profits and losses: The main objective of agreement of partnership businesses to share the profit 5. Liability of partners: The liability of partners in a partnership firm is unlimited 6. Lowest rate legal assistance: Partnership firm is not a legal entity Partnership deed Meaning The document which contains terms and conditions of partnership is known as Partnership Deed. In the absence of an agreement, the partnership Act is applicable Contents of Partnership Deed The following are the contents partnership deed. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

Name of the partners. Name and nature of the business. Capital contributed by each partner. The ratio of Gain or Loss. Rate of interest is allowed on a partner’s capital. Salary is to be paid to a partner for doing the extra job. The maximum amount of withdrawal of a partner during a particular period. Whether a partner’s capitals are to be maintained on fixed or fluctuating methods. Life of partnership business. Rate of interest on the drawing if any to be charged. Interest on partner’s loan. Financial period for determining Gain or Loss of the business.

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Advanced Financial Accounting Notes – Third semester B.com CBCSS

Methods of Maintaining Capital Account There are two methods of maintaining capital accounts of the partners a. Fluctuating Capital Method b. Fixed Capital Method Fluctuating Capital Method fluctuating capital account method is that method in which only one account called capital account is maintained and all adjustments are like share of profit or loss, interest on capital, drawings, etc. are recorded in capital account of the partner. Fixed Capital Method Fixed capital account method is that method in which the capitals of the partner’s remains fixed unless additional capital is introduced or a part of the capital is withdrawn as per the agreement or requirement of the partners and all other adjustments like share of profit or loss, interest on capital, drawings, etc. are recorded in a separate account which is called partner’s current account Under this method, two accounts, viz., The Capital Account and Current Account are maintained for each partner. Profit and loss Appropriation Account Profit and Loss appropriation Account is prepared after Trading Profit and loss Account. Profit and loss Appropriation Account is prepared to distribute the net profits into general reserve, salary to partners, commission, interest on capital etc. and remaining balance is also distributed to partners in an agreed ratio Partnership Dissolution Dissolution means discontinuation. Dissolution may be a. Dissolution of Partnership and b. Dissolution of Partnership firm Dissolution of Partnership refers to the termination of the original partnership agreement among the partners, Every time, when there is an admission or retirement or death of partners, technically there is dissolution of existing partnership and formation of new partnership Section 39 of the Indian Partnership Act Lays down that. “Dissolution of partnership between all the partners of a firm is called the dissolution of the firm” Prepared by Remesh AR

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Advanced Financial Accounting Notes – Third semester B.com CBCSS

Modes of dissolution 1. Dissolution by agreement (section 40) When all the partners are agreed to dissolve the firm it is called dissolution by agreement. 2. Compulsory dissolution (section 41) In the following cases a firm must be dissolved as per law a. When all the partners or all except one become insolvent or insane b. When the business become illegal c. When all the partners or all except one decide to the letter from the firm d. When all the partners or all except one partner die 3. Dissolution on the happening of contingencies (section 42) In the following cases a firm may be dissolved a. By the death of a partner b. Insolvency of a partner c. By the completion of the venture/project d. The expiry of the terms of the firm 4. Dissolution by notice (section 43) Where a partner gives notice in writing to all the other partners of his intention to dissolve the form, this may be reason to dissolve the firm. 5. Dissolution by Court (Section 44) A court order a partnership firm to be dissolved in case of a suit by a partner on the following : a. b. c. d. e.

When a partner becomes unsound mind When a partner becomes permanently incapable of performing his duties as a partner When a partner transfers whole of his interest in the firm to third party When the court regards it just and equitable to dissolve the firm When a partner breaches agreement among the partners

Settlement of accounts on dissolution The following is the steps of settling the accounts at the time of dissolution of Partnership Firm a) Realising all the assets of the firm Prepared by Remesh AR

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Advanced Financial Accounting Notes – Third semester B.com CBCSS

b) Losses, deficiencies of capital if any shall be paid first out of profit, next out of capital, and lastly, if necessary, by the partners individually in their profit-sharing ratio. c) Pay expenses on realisation d) Pay third party liabilities or external liabilities like loan from bank, loan from friends or relatives of partners e) Pay internal liabilities like loan from partners f) Surplus, if any, will be divided among the partners in their profit sharing ratio. Realisation Account Realisation account is a nominal account prepared at the time of dissolution of a partnership firm in order to find the profit or loss on dissolution Garner Vs. Murray Decision Under Garner Vs. Murray Decision when a partner is declared as insolvent and he is unable to pay his liabilities/debt at the time of dissolution of partnership firm, his entire liabilities after deducting anything recovered from his private property are treated as realisation expenses and it should be divided among the solvent partners in their capital ratio. Realisation Account Particulars

Amount

Particulars

1. All Assets except Cash

XXXX

2. All liabilities except capital and reserves

4. Cash /Bank(Liabilities payed)

XXXX

3. Cash/Bank( Assets realised ( Assets sold))

6. Partners Capital A/c (Liabilities taken XXXX over by partners)

5. Partners capital A/c ( Assets taken over by

8. Cash/Bank (unrecorded liabilities payed) XXXX

7.Cash/Bank (Unrecorded assets realised)

9. Cash/Bank ( Realisation expenses)

10. Partners capital account (loss on realisati

XXXX

11. Partners capital account (profit on realisation) XXXX XXXX Prepared by Remesh AR

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Advanced Financial Accounting Notes – Third semester B.com CBCSS

Module 2 : ACCOUNTING OF CONSIGNMENT Meaning Consignment means transfer of goods from one person to another for sale on commission of the person who send goods Person who send goods to consignee under consignment contract is called consigner Person to whom the goods are sent for sale on commission basis is called the consignee Features of Consignment Business a) b) c) d) e)

The relation between consignor and consignee is that of principal and agent. Only the possession and not ownership is transferred to the consignee Risk of goods remains with Consignor and not with the consignee Only movable property is subject matter of the consignment Consignment goods are dispatched on the basis that the goods will be sold on behalf of, at the expense and at the risk of the consignor. f) Consignor sends Pro-forma Invoice and not Account Sales g) Consignee sends Account Sales (which contains information as to Sales, Expenses, Commission, Advance, and Balance due). h) The Profit or Loss on consignment belongs to Consignor and not Consignee. Pro-forma Invoice A Pro-forma invoice is a document prepared by the consignor which is sent to the consignee along with the goods. It contains the details with respect to the quantity of goods sent, rates at which the goods are sent and other terms and conditions for sending the goods on consignment. Commission on Consignment Commission on consignment is the reward or remuneration given by the consignor to the consignee for selling the goods. Commission may be a) Delcredere Commission b) Overriding Commission Del-credere commission is an extra commission paid by the consignor to the consignee to cover the risk of bad debts, if any, arising out of credit sale made by the consignee. Overriding Commission is the extra commission paid to the consignee in addition to the normal commission for selling products at its maximum possible price Expenses on Consignment Prepared by Remesh AR

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Advanced Financial Accounting Notes – Third semester B.com CBCSS

Expenses on consignment may be a. Recurring expenses b. Non-recurring expenses No-recurring expenses The expenses incurred between the period of goods sent by consignor to receive by the consignee is known as non-recurring expenses. Examples Expenses of the consignor * Packing * Carriage * Docks dues Expenses of the consignee * Unloading charge * Dock dues * Import duty 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. Examples Expenses of the consignor * Bank charges * Expenses incurred on damaged * Goods received back Expenses of the consignee * Storage charge * Salary to salesmen * Expenses on goods return * Goods damaged Account Sale An Account sale is a statement prepared and sent by the consignee to the consignor. It contains the details with regard to the quantity of goods received, sales made, expenses incurred, commission, amount sent and the balance payable by consignee to the consignor. Consignment Account Prepared by Remesh AR

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Advanced Financial Accounting Notes – Third semester B.com CBCSS

Consignment account is a nominal account prepared by the consignor at the end of an accounting year in order to find the profit or loss from consignment business

Normal loss The loss which is inherited and cannot be avoided in consignment business is called normal loss. It should also be considered while valuing the closing stock. Value of stock =Total cost of goods send–Non-profit recurring expenses. X Qty in sales Net quality Abnormal loss Losses whose occurrence is not certain and are avoidable i.e. which occur on account of abnormal reasons are abnormal losses. Eg: Loss on account of fire, accidents, theft, etc. Consignment Account Consignment Account particulars

Amount particulars

Amount

Goods send on consignment XXXX X A/c (Money received from consignee) XXXX Bank (Expenses of consigner) XXXX Unsold stock XXXX X A/c (Expenses of consignee) XXXX X A/c ( Commission for consignee) XXXX Profit and loss Account (Loss) XXXX X A/c ( Bad debts) XXXX Profit and loss Account (Profit) XXXX XXXX

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XXXX

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Advanced Financial Accounting Notes – Third semester B.com CBCSS

Module No 3 : JOINT VENTURE Meaning When two or more persons or firms jointly undertaken a business or a project with a view to earn profit and to share profits and losses therefrom in certain agreed proportions is called Joint Venture Definition A joint venture may be defined as “ a particular partnership, Jolly undertaken by two or more persons with a view to earn profit and to share profits and losses there from in agreed proportions” Features of joint venture 1. 2. 3. 4.

A joint venture is formed mainly to undertake risk bearing business and to earn profit A joint venture is a partnership without the use of a firm name In joint venture, there should be sharing of profits and losses between co-ventures Joint venture is a temporary partnership which comes to end on completion of the particular venture 5. There is no restrictions on the maximum number of members in a joint venture Difference between Joint Venture and Partnership Basis

Joint venture

Partnership

Firm Name Relationship Continence Books of Accounts Regulation

Not required Co-ventures Till the completion of the venture Not compulsory There is no specific act

Required Partners Continue longer period Compulsory Partnership Act

Difference between Joint Venture and Partnership Basis Joint venture Consignment Co-ventures Principal and Agent Relationship Till the completion of the ventureConsignment Continue longer period Continence Bearing of risk Co-ventures has to bear all risks Risk is bore by the consigner Ownership of Co-ventures are owners Consigner is the owner Goods Profit or loss is shared by CoVentures Entire profit or loss goes to the consigner Sharing P&L Not compulsory to pay Payment of commission to consignee is commission compulsory Commission Prepared by Remesh AR

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Advanced Financial Accounting Notes – Third semester B.com CBCSS

Methods of recording joint many transactions The followings are the main methods of recording joint venture transactions I. II. III. IV. I.

II.

III.

IV.

When one of the partner is appointed to manage the venture. When separate set of books are not maintained for recording joint venture transactions. When joint venture transactions are recorded through memorandum joint venture account. When separated set of books are maintained for joint venture. When one of the partner is appointed to manage the venture. Under this method one of the co venture is appointed as the manager to manage the entire joint venture business. The venturer who is appointed to manage the venture, prepares a Joint Venture Account to find out the profit or loss on the venture and the accounts of the other co-venturers to find out the amount due to them. Joint venture Account Joint venture account is a nominal account prepare to find out the profit or loss from venture to which all the expenses are debited and all incomes are credited When separate set of books are not maintained for recording joint venture transactions. Under this method all the Ventirers keep separator set of books are maintained instead of keeping one set of books for the joint venture by one of the ventures who manage the entire affairs. Under this method, each venture prepares a joint venture Account to find out the profit or loss and the other venturers account to find out the amount due to due by the venturer When joint venture transactions are recorded through memorandum joint venture account. Joint venture method is a method of recording joint venture transaction without completing double entry in any book. Under this method each venturer records only those transactions which are affected by him. Memorandum Joint Venture Account Memorandum joint venture account is a nominal account prepared to find out the profit or loss from a joint venture without completing double entry in accounting When separated set of books are maintained for joint venture. In this method, The Venturers do not record the joint venture transaction in their books, instead of complete set of books is maintained for recording the joint venture transactions. The accounting treatment is similar to that of partnership transactions.

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Advanced Financial Accounting Notes – Third semester B.com CBCSS

Module No : 4 BRANCH ACCOUNTING Branch Meaning Branches are offspring organisations set up at different places by a parallel organisational known as the head office, in order to increase its sales territory and sales volume Definition The Indian Companies Act 2013 defines a branch as “any establishment carrying on the same or substantially the same activity as that carried on by the head office of the company” Features of branches 1. One branch at one place 2. Branches deals same products and services 3. Branches are established by head office, hence the entire investment made by head office 4. The entire profit of the branch transferred to the head office 5. The entire expenses of branches are met by head office Difference 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. Branch accounting Meaning Branch accounting is the process through which the accounting system of a branch is maintained. Types of Branches The branches can be divided in to ➢ Dependent Branches (Branches not keeping full system of Accounting) ➢ Independent Branches (Branches keeping full system of Accounting) ➢ Foreign Branches

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Advanced Financial Accounting Notes – Third semester B.com CBCSS

Dependent Branches Branches that operate as per strict instruction and direction given by the head office is known as dependent Branch Features 1. 2. 3. 4.

These branches sale only such goods which are supplied by head office Goods are often supplied by head office at cost price All the expenses of branches are met by head office Sales are normally made on cash basis, but branches are authorised to make credit sales also 5. Branches keep only some memorandum records like stock register, debtors register Etc.. Methods of maintaining Accounts of Dependent Branches

Methods of maintaining Accounts of Dependent Branches

Debtor System

Stock and debtor Final Accounts Wholesale Branch system System System

I. Debtor System Under this system the Head Office opens one Branch Account to record various transactions with the Branch. In the books of the Head Office, Branch Account is debited with the goods supplied and all expenses met by Head Office and credited with all remittances and returns by branch As per debtor system the Branches may be again classified in to a. A branch that receives goods at cost and sells only for cash b. Branch that receives goods at cost but sells both for cash and credit c. Branch that receives goods at invoice price or loaded price and sells for cash and credit II. Stock and debtor system This method is applicable particularly where there are large numbers of transaction. This method helps the Head Office to make efficient control on branches as there are a few more accounts are to be opened Viz.. a) Branch Stock Account b) Branch Debtors Account c) Branch Stock Adjustment Account Prepared by Remesh AR

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Advanced Financial Accounting Notes – Third semester B.com CBCSS

d) Goods Sent to Branch Account e) Branch expenses Account f) Branch Profit and loss Account A. Branch stock account Branch stock account is a practical means of controlling stock at branch. This account records the transactions in regard to the stock in the branch at invoice price. The debit side of this account re...