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Semester 2: CORE III FINANCIAL ACCOUNTING-II
Hire Purchase and Instalment System Accounting Treatment Calculation of Interest - Default and Repossession - Hire Purchase Trading Account - Instalment System - Calculation of Profit
Hire Purchase and Instalment System Accounting Treatment
Definition and Overview
Hire purchase is a type of credit purchase where the buyer pays for the goods in instalments. The buyer has possession of the goods while making payments but the ownership remains with the seller until the final payment is made.
Accounting Treatment
In the hire purchase system, the accounting treatment involves recording the asset in the books at a minimum of the cash price or the total hire purchase price, depending on the ownership transfer.
Calculation of Interest
Interest on hire purchase is calculated on the outstanding balance. The total interest paid over the life of the hire purchase agreement can be determined by subtracting the cash price from the total amount paid.
Default and Repossession
If a buyer defaults on payments, the seller has the right to repossess the goods. The accounting treatment upon repossession would involve removing the asset and any unpaid interest from the books.
Hire Purchase Trading Account
The hire purchase trading account is prepared to ascertain the profit or loss from hire purchase transactions. It includes the hire purchase sales and related expenses.
Instalment System
The instalment system allows for payment of goods in parts. Each instalment includes a portion of the principal and interest. Accounting treatment involves recognizing the revenue and corresponding cost with each instalment.
Calculation of Profit
Profit in the context of hire purchase and instalment systems is calculated by deducting cost of goods sold and expenses related to hire purchase transactions from the sales revenue.
Branch and Departmental Accounts Branch Dependent Branches Accounting Aspects - Debtors system -Stock and Debtors system Distinction between Wholesale Profit and Retail Profit Independent Branches Foreign Branches excluded - Departmental Accounts Basis of Allocation of Expenses Inter- Departmental Transfer at Cost or Selling Price.
Branch and Departmental Accounts
Branch Dependent Branches Accounting
Branch dependent branches are those branches whose accounts are maintained by the head office. The head office keeps track of all transactions related to these branches, facilitating centralized control over financial reporting.
Debtors System
The debtors system is a method of tracking the amounts owed to a business by its customers. This system helps in managing receivables and assessing the financial health of the branches.
Stock and Debtors System Distinction
The stock system focuses on inventory management, while the debtors system deals with receivables. Understanding both systems is crucial for effective financial management of branches.
Distinction between Wholesale Profit and Retail Profit
Wholesale profit is derived from selling goods in bulk at a lower price, while retail profit comes from selling goods at higher margins to consumers. Both types of profits are essential for assessing branch performance.
Independent Branches
Independent branches maintain their accounts separately from the head office. This allows for a more autonomous operation while still aligning with the overall organizational objectives.
Foreign Branches
Foreign branches operate outside the home country and may face additional accounting challenges such as currency exchange and compliance with local laws.
Departmental Accounts
Departmental accounts track the financial performance of different departments within a business. This allocation of expenses allows for better resource management and performance evaluation.
Basis of Allocation of Expenses
Expenses can be allocated based on various criteria such as revenue generated, square footage, or other relevant metrics to provide a clearer picture of departmental efficiency.
Inter-Departmental Transfer
Inter-departmental transfers can occur at cost or selling price. The method chosen affects profitability calculations and managerial decisions.
Partnership Accounts - I Partnership Accounts Admission of a Partner Treatment of Goodwill - Calculation of Hidden Goodwill Retirement of a Partner Death of a Partner.
Partnership Accounts
Admission of a Partner
When a new partner is admitted into an existing partnership, changes in the partnership agreement and capital structure need to be recorded. The new partner may contribute cash or assets, and goodwill may be calculated to compensate existing partners for the value brought by the new partner.
Treatment of Goodwill
Goodwill represents the intangible value of a partnership. Upon the admission of a partner, goodwill can be treated in two ways: accounting for it in the books or adjusting partners' capital accounts. Goodwill is calculated based on the expected future earnings and market value.
Calculation of Hidden Goodwill
Hidden goodwill refers to the goodwill that is not recorded in the financial statements. It can be calculated by determining the total capital of the partnership and comparing it with the actual value of the business. The difference indicates hidden goodwill that may be assigned to the partners.
Retirement of a Partner
When a partner retires, their share in the profits and capital must be settled. The remaining partners may need to revalue the partnership and account for any goodwill or losses associated with the retiring partner's share.
Death of a Partner
The death of a partner requires the settlement of the deceased partner's capital account, which may involve the distribution of assets to the partner's legal heirs. The partnership must evaluate the continuing partnership structure and may need to address goodwill and liabilities.
Partnership Accounts - II Dissolution of Partnership - Methods Settlement of Accounts Regarding Losses and Assets Realization account Treatment of Goodwill Preparation of Balance Sheet - One or more Partners insolvent All Partners insolvent Application of Garner Vs Murray Theory Accounting Treatment - Piecemeal Distribution Surplus Capital Method Maximum Loss Method.
Partnership Accounts - II Dissolution of Partnership
Methods of Settlement of Accounts
Settlement of accounts upon dissolution can be categorized into various methods, including cash settlements, transferring assets among partners, and creating a realization account to assess the final position.
Losses and Asset Realization Account
A realization account is prepared to capture all the transactions involved in the dissolution, detailing the sale of assets and payments of liabilities, thereby determining the profit or loss from the realization.
Treatment of Goodwill
Goodwill's treatment during dissolution involves evaluating whether it should be written off, retained by the continuing partner, or accounted for as an asset to be shared among the partners based on their profit-sharing ratio.
Preparation of Balance Sheet
A balance sheet must be prepared at the time of dissolution to depict the financial position of the partnership after accounting for all assets, liabilities, and the partners' capital balances.
Insolvency of Partners
When one or more partners are insolvent, the remaining partners are responsible for settling the debts in accordance to the terms of the partnership agreement, which may involve applying the Garner vs Murray principle.
Garner vs Murray Theory
The Garner vs Murray principle addresses the treatment of insolvent partners during the distribution of assets, guiding that solvent partners are liable to bear the losses of insolvent partners in proportion to their capital.
Piecemeal Distribution
Piecemeal distribution involves settling debts and distributing assets in stages. This method aims to ensure all creditors are paid, and partners receive their fair share based on the distribution plan.
Surplus Capital Method
The surplus capital method is a systematic approach where the remaining capital after settling debts is divided among partners based on their profit-sharing ratio, taking into account any preferences or agreements.
Maximum Loss Method
Maximum loss method focuses on determining the maximum potential loss that each partner could incur upon the realization of assets and liabilities, guiding the eventual distribution of any remaining capital.
Accounting Standards for financial reporting Theory only Objectives and Uses of Financial Statements for Users-Role of Accounting Standards - Development of Accounting Standards in India Role of IFRS- IFRS Adoption vs Convergence Implementation Plan in India- Ind AS- An Introduction - Difference between Ind AS and IFRS.
Accounting Standards for Financial Reporting
Theory Only
Accounting standards provide a framework for financial reporting, ensuring transparency, consistency, and comparability of financial statements across different entities. They set the criteria for recognition, measurement, presentation, and disclosure of transactions.
Objectives and Uses of Financial Statements for Users
Financial statements aim to provide information useful for economic decision-making. Users include investors, creditors, regulators, and management. The primary objectives include assessing the entity's performance, financial position, and cash flows.
Role of Accounting Standards
Accounting standards play a crucial role in standardizing financial reporting, preventing fraud, and ensuring compliance with regulations. They enhance the reliability of financial information, thus fostering trust among stakeholders.
Development of Accounting Standards in India
The development of accounting standards in India has evolved through various committees and regulatory bodies, such as the Institute of Chartered Accountants of India (ICAI). The adoption of International Financial Reporting Standards (IFRS) represents a significant milestone in aligning with global practices.
Role of IFRS
International Financial Reporting Standards (IFRS) provide a common accounting language that enhances comparability and consistency across international boundaries. IFRS adoption supports cross-border investments and financial reporting.
IFRS Adoption vs Convergence
IFRS adoption refers to the switch to IFRS from local Generally Accepted Accounting Principles (GAAP), while convergence involves harmonizing local standards with IFRS. Each approach has its advantages, with adoption offering uniformity and convergence allowing for gradual implementation.
Implementation Plan in India
India's implementation plan includes transitioning from Indian GAAP to Ind AS based on IFRS. The phased approach aims to address challenges posed by the convergence process, ensuring a smooth transition for companies and stakeholders.
Ind AS - An Introduction
Indian Accounting Standards (Ind AS) are the standards notified by the Ministry of Corporate Affairs in India. They are converged with IFRS to enhance financial reporting quality and improve global comparability.
Difference between Ind AS and IFRS
While Ind AS is largely based on IFRS, there are key differences in areas such as revenue recognition, financial instruments, and employee benefits. Understanding these differences is crucial for compliance and accurate financial reporting.
