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Advanced Financial Accounting

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Advance Financial Accounting (FIN-611)
VU
LESSON # 10
DEPARTMENTAL ACCOUNTS
Some times departments prefer to buy goods from their internal departments for this
prices are charged equal to the normal selling prices or a department may transfer at it
original cost price. Since each department is considered as a separate profit centre, it is
necessary to have separate records for inter-departmental transfer of goods or even
services.
The department which transfers the goods considers its transfers as equal to sales and
the department which receives the goods considers it as equal to its purchases and put
it in the cost of goods sold. Generally a periodical analysis sheet is prepared to record
these departmental transfers:
Transferring
Receiving Departments
Departments
Date
X (Rs)  Y (Rs)
Z (Rs)
X (Rs)
Y (Rs)
Z (Rs)
April 3 (from X to Y)
400
----
----
----
400
----
April 10 (from Y to X)
----
500
----
500
----
----
April 20 (from Z to Y)
----
----
300
----
300
----
April 30 (from X to Z)
200
----
----
----
----
200
Total
600
500
300
500
700
200
At the end of the period the inter-departmental transfers are recorded by recording the
following accounting entry:
Receiving Department
Dr. (at transfer price)
X
500
Y
700
Z
200
Transferring Department Cr. (at transfer price)
X
600
Y
500
Z
300
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Advance Financial Accounting (FIN-611)
VU
Solved Problem:
A firm has two departments X and Y. Department Y (manufacturing department)
receives goods from department X as its raw material. Department X supplies the
goods to Y at cost price. From the following information prepare a Departmental
Income Statement for the year ended on 31 December 2007:
X
Y
Rupees
Rupees
Opening Stock (1-1-2007)
250,000
75,000
Purchases (Outside supplier)
1,000,000
20,000
Sales (Outside customer )
1,200,000
300,000
Closing stock (31-12-07)
150,000
50,000
Other Information:
1. Depreciation is charged on building @ 20% p.a. Cost of building is Rs. 105,000
and occupancy ratio is 2/3 and 1/3 for X and Y respectively.
2. X department transferred goods Rs. 250,000 to department Y.
3. Manufacturing expenses Rs. 10,000.
4. Selling expenses Rs. 15,000.
5. General expenses Rs. 58,000.
Solution:
Income Statement for the year ended December 31, 2007
Particulars
X (Rs).
Y (Rs).
Total (Rs).
Sales
1,200,000
300,000
1,500,000
Transfer to Y
250,000
----
250,000
Total Revenue
1,450,000
300,000
1,750,000
Less Cost of goods sold
Opening stock
250,000
75,000
325,000
Add Purchases
1,000,000
20,000
1,020,000
Less closing stock
150,000
50,000
200,000
Transfer from X
----
250,000
250,000
Manufacturing expenses
----
10,000
10,000
Total cost
1,100,000
305,000
1,405,000
Gross profit
350,000
(5,000)
345,000
Less Selling expenses
12,000
3,000
15,000
Deprecation
14,000
7,000
21,000
Net profit
324,000
(15,000)
309,000
Less General expenses
58,000
Net profit of business
251,000
Working:
Selling expense Rs. 15,000
48
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Advance Financial Accounting (FIN-611)
VU
X (Rs)
Y (Rs)
Sales
1,200,000
300,000
Sales ratio
12
3
X =15,000 X 12/15 = 12,000
Y =15,000 X 3/15 = 3,000
Depreciation expense
Building 105,000 X 20/100 = Rs. 21,000
X (Rs)
Y (Rs)
Deprecation
2/3
1/3
X =21,000 X 2/3 = 14,000
Y =21,000 X 1/3 = 7,000
BRANCH ACCOUNTING
Introduction
Large business entities open up branches in diversified geographic segments such as
towns and cities and even in different countries. Segmenting their business
geographically facilitate the business to market its products/services over a large
territory and thus increase its profits. Here we must make this distinction that
departments are business segments whereas, branches are geographic segments.
A branch may be defined as a segment of an enterprise that is geographically
separated from the rest of the entity, controlled by a head office, and generally
carrying on the same or substantially same activities as of the entity.
For example in our daily life we observe branches of banks, bakeries, shoes stores,
schools, hotels and restaurants etc.
It is worth mentioning here that a branch is not a separate legal entity, it is simply a
segment of an entity. From accounting perspective, a branch is identified as a profit
centre and if it is an independent branch then it becomes an investment centre.
To have clear picture of the performance, profits of each branches are calculated
separately and then are consolidated in the accounts of the head office. Depending
upon the size of the branch the decision is taken regarding the accounting system to be
implemented there. Had the branch size is small there would have been single entry
system. Where the branch size is considerable large and it can afford a complete
accounts department there we will follow the double entry accounting system, such
are often independent branches.
Classification of Branches
For accounting purposes branches are classified as under:
1. Foreign Branch (not part of our syllabus)
2. Domestic Branch
a. Independent branch (investment centre)
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Advance Financial Accounting (FIN-611)
VU
b. Dependent branch (profit centre)
i. Whole-sale branch
ii. Retail branch
Classification
Domestic branch
Foreign branch
Independent
Dependent
Dependent Branch
Retail sale branch
Whole sale branch
Debtors system
Income statement system / Final account system
Stock & Debtors system
Independent Branch
This is the type of branch which maintains its own set of books. The method of
accounting is the double entry book keeping.
Branch manager of such a branch is given certain powers for decision making
regarding procurement, selling, advertising, staffing, pricing, and even for purchasing
of fixed assets. These branches are taken as an investment centre.
Dependent Branch
This is the type of branch which does not maintain its own set of books. All records are
maintained by the head office, which is concerned with the branch profits only.
Branch manager of such a branch is not given decision making powers, the manager
acts according to the instruction and policies directed by the head office.
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Table of Contents:
  1. ACCOUNTING FOR INCOMPLETE RECORDS
  2. PRACTICING ACCOUNTING FOR INCOMPLETE RECORDS
  3. CONVERSION OF SINGLE ENTRY IN DOUBLE ENTRY ACCOUNTING SYSTEM
  4. SINGLE ENTRY CALCULATION OF MISSING INFORMATION
  5. SINGLE ENTRY CALCULATION OF MARKUP AND MARGIN
  6. ACCOUNTING SYSTEM IN NON-PROFIT ORGANIZATIONS
  7. NON-PROFIT ORGANIZATIONS
  8. PREPARATION OF FINANCIAL STATEMENTS OF NON-PROFIT ORGANIZATIONS FROM INCOMPLETE RECORDS
  9. DEPARTMENTAL ACCOUNTS 1
  10. DEPARTMENTAL ACCOUNTS 2
  11. BRANCH ACCOUNTING SYSTEMS
  12. BRANCH ACCOUNTING
  13. BRANCH ACCOUNTING - STOCK AND DEBTOR SYSTEM
  14. STOCK AND DEBTORS SYSTEM
  15. INDEPENDENT BRANCH
  16. BRANCH ACCOUNTING 1
  17. BRANCH ACCOUNTING 2
  18. ESSENTIALS OF PARTNERSHIP
  19. Partnership Accounts Changes in partnership firm
  20. COMPANY ACCOUNTS 1
  21. COMPANY ACCOUNTS 2
  22. Problems Solving
  23. COMPANY ACCOUNTS
  24. RETURNS ON FINANCIAL SOURCES
  25. IASBíS FRAMEWORK
  26. ELEMENTS OF FINANCIAL STATEMENTS
  27. EVENTS AFTER THE BALANCE SHEET DATE
  28. PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS
  29. ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS 1
  30. ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS 2
  31. BORROWING COST
  32. EXCESS OF THE CARRYING AMOUNT OF THE QUALIFYING ASSET OVER RECOVERABLE AMOUNT
  33. EARNINGS PER SHARE
  34. Earnings per Share
  35. DILUTED EARNINGS PER SHARE
  36. GROUP ACCOUNTS
  37. Pre-acquisition Reserves
  38. GROUP ACCOUNTS: Minority Interest
  39. GROUP ACCOUNTS: Inter Company Trading (P to S)
  40. GROUP ACCOUNTS: Fair Value Adjustments
  41. GROUP ACCOUNTS: Pre-acquistion Profits, Dividends
  42. GROUP ACCOUNTS: Profit & Loss
  43. GROUP ACCOUNTS: Minority Interest, Inter Co.
  44. GROUP ACCOUNTS: Inter Co. Trading (when there is unrealized profit)
  45. Comprehensive Workings in Group Accounts Consolidated Balance Sheet