Financial Accounting 2 Unit 1/4

Head Office

The parent establishment in branch accounting.

Branch

An offshoot of the head office, representing an extension and profit center of an existing firm.

Dependent Branch

Branches that do not maintain separate books of account and wholly depend on the Head Office.

Independent Branch

Branches that maintain a complete system of accounting and prepare their accounts independently.

Inland Branch

Branches situated within the territory of the country.

Foreign Branch

Branches located outside the country.

Branch Accounting

An accounting system that maintains separate accounts for a corporate entity or organisation’s branches.

Debtors System

A system where the head office maintains a separate branch account for each branch to find out the profit or loss.

Cost Price Method

Goods are recorded at their cost value in branch accounting.

Invoice Price Method

Used to have effective control over the stock with branches, allowing the head office to keep the profit margin a secret from the branch manager.

Stock and Debtors System

A method adopted to find out the profit or loss made by the branch, generally used when goods are dispatched to the branch at selling price that the branch cannot vary.

Branch Stock Account

Account prepared to find out the surplus or shortage of stock at the branch.

Branch Adjustment Account

Account used to determine the gross profit or loss and net profit or loss of a branch.

Final Accounts System

A method of computing profit or loss of a dependent branch by preparing a memorandum branch trading and profit and loss account.

Wholesale Price System

A system where goods are invoiced at the wholesale price to a retail branch to compute the profit earned by the branch through retail trading over wholesale trading.

Loaded Price

The price at which the head office sends goods to the branch, including the cost price and a profit percentage.

Hire Purchase

An arrangement between two parties where the purchaser pays a down payment and the balance in installments with interest.

Installment Scheme

Goods are delivered immediately, and the price is paid in periodic installments.

Hire Purchase System

A system of buying and selling goods where the seller transfers possession but ownership transfers only after all installments are paid.

Hire Purchase System

The buyer makes a down payment, and the remaining amount is paid in installments.

Objectives of Hire Purchase System

Buyer benefits from installment payments, attracting more customers and increasing sales and profits for the seller.

Hire Seller

Individual or organization that sells goods under the hire purchase system, retaining ownership until the last installment is paid.

Hire Purchaser

Individual or firm that obtains possession of goods under hire purchase, paying in installments and gaining ownership after the last payment.

Cash Value

Total value of goods under hire purchase, representing the cash price.

Down Payment

Initial amount paid by the hire purchaser at the time of accepting the goods.

Hire Purchase Charge

Excess of total price paid over the cash price, representing the interest charged by the hire seller.

Hire Purchase Price

Total amount a hire purchaser pays, including cash price and hire purchase charge (interest).

Hire Purchase Agreement

Contract signed by hire seller and purchaser, containing terms and conditions of the hire purchase.

Advantages of Hire Purchase for Seller

Payment in installments, increased sales and profits, and lower risk due to asset repossession rights.

Advantages of Hire Purchase for Purchaser

Convenient payments, encouraged savings, helpful for small traders, and immediate use of goods.

Disadvantages of Hire Purchase for Seller

Extra costs in recovering installments, potential for un-resalable goods, and losses from price increases.

Disadvantages of Hire Purchase for Purchaser

Higher price than actual cost, temptation to overspend, financial burden, and responsibility for loss or damage.

Hire Purchase Act 1972

Regulates hire purchase, requiring agreements in writing and specifying contents.

Termination of Hire Purchase Agreement

Terminated by agreement terms, performance, renewal, repudiation acceptance, release, or time lapse.

Installment System

Agreement where the buyer makes a down payment and pays the balance in installments over time.

Installment Purchase System

An outright credit sale where the buyer acquires possession and ownership immediately.

Installment System

The seller cannot repossess goods for default but can sue for recovery.

Installment System

The buyer can sell or mortgage goods even before clearing all installments.

Hire Purchase

Goods can be returned before the final installment; risk resides with the seller.

Hire Purchase Parties

Generally involves a seller, financing party, and buyer.

Accounting Methods in Hire Purchase

Includes Asset Accrual, Credit Purchase with Interest, and Interest Suspense methods.

Accounting Entries in Hire Purchase

Used to record down payment, installment amounts, depreciation, and transferring amounts to the Profit and Loss account.

HIRE

It is the sum payable periodically by the hirer under a hire- purchase agreement

HIRE-PURCHASE PRICE

It means total amount payable by buyer under hire purchase agreement . Down payment + (Instalment amount x Number of instalments).

HIRE-PURCHASE CHARGES

It means the difference between hire-purchase price and cash price in hire-purchase agreement.

Joint Venture

A short-duration business, generally confined to a single transaction, entered into by two or more persons jointly; a temporary partnership between two or more persons, without the use of the firm name, for a limited purpose.

Economies of Scale

A factor for which joint ventures are helpful to gain.

Agreement (Feature of Joint Venture)

Two or more firms come to an agreement to undertake business for a definite purpose and are bound by it.

Joint Control (Feature of Joint Venture)

The business assets, operations, administration and the venture itself exists under the joint control of the co-venturers.

Pooling of Resources and Expertise (Feature of Joint Venture)

Firms pool their resources like capital, workforce, technical know-how, and expertise which helps in large-scale production.

Sharing of Profit and Loss (Feature of Joint Venture)

The co-venturers agree to share the profits and losses of the business in an agreed ratio. The computation of the profit and loss settles at the end of the venture.

Access to Advanced Technology (Advantage of Joint Venture)

By entering joint ventures, firms get access to various techniques of production, marketing and business, which decreases the overall cost while improving quality.

Dissolution (Feature of Joint Venture)

Once the term or purpose of the joint venture is complete, the agreement comes to an end, and the accounts of the coventurers are settled, as and when they are dissolved.

Disharmony/Conflict of Interest (Disadvantage of Joint Venture)

The co-venturers may have different interests and motives behind setting up a joint venture which may cause loss for the business and create a conflict of interest.

Leakage of Trade Secrets (Disadvantage of Joint Venture)

There are chances that trade secrets and other confidential information and methods may be leaked out due to the involvement of diverse people.

Joint Venture vs. Consignment - Meaning

Joint Venture: Created when two or more entities collaborate and pool resources to carry out a joint business. Consignment: Business arrangement where a consignor sends goods to a consignee who sells them ahead in lieu of a commission.

Joint Venture vs. Consignment - Participating Entities

Joint Venture: Two or more entities. Consignment: Two parties - a consignor and a consignee.

Joint Venture vs. Consignment - Nature of Relation

Joint Venture: Co-venturers with a profit-sharing relation. Consignment: Principal-agent relationship.

Joint Venture vs. Consignment - Formation of Separate Entity

Joint Venture: Typically results in a new and separate entity. Consignment: No new entity is formed.

Joint Venture vs. Consignment - Purpose

Joint Venture: Pool collective resources to carry out a joint business. Consignment: Increase product sales for the consignor and earn a commission for the consignee.

Joint Venture vs. Consignment - Scope

Joint Venture: Extensive, for conducting any kind of business. Consignment: Narrow, restricted only to the sale and distribution of goods.

Joint Venture vs. Consignment - Permanence

Joint Venture: Typically entered for a specific task or objective. Generally, it is liquidated once the task is complete. Consignment: Can be a more long-lasting relation between consignor and consignee for the sale of goods.

Joint Venture vs. Consignment - Accounting

Joint Venture: Done in the books of the new entity separately. Consignment: Done individually in the books of both the consignor and consignee.

Joint Venture vs. Consignment - Profit Sharing/Compensation

Joint Venture: Co-venturers share profits in a pre-determined ratio. Consignment: Consignee earns a percentage commission on the sales realised by them.

Joint Venture vs. Consignment - Risk Sharing

Joint Venture: Co-venturers jointly take on risks of the business. Consignment: Consignor owns the goods and bears all related risks.

Joint Venture vs. Consignment - Compliances

Joint Venture: Must comply with the laws. Consignment: Subject to fewer compliances than general business contracts.

Methods for Maintaining Joint Venture Accounts

Method 1: When separate books of accounts are maintained (Joint venture account, Co-venture ‘s account, Joint bank account) Method 2: When separate books of accounts are not maintained CASE 1: When each co-venture keeps record of all transactions (Joint venture account, Co-venture’s account) CASE 2: When each co-venture keeps record of own transaction only (Memorandum joint venture account, Joint venture with co-venture account)

Joint Venture Account

This account is prepared to measure venture profit. This account is debited for all venture expenses and is credited for all sales or collections. Venture profit/loss is transferred to co-venturers’ accounts.

Co-venturers’ Accounts

Personal accounts of the venturers are maintained to keep a record of their contributions of cash, goods or meeting venture expenditure directly and direct payment received by them on venture transactions. This account is also closed simultaneously with the closure of the joint bank account.

Memorandum Joint Venture Account

It is a rough statement prepared by the venturers to determine venture profit when they do not maintain complete records of venture transactions in the books of accounts. Unless this memorandum account is prepared, the venturer cannot compute venture profit.

Consignment Sale

A business arrangement where a manufacturer or trader (consignor) agrees with a third party (consignee) to make a sale.

Objectives of Consignment Sale

To increase sales volume, capture the market, earn higher revenue, grow the business, maintain sustainability, and utilize the consignee's expertise.

Features of Consignment Sales

The consignor sends goods, unsold goods remain the consignor's property, the consignee receives commission and expense reimbursement, the consignee sends account sales, the consignee remits net proceeds, only possession transfers, and profit/loss belongs to the consignor.

Consignor

The person who sends goods to an agent for sale on a commission basis.

Consignee

An agent who sells goods on a commission basis on behalf of the consignor.

Consignment Agreement

An agreement between consignor and consignee for storage, transfer, sale, resale, and use of goods.

Commission

Amount payable to the consignee for selling goods, as per the agreement terms.

Ordinary Commission

Paid as a percentage of sales, not covering the risk of bad debts.

Del Credere Commission

Commission to cover the risk of loss due to bad debts, making the consignee responsible for such losses.

Overriding Commission

Additional commission for extra efforts to increase sales, calculated on total sales.

Account Sales

A statement accounting for all transactions at the consignee's end, prepared periodically and sent to the consignor.

Recurring Expenses

Expenses that occur regularly in day-to-day business operations.

Non-Recurring Expenses

Irregular or one-time expenses not expected to be repeated regularly.

Pro-Forma Invoice

A commercial document detailing agreement terms like pricing between a consignor and consignee.c

Consignment Account

Account to find out profit or loss on a particular consignment (nominal account).

Consignee Account

A personal account showing the balance due from the consignee.

Goods Sent on Consignment Account

A real account where goods sent on consignment are credited, closed by transferring to a trading account.

Value of Unsold Stock

Purchasing price of unsold stock and proportionate direct expenses incurred by consignor and consignee.

Non-Recurring/Direct Expenses (Consignor)

Expenses paid to send goods to the consignee (e.g., freight, loading charges, custom duty).

Non-Recurring/Direct Expenses (Consignee)

Expenses to bring goods to the consignee's godown (e.g., unloading, freight, custom duties).

Recurring/Indirect Expenses

Expenses after goods reach the godown (e.g., rent, insurance, advertisement).

Normal Losses

Losses due to expected but unavoidable causes (e.g., evaporation, leakage).

Abnormal Losses

Losses caused by unnatural and unexpected reasons (e.g., fire, flood, theft).