BCOC-131

Financial Accounting
Indira Gandhi
National Open University
School of Management Studies

Block

4
HIRE PURCHASE AND INLAND BRANCHES
UNIT 11
Hire Purchase Accounts-I 5

UNIT 12
Hire Purchase Accounts-II 29

UNIT 13
Branch Accounts-I 67

UNIT 14
Branch Accounts-II 91
 PROGRAMME DESIGN COMMITTEE B.COM (CBCS)
Prof. Madhu Tyagi Prof. D.P.S. Verma (Retd.) Faculty Members
Director, SOMS, IGNOU Department of Commerce
University of Delhi, Delhi SOMS, IGNOU
Prof. R.P. Hooda Prof. N V Narasimham
Former Vice-Chancellor Prof. K.V. Bhanumurthy (Retd.)
Department of Commerce Prof. Nawal Kishor
MD University, Rohtak
University of Delhi, Delhi Prof. M.S.S. Raju
Prof. B. R. Ananthan Dr. Sunil Kumar
Former Vice-Chancellor Prof. Kavita Sharma
Rani Chennamma University Department of Commerce Dr. Subodh Kesharwani
Belgaon, Karnataka University of Delhi, Delhi Dr. Rashmi Bansal
Dr. Madhulika P Sarkar
Prof. I. V. Trivedi Prof. Khurshid Ahmad Batt
Former Vice-Chancellor Dean, Faculty of Commerce & Dr. Anupriya Pandey
M. L. Sukhadia University Management
Udaipur University of Kashmir, Srinagar

Prof. Purushotham Rao (Retd.) Prof. Debabrata Mitra

Department of Commerce Department of Commerce
Osmania University, Hyderabad University of North Bengal
Darjeeling
Prof. R. K. Grover (Retd.)
School of Management Studies
IGNOU

COURSE DESIGN COMMITTEE Faculty Members

SOMS, IGNOU
Prof. Madhu Tyagi Prof. N. V. Narasimham
Director, SOMS, IGNOU Prof. Nawal Kishor
Prof. M.S.S. Raju
Prof. A.A. Ansari Dr. Sunil Kumar
Jamia Millia Islamia, New Delhi Dr. Subodh Kesharwani
Dr. Rashmi Bansal
Ms. Surbhi Gupta Dr. Madhulika P. Sarkar
Vivekananda College Dr. Anupriya Pandey
University of Delhi, Delhi

COURSE PREPARATION TEAM

Accountancy-II: ECO-14
Prof. N V Narasimham, Editor
(Unit-1, 2, 4, 5 and 6 Revised by Dr. Sunil Kumar)
Prof. M.S.S. Raju
Prof. S. N. Mehrotra, Banaras Hindu University, Varanasi (Course Coordinator & Editor)
Prof. T.P. Maitin Patna University, Patna
Dr. Sunil Kumar
Prof. R. K. Grover (Retd.), SOMS, IGNOU (Course Coordinator & Editor)
Mr. Amitabh K. Nag Chartered Accountant, Calcutta

Print Production
Sh. Y. N. Sharma Sh. Sudhir Kumar
Assistant Registrar (Pub.) Section Officer (Pub.)
MPDD, IGNOU MPDD, IGNOU

June, 2019
Indira Gandhi National Open University, 2019
ISBN-978-93-89200-
All rights reserved. No part of this work may be reproduced in any form, by mimeograph or any
other means, without permission in writing from the Indira Gandhi National Open University.
Further information on the Indira Gandhi National Open University courses may be obtained from
the University’s Office at Maidan Garhi, New Delhi-l10068 or website of INGOU www.ignou.ac.in
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2
BLOCK 4 HIRE PURCHASE AND INLAND
BRANCHES
Now a days it is quite common to sell goods on the basis of payment in
instalments. This may take the form of hire purchase or instalment payment
system. In both cases, the price charged by the vendor is higher than the cash
price because it would include the amount of interest for deferment of payment.
Hence, while recording such transactions in books of account, one has to keep
this aspect in view. The accountants have developed suitable methods for
recording all transactions relating to such purchases and sales. In this block,
you will study the methods of recording these transactions in the books of the
seller as well as the buyer in Unit 11 and Unit 12.
Large business houses usually operate through a network of branches spread
over a wide area. To ensure operational efficiency, each branch is treated as
a separate profit centre. Hence, there is need for devising suitable system of
branch accounting.
In this block, Unit 13 and Unit 14 deal with the systems of accounting for
branches.
Unit 11 deals with the hire purchase system and its accounting treatment in
the books of the vendor and the buyer, where goods sold on hire purchase
basis are of substantial sales value.
Unit 12 describes the accounting treatment in case of default and repossession
of goods by the vendor under the hire purchase agreement. It also discusses
the accounting treatment when goods are sold under the instalment payment
system. It also explains the method of maintaining basic record for transactions
relating to goods of small value sold on hire purchase, and discusses the systems
of ascertaining profit or loss on such business during an accounting period.
Unit 13 deals with the accounting system for dependent branches which do
not keep full accounting records.
Unit 14 explains the accounting system of independent branches (excluding
foreign branches) which keep full accounting records.
Hire Purchase and Inland
Branches

4
 Hire Purchase Accounts-I
Journal and Ledger
UNIT 11 HIRE PURCHASE ACCOUNTS-I
Structure
11.0 Objectives
11.1 Introduction
11.2 Nature of Hire Purchase Agreement
11.3 Legal Position
11.3.1 Definition
11.3.2 Characteristics of Hire Purchase Agreement
11.3.3 Rights of Hirers

11.4 Ascertaining the Interest and Cash Price

11.4.1 Ascertainment of Interest
11.4.2 Ascertainment of Total Cash Price

11.5 Accounting Records in the Books of the Purchaser

11.5.1 When the Asset is Recorded at Full Cash Price
11.5.2 When the Asset is Recorded at Cash Price Actually Paid

11.6 Accounting Records in the Books of Vendor

11.7 Let Us Sum Up
11.8 Key Words
11.9 Answers to Check Your Progress
11.10 Terminal Questions/Exercises

11.0 OBJECTIVES
After studying this unit, you should be able to:
 explain what a hire purchase agreement is;
 describe the legal position to a hire purchase agreement;
 calculate interest and cash price in relation to a hire purchase agreement;
and
 pass the basic accounting entries in the books of both purchaser and vendor.

11.1 INTRODUCTION
When the goods are sold, the purchaser may either make the full payment at
one time or may defer the payment. When the payment is deferred, the amount
may be paid in monthly, quarterly or yearly instalments. When the price of an
article is paid by instalments, the total amount paid is higher than the actual
cash price of the article. The excess price is the charge for interest and the
risk involved. This arrangement of making the payment in instalments is
beneficial to both the seller and the buyer. The seller is able to sell more goods
and the buyer can buy expensive items with his limited resources. There are
two systems of deferred payments, namely, (i) Hire Purchase System, and
5
Hire Purchase and Inland (ii) Instalment Payment System. In this unit, we will learn in detail about the
Branches
Hire Purchase System.

11.2 NATURE OF HIRE PURCHASE AGREEMENT

A hire purchase agreement is one under which the buyer takes delivery of goods,
promising to pay the price in certain number of instalments and until full payment
is made, to treat the payment as hire charges for using the said goods. In fact,
a hire purchase agreement stipulates that (i) the delivery of goods will be given
by the owner of goods to the hire purchaser, (ii) payment will be made in
instalments, (iii) each instalment will be treated as hire charge so that if default
in respect of payment of even the last instalment is made, the seller will be
entitled to take away the goods without compensating the hire purchaser in any
form, and (iv) if all instalments are paid and the other conditions are fulfilled,
the ownership of the goods will pass to the buyer.
Therefore in case of hire purchase, the seller i.e., the vendor gives only the
possession of the goods and retains the ownership with him until the last
instalment is paid. In other words, the hire purchaser is only the user of the
goods and not the owner. In case, he fails to pay the instalments, the vendor
will take his goods back. Apart from that, the vendor will not pay back the
amount received from the purchaser. Such an amount will be treated as hire
charge for the goods. Therefore, till the last instalment is paid, the hire purchaser
has got an option, whether to purchase that particular article or not.
As mentioned earlier, the payment made by the hire purchaser under this system
is always more than what he pay if he decide to go for cash purchase. The
reason is that, apart from the cash price, the hire purchase price includes:
i) interest for payment being made over a period of time,
ii) the payment for the risk taken by the seller,
iii) expenditure on the registration, insurance and delivery of goods, etc.

11.3 LEGAL POSITION

11.3.1 Definition
According to Section 2(c) of the Hire Purchase Act. 1972, the hire purchase
agreement is an agreement under which the goods are let on hire and the hirer
has an option to purchase them in accordance with the terms of the agreement
under which:
i) possession of goods is delivered by the owner thereof to a person on
condition that such person pays the agreed amount in periodical instalments,
ii) the property in the goods is to pass to such person on the payment of
the last such instalments, and
iii) such person has a right to terminate the agreement at any time before the
property so passes.

11.3.2 Characteristics of Hire Purchase Agreement

Following are the characteristics of the hire purchase agreement.
6
i) It must be in writing and must he signed by all the parties thereto (Section Hire Purchase Accounts-I
3)
ii) According to Section 4 of Hire Purchases Act, 1972, the agreement must
state
a) the hire purchase price of the goods to which the agreement relates;
b) the cash price of the goods, that is to say, the price at which the
goods may be purchased by the hirer for cash;
c) the date on which the agreement shall be deemed to have commenced;
d) the number of instalments by which the hire purchase price is to be
paid, the amount of each of those instalments and the date (the mode
of determining the date upon which it is payable) and the person to
whom and the place where it is payable; and
e) the goods to which the agreement relates, in a manner sufficient to
identify them.
Apart from the above mentioned conditions, a full description of the amount
to be paid in cash or by cheque, if any, should be given in the agreement.

11.3.3 Rights of Hirers

As per the Hire Purchase Agreement, the hirer has got the right to return the
goods to the vendor. Apart from this, the Hire Purchase Act gives the following
rights to the hirer.
1) The owner (or the vendor) cannot terminate the hire purchase agreement
for default in payment of hire or due to an unauthorised act or breach
of expressed conditions unless a notice in this regard in writing is given
to the hirer. The notice period is (i) one week where the hire is payable
at weekly or less than that interval, and (ii) two weeks in other cases.
2) In the following cases, the right to repossess the goods will not exist unless
it is sanctioned by the court.
i) Where the hire-purchase price is less than Rs. 15, 000 and one half
of the hire purchase price has been paid.
ii) Where the hire purchase price is higher, three-quarters of the hire
purchase price has been paid. However, the right of repossession will
lapse in case of motor vehicles where the hire purchase price is less
than Rs. 5,000 and one-half of the amount has been paid. In other
cases (where H.P. price is Rs. 5,000 or more), it happens if three-
quarters of the hire purchase price has been paid. The Central
Government has the power of raising the limit to nine-tenths where
the hire purchase price is Rs. 15,000 or more.
3) The hirer has the right of receiving from the owner, on payment of Re. 1
for expenses, a statement showing the amount paid by or on behalf of
the hirer, the amount which has become due under the agreement which
remains unpaid together with the dates concerned and the amount which
has not yet become payable under the agreement and the dates and the
modes concerned.
7
Hire Purchase and Inland 4) If the amount paid by the hirer till the date of the repossession of the
Branches
goods and the value of the goods on the date of the repossession taken
together exceeds the hire purchase price, the excess is payable to the hirer.
For ascertaining the value of the goods, the owner or the vendor has the
right of deducting reasonable expenses for repossessing the goods for
storing the goods or repairing them, for selling them, and for payment of
arrears of taxes.
Cheek Your Progress A
1. Fill in the blanks
i) A contract for sale of goods may be either a sale or an ………..
to sell.
ii) A hire purchase sale is an agreement to ………..
iii) The ownership of goods under a hire purchase agreement is to
……….. upon fulfilment of certain…………..
iv) Under a hire purchase agreement payments are made in ………..
v) Each instalment payment is treated as ………..
vi) If the purchaser fails to pay even the last instalment, the seller will
be entitled ……….. to the goods.
vii) From the legal point of view, a hire purchase agreement should be
made in ………..
viii) A hirer has the right to ……….. the agreement before payment of
the last instalment by paying the seller the agreed amount.
ix) A hirer may assign his ……….,………. and interest under a hire
purchase agreement.
2. State whether the following statements are True or False.
i) A hire purchase agreement is an ‘outright’ sale transaction.
ii) If the hirer fails to pay the last instalment, the amounts paid earlier
are considered as hire charges.
iii) A hire purchase agreement is an ‘executed contract’ and an instalment
sale is an ‘executory contract’.
iv) If the hirer opts for full payments before the due dates, a rebate should
be available to him.
v) A seller cannot repossess the goods if the purchaser fails to pay the
last instalment only.
vi) The Hire Purchase Act, 1972 is in operation now.

11.4 ASCERTAINING THE INTEREST AND CASH

PRICE
As mentioned earlier, when the goods are sold on hire purchase, the price so
charged by the vendor is always higher than the cash price. The excess price
8 i.e., the difference between the hire purchase price and the cash price, includes
the interest charges and the compensation for risk. However, for accounting Hire Purchase Accounts-I
purposes, the difference between the two prices is treated as the payment for
interest. Thus, the hire purchase price includes:
i) the cash price, which is a capital expenditure for purchase of an asset,
and
ii) the interest, which is an item of revenue nature. Since the cash price is
of capital nature and the interest payment is of revenue nature, both will
be treated in a different manner in the books of account. It is, therefore,
necessary to separate the hire purchase price into cash price and interest.
However, it may be noted that the Cash Down Payment made immediately
after signing the agreement will not include the element of interest. Another
point to be kept in mind is that the interest element in each instalment
is not same. It keeps on reducing with every instalment. This is so because
the interest is charged on the balance of the principal amount due and
not on the full amount. For proper allocation, therefore, we must know
the cash price, the hire purchase price and the amount of interest.

11.4.1 Ascertainment of Interest

While calculating interest, we may be faced with any of the following two
situations:
a) When rate of interest, total cash price and instalments are given
b) When total cash price and instalments are given but the rate of interest
is not given.
In both the above mentioned cases, the interest has to be calculated. Let us
now take them one by one.
a) When Rate of Interest, Total Cash Price and Instalments are given
In this situation, before calculating the element of interest included in each
instalment, it will be helpful to ascertain the total amount of interest involved.
This will be ascertained by subtracting the Total Cash Price from the hire
purchase price. Then the following steps should be followed for calculating
the amount of interest on each instalment.
i) Calculate the outstanding cash price at the time of first instalment by
subtracting down payment from the total cash price.
ii) Calculate interest on the first instalment. This is to be calculated on
the outstanding cash price at the time of first instalment by applying
the given rate of interest. In this connection, you should keep in view
the mode of instalments i.e., whether the instalment is annual, half-
yearly or quarterly. Usually, in case of purchases for heavy equipment,
the instalment is annual.
iii) Calculate the amount of cash price included in the first instalment by
subtracting the amount of interest as calculated in step (ii) from the
amount of the first instalment.
iv) Calculate the outstanding cash price at the time of second instalment
by subtracting the amount of cash price of the first instalment from
the outstanding cash price at the time of first instalment i.e., (i) — 9
Hire Purchase and Inland (iii).
Branches
v) Calculate, interest on the second instalment by applying the rate of
interest to the outstanding cash price at the time of second instalment.
The amount of the subsequent instalments can be worked out in the same
manner i.e., by first calculating the outstanding cash price at the time of
the instalment due and then applying the rate of interest to this amount.
However, the amount of interest on the last instalment is worked out
differently. This can be done by simply subtracting the outstanding cash
price at the time of last instalment from the amount of the last instalment.
Alternatively, you can work it out by subtracting the sum of interests of
all previous instalments from the total amount of interest included in the
hire purchase price. The amount of interest so calculated can also be verified
by applying the rate of interest to the outstanding cash price at the time
of last instalment. Of course, there may be a small difference due to the
fact that the hire purchase price is not fixed by inclusion of the exact amount
of interest. It is usually fixed as a round figure. However, if the difference
happens to be a large amount, you should check all calculations of interest
and outstanding cash price at the time of each instalment.
illustration 1 will help you to calculate the interest with the help of the
above mentioned procedure.
Illustration 1
A Ltd. purchased a Machine on hire purchase from Z Ltd. on January 1, 2016,
paying Rs. 8,000 immediately and agreeing to pay three annual instalments of
Rs. 8,000 each on December 31, every year. The cash price of the machine
is Rs. 29,800 and the vendors charge interest @ 5% per annum. Calculate
the amount of interest paid by the buyer to the seller every year.
Solution :
The total interest = Hire Purchase Price  Cash Price
Hire Purchase Pric = Cash Down Payment + Instalments
= 8,000 + 3(8,000)
= 8,000 + 24,000
= Rs. 32,000
Cash Price = Rs. 29,800
So Total Interest = 32,000 — 29,800 = Rs. 2,200
Now, we can calculate the interest on each instalment as follows.
i) Outstanding Cash Price at the time of first instalment
Total Cash Price  Down Payment
= 29,800  8,000
= Rs. 21,800
ii) Interest on first instalment
Rate of Interest
Outstanding Cash Price 
100

10
 Hire Purchase Accounts-I
5
= 21,800 
100
= Rs. 1,090
iii) Cash Price of first instalment
Instalment  Interest on first instalment
= 8,000  1,090
= Rs. 6,910
iv) Outstanding Cash Price at the time of second instalment
Outstanding Cash Price atthe time of 1st instalment  Cash Price of the
first Instalment
= 21,800  6,910
= Rs. 14,890
v) Interest on second instalment
= 14,890  5
= Rs. 745
100
vi) Cash Price of second instalment
= 8,000  745 = Rs. 7,255
vii) Outstanding Cash Price at the time of last instalment
= 14,890  7,255 = Rs. 7,635
viii) Interest on the last instalment
= Instalment  Outstanding Cash Price at the time of last instalment
= Rs. 8,000  7,635
= Rs.365
Alternatively, Total Interest  Sum of Interest of all previous years.
= 2,200  (1,090 + 745)
= 2,200  1,835
= Rs. 365

Verification
Rate of Interest
Outstanding Cash Price at the time of last instalment 
100

5
= 7,635 
100

= Rs. 382

As indicated earlier, the amount calculated above is not the same as calculated
in step (viii). But the difference is small i.e..Rs. 17 (382  365).

11
Hire Purchase and Inland For Steps from (i) to (viii) following table would he helpful.
Branches

(1) (2) (3) (2-3)

Total Cash Instalment Interest Cash Price of
Price Paid Paid the Instalment
Rs. Rs. Rs. Rs.

Total Cash Price 29,800

Less Down Payment 8000 8000 8000
5
Amount outstanding at the 21,800 8000 (21,800  ) (8,000-1,090)
time of Ist Instalment 100

Cash price of the Instalment 6,910 1,090 6,910

5
Amount outstanding at the 14890 8000 (14,890  ) (8,000-745)
time of 2nd Instalment 100
Cash price of the Instalment 7,255 745 7,255
Amount outstanding at the 7635 8,000 (8,000-7,635) 7,635
time of 3rd Instalment Cash
7635 365
You should calculate interest and cash price with the help of the above table.
It makes your task easier.
b) When Total Cash Price and Instalments are given, but rate of
interest is not given:
When the total cash price, down payment and the amount of each instalment
is given, but the rate of interest is not given, the interest will be calculated by
procedure mentioned below.
i) Calculate the total interest by subtracting the total cash price from the total
hire purchase price
ii) Calculate the amounts of hire purchase outstanding at the beginning of each
year after subtracting the down payment
iii) Find out the ratio of outstanding amounts calculated in step (ii). If the
amount of each instalment is equal, the ascertainment of ratio is simple.
For example, if there are four instalments of equal amounts, the ratio will
be 4 : 3 : 2 : 1 and if there are three instalments of equal amounts, it
will be 3 : 2 :1.
iv) Apply this ratio to the total interest and calculate the interest on each
instalment.
Let us now take an example and clarify the calculation of interest included in
each instalment.
Illustration 2
Taking the relevant data from illustration 1 excluding the rate of interest element
12 in each instalment.
Hire Purchase Price Rs. 32,000 [8,000 + 3 (8,000)] Hire Purchase Accounts-I
Cash Price Rs. 29,800
Down Payment Rs. 8,000
Solution:
Total Interest = Rs. 32,000  29,800
= Rs. 2,200

Beginning Amount (Rs.) Ratio Interest (Rs.)

of the year Outstanding

1 24,000 3 1,100
3
(32,000-8,000) (2,200  )
6
2 16,000 2 733
2
(24,000-8000) (2,200  )
6
3 8,000 1 367
1
(16,000-8,000) (2,200  )
6
2,200

You will observe that the amounts of interest for each instalment calculated with
the help of ratio in illustration 2 is almost the same as calculated with a given
rate of interest in illustration 1.

11.4.2 Ascertainment of Total Cash Price

Sometimes, the total cash price is not given. In such a situation, we cannot
proceed with the accounting for hire purchase transaction because in the books
of the buyer, the amount to be capitalised cannot be more than the cash price.
The different methods of calculation of cash price are as below:

i) Without the help of annuity table

ii) With the help of annuity table

Let us now discuss both the methods

i) Without the Help of Annuity Table

Under this method, interest is calculated starting with the last instalment. Suppose
there are three instalments, the interest will be calculated first on the third
instalment, then on the second and lastly on the first instalment. No interest
is calculated on down payment as it doesnot involve any element of interest.

You know that the interest is to be calculated on the outstanding amount of

cash price. But since it is not known, it will have to be calculated with the
help of total amount due on hire purchase price. For this purpose, we will have 13
Hire Purchase and Inland to use the following formula for calculating first the interest involved in each
Branches
instalment and then subtract this amount of interest from the total amount due,
so as to work out the outstanding amount of cash price.

rate of interest
Interest = Total amount due at the time of instalment 
100  rate of interest

Let us now see what steps are followed for the calculation of Cash Price due
at the time of each instalment assuming there are three yearly instalments.

a) Calculate the interest on the instalment of the third year, deduct interest
from this instalment. The resultant figure is the outstanding cash price at
the time of third (last) instalment.

b) Add the cash price calculated under (a) above to the instalment amount
of the second year. Calculate the interest on the sum so obtained and
subtract it from the total amount due at the end of the second year to
get the outstanding cash price at the time of second instalment.

c) Add the cash price calculated under (b) above to the instalment amount
of the first year and calculate the interest on the sum so obtained. Deduct
this amount of interest from the total amount due at the end of the first
year. The resultant figure is the cash price due at the time of the first
instalment.

d) Add the cash price calculated under (c) above to the down payment, if
any. The sum so obtained will be the total cash price.

Illustration 3 will help you to understand the calculation of cash price.

Illustration 3

Renuka purchased a Machine on January 1, 2015 on hire purchase basis for

Rs. 5,000 payable as under :

Rs.

Down Payment 930

At the end of 1st year 1,426

(1st instalment)

At the end of 2nd year 1804

(2nd instalment)

At the end of 3rd year 840

(3rd instalment)
Rate of interest 5% p.a.
Calculate the Cash Price of the Machine and interest paid with each instalment.

14
Solution : Hire Purchase Accounts-I

Amount Interest
Rs. Rs.

Total Amount Due on 3rd Instalment (last) 840

Less Interest 40 40

5
Outstanding Cash Price of 3rd Instalment 800 (840  )
105
Add 2nd Instalment 1,804
Total Amount due on 2nd Instalment 2,604
Less Interest 124 124
5
Outstanding Cash Price of 2nd Instalment 2,480 (2,604  )
105
Add 1st Instalment 1,426
Total Amount dues on Ist Instalment 3,906
Less Interest 186 186
5
Outstanding Cash Price of Ist Instalment 3,720 (3,906  )
105
Add Down Payment 930
Total Cash Price 4650 350

So Total Cash Price is Rs. 4,650 and Total Interest Rs. 350.
Note: This calculation can be verified by following the procedure given for
calculation of interest on each instalment when cash price, instalments,
down payment and rate of interest are given.
ii) With the Help of an Annuity Table
If the annuity table is available, calculation of interest involved in each instalment
is simplified. In the annuity table, the rate of interest is given in the rows and
the years in the columns. With reference to the table, the present value of each
instalment can be calculated. The sum of these present values as calculated,
if added to the cash down payment gives us the cash price. The procedure
is as follows:
a) See the given rate of interest in the row and the year in the column and
find out the corresponding figure in the table.
b) This figure is the present value of Re. 1
c) Multiply the present value of Re. 1 with the amount of the instalment.
d) The resulting figure is the present value of the instalment. This is nothing
but the amount of cash price included in the instalment.
e) Calculate the present values of all the instalments in same manner.
f) Add the present values of all the instalments to the down payment if any.
The resultant figure will be the total cash price. 15
Hire Purchase and Inland illustration 4 will help us to understand the calculation of total cash price with
Branches
the help of the annuity table.
Illustration 4
X Ltd. purchased a Machine on hire purchase system. The payment is made
as follows:
Rs.
Down Payment 232.50
1st Instalment 356.50
2nd Instalment 451
3rd Instalment 210
The payments are made at the end of 1st year, 2nd year and 3rd year
respectively. The rate of interest is 5% p.a. The annuity table shows that
the present value of Re. 1 for one, two and three years is .9524, .9070
and .8639 respectively. Calculate the cash price of the Machine.
Solution:

(1) (2) (1  2)
Instalement Present Present value
Value of of the
Re. 1 instalement

Cash Down 232.50 1 232.50

1st Instalment 356.50 .9524 339.53
2nd Instalment 451.00 .9070 409.08
3rd Instalment 210.00 .8619 189.42
Total 1,250.00 1,162.53

So the Total Cash Price is Rs. 1,162.53

Check Your Progress B
1. Calculate total interest and interest on each instalment for the following
cases.
i) Cash Price of a Machinery is Rs. 349. Down payment is Rs. 100
to be followed by three annual instalments of Rs. 100 each. The rate
of interest is 10%.
.........................................................................................................
.........................................................................................................
.........................................................................................................
ii) Cash price of a Machine is Rs. 1900. Payment is to be made in
3 equal instalments of Rs. 800 each.
.........................................................................................................
.........................................................................................................

16 .........................................................................................................
2. Calculate cash price for each of the following cases. Hire Purchase Accounts-I

i) The price of a Machinery is to be paid in four instalments of Rs. 5,000

each, the first one being made as initial payment. The rate of interest
is 5% p.a. and the instalment is paid annually.
.........................................................................................................
.........................................................................................................
.........................................................................................................
ii) The price of a Machinery is to be paid in five annual instalments of
Rs. 10,000 each. The rate of interest is 5% p.a. The first instalment
is to be paid at the end of the first year. At 5% interest the present
value of Re. 1 payable at the end of each year for 5 years is
Rs. 4.3294.
.........................................................................................................
.........................................................................................................
.........................................................................................................

11.5 ACCOUNTING RECORDS IN THE BOOKS

OF THE PURCHASER
You know, there are two parties to a hire purchas e agreement i.e., the Vendor
and the Purchaser. Both these parties have to maintain books of account and
record all the transactions relating to that particular hire purchase.
Before explaining the accounting records, let us first see what information is
required for recording the hire purchase transaction in the books of account.
The list of items required for accounting records is as follows:
1. Date of Purchase and down payment
2. Date at which the instalments become due
3. Date of closure of accounts
4. Cash Price
5. Hire Purchase Price
6. Number, Amount and Mode of each instalment
7. Rate of Interest
8. Rate of Depreciation
9. Method of Depreciation
Let us now see how accounting records are maintained in the books of the
purchaser. There are two methods by which the purchaser can record the hire
purchaser transaction in the books of account. These are as follows:
i) When the asset is recorded at the full cash price, and
ii) When the asset is recorded at the cash price actually paid.
17
Hire Purchase and Inland Let us now discuss these methods in detail.
Branches
11.5.1 When the Asset is Recorded at Full Cash Price
In this method, when the asset is purchased on hire purchase, it is assumed
that the purchaser has full intention of paying all the instalments. It is believed
that hire purchase is just a method of financing fixed assets. Under this method,
on purchase of plant and machinery, the Plant & Machinery Account (Fixed
Asset) is debited with the total amount of Cash Price, and the corresponding
credit is given to Hire Vendor’s Account. Interest is recognised and accounted
for at the time of instalments becomes due by debiting the Interest Account
and crediting the Hire Vendor’s Account. For the purpose of accounting for
initial cash down payment and annual instalments, the Hire Vendor’s A/c is
debited on the relevant date, and the credit is given to Bank Account. The
following journal entries are passed in the books of the purchaser.
1 When the asset is purchased on hire purchase
Asset A/c Dr.
To Hire Vendor A/c
(With the total cash price)
2 For cash down payment
Hire Vendor A/c Dr.
To Bank A/c
3 When the first instalment becomes due
Interest A/c Dr.
To Hire Vendor A/c
4 When the first instalment is paid
Hire Vendor A/c Dr.
To Bank A/c
5 For Depreciation Charge (at the end of accounting period)
Depreciation A/c Dr.
To Asset A/c
6 For transfer of interest and depreciation to Profit & Loss A/c
Profit& Loss A/c Dr.
To Interest A/c
To Depreciation A/c
Entries 3 and 4 will be repeated for all subsequent instalments.
With the help of the journal entries, we can easily prepare the Asset Account
and the Hire Vendor’s Account. Look at illustration 5 and see how the journal
entries are passed and ledger accounts are made in the books of the purchaser.
Illustration 5
ABC Ltd. bought a machine on 1.1.2016 from XYZ Ltd. under a hire purchase
system of payment under which three annual instalments of Rs. 2,412 would
be paid. There is no down payment and the cash price is Rs, 6,000. The rate
of interest would be 10% and depreciation @20% p.a. would be charged on
straight line basis.

18
Solution Hire Purchase Accounts-I

Let us first find out all the information required.

1) Date of Purchase  January 1, 2016; No down payment.
2) Date at which the instalments become due  December 31, 2016, 2017
and 2018.
3) Date of closure of accounts  December 31.
4) Cash Price  Rs. 6,000.
5) Hire Purchase Price  Rs. 2,412 x 3 = Rs. 7,236.
6) Number, amount and mode of each instalment  3 instalments of Rs. 2,412
each payable annually.
7) Rate of Interest  10% p.a.
8) Rate of Depreciation  20% p.a.
9) Method of Depreciation  Straight Line.
Journal Entries in the Books of ABC Ltd

Date Particulars Amount Amount

(Dr.) (Cr.)

2016 Rs. Rs.

Jan. 1 Machinery A/c Dr. 6,000
To XYZ Ltd. 6,000
(Being a machine purchased on
hire purchase)
Dec.31 Interest A/c Dr. 600
To XYZ Ltd. 600
(Being the charge of interest @ 10%
on Rs. 6,000)
Dec.31 Depreciation A/c Dr. 1,200
To Machinery A/c
(Being the charge of depreciation) 1,200
Dec.31 XYZ Ltd. A/c Dr. 2,412
To Bank A/c 2,412
(Being thepaymentofannual instalment)
Dec.31 Profit & Loss A/c Dr. 1,800
To Interest A/c 600
To Depreciation A/c 1,200
(Being the annual charges transferred
to Profit & Loss A/c)
2017
Dec.31 Interest A/c Dr. 418
To XYZ Ltd. 418
(Being the charge of interest @ 10%
on Rs. 4,188) 19
Hire Purchase and Inland
Branches
Dec.31 Depreciation A/c Dr. 1,200
To Machinery A/c 1,200
(Being the annual charge of
depreciation)
Dec.31 XYZLtd. A/c Dr. 2,412
To Bank A/c 2,412
(Being the payment of annual instalment)
Dec.31 Profit & Loss A/c Dr. 1,618
To Interest A/c 418
To Depreciation A/c 1,200
(Being the transfer of annual charges to
Profit & Loss A/c)
2018
Dec.31 Interest A/c Dr. 218
To XYZ Ltd. 218
(Being the charge of interest @ 10%
on Rs. 2,194)
Dec.31 Depreciation A/c Dr. 1,200
To Machinery A/c 1,200
(Being theannual charge of depreciation)
Dec.31 XYZ Ltd. A/c Dr. 2,412
To Bank A/c 2,412
(Being the 3rd and final instalment paid)
Dec.31 Profit & Loss A/c Dr. 1,418
To Interest A/c 218
To Depreciation A/c 1,200
(Being the transfer of annual charges to
Profit & Loss A/c)
Ledger Accounts in the Books of ABC Ltd
Machinery Account
Dr. Cr.

2016 Rs. 2016 Rs.

Jan. 1 To XYZ Ltd 6,000 Dec. 31 By Depreciation A/c 1,200
Dec. 31 By Balance c/d 4,800
6,000 6,000
2017 2017
Jan. 1 To Balance b/d 4,800 Dec. 31 By Depreciation A/c 1,200
Dec. 31 By Balance c/d 3,600
4,800 4,800
2018 2018
Jan. 1 To Balance b/d 3,600 Dec. 31 By Depreciation A/c 1,200
Dec. 31 By Balance c/d 2,400

20 3,600 3,600
 XYZ LTD (Hire Vendor) Account Hire Purchase Accounts-I

Dr. Cr.

2016 Rs. 2016 Rs.

Dec.31 To Bank A/c 2,412 Jan. 1 By Machinery A/c 6,000
Dec.31 To Balance c/d 4,188 Dec. 31 By Interest A/c 600
6,600 6,600
2017 2017
Dec.31 To Bank A/c 2,412 Jan. 1 By Balance b/d 4,188
Dec.31 To Balance c/d 2,194 Dec. 31 By Interest A/c 418
4,606 4,606
2018 2018
Dec.31 To Bank A/c 2,412 Jan. 1 By Balance b/d 2,194
Dec. 31 By Interest A/c 218
2,412 2,412

Working Notes :

Rs.

Cash Price 6,000

10
Add : Interest on Ist Instalment (  6, 000 ) 600
100
6,600
Less : Ist Instalment 2,412
Amount outstanding at the time of 2nd Instalment 4,188

10
Add : Interest on 2nd Instalment (  4,188) 418
100
4,606

Less : 2nd Instalment 2,412

Amount outstanding at the time of 3rd instalment 2,194
Add : Interest on 3rd Instalment 218
2,412

11.5.2 When the Asset is Recorded at Cash Price

Actually Paid
You know that in case of hire purchase, the ownership of the goods passes
to the hire purchaser after the last instalment has been paid. Since the goods
do not become the property of the purchaser, he does not have any right to
debit the asset at its full price. Hence, no entry is passed when the asset is
purchased unless it involves down payment. The entries are passed as and when
the instalments become due and the amount is paid towards the price of the
article. The journal entries are as follows : 21
Hire Purchase and Inland 1. When the asset is purchased
Branches
No entry
2. When the down payments is made
Asset A/c Dr.
To Bank A/c
3. When the instalment becomes due
Asset A/c Dr. (cash price part of instalment)
Interest A/c Dr. (interest on instalment)
To Hire Vendor
4. When instalment is paid
Hire Vendor Dr.
To Bank A/c
5. When depreciation is charged
Depreciation A/c Dr.
To Asset A/c
6. When interest and depreciation accounts are closed by transfer
to Profit & Loss A/c
Profit & Loss A/c Dr.
To Interest A/c
To Depreciation A/c
It should be noted that though the asset account is debited with the amount
of the cash price paid (not full cash price), the depreciation is charged on the
full cash price. The Balance Sheet will reflect the amount of cash price debited
to the asset account minus depreciation charged.
Look at the illustration 6 and see how accounting records are maintained in
case the asset is recorded at cash price actually paid.
Illustration 6
Solve illustration 6 by debiting the asset account at cash price actually paid.
Solution:
Journal Entries in the Books of ABC Ltd.

Date Particulars Amount (Dr.) Amount (Cr.)

Rs. Rs.

2016
Dec. 31 Machinery A/c Dr. 1,812
Interest A/c Dr. 600
To XYZ Ltd. 2,412
(Being first instalment due)
Dec. 31 XYZ Ltd Dr. 2,412
To Bank A/c 2,412
(Being first instalment paid)
Dec. 31 Depreciation A/c Dr. 1,200
To Asset A/c 1,200
(Being annual depreciation
22 charged)
 Hire Purchase Accounts-I
Dec. 31 Profit & Loss A/c Dr. 1,800
To Depreciation A/c 1,200
To Interest A/c 600
(Being annual charges
transferred to Profit &
Loss A/c)
2017
Dec. 31 Machinery A/c Dr. 1,994
Interest A/c Dr. 418
To XYZ Ltd.
(Being third instalment due) 2,412
Dec. 31 XYZ Ltd Dr. 2,412
To Bank A/c 2,412
(Being third instalment paid)
Dec. 31 Depreciation A/c Dr. 1,200
To Asset A/c 1,200
(Being annual depreciation
charged)
Dec. 31 Profit & Loss A/c Dr. 1,618
To Depreciation A/c 1,200
To Interest A/c 418
(Being annual charges
transferred to Profit & Loss A/c)
2018
Dec. 31 Machinery A/c Dr. 2,194
Interest A/c Dr. 218 2,412
To XYZ Ltd.
(Being third instalment due)
Dec. 31 XYZ Ltd Dr. 2,412
To Bank A/c 2,412
(Being third instalment paid)
Dec. 31 Depreciation A/c Dr. 1,200
To Asset A/c 1,200
(Being annual depreciation
charged)
Dec. 31 Profit & Loss A/c Dr. 1,418
To Depreciation A/c 1,200
To Interest A/c 218
(Being annual charges
transferred to Profit & LossA/c)

Note:Depreciation has been charged on straight line method @20% p.a. at

the full cash price of Rs. 6,000.

23
Hire Purchase and Inland
Branches 11.6 ACCOUNTING RECORDS IN THE BOOKS
OF VENDOR
So far as the vendor is concerned, a hire purchase sale is just like an ordinary
sale with the exception that payment is deferred over a period of time for which
the vendor charged interest. He debits the Hire Purchaser’s A/c with full cash
price and credit is given to Sales A/c. The interest amount is debited to Hire
Purchaser’s A/c as and when the instalments become due. Instalment amounts
received are credited to the Hire Purchaser’s A/c and debited to Bank A/c.
The journal entries passed are as follows:
1 On sale of goods under hire purchase
Hire Purchaser A/c Dr
To Sales A/c (with full cash price)
2 On receiving cash price down payment
Bank A/c Dr
To Hire Purchaser A/c
3 On instalment becoming due
Hire purchaser A/c Dr.
To Interest A/c
4 On getting payment on the due instalment
Bank A/c Dr.
To Hire Purchaser A/c
With the help of above entries, you can easily prepare the Hire Purchaser’s
A/c and Interest A/c. Look at illustration 7 and see how accounting records
are maintained in the books of the vendor.
Illustration
On January 1, 2017, IFB Ltd. acquired machinery from JK Ltd. for Rs. 1,886
(cash price) under a hire purchase agreement where Rs. 400 was the initial
payment and two instalments of Rs. 800 each would be paid. Interest @ 6%
p.a. would be charged. Prepare the ledger accounts in the books of J.K. Ltd.,
assuming rate of depreciation @ 10% (straight line).
Solution:
In the books of JK. Ltd.
IFB LTD.

Dr. Cr.

2017 Rs. 2017 Rs.

Jan. To Sales A/c 1 1,886 Jan. 1 By Bank A/c 400
Dec. 31 To Interest A/c 89 Dec. 31 By Bank A/c (1st Inst.) 800
Dec. 31 By Balance c/d 775
1,975 1,975
2018 2018
Jan. 1 To Balance b/d 775 Dec. 31 By Bank A/c (2nd Inst.) 800
Dec. 31 To Interest A/c 25
800 800
24
 Interest Account Hire Purchase Accounts-I

2017 Rs. 2017 Rs.

Dec. 31 To Profit & Loss A/c 89 Dec. 31 By IFB Ltd. 89
89 89
2018 2018
Dec. 31 To Profit & Loss A/c 25 Dec. 31 By IFB Ltd 25
25 25

Working Note
Statement having calculation of hire purchases interest and the amount of principal in each
instalment.

Rs. Interest Cash Price

Rs. Rs.

Cash Price 1,886 — 400

Less: Down Payment 400
1,486
Add: Interest on 1st instalment to be paid on 89
Dec. 31, 2017 @ 6%
1,575
Less : 1st Instalment on Dec. 31, 2017 800 89 711
775
Add: Interest on 2nd instalment @ 6% 25

800
Less: 2nd Instalment on Dec. 31, 2018 800 25 775

Check Your Progress C

1. Enlist the information required before solving the hire purchase problem.
.................................................................................................................
.................................................................................................................
.................................................................................................................
.................................................................................................................
2. State whether following statements are True or False.
i) When the asset is recorded at full cash price, the hire purchase
becomes a method of financing the fixed asset.
ii) When the asset is recorded at the price actually paid, the Asset
A/c is debited and the Hire Vendor’s A/c is credited with full cash
price.
iii) The Hire Vendor debits the hire purchaser’s A/c and credits the sales
A/c on sale of goods with cash price. 25
Hire Purchase and Inland iv) When the asset is recorded at cash price actually paid no entry is
Branches
passed when the instalment becomes due.
v) The Hire Vendor’s A/c is in the nature of a personal account.

11.7 LET US SUM UP

In the hire purchase agreement, the buyer takes the delivery of the goods and
promises to pay the price in instalments. Under this agreement, though the buyer
takes the possession of the goods, but he does not have the ownership. The
ownership of the goods passes only after the last instalment has been paid.
In case the buyer fails to pay any of the instalments, the seller can take back
the possession of the goods.
The hire purchase price is always more than the cash price, the difference
between the two is the interest charged for deferred payment. If any two of
the three items of information i.e., hire purchase price, cash price and interest,
are given, the third can be found out with the help of the formula HP = CP
+ Interest (HP is hire purchase price and CP is cash price).
Both the parties to hire purchase agreement i.e., the vendor and the purchaser,
record the hire purchase transactions in their books.
The purchaser can prepare accounting records in two ways (i) when the asset
is recorded at full cash price, or (ii) when the asset is recorded at the cash
price actually paid.
The purchaser mainly maintains two accounts i.e., the Hire Vendor Account and
the purchaser, record the hire purchase transactions in their books. The vendor
on the other hand maintains the Hire Purchaser ’s
Account and the Interest Account.

11.8 KEY WORDS

Agreement to Sell : In a contract of sale, when the ownership of goods sold
is to pass to the buyer subject to fulfilment of certain conditions, such sale is
termed as an agreement to sell.
Cash Price: The amount to be paid in outright sale on cash.
Down Payment: Initial payment made at the time of purchase under hire
purchase agreement.
Hire Charges: If the hirer in a hire purchase agreement fails to pay even the
last instalment, the amounts he has paid so far will be treated as hire charges
for using the asset.
Hire Purchase: An agreement to sell under which the buyer takes the delivery
of goods promising to pay the price in instalments and until full payment is made,
to treat payment as hire charges for using the goods.
Hire Purchaser: The purchaser in a hire purchase contract.
Hire Vendor: The seller in a hire purchase agreement who agrees to receive
the price in instalments, and has the right to treat the amounts paid by the hirer
as hire charges if the hirer fails to pay the last instalment.
26
Instalment Payment System: When the price in a contract of sale is paid Hire Purchase Accounts-I
over a period of time but at fixed intervals, the system of payment is called
instalment payment system.

11.9 ANSWERS TO CHECK YOUR PROGRESS

A 1. i) agreement ii) sell iii) pass, conditions iv) instalment v) hire charges
vi) repossess vii) writing viii) terminate ix) right, title

2. i) False ii) True iii) False iv) True v) False vi) False

B 1. i) Total interest = Rs. 51(25+17+9)

ii) Total interest = Rs. 500 (264+178+58)
2. i) Cash Price = Rs. 18,616, ii) Cash Price = 43,294

C 1. i) True ii) False iii) True iv) False v) True

11.10 TERMINAL QUESTIONS/EXERCISES

Questions
1) What are the characteristics of a hire purchase agreement?
2) Describe the rights of a hirer under hire purchase agreement.
3) What steps would you take to calculate the interest when the total cash
price instalments are given?
Exercises
1. Based on particulars given below, give entries in the books of the purchaser
and the seller under the hire purchase system :
a) Ramesh & Co.Purchaser, Date of PurchasJan. 1, 2018, goods
purchasedTrucks, Cash PriceRs. 1,49,000, Instalments Rs. 40,000
on signing of the agreement. Rest in three instalments of Rs. 40,000
each, Rate of interest5%, Depreciation 10% on the diminishing
balance.
b) All particulars as above except that the rate of interest is not given.
c) All particulars as in (a) above except that the cash price is not given.
2. Hire Purchases Ltd. purchased Motor Car on hire purchase system. Rs.
12,000 was payable on delivery i.e., on 1.1.18 and the rest in four equal
instalments of Rs. 12,000 each payable at the end of each year. The seller,
Hire Vendors Ltd. agreed to charge interest @ 5% on the yearly balances.
The cash price of the Car was Rs. 54,551. Depreciation @ 25% on written
down values was to be written off in each year.
Give the necessary journal entries and ledger accounts in the books of
Hire Purchasers Ltd.
(Answer:Total Interest Rs. 5,449. The written down value of the Car at
the of fourth year is Rs. 17,260)
27
Hire Purchase and Inland 3 Dinesh Ltd., on April 1, 2015, purchased a machine from Rajesh Ltd.,
Branches
on hire purchase basis. The cash price of the machine was Rs. 25,000.
The payment was to be made Rs. 5,000 on the date of the contract and
the balance in four annual instalments of Rs. 5,000 each plus interest at
5% per annum payable on December 31 each year, and the first such
instalment being payable on 31.12.15. Depreciation is to be charged @10%
on original cost.
Show the journal entries and ledger accounts in the books of both the
parties.
(Answer: The amount of total interest Rs. 2,500, balance of Machinery
A/c on 1.1.19 Rs. 15,000).
4. An engineering company purchased a Machine on Hire Purchase System
over a period of three years paying Rs. 846 as initial payment on 1.1.16
and further annual payments of Rs. 2000 due on 31.12.16, 31.12.17 and
31.12.18. The cash price of the Machine was Rs. 6,000 and the vendor
company was to charge interest at 8% p.a. on outstanding balances.
Show the appropriate ledger accounts in the books of the hire purchaser
assuming depreciation @ 10% p.a. was to be charged on the Machine,
Assume that capitalisation was to be done at the time of payment of each
instalment.
(Answer : Interest (total) Rs. 846).

Note : These questions will help you to understand the unit better. Try to
write answers for them. But, do not submit your answers to the
University for assessment. These are for your own practice only.

28
 Hire Purchase
Journal Accounts-II
and Ledger
UNIT 12 HIRE PURCHASE ACCOUNTS -II
Structure
12.0 Objectives
12.1 Introduction
12.2 Default and Repossession
12.2.1 Rights of the Hire Vendor
12.2.2 Restrictions on the Owner

12.3 Accounting for Default and Repossession

12.3.1 Complete Repossession
12.3.2 Partial Repossession

12.4 Instalment Payment System

12.5 Accounting for Instalment Payment System
12.5.1 Books of the Buyer
12.5.2 Books of the Vendor

12.6 Basic Record for Goods of Small Value Sold on Hire Purchase
12.7 Relevant Terms
12.8 Ascertainment of Profit
12.8.1 Treatment of Goods Repossessed
12.8.2 Calculation of Missing Figures

12.9 Stock and Debtors System

12.10 Let Us Sum Up
12.11 Key Words
12.12 Answers to Check Your Progress
12.13 Terminal Questions/Exercises

12.0 OBJECTIVES
After studying this unit, you should be able to:
 explain default and repossession in relation to a hire purchase contract;
 pass accounting entries for complete and partial repossession of goods in
the books of both hire vendor and hire purchaser;
 describe the instalment payment system and distinguish it from hire purchase
system;
 pass accounting entries in case an asset is bought under the instalment
payment method;
 explain the basic record maintained for hire purchase transactions of goods
of small value;
29
Hire Purchase and Inland  explain the terms like cost price, goods sold on hire purchase, hire purchase
Branches
stock, hire purchase debtors, etc. considered relevant for ascertainment of
profit on hire purchase business;
 prepare hire purchase trading account and ascertain the profit/loss on hire
purchase business; and
 ascertain the profit or loss on hire purchase business through stock and
debtors method.

12.1 INTRODUCTION
In Unit 11, you learnt about the nature, legal position and the accounting treatment
of a hire purchase contract. So far as the accounting treatment goes, we
discussed a simple situation where the purchaser had paid all the instalments
and consequently the ownership was transferred to him. But sometimes the
purchaser is unable to pay all instalments. In such a situation, the vendor has
the right to take back the possession of goods and treat the instalments paid
as hire charges for the use of the asset. But, in practice, he may arrive at some
compromise with the hire purchaser. In this unit, you will learn how default in
payment of instalments is treated in the books of account of both the parties.
We shall also discuss the accounting treatment in case the asset is purchased
under instalment payment system as against the hire purchase system.
So far we have discussed the system of maintaining accounting records related
to hire purchase transactions for goods of substantial sales value. In practice,
however, the goods bearing small value like fridge, TV, scooter, etc. are also
sold on hire purchase basis. The retailers often keep separate records for these
transactions and compute the profit on hire purchase business separately. This
involves a peculiar method of accounting and profit ascertainment. In this unit,
we shall also discuss the accounting treatment of hire purchase transactions for
goods of small value and study the methods of ascertaining the profit or loss
on such transactions during an accounting period.

12.2 DEFAULT AND REPOSSESSION

‘Default’ is the failure to act, appear or pay i.e., failure to meet obligation. Under
a hire purchase agreement, the hirer has obligation to pay up to the last instalment
so that the ownership of goods smoothly passes to him. If he fails to meet
this obligation, it will be treated as default on his part.
Possession of goods means physical holding of goods. You know that under
hire purchase agreement, the vendor simply transfers the possession of goods.
He does not transfer the ownership, and if the hirer fails to pay even the last
instalment, the vendor has the legal right to recover the possession of the goods.
This act of recovery of possession is termed as ‘repossession’.
The legal position of the hire vendor and hire purchaser (hirer) in case of default
is complicated. The Hire Purchase Act of 1972 did codify this issue first, but
as this Act was not put to operation, the legal position is not very clear. However,
the relevant provisions of the said Act are discussed below.

30
 Hire Purchase Accounts-II
12.2.1 Rights of the Hire Vendor
1. Rights of hire vendor to terminate hire purchase agreement: Where
the hirer makes more than one default in payment of instalment as provided
in the agreement, the hire vendor (the owner) shall be entitled to terminate
the agreement by giving the notice of termination in writing.
2. Rights of the hire vendor on termination: Where a hire purchase
agreement is terminated, the hire vendor (the owner) shall-be entitled (i)
to enter the premises of the hirer and seize the goods, (ii) to retain the
hire charges already paid and to recover the arrears of hire charges due,
and (iii) to claim damages for non-delivery of the goods.

12.2.2 Restrictions on the Owner

The above rights of the owner are, however, subject to the following restrictions:
1. Rights of hirer in case of seizure of goods by the owner: Where
the owner seizes the goods lent under a hire purchase agreement, the hirer
may recover from the owner the amount, if any, by which the hire purchase
price falls short of the aggregate of two amounts (a) the amounts paid
in respect of the hire purchase price up to the date of seizure, and (b)
the value of the goods on the date of seizure.
2. Restrictions on owner’s right to repossess: Where goods have been
let under a hire purchase agreement, and the statutory amount of the hire
purchase price has been paid, the owner shall not enforce any right to
recover possession of the goods from the hirer otherwise than by verdict
of any competent court.

12.3 ACCOUNTING FOR DEFAULT AND

REPOSSESSION
You know that when the purchaser fails to pay any of the instalments, the hire
vendor can take back the possession of the goods. The amount already paid
to the vendor as a part of the payment for the asset is treated as the hire
charge. So far as the repossession of goods is concerned, the vendor can either
take back the whole of the asset or a part of it. Let us now discuss what
entries will be passed in case of (i) complete repossession and (ii) the partial
repossession.

12.3.1 Complete Repossession

When the hire purchaser does not pay the instalment, the vendor can take back
the possession of goods. In case the vendor takes the possession of all the
goods, it is called complete repossession. It means the vendor will close Hire
Purchaser’s Account in his books and vice versa. The journal entries passed
are as follows:
i) All the entries (except the entry for payment) are passed as usual up to
the date of default.
ii) For closing the account of the purchaser
Goods Repossessed A/c Dr.
To Hire Purchaser
(Transfer of balance) 31
Hire Purchase and Inland iii) For repairs and other expenses on the repossessed goods
Branches
Goods Repossessed A/c Dr.
To Cash A/c
(Repairs and other expenses)

iv) For resale of goods repossessed

Cash A/c Dr.
To Goods Repossessed A/c

v) Any balance left in Goods Repossessed Account is either profit or

loss, which is ultimately transferred to’ Profit & Loss A/c.

In case of profit the entry will be :

Goods Repossessed A/c Dr.
To Profit & Loss A/c

In case of loss, the above entry will be reversed.

In the books of Hire Purchaser

i) All the entries (except the entry for payment) are passed as usual up to
the date of default, including the entry for depreciation.

ii) For closing the account of the vendor

Hire Vendor A/c Dr.
To Asset A/c

iii) For closing the Asset Account

Profit & Loss A/c Dr.
To Asset A/c

Generally there is a loss to the hire purchaser, so the above entry is passed
for loss on seizure of goods. In case of profit, the above entry will be reversed.

Look at illustration 1 and see how entries are passed and the books are closed
in case of complete repossession.

Illustration 1

On January 1, 2017, ABC Ltd. sold some plant & machinery costing Rs. 28,000
(cash price) to XYZ Ltd. on hire purchase. Payment was to be made as Rs.
7,500 cash down and three instalments of Rs. 7,500 at the end of each year.
Rate of interest was @ 5% p.a. The rate of depreciation for the asset was
10% p.a.

XYZ Ltd. made the down payment and paid the first instalment. But they could
not pay the second instalment. Consequently, ABC Ltd. repossessed the goods.

ABC Ltd. spent Rs, 300 on repairs and disposed off the asset for Rs. 15,350.
32 Open ledger accounts in the books of both the parties.
Solution: Hire Purchase Accounts-II

Books of XYZ Ltd.

Plant & Machinery Account
Dr. Cr.

Date Particulars Amount Date Particulars Amount

2017 Rs. 2017 Rs.

Jan.1 To ABC Ltd 28,000 Dec.31 By Depreciation 2800
(10% on 28,000)
Dec.31 By Balance c/d 25,200
28,000 28,000
2018 2018
Jan. 1 To Balance b/d 25,200 Dec. 31 By Depreciation 2,520
(10% on 25,200)
Dec. 31 By ABC Ltd 14,726
Dec. 31 By Profit and Loss A/c 7,954
25,200 25,200

ABC Ltd’s Account

2017 Rs. 2017 Rs.

Jan.1 To Cash A/c 7,500 Jan. 1 By Plant & Machinery 28,000
(down payment) Dec.31 By Interest A/c 1,025
Dec.31 To Cash A/c 7,500
(first instalment)
Dec. 31 To Balance c/d 14,025
29,025 29,025
2018 2018
Dec. 31 To Plant & Machinery 14,726 Jan.1 By Balance b/d 14,025
A/c (default) Dec.31 By Interest A/c 701
14726 14,726

Books of ABC Ltd

XYZ Ltd’s Account
2017 Rs. 2017 Rs.
Jan.1 To Sales A/c 28,000 Jan.1 By Cash A/c 7,500
Dec.31 To Interest A/c 1,025 Dec.31 By Cash A/c 7,500
(5% on 20,500) Dec.31 By Balance c/d 14,025
29,025 29,025
2018 2018
Jan.1 To Balance b/d 14,025 Dec.31 By Goods Repossessed 14,726
Dec. 31 To Interest A/c 701 A/c
(5% on 14,025) 14,726 14,726
33
Hire Purchase and Inland
Branches
Goods Repossessed Account

2018 Rs. 2018 Rs.

Dec.31 To XYZ Ltd A/c 14,726 Dec.31 By Cash A/c (sales) 15,350
Dec.31 To Cash A/c (repairs) 300
Dec.31 To Profit & Loss A/c 324
(profit on sale)
15,350 15,350

12.3.2 Partial Repossession

Sometimes, in case of default, the vendor enters into a compromise with the
hirer and does not repossess the complete goods. But, he repossesses a part
of the goods called partial repossession. In this case, some part of the asset
is still left with the buyer.
So far as the accounting treatment of partial possession is concerned, interest
and depreciation entries are passed as usual in the books of both the parties
upto te date of default, but not the entry for payment.
As some part of the asset is left with the hire purchaser, the hire vendor does
not close the Hire Purchaser’s Account in his books, nor does the hire purchaser
close the Hire Vendor’s Account in his books. They ascertain the current value
of the asset repossessed with the help of an agreed rate of depreciation (it
is usually an enhanced rate). The hire vendor debits the same to the Goods
Repossessed Account and credits it to the Hire Purchaser’s Account. Similarly,
the hire purchaser debits the Hire Vendor’s Account and credits the Asset
Account with the agreed value of the asset repossessed. As for the part of
asset left with him, the hire purchaser applies the normal rate of depreciation
and shows the depreciated value as a balance in the Asset Account. The
balancing figure in the asset account will show the profit or loss on default and
it will be transferred to the Profit & Loss Account.
Look at the illustration 2 and see how accounts are prepared in case of partial
repossession.
Illustration 2
Jalani Distributors sold three light commercial vans to Jain Enterprises on January
1, 2017 on hire purchase system. The price of each van was Rs. 90,000 payment
of which was to be made as follows
i) Rs. 30,000 as down payment for each van,
ii) Remaining amount in 3 annual equal instalments along with interest @15%.
Jain Enterprises were charging depreciation @ 20% each year on written down
value method. After payment of 1st instalment as on December 31, 2017, they
could not pay further instalments. It was agreed between the parties for
repossession of two vans adjusting their value against the amount due. For the
purposes of repossession, depreciation @ 30% p.a. was charged.
Repossessed goods were repaired at a cost of Rs. 2,000 and were then sold
for Rs, 92,000, Calculate the value of repossessed stock and show the necessary
accounts in the books of both the parties.
34
Solution Hire Purchase Accounts-II

In the books of Jain Enterprises

Light Commercial Vans Account
Dr. Cr.

Date Particulars Amount Date Particulars Amount

2017 Rs. 2017 Rs.

Jan, 1 To Jalani Distributors 2,70,000 Dec. 31 By Depreciation A/c 54,000
(Rs. 90,0003) (20% on 2,70,000)
Dec. 31 By Balance c/d 2,16,000
2,70,000 2,70,000
2018 2018
Jan. 1 To Balance b/d 2,16,000 Dec. 31 By Depreciation A/c 43,200
(20% on 2,16,600)
Dec. 31 By Jalani Distributors 88,200
(value of two vans on
repossession)
Dec. 31 By Profit & Loss A/c 27,000
(loss on repossession)
Dec. 31 By Balance c/d 57,600
2019 2,16,000 2,16,000
Jan. 1 To Balance b/d 57,600

Jalani Distributors’ Account

2017 Rs. 2017 Rs.

Jan. 1 To Bank A/c 90,000 Jan. 1 By Light Commercial 2,70,000
(down payment) Vans A/c
(Rs. 30,0003)
Dec.31 To Bank A/c 87,000 Dec 31 By Interest A/c 27,000
(first instalment
Rs. 60,000+27,000) 15
(1,80, 000  )
100
Dec.31 To Balance c/d 1,20,000
2,97,000 2,97,000
2018 2018
Dec. 31 To LightCommercial 88,200 Jan. 1 By Balance b/d 1,20,000
Vans A/c
Dec. 31 To Balance c/d 49,800 Dec. 31 By Interest 18,000
15
(1, 20, 000  )
1,38,000 100 1,38,000
2019
Jan. 1 By Balance b/d 49,800
35
Hire Purchase and Inland Books of Jalani Distributors
Branches
Jain Enterprises’ Account

2017 Rs. 2017 Rs.

Jan.1 To Sales A/c 2,70,000 Dec. 31 By Bank A/c
(down payment) 90,000
Dec. 31 To Interest A/c 27,000 Dec. 31 By Bank A/c 87,000
(Ist instalment)
15
(  1,80, 000)
100
Dec. 31 By Balance c/d 1,20,000
2,97,000 2,97,000

2018 2018
Jan. 1 To Balance b/d 1,20,000 Dec. 31 By Goods Repossessed A/c 88,200
Dec. 31 To Interest A/c 18,000 Dec. 31 By Balance c/d 49,800
15
( 1, 20, 000)
100
1,38,000 1,38,000
2019
Jan. 1 To Balance b/d 49,800

Goods Repossessed Account

2018 Rs. 2018 Rs.

Dec. 31 To Jain enterprises 88,200 Dec. 31 By Cash A/c (sale) 92,000
Dec. 31 To Cash A/c (repairs) 2,000
Dec. 31 To Profit & Loss A/c 1,800
(profit on sale)
92,000 92,000

Working Notes
1 Calculation of the value of repossessed asset Rs.
Cost Price of two vans (90,0002) 1,80,000
Depreciation
30
First year ( 1,80, 000) 54,000
100
30
Second year ( 1,80, 000  54, 000) 37,800 91,800
100
Value of repossessed stock 88,200
2 Loss on Repossession Rs.
Cost Price of two vans (90,0002) 1,80,000
36 Depreciation
 Hire Purchase Accounts-II
20
First year (  1,80, 000) 36,000
100

20
Second year ( 1,80, 000  36, 000) 28,800 64,800
100
Depreciated value of two vans 1,15,200
Less : Value of the two vans at higher rate of depreciation
for repossession 88,200
Loss on repossession 27,000

12.4 INSTALMENT PAYMENT SYSTEM

Instalment Payment System also called the Deferred Instalments is a system
where the buyer is given the ownership as well as the possession of the goods
right at the time of signing the contract. The buyer has the facility to pay the
price in instalments. The features of Instalment Payment System are as follows:
i) It is an outright sale.
ii) The possession as well as the ownership is passed to the buyer on signing
of the contact.
iii) The buyer can make the payment in instalments.
iv) In case of default in payment, the seller cannot repossess the goods.
v) The amount paid up to the default is not forfeited and the seller can sue
the buyer for the amount due.
From the above discussion we can see that the Instalment Payment System
has some similarities with the Hire Purchase System, but there are some points
of difference as well. They are as follows:

Hire Purchase System Instalment Payment System

i) It is an agreement of hiring. i) It is an agreement of sale.

ii) The buyer gets only the possession ii) The buyer gets possession
of goods on signing the contract. on signing of the contract.
iii) In case of default, the goods iii) The goods cannot be
can be repossessed repossessed in case of default.
iv) In case of default, the payment iv) The payment made up to the
made up to the date of default date of default is a payment
is forfeited and treated as hire towards the price of the asset
charge. and cannot be forfeited. The
seller can at the most sue the
buyer for the amount due.
v) The buyer cannot sell, destroy, v) Buyer can sell, destroy, damage,
transfer, damage or pledge the . transfer or pledge the goods.
goods.
37
Hire Purchase and Inland
Branches 12.5 ACCOUNTING FOR INSTALMENT PAYMENT
SYSTEM
You know that the ownership of goods passes to the buyer immediately on
the signing of the contract. Hence, while accounting for the purchase under the
Instalment payment system, this fact should be taken into account. Accordingly,
the buyer credits the vendor with the full amount payable to him (inclusive of
total interest) and debits the assets with cash price and the Interest Suspense
Account with the total amount of interest being the difference between the full
amount payable and the cash price. The Interest Suspense Account is credited
with the actual amount of interest at the time of each instalment by transferring
the same to Interest Account. Similarly, the vendor debits the buyer with the
full amount and credit sale with cash price and Interest Suspense Account with
total interest. He transfers the actual amount of interest to Interest Account at
the time of each instalment by debiting Interest Suspense Account and crediting
the Interest Account.
Thus, from accounting point of view, the main point of difference between
Instalment Payment System and the Hire Purchase System relates to the treatment
of interest. But in practice, even this may be dispensed with.
The asset account is maintained by the buyer in a manner similar to that of
Hire Purchase System i.e., depreciation is charged in the usual manner and the
depreciated value of the asset is shown in the Balance Sheet. It should be noted
that the balance in Vendor’s Account shall be shown on the liability side every
year.
Let us now study the journal entries both in the books of the buyer and seller
under Instalment Payment System.
12.5.1 Books of the Buyer
The buyer passes the following journal entries in his books.
i) When the Asset is purchased
Asset A/c Dr. (with cash price)
Interest Suspense A/c Dr. (difference between cash price
To Vendor (with Instalment price) and instalment)

ii) For cash down payment

Vendor A/c Dr
To Bank A/c

iii) For interest due at the time of instalment

Interest A/c Dr.
To Interest Suspense A/c

iv) For the payment of instalment

Vendor A/c Dr
To Bank A/c
38
v) For Depreciation at the end of the accounting year Hire Purchase Accounts-II

Deprecation A/c Dr.

To Asset A/c
vi) For transfer of interest and depreciation to Profit & Loss A/c
Profit & Loss A/c Dr.
To Interest A/c
To Depreciation A/c
After passing the above mentioned journal entries, the purchaser prepares the
following ledger accounts.
i) Asset A/c
ii) Vendor’s A/c
iii) Interest Suspense Account
iv) Interest Account
Look at the illustration 3 and see how ledger accounts are maintained in the
books of the buyer when goods are purchased under Instalment Payment System.
Illustration 3
Fire industries Ltd. purchased a plant on 1.1.2016 from MMC Ltd. under
instalment payment system. The cash price was Rs. 20,000 payable as Rs, 6,384
for down payment and the balance by three equal annual instalment of Rs. 5,000
each including 5% interest. Depreciation @ 10% was to be charged as per
W.D.V. method.
Show the necessary ledger accounts in the books of Fire Industries Ltd.
Solution : In the books of Fire Industries Ltd.
MMC Ltd. Account
Dr. Cr.

Date Particulars Amount Date Particulars Amount

2016 Rs. 2016 Rs.

Jan.1 To Bank A/c 6,384 Jan. 1 By Plant A/c 20,000
Dec.31 To Bank A/c (1st Inst.) 5,000 Dec.31 By Interest Suspense A/c 1,384
Dec.31 To Balance c/d 10,000
21,384 21,384
2017 2017
Dec.31 To Bank A/c (2nd Inst.) 5,000 Jan. 1 By Balance b/d 10,000
Dec.31 To Balance c/d 5,000
10,000 10,000
2018 2018
Dec.31 To Bank A/c (3rd Inst.) 5,000 Dec.31 By Balance b/d 5,000
5,000 5,000
39
Hire Purchase and Inland
Branches
Plant Account
Date Particulars Amount Date Particulars Amount

2016 Rs. 2016 Rs.

Jan.1 To MNC Ltd. 20,000 Dec. 31 By Depreciation A/c 2,000
Dec. 31 By Balance c/d 18,000
20,000 20,000
2017 2017
Jan. 1 To Balance b/d 18,000 Dec. 31 By Depreciation A/c 1,800
Dec. 31 By Balance c/d 16,200
18,000 18,000
2018 2018
Jan. 1 To Balance b/d 16,200 Dec. 31 By Depreciation A/c 1,620
Dec. 31 By Balance c/d 14,580
16,200 16,200

Interest Suspense Account

Date Particulars Amount Date Particulars Amount

2016 Rs. 2016 Rs.

Jan.1 To MNC Ltd. 1,384 Dec.31 By Interest A/c 681
Dec.31 By Balance c/d 703
1,384 1,384
2017 2017
Jan. 1 To Balance b/d 703 Dec. 31 By Interest A/c 465
Dec. 31 By Balance c/d 268
703 703
2018 2018
Jan. 1 To Balance b/d 238 Dec. 31 By Interest A/c 238
238 238

Interest Account

Date Particulars Amount Date Particulars Amount

2016 Rs. 2016 Rs.

Dec.31 To Interest Suspense A/c 681 Dec. 31 By Profit & Loss A/c 681
681 681
2017 2017
Dec.31 To Interest Suspense A/c 465 Dec. 31 By Profit & Loss A/c 465
465 465
2018 2018
Dec.31 To Interest Suspense A/c 238 Dec. 31 By Profit & Loss A/c 238
238 238
40
Working Note: Hire Purchase Accounts-II

Statement showing calculation of Interest for deferment period

Particulars Amount Principal Interest Total

Rs. Rs. Rs. Rs.

(a) (b) c = (a+b)
Cash Price 20,000
(6384+13616)
1.1.16
Less : Down payment 6,384 6,384 6,384
13,616
31.12.16
Add : Interest @ 5% 681
5
(  13, 616)
100
14,297
Less : Ist Instalment 5,000 4,319 681 5,000
9,297
31.12.17
Add : Interest @ 5% 465
5
(  9, 297)
100
9,762
Less : 2nd Instalment 5,000 4,535 465 5,000
4,762
31.12.18
Add : Interest @ 5% 238
5
(  4, 762)
100
5,000
Less : 3rd Instalment 5,000 4,762 238 5,000
Total NIL 20,000 1,384 21,384

12.5.2 Books of the Vendor

The vendor passes the following journal entries when the goods are sold on
instalment payment system.
i) When the goods are sold
Purchaser Dr. (with total price)
To Sales A/c (with cash price)
To Interest Suspense A/c (with the difference between
the total price and cash price)
ii) For cash received as down payment
Bank A/c Dr.
To Purchaser A/c
41
Hire Purchase and Inland iii) For interest due on instalment
Branches
Interest Suspense A/c Dr.
To Interest A/c
iv) For receipt of the amount of instalment
BankA/c Dr.
To Purchaser A/c
v) For transfer of interest to Profit & Loss A/c
Interest A/c Dr.
To Profit & Loss A/c
Like the buyer, the vendor also prepares certain Ledger accounts. They are
i) Buyer’s Account
ii) Interest Suspense Account
iii) Interest Account
Look at the illustration 4 and see how the accounts are maintained in the books
of the vendor when the goods are sold on instalment payment system.
Illustration 4
We consider the problem given in illustration 3 and prepare ledger accounts
in the books of the vendor.
Solution:
In the books of MMC Ltd.
Fire Industries Ltd. Account
Dr. Cr.

Date Particulars Amount Date Particulars Amount

2016 Rs. 2016 Rs.

Jan.1 To Sales A/c 20,000 Jan. 1 By Bank A/c (down payment) 6,384
Dec.31 To Interest Suspense A/c 1,384 Dec.31 By Bank A/c (Ist Instalment) 5,000
Dec.31 By Balance c/d 10,000
21,384 21,384

2017 2017
Jan. 1 To Balance b/d 10,000 Dec.31 By Bank A/c (2ndInstalement) 5,000
Dec.31 To Balance c/d 5,000
10,000 10,000
2018 2018
Jan.1 To Balance b/d 5,000 Dec.31 By Bank A/c (3rd Instalment) 5,000
5,000 5,000
42
 Interest Suspense Account Hire Purchase Accounts-II

Dr. Cr.

2016 Rs. 2016 Rs.

Dec.31 To Interest A/c 681 Jan. 1 By Fire Industries Ltd A/c 1,384
Dec.31 To Balance c/d 703 2016
1,384 1,384
2017 2017
Dec.31 To Interest A/c 465 Jan. 1 By Balance b/d 703
Dec.31 To Balance c/d 238
703 703
2018 2018
Dec.31 To Interest A/c 238 Jan. 1 By Balance b/d 238
238 238

Interest Account
Dr. Cr.

2016 Rs. 2016 Rs.

Dec.31 To Profit & Loss A/c 681 Dec.31 By Interest Suspense A/c 681
681 681
2017 2017
Dec.31 To Profit & Loss A/c 465 Dec.31 By Interest Suspense A/c 465
465 465
2018 2018
Dec.31 To Profit & Loss A/c 238 Dec.31 By Interest Suspense A/c 238
238 238

Check Your Progress A

1. Fill in the blanks
i) Default is ……………to act, appear or pay.
ii) Possession of goods means ……………..of goods.
iii) The act of…………. of …………….is termed as repossession.
iv) Where a hire purchase agreement is …………..due to default in
payment, the hire vendor shall be entitled to enter the premises of
the hirer and …………….the goods.
v) In case of termination due to default in payment the hire vendor
is entitled to …………….for non-delivery of goods.
vi) Under an instalment payment system, the buyer gets the
................................. of the goods on the date of…………………
2. State whether the following statements are True or False.
i) Under a hire purchase agreement, failure in payment of only the last
instalment would be considered as a default. 43
Hire Purchase and Inland ii) On default, the vendor under the instalment payment system is entitled
Branches
to retain the amount which has already been paid and recover the
arrears of hire due.
iii) After repossession, a hire vendor has no right to resell the goods
repossessed.
iv) In case of an instalment payment system, the buyer is entitled to dispose
off the goods he has bought.
v) Under an instalment payment system, the buyer can return the goods
at any time.

12.6 BASIC RECORD FOR GOODS OF SMALL

VALUE SOLD ON HIRE PURCHASE
You are aware of the fact that with advancement of technology and improvement
in the standard of living of the people both in India and abroad, the demand,
for consumer durables like fridge, T.V., automobiles, etc. has increased manifold
over the years. To meet this demand explosion, the dealers have come up with
innovative schemes which attract the prospective consumers to purchase such
goods. One such scheme is the sale on hire purchase basis. The consumers
with limited resource are naturally interested in buying under this scheme in view
of the benefits of deferred payment at reasonable rate of interest. Hence, a
large volume of transactions in these goods are being conducted everyday.
It should be noted that these transactions take place between a retailer (dealer)
and the consumers, and not between two business units. Hence, the accounting
is important only for the vendor and not the buyer. Let us now study how
a hire vendor(retailer) maintain the account when goods of small value are sold
on hire purchasebasis.
In case of hire purchase transactions of numerous goods of small value, it
becomes practically inconvenient for a particular dealer of these items to maintain
separate accounts for each transaction. Hence, the accounting system is designed
in such a way that overall control can be exercised on all the transactions during
a particular accounting period through control accounts. However, for individual
transactions, detailed record may be kept in a subsidiary book called ‘Hire
Purchase Sale Register showing the necessary information as may be required
to control individual accounts of the buyers. A specimen of the register is given
in Figure 12.1.
S.No Date of Name of Name of Cost Hire Cash No. of Instalments Due To t a l Instal- Instal-
Agreement Article Customer Price Purchase Down Instalments install- ments ments
Price Payment ments due not yet
received but due
not
paid
1 2 3 4

Fig 12.1: Hire Purchase Sales Register

44
In Hire Purchase Sales Register as given in Figure 12.1, you will observe that, Hire Purchase Accounts-II
besides the details of individual hire purchase transactions, there are columns
showing cost price, hire purchase price, cash down payment, instalments
received, instalments due but not yet paid, and instalments not yet due. The
figures are very relevant for the accounting for hire purchase transactions and
the ascertainment of profit/loss from hire purchase business and, therefore, the
accountant must be careful in recording the amounts and the casting (totalling)
of these columns. The totals of these columns are posted to the relative control
accounts periodically, say monthly, quarterly, half yearly, or yearly by passing
the necessary journal entries.

12.7 RELEVANT TERMS

In connection with the accounting for goods of small value sold on hire purchase
basis, we have to define certain terms before we study different methods of
ascertaining the profit or loss on such transactions. These relevant terms are
1. Cost price of goods sold on hire purchase
2. Value of goods sold on hire purchase
3. Cash received
4. Hire Purchase Debtors
5. Hire Purchase Stock
6. Stock at shop
1. Cost price of Goods Sold on Hire Purchase : You know the hire vendor
is only a dealer. He purchases goods from various manufacturers and sells
them to the consumers under hire purchase system. Naturally, he sells the
goods at a price higher than the price at which he has bought. His mark-
up on hire purchase sales is bound to be more than even the cash price
because he has also to cover the loss of interest on such transactions.
Normally, interest is accounted for separately as you studied in the case
of sale of goods of a substantial value. But, in the case of sale of goods
of small value, Interest is ignored and the profit is worked out on
the basis of the difference between cost price and hire purchase
price. This is called ‘loading’. Loading is generally given in terms of
percentage on cost or as percentage of hire purchase price. Usually you
are provided with the figure of hire purchase price and you have to work
out the cost price with the help of loading. Alternatively, both the hire
purchase price and cost price are given and you may have to work out
the loading for the purpose of ascertaining profit or loss in hire purchase
business.
2. Goods Sold on Hire Purchase: For the purpose of finding out the profit
or loss on the hire purchase business during an accounting period, we need
the figure of the value of goods sold on hire purchase. This reflects the
hire purchase price of all the goods sold on hire purchase basis during
the accounting period. This is mostly given. If, however, the value of goods
sold on hire purchase is not given, it can be worked out by applying the
loading rate to the cost of goods sold on hire purchase. Alternatively, it
can be worked out with the help of the first part of the Hire Purchase
Trading Account.
45
Hire Purchase and Inland 3. Cash Received : This refers to the total amount received during the
Branches
accounting period in respect of hire purchase sales whether they relate to
previous years or the current year. This includes the amount of down
payment and the amount of instalments paid during the year.
4. Hire Purchase Debtors : It is also known as instalments due but not
yet paid’ or ‘Instalment due, customers paying’. Thus, it refers to the
total amount of such instalments which have fallen due during the accounting
period but have not yet been paid by the hire purchase customers. For
purposes of profit on hire purchase business, the total of ‘cash received’
and ‘hire purchase debtors’ is taken as the ‘realised sales’ during an
accounting period, and not the goods sold on hire purchase.
5. Hire Purchase Stock : You know when goods are sold on hire purchase
basis, customer makes some down payment and agrees to pay the balance
in instalments. Some of these instalments become due during the accounting
year when goods were sold to him while others shall become due during
the following year/years. The instalments which have not become due during
the current year, are called ‘instalments not yet due’ or ‘hire purchase stock’.
It should be noted that hire purchase stock does not mean stock of goods
in the shop. It is a special term used for the total amount of
instalments which have not become due during the current year. It
represents the unrealised sales and needs adjustment of loading involved.
This amount is required for the purpose of ascertaining profit or loss on
hire purchase business.
The amount of ‘instalments not yet due’ (hire purchase stock) is usually
given. But, if it is not given, the same can be worked out with the help
of Hire Purchase Trading A/c.
6. Stock at Shop: ‘Stock at shop’ should not be confused with ‘hire purchase
stock’. You know that hire purchase stock represents the instalments not
yet fallen due. But, the stock at shop is a common term used for unsold
goods lying in store. The amount of stock at shop is not relevant to the
ascertainment of profit or loss of the hire purchase business. This however,
can be helpful in ascertaining the cost of goods sold on hire purchase which,
in turn, helps the ascertainment of the value of goods sold on hire purchase
(if not given) by adding the loading thereto.

12.8 ASCERTAINMENT OF PROFIT

For the ascertainment of profit or loss on goods of small value sold on hire
purchase, we have to prepare a ‘Hire Purchase Trading Account’. It is just
like the Consignment Account prepared for ascertaining the profit/loss on
consignment of goods invoiced at selling price. For preparing the Hire Purchase
Trading Account, we require the amounts of goods sold on hire purchase, cash
received, goods repossessed, hire purchase debtors (both at the beginning and
the end), and hire purchase stock (both at the beginning and at the end).
These figures can be extracted from the Hire Purchase Sales Register
or the relevant control accounts and taken to Hire Purchase Trading
Account by passing the necessary closing entries in the journal. Further,
we shall have to ascertain the percentage of loading and the amount of expenses
46 incurred on hire purchase business.
The proforma of Hire Purchase Trading Account is given in Figure 12.2 Hire Purchase Accounts-II

Hire Purchase Trading Account

Dr. Cr.

To H.P. Stock (opening) ... By Cash Received ...

To H.P. Debtors (opening) ... By Goods Repossessed
(market value) ...
To Goods Sold on H.P ... By H.P. Stock (closing) ...
(at H.P. price)
To Stock Reserve ... By H.P. Debtors (closing) ...
(loading on closing H.P. stock)
To Expenses ... By Stock Reserve ...
(loading on opening H.P. stock)
To Net Profit (transferred to ... By Goods Sold on H.P. ...
P&L A/c) (loading)
... ...

Fig. 12.2: Proforma of Hire Purchase Trading Account

The proforma of Hire Purchase Trading Account as given in Figure 12.2 is

the usual form in which the Hire Purchase Trading Account is prepared. But,
it is better to divide it into two parts as shown in Figure 12.3, the first part
to contain only those items which are recorded at H.P. price and the second
part showing the adjustment of loading and the expenses, losses, etc. relating
to hire purchase business for ascertaining the profit or loss.
Hire Purchase Trading Account
Dr. Cr.

To H.P. Stock (opening) .. By Cash Received ...

To H.P. Debtors (opening) ... By Goods Repossessed
(Instalments unpaids) ...
To Goods Sold on H.P ... By H.P. Stock (closing) ...
(at H.P. price) By H.P. Debtors (closing) ...
... ...
To Loss on Goods Repossessed ....
(dif. between market value or cost
and unpaid instalments)
To Stock Reserve ... By Stock Reserve ...
(loading on closing H.P. stock) (loading on opening H.P. stock)
To Expenses By Goods Sold on H.P.
(on hire purchase business) ... (loading)
To Net Profit
(transferred to P&L A/c) ...
... ...
Fig. 12.3 : Another Proforma of Hire Purchase Trading Account 47
Hire Purchase and Inland It should be noted that the totals of two sides in the first part of the Hire
Branches
Purchase Trading Account will be equal. If they are not equal, it would mean
that there is some mistake. Not only that, the first part can also help us in
finding out the amount of any item which is missing (being the balancing figure)
provided all the other figures are given.
Look at illustration 5 and see how profit is ascertained in respect of goods
of small value sold on hire purchase with the help of Hire Purchase Trading
Account.
Illustration 5
Capital Electronics & Co. started business on 1.1.18 for selling electronic goods
on hire purchase basis. During the year end on 31.12.18, the following
transactions were made.
a Krishna purchased a T.V. costing Rs. 3,000 at Rs. 4,500 payable Rs. 1,500
as down payment and the balance in 12 monthly instalments of Rs. 250
each,
b) Vim purchased one Grinder costing Rs. 1,000 at Rs. 1,500 payable Rs.
300 as down payment and the balance in 12 monthly instalments of Rs.
100 each,.
c) Arjun purchased a Refrigerator costing Rs. 2,400 at Rs. 3,000 payable
Rs. 600 as down payment and the balance in 12 monthly instalment of
Rs. 200.
As on 31.12.18, Krishna could not pay one instalment out of the seven
instalments due, Vim could not pay one instalment out of the five instalments
due, and Arjun could not pay the two instalments out of eight instalments due.
Calculate the profit or loss on Hire Purchase Transactions.
Solution:
Hire Purchase Trading Account
Dr. Cr.
Rs. Rs.
To Goods Sold on 9,000 By Cash Received 5,500
By Goods Repossessed .....
Hire Purchase By Hire Purchase Stock (closing) 2,750
By Hire Purchase Debtors (closing) 750
9,000 9,000
To Stock Reserve 810 By Goods Sold on Hire 2,600
(loading on closing Purchase (closing)
H.P. stock)
To Net Profit transferred 1,790
to P & L A/c
2,600 2,600

48
Working Notes: Hire Purchase Accounts-II

a) Goods sold on hire purchase (H.P. Price) Rs.

i) TV purchased by Krishna 4,500
ii) Grinder purchased by Vim 1,500
iii) Refrigerator purchased by Arjun 3,000
Total 9,000
b) Cash received
i) From Krishna [Rs. 1,500 + (250 × 6)] 3,000
ii) From Vim [Rs. 300 + (100 × 4)] 700
iii) From Arjun[Rs. 600 + (200 × 6)] 1,800

Total 5,500
c) Amount of instalment due but not paid (H.P. Debtors)
i) From Krishna Rs. 250 × 1 250
ii) From Vim Rs. 100 × 1 100
iii) From ArjunRs. 200 × 2 400
Total 750
d) Amount of instalment which are not due (H.P. Stock)
i) From Krishna
Amount not due Rs. 250 × 5 1,250
ii) From Vim
Amount not due Rs. 100 × 7 700
iii) From Arjun
Amount not due Rs.200 × 4 800
Total 2,750
e) Loading
i) On goods sold on hire purchase
Hire Purchase Price  Cost Price
= (4,500 + 1,500 + 3,000)  (3,000 + 1,000 + 2,400)
= 9,000  6,400
= Rs. 2,600
ii) On hire purchase stock (Closing)
HP. Stock Loading
Rs. Rs.
1,500
Krishna 1,250 (  1, 250) = 417
4,500
500
Vim 700 (  700) = 233
1,500
600
Arjun 800 (  800) = 160
3, 000

Total 810
49
Hire Purchase and Inland 12.8.1 Treatment of Goods Repossessed
Branches
You know when the hire purchase customer commits default in payment of
instalments,the vendor may repossess the goods. The amount of instalments
unpaid (also termed as instalments due) in respect of such goods are shown
on the credit side of the first part of the Hire Purchase Trading Account as
shown in its proforma given in Figure 12.3.
If the market value of such goods is given or they have been sold out immediately
on repossession, the difference between the unpaid amount and the market value
(or sale value, if sold out) is treated as loss or profit on goods repossessed.
If it is loss, the same is debited in the second part of the Hire Purchase Trading
Account, and if it is profit (it is rare), the same can be shown on its credit
side. The difficulty arises when the market value or sales value of
repossessed goods is not available. In such asituation, you will have to
adjust the loading involved in the unpaid instalment in respect of such
goods because its true value is equal to its proportionate cost. Thus, having
credited the first part of Hire Purchase Trading Amount with amount of the
unpaid instalments, you must debit the amount of loading included in the unpaid
instalments. Alternatively, if you are preparing Hire Purchase Trading Account
without dividing it into two parts, credit the Hire Purchasing Trading Account
with its true value/market value/sale value itself. In that case, no adjustment will
be necessary.
Look at illustration 6 and see how goods repossessed have been treated in
the Hire Purchase Trading Account.
Illustration 6
Easy Payment Ltd. sells goods on hire purchase basis at a profit of 50% on
cost, The following particulars are given for the year ending December 31, 2018.
Prepare the Hire Purchase Trading Account.
Rs.
Hire Purchase Stock (opening) 18,000
Instalments due, customers paying (opening) 10,000
Goods sold on hire purchase during the year
(at hire purchase price) 1,74,000
Cash received from customers 1,20,000
Goods repossessed valued at (instalments due Rs. 6,000) 3,000
Hire Purchase Stock at the end 60,000
Instalments due (at the end), customers paying 16,000
Expenses 19,000
Solutions :

50
 Hire Purchase Trading Account Hire Purchase Accounts-II

Dr. Cr.

Date Particulars Amount Particulars Amount

Rs. Rs.
To Hire Purchase Stock (opening) 18,000 By Cash Received 1,20,000
To Hire Purchase Debtors (opening) 10,000 By Goods Repossessed (instalments unpaid) 6,000
To Goods sold on Hire Purchase 1,74,000 By Hire Purchase Debtors (closing) 16,000
By Hire Purchase Stock (closing) 60,000
2,02,000 2,02,000
To Loss on Goods Repossessed 3,000 By Stock Reserve 6,000
(diff. between instalments unpaid (Loading on opening H.P. stock)
and market value)
By Goods sold on Hire Purchase
(loading) 58,000
To Stock Reserve (loading on
closing H.P. stock) 20,000
To Expenses 19,000
To Profit & Loss A/c 22,000
(Profit)
64,000 64,000

Working Notes:
I Loading
50
a) On Opening H.P. Stock (18, 000  ) = Rs. 6,000
150
50
b) OnGoodsSoldonH.P. (1, 74, 000  ) = Rs. 58,000
150
50
c) OnClosing H.P. Stock (60, 000 
) = Rs. 20,000
150
2 Loss on Goods Repossessed: Amount of unpaid instalments - Market Value
= 6,000- 3,000 = Rs. 3,000

Alternatively
Hire Purchase Trading Account
Dr. Cr.
Rs. Rs.
To Hire Purchase Stock (opening) 18,000 By Cash Received 1,20,000
To Hire Purchase Debtors (opening) 10,000 By Goods Repossessed (market value) 3,000
To Goods sold on Hire Purchase 1,74,000 By Hire Purchase Debtors (closing) 16,000
(H.P. Price) 51
Hire Purchase and Inland
Branches
To Stock Reserve (loading on
closing H.P. stock) 20,000 By Hire Purchase Stock (closing) 60,000
To Expenses 19,000 By Stock Reserve
(loading on opening H.P. stock) 6,000
To Net Profit 22,000 By Goods sold on Hire Purchase
(transferred to P & L A/c) (loading) 58,000
2,63,000 2,63,000

12.8.2 Calculation of Missing Figures

Many times some of the figures needed to calculate the profit or loss on sale
of goods of small value on hire purchase are missing. These items may be H.P.
Stock (at the beginning or at the end), instalments due (opening or closing),
purchases, cash received, etc. Therefore, it becomes necessary to first calculate
the figures of these items and then prepare the Hire Purchase Trading Account.
If there is only one figure missing, the same can be worked out with
the help of the first part of the Hire Purchase Trading Account. But, if
more than one figure is missing, the following steps should be taken for the
calculation of the missing figures.
1. Prepare three memorandum accounts in the order mentioned below:
i) Memorandum Stock at Shop Account,
ii) Memorandum Stock out with Customers Account or Hire
Purchase Stock Account, and
iii) Memorandum Instalments Due Account or Hire Purchase Debtors
Account.
2. Fill up all the figures given.
3. Start with the account having maximum figures available. This will help you
to find out the missing figure of that account.
4. Transfer the figure so calculated to the relevant account.
5. Stock at Shop Account shows all figures at cost, whereas Hire Purchase
Stock Account and Hire Purchase Debtors Accounts show all figures at
hire purchase price. Therefore, while transferring any figure from Stock at
Shop Account to the other accounts, the figure should be raised to hire
purchase price. Similarly, while transferring any amount from other accounts
to the Stock at Shop Account, the figure has to be brought down to cost.
6. The process of transfer will continue until all the amounts are filled in these
accounts. The Proforma of the three accounts is given below.

Memorandum Stock at Shop Account

Dr. Cr.
To Balance b/d Rs. By Goods Sold on Hire Rs.
Purchase (at cost)(1)
To Purchases By Balance c/d

52
 Memorandum Hire Purchase Stock Account Hire Purchase Accounts-II

Dr. Cr.

Rs. Rs.
To Balance b/d By Instalment Due (2)
To Goods Sold on Hire By Goods Repossessed
Purchase(at HP. price) (1) (instalments not yet fallen due)
By Balance c/d

Memorandum Hire Purchase Debtors Account

Dr. Cr.

Rs. Rs.
To Balance b/d By Cash Received from
Customers
To Stock with Customer By Goods Repossessed
Account (total instalments (instalment due but not paid)
fallen due) (2) By Balance c/d

illustration 7 will help you to understand the calculation of missing figure for
the preparation of Hire Purchase Trading Account.
Illustration 7
Home Appliances Ltd sells goods on hire purchase terms at a profit of 25%
on hire purchase price. Following are the transactions for the year ended
December 31, 2018.
Rs.
January, 1 Stock out on hire at cost 6,000
Stock on hand (at shop) 1,000
Instalment due 600
Cash Received 16,000

December, 31 Stock out on hire (at cost) 6,900

Stock on hand (at shop) 1,400
Instalment due 1,000
Calculate the profit or loss on hire purchase under Debtors Method.
Hire Purchase Trading Account
Dr. Cr.

Rs. Rs.
To Stock with Customers 8,000 By Cash Received 16,000
To Instalment Due 600 By Stock with Customers 9,200
To Goods Sold on Hire
Purchase 17,600 53
Hire Purchase and Inland By Instalment Due 1,000
Branches
26,200 26,200
To Stock Reserve (loading) 2,300 By Stock Reserve (loading) 2,000
To Profit & Loss A/c 4,100 By Goods sold on Hire
(Profit) Purchase (loading) 4,400
6,400 6,400

Working Note :
Calculation of Missing Figure :

Memorandum Stock at Shop Account

Dr. Cr.

Rs. Rs.
To Balance b/d 1,000 By Stock with Customers 13,200
To Purchases 13,600 By Balance c/d 1,400
(balance figure)
14,600 14,600

Memorandum Stock with Customers Account

Dr. Cr.

Rs. Rs.
To Balance b/d 8,000 By Instalment Due 16,400
To Stock at Shop 17,600 By Balance c/d 9,200
(at hire purchase price)
(missing figure)
25,600 25,600

Memorandum Instalments Due Account

Dr. Cr.

Rs. Rs.
To Balance b/d 600 By Cash Received 16,000
To Stock with Customers 16,400 By Balance c/d 1,000
(missing figure)
17,000 17,000

Check Your Progress B

1. Fill in the blanks

i) The accounting treatment of goods of small value is recorded in the

books of …………..only.

54 ii) The vendor maintains a ……………….register.

 iii) The vendor prepares …………………Account to calculate profit or Hire Purchase Accounts-II
loss on hire purchase business.
iv) Goods sold on hire purchase are shown on the …………………side
of the Hire Purchase Trading Account.
v) Loss on goods repossessed by the vendor is equal to the difference
between the market value of the goods repossessed and the.……
in respect of such goods.
vi) Three Accounts prepared for the calculation of missing figures are stock
at Shop Account, ……………Account and Instalments Due Account.
2. What do you understand by Hire Purchase Debtors?
................................................................................................................
................................................................................................................
................................................................................................................
................................................................................................................
3. What do you mean by Hire Purchase Stock?
................................................................................................................
................................................................................................................
................................................................................................................

12.9 STOCK AND DEBTORS SYSTEM

The profit or loss for an accounting period on goods of small value sold on
hire purchase basis can also be ascertained by another method called ‘Stock
and Debtors System’. This system is similar to the system followed in case
of branch accounts. Under this system, we make use of the four control accounts
viz (i) Hire Purchase Stock Account, (ii) Hire Purchase Debtors Account, (iii)
Goods Sold on Hire Purchase Account, and (iv) Goods Repossessed Account;
and prepare Hire Purchase Adjustment Account for working out the profit or
loss on the hire purchase business. The Hire Purchase Adjustment Account
is similar to the second part of the Hire Purchase Trading Account wherein
entries are made for the loading involved in the goods sold on hire purchase
and the opening and closing balances of hire purchase stock (instalments not
yet due), and shows the expenses and losses re1ating to the hire purchase
business. The balancing figure in the Hire Purchase Adjustment Account
represents the profit or loss on the hire purchase business.

The following journal entries are passed under this system to open the necessary
accounts in the ledger.
1. For goods sold on hire purchase
Hire Repossessed A/c Dr.
To Goods sold on H.P. A/c
2. For total instalments due during the year
Hire Purchase Debtors A/c Dr
To Hire Purchase Stock A/c
55
Hire Purchase and Inland 3. For cash received
Branches
Cash A/c Dr.
To Hire Purchase Debtors A/c
4. For goods repossessed (unpaid instalments)
Goods Repossessed A/c Dr.
To Hire Purchase Stock A/c
5. For loading on goods sold on H.P.
Goods sold on H.P. A/c Dr.
To Hire Purchase Adjustment A/c
6. For loading on opening H.P. stock
Stock Reserve A/o Dr.
To Hire Purchase Adjustment A/c
7. For loading on closing H.P. stock
Hire Purchase Adjustment A/c Dr.
To Stock Reserve A/c
8. For loss on goods repossessed
Hire Purchase Adjustment A/c Dr.
To Goods Repossessed A/c
(With difference between instalments unpaid and market value of goods
repossessed or for loading only)
9. For expenses on hire purchase business
Hire Purchase Adjustment A/c Dr.
To Expenses A/c
10. For transfer of profit on hire purchase business
Profit & Loss A/c Dr.
To Hire Purchase Adjustment A/c
In case of loss, the entry can be reversed
11. For closing goods sold on Hire Purchase Account
Goods Sold on H.P. A/c Dr.
To Trading (Stock at shop) A/c
Look at illustrations 8 and 9 and see how profit or loss is ascertained with
the help of control accounts under the Stock and Debtors System.
Illustration 8
Prepare necessary accounts in the books of S.S.K. & Co. who sold goods
at a profit @ 25% on cost price, with the help of the following information.
Follow Stock and Debtors System.
Stock in Shop
On 1.4.18 15,000
On 31.3.19 12,500

Goods with customers on hire purchase on 1.4.18 18000

Purchases for shop stock 32,300
Goods sold on H.P. during the year 18-19 43,500
Instalments received 30,000
56
Overdue Instalments Hire Purchase Accounts-II
On 1.4.18 1,000
On 31.3.19 1,500
Solution:
Hire Purchase Stock Account
Dr. Cr.

Rs. Rs.
To Balance b/d 18,000 By Hire Purchase Debtors A/c (1) 30,500
To Goods Sold on Hire 43,500
Purchase A/c By Balance c/d 31,000
61,500 61,500
To Balance b/d 31,000

Hire Purchase Debtors Account

Dr. Cr.

Rs. Rs.
To Balance b/d 1,000 By Bank A/c 30,000
To Hire Purchase 30,500 By Balance c/d 1,500
Stock A/c (1)
(amount of instalments due-
balancing figure)
31,500 31,500
To Balance b/d 1,500

Goods Sold on Hire Purchase Account

Dr. Cr.

Rs. Rs.
To Hire Purchase Adjustment A/c 8,700 By Hire Purchase Stock A/c 43,500
To Shop Stock 34,800
43,500 43,500

Hire Purchase Adjustment Account

Dr. Cr.
Rs. Rs.
To Stock Reserve A/c 6,200 By Stock Reserve A/c 3,600
(loading on closing H.P. Stock) (loading on opening H.P.stock)
To Profit & Loss A/c 6,100 By Goods Sold on H.P. A/c 8,700
(balancing figure) (loading)
12,300 12,300

Working Notes:
Loading is 25% on cost. The figures of items on which loading is to be calculated are
given at H.P. price. Hence, the loading on various items has been calculated as follows: 57
Hire Purchase and Inland
Branches
25
i) On goods sold on H.P. = 43,500 × = Rs. 8,700
125
25
ii) On opening H.P. stock = 18,000 × = Rs. 3,600
125
25
iii) On closing H.P. stock = 31,000 × = Rs. 6,200
125
Illustration 9
Taking the information from illustration 6, ascertain the profit on hire purchase business by following
the Stock and Debtors system
Hire Purchase Stock Account
Dr. Cr.

Rs. Rs.

To Balance b/d 18,000 By Hire Purchase Debtors A/c 1,28,000

(at hire purchase price) (balancing figure)
To Goods Sold on Hire Purchase A/c 1,74,000 By Goods Repossessed A/c 6,000
(at hire purchase price)
By Balance c/d
(at hire purchase price) 60,000
1,92,000 1,92,000
To Balance b/d 60,000

Hire Purchase Debtors Account

Dr. Cr.

Rs. Rs.

To Balance b/d 10,000 By Cash A/c 1,20,000

To Hire Purchase Stock A/c. 1,26,000 By Balance c/d 16,000
(total instalment due—
balancing figure)
1,36,000 1,36,000
To Balance b/d 16,000

Goods Repossessed Account

Dr. Cr.

Rs. Rs.
To H.P. Stock A/c 6,000 By H.P. Adjustment A/c 3,000
(loss being the diff. between
instalments unpaid and its market value)
By Balance c/d 3,000
6,000 6,000
To Balance b/d 3,000
58
 Hire Purchase Adjustment Account Hire Purchase Accounts-II

Dr. Cr.

Rs. Rs.
To Stock Reserve A/c 20,000 By Stock Reserve A/c 6,000
(loading on closing H.P. stock) (loading on opening H.P. Stock)
To Loss on Goods Repossessed 3,000 By Goods Sold on Hire
(diff. between instalment due and Purchase A/c
market price) (loading) 58,000
To Expenses A/c 19,000
To Profit & Loss A/c 22,000
64,000 64,000

Check Your Progress C

1. Fill in the blanks:
i) Hire Purchase Adjustment Account shows the ………..on the opening
and closing stocks, and the goods sold on hire purchase.
ii) Hire Purchase Debtors Account is credited with the closing balance
and……….
iii) The Goods Sold on Hire Purchase are shown at ………….in Shop
Stock Account.
iv) The loss on goods repossessed is shown on the debit side of
…………………. Account.
v) The balance of ……………Account represents the value of stock
with customers at ………………………. Price.
2. List the accounts opened for ascertaining the profit or loss on hire purchase
business under the Stock and Debtors System.
................................................................................................................
................................................................................................................
................................................................................................................

12.10 LET US SUM UP

Under the hire purchase agreement, the hire vendor delivers only the physical
possession of the goods to the buyer (the hirer) and not the title of the goods.
Title passes when the payment of the last instalment is made. If the buyer makes
default, the hire vendor has the right to repossess the goods. But the vendor
can also enter into a compromise and repossess a part of the goods. When,
on default by the buyer, the vendor repossesses only a part of the goods,
he reassesses its value and adjusts the same against the amount due from hirer.
The basic difference between the hire purchase system and the instalment
payment system relates to the point of time when the title of the goods passes
from the seller to the buyer. In case of hire purchase system, the title of the 59
Hire Purchase and Inland goods passes at the time of payment of the last instalment while in case of
Branches
instalment payment system it passes at the time of signing the contract. Accounting
treatment in both systems is more or less the same. The only difference relates
to the treatment of interest. In case of hire purchase system, the actual amount
of interest is debited to the purchaser as and when the instalments fall due.
But, in case of instalment payment system, the buyer is debited with the total
amount of interest right at the time of sale by crediting it to Interest Suspense
Account. This account is debited with the actual amount of interest as and when
the instalments fall due. Under this system, the buyer is treated as a debtor
for the full amount including total interest. However, in practice, even this may
be dispensed with.
When the goods of small value are sold on hire purchase terms, a special
accounting treatment is required. The accounting records of sale of such goods
are maintained by the vendor only. He keeps a Hire Purchase Sale Register
with appropriate columns. The totals of these columns are posted in different
control accounts periodically.
There are two methods of ascertaining profit or loss on goods of small value
sold on hire purchase. They are (i) Debtors method under which Hire Purchase
Trading Account is prepared, and (ii) Stock and Debtors Method.
The Hire Purchase Trading Account is like Consignment Account; the first part
of which shows the opening H.P. stock, opening H.P. debtors and the goods
sold on hire purchase on the debit side; and cash received, goods repossessed
and closing H.P. stock and H.P. debtors on the credit side. The total of these
two sides should be equal. Its second part mainly shows the loading on goods
sold on hire purchase, loading on opening and closing stocks, the loss on goods
repossessed and the expenses on hire purchase business. The difference
represents the profit or loss on hire purchase business which is transferred to
the Profit & Loss Account.
Sometimes, certain items needed to prepare Hire Purchase Trading Account
may be missing. These can be ascertained by preparing three memorandum
accounts (i) Stock at Shop Account, (ii) Stock with Customers Account, and
(iii) Instalments Due Account. If, however, only one item is missing, it can be
ascertained directly from the first part of the Hire Purchase Trading Account.
Under Stock and Debtors Method, the accounts prepared for ascertaining the
profit or loss on hire purchase business are : (i) Goods sold on Hire Purchase
Account, (ii) Hire Purchase Stock Account, (iii) Hire Purchase Debtors Account,
(iv) Goods Repossessed Account, and (v) Hire Purchase Adjustment Account.
The Hire Purchase Adjustment Account is nothing but the second part of Hire
Purchase Trading Account which shows the profit or loss on Hire Purchase
sale. It is similar to Branch Adjustment Account prepared in case of branch
accounts.

12.11 KEY WORDS

Default: Failure on the part of the hirer (the buyer of the goods) to pay
instalment.
Instalment Sale: An ordinary sale transaction where the payments are made
on deferred terms, but the buyer becomes the owner of the goods immediately
60 on completion of the transaction.
Passing of Title: Transfer of ownership. Hire Purchase Accounts-II

Seizure: Repossession of goods within the provision of the law. A hire purchase
agreement may give the right to the hire vendor to seize the goods he has sold
if the hirer (the buyer) makes default in payment of instalments.
Control Accounts: Accounts prepared with aggregate figures to check the
accuracy of respective accounts-like H.P. Stock. H.P. Debtors, etc.
Hire Purchase Debtors: Amount of instalment due but not yet paid.
Hire Purchase Stock: Instalments not yet fallen due.
Hire Purchase Trading Account : An account prepared for ascertaining the
profit or loss on goods of small value sold on hire purchase basis.
Stock Reserve: Amount of loading involved in hire purchase stock.
Stock at Shop: Stock of unsold goods lying in the store.

12.12 ANSWERS TO CHECK YOUR PROGRESS

A 1. i) failure ii) physical holding iii) recovery, possession
iv) terminated, seize, v) damages vi) title, initial payment.
2. i) False ii) True iii) False iv) True v) False
B 1. i) vendor ii) hire purchase sales iii) hire purchase trading iv) debit
v) instalment unpaid vi) stock with customers.
C 1. i) loading ii) cash received iii) cost iv) hire purchase adjustment
v) hire purchase stock, hire purchase.

12.13 TERMINAL QUESTIONS/EXERCISES

Questions
1. Explain the terms ‘Default’ and ‘Repossession’ both in relation to a hire
purchase transaction and an instalment sale transaction.
2. What are the rights of a hire vendor in case of default under the Hire
Purchase Act, 1972?
3. What are the rights of hirer in case of seizure and repossession of goods
under the Hire Purchase Act, 1972?
4. Describe the difference between the accounting treatment under the hire
purchase system and the instalment payment system.
5. Discuss in detail the similarities and dissimilarities of Hire Purchase System
and Instalment Payment System.
6. Describe how you can keep a detailed record of individual transactions
in subsidiary book.
7. State the journal entries passed to open various accounts under Stock
and Debtors System as applicable to hire purchase business.
8. Distinguish between ‘Stock and Debtor System’ and ‘Hire Purchase
Trading A/c Method’ (Debtors System) of ascertaining profit or loss on
goods of small value sold on hire purchase basis.
61
Hire Purchase and Inland Exercises
Branches
I. PQR Ltd. sold a piece of Machinery to RST Ltd. on 1.1.15 under a
hire purchase agreement. The payments were to be made in four annual
instalments of Rs. 4,230 each at the end of each year. The rate of interest
@ 5% was to be charged. RST Ltd. defaulted at the time of the third
instalment and POR Ltd. repossessed the machinery. RST Ltd. charged
depreciation @ 10% p.a. on W.D.V. method.
Show necessary ledger accounts in the books of RST Ltd.
(Answer : Cash Price Rs, 15,000, Total Interest Rs. 1920, Loss on
repossession Rs. 2,676).
2. Karim Ltd. purchased some furniture from Solman Ltd. on hire purchase
system on 1.1.17 at a cash price of Rs. 60,000, of this Rs. 15,480 was
to be paid as down payment and the balance in five annual instalments
of Rs. 10,000 each. The rate of interest was charged @ 4% p.a. Karim
Ltd., could only pay the first instalment and, on default, Solman Ltd.
repossessed the goods which were revalued by charging depreciation @
15% p.a. on straight line method. On 1.3.19 Solman Ltd. incurred Rs.
1,500 for reconditioning of the goods and sold them at Rs. 45,000.
Show the ledger accounts in the books of Solman Ltd.
(Answer: Amount due from Karim Ltd. on 31.12.18 Rs. 37,753; Profit
taken to P & L A/c in 2018 Rs. 4,247 : Profit on resale in 2019 Rs.
1,500. )
3. Fair Ltd. purchased on 1.1.16 machinery valued at Rs. 12,000 from Unfair
Ltd. under a hire purchase system under which the payments were to
be made in three equal annual instalments of Rs. 4,000. The interest @
6% p.a. was to be charged and paid along with the instalments. Fair
Ltd. could not pay the second instalment and it was agreed that Unfair
Ltd. would partly repossess Machinery costing Rs. 8,000 at Rs. 4,500
provided Fair Ltd. paid the arrear interest to-date. Show ledger accounts
in the books of Fair Ltd. assuming that depreciation @ 10% p.a. was
charged on W.D.V. method.
(Answer: Loss on partial repossession Rs. 1,980, value of the machinery
carried forward Rs. 3,240. Total amount of interest paid Rs. 1,200).
4. Ajay purchased five trucks on hire purchase on July 1, 2016. The cash
price of each truck was Rs. 1,00,000. He was to pay 25% of the cash
price as down payment with the delivery and the balance in five yearly
instalments together with the interest @ 5% per annum. Ajay fails to pay
the third instalment due on June 30, 2019. It was agreed that two trucks
would be returned to the vendor and the value of these two trucks would
be adjusted against the amount due. The trucks to be returned will be
valued at depreciation of 25% p.a. on W.D.V. method. The repossessed
trucks were overhauled at a cost of Rs 4,000 and sold for Rs. 90,000.
Show the necessary ledger accounts in the books of both the parties.
Books are closed on June 30 every year and depreciation @ 20% per
annum is charged.

62
 (Answer: Goods Repossessed Rs. 84,375. Loss on Goods repossessed Hire Purchase Accounts-II
Rs. 18,025. Balance due to Hire Vendor Rs. 1,88,297)
5. Harish purchased from Ramesh some motor pumps on 1.1.17 under
instalments payment system. The cash price was Rs. 74,466 which was
to be paid Rs. 20,000 as down payment and the balance in three equal
annual instalments of Rs. 20,000 including interest @ 5% p.a.

Show the ledger accounts in the books of Harish and Ramesh assuming
depreciation @ 10% p.a. on straight line method.

(Answer: Total Interest for Interest Suspense A/c Rs. 5,534 adjusted
Rs. 2,723 in 2017, Rs. 1,859 in 2018 and Rs. 952 in 2019).

6. Lokesh purchased on 1.1.17 some machinery from Suresh under instalment

payment system under which Rs. 6,000 was to be paid as down payment
and the rest in 3 equal annual instalments at interest @ 5%. The cost
price was Rs. 22,350. Depreciation was charged @ 10% on W.D.V.
method.

Show the ledger accounts in the books of both the parties.

(Answer: Total interest for Interest Suspense A/c Rs. 1,650 adjusted as
Rs. 818 in 2017, Rs. 558 in 2018 and Rs. 274 in 2019)
7. Premier Trader Co., a hire vendor, furnished the following information for
the year ended 31.12.2018.
Rs.
Goods with hire purchase Customers
(at hire purchase price) on 1.1.2018 32,000
Goods sold on hire purchase during the year 1,60,000
(at hire purchase price) ,
Cash received during the year 1,12,000
Goods received back 600
(instalments unpaid Rs. 4,000) at market value
Goods with hire purchase customers 72,000
(at hire purchase price) on 31.12.2018
Prepare Hire Purchase Trading Account in the books of Premier Trader
Co. who sold goods on hire purchase at cost plus 60%.
(Answer: Profit Rs. 41,600; Missing figure : H.P. Debtors at the end
of Rs. 4,000)

63
Hire Purchase and Inland 8. From the following transactions of Lee Ltd., a hire vendor, prepare the
Branches
necessary accounts under Debtors Method in its books for the year ended
1
31.12.18. The goods are sold at cost plus 33 %
3
Rs.
January 1, 2018 Stock in the shop 2,000
Instalments due 1,200
Stock with customers at H.P. price 16,000
December 31.12.18 Stock in the shop 2,800
Instalments due and unpaid 2,000
Stock with customers at H.P. price 18,400
Cash received during the year 32,000
Expenses on hire purchase business 3,000
Purchases 27,200
(Answer: Goods sold on Hire Purchase at H.P. price Rs. 35,200; Profit
Rs. 5,200)

9. H.C. Sales, a hire vendor, was engaged in hire purchase business. The
following information is provided to you for the year ended December
31, 2018, in respect of his business.

January 1, 2018 Stock with Customers at H.P. price 4,500

Instalment due 2,500
December 31,2018 Cash received form customers 30,000
Goods repossessed
(instalments due Rs. 1,000)
at market value 650
Instalment due 4,500
Goods sold on hire purchase 43,500

Prepare necessary accounts under Stock and Debtors System assuming

H.P. Price at cost plus50%.

(Answer: Net profit Rs. 10,650; missing figure H.P. Stock at end
Rs. 15,000)

10. Following information was available for the year ended June 30, 2018,
in respect of Auto Dealers Ltd. who was engaged in hire purchase
business. Calculate the amount of profit under Stock and Debtors Method.
July 1, 2017 Instalments due 4,000

Stock, at shop 12,000

Stock out with customers (at H.P.Price) 25,000

Cash received during the year 2,00,000

64
 Purchases 1,67,000 Hire Purchase Accounts-II

Goods repossessed
(instalments due Rs. 3,000) valued at 500

June 30, 2018 Instalments due 6,000

Stock at shop 11,000

Stock out with customers (at H.P. Price) 30,000

The goods were sold on purchase at 20% on hire purchase price.

(Answer : Profit Rs. 38,500)
11. Girdhari also sells goods on hire purchase basis. The hire purchase price
is fixed by adding 50% to the cost. The following are the figures relating
to his hire purchase business for the year 2018.
Rs.
H.P. Stock as on 1.1.2018 36,000
H.P. Debtors as on 1.1.2018 900
Goods sold on hire purchase at H.P. price 2,71,800
Cash received during the year 2,77,200
Total amount of instalments that fell due during 2018 2,78,100

A customer to whom goods had been sold for Rs. 3,600 paid three
instalments of Rs. 300 each. His fourth instalment fell due on December
1, 2018 which he failed to pay. Consequently, the goods were repossessed
on December 27, 2018 after due legal notice. Prepare the necessary
accounts under the Stock and Debtors System for the year ending
December 31, 2018.
(Answer: Profit Rs. 92,600; Missing figures; H.P. Stock at the end Rs.
27,300 and H.P. Debtors at the end Rs. 1,500 after crediting Rs. 2,400
and Rs. 300 for goods repossessed.)

12.14 SOME USEFUL BOOKS

Maheshwari. S.N., 2018: Introduction to Accounting Vikas Publishing House,
New Delhi.

MongaJ.R..Ahuja G.C. & Ashok Sehgal, 2018 :Advanced Accounting National

Publishing House Sew Delhi.

William Pickes, 2002, Accountancy, E.L.B.S. and Pitman, London

Gupta R L. and M. Radbaswamy, 2018.Advanced Accounting Sultan Chand

& Sons, New Delhi

Shukla.M.C..Grewal T.S. & S.C. Gupta, 2018 Advanced Accounts S. Chand

& Co. Ltd., New Delhi.
65
Hire Purchase and Inland
Branches Note : These questions will help you to understand the unit better. Try to
write answers for them. But, do not submit your answers to the
University for assessment. These are for your own practice only.

66
 Branchand
Journal Accounts-I
Ledger
UNIT 13 BRANCH ACCOUNTS-I
Structure
13.0 Objectives
13.1 Introduction
13.2 Need for Branch Accounting
13.3 Types of Branches
13.4 Accounting for Dependent Branches
13.5 Debtors System
13.5.1 Cost Price Method
13.5.2 Invoice Price Method

13.6 Final Accounts System

13.7 Stock and Debtors System
13.8 Let Us Sum Up
13.9 Key Words
13.10 Answers to Check Your Progress
13.11 Terminal Questions/Exercises

13.0 OBJECTIVES
After studying this unit, you should be able to:
 describe the need for branch accounting;
 explain the different types of branches from accounting point of view;
 describe three systems of maintaining branch accounts for a dependent
branch;
 prepare branch account under the debtors system both at cost price and
at invoice price;
 prepare branch account under the final accounts system; and
 prepare the necessary accounts under the stock and debtors system.

13.1 INTRODUCTION
A business may be split up into a number of divisions. The divisions are known
as departments if located under the same roof. On the other hand, if divisions
are located at different places of the same town, country or world, they are
called branches. For example, Cottage Emporium has various divisions like
garments, furniture, gift items, jewellery, etc. They are located in the same building
and so are called departments. Snowhite has its showrooms in Connaught Place,
Nehru Place, Karol Bagh, South Extension and Kamlanagar. These are all
branches of Snowhite. Similarly, Bata has its branches all over the country and
Leventies all over the world. Each branch is treated as a separate profit centre 67
Hire Purchase and Inland and hence the profit or loss is to be worked out separately for each branch.
Branches
Moreover, the firm has to keep strict control over various activities of each
branch and ensure its smooth functioning. The accountants, therefore, have
developed some specialised accounting methods for the recording of transactions
at branch level and for incorporating the net effect of all branch transactions
in the firm’s books.
From accounting point of view, the branches are divided into three categories
(i) dependent branches, (ii) independent branches, and (iii) foreign branches.
In this unit, you will learn how the accounts of dependent branches are maintained
and how their profit or loss is worked out.

13.2 NEED FOR BRANCH ACCOUNTING

As stated earlier, each branch is treated as a separate profit centre. Hence,
it should record various transactions in such a manner that its profit or loss
can be worked out and incorporated in the firm’s overall results at the end
of the accounting year. Moreover, the branches conduct all activities under the
direction and control of the head office which may need a variety of information
from time to time about the functioning of each branch. This becomes possible
only if the branches keep proper books of account. Thus, the main reasons
of keeping branch accounts can be summarised as follows :
i) to find out the profit or loss of each branch for the accounting period;
ii) to ascertain the financial position of each branch at the end of the accounting
year;
iii) to incorporate the net effect of branch transactions and their assets and
liabilities in a firm’s final accounts;
iv) to estimate requirements of cash and stock for each branch;
v) to evaluate the progress and performance of each branch;
vi) to calculate the commission for payment to the managers, if based on profit
of branch;
vii) to assess the prospects for expansion of business in each branch; and
viii) to meet audit requirements.

13.3 TYPES OF BRANCHES

From accounting point of view, the branches can be divided into the following
categories:
1) Branches not keeping full system of accounting;
2) Branches keeping full system of accounting;
3) Foreign branches.
Let us have an idea about their main characteristics.
Branches not Keeping Full System of Accounting: The branches not keeping
full system of accounting are also called dependent branches. The main features
68
of such branches are: Branch Accounts-I

i) They sell only those goods which are received from the head office and
are not usually allowed to make purchases in the open market except with
the permission of the head office.

ii) Goods are supplied by the head office to such branches either at cost
price or at invoice price.

iii) All major expenses of the branch are paid by the head office. The branch
manager is allowed to incur only petty expenses like cartage, postage, etc.
out of the petty cash provided to him for which he is required to maintain
a simple petty cash book.

iv) The amount received from cash sales and debtors is either remitted to the
head office daily or deposited in the account of head office in some local
bank.

v) The branch manager is normally expected to sell the goods for cash, but
he may be authorised to sell goods on credit in certain cases.

vi) Such branches do not keep complete books of account. They simply
maintain record of sales and prepare debtors accounts, if necessary. They
are also required to maintain a stock register and furnish weekly or monthly
statements giving complete information about stock position and movement
of goods to the head office. This enables the head office to keep proper
control over stock at branches.

Branches Keeping Full System of Accounting: Branches keeping full system

of accounting are called independent branches. They are allowed to purchase
goods from the market and also supply to the head office, if necessary. They
can incur expenses from the cash realised and operate the bank account in
their own names. Thus, they operate as independent units for all practical
purposes. Their only link with the head office is that they are owned by the
head office and whatever profit they earn or loss they incur ultimately belongs
to the head office.

Such branches keep a complete set of books on the double entry system and
prepare their own Trial Balance, Trading and Profit & Loss Account and Balance
Sheet. Such branches open Head Office Account in their books and record
all transactions between the branch and the head office in this account.

Foreign Branches: When a branch is located in a foreign country, it is called

a foreign branch. Such branches will keep their books of account in foreign
currency. The Distinctive feature of foreign branches is that financial information
received from them will be in foreign currency which has to be converted into
the currency of the country of the head office before it is incorporated in the
head office books. For example, if an Indian company has a branch in Nairobi,
the branch Trial Balance will be in Kenyan shillings. The Trial Balance must
be converted into rupees before it can be incorporated in head office books.
For all practical purposes, however, foreign branches are treated as independent
branches.

Look at Figure 13.1 for complete classification of branches. 69

Hire Purchase and Inland Classification of Branches
Branches

Inland Branches Foreign Branches

Branches not keeping Branches keeping

full system of Accounting full system of Accounting
(Dependent Branches) (Independent Branches)
Fig. 13.1

13.4 ACCOUNTING FOR DEPENDENT

BRANCHES
You know that the dependent branches do not keep a complete set of books.
Most of their transactions are recorded at the head office level. The accounting
system adopted by head office for a branch depends up on the size of a branch
and the degree of control to be exercised by the head office. The following
are the various methods by which the head office usually keeps branch accounts
in its books:
i) Debtors System: This system is adopted generally for those branches
which are fairly small in size. Under this system, the head office simply
opens a Branch Account for each branch in which it records all transactions
relating to the branch. The Branch Account is prepared in such a manner
that it also helps in ascertaining the branch profit or loss.
ii) Final Accounts System: Under this system, the head office prepares a
Trading and Profit and Loss Account in order to find out profit or loss
of each branch and a Branch Account to find out the amount due to, or
due from that branch. In this case, the Branch Account simply acts as
a personal account.
iii) Stock and Debtors System: Under this system, the head office does not
open any Branch Account. For each branch, it prepares a Branch Stock
Account, a Branch Expenses Account, a Branch Adjustment Account and
Goods sent to Branch Account in order to find out the profit or loss of
each branch.

13.5 DEBTORS SYSTEM

As stated earlier, under debtors system, the head office simply opens a
Branch Account for each branch in which it records all transactions relating
to the branch. The Branch Account also helps in ascertaining the profit or loss
of the branch.
Goods may be invoiced to a branch at cost or at selling price (also called
invoice price). Accordingly, there are two methods of preparing the Branch
Account: (1) Cost Price Method, and (ii) Invoice Price Method. Let us now
study the preparation of Branch Account under both of these methods.
70
13.5.1 Cost Price Method Branch Accounts-I

When goods are invoiced at cost, the following journal entries are passed in
the books of the head office to record various transactions relating to the branch.
1) For Goods sent to Branch
Branch A/c Dr.
To Goods Sent to Branch A/c
(Being goods sent to branch)
2) For return of goods to head office
Goods Sent to Branch A/c Dr
To Branch A/c
(Being goods returned by the branch)
3) For amount sent to branch for expenses
Branch A/c Dr.
To Bank A/c
(Being cheque sent to branch for expenses)
4) For amount received from branch
Bank A/c Dr.
To Branch A/c
(Being cash or cheque received from branch)
5) For closing goods sent to branch account
Goods Sent to Branch A/c Dr.
To Purchases/Trading A/c
(Being balance transferred to Trading Account)
6) For closing balances of assets at the branch
Branch Assets A/c (Individually) Dr.
To Branch A/c
(Being closing balances of assets brought into account)
7) For closing balances of liabilities at the branch
Branch A/c Dr.
To Branch Liabilities A/c (Individually)
(Being closing balances of liabilities brought into account)
8) For transferring profit or loss to the General Profit and
Loss Account
i) If profit
Branch A/c Dr.
To General Profit and Loss A/c
(Being branch profit transferred to General P & L A/c)
ii) If loss
General Profit and Loss A/c Dr.
To Branch A/c
(Being branch loss transferred to General P & L A/c)
The closing balances of branch assets and liabilities are shown in the Balance
Sheet of the head office. At the beginning of the next year, the entry numbers
6 and 7 are reversed so as to show opening balances in the Branch Account.
The Branch Account will appear as given in Figure 13.2. 71
 Figure 13.2
Hire Purchase and Inland
Branches Branch Account
Dr. Cr.

To Opening Balances By Opening Balances

Stock Creditors
Debtors Outstanding expenses
Petty Cash By Bank
Furniture Cash Sales
Prepaid expenses Collections from Debtors
To Goods Sent to Branch A/c (for remittances)
To Bank A/c (for expenses of By Goods Sent to Branch A/c
any payment made by the H.O. (goods returned by the
on behalf of the Branch) branch to head office)
To Closing Balances By Closing Balance
Outstanding expenses Petty Cash
Creditors Stock
To Profit, if any Debtors
(transferred to General Furniture (at depreciated value)
Profit & Loss A/c) Prepaid Expenses
By Loss, if any
(transferred to General
Profit & Loss A/c)

Look at illustrations 1 and 2 and study how Branch Account is prepared with the help of the given
information.
Illustration 1
From the following particulars relating to Delhi Branch for the year ending December 31, 2018, prepare
Branch Account in the books of head office.
Rs. Rs.
Stock at Branch on 1-1-2018 15,000 Cheques sent to Branch:
Debtors at Branch on 1-1-2018 30,000 Salaries 9,000
Petty Cash at Branch on 1-1-2018 300 Rent and Taxes 1,500

Goods sent to Branch 2,52,000 Petty Cash 1,100 11,600

Cash sales 60,000 Goods returned by branch 2,000

Received from Debtors 2,10,000 Stock at Branch on 31-12-2018 25,000
Credit Sales 2,28,000 Petty Cash at Branch on 31-12-2018 200
Debtors at Branch on 31-12-2018 48,000

72
Solution: Branch Accounts-I
Head Office Ledger
Delhi Branch Account
Dr. Cr.

Rs. Rs.
To Balance b/d By Cash:
Branch Stock 15,000 Cash Sales 60,000
Branch Debtors 30,000 Received from
Branch Petty Cash 300 Debtors 2,10,000 2,70,000
To Goods sent to Branch A/c 2,52,000
To Bank A/c By Goods sent to Branch A/c 2,000
Salaries 9,000
Rent & Taxes 1,500
Petty Cash 1,100 11,600 By Balance c/d
To Profit (transferred to General Branch Stock 25,000
P & L A/c) 36,300 Branch Debtors 48,000
Branch Petty Cash 200
3,45,200 3,45,200

Illustration 2
Sankat Mochan Ltd., Varanasi opened a branch at Madras on January 1, 2018. The following particulars
are available in respect of the branch for the year 2018.

Rs. Rs.
Goods sent to branch 75,000 Cash remittance to branch towards Petty Cash 6,000
Cash sales at branch 50,000 Petty Cash at branch on 31-12-2018 500
Credit sales at branch 60,000 Debtors at branch on 31-12-2018 5,000
Salaries of branch staff paid by Stock at branch on 31-12-2018 27,000
Head Office 15,000
Office expenses of branch
paid by Head Office 12,000

Prepare Branch Account to show the profit/loss from the branch for the year 2018.
Solution
Books of Sankat Mochan Ltd. Madras Branch Account
Dr. Cr.
Rs. Rs.
To Goods sent to Branch A/c 75,000 By Bank A/c
To Bank A/c Cash Sales 50,000
Salaries 15,000 Received from Debtors 55,000 1,05,000
Office expenses 12,000 27,000
To Bank A/c (for petty expenses) 6,000 By Balance c/d:
To Profit (transferred to General Branch Petty Cash 500
P & L A/c) 29,500 Branch Debtors 5,000
Branch Stock 27,000
1,37,500 1,37,500
73
Hire Purchase and Inland
Branches
Note: The amount of cash received from debtors is not given. It has been found by preparing the
Memorandum Branch Debtors Account as follows:
Memorandum Madras Branch Debtors Account
Dr. Cr.

Rs. Rs.
To Credit Sales 60,000 By Cash Received (balancing figure) 55,000
By Balance c/d 5,000
60,000 60,000

Some Peculiar Items

Petty cash expenses: No entry is made in respect of petty cash expenses
incurred by the branch out of its petty cash. As per practice, the Branch Account
is debited with the opening balance of petty cash and the amount of petty cash
sent by Head Office, and it is credited with the closing balance of petty cash.
This amounts to a net debit to Branch Account which is equal to the
amount of petty expenses incurred by branch. For example, the opening
balance of petty cash with a branch was Rs. 200, the cash sent by Head Office
for petty expenses was Rs. 300 and the petty expenses incurred by branch
were Rs. 400. When we debit the Branch Account with Rs. 200 (opening petty
cash balance) and Rs. 300 (amount sent by head office) and credit it with
Rs. 100 (closing petty cash balance), the Branch Account stands debited by
a net amount of Rs. 400 (Rs. 200 + Rs. 300 — Rs. 100) which is equal
to the amount of petty cash expenses (Rs. 400) incurred by the branch.
Credit sales, sales returns, bad debts, discount allowed to debtors etc. :
All these items relate to branch debtors and will not be shown in the Branch
Account. The reasoning is similar to that of petty cash expenses. When the
Branch Account is debited with the opening balance of branch debtors and
credited with cash received from debtors and the closing balance of branch
debtors, the amount of credit sales automatically stand accounted for.
Shortage or surplus of stock: It is possible that, at the time of checking
the stock of a branch, certain amount of shortage or surplus is detected. These
are not to be shown in the Branch Account because the closing stock credited
to the Branch Account is the actual amount of stock and thus the shortage
or surplus is automatically covered.
Depreciation of fixed assets: This is also not shown in the Branch Account
because, as per practice, the closing balance of the fixed asset after deducting
the amount of depreciation is shown on the credit side of the Branch Account.
Thus you should note that while preparing the Branch Account for dependent
branches, the following Items will be ignored:
1) Petty Cash Expenses
2) Credit Sales
3) Sales Returns
74 4) Bad Debts
5) Discount Allowed to Debtors Branch Accounts-I

6) Shortage or Surplus of Stock

7) Depreciation
Look at illustration 3 and see how Branch Account is prepared without
specifically showing the above items, if given.
Illustration 3
Pratap Tractors Ltd., Allahabad, has a branch at Hissar. From the following
particulars relating to the branch for the year ending December 31, 2018, prepare
the Branch Account in the head office books:

Stock at Branch on 1-1-2018 10,000 Discount allowed to Debtors 100

Branch Debtors on 1-1-2018 4,000 Cash sent to Branch:
Petty Cash on 1-1-2018 500 Rent 2,000
Furniture on 1-1-2018 2,000 Salaries 2,400
Prepaid Insurance on 1-1-2018 150 Petty Cash 1,000
Salaries Outstanding on1-1-2018 1,00,000 Insurance (upto 31-3-2019) 600
Goods sent to Branch 80,000 Good Returned by Branch 1,000
Cash Sales 30,000 Good Returned by Debtors 2,000
Credit Sales 40,000 Stock at Branch on 31-12-2018 5,000
Cash received from Debtors 35,000 Petty Expenses paid by Branch 850
(direct to HO)
Cash paid by Debtors 2,000
Provide depreciation on furniture @ 10% p.a.
Solution :
Hisar Branch Account
Dr. Cr.

Rs. Rs.
To Balance b/d By Balance b/d
Branch Stock 10,000 Branch Outstanding Salaries 1,00,000
Branch Debtors 4,000
Branch Petty Cash 500 By Cash:
Branch Furniture 2,000 Cash Sales 30,000
Branch Prepaid Insurance 150 Cash Received from Debtors 37,000 67,000
To Goods Sent to Branch 80,000 By Balance c/d
Less : Return from 1,000 79,000 Branch Stock 5,000
Branch Branch Petty Cash 650
To Bank Branch Debtors 4,900
Rent 2,000 Branch Furniture 1,800
Salaries 2,400 Branch Prepaid Insurance 150
Petty Cash 1,000
Insurance 600
6,000
To Profit (transferred to General
P & L A/c) 77,850
1,79,500 1,79,500
75
Hire Purchase and Inland Notes:
Branches
1) Cash received from debtors include Rs. 2,000 which the debtors directly
paid to the head office.
2) Branch petty cash balance at the end is not given. It is ascertained as
follows:
Petty Cash at the beginning 500
Add: Amount sent by head office 1,000
1,500
Less: petty cash expenses 850
Petty Cash Balance 650
3) Furniture at the end has been shown after deducting Rs. 200 for
depreciation.
4) Prepaid insurance on 31-12-2018 is one-fourth of Rs. 600.
5) The closing balance of branch debtors is not given. It has been worked
out by preparing the Memorandum Branch Debtors Account as follows:

Memorandum Branch Debtors Account

Rs. Rs.
To Balance c/d 4,000 By Cash Received from Debtors 37,000
To Sales (Credit) 40,000 By Sales Returns 2,000
By Discount Allowed 100
By Balance c/d (balancing figure) 4,900
44,000 44,000

13.5.2 Invoice Price Method

As in the case of consignment, the goods may he invoiced to branches at a
price higher than the cost (termed as invoice price). This is done primarily to
have an effective control over stock with branches and keep the margin of profit
secret from the branch manager. In such a situation, all entries relating to goods
are made in the Branch Account at invoice price and necessary adjustments
for loading (difference between I.P. and C.P.) are recorded at the end by passing
the following additional journal entries:
1) For adjustment of loading in opening stock at branch
Stock Reserve A/c Dr.
To Branch A/c
2) For adjustment of loading in goods sent to branch less returns
Branch A/c Dr.
To Goods Sent to Branch A/c
3) For adjustment of loading in closing stock at branch
Branch A/c Dr.
76 To Stock Reserve A/c
Look at illustration 4 and see how Branch Account is prepared when goods Branch Accounts-I
are invoiced at a price higher than cost.
Illustration 4
The Mukund Gas Co., Varanasi have a sales branch at Ghaziabad and invoiced
1
goods to the branch at cost price plus 33 per cent. It is arranged that all
3
cash received by the branch is to be paid daily to the Head Office Account
with the Banaras State Bank Ltd. and the necessary advice sent to the Head
Office. From the following particulars, prepare Branch Account and Goods Sent
to Branch Account in the Head Office ledger showing the actual profit or loss
of the branch for the year ending December 31, 2018.
Rs. Rs..
Stock on 1.1.2018 12,000 Rent, Rates and Taxes 3,200
(at invoice price)
Goods Sent to Branch 96,000 Salaries and Wages 4,800
(at invoice price)
Debtors on 1-1-2018 1,500 Debtors on 31-12-2018 1,600
Cash Sent to Head Office 77,100 Goods Returned to Head Office 16,000
(at invoice price)
Sales 77,000 Shortage of stock 200
(at invoice price)
Solution :
Books of Mukumd Gas. Co., Varanasi
Ghaziabad Branch Account
Dr. Cr.
Rs. Rs.
To Balance b/d
Branch Stock 12,000 By Cash Received 77,100
Branch Debtors 1,500 By Goods Returned by Branch A/c 16,000
To Goods Sent to Branch 96,000 By Stock Reserve A/c 3,000
(loading in op. stock)
To Bank A/c By Goods Sent to Branch A/c 20,000
(loading in goods sent less returns)
Rent, Rates & Taxes 3,200 By Balance c/d
Salaries & Wages 4,800 8,000 Branch Stock 14,800
To Stock Reserve A/c 3,700 Branch Debtors 1,600
(loading in Cl. Stock)
To Profit (Transferred to 11,300
General P & L A/c)
1,32,500 1,32,500
77
Hire Purchase and Inland Goods Sent to Branch Account
Branches

Rs. Rs.
To Ghaziabad Branch A/c 16,000 By Ghaziabad Branch A/c 96,000
To Ghaziabad Branch A/c 20,000
(loading on Rs. 80,000)
To Trading A/c (transfer) 60,000
96,000 96,000

Notes : 1) The branch stock at the end has not been given. It can be worked out by preparing
Memorandum Branch Stock Reserve Account as follows :
2) Loading is 25% of invoice price.
Memorandum Branch Stock Account

Rs. Rs.
To Balance b/d 12,000 By Goods returned to Head Office 16,000
To Goods received form Head Office 96,000 By Sales 77,000
To Goods returned to Customers ... By Shortage of stock 200
By Balance c/d 14,800
1,08,000 1,08,000

It should be noted that all figures in Memorandum Branch Stock Account

have been recorded at the invoice price.
Check Your Progress A
1. What do you mean by dependent branch?
................................................................................................................
................................................................................................................
................................................................................................................
2. Fill in the blank:
i) The branch expenses paid by the Head Office are …..........….. to
the Branch Account.
ii) The balance in Goods sent to Branch Account is transferred
to…....................… Account.
iii) If the cost price is Rs. 100 and the invoice price is cost plus 20%
on invoice price, the invoice price is Rs ……………
iv) Loading is the ……...................…..between cost price and invoice
price.
v) If opening or closing stock is not given, the same can be worked
out by preparing ……….. Account at ………price.
78
3. List the items which are not to be shown in Branch Account prepared Branch Accounts-I
under the Debtors System.
................................................................................................................
................................................................................................................
................................................................................................................
................................................................................................................

13.6 FINAL ACCOUNTS SYSTEM

The profit or loss of a dependent branch can also be worked out by preparing
a Memorandum Branch Trading and Profit & Loss Account. This account is
prepared on the basis of cost of goods sent to the branch (not the invoice
price). Apart from the Branch Trading and- Profit & Loss Account, the Head
Office also maintains the Branch Account. But, under this system, the Branch
Account is in the nature of a personal account which shows only the mutual
transactions between the head office and the branch. The balance of Branch
Account, therefore, represents the net assets of the branch.
Look at illustration 5 and study how profit or loss is ascertained and how Branch
Account is maintained under the final accounts system.
Illustration 5
A-one Ltd., Bhopal has a branch at Madras to which the goods are sent at
cost plus 25%. The Madras branch keeps its own Sales Ledger and remits
all cash received to the Head Office every day. All expenses are paid by the
head office. The transactions for Madras Branch during the year ending
December 31, 2018 were as follows:
Rs. Rs.
Stock (1-1-2018) 11,000 Return Inwards 500
Debtors (1-1-2018) 100 Cheques Sent to Branch
Petty Cash 100 Rent 600
Cash Sales 2,650 Wages 200
Credit Sales 23,950 Salary and other Expenses 900
Goods Sent to Branch 20,000 Stock (31.12.2018) 13,000
Collection on Ledger A/c 21,000 Debtors (31.12.2018) 2,000
Goods Returned to H.O. 300 Petty Cash (31.12.2018)
(Including miscellaneous
income Rs. 25 not remitted) 125
Bad Debts 300
Allowances to Customers 250
Prepare the Memorandum Branch Trading and Profit & Loss Account and
Madras Branch Account for the year ending December 31, 2018.
79
Hire Purchase and Inland
Branches

Solution:
Memorandum Branch Trading and Profit & Lass Account for the year ending 31.12.2018
Dr. Cr.

Rs. Rs.
To Opening Stock 8,800 By Sales
(11,000 – 2,200) (1/5 loading) Cash 2,650
To Goods sent to Branch 16,000 Credit 23,950
(20,000 – 4,000) (1/5 loading) 26,600
To Wages 200 Less Returns 500 26100
To Gross Profit c/d 11,740 By Goods sent to HO. 240
(300-60) 1/5 loading
By Closing Stock 10,400
(13,000 – 2,600) (1/5 loading)
36,740 36,740
To Bad Debts 300 By Gross Profit b/d 11,740
To Allowances 250 By Misc. Income 25
To Rent 600
To Salaries and other expenses 900
To Profit transferred to General 9,715
Profit & Loss A/c
11,765 11,765

Madras Branch Account

Rs. Rs.
To Balance b/d By Bank A/c
Stock 8,800 Cash Received from
Debtors 100 Debtors 21,000
Petty Cash 100 Cash Sales 2,650
To Goods sent to Branch A/c 16,000 By Goods Sent to Branch 240
(returns to H.O.)
To Bank A/c By Balance c/d
Rent 600 Stock 10,400
Wages 200 Debtors 2,000
Salaries and other expenses 900 Petty Cash 125

To Profit as per Branch Trading 9,715

and P & L A/c
36,415 36,415
80
 Branch Accounts-I
13.7 STOCK AND DEBTORS SYSTEM
Under Stock and Debtors System, the Head Office does not open a Branch
Account in its books. It maintains a few control accounts for recording the
various branch transactions. These accounts usually are : (1) Branch Stock
Account, (ii) Branch Debtors Account, (iii) Branch Expenses Account, (iv)
Branch Cash Account, (v) Goods Sent to Branch Account, and (vi) Branch
Fixed Assets Account. At the end of the accounting year, it prepares the Branch
Adjustment Account and the Branch Profit & Loss Account. This system is
used only when goods are invoiced at selling price which the branch is not
allowed to vary.

Let us now study the working of each account opened by the Head Office
when such a system is followed.

Branch Stock Account: This is the most important account which helps the
Head Office in controlling the branch stock. It shows all branch transactions
relating to goods. The goods sent to branches and the sales returns are shown
on its debit side, and the sales (both cash and credit) and the goods returned
to head office on the credit side. All these items are recorded at the invoice
price. Hence, if the figure of any of these items is given at cost, the same
should be converted into invoice price before recording it in the Branch Stock
Account. The balance of this account would show the unsold goods (stock)
lying with the branch. If it is found that the actual stock with the branch is
less than the balance shown by the Branch Stock Account, it means that there
is a ‘shortage’ in the stock with the branch. Similarly, if the actual stock with
the branch is more than the balance shown by the Branch Stock Account, it
would reflect ‘surplus’. Both situations warrant investigation. But, so far as their
recording goes, the shortage will be shown on the credit side of the Branch
Stock Account and if there is surplus, the same will be recorded on its debit
side. Then, the balance of the Branch Stock Account will be the exact amount
of actual stock with the branch. In other words, while preparing the Branch
Stock Account, you will show the actual stock with branch as the balance in
this account, and then if the totals of both sides do not tally, you will show
the difference as shortage or surplus as the case may be.

Branch Debtors Account: This account shows all transactions relating to branch
debtors. The credit sales are shown on its debit side, and cash received from
debtors, sales returns, bad debts, discount allowed, etc. on the credit side. The
balance of this account represents the closing debtors of the branch.

Branch Expenses Account: This account shows all expenses incurred by the
branch. In addition, the items like bad debts, discount allowed, depreciation
on branch fixed assets, etc. are also debited to this account. This account is
closed by transfer to the Branch Adjustment Account.

Branch Cash Account: This account shows all cash transactions of the branch
where the branch is not required to remit all collection of cash immediately
to the Head Office, but use it for branch expenses and remit the balance to
the Head Office from time to time. This account helps the Head Office to keep
control over branch cash. Normally, the dependent branch is not allowed the
freedom to retain cash collections. Hence, this account need not be maintained.
81
Hire Purchase and Inland Branch Fixed Assets Account: The Head Office maintains separate account
Branches
for each type of branch asset such as furniture, equipment, building, etc. These
accounts are prepared in the usual manner. The depreciation on branch fixed
assets is, however, debited to Branch Expenses Account and credited to the
respective account.
Goods Sent to Branch Account: This account is prepared in the same manner
as in case of branches to which the goods are sent at the invoice price.
Branch Adjustment Account: This account is like a Trading Account of the
branch. It is prepared to ascertain the gross profit or gross loss made at the
branch by recording the loading (difference between invoice price and cost price)
on various items. The loading on branch closing stock and shortage is shown
on its debit side while the loading on branch opening stock, goods sent to branch
(less returns) and surplus on the credit side. The balance of this account reflects
the gross profit or gross loss which is transferred to Branch Profit & Loss
Account.
Branch Profit & Loss Account: This account is prepared to ascertain the
net profit or net loss made at the branch. As stated earlier, the gross profit
or gross loss ascertained by the Branch Adjustment Account is transferred to
this account. It is debited with branch expenses as per the Branch Expenses
Account and the loss on account of shortage being the cost of such shortage.
In case the Branch Stock Account reveals some surplus, the amount equal to
the cost of such surplus will be shown on the credit side of the Branch Profit
& Loss Account. The balance of the Branch Profit & Loss Account represents
the net profit or net loss made at the branch which is transferred to the General
Profit & Loss account.
The following journal entries are passed in the Head Office books for opening
the above accounts relating to the various branch transactions:
1) When goods are sent to the branch (at invoice price)
Branch Stock Ale Dr.
To Goods Sent to Branch A/c
2) When goods are returned by the branch to the H.O. (at invoice
price)
Goods Sent to Branch A/c Dr.
To Branch Stock A/c
3) When sales are made by the branch
i) For Cash Sales
Cash A/c Dr.
To Branch Stock A/c
ii) For Credit Sales
Branch Debtors A/c Dr.
To Branch Stock A/c
4) When cash is received from debtors
Cash A/c Dr.
To Branch Debtors A/c

82
5) For sales returns Branch Accounts-I
Branch Stock A/c Dr.
To Branch Debtors A/c
6) For discount allowed, bad debts, etc.
Branch Expenses A/c Dr.
To Branch Debtors A/c
7) For shortage of stock
Branch Adjustment A/c Dr.
(with amount of loading)
Branch P & L A/c Dr.
(with cost of shortage)
To Branch Stock A/c
For surplus at branch, the reverse entry will be passed.
8) For Branch expenses paid in Cash
Branch Expenses A/c Dr.
To Cash A/c
9) For closing branch expenses account
Branch P & L A/c Dr.
To Branch Expenses A/c
10) For adjustment of loading on the opening stock
Stock Reserve A/c Dr.
To Branch Adjustment A/c
11) For adjustment of loading on the closing stock
Branch Adjustment A/c Dr.
To Stock Reserve A/c
12) For adjustment of loading on net goods sent to branch
Goods Sent to Branch A/c Dr.
To Branch Adjustment A/c
13) For transfer of gross profit
Branch Adjustment A/c Dr.
To Branch P & L A/c
14) For transfer of net profit to General Profit & Loss Account
Branch Adjustment A/c Dr
To General P & L A/c
The entry will be reversed if there is net loss.
15) For closing the Goods Sent to Branch Account
Goods Sent to Branch A/c Dr.
To Trading A/c
Look at illustration 6 and see how the accounts for various branch transactions
are prepared under Stock and Debtors System.

83
Hire Purchase and Inland
Branches
Illustration 6
Indiana Traders, Jaipur opened a branch at Jodhpur on 1-7-2017. The goods were sent by the Head
Office to the branch invoiced at selling price of the branch which was 125% of the cost price of
the head office.
The following are the particulars relating to the transactions of Jodhpur Branch
Rs. Rs.
Goods sent to branch 2,80,000 Cash sent to branch for:
(at cost to head office) Wages 3,000
Sales—Cash 1,24,000 Freight 11,000
Sales—Credit 1,75,000 Other expenses including
godown rent 6,000 20,000
Cash collected from debtors 1,56,000
Discount allowed 4,000 Stock on June 30, 2018 55,500
Spoiled cloth in bales 500 (at invoice price)
written off at invoice price
Ascertain the profit or loss for the Jodhpur Branch for the year ended June 30, 2018 by preparing
accounts under the Stock and Debtors System.
Solution
Branch Stock Account
Dr. Cr.

Rs. Rs.
To Goods Sent to Branch A/c 3,50,000 By Cash A/c (cash sales) 1,24,000
To Branch Debtors A/c 5,000 By Branch Debtors A/c 1,75,000
(sales returns being (credit sales)
balancing figure) By Branch Adjustment A/c
(spoilage-loading) 100
By Branch P & L A/
(spoilage-cost) 400
By Balance c/d 55,500
3,55,000 3,55,000

Note: Total of the credit side of Branch Stock A/c exceeds the debit side by Rs. 5,000. It is assumed
to be on account of returns by customers.
Goods Sent to Branch Account
Dr. Cr.

Rs. Rs.
To Branch Adjustment A/c (loading) 70,000 By Branch Stock A/c 3,50,000
To Trading A/c 2,80,000
3,50,000 3,50,000
84
 Branch Debtors Account Branch Accounts-I

Dr. Cr.

Rs. Rs.
To Branch Stock A/c 1,75,000 By Cash A/c 1,56,000
By Branch Stock A/c (returns) 5,000
By Branch Expenses A/c (discount allowed) 4,000
By Balance c/d 10,000
1,75,000 1,75,000

Branch Expenses Account

Dr. Cr.

Rs. Rs.
To Cash A/c
Wages 3,000 By Branch Profit & Loss A/c 24,000
Freight 11,000
Other Expenses 6,000
To Branch Debtors A/c
(discount) 4,000
24,000 24,000

Branch Adjustment Account

Dr. Cr.

Rs. Rs.
To Branch Stock A/c 100 By Goods Sent to Branch A/c 70,000
(loading on spoilage) (loading)
To Stock Reserve A/c 11,100
(loading on closing stock)
To Branch Profit & Loss A/c 58,800
70,000 70,000

Branch Profit & Loss Account

Dr. Cr.

Rs. Rs.
To Branch Expenses A/c 24,000 By Branch Adjustment A/c 58,800
To Branch Stock A/c
(spoilage-cost) 400
To Net Profit transferred
to General P & L A/c 34,400
58,800 58,800

85
Hire Purchase and Inland It should be noted that if there is any theft or spoilage of goods at the branch,
Branches
or some goods are lost in transit, these are to be treated in accounts in the
same way as the shortage of goods. If, however, some amount is received from
the insurance company for such abnormal losses of stock, the same will be
credited to the Branch Profit and Loss Account.
Check Your Progress B
1. How is the Branch Account prepared under the Debtors System different
from the Branch Account prepared under the Final Accounts System.
.................................................................................................................
.................................................................................................................
.................................................................................................................
2. Fill in the blanks :
i) The closing balance of Branch Account under the Final Accounts
System represents ……….at the branch.
ii) Branch Expenses Account under the Stock and Debtors System is
closed by transfer to ……….Account.
iii) Under Stock and Debtors System, all figures in Branch Stock Account
are recorded at ……….price.
iv) Under Stock and Debtors System,…………….. Account is credited
when the branch returns goods to the Head Office.
v) Under the Stock and Debtors System, Bad Debts are credited to
Branch Debtors Account and debited to …………..................……..
Account.
vi) If the balance shown by Branch Stock Account is different from actual
stock with the branch, the difference reflects……………………

13.8 LET US SUM UP

From accounting point of view, each branch is treated as a separate profit-
centre.
Hence, accounting for branch transaction is designed in such a way that profit
or loss made at each branch can be correctly worked out and proper control
can be exercised over their financial activities. For this purpose, the branches
are divided into three categories: (i) branches not keeping full system of
accounting (dependent branches), (ii) branches keeping full system of accounting
(independent branches), and (iii) foreign branches.
Where branches do not keep full system of accounting, the Head Office has
to maintain proper record of branch transactions. There are three methods that
can be followed for this purpose: (i) Debtors System, (ii) Final Accounts System,
and (iii) Stock and Debtors System.
Debtors System is usually adopted for small branches which merely act as sales
depots. Under this system, the head office simply opens a Branch Account for
each branch in which it records all related transactions. The Branch Account
86
is maintained like a Consignment Account which also helps in ascertaining the Branch Accounts-I
profit or loss made by the branch.
Under the Final Accounts System of maintaining branch accounts, the Head
Office prepares a Memorandum Trading and Profit & Loss Account for each
branch from the data ‘provided by the branch and ascertains its profit or loss
for the accounting period.
Then it also maintains a Branch Account for recording mutual transactions
between the Head Office and the branch which finally reveals the amount due
to, or due from, the branch. Its balance will be equal to the net assets with
the branch.
Stock and Debtors System is followed where the goods are invoiced to the
branch at selling price. Under this system, no Branch Account is opened. The
Head Office maintains (i) Branch Stock Account, (ii) Branch Expenses Account,
(iii) Goods Sent to Branch Account, and (iv) Branch Fixed Assets Account.
At the end of the accounting period, it prepares Branch Adjustment Account
and Branch Profit and Loss Account for ascertaining the branch gross profit/
gross loss and the net profit/net loss respectively. This system also enables the
Head Office to exercise effective control on branch stock.

13.9 KEY WORDS

Branch Adjustment Account: An Account prepared under Stock and Debtors
System for ascertaining the gross profit or gross loss made by a branch.
Debtors System: A system of accounting for transactions of a branch by
opening Branch Account which also helps to ascertain branch profit or loss.
Dependent Branch: A small branch which does not keep full system of
accounting.
Final Accounts System: A system of accounting for transactions of a branch
under which branch profit or loss is ascertained by preparing Memorandum
Branch Trading and Profit & Loss A/c.
General Profit & Loss Account: Profit and Loss Account of the Head Office
which shows the profit or loss of the business unit as a whole.
Independent Branch: Branch keeping full system of accounting.
Loading: Difference between the cost price and the price at which goods are
invoiced to the branch.
Stock and Debtors System: A System of accounting for transactions of a
branch without opening a Branch Account. Under the system, branch profit or
loss is ascertained through Branch Adjustment Account.

13.10 ANSWERS TO CHECK YOUR PROGRESS

A 2) i) debited ii) Trading iii) 125 iv) difference
v) Memorandum Branch Stock, invoice price
B 2) i) net assets ii) Branch Adjustment iii) invoice iv) Branch
Stock v) Branch Expenses vi) Shortage or surplus 87
Hire Purchase and Inland
Branches 13.11 TERMINAL QUESTIONS/EXERCISES
Questions
1) What are the objectives of keeping, branch accounts?
2) Name the three systems of maintaining the accounts of a dependent branch,
and describe how profit is ascertained under each system.
3) Explain how Branch Stock Account helps in keeping effective control over
the branch stock.
Exercises
1) Kabir & Co. of Moradabad have their branch at Kanpur. The following
are the transactions relating to the branch for the year ending December
31, 2018:
Rs.
Opening Stock on January 1, 2018 20,000
Goods supplied to Branch 50,000
Cash sent to Branch for
Rent 200
Other Expenses 100 300
Cash received from Branch during the year 60,000
Closing Stock on December 31, 2018 15,000
Closing balance of Petty Cash on December 31, 2018 10
From the above information, pass the necessary journal entries and prepare
Kanpur Branch Account and other necessary accounts in the books of the Head
Office.
(Answer: Branch Net Profit Rs. 4,710)
2) A Meerut Company has a retail branch in Kota which is supplied with
all goods from Meerut. The branch keeps its own Sales Ledger, receives
cash against the ledger accounts and remits the whole of the cash received
daily to the Head Office. All wages and branch expenses are drawn by
cheque weekly from the Head Office upon the imprest system. From the
under mentioned particulars supplied by the Branch Manager, show how
the Branch Account would appear in the Head Office books as on
December 31, 2018.

Rs. Rs.
Six months credit sales 2,387 Stock on December 31, 2018 1,121
Return inwards 20 Debtors July 1, 2018 1,227
Cash received on 2,384 Goods received from
Ledger accounts Head Office 2,178
Cash Sales 1,214 Rent, Taxes etc. paid 375
Stock on July 1,2018 720 Sundry Expenses 396
Bad Debts 100

88 (Answer : Net Profit Rs 933; Missing Figure; Closing Debtors Rs. 1,110)
3) Royal Store of Kanpur opened a selling branch at Madras on July 1, 2018. Branch Accounts-I
Goods are sent to branch from the head office at cost plus 25%. The
branch is advised to deposit cash every day in the bank in head office
account. From the following particulars, prepare Branch Account in the
books of head office for the period ending December 31, 2018. Petty
Cash at branch is maintained on imprest system.
Rs. Rs.
Cash sent to branch for meeting 1,500 Cash sales by the branch 80,000
petty expenses
Furniture purchased for the branch 12,000 Credit sales during 6 months 30,000
Goods sent to branch at 1,60,000 Cash received from debtors 22,000
invoice price Discount allowed to the debtors 400
Expenses paid by Head Office: Goods returned by debtors
(at invoice price) 800
Rent 2,200 Bad debts written off 100
Advertisement 800 Petty expenses paid by the branch 1,000
Salaries 4,600
Insurance 400 Stock at invoice price on December 31
(up to June 30, 2019) (excluding stock received from debtors) 40,000
Provide depreciation on furniture at 10% p.a.
(Answer: Profit Rs. 3,940; Debtors at the end Rs. 6,700)
4) X Ltd. of Bombay has a branch in Delhi. The head office sends goods to the branch at cost
plus 50%. From the following data, prepare the necessary accounts in the books of head office
under Stock and Debtors System.
Rs. Rs.
Goods sent from Head Office 50,000 Credit Sales 8,000
(at invoice price)
Returned to Head Office 1,000 Opening Stock 10,000
Cash Sales 35,500 Closing Stock 11,000
(Answer: Profit Rs. 11,500; Shortage of Goods Rs. 4,500)
5) Shyam Brothers of Delhi has a branch at Hyderabad. In order to maintain strict control over
stocks, it invoices goods to the branch at selling price including profit of 25% on selling price.
From the following particulars, prepare Branch Stock Account, Branch Debtors Account, Goods
Sent to Branch Account, Branch Adjustment Account, and Branch Profit and Loss Account.

89
Hire Purchase and Inland Rs.
Branches
Stock January 1, 2018 30,000
Debtors on January 1, 2018 22,800
Goods invoiced to Branch at invoice price 1,34,000
Sales at the branch
Cash 62,000
Credit 74,800
Cash received from Debtors 80,000
Bad Debts written off 500
Discount allowed to customers 600
Expenses at the branch 13,400
Stock on December 31, 2018 26,800
(Answer: Gross Profit Rs. 34,200; Net Profit Rs. 19,400)

Note : These questions will help you to understand the unit better. Try to
write answers for them. But, do not submit your answers to the
University for assessment. These are for your own practice only.

90
 Branch Accounts-II
Journal and Ledger
UNIT 14 BRANCH ACCOUNTS-II
Structure
14.0 Objective
14.1 Introduction
14.2 Accounting System of an Independent Branch
14.3 Some Peculiar Items
14.3.1 Goods in Transit
14.3.2 Cash in Transit
14.3.3 Head Office Expenses Chargeable to Branch
14.3.4 Depreciation on Branch Fixed Assets, Accounts Maintained by
Head Office
14.3.5 Inter-branch Transactions

14.4 Incorporation of Branch Trial Balance in the Head Office Books

14.4.1 Detailed Incorporation
14.4.2 Abridged Incorporation

14.5 Closing Entries in Branch Books

14.6 A Comprehensive Illustration
14.7 Let Us Sum Up
14.8 Key Words
14.9 Answers to Check Your Progress
14.10 Terminal Questions/Exercises
14.11 Some Useful Books

14.0 OBJECTIVES
After studying this unit, you should be able to:
 describe the features of the accounting system of an independent branch;
 make adjustment entries in the books of both Head Office and branch
for certain peculiar items relating to independent branches;
 pass necessary journal entries for the incorporation of branch balances in
the books of the Head Office;
 make closing entries in the books of the branch; and
 prepare consolidated balance sheet of the business.

14.1 INTRODUCTION
In Unit 13, you learnt about the systems of accounting for a dependent branch.
Dependent branch is usually a small branch which merely functions as a sales
depot. It does not keep full system of accounting. The main accounting records
for such branches are maintained at the Head Office level. But, when a branch
functions as an independent unit and enjoys certain amount of operational
91
autonomy, it keeps full system of accounts. Such branches are termed as
Hire Purchase and Inland independent branches and maintain complete set of books on double entry
Branches
system. They prepare their own Trial Balance, Profit & Loss Account and
Balance Sheet. At the end of the accounting year, their summarised results and
the assets and liabilities are incorporated in the books of the Head Office. In
this unit, you will learn how does the Head Office incorporate all branch balances
in its books and what sort of records are maintained for mutual transactions
between the branch and the Head Office.

14.2 ACCOUNTING SYSTEM OF AN

INDEPENDENT BRANCH
You know an independent branch enjoys certain amount of operational autonomy.
Besides receiving goods from the Head Office, it may also purchase goods
from the outside parties. It maintains its own bank account and remits money
from time to time to Head Office as per the instructions of the Head Office.
It is treated as a separate accounting entity. The main features of the accounting
system of independent branches are as follows:
1) The branch maintains complete set of books on double entry system.
2) The branch opens a Head Office Account in its books. It is a personal
account wherein, all transactions between the branch and the Head Office
are recorded at the branch level. This account is debited with cash sent
to the Head Office and the goods returned or supplied to the Head Office,
and is credited by goods received from the Head Office and the Head
Office expenses charged to the branch for centralised services.
3) The Head Office also maintains a Branch Account in its books for all
transactions, it makes with a particular branch. It is also a personal account
which shows the same entries as the Head Office Account in branch books,
but on the reverse sides.
4) At the end of the accounting period, the branch prepares its trial balance
and the final accounts, and send their copies to the Head Office.
5) As soon as the Head Office receives the trial balance from a branch, it
compares the balance in Head Office Account as shown in the branch
Trial Balance with the balance in the Branch Account as it appears in the
Head Office books. The difference, if any, is investigated and, after
ascertaining the causes thereof, the necessary adjustment entries are passed.
6) After reconciling the Head Office Account balance with the Branch Account
balance, the Head Office passes the necessary entries for incorporating
various branch balances in its books.

14.3 SOME PECULIAR ITEMS

In respect of independent branches, there are certain items which require special
accounting treatment. These items are:
i) Goods in transit
ii) Cash in transit
iii) Head Office expenses chargeable to branch
92
iv) Depreciation on branch fixed assets, the accounts of which are maintained Branch Accounts-II
at the head office level
v) Inter-branch transactions
Let us discuss these items one by one.
14.3.1 Goods in Transit
The Head Office and the branch send goods to each other quite frequently.
When goods are sent by the Head Office to the branch, the Head Office debits
the Branch Account in its books immediately. But the branch credits the Head
Office Account only when it receives the goods. Similarly, when the branch
sends or returns some goods to the Head Office, it (the branch) debits the
Head Office Account in its books immediately, but the Head Office credits the
Branch Account only when it receives the same. It is quite possible that goods
sent in the later part of the accounting year may not have been received by
the closing date of the accounting year by the Head Office or the branch, as
the case may be. Such goods are called ‘goods in transit’ for which no entry
will appear in the books at the receiving end at the time of the closing the
accounts. Hence, the balance in the Head Office Account in branch books will
not tally with the balance in the Branch Account in the Head Office books.
This will require an adjustment entry which may be passed either in the Head
Office book or in the branch books, but not in both sets of books.
If the Head Office decides to pass the adjustment entry, it will be as follows:
Goods in Transit A/c Dr.
To Branch A/c
If, however, the adjustment is made in branch books, the entry will be:
Goods in Transit A/c Dr.
To Head Office A/c
It should be noted that the adjustment entry for goods in transit shall be passed
only in one set of books, either at the Head Office level or the branch level.
Usually, such entry is made in the books of the Head Office.
14.3.2 Cash in Transit
Like goods, cash is also regularly remitted by the Head Office and the branch
to each other. For this, the entries are made in both sets of books in the same
manner, as they are made for the goods. In this case also, it is possible that
some remittances are in transit at the time of closing the books for the accounting
year. This would again lead to difference in Branch Account balance in the Head
Office books and Head Office Account balance in branch books. Hence, an
adjustment entry will have to be passed to reconcile the same. This may be
done either by the Head Office or by the branch, but not by both.
In case the Head Office decides to pass the adjustment entry, it will be as
follows:
Cash in Transit A/c Dr.
To Branch A/c
93
Hire Purchase and Inland If, however, the adjustment is made in the branch books, the entry will he:
Branches
Cash in Transit A/c Dr.
To Head Office A/c
It should be noted that for cash in transit also, the entry shall be passed in
one set of books, either at the Head Office level or at the branch level. This
entry is also made usually at the Head Office level. The reason for passing
such adjustment entries in Head Office books lies in the fact that all in-transit
items are noticed by the Head Office at the time of receiving the branch Trial
Balance and, at this stage, it is not considered desirable to alter the balances
in the branch books.
Look at illustration 1 and see how are the amounts of goods in transit and
cash in transit ascertained and the adjustment entries passed to reconcile the
difference between the Branch Account balance and the Head Office Account
balance.
Illustration 1
Following are the extracts from the Trial Balances of a Head Office and a branch.
You are required to pass the necessary journal entries for reconciling the balances
of the Head Office Account and the Branch Account.
Trial Balance

Particulars Head Office Branch Office

Dr. Cr. Dr. Cr

Rs. Rs. Rs. Rs.

Current Accounts 1,00,000 90,000
Goods sent/received 1,50,000 1,45 ,000
by Branch

Solution
The current accounts represent the Branch Account in the Head Office books
and the Head Office Account in the branch books. As per the above Trial
Balance, there is a difference of Rs. 10,000 between the two current account
balances. It is observed that there is a difference of Rs. 5,000 in the goods
sent received by branch. This can be attributed to goods in transit. The remaining
difference of Rs. 5,000 may be taken to be on account of the cash in transit.
The required adjustment entry may be passed in the books of Head Office
as follows:
Cash in Transit A/c Dr. 5,000
Goods in Transit A/c Dr. 5,000
To Branch A/c 10,000
(Being cash in transit and goods in transit adjusted)
If, however, this entry is passed in the books of the branch. it will be as follows:
94
 Cash in Transit A/c Dr. 5,000 Branch Accounts-II
Goods in Transit A/c Dr. 5,000
To Head Office A/c 10,000
(Being cash in transit and goods in transit adjusted)

14.3.3 Head Office Expenses Chargeable to Branch

The Head Office may like to allocate a part of its expenses to branches for
the centralised services at the Head Office level. As a matter of fact, quite
a good amount of time of the Head Office staff may be spent in doing the
work of the branches. Hence, it may decide to charge a part of its
expenditure on salaries to the branches. The same thing may be true for certain
other items of expenses. If the Head Office so decides to charge some expenses
to the branch, the journal entry passed in the books of the Head Office is
as follows:
Branch A/c Dr.
To Expenses (Salaries A/c)
(Being Head Office expenses chargeable to branch)
The branch will also pass a corresponding entry in its books as follows:
Head Office Expenses A/c Dr.
To Head Office
(Being Head Office expenses chargeable to branch)
Like all other expenses accounts, the Head Office Expenses Account will be
closed by transferring its balance to the Profit & Loss Account at the end of
the accounting year.

14.3.4 Depreciation on Branch Fixed Assets, Accounts

Maintained by Head Office
Sometimes, the accounts for the fixed assets of independent branches are
maintained at the Head Office level. In such a situation, all entries in respect
of branch fixed assets are made in the Head Office books. For example, when
a fixed asset is purchased for the branch, the Head Office debits the Branch
Fixed Assets Account and credits the Cash Account. No entry for this transaction
is passed by the branch unless the payment is made by the branch for this
purchase. Even if the payment for the purchase of such fixed assets is made
by the branch, it will not debit the Fixed Assets Account. In fact such payment
is treated like a remittance to the Head Office, Therefore, is debited to the
Head Office Account. But when it comes to depreciation on such fixed assets,
the branch has to pass the necessary entry in its books because the assets
were used by the branch and not by the Head Office. Normally an entry for
the depreciation on fixed assets is passed by debiting the Depreciation Account
and crediting the Fixed Asset Account. But in this situation, the branch cannot
credit the Fixed Asset Account because the accounts for its fixed assets are
maintained at the Head Office level. Hence, the entry passed for depreciation
on such fixed assets is different from the normal entry for depreciation. It is
as follows:
Depreciation A/c Dr.
To Head Office A/c
(Being depreciation on fixed assets) 95
Hire Purchase and Inland Since the account for the branch fixed assets is maintained in head office books,
Branches
the Head Office must reduce the balance in Branch Fixed Assets Account by
the amount of depreciation thereon. But, it cannot debit the Depreciation Account
because the loss relates to the branch. Hence, it makes the following journal
entry for depreciation on branch fixed assets when their accounts are maintained
by the Head Office:
Branch A/c Dr.
To Branch Fixed Assets A/c
(Being depreciation on branch fixed assets)
It should be noted that the above entries are passed only for such branch fixed
assets accounts of which are maintained by the Head Office. Any branch fixed
assets for which the branch itself maintains the accounts, the branch will
pass the normal entry for depreciation. The Head Office need not pass
an entery in its books for the amount of depreciation on such fixed assets.
14.3.5 Inter-branch Transactions
When an organisation has more than one branch, it is possible that some
transactions take place between one branch and the other. This usually happens
under instructions from the Head Office. For example, a branch may be asked
to transfer its surplus stock to some other branch which may need the same
(it may be facing shortage). In such a situation, the usual practice for the sending
branch is to regard it as a transaction of returning the goods to the Head Office.
Similarly, the receiving branch shall regard it as a transaction of receiving the
goods from the Head Office. Hence, entries are passed on the same basis in
the books of the branches and the Head Office. These are as follows:
In the books of the Head Office
Receiving Branch A/c Dr.
To Sending Branch A/c
(Being goods transferred from .......... branch to ............ branch)
In the books of the sending branch
Head Office A/c Dr.
To Goods Sent to H.O. A/c
(Being goods sent to ............ branch under instructions from H. O.)
In the books of the receiving branch
Goods from H.O. A/c Dr.
To Head Office A/c
(Being goods received from ............ branch under instruction from H.O.)
Look at illustration 2 and see how the above-mentioned peculiar items are
recorded in the books of the Head Office and the branches.
Illustration 2
Give the journal entries that would be passed in the books of the Head Office
to record the following transactions:
i) Goods amounting to Rs. 1,000 transferred from Madras branch to Bombay
branch under instructions from the Head Office.
96
ii) Depreciation on branch fixed assets accounts maintained by the Head Office: Branch Accounts-II
(Bombay Rs. 4,000 and Madras Rs. 6,000).
iii) A remittance of Rs. 6,000 made by Bombay branch to Head Office on
December 27, 2018 and received by Head Office on January 7, 2019.
iv) Goods worth Rs. 10,000 sent by the Head Office on December 25, 2018
and received by Madras branch latter on January 15, 2019.
v) A sum of Rs. 10,000 is to be charged to the Madras branch for
administrative services rendered by the Head Office.
Solution
Head Office Books
Journal

Rs. Rs
i) Bombay Branch A/c Dr. 1,000
To Madras Branch A/c 1,000
(Being goods transferred from
Madras branch to Bombay branch)
ii) Bombay Branch A/c Dr. 4,000
To Branch Fixed Assets A/c 4,000
(Being depreciation)
iii) Madras Branch A/c Dr. 6,000
To Branch Fixed Assets A/c 6,000
(Being depreciation)
iv) Goods in Transit A/c Dr 6,000
To Bombay Branch A/c 6,000
(Being Goods in transit adjusted)
v) Goods in Transit A/c Dr 10,000
To Madras Branch A/c 10,000
(Being Goods in transit adjusted)
vi) Madras Branch A/c Dr. 10,000
To Gen. P & LA/c 10,000
(Being Administrative expenses
charged to Madras branch)

Check Your Progress A

1. What do you mean by Cash in Transit?
................................................................................................................
................................................................................................................
................................................................................................................
................................................................................................................
................................................................................................................
97
Hire Purchase and Inland 2. Why does Head Office charge a part of its expenses to branches?
Branches
................................................................................................................
................................................................................................................
................................................................................................................

3. Put tick ( ) mark against the correct answer:

i) An independent branch
a) receives the goods from the Head Office.
b) purchases the goods from outside parties.
c) receives the goods from both (a) and (b) sources.
ii) The Head Office Account in the books of branch is debited with
a) cash sent to the Head Office and goods returned to the Head
Office.
b) cash and goods received from Head Office, and Head Office
expenses allocated to branch by Head Office.
c) none of the above.
iii) The adjustment entry for goods in transit is passed in the books of
a) either the branch or the Head Office.
b) branch as well as the Head Office.
c) none of them.
iv) For depreciation on fixed assets. whose accounts are maintained by
the Head Office, the Head Office
a) debits Fixed Assets A/c and credits Branch A/c.
b) debits Branch A/c and credits its Fixed Assets A/c
c) none of the above.
v) In case of inter-branch transactions, each branch
a) opens separate accounts for other branches.
b) passes no entry.
c) may treat such transactions as the transactions with the Head
Office.
vi) The Head Office Account maintained by the branch is of the nature
of
a) Real Account.
b) Personal Account.

98 c) Nominal Account.
 Branch Accounts-II
14.4 INCORPORATION OF BRANCH TRIAL
BALANCE IN THE HEAD OFFICE BOOKS
Just because an independent branch keeps full system of accounting and prepares
its own final accounts does not mean that its year-end results will not form
part of the final accounts of the Head Office. In fact, as in case of dependent
branches, the profit or loss made by an independent branch shall also be included
in the General Profit and Loss Account which shows the profit or loss of the
company as a whole. Similarly, its assets and liabilities shall also be shown as
part of the assets and liabilities of the company. This is done by preparing the
combined (consolidated) Balance Sheet of the Head Office and its branches.
Thus, it becomes necessary for the Head Office to incorporate the branch
balances in the Head Office books by means of suitable journal entries at the
end of the accounting period.
The incorporation of branch balances involves the following two steps:
i) incorporation of branch profit or loss, and
ii) incorporation of branch assets and liabilities.
For incorporation of the branch profit or loss, the Head Office may either pass
various entries to include all revenue items and prepare a proper Branch Trading
and Profit & Loss Account or simply pass one entry for profit or loss made
by the branch after working it out with the help of a Memorandum Branch
Trading and Profit & Loss Account. The first method is called ‘detailed
incorporation’ and the second method is called ‘abridged incorporation’ (or
simply short cut method). Whatever the method for incorporating branch profit
or loss, the entries for incorporating branch assets and liabilities remain the same.
14.4.1 Detailed Incorporation
As stated earlier, under this method, the Head Office prepares a proper Branch
Trading and Profit & Loss Account and makes entries for all revenue items
before incorporating the branch assets and liabilities in its books. The entries
passed under this method are as follows:
1) For items on the debit side of the Trading Account
Branch Trading A/c Dr.
To Branch A/c
(This entry is passed for the total amount of items like opening stock, net
purchases, wages, goods received from HO., carriage inwards, etc.)
2) For items on the credit side of the Trading Account
Branch A/c Dr.
To Branch Trading A/c
(This entry is passed for the total amount of items like net sales, closing
stock, etc.)
3) For branch gross profit
Branch Trading A/c Dr
To Branch Profit & Loss A/c
(In case of gross loss, the above entry will be reserved)
99
Hire Purchase and Inland 4) For items on the debit side of the Profit and Loss Account
Branches
Branch Profit & Loss A/c Dr.
To Branch A/c
(This entry is passed for the total amount of items like salaries, rent, bad
debts, repairs, depreciation, etc.).
5) For items on the credit side of the Profit & Loss Account
Branch A/c Dr
To Branch Profit & Loss A/c
(This entry is passed for total amount of items like interest received, discount
received, commission received, etc.)
6) For branch net profit
Branch Profit & Loss A/c Dr.
To General Profit & Loss A/c
(If there is net loss, the above entry will be reversed)
7) For branch assets
Branch Assets A/c Dr.
To Branch A/c
(Each asset should be debited individually)
8) For Branch liabilities
Branch A/c Dr.
To Branch Liabilities A/c
(Each liability credited individually. This should not include H.O. A/c
balance)
As a result of the last two entries (7 and 8), the Branch Account in the Head
Office books will stand closed because the net assets (assets minus liabilities)
of the branch are equal to the balance in the Branch Account after branch net
profit or net loss has been incorporated in Head Office books. In order to
open the Branch Account in the next year’s books of the Head Office and
show the amount due from the branch, the entries for branch assets and branch
liabilities (7 and 8 above) shall be reversed at the beginning of the next year.
Look at illustration 3 and see how branch balances are incorporated in the
Head Office books when detailed incorporation method is followed.
Illustration 3
On December 31, 2018, the Trial Balance of the Kanpur branch stood as
follows:
Dr. Cr.
Rs. Rs.
Stock on January 1, 2018 12,000
Furniture 4,800
Debtors 11,200
Goods received from H.O. 32,000
Salaries, rent and expenses 4,400
Cash in hand 3,600
Head Office Account 22,000
Sales 45,600
Sundry creditors 400
100 68,000 68,000
Stock on December 31, 2018 was Rs. 9,200. Branch Accounts-II

Pass the necessary journal entries to incorporate Kanpur branch balances in

the Head Office books, and prepare the Kanpur Branch Account in the books
of the Head Office.
Solution
Head Office Books
JOURNAL

Rs. Rs
2018
Dec.31 Kanpur Branch Trading A/c Dr 44,000
To Kanpur Branch A/c 44,000
(Being incorporation of opening stock and
goods received from HO.)
“ 31 Kanpur Branch A/c Dr. 54,800
To Kanpur Branch Trading A/c 54,800
(Being incorporation of branch sales and
closing stock)
“ 31 Kanpur Branch Trading A/c Dr. 10,800
To Kanpur Branch P&L A/c 10,800
(Being gross profit transferred to
Branch P & L A/c)
“ 31 Kanpur Branch P & LA/c Dr. 4,400
To Kanpur Branch A/c 4,400
(Being incorporation of branch expenses)
“ 31 Kanpur Branch P & LA/c Dr. 6,400
To General Profit & Loss A/c 6,400
(Being incorporation of branch expenses)
“ 31 Branch Closing Stock A/c Dr. 9,200
Branch Furniture A/c Dr. 4,800
Branch Debtors A/c Dr 11,200
Branch Cash A/c Dr. 3,600
To Kanpur Branch A/c 28,800
(Being incorporation of branch assets)
“ 31 Kanpur Branch A/c Dr. 400
To Branch Creditors A/c 400
(Being incorporation of branch liabilities)

Kanpur Branch Account

Dr. Cr.

Rs. Rs.
To Balance b/d 22,000 By Branch Trading A/c 44,000
To Branch Trading A/c 54,800 By Branch P & L A/c 4.400 101
Hire Purchase and Inland To Creditors 400 By Closing Stock 9,200
Branches
By Furniture 4,800
By Debtors 11,200
By Cash 3,600
77,200 77,200

14.4.2 Abridged Incorporation

Incorporation of branch balances in the Head Office books can also be effected
with the help of a short cut method known as the ‘abridged incorporation’.
Under this method, we prepare a Memorandum Branch Trading and Profit &
Loss Account and pass a journal entry only for the net profit or net loss. Thus,
the six entries passed under the detailed incorporation method are replaced by
just one entry which is as follows:
Branch Account Dr.
To General Profit & Loss A/c
Being branch net profit incorporated)
In case of net loss, the above entry shall be reversed.
Look at illustration 4 and see how branch balances are incorporated in the
Head Office books with the help of the short cut method.
Illustration 4
From the particulars given in illustration 3, prepare Memorandum Branch Trading
and Profit & Loss Account, pass the necessary journal entries to incorporate
the Kanpur branch balances, and prepare Kanpur Branch Account in the books
of the head office.
Solution :

Books of Head Office

Memorandum Kanpur Branch Trading and Profit & Loss Account

for the year ended December 31, 2018

Dr. Cr.

Rs. Rs.
To Opening Stock 12,000 By Sales 45,600
To Goods Received from H.O. 32,000 By Closing Stock 9,200
To Gross Profit c/d 10,800
54,800 54,800
To Salaries, Rent and Expenses 4,400 By Gross Profit b/d 10,800
To Net Profit 6,400
10,800 10,800

102
Solution Branch Accounts-II
Journal
Rs. Rs.
2018
Dec. 31 Kanpur Branch A/c Dr. 6,400
To General Profit & Loss A/c 6,400
(Being branch net profit incorporated)
“ 31 Kanpur Branch Closing Stock A/c Dr. 9,200
Kanpur Branch Furniture A/c Dr. 4,800
Kanpur Branch Debtors A/c Dr. 11,200
Kanpur Branch Cash A/c Dr. 3,600
To Kanpur Branch A/c 28,800
(Being branch assets incorporated)
“ 31 Kanpur Branch A/c Dr. 400
To Kanpur Branch Creditors A/c 400
(Being branch liabilities incorporated)

Kanpur Branch Account

Dr. Cr.
Rs. Rs.

To Balance b/d 22,000 By Closing Stock 9,200

To General Profit & 6,400 By Furniture 4,800
Loss A/c By Debtors 11,200
To Creditors 400 By Cash 3,600
28,800 28,800

14.5 CLOSING ENTRIES IN BRANCH BOOKS

At the end of the accounting period, the branch books have also to be closed.
For this purpose, the branch can pass the usual closing entries for transferring
all revenue items to its Trading and Profit & Loss Account and ascertaining
its net profit or net loss. The amount of net profit or net loss should be transferred
to the Head Office Account by passing the following journal entry.
In case of net profit
Profit and Loss A/c Dr.
To Head Office A/c
In case of net loss
Head Office A/c Dr.
To Profit and Loss A/c
After the above entry for transferring net profit or net loss to the Head Office
Account has been passed, the balance in the Head Office Account will be equal
to the branch net assets (assets minus liabilities). The branch can then prepare
its Balance Sheet by showing the Head Office Account balance on the liabilities
side as this account would normally show a credit balance. If, the Head Office
Account shows a debit balance, the same will appear on the assets side of
the Balance Sheet. 103
Hire Purchase and Inland The accounts pertaining to assets and liabilities can also be closed, if required,
Branches
by transferring their balances to the Head Office Account. For this purpose,
the following two journal entries will be passed in the branch books.
1) For transfers of assets
Head Office A/c Dr.
To Assets A/c
The assets should be credited individually
2) For transfer of liabilities
Liabilities A/c Dr.
To Head Office A/c
(The liabilities should be debited individually)
As a result of the above entries, the Head Office Account shall also be closed
as it will not show any balance.
Look at illustration 5 and see how does a branch close its books.
Illustration 5
A Delhi trader has independent branch at Patna. Its Trial Balance for the year
ending December 31, 2018 is given below. Pass journal entries to close the
books of Patna branch and prepare its Head Office Account.
Trial Balance
Dr. Cr.

Rs. Rs.
Purchases 25,600 Creditors 5,400
Stock on 1.1.18 16,400 Sales 69,900
Wages 13,100 Head Office 28,000
Factory Expenses 6,800 Discount 300
Salaries 8,000 Purchase Returns 600
Rent 3,400
Sundry Expenses 4,000
Goods Received from HO. 14,400
Debtors 11,000
Cash 1,500
1,04,200 1,04,200

Additional information
1) The accounts of the branch fixed assets were maintained in the Head Office
which show machinery of Rs. 50,000 and furniture of Rs. 2,000
2) Depreciation is to be charged @ 10% on Machinery and 15% on Furniture.
3) Rs. 300 are due for salaries.
4) A remittance of Rs. 8,000 made by branch on December 29, 2018, was
received by head office on January, 3, 2019
5. Clossing stock at branch was Rs. 28,700
104
Solution Branch Accounts-II

Books of Patna Branch

Journal

2017 Rs. Rs.

Dec.31 Depreciation A/c Dr. 5,300
To Head Office A/c 5,300
(Being depreciation on fixed assets accounts maintained by
Head Office)
“ 31 Cash in Transit A/c Dr. 8,000
To Head Office A/c 8,000
(Being outstanding salaries)
“ 31 Salaries A/c Dr. 300
To Salaries Outstanding A/c 300
( Being outstanding salaries)
“ 31 Profit & Loss A/c Dr. 2,200
To Head Office A/c 2,200
(Being net profit transferred)
“ 31 Head Office A/c Dr. 49,200
To Debtors
To Cash A/c 11,000
To Cash in Transit A/c 1,500
To Closing Stock A/c 8,000
(Being assets account balance transferred) 28,700
“ 31 Creditors A/c Dr. 5,400
Salaries Outstanding A/c Dr. 300
To Head Office A/c 5,700
(Being liabilities account balances transferred)

Head Office Account

Dr. Cr.
Rs. Rs.
To Balance c/d 43,500 By Balance b/d 28,000
By Depreciation A/c 5,300
By Cash in Transit A/c 8,000
By Profit & Loss A/c 2,200
43,500 43,500
To Debtors 11,000 By Balance b/d 43,500
To Cash A/c 1,500 By Creditors 5,400
To Cash in Transit A/c 8,000 By Salaries outstanding A/c 300
To Closing Stock A/c 28,700 A/c
49,200 49,200

105
Hire Purchase and Inland
Branches

Working Notes
Trading and Profit & Loss Account
Dr. Cr.
Rs. Rs.
To Opening Stock A/c 16,400 By Sales 69,900
To Purchases 25,600 By Closing Stock 28,700
Less Return 600 25,000
To Goods from H.O. 14,400
To Wages 13,100
To Factory Expense 6,800
sTo Gross Profit c/d 22,900
98,600 98,600
To Salaries 8,000 By Gross Profit b/d 22,900
Add O/s 300 8,300 By Discount 300
To Rent 3,400
To Depreciation 5,300
To Sundry Expenses 4,000
To Net Profit 2,200
23,200 23,200

Notes: 1) The closing entries for transfer of revenue items have been omitted.
2) The balance in Head Office Account after adjustment entries and
transfer of net profit is Rs. 43,500. This is equal to the net assets
at Patna as given below:
Rs. Rs.
Assets
Debtors 11,000
Cash 1,500
Cash in Transit 8,000
Closing Stock 28,700
Liabilities: 49,200
Creditors 5,400
Salaries O/s 300 5,700
Net Assets 43,500
3) After the assets and liabilities are transferred to Head Office
Account, it stands closed.
Check Your Progress B
1. Why is the incorporation of branch balances necessary in the books of
the Head Office?
...............................................................................................................

106 ...............................................................................................................
2/ Name the two methods of incorporating branch balances in the books of Branch Accounts-II
the Head Office?
...............................................................................................................
...............................................................................................................
...............................................................................................................
3. Fill in the blanks:
i) The short cut method of incorporating the branch balances is called
………….
ii) The branch net profit can be incorporated in the Head Office books
by debiting the …………..Account and crediting the ……………
Account.
iii) The net assets of the branch are equal to the …………… of the
Branch Account after the entry of branch net profit or net loss has
been passed in Head Office books.
iv) The balance in the Head Office Account in branch books represents
the branch………………. after the net profit or not loss has been
transferred to this account.

14.6 A COMPREHENSIVE ILLUSTRATION

As stated earlier, any organisation having branches has to present the final
accounts of the organisation as a whole and not separately for the Head Office
and for the branches. Hence, it prepares General Profit and Loss Account which
includes the profit or loss made by the branches and draws a consolidated
Balance Sheet to show the assets and liabilities of both the Head Office and
the branch office. Illustration 6 below will help you to understand the preparation
of a consolidated Balance Sheet.
Illustration 6
Following are the Trial Balances of the Head Office and its branch as on
December 31, 2018.

Particulars Head Office Branch Office

Dr. Cr. Dr. Cr

Rs. Rs. Rs. Rs.

Capital 1,50,000
Fixed Assets 86,000 26,000
Stock 34,700 20,700
Debtors and Creditors 17,820 13,900 14,800 23,000
Cash 10,740 1,500
Profit & Loss 14,720 13,100
Branch Office 29,360
Head Office A/c 26,900
1,78,620 1,78,620 63,000 63,000
107
Hire Purchase and Inland Prepare the Balance Sheet of the business as on December 31, 2018 and pass
Branches
the necessary journal entries in both sets of books to record the adjustments
dealing with the following.
a) On December 28, the branch had sent a cheque for Rs. 1,600 to the
Head Office but not yet received by them.
b) Goods valued at Rs. 560 had been forwarded by the Head Office to the
branch and invoiced on December 30, but were not yet received by the
branch.
c) It was agreed that the branch should be charged with Rs. 400 for
administration services rendered by the Head Office during the year.
d) Rs. 1,250 for depreciation on branch assets, the accounts of which are
maintained by the Head Office, is to be provided for.
e) The balance of profit shown by the branch is to be transferred to the Head
Office books.
Solution
Head Office Journal
2018 Rs. Rs.
1 Cash in Transit A/c Dr. 1,600
To Branch A/c 1,600
(Being cash sent by branch but not received by H.O.
till December31)
2 Goods in Transit A/c Dr. 460
To Branch A/c 460
(Being goods invoiced on December 31 not yet received
by the branch)
3 Branch A/c Dr. 400
To Gen. Profit & Loss A/c 400
(Being administrative expenses charged by H.O. to
the Branch)
4 Branch A/c Dr. 1,250
To Branch Fixed Assets A/c 1,250
(Being depreciation on branch fixed assets accounts
provided by H.O.)
5 Branch A/c Dr. 11,450
To General P & L A/c 11,450
(Being profit of branch transferred to General P & L A/c)

Branch Journal

2018 Rs. Rs.

1 Profit & Loss A/c Dr 400
To Head Office A/c 400
(Being administrative expenses charged by H.O.)

108
 Branch Accounts-II
2 Depreciation A/c Dr. 1,250
To Head Office A/c 1,250
(Being depreciation on Branch fixed assets accounts
which are maintained by H.O.)
3 Profit & Loss A/c Dr. 11,450
To Head Office A/c 11,450
(Being transfer of profit credited to Head Office A/c)

Balance Sheet as on December 31, 2018

Liabilities Rs. Assets Rs.
Capital 1,50,000 Fixed Assets
Creditors H.O. 86,000
H.O. 13,900 Branch 26,000
Branch 23,000 36,900 Less Dep. 1,250 24,750 1,10,750
Profit & Loss A/c Stock
H.O. 15,120 H.O. 34,700
Branch 11,450 26,570 Branch 20,700
Goods in Transit 460 55,860
Debtors
H.O. 17,820
Branch 14,800 32,620
Cash
H.O. 10,740
Branch 1,500
Cash in Transit 1,600
Cash for Exp. 400 14,240
2,13,470 2,13,470

Working Notes
1) The profits at branch and Head Office have been ascertained by preparing Profit and Loss
A/c of the Head Office as well as that of branch.
Branch Profit and Loss Account
Dr. Cr.

Rs. Rs.
To Head Office Exp. 400 By Profit (as given) 13,100
To Depreciation 1,250
To Profit taken to General P & L A/c 11,450
13,100 13,100

109
Hire Purchase and Inland General (H.O.) Profit and Loss Account
Branches
Dr. Cr.

Rs. Rs.
To Profit c/d 15,120 By Profit (as given) 14,720
By Branch A/c 400
15,120 15,120
To Net Profit
(taken to Balance Sheet) 26,570 By Profit b/d 15,120
By Branch A/c 11,450
(profit made by branch)
26,570 26,570
2) The Head Office A/c in the books of branch and Branch A/c in the books of Head Office will
appear as follows:
Branch Books
Head Office Account
Dr. Cr.

Rs. Rs.
To Balance c/d 40,000 By Balance b/d 29,900
By H.O. Exp. A/c 400
By Depreciation 1,250
By P & L A/c 11,450
40,000 40,000
Head Office Books
Branch Account
Dr. Cr.

Rs. Rs.
To Balance b/d 29,360 By Goods in Transit 460
To Branch Assets A/c 1,250 By Cash in Transit 1,600
To General P & L A/c 11,450 By Balance c/d 40,000
42,060 42,060

3) The balance in the Branch Account in Head Office books and the balance
in Head Office Account in branch books show the same amount. i.e..
Rs. 40,000. But, the Branch Account balance is a debit balance while
the Head Office Account balance is a credit balance. Having merged branch
accounts with the Head Office accounts, these two balance cancel each
other and so they do not appear in the consolidated Balance Sheet.

14.7 LET US SUM UP

Independent Branches are those branches which keep full system of accounting
110 and enjoy certain amount of autonomy in functioning. They maintain complete
records on double entry system and prepare their own trial balances. The Head Branch Accounts-II
Office simply maintains a personal account for each branch which shows all
transactions that take place between the branch and the Head Office. Similarly,
each branch maintains a Head Office Account to show the corresponding entries.

There are certain transactions which require special treatment both in Head Office
and branch books. These are: (i) goods in transit, (ii) cash on transit, (iii) Head
Office expenses chargeable to branch, (iv) depreciation on branch fixed assets
the accounts of which are maintained at the Head Office level, and (v) inter-
branch transactions.

At the end of the accounting year, the branch sends its Trial Balance to the
Head Office. This enables the Head Office to incorporate all branch balances
in its books so as to include them in the final accounts of the organisation.
The incorporation entries can be passed for all items given in branch Trial Balance
(called detailed incorporation), or simply for branch profit/loss (based on
Memorandum Branch Profit and Loss Account) and for branch assets and
liabilities (called abridged incorporation or short cut method). After the
incorporation entries have been passed, the Branch Account stands closed. At
the beginning of the next year, the opening entries are passed for branch assets
and liabilities which restores the balance in the Branch Account. The branch
closes its books by transferring its profit or loss to Head Office Account which
then shows a credit balance equal to the net assets with the branch.

14.8 KEY WORDS

Abridged Incorporation: A short cut method of incorporating the branch
balances in Head Office books.

Cash-in-transit: Cash remitted by branch to Head Office, but not received

by Head Office by the end of the accounting year,or vice versa.

Consolidated Balance Sheet: Combined Balance Sheet showing both Head

Office and branch assets and liabilities.

Goods-in-transit: Goods sent by Head Office to branch but not received by

branch by the end of the accounting year, or vice versa.

Inter-branch transactions: The transactions between two or more branches

under the same Head Office.

14.9 ANSWERS TO CHECK YOUR PROGRESS

A 3. i) c

ii) a

iii) a

iv) b

v) c

vi) b 111
Hire Purchase and Inland B 3. i) Abridged Incorporation
Branches
ii) Branch Account, General Profit & Loss Account
iii) balance
iv) net assets

14.10 TERMINAL QUESTIONS/EXERCISES

Questions
1) How are branch balances incorporated in Head Office books at the end
of the accounting year?
2) Write short notes including accounting treatment on the following:
a) Cash in Transit
b) Goods in Transit
c) Head Office Expenses Chargeable to Branch
d) Inter-branch Transactions
3) How do you deal with purchase and depreciation of branch fixed assets
whose accounts are maintained at the Head Office level?
Exercises
1) Show what entries would be passed by the Head Office to record the
following transactions in their books.
a) Goods amounting to Rs. 1,000 transferred from Varanasi branch to
Allahabad branch under intimation from H.O.
b) Depreciation amounting to Rs. 2,000 on branch fixed assets when
such assets’ accounts are opened in the Head Office books.
c) A remittance of Rs. 3,000 made by the Calcutta branch to Head Office
on December 25, 2018 and received by Head Office on January 4,
2019.
d) Goods of Rs. 10,000 sent by the Head Office on December 27, 2018
and received by Calcutta branch on January 10, 2019.
e) The Allahabad branch collected Rs. 4,000 from Allahabad customers
of Head Office.
f) The Varanasi branch paid Rs. 25,000 for machinery purchased by
the Head Office at Varanasi.
2) Show the journal entries that will be passed by Surat branch to record
the following transactions in its books.
a) Goods amounting to Rs. 6,000 transferred from Surat branch to
Lucknow branch under instructions from Calcutta Head Office
assuming that Head Office keeps a control on inter-branch transactions.
b) Depreciation on Lucknow Branch Machinery Rs. 4,000 and Surat
Branch Machinery Rs. 3,000, when the Branch Machinery Account
is maintained in Head Office books.
c) A remittance of Rs.10,000 made by Surat branch to Head
Office on December 28, 2018 but received by the Head Office on
112 January 4, 2019.
 d) Goods worth Rs. 15,000 sent by Head Office to Surat branch on Branch Accounts-II
December 26, 2018 but received by the latter on January 2, 2019.
3) On December 31, 2018, the Trial Balance of Varanasi branch stood as
follows:

Debit Credit
Particulars Rs. Rs.

Stock on January 1, 2018 12,000

Furniture 4,800
Debtors 11,200
Goods Received from Delhi HO. 32,000
Salaries, Rent and Expenses 4,400
Cash in Hand 3,600
Delhi Office Account 22,000
Sales 45,600
Sundry Creditors 400
Total Rs. 68,000 68,000

Stock on December 31, 2018 was Rs. 9,200. Prepare (1) Trading and
Profit & Loss Account, Balance Sheet and Head Office Account in Varanasi
branch books (2) Prepare journal entries necessary to incorporate the
Varanasi Branch Trial Balance and show the Varanasi Branch Account in
the Head Office books.
(Answer: Branch Profit Rs. 6,400; Balance Sheet Total Rs. 28,800; Head
Office A/c Balance Rs. 28,400 and Total of Varanasi Branch A/c Rs,
77,200)
4) The Kanpur branch of Wahi Bros. sent the following Trial Balance to Head
Office, as on December 31, 2018:

Rs. Rs.
Sundry Debtors 12,000 Sundry Creditor 8,600
Cash in hand 6,250 Goods returned to H.O. 2,250
Furniture 1,900 Sales 1,12,500
Stock on 1-1-88 2,250 Head Office A/c 10,250
Goods from H.O. 34,000
Purchases 66,450
Wages & Salaries 5,500
Trade Expenses 5,250
1,33,600 1,33,600

The stock on December 31, 2018 was Rs. 5,200. Pass the necessary
journal entries to incorporate the above figures and show Branch A/c in
Head Office books, and Trading and Profit & Loss A/c and Balance Sheet
in the branch books.
(Answer: Branch profit Rs. 6,500; Balance Sheet Total Rs. 25,350; Total
of Branch A/c Rs. 1,38,800.)
5) Following is the Trial Balance of Kanpur Branch of Varanasi Head Office.
Prepare Trading and Profit & Loss A/c and Balance Sheet in the books
of branch. Also show Head Office A/c in the books of branch: 113
Hire Purchase and Inland
Branches Rs. Rs.
Furniture & Fixtures 1,500 Cash in Bank 3,000
Purchases 20,000 Carriage etc. 150
Goods from H.O. 40,000 Bad Debts 100
Sales 80,000 Allowances to Customers 200
Sundry Debtor 10,000 Bills Receivable 4,000
Sundry Creditors 12,000 Stock on 1-1-2018 10,000
Head Office A/c Salaries 6,400 Returns Inwards 1,000
General Exp. 600 Returns to H.O. 400
Rent & Taxes 600

Closing Stock on December 31, 2018 Rs. 9,000

(Answer: Branch Net Profit Rs. 10,350; Balance Sheet Total Rs. 27,500;
H.O. A/c Balance including net profit Rs. 15,500.)
6) From the following balances, prepare the Branch Current Account in the
books of head office and Head Office Current A/c in the books of branch.

Head Office Branch

Particulars
Dr. Cr. Dr. Cr.
Rs. Rs. Rs. Rs.

Branch Current A/c 5,000 - - -

Goods sent to Branch - 7,800 - -
Goods received from H,O. - - 7,000 -
Head Office Current A/c - - - 1,400

(Answer: Goods in Transit Rs. 800: Cash in Transit Rs. 2,800.)

7) A limited company with its Head Office in Delhi has a branch at Kota
which obtains goods from the Head Office as well as from outside suppliers.
The branch keeps a separate set of books on June 30, 2019. The trial
balances of the Head Office and its branch were as follows:

Head Office Branch

Particulars Dr. Cr. Dr. Cr.
Rs. Rs. Rs. Rs.
Share Capital  30,000  
P & L Account balance on 1-7-18  4,000  
Fixed Assets 16,000   

Opening Stock 14,000   

Debtors and Creditors 17,000 10,000 1,500 2,050
Cash 3,000   
Purchases and Sales 1,20,000 1,40,000 6,750 20,500
Sundry Expenses 15,000   
Goods from HO. to Branch    
Current Accounts on 30-6-19 11,000   
1,96,000 1,96,000 32,900 32,900

114
 The difference between the balances of Head Office and the Branch Current Branch Accounts-II
Accounts is due to goods and cash being in transit at the close of the
year. Fixed assets are to be depreciated at 10 per cent. Stocks on June
30, 2019 were: Head Office Rs. 10,000 and Branch Rs. 2,100.
Prepare consolidated Balance Sheet of the company. Also show journal
entries for the adjustments and the incorporation of Branch Trial Balance.
(Answer: Balance Sheet Total Rs. 56,850.)
Hints: Goods in Transit Rs. 500; Cash in Transit Rs. 150; Branch Net
Loss Rs. 600; H.O. Net Profit (excluding branch net loss) Rs. 11,400.

14.11 SOME USEFUL BOOKS

Maheshwari. S.N., 1998: Introduction to Accounting Vikas Publishing House,
New Delhi. (Chapters 4 & 5, Section II).
Gupta R L. and M. Radbaswamy, 1998.Advanced Accounting Sultan Chand
& Sons, New Delhi (Chapters 19 & 20).
Shukla.M.C..Grewal T.S. & S.C. Gupta, 1998 Advanced Accounts S. Chand
& Co. Ltd., New Delhi, Chapter 11.
MongaJ.R..Ahuja G.C. & Ashok Sehgal, 1998 :Advanced Accounting National
Publishing House Sew Delhi.

Note : These questions will help you to understand the unit better. Try to
write answers for them. But, do not submit your answers to the
University for assessment. These are for your own practice only.

115