Elective Course in Commerce
ECO – 14: Accountancy - II

Dear Students,

As explained in the Programme Guide, you have to do one Tutor Marked Assignment in this Course.

Assignment is given 30% weightage in the final assessment. To be eligible to appear in the Term-end examination, it is compulsory for you to submit the assignment as per the schedule. Before attempting the assignments, you should carefully read the instructions given in the Programme Guide.

This assignment is valid for two admission cycles (July 2020 and January 2021). The validity is given below:

1)         Those who are enrolled in July 2020, it is valid up to June 2021.

2)         Those who are enrolled in January 2021, it is valid up to December 2021.

You have to submit the assignment of all the courses to The Coordinator of your Study Centre. For appearing in June Term-End Examination, you must submit assignment to the Coordinator of your study centre latest by 15th March. Similarly for appearing in December Term-End Examination, you must submit assignments to the Coordinator of your study centre latest by 15th September.

Course Code: ECO - 14
Course Title: Accountancy - II
Assignment Code: ECO – 14/TMA/2020-21
Coverage: All Blocks
Maximum Marks: 100

Attempt all the questions:

1. Explain various systems of maintaining the accounts of a dependent branch and describe how is profit ascertained under each system? (20)

Ans: Dependent Branch: The term ‘Dependent Branch’ means a branch which does not maintain its own set of books. All records have to be maintained by the head office. When the business policies and the administration of a branch are wholly controlled by the head office, its accounts also are maintained by it. In such a case, Branch accounts are written up at the head office out of reports and returns received from the branch.

Methods of Branch Accounting – Dependent Branch

In case of a dependent branch, the head office may keep accounts of the branch acc to any of the following systems

1)      Debtors System – Most Popular Method

2)      Stock and Debtors system

3)      Wholesale System

4)      Final Account system 

(1) Debtors System (Synthetic Method): This system is adopted in case of branches of small size. Under this system, a branch account is opened separately for each branch in the books of head office. This account is nominal account in nature and is prepared to calculate profit and loss for each branch. The goods supplied by the head office to the branch may be either at cost price or at cost plus profit. Following entries are passed in the books of head office under this method:

Branch Accounting Entries in case of dependent branch in the books of head office:


Debit / Credit

1. When Goods are sent to branch

Branch A/c Dr.

To Goods Sent to Branch A/c

2. For return of goods to H.O.

Goods Sent to Branch A/c  Dr

To Branch A/c

3. For Cheque or draft sent to branch for exp.

Branch A/c Dr

To Bank A/c

4. For Cheque or Draft received for remittance

Bank A/c Dr

To Branch A/c

5. For Closing Balance of Assets

Branch Assets A/c Dr

To Branch A/c

6. For opening Balance of assets

Branch A/c Dr

To Branch Assets A/c

7. For Closing Balance of Liabilities

Branch A/c

To Branch Liabilities A/c

8. For opening Balance of Liabilities

Branch Liabilities A/c Dr

To Branch A/c

9. For Branch Profit

Branch A/c Dr

To General Profit and Loss A/c

10. For Branch Loss

General Profit and Loss Ac/ Dr

To Branch A/c

Under this method, a separate branch account for each branch is prepared to find profit or loss of each Branch:





To Branch Assets (Opening balance)

- Branch Cash

- Branch Debtors

- Branch Debtors

- Branch Furniture

To Goods Sent to Branch

Less: Return to Head office

To Bank (Expenses paid by HO)

To Branch Liabilities (Closing Balance)


By Branch Liabilities (Opening Balance)

By Bank (Remittance)

- Cash Sales

- Collection from debtors

- Any cash realised at branch

Less: Expenses paid by branch manager

By Branch Assets (closing balance)


Treatment of Certain Branch Transactions in case of dependent branch

1.       Branch expenses paid by branch: If petty cash is maintained – deducted with petty cash balance and only closing balance shown in account. If petty cash is not maintained – deducted with remittance.

2.       Depreciation on fixed assets – Not shown in branch account.

3.       Credit sale, bad debts, sales returns, allowance and discount allowed – not shown in branch account but shown in branch debtor’s account.

4.       Goods in transit - Either shown on the both sides of the branch account or will be ignored totally.

5.       Losses due to pilferage, wastage and other losses of stock due to normal or abnormal – ignored while preparing branch accounting.

6.       Purchase of fixed asset by the branch.  If the branch has purchased any fixed assets, then on one hand branch account will be credited by the head office and on the other the remittance from the branch will be reduced by the amount. If branch has purchased the asset on credit basis and liability arising from such purchase will be shown on the debit side of branch account.

7.       Sale of Fixed Asset. If the sale is for cash, cash remittance will increase from the branch but asset will reduce in value to be shown on the credit side of the branch account as this is automatically adjusted through the above adjustments.

(2) Stock and Debtors System: Profit and loss of a branch can be found out by preparing branch account but there is another method for the same purpose. This method is known as stock and debtors method. If it is desired to exercise a more detailed account control over the working of a branch, the accounts of the branch are maintained under which is described as the stock and debtors method.

(3) Wholesale Branch System: Manufacturers may sell goods to the consumers either through the wholesalers and approved stockists or through their branches. In order to know whether self-retailing through branch is more profitable than wholesaling, it is necessary to make distinction between profit due to wholesale and profit due to retail business of the branch. Wholesale price is always less than retail price.

(4) Final Accounts System: The head office can also ascertain the profit or loss of a dependent branch by preparing branch trading and profit and loss a/c at cost. In such cases, the head office may also maintain a branch account. 

2. State the similarities and dissimilarities of Hire Purchase System and Installment Payment System. Describe the difference between the accounting treatment under the Hire Purchase System and Installment Payment System. (20)

Ans: Hire Purchase System Meaning:

A trader could sell goods either for cash or for credit. For goods sold on credit, the payments may be made by the buyer in lump sum on a future date, or in installments spread over for a specified period of time. When goods are sold on credit, for which payment is made by the buyer in installments over a period of time, it is called purchase system or installment system.

Hire Purchase System refers to the system wherein, the seller of goods transfers the goods to the buyer without transferring the ownership of goods. The payment for the goods will be made by the buyer in installments. If the buyer pays all the installments, the ownership of the goods will be transferred, on payment of the last installment. However, if the buyer does not pay for any installment, the goods will be repossessed by the seller and the money paid on earlier installments will be treated as hire charges for using the goods. So, under this system, the transaction may result in purchasing of goods by the buyer or in hiring the goods. Hence, the system is called Hire Purchase System.

Installment Purchase System Meaning:

Installment payment system (also called the deferred installments) is a system where the buyer is given the ownership as well as the possession of the gods at the time of signing the contract. The buyer has the facility to pay the price in installments.

According to J.B. Batliboi, Installment Purchase System is a system under there is an agreement to purchase and pay by installments, the goods which become the property of the Purchaser immediately when he receives the delivery of the same.

Similarities between Hire Purchase System and Installment Purchase System: There are some similarities between both the systems which are listed below:

1. In both the system, the buyer has the facility to pay the price in installment.

2. In both the system, interest is charged on the amount outstanding.

Differences between Hire Purchase System and Installment Purchase System:

Hire-Purchase System

Installment Purchase

It is a contract of hiring.

It is a contract of sale.

It is transferred by seller to buyer only after payment of all installments.

It is transferred by seller to buyer, immediately on signing the contract.

In this case, the buyer is like a bailee

In this case, the buyer is not in the position of a bailee

Such risk is on the seller.

Such risk is on the buyer.

On default of payment of any installment by the buyer, the seller can repossess the goods.

On default and payment of any installment by the buyer, seller cannot repossess the goods, but can file a suit in the court of law against the buyer for the recovery of unpaid price.

The buyer can exercise the option of return of goods.

The buyer cannot exercise the option of return of goods.

The buyer cannot dispose the goods, until the payment of last installment. If disposed, the third party buyer does not get a better title.

The buyer has the right to dispose the goods, even if all installments are not yet paid.

Difference between the accounting treatment under the hire purchase system and installment purchase system:

1. In hire purchase system, when goods are sold it is shown as H.P. Sales in the books of vendor. But in case of installment purchase system, when goods are sold it is shown as actual sales.

2. In hire purchase system, interest suspense account showing total interest included in hire purchase price may or may not be opened. But in case of installment purchase system, total interest is transferred to interest suspense account.

3. What journal entries are passed at the time of revaluation of assets and liabilities when a new partner is admitted in to the partnership? How will you work out the new capital of each partner if the capital is to be adjusted in the new profit sharing ratio? Give examples. (20)

Ans: Journal Entries in case of revaluation of assets and liabilities when a new partner is admitted:

Whenever a new partner is admitted, it is desirable to revalue the assets and liabilities of the firm to show them at their true and fair values. Revaluation of assets and liabilities is necessary because with the passage of time the value of some assets might have been increased while the value of some assets might have been decreased; the same is the case with the liabilities. Generally, no adjustments are made in this respect. Therefore, the actual values of various assets and liabilities may be different from the values stated in the balance sheet. It is, therefore, desirable from the point of view of the new partner as well as old partners the value of assets and liabilities should be revalued.

For the purpose of revaluation, a separate account is opened which is called Revaluation Account. It is a nominal account. The Revaluation account is credited if there is an increase in the value of assets or decrease in the value of liabilities. On the other hand it is debited if there is any decrease in the value of assets or an increase in the value of liabilities. This account is a nominal account and is sometimes also called Profit and Loss adjustment account. The profit or Loss arising due to revaluation is divided among the old partners in their old ratio.

Journal Entries

In the books of the firm



Amount (Dr)

Amount (Cr)

Revaluation Account                                Dr.

To Sundry Assets [decrease in value]

To Sundry Liabilities [increase in value]

To Unrecorded Liabilities

(Being loss on revaluation of assets and liabilities transferred to revaluation account)




Sundry Assets [Increase in value]                          Dr

Sundry Liabilities [Decrease in value]                   Dr

Unrecorded Assets Account                                   Dr

To Revaluation Account

(Being profit on revaluation of assets and liabilities transferred to revaluation account)




For Distribution of profit on revaluation:

Revaluation Account                                                  Dr

To Partner’s Capital Account

(Being profit on revaluation of assets and liabilities distributed between partners)




For Distribution of loss on revaluation: (If any)

Partner’s Capital Account

To Revaluation Account

(Being loss on revaluation of assets and liabilities distributed between partners)




Adjustment of Capital: Sometimes, on the admission of new partner it is decided that either the new partner will contribute as capital an amount in proportion to his share of profit or that the capitals of other partners will be adjusted to make them proportionate to their respective shares of profit.  Suppose, A, and B share profits in the ratio of 3 : 2, then, if the capitals are to be in the same proportion, and if say A’s capital is Rs. 30,000 then B’s capital should be Rs. 20,000. Adjustment of capital of partners can be done in the following ways:

1)      Adjustment of capitals on the basis of incoming partner’s capital, or

2)      Calculating capital on incoming partner on the basis of old partner’s capitals.

1. Adjustment of Old Partners. Capital Accounts on the Basis of Incoming Partner’s Capital

If the amount to be brought in by the new partner is fixed and it is decided that the capitals of the partners will be in the profit-sharing ratio, the capital brought in by the new partner shall be the basis to determine capitals of existing partners. On this basis, the entire capital of the firm is determined by multiplying the capital of new partner by the inverse of his share. The capital of each partner is ascertained by dividing the amount according to their profit-sharing ratio. Suppose, A and B are partners sharing profits and losses in the ratio of 3 : 2. They admit C as partner with 1/6th share of profits on the condition that he contributes Rs. 30,000 as capital. The total capital of the firm should be obviously six times this figure, i.e., Rs. 1,80,000. A’s share of profit will be 5/6th x 3/5th or 3/6th. B’s share of profit will be 5/6th x 2/5th or 2/6th. Therefore, A’s capital will be Rs. 1,80,000 x 3/6th or Rs. 90,000; B’s capital will be Rs. 60,000.

If the capital of a partner after making adjustment as to goodwill, reserves and revaluation, etc;, is less than what it should be according to the agreement, he should bring in additional capital. If there is an excess, the excess capital should be credited to the partner’s current account by debit to his capital account, unless the excess amount is to be paid off immediately. It should be noted that if the capitals are to be in the same proportion as the share of profits, the capitals should be treated as fixed. Current accounts should be opened for entries in respect of drawings, interest, shares of profits, etc. In short the adjustment of capital can be done in the following ways:

1)      Determine total capital of the new firm as Capital of incoming partner Reciprocal of incoming partner’s share.

2)      Determine new capitals of each partner. Total capital is divided in their new profit sharing ratio.

3)      Adjust the old partners’ capital to goodwill, profit/loss on revaluation, reserves, etc.

4)      Determine the surplus or deficiency. Surplus be paid or transferred to his current account and deficiency to be made up.

2. Calculating the Capital of Incoming Partner on the Basis of Capitals of the Old Partners.

If a new partner is to bring in proportionate capital, the amount is determined on the basis of the total of capitals (after all adjustments have been made) of the other partners and the total of their shares of profits. Suppose C is admitted with 1/5th share of profit into a firm having already A and B as partners. The total of the share of profits of A and B will be 4/5th, i.e., 1 – 1/5th. C’s capital should be 1/4th (since 1/5 is 1/4 of 4/5) of the total of capital of A and B. If A’s capital is Rs. 20,000 and B’s Rs. 16,000, C should bring in Rs. 9,000. We may also say that C’s capital should be 1/5th of the total capital including his own. After C brings in his capital, the total will be Rs. 45,000; Rs. 9,000 is 1/5th of that. If the new partner is given 1/4th share of profits, he should contribute as capital 1/4th of the total capital, including his own, or 1/3rd of the combined capitals of the other partners. Suppose, the combined capital of others is Rs. 75,000, then C should bring in Rs. 25,000. In short the adjustment of capital can be done in the following ways:



Capital for 3/4th share of profits

Capital for full share of profits  (Rs. 75,000 x 4/3)

Capital for 1/4th share of profits  (Rs. 1,000,000 x 1/4) of profits




We may understand the method more explicitly as follows:

1)      Determine the total adjusted capital of old partners, i.e., after effecting adjustments as to goodwill, reserves and revaluation account, etc.

2)      Determine the total capital of the new firm as follows: Total Adjusted Capital of old partners  Reciprocal of total share of old partners.

3)      Determine the capital of incoming partner as follows: Total Capital (as per 2 above)  Share of incoming partner.

4. (a)Explain the provisions relating to issue of shares at a discount under Companies Act. Also explain the procedure of forfeiture of shares by the company. (10+10)

Ans: Provisions of the Companies Act, 2013 relating to issue of shares at a discount:

As per sec. 53 of the Companies Act, 2013, issue of shares at a discounted price is prohibited. This prohibition applies to all companies, public or private. Any issue of share at a discounted price shall be void. But a company can issue sweat equity shares to its directors or employees as a reward to them for their contributions or conversion of debt into shares. Sweat equity shares are those which are issued by a company at a discounted price or for consideration other than cash.

According to Section 54 of company act 2013, a company is permitted to issue sweat equity shares provided the following conditions are satisfied:

a)      The issue of shares at a discount is authorised by a resolution passed by the company in its general meeting and sanctioned by the Central Government.

b)      The resolution must specify the maximum rate of discount at which the shares are to be issued but the rate of discount must not exceed 10 per cent of the nominal value of shares. The rate of discount can be more than 10 per cent if the Government is convinced that a higher rate is called for under special circumstances of a case.

c)       A company can issue sweat equity shares at any time after the registration of the company.

d)      The shares are of a class, which has already been issued.

e)      The shares are issued within two months from the date of sanction received from the Government.

Meaning of Forfeiture of shares and its procedure

Cancellation of shares due to non-payment of allotment and call money is called forfeiture of shares. A company has no inherent power to forfeit shares. The power to forfeit shares must be contained in the articles. Where a shareholder fails to pay the amount due on allotment or any call, the directors may, if so authorized by the articles, forfeit his shares. Shares can only be forfeited for non-payment of allotment and calls. An attempt to forfeit shares for other reasons is illegal. Thus where the shares are declared forfeited for the purpose of reliving a friend from liability, the forfeiture may be set aside.

Before the shares are forfeited the shareholder:

i) Must be served with a notice requiring him to pay the money due on the call together with interest;

ii) The notice shall specify a date, not being earlier than the expiry of 14 days from the date of service of notice, on or before which the payment is to be made and must also state that in the event of non-payment within that date will make the shares liable for forfeiture;

iii) There must be a proper resolution of the board;

iv) The power of forfeiture must be exercised bonafide and for the benefit of the company.

A person, whose shares have been forfeited, ceases to be a member of the company. But he shall remain liable to pay to the company all moneys which at the date of forfeiture were payable by him to the company in respect of the shares. The liability of such a person shall cease as and when the company receives payment in full in respect of the shares.

(b)Describe the accounting treatment of debentures issued as a collateral security by the company.

Ans: Issue of Debentures as Collateral security and Its accounting Treatment

When debentures are issued as security in addition to any other security against a loan or bank overdraft such an issue of debentures is known as issue of debentures as collateral security. The use of such an issue is that if the company does not repay the loan and the interest and the main security is not sufficient, the bank will be entitled to sell the debentures in the market or the bank may keep the debentures with it. If the company repays the loan, the bank will return the debentures issued as collateral security to the company.

Debenture issued as Collateral security can be dealt in two ways:

First Method: No entry needs to be passed in the books of the company because debentures are issued only as a collateral security. Debentures become alive only when loan is not repaid. The fact of such an issue of debentures must be clearly stated in the Balance Sheet by way of a note under the loan and debentures.

Second Method: Under this method, a journal entry is passed for the issue of debentures as collateral security:

When debentures are issued

Debenture Suspense A/c                             Dr.

To Debenture A/c

(Being the issue of _____ debentures of Rs. _ each issued against ____ loan as collateral securities)

When the loan is Repaid

Debentures A/c                                                Dr.

To Debenture Suspense A/c

(Being the cancellation of ________ debentures of Rs. _____ each issued as collateral security against ____ loan as the same is repaid)

5. What is Cash Flow Statement? How net profit from business is converted to cash from operations? Describe the uses of Cash Flow Statement.

And: Cash Flow Statement: A Cash Flow Statement is similar to the Funds Flow Statement, but while preparing funds flow statement all the current assets and current liabilities are taken into consideration. But in a cash flow statement only sources and applications of cash are taken into consideration, even liquid asset like Debtors and Bills Receivables are ignored.

A Cash Flow Statement is a statement, which summarises the resources of cash available to finance the activities of a business enterprise and the uses for which such resources have been used during a particular period of time. Any transaction, which increases the amount of cash, is a source of cash and any transaction, which decreases the amount of cash, is an application of cash.

Simply, Cash Flow is a statement which analyses the reasons for changes in balance of cash in hand and at bank between two accounting period. It shows the inflows and outflows of cash.

Calculation of Cash flow from operating activities with the help of net profit:

Operating activities are the principal revenue generating activities of the business. These are cash flows from regular course of operations such as manufacturing, trading etc. All activities that are not investing or financing activities are included under operating activities. Examples of Operating Activities:

Ø  Cash receipts from the sale of goods and rendering of services. (Source)

Ø  Cash payments to suppliers of goods and services. (application)

Ø  Cash receipts from royalties, fees, commission and other revenue. (Source)

Ø  Cash payments to and on behalf of employees for wages, etc. (application)

Ø  Cash payments and refunds of income taxes. (application)

Under indirect method cash flow from operating activities is calculated with the help of net profit before tax and extraordinary items. Non-cash and non-operating expenses and losses are added and non-cash and non-operating incomes are deducted from net profit before tax and extraordinary items to find net cash flow from operating activities before working capital change. After this changes in working capital is adjusted and payment of taxes during the year is deducted to find cash flow from operating activities.

Format of Cash Flow Statement under Indirect Method to find cash flow from operations with the help of net profit



Cash Flow from operating activities:

Net Surplus before tax and extraordinary items

Add: Non operating/non-cash expenses

Less: Non operating/non-cash income





Net cash flow from operating activities before change in W.C

Effect of change in working capital:

Increase in current assets

Decrease in current assets

Increase in Current Liabilities 

Decrease in current liabilities








Less: Payment of taxes net of tax refund



Cash flow from operating activities


Objectives and Uses of Cash Flow Statement

The Cash Flow Statement is prepared because of number of merits, which are offered by it. Such merits are also termed as its objectives. The important objectives are as follows:

1)      To Help the Management in Making Future Financial Policies: Cash Flow statement is very helpful to the management. The management can make its future financial policies and is in a position to know about surplus or deficit of cash.

2)      Helpful in Declaring Dividends etc.: Cash Flow Statement is very helpful in declaring dividends etc. This statement can supply necessary information to understand the liquidity.

3)      Cash Flow Statement is Different than Cash Budget: Cash budget is prepared with the help of inflow and outflow of cash. If there is any variation, the same can be corrected.

4)      Helpful in devising the cash requirement:  Cash flow statement is helpful in devising the cash requirement for repayment of liabilities and replacement of fixed assets.

5)      Helpful in finding reasons for the difference:  Cash Flow Statement is also helpful in finding reasons for the difference between profits/losses earned during the period and the availability of cash whether cash is in surplus or deficit.

6)      Helpful in predicting sickness of the business:  Cash flow is helpful in predicting sickness of the business. A sound cash position is a true indicator of sound financial position.

7)      Supply Necessary Information to the Users: A Cash Flow Statement supplies various information relating to inflows and outflows of cash to the users of accounting information in the following ways:

(i) To assess the ability of a firm to pay its obligations as soon as it becomes due;

(ii) To analyze and interpret the various transactions for future courses of action;

(iii) To see the cash generation ability of a firm;

(iv) To ascertain the cash and cash equivalent at the end of the period.

8)      Helps the Management to Ascertain Cash Planning: No doubt a cash flow statement helps the management to prepare its cash planning for the future and thereby avoid any unnecessary trouble.

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