financial accounting

Financial Accounting Part-I
Outstanding expenses and its accounting treatment
Some people are coming from non medical and medical in field of accounting . There can easily learn tally and some basic rules of accounting From any coaching institute but they do not know the accounting treatment of outstanding expenses in book of accounts . Then I am training of this point at this time .First of all I am telling you that outstanding expenses are those expenses which are payable but not paid , so it is our duty to record it at the closing of financial year .Dear friends according to the accounting principals any expenses paid or payble is the expenses of business , so when we makes profit and loss account of business , it must be added in paid expense and you can make journal entry in tally
Expenses account dr. xxxxx
To outstanding expense account xxxxx
This entry automatically adjust your final account , you need not change your final accounts in tally . This is facility to you in using tally.
Adjustments of Final accounts
Name of items
 Adjustment entry
 Effect on trading and profit and loss account
 Effect on balance sheet

1. Closing stock
 Closing stock account dr. xxx
To trading account xxx
 Closing stock will write in the credit side of trading account
 It will show as asset in the final account

2. outstanding expenses or expenses payable or expenses due but not paid
 Expenses account dr. xxx
To outstanding exp. xxx
 Outstanding expenses will add in expenses . if it is direct it will go to trading account’s debit side , if it is indirect nature then it will go to the debit side of profit and loss account
 It will be the current liability so it will go to the liability side of balance sheet.

3. advance expenses
 Advance expenses a/c dr. xxx
To expenses account xxx
 It will deduct from respective expenses paid .
 It will be the current asset so it will go to assets side of balance sheet

4. income receivable
 Outstanding income account dr. xxx
To income account xxx
 It will add in the income and go to credit side of profit and loss account
 It will show as asset in the assets side of balance sheet

5. income received in advance
 Income account dr. xxx
To advance income account xxx
 It will deduct from the income received
 It will shown as liability in the liabilities side of balance sheet

6 Goods use for personal use
 Drawing account dr. xxx
To purchase account
 It will deduct from purchase in the debit side of trading account
= purchase –drawing in goods
 It will deduct from capital in the liabilities side of balance sheet
=capital- drawing in goods

7. Destroyed of goods
 loss by fire or accident account Dr. xxx
To trading
If there is no insurance
It will also go to profit and loss account
Profit and loss account dr. xxx
To loss by fire / accident
 It will shown in credit side of trading account
And also in profit and loss account’s debit side
 It will not go to balance sheet

8. Depreciation
 Depreciation account dr. xxx
To respective asset account xxxx
 It will go to the debit side of profit and loss account
 It will deduct from fixed asset . Because it decrease the value of asset
=fixed asset - depreciation

9. provisional for doubtful debts
 If you have make any provision for doubt ful debts the its journal entry will passed
Provision for doubtful debt account dr. xxx
To Bad debts account xxx
( New bad debts which is not shown in trial balance will transfer to provision for doubtful debt account )
 Net value of provision for doubtful debt account transfer to profit and loss account’s debit side
=total bad debt + closing balance or provision of doubtful debt or this year provision - opening balance of provision for doubtful debts
 Deduct from debtor
= debtor – new bad debts – this year provision or closing balance of provision for bad debts

10. Commission to manager
 Commission account dr. xxx
To outstanding commission
 It will shown in the debit side of profit and loss account as o/s commission to manager
If it charge on the amount after charging such commission then we will calculate
= profit before commission X Rate/ 100+rate
 It will shown as liability

Accounting Treatment of Provision for doubtful debts
Before doing accounting treatment of provision for doubtful debts , you must know the complete definition of provision . In accounting , it is a reserve that is against loss due to non payment of debtors . In case debtor does not give us our amount . Then if we have make provision or reserve for this , we can easily purchase new goods but if we have no money due to every year bad debts then we can become insolvent . So with our work experience we should make our provision on our debtors with some % on debtor .
Now you are ready for doing the accounting treatment of provision for doubtful debts .
First of pass the journal entry of actual bad debts .
Entry for recording actual bad debt which did not record in books of business
1. Bad debts account Dr. xxxxx
To Sundry Debtors Account xxxxxx
Entry for transferring bad debts to provision for bad debts Account
2. Provision for bad debts account Dr. xxxxxx
To Bad Debts account xxxxx
Transfer of provision for bad debts account to profit and loss account
3. Profit and loss account Dr. xxxxxx
To Provision for bad debts account xxxxx
It is not necessary that provision for doubtful debt account will go only to the debit side of this account but it may go to the credit side . It will decide after making provision for doubtful debt account . Which is very easy to make . I am showing you this account . After study of this account you can easily make this account and take the benefits of this provision .

Manufacturing accounting
Manufacturing accounting means accounting relating to production or manufacturing. All accounting can divide also manufacturing and non manufacturing. Accounting up to converting raw material to finished product includes in manufacturing accounting. We specially open manufacturer account for recording all items regarding production. In manufacture account we record direct material cost, labor cost and production overhead cost. Manufacture account is helpful to find out the value of cost of production which transfers to trading account. It is also part of financial statement.
Manufacturing account starts opening balance of raw material in its debit side. Amount of purchase of raw material are also debited in this account and direct labour charges and other manufacturing overheads like, depreciation of plant, lighting of plant and factories other expenses will transfer to debit side of manufacturing account. In the credit side of manufacturing account we shows closing balance of raw material and work in progress and scrap sale. The difference of both sides is the cost of production which transfers to trading account’s debit side. Manufacturing account is also helpful for finding the value of gross profit because gross profit is difference between cost of sale and sale value but cost of sale can not be calculated without finding the value of cost of production .So, factory accountant records every transaction relating to factory and one these voucher entry basis we find manufacture or manufacturing account.

How can I make the accounts of NGO and Charitable societies.
 To make the accounts of ngo and charitable societies is very simple . In charitable societies we have to make receipt and payment account . This is just like cash account .But cash account can not be made in non profit organization .Debit side of receipt and payment account is receipt of cash. Ngo can receipt cash in the form of subscription , interest ,general donation , rent received and entrance fees etc. Ngo can also pay certain expenses like salaries , printing & stationery expenses and other purchasing of fixed and current asset . This must show in the credit side of receipt and payment account .After doing this , accountant can calculate balance of cash at the end time of accounting period . It is also duty to collect other information like outstanding and advance income and expenditure :-for calculating net excess of income over expenses of ngo and charitable societies . There is given a procedure to calculate above
Showing the amount of expenses in income and expenses account
Current year Expenses paid xxxxxxxxxx
Add outstanding expenses upto the end of current year xxxxxxxxxx
Less Previous year outstanding expenses xxxxxxxxxx
Less current year advance expenses xxxxxxxxxx
Add previous year advance expenses xxxxxxxxxx
_______________________________________________________________
Expense for showing income & expenses account = xxxxxxxxxxx_________________________________________________________
Statement showing of income in income and expenses account
Current year Income received in cash xxxxxxxxxx
Add receivable income upto the end of current year xxxxxxxxxx
Less Previous year receivable income xxxxxxxxxx
Less current year advance income xxxxxxxxxx
Add previous year advance income xxxxxxxxxx
_______________________________________________________________
Income for showing income & expenses account = xxxxxxxxxxx

Accounts for Sports Club
Making the accounts of Sport clubs or trust or society is very easy but you should know the way of maintaining it . First of all when you are making the accounts you must classify all the item in to capital and revenue nature . If expenses are in cash , so it must show in receipt and payment accounts , here do not see any nature because this account show all receipt of cash and bank from any source for business . Even if we get money through other person's credit card , then it will be deemed cash receipt . After this you can easily make income and expenditure account . This account shows net income or loss from club , so only all expenses which belongs to this year will send in expenses side of this account .It is not necessary that these are in cash it may also payable also .

Accounting for Temple
It is very easy to make the accounts of temple . A temple is religious place. So recording of donation from devotee is very necessary. Devotee may be monthly or annual member. A seal of Of temple must be on the receipt and continually it records in the books of accounts .It is also necessary to record all the expenses related to langur, rent, lighting, and electricity, building repair and other smangum expenses. For this temple accountant should make the income and expenditure account and receipt and payment account. If it is registered under charitable trust , then to make accounts of such temple is very useful for keep the faith of devotee. Because fraud in temple fund can decrease the number of devotee in that temple

Partnership accounting
1.For division of profit or loss from partnership
2.for division of properties in case of dissolution of partnership
In partnership accounts you must open profit and loss appropriation account . It is accounts in which accountant can adjust salary , interest on capital and interest on drawing and also new division of profit or loss . So it is necessary to make this account . At the time of admission , partnership accounts can be change .
Because Capital accounts will change because , old partner sacrify for new partner so it is the duty to new partner to give some part of goodwill in cash of any other way . So that other partner can credit it in their capital accounts .

Partnership accounting basics
In the partnership accounting , all the final accounts are same as sole trade business final accounts . But main difference in these accounts are that In partner ship accounting , we make one extra account that is called profit and loss appropriation account which is used for calculating net share of profit or loss of different partner of a firm.
•This account is opened with credit balance of net profit ,

•In the debit side , we show interest on capital , salary and commission of partners and

•in credit side we shows interest on drawing , after adjusting these items , we transfer net profit to partners capital accounts in their profit sharing ratio

•In Absence of any partner ship deed Partner will divide profit or loss equally

•No interest on capital is given

•No interest on drawing is given

•No salary to any partner Interest on loan given by any partner is 6% annual.

Practical Problem of Partner ship accounting
Suppose A and B are the partners . They do not have any partnership agreement . How will you solve the following disputes among them ?
a) A spent twice the time that B devoted to business .A claims that he should get a salary of Rs. 3000 per month for extra time spent Ans. No Salary will be given in the absence of any agreement .
b)B has provided a capital of Rs. 50000 where as A has provided only Rs. 10000 as capital . A however has provided Rs. 20000 as loan to firm . What interest if any will be given to A and B ?Ans. Only interest on loan @6% will be given
c) A wants to introduce his son Sunil into his business . B objects to it .
Ans. No new partner will be admitted
d) B wants that profit should be distributed in ratio of capital but A wants that it should be distributed equally
Ans.Profit should be shared equally in the absence of any agreement .

Calculation of interest on drawing in partner ship accounting
There are four latest method apply , if any body withdraws any fund or cash for personal use from his firm .
1.If any partner withdraws every month in the first day the he will pay to firm @ given rate for 6.5 months
2.If any partner withdraws every month in the middle of month , he will pay interest on drawing @ given rate for 6 months
3.If any partner withdraws every month in the end of month , he will pay interest on drawing @ given rate for 5.5 months
4.If any partner does not withdraw every month then his withdrawing month usage product will be calculated
suppose if he withdraw Rs.5000 in first of march then he will calculate product of
5000X10 =50000
after calculating product he calculate his payable interest on drawing @ given rate
= amount of product X R/100 X 1/12

Accounting treatment of partnership accounts at the time of admission
Admission of a New partner
Without permission , a new partner can not enter in any firm but with the acceptance of all partner , a new partner has come in partnership firm , then it is the duty of existing partner to sacrifice his share for giving share to new partner .It is the duty of new partner to give his own capital and share of goodwill to partnership firm
Accounting treatment on the time of Admission of new partner
Calculating New and sacrificing ratio
It is necessary to calculate new and sacrifice ratio at the time of admission of a new partner because all the journal entries like profit sharing of new firm and goodwill division is on base of calculated new and sacrifice ratio respectively .
Calculate the profit or loss on the revaluation of assets and liabilities .
It is necessary to calculate profit or loss on the revaluation of assets and liabilities at the time of admission . This profit or loss must be divide between old partner in old ratio . Because this is the result of the hard work of old partner only .
Calculate the share of Goodwill which will have to take from new partner
There are many method of calculating and accounting treatment of goodwill . But these days goodwill name has been changed with premium . and It has been brought in business by new partner is very famous treatment . This premium is divided by old partner in their sacrifice ratio . It means their share will transfer to their capital account .
Capital Adjustment
Some time all partner can decide to maintain their new capital . If any partner’s share will less than accepted portion then , that partner will give fresh capital in cash form or any partner who has given more capital from accepted capital , that partner can withdraw this excess in cash form .

Making of provision for bad debts accounts
Before making of provision of bad debts accounts , you must understand the concept of provision , reserve etc. Because without understanding these you cannot understand the concept of making of provision of bad debts accounts .
Meaning of provision or reserve
When we start our business , we faces certain losses like bad debts , depreciation or discount so if we do not keep some part of our cash or profit in cash form in business pocket , we can face the problem of lack of money for operational requirement , so we take future planning and after scientific estimation we makes provision of reserve of our losses on the certain percentage of loss it may be 5% or 10% or 15 % . This is called provision or reserve of loss .

•Making of this account is very easy
•It will open with opening balance of provision for bad debts
•it will show in credit side of this account .
•In the debit side we will write actual bad debt of trail balance and outside
•in the debit side also writing new provision of bad debts with writing to balance c/d
•Balancing figure will be the amount of provision transferring to profit and loss account as loss written off.

Financial Accounting Part-II
Rectification of errors
Rectification of errors is very tough work . It is main duty of chartered accountant of any country . A lot of errors
can be done by accountant . So C.A. audits the full accounts and if he see any error , his duty to see that why it
happen and how can rectify this so that profit or loss or financial position do not affect of this happenings .
To day my main aim is not write just article on this topic but actually , I want to give you simple way to correct your
accounts error forever .Read following lines very seriously and concentrately
1. first of find out your error and mistake from accounts
2. write what is the mistake or incorrect journal entry or incorrect accounts .This error may affect one account or two
account note it .
3. Write correct journal entry or make correct account in rough page
4. in rough page , you will also have to do treatment of your mistake
suppose you wrote 1000Rs. as sake instead of RS.2000 sale which was correct .
Its wrong is journal entry is
cash account Dr. 1000
To Sale account 1000
In rough paper you should also write correct journal entry
Cash account Dr. 2000
To sale account 2000
Then now your are analyst you should see that 1000 is less in both side so for making the correctness pass another
journal entry of 1000 Rs.
Cash account Dr. 1000
To Sale Account 1000
This entry is called rectify entry .

Simple method of rectification of error
I am writing very simple method for correcting the mistakes and error in books of accounts
All work must be done on rough paper or notepad .There are the part of working notes .
Ist step
What is the mistake or error .
Write it as wrong record of ledger accounts or wrong journal entry .
2nd step
What should be the correct entry or what should record which is correct according to the nature of error of accounting
. Write it in second step
3rd step
Best rectification of error or write the rectification entry in such a way so that difference will be auto correct .
I take an example
XYZ co. purchased machinery of $ 5000 but by mistake this amount was debited in purchase account .
Ist step
Wrong entry
Purchase account debit $ 5000
Cash Account Credit $ 5000
2nd step
Correct entry
Machinery Account Debit $ 5000
Cash Account Credit $ 5000
3rd Step
Rectification of error entry
Machinery account Debit $ 5000
Purchase account Credit $ 5000

Proforma of Balance Sheet
Balance sheet is main part of financial statement . This is necessary to make it . Making of balance sheet is very easy
but you must know the rule of making balance sheet . In Right side we will have to show all assets and in the left side
we will have to show all liabilities .

Method of calculating goodwill
Correct calculation of goodwill is very difficult work. But with using correct formulae of specific method , you can
easily calculate goodwill . There are four methods to calculate goodwill .
Ist Method
Average profit method
In this method, we calculate previous year’s profits average and then we multiply it with number of purchase years.
2nd Method
Super profit method
In this method, we calculate normal profit with normal rate on investment. Then we calculate super profit with
following formula.
Super profit = average profit / actual profit – normal profit
Goodwill = super profit X No. of purchase years
3rd Method
Capitalization method
In this method, we calculate capital employed with following formula
Capital employed = average profit or normal profit X 100/ Rate
Goodwill = capital employed – Net Assets
4th Method
Annuity Method
In this method we first of all calculate annuity . Annuity means annual value . These day , accountant are using
different annuity tables for calculating annuity , after this they can easy calculate goodwill with following formula .
Goodwill = Super profit X Annuity

Revaluation account

This account is very useful for calculating the profit or loss when partners decides to reconstruct their partnership
firm . When a new partner comes in firm or exit from firm , making of this account is very necessary , I am giving the
proforma of this account

Revaluation account
Dr. side
To Asset ( decrease in the amount of certain asset )
To Liabilities ( increase in the amount of any certain liabilities )
To Liabilities ( if any liability have but not recorded in books )
To transfer of profit to partner in old ratio
(if credit side is more than debit side )
Cr. Side
By Asset ( increase in the amount of certain asset )
By Liabilities ( Decrease in the amount of any certain liabilities )
By Asset ( if any asset have but not recorded in books )
By transfer of profit to partner in old ratio
(if debit side is more than credit side )

Revaluation account
This account is very useful for calculating the profit or loss when partners decides to reconstruct their partnership
firm . When a new partner comes in firm or exit from firm , making of this account is very necessary , I am giving the
proforma of this account

Capital Adjustment
When two or more partner decides to change their capital according to their profit and loss ratio , then it is
necessary to make capital adjustment in the form of cash .
For Example: Suppose one partner A who invested Rs. 100000 and other partner B invested Rs 200000 . If they decides to
divide their capital in their profit sharing ratio and suppose their profit and loss sharing ratio is 1:1 then we
calculate total capital first that is Rs.300000 and if we divide into ½ and ½ , it will be 150000 and150000 to A and B
so A will invest more 50000 Rupees and B will withdraw Rs . 50000 because his old capital excess Rs.50000 from his new
capital .
Then the journal entry will pass in the books of account
_________________________________________________________________
Cash account Debit
A partner’s capital account Credit
___________________________________________________________________
B partner’s capital account Debit
Cash Account Credit

How can You calculate new and sacrifice ratio at the time of admission of new partner
Calculation of new and sacrifice ratio at the time of admission of new partner is very easy. If you want to calculate
new profit sharing ratio, you should only calculate the difference between old and sacrifice ratio .Sacrifice ratio
means total sacrifice of old partner for new partner.
It is given by old partner to new partner so if you want to calculate new profit sharing ratio, you just deduct this
from old profit sharing ratio. But in different situation, partner can make condition at the time of admission, and fix
his surrender share for new partner from his share then we first calculate sacrifice ratio and then calculate new
profit sharing ratio.
For example Ram and sham are the two partners with profit sharing ratio are 3:2. Sita enters in this partner ship. Both
after that sita will take ¼ as new share, If agree that Ram will give 20% of his share and balance will give by Sham
then we will calculate both new and sacrifice profit sharing ratio as bellow way.

Solution :-
Ram’s sacrifice = 3/5X20% =0.12
Sham’s sacrifice =1/5-0.12 = 0.08
New profit share of Ram = 3/5 -0.12 = 0.48
New profit share of Sham = 2/5 – 0.08 = 0.32
New profit share of Sita = 1/5 = 0.20

Accounting treatment of goodwill at the time of admission
When a new partner enters in partnership firm, the old partner sacrifices his share for him , so it is the duty of new
partner to give goodwill in cash or in any other way to old partner . There are following method with this new partner
give his share of goodwill to old partners .
1st method
Private distribution of goodwill
Under this method , new partner gives his share of goodwill to old partners personally .So there is no need to record
it to the books of firm . No journal entry will pass .
2nd method
Goodwill is given in cash form by new partner
Under this method , old partner bring his share of goodwill in cash form in the firm and it is taken by old partner in
their sacrifice ratio . For this following journal entry pass in the books of firm
Cash / Bank Account Debit xxxxxxxxx
To Goodwill / Premium Account xxxxxxxxxx

Goodwill account debit xxxxxxxx ( share of new partner’s goodwill )
To old partner’s capital account xxxxxxx ( divide in sacrifice ratio )
3rd method
when new partner bring goodwill in cash in business and taken by old partner and then withdraw by old partner
Above two entries will pass as same as in second method but third new entry will pass
Old partner’s capital account Debit xxxxxxxxxxx
To cash / bank account xxxxxxxx
4th method
when new partner do not bring goodwill in cash form
If new partner do not bring goodwill in cash in firm , then following entry will pass for the adjustment of goodwill .
New partner’s capital account debit xxxxxxxx (share of goodwill )
To old partner’s capital account xxxxxxxxx (division in sacrifice ratio)
5th method
If partial in cash form of goodwill
Part of cash goodwill
Cash account dr. xxxxxx
To goodwill / premium account xxxxxxxx
Goodwill account debit ( cash goodwill) xxxxxxxxx
New partner account debit ( not in cash goodwill ) xxxx
To old partner capital account in sacrifice ratio xxxxxxx

6th method
If goodwill already exits in balance sheet of old partner , then it must be transfer to old partner’s capital account
in old ratio . Other method is same above from 1 to 5 method .
Entry passed for transferring of old goodwill
Old partner’s capital account debit xxxxxxx
To goodwill xxxxxxx
7th method
If new partner brings other asset as goodwill of his share of goodwill . Then following entry will pass
Asset account debit xxxxxx
To goodwill account xxxxxxxx

Goodwill account debit xxxxxxxxx
To old partner’s capital account in sacrifice ratio xxxxxxxxxx

Adjustment of capital at the time of admission of new partner
" When a new partner in partnership firm , he and other partner can agree for the capital adjustment on the basis of
new profit sharing ratio and new partner’s capital as base . In such condition , we first calculate total capital on
the basis of new partner’s capital. "
Suppose Vinod is new partner in the firm of vijay and rajesh with 3:2 and their capital are Rs. 10000 and Rs. 30000 but
Vinod will ¼ share . He brings Rs. 10000 as capital . If all the partner agree to adjust their capital according to new
profit sharing ratio , then calculate who invest more capital in cash form or who withdraw his excess capital
Total capital = 10000 X 4/1 =40000
Vijay’s new capital = 40000 X 9/20 = 18000
Rajesh’s new capital = 40000 X 4/20 = 8000
Vijay brings his external capital in cash because now he needs = 18000-10000 = 8000
But Rajesh withdraw his
excess capital = 30000-8000 = 22000

Difference between memorandum revaluation account and revaluation account
In the partnership accounting, at the time of retirement or admission, we either make revaluation account or make
memorandum revaluation account but we should know the main difference between both
1.In memorandum revaluation account we make reciprocal entries in same account for covering double record system but in
revaluation account we make only one side record.
2.In memorandum revaluation system of accounting, we can not change the value of assets or liabilities outside because
all the procedure of double record is completed in memorandum revaluation account.
3.In memorandum revaluation account , first we divide profit or loss on revaluation is in old profit sharing ratio
among all partners but after reciprocal entries recording we divide partner in new profit sharing ratio but in
revaluation account we only divides in old profit sharing ratio
4.Making of memorandum revaluation account is not necessary but making of revaluation account is very necessary .

Accounting treatment at the time of retirement
In any partnership firm when a partner retires from a firm it is the duty of remaining partner to give him his share
because he has to spend his remaining life . So at this time accounting treatment is very necessary in the books of
firm.
Tips for easy recording these transactions

•Calculate new profit sharing ratio and calculate gaining ratio by deducting new profit sharing ratio from old ratio .
•Calculate profit or loss on revaluation of assets and liabilities and transfer it to retiring partner's capital
account .
•Calculate the goodwill share of retiring partner and transfer to retiring partner's capital account ( credit side with
his share)
•Calculate joint life policy share and transfer to retiring partner's capital account
•Calculate General reserve share and transfer to retiring partner's capital account
•In his debit side we will transfer his drawing and interest on his drawing after this we can give his capital after
above adjustment in cash form or after this his amount will deemed as loan to firm . Firm will liable to give 6%
interest to retiring partner . Make and retiring partner and calculate his total amount and give him .That is called
accounting treatment of retirement of a partner .

Dead partner’s executer account
This is very simple account and it is open when Firm has to pay deceased partner’s executors. In this account first of
all we calculate payable amount then we calculate per year installment of executors then include total interest in this
amount every year.
I am trying to make you understand with an example suppose firm has to pay RS 100000 to the executor of dead partner B
in four installment with 10% rate of interest . For this we divide Rs 100000 by 4 and it will Rs. 25000 every year but
first year we include
1st installment Rs. 25000 + interest of Rs. 100000 X 10% =35000
2nd installment Rs. 25000+ interest of Rs. 75000 x 10% =32500

and same procedure for 3rd and 4th year . This is the easy method of given amount to executor of deceased partner

.

Financial Accounting Part-III
Accounting treatment at the time of Dissolution of Firm
 You must know the definition of dissolution of firm before completing the accounting treatment at the time of
dissolution .
Dissolution is the end of firm and its work . In other words , after dissolution , firm will not continue same business
with same partners because there are so many causes of dissolution of firm . Dissolution may be with or without
interfere of court . When faith among partners have completely ended or partners are continuing illegal business or all
the partners became insolvent then court may order to dissolute the firm and distribute firms asset among the creditors
of firm .
At this time for proper allocation of assets among liabilities , it is very necessary to treatment each and every
accounting elements .
1st step
Making the account of Realisation.
· In the debit side of this account we will transfer all current and fixed assets at book value except cash and bank
account.
· In the credit side of this account we will transfer all the liabilities except general reserve and capital accounts
· In the debit side of this account we will show the all the amount of payment of creditors in cash or if any partner
take over any liabilities .
· In the credit side of this account we will show the amount received after sale of the assets or name of partner’s
capital account if he takes over any particular asset.
· In the debit side of this account we will also show the expenses of realization of assets .
· The difference of this account will profit or loss which will transfer to capital accounts of partners in their
profit and loss sharing ratio.
2nd step
Making of capital accounts
After this capital accounts of partner will be made . This account will open with opening balance of their capital. In
the credit side we will transfer general reserve share , profit share of realization account this account show the new
amount that will be paid to each partner after dissolution .
3rd step
Making of cash or bank account
This will the last account which will make at the time of dissolution because at the time of dissolution , it is
necessary to make this account . This account shows receipt and payment of cash or bank at the end of business . There
must not a balance at the end of business in this account . If the debit side of this account is equal to the credit
side of this account , you are made proper this account .

Accounting Treatment of Assets and liabilities taken by partner at the time of dissolution
When a partner agree to pay the liabilities or take over any asset then firm will make the realisation account and
respective partner who take over the asset will credit in realisation account and if he agree to pay the liabilities
then his account will debit in realisation account . For this we will pass the journal entry.
1. For take over the assets
Partner's capital account Dr. ( Who take over the assets)
To realisation account ( With accepted amount)
2. For paying any liability by any partner at the time of dissolution
Realisation account Dr. ( accepted pay the amount)
To Partner's capital Account( Who pays the amount of liability)

Explanation the scheme of Gradual realisation of assets and Piecemeal distribution
 Generally we see that a long time is spent on realisation of assets after dissolution of firm . But we can distribute
it in installment basis . When any part of assets sells and we get the amount that amount is called gradual realisation
and its piecemeal distribution is done with following method.

1) First of all we pay all realisation expenses out of series realisation of assets

2) After this we pay outside liabilities like trade creditors , B/P out of this realisation of assets.

3) After this we repay the loan of partner .

4) In end we repay the partner's capital out of this realisation of assets

Accounting procedure for Convertion of a partnership into Limited Company
These days , partnership firms are converting into limited companies for getting the benefit of limited liabilities .
At this time firms book is closed just like dissolution of firms .
In the books of firms , the following journal entries are passed :
1) For closing the accounts of assets
Realisation account Debit
Assets Account Credit ( At book value )
2) For sale of assets and amount received
Cash /Bank Account Debit
Assets Account Credit
Realisation Account Credit
3) For closing the account of liabilities
Liabilities Account Debit
Realisation Account Credit
4) For Payment of liabilities
Realisation Account Debit ( Loss of payment )
Liabilities Account Debit
Cash / Bank account credit
5 ) For Assets and liabilities are taken over by new company
New Company Account Debit ( Purchase price = Agreed value of assets - agreed value of liabilities )
Realisation account Credit
6) For Payment of expenses of realisation
a) If pay by partner
Realisation Account Debit
Cash / Bank Account Credit
b) If pay by new company
New company Account Debit
Cash /Bank account Credit
7) Closing of Realisation account
If profit
Realisation account Debit
partner's capital Account Credit
8 ) Receipt of purchase price
Cash / Bank /Shares / Debentures Account Debit
Purchasing company Account Credit
9 ) On distribution of shares / debenture and cash from purchasing company
Partner's capital account Debit ( dividing in adjusted capital ratio )
Cash/Bank/ Shares /Debenture Account
After journal entry , you can transfer into ledger for making realisation account , company account , partner's capital
account

Amalgamation of Firms
When two or more firms merge into one firm and makes a new firm , then this is called amalgamation of firms . For
accounting point of view this definition is so important because if one firm purchases other firm , then this is not
called amalgamation but if both firms decide to join or integrate then this is called amalgamation .
For Example
Suppose A and B firm decide to close their business and start the business with the name of AB firm after joining with
each other then this is called amalgamation of A and B firm.

Steps for closing the accounts of old firm at the time of amalgamation of firms
When two firm amalgamate with each other , at this time we treat following accounting in the books of old firms so that
all doubt solves .
1st
Revaluation of Assets and Liabilities
All entries same as at the time of admission and retirement
2nd
Transferring reserve to old partners capital account into their old ratio
3rd
treatment of Goodwill
We evaluate the goodwill according to the condition of agreement and then goodwill will open with agreed value int the
books
4th
Treatment of Assets and liabilities not taken by new firm
If assets and liabilities are not taken by new firm , then these item will transfer to the capital accounts of partners
of old firm and we close these accounts
A -Treatment of assets and liabilities taken by new firm (In the books of old partners)
a) For closing the account of assets
New Firms Account Debit
Assets Account Credit ( at revalued value)
b) For closing the accounts of liabilities
Liabilities Account Debit
New Firm Account Credit
6th
Closing the accounts of partners capital
Partner's capital account Debit
New Firms Account Credit
B - In the books of new firm
Assets Account Debit
Liabilities Account Credit
Partner's capital Account Credit

Accounting of jewellery business
There is boom in jewellery business . Due to increasing the value of gold jewellery business is giving high rate of
return to business man . Because of my background is related to this business so , I am writing and telling you the
technique of how to make and maintain the accounts of jewellery business .It is very simple to record of jewellery
business but it is very harmful to make any mistake in these type of accounts .
Because 10 gram’s quantity’s value is approximately Rs. 10000 so be careful while doing the accounts of jewellery
business .
When we purchase gold , it will our raw material . So it will deal as stock , it should valued on cost . Then you
should regular passing the voucher entry of purchasing of gold . in cash book if you purchase on cash , if you purchase
on credit , then your duty is also to maintain the accounts of your creditors also . Because this is our current
liabilities , we should know how much amount , we will have to pay to our creditors . In manual accounting , we just
make journal or day book , ledger after this we should find out our profit or loss from manufacturing , trading and
profit and loss account after this we also must make balance sheet .

Steps for maintaining branch accounting
a) In that type of branches, it is necessary to make bank account in the name of head office so that amount got from
cash sale can be deposited in head office bank account.
b) All miscellaneous expenses is given by head office accountant to branch accountant on impress or advance system of
cash book.
c) All salaries, rent, advertising and other expenses must be paid by head office.
d) Head office can send goods to branch on cost price or invoice price.
e) It is necessary for branch to make the list of debtors if branch has all to sell the goods on credit .It is duty of
branch accountant to send branch debtors list to head office weekly or monthly.
f) These branches can make memorandums in different registers.
On these memorandums and registers head office can make branch account
For making branch account in head office, we open each branch account in head office with given branch name.

Accounting treatment of web-publishing profession

If you have your own website , web blog , or any blog and you are earning more than tax limit in India . I am providing
you the full tutorial of accounting treatment of web publishing profession . For this I am making income and
expenditure account ( In vertical form ) which is accepted by Income tax department.

Income and Expenditure Account of Swami Vivekanand Online Publishing Institute ( For Example ) As on 31st March 2009

Incomes
1.Earning from web publishing ( there is no need to mention AdSense publishing or any other source XXXXX

2.E-buy earning XXXXX

3.Donation by youre online visitors XXXXX

4.Earning from direct space give for advertisement XXXXX

5.Link sharing Income XXXXX

6.Earning from direct Sale on your website XXXXX

7.Earning from selling the brand of blog or website XXXXX

8.Earning from e-news letters XXXXX

9.Earning from other printing newspaper or journal for publishing in their printing press XXXXX

10.Earning from selling of Image of your site XXXXX

11.Other earnings XXXXX
__________________________________________________________
Total Earning from web publishing profession XXXXX
Less Expenses and Losses of web publishing
1.Internet -broadband rent / Charges XXXXX

2.Salaries of employees XXXXX

3.Electricity bill XXXXX

4.Depreciation of Computer /Laptop XXXXX

5.Depreciation of your own building or rent of building XXXXX

6.Repair of computer XXXXX

7.Website domain hire charges XXXXX

8.Web designing expenses XXXXX

9.Image purchasing cost XXXXX

10.Link sharing expenses XXXXX

11.Advertisement of website XXXXX

12.Bank Charges for transfer of your earning in your bank account XXXXX

13.Travelling Expenses for getting latest news for your website XXXXX

14.Hire expenses for getting news or article from others XXXXX

15.Hire expenses of brand logo XXXX

16.Cost of goods sold online XXXXX

17.Stationery expenses XXXXX

18.Office Expenses XXXXX

19.Advertising Expenses XXXXX

20.Other related expenses XXXXX
________________________________________________________
Net Income from web publishing XXXXX
taxable under the head of business and profession income
__________________________________________________________
_________________________________________________________
You must keep different proof , like photo copy of earning cheques , bill of Internet rent , or electricity and bank
statement when you have to return of income tax for web publishing work

Financial Accounting Part-IV
Accounting Treatment of Provident Fund
Employees Provident Fund
Employees provident fund is the fund which is created for the social security and retirement benefits for the
employees. Different Countries organizations are created this for the benefits of employees.
Employees' Provident Fund Organisation of India
EPFO , India Established in 1952 consequent to the enactment of the Employees' Provident Funds and Miscellaneous
Provisions Act, 1952. The head office of the Organisation is in New Delhi. [1].


Presently, the following three schemes are in operation under the Act:
1. Enrolment: An employee is eligible for membership from the day he joins the covered establishment.
•If the employee’s emoluments exceed Rs. 6,500/- per month, he has the option to join the Scheme(s) with the consent of
employer.

•Declare previous employment details, if any, in Form No. 11 to the employer.
On becoming a member of the Schemes file details in Form No. 2 ( family particulars/ nominations) through the employer.

•Rate of contribution payable by a member shall be @ 12% of his emoluments.
A member can contribute statutorily over and above the prescribed rate.

•In provident fund includes three scheme
•The Employees Provident Fund Scheme, 1952

•The Employees Family Pension Scheme, 1971

•The Employees Deposit-Linked Insurance Scheme, 1976

6. Calculation of Provident Fund from Basic Salary
Employee
Both Employer and employee give their share in this fund . Currently employee gives 12% of his basic salary in this
employee provident fund .
Employer
Employer is also responsible for contribution in employees provident fund for the benefit of employees .

•The rate are given following on basic salary .
3.67% Provident Fund (A/c 1) + 8.33% Pension (A/c 10) + 1.10% Admin Charges onPF (A/c 2) + 0.50% EDLI (A/c 21) + 0.01%
Admin Charges on EDLI (A/c 22)
Total employee’s provident fund
Now total is equal to = Employee’s contribution + Employer’s contribution
Total provident fund = 13.61% on basic salary
Pension (8.33% or 541/- which ever less)
7. Regular activities:
employer is responsible for given information and following forms

•Time of joining:- Form

•Employee should fill, at the time of joining, nomination & Declaration form.

•Form 2, includes the following· Name of the employee· Parent/spouse name· Date of Birth· Sex· Marital Status· AC No·
Address· Names, address, relation, Share for each etc Also for changing nominee names Form 2 is used. His eligibility
begins on the date of joining the firm.
Submitted along with form-5. Withdrawers/Dead :

•Form 10c (pension) &

•19 PFForm 19 is used for withdrawing PF amount. Employee and parent/spouse name, name of the establishment, Ac no,
Reasons for leaving service, Contribution for current financial year etc.

•Form 10 is used for pension withdrawal.

•Form 19: Employee should fill, all information like Bank a/c, name, DOJ…with signature and then Employer like present
year contributions, DOR…for PF Fund – Due date: After 60 Daysof Resignation)

•Transfer :- Form 13Form 13 is used for transferring an employee AC from one company to another. Both employer and
employee have to specify his name, PF AC no, Position etc and submitted with a covering letter (consolidated list of
employees). Photocopy of the above is kept in PF file for transfer.4. Employee register 3A, 65. For advance : Form 316.
In case of employee expired / dead :

•Process detailsForm 10 D (For claiming benefits under Pension)Employee should fill like Expired/late employee name,
nomination name, details, Nomination Bank a/c…for monthly Pension

•Form 20 (For Claiming EPF Contributions)Employee should fill like Expired/late employee name, nomination name,
details,Nomination Bank a/c…for withdrawal of PF Fund (Incase of Death of a member

•Form 5 IF (For Claiming EDLI benefits, nominee will get benefit)EDLI for death case, nominee will get benefit.7.

•Form 9 (Register of employers - Application for review filed under)Monthly Remittance / Challans:1. Challans every
month before 15th (4 copies/ quadruplicate)2. All A/c (A/c Nos-1,2,10,21&22)3. To Bank4. both employer & employee
contribution· Account group no eg Ma mu 1246 (state-first two alphabets /city/acc no: of the company)· Month· Total
number of subscribers· Total wages due for each account (wages on which calculations are done)· Each accounts totals
(consolidated amount with employer and employee share)· Name of the establishment and address· Name and signature of
the depositor· Name of the bank, mode and date of remittance etc

•Challan is submitted tp PF office along with form-12A every month.Monthly returns:1. Form 12 A, with all information
and employees list of contribution before 25th2. With Form 5 (new joiners list) , form 10 (resigned employees list),
challans copy3. Information about last month employees, new & resigned employees & this month staff.Form 5· Name of the
establishment and address· Month· Code no: of the factory· A c no:· Name of new employees· Fathers or Husband name in
case of married women· Date of birth· Sex· Date of joining the fund· Total period of previous services as on the date
of joining the fund Form 10· Name of the establishment and address· Month· Code no: of the establishment· A c no:· Name
of member who is leaving· Fathers or Husband name in case of married women· Date of leaving service· Reasons for
leaving service· Signature of authorized officer and stamp of the establishment Cross checking the above is done with
the salary statement which includes the number and name all current employees.Form 12 A:· Name of the establishment and
address· Currency period and month (April yr to march yr)· Statutory rate of contribution (12%)· Group code (NA for
unexampled establishment. Establishment having more than 1000 have to keep a PF trust and have to specify the group
code)· Total wages due for each account (wages on which calculations are done)· Amount of contribution and amount
remitted (consolidated amount with employer and employee share)· Date of remittance· Total number of subscribers for
the current month.· Name and address of the bank in which the amount is remitted.· Details of subscribers for E.P.F,
PF, EDLI--No of subscribers as per last month--No of new subscribers (vide Form 5)--No of subscribers left service
(vide Form 10)--Total no of subscribers (After adding and subtracting the new and retired employees with,the number
should tally with monthly list of employees)Cross checking the above is done with the salary statement.
Annul returns:

•Form 3 A (Individual Computation sheet)

•2. Form 6 A (Consolidated Annual Contribution Statement)

•3. before 30th April every yearForm 6A:· Currency period and month (April yr to march yr)· Name of the establishment
and address· Code no: of the establishment· No: of member voluntary contributing at a higher rate· AC No of each
employee followed by their name, annual salary, annual contribution, employer contribution, refund of advance, rate of
voluntary contribution.· This grand total should tally with all form 12 A and challans totals.

•Form 3A: RegisterThis form is filled up for each employee stating his each monthly salary, contribution, Employer
share, Refund of advance, No of days/period of non contributing service, if any (eg. unauthorised leave). If the
employee is resigned during that financial year then the date of leaving service and reasons for leaving service should
be specified in this form. Using Form 3A, form 6 A is filled up and crosschecking is done with all challans and 12 A
forms.* Muster Roll * Wage Register * Inspection Book * Cash Book, Voucher & Ledger * PF work sheet Forms:Form 3:
Contribution Cards - Individual Computation sheet contains all PF amts month-wise.

•Form 3 A: Contribution Cards – Form

•Form 4: Contribution card for employees other than monthly paid employees - Form Form 5 A: Return of Ownership to be
sent to the Regional Commissioner - Form Form 6: Return of the Contribution Cards sent to the Commissioner on the
expiry of the period of currency – FormForm 6 A: Consolidated Annual Contribution Statement - Consolidated Computation
Sheet,contains total employees list, there total half yearly information.

•Form 6 is top sheet and 6A is attachments.

•Form 9: Register of employees - Application for review filed under.Register 3: Individual Computation, there Gross
salary, Basic, DA, attendance, PF, Pension Information maintains month-wise.

•Form 3 is top sheet and 3A is attachments

Accounting Treatment of Provident Fund: Provident Fund Calculator
For calculation , you must fill the following form
1.Enter current age

2.Enter retirement age

3.Enter current EPF balance

4.Enter monthly basic pay

5.Enter monthly dearness allowance

6.Enter (%)contribution to EPF

7.Enter expected (%)salary hike

What is Investment ?
Investment are those assets of businessman by which he earn dividend , interest , rent or profit due to increase the
value of investment .
Current stock is not called investment because businessman purchases them for selling, in other words, the do business
of that stock.
Generally businessman invests money in property and building so, these are the basic investments.
According to Accounting Standard 13 “Investment is the assets held by enterprise for earning income by way of
dividends, interest and rent."
¤ Types of Investment
Investment may be short term or long term.
We can also include shares, debentures, and bonds and mutual funds of other company, if we purchase them for the
purpose of earning of interest or dividend from them.
¤ Type of Business
1. Commodity business: - These are general type of business which deal in products but invests his extra money in
different property, shares and bonds.
2. Financial business: - If any business which deal in the trading of shares, or debentures or any other fixed
property. Then his work is to purchase and sale of such product and earn profit from them. This is special case .
According to AS -13 , at this time , these products will deem as his stock item not investment .
¤ Com- Interest Investment
When a businessman buys investment include its cost and accrued interest . Then this investment is called com-interest
investment .
So it is the duty of accountant to separate both .
Calculation of accrued interest = face value of security purchase X period( months )
_________________________________________________________
12 X 100
Calculation of cost of investment = ( Quotation price X No. of security purchase ) – Accrued interest as per calculated
¤ Ex- Interest Investment
When businessman buys investment on its cost and gives accrued interest amount extra to the seller .
¤ Nominal Value
Nominal Value is face value of security . This is so important in investment accounting . Because interest is
calculated on nominal value of security .

Journal Entries of transactions relating to investment
1. When investment is purchased interest date
Investment account Debit ( Quoted price + brokerage ) X No. of investment
bank account Credit
2. When interest or dividend is received after purchase
Bank Account Debit
Investment Account Credit
3. When investment is sold at interest date
Bank Account debit
investment account Credit
4. For transfer of interest or dividend to profit and loss account at the end of year ( but there is no need to enter
this entry in tally 9 because tally 9 automatically transfer to profit and loss account )
Interest account or dividend account debit
Profit and loss account credit
5. Pass the journal entry of profit on sale of investment in manual or tally 9 both
Investment Account Debit
Profit and loss account Credit
6. At end of year show investment at cost price or market price which is less as asset in balance sheet ( but need no
do in tally 9)
Example
On 1st jan 2008 S.P. Ltd purchase 1000 15 % debentures of Reliance Ltd. Of Rs. 100 each @ Rs. 96 each . On 1st july
2008 , ½ of debentures were sold at Rs. 99 each . Debenture interest is payable half yearly on 30th june and 31st
December . Pass voucher entries in tally 9
Working notes
1) Interest on 30th june 2008 will be received 15% on Rs 100000 for 6 months interest = Rs. 100000 X 15/100 X 6/12 =
Rs. 7500
2) ½ of debentures were sold @ Rs. 99 . Therefore sale proceeds will be Rs. 99 X 500 = Rs. 49500
3) Interest on 31st December 2008 will be received @ 15% on Rs. 50000 for 6 months . Interest = Rs. 50000 X 15/100 X
6/12 = Rs. 3750
4) profit on sale of investment = 49500-48000 = Rs. 1500
For recording above transaction in tally 9
1) First of all create S.P. Ltd in tally 9
2) Activate interest calculation in feature F11
3) Create ledger of 15 Debenture in reliance Co. account under investment account , bank account under bank account ,
Interest account under indirect income .
4) Pass the voucher entry of purchasing investment in payment voucher, sale of investment in receipt voucher and
interest received on investment is in receipt voucher and profit on sale of investment transfer to profit and loss
account in journal voucher .

Insurance is the contract in which Mercantilist pays minimum amount of premium to insurance company, and shift his
burden of risk of loss on the head of insurance company.
Insurance company incurred the loss of Mercantilist if it is under the policy of insurance.
Generally Mercantilist does the insurance of many risks like fire of shop or office or plant, fire of stock and loss of
profit.
If Godown or office caught fire. Suppose fire to Godown and insurance company’s special evaluator can easily evaluate
the loss of building due to fire. But it is most difficult to calculate loss of stock or loss of profit. Only
accounting professionals can solve this problem with scientific rules and regulations of accounting.

Calculation the value of stock lost due to fire
Statement Form – Ist way
Particular Amount
Stock in the beginning of the year xxxx
Add : purchase from the beginning of accounting
Year to the date of fire (+) xxxx
------------------------------------------------------------------
XXXX
Less : cost of goods sold from the beginning of
Accounting year to the date of fire (-) XXXX
-----------------------------------------------------------------
Value of stock on the date of fire XXXXX
Less : Stock of Salvaged or saved from fire (-) XXXX
-----------------------------------------------------------------
Value of stock lost due to fire XXXXX
----------------------------------------------------------------
Or
You can make memorandum trading accounting - 2nd Way
“Memorandum trading account is not part of final account but it is just part of working notes for calculating the net
value of stock due to fire.”
Remembering pin -point
1. From both above two methods we must need to calculate gross profit rate. There are following way to calculate gross
profit of business. There are following way to calculate gross profit of business
i) Average of old year gross profit method
ii) Previous gross profit method
G.P. Rate = Previous year Gross profit / Sale of previous year X 100
2. Average Clause
“ Average clause means insurance company will pay only insurance in the proportion of actual loss . Before this rule
businessman used to take insurance policy below the actual amount of his asset. So , Now under this method his claim
will be reduced . "
Formula of Calculating of Claim of loss of stock =
Amount of policy X stock destroyed
----------------------------------------------
Stock on the date of fire

Suppose, xyz Co. got the insurance policy of $ 10000 but his stock value is $ 20000 and actual loss is $ 5000. Now we
will calculate claim under average clause
Claim accept = 5000 X 10000/ 20000 = $2500

3. Some time, information of opening stock , purchase and sale is not give by businessmen , so calculating correct
value of loss due to fire it is very necessary to make total debtor account , total creditor account and previous year
trading account .

Procedure of calculating loss of profit
Many commerce students are confused about how to calculate loss of profit. They know that businessman can take loss of
profit, due to dislocation of business after fire to concern . It can also take with fire insurance policy. But for
getting claim , the businessman want to calculate exact loss of net profit from the date of fire to that day in which
business becomes normal .
Steps of calculating loss of profit
Ist step
Calculate gross profit ratio:-
As the starting point of this procedure you have to determine the value of gross profit because loss of profit is easy
to calculate by multiplying Gross profit with short of sale in that disturbance period .
Net profit xxxx
Add Insured standing
Charges of lass year (+) xxxx
-------------------------------------
Gross profit of last year xxxx
-------------------------------------
Gross profit ratio = Gross profit / sale of last year X 100
2nd step
Calculate shortage in sale due to loss of fire
Actual sale of same period of loss xxxx
Add any increase in thrend of sale (+)xxxx
------------------------------------------------
xxxxx
Less actual sale in dislocation period (-) xxxx
--------------------------------------------------
Shortage of sale in dislocation period xxxx
==================================
3rd step
Calculation of loss of profit
Loss of profit = shortage of sale X G.P. rate / 100
4th Step
Total amount for claim of loss of profit
Loss of gross profit xxxx
Add increase in cost of working (+) xxxx
---------------------------------------------
xxxx
Less saving in standing charges
---------------------------------------------
Amount of claim xxxx
===================================
5th step
Apply average clause
Amount of claim = policy value / amount to be insured
Important notes

1. We will use of only less rate from following rates for calculating correct amount of loss pf profit
Net profit + Insured standing charges of last accounting year
-------------------------------------------------------------------------- X 100
Sale for the last accounting year
Or
Policy value / sale of 12 months immediately proceeding fire as adjusted for trend .
2. The Indemnity period or dislocation period which will small, that period will be fixed for calculation of claim .
3. We will calculate loss of sale on the base of future trend of sale.
4. Insured standing charges means all expenses which are mentioned in the policy of loss of profit. Businessman wants
to get these expenses in the case of mishappening. We can make its list

•Traveling expenses
•Rent, rate and taxes not related with profit of business
•Advertising
•Interest on debentures and loans.
•Auditors fee
•Salaries of permanent staff
•Directors’ fee
•Salaries of permanent staff
•Wages of skilled workers
•All not described expenses must not more than 5% of described standing expenses .
Explanation with example
From the following information, find out the claim under loss of profit policy :-
2007 – net profit for the year $ 10000
2007- Standing charges insured $ 6000
$ sales for 2007 $ 160000
Date of fire 1.1.2008
Period of dislocation 3 months
Sales from 1.12007 to 31.3.2007 $ 54000
Sales from 1.1.2008 to 31.3.2008 $ 19400
Indemnity period 6 months
Policy subject to average clause $ 11000
Trend in annual sales 10% increase
Solution
Ist step
Calculation of gross profit ratio
Net profit + Insured standing charges of last yea
----------------------------------------------------------- X 100
Sale of last year
10000+6000
---------------------- X 100
160000
= 10%
2nd step
Shortage of sale
Last year’s sale from 1.12007 to 31.3.2007 $ 54000
Add 10% for upward trend $ 5400
---------------------------------------------------
$ 59400
Less actual sale during dislocation period $ 19400
-----------------------------------------------------
Shortage of sale $ 40000
=====================================

3rd step
Calculate of loss of profit
Loss of sale X G.P. rate /100
40000 X 10/100 = 4000
4th step
Total amount for claim of loss of profit
Loss of gross profit 4000
Add increase in cost of working (+) nil
Less saving in standing charges nil
Amount of claim $4000
5th step
Average clause
Since the policy is subject to average clause, it is necessary to find out whether expected profit of the current year
was fully insured or not .
Expected sale for current year
Last year sale $ 160000
Add :Increase in current year 10% = $ 16000
--------------------------------------------
Total sale of current year = 176000
---------------------------------------------
Profit rate 10%
The profit of current year = 176000 X 10% = $17600
But we take the policy of $ 11000
This is a case of under insurance. It means insurance company pays $ 110 of every $ 176 loss
Claim = insurance policy / insurable profit X profit lost
= 11000 / 17600 X 4000 = $ 2500
So , amount of claim would be $ 2500
Voucher Entry of Insurance Claim in Tally 9
" Record of Claim of insurance is special type transaction and only when we record when actual claim we get . In this
we should make new group of sundry insurance under prime group of current asset after this we should create ledger of
insurance company and other ledger one time . "
When claim relating to fixed assets is admitted
Insurance company a/c ( Under Sundry Insurance account ) Debit
Particular fixed asset account ( under Fixed asset ) Credit
* Above voucher entries means insurance company is receiver , he has taken our burden of loss And if loss happen , it
mean we sent of fixed asset to insurance company means fixed asset goes out , so it will be credit .
When the claim relates to stock in trade
Insurance company account ( under Sundry insurance account ) Debit
To stock destroyed account or damaged account Credit
Above voucher entries means insurance company is receiver , he has taken our burden of loss of stock
And if loss happens , it mean we sent of goods to insurance company means goods goes out , so it will be credit .
When claim relates to loss of profit
Insurance company account(under sundry insurance account ) Debit
Profit and loss account Credit
When insurance claim amount is received
Bank account ( Under bank account ) Debit
Insurance company account ( Under sundry insurance ) credit
This entry means that we are receiver of cash and bank is our representative . So , this account Will debit in voucher
entry and Insurance company is giver of claim amount and this entry is simply passed under the rules of double entry .