Month: December 2020

Under invoice price method, the goods are consigned to the consignee at a price which is higher than their original cost. The proforma invoice is prepared by adding a certain percentage of the cost price or the sales price to the original cost of the goods.

The invoice price method is adopted to achieve one or more of the following purposes:

• Sending goods to consignee not at original cost but at a higher price helps keep the consignment profit secrete.
• Its incentives consignee to realize the best possible price on sale of goods.
• It makes consignee charge uniform price to all the customers.

Items on Which Excess Price is to be Calculated:

Excess Price or Loading is to be calculated on the following items:

1. Consignment stock at the beginning
2. Goods sent on consignment
3. Goods returned by the consignee
4. Consignment stock at the end of the period

(a) To Remove the Excess Price in the Opening Stock:

Consignment Stock Reserve A/c Dr.

  To Consignment Account

(Being the excess value of opening stock is brought down to cost price)

(b) To Remove the Excess Price in the Goods Sent on Consignment:

Goods sent on Consignment Account Dr.

  To Consignment Account

(Being the difference between the invoice price and cost price is adjusted)

(c) To Remove the Excess Price in Goods Return:

Consignment Account Dr.

  To Goods sent on Consignment A/c

(Being to bring down the value of goods to cost price)

(d) To Remove the Excess Price in Closing Stock:

Consignment Account Dr.

  To Consignment Stock Reserve A/c

(Being the excess value of stock is adjusted)

But these adjustments are not needed in consignee’s book. Invoice price does not affect the consignee. When the stock is shown in the Balance Sheet, in Consignor’s Book, the Consignment Stock Reserve is deducted.

Journal entries under invoice price method

The preparation of journal entries and ledger accounts under invoice price method is much similar to the cost price method, except for some adjusting entries that are required to remove excess price on goods and bringing their value down to the cost. The removal of excess price or loading is essential to know the actual profit earned by the consignment.

The journal entries that are made in the books of consignor under cost price method have been given here. In this article, we will discuss only those entries that are required to eliminate the impact of excess price or loading.

1. Journal entry for adjusting the value of opening stock

Stock reserve [Dr]

Consignment [Cr]

2. Journal entry for adjusting the value of goods sent on consignment:

Goods sent on consignment [Dr]

Consignment [Cr]

3. Journal entry for adjusting the value of abnormal loss:

Consignment [Dr]

Abnormal loss [Cr]

4. Journal entry for adjusting the value of stock on consignment:

Consignment [Dr]

Stock reserve [Cr]

When balance sheet is prepared at the end of accounting period, the balance of the stock reserve account is shown as deduction from the value of stock on consignment.

In accounting, Ledgers are the backbone of financial recording. A ledger is a book or record that contains all accounts related to assets, liabilities, income, and expenses. In TallyPrime, ledgers are created under predefined Groups that classify them into categories such as Assets, Liabilities, Direct Expenses, Indirect Income, etc. Groups act like a classification framework, while ledgers record specific transactions under those categories. For example, “Cash” is a ledger under the “Cash-in-Hand” group, and “Salaries” is a ledger under the “Indirect Expenses” group. Together, groups and ledgers form the foundation of a company’s accounting system.

Process of Ledger Creation in TallyPrime:

Step 1. Accessing Ledger Creation in TallyPrime

The process of creating a ledger begins from the Gateway of Tally. After launching TallyPrime and selecting the desired company, navigate to Create → Ledger. This menu allows users to define a new ledger for accounting purposes. TallyPrime provides a simplified interface where all essential details such as ledger name, group classification, and balances are entered. Accessing the ledger creation option is the very first step, as it ensures that all transactions can be systematically recorded under the correct head, forming the backbone of financial reporting and analysis.

Step 2. Entering Ledger Name

Once inside the ledger creation screen, the first important field is the Ledger Name. This should be meaningful, clear, and directly related to the account it represents. For example, names such as “Cash,” “HDFC Bank,” “Sales,” or “Salary Expense” can be used. A proper naming convention avoids confusion while recording entries and generating reports. Businesses may adopt consistent prefixes or suffixes to distinguish between different accounts. For instance, “Sales – Domestic” and “Sales – Export” make identification easier. A clear ledger name ensures proper categorization and easier recognition during day-to-day accounting operations.

Step 3. Selecting the Appropriate Group

The next critical step is to assign the ledger to a suitable Group. In TallyPrime, groups are categories such as Assets, Liabilities, Income, and Expenses. For example, “Cash” falls under the group Cash-in-Hand, “Rent” under Indirect Expenses, and “HDFC Bank” under Bank Accounts. Selecting the right group ensures the ledger contributes accurately to financial statements like the Balance Sheet and Profit & Loss Account. Misclassification here can distort reports, making decision-making difficult. Thus, groups serve as the foundation, ensuring that every ledger aligns correctly with the company’s financial framework.

Step 4. Providing Opening Balances

TallyPrime allows users to enter an Opening Balance while creating a ledger, which is essential when starting accounts for a new financial year or migrating from manual records. For example, if a company has ₹50,000 in cash on hand, this amount should be recorded as the opening balance in the “Cash” ledger. Similarly, outstanding creditors or debtors are entered with their balances. Opening balances provide a starting point for accounting records, ensuring continuity and accuracy in financial tracking. Without them, current transactions cannot reflect the true financial position of the business.

Step 5. Saving and Reviewing the Ledger

After filling in details such as name, group, and opening balance, the final step is to Save the ledger. Once saved, it becomes available for use in vouchers and transactions. However, before saving, it is advisable to review all details to ensure accuracy. Errors like misgrouping or incorrect balances can affect the entire accounting cycle. TallyPrime also allows editing of ledgers later, but careful entry at the start reduces mistakes. Reviewing helps maintain consistency and prevents the need for frequent corrections, which could otherwise disrupt financial statements and reports.

Step 6. Using the Created Ledger in Transactions

Once the ledger is created, it becomes functional within TallyPrime. Users can immediately use it while recording Vouchers, such as Sales, Purchases, Payments, and Receipts. For instance, the “Cash” ledger can be used in a payment voucher, while “Rent Expense” can be applied to a journal entry. The system automatically updates balances, ensuring real-time accuracy of books. This integration of ledgers into transaction processing makes TallyPrime a powerful accounting tool. By correctly setting up ledgers at the start, businesses ensure seamless operations and accurate financial analysis throughout the accounting period.

Process of Group Creation in TallyPrime:

Step 1. Accessing the Group Creation Option

The first step in group creation is to access the Group Creation screen from the Gateway of Tally. After selecting the active company, navigate to Create → Group. This option allows users to define new groups, which serve as categories for classifying ledgers. Groups are the foundation of TallyPrime’s accounting structure, ensuring proper segregation of accounts under Assets, Liabilities, Income, and Expenses. Accessing this option ensures that before creating ledgers, businesses can establish a strong categorization system to maintain clarity in financial reporting and smooth voucher entries.

Step 2. Naming the Group

Once inside the group creation screen, the first detail to be entered is the Group Name. This name should be clear and descriptive, as it helps in identifying the purpose of the group. For instance, groups can be created as “Sundry Debtors,” “Sundry Creditors,” “Fixed Assets,” or “Direct Expenses.” A logical naming convention avoids confusion and makes future ledger creation more streamlined. Choosing a precise name for the group is important because it directly impacts how ledgers and accounts are classified, making financial analysis easier and more systematic.

Step 3. Selecting Primary or Sub-Group

The next step is to specify whether the new group is a Primary Group or a Sub-Group. A primary group stands independently, such as “Assets” or “Liabilities,” while a sub-group is created under an existing group. For example, “Office Equipment” can be a sub-group under “Fixed Assets.” This classification is crucial for hierarchical arrangement in financial statements. Choosing the right level ensures that related ledgers are properly aligned in reports, providing clarity. Sub-groups enhance flexibility by breaking down broad categories into smaller, more detailed classifications for accurate reporting.

Step 4. Specifying Nature of Group

TallyPrime requires specifying the Nature of Group, such as whether it relates to Assets, Liabilities, Income, or Expenses. This step ensures that the group is reflected appropriately in the Balance Sheet or Profit & Loss Account. For instance, a group like “Direct Expenses” impacts the profit calculation, while “Loans” affect liabilities. By specifying the nature of the group, businesses maintain consistency in financial reporting. This step eliminates misclassification, which can otherwise distort the financial position. Proper categorization ensures smooth accounting operations and accurate representation of the company’s accounts.

Step 5. Setting Group Behaviors

After selecting the group nature, users can define Behavioral Settings for the group, such as whether it should calculate balances as debit or credit, or allow net debit/credit balances. For example, income groups usually have credit balances, while expense groups carry debit balances. These configurations help TallyPrime automatically manage postings and reports without manual intervention. Businesses can also decide if the group should be used in specific statements or excluded. Setting these behaviors reduces accounting errors and ensures smooth functioning, as the software follows predefined rules for the group.

Step 6. Saving and Utilizing the Group

The final step is to Save the group after reviewing all details. Once saved, the group becomes available for creating ledgers under it. For example, if a group “Bank Accounts” is created, ledgers such as “HDFC Bank” or “SBI Bank” can be added under it. The group thus acts as a parent category, simplifying the classification of ledgers. Groups ensure that all transactions fall under well-defined heads, making Balance Sheet and Profit & Loss reporting accurate. Proper group creation also helps during audits and decision-making, improving overall efficiency.

Importance of Ledger and Group Creation

• Systematic Recording – Ledgers classify and store transactions systematically.

• Financial Reporting – Groups allow TallyPrime to generate Balance Sheets, P&L A/c, and Trial Balance automatically.

• Error Prevention – Correct classification prevents mismatches in financial statements.

• Business Analysis – Helps management analyze income, expenses, assets, and liabilities in detail.

• Automation – Once groups and ledgers are created correctly, entries and reports flow automatically.

Key differences between Basic Ledger & Group Creation

Fire insurance is a contract between an insurer and an insured where the insurer promises to compensate the insured for the financial loss or damage caused by fire, subject to certain terms and conditions. It is a type of property insurance that specifically covers losses or damages to property, goods, or assets due to accidental fire, lightning, or explosion. The purpose of fire insurance is to ensure that the insured is protected from the devastating financial consequences that can result from fire-related incidents.

In a fire insurance contract, the insured pays a regular premium to the insurance company, and in return, the insurer agrees to indemnify the insured if a loss occurs due to fire. The insurance policy typically specifies the maximum amount the insurer will pay, which is known as the sum insured. However, the insurer is liable to compensate only up to the actual loss suffered, not exceeding the sum insured.

Fire insurance policies often cover not just the direct damage caused by fire but also losses due to smoke, water used to extinguish the fire, or efforts to prevent the spread of fire. However, damages resulting from intentional acts, war, or nuclear risks are usually excluded.

Fire Insurance Claim:

Fire insurance claim refers to the process through which an insured individual or entity seeks compensation from the insurance company for losses or damages incurred due to a fire. The primary purpose of fire insurance is to indemnify the policyholder, meaning to restore them to the same financial position they were in before the loss, as per the policy terms.

Fire insurance claims are typically filed after any fire-related damage to the insured property or assets. The claim can be related to physical damage to the building structure, machinery, equipment, or stock. Some policies also cover additional costs like debris removal, temporary accommodations, or business interruption losses.

To successfully file a fire insurance claim, the insured must follow a series of steps, which generally:

• Immediate Notification

The insured must notify the insurer about the fire incident as soon as possible. Prompt communication is essential, as delaying notification could lead to denial of the claim.

• Filing an FIR (First Information Report)

In most cases, an FIR must be lodged with the local authorities to confirm the fire incident. This report serves as an official record and is often required by the insurance company during the claim process.

• Submission of Proof

The insured must provide detailed documentation of the fire incident, including photographs, a fire brigade report, and an inventory of the damaged goods. A claim form must be submitted with all relevant details regarding the extent of damage and loss.

• Survey and Inspection

After the claim is submitted, the insurance company sends a surveyor or an independent adjuster to inspect the property and assess the loss. This step helps determine the cause of the fire, the amount of damage, and the extent of liability for the insurer.

• Claim Settlement

Once the inspection is complete, the insurer evaluates the claim based on the surveyor’s report. If all terms and conditions of the policy are met, the insurance company compensates the insured, either by repairing or replacing the damaged property or providing a monetary settlement.

Types of Fire Insurance Claims:

• Specific Policy Claim

A specific policy covers a particular property or item against fire risk up to a fixed amount. If a fire damages the insured asset, the claim is limited to the amount specified in the policy, even if the loss exceeds that. This type is useful when only selected assets are insured. It simplifies claim settlement but requires accurate valuation to avoid underinsurance or overinsurance, ensuring the insured receives fair compensation within the declared policy limit.

• Valued Policy Claim

In a valued policy, the value of the insured property is agreed upon at the time of issuing the policy. In case of a total loss due to fire, the insurer pays the pre-agreed amount, regardless of the actual market value at the time of the loss. This type of claim helps avoid disputes over valuation after the incident, providing certainty to both the insurer and the insured, especially for items like artwork or antiques.

• Average Policy Claim

An average policy contains an average clause that applies when the insured has underinsured the property. In case of a partial loss, the claim amount is reduced proportionately based on the ratio of insured value to actual value. This discourages underinsurance by ensuring that the insured bears part of the loss if they have not insured the full value of the property, promoting fair insurance practices and accurate asset valuation.

• Floating Policy Claim

A floating policy covers assets located at multiple places under a single sum insured. In case of a fire loss at any location, the claim is settled from the overall insured amount. This type of policy is useful for businesses with goods stored in multiple warehouses or locations. It simplifies administration and offers flexibility, but it requires proper record-keeping to assess the actual loss and ensure claims are settled accurately.

• Replacement or Reinstatement Policy Claim

A reinstatement or replacement policy provides for the replacement of the damaged property with a new one of similar kind, instead of paying the depreciated value. Claims under this policy ensure the insured can restore their property or asset to its original state, avoiding the impact of depreciation. However, the insured must actually replace the asset to claim under this policy, and the replacement cost should not exceed the sum insured.

• Comprehensive Policy Claim

A comprehensive fire policy covers not only fire damage but also risks like theft, burglary, riot, strike, explosion, and natural disasters. Claims under this policy can cover multiple types of losses, making it a broad and protective insurance option for businesses. This type of claim often involves detailed assessment due to the multiple risks covered, ensuring all possible damages are included in the compensation process.

• Consequential Loss Policy Claim

This type of claim arises from losses due to business interruption after a fire, such as loss of profits, fixed expenses, or loss of market share. Also known as a loss of profit policy, it compensates for indirect losses that follow the fire incident, helping businesses maintain financial stability during recovery. It requires detailed financial records to assess the extent of consequential losses, making it crucial for businesses reliant on continuous operations.

• Declaration Policy Claim

A declaration policy is used when the value of stock or goods fluctuates frequently. The insured declares the value of stock monthly, and the premium is adjusted accordingly. In case of fire, the claim is based on the last declared value, ensuring accurate compensation. This type of claim benefits businesses with seasonal or variable inventories, as it prevents over- or under-insurance by aligning the coverage with actual stock levels.

• Adjustable Policy Claim

An adjustable policy allows the sum insured to be increased or decreased during the policy period based on changes in the value of the insured property. Premiums are adjusted accordingly. In case of fire, the claim is settled based on the adjusted sum insured. This type of claim ensures businesses have flexible coverage that adapts to their changing needs, providing accurate protection and avoiding gaps or excesses in insurance.

Features of Fire Insurance:

• Indemnity Principle

Fire insurance operates on the principle of indemnity, meaning that the insurer compensates the insured for the actual financial loss incurred due to a fire. The compensation is limited to the amount required to restore the policyholder to the financial position they were in before the loss, preventing any gain from the insurance policy. The insured is not allowed to claim more than the actual loss suffered.

• Coverage for Fire-Related Perils

Fire insurance primarily covers damages caused by fire, but it also typically includes other associated risks such as lightning, explosion, implosion, riot, and strikes. In some cases, additional perils like damage due to smoke, water used to extinguish the fire, or firefighting equipment may also be covered. This comprehensive protection helps mitigate the financial risk caused by fire-related incidents.

• Policy Tenure

A fire insurance policy generally offers coverage for a fixed period, usually one year, after which it must be renewed. The policyholder pays a premium for this period, and the coverage ceases once the policy expires unless it is renewed. The insurer may revise the terms, conditions, and premium rates during the renewal process.

• Insurable Interest

To purchase fire insurance, the insured must have an insurable interest in the property or assets. This means that the insured should stand to suffer a financial loss if the property is damaged or destroyed by fire. The insurable interest must exist at the time the policy is taken and also at the time of the fire event.

• Claim Procedure

In the event of a fire, the policyholder is required to follow a specific claim procedure. This typically involves immediate notification to the insurer, submission of required documents such as a First Information Report (FIR), fire brigade report, and detailed proof of loss. A surveyor appointed by the insurance company assesses the damage before the claim is settled.

• Average Clause

Average clause in fire insurance comes into play when the insured property is underinsured. If the sum insured is less than the actual value of the property, the insurer applies the average clause, which reduces the compensation paid based on the proportion of underinsurance.

• Reinstatement Value

Many fire insurance policies offer compensation based on the reinstatement value rather than the market value. This means the insurer compensates the insured for the cost of replacing or rebuilding the damaged property, without considering depreciation.

• Exclusions

Fire insurance policies typically exclude certain events from coverage. Common exclusions include damage caused by war, nuclear risks, terrorism, and intentional fire caused by the insured. Additionally, some policies exclude losses resulting from electrical malfunctions, natural wear and tear, or fires caused by chemical reactions.

Advantages of Fire Insurance Claims:

• Financial Protection

The primary advantage of fire insurance claims is that they provide essential financial protection against unexpected fire losses. Businesses and individuals can recover the value of damaged property, goods, or assets, ensuring they do not bear the entire financial burden. This compensation helps maintain financial stability, prevents bankruptcy, and allows the insured party to rebuild or replace assets without major disruption to their long-term financial plans or business operations.

• Business Continuity

Fire insurance claims help businesses maintain continuity after a fire disaster. By covering repair costs, replacement of machinery, and even stock replenishment, the insurance payout enables the company to resume operations quickly. Without such support, many businesses would struggle to recover from severe fire damages. Thus, fire insurance plays a critical role in reducing downtime, preserving market share, and maintaining customer trust by ensuring the company can continue its operations smoothly.

• Peace of Mind

Having fire insurance provides peace of mind to the insured, knowing they have a financial safety net in place. Even in the face of accidental fires or unforeseen disasters, the insured party can focus on recovery without the stress of arranging large funds for repairs or replacements. This emotional and psychological benefit is valuable for both individuals and business owners, allowing them to handle post-disaster recovery with confidence and clarity.

• Compensation for Consequential Losses

Certain fire insurance policies, such as consequential loss policies, cover not just the physical damage but also the indirect financial losses, such as loss of profit or increased operational costs. This advantage ensures businesses are compensated for the broader impact of fire incidents, helping them cover ongoing expenses like salaries, rent, and loan repayments even during periods of disruption. This comprehensive coverage enhances the company’s ability to navigate financial challenges after a fire.

• Encourages Risk Management

Fire insurance often requires the insured to adopt safety measures and comply with risk management standards, such as installing fire alarms, extinguishers, or sprinkler systems. These proactive steps reduce the chances of fire-related incidents and minimize damages if they occur. Thus, having a fire insurance policy indirectly promotes better risk awareness and safety practices within organizations, creating a safer work or living environment and reducing overall exposure to fire hazards.

• Affordable Premiums

Compared to the massive financial impact a fire can cause, the premiums for fire insurance are generally affordable and cost-effective. This makes fire insurance an economically practical tool for risk management. The relatively low investment in premiums offers high-value protection, ensuring that even small businesses or individuals can safeguard their assets. The ability to make claims when needed ensures that the policyholder maximizes the value derived from their insurance expenditure.

• Legal and Contractual Compliance

Many businesses are required by law, lenders, or lease agreements to have fire insurance in place. Fire insurance claims help ensure that the insured remains compliant with these legal or contractual obligations. This compliance not only avoids legal penalties but also strengthens business relationships with investors, banks, and landlords. By maintaining proper insurance and having the ability to claim when necessary, businesses demonstrate financial responsibility and reliability to stakeholders.

• Simplified Recovery Process

When a fire occurs, the insured can raise a claim, and the insurer typically handles the assessment, loss evaluation, and settlement processes. This simplifies the recovery process, as the insured does not have to manage all aspects of damage evaluation and cost estimation on their own. The insurance company’s expertise ensures fair and accurate compensation, allowing the insured to focus on restoring operations or repairing property rather than handling complex financial calculations.

• Protection Against Inflation

Certain fire insurance policies, such as reinstatement value policies, provide compensation based on current replacement costs rather than depreciated values. This protects the insured against the effects of inflation, ensuring they receive enough funds to replace or rebuild their property at today’s prices. Without such protection, the insured might face a shortfall due to rising costs. This advantage strengthens financial security and guarantees adequate recovery in the face of economic changes.

Principles of Fire Insurance:

• Principle of Indemnity

The principle of indemnity is the core of fire insurance. It states that the insured will only be compensated for the actual loss suffered due to fire, ensuring they are restored to the same financial position they were in before the loss. The insured cannot make a profit from the insurance claim. If the property is insured for a higher amount than its value, the insurer will only pay the amount equivalent to the actual loss.

• Principle of Insurable Interest

To purchase fire insurance, the insured must have an insurable interest in the property. This means the insured should stand to suffer a financial loss if the property is damaged or destroyed by fire. The insurable interest must exist both at the time the policy is purchased and at the time of the fire. For example, a property owner, a tenant, or a mortgage holder can all have an insurable interest in a property.

• Principle of Utmost Good Faith (Uberrimae Fidei)

Fire insurance is a contract of utmost good faith. Both the insured and the insurer must disclose all relevant information honestly and completely. The insured is obligated to disclose any material facts that could affect the insurer’s decision to provide coverage or determine the premium. Failure to disclose such information could render the contract void. The insurer is also expected to provide clear terms, conditions, and limitations of the policy.

• Principle of Subrogation

The principle of subrogation allows the insurer to step into the shoes of the insured after compensating them for the loss. If a third party is responsible for the fire, the insurer has the right to recover the amount paid to the insured from that third party. This principle ensures that the insured does not receive double compensation, one from the insurer and another from the responsible party.

• Principle of Contribution

If the insured has taken multiple fire insurance policies on the same property with different insurers, the principle of contribution applies. In case of a loss, all insurers will contribute proportionally to the claim. The insured cannot claim the full loss amount from each insurer separately. This prevents overcompensation for the loss.

• Principle of Proximate Cause

Fire insurance covers losses caused directly by fire or related perils like explosion, smoke, or water used to extinguish the fire. The principle of proximate cause ensures that only losses resulting from insured perils are covered. If a fire occurs due to a covered event (like lightning), the insurer will compensate for the loss. However, if the fire is caused by an excluded peril (like war or terrorism), the insurer is not liable to pay.

• Principle of Loss Minimization

The insured has a duty to take reasonable steps to minimize the loss after a fire occurs. They must act prudently to prevent further damage to the property. For example, if a fire breaks out, the insured should call the fire brigade immediately and take steps to save the undamaged property. Failure to do so may lead to a reduction in the claim amount.

• Principle of Cause and Effect (Causa Proxima)

In fire insurance, only the proximate cause of the damage is considered for compensation. If fire is the immediate cause of damage, even if it resulted from another insured peril, the loss is covered. For example, if an earthquake causes a fire and damages property, the insurer may compensate for the fire damage, but not for the earthquake damage, if the policy excludes earthquakes.