Tag: Segment Reporting

Departmental Accounts refer to the financial records maintained for each department or section within a business to assess its performance individually. They help in identifying the profitability and efficiency of each department by segregating income, expenses, assets, and liabilities. This system is particularly useful in multi-departmental organizations, such as retail stores or manufacturing firms, where each department functions as a separate profit center. Departmental accounting enables better decision-making, cost control, and resource allocation while facilitating performance comparisons across departments and aiding in overall organizational profitability assessment.

Objectives of Departmental Accounts:

• Evaluate Departmental Performance

The primary objective of maintaining departmental accounts is to assess the profitability and efficiency of each department. By segregating income and expenses, management can determine the contribution of individual departments to the overall business.

• Facilitate Comparative Analysis

Departmental accounts allow for comparisons between various departments to identify strengths and weaknesses. Management can analyze why one department is outperforming another and implement strategies to replicate success across the organization.

• Assist in Decision-Making

Accurate departmental accounts provide critical insights for decision-making. For example, management can decide whether to expand a high-performing department, restructure underperforming ones, or allocate resources more effectively.

• Control Costs

Departmental accounts help identify cost centers and monitor expenses at the departmental level. By analyzing these accounts, management can implement cost-saving measures and prevent unnecessary expenditures, improving overall financial efficiency.

• Aid in Budgeting and Forecasting

Departmental accounting provides a foundation for creating realistic budgets and forecasts. Historical data from these accounts help estimate future revenues and expenses, enabling better financial planning and resource allocation.

• Determine Accurate Pricing Strategies

By understanding the profitability of individual departments, businesses can establish pricing strategies that align with departmental goals. For example, products or services from a department with high operational costs may need to be priced higher to maintain profitability.

• Facilitate Incentive Systems

Departmental accounts make it easier to design incentive systems for department heads and staff. By linking rewards to departmental performance, businesses can motivate employees to achieve better results, fostering a culture of accountability and productivity.

Advantages of Departmental Accounts:

• Enhanced Performance Evaluation

Departmental accounts provide a clear picture of the performance of each department. By segregating revenues, expenses, and profits, management can assess which departments are contributing significantly to the business and which are underperforming. This detailed analysis helps in identifying areas requiring improvement or further investment.

• Effective Cost Control

Maintaining separate accounts for each department enables better tracking of expenses. It helps pinpoint departments with high operational costs, allowing management to implement cost-saving measures and eliminate inefficiencies. This fosters better resource utilization and overall financial discipline.

• Improved Decision-Making

Departmental accounts supply vital data for making informed decisions. For instance, management can decide on expanding a profitable department, merging departments with overlapping functions, or shutting down non-performing ones. This data-driven approach enhances strategic planning and operational efficiency.

• Facilitates Comparison and Competition

By providing individual performance metrics, departmental accounts make it easy to compare departments. Healthy competition among departments can be encouraged, motivating teams to perform better. Comparisons also help identify best practices in successful departments that can be implemented elsewhere in the organization.

• Simplifies Budgeting and Forecasting

With detailed financial data for each department, businesses can prepare more accurate budgets and forecasts. Departmental accounts reveal trends in revenue and expenditure, enabling realistic financial planning. This ensures optimal resource allocation and minimizes the risk of overspending or underfunding critical operations.

• Basis for Incentive Systems

Departmental accounting enables the development of performance-based incentive schemes. By linking bonuses or rewards to departmental profitability and efficiency, employees are motivated to achieve their targets. This not only boosts morale but also aligns individual and departmental goals with the organization’s objectives.

Disadvantages of Departmental Accounts:

• Increased Administrative Costs

Maintaining departmental accounts requires additional resources, including staff and accounting systems, which can lead to higher administrative costs. Small businesses with limited budgets may find the system too expensive to implement and sustain.

• Complexity in Implementation

Setting up and maintaining departmental accounts can be complex. It involves dividing revenues and expenses accurately among departments, which can be challenging, especially for shared costs like utilities, rent, or administrative expenses. Errors in allocation can lead to misleading financial results.

• Time-Consuming Process

The preparation and maintenance of departmental accounts demand significant time and effort. Regular updates, reconciliations, and performance evaluations require a dedicated team, which can divert focus from core business activities, particularly in organizations with multiple departments.

• Risk of Inter-Departmental Conflicts

Departmental accounts often highlight differences in performance, which can create unhealthy competition among departments. Teams might focus on maximizing their department’s results rather than working collaboratively toward the overall goals of the organization.

• Overemphasis on Profitability

Departmental accounting may lead to an undue focus on profitability at the expense of other critical factors such as employee satisfaction, customer service, or innovation. Departments with lower profitability but essential roles, such as research and development, may receive less attention or funding.

• Possibility of Manipulation

There is a risk of intentional misallocation of revenues or expenses to show better performance for a specific department. Such manipulations can lead to inaccurate financial reports, affecting management decisions and potentially harming the organization’s overall success.

When two or more parties engage in a joint venture, they may decide to maintain separate books of accounts to record the financial transactions of the venture. This method ensures clarity in recording transactions, sharing profits or losses, and tracking contributions made by each party. Separate books are particularly useful for larger ventures involving significant investments, multiple transactions, or a long duration.

Features of Maintaining Separate Books:

• Joint Bank Account:

A joint bank account is opened to record all cash transactions, including contributions by co-venturers, payments for expenses, and receipts from sales or services.

• Joint Venture Account:

This account is used to record all transactions related to the joint venture, such as expenses incurred, revenues earned, and the profit or loss from the venture.

• Co-Venturers’ Accounts:

Separate accounts for each co-venturer are maintained to record their contributions, withdrawals, and share of profit or loss.

Steps in Maintaining Separate Books:

• Opening a Joint Bank Account:

Each co-venturer contributes their share of initial capital, which is deposited in the joint bank account. The account is then used for all cash transactions during the venture.

• Recording Expenses:

All expenses related to the venture, such as purchase of goods, wages, and other overheads, are paid through the joint bank account and recorded in the joint venture account.

• Recording Revenues:

Any income or revenue earned from the joint venture operations is deposited into the joint bank account and recorded in the joint venture account.

• Distribution of Profit or Loss:

After determining the profit or loss of the joint venture, it is transferred to the co-venturers’ accounts in their agreed ratio.

• Settlement:

Upon completion of the joint venture, the remaining cash balance in the joint bank account is distributed to the co-venturers after settling any outstanding liabilities.

Example

A and B enter into a joint venture to sell imported electronic gadgets. They agree to share profits and losses equally. Below are the transactions during the venture:

1. Initial Contribution:
   • A contributes ₹1,00,000.
   • B contributes ₹1,00,000.
2. Expenses Incurred:
   • Goods purchased for ₹1,50,000.
   • Transportation expenses of ₹10,000.
   • Advertising expenses of ₹20,000.
3. Revenue Earned:
   • Total sales amount to ₹2,20,000.
4. Profit Distribution:
   • The profit is shared equally between A and B.

Journal Entries

Date	Particulars	Debit (₹)	Credit (₹)
Jan 1	Joint Bank Account Dr.	2,00,000
	To A’s Account		1,00,000
	To B’s Account		1,00,000
Jan 5	Joint Venture Account Dr.	1,50,000
	To Joint Bank Account		1,50,000
Jan 10	Joint Venture Account Dr.	10,000
	To Joint Bank Account		10,000
Jan 15	Joint Venture Account Dr.	20,000
	To Joint Bank Account		20,000
Jan 31	Joint Bank Account Dr.	2,20,000
	To Joint Venture Account		2,20,000
Jan 31	Joint Venture Account Dr. (Profit)	40,000
	To A’s Account		20,000
	To B’s Account		20,000

Profit Calculation

Particulars	Amount (₹)
Revenue from Sales	2,20,000
Less: Goods Purchased	1,50,000
Less: Transportation	10,000
Less: Advertising	20,000
Profit	40,000

Each co-venturer’s share of profit = ₹40,000 ÷ 2 = ₹20,000

Ledger Accounts

1. Joint Bank Account

Date	Particulars	Debit (₹)	Credit (₹)	Balance (₹)
Jan 1	A’s Contribution	1,00,000		1,00,000
	B’s Contribution	1,00,000		2,00,000
Jan 5	Goods Purchased		1,50,000	50,000
Jan 10	Transportation		10,000	40,000
Jan 15	Advertising		20,000	20,000
Jan 31	Sales Revenue	2,20,000		2,40,000
Jan 31	A’s Withdrawal		1,20,000	1,20,000
	B’s Withdrawal		1,20,000	0

2. Joint Venture Account

Date	Particulars	Debit (₹)	Credit (₹)	Balance (₹)
Jan 5	Goods Purchased	1,50,000		1,50,000
Jan 10	Transportation	10,000		1,60,000
Jan 15	Advertising	20,000		1,80,000
Jan 31	Sales Revenue		2,20,000	40,000 (Profit)

Branch Account is a record kept to track the transactions, income, and expenses of a branch of a business separately from the main office. These accounts help in analyzing the performance and financial position of each branch.

Branches may either operate with complete autonomy (independent branches) or under direct control of the head office (dependent branches). The accounting for these branches varies based on their nature. For dependent branches, the head office manages most of the financial activities and maintains their accounts. Independent branches, however, maintain their records independently and send periodic summaries to the head office.

Objectives of Branch Accounts:

• Assessing Branch Performance

The most critical objective is to evaluate the financial performance of each branch. This helps the head office understand the profitability of the branches and take necessary steps to improve their efficiency.

• Ensuring Proper Control

Branch accounts enable the head office to exercise better control over the operations of the branches. It ensures that financial transactions are carried out as per organizational policies and minimizes instances of fraud or mismanagement.

• Facilitating Consolidation

Branch accounts simplify the consolidation of financial statements. The data from branch accounts can be integrated with the head office accounts to provide a complete view of the company’s financial status.

• Promoting Accountability

By maintaining separate accounts, branch managers are held accountable for the financial results of their branches. It encourages them to manage their operations efficiently and responsibly.

• Segregating Revenues and Expenses

Separate branch accounts help segregate the revenues and expenses of each branch, making it easier to analyze branch-wise profitability and financial trends.

• Monitoring Inventory and Assets

Branch accounts provide a systematic record of inventory and other assets held at the branch. This helps in avoiding discrepancies and ensuring proper asset utilization.

• Assisting in Decision-Making

Detailed branch accounts provide the management with valuable insights, aiding in strategic decision-making related to branch expansion, resource allocation, and cost optimization.

• Legal and Tax Compliance

Maintaining proper branch accounts ensures compliance with local legal and tax regulations. This is particularly important for branches operating in different regions or countries with varying tax laws.

Types of Branches and Their Accounting

Branches can generally be classified into two types:

1. Dependent Branches

• These branches operate under the direct supervision of the head office.
• The head office manages most financial activities, including purchasing, pricing, and policy-making.
• Branch accounts for dependent branches are maintained at the head office using the Debtors System or Stock and Debtors System.

2. Independent Branches

• These branches have significant autonomy and maintain their financial records independently.
• They prepare their profit and loss account and balance sheet and periodically send summaries to the head office.
• The Final Accounts System is commonly used for accounting in independent branches.

Methods of Branch Accounting:

Several methods are used to maintain branch accounts, including:

1. Debtors System:
   • Suitable for smaller, dependent branches.
   • The head office records all branch transactions, and only a summary is maintained.
2. Stock and Debtors System:
   • Provides a detailed view of branch activities, including stock, expenses, and income.
   • Helps in effective inventory control.

3. Final Accounts System:

   • Used by independent branches.
   • Branches prepare their trial balance, profit and loss account, and balance sheet.
4. Wholesale Branch System:
   • Used for branches dealing with wholesale trading.
   • Focuses on maintaining separate records for wholesale inventory and accounts receivable.

Advantages of Branch Accounts:

• Improved Financial Control:

Provides better control over branch operations and ensures adherence to organizational policies.

• Performance Evaluation:

Facilitates the analysis of profitability and efficiency of individual branches.

• Transparent Record-Keeping:

Enhances the accuracy and transparency of financial records.

• Strategic Insights:

Assists in identifying underperforming branches and planning future expansion.

Generally when branches are small their accounts are maintained by the head office. If the branch is big and, specially, if it carries on manufacturing operations also, it usually maintains its own books of account, extracts own trial balance and prepares its own trading and profit and loss account and balance sheet.

The head office must, however, present one consolidated balance sheet for the benefit of the shareholders and the outside world. The head office will maintain, in its books, “Branch Account” to which goods or cash sent will be debited: When cash is received from the branch, the Branch Account will be credited.

The account is maintained more or less like other personal accounts, so that any expenses incurred on behalf of the branch will also be debited to the Branch Account. The balance of this account shows how much money the branch owes to the head office or, in other words, how much money the head office has invested at the branch.

Similarly, in the branch books, there will be Head Office Account. Goods received from head office, expenses incurred by the head office on behalf of the branch, cash received from head office, etc., will be credited. Cash sent to the head office will be debited. The balance in the account shows how much money is owing to the head office. There are a few special points to note.

Accounts of fixed assets. Usually, accounts relating to fixed assets used by the branch are kept in the head office books even if the asset is originally paid for by the branch. If it is so, the entry on purchase of a fixed asset by a branch will be to debit Head Office and credit Cash.

The head office will pass the following entry on receipt of advice from branch:

Branch Machinery (or Furniture or Building A/c) …. Dr.

To Branch Account

If payment for the asset is made by the head office, no entry will be passed by the branch. The head office will debit the particular branch asset (Branch Machinery, Branch Furniture, or Branch Building, etc.) and credit Cash.

Depreciation of Fixed Assets:

There is no specialty if the accounts of branch fixed assets are maintained in the branch books. But if the accounts of such assets are maintained in head office books, the entry in respect of depreciation will be:

Branch Account ….. Dr.

To Branch Fixed Assets

The branch will be debited because the branch uses the asset.

In the branch books, the entry will be:

Depreciation Account …. Dr.

To Hard Office Account

Head Office Expenses:

The head office always does some work on behalf of the branch and it is, therefore, usual to charge the branch at the end of the year with a reasonable amount for service rendered by the head office. The entry is:

Branch Account …… Dr.

To Profit and Loss Account

It may credit the Salaries Account, since it is mostly service rendered by the staff of the head office which has to be accounted for. The student should note not to credit cash since no payment is made specifically on this account. When salaries were paid to the head office staff, cash was credited; now only a proportionate charge is being made to the branch. The entry to be passed in the books of the branch is:

Head Office Expenses Account ….. Dr.

To Head Office Account

Head Office Expenses Account is an expense and will be transferred to its Profit and Loss Account by the branch at the end of the accounting year.

Reconciliation of Transit Items:

Normally, the balance shown in Branch Account (in head office books) and in the Head Office Account (in branch books) should be the same. One will be debit and the other will be credit. But on a particular date, there may be a difference in the balances shown by the two accounts. Suppose, branch remits cash on 30th March.

The branch will immediate debit head office and credit cash. But the head office will not pass the entry for receipt of cash till cash is actually received and that may be a few days later. For a few days, therefore, the two accounts will show different balances. On the date of closing of the accounts, the items in transit have to be brought into books. Adjustment entries have to be passed by the one which originally sent the cash or goods.

If cash is sent by the branch and is still in transit on the day of closing, branch will pass the following entry to make the necessary adjustment:

Cash in Transit Account ….. Dr.

To Head Office Account

Cash in Transit is an asset and will be shown in the balance sheet. If goods have been sent by the head office and are still in transit, the head office will pass the following entry on the date of closing:

Goods in Transit Account ….. Dr.

To Branch Account

The rule as to who will pass the entries in respect of cash or goods in transit is not hard. The head office may pass both the entries. For example, if cash sent by branch is still in transit and the entry for adjustment is to be passed in head office books, the entry will be:

Cash in Transit Account ….. Dr.

To Branch Account

The student must be careful to find whether something is in transit. If the balances shown by the branch account and the head office account are the same, nothing is in transit. If there is a difference, it should be assumed that cash (or goods) is in transit and the necessary entry should be passed.

Inter-Branch Transactions:

Where transactions take place between branches themselves, it will facilitate matters if a branch considers all transactions with other branches as if these are with head office. Suppose, Kanpur Branch sends goods to Agra Branch, the various entries to be passed will be as follows:

In Kanpur books:

Head Office Account ….. Dr.

To Goods Supplied to Head Office

In Agra books:

Goods Received from Head Office Account ….. Dr.

To Head Office Account

If each branch has to maintain accounts of all other branches, the ledger may become unwieldy. The head office will, of course, keep accounts of all the branches and will also record inter branch transactions. If, therefore, goods are supplied by Kanpur Branch to Agra Branch, the head office will pass the following entry:

Agra Branch Account ….. Dr.

To Kanpur Branch Account

Or

Agra Branch Account …… Dr.

Goods Received from Kanpur Branch Account ….. Dr.

To Goods Sent to Agra Branch Account

To Kanpur Branch Account

Incorporation of Branch Trial Balance in Head Office Books:

Since to the outside world, there is no difference between the head office and its branches, there must be a consolidated balance sheet if not a consolidated profit and loss account also. The process by which the consolidated balance sheet will be prepared is known as incorporation of branch trial balance. What it involves is that in the head office books, the Trading and Profit and Loss Account of the branch will have to be prepared and after that the combined balance sheet of the branch and head office. There are two ways of doing this.

First method:

In this method, the head office prepares Branch Trading Account Branch Profit and Loss Account.

The entries to be passed are as follows:

1. Debit Branch Trading Account and credit Branch Account with the total of the items (in Branch Trial Balance) usually debited to a Trading Account, such as Opening Stock, Purchases, Wages, Manufacturing Expenses, etc.
2. Debit Branch Account and credit Branch Trading Account with the total of items to be credited to the Trading Account Sales and Closing Stock.
3. Debit Branch Trading Account and credit Branch Profit and Loss Account with gross profit revealed by the Trading Account. (The entry will be reversed if there is a gross loss.)
4. Debit Branch Profit and Loss Account and credit Branch Account with the total of the various expenses and losses, e.g., Salaries, Rent, Depreciation, Discount Allowed, etc.
5. Debit Branch Account and credit Branch Profit and Loss Account with the total of gains or incomes such as discount earned.
6. Debit Branch Profit and Loss Account and credit (General) Profit and Loss Account with the net profit revealed by the Branch Profit and Loss Account. (The entry will be reversed if there is a loss).

The above six steps will enable the consolidated Branch Trading Account and Branch Profit and Loss Account to be prepared. If it is desired to close the books of the branch completely and to record branch assets and liabilities in the head office books for the purpose of preparing a common balance sheet, the following two further entries should be passed:

7. Debit branch assets individually (such as Branch Debtors, Closing Branch Stock, Cash in Hand at Branch, Cash in Transit, etc.) and credit Branch Account with the total of the assets.
8. Debit Branch Account and credit branch liabilities, such as Branch Creditors, Branch Expenses Outstanding, etc.

The effect of the eight entries is to balance off the Branch Account. It is not necessary to pass entries Nos. 7 and 8. In that case, the Branch Account will show a balance equal to net assets at the branch i.e., total of branch assets less branch liabilities.

Second method:

Under this method, the Branch Trading and Profit and Loss Account is prepared only as a memorandum account and entry is passed only for net profit or net loss at the branch.

Entries in Branch Books:

The branch books must also the closed. There are two ways of doing this. The first is to transfer all accounts to the head office account-separate entries being passed for revenue items and for assets and liabilities. The second method is to prepare the Trading and Profit and Loss Account and then to transfer the net profit or net loss to the head office account. Head office account will be closed, if assets and liabilities are also transferred if the assets and liabilities are not transferred, the head office account will show a balance equal to the net assets and thus a balance sheet can be prepared.

Under this method, it will be necessary to prepare the Branch Trading and Profit and Loss Account. The first three journal entries given in the first method will also be passed in this case, since they have nothing to do, really, with the closing of books.

If it is desired to close the books completely, assets and liabilities will be transferred to the Head Office Account the entries being exactly the same as the last two given in the first method. The Head Office Account will then balance. In some cases, the branch is not allowed to have full information about the value of goods sent to branch. In such as case, the branch is not informed about it and hence the branch cannot pass any entry in respect of it.

Only the Head Office will pass the appropriate entry in its own books. If such is the policy, the Head Office may not advise the branch about value of anything done by Head Office on behalf of the branch. Branch books will furnish a trial balance, but the information contained therein will be entirely inadequate to prepare the final accounts. In such a case, the branch will close the accounts of revenue items, at least, by merely transferring them to the Head Office Account.

Opening Entries:

Whether an opening entry is required in the books of the head office in the beginning of the year in respect of branch assets and liabilities depends upon what entries were passed at the close of the previous year. If accounts of branch assets and branch liabilities were not transferred to Branch Account, no opening entry will be required. Only the balance in the Branch Account will be carried forward. If the Branch Account was closed by transfer of the branch assets and liabilities, an entry will be required in the beginning of the year to re-transfer the assets and liabilities to the Branch.

Dependent Branches are branches that operate under the direct control of the head office. They have limited autonomy and rely on the head office for critical functions such as inventory procurement, pricing decisions, and financial management. The head office maintains detailed accounts of all transactions related to the branch, including sales, expenses, and stock. Dependent branches typically do not prepare independent financial statements; instead, their data is consolidated with the head office’s accounts. This system ensures centralized control, better monitoring, and streamlined operations, making it suitable for smaller or geographically close branches with limited decision-making authority.

Types of Dependent Branches

• Service Branch:

All the branches which are booking or executing orders on behalf of the head office are called service branches. These are the branches that are busy in executing all the orders for the sake of head office.

• Retail Branch:

Retail branches are also dependent branches, but they are concerned with the head office for selling goods, produced by the head office itself or purchased from outside in a bulky position and are sent to the retail selling branches for selling them out as like.

Features of Dependent Branch:

1. Centralized Control

• Dependent branches function under the strict supervision and control of the head office.
• The head office takes key decisions related to procurement, pricing, marketing, and financial policies.
• The branch manager primarily focuses on operational tasks as per the directives of the head office.

2. No Independent Financial Records

• Dependent branches do not maintain full-fledged financial records.
• Their transactions, such as sales, purchases, and expenses, are recorded by the head office.
• The branch usually keeps a memorandum record for internal purposes but sends all relevant details to the head office.

3. Limited Autonomy

• These branches have minimal decision-making authority.
• Functions like inventory management, pricing strategies, and promotional activities are handled by the head office.
• The branch’s role is limited to implementing policies and directives.

4. Stock Supplied by Head Office

• The head office supplies goods to the branch at either cost price or an invoice price.
• The branch does not procure goods directly from suppliers.
• The head office keeps detailed records of stock movements to and from the branch.

5. Sales and Collection

• Sales, whether on credit or cash, are conducted by the branch but under the pricing policies set by the head office.
• For credit sales, the head office manages customer accounts and debt collections.
• Cash collections are periodically remitted to the head office.

6. Profit and Loss Determined by Head Office

• The head office determines the profitability of the dependent branch.
• A branch’s performance is assessed by comparing revenues and expenses recorded in the head office’s accounts.
• The branch itself does not prepare independent profit and loss statements.

7. Simplified Reporting Structure

• The branch periodically sends sales reports, expense statements, and stock details to the head office.
• These reports ensure transparency and help the head office in consolidating branch operations.

When goods are invoiced at cost price, the head office sends goods to its branches at their original cost, without any markup or profit margin. This ensures that the branch’s accounts reflect the actual cost of goods rather than an inflated price. The system simplifies inventory valuation and profit calculation, as the branch directly records transactions based on the cost price. It is commonly used in dependent branch accounting, where the head office maintains control over pricing and profit determination. This method offers transparency and accuracy in financial reporting but may require additional adjustments for sales margins.

The consignor wants to know two things which are:

(1) To ascertain profit or loss when goods on consignment sold by the consignee.

(2) To know the settlement of account by the consignee i. e. to know the amount due by or due to consignee.

The consignment account is opened by the consignor to know profit or loss on each consign­ment. Each consignment is distinguished from the other by naming it in respect to place, examples, Consignment to Madras, Consignment to Bombay etc.

If there are a number of consignments in one place, then the name of the consignee is added to the consignment account, for example: Consign­ment to Ramu Account, Consignment to Krishna Account etc. For that, he opens a Consignment Account for each consignment.

It is revenue (Nominal) Account. It is a special Trading and Profit and Loss Account. Consignee Account is prepared to know the amount due by or due to the Con­signee. It is a personal account.

Journal Entries:

Journal Entries in the Books of Consignor

S. No.	Transaction	Journal Entry	Explanation
1	When Goods are Sent on Consignment	Consignment Account Dr.	To Goods Sent on Consignment A/c
2	When Expenses are Incurred by the Consignor	Consignment Account Dr.	To Bank/Cash Account
3	When Advance is Received from Consignee	Cash/Bank/Bill Receivable Account Dr.	To Consignee Account
4	When the Bill is Discounted by the Consignor with Banker	Bank Account Dr.	Discount Account Dr.
5	When Gross Sales Proceeds are Reported by Consignee	Consignee Account Dr.	To Consignment Account
6	For Expenses Incurred by Consignee	Consignment Account Dr.	To Consignee Account
7	For Commission Payable to Consignee	Consignment Account Dr.	To Consignee Account
8	For Unsold Stock Remaining with Consignee	Consignment Stock Account Dr.	To Consignee Account
9a	For Transferring Profit to Profit and Loss A/c	Consignment Account Dr.	To Profit and Loss Account
9b	For Transferring Loss to Profit and Loss A/c	Profit and Loss Account Dr.	To Consignment Account
10	For Settlement of Account by Consignee	Bank/Cash/Bill Receivable Account Dr.	To Consignee Account
11	When Goods Sent on Consignment A/c is Closed	Goods Sent on Consignment Account Dr.	To Trading/Purchase Account

The Consignor, instead of sending the goods on consignment at cost price, may send it at a price higher than the cost price. This price is known as Invoice Price or Selling Price. The difference between the cost price and the invoice price of goods is known as loading or the higher price over the cost. This is done with a view to keep the profits on consignment secret.

As such, consignee could not know the actual profit made on consignment. Hence the consignor sends the Proforma invoice at a higher price than the cost price. When the consignor records the transaction in his book at invoice price, some additional entries have to be passed in order to eliminate the excess price and to arrive at the correct profit or loss on consignment.

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.

Normal Loss refers to the unavoidable and inherent loss that occurs during the regular course of business operations, especially in manufacturing, transportation, and storage. It is considered an expected and uncontrollable part of production, such as evaporation, shrinkage, or spoilage. Normal loss is typically accounted for in cost calculations, and its value is distributed across the remaining usable units to determine the cost per unit. Since it is anticipated, normal loss does not impact profit directly but increases the cost of goods manufactured or sold.

Accounting Treatment:

The cost of normal loss is considered as part of the cost of production in which it occurs. If normal loss units have any realisable scrap value, the process account is f credited by that amount. If there is no abnormal gain, then there is no necessity to maintain a separate account for normal loss.

Journal Entry:

(i) Normal Loss A/c …Dr.

To Process A/c

(ii) Cost Ledger Control A/c …Dr.

(Scrap value) To Normal Loss

Abnormal Loss:

Abnormal loss means that loss which is caused by unexpected or abnormal conditions such as accident, machine breakdown, substandard material etc. From accounting point of view we can say that abnormal loss is that loss which occurred over and above normal loss. These losses are segregated from process costs and investigated to prevent their occurrence in future.

Process account is to be credited by abnormal loss account with cost of material, labour and overhead equivalent to good units and the loss due to abnormal is transferred to Costing Profit and Loss Account.

Journal Entries:

(i) Abnormal Loss A/c …Dr.

To Process A/c

(ii) Cost Ledger Control A/c …Dr. (Scrap value)

Costing Profit & Loss A/c …Dr.

To Abnormal Loss

Abnormal Gain:

If the actual loss of a Process is less than that of expected loss then the difference between the two will be treated as abnormal gain. In another way we can define it as the difference between actual production and expected production.

Accounting Treatment:

The value of abnormal gain is transferred to the debit side of the relevant process and ultimately closed by crediting it to the Costing Profit and Loss Account.

Journal Entries:

(i) Process A/c ..Dr.

To Abnormal Gain

(ii) Abnormal Gain A/c ..Dr.

To Normal Loss

To Costing Profit & Loss A/c

Stock reserve is an adjustment made to account for unrealized profits that arise when goods are transferred between departments or branches of a business at a price above cost. The objective is to eliminate such unrealized profits from the closing stock valuation to ensure that only actual realized profits are reported in the financial statements.

In many organizations, especially those with multiple branches or departments, goods are often transferred internally. When goods are transferred at a profit margin (i.e., at a selling price higher than the cost), this creates an artificial profit in the transferring branch. However, since these goods are not yet sold to external customers, the profit is unrealized and should not be considered in the consolidated financial statements. Hence, a stock reserve is created to adjust the closing stock valuation.

Need for Stock Reserve:

• Avoidance of Overstated Profits

Without a stock reserve, unrealized profits would inflate the profit figures of the business, leading to misleading financial results.

• True and Fair Financial Reporting

The stock reserve ensures that the financial statements reflect only actual realized profits, adhering to the principle of conservatism in accounting.

• Internal Transfers

In organizations with decentralized operations, branches or departments may maintain their accounts separately. When goods are transferred at a price above cost, creating a stock reserve helps adjust for the unrealized profit in the branch stock.

Calculation of Stock Reserve:

The stock reserve is calculated as a percentage of the value of closing stock. The percentage used is based on the profit margin included in the transfer price of goods.

Stock Reserve = Closing Stock × Unrealized Profit Percentage

Where the unrealized profit percentage is determined as:

Unrealized Profit Percentage = [(Transfer Price − Cost Price) / Transfer Price] × 100

Accounting Principles Involved:

• Conservatism:

Stock reserve follows the conservatism principle, which states that unrealized profits should not be recorded in the financial statements.

• Matching Principle:

By eliminating unrealized profits from the closing stock, the stock reserve ensures that only the realized portion of revenue is matched with the related expenses.