Financial Accounts Cheatsheet

Cheatsheet Content

Hire Purchase System Definition: Buyer takes possession of goods immediately but ownership transfers only after paying the last installment. Key Parties: Hire Purchaser (Hirer) Hire Vendor (Seller) Key Terms: Down Payment Installment Amount (includes principal and interest) Hire Purchase Price (Cash Price + Total Interest) Cash Price Accounting Methods: Interest Suspense Method: Interest is debited to an Interest Suspense A/c and transferred to Interest A/c as it accrues. Cash Price Method (Asset Accrual Method): Asset is recorded at cash price, interest charged separately. Journal Entries (Books of Hirer - Cash Price Method): On entering agreement: Asset A/c Dr. To Hire Vendor A/c (with cash price) On making down payment: Hire Vendor A/c Dr. To Bank A/c For interest due: Interest A/c Dr. To Hire Vendor A/c For installment payment: Hire Vendor A/c Dr. To Bank A/c For depreciation: Depreciation A/c Dr. To Asset A/c Installment Payment System Definition: Buyer takes possession and ownership of goods immediately upon signing the agreement. Payment is made in installments. Key Difference from HP: Ownership transfers immediately. Buyer can sell or mortgage the goods. Vendor cannot repossess, only sue for unpaid installments. Accounting: Similar to a normal credit sale with interest charged on outstanding balance. Journal Entries (Books of Purchaser): On purchase: Asset A/c Dr. To Vendor A/c (with cash price) On making down payment: Vendor A/c Dr. To Bank A/c For interest due: Interest A/c Dr. To Vendor A/c For installment payment: Vendor A/c Dr. To Bank A/c Branch Accounting Definition: Accounting system used to record transactions of various branches of a business. Types of Branches: Dependent Branches: Accounts maintained by Head Office. Branch only sends cash/goods records. Independent Branches: Maintain their own set of books and prepare their own trial balance. Foreign Branches: Similar to independent branches but involve foreign currency conversion. Dependent Branch Methods: Debtors System: Head Office opens a 'Branch A/c' to ascertain profit/loss. Goods generally sent at cost or invoice price. Stock & Debtors System: Detailed control over branch stock and debtors. Separate accounts for Branch Stock, Branch Debtors, Branch Expenses, etc. Final Accounts System: Head Office prepares branch trading and profit & loss accounts from information supplied by the branch. Goods Sent at Invoice Price: If goods are sent at a price higher than cost, 'Loading' (profit margin) needs to be adjusted. Loading on Opening Stock: Dr. Stock Reserve A/c, Cr. Branch A/c Loading on Goods Sent: Dr. Goods Sent to Branch A/c, Cr. Branch A/c Loading on Closing Stock: Dr. Branch A/c, Cr. Stock Reserve A/c Independent Branch Accounting: Branch prepares own Trial Balance. Head Office opens 'Branch A/c' and Branch opens 'Head Office A/c'. These are reciprocal accounts. Inter-branch transactions are routed through Head Office. Consolidation of accounts at year-end. Lease Accounting Definition: An agreement where one party (lessor) grants another party (lessee) the right to use an asset for an agreed period in return for periodic payments. Types of Leases (as per Ind AS 116/IFRS 16): Finance Lease (Lessee): Effectively transfers substantially all the risks and rewards incidental to ownership of an underlying asset. Lessee recognizes Right-of-Use (ROU) asset and Lease Liability. Operating Lease (Lessee): All leases are accounted for as finance leases unless they meet criteria for short-term lease or low-value asset lease. Finance Lease (Lessor): Transfers substantially all risks and rewards. Lessor derecognizes the asset and recognizes a lease receivable. Operating Lease (Lessor): Does not transfer substantially all risks and rewards. Lessor retains the asset on its balance sheet and recognizes lease payments as income. Lessee Accounting (Finance Lease approach): Initial Recognition: Right-of-Use Asset Dr. To Lease Liability A/c Subsequent Measurement (Lease Liability): Lease Liability Dr. (for payment) Interest Expense Dr. (interest portion) To Cash/Bank A/c Subsequent Measurement (ROU Asset): Depreciation Expense Dr. To Accumulated Depreciation - ROU Asset A/c Lessor Accounting (Finance Lease): Initial Recognition: Lease Receivable Dr. To Asset A/c (derecognize asset) To Unearned Finance Income A/c (if applicable) Subsequent Recognition: Cash/Bank A/c Dr. To Lease Receivable A/c (principal portion) To Finance Income A/c (interest portion) Voyage Accounts Definition: An account prepared to ascertain the profit or loss from a single voyage of a ship. Period: Covers the duration of a specific sea journey. Nature: Similar to a Profit & Loss Account for a specific venture. Debit Side Items: Opening Stock of Coal/Stores Bunker Cost (fuel) Port Charges (pilotage, tug, dock charges) Stevedoring Charges (loading/unloading) Wages & Salaries of Crew Provisions & Stores Consumed Insurance (hull, cargo, freight) Depreciation of Ship (for voyage period) Address Commission Brokerage Manager's Commission Dispatch Money (if applicable) Administrative Expenses (allocated) Credit Side Items: Freight Earned (inward/outward) Passage Money Primage Demurrage (charges for delay in loading/unloading) Closing Stock of Coal/Stores Balancing Figure: Profit or Loss on Voyage. Accounting for Insurance Claims Context: When goods or assets are lost due to fire, theft, or other insurable events. Types of Claims: Loss of Stock: Claim for goods destroyed. Loss of Profit (Consequential Loss): Claim for loss of gross profit due to disruption of business. Loss of Stock Claim: Steps: Ascertain Stock on date of fire (using Memorandum Trading A/c). Calculate value of salvage (if any). Loss of Stock = Stock on date of fire - Salvage Value. Determine actual claim amount (subject to average clause and policy amount). Memorandum Trading Account: Dr. Side: Opening Stock, Purchases, Direct Expenses. Cr. Side: Sales, Closing Stock (balancing figure before fire). Gross Profit Rate: Based on previous year's trading results. Average Clause: Applied if the sum insured is less than the actual value of stock on the date of fire. Claim = Loss of Stock $\times \frac{\text{Policy Amount}}{\text{Actual Stock on Date of Fire}}$ Loss of Profit Claim: Purpose: To cover loss of net profit and standing charges during the period of disruption. Key Terms: Gross Profit (GP) = Net Profit + Insured Standing Charges Annual Turnover: Sales in 12 months immediately preceding the fire. Standard Turnover: Sales during the corresponding period in the previous year. Short Sales: Standard Turnover - Actual Sales during indemnity period. Claim for Loss of GP: Short Sales $\times$ GP Rate Additional Expenses: Incurred to minimize loss of sales (e.g., renting temporary premises). Recoverable if they reduce the loss or are within limits. Average Clause: Applied if sum insured is less than the GP on Annual Turnover. Journal Entries (General): For loss of stock: Loss by Fire A/c Dr. To Trading A/c (for cost of goods) For claim lodged: Insurance Claim A/c Dr. To Loss by Fire A/c For claim received: Bank A/c Dr. To Insurance Claim A/c For unpaid balance (if any): Profit & Loss A/c Dr. To Insurance Claim A/c Royalty Accounts Definition: A payment made by one party (lessee/licensee) to another (lessor/licensor) for the right to use an asset (e.g., mine, patent, copyright, trademark). Key Terms: Royalty: Payment based on output, sales, or usage. Minimum Rent (Dead Rent): A fixed minimum amount payable regardless of actual output/usage. Shortworkings: When actual royalty is less than minimum rent. The excess of minimum rent over actual royalty. Recoupment of Shortworkings: The right of the lessee to recover shortworkings out of future excess royalties (actual royalty > minimum rent). Subject to a time limit. Journal Entries (Books of Lessee/Licensee): When Royalty is less than Minimum Rent (Shortworkings): Royalty A/c Dr. (Actual Royalty) Shortworkings A/c Dr. (Minimum Rent - Actual Royalty) To Lessor/Licensor A/c (Minimum Rent) When Royalty is more than Minimum Rent (Recoupment): Royalty A/c Dr. (Actual Royalty) To Lessor/Licensor A/c (Minimum Rent + Shortworkings Recouped) To Shortworkings A/c (Shortworkings Recouped) When Royalty is more than Minimum Rent (No Recoupment or Shortworkings Exhausted): Royalty A/c Dr. (Actual Royalty) To Lessor/Licensor A/c (Actual Royalty) For payment to Lessor: Lessor/Licensor A/c Dr. To Bank A/c For unrecouped Shortworkings (expired recoupment period): Profit & Loss A/c Dr. To Shortworkings A/c For transfer of Royalty to P&L: Profit & Loss A/c Dr. To Royalty A/c Journal Entries (Books of Lessor/Licensor): When Royalty is less than Minimum Rent: Lessee/Licensee A/c Dr. (Minimum Rent) To Royalty Receivable A/c (Actual Royalty) To Shortworkings Suspense A/c (Minimum Rent - Actual Royalty) When Royalty is more than Minimum Rent: Lessee/Licensee A/c Dr. (Amount Payable) Shortworkings Suspense A/c Dr. (Shortworkings Recouped) To Royalty Receivable A/c (Actual Royalty) For receipt from Lessee: Bank A/c Dr. To Lessee/Licensee A/c For transfer of Royalty Receivable to P&L: Royalty Receivable A/c Dr. To Profit & Loss A/c