Financial Accounting

ECO-14 Accountancy II – Solved IGNOU Assignment

Assignment Code: ECO-14/TMA/2021-22

What are the different types of branches? Explain various methods of keeping branch accounts in the books of Head Office.

From an accounting standpoint, branches may be categorised as follows:

  1. Domestic Branches
  2. Foreign Branches

Domestic Branches

The branches opened in various regions of the country where the parent enterprise is registered are known as inland branches. These branches are also referred to as home or national branches. There are two varieties of domestic branches:

A) Dependent branch

B) Independent branch

A). Dependent Branch

Dependent branches are branches that do not retain their own records but instead rely on the central office to maintain all records. They are not permitted to act independently without the prior approval of the headquarters. The central office formulates and executes all of these branches’ plans, policies, rules, and regulations. In other words, the head office controls all the functions of the dependent branch.

There are two types of branches listed under the dependent branch: service branch and retail branch.

Service Branch: All branches that book or execute orders on behalf of the corporate headquarters are referred to as service branches. These branches are actively executing all instructions for the benefit of the headquarters.

Retail Branch: Retail branches are likewise dependent branches, but they are concerned with the head office for selling items created by the head office or purchased externally in huge quantities and sent to the retail selling branches for selling them out.

B). Independent Branch

Independent branches are ones that are able to maintain their own books and sell both commodities delivered by the main office and those that they have purchased independently. These are the branches that can also sell goods to the headquarters. They can pay for their own costs and deposit their earnings in their own name. These branches independently and separately record all transactions that are also recorded by the headquarters.

Foreign Branches

Due to the fast growth of trade, commerce, and industries, as well as the intensifying competition, businesses are creating overseas branches in order to grab the potential market and accelerate their global company. Consequently, the branches developed abroad are known as foreign branches. The accounting system of a foreign branch is identical to that of an independent branch, with the exception of the following circumstances: – Exchange rate and conversion of foreign money to domestic currency

The effects of foreign exchange rates must be accounted for in the records of the headquarters.


What is meant by default and repossession in Hire Purchase Accounts? Describe the Accounting treatment for default and repossession with a suitable example.

How will you raise the Goodwill accounts and write it off under the following circumstances:
(i) When the partners decide that all the partners should be credited with their share of goodwill, and
(ii) When you find that there is an unrecorded liability, how will you record it in the books of the partnership firm?


What ratios are to be studied for assessing the liquidity and profitability position of a firm? Explain with suitable examples.

Liquidity Ratios

The liquidity ratio measures a company’s capacity to meet its short-term obligations as they mature. Creditors are particularly interested in these ratios. Current ratio, acid-test (quick) ratio, and nett working capital are the three principal metrics of liquidity.

The current ratio represents the relationship between total current assets and total current liabilities. A current ratio of 2:1 has traditionally been regarded as favourable. Whether or not it is sufficient depends on the company’s industry. With a current ratio far below 2, public utilities with a fairly stable cash flow perform quite well. A current ratio of 2 may not be sufficient for manufacturers and retailers with large inventories and a large number of receivables.

The acid-test (quick) ratio is similar to the current ratio with the exception that inventory, the least liquid current asset, is not included. The acid-test ratio measures a company’s capacity to pay current creditors without selling inventory. The term acid-test suggests that this ratio is a vital indicator of a company’s liquidity.

A minimum acid-test ratio of 1 is prefered. Again, however, what constitutes an acceptable value differs by industry. When inventory cannot be quickly converted to cash, the acid-test ratio is a strong indicator of liquidity (for instance, if it consists of very specialised goods with a limited market). If stock is liquid, the current ratio is improved.

Profitability Ratios

To determine a company’s profitability, its profits might be correlated with its sales, equity, or stock price. Profitability ratios reflect a company’s use of its resources to generate profit and its management efficiency. Principal profitability ratios consist of nett profit margin, return on equity and profits per share.

The net profit margin, or return on sales, is the ratio of nett profit to nett sales. It estimates the proportion of each dollar of sales remaining after deducting all expenses and taxes. Greater nett profit margins are preferable to those that are lower. The net profit margin is frequently used to measure the profitability of a company. “Good” nett profit margins vary considerably amongst industries.


What do you understand by the consignment business? What is the difference between consignment and sale? What entries are passed in the books of the consignor in this connection and what necessary accounts are opened?

Consignment Business

It is a business model in which sellers sell their inventory to a wholesaler who is also known as a reseller. Usually the reseller buys the inventory from the sellers at a discount price.

What is the difference between consignment and sale?

Goods on consignment cannot be considered sales. It is not the same as sales. Following is the distinction between consignment and sales:

Ownership
Consignment: The consignor retains ownership of the items until they are sold by the consignee.
Sale: When a transaction is made, ownership of the goods is immediately transferred to the buyer.

Relationship
The connection between the consignor and consignee in a consignment is that of principal and agent. Their relationship will endure till it ends.
The connection between the parties is that of seller and buyer, and it ends when money is received and the items are delivered.

Expenses

The consignor is responsible for both the costs incurred by the consignee to execute the sale and the costs incurred by the consignor to ship the items to the consignee.
Any expenses incurred after the sale are not the seller’s responsibility.

Risk

Consignment: The consignor always assumes risk for consigned items.
When a sale is made, risk is shifted to the purchaser.

Return Of Merchandise

Since the products are the consignor’s property, the consignee may return them to the consignor.
A buyer cannot return anything unless they are defective or damaged, or with the seller’s permission

Statement

Consignment: The consignee delivers the consignor an account of the products sold and expenditures spent in exchange for information on the goods sold and the sales incurred.
Sales: The buyer is not required to report account sales to the seller.

Stock

The unsold inventory at the consignee will be treated as the consignor’s inventory.
The seller is not interested in the buyer’s unsold inventory in the event of a transaction.

Commission

The commission is the primary consideration for consignment. The consignee simply engages in the selling process for commission.
On the other hand, sale is directed towards profit.

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