Table of Contents
Q.1. What is Departmental Accounting? Explain in detail its advantages.
Departmental Accounting is a method of accounting used to segregate the expenses and revenues of a company into various departments or units based on their functional areas. Each department or unit is treated as a separate profit center, and its financial performance is evaluated independently.
Advantages of Departmental Accounting:
- Effective cost control: Departmental accounting helps in identifying the expenses and revenues of each department separately, which helps the management to control the costs effectively. It enables the management to allocate the resources in a better way and identify the areas of wastage and inefficiency.
- Performance evaluation: Departmental accounting provides an accurate and reliable way to evaluate the performance of each department or unit. The financial statements of each department are prepared separately, which helps in identifying the areas of strengths and weaknesses of each department. This information helps in making informed decisions to improve the performance of each department.
- Motivation: Departmental accounting helps in creating a sense of ownership and responsibility among the employees of each department. Since each department is treated as a separate profit center, the employees are motivated to improve the financial performance of their respective departments.
- Better decision-making: Departmental accounting provides accurate and timely information about the financial performance of each department. This information helps the management to make informed decisions about resource allocation, expansion, and contraction of departments, and overall business strategy.
- Better budgeting: Departmental accounting helps in preparing accurate budgets for each department. The budgets are based on the past performance of the department, which helps in identifying the areas of improvement and setting realistic targets.
- Facilitates internal control: Departmental accounting facilitates better internal control by ensuring that all expenses and revenues are properly allocated to the appropriate department. This helps in preventing fraud, misappropriation of funds, and other irregularities.
- Facilitates pricing decisions: Departmental accounting helps in determining the price of products or services produced by each department. By allocating the costs of each department accurately, management can ensure that the prices charged are competitive and profitable.
- Helps in tax planning: Departmental accounting helps in tax planning by providing accurate information on the revenue and expenses of each department. This information is useful for tax planning and identifying tax-saving opportunities.
- Helps in benchmarking: Departmental accounting facilitates benchmarking by providing accurate and reliable financial information for each department. This information can be used to compare the performance of one department with another or with the industry average.
- Facilitates efficient resource allocation: Departmental accounting helps in efficient resource allocation by providing accurate information about the financial performance of each department. This information can be used to allocate resources to departments that are performing well and reduce resources to departments that are underperforming.
OR What is cost allocation? Explain the different basis of allocation with examples.
Cost allocation is the process of assigning indirect costs to products, services, or cost centers based on some logical basis. Indirect costs are the costs that cannot be traced directly to a specific product or service. These costs are allocated to products or services based on some predetermined basis. Cost allocation is used to determine the true cost of a product or service and to make informed decisions about pricing and profitability.
Different basis of allocation with examples:
- Direct labor hours: This basis allocates indirect costs to products or services based on the amount of direct labor hours required for their production. For example, if a product requires 10 direct labor hours and the indirect costs for the period are ₹1,000, then the indirect cost allocated to the product would be ₹100 per unit.
- Direct machine hours: This basis allocates indirect costs to products or services based on the amount of machine time required for their production. For example, if a product requires 5 machine hours and the indirect costs for the period are ₹500, then the indirect cost allocated to the product would be ₹100 per unit.
- Direct material cost: This basis allocates indirect costs to products or services based on the amount of direct material cost used in their production. For example, if a product requires ₹500 of direct materials and the indirect costs for the period are ₹1,000, then the indirect cost allocated to the product would be ₹200 per unit.
- Percentage of direct labor cost: This basis allocates indirect costs to products or services based on the percentage of direct labor cost in their production. For example, if a product requires ₹1,000 of direct labor cost and the total direct labor cost for the period is ₹10,000, and the indirect costs for the period are ₹2,000, then the indirect cost allocated to the product would be ₹200 per unit.
- Percentage of the direct material cost: This basis allocates indirect costs to products or services based on the percentage of direct material cost in their production. For example, if a product requires ₹1,000 of direct material cost and the total direct material cost for the period is ₹10,000, and the indirect costs for the period are ₹2,000, then the indirect cost allocated to the product would be ₹200 per unit.
- Activity-based costing: This basis allocates indirect costs to products or services based on the activities that drive those costs. For example, if a company has activities such as order processing, production setup, and quality control, the indirect costs associated with each activity are allocated to products or services that use those activities.
Q.2. What is Uniform System of Accounting? Explain the difficulties in implementing this system.
Uniform System of Accounting (USA) is a standardized method of accounting used in the hospitality industry, such as hotels and restaurants, to record and report financial transactions. The USA system is designed to provide a uniform and consistent method of recording and reporting financial information that can be easily understood and compared across different businesses in the same industry.
The USA system provides guidelines for categorizing and reporting financial information, such as revenues, expenses, assets, and liabilities. These guidelines ensure that financial statements are prepared in a standardized format that can be easily compared between different businesses. The USA system also provides guidelines for internal controls and audit procedures to ensure the accuracy and reliability of financial information.
Difficulties in implementing the USA system:
- Cost: Implementing the USA system can be expensive, especially for smaller businesses that may not have the resources to invest in new accounting software, training, and consulting services.
- Training: Employees must be trained to use the USA system, which can be time-consuming and costly. Training must be ongoing to ensure that employees understand the system and are following the guidelines.
- Resistance to change: Employees may resist the change to the USA system, especially if they are used to a different system or if they perceive the new system as more cumbersome or difficult to use.
- Complexity: The USA system can be complex, with detailed guidelines for categorizing and reporting financial information. Some businesses may find it difficult to understand and implement the guidelines.
- Industry-specific requirements: The USA system is designed for the hospitality industry, and some businesses may have unique requirements that are not addressed by the system.
- Legal requirements: The USA system may not comply with legal requirements in all jurisdictions, and businesses may need to modify the system to meet local requirements.
- Time-consuming: Implementing the USA system can be time-consuming, especially during the initial implementation phase. It can take several months or even years to fully implement the system and train employees.
Q.3. Differentiate between the following (any two):
(a) Income statement and Balance sheet
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Income Statement |
Balance Sheet |
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Purpose |
The income statement is also known as a profit and loss statement. The primary purpose of an income statement is to determine how much money a company earned or lost over a period of time |
The balance sheet is also known as the statement of financial position, it gives managers and investors an overview of where the company stands financially. |
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Content |
The income statement documents all of a business’s income and expenses over a period of time. Revenue is documented in the credit account on the income statement while expenses are recorded as debits |
The balance sheet provides a snapshot of the company’s finances. It reports three items: assets, liabilities and owners’ equity. |
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Time Frame |
The income statement represents a period of time. The length of this period can vary. For example, annual statements will contain information for the entire year while quarterly statements cover three months. The time frame should be clearly indicated on an income statement. |
The balance sheet, on the other hand, reflects the finances at one specific point in time. The balance sheet must be dated and values expressed on it are only accurate as of that date. |
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Calculatios |
The income statement requires just one simple set of calculations. Add up the company’s revenue and add up all of its expenses. Subtract expenses from revenue to reveal the company’s profit or loss. |
You must perform a few basic calculations on the balance sheet as well. To calculate owners’ equity, subtract the firm’s liabilities from its assets. The firm’s assets must always be equal to liabilities and owners’ equity on the balance sheet. |
(b) Gross profit and Net profit
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Gross Profit |
Net Profit |
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Gross profit is the difference between a company’ s total revenues or sales of its products and services, and the direct costs associated with producing and selling a company’ s products and services, which is defined as the cost of goods or cost of sales. |
Net profit, or net income, is a company ’ s total earnings after subtracting all its expenses from its total sales and other income for a specific period of time. Typically, net profit is measured on a quarterly or annual basis. |
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Gross profit is determined by taking a company’ s revenues, or total sales, and subtracting the cost of goods, known as COGS, for a specific period of time |
Net profit is determined by subtracting a company ’ s COGS; selling, general and administrative expenses, depreciation costs; and taxes from its revenues and any other income. |
(c) Reserve and Revenue
Revenue is the amount of money that a company receives during a specific period, including discounts and deductions for returned merchandise. It is the “top line” or “gross income” figure from which costs are subtracted to determine net income. Reserve is an appropriation of profit. Any company must have financial reserves to meet its sudden financial requirements, for growth and development, to expand the business in other areas, etc. Reserves in any company can be broadly categorized into two based on the kind of profit it appropriates. One category is the capital reserve, and the other is revenue reserve. Reserves must be kept aside to meet requirements.
(d) Bills receivable and Accounts receivable
Accounts receivable are amounts a company has a right to collect because it sold goods or services on credit to a customer. Accounts receivable are assets. Accounts receivable is what your customers owe you based on invoices you’ve issued to them. Bills receivable are also known as notes receivable and they’re more formal arrangements than Accounts receivable. A Bill receivable is a written promise from a client or customer to pay a definite amount of money on a specific future date. Such notes typically bear interest charges.
(e) Current assets and Current liabilities
A current asset is an asset which can reasonably be expected to be sold, consumed, or exhausted through the normal operations of a business within the current fiscal year or operating cycle (whichever period is longer). Typical current assets include cash, cash equivalents, short-term investments (marketable securities), accounts receivable, stock inventory, supplies, and the portion of prepaid liabilities, sometimes referred to as prepaid expenses, which will be paid within a year. Current liabilities are a company’s debts or obligations that are due within one year, appearing on the company’s balance sheet and include short-term debt, accounts payable, accrued liabilities and other debts. Essentially, these are bills that are due to creditors and suppliers within a short period. Normally, companies withdraw or cash current assets to pay their current liabilities.
Q.4. Write short notes on any five:
(a) Amortization:
Amortization is the process of spreading out the cost of an intangible asset over its useful life. Intangible assets, such as patents, copyrights, trademarks, and goodwill, have no physical substance and their value decreases over time as they are used or become outdated. The cost of acquiring an intangible asset is typically recorded on a company’s balance sheet as an asset, and the amount is gradually reduced over the asset’s useful life through the process of amortization. The goal of amortization is to match the expense of the intangible asset with the revenue it generates over its useful life. Amortization is similar to depreciation, which is the process of spreading out the cost of a tangible asset over its useful life. However, unlike tangible assets, which typically have a physical existence and wear out over time, intangible assets may still retain their value even as they are used or become outdated.
(b) Asset:
An asset is a resource with economic value that an individual, corporation or country owns or controls with the expectation that it will provide future benefit. Assets are reported on a company’s balance sheet, and they are bought or created to increase the value of a firm or benefit the firm’s operations. An asset can be thought of as something that in the future can generate cash flow, reduce expenses, improve sales, regardless of whether it’s a company’s manufacturing equipment or a patent on a technology.
(c) Apportionment :
Apportionment of costs is the process of sharing a group’s expenditure among the individual funding streams/programmes being implemented. This process is generally used to cover central cost items such as salaries, general overheads, and ongoing running costs.
Taking an example of the F&B manager’s salary, such as expense would have to be apportioned (between Bar, Banquet, Restaurant etc.) depending on fair criteria. This could be something like the percentage of the manager’s time taken up in each specific department. Other overheads that require apportionment include property rent, water and utility bills, general administration salaries, etc. Expenses such as rent, water and utilities can be fairly shared among departments by using a basis such as square feet per department space
(d) Bad debt:
Bad debt is debt that is not collectible and therefore worthless to the creditor. Bad debt is usually a product of the debtor going into bankruptcy but may also occur when the creditor’s cost of pursuing the debt collection activities is more than the amount of the debt. Once a debt is considered bad, the business may be able to write it off as an expense on its income tax return.
(e) Capital:
Capital refers to financial assets or the financial value of assets, such as cash and funds held in deposit accounts, as well as the tangible machinery and production equipment used in environments such as factories and other manufacturing facilities. Additionally, capital includes facilities, such as the buildings used for the production and storage of the manufactured goods. Materials used and consumed as part of the manufacturing process do not qualify.
(f) Depreciation:
Depreciation is an accounting method of allocating the cost of a tangible asset over its useful life. Businesses depreciate long-term assets for both tax and accounting purposes. For tax purposes, businesses can deduct the cost of the tangible assets they purchase as business expenses; however, businesses must depreciate these assets in accordance with tax rules about how and when the deduction may be taken.
(g) Creditor:
A creditor is an entity (person or institution) that extends credit by giving another entity permission to borrow money intended to be repaid in the future. A business who provides supplies or services to a company or an individual and does not demand payment immediately is also considered a creditor since the client owes the business money for services already rendered. Creditors can be classified as either personal or real. People who loan money to friends or family are personal creditors. Real creditors such as banks or finance companies have legal contracts with the borrower, sometimes granting the lender the right to claim any of the debtor’s real assets (e.g. real estate or cars) if he fails to pay back the loan.
Q.5. What do you mean by auditing? What are the advantages and limitations of auditing?
Auditing is a systematic examination of the books and records of a business or other organization in order to ascertain or verify and to report the facts regarding its financial operation and the results thereof. R.B. Bose has defined as ‘audit may be said to be verification of the accuracy and correctness of the books of accounts by an independent person qualified for the job and not in any way connected with the preparation of such accounts. Auditing is the verification of the correctness of accounts and reliability of accounting system, date, and information. An auditing, therefore, includes verification of correctness of the accounts, statements, reports, data, etc. and finally checking these data to see that they adhere to accounting principles, plans, procedures, and objectives.
Advantages of auditing
An auditing is not only useful to the management but it also ensures socio-economic benefits.
Benefits to the management
1. It detects the errors and frauds.
2. It keeps employees more alert.
3. It reduces the wear and tear of assets and helps in better utilization of assets.
4. It increases profitability.
5. It reduces the cost due to better management, efficiency, and control. 6. It points out management’s weakness and recommends better accounting.
The benefit to Share Holders and Public
1. This tells the public whether it is making sufficient profit or not.
2. In its reports, it gives the information like earning per share, cash earnings per share, debt-equity ratio, comparative balance sheets, comparative income expenditure income statement s, etc. This helps public and shareholders in deciding whether to invest in the company or not.
3. The public gets goods and services at reasonable price.
Benefits to the Government
1. The bills at cost plus profit submitted to the government are settled without dispute.
2. The government can fix the price of essential commodities.
3. The subsidies can be decided after studying the cost and selling price government wants to fix.
4. It helps in fixing the export price of commodities.
5. The income tax and other tax authorities accept the reports submitted by the auditors.
Limitations of auditing
1. Qualification: The auditors must be well qualified and they must know their job perfectly.
2. Experience: The prior experience of auditing is essential to audit the accounts accurately.
3. Independence: The auditors must be extended independence. That is why usually they are hired from outside. Even if internal auditor/employee are to be used when he must not work with accounts department. In fact, he should report to General Manager or the Director of the company.
4. Access to Records: The auditors must have an authority to have any or all the documents, files, etc. for auditing.
5. Safety: The auditors must not feel unsafe for submitting an adverse report on the organization in general or any department.
6. Adequate Staff: There should be an adequate number of persons to carry out the work.
OR What do you understand by internal audit? How is it different from external audit?
Internal audit and external audit are two distinct types of auditing that serve different purposes in organizations. In this answer, we will explore what internal and external audits are, their differences, and their importance in organizations.
Internal Audit Internal audit is an independent and objective assurance activity designed to add value and improve an organization’s operations. It is conducted by internal auditors who are employees of the organization. The primary objective of internal audit is to evaluate and improve the effectiveness of an organization’s risk management, control, and governance processes. Internal audit involves a comprehensive review of an organization’s operations, financial systems, and internal controls to identify weaknesses, inefficiencies, and potential risks.
Internal audit is an essential function in organizations as it provides management with independent and objective insights into the effectiveness of the organization’s operations, processes, and controls. The insights obtained from internal audit help organizations to identify areas for improvement and implement measures to mitigate risks.
External Audit External audit, also known as financial audit, is an independent examination of an organization’s financial statements, operations, or systems by a third-party auditor. The purpose of external audit is to provide an independent opinion on the fairness and reliability of an organization’s financial statements and to ensure compliance with relevant laws and regulations. External audit is typically conducted by certified public accountants (CPAs) or other professional auditors who are not employees of the organization.
The primary objective of external audit is to provide stakeholders, such as investors, creditors, and regulators, with an assurance that an organization’s financial statements are free from material misstatements and are presented fairly in accordance with generally accepted accounting principles (GAAP) or international financial reporting standards (IFRS). External audit also ensures that an organization complies with relevant laws and regulations.
Differences between Internal and External Audit The main difference between internal and external audit is the focus of their audits. Internal audit focuses on evaluating and improving an organization’s internal processes, while external audit focuses on verifying the accuracy and compliance of an organization’s financial statements and operations. Internal audit is conducted by internal auditors who are employees of the organization, while external audit is conducted by third-party auditors who are not affiliated with the organization.
Another key difference between internal and external audit is the reporting line. Internal auditors report to the management or board of directors, while external auditors report to the shareholders or other stakeholders of the organization.
Importance of Internal and External Audit Both internal and external audit are important functions in organizations. Internal audit helps organizations to identify areas for improvement, mitigate risks, and ensure compliance with policies and procedures. External audit provides assurance to stakeholders that an organization’s financial statements are presented fairly and comply with relevant laws and regulations.
Q.6. From the following information of a hotel, you are required to prepare the Income Statement under the Uniform System of Accounting:
Amount in ₹ |
Amount in ₹ |
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Room: |
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Food & Beverage |
.
5,00,000/ – 1,60,000/ – 20,000/ – 3,000/ – |
Other operated departments: |
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Telephone: |
. |
Marketing: |
. |
Property maintenance: |
. |
Other items: |
. |
Fixed expenses: |
. |
Q.7. Prepare an Income statement of the Food & Beverage department from the information given below:
Amount ( ₹ ) |
Amount ( ₹ ) |
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Food Sales |
12,55,000/ – |
Kitchen fuel |
1,32,000/ – |
Beverage sales |
3,25,000/ – |
Laundry |
25,000/ – |
Food allowance |
5,000/ – |
Music |
65,000/ – |
Beverage allowance |
3,000/ – |
Other expenses |
6,300/ – |
Cost of sale – Food |
4,80,000/ – |
Cleaning expenses |
14,000/ – |
Cost of sale – Beverage |
1,75,000/ – |
Employee benefits |
25,000/ – |
Salaries |
1,25,000/ |
Income statement of Food & Beverage department
Q.8. Prepare an Income statement according to Departmental accounting from the following information:
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Amount (in ₹ ) |
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Sales |
Restaurant |
5,00,000/ – |
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Cost of sales |
Restaurant |
1,50,000/ – |
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Wages and salaries |
Restaurant |
80,000/ – |
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Unallocated expenses |
Office expenses |
15,000/ – |
Note: Unallocated expenses are to be apportioned amongst departments on the following basis:
(i) Head office expenses and Advertisement & Marketing expenses to be apportioned on the basis of sales.
(ii) Office expenses and fixed charge to be apportioned equally amongst three departments.
(iii) Interest to be apportioned in the ratio of 2:2:1 amongst Restaurant, Banquet and Bar.
Working Note: Apportionment of Unallocated Expense
Restaurant |
Banquet |
Bar |
Total |
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Sale |
500,000 |
300,000 |
200,000 |
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Sales Ratio |
5 |
3 |
2 |
8 |
Head Office Expenses |
5 |
3 |
2 |
8 |
Advertisement & Marketing Expenses |
5 |
3 |
2 |
8 |
Office Expense |
1 |
1 |
1 |
3 |
Fixed Charges |
1 |
1 |
1 |
3 |
Interest |
2 |
2 |
1 |
5 |
Head Office Expenses
Restaurant ( 20,000/8)*5= 10,000
Banquet (20,000/8)*3= 6,000
Bar (20,000/8)*2= 4,000
Advertisement & Marketing Expenses
Restaurant ( 20,000/8)*5= 10,000
Banquet (20,000/8)*3= 6,000
Bar (20,000/8)*2= 4,000
Office Expense 15,000/3= 5,000 to be Debited to Each Department
Fixed Charges 12,000/3= 4,000 to be Debited to Each Department
Interest Restaurant ( 5,000/5)*2= 2,000 Banquet (5,000/5)*2= 2,000 Bar (5,000/5)*1= 1,000
Q.9. Prepare a Balance Sheet from the following information:
Amount ( ₹ ) |
Amount ( ₹ ) |
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Creditors |
70,000/ – |
Bills payable |
40,000/ – |
Capital |
2,50,000/ – |
Drawings |
20,000/ – |
Net profit |
23,000/ – |
Cash |
16,000/ – |
Bank |
40,000/ – |
Bills receivable |
20,000/ – |
Debtors |
15,000/ – |
Closing stock |
1,00,000/ – |
Furniture |
15,000/ – |
Plant |
57,000/ – |
Land |
1,00,000/ – |
Balance Sheet
As at…………………
OR Define Internal Control. Explain briefly the features of internal control.
The control is a continuous process. It is a part of the routine in all types of organizations whether small or big. The word ‘control’ itself is disliked by one and all, nobody likes to be controlled by others no matter how small or big employee he may be. The whole system of control, financial and otherwise, established by the management in order to carry on the business of the enterprises in an orderly and efficient manner, ensure adherence to management policies, safeguard the assets and secure as far as possible the completeness and accuracy of the records.
ESSENTIAL FEATURES OF INTERNAL CONTROL:
1. Experienced, Qualified and Trustworthy Personnel: The personnel should be well qualified, experienced and trustworthy and this helps in providing better services than competitors. This also ensures in having a better internal control on pilferages.
2. Division of Duty: The duties are segregated to improve the efficiency, quality and for controlling the pilferage.
3. Leadership: Board of Directors, General Manager and other managers and supervisors must lead the person by communicating the policies of the hotel to one and all and encourage the person to have the best output and control.
4. Organisational Structure: The chain of hotels or hotel as the case may be must have a clear organizational structure and the personnel must know from whom to take orders and whom to report.
5. Sound Practice: These are policy measures generally set up and implemented by the board of directors and other senior executives in order to create an environment which facilitates internal control.
6. Authorise Personnel: The management must authorize clearly the personnel for taking a certain decision. For example, a person should be authorized to extend the discount, cancel a bill, extend complimentary food/room, etc.
7. Records: The records must be maintained to ensure internal control. The records like guest registration cards, bills, K.O.T’s, control sheets, etc. Are not only maintained, checked, verified, and stored for future references. 8. Manual Procedures: Each job should be reduced to writing. Log books must be maintained in each department. The manual procedures should list the details of each position including how and when to perform each task.
9. Control: Control includes security services and measures for protecting assets, stores, guest’s valuables, etc. The security services, as far as possible, must be hired from professionals.
10. Budget: The Budgets like short-term, long-term, specific budgets, etc. Must be made for sale, cost, production etc. The budgets must be achievable but not achievable so easily. The goals of the hotel must be clearly mentioned and the goals must be made not only for sale, cost etc. but must also be made for controlling pilferages.
11. Reports: For each job reports, must be made and circulated among the executives of the hotel for information and control. 12. Independent Checks: The personnel responsible for performing the jobs should not be asked for the internal checks but internal checks must be performed by different personnel either from the permanent personnel employed in the hotel or sometimes maybe hired from outside.
Q.10. State whether True or False:
(a) Net profit = sales minus Departmental expenses.
FALSE
Net Profit is bottom line profit which is calculated after subtracting all taxes, interests etc from the total sales. net profit is equal to the gross profit minus overheads and interest payable for a given time period ………. from Wikipedia. Overheads – Overhead expenses are all costs on the income statement except for direct labor, direct materials, and direct expenses. Overhead expenses include accounting fees, advertising, insurance, interest, legal fees, labor burden, rent, repairs, supplies, taxes, telephone bills, travel expenditures, and utilities.
(b) Segregation of duties is a method of internal control.
TRUE
Division of Duty: The duties are segregated to improve the efficiency, quality and for controlling the pilferage for more see question 9 or of this paper
(c) Goodwill is an intangible asset.
TRUE
A tangible asset is an asset that has a physical form. Tangible assets include both fixed assets, such as machinery, buildings, and land, and current assets, such as inventory. Goodwill has no physical form.
(d) Outstanding expenses are an asset.
FALSE
Outstanding expenses are those expenses which have been incurred and consumed during an accounting period and are due to be paid but are not paid. It’s a liability.
(e) Prepaid expenses are an income.
FALSE
Prepaid expenses are future expenses that have been paid in advance. You can think of prepaid expenses as costs that have been paid but have not yet been used up or have not yet expired. The amounts of prepaid expenses that have not yet expired are reported on a company’s balance sheet as an asset.