Table of Contents
Q.1. Prepare an Income Statement of Food & Beverage department as on 31st December from the information given below:
| Food Sales | 7,25,000/- | Kitchen fuel | 40,000/- |
| Beverage Sales | 2,00,000/- | Laundry | 5,000/- |
| Food Allowance | 1,500/- | Music | 30,000/- |
| Beverage Allowance | 1,000/- | Other expense | 3,300/- |
| Food – Cost of Sale | 1,80,000/- | Cleaning expenses | 5,000/- |
| Beverage – Cost of Sale | 90,000/- | Employee benefits | 25,000/- |
| Salaries | 1,25,000/- |
OR What do you mean by Departmental accounting? Explain in detail its advantages and limitation.
Departmental Accounting is basically keeping the separate book of accounts of individual department.If a business consists of several independent activities, or divided in to several department for carrying out its functions, its management is usually interested in finding out the working results of each departments to ascertain their relative efficiencies.
This can be made possible only if departmental accounts are prepared. Departmental accounts are of great help and assistance to the management as the information for controlling the business more intelligently and effectively.
Advantages of departmental accounting:
1 Evaluation of performance: The performance of each department can be evaluated separately based on trading results. An endeavour may be made to push up sales of that
department which is earning maximum profit.
2 Growth potential of each department: The growth potential of a department as compared to others can be evaluated.
3 Justification of capital outlay: It helps the management to determine justification of capital outlay in each department.
4 Judgement of efficiency: It helps to calculate stock turnover ratio of each department separately thus the efficiency of each department can be revealed.
5 Planning and control: Availability of separate cost and profit figures for each department facilitates better control. Thus, effective planning control can be achieved on the basis of departmental accounting information.
Limitation of Departmental Accounting:-
Q2. From the following information prepare a Balance Sheet:
| Creditors | 7,000/- | Bills Payable | 4,000/- |
| Capital | 25,000/- | Drawings | 2,000/- |
| Net Profit | 2,300/- | Cash | 1,600/- |
| Bank | 4,000/- | Bills receivable | 2,000/- |
| Debtors | 1,500/- | Closing stock | 10,000/- |
| Furniture | 1,500/- | Plant | 5,700/- |
| Land | 10,000/- |
OR What is the role of cost allocation in the departmental accounting?
The main advantage of cost allocation is that the management knows the true financial position of each department and if so desired the management can take the corrective measure to make any particular department more efficient and control its overhead and other costs. In case the cost are not allocated to the respective departments and it is debited to the overall gross profit then the management may never come to know which department is more viable and which department is least viable. The cost allocation also makes department more efficient and they also impose self-control to show better financial results. The cost allocation helps the individual Restaurant, Bar, Rooms etc. to fix their selling price. The different outlets may operate on different food cost in order to cover their allocated overheads and other costs and still make a reasonable profit. With the knowledge of full cost of each department and may be for each banquet party the management can decide any division of price or if particular department is to be closed altogether or if the sales target are to be revised towards to cover overheads and still make profit.
Q3. Define Internal Control. Explain briefly the features of Internal Control.
The control is a continuous process. It is a part of routine in all types of organisations 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 maybe.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, safe-guard 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 servicesthan 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 personnel to have the best output and control.
4. Organisational Structure: The chain of hotels or hotel as the case maybe must have a clear organisational 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. Authorised Personnel: The management must authorise clearly the personnel for taking certain decision. For example: a person should be authorised to extend 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, but are also 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.7. Differentiate between the following (any two):
(a) Income Statement and Balance Sheet
(b) Internal Audit and Internal Control
Internal Audit is the frequent or ongoing audit conducted by an organisation’s own personnel. Internal Audit primarily monitor operating results, verify financial records,evaluate internal controls, and assist with enhancing the efficiency and effectiveness of operations. Not least their role includes detecting fraud. Internal Audit does not have responsibility for developing or maintaining internal controls.
Internal Control on the other hand is recognised as one of the core business processes. It is an integral part of an organisation’s financial and business policies that control the strategic, financial and operational procedures of an organisation. The process is based upon a system of management information, financial regulations,
administrative procedures and a system of accountability.We define internal controls as ‘comprising the plans, methods, techniques and procedures used to meet an organisation’s mission, goals, and objectives, and to ensure the security of an organisation’s operations.
(c) Gross Profit and Net Profit
| Gross Profit | Net Profit |
| 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. |
| 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. |
(d) Reserve and Revenue
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 capital
reserve, and the other is revenue reserve. Reserves must be kept aside to meet requirements.
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.
Q.8. Prepare an Income Statement according to Departmental Accounting from the following information:
| Sales: | ₹ |
| Restaurant | 5,00,000/- |
| Banquet | 3,00,000/- |
| Bar | 2,00,000/- |
| Cost of sales: | |
| Restaurant | 1,50,000/- |
| Banquet | 60,000/- |
| Bar | 35,000/- |
| Wages & Salaries: | |
| Restaurant | 80,000/- |
| Banquet | 25,000/- |
| Bar | 10,000/- |
| Repair & Maintenance: | |
| Restaurant | 20,000/- |
| Banquet | 10,000/- |
| Bar | 6,000/- |
| Gas & Electricity | 20,000/- |
| Rent | 60,000/- |
| Depreciation | 50,000/- |
| Office expenses | 30,000/- |
| Postage | 10,000/- |
| Advertising | 20,000/- |
| Laundry | 3,000/- |
Unallocated expenses are to be apportioned based on following basis:
| (a) | Gas and Electricity | ||
| (i) | Restaurant | – | 40% |
| (ii) | Banquet | – | 40% |
| (iii) | Bar | – | 20% |
| (b) | Rent & Depreciation: | ||
| (i) | Restaurant | – | 40% |
| (ii) | Banquet | – | 40% |
| (iii) | Bar | – | 20% |
(c) All other expenses in the ratio of turnover.
Departmental Income Statement
| Restaurant | Banquet | Bar | Total | |
| Sale | 5,00,000 | 3,00,000 | 2,00,000 | 9,00,000 |
| Cost of Sale | (1,50,000) | (60,000) | (35,000) | (2,45,000) |
| Gross Profit | 3,50,000 | 2,40,000 | 1,65,000 | 6,55,000 |
| Wages & Salary | (80,000) | (25,000) | (10,000) | (1,15,000) |
| Repair & Maintenance | (20,000) | (10,000) | (6,000) | (26,000) |
| Gas & Electricity | (8,000) | (8,000) | (4,000) | (20,000) |
| Rent | (24,000) | (24,000) | (12,000) | (60,000) |
| Depreciation | (20,000) | (20,000) | (10,000) | (50,000) |
| Office Expense | (15,000) | (9,000) | (6,000) | (30,000) |
| Postage | (5,000) | (3,000) | (2,000) | (10,000) |
| Advertising | (10,000) | (6,000) | (4,000) | (20,000) |
| Laundry | (1,500) | (900) | (600) | (3,000) |
| Net Profit | 1,66,500 | 1,34,100 | 1,10,400 | 4,11,000 |
Q.9. What do you mean by Financial Reporting Centres? Explain the difference between Revenue Centers and Support Centers.
“Financial Reporting involves the disclosure of financial information to the various stakeholders about the financial performance and financial position of the organization over a specified period of time. These stakeholders include – investors, creditors, public, debt providers, governments & government agencies. In case of listed companies the frequency of financial reporting is quarterly & annual.Financial Reporting is usually considered as end product of Accounting.” –For Sake of Knowledge
The word Financial Reporting Centre have several meaning.
(Software) Financial Reporting Center is a powerful tool for accessing, designing, and presenting financial reports and analytic data. It delivers a unique multi-dimensional
reporting and analysis platform that provides real-time access to financial information.Users can quickly report and analyze data from different perspectives from the same
system that is used for operational accounting. Ex- Oracle Fusion.
From www.businessdictionary.com/definition/financial-reporting-center-FRC.html Department or area of responsibility for which separate cost data must be collected for preparation of financial reports. These reporting centres are classified generally under three groups: (1) Revenue centre, (2) Support centre, and (3) Other (such as those incurring fixed expenses).
(U.S.A) The Financial Reporting Centre helps CPAs meet the challenges of providing high quality financial reporting. Whether you are a financial statement preparer or a member in public practice, this centre provide resource for the entire financial reporting process, providing you the information you need to know when you need it.In many countries like Kenya,etc.,The Financial Reporting Centre (FRC) is a Government institution, with the principal objective being to assist in the identification of the proceeds of crime and the combating of money laundering.
A revenue centre sells goods or service to guests and thereby generates revenue for the hotel. The front office and food and beverage outlets are examples of typical hotel revenue centre. Support centres do not generate revenue directly, but play a supporting role to the hotel’s revenue centres. The housekeeping department is a major support centre within the rooms division. Other hotel support centres include the areas of accounting, engineering and maintenance, and human resources.
OR Why Income statement is made? How is it different from Receipts and Payments account?
Reason for making statement of income:
1. Debt Servicing Cost: Income statement helps company to know that whether they are in position to recover the interest paid on borrowing from bank, market (both secured and unsecured loans) or not.
2. Return on Investment: It is very important to know whether the reasonable return is being paid to the investors, share holders both equity and preference or not. The company would also like to maintain different types of reserves like general reserve,capital reserve, special reserve, etc.
3. Income: To know Income, Company is making from routine, normal day-to-day operations.
4. Success or Failure of Management: Whether Company is making reasonable returns from the capital deployed by them. If the returns are better than the competitors then the policies of the management are considered as successful.
5. Popular: Whether the goods or/and services offered by the company are popular in the market or not. If the sale is improving or is better than the competitors then it is considered that the services/goods offered are popular.
6. Price Sensitivity: The impact on the sale by increasing or reducing the price is known from income statement and this helps management in deciding whether to increase or reduce the rate and by what percentage.
7. Profit Centered or Volume Centered: The price sensitivity helps managements in deciding that the policy of the management should be price centred. The high volume of sale will give a lower percentage of profit as compare to low volume of sale will increase if the price of the product is reduced. At times by reducing the price the volume of sale is increased considerably and the management makes more profit even if the percentage profit on sale is lower.
Receipt and Payment Account:
“A receipt and payment account is a summarized cash book (cash and bank) for a given period”.
or
“This is simply a summary of the cash transactions as in the cash book, analyzed and classified under suitable headings, including the opening and closing balances”.
All the information necessary for the preparation of this account is available from cash book. Various cash receipts and cash payments during the whole year find place in this account in a classified manner. Its closing balance indicates cash in hand and cash at bank at the year end.
Following are the features of receipt and payment account:
1. It is abridged addition of cash book – it is, in effect, a summary of cash book.
2. All cash receipts during the whole year are recorded on its left hand (i.e., debit) side. While all the cash payments during the whole year written on its right hand (i.e., credit) side,arranged in a classified form.
3. Cash receipts and cash payments of both capital and revenue nature are recorded here.
4. Only cash transactions are recorded in this account.
5. It generally shows a debit balance. In case of bank overdraft balance, however,its net balance may be credit. Again, it may also show nil balance but such occasion is rare.
6. Its closing balance indicates closing cash in hand and closing cash at bank.
7. It is not an account within the double entry system – it is a statement only.
8. It is prepared on the last day of the accounting year.
Whereas
An income statement is a financial statement that reports a company’s financial performance over a specific accounting period. Financial performance is assessed by giving a summary of how the business incurs its revenues and expenses through both operating and non-operating activities.
Q.10. Prepare a Room Department schedule from the Uniform Systems of Accounts:
Sales – regular 2,10,000/-
Salaries 40,000/-
Commissions 5,000/-
Uniforms 1,000/-
Linen expenses 4,000/-
Sales – group 60,000/-
Wages 12,000/-
Payroll taxes 2,000/-
Dry cleaning 2,000/-
Other expenses 2,500/-
