Topic 3 Special Accounts

EAB10503 FINANCIAL ACCOUNTING & REPORTING 1
Topic 3
Special Accounts
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Branch Accounting
There are 2 methods used to record transactions for
branches of an organisation:
1. The headquarters keeps all accounting records.
Headquarters naturally would want to keep track of
changes in its assets, liabilities and capital. Also, the
headquarters will be most interested in the
profitability of each branch. For an entity with many
branches, it is important for it to check if there is any
theft of goods or cash.
2. Each branch has its own full accounting system.
The Double Column System
Inventory & Accounts Receivable System
There are 2 methods in updating the inventory and
debtors movement:
a) Memoranda columns method
b) Integrated method
Example:
A branch sells all its goods at a uniform mark-up of
50% on cost price. Credit customers are to pay their
accounts directly to the head office.
First day of the period:
Inventory (at cost) (A) 2,000
Accounts receivable (B) 400
During the period:
Goods sent to the branch (at cost) (C) 7,000
Sales – cash (D) 6,000
Sales – credit (E) 4,800
Cash remitted by debtors to HQ (F) 4,500
At the close of the period:
Inventory (at cost) (G) 1,800
Accounts receivable (H) 700
a) Memoranda columns method:
b) Integrated method:
Branch Maintaining Own Records
Items in transit
Items in transit
Items in transit
Items in transit
Items in transit
Joint Venture Accounting
Sometimes two businesses will join together for a project, such
projects are called joint ventures.
• The profits or losses are shared in agreed ratios
• Each company involved keeps their own records for the venture
• One set of financial statements is produced for the venture
In White’s books:
In Green’s books:
A memorandum joint venture account is prepared to include all the
details from each joint venture account. This will ascertain the share
of net profit or loss of each party of the joint venture and help
calculate the amounts payable/receivable to close the venture.
The net profit shares for White and Green need to be brought
into their own books. These accounts are then balanced off.
Finally the parties in the joint venture need to settle
their debts to each other. If the balance in the JV
account is a credit balance, money is owed to the party.
The payment will then be made and the account closed
off.
Accounting for Hire Purchase
Hire purchase is a way of buying assets that avoids the
need to pay in full immediately. Characteristics of a hire
purchase:
1. Asset does not belong to the purchaser when it is
received from the supplier
2. The purchaser will pay for the asset by instalments
over a period of time
3. The cost to the buyer is higher than a direct
purchase of the asset
4. The asset will only be the purchaser upon payment
of the final instalment, and when the purchaser
agrees to a legal option to buy the asset.
Accounting for Hire Purchase - Purchaser
Accounting treats the asset as though it belongs immediately
to the purchaser – it is assumed that the purchaser intends to
pay all the instalments with the objective to own the asset.
The total purchase price is split into 2 parts, cash price and
interest expense.
Double entries:
Dr Non Current Asset Dr Creditor
Cr Creditor Cr Bank
Recognition of cash price Payment of hire purchase instalment
Dr Hire purchase interest Dr Income statement
Cr Creditor Cr Hire purchase interest
Recognition of interest Interest charged to income
for the period statement
Statement of financial position for assets bought on hire
purchase will look like any other PPE, but there will be
the hire purchase creditor being recognised under
liabilities.
Full illustration:
Accounting for Hire Purchase - Seller
As the seller makes the sale, the profit to be recognised is:
Profit on items sold: cash price less cost xxx
Income made from interest charged xxx
xxx
Referring to the previous illustration, assuming that the cost

of the machine is $2,100, total profit upon final instalment is:
Profit on sale of machine: $3,000-$2,100 900
Income earned from interest: 2012 300
2013 209
2014 109
Total profit over three years 1,518
Full illustration:
Repossessions
When customers stop paying their instalments half way, the
goods will be repossessed by the seller. The amounts already
paid by the customers will be kept by the seller.
The repossessed items will be entered in the books of the
seller in their inventory and revalued as used items.
Example:
MFRS 117/IAS 17
Leasing and hire purchase are ways an organisation can acquire the
right to use or purchase non-current assets. In a lease contract, the
legal title of the asset does not transfer to the lessee. However, under
a hire purchase agreement, the hirer may acquire legal title of the
asset towards the end of the instalment payments.
Under MFRS 117 or IAS 17, a hire purchase agreement would
normally be categorised as finance lease while a leasing
arrangement would lead to an operating lease.
A finance lease involves repayment to the lessor a full cost of the
asset together with some interest. It is normally non-cancellable and
the lessee enjoys all the risks and rewards by owning the asset.
An operating lease involves the lessee paying rental for the use
of an asset for a period of time. The lessor retains the risks and
rewards of ownership of the asset and normally responsible
for the repairs, maintenance and insurance of the asset.

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EAB10503 FINANCIAL ACCOUNTING & REPORTING 1

Referring to the previous illustration, assuming that the cost

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