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Monday, October 31, 2011

Post-Keynesian Economics

Post-Keynesian Economics Post-Keynesian economics is a school of economic thought with its origins in The General Theory of John Maynard Keynes, although its subsequent development was influenced to a large degree by Michał Kalecki, Joan Robinson, Nicholas Kaldor and Paul Davidson. Keynes' biographer Lord Skidelsky writes that the post-Keynesian school has remained closest to the spirit of Keynes' work, particularly in his monetary theory and in rejecting the neutrality of money. Introduction Post-Keynesian economists maintain that Keynes' theory was seriously misrepresented by the two other principle Keynesian schools: neo-Keynesian economics which was orthodox in the 1950s and 60s - and by New Keynesian economics, which together with various strands of neoclassical economics has been dominant in mainstream macroeconomics since the 1980s. 

Post-Keynesian economics can be seen as an attempt to rebuild economic theory in the light of Keynes's ideas and insights. However even in the early years in the late 1940s post-Keynesians such as Joan Robinson sought to distance themselves from Keynes himself, as well as from the then emergent neo-Keynesianism. Some post-Keynesians took an even more progressive view than Keynes with greater emphases on worker friendly policies and re-distribution. Robinson, Paul Davidson and Hyman Minsky were notable for emphasising the effects on the economy of the practical differences between different types of investments in contrast to Keynes more abstract treatment. A feature of post-Keynesian economics is the principle of effective demand, that demand matters in the long as well as the short run, so that a competitive market economy has no natural or automatic tendency towards full employment. Contrary to a view often expressed, the theoretical basis of this market failure is not rigid or sticky prices or wages (as in New Keynesian economics, which is best regarded as a modified form of neoclassical economics[citation needed]). 

Many post-Keynesians reject the IS/LM model of John Hicks, which was very influential in neo-Keynesian economics. The positive contribution of post-Keynesian economics has extended beyond the theory of aggregate employment to theories of income distribution, growth, trade and development in which demand plays a key role, whereas in neoclassical economics these are determined by the supply side alone. In the field of monetary theory, post-Keynesian economists were among the first to emphasise that the money supply responds to the demand for bank credit, so that the central bank can choose either the quantity of money or the interest rate but not both at the same time. This view has largely been incorporated into monetary policy, which now targets the interest rate as an instrument, rather than the quantity of money. In the field of finance, Hyman Minsky put forward a theory of financial crisis based on financial fragility, which has recently received renewed attention. Strands There are a number of strands to post-Keynesian theory with different emphases. 

Joan Robinson regarded as superior to Keynes’s Michal Kalecki’s theory of effective demand, based on a class division between workers and capitalists and imperfect competition. She also led the critique of the use of aggregate production functions based on homogeneous capital – the Cambridge capital controversy – winning the argument but not the battle. Much of Nicholas Kaldor’s work was based on the ideas of increasing returns to scale, path dependency, and the key differences between the primary and industrial sectors.

Paul Davidson follows Keynes closely in placing time and uncertainty at the centre of theory, from which flow the nature of money and of a monetary economy. Monetary circuit theory, originally developed in continental Europe, places particular emphasis on the distinctive role of money as means of payment. Each of these strands continues to see further development by later generations of economists, although the school of thought has been marginalized within the academic profession. Current work Journals Much post-Keynesian research is published in the Journal of Post Keynesian Economics (founded by Sidney Weintraub and Paul Davidson), the Cambridge Journal of Economics, the Review of Political Economy and the Journal of Economic Issues (JEI). UK There is also a UK academic association, the Post Keynesian Economics Study Group (PKSG). US Kansas City School In America, there is a center of post-Keynesian work at the University of Missouri – Kansas City, dubbed "The Kansas City School", together with the Center for Full Employment and Price Stability, which run a Post Keynesian Conference and Post Keynesian Summer School, together with a group blog, Economic Perspectives from Kansas City. Their research emphasis includes Neo-Chartalism, job guarantee programs, and economic policy. 

Major post-Keynesian economists Main article: List of Post-Keynesian economists See also: Category:Post-Keynesian economists Major post-Keynesian economists of the first and second generation after Keynes include: • Victoria Chick • Paul Davidson • Alfred Eichner • Geoff Harcourt • Nicholas Kaldor • Michał Kalecki • Hyman Minsky • Basil Moore • Luigi Pasinetti • Joan Robinson • G. L. S. Shackle • Anthony Thirlwall • Sidney Weintraub • Jan Kregel • L.Randall Wray • Frederic S. Lee • Fernando Cardim de Carvalho Post-Keynesian theories • Job guarantee, from the Kansas City School • Monetary circuit theory, often associated with post-Keynesian economics • Neo-Chartalism, another post-Keynesian theory of money See also • Keynesian economics • New Keynesian economics Notes 1. ^ There is semantic dispute as to whether there should be a hyphen between Post and Keynesian. The American journal of the same name does not use the hyphen despite its grammatical correctness, and the objection to its use dates back to Paul Samuelson's claim to be a Post-Keynesian. However Harcourt 2006 uses the hyphen, following Joan Robinson's original use of the phrase. 2. ^ Skidelsky 2009, p. 42 3. ^ Financial markets, money and the real world, by Paul Davidson, pp. 88–89 4. ^ Hayes 2008 5. ^ Arestis 1996 6. ^ For a general introduction see Holt 2001 7. ^ Kaldor 1980 8. ^ Minsky 1975 9. ^ Robinson 1974 10. ^ Pasinetti 2007 11. ^ Harcourt 2006, Pasinetti 2007 12. ^ Davidson 2007 Post Keynesian Economics (1970s-80s) What is post keynesian economics Thanks to Samuelson's reconciliation, today neoclassical economics is known as microeconomics and Keynesian economics has become largely known as macroeconomics the twin pillars of mainstream or orthodox economic thought. However, because this reconciliation clearly disavowed many of Keynes's original ideas that were not held to be compatible with neoclassical economics, many critics have sought to revive some of them and to combine them with theories of scholars such as Michael Kalecki, Joan Robinson, and Piero Sraffa to form a new school of economic thought known as "post-Keynesian Economics" (see Eicher, 1979). Post-Keynesians are highly concerned with short-term economic growth as induced by aggregate demand and, unlike neo-classical economists, are concerned with real world variables that exist in a very concrete historical situation. For them, the adjustment process of the economy to equilibrium conditions is not so "automatic" as neoclassical economist's claimed because it largely depends on the economic agent's interpretation of both the past and expectations for the future all in the midst of a decision making setting involving complex interdependencies and unforeseen factors. As a result of these beliefs, post-Keynesians essentially deny relevance of conventional equilibrium analysis. Moreover, reliance on the role of uncertainty has created some problems for post-Keynesians because it has made it nearly impossible for them to devise any viable theory for long-term growth. It has further prevented them from developing a formal economic model that they all agree upon. According to Professor J. A. Kregel (1976), one of the most distinguished post-Keynesian economists, "post-Keynesian theory can be viewed as an attempt to analyze various different economic problems, e.g., capital accumulation, income distribution, etc., through the methodology of Keynes." Keynes's methodology, then, was to confront "the analysis of an uncertain world was in terms of alternative specifications about effects of uncertainty and disappointment." Using this approach while adopting theories of both Keynes and Kalecki, post-Keynesians have analyzed the relationship between income distribution and economic growth. One of the most significant conclusions of post-Keynesian economics is that for a given level of investment and an economy at equilibrium where savings equals investment, the lower the capitalist's propensity to save, the higher will be their share of national income and the lower will be the worker's share. This assertion is significant because it contradicts the claim by neoclassical economists that capitalists enjoyed a high income due to the pain that is necessary for them to save. This result of the post-Keynesians is founded in their belief that saving is passively linked to changes in level of income, and investment is highly correlated with capitalists' expectations for the future. If optimistic, investment increases, growth occurs, and capitalists' share of income increases as well. As their income rises, capitalists save more bringing savings back in line to a new level of Keynesian equilibrium where savings and investment equate. What this means is that if capitalists are frugal (i.e. save more), or if they are abstemious (i.e. abstain from consuming), they lower their share of the national income. This, of course, directly violates Nassau Senior's assertion that the high income of capitalists was morally justified by their painful abstinence of personal consumption and willful propensity to reinvest their profits into the growth of capital. Another area where post-Keynesians have divergent economic thought from orthodoxy has to do with their belief in the endogenity of money. For them, post-Keynesians stress the fact that real commodity and labor flows are expressed in the economy as monetary flows. They also assume that money possesses a negligible elasticity of substitution with any other medium of exchange and therefore has the unique capacity to be able to be used by financial institutions as a tool to mitigate the effects of exogenous economic system shocks.

Monday, October 17, 2011



1. A and B each carrying on business as a sole trader decided to combine as on January 1,2002 when their individual Balance Sheets were as follows.
Creditors 30,000 25,000 Cash 14,000 8,000
Bank Overdraft 20,000 15,000 Debtors 50,000 40,000
Capital 62,000 31,000 Stock 18,000 11,000
Machinery 20,000 12,000
National war
_______ ______ Bonds 10,000 -____
1,12,000 71,000 1,12,000 71,000 _

The following revaluations were to be made before the firms were amalgamated:
(a) A provision of 5% is to be made against debtors.
(b) Stock was to be reduced in case of A by 10% and in case of B by 5%.
(c) Machinery is to be reduced by 20%.
(d) Each partner is to be credited with goodwill of Rs.20,000.
(e) The bank overdraft of B is to be paid off by him.
(f) National war bonds of A were not take over.

B should introduce cash to make his capital equal of that of A.
You are required to pass the necessary journal entries to close the books of A and B and the opening entries in the books of the new firm. Prepare also the Balance Sheet of the new firm.

2. M/S A and Co., having A and B as equal partners, decided to amalgamate with C and Co., have C and D as equal partners on the following terms and condition:
1. The new firm to take investments at 10% depreciation, land at Rs.80,000, premises at Rs.45,000, machinery at Rs.9,000 and to take over only the trade liabilities of both the firms, the debtors being taken over at book value including provision.
2. The new firm to pay Rs.12,000 to each firm for Goodwill.
3. Typewriters at the written off value of Rs.800, belonging to C and Co., and not appearing in the B/S was also not taken over by the new firm.
4. It was also agreed that the furniture belonging to both the firms be not taken over by the firm.
5. All the four partners in the new firm to bring in Rs.1,60,000 as capital in equal shares.
The following were the Balance Sheets of both the firms on the date of amalgamation;
Balance Sheets
Liabilities A & Co,. C & Co,. Assets A & Co, C & Co,.
Rs. Rs Rs. Rs
Sundry Creditors 20,000 10,000 Cash at Bank 15,000 8,000
Bills Payable 5,000 Investment 10,000 8,000
Bank Overdraft 2,000 10,000 Rs.
A’s Loan 6,000 Debtors 10,000

Capitals: Less: Provision 1,000
A 35,000 9,000 8,000
B 22,000 Furniture 12,000 6,000
C 36,000 Premises 30,000
D 20,000 Land 50,000
General Reserve 8,000 3,000 Machinery 15,000
Investment Goodwill 9,000
Fluctuation Fund 2,000 1,000 _______ _______
1,00,000 80,000 1,00,000 80,000_

Pass journal entries in the books of both the firms and prepare a Balance sheet of the new firm.

3. Following were the Balance Sheets of two firms M/s R and S and M/s X and Y as on 31st December, 2001:
M/s R and S
Rs. Rs.
Creditor 3,000 Stock 50,000
Bills payable 6,000 Debtors 30,000
Capitals: 50,000 Premises 20,000
R 50,000 Plant and Machinery 5,000
S 50,000 Bank 1,500
Furniture 500
_______ Investment 2,000
1,09,000 1,09,000

M/s X and Y
Rs. Rs.
Creditor 25,000 Stock 75,000
Bank C/d 10,300 Debtors 45,000
X’s Capitals: 52,500 Plant and Machinery 20,000
Y’s Capitals 52,500 __ Furniture 300____
1,40,300 1,40,300

The two firms decided to amalgamate their respective business from 1st January 2002. For this purpose it was agreed that the premises and plant and machinery belonging to R&S should be taken over by the new firm at Rs.25,000 and Rs.10,000 respectively. X & Y to be credited with Rs.5,000 for certain patent rights they possessed which became the property of the partnership and which were not included in their Balance Sheet. All the other assets were taken over at the values stated in the respective Balance sheets except the investment belonging to R and S which were not take over. Both firms undertook to discharge their own liabilities.

Prepare ledger accounts in the books of the old firms and Balances Sheet of the new firm.

4. Following were the Balance Sheets as at 31st December, 2001 of two firms M/s P & Q and M/s R &S.

P & Q R & S P & Q R & S
Rs. Rs Rs. Rs
Creditors 3,000 25,000 Stock 50,000 75,000
Bills Payable 6,000 - Debtors 30,000 45,000
Bank Overdraft - 10,300 Premises 20,000 - Capitals: Plant and Machinery 5,000 20,000
P 50,000 Bank 1,500 -
Q 50,000 Furniture 500 300
R - 52,500 Defence Bonds 2,000 - S - 52,500 _______ _______
1,09,000 1,40,300 1,09,000 1,40,300

The two firms decided to amalgamate their business from 1st January 2002. For this purpose it was agreed that the premises and plant and machinery belonging to P&Q taken over by the new firm at Rs.25,000 and Rs.10,000 respectively. R & S were to be credited with Rs.5,000 at the value of certain patent rights they possessed which became the property of the partnership and which were not included in their Balance Sheet. All the other assets were taken over a book values. Both firms undertook to discharge their own liabilities and it was agreed that P&Q should introduce cash to make their capital equal to that of R&S
Pass incorporating entries in the books of the new firm and prepare also the Balances Sheet of the new firm.

Wednesday, October 12, 2011

Branch Accounting. Theory & Practice Exercises

Objectives of Branch Accounting

The main object of keeping branch accounts is dependent on the nature of the business and specific need of a particular branch. The objectives of keeping the branch accounts acceptable to all business are (i) To know the profit or loss of each branch separately. (ii) To ascertain the financial position of each branch on a particular date. (ii) To know the cash and goods requirements of the various branches (iv) To evaluated the progress and performance of each branch. (v) To calculate commission for payment to the managers, if based on profits of branch. (v) To know the profitability of each branch and type of business for expansion of the business. (vii) To give concrete suggestions for the improvement in the working of the various branches (viii) To meet the requirements of specific enactments as all branches of a company must keep the accounts for audit purposes.

Treatment of Certain Branch Transactions

1. Branch expenses paid by the branch out of petty cash: Such expenses will be deducted from the branch cash and at the close reduced balance of cash will be shown on the credit side of the branch account as such expenses need not be shown in the branch account.

2. Depreciation of fixed assets: This is not shown in the branch account. But the closing balance of the fixed assets will be shown on the credit side of the branch account after deduction of the amount of depreciation.

3. Credit sale, bad debts, sales returns, allowances and discount allowed pertaining to branch as these are not direct transactions between branch and head office: These items are pertaining to the debtors account and will not be shown in the branch account. However, these items will be taken into consideration while ascertaining the amount of opening or closing balance of debtors or amount received from debtors, which are shown in the branch account.

4. Goods in transit: Goods in transit is the difference between goods sent by head office and received by the branch. Such goods will be shown either on the both sides of the branch account or will be ignored totally while preparing the branch accounts.

Invoice Price Method
When the goods are sent by the head office to the branch at invoice price i.e., cost plus some percentage of profit, the branch manager is required to sell the goods at invoice price only. Goods are marked on invoice price to achieve the following objectives:
(i) In order to keep secret from the branch manager the cost price of the goods and profit made, so that the branch manager many not start a rival and competitive business with the concern; and
(ii) In order to have effective control on stock i.e, stock at any time must be equal to opening stock plus goods received from head office minus sales made at the branch.

I Debtors System

A. When goods are sent to branch at cost

1. From the following particulars relating to Delhi Branch for the year ending 31st march 2001, prepare branch account in the head office books:
Balance as on 1-4-2000 Rs Rs
Stock at the branch 15000 Credit sales during 2001-01 228000
Debtors at the branch 30000 Cheques sent to branch
Petty cash at the branch 300 during the year:
goods sent to branch during the year: 252000 for salaries 9000
Remittance from the branch for rent and taxes 1500
for cash sales 60000 For Petty cash 1100 11600
received from debtor 210000 270000 Balance as on 31-12-2001
Goods returned by the branch 2000 Stock at the Branch on 25000
Petty cash 200
Debtors 48000

2.Sincere Brothers of Delhi opened a branch at Kanpur on January 2000. From the following figures prepare kanpur Branch accounts in the book of sincere brothers for the year ending December 31, 2000&2001.
2000 2001
Goods sent to kanpure Branch 100000 120000
Expenses paid by the head office
Rent 1200 1200
Salaries 6000 6000
Advertisement 600 800
Cash sales at branch 120000 165000
Remittance received from the branch 160500
Remittance made on December 30,still in transit 4000
Expenses paid by the branch:
Carriage 200 250
Petty expenses 300 400
Stock on December 31 20000 30000
Petty cash in hand 200

B. When goods are sent to branch at invoice price

3. A head office in madras has a branch in Delhi to which goods are invoiced by the head office at cost plus 25%. All cash received by the branch is daily remitted to head office. Form the following particulars; show how the branch Account will appear in the H.O. books. Entries are to be made at invoice price

Stock on January 1,2001(at invoice Price) 62500
Debtors on 1-1-2001 60000
Goods Supplied by H.O.(at invoice Price) 200000
Cash sales 80000
Cash received from customers 147500
Goods returned to the head office(at invoice Price) 12000
Cheques received from the H.O.
Wages and Salaries 55000
Rent, Rates and Taxes 15000
Sundry Expenses 2550 72550
Stock on 31-12-2001(at invoice Price) 75000
Debtors on 31-12-2001 112500
Liability for Petty expenses 550

4. Unique shoe stores have an old established branch at Kanpur. Goods are invoiced to the branch at 20% profit on invoice price; the branch having been instructed to send all cash daily to the Head Office. All expenses are paid by the Head Office except petty expenses which are met by the branch manager. From the following the Head Office, i.e. Unique Shoe Stores:
Stock on January 1,2001(at invoice Price) 15000
Sundry Debtors on January 1,2001 9000
Cash in hand on January 1,2001 4000
Office furniture on January 1, 2001 1200
goods Supplied by Head Office (invoice Price) 80000
Goods returned to Head Office 1000
Goods returned by debtors 480
Debtors at the end 8220
Cash sales 50000
Credit sales 30000
Discount allowed 300
Expense Paid by Head Office
Rent 1200
Salary 2400
Stationery and Printing 300 3900
Petty Expenses paid by branch Manager 280
Stockon31-12-2001(invoice Price) 14000
Provide depreciation on furniture @ 10%p.a.

5. X Company has a branch at Delhi. Goods are invoiced from Head Office at cost plus 33.1/3%. Find out profit at the branch according to debtors system.
Opening balances:
Debtors 10000
Petty cash 1000
furniture 2000
Stock(I.P.) 8000
Cash send by Head Office for Petty expenses 2000
Branch expenses and losses
Freight and advertisement 5600
Bad Debts 50
Depreciation on furniture 80
Petty Expenses 1500
Cash 50000
Credit 36000
Goods Return by Debtors 800
Goods return by branch to Head Office 2000
Cash received from Debtors 20000
Stock at the end at I.P. 7800
Goods invoice by Head Office during the year 88000

6. X and co. of Delhi has a branch at Madras. Goods are sent by the head office at invoice price which is at a profit of 20% on invoice price. All expenses of the branch are paid by the head office. From the following particulars, prepare branch account in the head office books when goods are shown at invoice price:
Rs Rs
Opening balance Goods Returned by Branch at invoice price 300
Stock at invoice Price 11000 Credit sales 22800
Petty cash 100
goods sent to branch at invoice price 20000 Balance at the end:
expenses made by Head Office Stock at invoice price 13000
Rent 600 Debtors at the end 2000
Wages 200 Petty Cash(including miscellaneous income Rs. 25 not remitted) 125
Salary etc. 900 Bad debts 300
Remittances made to head office Allowances to customer 500
Cash sales 2650 Goods returned by customers 700
Cash collected from Debtors 21000

7. Jain Bros. had a branch at Calcutta. Goods are invoiced to the Branch at cost plus 25%. Branch is instructed to deposit cash every day in the head office account in the bank. All expenses are paid by the branch manager. From the following particulars, prepare branch account in the book of head office:
Rs Rs
Stock on 1-1-2001 2500 Furniture purchased by the branch manager 1200
Stock on 31-12-2001 3000 Goods invoiced from the head office 18200
Sundry Debtors on 1-1-2001 1400 Expenses paid by the head office 1640
Sundry Debtors on 31-12-2001 1800 Expenses paid by the branch 120
Cash sales for the year 10800 Head Office sent cash to purchase safe for the branch 1300
Credit sales for the year 7000
Cash remitted to the head office 15000

II Final Account system

8. A Delhi merchant has a branch at Madras to which he charges but the goods at cost plus 25%. The Madras branch keeps its own sales ledger and remits all cash received to the Head Office every day. All expenses are paid from the Head Office the Transactions for the branch during the year 1995 were as follows:
Rs Rs
Stock(1-1-2001) at I.P. 11000 Returns Inwards 500
Debtors(1-1-2001) 100 Cheques sent to branch
Petty Cash(1-1-2001) 100 Rent 600
Cash sales 2650 Wages 200
Credit sales 23950 Salary and other Expenses 900
Goods sent to branch at I.P. 20000 Stock(31-12-2001) at I.P. 13000
Collection on ledger accounts 21000 Debtors(31-12-2001) at I.P. 2000
Goods returned to H.O. at I.P. 300 Petty Cash(31-12-2001) including miscellaneous income Rs. 25
Bad Debts 300 not remitted 125
Allowances to customers 250

Prepare the branch trading and profit & loss account and Branch account for the year ending 31-12-2001

9. Mamta & Co of Hyderabad has a branch at karnool. Goods are invoiced to branches at cost plus 20%. The expenses of the branch are paid from Hyderabad. From the information supplied by the branch prepare trading & profit & loss a/c of the branch for the year ending 31-3-2001 & show the account of the branch as it would appear in the books of the head office:

Opening stock I.P 24,000
Closing stock I.P 18,000
Credit sales 41,000
Cash sales 17,500
Sundry debtors on 31-3-2001 8,500
Goods received from head office 34,000
Goods in transit from H.O as on 31-3-2001 3,500
Expenses paid by the H.O for the branch 10,000
Cash received from debtors 35,000

Independent Branches – Incorporation Enteries

10. A and CO. Limited having its head office at Delhi with branches at Lucknow and Allahabad closes its annual accounts on 31st December, when the following transactions have taken place:

(a) Remittances of Rs. 4500 made by Lucknow branch to its Head Office on 30th December, received by Head Office 5th January(next year).
(b) Goods valuing Rs. 2200 despatched by Allahabad branch on 27th December under instructions form the head office and received by the Lucknow branch on 30th December.
(c) Depreciation amounting to Rs. 1100 on Lucknow branch fixed assets when accounts of such assets are maintained at the Head Office.
(d) Goods worth Rs. 9000 despatched by Head Office to Allahabad branch on 30th December, received by that branch on 7th January (next year).
(e) Lucknow branch paid Rs. 400 dividend to a local shareholder on behalf of the Head Office.
(f) A sum of Rs. 600 being arrears of call money was received by the Allahabad branch from a shareholder in November but was not communicated to the Head Office till 3rd January(next year).
(g) Lucknow branch draw a bill receivable for Rs. 5000 on Allahabad branch which sends its acceptance.
Pass adjusting journal entries in the books of Head Office.

11. Give Journal entries for incorporation of Delhi Branch accounts in the head office and show the branch account in Head Office books after incorporating therein the assets and liabilities.
The trial balance as on 31st December, 2001 is as under:

Dr Cr
Manufacturing Expenses 10000
Salaries 10000
Wages 40000
Cash in hand 2000
Purchases 80000
Goods received from H.O. 15000
Rent 4000
General expenses 5000
Sales 150000
Purchases returns 1000
Opening stock 30000
discount earned 1000
Debtors 15000
Creditors 5000
H.O. account 54000
211000 211000

Closing stock at branch Rs. 30000. Deprecation is to be provided on branch Machinery of Rs. 50000 @ 20 Per cent Branch Furniture of Rs. 3000 @ 15 per cent. Rent outstanding is Rs. 500

12. The Trail Balance of the Madras branch of a company as on 31st March 1995 was as under:
Stock on 1-1-1994 6000
Furniture 2400
Sundry Debtors and Creditors 5600
Goods received from Head Office 16000
Established expenses 2200
Cash at Bank 1400
Cash in Hand 400
Head Office Account 11000
Sales 22800
34000 34000
Stock on 31st March 1995 Rs. 4600.
Prepare Branch Profit and Loss Account and Branch Account in the Account in the books and give the journal entries in the Head Office Books for incorporating the assets and liabilities of the Madras Branch.

13. Following is the Trial Balance of Bangalore Branch as on 31-3-1995:
Rs. Rs.
Furniture 1400
Cash at Bank and on hand 1780
Office expenses 470
Rent 960
Debtors and creditors 3700 1850
Salaries 1500
Gods supplied to Head Office 6000
Sales 38000
Goods received from Head Office 8000
Purchase 18800
Stock, 1St July 1994 6000
Head Office Account 3240
45850 45850
Closing stock was valued at Rs.2700. The Branch Account in the Head Office books on 31-3-1995 stood at Rs.460 (Dr). Goods worth Rs. 2500 sent by Head Office to Branch and remittance of Rs. 1200 sent by Branch to Head Office were in transit.
You are required to incorporate the above trial balance of the Branch in Head Office and give the Bangalore Branch account appearing finally in the Bombay Head Office books

Monday, October 10, 2011


So, far we have assumed that all the assets are realized immediately on the date of dissolution and the accounts of all the partners and the creditors are settled on the same date.
But this assumption is unrealistic in nature, because normally the process of realizing the assets takes a long time and cash is distributed as and when it is realized. In such a case to avoid unpleasant consequences the assets realized are distributed in such way that the unpaid balance of capitals of each partners is left in their profit sharing ratio.

On a gradual realisation of assets, the cash is distributed in the following order:

1. The debts of the firm to the third parties (outside liabilities) must be paid first.
2. After the creditors, have been paid off, the amount due to a partners as loan should be paid. When the loans are due to more than one partner the cash available should be distributed proportionately.
3. After the payment of outside liabilities and loans due to the partners, the capitals of the partner are paid.

There are two methods for distribution of cash under Piecemeal distribution:


If the capitals of the partners are in the ratio of their profit sharing arrangement, then each of them is paid out according to his capital ratio at each distribution. If the capitals of the partners are not in the profit sharing ratio then the first cash available (after making payment of outside liabilities and loans due to the partners) for distribution amongst the partners should be paid to those partners whose capitals are more than their profit sharing ratio so as to bring their capitals to their profit sharing levels. After this the cash available is distributed amongst all partners according to their profit sharing ratio.

The unpaid balance of capital accounts will represent loss on realisation and this loss will be exactly in their profit sharing ratio.


An alternative method of piecemeal distribution amongst partner is to calculate the maximum possible loss on every realisation after the outside liabilities and the partners loan has been paid. The amount available for distribution amongst partners is compared with the total amount of capital payable to the partners and the maximum loss is ascertained on the assumption that in future assets will not realize any amount. The maximum possible loss so ascertained is deducted from the capital balances of the partners in their profit and loss sharing ratio and the balance left in the capital account after deducting the maximum possible loss will be the amount payable to the partner.

If a partner’s share of maximum possible loss is more than the amount standing to the credit of his capital account, he should be treated as insolvent and his deficiency should be debited to the capital accounts of the solvent partners in the proportion of their capitals which stood on the dissolution date as stated under the Garner V/s. Murray Rule. The amount standing to the credit of the partners after debiting their share of maximum loss and their share of insolvent partners deficiency will be equal to the cash available for the distribution amongst the partners.

This process of maximum possible loss is repeated on each realisation till all the assets are disposed.

Friday, October 7, 2011



An important development of recent times in the business world is the combining of independent business units into a group or an economic unit. A company may acquire either the whole or majority of shares of another company so as to have a controlling interest in such a company or companies. The controlling company is known as Holding or Parent Company and the company controlled is known as Subsidiary Company.

Meaning of Holding Company

Section 4 of the Companies Act, 1956 defines a holding company. According to this section, one company can become the holding company of another in any of the following three ways:
1. By holding more than 50% of nominal value of the equity shares of the other company ie the holding company holds the majority of voting power in the subsidiary company.
2.By controlling the composition of the Board of Directors of the other company so that the holding company is able to appoint or remove the directors of the subsidiary company.
3. By controlling a holding company which controls another subsidiary or subsidiaries. For example, if B Ltd is a Subsidiary of C Ltd & C Ltd is a subsidiary of A Ltd then B Ltd is also deemed to be a subsidiary of A Ltd.


The purpose of getting the control over another company may be to gain advantages such as:-
1. To eliminate of competition.
2. To enjoy the economies of large scale of production.
3. To achieve an assured market for the product of the company.
4. To ensure a smooth supply of raw materials.


Under section 212 of the Companies Act, 1956 the following must be attached to the Balance Sheet of a holding company:
1. A copy of the Balance Sheet of the Subsidiary or Subsidiaries.
2. A copy of the Profit & Loss Account.
3. A copy of the Report of its Board of Directors.
4. A copy of the Report of the Auditors.
a. A statement of the holding company’s interest in the subsidiary.
b. The profits of the subsidiary so far as they concern the holding company.

Consolidation of Balance Sheet & Profit & Loss Account

In England, the holding company is required to present, in addition to its normal Balance Sheet, a Consolidated Balance Sheet covering the holding company & its subsidiaries & Consolidated Profit & Loss Account.
In India, the law does not compel a holding company to prepare a consolidated Balance Sheet & Profit & Loss Account. It is only for convenience that these statements are prepared.
Shareholders of a holding company are interested in knowing the affairs of the subsidiary company as part of their money given to the holding company is invested in subsidiary company. So it becomes safe for directors of the holding company to disclose to the shareholders of the holding company the extent to which they are entitled to the net assets of the subsidiary company. By way of consolidated Balance Sheet, the investments of the holding company in the subsidiary company are replaced by assets.
Consolidation of Balance Sheet & Profit & Loss Account means the combining of the separate Balance Sheet & the separate Profit & Loss Accounts of the Holding company & its subsidiary company or companies into Single Balance Sheet & a Single Profit & Loss Account.
The purpose of a Consolidated Balance Sheet & Profit & Loss Account is to show the Financial position & Operating results of a group consisting of a holding company & one or more subsidiaries. The consolidated statement are reports of notional accounting entity which subsist on the view that the holding & subsidiary companies are to be treated as one economic unit. The Financial position & Operating results reported through the consolidated statements are portrayed from the interest of the members of the holding company.

Wholly owned subsidiary company

When all the shares of a subsidiary company are held or owned by the holding company, the subsidiary company is known as a wholly owned subsidiary company.

Partly owned subsidiary company

When a majority of shares, but not all the shares of a subsidiary company are owned by the holding company, the subsidiary company is known as a partly owned subsidiary company.

Elimination of Investments

Where a holding company holds all the shares of a subsidiary or its assets belong to the holding company, which is also liable for all its debts. In other words, the investment by the holding company in the shares of subsidiary company represents excess of assets over liabilities or capital.
While preparing the consolidated balance sheet it is necessary to eliminate investment & its complement of the paid up capital of subsidiary company. Holding company’s investment which its subsidiary’s capital, which in turn is equal to the excess of assets over liabilities of the subsidiary, become internal items in the consolidated balance sheet. Hence, the two are cancelled against each other & substituted by the assets & liabilities of the subsidiary.

Pre Acquisition Period

Pre acquisition period is the period which falls on or before the date on which the shares of the subsidiary company are acquired by the holding company.

Post Acquisition Period

Post acquisition period is the which falls on after the date on which the shares of the subsidiary company are acquired by the holding company.


The profit of the subsidiary may be divide into
1.Capital profit
2.Revenue profit

Pre & Post Acquisition of Profits

a. General Reserve & Profit & Loss Account (credit balance) appearing in the books of the subsidiary company on the date of acquisition are treated as pre – acquisition profits. Since, they were not earned by the holding company in the ordinary course of business they are capitalized & set off against the purchase price of the shares.
b. A pre – acquisition loss appearing in the books of the subsidiary company is treated as a capital loss & debited to goodwill account.
c. Post acquisition profits or losses are those that are made or suffered by a subsidiary company after its shares have been purchased by the holding company. Revenue profits are added to the profits of the holding company if it acquires all the shares of the subsidiary company or to extent of its share holding in the subsidiary company. A post acquisition loss is treated as a revenue loss & deducted from the profits of the holding company.
d. If the date of acquisition is during the course of the year it becomes necessary to make an estimate of pre acquisition & post acquisition periods on time basis so as to apportion profits.

Cost of Control

In practice the holding company may pay more or less than the net worth of the subsidiary company. If the holding company feels that a company the shares of which it wants to acquire enjoys considerable reputation or exceptionary favourable factor it may pay more than the paid up value of shares or net assets.
The excess of acquisition price over net assets represents goodwill or cost of control. If on the other hand the acquisition price is less than the paid up value of shares the difference is again to the holding company & is known as capital reserve.

Minority Interest

When some of the shares in the subsidiary are held by outside shareholders they will be entitled to a proportionate share in the assets and liabilities of that company. The shares of the outsider in the subsidiary is called minority interest.
In the consolidated balance sheet all the assets and liabilities of the subsidiary are consolidated with assets and liabilities of the holding company and the minority interest representing the interest of the outsider in the subsidiary is shown as a liability.

Revaluation of Assets and Liabilities

At the time of acquiring shares in a subsidiary it is usual for the holding company to revalue the assets and liabilities of the subsidiary in order to arrive at a fair price to be paid for the shares.
If the altered values are not taken in the books of subsidiary it is necessary to bring the assets and liabilities into the consolidated balance sheet at the altered values. The difference between the book values and revised values should be adjusted after ascertaining the share of the outsiders.
Where the assets are shown in the consolidated balance sheet at the increase values depreciation provision should be increased and such increase should be deducted from capital reserve and minority interest.
If on the other hand the assets are brought in at reduced value depreciation value should be reduced and such reduction should be added to capital reserve and minority interest.

Treatment of Unrealized Profits

An unrealized inter-company profits exist where the company still holds (at the date of consolidation) stocks sold to it by the other company at a profit.
It is considered that only the holding company share of unrealized profit should be eliminated since for the minority shareholders the profit is nothing but a realized profit. Stock reserve is created whether the goods are sold by the holding company to the subsidiary and vice versa. The amount of unrealized profit (stock reserve) is deducted from the stock on the asset side and also the profit and loss account on the liability side of the consolidated balance sheet.

Example: A subsidiary sells goods to the holding company goods worth Rs 30,000 on which the subsidiary company made 20% profit on selling price (holding company share holds 3000 out of 4000 shares)

Unrealized profit = 20% of 30,000 = 6,000
Holding company’s share = ¾ *6,000 = 4,500.

Inter-Company Balances

1. Internal Debts
When loans are advanced to the subsidiary company by the holding and vice versa the same will appear on the asset side of the lending company’s balance sheet and on the liability side of the borrowing company’s balance sheet.
These being inter-company items they should be eliminated from the consolidated balance sheet.

2.Bills of Exchange
Bills drawn by the holding company on its subsidiary and vice versa appearing as bills payable in one balance sheet and bills recevieables on the other, cancel each other.
However bills discounted cannot get cancelled because of the liability in respect
of bills payable by the accepting company and a contingent liability in the company getting the bills discounted.
a. The company discounting the bill will include the proceeds of the bills in its bank balance and will appear as a note to show the contingent liability.
b. In the consolidated balance sheet the total of bills discounted appear as bills payable representing actual liabilities.

Debentures issued by one of the companies in the group and held as investment
by another in the same group gets cancelled in the consolidated balance sheet and should be eliminated.

4.Contingent Liability
Contingent liability which may or may not materalise into liabilities are shown in the usual way by appending a footnote in the individual balance sheet. For the purpose of consolidation the treatment depends upon whether they are internal or external.
External contingent liability between the company in the group and a third party continue to appear by way footnote.
Internal contingent liability between holding and subsidiary are eliminated without being shown in the consolidated balance sheet.

Dividends paid by Subsidiary Company

(no adjustments need be made in the books of subsidiary company)

Books of Holding Company
1.if the dividends has been paid out of pre-acquisition profits the dividends should be credited by the holding company to investment account but not profit and loss account.
2.on the other hand if the holding company has credited the dividend to profit and loss account then the dividend should be debited to profit and loss account and credited to the investment account.
3.if the dividend has been paid by subsidiary company out of post - acquisition profits the same should be credited by the holding company to its profit and loss account. If it has already credited the dividend to profit and loss account then no adjustment is required.

Dividends declared by the subsidiary company but not paid will appear as a liability in the balance sheet of the subsidiary company. In the consolidated balance sheet the proportion of unpaid dividend attributable to the holding company will be deducted from liability of subsidiary company & the balance payable to the outside shareholders will appear as a liability of the group.
Any interim dividend paid during the accounting period by the subsidiary company to the holding company should be added to the balance of profit & loss account of the holding company & deducted from the balance of profit & loss account of the subsidiary company if the adjustments has not taken place.

Bonus Shares

When a company issues bonus shares out of its accumulated profits it is necessary to distinguish between pre & post acquisition profits utilized for this purpose. In case bonus shares are issued out of pre – acquisition profits no adjustments are necessary for preparing the consolidated balance sheet because in such a case the holding company’s share of such profits gets reduced & the paid up value of the shares held by it will increase. As such the amount of goodwill remains the same.
Bonus shares issued out of post acquisition profits will reduce the holding company’s share in revenue profits & increase the paid up value of the shares held. Consequently, the amount of goodwill gets reduced.


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