Question 5
Departmental accounts with an inter-departmental transfer
18 marks
- Time to write
- About 36 minutes
- Notes
- Crux notes
Question
Question 5 · 18 marksM/s. KP Enterprise had two departments, Cloth and Readymade Clothes. The firm itself made the Readymade Cloths out of cloth supplied by the cloth department at its usual selling price. Using the figures below, prepare the Departmental Trading and Profit & Loss Account for the year that ended 31st March 2024:
| Cloth Department (₹) | Readymade Clothes Department (₹) | |
|---|---|---|
| Opening Stock on 1st April, 2023 | 37,80,000 | 6,38,400 |
| Purchases | 2,52,00,000 | 2,01,600 |
| Sales | 2,77,20,000 | 56,70,000 |
| Transfer to Readymade clothes Department | 37,80,000 | ---------- |
| Manufacturing Expenses | ---------- | 7,56,000 |
| Selling Expenses | 2,52,000 | 88,200 |
| Rent & Warehousing | 10,08,000 | 6,72,000 |
| Stock on 31st March, 2024 | 25,20,000 | 8,06,400 |
Besides the above, the following information is supplied for necessary consideration:
The Readymade Clothes Department's stock may be taken as made up of 75% cloth and 25% other expenses. The Cloth Department earned gross profit at the rate of 15% in 2023-24. General Expenses of the business as a whole amount to ₹ 13,02,000.
Reworded from the university paper: names and figures differ, the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.
Before you write
Read off the question and its marks
Read from the question
- prepare … AccountProper formats (heading, date, both sides): post the plain items, then each adjustment, and balance last.
What the paper leaves open
- The rate. The question gives the Cloth Department's gross profit rate for 2023-24 as 15%, but that department's own figures for the year give 16% (in our version, ₹50,40,000 on a turnover of ₹3,15,00,000, transfers included), and no rate is given for any other year. We read the stated 15% as the rate in the opening stock of the Readymade Clothes Department and use the year's own 16% for its closing stock. Using 15% for both would make the closing reserve ₹90,720 instead of ₹96,768 and the net profit ₹27,99,300 instead of ₹27,93,252.
- The stock of the Readymade Clothes Department, which the question splits into 75% cloth and 25% other expenses, is read as both its opening and its closing stock.
Write it in this order
- Read the data; tick every adjustment as you plan it 2 min
- 1 Trading section, Cloth: transfer credited at selling price 4 marks 7 min
- 2 Trading section, Readymade Clothes: transfer and manufacturing expenses debited 4 marks 7 min
- 3 Profit & Loss section: expenses charged 4 marks 7 min
- 4 Stock reserve on closing stock and opening stock on the cloth content 4 marks 7 min
- 5 General expenses and net profit of the business 2 marks 4 min
- Check: every adjustment used, both sides agree, dates in 2 min
Try it first. About 36 minutes for 18 marks. Write it out, then open the solution.
Solution
Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.
Where one department's output is another department's input, the transfer is recorded between the departments. Here the Cloth Department supplies cloth at its usual selling price, so it is credited with the transfer like a sale, and the Readymade Clothes Department is debited with it like a purchase. The Trading section shows whether the revenue covers the cost of earning it.
Departmental Trading and Profit & Loss Account for the year that ended 31st March 2024
| Dr | Cloth (₹) | Readymade (₹) | Cr | Cloth (₹) | Readymade (₹) |
|---|---|---|---|---|---|
| To Opening stock | 37,80,000 | 6,38,400 | By Sales | 2,77,20,000 | 56,70,000 |
| To Purchases | 2,52,00,000 | 2,01,600 | By Transfer to Readymade Clothes | 37,80,000 | — |
| To Transfer from Cloth Department | — | 37,80,000 | By Closing stock | 25,20,000 | 8,06,400 |
| To Manufacturing expenses | — | 7,56,000 | |||
| To Gross profit c/d | 50,40,000 | 11,00,400 | |||
| Total | 3,40,20,000 | 64,76,400 | Total | 3,40,20,000 | 64,76,400 |
| Dr | Cloth (₹) | Readymade (₹) | Cr | Cloth (₹) | Readymade (₹) |
|---|---|---|---|---|---|
| To Selling expenses | 2,52,000 | 88,200 | By Gross profit b/d | 50,40,000 | 11,00,400 |
| To Rent & warehousing | 10,08,000 | 6,72,000 | |||
| To Departmental net profit | 37,80,000 | 3,40,200 | |||
| Total | 50,40,000 | 11,00,400 | Total | 50,40,000 | 11,00,400 |
Concluding section: the business as a whole (total column)
The Readymade Clothes stocks contain cloth charged at the Cloth Department's selling price, so part of each stock is profit the business has not yet earned from outsiders. That unrealised profit is removed through a stock reserve, as the DU text's illustration does: 75% of each stock is cloth. The printed 15% is read as the rate of the year before (paper note), so it applies to the opening stock; the closing stock takes the Cloth Department's own rate for this year, ₹50,40,000 ÷ ₹3,15,00,000 = 16%.
- Closing stock: ₹8,06,400 × 75% × 16% = ₹96,768, deducted.
- Opening stock: ₹6,38,400 × 75% × 15% = ₹71,820, added back (last year's reserve, released).
| Dr | ₹ | Cr | ₹ |
|---|---|---|---|
| To Stock reserve on closing stock | 96,768 | By Departmental net profit: Cloth | 37,80,000 |
| To General expenses | 13,02,000 | By Departmental net profit: Readymade Clothes | 3,40,200 |
| To Net profit of the business | 27,93,252 | By Stock reserve on opening stock | 71,820 |
| Total | 41,92,020 | Total | 41,92,020 |
| Dr | ₹ |
|---|---|
| To Stock reserve on closing stock | 96,768 |
| To General expenses | 13,02,000 |
| To Net profit of the business | 27,93,252 |
| Total | 41,92,020 |
| Cr | ₹ |
| By Departmental net profit: Cloth | 37,80,000 |
| By Departmental net profit: Readymade Clothes | 3,40,200 |
| By Stock reserve on opening stock | 71,820 |
| Total | 41,92,020 |
The paper asks only for the Departmental Trading and Profit & Loss Account, so the general expenses and the stock reserve are taken in its concluding, business-as-a-whole section rather than in a separate General Profit & Loss Account. The figures are the same either way.
The alternative: 15% on both stocks, as the paper literally says. The closing reserve would be ₹8,06,400 × 75% × 15% = ₹90,720, and the net profit of the business ₹27,99,300 instead of ₹27,93,252. Every other figure is the same.
Where the 18 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Trading section, Cloth: transfer credited at selling price; gross profit ₹50,40,000 | 4 |
| 2 | Trading section, Readymade Clothes: transfer and manufacturing expenses debited; gross profit ₹11,00,400 | 4 |
| 3 | Profit & Loss section: expenses charged; departmental net profits ₹37,80,000 and ₹3,40,200 | 4 |
| 4 | Stock reserve on closing stock (₹96,768, the year's 16%) and opening stock (₹71,820, the printed 15%) on the cloth content | 4 |
| 5 | General expenses and net profit of the business (₹27,93,252) | 2 |
| Total | 18 |
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