Question 5 (a)
Departmental Trading and Profit and Loss Account with an inter-departmental transfer
12 marks
- Time to write
- About 24 minutes
- Notes
- Crux notes
Question
Question 5 (a) · 12 marksM/S PK Enterprises has two departments, Raw Clothes and readymade clothes. The firm made the readymade clothes itself, out of the Raw clothes that the Raw clothes department supplied at its usual selling price. On the basis of the information below, you are required to prepare the Departmental Trading and Profit and Loss Account for the year that ended 31st March 2024:
| Details | Raw Clothes Department (RS) | Readymade Clothes Department (RS) |
|---|---|---|
| Opening Stock | 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 | ----- |
| Closing Stock | 25,20,000 | 8,06,400 |
| Manufacturing expenses | ---------- | 7,56,000 |
| Selling Expenses | 2,52,000 | 88,200 |
| Rent and warehousing | 10,08,000 | 6,72,000 |
Besides the above, the information below is given for necessary consideration:
The ready made clothes department's stock may be taken to consist of 75% raw cloth and of 25% other expenses. The Raw clothes department's gross profit rate was 15% in 2023-2024. 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 Raw clothes department's printed rate of 15% is applied to the unrealised profit in the readymade department's opening stock; the closing stock's unrealised profit uses the department's own rate for the year, worked out from the figures.
- The stray "(b)" before the table is a misprint.
- General expenses are shown in the General Profit and Loss Account, as no basis for dividing them is given.
Write it in this order
- Read the data; tick every adjustment as you plan it 2 min
- 1 Trading section: transfer at selling price 5 marks 8 min
- 2 Profit and loss section: departmental net profits 3 marks 5 min
- 3 Stock reserve on closing stock and opening stock on the cloth content 3 marks 5 min
- 4 General expenses and net profit of the business 1 mark 2 min
- Check: every adjustment used, both sides agree, dates in 2 min
Try it first. About 24 minutes for 12 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 applied to the opening stock (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 12 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Trading section: transfer at selling price; gross profits ₹50,40,000 and ₹11,00,400 | 5 |
| 2 | Profit and loss section: departmental net profits ₹37,80,000 and ₹3,40,200 | 3 |
| 3 | Stock reserve on closing stock (₹96,768) and opening stock (₹71,820) on the cloth content | 3 |
| 4 | General expenses and net profit of the business (₹27,93,252) | 1 |
| Total | 12 |
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