CA Inter Audit & Ethics

Departmental Trading Account for the year ended 31st December, 2014

The key challenge in this problem is that the gross profit ratios are given on normal selling price, but some goods were sold at a discount. Therefore, to compute the cost of goods sold, we must first determine the notional normal selling price of all goods actually sold.

Step 1 – Adjust Sales to Normal Selling Price (for cost computation)

For goods sold at a discount, cost must be based on the normal price (not the actual discounted price). Adjusted Sales at Normal Price = (Actual Sales – Sales at actual/discounted price) + Sales at normal price.

- P: 1,88,000 – 11,000 + 15,000 = ₹1,92,000
- Q: 1,66,000 – 6,000 + 8,000 = ₹1,68,000
- R: 93,000 – 4,000 + 6,000 = ₹95,000

Step 2 – Cost of Goods Sold

Using cost ratio (100% – GP%) applied to adjusted normal sales:

- P: 75% × 1,92,000 = ₹1,44,000
- Q: 66⅔% × 1,68,000 = ₹1,12,000
- R: 60% × 95,000 = ₹57,000

(i) Departmental Results – Gross Profit

GP = Actual Sales – Cost of Goods Sold:

- P: 1,88,000 – 1,44,000 = ₹44,000
- Q: 1,66,000 – 1,12,000 = ₹54,000
- R: 93,000 – 57,000 = ₹36,000

Cross-check: GP on normal sales less discount given → P: 48,000 – 4,000 = 44,000 ✓; Q: 56,000 – 2,000 = 54,000 ✓; R: 38,000 – 2,000 = 36,000 ✓

(ii) Value of Closing Stock as on 31st December, 2014

Closing Stock = Opening Stock + Purchases – Cost of Goods Sold:

- P: 30,000 + 1,60,000 – 1,44,000 = ₹46,000
- Q: 45,000 + 1,30,000 – 1,12,000 = ₹63,000
- R: 15,000 + 60,000 – 57,000 = ₹18,000

The Liquidators' statement of account is a periodic statement prepared by the liquidator to account for all transactions during the winding up process and is filed with the Registrar of Companies. The contents typically include:

Opening Position: Details of assets and liabilities at the commencement of liquidation, including the balance sheet position transferred to the liquidation account.

Receipts: All monies received by the liquidator during the period, including (i) amounts from realization of fixed and current assets, (ii) proceeds from sale of investments and other property, (iii) amounts received from debtors and trade receivables, (iv) interest and income earned on bank deposits, (v) refunds received, and (vi) any other miscellaneous receipts.

Payments Made: All amounts disbursed by the liquidator, classified as (i) preferential creditors - wages, salaries, and gratuity dues of employees, (ii) secured creditors - amounts paid against secured claims, (iii) unsecured creditors - dividends distributed to unsecured creditors, (iv) government dues - income tax, GST, and other statutory liabilities, (v) liquidator's remuneration and expenses - commission, traveling, postage, and professional fees, and (vi) other payments - court fees, printing charges, and other liquidation costs.

Assets Not Yet Realized: A schedule showing movable and immovable property not yet converted into cash, with reasons for non-realization and estimated realizable value.

Bank Balances and Cash on Hand: The closing balance of cash at bank and in hand as on the date of statement.

Reconciliation: Verification that receipts less payments reconciles with the opening balance plus realized assets less liquidation costs.

Contingent Liabilities: Details of claims that may arise after statement date, such as disputed claims or pending litigation.

An account is treated as 'Out of Order' when it does not conform to the agreed-upon terms and conditions of operation. For Cash Credit and Overdraft accounts, the RBI has specified the following conditions under the Master Circular on Asset Classification:

Condition 1: Continuous Debit beyond 90 Days – The account remains continuously in debit (i.e., borrowing outstanding without any credit) for a period exceeding 90 days from the date it first went into debit. This indicates the borrower is not repaying as expected and the facility is being misused as a long-term loan.

Condition 2: No Credit Balance for 90 Days – The account has not been credited with any amount (no credit operation) for more than 90 days. In other words, the account does not have a credit balance even for a single day during the preceding 90-day period. This shows the account is not being operated as a CC/OD facility should be—intermittently, with periodic repayments.

Condition 3: Non-operation for 90 Days – The account remains completely inoperative (neither debited nor credited) for a period exceeding 90 days, indicating abandonment or stagnation of the facility.

Condition 4: Principal Amount Unpaid – Any principal amount due under the CC/OD arrangement remains unpaid for more than 90 days from the due date.

Condition 5: Extension for Seasonal Accounts – For accounts classified as having a seasonal pattern of operation, the period of 90 days is extended to 180 days before treating the account as out of order, provided the borrower has declared and the bank has approved the seasonal nature of the business.

Once an account is classified as 'Out of Order', it becomes a Substandard Asset under the NPA classification framework, affecting the bank's asset quality and requiring enhanced provisioning. The purpose of this classification is to ensure that the credit facility is actually serving its intended purpose and not being diverted for other uses.