HIGHER FINANCIAL ACCOUNTING UNIT 5

Prepared By
Ms. Jissy.C
Assistant Professor
HIGHER FINANCIAL ACCOUTNING
UNIT 5
1 Ms.Jissy.C,Assistant Professor

 Unit 5
 Voyage Accounts-Human Resources Accounting and
Inflation Accounting”(Theory Only)

 MEANING OF VOYAGE ACCOUNT
 The method of accounting followed by shipping companies is
known as voyage accounting. Shipping companies prepare
their accounts periodically and also prepare the results of
each voyage separately. Shipping companies carry goods
from one place to another. Some companies carry pas-
sengers also in addition to goods from one place to another
place.
 In order to ascertain the result of operating a ship’s voyage,
Voyage Account is prepared. The Voyage Account is a
revenue account. It is important to note that there is no
difference in the manner of preparing accounts period-wise
and voyage-wise.
 All expenses connected with the voyage, such as port
charges, wages and salaries of the crew, captain and other
staff, transshipment, agency fees, provisions, loading and
unloading charges, bunker and harbour wages, freight and
insurance, insurance of the ship on a time policy according to
duration of voyage, depreciation arising as a result of the

Accounting Entries- Debit and Credit:
 Voyage Account is debited usually with the following
items:
1. Bunker Cost:
This is the expenditure incurred on fuel oil, diesel, coal
and fresh water used during the voyage. Now-a-days oil
and diesel are used in place of coal. The bin or storing
place of coal is referred to as bunker. Hence the name
bunker costs.
2.Port Charges:
Port is used by the shipping companies for loading and
unloading of goods and parking of ships, hence the
charges paid for these purposes are known as port
charges.
3. Depreciation:

4. Insurance:
Insurance premium of cargo must be entirely debited to
the concerned Voyage Account whereas the insurance
charges of the ship are charged proportionately to each
voyage on the basis of time of voyage.
5. Address Commission and Brokerage:
This is payable to the brokers and agents who help the
shipping company in procurement of cargo, i.e., freight or
business. This is calculated at a certain per cent of the
freight earned including the primage or surcharge and
debited to Voyage Account. Address commission is
payable to the Charterer whereas brokerage is payable
to the agent of the charterer.

 6. Stevedoring Charges:
The expenses which are incurred in loading of goods on
the ships and unloading of goods from the ships are
known as stevedoring charges.
7. Port Charges:
These are the charges paid to port authorities for
allowing the ship to use the port either for loading or
unloading the cargo.
8. Salaries and wages of the crew, captain and other staff.
9. Harbour charges
10. Manager’s commission, if any

 Voyage Account is credited usually with the following items:
1. Freight:
The amount which is charged by the shipping companies for taking
goods or cargo from one place to another is called freight. It is an
income.
2. Primage:
It is additional freight just like surcharge on freight originally
collected for the captain of the ship, now-a-days it is treated as
income of the shipping company.
3. Passage Money:
Fare collected from the passengers travelled in addition to the fare
collected for merchandise.
4. Closing Stocks of Stores, Provisions, Coal, Fuel etc.
Generally, voyage profit represents the excess of voyage incomes
earned over the expenses incurred for this purpose. But if,
however, the voyage is in progress, the incomes and expenses
relating to the unfinished voyage are carried forward to the next
year.
Excess of credit side of Voyage Account over its debit side is profit
on the voyage. Excess of debit side of Voyage Account over its
credit side is loss on the voyage. This profit or loss is transferred to7 Ms.Jissy.C,Assistant Professor

 Format of Voyage Account
Particulars Amount PArticulars Amount
To Wages XXX By Freight XXX
To Salary XXX By Primage XXX
TO Insurance XXX By Passage
Money
XXX
To Insurance XXX
TO Depreciation XXX
TO Commission XXX
TO Brokerage XXX
To Address Commission XXX
To Profit XXX
XXX XXX

1.India Shipping Company of Bombay had a ship by name
Bharat, whose written down value as on 1st July 2005
was Rs 24 lakhs. The ship was insured for Rs. 30 lakhs
at 1% for voyage policy of hull. The ship made a trip to
Sydney and returned to Madras during the period 1st
July 2005 to 30th Sept. 2005.
The particulars relating to the voyage are given below:
1. Expenses incurred: Salaries Rs25000,Fuel
Rs55000,Port dues Rs 30000,Store Expenses
Rs32000,Shares of overhead for the ship Rs16000.
2. Stevedoring at the rate of Rs. 3 per tonne.
3.Depreciation was charged on the written down value of
the ship at the rate of 10% p.a.
4. The freight was insured at 1%.

5. The particulars of the freight consisted of the
following:
 (a) Leather goods 1,100 tonnes at the rate of Rs. 120 per
tonne.
 (b) Cotton 500 tonnes at the rate of Rs. 150 per tonne.
 c) Sugar 1,700 tonnes at the rate of Rs. 100 per tonne
 6. In addition to primage @ 10%, the brokerage payable
was @ 5%.
 Prepare Voyage Account for the three months.

Particulars Amount Particulars Amount
To Fuel 55000
To Salareis of the Crew 25000
Indian Shipping Company :Voyage
Account
To Port Dues 30000
To Store Expenses 32000
By Freight
leather goods(1100
X120)
Cotton (500 X150)
Sugar 1700 X100)
377000
To Share of overhead 16000
ToStevodring@Rs3per3300to
n
(1100+500+1700) X 3
9900
ToInsurance of Hull @1% 30000
ToInsurance for Freight on
1% on 377000
3770
ToDepreciation @10%on
Rs2400000 for 3 months
2400000 X10% X3/12
60000
By Primage377000 X10% 37700

To Brokeage at 5% on
Rs414700
20375
ToProfit 132295
414700 414700

 S.S jalaganga Commenced a voyage on june 1.1998
from Mumbai to Newyork & back. The voyage was
completed on july 31.1998.It Carried a consignment of
handloom textiles on its outward journey and wheat on it
return journey. The ship was insured at an annual
premium of Rs 24000.From the following Particulars
draw up the voyage account :Port Charges Rs5000, Coal
Rs30000,Wage & salaries Rs50000,Stores Purchase Rs
8600, Sundry Expenses Rs5500,Depreciation (annual)
Rs96000,Freight earned (out) Rs 130000,Freight earned
(Return)Rs70000
Address Commission 5% on outward &4% on return freight
.Passage money received Rs10000.
Primage is 5%on freight.The manager is entittled to a
Commission on 5% Profit earned ,after charging such a
commission .Stores & Coal on hand were valued at

Voyage Account-
Particulars Rs Particulars Rs
To Port Charges 5000 By freight out ward 130000
To Coal 30000 By Freight -Return 70000
To Wages & salaries 50000 By passage Money 10000
To Stores purchased 8600 By Primage @5%
Out ward 130000 X 5%=6500
Inward=75000 X 5%=3500 10000
To Sundry expe 5500 By Stores & Coal On Hand 3000
To Depreciation 96000 X2/12 16000
To Insurance (240000 X2/12) 4000
To Address Commission
Outward 5% on 136500=6825
Inward 4% on 73500=2940 9765
To Manager Commission
223000 – 128865 X 5/105
4483
To Net Profit 89652
223000 22300014 Ms.Jissy.C,Assistant Professor

INTRODUCTION
Human Resource Accounting (HRA) means to
measure the cost and value of the people (i.e. of
employees and managers) in the organization. It
measures the cost incurred to recruit, hire, train and
develop employees and managers. HRA also finds
out the present economic value of its employees and
managers. After measuring the cost and value of its
employees and managers, the organization prepares
a report. This report is called HRA Report. It is
shown to the top level management . It can also be
shown to the employees, managers and outside
investors.

 Definition: ‘HRA is a process of identifying and
measuring data about human resources and
communicating this information to interested parties’. -
American Association of Accountants ‘HRA is the
measurement and quantification of human organizational
inputs such as recruiting, training, experience and
commitment’.

 OBJECTIVES
 Providing cost value information about acquiring,
developing, allocating and maintaining human resources.
 Enabling management to monitor the use of human
resources.
 Finding depreciation or appreciation among human
resources.
 Assisting in developing effective management practices.
 Increasing managerial awareness of the value of human
resources
 For better human resource planning
 For better decisions about people, based on improved
information system.
 Assisting in effective utilization of manpower.17 Ms.Jissy.C,Assistant Professor

ADVANTAGES
 Information for manpower planning
HRA provides useful information about the cost and
value of human resources. It shows the strengths and
weakness of the human resources. All this information
helps the managers in planning and making the right
decisions about human resources. Thus, it provides
useful information for Manpower Planning and Decision
Making.
 Information for making personnel policies
HRA provides useful information for making suitable
personnel policies about promotion, favorable working
environment, job satisfaction of employees, etc.

 Utilization of human resources
HRA helps the organization to make the best utilization
of human resources.
 Proper placements
HRA helps the organization to place the right man in the
right post depending on his skills and abilities.
 Increases morale and motivation
HRA shows that the organization cares about the
employees and their welfare. This increases their morale
and it motivates them to work hard and achieve the
objectives of the organization

 Attracts best human resources
Only reputed organizations conduct HRA. So,
competent and capable people want to join these
organizations. Therefore, it attracts the best employees
and managers to the organization.
 Designing training and development programs
HRA helps the organization to design (make) a suitable
training and development program for its employees and
managers
 Valuable information to investors
HRA provides valuable information to present and future
investors. They can use this information to select the
best company for investing their money.

 Limitations
 There is no proper clear-cut and specific procedure or
guidelines for finding cost and value of human resources of
an organization. The systems which are being adopted have
certain drawbacks.
 The period of existence of human resource is uncertain and
hence valuing them under uncertainty in future seems to be
unrealistic.
 There is a fear that HRA may dehumanize and manipulate
employees.
 As human resources are not capable of being owned,
retained and utilized, unlike the physical assets, there is
problem for the management to treat them as assets in the
strict sense.
 There are no specific and clear cut guidelines for 'cost' and
'value' of human resources of an organization. The present
valuation systems have many limitations.
 In spite of all its significance and necessity, tax laws do not

Methods Of Human Resource Accounting
 1. Historical Cost Method
 2. Replacement Cost Method
 3. Opportunity Cost Method
 4. Capitalization of Salary Method
 5. Economic Valuation Method

 Historical Cost Method
 • This method developed by Brummet, Flamholtz and
Pale.
 • According to this method, the actual cost incurred on
recruiting, selecting, training, placing and developing the
human resources of an enterprise are capitalized and
written off over the expected useful life of human
resources.
 • The procedure followed for human resource asset is
the same as that of other physical asset.
 • Any amount spent on training and developing human
resources increase its efficiency, hence capitalized.

 Replacement Cost Method
 This method was developed by Rensis Likert and Eric
G. Flamholtz.
 The cost of replacing employees is used as the measure
of company’s human resources. The human resources of
a company are to be valued on the assumptions as to
what it will cost the concern it existing human resources
are required to be replaced with other persons of
equivalent experience and talent.
 This method corresponds to the historical cost method
mentioned earlier except that it allows for changes in the
cost of acquiring and developing employees in place of
taking their historical cost.

 Opportunity Cost Method
 • In order to overcome the limitations of replacement cost
method, Hekimian and Jones suggested the use of
opportunity cost method.
 • This method determines the value of human resources
by establishing competitive bidding within an
organization.
 • It determines the value of human resource on the basis
of an employee's value in alternative uses.
 • Accordingly a the value of an employee is based on his
opportunity cost.

 Capitalization of Salary Method
 The advocates of this method Baruch Lev and Aba
Schwartz have used the concept of human resources in
terms of i.e. economic value in this model.
 According to them the salaries payable to employees
during their stay with the organization may be used as a
replacement for the value of human resources, in view of
the close co-relation between employees' compensation
and their value to the organization.
 Thus the a value of human resources is the present
value of future earnings of homogeneous group of
employees.

 Economic Valuation Method
 Economic valuation method considers the present worth
of the employee's future service expected to be derived
during their stay with the organization as the value of
firm's human resource.
 Although there are some resemblances between earlier
model i.e., capitalization of salary method and this
model, yet they differ with each other.
 The economic valuation model recommends the
capitalization.

Meaning of Inflation Acounting
Inflation is that state of affair when money in circulation is
more than the production of commodities and services
and purchasing power of money comes down and prices
of commodities and services increases.
Definition of inflating accounting
According to Roy A. Foulke Inflation accounting is a
method of converting values by means of an index
number from the cost or depreciated cost to current
economic values.

 Objectives of inflation accounting
 To reveal the truth and fair view of the operational
results and financial position of the business.
 To maintain operational efficiency of the business.
 To ensure adequate funds for the replacement of various
assets.
 To indicate the real worth of the business.
 To strengthen decision making process.

 Methods of Accounting for price level changes: There is no
consensus on the method to be adopted for adjusting the
financial statements for price level changes. Price level
changes can be broadly classified into general price level
changes and specific price changes. General Price changes
reflect the overall increase or decrease in the value of
monetary unit. The changes in wholesale price index (WPI) or
the consumer price index (CPI) are examples of such price
level changes. Specific price refer to changes in the price of a
specific asset. It is important to note that the price of a
particular asset may not follow the same trend as WPI or CPI.
 They are
 1. Current Purchasing Power (CPP) method, based on
changes in general price level changes
 2. Current Cost Accounting (CCA) method, based on
changes in prices of specific assets.30 Ms.Jissy.C,Assistant Professor

 Current Purchasing Power (CPP):
 Monetary items and non-monetary items are separated
according to the CPP method. The monetary items
accounting adjustment is subject to recording a
net gain or loss. Non-monetary details are updated into
figures with a conversion factor equivalent to price index
at the end of the period divided by price index at the date
of transaction.
 Current Cost Accounting (CCA
 The CCA method values assets at their fair market
value (FMV) rather than at historical cost, the price paid
when the fixed asset was purchased. Under the CCA,
currency, as well as non-monetary items, are restated to
current values.

Advantages:
 Since assets are shown at current values, Balance
Sheet exhibits a fair view of the financial position of a
firm.
 Depreciation is calculated on the value of assets to the
business and not on their historical cost—a correct
method. It facilitates easy replacement.
 Profit and Loss Account will not overstate business
income.
 Inflation accounting shows current profit based on
current prices.
 Profit or loss is determined by matching the cost and the
revenue at current values which are comparable—a
realistic assessment of performance.
 Financial ratios based on figures, adjusted to current

 Demerits of Inflation Accounting:
 The system is not acceptable to Income tax authorities.
 Too much calculations make complications.
 Changes in prices are a never ending process.
 The amount of depreciation will be lower in times of
deflation.
 The profit calculated on the system of price level
accounting may not be a realistic profit.

HIGHER FINANCIAL ACCOUNTING UNIT 5

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