Accountancy 12 English Main

CLASSXII
PARTA:AccountingforPartnershipFirmsandCompanies
Unit1:AccountingforPartnershipFirmsFundamentals
1
Partnership:features,Partnershipdeed.
2. ProvisionsoftheIndianPartnershipAct1932intheabsenceofpartnership
deed.
3. Fixedv/sfluctuatingcapitalaccounts,divisionofprofitamongpartners,
guaranteeofprofits,past,adjustment(relatingtointerestoncapital,interest
on drawing, salary and profit sharing ratio), preparation of P & L
Appropriationaccount.
4. Goodwill:nature,factorsaffectingandmethodsofvaluationaverage
profit,superprofit,andcapitalization.
Unit2:AccountingforPartnershipfirms:ReconstitutionandDissolution
1
ChangeintheProfitsharingRationamongtheexistingpartnerssacrificing
ratio,gainingratio.Accountingforrevaluationofassetsandreassessment
ofliabilitiesanddistributionofreservesandaccumulatedprofits.
2. Admissionofapartnereffectofadmissionofapartneronchangeinthe
profitsharingratio,treatmentofgoodwill(asperAS26),treatmentfor
revaluationofassetsandreassessmentofliabilities,treatmentofreserves
andaccumulatedprofits,adjustmentofcapitalaccountsandpreparation
ofbalancesheet.
3. Retirementanddeathofapartner:effectofretirement/deathofapartner
onchangeinprofitsharingratio,treatmentofgoodwill,treatmentfor
revaluation of assets and reassessment of liabilities, adjustment of
accumulatedprofitsandreserves,calculationofdeceasedpartner'sshare
ofprofittilldateofdeath.Preparationofdeceadespartner'scapitalaccount,
executors'saccountandpreparationofbalancesheet.
1
Accountancy& XII
4. Dissolutionofpartnershipfirms:typesofdissolutionoffirm.Settlementof
accountspreparationofrealizationaccount,andotherrelatedaccounts
(excludingpiecemealdistribution,saletoacompanyandinsolvencyof
partner'sfirm).
Unit3:AccountingforShareCapital
1
Shareandsharecapital:natureandtypes.
2. Accountingforsharecapital:issuesandallotmentofequityshares,private
placementofshares,Publicsubscriptionofsharesoversubscriptionand
undersubscriptionofsharesIssueatparandatpremiumandatdiscount,
callsinadvanceandarrears,issueofsharesforconsiderationotherthan
cash.
3. Accountingtreatmentofforfeitureandreissueofshares.
4. Disclosureofsharecapitalincompany'sBalanceSheetonly.
Unit4:AccountingforDebentures
1
Debentures:Issueofdebenturesatpar,atpremiumandatdiscount.Issue
ofdebenturesforconsiderationotherthancash,debenturesascollateral
security,interestondebentures
2. Redemptionofdebentures:LumpSum,drawoflotsandconversion
PART B:FinancialStatementAnalysis
Unit5:AnalysisoffinancialStatements
1. Financialstatementofacompany:balancesheetofcompanyinthe
prescribedfromwithmajorheadingsandsubheadings(asperschedule
VItotheCompaniesAct1956).
2. FinancialStatementAnalysis:objectivesandlimitations.
3. ToolsforFinancialStatementAnalysis:comparativestatements,common
sizestatements,cashflowanalysisratioanalysis.
4.
Accordingratios:currentratioandquickratio.
5. SolvencyRatios:DebtofEquity Ratio,TotalAssettoDebtRatio,
ProprietaryRatio,InterestCoverageRatio.
6. Activityratios:StockTurnoverRatio,DebtorsTurnoverRatio,Creditors
TurnoverRatio,WorkingCapitalTurnoverRatio
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Accountancy& XII
7. ProfitabilityRatios:GrossProfitRatio,OperatingRatio,CreditorsTurnover
Ratio,WorkingCapitalTurnoverRatio.
8. ProfitabilityRatios:GrossProfitRatio,OperatingRatio,OperatingProfit
Ratio,NetProfitRatioandReturnonInvestment.
Unit6:CashFlowStatement
1. Meaning objectives and preparation (as perAS 3 revised) (Indirect
Method)
Unit7:ProjectWork
1. KindlyrefertotheGuidlinespublishedbytheCBSE
PartC:ComputerisedAccounting
Unit5OverviewofComputerisedAccountingSystem
1. Introduction:ApplicationinAccounting
2. FeaturesofComputerisedAccountingSystem
3. StructureofCAS
4. SoftwarePackages:
Generic
Accountancy& XII
Chapters
1.
Fundamentalsofpartnership
2.
Goodwill
22
3.
ChangeinProfitsharingratioofexistingPartness
26
4.
AdmissionofaPartner
33
5.
RetirementandDeathofaPartner
52
6.
DissolutionofPartnership
66
7.
CompanyAccountsIssueofShares
81
8.
CompanyAccountsIssueofDebentures
101
9.
RedemptionofDebentures
116
10. FinancialStatements&AnalysisofFinancialStatements
128
11. ToolsofFinancialAnalysisAccountingRatios
139
12. CashFlowStatement
158
Accountancy& XII
CHAPTER1
AccountingforPartnershipFirms
Fundamentals
AccordingtoSection4oftheIndianPartnershipAct,1932:
"Partnershipistherelationshipbetweenpersonswhohaveagreedtotheshare
theprofitsofabusinesscarriedonbyalloranyoneofthemactingforall"
FeaturesofPartnership
1. Theremustbeatleasttwopersonstoformavalidpartnership.Section11of
theIndianPartnershipAct,1932restrictthe (maximum)numberofpartnersto10
forcarryingonbankingbusinessand20forotherkindofbusiness.
2. Partnershipcomesintoexistencebyanagreement(eitherwrittenororal)
amongthe partners.Thewrittenagreement amongtehpartners iscalled
PartnershipDeed.
3. APartnershipcanformedforthepurposeof carryingatsharingtheprofits
orlossesofthebusiness
4. Anagreementbetweenthepartnersmustbeaimedat sharingtheprofitsor
lossesofthebusiness.
5. Apartnershipcanbecarriedonbyalloranyoneofthemactingforall.
PARTNERSHIP DEED
Thepartnershipdeedisawrittenagreementamongthepartnerswhichcontains
thetermsofagreement.Apartnershipdeedshouldcontainthefollowingpoints:
1. Nameandaddressofthefirm.
2. Nameandaddressesofthepartners.
3. Natureofthebusiness
4. TermsofPartnership
5. Capitalcontributionbyeachpartner.
6. Interestoncapital
7. Drawingsandinterestondrawings.
8. Profitsharingratio
9. Interestonloan.
10. Partner'sSalary/commissionetc.
11. Methodforvaluationofgoodwill
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Accountancy& XII
12. Accountingperiodofthefirm
13. Rightsanddutiesofpartners.
BenefitsofPartnershipdeed
(1)Helpstoavoiddisputeinfuture
(2)Itisanevidenceinthecourt
(3)Facilitatesfunctioningofbusinessbyavoidingmisunderstanding
RULES APPLICABLEIN THE ABSENCEOF PARTNERSHIP DEED
ProfitsharingRatio
Equal
InterestonCapital
NoInterestonCapitalistobeallowedto
anyPartner
InterestonDrawings
NointerstonDrawingsistobecharged
fromanyPartner
SalaryonCommissionto
aPartner
InterestonloanbyaPartner
NotAllowed
Interestisallowed@6%perannum
DISTRIBUTIONOFPROFITSAMONGPARTNERS
AProfitandLossAppropriationAccountispreparedtoshowthedistribution
ofprofitsamongpartners aspertheprovisionofPartnershipDeed(orasperthe
provisionofIndianPartnershipAct,1932intheabsesnceofPartnershipDeed).Itis
anextensionofProfitandLossAcccount. Itisnominalaccount.
TheJournalEntriesregardingProfitandLossAppropriationAccountareasfollows:
1.
2.
FortransferofbalanceofProfitandLossAccount
ProfitandLossA/c
Dr.
ToProfitandLossAppropriationA/c
(BeingnetprofittransferredtoP&LAppropriationA/c)
ForInterestonCapital
1.ForallowingInterestoncapital
InterestonCapitalA/c
ToPartners'Capital/CurrentA/cs
(Beinginterestoncapitalallwoed@___%p.a)
2.FortransferringInterestonCapitaltoProfitandLossAppropriation
A/c:
6
Accountancy& XII
ProfitandLossAppropriationA/cDr.
ToInterestonCapitalA/c
(BeinginterestoncapitaltransferretoP&LAppropriationA/c)
3.
ForSalaryofCommissionpayabletoapartner
i.
ForallowingSalaryorCommissiontoapartner:
Partner'sSalary/CommissionA/c
Dr.
ToPartner'sCapital/CurrentA/cs
(Beingsalary/commissionpayabletoapartner)
ii.
FortransferringPartner'sSalary/CommissionA/ctoProfitandLoss
AppropriationA/c:
ProfitandLossappropriationA/c
Dr.
ToPartner'sSalary/CommissionA/c
4.
FortransferofReserves:
ProfitandLossAppropriationA/c
Dr.
ToReserveA/c
(Beingreservecreated)
5.
ForIntereston Drawings:
1.Forcharginginterestonapartner'sdrawings:
Partner'sCapital/CurrentA/c
Dr.
ToInterestonDrawingsA/c
(Beinginterestondrawingscharged@____%p.a.)
2. FortransferringInterestondrawingstoProfitandLossAppropriation
A/c:
Dr.
InterestonDrawingsA/c
ToProfitandLossAppropriationA/c
(BeinginterestondrawingstransferredtoP&LApprpriationA/c)
6.
For transfer to Profit (i.e. Credit Balance of Profit and Loss

Appropriation Account
7
Accountancy& XII
ToPartnersCapitalA/cs
(Beingprofitsdistributedamongpartners)
Dr.
SPECIMENOFPROFITANDLOSSAPPROPRIATIONACCOUNT
ProfitandLossAppropriationAccount
Fortheyearendingon________________
Dr.
Particulars
ToInterestonCapital
A
B
ToPartner's Salary/
Commission
To Reserves
To Profits transferred to
capitalA/cof:
A
B
Cr.
`
Particulars
ByProfitLossA/c
(NetProfitstransferredfrom
P&LA/c)
ByInterstonDrawings
A
B
PARTNERSCAPITALACCOUNTS
Partner'sCapitalAccounts: Itisanaccountwhichrepresentsthepartner'sinterstin
thebusiness.
Incaseofpartnershipbusiness,aseparatecapitalaccountismaintainedforeach
partner.Thecapitalaccountsofpartnersmaybemaintainedbyfollowinganyofthe
followingtwomethods:
(1) FixedCapitalAccounts
(2) FluctuatingCapitalAccounts
1. FixedCapitalAccounts
Underthismethodthefollowingtwoaccountsaremaintained:
1. CapitalAccount
This accountwill always show acredit balance. Balance of Capital account
remainsfixedandonlythefollowingtwotransactionsarerecordedintheFixedCapital
Accounts:
AdditionalCapitalIntroduced

CapitalWithdrawnorDrawingsoutofCapital
8
Accountancy& XII
Dr.
Particulars
ToCash/BankA/c
(CapitalWithdrawn)
ToBalancec/d
(Closingbalance)
Partner'sCapitalA/cs
X
Y
`
` Particulars
ByBalanceb/d
(OpeningCr.Balance)
ByCash/BankA/c
(AdditionalCapital
Introduced)
Cr.
Y
`
X
`
2. CurrentAccount
TheCurrentaccountmayshowadebitorcreditbalance.Alltheusual
adjustments such as Interest on Capital, partner's salary/commission,
drawings(outofprofits),interestondrawingsandshareinprofitsorlosses
etc.arerecordedinthisaccount
Dr.
X
Y
Particulars
`
` Particulars
ToBalanceb/d
ByBalanceb/d
(OpeningDr.Balance)
(OpeningCr.Balance)
To Drawings
ByInterestonCapital
(out of Profits)
ByPartner'sSalaryor
To Interest on Drawings
Commission
ToProfitandLossA/c
ByProfitandLoss
(Shareinlosses)
AppropriationA/c
ToBalancec/d
(ShareinProfits)
(ClosingcreditBalance)
ByBalancec/d
ClosingDr.Balance
X
`
Cr.
Y
`
Note:
1. Debit balance of CurrentAccount is shown inAssets side of Balance
Sheet.
2. CreditbalanceofCurrentAccountisshowninLiabilitiessideofBalance
Sheet.
3. Balance of CapitalAccounts are always shown in Liabilities side of
BalanceSheetas thisaccountwillalwaysshowa creditbalancewhen
capitalisfixed
Accountancy& XII
2. FluctuatingCapitalAccounts:
Inthismethodonlyoneaccounti.e.,CapitalAccountofeachandeverypartner
ispreparedandalltheadjustmentsuchasinterestoncapital,interestondrawings
etc.arerecordedinthisaccount.Underthismethod,Capitalaccountmayshow
adebitorcreditbalanceandthebalanceofthisaccountchangesfrequentlyfrom
timetotimethereforeitiscalledfluctuatingCapitalAccount
Dr.
X
Y
Particulars
`
` Particulars
ToBalanceb/d
ByBalanceb/d
(OpeningDr.Balance)
(OpeningCr.Balance)
ToCash/BankA/c
ByCash/BankA/c
(CapitalWithdrawn)
(AdditionalCapital
To Drawings
Intoduced)
(out of profits)
ByInterestonCapital
To Interest on Drawings
ByPartner'sSalaryor
ToProfitandLossA/c
Commission
(Shareinlosses)
ByProfitandLoss
ToBalancec/d
AppropriationA/c
(ClosingcreditBalance)
(ShareinProfits)
ByBalancec/d
(ClosingDr.Balance)
X
`
Cr.
Y
`
INTERESTONCAPITAL
Interestonpartnerscapitalwillbeallowedonlywhenithasbeenspecificallymentioned
inthepartnershipdeed.InterestonCapitalcanbetreatedaseither:
a. AnAppropriationofprofitor
b. AChargeagainstprofits
A. InterestonCapital:AnAppropriationofProfits:
InCaseofLosses
InterestonCapitalisNOTALLOWED
InCaseofSufficientProfits
InterestonCapitalisALLOWEDIN
FULL
IncaseofInsufficientProfits
InterestonCapitalisallowedonlyto
theextentofprofitsintheratioof
interestoncapitalofeachpartner
B.InterestonCapital:AsaChargeagainstProfits:
InterestonCapitalisalwaysallowedinfullirrespectiveofamountofprofits
orlosses
10
Accountancy& XII
JOURNAL
a. IncaseofSufficientProfits
Dr.
(BeinginterestoncapitaltransferredtoP&LAppropriationA/c)
b. IncaseofInsufficientProfitsorLosses
ProfitandLoss/ProfitandLossAdjustmentA/cDr.
(BeinginterestoncapitaltransferredtoP&LAdjustmentA/c)
Note :
InterestonCapitalisalwayscalculatedontheOPENINGCAPITAL. If
OpeningCapitalisnotgiveninthequestion,itshouldbeascertainedasfollows:
Particulars
CapitalattheEnd
Add:1.Drawings
xxxxxx
__________
2.InterestonDrawings
xxxxxx
3.LossesduringtheYear
xxxxxx
__________
(xxxxxx)
(xxxxxx)
()
Less:1.AdditionalCapitalIntroduced
2.Profitsduringtheyear
OpeningCapital
__________
Foradditionalcapitalinterestiscalculatedforperiodforwhichcapitalisutilisede.gif
additionalcapitalisintroducedon1Aprilinfirmwhereaccountsareclosedon31st
December
Interest=AmountintroducedxRate/100x9/12
asmoneyisutilisedfor9months
INTERESTONDRAWINGS
InterestondrawingsinchargedbythefirmonlywhenitisclearlymentionedinPartnership
Deed.Itiscalculatedwithreferencetothetimeperiodforwhichthemoneywas
withdrawn.
Case1:WhenRateofInterestonDrawingsisgivenin%
InterestonDrawingsiscalculatedwithaflatrateirrespectiveofdateofdrawings.
11
Accountancy& XII
Case2:WhenRateofInterestonDrawingsisgivenin%p.a.
1.
When date of Drawings is not given

InterestonDrawing=TotalDrawingsxRate/100x6/12
Note : Interest is calculated for a period of 6 months
2. When date of Drawings is given
InterestonDrawing=TotalDrawingsxRate/100xTimeLeftafter
drawings/12
Case3:Whendifferent amount arewithdrawnondifferent date:
WehavethefollowingtwomethodstocalculatetheamountofInterestonDrawing:
1. Simple Interest Method
Inthismethod,interestondrawingiscalculatedforeachamountofdrawing
indivduallyofthebasisofperiodsforwhich
2. Product Method
Inthismethod,theamountsofdrawingsaremultipliedbytheperiodforwhich
itremainedwithdrawnduringtheperiod,Interestfor1monthiscalculatedon
thesumoftheseproducts.
Wecanexplaintheabovementionedtwomethodswiththehelpofanexample.
Example :
AarushiandSimranarepartnersinafirm.Duringtheyearendedon31stMarch2011
Aarushimakesthedrawingsasunder:
DateofDrawing
Amount (`)
01082010
5,000
31122010
10,000
31032011
15,000
PartnershipDeedprovidedthatpartnersaretobechargedinterestondrawings@12%
p.a.CalculatetheinterestchargeabletoAarushiDrawingbyusingSimpleInterestMethod
andProductMethod.
SOLUTION
Dateof
Withdrawal
01.08.2010
31.12.2010
31.03.2011
1.SimpleInterestMethod
Amountof
Monthstill
Drawings(`)
March31,2011
5,000
10,000
15,000
08
03
00
12
Interest@12%p.a
(`)
400
300
000
700
Accountancy& XII
Dateof
Withdrawal
2.ProductMethod
Amountof
Monthsforwhich
Drawings(`)
amounthas
withdrawntill
December31,2011
01.08.2010
31.12.2010
31.03.2011
40,000
30,000
00000
70,000
InterestonDrawing=TotalProductxRate/100xTime/12(inmonths)
=70,000x12/100x1/12
=` 700
Case4:Whenanequalamountiswithdrawnregularly
InterestonDrawingcanbecalculatedusingeitherProductMethodorDirectMethod
(i.e.,ShortCutMethod)
DirectMethodwillbeusedonlyifallthefollowingthreeconditionsaresatisfied:
1.Amountshouldbesamethroughouttheperiod
2.DateofDrawingsshouldbesamethroughouttheperiod
3.Drawingsshouldbemadethroughouttheperiodregularlywithoutanygap.
InterstonDrawing=TotalProductxRate/100xT/12
T=Time(inmonths)forwhichinterestistobecharged
T=Timeleftafterfirstdrawing+Timeleftafterlastdrawing/2
ValueofTunderDifferentcircumstanceswillbeasunder:
Monthly
Quarterly
HalfYearly Monthly
Drawingsfor Drawingsfor DrawingsforDrawingsfor
12Months
12Months
12Months 06Months
Whendrawingare
madeintheBeginning
ofeachperiod
5,000
10,000
15,000
Product
(`)
08
03
00
6.5 7.5 9
3.5
Whendrawingare
madeintheMiddleof
eachperiod
6
13
Accountancy& XII
Whendrawingare
madeintheEndof
eachperiod
Illustration:
5.54.5
32.5
CalculateinterestondrawingsofMr.X@10%p.aifhewithdrew` 1000permonth(i)In
thebegnningofeachMonth(ii)Inthemiddleofeachmonth(iii)atendofeachmonth.
TotalAmountwithdrawn= `1000x12=12,000
(i)Interestondrawing=AmountxRate/100x6.5/12
=12,000x10/100x6.5/12= ` 650
(ii)Interestondrawing=AmountxRate/100x6/12
=12,000x10/100x6/12=`600
(iii)Interestondrawing=AmountxRate/100x5.5/12
=12,000x10/100x5.5/12= `550
Illustration 2
CalculateinterestondrawingofVimalifthewithdrewRs.48000inyearwithdrawnevenly
(1) at beginning of each Quarter (ii) in the middle of each Quarter (iii) at end of each
Quarterrateis10%P.A.
Solution
CaseIDrawingmadeonbegnningofeachQuarter
Interestondrawing=AmountxRate/100x7.5/12
=48,000x10/100x7.5/12=Rs.3,000
CaseIIDrawingmadeinmiddleofeachquarter
Interestondrawing=AmountxRate/100x6/12
=48,000x10/100x6/12=Rs.2,400
CaseIIIDrawingsmadeatendofeachquarter
Interestondrawing=AmountxRate/100x4.5/12
=48,000x10/100x4.5/12=Rs.1800
SimilarlyInterestcanbecalculatedbyfollowingfarmulas
HalfyearlyDrawingsforyearwhen
(a)Drawingsaremadeinthebegnningofeachperiod(halfyear)
(b)Drawingsaremadeinthemiddleofeachperiod(halfyear)
Interesondrawing=AmountxRate/100x6/12
(c)Drawingsaremadeattheendofeachperiod(halfyear)
For monthlydrawings for6 months
(a)Drawingsaremadeinbeginningofeachmonth
Interst=AmountxRate/100x3.5/12
(b)Whendrawingsaremadeinthemiddleofeachmonth
Interest=AmountxRate/100x3/12
14
Accountancy& XII
(c)Whendrawingsaremadeattheendofeachmonth
Interest =Amount x Rate/100x 2.5/12
INTERESTONPARTNERSLOAN
Itisachargeagainstprofits.Itisprovidedirrespectiveofprofitsorloss.Itwillalsobe
providedintheabsenceofPartnershipDeed@6%perannum.
Thefollowingentriesarepassedtorecordtheinterestonpartnersloan
i.
ForallowingInterestonloan:
InterestonPartners LoanA/c
Dr.
ToPartnersLoanA/c
(Beinginterestonloanallowed@___%p.a.)
ii.
FortransferringInterestonLoantoProfitandLossA/c:
ProfitandLossA/c
Dr.
ToInterestonLoanA/c
(BeinginterestonloantransferredtoP&LA/c)
ItisalwaysDEBITEDtoProfitandLossA/c
RentpaidtoapartnerisalsoachargeagainstprofitsanditwillalsobeDEBITEDto
ProfitandLossA/c.
Q.1.AandBenteredintopartnershipon1stApril,2010withoutanypartnershipdeed.They
introduced capitals of Rs. 5, 00,000 and Rs. 3, 00,000 respectively. On 31st October,
2010,Aadvanced Rs.2,00,000by wayofloanto thefirmwithoutany agreementasto
interest.
TheProfitandLossAccountfortheyearended31032011showedaprofitofRs.
4,30,000butthepartnerscouldnotagreeupontheamountofinterestonLoantobe
chargedandthebasisofdivisionofprofits.PassaJournalEntryforthedistributionofthe
ProfitsbetweenthepartnersandpreparetheCapitalA/csofboththepartnersandLoanA/
cofA.
SOLUTION:
Fortheyearendingon31stMarch,2011
Dr.
`
Particulars
To Profits transferred to
CapitalA/cof:
A2,12,500
B2,12,500
Particulars
ByProfitandLossA/c
Rs.
(Net Profits 4,30,000
Less:Intereston
4,25,000 A'sLoan
(5,000)
4,25,000
15
Cr.
`
4,25,000
4,25,000
Accountancy& XII
Dr.
Cr
Date
Particular
A
B
31.03.2011 To
Balance
7,12,500 5,12,500
c/d
Date
01.04.2010
31.03.2011
Particular
A
ByBankA/c 5,00,000
By Profit and
Loss
Appropriation
A/c
2,12,500
7,12,500
7,12,500 5,12,500
B
3,00,000
2,12,500
5,12,500
JOURNAL
Date
Particulars
L.F.
31.03.2011 ProfitandLossAppropriationA/c
ToA'sCapitalA/c
ToB'sCapitalA/c
(Beingprofitdistributedamongthe
partners)
Dr.
Date
2011
March,
31
Dr
Particulars
A'sLoanA/c
Amount
Date
ToBalancec/d
2,05,000
Debit
Rs.
4,25,000
2,12,500
2,12,500
Particulars
2010
Oct., 31 ByBankA/c
2011
March,31 ByIntereston
LoanA/c
2,05,000
Credit
Rs.
Cr.
Amount
Rs.
2,00,000
5,000
2,05,000
Note:InterestonA'sLoan=LoanAmountxRate/100xTimeLeftafterLoanTaken/12
=2,00,000x6/100x05/12
= Rs.5,000
PASTADJUSTMENTS
If,afterpreparationofFinalAccountsoffirm,itisfoundthatsomeerrorsoromissionin
accounts has occurred than such errors or omissions are rectified in the next year by
passing anadjustment entry.
Astatementispreparedtoascertaintheneteffectofsucherrorsoromissionsonpartner's
capital/current accounts inthe following manner.
16
Accountancy& XII
Particulars
A.Amounttobegiven(CREDITED)
*InterestonCapital
(Notallowedorprovidedatalowerrate)
*Partner'sSalaryorCommissionetc.
(Omittedtoberecorded)
*ActualProfits
(Tobedistributedincorrectratio)
TOTAL A
B.Amountalreadygiventobetakenbacknow
(DEBITED)
*InterestonCapital
(Ifgivenatahigherrate)
* Interest on Drawings
(if not charged)
*Profitsalreadydistributedinworngratio
(debited now)
TOTALB
NetEffect(AB)
Date
A
Rs.
B
Rs.
C
Rs.
+/
+/
+/
+IndicatesAmounttobeCreditedtoPartner'sCapitalAccount
indicatesAmounttobeDebitedtoPartner'sCapitalAccount
JOURNAL
Particulars
L.F.
Debit
Rs.
Partner'sCapitalA/c(Amounttobe
Dr
Debited)
ToPartners'CapitalA/c(Amountto
beCredited)
(Beingadjustmententrypassed)
Credit
Rs.
DuringPastadjustmentitisnotcompulsorythatcapitalaccountsofallpartner'sare
affected.Morethanonepartner'sCapitalAccountmaybedebitedorcreditedbutamount
ofdebit&creditsholdbeequal
Q.1:ManojSahilandDipankararepartnersinafirmsharingprofitsandlossesequally.The
haveomitted interestobCapital@10% perannumfor threeyearsendedon 31stMarch,
2011.TheirfixedCapitalonwhichinterestwastobecalculatedthroughoutthewere:
Manoj
Rs.3,00,000
Sahil
Rs.2,00,000
Dipankar Rs.1,00,000
Givethenecessaryadjustingjournalentrywithworkingnotes.
17
Accountancy& XII
SOLUTION:
Date
BooksofManoj,SahilandDipankar
JOURNAL
Particulars
L.F.
Dipankar'sCurrentA/c
ToManoj'sCurrentA/c
(Beingadjustmententrypassed)
Dr.
Debit Credit
Rs.
Rs.
30,000
30,000
STATEMENTSHOWINGADJUSTMENT
Particulars
A.Amounttobegiven(Credited)
InterestonCapital
Manoj
Rs.
Sahil
Rs.
Dipankar
Rs.
90,000
TotalA 90,000
60,000
60,000
30,000
30,000
B.Amountalreadygiventobetakenback
now(DEBITED):
ExcessProfittakenbackfromtehpartnersin
theirprofitsharingratio
60,000 60,000
60,000
(Rs.90,000+60,000+30,000 = 1,80,000)
TotalB 60,000 60,000
60,000
NetEffect(AB)
30,000
Nil
30,000
Credit
Debit
Hint:Asclosing balancesheetisgivensobeforecalculation ofinterestopeningcapital
shouldbecalculated
Q2.A and B are partners in a firm sharing profits and losses in the ratio of 3:2. The
followingwastheBalanceSheetofthefirmason31032011:
BALANCESHEET
ASON31032011
Liabilities
` Assets
`
Capitals:
Rs.
SundryAssets
80,000
A
60,000
B
20,000
80,000
80,000
80,000
The profits Rs.30,000 for the year ended 31032011 were divided between the partners
withoutallowinginterestoncapital@12%p.a.andsalarytoARs.1,000permonth.During
theyearAwithdrewRs.10,000andBRs.20,000.
Pass the necessary adjustment entryand show your working clearly
18
Accountancy& XII
The profits ` 30,000 for the year ended 31032011 were divided between the partners
withoutallowinginterestoncapital@12%p.a.andsalarytoA `1,000permonth.During
theyearAwithdrew `10,000andB `20,000.
Pass the necessary adjustment entryand show your working clearly
BooksofAandB
JOURNAL
Date
Particulars
L.F.
Debit Credit
`
`
B'sCapitalA/c
Dr.
30,000
ToA'sCapitalA/c
30,000
(BeinginterestoncapitalandsalarytoAnot
Charged, now rectified)
WorkingNotes:
1.CalculationofOpeningCapital:AsClosingBalanceSheetisgivensobeforecalculation
ofinterestopeningcapitalshouldbecalculated
Particulars
A
B
`
`
CapitalattheEnd
60,000
20,000
Add:1.Drawings
10,000
20,000
70,000
40,000
Less:Profitsduringtheyear
(18,000)
(12,000)
OpeningCapital
52,000
28,000
2.CalculationofNetEffect
STATEMENTSHOWINGADJUSTMENT
Particulars
A
`
A.Amounttobegiven(CREDITED)
InterestonCapital
6,240
(Not provided)
SalarytoA
12,000
(Not provided)
TOTALA
18,240
B.Amountalreadygiventobetakenbacknow
(DEBITED):
LosstothefirmduetoInterestonCapitalandSalaryto
Abedebitedtothepartnersin
theirprofitsharingratio
12,960
(Rs.18,240+3,360=21,600)
TOTALB
12,960
NETEffect(AB)
5,280
Credit
19
B
`
3,360
3,360
8,640
8,640
5,280
Debit
Accountancy& XII
GUARANTEEOFPROFITSTOAPARTNER
Guaranteeisanassurancegiventothepartnerofthefirmthatatleastafixedamountshall
begiventohim/herirrespectiveofhis/heractualshareinprofitsofthefirm.Ifactualshare
inprofitsislessthantheguaranteedamountinthatcasethedeficitamountshallbeborne
eitherbythefirmorbyanypartnerasthecasemaybe.
Note:Guaranteetoapartnerisgivenforminimumshareinprofits.Iftheactualsharein
profitsismorethantheminimumguaranteedamountthentheactualprofitswillbeallowed
tothepartner
Case:1.WhenguaranteeisgivenbyFIRM(i.e.,byallthePartnersofthefirm)
1.GuaranteedamounttoapartneriswritteninProfitandLossAppropriation
A/c
2. Remaining profits are distributed among the remaining partners in their
remaining ratio.
Case2:Whenguaranteeisgivenbyapartnerorpartnerstoanotherpartner
1. Calculatethe sharein profitsforthe partnerto whomguarantee isgiven
2. If sharein profitsis morethan the guaranteedamount, distributethe profits
as perthe profitand loss sharingratio inusual manner.
3. If share in profits is less than the guaranteed amount, find the difference
betweentheshareinprofitsandthe guaranteedamountandthedifferenceis
known as Deficiency.
Deficiency isdistributed amongthe partneror partnerswho guaranteedin a
certainratioandsubtractedfromhisortheirrespectiveshares.
Q.AandBwerepartnersinafirmsharingprofitsandlossesintheratioof3:2.Theyadmit
Cfor1/6thshareinprofitsandguaranteedthathisshareofprofitswillnotbelessthenRs.
25,000. Total profits of the firm were Rs. 90,000. Calculate share of profits for each
partner when:
1.Guaranteeisgivenbyfirm.
2.GuaranteeisgivenbyA
3.GuaranteeisgivenbyAandBequally.
SOLUTION:
Case1.WhenGuaranteeisgivenbyfirm
Fortheyearendingon31STMarch,2011
Dr.
Cr.
Particulars
`
Particulars
`
ToA'sCapitalA/c
ByProfitandLossA/c
(3/5 of Rs.65,000)
39,000
90,000
ToB'sCapitalA/c
(2/5 of Rs.65,000)
26,000
ToC'sCapitalA/c
(1/6ofRs.90,000 orRs.
25,000 whichever is more
25,000
90,000
90,000
20
Accountancy& XII
Case2.WhenGuaranteeisgivenbyA
Dr.
Particulars
`
Particulars
ToA'sCapitalA/c
ByProfitandLossA/c
(3/6 of Rs.90,000)
45,000
(Net Profits)
Less:Deficiency
BorneforC
(10,000) 35,000
ToB'sCapitalA/c
(2/6 of Rs.90,000)
30,000
ToC'sCapitalA/c
(1/6 of Rs.90,000
15,000
Add:Deficiencey
RecoverfromA
10,000 25,000
90,000
Case3.WhenGuaranteeisgivenbyAandBequally
Dr.
Particulars
`
Particulars
ToA'sCapitalA/c
ByProfitandLossA/c
(3/6 of Rs.90,000)
45,000
(Net Profits)
Less:Deficiency
BorneforC
(1/2of10,000)
5,000 30,000
ToB'sCapitalA/c
(2/6 of Rs.90,000)
30,000
Less:Deficiency
BorneforC
(1/2of10,000)
5,000
25,000
ToC'sCapitalA/c
(1/6 of Rs.90,000
15,000
Add:Deficiency
RecoverfromA
5,000
Deficiency
RecoverFromB
5,000 25,000
90,000
21
Cr.
`
90,000
90,000
Cr.
`
90,000
90,000
Accountancy& XII
CHAPTER2
Goodwill:NatureandValuation
Meaning of Goodwill:
Goodwillplacestheorganizationatagoodpositionduetowhichtheorganizationisable
toearnhigherprofitswithoutanyextraefforts.Goodwillcannotbeseenbutfelt.
ThereforegoodwilliscalledanIntangibleasset.
Factors affecting the value of Goodwill :
1. Efficient management
2. Qualityofproducts
3. Locationofbusiness
4. Availabilityofrawmaterial
5. Favorablecontracts
Needforvaluinggoodwill:Wheneverthemutualrightsofthepartnerschangesthen
party which makes a sacrifice must be compensated. This basis of compensation is
goodwillsoweneedtocalculategoodwill.
Mutualrightschangeunderfollowingcircumstances
1)Whenprofitsharingratiochanges
2)Onadmissionofapartner
3)OnRetirementordeathofapartner
4)Whenamalganationoftwofirmstakenplace.
5)Whenpartnershipfirmissold.
Methods of valuation of goodwill :
1. Averageprofit method
2. Superprofitmethod
3. Capitalizationmethod
Average Profit Method
TheprofitearnedbyaFirmduringpreviousaccountingperiodsonanaveragebasisis
calledaverageprofit.Goodwilliscalculatedonthebasisofaverageprofitduetofuture
expectationsofearningcapacityofthefirm.
Illustration 1. (Average Profit Method)
Akanksha,ChetnaandDipanshuarepartnersinafirmsharingprofitsandlossesinthe
ratioof3:2:1.TheydecidetotakeJatinintopartnershipfromJanuary1,2012for1/5
share inthe futureprofits. For this purpose ,goodwill is to be valuedat 2times the
averageannualprofitsofthepreviousfouryears.Theaverageprofitsforthepastfour
years were:
22
Accountancy& XII
Formula
Average Profit = Total Profits/No. ofYears
Goodwill =Average Profit x Number of years of purchase.
Year
`
2008
96,000
2009
60,600
2010
62,400
2011
84,400
Calculatethevalueofgoodwill.
Solution:
Year
`
2008
96,000
2009
60,600
2010
62,400
2011
84,400
Total
3,03,400
AverageProfit=TotalProfit/No.ofYears
Averageprofit=3,03,400/4=75,850
Goodwill=AverageProfitxNumberofYearsofPurchase
Goodwill=75,850x2=1,51,700
Super Profit Method
Ifafirmearnshigherprofitincomparisontonormalprofit(generallyearnedbyother
firmsofsameindustry)thenthedifferenceiscalledSuperProfit.Goodwilliscalculated
onthebasisofSuperprofitduetofutureexpectationsoflearningcapacityofthefirm.
Superprofit=AverageprofitNormalprofit
NormalProfit=Investment(CapitalEmployed)xNormalRateofReturn/100
Illustration 2. (Super Profit Method)
Afirmearnednetprofitsduringthelastthreeyearsas:
Year
200809
200910
201011
Profit (`)
36,000
40,000
44,000
Thecapitalinvestmentofthefirmis ` 1,20,000.Afairreturnonthecapitalhavingregard
totheriskinvolvedis10%.Calculatethevalueofgoodwillonthebasisofthreeyears
purchaseoftheaverageprofitforthelastthreeyears.
Solution :
Averageprofit:36000+40000+44000/3=40000
NormalProfit=CapitalEmployedxNormalRateofReturn/100
NormalProfit:120000x10/100=12,000
23
Accountancy& XII
Superprofit=AverageprofitNormalprofit
=40,00012,000=28,000
Goodwill=Superprofitxnumberofyearspurchased
=28,000x3=84,000
Capitalisation Method
Inthismethodcapitalizedvalueofthefirmiscalculatedonthebasisofnormalrateof
return.Differencebetweentehcapitalizedvalueandactualcapitalemployediscalled
goodwill.
Illustration 3 (Capitalisation Method)
Aearns`1,20,000asitsannualprofits,theratesofnormalprofitbeing10%Theassets
oftehfirmamountedto` 14,40,000andliabilitiesto` 4,80,000.Findoutthevalueof
goodwillbycapitalizationmethod.
Solution :
Capitalizedvalueofthefirm=Averageprofitx1000/Rateofnormalprofit
=1,20,000x10/100=12,00,0005
Capitalemployed=Totalassetsliabilities
=14,40,0004,80,000=9,60,000
Goodwill=capitalizedvaluecapitalemployeed
=12,00,0009,60,000=2,40,000
Illustration 4 . (Average profit method)
AandBarepartnersinafirm.TheyadmitCintothefirm.Thegoodwillforthepurpose
istobecalculatedat 2year'spurchaseoftheaveragenormalprofitsofthelastthree
years which were ` 10,000, ` 15,000 and ` 30,000respectively. Secondyears profit
includedprofitonsaleofMachinery` 10,000.Findthevalueofgoodwillofthefirmon
C'sAdmission.
Solution
(1)CalculationofAverageProfit:
Year ended
`
IstYear
10,000
2ndYear(`15,000`10,000)
5,000
3rdYear
TotalProfits
Averageprofit=Totalprofit/No.ofyears
30,000
45,000
= ` 45,000/3=15,000
Illustration 5 (Super profit method)
Theaveragenetprofitsexpectedofafirminfutureare ` 68,000peryearandcapital
24
Accountancy& XII
investedinthebusiness bythefirmis ` 3,50,000.Therateofinterestexpectedfrom

capitalinvested inthis class ofbusiness is 12%.The remunerationofthe partners is
estimatedtobe `8,000fortheyear.Youarerequiredtofindoutthevalueofgoodwillon
thebasisoftwoyears'purchaseofsuperprofits.
Solution
AverageProfit=AverageNet ProfitPartner'sremuneration
(1)Averageprofit=` 68,000` 8,000=`60,000
(ii)Normalprofit=CapitalemployedxNormalrateofreturn/100
= ` 3,50,000x12/100= ` 42,000
(iii)SuperProfit=AverageprofitNormalprofit
= `60,000 `42,000= `18,000
(iv)Valueofgoodwill=SuperprofitxNo.ofyears'purchase
= `18,000x2= ` 36,000
Illustration 6. (Super profit method)
OnApril1st,1998anexistingfirmhadassetsof `75,000includingcashof ` 5,000.The
partners' capitalaccounts showeda balanceof ` 60,000 andreserves constituted the
rest.Ifthenormalrateofreturnis20%andthegoodwillofthefirmisvaluedat ` 24,000
at4yearspurchaseofsuperprofits,findtheaveragesprofitsofthefirm
Solution:
(1)CalculationofNormalProfit:
Capitalemployedxnormalrate/100
=75,000x20/100= ` 15,000
(2)CalculationofSuperProfit:
Goodwill=SuperprofitxNo.ofyears'purchase
`24,000=SuperProfitx4
SuperProfit= `24,000= `6,000
(3)CalculatingofAverageProfit:
SuperProfit=AverageProfitNormalProfit
` 6,000=AverageProfit` 15,000
AverageProfit=` 6,000+` 15,000=` 21,000
25
Accountancy& XII
CHAPTER3
ReconstitutionofPartnership
MeaningofReconstitution:
Anychangeinagreementofpartnershipiscalledreconstitutionofpartnershipfirm.In
followingcircumstancesapartnershipfirmmaybereconstituted:
1.ChangeinProfitSharingRatio
2.Admissionofapartner
3.Retirement/Deathofapartner
Change in profit sharing ratio among the existing partners
Meaning:
Whenallthepartnersofafirmagreetochangetheirprofitsharingratio,theratiomaybe
changed.Inthiscaseoneprofit ispurchasingashareofpartnerfromanotherone.In
other words, share of one partner may increase and share of another partner may
decrease.
Accounting treatment of goodwill:
In case of change in profit sharing ratio, the gaining partner must compensate the
sacrificingpartnerbypayingtheproportionateamountofgoodwill.
Illustration1
AmitandKajalwerepartnersinafirmsharingprofitsintheratioof3:2.Witheffect
fromJanuary1,2012theyagreedtoshareprofitsequally.Forthispurposethegoodwill
ofthefirmwasvaluedat60,000.Passthenecessaryjournalentry.
Solution:
OldratioofAandB=3:2
NewratioofAandB=1:1
SacrificeorGain:
Amit=3/51/2=65/10=1/10Sacrifice
Kajal=2/51/2=45/10=1/10Gain
Journal
Date
Particulars
L.F. Debit Credit
Rs.
Rs.
2012
KajalcapitalA/c
Dr.
6,000
Jan1
ToAmit'CapitalA/c
6,000
(Adjustmentforgoodwill onchange
inprofitsharingratio)
26
Accountancy& XII
Accounting treatment of Reserves andAccumulated Profits:

Case (i) When reserves and accumulated profits/losses are to be distributed
Atthetimeofchangeinprofitsharingratio,iftherearesomereservesoraccumulated
profits/lossesexistinginthebooksofthefirm,theseshouldbedistributedtopartnersin
theiroldprofitsharingratio.
Illustration2:Vaishali,VinodandAnjaliarepartnerssharingprofitsintheratioof4:3:2.
FromApril1,2011,theydecidedtosharetheprofitsequally.Onthatdatetheirbooks
showedacreditbalanceof3,60,000intheprofitandlossaccountandabalanceof
90,000intheGeneralreserve.Recordthejournalentryfordistributionoftheseprofits
and reserves.
Solution:
Journal
Date
Particulars
L.F.
Debit
Credit
2011
Apr.1
Profit& Loss
Dr.
GeneralReserveA/c
Dr.
ToVaishali'sCapitalA/c
ToVinod'sCapitalA/c
ToAnjali'sCapitalA/c
(Profitandgeneralreservedistributed
inoldratio)
`
3,60,000
90,000
2,00,000
1,50,000
1,00,000
Illustration3:AnjumandKanchanarepartnerssharingprofitsandlossesintherationof
3:2,FromApril1,2011theydecidedtosharetheprofitsintheratioof2:1.Onthatdate,
profit and loss account showed a debit balance of ` 1,20,000. Record the Journal for
transferring this to partner's capital accounts.
Solution:
Journal
Date
Particulars
L.F. Debit Credit
`
`
2011
Anjum'scapitalA/c
Dr.
72,000
Apr.1
Kanchan'scapitalA/c
Dr.
48,000
ToProfitandLossA/c
1,20,000
(Undistributed losses transferred to partners'
capitalaccountsinoldratio)
Case (ii) When accumulated profits/losses are not be distributed at the time of
change in ratio
Partners may decidethat reserves and accumulatedprofits/losses willnot beaffected
and remains in the books with same figure. In this case, the gaining partner must
27
Accountancy& XII
compensatethesacrificingpartnerbythesharegainedbyhimi.e.
GainingPartner'sCapitalA/c
Dr.
ToSacrificingPartner'sCapitalA/c.
Illustration 4:Keshav, Meenakshiand Mohit sharingprofit and losses in theratio of
1:2:2,decidetosharefutureprofitequallywitheffectfromApril1,2011.Onthatdate
generalreserveshowedabalanceof ` 2,40,000.Partnersdonotwanttodistributethe
reserves.Youarerequiredtogivetheadjustingentry.
Solution:Keshav:Meenakshi:Mohit
Oldratio1/5:2/5:2/5
Newratio1/3:1/3:1/3
SacrificeorGain:
Keshav=1/51/3=35/15=2/15(Gain)
Meenakshi=2/51/3=65/15=1/15(Sacrifice)
Mohit=2/51/3=65/15=1/15(Sacrifice)
Journal
Date
Particulars
L.F. Debit Credit
`
`
Keshav'scapitalA/c
Dr.
32,000
ToMeenakshi'scapitalA/c
16,000
ToMohit'scapitalA/c
16,000
(AdjustmentforGeneralreserveon
changeinprofitsharingratio
Illustration5:Neha,Niharika,andNitinarepartnerssharingprofitsandlossesinthe
ratioof2:3:4.Theydecidedtochangetheirratioandtheirnewratiois4:3:2.Theyalso
decidedtopassasinglejournalentrytoadjustthefollowingwithoutaffectingtheirbook
values:
`
Profit&Lossaccount
80,000
General Reserve
40,000
Advertisement SuspenseA/c
30,000
Youarerequiredtogivethesinglejournalentrytoadjusttheabove.
Solution:
Profit&Lossaccount
80,000
Add: General Reserve
40,000
1,20,000
Less:Advertisement Suspense
30,000
Totalamounttobeadjusted
90,000
Neha
Niharika
Nitn
Oldratio
2/9
3/9
4/9
Newration
4/9
3/9
2/9
SacrificeorGain:
2011
Apr.1
28
Accountancy& XII
Neha=2/94/9=2/9(Gain)
Niharika=3/93/9=0(Nochange)
Nitin=4/92/9=2/9(Sacrifice)
JOURNAL
Date
Particulars
L.F.
Debit Credit
`
`
20,000
20,000
Neha'scapitalA/c
Dr.
ToNitin'scapitalA/c
(adjustmentforprofit&lossA/c,
General reserves and advertisment
SuspenseA/c
Accounting treatment for Revaluation ofAssets and reassessment of Liabilities
on change in Profit sharing ratio:
Atthetimeofchangeinprofitsharingratioofexistingpartners,Assetsandliabilitiesof
afirmmustberevaluedbecauseactualrealizablevalueofassetsandliabilitiesmaybe
differentfromtheirbookvalues.Changeintheassetsandliabilitiesbelongstotheperiod
priortochangeinprofitsharingratioandthereforeitmustbesharedinoldprofitsharing
ratio.
Revaluationofassetsandliabilitiesmaybetreatedintwoways:
(i) Whenrevisedvaluesaretobeshowninthebooks.
(ii) Whenrevisedvaluesarenottobeshowninthebooks
When revised values are to be shown in the books:
Inthiscaserevaluationofassetsandliabilitiesiscompletedwiththehelpof"Revaluation
Account.This account is alsoknown as Profit andLossAdjustmentAccount.All
losses duetorevaluationare shownindebit sideofthis account and allgains dueto
revaluationareshownincreditsideofthisaccount.
Note:(1)IncreaseinthevalueofanAssetanddecreaseinthevalueofaliabilityresult
inprofit.
(2)DecreaseinthevalueofanyassetandIncreaseinthevalueofliabilitygivesloss.
Illustration6:
Piyush,PujaandPraveenarepartnerssharingprofitsandlossesintheratioof3:3:2.
TherebalancesheetasonMarch31st 2011wasasfollows.
Liabilities
`
Assets
`
Sundry creditors
48,000 Cashatbank
74,000
BankLoan
72,000 Sundry debtors
88,000
Capital:
Stock
2,40,000
Piyush
4,00,000
Machinery
3,18,000
Puja
3,00,000
Building
4,00,000
Praveen
3,00,000
10,00,000
11,20,000
11,20,000
29
Accountancy& XII
PartnersdecidedthatwitheffectfromApril1,2011,theywouldshareprofitsandlosses
intheratioof4:3:2.Itwasagreedthat:
(i)Stockbevaluedat` 2,20,000.
(ii)Machineryistobedepreciatedat10%.
(iii)Aprovisionfordoubtfuldebtsistobemadeondebtorsat5%.
(iv)Buildingistobeappreciatdby20%.
(v)Aliabilityfor` 5,000includedinsundrycreditorsisnotlikelytoarise.
Partnersagreedthattherevisedvaluearetoberecordedinthebooks.Youarerequired
to prepare journal, revaluation account, partners capital account and revised balance
sheet.
Journal
Date
Particulars
L.F.
Debit
Credit
2011
RevaluationA/c
Dr.
To Stock
To Machinery
ToProvisionfordoubtfuldebtsA/c
(Revaluationofassets)
BuildingA/c
Sundry creditors
ToRevaluationA/c
(Revaluationofassetsandliabilities)
RevaluationA/c
ToPiyush'scapitalA/c
ToPooja'scapitalA/c
ToPraveen'scapitalA/c
(Profitonrevaluation)
`
56,200
20,000
31,800
80,000
5,000
85,000
28,800
10,800
10,800
7,200
RevaluationAccount
Particulars
`
Particulars
To stock
20,000 Bybuilding
To machinery
31,800 By sundry creditors
To Provisionfor doubtful debts
4,400
Toprofitdistributed:
Piyush
10,800
Pooja
10,800
Praveen
7,200
28,800
85,000
30
`
80,000
5,000
85,000
Accountancy& XII
Partners' CapitalAccount
Particulars Piyush Pooja Praveen Particulars Piyush
Pooja Praveen
Tobalance 4,10,8003,10,800 3,07,200 Bybalance 4,00,000 3,00,000 3,00,000
c/d
b/dByreval
uation
10,800 10,800
7,200
4,10,8003,10,800 3,07,200
4,10,800 3,10,800 3,07,200
Balance Sheet
asonApril1,2011
Liabilities
`
Assets
`
Sundry creditors
43,000 Cashatbank
74,000
BankLoan
88,000
Capitalaccount:
Less:provision5% 4,400 83,600
Piyush
4,10,000
Puja
3,10,800
Stock
2,20,000
Praveen
3,07,200
Machinery
2,86,200
10,28,800 Building
4,80,000
11,43,800
11,43,800
When revised values are not to be shown in the books.
Illustration7.
Inillustration6,Partnersagreedthattherevisedvalueofassetsandliabilitiesarenotto
beshowninthebooks.Youarerequiredtorecordtheeffectbypassingasinglejournal
entry.Alsopreparetherevisedvaluebalancesheet.
Gain due to revaluation
`
Building
80,000
Sundrycreditors
5,000
TotalA
85,000
Less:lossduetorevaluation
Stock
20,000
Machinery
31,800
Provisionfordoubtfuldebts
4,400
Total B
56,200
Netgainfromrevaluation
Total (AB)
28,800
OldRatio=3:3:2
NewRatio=4:3:2
SacrificeorGain:
Piyush=3/84/9=5/72(Gain)
Pooja=3/83/9=3/72(Sacrifice)
Praveen=2/829=2/72(Sacrifice)
Amounttobeadjusted:
Piyush=` 28,800x5/72=` 2,000Debit
Pooja=` 28,800x3/72=` 1,200Credit
Praveen=` 28,800x2/72=` 800Credit
31
Accountancy& XII
Journal
Date
Particulars
L.F.
Rs.
2011
Apr.1
Piyush'scapitalA/c
Dr.
ToPooja'scapitalA/c
ToPraveen'scapitalA/c
(Adjustmentforprofitonrevaluation)
Debit Credit
Rs.
2,000
1,200
800
Capital Accounts
Pooja Praveen Particulars
Piyush PoojaPraveen
ByBalanceb/d 4,00,0003,00,0003,00,000
Particulars Piyush
To Pooja's
1,200
CapitalA/c
To Praveen
ByPiyush's
CapitalA/c
800
CapitalA/c
ToBalance 3,98,000 3,01,200 3,00,800
C/d
4,00,000 3,01,200 3,00,800
Liabilities
Sundry Creditors
BankLoan
Capitalaccount:
Piyush
3,98,000
Puja
3,01,200
Praveen
3,00,800
32
800
4,00,0003,01,2003,00,800
Balance Sheet
asonApril1,2011
`
Assets
48,000 Cashatbank
Stock
Machinery
Building
10,00,000
11,20,000
1,200
`
74,000
88,000
2,40,000
3,18,000
4,00,000
11,20,000
Accountancy& XII
CHAPTER4
AccountingforPartnershipFirms:
Admissionofapartner
Meaning:
Whenanewpartnerisadmittedinarunningbusinessduetotherequirementofmorecapitalor
maybetotakeadvantageoftheexperienceandcompetenceofthenewlyadmittedpartnerorany
otherreason,itiscalledadmissionofapartnerinpartnershipfirm.
Accordingtosection31(1)ofIndianpartnershipAct,1932,Anewpartnercanbeadmittedonly
withtheconsentofalltheexistingpartners.
Atthetimeofadmissionofanewpartner,followingadjustmentsarerequired:
1.Calculationofnewprofitsharingratioandsacrificingratio.
2.AccountingtreatmentofGoodwill.
3.Accountingtreatmentofaccumulatedprofit.
4.Accountingtreatmentofrevaluationofassetsandreassessmentofliabilities.
5.Adjustmentofcapitalinnewprofitsharingratio.
1.Calculationofnewprofitsharingratio.
Followingtypesofproblemsmayariseforthecalculationofnewprofitsharingratio.
Case(i) Whenoldratioisgivenandshareofnewpartnerisgiven.
Illustration1.(Whennewpartneracquireshissharefromallpartnersintheiroldratio)
AandBarepartnersinafirmsharingprofitsandlossesintheratio1:2.TheyadmittedCinto
thepartnershipand
decidedtogivehim1/3rdshareofthefutureprofits.Findthenewratioofthepartners. (CBSE
2003)
Solution
(i)
CalculationofSacrificeShare:
Assacrifice=1/3of1/3=1/9
Bssacrifice=2/3of1/3=2/9
SacrificingRation=1/9:2/9=1:2
whichisequaltooldratio
(ii)
CalculationofNewProfitsharingRatio:
Newshare=OldshareSacrificeshare
Asnewshare=1/31/9=31/9=2/9
Bsnewshare=2/32/9=62/9=4/9
Csnewshare=1/9+2/9=3/9
NewratioamongA,BandC:2/9:4/9:3/9=2:4:3respectively
Note: Unlessagreedotherwise,itispresumedthatthenewpartneracquireshisshareinprofits
33
Accountancy& XII
fromtheoldpartnersintheiroldprofitsharingratio.
AlternativeMethod:
OldRatio=
A:B
1:2
Lettheprofitofthefirm=1
C'sshare(NewPartner)=1/3
RemainingProfit=11/3=2/3
Nowthisprofit2/3willbedivided
betweentheoldpartnersintheiroldratioi.e.,1:2
A'snewProfit=1/3of2/3=1/3x2/3=2/9
B'snewProfit=2/3of2/3=2/3x2/3=4/9
C'sprofit=1/3or1/3x3/3=3/9
Hencethenewratio=2:4:3
NoteInthiscaseonlyNewPartner'sshareisgiventhen
SacrificingRatio=OldRatio
=1:2
Thereisnoneedtocalculateit
Case(ii)Whennewpartneracquireshis/hersharefromallpartnersinagreedshare.
Illustration2.(Whennewpartneracquireshissharefromallpartnersinagreedshare)
LandMarepartnersinafirmsharingprofitsandlossesintheratioof7:3.TheyadmittedNfor
3/7thshare,whichhetakes2/7th fromLand1/7fromM.Calculatethenewprofitsharingratio.(CBSE
1999Compt.,2001,2003)
Solution.
(i) Assacrificeshareofoldpartnersaregiveninthequestionitself,hencethereisnoneedto
calculateit.
(ii) CalculationofNewprofitsharingratio:
Newshare=oldsharesacrificeshare
Lsnewshare=7/102/7=4920/70=29/70
Msnewshare=3/101/7=2110/70=11/70
Nsnewshare=2/7+1/7=3/7(given)
NewratioamongL,MandN=29/70:11/70:3/7=29:11:30/70=29:11:30
Case(iii)Whennewpartneracquireshis/hersharefromallpartnersincertainratio.
Illustration3.
XandYarepartnersinafirmsharingprofitandlossesintheratioof3:2.Zisadmittedaspartner
inthefirmfor1/6th shareinprofits.ZacquireshissharefromXandYintheratioof2:1.Calculate
newprofitsharingratioofpartners.
(CBSE2003)
Solution.
(i) CalculationofSacrificeshare:
GivensacrificingRatio=X:Y=2:1,
34
Accountancy& XII
therefore:
Xssacrifice=2/3of1/6=2/18
Yssacrifice=1/3of1/6=1/18
(ii) CalculationofNewProfitSharingRatio:
Xsnewshare=3/52/8=5410/90=44/90
Ysnewshare=2/51/18=365/90=31/90
Zsnewshare=2/18+1/18=3/18or1/6(Given)
NewratioamongX,YandZ=44/90:31/90:1/6=44:31:15/90=44:31:15
Case(iv)Whennewpartneracquireshissharefromallpartnersasafractionoftheirshare.
Illustration4.(Whennewpartneracquireshissharefromallpartnersasafractionoftheir
share)
AandBarepartnersinafirmsharingprofitandlossesintheratioof5:3.Asurrenders1/5th ofhis
share,whereasBsurrenders1/3ofhisshareinfavourofC,anewpartner.Calculatethenewprofit
sharingratio
.(CBSE2003,AI2004)
Solution.
(i) Calculationofsacrificeshare
Asacrifices1/5th ofhissharei.e.,1/5of5/8=5/40or1/8
Bsacrifices1/3thofhissharei.e.,1/3of3/8=3/24or1/8
(ii) CalculationofNewprofitshaingRatio:
Newshare=Oldsharesacrificeshare
Asnewshare=5/81/8=4/8
Bsnewshare=3/81/8=2/8
Csnewshare=1/8+1/8=2/8
NewratioamongA,BandC=4/8:2/8:2/8=4:2:2/8=2:1:1
Case(v)Whennewpartnerdoesnotacquirehis/hersharefromallpartners
Illustration5.(whennewpartnerdoesnotacquirehissharefromallpartners)
A,BandCarepartnerssharingprofitsintheratioof3:2:1.TheyadmitDfor1/6share.Cwould
retainhisoldshare.Calculatenewratioofallpartners.
(CBSE2002Compt.)
Solution.
(i)
Calculationofsacrificeshare:(OnlyAandBwillsacrificeinratioof3:2)
Assacrifice=3/5of1/6=3/30or1/10
Bssacrifice=2/5of1/6=2/30or1/15
Cssacrifice=0
(ii)
Calculationofnewprofitsharingratio:
Asnewshare=3/61/10=306/60=24/60
Bsnewshare=2/61/15=306/90=24/90
Csnewshare=1/60=1/6
Dsnewshare=1/10+1/15=3+2/30=5/30=1/6
NewratioamongA,B,CandD
35
Accountancy& XII
24/60:24/90:1/6:1/6=72:48:30:30/180=12:8:5:5
Case(vi)Whenmorethanonepartnerisadmitted.
Illustration6.(whenmorethanonepartnerisadmittedsimultaneously)
XandYarepartnerssharingprofitsintheratioof3:2.TheyadmitPandQasnewpartners.X
surrendered1/3ofhisshareinfavourofPandYsurrenderedofhisshareinfavourofQ.
CalculatethenewprofitsharingratioofX,Y,PandQ.
(CBSE2002Compt.)
Solution.
(i) Calculationofsacrificeshare:(onlyAandBwillsacrificeintheratio3:2)
Xsurrenders1/3ofhisshareinfavourofP=1/3of5/3=3/15or1/5
Ysurrenders1/4ofhisshareinfavourofQ=1/4of2/5=2/20or1/10
2. AccountingTreatmentofGoodwill.
Atthetimeofadmissionofapartner,treatmentofGoodwillisnecessarytocompensatethe
oldpartnersfortheirsacrifice.Theincomingpartnermustcompensatetheexistingpartners
becauseheisgoingtoacquiretherighttosharefutureprofitsandthisshareissacrificedbyold
partners.Ifgoodwill(Premium)ispaidtooldpartnersprivatelyoroutsidethebusinessbythe
newpartnerthennoentryisrequiredinthebooksofthefirm.
Theremaybedifferentsituationsaboutthetreatmentofgoodwillatthetimeoftheadmissionof
thenewpartner:
(i) Goodwill(premium)broughtinbythenewpartnerincashandretainedinthebusiness
Illustration7.(Allpartnerssacrifice)
AandBarepartnerssharingprofitsandlossesintheratioof3:2.TheyadmitCintopartnership
forshareinprofits.Cbrings3,00,000ascapitaland1,00,000asgoodwill.Newprofitsharing
ratioofthepartnersshallbe3:3:2.PassnecessaryJournalentries.(CBSE2003)
Journal
Date
Particulars
L.F.
Debit Credit
Rs.
Rs.
BankA/c
Dr.
4,40,000
ToPremiumforGoodwillA/c
1,00,000
ToC'sCapitalA/c
3,00,000
(Beingtheamountofgoodwilland
capitalbroughtinbynewpartnerC)
PremiumforGoodwillA/c
Dr.
1,00,000
ToA'scapitalA/c
90,000
ToB'scapitalA/c
10,000
(Beingtheamountofgoodwilldistributed
betweenAandBintheirsacrificingratio
i.e.,9:1)
Note:Sacrificingratio=OldrationNewratio
A=3/53/8=2415/40=9/40
B=2/53/8=1615/40=1/40
ThissacrificingratiobetweenAandBi.e.,9:1.
Illustration8.(Sacrificingratioistobecalculated)
36
Accountancy& XII
AandBarepartnersinafirmsharingprofitsandlossesintheratioof3:2 AnewpartnerCis
admitted.Asurrenders1/5ofhisshareandB2/5ofhisshareinfavourofC.ForpurposeofCs
admission,goodwillofthefirmisvaluedat75,000andCbringshisshareofgoodwillincash
whichisretainedinthefirmsbooks.Journalisetheabovetransactions.
(CBSE2003)
Journal
Date
Particulars
L.F.
Debit Credit
Rs.
Rs.
BankA/c
Dr.
21,000
21,000
(Beingtheamountofgoodwilland
capitalbroughtinbynewpartnerC)
Dr.
21,000
ToA'scapitalA/c
9,000
ToB'scapitalA/c
12,000
i.e.,3:4)
Note:(i)Calculationofsacrificingratio:
Assacrifice,1/5ofhisshare=1/5of3/5=3/25
Bssacrifice,2/5ofhisshare=2/5of2/5=4/25
SacrificingratiobetweenAandBi.e.,3/25:4/25=3:4
(ii)CalculationofCsshareofprofit:
Csshareofprofit=3/25+4/25=7/25
(iii)CalculationofCsshareofgoodwill:
75,000x7/25=21,000
TreatmentofExistingGoodwillshowninthebooks
Ifgoodwillalreadyshowninthebalancesheet,itshouldbewrittenoffbydebitingoldpartners
intheiroldprofitsharingratio.
Illustration9.(Existinggoodwilltobewrittenoff)
AandBarepartnersinafirmsharingprofitsandlossesintheratioof3:2.TheyadmitCinto
partnershipfor1/5share.Cbrings`30,000ascapitaland`10,000asgoodwill.Atthetimeof
admissionofC,goodwillappearsinthebalancesheetofAandBat ` 3,000.Newprofitsharing
ratioofpartnersshallbe5:3:2.Passnecessaryentries.
37
Accountancy& XII
(CBSE2003)
Journal
Date
Particulars
L.F.
BankA/c
Dr.
ToC'sCapitalA/c
(Beingtheamountofgoodwillandcapital
broughtinbynewpartnerC)
Dr.
ToA'scapitalA/c
ToB'scapitalA/c
i.e.,1:1)
A'scapitalA/c
Dr.
B'scapitalA/c
Dr.
ToGoodwillA/c
(Beingexistinggoodwillwrittenoffbetween
oldpartnersintheiroldratioi.e.,3:2)
38
Debit Credit
`
`
40,000
30,000
10,000
10,000
5,000
5,000
1,800
1,200
3,000
Accountancy& XII
Notes:Sacrificingratio=OldratioNewratio
A=3/55/10=65/10=1/10
B=2/53/10=43/10=1/10
SacrificingratiobetweenAandB1:1i.e.,equal.
Case(ii)Premiumbroughtinkind:
Illustration10.(premiumbroughtinkind)
AnubhavandBabitaarepartnersinafirmsharingprofitsandlossesintheratioof3:2.On
April1,2003theyadmit
Deepakasanewpartnerfor3/13shareintheprofits.Deepakcontributedthefollowingassets
towardshiscapital
andforhisshareofgoodwill:
Land ` 90,000,machinery ` 70,000,stock ` 60,000anddebtors ` 40,000.Onthedateofadmission
ofDeepak,thegoodwillofthefirmwasvaluedat `5,20,000,whichisnotappearinthebooks.
Recordnecessariesjournalentriesinthebooksofthefirm.Showyourcalculationsclearly.
(NCERT,CBSE2004Compl)
Journal
Date
Particulars
L.F.
LandA/c
Dr.
MachineryA/c
Dr.
StockA/c
Dr.
DebtorsA/c
Dr.
ToPremiumforGoodwillA/c(5,20,000x3/13)
ToDeepak'sCapitalA/c(Balancingfigure)
(Beingtheamountofgoodwillandcapitalbrought
inkindbynewpartner)
Dr.
ToAnubhav'scapitalA/c
ToBabita'scapitalA/c
(Beingtheamountofgoodwilldistributedbetween
AnubhavandBabitaintheirsacrificingratioi.e.3:2)
Debit Credit
`
`
90,000
70,000
40,000
60,000
1,20,000
1,40,000
1,20,000
72,000
48,000
Note:HereSacrificingRatio=OldRatioi.e.,3:2
Case(iii)Amountofgoodwillwhichwasbroughtinbynewpartner,iswithdrawnbyoldpartners:
InthiscaseoneadditionalJournalentrymaybepassed:
OldPartnersCapitalA/cDr.
ToBank/CashA/c
(Cashwithdrawnbyoldpartners)
Case(iv)whenthenewpartnerisunabletobringhisshareofgoodwillincash
39
Accountancy& XII
Sometimesthe newpartner doesnot bringhis shareof goodwillin cash.Then hisshare of

goodwilliscalculatedandadjustedbythefollowingJournalentry.
NowPartners'CapitalA/cDr.
TooldpartnersCapitalA/cs
(inthesacrificingratio).
Illustration11:
NeetaandSumitaarepartnerssharingprofitsandlossesinthesates2:1.TheyadmitGeetaasa
partnerfor 1/4thShare. Geetapays Rs.50,000as capitalbut doesnot bringany amountfor
goodwill.Thegoodwillofthenewfirmisvaluedat `36,000.GiveJournalentries.
(CBSE1997,2003)
Solution
Journal
Date
Particulars
L.F.
1.
Debit Credit
`
`
50,000
50,000
CashA/c
Dr.
ToGeeta'sCapitalA/c
BeingtheamountofCapital
broughtincashby thenewpartner)
2.
Geeta'sCapitalA/c
Dr.
9,000
ToNeeta'sCapitalA/c
6,000
ToSunita'sCapitalA/c
3,000
BeingtheamountofnewPartner's
shareofgoodwilltransferredtoold
Partner'sCapitalA/cintheirsacrificing
ratioi.e.2:1)
WorkingNote:
(1)Asnothingisgivenaboutsacrificeetc.excepttheoldratioandthenewpartnersshareof
profit
SacrificingRatio=OldRatio=2:1
(2)Goodwillofthefirm=Rs.36,000
Geeta'sshareofprofit=1/4
Geeta'sshareofGoodwill=Rs.36,000x1/4=Rs.9,000
Case(v)Partlygoodwillbroughtinbynewpartner:
Illustration12.(Partlypremiumbroughtincash)
SheetalandRamanshareprofitsequally.TheyadmitChinkiintopartnership.
Chinkipaysonly1,000forpremiumoutofhisshareofpremiumof1,800
for1/4shareofprofit.GoodwillAccountappearsinthebooksat6,000.All
partnershavedecidedthatgoodwillshouldnotappearinthebooksofthe
newfirm.Journalise.
(CBSE1997,2003)
40
Accountancy& XII
Journal
Date
Particulars
L.F.
BankA/c
Dr.
(Beingtheamountofgoodwillbroughtin
cash by new partner)
Dr.
Chinki'scapitalA/c
Dr.
ToSheetal'scapitalA/c
ToRaman'scapitalA/c
(BeingChinki'sshareofgoodwilltransferred
tosacrificingpartnersintheirsacrificingratio
i.e.,1:1)
Sheetal'scapitalA/c
Dr.
Raman'scapitalA/c
Dr.
ToGoodwillA/c
(Beingexistinggoodwillwrittenoffbetweenold
partnersintheiroldrationi.e.,equal)
Debit Credit
`
`
1,000
1,000
1,000
800
900
900
3,000
3,000
6,000
Case(vi)Gainmadebyanoldpartner:
Illustration13.(Sacrifice/Gainmadebyapartner)
AshokandRaviwerepartnersinafirmsharingprofitsandlossesintheratioof7:3.Theyadmitted
Chanderasanewpartner.ThenewprofitratiobetweenAshok,RaviandChanderwillbe2:2:1.
Chanderbrought24,000forhisshareofhisgoodwill.Passnecessaryjournalentriesforthe
treatmentofgoodwill.
(CBSE 2000)
Solution:
Journal
Date
Particulars
L.F.
BankA/c
Dr.
by new partner)
Dr.
Ravi'scapitalA/c
Dr.
ToAshok'scapitalA/c
(BeingthegoodwillcreditedtoAshok's
capitalA/c)
41
Debit Credit
`
`
24,000
24,000
24,000
12,000
36,000
Accountancy& XII
Note:Calculationofsacrifice/gainshareofpartners(s):
Sacrificingration=OldratioNewratio
Ashok=7/102/5=74/10=3/10sacrifice
Ravi=3/102/5=34/10=(1/10)gain
Being negative result, it shows gain. Since Ravi is gaining equal to 1/10 in the profits,
therefore,he willalsocompensateAshok proportionately.For1/5share Chanderbrought
` 24,000,therefore,RaviwillcompensateAshokby ` 12,000i.e.,24,000x5/1x1/10.
Case(vii)HiddenGoodwill
Illustration14.
AandBarepartnerswithcapitalsof` 26,000and` 22,000respectively.TheyadmitCas
partnerwith1/4thshareintheprofitsofthefirm.Cbrings` 26,000ashisshareofcapital.
GivejournalentrytorecordgoodwillonCsadmission.
(CBSE2001Compt.)
Journal
Date
Particulars
L.F.
BankA/c
Dr.
ToC'scapitalA/c
by new partner)
C'scapitalA/c
Dr.
ToA'scapitalA/c
ToB'scapitalA/c
(Beingthegoodwillcreditedtosacrificing
partners'capitala/csintheirsacrificing
ratioi.e.,equal)
42
Debit Credit
`
`
26,000
26,000
7,500
3,750
3,750
Accountancy& XII
Notes:(1)CalculationofCsshareofgoodwill:
TotalcapitalofnewfirmonbasisofCscapitali.e.,26,000x4/1
1,04,000
TotalcapitalofAandBandCi.e., `26,000+ ` 22,000+ ` 26,000
(74,000)
Goodwillofthefirm
30,000
ThusCsshareofgoodwill=30,000x1/4=
` 7,500
(2)Intheabsenceofinformation,profitswillbesharedequally.
3.AccountingtreatmentofAccumulatedProfits.
Accumulatedprofitsandreservesaredistributedtopartnersintheiroldprofitsharingratio.
Ifoldpartnersarenotinterestedtodistribute,theseaccumulatedprofitsareadjustedinthe
samemanner
asgoodwillandthefollowingadjustingentrywillbepassed.
NewPartnerscapitalA/cDr.(Newshare)
TooldpartnerscapitalA/c(Sacrificingratio)
4. Accountingtreatmentforrevaluationofassetsandreassessmentofliabilities:
The assets and liabilities are generally revalued at the time of admission of a new partner.
RevaluationAccountispreparedforthispurposeinthesamewayasincaseofchangeinprofit
sharingratio.Thisaccountisdebitedwithalllossesandcreditedwithallgains.Balanceof
RevaluationAccountistransferredtooldpartnersintheiroldratio.
Illustration15.
FollowingistheBalanceSheetofShashiandAshusharingprofitas3:2.
Liabilities
Creditors
Generalreserve
Workmens compensation fund
Capital:Shashi
Ashu
`
Assets
`
18,000 Debtors
22,000
25,000 Less provision for
D.D.
1,000 21,000
15,000 LandandBuilding
18,000
15,000 Plantandmachinery
12,000
10,000 Stock
11,000
Bank
21,000
83,000
83,000
OnadmissionofTanyafor1/6thshareintheprofititwasdecidedthat:
(i) Provisionfordoubtfuldebtstobeincreasedby `1,500.
(ii) Valueoflandandbuildingtobeincreasedto ` 21,000.
(iii) Valueofstocktobeincreasedby ` 2,500.
(iv) Theliabilityofworkmenscompensationfundwasdeterminedtobe ` 12,000.
(v) Tanyabroughtinashershareofgoodwill ` 10,000incash.
(vi) Tanyawastobringfurthercashof ` 15,000forhercapital.
PrepareRevaluationA/c,CapitalA/candtheBalanceSheetofthenewfirm. (CBSE2001)
43
Accountancy& XII
Solution:
RevaluationAccount
Particulars
ToProvisionforD.D.
ToCapitalA/cs:
Shashi3/5
2,400
Ashu2/5
1,600
Particulars
Tobalance
c/d
`
Particulars
1,500 ByLandandBuildingA/c
By Stock
`
3,000
2,500
4,000
5,500
5,500
Partners'CapitalAccount
Sashi Ashu Tanya Particulars Shashi
Ashu Tanya
40,200 26,800 15,000 Bybalance
b/d
15,000 10,000
Bygeneral
reserve
15,000 10,000
By workmen's
compensation
A/c
1,800
1,200
ByRevaluation
A/c
2,400
1,600
ByBankA/c
15,000
ByPremium
forgoodwill
40,200 26,800
15,000
6,000
40,200
4,000
26,800
15,000
BalanceSheetoftheNewFirm
Liabilities
Creditors
Workmen compensation fund
Capital:
Shashi
Ashu
Tanya
`
Assets
`
18,000 Debtors
22,000
12,000 Less provision for
D.D.
2,500 19,500
21,000
26,800 Plantandmachinery
12,000
15,000 Stock
13,500
Bank
46,000
1,12,000
1,12,000
44
Accountancy& XII
Illustration16.:A,Bandarepartnerssharingprofitsandlossesintheratioof2:3:5.On31st
March2001,theirBalanceSheetwasasfollows
`
Liabilities
Capital
A
B
C
Creditors
BillPayable
Profit and LossAccount
36,000
44,000
52,000 1,32,000
64,000
32,000
14,000
Assets
Cash
Billsreceivable
Furniture
Stock
Debtors
Investments
Machinery
Goodwill
2,42,000
`
18,000
24,000
28,000
44,000
42,000
32,000
34,000
20,000
2,42,000
TheyadmitDintopartnershiponthefollowingterms:
(i) FurnitureandMachinerytobedepreciatedby15%.
(ii) Stockisrevaluatedat `48,000.
(iii) Goodwilltobevaluedat `24,000.
(iv) Outstandingrentamountto `1,800.
(v) Prepaidsalaries ` 800.
(vi) Dtobring `32,000.Towardshiscapitalfor1/6thshare.
PrepareRevaluationAccount,PartnersCapitalAccountsandBalanceSheetofthenewfirm
(CBSE2001)
Solution:
RevaluationAccount
Particulars
`
Particulars
`
TofurnitureA/c
4,200 ByStockA/c
4,000
ToMachineryA/c
5,100 ByPrepaidsalariesA/c
800
ToOutstandingrentA/c
1,800 ByCapitalA/c(loss):
A2/10
1,260
B3/10
1,890
C5/10
3,150
6,300
11,100
11,100
Particulars
A(`)
To Revaluation 1,260
A/c
ToGoodwillA/c 4,000
ToA's capital
To B's capital
To C's capital
ToBalanceC/d34,340
39,600
B(`)
1,890
6,000
41,510
49,400
C(`) D (`) Particulars A(`) B(`)

3,150
By balance 36,000 44,000
c/d
10,000
By P/LA/c 2,800 4,200
8,00 By D's
1,000 capital
8,000 1,200
2,000
47,850 28,000 ByCashA/c
61,000 32,000
39,600 49,900
45
C(`)
52,000
D (`)
7,000
2,000
32,000
61,000 32,000
Accountancy& XII
Liabilities
Capital:
A
B
C
D
Creditors
BillsPayable
Outstanding rent
BalanceSheetofNewFirm
`
Assets
Cash
34,340
BillReceivable
41,510
Furniture
47,850
Stock
28,000 1,51,700 Debtors
64,000 Investment
32,000 Machinery
1,800 Prepaidsalaries
2,49,500
`
50,000
24,000
23,800
48,000
42,000
32,000
28,900
800
2,49,500
5.Adjustmentofcapitalinnewprofitsharingratio
Illustration17A,BandCarepartnerssharingprofitsandlossesintheratioof5:3:2On
March31st,1998theirBalanceSheetwasasfollows:
Liabilities
`
Assets
`
Capital:
Cash
18,000
A
36,000
Billreceivable
14,000
B
44,000
Stock
44,000
C
52,000 1,32,000 Debtors
42,000
Creditors
64,000 Machinery
94,000
BillsPayable
32,000 Goodwill
20,000
GeneralReserve
14,000
2,32,000
2,32,000
TheydecidedtoadmitDintothepartnershiponthefollowingterms:
(i) Machineryistobedepreciatedby15%.
(ii) Stockistoberevaluedat ` 48,000.
(iii) A,BandChaveajointlifepolicywhosesurrendervalueis ` 12,000.
(iv) Outstandingrentis ` 1,900.
(v) Distobring ` 6,000asgoodwillandsufficientcapitalfora2/5thshareinthecapitalsof
firm.
PrepareRevaluationA/c,PartnersCapitalA/c,CashA/candBalanceSheetofthenewfirm.
(CBSE2001Compt.)
RevaluationAccount
Particulars
`
Particulars
`
ToMachineryA/c
14,100 ByStockA/c
4,000
ToOutstanding Rent
1,900 ByCapitalA/c(Loss):
A5/10
6,000
B3/10
3,600
C2/10
2,400
12,000
16,000
16,000
46
Accountancy& XII
Particulars
A(`) B(`) C(`) D (`) Particulars
A(`) B(`) C(`) D (`)
ToGoodwillA/c
ToRevaluation
A/c
ToBalancec/d
10,000 6,000 4,000

6,000 3,600 2,400
36,000 44,000 52,000
36,000 44,000 52,000

7,000 4,200 2,800
6,000 3,600 2,400
ToBalancec/d
ByBalanceb/d
ByGeneralreserve
ByJointlifepolicy
ByPremium
52,000 53,600 58,400
for goodwill
36,000 44,000 52,000 88,000 By Balance
b/d
36,000 44,000 52,000 88,000 BycashA/c
3,000 1,800 1,200
36,000 44,000 52,000
36,000 44,000 52,000 88,000
Note:CombinedcapitalofA,BandCfor3/5(12/5)=1,32,000
Thustotalcapitalofthefirm=1,32,000x5/3= ` 2,20,000
D'sshareofcapital=2,20,000x2/5= ` 88,000
Balance Sheet of the New Firm

Liabilities
Creditors
BillPayable
Outstanding rent
Capital
A
B
C
D
`
Assets
64,000 Cash
22,000 Billsreceivable
1,900 Stock
Debtors
Machinery
JointLifePolicy
36,000
44,000
52,000
88,000 2,20,000
3,07,900
`
1,12,000
14,000
48,000
42,000
79,000
12,000
3,07,900
Illustration18:FollowingistheBalanceSheetofA,BandCsharingprofitsandlossesin
theratioof6:5:3respectively
Liabilities
`
Assets
`
Creditors
37,800 Cash
3,780
BillPayable
12,600 Debtors
52,920
Generalreserve
21,000 Stock
58,800
A'scapital
70,800 Furniture
14,700
B'scapital
90,300
C'scapital
29,100 Goodwill
10,500
2,31,000
2,31,000
They agreed to take into partnership giving 1/0th share in profits on the following
terms:
(a) Furnituretobedepreciatedby ` 1,840Stockby10%
(b) Aprovisionof` 2,640tobemadeforanoutstandingbillforrepairs.
47
Accountancy& XII
(c) Thatlandandbuildingbebroughtupto ` 1,19,700.

(d) Thatthegoodwillisvaluedat ` 28,140.
(e) ThatDshouldbringin` 35,400ashiscapital
(f) Aftermakingtheaboveadjustmentsthecapitalofoldpartnersbeadjustedinproportion
toD'sCapitalbybringingincashorexcesstobepaidoff.
D'sCapitalbybringingincashorexcesstobepaidoff.
PrepareRevaluationAccount,CapitalAccountofPartnersandbalanceSheetofnewfirm.
(CBSE1997Compt.)
Solution:
RevaluationAccount
Particulars
`
Particulars
`
TofurnitureA/c
1,840 ByLandandBuildingA/c
29,400
To stockA/c
5,880
ToO/SrepairsA/c
2,640
TocapitalA/cs:
A
6/14 8,160
B
5/14 6,800
C
3/14 4,080
19,040
29,400
29,400
Particulars
A(`)
To Goodwill
4,500
ToA's capital
To B's capital
To C's capital
ToBalancec/d 84,968
89,468
Tobalancec/d 95,646
B(`)
3,750
71,506
75,256
79,705
95,646
79,705
C(`)
2,250
38,184
38,434
47,823
D (`)
1,508
1,256
754
31,882
35,400
31,882
Particulars
A(`) B(`)
ByBalanceb/d 70,800 59,700
By General
9,000 7,500
reserve
8,160 6,800
By rev
aluationA/c 1,508 1,256

BycashA/c 89,468 75,256
By D's Capital
Bybalanceb/d84,968 71,506
BycashA/c 10,678 8,199
47,823 31,882
95,646 79,705
C(`) D (`)
29,100
4,500
4,080
35,400
754
38,434 35,400
36,184 31,382
11,639
47,823 31,882
Balance Sheet of the New Firm
`
37,800 Cash
12,600 Debtors
2,640 Stock
Furniture
Liabilities
Creditors
BillsPayable
Outstandingrepairs
Capital
A
B
C
Assets
`
69,696
52,920
12,860
12,860
95,646
79,705
47,823
48
Accountancy& XII
31,882
2,55,056
3,08,096
3,08,096
3,08,096
Notes:CalculationofNewProfitSharingRatio:
1.SharegiventoD=1/8,Balanceofprofit=11/8=7/8.Hence,
A'sShare=7/8x6/14=42/112
B'sShare=7/8x5/14=35/112
C'sShare=7/8x3/14=21/112
A
B
C
D
NewRatio:42/112:35/112:21/112:1/8=42:35:21:14/112or6:5:3:2.
2.CalculationofnewcapitalofA,B,andCbasedonD'sCapitalfor1/8shareis` 31,882.
Thus
Capitalofwholefirm=31,882x8/1= ` 2,55,056.Therefore
A'sCapital=2,55,056x6/16=95,646
B'sCapital=2,55,056x5/16=79,705
C'sCapital=2,55,056x3/16=47,823
Illustration19:AandBareparentsinafirmsharingprofitsandlossesintheratioof3:2.
Theirbalancesheetwasasfollowson1stJanuary,1993:
Liabilities
`
Assets
`
Sundry creditors
15,000 Plant
30,000
Capital
Patents
10,000
A
30,000
Stock
20,000
B
25,000
55,000 Debtors
18,000
Generalreserve
10,000 Bank
2,000
80,000
80,000
Cisadmittedasapartnerontheabovedateonthefollowingterms:
(i) Hewillpay` 10,000asgoodwillforonefourthshareintheprofitofthefirm.
(ii) Theassetsaretobevaluedasunder:
Plantat32,000Stockat ` 18,000Debtorsatbookfigurelessaprovisionof5percet
for bad debts.
(iii)Itwasfoundthatthecreditorsincludedasumof` 1,400whichwasnottobepaid.But
itwasalsofoundthattherewasaliabilityforcompensationtoworkersamountintto`
2,000.
(iv) C wasto introduce ` 20,000 as capital and the capitals of other partners were to be
adjustedinthenewprofitsharingratioForthisPurpose,currentaccountsweretobe
opened.
GiveRevaluationAccount,CapitalAccountandBalanceSheetafterC'sadmission.
(CBSE1994)
49
Accountancy& XII
Solution :
Dr.
RevaluationAccount
Cr.
Particulars
`
Particulars
`
To stockA/c
2,000 ByplantA/c
2,000
ToprovisionforD.D.A/c
900 BycreditorsA/c
1,400
TooutstandingliabilityA/c
2,000 BycapitalA/c(loss):
A
3/5
900
B
2/5
600 1,500
4,900
4,900
Dr.
Partner'sCapitalAccounts
Cr.
Particulars
A
B
C Particulars
A
B
C
ToRevaluationA/c 900
600
ByBalanceb/d 30,000 25,000
ToBalancec/d
41,100 32,400 20,000 ByGeneral
6,000 4,000
Reserve
ByBankA/c
20,000
ByPremium
6,000 4,000
42,000 33,000 20,000

42,000 33,00020,000
ToCurrentA/c
5,100
8,400
ToBalancec/d
36,000 24,000 20,000 Bybalanceb/d 41,100 32,40020,000
41,100 32,400 20,000
41,100 32,40020,000
Dr.Partner'sCurrentAccount
Cr.
Particulars
A (`)
B (`) C (`) Particulars
A (`) B (`) C (`)
Tobalancec/d
5,100
8,400
BycapitalA/cs 5,100 8,400
Liabilities
Sundry Creditors
Outstandingliability
CapitalA/cs:
Balance Sheet (after C's admission)

` Assets
13,600 Plant
2,000 Patents
Stock
A 36,000
Debtors
18,000
B 24,000
Less:provisionforD.D.
(900)
C 20,000 80,000 Bank
32,000
10,000
18,000
17,100
32,000
CurrentA/cs:
A
B
5,100
8,400 13,500
1,09,100
Notes:(1)Calculationofnewprofitsharingration:
SharegiventoC=1/4BalanceofProfit=11/4=3/4
50
1,09,100
Accountancy& XII
A'share=3/4x3/5=9/20
A:B:C
B'share=3/4x2/5=6/20
9/20:6/20:1/4
C'sshare(given)=1/4or9:6:5/20=9:6:5
(2)NewcapitalofAandB:BasedonC'scapital,thetotalcapitalofthefirmwillwork
out i.e.,
C'scapitalfor1/4thshare=20,000
Thusthecapitalofwholefirm=20,000x4/1= ` 80,000
Therefore,basedontheirnewprofitnewprofitsharingratio,thecapitalofAandBwill
be.
A'sshareofcapital=80,000x9/20= ` 36,000
B'sshareofcapital=80,000x6/20= ` 24,000
51
Accountancy& XII
CHAPTER5
Retirement/DeathofaPartner
Introduction Likeadmissionandchangeinprofitsharingratio,incaseofretirementordeathalso
theexistingpartnershipdeedcomestoanendandthenewonecomesintoexistenceamongthe
remainingpartners.Thereisnotmuchdifferenceintheaccountingtreatmentatthetimeof
retirementorintheeventofdeath.
AmountduetoretiringdeceasedPartner
(Tobecreditedtohiscapitalaccount)
1.CreditBalanceofhiscapital.
2.CreditBalanceofhiscurrentaccount(ifany)
3.ShareofGoodwill.
4.ShareofReservesorUndistributedprofits.
5.Hisshareintheprofitrevaluationofassetsandliabilities.
6.ShareinprofitsuptothedateofRetirement/Death.
7.Interestoncapitalifinvolved.
8.Salaryifany
Deductionfromtheabovesum(tobedebitedtothecapitalaccount)
1.Debitbalanceofhiscurrentaccount(ifany)
2.ShareofGoodwilltobewrittenoff.
3.ShareofAccumulatedloss.
4.Drawingsandinterestondrawings(ifany)
5.ShareoflossonaccountofRevaluationofassetsandliabilities.
6.Hisshareofbusinessloss.
AccountingTreatement
1.Calculationofnewprofitsharingrationandgainingratio
2.Treatmentofgoodwill.
3.Revaluationa/cpreparationwiththeadjustmentintherespectofunrecordedassets/
liabilities.
4.Distributionofreservesandaccumulatedprofits/loss.
5.Ascertainmentofshareofprofits/losstillthedateofretirement/death.
6.Adjustmentofcapitalifrequired
7.SettlementoftheAccountsduetoRetired/Deceasedpartner.
NewProfitSharingRatio&GainingRatio
NewProfitSharingRatio Itistheratioinwhichtheremainingpartnerswillsharefurther
profitsafterretirement/death.
Gainingratio Itistheratioinwhichthecontinuingpartnershaveacquiredthesharefromthe
outgoingpartner
Calulationofthetworatios
Followingsituationsmayarise.
52
Accountancy& XII
1.Whennoinformationaboutnewratioorgainingratioisgiveninthequestion
Inthiscaseitisconsideredthattheshareoftheretiringpartnerisacquiredbytheremaining
partnersintheoldratio.Thennoneedtocalculatethenewratio/gainingratioasitwillbethesame
asbefore.
Example1: ABandCarepartnerssharingprofitandlossintheratioof3:2:1thenonretirement
ofthegainingratio/newratiowillbe
A2:1
B3:1
C3:2
2.Gainingratioisgivenwhichisdifferentthantheoldratio
Inthiscase
Newshareofcontinuingpartner=hisoldshare+gainedfromtheoutgoingpartner.
Example2:A,B&Cshareprofitsintheratio3:2:1.OnC'sdeathhisshareistakenbyA&Bin
theratioof2:1Calculatenewratio
SolutionInthiscasegainingratio=2:1(given)
A'soldshare=3/6,B'soldshare=2/6&C'sshare=1/6
A'sgain=2/3ofC'sshare=2/3*1/6=2/18
B'sgain=1/3ofC'sshare=1/3*1/6=1/18
A'snewshare=A'soldshare+A'sgain
=3/6+2/18=11/18
B'snewshare=B'soldshare+B'sgain
=2/6+1/18=7/18
Newratio=11:7
3.Ifthenewratioisgiventhen
Gainingratio=NewRatioOldRatio
Example3: A,B&Carepartnersintheratioof3:2:1Cretires&A&Bdecidetosharefuture
profitintheratioof5:3
A'sGain=5/83/6=3/24
B'sGain=3/82/6=1/24
Gainingratio=3:1
DistinctionbetweentheSacrificingandGainingRatio
Basis
1.Meaning
2.Whencalculated
3.Formula
4.Purpose
SacrificingRatio
Itistheratioinwhichtheold
partnerssurrenderapartof
theirshareofprofitsinfavour
ofanewpartner.
Atthetimeofadmissionofa
newpartner
SacrificingRatio=
OldRatioNewRatio
Newpartnersshareofgoodwill
isdividedbetweenoldpartners
inthisratio.
53
GainingRatio
Itistheratioinwhichthe
remainingpartner'sacquire
theoutgoingpartner's
shareofprofit
Atthetimeofretirementor
deathofapartner.
GainingRatio=NewRatio
OldRatio
Retiringordeceased
partner'sshareofgoodwill
ispaidbythecontinuing
partnersinthisratio
Accountancy& XII
TreatmentofGoodwill
Accordingtoaccountingstandard10,Goodwillaccountcan'tberaised.Thereforeonly
adjustmententryisdoneforgoodwill.
Stepstobefollowed:
1.Whenoldgoodwillappearsinthebooksthenfirstofallthisiswrittenoffintheoldratio.
RememberOldGoodwillOldRatio
AllPartners'capitalA/cDr
ToGoodwillA/c
2.Afterwritingoffoldgoodwill adjustmentofretiringpartner'sshareofgoodwillwillbemade
throughthefollowingjournalentry.
RemainingPartner'sCapA/cDr(ingainingratio)
ToRetiring/DeceasedPartner'sCapA/c
Example4:M,N&Parepartnersinafirm.Pretires&thegoodwillofthefirmisvaluedatRs.30000.
M&Ndecidetosharefutureprofitsintheratioof3:2.Passnecessaryadjustmententries.
1.IfgoodwillA/calreadyappearsintehbooksatRs.18000
2.WhennogoodwillA/cappearsinthebooks.
Solution:OldratioofM,N&P=1:1:1(sinceprofitsharingratioisnotgivenitistreatedasequal)
Newratio=3:2
M'sgain=3/51/3=4/15
N'sgain=2/51/3=1/15
Gainingratio=4:1
P'sshareofgoodwill=30,000*1/3=10,000
Case1.
1.Oldgoodwillwillbewrittenoffintheoldratioi.e.1:1:1
M'sCapitalA/c Dr6000
N'sCapitalA/c Dr.6000
P'sCapitalA/c Dr6000
ToGoodwillA/c18000
2.Adjustmententrywillbedoneingainingratio
M'sCapitalA/c Dr.8000
N'sCapitalA/c Dr.2000
ToP'sCapitalA/c10,000
Case2.WhenNogoodwillalreadyappearsinthebooksthenonlysecondentrywillbedone.
Hiddengoodwill
Sometimesgoodwillisnotgiveninthequestiondirectly.Butifafirm agreestopayasumwhich
ismorethanhisbalanceincapitala/caftermakingalladjustmentwithrespecttoreserves,
revaluationofassetsandliabilitiesetc.thenexcessamountistreatedashisshareofgoodwill
(knownashiddengoodwill)
EXAMPLE5: LetR,S&Tarepartnersinafirmsharingprofit&lossintheratioof2:2:1.TRetires
andhisbalanceincapitala/cafteradjustmentforreserve&revaluationofassets&liabilities
comesouttobeRs.50000.R&SagreetopayhimRs.60000.Givejournalentryfortheadjustmnet
ofgoodwill.
Solution
NewratiobetweenR&S=gainingratio=2:2or1:1
T'sshareofgoodwill(hidden)=Rs.6000050000=10000
Henceadjustmententryis
R'scapitala/c Dr5000
S'scapitala/c
Dr5000
ToT'scapitala/c10000
(T'sshareofgoodwilladjustedingainingratioi.e.1:1)
54
Accountancy& XII
3.RevaluationofAssetsandReassessmentLiabilities
RevaluationA/cispreparedinthesamewayasinthecaseofadmissionofanewpartner.
Profitandlossonrevaluationistransferredamongallthepartnersinoldratio.
4.AdjustmentofReservesandSurplus (Profits)
(AppearingintheBalanceSheetLiabilitySide)
(a)GeneralReseveA/c
Dr.
ReserveFundA/c
Dr.
P&LA/c(CreditBalance)
Dr.
ToallpartnersCapital/CurrentA/cinoldratio.
Example6:X,YandZarepartnersinafirmsharingprofitsandlossesintheratioof2:1:1,Yretires
on31stMarch,2011.Onthatdate,therewasabalanceofRs.24,000ingeneralreserveand
Rs.16,000inprofitandlossA/cofthefirm.GiveJournalentries.
Solution
GeneralReserveA/c
Dr24,000
P&LA/c
Dr16,000
ToX'sCapA/c
20,000
ToY'sCapA/c
10,000
ToZ'sCapA/c
10,000
(Reserve&SurplusamountdistributedinoldratioonY'sretirement)
b)SpecificFundsIfthespecificfundssuchasworkmen'scompensationfundorinvestment
fluctuationfundareinexcessofactualrequirement,theexcesswillbetransferredtotheCapital
A/cinoldratio.
WorkmentCompensationFundA/c
Dr
InvestmentFluctuationFundA/c
Dr
ToAllPartner'sCapA/cs
Example7:P,QandRarepartner'ssharingprofitsandlossesintherationof3:2:1.Pretiresandon
thatdatetherewasworkmen'scompensationfundamountRs.30,000intheBalanceSheet.But
actualliabilityonthisaccountwasforRs.12,000onlyonthatdate.GiveJournalEntry.
Solution
ExcessamountinWorkmen'sCompensationFund=
Rs.30,000Rs.12,000=Rs.18,000(Cr)
Thiswillbetransferredtoallpartner'sCapitalA/cinoldratio
JournalEntry
W.CompensationFundA/c
Dr18,000
ToP'sCapA/c
9000
ToQ'sCapA/c
6000
ToR'sCapA/c
3000
(ExcessamountinW.Comp.Fundistrfdtopartner'sCapA/csinoldratio)
c)Fordistributingaccumulatedlosses
(I.e.P&LA/cdebitbalanceshownontheAssetsideofBalanceSheet)
Allpartner'sCap/CurrentA/cDr(inoldratio)
ToP&LA/c
Example8: A,BandCareequalpartner's.Aretiresandonthatdatetherewasadebitbalanceof
Rs.15,000inP&LA/c.GiveJournalentry.
Solution
A'sCapA/c
Dr 5,000
55
Accountancy& XII
B'sCapA/c
Dr 5,000
C'sCapA/c
Dr 5,000
ToP&LA/c
15,000
(LossinP&LA/cwrittenoffinoldratioonA'sretirement)
5.AdjustmetnofJointLifePolicy(JLP)
Introduction
JLPmeansthepolicytakenbythefirmonthelivesofthepartners.Whenanyoftehpartnersdies
the insurance company pays the whole amount which makes the payment easy to deceased
partner'slegalrepresentativesincaseofdeath.
Accounting treatment in case of retirement

Case1. . When premium paid is considered as Revenue Expenditure In this
casethepremiumpaidisdebitedtoP&LA/candJLPA/cdoesntappearinthebalance
sheet. In this case theRetiring partner'sshare in thesurrender value of JLP will
be debited to the remaining partners CapA/c in
gaining ratio.
I.e.RemainingPartnersCapA/cDr
ToRetiringPartnersCapA/c
Example9:D,EandFarepartnersinafirmsharingprofit&lossesintheratioof
3:2:1.Fretireson31st March2011.ThefirmhadaJLPofRs.80,000,thesurrendervalue
ofwhichwasRs.18,000onthatdateannualpremiumpaidonthepolicyofRs.10,000
whichwasdebitedtoP&LA/ceveryYear.GiveadjustmententryifnoJLPA/cappears
intheBalanceSheet.
Solution
F's sharein the surrendervalue = 1/6*18000=Rs.3000
GainingRatiob/wD:E=3:2
Adjustment Entry
D's CapA/c Dr1800
E's CapA/c Dr1200
To F's CapA/c 3000
(FsshareinthesurrendervalueofJLPadjustedingainingratio)
Case2. . When premium paid is considered as Capital Expenditure In this
casetheJLPA/cwillbe
alreadyappearingintheBalanceSheetatsurrendervalue.Thennofurthertreatment
isrequiredbecauseit
meansthattheretiringpartnersshareisalreadyincludedinhisCapA/c.
Disposal of theAmount Due to the Retiring Partner
TheoutgoingpartnersA/cissettledasperthetermsofpartnershipdeed.Threecases
maybe there as
givenbelow
1.Whentheretiringpartnerispaidfullamounteitherincashorbycheque.
RetiringPartnersCapA/c
Dr
ToCashorBankA/c
56
Accountancy& XII
2.Whentheretiringpartnerispaidnothingincashthenthewholeamountdueistrfd
tohisloan
A/c.
RetiringPartnersCapA/c
Dr
ToretiringpartnersLoanA/c
3.WhenRetiringPartnerispartlypaidincashandtheremainingamountistreatedas
Loan.
RetiringPartnersCapA/cDr(TotalAmountdue)
ToCash/BankA/c(AmountPaid)
ToRetiringPartnersLoanA/c(AmountofLoan)
Settlement of Loan of the Retiring Partner
Loan of the retiring partner is disposed off according to the pre decided terms and
conditions among the partners. Normally the Principal amount is paid in few equal
installments. In such cases interest is credited to the LoanA/c on the basis of
theamountoutstandingatthebeginningofeachyearandtheamountpaidisdebited
toloanA/c.ThefollowingJournalentriesaredone
a) For interest on Loan.
InterestA/c
Dr
ToRetiringpartnersLoanA/c
b) For the payment of installment.
RetiringPartners LoanA/c
Dr
ToCash/BankA/c
Example10:A,B,andCarepartnersinafirm.Bretiresfromthefirmon1st Jan2008.
On the date of his retirement Rs.66, 000 were due to him. It was decided that the
paymentwillbedonein3equalyearlyinstallmentstogetherwithinterest@10%p.a.on
theunpaidbalance.PrepareBsLoanA/c.
B'sLoanA/c
Date Particulars
2008
Dec31 BankA/c
(22,000+6600)
"
Balancec/d
2009
Dec31 BankA/c
"
Balancec/d
LF Amt.(`)
Date Particulars
2008 B'sCapA/c
Jan1
Dec31 InterestA/c
28,600
44,000
72,600
26,400
22,000
2010
Dec31 BankA/c
(FinalPayment)
(10%of66,000)
Balanceb/d
6,600
(72,600)
44,000
of 44,000)
4,400
48,400
2009
Jan1
Dec31InterestA/c(10%
48,400
24,200
24,200
57
L Amt(`)
F 66,000
2010
Jan1 Balanceb/d
Dec31
InterestA/c (
10%of22,000)
22,000
2,200
24,200
Accountancy& XII
Adjustment of Capitals
At the time of retirement /death, the remaining partners may decide to adjust their
capitalsintheir newprofitsharingRatio.Then
The sum of their capitals will be treated as the total capital of the new firm
whichwill bedivided intheir NewProfit SharingRatio.
Excess or Deficiency of capital in the individual capitalA/c is calculated.
Suchexcess orshortageis adjustedbywithdrawalorcontributionincashor
transferring to their currentA/cs.
JOURNAL ENTRIES
a) For excess Capital withdrawn by the Partners
PartnerscapitalA/cDr
ToCash/BankA/c
b) For deficiency, cash will be brought in by the partner
Cash/BankA/c Dr
ToPartnersCapA/c
Example11:X,YandZarepartnersinafirmsharingprofitsintheratioof2:2:1.X
retires and after all adjustments the CapitalA/cs of theY and Z have a balance of
` 70,000and` 50,000respectively.Theydecidedtoadjusttheircapitalsinnewprofit
sharingratiobywithdrawingorbringingcash.GivenecessaryJournalentriesandshow
yourworkingclearly.
Solution
The capitalof thenew firm
=TotalcapitalofYandZafteradjustments
= ` 70,000+50,000
=` 1,20,000
58
Accountancy& XII
NewCapitalbasedonNewRatio
i.e.2:1(totalbeing1,20,000)
Existingcapitalafteradjustments
Cashisbeingbroughtinor
paidoff
Y
80,000
Z
40,000
70,000
10,000
(broughtin)
50,000
10,000
(tobepaid)
JournalEntries
Dr. (` )
1.BankA/cDr
ToY'sCapA/c
(AmounttobebroughtinbyY)
2.Z'sCapA/cDr
(AmounttobewithdrawnbyZ)
Cr.(`)
10,000
10,000
10,000
10,000
Problem:(Preparationofbalancesheetofthereconstitutedfirm) Vijay,VivekandVinaywre
partnersinafirmsharingprofitsin2:2:1ratio.On31.03.2006Vivekretirefromthefirm.Onthe
dateofVivek'sretirementthebalancesheetofthefirmwasasfollows:
BalanceSheetofVijay,VivekandVinay
Asat31.03.2006
Liabilities
Amount Assets
Amount
( ` )
( ` )
Creditors
54,000 Bank
55,200
BillsPayable
24,000 Debtors
12,000
OutstandingRent
4,400 Less:Provisionfor
ProvisionforLegal
12,000 doubtful debts
800
11,200
Claims
Stock
18,000
Capitals:
Furniture
8,000
Vijay 92,000
Premises
1,94,000
Vivek 60,000
Vinay 40,000 1,92,000
2,86,400
2,86,400
OnViveks retirementit wasagreedthat:

i.
Premiseswillbeappreciatedby5%andfurniturewillbeappreciatedby `2,000.
Stockwillbedepreciatedby10%.
ii. Provisionforbaddebtswastobemadeat5%ondebtorsandprovisionforlegal
damagestobemadefor`14,400.
iii. Goodwillofthefirmisvaluedat `48,000.
iv. ` 50,000 fromViveks CapitalA/C will be transferred to his loanA/c and the
balancewillbepaidbycheque.
Preparerevaluationa/c, partners CapitalA/csAndBalanceSheet ofVijayandVinay
after Viveks retirement.
[CBSE 2007(outside Delhi)]
59
Accountancy& XII
Solution :
RevaluationAccount
Dr.
Particulars
Amount Assets
( ` )
1,800 ByPremises
2,400 ByFurniture
ByProvisionFor
doubtful debts
To Stock
ToProvisionforlegal
Claim
To profit Transferred
Vijay
3,080
Vivek
3,080
Vinay
1,540
7,700
11,900
Capital Accounts
Dr.
Particulars
ToVivek's
Capital
ToVivek's
Loan
ToBank
Piyush
12,800
Cr.
Amount
( ` )
9,700
2,000
11,900
Cr.
Pooja Praveen Particulars
Piyush Pooja Praveen
6,400 ByBalanceb/d 92,000 60,000 40,000
50,000
ByrevaluationA/c 3,080 3,080
32,280
ByVijay'sCapital
1,540
12,800
35,140 ByVinay'sc/d
Capital
6,400
95,080 82,280 41,540

95,080 82,280 41,540
Balance Sheet
As at 31st March 2006
Liabilities
Amount Assets
Amount
( ` )
( ` )
Creditors
54,400 Bank
22,920
Billspayable
24,000 Debtors
OutstandingRent
4,400 12,000
11,400
Provisionforlegalclaims
14,400 Less provision
16,200
Vivek'sLoan
50,000 600
10,000
Vijay'sCapital
82,280 Stock
2,03,700
Vinay'sCapital
35,140 Furniture
Premises
2,64,220
2,64,220
ToBalance
82,280
60
Accountancy& XII
WORKING NOTE:
1. Newprovisionofbaddebtsondebtors(5%)=5%ofRs.12,000=600
Oldprovision=Rs.800asgiveninthebalanceSheet
ExcessofRs.200isprofit&trfdtorevaluationA/c
2. Goodwillofthefirm=48,000
Vivekshare=48,000*2/5=Rs.19,200
WillbegivenbyVijay&VinayinGainingRatioi.e.2:1
3. Vivekstotalamountdueonretirement=Rs.82,280
LessamounttrfdtohisloanA/c=Rs.50,000
Amounttobepaidbycheque=Rs.32,280
Death of a Partner
Accountingtreatmentinthecaseofdeathissameasinthecaseofretirementexcept
thefollowing:
1. The deceased partners claim is transferred to his executer's account.
2. NormallytheretirementtakesplaceattheendoftheAccountingPeriodbut the
deathmay occur at any time. Hence the claim of deceased partner shall also
includehisshareofprofitorloss,interestoncapitalanddrawingsifanyfrom
the date of the last balance sheet to the date of his death.
3. Ondeathofapartner,theinsurancecompanypaystheentireamountofthesum
assured on JLP.
ThetreatmentofprofitsandJLPwillbetakenuponebyoneasfollows
I. Calculation of Profits/Loss for the Intervening Period
Itiscalculatedbyanyoneofthetwomethodsgivenbelow:
a) On Time Basis: in this method proportionally profit for the time period is
calculated either on the basis of last year's profit or on the basis of average
profitsoflastfewyearsandthendeceasedpartnersshareis calculatedbasedon
hisshareofprofits.
Example1.A,BandCarepartnerssharingprofitsintheratioof3:2:1.Adieson31st
July2011.Theprofitsofthefirmfortheyearending31st March2011were ` 42000.
CalculateAs sharefortheperiodfrom1st Aprilto31st July2011onthebasis oflast
yearsprofits.Passnecessaryjournalentryalso.
Solution Asprofit=PrecedingyearsprofitxProportionatePeriodxShareofA
= ` 42,000x4/12x3/6
=`7,000
61
Accountancy& XII
Journal Entry
Dr. (Rs.)
Dr. (Rs.)
P&LSuspenseA/cDr
7,000
ToAsCapitalA/c
7,000
b) OnTurnoverorSalesBasisInthismethodtheprofitsuptothedateofdeathfor
thecurrent yeararecalculatedonthebasisofcurrentyear'ssalesuptothedate
of death by using the formula.
Profitsforthecurrentyearuptothedateofdeath=
(Salesofthecurrentyearuptothedateofdeath/totalsalesoflastyear)xProfitfor
thelastyear.
Then from this profit the deceased partner's share of profit is calculated.
Example2 If in the example 1 given above the sales for the last year are
Rs.2,10,000andforthecurrentyearupto31st JulyaresayRs.90,000thenProfitsfrom
1st Aprilto31st July2011
=(90,000/2,10,000)x42,000
=Rs.18,000
Asshare=Rs.18,000x3/6=Rs.9,000
JournalEntrywillbe
P&LSuspenseA/cDr9,000
ToAsCapitalA/c9,000
c)LifePolicyLifepoliciesonthelives ofthepartnersis takenbyafirmtoarrange
moneytosettletheaccountofdeceasedpartner.Itmaybeoftwotypes:
1)JointLifePolicyItistakenjointlybythefirmonthelivesofallthepartners.If
any of the partners dies, the insurance company pays whole of the amount.
2) Individual life policies Sometimes the firm takes individual life policies on the
lives of partners instead of one single Joint life policy. In this case the insurance
companypays thefullsumassuredonthelifepolicyofthedeceasedpartneronly.
Accounting Treatment
Case 1 When surrender values are not appearing in the books.
a) Fortheamounttobereceivedonmaturity(death)ofapartner.
i.InsuranceCo.A/cDr
ToLifePolicyA/C
(Fortheamountdueonthedeathofapartner)
ii.LifePolicyA/cDr
ToAllPartnersCapitalA/cs
(FortheamountduetransferredtoallpartnerscapitalA/csinoldratio)
62
Accountancy& XII
b) For deceased partners share in the surrender values of the life policies of
surviving partners.
RemainingPartnersCapitalA/cDr
To Deceased Partners CapitalA/c
(Fordeceasedpartnersshareinthesurrendervaluesofsurvivingpartnerslifepolicies
adjusted in gaining ratio)
Example3:A,BandCarepartnersinafirmsharingprofitsandlossesintheratioof
3:2:1,BdiesandonthattherewasaJLPforR.60,000forwhichannualpremiumof
Rs.6,000waspaidoutofprofits.
SurrendervalueofthepolicyonthedateofdeathwasRs.12,000.Givenecessary
journalentries.
Solution
Note.Here(IncaseofJLP)surrendervalueisnotimportantbecauseondeathof
anypartner,insurance
companypaysthefullamountasonmaturityi.e.Rs.60,000.
Journal entry
1. Insurance Co.A/c Dr
60, 000
To Joint Life PolicyA/c
60,000
(Sum due on B's death)
2.JLPolicyA/cDr
60,000
ToA's CapA/c
30,000
To B's CapA/c
20,000
ToC's CapA/c
10,000
(Amount transferred in all partners Capital in old ratio)
Example4.X,YandZarepartnersinafirmsharingprofitsandlossesintheratioof
3:2:1,AdiesandonthatdatetherewerethreelifepoliciesofRs.30,000onthelifeofA,
Rs.20,000onlifeofBandRs.10,000onthelifeofC.Surrendervalueofthispolicieson
thedateofdeathwas40%.GivejournalentriesonAsdeathifnopolicyA/cappearsin
the Balance Sheet.
Solution
I) ForA's policies
(a) Insurance Co.A/c Dr
30,000
To Life PolicyA/c
30,000
(Amount due onA's Policy onA's Death)
(b)LifePolicyA/cDr
30, 000
ToA's CapA/c
15,000
63
Accountancy& XII
To B's CapA/c
10,000
ToC's CapA/c
5,000
(Amount transferred in old ratio)
II) For B's and C's Policies
MaturityamountofBsPolicy=20,000
MaturityamountofCsPolicy=10,000
Total=30,000
SurrenderValue=40%ofRs.30,000
=Rs.12,000
Asshareinthesurrendervalue=(3/6)x12,000=Rs.6000
GainingratiobetweenBandC=2:1
Adjustment entry
B's capitalA/c Dr 4,000
C's capitalA/c Dr 2,000
ToA's capitalA/c 6, 000
(Adjustment of retiring partners share in surrender values of B and C's
policies in gaining ratio)
Case2 when surrender values already appears in the Balance Sheet.
1. For the amount to be received from theInsurance Co. on Joint Lifepolicy or the
Policyinthenameofdeceasedpartner.
(a)InsuranceCo.A/cDr
TolifepolicyA/c
(FortheamountdueonthedeathofaPartner)
(b) Life policyA/c Dr(By theAmount received less surrender value)
ToAllPartnersCapitalA/c
2. No entry for the surviving partners policies.
Example 5 In the 3rd example if the surrender value of Rs.12, 000 is shown in the
BalanceSheetthenfollowingentrieswillbepassed.
Solution
1. Insurance Co.A/c Dr 60, 000
To JLPA/c
60,000
(Amount due on JLP on B's death)
2. J.LPolicyA/cDr
48,000
ToA's CapitalA/c
24,000
To B's CapitalA/c
16,000
To C's CapitalA/c
8,000
64
Accountancy& XII
(Balance in JL PolicyA/c has transferred to all Partners Capital A/cs in old

ratio)
Working note J.L.PolicyA/c
AmountduetoInsuranceCo.(CreditedtoJLP)=
Rs60,000
LessSurrendervaluealreadyAppearingonthedebitofJLP=
Rs12,000
Balance amount in the credit side of JLP to be transferred top all partners Cap
A/cs
=Rs48,000
Complete question generally asked for 6 marks
Problem(Deathofapartner)M,NandOwerepartnersinafirmsharingprofits
andlossesequally.
TheirBalanceSheeton31122009wasasfollows
Liabilities
Amount Assets
Amount
( ` )
( ` )
Capitals:
M70,000
Plantandmachinery
60,000
N70,000
Stock
30,000
O70,000
Sundry Debtors
95,000
GeneralReserve
2,10,000 CashatBank
40,000
Creditors
30,000 CashinHand
35,000
20,000
2,60,000
2,60,000
Ndiedon14th March,2010.AccordingtothePartnershipDeed,executersofthedeceased
partnerareentitleto:
(i) BalanceofpartnerscapitalA/c.
(ii) Interestoncapital@5%p.a.
(iii) Shareofgoodwillcalculatedonthebasisoftwicetheaverageofpastthreeyears
profits.
(iv) Shareofprofitsfromtheclosureofthelastaccountingyeartillthedateofdeathon
thebasis oftwicetheaverageofthreecompletedyearsprofitsbeforedeath.
Profitsfor2007,2008and2009wereRs.80,000,Rs.90,000,Rs1,00,000respectively.
Showtheworkingfordeceasedpartnersshareofgoodwillandprofitstillthedateofhis
death.PassthenecessaryjournalentriesandprepareNsCapitalA/ctoberendererto
his executers.
(CBSE 2011, Delhi)
Solution
Date Particulars
L.F. Debit Credit
2010
GeneralReserveA/c
14th
ToN'sCapitalA/c
March (BeingtransferofN'sshareofgeneral
reserveofhisCapitalA/c)
65
Dr
`
10,000
10,000
Accountancy& XII
InterestonCapitalA/c
Dr
700
ToN'sCapitalA/c
700
(Beinginterest5%p.a.creditedtoN's
CapitalA/cupto14/03/2010)
M'sCapitalA/c
Dr
30,000
O'sCapitalA/c
Dr
30,000
ToN'sCapitalA/c
60,000
(Beinggoodwilladjustedingainingratio
i.e.1:1)
ProfitandLossSupenseA/c
Dr
12,000
ToN'sCapitalA/c
12,000
(BeingthetransfertoN'sshareofprofit
tohiscapitalA/c)
N'sCapitalA/c
Dr
1,52,700
ToN's ExecutorA/c
1,52,700
(BeingthetransferofamountduetoN's
executorA/c)
N'sCapitalA/c
Particulars
Rs. Particulars
Rs.
To N'sExecutorsA/c
1,52,700 ByBalanceb/d
70,000
ByGeneralReserveA/c
10,000
ByInterestonCapitalA/c
(70,000*5/100*73/365)
700
ByM'sCapitalA/c
30,000
ByO'sCapitalA/c
30,000
ByProfit&LossSuspense
A/c
(90,000*2*73/365*1/3)
12,000
1,52,700
1,52,700
WorkingNote:
1)CalculationofGoodwill
Averageprofitfor3years=(Rs.80,000+90,000+1,00,000)/3
=90,000
Goodwillofthefirm=AverageProfit*No.OfYearofPurchase=90,000*2=Rs.1,80,000
TotalNsShareinGoodwill=1,80,000*1/3=60,000
2) Time from the date of last balance Sheet(31st December,2009) to the date of
death(14thMarch,2010)
=31daysofJanuary+28daysofFeb(2010isnotaleapyear)+14daysofMarch
=73days
66
Accountancy& XII
CHAPTER6
DISSOLUTIONOFAPARTNERSHIPFIRM
Dissolutionofafirm:AsperIndianPartnershipAct,1932: Dissolutionoffirm
meansterminationofpartnershipamongallthepartnersofthefirm. Whena
firmisdissolved,thebusinessofthefirmterminates.Alltheassetsofthefirmare
disposedoffandalloutsidersliabilitiesandpartnersloanandpartnerscapitalsare
paid.
DissolutionofPartnership:DissolutionofPartnershipreferstotermination
ofoldpartnershipagreement(i.e.,PartnershipDeed)andareconstructionof
thefirm. Itmaytakeplaceon
Changeinprofitsharingratioamongtheexistingpartner
Admissionofapartnerand
RetirementorDeathofapartner.
Itmayormaynotresultintoclosingdownofthebusinessastheremainingpartners
maydecidetocarryonthebusinessunderanewagreement.
Typesofdissolutionoffirms: Apartnershipfirmcanbedissolvedinanyofthe
followingways:
(A)Withouttheinterventionofthecourt:
(1)Whenallpartnersagreetodissolvethefirm(Sec.40)
(2)CompulsoryDissolution(Sec.41)
(i)Whenallorallbutonepartnerofthefirmbecomeinsolvent.
(ii)whenbusinessofthefirmbecomeunlawful.
(3)Onthehappeningofanyofthefollowingevents:(Sec.42)
(i)Ontheinsolvencyofapartner.
(ii)Onthefulfilmentoftheobjectiveofthefirmforwhichthefirmwasformed.
(iii)Ontheexpiryoftheterm(period)forwhichthefirmwasformed.
(4)ByNotice(Sec.43):Whenthedurationofthepartnershipfirmisnotfixedandit
isatwillofthepartners.Anypartnerbygivingnoticetootherpartnerscandissolvethe
firm.
(B)Dissolutionbyorderofthecourt(Sec44):Acourtonapplicationbyapartner
mayorderthedissolutionofthefirmunderthefollowingcircumstances:
(1)Whenapartnerhasbecomeofunsoundmind.
(2)Whenapartnerhasbecomepermanentlyincapableofperforminghisdutiesasa
partner.
(3)Whenapartnerisfoundguiltyofmisconductthatmayharmthepartnership.
67
Accountancy& XII
(4)Whenapartnerconsistentlyanddeliberatelycommitsbreachofpartnership
agreement.
(5)Whenapartnertransferwholeofhisinterestinthebusinessfirmtoathirdparty,
withouttheconsentofexistingpartners.
(6)Whenthecourtissatisfiedthatthepartnershipfirmcannotbecarriedonexceptat
aloss.
(7)Whenthecourtfindisthatthedissolutionoffirmisjustifiedandequitable.
ACCOUNTINGTREATMENTONDISSOLUTION
Ondissolutionofafirm,thefollowingaccountsareopenedtoclosethebooksofthe
firm:
RealisationAccount
PartnersLoanAccount
PartnersCapitalAccountsand
CashorBankAccount.
RealisationAccount: Itis nominalaccount openedonthedissolutionofafirm to
ascertaintheprofitorlossonrealisationofassetsandpaymentsofoutsiders
liabilities.Thisaccountisclosedbytransferringthebalance(i.e.,profitorlosson
realisation)topartnerscapitalaccounts.
PreparationofRealisationAccount
ThefollowingJournalEntriesarepassed:
A.ForClosingAssetsAccounts:
RealisationA/C
Dr.
ToSundryAssetsA/C
(BeingassetstransferredtoRealisationA/c)
Note:
1. CashandBankbalancearenottransferredtoRealisationAccount.
2. Assets(tangibleandintangible)aretransferredtoRealisationAccountattheir
GrossValue
3. FictitiousAssets such as Debit balance of Profit and LossAccount or
AdvertisementSuspenseAccountetc.arenottransferredtoRealisationAccount.
Thesearedirectlydebitedtopartnerscapitalaccountsintheirprofitsharingratio
bypassingthefollowingentry:
PartnerscapitalA/c
Dr.
ToProfitandLossA/c
ToAdvertisementSuspenseA/c
(BeingBalanceoflossestransferredtocapitalaccounts)
4.ProvisionsagainstassetssuchasProvisionforDepreciationorProvisionfor
Bad&Doubtfuldebtsetc.aretransferredtoRealisationAccountbypassinga
68
Accountancy& XII
separateentry:
ProvisionsforBadDebtsA/c
Dr.
ProvisionsforDepreciationA/c
Dr.
JointLifePolicyReserveA/c
Dr.
InvestmentFluctuationFundA/c
Dr.
MachineryReplacementReserveA/c
Dr.
ToRealisationA/c
(BeingProvisions&ReservesAgainstAssets
transferredtoRealisationAccount)
B.ForClosingLiabilitiesAccounts:
SundryLiabilitiesA/cs
Dr.
ToRealisationA/c
(BeingsundryliabilitiestransferredtoRealisationA/c)
Note:
1. Onlythirdpartiesliabilities/outsidersliabilitiesaretransferredtoRealisationA/c.
2. BalanceofPartnersLoanAccountsarenottransferredtoRealisationAccount.
Separateaccountsareopenedtosettlesuchliabilities.
3. UndistributedprofitsandreservesarealsonottransferredtoRealisationA/c.
Thesearedirectlycreditedtopartnerscapitalaccountsintheirprofitsharingratio
bypassingthefollowingentry:
ProfitandLossA/c
Dr.
GeneralReservesA/c
Dr.
ReserveFundA/c
Dr.
ContingencyReserveA/c Dr.
(Beingbalanceofundistributedprofitstransferredtocapitalaccounts)
4.ProvidentFundisaliabilityonthefirmtowardsemployeesandhenceit
istransferredtoRealisationA/c
5. Ifanyliabilityisexpectedtoariseagainstanyfundorreservee.g.,Workmens
CompensationFund,thenanamountequaltosuchliabilityistransferredtoRealisation
A/candbalance,ifany,isdistributedamongthepartnersintheirprofitsharingratioby
passingthefollowingentry:
WorkmensCompensationFundA/c
Dr.
ToRealisationA/c
(Liability)
(Balance,ifany)
(Beingliabilityagainstworkmenscompensation
fundtransferredtoRealisationA/candbalance
69
Accountancy& XII
distributedamongpartners)
Example.WorkmensCompensationFundshownintheliabilitysideofBalanceSheet
isRs.50,000.Atthetimeofdissolutionliabilityagainstthisfundisestimatedat
Rs.30,000.PassnecessaryJournalEntry.
WorkmensCompensationFundA/cDr. 50,000
ToRealisationA/c
30,000
ToAsCapitalA/cs
10,000
ToBsCapitalA/cs
10,000
(Beingliabilityagainstworkmenscompensation
fundtransferredtoRealisationA/candbalance
distributedamongpartners)
C.ForRealisationofAssets(whetherrecordedorunrecorded
a.Whenassetsaresoldforcash
Cash/BankA/c
Dr.
ToRealisationA/c
(Beingassetssoldforcash)
b.Whenassetsaretakenoverbyanypartner
PartnersCapitalA/c
Dr.
ToRealisationA/c
(Beingassetstakenoverbyanypartner)
c.Whenassetsaretakenoverbyanycreditorinpartorfullpaymentof
hisdues:
I. IncaseofFullSettlement :
i.NOENTRYispassedforthetransferofassetstothecreditor
ii.NOENTRYispassedforthepaymenttocreditor
II.IncaseofPartSettlement:
i.NOENTRYispassedforthetransferofassetstothecreditor.
ii.Theagreedamountofassetisdeductedfromtheclaimsofthecreditorand
thebalanceispaidtohim.
Note:
1.Ifnothingisstatedregardingtherealisationofanytangibleassetsthen
suchassetsshouldbeassumedtoberealizedatbookvalue
2.Ifnothingisstatedregardingtherealisationofanyintangibleassetslike
goodwill,patents,trademarksetc.thenitisassumedthatsuchassetshave
notrealizedanyamount.
70
Accountancy& XII
D.ForPaymentsofLiabilities
a.Whenliabilitiesarepaidincash
RealisationA/c
Dr.
ToCash/BankA/c
(Beingliabilitiespaidincash)
b.Whenliabilitiesaretakenoverbyanypartner
RealisationA/c
Dr.
ToPartnersCapitalA/c
(Beingliabilitiestakenoverbyapartner)
c.Whenassetsaretakenoverbyanycreditorinpartorfullpayment
ofhisdues:
I.IncaseofFullSettlement:
ii.NOENTRYispassedforthepaymenttocreditor
II.IncaseofPartPayment:
ii.Theagreedamountofassetisdeductedfromtheclaimsofthecreditorand
thebalanceispaidtohim.
Note:
Ifnothingisstatedregardingthesettlementofanyoutsideliability,thenit
shouldbeassumedthattheamountequaltobookvalueispaid.
E.ForRealisationExpenses
a.Whenexpensesarepaidbyfirmandbornebyfirm:
RealisationA/c
Dr.
ToCash/BankA/c
(Beingrealisationexpensespaidincash)
b.Whenexpensesarepaidbyanypartnerandbornebyfirm:
RealisationA/c
Dr.
(Beingrealisationexpensespaidbyapartner)
c.Whenexpensesarepaidbyfirm(onbehalfofanypartner)andbornebyanypartner:
PartnersCapitalA/c
Dr.
ToCash/BankA/c
(Beingrealisationexpensespaidonbehalfofapartner)
d.Whenexpensesarepaidbyanypartnerandbornebysamepartner:
NOENTRY
e.Whenapartnerispaidafixedamountforbearingrealisationexpensesthen:
i.Actualexpensesarenottobeconsideredand
71
Accountancy& XII
ii. RealisationA/c
Dr.[WithFixedAmount]
(Beingrealisationexpensespaidbyapartner)
f.Whenexpensesarepaidbyonepartnerandbornebyanotherpartner:
PartnersCapitalA/c
Dr.(Whobornetheexpenses)
(Whopaystheexpenses)
(Beingrealisationexpensespaidbyonepartnerandbornebyanotherpartner)
F.ForClosingRealisationAccount
a.WhenRealisationA/cdisclosesprofit(incasetotalofcreditsideismorethanthe
totalofdebitside)
RealisationA/c
Dr.
(BeingprofitonrealisationtransferredtopartnerscapitalA/cs)
b.WhenRealisationA/cdisclosesloss(incasetotalofdebitsideismorethanthetotal
ofcreditside)
PartnersCapitalA/cs
Dr.
ToRealisationA/c
(BeinglossonrealisationtransferredtopartnerscapitalA/cs)
72
Accountancy& XII
FORMATOFREALISATIONACCOUNT
RealisationAccount
Dr.
Particulars
ToSundryAssetsA/c
(Excludingcashorbank
balance,fictitiousassets,Dr.
balanceofP&LA/c,Dr.
balanceofpartners'capital/
currentA/cs, Loans to
partners
ToCash/BankA/c
(Amountpaidfordischarging
liabilitiesrecordedand
unrecorded)
ToCashBankA/c
ExpensesonRealisation)
ToPartner'sCapitalA/cs
(Liabilitiestakenoverbya
commissionpayabletohimor
anyexpensespayabletohimor
Topartners'CapitalA/cs
(For transferring profit on
Realisation)
Rs. Particulars
BySundryLiabilitiesA/c
(ExcludingCr.Balanceof
P&LA/c,Reserves,Partners'
capital/currentA/cs,Loan
fromPartnerandBank
Overdraft)
ByProvisionon anyAssets
A/c
(Such as Provision for
Depreciation,Provisionfor
DoubtfulDebts,JointLife
Policy Reserve etc.
ByCash/BankA/c
(Amount received on
realisation of assetsrecorded
and unrecorded)
ByPartners'CapitalA/cs
(Assetstakenoverbyapartner
recorded or unrecorded)
(For transferring loss on
Realisation)
PreparationofPartners'LoanAccount
Ifapartnerhasgivenanyloantofirm,hisloanwillbepaid
Afterpayamentofalltheoutsideliabilities:but
Beforemakinganypaymenttopartnersonaccountofcapital
Partner'sLoanA/c
Dr.
ToCash/BankA/c
(Beingloanofapartnerpaid)
Dr.
Partner'sLoanA/c
Particulars
Rs.
Particulars
ToCash/BankA/c
ByBalanceb/d
Cr.
Rs.
Cr.
Rs.
Note:
Ifthe firmhasgivena loantoany partnerthensuch loanaccountwillshow adebit
balance and will appear on the asset side of Balance Sheet of the firm. Such loan
accountsaresettledthroughpartner'scapitalaccountbypassingthefollowingentry:
73
Accountancy& XII
Partner'sCapitalA/c
Dr.
ToPartner'sLoanA/c
(BeingloantopartnertransferredtohisCapitalA/c)
PreparationofPartner'sCapitalAccounts
After the transfer of
Undistributedprofitsandreserves
Profiton Realisation
Anyliabilitytakenoverbyanypartner
And
Undistributed losses and fictitious assets
Loss on realisation
Anyassetstakenoverbyanypartner
Thebalanceofpartners'capitalA/csareclosedinthefollowingmanner
a.Formakingfinalpaymenttoapartner(iftotalofcreditsideismorethanthetotalof
debitside)
Partner'sCapitalA/c
Dr.
ToCash/BankA/c
(Beingexcesspaidtopartnerincash)
b.Foranyamountreceivedfromapartneragainstdebitbalanceinhiscapitalaccount
Cash/BankA/c
Dr.
ToPartners'Capital
(Beingcashbroughtinbyanypartner)
Dr.
Partner'sCapital A/cs
Cr.
Particulars
Rs.
Rs.
Particulars
Rs.
Rs.
ToBalanceb/d
Bybalanceb/d
(Dr.Balance)
(Cr.Balance)
ToProfitandLossA/c
ByGeneralReserve
A/c
ToAdvertisement
ByProfitandLoss
A/c
ToRealisationA/c
Compensation Fund
(Assets taken)
ByRealisationA/c
ToRealisationA/c
(Liabilitiestaken)
(LossonRealisation
ByRealisationA/c
ToCash/BankA/c
(ProfitonRealisation)
(Excess cash paid)
ByCash/BankA/c
(Cashbroughtin)
74
Accountancy& XII
PreparationofCashorBankAccount
Thisaccountispreparedattheendandclosedlastofall.Thisaccounthelpsinverification
of the airthmetical accuracy of accounts as both sides of this account must be equal.
ThereshouldbenobalanceleftinCashorBankA/c.
Note:
Ifcashandbankbalance(orBankOverdraft)botharegivenintheBalanceSheet,only
oneA/cisprepared,eitheraCashA/coraBankA/c.IfCashA/cisopened,anentryfor
withdrawingthebankbalanceismade:
CashA/c
Dr.
ToBankA/c
(BeingcashwithdrawnfromBank)
IfBankA/cisopened,anentryfordepositingthecashintobankispassed.
BankA/c
Dr.
ToCashA/c
(BeingcashdepositedintoBank)
Dr.
Cash/Bank/A/c
Cr.
Particulars
Rs. Particulars
Rs.
ToBalanceb/d
ByBalanceb/d
(CashinHandorCashat
(BankOverdraft)
Bank)
ByRealisationA/c
ToRealisationA/c
(LiabilitiesPaid)
(AssetsRealised)
ByRealisationA/c
ToPartners'CapitalA/cs
(RealisationExpensesPaid)
(Cashbroughtinby
ByPartner'sLoanA/c
partner)
(Partner'sLoanPaid)
(Excesscashpaidtopartner
DistinctionbetweenRevaluationAccountandRealisationAccount
Basis of
RevaluationAccount
RealisationAccount
Difference
Purpose
It isprepared toshow assets
Itispreparedtoascertainthe
andliablitiesinthebooksat
profitorlossonsaleofassets
theirrevisedvalues
andrepaymentofliabilities.
Whento be Itispreparedatthetimeof
Itispreparedatthetimeof
prepared
changeinprofitsharingratio
dissolutionofafirm
amongtheexistingpartner,
admission,retirement and
deathofapartner.
Preparation This account may be
Thisaccountis preparedonly
ofAccount
preparedatanumberof
onceduringthelifeofafirm
timesduringthelifeofafirm
75
Accountancy& XII
This account records only those

This account records all assets
assetsandliabilitieswhosebook
(except cash, fictious assets
valueshavebeenchanged
etc.)andalloutsideliabilities
Result
Afirmcontinuesitsbusiness
Afirmcomestoanendafter
evenafterthepreparationof
preparationofrealisation
revaluation account.
account
PreparationofMemorandumBalanceSheet
Ifabalancesheetonthedateofdissolutionisnotgiveninthequestion,thenitisalways
advisabletoprepareMemorandumBalanceSheetonthedateofdissolutiontoascertainthe
amountofbalancingfigure.
Note:
Intheabsenceofanyotherinformation"SundryAssets"shouldbetreatedasbalacing
figureontheassetssideofBalanceSheet.
IfthebalancesofPartners'CapitalA/csarenotgivenasonthedateofdissolution,first
we will find the balance of partners' capital accounts as on the date of dissolution by
recasting the capital accounts.
When "SundryAssets" are given in the question and nothing is specified about the
differenceontheassetsideofBalanceSheet,thedifferenceshouldbetreatedasDr.balance
ofProfitandLossA/c.
Some common mistakes committed by the students in Examination
EntriesforAssetsorliabilitiestakenbypartners
DissolutionExpenses
Realisationofunrecordedassets
PaymentsofUnrecordedLiabilities
Treatmentof FictitiousAssets
Duecareshouldbetakenwhileshowingtheeffectofabovementioneditems.
PracticalProblem
Q1.:FollowingistheBalanceSheetofXandY,whoshareprofitsandlossesintheratioof
4:1,asat31stMarch,2011:
BalanceSheet
Ason31stMarch,2011
Liabilities
Rs.
Assets
Rs.
Sundry Creditors
8,000
Bank
20,000
BankOverdraft
6,000
Debtors
17,000
X'sWifeLoan
8,000
Less:Provision
(2,000) 15,000
Y'sLoan
3,000
Stock
15,000
Investment Fluctuation Fund
Investments
25,000
Capital
5,000
Buildings
25,000
X
Goodwill
10,000
Y
50,000
ProfitandLossA/c
10,000
40,000
1,20,000
1,20,000
Contents
76
Accountancy& XII
The firm was dissolved on the above date and the following arrangements were
decided upon :
(i)
X agreed to pay off his wife's loan.
(ii) Debtors of Rs.5,000 proved bad.

(iii) Others assets realised - Investments 20% less; and Goodwill at 60%
(iv) One of the creditors for Rs.5,000 was paid only Rs.3,000
(v) Buildings were auctioned for Rs.30,000 and auctioneer's commission
amounted to Rs.1,000.
(vi) Y took over part for Stock at Rs.4,000 (being 20% less that the book valve).
Balance stock realised 50%.
(vii) Realisation expenses amounted to Rs.2,000.
Prepare Realisation A/c, Partners' Capital A/cs and Bank A/c
Solution:
Dr.
Particulars
ToGoodwill
ToBuildings
To Investments
To Stock
To Debtors
ToX'sCapitalA/c
(X'sbrotherloan)
(Creditors)
ToBankA/c
(ExpensesonRealisation
RealisationAccount
Rs.
Particulars
10,000
By Investment Fluctuation
25,000
Fund
25,000
ByProvisionforDoubtful
15,000
Debts
17,000
ByCreditors
ByX'sWifeLoan
8,000
ByBankA/c:
(Assetrealised
Debtors
12,000
6,000
Investments
20,000
Goodwill
6,000
6,000
Buildings
29,000
Stock
5,000
Cr.
Rs.
5,000
2,000
8,000
6,000
8,000
72,000
ByY'sCapitalA/c
(Stock)
ByLosstransferredto:
X'sCapitalA/cs
7,200
Y'sCapitalA/cs
1,800
1,08,000
77
4,000
9,000
1,08,000
Accountancy& XII
Dr.
Particulars
ToProfitandLossA/c
ToRealisationA/c
(Assets taken)
ToRealisationA/c
(LossonRealisation
ToBankA/c
(Excess cash paid)
Partner'sCapital A/cs
X
Y Particulars
Rs.
Rs.
8,000 2,000 ByBalanceb/d
(Cr.Balance)
4,000 ByRealisationA/c
(Liabilitiestaken)
7,200 1,800
42,800 42,800
58,000 58,000
X
Rs.
50,000
Cr.
Y
Rs.
40,000
8,000
58,000
40,000
Cash/BankA/c
Dr.
Particulars
ToBalanceb/d
(CashatBank)
ToRealisationA/c
(AssetsRealised)
ToPartners'CapitalA/c
(CashbroughtinbyPartner
Rs.
Particulars
ByBalanceb/d
(BankOverdraft)
ByRealisationA/c
(LiabilitiesPaid)
ByRealisationA/c
RealisationExpensesPaid)
ByY'sLoanA/c
(Partner'sLoanPaid)
ByX'CapitalA/c
ByY'sCapitalA/c
20,000
72,000
92,000
Cr.
Rs.
6,000
6,000
2,000
3,000
42,800
32,200
92,000
Q2.AandBwerepartnersinafirmfrom142008withcapitalsofRs.60,000andRs.40,000
respectively.Theysharedprofitsandlossesintheratioof3:2.Thecarriedonbusinessfor
2years.Inthefirstyear,theymadeaprofitofRs.50,000andinthe2ndyearendingon31st
March2010,theyincurredalossofRs.20,000.Asthebusinesswasnolongerprofitable,
they decided to wind up. Creditors on that date were Rs.20,000. The partners withdrew
Rs.8,000eachper yearfortheirpersonal expenses.Theassetsrealised Rs.1,00,000.The
expensesonrealisationwereRs.3,000.PrepareRealisationA/candPartner'sCapitalA/c
and show your working clearly.
78
Accountancy& XII
Solution :
Particulars
To SundryAssets
ToBankA/c
(Creditors)
ToBankA/c
(ExpensesonRealisation
BookofAandB
RealisationAccount
Rs.
Particulars
1,18,000
ByCreditors
ByBankA/c
20,000
(Assetsrealised)
ByLosstransferredto:
3,000
A'sCapitalA/cs12,600
B'sCapitalA/cs8,400
1,41,000
Rs.
20,000
21,000
1,41,000
WorkingNotes:
(i)
Dr.
Date
Particulars
A
B Date
Particulars
Rs.
Rs.
8,000 8,000 1.04.08 ByCashA/c
31.03.09 ByProfitand
82,000 52,000
LossA/c
90,000 60,000
1.04.09 ByBalance
b/d
8,000 8,000
2008
ToBankA/c
?
(Drawings)
31.03.2009 ToBalance
c/d
2009
?
ToBankA/c
(Drawings)
31.03.09 ToProfitand
LossA/c
12,000 8,000
31.03.09 ToBalance
c/d
62,000 36,000
82,000 52,000
ToRealisation
A/c (Loss)
12,600 8,400
ToBankA/c 49,400 27,600
6,2000 36,000
79
30,000 30,000
90,000 60,000
82,000 52,000
82,000 52,000
1.4.10
01.04.10
Cr.
A
B
Rs.
Rs.
60,000 60,000
ByBalance
b/d
62,000 36,000
62,000 36,000
Accountancy& XII
(ii)
Memorandum Balance Sheet
Rs.
Assets
SundryAssets
(BalancingFigure)
Liabilities
Capital
A
B
Creditors
Rs.
62,000
36,000
98,000
20,000
1,18,000
Rs.
1,18,000
1,18,000
Q.3AandBshareprofitssandlossesintherationof5:2.Theyhavedecidedtodissolvethe
firm.AssetsandexternalliabilitieshavebeentransferredtoRealisationA/c.PasstheJournal
Entriestoaffectthefollowing:
(a)BankLoanofRs.12,000ispaidoff.
(b)AwastobearallexpensesofRealisationforwhichheisgivenacommissionofRs.400.
(c)DeferredAdvertisementExpenditureA/cappearedinthebookatRs.28,000.
(d)StockworthRs.1,600wastaken overbyBatRs.1,200.
(e)AsunrecordedComputerrealizedRs.7,000.
(f)TherewasanoutstandingbillforrepairsforRs.2,000.whichwaspaidoff.
Solution
Date Particulars
L.F. Debit Credit
`
`
a
RealisationA/c
Dr.
12,000
ToBankA/c
12,000
(Beingbankloandischarged)
b
RealisationA/c
Dr.
400
ToA'sCapitalA/c
400
(BeingcommissioncreditedtoA)
c.
A'sCapitalA/c
Dr.
20,000
B'sCapitalA/c
Dr.
8,000
ToDeferredAdvertisementExpenditureA/c
28,000
(Beingthedeferredadvertisementexpenditure
Writtenoff)
1,200
d.
B'sCapitalA/c
Dr.
1,200
ToRealisationA/c
(BeingStocktakenoverbyBatRs.1,2000
e.
BankA/c
Dr.
7,000
ToRealisationA/c
7,000
(Being unrecorded computer sold for Rs.7,000)
f.
RealisationA/c
Dr.
2,000
ToBankA/c
2,000
(Beingbankloandischarged)
80
Accountancy& XII
CHAPTER7
AccountingforShareCapital
Company:Itis
1.AFormofbusinessorganization
2.ItisanAssociationofpersonswhoprovidecapital
3.Isanartificial,invisibleandintangible
4.Hasseparatelegalidentity
5.HasPerpetualexistence
6.HasCommonseal
7.isnotaffectedbydeath,insolvencyorinsanityofindividual
Privatecompany:
Accordingtosection3(1)(iii)
1.Haspaidupcapitalofonelakh
2.Maximumnumberofmembersis50
3.Itrestrictstherighttotransferofshares
4.ProhibitsanyinvitationtopublictosubscribeforsharesandDebentures
5. Prohibits any invitation or acceptance of deposits from persons other than its members ,
directorsortheirrelatives
PUBLICCOMPANY:
Accordingtosection3(1)(iv)
1.Isnotaprivatecompany
2.Hasminimumpaidupcapitalof5lakhsorhigherasmaybeprescribed
3.Isaprivatecompanywhichissubsidiaryofacompanywhichisnotaprivatecompany
GOVERNMENTCOMPANY
Aspersection617isacompanyinwhichmorethan50%ofpaidupcapitalisheldbyCentralor
StateGovernmentorboth
FOREIGNCOMPANY
Section591ofActstatesthistypeofcompanyisincorporatedoutsideIndiabuthasestablished
businessinIndia.
Incorporationofcompany
Thereare4stages
1.Promotionconceivinganideaofbusiness
2.Incorporationorregistration
3.Capitalsubscriptionwhichmeansraisingcapital
4.CommencementofbusinessforwhichcertificateofCommencementofbusinessistobeobtained.
81
Accountancy& XII
Someimportantdefinitions(theoryquestions)
MINIMUMSUBSCRIPTION :Itisnumberofsharesonwhichamountreceivedissufficientto
commencebusiness.
PROSPECTUS :Itisaninvitationtopublicforsubscriptionofsharesordebentures.
PRELIMINARYEXPENSES :areexpensesincurredforincorporatingthecompanyarecarriedin
balancesheetunlessthesearewrittenoff.
CAPITALmeansamountinvestedinthebusinessforthepurposeofearningrevenue.Incaseof
companymoneyiscontributedbypublicandpeoplewhocontributemoneyarecalledshareholders.
SHARECAPITAL:capitalraisedbyissueofsharesiscalledsharecapital.
AUTHORISEDCAPITAL:AlsoCalledasNominalorregisteredcapital.Itisthemaximumamount
ofcapitalacompanycanissue.Itisstatedin MemorandumofAssociation.
ISSUEDCAPITAL:thisispartofauthorizedcapitalwhichisofferedtopublicforsubscription.
Itcannotexceedauthorizedcapital.
SUBSCRIBEDCAPITAL :Itispartofissuedcapitalsubscribedorappliedbypublic.
CALLEDUPCAPITAL :Itistheamountofnominalvalueofsharesthathasbeencalledupbythe
companyforpaymentbythesubscribertowardstheshare.
PAIDUPCAPITAL :Itispartofcalledupcapitalthatthemembersofcompanyorshareholders
havepaid.
Example:XLtd.isregisteredwiththefollowingsharecapital1,25,000equitysharesofRs.10each,
payableinthefollowingmanner10%onapplication,20%onallotment,30%onfirstcallthe
balanceonfinalcall.
Thecompanyofferedforsubscription80,000equityshares.Thepublicappliedfor75,000share
Thecompanydulyallottedtheseshares.Itmadeonlyfirstcallby31stMarch2010.Thefirstcall
wasreceivedonallsharesexcept300equityshares.PrepareBalanceSheetofCompany
DisclosureofsharecapitalinCompanysBalanceSheet
RevisedFormofBalanceSheetofXLtd.asperScheduleVIPartIasat31.03.2012
Particulars
EquityandLiabilities
1) Shareholder's Funds
a)ShareCapital
Total
ASSETS
CurrentAssets
Cash&CashEquivalent
NoteNo.
Figure on
Figure as
31.03.2010(end of on 31.03.2009
currentperiod)
(end of
previous
Year
4,49,100
4,49,100
4,49,100
4,49,100
82
Accountancy& XII
NoteNo.:1
AuthorisedCaptial
1,25,000equityshares@ ` 10each
IssuedCapital
80000EquityShares@` 10each
Subscribed&Paidup
75000eq.sharesof@ ` 10each
issuedtopublic@ ` 6
Less:Unpaidcalls
NoteNo.2:
12,50,000
8,00,000
4,50,000
900
Amountreceivedonapplication
75000@ ` 1(10%)
Amountreceivedonallotment
75000sh@ ` 2(20%)
AmountReceivedoncall
74700Shares@ ` 3(30%)
4,49,100
4,49,100
75,000
1,50,000
2,24,100
4,49,100
RESERVECAPITAL :Itisthatpartofuncalledcapitalwhichthecompanyreservetobecalled
onlyuponwindingupofcompany.Forthisaspecialresolutionhastobepassed
CAPITAL RESERVE :Itiscapitalprofitnotavailablefordistributionasdividend.
It is represented in balance sheet of company as Reserves and Surplus under the heading
Shareholders'Funds
CLASSESOFSHARES: Therearetwoclassesofshares
1.Preferenceshares
2.Equityshares
1.Preferenceshares:areshareswhichgetpreferentialrightinrespectof
A)Rightofdividend
B)Repaymentofcapitalonwindingup
Equityshares:Theshareswhicharenotpreferencesharesarecalledequitysharesanddonotget
preferenceinaboverespect.
ISSUEOFSHARES
Sharescanbeissuedintwoways
1.forcash
2.forconsiderationotherthancash
Termsofissueofshare:sharescanbeissuedinthreeways
1.IssueofsharesatPar
2.IssueofsharesatPremium
3.IssueofsharesatDiscount
SharespayableinInstalments
1.Firstinstalmentpaidalongwithapplicationiscalledasapplicationmoney.
2.Secondinstalmentpaidonallotmentiscalledasallotmentmoney.
83
Accountancy& XII
3.SubsequentinstalmentpaidarecalledascallmoneycallscanbemorethanoneandcalledFirst
call,secondcallorasthecasemaybe
ISSUEOFSHARESFORCASHATPAR: Thismeanssharesareissuedatfacevalue
Journalentries
ForapplicationmoneyBankAccountDr.
(No.ofapplication
received
ToShareApplicationA/c
receivedAmountreceived
OnacceptanceofShareApplicationAccountDr.
(Noofsharesallotedx
application
ToShareCapitalAccount
amountcalledoneach)
ForallotmentmoneydueShareAllotmentAccountDr.
(No.ofsharesallotedx
ToShareCapitalA/c
amountcalledoneach
share)
OnreceiptofallotmentBankAccountDr.
(No.ofapplication
money
ToShareAllotmentA/c
allottedxAmount
receivedoneachshareor
actualamountreceived)
ForcallmoneydueShareCallA/cDr.
(No.ofsharesallotedx
ToShareCapitalAccount amountcalledoneach
share)
OnreceiptofcallsBankAccountDr.
(No.ofapplication
money
ToShareCallA/c
allottedxAmount
receivedoneach
share
NOTE:Foreachentrynarrationiscompulsoryasgiveninexamplebelowandcarriesmarks
columnsarecompulsorytableshouldbemadeinproperformat(allcolumnsarecompulsory)after
eachentryincolumnofparticularslinemustbedrawn.
Example:XLtd.invitedapplicationfor10,000sharesofthevalueofRs.10each.Theamountis
payableasRs.2onapplicationandRs.5onallotmentandbalanceonFirstandFinalcall.Teh
wholeoftheaboveissuewasappliedandcashdulyrecived.GiveJournalentriesfortheabove
transaction.
IntheBooksofXLtd.
Solution
JOURNAL
Date
Particulars
L.F.
BankAccount
Dr.
ToShareApplicationA/c
(Beingtheapplicationmoneyreceivedon10,000
sharesatRs.2pershare)
ShareApplicationA/c
Dr.
ToShareCapitalA/c
(Beingthetransferofapplicationmoneyon10,000
sharestoshare capitalaccount
84
Debit Credit
`
`
20,000
20,000
20,000
20,000
Accountancy& XII
ShareAllotmentA/c
Dr.
50,000
ToShareCapitalA/c
50,000
(Beingtheamountdueon10,000sharesat
Rs.5per share)
BankAccount
Dr.
50,000
ToShareAllotmentA/c
50,000
(BeingthereceiptofRs.5on10,000shares)
ShareCallA/c
Dr.
30,000
ToShareCapitalA/c
30,000
(Beingtheamountdueon10,000sharesatRs.3per
share
BankAccount
Dr.
30,000
ToShareCallA/c
30,000
(BeingthereceiptofRs.3on10,000shares
ISSUESOFSHARESATPREMIUM: Itisissueofshareatmorethanfacevalue.(Section
78)
Thispremiumcanbeutilisedfor
1. Issue of bonus shares
2.Writeoff preliminaryexpenses, discount, commissionon issueof shares
3.Buybackofshares
4. Redemption of debentures o preference shares
JOURNALENTRIESARE
Forapplicationmoney
BankAccountDr.
(No.ofapplication
received
ToShareApplicationA/c receivedxAmountreceived
oneachshare
Onacceptanceof
ShareApplicationAccountDr. (withtotalapplicationmoney)
application
ToShareCapitalAccount (sharecapitalreceivedon
application)
ToSecuritiesPremiumA/c (amountofpremiumreceivedif
any)
Forallotmentmoneydue
ShareAllotmentAccountDr (Noofsharesallotedxamount
calledoneachshare
ToSharecapitalAccount (securitiespremiumdue
ToSecuritiesPremium
Onreceiptofmoney
BankAccountDr (No.ofapplicationallotedx
Amountreceivedoneach
ToShareAllotmentA/c
sharei.e.actualamount
received
Forcallmoneydue
ShareCallAccountDr.
(Noofsharesallottedxamount
calledonshare)
ToSecuritiesPremium
85
Accountancy& XII
Onreceiptofcallsmoney
BankAccount
(Actualamountreceived)
ToSharecallAccount
Example:VLtd.Issued20,000EquitysharesofRs.10eachatapremiumofRs.3payableas
follows
OnApplication
Rs.4
OnAllotment
Rs.5(including)
OnApplication
Rs.2
OnApplication
Rs.2
Allsharesweredulysubscribedandallmoneydulyreceived.PassnecessaryJournal
Date
INTHEBOOKSOFVLtd.JOURNAL
Particulars
L.F.
BankAccount
Dr.
ToEquityShareApplicationA/c
sharesatRs.4pershare)
EquityShareApplicationA/c
Dr.
ToShareCapitalA/c
(Beingthetransferofapplicationmoneyon20,000
sharestoshare capitalaccount)
ShareAllotmentA/c
Dr.
ToEquityShareCapitalA/c
To Securities premiumAccount
(Beingtheamountdueon20,000sharesatRs.5
includingpremiumofRs.3pershare
BankAccount
Dr.
ToShareAllotmentA/c
EquityShareFirstCallA/c
Dr.
share)
BankAccount
Dr.
ToEquityShareFirstCallA/c
EquitySharesecondandFinalCallA/c
Dr.
share)
BankAccount
Dr.
ToEquityShareSecondandFinalCall.A/c
86
Debit Credit
`
`
80,000
80,000
80,000
80,000
1,00,000
40,000
60,000
1,00,000
1,00,000
40,000
40,000
40,000
40,000
40,000
40,000
40,000
40,000
Accountancy& XII
ISSUEOFSHARESATDISCOUNT: Whenacompanyissuessharesatpricelessthanits
facevalueitisissueofsharesatdiscount.
Section79imposesrestrictionsonissue atdiscountAccordingtothis
1.Sharesmustbeoftheclassalreadyissued.
2.Ordinaryresolutionmustbepassedinthegeneralmeetingwhichshouldspecifymaximum
discount.
3.Rateofdiscountshouldnotbemorethan10%
4.SanctionfromcompanyLawboardmustbeobtainedandsharesmustbeissuedwithin
two months of permission.
5.Atleastoneyearshouldhavepassedsincecommencementofbusinesshasbegun
NOTE:UnlessspecifiedDiscountisgivenonallotment
JOURNALENTRIES(ONALLOTMENT)
Date
Particulars
L.F.
ShareAllotmentAccount
Dr.
Discount on issue of sharesAccount Dr.

ToShareCapital
(Beingthenetamountdueonallotment)
BankAccount
Dr.
ToShareAllotmentAccount
(Beingtheamountreceivedonallotment
Debit
`
NetAmount
due
Amount of
discount
Credit
`
Facevalue
of share
NetAmount
NetAmount
Example:
J.K.IndiaLtd.issued10,000sharesofRs.10eachatadscountof10%payableRs.5on
application,Rs.3onallotmentandRs.2onFirstandFinalCall.
Only9,000shareswereappliedforandtheallotmentwasmadetoalltheapplicants.
GivenecessaryyjournalentriesinthebookoftheCompany.
JOURNALENTRIES
Date Particulars
L.F.
Debit
Credit
`
`
BankAccount
Dr.
36,000
ToShareApplicationAccount
36,000
(Beingapplicationmoneyreceivedon9000
shares @Rs.4 per share)
ShareApplicationAccount
Dr.
36,000
ToShareCapitalaccount
36,000
(Beingtheapplicationmoneytransferredto
ShareCapitalAccount)
87
Accountancy& XII
ShareAllotmentAccount
Dr.
Discount on issue of sharesAccount
ToShareCapital
(Beingtheallotmentmoneydueon9,000
shares@ Rs.3per share.The amountof
discount is @Rs.1)
BankAccount
Dr.
ToShareAllotmentAccount
(Beingapplicationmoneyreceivedon9000
shares @Rs.3per share
ShareFirstandFinalCallAccount
Dr.
(Beingthecallmoneydueon9,000shares
@Rs.2 per share)
Bank account
Dr.
ToShareFirstandFinalcallAccount
(Beingmoneyreceivedon9000shares@Rs.3
per share
27,000
9,000
36,000
27,000
27,000
18,000
18,000
18,000
18,000
SHARESISSUEFORCONSIDERATIONOTHERTHANCASH
When a company purchase any fixed asset or business and makes the payment to the
vendor in form of issue of shares in place of cash it is called the issue of shares for
consideration other than cash.
Sharecanbeissuedatpar,atpremiumordiscount.
JOURNALENTRIES
Date Particulars
L.
Debit
Credit
F.
`
`
On purchase of asset
Amount of
SudryAssetAccount
Dr.
purchase
ToVendor
price
On purchase of business
Whenpurchaseconsideration ismorethan
net asset
SundryAssetAccount
Dr.
Agreedvalue
GoodwillAccount(B/F)
Dr.
(Purchase
consideration
Agreed
Netassets)
Value
ToLiability
Purchase
ToVendor
Consideration
Whenpurchaseconsiderationislessthannet
asset Sundry
AssetAccount
Dr.
Agreedvalue
88
Accountancy& XII
ToLiability
ToVendor
ToCapitalReserve(B/F)
Onissueofshare
a)AtPAR
VendorDr.
ToShareCapital
b)Atpremium
Vendor
Dr.
ToShareCapital
To Securities Premium
c)VendorDr.
DiscountonissueofsharesDr.
ToShareCapital
AgreedValue
Purchase
Consideration
(Sundry asset
less
purchase
consideration)
Nominal
Value
Purchase
Price
Nominalvalue
Amount of
Premium
Purchase Price
Amount &
discount
Value&
Share
NOTE:Whennameofvendorisgiventhenwewritethenameofvendor
Example :Atlas Co. Ltd. Purchased a machine from HMT Co. for Rs.64,000. It was
decidedtopayRs.10,000incashandbalancewillbepaidbyissueofsharesofRs.10each.
Passjournalentriesifshares
a)Issuedatpar
b)Issuedat premiumof12%
c) Issued at discount of 10%
JOURNALENTRIES
Date
Particulars
L.F. Debit
Credit
`
`
MachineryAccount
Dr.
64,000
ToHMTLtd.
54,000
ToBankAccount
10,000
(BeingthemachinepurchasedandRs.10,000
paidcashandbalancetobepaidbyissueof
shares)
a)Whensharesareissuedatpar
HMTLtd.(Vendor)
Dr.
54,000
89
Accountancy& XII
ToShareCapital
(Being5,400sharesofRs.10eachatparto
HMTLtd.)
b)Whensharesareissuedatpremiumof20%
HMTLtd.(Vendor)
Dr.
To Security PremiumAccount
(Being4,500sharesofissuedtovendorata
premiumofRs.2pershare54,000/10+2=4500)
c)Whensharesareissuedatdiscountof10%
HMTLtd.(Vendor)
Discount onissue of sharesAccount Dr.
ToShareCapitalAccount Dr.
(Being6,000sharesissuedat10%discounttoHMT
Ltd.)
54,000/109=6000)
54,000
54,000
45,000
9000
54,000
600
60,000
Purchase of business example :

Acompanyissued15,000fullypaidupequitysharesofRs.100eachforthepurchaseof
thefollowingassetsandliabilitiesfromGuptaBros..
Plant
Rs.3,50,000
Stock
Rs.4,50,000
LandandBuilding Rs.6,00,000
Sundry Creditors
Rs.1,00,000
pass necessary Journal entries
JOURNALENTRIES
Date Particulars
L.F.
Debit
Credit
`
`
PlantAccount
Dr.
3,50,000
LandandBuildingAccount
Dr.
6,00,000
Stock Account
Dr.
4,50,000
GoodwillAccount
Dr.
2,00,000
To sundry creditors Account
1,00,000
ToGuptaBros.
15,00,000
(Beingthepurchaseofbusiness)
GuptaBros.
15,00,000
ToEquitySharesCapitalAccount
15,00,000
Beingissueof15,000sharesofRs.100eachas
payment of business price
Calculation : Goodwill = purchase consideration + liablilities assets = Rs.15,00,000+
Rs.1,00,000 Rs.14,00,000= Rs.2,00,000
90
Accountancy& XII
Q. : A company purchased a running business from Mahesh for a sum of ` 1,50,000

payableasRs.1,20,000infullypaidequitysharesofRs.10eachandbalanceincash.The
assetsandliabilitiesconsistedofthefollowing
PlantandMachinery
` 40,000
Stock
` 50,000
Building
` 40,000
Cash
` 20,000
Sundry debtors
` 30,000
Sundry creditors
` 20,000
JOURNAL
Date Particulars
L.F.
Debit
Credit
`
`
PlantandMachineryAccount
Dr.
40,000
BuildingAccount
Dr.
40,000
Sundry debtorsAccount
Dr.
30,000
Stock Account
Dr.
50,000
CashAccount
Dr.
20,000
To Sundry creditors
20,000
To Mahesh
1,50,000
ToCapitalReserve
10,000
(Beingtheassetsandliabilitiestakenover)
Mahesh
Dr.
1,50,000
ToEquitysharecapitalAccount
1,20,000
ToBankAccount
30,000
(BeingthepaymentmadetoMaheshinform
of shares
CalculationsNetassets=totalassetsliabilities=Rs.1,800,000Rs.20,000=Rs.1,60,000
Capitalreserve=NetAssetpurchaseconsideration=Rs.1,60,000Rs.1,50,000=Rs.10,000
SweatequityShares: [section79A]Thesearetheshareswhichareissuedbythecompanies
toitsemployeesordirectosatadiscountorforconsiderationotherthancashforproviding
knowhoworintellectualpropertyrightsorvalueaddition
These canbe issued onlyafter one yearof commencement ofbusiness and isreward for
their hard work.
Privateplacementofshares:[section81(1A)Thisisanissueofsharesofsecuritesto
arelativelysmallselectedgroupofpersonsnottothepublic.
ThisisgovernedbySEBIguidlinesandrequiresspecialresolutiontobepassedinGeneral
Bodymeeting.
Undersubscription:Whenthenumberofreceivedislessthanthenumberofsharesoffered
topublicitisundersubscription
Oversubscription:Whenthenumberofreceivedismorethanthenumberofsharesoffered
topublicitisoversubscription.
In such cases we
91
Accountancy& XII
1.Eitherrejecttheexcessapplications
2.makeprorataallotment
3.pratiallyrefundamountonotherprorataallotmentismade
Right issue : The existing share holders have a right under section 81 to subscribe for
freshcapitalofsharesofcompanyforconsiderationdecidedbythecompanyinproportion
toexistingshareholdings.Thisiscalledrightissue.
PreferentialAllotment:Itiswayofinfusingfreshcapital(outofpublicissue)inbusiness
byissuingsharesorwarrantstothespecifiedentitiesatspecifiedprice.Theseentitiesare
those who want to have stake in company like promoters, financial institutions, venture
capitalistsetc.
ESCROWACCOUNTS : Funds placed in trust with a third party by a borrower for a
specific purpose and to be delivered to the borrower only upon the fulfillment of certain
conditions.
Employeesstockoptionplan(ESOP):Thisisemployeecompensationschemethrough
whichcompanieswanttointroduceasenseofbelongingessamongtheemployees.Under
thisschemeacertainnumberofsharesarereservedforpurchaseandissuetokeypermanent
employeesatapricemuchlowerthanthemarketprice.Suchshareshavelockinperiod.
Buybackofshares:Therepurchaseofstockbythecompanythatissuedit,astoreduce
holdingsofasingleinvestororincreasethevalueofsahresbyreducingtheirnumber
Thiscanbedoneoutoffree reserves,securitypremiumorproceedsofsecurities
Employees stock Purchase Scheme (ESPS) :
AboutEmployee StockPurchase Plans
CompaniesofferEmployessStockPurchasePlanstoemployeestoallowthemtheopportunity
tosharethesuccessofthefirm.Astockpurchaseplanenablesemployeestopurchasetheir
company's common stock, often at a discount from the market price.
JOURNALENTRY
Bank account
Dr.(issueprice)
Employee compensation Expenses
Dr.(accountingvalueofoption)
ToEquityShareCapital
(facevalue)
To securities premium
(market priceface value)
Call in arrear : Any amount which has been called or demanded by company from
shareholdersbutnotpaidbytheshareholdertillthelastdatementionedincallletteriscalled
ascallinarrearCompanycanchargeinterestonthis
Accounting treatment
Date
Particulars
L.F.
Debit
Credit
`
`
CallinArrearAccount
Dr.
ToRelevantcallAccount/Allotment
Account
(Beingthecallamountnotreceived)
92
Accountancy& XII
Whencallamountisreceived
BankAccount
Dr.
ToCallinArrearAccount
(Beingtheamountofcallreceived)
Onmakingtheinterestdue
Sundry MemberAccount
TointerestonCallinArrearAccount
(Beingtheamountofinterestdue)
Onreceiptoftheinterest
BankAccount
Dr.
To Sundry MemberAccount
(Beingtheamountofinterestreceived)
Wheninterestistransferredtoprofitandloss
account
InterestonCallinArrearAccount
Dr.
To Profit and LossAccount
(BeingtheamounttransferredtoProfitand
Loss Account)
Callsinadvance:Anyamountpaidinexcessofwhattheyhasaskedtopayiscalledas
callinadvance.InterestisreceivedonthisatratementionedinArticleofAssociationor6%
asperTableA.
Date
Particulars
L.F.
Debit
Credit
`
`
Onreceivingmoneyinadvance
BankAccount
Dr.
ToCallinAdvanceAccount
(Beingtheamountofcallreceived)
Onadjustmentoftheadvance
CallinAdvanceAccount
Dr.
ToRelevantcallAccount
(Beingtheamountadjustedoncallbecomingdue)
Oninterestbecomingdue
InterestonCallinAdvanceAccount Dr.
To Sundry MemberAccount
(Beingtheinterestduetomember)
Onpaymentofinterest
Sundry MemberAccount
Dr.
ToBankAccount
(Beingtheinterestpaidtomember
WheninterestistransferredtoProfitandloss
account
Dr.
ToInterestonCallinAdvanceAccount
(BeingtheamounttrnaferredtoProft
and Loss Account)
93
Accountancy& XII
Forfeitureofshares:Ifonallotmentfoshareallotteesfailtopaytheamountonanycall
hismoneyisforfeitedorwithheldbycompanythisiscalledforfeitureofsoforteitmeans
totakeawayortowithdrawtherightsofaperson.
Forfeiture of share referes to the cancellation or termination of membership of a share
holderbytakingawaythesharesandrightsofmembership.
Forfeitureofsharesissuedatpar
Accounting treatment :
JOURNAL
Date
Particulars
L.F.
ShareCapitalAccount
Dr.
Debit
`
Amount
Called
Credit
`
ToVariousUnpaidCalls/Callsinarrear
Account
Amount
unpaid
To Forfeited Shares
Amount
paid
Example:JaiJawanholding10sharesofRs.10eachofwhichRs.2onapplicationRs.2on
allotmentbutcouldnotpayRs.3onfirstcall.HisshareswereforfeitedbytheDirectors.
GiveJournalentry.
JOURNAL
Date
Particulars
L.F.
Debit
Credit
`
`
ShareCapitalAccount(10x8)
Dr.
80
To Forfeited SharesAccount (10x5)
50
ToshareFirstCallAccounts(10x3)
30
(Being10sharesforfeitedfornonpaymentofcall
money)
Forfeitureofshares issuedatpremium.Forthisthere aretwoconditions
1.thepremiumhasbeenreceived
2.thepremiumhasnotbeenreceived
whenthepremiumhasbeenreceived:Insuchcasepremiumreceivedwillnotbeforfeited
andwillnotcomeanywhere:
Accountingtreatment :
JOURNAL
Date
Particulars
L.F.
Debit
Credit
`
`
ShareCapitalAccount
Dr.
To Share ForfeitedAccount
ToShareFirstCallAccount
94
Accountancy& XII
Example1000sharesofRs.10eachissuedatapremiumofRs.2pershareareforfeited
onwhichRs.8(includingpremium)havebeenreceived.FinalcallofRs.4hasnotbeen
received Pass necessary entry.
Date Particulars
L.F.
Debit
Credit
`
`
ShareCapitalAccount(1,000x10)
Dr.
10,000
To SharesForfeitedAccount (1000x6)
6,000
ToShareFirstCallAccount(1,000x4)
4,000
(Being1,000sharesforfeitedfornonpaymentof
Finalcallmoney)
Thepremiumhasnotbeenreceived:Insuchcasesecuritypremiumisdebitedwiththe
amount of premium not received
Accountingtreatment :
JOURNAL
Date Particulars
L.F.
Debit
Credit
`
`
ShareCapitalAccount
Dr.
Security Premium Account
Dr.
To Shares ForfeitedAccount
ToSharesUnpaidCallAccount)
(Being1,000sharesforfeitedfornonpayment
ofallotmentandcallsmoney)
Example1000sharesofRs.10eachissuedatapremiumofRs.2pershareareforfeitedon
whichonlyapplicationmoneyofRs.4hasbeenreceivedandRs.8(includingpremium)has
not been received. Pass necessary entries.
Date Particulars
L.F.
Debit
Credit
`
`
ShareCapitalAccount(1,000x10)
Dr.
10,000
Security PremiumAccount (1000x2) Dr.
2,000
ToShare ForfeitedAccount (1000x4)
4000
ToShareUnpaidCallAccount(1000x8)
8000
(Being1,000sharesforfeitedfornonpaymentof
allotmentandcallsmoney
Forfeiture of sharesissued at discount
Accountingtreatment:
JOURNAL
Date Particulars
L.F.
Debit
Credit
`
`
ShareCapitalAccount
Dr.
To Discount onissue of shareAccount
ToShareUnpaidCallAccount
95
Accountancy& XII
ExampleALtd.Forfeited1000sharesofRs.100eachissuedatdiscountofRs.10pershare
FinalcallofRs.20hasnotbeenmadeontheseshares.Rs.40hasbeenreceivedpershare
Pass necessary entry.
Accounting treatment :
Date Particulars
L.F.
Debit
Credit
`
`
ShareCapitalAccount
Dr.
80,000
To Discount onissue of shareAccount
10,000
40,000
ToShareUnpaidCallAccount
30,000
(Being1000sharesforfeited)
Reissue of forfeited shares : forfeited shares can be issued to some investor. This is
called as reissue of sharesThese can beissued at par, premium or discount but discount
cannot exceed the forfeited amount
JOURNAL
Date
Particulars
L.F.
Debit
Credit
`
`
REISSUEATPAR
BankAccount
Dr.
REISSUEATPREMIUM
BankAccount
Dr.
REISSUEATDISCOUNT
BankAccount
Dr.
Forfeitted SharesAccount
Dr.
BALANCEOFFORFEITEDSHARES
ACCOUNT
Forfeited SharesAccount
Dr.
ToCapitalReserve
ForfeitureofSharesoriginallyissuedatparandreissuedatadiscount
ExampleA Ltd. Forfeited 200 shares of Rs.10 each fully called up held by X for non
paymentofallotmentmoneyofRs.3pershare&FinalcallofRs.4pershare.Hepaidthe
applicationmoneyofRs.3pershare.TheseshareswerereissuedtoYforRs.8pershares
pass necessary entry.
96
Accountancy& XII
JOURNAL
Date
Particulars
L.F.
Debit
`
2,000
Credit
`
ShareCapitalAccount
Dr.
ToshareAllotmentAccount(20x3)
600
ToSharesFinalCallAccount(200x4)
800
To Shares ForfeitedAccount (200x3)
600
(Being200sharesforfeitedheldbyX)
BankAccount(200x8)
Dr.
1,600
Forfeited SharesAccount (200x2)
Dr.
400
ToShareCapitalAccount(200x10)
2,000
(BeingreissueofforfeitedsharestoY)
Dr.
200
ToCapitalReserve
200
(BeingthetransferofprofitonreissuetoCapital
Reserve)
Forfeiture ofShares originally issuedat premiumand reissued ata discount
ExampleALtd.Forfeited100sharesofRs.100eachissuedatapremiumof50%tobepaid
attimeallotmentonwhichfirstcallofRs.30perequitysharewasnotreceived,finalcallof
Rs.20isyettobemade.TheseshareswerereissuedatRs.70pershareatRs.80paidup.
Pass necessary entries.
JOURNAL
Date Particulars
L.F.
Debit
Credit
`
`
Dr.
8,000
ToSharesFirstCallAccount(100x50)
5,000
3,000
(Being100sharesforfeitedfornonpaymentof
calls money)
BankAccount(100x70)
Dr.
7,000
Forfeited SharesAccount (100x10)
Dr.
1,000
8,000
(Beingreissue100forfeitedsharesatRs.70per
shareatRs.80paidup)
Dr.
4,000
ToCapitalReserve
4,000
Reserve)
97
Accountancy& XII
Forfeiture ofShares originally issuedat discountand reissued ata premium

Y Ltd. Forfeited 800 equity shares of Rs.100each issued at a discount of 10% for non
payment of first and final call of Rs.3 per share. The forfeited shares were reissued at
Rs.12pershareasfullypaidup.Passnecessaryjournalentriesinthebooksofcompany.
JOURNAL
Date
Particulars
L.F.
Debit
`
80,000
Credit
`
To Discount on issue of SharesAccount
8,000
(800x10)
ToSharesandFinalCallAccount(800x3)
2,400
69,600
(Being800sharesforfeitedfornonpaymentof
finalcallmoney
BankAccount(800x12
Dr.
9,600
Shares ForfeitedAccount (100x10)
Dr.
62,400
Discount on issue of SharesAccount Dr.
8,000
shareatfullypaiduppaidup
Dr.
4,000
ToCapitalReserve
4,000
Reserve)
PRORATAALLOTMENTWhen there is oversubscription of shares either the excess
amountisrefundedorproportionatesharesareallotted.Allotmentofproportionateshares
iscalledasProRataAllotment.
Example:ABLtd.Invitedapplicationsfor1,00,000EquitysharesRs.10eachpayableas
Rs.2onapplication,Rs.3onAllotmentandthebalanceonfirstandfinalcall.Application
werereceivedfor3,00,000sharesandshareswereallottedonproratabasis.Theexcess
application money was to be adjusted against allotment only. M a shareholder who has
appliedfor3,000sharesfailedtopaythecallmoneyandhisshareswereforfeitedandre
issuedatRs.8pershareasfullypaid.Passjournalentries.
JOURNAL
Date Particulars
L.F.
Debit
Credit
`
`
BankAccount
Dr
6,00,000
ToEquityShareApplicationAccount
6,00,000
(Beingtheapplicationmoneyreceivedon
3,00,000sharesatRs.2pershare)
EquityShareApplicationAccount
Dr
6,00,000
98
Accountancy& XII
ToEquityShareCapitalAccount
2,00,000
ToEquityShareAllotmentAccount
3,00,000
ToBankAccount
1,00,000
(Beingtheamountofapplicationmoneyadjusted
intsharecapitalallotmentandbalancerefunded
EquityShareAllotmentAccount
Dr.
3,00,000
ToShareEquityCapitalAccount
3,00,000
(Beingtheamountdueforallotment)
EquityShareFirst&FinalCallAccountDr.
5,00,000
ToShareCapitalA/c
5,00,000
(Beingtheamountdueforfinalcall)
BankAccount
Dr.
4,95,000
ToEquityShareFirst&FinalCallAccount
4,95,000
EquityShareCapitalAccount(100x10)Dr.
10,000
ToSharesFirst&FinalCallAccount
(100x50)
5,000
5,000
(Being1000sharesforfeitedfornonpayment
offirstandfinalcallmoney
BankAccount(1000x8)
Dr.
8,000
Shares ForfeitedAccount (1000x2)
Dr.
2,000
10,000
shareatRs.10paidup)
Dr.
3,000
ToCapitalReserve
3,000
Reserve)
Notethereisnobankaccountafterallotmentasallduemoneyisalreadyreceived
WhencashbookisalsopreparedthenBankaccountentriesarenotpassedinjournalbut
arepassedonlyiscashbook
ForexampleABLtd.Invitedapplicationfor1,00,000EquitysharesRs.10eachpayableas
Rs.2onapplication,Rs.3onAllotmentandthebalanceonfirstandfinalcall.Applications
werereceivedfor3,00,000sharesandshareswereallottedonproratabasis.Theexcess
application money was to be adjusted against allotment only. M a sharehodler who has
applied for 3,000 shares failed to pay the call money and his shares were forfeited and
reissuedatRs.8pershareasfullypaid.Passjournalentries.
99
Accountancy& XII
JOURNAL
Date
Particulars
L.F.
EquityShareApplicationAccount
Dr.
ToEquityShareCapitalAccount
ToEquityShareAllotmentAccount
(Beingtheamountofapplicationmoneyadjustedin
tsharecapitalallotmentandbalancerefunded
EquityShareAllotmentAccount
Dr.
ToShareEquityCapitalAccount
(Beingtheamountdueforallotment)
EquityShareFirst&FinalCallAccountDr.
ToShareCapitalA/c
(Beingtheamountdueforfinalcall
EquityShareCapitalAccount(1000x10)Dr.
ToSharesFirst&FinalCallAccount
(100x50)
(Being1000sharesforfeitedfornonpayment
Dr.
ToCapitalReserve
Reserve)
Debit
`
5,00,000
Credit
`
2,00,000
3,00,000
3,00,000
3,00,000
5,00,000
5,00,000
10,000
5000
5000
3,000
3,000
CASHBOOK(BANKCOLUMNONLY)
Particulars
Rs. Particulars
Rs.
ToShare applicationaccount
5,00,000 ByShareapplicationaccount 1,00,000
To Shareallotment account
Nil Bybalancec/d
9,03,000
ToSharecallaccount
4,95,000
8,000
10,03,000
10,03,000
100
Accountancy& XII
CHAPTER8
AccountingforDebentures
DEBENTURES:Adebentureisadocumentthateithercreatesadebtoracknowledges
it.In corporatefinance, theterm is used fora mediumto longtermdebt instrument
used by large companies to borrow money. In some countries the term is used
interchangeablywithbond,loanstockornote.Adebentureisthuslikeacertificateof
loanora loanbondevidencing thefact that thecompanyis liabletopay aspecified
amountwithinterestandalthoughthemoneyraisedbythedebenturesbecomesapartof
thecompanyscapitalstructure,itdoesnotbecomesharecapital.
Note:Debentureisinstrumentthatisnotsecuredbyphysicalassetorcollateral
Incaseofbondinterestisnotdeclared.
Debenturesaregenerallyfreelytransferablebythedebentureholder.Debentureholders
havenorightstovoteinthecompanysgeneralmeetings ofshareholders,Theinterest
paidtothemisachargeagainstprofitinthecompanysfinancialstatements.
Types of debentures
Convertibilitypoint ofview :thereare twotypes ofdebentures:
Convertible debentures, which are can be converted into equity shares of the
issuing company after a predetermined period of time.
ThesemaybePartlyConvertibleDebentures(PCD):Apartoftheseinstrumentsare
convertedintoEquitysharesinthefutureatnoticeoftheissuer.Theissuerdecidesthe
ratioforconversion.Thisis normallydecidedatthetimeofsubscription.
FullyconvertibleDebentures(FCD):ThesearefullyconvertibleintoEquitysharesat
theissuersnotice.Theratioofconversionisdecidedbytheissuer.Uponconversion
theinvestorsenjoythesamestatusasordinaryshareholdersofthecompany.
Nonconvertibledebentures,whicharesimplyregulardebentures,cannotbeconverted
intoequitysharesoftheliablecompany.Theyaredebentureswithouttheconvertibility
feature,theyusuallycarryhigherinterestratesthantheirconvertiblecounterparts.
OnbasisofSecurity,debenturesareclassifiedinto:
SecuredDebentures: These instruments are secured bya charge on the fixed assets
oftheissuercompany.Soiftheissuerfailsonpaymentofeithertheprincipalorinterest
amount,hisassetscanbesoldtorepaytheliabilitytotheinvestors
UnsecuredDebentures:Theseinstrumentareunsecuredinthesensethatiftheissuer
defaultsonpaymentoftheinterestorprincipalamount,theinvestoristreatedlike
alongotherunsecuredcreditorsofthecompany.
From redemption point of view
Redeemable Debentures: Redeemable debentures are those which are redeemed
orpaidoffaftertheterminationoffixedterm.Theamountpaidoffincludestheprincipal
amountandthecurrentyearsinterest.Thecompanyalwayshastheoptionofeitherto
redeem a specific number of debentures each year or redeem all the debentures at
101
Accountancy& XII
specified date.
Irredeemable or Perpetual Debentures: Irredeemable debentures are those
debentureswhichdonothaveanyfixeddateofredemption.Theyareredeemedeither
intheeventofwindinguporataveryremoteperiodoftime.Irredeemableorperpetual
debenture holders
canneverforce thecompanytoredeem theirdebentures.
Issue of Debentures :
Debenturescanbeissuedintwoways
1.forcash
2. for consideration other than cash
3.As collateral security
Termsofissueof:Debenturescanbeissuedintwoways
1.IssueofDebentures atPar
2.IssueofDebenturesatPremium
DebenturespayableinInstalments
1.Firstinstalmentpaidalongwithapplicationiscalledasapplicationmoney
2.Secondinstalmentpaidonallotmentiscalledasallotmentmoney
3.Subsequentinstalmentspaidarecalledascallmoneycallscanbemorethanoneand
calledFirstcall,secondcallorasthecasemaybeISSUEOFDebenturesFORCASH
ATPAR:Thismeanssharesareissuedatfacevalue
JOURNALENTRIES
Onreceiptofapplication
BankAccount
Dr. Withtheapplication
ToDebentureApplication
moneyreceived
Account
OnacceptanceofapplicationDebentureApplicationAccount Dr. Withtheamountof
ToDebentureAccount
ofapplicationmoneyon
allotted debentures
Onmakingallotmentmoney DebentureAllotmentAccount Dr. Withtheamountdue
due
ToDebentureAccount
onallotmentof
debentures
Onadjustmentofexcess
DebentureApplicationAcccountDr. Withthesurplus
debentureapplicationmoney ToBankAccount
moneyonrejectedshares
Onreceiptofallotment
BankAccount
Dr. Withtheamount
money
ToDebentureAllotmentAccount actuallyreceived
Onmakingcalls
DebentureCallAccount
Dr. Withtheamountdueon
ToDebentureAccount
particularcallof
debentures
Onreceiptofcallmoney
BankAccount
Withtheamount
actuallyreceived
IssueofDebentureatpar:
ThismeansDebenturesareissuedatfacevalue
102
Accountancy& XII
Example
RajLtd.Issued2,00012%DebenturesofRs.100eachatparpayableRs.25onApplication,Rs.50
onAllotmentandthebalanceonfirstandfinalcall.Inall3,000 applicationwerereceived.Allotment
wasmadeto2,000applicantsotherswererejected.GiveJournalentries.
JOURNAL
Date
Particulars
L.F.
BankAccount
Dr.
To12%DebentureApplicationAccount
debentures @Rs.25 per debenture)
12%DebentureApplicationAccount Dr.
To 12%DebentureAccount
ToBankAccount
(Beingthetransferofapplicationmoneyto
debenture account and refund made on rejedected
Applications)
12%DebentureAllotmentAccount
Dr.
debentures @Rs.50)
BankAccount
Dr.
To12%DebentureAllotmentAccount
(Beingtheapplicationmoneyreceived)
12%DebentureFirst&FinalCallAccountDr.
(Beingthecallmoneydueon2,000debentures
@ Rs.25)
BankAccount
Dr.
To12%DebenturFirst&CallAccount
Debit
`
75,000
Credit
`
75,000
75,000
50,000
25,000
1,00,000
1,00,000
1,00,000
1,00,000
50,000
50,000
50,000
50,000
Importan:If%ofdebentureisgiventhenitmustbewrittenalongwithDebenture
ISSUEOFDEBENTURESATPREMIUM:ItisissueofDebentureatmorethanfacevalue
Note:PremiumisPresumedTobeDemandedonAllotmentUnlessSpecifiedandCreditedto
SecuritiesPremiumAccount
ExampleZLtd.Invitedapplicationsfor5,000,8%DebenturesofRs.100eachatapremiumof2%,
Rs.40werepayableonApplicationandbalanceanallotment.Applicationswerereceivedfor4,800
sharesandacceptedinfull.Allmoneydulyreceived.Journalisethetransactions.
103
Accountancy& XII
Date
Particulars
L.F.
BankAccount
Dr.
ToDebentureApplicationAccount
(Beingtheapplicationmoneyreceivedon4800
8%DebentureApplicationAccount
Dr.
To DebentureAccount
(Beingthetransferofapplicationmoneyto8%
debenture account)
Dr.
debentures @Rs.60and premium ofRs.2 share)
BankAccount
Dr.
ToDebentureAllotmentAccount
Debit
`
1,92,000
Credit
`
1,92,000
1,92,000
1,92,000
2,97,600
288000
9600
2,97,600
2,97,600
Oversubscriptionofdebentures:Insuchcaseexcessapplicationarerejectedorpartialor
Prorataallotmentisdoneorcombinationofbothiscarriedon.
GangaLtd.issued2,000debenturesofRs.100eachatapremiumof10%payableRs.25on
applicationRs.40(includingpremium)payableonallotmentandbalanceonFirstandfinal
Call.Inall3,500applicationwerereceived500applicationwererejectedandallotmentwas
madetoapplicantsof3,000debenturesonProratabasis.Theexcessmoneywasadjusted
onallotment.Givejournalentries.
Date Particulars
L.F.
Debit
Credit
`
`
BankAccount
Dr.
87,500
To12%DebentureApplicationAccount
87,500
12%DebentureApplicationAccount Dr.
87,500
50,000
ToBankAccount
12,500
ToDebentureAllotmentAccount
25,000
debentureaccountand refund made on rejected
Applications)
104
Accountancy& XII
Dr.
debentures @Rs.30 and premium of Rs.10)
BankAccount
Dr.
To12%DebentureAllotmentAccount
(Beingtheapplicationmoneyreceived
Rs.80,000Rs.25,000)
12%DebentureFirst&FinalCallAccountDr.
(Beingthecallmoneydueon2,000
debentures @Rs.45)
BankAccount
Dr.
To12%DebentureFirst&CallAccount
Issue of debentures for consideration other than cash
WhenDebentures areissuedforpurchase ofasset
WhenDebenturesareissued SundryAssetAccount
forpurchase ofasset atpar ToVendor
Vendor
To DebentureAccount
WhenDebenturesareissued SundryAssetsAccount
for purchase of asset at
ToVendor
premium
Vendor
To DebentureAccount
To Security Premium
Account
80,000
60,000
20,000
55,000
55,000
90,000
90,000
90,000
90,000
Dr. Withthepurchase
consideration
Dr.
Dr. Withthepurchase
Consideration
Dr.
No.ofdebenturesxpar
value
No.of debenturesx
premium
When business is purchased When Purchase consideration
and debentures issued
isequaltonetvalueofassets
SundryAssetsAccount Dr. Valueofasset
ToSundryLiabilitiesAccount Valueofliability
ToVendor
Purchase consideration
When Purchase consideration
morethannetvalueofassets
SundryAssetAccount
Dr. Valueofasset
Goodwill account
Dr.Excessof purchasevalue
ToSundryLiabilitiesAccount
105
Accountancy& XII
ToVendor
When Purchase consideration
islessthannetvalueofasset
SundryAssetsAccount Dr
ToSundryLiabilitiesAccount
ToCapitalReserve
ToVendor
Purchase Consideration
Valueofasset
Valueofliability
Excessliabilitiy
Purchase consideration
Example:AcompanypurchasedassetsofbookvalueofRs.99,000fromGirish.Itwas
agreed that Purchase consideration be paid by issuing 11% Debentures of Rs.100 each.
AssumeDebentureshavebeenissued(i)atpar(ii)atapremiumof10%.
GiveJournal
Date
Particulars
L.F.
Debit
Credit
`
`
SundryAssetsAccount
Dr.
99,000
ToGirish
99,000
(for assets purchase)
(i)
Debenturesareissuedatpar
Girish
Dr.
To11%Debentures
99,000
(Fortheissueofdebentureatpar)
99,000
(ii)
Debenturesareissuedatpremium
Girish
Dr.
To11%Debentures
99,000
90,000
Forissueof900debenturesofRs.100eachat
9,000
10% premium)
When Purchase consideration is more than net value of assets
AcompanyissueddebenturesofRs.100eachatparforthepurchaseofthefollowing
assetsandliabilitiesfromGuptaBros.atpurchaseconsiderationofRs.15,00,000
Plant
Rs.3,50,000
Stock
Rs.4,50,000
LandandBuilding Rs.6,00,000
Sundry Creditors
Rs.1,00,000
JOURNAL
Date
Particulars
L.F.
Debit
Credit
`
`
PlantAccount
Dr.
3,50,000
LandandBuildingAccount
Dr.
6,00,000
Stock Account
Dr.
4,50,000
106
Accountancy& XII
GoodwillAccount
Dr.
To Sundry creditors Account
ToGuptaBros.
GuptaBros
To DebentureAccount
(Beingissueof15,000sharesofRs.100eachas
payment of business price)
2,00,000
1,00,000
15,00,000
15,00,000
15,00,000
Calculation:Goodwill=purchaseconsideration+liabilities
assets = Rs.15,00,000+Rs.1,00,000Rs.14,00,000 =Rs.1,00,000
WhenPurchaseconsiderationislessthannetvalueofassets
ZeeLtd.TookoverthefollowingassetsandliabilitiesofbusinessofUshaLtd.
ASSETS : MachineryRs.1,00,000, Furniture Rs.1,80,000 StockRs.20,000
LiabilitiesCreditorsRs.80,000
ThepurchasepricewasagreedatRs.1,08,000.Thisistosettlebyissueof12%Debentures
atpremiumof20% passnecessaryJournalentries.
Date
Particulars
L.F.
MachineAccount
Dr.
FurnitureAccount
Dr.
Stock Account
Dr.
To CreditorsAccount
ToCapitalReserve
ToUshaCo.Ltd.
UshaCo.Ltd.
Beingissueof900debenturesofRs.100eachat
premium of 20%)
Debit
`
1,00,000
1,80,00
20,000
Credit
`
80,000
1,12,000
1,08,000
CalculationsNetassets=totalassetsliabilities=Rs.3,00,000Rs.80,000=Rs.2,20,000
Capital reserve = Net assets purchase consideration = Rs.2,20,000Rs.1,08,000 =
Rs.1,12,000
Collateralsecuritymeanssecurityprovidedtolenderinadditiontotheprincipalsecurity.It
is a subsidiaryor secondary security.Whenevera company takes loan frombank or any
financialinstitutionitmayissueitsdebenturesassecondarysecuritywhichisinadditionto
the principal security. Such an issue of debentures is known as 'issue of debentures as
collateralsecurity'.Thelenderwillhavearightoversuchdebenturesonlywhencompany
fails to pay the loan amount and the principal security is exhausted. In case the need to
107
Accountancy& XII
excercise the right dose not arise debentures will be returned back to the company. No
interestispaidonthedebenturesissuedascollateralsecuritybecausecompanypaysinterest
onloan.Thisisusedwhentherearenoassetstomortgage.
In the accounting books of the company issue of debentues as collateral security can be
credited in two ways.
(i) Firstmethod:NoJournalentrytobemadeinthebooksofaccountsofthecompany.
Debenturesareissuedascollateralsecurity.Anoteofthisfactisgiven
(ii) ontheliabilitysideofthebalancesheetundertheheadingSecuredLoansandAdvances.
Liabilities
Rs.
Assets
Rs.
Secured Loans
BankLoan
(Securedby issueof %
Debenturesascollateral
security)
(ii)Entrytobemadeinthebooksofaccountthecompany
A journal entry is made on the issue of debentures as a collateral security, Debentures
suspenseAccountis debitedbecausenocashisreeived forsuchissue
Followingjournalentrywillbemade
Date
Particulars
L.F.
Debit
Credit
`
`
Debenture SuspenseAccount
Dr
To DebentruesAccount
(BeingtheissueofDebentuesofRs....each
issuedascollateralsecurity)
ItisrepresentedinBalanceSheet
Balance Sheet as on
Liabilities
Rs.
Secured Loans
Debentureissuedascollateral
security
LoanfromtheBanks
Assets
MiscellaneousExpenditure
Rs.
Example:AcompanytookaloanofRs.3,80,000fromVaishCooperativeBankLtd.and
issued13%debenturesofRs.4,00,000asacollateralsecurity.Explainhowwillyoudeal
withthe issueofdebentruesin thebooksof thecompany.
108
Accountancy& XII
Solution:
MethodNo.1
BALANCESHEET
Rs. Assets
Liabilities
Capital
Reserveand Surplus
SECUREDLOANS
Debentures
(Inaddition....4,000
Debenturesofeach issuedas
collateralsecurity)
LoanfromVaishCoOpBank
(securedby theissue of4,000
debentures of Rs.100 each issued 4,00,000
ascollateralsecurity)
Rs.
MethodNo.2
JOURNAL
Date
Particulars
L.F.
Dr.
(Beingtheissueof4,000DebentureofRs.100
eachissuedascollateralsecurity)
Debit
`
4,00,000
Credit
`
4,00,000
BALANCESHEET(EXTRACT)
Liabilities
Rs. Assets
Rs.
SECUREDLOANS
4,000,13%Debentures100each 4,00,000 MiscellaneousExpenditure
(issuedascollateralsecurity)
DebenturesSuspenseAl
4,00,000
LoanfromVaishCoOpBank
(securedby theissue of4,000
3,80,000
debentures of Rs.100 each issued
ascollateralsecurity)
Variouscasesfromthepointofview:Varioustermsofissueandredemptionare
CaseNo.
Conditionofissue
Conditionofredemption
1.
Issuedat par
Redemptionatpar
2.
Issued at premium
Redemptionatpar
3.
Issuedat par
Redemptionat premium
4.
Issued at premium
Redemptionat premium
109
Accountancy& XII
WhenDebenturesareissuedatparandredeemableatpar
JOURNAL
Date
Particulars
L.F.
Debit
`
Credit
`
BankAccount
Dr.
To%DebentureApplicationAccount
(Beingtheapplicationmoneyreceived
DebentureApplicationAccount
Dr.
to% DebentureAccount
debenture account)
Example:LarsenandTourboLtd.Issued50,0008%debenturesofRs.100eachpayableon
applicationatparandredeemableatparanytimeafter7yearsfromthedateoftheissue
Recordnecessary entriesforthe issueofdebentures inthebook ofCompany.
Solution : Books of Larsen & Turbo Ltd. Issued 50,000 8% debentures of Rs.100 each
payableonapplicationatparandredeemableatparanytimeafter7yearsfromthedateof
theissueRecordnecessary entriesfortheissueofdebenturesin thebookofCompany.
Solution:BooksofLarsen&ToubroLtd.
JOURNAL
Date Particulars
L.F.
Debit
Credit
`
`
BankAccount
Dr.
50,00,000
50,00,000
Dr.
50,00,000
To %DebenturesAccount
50,00,000
debenture account)
WhenDebenturesareissuedatpremiumredeemableatpar
JOURNAL
Date Particulars
L.F.
Debit
`
Credit
`
BankAccount
Dr.
Dr.
To %DebentureAccount
(Beingthedebentureissuedatpremiumand
redemableatpar
110
Accountancy& XII
Example:GreenLtd.IssuedRs.80,000,9%Debentureatapremiumof5%redeemableat
parGivethenecessaryJournalentry.
JOURNAL
Date Particulars
L.F.
Debit
Credit
`
`
BankAccount
Dr.
84,000
84,000
Dr.
84,000
80,000
4,000
(Beingthedebentureissuedatpremium
andredeemableatpar)
When Debenturesare issuedat par redeemableat premium
JOURNAL
Date Particulars
L.F.
Debit
`
Credit
`
BankAccount
Dr.
Dr.
Loss onissue ofDebentureAccount Dr.
redeemableatpar)
Example:WhiteLtd.IssuedRs.60,000,9%Debentureatpar&redeemableat10%premium.
GivethenecessaryJournalentry.
JOURNAL
Date Particulars
L.F.
Debit
Credit
`
`
BankAccount
Dr.
60,000
60,000
Dr.
60,000
6,000
60,000
6,000
redeemableatpar)
111
Accountancy& XII
When Debentures are issued at Premium redeemable at premium

Date
Particulars
L.F.
Debit
`
Credit
`
BankAccount
Dr.
Dr.
To Premium on Redemption of Debenture account
redeemableatpremium)
Example:GiveJournalEntryassumingthefacevalueof10%debenturesatRs.100issued
atRs.105andrepayableatRs.110.
Date
Particulars
L.F.
Debit
Credit
`
`
BankAccount
Dr.
105
105
Dr.
105
10
100
5
To Premium on Redemption of Debenture account
10
(Beingthedebentureissuedat5%premiumand
redeemableat10%premium)
WRITINGOFFLOSSONISSUEOFDEBENTURES
The loss on issue of debentures is fictitious asset and shown on assets side of Balance
Sheetandshouldbewrittenoffassoonaspossiblebydebitingprofitandlossaccount
Dr.
To Losson issueof Debentures
A/c
WRITINGOFFLOSSONISSUEOFDEBENTURES
FirstMethod:Whendebentuesareredeemedafterfixedperiodherelossisspreadequally
overlifeofdebenturethereforecalledequalinstalmentmethod.
Example:AlimitedcompanyhasissedRs.1,00,0009%debenturesatadiscountof6%1st
Jan2000.Thesedebenturearetoberedeemedequallyover3yearsstartingfromtheendof
1st year show discount onissue account for 3 years
LossonissueofDebenturesAccount=Amountxrate/100=1,00,000x6/100
= Rs.6.
112
Accountancy& XII
1.1.2000
1.1.2001
1.1.2002
1.1.2003
To9%Debenture
Account
ToBalanceb/d
Rs.
6,000
6,000
3,600
ToBalanceb/d
3,600
1,800
ToBalanceb/d
1,800
600
31.12.2001 ByProfitLoss
Account
ByBalancec/d
31.12.2001 ByProfit&Loss
Account
ByBalancec/d
Account
Rs.
2,400
3,600
6,000
1,800
1,800
3,600
1,200
1,800
600
Account
ProportionMethodorvariableinstalmentmethod:Inthismethodlossonissueofdebenture
is written off each year in proportion to amount of debenture which reduces with every
instalmentpaid
Example:AlimitedcompanyhasissuedRs.1,00,0009%debenturesatadiscountof6%
1stJan2000.Thesedebenturearetoberedeemedinequalinstalmentsover4yearsstarting
from the endof 1st year showdiscount on issue accountfor 4 years.
LossonissueofDebenturesAccount=Amountxrate/100=1,00,000x6/100=Rs.6,000
Year
Outstanding Debentures
Ratios
AmountofLosstobe
written off
Ist
1,00,000
Rs.6,000x4/10=Rs.2,400
2nd
75,000
Rs.6000x3=Rs.1,800
3rd
50,000
Rs.6000x2/10=Rs.1,200
4th
25,000
Rs.6000x1/10=Rs.600
Discount on issueof DebentureAccount
113
Accountancy& XII
1.1.2000
1.1.2001
1.1.2002
To9%Debenture
Account
ToBalanceb/d
ToBalanceb/d
Rs.
6,000
Account
ByBalancec/d
6,000
4,000
ByProfit&Loss
Account
4,000
2,000
ByProfit&Loss
Account
Rs.
2,000
4,000
6,000
2,000
4,000
2,000
Interest on Debentures :
InterestonDebenturesiscalculatedatafinaleateonitsfacevalueandisusuallypayable
halfyearly&ispaidevencompanyissufferingfromlossbecauseitischargeonprofit.
IncoemTax is deducted from interest before payment to debenture holders
Journal Entries
(1)
WhenInterestisDue
Debenture'sinterestA/c
Dr
(Green Interest)
ToDebentureholderA/c
(Netinterest)
ToIncomeTaxPayableA/c
(Income Tax deducted)
(2)
Wheninterestispaid
DebentureholderA/c
Dr
(Withinterest)
ToBankA/c
(3)
On payment of IncomeTax to Garenment
IncomeTaxpayableat
Dr
ToBankA/c
(Amount of Income tax
deducted at source)
(4)
OntransferofinterestondebenturetoProfit&lossAccount
Profit&LossA/c
Dr.
ToDebentureinterestA/c
(amount of interest)
Illustration:
ABC Company Ltd., had 6% debentures of Rs.1,00,000 on 1st January 2009 on which
interest is paid on 30th June and 31st December pass necessary journal entries for the
payment of interest for the year 2009, 10% tax is deducted at source from interest and
remittedimmediately.Booksareclosedon31stDecember.
Date
Particulars
L.F.
Debit
Credit
`
`
June30 InterestonDebentureA/c
Dr.
3,000
2009
To InterestAccountA/c
2,700
To Income Tax
300
InterestAccruedTaxPayable
June30 InterestAccruedA/c
Dr.
2,700
114
Accountancy& XII
2009
TaxPayableA/c
ToBank
(Interest&taxpaid)
Dec.31 InterestonDebentureA/c
2009
To Interest Accrued
ToTaxPayable
Dec. 31 InterestAccrued
2009
TaxPayableA/c
ToBank
(Interest&taxpaid)
Dec.31 Profit & LossAccount
ToIntereston DebentureA/c
(Interest transfered to P&L
Account)
300
3,000
Dr.
3,000
2,700
300
Dr.
Dr.
2,700
300
3000
Dr.
6,000
6,000
Insert on Debentures :
InsertonDebenturesiscalculatedatafixedrateonitsfacevalueandisusuallypayable
halfyearlyispaidevencompanyissufferingfromlossbecuaseitischangeonprofit.
IncomeTax is deducted from interest before payment to debenture holders
JOURNALENTRIES
(1)WhenInterestisDue
Dr. (Gross Interest)
(Net Interest)
(2)WhenInterestispaid
DebentureholderA/c
Dr. (Withinterest)
ToBankA/c
(3) On payment of IncomeTax to Government
IncomeTaxPayableA/c
Dr.
ToBankA/c
(Amount of Income Tax
deducted at source)
(4)OntransferofinterestondebenturetoprofitandlossAccount
Profit&LossA/c
Dr.
(Amount of Interest)
Illustration
ABC Company Ltd., had 6% debentures of Rs.1,00,000 on 1st January 2009 on which
interest is paid on 30th June and 31st December. Pass necessary journal entries for the
payment of interest for the year 2009. 10% tax is deducted at source from interest and
remittedimmediately.Booksareclosedon31stDecember.
115
Accountancy& XII
Date
June30
2009
June30
Dec.31
Dec.31
Dec.31
(1)
(2)
(3)
(4)
ABCLtd.
JOURNAL
Particulars
L.F.
InterestonDebentureA/cDr.
To InterestAccountA/c
To Income Tax
(InterestAccuedlessTaxPayable)
InterestAccruedA/cDr.
TaxPayableA/cDr.
ToBank
(Interest&Taxpaid)
InterestonDebentureA/cDr.
To InterestAccrual
ToTaxPayable
InterestAccrualDr.
TaxPayableA/cDr.
ToBank
(Interest&TaxPaid)
ProfitandLossAccountDr.
ToIntereston DebentureA/c
(InterestTransferedtoP&L
Account)
WhenInterestisDue
Dr
Wheninterestispaid
DebentureholderA/c
Dr
ToBankA/c
On payment of IncomeTax to Garenment
IncomeTaxpayableat
Dr
ToBankA/c
Dr.Amount Cr.Amount
3,000
2,700
300
2,700
3,00
3,000
3,000
2,700
300
2,700
300
3000
6,000
6,000
(Green Interest)
(Netinterest)
(Withinterest)
(Amount of Income tax

deducted at source)
OntransferofinterestondebenturetoProfit&lossAccount
Profit&LossA/c
Dr.
(amount of interest)
116
Accountancy& XII
CHAPTER9
RedemptionofDebenture
Meaning: Redemptionofdebenturesmeansrepaymentofthedueamountofdebentures
tothedebentureholders.Itmaybeatparoratpremium.
Timeofredemption: (a)Atmaturity:whenrepaymentismadeatthedateofmaturity
ofdebentureswhichisdeterminedatthetimeofissueofdebentures.
(b) Beforematurity: Ifarticlesofassociationandtermsofissuementionedinprospectus
allows,thenacompanycanredeemitsdebenturesbeforematuritydate.
Redemptionmethods:(1)RedemptionisLumpsum:Whenredemptionismadeat
theexpiryofaspecificperiod,asperthetermsofissue.
(2)Redemtionbydrawoflots:Inthismethodacertainproportionofdebenturesare
redeemeachyear,thedebentureforwhichrepaymentistobemadeisselectedbydraw.
(3)Redemtionbypurchaseinopenmarket:ifarticlesofassociationofacompany
authorize,itmaypurchaseitsowndebenturesfromopenmarketi.e.stockexchange.
Advantage ofthis method: 1. Whenmarket priceof own debentures is lowthan the
redeemable value.
2.Decreasetheamountofinterestpayabletooutsiders.
3.iftermofissueisprovidedthatdebenturesaretoberedeemedatpremiumthensuch
premium can be decrease.
Sometimes company can purchase the debentures at more than the redeemable value
duetothefollowingreasons:
1.Tomaintainthesolvencyratio.
2.Toutlizethesurplusmoneyorfundswhicharelyingidlewiththecompany.
3.Whenrateofinterestondebenturesismorethanthecurrentmarketrateofinterest
ondebenturesintheindustry.
4. Redemption by conversion : As per the terms of issue, convertible debentures
maybecovert intoshares ornewdebentures at theoptionofdebentureholders.This
optionofconversionisgiventothedebentureholderwithinspecificperiod.Inthiscase
noneedtotransferprofit toDebentureRedemptionReserveAccount.
SourcesofRedemptionofdebentures.
1.Proceedsfromfreshissueofsharecapitalordebentureholders.
2.Fromaccumulatedprofits.
3.Proceeds fromsaleoffixedassets.
4.Acompanymaypurchasesitsowndebenturesoutofitssurplusfunds.
Twotermswhichareusedintheredemptionofdebentures:
1.Redemptionoutofcapital:whenacompanynotuseditsreserveoraccumulated
profitforredemptionofitsdebentures.Itiscalledredemptionoutofcapital.Socompany
usingthismethodarenottransferitprofittoDRRA/c.ButasperSEBIguidelinesitis
necessaryforacompanytotransfer50%amountofnominalvalueofdebenturestobe
redeemed in DRRA/c before redemption of debentures commence.
117
Accountancy& XII
2.Redemptionoutofprofit:Redemptionout ofprofitmeansthat adequateamount

ofprofitsaretransferredtoDRRA/cfromP&LAppropriationA/cbeforetheredemption
ofdebenturecommences.Thisreducetheamountavailablefordividendstoshareholders.
NOTE : If it is mentioned in question that redemption is out of capital then
DRR should also created with 50% of the nominal value of debentures.
If it is mentioned that redemption is out of profit then DRR should be created
with the 100% of the nominal value of debentures.
IfnothingismentionaboutthesourceofredemptionthanasperSEBIguidelines
50% of nominal value of debentures is to be transferred to DRRA/c.
IfinanyparticularquestionDRRisalreadyexistedwithmorethan50%amount
ofnominal valueofdebentures, theninthis casetotal 100%ofnominal valueof
debentures is to be transferred to DRRA/c
Debenture Redemption Reserve : Debenture redemption reserve is a reserve
representingretentionsoutofprofitmadeforthepurposeofredemptionofdebentures.
AmountofDRRtobecreated:Section117(c)oftheIndianCompaniesAct 1956
requiresthat,anadequateamountofprofitshouldbetransferredtoDRRbeforeredemption
commences.Howevertheadequateamount isnot specifiedbythecompaniesAct.
SEBIhasissuedguidlinesfortheredemptionofdebentureswhereby:
1.Anamountequivalentto50%oftheamountofdebenturesissuemustbetransferred
to DRRbefore redemption ofdebentures commences.
This provisionis applicablefornonconvertibledebentures ornonconvertiblepart of
partyconvertibledebentures.
Afterallthedebenturesareredeemed,thisaccountisclosedbytransferringtogeneral
reserve account.
Exception to the creation of DRR as per SEBI guidlines :
1.Allinfrastructurecompanies,whollyengagedinthebusinessrelatedtodevelopment
maintenanceandoperationofinfrastructurefacilities.
2.Acompanyissuingdebenturesmaturityperiodofnotmorethan18months.
3.DebenturesissuedbyBankingCompanies.
4.Companiesissuingprivatelyplaceddebentures.
The above types of companies are exempted by SEBI from creating DRR. However
the above types of companies can create DRR(at it option) for the redemption of
debentures.
Redemption method : (1) Redemption in Lumpsum
(A)RedemptionatPar:Illustration1.XLtd.Redeemedits10,00010%Debentures
ofRs.10eachatparon31st March,2011.
XLtd.
Date
Particulars
Debit
Credit
2011
Profit&LossAppropriationA/c
Dr.
March,31
ToDebentureRedemptionReserveA/c
(BeingtransferofProfittoDeb.RedReserveA/c)
118
`
50,000
50,000
Accountancy& XII
March,31 10%DebenturesA/c
Dr.
ToDebentureholdersA/c
(Beingtheamountduetodebentureholders)
March,31 DebentureholdersA/c
Dr.
ToBankA/c
(Beingtheamountpaidtothedebantureholder
March,31 DebentureRedemptionReserveA/c Dr.
ToGeneralReserveA/c
(BeingDeb.Red.ReserveA/cclosedbytransferto
GeneralReserve)
1,00,000
1,00,000
1,00,000
1,00,000
50,000
50,000
(B) Redemption At Premium : Illustration 2. Z Ltd. Redeemed its 1,00,000 10%

DebenturesofRs.10eachat5%premiumon31stMarch,2011.
ZLtd.
Date
Particulars
Debit
Credit
`
`
2011
Dr.
5,00,000
March,
5,00,000
31
(BeingProfittransfertoDRRA/c
March,31 10%DebenturesA/c
Dr.
1,00,000
PremiumonRedemptionofDebenturesA/cDr.
50,000
10,50,000
(Beingtheamountduetodebentureholders
March,31 DebentureholdersA/c
Dr.
10,50,000
ToBankA/c
10,50,000
(Beingtheamounttothedebentureholders)
March,31 DebentureRedemptionReserveA/c Dr.
5,00,000
ToGeneralReserveA/c
5,00,000
(BeingDeb.RedReserveA/cclosedby
transfertoGeneralReserveA/c)
Illust.3:RajeshExportLtd.has2,000,9%DebenturesofRs.100eachdueonredemption
on31stMarch2011. Debenturesredemptionreservehasabalance ofRs.30,000onthat
date.Recordthenecessaryjournalentriesatthetimeofredemptionofdebentures.
Rajesh Export Ltd.
Date
Particulars
Debit
Credit
`
`
2011
Dr.
70,000
March,
31
70,000
(BeingtheprofittransfertoDRRA/c)
March, 10%DebenturesA/c
Dr.
2,00,000
31
To Debentureholder a/c
2,00,000
(Beingtheamountduetodebantureholders)
119
Accountancy& XII
March, DebentureholdersA/c
Dr.
2,00,000
31
ToBankA/c
2,00,000
(Beingtheamountpaidtothedebentureholders)
March, DebentureRedemptionReserveA/c Dr.
1,00,000
31
ToGeneralReserveA/c
1,00,000
(BeingDeb.RedResourceA/cclosedbytransfer
GeneralReservea/c)
Illust. 4 : Rahul Ltd. has 50,000, 9% Debentures of Rs.50 each due on redemption on
31stMarch 2011.Debenturesredemption reservehasa balanceofRs.15,00,000 onthat
date.Recordthenecessaryjournalentriesatthetimeofredemptionofdebentures.
Rajesh Export Ltd.
Date
Particulars
Debit
Credit
`
`
2011
Dr.
10,00,000
March,
31
10,00,000
(BeingtheProfittransferDRA/c)
March, 10%DebenturesA/c
Dr.
25,00,000
31
25,00,000
(Beingtheamountduetodebantureholders)
March, DebentureholderA/c
Dr.
25,00,000
31
ToBankA/c
25,00,000
(Beingtheamountpaidtothedebentureholders)
March, DebentureRedemptionReserveA/c Dr.
25,00,000
31
ToGeneralReserveA/c
25,00,000
(BeingDebentureRedemptionReserveA/ctransferred
toGen.ReservedA/c)
Note:InthiscaseDRRisAlreadymorethan50%ofnominalvalueofdebentures,
then it is created upto the100% of the nominal value of debenture
Illust.5 : Saket Ltd.(an infrastructure co.) has outstanding 10,000, 9% Debentues of
Rs.50eachdueonredemptionon31stMarch,2011.Recordthenecessaryjournalentries
atthetimeofredemptionofdebentures.
RajeshExportLtd.
Date
Particulars
Debit
Credit
`
`
2011
Dr.
2,50,000
31st
March,
2,50,000
(BeingtheprofittransferredtoDRRA/c)
31st
10%DebenturesA/c
Dr.
5,00,000
March
5,00,000
120
Accountancy& XII
31st
March
DebentureholdersA/c
Dr.
5,00,000
ToBankA/c
5,00,000
(Beingtheamountpaidtothedebentureholders
31st
DebentureRedemptionReserveA/c Dr,
2,50,000
ToGeneralReserveA/c
2,50,000
(BeingDeb.Red.Res.A/ctransferredto
Gen.ReserveA/c)
(Note : The infrastructure Companies are exempted from creating DRR as per SEBI
guidlines.HoweverthesecompaniesmaycreateDRRatitsoption.)
RedemptionMethod:2Drawoflots
Illustration6:SLtd.redeemeditsRs.10,000,8%Debenturesoutofcapitalbydrawinga
Loton30Nov.2011Journalise.
SLtd.
Date
Particulars
Debit
Credit
`
`
2011
Dr.
5,000
30th
5,000
Nov.
(BeingtheProfittransfedtoDRRA/c)
30th
10%DebentureA/c
Dr.
10,000
Nov.
10,000
30th
DebentureholdersA/c
Dr.
10,000
Nov.
ToBankA/c
10,000
(Note:theDRRBalancewillbetransferreedtoGeneralReserveafterallthedebentures
are redeemed)
Illustration7:YLtd.redeemeditsRs.20,000,9%debenturesoutofprofitbydrawing
ofloton30thNov.2011.Journalise.
YLtd.
Date
Particulars
Debit
Credit
`
`
2011
Dr.
20,000
30th
20,000
Nov.
(BeingtheProfittransferredtoDRRA/c)
30th
10%DebenturesA/c
Dr.
20,000
Nov.
20,000
(BeingtheProfittransferredtoDRRA/c)
30th
DebentureholderA/c
Dr.
20,000
Nov.
ToBankA/c
20,000
(BeingtheamountpaidtoDebentured)
121
Accountancy& XII
(Note:theDRRBalancewillbetransferredtoGeneralReserveafterallthedebentures
are redeemed.)
Redemptionmethod3:RedemptionofDebenturesbyConversion: ACompanymay
offertothedebentureholdertoconverttheirdebentureintoanewclassofsecuritieslike
Equitysharesorpreferenceshareornewdebentures.Thedebentureholdermayacceptthe
offer or not. If debentures are converted.
CalculationofNumberofnewsecuritiestobeissued
=Amount due to debentureholders/Issue Price
IssuePrice=NominalPrice+SecuritiesPremiumonIssueofNewSecurities
OrIssePrice=NominalPriceDiscountonIssueofNewSecurities.
Illustration8: 2000,8%DebentureRs.100eachissuedatparredeemableat5%premium
wereconvertedintoequityshareofRs.10eachatpar,Journalise.
Solution:
JOURNAL
Date
Particulars
Debit
Credit
`
`
8%DebenturesA/c
Dr.
2,00,000
PremiumonRedemption ofDebenturesA/c
Dr.
10,000
ToDebenturholderA/c
2,10,000
(Beingtheamountduedebentureholder)
DebentureholdersA/c
Dr.
2,10,000
2,10,000
(Beingtheconversionof2,000,8%Debentures
in21,000equityshareof` 10issuedatpar
NumberofEquitysharestobeissued: ` 2,10,000/10=21,000
Illustration9:LLtd.redeemed4,0009%Debenturesof ` 100eachwhichwere
issuedatparbyconvertingtheminto10%PreferenceShareof ` 10eachissuedata
premiumof25%Journalise.
Solution:
LLtd.
Date
Particulars
Debit
Credit
`
`
8%DebenturesA/c
Dr.
4,00,000
4,00,000
(Beingtheamountduedebentureholder
DebentureholdersA/c
Dr.
4,00,000
10%PreferenceShareCapitalA/c
3,20,000
122
Accountancy& XII
80,000
(Beingtheconversionof4,000,9%Debentures
in32,000equityshareof ` 10issuedat ` 12.50)
NumberofPreferencesharestobeissued: ` 4,00,000/12.50=32,000
Illustration10.:JaiLtd.redeemed ` 1,80,000,12%Debenturesof ` 100eachat
110%byconvertingthemintoequitysharesof ` 100each, ` 90paidupJournalise.
Solution
JaiLtd.
Date
Particulars
Debit
Credit
`
`
8%DebenturesA/c
Dr.
1,80,000
18,000
1,98,000
DebentureholdersA/c
Dr.
1,98,000
1,98,000
(Beingtheconversionof1,800,12%Debenturesin
2200Equityshareof ` 10, ` 90paidup)
NumberofEquitysharestobeissued: ` 1,98,000/90=2,200EquityShares
Illustration11.:RashiLtd.redeemed5,280,12%Debenturesof` 100each,at110%by
convertingthemintoequitysharesof ` 100each,at4%discount.Journalise.
Solution
RashiLtd.
Date
Particulars
Debit
Credit
`
`
12%DebenturesA/c
Dr.
5,28,000
52,800
5,80,800
DebentureholdersA/c
Dr.
5,80,800
Discountonissue ofsharesA/c
Dr.
24,200
6,05,000
(Beingtheconversionof5,280,12%Debenturesin
6,050Equityshareof ` 100at ` 96.00each
NumberofEquitysharestobeissued: ` 5,80,800/96.00=6050EquityShares
Illustration : 12 Pass the necessary journal entries for the issue and redemption of
123
Accountancy& XII
Debenturesinthefollowingcases:
(i)10,00010%Debenturesof` 120eachissuedat5%premiumrepayableatpar.
(ii)20,0009%Debenturesof ` 200eachissuedat20%premiumrepayableat30%premium
Date
Particulars
L.F.
Debit
Credit
`
`
(i)
BankA/c
Dr.
12,60,000
ToDebentureApplicationandAllotmentA/c
12,60,000
(BeingreceiptofApplicationmoney)
DebentureApplicationandAllotmentA/cDr.
12,60,000
To10%DebentureA/c
12,00,000
ToSecuritiesPremiumA/c
60,000
(BeingIssueof10%Debentureatpremium
redeemableatpar)
Atthe 10%DebentureA/c
Dr.
12,00,000
timeof
12,00,000
redem (Beingamountduetodebentureholder)
DebentureholderA/c
Dr.
12,00,000
ToBankA/c
12,00,000
(Beingtheamountpaidtodebentureholders)
(ii)
BankA/c
Dr.
48,00,000
ToDebentureApplicationand
48,00,000
AllotmentA/c
(BeingreceiptofApplicationmoney)
DebentureApplicationandAllotmentA/c
Dr.
48,00,000
Loss onIssue ofDebenturesA/c
Dr.
12,00,000
To9%DebentureA/c
40,00,000
ToSecuritiesPremiumA/c
8,00,000
ToPremiumonRedemptionof
12,00,000
DebenturesA/c
(BeingIssueof9%Debentureatpremium
redeemableatpremium)
Atthe 9%DebentureA/c
Dr.
40,00,000
timeof PremiumonRedemptionofDebentureA/c Dr.
12,00,000
redeem
52,00,000
(Beingamountduetodebentureholder
DebentureholderA/c
Dr.
52,00,000
ToBankA/c
52,00,000
(Beingtheamountpaidtodebentureholders)
Conversion of Debentures into shares which are originally issued at a Discount :
Whendebenturesareoriginallyissuedatdiscount,discountonissueofdebentureaccount
isdebitedwiththeamountofdiscount,Discountonissueofdebentureaccountiswritten
offduringthetimeperiodofdebentureasasissuedatetoredemptiondate.
Note : By the maturity date the discount on issue of debenture account is fully
writtenofffromtheProfit&LossA/c.
124
Accountancy& XII
(a)Whenconversiondoneafterthematurityofdebenture:Theconversionisdone
with the full amount of debenture the discount on issue of debenture account is fully
written off, so discount account is not credited on the date of conversion in maturity of
debentures: e.g.
1stApril,2005XLtd.issued20,000,9%debenturesofRs.10eachatadiscountof10%
redeemableatparafter5yearsbyconvertingthemintoequitysharesofRs.10eachissued
atapremiumof25%passjournalentriesfortheredemptionofdebentures.
Sol:
Date
Particulars
L.F.
Debit
Credit
`
`
1.4.
9%DebenturesA/c
Dr.
2,00,000
2010
ToDebenturesholdersA/c
2,00,000
(Beingamountduetodebentureholders
onconversion atmuturity date)
1.4.
DebentureholdersA/c
Dr.
2,00,000
2010
ToEquityShareCapital
1,60,000
ToSecurities PremiumA/c
40,000
(Beingamountdueonconversion
dischargebyissueof16,000equityshares)
2,00,000/12.5=16,000
(1)DiscountA/calreadywrittenoff.conversionisdonewiththefullamountofDebentures.
(B)ConversionbeforeMaturitydateofredemptionofdebentures:Inthis situation
thediscountonisssueofdebenturesaccountisnotfullywrittenoffbecauseconversionis
beforetheduedateoftheredemption.Sotheactualamountreceivedonissueofdebenture
atthetimeofissueistobedeterminedanditshouldbetakenasamountduetodebenture
holdersandnewequitysharesaretobeissuedfortheamountactuallyreceivedatthetime
ofissueofdebentures.Ifthisruleisnotapplied,theprovisionalconditionsofsection79of
thecompaniesAct1956wouldbeviolated.
Ifacompany,convertitdebenturesintoequitysharebeforethematurity,thenDiscountin
issueofdebenturesAccountshouldbecreditedwiththeamountifdiscountwhichhasnot
yet been written off and Profit & LossAccount should be credited with the amount of
discount which has already written off e.g.
On1stApril2010,XLtd.issued50,000,10%DebenturesofRs.10eachat4%discount
andredeemableatparafter5year.Itofferedthedebentureholdersoptiontoconverttheir
debenturesinequityshareofRs.10eachafter31stMarch,2012.On1stApril,2012,25%
of debentureholders accepted & exercised their option. Give necessary journal entries at
the time of converssion of debentures.
Date
Particulars
Debit
Credit
`
`
1.4.
10%DebenturesA/c
Dr.
1,25,000
2010
ToDiscountonissueofDeb.A/c
3,000
ToProfit&LossA/c
2,000
ToDebentureholder'sA/c
1,20,000
125
Accountancy& XII
(Beingtheamountduetodebenture
holder's on conversion of debentures)
1.4.
Debentureholder'sA/c
Dr.
1,20,000
2012
1,20,000
(Beingtheissueof12,000EquityShares
ofRs.10eachatparonconversionof12,500
10%Debanturs
Note:IntheaboveIllustrationdiscountonissueofdebenturesaccountiscreditedwiththe
amountofdiscount notwrittenoffon theconversiondatei.e. totalDebenture.
TotalNo.ofDebenturesissue= ` 50,000
Debenturestobeconverted25%of50,000=12,500debenturesof ` 10/each
TotalDiscountatthetimeofissueon12,50010%Debentures=
12500x10=125000x4/100= ` 5000,termofDeb.5years.
Discountwrittenoffperyear=5000/5=Rs.1,000
Discount written off of between issue date (1/4/2010) to conversion date (1/4/2012) is
twoyear=1000x2=Rs.2000.
Discount not written off Rs.5,0002,000 = Rs.3,000
DiscountinissueofDebentureAccountshouldbecreditedwithRs.3000
Discountinissueofdebenturehasthedebitbalance ` 3000onthedateofconversionof
debentures.sothediscountonissueofdebentureAccountshouldbecreditedwith` 3000.
DiscountonissueofdebenturesRs.2000hasbeenwrittenoffbydebitedtheprofitandloss
accounttillonconversionofdebenturedatesoProfit&Lossa/cshouldbecreditedwith
Rs.2,000.
Note If there is no information about the date of conversion, it will be assumed that
conversiontookplacebeforethedateofmotutiry.Inthiscaseitisnotpossibletocalculate
theamountofdiscountwhichhasbeenwrittenoffuptodateofconversionandwhichhas
notwrittenoff.Itisassumedinthiscasethatnodiscounthasbeenwrittenoffanddiscount
on issueof debenture accountshould be credited withwhole amount ofdiscount e.g.
X Ltd. redeemed its 1,000 10% Debentures of Rs.100 each which were issued at a
discountof5%byconvertingthemintoequitysharesofRs.10eachissuedataPremiumof
25%Journalise.
Date
Particulars
Debit
Credit
`
`
10%DebenturesA/c
Dr.
1,00,000
ToDiscount onissueof debenturesA/c
5,000
95,000
DebentureholdersA/c
Dr.
95,000
ToEquityShareCapitala/c(7600x10)
76,000
ToSecuritiesPremiumA/c(7600x2.5)
19,000
(Beingtheissueof7600equitysharesof
Rs.10eachat12.50=95000/12.5=7600)
126
Accountancy& XII
Note:TheprovisionofSec79ofcompaniesAct,1956appliesonlyontheissueofshares
only. The amount of discount on issue of debentures should be considered for when
redemption is made on conversion into share only. If redemption is made on conversion
into new class of debenture, then the provision of Sec 79 not violated. The discount on
issue of debenture account should not be credited e.g. 2,500, 10% Debentures of ` 100
eachissuedatadiscountof5%andredeemableatparaftereach4yearswereconverted
into14%Debenturesof ` 10eachissuedatparbeforematurity.Givethenecessaryjournal
entries for redeemption of debentures
Sol. :
Date
Particulars
Debit
Credit
`
`
10%DebenturesA/c
Dr.
2,50,000
ToDebentureholder'sA/c
2,50,000
Debentureholder'sA/c
Dr.
2,50,000
To14%DebenturesA/c
2,50,000
(Beingissueof25,00014%Debentures
of ` 10eachatparonconversion
= 2,50,000/10=25,000 debenturs
Illusration13:Journalisethefollowingtransactions:
(i)ALtd.redeemed5,000,12%debenturesof` 100eachwhichwereissuedatadiscount
of8%byconvertedthemintoequitysharesof ` 10eachissuedatpar.
(ii)BLtd.redeemed600,14%debenturesof` 10eachwhichwereissuedatadiscountof
5% by converting them 12% preference shares of ` 100 each at a premium of ` 25 per
share.
(iii)CLtd.redeemed1000,10%Debenturesof ` 100eachwhichwereissuedatadiscount
of10%byconvertingthemequitysharesof ` 50each, ` 45paidup.
(iv)DLtd.redeemed4000,12%Debenturesof ` 100eachwhichwereissuedatadiscount
of35%byconvertingtheminto8%Debentures `100eachissuedatpar,beforethematurity
date of debentures.
Sol. :
Date
Particulars
Debit
Credit
`
`
(i)
12%DebenturesA/c
Dr.
5,00,000
ToDiscountonissueofDebenturesA/c
40,000
4,60,000
DebentureholdersA/c
Dr.
4,60,000
4,60,000
(Beingamountduetodebentureholderson
conversion discharged issue of 4,60,000/10
=46,000equitysharesof ` 10each
(ii)
14%DebenturesA/c
Dr.
60,000
127
Accountancy& XII
3,000
57,000
DebentureholdersA/c
Dr.
57,000
To12%performancesharecapitala/c
45,600
ToSecurities PremiumA/c
11,400
conversion dischargedby issueof 57000/125=456
12%preferencesharesatapremiumofRs.25each
(iii)
10%DebenturesA/c
Dr.
1,00,000
10,000
90,000
DebentureholdersA/c
Dr.
90,000
ToEquitysharecapitalA/c
90,000
conversion discharged byissue of 90,000/45=2000
Equitysharesof ` 50each, ` 45paidup)
(iv)
12%DebenturesA/c
Dr.
4,00,000
4,00,000
(Beingamountduetodebentureholders)
DebentureholdersA/c
Dr.
4,00,000
To8% Debentures
4,00,000
(Beingtheamountduetodebentureholderson
conversion discharged by issue of 4,00,000/10
4000,8)DebentureofRs.100eachatpar)
Note:Intheabovefirstthreecasesnothingismentionedaboutthedateofissue&dateof
maturityofdebentures.Itisassumedthatdebentureswereredeemedbeforematuritydate
&discountonissueofdebenturesA/ccreditedwiththeamountofdiscountallowedatthe
timeofissue.ThenewsharesunderSec.79wouldbeissuedamountequaltoNetamount
receivedfromdebentureholdersatthetimeofissueoforiginalfromdebentureholders.
Case 4. Sector79does not apply on issueof debentures discountA/c notcredited in the
solution.
128
Accountancy& XII
CHAPTER10
FinancialStatementofCompanies
Basic Financial Statement also called FinalAccounts
1.IncomeStatement:Itshowthenetresultofbusinessoperationi.e.Net/profit/Net
lossduringanaccountingperiod(orTradingandprofit&lossA/c)
FORM OF BALANCE SHEET
Name ofthe Company ..................
Balance Sheet as at .....................
Particulars
Note
Fig.for
Fig.for
No.
the
the
CurentYear PreviousYear
I. EQUITYANDLIABILITIES
(i) Shareholders' Fund
(ii)ShareApplicationpendingallotment
(iii)NonCurrentLiabilities
(iv)CurrentLiabilites
Total
II. ASSETS
(i)NonCurrentAssets
(ii)CurrentAssets
Total
Henceweseethatthereareonlyfourmajorheadingsunderequityandliabilitysidewhereas
Assetsideconsistofonlytwomajourheading
Subheadingundervariousmajorheading
EquityandLiability
(1) Shareholder's Fund
(a)ShareCapital
(b)Reserves andSurplus
(c)Moneyreceivedagainstsharewarrants
(2)NonCurrentLiabilities
(a)LongtermborrowingsBonds,Debenture,loansfromBanksetcareincluded.
(b)Deferredtaxliabilities.
(c)OtherlongtermliabilitiesItincludetradepayablewhichoutstandingformorethan
12 months.
(3) Current Liabilities
(a) Short term borrowings
(b)TradePayables(CreditorsandBillsPayable)
(c)OtherCurrentLiabilitiesIncludecurrentmaturitiesoflongtermdebt.,Interestaccrued
but not due & interest acerued and due on borrowings, outstanding expenses, calls in
advance, unclaimed dividents etc.
129
Accountancy& XII
ASSETS
(1)Non CurrentAssets
(a)FixedAssets:Thissubheadingisdividedintotangible,IntangibleAssetsandCapital
workinprogress.
(b) NonCurrent Investments.
(c) DeferredTaxAssets
(d)LongtermLoansandAdvances
(e)OtherNonCurrentAssets
(2) CurrentAssets
(a)Current Investment(i.e.upto oneyear)
(b) Inventories Raw material, stock in trade work in progress, stores and spares and
loosetoolsetc.arealsoincludedalongwiththefinishedgoods
(c)TradeReceivablesSundayDebtors,BIR
(d)CashandCashEquivalents
(e)Shorttermloanandadvances
(f)OthercurrentAssetsItincludeprepaidexpenses,interestoceruedoninvestmentsetc.
Note1.MiscellaneousExpenditureandtheDebitBalanceofProfitandLossA/carenot
shown separately.
2.Profit&LossA/cDebitBalanceisshownasaminusitemunderReserveandSurplus.
3.MiscellaneousExpenditureitemsaresubtraetedfromthesecuritypremiumontheequity
andliabilityheadingandintheabsenceofsuchareservetheseareshownasaotherNon
CurrentAssetsor othercurrentAssets asper instructions.
Contingent Liabilities :
Thesearetheliabilitieswhicharenotliabilitiesonthedatebutmayariseuponthehappening
ofacertainevent.ThesearenotaddedintheAmountofliabilitiesandareshownonlyas
footnotes.
Remember some examples :
Disputedclaimsnotasknowledgeasdebtsonthatdate
Uncalledliabilityonpartlypaidshares
Arrearsofdividendsoncumulativepreferenceshares.
Billsdiscountedbutnotmatured
Guaranteeforloans
SomeExampleofMiscellaneous Expenditure(MustRemember):
PreliminaryExpenses
Expensesonissue ofsharesondebentures
Discountallowedontheissueofshares/deb.
Developmentexpenditurenotadjusted.
Interestpaidoutofcapitalduringconstructionperiod.
Some Important Items normally asked in the Exam :
EquityandLiabilityhead
S.No.
Items
MajorHeading
Subheading
1.
Proposed Dividend
CurrentLiability
Shortterm Provision
2.
UnclaimedDividend
CurrentLiability
OtherCurrentLiabilities
3.
BillsPayable
CurrentLiability
TradePayable
130
Accountancy& XII
4.
5.
6.
7.
8.
9.
10.
ProvisionforTax
OutstandingSalaries
PreliminaryExpenses
AuthorisedCapital
Debenture
SinkingFund
Provision for
Provident Fund
11.
Security Premium
12.
Creditors
Assets head
S.No.
Items
1.
PatentsandTradeMarks
2.
BillsReceivables&
Debtors
3.
PrepaidExpesnes
4.
AdvancesRecoverable
inCash
5.
Goodwill
6.
Loose Tools
7.
Bank/CashBalance
CurrentLiability
CurrentLiability
Shareholders' Fund
Shortterm Provision
OtherCurrentLiabilites
Subtracted from security
premium under Reserve
and Surplus.
Shareholder's Fund
ShareCapital
NonCurrentLiabilities Longterm Borrowings
Shareholder's Fund
Reserveand Surplus
NonCurrent
Longterm provision
Liabilities
Shareholders' fund
Reserveand Surplus
CurrentLiabilities
TradePayable
MajorHeading
NonCurrentAssets
CurrentAssets
Subheading
IntangibleAssets
TradeReceivable
CurrentAssets
CurrentAssets
OtherCurrentAssets
Shortterm Loans and
Advances
IntangibleAssets
Inventories
Cash&Cash
Equivalents
NonCurrent Investment
Inventories
NonCurrent Investment
NonCurrentAssets
CurrentAssets
CurrentAssets
8.
Investments
NonCurrentAssets
9.
Workin progress
CurrentAssets
10.
Govt. Securities
NonCurrentAssets
Financial StatementAnalysis
Meaning In the words of Finney and miller 'FinancialAnalysis consists in separating
facts according to some definite plan arranging them in groups according to certain
circumstancesandthenpresentingtheminaconvenientandeasilyreadableandunderstandable
form.'
Objectives/Need
Tomeasuretheprofitabilityofthebusiness
Tomeasurethefinancialstrengthofthebusiness
To makecomparativestudywithin thefirmandwith otherforms
To judgethe effciencyof Management
ToprovideusefulinformationtotheManagement
Tofindoutthecapabilityofpaymentofinterest,dividendetc.
Tofindoutthetrendofthebusiness
Significance or Importance of FinancialAnalysis
ForManagementToknowtheprofitability,liquidityandsolvencyconditiontomeasure
the effectivenessof owndecision takenand takecorrective measurein future.
131
Accountancy& XII
For Investors : Want to know the earning capacity and future growth prospects of the
businesswhichhelpsinassessingthesafetyoftheirinvestmentandreasonablereturn.
ForCreditors:Shorttermcreditorswanttoknowtheliquidityconditionofthebusiness
where as long term creditors want to know the solvency will be able to pay the interest
constantly.
ForGovt.:Toknowtheprofitabilityconditionfortakingtaxationdecisionandtofindout
the company.
ForEmployees:ToknowtheprogressofthecompanyforassessingBonus,increasein
wagesandensurestabilityoftheirjob.
Limitation of Financial Analysis
Basedonbasicfinancialstatementwhichthemselvessufferfromcertainlimitations.
Don'treflectchangesinpricelevel.
AffectedbythepersonalabilityandbiasoftheAnalyst.
Lackofqualitativeanalysisasonlythosetransactionandeventsarerecordedwhichcan
be measured interms of money.
When different accounting policies are followed then the comparison of two financial
statementbecomes unreliable.
Singleyears'Analysisoffinancialstatementhavelimiteduse.
Typesof financialAnalysis
HorizontalAnalysis:Inthis,figurefortwoormoreyearsarecomparedandanalyzed.
ItisalsocalleddynamicAnalyses.
Examples:Comparisonofsales,profits,costofgoodssoldfortwoormorethan2years.
VerticalAnanlysis : In this type, Financial Statement for a single year is analyzed. It
involvesthestudyofrelationshipbetweentwoquantitiesofbalancesheetorP&LA/cof
asingleyearsorperiod.
Example: Commonsize statements.
ToolofFinancialAnalysis
ComparativeStatement: FinancialStatementoftwoyearsiscompared.Absolutechange
andthenthepercentagechangeinfigurearecalculated.Itisaformof HorizontalAnalysis
CommonSizeStatement:VariousfigureofsingleyearFinancialStatementareconverted
intopercentagewithresepecttosomecommonbase.InIncomeStatementsalesintake
asbase(i.e.100)whereasinBalanceShettotalassetsaretakenasbase.
TrendAnalysis :Here trendpercentage are calcultedfor a numberof yearstaking one
year as a base year.This helps is assessing the trend of increase or decrease in various
items.
Accounting Ratios : Study of relationship between various items is known as Ratio
analysis.
Cash Flow Statement : It shows the inflow and outflow of cash and cash equivalents
duringaparticularperiodwhichhelpsinfindingoutthecausesofchangesincashbetween
the two dates.
FundFlowStatement:Itindicatesthereasonsofchanginginworkingcapitalduringa
particular timeperiod. Itshows sources(inflow) andApplications (Outflow)of funds.
BreakevenAnalysis:Itisapointwheretotalofsalesisexactlyequaltothetotalof
costtothetotalofcostofsalesi.e.thefirmhasneitheranyprofitnoranyloss.Itisalso
132
Accountancy& XII
calledasNoProfitNoLossPoint.
Comparative Statement Preparation :
Steps :
Putthefig.ofFinancialStatementoftwoyearsidebyside(previousyearamount
in the Ist column
Inthenextcolumnwritethedifferenceofthetwofig.Forincreasewithrespectto
theprevious year's(+) signand Decreaseput ()sign.
Percentageincreaseordecreaseiscalculatedbytheformulagivenbelow:
Absoluteincreaseordecrease*100
Fig.forthepreviousyear
FormatforComparativeBalanceSheet
COMPARATIVEBALANCESHEET
Asat31stMarch,2010and2011
Particulars
2002
2003 Absolute increase % Increase or
or
decrease in
Decrease over relationto2011
2010
Rs.
Rs.
Rs.
%
FixedAssets(A)
Investment (B)
WorkingCapital
CurrentAssets(i)
CurrentLiabilities(ii)
WorkingCapital(iii)
CapitalEmployed(A+B+C+)
Less:Longterm Debts(e.g.
debentures)
Shareholder's Funds
Representedby:
PreferenceShareCapital
+EquityShareCapital
+NetReserveandSurplus
Example1.
Fromthefollowinginformation,prepareBalanceSheetofXLtd.:
Particulars
31.03.2006
31.03.2007
Rs.
Rs.
CurrrentAssets
13,00,000
18,20,000
12% Debentures
5,00,000
4,00,000
EquityShareCapital
10,00,000
10,00,000
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Accountancy& XII
FixedAssets
15,00,000
20,00,000
Investments
2,00,000
50,000
CurrentLiabilities
9,00,000
12,70,000
Reserves and Surplus
6,00,000
12,00,000
Solution :
COMPARITIVEBALANCESHEETOFXLTD.
Ason31stMarch2006&2007
Particulars
2002
2003
Increase
% Increase or
or
decrease in
decrease over relationto2011
2006
Rs.
Rs.
Rs.
%
FixedAssets(A)
15,00,000 20,00,000
+5,00,000
+33.33
Investments (B)
2,00,000
50,000
1,50,000
75
WorkingCapital:
CurrentAssets(1)
13,00,000 18,20,000
+5,20,000
+40
CurrentLiabilities(2)
9,00,000 12,70,000
+3,70,000
+41.11
WorkingCapital(c)(12) 4,00,000 5,50,000
+1,50,000
+37.50
CapitalEmployed(A+B+C)21,00,000 26,00,000
5,00,000
+23.81
Less:12%Debenture
5,00,000 4,00,000
1,00,000
20
Shareholder's Funds
16,00,000 22,00,000
+6,00,000
+37.50
Representedby:
EquityShareCapital
10,00,000 10,00,000
+ReseveandSurplus
6,00,000 12,00,000
+6,00,000
+100
Shareholder's Funds
16,00,000 22,00,000
+6,00,000
+37.50
Format ofa ComparativeIncome Statement
COMPARATIVEINCOMESTATEMENT
Fortheyearended31stMarch,2010and2011
Particulars
2010
2011
Absolute
% Increase or
increase or
decrease in
decrease over relationto2011
2010
Rs.
Rs.
Rs.
%
Netsales
Less:Costofgoodssold
GrossProfit(A)
Less:OperatingExpenses:
(Seenote1)
Office&administrationExpenses
Selling&distributionexpenses
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Accountancy& XII
Totaloperatingexpenses(B)
Operatingprofit(AB)
Add:NonOperatingIncome(note2)
Total Income
Less:NonOperatingExpenses
(Seenote3)
Net Income(profit) before tax
Less:tax
NetIncome(profit) aftertax
Note(1)OperatingExpenses:Theserefertotheindirectexpensesrelatingtothe
principalrevenuegeneratingactivitiesoftheenterprise.Theseinclude:
OfficeandAdministrativeexpensessuchasalary,postage,depreciationetc.
SellingandDistributionexpenses
Cash discount allowed to customers
BaddebtsandProvisionfordoubtfuldebts.
Interest on short term debts
(2)NonoperatingIncomes:Theserefertotheincomeswhicharenotfromtheprincipal
revnueproducingactivities.Theseinclude:
Interestanddividendreceivedonlongterminvestments
Rentreceived
Profitonsaleoffixedassets
Compensationforacquisitionofland
(3) Nonoperating Expenses : These refer to the expenses and losses which are not
relatedtotheoperatingactivities.Theseinclude:
Intereston longtermdebts
Lossonsaleoffixedassets
Intangibleassets writtenoffsuchas goodwill,patentsetc.
Fictitious assets written off such as preliminary expenses, underwriting commission,
discount on issue of share of debentures etc.
Example2. Prepare a Comparative Income statementAhmed Ltd., with the help of the
followinginformation:
31.03.2000
31.03.2001
Rs.
Rs.
Sales
5,00,000
8,00,000
Costof GoodsSold
3,00,000
5,00,000
Direct Expenses
40,000
20,000
Indirect Expesnes
30,000
40,000
Income Tax
40%
50
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Accountancy& XII
(C.B.S.E.2002)
SOLUTION:COMPARATIVEINCOMESTATEMENT
Particulars
31.03.2000 31.03.2001 Absolute Change % Change
Rs.
Rs.
Rs.
Sales
5,00,000 8,00,000
3,00,000
60.00
Less:Costofgoodssold
3,00,000 5,00,000
2,00,000
66.67
Gross Profit
2,00,000 3,00,000
1,00,000
50.00
Less:IndirectExpenses
30,000
40,000
10,000
33.33
NetProfitbeforetax
1,70,000 2,60,000
90,000
52.94
Less:Incometax
68,000 1,30,000
62,000
91.18
NetProfitaftertax
1,02,000 1,30,000
28,000
27.45
Importance of Comparative Statement
Tomakethedatasimpleandmoreunderstandable.
Toindicatethetrendwithrespecttothepreviousyear.
Tocomparethefirmperformancewiththeperformanceofotherfirminthesamebusiness.
Common Size Statement Preparation
STEPS
1. Puttheabsoluteamountsoftwoyearssidebyside.Previousyear'samountinthefirst
columnand currentyearinthe 2ndcolumn.
2. Calculatethepercentageofeachitemsw.r.tthecommonbasebyusingtheformula
Percentageoftheitem=
Absolutefigureoftheitemoftheyearx100/Basefigureofthatyear
3. Base figure for the Income statement is taken as total sales whereas for Balance
Sheet it is total assets.
4. 3rd column is for Previous year's Percentage and 4th column is for current year's
percentage.
FormatofBalanceSheetAsat31stMarch2010&2011
Particulars
AbsoluteAmounts
EquityShareCapital
PreferenceShareCapital
ReserveandSurplus(Net)
NonCurrentLiabilities
CurrentLiabilities
Shortterm Provisions
Total
2010
Rs.
2011
Rs.
Percentage& Balance
Sheet Total
2010
2011
%
%
Assets
NonCurrentAssets
NonCurrent Investmnets
CurrentAssets
Total
NoteNetReserveandSurplusmeanstotalofallreserveslessMiscellaneousExpenditure
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Example3:Prepareacommonsizebalancesheetfromthefollowingdata:
BalanceSheetason31stMarch2010and2012
Particulars
31.03.2010 31.03.2011
(Rs.)
(Rs.)
EquitySahreCapital
6,00,000
6,00,000
Reserveand Surplus
GeneralReserve
Total
6,80,000
3,00,000
84,000
3,28,000
8,000
20,00,000
10,00,000
3,00,000
1,40,000
4,50,000
10,000
25,00,000
Total
8,00,000
3,00,000
1,00,000
4,50,000
2,55,000
95,000
20,00,000
7,50,000
5,00,000
1,06,250
6,25,000
4,10,000
1,08,750
25,00,000
10% Debentures
BillsPayable
Creditors
Outstanding Expenses
ASSETS :
LandandBuilding
Plant&Machinery
Furniture
Stockintrade
Sundry Debtors
CashatBank
SOLUTION
Particulars
COMMONSIZEBALANCESHEET
Asat31stMarch2010and2011
AbsoluteAmounts
Percentage& Balance
Sheet Total
2010
2011
2010
2011
Rs.
Rs.
%
%
EquityShareCapital
Reserveand Surplus
NonCurrentLiabilities(Debentures)
CurrentLiabilities
Total
Assets
NonCurrentAssets
CurrentAssets (Stock, Debtors
&Cash)
Total
6,00,000 6,00,000
6,80,000 10,00,000
3,00,000 3,00,000
4,20,000 6,00,000
20,00,000 25,00,000
30
34
15
21
100
24.00%
40.00
12.00
24.00
100.00
12,00,000 13,56,250
60
54.25
8,00,000 11,43,750
20,00,000 25,00,000
40
100
45.75
100.00
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Accountancy& XII
Format of a Common Size Income Statement

COMMONSIZEINCOMESTATEMENT
Fortheyearended31stMarch,2010and2011
Particulars
AbsoluteAmounts
Percentage& Balance
Sheet Total
2010
2011
2010
2011
NetSales
Rs.
Rs.
%
%
Less:CostofGoodsSold
GrossProfit(A)
Office&AdministrationExpenses
Selling&DistributionExpesnses
TotalOperatingExpenses(B)
OperatingProfit(AB)
Add:NonOperatingIncomes
Total Income
Less:NonoperatingExpenses
Net Income(Profit) before tax

Less:Tax
NetIncome (Profit)after tax
Example4:PrepareaCommonSizeofIncomeStatementfromthefollowingStatement
:
Particulars
2007
2008 Particular
2007
2008
Rs.
Rs.
Rs.
Rs.
To Cost of Goods
ByNetSales
1,00,000 1,20,000
Sold
60,000
60,000
To Gross Profit c/d
40,000
54,000
1,00,000 1,20,000
1,00,000 1,20,000
To Office and
ByGrossProftb/d 40,000
54,000
Admn. Exp.
12,000
12,000
ToSellingand
DistributionExp.
5,000
9,600
ToNetProfit
23,000
32,400
40,000
54,400
40,000
54,000
COMMONSIZEINCOMESTATEMENT
AbsoluteAmounts
PercentageofNet
Sales
2007
2008
2007
2008
NetSales
1,00,000 1,20,000
100
100
Less:CostofGoodsSold
60,000
66,000
60(1)
55(4)
Gross Profit
40,000
54,000
40(2)
45(5)
OfficeandAdministrationExp.
12,000
12,000
12(3)
10(6)
SellingandDistributionExp.
5,000
9,600
5
8
Operating Income
23,000
32,400
23
27
Particulars
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Accountancy& XII
AllpercentagewillbecalculatedonthebasisofNetSales.CalculatingofPercentagesisas
follows:
Year2007
Year2008
Note:(1)60,000x100/1,00,000=60%(4)66,000x100/1,20,000=55%
(2)40,000x100/1,00,000=40%
(5)54,000x100/1,20,000=45%
(3)12,000x100/1,00,000=12%
(6)12,000x100/1,20,000=10%
Importance of Common Size Statements
Providescommonbaseforcomparisonirrespectiveofthesizeofindividualitem.
Itpresentsthechangeinvariousitemsinrelationisnetsales,totalassetsortotalliabilities.
Itestablishthetrendinvariousitemsoffinancialstatements.
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Accountancy& XII
CHAPTER11
AccountingRatios
AccountingRatio:Itisarithmeticalrelationshipbetweentwoaccountingvariables.
RatioAnalysis : A tool used by individuals to conduct a quantitative analysis of
infomationinacompany'sfinancialstatements
Expressionofratios:Ratiosareexpressedin
1.Pureformlike2:1allcurrentratiosareexpressedinpureform.
2.Percentagee.g.15%allprofitabilityratiosarepresentedinpercentageform
3.Timeslike4timesallturnonverratiosarepresentedinno.oftimes
4.Fractionlike3/4or.75allsolvencyratiosarepresentedinfractionsexceptInterest
CoverageRatiowhichispresentedinNumberoftimes:
Classificationortypesofratios
Ratiosareclassifiedinto4categories
1.LiquidityRatiosalsocalledasshorttermsolvencyratios.
2.SolvencyRatios
3.ActivityratiosalsoknownasTurnoverratiosorPerformanceratios
4.Profitabilityratios
Note:ForCalculationofratiosFormulamustbewrittenasitcarriesmarks
LiquidityRatios:Thesemeasureshorttermsolvency,i.e.thefirm'sabilitytopaycurrent
dues. These are
1.CurrentRatioalsocalledasworkingcapitalratio
2.LiquidRatioalsocalledasquickratiooracidtestratio.
Currentratioisrelationshipofcurrentassetswithcurrentliabilities.
1. CURRENTRATIO = CURRENTASSETS/CURRENT LIABILITIES
Currentassetsareassetsthatcanbeconvertedintocashorcashequivalentwithinshort
period of time usually a year and current liabilities are those are to be paid in short
period.
Example:Current assetsare:Cash, Bank,Debtor,Stock(also calledas Inventory),
PerpaidExpenses andMarketableSecurities (highlyliquidinvestmentwithverylittle
riskofchangesinvalue),Accruedincome.
CurrentLiabilitiesare:Creditors,BillsPayable,BankOverdraft,OutstandingExpenses,
AdvanceIncome,UnclaimedDividend,Provisionfortaxation.
Significance:Itassessesabilityofbusinesstopayshorttermliabilitypromptly.
IdealRatio:2:1
Lowratioindicatescannotmeetshorttermliability.
Highratioindicatesfundsnotusedeffcientlyandlyingidleorpoorinvestment
(importantforProjectwork)
Example:XYZCompany'stotalcurrentassetsareRs.10,000,000anditstotalcurrent
liabilities areRs.8,000,000 thenits current ratio wouldbe Rs.10,000,000divided by
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Accountancy& XII
Rs.8,00,000whichisequalto1.25XYZCompanywouldbeinrelativelygoodshortterm
financialstanding.
Computationofratio
FromthefollowingbalancesheetofM/s.RamLtd.calculatecurrentratioason31.03.2010
Liabilities
Rs. Assets
Rs.
Capital
21,000 FixedAssets
17,000
Reserves
1,500 Stock
6,200
ProfitandLossAccount
2,500 Debtors
3,200
Bank Overdraft
2,000 Cash
6,600
SundryCreditors
6,000
33,000
33,000
Solution :
CurrentRatio=CurrentAssets/CurrentLiabilities
=Stock+Debtors+Cash/BankOverdraft+SundryCreditors
=Rs.6,200+Rs.3,200+Rs.6,600
=Rs.16,000/Rs.8,000=2:1
Alternativelycurrentassetscanbecalculatedas
CurrentAssets=WorkingCapital+CurrentLiabilities
CurrentAssets=TotalAssetsFixedAssets
CurrentLiabilities=TotalAssetsCapitalEmployed
Indirect question
On payment of current liablity CurrentAssets and Current Liability reduce to same
extent,insuchcasesratiochangee.g.IfcurrentassetsareRs.40,000andcurrentliabilities
areRs.20,000onpaymentofRs.10,000tocreditorsthecash(currentasset)willdecrease
toRs.30,000(Rs.40,000Rs.10,000)&currentliabilitieswilldecreasetoRs.10,000
(Rs.20,000Rs.10,000)
Infirstcasecurrentratiois2:1
Rs.40,000/Rs.20,000
Andissecondcaseitis3:1
Rs.30,000/Rs.10,000
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Balance Sheet ofY Ltd.

Particulars
Note
No.
1.Shareholder'sFunds
(a)ShareCapital
(b) Reserves
12%Loan(LongTerm)
CurrentLiabilities
Figures for
CurrentYears
15,00,000
3,00,000
6,00,000
36,00,000
Total
Assets
Non CurrentAssets
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Accountancy& XII
FixedAssets
22,50,000
CurrentAssets
Inventories
9,37,500
OtherCurrentAssets
10,12,500
Total
36,00,000
TotalAssetsonDebtRatio=TotalAssets/LongTermDebts
=36,00,000/12,00,000=3:1
Balance Sheet ofABC Ltd.

Particulars
Note
No.
Figures for
CurrentYears
1.Shareholder'sFunds
(a)ShareCapital
4,50,000
(b) Reserves General Reserves
1,80,000
LongTermborrowing
(12% Debentures)
75,000
CurrentLiabilities
TradePayable(Creditors)
45,000
Total
7,50,000
2.Assets
NonCurrentAssets
(a)FixedAssets
3,75,000
(b)NonCurrent Investments
2,25,000
CureentAssets
OtherCurrentAssets
1,50,000
Total
7,50,000
Ans.:ProprietoryRatio=Shareholder'sFunds/TotalAssets
ShareholderFunds=ShareCapital+Reserves=4,50,000+1,80,000=6,30,000
PropritoryRatio=6,30,000/7,50,000=.84:1
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Accountancy& XII
6.InterestCoverageRatio:Thisratioestablishesrelationhipbetweenthenetprofit
beforeinterest&taxandinterestpayableonlongtermdebts.Sinceinterestischargeon
profit,netprofittakentocalculateratioisbeforeinterest&taxitdetermineseasewith
whichacompanycanpayinterestexpenseonoutstandingdebt.
InterestCoverageRatio=NetProfit beforeInterest&Tax/Interest
Objective& SignificanceObjectiveis toascertaintheamount ofprofit availableto
cover the interest charge.
PartiesinterestedDebentureholdersunderoflongtermcredit
High Ratio is better for lenders as it indicates higher safety margin
Illustration 1
CalculateInterestCoverageRatio
NetProfit(aftertaxes)= ` 1,00,000
Fixedinterestchargesonlong=` 20,000
Termborrowing
Rateoftax
50%
Solution
InterestCoverageRatio=NetProfit BeforeInterest&Tax/Interest
=1,00,000+1,00,000(tax)+20,000/20,000
=1,00,000+1,00,000(tax)+20,000/20,000=2,20,000/20,000=11Times
Illustration2:Fromthefollowingulternationcalculateinterestcoverageratio:
10,000equitysharesof ` 10each
` 1,00,000
8% Preference Shares
` 70,000
10% Debentures
` 50,000
LongtermLoansfromBanks
` 50,000
Interestonlongtermloansfrombank
` 50,000
Profitbeforetax
` 75,000
Tax
`9,000
Solution:InterestonDebentures=50,000x10/100=25000
ProfitbeforeInterest&Tax=Profitaftertax+tax+Interestondebentures+Interest
onLongtermLoans
=75,000+9,000+5000+5000=Rs.94,000
InterestCoverageRatio=ProfitbeforeInterest&Tax/Interst=94,000/10,000
=9.4Times
ACTIVITIESRATIOS:Theseratios measuretheefficiencyofassetmanagement
and measure the effectiveness with which a concern uses resources at its disposal.
Theseshowrotationofconcerneditemwithinaccountingperiod.
7.INVENTORYTURNOVERRATIO: ItisalsocalledasStockturnoverratio.This
ratioisarelationshipbetweenthecostofgoodssoldduringaparticularperiodoftime
andthecostofaverageinventoryduringaparticularperiod.Itisexpressedinnumberof
times
This ratio indicates whether investment in stock is within proper limit or not.
Thisshowshowquicklyinventoryissold.GenerallyhigherratioIconsideredbetterbut
veryhighratioshowsovertradingandlowratiomeansstockispileduporoverinvestment
instock.
INVENTORYTURNOVER RATIO=Cost ofgoods sold/Averagestock
Averagestock=Openingstock+Closingstock/2
Example:
ThecostofgoodssoldisRs.500,000.TheopeningstockisRs.40,000andtheclosing
stockisRs.60,000(atcost).Calculateinventoryturnoverratio
Calculation:
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Accountancy& XII
InventoryTurnoverRatio=Costofgoodssold/Averagestock
Averagestock=OpeningStock+ClosingStock/2
Rs.40,000+Rs.60,000/2=Rs.50,000
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148
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149
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150
Accountancy& XII
CurrentAssets=Rs.10,000+Rs.5,000+Rs.25,000+Rs.20,000=Rs.60,000
CurrentLiabilities=30,000
NetWorkingCapital=CurrentAssetsCurrentLiabilities=Rs.60,000Rs.30,000
=Rs.30,000
SothewokingCapitalTurnoverRatio=150,000/30=5times
10.CreditorsTuroverRatio:ThisisalsocalledasPayableTurnoverRatio...Itis
relationship between net credit purchase and total payable or average payable.
Total payables are bills payable and creditors
CreditorsTurnoverRatio=Netcreditpurchases/totaloraveragepayable
Average payable = (Opening creditors + Opening bills payable)+(closing creditors +
closingbillspayable)/2
Averagepaymentperiod=totaloraveragepayable/NetcreditpurchasesxNoofmonths
ordaysinyear
Objectives:Highratioshowsstricttermsbysuppliersandquickpaymentafterashort
periodandlowratioshowsliberalcredittermsgrantedbysupplier.
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152
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153
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OperatingProfits=NetSalesOperatingCost
OperatingProfits=GrossProfitOperatingExpenses
Illustration 1
ComputeOperatingProfitRatiofromthefollowing
`
NetProfit
6,00,000
LessonSaleoffurniture
20,000
ProfitonSaleofInvestment
60,000
Interestpaidonloan
60,000
Interest from Investment
40,000
Sales
11,60,000
Solution:NonOperatingExpenses=InterestonLoan+Lossonsaleoffurniture
= ` 60,000+20,000= ` 80,000
NonOperatingIncome=InterestReceivedonInvestment+ProfitonsaleofInvestment
= ` 40,000+60,000= ` 1,00,000
OperatingProfit=NetProfit+NonOperatingExpensesNonOperatingIncome
=6,00,000+80,0001,00,000= ` 5,80,000
OperatingprofitRatio=OperatingProfit/NetSalesx100
=5,80,000/11,60,000x100=50%
Illustration 2
CalculateOperatingProfitratiowhenNetSalesare `10,00,000,GrossProfitis20%&
154
Accountancy& XII
OperatingExpenses ` 20,000
Solution:GrossProfit=20/100x10,00,000=2,00,000
OperatingProfit=GrossProfitOperatingCost
=2,00,00020,000= ` 1,80,000
OperatingProfitRatio=OperatingProfit/NetSalesx100
=1,80,000/10,00,000x100=18%
OperatingProfitscanbecalculatedbyformula
NetOperatingProfits=NetSales(OpeningStock+Purchase+administrativeexpenses
+SellingExpensesClosingStock)
155
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156
Accountancy& XII
Misc Problem : With the help of the given information, calculate any three of the
followingratios:
(i)OeratingRatio(ii)CurrentRatio(iii)StockTurnoverRatioand(iv)DebtEquityRatio
Particulars
`
EquityShareCapital
5,00,000
9% Preference Share Capital
4,00,000
12%Debenture(NonCurrentLiabilities)
2,40,000
General Reserve
40,000
Sales
8,00,000
Openingstock
48,000
Purchases
5,00,000
Wages
30,000
ClosingStock
52,000
Selling&DistributionExpenses
6,000
Other CurrentAssets
2,00,000
CurrentLiabilities
1,50,000
Sol.:
OperatingRatio=OperatingCost/NetSalesx100
OperatingCost:CostofGoodssold+Selling&distributionExpenses
Cost of Goods sold = opening stock+purchase + wages (Direct Expenses) Closing
stock
=Rs.48,000+Rs.5,00,000+Rs.30,000Rs.52,000=Rs.5,26,000
OperatingCost=Rs.5,26,000+Rs.6,000=Rs.5,32,000
OperatingRatio=Rs.5,32,000/Rs.8,00,000x100=66.5%
CurrentRatio=CurrentAssets/CurrentLiabilities
CurrentAssets=Stock+OtherCurrentLiabilities=Rs.52,000+Rs.2,00,000=Rs.2,52,000
CurrentRatio=Rs.2,52,000/Rs.1,50,000=1.68:1
StockTurnoverRatio=Costofgoodssold/AverageStock
AverageStock=OpeningStock+ClosingStock/2=Rs.48,000+Rs.52,000=Rs.50,000
StockTurnoverRatio=Rs.5,26,000/Rs.50,000=10.52times
DebtEquityRatio=Debts(LongTermLoan)
EquityShareholder'sFunds
=Rs.2,40,000/Rs.9,40,000=255:1
Advantage
1.JudgingoperatingefficiencyofBusiness
2.Usefulforcasting
3.Usefulinlocationweakpoints
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Accountancy& XII
4.UsefulinInterandintrafirmcomparison
Limitations:
1.Nostandarddefinition
2.Ifdifferentaccountingpoliciesarefollowedcomparisonismeaningless
3.Ignoresqualitativefactors
InterestCoverageRatio:Thisratioestablishesrelationshipbetweenthenetprofitbefore
interest&taxandinterestpayableonlongtermdebts.Sinceinterestischangeonprofit
netprofittakentocalculateratioisbeforeinterest&tax.Itdeterminescasewithwhich
acompanycanpayinterestonoutstandingdebt.
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Accountancy& XII
CHAPTER12
CASHFLOWSTATEMENT
Meaning : It is a statement that shows flow (inflow or outflow) of cash and cash
equivalentsduringagivenperiodoftime.
As perAccounting Standard3(Revised) the changes resulting in theflow ofcash &
cashequivalentsarisesonaccountofthreetypesofactivitiesi.e.
(1)CashflowfromOperatingActivities.
(2)CashflowfromInvestingActivities.
(3)CashflowfromFinancingActivities.
Cash:Cashcomprisescashinhandanddemaddepositswithbank.
Cashequivalents:Cashequivalentsareshorttermhiglyliquidinvestmentthatarereadily
convertibleintoknownamountofcashandwhicharesubjecttoaninsignificantriskof
changeinthevalue(ofshotterminvestment).Generallythesesinvestmenthaveamaturity
periodoflessthanthreemonths.
Some example of cash equivalent : Bank overdraft, cash credit, shortterm deposits,
maketable securities,treasury bills, commercialpapers, money market funds (mutual
fund), investment in preference shares if redeemable within three months and ensure
thatthereisnoriskofthefailureofthecompany.
Some type of transaction which are considered movement between cash and cash
equivaletnsaregivenbelow:
1.Cashdepositedintobank.
2.Cashwithdrawnfrombank.
3.Saleofcashequivalentsecurities(e.g.saleofshortterminvestment,saleofcommercial
papers)
4. Purchase of cash equivalent securities (e.g. Purchase of shortterm investment,
PurchaseofTreasurybills).
The above types of transaction are part of cash and cash equivaltens, so these are
included in opening and closing cash and cash equivalent only. So these types of
transanctionnot beincludedincashfromdifferentactivitieslikeoperating,investing,
financingactivities.
Preparation of cash flow statement :
Cashflowfromoperatingactivities
_______
Cashflowfrominvestingactivities
_______
Cashflowfromfinancingactivities
_______
Net increase/decrease incash & cash equivalent (Totaloftheabovethreeactivities)
Add:Cash&Cashequivalentinthe
beginningoftheyear(Giveninopeningbalancesheet)
_______
Cash&Cashequivalentattheendoftheyear
_______
Note:Thestudentshouldensurethatthecash&Cashequivalentattheendoftheyear
as calculated above will be same as cash & cash equivalent given in
closingbalancesheet
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Accountancy& XII
OBJECTIVES OF CASH FLOW STATMEMENT :

1. Toascertainhowmachcashorcashequivalentshavebeengeneratedorusedin
differentactivitiesi.e. operating/investing/financingactivity.
2. To ascertain the net changes in cash and cash equivalents.
3. To assesss the causes of difference between actual cash & cash equivalent and
relatednet earning/income.
4. Tohelpinformulationoffinancialpoliciessuchasdividendpolicy,fixedassests
policy,capitalstructurerelatedpolicy.
5. Tohelpinshorttermfinancialplaning.
6. Toascertaintheliquidityofenterprises
LIMITATIONS OF CASH FLOW STATEMENT
1. Non cash transaction are not taken into consideration like sahres or debentures
issuedtovendores,deprecaitionchargedduringtheyear.
2. Itisastatementrelatedwithpastdata.
3. Itisnotusedforjudgingtheprofitabilityofenterprises.
4. Accrual accounting concept is ignored in this statement e.g. credi sales, credit
purchases,outstandingexpesnes,accruedincomearenotincluded.
Computation of Cash flow from different activities.
(1) Cash flow from operating activities : operating activities are the main revenue
generatingactivitiesoftheenterprises.Itincludesthatransactionalsowhicharenot
includedininvestingandfinancingactivities.
Accounting standard 3 (Revised) has suggested two methods of computing net cash
fromoperatingactivities(A)DirectMethod(B)IndirectMethod.
(C) Indirect Method of calculating the cash flow from OperatingActivities :
UnderthismethodNetProfitBeforeTaxandExtraordinaryItemisthestartingpoint
furthercalculations.
CalculationsofNetProfitBeforeTaxExtraordinaryItem:
Differencebetweenclosingbalanceandopeningbalanceofprofit&lossA/c ____
Add:1.Proposesdividentforcurrentyear
____
2.InterimDividentpaidduringtheyear.
____
3.ProfitTransferredtoReserve
(Ifreserveofcurrentyearincreasedfrompreviousyear)
____
4.ProvisionforTaxationmadedurningtheyear
____
Less:1RefundofTaxcreditedtoP&LA/c
____
2.ExtraordinaryitemifanyCreditedtoP&LA/c
____
NetProfitBeforeTaxandExtraordinaryItem
Extraordinaryitems:Theseitemsarenotrelatedtonormalbusinessoperationandnot
includedininvestingandfinancingactivities
160
Accountancy& XII
Format for Cash Flow from OperationActivities

Particulars
1. CashFlowfromOperatingActivities
(A)NetProfitBeforeTaxandExtraordinaryItem
Adjustmentfornoncashandnonoperatingitmes
Add:1.Derpreciationchargedduringthecurrentyear
2.Preliminayexpesnes,Discountonissueofsharesand
debentures written off
3.Goodwill,PatentsandTrademarkAmortised(writtenoff)
4.InteresonBorrowingandDebentures.
5.LossonSaleofFixedAssets
Less:1.Interestincome
2.DividendIncome
3.Rentalincome
4.ProfitonsaleofFixedAssets
(B)OperatingProfitbeforeWorkingCapitalchanges
Add:IncreaseinCurrentLiabilitiesand
DecreaseincurrentAssets(otherthancashandcashequivalent)
Less:IncreaseincurrentAssets(otherthancashandcash
equivalent)andDecreaseincurrentliabilities
(C)CashGeneratedfromoperations
Less:Incometaxpaid(NetofRefundreceived)
(D)CashflowbeforeExtraordinaryitem
Extraordinaryitems+/
(E)NetCashFrom(orusedin)OperatingActivities
(` )
______
______
______
______
______
ForthecalculationofProposedDividendduringthecurrentyeartheproposeddividend
accountistobepreparedasfollows:
Dr.
Cr.
ProposedDividendAccount
Date
Particular
To(Dividendpayable
A/c)
Tobalancec/d
` DateParticulars
ByBalanceb/d
161
ByProfit&LossA/c
(Proposed dividend during

the current year)
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2.If anyother informationis notgiven inthe questionabout finaldividend paidamount

thenthepreviousyearproposeddividendisassumedasdividendpayableincurrentyear.
Current year proposeddividend amount is assumed as proposeddividend in current year
andtobeaddedinoperatingactivitiestocalculatednetprofitbeforetaxandextraordinary
item.
3. Previous year proposed dividend unpaid dividend = final dividend paid during the
currentyeariscashusedinfinancingactivities.
Comprehensive :
Illustration No.5 : Prepare a cash flow statementfrom the following Balance Sheet of
Dev'Ltd.:
Particulars
I.EquityandLiabilities
1. Shareholder's funds :
(a)ShareCapital
(b)ReserveandSurplus
2. ShareApplicationmoney pending allotment
3.NoncurrentLiabilities
4.CurrentLiabilities
TradePayables
Total
II.Assets
1. NoncurrentAssets
(a)FixedAssets
2.CurrentAssets
(a) Inventories
(b)TradeReceivables
(c)CashandCashequivalents
Total
NotestoAccountNo.1
Particulars
Reserve and Surplus

1. Shareholder's funds :
GeneralReserve
ProfitandLossA/c
Total
171
31.03.2011
( ` )
31.03.2012
( ` )
65
42.5
10.5
118
65
25
7.7
77.7
83
46.7
13
19.5
2.5
118
11
18
2
77.7
31.03.2012
( ` )
31.03.2011
( ` )
27,500
15,000
42,500
15,000
10,000
25,000
Accountancy& XII
AdditionalInformation:
(1)Depreciationonfixedassetsfortheyear201112wasRs.14,700
(2)AninterimdividedofRs.7000hasbeenpaidtotheshareholdersduringtheyear.
Solution:CalculationofNetProfitbeforetaxandExtraordinaryitem:
NetProfitasPerProfit&LossA/c(1500010000)
5,000
Add:TransfertoGeneralReserve(27,50015,000)
12,500
InterimDividendPaidduringtheyear
7,000
NetProfitBeforeTaxandExtraordinaryitem
24,500
Cash Flow Statement
fortheyearended31stMarch2012
Particulars
(Rs.)
(Rs.)
31.03.2012 31.03.2011
(A)CashFlowfromOperatingActivities:
NetProfitbeforetaxandExtraordinaryitem
24,500
AdjustmentforNonCashandNonoperatingitem:
Add:DepreciationonfixedAssets
14,700
OperatingProfitbeforeWorkingCapitalChanges
39,200
AdjustmentforWorkingCapitalChanges:
Add:IncreaseinTradeCreditors
2,800
Less:IncreaseinStock
(2,000)
Increase in Debtors
(1,500)
(700)
CashflowfromOperatingActivities
38,500
(B)CashFlowfromInvestingActivities
Purchase ofFixedAssets
(51000)
NetCashusedinInvestingActivities
(51000)
(C)CashflowfromfinancingActivities
Proceedsfromissueofequitysharecapital
20,000
InterimDividendPaid
(7,000)
NetCashfromFinancingActivities
13,000
13,000
NetIncreaseinCashandCashEquivalents
500
CashandCashequivalentsinthebeginningoftheyear
2000
CashandCashequivalentsattheandoftheyear
2500
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Accountancy& XII
Dr.
Date
FixedAssetsA/c(onoriginalcost)
Cr.
Particulars
Rs. Date Particulars
Rs.
ToBalanceb/d
46,700
ByDepreciationA/c
14,700
ToBankA/c
51,000
(Currentyeardep.on
remainingfixedassets)
(Additionalpurchase)
Bybalancec/d
83,000
173
Accountancy& XII

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CLASSXII

For transfer to Profit (i.e. Credit Balance of Profit and Loss

When date of Drawings is not given

investedinthebusiness bythefirmis ` 3,50,000.Therateofinterestexpectedfrom

Accounting treatment of Reserves andAccumulated Profits:

Sometimesthe newpartner doesnot bringhis shareof goodwillin cash.Then hisshare of

C(`) D (`) Particulars A(`) B(`)

A(`) B(`) C(`) D (`) Particulars

A(`) B(`) C(`) D (`)

10,000 6,000 4,000

36,000 44,000 52,000

3,000 1,800 1,200

36,000 44,000 52,000

36,000 44,000 52,000 88,000

Balance Sheet of the New Firm

(c) Thatlandandbuildingbebroughtupto ` 1,19,700.

aluationA/c 1,508 1,256

Balance Sheet of the New Firm

42,000 33,000 20,000

Balance Sheet (after C's admission)

Accounting treatment in case of retirement

OnViveks retirementit wasagreedthat:

6,400 ByBalanceb/d 92,000 60,000 40,000

ByrevaluationA/c 3,080 3,080

95,080 82,280 41,540

(Balance in JL PolicyA/c has transferred to all Partners Capital A/cs in old

This account records only those

X agreed to pay off his wife's loan.

(ii) Debtors of Rs.5,000 proved bad.

Discount on issue of sharesAccount Dr.

Purchase of business example :

Q. : A company purchased a running business from Mahesh for a sum of ` 1,50,000

Forfeiture ofShares originally issuedat discountand reissued ata premium

When Debentures are issued at Premium redeemable at premium

Discount on issueof DebentureAccount

(Amount of Income tax

2.Redemptionoutofprofit:Redemptionout ofprofitmeansthat adequateamount

(B) Redemption At Premium : Illustration 2. Z Ltd. Redeemed its 1,00,000 10%

Format of a Common Size Income Statement

Net Income(Profit) before tax

NetIncome (Profit)after tax

Balance Sheet ofY Ltd.

Balance Sheet ofABC Ltd.

OBJECTIVES OF CASH FLOW STATMEMENT :

Format for Cash Flow from OperationActivities

(Proposed dividend during

2.If anyother informationis notgiven inthe questionabout finaldividend paidamount

Reserve and Surplus

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