Accountancy 12 English Main PDF

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
2 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
3 Accountancy& XII
Chapters
1. Fundamentalsofpartnership 5
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
4 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
5 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 NotAllowed
aPartner
InterestonloanbyaPartner Interestisallowed@6%perannum
DISTRIBUTIONOFPROFITSAMONGPARTNERS
AProfitandLossAppropriationAccountispreparedtoshowthedistribution
ofprofitsamongpartners aspertheprovisionofPartnershipDeed(orasperthe
provisionofIndianPartnershipAct,1932intheabsesnceofPartnershipDeed).Itis
anextensionofProfitandLossAcccount. Itisnominalaccount.
TheJournalEntriesregardingProfitandLossAppropriationAccountareasfollows:
1. FortransferofbalanceofProfitandLossAccount
ProfitandLossA/c Dr.
ToProfitandLossAppropriationA/c
(BeingnetprofittransferredtoP&LAppropriationA/c)
2. 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)
SPECIMENOFPROFITANDLOSSAPPROPRIATIONACCOUNT
ProfitandLossAppropriationAccount
Fortheyearendingon________________
Dr. Cr.
Particulars ` Particulars `
ToInterestonCapital ByProfitLossA/c
A (NetProfitstransferredfrom
B P&LA/c)
ToPartner's Salary/ ByInterstonDrawings
Commission A
To Reserves B
To Profits transferred to
capitalA/cof:
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. Partner'sCapitalA/cs Cr.
X Y X Y
Particulars ` ` Particulars ` `
ToCash/BankA/c ByBalanceb/d
(CapitalWithdrawn) (OpeningCr.Balance)
ToBalancec/d ByCash/BankA/c
(Closingbalance) (AdditionalCapital
Introduced)
2. CurrentAccount
TheCurrentaccountmayshowadebitorcreditbalance.Alltheusual
adjustments such as Interest on Capital, partner's salary/commission,
drawings(outofprofits),interestondrawingsandshareinprofitsorlosses
etc.arerecordedinthisaccount
X Y X Y
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
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
9 Accountancy& XII
2. FluctuatingCapitalAccounts:
Inthismethodonlyoneaccounti.e.,CapitalAccountofeachandeverypartner
ispreparedandalltheadjustmentsuchasinterestoncapital,interestondrawings
etc.arerecordedinthisaccount.Underthismethod,Capitalaccountmayshow
adebitorcreditbalanceandthebalanceofthisaccountchangesfrequentlyfrom
timetotimethereforeitiscalledfluctuatingCapitalAccount
X Y X Y
(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)
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
(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 __________

Less:1.AdditionalCapitalIntroduced (xxxxxx)
2.Profitsduringtheyear (xxxxxx)
()
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
1.SimpleInterestMethod
Dateof Amountof Monthstill Interest@12%p.a
Withdrawal Drawings(`) March31,2011 (`)
01.08.2010 5,000 08 400
31.12.2010 10,000 03 300
31.03.2011 15,000 00 000
700
12 Accountancy& XII
2.ProductMethod
Dateof Amountof Monthsforwhich Product
Withdrawal Drawings(`) amounthas (`)
withdrawntill
December31,2011
01.08.2010 5,000 08 40,000
31.12.2010 10,000 03 30,000
31.03.2011 15,000 00 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 6.5 7.5 9 3.5

madeintheBeginning
ofeachperiod
Whendrawingare
madeintheMiddleof
eachperiod 6 6 6 3
13 Accountancy& XII
Whendrawingare
madeintheEndof
eachperiod
5.54.5 32.5
Illustration:
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:
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. Cr.
To Profits transferred to ByProfitandLossA/c
CapitalA/cof: Rs.
A2,12,500 (Net Profits 4,30,000
B2,12,500 Less:Intereston
4,25,000 A'sLoan (5,000) 4,25,000
4,25,000 4,25,000
15 Accountancy& XII
Dr. Partner'sCapitalA/cs Cr
Date Particular A B Date Particular A B
31.03.2011 To 01.04.2010 ByBankA/c 5,00,000 3,00,000
Balance 7,12,500 5,12,500 31.03.2011 By Profit and
c/d Loss
Appropriation
A/c 2,12,500 2,12,500
7,12,500 5,12,500 7,12,500 5,12,500
JOURNAL
Date Particulars L.F. Debit Credit
Rs. Rs.
31.03.2011 ProfitandLossAppropriationA/c Dr 4,25,000
ToA'sCapitalA/c 2,12,500
ToB'sCapitalA/c 2,12,500
(Beingprofitdistributedamongthe
partners)
Dr. A'sLoanA/c Cr.

Date Particulars Amount Date Particulars Amount
Rs.
2011 ToBalancec/d 2,05,000 2010
March, Oct., 31 ByBankA/c 2,00,000
31 2011
March,31 ByIntereston
LoanA/c 5,000
2,05,000 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 B C
Rs. Rs. Rs.
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) +/ +/ +/
+IndicatesAmounttobeCreditedtoPartner'sCapitalAccount
indicatesAmounttobeDebitedtoPartner'sCapitalAccount
JOURNAL
Rs. Rs.
Partner'sCapitalA/c(Amounttobe Dr
Debited)
ToPartners'CapitalA/c(Amountto
beCredited)
(Beingadjustmententrypassed)
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:
BooksofManoj,SahilandDipankar
JOURNAL
Rs. Rs.
Dipankar'sCurrentA/c Dr. 30,000
ToManoj'sCurrentA/c 30,000
(Beingadjustmententrypassed)
STATEMENTSHOWINGADJUSTMENT
Particulars Manoj Sahil Dipankar

Rs. Rs. Rs.
A.Amounttobegiven(Credited)
InterestonCapital 90,000 60,000 30,000
TotalA 90,000 60,000 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
` `
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 B
` `
A.Amounttobegiven(CREDITED)
InterestonCapital 6,240 3,360
(Not provided)
SalarytoA 12,000
(Not provided)
TOTALA 18,240 3,360
B.Amountalreadygiventobetakenbacknow
(DEBITED):
LosstothefirmduetoInterestonCapitalandSalaryto
Abedebitedtothepartnersin
theirprofitsharingratio 12,960 8,640
(Rs.18,240+3,360=21,600)
TOTALB 12,960 8,640
NETEffect(AB) 5,280 5,280
Credit Debit
19 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.
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. Cr.
(3/6 of Rs.90,000) 45,000 (Net Profits) 90,000
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 90,000
Case3.WhenGuaranteeisgivenbyAandBequally
Dr. Cr.
(3/6 of Rs.90,000) 45,000 (Net Profits) 90,000
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 90,000
21 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 30,000
TotalProfits 45,000
Averageprofit=Totalprofit/No.ofyears
= ` 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
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
` `
2011 Profit& Loss Dr. 3,60,000
Apr.1 GeneralReserveA/c Dr. 90,000
ToVaishali'sCapitalA/c 2,00,000
ToVinod'sCapitalA/c 1,50,000
ToAnjali'sCapitalA/c 1,00,000
(Profitandgeneralreservedistributed
inoldratio)
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
` `
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
` `
2011 Keshav'scapitalA/c Dr. 32,000
Apr.1 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:
28 Accountancy& XII
Neha=2/94/9=2/9(Gain)
Niharika=3/93/9=0(Nochange)
Nitin=4/92/9=2/9(Sacrifice)
JOURNAL
` `
Neha'scapitalA/c Dr. 20,000
ToNitin'scapitalA/c 20,000
(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.
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
` `
2011 RevaluationA/c Dr. 56,200
To Stock 20,000
To Machinery 31,800
ToProvisionfordoubtfuldebtsA/c
(Revaluationofassets)
BuildingA/c 80,000
Sundry creditors 5,000
ToRevaluationA/c 85,000
(Revaluationofassetsandliabilities)
RevaluationA/c 28,800
ToPiyush'scapitalA/c 10,800
ToPooja'scapitalA/c 10,800
ToPraveen'scapitalA/c 7,200
(Profitonrevaluation)
RevaluationAccount
To stock 20,000 Bybuilding 80,000
To machinery 31,800 By sundry creditors 5,000
To Provisionfor doubtful debts 4,400
Toprofitdistributed:
Piyush 10,800
Pooja 10,800
Praveen 7,200
28,800
85,000 85,000
30 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
Sundry creditors 43,000 Cashatbank 74,000
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
Rs. Rs.
2011 Piyush'scapitalA/c Dr. 2,000
Apr.1 ToPooja'scapitalA/c 1,200
ToPraveen'scapitalA/c 800
(Adjustmentforprofitonrevaluation)
Capital Accounts
Particulars Piyush Pooja Praveen Particulars Piyush PoojaPraveen
To Pooja's 1,200 ByBalanceb/d 4,00,0003,00,0003,00,000
CapitalA/c
To Praveen ByPiyush's
CapitalA/c 800 CapitalA/c 1,200 800
ToBalance 3,98,000 3,01,200 3,00,800
C/d
4,00,000 3,01,200 3,00,800 4,00,0003,01,2003,00,800
Balance Sheet
asonApril1,2011
Sundry Creditors 48,000 Cashatbank 74,000
Capitalaccount: Stock 2,40,000
Piyush 3,98,000 Machinery 3,18,000
Puja 3,01,200 Building 4,00,000
Praveen 3,00,800
10,00,000
11,20,000 11,20,000
32 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
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
Rs. Rs.
BankA/c Dr. 21,000
ToPremiumforGoodwillA/c 21,000
(Beingtheamountofgoodwilland
capitalbroughtinbynewpartnerC)
PremiumforGoodwillA/c Dr. 21,000
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

` `
BankA/c Dr. 40,000
ToC'sCapitalA/c 10,000
(Beingtheamountofgoodwillandcapital
broughtinbynewpartnerC)
i.e.,1:1)
A'scapitalA/c Dr.
B'scapitalA/c Dr.
ToGoodwillA/c 1,800
(Beingexistinggoodwillwrittenoffbetween 1,200
oldpartnersintheiroldratioi.e.,3:2) 3,000
38 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
` `
LandA/c Dr. 90,000
MachineryA/c Dr. 70,000
StockA/c Dr. 40,000
DebtorsA/c Dr. 60,000
ToPremiumforGoodwillA/c(5,20,000x3/13) 1,20,000
ToDeepak'sCapitalA/c(Balancingfigure) 1,40,000
(Beingtheamountofgoodwillandcapitalbrought
inkindbynewpartner)
PremiumforGoodwillA/c Dr. 1,20,000
ToAnubhav'scapitalA/c 72,000
ToBabita'scapitalA/c 48,000
(Beingtheamountofgoodwilldistributedbetween
AnubhavandBabitaintheirsacrificingratioi.e.3:2)
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
` `
1. CashA/c Dr. 50,000
ToGeeta'sCapitalA/c 50,000
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

` `
BankA/c Dr. 1,000
(Beingtheamountofgoodwillbroughtin
cash by new partner)
Chinki'scapitalA/c Dr. 800
ToSheetal'scapitalA/c 900
ToRaman'scapitalA/c 900
(BeingChinki'sshareofgoodwilltransferred
tosacrificingpartnersintheirsacrificingratio
i.e.,1:1)
Sheetal'scapitalA/c Dr. 3,000
Raman'scapitalA/c Dr. 3,000
ToGoodwillA/c 6,000
(Beingexistinggoodwillwrittenoffbetweenold
partnersintheiroldrationi.e.,equal)
Case(vi)Gainmadebyanoldpartner:
Illustration13.(Sacrifice/Gainmadebyapartner)
AshokandRaviwerepartnersinafirmsharingprofitsandlossesintheratioof7:3.Theyadmitted
Chanderasanewpartner.ThenewprofitratiobetweenAshok,RaviandChanderwillbe2:2:1.
Chanderbrought24,000forhisshareofhisgoodwill.Passnecessaryjournalentriesforthe
treatmentofgoodwill.
(CBSE 2000)
Solution:
Journal

` `
BankA/c Dr. 24,000
by new partner)
Ravi'scapitalA/c Dr. 12,000
ToAshok'scapitalA/c 36,000
(BeingthegoodwillcreditedtoAshok's
capitalA/c)
41 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

` `
BankA/c Dr. 26,000
ToC'scapitalA/c 26,000
by new partner)
C'scapitalA/c Dr. 7,500
(Beingthegoodwillcreditedtosacrificing
partners'capitala/csintheirsacrificing
ratioi.e.,equal)
42 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.
Creditors 18,000 Debtors 22,000
Generalreserve 25,000 Less provision for
D.D. 1,000 21,000
Workmens compensation fund 15,000 LandandBuilding 18,000
Capital:Shashi 15,000 Plantandmachinery 12,000
Ashu 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
ToProvisionforD.D. 1,500 ByLandandBuildingA/c 3,000
ToCapitalA/cs: By Stock 2,500
Shashi3/5 2,400
Ashu2/5 1,600
4,000
5,500 5,500
Partners'CapitalAccount
Particulars Sashi Ashu Tanya Particulars Shashi Ashu Tanya
Tobalance 40,200 26,800 15,000 Bybalance
c/d 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 6,000 4,000
40,200 26,800 15,000 40,200 26,800 15,000
BalanceSheetoftheNewFirm
Workmen compensation fund 12,000 Less provision for
D.D. 2,500 19,500
Capital: Shashi 40,200 LandandBuilding 21,000
Ashu 26,800 Plantandmachinery 12,000
Tanya 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
Capital Cash 18,000
A 36,000 Billsreceivable 24,000
B 44,000 Furniture 28,000
C 52,000 1,32,000 Stock 44,000
BillPayable 32,000 Investments 32,000
Profit and LossAccount 14,000 Machinery 34,000
Goodwill 20,000
2,42,000 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
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(`) B(`) C(`) D (`) Particulars A(`) B(`) C(`) D (`)
To Revaluation 1,260 1,890 3,150 By balance 36,000 44,000 52,000
A/c c/d
ToGoodwillA/c 4,000 6,000 10,000 By P/LA/c 2,800 4,200 7,000
ToA's capital 8,00 By D's
To B's capital 1,000 capital 8,000 1,200 2,000
To C's capital 2,000
ToBalanceC/d34,340 41,510 47,850 28,000 ByCashA/c 32,000
39,600 49,400 61,000 32,000 39,600 49,900 61,000 32,000
45 Accountancy& XII
BalanceSheetofNewFirm
Capital: Cash 50,000
A 34,340 BillReceivable 24,000
B 41,510 Furniture 23,800
C 47,850 Stock 48,000
D 28,000 1,51,700 Debtors 42,000
Creditors 64,000 Investment 32,000
BillsPayable 32,000 Machinery 28,900
Outstanding rent 1,800 Prepaidsalaries 800
2,49,500 2,49,500
5.Adjustmentofcapitalinnewprofitsharingratio
Illustration17A,BandCarepartnerssharingprofitsandlossesintheratioof5:3:2On
March31st,1998theirBalanceSheetwasasfollows:
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
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 10,000 6,000 4,000 ByBalanceb/d 36,000 44,000 52,000
ToRevaluation 6,000 3,600 2,400 ByGeneralreserve 7,000 4,200 2,800
A/c 36,000 44,000 52,000 ByJointlifepolicy 6,000 3,600 2,400
ToBalancec/d ByPremium
52,000 53,600 58,400 for goodwill 3,000 1,800 1,200
36,000 44,000 52,000 88,000 By Balance 36,000 44,000 52,000
ToBalancec/d b/d
36,000 44,000 52,000 88,000 BycashA/c 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

Creditors 64,000 Cash 1,12,000
BillPayable 22,000 Billsreceivable 14,000
Outstanding rent 1,900 Stock 48,000
Capital Debtors 42,000
A 36,000 Machinery 79,000
B 44,000 JointLifePolicy 12,000
C 52,000
D 88,000 2,20,000
3,07,900 3,07,900
Illustration18:FollowingistheBalanceSheetofA,BandCsharingprofitsandlossesin
theratioof6:5:3respectively
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 59,700 LandandBuilding 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
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(`) B(`) C(`) D (`)
Particulars A(`) B(`) C(`) D (`)
To Goodwill 4,500 3,750 2,250
ByBalanceb/d 70,800 59,700 29,100
ToA's capital 1,508
By General 9,000 7,500 4,500
To B's capital 1,256
reserve 8,160 6,800 4,080
To C's capital 754
By rev 35,400
ToBalancec/d 84,968 71,506 38,184 31,882
aluationA/c 1,508 1,256 754
89,468 75,256 38,434 35,400
BycashA/c 89,468 75,256 38,434 35,400
Tobalancec/d 95,646 79,705 47,823 31,882
By D's Capital
Bybalanceb/d84,968 71,506 36,184 31,382
BycashA/c 10,678 8,199 11,639
95,646 79,705 47,823 31,882 95,646 79,705 47,823 31,882
Balance Sheet of the New Firm

Creditors 37,800 Cash 69,696
BillsPayable 12,600 Debtors 52,920
Outstandingrepairs 2,640 Stock 12,860
Capital Furniture 12,860
A 95,646
B 79,705
C 47,823
48 Accountancy& XII
D 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:
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.
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
Balance Sheet (after C's admission)
Sundry Creditors 13,600 Plant 32,000
Outstandingliability 2,000 Patents 10,000
CapitalA/cs: Stock 18,000
A 36,000 Debtors 18,000
B 24,000 Less:provisionforD.D. 17,100
(900)
C 20,000 80,000 Bank 32,000
CurrentA/cs:
A 5,100
B 8,400 13,500
1,09,100 1,09,100
Notes:(1)Calculationofnewprofitsharingration:
SharegiventoC=1/4BalanceofProfit=11/4=3/4
50 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 SacrificingRatio GainingRatio
1.Meaning Itistheratioinwhichtheold Itistheratioinwhichthe
partnerssurrenderapartof remainingpartner'sacquire
theirshareofprofitsinfavour theoutgoingpartner's
ofanewpartner. shareofprofit
2.Whencalculated Atthetimeofadmissionofa Atthetimeofretirementor
newpartner deathofapartner.
3.Formula SacrificingRatio= GainingRatio=NewRatio
OldRatioNewRatio OldRatio
4.Purpose Newpartnersshareofgoodwill Retiringordeceased
isdividedbetweenoldpartners partner'sshareofgoodwill
inthisratio. ispaidbythecontinuing
partnersinthisratio
53 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 LF Amt.(`) Date Particulars L Amt(`)
2008 2008 B'sCapA/c F 66,000
Dec31 BankA/c Jan1
(22,000+6600) 28,600 Dec31 InterestA/c
" Balancec/d 44,000 6,600
2009 72,600 (10%of66,000) (72,600)
Dec31 BankA/c 26,400 2009 Balanceb/d 44,000
" Balancec/d 22,000 Jan1
Dec31InterestA/c(10% 4,400
48,400 of 44,000) 48,400
2010 2010
Dec31 BankA/c 24,200 Jan1 Balanceb/d 22,000
(FinalPayment) Dec31
InterestA/c ( 2,200
24,200 10%of22,000) 24,200
57 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
Y Z
NewCapitalbasedonNewRatio 80,000 40,000
i.e.2:1(totalbeing1,20,000)
Existingcapitalafteradjustments 70,000 50,000
Cashisbeingbroughtinor 10,000 10,000
paidoff (broughtin) (tobepaid)
JournalEntries
Dr. (` ) Cr.(`)
1.BankA/cDr
ToY'sCapA/c 10,000 10,000
(AmounttobebroughtinbyY)
2.Z'sCapA/cDr
(AmounttobewithdrawnbyZ) 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. Cr.
Particulars Amount Assets Amount
( ` ) ( ` )
To Stock 1,800 ByPremises 9,700
ToProvisionforlegal 2,400 ByFurniture 2,000
Claim ByProvisionFor
To profit Transferred doubtful debts
Vijay 3,080
Vivek 3,080
Vinay 1,540
7,700
11,900 11,900
Capital Accounts
Dr. Cr.
Particulars Piyush Pooja Praveen Particulars Piyush Pooja Praveen
ToVivek's 12,800 6,400 ByBalanceb/d 92,000 60,000 40,000
Capital
ToVivek's 50,000 ByrevaluationA/c 3,080 3,080 1,540
Loan
ToBank 32,280 ByVijay'sCapital
12,800
ToBalance 82,280 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
( ` ) ( ` )
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
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
( ` ) ( ` )
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
` `
2010 GeneralReserveA/c Dr 10,000
14th ToN'sCapitalA/c 10,000
March (BeingtransferofN'sshareofgeneral
reserveofhisCapitalA/c)
65 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:
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)
ToPartnersCapitalA/cs (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)
ToPartnersCapitalA/c (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. Cr.
ToSundryAssetsA/c BySundryLiabilitiesA/c
(Excludingcashorbank (ExcludingCr.Balanceof
balance,fictitiousassets,Dr. P&LA/c,Reserves,Partners'
balanceofP&LA/c,Dr. capital/currentA/cs,Loan
balanceofpartners'capital/ fromPartnerandBank
currentA/cs, Loans to Overdraft)
partners ByProvisionon anyAssets
ToCash/BankA/c A/c
(Amountpaidfordischarging (Such as Provision for
liabilitiesrecordedand Depreciation,Provisionfor
unrecorded) DoubtfulDebts,JointLife
Policy Reserve etc.
ToCashBankA/c ByCash/BankA/c
ExpensesonRealisation) (Amount received on
ToPartner'sCapitalA/cs realisation of assetsrecorded
(Liabilitiestakenoverbya and unrecorded)
commissionpayabletohimor ByPartners'CapitalA/cs
anyexpensespayabletohimor (Assetstakenoverbyapartner
Topartners'CapitalA/cs recorded or unrecorded)
(For transferring profit on ByPartners'CapitalA/cs
Realisation) (For transferring loss on
Realisation)
PreparationofPartners'LoanAccount
Ifapartnerhasgivenanyloantofirm,hisloanwillbepaid
Afterpayamentofalltheoutsideliabilities:but
Beforemakinganypaymenttopartnersonaccountofcapital
Partner'sLoanA/c Dr.
ToCash/BankA/c
(Beingloanofapartnerpaid)
Dr. Partner'sLoanA/c Cr.
ToCash/BankA/c ByBalanceb/d
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.
(CashinHandorCashat (BankOverdraft)
Bank) ByRealisationA/c
ToRealisationA/c (LiabilitiesPaid)
(AssetsRealised) ByRealisationA/c
ToPartners'CapitalA/cs (RealisationExpensesPaid)
(Cashbroughtinby ByPartner'sLoanA/c
partner) (Partner'sLoanPaid)
ByPartners'CapitalA/cs
(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
Contents 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
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. RealisationAccount Cr.
ToGoodwill 10,000 By Investment Fluctuation
ToBuildings 25,000 Fund 5,000
To Investments 25,000 ByProvisionforDoubtful
To Stock 15,000 Debts 2,000
To Debtors 17,000 ByCreditors 8,000
ToX'sCapitalA/c ByX'sWifeLoan 6,000
(X'sbrotherloan) 8,000 ByBankA/c: 8,000
(Assetrealised
Debtors 12,000
(Creditors) 6,000 Investments 20,000
ToBankA/c Goodwill 6,000
(ExpensesonRealisation 6,000 Buildings 29,000
Stock 5,000
72,000
ByY'sCapitalA/c
(Stock) 4,000
ByLosstransferredto:
X'sCapitalA/cs 7,200
Y'sCapitalA/cs 1,800
9,000
1,08,000 1,08,000
77 Accountancy& XII
Dr. Partner'sCapital A/cs Cr.
Particulars X Y Particulars X Y
Rs. Rs. Rs. Rs.
ToProfitandLossA/c 8,000 2,000 ByBalanceb/d 50,000 40,000
ToRealisationA/c (Cr.Balance)
(Assets taken) 4,000 ByRealisationA/c
ToRealisationA/c (Liabilitiestaken) 8,000
(LossonRealisation 7,200 1,800
ToBankA/c
(Excess cash paid) 42,800 42,800
58,000 58,000 58,000 40,000
Cash/BankA/c
Dr. Cr.
ToBalanceb/d ByBalanceb/d 6,000
(CashatBank) 20,000 (BankOverdraft)
ToRealisationA/c ByRealisationA/c
(AssetsRealised) 72,000 (LiabilitiesPaid) 6,000
ToPartners'CapitalA/c ByRealisationA/c
(CashbroughtinbyPartner RealisationExpensesPaid) 2,000
ByY'sLoanA/c 3,000
(Partner'sLoanPaid)
ByX'CapitalA/c 42,800
ByY'sCapitalA/c 32,200
92,000 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 :
BookofAandB
RealisationAccount
To SundryAssets 1,18,000 ByCreditors 20,000
ToBankA/c ByBankA/c
(Creditors) 20,000 (Assetsrealised)
ToBankA/c ByLosstransferredto:
(ExpensesonRealisation 3,000 A'sCapitalA/cs12,600
B'sCapitalA/cs8,400 21,000
1,41,000 1,41,000
WorkingNotes:
(i)
Partner'sCapitalA/cs
Dr. Cr.
Date Particulars A B Date Particulars A B
Rs. Rs. Rs. Rs.
2008 ToBankA/c 8,000 8,000 1.04.08 ByCashA/c 60,000 60,000
? (Drawings) 31.03.09 ByProfitand
31.03.2009 ToBalance 82,000 52,000 LossA/c 30,000 30,000
c/d 90,000 60,000 90,000 60,000
2009 1.04.09 ByBalance
? ToBankA/c b/d 82,000 52,000
(Drawings) 8,000 8,000
31.03.09 ToProfitand
LossA/c 12,000 8,000
31.03.09 ToBalance
c/d 62,000 36,000
82,000 52,000 82,000 52,000
1.4.10 ByBalance
b/d 62,000 36,000
01.04.10 ToRealisation
A/c (Loss) 12,600 8,400
ToBankA/c 49,400 27,600
6,2000 36,000 62,000 36,000
79 Accountancy& XII
(ii)
Memorandum Balance Sheet
Capital SundryAssets
(BalancingFigure) 1,18,000
Rs.
A 62,000
B 36,000 98,000
Creditors 20,000
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
` `
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 NoteNo. Figure on Figure as
31.03.2010(end of on 31.03.2009
currentperiod) (end of
previous
Year
EquityandLiabilities
1) Shareholder's Funds
a)ShareCapital 1 4,49,100
Total 4,49,100
ASSETS
CurrentAssets
Cash&CashEquivalent 2 4,49,100
4,49,100
82 Accountancy& XII
NoteNo.:1
AuthorisedCaptial
1,25,000equityshares@ ` 10each 12,50,000
IssuedCapital
80000EquityShares@` 10each 8,00,000
Subscribed&Paidup
75000eq.sharesof@ ` 10each
issuedtopublic@ ` 6 4,50,000
Less:Unpaidcalls 900 4,49,100
4,49,100
NoteNo.2: Amountreceivedonapplication
75000@ ` 1(10%) 75,000
Amountreceivedonallotment 1,50,000
75000sh@ ` 2(20%)
AmountReceivedoncall 2,24,100
74700Shares@ ` 3(30%)
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
` `
BankAccount Dr. 20,000
ToShareApplicationA/c 20,000
(Beingtheapplicationmoneyreceivedon10,000
sharesatRs.2pershare)
ShareApplicationA/c Dr. 20,000
ToShareCapitalA/c 20,000
(Beingthetransferofapplicationmoneyon10,000
sharestoshare capitalaccount
84 Accountancy& XII
ShareAllotmentA/c Dr. 50,000
(Beingtheamountdueon10,000sharesat
Rs.5per share)
ToShareAllotmentA/c 50,000
(BeingthereceiptofRs.5on10,000shares)
ShareCallA/c Dr. 30,000
(Beingtheamountdueon10,000sharesatRs.3per
share
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)
ToShareCapitalAccount
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
INTHEBOOKSOFVLtd.JOURNAL
` `
ToEquityShareApplicationA/c 80,000
sharesatRs.4pershare)
EquityShareApplicationA/c Dr. 80,000
(Beingthetransferofapplicationmoneyon20,000
sharestoshare capitalaccount)
ShareAllotmentA/c Dr. 1,00,000
ToEquityShareCapitalA/c 40,000
To Securities premiumAccount 60,000
(Beingtheamountdueon20,000sharesatRs.5
includingpremiumofRs.3pershare
BankAccount Dr. 1,00,000
ToShareAllotmentA/c 1,00,000
EquityShareFirstCallA/c Dr. 40,000
share)
ToEquityShareFirstCallA/c 40,000
EquitySharesecondandFinalCallA/c Dr. 40,000
share)
ToEquityShareSecondandFinalCall.A/c 40,000
86 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)
` `
ShareAllotmentAccount Dr. NetAmount
due
Discount on issue of sharesAccount Dr. Amount of
discount
ToShareCapital Facevalue
(Beingthenetamountdueonallotment) of share
BankAccount Dr. NetAmount
ToShareAllotmentAccount NetAmount
(Beingtheamountreceivedonallotment
Example:
J.K.IndiaLtd.issued10,000sharesofRs.10eachatadscountof10%payableRs.5on
application,Rs.3onallotmentandRs.2onFirstandFinalCall.
Only9,000shareswereappliedforandtheallotmentwasmadetoalltheapplicants.
GivenecessaryyjournalentriesinthebookoftheCompany.
JOURNALENTRIES
` `
ToShareApplicationAccount 36,000
(Beingapplicationmoneyreceivedon9000
shares @Rs.4 per share)
ShareApplicationAccount Dr. 36,000
ToShareCapitalaccount 36,000
(Beingtheapplicationmoneytransferredto
ShareCapitalAccount)
87 Accountancy& XII
ShareAllotmentAccount Dr. 27,000
Discount on issue of sharesAccount 9,000
ToShareCapital 36,000
(Beingtheallotmentmoneydueon9,000
shares@ Rs.3per share.The amountof
discount is @Rs.1)
ToShareAllotmentAccount 27,000
(Beingapplicationmoneyreceivedon9000
shares @Rs.3per share
ShareFirstandFinalCallAccount Dr. 18,000
ToShareCapitalAccount 18,000
(Beingthecallmoneydueon9,000shares
@Rs.2 per share)
Bank account Dr. 18,000
ToShareFirstandFinalcallAccount 18,000
(Beingmoneyreceivedon9000shares@Rs.3
per share
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 AgreedValue
ToVendor Purchase
Consideration
ToCapitalReserve(B/F) (Sundry asset
less
purchase
consideration)
Onissueofshare
a)AtPAR Nominal
VendorDr. Value
ToShareCapital
b)Atpremium
Vendor Dr. Purchase
Price
ToShareCapital Nominalvalue
To Securities Premium Amount of
Premium
c)VendorDr. Purchase Price
DiscountonissueofsharesDr. Amount &
discount
ToShareCapital 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
` `
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 54,000
(Being5,400sharesofRs.10eachatparto
HMTLtd.)
b)Whensharesareissuedatpremiumof20% 54,000
HMTLtd.(Vendor) Dr. 45,000
ToShareCapitalAccount 9000
To Security PremiumAccount
(Being4,500sharesofissuedtovendorata
premiumofRs.2pershare54,000/10+2=4500)
c)Whensharesareissuedatdiscountof10%
HMTLtd.(Vendor) 54,000
Discount onissue of sharesAccount Dr. 600
ToShareCapitalAccount Dr. 60,000
(Being6,000sharesissuedat10%discounttoHMT
Ltd.)
54,000/109=6000)
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
` `
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
` `
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
(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
` `
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.
` `
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
Profit and LossAccount 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

` `
ShareCapitalAccount Dr. Amount
Called
ToVariousUnpaidCalls/Callsinarrear
Account Amount
unpaid
To Forfeited Shares Amount
paid
Example:JaiJawanholding10sharesofRs.10eachofwhichRs.2onapplicationRs.2on
allotmentbutcouldnotpayRs.3onfirstcall.HisshareswereforfeitedbytheDirectors.
GiveJournalentry.
JOURNAL
` `
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
` `
ShareCapitalAccount Dr.
To Share ForfeitedAccount
ToShareFirstCallAccount
94 Accountancy& XII
Example1000sharesofRs.10eachissuedatapremiumofRs.2pershareareforfeited
onwhichRs.8(includingpremium)havebeenreceived.FinalcallofRs.4hasnotbeen
received Pass necessary entry.
` `
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
` `
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.
` `
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
` `
To Discount onissue of shareAccount
To Shares ForfeitedAccount
ToShareUnpaidCallAccount
95 Accountancy& XII
ExampleALtd.Forfeited1000sharesofRs.100eachissuedatdiscountofRs.10pershare
FinalcallofRs.20hasnotbeenmadeontheseshares.Rs.40hasbeenreceivedpershare
Pass necessary entry.
Accounting treatment :
` `
ShareCapitalAccount Dr. 80,000
To Discount onissue of shareAccount 10,000
To Shares ForfeitedAccount 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
` `
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
` `
ShareCapitalAccount Dr. 2,000
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)
Forfeited SharesAccount 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
` `
ShareCapitalAccount(100x80) Dr. 8,000
ToSharesFirstCallAccount(100x50) 5,000
(Being100sharesforfeitedfornonpaymentof
calls money)
Forfeited SharesAccount (100x10) Dr. 1,000
(Beingreissue100forfeitedsharesatRs.70per
shareatRs.80paidup)
Forfeited SharesAccount Dr. 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
` `
ShareCapitalAccount(800x100) 80,000
To Discount on issue of SharesAccount 8,000
(800x10)
ToSharesandFinalCallAccount(800x3) 2,400
To Shares ForfeitedAccount 69,600
(Being800sharesforfeitedfornonpaymentof
finalcallmoney
BankAccount(800x12 Dr. 9,600
Shares ForfeitedAccount (100x10) Dr. 62,400
Discount on issue of SharesAccount Dr. 8,000
ToShareCapitalAccount(100x80)
shareatfullypaiduppaidup
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
` `
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)
ToEquityShareFirst&FinalCallAccount 4,95,000
EquityShareCapitalAccount(100x10)Dr. 10,000
ToSharesFirst&FinalCallAccount
(100x50) 5,000
(Being1000sharesforfeitedfornonpayment
offirstandfinalcallmoney
Shares ForfeitedAccount (1000x2) Dr. 2,000
shareatRs.10paidup)
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
` `
EquityShareApplicationAccount Dr. 5,00,000
ToEquityShareCapitalAccount 2,00,000
ToEquityShareAllotmentAccount 3,00,000
(Beingtheamountofapplicationmoneyadjustedin
tsharecapitalallotmentandbalancerefunded
EquityShareAllotmentAccount Dr. 3,00,000
ToShareEquityCapitalAccount 3,00,000
(Beingtheamountdueforallotment)
EquityShareFirst&FinalCallAccountDr. 5,00,000
ToShareCapitalA/c 5,00,000
(Beingtheamountdueforfinalcall
EquityShareCapitalAccount(1000x10)Dr. 10,000
ToSharesFirst&FinalCallAccount
(100x50) 5000
To SharesForfeitedAccount (1000x5) 5000
(Being1000sharesforfeitedfornonpayment
Reserve)
CASHBOOK(BANKCOLUMNONLY)
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

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

Example
RajLtd.Issued2,00012%DebenturesofRs.100eachatparpayableRs.25onApplication,Rs.50
onAllotmentandthebalanceonfirstandfinalcall.Inall3,000 applicationwerereceived.Allotment
wasmadeto2,000applicantsotherswererejected.GiveJournalentries.
JOURNAL
` `
To12%DebentureApplicationAccount 75,000
debentures @Rs.25 per debenture)
12%DebentureApplicationAccount Dr. 75,000
To 12%DebentureAccount 50,000
(Beingthetransferofapplicationmoneyto
debenture account and refund made on rejedected
Applications)
12%DebentureAllotmentAccount Dr. 1,00,000
To 12%DebentureAccount 1,00,000
debentures @Rs.50)
To12%DebentureAllotmentAccount 1,00,000
(Beingtheapplicationmoneyreceived)
12%DebentureFirst&FinalCallAccountDr. 50,000
(Beingthecallmoneydueon2,000debentures
@ Rs.25)
To12%DebenturFirst&CallAccount 50,000
Importan:If%ofdebentureisgiventhenitmustbewrittenalongwithDebenture
ISSUEOFDEBENTURESATPREMIUM:ItisissueofDebentureatmorethanfacevalue
Note:PremiumisPresumedTobeDemandedonAllotmentUnlessSpecifiedandCreditedto
SecuritiesPremiumAccount
ExampleZLtd.Invitedapplicationsfor5,000,8%DebenturesofRs.100eachatapremiumof2%,
Rs.40werepayableonApplicationandbalanceanallotment.Applicationswerereceivedfor4,800
sharesandacceptedinfull.Allmoneydulyreceived.Journalisethetransactions.

` `
ToDebentureApplicationAccount 1,92,000
(Beingtheapplicationmoneyreceivedon4800
8%DebentureApplicationAccount Dr. 1,92,000
To DebentureAccount 1,92,000
(Beingthetransferofapplicationmoneyto8%
debenture account)
12%DebentureAllotmentAccount Dr. 2,97,600
To 8%DebentureAccount 288000
To Security PremiumAccount 9600
debentures @Rs.60and premium ofRs.2 share)
ToDebentureAllotmentAccount 2,97,600
Oversubscriptionofdebentures:Insuchcaseexcessapplicationarerejectedorpartialor
Prorataallotmentisdoneorcombinationofbothiscarriedon.
GangaLtd.issued2,000debenturesofRs.100eachatapremiumof10%payableRs.25on
applicationRs.40(includingpremium)payableonallotmentandbalanceonFirstandfinal
Call.Inall3,500applicationwerereceived500applicationwererejectedandallotmentwas
madetoapplicantsof3,000debenturesonProratabasis.Theexcessmoneywasadjusted
onallotment.Givejournalentries.
` `
To12%DebentureApplicationAccount 87,500
12%DebentureApplicationAccount Dr. 87,500
ToDebentureAllotmentAccount 25,000
debentureaccountand refund made on rejected
Applications)

12%DebentureAllotmentAccount Dr. 80,000
To Security PremiumAccount 20,000
debentures @Rs.30 and premium of Rs.10)
To12%DebentureAllotmentAccount 55,000
(Beingtheapplicationmoneyreceived
Rs.80,000Rs.25,000)
12%DebentureFirst&FinalCallAccountDr. 90,000
(Beingthecallmoneydueon2,000
debentures @Rs.45)
To12%DebentureFirst&CallAccount 90,000
Issue of debentures for consideration other than cash

WhenDebentures areissuedforpurchase ofasset
WhenDebenturesareissued SundryAssetAccount Dr. Withthepurchase
forpurchase ofasset atpar ToVendor consideration
Vendor Dr.
To DebentureAccount
WhenDebenturesareissued SundryAssetsAccount Dr. Withthepurchase
for purchase of asset at ToVendor Consideration
premium Vendor Dr.
To DebentureAccount No.ofdebenturesxpar
To Security Premium value
Account 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

ToVendor Purchase Consideration
When Purchase consideration
islessthannetvalueofasset
SundryAssetsAccount Dr Valueofasset
ToSundryLiabilitiesAccount Valueofliability
ToCapitalReserve Excessliabilitiy
ToVendor 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
` `
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
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
` `
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
GuptaBros
To DebentureAccount 15,00,000
(Beingissueof15,000sharesofRs.100eachas 15,00,000
payment of business price)
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.
` `
MachineAccount Dr. 1,00,000
FurnitureAccount Dr. 1,80,00
Stock Account Dr. 20,000
To CreditorsAccount 80,000
ToCapitalReserve 1,12,000
ToUshaCo.Ltd. 1,08,000
UshaCo.Ltd.
To 12%DebentureAccount
Beingissueof900debenturesofRs.100eachat
premium of 20%)
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

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.
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
` `
Debenture SuspenseAccount Dr
To DebentruesAccount
(BeingtheissueofDebentuesofRs....each
issuedascollateralsecurity)
ItisrepresentedinBalanceSheet
Balance Sheet as on

Secured Loans MiscellaneousExpenditure
Debentureissuedascollateral Debenture SuspenseAccount
security
LoanfromtheBanks
Example:AcompanytookaloanofRs.3,80,000fromVaishCooperativeBankLtd.and
issued13%debenturesofRs.4,00,000asacollateralsecurity.Explainhowwillyoudeal
withthe issueofdebentruesin thebooksof thecompany.

Solution:
MethodNo.1
BALANCESHEET
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)
MethodNo.2
JOURNAL
` `
Debenture SuspenseAccount Dr. 4,00,000
To 13%DebentureAccount 4,00,000
(Beingtheissueof4,000DebentureofRs.100
eachissuedascollateralsecurity)
BALANCESHEET(EXTRACT)
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

WhenDebenturesareissuedatparandredeemableatpar
JOURNAL
` `
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
` `
To%DebentureApplicationAccount 50,00,000
DebentureApplicationAccount Dr. 50,00,000
To %DebenturesAccount 50,00,000
debenture account)
WhenDebenturesareissuedatpremiumredeemableatpar
JOURNAL
` `
BankAccount Dr.
To %DebentureAccount
(Beingthedebentureissuedatpremiumand
redemableatpar
Example:GreenLtd.IssuedRs.80,000,9%Debentureatapremiumof5%redeemableat
parGivethenecessaryJournalentry.
JOURNAL
` `
To%DebentureApplicationAccount 84,000
DebentureApplicationAccount Dr. 84,000
To %DebentureAccount 80,000
(Beingthedebentureissuedatpremium
andredeemableatpar)
When Debenturesare issuedat par redeemableat premium

JOURNAL
` `
BankAccount Dr.
Loss onissue ofDebentureAccount Dr.
redeemableatpar)
Example:WhiteLtd.IssuedRs.60,000,9%Debentureatpar&redeemableat10%premium.
GivethenecessaryJournalentry.
JOURNAL
` `
To%DebentureApplicationAccount 60,000
DebentureApplicationAccount Dr. 60,000
Loss onissue ofDebentureAccount Dr. 6,000
To %DebentureAccount 60,000
redeemableatpar)

When Debentures are issued at Premium redeemable at premium
` `
BankAccount Dr.
Loss onissue ofDebentureAccount Dr.
To Premium on Redemption of Debenture account
redeemableatpremium)
Example:GiveJournalEntryassumingthefacevalueof10%debenturesatRs.100issued
atRs.105andrepayableatRs.110.
` `
BankAccount Dr. 105
To%DebentureApplicationAccount 105
DebentureApplicationAccount Dr. 105
Loss onissue ofDebentureAccount Dr. 10
To %DebentureAccount 100
To Security PremiumAccount 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
Profit and LossAccount 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.

Rs. Rs.
1.1.2000 To9%Debenture 6,000 31.12.2001 ByProfitLoss 2,400
Account Account
ByBalancec/d 3,600
6,000 6,000
1.1.2001 ToBalanceb/d 3,600 31.12.2001 ByProfit&Loss
Account 1,800
ByBalancec/d 1,800
3,600 3,600
1.1.2002 ToBalanceb/d 1,800 31.12.2002 ByProfit&Loss 1,200
Account
1,800 1,800
1.1.2003 ToBalanceb/d 600 31.12.2003 ByProfit&Loss 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 3 Rs.6000x3=Rs.1,800
3rd 50,000 2 Rs.6000x2/10=Rs.1,200
4th 25,000 1 Rs.6000x1/10=Rs.600
Discount on issueof DebentureAccount

Rs. Rs.
1.1.2000 To9%Debenture 6,000 31.12.2000 ByProfit&Loss 2,000
Account Account
ByBalancec/d 4,000
6,000 6,000
1.1.2001 ToBalanceb/d 4,000 ByProfit&Loss
Account 2,000
1.1.2002 ToBalanceb/d 4,000 4,000
2,000 ByProfit&Loss 2,000
Account
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.
` `
June30 InterestonDebentureA/c Dr. 3,000
2009 To InterestAccountA/c 2,700
To Income Tax 300
InterestAccruedTaxPayable
June30 InterestAccruedA/c Dr. 2,700

2009 TaxPayableA/c 300
ToBank 3,000
(Interest&taxpaid)
Dec.31 InterestonDebentureA/c Dr. 3,000
2009 To Interest Accrued 2,700
ToTaxPayable 300
Dec. 31 InterestAccrued Dr. 2,700
2009 TaxPayableA/c Dr. 300
ToBank 3000
(Interest&taxpaid)
Dec.31 Profit & LossAccount Dr. 6,000
ToIntereston DebentureA/c 6,000
(Interest transfered to P&L
Account)
Insert on Debentures :
InsertonDebenturesiscalculatedatafixedrateonitsfacevalueandisusuallypayable
halfyearlyispaidevencompanyissufferingfromlossbecuaseitischangeonprofit.
IncomeTax is deducted from interest before payment to debenture holders
JOURNALENTRIES
(1)WhenInterestisDue
Debenture'sinterestA/c Dr. (Gross Interest)
ToDebentureholderA/c (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.
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.

ABCLtd.
JOURNAL
Date Particulars L.F. Dr.Amount Cr.Amount
June30 InterestonDebentureA/cDr. 3,000
2009 To InterestAccountA/c 2,700
To Income Tax 300
(InterestAccuedlessTaxPayable)
June30 InterestAccruedA/cDr. 2,700
TaxPayableA/cDr. 3,00
ToBank 3,000
(Interest&Taxpaid)
Dec.31 InterestonDebentureA/cDr. 3,000
To InterestAccrual 2,700
ToTaxPayable 300
Dec.31 InterestAccrualDr. 2,700
TaxPayableA/cDr. 300
ToBank 3000
(Interest&TaxPaid)
Dec.31 ProfitandLossAccountDr. 6,000
ToIntereston DebentureA/c 6,000
(InterestTransferedtoP&L
Account)
(1) WhenInterestisDue
Debenture'sinterestA/c Dr (Green Interest)
ToDebentureholderA/c (Netinterest)
(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)

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.
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. 50,000
March,31 ToDebentureRedemptionReserveA/c 50,000
(BeingtransferofProfittoDeb.RedReserveA/c)

March,31 10%DebenturesA/c Dr. 1,00,000
ToDebentureholdersA/c 1,00,000
(Beingtheamountduetodebentureholders)
March,31 DebentureholdersA/c Dr. 1,00,000
ToBankA/c 1,00,000
(Beingtheamountpaidtothedebantureholder
March,31 DebentureRedemptionReserveA/c Dr. 50,000
ToGeneralReserveA/c 50,000
(BeingDeb.Red.ReserveA/cclosedbytransferto
GeneralReserve)
(B) Redemption At Premium : Illustration 2. Z Ltd. Redeemed its 1,00,000 10%

DebenturesofRs.10eachat5%premiumon31stMarch,2011.
ZLtd.
` `
2011 Profit&LossAppropriationA/c Dr. 5,00,000
March, ToDebentureRedemptionReserveA/c 5,00,000
31 (BeingProfittransfertoDRRA/c
March,31 10%DebenturesA/c Dr. 1,00,000
PremiumonRedemptionofDebenturesA/cDr. 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.
` `
March,
31 ToDebentureRedemptionReserveA/c 70,000
(BeingtheprofittransfertoDRRA/c)
March, 10%DebenturesA/c Dr. 2,00,000
31 To Debentureholder a/c 2,00,000
(Beingtheamountduetodebantureholders)

March, DebentureholdersA/c Dr. 2,00,000
31 ToBankA/c 2,00,000
(Beingtheamountpaidtothedebentureholders)
March, DebentureRedemptionReserveA/c Dr. 1,00,000
31
(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.
` `
March,
31 ToDebentureRedemptionReserveA/c 10,00,000
(BeingtheProfittransferDRA/c)
March, 10%DebenturesA/c Dr. 25,00,000
31 To Debentureholder a/c 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.
` `
31st
March, ToDebentureRedemptionReserveA/c 2,50,000
(BeingtheprofittransferredtoDRRA/c)
31st 10%DebenturesA/c Dr. 5,00,000
March ToDebentureholdersA/c 5,00,000

31st DebentureholdersA/c Dr. 5,00,000
March
ToBankA/c 5,00,000
(Beingtheamountpaidtothedebentureholders
31st DebentureRedemptionReserveA/c Dr, 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.
` `
30th ToDebentureRedemptionReserveA/c 5,000
Nov. (BeingtheProfittransfedtoDRRA/c)
30th 10%DebentureA/c Dr. 10,000
Nov. ToDebentureholdersA/c 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.
` `
30th ToDebentureRedemptionReserveA/c 20,000
Nov. (BeingtheProfittransferredtoDRRA/c)
30th 10%DebenturesA/c Dr. 20,000
Nov. ToDebentureholdersA/c 20,000
(BeingtheProfittransferredtoDRRA/c)
30th DebentureholderA/c Dr. 20,000
Nov. ToBankA/c 20,000
(BeingtheamountpaidtoDebentured)

(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
` `
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
ToEquityShareCapitalA/c 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.
` `
ToDebentureholderA/c 4,00,000
(Beingtheamountduedebentureholder
10%PreferenceShareCapitalA/c 3,20,000

(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.
` `
To Debentureholder a/c 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.
` `
ToDebentureholderA/c 5,80,800
Discountonissue ofsharesA/c Dr. 24,200
(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

Debenturesinthefollowingcases:
(i)10,00010%Debenturesof` 120eachissuedat5%premiumrepayableatpar.
(ii)20,0009%Debenturesof ` 200eachissuedat20%premiumrepayableat30%premium
` `
(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 ToDebentureholderA/c 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 ToDebentureholderA/c 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.
(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:
` `
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.
` `
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
(Beingtheamountduetodebenture
holder's on conversion of debentures)
1.4. Debentureholder'sA/c Dr. 1,20,000
2012 ToEquityShareCapitalA/c 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.
` `
ToDiscount onissueof debenturesA/c 5,000
ToDebentureholdersA/c 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)

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. :
` `
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. :
` `
(i) 12%DebenturesA/c Dr. 5,00,000
ToDiscountonissueofDebenturesA/c 40,000
(Beingamountduetodebentureholderson
conversion discharged issue of 4,60,000/10
=46,000equitysharesof ` 10each
(ii) 14%DebenturesA/c Dr. 60,000

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
ToEquitysharecapitalA/c 90,000
conversion discharged byissue of 90,000/45=2000
Equitysharesof ` 50each, ` 45paidup)
(iv) 12%DebenturesA/c Dr. 4,00,000
(Beingamountduetodebentureholders)
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.

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.

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
4. ProvisionforTax CurrentLiability Shortterm Provision
5. OutstandingSalaries CurrentLiability OtherCurrentLiabilites
6. PreliminaryExpenses Shareholders' Fund Subtracted from security
premium under Reserve
and Surplus.
7. AuthorisedCapital Shareholder's Fund ShareCapital
8. Debenture NonCurrentLiabilities Longterm Borrowings
9. SinkingFund Shareholder's Fund Reserveand Surplus
10. Provision for NonCurrent Longterm provision
Provident Fund Liabilities
11. Security Premium Shareholders' fund Reserveand Surplus
12. Creditors CurrentLiabilities TradePayable
Assets head
S.No. Items MajorHeading Subheading
1. PatentsandTradeMarks NonCurrentAssets IntangibleAssets
2. BillsReceivables& CurrentAssets TradeReceivable
Debtors
3. PrepaidExpesnes CurrentAssets OtherCurrentAssets
4. AdvancesRecoverable CurrentAssets Shortterm Loans and
inCash Advances
5. Goodwill NonCurrentAssets IntangibleAssets
6. Loose Tools CurrentAssets Inventories
7. Bank/CashBalance CurrentAssets Cash&Cash
Equivalents
8. Investments NonCurrentAssets NonCurrent Investment
9. Workin progress CurrentAssets Inventories
10. Govt. Securities NonCurrentAssets NonCurrent Investment
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.

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

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

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
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

(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 Percentage& Balance

Sheet Total
2010 2011 2010 2011
Rs. Rs. % %
EquityShareCapital
PreferenceShareCapital
ReserveandSurplus(Net)
NonCurrentLiabilities
CurrentLiabilities
Shortterm Provisions
Total
Assets
NonCurrentAssets
NonCurrent Investmnets
CurrentAssets
Total
NoteNetReserveandSurplusmeanstotalofallreserveslessMiscellaneousExpenditure

Example3:Prepareacommonsizebalancesheetfromthefollowingdata:
BalanceSheetason31stMarch2010and2012
Particulars
31.03.2010 31.03.2011
(Rs.) (Rs.)
EquitySahreCapital 6,00,000 6,00,000
Reserveand Surplus
GeneralReserve
6,80,000 10,00,000
10% Debentures 3,00,000 3,00,000
BillsPayable 84,000 1,40,000
Creditors 3,28,000 4,50,000
Outstanding Expenses 8,000 10,000
Total 20,00,000 25,00,000
ASSETS :
LandandBuilding 8,00,000 7,50,000
Plant&Machinery 3,00,000 5,00,000
Furniture 1,00,000 1,06,250
Stockintrade 4,50,000 6,25,000
Sundry Debtors 2,55,000 4,10,000
CashatBank 95,000 1,08,750
Total 20,00,000 25,00,000
SOLUTION
COMMONSIZEBALANCESHEET
Asat31stMarch2010and2011
Sheet Total
2010 2011 2010 2011
Rs. Rs. % %
EquityShareCapital 6,00,000 6,00,000 30 24.00%
Reserveand Surplus 6,80,000 10,00,000 34 40.00
NonCurrentLiabilities(Debentures) 3,00,000 3,00,000 15 12.00
CurrentLiabilities 4,20,000 6,00,000 21 24.00
Total 20,00,000 25,00,000 100 100.00
Assets
NonCurrentAssets 12,00,000 13,56,250 60 54.25
CurrentAssets (Stock, Debtors
&Cash) 8,00,000 11,43,750 40 45.75
Total 20,00,000 25,00,000 100 100.00

Format of a Common Size Income Statement
COMMONSIZEINCOMESTATEMENT
Fortheyearended31stMarch,2010and2011
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
Particulars 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
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.

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

Rs.8,00,000whichisequalto1.25XYZCompanywouldbeinrelativelygoodshortterm
financialstanding.
Computationofratio
FromthefollowingbalancesheetofM/s.RamLtd.calculatecurrentratioason31.03.2010
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

Balance Sheet ofY Ltd.
Particulars Note Figures for

No. CurrentYears
1.Shareholder'sFunds
(a)ShareCapital 15,00,000
(b) Reserves 3,00,000
12%Loan(LongTerm)
CurrentLiabilities 6,00,000
Total 36,00,000
Assets
Non CurrentAssets

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 Figures for

No. 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

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:

InventoryTurnoverRatio=Costofgoodssold/Averagestock
Averagestock=OpeningStock+ClosingStock/2
Rs.40,000+Rs.60,000/2=Rs.50,000

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.

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%&

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)

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

4.UsefulinInterandintrafirmcomparison
Limitations:
1.Nostandarddefinition
2.Ifdifferentaccountingpoliciesarefollowedcomparisonismeaningless
3.Ignoresqualitativefactors
InterestCoverageRatio:Thisratioestablishesrelationshipbetweenthenetprofitbefore
interest&taxandinterestpayableonlongtermdebts.Sinceinterestischangeonprofit
netprofittakentocalculateratioisbeforeinterest&tax.Itdeterminescasewithwhich
acompanycanpayinterestonoutstandingdebt.

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

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

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 ` DateParticulars `

To(Dividendpayable ByBalanceb/d
A/c)
Tobalancec/d ByProfit&LossA/c
(Proposed dividend during
the current year)

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
31.03.2011 31.03.2012
( ` ) ( ` )
I.EquityandLiabilities
1. Shareholder's funds :
(a)ShareCapital 65 65
(b)ReserveandSurplus 1 42.5 25
2. ShareApplicationmoney pending allotment
3.NoncurrentLiabilities
4.CurrentLiabilities
TradePayables 10.5 7.7
Total 118 77.7
II.Assets
1. NoncurrentAssets
(a)FixedAssets 83 46.7
2.CurrentAssets
(a) Inventories 13 11
(b)TradeReceivables 19.5 18
(c)CashandCashequivalents 2.5 2
Total 118 77.7
NotestoAccountNo.1
Particulars
31.03.2012 31.03.2011
( ` ) ( ` )
Reserve and Surplus
1. Shareholder's funds :
GeneralReserve 27,500 15,000
ProfitandLossA/c 15,000 10,000
Total 42,500 25,000

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

Dr. FixedAssetsA/c(onoriginalcost) Cr.
Date 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

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CLASSXII

Whendrawingare 6.5 7.5 9 3.5

Dr. A'sLoanA/c Cr.

Particulars Manoj Sahil Dipankar

Date Particulars L.F. Debit Credit

Date Particulars L.F. Debit Credit

Date Particulars L.F. Debit Credit

Date Particulars L.F. Debit Credit

Balance Sheet of the New Firm

Balance Sheet of the New Firm

Purchase of business example :

Calculation : Goodwill = purchase consideration + liablilities assets = Rs.15,00,000+

Date Particulars L.F. Debit Credit

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Issue of debentures for consideration other than cash

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When Purchase consideration is more than net value of assets

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Liabilities Rs. Assets Rs.

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When Debenturesare issuedat par redeemableat premium

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Year Outstanding Debentures Ratios AmountofLosstobe

Discount on issueof DebentureAccount

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

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Particulars AbsoluteAmounts Percentage& Balance

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Particulars Note Figures for

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Balance Sheet ofABC Ltd.

Particulars Note Figures for

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