Chap 1 PDF

UNIT 1
CHAPTER 1
ACCOUNTING FOR PARTNERSHIP
( FUNDAMENTALS OF PARTNERSHIP)
A business can be organised in the form of

LEARNING OBJECTIVES a sole proprietorship, a partnership firm or
After studying this chapter you will be able to : a company. Earlier, you have studied how
to prepare Profit and Loss Account and
l Define partnership and list its essential Balance Sheet of a sole proprietor. If one
features;
man was intelligent enough and
l Explain the meaning and list the contents of
partnership deed; commanded all the resources that he
l Recognise the relevant provisions of the needed and also the necessary power to do
Indian Partnership Act 1932, as applicable to everything, he would have carried on his
accounting in the absence of any provision to
business as an individual. Alas, this is not
the contrary in the partnership agreement;
true in life. Every man needs help from
l Prepare partners' capital account under fixed others and this is true in business which
and fluctuating capital method; requires huge resources for the ongoing
l Distribute profit or loss among the partners expansion programmes. Therefore, one of
and prepare profit and loss appropriation
account;
the inevitable ways is to form partnership
l Explain how guarantee of a minimum amount by joining hands with person(s) who can
of profit to a partner is treated in the books of complement the efforts by bringing in the
accounts; necessary intellectual as well as financial
l Carry out past adjustments; capital. This chapter is devoted to the
l Explain the meaning of goodwill and methods
basic aspects of partnership accounting
of its evaluation;
l Describe the accounting implications of dealing with the
change in profit sharing ratio; and
l Explain 'joint life policy' in relation to
partnership accounts.
preparation of Profit and Loss Account and Balance Sheet of a partnership firm. Although the
basic accounting procedure is similar in all cases, there are certain special features in the
accounts of a partnership firm. In the case of a partnership firm, for example, the special
features relate to the distribution of profits, the maintenance of capital accounts and the
adjustments required when the firm is reconstituted. In this chapter, we shall study the nature
of partnership and discuss the basic aspects of partnership accounts like preparation of capital
accounts, distribution of profits amongst partners and change in the profit-sharing ratio of the
existing partners along with preparation of Profit and Loss Account and Balance Sheet of the
partnership firm.
Nature of Partnership
The sole proprietorship has its limitations such as limited capital, limited managerial ability
and limited risk-bearing capacity. Hence, when a business expands or when it is to be set up
on a scale, which needs more capital and involves more risk, two or more persons join hands
to run it. They agree to share the capital, the management, the risk and profits of the business.
Such mutual economic relationship based on a written or an oral agreement amongst these
persons is termed as 'partnership'. The persons who have entered into partnership are
individually known as 'partners' and collectively as 'firm'.
The Indian Partnership Act, 1932 defines partnership as "the relation between persons
who have agreed to share the profits of a business carried on by all or any of them acting for
all". Based on this definition, the essential features of partnership are as follows:
1. Two or more persons : To form a partnership, there must be at least two persons. There
is, however, a limit on the maximum number of persons who constitute a partnership
firm. It should not exceed 10 if the firm is carrying on a banking business and 20 if it is
engaged in any other business.
2. Agreement between the partners : A partnership is created by an agreement. It is neither
created by operation of law as in the case of Hindu Undivided Family nor by status. The
agreement forms the basis of economic relationship amongst the partners. The agreement
can be written or oral.
3. Business : The agreement should be for carrying on some legal business. A joint
ownership of some property by itself does not constitute partnership. However, the joint
ownership of the property may be used for forming the partnership in order to pursue the
business objectives for which the partnership is formed.
4. Sharing of profits : The agreement should be to share the profits of the business. If some
persons join hands to carry on some charitable activity, it will not be termed as
partnership. Of course, the ratio in which the partners will share the profits is determined
by the agreement or in the absence of the agreement; it is shared equally amongst the
partners.
5. Business carried on by all or any of them acting for all : The firm's business may be
carried on by all the partners or any one of them acting for all. This means that
partnership is based on the concept of mutual agency relationship. A partner is both an
agent (he can, by his acts, bind the other partners) and a principal (he is bound by the acts
of other partners). The implication of this is that partner binds others and others bind him
in the same way. Further implication of this is that each partner is entitled to participate
in the conduct of business affairs and act for and on behalf of the firm.
Partnership Deed
Meaning
A partnership is formed by an agreement. This agreement may be written or oral. Though the
law does not expressly require that there should be an agreement in writing but the absence of
a written agreement may be a source of trouble in managing the affairs of the partnership
firm. Therefore, a partnership deed should be written, assented and signed by all the partners.
Contents of Partnership Deed

The partnership deed usually contains the following particulars:
l Name of the firm;
l Names and addresses of all partners;
l Nature and place of the business;
l Date of commencement of partnership;
l Duration of partnership, if any;
l Amount of capital contributed or to be contributed by each partner;
l Rules regarding operation of bank accounts;
l Ratio in which profits are to be shared;
l Interest, if any, on partners' capital and drawings;
l Interest on loan by the partners(s) to the firm;
l Salaries, commissions, etc. if payable to any partner(s);
l The safe custody of the books of accounts and other documents of the firm;
l Mode of auditor's appointment, if any;

l Rules to be followed in case of admission, retirement, death, of a partner;
l Settlement of accounts on dissolution of the firm; and
l Mode of settlement of disputes among the partners.
Provisions Affecting Accounting Treatment

Normally, a partnership deed covers all matters relating to the mutual relationship amongst
the partners. But if the deed is silent on certain matters or in the absence of any deed or an
express agreement, the relevant provisions of the Partnership Act shall become applicable. It
is, therefore, necessary to know the provisions of the Act, which have a direct bearing on the
accounting treatment of certain items. These are as follows:
1. Profit Sharing : The partners shall share the profits of the firm equally irrespective of
their capital contribution.
2. Interest on Capital : No interest is allowed to partners on the capital contributed by
them. Where, however, the agreement provides for interest on capital, such interest is
payable only out of the profits of the business. In other words, if there are losses, interest
on capital will not be allowed even if the agreement so provides.
3. Interest on Loan : If any partner, apart from his share of capital, advances money to the
firm as a loan, he is entitled to interest on such amount at the rate of 6 per cent per
annum. Such interest shall be paid even out of the assets of the firm. This means that
interest on loan shall be paid even if there are losses. Implying, thereby, that it is a
charge against the revenues.
4. Interest on Drawings : No interest will be charged on drawings made by the partners.
5. Remuneration to Partners : No partner is entitled to any salary or commission for

participating in the business of the firm.
It should be remembered that the above rules are applicable only in the absence of any
provision to the contrary in the partnership agreement.
Special Aspects of Partnership Accounts
Following are the specific issues that require special attention in case of partnership accounts:
l Maintenance of capital accounts of partners;

l Ascertainment and allocation of profit and losses;
l Adjustment for wrong allocation of profits and losses;
l Allocation of profits involving minimum guaranteed profit to a partner;
l Reconstitution of the partnership firm; and
l Dissolution of the firm.
The first four aspects are discussed in this chapter and the last two are dealt with in the
following chapters.
Partners' Capital Accounts

In case of partnership firm, the transactions relating to partners are recorded in their
respective capital accounts. Normally, each partner's capital account is prepared separately.
But these accounts can also be shown in a tabular form as shown later in this chapter.
There are two methods by which the capital accounts of partners can be maintained.
These are:
l Fluctuating Capital Method; and
l Fixed Capital Method.
Fluctuating Capital Method

Under the fluctuating capital method, only one account viz., the capital account for each
partner, is maintained. It records all items affecting partner's account like interest on capital,
drawings, interest on drawings, salary, commission, and share of profit or loss in the capital
account itself. As a result of these, the balance in the capital account keeps on fluctuating.
The items that usually appear on the debit and the credit side of the Partners' capital
account are :
l Credit Side
1. Capital introduced or the opening balance;
2. Additions to capital made during the year, if any;
3. Interest on capital, if any;
4. Salary to the partners, if any;
5. Commission and bonus to the partners;
6. Share of profit.
l Debit Side
1. Drawings made during the year, if any;
2. Interest on drawings, if any;
3. Share of loss, if any;
4. Withdrawal of capital, if any;
5. Closing Balance.
Thus, the capital account of a partner will appear as follows:
Partners' Capital Account
Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
(Rs.) (Rs.)
Drawings *** Opening balance ***
Interest on *** Addition to capital ***
drawings Interest on capital ***
Share of loss *** Salary ***
Withdrawal of *** Commission/Bonus ***
capital Share of profit ***
Closing balance ***
Total *** Total ***
Format under fluctuating method

Note : A Partners' Capital Account usually shows a credit balance. It can, however, show a debit balance
under certain circumstances, such as over withdrawal or insolvency of the partner.
Fixed Capital Method

Under the fixed capital method, the capitals of the partners shall remain fixed unless some
additional capital is introduced or some amount of capital is withdrawn by an agreement
among the partners. Hence, all items like interest on capital, drawings, interest on drawings,
salary, commission, and share of profit or loss are not to be shown in the capital accounts. For
all these transactions, a separate account called 'Partner's Current Account' is opened. Thus,
under fixed capital method, two accounts are maintained for each partner viz., (i) Capital
Account, and (ii) Current Account. It may be noted that the capital account will continue to
show the same balance from year to year unless some amount of capital is introduced or
withdrawn, while the balance of current account will fluctuate from year to year.
Under the fixed capital account method, the capital account and the current account
would appear as shown below:
Dr. Cr.
(Rs.) (Rs.)
Withdrawal **** Opening balance ****
of capital Addition to capital ****
Closing balance ****
Total **** Total ****

Format under fixed capital method
Partners' Current
Dr. Cr.
(Rs.) (Rs.)
Opening balance* **** Opening balance* ****
Drawings **** Interest on capital ****
Interest on **** Salary ****
drawings **** Commission/Bonus ****
Share of loss **** Share of profit ****
Closing balance* **** Closing balance* ****
Total **** Total ****
Format of Current Account
* In Partners' Current Account, opening balance and closing balance may appear on either side, i.e. debit
or credit.
Illustration 1 (Fixed and Fluctuating Capital Account)

Amit and Sumit commenced business as partners on April 1, 2000. Amit contributed Rs.
40,000 and Sumit Rs. 25,000 as their share of capital. The partners decided to share their
profits in the ratio of 2:1. Amit was entitled to a salary of Rs. 6,000 p.a. Interest on capital
was to be provided @ 6% p.a. The drawings of Amit and Sumit for the year ending March 31,
2001were Rs. 4,000 and Rs. 8,000, respectively. The profits of the firm after providing Amit's
salary and interest on capital were Rs. 12,000.
Draw up the Capital Accounts of the partners:

(i) When capitals are fluctuating, and
(ii) When capitals are fixed.
Solution
(i) When capitals are fluctuating
Books of Amit and Sumit

Amit's Capital Account
Dr. Cr.
(Rs.) (Rs.)
Drawings 4,000 Cash 40,000
Balance c/f 52,400 Salary 6,000
Interest on Capital 2,400
Profit and Loss
Appropriation A/c. 8,000
(Share of profit 2/3
of Rs. 12,000)
Total 56,400 Total 56,400
Sumit's Capital Account
Dr. Cr.
(Rs.) (Rs.)
Balance c/f 22,500 Interest on Capital 1,500
Profit and Loss 4,000
Appropriation A/c
of Rs.12,000)
(ii) When capitals are fixed.

Books of Amit and Sumit
Amit's Capital Account
Dr. Cr.
(Rs.) (Rs.)
Balance c/f 40,000 Cash 40,000

Amit's Current Account
Dr. Cr.
(Rs.) (Rs.)
Drawings 4,000 Salary 6,000
Appropriation
of Rs. 12,000)
Sumit's Capital Account
Dr. Cr.
(Rs.) (Rs.)
Balance c/f 25,000 Cash 25,000
Sumit's Current Account

Dr. Cr.
(Rs.) (Rs.)
Drawings 8,000 Interest on Capital 1,500
Appropriation
of Rs. 12,000)
Balance c/f 2,500
Distribution of Profit
In case of partnership firm, the net profit (after charging the interest on capital, partners'
salary and commission and after taking into account the interest on drawings) is to be shared
by all the partners in the agreed profit sharing ratio. As stated earlier, in the absence of any
specific agreement to this effect, the profit is to be distributed equally among the various
partners.
Profit and Loss Appropriation Account
As stated above, the net profit as shown by the profit and loss account of a partnership firm
needs certain adjustments with regard to interest on capitals, interest on drawings, salary,
commission to the partners, if provided, under the agreement. For this purpose, 'Profit and
Loss Appropriation Account' may be prepared. This is merely an extension of the profit and
loss account and is prepared to show how net profit is to be distributed among the partners.
This account is credited with net profit and interest on drawings, and debited with interest on
capitals, salary or commission to partners. If, however, the profit and loss appropriation
account shows a net loss, it will be shown on the debit side of the profit and loss
appropriation account. After these adjustments have been made, the Profit and Loss
Appropriation Account will show the amount of profit or loss, which shall be distributed
among the partners in the agreed profit sharing ratio.
For preparing the profit and loss appropriation account, the following journal entries
have to be recorded for various items:
1. For Interest on Capital
(i) For Crediting Interest on Capital to Capital/Current Account :

Interest on Capital a/c Dr.
Partners' Capital/Current a/c
(ii) For transferring Interest on Capital to Profit and Loss Appropriation Account:
Profit and Loss Appropriation a/c Dr.
Interest on Capital a/c
2. For Interest on Drawings
(i) Interest on Drawings is a gain to the firm and is charged to Partner's Capital/Current
Account
Partners Capital/Current a/c Dr.
Interest on Drawings a/c
(ii) For transferring Interest on Drawings to Profit and Loss Appropriation Account, the following
entry is to be recorded:
Interest on Drawings a/c Dr.

Profit and Loss Appropriation a/c
3. Partner's Salary
(i) Salary allowed to a partner is a gain of the individual partner and charge against the profits of the
firm as per partnership agreement. For this following entry is recorded:
Salary to Partner a/c Dr.

Partner Capital/Current a/c
(ii) For charging salary allowed to a partner:

Salary to partner a/c
4. Partner's Commission
(i) Commission is an expense for the firm and a gain to the partner. For this, following entry is made:
Commission to partner a/c Dr.

Partner's capital/current a/c
(ii) Commission paid to a partner is charged to Profit and Loss Appropriation account by recording
the following entry:
Commission to partners a/c
5. For Transfer to Reserve:

Reserve
6. For share of Profit or Loss on Appropriation
If Profit:
Partner's Capital/Current a/c
If Loss:
Partner's Capital/Current a/c Dr.
Profit and Loss Appropriation a/c
The Profit and Loss Appropriation Account will appear as follows:

Dr. Cr.
(Rs.) (Rs.)
Net Loss as per ** Net profit as per .....

Profit and Loss A/c Profit and Loss A/c
(if loss) (if profit)
Interest on Capital Interest on drawings
A ×× A ××
B ×× ** B ×× ×××
Partner's Salary ...... Capital A/cs Share
Partner's ...... of loss (if loss)
Commission A ××
Reserve (transfer) ...... B ×× ×××
Capital A/cs - ......
Share of profit
(if profit)
A ××
B ×× ***
Total ......... Total .........
Proforma of Profit and Loss Appropriation Account
Illustration 2 (Preparation of Profit and Loss Account and Balance Sheet)

Aakriti and Akash are partners sharing profits in the proportion of 3:2. The undermentioned
trial balance was extracted from their books on December 31, 2000.
Trial Balance as on December 31, 2000
Rs. Rs.
Aakriti's Capital 65,000

Akash's Capital 40,000
Aakriti's Drawings 4,000
Akash's Drawings 3,000
Goodwill 10,000
Plant and Machinery 40,000
Office Furniture 5,000
Purchases 85,000
Sales 1,60,000
Total c/f 1,47,000 2,65,000
Total b/f 1,47,000 2,65,000
Sundry Debtors 40,500

Sundry Creditors 14,510
Returns Inwards and Outwards 1,500 2,500
Rent 3,750
Postage and Telegrams 500
Advertising Expenditure 9,000
Opening stock 11,500
Cash in hand 16,000
Wages 14,000
Telephone Charges 500
Salaries to staff 12,250
Printing and Stationery 750
Commission 5,000
Travelling Expenses 2,000
Carriage Inwards 5,800
Motor Van 20,860
Bills payable 8,900
Total 2,90,910 2,90,910
You are required to prepare the Profit and Loss Account for the year ended December
31, 2000 and Balance Sheet as at that date. The following adjustments are to be made:
1. The value of stock on December 31, 2000 was Rs. 12,500.

2. Write off Rs. 250 from office furniture; 10% on plant and machinery and 20% on
motor van.
3. Create a provision of 5% on the sundry debtors for bad debts.
4. Write off 1/5th of the advertising expenses.
5. Partners are entitled to interest on capital @ 5% p.a. and Akash is entitled to a
salary of Rs. 1,800 p.a.
Solution
Books of Akriti and Akash
Profit and Loss Account for the year ended December 31, 2000.
Dr. Cr.
Particulars Amount Particulars Amount
(Rs.) (Rs.)
Opening Stock 11,500 Sales 1,60,000
Purchases 85,000 Less : Returns 1,500 1,58,500
Less: Returns 2,500 82,500
Wages 14,000
Carriage Inwards 5,800
Gross Profit c/f 57,200 Closing Stock 12,500
1,71,000 1,71,000
Salaries to staff 12,250 Gross Profit b/f 57,200
Rent 3,750
Postage and Telegram 500
Advertising Exp. written off 1,800
Telephone Charges 500
Printing and Stationery 750
Commission 5,000
Travelling Expense 2,000
Depreciation
Plant 4,000
Furniture 250
Motor Van 4,172 8,422
Provision for Bad Debts 2,025
Salary to Akash 1,800
Interest on capital :
Aakriti 3,250
Akash 2,000 5,250
Net Profit Transferred to
Capital a/c:
Aakriti 7,892
Akash 5,261 13,153

Balance Sheet as at December 31, 2000
Liabilities Amount Assets Amount

(Rs.) (Rs.)
Aakriti's Capital 65,000 Goodwill 10,000

Less:Drawings 4,000 Plant and Machinery 40,000
61,000 Less: Depreciation 4,000 36,000
Add: Interest on Capital 3,250
Net profits 7,892 72,142 Office Furniture 5,000
Less: Depreciation 250 4,750
Akash's Capital 40,000
Less: Drawings 3,000 Motor Vans 20,860
37,000 Less: Depreciation 4,172 16,688
Add: Interest on Capital 2,000
Salary 1,800 Sundry Debtors 40,500
Net profits 5,261 46,061 Less: Provision 2,025 38,475
Sundry Creditors 14,510 Cash on hand 16,000
Bills Payable 8,900 Advertising exp. 9,000
Less: Written-off (1/5) 1,800 7,200
Stock on hand 12,500
Total 1,41,613 Total 1,41,613
Illustration 3 (Distribution of profit)

Ajit, Choudhary and Vishal set up a partnership firm on January 1, 2001. They contributed
Rs. 50,000, Rs. 40,000 and Rs. 30,000 respectively as their capitals and decided to share
profits in the ratio of 3:2:1. The partnership deed provided that Ajit is to be paid a salary of
Rs. 1,000 p.m. and Choudhary a commission of Rs. 5,000. It also provided that interest on
capital be allowed @ 6% p.a. The drawings for the year were: Ajit Rs. 6,000, Choudhary Rs.
4,000 and Vishal Rs. 2,000. Interest on drawings Rs. 270 on Ajit's drawings, Rs. 180 on
Choudhary's drawings and Rs. 90 on Vishal's drawings. The net amount of profit as per the
profit and loss account for the year ended 2001 was Rs. 35,660.
You are required to record the necessary journal entries relating to appropriation of
profit and prepare the profit and loss appropriation account and the partners' capital accounts.
Solution
Books of Ajit, Chaudhary and Vishal
Journal
Date Particulars L.F. Debit Credit
Amount Amount
2001 (Rs.) (Rs.)
End of Profit and Loss a/c Dr. 35,660

the year Profit and Loss Appropriation a/c 35,600
(Transfer of Profit to Profit and Loss
Appropriation Account)
Ajit's Salary a/c Dr. 12,000
Ajit's Capital a/c 12,000
(Amount of Ajit's Salary)
Profit and Loss Appropriation a/c Dr. 12,000
Ajit's Salary a/c 12,000
(Transfer of Ajit's Salary to
Profit and Loss Appropriation Account)
Choudhary's Commission a/c Dr. 5,000
Choudhary's Capital a/c 5,000
(Amount of Choudhary's Commission)
Choudhary's Commission a/c 5,000
(Transfer of Choudhary's Commission
to Profit and Loss Appropriation Account)
Interest on Capital a/c Dr. 7,200
Vishal's Capital a/c 1,800
(Amount of interest on capital)
Interest on Capital a/c 7,200
(Transfer of Interest on Capital to
Ajit's Capital a/c Dr. 270
Choudhary's Capital a/c 180
Vishal's Capital a/c 90
Interest on Drawings a/c 540
(Amount of interest on drawings)
Interest On Drawings a/c Dr. 540
Profit and Loss Appropriation a/c 540
(Transfer of Interest on drawings to
Vishal's Capital a/c 2,000
(Amount of profit on appropriation)
Profit and Loss Appropriation Account for the year ended December 31,2001
Dr. Cr.
(Rs.) (Rs.)
Ajit's Salary 12,000 Net profit as per profit 35,660
Choudhary's Commission 5,000 and loss account
Interest on Capital: Interest on Drawings :
Ajit's Capital 3,000 Ajit's Capital 270
Choudhary's Capital 2,400 Choudhary's capital 180
Vishal's Capital 1,800 7,200 Vishal's Capital 90 540
Capital Accounts -
Share of Profit:
Ajit's Capital 6,000
Choudhary's Capital 4,000
Vishal's Capital 2,000 12,000
Ajit's Capital Account
Dr. Cr.
2001 (Rs.) 2001 (Rs.)
Interest on Drawings 270 Salary 12,000
Profit and Loss
Appropriation
(Share of profit) 6,000
Choudhary's Capital Account
Dr. Cr.
2001 (Rs.) 2001 (Rs.)
Interest on Drawings 180 Commission 5,000
Profit and Loss
Appropriation
Vishal's Capital Account
Dr. Cr.

2001 (Rs.) 2001 (Rs.)
Interest on Drawing 90 Interest on Capital 1,800
Balance c/f 31,710 Profit and Loss
Appropriation
Illustration 4 (Distribution of profit)

Pawan and Purna are partners in a firm sharing profits in the ratio of 3:2. The balance in their
capital and current accounts as on January1, 1998 were as under :
Pawan Purna
(Rs.) (Rs.)
Capital Account 30,000 20,000
Current Account (Cr.) 10,000 8,000
The partnership deed provided that Pawan is to be paid salary @ Rs. 500 p.m. whereas Purna
is to get commission of Rs. 4,000 for the year.
Interest on capital is to be allowed @ 6% p.a. The drawings of Pawan and Purna for the
year were Rs. 3,000 and Rs. 1,000, respectively. Interest on
drawings for Pawan and Purna works out at Rs. 75 and Rs. 25, respectively. The net profit of
the firm before making these adjustments was Rs. 24,900.
Prepare the Profit and Loss Appropriation Account and the partners' capital and current
accounts.
Solution
Books of Pawan and Purna

Profit and Loss Appropriation Account for the year ended Dec. 31,1998
Dr. Cr.
(Rs.) (Rs.)
Pawan's Salary 6,000 Net profit as per Profit and 24,900
Purna's Commission 4,000 Loss account
Interest on Capital: Interest on drawings :
Pawan's current 1,800 Pawan's current a/c 75
Purna's current 1,200 3,000 Purna's current a/c 25 100
Capital accounts
(Share of Profit):
Pawan's current 7,200
Purna's current 4,800 12,000

Dr. Cr.
Date Particulars J. Pawan Purna Date Particulars J. Pawan Purna
1998 F. Rs. Rs. 1998 F. Rs. Rs.
Balance c/f 30,000 20,000 Balance b/f 30,000 20,000
Partners' Current Account

Dr. Cr.
Date Particulars J.F. Pawan Purna Date Particulars J.F. Pawan Purna
1998 Rs. Rs. 1998 Rs. Rs.
Drawings 3,000 1,000 Balance b/f 10,000 8,000
Interest on 75 25 Salary 6,000 --
Drawing Commission -- 4,000
Balance c/f 21,925 16,975 Interest on 1,800 1,200
Capital
Share of profit 7,200 4,800
Total 25,000 18,000 Total 25,000 18,000
Calculation of Interest on Capital
If the partnership agreement specifically provides for the payment of the interest on the
capital contributed by the partners, the same has to be allowed. Interest to be allowed on
capital is to be calculated with respect to the time, rate and amount. Generally, following
points are to be borne in mind while calculating the interest on capital:
1. Normally, interest on the opening balance at the beginning of the year is allowed for the
whole accounting year.
2. If additional capital is invested during the year, interest for the relevant period is
calculated.
3. If part of the capital is withdrawn during the year, interest on the part of the capital that
was invested for the whole year, interest is calculated for the whole year and it is added
with the amount of interest that is calculated on the remaining capital that was invested
for the relevant period. For example, Anmol has Rs. 30,000 as balance in his capital
account at the beginning of the year. In the middle of the year he withdrew Rs.10,000
from his capital. He is entitled for interest @ 10% p.a.
In this case, interest will be calculated in the following manner:

(20,000 × 10/100) + (10,000 × 10/100 × 1/2) = Rs. 2,500;
Alternatively, we can calculate interest on capital with respect to the amount

remained invested for the relevant period. In the above example, the interest may also be
calculated as follows:
(30,000 × 10/100 × 1/2) + (20,000 × 10/100 × 1/2) = Rs. 2,500.
Illustration 5 (Interest on Capital)

Mansoor and Reshma are partners in a firm. Their capital accounts showed the balance
on Jan 1, 2000 as Rs. 20,000 and Rs. 15,000 respectively.During the year, Mansoor
introduced additional capital of Rs.10,000 on May 1, 2000 and Reshma brought in further
capital of Rs.15,000 on July 1, 2000. Reshma withdrew Rs. 5,000 from her capital on
October 1, 2000. Interest is allowed @ 6% p.a. on the capitals. Calculate the interest to be
paid on the capital.
Solution
Statement showing calculation of interest
Particulars Mansoor Reshma

Rs. Rs.
1. Interest on capital balance on
Jan 1, 2000:
Mansoor – (20,000×6/100) 1,200
Reshma – (15,000×6/100) 900
2. Add interest on additional capital:
Mansoor – (10,000×6/100×8/12) 400
Reshma – (15,000×6/100×6/12) 450
3. Less: Interest on capital withdrawn
by Reshma (5000×3/12×6/100) (75)
Total Interest Payable 1,600 1,275
Calculation of Interest on Drawings

Interest on drawings is to be charged from the partners, if the same has been specifically
provided in the partnership deed. Interest on drawings is to be calculated with reference to the
time period for which the money was withdrawn. Following may be the possibilities requiring
the different calculations of interest when:
(1) Amount, rate of interest and date of withdrawal is given:

Suppose, Johnson is a partner who withdrew Rs. 20,000 on October 1, 2002. Interest on
drawings is charged @ 10% per annum. The calculation of interest will be as follows:
Rs. 20,000 10 3 Rs. 500

100 12
(2) Amount and rate of interest are given but date of withdrawal is not specified:
Suppose, Ahmed is a partner who withdraws Rs. 20,000 and interest on drawings is
charged @ 10% per annum. The calculation of interest will be as follows:
Rs. 20,000 10 6 Rs. 1,000

100 12
Here, it is noted that in the absence of any particular date of withdrawal, it is assumed
that withdrawals are made evenly throughout the year. Hence, interest is charged for the
average of the period of the year, i.e., six months.
(3) Fixed amount is withdrawn every month:
In this case, there may be three possibilities and accordingly the interest for that period
will be charged:
a) If amount is withdrawn during the month (implicitly assumed to be in the middle
of month), interest is calculated for six months;
b) If the withdrawal is made in the beginning of the month, interest is calculated for
6½ months (six and a half months), and
c) If withdrawal is made at the end of the month, interest is calculated for 5 ½
months (five and a half months).
(4) If amount is withdrawn at each quarter:
(a) If amount is withdrawn in the beginning of each quarter, in this case the interest is
calculated on total drawings for a period of seven and a half months, and
(b) If amount is withdrawn at the end of each quarter, the amount of interest is
calculated on total drawings for a period of four and a half months.
(5) Different amounts are withdrawn at different intervals:

In this case, the sum of the product of amount withdrawn and the time is calculated and
then the rate of interest is applied for a period of one month. For example, Sonu
withdraws Rs. 1,000 on March 1; Rs. 2,000 on 30th June; Rs. 1,000 on 1st November
and Rs. 2,000 on 31st December. Interest on drawings is charged at 10% per annum. In
this case, interest on drawings will be calculated as follows :
Statement of Calculation of Interest on Drawings
(1) (2) (3) (4) (5)

Date Amount(Rs.) Time Period Product Interest*(Rs.)
(2×3)
March 1 1000 10 Months 10,000 10,000 × 10/100 × 1/12 = 83.33
June 30 2000 6 Months 12,000 12,000 × 10/100 × 1/12 = 100
Nov.1 1000 2 Months 2,000 2,000 × 10/100 × 1/12 = 16.67
Dec.31 2000 0 0 0
Total 24,000 200*
* Instead of this cumbersome calculation, the same result can be obtained by calculating the Interest on the sum of
product for a period of one month = Rs. 24,000 × 10/100 × 1/12 = Rs. 200
Illustration 6 (Interest on Drawings)
Rajesh is a partner in a firm. He withdrew the following amounts during the year 2000 :
Rs.
January 31 6,000
March 31 4,000
June 30 8,000
September 30 3,000
October 31 5,000
The interest on drawings is to be charged @ 6% p.a. Assuming the accounting year
closes on December 31each year, interest on drawings to be debited to Rajesh shall be worked
out as follows :
1 2 3 4
Date Amount(Rs.) Period Months Product(Rs.)
(2×3)
Jan 31 6,000 11 66,000
March 31 4,000 9 36,000
June 30 8,000 6 48,000
Sept 30 3,000 3 9,000
Oct 31 5,000 2 10,000
Total 26,000 1,69,000
Interest on drawings for one month on the sum of products :
Rate of interest 1
sum of products
100 12
= 6/100 × Rs. 1,69,000 × 1/12
= Rs. 845
Alternatively, interest can be calculated separately for each amount for the period
involved and then totalled. In that case also, we shall arrive at the same amount of interest.
Illustration 7 (Interest on drawings)

Amit and Sonu are partners sharing profits equally. Amit withdrew Rs. 1,000 p.m. regularly
on the first day of every month for personal expenses. If interest
on drawings is to be charged @ 5% p.a., calculate the interest on the drawings of Amit.
Solution
Calculation of Interest on Drawings
(1) (2) (3) (4)

Date Amount of drawings(Rs.) Period for which money has Product(Rs.)
2001 been used (2 × 3)
Jan 1 1,000 12 12,000
Feb 1 1,000 11 11,000
Mar 1 1,000 10 10,000
Apr 1 1,000 9 9,000
May 1 1,000 8 8,000
June 1 1,000 7 7,000
July 1 1,000 6 6,000
Aug 1 1,000 5 5,000
Sept 1 1,000 4 4,000
Oct 1 1,000 3 3,000
Nov 1 1,000 2 2,000
Dec 1 1,000 1 1,000
Total 12,000 78,000
Interest on Drawings = Rate of Interest/100 × 1/12 × Sum of the product

= 5/100 × 1/12 × 78,000
= Rs. 325
It may be noted that when a fixed amount is drawn at regular intervals, the interest on
drawings can also be calculated on the basis of the average period. The calculation of the
average period depends upon the fact whether the fixed amount is withdrawn on the first day
of every month or the last day of every month.
If the fixed amount is withdrawn on the first day of every month, the average period will
be calculated with the help of following formula :
Average period = (Total period in months + 1)/2
If the fixed amount is withdrawn on the last day of every month, the average period will
be calculated by the following formula :
Average period = (Total period in months – 1)/2
In illustration 6, the partners withdrew a fixed amount on the first day of every month.
Hence, the interest on drawings can also be calculated by applying the average period
formula.
Average period = (Total period in months + 1)/2
= (12 +1)/2 = 6.5 Months
Interest on drawings for 6.5 months @ 5% p.a.
5 13 1
= 12000
100 2 12
= Rs. 325
Illustration 8 (Interest on Drawings)

Maneesh and Mohan are partners in a firm. The partnership deed provided that interest on
drawings will be charged @ 6% p.a.. During the year ended, December 31, 2002, Maneesh
withdrew Rs.5,000 in the beginning of each quarter and Mohan withdrew Rs. 5,000 at the end
of each quarter. Calculate interest on the partners' drawings.
Solution
Maneesh's total drawings = Rs.5,000 × 4 = Rs.20,000
Mohan's total drawings = Rs.5,000 × 4 = Rs.20,000
Interest on Maneesh's Drawings :
12 3
Number of months for which interest will be charged = 7.5 months
2
6 15 1
Interest = Rs. 20,000 Rs. 750
100 2 12
Interest on Mohan's drawings :
Number of months for which interest will be charged = 12 − 3 4.5 months

2
6 9 1
Interest = Rs. 20,000 Rs. 450
100 2 12
1.4 Guarantee of Profit to a Partner
Guarantee is an assurance that a partner will not get as his share of profit less than the
guaranteed amount. There may be two situations :
(a) Guarantee to one partner by (others) the firm,
(b) Guarantee to a partner by another partner individually. (a)
Guarantee to one partner by (others) the firm
Sometimes, a partner is guaranteed a minimum amount by way of his share in the profits
of the firm. Such a guarantee may be given to an existing partner or to a new partner at
the time of admission. Such guaranteed amount shall be paid to partner when his share
of profit, as calculated, according to his profit sharing ratio is less than the guaranteed
amount. The deficiency of such guaranteed amount will be borne by the other partner's
in their profit sharing or agreed ratio as the case may be.
Example, Soni and Mita are partners and they decide to admit Mary into the partnership
firm. The profit sharing ratio is agreed as 3:2:1 with a guaranteed amount of Rs. 5,000 to
Mary. For the year ended 2001, the business earns a profit of Rs. 24,000. Mary's share
works out to Rs. 4,000 (1/6 of Rs. 24,000). This is Rs. 1,000 less than the guaranteed
amount of Rs. 5,000. Hence, Mary will get Rs. 4,000 as her share of the profit in the
profit sharing ratio and the deficiency of Rs.1,000 (i.e. the amount by which Rs. 4,000
falls short of the guaranteed amount) shall be transferred to the credit of Mary by
transfer from Soni and Mita in their profit sharing ratio, i.e. 3:2.
Illustration 9 (Guarantee of Profit)

Mouse, Keyboard and Monitor are partners. They admit Printer as a partner with a guarantee
that his share of profits shall not be less than Rs. 20,000 p.a. Profits are to be shared in the
proportion of 4:3:3:2. The total profits for the year ended 2002 were Rs. 96,000. Prepare the
profit and loss appropriation account showing the division of the profits for the year.
Solution
Books of Mouse, Key Board and Monitor
for the year ended........2002
Dr. Cr.
(Rs.) (Rs.)
Mouse 30,400 Net Profits 96,000
Keyboard 22,800
Monitor 22,800
Printer 20,000
Notes to Solution :
Printer's share = Rs. 96,000 × 2/12 = Rs. 16,000.
Since Printer has been guaranteed a minimum amount of Rs. 20,000, therefore, he will given Rs.
20,000 and remaining amount i.e., Rs. 20,000 – Rs.16,000 = Rs. 4,000 will be borne by Mouse,
Keyboard and Monitor in the ratio of 4:3:3.
Mouse's share = Rs. 96,000 × 4/12 = Rs. 32,000

Less :
contribution to Printer (Rs. 4,000 × 4/10) = Rs. 1,600 Rs. 30,400
Keyboard's share = Rs. 96,000 × 3/12 = Rs. 24,000
Less:
Monitor's share = Rs. 96,000 × 3/12 = Rs. 24,000
Less:
(b) Guarantee to a partner by another partner individually
The guarantee to an existing or incoming partner may be given by all the old partners or
any of them in their new profit sharing ratio or an agreed basis. In illustration 9, all the
three partners have agreed to guarantee Printer for the minimum share of profit. Hence,
these three divided the Printer's share in the ratio of 4:3:3. Suppose Mouse alone agrees
to guarantee Printer then profit distribution will be as follows :
Mouse's share Rs. 96,000 × 4/12 = Rs. 32,000

Less : Printer's share Rs. 4,000
Final share of Mouse Rs. 28,000
In other words Keyboard and Monitor will get full share, i.e. Rs.24,000 each.
Illustration 10 (Guarantee of Profit)
Kim and Lal are partners in a firm sharing profit in the ratio of 2:1. They decide to admit
Mohit with 1/4th share in profits with a guaranteed amount of Rs. 25,000. Kim undertook to
meet the liability arising out of the guaranteed amount to Mohit. The profit sharing ratio
between Kim, Lal and Mohit will be 2:1:1. The firm earned profit of Rs. 76,000 for the year
ended March 31, 2001.
You are required to prepare Profit and Loss Appropriation Account and show the
distribution of profit amongst the partners.
Solution
The Profit and Loss Appropriation Account will be prepared as follows :
The Profit and Loss Appropriation Account for the
year ended March 31, 2001
Dr. Cr.
(Rs.) (Rs.)
Share of Profit Net Profit as per profit 76,000
Kim and loss account
(2/4 of 76,000) 38,000
Less: Mohit's
deficiency
(2/3 of 9,000) 6,000 32,000
Lal
(1/4 of 76,000) 19,000
Mohit
(1/4 of 76,000) 19,000
Add: deficiency
borne by Kim 6,000 25,000
Notes to the Solution :

The minimum guaranteed amount to Mohit is Rs. 25,000 whereas, his share of profit as per the profit
sharing ratio works out to be Rs. 19,000 only. Hence, there is a shortfall of Rs 6,000. This amount will
be borne by Kim.
Past Adjustments
Sometimes, after the final accounts have been prepared and the partners' capital account are
closed, it is found that certain items have been omitted by
mistake or have been wrongly treated. Such omissions and commissions usually relate to the
interest on capital, interest on drawings, salary to partners, etc. In such a situation, necessary
adjustments have to be made in the partners' capital account through an account called Profit
and Loss Adjustment Account. The following procedure may be helpful in recording
necessary adjustments :
1. If, interest on capital is one of the items of omissions, then first ascertain the partners'
capital at the beginning. This can be done by deducting partners' share of current year's
profit from their capitals at the end and adding their drawings thereto.
2. Work out the amounts of omitted items that are to be credited to partners' capital
accounts such as interest on capital, salaries to partners, etc. The following journal entry
for the adjustment is recorded :
Profit and Loss Adjustment a/c Dr.
Partners' Capital a/c (individually)
3. Work out the amounts of omitted items which are to be debited to Partners' Capital
Accounts such as interest on drawings and record the following adjustment entry are
recorded :
Partners' Capital (individually) a/c Dr.
Profit and Loss Adjustment a/c
4. Work out the balance of the Profit and Loss Adjustment Account. The credit balance of
the Profit and Loss Adjustment Account reflects the profit and the debit balance, the
loss. This is to be distributed among the partners.
5. The balance of the Profit and Loss Adjustment Account as worked out in point 4 above
be transferred to the partners' capital accounts in their profit sharing ratio. Thus, the
Profit and Loss Adjustment Account will stand closed. It will involve the following
journal entry :
If it is a credit balance (profit)
Profit and Loss Adjustment a/c Dr.
Partners' Capital (individually) a/c
If it is a debit balance (loss)
Partners' Capital (individually) a/c Dr.
Profit and Loss Adjustment a/c
The adjustment can also be made directly in the Partners' Capital Accounts without
preparing a Profit and Loss Adjustment Account. In such a situation,
we shall prepare a statement to find out the net effect of omissions and commissions and then
to debit the capital account of the partner who had been credited in excess and credit the
capital account of the partner who had been debited in excess.
Illustration 11 (Past adjustments)

Asha and Bony are partners in a firm sharing profits equally. Their capital accounts as on
December 31, 2000 showed balances of Rs. 60,000 and Rs. 50,000 respectively. After taking
into account the profits of the year 2000, which amounted to Rs 20,000, it was subsequently
found that the following items have been left out while preparing the final account of the year
ended 2000.
(i) The partners were entitled to interest on capitals @ 6% p.a.

(ii) The drawings of Asha and Bony for the year 2000 were Rs.8,000 and Rs.6,000
respectively. The interest on drawings was also to be charged @ 5% p.a.
(iii) Asha was entitled to salary of Rs.5,000 and Bony, a commission of Rs.2,000 for the
whole year.
It was decided to make the necessary adjustments to record the above omissions. Give
the necessary journal entries and prepare the profit and loss adjustment account and Partners'
capital accounts.
Solution
(1) Partners capital at the beginning
Asha Bony
(Rs.) (Rs.)
Capital at the end 60,000 50,000
Less: Share of Profit (10,000) (10,000)
(Rs. 20,000 shared equally) 50,000 40,000
Add: Drawings 8,000 6,000
Capital at the beginning 58,000 46,000
(2) Interest on Capital

For Asha : 58,000 × 6/100 = Rs. 3,480
For Bony : 46,000 × 6/100 = Rs. 2,760
(3) Interest on Drawings
For Asha : on Rs. 8,000 @ 5% p.a. for 6 months.
5 6
8,000 Rs. 200
100 12
For Bony : on Rs. 6,000 @ 5% p.a. for 6 months

5 6
6,000 Rs . 150
100 12
Books of Asha and Bony

Journal
Amount Amount
2000 (Rs.) (Rs.)
Dec 31 Profit and Loss Adjustment a/c Dr. 6,240
Asha's Capital a/c 3,480
Bony's Capital a/c 2,760
(Amount of interest on capital )
,, Asha's Capital a/c Dr. 200
Bony's Capital a/c Dr. 150
Profit and Loss Adjustment a/c 350
(Amount of interest on drawings )
,, Profit and Loss Adjustment a/c Dr. 5,000
(Amount of salary )
,, Profit and Loss Adjustment a/c Dr. 2,000
Bony's Capital a/c 2,000
(Amount of commissions )
,, Asha's Capital a/c Dr. 6,445
Bony's Capital a/c Dr. 6,445
Profit and Loss Adjustment a/c 12,890
(Amount of loss on adjustment )
Profit and Loss Adjustment Account
for the year ended December 31, 2000
Dr. Cr.
(Rs.) (Rs.)
Capital (Interest on capital) Capital ( Interest on Drawings )
Asha 3,480 Asha 200
Bony 2,760 6,240 Bony 150 350
Asha's capital (Salary) 5,000 Capital (Loss on adjustments)
Bony's capital (Commission ) 2,000 Asha 6,445
Bony 6,445 12,890

Dr. Cr.
Date Particulars J.F. Asha's Bony's Date Particulars J.F. Asha's Bony's
2000 Rs. Rs. 2000 Rs. Rs.
Dec31 Profit and Loss Dec 31 Balance b/f 60,000 50,000

Adjustment: 200 150 Profit and Loss
(interest on Adjustment: 3,480 2,760
drawings) (Interest on
Profit and Loss capital)
Adjustment: 6,445 6,445 Profit and Loss
(Loss on Adjustment: 5,000
Adjustment) (Salary)
Balance c/f 61,835 48,165 Profit and Loss
Adjustment: 2,000
(Commission)
68,480 54,760 68,480 54,760
Balance b/f 61,835 48,165
For a Single adjustment entry an analysis table to find out the amount to be debited or
credited to the capital accounts of the partners individually.
Analysis Table
Particulars Asha Bony

(Rs.) (Rs.)
Amount credited 8,480 4,760
(Interest on capital, salary and commission)
Amount debited 6,645 6,595

(Interest on drawings and share of loss)
Cr. 1,835 Dr. 1,835
Journal Entry

Alternatively: A detailed statement can be prepared as follows :
Statement of Adjustment
Particulars Amount already Amount as should Adjustment

recorded have been recorded
Dr. (Rs.) Cr. (Rs.) Dr. (Rs.) Cr. (Rs.) Dr./Cr (Rs.)
Asha's Capital : -- -- --
Interest on Capital -- -- 3,480
Interest on Drawings -- -- 200
Salary -- -- 5,000
Share of Profit 10,000 3,555
200 12,035
NET 10,000 -- 11,835 Cr. 1,835
Bony's Capital :
Interest on Capital -- -- -- 2,760
Interest on Drawings -- -- 150 --
Commission -- -- -- 2,000
Share of Profit -- 10,000 -- 3,555
150 8,315
NET 10,000 -- 8,165 Dr. 1,835
Direct Adjustment Entry
Note : Share of Profit has been worked out as under :
Profit and Loss Appropriation Account for the

year ended December 31, 2000
Dr. Cr.
(Rs.) (Rs.)
Interest on Capital Profit as per Profitand Loss a/c 20,000
Asha 3,480 Interest on Drawings :
Bony 2,760 6,240 Asha's 200
Asha's Capital (Salary) 5,000 Bony's 150 350
Bony's Capital (Commission) 2,000
Share of Profit :
Asha 3,555
Bony 3,555 7,110
Goodwill
Goodwill is also one of the special aspects of partnership accounts which requires adjustment
at the time of a change in the profit sharing ratio, the admission of a partner or the retirement
or death of a partner.
Meaning of Goodwill
Over a period of time, a well-established business develops an advantage of good name,
reputation and wide business connections. This helps the business to earn more profits as
compared to a newly set up business. In accounting, the monetary value of such advantage is
known as 'goodwill'.
It is regarded as an intangible asset. In other words, goodwill is the value of the
reputation of a firm in respect of the profits expected in future over and above the normal
profits. It is generally observed that when a person pays for goodwill, he/she pays for
something, which places him in the position of being able to earn super profits as compared to
the profit earned by other firms in the same industry.
In simple words, goodwill can be defined as ''the present value of a firm's anticipated
excess earnings'' or as "the capitalized value attached to the differential profit capacity of a
business". Thus, goodwill exists only when the firm earns super profits. Any firm that earns
normal profits or is incurring losses has no goodwill.
Factors giving rise to Goodwill

The main factors helping the creation of goodwill are as follows :
1. Nature of Business : A firm that produces high value added products or having a stable
demand is able to earn more profits and therefore has more goodwill.
2. Location : If the business is centrally located or is at a place having heavy customer

traffic, the goodwill tends to be high.
3. Efficiency of Management : A well-managed concern usually enjoys the advantage of
high productivity and cost efficiency. This leads to higher profits and so the value of
goodwill will also be high.
4. Market situation : The monopoly condition or limited competition enables the concern
to earn high profits which leads to higher value of goodwill.
5. Special Advantages : The firm that enjoys special advantages like import licences, low
rate and assured supply of electricity, long-term contracts for supply of materials, well-
known collaborators, patents, trade marks, etc. enjoy higher value of goodwill.
Need for Valuation

Normally, the need for valuation of goodwill arises at the time of the sale of a business. But,
in case of a partnership firm it may also arise in the following circumstances:
1. Change in the profit sharing ratio amongst the existing partners;

2. Admission of a new partner;
3. Retirement of a partner;
4. Death of a partner;
5. Dissolution of a firm which involves sale of business as a going concern; and
6. Amalgamation of firms.
Methods of Valuation of Goodwill
The important methods of valuation of goodwill are as follows :
1. Average Profits Method : Under this method, the goodwill is valued at agreed number of
'years' purchase of the average profits of the past few years. It is based on the
assumption that a new business will not be able to earn any profits during the first few
years of its operations. Hence, the person who purchases a running business must pay in
the form of goodwill a sum which is equal to the profits he is likely to receive for the
first few years. The goodwill, therefore, should be calculated by multiplying the past
average profits by the number of years during which the anticipated profits are expected
to accrue.
For example, if the past average profits of a business works out at Rs. 20,000 and it is
expected that the same profits will be available in future, the value of goodwill will be
Rs. 60,000 (Rs. 20,000 × 3), if three years, purchase of the past average profits
constitute the basis of valuation of the goodwill.
Illustration 12 (Goodwill)
The profit for the last five years of a firm were as follows year 1999 Rs. 4,00,000; year 2000
Rs. 3,98,000; year 2001 Rs. 4,50,000; year 2002 Rs. 4,45,000 and year 2003 Rs. 5,00,000.
Calculate goodwill of the firm on the basis of 4 years purchase of 5 years average profits.
Solution
Year Profit
Rs. Rs.
1999 4,00,000
2000 3,98,000
2001 4,50,000
2002 4,45,000
2003 5,00,000
Total 21,93,000
Total profit of last 5 years

Average Profit = = Rs. 21,93,000 Rs. 4,38,600
No. of years 5
Goodwill = Average Profits × No. of years purchased
= Rs. 4,38,600 × 4 = Rs. 17,54,400
Compute the value of goodwill on the basis of four years' purchase of the average profits
based on the last five years.
The profits for the last five years were as follows :
Year Rs.
1999 40,000
2000 50,000
2001 60,000
2002 50,000
2003 60,000
Solution
Calculation of Average Profits
(Profits)
Year Rs.
1999 40,000
2000 50,000
2001 60,000
2002 50,000
2003 60,000
Total 2,60,000
Average Profits = 2,60,000/5
= Rs. 52,000
Goodwill = Rs. 52,000 × 4
= Rs. 2,08,000
The following were the profits of a firm for the last three years.
Year ending Profit (Rs.)
March 31
2000 4,00,000 (including an abnormal gain of
Rs. 50,000)
2001 5,00,000 (after charging an abnormal loss of
Rs. 1,00,000)
2002 4,50,000 (excluding Rs. 50,000 payable on the
insurance of plant and machinery )
Calculate the value of firm's goodwill on the basis of two years purchase of the average
profits for the last three years.
Solution
Calculation of average maintainable profits.
Year ended Profit

(Rs.)
2000 (4,00,000 – 50,000) 3,50,000
2001 (5,00,000 + 1,00,000) 6,00,000
2002 (4,50,000 – 50,000) 4,00,000
Total 13,50,000
Rs.13,50,000
Average profit = Rs. 4,50,000
3
Goodwill at 2 years purchase of Average Profit = Rs.

4,50,000 × 2 = Rs. 9,00,000
The above calculation of goodwill is based on the assumption that no change in the
overall situation of profits is expected in the future.
1. Weighted Average Profit Method : This method is a modified version of the earlier
method. Under this method each year's profit is multiplied by the respective number of
weights i.e. 1,2,3,4 etc., in order to find out value of product and the total of products is
then divided by the total of weights in order to ascertain the weighted average profits.
Thereafter, the weighted average profit is multiplied by the agreed number to find out
the value of goodwill.
Total of Products of Profits

Weighted Average Profit = Total of Weights
Goodwill = Weighted Average Profits × Agreed
Number of years'(Purchase)
Weighted average profit method of valuation of goodwill is better than the simple
average profit method because it gives weightage to latest profit,which is likely to be
maintained in the future by the firm. It is applicable when the profit shows a rising or
falling trend.
The profits of a firm for the year ended 31st March for the last five years were as follows :
Year Profit (Rs.)

1999 20,000
2000 24,000
2001 30,000
2002 25,000
2003 18,000
Calculate the value of goodwill on the basis of three years' purchase of weighted
average profits after weights 1,2,3,4 and 5 respectively to the profits for 1999, 2000, 2001,
2002 and 2003.
Solution
Year Profit
ended 31 March Rs. Weight Product
1999 20,000 1 20,000
2000 24,000 2 48,000
2001 30,000 3 90,000
2002 25,000 4 1,00,000
2003 18,000 5 90,000
Total 15 3,48,000
3,48,000
Weighted Average Profit Rs. 23,200
15
Goodwill = 23,200 × 3 = Rs. 69,600
Calculate goodwill of a firm on the basis of three years' purchase of the weighted average
profits of the last four years. The profit of the last four years were : 2000 Rs. 20,200; 2001 Rs.
24,800; 2002 Rs.20,000 and 2003 Rs. 30,000. The weights assigned to each year are : 2000-1;
2001- 2; 2002- 3 and 2003-4.
You are supplied the following information :
(i) On September 1, 2002 a major plant repair was undertaken for Rs. 6,000 which was
charged to revenue. The said sum is to be capitalized for goodwill
calculation subject to adjustment of depreciation of 10% p.a. on reducing balance
method.
(ii) The closing stock for the year 2001 was overvalued by Rs. 2,400.
(iii) To cover management cost an annual charge of Rs. 4,800 should be made for the
purpose of goodwill valuation.
Solution
Calculation of adjusted 2000 2001 2002 2003
profit Rs. Rs. Rs. Rs.
Given Profits 20,200 24,800 20,000 30,000
Less Management Cost 4,800 4,800 4,800 4,800
15,400 20,000 15,200 25,200
Add Capital expenditure
charged to revenue - - 6,000 -
15,400 20,000 21,200 25,200
Less unprovided
depreciation - - 200 580
15,400 20,000 21,000 24,620
Less over valuation of
closing stock - 2,400 - -
15,400 17,600 21,000 24,620
Add over value of opening - - 2,400 -
stock
Adjusted Profit 15,400 17,600 23,400 24,620
Calculation of weighted average profits :
Year Profit Weight Product

Rs.
2000 15,400 1 15,400
2001 17,600 2 35,200
2002 23,400 3 70,200
2003 24,620 4 98,480
Total 10 2,19,280
2,19,280
Weight Average Profit = Rs. 21,928
10
Goodwill = 21,928 × 3 = Rs. 65,784
Notes to the Solution
(i) Depreciation of 2002 = 10% of Rs. 6,000 for 4 months
= 6,000 × 10/100 × 4/12 = Rs. 200
(ii) Depreciation of 2003 = 10% of Rs. 6,000 – Rs. 200 for one years
= 5,800 ×10/100 = Rs. 580
(iii) Closing stock of 2001 will become opening stock of 2002.
2. Super Profits Method : The basic assumption in the average profits method of
calculating goodwill is that, if a new business is set up, it will not be able to earn any
profits during the first few years of its operations. Hence, the person who purchases an
existing business has to pay in the form of goodwill a sum equal to the total profits he is
likely to receive for the first 'few years'.
It is also contended that the buyer's real benefit does not lie in total profits; it is limited
to such amounts of profits which are in excess of the normal return on capital employed in
similar business. Therefore, it is desirable to value, goodwill on the basis of the excess profits
and not the actual profits. The excess of actual profits over the normal profits is termed as
super profits. Normal profits can be ascertained as follows :
Capital Employed Normal Rate of Return

Normal Profits
100
Suppose an existing firm earns Rs. 18,000 on the capital of Rs. 1,50,000 and the normal
rate of return is 10%. The Normal profits will work out at Rs.15,000 (1,50,000 × 10/100). The
super profits in this case will be Rs. 3,000 (Rs. 18,000 – 15,000).
The goodwill under the super profits method is ascertained by multiplying the super
profits by certain number of years' purchase. If, in the above example, it is expected that the
benefit of super profits is likely to be available for 5 years in future, the goodwill will be
valued at Rs. 15,000 (3,000 × 5). Thus, the steps involved under the method are :
1. Calculate the average profit,

2. Calculate the normal profit on the capital employed on the basis of the normal rate of
return,
3. Calculate the super profits by deducting normal profit from the average profits, and
4. Calculate goodwill by multiplying the super profits by the given number of years'
purchase.
The books of business showed that the capital employed on December 31,2001, Rs. 5,00,000
and the profits for the last five years were: 1997-Rs. 40,000; 1998-Rs. 50,000; 1999-Rs.
55,000; 2000-Rs. 70,000 and 2001-Rs. 85,000. You are required to find out the value of
goodwill based on 3 years purchase of the super profits of the business, given that the normal
rate of return is 10%.
Solution

Normal Profit
100
5,00,000 10
= Rs. 50,000
100
Average Profits :
Year Profit
Rs.
1997 40,000
1998 50,000
1999 55,000
2000 70,000
2001 85,000
Total Profit Rs. 3,00,000
Average Profit = Rs. 3,00,000/5 = Rs. 60,000

Super Profit = Rs. 60,000 – Rs. 50,000 = Rs. 10,000
Goodwill = Rs. 10,000 × 3 = Rs. 30,000
Capital employed in a business on March 31, 2003 was Rs. 20,00,000 and the profits for the
last five years were as follows :
Year ending Profit
31st March Rs.
1999 2,60,000
2000 2,80,000
2001 2,70,000
2002 2,50,000
2003 2,10,000
Calculate the value of goodwill on the basis of 3 years' purchase of the super profits of
the business. The normal rate of return is 10%.
Solution

Normal Profit
100
Rs. 20,00,000 10
Rs. 2,00,000
100
Rs. 2,60,000 2,80,000 2,70,000 2,50,000 2,10,000

Average Profit
5
Rs.12,70,000
= Rs. 2,54,000 5
Super Profit = Average Profit – Normal Profit

= 2,54,000 – 2,00,000
= Rs. 54,000
Goodwill = Super Profit × No. of years purchase
= 54,000 × 3
= Rs. 1,62,000
The capital of the firm of Anu and Benu is Rs. 1,00,000 and the market rate of interest is
15%. Annual salary to partners is Rs. 6,000 each. The profits for the last 3 years were Rs.
30,000; Rs. 36,000 and Rs. 42,000. Goodwill is to be valued at 2 years purchase of the last 3
years' average super profits. Calculate the goodwill of the firm.
Solution
Interest on capital = 1,00,000 15 Rs. 15,000 (i)

100
Add partner's salary = Rs. 6,000 × 2 = Rs. 12,000 ..................... (ii)
Normal Profit (i + ii) = Rs. 27,000
Rs. 1,08,000
Average Profit = Rs. 30,000 + Rs. 36,000 + Rs. 42,000 =
3
= Rs. 36,000
Super Profit = Average Profit – Normal Profit
= Rs. 36,000 – Rs. 27,000
= Rs. 9,000
Goodwill = Super Profit × No of years' purchase
= Rs. 9,000 × 2
= Rs. 18,000
3. Capitalization Method : Under this method the goodwill can be calculated in two ways :
(a) by capitalizing the average profits, or (b) by capitalizing the super profits.
(a) Capitalization of Average Profit : In this method, the value of goodwill is

ascertained by deducting the actual capital employed (net assets) in the business
from the capitalized value of the average profits on the basis of normal rate of
return. This involves the following steps :
(i) Ascertain the average profits based on the past few years' performance.
(ii) Capitalize the average profits on the basis of the normal rate of return as
follows :
Average Profits × 100/Normal Rate of Return
This will give the total value of business.
(iii) Ascertain the actual capital employed (net assets) by deducting outside
liabilities from the total assets (excluding goodwill).
Capital Employed = Total Assets (excluding goodwill) – outside liabilities
(iv) Compute the value of goodwill by deducting net assets from the total value
of business, i.e. (ii) – (iii).
A business has earned average profits of Rs. 1,00,000 during the last few years and the
normal rate of return in a similar type of business is 10%. Ascertain the value of goodwill by
capitalization method, given that the value of net assets of the business is Rs. 8,20,000.
Solution
Capitalized Value of Average Profits
Rs. 1,00,000
100
= Rs 10,00,000
10
Goodwill = Capitalized Value – Net Assets
= 10,00,000 – 8,20,000
= Rs. 1,80,000
(b) Capitalization of Super Profits : Under this method following steps are involved :
(i) Calculate Capital employed of the firm, which is equal to total assets minus
outside liabilities.
(ii) Calculate required profit on capital employed by using the following
formula :
Profit = Capital Employed × Required Rate of Return/100
(iii) Calculate average profit of past years, that is, 3 to 5 years.
(iv) Calculate super profits by deducting required profits from average profits.
(v) Multiply the super profits by the required rate of return multiplier, that is,
Goodwill = Super Profits × 100/Normal Rate of Return

In other words, goodwill is the capitalized value of super profits.
Illustration 21(Goodwill)
Calculate Goodwill if :
(i) The goodwill of a firm is estimated at three years' purchase of the average profits of the
last five years which are as follows :
Years: 1998 1999 2000 2001 2002
Profits (Loss): Rs.10,000 15,000 4,000 (5,000) 6,000
(ii) If in the firm total capital employed is Rs.1,00,000 and normal rate of return is 8%, the
average profit for last 5 years is Rs. 12,000 and goodwill is estimated at 3 years'
purchase of super profits, remuneration to partners Rs. 3000.
(iii) Rama Brothers earn a net profit of Rs. 30,000 with a capital of Rs. 2,00,000. The normal
rate of return in the business is 10%. Use capitalization of super profits method to value
the goodwill.
Solution
(i) Total Profit = Rs. 10,000 + 15,000 + 4,000 + 6,000 – 5,000 = Rs. 30,000
Average Profit = Rs. 30,000/5 = Rs. 6,000
Goodwill = Average Profit × 3 = Rs. 6,000 × 3 = Rs. 18,000.
Average Profit = Rs. 12,000
Remuneration to Partners = Rs. 3,000
Average actual profit = Rs. 12,000 – Rs. 3,000 = Rs. 9,000
Normal Profit = Rs. 1,00,000 × 8/100 = Rs. 8,000
Super Profit = Average Profit – Normal profit = Rs. 9,000 – 8,000
(ii)
= Rs. 1,000
Goodwill = Super Profit × 3 = 1,000 × 3 = Rs. 3,000
(iii) Normal Profit = Rs. 2,00,000 × 10/100 = Rs. 20,000
Super Profit = Average Profit – Normal Profit = Rs. 30,000 – 20,000
= Rs. 10,000
Goodwill = Super Profit × 100/Normal Rate of Return
= 10,000 × 100/10 = Rs. 1,00,000
4. Present Value of Super Profits : Under this method, goodwill is estimated as the present
value of the future super profits. This requires following steps :
(i) Calculate the future super profits for next 5 to 7 years depending upon the business
potential.
(ii) Choose the required rate of return.
(iii) Calculate present value factors.
(iv) Multiply present value factors with future super profits.
(v) The sum of product of present value factors and super profits is the value of
goodwill.
A firm has the forecasted profits for the coming 5 years as follows :
Year I II III IV V
Profits (Rs.) 1,00,000 1,20,000 90,000 1,00,000 1,50,000
The total assets of the firm are Rs. 10,00,000 and outside liabilities are Rs. 2,00,000. The
present value factor at 10% are as follows :
Year I II III IV V
PVF 0.9091 0.8264 0.7513 0.6830 0.6209
Calculate the Value of goodwill.
Solution
Year I II III IV V
Profits (Rs.) 1,00,000 1,20,000 90,000 1,00,000 1,50,000

Normal Profit 80,000 80,000 80,000 80,000 80,000
Super Profit 20,000 40,000 10,000 20,000 70,000
PVF 0.9091 0.8264 0.7513 0.6830 0.6209
Present Value 18,182 33,056 7,513 13,660 43,463
of Super Profits
Value of Goodwill = Rs. 18,182 + 33,056 + 7,513 + 13,660 + 43,463
= Rs. 1,15,874
Change in Profit Sharing Ratio
Sometimes, the partners of a firm may agree to change their existing profit sharing ratio. As a
result of this, some partners will gain in future profits while others will lose. In such a
situation, the partner who gains by the change in the profit sharing ratio must compensate the
partner who has made the sacrifice because this effectively amounts to one partner buying the
share of profits from another partner. For example, Anu and Benu are partners in a firm
sharing profits in the ratio of 3:2. They decide to have an equal share in profits in future. In
this case, Anu looses 1/l0th (3/5 – 1/2) share of profits and Benu gains this 1/l0th. Hence,
Benu must compensate Anu for her loss in the share of future profits.
The amount of compensation will be equal to the proportionate amount of goodwill.

Suppose, the total value of goodwill is ascertained as Rs. 50,000/-, then Benu must pay 1/10
of Rs. 50,000/-, i.e. Rs. 5,000 to Anu. Alternatively, Benu's Capita1 Account be debited by Rs
5,000 and Anu's Capital Account credited with Rs. 5,000. The entry, thus, will be :
Benu's Capital a/c Dr. 5,000

Anu's Capital a/c 5,000
Alternatively, if the amount is paid privately by the gaining partner to the other partner,
then no entry is made in the books of the firm.
Apart from the payment of compensation for goodwill, the change in profit sharing ratio
may also necessitate adjustment in the partners' capital accounts with regard to reserves,
revaluation of assets and liabilities, etc. These are
similar to those made at the time of the admission or retirement of a partner. All these aspects
will be discussed in details in chapter dealing with admission of a partner.
Joint Life Policy
A life assurance policy obtained jointly on the lives of the members of a partnership firm is
called a joint life policy. Since the firm has an insurable interest in the lives of its members,
hence to make finances available for payment to the retiring partner on his retirement or to the
legal heirs of the deceased partner, it obtains a joint life policy. The payment for the policy
may be made either privately by the partners or by the firm. The joint life policy matures on
the death of any one of the partners or on the expiry of the time for which it is obtained.
Maturity of the policy means that the insurance company becomes liable to pay the sum
assured to the firm either on the death of a partner or on the expiry of the time whichever
happens earlier.
Accounting Treatment
The premium on the joint life policy may be paid either privately by the partners or by the
firm. When the premium is paid privately by the partners then no accounting treatment is
required in the books of the firm. But when the premium is paid out of the firms cash then the
transactions relating to joint life policy will be shown in the books of the firm. The treatment
of joint life policy in the books of the firm will depend upon the fact whether the premium
paid has been considered as revenue expenditure or capital expenditure.
When premium paid is considered by the firm as a revenue expenditure then it opens in
its books an account called 'Joint Life Policy Premium Account'. Premium paid annually is
debited to this account and credited to cash account. At the end of the year the premium paid
is transferred to joint life policy account. These two entries of payment of premium and its
writing off to profit and loss account are recorded every year. On maturity of the policy the
maturity amount received from the insurance company is credited to the capital accounts of
all the partners including the retiring/deceased partner in their profit sharing ratio.
When premium paid is considered as a capital expenditure then the firm opens in its
books 'Joint Life Policy Account' which is an asset account.
Premium paid is debited to this account and credited to bank account. At the end of the year the 'Joint Life
Policy Premium Account' is reduced to surrender value by debiting the difference between the premium
paid and surrender value. Surrender value is that amount of money which the insurance company pays to
the policy holders in the event of surrendering the policy to the insurance company before the date of its
maturity. At the time of maturity of the policy a joint life policy account is credited with an amount which
is equal to the claim receivable from the insurance company. Afterwards the joint life policy account is
closed by transferring its balance to the capital accounts of all the partners in their profit sharing agreement.
CHAPTER - 2
ADMISSION OF A PARTNER
Kapil and Krish are running a partnership firm dealing in toys. They are
one of the most successful businessmen in the locality. They now decide
to start manufacturing toys that are electronically operated to diversify
their busmess. For this they need more capital and also technical expertise.
Mohit; their friend is an electronic engineer and has capital also. They
have persuaded him to join their firm. In case, he joins the partnership
firm, this will be a case of admission of a partner. As a result, he may need
to bring in capital and share of goodwill. In this lesson, you will learn
about goodwill and other ajustments at the time of admission of a partner.
Mohit will bring in capital and share of goodwill. Some changes in the
value of some assets and liabilities of the existing firm are need to bring
them at their realistic value, on his admission. There may be other issues
involing finance on his admission. All this need accounting treatment. In
this lesson you will learn accounting treatment and adjustments to be
made on the admission of a partner.
After studying this lesson, you will be able to :

l state the meaning of admission of a partner;
l calculate new profit sharing ratio and sacrificing ratio;
l state the meaning and factors affecting goodwill;
l explain the methods of valuation of goodwill;
l describe accounting treatment of goodwill;
l explain the need for revaluation of assets and reassessment of liabilities;
40
illustrate the accounting treatment of changes arising from revaluation
of assets and reassessment of liabilities;
4. describe accounting treatment of undistributed profits and reserves;
5. explain the treatment of various adjustments in partners‘ capitals ;
6. prepare Revaluation Account, Partners‘ Capital Accounts and balance

sheet of the reconstituted firm.
ADMISSION OF A PARTNER
Meaning, New Profit Sharing Ratio and Sacrificing Ratio
Meaning
An existing partnership firm may take up expansion/diversification of the
business. In that case it may need managerial help or additional capital. An
option before the partnership firm is to admit partner/partners, when a
partner is admitted to the existing partnership firm, it is called admission
of a partner.
According to the Partnership Act 1932, a person can be admitted

into partnership only with the consent of all the existing partners
unless otherwise agreed upon.
On admission of a new partner, the partnership firm is reconstituted with a

new agreement. For example, Rekha and Nitesh are partners sharing profit
in the ratio of 5:3. On April 1, 2006 they admitted Nitu as a new partner
with 1/4th share in the profit of the firm. In this case, with the admission
of Nitu as partner, the firm stands reconstituted.
On the admission of a new partner, the following adjustments become

necessary:
(i) Adjustment in profit sharing ratio;
(ii) Adjustment of Goodwill;
(iii) Adjustment for revaluation of assets and reassessment of liabilities;
(iv) Distribution of accumulated profits and reserves; and
(v) Adjustment of partners‘ capitals.
Adjustment in Profit sharing Ratio

When a new partner is admitted he/she acquires his/her share in profit from
the existing partners. As a result, the profit sharing ratio in the new firm is
decided mutually between the existing partners and the new partner. The
Admission of a Partner
incoming partner acquires his/her share of future profits either incoming

from one or more existing partner. The existing partners sacrifice a share
of their profit in the favour of new partner, hence the calculation of new
profit sharing ratio becomes necessary.
Sacrificing Ratio
At the time of admission of a partner, existing partners have to surrender
some of their share in favour of the new partner. The ratio in which they
agree to sacrifice their share of profits in favour of incoming partner is
called sacrificing ratio. Some amount is paid to the existing partners for
their sacrifice. The amount of compensation is paid by the new partner to
the existing partner for acquiring the share of profit which they have
surrendered in the favour of the new partner.
Sacrificing Ratio is calculated as follows:
Sacrificing Ratio = Existing Ratio – New Ratio

Following cases may arise for the calculation of new profit sharing ratio
and sacrificing ratio:
(i) Only the new partner’s share is given

In this case, it is presumed that the existing partners continue to share the
remaining profit in the same ratio in which they were sharing before the
admission of the new partner. Then, existing partner‘s new ratio is calculated
by dividing remaining share of the profit in their existing ratio. Sacrificing
ratio is calculated by deducting new ratio from the existing ratio.
Illustration 1
Deepak and Vivek are partners sharing profit in the ratio of 3 : 2. They
admit Ashu as a new partner for 1/5 share in profit. Calculate the new
profit sharing ratio and sacrificing ratio.
Solution:
Calculation of new profit sharing ratio:
Let total Profit = 1
New partner‘s share = 1/5
Remaining share = 1 – 1/5 = 4/5
Deepak‘s new share = 3/5 of 4/5 i.e. 12/25
142
Vivek‘s new share = 2/5 of 4/5 i.e. 8/25

Ashu‘s Share = 1/5
The new profit sharing ratio of Deepak, Vivek and Ashu is :
= 12/25 : 8/25 : 1/5 = 12 : 8 : 5/25 = 12 : 8 : 5
So Deepak Sacrificed = 3/5 – 12/25 = 15 – 12/25 = 3/25
Vivek Sacrificed = 2/5 – 8/25 = 10 – 8/25 = 2/25
Sacrificing Ratio = 3:2
Sacrificing ratio of the existing partners is same as their existing ratio.
l The new partner purchases his/her share of the profit from the
Existing partner in a particular ratio.
In this case : the new profit sharing ratio of the existing partners is to be
ascertained after deducting the sacrifice agreed from his share. It means
the incoming partner has purchased some share of profit in a particular
ratio from the existing partners.
Illustration 2
Neha and Parteek are partners, sharing profit in the ratio of 5 : 3. They
admit Nisha as a new partner for 1/6 share in profit. She acquires this
share as 1/8 from Neha and 1/24 share from Parteek. Calculate the new
profit sharing ratio and sacrificing ratio.
Solution
Neha‘s and Parteek existing ratio is 5 : 3
Neha‘s new share = 5/8-1/8 = 4/8 or 12/24
Parteek‘s new share = 3/8-1/24 = 8/24
Nisha‘s share = 1/8+1/24 =4/24
The new profit sharing ratio of Neha, Parteek and Nisha is
12/24 : 8/24 : 4/24
= 12 : 8 : 4 = 3 : 2 : 1
(ii) Sacrifice ratio = 1/8 : 1/24 or 3 : 1
l Existing partners surrender a particular portion of their share in

favour of a new partner.
In this case, sacrificied share of the each partner is to be ascertained. This
ascertained by multiplying the existing partner share in the ratio of their
sacrifice. The share sacrificed by the existing partners should be deducted
from his existing share. Therefore, the new share of the existing partners is
determined. The share of the incoming partner is the sum of sacrifice by
the existing partners.
Illustration 3
Him and Raj shared profits in the ratio of 5:3. Jolly was admitted as a
partner. Him surrendered 1/5 of his share and Raj 1/3 of his share in
favour of Jolly. Calculate the new profit sharing ratio.
Solution :
Him surrenders 1/5 of his share, i.e., = 1/5 of 5/8 = 1/8
Raj surrenders 1/3 of his share, i.e., = 1/3 of 3/8 = 1/8
So, sacrificing ratio of Him and Raj is 1/8 : 1/8 or equal.
Him‘s new share = 5/8 – 1/8 = 4/8
and Raj‘s new share = 3/8 – 1/8 = 2/8
Jolly‘s New share = 1/8 + 1/8 = 2/8
New profit sharing ratio of Him‘s, Raj‘s and Jolly‘s is
= 4/8 : 2/8 : 2/8 or 4 : 2 : 2 or 2 : 1 : 1.
144
GOODWILL : MEANING, FACTORS AFFECTING

GOODWILL AND VALUATION
Meaning of Goodwill
Over a period of time, a business firm develops a good name and reputation
among the customers. This help the business earn some extra profits as
compared to a newly set up business. In accounting capitalised value of this
extra profit is known as goodwill. For example, your firm earns say Rs 1200
and the normal profit was expected from your firm Rs 700. The rate of return
is @ 10%. In this case goodwill is ascertained as under :
Step 1 : Excess profit = Actual profit – Desired normal profit

1200 – 700 = 500
100
Step 2 : Goodwill = 500 = Rs 5000
10
In other words, goodwill is the value of the reputation of a firm in respect
of the profit earned in future over and above the normal profit. It may also
be defined as the present value of the capacity to earn future profits. This
means that a firm can be said to have goodwill only if it has capacity to
earn profit in future. A firm earning only normal profits like similar firms
cannot claim to have any goodwill.
Factors affecting the Goodwill

The factors affecting goodwill are as follows:
1. Location : If the firm is located at a central place, resulting in good

sale, the goodwill tends to be high.
2. Nature of Business : A firm that produces high value products or

having a stable demand is able to earn more profits and therefore has
more goodwill.
3. Efficient management : A well managed firm earns higher profit and

so the value of goodwill will also be high.
4. Quality : If a firm is known for the quality of its products the value of
goodwill will be high.
5. Market Situation : The monopoly condition to earn high profits

which leads to higher value of goodwill.
6. Special Advantages : The firm has special advantages like importing

licenses, long term contracts for supply of material, patents,
trademarks, etc. enjoy higher value of goodwill.
Methods of valuation of Goodwill

The methods of valuation of goodwill are generally decided by the
partners among themselves while preparing partnership deed. The
following are the important methods of valuing the goodwill of a firm :
(i) Average Profit Method

(ii) Super Profit Method
(iii) Capitalisation Method
Let us learn about these methods.
1. Simple Average Profit Method : Under this method, average of the

profits of certain given years is calculated. The value of the goodwill is
calculated at an agreed number of years purchase of the average profit.
Thus the goodwill is calculated as follows :
Value of goodwill = Average Profit × Number of year of purchase
For example, the average profits of a firm of say 3 years and the goodwill
is to be calculated at 2 years purchase of the average profits works out at
Rs.25,000 and it is assumed that the same profits will be the value of the
goodwill will be Rs.50,000[Rs.25,000 × 2]. Thus the goodwill is
calculated as goodwill = average profits × Number of years purchase.
Illustration : 4
The profit for the last five years of a firm were as follows Year 2001 Rs.
1,20,000: Year 2002 Rs.1,50,000: Year 2003 Rs.1,70,000: Year 2004
Rs.1,90,000: Year 2005 Rs.2,00,000. Calculate goodwill of the firm on the
basis of 3 years purchases of 5 years average profits.
Solution :
Year Profit (Rs.)
2001 1,20,000
2002 1,50,000
2003 1,70,000
2004 1,90,000
2005 2,00,000
Total 8,30,000
146
Average Profit = Total Profit/No. of Years

= Rs.8,30,000/5 = Rs.1,66,000
Goodwill = Average Profits × No. of years purchased
Rs.1,66,000 × 3 = Rs.4,98,000
* Super Profit Method : Super profits is the excess of actual profit over
the normal profits. If a new business earns certain percentage of the
capital employed, it is called ‗normal profit‘. The value of the
goodwill is calculated at an agreed number of years purchase is
multiplied by the Super profit. Normal profit is that profit which is,
earned by other business unit of the same business. Normal profit will
be calculated as follows:
Normal profit = Capital employed × normal rate of return/100
Actual Profit : These are the profit earned during the year or it is also
taken as the average of the last few years profit.
Super Profit = Actual Profit – Normal Profit
For example, A firm earns profit of Rs.65,000 on a capital of

Rs.4,80,000 and the normal rate of return in similar business is 10%.
Then the normal profit is Rs.48,000[10% of the Rs.4,80,000]. The
actual profit is Rs.65,000. Thus,
Super profit = Actual profit – Normal profit
= Rs.65,000 – Rs.48,000
= Rs.17,000
If value of Goodwill is calculated by 3 years‘ purchase of super profit

then goodwill is equal to Rs.51,000[ Rs.17,000 × 3].
(b) Weighted average method : This method is a modified version of

average profit method. In this method each year profit is assigned a
weight i.e. 1, 2, 3, 4 etc. Thereafter each year profit is multiplied by
the weight and find product. The total of products is divided by the
total of weight. As a result we find the weighted average profit. After
this the value of goodwill is calculated to multiplied the weight
average profit into the agreed number of year‘s purchase. Thus the
goodwills calculated as follows
Total product of profit
Weighted average profit =
Total of weights
Value of goodwill = Weighted average profit × number of year of purchase
(Note : This method is used when we observe that there is a tendency to

increase the annual profits. Latest year profit is assigned the highest weight.
Illustration : 5
The profit of firm for past years were as follow :
Profit Rs.
2002 80,000
2003 85,000
2004 90,000
2005 1,00,000
2006 1,10,000
The weight to be used are 1, 2, 3, 4, and 5 for the years from 2002- 2006.
Calculate the value of goodwill on the basis of two year‘s purchase of

weighted average profit.
Solution
Year Profit Weight Products
2002 80,000 1 80,000
2003 85,000 2 170000
2004 90,000 3 270000
2005 1,00,000 4 400000
2006 1,10,000 5 550000
15 1470000
14,70,000
Weighted Average Profit = = Rs 98,000
15
Goodwill = Rs 98000 × 2 = Rs 1,96,000
Illustration : 6
A firm earned the following net profits during the last 4 years
148
Rs.
2003 90,000
2004 1,20,000
2005 1,60,000
2006 1,80,000
Capital employed in the firm is Rs.10,00,000. The normal rate of profit is

10%. Calculate the value of the goodwill on the basis of 4 year purchase.
Solution:
Total profit of 4 years = Rs. 90,000 + Rs. 1,20,000 + Rs. 1,60,000 + Rs.
1,80,000
= Rs.5,50,000
Average annual profit = Rs.5,50,000/4
= Rs.1,37,500
Normal Profit = Rs.10% of Rs.10,00,000 = Rs.10,00,000
× 10/ 100
= Rs.1,00,000
Super profit = Rs. 1,37,500 – Rs. 1,00,000
= Rs.37,500
Value of goodwill at = Rs. 37,500 × 4 = Rs. 1,50,000
4 years‘ of purchase
(ii) Capitalisation Method : In this method, goodwill is the amount of

capital saved. Normally businessmen invest capital to operate business
activities, and earn profit with the efficient utilisation of capital. If the
business earns more profit by investing lesser amount of capital as
compared to other business, who earned same amount of profit with
more amount of capital, the saved amount is assumed to be goodwill.
Under this method, the Goodwill is calculated in two ways:
Capitalisation of Average profit
Capitalisation of Super profit

1. Capitalisation of Average profit

In this method, the value of goodwill is assumed to be excess of the capital
value of average profit over the actual capital employed.
Following formula is applied for Calculation of capital employed:
Capital employed = Total assets – outsider liabilities
Following formula is applied for calculation of capitalised value of
profit:
Capitalised value of profit = Average Profit × 100/ Normal rate of profit
Goodwill = Capitalised value of profits – Capital cimployed
Illustration : 7
A firm earned average profit during the last few years is Rs.40,000 and the
normal rate of return in similar business is 10%. The total assets is
Rs.3,60,000 and outside liabilities is Rs.50,000. Calculate the value of
goodwill with the help of Capitalisation of Average profit method.
Solution:
Capital employed = Total assets - Outside liabilities
= Rs.3,60,000 - Rs.50,000
= Rs.3,10,000
Capitalised value of average profit = Average Profit × 100/ Normal rate of

profit
= Rs. 40,000 × 100/10
= Rs. 4,00,000
Goodwill = Capitalised value – Capital employed
5. Rs. 4,00,000 – Rs. 3,10,000
6. Rs. 90,000
Illustration : 8
The capital invested in a firm is Rs.4,60,000 and the rate of return in the
similar business is 12%. The firm earns the following profit in the last 4
years:
2003 Rs. 60,000 2005 Rs. 80,000
2004 Rs. 70,000 2006 Rs. 90,000
Calculate the value of goodwill by Capitalisation method.
150
Solution
Total Profit = Rs.60,000 + Rs.70,000 + Rs.80,000 + Rs.90,000/4
Average Profit = Rs.3,00,000/4
= Rs.75,000
Capitalised Value = Average profit × 100/12
= Rs.75,000x100/12
= Rs.6,25,000
Goodwill = Capitalised value – Capital employed
= Rs.6,25,000 – Rs.4,60,000
= Rs.1,65,000
2. Capitalisation of Super profit

In this method, the value of goodwill is calculated on the basis of super
profit method. Following formula is applied for Calculation of capital
employed:
Goodwill = Super profit × 100/normal rate of profit
Illustration : 9
A firm earns a profit of Rs.26,000 and has invested capital amounting to
Rs.2,20,000. In the same business normal rate of earning profit is 10%.
Calculate the value of goodwill with the help of Capitalisation of super
profit method.
Solution
Actual profit = Rs. 26,000
Normal profit = Rs. 2,20,000 x 10/ 100 = Rs.22,000
Super Profit = Actual Profit – Normal Profit
6. Rs. 26,000 – Rs.22,000
7. Rs. 4,000
Goodwill = Super profit × 100/normal rate of profit
4. Rs. 4,000 × 100/10
5. Rs. 40,000
TREATMENT OF GOODWILL
The new partner acquires his/her share profit from the existing partners.
This will result in the reduction of the share of existing partners.
Therefore, he/she compensates the existing partners for the sacrifices.
He/she compensates them by making payment in cash or in kind. The
payment is equal to his/her share in the goodwill.
As per Accounting Standard 10(AS-10) that goodwill should be

recorded in the books only when some consideration in money
has been paid for it. Thus, if a new partner does not bring
necessary cash for goodwill, no goodwill account can be raised in
the books. He/she should pay for goodwill in addition to his/her
contribution for capital.
If, he/she does not pay for goodwill, then amount equal to his/her share of
goodwill will be deducted from the capital. The amount brought in by him/
her as goodwill or amount of goodwill deducted from his/her capital and
152
divided between the existing partners in their sacrificing ratio. At the time
of admission of a new partner any goodwill appearing in the books, will be
written off in existing ratio among the existing partners.
There are different situations relating to treatment of goodwill at the time

of admission of a new partner. These are discussed as under:
1. When the amount of goodwill is paid privately by the new partner.
2. When the new partner brings his/her share of goodwill in cash.
3. When the new partner does not bring his/her share of goodwill in cash.
1. The amount of goodwill is paid privately by the new partner
If the amount of goodwill is paid by the new partner to the existing

partner privately, no journal entries are made in the books of the firm.
2. The new partner brings his/her share of goodwill in cash and the
amount of goodwill is retained in the Business:
When, the new partner brings his/her share of goodwill in cash. The
amount brought in by the new partner is transferred to the existing
partner in the sacrificing ratio. If there is any goodwill account in the
balance sheet of existing partner, it will be written off immediately in
existing ratio among the partners. The journal entries are as follows:
* The existing goodwill in the books of the firm will be written off
in existing profit ratio as;
Existing Partners Capital A/c Dr. [individually]
To Goodwill A/c
(Existing goodwill written off)
(ii) For bringing cash for Capital and goodwill
Cash/Bank A/c Dr.
To Premium for Goodwill A/c
To New partner‘s Capital A/c
(Cash brought in for capital and goodwill)
= For amount of goodwill transferred to existing partner capital
account:
Premium for Goodwill A/c Dr.
To Existing Partner‘s Capital/current A/c [individually]
(The amount of goodwill credited to existing partner‘s capitals in
sacrificing ratio)
Illustration : 10
Tanaya and Sumit are partners in a firm sharing profit in the ratio 5 : 3.
They admitted Gauri as a new partner for 1/4th share in the profit. Gauri
brings Rs. 30,000 for her share of goodwill and Rs.1,20,000 for capital.
Make journal entries in the books of the firm after the admission of Gauri.
The new profit sharing ratio will be 2 : 1 : 1.
Solution :
Books of Tanaya, Sumit and Gauri
Date Particulars LF Debit Credit
Amount Amount
(Rs) (Rs)
1. Bank A/c Dr. 1,50,000

To Premium for Goodwill
A/c 30,000
To Gauri‘s Capital A/c 1,20,000
(cash brought by Gauri for her

share of goodwill and capital)
To Tanaya‘s Capital A/c 30,000
To Sumit‘s Capital A/c 15,000
(Goodwill transferred to existing partners 15,000

capital account in their profit sharing ratio)
Working Note:
Calculation of sacrificing ratio [existing ratio – new ratio]
Partners Existing ratio New ratio Sacrifice Sacrificing ratio
Tanaya 5/8 2/4 5/8 – 2/4 = 1/8 Tanaya : Sumit
Sumit 3/8 1/4 3/8 – 1/4 = 1/8 1:1
The amount of goodwill is withdrawn by the existing partners:

(iv) Existing Partners Capital/current A/c Dr. [individually]
To Cash/Bank A/c
(The amount of goodwill withdrawn by the existing partners)
It is to be noted that sometimes partner‘s withdraw only 50% or 25%
amount of goodwill. In such a case, entry will be made for the withdrawn
amount only.
154
I1lustration : l1
In previous illustration, it is assumed that the full amount of goodwill is
withdrawn by the Tanaya and Sumit . Make journal entry in the books of
the firm.
Solution:
Books of Tanaya, Sumit and Gauri
amount amount
Rs Rs
Tanaya‘s Capital A/c Dr. 15,000
Sumit‘s Capital A/c Dr. 15,000
To Bank A/c 30,000
(Amount of Goodwill is withdrawn

by them)
3. New partner does not bring his/her share of goodwill in cash:

When the goodwill of the firm is calculated and the new partner is not able to
bring his/her share of goodwill in cash, goodwill will be adjusted through new
partner‘s capital accounts. In this case new partner‘s capital account is
debited for his/her share of goodwill and the existing partner‘s capital
accounts are credited in their sacrificing ratio. The journal entry is as under:
New Partner‘s Capital A/c Dr.
To Existing Partner‘s Capital A/c [individually in sacrificing ratio]
(New partner‘s share in goodwill credited to exisitng partner‘s in sacrificing ratio)
Goodwill appears in the books of the firm and new partner does not
bring his/her share of goodwill in cash:
If the goodwill account appears in the books of the firm, and the new
partner is not able to bring goodwill in cash. In this case, the amount of
goodwill existing in the books is written off by debiting the capital
account of existing partners in their existing profit sharing ratio.
Illustration 12
Ashmita and Sahil are partners sharing profit in the ratio of 3 : 2. They agree
to admit Charu for 1/5 share in future profit. Charu brings Rs. 2,50,000 as
capital and enable to bring her share of goodwill in cash, the goodwill of
the firm to be valued at Rs. 1,80,000. At the time of admission goodwill
existed in the books of the firm at Rs.80,000. Make necessary journal
entries in the books of the firm.
Solution:
Notes Books of Ashmita, Sahil and Charu
amount amoun
Rs Rs
Bank A/c Dr. 2,50,000
To Charu‘s Capital A/c 2,50,000
[Cash brought by Charu for her capital]
Ashmita‘s Capital A/c Dr. 48,000
Sahil‘s Capital A/c Dr. 32,000
To Goodwill A/c 80,000
[Goodwill written off before Charu‘s

admission]
Charu‘s Capital A/c Dr. 36,000
To Ashmita‘s Capital A/c 21,600
To Sahil‘s Capital A/c 14,400
[Existing partners capital a/c credited

for goodwill on Charu‘s admission in
sacrificing ratio]
Working Note :
Ashmita and Sahil sacrifice their profit in favour of Charu in their existing
profit sharing ratio i.e. 3 : 2. Therefore, the sacrificing ratio is 3 : 2.
Value of Goodwill = Rs.1,80,000
Charu‘s share in Profit = 1/5
Charu‘s share of Goodwill = Rs. 1,80,000 × 1/5 = Rs. 36,000
New partner brings in only a part of his share of goodwill

When new partner is not able to bring the full amount of his/her share of
goodwill in cash and brings only a part of cash. In this case, the amount
156
of goodwill brought by him is credited to goodwill account. At the time of

goodwill transferred to capital account of existing partner‘s, new partner‘s
capital account is debited with his unpaid share of goodwill besides
debiting goodwill account with the amount of goodwill is paid by him.
The journal entries is as
Bank A/c Dr.
To Premium for Goodwill A/c
[Part Amount of goodwill brought by new partnerI
New Partner‘s Capital A/c Dr.
To Existing Partner‘s Capital A/c [individually in sacrificing ratio]
[Credit given to sacrificing partner by new partner‘s in full share of goodwill]
Illustration 13
Tanu and Puneet are partners sharing profit in the ratio of 5 : 3. They
admit Tarun into the firm for 1/6 share in profit which he takes 1/ 18 from
Tanu and 2/ 18 from Puneet. Traun brings Rs.9,000 as goodwill out of his
share of Rs. 12,000. No goodwill account appears in the books of the firm.
Make necessary journal entries in the books of the firm.
Solution:
JOURNAL
Amount Amount
Rs Rs
Bank A/c Dr 9,000

To Premium for Goodwill
A/c 9,000
[A part of his share of goodwill

brought in by Tarun]
Premium for Goodwill A/c Dr. 9,000
Tarun Capital A/c Dr. 3,000
To Tanu‘s Capital A/c 4,000
To Puneet‘s Capital A/c 8,000
[Goodwill credited to Tanu and Puneet

in their sacrificing ratio i.e 1 : 2]
REVALUATION ACCOUNT
On admission of a new partner, the firm stands reconstituted and consequently

the assets are revalued and liabilities are reassessed. It is necessary to show the
true position of the firm at the time of admission of a new partner. If the values of
the assets are raised, gain will increase the capital of the existing partners.
Similarly, any decrease in the value of assets, i.e. loss will decrease the capital of
the existing partners. For this purpose a‗Revaluation Account‘ is prepared. This
account is credited with all increases in the value
of assets and decrease in the value of liabilities. It is debited with decrease
on account of value of assets and increase in the value of liabilities. The
balance of this account shows a gain or loss on revaluation which is
transferred to the existing partner‘s capital account in existing profit
sharing ratio The following journal entries made for this purpose are:
(i) For increase in the value of assets:
Asset A/c Dr. (individually)
To Revaluation A/c
(ii) For decrease in the value of Asset
Revaluation A/c Dr. (individually)
To Asset A/c
[Decrease in the value of assets]
(iii) For increase in the value of Liabilities:
Revaluation A/c Dr. (individually)
To Liabilities A/c
[Increase in the value of Liabilities]
(iv) For decrease in the value of Liabilities:
Liabilities A/c Dr.
To Revaluation A/c
[Decrease in the value of Liabilities]
(v) For unrecorded Assets
Asset A/c [unrecorded] Dr.
To Revaluation A/c
[Unrecorded asset recorded at actual value]
(vi) For unrecorded Liability :
Revaluation A/c Dr.
To Liability A/c [unrecorded]
[Unrecorded Liability recorded at actual value]
(vii) For transfer of gain on revaluation:
Revaluation A/c Dr.
To Existing Partner‘s Capital/Current A/c
[Profit on revaluation transferred to capital account in existing ratio]
159
(viii)For transfer of loss on revaluation:

Existing Partner‘s Capital/Current A/c Dr.
To Revaluation A/c
[Loss on revaluation transferred to capital account in existing ratio]
Proforma of Revaluation account is given as under:
Revaluation account
Dr. Cr.

(Rs.) (Rs.)
Assets Assets
[decrease in value] [Increase in value]
Liabilities Liabilities
[increase in value] [Decrease in value]
Liabilities[unrecordcd] Assets [unrecorded]
Profit transferred to Loss transferred to
Capital A/c Capital A/c
[Individually in existing [Individually in existing

ratio] ratio]
Illustration 14
Karan and Tarun are partners sharing profit and losses in the ratio of 2 : 1.
Their Balance Sheet was as follows:
Balance Sheet of Karan and Tarun as on December 31,2006
Liabilities Amount (Rs.) Assets Amount (Rs.)
Creditors 10,000 Cash in hand 7,000
Bills payable 7,000 Debtors 26,000
Building 20,000
Capitals: Investment 15,000
Karan 40,000 Machinery 13,000
Tarun 30,000 Stock 6,000
70,000
87,000 87,000
160
Nikhil is admitted as a partner and assets are revalued and liabilities

reassessed as follows:
(i) Create a Provision for doubtful debt on debtors at Rs.800.
(ii) Building and investment are appreciated by 10%.
(iii) Machinery is deprecated at 5%
(iv) Creditors were overestimated by Rs.500.
Make journal entries and Prepare revaluation account before the admission
of Nikhil.
Solution
Journal
Amount Amount
(Rs.) (Rs.)
Revaluation A/c Dr. 800

To Provision for Doubtful Debts 800
[Provision made for doubtful debts]
Building A/c Dr.
Investment A/c Dr. 2,000
To Revaluation A/c 1,500
[Increase in the value of Building & 3,500
Investment]
Revaluation A/c Dr. 650
To Machinery A/c 650
[Decrease in the value of machinery]
Creditor A/c Dr. 500
To Revaluation A/c 500
[Value of creditors reduced by Rs.500]
Revaluation account
Dr. Cr.
Particulars Amount (Rs.) Particulars Amount (Rs.)
Provision for Building 2,000
Doubtful Debts 800 Investment 1,500
Machinery 650 Creditors 500
Profit transferred to
Karan‘s Capital 1,700
Tarun‘s Capital 850
2,550
4,000 4,000
161
Accumulated Profit or Reserve appearing in the Balance Sheet
19.7 ADJUSTMENTS OF RESERVES AND A
19.8 Any accumulated profit or reserve appearing in the balance sheet at
the time of admission of a new partner, is credited in the existing
partner‘s capital account in existing profit sharing ratio. If there is
any loss, the same will be debited to the existing partner in the
existing ratio. For this purpose the following journal entries are
made as:
(i) For distribution of undistributed profit and reserve.
Reserves A/c Dr
Profit & Loss A/c(Profit) Dr.
To Partner‘s Capital A/c [individually]
[Reserves and Profit & Loss (Profit) transferred to
all partners capitals A/c in existing profit sharing ratio]
(ii) For distribution of loss
Partner‘s Capital A/c Dr. [individually]
ToProfit and Loss A/c [Loss]
[Profit & Loss (loss) transferred to all partners
capitals A/c in existing profit sharing ratio]
Illustration 15
Rohit and Soniya are partners sharing profit in the ratio of 4:3. On lst
April 2006 they admit Meena as as new partner for 1/4 shares in profits.
On that date the balance sheet of the firm shows a balance of Rs.70,000 in
general reserve and debit balance of Profit and Loss A/c of Rs.21,000.
make the necessary journal entries.
Solution
Journal
Amount Amount
(Rs.) (Rs.)
General Reserve Dr 70,000
To Rohit‘s Capital A/c 40,000
To Soniya‘s Capital A/c 30,000
[Transfer of general reserve to
the existing partner‘s capital accounts]
Rohit‘s Capital A/c Dr. 12,000

Soniya‘s Capital A/c Dr. 9,000
To Profit & Loss A/c 21000
[transfer of accumulated Loss to
existing partner‘s capital A/c]
162
Illustration : l6
Bhanu and Etika are partners sharing profit and losses in the ratio of 3:2
respectively. Their Balance Sheet as on March 31, 2006 was as under:
Balance Sheet of Bhanu and Etika as on December 31,2006
(Rs.) (Rs.)

Capitals: Cash at Bank 23,000
Bhanu 70,000 Debtors 19,000
Etika 70,000 1,40,000 Buildings 65,000
Furniture 15,000
Machinery 13,000
Stock 30,000
1,68,000 1,68,000
On that date, they admit Deepak into partnership for 1/3 share in future
profit on the following terms:
(i) Furniture and stock are to be depreciated by 10%.
(ii) Building is appreciated by Rs.20,000.
(iii) 5% provision is to be created on Debtors for doubtful debts.
(iv) Deepak is to bring in Rs.50,000 as his capital and Rs.30,000 as
goodwill.
Make necessary ledger account and balance sheet of the new firm.
Solution :
Revaluation account
Dr. Cr.
(Rs.) (Rs.)
Provision for Doubtful 950 Building 20,000

Debts
Furniture 1,500
Stock 3,000
Bhanu‘s Capital A/c 8,730
Etika‘s Capital A/c 5,820 14,550
20,000 20,000
163
Capital account
Dr. Cr.
Particulars Bhanu Etika Deepak Particulars Bhanu Etika Deepak

(Rs) (Rs) (Rs) (Rs) (Rs) (Rs)
Balance c/d 96,730 87,820 50,000 Balance b/d 70,000 70,000 —

(closing) (closing)
Revaluation 8,730 5,820 —

(Profit)
Bank A/c — — 50,000
Premium
for Goodwill
A/c 18,000 12,000 —
96,730 87,820 50,000 96,730 87,820 50,000
Balance Sheet of Bhanu , Etika and Deepak
as on December 31, 2006
(Rs.) (Rs.)

Capitals: Cash at Bank 1,03,000
Bhanu 96,730 Debtors 19,000
Etika 87,820 Less Provision 950 18,050
Deepak 50,000 2,34,550 Stock 27,000
Furniture 13,500
Machinery 13,000
Building 85,000
2,62,550 2,62,550
Illustration: 17
Ashu and Pankaj are partners sharing profit in the ratio of 3 : 2, their
Balance sheet on March 31, 2007 was as follows:
Balance Sheet of Ashu and Pankaj
as on March 31,2007
(Rs.) (Rs.)

Bills Payable 40,000 Cash at Bank 62,000
Salaries outstanding 5,000 Debtors 58,000
Profit & Loss 40,000 Stock 85,000
Capitals: Machinery 1,45,000
Ashu 1,50,000 Goodwill 38,000
Pankaj 1,30,000 2,80,000
4,03,000 4,03,000
164
They admitted Gurdeep into partnership on the following terms on March

31, 2007.
(a) New profit sharing ratio is agreed as 3 : 2 : l.
(b) He will bring in Rs.1,00,000 as his shared capital and Rs.30,000 as
his share of goodwill.
(c) Machinery is appreciated by 10%
(d) Stock is valued at Rs. 87,000.
(e) Creditors are unrecorded to the extent of Rs.6,000.
(f) A provision for doubtful debts is to be created by 4% on debtors.
Prepare Revaluation account, Capital Accounts, Bank account and
Balance Sheet of the new firm after admission of Gurdeep.
Solution
Revaluation account
Dr. Cr.

(Rs.) (Rs.)
Provision for Doubtful Debts 2,320 Machinery 14,500
Creditors 6,000 Stock 2,000
Ashu‘s Capital A/c 4,908
Pankaj‘s Capital A/c 3,272 8,180
16,500 16,500
Capital account
Dr. Cr.
Particulars Ashu Pankaj GurdeepParticulars Ashu Pankaj Gurdeep

Goodwill A/c 22,800 15,200 — Balance b/d 1,50,000 1,30,000 —
Balance c/d 1,74,108 1,46,072 1,00,000 Profit & 24,000 16,000 —

Loss A/c
Revaluation 4,908 3,272

A/c (Profit)
Bank A/c — — 1,00,000

Premium
for Goodwill
A/c 18,000 12,000 —
1,96,908 1,61,272 50,000 1,96,908 1,61,272 1,00,000

S
Balance Sheet of Ashu Pankaj and Gurdeep

as on March 31,2007

(Rs.) (Rs.)
Bills Payable 40,000 Cash at Bank 1,92,000
Salaries outstanding 5,000 Debtors 58,000
Capitals: Less Provision (2,320)
Ashu 1,74,108 of doubtful debts 55,680
Pankaj 1,46,072 Stock 87,000
Gurdeep 1,00,000 4,20,180 Machinery 1,59,500
5,09,180 5,09,180
Bank account
Dr Cr
Particulars Amount
Amount Particulars
(Rs} (Rs)
Balance b/d 62,000 Balance c/d 1,92,000
Gurdeep‘s Capital A/c 1,00,000
Goodwill A/c 30,000
1,92,000 1,92,000
Working Note:
Sacrificing Ratio = Existing Ratio – New Ratio

Partners Existing ratio New ratio sacrifice Sacrificing ratio
18-15
Ashu 3/5 3/6 30 Ashu:Pankaj
12 − 10 2
Pankaj 2/5 2/6 3:2
30 30
166
19.8 ADJUSTMENT OF PARTNER’S CAPITAL

Sometime, at the time of admission, the partners‘ agree that their capitals
be adjusted in proportion to their profit sharing ratio. For this purpose, the
capital accounts of the existing partners are prepared, making all
adjustments, on account of goodwill, general-reserve, revaluation of assets
and resettlement of liabilities. The actual capital so adjust will be
compared with the amount of capital that should be kept in the business
after the admission of the new partner. The excess if any, of adjusted
actual capital over the proportionate capital will either be withdrawn or
transferred to current account and vice versa.
The partners may decide to calculate the capitals which are to be

maintained in the new firm either on the basis of new Partner‘s Capital
and his profit sharing ratio or on the basis of the existing partner‘s capital
account balances.
1. Adjustment of existing partner’s capital on the basis of the capital

of the new partner:
If the capital of the new partner is given, the entire capital of the new firm
will be determined on the basis of the new partner‘s capital and his profit
sharing ratio. Therefore the capital of other partners is ascertained by
dividing the total capital as per his profit sharing ratio.
If the existing capital of the partner after adjustment is in excess of his

new capital, the excess amount is withdrawn by partner or transferred to
the credit of his current account. If the existing capital of the partner is less
than his new capital, the partner brings the short amount or makes transfer
to the debit of his current account. The journal entries are made as under:
(i) when excess amount is withdrawn by the partner or transferred to

current account.
Existing Partner‘s Capital A/c Dr.
To Bank A/c or Partner Current A/c
(Excess amount is withdrawn by the partner
or transferred to current account]
(ii) For bringing in the Deficit amount or Balance transferred to current

account.
Bank A/c or Partner Current A/c Dr.
To Existing Partner‘s Capital A/c
(Bringing the Deficit amount or Balance
transferred to current account)
170
Illustration 19
Asha and Boby are partners sharing profit in the ratio of 5:3 with capital of
Rs.80,000 and Rs.70,000 respectively. They admit a new partner Nitin.
The new profit sharing ratio of Asha, Boby and Nitin is 5:3:2 respectively.
Ntin brings Rs.40,000 as capital. The profit on revaluation of assets and
reassessment of liabilities is Rs.6,400. it is agreed that capitals of the
partner‘s should be in the new profit sharing ratio. Calculate new capital
of each partner.
Solution:
Actual Capital of Asha and Boby
Asha Boby
(Rs.) (Rs.)
Balance in Capital A/c 80,000 70,000
Add Profit on Revaluation (5 : 3) 4,000 2,400
Capital after Adjustment 84,000 72,400
Calculation of new capital of the firm and existing partner’s capital

Nitin‘s Share in the firm = 2/10
Nitin‘s brings 40,000 for 2/10 Share
Total capital of the new firm in terms of Nitin‘s capital
= 40,000 × 10/2
= Rs.2,00,000
Asha‘s share in New Capital = 2,00,000 × 5/10 = Rs.1,00,000
Boby‘s share in New Capital = 2,00,000 × 3/10 = Rs.60,000
On comparing Asha‘s adjusted capital with the new capital we find that
the Asha brings Rs.16,000 [Rs.1,00,000 - Rs.84,000] or the amount may
be debited to her current account.
On comparing the Boby‘s adjusted capital with the new capital, we find
that the Boby is to withdraw Rs. 12,400 [Rs.72,400 - Rs.60,000] or the
amount may be credited to his current account.
3. When the capital of the new partner is calculated in proportion to

the total capital of the new firm.
Sometimes the capital of the new partner is not given. He/she is required
to bring an amount proportionate to his/her share of profit. In such a case,
171
new partner‘s capital will be calculated on the basis of adjusted capital of

the existing partners.
For example, the capital account of Sumit and Anu show the balance after
all adjustments and revaluation are Rs.90,000 and Rs.60,000 respectively.
They admit Rohit as a new partner for 1/4 share in the profits. Rohit‘s
capital is calculated as follows:
Total share = 1
Rohit‘s share in the profit = 1/4
Remaining share = 1 – 1/4 = 3/4
3/4 share of profit combined capital of Sumit and Anu
= Rs.90,000+Rs.60,000 = Rs.1,50,000
Total Capital of the firm = Rs.1,50,000 × 4/3
= Rs.2,00,000
Rohit‘s capital for 1/4 share of profits = Rs.2,00,000 × 1/4 = Rs.50,000
Rohit brings in Rs.50,000 as his Capital
Illustration : 20
Manoj and Hema are partner sharing profit and losses in the ratio of
7 : 3. On March 31,2006, their Balance Sheet was as follows:
Balance Sheet of Manoj and Hema
as on March 31,2006
(Rs.) (Rs.)
Capital : Bank 12,000

Manoj 88,00 Sundry Debtors 45,000
Hema 64,00 1,52,000 Bills Receivable 30,000
Sundry creditors 32,000 Stock 35,000
Bills Payable 38,000 Investment 13,000
Reserve 18,000 Machinery 40,000
Building 45,000
Goodwill 20,000
2,40,000 2,40,000
They admit Tarun into partnership on the following terms:

(i) Stock is revalued at Rs.40,000.
172
5. Building, Machinery and Investment are depreciated by 12%.

6. Prepaid Insurance is Rs. 1,000.
7. Tarun brings Rs.40,000 as his capital and Rs. 12,000 for goodwill for
1/6 share of profit of the firm.
8. Capital of the partners shall be proportionate to their profit sharing

ratio. Adjustment of Capitals to be made by Cash.
Prepare Revaluation Account, Partners‘ Capital Account , Cash Account

and Balance Sheet of the new firm.
Solution:
Revaluation account
Dr. Cr.

(Rs.) (Rs.)
Building 5,400 Stock 5,000
Machinery 4,800 Prepaid Insurance 1,000
Investment 1,560 Loss transferred to

Manoj‘s Capital 4,032
Hema‘s Capital 1,728 5,760
11,760 11,760
Capital account
Dr. Cr.
Particulars Manoj Hema Tarun Particulars Manoj Hema Tarun

Goodwill 14,000 6,000 — Balance b/d 88,000 64,000 —

Revaluation 4,032 1,728 — General 12,600 5,400 —
A/c (loss) Reserve
Premium
for
(loss) Goodwill A/c 8,400 3,600
Bank A/c — 5,272 — Bank A/c — — 40,000
Balance c/d 1,40,000 60,000 40,000 Bank A/c 49,032 — —

(Profit)
1,58,032 73,000 90,000 1,58,032 73,000 90,000

Balance Sheet of Manoj, Hema and Tarun

as on March 31, 2006
(Rs.) (Rs.)
Bills Payable 38,000 Bank 1,07,760

Sundry creditors 32,000 Bills Receivable 30,000
Capitals A/c: Sundry Debtors 45,000
Manoj 1,40,000 Stock 40,000
Hema 60,000 Investment 11,440
Tarun 40,000 2,40,000 Prepaid Insurance 1,000
Machinery 35,200
Building 39,600
3,10,000 3,10,000
Bank account
Dr Cr

(Rs) (Rs)
Balance b/d 12,000 Hema‘s Capital A/c 5,272

Manoj‘s Capital A/c 49,032 Balance c/d 1,07,760
Goodwill A/c 12,000
Tarun‘s Capital A/c 40,000
1,13,032 1,13,032
Working Note:
= Calculation of New profit Sharing Ratio:

Total Profit = 1
Tarun gets = 1/6
Remaining Profit = 1 – 1/6 = 5/6 share by Manoj and Hema in their

existing profit sharing ratio.
Manoj‘s new share = 5/6 × 7/10 = 7/12

Hema‘s new shares = 5/6 × 3/10 = 3/12
New profit sharing ratio of Manoj, Hema and Tarun =

7/12 : 3/12 : 1/6 or 7 : 3 : 2.
174
= Adjustment of Capital:
Tarun brought capital for 1/6 share = Rs.40,000
Total Capital of the firm = Rs. 40,000 × 6/1 = Rs.2,40,000
Manoj‘s Capital = Rs. 2,40,000 × 7/12 = Rs. 1,40,000
Hema‘s Capital = Rs. 2,40,000 × 3/12 = Rs.60,000 Tarun‘s
Capital = Rs. 2,40,000 × 2/12 = Rs.40,00
TOPICS COVERED UNDER ABOVE MENTIONED

CHAPTER ARE :
Admission of a partner – Meaning

When a partner so admitted to the existing partnership firm, it is called
admission of a partner.
On the admission of a new partner, the following adjustments become
necessary:
4. Adjustment in profit sharing ratio;
5. Adjustment of Goodwill;
6. Adjustment for revaluation of assets and reassessment of liabilities;
7. Distribution of accumulated profits and reserves; and
8. Adjustment of partners‘ capitals.
Adjustment in Profit sharing Ratio

When new partner is admitted he/she acquires his/her share in profit from
the existing partners. As a result, the profit sharing ratio in the new firm is
decided mutually between the existing partners and the new partner.
Sacrificing Ratio
At the time of admission of an incoming partner, existing partners have to
surrender some of their share in favour of the new partner. The ratio in
which they surrender their profits is known as sacrifice ratio.
Meaning of Goodwill:
A established firm develops wide business connections. This helps the firm to earn more
profits as compared to a new firm. The monetary value of such advantage is known as
―Goodwill‖.
Methods of valuation of Goodwill

(i) Average Profit Method
(ii) Super Profit Method
(iii) Capitalisation Method
Revaluation of assets and liabilities

On admission of a new partner, the firm is reconstituted and the assets are revalued and
liabilities are reassessed. It is necessary to show the true position of the firm at the time of
admission of a new partner.
Adjustments of reserves and accumulated profit or losses

Any accumulated profit or reserve appearing in the balance sheet at the time of admission of a
new partner, are credited in the existing partner‘s capital account in existing profit sharing
ratio. If there is any loss, the same will be debited to the existing partner in the existing ratio.
Adjustment of partner’s capital

Sometime, at the time of admission, the partners‘ agreed that their capitals are adjusted to the
proportionate to their profit sharing ratio. The partners may decide to calculate the capitals
which are to be maintained in the new firm either on the basis of new Partner‘s Capital and his
profit sharing ratio or on the basis of the existing partner‘s capital accounts.
TERMINAL QUESTIONS
CHAPTER-3
RETIREMENT AND DEATH

OF A PARTNER
If you look around, you must have noticed people in your relation and in your
neighbourhood running business in partnership. You must have seen people
quitting partnership firm or a person dies while in partnership. These are the
events that take place during the lifetime of a partnership firm. Some issues
arise on the happening of these events involving finance. Some assets and
liabilities may need revaluation, goodwill is to be treated and amount of joint
life policy is distributed and soon accounting adjustment are required to be
made. Whenever such events take place, the firm has to calculate the dues of
a partner leaving the firm or that of the deceased. In this lesson you will learn
the accounting treatment in the books of the firm in these two cases i.e.
retirement of a partner and death of a partner.
OBJECTIVES
After studying this lesson, you will be able to:
state the meaning of retirement/death of a partner;
calculate new profit sharing ratio and gaining ratio;
make adjustments relating to goodwill, accumulated reserves and
undistributed profits at the time of retirement/death of a partner;
explain the need for revaluation of assets and reassessment of
liabilities at the time of retirement/death;
prepare the revaluation account relating to retirement/death of a partner;
illustrate the various methods of settling the claim of retiring partner
and the related accounting treatment;
illustrate the accounting treatment of partners capital and its
adjustment; ascertain profit up to the date of death of a partner;
prepare the account of the deceased partner‘s executor.
180
Retirement and Death of a Partner
RETIREMENT – MEANING, CALCULATION OF NEW

PROFIT SHARING RATIO AND GAINING RATIO
When one or more partners leaves the firm and the remaining partners
continue to do the business of the firm, it is known as retirement of a
partner. Amit, Sunil and Ashu are partners in a firm. Due to some family
problems, Ashu wants to leave the firm. The other partners decide to allow
him to withdraw from the partnership. Thus, due to some reasons like old
age, poor health, strained relations etc., an existing partner may decide to
retire from the partnership. Due to retirement, the existing partnership
comes to an end and the remaining partners form a new agreement and the
partnership firm is reconstituted with new terms and conditions. At the
time of retirement the retiring partner‘s claim is settled.
A partner retires either :

6. with the consent of all partners, or
7. as per terms of the agreement; or
8. at his or her own will.
The terms and conditions of retirement of a partner are normally provided

in the partnership deed. If not, they are agreed upon by the partners at the
time of retirement. At the time of retirement the following accounting
issues are dealt :
(a) New profit sharing ratio and gaining ratio.
(b) Goodwill
(c) Adjustment of changes in the value of Assets and liabilities
(d) Treatment of reserve and accumulated profits.
(e) Settlement of retiring partners dues,
(f) New capital of the continuing partners.
New profit sharing ratio and gaining ratio

As soon as a partner retires the profit sharing ratio of the continuing
partners get changed. The share of the retiring partner is distributed
amongst the continuing partners. In the absence of information, the
continuing partners take the retiring partner‘s share in their profit sharing
ratio or in an agreed ratio. The ratio in which retiring partner‘s share is
distributed amongst continuing partners is known as gaining ratio. It is
Gaining Ratio = New Ratio – Existing Ratio
181
Various cases of new ratio and gaining ratio are illustrated as follows:
(i) Retiring partner’s share distributed in Existing Ratio :

In this case, retiring partner‘s share is distributed in existing ratio amongst
the remaining partners. The remaining partners continue to share profits
and losses in the existing ratio. The following example illustrates this :
Tanu, Manu and Rena are partners sharing profits and losses in the ratio of
= 4 : 3 : 2. Tanu retires and remaining partners decide to take Tanu‘s share
in the existing ratio i.e. 3 : 2. Calculate the new ratio of Manu and Rena.
Existing Ratio between Manu and Rena = 3/9 and 2/9

Tanu‘s Ratio (retiring partner) = 4/9
Tanu‘s share taken by the Manu and Rena in the ratio of 3 : 2
Manu‘s gets = 4/9 × 3/5 = 12/45
Manu‘s New Share = 3/9 + 12/45 = 27/45
Rena‘s gets = 4/9 × 2/5 = 8/45
Rena‘s New Share = 2/9 + 8/45 = 18/45
New ratio between Manu and Rena is 27/45 : 18/45 = 27 : 18 = 3 : 2.
Manu Gain = 27/45 – 3/9 = 12/45
Rena Gain = 18/45 – 2/9 = 8/45
12/45 : 8/45
3:2
You may note that the new ratio is similar to existing ratio that existed
between Manu and Rena before Tanu‘s retirement.
Note: In absence of any information in the question, it will be presumed
that retiring partner‘s share has been distributed in existing ratio.
(ii) Retiring partner’s share distributed in Specified proportions:

Sometimes the remaining partners purchase the share of the retiring partner in
specified ratio. The share purchased by them is added to their old share and
the new ratio is arrived at. The following example illustrates this:
182
A B and C are partners in the firm sharing profits in the ratio of 3 : 2 : 1. B

retired and his share was divided equally between A and C. Calculate the
new profit sharing ratio of A and C.
B‘s Share = 2/6
B‘s share is divided between A and C in the ratio of 1 : 1.
A gets 1/2 of 2/6 = 2/6 × 1/2 = 1/6
A‘s New Share = 3/6 + 1/6 = 4/6
C‘s gets 1/2 of 2/6 = 2/6 × 1/2 = 1/6
C‘s New share = 1/6+1/6 = 2/6
Gaining Ratio
Gaining Ratio = New Ratio – Existing, Ratio
Gain of A = 4/6 – 3/6 = 1/6
Gain of C = 2/6 – 1/6 = 1/6
1/6 : 1/6
1 : 1 i.e, equal.
(iii) Retiring Partner’s share is taken by one of the partners

The retiring partner‘s share is taken up by one of the remaining partners. In
this case, the retiring partner‘s share is added to that of partner‘s existing
share. Only his/her share changes. The other partners continue to share profit
in the existing ratio. An example illustrating this point is given below:
Anuj, Babu and Rani share profit in the ratio of 5 : 4 : 2. Babu retires and
his share is taken by Rani, So Rani‘s share is 2/11 + 4/11 = 6/11, Anuj
share will remain unchanged i.e, 5/11. Thus, the new profit sharing ratio of
Anuj and Rani is 5 : 6.
Illustration 1
Neru, Anu and Ashu are partners sharing profit in the ratio of 4 : 3 : 2.
Ashu retires. Find the new ratio of Neru and Anu if terms for retirement
provide the following :
(i) ratio is not given
(ii) equal distribution of Ashu‘s share
(iii) Ashu‘s share is taken by Neru and Anu in the ratio of 2 : 1

(iv) Anu take over the share of Ashu.
Solution:
(i) New profit sharing ratio of Neru and Anu is 4 : 3.
(ii) Ashu‘s share = 2/9
Neru gets = 1/2 of 2/9 = 2/9 × 1/2 = 1/9
Neru‘s New share = 4/9 + 1/9 = 5/9 Anu
gets = 1/2 of 2/9 = 2/9 × 1/2 = 1/9 Anu‘s
New Share = 3/9 + 1/9 = 4/9
New profit sharing ratio of Neru and Anu is 5/9 : 4/9 or 5 : 4
Gaining ratio is equal 1/9 : 1/9 = 1 : 1 Mi. e.
(iii) Ashu‘s Share = 2/9

Neru gets = 2/3 of 2/9 = 2/9 × 2/3 = 4/27
Neru‘s new share = 4/9 + 4/27 = 16/27 Anu
gets = 1/3 of 2/9 = 2/9 × 1/3 = 2/27 Anu‘s
new share = 3/9 + 2/27 = 11/27
New profit sharing ratio of Neru and Anu is 16 : 11.
Gaining ratio is 4/27 : 2/27 = 4 : 2 = 2 : 1
(iv) Anu takes over Ashu share fully.
Ashu‘s share = 2/9
Anu gets = 2/9
Anu‘s new share = 3/9 + 2/9 = 5/9
New profit sharing ratio of Neru and Anu is 4 : 5
Only Anu gains.
184
Illustration 2
Ashish, Barmon, and Chander are partners sharing profits and losses in the
ratio of 2 : 1 : 2 respectively. Chander retires and Ashish and Barman decide
to share the profits and losses equally in future. Calculate the gaining ratio.
Solution:
Gaining ratio = New Ratio – Existing Ratio
Hence, Ashish gets = 1/2 – 2/5
= 1/10
Barman gets = 1/2 – 1/5
= 3/10
Gaining ratio between Ashish and Barman is 1 : 3
INTEXT QUESTIONS 20.1
TREATMENT OF GOODWILL
The retiring partner is entitled to his/her share of goodwill at the time of
retirement because the goodwill is the result of the efforts of all partners
including the retiring one in the past. The retiring partner is compensated
for his/her share of goodwill. As per Accounting Standard 10 (AS-10),
goodwill is recorded in the books only when some consideration in money
is paid for it. Therefore, goodwill is recorded in the books only when it is
purchased and the goodwill account cannot be raised on its own.
Therefore, in case of retirement of a partner, the goodwill is adjusted

through partner‘s capital accounts. The retiring partner‘s capital account is
credited with. his/her share of goodwill and remaining partner‘s capital

account is debited in their gaining ratio. The journal entry is made as under:
Remaining Partners‘ Capital A/c Dr. (individually)

To Retiring Partner‘s Capital A/c
(Retiring partner‘s share of goodwill adjusted to

remaining partners in the gaining ratio)
Illustration 3
Mitu, Udit and Sunny are partners sharing profit equally. Sunny retires
and the goodwill of the firm is valued at Rs 54,000. No goodwill account
appears in the books of the firm. Mitu and Udit share future profit in the
ratio of 3 : 2. Make necessary journal entry for goodwill.
Solution:
Journal
Amount Amount
(Rs.) (Rs.)
Mitu‘s Capital A/c Dr 14,400
Udit‘s Capital A/c Dr. 3,600
To Sunny‘s Capital A/c 18,000
(Sunny‘s share of goodwill adjusted

to remaining partners in their gaining
ratio 4 : 1]
Note : Sunny‘s share of goodwill = Rs.54,000 × 1/3 = Rs.18,000

Mitu Gains = 3/5 – 1/3 = 9 – 5/15 = 4/15
Udit Gains = 2/5 - 1/3 = 6 – 5/ 15 = 1/15
Gaining Ratio between Mitu and Udit = 4 : 1
When the Goodwill Account already appears in the Books

Normally the goodwill is not shown in the books of the firm. If at the time
of retirement/death of a partner, goodwill appears in the Balance Sheet of
the firm, it will be written off by debiting all the partners‘ capital account
186
in their existing profit sharing ratio and crediting the goodwill account. In
such a case, the following journal entry is made:
Partners‘ Capital A/c Dr (including retiring partner‘s capital A/c)
To Goodwill A/c
(Existing goodwill written-off)
Illustration 4
Tanu, Priya and Mayank are partners‘ sharing profit in the ratio of 3 : 2 : l.
Priya retires and on the date of Priya‘s retirement goodwill is valued at
Rs.90,000. Goodwill already appears in the books at a value of Rs.48,000.
New ratio of Tanu and Mayank is 3 : 2. Make the necessary journal entries.
Solution:
Journal
Amount Arnount
(Rs.) (Rs.)
Tanu‘s Capital A/c Dr 24,000
Priya‘s Capital A/c Dr 16,000
Mayank‘s Capital A/c Dr 8,000
To Goodwill A/c 48,000
(Existing goodwill written-off in the

books)
Tanu‘s Capital A/c Dr 9,000
Mayank‘s Capital A/c Dr 21,000
To Priya‘s Capital A/c 30,000
(Priya‘s share of goodwill adjusted to
remaining partners in their gaining
ratio 3 : 7
Note : Priya‘s share of goodwill = Rs.90,000 × 2/6 = Rs.30,000

Gaining Ratio = New Ratio – Existing Ratio,
Tanu Gains = 3/5 – 3/6 = 18 – 15/30 = 3/30
Mayank Gains = 2/5 – 1/6 = 12 – 5/30 = 7/30
Gaining Ratio between Tanu. and Mayank = 3 : 7
REVALUATION OF ASSETS AND LIABILITIES

At the time of retirement of a partner the assets and liabilities of the firm
are revalued and Revaluation Account is prepared in the same way as in
case of admission of a partner. This is done to adjust the changes in value
of assets and liabilities at the time of retirement/death of a partner. Any
profit or loss due to revaluation is divided amongst all the partners
including retiring/deceased in their existing profit sharing ratio. Following
journal entries are made for this purpose :
2. For increase in value of assets:
Assets A/c Dr. [Individually]
To Revaluation A/c
(Increase in the value of assets)
(ii) For decrease in value of assets:
Revaluation A/c Dr.
To Assets A/c (Individually)
(decrease in the value of asset)
(iii) For increase in value of Liabilities:
Revaluation A/c Dr.
To Liabilities A/c [Individually]
(Increase in the value of liabilities)
188
(iv) For decrease in value of Liabilities:
Liabilities A/c Dr. [Individually]
To Revaluation A/c
(decrease in the value of liabilities)
Revaluation account is prepared to record the change in the value of assets

or liabilities. It will reveal profit or loss on revaluation. This profit or loss
is divided amongst all partners including the retiring/deceased partner in
existing profit sharing ratio.
(v) For Profit on Revaluation :
Revaluation A/c Dr. (Individually)
To Partner‘s Capital A/c
(Profit on revaluation divided amongst all

partners in their existing profit sharing ratio)
[v] For loss on Revaluation:
Partner‘s Capital A/c Dr. (Individually)
To Revaluation A/c
(Loss on revaluation borne by all partners

in their existing profit sharing ratio)
Illustration 5
Mudit, Mohit and Sonu are partners sharing profit in the ratio 3 : 2 : 1.
Mudit retires from the partnership. In order to settle his claim, the
following revaluation of assets and liabilities was agreed upon:
* The value of Machinery is increased by Rs.25,000.
* The value of Investment is increased by Rs 2,000.
* A provision for outstanding bill standing in the books at Rs. 1,000 is

now not required.
* The value of Land and Building is decreased by Rs.12,000.
Give journal entries and prepare Revaluation account.

Solution

Amount Arnount
(Rs.) (Rs.)
Machinery A/c Dr. 25,000

Investments A/c Dr. 2,000
Provision for Outstanding Bill Dr. 1,000
To Revaluation A/c 28,000
(Increase in value of Assets i.e. Machinery
and investment and reduction in provision)
Revaluation A/c Dr. 12,000

To Land and Building A/c 12,000
(Decrease in value of assets)
Revaluation A/c Dr. 16,000
To Mudit‘s Capital A/c 8,000
To Mohit‘s Capital A/c 5,333
To Sonu‘s Capital A/c 2,667
(Profit on revaluation credited to all
partners capital A/c in old profit sharing
ratio i.e. 3 : 2 : 1)
Revaluation account
Dr Cr

(Rs) (Rs)
Land and Building 12,000 Machinery 25,000

Profit transferred to : Investments 2,000
Mudit Capital 8,000 Provision for 1,000
Mohit Capital 5,333 Outstanding Bill
Sonu Capital 2,667 16,000
28000 28000
Treatment of accumulated reserves and undistributed profit

All the balances of Accumulated Reserves, funds and undistributed amount of
Profit or Loss appearing in the balance sheet of the firm on the date of
retirement/death is distributed amongst all partners including retiring/deceased
partner in their old profit sharing ratio, The following entries are made:
190
(iii) For distribution of undistributed profit and reserve.

Reserves A/c Dr
Profit & Loss A/c (Profit) Dr.
To Partners‘ Capital A/c (individually)

(Reserves and Profit & Loss (Profit)
transferred to all partners capitals A/c
in existing profit sharing ratio)
(ii) For distribution of undistributed loss
Partners‘ Capital A/c Dr. (individually)
To Profit & Loss A/c (Loss)
(Profit & Loss (loss) transferred to
all partners Capitals A/c in old profit
sharing ratio)
SETTLEMENT OF RETIRING PARTNER’S CLAIM

The amount due to the retiring partner is paid according to the terms of
partnership agreement. The retiring partners‘ claim consists of
(a) The credit balance of Capital Account;
= His/her share in the Goodwill of the firm;
= His/her share in the Revaluation Profit:
= His/her share in General Reserve and Accumulated Profit;
(f) Interest on Capital
But, the following deductions are made from his/her Capital Account on
account of :
= His/her share in the Revaluation loss;
= His/her Drawings and Interest on Drawings up to the date of retirement
= His/her share of any accumulated losses
= Loan taken from the firm.
The total amount so calculated is the claim of the retiring partner. He/she
is interested in receiving the amount at the earliest. Total payment may be
made immediately after his/her retirement. However, the resources of the
firm may not be adequate to make the payment to the retiring partner in
lumsum. The firm makes payment to retiring partner in instalments.
(i) Payment in Lump Sum

Retiring partners‘ claim is paid either out of the funds available with the
firm or out of funds brought in by the remaining partners.
The following journal entry is made for disposal of-the amount payable to
the retiring partner :
On payment of cash in lump sum.
Retiring Partner‘s Capital A/c Dr.
To Cash/Bank A/c
(Amount paid to the retiring partner)
Illustration 6
Om, Jai and Jagdish are partners sharing profit in the ratio of 3 : 2 : l.
Their balance sheet as on December 31st 2006 is as under :
192
Balance sheet as on December 31st, 2006

(Rs.) (Rs.)
Creditors 80,000 Building 1,80,000
Bills Payable 26,000 Plant 1,40,000
General reserve 24,000 Motor Car 40,000
Capital : Stock 1,00,000
Om 1,60,000 Debtors 63,000
Jai 1,20,000 4,00,000 Less Provision 3,000 60,000.
Jagdish 1,20000 for Bad debts
Cash at Bank 10,000
5,30,000 5,30,000
Jai retires on that date on the following terms:

7. The Goodwill of the firm is valued at Rs.60,000.
8. Stock and Building to be appreciated by 10%.
9. Plant is depreciated by 10%
10. Provision for Bad debts is increased upto Rs.5,000.
11. Jai‘s share of goodwill adjusted through remaining partners capital

account,
The amount due to Jai is paid out of the fund brought in by Om and Jagdish
for that purpose in their new profit sharing ratio. Jai is paid full amount.
Prepare Revaluation Account and Partner‘s Capital account.
Solution :
It is assumed that Om and Jagdish gaining ratio remains 3 : l.
3. Gaining ratio = 3 : 1.
Om gets = 2/6 × 3/4 = 1/4
Om‘s new share = 3/6 + 1/4 = 3/4
Jagdish gets 2/6 × 1/4 = 1/12
Jagdish‘s new share = 1/6 + 1/12 = 3/12 = 1/4
New profit sharing ratio between Om and Jagdish is 3/4 : 1/4 = 3 : 1.
(b) Jai‘ Share of goodwill

60,000 × 2/6 = 20,000
Adjusted through the remaining partners capital account:
Om Capital A/c Dr. 15,000
Jagdish Capital A/c Dr. 5,000
To Jai Capital A/c 20,000
(Jai‘s share of goodwill debited to remaining partners‘ capital A/c)
Revaluation Account
Dr. Cr.

(Rs.) (Rs.)
Provision for Bad debts 2,000 Stock 10,000
Plant 14,000 Building 18,000
Capital Accounts:
Om 6,000
Jai 4,000
Jagdish 2,000 12,000
28,000 28,000
Capital account
Dr. Cr.
Particulars Om Jai Jagdish Particulars Om Jai Jagdish

Capital 15,000 — 5,000 Balance b/d 1,60,000 1,20,000 1,20,000
Bank 1,52,000 General Reserve 12,000 8,000 4,000
Balance c/d 2,77,000 — 1,59,000 Revaluation (Profit) 6,000 4,000 2,000
Om Capital — 15,000 —
Jagdish Capital — 5,000
Bank 1,14,000 38,000
2,92000 1,52,000 164,000 2,92000 1,52,000 164,000
194
(ii) Payment in instalments

In this case the amount due to retiring partner is paid in instalments. Usually,
some amount is paid immediately on retirement and the balance is transferred
to his loan account. This loan is paid in one or more instalments The loan
amount carries some interest. In the absence of any agreement the rule under
Section 37 of the Indian Partnership Act 1932 applies.
According to this rule, if the amount due to him is not paid

immediately on his retirement, he can claim interest @ 6% p.a. on
the amount due.
An instalment consists of two parts :
(i) Principal Amount of instalment due to retiring partner.
(ii) Interest at an agreed rate,
Interest due on loan amount is credited to retiring partners‘ loan account.
Instalment inclusive of interest then is paid to the retiring partner as per
schedule agreed upon.
(i) On part payment in cash and balance transferred to his/her loan
account.
To Cash/Bank A/c
To Retiring Partner‘s Loan A/c
(Part payment made and balance transferred to loan A/c)
(ii) Total amount due transferred to loan A/c
To Retiring Partner‘s Loan A/c
(Total amount due transferred to loan A/c)
(iii) For interest due
Interest on loan A/c Dr.
To Retiring Partners‘ Loan A/c
(Interest due on loan)
(iv) For payment of instalment
Retiring Partners‘ Loan A/c
To Cash/Bank A/c
(Instalment inclusive of interest paid)
Illustration 7
Taking the figures of the pervious illustration, assuming that he is paid 40% of the amount due
immediately and the balance in three equal yearly instalments. The interest payable is 12% p.a.
Solution:
The amount due to Jai = Rs.1,52,000
Amount paid immediately = Rs.1,52,000 × 40/100
= Rs.60,800
Amount of three equal instalments = Rs.1,52,000 – Rs.60,800 × 3
= Rs.91,200 ÷ 3 = Rs.30,400
1st Instalment at the end of 1st Year = Rs.30,400 + Rs. 10,944
= Rs.41,344
Interest @ 12% pa. = Rs.91,200 × 12/100
= Rs.10,944
2nd Instalment at the end of 2nd Year = Rs.30,400 + Rs.7,296
= Rs.37,344
Interest @ 12% pa. = Rs.60,800x1.2/ 100
= Rs.7,296
3rd Instalment at the end of 3rd Year = Rs.30,400 + Rs.3,648
= Rs.34,048
Interest @ 12% pa. = Rs.30,400 × 12/100
= Rs.3,648
196
III. Find the total amount due to Munish, who is retiring as a partner:
1. Credit balance in Munish capital account Rs.20,000.
2. Munish‘s share of goodwill Rs.7,000
3. General reserve balance shown in Balance sheet Rs.10,000
4. Profit on Revaluation of Assets /liabilities Rs.3,000
5. Interest on drawings Rs.5,00.
6. Munish share in the profit of the firm 1/2
ADJUSTMENT OF REMAINING PARTNER’S CAPITAL

ACCOUNT AFTER RETIREMENT
After retirement of a partner the remaining partners may decide to adjust
their capital. Often the remaining partners determine the total amount of
capital of the reconstituted firm and decide to keep their respective capital
accounts in proportion to the new profit sharing ratio. The total capital of
the firm may be more or less than the total of their capital at the time of
retirement. The new capitals of the partners are compared with the balance
standing to the credit of respective partner‘s capital account. If there is a
surplus in the capital account, the amount is withdrawn by the concerned
partner. The partner brings cash in case the balance in the capital account
is less than the calculated amount.
Illustration 8
Roopa, Sunder and Shalu are partners sharing profit in the ratio of 5 : 3 : 2.
Roopa retired, when their capitals were: Rs.46,000, Rs.42,000 and
Rs.38,000 respectively after making all adjustments on retirement. Sunder
and Shalu decided to have a total capital of the firm at Rs.84,000 in the
proportion of 7 : 5. Calculate actual cash to be paid or brought in by each
partner and make necessary journal entries.
Solution:
Total Capital of the New firm = Rs.84,000
Sunder‘s share in the new capital = Rs.84,000 × 7/12
= Rs.49,000
Shalu‘s share in the new capital = Rs.84,000 × 5/12
= Rs.35,000
On comparing Sunder‘s share in the new capital of the firm with the
amount standing to the credit of his capital, It is observed that he has to
bring Rs.7,000 the deficit amount (Rs.49,000 – 42,000) in Cash.
Similarly, Shalu‘s share in the new capital of the firm is Rs.35,000 while
Rs.38,000 stands credited to her capital account. So she is allowed to
withdraw Rs.3,000, the surplus amount (Rs.38,000 – Rs.35,000) from the
firm so as to make her capital in proportion to her new profit share ratio.
journal
Amount Arnount
(Rs.) (Rs.)
Bank A/c Dr. 7,000
To Sunder‘s Capital A/c 7,000
(The deficit amount brought in by

the partner)
Shalu‘s Capital A/c Dr. 3,000
To Bank A/c 3,000

(The surplus amount withdrawn by
the partner)
Adjustment of remaining partner’s capital in their profit sharing

ratio, when the total capital of the new firm is not pre-determined.
In this case the total amount of adjusted capital of the remaining partners
is rearranged as per agreed proportion in which they share profit of the
reconstituted firm. The following steps may be adopted:
2 Add the balance standing to the credit of the remaining partners‘
capital accounts.
3 The total so obtained is the total capital of the firm.
4 This capital is divided according to the new profit sharing ratio.
Illustration 9
Sumit, Amit and Neha are partners sharing profit in the ratio of 4 : 3 : 1.
when Amit retired , their adjusted capitals were Rs.76,000: Rs.45,000 and
Rs.34,000 respectively. Sumit and Neha decided to have their total capital
of the firm in the ratio of 3 : 2. The necessary adjustments were to be
made in cash only. Calculate actual cash to be paid off or brought in by
each partner.
198
Solution:
Total of the adjusted capitals of the remaining partners.
Sumit = Rs. 76,000
Neha = Rs. 34,000
Total = Rs.110,000
Total capital of the firm which is divided in the new ratio of 3 : 2.

New capital of Sumit = 1,10,000 × 3/5 = Rs. 66,000
New Capital of Neha = 1,10,000 × 2/5 = Rs.44,000
Sumit‘s share in the new capital of the firm is Rs.66,000 while Rs.76,000
stands credited to his capital account. So he will withdraw Rs.10,000
(Rs.76,000 – Rs.66,000) from the firm so as to make his capital in
proportion to his new profit sharing ratio.
Similarly, Neha‘s share in the new capital of the firm is Rs.44,000 while
Rs.34,000 stands credited to her capital account, She has to bring Rs,10,000
(Rs,44,000 – 34,000) in Cash to make up the deficit in the capital account.
Illustration 10
The Balance Sheet of Rohit, Nisha and Sunil who are partners in a firm
sharing profits according to their capitals as on 31st March 2006 was as
under:
Liabilities Amount As.sets Amount
(Rs.) (Rs.)
Creditors 25,000 Machinery 40,000
Bills Payable 13,000 Building 90,000
General Reserve 22,000 Debtors 30,000
Capital Less Provision for 1.000 29,000
Rohit 60,000 Bad debts
Nisha 40,000 Stocks 23,000
Sunil 40,000 1,40,000 Cash at Bank 18,000
2,00,000 2,00,000
On the date of Balance Sheet, Nisha retired from the firm, and following
adjustments were made:
19
(i) Building is appreciated by 20%.

(ii) Provision for bad debts is increased to 5% on Debtors.
(iii) Machinery is depreciated by 10%.
(iv) Goodwill of the firm is valued at Rs.56,000 and the retiring partner‘s
share is adjusted.
(v) The capital of the new firm is fixed at Rs.1,20,000.
Prepare Revaluation Account, Capital Accounts of the partner and Balance

sheet of the new firm after Nisha‘s retirement.
Solution:
Revaluation Account
Dr. Cr.
(Rs.) (Rs.)
Provision for Bad debt A/c 500 Building A/c 18,000

Machinery A/c 4,000
Capital Accounts (3 : 2 : 2)
Rohit 5,786
Nisha 3,857
Sunil 3,857 13,500
18,000 18,000
Capital account
Dr. Cr.
Particulars Rohit Nisha Sunil Particulars Rohit Nisha Sunil

Sunil Capital 9,600 — 6,400 Balance b/d 60,000 40,000 40,000
Bank 66,143 General : Reserve 9,428 6,286 6,286
Balance c/d 72,000 — 48,000 Revaluation (Profit) 5,786 3,857 3,857
Rohit Capital — 9,600 —
Sunil Capital 6,400
Bank 6,386 4,257
81,600 66,143 54,400 81,600 66,143 54,400
200
Balance Sheet as on 31st March 2006

(Rs.) (Rs.)
Creditors 25,000 Building 1,08,000
Bank overdraft 37,500 Machinery 36,000
Bills Payable 13,000 Debtors 30,000
Capital: Less Provision for 1,500 28,500
Rohit 72,000 Bad debts
Sunil 48,000 1,20,000 Stock 23,000
1,95,500 1,95,500
Working Notes :
(i) (a) Profit sharing ratio is 60,000:40,000:40,000 i.e. = 3:2:2
(b) Gaining Ratio: Rohit = 3/5 – 3/7 = 21/35 – 15/35 = 6/35
Sunil = 2/5-2/7 = 14/35 – 10/35 = 4/35
= 6/35 : 4/35
= 6:4=3:2
(c) Nisha Share of Goodwill = 56,000 × 2/7 = Rs.16,000.
Share of Goodwill in the gaining ratio by the existing partner,
i.e. Rohit = 16,000 × 3/5 = Rs.9,600
Sunil = 16,000 × 2/5 = Rs.6,400
The journal entry is
Rohit‘s Capital A/c Dr 9,600
Sunil‘s Capital A/c Dr 6,400
To Nisha‘s Capital A/c 16,000
(Share of Goodwill divided into gaining ratio}

Bank account
Dr Cr

(Rs) (Rs)
Balance b/d 18,000 Nisha‘s Capital A/c 66,143
Rohit‘s Capital A/c 6,386
Sunil‘s Capital A/c 4,257
Balance c/d 37,500

(Bank overdraft)
66,143 66,143
(ii) Bank overdraft is taken to pay the retiring partner amount.

(iv) New Capital of the firm is fixed at Rs.1,20,000.
Rohit Sunil
(Rs.) (Rs.)
New Capital (Rs.1,20,000 in the ratio of 3 : 2) 72,000 48,000
Existing Capital (After Adjustments) i.e. partner capitals 65,614 43,743
Cash to be brought by the remaining partners 6.386 4,257
Illustration 11
Chauhan Triphati and Gupta are partners in a firm sharing profit and
losses in the ratio of 1/2, 1/6 and 1/3 respectively. The Balance Sheet on
March 31, 2006 was as follows :
(Rs.) (Rs.)
Sundry Creditors 36,000 Freehold Premises 80,000

Bills Payable 24,000 Machinery 60,000
General Reserve 24,000 Furniture 24,000
Capitals: Debtors 40000
Chauhan 60,000 Less Provision for 2,000 38,000
Triphati 60,000 Bad debts
Gupta 56,000 1,76,000 Stock 44,000
Cash 14,000
2,60,000 2,60,000
202
Gupta retires from the business and the partners agree to the following
revaluation:
= Freehold premises and stock are to be appreciated by 20% and 15%.
respectively
= Machinery and furniture are to be depreciated by 10% and 7%
respectively
= Bad debts reserve is to be increased to Rs.3,000.
= On Gupta retirement, the goodwill is valued at Rs.42,000.
= The remaining partners have decided to adjust their capitals in their
new profit sharing ratio after retirement of Gupta. Surplus/deficit, if
any in their capital account will be adjusted through cash.
Prepare necessary ledger accounts and Balance Sheet of reconstituted
firm.
Solution:
Revaluation Account
Dr. Cr.
(Rs.) (Rs.)
Provision for Bad debts 1,000 Freehold Premises 16,000
Machinery 6,000 Stock 6,600
Furniture 1,680
Capital Accounts:
Chauhan 6,960
Triphati 2,320
Gupta 4,640 13,920
22,600 22,600
Capital Account
Dr. Cr.
Particulars Chauhan Triphati Gupta Particulars Chauhan Triphati Gupta

Gupta Capital 10,500 3,500 – Balance b/d 60,000 60,000 56,000

Gupta Loan 82,640 General Reserve 12,009 4,000 8,000
Cash 30,000 Revaluation (Profit) 6,960 2,320 4,640
Balance c/d 98,460 32,820 Chauhan Capital — — 10,500
Tirphati Capital 3,500
Cash 30,000
1,08,960 66,320 82,640 1,08,960 66,320 82,640
203
Balance Sheet as on March 31, 2006

(Rs.) (Rs.)
Creditors 36,000 Freehold Premises 96,000

Bills Payable 24,000 Machinery 54,000
Gupta‘s Loan 82,640 Furniture 22,320
Capital: Debtors 40,000
Chauhan 98,460 Less Provision for 3,000
Tirphati 32.820 1,31,280 Bad debts 37,000
Stock 50,600
Cash 14,000
2,73,920 2,73,920
Working Note:
(c) In the absence of agreement, retiring partner‘s capital account is transferred to his loan account.
(d) In the absence of agreement, existing ratio of remaining partners is gaining ratio i.e. 3 : 1
(e) Calculation of Cash brought in (or paid off) by remaining partner.
Chauhan Tirphati
3. Total Capital of Chauhan and Tirphati
(Rs.68,460 + 62,820 = Rs.1,31,280 in the
ratio of 3 : 1) 98,460 32,820
Adjusted existing Capital 68,460 62,820
Excess or Deficit (Excess) 30,000 (Deficit) 30,000
INTEXT QUESTION 20.5
204
DEATH OF A PARTNER
On the death of a partner, the accounting treatment regarding goodwill,
revaluation of assets and reassessment of liabilities, accumulated reserves
and undistributed profit are similar to that of the retirement of a partner,
When the partner dies the amount payable to him/her is paid to his/her
legal representatives. The representatives are entitled to the followings :
(iv) The amount standing to the credit to the capital account of the
deceased partner
(v) Interest on capital, if provided in the partnership deed upto the date of
death:
(vi) Share of goodwill of the firm;
(vii) Share of undistributed profit or reserves;
(viii) Share of profit on the revaluation of assets and liabilities;
(ix) Share of profit upto the date of death;
(x) Share of Joint Life Policy.
The following amounts are debited to the account of the deceased
partner‘s legal representatives:
(4) Drawings
(5) Interest on drawings
(6) Share of loss on the revaluation of assets and liabilities;
(7) Share of loss that have occurred till the date of his/her death.
The above adjustments are made in the capital account of the deceased
partner and then the balance in the capital account is transferred to an
account opened in the name of his/her executor.
The payment of the amount of the deceased partner depends on the
agreement. In the absence of an agreement, the legal representative of a
deceased partner is entitled to interest @ 6% p.a. on the amount due from
the date of death till the date of final payment.
205
Calculation of profit upto the date of death of a partner.

If the death of a partner occurs during the year, the representatives of the
deceased partner are entitled to his/her share of profits earned till the date of
his/her death. Such profit is ascertained by any of the following methods:
6. Time Basis
7. Turnover or Sales Basis
(i) Time Basis

In this case, it is assumed that profit has been earned uniformly through
out the year. For example:
The total profit of previous year is Rs. 2,25,000 and a partner dies three
months after the close of previous year, the profit of three months is Rs.
31,250 i.e. 1,25,000 × 3/12, if the deceased partner took 2/10 share of
profit, his/her share of profit till the date of death is Rs. 6,250 i.e. Rs.
31,250 × 2/10
(ii) Turnover or Sales Basis

In this method, we have to take into consideration the profit and the total
sales of the last year. Thereafter the profit upto the date of death is
estimated on the basis of the sale of the last year. Profit is assumed to be
earned uniformly at the same rate.
Illustration 12
Arun, Tarun and Neha are partners sharing profits in the ratio of 3 : 2 : 1
Neha dies on 31st May 2006. Sales for the year 2005-2006 amounted to
Rs.4,00,000.and the profit on sales is Rs.60,000. Accounts are closed on
31 March every year. Sales from lst April 2006 to 31st May 2006 is
Rs.1,00,000.
Calculate the deceased partner‘s share in the profit upto the date of death.
Solution :
Profit from 1st April 2006 to 31st May 2006 on the basis of sales:
If sales are Rs.4,00,000, profit is Rs.60,000
If the sales are Rs.1,00,000 profit is : 60,000/4,00,000 × 1,00,000
= Rs.15,000
Neha‘s share = 15,000 × 1/6 = Rs.2,500
206
Alternatively profit is calculated as

60000
Rate of profit = 100 15%
400000
Sale upto date of death = 1,00,000
15
Profit = 1,00,000 = Rs 15000
100
Illustration 13
Nutan, Sumit and Shiba are partners in a firm sharing profits in the ratio
5 : 3 : 2. On 31st December 2006 their Balance Sheet was as under:
(Rs.) (Rs.)
Creditors 52,000 Building 60,000
Reserve Fund 15,000 Plant 50,000
Capitals : Stock 27,000
Nutan 60,000 Debtors 25,000
Sumit 45,000 Cash 10,000
Shiba 30,000 1,35,000 Bank 30,000
2,02,000 2,02,000
Nutan died on 1 July 2007. It was agreed between her executor and the
remaining partners that:
7. Goodwill to be valued at 2½ years purchase of the average profits of
the last Four years, which were: 2003 Rs. 25,000; 2004 Rs.20,000;
2005 Rs.40,000 and 2006 Rs.35,000.
8. Building is valued at Rs.70,000; Plant at Rs.46,000 and Stock at
Rs.32,000.
9. Profit for the year 2006 be taken as having accrued at the same rate as
that of the previous year.
10. Interest on capital is provided at 9% p.a.
11. On 1 July 2007 her drawings account showed a balance of Rs.20,000.
12. Rs.25,950 are to be paid immediately to her executor and the balance
is transferred to her Executors Loan Account.
Prepare Nutan‘s Capital Account and Nutan‘s Executor‘s Account as on
1st July 2007.
Solution
(i) Valuation of Goodwill:
Total Profit = Rs.25,000 + Rs.20,000 + Rs.40,000 + Rs.35,000
= Rs. 1,20,000
207
Average Profit = 1,20,000/4 = Rs.30,000

Hence, Goodwill at 2½ year‘s purchase = Rs.30,000 × 2½ =
Rs.75,000 Nutan‘s share of goodwill = 75,000 × 5/10 = Rs.37,500
It is adjusted into the Capital Accounts of Sumit and Shiba in the
gaining ratio of 3 : 2 i.e. Rs 22,500 and Rs 15000 respectively.
2. Share of Profit payable to Nutan [upto the date of death]
Rs.35,000 × 6/12 × 5/10
Rs.8,750
3. Nutan‘s Share of Reserve Fund = Rs.15,000 × 5/10
Rs.7,500
4. Interest on Nutan‘s Capital = 60,000 × 9/100 × 6/12
Rs.2,700
Revaluation account
Dr Cr
(Rs) (Rs)
Plant 4,000 Building 10,000

Profit transferred to Stock 5,000
Nutan Capital 5,500
Sumit Capital 3,300
Shiba Capital 2,200 11,000
15,000 15,000
Nutan’s Capital account
Dr. Cr.
(Rs.) (Rs.)
Drawings 20,000 Balance b/d 60,000

Nutan‘s Executor‘s 1,01,950 Reserve fund 7,500
Sumit‘s Capital (Goodwill) 15,000
Shiba‘s Capital (Goodwill) 22,500
Profit & Loss (Suspense) 8,750
Revaluation A/c 5,500
Interest on Capital 2,700
1,21,950 1,21,950
208
Retirement and Death of a Partner Nutan’s Executor’s accounts
Dr. Cr.
(Rs.) (Rs.)
Bank 25,950 Nutan‘s Capital 1,01,950
Nutan‘s Executor‘s 76,000

Loan Transfer
1,01,950 1,01,950
CHAPTER-4
DISSOLUTION OF A PARTNERSHIP FIRM
The word Dissolution implies ―the undoing or

breaking of a bond tie‖. In other words,
dissolution implies that the existing state of
arrangement is done away with. Suppose,
certain colour is put into the water, the colour
dissolves into the water because the solid state
LEARNING OBJECTIVES of the colour disintegrates through the process
of breaking of bond of chemicals that was the
After studying this chapter you will be
able to :
basis of that solid state. In life, anything
dissolves only by losing its current state, so is
l State the meaning of dissolution of
firm; true in the case of the partnership as well. An
l Differentiate between dissolution existing partnership dissolves whenever the
of firm and dissolution of reconstitution of the existing firm is caused by
partnership; admission, retirement or death of a partner.
l Prepare realization account; However, the dissolution of partnership does
l Settle the claims against the firm; not lead to the dissolution of the firm since the
two situations are different. In case of
l Record transactions for closure of
the books and settlement of dissolution of partnership, the firm continues,
partners‘ accounts. only the partnership relation is reconstituted, but
in case of dissolution of firm, not only
partnership is dissolved but the
firm also loses its existence,
implying thereby that the firm
ceases to operate as a partnership firm (Section 39 of the Partnership Act, 1932). After
dissolution of firm, the firm does not remain in business. The only business to be carried out
is akin to its funeral ceremony, i.e., closing ceremony of all existing activities.
Dissolution of a Partnership
The relation of partnership among different partners is changed without changing the
partnership firm. Thus, in case of dissolution of partnership, the economic basis of
relationship of partners is reconstituted without affecting the entity of the firm which
continues to remain in business as ever before. A partnership is dissolved by change of
mutual contract in the following cases :
7. Change in profit sharing ratio among partners;
8. Admission of a new partner;
9. Retirement of a partner, where at least two persons remain as partners;
10. Death of a partner (Section 42);
11. Adjudication of a partner as an insolvent;
12. Completion of a venture if partnership is formed for that;
13. Expiry of the period of partnership if partnership is for a pre-determined period;
14. Merger of one partnership firm into another.
Dissolution of a Firm
Dissolution of a firm takes place in the following cases :

9. Dissolution by agreement : A firm is dissolved in case :
1.2 All the partners give consent to it, or
1.3 As per the terms of partnership agreement.
10. Compulsory dissolution : A firm is dissolved compulsorily in the following cases :
1.2 Where all the partners or all except one partner, become insolvent or insane
rendering them incompetent to sign a contract;
1.3 Where the business becomes illegal;
Where all the partners except one decide to retire from the firm;
Where all the partners or all except one partner dies;
Where the partnership deed includes any provision regarding the happening of the
following :
Expiry of the period for which the partnership was formed;
Completion of the specific venture or project for which the firm was formed.
6. Dissolution by notice : In case of partnership at will, the firm may be dissolved if any of
the partners gives a notice in writing to the other partners signifying his intention of
seeking dissolution of the firm.
7. Dissolution by court : A court, may order a partnership firm to be dissolved (under
Section 44), in case of a suit by a partner in the following situations :
A partner becomes insane;
A partner becomes permanently incapable of performing his duties as a partner;
A partner deliberately and consistently commits breach of agreements relating to

the management of the firm;
A partner‘s conduct is likely to adversely affect the business of the firm;
The partner transfers whole of his interest in the firm to a third party;
The business of the firm cannot be carried on, except at a loss;
The court, on any ground, regards dissolution to be just and equitable.
Distinction between Dissolution of
Partnership and Dissolution of Firm
Basis Dissolution of Partnership Dissolution of Firm

1. Termination of No, the business is not The business of the firm is
business terminated. closed.
2. Settlement of as- Assets and liabilities are Assets are sold and realized
sets and liabilities revalued and new balance and liabilities are paid off.
sheet is drawn.
3. Court‘s Court does not intervene A firm can be dissolved by
Intervention because partnership is the court‘s order.
dissolved by mutual agreement
and through the process of
reconstitution.
4. Economic Relation- Economic relationship may Economic relationship

ship remain and changes. between the partners comes
to an end.
5. Closure of books Does not require because the All books of accounts are
business is not terminated. closed.
Settlement of Accounts
In case of dissolution of firm, the firm ceases to conduct business and has to settle its
accounts. For this purpose, it disposes off all its assets for making payment to all the
claimants against it.
Section 48 of the Partnership Act provides the following rules for the settlement of
accounts between the partners :
l Loss to be paid first out of profits, next out of capital and lastly by the partners
individually in the proportion in which they were entitled to share the profits. In other
words, losses are to be shared by the partners in their profit sharing ratio;
l Assets of the firm are first to be applied in paying off the debts of the firm to the third
parties, next in paying off to each partner proportionately what is due to him from the
firm for advances as distinguished from
capital; and the residue to be divided among the partners in the proportion in which they
were entitled to share profits. In simple words, following is the order of payment from
the proceeds of the sale of the firm :
l Expenses of realization;
l Payment to outside creditors. It is to be noted that secured creditors are to be paid
off first out of the proceeds of secured assets before anything is paid to unsecured
creditors;
l Loans and advances made by partners‘ spouse;
l Loans and advances made by a partner apart form his capital; and
l Final claims of the partners on their capital account.
Debts of firm verses personal debts of partners

If assets of the firm are not sufficient to pay off the firm‘s creditors, the partners may be
required to make contributions because of the unlimited nature of the liability of the partner.
In such a case, the partner will have the right to apply his personal assets in paying off his
personal debts first. Thereafter, the remaining surplus of personal assets will be used for
making his contribution to satisfy the unsettled portion of outside creditors. It is to be further
noted that personal assets of the partner are individually owned assets excluding the personal
property of wife (Streedhan).
Accordingly the following steps are taken :

l All assets would be disposed off and cash has to be realized;
l With the available funds, claims are satisfied in the following order—
1. Payment of expenses for realizing the assets and collection of debts;
2. Payment of outside liabilities of the firm, i.e. creditors, loans, bank overdrafts, bills
payable, advances from partners‘ relatives;
3. Loans and advances made by a partner;
4. Repayment of advances extended by the partners;
5. Repayment of capital contribution to the partner;
6. Any surplus left, is distributed among all partners in their profit sharing ratio.
The books of accounts are closed and profit or loss on realizing the assets and discharge of
liabilities has to be computed in the event of dissolution of the firm. For this purpose, a
realization account is prepared for recording the realization of assets and payment of
liabilities. Sale of assets is recorded at the realized value and payment to creditors is recorded
at the settlement value. After recording of all transactions with respect to sale, transfer or
takeover of assets and payment of all external liabilities, the realization account would have a
balance that will either be profit or loss. Profit arises when assets are realized at more than the
book value and/or liabilities are settled at less than book value. In an otherwise situation there
is loss. The profit or loss on realization is transferred to partners‘ capital accounts in their
profit sharing ratio.
Journal Entries
* For transferring the assets
Transfer to the debit of realization account at their gross book values of all accounts of
assets excluding cash, bank and the fictitious assets.
Realization a/c Dr.
Assets a/c(individually)
It is to be noted that debit balance such as accumulated losses deferred expenses are not
transferred to the realization account. These are transferred to the partners‘ capital
account in their profit sharing ratio by recording the following entry :
Partners‘ capital a/c Dr.

Fictititous assets a/c
(iv) For transferring the liabilities
All external liability accounts including provisions, if any, in respect of assets which
have been transferred to the realization account are closed by transferring them to the
credit of realization account at their book values.
External liabilities a/c(Individually) Dr.
Realization a/c
Partners‘ capital account and loan account of the partner are prepared separately and are
not transferred to realization account.
2. For sale of assets
Bank a/c(realized price) Dr.
Realization a/c
4. For an asset taken over by a partner

Partner‘s capital a/c Dr.
Realization a/c(Agreed price)
5. For payment to creditors
Any amount paid in cash to creditors, realisation account is debited and cash/bank
account is credited.
Realization a/c Dr.
Bank a/c
6. Settlement with the creditors through transfer of asset
When a creditor accepts an asset in part payment no entry is recorded. It is because the
liability due to the creditors has already been transferred to the credit of realization
account and the asset taken over by the creditor is appearing on the debit side of the
realization account. Thus, the debit of the asset cancels the credit of the corresponding
liability in the realization account. Sometimes, a creditor may accept part of his payment
in cash and part of his payment by taking over an asset. In this case, the entry will be
recorded for cash payment only. For example, a creditor to whom Rs. 10,000 was due
accepted office equipment worth Rs. 8,000. He will be paid Rs. 2,000 in cash by
recording the following entry :
Realization a/c Dr. Rs. 2,000

Bank a/c Rs. 2,000
Whenever a creditor takes over an asset, there may be two situations :
(a) When a creditor accepts an asset whose value is more than the amount due to him,
he will pay cash. It is recorded as :
Bank a/c Dr.
Realization a/c
(b) When a creditor accepts an asset as full and final settlement, no journal entry is
recorded.
(iii) Expenses of realization
(a) When realization expenses are paid by the firm
Realization a/c Dr.
Bank a/c
8. When firm has agreed to pay partner a fixed amount towards realization expenses
irrespective of the actual realization expenses
Realization a/c Dr.
Partners‘ capital a/c
6. When the actual expenses are paid by the firm on behalf of a partner, the following
entry will be recorded :
Bank a/c
(2) However, if a partner himself pays and agreed not to get them reimbursed, no
journal entry is recorded.
(3) When the partner agrees to pay the expenses on behalf of the firm, the entry to be
recorded :
Realization a/c Dr.
(3) When liabilities are paid off
Realization a/c Dr.
Bank a/c
(5) When partner discharges a liability
The liability account is transferred from realization account to partner‘s capital account
by recording the following entry :
Realization a/c Dr.
10. For realization of any unrecorded assets
Bank a/c Dr.
Realization a/c
11. Unrecorded asset taken over by a partner
Realization a/c
12. For settlement of any unrecorded liability
Realization a/c Dr.
Bank a/c
13. Unrecorded liability taken over by a partner

Realization a/c Dr.
Partners‘ Capital a/c
14. When the profit (loss) on realization is transferred to partners’ capital account in their
respective profit sharing ratio :
(a) In case of profit on realization
Realization a/c Dr.
Partners‘ Capitals a/c(individually)
(b) In case of loss on realization

Partners‘ Capitals a/c (individually) Dr.
Realization a/c
4. For transferring accumulated profits and reserve

All accumulated profits and reserves are transferred to the partners‘ capital account in
their respective profit sharing ratio :
Accumulated profit/reserves Dr.
Partners‘ capitals a/c (Individually)
16. Transfer of fictititous assets

All accumulated losses and fictitious assets are debited to the partners‘ capital accounts
in their profit sharing ratio :
Partners‘ capitals a/c (Individually) Dr.
Accumulated losses/Fictitious Assets a/c
17. Payment of loans

Any loans due to partners are paid off :
Partner‘s loan a/c Dr.
Bank a/c
18. Settlement of capital accounts
3. If the partner‘s capital account shows debit balance, he is to bring in the necessary
cash :
Bank a/c Dr.
(b) In case of partners whose accounts show credit balance, the same is paid off :
Partners‘ capitals a/c Dr.

Bank a/c
It may be noted that the aggregate amount finally payable to the partners must equal to
the amount available in the bank and cash accounts. Thus, all accounts of a firm are closed in
case of dissolution.
At times, the Balance Sheet of the firm may not be available on dissolution of partnership
firm. In such a situation, first of all, all the relevant ledger balances are worked out and then
Balance Sheet of the firm on the date of its dissolution is prepared. Thereafter, the process of
dissolution is undertaken in the same manner as discussed above.
Illustration 1(Ascertaining the value of assets)

Ram and Shyam share the profits equally. They decided to dissolve their firm. Their liabilities
were : Ram‘s Capital Rs. 25,000; Shyam‘s Capital Rs. 30,000; Creditors Rs. 12,500; Bills
payable Rs.7,500; Assets of the firm realized Rs.1,00,000. Prepare a Realization Account.
Solution
Books of Ram and Shyam
Realization Account
Dr. Cr.
(Rs.) (Rs.)
1
Sundry assets 75,000 Bank 1,00,000
Bank: Creditors 12,500
Creditors 12,500 Bills payble 7,500
Bills payable 7,500
Capital Accounts:
Ram 12,500
Shyam 12,500 25,000
Total 1,20,000 Total 1,20,000
Notes to the Solution
Capital + Liabilities = Assets
Capital + Creditors + Bills payable = Assets
1
Rs. 25,000 + 30,000 + 12,500 + 7,500 = Rs. 75,000
Illustration 2(When balance sheet at the time of dissolution is not given)

Kumar, Yash and Zakir commenced business on January 1, 2001 with capitals of Rs.
1,00,000, Rs. 80,000 and Rs. 60,000 respectively. Profits are shared in the ratio 4:3:3.
Capitals carried interest at 5% p.a. During 2001 and 2002 they made profits of Rs. 40,000 and
Rs. 50,000 (before allowing interest on capitals). Drawings of each partner were Rs. 10,000
per year.
On December 31, 2002 the firm was dissolved. Creditors on that date were Rs. 24,000.
The assets realized Rs. 2,60,000 net. Prepare the necessary accounts to close the books of the
firm.
Solution
Books of Kumar, Yash and Zakir
Partners’ Capital Accounts
Dr. Cr.
Date Particulars J.F. Kumar Yash Zakir Date Particulars J.F. Kumar Yash Jakir
Rs. Rs. Rs. Rs. Rs. Rs.
2001 2001
Dec. 31 Drawings 10,000 10,000 10,000 Jan. 1 Bank 1,00,000 80,000 60,000
Bal. c/f 1,06,200 82,400 61,400 Int. on Capital 5,000 4,000 3,000
Dec. 31 Net profit 11,200 8,400 8,400
1,16,200 92,400 71,400 1,16,200 92,400 71,400
2002 2002
Dec. 31 Drawings 10,000 10,000 10,000 Jan. 1 Bal. b/f 1,06,200 82,400 61,400
Bal. c/f 1,16,510 87,770 65,720 Int. on capital 5,310 4,120 3,070
Net Profit 15,000 11,250 11,250
1,26,510 97,770 75,720 1,26,510 97,770 75,720
Dec. 31 Realization a/c 13,600 10,200 10,200 Jan. 1 Balance b/f 1,16,510 87,770 65,720
Bank 102,910 77,570 55,520
Total 1,16,510 87,770 65,720 Total 1,16,510 87,770 65,720

Balance Sheet
as at December 31, 2002
(Rs.) (Rs.)
Capital : Assets Assets(balancing figure) 2,94,000

Kumar 1,16,510
Yash 87,770
Zakir 65,720 2,70,000
Creditors 24,000
Total 2,94,000 Total 2,94,000
Realization Account
Dr. Cr.
2002 (Rs.) 2002 (Rs.)
Dec31 Assets 2,94,000 Dec31 Bank (Assets) 2,60,000
Bank (Creditors) 24,000 Creditors 24,000
Loss transferred to:
Kumar‘s Capital 13,600
Yash‘s Capital 10,200
Zakir‘s Capital 10,200
Total 3,18,000 Total 3,18,000
Bank Account
Dr. Cr.
2002 (Rs.) 2002 (Rs.)
Dec31 Realization 2,60,000 Dec 31 Realization 24,000
(assets) (Creditors)
Capital :
Kumar 1,02,910
Yash 77,570
Zakir 55,520
Total 2,60,000 Total 2,60,000
218
Illustration 3(Preparation of Realization Account)

The following is the Balance Sheet of Anju and Manju sharing profits in the ratio of 3:2 as on
December 31, 2003 :
Balance Sheet as at December 31, 2003

(Rs.) (Rs.)
Creditors 19,000 Plant and Machinery 14,000
Loan by Anju‘s brother 5,000 Furniture and Fixtures 2,000
Loan by Manju 7,500 Investment 5,000
General Reserve 1,250 Stock 3,000
Capitals : Debtors 10,000
Anju 5,000 Less: provision 500 9,500
Manju 4,000 9,000 Bank 5,750
The firm was dissolved on March 31, 2003. As a result,

* Anju took over investments at an agreed value of Rs. 4,000 and agreed to pay loan taken
from her brother
* Realization of assets is as follows : Stock Rs. 2,500, Debtors Rs. 9,250, Furniture and
Fixture Rs. 2,250, Plant and Machinery Rs. 12,500
* Expenses of realization were Rs. 300
* Creditors allowed 2.5% discount in full settlement. Record necessary journal entries and
close the books of the firm.
Solution
Books of Anju and Manju
Journal

2003 Amount Amount
(Rs.) (Rs.)
Dec 31 Realization a/c Dr. 34,000
Stock 3,000
Debtors 10,000
Furniture and Fixtures 2,000
Investments 5,000
(Transfer of Sundry assets to realization
account)
Loan by Anju‘s brother a/c Dr. 5,000
Sundry creditors a/c Dr. 19,000
Provision for doubtful debts a/c Dr. 500
Realization a/c 24,500
(Transfer to Sundry Liabilities to
Realization Account)
Bank a/c Dr. 26,500
(Value of assets realized)
Realization a/c Dr. 5,000
Anju‘s capital a/c 5,000
(For adjustment of liabilities
taken over by Anju)
Anju‘s capital a/c Dr. 4,000
(Ajustment of investment taken over by Anju)
Bank a/c 18,525
(Payment to creditors at a discount of 2.5%)
Manju‘s capital a/c Dr. 1,130
(Transfer of loss on realization)
Profit and Loss a/c 2,500
(Transfer of accumulated loss to capital
accounts)
General Reserve a/c Dr. 1,250
Anju‘s capital a/c 750
Manju‘ s capital a/c 500
(Transfer of General Reserve to
Capital Account)
Manju‘s loan a/c Dr. 7,500
Bank a/c 7,500
(Loan paid off)
Bank 5,925
(Final payment to partners)
Realization Account
Dr. Cr.
2003 (Rs.) 2003 (Rs.)
Dec31 Stock 3,000 Dec31 Sundry Creditors 19,000
Debtors 10,000 Provision for 500
Furniture and Fixture 2,000 doubtful debts
Plant and Machinery 14,000 Loan by Anju‘s brother 5,000
Investments 5,000 Bank (assets realized) 26,500
Anju‘s Capital 5,000 Anju‘s capital 4,000
(Anju brother‘s loan) (Investment)
Bank (Expenses) 300 Capitals (loss on
Bank (Creditors) 18,525 realization)
Anju 1,695
Manju 1,130 2,825
Anju’s Capital Account

Dr. Cr.
20.03 (Rs.) 2003 (Rs.)
Dec 31 Realization (loss) 1,695 Dec 31 Balance b/f 5,000
Realization 4,000 Realization 5,000
(Investment) (Anju brother‘s loan)
Profit and Loss 1,500 General Reserve 750
Bank 3,555
Manju’s Capital Account
Dr. Cr.
2003 (Rs.) 2003 (Rs.)
Dec31 Realization (loss) 1,130 Dec 31 Balance b/f 4,000
Profit and Loss 1,000 General Reserve 500
Bank 2,370
Manju’s Loan Account

Dr. Cr.
2003 (Rs.) 2003 (Rs.)
Dec 31 Bank 7,500 Dec 31 Balance b/f 7,500
Bank Account
Dr. Cr.
2003 (Rs.) 2003 (Rs.)
Dec31 Balance b/f 5,750 Dec 31 Realization :
Realization a/c 26,500 Creditors 18,525
(assets realized) Expenses 300
Manju‘s Loan 7,500
Manju‘s Capital 2,370
Anju‘s Capital 3,555
Illustration 4 (Preparation of Balance Sheet at the time of Dissolution)

X and Y are partners in a firm with a profit sharing ratio of 3:2 respectively. They decided to
dissolve the partnership on June 1, 2001. On that date their capitals stood as Rs. 20,000 and
Rs. 10,000, respectively. Amount owed by Y to the firm was Rs. 6,400 and there was a loan
by X for Rs. 8,000; Creditors were Rs. 50,000 and cash Rs. 5,400. The remaining assets other
than loan to Y and cash, realized Rs. 59,200. Realization expenses amounted to Rs. 2,000.
Prepare the Balance Sheet of the firm as on June 1, 2001 and necessary ledger accounts
to close the books of the firm.
Solution
Books of X and Y
Balance Sheet as at June 1, 2001

(Rs.) (Rs.)
Sundry Creditors 50,000 Cash 5,400
X‘s Loan 8,000 Y‘s Loan 6,400
Capitals: Other Assets 76,200
X 20,000 (Balancing figure)
Y 10,000 30,000
Realization Account
Dr. Cr.
2001 (Rs.) 2001 (Rs.)
June Sundry Assets 76,200 June Creditors 50,000
1 Cash (expenses) 2,000 1 Cash (Assets
Cash (Creditors) 50,000 realised) 59,200
Capitals:
Loss on
realisation :
X 11,400
Y 7,600 19,000
Total 1,28,200 Total 1,28,200
Cash Account
Dr. Cr.
2001 (Rs.) 2001 (Rs.)
June Balance b/f 5,400 June Realization 2,000
1 Realization 59,200 1 (expenses)
(Assets) Realization 50,000
Y‘s capital 4,000 (Creditors)
X Loan‘s 8,000
X‘s capital 8,600
X’s Loan Account
Dr. Cr.
2001 (Rs.) 2001 (Rs.)
June 1 Cash 8,000 June 1 Balance b/f 8,000
Capital Accounts
Dr. Cr.
Date Particulars J.F. X Y Date Particulars L.F. X Y
2001 Rs. Rs. 2001 Rs. Rs.
Loan to Y - 6,400 Balance b/d 20,000 10,000
Realization Cash - 4,000
(Loss) 11,400 7,600
Cash 8,600 -
Total 20,000 14,000 Total 20,000 14,000
Illustration 5 (Realization of Assets by a partner)

Dinesh, Ramesh and Satish were partners in a firm sharing-profits in the ratio of 5:3:2. They
agreed to dissolve their partnership firm on March 31, 2002. Dinesh was asked to realize the
assets and pay off liabilities. He had to bear the realization expenses for which he was
promised a lump sum amount of Rs. 2,000. Their financial position on that date was as
follows :
Balance Sheet as at March 31, 2002

(Rs.) (Rs.)
Creditors 27,500 Plant and Equipment 60,000
Invst. Fluctuation fund 9,000 Investment 30,000
Capitals: Stock 11,000
Dinesh 75,000 Debtors 14,200
Ramesh 30,000 Less Provision for
Doubtful debts 900 13,300
Cash 11,200
Satish‘s Capital 16,000
Total 1,41,500 Total 1,41,500
Dinesh agreed to purchase investments at Rs. 25,000. Ramesh took over stock at Rs.
10,500 and Debtors at Rs. 11,800. Plant and Equipment was sold for Rs. 45,000. Unrecorded
assets realized cash of Rs. 3,000. Actual realization
expenses amounted to Rs. 1,800. Prepare necessary ledger accounts on the dissolution of
firm.
Solution
Books of Dinesh, Ramesh and Satish
Realization Account
Dr. Cr.
2002 (Rs.) 2002 (Rs.)
Mar. Plant and Equip. 60,000 Mar. Creditors 27,500
31 Stock 11,000 31 Provision for 900
Investment 30,000 doubtful debts
Debtors 14,200 Investment 9,000
Dinesh‘s Capital 2,000 fluctuation fund
(expenses) Dinesh‘s Capital 25,000
Cash (Payment to 27,500 (Investments)
Creditors) Ramesh‘s Capital 10,500
(Stock)
Ramesh‘s Capital 11,800
(Debtors)
Cash (Plant and 45,000
Equipment)
Cash (Unrecorded 3,000
assets)
Capitals :
(Loss on realization)
Dinesh 6,000
Ramesh 3,600
Satish 2,400 12,000
Total 1,44,700 Total 1,44,700
Cash Account
Dr. Cr.
2002 (Rs.) 2002 (Rs.)
Balance b/f 11,200 Realization (Creditors) 27,500
Equipment 45,000 Dinesh‘s Capital 46,000
Realization 3,000 Ramesh‘s Capital 4,100
(Unrecorded asset)
Satish‘s Capital 18,400
Partner’s Capital
Dr. Cr.
Date Particulars J.F. Dinesh Ramesh Satish Date Particulars J.F. Dinesh Ramesh Satish
Rs. Rs. Rs. Rs. Rs. Rs.
Balance b/f - - 16,000 Balance c/d 75,000 30,000 -
Realization 6,000 3,600 2,400 Cash - - 18,400
(Loss) Realization 2,000
Realization 25,000 - - (Expenses)
(Investments)
Realization - 10,500 -
(Stock)
Realization - 11,800 -
(Debtors)
Cash 46,000 4,100 -
Total 77,000 30,000 18,400 Total 77,000 30,000 18,400
Illustration 6 (Preparation of ledger accounts)

A, B and C are running a hardware shop sharing profits equally. Their financial position is as
under :
Balance Sheet as at March 31, 2003

(Rs.) (Rs.)
Accounts Payable 20,000 Land and Buildings 50,000
Bank Loan 7,000 Office Equipment 5,000
B‘s Loan 20,000 Stock 40,000
Joint Life Policy Accounts Receivable 30,000
Reserve 18,000 Joint Life Policy 18,000
Capitals : Bank 6,000
A Rs. 27,000
B Rs. 34,000
C Rs. 23,000 84,000
Total 1,49,000 Total 1,49,000

Partners agreed to dissolve the firm on that date. You are given the following
information regarding dissolution :
= The Joint Life Policy was surrendered to the insurance company. The company paid a
sum of Rs. 11,500 after deducting an amount of Rs. 6,500 towards loan and interest
thereon by B against the policy.
= Office equipment was accepted by a Accounts Payable for Rs. 7,000 at Rs. 3,500 and
the balance was paid to him by cheque.
= Bankers accepted stock worth Rs. 5,000 and the balance in cash.
= The firm purchased 200 convertible debentures of a leasing company in 2001. After
sometime the investment was treated as bad and was written off. These debentures were
found to be having a market value of Rs. 8,000 and were accepted by a creditor at this
value.
= Assets realized in the following manner :
Land and Buildings Rs. 2,00,000
Stock Rs. 30,000
Accounts Receivable Rs. 20,000
(f) All the liabilities were paid off. Accounts Payable allowed a discount of Rs. 200.
(g) Realization expenses amounted to Rs. 1,800.

You are required to prepare the realization account, bank account and capital accounts
of the partners.
Solution
Books of A, B and C
Realization Account
Dr. Cr.
2003 (Rs.) 2003 (Rs.)
Mar31 Land and Buildings 50,000 Mar31 Accounts payable 20,000
Office equipments 5,000 Bank Loan 7,000
Stock 40,000 Joint Life Policy 18,000
Accounts Receivable 30,000 Reserve
Joint Life Policy 18,000 Bank :
Bank 20,000 Joint Life 11,500
(Accounts Policy
Payable) Land 2,00,000
Less: and
Office Equip. 7,000 Building
Debentures 8,000 Stock 30,000
Discount 200 Accounts 20,000 2,61,500
15,200 4,800 Receivable
Total c/f 1,47,800 Total c/f 306,500
Total b/f 1,47,800 Total b/f 306,500
Bank 7,000 B‘s Capital 6,500
(Bank Joint Life Policy
Overdraft)
Less: Stock 5,000 2,000
Bank (Realization 1,800
Expenses)
Capitals-Gain on
Realization
A Rs. 53,800
B Rs. 53,800
C Rs. 53,800 1,61,400
Total 3,13,000 Total 3,13,000
Bank Account
Dr. Cr.
2003 (Rs.) 2003 (Rs.)
Mar Balance b/f 6,000 Mar Realization 4,800
31 Realization : 31 (Accounts
Joint Life Policy 11,500 Payable)
Land and Buildings 2,00,000 Realization 2,000
Stock 30,000 (Bank
Accounts 20,000 Overdraft)
Receivables Realization 1,800
Realization (Expenses)
Accounts B‘s Loan 20,000
Receivable Capital :
A 80,800
B 81,300
C 76,800 2,38,900
Total 2,67,500 Total 2,67,500
A’s Capital Account

Dr. Cr.
2003 (Rs.) 2003 (Rs.)
Mar Bank 80,800 Mar Balance b/f 27,000
31 31 Realization (Gain) 53,800
B’s Capital Account
Dr. Cr.
2003 (Rs.) 2003 (Rs.)
Mar Realization (JLP) 6,500 Mar Balance b/f 34,000
31 Bank 81,300 31 Realization (Gain) 53,800
C’s Capital Account
Dr. Cr.
2003 (Rs.) 2003 (Rs.)
Mar Bank 76,800 Mar Balance b/f 53,800
31 31 Realization (Gain) 23,000
Illustration 7 ( Preparation of ledger accounts)

R and K are equal partners. They decided to dissolve their firm as on December 31, 2000.
Their Balance Sheet on that day stood as under :
Balance Sheet of R and K as at December 31, 2000

(Rs.) (Rs.)
Sundry Creditors 10,000 Land and Buildings 20,000
Bills Payables 20,000 Furniture and Fittings 14,000
Capitals : Lorry 10,000
Ram 15,000 Stock 5,000
Krishan 15,000 30,000 Debtors 6,000
Cash 5,000
They decided to take up liabilities : R : Sundry Creditors and K : Bills Payable. Assets
realized – Debtors Rs. 4,000; Furniture – Rs. 10,000; Stock Rs. 4,000; Lorry Rs.15,000 and
Land and Buildings Rs. 35,000. Expenses on realization amounted to Rs. 500.
Record necessary journal entries for the above transactions and prepare realization
account, cash account and capital accounts of partners.
Solution
Books of R and K
Journal

Amount Amount
2000 (Rs.) (Rs.)
Dec 31 Realization a/c Dr. 55,000
Debtors 6,000
Furniture and Fittings 14,000
Stock 5,000
Lorry 10,000
Land and Building 20,000
(Asset Accounts Closed)
Sundry Creditors Dr. 10,000
Bills Payable Dr. 20,000
(Transfer of Liability)
Cash a/c Dr. 68,000
(Assets realised)
Realisation a/c Dr. 500
Cash a/c 500
(Expense on Realization paid off)
R 10,000
K 20,000
(Liabilities taken over by partners
R – Sundry creditors, K –
Bills payable)
R 6,250
K 6,250
(Profit credited)
R Dr. 31,250
K Dr. 41,250
Cash a/c 72,500
Realization Account
Dr. Cr.
2000 (Rs.) 2000 (Rs.)
Mar31 Sundry Debtors 6,000 Mar31 Sundry creditors 10,000
Furniture 14,000 Bills Payable 20,000
and Fittings Cash : Assets 68,000
Stock 5,000 Realized
Lorry 10,000
Land and 20,000
Buildings
R (Creditors) 10,000
K (Bills 20,000
Payable)
Cash – (Expenses 500
on Realization)
Capital – (Gain on
Realization):
R 6,250
K 6,250 12,500
Cash Account
Dr. Cr.
2000 (Rs.) 2000 (Rs.)
Dec31 Balance b/f 5,000 Dec31 Realisation – 500
Realization - 68,000 Expenses
Assets Capitals –
R 31,250
K 41,250 72,500
R’s Capital Account

Dr. Cr.
2000 (Rs.) 2000 (Rs.)
Dec31 Balance c/f 31,250 Dec31 Balance b/f 15,000
Realization 10,000
Creditors
Realization(Gain) 6,250
Krishan’s Capital Account
Dr. Cr.
2000 (Rs.) 2000 (Rs.)
Dec31 Balance c/f 41,250 Dec31 Balance b/f 15,000
Realization 20,000
(Bills Payable)
Realization– Profit 6,250
Illustration 8 (Unrecorded assets and liabilities)

Lata, Geeta and Neeta were partners sharing profits in the ratio of 5:3:1. They decided to
dissolve the partnership on March 31, 2001 and their balance sheet was as under.
Balance Sheet Lata, Geeta and Neeta as at March 31, 2001

(Rs.) (Rs.)
Sundry creditors 16,600 Plant and Machinery 40,000
Bills payable 3,400 Stock 10,000
Mortgage loan 15,000 Debtors 25,000
General reserve 4,500 Less : provision 5,000 20,000
Capital accounts : Cash at bank 19,500
Lata 22,000
Geeta 18,000
Neeta 10,000 50,000
There was a typewriter written off which realised Rs. 500. They had a joint life policy of
Rs. 20,000 which was surrendered for Rs. 5,000. Goodwill was sold for Rs. 5,000. Other
assets realized – stock Rs. 6,700; debtors 50%; plant and machinery 10% less than its book
value. Creditors were paid Rs. 16,000. But an outstanding bill of Rs. 400 for repairs was to be
paid off. Expenses on realization amounted to Rs. 620.
Give journal entries to record the above transactions and also prepare necessary
ledger accounts.
Solution
Books of Lata, Geeta and Neeta
Journal
Amount Amount
2001 (Rs.) (Rs.)
Mar 31 Realization a/c Dr. 70,000
Stock 10,000
Sundry Debtors 20,000
( All assets transferred to realization account)
Sundry Creditors a/c Dr. 16,600
Bills Payable a/c Dr. 3,400
Mortgage loan a/c Dr. 15,000
( All external liabilities transferred
realization account)
Realisation a/c Dr. 16,000
Bank a/c 16,000
( Payment made to creditors)
Realization a/c Dr. 400
Bank a/c 400
(Outstanding bill of repairs paid off)
Bank a/c Dr. 5,500
(Unrecorded assets – a typewriter and
J.L.P Surrender value realized Rs. 500 and
Rs. 5,000 respectively)
Bank a/c Dr. 52,700
(Assets realized at the time of dissolution)
Bank a/c 15,400
( Bills payable and mortgage paid off)
Realization a/c Dr. 620
Bank a/c 620
(Realization expenses paid off)
Lata‘s capital a/c Dr. 5,400
Geeta‘s capital a/c Dr. 3,240
Neeta‘s capital a/c Dr. 1,080
(Transfer of loss to partner‘s capital account)
Lata‘s capital a/c 2,500
Geeta‘s capital a/c 1,500
Neeta‘s Capital a/c 500
(General reserve distributed among partners)
Lata‘s Capital a/c Dr. 19,100
Geeta‘s Capital a/c Dr. 16,260
Neeta‘s Capital a/c Dr. 9,420
Bank a/c 44,780
(Final payment to partners after dissolution)
Bills Payable Account
Dr. Cr.
2001 (Rs.) 2001 (Rs.)
Mar31 Realization 3,400 Mar31 Balance b/f 3,400
Mortgage Loan Account
Dr. Cr.
2001 (Rs.) 2001 (Rs.)
Mar31 Realisation 15,000 Mar31 Balance b/f 15,000
General Reserve Account
Dr. Cr.
2001 (Rs.) 2001 (Rs.)
Mar31 Capitals : Mar31 Balance b/f 4,500
Lata 2,500
Geeta 1,500
Neeta 500
Stock Account
Dr. Cr.
2001 (Rs.) 2001 (Rs.)
Mar31 Balance b/f 10,000 Mar31 Realization 10,000
Debtors Account
Dr. Cr.
2001 (Rs.) 2001 (Rs.)
Provision for Bad and Doubtful Debts Account

Dr. Cr.
2001 (Rs.) 2001 (Rs.)
Mar31 Realization 5,000 Mar31 Balance b/f 5,000
Creditors Account
Dr. Cr.
2001 (Rs.) 2001 (Rs.)
Mar31 Realization a/c 16,600 Mar31 Balance b/f 16,600
Plant and Machinery Account

Dr. Cr.
2001 (Rs.) 2001 (Rs.)
Realization Account
Dr. Cr.
2001 (Rs.) 2001 (Rs.)
Mar31 Stock 10,000 Mar31 Provision for 5,000
Debtors 25,000 bad debts
Plant and Machine 40,000 Sundry creditors 16,600
Bank : Bills payable 3,400
Sundry Mortgage loan 15,000
creditors 16,000 Bank – assets
Bills realized :
payable 3,400 Stock 6,700
Mortgage 15,000 34,400 Debtors 12,500
loan Plant and 36,000
Bank : (repairs 400 Machinery 55,200
outstanding) Bank – unrecorded
Realization 620 assets realised –
expenses Goodwill 2,500
Typewriter 500
Joint
life policy 2,500 5,500
Partner Capitals –
Loss :
Lata : 5,400
Geeta : 3,240
Neeta : 1,080 9,720
Total 1,10,420 Total 1,10,420
Capital Account
Dr. Cr.
Date Particulars J.F. Lata Geeta Neeta Date Particulars J.F. Lata Geeta Neeta
2001 Rs. Rs. Rs. 2001 Rs. Rs. Rs.
Mar31 Realization 5,400 3,240 1,080 Mar31Balance b/f 22,000 18,000 10,000
(Loss) General
Bank 19,100 16,260 9,420 Reserve 2,500 1,500 500
Total 24,500 19,500 10,500 Total 24,500 19,50010,500
Bank Account
Dr. Cr.
2001 (Rs.) 2001 (Rs.)
Realization (liabilities)
(Assets Realization 400
Realized) 55,200 (unrecorded
Realization 5,500 liabilities)
(Unrecorded Realization 620
assets) (Expenses)
Capitals :
Lata 19,100
Geeta 16,260
Neeta 9,420 44,780
Illustration 9(Preparation of ledger accounts)

Following is the Balance Sheet of Raman and Ramesh on June 30, 2002.
(Rs.) (Rs.)
Sundry creditors 20,000 Goodwill 10,000
Bills payable 20,000 Building 25,000
Bank overdraft 10,000 Plant and fittings 25,000
Mrs. Raman‘s loan 20,000 Investment 15,300
Ramesh‘s loan 10,000 Stock 8,700
Investment fluctuation 2,800 Debtors 17,000
fund Less provision
Employee‘s provident 1,200 for bad debts 2,000 15,000
fund Bills receivable 10,000
General reserve 2,000 Cash at bank 13,000
Raman‘s capital 20,000 Profit and loss 4,000
Ramesh‘s capital 20,000
Total 1,26,000 Total 1,26,000
The firm was dissolved on June 30, 2002 and following was the position :
4. Raman agreed to pay off his wife‘s loan.
5. Debtors realized Rs. 12,000.
6. Ramesh took away all the investments at Rs. 12,000.
7. Other assets realized as follows :
Plant and Fittings 20,000
Building 50,000
Goodwill 6,000
4. Sundry creditors and Bills payable were settled at 5% discount.
5. Raman accepted stock at Rs 8,000 and Ramesh took over bills receivable at 20%
discount.
6. Realization expenses amounted to Rs. 2,000.
Record journal entries and also prepare various ledger accounts.
Solution
Books of Raman and Ramesh
Journal
2002 Amount Amount
(Rs.) (Rs.)
June 30 Realization a/c Dr. 1,11,000
Investments 15,300
Stock 8,700
Bills receivable 10,000
Debtors 17,000
Plant and fittings 25,000
Buildings 25,000
Goodwill 10,000
(Sundry asset accounts closed by
transferring to Realization accounts)
‗‘ Provision for bad and doubtful debts a/c Dr. 2,000
Sundry creditors Dr. 20,000
Bills payable Dr. 20,000
Bank overdraft Dr. 10,000
Mrs. Raman‘s loan Dr. 20,000
Employees provident Dr. 1,200
Investment fluctuation fund Dr. 2,800
(Sundry external liabilities transferred to
Realization account)
‗‘ Realization a/c Dr. 38,000
Bank a/c 38,000
(Payment to creditors and bills payable)
Bank a/c 11,200
(Payment of bank overdraft and
employees‘ provident fund)
Bank a/c 2,000
(Payment of realization expenses)
Raman‘s Capital a/c 20,000
(Mrs. Raman‘s loan paid off by Raman)
Bank a/c Dr. 88,000
(Assets realized)
Ramesh‘s Capital a/c Dr. 20,000
Raman‘s Capital a/c Dr. 8,000
(Bills receivable taken over by Ramesh
and investments and stock taken over
by Raman)
Ramesh‘s Capital a/c 4,900
(Profit on realization)
Ramesh‘s loan a/c Dr. 10,000
(Ramesh‘s loan transferred to his capital)
(General reserve distributed)
Proft and Loss a/c 4,000
(Transfer of loss to partners‘ capital
accounts)
Bank a/c 49,800
Realization Account
Dr. Cr.
2002 (Rs.) 2002 (Rs.)
June Investments 15,300 June Provision for bad 2,000
30 Stock 8,700 30 and Doubtful
Bills receivable 10,000 debts
Debtors 17,000 Sundry creditors 20,000
Plant and fittings 25,000 Bills payable 20,000
Buildings 25,000 Bank overdraft 10,000
Goodwill 10,000 Mrs. Raman‘s loan 20,000
Bank – Employees‘ P.F. 1,200
Creditors 19,000 38,000 Investment
Bills Payable19,000 Fluctuation 2,800
Bank – Bank 10,000 Fund
Overdraft Bank –
Employee‘s P.F. 1,200 Debtors 12,000
Bank (Realization 2,000 Plant and 20,000
Expenses) Fittings
Raman‘s Capital : 20,000 Building 50,000
(Mrs. Roman‘s loan) Goodwill 6,000 88,000
Capital Account: Ramesh‘s capital–
Raman 4,900 Bills Receivable 8,000
Ramesh 4,900 9,800 Raman‘s Capital–
Stock 8,000
Ramesh‘s Capital-
Investment 12,000
Total 1,92,000 Total 1,92,000
Bank Account
Dr. Cr.
Date Particulars J. Amount Date Particulars J. Amount
2002 F. (Rs.) 2002 F. (Rs.)
June Balance b/f 13,000 June Realization :
30 Realization : 30 Creditors 19,000
Debtors 12,000 Bills Payable 19,000 38,000
Plant and 20,000 Realization
Fittings : Expense 2,000
Buildings 50,000 Realization –
Goodwill 6,000 88,000 Employees‘ 1,200
Provident fund
Realization –
Bank Overdraft 10,000
Raman‘s Capital 35,900
Ramesh‘s Capital 13,900
Total 1,01,000 Total 1,01,000
Capital Accounts
Dr. Cr.
Date Particulars J.F. Raman Ramesh Date Particulars L.F. Raman Ramesh
2002 Rs. Rs. 2002 Rs. Rs.
June Realization – June Balance b/f 20,000 20,000

30 Investment 12,000 30 Loan – 10,000
Bills receivable 8,000 Mrs. Raman‘s 20,000 –
Stock 8,000 loan
Profit and Loss 2,000 2,000 General Reserve 1,000 1,000
Bank - 35,900 13,900 Realization 4,900 4,900
(settlement (Profit)
amount)
Total 45,900 35,900 Total 45,900 35,900
(A) For
considerat
ion other
than cash
(B) For cash
(A) Issue of shares
for
UNIT 2 consideration
other than cash
CHAPTER -1
(iii) Sometimes
ISSUE OF SHARES shares are
issued to the
promotors of the
company in lieu
CTIVES of the services
provided by
them during the
PROCEDURE OF ISSUE OF SHARES incorporation of
Face value of a share is the par value of the share. It is also known as the the
Nominal value or denomination of a share. To issue shares a company
follows a definite procedure which is controlled and regulated by the
Companies Act and Securities Exchange Board of India (SEBI). There are
different ways of issue of shares which may be:
Issue of Shares
compnay. The issue price of these shares is normally debited to

‗Goodwill A/c‘ and journal entry is made as follows :
Goodwill A/c Dr
To Share Capital A/c
In case a company does not have sufficient funds for the purchase of fixed
assets or for payment to creditors it may offer and allot its shares to vendors/
creditors in lieu of cash. Any allotment of shares against which cash is not to
be received is called ‗issue of shares for consideration other than cash‘. For
example building is purchased and payment is made by issuing shares.
In case of purchase of assets like building, machinery, stock of materials,

etc. the following journal entry is made :
1. Assets A/c Dr
To Vendors/Creditors A/c
(Assets purchased)
2. Vendors/Creditors A/c Dr
(Issue of shares of Rs…….each fullly paid up)
(B) Issue of Shares for cash

In general, shares are issued for cash. The company may call the share
money either in one instalment or in two or more instalments. But
company always collects this money through its bankers.
(i) Receipt of share money in one instalment
The company may receive the share money in one instalment along with
application. In this case the following journal entries are made in the
books of the company
1. On Receipt of Application Money
Bank A/c Dr
To Share Application A/c
(Application money received on ….shares of Rs…each)
2. On transferring the Application Money
Share Application A/c Dr
(Application money transferred to share capital A/c)
256
Issue of Shares
(ii) Share money received in two or more instalments

Instead of receiving payment in one instalment i.e. at the time of
application the company collects it in two or more instalments. The first,
instalment which the appplicants have to pay along with the applications
for shares is known as application money. On the allotment of shares the
allottees are required to pay the second instalment which is termed as
allotment money. If the company decides to call the share money in more
than two instalments the other instalment is/are termed as call money (i.e.
first-call, second call or final call).
In the above case the transactions are recorded in journal as given below :
(a) On receipt of application money

(i) Bank A/c Dr
(Reciept of share application money for …. Shares @ Rs.. per share)
(b) On allotment of shares

After receiving the application for shares within the prescribed time, the
Board of Directors of the company proceed to allot shares. On allotment
of shares the applicaion money is transferred to Share Capital A/c. For this
the following journal entry is made :
(Share application for …. Shares @ Rs… per share transferred to share
capital A/c)
Allotment Money becoming due and received

On the allotment of shares the amount receivable on the next instalment
i.e. on allotment becomes due. The following entry is made for recording
the amount due :
(i) Allotment money becoming due
Share Allotment A/c Dr
(Share allotment money due on …. shares @Rs ... per share)
257
Issue of Shares
(ii) Receipt of allotment money
On the receipt of share allotment money the following journal entry is made:
Bank A/c Dr
To Share Allotment A/c.
(Receipt of the amount due on allotment of … shares)
Calls on shares
After the receipt of application and allotment money the money that
remains unpaid can be called up by the company as and when required.
Thus a call is a demand made by the company asking the shareholders to
remit the called up amount on shares allotted to them.
The company may demand the remaining money in more than two
instalments. The amount called after the allotment is known as call money.
There may be one or more calls, depending on the funds requirements of
the company. When only one call is made Call Money is Due :
Share First and Final Call A/c Dr
To Share Capital A/c.
(Call money due on …. share @ Rs … per share).
Receipt of call money

The following journal entry is made for receipt of call money:
Bank A/c Dr
To Share First & Final call A/c
(call money due on … shares @ Rs ... per share received)
Note : If the company makes more than one call the same accounting
treatment is followed for recording the second call or third call money due
and their receipt. The last call made is termed as final call.
Illustration 1
st
Fashion Fabrics Ltd. issued 100000 shares of Rs. 10 each on 1 April,
2006. The amount payable on these shares was as under:
Rs 2 per share on application.
Rs 3 per share on allotment.
Rs 5 per share on call.
Make journal entries and prepare relevant accounts in the books of company.
258
Issue of Shares
Solution :
Fashion Fabrics Ltd.
Journal entries
S.No. Particulars L.F Dr Cr
Amount Amount
Rs Rs
1. Bank A/c Dr 200000

To Share Application A/c 200000
(Application money received
@ Rs 2 per share)
2. Share Application A/c Dr 200000

To Share Capital A/c 200000
(Share application money for
100000 shares transferred to
share capital A/c)
3. Share Allotment A/c Dr 300000

To Share Capital A/c… 300000
(Allotment money made due on
100000 shares @ Rs 3/- per share)
4. Bank A/c Dr 300000

To Share Allotment A/c. 300000
(Allotment money received
on 100000 shares @Rs 3 per
share.)
5. Share First & Final call A/c. Dr 500000
(Call money on 1,00,000

shares @ Rs 5 per share made due)
6. Bank A/c Dr 500000
To Share First & Final call A/c. 500000
(Call money received on 1,00,000

shares @ Rs 5 per share)
Note : Although shares may be equity shares or preference shares but if

the term shares is used it means equity shares)
259
Issue of Shares
Relevant Accounts
Bank A/c
Dr Cr
Date Particulars JF Amount Date Particulars JF Amount

Rs Rs
Share Application A/c 200000 Balance cld 1000000

Share Allotment A/c 300000
Share First and Final
call A/c 500000
1000000 1000000
Balance b/d 1000000
Share Application A/c

Dr Cr
Rs Rs
Share Capital A/c 200000 Bank A/c 200000
200000 200000
Share Capital A/c

Dr Cr

Rs Rs
Balance cld 1000000 Share Applicaiton 200000
A/c
Share Allotment 300000
A/c
Share First and
Final call A/c 500000
1000000 1000000
Balance b/d 1000000
Share Allotment A/c

Dr Cr

Rs Rs
300000 300000
260
Issue of Shares
Share First and Final Call A/c

Dr Cr

Rs Rs
500000 500000

23.2 FULL, UNDER AND OVER SUBSCRIPTION
A company decides to issue number of shares to raise capital. It invites
public to buy these shares. Now there may be three situations :
I. Full Subscription
Company may receive applications equal to the number of shares

company has offered to people. It is called full subscription. In case of
full subscription the journal entries will be made as follows :
(a) On receipt of application money
Bank A/c Dr
(Application money received for ......... shares)
(b) On allotment of shares
(Application money of shares transferred to capital A/c on their
allotment)
261
Issue of Shares
(iii)The company does not receive application equal to the number of

shares offered for subscription, there may be two situations :
under subscription
over subscription
(i) Under subscription

The issue is said to have been under subscribed when the company
receives applications for less number of shares than offered to the public
for subscription. In this case company is not to face any problem regarding
allotment since every applicant will be alloted all the shares applied for.
But the company can proceed with allotment provided the subscription for
shares is at least equal to the minimum required number of shares termed
as minimum subscription.
(ii) Over Subscription

When company receives applications for more number of shares than the
number of shares offered to the public for subscription it is a case of over
subscription. A company cannot allot more shares than what it has offered.
In case of over subscription, company has the following options :
Option I
(i) Rejection of Excess Applications and Money Returned
The company may reject the applications for shares in excess of the shares
offered for issue and a letter of rejection is sent to such applicants. In this
case the application money received from these applicants is refunded to
them in full. The journal entry made is as follows:
To Bank A/c
(Application money on … shares refunded to the applicants)
l Excess application money adjusted towards sums due on

allotment. Journal entry made is :
Shares Application A/c Dr

To Share Allotment A/c
(Excess application money adjusted towards sums due on allotment)
262
Issue of Shares
If the application money received on partially accepted applications is

more than the amount required for adjustment towards allotment money,
the excess money is refunded. However, if the Articles of the company so
authorise, the directors may retain the excess money as calls in advance to
be adjusted against the call/calls falling due later on and the following
entry is made :
To Call-in-advance A/c
(The adjustment of excess share application money retained as call-in-
advance in respect of ... shares).
Option II
Partial acceptance of Applications.
In some cases the company accepts the applications for subscription

partially. It means that the company does not allot the full number of
shares applied for. For example if an applicant has applied for 5000 shares
and is allotted only 2000 shares, then the applications is said to have been
partially accepted. The company may evolve some formula of accepting
applications partially or making proportionate allotment/ the Prorata
allotment which means that the applicants are allotted shares
proportionately. In such a case the company adjusts the excess share
money received on application towards share allotment money due on
partially accepted applications. The journal entry recording the adjustment
of application money towards share allotment money, is as under :
To Share Allotment A/c
(Share application money transferred to Share Allotment Account in
respect of ... shares).
Illustration 2
The Full Health Care Ltd has offered to public for subscription 20000
shares of Rs 100 each payable as Rs 30 per share on application, Rs 30 per
share on allotment and the balance on call. Applications were received for
30000 shares. Applications for 5000 shares were rejected all together and
applicaiton money was returned. Remaining applicants were alloted the
offered shares. Their excess application money was adjusted towards some
due on allotment. Calls were made and duly received. Make journal
entries in the books of the company.
263
Issue of Shares
Solution
Full Health Care Ltd.
Journal entries
Amount Amount
Rs Rs
1. Bank A/c Dr 900000
(Application money received for

30000 shares @ Rs 30 per share)
To Bank A/c 150000
To Share Allotment A/c 150000
(Application money of 20000 shares

transferred to share capital A/c on their
allotment. That of 5000 shares returned
and of 5000 shares adjusted towards sum
due on allotment.
To Share Capital A/c… 600000
(Allotment money due)
4. Bank A/c Dr 450000
To Share Allotment A/c. 450000
(Allotment money received)
5. Share First and Final call A/c. Dr 800000
(Call money due)
6. Bank A/c Dr 800000
To Share First and Final call A/c. 800000
(Call money received)
264
Issue of Shares
ISSUE OF SHARES AT PREMIUM

A company can issue its shares at their face value. When company issues
its shares at their face value, the shares are said to have been issued at par.
Company can also issue its shares at more than or less than its face value
i.e, at ‗Premium‘ or at ‗Discount‘ respectively. When shares are issued at
premium or at discount an accounting treatment different from shares
issued at par is required. Let us discuss issue of shares at premium.
Issue of shares at premium

If a company issues its shares at a price more than its face value, the
shares are said to have been issued at Premium. The difference between
the issue price and face value or nominal value is called ‗Premium‘. If a
share of Rs 10 is issued at Rs 12, it is said to have been issued at a
premium of Rs 2 per share. The money received as premium is transferred
to Securities Premium A/c. A company issues its shares at premium only
when its financial position is very sound. It is a capital gain to the
company. The Premium money may be demanded by the company with
application, allotment or with calls.
The Companies Act has laid down certain restrictions on the utilisation of
the amount of premium.
According to Section 78 of this Act, the amount of premium can be
utilised for :
5.4.1 Issuing fully-paid bonus shares;
5.4.2 Writing off preliminary expenses, discount on issue of shares,
underwriting commission or expenses on issue;
5.4.3 Paying premium on redemplion of Preference shares or Debentures.
265
Issue of Shares
Further, the company may demand the total amount of premium in more
than one instalment. In case the company doesn‘t specify the particular
call with which Securities Premium is to be paid it is supposed to be called
at the time of Allotment.
Accounting Treatment of premium on Issue of Shares

Following is the accounting treatment of Premium on issue of shares :
(a) Securities premium collected with share Application money :
If the Securities premium is collected on application and the company

has taken decision about the allotment of shares, the following journal
entry is made :
Share Application A/c. Dr

To Securities Premium A/c
(The amount of Securities premium received on application of the
alloted shares is transferred to Securities Premium A/c)
(b) Premium collected with Allotment money or Calls.
If the company decides to demand the premium with share Allotment

or/and share call money, the journal entry made is:
Or/and
Share Call A/c Dr

(Adjustment of share premium due on……shares @Rs…….per share.)
Illustration 3
Luxuary Cars Ltd. issued 100000 shares of Rs 10 each at a premium of Rs

5 per share, payable as:
On application Rs. 4 (including Rs 2 premium) per share
On allotment Rs 8 (including Rs 3 premium) per share
On call Rs. 3 per share
Applications were received for 100000 shares and allotment was made to
all.
Make journal entries.
266
Issue of Shares
Solution:
Books of Luxury Cars Ltd.

Journal entries

Amount Amount
Rs Rs
1. Bank A/c Dr. 400000

(Amount received for 1,00,000
shares)
To Securities Premium A/c 200000
(Share application money transferred
to share capital A/c and securities
Premium A/c)
3. Bank A/c Dr 800000
(Share allotment money

is received on 1,00,000

(Share allotment money made
Due)
5. Share First and Final Call A/c Dr 300000
(Share call money made due

on 1,00,000 shares @
Rs 3 per share.)
6. Bank A/c Dr 300000
To Share First and Final Call A/c 300000
(Share call money received
on 1,00,000 shares @ Rs 3 per
share.)
267
Issue of Shares
INTEXT QUESTION23.4 ISSUE OF SHARES AT ISISSUE

ISSUE OF SHARES AT DISCOUNT
When the issue price of share is less than the face value, shares are said to
have been issued at discount. For example if a company issues its shares
of Rs 100 each at Rs. 90 each, the shares are said to be issued at discount.
The amount of discount is Rs 10 per share (i.e. Rs 100 – Rs 90). Discount
on shares is a loss to the company.
Section 79 of Companies Act 1956 has laid down certain conditions
subject to which a company can issue its shares at a discount. These
conditions are as follows :
(i) At least one year must have elapsed from the date of
commencement of business;
(ii) Such shares are of the same class as had already been issued;
(iii) The company has sanctioned such issue by passing a resolution in
its General meeting and the approval of the court is obtained.
(iv) Discount should not be more than 10% of the face value of the
share and if the company wants to give discount more than 10%,
it will have to obtain the sanction of the Central Government.
Accounting Treatment of Shares Issued at Discount

The amount of discount is generally adjusted towards share allotment
money and the following journal entry is made:
Discount on issue of shares A/c Dr
Allotment money due on….shares @Rs ……per share after allowing
discount @Rs ……….per share.
268
Issue of Shares
Illustraion 4
Sri Krishna Agro Chemical Ltd. was registered with a capital of Rs
5000000 divided into 50000 shares of Rs 100 each. It issued 10000 shares
at discount of Rs 10 per share, payable as :
Rs 40 per share on application

Rs 30 per share on allotment
Rs 20 per share on call.
Company received applications for 15000 shares. Applicants for 12000

shares were allotted 10000 shares and applications for the remaining
shares were sent letters of regret and their application money was returned.
Call was made. Allotment and call money was duly received. Make
journal entries in the books of the company.
Solution
Sri Krishna Agro Chemicals Ltd
Journal entries

Amount Amount
Rs Rs
1 Bank A/c Dr. 6,00,000

To Share Application A/c 6,00,000
for 15000 shares @ Rs 40 per
Share)
2. Share Application A/c Dr 4,00,000
To Share Capital A/c 4,00,000
(Application money of 10000

shares transferred to share Capital A/c
on their allotment)
3. Share Application A/c Dr 2,00,000

To Share Allotment A/c 80,000
To Bank A/c 1,20,000
(Application money of 3000 shares

returned and of 2000 shares adjusted
towards sum due on allotment)
4. Shares Allotment A/c Dr 3,00,000
Share discount A/c Dr 1,00,000
To Share Capital A/c. 4,00,000
(Allotment money due)
5. Bank A/c Dr 2,20,000

To Share Allotment A/c 2,20,000
6. Share First & Final Call A/c Dr 2,00,000

To Share Capital A/c 2,00,000
Amount due on call
7. Bank A/c Dr 2,00,000
To Share First & Final Call A/c 2,00,000
(Call money received)
CALLS IN ADVANCE AND CALLS IN ARREARS

If a shareholder pays any amount to company before it is demanded, it is
called Call-in-Advance. This amount is put in a separate account known as
Calls-in-Advance A/c. This amount is not shown as capital of the
company, till such time the company makes a demand from all the
shareholders. Call-in-Advance A/c is shown on the liabilities side of the
Balance Sheet. For example if a company issued shares of Rs 10 on which
it has already called Rs 5. Against the uncalled portion of Rs 5 per share
the company makes a call Rs 3 per share, the entry for call money due will
be made only for Rs 3 per share. Now suppose a shareholder pays Rs 5
270
Issue of Shares
per share including the uncalled amount of Rs 2 per share along with the
call money, it means he has paid Rs 2 per share in advance, which will be
credited to calls in Advance A/c. The company is required to pay interest
on this amount @ 6% till the date of its appropriation.
Accounting teatment
Following journal entry is made for calls-in-advance.
Bank A/c Dr
To Calls-in-Advance A/c
(Calls in advance received on…….shares @ Rs …….per share)
Appropriation of calls-in-Advance A/c say in the final call
Journal entry will be :
Calls-in-Advance A/c Dr
To Share Final call A/c

(Calls in advance amount adjusted)
For interest given on Calls-in-Advance
Journal entry will be
Interest on calls-in-Advance A/c Dr
To Bank A/c
(Interest paid on the amount of Call-in-Advance)
Illustration 5
India Software Ltd. offered 50000 shares of Rs 10 each to the public
payable as:
Rs 2 on application
Rs 3 on allotment
Rs 2 on First call and the balance as and when required.
All the shares were applied for and duly allotted but Mukesh a shareholder
holding 200 shares paid the entire balance on allotment.
Make necessary journal entries.
271
Issue of Shares
Solution
India Software Ltd.
Journal entries
Date Particulars L.F Dr Cr
Amount Amount
Rs Rs
Bank A/c Dr. 100000
To Share Application A/c. 100000
(Share application money

received for 50000
Share Application A/c Dr 100000
(Share application money

transferred to share capital
A/c on allotment.)
Share Allotment A/c Dr 150000

(Share allotment money made
due on 50000 shares @
Rs 3 per share.)
Bank A/c. Dr 151000

To Calls-in-Advance A/c 1000
(Amount received on
allotment @ Rs 3 per share
and advance for 200 shares
@ Rs 5 per share.)
Share First Call A/c Dr 100000
(Share first call money due on

50000 shares @ Rs 2 per share.)
Bank A/c Dr 99600

Call-in-Advance A/c Dr 400
To Share First call A/c 100000
(First call money is received on
49800 shares and on 200 shares
call in advance is adjusted.)
272
Issue of Shares
Calls in arrears
When the company sends notice to the shareholders to pay allotment and
/or call money, it has to be paid by them within the specified time period.
If it is not paid by any one or more of the shareholders, the unpaid amount
becomes arrears due from them. Such arrears are transferred to an account
termed as Calls-in-Arrears A/c. The company is authorised to charge
interest on calls-in-Arrears @ 5% p.a. for the intervening peroid. (The
period between date of non-receipt of the due amount and the date of
actual receipt of the due amount).
The following jounal entry is made to record Calls-in-Arrears:
Calls-in-Arrears A/c Dr
To Share Allotment/Call A/c
(Share allotment/ Call money not received on …. shares)
When the unpaid balance is received later on the following journal entry is
made:
Bank A/c Dr
To Calls in Arrears A/c
(Amount due on allotment/ call remaining unpaid now received on……
shares.)
The company may charge interest on the amount of calls in arrears at a
given rate from the date of amount due till it is paid journal entry will be
Bank A/c Dr
To Interest on calls in arrears A/c
Illustration 6
X Ltd. made its first call of Rs 20 per share on 1st July 2006. Zahir holding
200 shares failed to pay the call money. He could pay the money only on 31st
December, 2006. Company charged interest @12% per annum.
Make necessary journal entry for the interest charged by the company.
Solution
12 6
Amount of interest due 4000 240
100 12
273
Issue of Shares
Journal entry
S.No.Particulars L.F Dr Cr
Amount Amount
Rs Rs
Bank A/c Dr. 240

To Interest on call in Arrears A/c 240
(Receipt of interest on calls in arrears)
Illustration 7
ABC Ltd issued 20000 shares of Rs 10 each payable as Rs 2 per share on

application, Rs 5 (including premium of Rs 2 per share) on allotment, Rs 3
per share on first call and the balance on Final Call.
All the money were received except the first call money on 400 shares;
which was received later on with final call.
Solution :
Journal entries

Amount Amount
Rs Rs
1 Bank A/c Dr. 40000

for 20000 shares @ Rs 2 per
Share.)

(Application money of 20000
shares transferred to share Capital A/c
on allotment)

(Allotment money make due
with premium @ Rs 5 (3+2) per
share on 20000 shares.)
274
Issue of Shares
4. Bank A/c Dr 100000
(Share allotment money received)
5. Shares First Call A/c .Dr 60000
To Share Capital A/c. 60000
(Share first call money is due

on 20000 shares @ Rs 3 per share.)
6 Bank A/c Dr 58800
Calls-in-Arrears A/c Dr 1200
To Share First Call A/c 60000
(First call money received

on 19600 shares @ Rs 3 per share.)
7. Share Final Call A/c Dr 40000
(Final Call money due on 20000

shares @ Rs 2 per share.)
8. Bank A/c Dr 41200
To Share Final Call A/c 40000
To Calls-in-Arrears A/c 1200
(Final Call money received

on 20000 shares @ Rs 2 per
share along with arrears of
first call on 400 shares.
Illustration 8
The progressive Industries Limited was registered with a capital of Rs

5000000. It issued 20000 equity shares of Rs 100 each payable as Rs 25
on application, Rs 25 on allotment and balance on 1st and final call and
10000 9% preference shares of Rs 50 each payable as Rs 50 on application
and allotment and the balance on two calls of Rs 25 each. All the shares
were applied for and allotted. All money was duly received. Make
necessary journal entires in the books of the company :
275
Issue of Shares
Solution
Progressive Industries Ltd
Journal entries

Amount Amount
Rs Rs
1 Bank A/c Dr. 10,00,000

To Equity Share Application A/c 5,00,000
To 9% Preference Share Application

and Allotment A/c 5,00,000

for 2000 equity shares @ Rs 25 per
Share and 10000 9% preference shares
@ Rs 50 per share)
2. Equity Share Application A/c Dr. 500000
9% Preference Share Applicaiton

& Allotment A/c Dr. 500000
To Equity Share Capital A/c 500000
To 9% Preference Share Capital A/c 500000
(Applicaiton money transferred to capital

accounts)
3. Equity Share Allotment A/c Dr. 500000
To Equity share Capital A/c 500000
(Allotment money due on 20000 equity
shares at Rs 25 per share
4. 9% Preference share 1st call A/c Dr 250000

(1st call money due on 10000 9% preference
shares at Rs 25 pershare
5. Bank A/c Dr 750000

To Equity Share Allotment A/c 500000
To 9% Preference Share 1st call A/c 250000
(Equity share allotment money and
9% preference share 1st call money
received)
276
Issue of Shares
6. Equity Share First & Final Call A/c Dr 10,00,000

9% Preference Share Cinal Call A/c Dr 250000
To Equity Share Capital A/c 1000000
First & Final call on equity shares and
Final call on 9% preference shares due
7. Bank A/c Dr 1250000

To Equity Share First & Final Call A/c 1000000
To 9% Preference Share Fianl Call A/c 250000
Equity share 1st and final call and 9%
Preference share final call money received.

.
CHAPTER--2
ISSUE OF DEBENTURES
share capital is the main source of finance of a joint stock company. Such
capital is raised by issuing shares. Those who hold the shares of the
company are called the shareholders and are owners of the company.
Company may need additional amount of money for a long period. It
cannot issue shares every time. It can raise loan from the public. The
amount of loan can be divided into units of small denominations and the
company can sell them to the public. Each unit is called a ‗debenture‘ and
holder of such units is called Debenture holder. The amount so raised is
loan for the company. In this lesson we shall learn about issue of
debentures and its accounting treatment.
OBJECTIVES
DEBENTURE AND ITS TYPES
A Debenture is a unit of loan amount. When a company intends to raise
the loan amount from the public it issues debentures. A person holding
debenture or debentures is called a debenture holder. A debenture is a
document issued under the seal of the company. It is an acknowledgment
of the loan received by the company equal to the nominal value of the
debenture. It bears the date of redemption and rate and mode of payment
of interest. A debenture holder is the creditor of the company.
As per section 2(12) of Companies Act 1956, ―Debenture includes

debenture stock, bond and any other securities of the company
whether constituting a charge on the company‘s assets or not‖.
Types of debentures
Debenture can be classified as under :
B From security point of view
(A) Secured or Mortgage debentures : These are the debentures

that are secured by a charge on the assets of the company. These
are also called mortgage debentures. The holders of secured
debentures have the right to recover their principal amount with
the unpaid amount of interest on such debentures out of the
assets mortgaged by the company. In India, debentures must be
secured. Secured debentures can be of two types :
First mortgage debentures : The holders of such debentures

have a first claim on the assets charged.
Second mortgage debentures : The holders of such

debentures have a second claim on the assets charged.
Unsecured debentures : Debentures which do not carry any
security with regard to the principal amount or unpaid interest are
called unsecured debentures. These are called simple debentures.
l On the basis of redemption
Redeemable debentures : These are the debentures which are

issued for a fixed period. The principal amount of such
debentures is paid off to the debenture holders on the expiry of
such period. These can be redeemed by annual drawings or by
purchasing from the open market.
Non-redeemable debentures : These are the debentures which are

not redeemed in the life time of the company. Such debentures are
paid back only when the company goes into liquidation.
313
Issue of Debentures
3. On the basis of Records

(i) Registered debentures : These are the debentures that are
registered with the company. The amount of such debentures is
payable only to those debenture holders whose name appears in
the register of the company.
(ii) Bearer debentures : These are the debentures which are not
recorded in a register of the company. Such debentures are
transferrable merely by delivery. Holder of these debentures is
entitled to get the interest.
4. On the basis of convertibility
(i) Convertible debentures : These are the debentures that can be
converted into shares of the company on the expiry of
predecided period. The term and conditions of conversion are
generally announced at the time of issue of debentures.
(ii) Non-convertible debentures : The debenture holders of such
debentures cannot convert their debentures into shares of the
company.
5. On the basis of priority
(i) First debentures : These debentures are redeemed before other
debentures.
(ii) Second debentures : These debentures are redeemed after the
redemption of first debentures.
314
Issue of Debentures
ISSUE OF DEBENTURES
By issuing debentures means issue of a certificate by the company under
its seal which is an acknowledgment of debt taken by the company.
The procedure of issue of debentures by a company is similar to that of the

issue of shares. A Prospectus is issued, applications are invited, and letters
of allotment are issued. On rejection of applications, application money is
refunded. In case of partial allotment, excess application money may be
adjusted towards subsequent calls.
Issue of Debenture takes various forms which are as under :
(v) Debentures issued for cash
(vi) Debentures issued for consideration other than cash
(vii) Debentures issued as collateral security.
Further, debentures may be issued
(i) at par, (ii) at premium, and (iii) at discount
Accounting treatment of issue of debentures for cash
1. Debentures issued for cash at par :
Following journal entries will be made :
(i) Application money is received
Bank A/c Dr
To Debentures Application A/c
(Application money received for Debentures)
315
Issue of Debentures
7. Transfer of debentures application money to debentures account

on their allotment
Debentures Application A/c Dr
To Debentures A/c
(Application money transferred to debenture
account on allotment)
(iii) Money due on allotment

Debentures Allotment A/c Dr
To Debentures A/c
(Allotment money made due)
(iv) Money due on allotment is received
Bank A/c Dr
To Debentures Allotment A/c
(Receipt of Debenture allotment money)
(v) First and final call is made
Debentures First and Final call A/c Dr
To Debentures A/c
(First and Final call money made due on ............... debentures)
(vi) Debentures First and Final call money is received
Bank A/c Dr
To Debentures First and Final call A/c
(Receipt of Amount due on call)
Note : Two calls i.e. first call and second call may be made
Journal entries will be made on the lines made for first and final call.
Illustration 1
Shining India Ltd. issued 5000 8% Debentures of Rs 100 each payable as
follows
Rs 20 on Application
Rs 30 on Allotment
Rs. 50 on First and Final call
316
Issue of Debentures
All the debentures were applied for and allotted. All the calls were duly
received. Make necessary journal entries in the books of the company.
Solution :
Shining India Ltd.
Dr Cr
S.No. Particulars LF Amount Amount
Rs Rs
1. Bank A/c ... Dr 100000

To Debentures Application A/c 100000
(Application money received for
5000 debentures)
2. Debentures Application A/c Dr 100000

To 8% Debentures A/c 100000
(Application money transferred to
Debentures A/c on allotment)
3. Debentures Allotment a/c Dr 150000
(Allotment money due on 5000

debentures @ Rs 30 per debenture)
4. Bank A/c Dr 150000
To Debentures Allotment A/c 150000
5. Debentures First and Final call A/cDr 250000
(Debentures first and final call money

made due @ Rs 50 per debenture)
6. Bank A/c Dr 250000
To Debentures First and Final call A/c 250000
(Receipt of Debentures first and final

call money)
Over subscription
Company if receives applications for number of debentures that exceed the
number of debentures offered for subscription, it is called over
subscription. There can be following treatment of the excess application
money received :
317
Issue of Debentures
(iv) The total amount of excess number of applications is refunded in case

the applications are totally rejected.
(v) The amount of excess application money is totally adjusted towards
amount due on allotment and calls
— in case partial allotment is made,
— the excess amount is adjusted towards sums due on allotment and
rest of the amount is refunded.
Journal entries in the above cases will be as follows :
For refund of money if the applications are rejected
To Bank A/c
(Refund of money on rejected applications)
For adjustment of excess application money adjusted towards sum due on
allotment
To Debentures Allotment A/c
(Excess application money adjusted)
Illustration 2
ABC Ltd issued 5000 10% Debentures of Rs 100 each payable as Rs 40
on application and Rs 60 on allotment. Applications were received for
6000 debentures. Applicants for 500 debentures were sent letter of regret
and money was returned. Allotment was made proportionately to the
remaining applicants. Over subscription was applied to the amount due on
allotment. All money was duly received.
Make journal entries for the above transactions in the books of the company.
Solution : Journal entries

Dr Cr
Date Particulars LF Amount Amount
Rs Rs
1. Bank A/c Dr 240000

(Application money received for 6000
debentures @ Rs 40 per debenture)
318
Issue of Debentures
To Bank A/c 20000
(Debenture application money of 5000

debentures transferred to debenture A/c
on their allotment of 500 debentures
returned and balance of 500 adjusted
towards allotment)
3. Debentures Allotment A/c Dr 300000
(Allotment money due on 5000 debentures

@ Rs 60 per debenture)
4. Bank A/c Dr 280000
ISSUE OF DEBENTURES AT PREMIUM AND AT DISCOUNT

Debentures are said to be issued at premium when these are issued at a
value which is more than their nominal value. For example, a debenture of
Issue of Debentures
Rs 100 is issued at Rs 110. This excess amount of Rs 10 is the amount of

premium. The premium on the issue of debentures is credited to the
Securities Premium A/c as per section 78 of the Companies Act, 1956.
Journal entry will be as follows :
To Debentures Account
(Amount due on allotment alongwith premium of Rs ....)
Illustration 3
A company has issued 5000 10% Debentures of Rs 100 each at a premium
of 20% payable as Rs 60 on application
Rs 60 on allotment (including premium)
All the debentures were subscribed for and money was duly received.
Make journal entries.
Solution
Journal entries
Dr Cr
Rs Rs
1. Bank A/c Dr 300000

(Application money received)
Debenture A/c)
3. Debentures Allotment A/c 300000

(Amount due on allotment along
with premium)
4. Bank A/c Dr 300000
Issue of Debentures
Issue of Debentures at Discount

When debentures are issued at less than their nominal value they are said to
be issued at discount. For example, debenture of Rs 100 each is issued at Rs
90 per debenture. Companies Act, 1956 has not laid down any conditions for
the issue of debentures at a discount as have been laid down in case of issue
of shares at discount. However, there should be provision for issue of such
debentures in the Articles of Association of the Company.
Journal entry for issue of debentures at discount (at the time of allotment)
Discount on issue of debentures A/c Dr
To Debentures A/c
(Allotment money due. The amount of

discount is @ Rs .... per debenture)
Illustration 4
A company has issued 2000 9% debentures of Rs 100 each at a discount of
10% payable as
Rs 40 on application
Rs 50 on allotment
Solution
Dr Cr
Rs Rs
1. Bank A/c Dr 80000
(Application money received)

debenture A/c)
3. Debentures Allotment A/c Dr 100000
Debentures Discount A/c Dr 20000
To 9% Debenture A/c 120000
(Amount due on allotment,

along with discount amount
Rs 10 per debenture)
4. Bank A/c Dr 100000

To Debentures Allotment 100000
(Receipt of allotment money)
Issue of Debentures for consideration other than cash

When a company purchases some assets and issues debentures as a
payment for the purchase, to the vendors it is known as issue of debentures
for consideration other than cash. Debentures can be issued to vendors at
par, at premium and at discount
Accounting Treatment :
1. Purchase of Assets
Sundry Assets A/c Dr
(Individually)
To Vendors A/c
(Purchase of assets)
(v) Allotment of debentures
At par
Vendors' A/c Dr
To Debentures A/c
(issue of debentures at par to vendors)
(ii) At discount
Vendors' A/c Dr
Debentures Discount A/c Dr
To Debentures A/c
(Issue of debentures to vendors at a discount of
Rs ... per debenture)
322
(iii) At premium
Vendors‘ A/c Dr
To Debentures A/c
(issue of debentures to vendors at a premium

of Rs .... per debenture)
Illustration 5
M.B. Electronics Ltd. purchased machinery for Rs 198000 and issued 9%
debentures of Rs 100 each to the vendors. Make journal entries if the
debentures were issued
(a) at par
(b) at a premium of Rs 10
(c) at a discount of Rs 10
Solution :
Dr Cr
S.No. Particulars Amount Amount
Rs Rs
(a) Machinary A/c ...Dr 198000
To Vendors A/c 198000
(Machine purchased)
(b) Vendors A/c Dr 198000
1980 debentures of Rs 100 each issued

to vendors
(c) Vendors A/c Dr 198000
(1800 debentures issued at a premium of

Rs 10 per debenture)
323
Issue of Debentures
Working notes
Amount due = Rs 198000
Value of debenture including Rs 10 for premium = Rs 110
Rs 198000
No. of denentures to be issue = = 1800
Rs 110
∴ Debenture amount (Nominal value) = 1800 × 100 = Rs 180000

Securities Premium Amount = 1800 × Rs 10 = Rs 18000
(c) Vendors A/c Dr 198000
Discount on Issue of Debentures A/c Dr 22000
(Issue of 2200 9% debentures of Rs 100 each at a

discount of Rs 10 per debenture)
Working notes
Amount due to vendor = Rs 198000
Value of one debenture at a discount of Rs 10 = Rs 90
No. of denentures to be issued = Rs 198000 ÷ Rs 90 = 2200
Debentures amount (Nominal value) = 2200 × Rs 100 = Rs 220000
Discount on issue of Debentures = 2200 × Rs 10 = Rs 22000
Issue of Debentures with conditions Stipulated to their Redemption

(Journal entry)
(i) Issued at par redeemable at par
Bank A/c Dr
To Debentures Account
(Issue of debentures of Rs .... at par)
(ii) Issued at discount and redeemable at par
Bank A/c Dr
Discount on issue of Debentures A/c Dr
To Debentures A/c
(Issue of debentures of Rs ... at a discount of Rs ....)
(iii) Issued at premium redeemable at par
Bank A/c Dr
324
Issue of Debentures
To Debentures A/c
(Issue of ... debentures of Rs .... at a premium of Rs ....)
(iv) Issue at par, redeemable at premium
Bank A/c Dr
Loss on Issue of Debentures A/c Dr
To Debentures A/c
To Premium on Redemption of Debenture A/c
(Issue of ... debentures of Rs ... a redeemable at a premium of Rs ...)
(v) Issued at discount and redeemable at premium
Bank A/c Dr
Discount on Issue of Debentures A/c Dr
Loss on Issue of Debentures A/c Dr
To Debentures A/c
To Premium on Redemption of Debenture A/c
(issue of ... debentures of Rs ... at a discount of
Rs ... redeemable at a premium of Rs ....)
Illustration 6
Make journal entries if 200 debentures of Rs 500 each have been issued as
:
= Issued at Rs 500, redeemable at Rs 500
= Issue at Rs 450; redeemable at Rs 500
= Issued at Rs 550; redeemable at Rs 500
= issued at Rs 500; redeemable at Rs 550
= Issued at Rs 450; redeemable at Rs 550
Solution : Journal
Dr Cr
Rs Rs
(i) Bank A/c Dr 100000

To Debentures A/c 100000
(Issue of 200 debentures @ of
Rs 500 each)
325
(ii) Bank A/c Dr 90000
(Issue of 200 debentures of Rs 50
each at Rs 450)
(iii) Bank A/c Dr 110000

(Issue of 200 debentures of Rs 500
each at Rs 550)
(iv) Bank A/c Dr 10000
Loss on Issue of Debentures A/c Dr 10000
To Premium on redemption of 10000

debentures A/c
(Issue of 200 debentures of Rs 500 each

at Rs 500 repayable at Rs 550)
(v) Bank A/c Dr 90000
Loss on Issue of Debentures A/c Dr 10000
To Premium on Redemption of 20000

Debentures A/c
(Issue of 2000 Debentures of Rs 500 each at Rs 45 repayable at Rs 550)

Issue of
s
ISSUE OF DEBENTURES AS COLLATERAL SECURITY

Collateral security means security given in addition to the principal
security. It is a subsidiary or secondary security. Whenever a company
takes loan from bank or any financial institution it may issue its
debentures as secondary security which is in addition to the principal
security. Such an issue of debentures is known as ‗issue of debentures as
collateral security‘. The lender will have a right over such debentures only
when company fails to pay the loan amount and the principal security is
exhausted. In case the need to exercise this right does not arise debentures
will be returned back to the company. No interest is paid on the debentures
issued as collateral security because company pays interest on loan.
In the accounting books of the company issue of debentures as collateral

security can be credited in two ways.
(i) No journal entry to be made in the books of accounts of the company :
Debentures are issued as collateral security. A note of this fact is given on

the liability side of the balance sheet under the heading Secured Loans and
Advances.
Balance Sheet ...... Co. Ltd.
Capital & liabilities Amount Assets Amount
Rs Rs Rs
Debentures (.... debentures
of Rs .... per debenture
issued as collateral security
Loan
(Secured by the issue of ....
debentures of Rs .... each
issued as collateral security
(ii) Entry to be made in the books of account the company

A journal entry is made on the issue of debentures as a collateral security,
Debentures suspense A/c is debited because no cash is received for such
issue.
327
Issue of Debentures
Following journal entry will be made

Debenture Suspense A/c Dr
To Debentures A/c
(.....Debentures of Rs .... each issued as
collateral security to ..... )
In the Balance sheet of the issuing company it will be shown as udner :
Balance Sheet of ...... Co. Ltd.

Capital & Liabilities Amount Assets Amount
Rs Rs Rs
Bank
Debenture Debenture suspense A/c
(.....debenture of Rs .... each (Debenture issued as collateral

issued as collateral security security for loan as per contra)
as per contra)
Loan
Illustration 7
Sky Rocketing Company Ltd issued 6000 10% debentures of Rs 100 each
to the bank as collateral security against a loan of Rs 500000 taken from
the bank. Record the issue of debentures in the books of the company and
show the issued Debentures in the Balance Sheet of the Company.
Solution
(i) No journal entry is required
Balance Sheet (Relevant) of Sky Rocketing Co. Ltd

Rs Rs Rs
Secured Loan 500000 Current Assets & loans

and Advance
Bank loan Cash at Bank 500000
(Secured by 6000 10%

debentures of Rs 100 each
issued as collateral security)
328
Issue of Debentures
(ii) Journal
Dr Cr
Rs Rs
Debentures Suspense A/c Dr 600000
To Debenture A/c 600000
(Issue of 6000 10% debentures of

Rs 100 each issued as collateral
security to bank)
Balance Sheet (Relevant) of Sky Rocketing Co. Ltd.

Rs Rs
Secured Loan Current Assets
Bank loan 500000 Cash at Bank 500000
Miscellaneous expenditure
Debenture suspense A/c 600000
(6000 Debentures of Rs 100

each issued as collateral
security as per contra)
Debentures 600000
(6000 10% debentures issued

as collateral security)
DISCOUNT ON ISSUE OF DEBENTURES AND LOSS ON

ISSUE OF DEBENTURES
In case company issues debentures on discount the total amount of discount is
not charged to profit and Loss Account of the company in the accounting
Issue of Debentures
year in which this discount is allowed. The amount of such discount is

very heavy and to the company gets benefit from the loan by issuing
debentures over a number of years. Hence some part of the amount of
discount is written off every year. Generally it is written off prior to the
redemption of these debentures.
As the amount of discount on issue of debentures is treated as a capital

loss, it is shown on the asset side of the balance sheet of the company
under the head ―Miscellaneous Expenditure‖ until and by the amount it is
not written off.
The amount of debenture discount can be written off in two ways :

JJJ. All debentures are to be redeemed after a fixed period.
When the debentures are to be redeemed after a fixed period, the
amount of discount will be distributed equally within the number of
years spreaded between the issue of debentures and their redemption.
The amount of discount on issue of debentures to be written off each
year is calculated as
Amount of discount to be written off annually
TotalRs100000amount of Discount
Number5= of years
Illustration 8
A company issues 1000 debentures of Rs 1000 each at a discount of 10%
for a period of 5 years i.e. to be redeemed after 5 years. Calculate the
amount of discount to be written off each year and prepare on issue of
debentures discount account.
Solution
Amount of discount =
b1000 Rs1000 g 10
= Rs 100000
100
Amount to be written off each year = = Rs 20000
Journal entry to write off debenture discount each year
330
Issue of Debentures
Dr. Cr.
Profit and Loss A/c ...Dr 20000
To Discount on Issue of Debentures A/c 20000
(Amount of Discount on Issue of Debentures written off)
Discount on Issue of Debentures Account till the amount of discount is written off, is shown as under :
Discount on Issue of Debentures A/c

Dr. Cr.
Date Particulars Amount Date Particulars Amount

Rs Rs
1st year 1st year
Jan 1 Debenture A/c 100000 Dec 31 Profit & Loss A/c 20000
Dec 31 Balance cld 80000
100000 100000
2nd year 2nd year
Jan 1 Balance b/d 80000 Dec. 31 Profit & Loss A/c 20000
Dec.31 Balance cld 60000
80000 80000
3rd year 3rd year
Jan 1 Balance b/d 60000 Dec 31 Profit & Loss A/c 20000
60000 60000
4th year 4th year
40000 40000
5th year 5th year
20000 20000
331
Issue of Debentures
2. Debentures are redeemed in instalments

Debentures may also be redeemed in instalments but over a fixed
period. In that case the amount of debenture discount will be written
off each year in proportion to the amount of debentures redeemed.
Illustration 9
A company has issued 2000 9% debentures of Rs 1000 each at a discount
of 10%. If the debentures are to be redeemed in five equal annual
instalments, calculate the amount of Discount on Issue of Debentures to be
written off each year and prepare Discount on Issue of Debentures A/c.
Solution
Calculation of Amount of Discount on Issue of Debentures Account
Total amount of Discount on Issue of Debentures A/c
= = Rs 200000
Year end Outstanding amount Ratio Amount of Discount

of debenture 5 written off
Rs b2000 g
Rs1000 10 Rs Rs
300000
15
10
1st 3000000 5 = 100000
4
2nd 2400000 4 300000 = 80000
15
3
3rd 1800000 3 300000 = 60000
15
2
4th 1200000 2 300000 = 40000
15
1
5th 600000 1 300000 = 20000
15
15
Journal entry
Dr. Cr.
1st year Profit and Loss A/c ...Dr 100000
To Debenture Discount A/c 100000
(Discount on issue of debenture
written off)
332
ACCOUNTANCY
Issue of Debentures
Similarly entry will be made every year with the respective amount of
discount.
Discount on issue of Debentures account till the amount of discount is
written off will be shown as under.
Discount on Issue of Debentures A/c

Dr. Cr.

Rs Rs
1st year 1st year
Jan 1 Debentures A/c 300000 Dec 31 Profit & Loss A/c 100000
300000 300000
2nd year 2nd year
Jan 1 Balance b/d 200000 Dec. 31 Profit & Loss A/c 80000
Dec.31 Balance cld 120000
200000 200000
3rd year 3rd year
120000 120000
4th year 4th year
60000 60000
5th year 5th year
20000 20000
Loss on Issue of Debentures

You have learnt that a company may issue debentures with the stipulation
that the repayment of the debentures on maturity will be made at premium.
The amount of the premium payable is debited to Loss on Issue of
33
Issue of Debentures
Debentures A/c at the time of issue of debentures. This amount will also
be written off in the same manner as is done in case of writing off
Discount on Issue of Debentures. This is illustrated as under :
(i) All Debentures are redeemed after fixed period

Journal Entry
Amount of Loss on Issue of Debentures written off each year
Profit and Loss A/c Dr
To Loss on Issue of Debentures A/c
(Loss on Issue of Debentures written off)
Same journal entry will be made each year till the whole amount of the
Loss on issue of Debentures is written off.
Calculation of the amount to be written off
Total Amount of Loss on Issue of Debentures/No. of years.
Illustration 10
A company issues 1000 10% Debentures of Rs 1000 each on 1st Jan, 2006
payable at a premium of 10% after 5 years. Make journal entries and open
Rs100000
Loss on Issue of Debentures A/c for the year ending 31st December 2006.
5
Solution
1000 Rs1000 10
Amount of Loss on issue of Debentures = 100 = Rs 100000
Amount to be written off each year = = Rs 20000
Loss on issue of Debentures A/c

Dr. Cr.

Rs Rs
2006 2006
Jan 1 10% Debentures A/c 100000 Dec 31 By Profit & Loss A/c 20000
Dec 31 By Balance cld 80000
100000 100000
2007
Jan 1 Balance b/d 80000
334
Journal Entry
2006 Profit and Loss A/c Dr 20000
Dec 31 To Loss on Issue of Debentures A/c 20000
(Loss on Issue of Debentures transferred
to Profit and Loss A/c)
(ii) Debentures are Redeemed in Instalments

The amount of Loss on Issue of Debentures to be written off each year
is calculated in the manner it is calculated in case of Discount on Issue
of Debentures and accounting treatment is also the same.
Illustration 11
Refer Illustration No. 10. A company decides to redeem its debentures in
five equal instalments beginning from the end of first year. Make journal
entry for the writing off and show Loss on Issue of Debentures A/c for
first year.
Solution
Amount of Loss on Issue of Debentures = = Rs 100000

1000 Rs1000 10
100
Calculation of amount to be written off each year
Year end Amount Outstanding Ratio Amount of Loss to be
written off each year
5
1st 1000000 5 100000 = 33333
15
4
2nd 800000 4 100000 = 26667
15
3
3rd 600000 3 100000 = 20000
15
2
4th 400000 2 100000 = 13333
15
1
5th 200000 1 100000 = 6667
15
15
Journal Entry
2006 Profit and Loss A/c Dr 33333
Dec 31 To Loss on Issue of Debentures A/c 33333
(Amount of Loss on Issue of Debentures
written off for 2006)
335
Issue of Debentures
Loss on Issue of Debentures A/c

Dr. Cr.

Rs Rs
2006 2006
Jan 1 10% Debentures A/c 100000 Dec 31 Profit & Loss A/c 33333
100000 100000
2007
Jan 1 Balance b/d 66667
Interest on Debentures
If you have seen an advertisement in newspaper regarding issue of
debentures by a company, you must have noticed that ‗Debenture‘ is
always prefixed by a certain percentage say 9% Debentures or 12%
Debentures. Have you ever thought what meaning does this prefix carry. It
is the rate of interest per annum that will be paid to the debenture holders.
Companies generally pay interest on its debentures after every six months.
Journal entries that are made in the books of the company are as follows;
(i) Payment of Interest on Debentures
Debenture Interest A/c Dr
To Bank A/c
(Interest on ....% Debentures paid for six months ending ...@ ....% pa)
(ii) Transfer of Debenture Interest to Profit and Loss A/c
Profit and Loss A/c Dr
To Debenture Interest A/c
(Debenture Interest transferred to Profit and Loss A/c)
Illustration 12
X Ltd has issued 5000 9% Debentures of Rs 1000 each, on 1st April, 2006
Interest is payable after every six months. Make journal entries for the
interest paid for the first six months after the date of issue.
336
Solution.
Calculation of Interest payable at six monthly intervals :
Amount of Debentures 9 6
100 12
Amount of Debentures = 5000 × Rs 1000 = Rs 5000000
Interest on Debentures for six month ending 30th September, 2006
= Rs 5000000 9 6 = Rs 225000
100 12
Journal Entry
2006 Dr. Cr.
30th Sept. Debentures Interest A/c Dr 225000
To Bank A/c 225000
(Interest on 5000 9% Debentures @ Rs 1000
per debenture paid for 6 months ending
30th Sept 2006)
2007
31st Mar Profit and Loss A/c Dr 225000
To Debentures Interest A/c 225000
(Debenture Interest transferred
to profit and Loss A/c)
CHAPTER- 3
FINAL ACCCOUNTS OF COMPANY
Introduction :
As per the companies act it is a stationary obligation to prepare final accounts
of companies along with Profit and Loss A/C with in a stipulated time.
Preparation of Profit & Loss Account:-
The Principle for preparation of Profit & Loss a/c is same as it is a firm or
company, modified by the special provisions laid down in the companies act. It consists
of Trading Account to show Gross Profit, Profit & Loss a/c to determined net profit, and
Profit & Loss appropriation a/c to give a view about the manner in which Profits are
disposed.
No form for Profit & Loss a/c has been prescribed in the Companies act as it has
been prescribed for Balance Sheet, but requirement as to Profit and Loss a/c are given
in Part II of Schedule VI.
. Certain items Appearing in Profit & Loss A/c:-
The following are the some of the important items appearing in Profit &
Loss A/c and their treatment if it is given in Trail Balance and Adjustment.
(v) Dividends & Interest received:- It relates to income of the company
and appears credit side of Profit & Loss a/c.
19.9 Provision for Taxation:- It should be credited to Profit & Loss a/c. If it is
given in adjustment, it is debited to Profit & Loss A/c and second time on the
Liabilities side of Balance sheet.
19.10 Income tax Paid:- It is treated as advance tax is paid so it appears on Asset
side of “Loan & Advances” head.
19.11 Preliminary Expenses:- It appears Asset side of Balance Sheet. If
adjustment is there, the (adjustment appears) written off amount debited Profit &
Loss A/c, and the same deducted from the item in Balance Sheet.
19.12 Discount & Expenses on issue of shares / Debentures:- It is appears on
the Assets side of Balance Sheet. If adjustment is there on these items, the
written off amount appears on debit side of Profit & Loss A/c and the same
deducted from the respective items, in Asset side of Balance sheet.
19.13 Interest on Debentures:- If it is given in Trail balance it is debited to
Profit & Loss A/c. If it is given in adjustment it appears both side of Profit &
Loss A/c Debit and Liabilities side of Balance sheet.
Proforma of Trading & Profits and Loss A/C of a Company is titled as

Profit & Loss A/c of ____________Co. Ltd., as on ___________.
Dr Cr
Amount Amount
Particulars Particulars
(Rs) (Rs)
To Opening Stock Xxxxx By Sales xxxxx
To Purchases xxxxx (-) Returns xxx Xxxxx
(-) Returns xxx Xxxxx By Closing Stock Xxxxx
To Carriage inwards Xxxxx
To Productive wages Xxxxx
To Freight Xxxxx
To Gross Profit Xxxxx
(Transferred to Profit & Loss
A/c) Xxxxxx xxxxxx
To Salaries xxxxx By Gross Profit

(-) Out standing xxx Xxxxx (Transferred from Trading xxxxx
To Insurance xxxxx A/c)
(-) Prepaid xxx Xxxxx By Discount received xxxxx
To Bank expenses Xxxxx By Share Transfer fees xxxxx
To Director fees Xxxxx By Interest on Investments xxxxx
To General expenses Xxxxx By Interest on defence bonds
To Discount paid Xxxxx By Net Loss (if arises) xxxxx
To Bad debts Xxxxx (Transferred to Profit & Loss xxxxx
To Advertisement Xxxxx Appropriation A/c)
To Commission paid Xxxxx
To Interest on Debentures xxxx
(+) Out standing xxx Xxxxx
To Preliminary Expenses written
off (Adj) Xxxxx
To Depreciation (on Assets) Xxxxx
To Provision for Income tax Xxxxx
To Net Profit (Transferred to
Profit & Loss Appropriation Xxxxx
A/c)
xxxxxx xxxxxx
A company has to prepare the Profit and Loss Appropriation

Account in addition to the profit and loss account. It shows the
appropriation of Profit and is popularly known as below the line the
splitting of the Profit and Loss A/C into three section (i.e. trading A/C,
Profit and loss A/C and profit and loss appropriation A/C) is not forbidden
by the companies Act. It is desirable to split the profit and loss A/C into
three sections so that gross profit, Net profit and surplus carried to the
balance sheet may be ascertained. It is prepared as follows.
Profit and loss appropriation Account
Dr Cr
Amount Amount
(Rs) (Rs)
To Transfer to Reserves Xxxxx By Last year’s Balance b/d Xxxxx
To Income tax for Previous Year By Net Profit for the year Xxxxx
not provided for Xxxxx By Amount withdrawn from
To Interim dividend Xxxxx General Reserve/other
To Surplus (balancing figure reserve Xxxxx
carried to Balance Sheet) Xxxxx By Provision( Income tax
provision not required) Xxxxx
xxxxx xxxxx
Illustration: -
The following are the particulars of J.S.Co., Ltd., Tirupathi as 31-12-05.

Particulars Dr Cr
Opening Stock 75,000
Sales 3,50,000
Purchases 2,50,000
Wages 50,000
Discount 5,000
Salaries 7,500
Rent 5,000
Sundry Expenses 7,000
Profit & Loss Appropriation A/c1-1-06 15,000
Dividend Paid 9,000
Plant & Machinery 30,000
Adjustments:- Closing stock valued Rs.80,000, Depreciate Plant & Machinery

@ 10/-. You are required to Prepare Profit & Loss A/c for the year ended 31-12-
06.
J.S.Co.,Ltd.,Profit & loss A/c for the year ended 31-12-05.
Dr Cr
Amount Amount
(Rs) (Rs)
To Opening stock 75,000 By Sales 3,50,000
To Purchases 2,50,000 By Closing stock 80,000
To Wages 50,000
To Gross Profit C/d 55,000
4,30,000 4,30,000
To Salaries 7,500 By Gross Profit B/d 55,000
To Rent 5,000 By Discount 5,000
To Sundry Expenses 7,000
To Depreciation on Plant &
Machinery 3,000
To Net Profit C/d 37,500
60,000 60,000
To Dividend Paid 9,000 By Balance B/d 15,000
To Balance C/d (Carried forward 43,500 By Net Profit Current year 37,500
to Balance sheet)
52,500 52,500
Illustration 2:-
PremRaj Ltd had a nominal Capital of Rs.6, 00,000 dividend in to shares of Rs.10/-each.
The Balances as per Ledger of the Company as at Dec.31, 2005 was as follows: -
Particulars Rs Particulars Rs
Calls in arrear 7,500 Premises 3,00,000

Plant & Machinery 3,60,000 Interim Dividend Paid 7,500
Purchases 1,85,000 Preliminary Expenses 5,000
Freight 13,100 Directors’ Fees 5,740
Bad debts 2,110 6% Debentures 3,00,000
P. & L.A/c (Cr) 14,500 Sundry Creditors 50,000
General Reserves 25,000 4% Govt.Securities 60,000
st
Stock (1 Jan.2005) 75,000 Fixtures 7,200
Sundry Debtors 87,000 Good will 25,000
Cash in Hand 750 Cash at Bank 39,900
Wages 84,800 General Expenses 16,900
Salaries 14,500 Provision for Bad debts 3,500
Debentures Interest Sales 4,15,000
Share Capital (fully called) 4,60,000 Bills Payable 38,000
Prepare the Final Accounts and the Balance sheet relating to 2005 from
the figures given above after taking in to account the following:-
(ii) Depreciate Plant & Machinery by 10 % and Fixtures by 5%;
(iii) Write off1/5 of Preliminary Expenses;
(iv) Rs.10, 000 of wages were utilized in adding rooms to the Premises; no entry
has as yet been made for it
(v) Leave Bad Debts Provision at 5% of the Sundry Debtors;
(vi) Provide a final dividend @5%
(vii) Transfer Rs.10,000 to General Reserve; and
(viii) Make a Provision for Income Tax to the extent of Rs.25, 000.
st
(ix) The stock on 31 December 2005 was Rs.1, 01,000.
Trading and Profit & loss A/c of the Prem Raj Co., Ltd., for the year
ended 31-12-2005.
Dr Cr
Figures Figures
Figures for Figures for
relating relating
the Current the Current
st st
to 31 Expenses to 31 Incomes
Year Year
Dec Dec
Rs. Rs.
2005 2005
To Stock 75,000 By Sales 4,15,00
To Purchases 1,85,000 By Stock 1,01,000
To Wages 84,800
Less Charged to
Premises 10,000 74,800
To Freight 13,100
To Gross Profit C/d 1,68,100
5,16,000 5,16,000
To General Expenses
To salaries 16,900 By Gross Profit
To Debenture Interest* 14,500 b/d 1,68,100
By Interest due
Paid 9,000 on Govt.
Add out Securities
Standing 9,000 (4% on
_______ 18,000 Rs.60,0000) 2,400
To Directors’ Fees 5,740
To Preliminary
Expenses 1,000
To Depreciation- Plant
& Machinery 36,000
Fixtures 360
______ 36,360
To Provision for Bed
Debts-
Required 4,350
Add Bad
Debts 2,110
______
6,460
Less Existing
Provision 3,500
_______ 2,960
To Provision for
Income Tax 25,000
To Net Profit c/d 50,040
1,70,500 1,70,500
Balance Sheet of the Quick Ltd. as at December 31, 2005
(not in prescribed form)
Amount Amount
Liabilities Assets
Rs. Rs.
Share Capital: Fixed Assets:
Authorised – 60,000 Good will
Shares of Rs. 10 each Premises 25,000
Issued 6,00,000 Plant and 3,10,000
Subscribed & paid – up Machinery 3,60,000
Capital : Less Depre-
46,000 Shares Citations 36,000
of Rs.10 each _________
fully called 4,60,000 Fixtures 7,200 3,24,000
Less Calls in Less Depre-
Arrear 7,500 4,52,500 Citations 360
Reserves and Surplus: Current Assets: 6,840
General Reserve 35,000 Investments
P.& L., A/c 24,415 Interest Due 60,000
Stock 2,400
Secured Loans : Sundry Debtors 87,000 1,01,000
6% Debentures 3,00,000 Less Provision
Interest Outstanding 9,000 For Bad Debts 4,350
Current Liabilities: Cash in Hand
Bills Payable 38,000 Cash in Bank 82,650
Sundry Creditors 50,000 Preliminary Expenses 750
Provision for Income Tax 25,000 39,900
Proposed Dividend 22,625 4,000
9,56,540 9,56,540
Alternatively, the Trading and Profit and Loss Account and the Profit and
Loss Appropriation Account may be merged together and presented as
follows: -
Trading and Profit & loss A/c of the Prem Raj Co., Ltd., for the year
ended 31-12-2005.
Dr Cr
Figures Figures
relating relating
st
the Current st
the Current
Year Year
Dec Dec
Rs. Rs.
2005 2005
To Stock 75,000 By Sale 4,15,000
To Purchases 1,85,000 By Stock 1,01,000
To Wages 74,800 By Interest on
To Freight 13,100 Government.
To General Expenses 16,900 Securities 2,400
To Salaries 14,500
To Debenture interest 18,000
To Director’s Fees 5,740
To Preliminary
Expenses 1,000
To Depreciation – Plant
& Machinery 36000
Fixtures 360 36,360
To Provision for Bad
Debts:
Required 4350
Add Bad Debts 2110
6460
Less Existing
Provision 3500 2,960
To Provision for Income
– Tax 25,000
To General Reserve 10,000
To Interim Dividend 7,500
To Proposed Dividend 22,625
To Balance of Profit 9,915
5,18,400 5,18,400
Balance Sheet:-
It must be drawn up in such a form and should have such contents as will
give affairs. For this purpose it should be drawn up as far as possible in
conformity with the form set out in Part –I of schedule VI of the companies
Act. Section 210 of the companies Act requires that at every annual
general meeting of the shareholders, the Board of Directors of the
Company shall lay before the company a Balance Sheet at the end of
each trading period.
Certain important items in Balance Sheet:-
The following are some of the important items appearing in Balance

Sheet.
(iii) Call in Arrears: This amount is deducted from the called up share capital.
(iv) Call in advance: The amount received in advance. Son it is
shown separately from the called up capital on the liabilities side.
(v) Share premium: It is shown on the liabilities of Balance sheet under the
head Reserve and surplus.
(vi) Forfeited shares: It is to be added to the paid up capital on the liability
side of Balance sheet.
(vii) Fixed deposits: It can accepts from public it is shown under
unsecured Loan on the liability side of Balance sheet.
(viii) Unclaimed dividend: Dividend which are not en cashed by the
share holders are called unclaimed dividends. This item is shown under
current liabilities.
(ix) Secured Loan: In case of each secured loan the nature of security
given by the company should be indicated.
(x) Unsecured Loans: Interest occurred and due on unsecured loans must be
shown as an addition to the respective loans.
(xi) Fixed Assets: Full details of fixed assets their additions,
Total depreciations should be clearly shown.
(xii) Current Assets: Closing stock, debtors, Bills Receivable etc.,
comes under this head.
(xiii) Miscellaneous Expenditure: Not written off expenditure comes
under this head. Ex: Preliminary Expenditure.
The form of the Balance sheet as given in Part I of Schedule VI of the

Companies Act is given below.
Schedule VI (Section 211)
Part – I Form of Balance Sheet
Balance Sheet of __________________ as on _________________
Figure Figur Figure Figu Figu

s for es for s for res res
the the the for for
Previo Curre Previo the the
Liabilities Assets
us nt us Curr Prev
Year Year Year ent ious
Rs. Rs. Rs. Year Year
Rs. Rs.
1 2 3 4 5 6 7
Share Capital: Fixed Assets:
Authorised _______ Good will
Shares of _____ each. Land
Issued ____ Shares of Buildings
Rs._______ each. Leaseholds
Subscribed____ Railway sidings
shares of Rs. Each Plant and Machinery
_____ Shares of Furniture & Fittings
Rs.____ per share Development of
called up. Property
Less: Calls unpaid Patents, trade marks
1) by directors and designs
2) by others Livestock
Vehicals, etc.
Add: Forfeited Shares
of the above shares Investments:
____ shares are
allotted as fully paid up Showing nature of
pursuant to a contract investments and
without payments mode of valuation,
being received in cash e.g., cost or market
of the above ____ value:
shares are allotted as a) Investments in
fully paid up by way of Government or
bonus shares. Trust Securities.
b) Investments in
shares,
Reserves and debentures or
Surplus: bonds.
Immovable
Capital Reserve Properties.
Capital Redemption
Reserve Current Assets,
Share Premium Loans and
Account Advances
Other Reserve
A) Current Assets
Less: Debit Balance in Interest accrued
Profit and Loss on Investments
Account, if any. Stores &
Surplus, i.e., balance in Spare parts
Profit and Loss Loose Tools
Account after providing Stock – in – Trade
for proposed Work-in-Progress
allocations, namely,
Dividend, Bonus, etc. Sundry Debtors
Proposed additions to
Reserves, Sinking a) Debts
Funds out standing for a
period exceeding
Secured Loans six months
Debentures b) Other debts
Loans & Advances Less: Provision
from Banks
Loans & Advances Cash balance in
from Subsidiaries hand Bank Balances:
Other Loans & a)With Scheduled
Advances Banks
B) With others
Unsecured Loans
Fixed Deposits B) Loans&
Loans & Advances Advances
from Subsidiaries
Advances and Loans
Short term loans and to Subsidiaries
advances: Advances and Loans
a) from Banks to partnership firms in
b) from others which the company
or any of its
Current Liabilities subsidiaries is a
and Provisions partner
a) Current Liabilities
Acceptances Bills of Exchange
Sundry Creditors
Advance payments Advances
and unexpired recoverable in cash
discounts or in kind or for value
Unclaimed to be received, e.g.,
dividends, other Rates, Taxes,
Liabilities (if any) Insurance, etc.
Interest Accrued but Balance with
not due on loans Customs, Port Trust
etc. (Where payable
B) Provisions on demand)
Provision of
Taxation Proposed Miscellaneous
Dividends For Expenditure
contingencies (To the extent not
For Provident Fund write off or adjusted)
Scheme Preliminary
For Insurance, Expenses Expenses
Pension and similar including commission
staff other provisions or brokerage on
Contingent Liabilities underwriting or
(A foot note to the subscription of
balance sheet is shares or debentures
added to show Interest paid out of
separately and these capital during
are not included in construction (also
the total) stating the rate of
interest)
Claims against the
company not Development
acknowledged as expenditure not
debts uncalled liability adjusted
on shares partly paid Other items
Arrears of fixed (specifying nature)
cumulative dividends
Estimated amount of Profit and Loss
contracts remaining to Account
be executed on capital (Show here the debit
account and not balance of profit and
provided for other Loss Accountant
moneys for which the carried forward, after
company is deduction of the
contingently liable. uncommitted
reserves, if any.)
Summing up:
Companies have to prepare final Accounts as per the provisions of

the companies Act 1956 Every profit and loss A/C and Balance sheet
must disclose a true and fair view of the profit or loss and financial state of
the affairs of the company. Balance sheet is to be prepared in prescribe
form is part I of schedule VI. The Profit and loss A/C must company with
the requirements of part II of the schedule VI.
Glossary :
Dividend: Amount paid to the shareholders out of the profits.

Preliminary Expenses: It is incurred in connection with the formation of
the company.
Profit & Loss appropriation A/C: It shows the appropriation out of profits.
Illustration:
The following was the Trail balance of Sri. Nagi Reddy Textiles of Kurnool
as on 31-12-05.
Trail Balance
Particulars Debit Rs. Credit Rs.
Call in Arrears 5,000
Land & Building 5,00,000
Machinery 4,00,000
Purchases & Sales 4,00,000 9,00,000
Preliminary Expenses 1,00,000
Wages 10,000
Director fees 2,000
Bad debts 3,000
Profit & Loss A/c 1,00,000
Sundry Debtors & Creditors 1,00,000 50,000
General Reserve 50,000
1-1-05 Stock 50,000
Cash in hand 10,000
Cash at Bank 50,000
Salaries 20,000
Share Capital 4,00,000
Bills Payable 1,50,000
16,50,000 16,50,000
Adjustments:-
(v) Depreciate Machinery @10 %
(vi) Write off ¼ Preliminary Expenses.
(vii) Transfer Rs.5000 to General Reserve
(viii) Closing stock 1,00,000.
You are required to Prepare final Accounts.

Profit & loss A/c of the Nagi Reddy Textiles for the year ended 31-12-
2005.
Dr Cr
Figures Figures
relating relating
st
the Current st
the Current
Year Year
Dec Dec
Rs. Rs.
2005 2005
To Stock 1-1-05 50,000 By Sales 9,00,000
To Purchases 4,00,000 By Closing Stock 1,00,000
To Wages 10,000
To Gross Profit C/d 5,40,000
10,00,000 10,00,000
To Salaries 20,000 By Gross Profit 5,40,000
To Director fees 2,000 B/d
To Bad debts 3,000
To Preliminary
Expenses1/4 25,000
To Depreciation on 40,000
machinery 10%
To Net Profit C/d 4,50,000
5,40,000 5,40,000
Profit & loss Appropriation A/c.

Dr Cr
Figures Figures
relating relating
the Current the Current
st st
Year Year
Dec Dec
Rs. Rs.
2005 2005
To General Reserve 5,000 By Balance B/d 1,00,000
To Surplus 5,45,000 By Net Profit for 4,50,000
Current Year
5,50,000 5,50,000
Sri Nagi Reddy Textiles Balance Sheet as on 31-12-05
Liabilities Amount Rs Assets Amounts RS
1. Share Capital 1. Fixed Assets 5,00,000
Authorised Land & Building
Issued Called up & Machinery 4,00,000
Paid up 4,00,000 (-) Depreciation 4,000 3,60,000
(-)Call in Arrears 5,000 3,95,000 2. Investments --------
2. Reserves & Surplus 3. Current Assets Loan
General Reserve 50,000 Advances
(+)Addition 5,000 55,000 Closing Stock 1,00,000
P & L A/c Sundry Debtors 1,00,000
3. Secured Loans 5,45,000 Cash in hand 10,000
4.Unsecured Loans -------- Cash at Bank
5. Current Liabilities & -------- 4. Miscellanies
Provisions Expenditure 50,000
Bills Payable 1,50,000 Preliminary
Sundry Creditors 50,000 Expenses 1,00,000
6. Contingent Liabilities -------- (-) Written off 25,000 75,000
11,95,000 11,95,000
UNIT -- 3
Consignment—What is it?
Quite often it happens that a manufacturer or a wholesale dealer who does not find ready market in
his own place becomes desirous of seeking a good market elsewhere. Even when there is a good market
for his goods in his own place, he is often anxious to make his goods popular elsewhere. For this purpose
the merchant employs a leading dealer at the place where he wants to push his goods to act as his agent
and sell goods on his behalf and risk as agent on commission. Goods so sent to a person are known
as Consignment. The person who sends such goods is known as the Consignor and the person to whom
the goods are sent is known as the consignee. Such goods sent to the Consignee remain the property of
the Consignor. The Consignee to whom the goods are sent does not buy them, but, merely undertakes
to sell them on behalf of the consignor. He is not responsible for any loss or damage to the goods, if such
loss or damage is caused for no fault of the Consignee.
Such a shipment of the goods by the Consignor cannot be treated as ordinary sale and such transactions
require special treatment in the books of accounts.
Difference between a Sale and a Consignment

1. When goods are sold by one to another, the property in the goods immediately passes to the
buyer, whereas when goods are sent on Consignment, the property in the goods remains with
the consignor. Only the possession is transferred to the consignee.
2. When goods are sold by one to another, it becomes a relationship of a buyer and seller or a
Debtor and a Creditor between the two persons, whereas when goods are Consigned by one
to another, it becomes a relationship of a Principal and an Agent between the Consignor and
the Consignee.
3. When goods are sold, the buyer cannot return the goods to the seller whereas when goods are
sent on Consignment the goods are returnable, if they remain unsold.
4. The risk in the goods is not transferred to the consignee despite the transfer of possession of
goods. Any damage or loss to the goods is therefore borne by consignor. But in the case of sale,
the risk is immediately transferred to the buyer even when the goods are still in the possession
of the seller.
5. The expenses, in respect of freight, cartage, insurance, etc. are met by the consignor in a
consignment transaction, but in the case of sale the expense are borne by the purchaser unless
otherwise provided in the agreement.
6. The transfer of possession (i.e. delivery of goods) is essential in a consignment transaction. In
a sale, however, the goods may be delivered at a later date.
The consignee will be treated as a debtor only when goods or part of them have been sold by him.
But if goods remain unsold, the consignee will send them back to the Consignor and the Consignor will
pay the Consignee all the expenses he has incurred in keeping the goods in safety and in attempting to
push the goods in the market.
*Note:— Strictly speaking the term consignment implies the despatch or shrpping of goods to an
agent in a foreign country for sale on commission basis. In business circles, however, the term is used
for despatch of goods to an agent in different parts of the same country as well.
Commission or Consignee’s Remuneration
When the goods are sold by the consignee, he is paid a commission for his services at a fixed rate
on the proceeds of the goods sold by him. In addition to this commission, he is to be reimbursed for all
expenses incurred by him in connection with the consignment sales. Usually these expenses are in the
nature of dock charges, custom duties, carriage, godown rent, advertisement, insurance of the goods while
in his possession etc.
Del Credere Commission. Usually the consignor advises the consignee to sell the goods consigned
to him for cash only, because if such goods are sold on credit by the consignee and if any amount becomes
irrecoverable from the debtors the loss will fall upon the consignor. As the consignee acted as an agent
only in effecting the sales, he does not become responsible for any debts. But sometimes an arrangement
is made between the consignor and the consignee whereby the later guarantees payment and undertakes
responsibility for bad debts. For this the consignee receives an additional commission known as ‗‗Del
Credere Commission‘‘ on the total sales. When del-credere commission is given to the consignee, the
consignee will make payment to the consignor, whether he himself receives the payment or not from the
purchaser(s).
Over-riding Commission : This type of commission is allowed to the consignee in addition to the
normal commission (as distinct from Del credere commission). The idea seems to be to provide addition
incentive to the consignee for the purpose of creating market for new products.
Proforma Invoice :
When goods are despatched, the consignor makes out a ‗Pro-Forma Invoice‘ giving indication of the
price of the goods at which the consignee ought to sell the goods. Pro-Forma Invoice is a statement which
is similar to that of an invoice, but it is called proforma because it does not make the consignee responsible
to pay the amount named therein.
The consignor generally mentions a higher price than his cost so that consignee does not know the
profit of the consignor.
Advance against Consignment :

Until the goods are sold by the consignee, he is not indebted to the consignor and is not expected to
pay for them. This results in a part of the consignor's Capital being locked up for a period. To overcome
his difficulty, the consignee often remits a sum of money in advance to the consignor. This may be done
in the form of an acceptance of a Bill of Exchange drawn by the consignor on the Consignee or a simple
bank draft. An advance is readily sent against consignment by the consignee to the consignor when the
consignment goods have become popular in the consignee‘s place.
Account Sales :
Periodically, the consignee will send statements of sales and expenses incurred, commission earned
and the consequent amount due to the consignor. Such a statement is made in a form known as ‗‗Account
Sales‘‘. An Account Sales may be defined as a ‗‗statement prepared and sent by the consignee to the
consignor at periodical travels, say three months or six moths detailing therein the goods payable and the
net amount due from the consignee after deducting the advances, if any, paid already.‘‘ The following is
a specimen :—
Accounts Sales
Account Sales of 65 cases of Fancy goods ex. S.S. Vikram sold by Messers A. Dutt & Co., Colombo,
Ceylon on account and risk of Messers Thankers & Co., Delhi, India.
Accounting treatment
Entries in the Books of the Consignor
1. On Despatch of Goods : Rs. Rs.
Consignment Outward A/c Dr. ?
or
Consignments to such and such
Person or Place A/c Dr.
To Goods sent on Consignment A/c ?
(With either the cost of the goods consigned
or with the amount of the higher price charged
Consignment.)
Here Sales Account is not credited because sending goods on consignment does not mean actual
sales. These goods are returnable by the Consignee if it cannot effect sale. Hence a new account ‗‗Goods
sent on Consignment‘‘ is opened.
2. On Paying Expenses (by the Consignor) :
Consignment Outward A/c Dr.
To Case (or bank) A/c
(For amount spent on carriage, freight, insurance, etc., at the time of despatching the goods.)
3. (On Receipt of an Advance from the Consignee :
Case (or Bank or Bills Receivable) a/c Dr.
To Consignee‘s Personal A/c
(An advance of rs....received against consignment from the Consignee).
4. If the Advance is in the form of a Bill Receivable and the same is discounted by the
Consignor :
Cash (or bank) A/c Dr.
*Discount A/c Dr.
To B/R A/c
(No further entry is made in the books of the Consignor till an Account Sales is received from
the Consignee.)
5. On Receipt of Account Sales :
(i) Consignee‘s Personal A/c Dr.
To Consignment Outward A/c
(With the gross proceeds of the Account sales.)
(ii) Consignment Outward A/c Dr.
(With the expenses incurred by the Consignee plus commission payable to the Consignee as per
Account Sales.)
6. On Receipt of Remittance from the Consignee :
Cash (or Bank or Bills Receivable) A/c Dr.
7. For unsold Stock (if any) with the Consignee
Stock on Consignment A/c Dr.
To Consignment outward A/c
8. Entry for Profit & Loss :
If all the goods dent have been sold, and the cosignment account to such and such person or place
was debited with the cost price of the goods, the Consignment Outward Account will now reflect profit
or loss. In case it results in a profit, the entry will be :
To Profit and Loss A/c
(The profit earned on Consignment to such and such place transferred to Profit & Loss A/c.)
In case the consignment deal results in loss, the entry will be reverse, i.e.,
Profit & Loss A/c Dr.
(The loss of Consignment A/c transferred to Profit & Loss A/c.)
Adjustment of Proforma Invoice Price :

But if the goods were consigned at a price in excess of cost and the Consignment Outward Account
was debited and Goods sent on Consignment A/c credited at the excess price, then an adjustment entry
will have to be made, before ascertaining the profit or loss on Consignment. The adjustment entry will
be :
Goods sent on Consignment A/c Dr.
(With the amount of excess price charged on Consignment A/c)*
*Note:— The discount charge is financial expense and discount acount therefore is transferred to
profit and loss account and not to consignment account.
Lastly, the ‗‗Goods sent on consignment A/c‘‘ will be transferred to the Purchase or Trading A/c. The
journal entry will be ;
Goods sent on Consignment A/c Dr.
To Trading A/c
Unsold Stock of Consignment Goods : Its Valuation :

If a part of the goods sent to the Consignee has remained unsold, the unsold stock with the Consignee
must be valued and brought into the books before profit or loss can be ascertained. This unsold stock is
valued at cost price or market price, whichever is lower of the two. The cost price here should not mean
merely the cost at which the goods were invoiced but should include such proportionate expenses
as normally increase the value of the goods consigned. Such expenses are freight, custom duties, dock
dues, insurance-in-transit, loading and unloading charges, etc. It does not matter whether these expenses
are paid by the Consignor himself or by the Consignee. But the expenses incurred by the Consignee in
effecting sales, such as advertisement, travellers commission, storage, insurance against fire or theft, are
not included in determining the cost price of the unsold stock. In other words it can be said that all direct
expense or all expenses made whether by the consignor or by the consignee in placing the goods in a
saleable condition (all expenses till the goods reach the godown of the consignee) will be taken into
account while valuing the closing stock.
Example : Suppose the Consignor sends to the Consignee, 1,00 units at Rs.25 per unit and pays costa
duty, Rs.1,000; marine insurance, Rs.500. The Consignee pays, at the time of taking delivery, unloading
charges of Rs.250. The Consignee also pays godown rent Rs.550 and advertisement Rs.250.
If 200 units (1/5th of the total goods) remain unsold. They will be valued as :— Rs.P.
1/5th of 1000 units, i.e., 200 Radios @ Rs.25 ..... 5,000.00
1/5th of Rs.500, Marine Insurance ..... 100.00
1/5th of Rs.250, unloading charges paid by the Consignee ..... 50.00
Total value of unsold Stock 5,350.00
The rule regarding valuation is cost or market price whichever is lower.
In the market price of the unsold stock is more than Rs.5,350, it will be valued at Rs.5,350. If however,
the market price is less than Rs.5,350, it will be valued at the market price. Any loss or depreciation
of stock should be duly taken into account.
The unsold stock valued in the above manner will now be brought into books by passing an entry, as
Stock on Consignment A/c Dr.
To Consignment Outward A/c ?
Note : If the proforma invoice was made out at a price higher than the cost, stock will also be valued
at invoice and not at cost. But it is wrong to show unsold stock in Balance Sheet at a figure higher than
the cost. Hence for the difference (i.e., difference between value of stock at invoice price and value of
stock at cost) reserve must be created, Entry is :
To Stock Reserve A/c ?
The Stock on Consignment will appear as an asset in Balance Sheet of the Consignor.
Entries in the Books of the Consignee :

As has already been pointed out, the Consignee receives the goods of the Consignor as an agent and
sells them on behalf of the principal. These goods do not belong to him, so he is not to make any entry
*Note:— This entry is the everse of the ntry paswsed at the time when goods ae sent on Consignment
to the Consignee.
till he incurs expenditure on them and sells them at his place. But he must keep a detailed note of the
receipt of these goods, otherwise they are mixed with his own goods.
The Entries are
1. On Receipt of Goods :
No Entry. Only a detailed note is maintained.
2. Expenses of the Consignee :
Consignor‘s Personal A/c Dr.
To Cash (or Bank) A/c
(Custom-duty, dock charges, unloading charges
at the time of receiving the goods and later on,
advertisement, godown rent, etc., paid)
3. When (and if) an Advance is given :
Consignor‘s Personal A/c Dr.
To Cash (r Bank or Bills Payable) A/c
4. When goods are sold :
(i) For Cash .......... (i) Cash (or bank) A/c..... Dr.
Consignor‘s Personal A/c
(ii) On Credit ....... (ii) Debtors A/c ........ Dr.
To Consignor‘s Personal A/c
(iii) If Purchased by the.... (iii) Purchase A/c..... Dr.
Consignee himself To Consignor‘s Personal A/c
5. For Commission Earned :
Consignor‘s Personal A/c....... Dr.
To Commission A/c.
6. On Settling the account of the Consignor :
Consignor‘s Personal A/c ........ Dr.
To Cash (or Bank or B/P) A/c
Det Credere Commission :

Sometimes the consignor allows a special commission to the consignee, called the Del Credere
Commission, by which the loss arising on bad debts on credit sales is borne by the Consignee. Thus if
the Consignee is paid Del Credere Commission and if any amount due from Debtors (to whom Consignment
goods have been sold on credit) becomes irrecoverable, the bad debts will be Consignee‘s loss. The entry
then will be :
Commission A/c........ Dr.
To Bad Debts A/c
The Balance of Commission earned will then be transferred to the Profit and Loss Account.
Thus :
Commission A/c....... Dr.
To Profit and Loss A/c*
Illustration-1
D. Dogra of Delhi sent to his agent, M. Monga of Madras, 500 articles costing Rs.15/- per article
at an invoice price of Rs.20 per article. The following payments were made by D. Dogra in this
connection: freight and carriage Rs. 450, miscellaneous exp. Rs. 50. M. Monga sent a bank draft for
Rs.3,000 as an advance against the Consignment M. Monga sold 300 articles at a flat rate of Rs.28 per
article and sent an Account Sales showing deduction for storage charges Rs.550 insurance Rs.550 and
his Commission of 3% plus 2% Del Credere on gross sale proceeds, and remitted the amount due on
consignment. M. Monga also informed D. Dogra that 50 articles were damaged in transit and thus they
were valued at Rs.550
Record the above transactions in the books of the consignor and consignee.
\
Solution : (Entries made on Cost Price Basis)
Books of D. Dogra (Consignor)
Journal
Dr. Cr.
Rs. Rs.
(1) Consignment to madras A/c 7,500
To Goods sent on Consignment A/c 7,500
(500 articles sent to M. Monga, Agent, Cost being Rs.15 per article).
(2) Consignment to Madras A/c 500

To Bank Account 500
(Expenses incurred on the Consignment)
Freight & Carriage Rs. 450
Miscellaneous Exp. Rs. 50
500
(3) Bank Account 3,000

To M. Monga 3,000
(Advance received from the Agent in the form of Bank Draft.)
(4) M. Monga 8,400

To Consignment to Madras A/c 8,400
(Sales affected by M. Monga as per Account Sales.)
(5) Consignment to Madras A/c Dr. 570

To M. Monga 570
(Expenses incurred by M. Monga Rs.150 and Commission due to
him, Rs.550 (5% of Rs.8,400).
(6) Bank Account Dr. 4,830

To M. Monga 4,830
(Amount due from the consignee received.)
(7) P & Loss A/c Dr. 350

To Consignment to Madras A/c 350
(Abnormal Loss on 50 damaged Articles)
(8) Stock on Consignment A/c Dr. 2,850

(Value of stock unsold at Madras) Rs.
150, goods articles, @ Rs.20 2,250
Add: Expenses Rs.150 150
50 damaged articles 450
2,850
130
(9) Consignment to Madras A/c Dr. 3030
To Profit & Loss Account 3030
(Profit on consignment transferred to Profit & Loss Account)
(10) Goods sent on Consignment A/c Dr. 7,500

To Trading Account 7,500
(Goods sent on consignment A/c closed by transfer to trading
Account)
Note—(Figures in brackets denote sequence of entries

Ledger
Consignment to Madras Accountt to Madras Account
Dr. Cr.
Rs. Rs.
To Goods sent on Consignment A/c 7,500 By M. Monga
To bank A/c (expenses) 500 (Sale proceeds) 8,400
To M. Monga
Expenses 150 By Stock on
Commission 430 Consignment A/c 2,850
570
To P & L A/c (Transfer) 3,030 By Profit & Loss A/c
(Abnormal Loss) 350
11,600 11,600
M. Monga
Rs. Rs.
To Consignment to madras A/c 8,400 By Bank A/c 3,000
By Cosignment to
Madras A/c 570
By Bank A/c 4,830
8,400 8,400
Bank Account
Dr. Cr.
Rs. Rs.
To M. Monga 3,000 By Consignment to Madras A/c 500
Goods sent on Consignment Account
Rs. Rs.
To Trading A/c Transfer 7,500 By Consignment to Madras A/c 7,500
Profit & Loss A/c
Rs. By Consignment to Rs.

To Consignment to Madras A/c 350 Madras A/c 3,030
Books of M. Monga (Consignee)

Journal
Dr. Cr.
Rs. Rs.
D. Dogra 3,000
To Bank Account 3,000
(Advance sent to the Consignor against consignment)
D. Dogra 150
To Bank Account 150
(Expenses incurred on the Consignment on behalf of D. Dogra
Storage 50
Insurance 100
150
Bank Account 8,400

To D. Dogra 8,400
(Sale of 300 articles @ Rs.28 each out of the Consignment.)
D.Dogra 420
To Commission Account 420
(5% Commission on Sales made on half of D. Dogra; 3% Commission
+ 2% Del Credere Com.)
D. Dogra 4,830
To Bank Account 4,830
(Amount due to D. Dogra remitted).
Ledger
D.Dogra
Dr. Cr.
Rs. Rs.
To Bank A/c (Advance) 3,000 By Bank A/c (Sale proceeds) 8,400
To Bank A/c (Expenses) 150
To Commission A/c 420
To Bank A/c (amount remitted) 4,830
8,400 8,400
Bank Account
Rs. Rs.
To D. Dogra 8,400 By D. Dogra 3,000
By D. Dogra 150
By. D. Dogra 4,830
Commission Account
By D. Dogra 420
Entries made on Invoice Price basis. If it is desired to make entries on the basis of invoice price,
the following will be the changes as compared to the solution given above :
Instead of entry No. 1 there will be the following entry ;
Rs. Rs.
1. Consignment to Madras A/c
To Goods sent on consignment A/c 10,000
(500, articles consigned at an invoice price of Rs.20 each (cost Rs.15) 10,000
Entries No.(2) to (6) will remain unchanged.

The following will be other entries—No.(7) onwards :
Rs. Rs.
7. Stock on Consignment A/c 3,600
Value of Stock at Madras Rs.
150 goods articles @ Rs.20 3,000
proportionate expenses 150
50 damaged articles 450
3,600
8. Goods sent on Consignment a/c 2,500

(Excess amount included in invoice price of articles sent to Madras
(Rs.5 each) credited on consignment A/c)
9. Consignment to Madras A/c 750

To Stock Reserve Account 750
(Reserve credited equal to excess amount above cost (Rs.5 per
articles) included in valuation of stock)
10. Consignment to Madras A/c 3030

To Profit and Loss Account 3030
(Transfer of Profit on Consignment)
11. Goods sent on Consignment A/c 7,500

To Trading Account 7,500
(Goods sent on Consignment A/c closed by transfer to Trading A/c)
The Ledger Accounts relating to M. Monga, bank and Profit and Loss will be same as shown already.
The other accounts will now appear as under :—
Dr. Consignment to Madras Account Cr
Rs. Rs.
To Goods sent on Consignment A/c 10,000 By M. Monga 8,400
To Bank A/c (expenses) 500 by Stock on Consignment
To M. Monga 570 Account 3,600
To Stock Reserve A/c 750 By Goods sent on Consignment
To Profit and Loss A/c 3,030 A/c (Loading) 2,2500
By Profit & Loss A/c
(Abnormal Loss) 350
14,850 14,850
Dr. Goods sent on Consignment Account Cr.

Rs. Rs.
To Consignment to Madras A/c 2,500 By Consignment to
Madras A/c 10,000
To Trading A/c 7,500
10,000 10,000
Dr. Stock on Consignment Account Cr.

Rs.
To Consignment to Madras a/c 3,600
Dr. Stock on Consignment Account Cr.

Rs.
By Consignment to Madras Account 750
In the Balance Sheet the stock on consignment will be shown at Rs.2,850 i.e., Rs.3,000 minus the
reserve of Rs.750.
Abnormal Loss. In the illustration, it has been mentioned that 50 articles have been damaged and
have been valued at Rs.450 Had there been no damage, the value (at cost) would have been Rs.800.
Cost @ Rs.15 Rs.750
Proportionate Expenses Rs.50
Rs.800
Thus, there is a loss of Rs.350, i.e., Rs.800 less Rs.450 In the absence of such loss, the profit on
consignment would have been Rs.2,680 + Rs.350, i.e., Rs.3,030 This is a better measure of the profit on
consignment. To ensure that the Consignment Account shows true consignment profit, such a loss would
be recorded by means of the following entry ;
Profit and Loss Account Dr. 350
To Consignment Account 350
This entry will no doubt increase the profit shown y the consignment account ut will not inflate profits
because the amount concerned is being debited in the Profit and Loss Account.
Loss of Stock
In case the goods sent on consignment are lost or damaged in transit or otherwise, the loss is that
of the consignor and not of the consignee. Accordingly the consignor will have to make the entries for
such loss. There may be two types of losses viz. Normal loss and Abnormal loss.
Normal Loss:—Normal loss is natural, unavoidable and inherent in the nature of goods or commodities
or articles sent on consignment. This type of loss is a part of the cost of the consignment, so the consignor
does not make separate entry for such a loss. However, the normal loss has to be taken into consideration
while valuaing the unsold consignment stock in the hand of the consigne.
The accounting treatment of normal loss is to charge the total cost of the goods to the remaining goods
after the normal loss. In other words, the value of the unsold stock is calculated in proportion to the total
cost of the goods consigned.
Total Cost of the goods sent
Value of unsold stock = unsold quantity
Total quantity sent – quantity of normal loss
Suppose 10,000 tones of coal are despatched. The cost of 1 tonne of coal is Rs.80 and the freight
incurred is Rs.36,000. To the Consignor the total cost comes to rs.8,35,000. In the nature of coal some
shortage is unavoidable. Suppose the Consignee receives only 9,500 tonnes. It is legitimate to say that the
cost is Rs.8,36,000 for 9,500 tonnes.
In that case the Consignor can properly say that the cost of 1 tonne of coal is Rs.8,36,000
9,500
or Rs.88. If 2,000 tonnes of coal are left unsold with the Consignee, the value of stock will e 2,000 ×
88 i.e. Rs.1,76,000.
Illustration 2 :
Mr. Datta Consigned to hatt 10,000 kgs of flour, costing Rs.33,000. He spent Rs.550 as forwarding
charges. 12% of the Consignment was lost in weighning and handling. Mr. Bhatta sold 8,200 kgs. of flour
at Rs.6 per kg, his selling expenses being Rs.3,300 and Commission 5% on sales. Prepare the Consignment
Account.
Solution :
Ledger of Mrs. Datta
Consignment Account
Rs. Rs.
To Goods sent on Consignment Account 3,3000 By Bhatt (Sales) (8,200×6) 49,200
To Bank (forwarding Charges) 880 By Stock on
To Consignee‘s A/c Consignment* 2,310
Rs.
Selling Expenses 3,300
Commission
@5% on Rs.49,200 2,460 5,760
To Profit & Loss Account 11,870
51,510 51,510
Working Notes :
(i) Calculation of Closing Stock :
Total Quantity of Flour Consigned 10,000 kgs.
Less : Normal Loss 12% 1,200 kgs.
Sales 8,200 kgs.
9,400 kgs.
Closing Stock 600 kgs.

*(ii) Valuation of Closing Stock:
Total Cost of the goods sent The non recurring exp ensses
Closin gStock (units)
Units of Goods sent – Normal losses (units)
Rs. 33,000 Rs. 880

= 600
10,000 1,200
33,880
= 600 = 2,310
8,800
Abnormal loss:- It arises due to abnormal factors or circumstances such as fire, theft Pilferage,
sabotage etc. In case of abnormal loss the price is not inflated at all. This loss is calculated y adding
proportionate direct expenses incurred by the consignor and the consignee as the case may be to the
original cost of the goods.
The accounting Entry is :
Debit Abnormal Loss A/c
Credit Consignment A/c
In case the stock is insured, the amount of claim admitted by the insurance company should be
reduced from the Abnormal loss and only the net loss amount should be debited to Abnormal loss or P&L
A/c.
The entry will be :
Debit : Insurance Company A/c (with the amount of claim admitted)
Debit : Profit and Loss (Abnormal Loss A/c) (with the amount of loss)
Credit: Consignment A/c (with the amount of Total Abnormal loss)
The procedure for calculating the Abnormal loss and the valuation of the remaining stock is
summarised as under :
(i) Calculation of Abnormal loss :
Add Cost of goods Lost
Proportionate Expenses of the goods lost
Less any amount of claim
(if any received from the insurance company)
(ii) Valuation of Closing Stock
Closin g Stock
(1) Cost of the goods – × Cost of total goods consigned
Total goods consigned
Add. Proportionate Non-recurring (direct) expenses incurred before the loss –
closin g stock
× Expenses incurred before the loss
Total goods consigned
Add: Proportionate expenses (Direct only)
quantity unsoid
incurred after the loss : × Expenses incurred after the loss.
(Total quantity sent goods Lost)
Illustration 3 :
Philips Radio of Calcutta despatched 1,000 transistors at Rs.700 each to Mohan Bros. of Delhi, the
consignors paid freight Rs.7,500, cartage Rs.500 and insurance Rs.2,500 Mohan Bros. received only 900
sets and incurred he following expenses.
Rs.
Octroi and other Expenses 1,00,000
Cartage 5,000
Sales expenses 6,000
The consignee sold 600 sets only. You are required to calculate the value of closing stock.
Solution :
Calculation of the value of unsold stock
Sets received 900-sets sold 600 = unsold stock 300
Rs.
(i) Cost of unsold stock 300 × 700 = 2,10,000
(ii) Add: Proportionate Expenses Paid by consignor
3
(7500 + 500 + 2500) × 10,500 = 3,150
10
(iii) Add: Proportionate Expense Octroi 1,00,000
paid by consignee Cartage 5,000
1, 05, 000
300 = 35,000
900
2,48,150
Illustration 4 :
S of Bombay consigned 10,000 kg. of oil to D of Calcutta. The cost of oil was Rs.2 per kg. S paid
Rs.5,000 as freight and insurance. During transit 250 kg were accidentally destroyed for which the
insurers paid directly to the consignors Rs.450 if full settlement of the claim.
D reported that 7,500 kg were sold @ Rs.3 per kg. The expenses being on godown rent Rs. 200 on
advertisement Rs.1,000 and on salesman salary Rs.2,000 D. is entitled to a commission of 3% plus 1.5%
del credere. D reported a loss of 100 kg. due to leakage. D. settled the accounts by bank draft. Prepare
the accounts is the books of S.
Consignment to Calcutta A/c
Dr. Cr.
Rs. Rs.
To Goods on Consignment A/c 20,000 By Bank (Ins. Co.) 450
To Bank—Freight & Insurance 5,000 By P & L A/c (abnormal loss 175
To D—Expenses 3,200 By D—(Sale proceeds) 22,500
To D—Commission
By Consignment Stock A/c 5,431
Rs. By P & L A/c—Loss 657
Ordinary 3% 675
Del Credere 1.5% 338 1,013
29,213 29,213
Goods Sent on Consignment A/c

Dr. Dr.
Rs. Rs.
To Trading A/c 20,000 By Consignment to Calcutta A/c 20,000
Consignment Stock A/c

Dr. Dr.
Rs. Rs.
To Consignment Calcutta A/c 5,431 By Balance c/d 5,431
D
Dr. Dr.
Rs. Rs.
To Consignment to Calcutta A/c By Consignment to Calcutta A/c
—(sale proceeds) 22,500 (Exp.) 3,200
By Consignment to Calcutta A/c
(commission) 1,013
By Bank 18,287
22,500 22,500
Working Notes :
(A) Cost of Goods destroyed Rs.
Cost of 10,000 kg.@Rs.2 20,000
Freight 5,000
Total cost of 10,000 kg. 25,000
(B) Value of Stock still unsold Kg.
Quantity received by D = 9,750 (excluding accidental loss)
100
Less Normal leakage =
9,650
Cost of 9,650 kg = Rs.25,000-625 = Rs.24,375
100
Cost of 2,150 kg. = 2 1 5 0 = Rs.5,431
125
Illustration 5 (Valuation of Stock):
A company sends 300 bales of cotton to its consignee at profit 20% on sale. The cost of each
bale to company is Rs.600 per bale. The following are the expenses incurred in connection with this
consignment :
(a) Rs.900 paid by the consignor for despatching goods.
(b) Rs.2,000 paid by the consignee by way of freight, duty and landing charges.
(c) Rs.1,000 paid by the consignee by way of godown rent, salaries of salesman.
Required :
The Valuation of stock at the end (at invoice price) if the consignee sells away 2/3rd of the consignment.
Solution :
Total bales sent 300
Less bales sold 2/3rd or 300 200
Bales unsold 100
Cost price of 100 ales at Rs.550 per bale 60,000
Add Profit at 20% on sale or 25% on cost 15,000
Add 1/3rd direct expenses : 75,000
Expenses paid by Consignor 900
Expenses paid by Consignor 2,000
1/3rd thereof 2,900 967
Stock at the end (at Invoice Price) 75,967
Note : In the consignment account, stock reserve account will appear at Rs.15,000 on the debit side.
Illustration 6 (Calculation of Stock at the end) :

Deepak sold goods on behalf of Geep Sales Corporation on consignment basis. On 1 January 2002
he had with him a stock of Rs.20,000 on consignment. During the year he received goods worth
Rs.2,00,000.
Deepak had instructions to sell goods at cost plus 25% and was entitled to a commission of 4% on
sales in addition to 1% del credere commission.
During the year ended 31 December 2002 cash sales were Rs.1,20,000; credit sales Rs.1,05,000;
Deepak‘s expenses relating to consignment Rs.3,000 being salaries and insurance bad debts amounted to
Rs.3,000.
Prepare necessary accounts in the books of Geep Sales Corporation.
Solution :
In the books of Geep Sales Corporation
Consignment Account
Dr. Cr.
Rs. Rs.
To Consignment Stock b/d 20,000 By Deepak
To Goods sent on Consignment Account 2,00,000 Cash Sales 1,20,000
To Deepak (Commission) 9,000 Credit Sales 1,05,000 2,25,000
To Deepak (Commission) 2,250 By Consignment Stock c/d 40,000
To Deepak (expenses) 3,000
To Profit & Loss Account
Profit) 30,750
2,65,000 2,65,000
Deepak’s Account
Dr. Cr.
Rs. Rs.
To Consignment account (Sales) 2,25,000 By Consignment account
(Commission) 9,000
By Consignment Account
(Commission) 2,250
(Exp.) 3,000
By Balance c/d 2,10,750
2,25,000 2,25,000
Working Notes :
(1) Calculation of Consignment Stock
Sale Price = 100 + 25 = 125
100 100
Cost of Sales = Sales × = 2,25,000 × = Rs.1,80,000
125 125
Cost of the goods available for sale = Rs. 20,000 + Rs.2,00,000 = Rs.2,20,000
Hence stock at the end = Rs.2,20,000 - Rs.1,80,000 = Rs.40,000
(2) Since Deepak is paid del-credere commission, bad debts of Rs.3,000 would be borne by him.
Illustration 7 :
Messrs. Sundar & Company consigned 1,000 tins of Ghee costing Rs.60 per tin to their agents, Bansal
Stores, at Calcutta. The agents sold 400 tins at Rs.80 per tin for cash, 400 tins at Rs.82 per tin on credit
and they took over the balance to their own stock at Rs.82 per tin. Messrs. Sundar & Company paid
freight and carraige Rs.500 and miscellaneous expenses Rs.200. They drew on Bansal Stores at 3 Months
for Rs.45,000, which was duly accepted by the later. The expenses incurred by the Bansal Stores were :
Carriage Rs.50
Octroi Rs.40
Storage Rs.110
Miscellaneous Rs.100
They were entitled to 5% commission and 2% del credere commission on total gross sale proceeds.
They sent their account sales to their principal showing as a deduction there from their commission and
the various expenses incurred by them a month later. All the debtors except one who owed Rs.200 paid
cash and the bansal Stores remitted the amounts due on consignment.
Show the journal entries in the books of the consignor and the consignee‘s account and consignment
account in the consignor‘s ledger. Show also the entries relating to consignment inwards and the consignor‘s
personal accounts at it would appear in the consignee‘s ledger.
Journal Entries
(In the books of Consignor)
Rs. Rs.
(1) Consignment Account Dr. 60,000
To Goods sent on consignment account 60,000
(being the goods sent on consignment)
(2) Consignment Account Dr. 700

To Bank Account 700
(being the expenses incurred by consignor on account of consignment)
(3) Consignmet Account Dr. 300

To Bansal stores account 300
(being the expenses incurred by consignee on account of consignment)
(4) Bansal store account Dr. 81,200

To Consignment account 81,200
(being the sale effected by the consignee)
(5) Consignment account Dr. 5,684

To bansal stores account 5,684
(being the commission on sales)
(6) Consignment account Dr. 14,516

To Profit & Loss account
(being the profit on consignment transferred to profit ad loss account)
(7) Goods sent on consignment account Dr. 60,000

To Purchase account 60,000
(being the value of goods sent on consignment)
(8) Bills Receivable account Dr. 45,000

To Bansal stores account 45,000
(being the bill drawn on consignment)
Ledger
Consignment of Calcutta Account
Rs. Rs.
To Goods sent on consignment account 60,000 By Bansal store :

To Bank-Expenses 700 Cash sales
To Bansal store account-Expenses 300 (400 × 80) = 32,000 32,000
To Bansal stores account—Commission 5,684 Credit sales
(400 × 82) = 32,800 32,800
Balance of stock taken
To profit & Loss A/c 14,516 (200 × 82) 16,400
81,200 81,200
Illustration 8 (Abnormal Loss) :

On January 1, 2002, A of delhi sent on consignment to B of Bombay 200 packets of coffee costing
Rs.80 each invoiced pro forma at Rs.100 each. The freight and other charges paid by A amounted to
Rs.640. A sent the documents through Bank and drew upon B a bill for Rs.10,000 and discounted the
same with the Bank for Rs.9,800. The bill was met on maturity.
On march 15, B sent Account sales (together with the amount due) showing that 150 packets had
realised Rs.100 each and 25 packets Rs.110 each and 25 packets were shown as unsold stock. B incurred
Rs.400 as expenses for the entire consignment. B is entitled to a commission of 6%.
On March 31 B informed A that 15 packets were damaged due to bad packing and it was estimated
that the selling price of the damaged packets would be about Rs.20 per packet.
Both A and B close their books on March 31. Prepare ledger accounts in the books of A and B.
Solution :
Books of A, Delhi
Consignment of BOmbay Account
2002 Jan. 1 Rs. 2002 March 15 Rs.

To Goods sent on consignment 20,000 By B (sales) 17,750
To Bank (Expenses) 640 By Goods sent on consignment (loading) 4,000
To B. Exp. 400 March 31
To B (Commission) 1,065 By Abnormal Loss (1) 648
To Stock Reserve Account 200 By Stock on Consignment (2) 1,032
To Profit and Loss Account 1,725 By Stock of damaged goods 600
24, 030 24,030

B’s Account
2002 March 15 Rs. 2002 Jan. 1Rs.

To Consignment Account Sales 17,750 By Bills Receivable 10,000
March 31 March 15
To Balance c/d By Consignment Account-Expenses 400
500 By Consignment Account-Commission 1,065
March 31
By Bank 6,785
18,250 18,250
April 1 By Balance b/d 500
Goods sent of Consignment Account

2002 March 31 Rs. 2002 Jan. 1 Rs.
To Consignment account Loading 4,000 By Consignment Account 20,000
To Purchase Account Transfer 16,000
20,000 20,000
Books of B
2202 Jan. 1 Rs. 2002 March 15 Rs.
To Bills Payable 10,000 By Bank 17,750
To bank-Expenses 400 By Balance c/d 500
March 15
To Commission Account 1,065
March 31
To Bank 6,785
18,250 18,250
April 1 To Balance b/d 500
Note:
(i) Stock at the end (At Invoice Price) Rs.
10 Packets @ Rs.100 (Invoice Price) 1,000
Add Proportionate expenses incurred by A i.e. 1/20th of Rs.640 32
1,032
(ii) Abnormal Loss
Cost of 15 packets damaged 1,200
640
Add Proportionate expenses 15 48
200
1,248
600
Le ss Value of 15 packets @ Rs.20 Per Packet
648
(iii) Since 10 Packets are still in the stock-in-hand, advance to that extent has not been adjusted.
Hence Rs.500 is carried forward i.e.
10
10,000 ×
200
Illustration 9 (Normal and Abnormal Loss) :

Vegetables Oils Ltd., Pune, consigned 10,000 kg. of Ghee costing Rs.20 per Kg. to Ramesh and
Company of Madras on 1st January 2002. Oils Ltd. paid Rs.50,000 as freight and insurance. 250 Kgs.
of ghee were destroyed on 10-1-2002 in transit. The insurance claim was settled at Rs.4,500 and was
paid directly to the consignors.
Ramesh and Co. took delivery of the consignment on 20th January 2002 and accepted a bill drawn
upon them by Oils Ltd. for Rs 1,00,000 for 3 months. On 31st March 2002 Ramesh and co. reported as
Follows.
(i) 7,500 Kg. were sold at Rs.30 per Kg.
(ii) Other expenses were : godown rent Rs.2,000; Wages Rs.20,000 Printing and Stationary including
advertising Rs.10,000
(iii) 250 Kg. were lost due to leakage.
Ramesh and Co. are entitled to a commission of 4.5% on all the sales affected by them. They paid
the amount due in respect of consignment on 31st March itself.
Show the consignment account, the account of Ramesh and Co. and loss-in-transit account in the
books of consignor for the year ended 31st March 2002.
Solution :
Books of Oils Ltd., Pune.
Consignment to Madras Account
2002 Jan 1 Rs. 2002 Jan. 10 Rs.

To Goods sent on Consignment By Loss-in-transit 6,250
Account 2,00,000 March 31
To Bank-Expenses 50,000 By Ramesh and Co.—Sale 2,25,000
March 31 By Stock on Consignment A/c 51,316
To Ramesh and Co. Account By Profit & Loss Account (Loss) 9,559
Expenses and Commission
(2,000+20,000+10,000+10,125) 42,125
2,92,125 2,92,125
Loose-in-Transit Account
2002 Jan.10 Rs. 2002 March 31 Rs.

To Consignment Account 6,250 By Insurance Co. 4,500
By Profit & Loss Account 1,750
6,250 6,250
Ramesh and Co.
2002 March 31 Rs. 2002 Jan. 20 Rs.

To Consignment account 2,25,000 By Bill Receivable 1,00,000
To Balance c/d 20,000 March 1
Expenses and Commission 42,125
By Bank 1,02,875
2,45,000 2,45,000
Working Notes :
(1) Cost of ghee destroyed in transit Rs.
Cost of 10,000 Kg. of ghee @ Rs. 20 2,00,000
Freight and Insurance 50,000
Total cost of 10,000 Kg. 2,50,000
(2,50, 000 250)
Cost of 250 Kg. 10,000
6,250
Cost of 9,750 k.g. of ghee 2,43,750

(2) Value of stock at the end
Quantity of ghee received by the consignee 9,750 Kg.
Less : Quantity lost through leakage (Normal Loss) 250 Kg.
Quantity Available for sale 9,500 Kg.
Total Cost of 9,500 Kg. 2,43,750
2, 43, 750 2,000
Cost of 2,000 Kg. 51,316
9,500
(3) Since 2000 Kg. of ghee has not been sold.
Proportionate amount of advance is (100,000×1/5) is Rs.20,000 will not be adjusted.
Exercise :- Shah sends goods on consignment to Rao. The terms are that Rao will receive 10%
commission on the invoice price (which is cost plus 25%) and 20% of any price realised above the invoice
price. Rao will meet his expenses himself, goods to be sent freight paid.
Shah sent goods costing Rs.1,60,000 and septum Rs.15,000 on freight forwarding etc. Rao accepted
a bill of exchange for Rs.1,60,000 immediately on receiving the consignment. His expenses were Rs.2,000
as rent and Rs.1,000 as insurance. Rao sold 3/4 of the goods for Rs.1,95,000. Half of the sales were on
credit and one customer failed to pay Rs.4000.
Give consignment account and Rao‘s Account in the books of Shah and important ledger accounts
in the books of Rao.
INLAND BRANCH ACCOUNTS
A firm, having branches, would like to know the profits earned or losses incurred at each branch. The
system of accounting adopted by the firm (known as Head Office) will will depend on the type of branch.
The branches may be classified as under :
(i) Branches receiving goods only from the head office, selling goods only for cash, remitting all
cash received to the head office, expenses being met out of remittance from the head office.
(ii) The branches similar to (i) above, except that the goods are sold both for cash and credit.
(iii) The branches similar to (ii) except that the head office sends to the branches goods at invoice
price.
(iv) Branches functioning as an autonomous unit.
(v) Foreign Branches.
Accounts for the first three types of branches are kept by the head office. The last two types of
branches maintain an independent set of books of account.
Under the category (iii) the goods are invoiced to the branch at selling price (invoice price) by the
H.O. To ascertain correct profit, necessary adjusting entries are recorded to reduce the selling price to
cost price. Similarly closing stock is valued at invoice price. Now for reducing closing stock, stock reserve
is created. Thus the following journal entries will be passed in the books of H.O.
(i) Branch a/c Dr. Invoice value of goods sent.
To goods sent to Branch A/c
(ii) Branch A/c Dr. Cash sent for expenses.
To Bank A/c
(iii) Bank A/c Dr. Cash remitted by the branch to the H.O.
To Branch A/c (Cash consists of sales and receipts from Drs.)
(iv) Branch Stock A/c Dr. Branch stock (at invoice Price) and branch
Branch Debtors A/c Dr. debtors at the end of the year.
To Branch A/c
(v) Goods Sent to Branch A/c Dr. Invoice price on goods sent to branch adjusted.
To Branch A/c (Loading on the goods sent)
(vi) Branch A/c Dr. Invoice value of closing stock adjusted.
To Branch Stock Reserve A/c
(vii) Branch A/c Dr. Profit at branch
(viii) Goods sent to Branch A/c Dr. Goods sent to Branch Transferred.
To Trading A/c
Take an example. A new branch is opened and goods costing Rs.40,000. are sent to it. Further,
Rs.5,000 are sent by the H.O. to the branch for expenses. The branch remits Rs.51,000. as sale proceeds
194
to the H.O. All the goods sent by H.O. has been sold by the branch. Thus it is clear that the branch has
made a profit of 51,000-45,000 = Rs.6,000. This will be recorded in the books of H.O. as follows (without
narrations)
Rs. Rs.
Branch A/c Dr. 40,000
To Goods Sent to Branch A/c 40,000
To Bank 5,000
Bank A/c Dr. 51,000
To Branch A/c 51,000
To P & L A/c 6,000
In the above example, there was no unsold stock. If there is closing stock, it should be valued on the
basis of well-accepted principle, i.e. Cost or market Price, whichever is lower of the two. The journal
entry of the unsold stock will be :
Branch Stock A/c Dr.
To Branch A/c
In case, the branch sells goods on credit, the entry for closing debtors will be :
Branch Debtors A/c Dr.
To Branch A/c
The closing stock and closing Debtors will be shown in the Balance Sheet and transferred to the
Branch A/c next year. It should further noted that Branch is credited when it remits Cash to H.O. This
cash consists of Cash sales and collected from debtors. Branch accounts should not be debited.
Illustration-1 : A Limited opened a branch at Shimla in 2002. Goods were invoiced at cost plus 25%.
From the following prepare ledger accounts in the books of A Limited.
Rs.
Goods sent to Simla (Invoice Price) 40,000
Sales at Simla :
Cash Sales 21,000
Credit Sales 16,000
Cash collected from debtors 14,500
Discount allowed 200
Cash sent to Branch for expenses 4,000
Stock at Branch, 31st Dec.2002 (Invoice Price) 3,200
195
Solution
A. Ltd’s Books
Shimla Branch A/c
Dr. Cr.
Rs. Rs.
2002 To Goods sent to 2002 By Bank (Remittance)
Branch A/c 40,000 Cash sales 21,000
Dec.31 To Bank (Expenses) 4,000 Cash Form Drs. 14,500 35,500
To Bank stock Dec.31 By Branch Stock A/c 3,200
Reserve A/c 640 By Branch Debtors A/c 1,300
To P & L A/c By Goods sent to Branch A/c 8,000
transfer 3,360 (loading)
48,000 48,000
Goods sent to Branch A/c

2002 Rs. 2002 Rs.
Dec.31 To Shimla Branch A/c 8,000 By Shimla Brach A/c 40,000
(Loading)
To Trading A/c 32,000
(transfer)
40,000 40,000
Branch Debtors A/c

2002 Rs. 2002 Rs.
To Sales A/c 16,000 By Cash 14,500
By Discount 200
By Balance c/d 1,300
16,000 16,000
Branch Stock A/c

Rs. Rs.
2002 2002
Dec.31 To Shimla Branch A/c 3,200 Dec.31 By Balance c/d 3,200
2003 To Balance b/d 3,200
Jan.1
Branch Debtors A/c

Rs. Rs.
2002 2002
Dec.31 To Shimla Branch A/c 1,300 Dec.31 By Balance c/d 1,300
2003
Jan.1 To Balance b/d 1,300
196
Branch Stock Reserve A/c
Rs. Rs.
2002 2002
Dec.31 To Balance c/d 640 Dec.31 By Shimla Branch A/c 640
2000
Jan.1 By Balance 640
Stock and Debtors System :

When goods are sent by head office to branch at an invoice price, then this system can be used to
ascertain profit or loss of the branch. Under this system, the following ledger account are opened :
(1) Branch Stock Account
(2) Branch Debtors Account
(3) Branch expenses Account
(4) Branch Adjustment Account, Or
Branch Profit and Loss Account
The Head Office keeps branch assets‘ account as usual.
Entries to be made by the Head Office.
(1) When goods are sent by Head Office to branch at Invoice price.
S.No. Particulars L.F. Rs. Rs.

To Goods Sent to Branch A/c
(Goods sent to branch at an invoice price)
(2) If goods are returned by the branch then
Goods Sent to Branch A/c Dr.

To Brach Stock A/c
(Goods returned by the branch)
(3) When branch expenses are paid by the head office.
Branch Expenses A/c Dr.

To Cash A/c
(Branch expenses paid by head office)
(4) Sales of goods by branch
Cash A/c Dr.

To Branch Stock A/c
(Cash sales at branch)
197
(5) In case of credit sales by the branch
Branch Debtors A/c Dr.

To Branch stock A/c
(Credit sales at branch)
(6) Cash receipts from branch debtors
Cash A/c Dr.

To Branch debtors A/c
(Cash received form branch debtors)
(7) When any amount is spent or discount etc. is allowed on debtors of the branch.
Branch Expenses A/c Dr.

Branch Discount A/c Dr.
To Branch Debtors A/c
(Expenses on branch debtors)
(8) If there is shortage/loss of stock, then
Branch adjustment A/c Dr.

To Branch Stock A/c
(Loss in Stock at branch)
(9) Entry for difference in price i.e. invoice price and cost relating to opening stock at branch goods
sent to branch.

Goods Sent to branch A/c Dr.
To Branch adjustment A/c
(Difference in value passed)
(10) In case of closing stock at branch, reverse entry of the above is to be passed i.e.
Branch Adjustment A/c Dr.

To Branch Stock A/c
(Difference in value passed)
(11) Branch expenses are transferred to branch adjustment account i.e.

To Branch Expenses A/c
(Branch expenses transferred)
198
(12) Transfer of balance of branch adjustment account to general profit and loss account, then

To General Profit & Loss A/c
(Balance being profit transferred)
Note : In case of loss at branch, reverse entry to be passed.

(13) Goods sent to branch is transferred to Purchases account if it is a trading concern and in Trading
account if it is a manufacturing concern.
Illustration-2
A Ltd. has a branch in Calcutta. Goods are invoiced at cost plus 25%.
Opening Balance 2002
Stock 3,200
Debtors 1,300
Goods sent to Branch (Invoice price) 75,000
Sales at Calcutta
Cash Sales 32,000
Credit Sales 38,000
Cash collected from Debtors 33,400
Discount allowed 400
Bad Debts written off 250
Cash sent to Branch for expenses 5,500
Stock at end 7,900
Branch Stock A/c

2002 2002
Jan.1 To Balance b/d 3,200 To Cash Sales 32,000
To goods sent to By Branch Debtors 38,000
Branch A/c 75,000 By Branch Adjustment A/c 300
78,200 78,200
Goods sent to Branch A/c

2002 2002
Dec.31 To br. Adjustment By Br. Stock A/c 75,000
A/c (loading) 15,000
To Trading A/c
(Transfer) 60,000
75,000 75,000
199
Branch Stock Reserve A/c
2002 2002
Dec. 31 To Br. Adjustment A/c 640 Jan.1 By Balance b/d 640
To balance c/d 1,580 Dec.31 By Branch Adj. A/c 1,580
Branch Debtors Account

2002 2002
Jan. To Balance b/d 1,300 by Cash 33,400
To Branch Stock By Branch Exp. A/c
(cr. Sales) 38,000 Discount 400
Bad Debts 250 650
Dec.31 By Bal. c/d 5,250
39,300 39,300
Branch Adjustment A/c

2002 2002
Dec.31 To Be Stock Reserve Dec.31
(closing stock) A/c 1,580 By Stock Reserve 640
To br. Stock A/c 300 (opening stock)
(shortage)
To Br. Exp. A/c 7,150 By Goods sent to br. A/c 15,000
To P & L A/c 6,610
15,640 15,640
Branch Expenses A/c

2002 To Cash 6,500 2002 By Branch Adjustment A/c 7,150
To branch Dr.s A/c Dec.31
Discount 400
Bad Debts 250 650
7,150 7,150
* This is the balancing figure.
Illustration-3
Agra head office supplies goods to its branch at Alwar at invoice price which is cost plus 50%. All
Cash received by the branch is remitted to Agra and all branch expenses are paid by the head office.
From the following particulars related to Alwar Branch for the year 2006, prepare Branch debtors account
200
Branch stock account and Branch Adjustment Account in the books of the head office so as to find out
the gross profit and net profit made by the branch.
Rs.
Stock with Branch on 1.1.2006 (at invoice price) 66,000
Branch Debtors on 1.1.2006 22,000
Petty cash balance on 1.1.2996 500
Goods received from head office (at invoice price) 2,04,000
Goods returned to Head Office 6,000
Credit Sales 87,000
Sales Returns 3,000
Allowance to customer on selling price
(already adjusted while invoicing) 2,000
Cash received from debtors 93,000
Discount allowed to debtors 2,400
Expenses (cash paid by Head Office)
Rs.
Rent 2,400
Salaries 24,000
Petty Cash 2,000 28,400
Cash Sales 1,06,000
Stock with Branch on 31.12.2006 (at invoice price 69,000
Petty Cash balance on 31.12.2006 100
[Delhi B.Com. (Pass) 2001]
Solution
In the books of Agra Head Office
Alwar branch debtors accounts
Dr. Cr.
Particulars Rs. Particulars Rs.
To Balance b/d 22,000 By Branch Cash A/c 93,000
To Branch stock A/c By Branch Expenses A/c
(credit sales) 87,000 (Discount allowed to Debtors) 2,400
By Sales Returns 3,000
1,09,000 1,09,000
201
Dr. Alwar Branch Stock Account Dr.
To balance b/d 66,000 By branch A/c-cash sales 1,06,000
To Goods sent to Branch A/c 2,04,000 By Branch Debtors A/c-credit sales 87,000
To Branches Debtors A/c By Branch Adjustment A/c
Sales Return 3,000 Allowance to customer
On selling price (already
Adjusted while invoicing) 2,000
By Goods sent to branch A/c
Returns to H.O. 6,000
By Shortage-in-stock A/c 3,000
2,73,000 2,73,000
Alwar Branch Adjustment Account

Dr. Cr.
To Stock reserve A/c 23,000 By stock reserve A/c
To Goods sent to Branch A/c (66,000 × 50/150) 22,000
(6000 × 50/150) 2,000 By Goods sent to Branch A/c
To Branch stock A/c 2,000 (2,04,000 × 50/150) 68,000
To Shortage (Load) 1,000
To Gross profit c/d 62,000
90,000 90,000
To Branch expenses A/c By Gross profit b/d 62,000
Rent 2,400
Salaries 24,000
Petty exp. 2,400 28,800
(500 + 2000 - 100)
To Branch debtors A/c discount 2,400
To Shortage (cost) 2,000
To Net profit 28,800
62,000 62,000
Illustration-4
Delhi Head Office supplies goods to its branch at Kanpur at Invoice Price which is cost plus 50%.
All Cash received by the branch is remitted to Delhi and all branch expenses are paid by the head office.
From the following particulars related to Kanpur branch for the year 2006 prepare :
(i) Branch Account, and
(ii) Branch Stock Account, Branch Debtors Account, Branch expenses A/c and Branch Adjustment
account in the books of the head office so as to find out the gross profit and net profit made
by the branch.
202
Rs.
Stock with branch on 1.1.06 (at invoice price) 60,000
Branch Debtors on 1.1.06 12,000
Goods received from head office (at invoice price) 1,86,000
Goods returned to head office 3,000
Credit sales less returns 84,000
Allowances to customer at selling price
(already adjusted while invoicing) 2,000
Cash received from Debtors 90,000
Discount allowed to Debtors 2,400
Expenses (Cash paid by head office):
Rent 2,400
Salaries 24,000
Petty Cash 1,000 27,400
Cash sales 1,04,000

Stock with Branch on 31.12.06 (at invoice price) 54,000
[Delhi, B.Com. (Hons.) 1 Yr. 1889]
[Delhi, B. Com. (Pass), 1997]
Branch Debtors Accounts

Dr. Cr.
To Balance b/d 12,000 By Cash Received 90,000
To Credit Sales 84,000 By Discount Allowed 2,400
By balance c/d 3,600
96,000 96,000
Branch Stock Account

Dr. Cr.
To Balance b/d 60,000 By Cash Sales 1,04,000
To Goods Sent to Branch 1,86,000 By Credit sales 84,000
By Goods Sent to H,P. (Returned) 3,000
By Shortage (Loss) 1,000
By balance (Given) 54,000
2,46,000 2,46,000
203
Kanpur Branch Account
Dr. Cr.
To Stock 60,000 By Cash-Remittance
To Branch Cash 12,000 Cash Sales 1,04,000
To Petty Cash 10 Cash from Debtor 90,000 1,94,000
To Goods Sent to Branch 1,86,000 By Goods Sent to H.O. (Returns) 3,000
To Reserve for returns (1/3 of By Stock Reserve (1/3 of 60,000) 20,000
3,000) 1,000 By Reserve for Goods Sent (1/3 of 1,86,000) 62,000
To Stock Reserve (1/3 of By Stock at Branch (Given) 54,000
54,000) 18,000 By Branch debtors A/c 3,600
To Branch Expenses 27,400 By Petty Cash 100
To Cash (Petty expenses) 90
To Profit transferred to Gen.
P & L A/c
32,200
3,36,700 3,36,700
Branch Adjustment Account

Dr. Cr.
To Reserve for returns 1,000 By Stock Reserve 20,000
To Stock reserve 18,000 By Reserve for Goods Sent 62,000
To Shortage 333
To Profit transferred to P & L A/c 62,667
82,000 82,000
Branch Expenses Account

Dr. Cr.
To Cash 27,310 By Profit & Loss A/c 27,310
Branch Profit and Loss A/c

Dr. Cr.
To Branch Expenses 27,400 By Profit & Loss A/c 62,667
To Branch debtors (Discount A/c) 2,400
To Loss (Shortage) 667
To Net Profit 32,200
62,667 62,667
204
UNIT -- 4
JOINT VENTURES
Joint Venture What is it?

A Joint venture is a contract between two or more persons who agree to do a small piece of
commercial undertaking jointly. It is a temporary partnership, without the use of a firm name limited or
restricted to a particular venture in which the two or more persons agree to contribute a specific amount
of capital and to share profits or losses either in equal proportions or in any other agreed proportion.
Nature of Joint Venture
A Joint venture may be in connection with a joint cosignment of goods, and under-writing* of shares
or debentures of a new joint stock company, speculation in shares, the construction of a building jointly,
the purchase and sale of a particular plot of land or any other similar temporary or seasonal business
enterprise. Once the joint undertaking is complete and over; the joint venture or limited partnership ends
and no liability will then attach to any party.
Advantages of a Joint Venture
Sometimes a party may be in a position to buy goods at a much lower cost and on far better terms
than others. a second party may be in a position to sell the same at an exceptionally good price. Or, it
may so happen that merchandise is bought cheap at one place by one party and when sent to another
place it can be sold at a higher price by the second party. A third party may have financial resources but
may not be in a position either to buy at lower price or to sell at higher price. A combination of all these
parties in a common venture may result in a successful and remunerative business.
Consignment VS. Joint Venture
The points of difference between the two may be stated as under :—
Points of Difference Consignment Joint Venture

1. Relationship The Consignor is principal- Relationship between
while the consignee is Coventures is that of the
agent. Partners.
2. Nature of Business Agent is not necessarily a It is a partnership (Though
partner, hence it is not a temporary) since Co-venturers
partnership. are partners.
3. Powers Consignee being an agent Co-ventures enjoy full
is simply a servant and has powers as to sale and pur-
to obey the instructions of chase of goods and collec-
the Principal tions of dues etc.
*Underwritng means undertaking the responsibility that shares or debentures issued by company will
be taken up by the public. If the public does not take them, the underwriters agree to take up the shares
or debentures.
4. Scope Consignment is concerned Joint Venture may be
only with the sale of undertaken for any type of
movable goods. legal business e.g. construc-
ction of roads, building etc.
in addition to purchase and
sale of goods.
5. Finance Consignor (Principal) provides Funds are provided by the
the funds. Co-Ventures.
6. Profits and commission The Consignee is entitled Profits (or losses) are
to receive only commission shared by the Co-ventures
and reimbursement of his in the predetermined ratios
expenses. No share in the or equally in the absense of
profits or liability for losses. an agreement. Commission
may or may not be granted to
Co-ventures.
7. Number of Persons There are normally two The number of Co-venturers
parties namely the principal will be at least two though it
and the agent. may be more than two with
equal status i.e. that each is
a principal and agent at the
same time like partners.
Record of Transactions
No Separate sets of Books :

It may be arranged that one of the parties will alone manage the joint venture, that is he alone will
look after the buying and the selling on joint account. He may, for this service, be allowed certain
commission by other parties to the joint venture. Under such a circumstance he will open a Joint Venture
Account with such and such person‘‘ in his books. The Joint venture account will be debited with the cost
of goods and with expenses incurred by him, his cash account will be credited. If he is entitled to a
commission, joint venture account will be debited and commission account will be credited. When he sells
goods on joint account, joint venture account will be credited and cash or debtor‘s account will be debited.
Each party may remit his proportion of cost, which will be placed to the credit of the party‘s account.
This amount plus the share of profit will then be repaid to that party. The joint venture account will then
be balanced. The balance of this account will represent either profit or loss which proportionately be
credited or debited respectively to the other party‘s account. The amount due to other parties will then
be remitted to them by the party recording account of joint venture dealings.
But it may so happen that each party to the joint venture might effect transactions independent of
others. Under such a case each party would record in his own books the transaction that has entered into
on joint account. That it has own book, each will open one, ‗‗Joint Venture Account with such and such
person.‘‘ He will debit the joint venture account and credit cash for goods purchase and expenses incurred
by him on joint venture. If he supplies goods from his own stock, he will debit joint venture account and
credit goods or sales account. When the venture is complete each party will sent to the other details of
the transactions effected by him and as they appear in the joint venture account in his own books. On
receipt of such a statement the other party will make suitable entries indicated below.
The joint venture account in each party‘s books, will be debited with the cost of the goods purchased
and expenses incurred by the other party or parties, the corresponding credit being given to the personal
account of the other party or parties. Similarly, the other party‘s account will be debited with sale proceeds
received by him, the corresponding credit being given to the joint venture account. The joint venture
account will not be closed in each party‘s books the balance indicating either profit or loss which will be
credited or debited proportionately to the other party‘s personal account and to his own profit and loss
account (his share). The balance on the personal accounts of the other parties will then indicate their
relative position with each other.
Where No Separate Set of Books is Maintained
(A) Recording in the Books of Each Party?

Under this method Co-Venture will prepare two accounts namely (i) Joint Venture Account and (ii)
The Personal Account of other Co-Ventures.
Notes : (a) Joint Venture account, being a nominal account, is prepared to find out profit of loss of
the Venture. Personal account(s) of the other Co-Venture‘s) is prepared to find out the amount due from
or amount due to him.
(b) It must be made clear that each Co-Ventures has his own separate business and these
transactions are in addition to what he records in respect of his independent business.
A summary of accounting entries in respect of joint venture transactions in the books of any co-
venture is given below :—
(a) Transaction of the person recording the same.
1. Cash Contributed or Goods Purchased in Cash for Joint Venture :
Joint Venture Account Dr.
To Cash/Bank Account
2. Goods Supplied from own stock for Joint Venture
To Purchase Account
Note : If the goods are supplied at a price other than cost price, then Sales Account will be
credited.
3. For Paying Expenses
To Cash/Bank Account
4. For Sale of Goods for Cash
Cash Account Dr.
To Joint Venture Account
5. For Sale on Credit
Debtor‘s Account Dr.
6. Cash received from Debtors
Cash/Bank Account Dr.
To Debtors Account
7. Discount allowed or bad debts
to Debtors account
8. Cash or Bills Receivable received from other Co-Venturer(s)
Cash/Bank/Bills receivable Account Dr.
To (Other) Co-Venture‘s Personal Account
9. Cash or Bills Payable given to Co-Venture
(Other) Co-Venture‘s Personal Account Dr.
To Cash/Bank/Bills Payable Account
10. Commission/Salary etc. Receivable
To Commission/Salary etc. Account
11. Unsold Stock of Joint Venture taken into Stock
Purchase Account Dr.
(b) Transaction of the other Co-Venturer.
12. Cash Contributed or goods contributed or goods purchased for Cash or on Credit
for Joint Venture.
To (Other) Co-Venturer‘s Account
13. Any Expenses paid or discount allowed by him or any bad debts incurred by him
for joint Venture.
To (Other) Co-Venture‘s Account
14. Goods sold for cash or on Credit by other Co-Venturer(s).
(Other) Co-Venturer‘s Account Dr.
15. Commission or Salary payable to Co-Venturer
To (Other) Co-Venturer‘s Account
16. Unsold Stock taken by Co-Venturer(s)
(Other) Co-Venturer‘s Account Dr.
17. Profit or Loss on Joint Venture
(c) (i) For Profit
To Profit and Loss Account
(For the person recording the transaction)
To (Other) Co-Ventures Account
(For the share of other Co-Venturer)
(ii) For Loss
Profit And Loss Account Dr.
(For the share of self)
(Other) Co-Ventures Account Dr.
(For the share of other co-venturer)
(d) Final Settlement of account
(i) For Cash or Bill Receivable received
Cash or Bills Receivable Account Dr.
To (Other) Co-Venturers Account
(ii) For Cash or Bills Payable Given
(Other) Co-Venturers Account Dr.
To Cash or Bills Payable Account
Important :
(a) When any co-venturer receives cash from debtors for credit sales there is no entry in the books
of other Co-Venturers(s).
(b) When one Co-Venturer allows cash discount to and/or incurs bad debts on debtors, the entry
is :
To (other) Co-Venturer‘s Account
(c) The procedure adopted for valuing the closing stock is similar to the valuation of consignment
stock. Accounting treatment for unsold stock is :
(i) When Joint Venture account is only closed (though Joint Venture business is continuing),
closing stock is credited to Joint Venture Account as By balance c/d.
(ii) When Joint Venture Account business is finally closed the unsold stock is taken over by
co-venturer(s) at agreed value. But if the examination problem is silent as to its distribution
by co-ventures at agreed values it should be distributed in the profit sharing ratio by
debiting the purchase account and co-venturer‘s account and crediting the Joint Venture
Account.
Example of a Joint Venture where no Separate Set of Bok’s are Needed :
Illustration-1
A of Ahemdabad and B of Bombay enter into a joint venture to consign 100 bales of cotton to C of
Ceylon to be sol by the latter on the joint risk of A and B, sharing in proportion of 3/5 and 2/5 respectively.
A sends 60 bales at Rs.1,3000 each, paying freight and other charges amounting to Rs.900 B sends 40
bales at Rs.1,250 each and pays for freight and other charges Rs.800. All the bales are sold by the
consignee for rs.1,50,000 out of which he deducts Rs.1,600 for his expenses and his commission at 3 per
cent. He remits a bank draft for rs.70,000 to A and the balance to B in a separate draft.
Give the necessary ledger account to record these transaction in the books of A and B.
A’s Ledger
Dr. Joint Venture account with B Cr.
Rs. Rs.
To Goods A/c 78,000 By cash (recd. from C) 70,000
To Cash (Exps.) 900 By B (recd. from C*) 73,900
To B (Goods) 50,000
To B (Expenses) 800
To B (Profit) 5,680
To P & L A/c 8,520
1,43,900 1,43,900
*It is never called as B‘s Capital A/c since A and B are not partners.
Dr. B’s A/c Cr.
Rs. Rs.
To Joint Venture A/c By Joint Venture A/c
(Cash recd. from C) 73,900 —Goods 50,000
By Joint Venture A/c—exps. 800
By Joint Venture A/c—Profit 5,680
73,900 73,900
To Balance b/d 17,420
Rs.
Total Sales By C = 1,50,000
Less=his expenses 1,600
Less-his commission 3% of 1,50,000 4,500
6,100
Balance 1,43,900
Less amount sent to A 70,000
*Amount received by B 73,900
B’s Ledger
Dr. Joint Venture Account with A Cr.
Rs. Rs.
To Goods A/c 50,000 By Cash (received from C) 73,900
To Cash (Exps.) 800 By A (received from C) 70,000
To A (Goods) 78,000
To A (Expenses) 900
To A (Profit) 8,520
To P & L A/c 5,680
1,43,900 1,43,900
Dr. A Cr.
To Joint Venture A/c (From C) 70,000 By Joint Venture A/c—Goods 78,000
To Balance c/d 17,420 By Joint Venture A/c—Exps. 900
By Joint Venture A/c—Profit 8,520
87,420 87,420
Alternative Method :
On receipt of details of transactions effected by other parties, each party may prepare, in his books,
a ‗‗Memorandum Joint Venture Account (Memorandum Joint Venture is similar to Joint venture A/c) by
combining all this information received from other parties. The memorandum joint venture account is
prepared only to find out the profit or loss made. It is not a part of accounts. As part of accounts, only
the account of the other party under the style, say, Joint Venture with ‗‗B‘‘ A/c‘‘ is opened. This account
is debited with expenditure incurred venture this account is credited. The share of profit (as ascertained
by the memorandum joint venture account) is debited to this account and credited to Profit and Loss A/
c. This account will then show the amount due to or by the other party and will be closed by remittance
from one to the other party.
The above illustration is now worked out according to this method.
A’s Ledger
Joint Venture with ‘B’ Account
Dr. Cr.
Rs. Rs.
To Goods A/c 78,000 By Cash 70,000
To Cash (Exps.) 900 By Balance c/d 17,420
To Profit & Loss A/c 8,520
87,420 87,420
To balance b/d 17,420
B’s Ledger
Joint Venture with ‘A’ Account
Dr. Cr.
Rs. Rs.
To Goods A/c 50,000 By Cash 73,900
To Cash 800
To Profit & Loss A/c 5,680
To Balance c/d 17,420
73,900 73,900
By balance b/d 17,420
Memorandum Joint Venture A/c
Rs. Rs.
To A (goods) 78,000 By A Cash 70,000
To A (Exp) 900 By B Cash 73,900
To B (goods) 50,000
To B Exp. 800
To Profit A 8520
B 5680
1,43,900 1,43,900
*It is never called as B‘s Capital A/c since A and B are not partners.
Illustration-2
A of delhi and B of Bangalore entered into a Joint Venture for purchases and sales of one lot of
Mopeds. The cost of each Moped was Rs.3,000 and the fixed retail selling price Rs.3,000 The following
were the recorded transactions :
2002
Jan. 1
A Purchase 100 Mopeds paying Rs.72,000 in cash on account.
A raised a loan from Canara Bank for Rs.50,000@ 18% p.a. interest, repayable with interest on
1.3.2002.
A forwarded 80 Mopeds to B incurring Rs.2,880 as forwarding and insurance charges.
Jan.7
B received the consignment and paid Rs.720 as clearing charges.
Feb.1
A sold 5 Mopeds for Cash
B sold 20 Mopeds for Cash
B raised a loan of Rs.1,50,000 from Union Bank repayable with interest at 18% p.a. on 1.3.2002.
B telegraphically transferred Rs.1,50,000 to A incurring charges of Rs.50 A paid balance due for the
Mopeds.
Feb. 26
A sold the balance Mopeds for Cash
B sold the balance Mopeds for Cash
A paid selling expenses Rs.5,000
B paid selling expenses Rs.20,000
March. 1
Accounts settled between the venturers and loans repaid. Profit being appropriated equally.
You are required to show :
(1) The Memorandum Joint Venture Account.
(2) Joint Venture with B Account in A‘s Books.
(3) Joint Venture with A Account in B‘s Books.
You are to assume that each venturer recorded only such transactions concluded by him.
Solution :
Memorandum Joint Venture Account
For the period between Jan 1 to March 2002
To A Rs. By Sales Rs.

Cost of Mopeds 3,60,000 A (20 × 4,500) 90,000
Forwarding and Insurance 2,880 B (80 × 4, 500) 3,60,000
Interest on Bank Loan 1,500
To B
Clearing Charges 720
Interest on Bank Loan 2,250
Sundry Expenses
(Telegraphic transfer Charges) 50
To Net Profit
A 28,800
B 28,800 57,600
4,50,000 4,50,000
Books of ‘A’
Joint Venture with B Account
To Bank (Part payment of Cost) 72,000 By Bank (Sale proceeds) 22,500
To Bank (Forwarding Charges) 2,880 By Bank (Remittance from B) 1,50,000
To Bank (Balance cost of purc- By Bank (Sale proceeds) 67,500
hase) 2,88,000 By Bank (Cash recovered 1,58,180
To Bank (Selling expenses) 5,000 in settlement)
To Bank (Interest on Bank Loan) 1,500
3,98,180 3,98,180
Books of ‘A’
Joint Venture with A Account
To Bank (Clearing Charges) 720 By Bank (Sale
To Bank (Remittance plus telegraphics proceeds 20 Mopeds) 90,000
transfer charges) 1,50,050 By bank (Sale proceeds of 2,70,000
To bank (Selling expenses) 20,000 60 Mopeds)
To Bank (Interest on Bank Loan) 2,250
To Profit and Loss Account
To Bank (payment in settlement) 1,58,180
3,60,000 3,60,000
Separate Books for Joint venture :

A complete set of separate books is opened to record the joint venture transactions when buying and
selling on account of joint venture is managed by one of the parties and all the transactions are recorded
at the place of business. In this case the recorded of transactions does not differ in any way from ordinary
partnership transactions. The parties to the joint venture usually contribute their share of money to carry
out the joint venture dealings. This money is put in a joint banking account. The parties‘ personal accounts
are credited and the joint banking account debited. The joint venture account will be debited with the cost
of goods purchased, and expenses incurred and for this the joint banking A/c will be credited. Joint banking
account is debited. The joint venture account will be debited with the cost of goods purchased, and
expenses with the sale proceeds and the joint venture A/c will be credited. Finally, if any stock remains
unsold, it may be taken over by one of the parties. The party‘s A/c will then be debited and the joint
venture A/c will be credited with the agreed value. The joint venture A/c will then be balanced and the
profit or loss will be transferred to the parties‘ personal accounts. The amount due to each will be paid
out from the joint bank A/c and thus the books of account will be closed.
‘‘Summary of Journal Entries’’

(1) Amount contributed or invested by the Co-Venturers.
Joint Bank Account Dr.
To Co-Venturer‘s Capital Accounts (Individual)
(2) Goods or any other item contributed by a co-venturer or expenses paid by him.
To Co-Venturer‘s Capital Account
(3) For purchase of goods for cash.
To Joint Bank Account
(4) For purchase of goods on Credit.
To Creditor‘s (Suppliers) Accounts
(5) For expenses on Joint Venture.
(6) For good sold (Cash).
(7) Sale on Credit
Debtor‘s (Consumers) Account Dr.
(8) Payment to creditors in cash or issue Bills payable.
Creditors Account Dr.
To Bills Payable Account
(9) Cash or Bills Receivable received from debtors.
Joint bank Account Dr.
Bills Receivable account Dr.
To Debtor‘s Account
(10) Any Commission, salary, interest etc. payable to any Co-Venturer.
To Co-Venturer‘s Account
(11) Part of the stock taken by Co-Venturer
Co-Venturer‘s Account Dr.
To Joint venture Account
(12) For profit on joint venture.
To Co-Venturer‘s Account
(13) For loss on joint venture.
To Joint venture Account
(14) Settlement of the account of each party.
Note: Discount received should be Debited to Creditor‘s account and Credited to Joint Venture
Account. Similarly discount allowed and bad debts should be Debited to Joint Venture Account and
Credited to Debtor‘s Account.
Illustration-3 (Construction of a building)

A and B entered into a joint Venture to construct a building for a newly started Tools India. Ltd.
The Contract price was fixed at Rs.20 Lakhs to be settled as follows :—
Rs.8 lakhs in cash
Rs. 2 lakhs in fully paid preference shares.
A joint bank account is opened in which A and B deposited Rs.2,50,000 and rs.1,50,000 respectively.
The profit or loss is to be shared in the ratio of 2 : 1 after providing for interest on Capital at 10%.
The details of their transaction are :
Plant Purchased 2,00,000
Wages Paid 1,00,000
Material Purchased 7,00,000
Material supplied by A from his own stock 50,000
Material supplied by B from his own stock 40,000
Architect‘s fees paid By A 20,000
The contract was completed and the price was received as stipulated. Half of the plant was taken
over by A for Rs.80,000 and half was sold for Rs.1,10,000.
Joint Venture Account was closed by A taking up all the shares at an agreed valuation of Rs.1,60,000
and B taking up the stock of material at an agreed valuation of Rs.30,000 separate books were maintained
for the Joint Venture. Give ledger accounts.
Solution
Joint Venture Account
To Joint Bank (Plant) 2,00,000 By Joint Bank Account
To Joint Bank (Wages) 1,00,000 (Contract Price) 8,00,000
To Joint Bank (materials) 7,00,000 By Share Account
To A (Stock) 50,000 (Contract Price) 2,00,000
To B (Stock) 40,000 By A (1/2 Plant takeover) 80,000
To A (Architect‘s fees) 20,000 By Joint Bank Account
To A (Interest) 25,000 (1/2 Plant sold) 1,10,000
To B (Interest) 15,000 By B (Materials tekenover) 30,000
To Share‘s Account (Loss) 40,000
To A (2/3 Share of profit) 20,000
To B (1/3 Share of profit) 10,000
12,20,000 12,20,000
Joint Bank Account
To A‘s Account 2,50,000 By Joint Venture Account

To B‘s Account 1,50,000 (Plant) 2,00,000
To Joint Venture Account By Joint venture Account
(Contract Price) 8,00,000 (Wages) 1,00,000
To Joint Venture Account By Joint Venture Account (Materials) 7,00,000
(Sale of Plant) 1,10,000 By A (Refund of Capital) 1,25,000
By B (Refund of Capital) 1,85,000
13,10,000 13,10,000
A’s Account
To Joint Venture By Joint Bank (Capital) 2,50,000

(Plant taken over) 80,000 By Joint Venture (Stock) 50,000
To Shares 1,60,000 By Joint Venture (Architects‘s
To Joint bank 1,25,000 fees) 20,000
By Joint Venture (Interest) 25,000
By Joint venture (Profit) 20,000
3,65,000 3,65,000
B’s Account
To Joint Venture (Material) 30,000 By Joint bank 1,50,000
To Joint bank 1,85,000 By Joint Venture (Stock) 40,000
By Joint Venture (Interest) 15,000
By Joint Venture (Profit) 10,000
2,15,000 2,15,000
In the books of ‘A’
Joint Venture Investment Account
To Cash (Capital) 2,50,000 By Bank Account 1,25,000
To Cash (Architect‘s fees) 20,000 By Shares 1,60,000
To Stock 50,000 By Plant taken over 80,000
To Interest 25,000
To Profits 20,000
3,65,000 3,65,000
In the books of ‘B’

Joint Venture Investment Account
To Cash 1,50,000 By Materials taken over 30,000
To Stock 40,000 By Bank 1,85,000
To Interest 15,000
To Profits 10,000
2,15,000 2,15,000
Notes : (1) Joint Venture transactions are recorded in a separate set of books meant for Joint Venture
and not in the books of either of the co-venturers.
(2) Though plant is an asset it is simply transferred to Joint Venture Account to be used for Joint
Venture. The depreciation value of the plant is recorded on the credit side of the Joint Venture Account.
However, in this illustration since half of the plant is taken over by Co-Venturer (A) and the other half
is sold, the amounts are credited to Joint Venture account, and A‘s Account and Joint bank Account are
debited respectively.
(3) Interest on Capital is calculated @ 10% for one year.
Construction of Building, Bridges, Roads etc.
Such works are usually undertaken for joint stock companies which become contractee. Price is
usually received partly in cash and partly in the form of shares and debentures. The joint venturers have
to sell these shares/debentures in order to determine the overall profits/loss of the Venture. The shares/
debentures may be either sold in the market or one or more co-venturers may take them at an agreed
price. The additional entries, then are made as follows :
(1) For Contract price Contractee‘s (Company‘s) Account Dr.
becoming due To Joint Venture Account
(2) On receipt of contract Joint Bank Account Dr. (for cash)
price Shares Account Dr. (for shares/debentures
To Contractee (Company)
(3) On Sale of shares/ Joint Bank Account Dr.
debentures Co-Venturers Account Dr.
To Shares/Debentures Account
(4) For profit on sale of Shares/Debentures Account Dr.
shares/debentures To Joint Venture Account
(5) For Loss on sale of Joint Venture Account Dr.
shares/debentures To shares/Debentures Account
Illustration-4 (Construction of a Building)
A, B and C enter into a joint venture for supervision of the construction of a multistory building for
a joint stock company for a contract price of Rs.1,00,000.
Incidental expenses might have to be paid by the Venturers but as per agreement they are entitled
to be re-imbursed to the extent of actual such expenditure or Rs.5,000 whichever is less. In this way A
spends Rs.4,000; B Rs.5,000 and C Rs.6,000. The Venturers are to share profits and losses equally but
C being a technical person, is entitled to a special commission of 10% of the profit of the venture after
charging such commission. They open a joint bank account to which A contributes Rs.20,000, B Rs.15,000
and C Rs.15,000. B also gives his own plant to the venture for which he charges Rs.8,000. Materials are
purchased for Rs.20,000 and wages amount to Rs.30,000.
At the end of the Venture the company paid the agreed contract price (keeping Rs.10,000 as retention
money) to the extent of Rs.30,000 in cash and the balance in equity shares of the company of Rs.10 at
an agreed value of Rs.12 per share. The shares are subsequently sold in the market @ Rs. 13 per share.
Unused materials costing Rs.2,000 are taken over by A at Rs.1,000. The plant is taken back by B at an
agreed value of Rs.2,000 C takes up the retention money at Rs.7,000.
Show necessary ledger accounts in the books of the venturer.
Solution :
Rs. Rs.
To A 4,000 By Joint Bank Account 30,000
B 5,000 By Shares Account 60,000
C 5,000 14,000 By Shares Account
To B (Plant) 8,000 (Profit on sale) 5,000
To Joint Bank Account By A (Unused materials) 1,000
Materials 20,000 By B (Plant 2,000
Wages 30,000 50,000 By C (Retention money) 7,000
To C (Commission) 3,000
10% of Rs. 30,000
1/11 of Rs. 33,000 3,000
To Net Profit :
A 10,000
B 10,000
C 10,000 30,000
1,05,000 1,05,000
A’s Account
To Joint Venture By Joint Venture Rs.
(Unused materials) 1,000 (Incidental expenses) 4,000
To Joint Bank Account 33,000 By Joint Bank 20,000
By Joint Venture—Profits 10,000
34,000 34,000
B’s Account
To Joint venture (Plant) 2,000 By Joint Venture
To Joint Bank 36,000 (Incidental expenses) 5,000
By Joint Bank Account 15,000
By Joint Venture Plant 8,000
By Joint Venture-Profit 10,000
38,000 38,000
C’s Account
To Joint Venture (Retention By Joint Venture (Incidental
money) 7,000 expenses) 5,000
To Joint Bank Account 26,000 By Joint Venture
(Commission) 3,000
By Joint bank Account 15,000
By Joint Venture-profits 10,000
33,000 33,000
Joint Bank Account

To A 20,000 By Joint Venture
To B 15,000 Materials 20,000
To C 15,000 Wages 30,000 50,000
To Joint Venture (Contract Price) 30,000 By A 33,000
To Shares Account (sale of shares) 65,000 By B 36,000
By C 26,000 95,000
1,45,000 1,45,000
Illustration-5 (Development of land state)

A and B enter into a joint venture to purchase and develop certain lands as Industrial Estate. For that
purpose, a Joint bank Account was opened wherein A deposited Rs.60,000 and B deposited Rs.40,000.
A piece of land measuring 18,000 sq. meters was purchased at Rs.3 per sq. meter. The following
expenses were paid from the Joint Bank Account :
Rs.
Cost of earth filling to level land 14,000
Compensation paid to a human dweller for vacating possession 5,000
Municipal Taxes 2,000
Cost of barbed fire fence 3,000
Architect‘s fees for plans 1,000
Stamp duty and Solicitor‘s fees 6,000
General expenses 2,000
Income from sale of timber 2,000
It was decided to sell land in smaller plots of 500 sq. metres each. One sixth of the area was left
over for public lands. 10 plots were sold at Rs.20 per sq. metre through the brokers who were paid 2%
brokerage on the sale price of land.
A retained one plot for his personal use at an agreed price of Rs.3,000 The remaining plots were sold
at a consolidated price of Rs.76,200 directly. A and B shared profits (or losses) of the Joint Ventures in
the proportion of the amounts invested by them. All transactions have been effected through the bank.
Prepare joint venture account, joint bank account and accounts of A and B assuming that all accounts
are settled.
Solution :
Total land purchased 18,000 sq. meters
Less: 1/6th left for public roads 3,000 sq. meters
land available for sale of 30 plots. 15,000 sq. meters
Each plot measures 500 sq. metres
15,000
hence, there are = 30 plots.
500
(2) Sales
(a) 10 plots i.e. 10 × 500 sq. metres
= 5,000 sq. metres @ Rs.20 per sq. metre
= Rs. 60,000 less 2% of this as brokerage
= 60,000—1,200 58,800
(b) One plot to A for Rs. 5,000
(c) Remaining 19 plots sold for 76,200
1,40,000

Rs. Rs.
To Joint Bank : To Joint Bank :
Cost of land 54,000 Sale of timber 2,000
Cost of levelling 14,000 By Joint bank :
Compensation 5,000 Sale of 10 plots
Municipal taxes 2,000 less brokerage 58,800
Cost of fence 3,000 By Proceeds of 19 plots 76,200
Architect‘s fees 1,000 By A‘s Account-plot taken over 5,000
Stamp duty etc. 6,000
General expenses 2,000 87,000
To A‘s Account—(3/5 profit) 33,000
To B‘s Account—(2/5 profit) 22,000
1,42,000 1,42,000
Joint Bank Account
Rs. Rs.
To A 60,000 By Joint Venture A/c
To B 40,000 (cost of land and other
To Joint Venture-sales 1,35,000 expenses) 87,000
To Joint Venture-sale 2,000 By A 88,000
By B 62,000
2,37,000 2,37,000
A
To Joint Venture-cost of plot 5,000 By Joint Bank (Investment) 60,000
To Joint Bank (Settlement) 88,000 By Joint Venture (Profit) 3,000
93,000 93,000
B
Rs. Rs.
To Joint bank (settlement) 62,000 By Joint Bank (Investment) 40,000
By Joint Venture (profits) 22,000
62,000 62,000
Under writing of Shares :

When the co-venturers agree to under write the share of a limited company, they become entitled to
underwriting commission which may be received partly in cash and partly in shares. As per the nature
of the underwriting business the underwriters will have to take up the shares received as commission and
the shares not subscribed by the public. The shares are ultimately sold or taken over by co-venturers at
an agreed price in order to calculate the overall profit or loss on joint-venture. The additional entries are
given below :
(1) On receiving the commission
Joint Bank Account Dr. (for cash)
Shares Account Dr. (for shares)
To Joint Venture account
(2) For subscription of shares not taken over by public
Shares Account Dr.
To Co-Venturers Account
(3) For sale of shares
Co-Venturers Account Dr.
To Shares Account
(4) For profit on sale
Shares Account Dr.
Entry No. 4 will be reversed in case of loss.
Illustration - 6
A and B enter into a joint venture for guaranteeing the subscription at par of 1,00,000 shares of Rs.20
each of a joint stock company. They agree to share profits and losses in the ratio of 2 : 3. The terms
with the company are : 4½% commission in cash and 6,000 fully paid up shares of the company.
The public take up 88,000 of the shares and the balance shares of the guaranteed issue are taken
up by A and B who provide cash equally. The commission in cash is taken by the partners in the ratio
4 : 5.
The entire share holding of the Joint Venture is then sold through brokers : 25% at a price of Rs.9;
50% at a price of Rs.8.75; 15% at a price of Rs.8.0 and the remaining 10% is taken over by A and B
equally at Rs. 8 per share.
Prepare a joint venture account and the separate accounts of A and B showing the adjustment of
final balance between A and B. Ignore interest and income tax.

Rs. Rs.
To Share (Loss on sale) 24,750 By Joint Bank (Commission) 45,000
To A‘s Account 32,100 By Shares (Commission) 60,000
To B‘s Account 48,150
1,05,000 1,05,000
A’s Account
Rs. Rs.
To Joint Bank (Cash Commission) 20,000 By Joint Bank
To Shares 7,200 (Contribution) 60,000
To Joint bank-Final settlement 64,900 By Joint Venture
(Profit) 32,100
92,100 92,100
B’s Account
Rs. Rs.
To Joint Bank (Cash Commission) 25,000 By Joint Bank (Contribution) 60,000
To Shares 7,200 By Joint venture (Profit) 48,150
To Joint bank) Final Settlement 75,950
1,08,150 1,08,150
Shares Account
Rs. Rs.
To Joint Bank (Shares purchased) 1,20,000 By Joint Bank (25%) 40,500
To Joint Venture (Commission) 60,000 By Joint Bank (50%) 78,750
By Joint Bank (15%) 21,600
By A‘s A/c (5%) 7,200
By B‘s A/c (5%) 7,200
By Joint Venture (Loss on Sale) 24,750
1,80,000 1,80,000
Joint Bank Account
Rs. Rs.
To A (Contribution) 60,000 By Shares (purchased) 1,20,000
To B (Contribution) 60,000 By A 20,000
To Joint Venture (Commission) 45,000 By B 25,000
To Shares By A (Final settlement) 64,900
25% 40,500 By B (Final settlement) 75,950
50% 78,750
15% 21,600
3,05,850 3,05,850
Illustration-7
X and Y undertake jointly to build for a newly stated joint stock company for a contract price of
Rs.1,000,000 payable as to Rs.80,000 by instalments in cash and Rs.20,000 in fully paid shares of the new
company. A banking account is opened in the joint name, X contributing Rs. 25,000 and Y Rs,15,000. They
have to share profits and losses in the proportion of 2/3 and 1/3 respectively. Their transactions were as
follows :
Paid wages Rs.30,000
Bought materials Rs.79,000 on credit from Z.
Paid architect‘s fees Rs.3,000
The contract was completed and the price dully received: Z‘s dues were dully paid off. The joint
venture was closed by X taking up all the shares of the company at an agreed valuation of Rs.16,000
and Y taking up unused stock of materials for Rs.3,000 as mutually valued.
Prepare the necessary accounts to record the above transactions.
Solution :
Dr. Joint Bank Account Cr.
Rs.
To X (Capital contributed) 25,000 By Joint venture A/c—Wages 30,000
To Y (Capital contributed) 15,000 By Joint Venture A/c—Architect-
To Joint Venture A/c fees 2,000
(Amount Received from By Z 79,000
contractee) 80,000 By X (Amount returned) 1,000
By Y (Amount returned) 8,000
1,20,000 1,20,000
Z
Rs. Rs.
To Joint Bank Account 79,000 By Joint Venture Account 79,000

Dr. Cr.
Rs. Rs.
To Joint bank A/c—Wages 30,000 By Joint Bank A/c
To Z—Materials 79,000 (Amount received From-
To Joint Bank A/c (Architect‘s fees) 2,000 contractee) 80,000
To Share‘s A/c—Loss 4,000 By Share A/c 20,000
By Y (Materials Taken over) 3,000
By Loss transferred to :
X 2/3 8,000
Y 1/3 4,000 12,000
1,15,000 1,15,000
Dr. Shares Account Cr.

Rs. Rs.
To Joint Venture Account 20,000 By X 16,000
By Joint Venture A/c—Loss 4,000
20,000 20,000
X’s A/c
To Joint Venture A/c By Joint Venture A/c 25,000
Loss 8,000
To Shares a/c 16,000
To Joint Bank A/c 1,000
25,000 25,000
Y’s A/c
To Joint Venture A/c By Joint venture A/c 15,000
(Material) 3,000
To Joint venture A/c
Loss 4,000
To Joint Bank A/c 8,000
15,000 15,000
Illustration-8
A and B enter into a Joint Venture sharing profit and loss equally. A purchased goods for Rs. 5,000
and B spent Rs.3,000 for freight on 1st jan. 2002. On the same day B bought goods worth Rs.10,000 on
credit. Further expenses were incurred as follows :
On 1-2-2002—Rs.1,500 By B
On 1-3-2002—Rs.500 By A
Sales were made against cash as follows :
15-1-2002—Rs.3,000 By A
31-1-2002—Rs.6,000 By B
15-2-2002—Rs.3,000 By A
1-3-2002—Rs.4,000 By B
Creditors for goods were paid as follows :
1-2-2002—Rs.5,000 By A
1-3-2002—Rs.5,000 By B
On 31st March 2002 the balance stock was taken over by B at Rs.9,000 The accounts between the
venturers were settled by cash payment on this date. The venturers are entitled to interest at 12% per
annum.
Prepare necessary ledger accounts in the books of Venturers.
Solution
Memorandum Joint Venture Account
Rs. Rs.
To Cost of goods ; By Sales A 6,000
A 5,000 B 10,000
B 10,000 By Interest B 50
To Freight-B 1,000 By B-Stock 9,000
To Expenses-A 500
B 1,500
To Interest-A 135
To profit—A 3,457
B 3,458
25,050 25,050
A’s Ledger
Joint Venture with B Account
2002 Rs. 2002
Jan.1. To Bank (Purchase) 5,000 Jan 15 By Bank (sale proceeds) 3,000
Feb.1. To bank (Creditors) 5,000 Feb 15 By bank (sale proceeds 3,000
Mar.1. To Bank (Expenses) 500 Mar.15 By Bank (amount
‘‘ 31 To Interest A/c 135 received in settlement) 8,902
To Profit & Loss account-
share of profit 3,457
14,092 14,092
B’s Ledger
Joint Venture with A Account
2202 Rs. 2002 Rs.
Jan.1 To bank (freight) 1,000 Jan 31 By Bank (sale) 6,000
To Creditors (goods Mar.31 By Creditors
bought- on credit 10,000 paid by co-venturer 5,000
Feb 1 To bank (expenses) 1,500 By Bank (sale) 4,000
Mar.31 To Profit & Loss account Mar.31 By Stock account
(share of profit) 3,458 stock taken over 9,000
To bank (amount paid to By Interest account 50
A in settlement
8,092
24,050 24,050
Calculation of Interest
Payment by A
Date Amount Month Int. Till 31-3-2002
@1% p.m.
Rs. Rs.
1-1-2002 5,000 3 150
1-3-2002 500 1 5
1-2-2002 5,000 2 100
255
Amount received by A
@1% p.m.
Rs. Rs.
15-1-2002 3,000 2½ 75
15-2-2002 3,000 1½ 45
120
Net Interest due to A 135
Payment by B
@1% p.m.
1-1-2002 1,000 3 30
1-2-2002 1,500 2 30
1-3-2002 5,000 1 50
110
Amount received by B
@1% p.m.
31-1-2002 6,000 2 120
1-3-2002 4,000 1 40 160
Net Interest due from B 50
Conversion of Consignment into Joint venture :

Some times the consignor and consignee may decide to convert the consignment into Joint Venture
with retrospective effect i.e. from the date of the original consignment agreement. In such a case the
accounts will have to be prepared both on consignment basis and Joint Venture basis to be paid out :
(i) The amounts due to other party by way of commission on consignment basis; and
(ii) By way of profit on the basis of Joint Venture arrangement.
If the other party is entitled to more under the Joint Venture arrangement the following entry is to
be made :
Profit and Loss account Dr.
To Co-Venturer‘s Personal Account
The above entry will be reversed if the co-venturer has already received more than what is due to
him under Joint Venture arrangement.
Illustration-9 (Conversion of Consignment to Joint Venture)

On the 1st January of 2002 Singh of Amritraj, a manufacturer of sports goods, sent a Consignment
of 100 cricket bats to Bose of calcutta to be sold on consignment basis at a commission of 20%, such
commission to cover the consignee‘s expenses but not the freight charges of the goods to Calcutta. The
cost of each bat is Rs.100 but is invoiced to Bose at Rs.150 each. A case containing 10 cricket bats was
lost against which the consignor lodged a claim and collected from the insurance company Rs.800. The
consignee paid Rs.540 as freight charges and spent a further sum of Rs.400 as sales expenses. Consignor‘s
expenses amounted to Rs.500. The consignee accepted a bill of exchange drawn by Singh for 3 months
(beginning with the date of despatch) for Rs.10,000 which bill was discounted at 6% p.a. with the bankers.
Bose sold 75 bats at Rs.200 each and on 30th June 2002 remitted the balance due from him.
After making up accounts on 30th June 2002 the parties decide to convert their relationship to that
of a Joint Venture on the terms that the cost of a bat would be taken at Rs.350, Singh to get an interest
of 8% p.a. on his investment and Bose to get a commission of 10% on sales. Venturers are to share profit
and losses equally.
Prepare the necessary accounts in the books of Singh and indicate the adjustment entry required on
conversion of the terms of despatch.
Solution :
Consignment to Calcutta Account
Rs. Rs.
To Goods sent on consignment 15,000 By Bose (Sale proceeds) 15,000
To Bank (expenses) 500 By Goods sent on consignment
(Loading) 5,000
To Bose (Freight) 540
To Stock reserve (15 × 50) 750 By bank (Insurance Claim) 800
To Bose-Commission 3,000 By Abnormal loss 250
To Profit & Loss Account By Stock on consignment 2,415
(Profit on consignment) 3,675
23,465 23,465
Notes : (1) It is assumed that freight was paid only on 90 bats.

(2) Valuation of closing Stock at Invoice Price
15 bats @ Rs. 150 each Rs. 2,250
540 15
Proportionate freight Rs. 90
90
proportionate Expenses (Consignor)
540 15
Rs. 75
100
Rs. 2,415
(3) Abnormal Loss Rs.
Cost of bats 10 × 100 Rs. 1,000
500 15
Proportionate expenses Rs. 50
100
Rs. 1,050
Less : Amount of Claim 800
250
Memorandum Joint venture Account
Rs. Rs.
To Goods sent on Joint Venture 15,000 By Sales 15,000
To Expenses : Singh 500 By Insurance Claim 800
Bose 940 By Stock 15 bats 2,415
To Interest : Investments 8% on Rs.15,000 for 6 By Loss : Singh 163
months 600 Bose 162 325
To Commission (Bose) 1,500
18,540 18,540
Notes : (1) Interest has been allowed on investment in goods only; the question of expenses and of
claim received cancelling out one another.
(2) For the purpose of Joint Venture no stock reserve is required.
(3) Adjustment is required as under :
Amount already received by Bose (Commission) Rs.3,000
Amount receivable by Bose as co-Venturer :
Commission 1,500
Expenses 400
1,900
Less : Loss to be debited to him 162 1,738
1,262
Entries on Conversion into Joint Venture
Rs. Rs.
(1) Bose Dr. 1,262
To Profit and Loss Account 1,262
(Amount due to Bose under the Joint Venture Arrangement being Rs.3,000 whereas he previously
received Rs.3,000 amount now adjusted)
(2) Profit and Loss Account Dr. 375
To Stock Reserve 375
(Our share of the unrealised profit on unsold stock 50% of Rs.3,000
Exercise :
(1) Das, Bose and Gupta undertake to erect a five storied mansion for National Housing Trust Ltd.
The contract price is agreed at Rs.25,00,000 to be paid in cash Rs.22,00,000 by four equal instalments
and the balance amount in 13% debentures of the company. They agreed to share equally the profits and
losses. They opened a joint banking account with the cash contributed as stated below :
Das Rs.3,00,000; Bose Rs.3,75,000; and Gupta Rs.2,00,000. Das arranges the preparation of the
building plan etc. and pays Rs.32,000 as architects‘s fees; Bose brings a concrete Mixer and other
implements valued at Rs.80,000 and Gupta brings a Motor Lorry valued at Rs.75,000.
They paid out of joint banking account for the following : Materials Rs.12,26,800; Wages Rs.7,32,200;
Sundry expenses Rs.20,000 and plant Rs.60,000.
On Completion of the venture, concrete mixer is sold for Rs.50,000 and plant and other implements
are sold as scarp for Rs.10,000. Gupta Takes back the Motor Lorry at Rs.40,000. Das took over the
Debentures at a valuation of Rs.2,80,000.
Show the necessary accounts for the joint venture.
(Ans. Profit on joint venture Rs.3,54,000; Final payments: Dass Rs.1,70,000; Bose Rs.5,73,000 and
Gupta Rs.3,53,000.
(2) S and R carrying on a business separately as contractors, jointly take up the work of constructing
a building at an agreed price of Rs.3,50,000 payable in cash Rs.2,40,000 and in fully paid shares of a
company for the balance of Rs.1,10,000. A bank account is opened in which S and R paid Rs.75,000 and
Rs.50,000 respectively. The following costs were incurred in completing the constructions and the contract
price was duly realised :
(i) Wages paid Rs.90,000
(ii) Material purchased for Cash Rs.2,10,000
(iii) Materials supplied by R from his stock Rs.27,000.
(iv) Consulting Engineer‘s fees paid by S. Rs.3,000
The accounts were closed, S taking up all the shares of the company at an agreed valuation of
Rs.48,000, treating loss on shares as joint venture loss and R taking the remaining stock of materials at
Rs.9,000
Prepare and close the joint venture accounts and personal accounts of S and R assuming that a
separate set of books are opened for this purpose and that the net result of the venture is shared by s
and R in ratio of 2 :1.
(Ans. Loss on Joint venture Rs.36,000; Amounts brought in by S. Rs.9,000 and R Rs.56,000)
(3) Shyam took a contract for Rs.1,62,000 for supply of material in connection with tube wells. He
entered into a joint venture contract with Ashok. It was agreed to share profit and losses equally.
Following were the terms of the joint venture :
Shyam will contribute Rs.1,50,000 as capital on which he will get interest at 4% p.a. This amount was
given to Ashok on 1 January 2002 Shyam was entitled to a commission of 2% on the contract price. Ashok
being a technician will be entitled to a salary of Rs.400 per month. He will also get Rs1,500 because his
plant will be used on the contract.
Ashok made the following payments : Raw Materials Rs.50,000; Wages Rs.60,000; Repairs of
Machinery Rs.5,000 and Establishment expenses Rs.4,500.
Contract was complete on 30 September 2002 Shyam received the amount from Ashok.
Open Joint Venture Account, Shaym‘s Account and Cash Account in the books of Ashok.
(Ans. Joint Venture Profit Rs.36,000; Payment to Shyam Rs.1,72,825)
(4) B of Bombay and C of Calcutta enter into a joint venture to consign scrap iron A of agra, to be
sold on their risk. They share profit or losses equally. A is entitled to a commission of 10% of the net
proceeds after charging such commission.
B sends 50 tonnes costing Rs.3,000 per tonne and pays freight and other expenses of Rs.30,000. C
sends 70 tonnes costing Rs.3,000 per tonne and pays freight and other expenses of Rs.40,000.
All the scraps are sold by A @ Rs.10,000 per tonne and he pays selling expenses of Rs.12,000. he
remits Rs.5,00,000 to B and the balance of net proceeds to C by bank draft.
You are required (a) to show accounts in the books of B and C to record their own transactions and
(b) to prepare a Memorandum Joint Venture Account.
(Ans. Profit on Joint venture Rs.4,45,000; final settlement for Rs.32,500)
AMALGAMATION, ABSORPTION &
RECONSTRUCTION
ACCOUNTING FOR AMALGAMATIONS
The following terms are used in this standard with the meanings
specified:
l Amalgamation means an amalgamation pursuant to the

provisions of the Companies Act, 1956 or any other statute
which may be applicable to companies.
l Transferor company means the company which is amalgamated

into another company.
l Transferee company means the company into which a transferor

company is amalgamated.
l Reserve means the portion of earnings, receipts or other surplus

of an enterprise (whether capital or revenue) appropriated by the
management for a general or a specific purpose other than a
provision for depreciation or diminution in the value of assets or
for a known liability.
l Amalgamation in the nature of merger is an amalgamation

which satisfies all the following conditions.
All the assets and liabilities of the transferor company become,

after amalgamation, the assets and liabilities of the transferee
company.
(ii) Shareholders holding not less than 90% of the face value of the
equity shares of the transferor company (other than the equity
shares already held therein, immediately before the
amalgamation, by the transferee company or its subsidiaries or
their nominees) become equity shareholders of the transferee
company by virtue of the amalgamation.
(vi) The consideration for the amalgamation receivable by those

equity shareholders of the transferor company who agree to
become equity shareholders of the transferee company is
discharged by the transferee company wholly by the issue of
equity shares in the transferee company, except that cash may
be paid in respect of any fractional shares.
(vii) The business of the transferor company is intended to be carried
on, after the amalgamation, by the transferee company.
(viii) No adjustment is intended to be made to the book values
of the assets and liabilities of the transferor company when they
are incorporated in the financial statements of the transferee
company except to ensure uniformity of accounting policies.
Amalgamation in the nature of purchase is an amalgamation which
does not satisfy any one or more of the conditions specified in
sub-paragraph (e) above.
l Consideration for the amalgamation means the aggregate of the
shares and other securities issued and the payment made in the
form of cash or other assets by the transferee company to the
shareholders of the transferor company.
l Fair value is the amount for which an asset could be exchanged
between a knowledgeable, willing buyer and a knowledgeable,
willing seller in an arm‘s length transaction.
l Pooling of interests is a method of accounting for amalga-
mations the object of which is to account for the amalgamation
as if the separate businesses of the amalgamating companies
were intended to be continued by the transferee company.
Accordingly, only minimal changes are made in aggregating the
individual financial statements of the amalgamating companies.
Explanation
Types of Amalgamations
Generally speaking, amalgamations fall into two broad categories. In the first
category are those amalgamations where there is a genuine pooling not
merely of the assets and liabilities of the amalgamating companies but also of
the shareholders‘ interests and of the businesses of these companies. Such
amalgamations are amalgamations which are in the nature of ‗merger‘ and
the accounting treatment of such amalgamations should ensure that the
resultant figures of assets, liabilities, capital and reserves more or less
represent the sum of the relevant figures of the amalgamating companies. In
the second category are those amalgamations which are in effect a mode by
which one company acquires another company and, as a consequence, the
shareholders of the company which is acquired normally do not continue to
have a proportionate share in the equity of the combined company, or the
business of the company which is acquired is not intended to be continued.
Such amalgamations are amalgamations in
An amalgamation is classified as an ‗amalgamation in the nature of

merger‘ when all the conditions listed in paragraph 3(e) a re satisfied.
There are, however, differing views regarding the nature of any further
conditions that may apply. Some believe that, in addition to an exchange
of equity shares, it is necessary that the shareholders of the transferor
company obtain a substantial share in the transferee company even to the
extent that it should not be possible to identify any one party as dominant
therein. This belief is based in part on the view that the exchange of
control of one company for an insignificant share in a larger company
does not amount to a mutual sharing of risks and benefits.
Other s believe that the substance of an amalgamation in the nature of

merger is evidenced by meeting certain criteria regarding the relationship
of the parties, such as the former independence of the amalgamating
companies, the manner of their amalgamation, the absence of planned
transactions that would undermine the effect of the amalgamation, and the
continuing participation by the management of the transferor company in
the management of the transferee company after the amalgamation.
Methods of Accounting for Amalgamations

There are two main methods of accounting for amalgamations:
(a) the pooling of interests method; and
(b) the purchase method.
The use of the pooling of interests method is confined to circumstances

which meet the criteria referred to in paragraph 3(e) for an amalgamation in
the nature of merger.
The object of the purchase method is to account for the amalgamation by

applying the same principles as are applied in the normal purchase of
assets. This method is used in accounting for amalgamations in the nature
of purchase.
The Pooling of Interests Method

Under the pooling of interests method, the assets, liabilities and reserves
of the transferor company are recorded by the transferee company at their
existing carrying amounts. If, at the time of the amalgamation, the transferor
and the transferee companies have conflicting accounting policies, a uniform
set of accounting policies is adopted following the amalgamation. The effects
on the financial statements of any changes in accounting policies are reported
in accordance with Accounting Standard (AS) 5, Net Profit or Loss for the
Period, Prior Period Items and Changes in Accounting Policies.
The Purchase Method

Under the purchase method, the transferee company accounts for the
amalgamation either by incorporating the assets and liabilities at their
existing carrying amounts or by allocating the consideration to individual
identifiable assets and liabilities of the transferor company on the basis of
their fair values at the date of amalgamation. The identifiable assets and
liabilities may include assets and liabilities not recorded in the financial
statements of the transferor company.
Where assets and liabilities are restated on the basis of their fair values, the
determination of fair values may be influenced by the intentions
of the transferee company. For example, the transferee company may
have a specialised use for an asset, which is not available to other
potential buyers. The transferee company may intend to effect changes in
the activities of the transferor company which necessitate the creation of
specific provisions for the expected costs, e.g. planned employee
termination and plant relocation costs.
Consideration
The consideration for the amalgamation may consist of securities, cash or
other assets. In determining the value of the consideration, an assessment is
made of the fair value of its elements. A variety of techniques is applied in
arriving at fair value. For example, when the consideration includes
securities, the value fixed by the statutory authorities may be taken to be the
fair value. In case of other assets, the fair value may be determined by
reference to the market value of the assets given up. Where the market value
of the assets given up cannot be reliably assessed, such assets may be valued
at their respective net book values.
Many amalgamations recognise that adjustments may have to be made to the

consideration in the light of one or more future events. When the additional
payment is probable and can reasonably be estimated at the date of
amalgamation, it is included in the calculation of the consideration. In all
other cases, the adjustment is recognised as soon as the amount is
determinable
Treatment of Reserves on Amalgamation
If the amalgamation is an ‗amalgamation in the nature of merger‘, the
identity of the reserves is preserved and they appear in the financial
statements of the transferee company in the same form in which they
appeared in the financial statements of the transferor company. Thus, for
example, the General Reserve of the transferor company becomes the
General Reserve of the transferee company, the Capital Reserve of the
transferor company becomes the Capital Reserve of the transferee
company and the Revaluation Reserve of the transferor company becomes
the Revaluation Reserve of the transferee company. As a result of preserving
the identity, reserves which are available for distribution as dividend before
the amalgamation would also be available for distribution as dividend after
the amalgamation. The difference between the amount recorded as share
capital issued (plus any additional consideration in the form of cash or other
assets) and the amount of share capital of the
Revaluation Reserve of the transferee company. As a result of preserving the

identity, reserves which are available for distribution as dividend before the
amalgamation would also be available for distribution as dividend after the
amalgamation. The difference between the amount recorded as share capital
issued (plus any additional consideration in the form of cash or other assets)
and the amount of share capital of the transferor company is adjusted
If the amalgamation is an ‗amalgamation in the nature of purchase‘, the

identity of the reserves, other than the statutory reserves dealt with in
paragraph 18, is not preserved. The amount of the consideration is
deducted from the value of the net assets of the transferor company
acquired by the transferee company. If the result of the computation is
negative, the difference is debited to goodwill arising on amalgamation
and dealt with in the manner stated in paragraphs 19-20. If the result of
the computation is positive, the difference is credited to Capital Reserve.
Certain reserves may have been created by the transferor company pursuant
to the requirements of, or to avail of the benefits under, the Income-tax Act,
1961; for example, Development Allowance Reserve, or Investment
Allowance Reserve. The Act requires that the identity of the reserves should
be preserved for a specified period. Likewise, certain other reserves may
have been created in the financial statements of the transferor company in
terms of the requirements of other statutes. Though, normally, in an
amalgamation in the nature of purchase, the identity of reserves is not
preserved, an exception is made in respect of reserves of the aforesaid
nature (referred to hereinafter as ‗statutory reserves‘) and such reserves
retain their identity in the financial statements of the transferee company
in the same form in which they appeared in the financial statements of the
transferor company, so long as their identity is required to be maintained
to comply with the relevant statute. This exception is made only in those
amalgamations where the requirements of the relevant statute for
recording the statutory reserves in the books of the transferee company
are complied with. In such cases the statutory reserves are recorded in the
financial statements of the transferee company by a corresponding debit
to a suitable account head (e.g., ‗Amalgamation Adjustment Account‘)
which is disclosed as a part of ‗miscellaneous expenditure‘ or other
similar category in the balance sheet. When the identity of the statutory
reserves is no longer required to be maintained, both the reserves and the
aforesaid account are reversed.
Treatment of Goodwill Arising on Amalgamation

Goodwill arising on amalgamation represents a payment made in anticipation
of future income and it is appropriate to treat it as an asset to be amortised to
income on a systematic basis over its useful life. Due to the nature of
goodwill, it is frequently difficult to estimate its useful life with reasonable
certainty. Such estimation is, therefore, made on a prudent basis.
Accordingly, it is considered appropriate to amortise goodwill over a period
not exceeding five years unless a somewhat longer period can be justified.
Factors which may be considered in estimating the useful life of goodwill

arising on amalgamation include:
1. the foreseeable life of the business or industry;

2. the effects of product obsolescence, changes in demand and
other economic factors;
3. the service life expectancies of key individuals or groups of
employees;
expected actions by competitors or potential competitors; and
legal, regulatory or contractual provisions affecting the useful life.

Balance of Profit and Loss Account
In the case of an ‗amalgamation in the nature of merger‘, the balance of the
Profit and Loss Account appearing in the financial statements of the
transferor company is aggregated with the corresponding balance appearing
in the financial statements of the transferee company. Alternatively, it is
transferred to the General Reserve, if any.
In the case of an ‗amalgamation in the nature of purchase‘, the balance of the

Profit and Loss Account appearing in the financial statements of the
transferor company, whether debit or credit, loses its identity.
Treatment of Reserves Specified in A Scheme of

Amalgamation
The scheme of amalgamation sanctioned under the provisions of the
Companies Act, 1956 or any other statute may prescribe the treatment to
be given to the reserves of the transferor company after its amalgamation.
Where the treatment is so prescribed, the same is followed. In some cases,
the scheme of amalgamation sanctioned under a statute may prescribe a
different treatment to be given to the reserves of the transferor company
after amalgamation as compared to the requirements of this Standard that
would have been followed had no treatment been prescribed by the
scheme. In such cases, the following disclosures are made in the first
financial statements following the amalgamation:
l A description of the accounting treatment given to the reserves

and the reasons for following the treatment different from that
prescribed in this Standard.
l Deviations in the accounting treatment given to the reserves as

prescribed by the scheme of amalgamation sanctioned under
the statute as compared to the requirements of this Standard
that would have been followed had no treatment been
prescribed by the scheme.
(c) The financial effect, if any, arising due to such deviation.
Disclosure
(a) 24. For all amalgamations, the following disclosures are
considered appropriate in the first financial statements
following the amalgamationnames and general nature of
business of the amalgamating companies;
(b) effective date of amalgamation for accounting purposes;
(c) the method of accounting used to reflect the amalgamation; and
(d) particulars of the scheme sanctioned under a statute.
For amalgamations accounted for under the pooling of interests method,

the following additional disclosures are considered appropriate in the first
description and number of shares issued, together with the
percentage of each company‘s equity shares exchanged to effect
the amalgamation;
the amount of any difference between the consideration and the
value of net identifiable assets acquired, and the treatment
thereof.
For amalgamations accounted for under the purchase method, the

following additional disclosures are considered appropriate in the first
consideration for the amalgamation and a description of the

consideration paid or contingently payable; and
the amount of any difference between the consideration and the
thereof including the period of amortisation of any goodwill
arising on amalgamation.
Amalgamation after the Balance Sheet Date

When an amalgamation is effected after the balance sheet date but before
the issuance of the financial statements of either party to the
amalgamation, disclosure is made in accordance with AS 4,
‗Contingencies and Events Occurring After the Balance Sheet Date‘, but
the amalgamation is not incorporated in the financial statements. In
certain circumstances, the amalgamation may also provide additional
information affecting the financial statements themselves, for instance, by
allowing the going concern assumption to be maintained
Main Principles
An amalgamation may be either –
an amalgamation in the nature of merger, or
an amalgamation in the nature of purchase.
An amalgamation should be considered to be an amalgamation in the

nature of merger when all the following conditions are satisfied:
(i) All the assets and liabilities of the transferor company become,
after amalgamation, the assets and liabilities of the transferee
company.
Shareholders holding not less than 90% of the face value of the
equity shares of the transferor company (other than the equity
shares already held therein, immediately before the
amalgamation, by the transferee company or its subsidiaries or
their nominees) become equity shareholders of the transferee
company by virtue of the amalgamation.
The consideration for the amalgamation receivable by those

equity shareholders of the transferor company who agree to
become equity shareholders of the transferee company is
discharged by the transferee company wholly by the issue of
equity shares in the transferee company, except that cash may
be paid in respect of any fractional shares.
7. The business of the transferor company is intended to be carried
on, after the amalgamation, by the transferee company.
8. No adjustment is intended to be made to the book values of the

assets and liabilities of the transferor company when they are
incorporated in the financial statements of the transferee
company except to ensure uniformity of accounting policies.
An amalgamation shou ld be considered to be an amalgamation in the

nature of purchase, when any one or more of the conditions specified in
paragraph 29 is not satisfied31. When an amalgamation is considered to
be an amalgamation in the nature of merger, it should be accounted for
under the pooling of interests method described in paragraphs 33–35.
When an amalgamation is considered to be an amalgamation in the

nature of purchase, it should be accounted for under the purchase method
described in paragraphs 36–39.
The Pooling of Interests Method

In preparing the transferee company‘s financial statements, the assets,
liabilities and reserves (whether capital or revenue or arising on revaluation)
of the transferor company should be recorded at their existing carrying
amounts and in the same form as at the date of the amalgamation. The
balance of the Profit and Loss Account of the transferor company should be
aggregated with the corresponding balance of the transferee company or
transferred to the General Reserve, if any.
If, at the time of the amalgamation, the transferor and the transferee
companies have conflicting accounting policies, a uniform set of
accounting policies should be adopted following the amalgamation. The
effects on the financial statements of any changes in accounting policies
should be reported in accordance with Accounting Standard (AS)
5 Net Profit or Loss for the Period, Prior Period Items and Changes in
The difference between the amount recorded as sha re capital issued

(plus any additional consideration in the form of cash or other assets) and
the amount of share capital of the transferor company should be adjusted
in reserves.
The Purchase Method

In preparing the transferee company‘s financial statements, the assets and
liabilities of the transferor company should be incorporated at their
existing carrying amounts or, alternatively, the consideration should be
allocated to individual identifiable assets and liabilities on the basis of
their fair values at the date of amalgamation. The reserves (whether
capital or revenue or arising on revaluation) of the transferor company,
other than the statutory reserves, should not be included in the financial
statements of the
Any excess of the amount of the consideration over the value of the net
assets of the transferor company acquired by the transferee company
should be recognised in the transferee company‘s financial statements as
goodwill arising on amalgamation. If the amount of the consideration is
lower than the value of the net assets acquired, the difference should be
treated as Capital Reserve.
The goodwill arising on amal gamation should be amortised to income

on a systematic basis over its useful life. The amortisation period should
not exceed five years unless a somewhat longer period can be justified.
Where the requirements of the relevant statute for recording the statutory
reserves in the books of the transferee company are complied with,
statutory reserves of the transferor company should be recorded in the
financial statements of the transferee company. The corresponding debit
should be given to a suitable account head (e.g., ‗Amalgamation
Adjustment Account‘) which should be disclosed as a part of
‗miscellaneous expenditure‘ or other similar category in the balance
sheet. When the identity of the statutory reserves is no longer required to
be maintained, both the reserves and the aforesaid account should be
reversed.
Common Procedures
The consideration for the amalgamation should include any non-cash
element at fair value. In case of issue of securities, the value fixed by the
statutory authorities may be taken to be the fair value. In case of other
assets, the fair value may be determined by reference to the market value
of the assets given up. Where the market value of the assets given up
cannot be reliably assessed, such assets may be valued at their respective
net book values.
Where the scheme of amalgamation provides for an adj ustment to the

consideration contingent on one or more future events, the amount of the
additional payment should be included in the consideration if payment is
probable and a reasonable estimate of the amount can be made. In all
other cases, the adjustment should be recognised as soon as the amount is
determinable [see Accounting Standard (AS) 4, Contingencies and Events
Occurring After the Balance Sheet Date].
Treatment of Reserves Specified in A Scheme of

Amalgamation
Where the scheme of amalgamation sanctioned under a statute prescribes
the treatment to be given to the reserves of the transferor company after
amalgamation, the same should be followed. Where the scheme of
amalgamation sanctioned under a statute prescribes a different treatment
to be given to the reserves of the transferor company after amalgamation
as compared to the requirements of this Standard that would have been
followed had no treatment been prescribed by the scheme, the following
disclosures should be made in the first financial statements following the
amalgamation:
(a) A description of the accounting treatment given to the
reserves and the reasons for following the treatment different
from that prescribed in this Standard.
(b) Deviations in the accounting treatment given to the reserves as

prescribed by the scheme of amalgamation sanctioned under
the statute as compared to the requirements of this Standard
that would have been followed had no treatment been
prescribed by the scheme.
(c) The financial effect, if any, arising due to such deviation.
Disclosure
For all amalgamations, the following disclosures should be made in the
first financial statements following the amalgamation:
(a) names and general nature of business of the amalgamating

companies;
(b) effective date of amalgamation for accounting purposes;
(c) the method of accounting used to reflect the amalgamation; and
(d) particulars of the scheme sanctioned under a statute.
For amalgamations accounted for under the pooling of interests method,

the following additional disclosures should be made in the first financial
statements following the amalgamation:
(a) description and number of shares issued, together with the
percentage of each company‘s equity shares exchanged to effect
the amalgamation;
(b) the amount of any difference between the consideration and the
thereof.
For amalgamations accounted for under the purchase method, the

following additional disclosures should be made in the first financial
statements following the amalgamation:
(a) consideration for the amalgamation and a description of the

consideration paid or contingently payable; and
(b) the amount of any difference between the consideration and the
thereof including the period of amortisation of any goodwill
arising on amalgamation.
Amalgamation after the Balance Sheet Date

When an amalgamation is effected after the balance sheet date but before
the issuance of the financial statements of either party to the
amalgamation, disclosure should be made in accordance with AS 4,
‗Contingencies and Events Occurring After the Balance Sheet Date‘, but
the amalgamation should not be incorporated in the financial statements.
In certain circumstances, the amalgamation may also provide additional
information affecting the financial statement
.
1. Method to calculate Purchase Consideration:
Net Asset method Intansic value method Net payment method

Agreed value of MV of total assets xxx Amalgamation in nature of: -
assets taken over xxx Less: MV of total Liab. xxx Merger: Amount paid to Equity
Less: Agreed value of Net intrinsic value xxx shareholders only in the form of
Liab. taken over xxx equity shares in purchasing
PC xxx Intrinsic Value = Net Intrinsic value company except cash for
Per share No. of equity share fraction of shares.
Purchase: Cash and agreed
value of shares, debentures and
PC= No. of equity shares purchased other assets given by purchasing
X Intrinsic value per share of company to the liquidator of
vendor company vendor company For the
Shareholders of vendor
company.
Note: If information about all the three method is given in the question then we should
follow Net payment method.
Amalgamation in nature of merger: Amalgamation deemed to be in the nature of merger

if following conditions are satisfied: -
(BARED)
Business of vendor company must be carried on by the purchasing company. All
assets and liabilities of vendor company transferred to purchasing company.
Recorded in new company of assets and liabilities taken over at Book Value of vendor
company. (Except to comply with accounting policy)
Equity shareholders holding 90% shares (except already held) agree to become
shareholders in new company.
Disbursement of Purchase Consideration only in shares except cash for fraction of
shares.
Entries in books of vendor company:
Realisation account: We have to follow the following procedure

Transfer all real assets to debit side at Gross Book Value including goodwill but
excluding fictitious assets.
Transfer all outside liabilities to credit side at Gross Book Value but excluding
accumulated reserves and surplus.
If any asset/liabilities not taken over than any realisation on sale of such asset
or payment on disbursement of such liabilities is credited/debited to realisation
account.
Amount of Purchase Consideration is credited to realisation account.
Liquidation expenses debited to realisation account if born by vendor company
Realisation account is balanced and the balance of this account is profit or loss on
realisation, which is transferred to Equity Shareholders Account.
Notes:
1. Assets not taken over if transferred to shareholders account: it must be shown on
debit side of shareholders account at Current Value of such asset and a
corresponding credit is made to realisation account.
What are outside liabilities: Preference shareholders and Debenture
holders are treated outside liabilities. But proposed dividend is not treated
outside liabilities.
If against any reserve there is any expected liabilities: then to the extent of that
expected liability the amount of reserve is transferred to realisation account and
balance to shareholders account as usual.
Example:
Workmen compensation reserve given in Balance sheet = 8000
Expected liability to workmen =5000.
Therefore Rs 5000 will be transferred to the credit side of realisation account and
balance Rs 3000 to the credit side of shareholders account.
Any inter company owings or adjustments: is ignored while preparing vendor
company books, it is considered only while preparing purchasing company books.
Equity Shareholders Account:
Credit side: Equity Share Capital, Accumulated profits and reserves, balance of
realisation account.
Debit side: Accumulated losses, Fictitious asset, amount of Purchase
Consideration, balance of realisation account.
Purchasing Company Account:
Credit side: Amount of Purchase Consideration due.
Debit side: Discharge of Purchase Consideration.
3. Entries in books of Purchasing Company

a) Three basic entries
For purchase consideration due

Business purchase a/c Dr.
To liquidator of vendor company
For assets and liabilities taken over
Assets taken over Dr.
Goodwill a/c Dr.
To liabilities taken over
To business purchase a/c
To capital reserve a/c
For discharge of purchase consideration
Liquidator of vendor company a/c Dr.
To equity share capital a/c
To share premium a/c
To debentures a/c
To preference share capital a/c
To cash
b) For liquidation expenses paid by purchasing company
Goodwill/Capital reserve a/c Dr.

To cash a/c
c) For cancellation of mutual owings
Creditor /Bills payable a/c Dr.

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To Debtors/Bills receivable a/c
d) For adjustment of unrealised profit
Goodwill/Capital reserve a/c Dr.

To Stock a/c
e) For carry forward of statutory reserves
Amalgamation adjustment a/c Dr.

To Statutory reserve a/c
f) If both capital reserve and goodwill appears in books
Capital reserve a/c Dr.

To Goodwill a/c
Note:
Amalgamation in nature of merger: The entries in the case of amalgamation in the
nature of merger is almost similar to the entries given above, the only difference is:

In the second basic entry above, instead of opening the Goodwill/Capital reserve
a/c, the difference between purchase consideration paid and book value of the share
capital of vendor company is adjusted in general reserve. If general reserve is not
sufficient then balance adjusted in profit & loss account. Similarly any difference in
actual debenture value and the amount paid to them is also adjusted to general
 general reserve is not sufficient then balance adjusted in profit & loss
reserve. If
account.

Where ever Goodwill/Capital reserve a/c  is debited or credited in above entries we will have to
debit or credit general reserve account.
Following will remain same in both the methods of amalgamation
  
Calculation of Purchase consideration.
  
Discharge of Purchase consideration.
 
Entries in books of vendor company.

Inter company holding
Purchasing company held shares Vendor company held shares Both vendor and purchasing

in vendor company (P V) in purchasing company company held shares in each
 
(V P) other (P< V)
Calculation of purchase consideration
PC (Given/calculated) xxx PC (Given/calculated) PC (Given/calculated) xxx
Less: % reduction for shares xxx Less: % reduction for shares
Held by purchasing Less: Value of shares Held Held by purchasing
company in vendor by vendor company in company in vendor
company xxx purchasing company company xxx
Net PC xxx xxx Less: Value of shares Held
Net PC by vendor company in
xxx purchasing company xxx
Net PC xxx
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% = Shares held by X Value= No of shares held X
100 purch. comp. Intrinsic value per share
Total shares of
vendor comp.
Books of Vendor company

Realisation account Realisation account
All assets
WHAT YOU HAVE LEARNT
337
WHAT YOU HAVE LEARNT
77
Issue of Shares
TERMINAL QUESTIONS
278
Issue of Shares
279
Issue of Shares

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UNIT 1

ACCOUNTING FOR PARTNERSHIP

A business can be organised in the form of

Contents of Partnership Deed

l Mode of auditor's appointment, if any;

Provisions Affecting Accounting Treatment

5. Remuneration to Partners : No partner is entitled to any salary or commission for

l Maintenance of capital accounts of partners;

Partners' Capital Accounts

Fluctuating Capital Method

Total *** Total ***

Format under fluctuating method

Fixed Capital Method

Total **** Total ****

Illustration 1 (Fixed and Fluctuating Capital Account)

Draw up the Capital Accounts of the partners:

Books of Amit and Sumit

Total 56,400 Total 56,400

Sumit's Capital Account

(ii) When capitals are fixed.

Total 40,000 Total 40,000

Total 16,400 Total 16,400

Sumit's Capital Account

Balance c/f 25,000 Cash 25,000

Sumit's Current Account

1. For Interest on Capital

(i) For Crediting Interest on Capital to Capital/Current Account :

2. For Interest on Drawings

Interest on Drawings a/c Dr.

Salary to Partner a/c Dr.

(ii) For charging salary allowed to a partner:

Profit and Loss Appropriation a/c Dr.

Commission to partner a/c Dr.

5. For Transfer to Reserve:

6. For share of Profit or Loss on Appropriation

Profit and Loss Appropriation Account

Net Loss as per ** Net profit as per .....

Total ......... Total .........

Proforma of Profit and Loss Appropriation Account

Illustration 2 (Preparation of Profit and Loss Account and Balance Sheet)

Trial Balance as on December 31, 2000

Aakriti's Capital 65,000

Sundry Debtors 40,500

Total 2,90,910 2,90,910

1. The value of stock on December 31, 2000 was Rs. 12,500.

Total 57,200 Total 57,200

Liabilities Amount Assets Amount

Aakriti's Capital 65,000 Goodwill 10,000

Illustration 3 (Distribution of profit)

End of Profit and Loss a/c Dr. 35,660

Ajit's Capital Account

Total 51,400 Total 51,400

Vishal's Capital Account

Date Particulars J.F. Amount Date Particulars J.F. Amount

Total 33,800 Total 33,800

Illustration 4 (Distribution of profit)

Books of Pawan and Purna

Total 25,000 Total 25,000

Partners' Capital Account

Partners' Current Account

In this case, interest will be calculated in the following manner:

Alternatively, we can calculate interest on capital with respect to the amount

Total * Total *

Total Total