Support Material Accountancy 2023-24

कें द्रीय विद्यालय संगठन
जबलपुर संभाग
KENDRIYA VIDYALAYA SANGATHAN
JABALPUR REGION
STUDY /SUPPORT MATERIAL

ACCOUNTANCY
CLASS XII
SESSION 2023-24
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OUR PATRON
SHRI SOMIT SHRIVASTAVA
DEPUTY COMMISSIONER,
KVS, JABALPUR REGION
SHRI HEERA LAL

ASSISTANT COMMISSIONER,
DR SAROJ DABAS
SMT KIRAN SHARMA

SUBJECT COORDINATOR
SH. PRAVEEN NAIDU
PRINCIPAL
KV TFRI JABALPUR
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PGT’s who contributed in preparation of study material
S.
No. CHAPTER NAME OF TEACHER KV
1 Partnership- fundamentals Sh. D.K. Yadav K.V. Damoh

2 Partnership- Admission Sh. Tej Kumar Bharadwaj K.V. Dhanpuri
3 Partnership – Retirement & Death Sh. Brij Mohan Panthi K.V. ! STC ( S1)
4 Partnership Dissolution Sh. Brij Mohan Panthi K.V. ! STC ( S1)
5 Issue of Shares Sh. S.S. Thakur K.V. GCF No 1
6 Issue of Debentures Sh. S.S. Thakur K.V. GCF No 1
7 Analysis of financial statement Sh. P.K.Pathak K.V. VFJ ( S1)
8 Cash Flow Statement Dr. Roopa K.V. CWS Jayant
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TIPS FOR SCORING GOOD MARKS
Cracking an examination is a skill that can be acquired. As with studying, scoring
good marks too is a combination of managing one’s time well and applying the right method.
Here are some guidelines that one can follow while attempting to write an exam.
• Answer the question as it is asked.

Read the question at least twice before answering. Be at guard for either/or questions. Also make sure to tackle
all sub-sections of a question.
• Use the marks as a guide
The examination paper mentions the marks each question carry. Use these mark as a rough guide as to how
long their answers ought to be. Do not expand an answer more than is relevant. This will save a lot of time
which can be used while writing a Long-Answer question.
• Avoid writing irrelevant points

While writing an answer, focus on the nature of the question asked to maintain focus. Answering something
that is irrelevant to the question, no matter how good a description it is, will not only waste time but also be
given low marks.
• Budget your time

Don’t dwell too much on a particular question as remaining questions may get little or no time if. Despite how
much one writes, one can only score the maximum marks allocated to that question. If facing difficulty in
answering a question, move on to other questions and return to the former later.
• Check and double-check

Always keep some time for revision while budgeting time. In the rush to complete the paper, some basic
spelling mistakes or forgotten, half-attempted questions may spoil all the effort.
 Believe in yourself. Set a goal for yourself.

 Accordingly set a timetable for yourself.
 Identify a limited number of direct questions which usually come in the exams & prepare them well.
 Apply FRT (Fast reading technique) i.e. to revise more in less time.
 Presentation: Be particular about how you write the answers. It should always be in points with a
heading and a brief explanation.
 Do not leave out any Questions.
 Also be careful not to spend too much time on 1 question at the cost of other questions.
 Wherever any process is asked to be explained, write all the steps involved, irrespective if the marks
allotted to that question.
 Draw a flowchart/diagram in support of your answer, wherever possible.
 Answer those questions first, which you know very well.
 Underline all the sub-headings.
 Draw small cartoons /diagrams with small captions wherever fits suitable.
 Attempt ‘HOTS’ questions at the last.
 Utilize the QP paper reading time to plan writing strategies instead of trying to write answers in
advance.
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 While trying to understand ‘HOTS’ questions keep in mind chapter-wise allotment of marks for each
chapter. Sometimes this helps to guess the chapter from which the hots question is given.
 Especially in case of Application Oriented Questions (HOTS), read Hindi medium version also, it may
give you some clue. It also removes the vagueness in the English language.
 Maintain a separate small hand – book to write only sub-headings for all the concepts in the subject.
It helps as a ready- reckoner.
 Read summaries given at the end of each chapter to get a comprehensive idea about the given chapter.
Hots can be given from summaries also.
 Refer latest CBSE sample question papers along with previous year Board Question Papers.
 Refer ‘High scoring students’ answer sheets available in the CBSE web site.
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CHAPTER- 1
ACCOUNTING FOR PARTNERSHIP FIRM: FUNDAMENTALS
Meaning: A partnership is a form of business which enables two or more persons to co-own an
organization, and they agree to share the profits and losses of the company. Each member of such a
business is called a Partner, and collectively they are known as a partnership firm. In a partnership, every
owner contributes something to the welfare of the firm. These can be in the form of ideas, property,
money and sometimes a combination of all these. Owners of a Partnership share profits and losses in
proportion to their respective investments.
Features/ characteristics of Partnership:
Two or more persons (minimum -2 maximum -50)

 Sharing of profits and losses.
 Mutual agency.
 Unlimited liability.
 Lawful business.
 Contractual relationship.
Agreement (written or oral)
Registration is not compulsory
Management and control
Business with the motive of earning profit.
Partnership Deed
The document containing the agreement in writing among partners is called partnership deed. As far as
possible to keep it written to settle future disputes easily, But it is not compulsory to have written
partnership deed, it may be oral.
Contents of partnership Deed
(i) Name and address of all the partners

(ii) Principal place of business
(iii) Name and address of the firm
(iv) Nature of business
(v) Date of commencement of the partnership
(vi) Rules regarding operating of bank accounting
(vii) Capital to be contributed by each partner
(viii) Interest on capital/ drawings
(ix) Salary / commission to partners
(x) Profits and loss sharing ratio
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Importance of partnership Deed
Partnership deed and its registration is not compulsory but it is always better to have the agreement in
writing for the following reasons.
(i) It helps in settling any disputes or doubt with regarding to the terms of partnership.
(ii) It serves as an evidence in the court of law
(iii) It regulates duties and powers of each partner.
Rights of a partner:
1.Every partner has the right to share profits or losses with other partner in the agreed ratio.
2. Every partner has the right to take part in the conduct of the business.
3. Every partner has the right to disallow the admission of a new partner.
4. Every partner has a right to retire from the firm after giving a proper notice.
Rules Applicable in the absence of Partnership Deed
1. Profit – Sharing Ratio – Shared equally
2. Interest on Capital – Not allowed
3. Interest on Drawings – Not charged
4. Salary/commission to a Partner – Not allowed
5. Interest on advance/ loan given by a partner - @ 6% per annum. ( it will not applicable if loan/
advance is given by partner’s any family member)
Admission of a New Partner – Without the consent of all existing partners no new partner can be
admitted.
Duties of a partner
 Duty to act in good faith. The partners must act in good faith for the greater common advantage.
 Duty to Render true accounts.
 Duty to Indemnify for fraud.
 Duty not to compete.
 Duty to be Diligent.
 Duty to properly use the property of the firm
 Duty to account for personal profits.
Maintenance of capital Accounts of partners
There are two under mentioned methods of keeping of partners’ capital account
(i) Fixed Capital Account- under this method, two accounts are maintained namely partners’
capital account and partners’ current account.
Transactions related to introduction and withdrawn of capital are recorded in capital account
and rest of the transactions are recorded in partners’ current account.
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Fixed capital account will always show credit balance and current account may have both
balance that is either debit or credit.
Partners’ Capital Account (fixed capital account)
Dr Cr
Particulars A B C Particulars A B C
Rs Rs Rs Rs Rs Rs
To Cash/Bank A/c - - - By Balance b/d - - -
(Withdrawal of capital) By cash/Bank A/c ( - - -
To Balance c/d - - - Additional capital
introduced)
Dr Partners’ current Account Cr

Rs Rs Rs Rs Rs Rs
To Balance b/d ( in case of - - - By Balance b/d ( in case - - -
debit opening balance) of Credit opening
To interest on Drawings A/c - - - balance)
To Profit and Loss - - - By interest on capital A/c - - -
Appropriation A/c - - - By salary A/c - - -
To Balance c/d - - - By Commission A/c - - -
By profit and Loss - - -
Appropriation A/c - - -
By Balance c/d - - -
- - - - - -
(ii) Fluctuating Capital Method- under fluctuating capital method, one account is maintained,
i.e partners’ capital account.
All transactions including introduction and withdrawal of capital are recorded in capital
account. Generally capital accounts have credit balance but in exceptional cases it may have
debit balance due to heavy losses or damages.
Partners’ Capital Account

Rs Rs Rs Rs Rs Rs
To Balance b/d ( in case of - - - By Balance b/d ( in case - - -
debit opening balance) of Credit opening
To Cash/Bank A/c - - - balance)
(Withdrawal of capital) - - - By cash/Bank - - -
- - - ( Additional capital - - -
To interest on Drawings A/c - - - introduced) - - -
To Profit and Loss - - -
Appropriation A/c By interest on capital A/c - - -
To Balance c/d By salary A/c - - -
By Commission A/c
By profit and Loss
Appropriation A/c
By Balance c/d
- - - - - -
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Interest on capital - interest on capital is an appropriation of profits and it is provided only if there is
profit. It will be provided in case of loss also only if partnership deed says so or it is to be treated as a
charge against profits.
Different cases related to Interest on capital
the various cases related to interest on capital are as under.
Case-1- when partnership agreement is silent about interest on capital – not allowed
Case-2- when partnership agreement provides that interest on capital is to be allowed.
Situation-1- in case there is a loss- Not allowed
Situation-2- In case there are sufficient profits- Fully allowed
Situation-3- If there are insufficient profits- Profits are to be distributed in the ratio of capital.
Case-3- When partnership agreement says interest on capital is to be provided as a charge.

Fully allowed
Note: interest on capital is always calculated on the opening balance of capital in a year.in case if the
question gives closing capital, then opening capital will be calculated first by using the following
formula.
Opening capital= closing capital + Drawings + Withdrawal capital + Loss – Profits-

Additional capital.
Accounting treatment of interest on partner’s loan to the firm Interest on partner’s loan is a charge
against the profits and not an appropriation out of profit and hence, must be transferred to the debit of
profit and loss account and not to the debit of profit and loss appropriation account.
Note If there is an agreement as to the rate of interest, partner is entitled to interest on loan at the
agreed rate or interest .If there is no agreement as to the rate of interest, partner is entitled to interest on
loan @6% per annum.
Interest on partner’s loan is not recorded in the partner’s capital/current account but it should be
recorded to the credit side of partner’s loan account.
Accounting Treatment of Salary or Commission to a Partner Salary or commission to a partner is to be

allowed if the partnership agreement provides for the same.
Salary or commission to a partner is an appropriation out of profits and not a charge against the profits,
i.e., they are not to allowed only if there are profits and hence must be transferred to the debit of profit
and loss appropriation account and not to the debit of profit and loss account.
(i) Commission as Percentage of Net before Charging such Commission

Rate of Commission
= Net Profit before Commission ×
100
(ii) Commission as Percentage of Net Profit after Charging such Commission
Rate of Commission
= Net Profit before Commission × 100+Rate of Commission
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Note Charges such as interest on partner’s loans, manager’s salary and commission must be
deducted from profit before transferring it to profit and loss appropriation account.
Rent Paid to a Partner It is a charge against the profit and not an appropriation out of profits. It is
therefore debited to profit and loss account and credited to partners’ current account in case of fixed
capitals or to partner’s capital account when capitals are fluctuating
Distribution of Profit among Partners through Profit and Loss Appropriation Account Profit and loss
appropriation account in an extension of the profit and loss account. It is an account that is prepared to
distribute the profits in accordance with the agreement the partners. It is an account that shows
appropriation or distribution of profits.
Profit and Loss Appropriation Account

for the year ended --------------------
Dr Cr
Particulars Amt (Rs) Particulars Amt (Rs)
To Interest on capital A/cs By Profit & Loss A/c (Net profit …
A … before any appropriation)
B … …
To Partner’s Salaries A/c …
To Partner’s Commission A/c … By interest on Drawings …
To Reserve A/c … A- ------
To Profit Transferred to B- -------
***A’s Capital A/c … ________
***(or A’s Current A/c)
***B’s Capital A/c … …
***(or B’s Current A/c)
… …
Past Adjustments If after closing the accounts of a partnership firm, some errors or omissions are
discovered in the accounts, e.g. interest on capital or drawings may not have been allowed or
charged, charged or allowed at a higher or lower rate etc, then under such circumstances, the accounts
once closed are not reopened. Such errors and omissions are rectified by recording an adjusting entry.
Such adjustments are called past adjustments as they relate to past period.
A simple format of adjustment table is given below.
Statement Showing Adjustments to be Made
Particulars X (Rs) Y (Rs) Total (Rs)

A. Amounts already Recorded (e.g.)
Interest on Capital … … …
Interest on Drawings (…) (…) (…)
Salary/Commission to Partner … … …
Share of Profit … … …
… … …
B. Amount which should have been Recorded (e.g.)
Interest on Capital … … …
Interest on Drawings (…) (…) (…)
Salary/Commission to Partner … … …
Share of Profit … … …
… … …
Net Effect (A – B) … … …
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JOURNAL
Date Particulars L.F Amt (Dr) Amt (Cr)

Gaining Partners’ Capital A/c (Who received excess) Dr …
To Sacrificing Partner’s Capital A/c (Who received short) …
Guarantee of Profits to a Partner A partner may be admitted into the firm with a guarantee of minimum
profit, which means that if his share of profit less than that of guaranteed profit, then he would be paid
the guaranteed share of profit. The deficiency (difference between guaranteed profit and actual profit) is
borne by the firm or partner or partners who have guaranteed the profit in agreed ratio.
Difference Cases Regarding Guarantee of profits
Different cases regarding guarantee of profits are
(i) Guarantee by the Firm to a Partner

(ii) Guarantee by One Partner to Another Partner
(iii) Guarantee Given by the Partner to the Firm
(iv) Simultaneous Guarantee by the Firm to the Partner and by the Partner to the Firm
Steps Involved in the Distribution of Profits under Guarantee Arrangement are
The steps involved in the distribution of profits under guarantee arrangement are
Step 1 Calculate the actual share of profits/loss of guarantee arrangement partner.
Step 2 Calculate the guaranteed amount.
Step 3 Calculate the amount of deficiency
Deficiency = Guaranteed Amount – Actual Share of Profit
Step 4 Distribute the deficiency among the guaranteeing partners in their guaranteeing ratio.
Step 5 Distribute the actual profits/losses among all the partners in their profit sharing ratio as if
there is no guarantee arrangement
Step 6 Recover share of deficiency (as per step 3) from the guaranteeing partners and give credit for
the same to guaranteed partner.
Format of Profit and Loss Appropriation Account
Methods of maintaining Capital Accounts of Partners: 1. Fixed Capital Accounts 2. Fluctuating Capital
Accounts.
1. When varying amounts are withdrawn at different intervals.
Interest is calculated through Product method and given for 1month =Total product x Rate/ 100 X 1/ 12
2. When fixed amount is withdrawn (for Whole Year):
(a) At the beginning of each month. (a) Total drawings X Rate/ 100 X 6.5/ 12
(b) At the middle of each month. (b) Total drawings X Rate/ 100 X 6/ 12
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(c) At the end of each month. (c) Total drawings X Rate/ 100 X 5.5/ 12
3. When fixed amount is withdrawn:
(a) In the beginning of each quarter. (a) Total drawings Rate/ 100 X 7.5/ 12
(b)At the middle of each quarter. (b) Total drawings X Rate/ 100 X 6/ 12
(c) In the end of each quarter. (c) Total drawings X Rate/ 100 X 4.5/ 12
4. When fixed amount is withdrawn:
(a) In the beginning of each half year. (a) Total drawings X Rate/ 100 X 9/ 12
(b) At the middle of each half year. (b) Total drawings X Rate/ 100 X 6/ 12
(c) In the end of each half year. (c) Total drawings X Rate/ 100 X 3/ 12
5. When fixed amount is withdrawn (during 06 months):
(a) At the beginning of each month. (a) Total drawings X Rate/ 100 X 3.5/ 12
(b) At the middle of each month. (b) Total drawings X Rate/ 100 X 3/ 12
(c) At the end of each month. (c) Total drawings X Rate/ 100 X 2.5/ 12
MCQs
1- Sleeping partners are those who
(A) take active part in the conduct of the business but provide no capital. However, salary is paid to
them.
(B) do not take any part in the conduct of the business but provide capital and share profits and losses in
the agreed ratio
(C) take active part in the conduct of the business but provide no capital. However, share profits and
losses in the agreed ratio.
(D) do not take any part in the conduct of the business and contribute no capital. However, share profits
and losses in the agreed ratio.
Answer – B
2- In the absence of Partnership Deed, the interest is allowed on partner’s capital:
(A) @ 5% p.a. (B) @ 6% p.a. (C) @ 12% p.a. (D) No interest is allowed
Answer – D
3- A, B and C were Partners with capitals of ₹50,000; ₹40,000 and 30,000 respectively carrying on
business in partnership. The firm’s reported profit for the year was ₹80,000. As per provision of the
Indian Partnership Act, 1932, find out the share of each partner in the above amount after taking into
account that no interest has been provided on an advance by A of ₹20,000 in addition to his capital
contribution.
(A) ₹26,267 for Partner B and C and ₹27,466 for Partner A. (B) ₹26,667 each partner.
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(C) ₹33,333 for A ₹26,667 for B and ₹20,000 for C. (D) ₹30,000 each partner.
Answer – A
4- On 1st June 2018 a partner introduced in the firm additional capital ₹50,000. In the absence of
partnership deed, on 31st March 2019 he will receive interest:
(A) ₹3,000 (B) Zero (C) ₹2,500 (D) ₹1,800
Answer – B
5- According to Profit and Loss Account, the net profit for the year is ₹1,50,000.
The total interest on partner’s capital is ₹18,000 and interest on partner’s drawings is ₹2,000. The net
profit as per Profit and Loss Appropriation Account will be:
(A) ₹1,66,000 (B) ₹1,70,000 (C) ₹1,30,000 (D) ₹1,34,000
Answer- D
6- A and B are partners. According to Profit and Loss Account, the net profit for the year is ₹2,00,000.
The total interest on partner’s drawings is ₹1,000. As salary is ₹40,000 per year and B’s salary is ₹3,000
per month. The net profit as per Profit and Loss Appropriation Account will be:
(A) ₹1,23,000 (B) ₹1,25,000 (C) ₹1,56,000 (D) ₹1,58,000
Answer- B
7- If a fixed amount is withdrawn by a partner in each quarter, interest on the total amount is charged
for ………………... months
(A) 3 (B) 6 (C) 4.5 (D) 7.5
Answer- B
8- Anuradha is a partner in a firm. She withdrew ₹6,000 in the beginning of each quarter during the year
ended 31st March, 2019. Interest on her drawings @ 10% p.a. will be:
(A) ₹900 (B) ₹1,200 (C) ₹1,500 (D) ₹600
Answer- C
PRACTICAL PROBLEMS
Q1. Mention any four provisions of the Partnership Act, in the absence of Partnership Deed.
Ans. Rules Applicable in the absence of Partnership Deed
1. Profit – Sharing Ratio – Shared equally
2. Interest on Capital – No interest on Capitals
3. Interest on Drawings - No interest on Drawings
4. Salary to a Partner – No partner is entitled to any salary
5. Interest on loan - @ 6% per annum
6. Admission of a New Partner – Without the consent of all existing partners no new partner can be
admitted to the firm.
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Q2. Name any four-item shown in the Debit side of Profit and Loss Appropriation Account.
Ans.1. Salaries of Partners 2. Commission to Partners 3. Interest to Partner`s Capitals 4.Reserve A/c Q3.
Mention the items that may appear on the credit side of the Capital Account of a partner when the
capitals are fluctuating.
Ans.1. Cash/Bank A/c (Additional Capital) 2. Interest on Capital 3.Partner`s Salary 4.Partner`s
Commission
Q4. Mention the items that may appear on the Debit side of the Capital Account of a partner when the
capitals are fluctuating.
Ans.1.Cash/Bank A/c (Drawing against Capital) 2. Drawings (Drawing against Profit) 3.Interest on
Drawings 4.P.& L. A/c (Share of loss)
Q5. Ajay, Binod and Chandra entered into partnership on 1st April 2019 with capitals Rs.3,00,000, Rs.
2,00,000 and 1,00,000 respectively. In addition to capital, Chandra has advanced a loan of Rs. 1,00,000.
Since they had no agreement to guide them, they faced following issues during and at the end of the
year:
1. Ajay wanted interest on capital to be provided @ 8% P.a but Binod and Chandra did not agree.
2. Chandra wanted that interest on loan be paid to him @ 10% P.a but Ajay and Binod wanted to pay @
5% p.a.
3. Ajay and Binod demanded to share profits in the ratio their capital contribution, Chandra is not in
agreement with this proposal.
4. Binod, being working partner, demands a lump sum payment of Rs.40,000 as remuneration for which
other partners are not in agreement.
You are required to suggest and help them resolve these issues.
Ans. 1. No interest is payable on Capitals
2. Interest on loan by partner will be paid @ 6% P.a
3.Profits will be shared equally
4.No salary / remuneration is payable to any partner
Q6.B, C and D are partners sharing profits in the ratio of 1:1:1. As per the partnership deed salary is
allowed to the partners as follows:  B is entitled to a salary of ₹ 2,000 per month.  C is entitled to salary
of ₹ 16,000 p.a.  D is entitled to a salary of ₹ 4,000 quarterly.
Calculate the amount of salary payable to the partners in the following cases:
Case 1. When there is profit of ₹ 62,000
Case 2. When there is profit of ₹ 35,000
Case 3. When there is loss ₹ 20,000
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Answer Case 1 Profit is enough to pay the salary to the partners B’s Salary will be paid ₹ 24,000; C ₹
16,000 and D ₹ 16,000 and remaining profit 6,000 will be shared equally by all the partners
Case 2 Profit is not enough to pay salary to partners Profit will be shared in the ratio of salary 24,000:
16,000: 16,000 i.e., 3:2:2. B will get 15,000; C ₹ 10,000 and D ₹ 10,000.
Case 3 Salary will not be paid to any partner, because there is loss. Salary is not a charge in this case, it is
treated as an appropriation.
Q7. A, B and C were partners in a firm sharing profits in the ratio of 7:4:9. Their capitals on 1st April
2021 were: A ₹ 2,00,000; B ₹ 75,000 and C ₹ 3,50,000. Their partnership deed provided for the following:
(i) 10% of the net profit to be transferred to General Reserve.

(ii) Interest on capital is to be allowed @ 9% p.a.
(iii) (iii) Salary of ₹ 6,000 per month to B.
(iv) (iv) Interest on Drawings @ 6% p.a. Drawings made against the anticipated profits, by A during
the year ₹ 25,000, B withdrew ₹ 5,000 at the end of each quarter, C withdrew ₹ 25,000 on1st
June 2021 for personal use.
During the year ended 31st March 2022 the firm earned profits of ₹ 1,70,000. Prepare Profit
and Loss Appropriation Account.
Solution:
PROFIT AND LOSS APPROPRIATION ACCOUNT

(For the year ending 31st March 2021)
Dr Cr
Particulars Amount Particulars Amount
To General Reserve 17,000 By Profit and Loss, A/c (NP) 1,70,000
To Interest on Capital A/c By interest on drawings
A – 18,000
B - 6750 A- 750
C – 31,500 56,750 B - 450 2,450
To B ’s salary (6000 x 12) 72,000 C- 1250
To profit transferred to partners
capital A/c
A- 9520 27,200
B- 5440
C- 12,240
1,72,450 1,72,450
Q8. M and B are equal partners. M is a sleeping partner and B is an Active working partner. Their capitals
on 1st April 2021 were: M ₹ 6,000 Credit and B (₹ 20,000) Debit. M has given a loan to the firm ₹ 10,000
on 1st April 2021 @ 10% p.a. Partnership deed allows 10% p.a. interest on capital. Salary to every Active
working partner @ 3,000 p.a. but partnership deed is silent on interest on loan payable to any partner, in
case any partner provides loan to the firm. Profit for the year ending 31st March 2022 was ₹ 7,000
before providing above. Prepare Profit and Loss Appropriation Account.
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PROFIT AND LOSS APPROPRIATION ACCOUNT
Particulars Amount Particulars

Amount
To Interest on Capital By Profit and Loss, A/c (Net
A/c M 4,000 Profit) 6,000
To Partner’s Salary A/c (7,000-1,000 interest on loan)
B 2,000
6,000 6,000
Note-(i) interest
on capital to M 6,000 and salary to B 3,000 but profit only 6,000 will be shared in the ratio of
appropriation 6000 : 3000 = 2:1.
(iii) No interest on capital to B because his capital showing negative balance.
Q9. On 31st March, 2021, the balance in the capital accounts of Asha, Nisha and Disha after making
adjustments for profits and drawings were ₹ 1,50,000, ₹ 1,20,000 and ₹ 90,000 respectively.
Subsequently, it was discovered that interest on capital and interest on drawings had been omitted. The
partners were entitled to interest on capital @ 10% p.a. Interest on drawings was also to be charged @
10% p.a. The drawings during the year were: Asha ₹ 50,000, Nisha ₹ 60,000 and Disha ₹ 30,000. The net
profit for the year ending 31st March, 2021 amounted to ₹ 1,00,000. The profit-sharing ratio was 2: 2: 1.
Pass the necessary adjustment entry. Also show workings note clearly.
Solution:
journal
Particulars Dr (Amount)
Cr. (Amount)
Nisha’s capital A/c Dr 2,200
To Asha’s capital A/c 300
T Disha’s capital A/c 1900
(omission of interest on capital and commission, now
rectified)
Solution:
Working note:
Asha Nisha Disha Total

Interest on capital (Cr) 16,000 14,000 10,000 (40,000)
Interest on Drawings ( Dr) (2,500) (3,000) (1,500) 7,000
Cr 13,500 11,000 8,500 (33,000)
Division of profits 67000 in 2:2:1 Cr 26,800 26,800 13,400 (67,000)
Cr 40,300 37,800 21,900 (1,00,000)

Earlier given profit debited, (1,00,000 in 2:2:1) 40,000 40,000 20,000 1,00,000
300 Cr 2,200 Dr 1,900 Cr -
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Calculation of Interest on Capital:
Calculation of opening Capital:
Particulars Asha Nisha Disha

Closing Capital 1,50,000 1,20,000 90,000
Add- Drawings 50,000 60,000 30,000
Less- Profits (40,000) (40,000) (20,000)
Opening Capital 1,60,000 1,40,000 1,00,000
Interest on capital @ 10% p.a. 16,000 14,000 10,000
Q-10- Ram, Mohan and Sohan were partners sharing profits in the ratio of 2: 1: 1. Ram withdrew ₹ 3,000
every month and Mohan withdrew ₹ 4,000 every month. Interest on drawings @ 6% p.a. was charged,
whereas the partnership deed was silent about interest on drawings. Showing your working clearly, pass
the necessary adjustment Pass journal entry to rectify the error.
Solution:
journal
Particulars Dr (Amount) Cr. (Amount)
Ram’s capital A/c Dr 180

Sohan’s capital A/c Dr 630
To Mohan’s capital A/c 810
(adjustment entry for interest on drawings wrongly
charged)
Adjustment Table
Particulars Ram (Rs) Mohan (Rs) Sohan (Rs)

Interest on Drawings wrongly debited so credited back 1080 Cr 1440 Cr -------
again.
Firm’s gain wrongly distributed due to int. on drawings 1260 Dr 630 Dr 630 Dr
to be taken back in (2:1:1) 180 Dr 810 CR 630 Dr
Q8. Mansi, Simran and Namita started business on 1st April 2019 with capital of Rs.56,000, Rs.44,800
and Rs.33,600 respectively. After distributing the profit of Rs.67,200 for the year ended 31st March, 2020
in their agreed ratio of 3:1:1, it was found that following items were not taken into consideration in the
books of accounts: i) Interest on capital @ 10% p.a. ii) Commission to Mansi was Rs.6,720. iii) Salary to
Mansi and Simran Rs.11,200 and Rs.16,800 respectively. iv) Interest on drawings: Mansi Rs.784, Simran
Rs.560 and Namita Rs.336. You are required to pass a single adjustment entry to rectify the errors. Show
your workings clearly.
Q9. Rohit, Raman and Raina are partners in a firm. Their capital accounts on 1st April, 2019, stood at
Rs.2,00,000, Rs.1,20,000 and Rs.1,60,000 respectively. Each partner withdrew Rs.15,000 during the
financial year 2019-20. As per the provisions of their partnership deed: (a) Interest on capital was to be
allowed @ 5% per annum. (b) Interest on drawings was to be charged @ 4% per annum. (c) Profits and
losses were to be shared in the ratio 5:4:1. The net profit of Rs.72,000 for the year ended 31st March
2020, was divided equally amongst the partners without providing for the terms of the deed. You are
required to pass a single adjustment entry to rectify the error (Show workings clearly).
23
Change in Profit Sharing Ratio among the Existing Partners
Meaning of Reconstitution of Whenever old partnership deed comes to an end and a new
Partnership firm partnership deed is formed, it is called reconstitution of partnership
firm. In other words, any change in Existing agreement of
partnerships is Reconstitution of Partnership”
When reconstitution of Reconstitution of partnership takes place in the following
partnership takes place circumstances:
1. Change in profit sharing ratio among existing partners
2. Admission of a new partner
3. Retirement of an Existing partner
4. Death of a partner
5. Amalgamation of two Partnership firms
What is the effect of change It leads to dissolution of partnership and not the dissolution of the
in firm because the Existing partnership agreement ends and the new
profit sharing ratio? agreement comes into effect.
Issues which are to be dealt 1. Determination of sacrificing ratio and gaining ratio.
with at the time of change in 2. Accounting treatment of Goodwill.
profit sharing ratio 3. Accounting treatment of Reserves accumulated profits or losses.
4. Revaluation of Assets and reassessment liabilities.
5. Adjustment of Capital
Why do partner’s change This may happen on account of a change in the existing partner’s
their role in the firm
profit sharing ratio?
Sacrificing Ratio The ratio in which one or more partners of the firm agree to sacrifice
their share of profit in favour of one or more partners of the firm.
Gaining Ratio = New Ratio – Old Ratio
When is Sacrificing ratio 1. In case of change in Profit sharing ratio
computed? 2. If there is admission of a new partner
Gaining Ratio It is ratio in which one or more partners gain share of profit because
of sacrificed share in profit by one or more partners of the firm
New profit-sharing ratio The ratio in which the partners agree to share the profits in future on
reconstitution is known as new sharing ratio.
Treatment of goodwill in A) WHEN GOODWILL IS ADJUSTED THROUGH
case of change in profit PARTNER’S CAPITAL ACCOUNTS
sharing ratio
i) In case of Fluctuating Capitals
Gaining Partner’s Capital A/c Dr.
To Sacrificing Partner’s Capital A/c
(Being adjustment made for goodwill on change in profit sharing
ratio)
ii) In case of Fixed Capitals
Gaining Partner’s Current A/c Dr.
To Sacrificing Partner’s Current A/c
(Being adjustment made for goodwill on change in profit sharing
ratio)
24
B) WHEN EXISTING GOODWILL IS WRITTEN OFF
All Partner’s Capital Accounts/Current A/c Dr.
To Goodwill A/c
(Being the goodwill written off among partners in old ratio)
TREATMENT OF Accumulate Profits include credit balance of P&L A/c, General
RESERVES, Reserves, Reserve Fund, Workmen Compensation Reserve,
ACCUMULATED PROFITS Investment Fluctuation Reserve etc.
& LOSSES Accumulated Losses include debit balance of P&LA/c, Deferred
Revenue Expenditure i.e. Advertisement Suspense A/c.
A) WHEN QUESTION IS SILENT OR WHEN
ACCUMULATED PROFITS OR LOSSES ARE TO BE
DISTRIBUTED OR WHEN ACCUMULATAED
PROFITS OR LOSSES ARE NOT TO BE SHOWN IN
NEW BALANCE SHEET
Contingency Reserve A/c Dr.
Reserve A/c Dr.
P&L (Cr.) A/c Dr.
Workmen Compensation Reserve A/c Dr.
Investment Fluctuation Reserve A/c Dr.
To all Partner’s Capital A/cs
(Being reserves & accumulated profits transferred to all partners in
old ratio)
All Partners Capital A/c Dr.

To P&L (Dr.) A/c
To Deferred Revenue exp. A/c
(Being accumulated losses transferred to all partners in old ratio)
B) WHEN ACCUMULATED PROFITS OR LOSSES ARE
NOT TO BE DISTRIBUTED OR WHEN
ACCUMULATAED PROFITS OR LOSSES ARE TO
BE SHOWN IN NEW BALANCE SHEET AT SAME
BOOK VALUE
Calculate the net effect of Reserve Accumulated Profits & Losses-
Reserves xx
ACCUMULATED PROFITS xx
Less ACCUMULATED LOSSES (xx)
Net Effect +/–
i) In case the Net Effect is Positive
Gaining Partner’s Capital/Current Accounts Dr.
To Sacrificing Partner’s Capital/Current Accounts
ii) In case the Net Effect is Negative Sacrificing Partner’s
Capital/Current/Accounts Dr.
To Gaining Partner’s Capital/Current Accounts
REVALUATION OFASSETS & REASSESSMENT OF LIABILITIES
(It is a nominal account & prepared to revalue assets & reassess liabilities.)
WHEN QUESTION IS SILENT OR WHEN REVISED VALUES OFASSETS &
LIABILITIES ARE TO BE RECORDED
25
(Revaluation A/c is prepared & Profit/Loss of revaluation is distributed among old partners in
old ratio)
REVALUATION ACCOUNT
(Rs.) (Rs.)
To Asset (decrease in value) xxx By Asset (increase in value) xxx
To Liability (increase in value) xxx By Liability (decrease in value) xxx
To Unrecorded liability xxx By Unrecorded asset xxx
To Profit (transferred to partner’s xxx By Loss (transferred to partner’s xxx
capital account in old ratio) capital account in old ratio)
Total xxx Total xxx
WHEN REVISED VALUES OFASSETS & LIABILITIES ARE NOT TO BE

RECORDED
(Assets & Liabilities will appear in Balance Sheet at old Value)
Calculate the net effect of revaluation
Increase in the value of Assets xxx
Add Decrease in the value of liabilities xxx
Less: Decrease in the value of Assets (xxx)
Less: Increase in the value of liabilities (xxx)
Net Effect on Revaluation (Gain/Loss)
For Gaining Partner = Share Gained × Net Effect on

Revaluation
For Sacrificing Partner = Share Sacrificed × net Effect on
Revaluation
i. In case the Net Effect is Gain on revaluation
Gaining Partner’s Capital/Current Accounts Dr.
To Sacrificing Partner’s Capital/Current Accounts
ii. In case the Net Effect is loss on revaluation
Sacrificing Partner’s Capital/Current Accounts Dr.
To Gaining Partner’s Capital/current A/c’s
Illustration 1) SACRIFICING & GAINING RATIO

A, B & C are Partners sharing profits in the ratio of 5: 3: 2. They decided to share profits in the
future in the ration of 2:2:1 w.e.f 1st April 2019. Calculate Sacrificing & Gaining Ratio?
Solution:
Sacrificing ratio = Old ratio – New ratio
5 2 1
A= - = (Sacrifice)
10 5 10
3 2 −1
B= - = (Gain)
10 5 10
2 1
C= -5=0
10
Illustration 2) TREATMENT OF GOOD WILL

A, B & C are partners sharing profit & losses in the ratio of 5:4:1. It was decided that w.e.f. 15th
April 2019. The profit-sharing ratio will be 9:6:5. Goodwill is to be valued at 2 years purchase of
average profits of last 3 years profits. The profit for 2016-17, 2017-18 & 2018-19 were - ₹42,000,
₹48,000 & ₹60,000 respectively. Goodwill appears in the books at ₹ 10,000. Pass necessary journal
entries for the treatment of goodwill.
26
Solution:
Average Profit = 42,000+48,000+60,000 = 50,000
3
Goodwill = 50,000 × 2 = ₹ 1,00,000
Calculation of Sacrificing/Gaining Ratio: -
5 9 1
A= - = 20 (Sacrifice)
10 20
4 6 2
B= - 20 = 10 (Sacrifice)
10
1 5 −3
C= - 20 = (Gain)
10 20
Particulars Dr. Cr.

A’s Capital A/c Dr. 5,000
B’s Capital A/c Dr. 4,000
C’s Capital A/c Dr. 1,000
To Goodwill A/c 10,000
(Being existing goodwill written off)
To A’s Capital A/c 5,000
To B’s Capital A/c 10,000
(Being goodwill adjusted due to change in profit sharing ratio)
Illustration 3) TREATMENT OF RESERVES & LOSSES

X, Y, Z are partners sharing profits & losses in the ratio of 5:3:2. They decide to share future profits
& losses in the ratio of 2:3:5 w.e.f 1st April 2019 Following items appear in the balance sheet as
on 31 Mar 2018.
General Reserve 75,000
Workmen Compensation Reserve 12,500
Profit & Loss Account 37,500
Advertisement Suspense A/c (Dr.) 50,000
i. Pass necessary journal entries
ii. Show the effect without affecting their book values by passing an adjustment entry.
Solution (i)
Particulars Dr. Cr.
General Reserve A/c Dr. 75,000
Workmen Compensation Reserve A/c Dr. 12,500
Profit & Loss A/c Dr. 37,500
To X’s Capital A/c 62,500
To Y’s Capital A/c 37,500
To Z’s Capital A/c 25,000
(Being the reserves & profits transferred to odd partners int their old ratio)
X’s Capital A/c Dr. 25,000
Y’s Capital A/c Dr. 15,000
Z’s Capital A/c Dr. 10,000
To Advertisement Suspense A/c 50,000
(Being advertisement suspense transferred to old partners in old ratio)
Solution (ii) (SINGLE ADJUSTMENT ENTRY)
Z’s Capital A/c Dr. 25,500
To x’s Capital A/c 25,500
27
(Being adjustment made for net reserves & losses in partner’s gain and
sacrifice)
# Here, Reserves & Losses will appear in Balance Sheet of New Firm as their
old values
Working Notes
1) Calculation of Net Effect of Reserves & Profit
General Reserve 75,000
Profit & Loss A/c 37,500
1,25,000
Less: Advertisement Suspense A/c (Dr.) (50,000)
75,000
Illustration 4) REVALUATION OF ASSETS & LIABILITIES
Piyush, Pooja & Praveen are partners sharing Profits & losses in Ratio 3:3:2. Their balance sheet
as on 31st March 2019 was as follows-
Liabilities (₹) Assets (₹)
Sunday creditors 48,000 Cash at bank 74,000
Bank Loan 72,000 Sundry debtors 88,000
Capital: Stock 2,40,000
Piyush - 4,00,000 Machinery 3,18,000
Pooja - 3,00,000 Building 4,00,000
Praveen - 3,00,000 10,00,000
11,20,000 11,20,000
Partners decided that with effect from April 1 2019 they would share profits and losses in the
ratio of 4:3:2. It was agreed that:
a. Stock be valued at 2,20,000.
b. Machinery is to be depreciated by 10%
c. A provision for doubtful debts is to be made on debtors at 5%
d. Building is to be appreciated by 20%
e. A liability for 5,000 included in Sundry creditors is not likely to arise.
Partners agreed that the revised values are to be recorded in the books.
You are required to prepare journal, revaluation account, partner’s capital Accounts and revised
Balance Sheet.
Solution
Particulars Debit (₹) Credit (₹)
Revaluation A/c Dr. 56,200 20,00
To Stock 31,800
To Machinery 4,400
To Provision for doubtful debts A/c
(Revaluation of assets)
28
Building A/c Dr. 80,000
Sundry creditor A/c Dr. 5,000
To Revaluation A/c 8500
(Revaluation of assets and liabilities)
Revaluation A/c Dr. 28,800 10,800
To Piyush’s capital A/c 10,800
To Pooja’s capital A/c 7,200
To Praveen’s capital A/c
(Profit on revaluation)
Revaluation Account
Particulars (₹) Particulars (₹)
To stock 20,000 By Building 80,000
To Machinery 31,800 By Sundry creditors 5,000
To Provision for doubtful debts 4,400
To profits transferred to capital accounts
of:
Piyush 10,800
Pooja 10,800
28,800
Praveen 7,200
85,000 85,000
Partner’s Capital Accounts

Particulars Piyush Pooja Praveen Particulars Piyush Pooja Praveen
To balance 4,10,800 3,10,800 3,07,200 By bal. b/d 40,00,000 3,00,000 3,00,000
By Revaluation 10,800 10,800 7,200
4,10,800 3,10,800 3,07,200 4,10,800 3,10,800 3,07,200
29
Balance Sheet
As on April 1, 2019
Sundry creditors 43,000 Cash at bank 74,000
Capital Accounts Less: provision 5% (4,400) 83,600
Piyush 4,10,800 Stock 2,20,000
Pooja 3,10,800 Machinery 2,86,200
Praveen 3,07,200 10,28,800 Building 4,80,000
11,43,800 11,43,800
Illustration 5- If in the above (Illustration No. 4) partners agreed that the revised values of
Assets & Liabilities are not to be shown the books. You are required to record the effect by
passing a single journal entry. Also prepare the revised balance sheet.
Solution
Particulars Debit (₹) Credit (₹)
Piyush’s capital A/c Dr. 2,000
To Pooja’s capital A/c 1,200
To Praveen’s Capital A/c 800
(Adjustment for profit on revaluation)
Partner’s Capital Accounts

Particulars Piyush Pooja Praveen Particulars Piyush Pooja Praveen
To Pooja’s Capital 1,200 By bal. b/d by 40,00,000 3,00,000 3,00,000
A/c
800 By Piyush’s Capital 1,200 800
To Praveen Capital A/c
398,000 3,01,200 3,00,800
A/c
To Balance c/d
4,00,000 3,01,200 3,00,800 4,00,000 3,01,200 3,00,800
30
Balance Sheet of Piyush, Pooja and Praveen (As on April 1, 2019)
Sundry creditors 48,000 Cash at bank 74,000
Capital Accounts Stock 2,40,000
Piyush 3,98,000 Machinery 3,18,200
Pooja 3,01,200 Building 4,00,000
Praveen 3,00,800 10,00,000
11,20,000 11,20,000
W. Note-1 Calculation of Gain due to revaluation
Building 80,000
Sundry Creditors 5,000
Total 85,000
Less Loss due to revaluation
Of Stock (20,000)
Machinery (31,800)
Provision for Doubtful Debts (4,400)
Net Gain 28,800
W. Note-2 Calculation of Sacrificing / Gaining Ratio-
3 4 5
Piyush = - = 72 (Gain)
8 9
3 3 3
Pooja = - 9 = 72 (Sacrifice)
8
2 2 2
Praveen = - = 72 (Sacrifice)
8 9
Amount Sacrificed/ Gained.
Piyush = 28,800 × 5/72 = ₹ 2000 Dr.
Pooja = 28,800 × 3/72 = ₹ 1200 Cr.
Praveen = 28,800 × 2/72 = ₹ 800 Cr.
31
Multiple choice question
1 Any Change in the relationship of existing partners which results in an end of the existing
agreement and enforces making of new· agreement is called:
A. Revaluation of partnership
B. Reconstitution of partnership
C. Realisation of partnership
D. None of the above
A B
2 Reserves and Accumulated Profits are transferred to Partners' Capital accounts at the time
of reconstitution in:
A. Old profit-sharing ratio
B. Sacrificing Ratio
C. Gaining ratio
D. New profit-sharing ratio
A A
3 In which of the following case, Revaluation Account is debited?
A. Increase in value of Asset.
B. Decrease in value of Asset
C. Decrease in value of Liability.
D. No change in value of Assets.
A B
4 Sacrificing ratio is the difference between:
A. New ratio and Old ratio
B. Old ratio and New ratio
C. New ratio and Gaining ratio
D. Old ratio and Gaining ratio
A B
5 A and B are partners in a firm sharing profits in the ratio of 3:2. They decided to share
future profits equally. Calculate A’s gain or sacrifice:
A. 2/10 (sacrifice)
B. 5/10 (gain)
C. 1/10 (Gain)
D. 1/10 (sacrifice)
A D
6 R ; S and T sharing profits and losses in the ratio of 1:2:3, decide to share future profit and
losses equally. They also decided to adjust the following accumulated profits, losses and
reserves without affecting their book figures, by passing a single adjustment entry:
General Reserve A/c ₹ 40000
Profit and Loss A/c (Cr.) ₹ 30000
Share Issue expenses A/c ₹ 10000
Then necessary adjustment entry will be:
A. Dr. R and Cr. T by ₹ 10,000
B. Dr. T and Cr. R by ₹ 10,000
C. Dr. S and Cr. R by ₹ 10,000
D. Dr. R and Cr. S by ₹ 10,000
A A
7 U V and W are partners sharing profits in the ratio of 2:3:5. They decided to share profit
in equal ratio, also decide to record the effect of the following revaluations and
reassessments without affecting the book values of assets and liabilities by passing a
single adjustment entry:
32
Book Value (₹) Revised Value (₹)
Land and Building 3,00,000 3,50,000
Furniture 1,50,000 1,00,000
Sundry Creditors 60,000 25,000
Outstanding Salaries 10,000 15,000
The single adjustment entry will be:

A. Dr. U 4000,V 1000 and Cr. W 5000
B. Dr. V 4000,W 1000 and Cr. U 5000
C. Dr. W 1000,V 4000 and Cr. U 5000
D. Dr. U 3000,V 2000 and Cr. W 5000
A A
8 ___________ Partner should compensate _________ partner in the case of reconstitution
of the firm.
A. Old , new
B. New , old
C. Sacrificing , gaining
D. Gaining , sacrificing
A D
1 Consider the following information from the books of A and B who agree to share future
0 profits and losses in the ratio of 3:2:
Investments ₹ 100000
Investment Fluctuation Fund ₹ 20000
Investments were valued at ₹ 75000 at the time of reconstitution of the firm.
Which of the following treatment is correct:
A Investment DR 5000
To Revaluation 5000
B Investment Fluctuation Fund DR 5000
To A 2500
To B 2500
C A DR 2500
B DR 2500
To B 5000
D Revaluation DR 5000
To Investment 5000
A D
Assertion and Reason

1 Given below are two statements, one labelled as Assertion (A) and the other labelled as
Reason (R). You are to examine these two statements carefully and select the answers
using the code given below:
Assertion (A): X, Y, and Z are partners sharing profits in the ratio of 5:3:2 . As per new
agreement Z takes 1/5th share equally from X and Y. New Profit sharing ratio will be 2:1:2
Reason (R): change in profit sharing ratio can be done if it is agreed by all the partners to
do so.
A. Both (A ) and ( R ) are true and ( R ) is the correct explanation of ( A )
B. Both (A ) and ( R ) are true and ( R ) is not correct explanation of ( A )
C. ( A ) is true but ( R ) is false
D. ( A ) is false but ( R ) is true
A A
33
2 Assertion (A): Employees provident fund is not distributed to the partners’ capital A/c
Reason (R): Employees provident fund is a liability towards the employees; thus, partners
have no claim over it.
A. Both Assertion and Reason are correct and Reason is the correct explanation for
Assertion
B. Both Assertion and Reason are correct but Reason is not the correct explanation
for Assertion
C. Assertion is correct but Reason is incorrect
D. Both Assertion and Reason are incorrect
A A
3 Assertion (A): If the amount of any liability is understated, then revaluation account will
be debited to restore the liability's amount to its actual value.
Reason (R): Increase in amount of liability is a profit for the firm.
A. Both Assertion and Reason are correct and Reason is the correct explanation for
Assertion
B. Both Assertion and Reason are correct but Reason is not the correct explanation
for Assertion
C. Assertion is correct but Reason is incorrect
D. Both Assertion and Reason are incorrect
A C
Case Study
I Bhavna and Rajiv were partners in a partnership firm carrying on a restaurant in Kolkata.
Bhavna noticed that a lot of food is left at the end of the day. To avoid wastage, she
suggested that it can be distributed to the needy. Rajiv wanted that it should be mixed with
the food being served in the next day. Rajiv then give a proposal that if his share in the
profit increased, he will not mind free distribution of leftover food. Bhavna happily
agreed. So, they decided to change their profit- sharing ratio 1:2 with immediate effect.
On that day revaluation of assets and reassessment of liabilities was carried out that
resulted into again of ₹ 18,000. On that date the goodwill of the firm was valued at
₹1,20,000. Based on the above information, you are required to answer the following
question no 1 and 2:
1 Sacrifice/Gain of Bhavna and Rajiv will be
A. Bhavna sacrifice 1/6,Rajiv Gain 1/6
B. Bhavn Gain 1/6,RajivSacrifice 1/6
C. Only Bhavna gains 1/6
D. Only Rajiv Sacrifice 1/6
A A
2 At the time of change in Profit Sharing ratio , gaining partner capital account is
............... and sacrificing partner is.................for adjustment of Goodwill.
A. Credited, Debited
B. Debited, Credited
C. Increase, Decrease
D. Decreased, Credited
A B
II Shabir, David and Charu were partners in a firm supplying school uniforms who shared
profits in the ratio of 5:3:2. Shabir suggested to start supplying low cost school uniforms
to the students who belonged to low income group and admitted to the private schools of
the city as per the provisions of Right to Education Act 2009. On 1st April, 2022 David
requested to increase the share of profit of Charu, a specially abled partner having good
knowledge of cost-reduction methods. Shabir agreed to it and the new profit sharing ratio
34
was decided 2:5:3. For this purpose it was agreed that the goodwill is valued at ₹ 76,000.
The stock (book value ₹ 40,000) was to be depreciated by 8%. Creditors amounting to ₹
900 not likely to be claimed. Liability on account of workmen compensation amounted to
₹ 8,000. Investments (book value ₹ 38,000) were revalued at ₹ 40,000. From the given
passage answer the questions No. 3 to 6
3 Loss on revaluation will be.
(A) ₹ 9,300
(B) ₹ 8,300
(C) ₹ 7,300
(D) ₹ 6,300
A (B) ₹ 8,300
4 Shabir’s sacrificing ratio will be.
(A) 4/5
(B) 3/10
(C) 2/10
(D) 1/10
A (B) 3/10
5 David and Charu will compensate Shabir for adjustment for goodwill on account of
change in profit sharing ratio by.
(A) ₹ 12,800
(B) ₹ 13,900
(C) ₹ 22,800
(D) ₹ 23,900
A (C) ₹ 22,800
6 Decrease in value of stock by ₹3,200 will be.
(A) Debited to revaluation A/c
(B) Credited to revaluation A/c
(C) Debited to goodwill A/c
(D) Credited to partner’s capital A/c
A (A) Debited to revaluation A/c
Very Important Questions
1 Juhi, Chirag and Chitra were partners in a firm sharing profits and losses in the ratio of
2:3:1. With effect from 1st April, 2022, they decided to share future profits and losses in
the ratio of 3:2:1.
It was also agreed that:
(a) The goodwill of the firm be valued at ₹ 1,80,000.
(b) The Land (having book value of ₹ 3,00,000) will be valued at ₹ 4,80,000.
Pass the necessary Journal entries for the above changes.
A 1. Juhi’s Capital A/c Dr 30,000
To Chirag’s Capital A/c 30,000
2. Land A/c Dr. 180000
To Revaluation A/c 180000
3. Revaluation A/c Dr. 180000
To Juhi’s Cap A/c 60000
To Chirag’s Cap a/c 90000
To Chitra’s cap a/c 30000
2 Mayur, Niral, Narendra and Nitesh were partners in a firm sharing profits in the ratio of
4:3:2:1. On 1st April, 2022, their Balance Sheet was as follows:
Balance Sheet as on 1st April, 2022
35
Liabilities ₹ Assets ₹
Capital A/c Fixed Assets 4,40,000
Mayur 2,00,000 Current Assets 2,00,000
Niral 1,50,000
Narendra 1,00,000
Nitesh 50,000 5,00,000
Creditors 80,000
6,40,000 6,40,000
From the above date partners decided to share the future profits in the 3:1:2:4 ratio. For
this purpose the goodwill of the firm was valued at ₹ 90000. The partners also agreed for
the following.
i. The claim for workmen compensation has been estimated at ₹ 50,000.
ii. To adjust the capitals of the partners according to new profit sharing ratio by
opening Partners’ Current Accounts.
Prepare Partners’ Capital Account of the reconstituted firm.
A Partners’ Capital Accounts
Particular Mayur Niral Narendra Nihar Particular Mayur Niral Narendra Nihar
To Mayur’s 9000 By Bal 200000 150000 100000 50000

cap
To Niral’s 18000 By WCR 4000 3000 2000 1000
cap
By Nihar’s 9000 18000
cap.
To Curr. a/c 60000 120000 By curr a/c - 180000
To bal cf 153000 51000 102000 204000

213000 171000 102000 231000 213000 171000 102000 231000
3 Rakha, Seema and Mahesh were partners sharing profits and losses in the ratio of 5:3:2.
With effect from 1st April, 2022, they mutually agreed to share profits and losses in the
ratio of 2:2:1. On that date, there was a workmen’s compensation fund of ₹ 90,000 in the
books of the firm. It was agreed that :
(i) Goodwill of the firm be valued at ₹ 70,000.
(ii) Claim for workmen’s compensation amounted to ₹ 40,000.
(iii) Profit on revaluation of assets and re-assessment of liabilities amounted to ₹ 40,000.
Pass necessary journal entries for the above transactions in the books of the firm.
A Journal entries
SN Particular Dr ₹ Cr ₹
1 Seema’s Capital A/c Dr. 7,000
To Rakha’s Capital A/c 7,000
2 Workmen’s Compensation Fund Dr. 90,000
To Workmen’s Compensation Claim A/c 40,000
To Seema’s Capital A/c 15,000
To Mahesh’s Capital A/c 10,000
3 Revaluation A/c Dr. 40,000
36
To Seema’s Capital A/c 12,000
To Mahesh’s Capital A/c 8,000
4 Veer, Dev and Manav were partners in a firm sharing profits and losses equally. The firm
was engaged in the storage and distribution of canned juice and its godowns were located
at three different places in the city. Each godown was being managed individually by Veer,
Dev and Manav. Because of increase in business activities at the godown managed by Dev,
he had to devote more time. Dev demanded that his share in the profits of the firm be
increased, to which Veer and Manav agreed. The new profit sharing ratio was agreed to be
1 : 2 : 1. For this purpose the goodwill of the firm was valued at two years purchase of the
average profits of last five years. The profits of the last five years were as follows:
Year I II III IV V
Profit (₹) 8,00,000 9,60,000 14,66,000 (66,000) 4,40,000
You are required to :
(i) Calculate the goodwill of the firm.
(ii) Pass necessary Journal Entry for the treatment of goodwill on change in profit
sharing ratio of Veer, Dev and Manav.
A Calculation of Goodwill of the firm
Average Profit = ₹ (8,00,000+9,60,000+14,66,000–66,000+4,40,000) / 5
= ₹ 7,20,000
:. Goodwill of the firm = 2 x 7,20,000 = ₹ 14,40,000
Journal entry
Date Particulars Dr. ₹ Cr. ₹
Gupta’s Capital A/c Dr. 2,40,000
To Kumar’s Capital A/c 1,20,000
To Kavita’s Capital A/c 1,20,000
37
Admission of a New Partner
MEANING OF RECONSTITUTION OF PARTNERSHIP:

Partnership is an agreement between two or more persons (called partners) for sharing the profits
of a business carried on by all or any of them acting for all. Any change in the existing agreement
amounts to reconstitution of the partnership firm. This results in an end of the existing agreement
and a new agreement comes into being with a changed relationship among the members of the
partnership firm and/or their composition. However, the firm continues.
MODES OF RECONSTITUTION OF A PARTNERSHIP FIRM:

a. Admission of a new partner
b. Change in the profit-sharing ratio among the existing partners
c. Retirement of an existing partner
d. Death of a partner
Admission of a new partner: For example, Ajit and Ali are partners sharing profits in the ratio of
3:2. On April 1, 2022 they admitted John as a new partner with 1/6 share in profits of the firm.
With this change now there are three partners of the firm and it stands reconstituted. A new partner
may be admitted to supplement firm’s existing resources (additional capital or managerial help)
only with the consent of all the existing partners according to the Partnership Act 1932. A newly
admitted partner acquires two main rights in the firm–
a. Right to share the assets of the partnership firm; and
b. Right to share the profits of the partnership firm.
c.
Accounting treatment at the time of admission of a new partner include the following:
a. Calculation of New profit-sharing ratio and Sacrificing ratio;
b. Valuation and accounting treatment of goodwill;
c. Revaluation of assets and Reassessment of liabilities;
d. Distribution of accumulated profits (reserves);
e. Preparation of Partner’s capital Account;
f. Preparation of Cash Book (if asked)
g. Preparation of Balance Sheet; and
h. Adjustment of partners’ capitals.
1. NEW PROFIT-SHARING RATIO AND SACRIFICING RATIO
Points to remember:
a. Individual partner is called partner but collectively partners are called firm.
b. Individual partner’s share is called PROFIT SHARE but collectively it is called PROFIT
SHARING RATIO. For example, Abhay, Bhim and Chitra share profits in the ratio of
3:2:1 and their profit shares are Abhay 3/6, Bhim 2/6 and Chitra 1/6.
c. Incoming partner (admitted partner) is always a gainer.
d. Old partners may gain or sacrifice as per question.
e. Sum of all partner’s gain is always equal to all partner’s sacrifice.
Sacrificing Ratio: - The ratio in which the old partners agree to sacrifice their share of profit in
favour of the incoming partner is called sacrificing ratio.
Sacrifice by a Partner = Old share of Profit – New share of Profit
38
Cases for calculation of New profit-sharing ratio and sacrificing ratio
Case-1 Old Profit-sharing ratio and proportionate share of the new partner are given. Nothing
is specified as to the ratio in which the new partner acquires his share from the old
partners. (Default case)
Question: - Ajay and Baiju are partners sharing profits in the ratio of 3:2. They
admitted Suraj as a new partner for 1/5th share in the future profits of the firm.
Solution: - Suraj’s share = 1/5.
Therefore, combined share of Ajay and Baiju = 1-1/5= 4/5
Ajay’s new share = 3/5X4/5= 12/25
Baiju’s new share = 2/5X4/5=8/25
New profit-sharing ratio of Ajay, Baiju and Suraj = 12/25:8/25:1/5 = 12:8:5.
Case-2 Old profit-sharing ratio, share of the new partner and the new ratio between old
partners are given
Question: - Allu and Bankey are partners in a firm sharing profits in the ratio of 3: 2.
They admitted Chiku as a new partner for 1/4th share. The new profit-sharing ratio
between Allu and Bankey will be 2:1.
Solution: - Chiku’s share = 1/4
Combined share of Allu and Bankey = 1-1/4 =3/4, which is to be shared by Allu and
Bankey in 2:1.
Thus, Allu’s new share = 2/3X3/4=6/12
Bankey’s new share = 1/3X3/4 =6/12
Therefore, new profit sharing of Allu, Bankey and Chiku = 6/12:3/12:1/4 = 2:1:1
Case-3 Old partners old profit-sharing ratio, new partners share and sacrificing ratio are given
Question: - Ram and Lakhan are partners sharing profits in the ratio of 3:2. They
admit Mira as a new partner for 1/5th share in the future profits of the firm which he
gets equally from Ram and Lakhan.
Solution: - Sacrificing Ratio of Ram and Lakhan = 1:1
Therefore, Ram ‘s sacrifice = Lakhan’s sacrifice = 1/2X1/10= 1/10
Calculation of new profit-sharing ratio: new share of an existing partner = Old Share
– Sacrificing share
Ram’s new share = 3/5-1/10 = 5/10
Lakhan’s new share = 2/5 – 1/10 = 3/10
Therefore, new profit-sharing ratio between Ram, Lakhan and Mira = 5/10: 3/10:1/5
= 5:3:2
Case-4 Old partner’s old profit-sharing ratio, new partner’s share and old partner’s absolute
sacrificing share are given
Question: - Ajit and Dinesh are partner’s sharing profits in the ratio of 3:2. They
admitted Swati as a new partner for 3/10 share which she acquired 2/10 from Ajit and
1/10 from Dinesh.
Solution: - Sacrificing ratio of Ajit and Dinesh = 2/10 : 1/10 = 2:1
Calculation of new profit-sharing ratio: New share of an existing partner = Old Share
Ajit’s new share = 3/5-2/10=4/10

Dinesh’s new share = 2/5-1/10= 3/10
Therefore, new profit-sharing ratio between Ajit, Dinesh, and Swati = 4:3:3
Case-5 Old Partner’s old profit-sharing ratio and their relative sacrificing share are given
Question: - Arjun and Bhim are partners in a firm sharing profits in the ratio of 3:2.
They admit Nakul as a new partner. Arjun surrenders ¼ of his share and Bhim 1/3 of
his share in favour of Nakul.
Solution: - Share surrendered by Arjun = 1/4X3/5 = 3/20
39
Bhim’s sacrifice share = 1/3X2/5 = 2/15
Therefore, Sacrificing Ratio of Arjun and Bhim = 3/20:2/15 = 9:8
Calculation of new profit-sharing ratio: new share of an existing partner = Old Share
Arjun’s new share = 3/5-3/20 = 9/20
Bhim’s new share = 2/5-2/15 = 4/15
Nakul’s share = Arjun’s sacrificing share + Bhim’s sacrificing share =
3/20+2/15=17/60
Therefore, New profit-sharing ratio among Arjun, Bhim and Nakul = 9/20:4/15:17/60
= 27:16:17
2. ACCOUNTING TREATMENT OF GOODWILL
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 as an intangible asset.
Need for Valuation of Goodwill:
a. Change in the profit-sharing ratio amongst the existing partners;
b. Admission of new partner;
c. Retirement of a partner;
d. Death of a partner; and
e. Dissolution of a firm involving sale of business as a going concern.
f. Amalgamation of partnership firms.
The important methods of valuation of goodwill are as follows:

a. Average Profits Method
b. Super Profits Method
c. Capitalisation Method
Point to remember: As per AS-26 raised goodwill or self-evaluated goodwill should not be
recorded in books of account.
Cases for accounting treatment of goodwill

Case-1 New partner No Entry If, Goodwill already
brings goodwill in exists in the Balance
cash but Goodwill Sheet (Asset Side), it
(Premium) Paid should be written off
privately. among old partners in
old profit-sharing ratio
Case-2 When New partner Cash/Bank/ Asset A/c Dr. by passing the following
brings cash or To Premium for Goodwill A/c entry
some asset for (Amount brought by new partner as
Goodwill premium) Old Partners
(Premium) Capital/Current A/c Dr.
Premium for Goodwill A/c Dr. To Goodwill A/c
To Gaining Partners Capital, A/c (Existing Goodwill
(Goodwill distributed among the written off among the
sacrificing partners in their old partners in their old
sacrificing ratio) ratio)
40
Partner’s Capital A/C
(Individually) Dr.
To Cash/Bank A/c
(If, Goodwill (Premium) withdrawn
by the sacrificing partners)
Case-3 When the new Incoming (New) Partners Current
partner does not A/c Dr.
bring the share of To Sacrificing Partners Capital
goodwill in cash A/c (individually)
(Account of goodwill not brought in
by new partner)
Hidden Goodwill:
Sometimes the value of Goodwill is not given. It is inferred or estimated from other related
information given in question
Example-1: - A & B are two partners in 3:2 ratio. Their capitals are ₹ 1, 20,000 and ₹ 1, 00,000
respectively. C is admitted for 1/5th share and he is bringing ₹ 80,000 as his capital. Calculate the
value of goodwill.
Solution:
Value of Firm’s Hidden Goodwill = (C’s Capital x 5/1) – (A's Capital+ B's Capital+ C's Capital)
= (₹ 80,000 x 5/1) – (₹ 1, 20,000 +₹ 1, 00,000+₹ 80,000)
= ₹ 4,00, 000 – ₹ 3,00,000
= ₹ 1, 00,000
So, C's share of Goodwill = ₹ 1,00,000 x 1/5 = ₹ 20,000
Example-2: - A and B are partners with capital of ₹ 26000 and ₹ 22000 respectively. They admit
C as partner with 1/4th share in the profits of the firm. C brings ₹ 26,000 as his share of capital.
Give journal entries to record goodwill on C's admission
Bank A/c Dr. 26,000
To C's Capital A/c 26,000
(Being the amount of Capital brought in by new partner)
C's Current A/c Dr.

To A's Capital A/c
To B's Capital A/c
(Being the Goodwill credited to sacrificing partners’ Capital A/cs in their sacrificing ratio.)
Working Note:
(1) Calculation of C's share of Goodwill–
Total capital of new firm on the basis of C's capital = 26000 x 4/1 = 1,04,000
Total capital of A, B and C
26000 + 22000 + 26000 = 74000
Goodwill of the firm = Total capital of new firm – Combined capital of A, B and C
104000 – 74000= 30000
C's share of Goodwill = 30000 ×1/4 = 7500
(2) In the absence of information, profits will be shared Equally.
3. REVALUATION OF ASSETS AND REASSESSMENT OF LIABILITIES

Revaluation account is prepared to reevaluate assets and liabilities on reconstitution of a firm.
There are two reasons for preparation of Revaluation Account at the time of admission of a
partner are:
41
a. To record the effect of revaluation of assets and liabilities for showing the true financial
position of business firm;
b. To ensure that the profits or losses on revaluation of assets and liabilities may be divided
amongst the old partners.
c. Nature of Revaluation Account is Nominal Account.
Revaluation Account

To Assets A/c XXX By Assets A/c XXX
(Decrease in value of Asset) (Increase in value of Asset)
To Liability A/c XXX By Liability A/c XXX
(Increase in amount of liability) (Decrease in amount of liability)
To Unrecorded Liability or XXX By Unrecorded Assets or XXX
Cash/Bank A/c Cash/Bank A/c
To Profit credited to old partners’ XXX To Loss debited to old partners’ XXX
Capital/Current Capital/Current
XXXX XXXX
 For increase in the value of an assets:

Assets A/c (Gain) Dr
To Revaluation A/c
 For reduction in the value of a liability:
Liability A/c (Gain) Dr
To Revaluation A/c
 For recording or selling an unrecorded asset:
Unrecorded Assets or Cash/Bank A/c Dr
To Revaluation A/c
 For reduction in the value of an asset:
Revaluation A/c Dr
To Assets A/c(Loss)
 For increase in the amount of a liability:
Revaluation A/c Dr
To Liability A/c (Loss)
 For recording or making payment of an unrecorded liability:
Revaluation A/c Dr
To Unrecorded Liability or Cash/Bank A/c
 For transfer of gain on revaluation in old ratio:
Revaluation A/c Dr
To Old partners’ Capital/Current A/c
Or
For transferring loss on revaluation in old ratio
Old partners’ Capital/Current A/c Dr
To Revaluation A/c
Some Typical Cases of Revaluation of Assets & Reassessment of Liabilities.
(i) Value of stock is to be increased by Rs. 5,000 {Book value of stock is Rs. 1,00,000).
(ii) Value of stock is to be increased to Rs. 1,05,000 (Book value of stock is Rs. 1,00,000).
(iii) Value of stock is to be brought up to 105% of its value (Book value of stock is Rs. 1,00,000).
In all three cases journal entry will be –
42
Stock A/c Dr. 5,000
To Revaluation A/c 5,000
(Being the increase in the value of stock recorded)
(iv) Plant is undervalued by 10% (book value of Plant Rs.90,000) or Plant is recorded at 90% in
the books of account. Book value of Plant is Rs. 90,000 which is 90%. So, 100% value is 90,000
x 100/90 = 1,00,000. Therefore, Increase in Plant is Rs. 10,000
Plant A/C ... Dr. 10,000
(Being the plant is undervalued by Rs. 10,000)
(v) Book value of Machinery is Rs. 1,10,000 which is 110%. So, 100% value is 1,10,000 x
100/110 = 1,00,000. Therefore, decrease in machinery is Rs. 10,000.
Revaluation A/c Dr 10,000
To Machinery 10,000
Questions for practice

Q. K and S are partners sharing profits in the ratio of 3:2. Pass Journal entries for the following
on P's admission
(i) Value of furniture is to be increased by Rs.10,000 (Book Rs.50,000).
(ii) Value of furniture is to be increased to Rs.50,000 (Book Rs.40,000).
(iii) Value of furniture is to be brought up to 120% of its value furniture is Rs.20,000).
(iv) Stock is found undervalued by Rs. 4,000 (Book value of stock Rs. 20,000
(v) Creditors are written back by Rs. 5,000.
(vi) Debtors Rs. 80,000. Existing provision for doubtful Rs. 4,000 debts are to be written
off on P's admission Rs. 5,000 and 5% Provision is to be maintained for doubtful debts
on debtors.
4. DISTRIBUTION OF ACCUMULATED PROFITS (RESERVES ETC.)
Accumulated profits include credit balance of P and L A/c, General Reserves, Reserve Fund,
Workmen Compensation Reserves, Investment Fluctuation Reserve etc. Accumulated Losses
include debit balance of P and L A/c, Deferred Revenue Expenditure i.e., Advertisement Suspense
A/c.
When question is silent of when accumulated profits of losses are to be distributed or when
accumulated profits or losses are not to be shown in new balance sheet
Contingency Reserve A/c Dr.
Reserve A/c Dr.
P and L (Cr. Balance) A/c Dr.
Workmen Compensation Reserve A/c Dr.
To Old Partners' Capital / Current A/cs
(Being reserves and accumulated profits transferred to old partners
in old ratio)
Old Partners' Capital / Current A/Cs Dr.
To P and L (Dr. balance) A/c
To Deferred Revenue Expenditure A/c
(Being accumulated losses transferred to old partners in old ratio)
Current A/c in case of Fixed capitals
43
Treatment of Workmen Compensation Reserve
Case 1. Workmen Compensation Reserve A/c Dr.
When there is To Old Partners' Capital / Current A/cs
no Claim
WCC=WCR To Provision for Workmen Compensation Claim A/c
(equal)
WCC < WCR To Provision for Workmen Compensation Claim A/c
(less) To Old Partners' Capital / Current A/cs
WCC > WCR Revaluation A/c Dr.
(more) To Provision for Workmen Compensation Claim A/c
Treatment of Investment Fluctuation Reserve
Case 1. Investment Fluctuation Reserve A/c Dr.
BV = MV To Old Partners' Capital / Current A/cs
Case 2. Investment Fluctuation Reserve A/c Dr.
BV < MV To Old Partners' Capital / Current A/cs
(Entire reserve distributed in partners' old ratio)
Investment A/c Dr.
To Revaluation A/c
(For increase in value of Investments)
Case 3. (i) When fall in value is less than investment Fluctuation Reserve
BV > MV Investment Fluctuation Reserve A/c Dr.
To Investment A/c (BV-MV)
BV is for Book To Old Partners' Capital / Current A/cs
value of (In Old ratio)
Investment
(ii) When fall in value is equal to investment Fluctuation Reserve
MV is for Investment Fluctuation Reserve A/c Dr.
Market value of To Investment A/c
investment
(iii) When fall in value is more than investment Fluctuation Reserve
Revaluation A/c Dr.
To Investment A/c
Illustration:
X and Y were partners in a firm sharing profits and losses in the ratio of 3: 2. Their Balance sheet
as at 31st March, 2022 was as follows:
Creditors 42,000 Current Assets 2,00,000
Employee's Provident Fund 20,000 Investments 50,000
Contingency Reserve 30,000 Furniture 20,000
Profit and Loss Account 45,000 Machinery 90,000
Workmen Compensation Reserve 18,000 Advertisement Expenditure 20,000
Investment Fluctuation Reserve 25,000 (Deferred Revenue
Expenditure)
44
Capitals X 1,20,000
Capitals Y 80,000 2,00,000
3,80,000 3,80,000
They admit Z into partnership on 1st April, 2022 and the new profit-sharing ratio is agreed at 2: 1:
1. It is estimated that:
(i) Claim on account of Workmen's Compensation is estimated at ₹ 10,000.
(ii) Market value of Investments is ₹ 46,000.
Give necessary journal entries to adjust accumulated profits and losses.
Date Particulars L.F. Dr. ₹ Cr. ₹
1st April Investment Fluctuation Reserve 4,000
2022 Dr. 4,000
To Investment A/c
(Value of Investment brought down to market value)
Workmen Compensation Reserve A/c 10,000
Dr.
To Provision for Workmen Compensation Claim 10,000
A/c
(Provision made for workmen compensation claim)
1st April Contingency Reserve 30,000
2022 Dr. 45,000
Profit and Loss A/c 8,000
Dr. 21,000
Workmen Compensation Reserve (18,000 – 10,000) 62,400
Dr. 41,600
Investment Fluctuation Reserve (25,000 – 4,000)
Dr.
To X's Capital A/c
To Y's Capital A/c
(Transfer of accumulated profits to old partners in
their old profit-sharing ratio i.e., 3: 2)
1st April X's Capital A/c 12,000
2022 Dr. 8,000
Y's Capital A/c 20,000
Dr.
To Advertisement Expenditure A/c
(Transfer of accumulated loss to old partners in their
old profit-sharing ratio i.e., 3: 2)
Note: Employee's Provident Fund is outside liability payable by the firm.
X and Y are in partnership, sharing profits in the ratio of 5: 3 respectively. Their balance
sheet is as follows:
Creditors 28,000 Cash at Bank 15,800
Workmen Compensation Reserve 12,000 Debtors 40,000
Z's Loan A/c 30,000 Less: Provision 1,800 38,200
Capitals Account Stock 56,000
X 50,000 Investment 10,000
Y 40,000 90,000 Goodwill 10,000
Plant 30,000
1,60,000 1,60,000
45
Z is admitted into partnership on the following terms:
1. The new profit-sharing ratio will be 4: 3: 2 between X, Y and Z respectively.
2. Z's loan should be treated as his capital.
3. Goodwill of the firm is valued at ₹ 27,000.
4. ₹ 8,000 of investments were to be taken over by X and Y in their profit-sharing ratio.
5. Stock be reduced by 10%.
6. Provision for doubtful debts should be @ 5% on debtors and a provision for discount
on debtors @ 2% should also be made.
7. The liability of Workmen's Compensation Reserve was determined to be ₹ 15,000.
8. X is to withdraw ₹ 6,000 in cash.
9. Give journal entries to record the above and prepare balance sheet of the new firm.
Solution:
Particulars Dr. Cr.
Revaluation A/c 6,560
Dr. 5,600
To Stock A/c 200
To Provision for Doubtful Debts 760
To Provision for Discount on Debtors
(Decrease in the value of stock and creation of provision on debtors)
Workmen Compensation Reserve A/c Dr. 12,000
Revaluation A/c 3,000
Dr. 15,000
To Liability for Workmen's Compensation A/c
(Recording of liability for Workmen's Compensation)
X's Capital A/c Dr. 5.975
Y's Capital A/c Dr. 3,585
(Loss on revaluation transferred to old partner's Capital A/cs)
X's Capital A/c Dr. 5,000
To Investments A/c 8,000
(Investments taken over by old partners)
To Goodwill A/c 10,000
(Existing goodwill written off in old ratio i.e., 5: 3)
Z's Current A/c Dr. 6,000
To X's Capital A/c 4,875
To Y's Capital A/c 1,125
(Z's share of goodwill credited to old partners in the sacrificing ratio
i.e.13: 3)
Z's Loan A/c Dr. 30,000
To Z's Capital A/c 30,000
(Z's Loan Account transferred to Z's Capital Account)

To Bank A/c 6,000
(Cash withdrew by X)
46
Partner's Capital Accounts
Particulars X Y Z Particulars X Y Z
To Revaluation 5,975 3,585 – By Balance b/d 50,000 40,000 –
To Investment 5,000 3,000 – By Z's Current A/c 4,875 1,125 –
To goodwill A/c 6,250 3,750 – By Z's Loan A/c – – 30,000
To Bank A/c 6,000 – – – – 30,000
To Balance c/d 31,650 30,790 30,000
54,875 41,125 30,000 54,875 41,125 30,000
Balance Sheet as at .....
Creditors 28,000 Cash at Bank (15800 – 6000) 9,800
Liabilities for Workmen's Debtors 40,000
Compensation 15000 Less: Provision for Doubtful Debts 2,000
Capital A/cs: 38,000
X Less: Provision for Discount on Debtors 760 37,240
31,650 Stock 50,400
Y 92,440 Investment 2,000
30,790 Plant 30,000
Z Z's Current A/c 6,000
30,000
1,35,440 1,35,440
Working Note:
(1) Calculation of sacrificing ratio– Sacrificing ratio = Old ratio – New ratio
5 4 45  32 13
X=   
8 9 72 72
3 3 27  24 3
Y=   
8 9 72 72
Sacrificing ratio = 13: 3
(2) From Z's share of goodwill, his current A/c has been debited instead of A/c so that his Capital
is not reduced and remains intact at ₹ 30,000.
Illustration 15.
Sahaj and Nimish are partners in a firm. They share profit and losses in the ratio 2: 1. They
decided to admit Gauri for 1/3 share. At the time of her admission, Balance sheet of Sahaj and
Nimish was as under–
Liabilities Amount Assets Amount
Capital A/cs Machinery 1,20,000
Sahaj 1,20,000 Furniture 80,000
Nimish 80,000 2,00,000 Stock 50,000
General Reserve 30,000 Sundry Debtors 30,000
Creditors 30,000 Cash 20,000
Employees Provident Fund 40,000
3,00,000 3,00,000
47
Gauri brought her share of Goodwill in cash and proportionate capital.
It was also agreed–
a) Reduce the value of stock by ₹ 5000.
b) Depreciate furniture by 10% and appreciate machinery by 5%
c) ₹ 3000 of the debtors proved bad.
d) A provision of 5% was to be created on S. debtors for doubtful debts.
e) Goodwill of the firm was valued at ₹ 45000.
f) Prepare Revaluation A/c, Partner's Capital A/cs and Balance sheet of reconstituted firm.
Solution:
Revaluation Account
To Stock A/c 5,000 By Machinery A/c 6,000
To Furniture 8,000 By Loss transferred to
To (Sundry Debtors) Bad debts 3,000 Sahay's Capital A/c 7,567
To provision for bad debts Nimish's Capital A/c 3,783 11,350
(30,000 – 3000) ×5/100 1,350
17,350 17,350
Partner’s Capital Account

Particulars Sahaj Nimish Gauri Particulars Sahaj Nimish Gauri
To Revaluation A/c 7,567 3,783 — By balance b/d 120000 80000 —
To Balance c/d 142433 91217 116825 By General Reserve A/c 20000 10000 —
By Premium for Goodwill A/c 10000 5000 —
By Bank A/c 116825
150000 95000 116825 150000 95000 116825
Bank A/c
To Gauri's Capital A/c 116825 By balance c/d 131825
To Premium for Goodwill 15000
131825 131825
Balance Sheet of New Firm As on 1st January 2019

Capital A/cs Machinery 1,26,000
Sahaj 1,42,433 Furniture 72,000
Nimish 91,217 Stock 45,000
Gauri 1,16,825 3,50,475 Sundry Debtors 30,000
Employees Provident Fund 40,000 Less Bed debts (3,000)
Creditors 30,000 Less Provision for D/d (1,350) 25,650
Cash 20,000
Bank 1,31,825
4,20,475 4,20,475
Working Note:
(1) Gauri's share of Goodwill = 45000 X 1/3 = 15,000
(2) Total adjusted Capital = 14,2,433 + 91,217 = 2,33,650
(3) Proportionate Capital Gauri (1/3 share) = 2,33,652 × 3/2 × 1/3
= 2,33,650 / 2 = 1,16,825
48
Multiple Choice Questions
1. When a new partner brings his share of goodwill in cash, the amount is debited to–
(a) Goodwill A/c
(b) Capital A/cs of new partner
(c) Capital A/cs of old partners
(d) Cash A/c
2. When a new partner does not bring his share of goodwill in cash, the amount is debited
to–
(a) Cash A/c
(b) Current A/c of new partner
(c) Capital A/cs of old partners
(d) Premium for Goodwill A/c
3. It, at the time of admission, some profit and loss account balance appear in the books, it
will be transferred to–
(a) Profit and loss adjustment A/c
(b) Revaluation A/c
(c) Old partner's capital account
(d) All partner's capital accounts
4. If, at the time of admission, there is some unrecorded liability, it will be–
(a) Credited to revaluation account
(b) Debited to revaluation account
(c) Debited to partner's capital account
(d) Credited to partner's capital account
5. If at the time of admission, the revaluation A/c shows a loss, it should be–
(a) Credited to old partners’ capital A/c in old ratio.
(b) Credited to old partners’ capital A/c in sacrificing ratio.
(c) Debited to old partners’ capital A/c in old ratio.
(d) Debited to old partners’ capital A/c in sacrificing ratio.
6. Revaluation A/c is a–
(a) Real account (b) Asset account
(c) Personal account (d) Nominal account
7. When the balance sheet is prepared after the new partnership agreement, the assets and
liabilities are recorded at–
(a) Current figures (b) Revalued figures
(c) Historical cost (d) Realisable value
8. L and M are partners sharing profits in ratio of 3: 2 respectively. N was admitted for 1/5th
share of profit. Machinery would be appreciated by 10% (Book value 80,000) and Building
would be depreciated by 20% (2,00,000). Unrecorded debtors of 1250 would be brought
into books new and a creditor amounting to 2750 died and need not pay anything on this
account. What will be profit/loss on revaluation?
(a) Loss 28,000 (b) Profit 28,000
(c) Loss 40,000 (d) Profit 40,000
9. A and B are partners sharing profits in the ratio of 5: 4. They admitted C for 1/5th profit,
for which he paid 90,000 against capital and 45,000 against goodwill. Find the capital
balance for each partner taking C's capital as base capital.
(a) 2,00,000; 90,000; 90,000

(b) 3,00,000; 2,40,000; 1,35,000
(c) 2,00,000; 1,60,000; 90,000
(d) 3,00,000; 1,35,000; 1,35,000
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10. X and Y are partners sharing profits and losses in the ratio of 5: 3. On admission, C brings
70,000 as cash and 40,000 against Goodwill. New profit ratio between X, Y and Z is 7: 5:
4. The Sacrificing ratio of X and Y is–
(a) 3: 1 (b) 1: 3
(c) 4: 5 (d) 5: 9
11. A and B are partners in a firm with capital of 1,80,000 and 2,00,000. C was admitted for
1/3rd share in profit and brings 3,40,000 as capital, calculate the amount of goodwill–
(a) 2,40,000 (b) 1,00,000
(c) 1,50,000 (d) 3,00,000
12. A, B, C and D are partners. A and B share 2/3rd of profits equally and C and D share
remaining profits in the ratio of 3: 2. Find the profit-sharing ratio of A, B, C and D.
(a) 5: 5: 3: 2 (b) 7: 7: 6: 4
(c) 2.5: 2.5: 8: 6 (d) 3: 9: 8: 3
13. Sacrificing ratio is used to distribute in case of admission of a partner.
(a) Reserves (b) Goodwill
(c) Revaluation profit (d) Balance in profit and loss account
14. X, Y and Z are partners sharing profit in the ratio of 3: 2: 1. They agree to admit M into the
firm. X, Y and Z agreed to give 1/3rd, 1/6th, 1/9th share of their profit. The share of profit
of M will be–
(a) 11/54 (b) 12/54
(c) 13/54 (d) 14/54
15. A and B are partners sharing profits in the ratio of 2: 3. Their balance sheet shows
machinery at 4,00,000; stock at 1,60,000 and Debtors at 3,20,000. C is admitted and new
profit-sharing ratio is agreed at 6: 9: 5. Machinery is revalued at 3,40,000 and a provision
is made for doubtful debts @ 2.5%. A' s share in loss on revaluation amount to 20,000.
Revalued value of stock will be–
(a) 98,000 (b) 1,00,000
(c) 60,000 (d) 62,000
Answers
1. (d) 2. (b) 3. (c) 4. (b)

5. (c) 6. (d) 7. (b) 8. (a)
9. (c) 10. (a) 11. (d) 12. (a)
13. (b) 14. (c) 15. (a)
True or False
1. Contingent liability becoming a certain liability is debited to Revaluation Account at the time
of admission of a partner.
2. On revaluation of assets and liabilities, capital accounts of old partners do not change.
3. Unless agreed otherwise, the new profit-sharing ratio of old partners will be the same as their
old profit-sharing ratio.
4. It is necessary that partners should have capitals in their profit-sharing ratios.
5. In the absence of any information, any surplus or deficiency in capital should be adjusted
through current account.
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6. Revaluation account is credited for bills accepted issued by creditors, not recorded in books
earlier.
7. An old customer, whose account was written off as bad debts, has promised to pay but it will
not be shown in revaluation account.
8. Employee's provident fund will be distributed among old partners in old ratio, at the time of
admission of a partner. General reserve, in balance sheet at the time of admission of partner be
distributed among partners in their sacrificing ratio.
9. Existing Goodwill A/c in balance sheet is to be written off in old partners in odd ratio at the time
of admission of partner.
Answers
1. True 2. False 3. True 4. False

5. False 6. False 7. True 8. False
9. False 10. True
Fill in the Blanks with Appropriate Words–
1. Partner's current A/c balances in the balance sheet means that thecapital A/cs are ............
2. For any decrease in the value of Asset, the Revaluation Account is ............
3. Investment fluctuation reserve is a reserve set aside out of profit to adjust the difference
between ............and ............of investments.
4. C, the incoming partner, is to bring 6000 as goodwill for 1/5th share in the firms’ profits. Total
goodwill of the firm will be ............
5. Revaluation A/c is prepared to record the assets and liabilities at their ............ values.
Answers
1. Fixed 2. Debited 3. Book value, Market value

4. ₹30,000 5. Revised
MULTIPLE CHOICE QUESTIONS (MCQ) ON ASSERTION –

REASONING TYPE/STATEMENTS
1. Give below are two statement – Assertion (A) and Reason (R). Choose the correct alternative:
Assertion (A): There is a need for the revaluation of assets and liabilities on the admission of a
partner.
Reason (R): It is always desirable to ascertain whether the assets and liabilities of the firm are
shown in books at their current value.
a) Both (A) and (R) are true, and (R) is the correct explanation of (A)
b) Both (A) and (R) are true, but (R) is a not correct explanation of (A)
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c) Only (R) is correct
d) Both (A) and (R) are wrong
Ans. Both (A) and (R) are true, but (R) is a not correct explanation of (A)
Assertion (A): It is necessary to revalue assets and liability of A firm in case of admission of a
partner
Reason (R): It is because the incoming partner is neither put to an advantage nor to disadvantage
due to change in the value of assets and liabilities
a) Both (A) and (R) are true, and (R) is the correct explanation of (A)
b) Both (A) and (R) are true, but (R) is a not correct explanation of (A)
c) Only (R) is correct
d) Both (A) and (R) are wrong
Ans. Both (A) and (R) are true, and (R) is the correct explanation of (A)
Assertion (A): A new partner should contribute towards goodwill on his/her admission.
Reason (R). It is because the new partner must compensate the existing partners for the sacrifice
they make in his /her favour.
a) Both (A) and (R) are true, and (R) is not the correct explanation of (A)
b) Both (A) and (R) are true, but (R) is a correct explanation of (A)
c) Both (A) and (R) are false
d) is false, but (R) is true
Ans. Both (A) and (R) are true, and (R) is a correct explanation of (A)
ACCOUNTING FOR PARTNERSHIP FIRM- RECONSTITUTION & DISSOLUTION.

1.RETIREMENT AND DEATH OF A PARTNER
2. DISSOLUTION OF PARTNERSHIP FIRM.
Meaning of Retirement of a Partner: When a partner cuts off his relations from the partnership
on account of various reasons, settles his account and leaves the firm, such a situation is called
retirement of a partner. The partner who leaves the firm is known as the retiring partner or
outgoing partner.
Reconstitution of a Firm on Retirement of a Partner : After the retirement of a partner, the old
partnership comes to an end but the firm continues and a new partnership comes into
existence between the remaining partners. Thus, retirement of a partner results in the
reconstitution of a firm.
Matters that Need Adjustment at the Time of Retirement:
(i) Determination of New Profit-sharing Ratio, (ii) Determination of Gaining Ratio, (iii) Valuation
and Treatment of Goodwill, (iv) Revaluation of Assets and Liabilities, (v) Adjustment of
Accumulated Profits and Losses, (vi) Adjustment of Capitals, if necessary, (vii) Determination of
the Amount Payable to the Retiring Partner.
New Profit-sharing Ratio of Continuing Partners :
52
New Share = Old Share + Profit Share/Acquired Share from the Retiring Partner. In the absence
of any information regarding gaining ratio, the new ratio of the remaining partners will be
calculated by striking out the share of the retiring partner.
Gaining Ratio: Gaining ratio is the ratio in which the continuing partners have acquired the
share from the retiring or deceased partner.
Treatment of Goodwill :
(a) Goodwill should be adjusted through Partners’ Capital Accounts. Adjustment is to be made
to the extent of the retiring partner’s share of goodwill. Remaining (or continuing) Partners’
Capital Accounts are debited in their gaining ratio and the retiring Partner’s Capital Account
is credited.
(b) If goodwill already appears in the books, it should be written off by debiting all Partners’
Capital Accounts in their old profit-sharing ratio and crediting the Goodwill Account.
Accounting Treatment of Revaluation of Assets and Liabilities : At the time of retirement of
a partner, assets and liabilities are revalued, so that the retiring partner gets a fair share of
assets. Besides this, there may be unrecorded assets and liabilities which have to be recorded.
For this a Revaluation Account or Profit & Loss Adjustment Account is prepared. Profit or loss
arising from Revaluation Account is divided amongst all the partners (including the retiring
partner).
Accumulated Profits or Losses/Reserves etc.: The reserves, accumulated profits or losses
appearing in the Balance Sheet belong to all partners. Hence, they should be transferred to
Capital
Accounts of all the partners in their old profit-sharing ratio.
Settlement of the Account due to the Retiring Partner: The amount due to a retiring partner
has to be paid to him over lump sum or transferred to his Loan Account. His loan may be
payable with or without interest in instalments.
Adjustment of Capital: If the continuing partners so desire, they may decide to keep their
capital in accordance with their new profit-sharing ratio.
A partner has right to retire from the firm after giving due notice in advance. After retirement a
new partnership comes into existence between the remaining partners. Partner can retire from
the firm in the following circumstances.
 With the consent of the all the partners

 As per the terms of the partnership agreement
 By giving a notice in writing to all other partners, if the partnership is at will.
Following accounting treatments are done while retiring a partner.
1) Calculation of a new ration and gaining/sacrificing ration (in some cases) ration.
2) Treatment of goodwill.
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3) Adjustment of revaluation of assets and liabilities.
4) Adjustment of undistributed reserves and profits and losses A/c.
5) Capital adjustments and preparing opening balance sheet.
CALCULATION OF NEW RATIO AND GAINING RATIO: -
New ratio = Old share + Acquired share
Gaining ratio = New ratio- Old ratio
Gaining ratio is calculated to ascertain the amount of goodwill payable to retiring or deceased
partner by the remaining partners.
TREATMENT OF GOODWILL:-
The retiring partner share of goodwill is credited to capital account of respective partner and
debited to remaining partners' capital in gaining ratio.
JOURNAL ENTRY:-
Gaining partner’s Capital A/c --Dr (With the share of Goodwill)
To Retiring or Deceased Partner’s Capital A/c (in gaining ratio)
The existing goodwill (if any) will be written off by debiting all partners' capital account in their
old ratio and crediting the goodwill account.
Old partners' Capital A/c--Dr (in old ratio)
To Goodwill A/c ( existing goodwill)
Distribution of profit and loss on revaluation at the time of retirement/ Death of partner
Profit/Loss on revaluation will be shared between all the partners in their old profit-sharing
ratio.
(Journal entries for the revaluation of assets and liabilities and finding out profits or losses are
same like the previous topic admission of partner)
Journal entry for the transfer of profit and loss on revaluation at the time of retirement/
death of a partner.
For Profits:
Revaluation A/C Dr.
To All Partner's Capital A/C (in old ratio)

54
(Being profit on revaluation transferred to all partners' capital account in old profit sharing
ratio) For Losses:
All Partners' capital A/C Dr. (in old ratio)
To Revaluation A/c
(Being loss on revaluation transferred to all partners' capital account in old profit sharing ratio)
Treatment of undistributed profit at the time of retirement/death of the partner.
Special Note: - Reserves are always undistributed profits whereas P&L A/c may be profits or
losses. If P&L A/c is having credit balance or given on liability side it is profit andif P&L A/c is
having debit balance or given on assets side it is loss.
The undistributed profits are transferred to all partners' capital account in the old profit sharing
ratio.
General Reserve A/c Dr.

Profit & Loss A/c Dr.
To All partners' capital account (in old ratio)
(Being undistributed profits transferred to all partners' capital accounts in old ratio)
Treatment of undistributed losses at the time of retirement/death of a partner
The undistributed losses are transferred to all partners' capital accounts in their old profit
sharing ratio.
All partners' Capital A/c Dr. (in old ratio)
To profit & loss A/c
(Being undistributed losses are transferred to all partners' capital account in old profit ratio)
Calculation of share of profit of the deceased partner
In case of death of a partner during the accounting year the executor of the deceased partner is
entitled to a share of profit earned by the firm from the date of last balance sheet to the date
of the death. The following two methods are used for ascertaining the profit of that period:
(a) On the basis of time:-
Deceased partner's share= Last year profit/Average profits x period(in

months/days)/12/365 X Deceased partner's share of profits
55
Note: Period here means from the period from the beginning of the financial year to the
date of death.
(b) On the basis of sales :First of all find out the %age of Net Profit to sales on the basis of
profits and sales of previous year and apply the same %age of Net Profit on Current Year’s
Sales.
Net profit for Current Year = Sales for the period * Rate of Net Profit /100
Journal entry
Profit & Loss Suspense A/c Dr. (with the share of profit for the eriod)
To Deceased Partner's Capital A/c
Calculation of the amount payable to the representative of deceased partner The
representative of the deceased partner is entitled to the following.
i. The balance standing on the credit of the deceased partner capital and current
account.
ii. His share of profit in the goodwill of the firm.
iii. His share of profit in the revaluation of assets and liabilities
iv. His share of reserve and accumulated profits
v. His share of profit up to the date of death
vi. Interest on capital if provided in the partnership agreement
The following amount will be debited to the account of the deceased partner for ascertaining
the amount due to his representative.
i. His drawings
ii. Interest on drawings, if provided in the partnership deed

iii. His share of losses on revaluation of assets and liabilities
iv. His share of losses up to the date of his death
v. Loan to deceased partner.
The whole Accounting treatment / entries are passed in the same way as in case of Retirement
of a Partner i.e. the Goodwill is to be given to deceased partner by the Gaining Partners in
Gaining Ratio ; Accumulated Profits & Reserves are to be given in the old ratio itself.
Accumulated Losses are to be charged in the old ratio. After preparing the Deceased Partners’
Capital Account , the balance in his capital account will be transferred to Deceased Partners’
Executors Account.
56
From Deceased Partners’ Executors Account ,Amount may be paid in cash or transferred to
Executors’ Loan Account
RETIREMENT/ DEATH AND SETTLEMENT OF LOAN
It may be agreed among the partners that the principal amount will be paid in a few equal
instalments with interest.
QUESTIONS (VSA , SA )
1 What is meant by Gaining ratio?
Ans: Gaining ratio- it is the ratio in which the continuing/remaining partners gain or take over
the profit share of the retiring or deceased partner
Gaining ratio= New ratio- Old ratio
2 Mention the circumstances in which gaining ratio is applied
Ans:
i) To calculate new profit sharing ratio
ii) To divide the retiring/deceased partner’s share of g/w among the

remaining/continuing partner.
3. Explain the treatment of goodwill at the time of retirement of a partner.

2. ANS:TREATMENT OF GOODWILL:- The retiring partner share of goodwill is credited to
capital account of respective partner and debited to remaining partners' capital in
gaining ratio.
3. JOURNAL ENTRY:-
4. Gaining partner capital a/c/Current A/c Dr (With the share of Goodwill)
5. To Retiring or Deceased partner capital a/c (in gaining ratio)
6. The existing goodwill (if any) will be written off by debiting all partners' capital account
in their old ratio and crediting the goodwill account.
JOURNAL ENTRY
Old partners' capital a/c/ current a/c Dr (in old ratio)
To Goodwill a/c (Goodwill existing goodwill)
Special Note: - Goodwill cannot be shown in books unless and until it is purchased by paying
some consideration. (AS-26)
4. A, B, & C are partners with ratio 4:5:6. Find out new ratio if:
i) A retires ii). B retires iii) C retires.
Ans: Old ration between partners A, B, & C is 4:5:6.
So new ration i). 5:6, ii) 4:6, iii) 4:5
57
5 Calculation of deceased partner’s share of profit
on the basis of time: in this method profits are assumed to have

accrued on uniform basis over the year.
deceased partner’s share of profit=

time from the beginning of the year *profit of the year to the date of death* deceased
partner’s share in profit * no. of months/weeks/days in a yr.
A, B and C are partners in the ratio of 3:2:2 A died on 30 th June 2016. His share of profits upto
the date of death are:
12000 *3/12* 3/7= Rs. 1286/-
on the basis of sales or turnover: under this method deceased partner’s share of profit is
calculated on the basis of sales from the beginning of the year to the date of death. Sales are
treated to be occurred in the same ratio as in the last year.
Example: A,B and C are partners in the ratio of 3:3:2.
Last year sale 100000
Last year profit 15000.
A died 01-04-2009 sales from 1-1-09 to 31-03-09 20000
%age of profits 15000/100000*100= 15%
His share of profits= 20000*15%*3/8
Last year profits 15000
A died 01-04-2009 It is assumed that sales has been occurred on the
same scale as in the last Year.
15000/12 *3*3/8
6. A, B and C are partners in a firm sharing profits in the ratio of 5:3:2. A retires and his share
is taken up by B and C equally. Goodwill of the firm is Rs. 60000. Pass necessary journal entry.
Sol:- B's Capital a/c Dr 15000.00
C's Capital a/c Dr 15000.00
To A's Capital/c 30000.00
(Being adjustment of goodwill done on retirement of A)
Working Note: - Old Ratio is 5:3:2, New Ratio 11:9 and gaining ratio is 1:1. A's share of goodwill
=60000*5/10=30000.
58
7. What is the journal entry for the transfer of profit and loss on revaluation at the time of
retirement/ death of a partner.
For Profits:
Revaluation A/C Dr.
To All Partner's Capital A/C (in old ratio)
(Being profit on revaluation transferred to all partners' capital account in old profit
sharing ratio)
For losses:
All the partners' capital A/C Dr. (in old ratio)
To Revaluation A/c
(Being loss on revaluation transferred to all partners' capital account in old profit
sharing ratio)
8 . What is the treatment of undistributed profit at the time of retirement/death of the

partner.
Ans: Special Note: - Reserves are always undistributed profits whereas P&L a/c may be profits or
losses. If P&L a/c is having credit balance or given on liability side it is profit and if P&L a/c is
having debit balance or given on assets side it is loss.
The undistributed profits are transferred to all partners' capital account in the old profit sharing
ratio.
General Reserve a/c Dr.
Profit & Loss a/c Dr.
To All partners' capital account (in old ratio)
(Being undistributed profits transferred to all partners' capital accounts in old ratio)
Treatment of undistributed losses at the time of retirement/death of a partner The
undistributed losses are transferred to all partners' capital accounts in their old profit sharing
ratio.
All partners' Capital a/c Dr. (in old ratio)
To profit & loss a/c

(Being undistributed losses are transferred to all partners' capital account in old profit ratio)
9. At the time of death of a partner what his/her representative will get?
Ans: The representative of the deceased partner is entitled to the following.
Show a deceased partner capital A/c from the following information with imaginary amount and
period .
i. The balance standing on the credit of the deceased partner capital and current
account
ii. His share of profit in the goodwill of the firm.
iii. His share of profit in the revaluation of assets and liabilities
59
iv. His share of reserve and accumulated profit
v. His share of profit up to the date of death.
vi. Interest on capital if provided in the partnership agreement
10. What are the ways in which a partner can retire from a firm?
Ans:
i) With the consent of all other partners.

ii) With an express agreement by all other partners.
By giving a written notice.

11. Write the various matters that need adjustment at the time of retirement of a partner:
Ans:
Calculation of new and gaining ratio
Calculation of goodwill and its accounting treatment
Revaluation of assets and liabilities
Settlement of amount due to the partner.
Adjustments of capital accounts of remaining partners in their new profit sharing ratio.
Multiple Choice Questions [1 Mark]
1. On the retirement of a partner, profit on revaluation of assets and liabilities should the
credited to the Capital Accounts of :
(a) All partners in the old profit-sharing ratio
(b) The remaining partners in their old profit-sharing ratio
(c) The remaining partners in their new profit-sharing ratio
(d) None of these
2. On retirement of a partner, the retiring Partner’s Capital Account will be credited with :
(a) His/her share of goodwill (b) Goodwill of the firm
(c) Share of goodwill of remaining partners (d) None of these.
3. On the retirement of a partner, profit on revaluation of assets and liabilities should be
credited to the Capital Accounts of :
(a) All partners in the old profit-sharing ratio
(b) The remaining partners in their old profit-sharing ratio
(c) The remaining partners in their new profit-sharing ratio
(d) None of these.
4. The old profit-sharing ratio among A, B and C were 2:2:1. The new profit-sharing ratio after
B’s retirement is 3 : 2. The gaining ratio is :
(a) 3 : 2 (b) 2 : 1 (c) 1 : 1 (d) 2 : 3
5. A, B and C are partners. On retirement of A, the goodwill already appears in the Balance
Sheet at ` 24,000. The goodwill will be written off:
60
(a) By debiting all Partners’ Capital Accounts in their old profit-sharing ratio
(b) By debiting remaining Partners’ Capital Accounts in their new profit-sharing ratio
(c) By debiting retiring Partner’s Capital Account from his share of goodwill
(d) None of these.
6. The old profit-sharing ratio among Ram, Shyam and Taja were 2 :2 ; 1. The new profit-sharing
ratio after Shyam’s retirement is 3 : 2. The gaining ratio is :
(a) 3 : 2 (b) 2 : l (c) 1 : 1 (d) 2 : 3
7. X, Y and Z are Partners sharing profits in the ratio of 1/2, 1/3 and 1/6. X retires. New profi t
sharing ratio will be :
(a) 2 : 1 (b) 1 : 2 (c) 2 : 3 (d) l : 3
8. Kush, Hari and Pratap are partners. On retirement of Kush, the goodwill already appears in
the Balance Sheet at ` 24.000. The goodwill will be written off:
(a) By debiting all Partners’ Capital Accounts in their old profit-sharing ratio
(b) By debiting remaining Partners’ Capital Accounts in their new profit-sharing ratio
(c) By debiting retiring Partners’ Capital Account from his share of goodwill
(d) None of these.
9. The meaning of the retirement of a partner is :
(a) Incoming of a partner in a firm (b) Outgoing of a partner from a firm
(c) Outgoing of all the partners from the firm (d) Death of all the partners.
10. A, B and C are partners sharing profit in the ratio 3 : 2 : 1, B retires, A and C decided to share
the profit in the ratio of 2 : 1 in future. Gaining ratio of A and C will be :
(a) 3 : 1 (b) 3 : 2 (c) 1 : 1 (d) 2 : 1
11. X, Y and Z were partners sharing profit in the ratio 5 : 4 : 3. Z retires and his share was taken
up by X and Y in the ratio of 3 : 2. The new profit sharing ratio of X and Y will be :
(a) 5 : 4 (b) 4 : 3 (c) 5 : 3 (d) 17 : 13
12. The meaning of gaining ratio is :
(a) Increase in the share of profits of remaining partners in case of outgoing of a partner
(b) Decrease in the share of profit of old partners in case of incoming of a partner in the firm
(c) New profit sharing ratio
(d) Old profit sharing ratio
13. A, B and C are three partners sharing profit in the ratio 4 : 3 : 2. A retires, B and C decided to
share profi ts in future in the ratio of 5 : 3. Gaining ratio of B and C will be :
(a) 3 : 2 (b) 21 : 11 (c) 4 : 3 (d) 4 : 2
14. In case of retirement of a Partner from the firm, the profit on revaluation will be credited to
the capital accounts of partners :
(a) In old profit sharing ratio of remaining partners
(b) In new profit sharing ratio of remaining partners
(c) In old profit sharing ratio of all the partners
(d) Only a retiring partner
15. X, Y and Z are partners sharing profits in the ratio of 4 : 3 : 2. Y retires. X and Z decided to
share the profi ts in the ratio of 2 : 1 in future. Gaining ratio of X and Z will be :
(a) 1 : 1 (b) 3 : 2 (c) 2 : 1 (d) 3 : 1
16. A, B and C were partners sharing profits ts in the ratio of 5 : 4 : 1 . A retires from the fi rm.
New profits t sharing ratio will be :
61
(a) 5 : 4 (b) 3 : 1 (c) 4 : 1 (d) 5 : 1
17. A, B and C were partners sharing profits in the ratio of 3 : 2 : 1. C retires and his share was
taken by A and B in the ratio of 3 : 2. The new profits t sharing ratio of A and B will be :
(a) 3 : 5 (b) 1 : 1 (c) 5 : 3 (d) 3 : 2
18. X, Y and Z are partners sharing profits in the ratio of 5 : 4 : 1. What will be the new ratio of
the remaining partners if Z retires?
(a) 5 : 4 (b) 3 : 2 (c) 1 : 1 (d) 5 : 1
19. A, B and C are partners sharing profits in the ratio of 3 : 2 : 1. C retires and his capital after
making adjustments for reserves and pro ts on revaluation is ` 2,30,000. A & B agreed to pay
him ` 2,50,000 in full and final settlement of his claims. The amount of goodwill be :
(a) ` 50,000 (b) ` 2,00,000 (c) ` 20,000 (d) ` 1,00,000
20. X, Y and Z were partners sharing profits in the ratio of 4 : 3 : 2. X retires. Assuming Y & Z will
share profits in the ratio of 2 : 1 Gaining ratio will be :
(a) 2 : 1 (b) 4 : 3 (c) 3 : 2 (d) 3 : 1
21. A, B and C are partners in the ratio of 3 : 5 : 7 respectively. C retires and his share was taken
up by A & B in the ratio of 3 : 2. New profit sharing ratio will be :
(a) 5 : 7 (b) 12 : 13 (c) 3 : 5 (d) 7 : 3
ANSWERS
1. (a) 2. (a) 3. (a) 4. (c) 5. (a) 6. (c) 7. (a) 8. (b) 9. (b) 10. (c) 11. (d) 12. (a) 13. (b) 14. (c) 15. (c) 16.
(c) 17. (d) 18. (a) 19. (c) 20. (d)21. (b)
Assertion –Reason Based MCQ (1 Mark)
Read the statements given below and choose the correct option from (a),(b) , (c) and (d).
(a) Assertion (A) and Reason (R) are correct, but reason (R )is the correct explanation of
Assertion(A).
(b) Both Assertion (A) and reason (R ) are correct, but reason (R) is not the correct explanation
Of Assertion (A).
( c) Assertion (A) is correct but Reason ( R) is not correct.
( d) Assertion (A) is not correct but Reason ( R) correct.
1. Assertion (A) : Retiring partner will not get share in firm’s goodwill on his retirement from
the firm.
Reason (R ): Goodwill of the firm is valued and retiring partner share of goodwill is credited to
his capital A/c.
Ans. (d)
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2. Assertion (A ) : Revaluation account is prepared in the same manner as it is prepared at the
time of change in profit sharing ratio and admission of a partner.
Reason : At the time of retirement of a partner assets and liabilities are reassessed .
Ans. (a)
3. Assertion (A) : Sacrificing ratio means old ratio- new ratio.
Reason ( R) : At the time of retirement of a partner Gaining ratio is calculated.
A.s. (b)
4. Assertion (A) : At the time of retirement , remaining partners gain.
Reason ( R) : When a partner retires he share his profit share to other partners in gaining
ratio.
Ans. (a)
5. Assertion (A) : Amount due to the remaining partner is always transferred to executor’s
loan Account.
Reason (R ) : Amount due to the remaining partner may be paid immediately or later in
installments.
Ans. (d)
Short Answer Type Questions – II [3/4 Marks]
**************************************************************************************************
1. What is the effect of retirement of a partner to the firm?
Ans. The following are the effects of retirement of a Partner (any three) :
(i) The retirement of a partner will terminate the old partnership and a new partnership comes
into existence.
(ii) The combined shares of the remaining Partners is increased. Infact their profit-sharing ratio
changes.
(iii) Accumulated Profits and Losses and Reserves are distributed among all the partners.
(iv) The assets and liabilities are revalued and proper adjustments are to be made.
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(v) The goodwill of the firm has to be valued and retiring partner’s share of goodwill has to be
adjusted.
2. What are the problems that arise at the time of retirement of a partner?
Ans. The following are the main problems to be tackled at the time of retirement (any three) :
(i) Calculation of gaining ratio and new profits sharing ratios of the continuing partners.
(ii) Treatment of goodwill.
(iii) Revaluation of assets and liabilities.
(iv) Transfer of reserves, accumulated profits and losses.
(v) Payment to retiring partner.
(vi) Adjustment of capitals in proportion to profit sharing ratios.
3. Discuss various methods of payment to retiring partner.
Ans. Payment to Retiring Partner: When the total amount due to the retiring partner is
ascertained,
after all adjustments, it is either paid to him in (i) lump sum or, (ii) transferred to his loan
account.
(i) If the amount is paid to the retiring partner in lump sum and in cash or by cheque:
Retiring Partner’s Capital A/c Dr.
To Cash/Bank A/c
(For retiring partner’s share paid off)
(ii) If the amount is not paid in cash, the amount due to him will be transferred to his Loan A/c:
Retiring Partner’s Capital A/c Dr.
To Retiring Partner’s Loan A/c
(For amount due to retiring partner transferred to his Loan A/c)
If the amount due to retiring partner is transferred to his Loan A/c the interest is to be paid to the
retiring partner, at an agreed rate, on the balance appearing in the Loan A/c. But in the absence
64
of an agreement, the retiring partner is entitled to interest @ 6% p.a. till the loan is paid off.
Note : If nothing particular is mentioned in the question about the payment due to the retiring
partner, it will be transferred to his loan account.
Treatment of goodwill
(When goodwill does not appear in the books of account )
Q.4 A, B and C are partners sharing profits in the ratio of 5:3:2. C retires on 1 st April , 2018 . A
and B agree to continue the partnership with a ratio of 3;2 . the value of goodwill of the firm
is Rs. 4,00,000 . pass journal entry for the treatment of goodwill without opening goodwill
account.
Solution : Journal
Dae Particulars L. Dr. Cr.

F
2018 A’s Capital A/c Dr 40,000
Ap.1 B’s Capital A/c Dr. 40,000
To C’s Capital A/c 80,000
( Being C’s share of goodwill adjusted in gaining ratio,
i..e.., 1:1)
Working note
Gaining ratio = New Ratio – Old Ratio
A= 3/5-5/10= 6-5/10= 1/10; B=2/5-3/10=4-3/10=1/10
GAINING RATIO OF A AND B = 1:1
C’ share in goodwill = 4,00,000X 2/10=80,000
(When goodwill already appears in books; )
Q.5 A, B and C are sharing profits in the ratio of 3:2:1. Goodwill is appearing in the books at a
value of Rs. 24,000. B retires and on the day of B’ s retirement , goodwill is valued at Rs. 60,000.
A and C
decided to share future profits in the ratio of 3:2. Pass the necessary journal entries.
65
Solution : Journal

F
A’s Capital A/c Dr 12,000
B’s Capital A/c Dr 8,000
( Being existing goodwill written off in old ratio))
A’s Capital A/c Dr 6,000
C’s Capital A/c Dr 14,000
To B’s Capital A/c 20,000
( Being B’s share of goodwill adjusted to
remaining partners )
Working note
B’s share of goodwill = 60,000 X 2/6= Rs. Rs 20,000
Calculation of Gaining Ratio:
Gaining ratio = New ratio –Old ratio
A’s Gain = 3/5-3/6= 18-15/30=3/30; C’s Gain = 2/5-1/6 = 12-5/37/30
As such, Gaining ratio between A and C= 3:7
( Hidden Goodwill)
Q 6 X , Y and Z are partners sharing profits in the ratio 1:2:3. Z retires on 1 st April ,2018 and his
capital after making all adjustment for reserves and profit on revaluation stand at Rs
2,40,000. X and Y here agreed to pay him Rs. 3,00,000 in full settlement of his claim .
Records necessary journal entry for the treatment of goodwill if the new profit sharing ratio is
decided as 1:3.
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Solution
Journal

F
2018 X’s Capital A/c Dr 10,000
Ap.1 Y’s Capital A/c Dr. 50,000
( Being Z’s share of goodwill adjusted in gaining ratio,
i..e.., 1:5)
Calculation of Hidden goodwill. (Rs.)
Amount agreed to be paid in full settlement to Z 3,00,000
Less Z’s capital after (After all adjustments) 2,40,000
60,000 (hidden goodwill)
Calculation of Gaining ratio
New Ratio = 1:3 and Old Ratio = 1:2:3
X’s gain = ¼ - 1/6= 3-2/12=1/12 Y’s gain = 3/4 -2/6=9-4 /12 =5/12
Gaining ratio X & Y 1:5
Q.7 D , E and F are partners sharing profits and losses in the ratio of 2 : 3 : 2 F retired from the
firm and surrendered 2/9th of his share of profit to D and remaining in favour of E . What will
be the gaining ratio between D and E ?
Explanation : –
Old ratio between D, E and F = 2 : 3 : 2
Share surrendered by F in favour of D =2/7 X 2/9 = 4/63
Share surrendered by F in favour of E = 2/7 – 4/63 = (18- 4)/63 = 14
Gaining ratio = The ratio in which the continuing partners acquire the outgoing (retired )
partner share
New share – Old share
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Gaining ratio between D and E =4/63 : 14/63, = 4:14
Q.8 D, E and F are partners sharing profits and losses in the ratio of 1 : 2 : 1 F retired from the
firm and D and E decide to share future profits and losses in the ratio of 1 : 2 . What will be the
gaining ratio between partners?
Explanation : –
Old ratio between D , E and F = 1/4 : 2/4 : 1/4
New ratio between D and E = 1/3 : 2/3
Gaining ratio = New ratio – Old ratio
For D = 1/3 – 1/4 = (4-3)/12 = 1/12
For E = 2/3 – 2/4 = (8-6)/12 = 2/12
=1:2
(Revaluation of assets and Reassessment of liabilities)
Q partners sharing profits and losses in the ratio of 2:2:1 . on 31 st March ,2018, their Balance
sheet stood as under :
Liabilities Rs. Assets Rs.
Sundry creditors 19,000 Building 25,000
Bank loan 30,000 Sundry Debtors 25,000
Partner’s capital A/c Machinery 18,000
X 20,000 cash in hand 10,000
Y 15,000 cash at bank 6,000
Z 10,000 stock 10,000
45,000
94,000 94,000
On 1st April , 2018 , Y decides to retire from the firm . On that day, the assets and liabilities
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Of the firm are revalued as follows ;
(a) building is valued at Rs. 28,000
(b) value of stock has been increased by Rs. 5,000.
(c ) provision @ 5% is to be created for doubtful doubts on debtors..
(d) Machinery is valued at Rs. 15,000.
(e) Amount due to sundry creditors has been decreased by Rs. 5,000.
Pass necessary journal entries on revaluation of assets and liabilities and prepare a
Revaluation Account.
Solution : Journal
Date Particulars L. Dr. Cr.

F
2018 Revaluation A/c Dr 4,250
April To Provision for doubtful Debts A/c 1250
To machinery A/c 3,000
( Being decreases value of assets )
Building A/c Dr 3,000
Stock l A/c Dr 5,000
Sundry creditor A/c Dr 5,000
( Being increases in assets and decreases in liabilities
have been recorded )
Revaluation A/c Dr 8,750
To X’s capital A/c 3,500
( Being profit on revaluation transferred to partners
capital including retiring partner )
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Revaluation account
particulars Rs. particulars Rs.
To provision for doubtful debts 1,250 By building 3,000

A/c
To machinery A/c 3,000 By stock 5,000
To profit transferred to capital
A/c By sundry Creditor A/c 5,000
X 3,500
Y 3,500
Z 1,750 8,750
13,000 13,000
Q. (a) Give the journal entry to distribute , Workmen compensation Reserves ‘ of Rs. 70,000
At the time of retirement of Neeti , when there is a claim of Rs. 25,000 against it. The firm
has three partners Raveena , Neeti , and Rajat.
(b) Give the journal entry to distribute ‘ workmen Compensation Reserves ‘ of Rs. 60,000 At
the time of retirement of sajan, when there in no claim against it. The firm has three
partners Rajat ,Sajan and Kavita.
(c) Give the journal entry to distribute ‘ investment fluctuation reserve ‘ of Rs. 4,000 at the
time of retirement of Z, when investment (Market value Rs. 19,000) appears at Rs. 20,000.the
firm has three partners X, Y and Z.

F
a. Workmen compensation Reserves A/c Dr 70,000
To Workmen compensation Claim A/c 25,000
To Raveena’s capital A/c 15,000
To Neeti’s capital A/c 15,000
To Rajat’s capital A/c 15,000
( Being the liabilities for Workmen compensation
Claim made and balance WCR transferred to partners
capital A/c )
b Workmen compensation Reserves A/c Dr 60,000

To Rajat’s capital A/c 20,000
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To Sajan’s capital A/c 20,000
To kavita’s capital A/c 20,000
( Being WCR transferred to partners capital A/c in their
old ratio )
c investment fluctuation reserve A/c Dr 4,000

To Investment A/c 1,000
To Y’s capital A/c 1,000
To Z’s capital A/c 1,000
( Being the value of investment brought up to
market value and surplus
investment fluctuation reserve transferred to
partners capital accounts in their old sharing ratio )
Long Answer Type Questions – II [ 6 Marks]
( Full payment in cash to retiring partner)
Q.1 A B and C are partners in a business , sharing profits and losses in the ratio of 3:2:1. Their
balance Sheet on 31 st March , 2018 was as follows;
Liabilities’ Rs. Assets Rs.

Capital : Factory Building 14.000
A, 10,000 Machinery 6,000
B 10,000 Stock in hand 7,000
C 10,000 30,000 Sundry debtors 9,000
Reserve Fund 6,000 Cash at bank 1,000
Creditors 12,600 Cash in hand 11,600
48,600 48,600
On that date , C retires from business and amount due to him is paid in cash. It is agreed to
Adjust the values of assets as follows:
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(a) To provide a provision of 5% on Sundry Debtors for doubtful debts .
(b) to depreciate stock by 5% and Machinery by 10%
(c) Factory Building to be revalued at Rs. 15,100
Show the Revaluation Account and the partners capital account and prepare the balance
sheet of the continuing partners as on 1st April , 2018.
Solution
Dr. Revaluation Account Cr.
Particulars Rs. Particulars Rs.

To provision for doubtful debts A/c 450 By factory building A/c 1,100
To stock 350 By partners Capital A/c (loss)
To machinery 600 A 150
B 100
C 50 300
1,400 1,400
Dr. Partners capital A/c Cr.
To Revaluation A/c 150 100 50 By bal b/d 10,000 10,000 10,000
To cash A/c ….. ….. 10,950 By Reserve Fund 3,000 2,000 1,000
To Balance c/d 12,850 11,900 ……. A/c
13,000 12,000 11,000 13,000 12,000 11,000
Balance sheet
As at 1st April ,2018
Capital A/c Factory Building 15,100
A 12,850 Machinery (6000-600) 5,400
B 11,900 24,750 Stock in hand (7000-350) 6650
Creditors 12,600 Sundry debtors 9,000
Less prov. for doubtful debt; 450 8,550
Cash at bank 1,000
Cash in hand 6,50
37,350 37,350
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Q.2(Partial Payment to the retiring partner) X, Y and Z are partners in a firm sharing profits in
proportion of 1/2, 1/6 and 1/3 respectively. The Balance Sheet as on April 1, 2020 was as
follows:

Employee Provident fund 12,000 Freehold Premises 40,000
Sundry Creditors 18,000 Machinery 30,000
General Reserve 12,000 Furniture 12,000
Capitals: Stock 22,000
X 30,000 Debtors 20,000
Y 30,000 Less: Provision
Z 28,000 88,000 for Bad Debts1,000 19,000
Cash 7,000
1,30,000 1,30,000
Z retires from the business and the partners agree that:
(a) Machinery is to be depreciated by 10%.
(b) Provision for bad debts is to be increased to ₹ 1,500.
(c) Furniture was taken over by Y for ₹ 14,000 against cash payment
(d) Goodwill is valued at ₹ 21,000 on Z’s retirement.
(e) The retiring partner was paid half of his amount due in cash.
Prepare Revaluation Account and Partners Capital Accounts and Balance Sheet of the
reconstituted firm.
Solution : old Ratio X , Y ,Z 3:1:2
New Ratio X: Y 3:1
Gaining Ratio X: Y 3:1
Revaluation A/c
particulars Rs. particulars Rs.

To provision for Bad Debts A/c 500 By furniture 2,000
To machinery A/c 3,000 By loss on Rev. 1,500

X’s capital A/c-750
Y’s capital a/c -250
Z’s capital a/c-500
3,500 3,500
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Partners Capital Account
Particulars X Y Z Particulars X Y Z
Z’s capital 5,250 1,750 --- Balance b/d 30,000 30,000 28,000
Revaluation 750 250 500 X’s capital -- -- 5,250
Cash -- Y’s capital -- -- 1,750
-- 19,250
Z’s loan --- --- 19,250
Balance c/d 30,000 General res. 6,000 2,000 4,000
30,000
36,000 32,000 39,000 36,000 32,000 39,000

Balance sheet

Capital accounts Freehold Premises 40,000
X- 30,000 Machinery-30,000
Y-30,000 60,000 Less Dep – 3,000 27,000
Creditors 18,000 Stock 22,000
Employee provident fund 12,000 Debtors 20,000
Z’s loan 19,250 Less- prov 1,500 18,500
cash
1,750
1,09,250 109,250
Q.5. (Adjustment of capital)
Mohan , Vinay and Nitya were partners in a firm sharing profits and losses in the proportion
Of ½ , 1/3 , and 1/6 respectively . on 31st March , 2018 , their Balance sheet was as follows:
Balance sheet of Mohan, Vinay and Nitya as at 31 st March, 2018
Creditors 48,000 Cash at bank 31,000
Employees provident fund 1,70,000 Bills receivable 54,000
Contingency Reserve 30,000 Book debts 63,000
Capital Less: provision for doubt debt 2,000 61,000
Mohan 1,20,000 Plant and machinery 1,20,000
Vinay 1,00,000 Land and building 2,92,000
Nitya 90,000
3,10,000
5,58,000 5,58,000
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Mohan retired on the above date and it was agreed that;
(i) Plant and Machinery will be depreciated by 5%.
(ii) An old computer previously written off was sold for Rs. 4000.
(iii) bad debts amounting to Rs. 3,000 will be written off and a provision of 5% on debtors for
Bad and doubtful debts will be maintained.
(iv) Goodwil of the firm was valued at Rs. 1,80,000 and Mohan’s share of the same was
Credited inhis account by debiting Vinay’s and Nitya’s accounts.
(v) the capital of the new firm was to be fixed at 90 ,000 and necessary adjustments were to
be made by bringing in or paying off cash as the case may be.
(VI)vinay and Nitya will share future profits in the ratio of 3:2.
Prepare Revaluation and partner’s capital accounts & Balance sheet.
Dr. Solution Revaluation A/c Cr.
To plan and machinery A/c 6,000 By bank A/c (Sale of comp.) 4,000
To provision for Doubtful debts By loss transferred to cap.a/c
Bad debts (3,000-2000) 1,000 Mohan 3,000
Provision for doubtful debts 3,000 4,000 Vinay 2,000
Nitya 1,000 6,000
10,000 10,000
Dr. Capital A/c Cr.

particulars Mohan Vinay Nitya Particulars Mohan Vinay Nitya
To mahan’s cap …….. 48,000 42,000 By bal b/d 1,20,000 1,00,000 90,000
To Revaluation By contingency
A/c 3,000 2,000 1,000 reserve a/c 15,000 10,000 5,000
To mahan’s loan 2,22,000 ………. ……… By Vinay’s cap 48,000 ……… ……..
To bank a/c ……… 6,000 16,000 By Nitya’s cap 42,000 ……… …….
To balance C/d ……. 54,000 36,000
2,25,000 1,10,000 95,000 2,25,000 1,10,000 95,000
Balance sheet as at 31 march 2018

Creditors 48,000 Cash at bank 13,000
Emp . Prov. Fund 1,70,000 (31,000+4,000-6,000-16,000)
Vinay’s Cap 54,000 Bills receivables 54,000
Niya’s cap 36,000 Book debts 63,000
Mohan’s loan 2,22,000 Less; bad debts 3,000
Provision for doubtful debts 3,000 57,000
Plant and machinery 1,14,000
Land and building 2,92,000
5,30,000 5,30,000
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1. calculation of provision for doubtful debts 63,000-3,000-60,000 X 5%=3,000
2 gaining ratio Vinay’s gain 3/5-1/3=9-5/15 =4/15
Nitya’s gain 2/5-1/6 = 12-5/30=7/30
Gaining ratio = 4/15 :7/30= 8:7
3. calculation of new capital Vinay =90,000X3/5= Rs. 54,000
Nitya’s 90,000X2/5= Rs. 36,ooo
(Retirement and admission)

Q. A and B are partners. It was agreed that B shall retire on 31 st March. 2018, and C Shall be
admitted as a partner from 1st April, 2018 and he shall be entitled to one-third share of
profits of the firm.
The balance sheet of the firm as at 31st March, 2018 was as follows:
Balance Sheet

Capitals; Building 20,000
A 41,000 Furniture 15,000
B 20,000 61,000 Goodwill 10,000
Debtors 16,000
Sundry 11,000 Cash 11,000
72,000 72,000
For the purpose of B’s retirement and C’s admission , goodwill was valued at Rs. 24,000 and
Building at Rs. 30,000. It was agreed the sufficient money should be introduced to enable
B to be paid off in full and leave Rs. 10,000 as working capital. A and C brought in necessary
capital on 1st April, 2018 and the amount due to B was paid on the same day. prepare
Revaluation , partner’s Capital A/c & Balance sheet.
Solution : Revaluation Account
Particulars Rs. Particulars. Rs.

To partners Capital A/cs: By Building 10,000
A 5,000
B 5,000 10,000
10,000 10,000
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Partners’ Capital Accounts
Dr. Cr.
To goodwill 5,000 5,000 -- By bal.b/d 41,000 20,000 --
To B’s Cap. A/c 12,000 --- -- By A’s Cap. A/c -- 12,000 --
To bal.c/d 29,000 32,000 -- By Rev. A/c 5,000 5,000 --
46,000 37,000 -- 46,000 37,000 --
To cash A/c -- 32,000 20,000 By Bal. b/d 29,000 32,000 --
To Balance c/d 48,000 -- By cash A/c 11,000 -- 20,000
By C’s current 8,000 -- --
A/c
48,000 32,000 20,000 48,000 32,000 20,000
Balance Sheet of A and C

As at April, 2018

Sundry creditors 11,000 Cash in hand 10,000
Capital A 48,000 Debtors 16,000
C 20,000 Furniture 15,000
Building 30,000
C’s Current Account 8,000
79,000 79,000
Working note
Computation of capital of new firm Rs.
Amount payable to B 32,000
A’s capital 29,000
Cash balance required 10,000
71,000
Less; existing cash bal. 11,000
Total capital of the new firm 60,000
New ratio =2:1
A’s New Capital = 60,000 X 2/3 = Rs. 40,000; C’s Capital= 60,000 X 1/3 = Rs. 20,000
Death of a partner
As stated earlier, the accounting treatment in the event of death of a partner is similar to that in
case of retirement of a partner, and that in case of death of a partner his claim is transferred to
his executors and settled in the same manner as that of the retired partner. However, there is
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one major difference that, while the retirement normally takes place at the end of an
accounting period, the death of a partner may occur any time. Hence, in case of a death, his
claim shall also include his share of profit or loss, interest on capital, interest on drawings
(if any) from the date of the last Balance Sheet to the date of his death of these, the main
problem relates to the calculation of profit for the intervening period (i.e., the period from date
of the last balance sheet and the date of the partner’s death. Since, it is considered
cumbersome to close the books and prepare final account, for the period, the deceased
partner’s share of profit may be calculated on the basis of last year’s profit (or average of past
few years) or on the basis of sales.
For example, Bakul, Champak and Darshan were partners in a firm sharing profits in the ratio of
5:4:1. The profit of the firm for the year ending on March 31, 2006 was Rs.1,00,000. Champak
dies on June 30, 2006. Champak’s share of profit for the period from April 1 to June 30, 2006,
shall be calculated as follows:
Total profit for the year ending on 31st March, 2006 = Rs.1,00,000
Champak’s share of profit :
Proceeding Year’s Profit ´ Proportionate Period ´ Share of Deceased Partner
= Rs. 1,00,000
´ ´ = Rs. 10,000
The journal entry will be recorded as follows :
Profit & Loss Suspense A/c Dr. 10,000
To Champak’s Capital A/c 10,000
(Champak’s share of profit transferred to his capital account)
Deceased partner’s capital Account
Dr. Cr.

To Accumulated losses A/c ….. By balance b/d (Opening bal.) ……
To current A/c (Dr. Bal.) …… By current A/c (Credit bal) ……
To Revaluation A/c ( Share in loss) …… By interest on capital A/c ……
To Drawings …… By salary A/c …..
To Interest on drawings A/c …… By Accumulated profit ……
To profit and loss suspense A/c …… By share in Goodwill A/c ……
To deceased partner’s Executor … By Revaluation A/c (Share in profit) …..
A/c By profit and loss suspense A/c ……
(Balancing figure)
……. …….
MCQ (1 mark)
Q1. Rajesh , Rakesh and Ramesh are partners sharing profits and losses in the ratio of (2/5) :
(1/5) : (2/5). Ramesh died on 01-08-2017 and profit for the year 2017-18 were Rs. 36000. How
much profit for the period from 1st April 2017 to 31st March 2018 will be credited to Ramesh ‘s
Capital Account?
(a) Rs. 4000
(b) Rs. 13000
(c) Rs. 7200
(d) Rs. 4800
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Answer: (d) Rs. 4800
Explanation: Profit for the year 2017-18 = Rs. 36000
Number of Month’s profit entitlement to Ramesh = 4

Total Month in a Year = 12
Ramesh’s share in profits = (Total profit for the year X months upto date of death X Ramesh’s
share)/12
= 36000 x (4/12) x (2/5)
= Rs. 4800
Q2. Akash , Anoop and Anmol are partners sharing profits and losses in the ratio of (2/5) :
(2/5): (1/5)Rs. 280000 , Rs. 280000 , Rs. 140000. They had a joint life policy of Rs. 700000,
Surrender value of JLP in Balance Sheet is Rs. 200000. Anmol dies. What is the share of each
partner in JLP?
(a) Rs. 280000 , Rs. 280000 , Rs. 140000
(b) Rs. 80000 , Rs. 80000 , Rs. 40000
(c) Rs. 13000 , Rs. 180000 , Rs. 90000
(d) Rs. 200000 , Rs. 200000 , Rs. 100000
Answer: (d) Rs. 200000 , Rs. 200000 , Rs. 100000

Explanation: Amount of policy to be distributed to partner = Policy value – Surrender value of
joint life policy in Balance sheet
700000 – 200000
= Rs. 500000
Share of partners in joint life policy =
Akash’s share in policy 500000 X (2/5) = Rs. 200000
Anoop’s share in policy 500000 X (2/5) = Rs. 200000
Anmol’s share in policy 500000 X (1/5) = Rs. 100000
Q 3.Ram , Rahim and Rahman are partners sharing profits and losses in the ratio of (2/4) : (1/4)
: (1/4). They had a joint life policy of Rs. 500000, Surrender value of JLP in Balance Sheet is Rs.
100000, Rahman dies. What is the share of Rahman in JLP?
(a) Rs. 125000
(b) Rs. 25000
(c) Rs. 100000
(d) Rs. 90000
Answer: (c) Rs. 100000

Explanation: Amount of policy to be distributed to partner = Policy value – Surrender value of
joint life policy in Balance sheet
500000 – 100000
= Rs. 400000
Share of partners in joint life policy =
Rahman’s share in policy 400000 X (1/4) = Rs. 100000
Q.4 . D , E and F are partners sharing profits and losses in the ratio of (1/8) :(3/8):(4/8). F died
and (1/2)of his share is taken over by D and remaining by E. Calculate the new profit sharing
ratio between D and E.
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(a) 6 : 10
(b) 4 : 4
(c) 2 : 3
(d) None of the above
Answer: (a) 6 : 10
Explanation: Old ratio between D E and F = 1 : 3 : 4
Share of F taken over by D = (4/8) X (1/2) = 4/16
Share of F taken over by E = (4/8) – (4/16) = (8−4)/16 = 4/16
New share of D = (1/8) + (4/16) = (2+4)/16 = 6/16
New share of E = (3/8) + (4/16) = (6+4)/16 = 10/16
New ratio = (6/16) : (10/16)
= 6 : 10
Gaining ratio = The ratio in which the continuing partners acquire the outgoing (deceased )
partner share
New share – Old share
Gaining ratio between D and E = (4/16) :(4/16)
=4:4
Q.5.Shiv , Shakti and Shanti are partners sharing profits and losses in the ratio of (5/10)
:(3/10):(2/10). Shakti died. What will be the gaining ratio between Shiv and Shanti ?
(a) 15 : 6
(b) 5 : 3
(c) 1 : 2
(d) 5 : 1
Answer: (a) 15 : 6
Explanation: New Ratio between Shiv and Shanti after retirement of Shakti = (5/7) : (2/7)
Shiv’s Gaining Ratio = (5/7) – (5/10) = (50/70)- (35/70) = 15/70
Shanti’s Gaining Ratio = (2/7) -(2/10) = (20/70) – (14/70) = 6/70
Gaining Ratio = 15 : 6
Q6 .B, C and D are partners sharing profits and losses in the ratio of 1 : 1 : 2. B died on 01-Jun
2015. His share of profits from the closure of the last accounting year i.e. 31-Mar 2014 till the
date of death was to be calculated on the basis of the average profits of two completed years
before death. Profit for the year 2013 and 2014 were Rs. 50000 and Rs. 70000 respectively.
Calculate B ‘s share of profit till the death.
(a) Rs. 35000
(b) Rs. 12500
(c) Rs. 2500
(d) None of these
Answer: (c) Rs. 2500
Explanation: Total months upto the date of B’s death = 2
Total months in a year = 12
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Total profit for 2 years = 50000 + 70000
= Rs. 120000
Average profit = 120000/2
= Rs. 60000
Profit for the calculation of B’s share = 60000 X (2/12)
= Rs. 10000
B’s share = 10000 X (1/4)
= Rs. 2500
Q. 7 .D , E and F are partners sharing profits and losses in the ratio of 2 : 2 : 1. D died on 31-
Mar-2016 and after all the adjustments his capital account shows the credit balance of Rs.
100000. The amount due to X is to be paid on 01-Jul-2016. What will be the amount which D’s
executors are entitled to receive when profit upto 01-Jul-2016 was Rs. 50000 and total capital
of D and E was Rs. 150000?
(a) Rs. 120000
(b) Rs. 100000
(c) Rs. 101500
(d) None of these
Answer: (a) Rs. 120000

Explanation: Months upto the date of payment = 3
Month in a year = 12
Calculation of amount which executors of D are entitled
Capital balance after all adjustments = Rs. 100000
1) Add: Interest @6% p.a. on 100000 upto the date of payment
100000 x (6/100) x (3/12) = Rs. 1500
OR
2) Add: Share in profit
Profit from the last balance sheet (X) Outstanding amount of outgoing partner/(Capital of all
partners + Balance of
outgoing partner till the date of death or retirement)
= 100000 X 50000/(150000+100000)
(100000/(150000+100000)) X 50000
(100000/250000) X 50000
= Rs. 20000
D’s executors are entitled to choose higher from the above two i.e interest @6% p.a or share in
profit as per Section
37 of Partnership Act,1932
Total Amount Due = 100000 + 20000
= Rs. 120000
Long answer ( 6. Marks )
Q.1 Jag , Pravesh and Chander are partners in a firm sharing profits in the ratio of 5:3:2
respectively . Firm closes its accounts on 31st March every year . Jag died on 30th September ,
2017. there was a balance of 47,000 in Jag’s Capital Account in the beginning of the year .at
the event of death of any partner, the partnership Deed provides for the following ;
(i) Interest on capital will be calculated at the rate of 12% p.a..
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(ii) the deceased partner’s representative will be paid 16,000 for his share of goodwill.
(iii) his share of Reserve Fund which is Rs 50,000, shall be paid to his executor.
(iv) His share of profit till the date of death will be calculated on the basis of sales. It also
Specified that the sales during the year 2016-17 were Rs. 2,00,000. The profit of the firm
for the year ending 31st March , 2017 was Rs. 1,00,000.
Pravesh and Chander decided to share future profits in equal ratio after the retirement of Jag.
Prepare Jag’s Capital Account to be presented to his representative.
Solution ; Jag’s Capital Account

To jag’s Executor’s A/c 1,25,820 By balance b/d 47,000
(Bal.Fig) By interest on capital A/c 2,820
(Rs 47,000X12/100X 6/12)
By Rravesh’s capital A/c (WN 1) 6,400
By chander’s capital A/c (W N 1) 9,600
By reserve Fund A/c 50,000
By Rravesh’s capital A/c 4,000
By chander’s capital A/c 6,000
1,25,820 1,25,820
Working note
1. Jag’s share of goodwill is contributed by pravesh and Chander in the gaining ratio i..e 2:3,
Calculation of Gaining ratio
Pravesh = 1/2 − 3/10 = 5 − 3/10 = 2/10 , Chander =1/2-2/10=5-2/10 =3/10
2. jag’s share of profit till the date of death:
(i) Percentage of profit on sales= Profit/sales X 100= 1,00,000/10,00,000X 100=10%
(ii) Profit on sale ( 1st April , 2017 to 30th September, 2017) = 2,00,000X10/100=20,000
(iii) Jag’s share of profit = Rs. 20,000 X 5/10= Rs. 10,000.
Jag’s share of profit will be contributed through partners Capital accounts in their gaining ratio.
Q.2 The balance sheet of Prabhakar,Abhay nd Kavi who were sharing profits in the ratio of 3:3:4
respectively,as on 31 st march ,2015 was as follows:
Balance sheet
liabilities Amount Assets Amount

General reserve 10,000 Cash 32,000
Bills Payable 20,000 Stock 88,000
Loan 24,000 Investment 94,000
Capital Land and Building 1,20,000
Prabhakar 1,20,000 Prabhakar’s loan 20,000
Abhay 1,00,000
Kavi 80,000 3,00,000
3,54,000 3,54,000
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Prabhakar died on 31st July,2015 . the partnership deed provided for the following on the death
of a partner.
i) Goodwill of the firm valued Rs 1,60,000.
ii) Prabhakar share of profit till the date of his death was to be calculated on the basis of
sales. Sales for the year ended 31st march ,2015 amounted to Rs 8,00,000 and that
from 1st April to 31st July Rs 3,00,000. The profit for the year ended 31st march ,2015
was Rs 2,00,000.
iii) Interest on capital was to be provided @6% p.a.
iv) According to Prabhakar’s will , the executor should donate his share to Ashiyana-an
old are Home”.
Prepare Prabhakar’s capital account to be rendered to his executor. Also indentify the value being
highlighted in the question.
(Solution) Prabhakar’s capita l a/c
particulars amount particulars Amount

To Prabhakar’s loan a/c 20000 By bal b/d 120000
To Prabhakar’s Exe A/C 175900 By gen res 3000
By p & L suspense a/c 22500
By int on cap 2400
By Ajay’s cap(goodwill) 20571
By Kavi’s cap(goodwill) 27429
195900 195900
Working notes:
Prabhakar’share of profit
=300000x200000/800000x3/10=Rs 22500
Value highlighted-sympathy and kindness towards old aged citizens.
Q.3 Anil, Bhanu and Chandu were partners in a firm sharing profits in the ratio of
5:3:2. On March 31, 2017, their Balance Sheet was as under: Books of Anil, Bhanu and Chandu
Balance Sheet as on March 31, 2017

Creditors 11,000 Building 20,000
Reserves 6,000 Machinery 30,000
Anil’s capital 30,000 Stock 10,000
Bhanu’s capital 25,000 Patents 11,000
Chandu’s capital 15,000 70,000 Debtors 8,000
Cash 8,000
87,000 87,000
Anil died on October 1 2017. It was agreed between his executors and the remaining
Partners that ;
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(a) Goodwill to be valued at 2.5 years purchase of the average profits of the previous four years
which were;
Year 2013-14- Rs13,000, year 2014-15-Rs-12,000
Year 2015-16- Rs. 20,000, year 2016-17 Rs. 15,000
(b) Patents be valued at Rs. 8,000 ; machinery at Rs. 28,000 and building at Rs.25,000
(c)Profit for the year 2017-18 be taken as having accrued at the same rate as that of the
previous year.
(d) Interest on capital be provided at 10% p.a
(e) Half of the amount due to Anil be paid immediately .
Prepare Anil’s Capital account and Anil Executor’s account on Octover 1,2017.
(Solution) Anil’s capital Account

particulars Rs. Particulars Rs.
Anil’s executors 57,000 Balance b/d 30,000
Reserve fund 3,000
Bhanu’s capital 11,250
Chandu’s capital 7,500
Profit and loss (suspense) 3,750
Interest on capital 1,500

57,000 57,000
s 11 MCQs
Business Studies Class 11 MCQs
Anil’s Executors Account
particulars Rs particulars Rs.
Bank 28,500 Anil’s capital 57,000
Balance c/d 28,500
Q Q4. The balance sheet of Sindhu , Rahul and kamlesh who were sharing profit in the ratio
Of 3:3:4 respectively , as on 31st March , 2015 was as follows :

General reserve 10,000 Cash 32,000
Bills payable 20,000 Stock 88,000
Loan 24,000 Investment 94,000
Capital: Land and building 1,20,000
Sindhu 1,20,000 Sindhu’s Loan 20,000
Rahul 1,00,000
Kamlesh 80,000 3,00,000
3,54,000 3,54,000
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Sindhu died on 31st July , 2015 , the partnership deed provided for the following on the
Death of a partner:
(a) Goodwill of the firm be valued at two years purchase of average profits for the last three
years which were 80,000.
(b) Sindhu’s share of profit till the date on his death was to be calculated on the basis of sales.
Sales for the year ended 31st March, 2015 amounted to Rs, 8,00,000 and that from 1st April to
31st July ,2015 Rs. 3,00,000. The profit for the year ended 31st march, 2015 was Rs. 2,00,000.
(c) Interest on capital was to be provided @ 6% p.a.
Prepare Sindhu’s capital Account to be rendered to his executor.
Solution: Sindhu’s capital Account
particulars Rs Particulars Rs.

To Sindhu’s loan A/c 20,000 By balance b/d 1,20,000
By general reserve 3,000
To Sindhu’s Executors A/c 1,75,900 By profit and loss suspense A/c 22,500
By interest on capital A/c 2,400
By Rahul’s capital A/c (Goodwill) 20,571
By Kamlesh’s capital A/c ( Goodwill) 27,429
1,95,900 1,95,900
Working notes:
(i) Goodwill of the firm= Average profit X No. of Years purchase
= Average profits of last 3 years X 2
= Rs. 80,000X2 = 1,60,000
Sindhu’s share of goodwill
3
= 1,60,000 X 10 =48,000
Share’s given by Rahul = 48,000 X = 20,571

4
Share given by kamlesh= Rs. 48,000 X 7 = 27,429
(ii) Sindhu’s share of profit

2,00,000 3
= Rs. 3,00,000 X 8,00,000 X 10 = 22,500
6 4
Interest on capital = Rs. 1,20,000 X100 X12 =2,400.
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Dissolution of Partnership Firm
Meaning of Dissolution of Partnership Firm

As per Indian Partnership Act, 1932: “Dissolution of firm means termination of Partnership
among all the partners of the firm”. When a firm is dissolved, the business of the firm
terminates.
Dissolution of Partnership: Dissolution of Partnership refers to termination of Old Partnership
agreement (i.e., Partnership Deed) and a Reconstruction of the Firm. It may take place on
Change.
In profit sharing ratio among the existing partner; – Admission of a Partner; and– Retirement or
Death of a Partner. It may or may not result into closing down of the business as the remaining
partner may decide to carry on the business under a new agreement.
Modes of Dissolution
1. Dissolution by agreement:- A firm may be dissolved with the consent of all the partners or in
accordance with a contract between the partners (Section4)
2. Compulsory Dissolution:- A firm is dissolved
(a) By the adjudication of all the partners or of all partners but one as insolvent or,
(b) By the happening of any event which makes it unlawful for the business of the firm to be
carried on or for the partners to carry it on in partnership. (Section 41)
3. Dissolution on the happening of certain contingencies:-
(a) If constituted for a fixed term, by the expiry of that term.
(b) If constituted to carry out one or more adventures or undertakings by the completion
thereof.
(c) By the death of a partner.
(d) By the adjudication of a partner as an insolvent. (Section42)
4. Dissolution by notice of partnership at will:–
(a) Where the partnership is at will the firm may be dissolved by any partner giving notice in
writing to all the other partners of his intention to dissolve the firm.
(b) The firm is dissolved as from the date mentioned in the` notice as the date of dissolution or,
if no date is so mentioned, as from the date of the communication of the notice. (Section43)
5. Dissolution by the Court:- At the suit of a partner, the Court may dissolve a firm on any of
the following grounds, namely:
(a) A partner has become of unsound mind
(b) A partner has become permanently in capable of performing his duties as partner.
(c) A partner is found guilty of misconduct.
(d) Breach of Agreement by partner.
(e) A Partner transfer his right.
(f) That the business of the firm cannot be carried on at a loss.
(g) On any other ground which renders it just and equitable at the firm should be dissolved
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Main Activities at the time of Dissolution
1. Settlement of Accounts [ Section 48]
In setting the accounts of a firm after dissolution, the following rules shall, subject to agreement
by the partners, be observed.
(a) Losses, including deficiencies of capital, shall be paid first out of profits, next out of capital
and lastly, if necessary, by the partners individually in the proportion in which they were
entitled to share profits.
(b) The assets of the firm, including any sums contributed by the partners to make up
deficiencies of capital, shall be applied in the following manner and order:-
(i) Payment of outside liabilities or third parties’ liabilities.
(ii) Payment of Loan if any extended by the partner to the firm.
(iii) Balance in capital A/c of partners on date.
(iv) The residue, if any shall be divided among the partner’s in their profit sharing ratio.
At the time of Dissolution of a firm, all the assets of the firm are sold or realized , and all
liabilities
are paid off. Following accounts are prepared:
1. Realisation A/c – For realising assets and payment off outside liabilities.
2. Partner’s Loan A/c- For payment of partner’s loan if any.
3. Partner’s Capital A/c- calculation of amount due to/due by partners (Capital A/c’s are to be
closed)
4. Cash A/c- to check the receipts and payments of cash (should be tallied)
Main Journal entries:
(a) When assets are transferred to the Realisation Account:
Realisation A/c Dr
To Sundry Assets A/c
(b) When Provisions of related assets are transferred to realisation A/c :
Provision for Depreciation A/c Dr.
To Realisation A/c
(c) When Assets are realized :
Cash/bank A/c Dr.
To Realisation A/c
(d) When liabilities are transferred to the Realisation Account :
Sundries Liabilities A/c Dr.
To Realisation A/c
(e) When Liabilities are paid:
Realisation A/c Dr.
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To Cash/Bank A/c
(f) When Asset is taken over by the partner:
Partner’s capital A/c Dr.
To Realisation A/c
(g) When Liability taken over by the partner:
Realisation A/c Dr.
To Partners capital A/c
(h) When Liabilities are paid:
Realisation A/c Dr.
To Cash/Bank A/c
(i) When Asset is taken over by the partner:
Partner’s Capital A/c Dr.
To Realisation A/c
Dr. FORMAT OF REALISATION A/C Cr.
PARTICULARS AMOUNT PARTICULARS AMOUNT
To Sundry assets XXXXX By Sundry liabilities xxxxx

To Bank: Xxxxx By Prov. for d.debts xxxxx
(Liabilities Paid) By Bank: xxxxx
To Bank: XXXXX (sundry Assets Realized)
(Unrecorded liabilities paid) By Bank: xxxxx
To Partners cap. A/c (unrecorded assets realized)
(liab. Paid by partners) XXXX By Partners cap. A/c
To profit transferred to (Assets taken by partners) xxxxx
Partners cap. A/C: By Loss transferred to
A XX Partners cap. A/C:
B XX A XX
C XX B XX
C XX
xxxxx xxxxx
TOTAL xxxxxx TOTAL xxxxxx
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Preparation of Bank A/c:- Since the business is being closed, no need to prepare a balance
sheet, we prepare Cash/Bank Account. All cash realized are shown on the debit side of
cash/Bank account and all cash payments are shown on the credit side of Cash/Bank A/c.
Very Short Answer Type –I Questions (1mark)

1. State any two objectives of preparing realization account?
Ans : 1. To know the profit or loss on realization .
2. to close the balance sheet in the books.
2. State any two differences between dissolution of partnership and dissolution of

partnership firm.
Differences:- 1. Dissolution of partnership means to change in the existing agreement between
the partnership where as dissolution of firm means the dissolution of partnership between all
partners of the firm.
2. In dissolution of partnership business of the firm is continued and in dissolution of
firm the business is closed down.
3. What is the treatment of goodwill if it is given in the balance sheet?
Goodwill is treated just like any other asset and is written in the debit side of the Reaslisation
account and whatever amount is realized , it is written in the credit side of Realisation account .
4 State any two cases where court orders the dissolution of firm.
a ) When a partner becomes insane.
b ) When a partner becomes permanently incapable of performing his duties as a partner.
5. How are the accumulated profits and general reserve treated on the dissolution of the
firm?
Accumulated profits /gen reserve A/C dr.
To all partner capital A/C

6. state which of the following statements is true or false .
a) Provident fund is paid to the employees at the time of dissolution of the firm
b) Insolvency of a partner will always lead to the dissolution of the firm
c) Goodwill is sold like other assets
d) A loan from a partner and a loan from his wife will be treated in the same way
e) Partners capital are paid before paying the partners loan
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f) All accounts are closed when dissolution process is completed
g) Realization expenses are always paid by the firm
h) On dissolution of the firm, all partners will be paid interest on capital
i) Creditors like wages outstanding have to be paid first
j) Realization account and the revaluation account mean the same thing.
ANS: F,F,F,F,F,T,F,F,T,F
HOTS (Higher Order Thinking Skills)
7. When an item of assets is taken over by a partner, with what value the partner’s capital
Account should be debited ?
Ans. Partner’s Capital Account should be debited with the agreed value at which the asset has
been taken by him.
8. Stock with book value of Rs. 16,000 and Provision for doubtful debts at Rs. 12,000 in the
Balance Sheet before dissolution . the Sundry Debtors will be transferred at which figure
in Realisation Account ?
Ans . Rs. 12,000.
9. the amount of Sundry Assets transferred to Realisation Account is Rs. 1,80,000. Assets
Realized 85% of their book value. What amount should be credited to Realisation Account?
Ans. Rs. 68,000.
10. At which value. The various assets are transferred to Realisation Account?
Ans. Book value .
11. When the goodwill of the form is taken by a partner at the time of dissolution , what
should be the journal entry?
Ans. Concerned Partner’s Capital A/c Dr.
To Realisation A/c
12. Out of outsiders’ liabilities and Partners’ Capital , as per Section 48 of the Partnership
Act 1932, which is to be paid first at the time of of dissolution of the firm?
Ans. Outsider’s liabilities .
13. State any two contingencies that may result into dissolution of a partnership firm.
Ans: State any two contingencies that may result into dissolution of partnership firm
 on death of a partner.
 completion of work.
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14. Pass the necessary journal entry for treatment of Partners’ loan appearing on the asset side
of the balance sheet in case of dissolution of a partnership firm.
Answer: Partner’s loan a/c Dr
To cash Bank a/c
15. Name the liability which is not shown in the balance sheet, but paid at the time of
dissolution of the firm.
Answer: Unrecorded liability.
16. In case of dissolution of a firm, which liabilities are to be paid first? (Delhi to 2011)
Answer: According to Section 48 (b), the debts of the firm to the third parties are to be paid
first.
17. What are the modes of Dissolution of Firm?
Answer: The modes by which a Firm can be dissolved are:
 Mutual agreement
 Compulsory dissolution
 By notice
 The occurrence of an event
 Dissolution by court
18. in case of Dissolution , if a person is of unsound mind then it is a case of:
Ans. Dissolution by court.
MCQ (1 Mark)
1. The realization account is debited with _______ on the dissolution of a firm.
(a) All assets that are to be realized.

(b) All external liabilities of the firm.
(c) Cash received on sale of assets.
(d) Any assets were taken over by one of the partners.
Answer: (a) All assets that are to be realized.
2. If the total assets are Rupees 3,35,000 and the total outside/external liabilities is Rupees
35,000, then the amount of all partner’s capital will be _________.
(a) Rupees 3,70,000
(b) Rupees 2,80,000
(c) Rupees 3,00,000
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Answer: (c) Rupees 3,00,000
3. When the unrecorded assets are taken over by a partner, they are shown in ________.
(a) Debit side of realisation A/c
(b) Debit side of bank A/c
(c) Credit side of realisation A/c
(d) Credit side of bank A/c
Answer: (c) Credit side of realisation A/c
4 Realisation account is a ______.
(a) Personal A/c
(b) Nominal A/c
(c) Read A/c
Answer: (b) Nominal A/c
5 Unrecorded liabilities, when paid, are shown in ______.
(a) Debit side of realisation account
(b) Debit side of bank account
(c) Credit side of realisation account
(d) Credit side of bank account
Answer: (a) Debit side of realisation account
6. Liabilities to third parties in case of dissolution of partnership firm include:
a) Reserves b) Credit balance of Profit and Loss Account c) Partners loan d) Loan by relative
Ans. loan by relative
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Assertion –Reason Based MCQ
Read the statements given below and choose the correct option from (a),(b) , (c) and (d).
(a) Assertion (A) and Reason (R) are correct, but reason (R )is the correct explanation of
Assertion(A).
(b) Both Assertion (A) and reason (R ) are correct, but reason (R) is not the correct explanation
Of Assertion (A).
( c) Assertion (A) is correct but Reason ( R) is not correct.
( d) Assertion (A) is not correct but Reason ( R) correct.
1 Assertion (A) : Partner’s private property can be applied to pay firm’s debt.
Reason (R) : in a partnership firm partners have limited liability.
Ans.(c)
2. Assertion ( A) : Loan from a partner is not transferred to Realisation Account.
Reason (R ) : Loan from a partner is an external liability but it is not discharged before
repayment of capital.
Ans. (c )
3. Assertion (A) : Any amount paid to discharge an unrecorded liability is debited to the
realisation A/c.
Reason ( R) : payment made to discharge an unrecorded liability is a net loss to the firm and
Therefore is debited to Realisation Account.
Ans.(b)
4. Assertion (A) : Loan from a relative of a partner is an external liability.
Reason ( R) : it is transferred to the Realisation Account.
Ans. ( b)
5 Assertion (A) : Balance at Bank is not to be transferred to Realisation A/c.
Reason : (R ) : balance at bank is to partner’s capital A/c not to be is transferred .
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Ans. ( c ).
6. Assertion (A) : Dissolution of the firm means the dissolution of the partnership between all
the partners of the firm.
Reason ( R) : Dissolution of the firm mean closer of business and therefore means dissolution
of partnership also.
Ans : (b)
7. Assertion (A) : Undistributed profits such as General reserve , Reserve fund , credit balance of
P&L A/c are transferred to Realisation A/c.
Reason (R) : These accounts are transferred to partners capital account in their profit sharing
ratio.
Ans.(d) .
8. Assertion (A ) : Workman compensation Reserve is created out of profits of the firm.
Reason ( R) the reserve is created to meet the claim for compensation by workers.
Ans.(a)
9. Assertion (A ) it is real account.
Reason ( R) : Realizations account is opened for disposition of all the assets of the firm and
making payment to all the creditors.
Ans. (d)
10. Assertion (A) Firm debt refer to the debts by the firm to outsiders .
Reason (R) Firm’s property is applied first towards the payment of firm’s debts.
Ans. (a)
Short Answer Type-I (3 /4 marks)
Q.1 State the provisions of section 48 regarding settlement of accounts

Section 48:-
a ) Treatment of losses:-
Losses, including deficiencies of capital, shall be paid:
i ) first out of profits,
94
ii ) next out of capital of partners and
iii ) lastly, if necessary, by the partners individually in their profit sharing ratio.
b ) Application of assets:-
The assets of the firm, including any sum contributed by the partners to make up deficiencies of
capital, shall be applied in the following manner and order:
i ) in paying the debts of the firm to the third parties.
ii ) in paying the partners loan.
iii ) in paying the partners capital.
iv ) the balance, if any, shall be divided among the partners in their profit sharing ratio.
Q.2 Journalise the following transactions assuming that the assets (except cash) and
outside liabilities are transferred to Realisation account:-
i ) X, a partner agrees to pay the loan taken from his wife Rs. 5000.
ii ) Unrecorded typewriter realized Rs. 8000.
iii ) Y, a partner agrees to take over investment at Rs. 6000.
iv ) Realisation expenses paid by partner privately.
Ans.
i) Realisation a/c Dr. 5000
To X’s capital a/c 5000

ii) Cash a/c Dr. 8000
To Realisation a/c 8000
iii) Y’s capital a/c 6000
To Realisation a/c 6000

iv) No entry since it is paid privately
Q.3 Pass necessary journal entries for the following transaction.
a. Realisation expenses Rs 1350.

b. Sale of an unrecorded asset for- Rs 5,200.
c. Stock of Rs 12,000 taken over by a partner.
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d. Loss of Rs 15,000 on realisation.
e. Payment of the Rs 4,500 to the creditors.
S.NO PARTICULARS DR. AMOUNT CR AMOUNT

1 REALISATION A/C DR 1350
TO CASH A/C 1350
2 CASH A/C DR 5200
TO REALISATION 5200
3 PARTNER’S CAP. A/C DR 12000
TO REALISATION 12000
4 PARTNER’S CAP. A/C DR 15000
TO REALISATION 15000
5 REALISATION A/C DR 4500
TO CASH A/C 4500
Q. 4 The firm R,K and S was dissolved on 31 March, 2020. Pass necessary journal entries for the
following transactions (4)
(i) K agreed to pay off his wife’s loan of Rs. 6000.
(ii) Total Creditors of the firm were Rs. 40,000. Creditors worth Rs. 10,000 were given a
piece of furniture costing Rs. 8,000 in full and final settlement . Remaining creditors allowed a
discount of 10%.
(iii) A machine that was not recorded in the books was taken over by K at Rs. 3,000 whereas its
expected value was Rs. 5,000.
(iv) The firm had debit balance of Rs. 15,000 in the profit& loss account on the date of
dissolution.
Ans
1 Realisation A/c 6,000

To k’s capital A/c 6,000
2 Realisation A/c 27,000

Bank A/c 27,000
3 K’s capital A/c 3,000
To Realisation A/c 3,000
4 R’s capital A/c 5,000
K’s capital A/c 5,000
S’s capital A/c 5,000
To profit & Loss A/c 15,000
96
Q.5 Harveen and Arshiya were partners sharing profits and losses in the ratio 3:2 . They
decided to dissolve the firm on 31st March 2022. On that date capitals were Rs. 40,000
And Rs. 30,000 respectively . creditors amounted to Rs. 24,000.
Assets were Realised for Rs. 88,500 . Creditors of Rs. 16,000 were taken over by Harveen
At Rs. 14,000. Remaining Creditors were paid at Rs. 7,500. The cost of Reaisation come to Rs.
500. Prepare memorandum balance sheet and realisation account .
Ans . Memorandum Balance Sheet

Harveen capital 40,000 Sundry Assets (Bal. Fig) 94,000
Arshiya capital 30,000
creditors 24,000
94,000 94,000
Dr Realisation A/c Cr
particulars Rs. Particulars Rs.

To sundry Assets 94,000 By Creditors 24,000
To Harveen capital A/c ( Creditor taken) 14,000 By Cash A/c (assets realized) 88,500
To Cash A/c By Capital A/c –loss
Creditors 7,500 Harveen-=3500X3/5 2100
Expenses 5,00 8,000 Arshiya= 3500X2/5= 1400 3,500
1,16,000 1,16,000
Q.6 Abhay decided to dissolve their firm . Give journal entries in the following cases for the
Settlement of partners loans:
Loan from partners Partners’ capital Accounts (Balances after adj.

(i) Rahul Rs. 80,000 Rs. 75,000 (Credit)
(ii) Sumit Rs. 70,000 Rs. 40,000 (Debit)
(iii) Abhay Rs 60,000 Rs. 80,000 (Debit)
Solution:
Date Particulars LF Dr. Cr

2018 Rahul’s loan A/c Dr 80,000
Ap 1 To bank A/c 80,000
I (Being Rahul’s loan paid at the time of dissolution)
---------------------------------------------------------------
II Sumit’s loan A/c 70,000
To sumit’s capital A/c 40,000
97
To Bank A/c 30,000
( Being the the balance in sumit’s laon account
transferred
-----------------------------------------------------------------------
--------
III
Abhay.s Loan 60,000
Bank A/c 20,000
To Abhy’s Cap.A/c 80,000
Being Abhay’s loan account transferred to his capital
A/c
Q7 Aman and Harsh were partners in a firm. They decided to dissolve their firm. Pass necessary
Journal entries for the following after various assets (other than Cash and Bank) and third party
liabilities have been transferred to Realisation Account:
(a) There was furniture worth ₹ 50,000. Aman took over 50% of the furniture at 10% discount
and the remaining furniture was sold at 30% profit on book value.
(b) The firm paid realisation expenses amounting to ₹ 5,000 on behalf of Harsh who had to bear
these expenses.
(c) There was a bill for 1,200 under discount. The bill was received from Soham who proved
insolvent and a first and final dividend of 25% was received from his estate.
(d) Creditors, to whom the firm owed ₹ 6,000, accepted stock of ₹ 5,000 at a discount of 5% and
the balance in cash.
Ans
S.no. Particulars L.F Debit Credit

(a) Aman’s Capital A/c Dr. 22,500
Bank A/c Dr. 32,500
(Assets realized)
5,000
(b) Harsh’s Capital A/c Dr
To Bank A/c 5,000
(Expenses paid on behalf of partner)
(c) i) Bank A/c--------- Dr 300

To Realisation A/c 300
(Amount received)
ii) Realisation A/c ------- Dr 1,200

To Bank A/c 1,200
(Amount paid)
(d) Realisation A/c Dr 1,250

To Bank A/c 1,250
98
(Creditors paid)
Long Answer Questions (Marks 6)

Q.1 Hema and Garima were partners in a firm sharing profits in the ratio of 3:2. On March
31,2015, their Balance Sheet was as follows : Balance sheet of HEMA and GARIMA.

Creditors 36,000 Bank 40,000
Garima,s Husband’s Loan 60,000 Debtors 76,000
Hema’s loan 40,000 Stock 2,00,000
Capital : Furniture 20,000
Hema Rs 2,00,000 Leasehold premises 1,00,000
Garima Rs 1,00,000 3,00,000
4,36,000 4,36,000
On the above date the firm was dissolved . The various assets were realized and liabilities
were settled as under:
(i) Garima agreed to pay her husband’s loan.
(ii) Leasehold premises realized Rs. 1,50,000 and Debtors Rs. 2,000 less.
(iii) Half the creditors agreed to accept furniture of the firm as full settlement of their
claim and remaining half agreed to accept 5% less.
(iv) 50% Stock was taken over by Hema on cash payment of Rs. 90,000 and remaining stock
was sold for Rs.94,000.
(v) Realisation expenses of Rs. 10,000 were paid by Garima on behalf of Firm.
(vi) prepare ledger for the dissolution of the firm.
REALISATION ACCOUNT
Particulars Rs Particulars Rs.

To sundries Assets By Sundries Liabilities
To Debtors A/c 76,000 By Creditors A/c 36,000
To stock A/c 2,00,000 By Garima’s Husband loan 60,000
To Furniture A/c 20,000 By Bank (Assets Realized) 4,08,000
To leasehold Premises 1,00,000 Leasehold premises 1,50,000
To Bank (Creditor) 17,100 Debtor (76000-2000) 74,000
To Garima’s Capital A/c Stock (Rs. 90,000+94,000)
Husband loan Rs. 60,000
Exp. Paid Rs. 10,000 70,000 =1,84,000
To profit (Bal. Fig.)
HEMA Rs. 12540
GARIMA Rs. 8360 20,00
5,04,000 5,04,000
99
CAPITAL ACCOUNT
Particulars HEMA GARIMA Particulars HEMA GARIMA

Rs. Rs. Rs. Rs.
To Bank a/c 2,12,540 1,78,360 By balance b/d 2,00,000 1,00,000
By Realization A/c ---- 70,000
(liabilities taken)
By Realization A/c 12,540 8,360
(profits)
2,12,540 2,12,540 2,12,540 1,78,360
BANK ACCOUNT

To bal b/d 40,000 By Realisation A/c 17,100
To Realisation A/c 4,08,000 By Hema’s Cap. A/c 2,12,540
By Garima’s Cap. A/c 1,78,360
By Hema’s loan 40,000
4,48,000 4,48,000
Journal entry
HEMA’S LOAN A/C Dr. 40,000
TO BANK A/C 40,000
(FOR HEMA’S LOAN PAID)
Q. 2 Anup & Sumit are equal Partners in a firm. They decided to dissolve firm on March 31,
2019 BALANCE SHEET is as under.

Sundry Creditors 27,000 Cash at book 11,000
Reserve Fund 10,000 Sundry Debtors 12,000
Loan 40,000 Plants 47,000
Capital : Stock 42,000
Anup 60,000 Lease hold land 60,000
Sumit 60,000 1,20,000 Furniture 25,000
1,97,000 1,97,000
100
The Assets were realized as follows : Lease hold land 72,000 ,Furniture 22,500, Stock 40,500 ,
Plant 48,000 . Sundry Debtors 10,500. The Creditors were paid Rs. 25,500 in full settlement.
Expenses of realization amount to Rs. 2,500.Prepare Realisation Account, Bank Account,
Partners Capital Accounts to close the books of the firm. dissolution of the firm.
REALISATION ACCOUNT

To Sundries Assets: By Sundry Liabilities:
Debtors 12,000 Creditors 27,000
Plants 47,000 Loan 40,000
Stock 42,000 By Bank A/c (Realised)
Leasehold Land 60,000 Leasehold -
Furniture 25,000 Land 72,000
To Bank A/c Furniture 22,500
Creditors 25,500 Stock 40,500
Loan 40,000 Plant 48,000
Real. Exp. 2,500 68,000 Sundry. Debtors 10,500
To Profit Tr. to Cap.A/c 1,93,500
Anup 3,250
Sumit 3,250 6,500
2,60,500 2,60,500
CAPITAL ACCOUNT
Particulars ANUP SUMIT Particulars ANUP SUMIT

Rs. Rs. Rs. Rs.
To Bank A/c 68,250 68,250 By Balanced b/d 60,000 60,000
By Reserve Fund 5,000 5,000
(10,000)
By Realisation (profit) 3,250 3,250
6,500
68,250 68,250 68,250 68,250
Bank A/c/Cash A/c

To Balance b/d 11,000 By Realisatiom 68,000
To Realization A/c (Credtior+ Loan+Exp.)
Assets sold (Realized) 1,93,000 By Anup’s Cap. 68,250
By Sumit’s Cap. 68,250
2,04,000 2,04,000
101
( Treatment of General Reserve and Accumulated profits)
Q. 3 A , B and C are in partnership sharing profits in the proportion of 4:3:2. Their Balance
Sheet as at 31st March, 2018 stood as follows :

Capital A 4,000 Land 5,500
B 2,000 Stock 1,400
C 500 6,500 Debtors 1,000
Patents 600
General Reserve 1,800 Cash 1,500
Profit and Loss account 900
Creditors 800
10,000 10,000
st
They agree to dissolve partnership on 31 March 2018. A agrees to take over the stock at a
valuation of Rs. 1,500 and the debtors at a valuation of Rs. 700 (no cash passes) . Land is sold
at an auction for Rs. 2,700. Rs. 600 is paid to creditors in full settlement . the cost of winding up
comes to Rs. 500. Draw up the necessary ledger accounts to close the books of firm .
REALISATION ACCOUNT

To sundry Assets; By creditors 800
Land 5,500 By cash A/c (Land) 2,700
Stock 1,400 By A/s cap. A/c (Stock and debtors ) 2,200
Debtors 1000 By partners’ capital A/c (Loss)
Patents 600 8,500
A 1,733
To cash A/c B 1,300
Creditors 600 C 867
Cost of winding up 500 1,100 3,900
9,600 9,600
PARTNER’S CAPITAL ACCOUNT
To Realisation a/c 2,200 - - By balance b/d 4,000 2,000 500

To Realisation a/c 1,733 1,300 867 By Gen. Res. A/c 800 600 400
To cash 1,267 1,600 233 By P & L A/c 400 300 200
5,200 2,900 1,100 5,200 2,900 1,100
102
BANK ACCOUNT

To bal b/d 1,500 By Realisation A/c 500
To Realisation A/c 2,700 By Realisation A/c 600
By A’s capital A/c 1,267
By B’s capital A/c 1,600
By C’s capital A/c 233
4,200 4,200
( Journal Entries )
Q.4 Simar, Raja and Rita were partners in a form sharing profits and losses in the ratio of
2:2:1. The firm was dissolved on 31St March , 2019 . After the transfer of assets (Other than
cash)
And external liabilities to the Realisation account , the following transactions took place:
(i) A debtor whose debt of Rs. 90,000 had been written off as bad, paid Rs 88,000 in full
settlement.
(ii) Creditors to whom Rs. 1,21,000 were due to be paid, accepted stock at Rs. 71,000 and
The balance was paid to them by a cheque.
(iii) Raja had given a loan to the firm of Rs. 18,000. He was paid Rs. 17,000 in full settlement
Of his loan .
(iv) Investment were Rs. 53,000 out of which investments worth Rs. 43,000 were taken over
by Simar at Rs. 52,000 and balance of the investments were sold for Rs. 12,000.
(v) Expenses on dissolution amounted to Rs. 19,000 and the same were paid by the firm.
(vi) Profit on dissolution amounted to Rs. 30,000.
Pass the necessary journal entries for the above transactions in the books of the firm.
Solution Journal
Date Particulars LF Dr. Cr.

2019 (i) Bank A/c 88,000
March31 To Realisation A/c 88,000
(Being bad debts earlier written of , now recovered)
(ii) Realisation A/c 50,000
To Bank A/c 50,000
(Being payment made to creditors)
(iii) Raja’s Loan A/c 18,000
To Bank A/c 17,000
(Being Raja’s loan settled )
103
(iv) Simar’s Capital A/c 52,000
Bank A/c 12,000
(Being investment taken over by Simar and remaining
sold)
(vi) Realisation A/c 30,000
To Simar’s capital A/c 12,000
To Raja’s capital A/c 12,000
To Rita’s capital A/c 6,000
(Being profit distributed )
(When partners current accounts are given)
Q.5 Sharing profits and losses in the ratio 3:2:1. On 30 th June, 2017, they, agreed to dissolve
the partnership firm. Their balance sheet was as follows:
Balance sheet

Capital A 64,000 Machinery 56,200
B 25,000 Furniture 3,000
C 18,000 1,07,000 Closing stock 42,200
Reserve for Contingency 12,000 Sundry Debtors 20,000
10% Bank Loan 1,000 Cash at bank 4,200
Mrs B’s Loan 2,000 Current Account-C 26,000
Sundry creditors 15,000 Profit and Loss Account 1,800
Current Accounts : A 12,400
B 4,000 16,400
1,53,400 1,53,400
Additional Information:
It was found that an investment not recorded in the books worth Rs. 6,000 was taken over by
one of the creditors at this value. B agreed to accept furniture in foll settlement of his wife’s
loan . loan was repaid along with interest for nine months. Assets realized as; Debtors Rs.
12,000; Stock Rs. 18,000. And machinery Rs. 45,575. Expenses of realisation amounted to Rs.
500. Prepare necessary accounts from the above information at the time of dissolution.
Solution
REALISATION ACCOUNT

To sundry Assets; By creditors 15,000
Sundry debtors 20,000 By Mrs. B’s loanA/c 2,000
Stock 42,200 By 10% bank loan 1,000
Furniture 3,000 By Bank A/c (Assets realized)
Machinery 56,200 1,21,400 Debtors 12,000
To Bank A/c (loan with interest) 1,075 Stock 18,000
To bank A/c (Creditors) 9,000 Machinery 45,575 75,575
104
To bank A/c (Exp.) 500
By partners’ capital A/c (Loss)
A 19,200
B 12,800
C 6,400 38,400
1,31,975 1,31,975
PARTNER’S CURRENT ACCOUNT
To Balance b/d - - 26,000 By balance b/d 12,400 4,000 -

To capital A/c 12,400 4,000 - To capital A/c - - 26,000
12,400 4,000 26,000 12,400 4,000 26,000
PARTNER’S CAPITAL ACCOUNT
To Real. A/c(loss) 19,200 12,800 6,400 By balance b/d 64,000 25,000 18,000
To Current A/c ---- ------ 26,000 To current A/c 12,400 4,000 ---
To P&L A/c 900 600 300 By Reserve for 6,000 4,000 2,000
contingency
To Bank A/c 62,300 19,600 ---- By Bank A/c ---- --- 12,700
82,400 33,000 32,700 82,400 33,000 32,700
BANK ACCOUNT

To bal b/d 4,200 By Realisation A/c(loan) 1,075
To Realisation A/c(Debtors) 12,000 By Realisation A/c(creditors) 9,000
To Realisation A/c(stock) 18,000 By Realisation A/c(expenses) 500
To Realisation A/c(machinery) 45,575 By A’s capital A/c 62,300
To C’s capital A/c) 12,700 By B’s capital A/c 19,600
92,475 92,475
105
10 9
Interest on loan = 1,000 X X = Rs.75
100 12
Undistributed profits and losses are adjusted through capital A/c.

Questions with Incomplete information /missing figures
Q. 6 Ashish and Nehra were partners in a firm sharing profits and losses in the ratio 4:3. They
decided to dissolve the firm on 1st May 2020. Form the information given below, complete
Realization A/c , Partner’s Capital Accounts and Bank A/c.
Realisation A/c

To Sundry Assets By sundry liabilities:
Machinery 5,60,000 Creditors 40,000
Stock 90,000 Ashish’s wife’s loan 25,000
Debtors 55,000 By bank;
To bank : Machinery 4,80,000
(Creditors) …………… Debtors 10,000
To Ashish’s capital A/c By Ashish’s capital A/c
(Ahish’s wife loan) 34,000 Stock 1,28,000
To Neha’s capital A/c Typewriter 70,000 1,98,000
(Realisation exp.) 7,000 By Neha’s Capital A/c
To profit Transferred to : (Debtors) 40,000
Ashish’s Cap. A/c 4,000
Neha Capital A/c 3,000 7,000
7,93,000 7,93,000
Capital A/c
Particulars Ashish’s Neha’s Particulars Ashish Neha

To Realisation A/c ………… ………….. By ……………… …………… ………….
To Bank A/c 4,00,000 4,50,000 By……………… ……………. ……………
By………………. ……………. ………….
……………… ………….. ………. ………….
Dr. Bank Account Cr
Particulars Amount particulars Amount

To balance b/d ………. By realisation A/c ……..
To Realisation A/c 4,90,000 By Ashish’s loan A/c 4,000
By Ashish’s capital A/c 4,00,000
By Neha’s Capital A/c …………
…………… …………
106
Ans. Solution
Realisation A/c

To Sundry Assets By sundry liabilities:
Machinery 5,60,000 Creditors 40,000
Stock 90,000 Ashish’s wife’s loan 25,000
Debtors 55,000 By bank;
To bank : Machinery 4,80,000
(Creditors) 40,000 Debtors 10,000
To Ashish’s capital A/c By Ashish’s capital A/c
(Ahish’s wife loan) 34,000 Stock 1,28,000
To Neha’s capital A/c Typewriter 70,000 1,98,000
(Realisation exp.) 7,000 By Neha’s Capital A/c
To profit Transferred to : (Debtors) 40,000
Ashish’s Cap. A/c 4,000
Neha Capital A/c 3,000 7,000
7,93,000 7,93,000
Capital A/c
Particulars Ashish’s Neha’s Particulars Ashish Neha

To Realisation A/c 1,98,000 40,000 By balb/d…………… 5,60,000 4,80,000
To Bank A/c By…Real.…………… ……………. ……………
4,00,000 4,50,000 By…Real.…………. 34,000 7,000.
4,000
3,000
5,98,000 4,90,000 5,98,000. 4,90,000
Dr. Bank Account Cr
Particulars Amount particulars Amount

To balance b/d 4,04,000 By realisation A/c 40,000
To Realisation A/c 4,90,000 By Ashish’s loan A/c 4,000
By Ashish’s capital A/c 4,00,000
By Neha’s Capital A/c 4,50,000
8,94,000 8,94,000
*********************************************
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107
 *******
ISSUE OF SHARES
Meaning: Total capital of a Company is divided into units of small denominations. Each such
units is called ‘share’.
Nature: The shares of a company are movable property, transferable in the nature provided by
the Article of Association of the Company. Shares of a Company are treated as goods under the
sale of Goods Act 1930. These can be bought, sold, hypothecated and bequeathed.
Types of Shares:
(i). Preference Shares
(ii). Equity Shares
Kinds of Share Capital

(i) Authorised, Registered or Nominal Capital
(ii) Issued Capital
(iii) Subscribed and fully paid up
(iv) Subscribed but not fully paid up
(v) Called-up Capital
(vi) Paid-up Capital
(vii) Reserve Capital
ISSUE OF SHARES
(i) For Cash
(ii) For Consideration other than Cash
Following steps are to be taken by a Public Company for the issue of shares to public.
(i) To Issue Prospectus
(ii) To Receive Application
(iii) To Make Allotment
(iv) To Make Call
MINIMUM SUBSCRIPTION: Section 39(1) of the Company Act 2013 provides that a company
cannot allot any securities of the company to the public unless the amount stated in the
prospectus as the minimum amount has been subscribed and the sums payable on application
for the amount so stated have been received by the company. Company Act 2013 has not
prescribed the minimum subscription. However according to SEBI guidelines minimum
subscription has been fixed at 90% of the issued amount.
Ques.1 True/False:
According to the below given information the final call per share is Rs.22.
108
The subscribed capital of a company is Rs. 80,00,000 and the nominal value of the share is
Rs.100 each. There were no calls in arrear till the final call was made . The final call made was
paid on 77,500 shares only . The balance in the calls in arrear amounted to Rs.55,000.
Ques.2 True/ False :

Securities premium received on issue of shares cannot be used for the purpose of buy back of
shares.
Ques.3 True/False-Share application amount is in the nature of Real account
Ques.4. Arrange the following in proper sequence as types of “Share Capital”
i) Paid up capital
(ii.) Issued capital
(iii) Subscribed capital
(iv.) Called up capital
Ques.5 Maximum limit of premium on shares is :
(A.) 32%
(B.) 20%
(C.) No limit
(D.) 100%
Ques.6 Amount of money not received out of called up capital is :
(A.) Added to share capital
(B.) Subtracted from share capital
(C.) Shown as current liabilities
(D.) Shown as current asset
Ques.7 Following amounts were payable on issue of shares by a company : Rs.3 on application ,
Rs.3 on allotment , Rs.2 on first call and Rs.2 on final call . X holding 500 shares paid only
application and allotment money whereas Y holding 400 shares did not pay final call . Amount
of calls in arrear will be:
(A.) 3,800
(B.) 2,800
(C.) 1,800
(D.) 6,200
Ques.8 Rajan Limited issued 50,000 shares at a price lower than the nominal value of the share.
The shares issued are called:
109
A) Sweat equity shares
B) Redeemable Preference shares
C) Equity shares
D) Bonus shares
Ques.9 E Ltd. had allotted 10,000 shares to the applicants of 14,000 shares on pro-rata basis,
application money on another 6000 shares was refunded .The amount payable on the
application was Rs.2. Sitaraman applied for 420 shares . The number of shares allotted to him
will be:
(A.) 60 shares
(B.) 340 shares
(C.) 320 shares
(D.) 300 shares
Ques.10 A company issued 4,000 equity shares of rupees 10 each at par payable as under:
On application rupees 3 , on allotment rupees 2; on first call rupees 4 and on final call rupees 1
per share. Applicants were received for 16,000 share . Application for 6,000 shares were
rejected and pro-rata allotment was made to the applicants for 10,000 shares . How much
amount will be received in cash on first call,when excess application money is adjusted towards
amount due on allotments and calls :
(A.) Rupees 6.000
(B.) nil
(C.) Rupees 16,000
(D.) Rupees 10,000
Ques.11 A company issued 4000 equity shares of rupees 50 each at par payable as under:
On application rupees 20%, on allotment 40% ; on first call 10% ; on final call -balance
Applications were received for 10,000 shares . Allotment was made pro-rata . How much
amount will be received in cash on allotment?
A) Rupees 6.000
(B.) nil
(C.) Rupees 16,000
(D.) Rupees 20,000
Ques.12. Which one of the following is not a part of subscribed capital:
A) Equity shares issued to vendor
B) Preference shares of convertible type
C) Forfeited shares
110
D) Bonus shares
Ques.13. When nominal (face) value of a share is called up by the company but as some
shareholders did not pay the money, the shares are forfeited . The share capital is shown in the
balance sheet (notes) of a company under the following heading:
A) Subscribed and fully paid up

B) Subscribed but not fully paid up
C) Subscribed and called up
D) Subscribed but not called up
Ques.14.Zee Ltd issued 15,000 equity shares of Rs.20 each at a premium of Rs.5 payable Rs.5 on
application,Rs.10 on allotment (including premium) and the balance on first and final call. The
company received applications for 22,500 shares and allotment was made pro rata. Bittoo to
whom 1,200 shares were allotted, failed to pay the amount due on allotment. All his shares
were forfeited after the call was made. The forfeited shares were reissued to Dheeraj at par.
Assuming that no other bank transactions took place, the bank balance of the company after
the above transactions is :
A) Rs.6,85,000
B) Rs.3,60,500
C)Rs.3,78,000
D)Rs.6,34,000
Ques.15.Zen Ltd purchased the sundry assets of M/s Surat Industries for Rs.28,60,000 payable
in fully paid shares of Rs.100 each. State the number of shares issued to vendor when issued at
premium of 10%.
A)28,000
B)31,778
C)28,600
D)26,000
Answers
1. True
3. False
4. Issued, Subscribed, Called –up, Paid-up.
5. C
6. B
111
7. B
8. A
9. D
10. A
11. D
12. C
13. A
14. C
15. D
Solved Numerical Questions
Q1
Pass necessary Journal entries for the following transaction in the books of Sachin Ltd.
Sachin Ltd. purchased a running business from Deepak Ltd. for a sum of Rs.3,00,000
payable as Rs.2,50,000 in fully paid Equity shares and balance by a bank draft. The assets
and liabilities consisted of the following :- Plant and Machinery Rs.72,000; Building
Rs.80,000; Sundry Debtors Rs. 38,000; Stock Rs. 60,000; Sundry Creditors Rs.40,000.
Ans: In the book of Sachin Ltd.

a) Plant & Machinery A/C ….. Dr 72,000
Building A/C……………… Dr 80,000
Sundry Debtors A/C ……… .Dr 38,000
Stock A/C ……………………. Dr 60,000
Goodwill A/C(Bal-in-Fig) Dr 90,000
To Creditors A/C 40,000
To Deepak Ltd. 3,00,000
(Being Assets and Liabilities taken over from Deepak Ltd at an agreed price )
b) Deepak Ltd A/C … . Dr 3,00,000

To Equity Share Capital A/C 2,50,000
To Bank A/C 50,000
(Being Eq Share and draft issued to Deepak Ltd. As purchase consideration)
Q 2 A ltd invited applications for issuing 1,50,000 equity shares of Rs.10 each at a discount of
10%.The amount was payable as follows:
On application Rs.2 per share
On allotment Rs.2 per share
On first and final call balance.
112
Applications for Rs.3,00,000 shares were received.
Applications for 50,000 shares were rejected and application money of these applicants was
refunded. Shares were allotted on pro rata basis to the remaining applicants Excess money
received with these applicants was adjusted towards sum due on allotment. Neha who had
applied for 2,500 shares, failed to pay the allotment and first and final call money. Hemant did
not pay the first and final call money on his 2000 shares. All these shares were forfeited and later
on 2000 of these shares were reissued at Rs.17 per share fully paid up. The reissue shares
included all the shares of Neha.
Pass the necessary journal entries in the books of A ltd. For the above transactions.
Ans. Journal
Date Particular L.F Rs. Rs.

Bank A/C Dr. 6,00,000
To Share application A/C 6,00,000
Share application account Dr 6,00,000
To Share capital account 3,00,000
To Bank Account 1,00,000
To share allotment account 2,00,000
Share allotment Dr 3,00,000
Discount on issue of share account Dr 1,50,000
To share capital account 4,50,000
Bank A/C Dr 99,000
To Share allotment account 99,000
Share first & Final A/C Dr 7,50,000
To Share capital account 7,50,000
Bank A/C Dr 7,32,500
To Share First & Final Account 7,32,500
Share Capital A/C Dr 35,000
To Share Forfeited 13,000
To discount A/C 3,500
To Share allotment account 1000
To Share First & Final Account 17,500
Bank A/C Dr 34,000
To Share capital account 20,000
To Security Premium 14,000
Share forfeited A/C Dr. 7,000
To Capital Reserve A/C 7,000
Q.3.Jk.ltd invited application for issuing 70,000 equity shares of Rs.10 each at a premium of Rs.2
per share the amount was payable as follows:
On application Rs.3 per share
On allotment Rs.4(including premium Rs.2)
On first and final call balance
Applications for 65,000 shares were received and allotment was made to all the applicants .A
shareholder Ram who was allotted 2000 shares failed to pay the allotment money. His shares
were forfeited immediately after the allotment. Afterwards the first and final call was made.
Soham who had 3,000 shares failed to pay the first and final call his shares were also forfeited.
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Out of forfeited shares 4,000 were reissued at Rs.20 per share fully paid up. The reissued share
included all the shares of Ram.
a) Which value has been followed by the JK ltd. While allotting the shares.
Pass the necessary journal entries for the above transactions in the book of JK.ltd
J.K limited has followed value of equality by allotting share to all the applicants’ i.e. by not
rejecting any applications.
Ans. Journal
Date Particular L.F Rs. Rs.

Bank A/C Dr. 1,95,000 ½
To Share application A/C 1,95,000
Share application account Dr. 1,95,000
To Share capital account 1,95,000 ½
Share allotment A/c Dr. 2,60,000

To share capital account 1,30,000 ½
To Security Premium 1,30,000
Bank A/C Dr. 2,52,000 ½
To Share allotment account 2,52,000
Share capital account A/c Dr. 10,000 1
Security Premium A/c Dr. 4,000
To Share allotment account 8,000 ½
First & Final Call account Debit Dr. 3,15,000
To Share Capital account 3,15,000 ½
Bank A/C Dr. 3,00,000
To Share First & Final Account 3,00,000
Share Capital A/C Dr. 30,000 1
To Share First & Final Account 15,000
Bank A/C Dr. 80,000 1
To Share capital account 40,000
To Security Premium 40,000 1
Share Forfeited account Dr. 16,000
Q 4 CANDID Ltd. Invited applications for issuing 75,000 equity shares of Rs. 100 each at a
premium of Rs. 30 per share . the amount was payable as follows .
On application and allotment Rs. – Rs. 85 per share (including premium )
On first and final call- the balance account .
Applications for 1,27,500 shares were received . Applications for 27,500 shares were rejected
and shares were allotted on prorate basis to the remaining applicants.
Excess money received on application and allotment was adjusted towards sum due on first
and final call. The calls were made. A shareholder , who applied for 1,000 shares, failed to pay
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the first and final call money . his shares were forfeited . all the forfeited shares were reissued
at Rs. 150 per share fully paid –up.
Pass necessary journal entries for the above transactions in the books of CANDID Ltd.
Ans. JOURNAL
Date Particulars LF Dr Cr
Bank A/c (1,27,500x 85) Dr. 1,08,37,500
To equity share application and allotment A/c 1,08,37,500
( Being the application and allotment money
received for 1,27,500 shares @ Rs. 85 per share)
Equity share application and allotment A/c Dr.
To equity share capital a/c (75,000xRs. 55) 1,08,37,500
To security premium Reserve A/c 41,25,000
(75,000x30) 22,50,000
To equity share first and final call A/c
(25,000x85) 21,25,000
To bank A/c (27,500x 85)
(Being the share allotted ; applications for 27,500 23,37,500
shares rejected and the balance applicants issued
shares on pro-rata)
Equity share first and final call A/c(75,000x45) Dr.
To equity share capital a/c 33,75,000
(Being the first and final call due on 75,000 shares 33,75,000
@ 45 per shares)
Bank A/c (WN 2) Dr.
To equity share first and final call A/c 12,37,500
( being the amount due on shares first and final call 12,37,500
received except on 750 shares)
Equity share capital a/c (750x150) Dr.
75,000
To equity share first and final call A/c
To forfeited shares a/c
12,500
( Being 750 shares forfeited for non-payment of
62,500
first and final call)
Bank A/c (750x150)
Dr. 1,12,500
To equity share capital a/c
To securities premium reserve A/c 75,000
( Being 750 forfeited shares re-0issued @ Rs. 150 37,500
per shares as fully paid-up)
Forfeited shares A/c
Dr. 62,500
To capital Reserve a/c
(being the amount of forfeited shares credited to 62,500
capital reserve upon re-issue)
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Working notes
1. Shares application and allotment money (1,000x Rs 85)
85,000
Share allotted 3 shares against 4 applied i.e. 750
Appropriation of share application money
(-) towards share capital (750x55) ( 41,250)
(-) towards securities premium reserve (750x30) (22,500)
(63,750)
Excess application and allotment money received
21,250
Amount due towards first and final call (750x45)
33,750
Amount not received on 750 shares ( 33,750-21250)
12,500
2. Amount received on first and final call
Due (75,000xRs.45) 33,75,000
(-) Received in –advance (21,25,000)
12,50,000
(-) not received on 750 shares (wn 1) (12,500)
Received on first and final call 12,37,500
Q 5 Sunrise Company Limited offered for public subscription 10,000 shares of Rs.10 each at Rs.
11 per share. Money was payable as follows:
Rs. 3 on application
Rs. 4 on allotment (including premium)
Rs. 4 on first and final call.
Applications were received for 12,000 shares and the directors made prorate allotment.
Mr. Ahmad, an applicant for 120 shares, could not pay the allotment and call money, and Mr.
Basu, a holder of 200 shares, failed to pay the call. All these shares were forfeited. Out of the
forfeited shares, 150 shares (the whole of Mr. Ahmad’s shares
being included) were issued at Rs. 8 per share fully paid-up.
Prepare Cash Book, Shares Capital Account and Share Forfeiture Account.
Ans CASH BOOK
Particulars Amt. Dr. Particulars Amt. Cr.

To share application 36,000 By bal.C/d 1,09,660
To share allotment 33,660
To share first and final call 38,800
To share capital 1,200
1,09,660 1,09,660
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Share capital A/c
Particulars Amt.Dr. Particular Amt. Cr.

To share allotment 240 By share app. 30000
To share first and final call 1200 By share allotment 30000
To share forfeiture 1560 By share first and final call 40000
To bal. c/d 98500 By bank 1200
By share forfeiture 300
101500 101500
Share forfeiture
Particulars Amt. Dr. Particulars Amt. Cr.

To share capital 300 By share capital 1560
To capital reserve 360
To bal c/d 900
1560 1560
Q 6 N Ltd. issued 2,000 shares of Rs100 each. All the money was received except on 200 shares
on which only Rs90 were received. These shares were forfeited and out of the forfeited shares
100 shares were reissued at Rs80 each as fully paid up. Pass necessary journal entries for the
forfeiture and reissue of shares
Date Particulars Debit₹ Credit₹

(i) Share capital A/C Dr 20,000
Calls-in- arrears A/C 2,000
Share forfeited A/C 18,000
(Being 200 shares forfeited)
(ii) Bank A/C Dr 8,000
Share forfeited A/C Dr 2,000
Share Capital A/C 10000
(Being 100 shares being reissued @80 as fully paid)
(iii) Share forfeited A/C Dr 7,000
(Being gain on forfeiture and reissue to capital
reserve)
Practice Questions
Q 1 Pass necessary journal entries for the forfeiture and reissue of shares in the following cases:
(i) BCG Limited forfeited 75 shares of ₹10 each issued at a premium of ₹4 per share for non-
payment of allotment money of ₹8 per share (including premium). The first and final call of ₹4
per share was not made. The forfeited shares were reissued at ₹15 per share fully paid. (ii)
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Geetika Limited forfeited 1,200 shares of ₹50 each issued at par for non-payment of final call of
₹10 per share. Out of these, 900 shares were reissued at ₹45 per share fully paid-up.
Q2 Pass necessary journal entries for the forfeiture and reissue of shares in the following cases:
(i) CC Ltd. forfeited 10,000 shares of ₹10 each, ₹8 called up, for non-payment of allotment
money of ₹3 per share and first call of ₹3 per share. Out of these, 2000 shares were reissued for
₹7 per share, ₹8 paid up. (ii) GG Ltd. forfeited 2000 shares of ₹10 each fully called up, issued at
a premium of 10% on which only application money of ₹3 per share was received. Out of these,
500 shares were re-issued at ₹11 per share, fully paid up
Q3 Pass journal entries for the following transactions: (i) AXN Ltd. forfeited 2,400 shares of ₹10
each for non-payment of final call of ₹3 per share. Out of the forfeited shares, 800 shares were
reissued at ₹8 per share as fully paid up. (ii) Vanya Ltd. purchased a running business from
Hardik Ltd. for sum of ₹18,00,000. The payment of ₹10,00,000 was made by issue of equity
shares of ₹10 each and balance by a cheque. The assets and liabilities acquired from Hardik Ltd.
consisted the following: ₹
Machinery 9,00,000
Land and building 13,50,000
Furniture 8,50,000
Sundry Creditors 3,00,000
Q4 R.P. Ltd. forfeited 1,500 shares of Rahim of < 10 each issued at a premium of ₹3 per share for
non-payment of allotment and first call money. Rahim had applied for 3,000 shares. On these
shares, amount was payable as follows: On application – ₹3 per share On allotment (including
premium) – ₹5 per share On first call – ₹3 per share On final call – Balance Final call has not
been called up. 1,000 of the forfeited shares were reissued for ₹8,500 as fully paid-up. Record
the necessary journal entries for the above transactions in the books of R.P. Ltd.
Q 5 Alpha India Ltd. was registered with an authorised capital of ₹10,00,000 divided into
1,00,000 equity shares of ₹10 each. The company offered to the public for subscription 80,000
equity shares payable per share as: ₹3 on application, ₹2 on allotment, ₹3 on first call and the
balance on second and final call. The issue was fully subscribed and all amounts due were
received except the first and final call money on 2,000 shares allotted to Chavi. Her shares were
forfeited. Present the ‘Share Capital’ in the Balance Sheet of the company as per Schedule III,
Part I of the Companies Act, 2013. Also prepare ‘Notes to Accounts’.
Q 6 DF Ltd. invited applications for issuing 50,000 shares of ₹10 each at a premium of ₹2 per
share. The amount was payable as follows: On Application: ₹3 per share (including premium ₹1)
On Allotment: ₹3 per share (including premium ₹1) On First call: ₹3 per share On Second and
Final Call: Balance amount Application for 70,000 shares were received. Allotment was made on
the following basis. Applications for 5,000 shares – Full Applications for 50,000 shares – 90%
Balance of the applications were rejected. ₹1,11,000 were received on account of allotment.
The amount of allotment due from the shareholders to whom shares were allotted on prorata
basis was fully received. A few shareholders to whom shares were allotted in full, failed to pay
the allotment money. ₹1,20,000 were received on first call. Directors decided to forfeit those
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shares on which allotment and call money was due. Half of the forfeited shares were re-issued
@ ₹8 per share fully paid up. Final call was not made. Pass the necessary journal entries for the
above transactions in the book of DF Ltd
Q 7 Random Ltd. took over running business of Mature Ltd. comprising of Assets of ₹45,00,000
and Liabilities of ₹6,40,000 for a purchase consideration of ₹36,00,000. The amount was settled
by bank draft of ₹1,50,000 and balance by issuing 12% preference shares of ₹100 each at 15%
premium. Pass entries in the books of Random Ltd.
Q 8 Shaktimaan Ltd. invited applications for issuing 1,00,000 Shares of ₹10 each at a premium of
₹2 per share. The amount was payable as ₹4 on application (including premium); ₹5 on
Allotment and balance on call. Applications were received shares for 1,80,000 of which
Applications for 30,000 shares were rejected and remaining applicants were allotted on pro-rata
basis. Manthan, holding 5,000 shares failed to pay call money and his shares were forfeited. Out
of these 2,000 shares were re-issued at premium of ₹3 per share. Prepare Cash Book and pass
necessary entries.
Q 9 Atishyokti Ltd. company was registered with an authorized capital of ₹ 20,00,000 divided
into 2,00,000 Equity Shares of ₹10 each, payable ₹3 on application, ₹6 on allotment (including
₹1 premium) and balance on call. The company offered 80,000 shares for public subscription. All
the money has been duly called and received except allotment and call money on 5,000 shares
held by Manish and call money on 4,000 shares held by Alok. Manish’s shares were forfeited
and out of these 3,000 shares were re-issued ₹9 per share as fully paid up. Show share capital in
the books of the company. Also prepare notes to accounts.
Case Study based Questions
Q 10 Nidiya limited was incorporated on 1st April 2017 with registered office in Mumbai. The
capital clause of memorandum of Association reflected a registered capital of 8,00,000 equity
shares of Rs.10 each and 1,00,000 preference shares of Rs.50 each. Since some large
investments were required for building and machinery the company in consultation with
vendors, Ms.VPS Enterprises, issued 1,00,000 equity shares and 20,000 preference shares at par
to them in full consideration of assets acquired. Besides this the company issued 2,00,000
equity shares for cash at par payable as Rs 3 on application, 2 on allotment, 3 on first call and 2
on second call. Till date second call has not yet been made and all the shareholders have paid
except Mr. Ajay who did not pay allotment and calls on his 300 shares and Mr. Vipul who did not
pay first call on his 200 shares. Shares of Mr. Ajay were then forfeited and out of them 100
shares were reissued at Rs.12 per share. Based on above information you are required to
answer the following questions
( 1) Shares issue to vendors of building and machinery, Ms. VPS Enterprises, would be
classified as:
a. Preferential Allotment
b. Employee Stock Option Plan
c. Issue for Consideration other than cash
d. Right Issue of Shares
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( 2 ) How many equity shares of the company have been subscribed?
a. 3,00,000
b. 2,99,500
c. 2,99,800
d. None of these
( 3 ) What amount of share forfeiture would be reflected in the balance sheet?

a. ₹600 b. ₹900 c. ₹200 d. ₹ 300
( 4 ) What is the amount of security premium reflected in the balance sheet at the end of
the year?
a. 200 b. ₹ 600 c. ₹ 400 d. Rs 1,000
ACCOUNTING FOR COMPANIES

ISSUE OF DEBENTURE
Meaning: Issue of debentures is referred to as the action of issuing a

certificate by a company under its seal in acknowledgement of any debt that
is taken by the company. The company issue the debentures when the funds
are needed for long term.
A Debenture Certificate contains the terms of repayment of the principal
sum at a specific date and the terms of payment of interest at a fixed rate.
Features of debentures
 Debentures are nothing more than a collection of papers.
 These documents show that you owe money to someone.
 Debentures provide a fixed rate of interest.
 The company has the option of repaying the debt or converting the debenture
into stock or another debenture.
Types of Debentures
 Convertible Debentures.
 Non-Convertible Debentures.
 Registered Debentures.
 Unregistered Debentures.
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 Redeemable Debentures.
 Irredeemable Debentures.
 Incentivized Debentures.
1 .What is debenture Trust Deed?

Debenture trust deed is a document created by the company whereby trustee is
appointed to protect the interest of debenture holders before they are offered for
public subscription.
2 .What is meant by convertible debentures?

Convertible debentures are those, the holders of which are given an option to
exchanging the amount of their debentures with equity shares or other
securities after a specified period.
3 .Why is premium on the issue of debentures considered as a capital profit?

Premium on the issue of debentures is considered a capital profit because it is not
an income arising from the normal course of business operations.
4 .Explain deep discount Bond

When debentures are issued without interest rate and issue price is thereby
discounted, the issue of debenture is said to have been made as deep discount
bond.
5 .Differentiate between shareholders and debenture holder,

Point of Difference Share holder Debenture holder
1) Status There are the owners of They are the creditors of
the company the company
2) Return They are paid Dividend They are paid interest
3) Security Shares are not secured Debentures are ordinarily
secured
6 .What is the nature of interest on debentures?

Interest on debentures is a charge against profits.
7 .State in brief, the SEBI Guidelines regarding Debenture Redemption Reserve

At per SEBI Guidelines, an amount equal to 25% of the debenture issue must be
transferred to DRR before the redemption begins. In other words, before
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redemption, at least an amount equal to 25% of the debenture issue must stand to
the credit of DRR
8 .What do you mean by debentures issued as collateral security?

The issue of debentures as a collateral security means the issue of debentures as
an additional security against the loan in addition to principal security that may be
offered.
9 . A Ltd issued 5,000 13% debentures of Rs.100 each at par and raised a loan of
Rs.80, 000 from Bank. Collaterally secured by Rs. 100,000 13% debentures. How
will you show the debenture in the Balance Sheet of the Company assuming that
the company has recorded the issue of Debentures as collateral security in the
books.
Balance Sheet
Liabilities Assets
Secured Loans Amount Current assets Amount
13% Debenture 500000 Bank a/c 500000
5,000 deb of Rs. 100 each
at par
Bank loan (secured by the 80000
issue of 1000 13% deb of
Rs.100 each)
10 .Ashoka Ltd. had Rs. 5, 00,000 12% debentures outstanding as on 1st Jan,
2003. During the year company took a loan of Rs. 3, 00,000 from Bank of Punjab
for which the company placed with the bank debentures of Rs. 3, 60,000 as
collateral security.
Pass journal entries and also show how the debentures and bank loan will appear
in the balance sheet.
Bank a/c Dr. 3,00,000
To Bank loan a/c 3,00,000
(Being loan taken from bank)

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Debenture suspense a/c 3,60,000
Dr.
3,60,000
To 12 % Debenture a/c
(Being Debentures issued as

collateral security )
11 . XYZ Co. Ltd., issued 10000 10% debentures of Rs.100 each at a premium of
Rs. 5 payable as follows On application Rs.40, on Allotment Rs.65 (including
premium)
All the debentures were subscribed and money was received, pass necessary
journal entries to record the issue of debentures
Journal Entries
1) Bank a/c Dr. 4,00,000 4,00,000

To 10% Debenture application
(Being application money received)
2) 10% Deb Application a/c Dr. 4,00,000 4,00,000
To 10% Debenture a/c
(Being application money
transferred to debenture a/c)
3) 10% Deb allotment a/c Dr. 6,50,000
To Debenture a/c 6,00,000
To S Premium a/c 50,000
(Being debenture allotment due)
4) Bank a/c Dr. 6,50,000
To 10% Deb allotment a/c 6,50,000
(Being allotment money received)
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12 . Pass Journal Entries to record the Issue of Debentures
1) 5000 15% debenture of Rs.100 each issued at Discount of 5% and

redeemable at premium at 5% after 5 years.
2) 10000 15% debenture of Rs.100 each issued at a premium of 10% and

redeemable at par after 6 years.
Ans: Journal Entries
1) Bank a/c Dr. 4,75,000

loss on issue of Deb a/c Dr. 50,000
To15% debenture a/c 5,00,000
To premium on redemption of
25,000
debenture (Being issue of debenture
at discount and redeemable at 5%
premium)
2) Bank a/c Dr. 1100000
To Debenture a/c 1000000
To Premium a/c
100000
To premium a/c (Being issue of debenture at
premium and redeemable at par)
13 . Journalise the following transactions:
(a) 10 debentures issued at Rs. 100 repayable at Rs. 100.

(b) 10 debentures issued at Rs. 95, repayable at Rs. 100
(c) 10 debentures issued at Rs. 105 , repayable at Rs. 100
(d) 10 debentures issued at Rs. 100, payable at Rs. 105.
(e) 10 debentures issued at Rs. 95, Repayable at Rs. 105.
Date Particulars Debit Credit

Amt Amt
(a) Bank a/c Dr. 1,000
To debenture Application a/c 1,000
Being Debenture application money

received)
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Debenture Application a/c Dr. 1,000
To Debenture a/c 1,000
(Being 10 debentures of Rs. 100 each

issued at par redeemable at par)
(b) Bank a/c Dr. 950
To debenture Application a/c 950

received)
Debenture Application a/c Dr. 950
Discount on issue of Debentures Dr. 50

issued at a discount of 5% and
repayable at par.)
(c) Bank a/c Dr. 1,050

received)
To Securities premium a/c 50

issued at premium of 5% and
redeemable at par)
(d) Bank a/c Dr. 1,000
To debenture Application a/c 1,000
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received)
Loss on issue of debentures a/c Dr. 50
To Debentures a/c 1,000
To Premium on redemption of 50
debentures a/c

issued at par but repayable at a
premium of 5%)
(e ) Bank a/c Dr. 950

received)
Debenture Application a/c Dr. 950
Loss on issue of debentures a/c Dr. 100
To Debentures a/c 1,000
To Premium on redemption of 50
debentures a/c

issued at discount of 5% but
repayable at a premium of 5%)
14 .A building has been purchased for Rs.1,10,000 from X Ltd., X Ltd., has been
issued 12% debentures in Purchase Consideration at a Premium of 10%
Journalise the above transaction.
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Ans: Journal entries
1) Building a/c Dr. 110000

To vendors a/c 110000
(Being purchasing of a building on credit)
2) Vendors a/c Dr. 110000 100000
To 12% debentures a/c
To securities premium a/c 10000
(Being issue of 12% debentures at 10%
premium)
15 .Raghav Limited purchased a running business from Krishna traders for a sum
of Rs. 15,00,000 payable Rs. 3,00,000 by cheque and for the balance issued 9%
debentures of Rs. 100 each at par.
The assets and liabilities consisted of the following:
Plant and Machinery 4, 00,000
Building 6, 00,000
Stock 5, 00,000
Debtors 3, 00,000
Creditors 2, 00,000
Record necessary journal entries in the books of Raghav Limited.
Date Particulars L.F Dr. (Rs.) Cr.(Rs.)

Plant and Machinery a/c 4,00,000
Dr.
6,00,000
Building a/c Dr.
5,00,000
Stock a/c Dr.
3,00,000
Debtors a/c Dr.
2,00,000
To Creditor’s a/c
15,00,000
To Krishna Traders
1,00,000
To Capital Reserve ( Bal.
Fig)
127
( Being assets and liabilities
taken over from the vendor
company).
Krishna Traders a/c Dr. 15,00,000
To Bank 3,00,000
To 9% Debentures a/c 12,00,000
( Being issues of 12,000

debentures of Rs.. 100 each at
par and rest paid by a cheque)
PRACTICE QUESTIONS;
1 .X Ltd invited applications for issuing 500, 12% debentures of ₹ 100 each at a
discount of 5%. These debentures were redeemable after three years at par.
Applications for 600 debentures were received. Pro-rata allotment was made to
all the applicants. Pass necessary journal entries for the issue of debentures
assuming that the whole amount was payable with application. (All India 2017)
2 .Pass the necessary journal entry when 10,000 debentures of ₹ 100 each are
issued as collateral security against a bank loan of ₹ 8.00.000. (Delhi 201
3 .Beta Ltd issued 5,000, 9% debentures of ₹ 500 each. Pass the necessary journal
entries for the issue of debentures in the books of the company in the following
case. When debentures are issued at a premium of 25% to the vendors for
machinery purchased for ₹ 6,25,000.
4 .On 1st April, 2015, P Ltd issues 6,000, 12% Debentures of ₹ 100 each at par
redeemable at a premium of 7%. The debentures were to be redeemed at the end
of third year. Prepare loss on issue of 12% Debentures Account.
5 .UZ Ltd purchased plant and machinery from Elk Machine Ltd for ₹ 6,90,000. Elk
Ltd was paid by accepting a draft of ₹ 90,000 payable after three months and the
balance by issue of 6% debentures of ₹ 100 each at a discount of 20%. Pass
necessary journal entries for the above transactions in the books of UZ Ltd
128
6 .Z Ltd purchased machinery from K Ltd, Z Ltd, paid K Ltd as follows
(i) By issuing 5,000 equity shares of ₹ 10 each at a premium of 30%.
(ii) By issuing 1,000, 8% debentures of ₹ 100 each at a discount of 10%.
(iii) Balance by giving a promissory note of ₹ 48,000 payable after two months.
Pass necessary journal entries for the purchase of machinery and payment to K
Ltd in the books of Z Ltd
7 .Tata Ltd issued 5,000, 10% debentures of ₹ 100 each on 1st April, 2012. The
issue was fully subscribed. According to the terms of issue, interest on debentures
is payable half yearly on 30th September and 31st March and tax deducted at
source is 10%.
Pass the necessary entries related to the debenture interest for the half yearly
ending on 31st March, 2013 and transfer of interest on debentures to statement
of profit and loss.
8 .Venus Ltd is a real estate company. To discharge its corporate social
responsibility, it decided to construct a night shelter for the homeless. The
company took over assets of ₹ 10,00,000 and liabilities of ₹ 1,80,000 of Cayns Ltd
for ₹ 7,60,000. Venus Ltd issued 9% debentures of ₹ 100 each at a discount of 5%
in full satisfaction of the purchase consideration in favour of Cayns Ltd.
Pass necessary journal entries in the books of Venus Ltd. for the above
transactions
9 Boots Ltd issued ₹ 6,0,000, 8% debentures at a discount of 6%. The debentures

were redeemable in four equal annual instalments. Pass necessary journal entries
for issue of debentures and prepare ‘Discount on issue of debentures account’ for
four years. Show your workings clearly.
10 .Pass necessary journal entries and prepare 9% debentures account for the
issue of 7,500, 9% debentures of ₹ 50 each at a discount of 6%, redeemable at a
premium of 10%
129
Analysis of Financial Statements
NO NAME
1 Financial Statements
2 Comparative statements
3 Common size statements
4 Accounting Ratios
SYLLABUS
Analysis of Financial Statements
• Financial Statements of a Company: Preparation of simple financial statements of a company
in the prescribed form with major headings only.
• Financial Analysis: Meaning, Significance and Purpose, Limitations.
• Tools for Financial Analysis: Comparative statements, Common size statements.
• Accounting Ratios:
Meaning and Objectives,
Types of ratios:
Liquidity Ratios: -Current ratio, Liquidity ratio.
Solvency Ratio: - Debt to equity, Total assets to debt, Proprietary ratio.
Activity Ratio: - Inventory turnover, Debtors turnover, Payables turnover, Working capital
turnover, Fixed assets turnover, Current assets turnover.
Profitability Ratio: - Gross profit, Operating ratio, Net profit ratio, Return on Investment,
earning per Share, Dividend per Share, Profit Earning ratio.
Financial Statements of a Company
Financial statements are the basic and formal annual reports through which the corporate
management communicates financial information to its owners and various other external
parties which include investors, tax authorities, government, employees, etc. These refer to:
1 the balance sheet (position statement) as at the end of accounting period,
2 the statement of profit and loss of a company and
3 the cash flow statement
The financial statements are the end products of accounting process.
130
The Companies Act 2013 shall prepare its balance sheet, statement of profit and loss and notes
to account according to the Companies Act, 2013, revised Schedule III, part -I
FORMAT OF THE BALANCE SHEET

Name of the company……………
Balance Sheet as at …………………. (Rs.

In…………)
Particulars Note Figure as at Figure as at

No. the end of the end of
Current Previous
reporting reporting
period. period.
1 2 3 4
I. EQUITY AND LIABILITIES
1) Shareholder’s Funds
(a) Share Capital
(b) Reserves and Surplus
(c) Money received against share warrants
2) Share Application money pending allotment
3) Non-current Liabilities
(a) Long term borrowings
(b) Deferred tax liabilities (net)
(c) Other long-term liabilities
(d) Long term provisions
4) Current Liabilities
(a) Short-term borrowings
(b) Trade payables
(c) Other current liabilities
(d) Short-term provisions
TOTAL
II.ASSETS
1) Non-Current Assets
(a) Property plant and equipment and intangible
assets
(i) Property plant and equipment
(ii) Intangible assets
(iii) Capital work-in-progress
(iv) Intangible assets under development
(b) Non-current investments
(c) Deferred tax assets (net)
(d) Long-term loans and advances
(e) Other non-current assets
131
2) Current Assets
(a) Current investments
(b) Inventories
(c) Trade receivables
(d) Cash and cash equivalents
(e) Short term loans and advances
(f) Other current assets Total
TOTAL
IMPORTANT NOTES OF BALANCE SHEET

Shareholders Fund
The shareholders’ funds are sub-classified on the face of the balance sheet.
a) Share Capital
b) Reserves and Surplus
c) Money received against Share Warrants Share Capital
Disclosures relating to share capital are to be given in notes to accounts.
a) For each class of shares, recognition of the number of shares outstanding at the beginning
and at the end of the reporting period is required.
b) The rights, preferences and restrictions attached to each class of shares including restrictions
on the distribution of dividends and repayment of capital.
c) In order to bring clarity regarding the identity of ultimate owners of the company:
This may be noted that the information of shareholders’ funds are presented on the face of
financial statements limited only to broad and significant items. Details are given in Notes to
Accounts. d) For each class of share capital:
i) The number and amount of share authorised.
ii) The number of shares issued, subscribed, fully paid and subscribed but not fully paid.
iii) Par value per share. iv) Reconciliation of the number of shares outstanding at the
beginning and end of the accounting period. v) Rights, preferences and restrictions
attaching each class of shares including restrictions on the distribution of dividends and
repayment of capital.
iv) Aggregate number of shares with respect to each class in the company held by its
holding company, its ultimate holding company including shares held by or by
subsidiaries or associates of the holding company or the ultimate holding company.
v) Rights, preferences and restrictions attaching each class of shares including restrictions
on the distribution of dividends and repayment of capital.
vi) Shares reserved for issue under options and contracts/ commitments for the sale of
shares/disinvestment, including terms and amount.
vii) For a period of 5 years immediately preceding the date at which balance sheet in
prepared for: (a) Shares reserved under contracts/commitments. (b) Number and class
132
of shares bought back. (c) Number and class of shares allotted for consideration other
than cash and bonus shares.
Reserve and Surplus

Reserves and Surplus are required to be classified as:
i) Capital Reserve
ii) Capital Redemption Reserve
iii) Securities Premium Reserve
iv) Debenture Redemption Reserve
v) Revaluation Reserve
vi) Share Options Outstanding Account
vii) Other Reserves (Specifying nature and purpose)
viii) Surplus: Balance in statement of profit and loss; disclosing allocations and
Appropriation such as dividend, bonus shares, transfer to/from reserve, etc.
Current/Non-current distinction
 An item is classified as current:
 if it is involved in entity’s operating cycle or,
 is expected to be realised/settled within twelve months or,
 if it is held primarily for trading or,
 is cash and cash equivalent or,
 if entity does not have on unconditional rights to defer settlement of liability for at
least 12 months after the reporting period,
 Other assets and liabilities are non-current.
Question -Under which major heads and sub-heads will the following items be placed in the Balance
Sheet of the company as per Schedule III, Part I of the Companies Act, 2013?
(i) Debentures with maturity period in current financial year
(ii) Securities Premium Reserve
(iii) Provident Fund
ANS.
S. Item Major Head Sub Head

No
i. Debentures with maturity period in Current Liabilities Other Current
current financial year Liabilities
ii) Securities Premium Reserve Shareholder’s Fund Reserves and
Surplus
iii) Provident Fund Non-Current Long Term
Liabilities Provision
133
PROFIT AND LOSS
The Companies Act 2013 shall prepare its balance sheet, statement of profit and loss and notes
to account according to the Companies Act, 2013, revised Schedule III, part -II
FORMAT OF PROFIT AND LOSS

Name of the company……………
Profit and loss as at …………………. (Rs.

In…………)
particulars Note Figure as Figure as at

no. at the end the end of
of Current Previous
reporting reporting
period. period.
I Revenue from operation

II Other income
III Total income (I+II)
IV Expenses
Total expenses
V Profit before tax
VI Tax
VII Profit before tax
Comparative statement When financial statements of one firm for two years are compared then
it is known as comparative statement.
FORMATE OF COMPARATIVE STATEMENT
Particulars Note Figure as at Figure as at Change Percentage

No. the end of the end of (increase change
previous current or (increase
reporting reporting decrease) or
period. period. decrease)
31.03.2022 31.03.2023
A B B-A=C C/A*100
(a) Share Capital
(c) Money received against
share warrants
134
2) Share Application money
pending allotment
(b) Trade payables
TOTAL
II.ASSETS
(a) Property plant and
equipment and intangible
assets
(i) Property plant and
equipment
(iv) Intangible assets under
development
(d) Long-term loans and
advances
2) Current Assets
(b) Inventories
(e) Short term loans and
advances
TOTAL
135
QUESTION: - From the following information prepare comparative statement of Vinayak limited.
Particulars Note Figure as at Figure as at

No. the end of the end of
Current Previous
reporting reporting
period. period.
31.03.2019 31.03.2018
1 2 3 4
1) Shareholder’s Funds 21,00,000 20,00,000
(a) Share Capital
(b) Reserves and Surplus 2,30,000 2,00,000
(c) Money received against share warrants 5,60,000 2,00,000
2) Share Application money pending allotment
4) Current Liabilities 2,80,000 1,00,000
(b) Trade payables
31,70,000 25,00,000
TOTAL
II.ASSETS
assets
(ii) Intangible assets 21,00,000 20,00,000
(iii) Capital work-in-progress 3,00,000 2,00,000
2) Current Assets 5,60,000 2,00,000
(b) Inventories 2,10,000 1,00,000
136
TOTAL 31,70,000 25,00,000
SOLUTION: - COMPERATIVE BALANCE SHEET OF VINAYAK LIMITED

As at 31.03.2019
Particulars Note Figure as at Figure as at Change Percentage

No. the end of the end of (increase change
Current Previous or (increase
reporting reporting decrease) or
period. period. decrease)
31.03.2018 31.03.2019 In %
A B B-A=C C/A*100
(a) Share Capital
(b) Reserves and Surplus 20,00,000 21,00,000 1,00,000 5
share warrants 2,00,000 2,30,000 30,000 15
pending allotment 2,00,000 5,60,000 3,60,000 180
(b) Deferred tax liabilities
(net)
(d) Long term provisions 1,00,000 2,80,000 1,80,000 180
(b) Trade payables
TOTAL 25,00,000 31,70,000 6,70,000 26.8

II.ASSETS
assets
(i) Property plant and 20,00,000 21,00,000 1,00,000 5
equipment 2,00,000 3,00,000 1,00,000 50
137
development
advances
2) Current Assets
(b) Inventories
(e) Short term loans and 2,00,000 5,60,000 3,60,000 180
advances
(f) Other current assets Total 1,00,000 2,10,000 1,10,000 110
TOTAL 25,00,000 31,70,000 6,70,000 26.8
Calculation of percentage - C/A*100=D

1,00,000/20,00,000*100=5% increase
30,000/2,00,000*100=15% increase and so on.
COMMON SIZE STATEMENT- A financial statement that displays each balance sheet item as a
percentage of total assets.
FORMATE OF COMMON SIZE STATEMENT-
Particulars Note Figure as at Figure as at Percentage Percentage

No. the end of the end of of balance of balance
previous current sheet total sheet total
reporting reporting 31.03.2022 31.03.2023
period. period.
31.03.2022 31.03.2023
A B % %
(a) Share Capital
share warrants
pending allotment
138
(b) Trade payables
TOTAL
100 100
II.ASSETS
assets
(i) Property plant and
equipment
development
advances
2) Current Assets
(b) Inventories
advances
TOTAL
100 100
139
QUESTION: - From the following information prepare comparative statement of XYZ limited.
Particulars Note Figure as at Figure as at the

No. the end of end of
Current Previous
reporting reporting
period. period.
31.03.2019 31.03.2018
1 2 3 4
(a) Share Capital
(b) Reserves and Surplus 21,00,000 20,00,000
(c) Money received against share warrants
2) Share Application money pending allotment 2,30,000 2,00,000
(a) Long term borrowings 5,60,000 2,00,000
4) Current Liabilities 2,80,000 1,00,000
(b) Trade payables
TOTAL 31,70,000 25,00,000

II.ASSETS
assets
(iii) Capital work-in-progress 3,00,000 2,00,000
2) Current Assets 5,60,000 2,00,000
(b) Inventories 2,10,000 1,00,000
140
31,70,000 25,00,000
TOTAL
SOLUTION- COMMON SIZE STATEMENT OF XYZ LIMITED FOR THE YEAR ENDING 31.03.2019
Particulars Note Figure as at Figure as at Percentage Percentage

No. the end of the end of of balance of balance
Current Previous sheet total sheet total
reporting reporting 31.03.2018 31.03.2019
period. period.
31.03.2018 31.03.2019
A B % %
(a) Share Capital
(b) Reserves and Surplus 20,00,000 21,00,000 80 66
share warrants 2,00,000 2,30,000 8 7.2
pending allotment
(b) Deferred tax liabilities 2,00,000 5,60,000 8 17.6
(net)
(d) Long term provisions 1,00,000 2,80,000 4 8.8
(b) Trade payables
TOTAL 25,00,000 31,70,000 100 100

II.ASSETS
assets
(i) Property plant and 20,00,000 21,00,000 80 66
equipment 2,00,000 3,00,000 8 9.4
development
141
advances
(e) Other non-current assets 2,00,000 5,60,000 8 17.6
2) Current Assets
(a) Current investments 1,00,000 2,10,000 4 6.6
(b) Inventories
advances
TOTAL 25,00,000 31,70,000 100 100
Working note-
All percentage will be calculated on the basis of total of balance sheet.
Hence in 2018 all % will be calculated on the basis of 25,00,000
Hence in 2019 all % will be calculated on the basis of 31,70,000
For example- 20,00,000*100/25,00,000 =80%
21,00,000*100/31,70,000=66%
Format of common size statement of profit and loss

particulars Note Figure as Figure as Percentage Percentage
no. at the at the end of revenue of revenue
end of of Current from from
Previous reporting operations operations
reporting period. previous current
period. year year
I Revenue from operation

II Other income
III Total income (I+II)
IV Expenses
Total expenses
V Profit before tax
VI Tax
VII Profit before tax
142
QUESTION
From the following statement of ABC limited prepare a common size statement of profit and
loss account for the year ending 31.03.2021
Particulars Amount Amount

31.03.2021 31.03.2020
Income
Revenue from operation 2,00,000 4,00,000
Other income 15,000 30,000
---------------------
Total income 2,15,000 4,30,000
Expenses
Cost of material consumed 1,10,000 2,20,000
Other expenses 5,000 10,000
1,15,000 2,30,000
Total expenses
Tax 40,000 50,000
SOLUTION:
particulars Note Figure as Figure as Percentage Percentage
no. at the at the end of revenue of revenue
end of of Current from from
Previous reporting operations operations
reporting period. previous current
period. 2021 year year
2020
2020 2021
I Revenue from operation 4,00,000 2,00,000 100 100
II Other income 30,000 15,000 7.5 7.5
III Total income (I+II) 4,30,000 2,15,000 107.5 107.5
IV Expenses 2,20,000 1,10,000 55 55
10,000 5,000 2.5 2.5
Total expenses 2,30,000 1,15,000 57.5 57.5
V Profit before tax 2,00,000 1,00,000 50 50
VI Tax 50,000 40,000 12.5 20
VII Profit before tax 1,50,000 60,000 37.5 30
143
ACCOUNTING RATIOS
RATIO-Relationship between two figures, expressed in arithmetical terms is known as ratio.
Accounting ratio- when two figures/amount taken from accounting field, relation between them
is known as accounting ratio.
Classification of ratios
A-liquidity ratio B-solvency ratio C-turnover ratio D-profitability

ratio
A-Liquidity ratio
- the ratio between the liquid assets and the liabilities of a business, bank or other institution is
known as liquid ratio. It is the ratio to meet current liabilities of the firm as they become due for
payment.
Liquidity ratio include two ratios-
1. Current ratio or working capital ratio
2. Quick ratio/acid test ratio/liquid ratio
B-solvency ratio-
The solvency ratio focuses on the company's ability to meet/pay its long-term debt.
1 debt equity ratio

2 total assets to debt ratio
3 proprietary ratio
4 interest coverage ratio
5 debt to capital employed ratio
C- Activity ratio-
that indicates how efficiently a company is leveraging/using the assets on its balance sheet, to
generate revenues and cash.
1. Inventory or stock turnover ratio
2. Debtors or receivable turnover ratio
3. Creditors or payable turnover ratio
4. Fixed assets turnover ratio
5. Net assets turnover ratio
6. Working capital turnover ratio.
D-profitability ratio or income ratio-

This ratio indicates how efficiently a company generates profit and value for shareholders.
144
1. Gross profit ratio
2. Operating ratio
3. Operating profit ratio
4. Net profit ratio
5. Return on investment (R. O. I.)
A-liquidity ratio
(1) current ratio or working capital ratio: - it shows the relationship between current assets
and current liabilities. how as a institution you are capable enough to meet your current
liability.
Current ratio formula=current assets/current liabilities
Current assets include current investment, cash, cash equivalents, accounts receivable,
stock inventory, marketable securities, pre-paid liabilities, and other liquid assets.
Current liabilities- all liabilities such as accounts payable, short-term loans, Interest
payable, Bank overdraft, interest accrued, provision for tax and the other such short-term
liabilities of the company.
(one more formula, current assets -working capital =current liabilities)
(2) Quick/acid/liquid ratio -quick ratio indicates whether the firm is able to pay its liquid
liability within a month or immediately.
Quick/acid/liquid ratio formula=liquid assets/current liability
Liquid assets=current assets-inventories-prepaid expenses and advance tax
Question -calculate current ratio and quick ratio from the following.
Liquid assets 75,000

Inventories (including loose tools of 20,000) 35,000
Prepaid expenses 10,000
Working capital 60,000
Current ratio formula=current assets/current liabilities

Current assets =75,000+15,000+10,000
Current assets= 1,00,000
Current liabilities= current assets -working capital 1,00,000-60,000=40,000
Current ratio=1,00,000/40,000 =2.5:1
Quick/acid/liquid ratio formula=liquid assets/current liability
75,000/40,000=1.87:1
Imp note-1- when same amount is deducted from numerator and denominator the ratio will
increase.
2- when same amount is added from numerator and denominator the ratio will
decrease.
145
B-solvency ratio-
The solvency ratio focuses on the company's ability to meet/pay its long-term debt.
1 debt equity ratio -this ratio expresses the relationship between the long-term debt and
shareholder’s funds. It shows the proportion of long-term debt to the shareholder’s fund.
debt equity ratio formula =Debt/Equity or long-term debt/shareholder’s

fund
long term debt includes (long term loan and borrowing for more than 12 months) long-term
borrowing and long-term provision such as debentures, bonds, bank loan, mortgage loan,
provision for provident fund and provision for gratuity.
Shareholder’s fund= share capital +reserve and surplus
Question- calculate debt equity ratio from the following information.
Share capital 2,50,000

Reserve and surplus 1,10,000
Long term borrowing 1,20,000
Long term provision 50,000
Current liabilities 70,000
Non-current assets 3,80,000
Current assets 2,20,000
Solution
debt equity ratio formula =Debt/Equity or long-term debt/shareholder’s
fund
long term debt= long-term borrowing and long-term provision 1,20,000+50,000=1,70,000
shareholder’s fund= share capital +reserve and surplus 2,50,000+1,10,000=3,60,000
1,70,000/3,60,000=0.47:1
2 total assets to debt ratio-in this ratio total assets are expressed in relation to long term
debt.
total assets to debt ratio formula=total assets/long term debt
Question
Calculate total assets to debt ratio from the following information.
146
Shareholder’s fund 14,00,000
Total debts 16,00,000
Current liabilities 4,00,000
Solution: -
total assets to debt ratio formula=total assets/long term debt
long term debt=total debts – current liabilities
=16,00,000-4,00,000=12,00,000
Total assets= shareholder’s fund + total debt
14,00,000+16,00,000=30,00,000
total assets to debt ratio=30,00,000/12,00,000=2.5:1
3 proprietary ratio- this ratio indicates the proportion of total assets funded by owner. In
simple words how much amount is invested by owner against total capital.
Formula = Equity/total assets or shareholder fund/non-current +
current assets
QUESTION- Calculate the proprietary ratio from the following information.
Equity share capital 3,00,000
Preference share capitol 1,00,000
General reserve 1,80,000
Profit and loss balance 1,20,000
Debentures 3,00,000
Trade payable 1,60,000
Outstanding expenses 40,000
Solution: -
Formula = Equity/total assets or shareholder fund/non-current + current
assets
Shareholder fund =noncurrent assets +working capital -noncurrent liabilities.
=3,00,000+1,00,000+1,80,000+1,20,000
=7,00,000
Total assets= total of equity and liability side
147
=12,00,000
Proprietary ration =7,00,000/12,00,000 0.58:1 or 58.3%
4-Interest coverage ratio-how many times you are capable enough to pay interest on loan
against your profit.
Interest coverage ratio formula = profit before interest and income tax/fixed interest charged.
Question: -
calculate interest coverage ratio.
Net profit after tax 6,00,000
12% debentures of 100 each 40,00,000
Tax rate 40%
Solution –
Interest coverage ratio formula = profit before interest and income tax/fixed interest charged.
Profit before tax= 6,00,000*100/60 =10,00,000
+int on debentures 40,00,000*12% =4,80,000
Profit before interest and tax =14,80,000
= profit before interest and income tax/fixed interest charged =14,80,000/4,80,000=3.08 times
5 Debt to capital employed ratio-
This ratio shows relationship between long term debt and capital employed to check long term
financial soundness of the business.
Debt to capital employed ratio = long term debt/ capital employed
Long term debt=long term borrowing + long term provision
Capital employed= share holder fund + long term debt
Question – From the following information, calculate Debt to Capital Employed Ratio:
Balance Sheet as at March 31, 2017
Equity and Liabilities:

1. Shareholders’ funds
a) Share capital 4,00,000
b) Reserves and surplus 1,00,000
2. Non-current Liabilities Long-term borrowings 1,50,000
3. Current Liabilities 50,000
148
II. Assets
1. Non-current Assets
a) property and plant 4,00,000
b) Non-current investments 1,00,000
2. Current Assets 2,00,000
Solution
Debt to Capital Employed Ratio = Long - term debts /Capital Employed
Capital Employed = Shareholders’ Funds + Long-term borrowings
= Rs. 5,00,000 + Rs. 1,50,000 = Rs. 6,50,000
Debt to Capital Employed Ratio= Long - term debts/ Capital Employed
= Rs. 1,50,000/ Rs. 6,50,000 = 0.23: 1
C -Activity (or Turnover) Ratio
These ratios indicate the speed at which, activities of the business are being performed. The
activity ratios express the number of times assets employed.
1. Inventory Turnover ratio
2. Trade receivable Turnover ratio
3. Trade payable Turnover ratio
4. Investment (Net assets) Turnover ratio
5. Fixed assets Turnover ratio
6. Working capital Turnover ratio
1. Inventory Turnover ratio -It determines the number of times inventory is converted into
revenue from operations during the accounting period under consideration.
Inventory Turnover Ratio = Cost of Revenue from Operations / Average Inventory
Average inventory= opening inventory + closing inventory/2
Question
From the following information, calculate inventory turnover ratio
Inventory in the beginning = 18,000
Inventory at the end = 22,000
Net purchases = 46,000
Wages = 14,000
Revenue from operations = 80,000
149
Carriage inwards = 4,000
Solution
Inventory Turnover Ratio = Cost of Revenue from Operations/ Average Inventory
Cost of Revenue from Operations
= Inventory in the beginning + Net Purchases + Wages + Carriage inwards – Inventory at the end
= Rs. 18,000 + Rs. 46,000 + Rs. 14,000 + Rs. 4,000 – Rs. 22,000
= Rs. 60,000
Average Inventory = Inventory in the beginning + Inventory at the end /2
= Rs. 18,000 + Rs. 22,000/ 2
= Rs. 20,000
Inventory Turnover Ratio = Rs. 60,000 /Rs. 20,000
= 3 Times
Trade Receivables Turnover Ratio
It expresses the relationship between credit revenue from operations and trade receivable.
Trade Receivable Turnover ratio = Net Credit Revenue from Operations/Average Trade
Receivable
Average Trade Receivable = (Opening Debtors and Bills Receivable + Closing Debtors and Bills
Receivable)/2
Question
Calculate the Trade receivables turnover ratio from the following information
Total Revenue from operations 4,00,000
Cash Revenue from operations 20% of Total Revenue from operations
Trade receivables as at 1.4.2016 40,000
Trade receivables as at 31.3.2017 1,20,000
Solution
Trade Receivables Turnover Ratio = Net Credit Revenue from Operations/ Average Trade
Receivables
Credit Revenue from operations = Total revenue from operations – Cash revenue from
operations
Cash Revenue from operations = 20% of Rs. 4,00,000
= Rs. 4,00,000 *20 /100 = Rs. 80,000
150
Credit Revenue from operations = Rs. 4,00,000 – Rs. 80,000 = Rs. 3,20,000
Average Trade Receivables = Opening Trade Receivables + Closing Trade Receivables /2
= Rs. 40,000 + Rs. 1,20,000/ 2
= Rs. 80,000
Trade Receivables Turnover Rations = Net Credit Revenue Form Operations /Average Inventory
Trade Receivables Turnover Ratio = Rs. 3,20,000 /Rs. 80,000 = 4 times.
3 Trade payable Turnover ratio-
it expresses relationship between credit purchases and trade payable.
Trade Payables Turnover ratio = Net Credit purchases/ Average trade payable
Average Trade Payable = (Opening Creditors and Bills Payable + Closing Creditors and Bills
Payable)/2
Average Payment Period = month in a year /Trade Payables Turnover Ratio
QUESTION-
Calculate the Trade payables turnover ratio from the following figures
Credit purchases during 2016-17 = 12,00,000
Creditors on 1.4.2016 = 3,00,000
Bills Payables on 1.4.2016 = 1,00,000
Creditors on 31.3.2017 = 1,30,000
Bills Payables on 31.3.2017 = 70,000
SOLUTION-
Trade Payables Turnover Ratio = Net Credit Purchases/ Average Trade Payables
= Rs. 3,00,000 + Rs. 1,00,000 + Rs. 1,30,000 + Rs. 70,000/ 2
= Rs. 3,00,000
Trade Payables Turnover Ratio = Rs. 12,00,000 /Rs. 3,00,000 = 4 times
4 Net assets Turnover ratio –

It IS relationship between revenue from operations and net assets (capital employed) in the
business. Higher turnover means better activity and profitability.
Net Assets or Capital Employed Turnover ratio = Revenue from Operation /Capital Employed
Two more relating ratios are
151
(a) Fixed Assets Turnover Ratio: Fixed asset turnover Ratio = Net Revenue from Operation/
Net Fixed Assets
(b) Working Capital Turnover Ratio = Net Revenue from Operation /Working Capital
Question –
From the following information, calculate
(i) Net assets turnover,
(ii) Fixed assets turnover,
(iii) Working capital turnover ratios
Preference shares capital 4,00,000 Plant and Machinery
8,00,000 Equity share capital 6,00,000 Land and Building
5,00,000 General reserve 1,00,000 Motor
Car 2,00,000 Balance in Statement of P& L 3,00,000
Furniture 1,00,000 15% debentures
2,00,000 Inventory 1,80,000 14% Loan
2,00,000 Debtors 1,10,000 Creditors
1,40,000 Bank 80,000
Bills payable 50,000 Cash
30,000 Outstanding expenses 10,000
Revenue from operations for the year 2016-17 were Rs. 30,00,000
Solution
Revenue from Operations = Rs. 30,00,000
Capital Employed = Share Capital + Reserves and Surplus + Long-term Debts (or Net Assets)
= (Rs.4,00,000 + Rs.6,00,000) + (Rs.1,00,000 + Rs.3,00,000) + (Rs.2,00,000 + Rs.2,00,000)
= Rs. 18,00,000
Fixed Assets = Rs.8,00,000 + Rs.5,00,000 + Rs.2,00,000 + Rs.1,00,000 = Rs. 16,00,000
Working Capital = Current Assets – Current Liabilities =
Rs.4,00,000 – Rs.2,00,000 = Rs. 2,00,000
Net Assets Turnover Ratio = Rs.30,00,000/Rs.18,00,000 = 1.67 times
Fixed Assets Turnover Ratio = Rs.30,00,000/Rs.16,00,000 = 1.88 times
Working Capital Turnover Ratio = Rs.30,00,000/Rs.2,00,000 = 15 times.
D-profitability ratio or income ratio-
This ratio indicates how efficiently a company generates profit and value for shareholders.
1. Gross profit ratio
2. Operating ratio
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3. Operating profit ratio
4. Net profit ratio
5. Return on investment (R. O. I.)
1 Gross profit ratio- it is relation between gross profit and revenue from operation
(sales)
Gross Profit Ratio = Gross Profit/Net Revenue of Operations × 100
2 Operating ratio – it is cost of operation in relation to revenue from operations.

Operating Ratio = (Cost of Revenue from Operations + Operating Exp.)/ Net Revenue
from Operations ×100
Operating expenses include office expenses, administrative expenses, selling expenses,
distribution expenses, depreciation and employee benefit expenses
3 Operating profit ratio- Operating Profit Ratio = 100 – Operating Ratio
Or
it is calculated as under
Operating Profit Ratio = Operating Profit/ Revenue from Operations × 100
4 Net profit ratio -it is the relation between net profit and revenue from operation (sales)
Net Profit Ratio = Net profit/Revenue from Operations × 100
QUESTION – from the following information calculate-
1-gross profit ratio 2-operating ratio 3-operating profit ratio 4-net profit ratio
Operating inventory 3,00,000
Closing inventory 4,20,000
Purchases 14,00,000
Wages 3,70,000
Carriage inward 1,50,000
Administarative exp. 84,000
Silling exp. 36,000
Income tax 1,00,000
Profit on sale of fixed assets 20,000
Revenue from operation 24,00,000
Solution –
Gross Profit Ratio = Gross Profit/Net Revenue of Operations × 100
=6,00,000*100/24,00,000
=25%
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Operating Ratio = (Cost of Revenue from Operations + Operating Exp.)/ Net Revenue from
Operations ×100
=18,00,000+1,20,000/24,00,000*100
=80%
Operating Profit Ratio = Operating Profit/ Revenue from Operations × 100
=4,80,000/24,00,000*100
=20%
Net Profit Ratio = Net profit/Revenue from Operations × 100
=4,00,000/24,00,000*100
=16.67%
5- Return on investment (R. O. I.) - It measures return on capital employed in the business
Return on Investment (or Capital Employed) = Profit before Interest and Tax/ Capital Employed ×
100
QUESTION – Calculate return on investment R. O. I.
Net profit before interest and after tax 1,50,000
Amount of tax 15,000
Capital employed 8,00,000
SOLUTION- Return on Investment (or Capital Employed) = Profit before Interest and Tax/ Capital
Employed × 100
=1,50,000+15,000=1,65,000/8,00,000*100
=20.62%
……………………………………………………………………………………………………………………………………………………
……….
Questions for Practice

MCQ
1. The __________ ratios provide the information critical to the long run operation of the
firm
A. liquidity
B. activity
C. solvency
D. profitability
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2. The __________ ratios provide the information critical to the long run operation of the
firm
A. liquidity
B. activity
C. solvency
D. profitability
3. What is ratio? how it is different from accounting ratio.
4. From the following information prepare the balance sheet of Gitanjali Ltd. Inventories
Rs. 14,00,000; Equity Share Capital Rs. 20,00,000; Plant and Machinery Rs. 10,00,000;
Preference Share Capital Rs. 12,00,000; Debenture Redemption Reserve Rs. 6,00,000;
Outstanding Expenses Rs. 3,00,000; Proposed Dividend Rs. 5,00,000; Land and Building Rs.
20,00,000; Current Investments Rs. 8,00,000; Cash Equivalent Rs. 10,00,000; Short term loan
from Zaveri Ltd. (A Subsidiary Company of Twilight Ltd.) Rs. 4,00,000; Public Deposits Rs.
12,00,000.
5. From the following information prepare the balance sheet of Jam Ltd. Inventories Rs.
7,00,000; Equity Share Capital Rs. 16,00,000; Plant and Machinery Rs. 8,00,000; 8% Preference
Share Capital Rs. 6,00,000; General Reserves Rs. 6,00,000; Bills payable Rs. 1,50,000; Provision
for taxation Rs. 2,50,000; Land and Building Rs. 16,00,000; Non-current Investments Rs.
10,00,000; Cash at Bank Rs. 5,00,000; Creditors Rs. 2,00,000; 12% Debentures Rs. 12,00,000.
6. From the following details, calculate interest coverage ratio: Net Profit after tax Rs.
60,000; 15% Long-term debt 10,00,000; and Tax rate 40%.
………………………………………………………………………………………………………………………………
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CASH FLOW STATEMENT
Meaning: Cash Flow Statement
A cash flow statement is the financial statement that measures the cash generated or
used by a company in a given period. A cash flow statement provides information
about the historical changes in cash and cash equivalents of an enterprise by
classifying cash flows into operating, investing and financing activities.
A Cash Flow statement may be defined as a summary of receipts and disbursements

of cash for a particular period of time.
Objectives : Cash Flow Statement
The primary objective of the cash flow statement is to help management in taking a
decision and making a plan by providing current information on cash inflow and outflow
of any accounting period. The other objectives are:
i) Ensuring future positive cash flow of particular concern.
ii) Ensuring the capacity of an organization to pay a dividend.
iii) Identifying non-cash items ensuring cash income and expenses of a concern.
iv) Comparing various items of the current year with those of last year.
Advantages : Cash Flow Statement
i) Cash Flow Statement helps in knowing the exact figure of cash inflows and outflows
from various operations of the business.
ii) Cash flow statement used in preparing the cash budget for future needs.
iii) It provides the information about various investing and financing cash transactions
takesplace during the year.
iv) It reveals the key changes required for the financial positioning of the business.
v) Cash flow information is useful in assessing the ability of the enterprise to generate
cashand cash equivalents.
vi) It also helps the comparability of the reporting of operating performance by
differententerprises
Cash and Cash Equivalents:
As per AS-3, ‘Cash’ comprises cash in hand and demand deposits with banks, and
‘Cash equivalents’ means short-term highly liquid investments that are readily
convertible into known amounts of cash.An investment normally qualifies as cash
156
equivalents only when it has a short maturity. Investments in shares are excluded from
cash equivalents. Short-term marketable securities which can be readily converted
into cash are treated as cashequivalents.
Cash Flows: Cash Flows is the net amount of cash and cash-equivalents being
transferred into and out of a business. It implies the movement of cash in and out due
to some non-cashitems. Receipt of cash from a non-cash item is termed as cash inflow
while cash payment inrespect of such items as cash outflow.
Classification of Activities for the Preparation of Cash Flow Statement: As per AS-
3,Cash flow activities are to classified into three categories
(1) Operating activities

(2) Investing activities
(3) Financing activities
Cash Inflows from operating activities

 cash receipts from sale of goods and the rendering of services.
 cash receipts from royalties, fees, commissions and other revenues.

Cash Outflows from operating activities
 Cash payments to suppliers for goods and services.
 Cash payments to an insurance enterprise for premiums and claims,annuities, and

other policy benefits.
 Cash payments of income taxes unless they can be specifically identified with financing
and investing activities. (2). Cash from Investing Activities:
As per AS-3, investing activities are the acquisition and disposal of long-term assets
and other investments not included in cash equivalents. Investing activities relate to
purchase andsale of long-term assets or fixed assets.
Cash Outflows from investing activities
 . Cash payments to acquire fixed assets including intangibles and capitalized
research and development.
 Cash payments to acquire shares, warrants or debt instruments of other
enterprises except those held for trading purposes.
 Cash advances and loans made to third party.

Cash Inflows from Investing Activities
• Cash receipt from disposal of fixed assets including intangibles.

• Cash receipt from the repayment of advances or loans made to third parties
157
• Cash receipt from disposal of shares, warrants or debt instruments of otherenterprises
except those held for trading purposes.
• Interest received in cash from loans and advances.

• Dividend received from investments in other enterprises
Cash from Financing Activities
As per AS-3, financing activities are activities that result in changes in the size and
composition of the owners’ capital and borrowings of the enterprise.
Cash Inflows from financing activities
• Cash proceeds from issuing shares (equity or/and preference).

• Cash proceeds from issuing debentures, loans, bonds and other short/ long term
borrowings.
Cash Outflows from financing activities
• Cash repayments of amounts borrowed.

• Interest paid on debentures and long-term loans and advances.
• Dividends paid on equity and preference capital
CASH FLOW STATEMENT FOR THE YEAR ENDED MARCH 31 2023

( MAIN HEADS ONLY)
A. CASH FLOWS FROM OPERATING ACTIVITIES XXX

B. CASH FLOWS FROM INVESTING ACTIVITIES XXX
C. CASH FLOWS FROM FINANCING ACTIVITIES XXX
(A+B+C)
NET INCREASE OR DECREASE IN CASH AND CASH EQUIVALENTS XXXX ADD:
CASH AND CASH EQUIVALENTS IN THE BEGINNING
X
XXX
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FORMAT OF CASH FLOW STATEMENT
(INDIRECT METHOD) FOR THE YEAR
ENDED……………………..
{As per Accounting Standard-3 (Revised)}
Particular ₹ ₹
s
I. CASH FLOW FROM OPERATING ACTIVITIES
…..
(A) Net profit before tax and extraordinary items (as per working note)
(B) Add : Items to be added
…..
*Depreciation
…..
*Goodwill, Patents and Trademarks amortized
…..
*Interest on Bank Overdraft/Cash Credit
…..
*Interest on Borrowings and Debentures
…..
*Loss on Sale of Fixed Assets
….. …..
*Increase in Provision for doubtful debts
…..
(C) Less : Items to be deducted

…..
*Interest Income
…..
*Dividend Income
…..
*Rental Income
…..
*Gain on Sale of Fixed Assets
….. …..
*Decrease in Provision for doubtful debts
(D) Operating profit before Working Capital changes (A+B-C) …..
(E) Add : Decrease in Current Assets & Increase in Current Liabilities …..
(F) Less : Increase in Current Assets & Decrease in Current Liabilities ….. …..
(G) Cash generated from Operations (D+E-F) ….. …..
…..
(H) Less : Income tax paid (Net of tax
…..
refund) Cash flow before
Extraordinary items ----
*Extraordinary items (+/-)
Cash Flow From (or Used in) Operating Activities
II. CASH FLOW FROM INVESTING ACTIVITIES

● Proceeds from sale of fixed assets …..
● Proceeds from sale of investments (other than Current …..
159
Investments to be included in cash & cash equivalents and
Marketable Securities) …..
…..
● Proceeds from sale of intangible assets
● Interest and Dividend received (for non-financial companies Only) …..
● Rent received (…..)

● Payment for Purchase of Fixed Assets (…..)
● Payment for Purchase of Investments (Other than
Marketable Securities) (…..)
● Payment for purchase of intangible assets like goodwill (…..)

● Extraordinary items (e.g. Insurance Claim on machinery against fire) .-.-.-.
(+/-)
Cash Flow From (or used in) Investing Activities
III. CASH FLOW FROM FINANCING ACTIVITIES
● Proceeds from Issue of Shares and Debentures …..
● Proceeds from Other Long-term Borrowings …..
● Increase/decrease in Bank Overdraft/Cash Credit …..
● Payment of Final Dividend (…..)
● Payment of Interim Dividend (…..)
● Payment of Interest on Debentures and Loans (Short-term and long- (…..)
term) (….)
● Repayment of Loans (…..)
● Redemption of Debentures/Preference Shares
● Payment of Share Issue Expenses (….)
● Payment for Buy-back of Shares as Extraordinary Activities (.....)
● Cash Flow From (or Used in) Financing Activities .-.-.-.
IV. Net Increase/Decrease in cash & Cash Equivalents (I+II+III) .-.-.-.
V. Add: Cash & Cash Equivalents in the beginning of the year …..
VI. Cash & Cash Equivalents at the end of the year …..
WORKING NOTES:
Net Profit Before tax and extraordinary items:
Net Profit as per Statement of Profit & Loss or difference between closing balance
& openingbalance of surplus i.e., balance in statement of profit & loss
Add: + Transfer to Reserves.
+ Proposed Dividend for current year.
+ Interim Dividend paid during the year.
+ Provision for Tax for the current year.
+ Extraordinary Items, if any, Debited to the Statement of Profit & Loss.
160
Less: - Extraordinary Items, if any, Credited to the Statement of Profit & Loss.
- Refund of Tax Credited to the Statement of Profit & Loss.
=Net Profit Before Tax and Extraordinary Items.
NOTES:
1. Amounts in brackets mean amounts that are to be deducted.
2. Increase/ Decrease in unpaid interest on debentures/ loans affect Cash Flow
from FinancingActivities.
3. Increase/ Decrease in Unclaimed dividend affect Cash Flow from Financing Activities.
4. Increase/ Decrease in Accrued interest on investments affects Cash Flow from Investing
Activities.
ASCERTAINING MISSING AMOUNTS OF FIXED ASSETS OR DEPRECIATION:

-
Case 1 : When fixed asset is shown at written down value.
Under this case, depreciation is credited to the Assets Account & balance of
the assetaccount shows the written down value of the asset, which is also called
the book value.
Dr. Fixed Asset A/c (at Written Down
Value) Cr.
Particular ₹ Particular ₹
s s
To Balance b/d xxx By Bank A/c (Sale of Fixed Asset) xxx
To Profit/Gain on Sale of Fixed xxx By Loss on Sale of Asset A/c xxx
Assets (Statement of Profit & (Statement of Profit
Loss)* xxx &Loss)* xxx
To Bank A/c. (Purchase) By Accumulated Depreciation A/c
(Accumulated depreciation on fixed
asset sold) xxx
xxxx By Balance c/d. xxxx
Note : Purchase of fixed asset is a balancing amount on the debit side of the account
and sale of fixed asset on the credit side of the account.
Dr. Accumulated Depreciation A/c Cr.

Particular ₹ Particular ₹
s s
To Fixed Assets xxx By Balance b/d xxx
A/c(Accumulated By Depreciation A/c (Current Year) xxx
depreciation on fixed asset)
(Statement of Profit & Loss)* xxx
To Balance c/d
xxxx xxxx
Note : Accumulated depreciation on the fixed asset sold or depreciation charged for the current
accountingyear may not be given, which shall be the balancing figure
161
Treatment of Some Peculiar Items
Extraordinary items: Extraordinary items are not the regular phenomenon, e.g., loss
due totheft or earthquake or flood. They are non-recurring in nature and hence cash
flows associated with extraordinary items should be classified and disclosed
separately as arising from operating, investing or financing activities.
Interest and Dividend: In case of a financial enterprise (whose main business is
lending and borrowing), interest paid, interest received and dividend received are
classified as operating activities while dividend paid is a financing activity.
In case of a non-financial enterprise, as per AS-3, payment of interest and dividends
are classified as financing activities whereas receipt of interest and dividends are
classified asinvesting activities.
Taxes on Income and Gains:

Tax on operating profit should be classified as operating cash flows. Dividend tax, i.e.,
tax paid on dividend should be classified as financing activity along with dividend paid.
Capital gains tax paid on sale of fixed assets should be classified under investing
activities.
Non-cash Transactions: As per AS-3, investing and financing transactions that do
not require the use of cash or cash equivalents should be excluded from a cash flow
statement.
MULTIPLE CHOICE QUESTIONS
Q1 From the following particulars, what will be the amount of provision for tax made
duringthe year?
Provision for Taxation 31.3.2011 50,000
31.3.2012 40,000
The Company paid taxes Rs 45,000 for the year 2011-2012.
(a) Rs 45,000
(b) Rs 35,000
(c) Rs 40,000
(d) Rs 50,000
Q2. From the following information, the outflow of cash for the purchase of machinery
willbe:
Written down value of machinery as on 1.4.2011 - Rs 5,00,000Written down value of
machinery as on 31.3.2012 -Rs7,00,000 Depreciation on machinery charged during
the year Rs 60,000 Machinery having book value Rs 25,000 sold for Rs 20,000
(a) Rs 2,70,000
(b) Rs 2,80,000
(c) Rs 2,75,000
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(d) Rs 2,85,000
Q3. Which of the following transactions would result inflow of cash:
(a) Cash withdrawn from Bank for office use.

(b) Purchase of machinery worth Rs 2,00,000 and issued shares in consideration thereof.
(c) Sale of furniture for Rs 3,000 to Mr. Mohan.
(d) Cash received from Debtors Rs 6,000
Q4 . From the following information find the cash generated from operations: Operating
Profit before working capital changes 1,00,000
Depreciation on fixed assets 15,000 Loss on sale of Furniture 5,000 Interest paid
13,000
Dividend received Increase in debtors 8,000 Decrease in stock 7,000 Increase in
creditors 4,000
(a) Rs 1,18,000
(b) Rs 1,24,000
(c) Rs 1,03,000
(d) Rs 1,00,000
Q5Which of the following transactions would not create a cash flow ?
(a) A company purchased some of its own stock from a stockholder

(b) Amortization of a patent
(c) Payment of a Cash Dividend
(d) Sale of equipment at book value
Q6. Bank Overdraft and cash credit are to be treated as:
(a) Cash Equivalents

(b) Non Current Liabilities
(c) Investing Activity
(d) Short Term Borrowings
Q7. From the following information find out the inflow of cashOffice Equipment `
31st March, 2014 60,000
31st March, 2013 1,00,000
Additional Information:
Depreciation for the year 2013-14 is Rs 7,000, Purchase of office Equipment during
the yearRs 10,000 Part of Office Equipment sold at a profit of Rs 6,000
163
(a) Rs 48,000
(b) Rs 49,000
(c) Rs 44,000
(d) Rs 33,000
Q8 From the following information find out the cash flow from financing activities.
Liabilities
Proposed Dividend
31st March 2013 20,000
31st March 2014 15,000
Additional Information: Equity Share Capital raised 3,00,000 10% Debentures
Redeemed 1,00,000 Preference Share capital Redeemed 50,000. Interim Dividend
paid during the year20,000
(a) Rs 1,25,000
(b) Rs 1,00,000
(c) Rs1,50,000
(d) Rs 1,30,000
Q9 Declaration of Final Dividend would result in
(a) Outflow in Financing activities.

(b) Outflow in Operating activities.
(c) Inflow in Operating activities.
(d) No Flow of cash.
Q10. From the following information find out the cash outflow cash outflow from
financing activities.
Year - IYear - IIProposed Dividend Rs 1,20,000 1,50,000
12% Debentures Rs 4,00,000 5,00,000
Additional Information: Additional Debentures were issued at the end of year.Interim
Dividend paid 50,000.
Preference Share capital issued Rs 2,00,000.(a) Rs 82,000
(b) Rs 2,08,000
(c) Rs 2,38,000
(d) Rs 2,48000
Q11 From the following information find out the inflow of cash
31st March, 2015 31st March, 2014 Plant and
Machinery Account ` Rs 6,00,000 Rs 4,50,000
164
Accumulated Depreciation ` Rs1,60,000 Rs 1,00,000
Additional Information: Depreciation for the year 2014‐15 is Rs 80,000. During the year
Machinery was Purchased for Rs 2,50,000 and a part of asset was sold at a profit of
Rs 40,000.
(a) Rs 1,20,000;
(b) Rs 1,00,000;
(c) Rs 80,000;
(d) Rs40000
Q12 Interest collected by an automobile company selling a car on installments basis

will beclassified as
a) Investing activity
b) Operating activity
c) Financing activity
d) Cash and cash equivalents
PRACTICE QUESTIONS
1. While preparing cash flow statement what type of activity is payment of
cash to acquireDebentures by an investment company?
Ans: - Operating Activity.
2. State how cash flow statements are historical in nature?
Ans: - Cash flow statement is historical in nature because it is prepared on the Profit and Loss
A/c andBalance sheet, which is based on past transactions.
3. Under which type of activity will you classify ‗Issue of Equity Shares at Premium‘ while
preparingcash flow statement?
Ans: - Financing Activity.
4. Give any two transactions which result into Inflow of cash.
Ans: - Sale of goods for cash and cash received from trade receivables.
5. Give an example of the activity which remains financing activity for
every enterprise.Ans: - Payment of dividend on shares.
6. When is dividend received considered as Operating Activity?
Ans:- Dividend received in case of a finance company is considered as an Operating Activity.
7. When is interest received considered as Financing Activity?
Ans: - Interest received on calls- in- arrear by a company is considered as Financing Activity.
8. Dividend paid by a trading or manufacturing company is classified under which
activity whilepreparing Cash Flow Statement?
Ans: - Financing Activity.
9. Interest paid by an investment company will come under which kind of activity
while preparingCash Flow Statement?
10. Under which type of activity will you classify ‗Commission & Royalty received‘ while
165
preparingCash Flow Statement?
11. Under which type of activity will you classify interest paid on long-term borrowings
while preparingCash Flow Statement?
Ans: - Financing activity.
12. Prepare Cash Flow Statement from the following information:-

1. Following are the Balance Sheets of XYZ Ltd., as on 31st March, 2021 and 2022
Particular Note 2020-21 (₹ ) 2021-22 (₹ )

s No.
EQUITY AND LIABILITIES
(1) Shareholder’s Funds
(a) Share capital 14,00,000 10,00,000
(b) Reserves & Surplus 5,00,000 4,00,000
(2) Non Current Liabilities
Long Term borrowings 6,00,000 2,00,000
(3) Current Liabilities
Short Term Provision (Proposed 80,000 60,000
Dividend)
16,60,000 25,80,000
Total
ASSETS
(1) Non Current Assets
(a) Fixed assets
16,00,000 9,00,000
(i) Tangible assets
(2) Current Assets
(a) Inventories 2,50,000 2,00,000
(b) Trade Receivables 5,00,000 3,00,000
(c) Cash & Cash equivalents 90,000 60,000
16,60,000 25,80,000
Total
Prepare a Cash Flow Statement after taking into account the following
adjustments: Depreciation provided on machinery during the year ₹ 2, 00,000.
Solution: Cash Flow Statement
(A) Cash Flows From Operating Activities
Particulars Details (₹ ) Amt. (₹ )
166
Net Profit 1,00,000
Add: Proposed dividend 80,000
Net Profit Before Tax and Dividend 1,80,000
Adjust non-cash and non-operating
items: Add- Depreciation 2,00,000
Amortization of Intangible assets 60,000 2,60,000
Operating Profit Before Working Capital 4,40,000

Changes Add- Decrease in CA & Increase in CL
Less- Increase in CA & Decrease

in CL Inventories (50,000)
Trade Receivables (2,00,000) 2,50,000
Cash flow from Operating activities 1,90,000
B) Cash Flows From Investing Activities
Purchase of Tangible Assets 9,00,000
Cash Used in Investing Activities (9,00,000)
C) Cash Flows From Financing Activities
Proceed from Issue of Shares 4,00,000
Proceed From Issue Of 4,00,000
Debentures Dividend Paid (60,000) 7,40,000
Cash Flows From Financing Activities 7,40,000
Net Increase in Cash Flows 30,000
(A + B + C= 190,000 + (9,00,000) + 740,000)
Add: Opening Balance of Cash and Cash 60,000
Equivalents 90,000
Closing Balance of Cash and Cash
Equivalents
Working note:
Purchase of Tangible Assets:
Dr. Tangible Assets A/c Cr.
Particulars Amt. (₹ ) Particulars Amt. (₹ )
To Balance b/d 9,00,000 By 2,00,000
To Bank A/c (Purchase) 9,00,000 Depreciation 16,00,000
18,00,000 By Balance 18,00,000
b/d
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13. From the following particulars, Calculate cash flow from Operating activities:
a.
Particulars 31st 31st
March,2019(₹) March,2018 (₹)
General Reserve 1,50,000 1,00,000
Surplus, Balance in statement of profit and loss 70,000 (60,000)
10% Debenture 3,10,000 2,10,000
Trade Payables 11,75,000 75,000
Cash & Cash 1,30,000 90,000
Equivalents Goodwill 80,000 1,00,000
4,60,000 5,00,000
Machinery
1,60,000 60,000
10% non-current
2,45,000 60,000
investment Inventories
1,50,000 1,00,000
Provision for Doubtful
21,00,000 10,00,000
Debts Trade Payables
… 10,000
Discount on issue of Debentures
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Solution
CASH FLOW FROM OPERATING ACTIVITIES
Particulars Amount (₹)

Net Profit before Tax and Extraordinary (WN1) 1,80,000 (1)
Adjustment for Non-cash and Non-operating
Items:
Add: Depreciation on Machinery 40,000
Provision for doubtful debts 50,000
Goodwill Amortised 20,000
Discount on issue of Debentures 10,000
Interest on Debentures 21,000
Less: Interest on Investments
(6,000) Operating profit before working capital changes 3,15,000 (2)
Add: increase in current liabilities

Trade payables 11,00,000
Less: increase in Current Assets:

Inventories (1,85,000)
Trade Payables (11,00,000)
Cash flow from Operating Activities 1,30,000 (2)
Working notes:
Calculation of net profit before Tax and extraordinary items:
Surplus, ie., Balance in statement of profit and loss A/c (70,000 + 60,000) = 1,30,000
Add: Transfer to General Reserve = 50,000
1,80,000
Exercise
1. Preparation of cash flow statement is guided by which Accounting Standard?
2. Identify activities as operating/investing/financing/cash and cash equivalent in

each of the following
1)interest received on loans granted by financial company
2)payment of dividend on equity shares
3) rent received on building
4)bank overdraft
169
3. State whether following activities will result into inflow/outflow/no flow of cash
1) purchase of goods on credit
2) sale proceed of building
3) proposed dividend
4) purchase of fixed assets at 10% less cost price
4. prepare Operating activities
Particulars 2003(Rs.) 2004(Rs.)

Debtors 42,000 46,000
Prepaid expenses 2,000 2,700
Accrued income 1,500 1,200
Bills receivables 14,000 12,000
Income received in advance 800 1,000
Bills payable 13,000 11,000
Creditors 26,000 28,000
Outstanding expenses 8,000 6,000
Profit earned during 2004 amounted Rs. 1,00,000 after taking into account the
following adjustments:
1) profit on sale of investment is Rs. 2,000
2) loss on sale of machine Rs. 900
3) goodwill amortized Rs. 3,000
4) Depreciation charged 2,900 (Rs 1,00,600)
5. From the following Balance sheet, prepare a cash flow statement as per AS-6
Particulars 31.03.12 31.03.11
I. Equity &liabilities:
(1) shareholders
funds:
(a) share capital 1,50,000 1,20,000
(b) reserve & surplus 60,000 50,000
(2) current liabilities:
Trade payables 1,10,000 1,50,000
3,20,000 3,20,000
Total
II. Assets :
(1) Non-current
assets :
Fixed assets 80,000 50,000
(2) current assets :
(a) inventory 40,000 60,000
(b) Trade receivables 80,000 1,00,000
(c) cash & cash 1,20,000 1,10,000
equivalent
3,20,000 3,20,000
Total
A dividend of 30,000 was paid during the year 2011-12.
Answer : cash from operating activities 40,000 ; cash used
investing activities
(30,000) ; cash from financing activities nil.
170
6. ABC ltd. Provide the following information.
Calculate cash from financing activities:
particulars 31/03/2014(Rs.) 31/03/2013(rs.)
Equity share capital 15,00,000 10,00,000
10%debentures - 1,00,000
Loan from bank 2,00,000 -
Additional information
1. Interest paid on debentures Rs. 10,000.
2. dividend paid Rs. 50,000
3. During the year 2013-14, XYZ ltd. Issued bonus shares in the ratio of 2:1 by
capitalizing reserves.
(Ans- Rs.40,000)
171
Link for CBSE sample paper -
https://cbseacademic.nic.in/web_material/SQP/ClassXII_2023_24/Accountancy-SQP.pdf
Link for CBSE sample paper Marking Scheme -

https://cbseacademic.nic.in/web_material/SQP/ClassXII_2023_24/Accountancy-MS.pdf
Accountancy Class 12 Notes
172
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कें द्रीय विद्यालय संगठन

STUDY /SUPPORT MATERIAL

SHRI HEERA LAL

SMT KIRAN SHARMA

1 Partnership- fundamentals Sh. D.K. Yadav K.V. Damoh

• Answer the question as it is asked.

• Avoid writing irrelevant points

• Budget your time

• Check and double-check

 Believe in yourself. Set a goal for yourself.

Features/ characteristics of Partnership:

Two or more persons (minimum -2 maximum -50)

Contents of partnership Deed

(i) Name and address of all the partners

Rules Applicable in the absence of Partnership Deed

1. Profit – Sharing Ratio – Shared equally

2. Interest on Capital – Not allowed

3. Interest on Drawings – Not charged

4. Salary/commission to a Partner – Not allowed

 Duty to Render true accounts.

 Duty to Indemnify for fraud.

 Duty not to compete.

 Duty to properly use the property of the firm

 Duty to account for personal profits.

Maintenance of capital Accounts of partners

Dr Partners’ current Account Cr

Partners’ Capital Account

Different cases related to Interest on capital

the various cases related to interest on capital are as under.

Case-2- when partnership agreement provides that interest on capital is to be allowed.

Situation-1- in case there is a loss- Not allowed

Situation-2- In case there are sufficient profits- Fully allowed

Case-3- When partnership agreement says interest on capital is to be provided as a charge.

Opening capital= closing capital + Drawings + Withdrawal capital + Loss – Profits-

Accounting Treatment of Salary or Commission to a Partner Salary or commission to a partner is to be

(i) Commission as Percentage of Net before Charging such Commission

(ii) Commission as Percentage of Net Profit after Charging such Commission

Profit and Loss Appropriation Account

A simple format of adjustment table is given below.

Statement Showing Adjustments to be Made

Particulars X (Rs) Y (Rs) Total (Rs)

Date Particulars L.F Amt (Dr) Amt (Cr)

Difference Cases Regarding Guarantee of profits

Different cases regarding guarantee of profits are

(i) Guarantee by the Firm to a Partner

Steps Involved in the Distribution of Profits under Guarantee Arrangement are

Step 1 Calculate the actual share of profits/loss of guarantee arrangement partner.

Step 2 Calculate the guaranteed amount.

Step 3 Calculate the amount of deficiency

Deficiency = Guaranteed Amount – Actual Share of Profit

Format of Profit and Loss Appropriation Account

1. When varying amounts are withdrawn at different intervals.

2. When fixed amount is withdrawn (for Whole Year):

3. When fixed amount is withdrawn:

4. When fixed amount is withdrawn:

5. When fixed amount is withdrawn (during 06 months):

2- In the absence of Partnership Deed, the interest is allowed on partner’s capital:

(A) ₹3,000 (B) Zero (C) ₹2,500 (D) ₹1,800

(A) ₹1,66,000 (B) ₹1,70,000 (C) ₹1,30,000 (D) ₹1,34,000