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Accounting for Not-for-Profit Organisation, LEARNING OBJECTIVES, After studying this chapter,, you will be able to;, • Identiy the need for, and, nature of accounting records, relating to not-for-profit, organisations;, • List the principal financial, statements prepared by notfor-profit organisations;, • Prepare the Receipt, and, Payment Account and Income, and Expenditure Account;, • Prepare Income and, Expenditure Account and, Balance Sheet from a given, Receipt and Payment, Account;, • Explain treatment of certain, peculiar items of Receipts, and Payments such as, subscriptions from members,, special funds, legacies, sale, of old fixed assets, etc., , 1, , T, , here are certain organisations which are set up, for providing service to its members and the, public in general. Such organisations include clubs,, charitable institutions, schools, religious, organisations, trade unions, welfare societies and, societies for the promotion of art and culture. These, organisations have service as the main objective and, not the profit as is the case of organisations in, business. Normally, these organisations do not, undertake any business activity, and are managed, by trustees who are fully accountable to their, members and the society for the utilization of the, funds raised for meeting the objectives of the, organisation. Hence, they also have to maintain, proper accounts and prepare the financial statement, which take the form of Receipt and Payment, Account; Income and Expenditure Account; and, Balance Sheet. at the end of for every accounting, period (normally a financial year)., This is also a legal requirement and helps them, to keep track of their income and expenditure, the, nature of which is different from those of the business, organisations. In this chapter we shall learn about, the accounting aspects relating to not-for-profit, organisation., 1.1 Meaning and Characteristics of Not-for-Profit, Organisation, Not-for -Profit Organisations r efer to the, organisations that are for used for the welfare of the, society and are set up as charitable institutions, , 2018-19
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2, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , which function without any profit motive. Their main aim is to provide service to a, specific group or the public at large. Normally, they do not manufacture, purchase or, sell goods and may not have credit transactions. Hence they need not maintain, many books of account (as the trading concerns do) and Trading and Profit and Loss, Account. The funds raised by such organisations are credited to capital fund or, general fund. The major sources of their income usually are subscriptions from their, members donations, grants-in-aid, income from investments, etc. The main objective, of keeping records in such organisations is to meet the statutory requirement and, help them in exercising control over utilisation of their funds. They also have to prepare, the financial statements at the end of each accounting period (usually a financial, year) and ascertain their income and expenditure and the financial position, and, submit them to the statutory authority called Registrar of Societies., The main characteristics of such organisations are:, 1. Such organisations are formed for providing service to a specific group or, public at large such as education, health care, recreation, sports and so on, without any consideration of caste, creed and colour. Its sole aim is to provide, service either free of cost or at nominal cost, and not to earn profit., 2. These are organised as charitable trusts/societies and subscribers to, such organisation are called members., 3. Their affairs are usually managed by a managing/executive committee, elected by its members., 4. The main sources of income of such organisations are: (i) subscriptions, from members, (ii) donations, (iii) legacies, (iv) grant-in-aid, (v) income, from investments, etc., 5. The funds raised by such organisations through various sources are, credited to capital fund or general fund., 6. The surplus generated in the form of excess of income over expenditure, is not distributed amongst the members. It is simply added in the, capital fund., 7. The Not-for-Profit Organisations earn their reputation on the basis of, their contributions to the welfare of the society rather than on the, customers’ or owners’ satisfaction., 8. The accounting information provided by such organisations is meant for, the present and potential contributors and to meet the statutory requirement., 1.2 Accounting Records of Not-for-Profit Organisations, As stated earlier, normally such organisations are not engaged in any trading, or business activities. The main sources of their income are subscriptions from, members, donations, financial assistance from government and income from, investments. Most of their transactions are in cash or through the bank. These, , 2018-19
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Accounting for Not-for-Profit Organisation, , 3, , institutions are required by law to keep proper accounting records and keep, proper control over the utilization of their funds. This is why they usually keep, a cash book in which all receipts and payments are duly recorded. They also, maintain a ledger containing the accounts of all incomes, expenses, assets, and liabilities which facilitates the preparation of financial statements at the, end of the accounting period. In addition, they are required to maintain a stock, register to keep complete record of all fixed assets and the consumables., They do not maintain any capital account. Instead they maintain capital, fund which is also called general fund that goes on accumulating due to, surpluses generated, life membership fee, donation, legacies, etc. received, from year to year. In fact, a proper system of accounting is desirable to avoid, or minimise the chances of misappropriations or embezzlement of the funds, contributed by the members and other donors., Final Accounts or Financial Statements: The Not-for-Profit Organisations are also, required to prepare financial statements at the end of the each accounting period., Although these organisations are non-profit making entities and they are not required, to make Trading and Profit & Loss Account but it is necessary to know whether the, income during the year was sufficient to meet the expenses or not. Not only that, they have to provide the necessary financial information to members, donors, and, contributors and also to the Registrar of Societies. For this purpose, they have to, prepare their final accounts at the end of the accounting period and the general, principles of accounting are fully applicable in their preparation as stated earlier,, the final accounts of a ‘not-for-profit organisation’ consist of the following:, (i) Receipt and Payment Account, (ii) Income and Expenditure Account, and, (iii) Balance Sheet., The Receipt and Payment Account is the summary of cash and bank, transactions which helps in the preparation of Income and Expenditure Account, and the Balance Sheet. Besides, it is a legal requirement as the Receipts and, Payments Account has also to be submitted to the Registrar of Societies along, with the Income and Expenditure Account, and the Balance Sheet., Income and Expenditure Account is akin to Profit and Loss Account. The, Not-for-Profit Organisations usually prepare the Income and Expenditure, Account and a Balance Sheet with the help of Receipt and Payment Account., However, this does not imply that they do not make a trial balance. In order to, check the accuracy of the ledger accounts, they also prepare a trial balance, which facilitates the preparation of accurate Receipt and Payment Account as, well as the Income and Expenditure Account and the Balance Sheet., In fact, if an organisation has followed the double entry system they must, prepare a trial balance for checking the accuracy of the ledger accounts and it, will also facilitate the preparation of Receipt and Payment account. Income, and Expenditure Account and the Balance Sheet., , 2018-19
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4, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , 1.3 Receipt and Payment Account, It is prepared at the end of the accounting year on the basis of cash receipts and, cash payments recorded in the cash book. It is a summary of cash and bank, transactions under various heads. For example, subscriptions received from the, members on different dates which appear on the debit side of the cash book, shall, be shown on the receipts side of the Receipt and Payment Account as one item, with its total amount. Similarly, salary, rent, electricity charges paid from time to, time as recorded on the credit side of the cash book but the total salary paid, total, rent paid, total electricity charges paid during the year appear on the payment, side of the Receipt and Payment Account. Thus, Receipt and Payment Account, gives summarised picture of various receipts and payments, irrespective of whether, they pertain to the current period, previous period or succeeding period or whether, they are of capital or revenue nature. It may be noted that this account does not, show any non cash item like depreciation. The opening balance in Receipt and, Payment Account represents cash in hand/cash at bank which is shown on its, receipts side and the closing balance of this account represents cash in hand and, bank balance as at the end of the year, which appear on the credit side of the, Receipt and Payment Account. However, if it is bank overdraft at the end it shall, be shown on its debit side as the last item. Let us look at the cash book of Golden, Cricket Club given in the example to show how the total amount of each item of, receipt and payment has been worked out., Example 1, Golden Cricket Club, Cash Book (Columnar), , Dr., Date, , Receipts, , 2014, April 1 Balance b/d, April 10 Subscriptions, April 10 Entrance fees, May 20 Life membership, fees, June 12 Locker rent, July 23 Life membership, fees, Aug. 20 Donation for, building, Sept. 13 Subscriptions, (2013-14), Sept. 13 Subscription, , L.F., , Bank, Office Date, Amount Amount, (Rs.), (Rs.) 2014, , Payments, , 2014, 35,000 20,000 April 15 Insurance premium, 1,20,000, May 12 Printing and, stationery, 13,000, May 20 Postage and, 12,000, courier fees, June 16 Telephone, 42,000, expenses, 8,000, July 10 Wages and salaries, July 15 Rates and Taxes, 60,000, July 30 Govt. securities, Aug. 13 Printing and, 30,000, stationery, Aug. 15 Postage and, 45,000, courier service, Sept. 10 Lighting, , 2018-19, , Cr., L.F., , Bank, Office, Amount Amount, (Rs.), (Rs.), 15,000, 10,750, 430, 810, 22,000, 17,000, 1,00,000, 15,000, 480, 12,250
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Accounting for Not-for-Profit Organisation, Sept. 14 Entrance fees, Nov. 9 Subscription, , 10,000, 35,000, , Nov. 9, , Subscription, (2015-16), , 10,000, , Subscription, , 25,000, , Interest on, government, securities, , 18,000, , 2015, Feb. 07, Mar. 28, , 5, Sept 13 Telephone expenses, Oct. 1 Wages and salaries, Oct. 18 Printing and, stationery, Oct. 31 Govt. securities, Dec. 31 Wages and Salaries, 2015, Jan. 21 Courier charges, Feb. 2 Telephone, expenses, Mar. 10 Postage and, Courier fees, Mar. 27 Lighting, Mar. 27 Wages and Salaries, Mar. 31 Balance c/d, , 4,21,000 62,000, , Item wise Aggregation of various Receipts, Subscriptions (2014–2015), April 10, 2014, Sept. 13, 2014, Nov. 9, 2014, Feb. 7, 2015, Total, , Amount (Rs.), 1,20,000, 45,000, 35,000, 25,000, 2,25,000, , Subscriptions (2013–14), Date, , Amount (Rs.), , Sept. 13, 2014, , 30,000, , Total, , 30,000, , Subscription (2015–16), Date, , Amount (Rs), , Nov. 9, 2014, , 10,000, , Total, , 10,000, , Entrance Fees, Date, , 1,00,000, 22,000, 240, 960, 850, 14,000, 22,000, 70,000 23,400, 4,21,000 62,000, , Part A, , Date, , 830, 10,000 12,000, 13,000, , Amount (Rs), , April 10, 2014, Sept.14, 2014, , 13,000, 10,000, , Total, , 23,000, , 2018-19
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6, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , Locker Rent, Date, , Amount (Rs), , June 12, 2014, , 42,000, , Total, , 42,000, , Life Membership fee, Date, , Amount (Rs), , May 20, 2014, July 23, 2014, , 12,000, 8,000, , Total, , 20,000, , Donation for Buildings, Date, , Amount (Rs), , Aug. 20, 2014, , 60,000, , Total, , 60,000, , Interest on Government securities, Date, , Amount (Rs), , March 28, 2015, , 18,000, , Total, , 18,000, , Part B, Item wise Aggregation of various Payments, Insurance Premium, Date, , Amount (Rs), , April 15, 2014, , 15,000, , Total, , 15,000, , Printing and Stationery, Date, , Amount (Rs.), , May 12, 2014, Aug. 13, 2014, Oct. 18, 2014, , 10,750, 15,000, 13,000, , Total, , 38,750, , Lighting, Date, , Amount (Rs.), , Sept. 10, 2014, March 27, 2015, , 12,250, 14,000, , Total, , 26,250, , 2018-19
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Accounting for Not-for-Profit Organisation, , 7, , Telephone Expenses, Date, , Amount (Rs.), , June 16, 2014, , 810, , Sept. 13, 2014, , 830, , Feb. 2, 2015, , 960, , Total, , 2,600, , Rates and Taxes, Date, , Amount (Rs.), , July 15, 2014, , 17,000, , Total, , 17,000, , Government Securities, Date, , Amount (Rs.), , July 30, 2014, , 1,00,000, , Oct. 31, 2014, , 1,00,000, , Total, , 2,00,000, , Wages and Salaries, Date, , Amount (Rs.), , July 10, 2014, , 22,000, , Oct. 1, 2014, , 22,000, , Dec. 31, 2014, , 22,000, , March 30, 2015, , 22,000, , Total, , 88,000, , Postage and Courier Service, Date, , Amount (Rs.), , May 20, 2014, , 430, , Aug. 15, 2014, , 480, , Jan. 21, 2015, , 240, , March 10, 2015, , 850, , Total, , 2,000, , The above data can also be shown in the form of the respective accounts in, the ledger. A detailed illustrative list of items of receipts and payments is given, in figure 1., , 2018-19
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8, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, Figure 1, Receipts, , Payments, , 1. Donations, (a) General, (b) Specific purpose, 2. Entrance Fees, 3. Legacies, 4. Sale of Investments, 5. Sale of Fixed Assets, 6. Subscriptions from Members, 7. Life Membership Fees, 8. Sale of old Newspapers, 9. Sale of Old Sports Material, 10. Interest on Fixed Deposits, 11. Interest/ Dividend on Investments, 12. Proceed from Charity Shows, 13. Sale of Scrap, 14. Grant-in-aid, 15. Interest/Dividend on Specific, Fund Investments, 16. Miscellaneous Receipts., , 1., 2., 3., 4., 5., 6., 7., 8., 9., 10., 11., 12., 13., 14., 15., 16., 17., 18., 19., , Purchase of Fixed Assets, Purchase of Sports Material, Investment in Securities, Printing and Stationery, Postage and Courier Charges, Advertisements, Wages and Salary, Honorarium, Telephone Charges, Electricity and Water Charges, Repairs and Renewals, Upkeep of Play Ground, Conveyance Charges, Subscription for Periodicals, Audit Fees, Entertainment Expenses, Municipal Taxes, Charity, Insurance, , Receipt and Payment Account is given below:, Receipt and Payment Account for the year ending ————Receipts, Balance b/d, Cash in Hand, Cash at Bank, Subscriptions, General Donations, Sale of newspaper/, periodicals/waste paper, Sale of old sports materials, Interest on fixed deposits, Interest/Dividend on general, investments, Locker Rent, Sale of scraps, Proceeds from charity show, Miscellaneous receipts, Grant-in-aid, Legacies, Specific Donations, Sale of Investments, Sale of Fixed Assets, , Amount, (Rs.), xxx, xxx, xxx, xxx, xxx, xxx, xxx, xxx, xxx, xxx, xxx, xxx, xxx, xxx, xxx, xxx, , Payments, Balance b/d (Bank overdraft), Wages and Salaries, Rent, Rates and Taxes, Insurance, Printing and Stationery, Postage and courier, Advertisement, Sundry expenses, Telephone charges, Entertainment expenses, Audit fees, Honorarium, Repair and Renewals, Upkeep of ground, Conveyance, Newspapers and Periodicals, Purchases of Assets, Purchase of Investments, Balance c/d, , 2018-19, , Amount, (Rs.), xxx, xxx, xxx, xxx, xxx, xxx, xxx, xxx, xxx, xxx, xxx, xxx, xxx, xxx, xxx, xxx, xxx, xxx, xxx, xxx
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Accounting for Not-for-Profit Organisation, Life membership fees, Entrance fees, Receipts on account of, specific purpose funds, Interest on specific funds', investments, Balance b/d (Bank Overdraft)*, , 9, xxx, xxx, xxx, , Cash in hand, Cash at Bank*, , xxx, xxx, , xxx, xxx, xxxxx, , xxxxx, , Fig. 1.1: Format of Receipt and Payment Account, , *, , There will be either of the two amounts i.e., each at bank or bank overdraft, not both., , It may be noted that the receipts side of the Receipt and Payment Account gives a, list of revenue receipts (for past, current and future periods) as well as capital receipts., Similarly, the payments side of the Receipts and Payments Account lists the Revenue, Payments (for past, current and future periods) as well as Capital Payments., 1.3.1 Salient Features, 1. It is a summary of the cash book. Its form is identical with that of simple, cash book (without discount and bank columns) with debit and credit, sides. Receipts are recorded on the debit side while payments are entered, on the credit side., 2. It shows the total amounts of all receipts and payments irrespective of, the period to which they pertain . For example, in the Receipt and Payment, account for the year ending on March 31, 2016, we record the total, subscriptions received during 2015–16 including the amounts related, to the years 2014–2015 and 2016-2017. Similarly, taxes paid during, 2015–16 even if they relate to the years 2014–15 and 2016–2017., 3. It includes all receipts and payments whether they are of capital nature, or of revenue nature., 4. No distinction is made in receipts/payments made in cash or through, bank. With the exception of the opening and closing balances, the total, amount of each receipt and payment is shown in this account., 5. No non-cash items such as depreciation outstanding expenses accrued, income, etc. are shown in this account., 6. It begins with opening balance of cash in hand and cash at bank (or, bank overdraft) and closes with the year end balance of cash in hand/, cash at bank or bank overdraft. In fact, the closing balance in this, account (difference between the total amount of receipts and payments), which is usually a debit balance reflects cash in hand and cash at bank, unless there is a bank overdraft., , 2018-19
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10, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , 1.3.2 Steps in the Preparation of Receipt and Payment Account, 1. Take the opening balances of cash in hand and cash at bank and enter, them on the debit side. In case there is bank overdraft at the begining of, the year, enter the same on the credit side of this account., 2. Show the total amounts of all receipts on its debit side irrespective of, their nature (whether capital or revenue) and whether they pertain to, past, current and future periods., 3. Show the total amounts of all payments on its credit side irrespective of, their nature (whether capital or revenue) and whether they pertain to, past, current and future periods., 4. None of the receivable income and payable expense is to be entered in, this account as they do not involve inflow or outflow of cash., 5. Find out the difference between the total of debit side and the total of, credit side of the account and enter the same on the credit side as the, closing balance of cash/bank. In case, however, the total of the credit, side is more than that of the total of the debit side, show the difference on, the debit as bank overdraft and close the account., From the following information based on the data assimilated from the cash, book given in example 1, at page 4, the Receipt and Payment Account of Golden, Cricket Club for the year ended on March 31, 2015 will be prepared as follows:, Summary of Cash Book, Details, , Amount, (Rs.), , Cash in hand as on April 1, 2014, Cash at bank as on April 1, 2014, Subscription:, Rs., 2013-14, 30,000, 2014-15, 2,25,000, 2015-16, 10,000, Donation for Building, Entrance fees, Life membership fee, Printing and Stationery, Lighting, Rates and Taxes, Telephone charges, Postage and courier, Wages and Salaries, Insurance Premium, Interest on government securities, Locker rent, Purchase of government securities, Cash in hand as on March 31, 2015, Cash at bank as on March 31, 2015, , 2018-19, , 20,000, 35,000, , 2,65,000, 60,000, 23,000, 20,000, 38,750, 26,250, 17,000, 2,600, 2,000, 88,000, 15,000, 18,000, 42,000, 2,00,000, 23,400, 70,000
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Accounting for Not-for-Profit Organisation, , 11, , Receipt and Payment Account for the year ending March 31, 2015, Dr., Receipts, Cash in hand as on, April 1, 2014, Cash at bank as on, April 1, 2014, Subscription:, 2013–14, 30,000, 2014–15, 2,25,000, 2015–16, 10,000, Donation for building, Entrance fees, Life membership fee, Interest on investment in, Government securities, Locker rent, , Cr., Amount, (Rs.), 20,000, 35,000, , 2,65,000, 60,000, 23,000, 20,000, 18,000, , Payments, Printing and Stationery, Lighting, Rates and Taxes, Telephone charges, Postage and Courier, Wages and Salaries, Insurance Premium, Purchase of govt. securities, Cash in hand as on, March 31, 2015, Cash at bank as on, March 31, 2015, , Amount, (Rs.), 38,750, 26,250, 17,000, 2,600, 2,000, 88,000, 15,000, 2,00,000, 23,400, 70,000, , 42,000, 4,83,000, , 4,83,000, , Illustration 1, From the following particulars relating to Silver Point, prepare a Receipt and, Payment account for the year ending March 31, 2017., Particulars, Opening cash balance, Opening bank balance, Subscriptions collected for:, 2015-16, Rs. 500, 2016-17, Rs. 7,600, 2017-18, Rs. 900, Sale of refreshments, Entrance fees received, , Amount, (Rs.), 1,000, 7,200, , 9,000, 1,000, 1,000, , Particulars, Sale of old sports materials, Donation received for pavilion, Rent paid, Sports materials purchases, Purchase of refreshments, Expenses for maintenance, of tennis court, Salary paid, Tournament expenses, Furniture purchased, Office expenses, Closing cash in hand, , 2018-19, , Amount, (Rs.), 1,200, 4,600, 3,000, 4,800, 600, 2,000, 2,500, 2,400, 1,500, 1,200, 400
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12, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , Solution, Books of Silver Point, Receipt and Payment Account, for the year ending March 31, 2017, Dr., , Receipts, Balance b/d, Cash, Bank, Subscriptions, 2015-16, 500, 2016-17, 7,600, 2017-18, 900, Sale of refreshments, Entrance fees, Sale of old sports materials, Donation for pavilion, , Cr., , Amount, (Rs.), 1,000, 7,200, , 9,000, 1,000, 1,000, 1,200, 4,600, , Payments, Rent, Sports materials purchased, Purchase of refreshments, Maintenance expenses for, tennis court, Salary, Tournament expenses, Furniture purchased, Office expenses, Balance c/d, Cash, Bank (balancing figure), , 25,000, , Amount, (Rs.), 3,000, 4,800, 600, 2,000, 2,500, 2,400, 1,500, 1,200, 400, 6,600, 25,000, , 1.4 Income and Expenditure Account, It is the summary of income and expenditure for the accounting year. It is just, like a profit and loss account prepared on accrual basis in case of the business, organisations. It includes only revenue items and the balance at the end, represents surplus or deficit. The Income and Expenditure Account serves, the same purpose as the profit and loss account of a business organisation, does. All the revenue items relating to the current period are shown in this, account, the expenses and losses on the expenditure side and incomes and, gains on the income side of the account. It shows the net operating result in, the form of surplus (i.e. excess of income over expenditure) or deficit (i.e. excess, of expenditure over income), which is transferred to the capital fund shown in, the balance sheet., The Income and Expenditure Account is prepared on accrual basis with the, help of Receipts and Payments Account along with additional information, regarding outstanding and prepaid expenses and depreciation etc. Hence, many, items appearing in the Receipts and Payments need to be adjusted. For example,, as shown in Example 1, (Page No. 10) subscription amount of Rs.2, 65,000 received, during the year 2014-15 appearing on the receipts side of the Receipt and Payment, Account includes receipts for the periods other than the current period. But the, subscription amount of Rs. 2,25,000 pertaining to the current year only will be, shown as income in Income and Expenditure Account for the year 2014-15., , 2018-19
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Accounting for Not-for-Profit Organisation, , 13, , 1.4.1 Steps in the Preparation of Income and Expenditure Account, Following steps may be helpful in preparing an Income and Expenditure Account, from a given Receipt and Payment Account:, 1. Persue the Receipt and Payment Account thoroughly., 2. Exclude the opening and closing balances of cash and bank as they, are not an income., 3. Exclude the capital receipts and capital payments as these are to be, shown in the Balance Sheet., 4. Consider only the revenue receipts to be shown on the income side of, Income and Expenditure Account. Some of these need to be adjusted by, excluding the amounts relating to the preceding and the succeeding, periods and including the amounts relating to the current year not yet, received., 5. Take the revenue expenses to the expenditure side of the Income and, Expenditure Account with due adjustments as per the additional, information provided relating to the amounts received in advance and, those not yet received., 6. Consider the following items not appearing in the Receipt and Payment, Account that need to be taken into account for determining the surplus/, deficit for the current year :, (a) Depreciation of fixed assets., (b) Provision for doubtful debts, if required., (c) Profit or loss on sale of fixed assets., Now you will observe how the income and expenditure account is prepared, from the receipts and payments account given in example 1, on page 10., Income and Expenditure Account, for the year ending on March 31, 2015, Dr., , Expenditure, Printing and Stationery, Lighting, Rates and Taxes, Telephone charges, Postage and courier charges, Wages and Salaries, Insurance Premium, Surplus (Excess of income, over expenditure), , Cr., , Amount, (Rs.), 38,750, 26,250, 17,000, 2,600, 2,000, 88,000, 15,000, 1,18,400, , Income, Subscriptions, Entrance fees, Interest on investment, in government securities, Locker rent, , 3,08,000, , 2018-19, , Amount, (Rs.), 2,25,000, 23,000, 18,000, 42,000, , 3,08,000
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14, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , Note that1. Opening and closing cash/bank balances have been excluded., 2. Payment for purchase of Government securities being capital expenditure has, been excluded., 3. Amount of subscriptions received for the year 2013-14 and 2015-16 have been excluded., 4. Life membership fee is an item of capital receipt and so excluded., 5. Donation for building is a receipt for a specific purpose and so excluded., , Illustration 2, From the Receipt and Payment Account given below, prepare the Income and, Expenditure Account of Clean Delhi Club for the year ended March 31, 2017., Receipt and Payment Account for the year ending March 31, 2017, Dr., , Cr., , Receipts, Balance b/d, (Cash in hand), Subscriptions, Entrance Fees, Donations, Rent of hall, Sale of investments, , Amount, (Rs.), 3,200, 22,500, 1,250, 2,500, 750, 3,000, , Payments, Salary, Rent, Electricity, Taxes, Printing and Stationery, Sundry expenses, Books purchased, Govt. bonds purchased, Fixed deposit with bank, (on 31.03.2017), Balance c/d, Cash in hand, 400, Cash at bank, 1,500, , 33,200, , Amount, (Rs.), 1,500, 800, 3,500, 1,700, 380, 920, 7,500, 10,000, 5,000, , 1,900, 33,200, , Solution, Books of Clean Delhi Club, Income and Expenditure Account for the year ending March 31, 2017, Dr., , Expenditure, Salary, Rent, Electricity, Taxes, Printing & Stationery, Sundray Expenses, Surplus, (excess of income over, expenditure), , Cr., , Amount, (Rs.), 1,500, 800, 3,500, 1,700, 380, 920, 18,200, , Income, Subscriptions, Entrance fees, Donation, Rent of hall, , 27,000, , 2018-19, , Amount, (Rs.), 22,500, 1,250, 2,500, 750, , 27,000
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Accounting for Not-for-Profit Organisation, , 15, , Illustration 3, From the following Receipt and Payment Account for the year ending March 31,, 2015 of Negi's Club, prepare Income and Expenditure Account for the same, period:, Receipt and Payment Account for the year ending March 31, 2015, Dr., , Cr., , Expenditure, , Amount, (Rs.), , Balance c/d Bank, Subscriptions, 2013, 1,500, 2014, 10,000, 2015, 500, Donation, Hall rent, Interest on bank deposits, Entrance fees, , 25,000, , 12,000, 2,000, 300, 450, 1,000, , Income, Purchase of furniture (1.7.14), Salaries, Telephone expenses, Electricity charges, Postage and Stationery, Purchase of books, Entertainment expenses, Purchase of 5% government, papers (1.7.14), Miscellaneous expenses, Balance c/d:, Cash, Bank, , 40,750, , Amount, (Rs.), 5,000, 2,000, 300, 600, 150, 2,500, 900, 8,000, 600, 300, 20,400, 40,750, , The following additional information is available:, (i) Salaries outstanding – Rs. 1,500;, (ii) Entertainment expenses outstanding – Rs. 500;, (iii) Bank interest receivable – Rs. 150;, (iv) Subscriptions accrued – Rs. 400;, (v) 50 per cent of entrance fees is to be capitalised;, (vi) Furniture is to be depreciated at 10 per cent per annum., Solution, Books of Negi's Club, Income and Expenditure Account for the year ending 31.3.2015, Dr., , Cr., , Expenditure, Salaries, Add: Outstanding, Telephone expenses, Electricity charges, Postage and Stationery, , Amount, (Rs.), 2,000, 1,500, , 3,500, 300, 600, 150, , Income, Subscriptions, Donation, Entrance Fees (50% of Rs. 1,000), Bank interest, 450, Add: Outstanding interest 150, , 2018-19, , Amount, (Rs.), 10,400, 2,000, 500, 600
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16, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , Entertainment expenses, Add: Outstanding, expenses, Miscellaneous expenses, Depreciation on furniture, Surplus, (Excess of Income over, Expenditure), , 900, 500, , 1,400, , Interest on investment, Hall rent, , 200, 300, , 600, 375, 7,075, , 14,000, , 14,000, , 1.4.2 Distinction between Income and Expenditure Account and Receipt, and Payment Account, Based upon discussion made in regard to the Receipts and Payments Account, and the Income and Expenditure Account we make the distinction between, Income and Expenditure Account and Receipts and Payments Account in the, tabular form:, Basis of distinction, Account, , Income and Expenditure, , Receipt and Payment, Account, , Nature, , It is like as profit and loss, account., , It is the summary of the cash, book., , Nature of Items, , It records income and, expenditure of revenue, nature only., , It records receipts and, payments of revenue as well as, capital nature., , Period, , Income and expenditure, items relate only to the, current period., , Receipts and payments may, also relate to preceding and, succeeding periods., , Debit side, , Debit side of this account, records expenses and losses., , Debit side of this account, records the receipts., , Credit side, , Credit side of this account, records income and gains., , Credit side of this account, records the payments., , Depreciation, , Includes depreciation., , Does not includes, depreciation., , Opening Balance, , There is no opening balance., , Balance in the beginning, represents cash in hand /cash, at bank or overdraft at, the beginning., , Closing Balance, , Balance at the end represents excess of income, over expenditure or viceversa., , Balance at the end represents, cash in hand at the end and, bank balance (or bank, overdraft)., , 2018-19
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Accounting for Not-for-Profit Organisation, , 17, , 1.5 Balance Sheet, ‘Not-for-Profit’ Organisations prepare Balance Sheet for ascertaining the financial, position of the organisation. The preparation of their Balance Sheet is on the same, pattern as that of the business entities. It shows assets and liabilities as at the end, of the year. Assets are shown on the right hand side and the liabilities on the left, hand side. However, there will be a Capital Fund or General Fund in place of the, Capital and the surplus or deficit as per Income and Expenditure Account which, is either added to/deducted from the capital fund, as the case may be. It is also, a common practice to add some of the capitalised items like legacies, entrance, fees and life membership fees directly in the capital fund., Besides the Capital or General Fund, there may be other funds created for, specific purposes or to meet the requirements of the contributors/donors such, as building fund, sports fund, etc. Such funds are shown separately in the, liabilities side of the balance sheet., Some times it becomes necessary to prepare Balance Sheet as at the beginning, of the year in order to find out the opening balance of the capital/general fund., 1.5.1 Preparation of Balance Sheet, The following procedure is adopted to prepare the Balance Sheet:, 1. Take the Capital/General Fund as per the opening balance sheet and, add surplus from the Income and Expenditure Account. Further, add, entrance fees, legacies, life membership fees, etc. received during the year., 2. Take all the fixed assets (not sold/discarded/or destroyed during the, year) with additions (from the Receipts and Payments account) after, charging depreciation (as per Income and Expenditure account) and show, them on the assets side., 3. Compare items on the receipts side of the Receipts and Payments Account, with income side of the Income and Expenditure Account. This is to, ascertain the amounts of: (a) subscriptions due but not yet received:, (b) incomes received in advance; (c) sale of fixed assets made during the, year; (d) items to be capitalised (i.e. taken directly to the Balance Sheet), e.g. legacies, interest on specific fund investment and so on., 4. Similarly compare, items on the payments side of the Receipt and, Payment Account with expenditure side of the Income and, Expenditure Account. This is to ascertain the amounts if: (a), outstanding expenses; (b) prepaid expenses; (c) purchase of a fixed, asset during the year; (d) depreciation on fixed assets; (e) stock of, consumable items like stationery in hand; (f) Closing balance of cash, in hand and cash at bank as, and so on., A proforma Balance Sheet is given for the proper understanding of preparing, the balance sheet., , 2018-19
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18, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, Balance Sheet of as on ..............., , Liabilities, , Amount, (Rs.), , Capital fund:, Opening Balance, Add: Surplus, OR, Less: Deficit, Add: Capitalised Income of the, Current Year on account of:, Legacies, Entrance Fees, Life Membership Fees, Closing Balance, Special Fund/Donations:, Previous Balance (If any ), Add: Receipts for the item, during the period, Add: Income earned on, fund/Donations’, Investments, Less: Expenses paid out of, fund/Donations, Net Balance, Creditors for Purchases, and/or supplies, Bank Overdraft, Outstanding Expenses:, Income received in Advance, , ......, , ......, ......, ......, ......, ......, , Assets, , Cash in hand and /or Cash, at Bank, Outstanding Incomes, Prepaid Expenses, Stock of Consumable Items:, Previous Balance, Add: Purchases in the current, period, Less: Value consumed during, the period, Previous Balance, Add: Purchases in the current, period, Less: Book Value of the Asset, sold/disposed off, Closing Balance, , Amount, (Rs.), ......, ......, ......, , ......, ......, , ......, , ......, ......, ......, ......, ......, , ......, , Fig. 1.2: Proforma Balance Sheet, , Illustration 4, From the following Receipt and Payment Account and additional information, relating to Excellent Cricket Club, prepare Income and Expenditure Account, for the year ended March 31, 2015 and Balance Sheet as on date., Dr., , Receipts, Balance b/d (Cash in Hand), Member’s subscriptions, Member’s admission fee, Sale of old sports materials, Hire of ground, Subscription for tournament, Life membership fee, Donations, , Cr., , Amount, (Rs.), 18,000, 2,50,000, 15,000, 2,500, 28,000, 60,000, 20,000, 6,00,000, , Payments, Balance b/d (bank overdraft), Upkeep of field and pavilion, Tournament expenses, Rates and Insurance, Telephone, Postage and Courier charges, Printing and Stationery, Miscellaneous expenses, , 2018-19, , Amount, (Rs.), 16,000, 1,15,000, 40,000, 10,000, 3,500, 4,000, 26,000, 4,400
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Accounting for Not-for-Profit Organisation, , 19, Secretary’s honorarium, Grass seeds, Investments, Purchase of sports materials, Balance c/d, , 9,93,500, , 30,000, 2,600, 6,00,000, 68,000, 74,000, 9,93,500, , Assets at the beginning of the year were:, Rs., 5,00,000, 18,000, 85,000, 11,000, 28,000, , Play ground, Cash in hand, Stock of sports materials, Printing and Stationery, Subscriptions receivable, , Donations and Surplus on account of tournament are to be kept in Reserve for a, permanent pavilion. Subscriptions due on March 31, 2015 were Rs. 42,000. Write-off fifty, per cent of sports materials and thirty per cent of printing and stationery., , Solution, Books of Excellent Cricket Club, Income and Expenditure Account for the year ending on March 31, 2015, Dr., , Expenditure, , Cr., , Amount, (Rs.), , Upkeep of field and pavilion, Rates and Insurance, Telephone, Postage and Courier charges, Printing & stationery, 26,000, Add: Opening stock, 11,000, Available for use, 37,000, , 1,15,000, 10,000, 3,500, 4,000, , Less: Closing stock, 25,900, Stationery consumed, Miscellaneous expenses, Secretary’s honorarium, Grass seeds, Sports materials consumed:, Opening stock, 85,000, Add: Purchases, 68,000, 1,53,000, Less: Closing stock, 76,500, Surplus, (Excess of income over, expenditure), , 11,100, 4,400, 30,000, 2,600, , Income, Subscriptions, Add: Outstanding, (closing), Less: Outstanding, (opening), Admission fees, , Amount, (Rs.), 2,50,000, 42,000, 2,92,000, 28,000, , Sale of old sports material, Rent of hall, , 2,64,000, 15,000, 2,500, 28,000, , 76,500, 52,400, , 3,09,500, , 3,09,500, , Note: Since the opening balance of the capital fund is not given, the same has been, ascertained by preparing opening balance sheet., , 2018-19
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20, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, Balance Sheet of Excellent Cricket Club as on March 31, 2015, , Liabilities, , Amount, (Rs.), , Capital Fund, Add: Surplus, , 6,26,000, 52,400, 6,78,400, Add: Life membership, fee, 20,000, Pavilion Fund:, Surplus from Tournament, (Rs.60,000-40,000) 20,000, Donation, 6,00,000, , 6,98,400, , Assets, , Amount, (Rs.), , Cash in hand, Outstanding subscriptions, Stock of sports materials, Stock of printing, and stationery, Investments, Play ground, , 74,000, 42,000, 76,500, 25,900, 6,00,000, 5,00,000, , 6,20,000, 13,18,400, , 13,18,400, , Balance Sheet of Excellent Cricket Club as on March 31, 2014, Liabilities, Bank overdraft, Capital/General fund, (balancing figure), , Amount, (Rs.), 16,000, 6,26,000, , Assets, Cash in hand, Outstanding subscription, Stock of sports materials, Printing and Stationery, Play ground, , 6,42,000, , Amount, (Rs.), 18,000, 28,000, 85,000, 11,000, 5,00,000, 6,42,000, , Test your Understanding – I, State with reasons whether the following statements are TRUE or FALSE:, (i) Receipt and Payment Account is a summary of all capital receipts and payments., (ii) If there appears a sports fund, the expenses incurred on sports activities will, be shown on the debit side of Income and Expenditure Account., (iii) The balancing figure on credit side of Income and Expenditure Account denotes, excess of expenses over incomes., (iv) Scholarships granted to students out of funds provided by government will be, debited to Income and Expenditure Account., (v) Receipt and Payment Account records the receipts and payments of revenue, nature only., (vi) Donations for specific purposes are always capitalized., (vii) Opening balance sheet is prepared when the opening balance of capital fund is, not given., (viii) Surplus of Income and Expenditure Account is deducted from the capital/, general fund., (ix) Receipt and Payment Account is equivalent to profit and loss account., (x) Receipt and Payment Account does not differentiate between capital and, revenue receipts., , 2018-19
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Accounting for Not-for-Profit Organisation, , 21, , 1.6 Some Peculiar Items, Final accounts of the Not-for-Profit organisations are prepared on the similar, pattern as that of a business orgnisation. However, a few items of income and, expenses of such orgnisations are somewhat different in nature and need special, attention in their treatment in final accounts. They are peculiar to these, orgnisations. Some of the common peculiar items are explained as under:, Subscriptions: Subscription is a membership fee paid by the member on annual, basis. This is the main source of income of such orgnisations. Subscription paid, by the members is shown as receipt in the Receipt and Payment Account and as, income in the Income and Expenditure Account. It may be noted that Receipt, and Payment Account shows the total amount of subscription actually received, during the year while the amount shown in Income and Expenditure Account is, confined to the figure related to the current period only irrespective of the fact, whether it has been received or not. For example, a club received Rs. 20,000 as, subscriptions during the year 2016-17 of which Rs.3,000 relate to year, 2015-16 and Rs.2,000 to 2017-18, and at the end of the year 2016-17 Rs.6,000, are still receivable. In this case, the Receipt and Payment Account will show, Rs.20,000 as receipt from subscriptions. But the Income and Expenditure, Account will show Rs. 21,000 as income from subscriptions for the year, 2016-17, the calculation of which is given as below:, Subscriptions received in 2016-17, Less: Subscriptions for the year 2015-16, Less: Subscription for the year 2017-18, Add: Subscriptions outstanding for the year 2016-17, Income from subscriptions for the year 2016-17, , Rs., 20,000, 3,000, 17,000, 2,000, 15,000, 6,000, 21,000, , The above amount of subscriptions to be shown as income can also be, ascertained by preparing the subscription account as follows:, Subscription Account, Dr., , Cr., , Date Particulars, Balance b/d, (outstanding at the, beginning), Income and Expenditure, Account (balancing figure), Balance c/d, (received in advance), , J.F., , Amount, (Rs.), , Date Particulars, , 3,000, , 21,000, 2,000, 26,000, , 2018-19, , Balance b/d, (received in advance, during previous year), Cash (subscription, received), Balance c/d, (outstanding at the end), , J.F. A m o u n t, (Rs.), Nil, , 20,000, 6,000, 26,000
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22, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , Illustration 5, As per Receipt and Payment Account for the year ended on March 31, 2017, the, subscriptions received were Rs. 2,50,000. Additional Information given is as, follows:, 1. Subscriptions Outstanding on 1.4.2016 Rs. 50,000, 2. Subscriptions Outstanding on 31.3.2017 Rs.35,000, 3. Subscriptions Received in Advance as on 1.4.2016 Rs.25,000, 4. Subscriptions Received in Advance as on 31.3.2017 Rs.30,000, Ascertain the amount of income from subscriptions for the year 2016–17, and show how relevant items of subscriptions appear in opening and closing, balance sheets., Solution, Details, , Amount, (Rs.), , Subscriptions Received as per Receipt and Payment account, Add: Subscriptions outstanding on 31.3.2017, Add: Subscriptions received in advance on 1.4.2016, , 2,50,000, 35,000, 25,000, , Less: Subscriptions outstanding on 1.4.2016, , 3,10,000, 50,000, , Less: Subscriptions received in advance on 31.3.2017, , 2,60,000, 30,000, , Income from subscription for the year 2016–17, , 2,30,000, , Alternately, income received from subscriptions can be calculated by, preparing a Subscriptions account as under., Subscription Account, Dr., , Cr., , Date Particulars, Balance b/d (outstanding), Income and, Expenditure Account, (balancing figure), Balance c/d (advance), , J.F. Amount Date Particulars, (Rs.), 50,000, 2,30,000, 30,000, 3,10,000, , Balance b/d (advance), Receipts and Payments A/c, Balance c/d (outstanding), , J.F., , Amount, (Rs.), 25,000, 2,50,000, 35,000, , 3,10,000, , Relevant items of subscription can be shown in the opening and closing, balance sheet as under:, , 2018-19
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Accounting for Not-for-Profit Organisation, , 23, , Balance Sheet as on March 31, 2014, Liabilities, , Amount, (Rs.), , Subscriptions received in advance, , 25,000, , Assets, , Amount, (Rs.), , Subscription outstanding, , 50,000, , *Relevant data only, Balance Sheet as on March 31, 2015, Liabilities, , Amount, (Rs.), , Subscriptions received in advance, , 30,000, , Assets, , Amount, (Rs.), , Subscriptions outstanding, , 35,000, , *Relevant data only, , Illustration 6, Extracts of Receipt and Payment Account for the year ended March 31, 2017, are given below:, Receipt, Subscriptions, , (Rs.), , 2015-16, 2016-17, 2017-18, , 2,500, 26,750, 1,000, 30,250, , Additional Information:, Total number of members: 230., Annual membership fee: Rs. 125., Subscriptions outstandings on April 1, 2016: Rs. 2,750., Prepare a statement showing all relevant items of subscriptions viz., income, advance,, outstandings, etc., , Solution, Amount of subscription due for the year 2016-17 irrespective of cash, Rs. 28,750 (i.e. Rs. 125 × Rs. 230)., Details, , Amount, (Rs.), , Subscriptions received as per Receipts and Payments Account, Add: Subscriptions outstanding on March 31, 2016, Add: Subscriptions received in advance on April 1, 2016, , 30,250, 2,250, NIL, , Less: Subscriptions outstanding on April 1, 2016, , 32,500, 2,750, , Less: Subscriptions received in advance on March 31, 2017, , 29,750, 1,000, , Income from Subscription for the year 2016-17. (125×230), , 28,750, , Note: The amount of subscriptions outstanding as on 01-04-2014 has been ascertained, as follows:, , 2018-19
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24, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, Details, , (Rs.), , (Rs.), , (i) Outstanding as on 01.04.2016, Received for 2015–16, (ii) Due for 2016–17 (125×230), Received for 2016–17, , 2,750, 2,500, 28,750, 26,750, , 250, 2,000, 2,250, , Outstanding as on 31-3-2017, , Illustration 7, From the following extract of Receipt and Payment Account and the additional, information, compute the amount of income from subscriptions and show as, how they would appear in the Income and Expenditure Account for the year, ending March 31, 2015 and the Balance Sheet., Receipt and Payment Account for the year ending March 31, 2015, Receipts, Amount Payments, Amount, (Rs.), (Rs.), Subscriptions:, 2013-14, 2014-15, 2015-16, , 7,000, 30,000, 5,000, , 42,000, , Additional Information:, 1. Subscriptions outstanding March 31, 2014, 2. Total Subscriptions outstanding March 31, 2015, 3. Subscriptions received in advance, as on March 31, 2014, , Rs., 8,500, 18,500, 4,000, , Solution, Income and Expenditure Account, for the year ending on March 31, 2015, Expenditure, , Amount, (Rs.), , Income, Subscriptions, Received for 2014-15, Add: Outstanding for 2014-15, Add: Received in advance for, 2014-15, , Amount, (Rs.), 30,000, 17,000, 4,000, 51,000, , Note: Total amount of subscriptions outstanding as on 31-3-2015 are Rs. 18,500. This,, includes Rs. 1,500 (Rs. 8,500 – Rs. 7,000) for subscriptions still outstanding for, 2013–14. Hence, the subscriptions outstanding for 2014–15 are Rs. 17,000, (Rs. 18,500 – Rs. 1,500)., , 2018-19
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Accounting for Not-for-Profit Organisation, , 25, , Balance Sheet (Relevant Data) as on March 31, 2015, Liabilities, , Amount, (Rs.), , Subscription Received in, Advance for 2014-15, 5,000, , Assets, Subscription Outstanding:, 2013-14, 1,500, 2014-15, 1,7000, , Amount, (Rs.), , 18,500, , *Relevant data only, Do it Yourself, 1. Subscriptions received by the health club during the year 2015 were as under:, Rs., 2014, 3,000, 2015, 96,000, 2016, 2,000, 1,01,000, Rs., Subscriptions Outstanding as on 31.12.14, 5,000, Subscriptions Outstanding as on 31.12.15, 12,000, Subscriptions received in advance in 2014 for 2015, 5,000, Calculate the amount of subscriptions to be shown on the income side of Income, and Expenditure A/c., 2. During the year 2015, subscriptions received by a sports club were Rs. 80,000., These included Rs. 3,000 for the year 2014 and Rs.6,000 for the year 2016., On March 31, 2016 the amount of subscriptions due but not received was, Rs.12,000. Calculate the amount of subscriptions to be shown in Income, and Expenditure Account as income from subscription., 3. Subscriptions received during the year ended December 31, 2015 by Royal, Club were as under:, Rs., 2014, 3,000, 2015, 93,000, 2016, 2,000, 98,000, , The club has 500 members each paying @ Rs.200 as annual subscription., Subscriptions outstanding as on March 31, 2016 are Rs. 6,000. Calculate, the amount of subscriptions to be shown as income in the Income and, Expenditure Account for the year ended March 31, 2016 and show the, relevant data in the Balance Sheet as on date., , Donations: It is a sort of gift in cash or property received from some person or, organisation. It appears on the receipts side of the Receipts and Payments, Account. Donation can be for specific purposes or for general purposes., (i) Specific Donations: If donation received is to be utilised to achieve specified, purpose, it is called Specific Donation. The specific purpose can be an, , 2018-19
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26, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , extension of the existing building, construction of new computer, laboratory, creation of a book bank, etc. Such donation is to be capitalised, and shown on the liabilities side of the Balance Sheet irrespective of the, fact whether the amount is big or small. The intention is to utilise the, amount for the specified purpose only., (ii) General Donations: Such donations are to be utilised to promote the, general purpose of the organisation. These are treated as revenue receipts, as it is a regular source of income hence, it is taken to the income side of, the Income and Expenditure Account of the current year., Legacies: It is the amount received as per the will of a deceased person. It appears, on the receipts side of the Receipt and Payment Account and is directly added to, capital fund/general fund in the balance sheet, because it is not of recurring, nature. However, legacies of a small amount may be treated as income and shown, on the income side of the Income and Expenditure Account., Life Membership Fees: Some members prefer to pay lump sum amount as life, membership fee instead of paying periodic subscription. Such amount is treated, as capital receipt and credited directly to the capital/general fund., Entrance Fees: Entrance fee also known as admission fee is paid only once by, the member at the time of becoming a member. In case of organisations like clubs, and some charitable institutions, is limited and the amount of entrance fees is, quite high. Hence, it is treated as non-recurring item and credited directly to, capital/general fund. However, for some organisations like educational institutions,, the entrance fees is a regular income and the amount involved may also be small., In their case, it is customary to treat this item as a revenue receipt. However, if, there is specific instruction, it is advisable to treat the entire amount as capital, receipt and the relevant amount should be directly added to capital/general fund., Sale of old asset: Receipts from the sale of an old asset appear in the Receipts, and Payments Account of the year in which it is sold. But any gain or loss on the, sale of asset is taken to the Income and Expenditure Account of the year. For, example, if an item furniture with a book value of Rs. 800 is sold for Rs. 700,, this amount of Rs. 700 will be shown as receipt in Receipts and Payments, Account and Rs. 100 on the expenditure side of the Income and Expenditure, Account as a loss on sale of old asset and while showing furniture in the balance, sheet Rs. 800 will be deducted from its total book value., Sale of Periodicals: It is an item of recurring nature and shown as the income, side of the Income and Expenditure Account., Sale of Sports Materials: Sale of sports materials (used materials like old balls,, bats, nets, etc) is the regular feature with any Sports Club. It is usually shown, as an income in the Income and Expenditure Account., , 2018-19
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Accounting for Not-for-Profit Organisation, , 27, , Payments of Honorarium: It is the amount paid to the person who is not the, regular employee of the institution. Payment to an artist for giving performance, at the club is an example of honorarium. This payment of honorarium is shown, on the expenditure side of the Income and Expenditure Account., Endowment Fund: It is a fund arising from a bequest or gift, the income of, which is devoted for a specific purpose. Hence, it is a capital receipt and shown, on the Liabilities side of the Balance Sheet as an item of a specific purpose fund., Government Grant: Schools, colleges, public hospitals, etc. depend upon, government grant for their activities. The recurring grants in the form of, maintenance grant is treated as revenue receipt (i.e. income of the current year), and credited to Income and Expenditure account. However, grants such as, building grant are treated as capital receipt and transferred to the building fund, account. It may be noted that some Not-for-Profit organisations receive cash, subsidy from the government or government agencies. This subsidy is also, treated as revenue income for the year in which it is received., Special Funds, The Not-for-Profit Organisations office create special funds for certain purposes/, activities such as 'prize funds', 'match fund' and 'sports fund', etc. Such funds, are invested in securities and the income earned on such investments is added, to the respective fund, not credited to Income and Expenditure Account., Similarly, the expenses incurred on such specific purposes are also deducted, from the special fund. For example, a club may maintain a special fund for, sports activities. In such a situation, the interest income on sports fund, investments is added to the sports fund and all expenses on sports deducted, therefrom. The special funds are shown in balance sheet. However, if, after, adjustment of income and expenses the balance in specific or special fund is, negative, it is transferred to the debit side of the Income and Expenditure, Account or adjusted as per prescribed directions. (see Illustrations 8 and 9.), Illustration 8, Show how you would deal with the following items in the financial statements of, a Club:, Details, , Debit, Amount, (Rs.), , Prize Fund, Prize Fund Investments, Income from Prize Fund Investments, Prizes awarded, , 2018-19, , Credit, Amount, (Rs.), 80,000, , 80,000, 8,000, 6,000
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28, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , Solution, Balance Sheet as on……….., Liabilities, , Amount, (Rs.), , Prize fund, 80,000, Add: Income from, 8,000, Investments, 88,000, Less: Prizes Awarded 6,000, , Assets, , Amount, (Rs.), , Prize Fund Investments, , 80,000, , 82,000, , Illustration 9, (a) Show the following information in financial statements of a ‘ Not-for-Profit’, Organisation:, Details, , Amount, (Rs.), , Match Expenses, Match Fund, Donation for Match Fund, Sale of Match tickets, , 16,000, 8,000, 5,000, 7,000, , (b) What will be the effect, if match expenses go up by Rs. 6,000 other things, remaining the same?, Solution, (a), Balance Sheet as on………..*, Liabilities, Match fund, 8,000, Add: Donation, 5,000, (Specific), Add: Sale of Match, 7,000, Tickets, 20,000, Less: Match Expenses 16,000, , Amount, (Rs.), , Assets, , Amount, (Rs.), , 4,000, 4,000, , * Only relevant data., (b), If match expenses go up by Rs. 6,000, the net balance of the match fund, becomes negative i.e. Debit exceeds the Credit, and the resultant debit balance, of Rs. 2,000 shall be charged to the Income and Expenditure Account of that, year., , 2018-19
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Accounting for Not-for-Profit Organisation, , 29, , Test your Understanding – II, How would you treat the following items in the case of a ‘not-for-profit’ organisation?, 1. Tournament Fund Rs. 40,000. Tournament Expenses Rs. 14,000. Receipts, from Tournament Rs. 16,000., 2. Table Tennis match expenses Rs. 4,000., 3. Prize Fund Rs. 22,000. Interest on Prize fund Investments Rs. 3,000. Prizes, given Rs. 5,000. Prize fund Investments Rs. 18,000., 4. Receipts from Charity Show Rs. 7,000. Expenses on Charity Show Rs. 3,000., , Illustration 10, Extract of a Receipt and Payment Account for the year ended on March 31,, 2015:, Payments:, Stationery Rs. 23,000, Additional Information:, Details, Stock of stationery, Creditors for stationery, , April 1, 2014, 4,000, 9,000, , March 31, 2015, 3,000, 2,500, , Solution, Details, , Amount, (Rs.), , Payment made for the purchase of stationery as per, Receipts and Payments account, Less: Creditors in the beginning, , 23,000, 9,000, , Payment made for the year 2014-15, Add: Payment not yet made (i.e. creditors at the end), , 14,000, 2,500, , Stationery Purchased for the year 2014-15, Add: Stock in the beginning, , 16,500, 4,000, , Stationery Available for consumption during 2014-15, Less: Stock at the end, , 20,500, 3,000, , Stationery Consumed during 2014-15 to be taken to the, Expenditure side of the Income and Expenditure account, , 17,500, , Stationery: Normally expenses incurred on stationary, a consumable items are, charged to Income and Expenditure Account. But in case stock of stationery, (opening and/or closing) is given, the approach would be make necessary, adjustments in purchases of stationery and work out cost of stationery consumed, and show that amount in Income and Expenditure Account and its stock in the, , 2018-19
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30, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , balance sheet. For example, the Receipt and Payment Account shows a payment, for stationery amounting to Rs. 40,000 and there is an opening and closing, stationery amounting to Rs. 12,000 and Rs. 15,000. The amount of expense on, stationery will be worked out as follows:, Stationery, Purchases, Add: Opening stock, , 40,000, 12,000, , Less: Closing stock, , 52,000, 15,000, 37,000, , In case stationery is also purchased on credit, the amount of its consumption, will be worked out as given in Illustration 12., Do it Yourself, 1. Find out the cost of medicines consumed during 2014-15 from the following, information:, Details, , Amount, (Rs.), , Payment for purchase of medicines, Creditors for medicines purchased:, On 1.4.2014, On 31.3.2015, Stock of Medicines:, On 1.4.2014, On 31.3.2015, Advance to suppliers of medicines:, On 1.4.2014, On 31.3.2015, , 3,70,000, 25,000, 17,000, 62,000, 54,000, 11,500, 18,200, , 2. What amount of sports material will be posted to Income and Expenditure, Account for the year ended March 31, 2016 as expenditure? :, Amount, (Rs.), Stock of sports materials as on April 1, 2014, Creditors for sports material as on April 1, 2014, Stock of sports material as on March 31, 2016, Amount paid for sports material during the year 2015-16, Advance paid for sports material as on March 31, 2016, Creditors for sports material as on March 31, 2016, , 2018-19, , 7,500, 2,000, 6,200, 17,000, 3,500, 1,200
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Accounting for Not-for-Profit Organisation, , 31, , Illustration 11, Following is the Receipt and Payment Account of an Entertainment Club for the, period April 1, 2016 to March 31, 2017., Receipt and Payment Account for the year ending March 31, 2017, Receipts, Balance b/d, Cash, 27,500, Bank, 60,000, Member’s subscriptions:, 2015-2016, 12,500, 2016-2017, 1,00,000, 2017-2018, 10,000, Sale of furniture, (book value: Rs. 8,000), Sale of food stuffs, Sale of old periodicals, and newspapers, Hire of ground used, for marriage, Donation for sports fund, Locker Rent, , Amount, (Rs.), , 87,500, , 1,22,500, 10,000, 1,00,000, 3,200, , Payments, , Amount, (Rs.), , Salaries, Electric bill, Food stuff for restaurant, Telephone bill, Subscription for periodicals, Printing and stationery, Sports expenses, Secretary’s honorarium, 8% Investments (31.3.2017), Balance c/d:, Cash, 21,500, Bank, 45,000, , 24,000, 21,000, 60,000, 35,000, 14,500, 13,000, 50,000, 30,000, 1,00,000, , 66,500, , 48,750, 25,000, 17,050, 4,14,000, , 4,14,000, , Additional Information, 1. The club had 225 members, each paying an annual subscription of Rs. 500., Subscription outstanding as on 31 March 2016 Rs. 15,000., 2. Telephone bill outstanding for the year 2016-2017 is Rs. 2,000., 3. Locker Rent Rs. 3,050 outstanding for the year 2015-16 and Rs. 1,500 for, 2016-17., 4. Salary outstanding for the year 2016-17 Rs. 4,000., 5. Opening Stock of Printing and stationery Rs. 2,000 and closing stock of printing, and stationery is Rs. 3,000 for the year 2016-17., 6. On 1st April 2016 other balances were as under:, Rs., 1,00,000, 6,50,000, 15,000, , Furniture, Building, Sports fund, , 7. Depreciation Furniture and Building @ 12.5% and 5% respectively assuming that, it is on reducing balance for the year ending March 31,2017, Prepare Income and Expenditure account and Balance Sheet as on, that date., , 2018-19
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32, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , Solution, Book of Entertainment Club, Income and Expenditure Account, for the year ending on March 31, 2017, Expenditure, Salary, 24,000, Add: Outstanding, 4,000, Electric Bill, Telephone Bill, 35,000, Add: Outstanding, 2,000, Subscription for periodicals, Printing and Stationery 13,000, Add: Opening Stock, 2,000, 15,000, Less: Closing stock, 3,000, Secretary's honorarium, Sports Expenses, 50,000, Less: Opening Balance, of sports fund, 15,000, 35,000, Less: Donation for, Sports, 25,000, Depreciation On:, Furniture, 11,500, Building, 32,500, Surplus (Excess of Income over, Expenditure), , Amount, (Rs.), 28,000, 21,000, 37,000, 14,500, , 12,000, 30,000, , Income, Subscriptions, 1,00,000, Add: Outstanding, 12,500, Sale of old periodicals, Profit on sale of furniture, Hire of ground for marriage, Locker rent, 17,050, Less: Opening o/s, 3,050, 14,000, Add: Closing o/s, 1,500, Sale of Food Stuff, 1,00,000, Cost of food Consumed 60,000, , Amount, (Rs.), 1,12,500, 3,200, 2,000, 48,750, , 15,500, , 40,000, , 10,000, , 44,000, 25,450, , 2,21,950, , 2018-19, , 2,21,950
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Accounting for Not-for-Profit Organisation, , 33, , Balance Sheet of Entertainment Club as on March 31, 2016, Liabilities, , Amount, (Rs.), , Sports fund, Capital/General Fund, (Balancing figure), , 15,000, 8,42,550, , Assets, , Amount, (Rs.), , Cash in hand, Cash at bank, Outstanding subscription, Outstanding locker Rent, Printing & Stationery, Furniture, Buildings, , 8,57,550, , 27,500, 60,000, 15,000, 3,050, 2,000, 1,00,000, 6,50,000, 8,57,550, , Balance Sheet of Entertainment Club as on March 31, 2017, Liabilities, Subscriptions received in, advanced, Outstanding Telephone Bill, Salary Outstanding, Capital/General Fund 8,42,550, Add: Surplus, 25,450, , Amount, (Rs.), 10,000, 2,000, 4,000, , Assets, , Amount, (Rs.), , Cash in hand, Cash at bank, Outstanding subscriptions, , 21,500, 45,000, 15,000, , (2015 Rs 2500 and 2016 Rs 12500), , 8,68,000, , Outstanding locker Rent, Printing and Stationery, Furniture, 1,00,000, Less: Sales, 8,000, 92,000, Less: Depreciation, 11,500, Building, Less: Depreciation, Investment, , 8,84,000, , 2018-19, , 6,50,000, 32,500, , 1,500, 3,000, , 80,500, 6,17,500, 1,00,000, , 8,84,000
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34, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , Illustration 12, Prepare Income and Expenditure Account and Balance Sheet for the year ended, March 31, 2015 from the following information., Receipt and Payment Account for the year ending March 31, 2015, Receipts, Balance b/d, Subscriptions:, 2013-14, 7,200, 2014-15, 3,37,600, 2015-16, 12,000, Entrance fees, Locker rent, Revenue from refreshment, Income from investments, , Amount, (Rs.), 41,000, , 3,56,800, 16,000, 58,000, 48,000, 56,000, , Payments, Salaries and Wages:, 2013-14, 4,800, 2014-15, 83,200, Sundry expenses, Freehold land, Stationery, Rates, Refreshment expenses, Telephone charges, Investments, Audit fee, Balance c/d, , 5,75,800, , Amount, (Rs.), , 88,000, 37,000, 60,000, 16,000, 24,000, 37,500, 4,000, 2,50,000, 6,000, 53,300, 5,75,800, , The following additional information is provided to you:, 1. There are 1800 members each paying an annual subscription of, Rs. 200, Rs. 8,000 were in arrears for 2013-14 as on April 1, 2014., 2. On March 31, 2015 the rates were prepaid to June 2015; the charge, paid every year being Rs. 24,000., 3. There was an outstanding telephone bill for Rs. 1,400 on March 31, 2015., 4. Outstanding sundry expenses as on March 31, 2014 totaled Rs. 2,800., 5. Stock of stationery as on March 31, 2014 was Rs. 2000; on March 31, 2015, it, was Rs. 3,600., 6. On March 31, 2014 Building stood at Rs. 4,00,000 and it was subject to, depreciation @ 2.5% p. a., 7. Investment on March 31, 2014 stood at Rs. 8,00,000., 8. On March 31, 2015, income accrued on investments purchased during, the year amounted to Rs. 1,500., , 2018-19
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Accounting for Not-for-Profit Organisation, , 35, , Solution, Income and Expenditure Account, for the year ending on March 31, 2015, Dr., , Cr., , Expenditure, , Amount, (Rs.), , Salaries and Wages, Sundry Expenses, 37,000, Less: Outstanding on, 31.3.2014, 2,800, Stationery : (consumed), Opening stock, 2,000, Add: Purchases, 16,000, Less: Closing stock, 3,600, Rates, 24,000, Less: Paid for 2015-16, 6,000, Add: Prepaid in 2014-15 6,000, Telephone charges, 4,000, Add: Outstanding, 1,400, audit fee, Surplus Depreciation on building, (excess of Income over, expenditure), , 83,200, , 34,200, , 14,400, , 24,000, 5,400, 6,000, 10,000, , Income, Subscriptions, Entrance fees, Locker rent, Income from refreshment:, Revenue from, 48,000, refreshment, Less: Refreshment, 37,500, expenses, Income from, 56,000, investments, Add: Accrued income, 1,500, on current year, investment, , Amount, (Rs.), 3,60,000, 16,000, 58,000, , 10,500, , 57,500, , 3,24,800, 5,02,000, , 5,02,000, , Balance Sheet as on March 31, 2015, Liabilities, Outstanding Telephone, Expenses, Subscription received in, Advance, General Fund, 12,49,400, Add: Surplus, 3,24,800, , Amount, (Rs.), 1,400, 12,000, 15,74,200, , Assets, , Amount, (Rs.), , Cash and Bank Balance, 53,300, Subscription in Arrears, 23,200, Stock of Stationery, 3,600, Rates Prepaid, 6,000, Accrued Interest on investment:, 1,500, Investments, 8,00,000, Additions, 2,50,000 10,50,000, Building, 4,00,000, Less: Depreciation, 10,000, 3,90,000, Land, 60,000, , 15,87,600, , 2018-19, , 15,87,600
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36, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, Balance Sheet as on March 31, 2014, , Liabilities, , Amount, (Rs.), , Outstanding Sundry Expenses, Outstanding Salary and Wages, General Fund, (Balancing figure), , 2,800, 4,800, 12,49,400, , Assets, , Amount, (Rs.), , Cash and Bank balance, Subscription in arrears, Stock of stationery, Rates prepaid, Investments, Building, , 12,57,000, , 41,000, 8,000, 2,000, 6,000, 8,00,000, 4,00,000, 12,57,000, , Working Note :, Subscription Account, Dr., , Cr., , Date Particulars, , J.F., , Opening Balance or, Balance b/d (Arrears, for 2013-14), Income and Expenditure, (1800×200), Balance, c/d (Advance for, 2015-16), , Amount, (Rs.), , Date Particulars, , 8,000, , Receipt and Payment, Balance c/d, , J.F., , Amount, (Rs.), 3,56,800, 23,200, , 3,60,000, 12,000, , 3,80,000, , 3,80,000, , Illustration 13, Following is the Receipt and Payment Account of Friendship Club in respect of, the Year on 31.3.2016., Receipt and Payment Account for the year ending March 31, 2016., Receipts, Opening cash in hand, Subscription:, 2014-15, 15,000, 2015-16, 20,000, 2016-17, 5,000, Profit from sports, Interest on 8% govt. securities, , Amount, (Rs.), 10,000, , 40,000, 17,800, 5,000, , Payment, Salaries, Stationery, Rates and Taxes, Telephone charges, 8% govt. securities at par, Sundry expenses, Courier service charges, Closing cash in hand, , 72,800, , 2018-19, , Amount, (Rs.), 20,000, 4,500, 1,500, 7,500, 25,000, 500, 300, 13,500, 72,800
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Accounting for Not-for-Profit Organisation, , 37, , Additional Information :, 1. There are 500 members, each paying an annual subscription of Rs. 50, Rs. 17,500, being in arrears for 2014-15 at the beginning of 2015-16. During 2014-15,, subscriptions were paid in advance by 40 members for 2015-16., 2. Stock of stationery on March 31, 2015, was Rs. 1,500 and on March 31, 2016, Rs. 2,000., 3. On March 31, 2016, the rates and taxes were prepaid to the following January 31,, the annual charge being Rs. 1,500., 4. A quarter’s charge for telephone is outstanding, the amount accrued being, Rs.1,500. There is no change in quarterly charge., 5. Sundry expenses accruing at 31.3.2015 were Rs. 250 and at March 31, 2016 Rs. 300., 6. On March 31, 2015 Building stood in the books at Rs. 2,00,000 and it is required, to write off depreciation @ 10% p.a., 7. Value of 8% Government Securities on March 31, 2015 was Rs. 75,000 which were, purchased at that date at Par. Additional Government Securities worth Rs. 25,000, are purchased on March 31, 2016., You are required to prepare:, (a) An Income and Expenditure Account for the year ended on 31.3.2016, (b) A Balance Sheet on that date., , Solution, Books of Friendship Club, Balance Sheet as on March 31, 2015, Liabilities, , Amount, (Rs.), , Outstanding Expenses:, Telephone charges, 3,000, Sundry Expenses, 250, Subscription received in, Advance, General Fund, (balancing figure), , 3,250, 2,000, 3,00,000, , Assets, , Amount, (Rs.), , Building, Investment in 8% Govt., Securities, Stock of stationery, Prepaid Rates and Taxes, Subscription outstanding, Cash in hand, , 3,05,250, , 2,00,000, 75,000, 1,500, 1,250, 17,500, 10,000, 3,05,250, , Income and Expenditure Account, for the year ending on March 31, 2015, Expenditure, Salaries, Stationery (paid), Add: Opening stock, Less: Closing stock, Stationery consumed, Rates and Taxes, , Amount, (Rs.), 20,000, 4,500, 1,500, 6,000, 2,000, 4,000, 1,500, , Income, Profit on Sports, Interest on 8% Govt., Securities Received, Add: Receivable, Total Subscription, Received during, the current year, , 2018-19, , Amount, (Rs.), 17,800, 5,000, 1,000, 40,000, , 6,000
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38, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , Less: Closing Prepaid, Add: Opening Prepaid, Telephone charges paid, Add: Outstanding, (Current Year), Less: Outstanding, (Previous year), Sundry expenses paid, Add: Outstanding, (Current Year), Less: Outstanding, (Previous year), Depreciation on building, Courier charges, , 1,250, 250, 1,250, 7,500, 1,500, 9,000, 3,000, , 1,500, , 6,000, , 500, 300, 800, 250, , 550, 20,000, 300, , Add: Opening, 2,000, Subscription in advance, Add: Outstanding at, 5,500, the end of the, Current Year, (2,500+3,000)=, 47,500, Less: Subscription, 5,000, received in, 42,500, Advance(Closing), Less: Outstanding, 17,500, at the start of, the Current Year, Deficit: (Excess of Expenditure, over to Income), , 52,350, , 25,000*, 3,550, , 52,350, , • Verification: 500 × 50 = 25000., Balance Sheet of Friendship Club as on March 31, 2016, Liabilities, Outstanding Expenses:, Telephone charges, 1,500, Sundry Expenses, 300, Subscription received in, Advance, General Fund, 3,00,000, Less: Deficit, 3,550, , Amount, (Rs.), , 1,800, 5,000, , 2,96,450, , Assets, Building :, 2,00000, Less: depreciation, 20,000, Investment in 8%, 75,000, Govt. Securities:, Add: Purchases, 25,000, Stock of stationery, Interest on 8%, Govt. securities Receivable, Prepaid Rates and Taxes, Subscription outstanding, (Rs.17,500-Rs. 5,000), +Rs. 3,000= Rs.5,500, Cash in hand, , 3,03,250, , Amount, (Rs.), 1,80,000, , 1,00,000, 2,000, 1,000, 1,250, 5,500, , 13,500, 3,03,250, , 1.7 Income and Expenditure Account based on Trial Balance, In case of not-for-profit organisations, normally the Income and Expenditure, Account and Balance Sheet is prepared based on the Receipts and Payments, Account and the additional information given. But, sometimes, the trial, balance along with some additional information is given for this purpose., See Illustration 14., , 2018-19
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Accounting for Not-for-Profit Organisation, , 39, , Illustration 14, From the trial balance and other information given below for a school, prepare, Income and Expenditure Account for the year ended on 31.3.2017 and a Balance, Sheet as on that date:, Debit Balance, , Amount, (Rs.), , Building, Furniture, Library books, Investment @12%, Salaries, Stationery, General expenses, Sports expenses, Cash at bank, Cash in hand, , 6,25,000, 1,00,000, 1,50,000, 5,00,000, 5,00,000, 40,000, 18,000, 15,000, 50,000, 2,000, , Credit Balance, Admission fees, Tuition fees received, Creditors for supplies, Rent for the school hall, Miscellaneous receipts, Government grant, General fund, Donation for library books, Sale of old furniture, , 20,00,000, , Amount, (Rs.), 12,500, 5,00,000, 15,000, 10,000, 30,000, 3,50,000, 10,00,000, 62,500, 20,000, 20,00,000, , Additional Information:, (i) Tution fee yet to be received for the year are Rs. 25,000., (ii) Salaries yet to be paid amount to Rs.30,000., (iii) Furniture costing Rs. 40000 was purchased on October 1, 2016., (iv) The book value of the furniture sold was Rs. 50,000 on April 1, 2016, (v) Depreciation is to be charged @ 10% p.a. on furniture, 15% p.a. on Library books,, and 5% p.a. on building., , Solution, , Expenditure, , Income and Expenditure Account, for the year ending on March 31, 2017, Amount Income, (Rs.), , Loss on sale of old furniture, (50,000 –20,000), Salaries, 5,00,000, Add: outstanding, 30,000, Stationery, General expenses, Depreciation:, Furniture, 3,000, Building, 31,250, Library books, 22,500, Sports expenses, Surplus (excess of income, over expenditure), , 30,000, 5,30,000, 40,000, 18,000, , Admission fees, Tuition fees, 5,00,000, Add: Outstanding, 25,000, Rent for the school hall, Miscellaneous receipts, Government grant, Interest accrued on, investments, , Amount, (Rs.), 12,500, 5,25,000, 10,000, 30,000, 3,50,000, 60,000, , 56,750, 15,000, 2,97,750, 9,87,500, , 2018-19, , 9,87,500
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40, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , Working Notes:, 1. As admission fee is a regular income of a school, so it has been taken as a revenue, income of the school., 2. Depreciation on furniture has been computed as following on the assumption, that furniture was sold on April 1, 2016., Amount, (Rs.), Book Value on March 31, 2017, 1,00,000, Less: Book Value of Sold furniture, (50,000), 50,000, Depreciation on furniture of Rs. 10,000 for one year, Depreciation on furniture of Rs. 40,000 for 6 months, , 1,000, 2,000, 3,000, , Total depreciation, Balance Sheet as on March 31, 2017, Liabilities, Creditors for Supplies, Outstanding Salaries, Donation for Library Books, General fund, 10,00,000, Add: Surplus, 2,97,750, , Amount, (Rs.), 15,000, 30,000, 62,500, , Assets, Buildings, Less: Depreciation, Furniture, Less: Sold, , 12,97,750, , Amount, (Rs.), 6,25,000, 31,250, 1,00,000, 50,000, 50,000, 3,000, , Less: Depreciation, Accrued fees, Library books, 1,50,000, Less: Depreciation, 22,500, Investments @ 12%, Interest accrued, Cash at bank, Cash in hand, 14,05,250, , 5,93,750, , 47,000, 25,000, 1,27,500, 5,00,000, 60,000, 50,000, 2,000, 14,05,250, , 1.8 Incidental Trading Activity, Sometimes, trading activities such as chemist Shop, hospital, canteen, beauty, parlour etc. also take place in such organisations to provide certain facilities to, members or public in general. In such a situation, trading account has to be, prepared to ascertain the results of such incidental activity. The profit from such, commercial (trading) activities is applied to fulfill the main objectives for which, the organisation was set up, and so it is transferred to the Income and, Expenditure Account. It is pertinent to note the following procedure:, 1. Prepare trading account to determine profit (or Loss) due to incidental, commercial (trading) activity. All costs and revenues directly and exclusively, , 2018-19
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Accounting for Not-for-Profit Organisation, , 41, , related to such activity are recorded in the trading account. Balance of, trading account is transferred to the Income and Expenditure Account., 2. Income and Expenditure Account records, in addition to trading Profit, (or loss), all other incomes and expenses not recorded in the Trading, Account. Surplus or deficit revealed by the Income and Expenditure, Account is transferred to capital/general fund., Illustration 15, Following balances have been extracted from the books of Pleasant Club for the, year ended on March 31, 2016:, Details, , Amount, (Rs.), , Capital Fund as on March 31, 2016, Furniture as on March 31, 2016, Additions of furniture during the year, Billiard Table and other accessories as on March 31, 2016, China glass and cutlery and Linen as on March 31, 2016, Restaurant receipts during the year, Restaurant stock as on March 31, 2016, Receipts from billiard Room during the year, Subscription received during the year, Interest on deposit received during the year, Honorarium paid to Secretary, Purchases for restaurant, Rent and Rates, Wages (restaurant Rs. 1,25,000), Repairs and Renewals, Lighting, Fuel, Sundry expenses, Cash in hand as on March 31, 2016, Bank balance as on March 31, 2016, Bank deposit @10% as on March 31, 2016, , 2,05,000, 21,000, 23,500, 22,250, 6,250, 9,68,000, 9,750, 86,000, 88,750, 6,000, 80,000, 5,59,500, 87,250, 2,30,750, 44,750, 44,250, 33,500, 8,000, 4,375, 36,875, 1,00,000, , Payment for purchases included Rs.7,500 for the year ended on March 31,, 2016. Restaurant stock as on March 31, 2017 were Rs. 11,250. Amount of, subscription received included Rs. 12,000 for the previous year and Rs. 3,000 for, the next year. Subscription outstanding as on March 31, 2017 were Rs. 12,500., Depreciation should be provided as per following rate Structure:, (a) Furniture @ 10 %; (b) Billiard Table and other accessories@ 12%;, (c) glass and cutlery @ 20%., Cost of boarding expenses of the staff is estimated at Rs. 68,750 of which, Rs. 50,000 is to be charged to restaurant., , 2018-19
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42, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , Prepare the Receipt and Payment Account; Income and Expenditure Account, and the Balance Sheet showing the working of the Restaurant separately. Cash, in hand on March 31, 2017 was Rs. 8,500., Solution, Books of Pleasant Club, Receipt and Payment Account, for the year ending on March 31, 2017, Receipts, , Amount, (Rs.), , Opening Balance:, Cash in hand, 4,375, Cash at bank, 36,875, Subscriptions, Interest on deposit, Restaurant receipts, Billiard receipts, , 41,250, 88,750, 6,000, 9,68,000, 86,000, , Payments, Rent and Rates, Wages:, Restaurant, 1,25,000, Others, 1,05,750, Repairs and Renewals, Furniture purchased, Honorarium of Secretary, Purchases for restaurant, Lighting, Fuel, Sundry expenses, Closing balance:, Cash in hand, 8,500, Cash at bank, 70,000, (balancing figure), , 11,90,000, , Amount, (Rs.), 87,250, , 2,30,750, 44,750, 23,500, 80,000, 5,59,500, 44,250, 33,500, 8,000, , 78,500, 11,90,000, , Trading Account, for the year ending on March 31, 2017, Details, Opening stock, Purchases, 5,59,500, Less: Previous year, 7,500, Wages, Depreciation of, glass cutlery, Cost of boarding expenses, of the staff, Fuel, Profit transferred to, Income and Expenditure, , Amount, (Rs.), 9,750, 5,52,000, 1,25,000, 1,250, , Details, Restaurant receipts, Cost of boarding expenses, of the staff, Closing stock, , Amount, (Rs.), 9,68,000, 68,750, 11,250, , 50,000, 33,500, 2,76,500, 10,48,000, , 2018-19, , 10,48,000
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Accounting for Not-for-Profit Organisation, , 43, , Income and Expenditure Account, for the year ending on March 31, 2017, Expenditure, , Amount, (Rs.), , Wages, Repairs and Renewals, Honorarium of Secretary, Lighting, Rent and Rates, Cost of boarding, expenses of the staff, Sundry expenses, Depreciation on:, Furniture, 4,450, Billiard table, 2,670, Surplus: (Excess of Income, over Expenditure), , 1,05,750, 44,750, 80,000, 44,250, 87,250, 18,750, 8,000, , 7,120, , Income, , Amount, (Rs.), , Subscription Received 88,750, Add: Outstanding, 12,500, this year, 1,01,250, Less: Outstanding, 12,000, previous year, 89,250, Less: Advance for, 3,000, Next year, Interest received, 6,000, Add: Accrued, 4,000, Billiard receipts, Profit transferred, from trading Account, , 86,250, , 10,000, 86,000, 2,76,500, , 62,880, 4,58,750, , 4,58,750, , Balance Sheet of Pleasant Club as on March 31, 2017, Liabilities, Capital Fund, 2,05,000, Add: Surplus, 62,880, Subscription received, in Advance, , Amount, (Rs.), 2,67,880, 3,000, , Assets, Furniture:, Opening Balance, Add: Additions, , Amount, (Rs.), 21,000, 23,500, 44,500, 4,450, 22,250, 2,670, 6,250, 1,250, , Less: Depreciation, Billiard Table, Less: Depreciation, Glass and cutlery, Less: Depreciation, Restaurant stock, Subscription Outstanding, Interest Accrued, Bank deposit, Cash in hand, Cash at bank, 2,70,880, , 40,050, 19,580, 5,000, 11,250, 12,500, 4,000, 1,00,000, 8,500, 70,000, 2,70,880, , Illustration 16, Prepare Income and Expenditure Account of Entertainment Club for the year, ending March 31, 2017 and Balance Sheet as on that date from the following, information:, , 2018-19
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44, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, Receipt and Payment Account, For the year ending on March 31, 2017, , Receipts, Balance b/d, Subscriptions, 2015-16, 23,250, 2016-17, 3,36,000, 2017-18, 13,000, Sale of sports materials, Entrance fees, General donation, Donation for prize fund, Interest on prize fund, Investments, Miscellaneous receipts, , Amount, (Rs.), 24,000, , 3,72,250, 26,000, 40,000, 20,250, 14,000, , Payments, , Amount, (Rs.), , Rent and Rates, Furniture purchased, Creditors for sports materials, Purchases for sports materials, Cost of prizes awarded, Match expenses, Miscellaneous expenses, Balance c/d, , 48,750, 40,000, 61,000, 10,000, 20,750, 35,150, 1,50,000, 1,34,050, , 1,500, 1,700, 4,99,700, , 4,99,700, , Additional Information:, Details, , Apr. 01, 2016 Mar. 31, 2017, , Sports materials, Furniture, 5% Prize fund investments, Creditors for sports materials, Subscription in arrears, Prize fund, Rent paid in advance, Outstanding rent, Outstanding miscellaneous expenses, Miscellaneous expenses paid in advance, Book value of sports materials sold was Rs. 20000, Depreciation on furniture is to be provided @ 10%., Half of the entrance fee is to be capitalised., There are 1440 members, each paying an annual, subscription @ Rs. 250., Subscription received in advance on 1.4.2016, were Rs. 7,000., , 2018-19, , 20,000, 2,00,000, 60,000, 7,000, 23,750, 60,000, ---3,750, 11,400, 3,750, , 25,000, ?, ?, 14,750, ?, ?, 3,750, 20,100, 4,250
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Accounting for Not-for-Profit Organisation, , 45, , Solution, Books of Entertainment Club, Income and Expenditure Account, for the year ending March 31, 2017, Expenditure, Rent, Less: Opening, Outstanding, , Amount, (Rs.), 48,750, 3,750, , 45,000, Less: Closing rent paid in 3,750, advance Sports Materials, Opening stock, 20,000, Add: Payments, 61,000, to creditor, 81,000, Add: Closing creditor, 14,750, 95,750, Add: Cash purchase, 10,000, 1,05,750, Less: Opening creditor, 7,000, 98,750, Less: Sports material, 20,000, Sold, 78,750, Less: Closing stock, 25,000, Match expenses, Depreciation on furniture, Miscellaneous expenses:, Paid 1,50,000, Less: Outstanding, 11,400, (Opening), 1,38,600, Paid in advance, 4,250, (Opening), 1,34,350, Add: Outstanding, 20,100, (Closing), 1,54,250, Paid in advance, 3,750, (Closing), Surplus (Excess of, income over expenditure), , 41,250, , Income, Subscriptions, 3,36,000, Add: Received, in advance, 01.04.2016, 7,000, Add: Outstanding, (2015–2016), 17,000, (Rs.3,60,000–Rs.3,43,000), General donations, Entrance fees, Sports materials, (Profit on sale), (i.e. 26,000–20,000), Miscellaneous receipts, , Amount, (Rs.), , 3,60,000, 20,250, 20,000, , 6,000, 1,700, , 53,750, 35,150, 24,000, , 1,58,200, 95,600, , 4,07,950, , 2018-19, , 4,07,950
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46, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, Balance Sheet of Entertainment Club as on March 31, 2016, , Liabilities, , Amount, (Rs,), , Capital Fund (Balancing figure), Prize fund, Creditors for, Sports Materials, Subscription Received in Advance, Outstanding Expenses:, Rent, Miscellaneous, Expenses, , 3,750, 11,400, , 2,42,350, 60,000, 7,000, 7,000, , Assets, Furniture, 5% Prize Fund Investments, Subscription Receivable, (i.e. outstanding), Stock of Sports Materials, Miscellaneous Expenses, Paid in Advance, Cash in hand, , Amount, (Rs,), 2,00,000, 60,000, 23,750, 20,000, 3,750, 24,000, , 15,150, 3,31,500, , 3,31,500, , Balance Sheet of Entertainment as on March 31, 2017, Liabilities, Capital fund, 2,42,350, Add: Surplus, 95,600, Entrance fees, 20,000, Prize fund, 60,000, Add: Donations, 14,000, Interest received, 1,500, Interest accrued* 1,500, 77,000, Less: Prizes awarded, 20,750, Creditors for sports materials, Subscription received in advance, Outstanding miscellaneous, expenses, , Amount, (Rs.), , 3,57,950, , 56,250, 14,750, 13,000, 20,100, , Assets, , Amount, (Rs.), , Furniture:, Opening balance, Additions, , 2,00,000, 40,000, 2,40,000, Less: Depreciation, 24,000, 5% Prize fund investments, Subscription receivable, (i.e. Outstanding):, (2015-2016), 500, (2016-2017), 17,000, Stock of sports materials, Miscellaneous expenses, Paid in advance, Prepaid rent, Accrued interest on, Prize fund investments, Cash in hand, , 4,62,050, , 2,16,000, 60,000, , 17,500, 25,000, 4,250, 3,750, 1,500, 1,34,050, 4,62,050, , Note: * Interest on Prize Fund Investments @ 5% amounts to Rs. 3,000 whereas only, Rs. 1,500 have been received; so the balance is treated as Accrued interest., , It is preferable to prepare separate accounts of various items involving, many transactions. In this case Account for Subscription, Miscellaneous, Expenses, and Sports Materials may be made as a Classroom activity., , 2018-19
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Accounting for Not-for-Profit Organisation, , 47, , Illustration 17, Shiv-e-Narain Education Trust provides the information in regard to Receipt, and Payment Account and Income and Expenditure Account for the year ended, March 31st 2017:, Receipt and Payment Account for the year ending March 31, 2017, Receipts, , Amount, (Rs.), , Cash in hand as on, April 1, 2016, Cash at bank as on, April 1, 2016, Subscription:, 2015-16, 12,000, 2016-17, 46,000, 2017-18, 15,600, Entrance fees, Tuition fees:, 2016-17, 80,000, 2017-18, 10,000, Interest on investment:, 2015-16, 4,000, 2016-17, 6,000, Miscellaneous receipts, , 3,000, 15,000, , 73,600, 25,200, 90,000, , Payments, Printing and Stationery, Lighting & Water, Rent, Advertisement, Miscellaneous Expenses, Staff Salaries, Furniture purchased, Honorarium, Books, Cash in hand as on, March 31, 2017, Cash at bank as on, March 31, 2017, , Amount, (Rs.), 6,000, 2,600, 21,000, 2,820, 4,400, 85,000, 28,000, 15,000, 5,000, 9,180, 45,000, , 10,000, 7,200, 2,24,000, , 2,24,000, , On March 31, 2016 the following balances appeared:, Investments Rs.1, 60,000; Furniture Rs.40, 000; and Books Rs.20, 000., Income and Expenditure Account, for the year ending on March 31, 2017, Expenditure, Printing and Stationery, Lighting & Water, Rent, Staff salaries, Advertisement, Honorarium, Misc. expenses, Depreciation on furniture, Surplus(Excess of income, over expenditure), , Amount, (Rs.), 7,800, 2,600, 24,000, 84,000, 3,200, 15,000, 4,400, 4,000, 5,000, , Income, Subscription, Interest on investment, Miscellaneous incomes, Tuition fees, , 1,50,000, , Prepare opening and closing balance sheet, , 2018-19, , Amount, (Rs.), 46,000, 6,800, 7,200, 90,000, , 1,50,000
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48, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , Solution, Shiv-e-Narain Education Trust, Balance Sheet as on March 31, 2016, Liabilities, Capital/General Fund, (Balancing figure), , Amount, (Rs.), 2,54,000, , Assets, , Amount, (Rs.), , Investments, Furniture, Books, Outstanding subscription, Accrued Interest on Invest., Cash in hand, Cash at bank, , 2,54,000, , 1,60,000, 40,000, 20,000, 12,000, 4,000, 3,000, 15,000, 2,54,000, , Balance Sheet of Shiv-e-Narain Education Trust as on March 31, 2017, Liabilities, Tuition fee advance, Rent Outstanding, Advertisement Outstanding, Printing & Stationery, Outstanding, Advance Subscription, Capital/, General Fund, 2,54,000, Add Entrance fee, 25,200, Add Surplus, 5,000, , Amount, (Rs.), 10,000, 3,000, 380, 1,800, 15,600, , 2,84,200, , Assets, Investments, Furniture, Less: Depreciation, , Amount, (Rs.), 1,60,000, 40,000, 4,000, 36,000, 28,000, 20,000, 5,000, , Add: Purchases, Books, Add: Purchases, Interest Accrued, Outstanding tuition fee, Staff Salary Advance, Cash in Hand, Cash at Bank, , 3,14,980, , 64,000, 25,000, 800, 10,000, 1,000, 9,180, 45,000, 3,14,980, , Note:, 1. Income and Expenditure Account for the current year shows interest on, investment income Rs.6,800 while Receipts and Payments Account shows, the receipts of Rs.6,000 the difference of Rs.800 means interest on, investment has become due but not yet receivable during the year., 2. Income and Expenditure Account shows Rs.90,000 as income from Tuition, fees. However, the Receipts and Payments Account shows Rs.10,000 as, tuition fees received for the year 2017-18 and Rs.80,000 for 2015-16. It, implies that Rs.10,000 on account of tuition fees for the year 2016-17 are, still receivable (i.e. Tuition fees are outstanding)., 3. Receipt and Payment Account shows a payment of Rs.85,000 on account of, staff salaries, but the Income and Expenditure Account shows expenditure, , 2018-19
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Accounting for Not-for-Profit Organisation, , 49, , of Rs.84,000 on account of staff salaries. It means the excess of Rs.1,000, shown in the Receipt and Payment Account may either belong to the, pervious year or the next year. Their is no evidence that staff salaries of, Rs.1,000 was outstanding at the end of the previous year 2013-14. This is, why this payment of Rs.1,000 has been considered as an advance salaries, to the staff., , Terms Introduced in the Chapter, 1., 2., 3., 4., 5., 6., 7., 8., 9., 10., , Not-for -Profit Organisation., Receipts and Payments Account, Income and Expenditure Account, Entrance Fee, Life Membership, Special Receipts, Subscription, Donation, Incidental Trading Activity, Legacy, , Summary, 1. Difference between Profit Seeking Entities and Not-for-Profit Entities: Profit-seeking, entities undertake activities such as manufacturing trading, banking and, insurance to bring financial gain to the owners. Not-for-Profit entities exist to, provide services to the member or to the society at large. Such entities might, sometimes carry on trading activities but the profits arising therefrom are used, for further the service objectives., 2. Appreciation of the need for separate Accounting Treatment for Not-for-Profit, Organisations: Since not-for-profit entities are guided primarily by a service, motive, the decisions made by their managers are different from those made by, their counterparts in profit-seeking entities. Differences in the nature of, decisions implies that the financial information on which they are based, must, also be different in content and presentation., 3. Explanation of the nature of the Principal Financial Statements prepare by Not-forProfit enterprises: Not-for -Profit Organisations that maintain accounts based, on the double-entry system of accounting, generally prepare three principal, statements to fulfil their information needs. These include Receipts and, Payments Account, Income and Expenditure Account, and a Balance Sheet., The Receipts and Payments Account is a summarised cash book which records, all cash Receipts and cash Payments without distinguishing between capital, and revenue items, and between items relating to the current year and those, relating to previous or future years., The Income and Expenditure Account is an income statement which is prepared, to ascertain the excess of revenue income over revenue expenditure or vice, , 2018-19
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50, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , versa, for a particular accounting year, as a result of the entity’s overall activities., Although it is considered to be a substitute for the Trading and Profit and Loss, Account of a profit-seeking entity, there are certain conceptual differences, between the two statements. The Balance Sheet is prepared at the end of the, entity’s accounting year to depict the financial position on that date. It includes, the Capital Fund or Accumulated Fund, special purpose funds, and current, liabilities on the left hand or liabilities side, and fixed assets and current assets, on the right hand or assets side., 4. Difference between the Receipt and Payment Account and the Income and, Expenditure Account: Many differences exist between the Receipt and Payment, Account and the Income and Expenditure Account which is evident from the, nature and purpose of two statements. While the former records both capital, and revenue receipts and payments relating to any accounting year, the latter, records only revenue items relating to the current accounting year. Non-cash, expenses such as depreciation on fixed assets and outstanding incomes and, expenses are shown in the latter but omitted in the former. The Receipt and, Payment Account has an opening balance while the Income and Expenditure, Account does not. The closing balance of the former account represents cash, and bank balances on the closing date while in the latter account it indicates, surplus or deficit from the activities of the enterprise., 5. Conversion of a Receipt and Payment Account into an Income and Expenditure, Account: This essentially involves five steps namely, (i) adjusting the revenue, receipts on the debit side to include outstanding incomes and incomes relating, to the current year received earlier and to exclude amounts received in arrears, or in advance; (ii) adjusting revenue payments on the credit side; (iii) identifying, and showing non-cash expenses and losses on the debit side of the Income, and Expenditure Account; (iv) computing and showing profits/losses from, trading and/or social activities on the credit/debit side of the Income and, Expenditure Account; and (v) ascertaining the surplus or deficit as the closing, balance of the Income and Expenditure Account., , Questions for Practice, Short Answer Questions, 1., 2., 3., 4., 5., , State the meaning of ‘Not- for- Profit’ Organisations., State the meaning of Receipt and Payment Account., State the meaning of Income and Expenditure Account., What are the feature of Receipt and Payment Account?, What steps are taken to prepare Income and Expenditure Account from a, Receipt and Payment Account?, 6. What is subscription? How is it calculated?, 7. What is Capital Fund? How is it calculated?, , 2018-19
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Accounting for Not-for-Profit Organisation, , 51, , Long Answer Questions, 1. Explain the statement: “Receipt and Payment Account is a summarised, version of Cash Book”., 2. “Income and Expenditure Account of a Not-for-Profit Organisation is akin, to Profit and Loss Account of a business concern”. Explain the statement., 3. Distinguish between Receipts and Payments Account and Income and, Expenditure Account., 4. Explain the basic features of Income and Expenditure Account and of, Receipt and Payment Account., 5. Show the treatment of the following items by a not-for-profit organisation:, (i) Annual subscription, (ii) Specific donation, (iii) Sale of fixed assets, (iv) Sale of old periodicals, (v) Sale of sports materials, (vi) Life membership fee, 6. Show the treatment of items of Income and Expenditure Account when, there is a specific fund for those items., 7. What is Receipt and Payment Account? How is it different from Income and, Expenditure Account?, , Numerical Questions, 1. From the following particulars taken from the Cash Book of a health club,, prepare a Receipts and Payments Account., Rs., Opening balance:, Cash in Hand, Cash at Bank, Subscriptions, Donations, Investment Purchased, Rent Paid, General Expenses, Postage and stationery, Courier charges, Sundry Expenses, Closing Cash in Hand, , 5,000, 25,000, 1,65,000, 35,000, 80,000, 20,000, 21,500, 2,000, 1,000, 2,500, 12,000, , (Ans: Cash at Bank (balancing figure) Rs. 91,000), , 2018-19
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52, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , 2. The Receipt and Payment Account of Harimohan charitable institution is given:, Receipt and Payment Account for the year ending March 31, 2015, Receipts, Balance b/d, Cash at Bank, Cash in Hand, Donations, Subscriptions, Endowment fund, Legacies, Interest on Investment, Interest on Deposits, Sale of old newspapers, , Amount, (Rs.), 22,000, 8,800, 32,000, 50,200, 60,000, 24,000, 3,800, 800, 500, , Payments, , Amount, (Rs.), , Furniture, Investments, Advance for building, Charities, Salaries, Rent and Taxes, Printing, Postage, Advertisements, Insurance, Balance c/d:, Cash at bank, Cash in hand, , 2,02,100, , 3,000, 55,000, 20,000, 60,000, 10,400, 4,000, 1,000, 300, 1,100, 4,800, 32,000, 10,500, 2,02,100, , Prepare the Income and Expenditure Account for the Year ended on March 31, 2015, after considering the following:, (i) It was decided to treat Fifty per cent of the amount received on account of, Legacies and Donations as income., (ii) Liabilities to be provided for are:, Rent Rs. 800; Salaries Rs. 1,200; advertisement Rs. 200., (iii) Rs. 2,000 due for interest on investment was not actually received., (Ans : Excess of income over Expenditure Rs. 1,500.), 3. From the following particulars , prepare Income and Expenditure account:, Details, , Amount, (Rs.), , Fees collected, including Rs.80,000 on account of the, previous year, Fees for the year outstanding, Salary paid , including Rs. 5,000 on account, of the previous year, Salary outstanding at the end of the year, Entertainment expenses, Tournament expenses, Meeting Expenses, Traveling Expenses, Purchase of Books and Periodicals, including, Rs. 31,000 for purchase of Books, Rent, Postage, telegrams and telephones, Printing and Stationery, Donations received, , (Ans : Excess of income over expenditure Rs. 3,23,000), , 2018-19, , 5,20,000, 30,000, 68,000, 3,000, 8,000, 25,000, 18,000, 7,000, 40,000, 15,000, 6,000, 18,000, 25,000
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Accounting for Not-for-Profit Organisation, , 53, , 4. Following is the information given in respect of certain items of a Sports Club., Show these items in the Income and Expenditure Account and the Balance, Sheet of the Club:, Rs., Sports Fund as on 1.4.2015, Sports Fund Investments, Interest on Sports Fund, Donations for Sports Fund, Sports Prizes awarded, Expenses on Sports Events, General Fund, General Fund Investments, Interest on General Fund Investments, , 35,000, 35,000, 4,000, 15,000, 10,000, 4,000, 80,000, 80,000, 8,000, , (Ans : Balance of Sports Fund Rs. 40,000.), 5. How will you deal with the following items while preparing for the Bombay, Women Cricket Club its income and expenditure account for the year ending, 31.3.2017 and its Balance Sheet as on 31.3.2017:, Rs., (a) Donation received during the year for the, construction of a permanent Pavilion, Expenditure incurred up to 31.3.2017 on its construction, The total estimated expenditure on construction, of Pavilion being, , 12,25,000, 10,80,000, 25,00,000, , (b) Tournament Fund:, Balance as on 1.4.2016, Subscriptions for tournament received during the year, Expenditure incurred during the year on conducting, tournaments, , 10,700, 65,800, 72,400, , (c) Life Membership fee received during the year, , 28,000, , Give reasons for your answers., (Ans : (a) Balance of Pavilion Fund Rs. 1,45,000; (b) Balance of Tournment, Fund Rs. 4,100; (c) Life Membership fee to the Capitalised)., 6. From the following receipts and payments and information given below, Prepare, Income and Expenditure Account and opening Balance Sheet of Adult Literacy, Orgnisation as on December 31, 2017., , 2018-19
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54, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, Receipt and Payment Account for the year ending as on December 31, 2017, , Receipts, Balance b/d, Cash in hand, Cash at Bank, Subscriptions, 2016, 1,200, 2017, 26,500, 2018, 500, Sale of old newspapers, Govt. grant, Sale of old furniture, (book value Rs.5000), Interest received on FD, , Amount, (Rs.), 4,000, 15,550, , 28,200, 1,250, 12,000, 3,700, 450, , Payments, General Expenses, Newspaper, Electricity, Fixed deposit with bank, (on 31.06.2017) @ 10% p.a., Books, Salary, Rent, Postage charges, Furniture (purchased), Balance c/d, Cash in hand, Cash at bank, , 65,150, , Amount, (Rs.), 3,200, 1,850, 3,000, 18,000, 7,000, 3,600, 6,500, 300, 10,500, 3,000, 8,200, 65,150, , Information:, (i) Subscription outstanding as on 31.12.2016 Rs.2,000 and on December 31,, 2017 Rs.1,500., (ii) On December 31, 2017 Salary outstanding Rs.600, and one month Rent, paid in advance., (iii) On Jan. 01, 2016 orgnisation owned Furniture Rs.12,000, Books Rs.5,000., (Ans : Surplus Rs. 22,300, Opening Capital Fund Rs.38,550, Total Balance, Sheet Rs. 61,950)., 7. The following is the account of cash transactions of the Nari Kalayan Samittee, for the year ended December 31, 2017:, Receipts, Balance from last year, Subscriptions, Life membership fee, Donation, Profit from entertainment, Sale of old Books, (books value Rs.1,000), Interest, , Amount, (Rs.), 2,270, 32,500, 3,250, 2,500, 7,250, 750, 350, , Payments, Rent, Electric charges, Lecturer’s fee, Office expenses, Printing and Stationery, Legal fee, Books, Furniture purchased, Expenses on nukar drama, Cash in hand, Cash at bank, , 48,870, , 2018-19, , Amount, (Rs.), 6,600, 3,200, 730, 1,480, 1,050, 1,870, 6,500, 8,600, 1,300, 8,040, 9,500, 48,870
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Accounting for Not-for-Profit Organisation, , 55, , You are required to prepare an Income and Expenditure Account after the, following adjustments:, (a) Subscription still to be received are Rs.750 , but subscription include Rs.500, for the year 2018., (b) In the beginning of the year the Sangh owned building Rs.20,000 and, furniture Rs.3,000 and Books Rs.2,000., (c) Provide depreciation on furniture @5% (including purchase ), books @, 10% and building @ 5%., (Ans : Surplus Rs. 24,040), 8. Following is the Receipt and Payment Account of Indian Sports Club, prepared, Income and Expenditure Account, Balance Sheet as on December 31, 2015:, Receipt and Payment Account for the year ending December 31, 2017, Receipts, Balance b/d, Subscriptions, Life membership fee, Entrance fee, Tournament fund, Locker Rent, Sale of old sports equipment, (Costing Rs.2,200), Sale of old newspaper, Legacy, , Amount, (Rs.), 7,890, 52,000, 2,200, 3,200, 26,000, 1,250, 2,500, 750, 37,500, , Payments, Salary, Electric charges, Billiard Table, Office expenses, Printing & Stationery, Tournament expenses, Repair of ground, Furniture purchased, Sports equipment, Cash in hand, Cash at bank, Fixed deposit, (on 1.10.2017 for 10% p.a), , 1,33,290, , Amount, (Rs.), 11,000, 5,500, 17,500, 4,100, 2,300, 18,500, 2,000, 7,700, 12,000, 12,690, 10,000, 30,000, 1,33,290, , Other Information:, Subscription outstanding was on December 31, 2016 Rs.1,200 and Rs.3,200, on December 31, 2017. Locker rent outstanding on December 31, 2017 Rs.250., Salary outstanding on December 31, 2017 Rs.1,000., On January 1, 2017, club has Building Rs.36,000, furniture Rs.12,000,, Sports equipments Rs.17,500. Depreciation charged on these items @ 10%, (including Purchase)., (Ans : Surplus Rs.26,300, Opening Capital fund Rs.74,590, Total of Closing, Balance Sheet Rs.1,49,090), 9. From the following Receipt and Payment Account of Jan Kalyan Club, prepare, Income and Expenditure Account and Balance Sheet for the year ending, March 31, 2017., , 2018-19
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56, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, Receipt and Payment Account, for the year ending March 31, 2017, , Receipts, , Amount, (Rs.), , Cash in hand as on 1.4.16, Subscription, Donation, Sale of furniture, (Book value Rs.6000), Entrance fee, Life membership fee, Interest on investment, (@ 5% for full year), , 6,800, 60,200, 3,000, 4,000, 800, 7,000, 5,000, , Payments, , Amount, (Rs.), , Salaries, Traveling Expenses, Stationery, Rent, Repair, Books purchased, Building purchased, Cash in hand as 31.03.2017, , 86,800, , 24,000, 6,000, 2,300, 16,000, 700, 6,000, 30,000, 1,800, 86,800, , Additional Information:, , (i), (ii), (iii), (iv), (v), (vi), , As on, 01.04.2016, , As on, 31.03.2017, , 1,000, 2,000, 1,200, 13,500, 16,000, 1,000, , 3,200, 3,700, 800, 16,500, 8,000, 2,000, , Subscription received in advance, Outstanding subscription, Stock of stationery, Books, Furniture, Outstanding rent, , (Ans : Surplus Rs.11,100 ,Opening Capital fund Rs.1,37,500, Total of Closing, Balance Sheet Rs.1,60,800], 10. Receipt and Payment Account of Shankar Sports club is given below, for the, year ended March 31, 2017, Receipt and Payment Account, for the year ending March 31, 2017, Receipts, Opening Cash in hand, Entrance fees, Donation for building, Locker rent, Life membership fee, Profit from entertainment, Subscription, , Amount, (Rs.), 2,600, 3,200, 23,000, 1,200, 7,000, 3,000, 40,000, , Payments, Rent, Wages, Billiard table, Furniture, Interest, Postage, Salary, Cash in hand, , 80,000, , 2018-19, , Amount, (Rs.), 18,000, 7,000, 14,000, 10,000, 2,000, 1,000, 24,000, 4,000, 80,000
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Accounting for Not-for-Profit Organisation, , 57, , Prepare Income and Expenditure Account and Balance Sheet with help of, following Information:, Subscription outstanding on March 31, 2016 is Rs.1, 200 and Rs.2, 300 on, March 31, 2017, opening stock of postage stamps is Rs.300 and closing stock, is Rs. 200, Rent Rs.1, 500 related to 2015 and Rs.1, 500 is still unpaid., On April 1, 2016 the club owned furniture Rs.15, 000, Furniture valued at, Rs. 22,500, On March 31, 2017, the club took a loan of Rs.20,000 (@ 10% p.a) in 2017., (Ans : Deficit Rs.6,100, Opening Capital fund Deficit Rs.2,400, Total of Closing, Balance Sheet Rs. 44,500), 11. Prepare Income and Expenditure Account and Balance Sheet for the year ended, March 31, 2016 from the following Receipt and Payment Account and Balance, Sheet of culture club:, Receipt and Payment Account, for the year ending March 31, 2016, Receipts, , Amount, (Rs.), , Opening cash balance, Subscription, 2014-15, 2,000, 2015-16, 22,000, Entrance fees, Locker rent, Life membership fee, Government grant, , 12,000, , 24,000, 2,800, 1,000, 1,200, 11,000, , Payments, Furniture, Telephone expenses, Salary, 2014-15, 2015-16, Newspapers, Sundry expenses, Defence bonds, Land, Closing cash balance, , 52,000, , Amount, (Rs.), 4,000, 800, 1,000, 4,000, 700, 1,000, 18,000, 20,000, 2,500, 52,000, , Balance Sheet for the year ending March 31, 2016, Liabilities, Advance locker rent, Subscription received in, Advance, Outstanding salary, Loan, Capital fund, , Amount, (Rs.), 200, 1,000, , Assets, Cash in hand, Outstanding subscription, Building, , Amount, (Rs.), 12,000, 3,000, 35,000, , 2,000, 10,000, 36,800, 50,000, , (Ans : Surplus Rs.31500, Total of Closing Balance Sheet Rs.80500), , 2018-19, , 50,000
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58, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , 12. From the following Receipt and Payment Account prepare final accounts of a, Unity Club for the year ended March 31, 2017, Receipt and Payment Accounts for the year ending March 31, 2017, Receipts, , Amount, (Rs.), , Balance b/d, Sale of Old furniture, (costing Rs. 6,000), Subscriptions:, 2015-16, 18,000, 2016-17, 60,000, 2017-18, 12,000, Sale of old newspapers, Profit from entertainment, Rent, , 15,000, 4,000, , 90,000, 10,800, 44,000, 84,000, , Payments, Furniture, Library books, Salaries, General expenses, Electric charges, Newspapers, Postage, Stationery, Audit fee, Balance c/d, , 2,47,800, , Amount, (Rs.), 18,000, 10,000, 72,000, 18,000, 12,000, 33,800, 3,000, 40,000, 8,000, 33,000, 2,47,800, , Balance Sheet as on March 31, 2017, Liabilities, Outstanding Salary, Capital Fund, , Amount, (Rs.), 6,000, 6,94,000, , Assets, Cash, Outstanding subscription, Library Books, Furniture, Land and Building, , 7,00,000, , Amount, (Rs.), 15,000, 18,000, 30,000, 37,000, 6,00,000, 7,00,000, , Additional Information:, 1. The Club had 500 members each paying an annual subscription of Rs. 150., 2. On 31.3.2016 salaries outstanding amounted to Rs. 1,200 and salaries paid, included Rs. 6,000 for the year 2015-16., 3. Provide 5% depreciation on Land and Building., (Ans : Deficit Rs. 200 Total of Closing Balance Sheet Rs.7,07,000), 13. Following is the information in respect of certain items of a Sports Club. You, are required to show them in the Income and Expenditure Account and the, Balance Sheet., , 2018-19
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Accounting for Not-for-Profit Organisation, , 59, , Details, , Amount, (Rs.), , Sports Fund as on April 1, 2016, Sports Fund Investments, Interest on Sports Fund Investments, Donations for Sports Fund, Sports Prizes awarded, Expenses on Sports Events, General Fund, General Fund Investments, Interest on General Fund Investments, , 80,000, 80,000, 8,000, 30,000, 16,000, 7,000, 2,00,000, 2,00,000, 20,000, , 14. Receipt and Payment Account of Maitrey Sports Club showed that Rs. 68,500, were received by way of subscriptions for the year ended on March 31, 2017., The additional information was as under:, 1. Subscription Outstanding as on March 31, 2016 were Rs. 6,500,, 2. Subscription received in advance as on March 31, 2016 were Rs. 4,100,, 3. Subscription Outstanding as on March 31, 2017 were Rs. 5,400,, 4. Subscription received in advance as on March 31, 2017 were Rs. 2,500., Show how that above information would appear in the final accounts for the, year ended on March 31, 2017 of Maitrey Sports Club., (Ans : Subscription credited to Income and Expenditure Account for the year, ended on March 31, 2017 is Rs. 69,000. Subscription Outstanding as on, 31.3.2017 is Rs. 5,400 and should be shown on the assets side of the Balance, sheet as on March 31, 2017 and subscriptions of Rs. 2,500 received in advance, as on March 31, 2017 on the liabilities side of the balance sheet as on March, 31, 2017), 15. Following is the Receipt and Payment account of Rohatgi Trust :, Receipt and Payment Account for the year ending December 31, 2017, Receipts, Cash in hand, Cash at bank, Subscription:, 2016, 5,000, 2017, 83,000, 2018, 3,000, Sale of investment, Interest on investment, Sale of furniture, (book value Rs.3,000), , Amount, (Rs.), 14,000, 60,000, , 91,000, 90,000, 2,000, 3,200, , Payments, Rent, Salary, Postage, Electricity charges, Purchase of furniture, Books, Defence Bonds, Help to needy students, Cash in hand, Cash at bank, , 2,60,200, , 2018-19, , Amount, (Rs.), 6,000, 12,000, 300, 6,000, 20,000, 3,000, 1,50,000, 22,000, 10,900, 30,000, 2,60,200
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60, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , Prepare Income and expenditure account for the year ended December 31,, 2017, and a balance sheet as on that date after the following adjustments:, Subscription for 2017, still owing were Rs. 7,000. Interest due on defence, bonds was Rs.7,000, Rent still owing was Rs. 1,000. The Book value of investment, sold was Rs. 80,000, Rs. 30,000 of the investment were still in hand. Subscription, received in 2017 included Rs. 400 from a life member. The total furniture on, January 1, 2017 was worth Rs.12,000. Salary paid for the year 2018 is, Rs.2,000., (Ans : Surplus Rs. 63,500, Total of Closing Balance Sheet Rs. 2,68,900), 16. Following Receipt and Payment Account was prepared from the cash book of, Delhi Charitable Trust for the year ending December 31, 2017, Receipt and Payment Account for the year ending December 31, 2017, Receipts, Balance b/d, Cash in hand, Cash at bank, Donation, Subscription:, Legacies, Interest on investment, Sale of old newspapers, , Amount, (Rs.), 11,500, 12,600, 9,000, 42,800, 18,000, 4,500, 200, , Payment, Charity, Rent and taxes, Salary, Printing, Postage, Advertisements, Insuranc es, Furniture, Investment, Balance c/d:, Cash in hand, Cash at bank, , 98,600, , Amount, (Rs.), 11,500, 3,200, 6,000, 600, 300, 4,500, 2,000, 21,600, 23,000, 9,900, 16,000, 98,600, , Prepare Income and expenditure account for the year ended December 31,, 2017, and a balance sheet as on that date after the following adjustments:, (a) It was decided to treat one-third of the amount received on account of, donation as income., (b) Insurance premium was paid in advance for three months., (c) Interest on investment Rs.1,100 accrued was not received., (d) Rent Rs.600: salary Rs.900 and advertisement expenses Rs.1,000, outstanding as on December 31, 2018., (Ans : Surplus Rs.21,400, Total of Closing Balance Sheet Rs.72,000), 17. From the following Receipt and Payment Account of a club, prepare Income, and Expenditure Account for the year ended March 31, 2017 and the Balance, Sheet as on that date., , 2018-19
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Accounting for Not-for-Profit Organisation, , 61, , Receipt and Payment Account for the year ending March 31, 2017, Receipts, Balance b/d, Subscription:, 2015-16, 2,000, 2016-17, 70,000, 2017-18, 3,000, Sale of old Books, (costing Rs.3,200), Rent from use of hall, Sale of newspapers, Profit from entertainment, , Amount, (Rs.), 3,500, , 75,000, 2,000, 17,000, 400, 7,300, , Payments, , Amount, (Rs.), , General expenses, Salary, Postage, Electricity charges, Furniture, Books, Newspapers, Meeting expenses, T.V. set, Balance c/d, , 1,05,200, , 900, 16,000, 1,300, 7,800, 26,500, 13,000, 600, 7,200, 16,000, 15,900, 1,05,200, , Additional Information:, (a) The club has 100 members each paying an annual subscription of Rs.900., Subscriptions outstanding on March 31, 2016 were Rs.3,600., (b) On March 31, 2017, salary outstanding amounted to Rs.1,000, Salary paid, included Rs. 1,000 for the year 2016., (c) On April 1, 2017 the club owned land and building Rs.25,000, furniture, Rs.2,600 and books Rs.6,200., (Ans : Surplus Rs.79,700, Total of Closing Balance Sheet Rs.1,23,600), 18. Following is the Receipt and Payment Account of Women’s Welfare Club for the, year ended December 31, 2017:, Receipt and Payment Account for the year ending December 31, 2017, Receipts, Balance b/d, Subscriptions, Donations, Grant from Government, Sale of newspapers, Proceeds of charity show, Interest on investments, @ 10% for full year, Sundries income, , Amount, (Rs.), 7,250, 81,750, 3,000, 15,000, 300, 16,500, 7,000, 400, , Payments, Salary, Stationery, Electricity charges, Insurance, Equipments, Petty expenses, Expenses on charity show, Newspapers, Lectures fee, Honorarium to Secretary, Balance c/d, , 1,31,200, , 2018-19, , Amount, (Rs.), 12,500, 1,700, 9,550, 7,500, 30,000, 500, 12,900, 1,000, 16,500, 12,000, 27,050, 1,31,200
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62, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , Additional Information:, , Outstanding salaries, Insurance prepaid, Subscription outstanding, Subscription received in advanced, Electricity charges outstanding, Stock of stationery, Equipments, Building, , 01.01.2017, Rs., , 31.12.2017, Rs., , 1,200, 700, 3,750, 1,750, —, 2,250, 25,600, 1,20,000, , 1,800, 300, 2,500, 1,000, 1,250, 700, 50,200, 1,14,000, , Prepare Income and Expenditure Account for the year ended December 31,, 2017 and Balance Sheet as on date., (Ans : Surplus Rs.34,100, Total of Closing Balance Sheet Rs.2,64,750), 19. As at March 31, 2015 the following balances have been extrated from the books, of the Indian Chartered Accountants Recreation Club and you are asked to, prepare (1) Trading Account for ascertaining gross profit derived from running, resturant and dining room and (2) Income and Expenditure Account for the, year ended March 31, 2017 (3) and a Balance Sheet as at that date., Debit Balances, Stock-in-hand, Purchases, Dining Room, Rent, Wages, Repairs and Renewals, Fuel and Light, Misc. Expenses, Cash in hand, Cash at bank, Fixed Deposit, Sundry Debtors, China glass, cutlery & linen, Billiard Table, Fixtures and Fittings, Furniture, Club Premises, , Credit Balances, Rs., 1170, 24,660, 32,370, 10,470, 18,690, 5,400, 5,280, 4,050, 560, 2,760, 8,500, 2,250, 600, 2,070, 870, 4,140, 30,000, 1,53,840, , Receipts Dining Room, Subscriptions, Billiard's Receipts, Sunday Receipts, Interest on Fixed Deposit, Sundry Credtiors, Grant from Institute, (permanent), Income and Exp. A/c, (2016), , Rs., 87,660, 9,450, 7,300, 410, 270, 5370, 42,000, 1,380, , 1,53,840, , On March 31,2016 stock of restaurant consisted of Rs. 900 and Rs. 60, respectively. Provide depreciations Rs. 60 on fixtures and fittings, Rs. 390 on billiard, table and Rs. 560 on furniture., (Ans: Excess of income over expenditure– Rs. 2,950: Total of Balance Sheet Rs. 51,700), , 2018-19
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Accounting for Not-for-Profit Organisation, , 63, , Check-list to Test your Understanding, Test your Understanding – I, Ans. TRUE: (iii) (vi) (vii) (x); FALSE: (i) (ii) (iv).(v).(viii).(ix)., Test your Understanding – II, 1. There is a specific tournament fund. The accounting treatment is as, under:, Liabilities side of the Balance Sheet, Tournament fund, Add: Receipts from tournament, Less: Tournament Expenses, Balance to remain on the Liabilities side of, , Amount (Rs.), 40,000, 16,000, 56,000, 14,000, 42,000, , the Balance Sheet, , 2. There is no specific fund. So the amount incurred on Table Tennis match, expenses Rs. 4,000 would be shown on the debit side of Income and, Expenditure Account. It is the case of expenses independent of any specific, fund., 3. There is a specific fund. The accounting treatment is as under:, Liabilities side of the Balance Sheet, Prize Fund, Add: Interest, Less: Prizes Paid, Balance to remain on the Liabilities side of the, Balance Sheet, Prize fund Investments would appear on the Assets, Side of the Balance Sheet, , Amount, (Rs.), 22,000, 3,000, 25,000, 5,000, 20,000, 18,000, , 4. There is no specific fund. Receipts from Charity Show would be shown, on the credit side and expenses on charity show are deducted from the, receipts and the net amount would be shown on the credit side of Income, and Expenditure Account., , 2018-19
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Accounting for Partnership : Basic Concepts, , LEARNING OBJECTIVES, After studying this chapter,, you will be able to :, • Define partnership and, list its essential features;, • Identify the provisions of, the Indian Partnership, Act 1932 that are, relevant for accounting;, • Prepare partners’ capital, accounts under fixed and, fluctuating, capital, methods;, • Explain the distribution, profit or loss among the, partners and prepare the, Profit, and, Loss, Appropriation Account;, • Calculate interest on, capital and drawing, under various situations;, • Explain how guarantee, for a minimum amount, of profit affects the, distribution of profits, among the partners;, • Make, necessary, adjustments to rectify, the past errors in, partners, capital, accounts; and, • Prepare final accounts of, a partnership firm;, , 2, , Y, , ou have learnt about the preparation of final, accounts for a sole proprietary concern. As the, business expands, one needs more capital and, larger number of people to manage the business and, share its risks. In such a situation, people usually, adopt the partnership form of organisation., Accounting for partnership firms has it’s own, peculiarities, as the partnership firm comes into, existence when two or more persons come together, to establish business and share its profits. On many, issues affecting distribution of profits, there may not, be any specific agreement between the partners. In, such a situation the provisions of the Indian, Partnership Act 1932 apply. Similarly, calculation, of interest on capital, interest on drawings and, maintenance of partners capital accounts have their, own peculiarities. Not only that a variety of, adjustments are required on the death of a partner, or when a new partner is admitted and so on. These, peculiar situations need specific treatment in, accounting that need to be clarified., The present chapter discusses some basic, aspects of partnership such as distribution of profit,, maintenance of capital accounts, etc. The treatment, of situations like admission of partner, retirement,, death and dissolution have been taken up in the, subsequent chapters., 2.1 Nature of Partnership, When two or more persons join hands to set up a, business and share its profits and losses, they are, said to be in partnership. Section 4 of the Indian, Partnership Act 1932 defines partnership as the, , 2018-19
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Accounting for Partnership : Basic Concepts, , 65, , ‘relation between persons who have agreed to share the profits of a business, carried on by all or any of them acting for all’., Persons who have entered into partnership with one another are individually, called ‘partners’ and collectively called ‘firm’. The name under which the business, is carried is called the ‘firm’s name’. A partnership firm has no separate legal, entity, apart from the partners constituting it. Thus, the essential features of, partnership are:, 1. Two or More Persons: In order to form partnership, there should be at, least two persons coming together for a common goal. In other words,, the minimum number of partners in a firm can be two. There is however,, a limit on their maximum number. By virtue of Section 464 of the, Companies Act 2013, the Central Government is empowered to prescribe, maximum number of partners in a firm but the number of partners can, not be more than 100. The Central government has prescribed the, maximum number of partness in a firm to be 50 under Rule 10 of the, Companies (Miscellaneous) Rules, 2014, So, a partnership firm cannot, have more than 50 partners., 2. Agreement: Partnership is the result of an agreement between two or, more persons to do business and share its profits and losses. The, agreement becomes the basis of relationship between the partners. It is, not necessary that such agreement is in written form. An oral agreement, is equally valid. But in order to avoid disputes, it is preferred that the, partners have a written agreement., 3. Business: The agreement should be to carry on some business. Mere coownership of a property does not amount to partnership. For example, if, Rohit and Sachin jointly purchase a plot of land, they become the joint, owners of the property and not the partners. But if they are in the business, of purchase and sale of land for the purpose of making profit, they will, be called partners., 4. Mutual Agency: The business of a partnership concern may be carried, on by all the partners or any of them acting for all. This statement has, two important implications. First, every partner is entitled to participate, in the conduct of the affairs of its business. Second, that there exists a, relationship of mutual agency between all the partners. Each partner, carrying on the business is the principal as well as the agent for all the, other partners. He can bind other partners by his acts and also is bound, by the acts of other partners with regard to business of the firm., Relationship of mutual agency is so important that one can say that, there would be no partnership, if the element of mutual agency is absent., 5. Sharing of Profit: Another important element of partnership is that, the, agreement between partners must be to share profits and losses of a, business. Though the definition contained in the Partnership Act describes, partnership as relation between people who agree to share the profits of, a business, the sharing of loss is implied. Thus, sharing of profits and, , 2018-19
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66, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , losses is important. If some persons join hands for the purpose of some, charitable activity, it will not be termed as partnership., 6. Liability of Partnership: Each partner is liable jointly with all the other, partners and also severally to the third party for all the acts of the firm, done while he is a partner. Not only that the liability of a partner for acts, of the firm is also unlimited. This implies that his private assets can also, be used for paying off the firm’s debts., Limited Liability Partnership, Limited Liability Partnership (LLP) is an incorporated partnership formed and, registered under the Limited Liability Partnership Act., 2008 with limited liability, and peretual succession., It is viewed as an alternative corporate business vehicle that provides the benefits, of limited liability but allows its partners the flexibility of organising their internal, structure as a partnership based on a mutually arrived agreement., Salient Features, The salient features of Limited Liability Partnership are as follows :, 1. Limited Liability Partnership is a corporate and a legal entity separate from is partners., 2. Every Limited Liability Partnership shall have at least two partners and shall, also have at least two individuals as designated partners, of whom at least one, shall be a resident in India., 3. The Indian Partnership Act, 1932, shall not be applicable to Limited Liability Partnership., 4. The Limited Liability Partnership has a perpetual succession., 5. The Central government has the power to investigate into the affairs of a Limited `Liability, Partnership, if required, by appointment of a Competent Inspector for the purpose., , 2.2 Partnership Deed, Partnership comes into existence as a result of agreement among the partners., The agreement can be either oral or written. The Partnership Act does not require, that the agreement must be in writing. But wherever it is in writing, the document,, which contains terms of the agreement is called ‘Partnership Deed’. It generally, contains the details about all the aspects affecting the relationship between the, partners including the objective of business, contribution of capital by each, partner, ratio in which the profits and the losses will be shared by the partners, and entitlement of partners to interest on capital, interest on loan, etc., The clauses of partnership deed can be altered with the consent of all the, partners. The deed should be properly drafted and prepared as per the provisions, of the ‘Stamp Act’ and preferably registered with the Registrar of Firms., Contents of the Partnership Deed, The Partnership Deed usually contains the following details:, •, Names and Addresses of the firm and its main business;, •, Names and Addresses of all partners;, , 2018-19
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Accounting for Partnership : Basic Concepts, •, •, •, •, •, •, •, •, •, •, •, •, •, •, , 67, , Amount of capital to be contributed by each partner;, The accounting period of the firm;, The date of commencement of partnership;, Rules regarding operation of Bank Accounts;, Profit and loss sharing ratio;, Rate of interest on capital, loan, drawings, etc;, Mode of auditor’s appointment, if any;, Salaries, commission, etc, if payable to any partner;, The rights, duties and liabilities of each partner;, Treatment of loss arising out of insolvency of one or more partners;, Settlement of accounts on dissolution of the firm;, Method of settlement of disputes among the partners;, Rules to be followed in case of admission, retirement, death of a partner; and, Any other matter relating to the conduct of business., Normally, the partnership deed covers all matters affecting relationship of, partners amongst themselves. However, if there is no express agreement on, certain matters, the provisions of the Indian Partnership Act, 1932 shall apply., , 2.2.1 Provisions Relevant for Accounting, The important provisions affecting partnership accounts are as follows:, (a) Profit Sharing Ratio: If the partnership deed is silent about the profit, sharing ratio, the profits and losses of the firm are to be shared equally, by partners, irrespective of their capital contribution in the firm., (b) Interest on Capital: No partner is entitled to claim any interest on the, amount of capital contributed by him in the firm as a matter of right., However, interest can be allowed when it is expressly agreed to by the, partners. Thus, no interest on capital is payable if the partnership deed, is silent on the issue. Further the interest is payable only out of the, profits of the business and not if the firm incurs losses during the period., (c) Interest on Drawings: No interest is to be charged on the drawings made, by the partners, if there is no mention in the Deed., (d) Interest on Advances: If any partner has advanced some money to the, firm beyond the amount of his capital for the purpose of business, he, shall be entitled to get an interest on the amount at the rate of 6 per cent, per annum., (e) Remuneration for Firm’s Work: No partner is entitled to get salary or, other remuneration for taking part in the conduct of the business of the, firm unless there is a provision for the same in the Partnership Deed., Apart from the above, the Indian Partnership Act specifies that subject to, contract between the partners:, (i) If a partner derives any profit for him/her self from any transaction of the, firm or from the use of the property or business connection of the firm or, the firm name, he/she shall account for the profit and pay it to the firm., (ii) If a partner carries on any business of the same nature as and competing, with that of the firm, he/she shall account for and pay to the firm, all, profit made by him/her in that business., , 2018-19
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68, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, Test your Understanding – I, 1. Mohan and Shyam are partners in a firm. State whether the claim is valid if the, partnership agreement is silent in the following matters:, (i) Mohan is an active partner. He wants a salary of Rs. 10,000 per year;, (ii) Shyam had advanced a loan to the firm. He claims interest @ 10% per, annum;, (iii) Mohan has contributed Rs. 20,000 and Shyam Rs. 50,000 as capital. Mohan, wants equal share in profits., (iv) Shyam wants interest on capital to be credited @ 6% per annum., 2. State whether the following statements are true or false:, (i) Valid partnership can be formulated even without a written agreement, between the partners;, (ii) Each partner carrying on the business is the principal as well as the agent, for all the other partners;, (iii) Maximum number of partners can be 50;, (iv) Methods of settlement of dispute among the partners can’t be part of the, partnership deed;, (v) If the deed is silent, interest at the rate of 6% p.a. would be charged on the, drawings made by the partner;, (vi) Interest on partner’s loan is to be given @ 12% p.a. if the deed is silent, about the rate., , 2.3 Special Aspects of Partnership Accounts, Accounting treatment for partnership firm is similar to that of a sole, proprietorship business with the exception of the following aspects:, • Maintenance of Partners’ Capital Accounts;, • Distribution of Profit and Loss among the partners;, • Adjustments for Wrong Appropriation of Profits in the Past;, • Reconstitution of the Partnership Firm; and, • Dissolution of Partnership Firm., The first three aspects mentioned above have been taken up in the following, sections of this chapter. The remaining aspects have been covered in the, subsequent chapters., 2.4 Maintenance of Capital Accounts of Partners, All transactions relating to partners of the firm are recorded in the books of the, firm through their capital accounts. This includes the amount of money brought, in as capital, withdrawal of capital, share of profit, interest on capital, interest, on drawings, partner’s salary, commission to partners, etc., There are two methods by which the capital accounts of partners can be, maintained. These are: (i) fixed capital method, and (ii) fluctuating capital, method. The difference between the two lies in whether or not the transactions, other than addition/withdrawal of capital are recorded in the capital accounts, of the partners., (a) Fixed Capital Method: Under the fixed capital method, the capitals of the, partners shall remain fixed unless additional capital is introduced or a, part of the capital is withdrawn as per the agreement among the partners., , 2018-19
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Accounting for Partnership : Basic Concepts, , 69, , All items like share of profit or loss, interest on capital, drawings, interest, on drawings, etc. are recorded in a separate accounts, called Partner’s, Current Account. The partners’ capital accounts will always show a credit, balance, which shall remain the same (fixed) year after year unless there, is any addition or withdrawal of capital. The partners’ current account, on the other hand, may show a debit or a credit balance. Thus under, this method, two accounts are maintained for each partner viz., capital, account and current account, While the partners’ capital accounts shall, always appear on the liabilities side in the balance sheet, the partners’, current account’s balance shall be shown on the liabilities side, if they, have credit balance and on the assets side, if they have debit balance., The partner’s capital account and the current account under the fixed capital, method would appear as shown below:, Partner’s Capital Account, Dr., , Cr., , Date Particulars, Bank (permanent, withdrawal of capital), Balance c/d, (closing balance), , J.F. Amount, (Rs.), , Date, , xxx, , Particulars, , J.F. Amount, (Rs.), , Balance b/d, (opening balance), Bank (fresh capital, introduced), , xxx, , xxx, xxx, , xxx, , xxx, , Partner’s Current Account, Dr., Date, , Cr., Particulars, , J.F. Amount, (Rs.), , Balance b/d (in case, of debit opening bal,), Drawings, Interest on drawings, Profit & Loss a/c, , xxx, , Balance c/d, (in case of credit, closing balance), , xxx, , Date, , xxx, xxx, xxx, , Particulars, , J.F. Amount, (Rs.), , Balance b/d, (in case of credit, opening balance), Salary, Commission, Interest on capital, Profit & Loss, Appropriation, (share of profit), Balance c/d, (in case of debit, closing balance), , xxxx, Fig. 2.1: Proforma of Partner’s Capital and Current Account under, Fixed Capital Method., , 2018-19, , xxx, , xxx, xxx, xxx, , xxx, , xxxx
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70, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , (b) Fluctuating Capital Method: Under the fluctuating capital method, only, one account, i.e. capital account is maintained for each partner. All the, adjustments such as share of profit and loss, interest on capital, drawings,, interest on drawings, salary or commission to partners, etc are recorded, directly in the capital accounts of the partners. This makes the balance, in the capital account to fluctuate from time to time. That’s the reason, why this method is called fluctuating capital method. In the absence of, any instruction, the capital account should be prepared by this method., The proforma of capital accounts prepared under the fluctuating capital, method is given below:, Partner’s Capital Account, Dr., , Cr., , Date, , Particulars, , J.F. Amount, (Rs.), , Drawings, , xxx, , Interest on drawings, Profit and Loss, A/c, (for share of loss), Balance c/d, , xxx, xxx, , Date Particulars, , J.F. Amount, (Rs.), , Balance b/d, Bank (fresh, capital introduced), Salaries, Interest on capital, Profit and Loss, Appropriation, (for share of profit), , xxxx, , xxx, xxx, xxx, xxx, xxx, , xxxx, , Fig. 2.2: Proforma of Partner’s Capital Account under Fluctuating capital Method., , 2.4.1 Distinction between Fixed and Fluctuating Capital Accounts, The main points of differences between the fixed and fluctuating capital methods, can be summed up as follows:, Basis of Distinction, , Fixed Capital Account, , Fluctuating Capital Account, , (i) Number of, accounts, , Under this method, two, separate accounts are, maintained for each partner, viz. ‘capital account’ and ‘, current account’., All adjustments for drawings,, salary, interest on capital,, etc. are made in the current, accounts and not in the, capital accounts., , Each partner has one account,, i.e. capital account, under this, method, , (iii) Fixed balance, , The capital account balance, remain unchanged unless, there is addition to or, withdrawal of capital., , The balance of the capital, account fluctuates from year, to year, , (iv) Credit balance, , The capital accounts, always show a credit balance., , The capital account, may sometimes show a debit, balance., , (ii) Adjustments, , 2018-19, , All adjustments for drawings,, salary interest on capital, etc.,, are made in the capital accounts,
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Accounting for Partnership : Basic Concepts, , 71, , Illustration 1, Sameer and Yasmin are partners with capitals of Rs.15,00,000 and Rs. 10,00,000, respectively. They agree to share profits in the ratio of 3:2. Show how the following, transactions will be recorded in the capital accounts of the partners in case:, (i) the capitals are fixed, and (ii) the capitals are fluctuating. The books are closed, on March 31, every year., Particulars, Additional capital contributed, on July 1, 2014, Interest on capital, Drawings (during 2014-15), Interest on drawings, Salary, Commission, Share in loss, for the year 2014-15, , Sameer, (Rs.), 3,00,000, , Yasmin, (Rs.), 2.00,000, , 5%, 30,000, 1,800, 20.000, 10,000, 60,000, , 5%, 20,000, 1,200, 7,000, 40,000, , Solution, Fixed Capital Method, Partner’s Capital Accounts, Dr., , Cr., , Date Details, , L.F., , Balance c/d, , Sameer, Amount, (Rs.), , Yasmin, Amount, (Rs.), , Date Details, , 18,00,000 12,00,000, , Balance b/d, (Additional, capital), , 18,00,000 12,00,000, , L.F., , Sameer, Amount, (Rs.), , Yasmin, Amount, (Rs.), , 15,00,000 10,00,000, 3,00,000, , 2,00,000, , 18,00,000 12,00,000, , Partner’s Current Accounts, Dr., , Cr., , Date Particulars, , Drawings, Interest on, drawings, Profit and Loss, A/c, Balance c/d, , J.F., , Amount Amount, (Rs.), (Rs.), Sameer Yasmin, 30,000, 1,800, , 20,000, 1,200, , 60,000, , 40,000, , 20,700, , Date Particulars, , Interest on, capital, Partner’s, salary, Commission, , J.F., , Amount Amount, (Rs.), (Rs.), Sameer Yasmin, 82,500 55,000, 20,000, , 7,000, , 10,000, , 800, , 1,12,500 6 2 , 0 0 0, , 2018-19, , 1,12,500 62,000
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72, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , Working Notes:, Calculation of interest on capitals:, , Rs., , X 5% on Rs. 15,00,000 for 1 Year, , 5% on Rs. 10,00,000 for 1 year, 5% on Rs. 2,00,000 for 6 month, , 15,00,000, 100, 6, 3,00,000, ×, =5×, 100, 12, =5×, , 5% on Rs. 3,00,000 for 6 months, , Y, , Rs., =, , 75,000, , =, , 7,500, 82,500, , 10,00,000, 100, 6, 2,00,000, =5×, ×, 100, 12, =5×, , =, , 50,000, , =, , 5,000, 55,000, , Fluctuating Capital Method, Partner’s Capital Accounts, , Dr,, Date Particulars, , Drawings, Interest on, Drawings, Profit and, Loss, Balance c/d, , J.F., , Amount, (Rs.), Sameer, , Amount, (Rs.), Yasmin, , 30,000, 1800, , 20,000, 1200, , 60,000, , 40,000, , Cr., , Date Particulars, , Balance b/d, Bank, Interest on, capital, Salary, Commission, , 18,20,700 12,00,800, 19,12,500 12,62,000, , J.F., , Amount, (Rs.), Sameer, , Amount, (Rs.), Yasmin, , 15,00,000 10,00,000, 3,00,000 2,00,000, 82,500, 55,000, 20,000, 10,000, , 7000, -, , 19,12,500 12,62,000, , Do it Yourself, 1. Soumya and Bimal are partners in a firm Sharing profits and losses in, the ratio of 3:2. The balance in their capital and current accounts as, on April 01, 2017 were as under:, , Capital Accounts, Current Accounts (Cr.), , Soumya, (Rs.), , Bimal, (Rs.), , 3,00,000, 1,00,000, , 2,00,000, 80,000, , The partnership deed provides that Soumya is to be paid salary @ Rs, 500 per, month where as Bimal is to get a commission of Rs. 40,000 for the year. Interest on, capital is to be credited at 6% p.a. The drawings of Soumya and Bimal for the year, were Rs. 30,000 and Rs. 10,000 respectively. The net profit of the firm before making, these adjustment was Rs, 2,49,000. Interest on Soumya’s drawings was Rs. 750 and, Bimal’s drawings, Rs. 250. Prepare Profit and Loss Appropriation Account and, Partner’s Capital and Current Accounts., 2. Soniya, Charu and Smita started a partnership firm on April 1, 2017. They, contributed Rs, 5,00,000, Rs. 4,00,000 and Rs. 3,00,000 respectively as, their capitals and decided to share profits and losses in the ratio of 3:2:1., , 2018-19
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Accounting for Partnership : Basic Concepts, , 73, , The partnership provides that Soniya is to be paid a salary of Rs. 10,000 per, month and Charu a commission of Rs. 50,000. It also provides that interest on, capital be allowed @6% p.a. The drawings for the year were Soniya Rs. 60,000,, Charu Rs. 40,000 and Smita Rs. 20,000. Interest on drawings was charged as, Rs. 2,700 on Soniya’s drawings, Rs. 1,800 on Charu’s drawings and Rs. 900 on, Smita’s drawings. The net amount of profit as per Profit and Loss Account for, the year 2015-16 was Rs. 3,56,600., (i) Record necessary journal entries., (ii) Prepare profit and loss appropriation account, (iii) Show capital accounts of the partners., , 2.5 Distribution of Profit among Partners, The profits and losses of the firm are distributed among the partners in an agreed, ratio. However, if the partnership deed is silent, the firm’s profits and losses are, to be shared equally by all the partners., You know that in the case of sole partnership the profit or loss, as ascertained, by the profit and loss account is transferred to the capital account of the, proprietor. In case of partnership, however, certain adjustments such as interest, on drawings, interest on capital, salary to partners, and commission to partners, are required to be made. For this purpose, it is customary to prepare a Profit, and Loss Appropriation Account of the firm and ascertain the final figure of, profit and loss to be distributed among the partners, in their profit sharing ratio., 2.5.1 Profit and Loss Appropriation Account, Profit and Loss Appropriation Account is merely an extension of the Profit and Loss, Account of the firm. It shows how the profits are appropriated or distributed among, the partners. All adjustments in respect of partner’s salary, partner’s commission,, interest on capital, interest on drawings, etc. are made through this account. It, starts with the net profit/net loss as per Profit and Loss Account is transfered to this, account. The journal entries for preparation of Profit and Loss Appropriation Account, and making various adjustments through it are given as follows:, Journal Entries, 1. Transfer of the balance of Profit and Loss Account to Profit and Loss Appropriation, Account:, (a), If Profit and Loss Account shows a credit balance (net profit):, Profit and Loss A/c, Dr., To Profit and Loss Appropriation A/c, (b), If Profit and Loss Account shows a debit balance (net loss), Profit and Loss Appropriation A/c, Dr., To Profit and Loss A/c, 2. Interest on Capital:, (a), For crediting interest on capital to partners’ capital account:, Interest on Capital A/c, Dr., To Partner’s Capital/Current A/cs (individually), , 2018-19
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74, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, (b), , 3., , 4., , 5., , 6., , For transferring interest on capital to Profit and Loss Appropriation Account:, Profit and Loss Appropriation A/c, Dr., To Interest on Capital A/c, Interest on Drawings:, (a), For charging interest on drawings to partners’ capital accounts:, Partners Capital/Current A/c’s (individually), Dr., To Interest on Drawings A/c, (b), For transferring interest on drawings to Profit and Loss Appropriation Account:, Interest on Drawings A/c, Dr., To Profit and Loss Appropriation A/c, Partner’s Salary:, (a), For crediting partner’s salary to partner’s capital account:, Salary to Partner A/c, Dr., To Partner’s Capital/Current A/c’s (individually), (b), For transferring partner’s salary to Profit and Loss Appropriation Account:, Profit and Loss Appropriation A/c, Dr., To Salary to Partner’s A/c, Partner’s Commission:, (a), For crediting commission to a partner, to partner’s capital account:, Commission to Partner A/c, Dr., To Partner’s Capital/Current A/c’s (individually), (b), For transferring commission paid to partners to Profit and Loss Appropriation, Account., Profit and Loss Appropriation A/c, Dr., To Commission to Partners Capital/Current A/c, Share of Profit or Loss after appropriations:, If Profit:, Profit and Loss Appropriation A/c, Dr., To Partner’s Capital/Current A/c’s (individually), , The Proforma of Profit and Loss Appropriation Account is given as follows:, Profit and Loss Appropriation Account, Dr., , Cr., , Particulars, , Amount, (Rs.), , Profit and Loss, (if there is loss), Interest on Capital, Salary to Partner, Commission to Partner, Interest on Partner’s Loan, Partners’ Capital Accounts, (distribution of profit), , xxx, xxx, xxx, xxx, xxx, xxx, , Particulars, Profit and Loss, (if there is profit), Interest on Drawings, , xxxx, Fig. 2.3: Proforma of Profit and Loss Appropriation Account, , 2018-19, , Amount, (Rs.), xxx, xxx, xxx, , xxxx
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Accounting for Partnership : Basic Concepts, , 75, , Illustration 2, Amit, Babu and Charu set up a partnership firm on April 1, 2015. They, contributed Rs. 50,000, Rs. 40,000 and Rs. 30,000, respectively as their, capitals and agreed to share profits and losses in the ratio of 3 : 2 :1. Amit is to, be paid a salary of Rs. 1,000 per month and Babu, a Commission of Rs. 5,000., It is also provided that interest to be allowed on capital at 6% p.a. The drawings, for the year were Amit Rs. 6,000, Babu Rs. 4,000 and Charu Rs. 2,000. Interest, on drawings of Rs. 270 was charged on Amit’s drawings, Rs. 180 on Babu’s, drawings and Rs. 90, on Charu’s drawings. The net profit as per Profit and, Loss Account for the year ending March 31, 2015 was Rs. 35,660. Prepare the, Profit and Loss Appropriation Account to show the distribution of profit among, the partners., Solution, Profit and Loss Appropriation Account, Dr., Particulars, Amits’ salary, Babus’ commission, Interest on Capitals :, Amit, 3,000, Babu, 2,400, Charu, 1,800, Share of profit transferred to, Capital accounts :, Amit, 6,000, Babu, 4,000, Charu, 2,000, , Cr., Amount, (Rs.), 12,000, 5,000, , Particulars, Net profit, Interest on drawings:, Amit, Babu, Charu, , Amount, (Rs.), 35,660, 270, 180, 90, , 540, , 7,200, , 12,000, 36,200, , 36,200, , Illustration 3, Amitabh and Babul are partners sharing profits in the ratio of 3:2, with capitals, of Rs. 50,000 and Rs. 30,000 respectively. Interest on capital is agreed @ 6%, p.a. Babul is to be allowed an annual salary of Rs. 2,500. During the year, 2016-17, the profits prior to the calculation of interest on capital but after, charging Babul’s salary amounted to Rs. 12,500. A provision of 5% of the profit, is to be made in respect of commission to the Manager., Prepare Profit and Loss Appropriation account showing the distribution of, profit and the partners’ capital accounts for the year ending March 31, 2017., , 2018-19
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76, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , Solution, Profit and Loss Appropriation Account, Dr., , Cr., , Particulars, , Amount, (Rs.), , Babul’s salary, Interest on capital:, Amitabh, Babul, Manager’s commission, (5% of Rs. 15,000), Profit transferred to partner’s, capital account;, Amitabh, 4,170, Babul, 2,780, , 2,500, , Particulars, , Amount, (Rs.), , Net profit, (before Babul’s salary), , 15,000, , 3,000, 1,800, 750, , 6,950, 15,000, , 15,000, , Amitabh’s Capital Account, Dr., Date, , Cr., Particulars, , J.F., , 2017, Mar.31 Balance c/d, , Amount, (Rs.), 57,170, , Date, 2016, , Particulars, , J.F., , 2016, Apr.01 Balance b/d, 2017, Mar.31 Interest on capital, Mar.31 Profit & Loss, Appropriation a/c, , 57,170, , Amount, (Rs.), 50,000, 3,000, 4,170, 57,170, , (share of profit), , Babul’s Capital Account, Dr., Date, 2017, , Cr., Particulars, , 2017, Mar.31 Balance c/d, , J.F., , Amount, (Rs.), 37,080, , Date, 2016, Apr.01, 2017, Mar.31, Mar.31, , 37,080, , 2018-19, , Particulars, , Balance b/d, Salary, Interest on capital, Profit & Loss, Appropriation, (share of profit), , J.F., , Amount, (Rs.), 30,000, 2,500, 1,800, 2,780, , 37,080
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Accounting for Partnership : Basic Concepts, , 77, , Test your Unerstanding – II, 1. Raju and Jai commenced business in partnership on April 1, 2017. No partnership, agreement was made whether oral or written. They contributed Rs. 4,00,000 and, Rs. 1,00,000 respectively as capitals. In addtion, Raju advanced, Rs. 2,00,000 as loan to the firm on October 1, 2017. Raju met with an accident, on July 1, 2017 and could not attend the business up to september 30, 2017., The profit for the year ended March 31, 2018 amounted to Rs, 50,600. Disputes, have arisen between them on sharing the profits of the firm., Raju Claims:, (i) He should be given interest at 10% p.a. on capital and so also on loan., (ii) Profit should he distributed in the proportion of capitals., Jai Claims:, (i) Net profit should be shared equally., (ii) He should be allowed remuneration of Rs, 1,000 p.a. during the period of, Raju’s illness., (iii) Interest on capital and loan should be given @ 6% p.a., State the correct position on each issue as per the provisions of the, Partnership Act. 1932., 2. Reena and Raman are partners with capitals of Rs. 3,00,000 and Rs. 1,00,000, respectively. The profit (as per Profit and Loss Account) for the year ended, March 31, 2017 was Rs. 1,20,000. Interest on capital is to be allowed at 6%, p.a. Raman was entitled to a salary of Rs. 30,000 p.a. The drawings of partners, were Rs. 30,000 and 20,000. The interest on drawings to be charged to Reena, was Rs. 1,000 and to Raman, Rs. 500., Assuming that Reena and Raman are equal partners. State their share of, profit after necessary appropriations., , 2.5.2 Calculation of Interest on Capital, No interest is allowed on partners’ capitals unless it is expressly agreed among, the partners. When the Deed specifically provides for it, interest on capital is credited, to the partners at the agreed rate with reference to the time period for which the, capital remained in business during a financial year. Interest on capital is generally, provided for in two situations: (i) when the partners contribute unequal amounts, of capitals but share profits equally, and (ii) where the capital contribution is same, but profit sharing is unequal., Interest on capital is calculated with due allowance for any addition or, withdrawal of capital during the accounting period. For example, Mohini, Rashmi, and Navin entered into partnership, bringing in Rs. 3,00,000, Rs. 2,00,000 and, Rs. 1,00,000 respectively into the business. They decided to share profits and, losses equally and agreed that interest on capital will be provided to the partners, , 2018-19
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78, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , @10 per cent per annum. There was no addition or withdrawal of capital by any, partner during the year. The interest on capital works out to Rs. 30,000, (10% on 30,000) for Mohini, Rs. 20,000 (10% on 2,00,000) for Rashmi, and Rs., 10,000 (10% on 1,00,000) for Navin., Take another case of Mansoor and Reshma who are partners in a firm and, their capital accounts showed the balance of Rs. 2,00,000 and Rs. 1,50,000, respectively on April 1, 2016. Mansoor introduced additional capital of, Rs. 1,00,000 on August 1, 2016 and Reshma brought in further capital of, Rs. 1,50,000 on October 1, 2016. Interest is to be allowed @ 6% p.a. on the, capitals. It shall be worked as follows:, For Mansoor, , Rs. 2,00,000 ×, , 6, 6, 8, + Rs. 1,00,000 ×, ×, 100, 100 12, , = Rs. 12,000 + Rs. 4,000 = Rs. 16,000, For Reshma, , Rs. 1,50,000 ×, , 6, 6, 6, + Rs. 1,50,000 ×, ×, 100, 100 12, , = Rs. 9,000+Rs. 4,500= Rs. 13,500, , When there are both addition and withdrawal of capital by of partners during, a financial year, the interest on capital is calculated as follows:, (i) On the opening balance of the capital accounts of partners, interest is calculated, for the whole year;, (ii) On the additional capital brought in by any partner during the year, interest is, calculated from the date of introduction of additional capital to the last day of the, financial year., (iii) On the amount of capital withdrawn (other than usual drawings) during the year, interest for the period from the date of withdrawal to the last day of the financial, year is calculated and deducted from the total of the interest calculated under, points: (i) and (ii) above., Alternatively, it can be calculated with respect to the amounts remained invested, for the relevant periods., , Illustration 4, Saloni and Srishti are partners in a firm. Their capital accounts as on, April 01. 2016 showed a balance of Rs. 2,00,000 and Rs. 3,00,000, respectively. On July 01, 2016, Saloni introduced additional capital of, Rs. 50,000 and Srishti, Rs. 60,000. On October 01 Saloni withdrew Rs., 30,000, and on January 01, 2016 Srishti withdraw, Rs. 15,000 from their, capitals. Interest is allowed @ 8% p.a. Calculate interest payable on capital, to both the partners during the financial year 2016–2017., , 2018-19
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Accounting for Partnership : Basic Concepts, , 79, , Solution, Statement Showing Calculation of Interest on Capital, For Saloni, (Rs,), Interest on Rs. 2,00,000 for full year, , Rs. 2,00,000 8 1, =, =, 100, , 16,000, , Add: Interest on Rs. 50,000 for 9 months=, , Rs.50,000 9 8, 12 100, , =, , 3,000, 19,000, , Less: Interest on 30,000 for 6 months, , Rs.30,000 8 6, 12 100, , =, , 1,200, , =, , 17,800, , Alternatively interest can be calculated on Rs. 2 lakh for 3 months, on, Rs. 2,50,000 for 3 months, and on Rs. 2,20,000, for 6 months (Rs. 4,000 +, Rs. 5,000 + Rs. 8,800 = Rs. 17,800)., For Srishti, (Rs.), Interest on Rs. 3,00,000, for full year @8% =, , Rs.3,00,000 8 1, =, 100, , 24,000, , Add: Interest on Rs. 60,000, for 9 months =, , Rs.60,000 8 9, =, 100 12, , 3,600, 27,600, , Less: Interest on Rs. 15,000 for 3 months =, , Rs.15,000 8 3, 100 12, , (Money withdrawn), , =, , 300, 27,300, , Alternatively interest can be charged on Rs. 3,00,000 for 3 months on, Rs. 3,60,000 for 6 months and on Rs. 3,45,000 for 3 months (Rs. 6,000 +, Rs. 14,400 + Rs. 6,900 = Rs. 27,300)., , 2018-19
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80, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , Illustration 5, Josh and Krish are partners sharing profits and losses in the ratio of 3:1. Their, capitals at the end of the financial year 2015-2016 were Rs. 1,50,000 and, Rs. 75,000. During the year 2015-2016, Josh’s drawings were Rs. 20,000 and the, drawings of Krish were Rs. 5,000, which had been duly debited to partner’s capital, accounts. Profit before charging interest on capital for the year was Rs. 16,000., The same had also been debited in their profit sharing ratio. Krish had brought, additional capital of Rs. 16,000 on October 1, 2015. Calculate interest on capital, @ 12% p.a. for the year 2015-2016., Solution, Statement Showing Calculation of Capital at the Beginning, Particulars, , Josh, Rs., , Krish, Rs., , Capital at the end, Add: Drawings during the year, , 1,50,000, 20,000, , 75,000, 5,000, , Less: Share of profit (credited), , 1,70,000, 12,000, , 80,000, 4,000, , Less: Additional capital, , 1,58,000, —-, , 76,000, 16,000, , Capital in the beginning, , 1,58,000, , 60,000, , Interest on capital will be as 18,960 (12% of Rs. 1,58,000) for Josh and, Rs. 960 for krish calculated as follows:, Rs. 60,000 ×, , 12, 12, 6, + Rs. 16,000 ×, ×, 100, 100 12, , = Rs. 7,200 + Rs. 960, = Rs. 8,160., , Sometimes opening capitals of partners may not be given. In such a situation, before calculation of interest on capital the opening capitals will have to be worked, out with the help of partners’ closing capitals by marking necessary adjustments, for the additions and withdrawal of capital, drawings, share of profit or loss, if, already shown in the capital accounts the partners., As clarified earlier, the interest on capital is allowed only when the firm has, earned profit during the accounting year. Hence, no interest will be allowed during, the year the firm has incurred net loss and if in a year, the profit of the firm is less, than the amount due to the partners as interest on capital, the payment of interest, will be restricted to the amount of profits. In that case, the profit will be effectively, distributed in the ratio of interest on capital of each partner., , 2018-19
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Accounting for Partnership : Basic Concepts, , 81, , Illustration 6, Anupam and Abhishek are partners sharing profits and losses in the ratio, of 3 : 2. Their capital accounts showed balances of Rs. 1,50,000 and Rs., 2,00,000 respectively on Jan 01, 2017. Show the treatment of interest on, capital for the year ending December 31, 2017 in each of the following, alternatives:, (a) If the partnership deed is silent as to the payment of interest on capital, and the profit for the year is Rs. 50,000;, (b) If partnership deed provides for interest on capital @ 8% p.a. and the, firm incurred a loss of Rs. 10,000 during the year;, (c) If partnership deed provides for interest on capital @ 8% p.a. and the, firm earned a profit of Rs. 50,000 during the year;, (d) If the partnership deed provides for interest on capital @ 8% p.a. and the, firm earned a profit of Rs. 14,000 during the year., Solution, (a) In the absence of a specific provision in the Deed, no interest will be paid on the, capital to the partners. The whole amount of profit will however be distributed, among the partners in their profit sharing ratio., (b) As the firm has incurred losses during the accounting year, no interest on capital, will be allowed to any partner. The firm’s loss will however be shared by the partners, in their profit sharing ratio., Rs. ., (c) Interest to Anupam @ 8% on Rs. 1,50,000, = 12,000, Interest to Abhishek @ 8% on Rs. 2,00,000, = 16,000, 28,000, , As the profit is sufficient to pay interest at agreed rate, the whole amount of, interest on capital shall be allowed and the remaining profit amounting to, Rs. 22,000 (Rs. 50,000 – Rs. 28,000) shall be shared by the partners in their, profit sharing ratio., (d) As the profit for the year is Rs. 14,000, which is less than the amount of, interest on capital due to partners, i.e. Rs. 28,000 (Rs. 12,000 for, Anupam and Rs. 16,000 for Abhishek), interest will be paid to the extent, of available profit i.e., Rs. 14,000. Anupam and Abhishek will be, credited with Rs. 6,000 and Rs. 8,000, respectively. Effectively this, amounts to sharing the firm’s profit in the ratio of interest on capital., , 2018-19
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82, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, Test your Understanding – III, 1. Rani and Suman are in partnership with capitals of Rs, 80,000 and Rs. 60,000,, respectively. During the year 2015-16, Rani withdrew Rs. 10,000 from her capital, and Suman Rs. 15,000. Profits before charging interest on capital was Rs. 50,000., Ravi and Suman shared profits in the ratio of 3:2. Calculate the amounts of, interest on their capitals @ 12% p.a. for the year ended March 31, 2016., 2. Priya and Kajal are partners in a firm, sharing profits and losses in the ratio of, 5:3. The balance in their fixed capital accounts, on April 1, 2016 were: Priya,, Rs. 6,00,000 and Kajal, Rs. 8,00,000. The profit of the firm for the year ended, 2017 is Rs, 1,26,000. Calculate their shares of profits: (a) when there is no, agreement in respect of interest on capital, and (b) when there is an agreement, that the interest on capital will be allowed @ 12% p.a., , 2.5.3 Interest on Drawings, The partnership agreement may also provide for charging of interest on money, withdrawn out of the firm by the partners for their personal use. As stated, earlier, no interest is charged on the drawings if there is no express agreement, among the partners about it. However if the partnership deed so provides for it,, the interest is charged at an agreed rate, for the period money remained, outstanding from the partners during an accounting year. Charging interest on, drawings discourages excessive amounts of drawings by the partners., The calculation of interest on drawings under different situations is shown, as here under., When Fixed Amounts is Withdrawn Every Month, Many a time, a fixed amount of money is withdrawn by the partners, at equal, time interval, say each month or each quarter. While calculating the time period,, attention must be paid to whether the fixed amount was withdrawn at the, beginning (first day) of the month, middle of the month or at the end (last day) of, the month. If withdrawn on the first day of every month, interest on total amount, will be calculated for 6½ months; if withdrawn at the end at every month, it will, be calculated for 5½ months, and if withdrawn during the middle of the month,, it will be calculated for 6 months., Suppose, Aashish withdrew Rs. 10,000 per month from the firm for his personal, use during the year ending March 31, 2017. The calculation of average period, and the interest on drawings, in different situations would be as follows:, (a) When the amount is withdrawn at the beginning of each month:, Average Period =, , Total Period in Months + 1, 12+1, 1, =, = 6, months., 2, 2, 2, , 2018-19
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Accounting for Partnership : Basic Concepts, , Interest on Drawings =, , 83, , Rs.1,20,000 8 13 1, = Rs. 5,200., 100 2 12, , (b) When the amount is withdrawn at the end of each month, Average Period =, , Total period in Months – 1, 12 1, 1, =, = 5 months, 2, 2, 2, , Interest on Drawings =, , Rs.1,20,000 8 11 1, = Rs. 4,400., 100 2 12, , (c) When money is withdrawn in the middle of the month, When money is withdrawn in the middle of the month, nothing is added or, deduced from the total period., Average Period =, , Total period in Months, 12, =, = 6 months, 2, 2, , Interest on Drawings =, , Rs.1,20,000 8 6 1, = Rs. 4,800., 100 12, , When Fixed Amount is withdrawn Quarterly, When fixed amount of money is withdrawn quarterly by partners, in such a, situation, for the purpose of calculation of interest, the total period of time is, ascertained depending on whether the money was withdrawn at the beginning, or at the end of each quarter. If the amount is withdrawn at the beginning of, each quarter, the interest is calculated on the total money withdrawn during the, year, for a period of seven and half months and if withdrawn at the and of each, quarter it will be calculated for a period of 4½ months., Suppose Satish and Tilak are partners in a firm, sharing profits and losses, equally. During financial year 2016–2017, Satish withdrew Rs. 30,000 quarterly., If interest is to be charged on drawings @ 8% per annum, the calculation of, average period and interest on drawings will be as follows:, (a) If the amount is withdrawn at the beginning of each quarter, Statement Showing Calculation of Interest on Drawings, Date, , Amount, (Rs.), , Time Period, , April 1, 2016, , 30,000, , 12 months, , 2018-19, , Interest, (Rs.), 30,000 ×, , 8, ×1, 100, = 2,400
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84, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , July 1, 2016, , 30,000, , 9 months, , 30,000×, , Oct. 1, 2016, , 30,000, , 6 months, , 30,000×, , Jan. 1, 2017, , 30,000, , 3 months, , 30,000×, , Total, , 1,20,000, , 9, 8, ×, 12 100, = 1,800, 6, 8, ×, 12 100, = 1,200, 3, 8, ×, 12 100, = 600, , = Rs. 6,000, , Alternatively, the interest can be calculated on the total amount withdrawn, during the accounting year, i.e. Rs. 1,20,000 for a period of 7½ months, (12+9+6+3)/4. as follows:, Rs. 1,20,000 ×, , (b), , 8, 15, 1, ×, ×, = Rs. 6,000., 100, 2, 12, , If the amount is withdrawn at the end of each quarter, Statement Showing Calculation of Interest on Drawings, Date, , Amount, (Rs.), , Time Period, , June 30, 2016, , 30,000, , 9 months, , September 30, 2016, , 30,000, , 6 months, , December 31, 2016, , 30,000, , 3 months, , March 31, 2017, , 30,000, , 0 months, , Total, , 1,20,000, , Interest, (Rs.), 30,000 ×, , 30,000 ×, , 30,000 ×, , 9 8, 12 100, = 1,800, , 6, 8, ×, 12 100, = 1200, , 3, 8, ×, 12, 100, = 6,000, , = 3,600, , Alternatively, the interest can be calculated on the total amount withdrawn, during the accounting year, i.e., Rs. 1,20,000 for a period of 4½ months, (9 + 6 + 3 + 0)/4 months as follows:, = Rs. 1,20,000 ×, , 8, 9, 1, ×, ×, = Rs. 3,600, 100, 2, 12, , 2018-19
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Accounting for Partnership : Basic Concepts, , 85, , When Varying Amounts are Withdrawn at Different Intervals, When the partners withdraw different amounts of money at different time, intervals, the interest is calculated using the product method. Under the product, method, for each withdrawal, the money withdrawn is multiplied by the period, (usually expressed in months) for which it remained withdrawn during the, financial year. The period is calculated from the date of the withdrawal to the, last day of the accounting year. The products so calculated are totalled and, interest for 1 month at the specified rate is worked out, on the total of the, products. The calculation of interest can be explained with the help of an example., Shahnaz withdrew the following amounts from her firm, for personal use, during the year ending March 31, 2017. Calculate interest on drawings by, product method, if the rate of interest to be charged is 7 per cent per annum., Date, , Amount, (Rs.), , April 1, 2016, June 30, 2016, October 31, 2016, December 31, 2016, March 1, 2017, , 16,000, 15,000, 10,000, 14,000, 11,000, , Calculation of interest on drawings will be as follows:, Statement Showing Calculation of Interest on Drawings, Date, , Amount, (Rs.), 16,000, 15,000, 10,000, 14,000, 11,000, , April 1, 2016, June 30, 2016, Oct. 31, 2016, Dec. 31, 2016, Mar. 1, 2017, Total, , Time Period, 12 months, 9 months, 5 months, 3 months, 1 month, , Product, (Rs.), 1,92,000, 1,35,000, 50,000, 42,000, 11,000, 4,30,000, , Interest = Sum of Products × Rate ×, = Rs. 4,30,000 ×, , 1, 12, , 7, 1, 30100, ×, =, = Rs. 2,508 (approx.)., 100, 12, 12, , Illustration 7, John Ibrahm, a partner in Modern Tours and Travels withdrew money during, the year ending March 31, 2017 from his capital account, for his personal use., Calculate interest in drawings in each of the following alternative situations, if, rate of interest is 9 per cent per annum., , 2018-19
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86, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , (a) If he withdrew Rs. 3,000 per month at the beginning of the month., (b) If an amount of Rs. 3,000 per month was withdrawn by him at the end of, each month., (c) If the amounts withdrawn were : Rs. 12,000 on June 01, 2016,, Rs. 8,000; on August 31, 2016, Rs. 3,000; on September 30, 2016,, Rs. 7,000, on November 30, 2016, and Rs. 6,000 on January 31, 2017., Solution, (a) As a fixed amount of Rs. 3,000 per month is withdrawn at the beginning of the, month, interest on drawings will be calculated for an average period of, 61, , 2 months., , Interest on drawings = Rs., , 36,000 9 13 1, = Rs. 1,755, 100 2 12, , (b) As the fixed amount of Rs. 3,000 per month is withdrawn at the end of each, month, interest on drawings will be calculated for an average period of, 5 1 months., 2, =, , Rs.36,000 9 11 1, = Rs. 1,485, 100 2 12, , (C) Statements showing Calculation of Interest on Drawings, 1, Date, , 2, Amount, withdrawn, (Rs.), , 3, Period, (in months), , 4, (Interest), , Jun. 1, 2016, , 12,000, , 10, , 12,000×, , 9, 10, ×, = 900, 100 12, , Aug. 31, 2016, , 8,000, , 7, , 8,000×, , 9, 7, ×, = 420, 100 12, , Sept. 30, 2016, , 3,000, , 6, , 3,000×, , 9, 6, ×, = 135, 100 12, , Nov. 30, 2016, , 7,000, , 4, , 7,000×, , 9, 4, ×, = 210, 100 12, , Jan. 31, 2017, , 6,000, , 2, , (Rs.), , Total Interest, , 2018-19, , 6,000×, , 9, 2, ×, = 90, 100 12, 1,755
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Accounting for Partnership : Basic Concepts, , 87, , Illustration 8, Manu, Harry and Ali are partners in a firm sharing profits and losses equally., Harry and Ali withdrew the following amounts from the firm, for their personal, use, during 2015., Date, 2015, January, 01, April, 01, September, 01, December, 01, , Harry, (Rs.), , Ali, (Rs.), , 5,000, 8,000, 5,000, 4,000, , 7,000, 4,000, 5,000, 9,000, , Calculate interest on drawings if the rate of interest to be charged is, 10 per cent, and the books are closed on December 31 every year., Statement Showing Calculation of Interest on Drawings, Harry, Amount, (Rs.), , Ali, , Period, (in months), , Product, (Rs.), , Amount, (Rs.), , Period, (in months), , Product, (Rs.), , 12, 9, 4, 1, , 60,000, 72,000, 20,000, 4,000, , 7,000, 4,000, 5,000, 10,000, , 12, 9, 4, 1, , 84,000, 36,000, 20,000, 10,000, , 5000, 8000, 5000, 4000, , 1,56,000, , 1,50,000, , Amount of Interest, Mannu, , = Rs., , 1,56,000 10 1, = Rs. 1,300, 100 12, , Ali, , = Rs., , 1,50,000 10 1, = Rs. 1,250, 100 12, , Do it Yourself, 1. Govind is a partner in a firm. He withdrew the following amounts during the, year 2015-16:, (Rs.), April 30, 2015, 6,000, June 30, 2015, 4,000, Sept. 30, 2015, 8,000, Dec. 31, 2015, 3,000, Jan. 31, 2016, 5,000, , 2018-19
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88, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, The interest on drawings is to be charged @ 6% p.a. The books are closed on, March 31, every year. calculate interest on drawing :, 2. Ram and Syam are partners sharing profits/losses equally. Ram withdrew, Rs. 1,000 p.m. regularly on the first day of every month during the year 2015-16, for personal expenses. If interest on drawings is charged @ 5% p.a. Calculate, interest on the drawings of Ram., 3. Verma and Kaul are partners in a firm. The partnership agreement provides, that interest on drawings should be charged @ 6% p.a. Verma withdraws, Rs. 2,000 per month starting from April 01, 2015 to March 31, 2014. Kaul, withdrew Rs, 3,000 per quarter, starting from April 01, 2015. Calculate interest, on partner’s drawings., , When Dates of Withdrawal are not specified, When the total amount withdrawn is given but the dates of withdrawals are not, specified, it is assumed that the amount was withdrawn evenly throughout the, year. For example; Shakila withdrew Rs. 60,000 from partnership firm during, the year ending March 31, 2015 and the interest on drawings is to be charged, at the rate of 8 per cent per annum. For calculation of interest, the period would, be taken as six months, which is the average period assuming, that amount is, withdrawn evenly in the middle of the month, throughout the year. The amount, of interest on drawings works out to be Rs. 2,400 as follows:, Rs.60,000 ×, , 8, 6, ×, 100 12, , = Rs. 2,400, , 2.6 Guarantee of Profit to a Partner, Sometimes a partner is admitted into the firm with a guarantee of certain, minimum amount by way of his share of profits of the firm. Such assurance, may be given by all the old partners in a certain ratio or by any of the old, partners, individually to the new partner. The minimum guaranteed amount, shall be paid to such new partner when his share of profit as per the profit, sharing ratio is less than the guarnteed amount. For example, Madhulika and, Rakshita, who are partners in a firm decide to admit Kanishka into their firm,, giving her the guarantee of a minimum of Rs.25,000 as her share in firm’s profits., The firm earned a profit of Rs.1,20,000 during the year and the agreed profit, sharing ratio between the partners is decided as 2:3:1. As per this ratio,, Madhulika’s share in profit comes to Rs.40,000 (2/6 of Rs. 1,20,000); Rakshita,, Rs. 60,000 (3/6 of Rs. 1,20,000) and Kanishka Rs. 20,000 (1/6 of Rs. 1,20,000)., The share of Kanishka works out to be Rs.5,000 short of the guaranteed amount., This shall be borne by the guaranteeing partners Madhulika and Rakshita in, , 2018-19
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Accounting for Partnership : Basic Concepts, , 89, , their profit sharing ratio, which in this case is 2:3, Madhulika’s share in the, deficiency comes to Rs.2,000 (2/5 of Rs. 5,000), and that of Rakshita Rs.3,000., The total profit of the firm will be distributed among the partners as follows, Madhulika will get Rs.38,000 (her share 40,000 minus share in deficiency, Rs.2,000); Rakshita Rs.57,000 (60,000–3,000) and Kanishka Rs. 25,000, (Rs. 20,000 + Rs. 2,000 + Rs. 3,000)., If only one partner gives the guarantee, say in the above case, only Rakshita, gives the guarantee, the whole amount of deficiency (Rs.5,000) will be borne by, her only. In that case profit distribution will be Madhulika Rs.40,000, Rakshita, Rs. 55,000 (60,000–5,000) and Kanishka Rs. 25,000 (Rs. 20,000 + Rs. 5,000)., Illustration 9, Mohit and Rohan share profits and losses in the ratio of 2:1. They admit, Rahul as partner with 1/4 share in profits with a guarantee that his share of, profit shall be at least Rs. 50,000. The net profit of the firm for the year, ending March 31, 2015 was Rs. 1,60,000. Prepare Profit and Loss, Appropriation Account., Solution, Profit and Loss Appropriation Account, Dr., , Cr., , Particulars, Mohit’s capital, (share of profit), Less: Share in, deficiency, Rohan’s capital, (share of profit), Less: Share in, deficiency, Rahul’s capital, (share of profit), Add: Deficiency, received from:, Mohit, Rohan, , Amount, (Rs.), , Particulars, Net profit, , 80,000, 6,667, , 73,333, , 40,000, 3,333, , 36,667, , Amount, (Rs.), 1,60,000, , 40,000, , 6,667, 3,333, , 50,000, 1,60,000, , 2018-19, , 1,60,000
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90, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , Working Notes:, The new profit sharing ratio after admission of Rahul comes to 2:1:1. As per this ratio the, share of partners in the profit comes to:, Mohit, , = Rs. 1,60,000 ×, , 2, 4, , = Rs. 80,000, , Rohan, , = Rs. 1,60,000 ×, , 1, 4, , = Rs. 40,000, , 1, = Rs. 40,000, 4, But, since Rahul has been given a guarantee of minimum of Rs. 50,000 as his share of, profit. The deficiency of Rs. 10,000 (Rs. 50,000 – Rs. 40,000) shall be borne by Mohit and, Rohan in the ratio in which they share profits and losses between themselves, viz. 2:1, as follows:, , Rahul, , = Rs. 1,60,000 ×, , Mohit’s share in deficiency comes to 2/3 × Rs. 10,000 = Rs. 6,667, Rohan’s share in deficiency comes to 1/3 × Rs. 10,000 = Rs. 3,333, Thus Mohit will get Rs. 80,000 – Rs. 6,667 = Rs. 73,333, Rohan will get, Rs. 40,000–Rs. 3,333 = Rs. 36,667 and Rahul will get Rs. 40,000 + Rs. 6,667 + Rs. 3,333 =, Rs. 50,000 in the profit of the firm., Calculation of new profit sharing ratio, The new partner Rahul’s share is, , 1, 1, 3, The remaining profit is 1 –, =, , to be shared, 4, 4, 4, , between Mohit and Rohan in the ratio of 2:1., Mohit’s new share =, Rohan’s new share =, , 3, 4, , 3, 4, , 2, 3, , 1, 3, , 2, 4, , 1, 4, , Thus, New profit sharing ratio comes to be, , 2 1 1, or 2 : 1 :1., : :, 4 4 4, , Illustration 10, John and Mathew share profits and losses in the ratio of 3:2. They admit Mohanty, into their firm to 1/6 share in profits. John personally guaranteed that Mohanty’s, share of profit, after charging interest on capital @ 10 per cent per annum would, not be less than Rs. 30,000 in any year. The capital provided was as follows:, John Rs. 2,50,000, Mathew Rs. 2,00,000 and Mohanty Rs. 1,50,000. The profit, for the year ending March 31,2015 amounted to Rs. 1,50,000 before providing, , 2018-19
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Accounting for Partnership : Basic Concepts, , 91, , interest on capital. Show the Profit & Loss Appropriation Account if new profit, sharing ratio is 3:2:1., Solution, Profit and Loss Appropriation Account, Dr., Particulars, Interest on capital, John, 25,000, Mathew, 20,000, Mohanty, 15,000, Capital accounts shared info :, John, 45,000, Less: Share of, deficiency, 15,000, Mathew, Mohanty, 15,000, Add: Deficiency, 15,000, received from, John, , Cr., Amount, (Rs.), , Particulars, Net profit, , Amount, (Rs.), 1,50,000, , 60,000, , 30,000, 30,000, 30,000, , 1,50,000, , 1,50,000, , Working Notes:, Profit after interest on capital is Rs. 90,000, which is to be distributed in the ratio of, 3:2:1 as follows: John gets Rs. 45,000 (3/6 × Rs. 90,000), Mathew Rs. 30,000, Mohanty, Rs. 15,000. Deficiency of Mohanty from the guaranteed profit of Rs. 15,000 will be borne, by John. John will therefore get Rs. 45,000 – Rs. 15,000 = Rs. 30,000, Mathew Rs. 30,000, and Mohanty Rs. 30,000., , Illustration 11, Mahesh and Dinesh share profits and losses in the ratio of 2:1. From January, 01, 2014 they admit Rakesh into their firm who is to be given a share of 1/10 of, the profits with a guaranteed minimum of Rs. 25,000. Mahesh and Dinesh, continue to share profits as before but agree to bear any deficiency on account, of guarantee to Rakesh in the ratio of 3:2 respectively. The profits of the firm for, the year ending December 31, 2015 amounted to Rs. 1,20,000. Prepare Profit, and Loss Appropriation Account., , 2018-19
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92, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, Profit and Loss Appropriation Account, , Dr., , Cr., , Particulars, , Amount, (Rs.), , Capital Accounts:, (for share of profit), Mahesh, 72,000, 6/10 × 1,20,000, Less: Deficiency share 7,800, Dinesh, 36,000, 3/10 × 1,20,000, Less: Deficiency share 5,200, Rakesh, 12,000, Add: Share of, Deficiency from, Mahesh, 7,800, Dinesh, 5,200, , Particulars, Net profit, , Amount, (Rs.), 1,20,000, , 64,200, , 30,800, , 25,000, 1,20,000, , 1,20,000, , Working Notes:, New profit sharing Ratio will be calculated as follows:, 1, 9, Rakesh to share 10 of the profits. The remaining profit, will be shared by Mahesh, 10, and Dinesh in the ratio of 2:1., 2 9, 3, 3 10 10, 1 9, 3, Dinesh’s share will be, 3 10 10, 3 3 1, The New ratio becomes, or 6 : 3 : 1., :, :, 5 10 10, 6, Mahesh’s share in profit = 1,20,000 ×, = Rs. 72,000,, 10, Dinesh’s share in profit = Rs. 36,000,, Rakesh’s share in profit = Rs. 12,000., , Mahesh’s share in profit will be, , Deficiency of Rakesh (Rs. 13,000) will be shared by Mahesh and Dinesh in the ratio of 3:2., Mahesh will bear 3 5 of 13,000, i.e. Rs. 7,800 and Rakesh, 2 5 of Rs. 13,000, i.e. Rs. 5,200., Thus, the profits of the firm will be shared as follows., Mahesh will get Rs. 72,000 – Rs. 7,800 = Rs. 64,200., Dinesh will get Rs. 36,000 – Rs. 5,200 = Rs. 30,800, Rakesh will get Rs. 12,000 + Rs. 7,800 + Rs. 5,200 = Rs. 25,000., , 2018-19
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Accounting for Partnership : Basic Concepts, , 93, , Do It Yourself, Kavita and Lalit are partners sharing profits in the ratio of 2:1. They decide to admit, Mohan with share in profits with a guaranteed amount of Rs. 25,000. Both Kavita, and Lalita undertake to meet the liability arising out of Guaranteed amount to, Mohan in their respective profit sharing ratio. The profit sharing ratio between Kavita, and Lalit does not change. The firm earned profits of Rs. 76,000 for the year, 2006–07.Show the distribution of profit amongst the partners., , 2.7 Past Adjustments, Sometimes a few omissions or errors in the recording of transactions or the, preparation of summary statements are found after the final accounts have been, prepared and the profits distributed among the partners. The omission may be, in respect of interest on capitals, interest on drawings, interest on partners’ loan,, partner’s salary, partner’s commission or outstanding expenses. There may also, be some changes in the provisions of partnership deed or system of accounting, having impact with retrospective effect. All these acts of omission and commission, need adjustments for correction of their impact. Instead of altering old accounts,, necessary adjustments can be made either; (a) through ‘Profit and Loss, Adjustment Account’, or (b) directly in the capital accounts of the concerned, partners. This is explained with the help of following example., Rameez and Zaheer are equal partners. Their capitals as on April 01, 2015, were Rs. 50,000 and Rs. 1,00,000 respectively. After the accounts for the financial, year ending March 31, 2016 have been prepared, it is discovered that interest at, the rate of 6 per cent per annum, as provided in the partnership deed has not, been credited to the partners’ capital accounts before distribution of profit. In, this case, the interest on capital not credited to the partners’ capital accounts, works out to be Rs. 3000 (6/100 × Rs. 50,000) for Rameez and Rs. 6,000, (6/100 × Rs. 1,00,000) for Zaheer. Had the interest on capital been duly, provided, the firm’s profit would have reduced by Rs. 9,000. By this omission,, the whole amount of profit as per Profit and Loss Account (without adjustment, of Rs. 9,000) has been distributed among the partners in their profit sharing, ratio, and the amounts of interest on capital have not been credited to their, capital accounts. This error can be rectified in any of the following ways;, (a) Through Profit and Loss Adjustment Account, (i), , Profit and Loss Adjustment A/c, To Rameez’s capital A/c, To Zaheer’s capital A/c, (Interest on capital), , 2018-19, , Dr., , 9,000, 3,000, 6,000
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94, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, (ii), , Rameez’s capital A/c, Zaheer’s capital A/c, To Profit and Loss Adjustment A/c, (Loss on adjustment), , Dr., Dr., , 4,500, 4,500, 9,000, , (b) Directly in Partners’ Capital Accounts, For direct adjustment in partners’ capital accounts first a statement to ascertain, the net effect of omission on partners’ capital accounts will be worked out as, follows and then the adjustment entries can be recorded., Statement Showing Net Effect of Omitting Interest on Capital, Details, (i), , Amount which should have been, credited as interest on capital, , (ii) Amount actually credited by, way of share of profit, (Rs. 9,000 divided equally)—, (iii) Difference between (i) and (ii), (Net effect), , Rameez, (Rs.), , Zaheer, (Rs.), , 3,000, , 6,000, , 4,500, , 4,500, , Dr. 1,500, (Excess), , Cr. 1,500, (Short), , The statement shows that Rameez has got excess credit of Rs. 1,500 while, Zaheer’s account has been credited less by Rs. 1,500. In order to rectify the, error Rameez’s capital account should be debited and that of Zaheer, credited, with Rs. 1,500 by passing the following journal entry;, journal entry., Rameez’s Capital A/c, Dr., To Zaheer’s Capital A/c, (Adjustment for omission of interest on capital), , 1,500, 1,500, , Illustration 12, Nusrat, Sonu and Himesh are partners sharing profits and losses in the ratio of, 5 : 3 : 2. The partnership deed provides for charging interest on drawing’s, @ 10% p.a. The drawings of Nusrat, Sonu and Himesh during the year ending, December 2015 amounted to Rs. 20,000, Rs. 15,000 and Rs. 10,000 respectively., After the final accounts have been prepared, it was discovered that interest on, drawings has not been taken into consideration. Give necessary adjusting, journal entry., , 2018-19
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Accounting for Partnership : Basic Concepts, , 95, , Statement showing Net Effect of Omitting Interest on Drawings, Particulars, , Nusrat, (Rs.), , Sonu, (Rs.), , Himesh, (Rs.), , Total, , Amount which should have been, debited by way of interest on, drawings, , 2,000, , 1,500, , 1,000, , 4,500, , Amount that should have been, credited by way of share of profit, , 2,250, , 1,350, , 900, , 4,500, , Cr. 250, (Short), , Cr. 150, (Excess), , Cr.100, (Excess), , Required Adjustment, , Journal Entry for adjustment of interest on drawings would be:, Sonu’s Capital A/c, Dr., Himesh’s Capital A/c, Dr., To Nusrat’s Capital A/c, (Adjustment for omission of interest on drawings), , 150, 100, 250, , Do it Yourself, 1. Gupta and Sarin are partners in a firm sharing profits in the ratio of 3:2. Their, fixed capitals are: Gupta 2,00,000, and Sarin 3,00,000. After the accounts for the, year are prepared it is discovered that interest on capital @10% p.a. as provided in, the partnership agreement, has not been credited in the capital accounts of partners, before distribution of profits. Record adjustment entry to rectify the error., 2. Krishna, Sandeep and Karim are partners sharing profits in the ratio of 3:2:1., Their fixed capitals are: Krishan Rs. 1,20,000, Sandeep 90,000 and Karim 60,000., For the year 2014-15, interest was credited to them @ 6% p.a. instead of 5%, p.a. Record adjustment entry., 3. Leela, Meera and Neha are partners and have omitted interest on capital @9%, p.a. for three years ended March 31, 2013. Their fixed capitals on which interest, was to be allowed throughout were: Leela Rs. 80,000, Meera Rs. 60,000 and, Neha Rs. 1,00,000. Their profit sharing ratio during the last three years were:, Year, Leela, Meera, 2015-16, 2, 2, 2014-15, 4, 5, 2013-14, 1, 2, Record adjustment entry., , Neha, 2, 1, 2, , 2.8 Final Accounts, The final accounts of a partnership firm are prepared in the same way as those, prepared for a sole trading concern with just one difference which relates to the, distribution of profit among the partners. After preparing the Trading and Profit, and Loss Account, the net profit or net loss is transferred to an account called Profit, and Loss Appropriation Account as discussed earlier in this chapter. As you know,, , 2018-19
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96, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , all adjustments in respect of interest on capital, interest on drawings, partner’s, salary, partners’ share of profit and loss, interest on partner’s loan, etc. are made, through the Profit and Loss Appropriation Account. This is done in order to, distinguish between the results of operations of business and the distribution of, the profit among the owners. The preparation of final accounts and the Profit &, Loss Appropriation Account is clarified with the help of Illustration 13., Illustration 13, Kapil and Vineet were partners sharing profits and losses in the ratio of 3:2. The, following balances were extracted from the books of account for the year ended, March 31, 2017., , Capitals, Kapil, Vineet, Current accounts (on April 01, 2013), Kapil, Vineet, Drawings:, Kapil, Vineet, Stock as on 1.4.2016, Purchases and Sales, Returns, Wages, Salaries, Printing and Stationery, Bills receivables, Bills payables, Debtors and Creditors, Discounts, Rent and Rates, Bad debts, Insurance, Postage and Telegrams, Salesman’s commission, Land and Building, Plant and Machinery, Furniture, Overdraft, Trade expenses, Cash in hand, Cash at bank, , 2018-19, , Debit, Amount, (Rs.), , Credit, Amount, (Rs.), , —, —, , 60,000, 50,000, 2,800, , —, —, , 1,600, —, —, —, , 12,000, 8,000, 11,000, 54,000, 2,000, 2,500, 4,000, 500, 12,000, —, 36,000, 1,200, 800, 1,400, 400, 300, 3,400, 24,000, 20,000, 13,500, —, 400, 500, 1,500, , 80,000, 1,500, —, —, —, —, 2,000, 8,000, 1,500, —, —, —, —, —, —, —, —, 2,000, —, —, —, , 2,09,400, , 2,09,400
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Accounting for Partnership : Basic Concepts, , 97, , Prepare the final accounts for the year ended March 31, 2017 firm taking into, consideration the following:, (a) Stock on March 31, 2017 was Rs. 18,000;, (b) Provision for doubtful debts is to be provided at 5% on debtors;, (c) Outstanding salaries were Rs. 1,000;, (d) Goods worth Rs. 8,000 were destroyed by fire on December 10, 2016. The, Insurance Company agreed to pay Rs. 7,000 in full settlement of the claim;, (e) Interest on capitals is allowed at 6% per annum and interest on drawings, is also charged at 6% per annum;, (f) Kapil is entitled to a Salary of Rs. 1,200 per annum;, (g) Write-off Land and buildings at 5%, Furniture at 10% and Plant and, Machinery at 15%., Solution, Trading and Profit & Loss Account for the year ending March 31, 2017, Dr., Cr., Particulars, Amount Particulars, Amount, (Rs.), (Rs.), Opening stock, Purchases, Less: Returns, Wages, Gross Profit c/d, , 11,000, 54,000, 1,500, , 52,500, 2,500, 38,000, , Sales, 80,000, Less: Returns, 2,000, Closing stock, Goods destroyed by fire, , 1,04,000, Salaries, 4,000, Add: Outstanding, 1,000, Printing and Stationery, Rent and Rates, Insurance, Discount allowed, Trade expenses, Postage and Telegrams, Bad debts, 1,400, Add: Provision, 1,800, Salesman’s commission, Loss due to fire, (Rs. 8000–Rs. 7000), Depreciation:, Land and Buildings, 1,200, Furniture, 1,350, Plant and Machinery 3,000, Net Profit transferred to, Profit and Loss Appropriation, , 5,000, 500, 800, 400, 1,200, 400, 300, , 78,000, 18,000, 8,000, 1,04,000, , Gross Profit b/d, Discount received, , 38,000, 1,500, , 3,200, 3,400, 1,000, , 5,550, 17,750, 39,500, , 2018-19, , 39,500
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98, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, Profit and Loss Appropriation Account, , Dr., , Cr., , Particulars, Interest on capital:, Kapil, Vineet, Salary to Kapil, Net profit (transferred, capital accounts), Kapil, Vineet, , Amount, (Rs.), 3,600, 3,000, , 6,600, 1,200, , to, 6,330, 4,220, , Particulars, Profit and Loss, Interest on drawings:, (for 6 months), Kapil, Vineet, , Amount, (Rs.), 17,750, , 360, 240, , 600, , 10,550, 18,350, , 18,350, , Partner’s Current Accounts, Dr., , Cr., , Date Particulars, , J.F., , Drawings, Interest on drawings, Balance c/d, , Kapil Vineet, (Rs.) (Rs.), , Date Particulars, , 12,000 8,000, 360, 240, 1,570, 580, , Balance b/d, Interest on capital, Salary, Share of profit, , 13,930 8,820, , J.F., , Kapil Vineet, (Rs.), (Rs.), 2,800 1,600, 3,600 3,000, 1,200, —, 6,330 4,220, 13,930 8,820, , Balance c/d, , 1,570, , 580, , Balance Sheet as on March 31, 2017, Liabilities, Overdraft, Bill payables, Creditors, Outstanding salaries, Capital:, Kapil, 60,000, Vineet, 50,000, Current Accounts, Kapil, 1,570, Vineet, 580, , Amount, (Rs.), 2,000, 2,000, 8,000, 1,000, , 1,10,000, , 2,150, , Assets, Land and Building, Less: Depreciation, Plant and Machinery, Less: Depreciation, Furniture, Less: Depreciation, Stock, Debtors, Less: Provision for, discount on debtors, Insurance company, Bill receivables, Cash at bank, Cash in hand, , 1,25,150, , 2018-19, , Amount, (Rs.), 24,000, 1,200, 20,000, 3,000, 13,500, 1,350, 36,000, 1,800, , 22,800, 17,000, 12,150, 18,000, 34,200, 7,000, 12,000, 1,500, 500, 1,25,150
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Accounting for Partnership : Basic Concepts, , 99, , Terms Introduced in the Chapter, •, •, •, •, •, •, , Partnership, Partnership Firm, Partnership Deed, Fixed Capital Account, Fluctuating Capital Account, Profit and Loss Adjustment Account, , •, •, •, •, , Interest on Capital, Interest on Drawings, Average Period, Profit and Loss Appropriation, Account, • Partner’s Current Account, , Summary, 1. Definition of partnership and its essential features: Partnership is defined as, “Relation between persons who have agreed to share the profits of a business, carried on by all or any one of them acting for all”. The essential features of, partnership are : (i) To form a partnership, there must be at least two persons;, (ii) It is created by an agreement; (iii) The agreement should be for carrying on, some legal business; (iv) sharing of profits and losses; and (v) relationship of, mutual agency among the partners., 2. Meaning and contents of partnership deed: A document which contains the terms, of partnership as agreed among the partners is called ‘Partnership Deed’. It, usually contains information about all aspects affecting relationship between, partners, including objective of business, contribution of capital by each partner,, ratio in which profit and losses will be shared by the partners, entitlement of, partners to interest on capital, interest on loan and the rules to be followed in, case of admission, retirement, death, dissolution, etc., 3. Provisions of Partnership Act 1932 applicable to accounting: If partnership deed, is silent in respect of certain aspects, the relevant provisions of the Indian, Partnership Act, 1932 become applicable. According to the Partnership Act,, the partners share profits equally, no partner is entitled to remuneration, no, interest on capital is allowed and no interest on drawings is charged. However,, if any partner has given some loan to the firm, he is entitled to interest on such, amount @ 6% per annum., 4. Preparation of capital accounts under fixed and fluctuating capital methods: All, transactions relating to partners are recorded in their respective capital, accounts in the books of the firm. There can be two methods of maintaining, Capital Accounts. These are; (i) fluctuating capital method, (ii) fixed capital, method. Under fluctuating capital method, all the transactions relating to a, partner are directly recorded in the capital account. Under fixed capital method,, however the amount of capital remains fixed, the transactions like interest on, capital, drawings, interest on drawings, salary, commission, share of profit or, loss are recorded in a separate account called ‘Partner’s Current Account’., , 2018-19
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100, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , 5. Distribution of profit and loss: The distribution of profits among the partners is, shown through a Profit and Loss Appropriation Account, which is merely an, extension of the Profit and Loss Account. It is usually debited with interest on, capital and salary/commission allowed to the partners, and credited with net, profit as per Profit and Loss Account and the interest on drawings. The balance, being profit or loss is distributed among the partners in the profit sharing ratio, and transferred to their respective capital accounts., 6. Treatment of guarantee of minimum profit to a partner: Sometimes, a partner may, be guaranteed a minimum amount by way of his share in profits. If, in any, year, the share of profits as calculated according to his profit sharing ratio is, less than the guaranteed amount, the deficiency is made good by the, guaranteeing partners’ in the agreed ratio which usually is the profit sharing, ratio. If, however, such guarantee has been given by any of them, he or they, alone shall bear the amount of deficiency., 7. Treatment of past adjustments: If, after the final accounts have been prepared,, some omission or commissions are noticed say in respect of the interest on, capital, interest on drawings, partner’s salary, commission, etc. necessary, adjustments can be made in the partner’s capital accounts through the Profit, and Loss Adjustment Account, to rectify the same., 8. Preparation of final accounts of a partnership firm: There is not much difference, in the final accounts of a sole proprietary concern and that of a partnership, firm except that in case of a partnership firm an additional account called, Profit and Loss Appropriation Account is prepared to show distribution of profit, and loss among the partners., , Questions for Practice, Short Answer Questions, 1. Define Partnership Deed., 2. Why it is considered desirable to make the partnership agreement in writing., 3. List the items which may be debited or credited in capital accounts of the, partners when:, (i) Capitals are fixed., (ii) Capital are fluctuating., 4. Why is Profit and Loss Adjustment Account prepared? Explain., 5. Give two circumstances under which the fixed capitals of partners may change., 6. If a fixed amount is withdrawn on the first day of every quarter, for what period, the interest on total amount withdrawn will be calculated?, , 2018-19
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Accounting for Partnership : Basic Concepts, , 7. In, (i), (ii), (iii), (iv), (v), , 101, , the absence of Partnership deed, specify the rules relating to the following :, Sharing of profits and losses., Interest on partner’s capital., Interest on Partner’s drawings., Interest on Partner’s loan, Salary to a partner., , Long Answer Questions, 1. What is partnership? What are its chief characteristics? Explain., 2. Discuss the main provisions of the Indian Partnership Act 1932 that are, relevant to partnership accounts if there is no partnership deed., 3. Explain why it is considered better to make a partnership agreement in writing., 4. Illustrate how interest on drawings will be calculated under various situations., 5. How will you deal with a change in profit sharing ratio among existing partners?, Take imaginary figures to illustrate your answer?, , Numerical Questions, Fixed and Fluctuating Capitals, 1. Triphati and Chauhan are partners in a firm sharing profits and losses in the, ratio of 3:2. Their capitals were Rs.60,000 and Rs.40,000 as on January 01,, 2015. During the year they earned a profit of Rs. 30,000. According to the, partnership deed both the partners are entitled to Rs. 1,000 per month as, salary and 5% interest on their capital. They are also to be charged an interest, of 5% on their drawings, irrespective of the period, which is Rs. 12,000 for, Tripathi, Rs. 8,000 for Chauhan. Prepare Partner’s Accounts when, capitals, are fixed., (Ans : Tripathi’s Current account Balance Rs. 3,600,Chauhan’s Current account, Balance Rs.6,400), 2. Anubha and Kajal are partners of a firm sharing profits and losses in the ratio, of 2:1. Their capital, were Rs.90,000 and Rs.60,000. The profit during the year, were Rs. 45,000. According to partnership deed, both partners are allowed, salary, Rs. 700 per month to Anubha and Rs. 500 per month to Kajal. Interest, allowed on capital @ 5%p.a. The drawings at the end of the period were, Rs. 8,500 for Anubha and Rs. 6,500 for Kajal. Interest is to be charged @ 5%, p.a. on drawings. Prepare partners capital accounts, assuming that the capital, account are fluctuating., (Ans : Anubha’s Capital Account Balance Rs.1,09,075, Kajal’s Capital Account, Balance Rs.70,175), , 2018-19
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102, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , Distribution of Profits, 3. Harshad and Dhiman are in partnership since April 01, 2016. No Partnership, agreement was made. They contributed Rs. 4,00,000 and 1,00,000 respectively, as capital. In addition, Harshad advanced an amount of Rs. 1,00,000 to the, firm, on October 01, 2016. Due to long illness, Harshad could not participate in, business activities from August 1, to September 30, 2016. The profits for the, year ended March 31, 2017 amounted to Rs. 1,80,000., Dispute has arisen between Harshad and Dhiman., Harshad Claims:, (i) he should be given interest @ 10% per annum on capital and loan;, (ii) Profit should be distributed in proportion of capital;, Dhiman Claims:, (i) Profits should be distributed equally;, (ii) He should be allowed Rs. 2,000 p.m. as remuneration for the period he, managed the business, in the absence of Harshad;, (iii) Interest on Capital and loan should be allowed @ 6% p.a., You are required to settle the dispute between Harshad and Dhiman. Also, prepare Profit and Loss Appropriation Account., (Ans : Harshad’s share in profit Rs. 88,500, Dhiman’s share in profit, Rs. 88,500), 4. Aakriti and Bindu entered into partnership for making garment on April 01, 2016, without any Partnership agreement. They introduced Capitals of Rs. 5,00,000, and Rs. 3,00,000 respectively on October 01, 2016. Aakriti Advanced. Rs, 20,000, by way of loan to the firm without any agreement as to interest. Profit and Loss, account for the year ended March 31 2017 showed profit of Rs, 43,000. Partners, could not agree upon the question of interest and the basis of division of profit., You are required to divide the profits between them giving reason for your solution., (Ans : Profit shares equal Aakriti and Bindu Rs. 21,200), 5. Rakhi and Shikha are partners in a firm, with capitals of Rs. 2,00,000 and, Rs, 3,00,000 respectively. The profit of the firm, for the year ended 2016-17 is, Rs. 23,200. As per the Partnership agreement, they share the profit in their, capital ratio, after allowing a salary of Rs. 5,000 per month to Shikha and, interest on Partner’s capital at the rate of 10% p.a. During the year Rakhi, withdrew Rs. 7,000 and Shikha Rs. 10,000 for their personal use. As per, partnership deed, salary and interest are caption treated as charged. You are, required to prepare Profit and Loss Account and Partner’s Capital Accounts., (Ans : Loss Transferred to Rakhi Capital Rs.34,720 and Shikha Capital Rs.52,080), 6. Lokesh and Azad are partners sharing profits in the ratio 3:2, with capitals of, Rs. 50,000 and 30,000, respectively. Interest on capital is agreed to be paid, , 2018-19
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Accounting for Partnership : Basic Concepts, , 103, , @ 6% p.a. Azad is allowed a salary of Rs. 2,500 p.a. During 2016, the profits, prior to the calculation of interest on capital but after charging Azad’s salary, amounted to Rs. 12,500. A provision of 5% of profits is to be made in respect of, manager’s commission. Prepare accounts showing the allocation of profits and, partner’s capital accounts., (Ans : Profit transferred to Lokesh’s Capital Rs. 4,170 and Azad’s Capital Rs.2,780), 7. The partnership agreement between Maneesh and Girish provides that:, (i) Profits will be shared equally;, (ii) Maneesh will be allowed a salary of Rs. 400 p.m;, (iii) Girish who manages the sales department will be allowed a commission, equal to 10% of the net profits, after allowing Maneesh’s salary;, (iv) 7% interest will be allowed on partner’s fixed capital;, (v) 5% interest will be charged on partner’s annual drawings;, (vi) The fixed capitals of Maneesh and Girish are Rs. 1,00,000 and Rs. 80,000,, respectively. Their annual drawings were Rs. 16,000 and 14,000,, respectively. The net profit for the year ending March 31, 2015 amounted, to Rs. 40,000;, Prepare firm’s Profit and Loss Appropriation Account., (Ans : Profit transferred to the Capital accounts of Maneesh and Girish each, Rs.10,290), 8. Ram, Raj and George are partners sharing profits in the ratio 5 : 3 : 2. According, to the partnership agreement George is to get a minimum amount of Rs. 10,000, as his share of profits every year. The net profit for the year 2013 amounted to, Rs, 40,000. Prepare the Profit and Loss Appropriation Account., (Ans : Profit transferred to Ram’s Capital Rs.18,750 Raj’s Capital Rs.11,250, and George’s Capital Rs.10,000), 9. Amann, Babita and Suresh are partners in a firm. Their profit sharing ratio is, 2:2:1. Suresh is guaranteed a minimum amount of Rs. 10,000 as share of profit,, every year. Any deficiency on that account shall be met by Babita. The profits, for two years ending March 31, 2016 and March 31, 2017 were Rs. 40,000 and, Rs. 60,000, respectively. Prepare the Profit and Loss Appropriation Account for, the two years., (Ans : For the year 2016, Profits transferred to Amann’s Capital, Rs.16,000;, Babita’s Capital Rs.14,000; Suresh’s capital Rs.10,000 and for the year 2017,, Profit transferred to Amann’s Capital Rs.24,000, Babita’s Capital Rs.24,000,, Suresh’s capital, Rs.12,000), 10. Simmi and Sonu are partners in a firm, sharing profits and losses in the ratio, of 3:1. The profit and loss account of the firm for the year ending, March 31, 2017 shows a net profit of Rs. 1,50,000. Prepare the Profit and Loss, Appropriation Account by taking into consideration the following information:, (i) Partners capital on April 1, 2016;, Simmi, Rs. 30,000; Sonu, Rs. 60,000;, , 2018-19
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104, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , (ii) Current accounts balances on April 1, 2016;, Simmi, Rs. 30,000 (cr.); Sonu, Rs. 15,000 (cr.);, (iii) Partners drawings during the year amounted to, Simmi, Rs. 20,000; Sonu, Rs. 15,000;, (iv) Interest on capital was allowed @ 5% p.a.;, (v) Interest on drawing was to be charged @ 6% p.a. at an average of six months;, (vi) Partners’ salaries : Simmi Rs. 12,000 and Sonu Rs. 9,000. Also show the, partners’ current accounts., (Ans : Profit transferred to Simmi’s Capital, Rs. 94,162 and Sonu’s Capital,, Rs. 31,388), 11. Ramesh and Suresh were partners in a firm sharing profits in the ratio of their, capitals contributed on commencement of business which were Rs. 80,000, and Rs. 60,000 respectively. The firm started business on April 1, 2016., According to the partnership agreement, interest on capital and drawings are, 12% and 10% p.a., respectively. Ramesh and Suresh are to get a monthly salary, of Rs. 2,000 and Rs. 3,000, respectively., The profits for year ended March 31, 2017 before making above, appropriations was Rs. 1,00,300. The drawings of Ramesh and Suresh were, Rs. 40,000 and Rs. 50,000, respectively. Interest on drawings amounted to, Rs. 2,000 for Ramesh and Rs. 2,500 for Suresh. Prepare Profit and Loss, Appropriation Account and partners’ capital accounts, assuming that their, capitals are fluctuating., (Ans : Profit transferred to Ramesh’s Capital Rs.16,000 and Suresh’s Capital,, Rs.12,000), 12. Sukesh and Vanita were partners in a firm. Their partnership agreement, provides that:, (i) Profits would be shared by Sukesh and Vanita in the ratio of 3:2;, (ii) 5% interest is to be allowed on capital;, (iii) Vanita should be paid a monthly salary of Rs. 600., The following balances are extracted from the books of the firm, on March, 31, 2017., , Capital Accounts, Current Accounts, Drawings, , Sukesh, (Rs.), , Vanita, (Rs.), , 40,000, (Cr.) 7,200, 10,850, , 40,000, (Cr.) 2,800, 8,150, , Net profit for the year, before charging interest on capital and after charging, partner’s salary was Rs. 9,500. Prepare the Profit and Loss Appropriation, Account and the Partner’s Current Accounts., (Ans : Profit transferred to Sukesh’s Capital, Rs.3,300 and Vanita’s Capital,, Rs. 2,200), , 2018-19
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Accounting for Partnership : Basic Concepts, , 105, , Calculation of Interest on Capital and Interest on Drawings, 13. Rahul, Rohit and Karan started partnership business on April 1, 2016 with, capitals of Rs. 20,00,000, Rs. 18,00,000 and Rs. 16,00,000, respectively., The profit for the year ended March 2017 amounted to Rs.1,35,000 and the, partner’s drawings had been Rahul Rs. 50,000, Rohit Rs. 50,000 and Karan, Rs. 40,000. The profits are distributed among partner’s in the ratio of 3:2:1., Calculate the interest on capital @ 5% p.a., (Ans : Rahul, Rs. 1,00,000, Rohit, Rs. 90,000, Karan Rs. 80,000), 14. Sunflower and Pink Rose started partnership business on April 01, 2016 with, capitals of Rs. 2,50,000 and Rs.1,50,000, respectively. On October 01, 2016,, they decided that their capitals should be Rs. 2,00,000 each. The necessary, adjustments in the capitals are made by introducing or withdrawing cash., Interest on capital is to be allowed @ 10% p.a. Calculate interest on capital as, on March 31, 2017., (Ans : Total interest on Sunflower’s Capital Rs. 22,500 and on Pink Rose’s, Capital, Rs. 17,500), 15. On March 31, 2017 after the close of accounts, the capitals of Mountain, Hill, and Rock stood in the books of the firm at Rs. 4,00,000,Rs.3,00,000 and, Rs. 2,00,000, respectively. Subsequently, it was discovered that the interest, on capital @ 10% p.a. had been omitted. The profit for the year amounted to, Rs. 1,50,000 and the partner’s drawings had been Mountain: Rs. 20,000, Hill, Rs. 15,000 and Rock Rs. 10,000., Calculate interest on capital., (Ans : Interest on Capital: Mountain, Rs.37,000; Hill, Rs.26,500; Rock, Rs.16,000), 16. Following is the extract of the Balance Sheet of, Neelkant and Mahdev as on, March 31, 2017:, Balance Sheet as at March 31, 2017, Liabilities, Neelkant’s Capital, Mahadev’s Capital, Neelkant’s Current Account, Mahadev’s Current Account, Profit and Loss Apprpriation, (March 2017), , Amount, (Rs.), 10,00,000, 10,00,000, 1,00,000, 1,00,000, , Assets, Sundry Assets, , Amount, (Rs.), 30,00,000, , 8,00,000, 30,00,000, , 30,00,000, , During the year Mahadev’s drawings were Rs. 30,000. Profits during 2016-17, is Rs. 10,00,000. Calculate interest on capital @ 5% p.a for the year ending, March 31, 2017., (Ans : Interest on Neelkant’s Capital, Rs. 50,000 and Mahadev’s Capital,, Rs. 50,000), , 2018-19
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106, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , 17. Rishi is a partner in a firm. He withdrew the following amounts during the year, ended March 31, 2017., May 01, 2017, Rs. 12,000, July 31, 2017, Rs. 6,000, September 30, 2017, Rs. 9,000, November 30, 2017, Rs. 12,000, January 01, 2018, Rs. 8,000, March 31, 2018, Rs. 7,000, Interest on drawings is charged @ 9% p.a., Calculate interest on drawings, (Ans : Interest on Drawing Rs. 2,295), 18. The capital accounts of Moli and Golu showed balances of Rs.40,000 and, Rs. 20,000 as on April 01, 2016. They shared profits in the ratio of 3:2. They, allowed interest on capital @ 10% p.a. and interest on drawings, @ 12 p.a. Golu, advanced a loan of Rs. 10,000 to the firm on August 01, 2016., During the year, Moli withdrew Rs. 1,000 per month at the beginning of every month, whereas Golu withdrew Rs. 1,000 per month at the end of every month. Profit for, the year, before the above mentioned adjustments was Rs.20,950. Calculate interest, on drawings show distribution of profits and prepare partner’s capital accounts., (Ans : Interest on Drawings : Moli, Rs. 780; Golu, Rs. 660; Profits Moli,, Rs. 9,594; Golu, Rs. 6,396), 19. Rakesh and Roshan are partners, sharing profits in the ratio of 3:2 with capitals, of Rs. 40,000 and Rs. 30,000, respectively. They withdrew from the firm the, following amounts, for their personal use:, Rakesh, , Month, , Rs., , Rohan, , May 31, 2016, June 30, 2016, August 31, 2016, November 1, 2016, December 31, 2016, January 31, 2017, March 01, 2017, At the beginning of each month, , 600, 500, 1,000, 400, 1,500, 300, 700, 400, , Interest is to be charged @ 6% p.a. Calculate interest on drawings, assuming, that book of accounts are closed on March 31, 2017, every year., (Ans : Interest on Rakesh’s Drawings : Rs. 126.50; Rohan’s Drawings Rs. 156, rounded off to nearest rupee), 20. Himanshu withdrews Rs. 2,500 at the end Month of each month. The Partnership, deed provides for charging the interest on drawings @ 12% p.a. Calculate, interest on Himanshu’s drawings for the year ending 31st December, 2017., (Ans : Interest on Drawings Rs.1,650), , 2018-19
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Accounting for Partnership : Basic Concepts, , 107, , 21. Bharam is a partner in a firm. He withdraws Rs. 3,000 at the starting of each, month for 12 months. The books of the firm closes on March 31 every year., Calculate interest on drawings if the rate of interest is 10% p.a., (Ans : Interest on Drawings, Rs.1,950), 22. Raj and Neeraj are partners in a firm. Their capitals as on April 01, 2017 were, Rs. 2,50,000 and Rs. 1,50,000, respectively. They share profits equally. On July, 01, 2017, they decided that their capitals should be Rs. 1,00,000 each. The, necessary adjustment in the capitals were made by introducing or withdrawing, cash by the partners’. Interest on capital is allowed @ 8% p.a. Compute interest, on capital for both the partners for the year ending on March 31, 2018., (Ans : Raj Rs. 11,000 and Neeraj’s Rs. 9,000), 23. Amit and Bhola are partners in a firm. They share profits in the ratio of 3:2. As, per their partnership agreement, interest on drawings is to be charged @ 10%, p.a. Their drawings during 2017 were Rs. 24,000 and Rs. 16,000, respectively., Calculate interest on drawings based on the assumption that the amounts, were withdrawn evenly, throughout the year., (Ans : Interest on Amit’s Drawings, Rs. 1,200 and Bhola’s, Rs.800), 24. Harish is a partner in a firm. He withdrew the following amounts during the, year 2017 :, February 01, May 01, June 30, October 31, December 31, , Rs., 4,000, 10,000, 4,000, 12,000, 4,000, , Interest on drawings is to be charged @ 7 1 % p.a., 2, Calculate the amount of interest to be charged on Harish’s drawings for the, year ending December 31, 2017., (Ans : Interest on Drawings, Rs.1,075), 25. Menon and Thomas are partners in a firm. They share profits equally. Their, monthly drawings are Rs. 2,000 each. Interest on drawings is to be charged @, 10% p.a. Calculate interest on Menon’s drawings for the year 2006, assuming, that money is withdrawn: (i) in the beginning of every month, (ii) in the middle, of every month, and (iii) at the end of every month., (Ans : (i) Interest on Drawings, Rs.1,300; (ii) Rs.1,200; (iii) Rs.1,100), 26. On March 31, 2017, after the close of books of accounts, the capital accounts, of Ram, Shyam and Mohan showed balance of Rs. 24,000 Rs. 18,000 and, Rs. 12,000, respectively. It was later discovered that interest on capital, @ 5% had been omitted. The profit for the year ended March 31, 2017, amounted, to Rs. 36,000 and the partner’s drawings had been Ram, Rs. 3,600; Shyam,, Rs. 4,500 and Mohan, Rs. 2,700. The profit sharing ratio of Ram, Shyam and, Mohan was 3:2:1. Calculate interest on capital., (Ans : Interest on Ram’s Capital Rs.480; Shyam’s Capital, Rs.525 and Mohan’s, Capital, Rs.435), , 2018-19
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108, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , Guarantee of Profit to the Partners, 27. Amit, Sumit and Samiksha are in partnership sharing profits in the ratio of, 3:2:1. Samiksha’ share in profit has been guaranteed by Amit and Sumit to, be a minimum sum of Rs. 8,000. Profits for the year ended March 31, 2017 was, Rs. 36,000. Divide profit among the partners., (Ans : Profit to Amit Rs. 16,800; Sumit, Rs. 11,200; Samiksha, Rs. 8,000), 28. Pinki, Deepati and Kaku are partner’s sharing profits in the ratio of 5:4:1., Kaku is given a guarantee that his share of profits in any given year would not, be less than Rs. 5,000. Deficiency, if any, would be borne by Pinki and Deepti, equally. Profits for the year amounted to Rs. 40,000. Record necessary journal, entries in the books of the firm showing the distribution of profit., (Ans : Deficiency borne by Pinki and Deepti Rs.500 each), 29. Abhay, Siddharth and Kusum are partners in a firm, sharing profits in the, ratio of 5:3:2. Kusum is guaranteed a minimum amount of Rs. 10,000 as per, share in the profits. Any deficiency arising on that account shall be met by, Siddharth. Profits for the years ending March 31, 2016 and 2017 are Rs. 40,000, and 60,000 respectively. Prepare Profit and Loss Appropriation Account., (Ans : year 2015 - Abhay Rs. 20,000, Siddharth Rs. 10,000, Kusum Rs. 10,000;, year 2016- Abhay Rs. 30,000, Siddharth Rs. 18,000, Kusum Rs. 12,000), 30. Radha, Mary and Fatima are partners sharing profits in the ratio of 5:4:1., Fatima is given a guarantee that her share of profit, in any year will not be less, than Rs. 5,000. The profits for the year ending March 31, 2017 amounts to, Rs. 35,000. Shortfall if any, in the profits guaranteed to Fatima is to be borne, by Radha and Mary in the ratio of 3:2. Record necessary journal entry to show, distributioin of profit among partner., (Ans : Deficiency borne by Radha, Rs. 900 and Mary, Rs. 600), 31. X, Y and Z are in Partnership, sharing profits and losses in the ratio of 3 : 2 : 1,, respectively. Z’s share in the profit is guaranteed by X and Y to be a minimum, of Rs. 8,000. The net profit for the year ended March 31, 2017 was Rs. 30,000., Prepare Profit and Loss Appropriation Account, indicating the amount finally, due to each partner., (Ans : Profit to X Rs.13,200; Y Rs.8,800; Z Rs.8,000), 32. Arun, Boby and Chintu are partners in a firm sharing profit in the ratio or, 2:2:1. According to the terms of the partnership agreement, Chintu has to get, a minimum of Rs. 60,000, irrespective of the profits of the firm. Any Deficiency, to Chintu on Account of such guarantee shall be borne by Arun. Prepare the, profit and loss appropriation account showing distribution of profits among, partners in case the profits for year 2015 are: (i) Rs. 2,50,000; (ii) 3,60,000., (Ans : (i) Profit to Arun Rs.90,000, Boby Rs.1,00,000 and Chintu Rs.60,000, (ii) Profit to Arun Rs.1,44,000, Boby Rs.1,44,000 and Chintu Rs.72,000), , 2018-19
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Accounting for Partnership : Basic Concepts, , 109, , 33. Ashok, Brijesh and Cheena are partners sharing profits and losses in the ratio, of 2 : 2 : 1. Ashok and Brijesh have guaranteed that Cheena share in any year, shall be less than Rs. 20,000. The net profit for the year ended March 31, 2017, amounted to Rs. 70,000. Prepare Profit and Loss Appropriation Account., (Ans : Profit to Ashok Rs.25,000, Brijesh Rs. 25,000 and Cheena Rs. 20,000), 34. Ram, Mohan and Sohan are partners with capitals of Rs. 5,00,000, Rs. 2,50,000, and 2,00,000 respectively. After providing interest on capital @ 10% p.a. the, profits are divisible as follows:, Ram 1 2 , Mohan 1 3 and Sohan 1 6 . But Ram and Mohan have guaranteed, that Sohan’s share in the profit shall not be less than Rs. 25,000, in any year., The net profit for the year ended March 31, 2017 is Rs. 2,00,000, before charging, interest on capital., You are required to show distribution of profit., (Ans : Profit to Ram, Rs. 48,000, Mohan, Rs. 32,000 and Sohan, Rs. 25,000), 35. Amit, Babita and Sona form a partnership firm, sharing profits in the ratio of, 3 : 2 : 1, subject to the following :, (i) Sona’s share in the profits, guaranteed to be not less than Rs. 15,000 in, any year., (ii) Babita gives guarantee to the effect that gross fee earned by her for the, firm shall be equal to her average gross fee of the proceeding five years,, when she was carrying on profession alone (which is Rs. 25,000). The net, profit for the year ended March 31, 2017 is Rs. 75,000. The gross fee earned, by Babita for the firm was Rs. 16,000., You are required to show Profit and Loss Appropriation Account (after giving, effect to the alone)., (Ans : Profit transferred to Capital Accounts of; Amit, Rs. 41,400, Babita,, Rs.27,600 and Sona, Rs.15,000), , Past Adjustment, 36. The net profit of X, Y and Z for the year ended March 31, 2016 was Rs. 60,000, and the same was distributed among them in their agreed ratio of 3 : 1 : 1. It, was subsequently discovered that the under mentioned transactions were not, recorded in the books :, (i) Interest on Capital @ 5% p.a., (ii) Interest on drawings amounting to X Rs. 700, Y Rs. 500 and Z Rs. 300., (iii) Partner’s Salary : X Rs. 1000, Y Rs. 1500 p.a., The capital accounts of partners were fixed as : X Rs. 1,00,000, Y Rs. 80,000, and Z Rs. 60,000. Record the adjustment entry., (Ans : X Dr. Rs.2,500 , Y credit Rs.2,400 and Z credit Rs.100], 37. The firm of Harry, Porter and Ali, who have been sharing profits in the ratio of, 2 : 2 : 1, have existed for same years. Ali wants that he should get equal share, in the profits with Harry and Porter and he further wishes that the change in, , 2018-19
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110, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , the profit sharing ratio should come into effect retrospectively were for the last, three year. Harry and Porter have agreement on this account., The profits for the last three years were:, (Rs.), 2014-15, 22,000, 2015-16, 24,000, 2016-17, 29,000, Show adjustment of profits by means of a single adjustment journal entry., (Ans : Harry (Dr.) Rs.5,000, Porter (Dr.) Rs.5,000 and Ali (Cr.) Rs.10,000), 38. Mannu and Shristhi are partners in a firm sharing profit in the ratio of 3 : 2., Following is the balance sheet of the firm as on March 31, 2017., Balance Sheet as at March 31, 2017, Liabilities, Mannu’s Capital, Shristhi’s Capital, , Amount, (Rs.), 30,000, 10,000, , 40,000, , Assets, Drawings :, Mannu, Shristhi, Other Assets, , Amount, (Rs.), 4,000, 2,000, , 40,000, , 6,000, 34,000, 40,000, , Profit for the year ended March 31, 2017 was Rs. 5,000 which was divided in, the agreed ratio, but interest @ 5% p.a. on capital and @ 6% p.a. on drawings, was inadvertently enquired. Adjust interest on drawings on an average basis, for 6 months. Give the adjustment entry., (Ans : Mannu (Cr.) Rs.288 and Shrishti (Dr.) Rs.288), 39. On March 31, 2017 the balance in the capital accounts of Eluin, Monu and, Ahmed, after making adjustments for profits, drawing, etc; were Rs. 80,000,, Rs. 60,000 and Rs. 40,000 respectively. Subsequently, it was discovered that, interest on capital and interest on drawings had been omitted., The partners were entitled to interest on capital @ 5% p.a. The drawings, during the year were Eluin Rs. 20,000; Monu, Rs. 15,000 and Ahmed, Rs. 9,000., Interest on drawings chargeable to partners were Eluin Rs, 500, Monu Rs. 360, and Ahmed Rs. 200. The net profit during the year amounted to Rs. 1,20,000., The profit sharing ratio was 3 : 2 : 1. Record necessary adjustment entries., (Ans : Eluin (Dr.) Rs.570, Monu (Cr.) Rs.10 and Ahmed (Cr.) Rs.560), 40. Azad and Benny are equal partners. Their capitals are Rs. 40,000 and, Rs. 80,000, respectively. After the accounts for the year have been prepared it, is discovered that interest at 5% p.a. as provided in the partnership agreement,, has not been credited to the capital accounts before distribution of profits. It is, decided to make an adjustment entry at the beginning of the next year. Record, the necessary journal entry., (Ans : Azad (Dr.)1,000 and Benny (Cr.)1,000), , 2018-19
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Accounting for Partnership : Basic Concepts, , 111, , 41. Kavita and Pradeep are partners, sharing profits in the ratio of 3 : 2. They, employed Chandan as their manager, to whom they paid a salary of Rs. 750, p.m. Chandan deposited Rs. 20,000 on which interest is payable @ 9% p.a. At, the end of 2017 (after the division of profit), it was decided that Chandan should, be treated as partner w.e.f. Jan. 1, 2014 with 1 6 th share in profits. His deposit, being considered as capital carrying interest @ 6% p.a. like capital of other, partners. Firm’s profits after allowing interest on capital were as follows:, 2014, 2015, 2016, 2017, , (Rs.), 59,000, 62,000, (4,000), 78,000, , Profit, Profit, Loss, Profit, , Record the necessary journal entries to give effect to the above., (Ans : Kavita (Dr.) 300, Pradeep (Dr.) 200 and Chandan (Cr.) 500), 42. Mohan, Vijay and Anil are partners, the balance on their capital accounts, being Rs. 30,000, Rs. 25,000 and Rs. 20,000 respectively. In arriving at these, figures, the profits for the year ended March 31, 2017 amounting to Rupees, 24,000 had been credited to partners in the proportion in which they shared, profits. During the tear their drawings for Mohan, Vijay and Anil were, Rs. 5,000, Rs. 4,000 and Rs. 3,000, respectively. Subsequently, the following, omissions were noticed:, (a) Interest on Capital, at the rate of 10% p.a., was not charged., (b) Interest on Drawings: Mohan Rs. 250, Vijay Rs. 200, Anil Rs. 150 was not, recorded in the books., Record necessary corrections through journal entries., (Ans : Debit Anil’s Capital Account by Rs. 550 and Credit Mohan’s Capital, Account by Rs. 550), 43. Anju, Manju and Mamta are partners whose fixed capitals were Rs. 10,000,, Rs. 8,000 and Rs. 6,000, respectively. As per the partnership agreement, there, is a provision for allowing interest on capitals @ 5% p.a. but entries for the, same have not been made for the last three years. The profit sharing ratio, during there years remained as follows:, Year, 2014, 2015, 2016, , Anju, 4, 3, 1, , Manju, 3, 2, 1, , Mamta, 5, 1, 1, , Make necessary and adjustment entry at the beginning of the fourth year i.e., Jan. 2015., (Ans : Mamta (Dr.) Rs. 200, Anju (Cr.) Rs. 100 and manju (Cr.) Rs. 100), 44. Dinker and Ravinder were partners sharing profits and losses in the ratio of, 2:1. The following balances were extracted from the books of account, for the, year ended December 31, 2017., , 2018-19
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112, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, Account Name, , Debit, Amount, (Rs.), , Capital, Dinker, Ravinder, Drawings, Dinker, Ravinder, Opening Stock, Purchases and Sales, Carriage inward, Returns, Stationerry, Wages, Bills receivables and Bills payables, Discount, Salaries, Rent and Taxes, Insurance premium, Postage, Sundry expenses, Commission, Debtors and creditors, Building, Plant and machinery, Investments, Furniture and Fixture, Bad Debts, Bad debts provision, Loan, Legal Expenses, Audit fee, Cash in hand, Cash at Bank, , Credit, Amount, (Rs.), 2,35,000, 1,63,000, , 6,000, 5,000, 35,100, 2,85,000, 2,200, 3,000, 1,200, 12,500, 45,000, 900, 12,000, 18,000, 2,400, 300, 1,100, 95,000, 1,20,000, 80,000, 1,00,000, 26,000, 2,000, , 3,75,800, 2,200, , 32,000, 400, , 3,200, 40,000, , 4,600, 35,000, 200, 1,800, 13,500, 23,000, 8,91,200, , 8,91,200, , Prepare final accounts for the year ended December 31,2017, with following, adjustment:, (a) Stock on December 31,2017, was Rs. 42,500., (b) A Provision is to be made for bad debts at 5% on debtors., (c) Rent outstanding was Rs.1,600., (d) Wages outstanding were Rs.1,200., (e) Interest on capital to be allowed on capital @ 4% per annum and interest, on drawings to be charged @ 6% per annum., (f) Dinker and Ravinder are entitled to a Salary of Rs.2,000 per annum, (g) Ravinder is entitled to a commission Rs.1,500., , 2018-19
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Accounting for Partnership : Basic Concepts, , 113, , (h) Depreciation is to be charged on Building @ 4%, Plant and Machinery, 6%,, and furniture and fixture, 5%., (i) Outstanding interest on loan amounted to Rs. 350., (Ans : Gross Profit Rs. 81,500, Net Profit Rs.32,200, Dinker ‘s Capital Rs. 2,47,627, Ravinder’s Capital Rs.1,71,573, Total of Balance Sheet Rs. 5,29,350), 45. Kajol and Sunny were partners sharing profits and losses in the ratio of 3:2., The following Balances were extracted from the books of account for the year, ended March 31, 2015., Account Name, , Debit, Amount, (Rs.), , Capital, Kajol, Sunny, Current accounts [on 1-04-2005], Kajol, Sunny, Drawings, Kajol, Sunny, Opening stock, Purchases and Sales, Freight inward, Returns, Printing and Stationery, Wages, Bills receivables and Bills payables, Discount, Salaries, Rent, Insurance premium, Traveling expenses, Sundry expenses, Commission, Debtors and Creditors, Building, Plant and Machinery, Motor car, Furniture and Fixtures, Bad debts, Provision for doubtful debts, Loan, Legal expenses, Audit fee, Cash in hand, Cash at bank, , 1,15,000, 91,000, 4,500, 3,200, 6,000, 3,000, 22,700, 1,65,000, 1,200, 2,000, 900, 5,500, 25,000, 400, 6,000, 7,200, 2,000, 700, 1,100, 74,000, 85,000, 70,000, 60,000, 15,000, 1,500, , 2,35,800, 3,200, , 21,000, 800, , 1,600, 78,000, , 2,200, 25,000, 300, 900, 7,500, 12,000, 5,78,100, , 2018-19, , Credit, Amount, (Rs.), , 5,78,100
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114, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , Prepare final accounts for the year ended March 31,2017, with following, adjustments:, (a) Stock on March 31,2015 was Rs.37,500., (b) Bad debts Rs.3,000; Provision for bad debts is to be made at 5% on debtors., (c) Rent Prepaid were Rs.1,200., (d) Wages outstanding were Rs.2,200., (e) Interest on capital to be allowed on capital at 6% per annum and interest, on drawings to be charged @ 5% per annum., (f) Kajol is entitled to a Salary of Rs. 1,500 per annum., (g) Prepaid insurance was Rs. 500., (h) Depreciation was charged on Building, @ 4%; Plant and Machinery, @ 5%;, Motor car, @ 10% and furniture and fixture, @ 5%., (i) Goods worth Rs.7,000 were destroyed by fire on January 20, 2015. The, Insurance company agreed to pay Rs.5,000 in full settlement of the claim., (Ans : Gross Profits Rs. 84,900; Net Profit, Rs. 48,000; Kajol’s Current account,, Rs. 27,369; Sunny’s Current Account, Rs. 12,931; Total of Balance Sheet,, Rs. 3,72,500), , Check-list to Test your Understanding, Test your Understanding – I, 1. (i) Invalid (ii) Invalid (iii) Valid (iv) Invalid, 2. (i) True (ii) True (iii) True (iv) False (v) False (vi) False, Test your Understanding – II, 1. (i) Interest on loan given 6% p.a., (ii) No interest allowed on capital and charged on drawings, (iii) Salary and Commission not given to partner, (iv) Profit to the shared equally, 2. Profit : Reena, Rs. 33,750; Raman, Rs. 33,750, Test your Understanding – III, 1. Interest on capital; Rani, Rs. 9,600; Suman, Rs. 7,200, 2. (a) Profit : Priya, Rs. 78,750; Kajal, Rs. 47,250, (b) Profit NIL. Interest on capital: Priya, Rs. 54.000; Kajal, Rs. 72,000, , 2018-19
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Reconstitution of a Partnership Firm –, Admission of a Partner, , LEARNING OBJECTIVES, After studying this chapter, you will be able to:, • Explain the concept of, reconstitution of a partnership, firm;, • Identify the matters that need, adjustments in the books of, firm when a new partner is, admitted;, • Determine the new profit, sharing ratio and calculate, the sacrificing ratio;, Define goodwill and, enumerate the factors that, affect it;, • Explain the methods of, valuation of goodwill;, • Describe how goodwill will, be treated under different, situations when a new, partner is admitted;, • Make necessary adjustments, for revaluation of assets and, reassessment of liabilities;, • Make necessary adjustments, for accumulated profits and, losses;, • Determine the capital of each, partner, if required according, to the new profit sharing ratio, and make necessary, adjustments;, • Make necessary adjustments, on change in the profit, sharing ratio among the, existing partners., , 3, , P, , artnership 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. The partners often resort to reconstitution, of the firm in various ways such as admission of a, new partner, change in profit sharing ratio,, retirement of a partner, death or insolvence of a, partner. In this chapter we shall have a brief idea, about all these and in detail about the accounting, implications of admission of a new partner or an on, change in the profit sharing ratio., 3.1 Modes of Reconstitution of a Partnership, Firm, Reconstitution of a partnership firm usually takes, place in any of the following ways:, Admission of a new partner: A new partner may be, admitted when the firm needs additional capital or, managerial help. According to the provisions of, Partnership Act 1932 unless it is otherwise provided, in the partnership deed a new partner can be, admitted only when the existing partners, unanimously agree for it. For example, Hari and, Haqque are partners sharing profits in the ratio of, , 2018-19
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116, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , 3:2. On April 1, 2017 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 stand reconstituted., Change in the profit sharing ratio among the existing partners: Sometimes the, partners of a firm may decide to change their existing profit sharing ratio. This, may happen an account of a change in the existing partners’ role in the firm. For, example, Ram, Mohan and Sohan are partners in a firm sharing profits in the, ratio of 3:2:1. With effect from April 1,2017 they decided to share profits equally, as Sohan brings in additional capital. This results in a change in the existing, agreement leading to reconstitution of the firm., Retirement of an existing partner: It means withdrawal by a partner from the, business of the firm which may be due to his bad health, old age or change in, business interests. In fact a partner can retire any time if the partnership is at, will. For example, Roy, Ravi and Rao are partners in the firm sharing profits in, the ratio of 2:2:1. On account of illness, Ravi retired from the firm on March 31,, 2017. This results in reconstitution of the firm now having only two partners., Death of a partner: Partnership may also stand reconstituted on death of a, partner, if the remaining partners decide to continue the business of the firm as, usual. For example, X,Y and Z are partners in a firm sharing profits in the ratio, 3:2:1. X died on March 31, 2017. Y and Z decide to carry on the business sharing, future profits equally. The continuity of business by Y and Z sharing future, profits equally leads to reconstitution of the firm., , 3.2 Admission of a New Partner, When firm requires additional capital or managerial help or both for the, expansion of its business a new partner may be admitted to supplement its, existing resources. According to the Partnership Act 1932, a new partner can, be admitted into the firm only with the consent of all the existing partners unless, otherwise agreed upon. With the admission of a new partner, the partnership, firm is reconstituted and a new agreement is entered into to carry on the business, of the firm., A newly admitted partner acquires two main rights in the firm–, 1. Right to share the assets of the partnership firm; and, 2. Right to share the profits of the partnership firm., For the right to acquire share in the assets and profits of the partnership, firm, the partner brings an agreed amount of capital either in cash or in kind., Moreover, in the case of an established firm which may be earning more profits, than the normal rate of return on its capital the new partner is required to, contribute some additional amount known as premium or goodwill. This is done, , 2018-19
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Admission of a Partner, , 117, , primarily to compensate the existing partners for loss of their share in super, profits of the firm., Following are the other important points which require attention at the time, of admission of a new partner:, 1. New profit sharing ratio;, 2. Sacrificing ratio;, 3. Valuation and adjustment of goodwill;, 4. Revaluation of assets and Reassessment of liabilities;, 5. Distribution of accumulated profits (reserves); and, 6. Adjustment of partners’ capitals., 3.3 New Profit Sharing Ratio, When new partner is admitted he acquires his share in profits from the old partners., In other words, on the admission of a new partner, the old partners sacrifice a, share of their profit in favour of the new partner. But, what will be the share of, new partner and how he will acquire it from the existing partners is decided, mutually among the old partners and the new partner. However, if nothing is, specified as to how does the new partner acquire his share from the old partners;, it may be assumed that he gets it from them in their profit sharing ratio. In any, case, on admission of a new partner, the profit sharing ratio among the old, partners will change keeping in view their respective contribution to the profit, sharing ratio of the incoming partner. Hence, there is a need to ascertain the new, profit sharing ratio among all the partners. This depends upon how does the, new partner acquires his share from the old partners for which there are many, possibilities. Let us understand it with the help of the following illustrations., Illustration 1, Anil and Vishal are partners sharing profits in the ratio of 3:2. They admitted, Sumit as a new partner for 1/5 share in the future profits of the firm. Calculate, new profit sharing ratio of Anil, Vishal and Sumit., Solution, Sumit’s share, , =, , 1, 5, , 4, 5, 3, 4, 12, Anil’s new share, =, of, =, 5, 5, 25, 2, 4, 8, Vishal’s new share =, of, =, 5, 5, 25, New profit sharing ratio of Anil, Vishal and Sumit will be 12:8:5., , Remaining share, , =, , 1−, , 1, 5, , =, , Note: It has been assumed that the new partner acquired his share from old partners in, old ratio., , 2018-19
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118, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , Illustration 2, Akshay and Bharati are partners sharing profits in the ratio of 3:2. They admit, Dinesh as a new partner for 1/5th share in the future profits of the firm which, he gets equally from Akshay and Bharati. Calculate new profit sharing ratio of, Akshay, Bharati and Dinesh., Solution, Dinesh’s share, , =, , 1, 2, or, 5, 10, , Akshay’s share, , =, , 3 1, 5, −, =, 5 10 10, , Bharati’s share, , =, , 2 1, 3, −, =, 5 10 10, , New profit sharing ratio between Akshay, Bharati and Dinesh will be 5:3:2., , Illustration 3, Anshu and Nitu are partners sharing profits in the ratio of 3:2. They admitted, Jyoti as a new partner for 3/10 share which she acquired 2/10 from Anshu and, 1/10 from Nitu. Calculate the new profit sharing ratio of Anshu, Nitu and Jyoti., Solution, Jyoti’s share, , =, , 3, 10, , Anshu’s new share, , =, , 3 2, 4, −, =, 5 10 10, , Nitu’s new share, , =, , Old share – Share Surrendered, , 2 1, 3, −, =, 5 10 10, The new profit sharing ratio between, Anshu, Nitu and Jyoti will be 4 : 3 : 3., , =, , Illustration 4, Ram and Shyam are partners in a firm sharing profits in the ratio of 3:2. They, admit Ghanshyam as a new partner. Ram surrenders 1/4 of his share and Shyam, 1/3 of his share in favour of Ghanshyam. Calculate new profit sharing ratio of, Ram, Shyam and Ghanshyam., , 2018-19
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Admission of a Partner, , 119, , Solution, Ram’s old share, , =, , Share surrendered by Ram, , =, , Ram’s new share, , =, , Shyam’s old share, , =, , Share surrendered by Shyam, , =, , Shyam’s new share, , =, , Ghanshyam’s new share, , =, , 3, 5, 3, 3, 1, =, of, 5, 20, 4, 3, 3, 9, −, =, 5 20 20, 2, 5, 2, 2, 1, =, of, 5 15, 3, 2 2, 4, −, =, 5 15 15, Ram’s sacrifice + Shyam’s Sacrifice, , 3, 2, 17, +, =, 20 15 60, New profit sharing ratio among Ram, Shyam and Ghanshyam will be 27:16:17, , =, , Illustration 5, Das and Sinha are partners in a firm sharing profits in 4:1 ratio. They admitted, Pal as a new partner for 1/4 share in the profits, which he acquired wholly from, Das. Determine the new profit sharing ratio of the partners., Solution, Pal’s share, , =, , Das’s new share, , =, =, , Sinha’s new share =, , 1, 4, Old Share – Share Surrendered, 4 1, −, 5 4, , =, , 11, 20, , 1, 5, , The new profit sharing ratio among Das, Sinha and Pal will be 11:4:5., , 3.4 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. The sacrifice by a partner, is equal to :, Old Share of Profit – New Share of Profit, , 2018-19
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120, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , As stated earlier, the new partner is required to compensate the old partner’s, for their loss of share in the super profits of the firm for which he brings in an, additional amount known as premium or goodwill. This amount is shared by, the existing partners in the ratio in which they forego their shares in favour of, the new partner which is called sacrificing ratio., The ratio is normally clearly given as agreed among the partners which could, be the old ratio, equal sacrifice, or a specified ratio. The difficulty arises where, the ratio in which the new partner acquires his share from the old partners is, not specified. Instead, the new profit sharing ratio is given. In such a situation,, the sacrificing ratio is to be worked out by deducting each partner’s new share, from his old share. Look at the illustrations 6 to 8 and see how sacrificing ratio, is calculated in such a situation., Illustration 6, Rohit and Mohit are partners in a firm sharing profits in the ratio of 5:3. They, admit Bijoy as a new partner for 1/7 share in the profit. The new profit sharing, ratio will be 4:2:1. Calculate the sacrificing ratio of Rohit and Mohit., Solution, Rohit’s old share, , =, , 5, 8, , Rohit’s new share, , =, , 4, 7, , Rohit’s sacrifice, , =, , 5 4, 3, − =, 8 7 56, , Mohit’s old share, , =, , 3, 8, , Mohit’s new share, , =, , 2, 7, , Mohit’s sacrifice, , =, , 3 2, 5, − =, 8 7 56, , Sacrificing ratio among Rohit and Mohit will be 3:5., , Illustration 7, Amar and Bahadur are partners in a firm sharing profits in the ratio of 3:2. They, admitted Mary as a new partner for 1/4 share. The new profit sharing ratio, between Amar and Bahadur will be 2:1. Calculate their sacrificing ratio., , 2018-19
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Admission of a Partner, , 121, , Solution, Marry’s share, , =, , 1, 4, , 1, 3, =, 4, 4, This 3/4 share is to be shared by Amar and Bahadur in the ratio of 2:1., Therefore,, Remaining share, , =, , Amar’s new share, , =, , Bahadur’s new share, , =, , 1−, , 2, 2, 3, 6, of, =, or, 3, 4, 4, 12, 3, 1, 1, 3, of, =, or, 12, 4, 3, 4, , New profit sharing ratio of Amar, Bahadur and Mary will be 2:1:1., Amar’s sacrifice, , =, , Bahadur’s sacrifice, , =, , 3 2, 2, − =, 5 4 20, 2 1, 3, − =, 5 4 20, , Sacrificing ratio among Amar and Bahadur will be 2:3., , Illustration 8, Ramesh and Suresh are partners in a firm sharing profits in the ratio of 4:3., They admitted Mohan as a new partner. The profit sharing ratio of Ramesh,, Suresh and Mohan will be 2:3:1. Calculate the gain or sacrifice of old partner., Solution, Ramesh’s old share, , =, , Ramesh’s new share, , =, , Ramesh’s sacrifice, , =, , Suresh’s new share, , =, , Suresh’s old share, , =, , Suresh’s gain, , =, , Mohan’s share, , =, , 4, 7, 2, 6, 4 2 10, − =, 7 6 42, 3, 6, 3, 7, 3 3, 3, − =, 6 7 42, 1, 7, or, 6, 42, , 2018-19
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122, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, Ramesh’s sacrifice, , =, , Suresh’s gain+Mohan’s gain, , =, , 3, 7, 10, +, =, 42 42 42, , In this case, the whole sacrifice is by Ramesh., Test your Understanding - I, 1., , A and B are partners sharing profits in the ratio of 3:1. They admit C for 1/4, share in the future profits. The new profit sharing ratio will be:, (a), , A, , 9, ,, 16, , B, , 3, 4, , C, 16, 16, , (b), , A, , 8, ,, 16, , B, , 4, ,, 16, , C, , 4, 16, , (c), , A, , 10, ,, 16, , B, , 2, ,, 16, , C, , 4, 16, , (d), , A, , 8, ,, 16, , B, , 9, ,, 16, , C, , 10, 16, , 2., , X and Y share profits in the ratio of 3:2. Z was admitted as a partner who sets, 1/5 share. New profit sharing ratio, if Z acquires 3/20 from X and 1/20 from, Y would be:, (a) 9 : 7 : 4, (b) 8 : 8 : 4, (c) 6 : 10 : 4, (d) 10 : 6 : 4, , 3., , A and B share profits and losses in the ratio of 3 : 1, C is admitted into, partnership for 1/4 share. The sacrificing ratio of A and B is:, (a) equal, (b) 3 : 1, (c) 2 : 1, (d) 3 : 2., , 3.5 Goodwill, Goodwill is also one of the special aspects of partnership accounts which requires, adjustment (also valuation if not specified) at the time of reconstitution of a firm, viz., a change in the profit sharing ratio, the admission of a partner or the, retirement or death of a partner., 3.5.1 Meaning of Goodwill, Over a period of time, a well-established business develops an advantage of, good name, reputation and wide business connections. This helps the business, to earn more profits as compared to a newly set up business. In accounting, the, monetary value of such advantage is known as “goodwill”., It is regarded as an intangible asset. In other words, goodwill is the value of, the reputation of a firm in respect of the profits expected in future over and above, the normal profits. It is generally observed that when a person pays for goodwill,, , 2018-19
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Admission of a Partner, , 123, , he/she pays for something, which places him in the position of being able to earn, super profits as compared to the profit earned by other firms in the same industry., In simple words, goodwill can be defined as “the present value of a firm’s, anticipated excess earnings” or as “the capitalised value attached to the differential, profit capacity of a business”. Thus, goodwill exists only when the firm earns super, profits. Any firm that earns normal profits or is incurring losses has no goodwill., 3.5.2, , Factors Affecting the Value of Goodwill, , The main factors affecting the value of goodwill are as follows:, 1. Nature of business: A firm that produces high value added products or, having a stable demand is able to earn more profits and therefore has, more goodwill., 2. Location: If the business is centrally located or is at a place having heavy, customer traffic, the goodwill tends to be high., 3. Efficiency of management: A well-managed concern usually enjoys the, advantage of high productivity and cost efficiency. This leads to higher, profits and so the value of goodwill will also be high., 4. Market situation: The monopoly condition or limited competition enables, the concern to earn high profits which leads to higher value of goodwill., 5. Special advantages: The firm that enjoys special advantages like import, licences, low rate and assured supply of electricity, long-term contracts, for supply of materials, well-known collaborators, patents, trademarks,, etc. enjoy higher value of goodwill., 3.5.3 Need for Valuation of Goodwill, Normally, the need for valuation of goodwill arises at the time of sale of a business., But, in the context of a partnership firm it may also arise in the following, circumstances:, 1. Change in the profit sharing ratio amongst the existing partners;, 2. Admission of new partner;, 3. Retirement of a partner;, 4. Death of a partner; and, 5. Dissolution of a firm involving sale of business as a going concern., 6. Amalgamation of partnership firms., 3.5.4, , Methods of Valuation of Goodwill, , Since goodwill is an intangible asset it is very difficult to accurately calculate its, value. Various methods have been advocated for the valuation of goodwill of a, partnership firm. Goodwill calculated by one method may differ from the goodwill, , 2018-19
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124, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , calculated by another method. Hence, the method by which goodwill is to be, calculated, may be specifically decided between the existing partners and the, incoming partner., The important methods of valuation of goodwill are as follows:, 1. Average Profits Method, 2. Super Profits Method, 3. Capitalisation Method, 3.5.4.1, , Average Profits Method, , Under this method, the goodwill is valued at agreed number of ‘years’ purchase, of the average profits of the past few years. It is based on the assumption that a, new business will not be able to earn any profits during the first few years of its, operations. Hence, the person who purchases a running business must pay in, the form of goodwill a sum which is equal to the profits he is likely to receive for, the first few years. The goodwill, therefore, should be calculated by multiplying, the past average profits by the number of years during which the anticipated, profits are expected to accrue., For example, if the past average profits of a business works out at Rs. 20,000, and it is expected that such profits are likely to continue for another three years,, the value of goodwill will be Rs. 60,000 (Rs. 20,000 × 3),, Illustration 9, The profit for the five years of a firm are as follows – year 2013 Rs. 4,00,000;, year 2014 Rs. 3,98,000; year 2015 Rs. 4,50,000; year 2016 Rs. 4,45,000 and, year 2017 Rs. 5,00,000. Calculate goodwill of the firm on the basis of 4 years, purchase of 5 years average profits., Solution, Year, , Profit, (Rs.), , 2013, 2014, 2015, 2016, 2017, Total, , 4,00,000, 3,98,000, 4,50,000, 4,45,000, 5,00,000, 21,93,000, , Total Profit of Last 5 Years, 21,93,000, = Rs., = Rs. 4,38,600, No.of years, 5, , Average Profit, , =, , Goodwill, , = Average Profits × No. of years purchased, = Rs. 4,38,600 × 4 = Rs. 17,54,400, , 2018-19
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Admission of a Partner, , 125, , The above calculation of goodwill is based on the assumption that no change, in the overall situation of profits is expected in the future., The above illustration is based on simple average. Sometimes, if there exists, an increasing on decreasing trend, it is considered to be better to give a higher, weightage to the profits to the recent years than those of the earlier years. Hence,, it is a advisable to work out weighted average based on specified weights like 1,, 2, 3, 4 for respective year’s profit. However, weighted average should be used, only if specified. (See illustrations 10 and 11)., Illustration 10, The profits of firm for the five years are as follows:, Year, , Profit, (Rs.), , 2012–13, 2013–14, 2014–15, 2015–16, 2016–17, , 20,000, 24,000, 30,000, 25,000, 18,000, , Calculate the value of goodwill on the basis of three years’ purchase of, weighted average profits based on weights 1,2,3,4 and 5 respectively., Solution, Year Ended 31st March, , 2012–13, 2013–14, 2014–15, 2015–16, 2016–17, , Profit, (Rs.), 20,000, 24,000, 30,000, 25,000, 18,000, , Weighted Average Profit = Rs., Goodwill, , Weight, , Product, , 1, 2, 3, 4, 5, , 20,000, 48,000, 90,000, 1,00,000, 90,000, , 15, , 3,48,000, , 3,48,000, = Rs. 23,200, 15, , = Rs. 23,200 × 3 = Rs. 69,600, , 2018-19
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126, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , Illustration 11, Calculate goodwill of a firm on the basis of three year’ purchase of the weighted, average profits of the last four years. The profit of the last four years were: 2012, Rs. 20,200; 2013 Rs. 24,800; 2014 Rs. 20,000 and 2015 Rs. 30,000. The weights, assigned to each year are : 2012 – 1; 2013 – 2; 2014 – 3 and 2015 – 4., You are supplied the following information:, 1. On September 1, 2014 a major plant repair was undertaken for Rs. 6,000,, which was charged to revenue. The said sum is to be capitalised for, goodwill calculation subject to adjustment of depreciation of 10% p.a., on reducing balance method., 2. The Closing Stock for the year 2013 was overvalued by Rs. 2,400., 3. To cover management cost an annual charge of Rs. 4,800 should be, made for purpose of goodwill valuation., Solution, 2012, Rs., , 2013, Rs., , 2014, Rs., , 2015, Rs., , Given Profits, Less: Management Cost, , 20,200, 4,800, , 24,800, 4,800, , 20,000, 4,800, , 30,000, 4,800, , Add: Capital Expenditure, Charged to Revenue, , 15,400, -, , 20,000, -, , 15,200, 6,000, , 25,200, -, , 15,400, , 20,000, , 21,200, , 25,200, , -, , -, , 200, , 580, , 15,400, , 20,000, , 21,000, , 24,620, , -, , 2,400, , -, , -, , 15,400, , 17,600, , 21,000, , 24,620, , -, , -, , 2,400, , -, , 15,400, , 17,600, , 23,400, , 24,620, , Calculation of Adjusted Profit, , Less: Unprovided Depreciation, Less: over valuation of Closing Stock, , Add: over value of opening stock, Adjusted Profits, Calculation of weighted average profits:, , (Rs.), Year, , Profit, , Weight, , Product, , 2012, 2013, 2014, 2015, , 15,400, 17,600, 23,400, 24,620, , 1, 2, 3, 4, , 15,400, 35,200, 70,200, 98,480, , 10, , 2,19,280, , Total, , 2018-19
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Admission of a Partner, , 127, , 2,19,280, = Rs. 21,928, 10, = Rs. 21,928 × 3 = Rs. 65,784, , Weight Average Profit = Rs., Goodwill, , Notes to Solution, (i), (ii), (iii), , Depreciation of 2014, , = 10% of Rs. 6000 for 4 months, = Rs. 6000 × 10/100 × 4/12 = Rs. 200, Depreciation of 2015, = 10% of Rs. 6000 – Rs. 200 for one year, = Rs. 5800 × 10/100 + Rs. 580, Closing Stock of 2014 will become opening stock for the year 2015., , 3.5.4.2, , Super Profits Method, , The basic assumption in the average profits (simple or weighted) method of, calculating goodwill is that if a new business is set up, it will not be able to, earn any profits during the first few years of its operations. Hence, the person, who purchases an existing business has to pay in the form of goodwill a sum, equal to the total profits he is likely to receive for the first ‘few years’. But it is, contended that the buyer’s real benefit does not lie in total profits; it is limited, to such amounts of profits which are in excess of the normal return on capital, employed in similar business. Therefore, it is desirable to value, goodwill on, the basis of the excess profits and not the actual profits. The excess of actual, profits over the normal profits is termed as super profits., Normal Profit =, , Capital Employed × Normal Rate of Return, 100, , Suppose an existing firm earns Rs. 18,000 on the capital of Rs. 1,50,000, and the normal rate of return is 10%. The Normal profits will work out at, Rs. 15,000 (1,50,000 × 10/100). The super profits in this case will be Rs. 3,000, (Rs. 18,000 – 15,000). The goodwill under the super profit method is ascertained, by multiplying the super profits by certain number of years’ purchase. If, in the, above example, it is expected that the benefit of super profits is likely to be, available for 5 years in future, the goodwill will be valued at Rs. 15,000, (3,000 × 5). Thus, the steps involved under the method are:, 1. Calculate the average profit,, 2. Calculate the normal profit on the capital employed on the basis of the, normal rate of return,, 3. Calculate the super profits by deducting normal profit from the average, profits, and, 4. Calculate goodwill by multiplying the super profits by the given number, of years’ purchase., , 2018-19
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128, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , Illustration 12, The books of a business showed that the capital employed on December, 31, 2015, Rs. 5,00,000 and the profits for the last five years were: 2010–, Rs. 40,000: 2012-Rs. 50,000; 2013-Rs. 55,000; 2014-Rs.70,000 and, 2015-Rs. 85,000. You are required to find out the value of goodwill based, on 3 years purchase of the super profits of the business, given that the, normal rate of return is 10%., Solution, Normal Profits =, , Capital Employed × Normal Rate of Return, 100, , = Rs., , 5,00,000 × 10, = Rs. 50,000, 100, , Average Profits:, Year, , Profit, (Rs.), , 2011, 2012, 2013, 2014, 2015, , 40,000, 50,000, 55,000, 70,000, 85,000, , Total, , 3,00,000, , Average Profits = Rs. 3,00,000/5 = Rs. 60,000, Super Profit, = Rs. 60,000 – Rs. 50,000 = Rs. 10,000, Goodwill, = Rs. 10,000 × 3 = Rs. 30,000, , Illustration 13, The capital of the firm of Anu and Benu is Rs. 1,00,000 and the market rate of, interest is 15%. Annual salary to partners is Rs. 6,000 each. The profits for the, last 3 years were Rs. 30,000; Rs. 36,000 and Rs. 42,000. Goodwill is to be, valued at 2 years purchase of the last 3 years’ average super profits. Calculate, the goodwill of the firm., Solution, 15, 100, , Interest on capital, , = 1,00,000 ×, , Add: partner’s salary, , = Rs. 6,000 × 2, , = Rs. 15,000…………(i), = Rs. 12,000…………(ii), , 2018-19
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Admission of a Partner, , 129, , Normal Profit(i+ii), , = Rs. 27,000, , Average Profit, , = Rs. 30,000+Rs.36,000+Rs.42,000 = Rs., =, =, =, =, =, =, =, , Super Profit, , Goodwill, , 1,08,000, 3, , Rs. 36,000, Average Profit–Normal Profit, Rs. 36,000–Rs. 27,000, Rs. 9,000, Super Profit × No of years’ purchase, Rs. 9,000 × 2, Rs. 18,000, , 3.5.4.3 Capitalisation Methods, Under this method the goodwill can be calculated in two ways: (a) by capitalizing, the average profits, or (b) by capitalising the super profits., (a) Capitalisation of Average Profits: Under this method, the value of goodwill, is ascertained by deducting the actual capital employed (net assets) in the, business from the capitalized value of the average profits on the basis of, normal rate of return. This involves the following steps:, (i) Ascertain the average profits based on the past few years’ performance., (ii) Capitalize the average profits on the basis of the normal rate of return to, ascertain the capitalised value of average profits as follows:, Average Profits × 100/Normal Rate of Return, , (iii) Ascertain the actual capital employed (net assets) by deducting outside, liabilities from the total assets (excluding goodwill)., Capital Employed = Total Assets (excluding goodwill) – Outside Liabilities, , (iv) Compute the value of goodwill by deducting net assets from the, capitalised value of average profits, i.e. (ii) – (iii)., Illustration 14, A business has earned average profits of Rs. 1,00,000 during the last few years, and the normal rate of return in a similar business is 10%. Ascertain the value, of goodwill by capitalisation average profits method, given that the value of net, assets of the business is Rs. 8,20,000., Solution, Capitalised Value of Average Profits, Rs., , 1,00,000 × 100, = Rs. 10,00,000, 10, , 2018-19
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130, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , Goodwill, , = Capitalised value – Net Assets, = Rs. 10,00,000 – Rs. 8,20,000, = Rs.1,80,000, (b) Capitalisation of Super Profits: Goodwill can also be ascertained by capitalising the, super profit directly. Under this method there is no need to work out the capitalised, value of average profits. It involves the following steps., (i) Calculate capital employed of the firm, which is equal to total assets minus outside, liabilities., (ii) Calculate normal profits on capital employed., , (iii) Calculate average profit for past years, as specified., (ii) Calculate super profits by deducting normal profits from average profits., (iii) Multiply the super profits by the required rate of return multiplier, that is,, Goodwill = Super Profits × 100 Normal Rate of Return, In other words, goodwill is the capitalised value of super profits. The amount of goodwill, worked out by this method will be exactly the same as calculated by capitalising the, average profits., For example, using the data given in illustration 14 where the average profits are Rs., 1,00,000 and the normal profits are Rs. 82,000 (10% of Rs. 8,20,000), the super profits, worked out as Rs. 18,000 (Rs. 1,00,000 – Rs. 82,000), the goodwill will be calculated as, follows., Rs. 18,000 ×, , 100, = Rs. 1,80,000., 10, , Illustration 15, 1. The goodwill of a firm is to be worked out at three years’ purchase of the, average profits of the last five years which are as follows:, Years, 2012, 2013, , Profits (Loss), (Rs.), 10,000, 15,000, , 2014, 2015, 2016, , 4,000, (5,000), 6,000, , 2. The capital employed of the firm is Rs. 1,00,000 and normal rate of return, is 8%, the average profits for last 5 years are Rs. 12,000 and goodwill is, to be worked out at 3 years’ purchase of super profits,, 3. Rama Brothers earn an average profit of Rs. 30,000 with a capital of, Rs. 2,00,000. The normal rate of return in the business is 10%. Using, capitalisation of super profits method work out the value the goodwill of, the firm., , 2018-19
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Admission of a Partner, , 131, , Solution, 1. Total Profits = Rs. 10,000 + Rs. 15,000 + Rs. 4,000 + Rs. 6,000 – Rs. 5,000, = Rs. 30,000, Average Profits = Rs. 30,000/5 = Rs. 6,000, Goodwill = Average Profits × 3 = Rs. 6,000 × 3 = Rs.18,000, 2. Average Profit, = Rs. 12,000, 8, = Rs. 8,000, 100, Super Profit=Average Profit – Normal profit = Rs. 12,000 – Rs. 8,000, = Rs. 4,000, Goodwill=Super Profit × 3, = Rs. 4,000 × 3 = Rs. 12,000, 3. Normal Profit= Rs. 2,00,000 × 10/100 = Rs. 20,000, Super Profit = Average Profit – Normal Profit = Rs. 30,000 – Rs. 20,000, = Rs. 10,000, Goodwill=Super Profit × 100/Normal Rate of Return, = 10,000 × 100/10 = Rs. 1,00,000., , Normal Profit, , 3.5.5, , = Rs.1,00,000 ×, , Treatment of Goodwill, , As stated earlier, the incoming partner who acquires his share in the profits of, the firm from the existing partners brings in some additional amount to, compensate them for loss of their share in super profits. It is termed as his share, of goodwill (also called premium). Alternatively he may agree that goodwill, account be raised in the books of the firm by giving the necessary credit to the, old partners. Thus, when a new partner is admitted, goodwill can be treated in, two ways: (1) By Premium Method, and (2) By Revaluation Method., 3.5.5.1 Premium Method, This method is followed when the new partner pays his share of goodwill in, cash. The amount of premium brought in by the new partner is shared by the, existing partners in their ratio of sacrifice. If this amount is paid to the old, partners directly (privately) by the new partner, no entry is made in the books of, the firm. But, when the amount is paid through the firm, which is generally the, case, the following journal entries are passed:, (i), , Cash A/c, To Goodwill A/c, (Amount brought by new partner as premium), , (ii), , Goodwill A/c, Dr., To Existing Partners Capital A/c (Individually), (Goodwill distributed among the existing, partners in their sacrificing ratio), , 2018-19, , Dr.
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132, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , Alternatively, it is credited to the new partner’s capital account and then, adjusted in favour of the existing partners in their sacrificing ratio. In that case, the journal entries will be as follows:, (i), , Cash A/c, To New Partner’s Capital A/c, (Amount brought by new partner for his, share of goodwill), , Dr., , (ii), , New Partner’s Capital A/c, Dr., To Existing Partner’s Capital A/cs (Individually), (Goodwill brought by new partners distributed, among the existing partners in their, sacrificing ratio), , If the partners decide that the amount of premium credited to their capital, accounts should be retained in business, there is no need to pass any additional, entry. If, however, they decide to withdraw their amounts, (in full or in part) the, following additional entry will be passed:, Existing Partner’s Capital A/c (Individually), To Cash A/c, (The amount of goodwill withdrawn by the, existing partners), , Dr., , Illustration 16, Sunil and Dalip are partners in a firm sharing profits and losses in the ratio of, 5:3. Sachin is admitted in the firm for 1/5 share of profits. He is to bring in, Rs. 20,000 as capital and Rs. 4,000 as his share of goodwill. Give the necessary, journal entries,, (a) When the amount of goodwill is retained in the business., (b) When the amount of goodwill is fully withdrawn., (c) When 50% of the amount of goodwill is fully withdrawn., Solution, (a) When the amount of goodwill credited to existing partners is retained, in business, , 2018-19
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Admission of a Partner, , 133, Books of Sunil and Dalip, Journal, , Date, , Particulars, , (i), , Cash A/c, To Sachin’s Capital A/c, To Goodwill A/c, (The amount brought in by Sachin as, Capital and Goodwill), , Dr., , Goodwill A/c, To Sunil’s Capital A/c, To Dalip’s Capital A/c, (Goodwill transferred to Sunil and Dalip, in the ratio of 5:3), , Dr., , (ii), , L.F., , Debit, (Rs.), , Credit, (Rs.), , 24,000, 20,000, 4,000, , 4,000, 2,500, 1,500, , Alternatively, if the goodwill account is not be the brought into the books of accounts, the following entries will be recorded:, (i), Cash A/C, Dr., 24,000, To Sachin’s Capital A/c, 24,000, (ii), Sachin’s Capital A/c, Dr, 4,000, To Sunil’s Capital A/c, 2,500, To Dalip’s Capital A/c, 1,500, Note: It assumed that the sacrificing ratio is the same as old profit sharing ratio., , (b) When the amount of goodwill credited to existing partners is fully, withdrawn., Journal, Date, , Particulars, , L.F., , 1., 2., 3., , Same as in (a) above, Same as in (a) above,, Sunil’s Capital A/c, Dalip’s Capital A/c, To Cash A/c, (Cash withdrawn by Sunil and Dalip, equal to their share of goodwill), , Dr., Dr., , Debit, (Rs.), , Credit, (Rs.), , 2,500, 1,500, 4,000, , (c) When 50% of the amount of goodwill credited to existing partners, is withdrawn., Journal, Date, , Particulars, , L.F., , 1., 2., 3., , Same as in (a) above,, Same as in (a) above, Sunil’s Capital A/c, Dalip’s Capital A/c, To Cash A/c, (Cash withdrawn for 50% of their share, of goodwill), , 2018-19, , Dr., Dr., , Debit, (Rs.), , Credit, (Rs.), , 1,250, 750, 2,000
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134, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , Illustration 17, Vijay and Sanjay are partners in a firm sharing profits and losses in the ratio, of 3:2. They decide to admit Ajay into partnership with 1/4 share in profits., Ajay brings in Rs. 30,000 for capital and the requisite amount of premium in, cash. The goodwill of the firm is valued at Rs. 20,000. The new profit sharing, ratio is 2:1:1. Vijay and Sanjay withdraw their share of goodwill. Give, necessary journal entries., Solution, (a) Ajay will bring Rs. 5,000 (1/4 of Rs. 20,000) as his share of goodwill (premium), (b) Sacrificing Ratio is 2:3 as calculated below:, For Vijay, old ratio is 3/5 and the new ratio is 2/4, hence, his sacrificing ratio is, =, , 3, 5, , 12 -10, 2, 2, =, =, 4, 20, 20, , For Sanjay, old ratio is 2/5 and the new ratio is 1/4, hence, his sacrificing, ratio is, , =, , 2, 5, , 1, 3, 8−5, =, =, 4, 20, 20, , Books of Vijay and Sanjay, Journal, Date, , Particulars, , 1., , Cash A/c, To Ajay’s Capital A/c, To Goodwill A/c, (The amount of capital and goodwill, brought by Ajay), , Dr., , Goodwill A/c, To Vijay’s Capital A/c, To Sanjay’s Capital A/c, (the amount of goodwill brought by Ajay, shared by Vijay and Sanjay in their, sacrificing ratio), , Dr., , Vijay’s Capital A/c, Sanjay’s Capital A/c, To Cash A/c, (Cash withdrawn by Vijay and Sanjay, for their share of goodwill), , Dr., Dr., , 2., , 3., , L.F., , Credit, (Rs.), , 35,000, 30,000, 5,000, , 5,000, 2,000, 3,000, , Note: Alternatively, journal entries (1) and (2) could be as follows:, , 2018-19, , Debit, (Rs.), , 2,000, 3,000, 5,000
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Admission of a Partner, , 135, Books of Vijay and Sanjay, Journal, , Date, , Particulars, , 1., , Cash A/c, To Ajay’s Capital A/c, (Ajay brought in Rs. 30,000 for capital, and Rs. 5,000 as goodwill), , Dr., , Ajay’s Capital A/c, To Vijay’s Capital A/c, To Sanjay’s Capital A/c, (Amount of goodwill brought in by Ajay, shared by Vijay and Sanjay in their, sacrificing in the ratio of 2:3), , Dr., , 2., , L.F., , Debit, (Rs.), , Credit, (Rs.), , 35,000, 35,000, , 5,000, 2.000, 3,000, , When goodwill already exists in books: The above treatment of goodwill was, based on the assumption that there was no goodwill account in the books of the, firm. However, It is quite possible that when a new partner brings in his share of, goodwill in cash, some amount of goodwill already exists in books. In that case,, after crediting the old partners by the amount of goodwill brought in by the new, partner, the existing goodwill must be written off by debiting the old partners in, their old profit sharing ratio. But, if it is decided that the goodwill may continue, to appear in the books at its old value, the amount to be brought in by new, partner will have to be proportionately reduced i.e., He will be required to bring, cash only for this share of the excess of the agreed value of goodwill over the, amount of goodwill already appearing in books., For example, in Illustration 17, the goodwill of the firm is valued at Rs., 20,000 and Ajay who is admitted to 1/4 share in its profits, brings in Rs. 5,000, as his share of goodwill. Suppose, goodwill already appeared in books at Rs., 10,000 and there is no decision to retain it. In that case, after crediting Vijay, and Sanjay for the amount of goodwill brought in by Ajay, the following additional, journal entry shall be recorded for writing off the existing amount of goodwill., Date, , Particulars, , L.F., , Vijay’s Capital A/c, Sanjay’s Capital A/c, To Goodwill A/c, (Goodwill written-off in old ratio), , Dr., Dr., , Debit, (Rs.), , Credit, (Rs.), , 6,000, 4,000, 10,000, , In case, however, the partners decide to maintain the Goodwill Account as it, is, the new partner is required to bring in as his share of goodwill only in respect of, the difference between its total value and the book value. In other words, Ajay will, be required to bring in Rs. 2,500 only [1/4 of Rs. 10,000 (Rs 20,000 – Rs. 10,000)]., Which will be credited to old partners in their sacrificing ratio, and no entry will, be recorded for writing off the existing amount of goodwill., , 2018-19
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136, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , Illustration 18, Srikant and Raman are partners in a firm sharing profits and losses in the ratio, of 3:2. They decide to admit Venkat into partnership with 1/3 share in the profits., Venkat brings in Rs 30,000 as his capital. He also promises to bring in the, necessary amount for his share of goodwill. On the date of admission, the goodwill, has been valued at Rs 24,000 and the goodwill account already appears in the, books at Rs 12,000. Venkat brings in the necessary amount for his share of, goodwill and agrees that the existing goodwill account be written off., Record the necessary journal entries in the books of the firm., Solution, Books of Srikant and Raman, Journal, Date, , Particulars, , 1., , Cash A/c, To Venkat’s Capital A/c, To Goodwill A/c, (Amount brought in by Venkat as his, capital and his share of goodwill), , Dr., , Goodwill A/c, To Srikant’s Capital A/c, To Raman’s Capital A/c, (Goodwill brought in by Venkat shared, by old partners in their ratio of sacrifice), , Dr., , Srikant’s Capital A/c, Raman’s Capital A/c, To Goodwill A/c, (Goodwill already appearing in books, written-off in the old ratio), , Dr., Dr., , 2., , 3., , L.F., , Debit, (Rs.), , Credit, (Rs.), , 38,000, 30,000, 8,000, , 8,000, 4,800, 3,200, , 7,200, 4,800, 12,000, , Note: Since nothing is given about the ratio in which the new partner acquires his share, of profit from Srikant and Raman, it is implied that they sacrifice their share of, profit in favour of Venkat in the old ratio i.e., 3:2., , 3.5.5.2 Revaluation Method, This method is followed when the new partner does not bring in his share of, goodwill in cash. In such a situation, the goodwill account is raised in the, books of account by crediting the old partners in the old profit sharing ratio., When goodwill account is to be raised in the books of account there are two, possibilities,, (a) No goodwill appears in books at the time of admission, and, (b) Goodwill already exists in books at the time of admission., , 2018-19
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Admission of a Partner, , 137, , (a) When no goodwill exists in the books: When no goodwill exists in the books, at the time of the admission of a new partner, the goodwill account must be, raised at its full value. This can be done by debiting goodwill account with its, full value and crediting the old partners’ capital accounts in their profit sharing, ratio. The journal entry will be:, Goodwill A/c, Dr., To Old Partners’ Capitals A/c (individually), (Goodwill raised at full value in the old ratio), , The goodwill thus raised shall appear in the balance sheet of the firm at its, full value., Illustration 19, Ahuja and Barua are partners in a firm sharing profits and losses in the ratio of, 3:2. They decide to admit Chaudhary into partnership for 1/5 share of profits,, which he acquires equally from Ahuja and Barua. Goodwill is valued at, Rs. 30,000. Chaudhary brings in Rs. 16,000 as his capital but is not in a, position to bring any amount for goodwill. No goodwill account exists in books, of the firm. Goodwill account is to be raised at full value. Record the necessary, journal entries., Solution, Book of Ahuja and Barua, Journal, Date, , Particulars, , 1., , Cash A/c, To Chaudhary’s Capital A/c, (Amount brought for capital), , 2., , L.F., Dr., , Goodwill A/c, Dr., To Ahuja’s Capital A/c, To Barua’s Capital A/c, (Goodwill raised at full value in old ratio), , Debit, (Rs.), , Credit, (Rs.), , 16,000, 16,000, 30,000, 18,000, 12,000, , Note: Goodwill shall appear in the balance sheet at Rs. 30,000, , Sometimes, a partner may bring in a part of his share of goodwill. In such a, situation, after distributing the amount brought in for goodwill among the old, partners in their sacrificing ratio, the goodwill account is raised in the books, based on the portion of premium not brought by the new partner. For example,, Pooja and Sandeep are partners sharing profits in ratio of 3:3. They admit Tushar, as a new partner for, , 1, 3, , share in profits. Tushar is to bring in Rs. 30,000 as his, , 2018-19
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138, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , share of goodwill as the total value of goodwill is estimated at Rs. 90,000. But, he brings Rs. 15,000 only (half of what is due) on this account. In this case, after, due credit for Rs. 15,000 to Pooja’s and Sandeep’s capital accounts in their, sacricifing ratio, goodwill account will be raised by Rs. 45,000 (half of its total, value) by crediting their old profit sharing ratio., (b) When goodwill already exists in the books : If the books already show some, balance in the Goodwill Account, the adjustment for goodwill in the old partner’s, capital accounts shall be made only for the difference between the agreed value, of goodwill and the amount of goodwill appearing in books., The amount of goodwill appearing in the books may be less than its agreed, value or it may be more than the agreed value. If it is less than the agreed value,, the difference between the agreed value of goodwill and the amount of goodwill, appearing in the books will be debited to goodwill account and credited to old, partner’s capital accounts in their old profit sharing ratio. If, however, it is more, than the agreed value, the difference will be debited to the old partners’ capital, accounts in their old profits sharing ratio and credited to the goodwill account., Thus, the journal entries will be as under:, (a) When the value of goodwill appearing in the books is less than the agreed, value., Goodwill A/c, Dr., To Old Partners’ Capital A/c (individually), (Goodwill raised to its agreed value), , (b) When the value of goodwill appearing in the books is more than the agreed, value., Old Partners’ Capital A/c (individually), Dr., To Goodwill A/c, (Goodwill brought down to its agreed value), , Illustration 20, Ram and Rahim are partners in a firm sharing profits and losses in the ratio of, 3:2. Rahul is admitted into partnership for 1/3 share in profits. He brings in Rs., 10,000 as capital, but is not in a position to bring any amount for his share of, goodwill which has been valued at Rs. 30,000. Give necessary journal entries, under each of the following situations:, (a) When there is no goodwill appearing in the books of the firm;, (b) When the goodwill appears at Rs 15,000 in the books of the firm; and, (c) When the goodwill appears at Rs. 36,000 in the books of the firm., , 2018-19
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Admission of a Partner, , 139, , Solution, (a) When no goodwill appears in the books, Books of Ram and Rahim, Journal, Date, , Particulars, , L.F., , Cash A/c, To Rahul’s Capital A/c, (Amount brought by Rahul as Capital), , Dr., , Goodwill A/c, To Ram’s Capital A/c, To Rahim’s Capital A/c, (Goodwill raised at full value in the, old profit sharing ratio), , Dr., , Debit, (Rs.), , Credit, (Rs.), , 10,000, 10,000, 30,000, 18,000, 12,000, , (b) When goodwill appears in the books at Rs 15,000, Journal, Date, , Particulars, , L.F., , Cash A/c, To Rahul’s Capital A/c, (Amount brought by Rahul as capital), , Dr., , Goodwill, To Ram’s Capital A/c, To Rahim’s Capital A/c, (Goodwill raised to its agree value), , Dr., , Debit, (Rs.), , Credit, (Rs.), , 10,000, 10,000, 15,000, 9,000, 6,000, , (c) When the goodwill appears in the books at Rs 36,000, Journal, Date, , Particulars, , L.F., , Cash A/c, To Rahul’s Capital, (Amount brought by Rahul as capital), , Dr., , Ram’s Capital A/c, Rahim’s Capital A/c, To Goodwill A/c, (Goodwill brought down to its, agreed vlaue), , Dr., Dr., , 2018-19, , Debit, (Rs.), , Credit, (Rs.), , 10,000, 10,000, 3,600, 2,400, 6,000
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140, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , Normally, when goodwill is raised in the books of the firm, it will be shown in, the balance sheet at its agreed value. If, however, the partners decide that after, necessary adjustments have been made in the old partners’ capital accounts,, the goodwill should not appear in the firm’s balance sheet, then it has to be, written off. This is done by crediting the goodwill account and debiting the capital, accounts of all the partners (including the new partner) in the new profit sharing, ratio. The net effect of such treatment will be that the new partner’s capital, account stands debited to the extent of his share of goodwill and the old partners, capital accounts credited in the ratio of their sacrifice, and the goodwill shows, nil balance., Illustration 21, A and B are partners sharing profits and losses equally. They admit C into, partnership and the new ratio is fixed as 4:3:2. C is unable to bring anything, for goodwill but brings Rs 25,000 as capital. Goodwill of the firm is valued at, Rs 18,000. Give the necessary journal entries assuming that the partners do, not want goodwill to appear in the Balance Sheet., Solution, Books of A and B, Journal, Date, , Particulars, , L.F., , Cash A/c, To C’s Capital A/c, (Cash brought in by C as Capital), , Dr., , Credit, (Rs.), , 25,000, 25,000, , Goodwill, To A’s Capital A/c, To B’s Capital A/c, (Goodwill raised at its full value), A’s Capital A/c, B’s Capital A/c, C’s Capital A/c, To Goodwill A/c, (Goodwill written-off), , Debit, (Rs.), , 18,000, 9,000, 9,000, Dr., Dr., Dr., , 8,000, 6,000, 4,000, 18,000, , The net effect of the entries (2) and (3) above is that C’s Capital account has, been debited by Rs. 4,000 and A’s Capital account and B’s Capital account, credited in their sacrificing ratio by Rs 1,000 (credit Rs 9,000 – debit Rs 8,000), and Rs 3,000 (credit Rs 9,000 – debit Rs 6,000 ) respectively, and goodwill will, show nil balance., , 2018-19
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Admission of a Partner, , 141, , Sometimes, the partners may decide not to show goodwill account anywhere, in books (not even in the journal and ledger). In that case, for adjustment of, goodwill, just one entry can be passed by debiting the new partner’s capital, account with his share of goodwill and crediting the old partners’ capital accounts, in their ratio of sacrifice. If in Illustration 21 we were to treat goodwill in this, manner, the entry for goodwill would have been as follows:, Date, , Particulars, , L.F., , C’s Capital A/c, To A’s Capital A/c, To B’s Capital A/c, (Adjustment for C’s share of goodwill), , Dr., , Debit, (Rs.), , Credit, (Rs.), , 4,000, 1,000, 3,000, , The above entry has the same effect on partners’ capital accounts as journal, entries (2) and (3)., Applicability of Accounting Standard 26: Intangible Assets, The Standard comes into effect in respect of expenditure incurred on intangible, items during the accounting periods commencing on or after April 1, 2003. As per, the Standard, Intangible Asset under AS 26 is defined as an identifiable, non, monetary, without physical existence and held for use in the production or supply, of goods or services for rental to others or for administrative purposes., Significant requirements of AS 26 w.r.t Intangible Assets:, 1. Intangible asset should be recognised by fulfilling the criteria as recognised, under AS 26., 2., , If an in asset does not satisfy recognition criteria, it should be expensed., , 3., , Internally generated goodwill should not be recognised as an asset., , 4. Internally generated brands, mastheads, and publishing titles and other similar, in substance should not be recognised as intangible assets., 5. Internally generated assets other than the goodwill, brands, mastheads, and, publishing titles may be recognised provided they satisfy recognition criteria as, prescribed by AS 26., , What this accounting standard implies is that normally goodwill should, not be brought into books unless it is paid for, and whenever it is recorded, it should be written- off over a period. Hence, crediting goodwill account, with the amount brought in by the incoming partner for his share of goodwill, and then transferring it to old partners’ capital accounts by debiting goodwill, account is quite in order. Similarly, when the incoming partner is unable to, bring in the necessary amount for his share of goodwill, raising goodwill account, at its agreed value by crediting the old partners in then old profit sharing ratio, and then writing it off immediately by debiting it to all the partners (including, the new partner) in the new profit sharing ratio is also acceptable as effectively it is, , 2018-19
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142, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , tent amount to purchase of goodwill because new partner’s capital account balance, stands reduced by his share of goodwill. The same logic equally implies to the, adjustments made for raising the goodwill account to its goodwill account when, it already appears in the balance sheet. What is important is that in the normal, course of raising goodwill as an asset should be avoided of and, if and when it is, brought in to books, it should be written off in the shortest possible period., Test your Understanding – II, Choose the correct alternative –, 1. At the time of admission of a new partner, general reserve appearing in the old, balance sheet is transferred to:, (a) all partner’s capital account, (b) new partner’s capital account, (c) old partner’s capital account, (d) none of the above., 2. Asha and Nisha are partner’s sharing profit in the ratio of 2:1. Asha’s son, Ashish was admitted for 1/4 share of which 1/8 was gifted by Asha to her son., The remaining was contributed by Nisha. Goodwill of the firm in valued at, Rs. 40,000. How much of the goodwill will be credited to the old partner’s, capital account., (a) Rs. 2,500 each, (b) Rs. 5,000 each, (c) Rs. 20,000 each, (d) None of the above., 3. A, B and C are partner’s in a firm. If D is admitted as a new partner:, (a) old firm is dissolved, (b) old firm and old partnership is dissolved, (c) old partnership is reconstituted, (d) None of the above., 4. On the admission of a new partner increase in the value of assets is debited to:, (a) Profit and Loss Adjustment account, (b) Assets account, (c) Old partner’s capital account, (d) None of the above., 5. At the time of admission of a partner, undistributed profits appearing in the, balance sheet of the old firm is transferred to the capital account of:, (a) old partners in old profit sharing ratio, (b) old partners in new profit sharing ratio, (c) all the partner in the new profit sharing ratio., , 3.5.5.3 Hidden Goodwill, Sometimes the value of goodwill is not given at the time of admission of a new, partner. In such a situation it has to be inferred from the arrangement of the, capital and profit sharing ratio. Suppose, A and B are partners sharing profits, equally with capitals of Rs. 45,000 each. They admitted C as a new partner for, , 2018-19
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Admission of a Partner, , 143, , one-third share in the profit. C brings in Rs. 60,000 as his capital. Based on the, amount brought in by C and his share in profit, the total capital of the newly, constituted firm works out to be Rs.1,80,000 (Rs. 60,000 × 3). But the actual, total capital of A, B and C works out as Rs. 1,50,000 (Rs. 45,000 + Rs. 45,000, + Rs. 60,000). Hence, it can be inferred that the difference is on account of goodwill, i.e., Rs. 30,000 (Rs. 1,80,000 – Rs. 1,50,000). Which is to be shared equally (old, ratio) by A and B. This shall raise their capital accounts to Rs. 60,000 each and, total capital of the firm to Rs. 1,80,000. Alternatively, if goodwill account is not, to be raised, C’s capital account can be debited by Rs. 10,000 (his share of, goodwill) and A and B’s Capital accounts credited by Rs. 5,000 each, and firm’s, total capital remains Rs. 50,000., Illustration 22, Hem and Nem are partners in a firm sharing profits in the ratio of 3:2. Their, capitals were Rs. 80,000 and Rs. 50,000 respectively. They admitted Sam on, Jan. 1, 2017 as a new partner for 1/5 share in the future profits. Sam brought, Rs. 60,000 as his capital. Calculate the value of goodwill of the firm and record, necessary journal entries on Sam’s admission., Solution, Value of Firm’s Goodwill, Sam’s capital, , = Rs. 60,000, , Sam’s share, , =, , Total capital of new firm, Hem’s+Nem’s+Sam’s, Goodwill of the firm, , =, =, =, =, , 5 × Rs.60,000 = Rs. 3,00,000, Rs.80,000 + Rs. 50,000 + Rs.60,000, Rs.1,90,000, Rs.1,10,000 (Rs. 3,00,000 – Rs.1,90,000), , Sam’s share, , =, , 1, × Rs.1,10,000 = Rs. 22,000, 5, , 1, 5, , Books of Hem, Nem and Sam, Journal, Date, 2007, , Particulars, , L.F., , 1., , Bank A/c, To Sam’s Capital A/c, (Cash brought by Sam for his capital), , 2018-19, , Dr., , Debit, Amount, (Rs.), , Credit, Amount, (Rs.), , 60,000, 60,000
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144, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , 2., , Goodwill A/c, To Hem’s Capital A/c, To Nem’s Capital A/c, (Credit given for goodwill to Hem and, Nem on Sam’s admission), , Dr., , 1,10,000, 66,000, 44,000, , Alternatively, if goodwill account is not to be raised, the second journal entry, passed for goodwill shall be as fallows., Sam’s Capital A/c, To Hem’s Capital A/c, To Nem’s Capital A/c, , Dr., , 22,000, 13,200, 8,800, , Do It Yourself, 1., , A firm’s profits for the last three years are Rs. 5,00,000; Rs. 4,00,000 and, Rs. 6,00,000. Calculate value of firm’s goodwill on the basis of four years’, purchase of the average profits for the last three years., , 2., , A firm’s profits for the last five years were Rs. 20,000, Rs. 30,000, Rs. 40,000,, Rs. 50,000 and Rs. 60,000. Calculate the value of firm’s goodwill on the basis, of three years’ purchase of weighted average profits after using weight of 1,2,3,4, and 5 respectively., , 3., , A firm’s profits during 2013, 2014, 2015 and 2016 were Rs. 16,000;, Rs. 20,000; Rs. 24,000 and Rs. 32,000 respectively. The firm has capital, investment of Rs. 1,00,000. A fair rate of return on investment is 18% p.a., Compute goodwill based on three years’ purchase of the average super profits, for the last four years., , 4., , Based on the data given in the above question, calculate goodwill by, capitalisation of super profits method. Will the amount of goodwill be different, if it is computed by capitalisation of average profits? Confirm your answer by, numerical verification., , 5., , Giri and Shanta are partners in a firm sharing profits equally. They admit, Kachroo into partnership who, in addition to capital, brings Rs. 20,000 as, goodwill for 1/5th share of profits in the firm. What shall be journal entries if:, (a) no goodwill appears in the books of the firm., (b) goodwill appears in the books of the firm at Rs. 40,000., , 6., , A and B are partners in a firm sharing profits in the ratio of 3:2. They admit C, into partnership for 1/5th share of profits in the firm. The goodwill of the firm, is valued at Rs. 1,00,000. He is unable to bring in his share of goodwill. What, will be the journal entries if:, (a) Goodwill is raised at full value and then written off., (b) Goodwill is not raised., , 3.6 Adjustment for Accumulated Profits and Losses, Sometimes a firm may have accumulated profits not yet transferred to capital, accounts of the partners. These are usually in the firm of general reserve, reserve, , 2018-19
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Admission of a Partner, , 145, , fund and/or Profit and Loss Account balance. The new partner is not entitled to, have any share in such accumulated profits. These are distributed among the, partners by transferring it to their capital accounts in old profit sharing ratio., Similarly, if there are some accumulated losses in the form of a debit balance of, profit and loss account appearing in the balance sheet of the firm., A remote possibility, the same should also be transferred to the old partners’, capital accounts (see Illustration 23)., Illustration 23, Rajinder and Surinder are partners in a firm sharing profits in the ratio of 4:1., On April 15, 2017 they admit Narender as a new partner. On that date there, was a balance of Rs. 20,000 in general reserve and a debit balance of Rs. 10,000, in the profit and loss account of the firm. Pass necessary journal entries regarding, adjustment of a accumulate a profit or loss., Solution, Books of Rajinder,Surinder and Narender, Journal, Date, 2015, , Particulars, , L.F., , Apr.15, , General Reserve A/c, To Rajinder’s capital A/c, To Surender’s capital A/c, (General Reserve balance transferred, to the capital account of Rajinder and, Surinder on Narender’s admission), , Dr., , Rajinder’s Capital A/c, Surender’s Capital A/c, To Profit and Loss A/c, (Debit balance of Profit and Loss A/c, transferred to old partners’ capital, accounts), , Dr., Dr., , Debit, Amount, (Rs.), , Credit, Amount, (Rs.), , 20,000, 16,000, 4,000, , 8,000, 2,000, 10,000, , 3.7 Revaluation of Assets and Reassessment of Liabilities, At the time of admission of a new partner, it is always desirable to ascertain, whether the assets of the firm are shown in books at their current values. In, case the assets are overstated or understated, these are revalued. Similarly, a, reassessment of the liabilities is also done so that these are brought in the books, at their correct values. At times there may also be some unrecorded assets and, , 2018-19
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146, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , liabilities of the firm. These also have to be brought into the books of the firm., For this purpose the firm has to prepare the Revaluation Account. The gain or, loss on revaluation of each asset and liability is transferred to this account and, finally its balance is transferred to the capital accounts of the old partners in, their old profit sharing ratio. In other words, the revaluation account is credited, with increase in the value of each asset and decrease in its liabilities because it, is a gain and is debited with decrease in the value of assets and increase in its, liabilities is debited to revaluation account because it is a loss. Similarly, unrecorded assets are credited and unrecorded liabilities are debited to the, revaluation account. If the revaluation account finally shows a credit balance, then it indicates net gain and if there is a debit balance then it indicates net loss., Which will be transferred to the capital accounts of the old partners in old ratio., The journal entries recorded for revaluation of assets and reassessment of, liabilities are as follows:, (i) For increase in the value of an asset, Asset A/c, To Revaluation A/c, , Dr., (Gain), , (ii) For reduction in the value of an asset, Revaluation A/c, To Asset A/c, , Dr., (Loss), , (iii) For appreciation in the amount of a liability, Revaluation A/c, To Liability A/c, , Dr., (Loss), , (iv) For reduction in the amount of a liability, Liability A/c, To Revaluation A/c, , Dr., (Gain), , (v) For an unrecorded asset, Cash A/c, To Revaluation A/c, , Dr., (Gain), , (vi) For an unrecorded liability, Revaluation A/c, To Cash A/c, , Dr., (Loss), , (vii) For transfer of gain on Revaluation if credit balance, Revaluation A/c, To Old Partners Capital A/cs, (individually), , Dr., (Old ratio), , (viii) For transferring loss on revaluation, Old partner’s Capital A/cs, (Individually), To Revaluation A/c, , Dr., (Old ratio), , Note: Entries (i), (ii), (iii) and (iv) are recorded only with the amount increase and decrease, in the value of assets and liabilities., , 2018-19
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Admission of a Partner, , 147, , Illustration 24, Following in Balance Sheet of A and B who share profits in the ratio of 3:2., Balance Sheet of A and B as on April 1, 2015, Liabilities, , Amount, (Rs.), , Sundry creditors, Captials, A, B, , 20,000, 30,000, 20,000, , 50,000, , Assets, , Amount, (Rs.), , Cash in hand, Debtors, Stock, Furniture, Plant and Machinery, , 3,000, 12,000, 15,000, 10,000, 30,000, , 70,000, , 70,000, , On that date C is admitted into the partnership on the following terms:, 1. C is to bring in Rs. 15,000 as capital and Rs. 5,000 as premium for, goodwill for, , 1, 6, , share., , 2. The value of stock is reduced by 10% while plant and machinery is, appreciated by 10%., 3. Furniture is revalued at Rs. 9,000., 4. A provision for doubtful debts is to be created on sundry debtors at 5%, and Rs. 200 is to be provided for an electricity bill., 5. Investment worth Rs. 1,000 (not mentioned in the balance sheet) is to be, taken into account., 6. A creditor of Rs. 100 is not likely to claim his money and is to be written, off., Record journal entries and prepare revaluation account and capital account, of partners., Solution, Books of A, B and C, Journal, Date, 2015, , Particulars, , L.F., , April, 01, , Bank A/c, To C’s capital account, To Goodwill A/c, (Cash brought in by C as capital, and goodwill/premium), , 2018-19, , Dr., , Debit, Amount, (Rs.), , Credit, Amount, (Rs.), , 20,000, 15,000, 5,000
Page 148 :
148, , 02, , 03, , 04, , 05, , 06, , 07, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , Goodwill A/c, To A’s Capital A/c, To B’s Capital A/c, (Premium divided between, A and B in sacrificing ratio 3:2), , Dr., , Revaluation A/c, To Stock A/c, To Furniture, To Provision for Doubtful Debt A/c, (Revaluation in the value of assets, on revaluation), , Dr., , Plant and Machinery A/c, Investment A/c, To Revaluation A/c, (Increase in the value of assets, on revaluation), , Dr., , Revaluation A/c, To Outstanding Electricity A/c, (Amount provided for outstanding, electricity bill), , Dr., , Sundry Creditors A/c, To Revaluation A/c, (Amount not likely to be claimed, by the creditors written off), , Dr., , Revaluation A/c, To A’s Capital A/c, To B’s Capital A/c, (Profit on revaluation of assets and, re-assessment of liabilities transferred, to A and B in old profit sharing ratio), , Dr., , 5,000, 3,000, 2,000, , 3,100, 1,500, 1,000, 600, , 3,000, 1,000, 4,000, , 200, 200, , 100, 100, , 800, 480, 320, , Revaluation Account, Dr., Particulars, Stock, Furniture, Provision for Doubtful, Outstanding Electricity, Profit on Revaluation, transferred to:, A’s Capital, B’s Capital, , Cr., Amount, (Rs.), 1,500, 1,000, 600, 200, , Particulars, Plant and Machinery, Investments, Sundry Creditors, , Amount, (Rs.), 3,000, 1,000, 100, , 480, 320, 4,100, , 2018-19, , 4,100
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Admission of a Partner, , 149, Partner’s Capital Accounts, , Dr., Date, 2017, , Cr., Particulars, , Apr.01 Balance, c/d, , A, (Rs.), 33,480, , B, (Rs.), , C, (Rs.), , Date, 2017, , Particulars, , 22,320 15,000, , Apr.1, , Balance b/d, Bank, Goodwill, Revaluation, (Profit), , 33,480 22,320 15,000, , A, (Rs.), , B, (Rs.), , 30,000, , 20,000, , 3,000, 480, , 2,000, 320, , C, (Rs.), , 15,000, , 33,480 22,320 15,000, , Illustration 25, Given below is the Balance Sheet of A and B, who are carrying on partnership, business as on March 31,2017. A and B share profits in the ratio of 2:1., Balance Sheet of A and B as at March 31, 2017, Liabilities, Bills Payable, Sundry creditors, Outstanding expenses, Capitals, A, 1,80,000, B, 1,50,000, , Amount, (Rs.), 10,000, 58,000, 2,000, , 3,30,000, , Assets, Cash in hand, Cast at bank, Sundry debtors, Stock, Plant and machinery, Building, , 4,00,000, , Amount, ( Rs.), 10,000, 40,000, 60,000, 40,000, 1,00,000, 1,50,000, 4,00,000, , C is admitted as a partner on the date of the balance sheet on the following, terms:, 1. C will bring in Rs 1,00,000 as his capital and Rs 60,000 as his share of, goodwill for 1/4 share in profits., 2. Plant is to be appreciated to Rs 1,20,000 and the value of buildings is to be, appreciated by 10%., 3. Stock is found overvalued by Rs 4,000., 4. A provision for doubtful debts is to be created at 5% of debtors., 5. Creditors were unrecorded to the extend of Rs 1,000., Record revaluation Account, partners’ capital accounts, and the Balance, Sheet of the constituted firm after admission of the new partner., , 2018-19
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150, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , Solution, Books of A and B, Revaluation Account, Dr., , Cr., , Particulars, , Amount, (Rs.), , Stock in hand, Provision for doubtful debts, Creditors, profit on revaluation, transferred to:, A’s Capital, 18,000, B’s Capital, 9,000, , 4,000, 3,000, , Particulars, , Amount, (Rs.), , Plant and machinery, Buildings, , 20,000, 15,000, , 1,000, , 27,000, 35,000, , 35,000, , Partners’ Capital Accounts, Dr., Date, 2017, , Cr., Particulars, , A, (Rs.), , B, (Rs.), , C, (Rs.), , March Balance c/d 2,38,000 1,79,000 1,00,000, 31, , 2,38,000, , 1,79,000, , Date, 2017, , Particulars, , March, 31, , Balabce b/d, Bank, Goodwill, Revaluation, , 1,00,000, , A, (Rs.), , B, (Rs.), , C, (Rs.), , 1,80,000 1,50,000, 1,00,000, 40,000, 18,000, , 20,000, 9,000, , 2,38,000, , 1,79,000, , 1,00,000, , Balance Sheet of A, B and C as on April 01, 2016, Liabilities, Bills Payable, Sundry Creditors, Outstanding Expenses, Capitals, A, 2,38,000, B, 1,79,000, C, 1,00,000, , Amount, (Rs.), 10,000, 59,000, 2,000, , 5,17,000, , Assets, Cash in hand, Cash at bank, Sundry Debtors, Less: Provision for, doubtful debts, Stock, Plant and Machinery, Buildings, , 5,88,000, , 2018-19, , Amount, (Rs.), 10,000, 2,00,000, 60,000, 3,000, , 57,000, 36,000, 1,20,000, 1,65,000, 5,88,000
Page 151 :
Admission of a Partner, , 151, Do It Yourself, , 1., , Aslam, Jackab, Hari are equal partners with capitals of Rs. 1,500, Rs. 1,750, and Rs. 2,000 respectively. They agree to admit Satnam into equal partnership, upon payment in cash of Rs. 1,500 for one-fourth share of the goodwill and, Rs. 1,800 as his capital, both sums to remain in the business. The liabilities, of the old firm amount Rs. 3,000 and the assets, apart from cash, consist of, Motors Rs. 1,200, Furniture Rs. 400, Stock Rs. 2,650, Debtors of Rs. 3,780., The Motors and Furniture were revalued at Rs. 950 and Rs. 380 respectively,, and the depreciation written-off. Ascertain cash in hand and prepare the, balance sheet of the firm after Satnam’s admission., , 2., , Benu and Sunil are partners sharing profits in the ratio of 3:2 on April 1,, 2017. Ina was admitted for 1/4 share who paid Rs. 2,00,000 as capital and, Rs. 1,00,000 for premium in cash. At the time of admission, general reserve, amounting to Rs. 1,20,000 and profit and loss account amounting to, Rs. 60,000 appeared on the asset side of the balance sheet., Required: Record necessary journal entries to record the above transactions., , 3., , Ashoo and Rahul are partners sharing profits in the ratio of 5:3. Gaurav was, admitted for 1/5 share and was asked to contribute proportionate capital and, Rs. 4,000 for premium (goodwill). The Capitals of Ashoo and Rahul, after all, adjustments relating to revaluation, goodwill etc., worked out to be Rs. 45,000, and Rs. 35,000 respectively., Required: Calculate New Profit sharing ratio, capital to be brought in by Gaurav, and record necessary journal entries for the same., , 3.8 Adjustment of Capitals, Sometimes, at the time of admission, the partners agree that their capitals should, also be adjusted so as to be proportionate to their profit sharing ratio. In such, a situation, if the capital of the new partner is given, the same can be used as a, base for calculating the new capitals of the old partners. The capitals thus, ascertained should be compared with their old capitals after all adjustments, relating to goodwill reserves and revaluation of assets and liabilities, etc. have, been made; and then the partner whose capital falls short, will bring in the, necessary amount to cover the shortage and the partner who has a surplus,, will withdraw the excess amount of capital. (See Illustration 26), Illustration 26, A and B are partners sharing profits in the ratio of 2:1. C is admitted into the, firm for 1/4 share of profits. C brings in Rs. 20,000 in respect of his capital. The, capitals of old partners A and B, after all adjustments relating to goodwill,, revaluation of assets and liabilities, etc., are Rs. 45,000 and Rs. 15,000, respectively. It is agreed that partners’ capitals should be according to the new, profit sharing ratio., , 2018-19
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152, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , Determine the new capitals of A and B and record the necessary journal, entries assuming that the partner whose capital falls short, brings in the amount, of deficiency and the partner who has an excess, withdraws the excess amount., Solution, 1. Calculation of new profit sharing ratio: Assuming the new partner C quires, his share from A and B in their old profit sharing ratio, i.e 2:1., Total Share, , =1, , C’s Share, , =, , 1, 4, , Remaining Shares, , =1, , 1, 4, , 3, 4, , A’s New Share, , =, , 3, 4, , 2, 3, , 6, 12, , B’s New Share, , =, , 3, 4, , 1, 3, , 3, 12, , 1 3, 3, 4 3 12, Thus, new profit sharing ratio between A,B and C is 6:3:3 or 2:1:1., 2. Required Capital of A and B, C’s capital (who has 1/4 share in profits) is Rs. 20,000. B’s new share in profits, 1/4. Hence his capital will also be Rs. 20,000. A’s new share is 2/4 which is double of, C’s share. Hence his capital will be Rs. 40,000., Alternatively, based on C’s capital, the total capital of the firm works out at, Rs. 80,000 (4/1 × Rs.20,000). Hence, based on their share in profits, the capital of A and, B will be:, , C’s New Share, , =, , A’s capital, , =, , 2, of 80,000 = Rs. 40,000, 4, , B’s capital, , =, , 1, of 80,000 = Rs. 20,000, 4, , The capital of A and B after all adjustments have been made, are Rs. 45,000, and Rs. 15,000 respectively. Hence, A will withdraw Rs. 5,000 (Rs. 45,000–, Rs.40,000) from the firm whereas B will contribute additional amount of, Rs. 5,000 (Rs. 20,000–Rs.15,000). The journal entries will be :, Date, , Particulars, , L.F., , Debit, Amount, (Rs.), , A’s Capital A/c, To Cash A/c, (Excess capital withdrawn by A), , Dr., , 5,000, , 2018-19, , Credit, Anount, (Rs.), 5,000
Page 153 :
Admission of a Partner, , 153, , Cash A/c, To B’s Capital A/c, (Deficiency made good by additional, amount brought in by B), , Dr., , 5,000, 5,000, , Sometimes, the total capital of the firm may clearly be specified and it is, agreed that the capital of each partner should be proportionate to his share in, profits. In such a situation each partner’s capital (including the new partner’s, capital to be brought by him) is calculated on the basis of his share in profits., By bringing in additional amount or withdrawal of excess amount, the final, capital of each partner can be brought up to the required level., It may be noted that subject to agreement among the partners, surplus or, deficiency in each old partners’ capital accounts can also be taken care of simply, by transfer to their respective current accounts. (See Illustration 27), Illustration 27, A, B and C are partners in a firm sharing profits the ratio of 3:2:1. D is admitted, into the firm for 1/4 share in profits, which he gets as 1/8 from A and 1/8 from, B. The total capital of the firm is agreed upon as Rs. 1,20,000 and D is to bring, in cash equivalent to 1/4 of this amount as his capital. The capitals of other, partners are also to be adjusted in the ratio of their respective shares in profits., The capitals of A, B and C after all adjustments are Rs. 40,000, Rs. 35,000 and, Rs. 30,000 respectively. Calculate the new capitals of A,B and C, and record the, necessary journal entries., Solution, 1., , Calculation of new profit sharing ratio:, A, , 1 1 3, − =, 2 8 8, , =, , 1 1, 5, − =, 3 8 24, C will continue to get 1/6 as his share in the profits., Thus, the new profit sharing ratio between A,B,C and D will be:, , B, , 3, 8, , 2., , :, , 5, 24, , =, , :, , 1, 6, , :, , 1, 4, , or, , 9, 24, , :, , 5, 24, , :, , 4, 24, , :, , 6, , or 9:5:4:6, , 24, , Required capitals of all partners:, 9, = Rs. 45,000, 24, , A’s Capital, , = Rs. 1,20,000 ×, , B’s Capital, , = Rs. 1,20,000 ×, , 5, = Rs. 25,000, 24, , 2018-19
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154, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, C’s Capital, , = Rs. 1,20,000 ×, , 4, = Rs. 20,000, 24, , D’s Capital, , = Rs. 1,20,000 ×, , 6, = Rs. 30,000, 24, , Hence, A will bring in Rs. 5,000 (Rs. 45,000 – Rs. 40,000), B will withdraw, Rs. 10,000 (Rs. 35,000 – Rs. 25,000), C will withdraw Rs. 10,000 (Rs. 30,000, – Rs, 20,000) and D will bring in Rs. 30,000. Alternatively, the current, accounts can be opened and the amounts to be brought in or withdrawn by, A, B and C will be transferred to their respective current accounts subject to, the agreement among the partners. The journal entries in this regard will be, recorded as follows:, Books of A, B, C and D, Journal, Date, , Particulars, , L.F., , Cash A/c, To A’s Capital A/c, (Deficiency made good by, additional amount brought in by A), , Dr., , B’s Capital A/c, C’s Capital A/c, To Cash A/c, (Excess amounts withdrawn by B and C), , Dr., Dr., , Cash A/c, To D’s Capital A/c, (Cash brought in by D as Capital), , Dr., , Debit, Amount, (Rs.), , Credit, Amount, (Rs.), , 5,000, 5,000, , 10,000, 10,000, 20,000, 30,000, 30,000, , Alternatively, for entries (2) and (3) above shall be, Books of A, B, C and D, Journal, Date, , Particulars, , L.F., , A’s Current A/c, To A’s Capital A/c, (Deficiency in A’s capital transferred to, A’s Current Account), , Dr., , B’s Capital A/c, C’s Capital A/c, To B’s Current A/c, To C’s Current A/c, (Excess Capital of B transferred, to their current account), , Dr., Dr., , 2018-19, , Debit, Amount, (Rs.), , Credit, Amount, (Rs.), , 5,000, 5,000, , 10,000, 10,000, 10,000, 10,000
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Admission of a Partner, , 155, , Illustration 28, A and B are partners in a firm sharing profits in the ratio 2:1. C is admitted into, the firm with 1/4 share in profits. He will bring in Rs. 30,000 as capital and, capitals of A and B are to be adjusted in the profit sharing ratio. The Balance, Sheet of A and B as on March 31, 2017 (before C’s admission) was as under:, Balance Sheet of A and B as at March 31,2017, Liabilities, , Amount, (Rs.), , Creditors, Bills payable, General Reserve, Capitals: A, B, , 8,000, 4,000, 6,000, 50,000, 32,000, , 82.,000, , Assets, , Amount, (Rs.), , Cash in hand, Cash at bank, Sundry debtors, Stock, Furniture, Machinery, Building, , 2,000, 10,000, 8,000, 10,000, 5,000, 25,000, 40,000, , 1,00,000, , 1,00,000, , Other terms of agreement are as under:, 1. C will bring in Rs. 12,000 as his share of goodwill., 2. Building was valued at Rs. 45,000 and Machinery at Rs. 23,000., 3. A provision for bad debts is to be created @ 6% on debtors., 4. The capital accounts of A and B are to be adjusted by opening current accounts., , Record necessary journal entries, show necessary ledger accounts and prepare, fund’s Balance Sheet after C’s admission., Books of A, B and C, Journal, Date, 2017, , Particulars, , L.F., , March 1, , Cash A/c, To C’s Capital A/c, To Goodwill A/c, (Amounts of capital and goodwill, brought in by C), , Dr., , Goodwill A/c, To A’s Capital A/c, To B’s Capital A/c, (Goodwill brought in by C transferred to, A and B in their ratio of sacrifice), , Dr., , Revaluation A/c, To Machinery A/c, To Provision for Bad Debts A/c, (Decrease in the value of machinery and, creation of provision for bad debts), , Dr., , 2018-19, , Debit, Amount, (Rs.), , Credit, Anount, (Rs.), , 42,000, 30,000, 12,000, , 12,000, 8,000, 4,000, , 2,480, 2,000, 480
Page 156 :
156, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, Building A/c, To Revaluation A/c, (Increase in the value of building), , Dr., , Revaluation A/c, To A’s Capital A/c, To B’s Capital A/c, (Profit on revaluation distributed, between A and B), , Dr., , General Reserve A/c, To A’s Capital A/c, To B’s Capital A/c, (Undistributed profit transferred, to A and B), , Dr., , A’s Capital A/c, To A’s Current A/c, (The excess of capital transferred to, partner’s current account), , Dr., , B’s Capital A/c, To B’s Current A/c, (The excess of B’s capital transferred to, partner’s current account), , Dr., , 5,000, 5,000, 2,520, 1,680, 840, , 6,000, 4,000, 2,000, , 3,680, 3,680, , 8.840, 8,840, , Revaluation Account, Dr., , Cr., , Particulars, , Amount, (Rs.), , Machinery, Provision for bad debts, Transfer of profit on, revaluation to:, A’s Capital, 1,680, B’s Capital, 840, , 2,000, 480, , Particulars, , Amount, (Rs.), , Building, , 5,000, , 2,520, 5,000, , 5,000, , Partner’s Capital Accounts, Dr., Date, , Cr., Particulars, , Current Accounts, Balance c/d, , A, (Rs.), , B, (Rs.), , C, (Rs.), , Date, , Particulars, , A, (Rs.), , B, (Rs.), , C, (Rs.), , 3,680 8,840, 60,000 30,000 30,000, , Balance b/d, 50,000 32,000, Cash, 30,000, Goodwill, 8,000, 4,000, General Reserve, 4,000, 2,000, Revaluation (transfer 1,680, 840, of profit), , 63,680 38,840 30,000, , 63,680 38,840 30,000, , 2018-19
Page 157 :
Admission of a Partner, , 157, Partner’s Current Accounts, , Dr., , Cr., , Date Particulars, , Balance c/d, , A, (Rs.), , B, (Rs.), , C, (Rs.), , 3,680, , 8,840, , -, , Date, , Particulars, , Capital A/cs, , A, (Rs.), , B, (Rs.), , C, (Rs.), , 3,680, , 8,840, , -, , Balance Sheet of A, B and C as on March 31, 2017, Liabilities, , Amount, (Rs.), , Creditors, Bills Payable, Partners Current accounts:, A, 3,680, B, 8,840, Capitals, A, 60,000, B, 30,000, C, 30,000, , 8,000, 4,000, , 12,520, , 1,20,000, , Assets, Cash in hand, Cash at bank, Sundry Debtors, Less: Provision for, Doubtful Debts, Stock, Furniture, Machinery, Buildings, , 1,44,520, , Amount, (Rs.), 44,000, 10,000, 8000, 480, , 7,520, 10,000, 5,000, 23,000, 45,000, 1,44,520, , Notes, 1., , New Profit Sharing Ratio, , Since nothing is given as to how C acquired his share from A and B. It is assumed that A, and B, between themselves continue to share the profit in the old ratio of 2:1., C’s Share of Profits =, , 1, 4, , Remaining Share, , =, , 1−, , 1 3, =, 4 4, , A’s New Share, , =, , 2, 3, , of, , 3, 6, 1, =, =, 4 12 2, , 1, 3, 3, 1, of, =, =, 3, 4 12 4, Thus, new profit sharing ratio between A, B and C is 2:1:1, , B’s New Share, , 2., , =, , New Capitals of A and B, , C’s capital is Rs 30,000 and his share of profits is 1/4. Based on C’s capital, the total, capital of the firm will work out at Rs 1,20,000 (4/1 × 30,000) and the respective capitals, of A and B will be as follows :, A’s Capital, , =, , 2, 4, , B’s Capital, , =, , 1, 4, , of 1,20,000 = Rs. 60,000, of 1,20,000 = Rs. 30,000, , 2018-19
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158, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , Illustration 29, The Balance Sheet of W and R who shared profits in the ratio of 3 : 2 was as, follows on January. 01, 2015., Balance Sheet of W and R as on Jan. 01, 2015, Liabilities, Sundry Creditors, Partner’s Capital, W, R, , Amount, (Rs.), 20,000, 40,000, 30,000, , 70,000, , Assets, Cash in hand, Sundry Debtors, Less: Provision for, doubtful debts, Stock, Plant and Machinery, Patents, , 90,000, , Amount, (Rs.), 5,000, 20,000, 700, , 19,300, 25,000, 35,000, 5,700, 90,000, , On this date B was admitted as a partner on the following conditions:, 1. He was to get 4/15 share of profit., 2. He had to bring in Rs 30,000 as his capital., 3. He would pay cash for goodwill which would be based on 2 ½ years, purchase of the profits of the past four years., 4. W and R would withdraw half the amount of goodwill premium brought, by B., 5. The assets would be revalued as: Sundry Debtors at book value less a, provision of 5%; Stock at Rs 20,000; Plant and Machinery at Rs 40,000;, and Patents at Rs 12,000., 6. Liabilities were valued at Rs 23,000, one bill for goods purchased, having been omitted from books., 7. Profit for the past four years were :, 2011, 15,000, 2013, 14,000, 2012, 20,000, 2014, 17,000, Give necessary journal entries and ledger accounts to record the above,, and prepare the Balance Sheet after B’s admission., Solution, The goodwill of the firm is Rs 41,250 worked out as under :, Profits :, Year 2011, 15,000, Year 2012, 20,000, Year 2013, 14,000, Year 2014, 17,000, 66,000, , 2018-19
Page 159 :
Admission of a Partner, Average Profits =, , 159, , Rs., , 66,000, = Rs. 16,500, 4, , Goodwill at 2 ½ Years purchase = Rs .16,500 ×, B’s share of goodwill = Rs. 41,250 ×, , 5, = Rs. 41,250, 2, , 4, = Rs, 11,000., 15, , Books of W, R and B, Journal, Date, 2015, , Particulars, , L.F., , Jan. 01, , Cash A/c, To B’s Capital A/c, To Goodwill A/c, (Sum brought in by B as his Capital and, his share (4/5) of the goodwill), , Dr., , Goodwill A/c, To W’s Capital A/c, To R’s Capital A/c, (Goodwill brought by B credited to W’s, and R’s capital accounts in old profit, ratio of 3:2 ), , Dr., , W’s Capital A/c, R’s Capital A/c, To Cash A/c, (Amount (half of goodwill), withdrawn by the old partners), , Dr., , Debit, (Rs.), , Credit, (Rs.), , 41,000, 30,000, 11,000, , 11,000, 6,600, 4,400, , 3,300, 2,200, 5,500, , Revaluation A/c, Dr., To Provision for Doubtful Debts A/c, To Stock A/c, (Increase in provision for doubtfull debts to, Rs 1,000 (5% of Rs 20,000) and decrease, in value of stock), , 5,300, , Plant and Machinery A/c, Patents A/c, To Revaluation A/c, (Increase in value of Plant and, Machinery and Patents), , Dr., Dr., , 5,000, 6,300, , Revaluation A/c, To Sundry Creditors A/c, (Increase in liabilities), , Dr., , 300, 5,000, , 11,300, , 3,000, 3,000, , 2018-19
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160, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, Revaluation A/c, To W’s Capital A/c, To R’s Capital A/c, (Being profit on adjustment transferred, to partners’ capital accounts), , Dr., , 3,000, 1,800, 1,200, , Cash Account, Dr., Date, 2015, , Cr., Particulars, , J.F., , Jan. 1 Balance b/d, B’s Capital, Goodwill, , Amount, (Rs.), 5,000, 30,000, 11,000, , Date, 2015, , Particulars, , J.F., , Jan. 1 W’s Capital, R’s Capital, Balance c/d, , Amount, (Rs.), 3,300, 2,200, 40,500, , 46,000, , 46,000, , B’s Capital Account, Dr., Date, 2015, , Cr., Particulars, , J.F., , Jan. 1 Balance c/d, , Anount, (Rs.), , Date, 2015, , Particulars, , 30,000, , Jan. 1 Cash, , J.F., , Amount, (Rs.), 30,000, , 30,000, , 30,000, , W’s Capital Account, Dr., , Cr., , Date, 2015, , Particulars, , Jan.1, , Cash, Balance c/d, , J.F., , Anount, (Rs.), , Date, 2015, , Particulars, , 3,300, 45,100, , Jan. 1 Balance b/d, Goodwill, Revaluation, , J.F., , Amount, (Rs.), 40,000, 6,600, 1,800, , 48,400, , 48,400, , R’s Capital Account, Dr., Date, 2015, , Cr., Particulars, , Jan. 1 Cash, Balance c/d, , J.F., , Anount, (Rs.), , Date, 2015, , 2,200, 33,400, , Jan. 1 Balance b/d, Goodwill, Revaluation, , 35,600, , 2018-19, , Particulars, , J.F., , Amount, (Rs.), 30,000, 4,400, 1,200, 35,600
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Admission of a Partner, , 161, Revaluation Account, , Dr., , Cr., , Particulars, , Anount, (Rs.), , Provision for, doubtful debts, Stock, Sundry Creditors, Profit transferred to:, W 3/5, 1,800, R 2/5, 1,200, , 300, , Particulars, , Amount, (Rs.), , Plant and Machinery, Patents, , 5,000, 6,300, , 5,000, 3,000, , 3,000, 11,300, , 11,300, , Balance Sheet of W, R and B as on January 01, 2015, Liabilities, , Amount, (Rs.), , Sundry Creditors, Capitals:, W, R, B, , 23,000, 45,100, 33,400, 30,000, , 1,08,500, , Assets, Cash in hand, Sundry debtors :, Less: Provision for, doubtful debits, Stock, Plant & Machinery, Patents, , 1,31,500, , Amount, (Rs.), 40,500, 20,000, 1,000, , 19,000, 20,000, 40,000, 12,000, 1,31,500, , The new profit sharing ratio will be:, W = (1 −, R = (1 −, B =, , 4, 3 11 3 33, )× =, × =, 15 5 15 5 75, , 4, 2 11 2 22, )× =, × =, 15 5 15 5 75, , 4 20, =, 15 75, , The new ratio is 33 : 22 : 20., , 3.9 Change in Profit Sharing Ratio among the existing Partners, Sometimes, the partners of a firm decide to change their existing profit sharing, ratio without any admission or retirement of a partner. This results in a gain of, additional share in future profits of the firm for some partners while a loss of a, part thereof for other partners. For example, A, B and C are partners in a firm, sharing profits in the ratios of 8:5:3 It is felt that A will no more be able to, , 2018-19
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162, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , actively participate in the affairs of the firm. Hence, with effect from, April 1, 2007, they decided that, in future they will share the profits in the, 8, 5, ratio of 5 : 6 : 5. This results in A losing 316, share in profits while B, 16 16, 6, , 5, , 5, , 3, , and 216, . In such a situation, first of, and C gaining 116, 16, 16, 16, 16, all, the loss and gain in the value of goodwill (if any) will have to be adjusted., This is done by raising goodwill at its full value in the MD profit sharing ratio, and then writing it off in the new ratio. Alternatively, losing partners can be, credited and gaining partners debited with appropriate amounts without, goodwill account appearing in the books, as explained earlier in the context of, the admission of a new partners., Any change, in the profit sharing ratio, like admission of partner, may also, involve adjustments in respect of revaluation of assets and liabilities, transfer of, accumulated profit and losses to partners' capital accounts in the old profit, sharing ratio and adjustment of partners' capitals, if specified, so as to make, them proportionate to the new profit sharing ratio. All this is done in the same, way as in case of admission of a partner., Illustration 30, Dinesh, Ramesh and Suresh are partners in a firm sharing profits and losses, in the ratio of 3:3:2. They decided to share the profits equally w.e.f. April 1,, 2015. Their Balance Sheet as on March 31, 2016 was as follows :, Liabilities, Sundry Creditors, General Reserve, Partner's Loan :, Dinesh, 40,000, Ramesh, 30,000, Partners Capital :, Dinesh, 1,00,000, Ramesh, 80,000, Suresh, 70,000, , Amount, Rs., 1,50,000, 80,000, , 70,000, , Assets, , Amounts, Rs., , Cash at Bank, Bills Receivable, Sundry Debtors, Stock, Fixed Assets, , 40,000, 50,000, 60,000, 1,20,000, 2,80,000, , 2,50,000, 5,50,000, , It was also decide that :, 1. The fixed assets should be valued at Rs. 3,31,000., 2. A provisions of 5% on sundry debtors be made doubtful debts., , 2018-19, , 5,50,000
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Admission of a Partner, 3., , 4., 5., , 163, , The goodwill of the firm at this date be valued at 4 12 years purchase of the, average net profits of last, five years which were Rs. 14,000; Rs. 17,000;, Rs. 20,000; Rs. 22,000 and Rs. 27,000 respectively., The value of stock be reduced to Rs. 1,12,000., Goodwill was not to appear in the books. Pass the necessary journal entries, and prepare the revised Balance sheet of the firm., , Solution, Books of Dinesh, Ramesh and Suresh, Journal, 2016, Apr. 01, , Fixed Assets A/c, To Revaluation A/c, (Increase in value of fixed assets), , Dr., , Revaluation A/c, To Stock A/c, To Provisions for, Doubtful debts A/c, (Decrease in value of stock and creation, of provision for doubtful debts), , Dr., , 51,000, 51,000, 11,000, 8,000, 3,000, , Revaluation A/c, Dr., To Dinesh's Capital A/c, To Ramesh's Capital A/c, To Suresh's Capital A/c, (Profit on revaluation transferred to partners', capital accounts in old profit sharing ratio), , 40,000, , General Reserve A/c, To Dinesh's Capital A/c, To Ramesh's Capital A/c, To Suresh's Capital A/c, (General reserve, transferred to partners', capital accounts in old ratio), , 80,000, , Dr., , Suresh's Capital A/c, Dr., To Dinesh's Capital A/c, To Ramesh's Capital A/c, (Goodwill adjusted in partner's capital, accounts in their sacrificing/gaining ratio), , 15,000, 15,000, 10,000, , 30,000, 30,000, 20,000, , 7,500, 3,750, 3,750, , Working Notes:, 1., , Gain or sacrifice of partners, Dinesh, Old Share, 3/8, New Share, 1/3, Difference, 1/24, (sacrifice), , Ramesh, 3/8, 1/3, 1/24, (sacrifice), , 2018-19, , Suresh, 2/8, 1/3, 2/24, (gain)
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164, 2., , Accountancy – Not-for-Profit Organisation and Partnership Accounts, Goodwill, Total Profits : Rs. 14,000 + Rs. 17,000 + Rs. 20,000 + Rs. 22,000 + Rs. 27,000, = Rs. 1,00,000, Average Profits, = Rs. 1,00,000/5, = Rs. 20,000, = Rs. 20,000 × 4, , Goodwill, , 1, 2, , = Rs. 90,000, Suresh in expected to bring in Rs. 7,500, 2, share in profits., 24, Dinesh in expected to receive Rs. 3,750, , as he gain, , 1, share in profits, 24, Ramesh is expected to receive Rs. 3,750, , as he sacrifices, , 1, share in profits, 24, Had we raised Goodwill A/c in the old ratio and written it off in the new ratio, the net, effect would have been the same., , as he sacrifices, , (a), , (b), , 3., , Good will A/c, To Dinesh's Capital A/c, To Ramesh's Capital A/c, To Suresh's Capital A/c, (Goodwill raised in old ratio), , Dr., , Dinesh's Capital A/c, Ramesh's Capital A/c, Suresh's Capital A/c, To Goodwill A/c, , Dr., Dr., Dr., , 90,000, 33,750, 33,750, 22,500, 30,000, 30,000, 30,000, 90,000, , Capital Accounts, , Date Particulars, Dinesh's, Account, Ramesh's, Account, Balance c/d, , J.F., , Dinesh, (Rs.), , Ramesh, (Rs.), , Suresh, (Rs.), , Date, , 3,750, 3,750, 1,48,750 1,28,750 92,500, , 1,48,750, , 1,28,750 1,00,000, , 2018-19, , Particulars, Balance b/d, Profit on, Revaluation, General, Reserve, Suresh's, Account, , J.F., , Dinesh, (Rs.), , Ramesh, (Rs.), , Suresh, (Rs.), , 1,00,000, , 80,000 70,000, , 15,000, , 15,000 10,000, , 30,000, 3,750, , 30,000 20,000, 3,750, , 1,48,750 1,28,750 1,00,000
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Admission of a Partner, , 165, Balance Sheet as on April 01, 2015, , Liabilities, Sundry Creditors, Partner's Loan :, Dinesh, Ramesh, Capitals:, Dinesh, Ramesh, Suresh, , Amount, (Rs.), 1,50,000, 40,000, 30,000, , 1,48,750, 1,28,750, 92,500, , 70,000, , Assets, Cash at Bank, Bills Receivable, Sundry Debtors, 60,000, Less Prov. for Doubtful, Debts, 3,000, Stock, Fixed Assets, , Amount, (Rs.), 40,000, 50,000, , 57,000, 1,12,000, 3,31,000, , 3,70,000, 5,90,000, , 5,90,000, , Terms Introduced in the Chapter, 1., 2., 3., 4., 5., 6., 7., 8., 9., 10., 11., , Reconstitution of Partnership Firm., Revaluation of Assets., Reassessment of liabilities., Undistributed and accumulated profits and losses., Accumulated Losses., Goodwill., Profit Sharing Ratio., Reserves., Revaluation Account., Sacrificing Ratio., Change in Profit Sharing Ratio., , Summary, 1. Matters requiring adjustments at the time of admission of a partner: Various matters, which need adjustments in the books of firm at the time of admission of a new, partner are : goodwill, revaluation of assets and liabilities, reserves and other, accumulated profits and losses and the capitals of the old partners (if agreed)., 2. Determining the new profit sharing ratio and calculating sacrificing ratio: The new, partner acquires his share in profits from the old partners. This reduces the, old partner’s share in profits. Hence, the problem of determining the new profit, sharing ratio simply involves the determination of old partner’s new share in, , 2018-19
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166, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , the profits of the reconstituted firm. Given the new partner’s share in profits, and the ratio, in which he acquires it from the old partners, the new share of, each old partner shall be worked out by deducting his share of sacrifice from, his old share in profits. The ratio in which the old partners have agreed to, sacrifice their shares in profit in favour of the new partner is called the, sacrificing ratio. It is usually same as the old profit sharing ratio. However,, based on the agreement it can be different also., 3. Treatment of Goodwill: Goodwill is an intangible asset and belonges to its owner, at a point of time. On the admission of a new partner the goodwill of the firm, belongs to the old partners. It means that on the admission of a new partner, some adjustments must be made into the capital accounts of the old partners, for goodwill so that the new partner will not acquire a share in that profit, which the firm earns because of its goodwill earned before admission without, making any payment for the same. The amount that the new partner pays for, goodwill is called goodwill. From accounting point of view the firm may have to, face different situations for the treatment of goodwill at the time of admission of, a partner. The amount of premium brought in by the new partner is shared by, old partners in the ratio of sacrifice. In case the new partner fails to bring his, share of premium for goodwill in cash than the capital account of the new, partner is debited for his share of premium of goodwill and the old partners, capital accounts are credited in their sacrificing ratio., 4. Adjustments for Revaluation of Assets and Reassessment of Liabilities: If, at the, time of admission of a partner, the assets and liabilities are revalued or some, asset or liability is found unrecorded, necessary adjustments are made through, the Revaluatiion Account. Any gain or loss arising from such exercise shall be, distributed among the old partner’s in their old profit sharing ratio., 5. Adjustment for reserves and accumulated profits/losses: If, at the time of admission, of a partner, any reserve and accumulated profits or losses exist in books of the, firm, these should be transferred to old partner’s capital/current accounts in, their old profit sharing ratio., 6. Determining/Adjusting partners’ capital: If agreed, the partner’s capital may be, adjusted so as to be proportionate to their new profit sharing ratio. In that, case, the new partner’s capital is normally used as a base for determining the, new capitals of the old partners and necessary adjustment made through case, or by transfer to partner’s current accounts. Other basis also may be available, for determining capitals of the partners after admissioin of the new partner, like sharing the total capital to be in the firm immeidately after admission of, the new partner., 7. Change in profit sharing ratio: Sometimes the partners of a firm may agree to, change their existing profit sharing ratio. With a result, some partners will, gain in future profits while others will lose. In such a situation, the partner, who gain by change in profit effecting amounts to one partner buying the share, of profit from another partner. Apart from the payment for compensation, the, change in profit sharing ratio also necessitates adjustment in partner’s capital, accounts with respect to undistributed profits and reserves, revaluation of, assets and reassessment of liabilities., , 2018-19
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Admission of a Partner, , 167, , Questions for Practice, Short Answer Questions, , 1. Identify various matters that need adjustments at the time of admission of a, new partner., 2. Why it is necessary to ascertain new profit sharing ratio even for old partners, when a new partner is admitted?, 3. What is sacrificing ratio? Why is it calculated?, 4. On what occasions sacrificing ratio is used?, 5. If some goodwill already exists in the books and the new partner brings in his, share of goodwill in cash, how will you deal with existing amount of goodwill?, 6. Why there is need for the revaluation of assets and liabilities on the admission, of a partner?, Long Answer Questions, , 1. Do you advise that assets and liabilities must be revalued at the time of admission, of a partner? If so, why? Also describe how is this treated in the book of account?, 2. What is goodwill? What factors affect goodwill?, 3. Explain various methods of valuation of goodwill., 4. If it is agreed that the capital of all the partners should be proportionate to the, new profit sharing ratio, how will you work out the new capital of each partner?, Give examples and state how necessary adjustments will be made., 5. Explain how will you deal with goodwill when new partner is not in a position to, bring his share of goodwill in cash., 6. Explain various methods for the treatment of goodwill on the admission of a new, partner?, 7. How will you deal with the accumulated profits and losses and reserves on the, admission of a new partner?, 8. At what figures the value of assets and liabilities appear in the books of the, firm after revaluation has been due. Show with the help of an imaginary, balance sheet., , Numerical Questions, 1. A and B were partners in a firm sharing profits and losses in the ratio of 3:2., They admit C into the partnership with 1/6 share in the profits. Calculate the, new profit sharing ratio?, (Ans : 3:2:1), 2. A,B,C were partners in a firm sharing profits in 3:2:1 ratio. They admitted D for, 10% profits. Calculate the new profit sharing ratio?, (Ans : 9:6:3:2), 3. X and Y are partners sharing profits in 5:3 ratio admitted Z for 1/10 share, which he acquired equally for X and Y. Calculate new profit sharing ratio?, (Ans : 23:13:4), , 2018-19
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168, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , 4. A, B and C are partners sharing profits in 2:2:1 ratio admitted D for 1/8 share, which he acquired entirely from A. Calculate new profit sharing ratio?\, (Ans : 11:16:8:5), 5. P and Q are partners sharing profits in 2:1 ratio. They admitted R into, partnership giving him 1/5 share which he acquired from P and Q in 1:2 ratio., Calculate new profit sharing ratio?, (Ans : 3:1:1), 6. A, B and C are partners sharing profits in 3:2:2 ratio. They admitted D as a, new partner for 1/5 share which he acquired from A, B and C in 2:2:1 ratio, respectively. Calculate new profit sharing ratio?, (Ans : 61:36:43:35), 7. A and B were partners in a firm sharing profits in 3:2 ratio. They admitted C for, 3/7 share which he took 2/7 from A and 1/7 from B. Calculate new profit, sharing ratio?, (Ans : 11:9:15), 8. A, B and C were partners in a firm sharing profits in 3:3:2 ratio. They admitted, D as a new partner for 4/7 profit. D acquired his share 2/7 from A. 1/7 from B, and 1/7 from C. Calculate new profit sharing ratio?, (Ans : 5:13:6:32), 9. Radha and Rukmani are partners in a firm sharing profits in 3:2 ratio. They, admitted Gopi as a new partner. Radha surrendered 1/3 of her share in favour, of Gopi and Rukmani surrendered 1/4 of her share in favour of Gopi. Calculate, new profit sharing ratio?, (Ans : 4:3:3.), 10. Singh, Gupta and Khan are partners in a firm sharing profits in 3:2:3 ratio., They admitted Jain as a new partner. Singh surrendered 1/3 of his share in, favour of Jain: Gupta surrendered 1/4 of his share in favour of Jain and Khan, surrendered 1/5 in favour of Jain. Calculate new profit sharing ratio?, (Ans : 20:15:24:21.), 11. Sandeep and Navdeep are partners in a firm sharing profits in 5:3 ratio. They, admit C into the firm and the new profit sharing ratio was agreed at 4:2:1., Calculate the sacrificing ratio?, (Ans : 1:1.), 12. Rao and Swami are partners in a firm sharing profits and losses in 3:2 ratio., They admit Ravi as a new partner for 1/8 share in the profits. The new profit, sharing ratio between Rao and Swami is 4:3. Calculate new profit sharing ratio, and sacrificing ratio?, (Ans : New Profit Ratio 4:3:1 and Sacrificing Ratio 4:1), 13. Compute the value of goodwill on the basis of four years’ purchase of the average, profits based on the last five years? The profits for the last five years were as follows:, , 2018-19
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Admission of a Partner, , 2013, 2014, 2015, 2016, 2017, , 169, Rs., 40,000, 50,000, 60,000, 50,000, 60,000, , (Ans : Rs. 2,08,000), 14. Capital employed in a business is Rs. 2,00,000. The normal rate of return on, capital employed is 15%. During the year 2015 the firm earned a profit of Rs., 48,000. Calculate goodwill on the basis of 3 years purchase of super profit?, (Ans : Rs. 54,000), 15. The books of Ram and Bharat showed that the capital employed on 31.12.2016, was Rs. 5,00,000 and the profits for the last 5 years : 2015 Rs. 40,000; 2014, Rs. 50,000; 2013 Rs. 55,000; 2012 Rs. 70,000 and 2011 Rs. 85,000. Calculate, the value of goodwill on the basis of 3 years purchase of the average super, profits of the last 5 years assuming that the normal rate of return is 10%?, (Ans : Rs. 30,000), 16. Rajan and Rajani are partners in a firm. Their capitals were Rajan Rs. 3,00,000;, Rajani Rs. 2,00,000. During the year 2015 the firm earned a profit of Rs., 1,50,000. Calculate the value of goodwill of the firm assuming that the normal, rate of return is 20%?, (Ans : Rs. 2,50,000), 17. A business has earned average profits of Rs. 1,00,000 during the last few years., Find out the value of goodwill by capitalisation method, given that the assets of, the business are Rs. 10,00,000 and its external liabilities are Rs. 1,80,000. The, normal rate of return is 10%?, (Ans : Rs. 1,80,000), 18. Verma and Sharma are partners in a firm sharing profits and losses in the, ratio of 5:3. They admitted Ghosh as a new partner for 1/5 share of profits., Ghosh is to bring in Rs. 20,000 as capital and Rs. 4,000 as his share of goodwill, premium. Give the necessary journal entries:, a) When the amount of goodwill is retained in the business., b) When the amount of goodwill is fully withdrawn., c) When 50% of the amount of goodwill is withdrawn., d) When goodwill is paid privately., 19. A and B are partners in a firm sharing profits and losses in the ratio of 3:2., They decide to admit C into partnership with 1/4 share in profits. C will bring, in Rs. 30,000 for capital and the requisite amount of goodwill premium in cash., The goodwill of the firm is valued at Rs, 20,000. The new profit sharing ratio is, 2:1:1. A and B withdraw their share of goodwill. Give necessary journal entries?, 20. Arti and Bharti are partners in a firm sharing profits in 3:2 ratio, They admitted, Sarthi for 1/4 share in the profits of the firm. Sarthi brings Rs. 50,000 for his, , 2018-19
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170, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , capital and Rs. 10,000 for his 1/4 share of goodwill. Goodwill already appears, in the books of Arti and Bharti at Rs. 5,000. the new profit sharing ratio between, Arti, Bharti and Sarthi will be 2:1:1. Record the necessary journal entries in, the books of the new firm?, 21. X and Y are partners in a firm sharing profits and losses in 4:3 ratio. They, admitted Z for 1/8 share. Z brought Rs. 20,000 for his capital and Rs. 7,000 for, his 1/8 share of goodwill. Subsequently X, Y and Z decided to show goodwill in, their books at Rs. 40,000. Show necessary journal entries in the books of X, Y, and Z?, 22. Aditya and Balan are partners sharing profits and losses in 3:2 ratio. They, admitted Christopher for 1/4 share in the profits. The new profit sharing ratio, agreed was 2:1:1. Christopher brought Rs. 50,000 for his capital. His share of, goodwill was agreed to at Rs. 15,000. Christopher could bring only Rs. 10,000, out of his share of goodwill. Record necessary journal entries in the books of, the firm?, 23. Amar and Samar were partners in a firm sharing profits and losses in 3:1, ratio. They admitted Kanwar for 1/4 share of profits. Kanwar could not bring, his share of goodwill premium in cash. The Goodwill of the firm was valued at, Rs. 80,000 on Kanwar’s admission. Record necessary journal entry for goodwill, on Kanwar’s admission., 24. Mohan Lal and Sohan Lal were partners in a firm sharing profits and losses in 3:2, ratio. They admitted Ram Lal for 1/4 share on 1.1.2013. It was agreed that, goodwill of the firm will be valued at 3 years purchase of the average profits of, last 4 years which were Rs. 50,000 for 2013, Rs. 60,000 for 2014, Rs. 90,000 for, 2015 and Rs. 70,000 for 2016. Ram Lal did not bring his share of goodwill, premium in cash. Record the necessary journal entries in the books of the firm, on Ram Lal’s admission when:, a) Goodwill already appears in the books at Rs. 2,02,500., b) Goodwill appears in the books at Rs. 2,500., c) Goodwill appears in the books at Rs. 2,05,000., 25. Rajesh and Mukesh are equal partners in a firm. They admit Hari into, partnership and the new profit sharing ratio between Rajesh, Mukesh and, Hari is 4:3:2. On Hari’s admission goodwill of the firm is valued at Rs. 36,000., Hari is unable to bring his share of goodwill premium in cash. Rajesh, Mukesh, and Hari decided not to show goodwill in their balance sheet. Record necessary, journal entries for the treatment of goodwill on Hari’s admission., 26. Amar and Akbar are equal partners in a firm. They admitted Anthony as a new, partner and the new profit sharing ratio is 4:3:2. Anthony could not bring this, share of goodwill Rs. 45,000 in cash. It is decided to do adjustment for goodwill, without opening goodwill account. Pass the necessary journal entry for the, treatment of goodwill?, , 2018-19
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Admission of a Partner, , 171, , 27. Given below is the Balance Sheet of A and B, who are carrying on partnership, business on 31.12.2016. A and B share profits and losses in the ratio of 2:1., Balance Sheet of A and B as on December 31, 2016, Liabilites, Bills Payable, Creditors, Outstanding, Expenses, Capitals:, A, B, , Amount, (Rs.), 10,000, 58,000, 2,000, , 1,80,000, 1,50,000, , Assets, Cash in Hand, Cash at Bank, Sundry Debtors, Stock, Plant, Buildings, , Amount, (Rs.), 10,000, 40,000, 60,000, 40,000, 1,00,000, 1,50,000, , 3,30,000, 4,00,000, , 4,00,000, , C is admitted as a partner on the date of the balance sheet on the following terms:, (i) C will bring in Rs. 1,00,000 as his capital and Rs. 60,000 as his share of, goodwill for 1/4 share in the profits., (ii) Plant is to be appreciated to Rs. 1,20,000 and the value of buildings is to be, appreciated by 10%., (iii) Stock is found over valued by Rs. 4,000., (iv) A provision for bad and doubtful debts is to be created at 5% of debtors., (v) Creditors were unrecorded to the extent of Rs. 1,000., Pass the necessary journal entries, prepare the revaluation account and partners’, capital accounts, and show the Balance Sheet after the admission of C., (Ans : Gain of Revaluation Rs. 27,000. Balance Sheet Rs. 5,88,000), 28. Leela and Meeta were partners in a firm sharing profits and losses in the ratio, of 5:3. In Jan. 2017 they admitted Om as a new partner. On the date of Om’s, admission the balance sheet of Leela and Meeta showed a balance of Rs. 16,000, in general reserve and Rs. 24,000 (Cr) in Profit and Loss Account. Record, necessary journal entries for the treatment of these items on Om’s admission., The new profit sharing ratio between Leela, Meeta and Om was 5:3:2., 29. Amit and Viney are partners in a firm sharing profits and losses in 3:1 ratio., On 1.1.2017 they admitted Ranjan as a partner. On Ranjan’s admission the, profit and loss account of Amit and Viney showed a debit balance of Rs. 40,000., Record necessary journal entry for the treatment of the same., 30. A and B share profits in the proportions of 3/4 and 1/4. Their Balance Sheet, on Dec. 31, 2016 was as follows:, , 2018-19
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172, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, Balance Sheet of A and B as on December 31, 2016, , Liabilites, Sundry creditors, Reserve fund, Capital Accounts, A, B, , Amount, (Rs.), 41,500, 4,000, 30,000, 16,000, , Assets, Cash at Bank, Bills Receivable, Debtors, Stock, Fixtures, Land & Building, , 91,500, , Amount, (Rs.), 26,500, 3,000, 16,000, 20,000, 1,000, 25,000, 91,500, , On Jan. 1, 2017, C was admitted into partnership on the following terms:, (a) That C pays Rs. 10,000 as his capital., (b) That C pays Rs. 5,000 for goodwill. Half of this sum is to be withdrawn by A, and B., (c) That stock and fixtures be reduced by 10% and a 5%, provision for doubtful, debts be created on Sundry Debtors and Bills Receivable., (d) That the value of land and buildings be appreciated by 20%., (e) There being a claim against the firm for damages, a liability to the extent of, Rs. 1,000 should be created., (f) An item of Rs. 650 included in sundry creditors is not likely to be claimed, and hence should be written back., Record the above transactions (journal entries) in the books of the firm assuming, that the profit sharing ratio between A and B has not changed. Prepare the, new Balance Sheet on the admission of C., (Ans : Gain on Revaluation Rs. 1600. Balance Sheet Total Rs. 1,05,950)., 31. A and B are partners sharing profits and losses in the ratio of 3:1. On Ist Jan., 2017 they admitted C as a new partner for 1/4 share in the profits of the firm., C brings Rs. 20,000 as for his 1/4 share in the profits of the firm. The capitals of, A and B after all adjustments in respect of goodwill, revaluation of assets and, liabilities, etc. has been worked out at Rs. 50,000 for A and Rs. 12,000 for B. It is, agreed that partner’s capitals will be according to new profit sharing ratio., Calculate the new capitals of A and B and pass the necessary journal entries, assuming that A and B brought in or withdrew the necessary cash as the case, may be for making their capitals in proportion to their profit sharing ratio?, 32. Pinky, Qumar and Roopa partners in a firm sharing profits and losses in the, ratio of 3:2:1. S is admitted as a new partner for 1/4 share in the profits of the, firm, whichs he gets 1/8 from Pinky, and 1/16 each from Qmar and Roopa., The total capital of the new firm after Seema’s admission will be Rs. 2,40,000., , 2018-19
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Admission of a Partner, , 173, , Seema is required to bring in cash equal to 1/4 of the total capital of the new, firm. The capitals of the old partners also have to be adjusted in proportion of, their profit sharing ratio. The capitals of Pinky, Qumar and Roopa after all, adjustments in respect of goodwill and revaluation of assets and liabilities, have been made are Pinky Rs. 80,000, Qumar Rs. 30,000 and Roopa Rs. 20,000., Calculate the capitals of all the partners and record the necessary journal, entries for doing adjustments in respect of capitals according to the agreement, between the partners?, 33. The following was the Balance Sheet of Arun, Bablu and Chetan sharing profits, and losses in the ratio of, Liabilites, Creditors, Bills Payable, Capital Accounts, Arun, Bablu, Chetan, , 6, 5, 3, respectively., :, :, 14 14 14, , Amount, (Rs.), 9,000, 3,000, 19,000, 16,000, 8,000, , Assets, Land and Buildings, Furniture, Stock, Debtors, Cash, , Amount, (Rs.), 24,000, 3,500, 14,000, 12,600, 900, , 43,000, 55,000, , 55,000, , They agreed to take Deepak into partnership and give him a share of 1/8, on the following terms: a) that Deepak should bring in Rs. 4,200 as goodwill, and Rs. 7,000 as his Capital; (b) that furniture be depreciated by 12%; (c) that, stock be depreciated by 10% (d) that a Reserve of 5% be created for doubtful, debts: (e) that the value of land and buildings having appreciated be brought, upto Rs. 31,000 ;(f) that after making the adjustments the capital accounts of, the old partners (who continue to share in the same proportion as before) be, adjusted on the basis of the proportion of Deepak’s Capital to his share in the, business, i.e., actual cash to be paid off to, or brought in by the old partners as, the case may be., Prepare Cash Account, Profit and Loss Adjustment Account (Revaluation, Account) and the Opening Balance Sheet of the new firm., (Ans : Gain on revaluation Rs. 4,550. Balance Sheet Total Rs. 68,000)), 34. Azad and Babli are partners in a firm sharing profits and losses in the ratio of, 2:1. Chintan is admitted into the firm with 1/4 share in profits. Chintan will, bring in Rs. 30,000 as his capital and the capitals of Azad and Babli are to be, adjusted in the profit sharing ratio. The Balance Sheet of Azad and Babli as on, December 31, 2016 (before Chintan’s admission) was as follows:, , 2018-19
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174, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, Balance Sheet of A and B as on 31.12.2016, , Liabilites, Creditors, Bills payable, General reserve, Capital accounts:, Azad, Babli, , Amount, (Rs.), 8,000, 4,000, 6,000, 50,000, 32,000, , 82,000, , Assets, , Amount, (Rs.), , Cash in hand, Cash at bank, Sundry debtors, Stock, Funiture, Machinery, Buildings, , 2,000, 10,000, 8,000, 10,000, 5,000, 25,000, 40,000, , 1,00,000, , 1,00,000, , It was, i), ii), iii), iv), , agreed that:, Chintan will bring in Rs. 12,000 as his share of goodwill premium., Buildings were valued at Rs. 45,000 and Machinery at Rs. 23,000., A provision for doubtful debts is to be created @ 6% on debtors., The capital accounts of Azad and Babli are to be adjusted by opening current, accounts., Record necessary journal entries, show necessary ledger accounts and, prepare the Balance Sheet after admission., (Ans : Gain or Revaluation Rs. 2,520. Balance Sheet Rs. 1,44,520)., , 35. Ashish and Dutta were partners in a firm sharing profits in 3:2 ratio. On Jan., 01, 2015 they admitted Vimal for 1/5 share in the profits. The Balance Sheet of, Ashish and Dutta as on Jan. 01, 2016 was as follows:, Balance Sheet of A and B as on 1.1.2016, Liabilites, Creditors, Bills Payable, Ashish Capital, Dutta’s Capital, , Amount, (Rs.), 15,000, 10,000, 80,000, 35,000, , Assets, Land & Building, Plant, Debtors, Less : Provision, Stock, Cash, , 1,40,000, , It was, i), ii), iii), iv), , Amount, (Rs.), 35,000, 45,000, 22,000, 2,000, , 20,000, 35,000, 5,000, 1,40,000, , agreed that:, The value of Land and Building be increased by Rs. 15,000., The value of plant be increased by 10,000., Goodwill of the firm be valued at Rs. 20,000., Vimal to bring in capital to the extent of 1/5th of the total capital of the, new firm., , 2018-19
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Admission of a Partner, , 175, , Record the necessary journal entries and prepare the Balance Sheet of the, firm after Vimal’s admission., (Ans : Gain on Revaluation Rs. 25,000. Balance Sheet Total Rs. 2,25,000)., , Check-list to Check your Understanding, Test your Understanding – I, 1. (a), 2 (a), 3. (b)., Test your Understanding – II, 1. (c),, , 2. (b),, , 3. (c),, , 4. (b),, , 5. (b)., , 2018-19
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Reconstitution of a Partnership Firm –, Retirement/Death of a Partner, , LEARNING OBJECTIVES, After studying this chapter, you will be able to:, • calculate new profit, sharing ratio and gaining, ratio of the remaining, partners, after, the, retirement/death of a, partner;, • describe the accounting, treatment of goodwill in, the event of retirement/, death of a partner;, • make the necessary entries, in respect of unrecorded, assets and liabilities;, • make necessary adjustment for accumulated, profits or losses;, • ascertain the retiring/, deceased partner claim, against the firm and, explain the mode of its, settlement;, • prepare the retiring, partner’s loan account, if, required; and, • prepare the deceased, partner’s, executor’s, account in the case of, death of a partner and the, balance sheet of a, reconstituted firm., , 4, , Y, , ou have learnt that retirement or death of a, partner also leads to reconstitution of a, partnership firm. On the retirement or death of a, partner, the existing partnership deed comes to an, end, and in its place, a new partnership deed needs, to be framed whereby, the remaining partners, continue to do their business on changed terms and, conditions. There is not much difference in the, accounting treatment at the time of retirement or in, the event of death. In both the cases, we are required, to determine the sum due to the retiring partner (in, case of retirement) and to the legal representatives, (in case of deceased partner) after making necessary, adjustments in respect of goodwill, revaluation of a, assets and liabilities and transfer of accumulated, profits and losses. In addition, we may also have to, compute the new profit sharing’s ratio among the, remaining partners and so also their gaining ratio,, This covers all these aspects in detail., 4.1 Ascertaining the Amount Due to Retiring/, Deceased Partner, The sum due to the retiring partner (in case of, retirement) and to the legal representatives/, executors (in case of death) includes:, (i) credit balance of his capital account;, (ii) credit balance of his current account (if any);, (iii) his share of goodwill;, (iv) his share of accumulated profits (reserves);, (v) his share in the gain of revaluation of assets, and liabilities;, , 2018-19
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Retirement/Death of a Partner, , 177, , (vi) his share of profits up to the date of retirement/death;, (vii) interest on his capital, if involved, up to the date of retirement/death; and, (viii) salary/commission, if any, due to him up to the date of retirement/death., The following deductions, if any, may have to be made from his share:, (i) debit balance of his current account (if any);, (ii) his share of goodwill to be written off, if necessary;, (iii) his share of accumulated losses;, (iv) his share of loss on revaluation of assets and liabilities;, (v) his share of loss up to the date of retirement/death;, (vi) his drawings up to the date of retirement/death;, (vii) interest on drawings, if involved, up to the date of retirement/death., Thus, as in the case of admission, the various accounting aspects involved on, retirement or death of a partner are as follows:, 1. Ascertainment of new profit sharing ratio and gaining ratio;, 2. Treatment of goodwill;, 3. Revaluation of assets and liabilities;, 4. Adjustment in respect of unrecorded assets and liabilities;, 5. Distribution of accumulated profits and losses;, 6. Ascertainment of share of profit or loss up to the date of retirement/death;, 7. Adjustment of capital, if required;, 8. Settlement of the amounts due to retired/deceased partner;, 4.2 New Profit Sharing Ratio, New profit sharing ratio is the ratio in which the remaining partners will share, future profits after the retirement or death of any partner. The new share of each, of the remaining partner will consist of his own share in the firm plus the share, acquired from the retiring /deceased partner., Consider the following situations :, (a) normally, the continuing partners acquire the share of retiring or deceased, partners in the old profit sharing ratio, and there is no need to compute the, new profit sharing ratio among them, as it will be same as the old profit, sharing ratio among them. In fact, in the absence of any information regarding, profit sharing ratio in which the remaining partners acquire the share of, retiring/deceased partner, it is assumed that they will acquire it in the old, profit sharing ratio and so share the future profits in their old ratio. For, example, Asha, Deepti and Nisha are partners in a firm sharing profits and, losses in the ratio of 3:2:1. If Deepti retires, the new profit sharing ratio, between Asha and Nisha will be 3:1, unless they decide otherwise., (b) The continuing partners may acquire the share in the profits of the, retiring/deceased partner in a proportion other than their old ratio, In that, case, there is need to compute the new profit sharing ratio among them., , 2018-19
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178, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , For example: Naveen, Suresh and Tarun are partners sharing profits and, losses in the ratio of 5:3:2. Suresh retires from the firm and his share was, required by Naveen and Tarun in the ratio 2:1. In such a case, the new, share of profit will be calculated as follows:, New share of Continuing Partner = Old Share + Acquired share from, the Outgoing Partner, Gaining Ratio 2 : 1, Share acquired by Naveen, , Share acquired by Tarun, , =, , 2, 3, of, 3, 10, , =, , 2, 3, 2, ×, =, 3, 10, 10, , =, , 1, 3, of, 3, 10, , =, , 1, 3, 1, ×, =, 3, 10, 10, , Share of Naveen, , =, , Share of Tarun, , =, , 5, 10, , 2, 10, , +, , +, , 2, 10, , 1, 10, , =, , =, , 7, 10, , 3, 10, , Thus, the new profit sharing ratio of Naveen and Tarun will be = 7 : 3., (c) The contributing partners may agree on a specified new profit sharing, ratio: In that case the ratio so specified will be the new profit sharing ratio., 4.3 Gaining Ratio, The ratio in which the continuing partners have acquired the share from the, retiring/deceased partner is called the gaining ratio. Normally, the continuing, partners acquire the share of retiring/deceased partner in their old profit sharing, ratio, In that case, the gaining ratio of the remaining partners will be the same, as their old profit sharing ratio among them and there is no need to compute the, gaining ratio, Alternatively, proportion in which they acquire the share of the, retiring/deceased partner may be duly spacified. In that case, again, there is no, need to calculate the gaining ratio as it will be the ratio in which they have, acquired the share of profit from the retiring deceased partner. The problem of, calculating gaining ratio arises primarily when the new profit sharing ratio of, the continuing partners is specified. In such a situation, the gaining ratio should, be calculated by, deducting the old share of each continuing partners from his, new share. For example, Amit, Dinesh and Gagan are partners sharing profits, in the ratio of 5:3:2., Dinesh retires. Amit and Gagan decide to share the profits of the new firm in, the ratio of 3:2. The gaining ratio will be calculated as follows :, , 2018-19
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Retirement/Death of a Partner, , 179, , Amit’s Gaining Share, , =, , 3 5, 6 −5, 1, −, =, =, 5 10, 10, 10, , Gagan’s Gaining Share, , =, , 2 2, 4−2, 2, −, =, =, 5 10, 10, 10, , Thus, Gaining Ratio of Amit and Gagan = 1:2, This implies Amit gains, , 1, 2, and Gagan gains, of Dinesh’s share of profit., 3, 3, , Gaining share of Continuing Partner = New share – Old share, Do it Yourself, Distinguish between Gaining Ratio and Sacrificing Ratio in terms of:, 1. Meaning, 2. Effect on Partner’s Share of Profit, 3. Mode of calculation, 4. When to calculate, , Illustration 1, Madhu, Neha and Tina are partners sharing profits in the ratio of 5:3:2. Calculate, new profit sharing ratio and gaining ratio if, 1. Madhu retires, 2. Neha retires, 3. Tina retires., Solution, Given old ratio among, , Madhu : Neha : Tina as 5 : 3 : 2, , 1. If Madhu retires, new profit sharing Ratio between Neha and Tina will be, Neha : Tina = 3:2 and Gaining Ratio of Neha and Tina =3:2, 2. If Neha retires new profit sharing Ratio between Madhu and Tina will be, Madhu : Tina = 5:2, Gaining Ratio of Madhu and Tina = 5:2, 3. If Tina retires, new profit sharing ratio between Madhu and Neha will be:, Madhu : Neha = 5:3, Gaining ratio of Madhu and Neha = 5:3, , Illustration 2, Alka, Harpreet and Shreya are partners sharing profits in the ratio of 3:2:1. Alka, retires and her share is taken up by Harpreet and Shreya in the ratio of 3:2. Calculate, the new profit sharing ratio., , 2018-19
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180, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , Solution, Gaining Given, Ratio of Harpreet and Shreya = 3:2 =, , 3 2, :, 5 5, , Old Profit Sharing Ratio of between Alka, Harpreet and Shreya 3:2:1 =, Share acquired by Harpreet, , =, , Share acquired by Shreya, , =, , 3 2 1, : :, 6 6 6, , 3 3, 9, of, =, 5 6, 30, , New Share, , 2 3, 6, of, =, 5 6, 30, = Old Share + Acquired Share, , Harpreet’s New Share, , =, , 2, 9, 19, +, =, 6 30 30, , 1, 6, 11, +, =, 6 30 30, New Profit Sharing Ratio of Harpreet and Shreya = 19:11, , Shreya’s New Share, , =, , Illustration 3, Murli, Naveen and Omprakash are partners sharing profits in the ratio of, 1, 3 1, ,, and . Murli retires and surrenders 2/3rd of his share in favour of Naveen, 8, 8 2, , and the remaining share in favour of Omprakash. Calculate new profit sharing, and the gaining ratio of the remaining partners., Solution, Naveen, (i), (ii), , (iii), , Old Share, , Omprakash, , 1, 2, , 1, 8, , Share Acquired by Naveen and, Omprakash from Murli, , =, , 2 3 2, of =, 3 8 8, , 1 3 1, of =, 3 8 8, , New Share = (i) + (ii), , =, , 1 2, +, 2 8, , 1 1, +, 8 8, , =, , 6, 3, or, 8, 4, , Thus, the New profit sharing Ratio =, , 3 1, or 3:1, and the, :, 4 4, , 2018-19, , =, , 2, 1, or, 8, 4
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Retirement/Death of a Partner, , Gaining Ratio =, , 181, , 2 1, :, or 2:1 [as calculated in (ii)]., 8 8, , Illustration 4, Kumar, Lakshya, Manoj and Naresh are partners sharing profits in the ratio of, 3 : 2 : 1 : 4. Kumar retires and his share is acquired by Lakshya and Manoj in, the ratio of 3:2. Calculate new profit sharing ratio and gaining ratio of the, remaining partners., Solution, , (i), (ii), , Lakshya, , Manoj, , Naresh, , 2, 10, , 1, 10, , 4, 10, , 3, 3, of, 5 10, , 2, 3, of, 5 10, , Old Share, Acquired Share from Kumar, , =, (iii), , 9, 50, , =, , 2, 9, +, 10 50, , New share = (i) = (ii), , =, , Nil, , 6, 50, , 1, 6, +, 10 50, , Nil, =, , 4, + Nil, 10, , 19, 11, 20, =, =, 50, 50, 50, The New Profit Sharing Ratio is 19 : 11 : 20, Gaining ratio is 3 : 2 : 0, Notes : 1. Since Lakshya and Manoj are acquiring Kumar’s share of profit in the ratio of, 3:2, hence, the gaining ratio will be 3:2 between Lakshya and Manoj., 2. Naresh has neither sacrificed nor gained., , =, , Illustration 5, Ranjana, Sadhna and Kamana are partners sharing profits in the ratio 4:3:2., Ranjana retires; Sadhna and Kamana decided to share profits in future in the, ratio of 5:3. Calculate the Gaining Ratio., Solution, Gaining Share, , =, , New Share – Old Share, , Sadhna’s Gaining Share, , =, , 5 3 45 − 24, − =, 8 9, 72, , 3 2, −, 8 9, , =, , 21, 72, , 27 − 16, 11, =, 72, 72, Gaining Ratio between Sadhna and Kamana = 21:11., Kamana’s Gaining Share =, , =, , 2018-19
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182, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, Do it Yourself, 1. Anita, Jaya and Nisha are partners sharing profits and losses in the ratio, of 1 : 1 : 1 Jaya retires from the firm. Anita and Nisha decided to share the, profit in future in the ratio 4:3. Calculate the gaining ratio., 2. Azad, Vijay and Amit are partners sharing profits and losses in the proportion, 1 1, 10, , and, . Calculate the new profit sharing ratio between continuing, 4 8, 16, partners if (a) Azad retires; (b) Vijay retires; (c) Amit retires., , of, , 3. Calculate the gaining ratio in each of the above situations., 4. Anu, Prabha and Milli are partners. Anu retires. Calculate the future profit, sharing ratio of continuing partners and gaining ratio if they agree to acquire, her share : (a) in the ratio of 5:3; (b) equally., 5. Rahul, Robin and Rajesh are partners sharing profits in the ratio of 3 : 2 : 1., Calculate the new profit sharing ratio of the remaining partners if (i) Rahul, retires; (ii) Robin retires; (iii) Rajesh retires., 6. Puja, Priya, Pratistha are partners sharing profits and losses in the ratio of, 5 : 3 : 2. Priya retires. Her share is taken by Priya and Pratistha in the ratio of, 2 : 1. Calculate the new profit sharing ratio., 7. Ashok, Anil and Ajay are partners sharing profits and losses in the, 1 3, 1, ,, and, . Anil retires from the firm. Ashok and Ajay decide, 2 10, 5, to share future profits and losses in the ratio of 3 : 2. Calculate the, gaining ratio., , ratio of, , 4.4 Treatment of Goodwill, The retiring or deceased partner is entitled to his share of goodwill at the time of, retirement/death because the goodwill has been earned by the firm with the, efforts of all the existing partners. Hence, at the time of retirement/death of a, partner, goodwill is valued as per agreement among the partners the retiring/, deceased partner compensated for his share of goodwill by the continuing, partners (who have gained due to acquisition of share of profit from the retiring/, deceased partner) in their gaining ratio., The accounting treatment for goodwill in such a situation depends upon, whether or, not goodwill already appears in the books of the firm., 4.4.1 When Goodwill does not Appear in the Books, When goodwill does not appear in the books of the firm there are four ways in, which the retiring partner can be given the necessary credit for loss of his share, of goodwill, these are as follows:, , 2018-19
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Retirement/Death of a Partner, , 183, , (a) Goodwill is raised at its full value and retained in the books as such: In, this case, Goodwill Account is debited will its full value and all the partner’s, (including the retired/deceased partner) capital accounts are credited in the, old profit sharing ratio. The full value of goodwill will appear in the balance, sheet of the reconstituted firm., (b) Goodwill is raised at its full value and written off immediately: If it decided, that goodwill should not be refrained and shown in the balance sheet of the, reconstituted firm then, after raising goodwill at its value by crediting all the, partners’ capital accounts (including that of the retired/deceased partners,, it should be written off by debiting the remaining partners in their new profit, sharing ratio and crediting the goodwill account with its full value., (c) Goodwill is raised to the extent of retired/deceased partner’s share and, written off immediately: In this case goodwill account is raised only to the, extent of retired/deceased partner’s share by debiting goodwill account with, the proportionate amount and credited only to the retired/deceased partner’s, capital account. Thereafter, the remaining partners capital accounts are, debited in their gaining ratio and goodwill account/credited to write it off., (d) No goodwill account is raised at all in firm’s books: If it is decided that, the goodwill account should not appear in firm’s books at all, in that case it, is adjusted discretely through partners capital accounts by recording the, following journal entry., Continuing partners’ capital A/c’s, (individually in their gaining ratio), To Retiring/Deceased Partner’s Capital A/c, (Retiring/deceased in the remaining partners’, capital accounts into their gaining ratio), , Dr., , Let us take an example and clarity the treatment of goodwill on retirement or, death of a partner using all the above alternatives. A, B. and C are partners in a, firm sharing profits in the ratio of 3:2:1 B retires. The goodwill of the firm is, valued at Rs. 60,000 and the remaining partners A and C continue to share, profits in the ratio of 3:1. The journal entries passed under various alternatives, shall be as follows:, (a) If goodwill is raised at full value and retained in books, Goodwill A/c, Dr., To A’s capital A/c, To B’s capital A/c, To C’s capital A/c, (Goodwill raised at full value and credited, to all the partners in their old profit, sharing ratio), , 2018-19, , 60,000, 30,000, 20,000, 10,000
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184, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, (b) If goodwill is raised at full value and written off immediately., (i) Goodwill A/c, Dr., 60,000, To A’s capital A/c, To B’s capital A/c, To C’s capital A/c, (Goodwill raised at full value and credited, to all partners in old ratio), (ii) A’s capital A/c, C’s capital A/c, To Goodwill A/c, (Goodwill written off and debited to, remaining partners in the new ratio), , Dr., Dr., , 30,000, 20,000, 10,000, , 45,000, 15,000, 60,000, , (c) If goodwill is raised to the extent of retiring partner’s share and written off immediately., (i) Goodwill A/c, Dr., 20,000, To B’s capital A/c, 20,000, (Goodwill raised to the extant of B’s share), (ii) A’s capital A/c, Dr., C’s capital A/c, Dr., To goodwill A/c, (Goodwill written off by debiting remaining, partners’ in gaining ratio), (d), , If goodwill is not to appear in firm’s books at all, A’s capital A/c, Dr., C’s capital A/c, Dr., To C’s capital A/c, (B’s share of goodwill adjusted to remaining, partners’ capital accounts in gaining ratio), , 15,000, 5,000, 20,000, , 15,000, 5,000, 20,000, , It may also happen that as a result of decision on the new profit sharing, ratio among the remaining partners, a continuing partner may also sacrifice a, part of his share in future profits. In such a situation his capital account will, also be credited along with the retiring/deceased partner’s capital account in, proportion to his sacrifice and the other continuing partners’ capital accounts, will be debited based on their gain in the future profit ratio., Illustration 6, Keshav, Nirmal and Pankaj are partners sharing profits and losses in the ratio of, 4 : 3 : 2. Nirmal retires and the goodwill is valued at Rs. 72,000. Keshav and, Pankaj decided to share future profits and losses in the ratio of 5 : 3. Record, necessary journal entries (a) when goodwill is raised at its full value and written, off immediately (b) when goodwill is not to appear in firms books at all., , 2018-19
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Retirement/Death of a Partner, , 185, , Solution, (a) When Goodwill is raised and written-off, Journal, Date, , Particulars, , (i), , Goodwill A/c, To Keshav’s Capital A/c, To Nirmal’s Capital A/c, To Pankaj’s Capital A/c, (Goodwill raised at its full value in, old profit sharing ratio), , Dr., , Keshav’s Capital A/c, Pankaj’s capital A/c, To Goodwill A/c, (Goodwill written off in the new profit, sharing ratio), , Dr., Dr., , (ii), , L.F., , Debit, Amount, (Rs.), , Credit, Amount, (Rs.), , 72,000, 32,000, 24,000, 16,000, , 45,000, 27,000, 72,000, , (b) When goodwill is not to appear in firm’s books at all, Journal, Date, , Particulars, , L.F., , Keshav’s Capital A/c, Dr., Pankaj’s Capital A/c, Dr., To Nirmal’s Capital A/c, (Nirmal’s share of goodwill adjusted to Keshav, and Pankaj in their gaining ratio of 13:11), , Debit, Amount, (Rs.), 13,000, 11,000, , 24,000, , Working Notes, 3, 1. Vimal’s share of goodwill = Rs. 72,000 × = Rs. 24,000, 9, 2. Calculation of Gaining Ratio, Gaining Share, = New Share – Old Share, 5 4 13, − =, 8 9 72, 3 2 11, Pankaj’s Gaining Share =, − =, 8 9 72, , Keshav’s Gaining Share =, , Hence, Gaining Ratio between Keshav and Pankaj is 13:11 i.e., , 2018-19, , Credit, Amount, (Rs.), , 13 11, :, 24 24
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186, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , Illustration 7, Jaya, Kirti, Ekta and Shewata are partners in a firm sharing profits and losses, in the ratio of 2 : 1 : 2 : 1. On Jaya’s retirement, the goodwill of the firm is valued, at Rs. 36,000. Kirti, Ekta and Shewata decided to share future profits equally., Record the necessary journal entry for the treatment of goodwill without opening, ’Goodwill Account’., Solution, Books of Kirti, Ekta and Shewata, Journal, Date, , Particulars, , L.F., , Kirti’s Capital A/c, Shewata’s Capital A/c, To Jaya’s Capital A/c, (Jaya’s share of goodwill adjusted to, remaining in their gaining ratio), , Debit, Amount, (Rs.), , Dr., Dr., , Credit, Amount, (Rs.), , 6,000, 6,000, 12,000, , Working Notes, 1. Jaya’s Share of Goodwill, 2, = Rs. 12,000, 6, 2. Calculation of Gaining Ratio, Gaining Share = New Share – Old Share, , = Rs. 36,000 ×, , Kirti’s Gain, , =, , Ekta’s Gain, , =, , Shewata’s Gain =, , 1 1 2 −1 1, − =, =, 3 6, 6, 6, 1 2 2−2 0, − =, =, (Neither Gain nor Sacrifice), 3 6, 6, 6, 1 1 2 −1 1, − =, =, 3 6, 6, 6, , Hence, Gaining ratio between Kirti and Shewata, , 1 1, :, = 1:1, 6 6, , Illustration 8, Deepa, Neeru and Shilpa were partners in a firm sharing profits in the ratio of, 5 : 3 : 2. Neeru retired and the new profit sharing ratio between Deepa and, Shilpa was 2 : 3. On Neeru’s retirement, the goodwill of the firm was valued at, Rs. 1,20,000. Record necessary journal entry for the treatment of goodwill on, Neeru’s retirement., , 2018-19
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Retirement/Death of a Partner, , 187, , Solution, Books of Deepa and Shilpa, Journal, Date, , Particulars, , L.F., , Shilpa’s Capital A/c, Dr., To Neeru’s Capital A/c, To Deepa’s Capital A/c, (Shilpa compensated Neeru for her share of, goodwill and to Deepa for the sacrifice made, by her on Neeru’s retirement), , Debit, Amount, (Rs.), , Credit, Amount, (Rs.), , 48,000, 36,000, 12,000, , Working Notes, 1. Calculation of Gaining Ratio, Gaining Share = New Share – Old Share, Deepa’s Gaining Share =, , 2 5, 4 −5, 1, 1, −, =, =−, =, i.e., Sacrifice., 5 10, 10, 10, 10, , Shilpa’s Gaining Share =, , 3 2, 6−2, 4, −, =, =, 5 10, 10, 10, , i.e., Gain, , 2. Hence, Shilpa will compensate both Neeru (retiring partner) and Deepa (continuing, partner who has sacrificed) to the extent of their sacrifice worked out as follows:, Deepa’s Sacrifice = Goodwill of the firm × Sacrificing Share, 1, = Rs. 12,000, 10, 3, Neeru’s (Retiring Partner’s Sacrifice) = Rs. 1,20,000 ×, = Rs. 36,000., 10, , = Rs. 1,20,000 ×, , Test your Understanding – I, Choose the correct option in the following questions:, 1. Abhishek, Rajat and Vivek are partners sharing profits in the ratio of, 5:3:2. If Vivek retires, the New Profit Sharing Ratio between Abhishek, and Rajat will be–, (a) 3:2, (b) 5:3, (c) 5:2, (d) None of these, 2. The old profit sharing ratio among Rajender, Satish and Tejpal were 2:2:1. The, New Profit Sharing Ratio after Satish’s retirement is 3:2. The gaining ratio is–, (a) 3:2, (b) 2:1, (c) 1:1, (d) 2:2, , 2018-19
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188, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, 3. Anand, Bahadur and Chander are partners. Sharing Profit equally On Chander’s, retirement, his share is acquired by Anand and Bahadur in the ratio of 3:2. The, New Profit Sharing Ratio between Anand and Bahadur will be–, (a) 8:7, (b) 4:5, (c) 3:2, (d) 2:3, 4. In the absence of any information regarding the acquisition of share in profit of, the retiring/deceased partner by the remaining partners, it is assumed that, they will acquire his/her share:(a) Old Profit Sharing Ratio, (b) New Profit Sharing Ratio, (c) Equal Ratio, (d) None of these, , Illustration 9, Hanny, Pammy and Sunny are partners sharing profits in the ratio of 3 : 2 : 1., Goodwill is appearing in the books at a value of Rs. 60,000. Pammy retires and, at the time of Pammy’s retirement, goodwill is valued at Rs. 84,000. Hanny and, Sunny decided to share future profits in the ratio of 2:1. Record the necessary, journal entries., Solution, Books of Hanny and Sunny, Journal, Date, , Particulars, , L.F., , Hanny’s Capital A/c, Pammy’s Capital A/c, Sunny’s Capital A/c, To Goodwill A/c, (Existing goodwill written-off in old ratio), , Dr., Dr., Dr., , Hanny’s Capital, Sunny’s Capital, To Pammy’s Capital A/c, (Pammy’s share of goodwill adjusted to, Hanny’s and Sunny’s capital account, to the extent of their gain), , Dr., Dr., , Debit, Amount, (Rs.), 30,000, 20,000, 10,000, , 60,000, 14,000, 14,000, 28,000, , Working Notes, (i) Pammy’s share of current value of goodwill, = 84,000, , 1, of Rs. 84,000, 3, , 1, = Rs. 28,000, 3, , 2018-19, , Credit, Amount, (Rs.)
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Retirement/Death of a Partner, , (ii) Gaining Share, , 189, , = New Share – Old Share, , Hanny’s Gaining Share =, , 2 3 1, − =, 3 6 6, , 1 1 1, − =, 3 6 6, 1 1, This gaining Ratio of Hanny and Sunny is, : = 1:1, 6 6, , Sunny’s Gaining Share =, , 4.4.2 When Goodwill is already Appearing in the Books, If value of goodwill already appearing in the books of the firm equals with the, current value of goodwill, normally no adjustment is required because goodwill, stands credited in the accounts of all the partners including the retiring one., In case the present value of goodwill is different from its book value, an, adjustment entry is required for the difference between the value already, appearing in the books (called book value) and its present value. In such a, situation, there are two possibilities: (a) the book value of goodwill is lower than, its current value, and (b) the book value is greater than its current value. These, are discussed as follows., (a) If the book value of goodwill is lower than its present value : In this, case the goodwill is raised to its present value by debiting goodwill, Account with the excess of its current value over the book value and, crediting all partners’ capital accounts in their old profit sharing ratio., For example, Deepak, Nakul and Rajesh are partners sharing profits in, the ratio of 5:3:2. Goodwill appears in the books at a value of Rs. 20,000., Nakul retires and, on the day of Nakul’s retirement, goodwill is valued at, Rs. 24,000. In this case, the following journal entry will be recorded., Books of Deepak, Nakul and Rajesh, Journal, Date, , Particulars, , L.F., , Goodwill A/c, Dr., To Deepak’s Capital A/c, To Nakul’s Capital A/c, To Rajesh’s Capital A/c, (Increase in the value of goodwill credited to, all partners’ capital accounts in their old, profit sharing ratio of 5:3:2), , Debit, Amount, (Rs.), , Credit, Amount, (Rs.), , 4,000, 2,000, 1,200, 800, , (b) If the book value of goodwill is greater than its current value: In this, case the difference between the book value of goodwill and its current, , 2018-19
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190, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , value will be credited to Goodwill Account and debited to all Partners’, capital accounts in their old profit sharing ratio. For example, Mohanlal,, Girdharilal and Shyamlal are partners sharing profits in the ratio of 4:3:1., Shyamlal retires from the firm. On Shyamlal’s retirement, goodwill has, been valued at Rs. 52,000. There was a goodwill account already, appearing in the books of the firm with a value of Rs. 60,000. In this, case, the following journal entry will be recorded., Books of Mohanlal, Girdharilal and Shyamlal, Journal, Date, , Particulars, , L.F., , Mohan Lal’s Capital A/c, Dr., Girdhari Lal’s Capital A/c, Dr., Shyam Lal’s Capital A/c, Dr., To Goodwill A/c, (Decrease in the value of goodwill adjusted, among all the partners’ capital accounts in, their old profit sharing ratio), , Debit, Amount, (Rs.), , Credit, Amount, (Rs.), , 4,000, 3,000, 1,000, 8,000, , It may be noted that in all the above situations, goodwill appears in the, balance sheet at its full value. In case it is decided by the partners that it should, be written-off, fully or partially, it can be done by debiting the remaining partner’s, capital accounts in the new profit sharing ratio and crediting Goodwill Account, with the respective value., Alternatively, instead of first raising goodwill to its full value and then writing, it off, if the partners so decide, we may first write off the existing goodwill as it, appears in the book by debiting all partners in the old profit sharing ratio, and, then give the necessary credit to the retiring/deceased partner by debiting the, remaining partners capital accounts in their gaining ratio and crediting the, retired/deceased partner by his share of goodwill. (See illustration 9), 4.4.3 Hidden Goodwill, If the firm has agreed to settle the retiring or deceased partner’s account by, paying him a lump sum amount, then the amount paid to him in excess of, what is due to him, based on the balance in his capital account after making, necessary adjustments in respect of accumulated profits and losses and, revaluation of assets and liabilities, etc., shall be treated as his share of goodwill, (known as hidden goodwill). For example, P, Q and R are partners in a firm, sharing profits in the ratio of 3:2:1. R retires, and the balance in his capital account, after making necessary adjustments on account of reserves, revaluation of assets, , 2018-19
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Retirement/Death of a Partner, , 191, , and liabilities workout to be Rs. 60,000, P and Q agreed to pay him, Rs. 75,000 in full settlement of his claim. It implies that Rs. 15,000 is, R’s share of goodwill of the firm. This will be debits to the capital accounts of, P and Q in their gaining ratio (3:2 assuming no change in their own profit, sharing ratio) and crediting R’s capital Account as follows:, Rs., P’s Capital A/c, Q’s Capital A/c, To R’s Capital A/c, (R’s share of goodwill adjusted in P’s, and Q’s capital accounts in their, gaining ratio of 3:2), , Dr., Dr., , Rs., , 9,000, 6,000, 15,000, , Test your Understanding – II, Choose the correct option in the following questions:, 1. On retirement/death of a partner, the retiring/deceased partner’s capital, account will be credited with, (a) his/her share of goodwill., (b) goodwill of the firm., (c) shares of goodwill of remaining partners., (d) none of these., 2. Gobind, Hari and Pratap are partners. On retirement of Gobind, the goodwill, already appears in the Balance Sheet at Rs. 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 accounts from his share of goodwill., (d) none of these., 3. Chaman, Raman and Suman are partners sharing profits in the ratio of 5:3:2., Raman retires, the new profit sharing ratio between Chaman and Suman will, be 1:1. The goodwill of the firm is valued at Rs. 1,00,000 Raman’s share of, goodwill will be adjusted, (a) by debiting Chaman’s Capital account and Suman’s Capital Account, with Rs 15,000 each., (b) by debiting Chaman’s Capital account and Suman’s Capital Account, with Rs. 21,429 and 8,571 respectively., (c) by debiting only Suman’s Capital Account with Rs. 30,000., (d) by debiting Raman’s Capital account with Rs. 30,000., 4. On retirement/death of a partner, the remaining partner(s) who have gained, due to change in profit sharing ratio should compensate the, (a) retiring partners only., (b) remaining partners (who have sacrificed) as well as retiring partners., (c) remaining partners only (who have sacrificed)., (d) none of these., , 2018-19
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192, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , 4.5 Adjustment for Revaluation of Assets and Liabilities, At the time of retirement or death of a partner there may be some assets which, may not have been shown at their current values. Similarly, there may be certain, liabilities which have been shown at a value different from the obligation to be, met by the firm. Not only that, there may be some unrecorded assets and liabilities, which need to be brought into books. As learnt in case of admission of a partner,, a Revaluation Account is prepared in order to ascertain net gain (loss) on, revaluation of assets and/or liabilities and bringing unrecorded items into firm’s, books and the same is transferred to the capital account of all partners including, retiring/deceased partners in their old profit sharing ratio. the Journal entries, to be passed for this purpose are as follows:, 1., , For increase in the value of assets, Assets A/c’s (Individually), To Revaluation A/c, (Increase in the value of assets), , 2., , For decrease in the value of assets, Revaluation A/c, To Assets A/c’s (Individually), (Decrease in the value of assets), , 3., , Dr., , For an unrecorded liability, Revaluation A/c, To Liability A/c, (Unrecorded liability brought into books), , 7., , Dr., , For an unrecorded asset, Assets A/c, To Revaluation A/c, (Unrecorded asset brought into book), , 6., , Dr., , For decrease in the amount of liabilities, Liabilities A/c’s (Individually), To Revaluation A/c, (Decrease in the amount of liabilities), , 5., , Dr., , For increase in the amount of liabilities, Revaluation A/c, To Liabilities A/c (Individually), (Increase in the amount of liabilities), , 4., , Dr., , Dr., , For distribution of profit or loss on revaluation, Revaluation A/c, Dr., To All Partners’ Capital A/c’s (Individually), (Profit on revaluation transferred, to partner’s capital), , 2018-19
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Retirement/Death of a Partner, , 193, , (or), All Partners’ Capital A/c’s (Individually), To Revaluation A/c, (Loss on revaluation transferred to, partner’s capital accounts), , Dr., , Illustration 10, Mitali, Indu and Geeta are partners sharing profits and losses in the ratio of, 5 : 3 : 2 respectively. On March 31, 2017, their Balance Sheet was as under:, Liabilities, , Amount, (Rs.), , Sundry Creditors, Reserve Fund, Capital Accounts:, Mitali, 1,50,000, Indu, 1,25,000, Geeta, 75,000, , 55,000, 30,000, , 3,50,000, , Assets, , Amount, (Rs.), , Goodwill, Buildings, Patents, Machinery, Stock, Debtors, Cash, , 25,000, 1,00,000, 30,000, 1,50,000, 50,000, 40,000, 40,000, , 4,35,000, , 4,35,000, , Geeta retires on the above date. It was agreed that Machinery be valued at, Rs.1,40,000; Patents at Rs. 40,000; and Buildings at Rs. 1,25,000. Record the, necessary journal entries and prepare the Revaluation Account., Solution, Books of Mitali and Indu, Journal, Date, 2017, , Particulars, , L.F., , Mar. 31, , Revaluation A/c, To Machinery A/c, (Decrease in the value of machinery), , Dr., , Debit, Amount, (Rs.), 10,000, , 10,000, , Patents A/c, Dr., Buildings A/c, Dr., To Revaluation A/c, (Increase in the value of patents and buildings), , 10,000, 25,000, , Revaluation A/c, To Mitali’s Capital A/c, To Indu’s Capital A/c, To Geeta’s Capital A/c, (Profit on revaluation transferred to all, partner’s capital accounts in old profit, sharing ratio), , 25,000, , 2018-19, , Credit, Amount, (Rs.), , Dr., , 35,000, , 12,500, 7,500, 5,000
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194, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, Revaluation Account, , Dr., , Cr., , Liabilities, , Amount, (Rs.), , Machinery, Profit, transferred to:, Mitali’s Capital A/c 12,500, Indu’s Capital A/c, 7,500, Geeta’s Capital A/c 5,000, , 10,000, , Assets, , Amount, (Rs.), , Patents, Buildings, , 10,000, 25,000, , 25,000, 35,000, , 35,000, , 4.6 Adjustment of Accumulated Profits and Losses, Sometimes, the Balance Sheet of a firm may show accumulated profits in the, form of general reserve on reserve fund and/on accumulated losses in the form of, profit and loss account debit balance. The retiring/deceased partner is entitled, to his/her share in the accumulated profits and is also liable to share the, accumulated losses, if any. These accumulated profits or losses belong to all the, partners and should be transferred to the capital accounts of all partners in their, old profit sharing ratio. The following journal entries are recorded for the purpose., (i) For transfer of accumulated profits (reserves),, Reserves A/c, To All Partners’ Capital A/c’s (Individually), (Reserves transferred to all partners’, capital account’s in old profit sharing ratio)., , Dr., , (ii) For transfer of accumulated losses, All Partners’ Capital A/c’s (Individually), Dr., To Profit and Loss A/c, (Accumulated loss transferred to all partners’, capital accounts in their old profit-sharing ratio), , For example; Inder, Gajender and Harinder are partners sharing profits in the ratio, of 3 : 2 : 1. Inder retires and the Balance Sheet of the firm on that date was as follows:, Books of Inder, Gajinder and Harinder, Balance Sheet as on March 31, 2017, Liabilities, Creditors, General Reserve, Capital Accounts:, Inder, 1,00,000, Gajender, 55,000, Harinder, 50,000, , Amount, (Rs.), 50,000, 90,000, , Assets, Land and Building, Stock, Bank, Cash, , Amount, (Rs.), 3,00,000, 30,000, 10,000, 5,000, , 2,05,000, 3,45,000, , 2018-19, , 3,45,000
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Retirement/Death of a Partner, , 195, , The journal entry to record the treatment of general reserve will be as follows :, Books of Gajender and Harinder, Journal, Date, , Particulars, , 2017, Mar. 31, , General Reserve A/c, Dr., To Inder’s Capital A/c, To Gajender’s Capital A/c, To Harinder’s Capital A/c, (General Reserves transferred to all partners’, capital accounts in the old ratio on, Inder’s retirement), , 4.7, , L.F., , Debit, Amount, (Rs.), , Credit, Amount, (Rs.), , 90,000, 45,000, 30,000, 15,000, , Disposal of Amount Due to Retiring Partner, , The outgoing partner’s account is settled as per the terms of partnership deed, i.e., in lumpsum immediately or in various instalments with or without interest, as agreed or partly in cash immediately and partly in installment at the agreed, intervals. In the absence of any agreement, Section 37 of the Indian Partnership, Act, 1932 is applicable, which states that the outgoing partner has an option to, receive either interest @ 6% p.a. till the date of payment or such share of profits, which has been earned with his/her money (i.e., based on capital ratio). Hence,, the total amount due to the retiring partner which is ascertained after all, adjustments have been made is to be paid immediately to the retiring partner., In case the firm is not in a position to make the payment immediately, the amount, due is transferred to the retiring Partner’s Loan Account, and as and when the, amount is paid it is debited to his account. The necessary journal entries recorded, are as follows., 1., , When retiring partner is paid cash in full., Retiring Partner’s Capital A/c, To Cash/Bank A/c, , 2., , When retiring partner’s whole amount is treated as loan., Retiring Partner’s Capital A/c, To Retiring Partner’s Loan A/c, , 3., , Dr., , Dr., , When retiring partner is partly paid in cash and the remaining amount treated, as loan., Retiring Partner’s Capital A/c, To Cash/Bank A/c, To Retiring Partner’s Loan A/c, , 2018-19, , Dr., , (Total Amount due), (Amount Paid), (Amount of Loan)
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196, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, 4., , When Loan account is settled by paying in instalment includes principal and, interest., a) For interest on loan, Interest A/c, To Retiring Partner’s Loan A/c, b) For payment of instalment, Retiring Partner’s Loan A/c, To Cash/Bank A/c, , Dr., , Dr., , Note:, 1. The balance of the retiring partner’s loan account is shown on the liabilities side, of the Balance Sheet till the last instalment is paid to him/her., 2. Entry number (a) and (b), above will be repeated till the loan is paid off., , Illustration 11, Amrinder, Mahinder and Joginder are partners in a firm. Mahinder retires from, the firm. On his date of retirement, Rs. 60,000 becomes due to him. Amrinder, and Joginder promise to pay him in instalments every year at the end of the, year. Prepare Mahinder’s Loan Account in the following cases:, 1. When payment is made four yearly instalments plus interest @ 12% p.a., on the unpaid balance., 2. When they agree to pay three yearly instalments of Rs. 20,000 including, interest @ 12% p.a on the outstanding balance during the first three years, and the balance including interest in the fourth year., 3. When payment is made in 4 equal yearly instalment’s including interest @, 12% p.a. on the unpaid balance., Solution, (a) When payment is made in four yearly instalments plus interest, Books of Amrinder and Joginder, Mahinder’s Loan Account, Dr., , Cr., , Date, , Particulars, , Year-I, , Bank, (15,000+7,200), Balance c/d, , J.F., , Amount, (Rs.), , Date, , Particulars, , 22,200, , Year -1 Mahinder Capital, Interest, , J.F., , Amount, (Rs.), 60,000, 7,200, , 45,000, 67,200, , 2018-19, , 67,200
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Retirement/Death of a Partner, Year-II, , Bank, , 197, 20,400, , Year-II Balance b/d, , (15,000+5,400), , 45,000, , Interest, , Balance c/d, , 5,400, , 30,000, 50,400, , Year-III, , Bank, , 18,600, , 50,400, Year-III Balance b/d, , (15,000+3,600), , 30,000, , Interest, , Balance c/d, , 3,600, , 15,000, 33,600, , Year-IV, , Bank, , 16,800, , 33,600, Year-IV Balance b/d, , (15,000+1,800), , 15,000, , Interest, , 1,800, , 16,800, , 16,800, , (b) When payment is made in three yearly installments of Rs. 20,000 each including, interest., Books of Amrinder, Mahinder and Joginder, Mahinder’s Loan Account, Dr., Date, Year-I, , Cr., Particulars, , J.F., , Amount, (Rs.), , Date, , Particulars, , Bank, , 20,000, , Year-I, , Mohan’s Capital, , Balance c/d, , 47,200, , Interest, , 67,200, Year-II, , Bank, Balance c/d, , 20,000, , Year-II, , 32,864, , Bank, , 20,000, , Balance c/d, , 16,808, , Balance b/d, Interest, , Bank, , 18,825, , 60,000, 7,200, , 47,200, 5,664, 52,864, , Year-III Balance b/d, Interest, , 36,808, Year-IV, , Amount, (Rs.), , 67,200, , 52,864, Year-III, , J.F., , 32,864, 3,944, 36,808, , Year-IV Balance b/d, Interest, , 18,825, , 2018-19, , 16,808, 2,017, 18,825
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198, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , (c) When payment is made in four equal yearly instalments including interest @12% (Annually)., Books of Amrinder and Joginder, Mahinder’s Loan Account, Dr., , Cr., , Date, , Particulars, , Year-I, , Bank, Balance c/d, , J.F., , Amount, (Rs.), , Date, , Particulars, , 19,754, 47,446, , Year -I, , Mohinder’s Capital, Interest, , 67,200, Year-II, , Bank, Balance c/d, , 19,754, 33,386, , Bank, Balance c/d, , 19,754, 17,638, , Year -II, , Balance b/d, Interest, , Bank, , 19,754, , 60,000, 7,200, , 47,446, 5,694, 53,140, , Year-III, , Balance b/d, Interest, , 37,392, Year-IV, , Amount, (Rs.), , 67,200, , 53,140, Year-III, , J.F., , 33,386, 4,006, 37,392, , Year-IV, , 19,754, , Balance b/d, Interest, , 17,638, 2,116, 19,754, , Note: The annual instalment of payment in 4 years @ 12% interest works out at, Rs. 19,754 (Annually of Rs. 0.329234 as per Annually Table x 60,000)., , It may noted that the accounting treatment for disposal of amount due to, retiring partner and deceased partner is similar with a difference that in case of, death of a partner, the amount credited to him/her is transferred to his Executors’, Account and the payment has to be made to him/her. This shall be taken up, later in this chapter., Do it Yourself, Vijay, Ajay and Mohan are friends. They passed B. Com. (Hons) from Delhi, University in June, 2016. They decided to start the business of computer hardware., On Ist of August, 2016, they introduced the capital of Rs. 50,000, Rs. 30,000, and Rs. 20,000 respectively and started the business in partnership at Delhi., The profit sharing ratio decided between there was 4:2:1. The business was, running successfully. But on Ist February, 2017, due to certain unavoidable, circumstances and family circumstances, Ajay decided to settle in Pune and, decided to retire from the partnership on 31st March, 2017; with the consent of, partners, Ajay retires as on 31st March, 2017, the position of assets and liabilities, are as follows:, Contd..., , 2018-19
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Retirement/Death of a Partner, , 199, Contd..., , Balance Sheet of Vijay, Ajay and Mohan as on March 31, 2017, Liabilities, , Amount, (Rs.), , Capital Accounts :, Vijay, 1,80,000, Ajay, 1,20,000, Mohan, 1,00,000, Bills Payable, General Reserve, Creditors, , 4,00,000, 12,000, 42,000, 90,000, , Assets, Goodwill, Stock, Debtors, Land and Buildings, Machinery, Motor Van, Cash at bank, , 5,44,000, , Amount, (Rs.), 56,000, 90,000, 66,000, 1,20,000, 1,59,000, 31,000, 22,000, 5,44,000, , On the date of retirement, the following adjustments were to be made:, 1. Firm’s goodwill was valued at Rs. 1,48,000., 2. Assets and Liabilities are to be valued as under: Stock Rs. 72,000; Land and, Buildings Rs. 1,35,600; Debtors Rs. 63,000; Machinery Rs. 1,50,000; Creditors, Rs. 84,000., 3. Vijay to bring Rs. 1,20,000 and Mohan Rs. 30,000 as additional capital., 4. Ajay was to be paid Rs. 97,200 in cash and the balance of his Capital Account to, be transferred to his Loan Account Work out the amount due to Ajay and state as, to how will you settle his account ?, , Illustration 12, The Balance Sheet of Ashish, Suresh and Lokesh who were sharing profits in, the ratio of 5 : 3 : 2, is given below as on March 31, 2017., Balance Sheet of Ashish, Suresh and Lokesh, As on March 31, 2017, Liabilities, Capitals:, Shyam, 7,20,000, Gagan, 4,15,000, Ram, 3,45,000, Reserve Fund, Sundry Creditors, Outstanding Expresses, , Amount, (Rs.), , 14,80,000, 1,80,000, 1,24,000, 16,000, , Assets, Land, Building, Plant & Machinery, Furniture & Fittings, Stock, Sundry Debtors, Cash in hand, , 18,00,000, , Amount, (Rs.), 4,00,000, 3,80,000, 4,65,000, 77,000, 1,85,000, 1,72,000, 1,21,000, 18,00,000, , Suresh retires on the above date and the following adjustments are agreed upon his, retirement., 1. Stock was valued at Rs. 1,72,000., 2. Furniture and fittings were valued at Rs. 80,000., , 2018-19
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200, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, 3. An amount of Rs. 10,000 due from Mr. Deepak, a debtor, was doubtful and a, provision for the same was required., 4. Goodwill of the firm was valued at Rs. 2,00,000 but it was decided not to show, goodwill in the books of accounts., 5. Suresh was paid Rs. 40,000 immediately on retirement and the balance was, transferred to his loan account., 6. Ashish and Lokesh were to share future profits in the ratio of 3:2., Prepare Revaluation Account, Capital Account and Balance Sheet of the, reconstituted firm., , Solution, Books of Ashish, Suresh and Lokesh, Revaluation Account, Dr., , Cr., , Particulars, , Amount, (Rs.), , Stock, Provision for Doubtful Debt, , 13,000, 10,000, , Particulars, , Amount, (Rs.), , Furniture, (Loss on Revaluation, transferred to :, Ashish’s capital, Suresh’s capital, Lokesh’s capital, , 3,000, , 10,000, 6,000, 4,000, , 23,000, , 20,000, 23,000, , Partners’ Capital Accounts, Dr., Date, 2017, , Cr., Particulars, , Mar.31 Revaluation, (Loss), Suresh’s, Capital, Cash, Suresh’s, Loan, Balance c/d, , J.F., , Ashish, (Rs.), , Suresh, (Rs.), , Lokesh, (Rs.), , 10,000, , 6,000, , 4,000, , 20,000, , 40,000, 40,000, 4,83,000, , 7,80,000, 8,10,000, , Date, 2017, , Particu, lars, , Mar.31 Bal. b/d, Reserve fund, Ashish’s, Capital, Lokesh’s, Capital, , J.F., , Ashish, (Rs.), , Suresh Lokesh, (Rs.), (Rs.), , 7,20,000 4,15,000 3,45,000, 90,000 54,000 36,000, 20,000, 40,000, , 3,37,000, 5,29,000, , 3,81,000, , 2018-19, , 8,10,000, , 5,29,000 3,81,000
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Retirement/Death of a Partner, , 201, , Balance Sheet of Ashish and Lokesh as on April 01, 2017, Liabilities, , Amount, (Rs.), , Capitals :, Ashish, 7,80,000, Lokesh, 3,37,000, Suresh’s Loan, Sundry Creditors, Outstanding Expresses, , Assets, Land, Buildings, Plant and Machinery, Furniture, Stock, Sundry Debtors, 1,72,000, Less: Provision for, Doubtful Debts 10,000, Cash (Rs. 1,21,000–Rs. 40,000), , 11,17,000, 4,83,000, 1,24,000, 16,000, , 17,40,000, , Amount, (Rs.), 4,00,000, 3,80,000, 4,65,000, 80,000, 1,72,000, , 1,62,000, 81,000, 17,40,000, , Working Notes, 1. Gaining Share = New Share – Old Share, Ashish’s Gain, , =, , 3, 5, , 5, 10, , 6, , 5, , 1, 10, , 10, , 2, 2, 4, 2, 2, 5, 10, 10, 10, Gaining Ratio between Ashish and Lokesh = 1 : 2,, , Lokesh’s Gain, , =, , 2. Suresh’s Share of Goodwill =, , 3, 10, , Rs. 2,00,000 = Rs. 60,000, , Illustration 13, Shyam, Gagan and Ram are partners sharing profit in the ratio of 2 : 2 : 1. Their, Balance Sheet as on March 31, 2017 are as under:, Liabilities, Sundry Creditors, Reserves, Capital:, Shyam, 80,000, Gagan, 62,500, Ram, 75,000, Employees’ Provident Fund, , Amount, (Rs.), 49,000, 14,500, , 2,17,500, 4,000, , Assets, Cash, Debtors, Stock, Machinery, Building, Patents, , 2,85,000, , 2018-19, , Amount, (Rs.), 8,000, 19,000, 42,000, 85,000, 1,22,000, 9,000, 2,85,000
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202, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , As Gagan got a very good break at an MNC, so he decided to retire on that date, and it was decided that Shyam and Ram would share the future profits in the, ratio of 5 : 3. Goodwill was valued at Rs. 70,000; Machinery at Rs. 78,000;, Buildings at Rs. 1,52,000; stock at Rs. 30,000; and bad debts amounting to, Rs. 1,550 were to be written off. Record journal entries in the books of the firm, and prepare the Balance Sheet of the new firm., Solution, Books of Shyam, Ram and Gagan, Journal, Date, , Particulars, , L.F., , 2017, Mar. 31, , Revaluation A/c, To Machinery A/c, To Stock A/c, To Debtors A/c, (Loss on revaluation of assets recorded, on Gagan’s retirement), , Dr., , Building A/c, To Revaluation A/c, (Appreciation in the value of Building, on Gagan’s retirement), , Dr., , Debit, Amount, (Rs.), 20,550, , 7,000, 12,000, 1,550, , 30,000, 30,000, , Revaluation A/c, Dr., To Shyam’s Capital A/c, To Gagan’s Capital A/c, To Ram’s Capital A/c, (Profit on revaluation transferred to partners’, capital accounts in the ratio of 2 : 2 : 1), , 9,450, , Reserve A/c, Dr., To Shyam’s Capital A/c, To Gagan’s Capital A/c, To Ram’s Capital A/c, (Reserve transferred to partner’s capital accounts), , 14,500, , Shyam’s Capital A/c, Dr., Ram’s Capital A/c, Dr., To Gagan’s Capital A/c, (Gagan’s share of goodwill adjusted to Shyam, and Ram in their gaining ratio of 9 : 7), , 15,750, 12,250, , Gagan’s Capital A/c, Dr., To Gagan’s Loan A/c, (Amount payable to retiring partner transferred, to his loan account), , 1,00,080, , 2018-19, , Credit, Amount, (Rs.), , 3,780, 3,780, 1,890, , 5,800, 5,800, 2,900, , 28,000, , 1,00,080
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Retirement/Death of a Partner, , 203, , Balance Sheet of Shyam and Ram as on March 31, 2017, Liabilities, , Amount, (Rs.), , Sundry Creditors, Employees’ Provident Fund, Capitals :, Shyam, 73,830, Ram, 67,540, Gagan’s Loan, , 49,000, 4,000, , 1,41,370, 1,00,080, , Assets, , Amount, (Rs.), , Cash, Debtors, Stock, Machinery, Building, Patents, , 8,000, 17,450, 30,000, 78,000, 1,52,000, 9,000, , 2,94,450, , 2,94,450, , Working Notes, Share Gained, , = New Share – Old Share, 5, 2, 25, 16, 9, Shyam’s Gain, =, 8, 5, 40, 40, 3, 1, 15, 8, 7, Ram’s Gain, = 8, 5, 40, 40, Therefore, Gaining Ratio of Shyam and Ram = 9 : 7., Revaluation Account, Dr., , Cr., , Liabilities, , Amount, (Rs.), , Machinery, Stock, Debtors, (Profit on Revaluation), Transfer to Capital, Shyam, 3,780, Gagan, 3,780, Ram, , 1,890, , 7,000, 12,000, 1,550, , Assets, , Amount, (Rs.), , Building, , 30,000, , 9,450, 30,000, , 30,000, , Partners’ Capital Accounts, Date, 2 01 7, , Particulars, , Mar.31 Gagan’s Capital, Gagan’s Loan, Bal. c/d, , J.F. Shyam, (Rs.), , Gagan, (Rs.), , 15,750, , Ram, (Rs.), 12,250, , 1,00,080, 73,830, , 67,540, , Date, 2 01 7, , Particulars, , Mar.31 Bal. b/d, Revaluation, Profit, Reserve, Shyam’s Capital, Ram’s Capital, , 89,580 1,00,080 79,790, , J.F. Shyam, (Rs.), , Gagan, (Rs.), , Ram, (Rs.), , 80,000, 3,780, 5,800, , 62,500, 3,780, 5,800, , 75,000, 1,890, 2,900, , 15,750, 12,250, 89,580 1,00,080 79,790, , Note: As sufficient balance is not available to pay the due amount to Gagan, the balance, in his capital account is transferred to his loan account., , 2018-19
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204, , 4.8, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , Adjustment of Partners’ Capitals, , At the time of retirement or death of a partner, the remaining partners may, decide to adjust their capital contributions in their profit sharing ratio. In such, a situation, the sum of balances in the capitals of continuing partners may be, treated as the total capital of the new firm, unless specified otherwise. Then, to, ascertain the new capital of the continuing partners, the total capital of the firm, is divided amongst the remaining partners as per the new profit sharing ratio,, and the excess or deficiency of capital in the individual capital account’s may be, worked out. Such excess or shortage shall be adjusted by withdrawal of, contribution in cash, as the case may be, for which the following journal entries, will be recorded., (i) For excess capital withdrawn by the partner :, Partners’ Capital A/c, To Cash / Bank A/c, , Dr., , (ii) For amount of capital to be brought in by the partner:, Cash / Bank A/c, To Partners’ Capital A/c, , Dr., , Consider the following situations:, The adjustment of the continuing partner’s capitals may involve any one of the, three ways as illustrated as follows :, 1. When the capital of the new firm as decided by the partners is specified., Illustration 14, Mohit, Neeraj and Sohan are partners in a firm sharing profits in the ratio, of 2 : 1 : 1. Neeraj retires and Mohit and Sohan decided that the capital of, the new firm will be fixed at Rs. 1,20,000. The capital accounts of Mohit, and Sohan show a credit balance of Rs. 82,000 and Rs. 41,000 respectively, after making all the adjustments. Calculate the actual cash to be paid off, or to be brought in by the continuing partners and pass the necessary, journal entries., Solution, The New Profit Sharing Ratio between Mohit and Sohan = 2 : 1, , New Capital based new ratio is, Existing Capital (after adjustments) is, Cash to be brought in on (Paid off), , 2018-19, , Mohit, , Sohan, , 80,000, 82,000, 2,000, , 40,000, 41,000, 1,000
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Retirement/Death of a Partner, , 205, Books of Mohit and Sohan, Journal, , Date, , Particulars, , L.F., , Mohit’s Capital A/c, Sohan’s Capital A/c, To Cash A/c, (Excess capital withdrawn by Sohan), , 2., , Dr., Dr., , Debit, Amount, (Rs.), , Credit, Amount, (Rs.), , 2,000, 1,000, 3,000, , When the total capital of new firm is not specified., , Illustration 15, Asha, Deepa and Lata are partners in a firm sharing profits in the ratio of 3 : 2 : 1., Deepa retires. After making all adjustments relating to revaluation, goodwill and, accumulated profit etc., the capital accounts of Asha and Lata showed a credit, balance of Rs. 1,60,000 and Rs. 80,000 respectively. It was decided to adjust, the capitals of Asha and Lata in their new profit sharing ratio. You are required, to calculate the new capitals of the partners and record necessary journal entries, for bringing in or withdrawal of the necessary amounts involved., Solution, a. Calculation of new capitals of the existinging partners, Balance in Asha’s Capital (after all adjustments), = 1,60,000, Balance in Lata’s Capital, =, 80,000, Total Capital of the New Firm, = 2,40,000, Based on the new profit sharing ratio of 3:1, Asha’s New Capital = Rs. 2,40,000, , 3, = 1,80,000, 4, , 1, = 60,000, 4, Note :The total capital of the new firm is based on the sum of the balance in the capital, accounts of the continuing partners., , Lata’s New Capital = Rs. 2,40,000, , b. Calculation of cash to be brought in or withdrawn by the continuing partners :, Asha, Lata, (Rs.), (Rs.), New Capitals, 1,80,000, 60,000, Existing Capitals, 1,60,000, 80,000, c. Cash to be brought in on (paid off), , 2018-19, , 20,000, , 20,000
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206, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, Books of Asha and Lata, Journal, , Date, , Particulars, , L.F., , Cash A/c, To Asha Capital A/c, (Cash brought by Asha), , Dr., , Lata’s Capital A/c, To Cash A/c, (Surplus capital withdrawn by Lata), , Dr., , Debit, Amount, (Rs.), , Credit, Amount, (Rs.), , 20,000, 20,000, 20,000, 20,000, , 3. When the amount payable to retiring partner will be contributed by, continuing partners in such a way that their capitals are adjusted, proportionate to their new profit sharing ratio:, Illustration 16, Lalit, Pankaj and Rahul are partners sharing profits in the ratio of 4 : 3 : 3. After, all adjustments, on Lalit’s retirement with respect to general reserve, goodwill, and revaluation etc., the balances in their capital accounts stood at Rs. 70,000,, Rs. 60,000 and Rs. 50,000 respectively. It was decided that the amount payable, to Lalit will be brought by Pankaj and Rahul in such a way as to make their, capitals proportionate to their profit sharing ratio. Calculate the amount to be, brought by Pankaj and Rahul and record necessary journal entries for the same., Also record necessary entry for payment to Lalit., After Lalit’s retirement, the new profit sharing ratio between Pankaj and Rahul, is 3 : 3, i.e. 1 : 1., Solution, a. Calculation of total capital of the new firm, Balance in Pankaj’s Capital account (after adjustment), Balance in Rahul’s Capital account (after adjustment), Amount payable to Lalit (Retiring partner), Total capital of new firm (i) + (ii) + (iii), , =, 60,000, =, 50,000, =, 70,000, = 1,80,000, , b. Calculation of new capitals of the continuing partners, Pankaj’s New Capital, , = Rs. 1,80,000, , 1, 2, , = Rs. 90,000, , Rahul’s New Capital, , = Rs. 1,80,000, , 1, 2, , = Rs. 90,000, , 2018-19
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Retirement/Death of a Partner, , 207, , c. Calculation of the amounts to be brought in or withdrawn by the continuing partners, Pankaj, (Rs.), , Rahul, (Rs.), , New Capital (Rs. 1,80,000 in the ratio of 1 : 1), Existing capital (after adjustment), , 90,000, 60,000, , 90,000, 50,000, , Cash to be brought in, , 30,000, , 40,000, , Credit, Amount, (Rs.), , Books of Pankaj and Rahul, Journal, Date, , Particulars, , L.F., , Debit, Amount, (Rs.), , Cash A/c, To Pankaj’s Capital A/c, To Rahul’s Capital A/c, , Dr., , 70,000, 30,000, 40,000, , (Amounts brought by Pankaj and Rahul), Lalit’s Capital A/c, To Cash A/c, (Amount paid to Lalit on retirement), , Dr., , 70,000, 70,000, , Illustration 17, The Balance Sheet of Mohit, Neeraj and Sohan who are partners in a firm sharing, profits according to their capitals as on March 31, 2017 was as under:, Liabilities, Creditors, Mohit’s Capital, Neeraj’s Capital, Sohan’s Capital, General Reserve, , Amount, (Rs.), 21,000, 80,000, 40,000, 40,000, 20,000, , Assets, Buildings, Machinery, Stock, Debtors, Less: Provision, for Bad Debt, Cash at bank, , 2,01,000, , Amount, (Rs.), 1,00,000, 50,000, 18,000, 20,000, 1,000, , 19,000, 14,000, 2,01,000, , On that date, Neeraj decided to retire from the firm and was paid for his share in the firm, subject to the following:, 1. Buildings to be appreciated by 20%., 2. Provision for Bad debts to be increased to 15% on Debtors., 3. Machinery to be depreciated by 20%., 4. Goodwill of the firm is valued at Rs. 72,000 and the retiring partner’s share is, adjusted through the capital accounts of remaining partners., , 2018-19
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208, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, 5. The capital of the new firm be fixed at Rs. 1,20,000., Prepare Revaluation Account, Capital Accounts of the partners, and the Balance, Sheet after retirement of B., , Solution, Revaluation Account, Dr., , Cr., , Particulars, , Amount, (Rs.), , Provision for Doubtful Debt, Machinery, Capital (Profit on, Revaluation), Mohit, 4,000, Neeraj, 2,000, Sohan, 2,000, , Particulars, , 2,000, 10,000, , Amount, (Rs.), , Building, , 20,000, , 8,000, 20,000, Partners’ Capital Accounts, , Dr., Date, 2017, , 20,000, , Particulars, , Mar.31 Neeraj’s Capital, Balance c/d, , J.F., , Mohit, (Rs.), 12,000, 82,000, , 94,000, Bank, Bank, Bal. c/d, (1), , Neeraj, (Rs.), , Sohan, (Rs.), , 6,000, 65,000 41,000, , Date, 2017, , Particulars, , Cr., J.F., , Mar.31 Bal. b/d, General Reserve, Revaluation, (Profit), Mohit’s Capital, Sohan’s Capital, , 65,000 47,000, Bal. b/d, 1,000, 40,000, , 82,000, , 65,000 41,000, , Neeraj Sohan, (Rs.), (Rs.), , 80,000 40,000 40,000, 10,000, 5,000 5,000, 4,000, 2,000 2,000, 12,000, 6,000, 94,000 65,000 47,000, , 65,000, 2,000, 80,000, , Mohit, (Rs.), , 82,000 65,000 41,000, , 82,000 65,000 41,000, , Balance Sheet as on March 31, 2017, Liabilities, Creditors, Bank overdraft, Capital, Mohit, Sohan, , Amount, (Rs.), 21,000, 54,000, 80,000, 40,000, , 1,20,000, , Assets, Building, Machinery, Stock, Debtors, Less: Provision for, Doubtful Debts, (1,000+2,000), , 1,95,000, , 2018-19, , Amount, (Rs.), 1,20,000, 40,000, 18,000, 20,000, 3,000, , 17,000, , 1,95,000
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Retirement/Death of a Partner, , 209, , Working Notes, Bank Account, , 1., Dr., , Cr., , Date Particulars, Balance b/d, Balance c/d, (overdraft), , J.F., , Amount, (Rs.), , Date Particulars, , 14,000, 54,000, , J.F., , Mohit’s Capital, Sohan’s Capital, Neeraj’s Capital, , 2,000, 1,000, 65,000, , 68,000, , 2., 3., , Amount, (Rs.), , 68,000, , It is assumed that bank overdraft is taken to pay the retiring partners., Cash to be brought in or withdrawn by Mohit and Sohan :, Mohit, (Rs.), (a) New capitals (Rs.1,20,000 in the, ratio of 2:1), (b) Existing capital (after adjustments), as calculated, Cash to be brought (paid off), , Sohan, (Rs.), , 80,000, , 40,000, , 82,000, 2,000, , 41,000, 1,000, , Do it Yourself, 1. The Balance Sheet of A, B and C who were sharing the profits in proportion to, their capitals stood as on March 31, 2017., Balance Sheet as on March 31, 2017, Liabilities, Bills Payable, Sundry Creditors, Reserve Fund, Capitals, A 20,000, B 15,000, C 15,000, , Amount, (Rs.), 6,250, 10,000, 2,750, , 50,000, , Assets, Land and Building, Debtors, Less Provision, for bad debts, Bill receivables, Stock, Plant and Machinery, Cash at bank, , 69,000, , 2018-19, , Amount, (Rs.), 12,000, 10,500, 500, , 10,000, 7,000, 15,500, 11,500, 13,000, 69,000
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210, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , B retired on the date of Balance Sheet and the following adjustments were to be made:, (a) Stock was depreciated by 10%., (b) Factory building was appreciated by 12%., (c) Provision for doubtful debts to be created up to 5%., (d) Provision for legal charges to be made at Rs.265., (e) The goodwill of the firm to be fixed at Rs.10,000., (f) The capital of the new firm to be fixed at Rs.30,000. The continuing partners, decide to keep their capitals in the new profit sharing ratio of 3:2., Work out the final balances in capital accounts of the firm, and the amounts to be, brought in and/or withdrawn by A and C to make their capitals proportionate to then new, profit sharing ratio., 2. R, S and M were carrying on business in partnership sharing profits in the ratio of, 3:2:1, respectively. On March 31, 2017, Balance Sheet of the firm stood as follows :, Balance Sheet as on March 31, 2017, Liabilities, Sundry Creditors, Capitals:, R, S, M, , Amount, (Rs.), 16,000, 20,000, 7,500, 12,500, , 40,000, , Assets, Building, Debtors, Stock, Patents, Bank, , 56,000, , Amount, (Rs.), 23,000, 7,000, 12,000, 8,000, 6,000, 56,000, , Shyam retired on the above mentioned date on the following terms :, (a) Buildings to be appreciated by Rs.8,800., (b) Provision for doubtful debts to be made @ 5% on debtors., (c) Goodwill of the firm to be valued at Rs.9,000., (d) Rs.5,000 to be paid to S immediately and the balance due to him to be treated, as a loan carrying interest @ 6% per annum., Prepare the balance sheet of the reconstituted firm., , 4.9, , 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 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 partner, 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, , 2018-19
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Retirement/Death of a Partner, , 211, , 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, 2017 was Rs.1,00,000. Champak dies on June 30, 2017. Champak’s share, of profit for the period from April 1 to June 30, 2017, shall be calculated as, follows:, Total profit for the year ending on 31st March, 2017 = Rs.1,00,000, Champak’s share of profit :, Proceeding Year’s Profit, Proportionate Period, = Rs. 1,00,000, , 3, 12, , Share of Deceased Partner, , 4, = Rs. 10,000, 10, , The journal entry will be recorded as follows :, Profit & Loss Suspense A/c, , Dr., , 10,000, , To Champak’s Capital A/c, (Champak’s share of profit transferred to his capital account), , 10,000, , Alternatively, if Champak’s share of profit was to be calculated on the basis of, average profits of the last three years, which were Rs. 1,36,000 for 2014-15,, Rs. 1,54,000 for 2015-16 and Rs. 1,00,000 for 2016-17; Champahs share of, profit for the period from April 7, 2017 to June 30, 2017 shall be calculated on, the basis of average profit based on profits for the last year calculation as follows:, Average Profit =, , Total Profit, No. of years, , Champak’s share of profit, , =, , Rs. 1,36,000 + Rs. 1,54,000 + Rs. 1,00,000, 3, , =, , Rs. 3,90,000, = Rs. 1,30,000, 3, , =, , Rs. 1,30,000, , 3 months, 12 months, , 4, 10, , = Rs. 13,000, , In case, the agreement provides, that share of profit of the deceased partner, will be worked out on the basis of sales, and it is specified that the sales during, the year 2015-16 were Rs. 8,00,000 and the sales from April 1, 2017 to June, , 2018-19
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212, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , 30, 2017 were Rs. 1,50,000 Champak’s share of profits for the period from, April 1, 2017 to June 30, 2017 shall be calculated as follows., If sale is Rs.8,00,000, the profit, , = Rs.1,00,000, , If sale is Rs.1, the profit, , =, , If sale is Rs.1,50,000, the profit, , =, , Champak’s share of profit, , 1,00,000, 8,00,000, , 1,00,000, 8,00,000, = Rs. 18,750, = Rs. 7,500, , 1,50,000, , For being deceased partner’s share of profits for the intervening period to books, of account, the following journal entry is recorded., Profit and Loss Account, Profit and Loss (Supense) A/c, To Deceased Partner’s Capital A/c, (Share of profit for the intervening period), , Dr., , Illustration 18, 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, Liabilities, Creditors, Reserve Fund, Anil’s Capital, Bhanu’s Capital, Chandu’s Capital, , Amount, (Rs.), 11,000, 6,000, 30,000, 25,000, 15,000, , 70,000, , Assets, Buildings, Machinery, Stock, Patents, Debtors, Cash, , 87,000, , Amount, (Rs.), 20,000, 30,000, 10,000, 11,000, 8,000, 8,000, 87,000, , Anil died on October 1, 2017. It was agreed between his executors and the, remaining partners that :, (a)Goodwill to be valued at 2 1 2 year’s purchase of the average profits of the previous, four years which were :, Year 2013-14 – Rs.13,000, Year 2014-15 – Rs. 12,000,, Year 2015-16 – Rs.20,000, Year 2016-17 – Rs.15,000, , 2018-19
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Retirement/Death of a Partner, , 213, , (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’s Executor’s Account as on October 1, 2017., , Solution, Books of Anil, Bhanu and Chander, Anil’s Capital Account, Dr., , Cr., , Date, 2017, , Particulars, , J.F. Amount, (Rs.), , Oct.1, , Anil’s Executors, , 57,000, , Date, 2017, , Particulars, , J.F., , April,1 Balance b/d, Oct. 1 Reserve Fund, Bhanu’s Capital, Chandu’s Capital, Profit & Loss, (Suspense), Interest on Capital, , Amount, (Rs.), 30,000, 3,000, 11,250, 7,500, 3,750, 1,500, , 57,000, , 57,000, , Anil’s Executor’s Account, Dr., , Cr., , Date, 2017, , Particulars, , Oct.1, , Bank, Balance c/d, , J.F. Amount, (Rs.), 28,500, 28,500, , Date, 2017, , Particulars, , Oct.1, , Anil’s Capital, , J.F., , Amount, (Rs.), 57,000, , 57,000, , 57,000, , Working Notes, Revaluation Account, , 1., Dr., , Cr., , Date, , Particulars, , J.F., , Patents, Machinery, , Amount, (Rs.), , Date, , 3,000, 2,000, , Particulars, , J.F., , Building, , 5,000, 2. Goodwill = 2½ years’ purchase × Average Profit, Average Profit, , =, , Rs. 13,000 + Rs.12,000 + Rs.20,000 + Rs.15,000, 4, , 2018-19, , Amount, (Rs.), 5,000, 5,000
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214, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, Rs. 60,000, = Rs. 15,000, 4, , =, Goodwill, , 5, Rs. 15,000, 2, = Rs. 37,500, , =, , 5, Rs. 37,500, 10, = Rs. 18,750, 3., Profit from the date of last balance sheet to date of death, (April 1, 2017 to October 1, 2017) = 6 months, , Anil’s Share of Goodwill =, , Profit for 6 months = Rs. 15,000, , 6, = Rs. 7,500, 12, , Anil’s share of profit = Rs. 7,500, , 5, = Rs. 3,750, 10, , 4. Interest on Capital, (April 1, 2017 to October 1, 2017), = Rs. 30,000, , 10, 100, , 6, 12, , = Rs.1,500, , Illustration 19, You are given the Balance Sheet of Mohit, Sohan and Rahul who are partners, sharing profits in the ratio of 2 : 2 : 1, as on March 31, 2017., Books of Mohit, Sohan and Rahul, Balance Sheet as on March 31, 2017., Liabilities, Creditors, Reserve Fund, Capitals:, Mohit, Sohan, Rahul, , Amount, (Rs.), 40,000, 25,000, 30,000, 25,000, 15,000, , Assets, Goodwill, Fixed assets, Stock, Sundry Debtors, Cash at bank, , Amount, (Rs.), 30,000, 60,000, 10,000, 20,000, 15,000, , 70,000, 1,35,000, , 1,35,000, , Sohan died on June 15, 2017. According to the Deed, his legal representatives, are entitled to:, (a) Balance in Capital Account;, (b) Share of goodwill valued on the basis of thrice the average of the past 4 years’ profits., , 2018-19
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Retirement/Death of a Partner, , 215, , (c) Share in profits up to the date of death on the basis of average profits for the past, 4 years., (d) Interest on capital account @ 12% p.a., , Profits for the years ending on March 31 of 2014, 2015, 2016, 2017, respectively were Rs. 15,000, Rs. 17,000, Rs. 19,000 and Rs. 13,000., The firm had taken a Joint Life Policy of Rs. 1,25,000, the annual premium, being charged to profit & loss account every year., Sohan’s legal representatives were to be paid the amount due. Mohit and, Rahul continued as partner by taking over Sohan’s share equally. Work out the, amount payable to Sohan’s legal representatives., Solution, Books of Mohit, Sohan and Rahul, Sohan’s Capital Account, Dr., , Cr., , Date, , Particulars, , J.F., , Amount, (Rs.), , Goodwill, Sohan’s Executor, , 12,000, 94,158, , Date, , Particulars, , Apr. 1 Balance b/d, Jun.15 Reserve Fund, Mohit’s Capital, Rahul’s Capital, Profit & Loss suspense, Joint life policy, Interest on Capital, , 1,06,158, , J.F., , Amount, (Rs.), 25,000, 10,000, 9,600, 9,600, 1,333, 50,000, 625, 1,06,158, , Working Notes, 1. Sohan’s Share of Goodwill, = Goodwill of the Firm, , 2, 5, , 2, = Rs. 19,200, 5, Average Profit, , = Rs. 48,000, Goodwill of the Firm, , = 3, = 3, , Rs. 64,000, = Rs. 48,000, 4, , 2. Profit and Loss, 1, (Share of Profit from the date of last Balance Sheet to the date of death) 2, 2, months., , 2018-19
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216, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, Rs. 64,000, 4, = Rs. 1,333, = Rs. 1,25,000, , 2, 5, , =, 3. Joint Life Policy, Sohan’s Share =, , 2, 5, , 2.5, 12, , Rs. 1,25,000, = Rs. 50,000, , 4. Interest on Capital, , = Rs. 25,000, , 12, 100, , 2.5, 12, , = Rs. 625, Do it Yourself, On December 31, 2015, the Balance Sheet of Pinki, Qureshi and Rakesh showed, as under :, Balance Sheet as on December 2015, Liabilities, Sundry Creditors, Reserve Fund, Capitals:, Pinki, 15,000, Qureshi, 10,000, Rakesh, 10,000, , Amount, (Rs.), 25,000, 20,000, , 35,000, , Assets, Buildings, Investments, Debtors, Bills Receivables, Stock, Cash, , 80,000, , Amount, (Rs.), 26,000, 15,000, 15,000, 6,000, 12,000, 6,000, 80,000, , The partnership deed provides that the profit be shared in the ratio of 2:1:1 and, that in the event of death of a partner, his executors be entitled to be paid out :, (a) The capital of his credit at the date of last Balance Sheet., (b) His proportion of reserves at the date of last Balance Sheet., (c) His proportion of profits to the date of death based on the average profits of, the last three completed years, plus 10%, and, (d) By way of goodwill, his proportion of the total profits for the three preceding, years. The net profit for the last three years were :, (Rs.), 2013, 16,000, 2014, 16,000, 2015, 15,400, Rakesh died on April 1, 2015. He had withdrawn Rs.5,000 to the date of his, death. The investment were sold at par and R’s Executors were paid off. Prepare, Rakesh’s Capital Account that of his executors., , 2018-19
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Retirement/Death of a Partner, , 217, , Terms Introduced in the Chapter, • Retirement of a Partner., • Death of a Partner., • Gaining Ratio, , •, •, , Executors of deceased Partner, Executor’s Account., , Summary, 1. New Profit Sharing Ratio: New profit sharing ratio is the ratio in which the, remaining partner will share future profits after the retirement or death of any, partner., New Share = Old Share + Acquired Share from the Outgoing partner, 2. Gaining Ratio: Gaining ratio is the ratio in which the continuing partners have, acquired the share from the retiring deceased partner., 3. T reatment of Goodwill: The basic rule is that gaining partner(s) shared, compensate the sacrificing partner to the extent of their gain for the respective, share of goodwill., If goodwill already appears in the books, it will be written off by debiting all, partner’s capital account in their old profit sharing ratio., 4. Revaluation of Assets and Liabilities: At the time of retirement/death of a partner,, there may be some assets which may not have been shown at their current, values. Similarly, there may be certain liabilities which have been shown at a, value different from the obligation to be met by the firm., Besides this, there may be unrecorded assets and liabilities which have to be, recorded., 5. Accumulated Profits or Losses: The reserves (Accumulated profits) or losses belong, to all the partners and should be transferred to capital account of all partners., 6. Retiring partner/deceased partner may be paid in one lump sum or, installments with interest., 7. At the time of retirement/death of a partner, the remaining partner may decide, to keep their capital contributions in their profit sharing ratio., , Questions for Practice, Short Answer Questions, , 1. What are the different ways in which a partner can retire from the firm., 2. Write the various matters that need adjustments at the time of retirement, of a partners., 3. Distinguish between sacrificing ratio and gaining tab., , 2018-19
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218, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , 4. Why do firm revaluate assets and reassers their liabilities on retirement or, on the event of death of a partner., 5. Why a retiring/deceased partner is entitled to a share of goodwill of the, firm., Long Answer Questions, , 1. Explain the modes of payment to a retiring partner., 2. How will you compute the amount payable to a deceased partner?, 3. Explain the treatment of goodwill at the time of retirement or on the event, of death of a partner?, 4. Discuss the various methods of computing the share in profits in the event, of death of a partner., , Numerical Questions, 1. Aparna, Manisha and Sonia are partners sharing profits in the ratio of 3 : 2 : 1., Manisha retires and goodwill of the firm is valued at Rs. 1,80,000. Aparna and, Sonia decided to share future in the ratio of 3 : 2. Pass necessary journal, entries., (Ans : Dr. Aparna’s Capital A/c by Rs. 18,000, Dr. Sonia’s Capital A/c by, Rs. 42,000, Cr. Manisha’s Capital A/c by Rs. 60,000)., 2. Sangeeta, Saroj and Shanti are partners sharing profits in the ratio of 2 : 3 : 5., Goodwill is appearing in the books at a value of Rs. 60,000. Sangeeta retires, and goodwill is valued at Rs. 90,000. Saroj and Shanti decided to share future, profits equally. Record necessary journal entries., 3. Himanshu, Gagan and Naman are partners sharing profits and losses in the, ratio of 3 : 2 : 1. On March 31, 2017, Naman retires., The various assets and liabilities of the firm on the date were as follows:, Cash Rs. 10,000, Building Rs. 1,00,000, Plant and Machinery Rs. 40,000, Stock, Rs. 20,000, Debtors Rs. 20,000 and Investments Rs. 30,000., The following was agreed upon between the partners on Naman’s retirement:, (i) Building to be appreciated by 20%., (ii) Plant and Machinery to be depreciated by 10%., (iii) A provision of 5% on debtors to be created for bad and doubtful debts., (iv) Stock was to be valued at Rs. 18,000 and Investment at Rs. 35,000., Record the necessary journal entries to the above effect and prepare the, revaluation account., 4. Naresh, Raj Kumar and Bishwajeet are equal partners. Raj Kumar decides to, retire. On the date of his retirement, the Balance Sheet of the firm showed the, following: General Reserves Rs. 36,000 and Profit and Loss Account (Dr.), Rs. 15,000., Pass the necessary journal entries to the above effect., , 2018-19
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Retirement/Death of a Partner, , 219, , 5. Digvijay, Brijesh and Parakaram were partners in a firm sharing profits in the, ratio of 2 : 2 : 1. Their Balance Sheet as on March 31, 2017 was as follows:, Liabilities, , Amount, (Rs.), , Creditors, Reserves, Digvijay’s Capital, Brijesh’s Capital, Parakaram’s Capital, , 49,000, 18,500, 82,000, 60,000, 75,500, , Assets, Cash, Debtors, Stock, Buildings, Patents, , 2,85,000, , Amount, (Rs.), 8,000, 19,000, 42,000, 2,07,000, 9,000, 2,85,000, , Brijesh retired on March 31, 2017 on the following terms:, (i) Goodwill of the firm was valued at Rs. 70,000 and was not to appear in the, books., (ii) Bad debts amounting to Rs. 2,000 were to be written off., (iii) Patents were considered as valueless., Prepare Revaluation Account, Partners’ Capital Accounts and the Balance, Sheet of Digvijay and Parakaram after Brijesh’s retirement., (Ans : Loss on Revaluation Rs. 11,000, Balance of Capital Accounts: Digvijay, Rs. 66,333 and Parakaram Rs. 67,667, Balance Sheet Total Rs. 2,74,000)., 6. Radha, Sheela and Meena were in partnership sharing profits and losses in, the proportion of 3:2:1. On April 1, 2017, Sheela retires from the firm. On that, date, their Balance Sheet was as follows:, Liabilities, Trade Creditors, Bills Payable, Expenses Owing, General Reserve, Capitals:, Radha, Sheela, Meena, , Amount, (Rs.), 3,000, 4,500, 4,500, 13,500, 15,000, 15,000, 15,000, , Assets, Cash-in-Hand, Cash at Bank, Debtors, Stock, Factory Premises, Machinery, Losse Tools, , Amount, (Rs.), 1,500, 7,500, 15,000, 12,000, 22,500, 8,000, 4,000, , 45,000, 70,500, , 70,500, , The terms were:, a) Goodwill of the firm was valued at Rs. 13,500., b) Expenses owing to be brought down to Rs. 3,750., c) Machinery and Loose Tools are to be valued at 10% less than their book, value., d) Factory premises are to be revalued at Rs. 24,300., , 2018-19
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220, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , Prepare:, 1. Revaluation account, 2. Partner’s capital accounts and, 3. Balance sheet of the firm after retirement of Sheela., (Ans : Profit on Revaluation Rs. 1,350, Balance of Capital Accounts: Radha Rs., 19,050 and Meena Rs. 16,350, Balance Sheet Total = Rs. 71,100)., 7. Pankaj, Naresh and Saurabh are partners sharing profits in the ratio of 3 : 2 :, 1. Naresh retired from the firm due to his illness. On that date the Balance, Sheet of the firm was as follows:, Books of Pankaj, Naresh and Saurabh, Balance Sheet as on March 31, 2017, Liabilities, General Reserve, Sundry Creditors, Bills Payable, Outstanding Salary, Provision for Legal Damages, Capitals:, Pankaj, 46,000, Naresh, 30,000, Saurabh, 20,000, , Amount, (Rs.), 12,000, 15,000, 12,000, 2,200, 6,000, , Assets, Bank, Debtors, Less: Provision for, Doubtful Debt, Stock, Furniture, Premises, , Amount, (Rs.), 7,600, 6,000, 400, , 5,600, 9,000, 41,000, 80,000, , 96,000, 1,43,200, , 1,43,200, , Additional Information, (i) Premises have appreciated by 20%, stock depreciated by 10% and provision, for doubtful debts was to be made 5% on debtors. Further, provision for, legal damages is to be made for Rs. 1,200 and furniture to be brought up to, Rs. 45,000., (ii) Goodwill of the firm be valued at Rs. 42,000., (iii) Rs. 26,000 from Naresh’s Capital account be transferred to his loan account, and balance be paid through bank; if required, necessary loan may be, obtained form Bank., (iv) New profit sharing ratio of Pankaj and Saurabh is decided to be 5 : 1., Give the necessary ledger accounts and balance sheet of the firm after Naresh’s, retirement., (Ans : Profit or Revaluation Rs. 18,000, Balance of Capital Account of Pankaj,, Rs. 47,000 and of Saurabh, Rs. 25,000)., (Total Amount at Credit in Naresh’s Capital = Rs. 54,000, Balance Sheet Total, = Rs. 1,54,800)., , 2018-19
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Retirement/Death of a Partner, , 221, , 8. Puneet, Pankaj and Pammy are partners in a business sharing profits and, losses in the ratio of 2 : 2 : 1 respectively. Their balance sheet as on March 31,, 2017 was as follows:, Books of Puneet, Pankaj and Pammy, Balance Sheet as on March 31, 2017, Liabilities, , Amount, (Rs.), , Sundry Creditors, Capital Accounts:, Puneet, 60,000, Pankaj, 1,00,000, Pammy, 40,000, Reserve, , 1,00,000, , 2,00,000, 50,000, 3,50,000, , Assets, Cash at Bank, Stock, Sundry Debtors, Investments, Furniture, Buildings, , Amount, (Rs.), 20,000, 30,000, 80,000, 70,000, 35,000, 1,15,000, 3,50,000, , Mr. Pammy died on September 30, 2017. The partnership deed provided the, following:, (i) The deceased partner will be entitled to his share of profit up to the date of, death calculated on the basis of previous year’s profit., (ii) He will be entitled to his share of goodwill of the firm calculated on the, basis of 3 years’ purchase of average of last 4 years’ profit. The profits for, the last four financial years are given below:, for 2013–14; Rs. 80,000; for 2014–15, Rs. 50,000; for 2015–16, Rs. 40,000;, for 2016–17, Rs. 30,000., The drawings of the deceased partner up to the date of death amounted to, Rs. 10,000. Interest on capital is to be allowed at 12% per annum., Surviving partners agreed that Rs. 15,400 should be paid to the executors, immediately and the balance in four equal yearly instalments with interest, at 12% p.a. on outstanding balance., Show Mr. Pammy’s Capital account, his Executor’s account till the settlement, of the amount due., (Ans : Total amount due is Rs. 75,400), 9. Following is the Balance Sheet of Prateek, Rockey and Kushal as on March 31, 2017., Books of Prateek, Rockey and Kushal, Balance Sheet as on March 31, 2017, Liabilities, Sundry Creditors, General Reserve, Capital Accounts:, Prateek, Rockey, Kushal, , Amount, (Rs.), 16,000, 16,000, 30,000, 20,000, 20,000, , 70,000, , Assets, Bills Receivable, Furniture, Stock, Sundry Debtors, Cash at Bank, Cash in Hand, , 1,02,000, , 2018-19, , Amount, (Rs.), 16,000, 22,600, 20,400, 22,000, 18,000, 3,000, 1,02,000
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222, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , Rockey died on June 30, 2017. Under the terms of the partnership deed, the, executors of a deceased partner were entitled to:, a) Amount standing to the credit of the Partner’s Capital account., b) Interest on capital at 5% per annum., c) Share of goodwill on the basis of twice the average of the past three, years’ profit and, d) Share of profit from the closing date of the last financial year to the, date of death on the basis of last year’s profit., Profits for the year ending on March 31, 2015, March 31, 2016 and, March 31, 2017 were Rs. 12,000, Rs. 16,000 and Rs. 14,000 respectively., Profits were shared in the ratio of capitals., Pass the necessary journal entries and draw up Rockey’s capital account, to be rendered to his executor., (Ans : Sony’s Executor Account is Rs. 33,821), 10. Narang, Suri and Bajaj are partners in a firm sharing profits and losses in, proportion of 1 2 , 1 6 and 1 3 respectively. The Balance Sheet on April 1, 2015, was as follows:, Books of Suri and Bajaj, Balance Sheet as on April 1, 2015, Liabilities, Bills Payable, Sundry Creditors, Reserves, Capital Accounts:, Narang, Suri, Bajaj, , Amount, (Rs.), 12,000, 18,000, 12,000, 30,000, 30,000, 28,000, , 88,000, , Assets, Freehold Premises, Machinery, Furniture, Stock, Sundry Debtors, Less: Reserve for Bad, Debt, Cash, , 1,30,000, , Amount, (Rs.), 40,000, 30,000, 12,000, 22,000, 20,000, 1,000, , 19,000, 7,000, 1,30,000, , Bajaj retires from the business and the partners agree to the following:, a) Freehold premises and stock are to be appreciated by 20% and 15%, respectively., b) Machinery and furniture are to be depreciated by 10% and 7% respectively., c) Bad Debts reserve is to be increased to Rs. 1,500., d) Goodwill is valued at Rs. 21,000 on Bajaj’s retirement., e) The continuing partners have decided to adjust their capitals in their new, profit sharing ratio after retirement of Bajaj. Surplus/deficit, if any, in their, capital accounts will be adjusted through current accounts., Prepare necessary ledger accounts and draw the Balance Sheet of the, reconstituted firm., (Ans : Profit on Revaluation, Rs. 6,960; Balance in Capital Accounts of Narang,, Rs. 49,230; and that of Suri, Rs. 16,410. Amount at Credit in Bajaj Capital is Rs. 41,320)., , 2018-19
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Retirement/Death of a Partner, , 223, , 11. The Balance Sheet of Rajesh, Pramod and Nishant who were sharing profits in, proportion to their capitals stood as on March 31, 2015:, , Liabilities, Bills Payable, Sundry Creditors, Reserve Fund, Capital Accounts:, Rajesh, Pramod, Nishant, , Books of Rajesh, Pramod and Nishant, Balance Sheet as on March 31, 2015, Amount Assets, (Rs.), 6,250, 10,000, 2,750, 20,000, 15,000, 15,000, , 50,000, , Factory Building, Debtors, Less: Reserve, Bills Receivable, Stock, Plant and Machinery, Bank Balance, , 69,000, , Amount, (Rs.), 12,000, 10,500, 500, , 10,000, 7,000, 15,500, 11,500, 13,000, 69,000, , Pramod retired on the date of Balance Sheet and the following adjustments, were made:, a) Stock was valued at 10% less than the book value., b) Factory buildings were appreciated by 12%., c) Reserve for doubtful debts be created up to 5%., d) Reserve for legal charges to be made at Rs. 265., e) The goodwill of the firm be fixed at Rs. 10,000., f) The capital of the new firm be fixed at Rs. 30,000. The continuing partners, decide to keep their capitals in the new profit sharing ratio of 3 : 2., Pass journal entries and prepare the balance sheet of the reconstituted firm, after transferring the balance in Pramod’s Capital account to his loan account., (Ans : Loss on Revaluation, Rs. 400 ; Balance in Capital Accounts of Rajesh,, Rs. 18,940; and of Nishant, Rs. 14,705; Pramod’s Loan Rs. 18,705, Balance, Sheet Total = Rs. 65,220)., 12. Following is the Balance Sheet of Jain, Gupta and Malik as on March 31, 2016., Books of Jain, Gupta and Malik, Balance Sheet as on March 31, 2016, Liabilities, , Amount, (Rs.), , Sundry Creditors, Telephone bills Outstanding, Accounts Payable, Accumulated profits, Capitals :, Jain, Gupta, Malik, , 40,000, 60,000, 20,000, , 19,800, 300, 8,950, 16,750, , 1,20,000, , Assets, Land and Building, Bonds, Cash, Bills Receivable, Sundry Debtors, Stock, Office Furniture, Plants and Machinery, Computers, , 1,65,800, , 2018-19, , Amount, (Rs.), 26,000, 14,370, 5,500, 23,450, 26,700, 18,100, 18,250, 20,230, 13,200, 1,65,800
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224, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , The partners have been sharing profits in the ratio of 5:3:2. Malik decides to, retire from business on April 1, 2016 and his share in the business is to be, calculated as per the following terms of revaluation of assets and liabilities :, Stock, Rs.20,000; Office furniture, Rs.14,250; Plant and Machinery Rs.23,530;, Land and Building Rs.20,000., A provision of Rs.1,700 to be created for doubtful debts. The goodwill of the firm, is valued at Rs.9,000., The continuing partners agreed to pay Rs.16,500 as cash on retirement of, Malik, to be contributed by continuing partners in the ratio of 3:2. The balance, in the capital account of Malik will be treated as loan., Prepare Revaluation account, capital accounts, and Balance Sheet of the, reconstituted firm., 13. Arti, Bharti and Seema are partners sharing profits in the proportion of 3:2:1, and their Balance Sheet as on March 31, 2016 stood as follows :, Books of Arti, Bharti and Seema, Balance Sheet as on March 31, 2016, Liabilities, Bills Payable, Creditors, General Reserve, Capitals:, Arti, Bharti, Seema, , Amount, (Rs.), 12,000, 14,000, 12,000, 20,000, 12,000, 8,000, , 40,000, 78,000, , Assets, , Amount, (Rs.), , Buildings, Cash in Hand, Bank, Debtors, Bills Receivable, Stock, Investment, , 21,000, 12,000, 13,700, 12,000, 4,300, 1,750, 13,250, 78,000, , Bharti died on June 12, 2016 and according to the deed of the said partnership,, her executors are entitled to be paid as under :, (a) The capital to her credit at the time of her death and interest thereon @, 10% per annum., (b) Her proportionate share of reserve fund., (c) Her share of profits for the intervening period will be based on the sales, during that period, which were calculated as Rs.1,00,000. The rate of profit, during past three years had been 10% on sales., (d) Goodwill according to her share of profit to be calculated by taking twice, the amount of the average profit of the last three years less 20%. The profits, of the previous years were :, 2013, – Rs.8,200, 2014, – Rs.9,000, 2015, – Rs.9,800, The investments were sold for Rs.16,200 and her executors were paid out. Pass, the necessary journal entries and write the account of the executors of Bharti., , 2018-19
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Retirement/Death of a Partner, , 225, , 14. Nithya, Sathya and Mithya were partners sharing profits and losses in the, ratio of 5:3:2. Their Balance Sheet as on March 31, 2015 was as follows :, Books of Nithya, Sathya and Mithya, Balance Sheet at March 31, 2015, Liabilities, , Amount, (Rs.), , Creditors, Reserve Fund, Capitals:, Nithya, Sathya, Mithya, , 14,000, 6,000, 30,000, 30,000, 20,000, , 80,000, , Assets, Investments, Goodwill, Premises, Patents, Machinery, Stock, Debtors, Bank, , 1,00,000, , Amount, (Rs.), 10,000, 5,000, 20,000, 6,000, 30,000, 13,000, 8,000, 8,000, 1,00,000, , Mithya dies on August 1, 2015. The agreement between the executors of Mithya, and the partners stated that :, (a) Goodwill of the firm be valued at 2, , 1, times the average profits of last four, 2, , years. The profits of four years were : in 2011-12, Rs.13,000; in 2012-13,, Rs.12,000; in 2013-14, Rs.16,000; and in 2014-15, Rs.15,000., (b) The patents are to be valued at Rs.8,000, Machinery at Rs.25,000 and, Premises at Rs.25,000., (c) The share of profit of Mithya should be calculated on the basis of the profit, of 2014-15., (d) Rs.4,200 should be paid immediately and the balance should be paid in 4, equal half-yearly instalments carrying interest @ 10%., Record the necessary journal entries to give effect to the above and write the, executor’s account till the amount is fully paid. Also prepare the Balance Sheet, of Nithya and Sathya as it would appear on August 1, 2015 after giving effect to, the adjustments., , Check-list to Test your Understanding, Test your understanding – I, 1. (b),, , 2. (c),, , 3. (b),, , 4. (a)., , Test your understanding – II, 1. (a),, , 2. (a),, , 3. (c),, , 4. (b)., , 2018-19
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Dissolution of Partnership Firm, , 5, , Y, LEARNING OBJECTIVES, After studying this chapter, you will be able to :, • State the meaning of, dissolution of, partnership firm;, • Differentiate between, dissolution of partnership and dissolution of a, partnership firm;, • Describe the various, modes of dissolution of, the partnership firm;, • Explain the rules, relating to the settlement, of claims among all, partners;, • Prepare Realisation, Account;, , ou have learnt about the reconstitution of a, partnership firm which takes place on account, of admission, retirement or death of a partner. In such, a situation while the existing partnership is dissolved,, the firm may continue under the same name if the, partners so decide. In other words, it results in the, dissolution of a partnership but not that of the firm., According to Section 39 of the partnership Act 1932,, the dissolution of partnership between all the partners, of a firm is called the dissolution of the firm. That, means the Act recognises the difference in the, breaking of relationship between all the partners of a, firm and between some of the partners; and it is the, breaking or discontinuance of relationship between, all the partners which is termed as the dissolution of, partnership firm. This brings an end to the existence, of firm, and no business is transacted after, dissolution except the activities related to closing of, the firm as the affairs of the firm are to be wound up, by selling firm’s assets and paying its liabilities and, discharging the claims of the partners., 5.1 Dissolution of Partnership, As stated earlier dissolution of partnership changes, the existing relationship between partners but the, firm may continue its business as before. The, dissolution of partnership may take place in any of, the following ways:, (1) Change in existing profit sharing ratio among, partners;, (2) Admission of a new partner;, , 2018-19
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Dissolution of Partnership Firm, , (3), (4), (5), (6), (7), , 227, , Retirement of a partner;, Death of a partner;, Insolvency of a partner;, Completion of the venture, if partnership is formed for that; and, Expiry of the period of partnership, if partnership is for a specific period, of time;, , 5.2 Dissolution of a firm, Dissolution of a partnership firm may take place without the intervention of, court or by the order of a court, in any of the ways specified later in this section., It may be noted that dissolution of the firm necessarily brings in dissolution of, the partnership., Dissolution of a firm takes place in any of the following ways:, 1. Dissolution by Agreement: A firm is dissolved :, (a) with the consent of all the partners or, (b) in accordance with a contract between the partners., 2. Compulsory Dissolution: A firm is dissolved compulsorily in the following cases:, (a) when all the partners or all but one partner, become insolvent, rendering, them incompetent to sign a contract;, (b) when the business of the firm becomes illegal; or, (c) when some event has taken place which makes it unlawful for the partners, to carry on the business of the firm in partnership, e.g., when a partner, who is a citizen of a country becomes an alien enemy because of the, declaration of war with his country and India., 3. On the happening of certain contingencies: Subject to contract between the, partners, a firm is dissolved :, (a) if constituted for a fixed term, by the expiry of that term;, (b) if constituted to carry out one or more ventures, by the completion thereof;, (c) by the death of a partner;, (d) by the adjudication of a partner as an insolvent., 4. Dissolution by Notice: In case of partnership at will, the firm may be dissolved, if any one of the partners gives a notice in writing to the other partners,, signifying his intention of seeking dissolution of the firm., 5. Dissolution by Court: At the suit of a partner, the court may order a, partnership firm to be dissolved on any of the following grounds:, (a) when a partner becomes insane;, (b) when a partner becomes permanently incapable of performing his duties, as a partner;, (c) when a partner is guilty of misconduct which is likely to adversely affect, the business of the firm;, , 2018-19
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228, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , (d) when a partner persistently commits breach of partnership agreement;, (e) when a partner has transferred the whole of his interest in the firm to a, third party;, (f) when the business of the firm cannot be carried on except at a loss; or, (g) when, on any ground, the court regards dissolution to be just and, equitable., Distinction between Dissolution of Partnership and Dissolution of Firm, Basis, , Dissolution of Partnership, , Dissolution of Firm, , 1. Termination of, business, 2. Settlement of, assets and, liabilities, 3. Court’s, intervention, , The business is not, terminated., Assets and liabilities are, revalued and new balance, sheet is drawn., Court does not intervene, because partnership is, dissolved by mutual, agreement., Economic relationship, between the partners, continues though in, a changed form., Does not require because, the business is not, terminated., , The business of the firm is, closed., Assets are sold and, liabilities are paid-off., , 4. Economic, relationship, , 5. Closure of books, , 6. Other dissolution It may or may not involve, dissolution of the firm., , A firm can be dissolved by, the court’s order., , Economic relationship, between the partners, comes to an end., The books of account are, closed., It necessarily involves, dissolution of partnership., , Test your Understanding – I, State giving reasons, which of the following statements are true or false:, 1. Dissolution of a partnership is different from dissolution of a firm,, 2. A partnership is dissolved when there is a death of a partner,, 3. A firm is dissolved when all partners give consent to it., 4. A firm is compulsorily dissolved when a partner decide to retire., 5. Dissolution of a firm necessarily involves dissolution of partnership., 6. A firm is compulsorily dissolved when all partners or when all except one partner, become involvent., 7. Court can order a firm to be dissolved when a partner becomes insane., 8. Dissolution of partnership can not take place without intervention of, the court., , 2018-19
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Dissolution of Partnership Firm, , 229, , 5.3 Settlement of Accounts, In case of dissolution of a firm, the firm ceases to conduct business and has to, settle its accounts. For this purpose, it disposes off all its assets for satisfying all, the claims against it. In this context it should be noted that, subject to agreement, among the partners, the following rules as provided in Section 48 of the, Partnership Act 1932 shall apply., (a) Treatment of Losses, Losses, including deficiencies of capital, shall be paid :, (i) first out of profits,, (ii) next out of capital of partners, and, (iii) lastly, if necessary, by the partners individually in their profits 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 each partner proportionately what is due to him/her from the, firm for advances as distinguished from capital (i.e. partner’ loan);, (iii) In paying to each partner proportionately what is due to him on account, of capital; and, (iv) the residue, if any, shall be divided among the partners in their profit, sharing ratio., Thus, the amount realised from assets along with contribution from partners, if, required, shall be utilised first to pay off the outside liabilities of the firm such as, creditors, loans, bank overdraft, bill payables, etc. (it may be noted that secured, loans have precedence over the unsecured loans); the balance should be applied, to repay loans and advances made by the partners to the firm. (in case the, balance amount is not adequate enough to pay off such loans and advances,, they are to be paid propartionately); and surplus, if any is to be utilised in, settlement of the capital account balances, after adjusting all profits and losses., Private Debts and Firm’s Debts: Where both the debts of the firm and private debts of, a partner co-exist, the following rules, as stated in Section 49 of the Act, shall apply., (a) The property of the firm shall be applied first in the payment of debts of the, firm and then the surplus, if any, shall be divided among the partners as, per their claims, which can be utilised for payment of their private liabilities., (b) The private property of any partner shall be applied first in payment of, his private debts and the surplus, if any, may be utilised for payment of, the firm’s debts, in case the firm’s liabilities exceed the firm’s assets., It may be noted that the private property of the partner does not include the, personal properties of his wife and children. Thus, if the assets of the firm are, not adequate enough to pay off firm’s liabilities, the partners have to contribute, out of their net private assets (private assets minus private liabilities)., , 2018-19
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230, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, Inability of a Partner to Contribute Towards Deficiency, , In the context of settlement of accounts among the partners there is still another, important aspect to be noted, i.e., when a partner is unable to contribute towards, the deficiency of his capital account (the account finally showing a debit balance),, he/she is said to be insolvent, and the sum not recoverable is treated as capital loss, for the firm. In the absence of any agreement, to the contrary, such a capital loss is, to be borne by the remaining solvent partners in accordance with the principle laid, down in Garner vs. Murray case, which states that the solvent partners have to bear, such loss in the ratio of their capitals as on the date of dissolution. However, the, accounting treatment relating to dissolution of partnership on account of insolvency, of partners is not being taken up at this stage., , 5.4 Accounting Treatment, When the firm is dissolved, its books of account are to be closed and the profit or, loss arising on realisation of its assets and discharge of liabilities is to be, computed. For this purpose, a Realisation Account is prepared to ascertain the, net effect (profit or loss) of realisation of assets and payment of liabilities which, may be is transferred to partner’s capital accounts in their profit sharing ratio., Hence, all assets (other than cash in hand bank balance and fictitious assets, if, any), and all external liabilities are transferred to this account. It also records, the sale of assets, and payment of liabilities and realisation expenses. The balance, in this account is termed as profit or loss on realisation which is transferred to, partners’ capital accounts in thier profit sharing ratio (see figure 5.1), Realisation Account, , Dr., Particulars, , Amount, (Rs.), , Land and Building, Plant and Machinery, Furniture and Fittings, Bills receivables, Sundry debtors, Cash/Bank, (payment of liabilities), Cash/Bank, (payment of unrecorded liabilities), Partner’s capital account, (liability assumed by the partner), Profit (transferred to partners’, capital account’s in their profit, sharing ratio), Total, , xxx, xxx, xxx, xxx, xxx, xxx, xxx, xxx, , Particulars, Sundry creditors, Bills payables, Bank overdraft, Outstanding expenses, Provision for doubtful debts, Cash/Bank (sale of assets), Partner’s capital account, (assets taken by the partner), Loss (transferred to partners, capital accounts), , Cr., Amount, (Rs.), xxx, xxx, xxx, xxx, xxx, xxx, xxx, xxx, , xxx, , xxxxx, , Total, , Fig. 5.1: Format of Realisation Account, , 2018-19, , xxxxx
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Dissolution of Partnership Firm, , 231, , Illustration 1, Supriya and Monika are partners, who share profit in the ratio of 3:2. Following, is the balance sheet as on March 31, 2017., Balance Sheet of Supriya and Monika as on March 31, 2017, Liabilities, , Amount, (Rs.), , Supriya’s Capital, Monika’s Capital, Sundry Creditors, Reserve fund, , 32,500, 11,500, 48,000, 13,500, , Assets, Cash and Bank, Stock, Sundry debtors, 21,500, Less: Provision, 500, for doubtful debts, Fixed Assets, , 1,05,500, , Amount, (Rs.), 40,500, 7,500, 21,000, 36,500, 1,05,500, , The firm was dissolved on March 31, 2017. Close the books of the firm with, the following information:, (i) Debtors realised at a discount of 5%,, (ii) Stock realised at Rs.7,000,, (iii) Fixed assets realised at Rs.42,000,, (iv) Realisation expenses of Rs.1,500,, (v) Creditors are paid in full., Prepare necessary ledger accounts., Solution, Books of Supriya and Monika, Realisation Account, Dr., Particulars, Assets transferred:, Stock, Sundry debtors, Fixed assets, Bank, Creditors, Realisation expenses, Profit transferred to:, Supriya Capital, 1,755, Monika Capital, 1,170, , Cr., Amount, (Rs.), 7,500, 21,500, 36,500, 48,000, 1,500, , Particulars, Provision for doubtful debts, Sundry creditors, Bank, Debtors, 20,425, Stock, 7,000, Fixed assets, 42,000, , Amount, (Rs.), 500, 48,000, , 69,425, , 2,925, 1,17,925, , 2018-19, , 1,17,925
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232, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, Partners Capital Accounts, , Dr., , Cr., , Date Particulars, , J.F. Supriya Monika, (Rs.), (Rs.), , Bank, , Date Particulars, , 42,355 18,070, , Balance b/d, Reserve fund, Realisation (Profit), , 42,355 18,070, , J.F. Supriya Monika, (Rs.), (Rs.), 32,500 11,500, 8,100 5,400, 1,755 1,170, 42,355 18,070, , Cash and Bank Account, Dr., , Cr., , Date Particulars, , J.F., , Amount, (Rs.), , Balance b/d, Realisation, , Date Particulars, , 40,500, 69,425, , Realisation, Realisation, Supriya’s Capital, Monika’s Capital, , 1,09,925, , J.F., , Amount, (Rs.), 48,000, 1,500, 42,355, 18,070, 1,09,925, , 5.4.1 Journal Entries, 1. For trnasfer of assets, All asset accounts excluding cash, bank and the fictitious assets, if any are, closed by transfer to the debit of Realisation Account at their book values. It, may be noted that sundry debtors are transferred at gross value and the, provision for doubtful debts is transferred to the credit side of Realisation, Account along with liabilities. The same thing will apply to fixed assets, if, provision for depreciation account is maintained., Realisation A/c, To Assets (Individually) A/c, , Dr., , 2. For transfer of liabilities, All external liability accounts including provisions, if any, are closed by, transferring them to the credit of Realisation account., Liabilities (individually), To Realisation A/c, , Dr., , 3. For sale of assets, Bank A/c, To Realisation A/c, , Dr., , 4. For an asset taken over by a partner, Partner’s Capital A/c, To Realisation A/c, , Dr., , 2018-19
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Dissolution of Partnership Firm, , 233, , 5. For payment of liabilities, Realisation A/c, To Bank A/c, , Dr., , 6. For a liability which a partner takes responsibility to discharge, Ralisation A/c, To Partner’s Capital A/c, , Dr., , 7. For settlement with the creditor through transfer of assets when a creditor, accepts an asset in full and final settlement of his account, journal entry, needs to be recorded. But, if the creditor accepts an asset only as part payment, of his/her dues, the entry will be made for cash payment only. For example,, a creditor to whom Rs. 10,000 was due accepts office equipment worth, Rs. 8,000 and is paid Rs. 2,000 in cash, the following entry shall be made, for the payment of Rs. 2,000 only., Realisation A/c, To Bank A/c, , Dr., , However, when a creditor accepts an asset whose value is more than the, amount due to him, he/she will pay cash to the frim for the difference for which, the entry will be:, Bank A/c, To Realisation A/c, , Dr., , 8. For payment of realisation expenses, (a) When some expenses are incurred and paid by the firm in the process of, realisation of assets and payment of liabilities:, Realisation A/c, To Bank A/c, , Dr., , (b) When realisation expenses are paid by a partner on behalf of the firm:, Realisation A/c, To Partner’s Capital A/c, , Dr., , (c) When a partner has agreed to undertake the dissolution work for an, agreed remuneration bear the realisation expenses:, (i) if payment of realisation expenses is made by the firm, Partner’s Capital A/c, To Bank A/c, , Dr., , (ii) if the partner himself pays the realisation expenses, no entry is required, (iii) For agreed remuneration to such partner, Realisation A/c, To Partner’s Capital A/c, , Dr., , 2018-19
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234, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , 9. For realisation of any unrecorded assets including goodwill, if any, Bank A/c, To Realisation A/c, , Dr., , 10. For settlement of any unrecorded liability, Realisation A/c, To Bank A/c, , Dr., , 11. For transfer of profit and loss on realisation, (a) In case of profit on realisation, Realisation A/c, Dr., To Partners’ Capital A/c (individually) A/c, , (b) In case of loss on realisation, Partners’ Capital A/c (individually), To Realisation A/c, , Dr., , 12. For transfer of accumulated profits in the form of reserve fund or general, reserve:, Reserve Fund/General Reserve A/c, To Partners’ Capital A/c (individually), , Dr., , 13. For transfer of fictitious assets, if any, to partners’ capital accounts in, their profit sharing ratio:, Partners’ Capital A/c (individually), To Fictitious Asset A/c, , Dr., , 14. For payment of loans due to partners, Partner’s Loan A/c, To Bank A/c, , Dr., , 15. For settlement of partners’ accounts, If the partner’s capital account shows a debit balance, he brings in the, necessary cash for which the entry will be:, Bank A/c, To Partner’s Capital A/c, , Dr., , The balance is paid to partners whose capital accounts show a credit balance, and the following entry is recorded., Partners’ Capitals A/cs (individually), To Bank A/c, , Dr., , It may be noted that the aggregate amount finally payable to the partners, must equal to the amount available in bank and cash accounts. Thus, all, accounts of a firm are closed in case of dissolution., , 2018-19
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Dissolution of Partnership Firm, , 235, Test your Understanding – II, , Tick (P, P) the Correct Answer, 1. On dissolution of a firm, bank overdraft is transferred to :, (a) Cash Account, (b) Bank Account, (c) Realisation Aaccount, (d) Partner’s capital Account., 2. On dissolution of a firm, partner’s loan account is transferred to:, (a) Realisation Account, (b) Partner’s Capital Account, (c) Partner’s Current Account, (d) None of the above., 3. After transferring liabilities like creditors and bills payables in the Realisation, Account, in the absence of any information regarding then payment, such, liabilities are treated as:, (a) Never paid, (b) Fully paid, (c) Partly paid, (d) None of the above., 4. When realisation expenses are paid by the firm on behalf of a partner, such, expenses are debited to:, (a) Realisation Account, (b) Partner’s Capital Account, (c) Partner’s Loan Account, (d) None of the above., 5. Unrecorded assets when taken over by a partner are shown in :, (a) Debit of Realisation Account, (b) Debit of Bank Account, (c) Credit of Realisation Account, (d) Credit of Bank Account., 6. Unrecorded liabilities when paid are shown in:, (a) Debit of Realisation Account, (b) Debit of Bank Account, (c) Credit of Realisation Account, (d) Credit of Bank Account., 7. The accumulated profits and reserves are transferred to :, (a) Realisation Account, (b) Partners’ Capital Accounts, (c) Bank Account, (d) None of the above., 8. On dissolution of the firm, partner’s capital accounts are closed through:, (a) Realisation Account, (b) Drawings Account, (c) Bank Account, (d) Loan Account., , 2018-19
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236, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , Illustration 2, Sita, Rita and Meeta are partners sharing profit and losses in the ratio of 2:2:1, Their balance sheet as on March 31, 2017 is as follows:, Balance Sheet of Sita, Rita and Meeta as on March 31, 2017, Liabilities, Reserve fund, Creditors, Capitals:, Sita, Rita, Meeta, , Amount, (Rs.), 2,500, 2,000, 5,000, 2,000, 1,000, , Assets, , Amount, (Rs.), , Cash at bank, Stock, Furniture, Debtors, Plant and Machinery, , 2,500, 2,500, 1,000, 2,000, 4,500, , 8,000, 12,500, , 12,500, , They decided to dissolve the business. The following amounts were realised:, Plant and Machinery Rs.4,250, Stock Rs.3,500, Debtors Rs.1850, Furniture 750., Sita agreed to bear all realisation expenses. For the service Sita is paid Rs.60., Actual expenses on realisation amounted to Rs.450.Creditors paid 2% less., There was an unrecorded assets of Rs.250, which was taken over by Rita at, Rs.200., Prepare the necessary accounts to close the books of the firm., Solution, Books of Sita, Rita and Meeta, Realisation Account, , Dr., Particulars, , Stock, Furniture, Debtors, Plant and Machinery, Bank [Creditors], Sita’s capital, (realisation expenses], Profit transferred to:, Sita’s capital, 212, Rita’s capital, 212, Meeta’s capital, 106, , Amount, (Rs.), 2,500, 1,000, 2,000, 4,500, 1,960, 60, , Cr., , Particulars, Creditors, Rita’s capital, [Unrecorded assets], Bank [assets realised]:, Plant and Machinery, Debtors, Stock, Furniture, , Amount, (Rs.), 2,000, 200, 4,250, 1,850, 3,500, 750, , 10,350, , 530, 12,550, , 2018-19, , 12,550
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Dissolution of Partnership Firm, , 237, Partner’s Capital Accounts, , Dr., Date Particulars, , J.F., , Bank, Realisation (asset), Bank, , Sita, (Rs.), , Rita Meeta Date Particulars, (Rs.) (Rs.), , 450, , Balance b/d, Reserve fund, Realisation, [profit], Realisation, (expenses), , 200, 5,822 3,012 1,606, , 6,272 3,212 1,606, , Cr., J.F., , Sita, (Rs.), , Rita Meeta, (Rs.) (Rs.), , 5,000 2,000 1,000, 1,000 1,000, 500, 212, , Date Particulars, , J.F., , Balance b/d, Realisation, (assets realised), , Amount, (Rs.), , Date Particulars, , 2,500, , Cr., J.F., , Realisation (Creditor), Sita’s Capital, [expenses], Sita’s Capital, Rita’s Capital, Meeta’s capital, , 10,350, , 106, , 60, —, —, 6,272 3,212 1,606, , Bank Account, , Dr., , 212, , 12,850, , Amount, (Rs.), 1,960, 450, 5,822, 3,012, 1,606, 12,850, , llustration 3, Nayana and Arushi were partners sharing profits equally Their Balance Sheet, as on March 31, 2017 was as follows:, Balance Sheet of Nayana and Arushi as on March 31, 2017, Liabilities, Capitals:, Nayana, 1,00,000, Arushi, 50,000, Creditors, Arushi’s current account, Workmen Compensation Fund, Bank overdraft, , Amount, (Rs.), , 1,50,000, 20,000, 10,000, 15,000, 5,000, , Assets, Bank, Debtors, Stock, Furniture, Machinery, Nayana’s current account, , 2,00,000, , Amount, (Rs.), 30,000, 25,000, 35,000, 40,000, 60,000, 10,000, 2,00,000, , The firm was dissolved on the above date:, 1. Nayana took over 50% of the stock at 10% less on its book value, and, the remaining stock was sold at a gain of 15%. Furniture and Machinery, realised for Rs.30,000 and Rs.50,000 respectively;, 2. There was an unrecorded investment which was sold for Rs. 25,000;, , 2018-19
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238, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , 3. Debtors realised 90% only and Rs.1,200 were recovered for bad debts, written-off last year;, 4. There was an outstanding bill for repairs which had to be paid for, Rs.2,000., Record necessary journal entries and prepare ledger accounts to close the, books of the firm., Solution, Books of Nayana and Arushi, Journal, Date, 2017, , Particulars, , L.F., , Realisation A/c, Dr., To Debtors, To Stock A/c, To Furniture A/c, To Machinery A/c, (Assets transferred to Realisation Account), Creditors A/c, Dr., Bank overdraft A/c, Dr., To Realisation A/c, (Liabilities transferred to Realisation Account), Realisation A/c, To Bank A/c, (Creditors, Bank overdraft, Outstanding, repair bill paid), , Dr., , Bank A/c, To Realisation A/c, (Assets sold and bad debts recovered), , Dr., , Debit, Amount, (Rs.), 1,60,000, , 25,000, 35,000, 40,000, 60,000, 20,000, 5,000, 25,000, 27,000, 27,000, , 1,57,825, 1,57,825, , Nayana’s Capital A/c, Dr., To Realisation A/c, (Half stock take over by Nayana at 10% less), , 15,750, , Realisation A/c, To Nayana’s Current A/c, To Arushi’s Current A/c, (Realisation profit transferred to partner’s, current account), , 15,575, , Dr., , Workman Compensation Fund A/c, Dr., To Nayana’s Current A/c, To Arushi’s Current A/c, (Compensation fund transfered to partners’, Current account), , 2018-19, , Credit, Amount, (Rs.), , 15,750, , 5,788, 5,787, , 15,000, 7,500, 7,500
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Dissolution of Partnership Firm, , 239, , Arushi Current A/c, To Arushi’s Capital A/c, (Current account balance transferred to, Capital account), , Dr., , 23,287, 23,287, , Nayana Capital A/c, Dr., To Nayana’s Current A/c, (Current account balance transferred to Capital, account), , 12,462, , Nayana’s Capital A/c, Arushi’s Capital A/c, To Bank A/c, (Final amounts due to partners paid), , 87,538, 73,287, , Dr., Dr., , 12,462, , 1,60,825, , Realisation Account, Dr., , Cr., , Particulars, , Debtors, Stock, Furniture, Machinery, Bank:, Creditors, Bank overdraft, Outstanding bill, Profit transferred to :, Nayana’s capital, Arushi’s capital, , Amount, (Rs.), 25,000, 35,000, 40,000, 60,000, , 1,60,000, , 20,000, 5,000, 2,000, , 27,000, , 5,788, 5,787, , 11,575, , Particulars, Creditors, Bank overdraft, Bank:, Investment, Furniture, Machinery, Debtors (90%), Stock :, Bad debts, recovered, Nayana’s capital, (stock taken over), , 1,98,575, , Amount, (Rs.), 20,000, 5,000, 25,000, 30,000, 50,000, 31,500, 20,125, 1,200, , 1,57,825, 15,750, 1,98,575, , Partners’ Current Accounts, Dr., , Cr., , Date Particulars, 2017, Balance b/d, Realisation, Arushi’s capital, , J.F. Nayana Arushi, (Rs.), (Rs.), , Date Particulars, 2017, , 10,000, 15,750, 23,287, , 25,750 23,287, , 2018-19, , Balance b/d, Workmen, Compensation, Fund, Realisation (profit), Nayana’s Capital, , J.F. Nayana, (Rs.), , Arushi, (Rs.), , 7,500, , 10,000, 7,500, , 5,788, 12,462, , 5,787, , 25,750 23,287
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240, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, Partner’s Current Accounts, , Dr., , Cr., , Date Particulars, 2017, Nayana’s current, account, Bank, , J.F., , Nayana Arushi, (Rs.), (Rs.), , Date Particulars, 2017, , 12,462, , Balance b/d, Arushi’s, current account, , 87,538 73,287, 1,00,000 73,287, , J.F., , Nayana, (Rs.), , Arushi, (Rs.), , 1,00,000 50,000, 23,287, 1,00,000 73,287, , Bank Account, Dr., , Cr., , Date Particulars, , J.F., , Balance b/d, Realisation, , Amount, (Rs.), , Date Particulars, , 30,000, 1,57,825, , Realisation, Nayana’s capital, Arushi’s capital, , 1,87,825, , J.F., , Amount, (Rs.), 27,000, 87,538, 73,287, 1,87,825, , Test your Understanding – III, Fill in the Correct Word(s):, 1. All assets (except cash/bank and fictitious assets) are transferred to the, ————— (Debit/Credit) side of ——————— Account (Realisation/Capital)., 2. All ————— (internal/external) liabilities are transferred to the —————, (Debit/Credit) side of ——————acccount (Bank/Realisation)., 3. Accumulated losses are transferred to ————— (Current/Capital Accounts), in —————— (equal ratio/profit sharing ratio)., 4. If a liability is assumed by a partner, such Partner’s Capital Account is –––––––, ——— (debited/credited)., 5. If a partner takes over an asset, such (Partner’s Capital Account) is, ———————— (debited/credited)., 6. No entry is required when a ——————— (partner/creditor) accepts a fixed, asset in payment of his dues., 7. When creditor accepts an asset whose value is more than the amount due to, him, he will ———————— (pay/not pay) the excess amount which will be, credited ———————— Account., 8. When the firm has agreed to pay the partner a fixed amount for realisation, work irrespective of the actual amount spent, such fixed amount is debited to, (Realisation/Capital) Account and Credited to (Capital/Bank) Account., 9. Partner’s loan is —————— (recorded/not recorded) in the (Realisation, Account)., 10. Partner’s current accounts are transferred to respective ————————, Partners’ (Loan/Capital) Accounts., , 2018-19
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Dissolution of Partnership Firm, , 241, , Illustration 4, Following is the Balance Sheet of Ashwani and Bharat on March 31, 2017., Liabilities, , Balance Sheet Ashwani and Bharat as on March 31, 2017, Amount Assets, (Rs.), , Creditors, Mrs.Ashwani’s loan, Mrs.Bharat loan, Investment fluctuation fund, Reserve fund, Capitals:, Ashwani, 20,000, Bharat, 20,000, , 76,000, 10,000, 20,000, 2,000, 20,000, 40,000, , Cash at bank, Stock, Investments, Debtors, 40,000, Less: Provision, for doubtful debts 4,000, Buildings, Goodwill, , 1,68,000, , Amount, (Rs.), 17,000, 10,000, 20,000, 36,000, 70,000, 15,000, 1,68,000, , The firm was dissolved on that date. The following was agreed transactions took place., (i) Aswhani promised to pay Mrs. Ashwani’s loan and took away stock for, Rs.8,000., (ii) Bharat took away half of the investment at 10% less. Debtors realised, for Rs.38,000. Creditor’s were paid at less of Rs.380. Buildings realised, for Rs.1,30,000, Goodwill Rs.12,000 and the remaining Investment were, sold at Rs.9,000. An old typewriter not recorded in the books was taken, over by Bharat for Rs. 600. Realisation expenses amounted to Rs. 2,000., Prepare Realisation Account, Partner’s Capital Account and Bank Account., Solution, Dr., Particulars, , Books of Ashwani and Bharat, Realisation Account, Amount Particulars, (Rs.), , Investment, 20,000, Debtors, 40,000, Buildings, 70,000, Stock, 10,000, Goodwill, 15,000, Ashwani’s Capital, (Mrs.Ashwani’s loan}, Bank (Mrs. Bharat’s loan), Bank (creditors), Bank (realisation expenses), Profit transferred to:, Ashwani’s Capital, 27,990, Bharat’s Capital, 27,990, , 1,55,000, 10,000, 20,000, 75,620, 2,000, , 55,980, , Provision for doubtful debts, Creditors, Mrs. Ashwani loan, Mrs. Bharat loan, Investment fluctuation fund, Ashwani’s Capital[stock], Bharat’s capital (Typewriter), Bharat’s capital (Investment), Bank:, Investment, 9,000, Debtors, 38,000, Buildings, 1,30,000, Goodwill, 12,000, , 3,18,600, , 2018-19, , Cr., Amount, (Rs.), 4,000, 76,000, 10,000, 20,000, 2,000, 8,000, 600, 9,000, , 1,89,000, 3,18,600
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242, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, Partner’s Capital Accounts, , Dr., , Cr., , Date Particulars, 2017, , J.F. Ashwani Bharat, (Rs,), (Rs,), , Realisation, (stock), Realisation, [sale of typewriter], Realisation, [investment], Bank, , 8,000, , Date Particulars, 2017, , J.F. Ashwani Bharat, (Rs,), (Rs,), , Balance b/d, Reserve fund, Realisation, [Mrs. Ashwini’s, loan], Realisation (profit), , —, 600, , 9,000, 59,990 48,390, 67,990 57,990, , 20,000 20,000, 10,000 10,000, 10,000, —, , 27,990 27,990, 67,990 57,990, , Bank Account, Dr., , Cr., , Date Particulars, 2017, Balance b/d, Realisation, , J.F., , Amount, (Rs.), , Date Particulars, 2017, , 17,000, 1,89,000, , Realisation [creditors], Realisation [expenses], Realisation, (Mrs.Bharat’s loan), Ashwani’s capital, Bharat’s capital, , 2,06,000, , J.F., , Amount, (Rs.), 75,620, 2,000, 20,000, 59,990, 48,390, 2,06,000, , Do it Yourself, Give the journal entry(ies) to be recorded for the following, in case of the dissolution, of a partnership firm., 1. For closure of assets accounts., 2. For closure of liabilities accounts., 3. For sale of assets., 4. For settlement of a creditor by transfer of fixed assets to him., 5. For expenses of realisation when actual expenses are paid by the partner on, behalf of the firm., 6. When a partner discharges the liability of the firm., 7. For payment of partner’s loan., 8. For settlement of capital accounts., , Illustration 5, Sonia, Rohit and Udit are partners sharing profits in the ratio of 5:3:2. Their, Balance Sheet as on March 31, 2017 was as follows:, , 2018-19
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Dissolution of Partnership Firm, , 243, , Balance Sheet of Sonia, Rohit and Udit as on March 31, 2017, Liabilities, , Amount, (Rs.), , Creditors, Bills payable, Bank loan, Sonia’s husband’s loan, General reserve, Capitals:, Sonia, 70,000, Rohit, 90,000, Udit, 1,10,000, , 30,000, 30,000, 1,20,000, 1,30,000, 80,000, , Assets, Buildings, Machinery, Stock, Bills receivable, Furniture, Cash at bank, , Amount, (Rs.), 2,00,000, 40,000, 1,60,000, 1,20,000, 80,000, 60,000, , 2,70,000, 6,60,000, , 6,60,000, , The firm was dissolved on that date. Close the books of the firm with following, information:, 1. Buildings realised for Rs.1,90,000, Bills receivable realised for, Rs.1,10,000; Stock realised Rs.1,50,000; and Machinery sold for, Rs.48,000 and furniture for Rs. 75,000,, 2. Bank loan was settled for Rs.1,30,000. Creditors and Bills payable were, settled at 10% discount,, 3. Rohit paid the realisation expenses of Rs.10,000 and he was to get a, remuneration of Rs.12,000 for completing the dissolution process., Prepare necessary ledger accounts., Solution, Dr., , Books of Sonia, Rohit and Udit, Realisation Account, , Particulars, Buildings, 2,00,000, Machinery, 40,000, Stock, 1,60,000, Bills receivable, 1,20,000, Furniture, 80,000, Bank (Bank Loan), Bank, [creditors and Bills payable], Bank [Sonia’s husbands loan], Rohit’s capital, (reslisation expenses), , Amount, (Rs.), , 6,00,000, 1,30,000, 54,000, 1,30,000, 12,000, , Particulars, Creditors, Bills payable, Bank loan, Sonia’s husband’s loan, Bank:, Buildings, 1,90,000, Bills receivable, 1,10,000, Stock, 1,50,000, Machinery, 48,000, Furniture, 75,000, Loss transferred to, capital accounts:, Sonia, 21,500, Rohit, 12,900, Udit, 8,600, , 9,26,000, , 2018-19, , Cr., Amount, (Rs.), 30,000, 30,000, 1,20,000, 1,30,000, , 5,73,000, , 43,000, 9,26,000
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244, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, Partner’s Capital Accounts, , Dr., , Cr., , Date Particulars, 2017, , J.F., , Realisation, (Loss), Bank, , Sonia, (Rs.), , Rohit, (Rs.), , Udit, (Rs.), , 21,500, , 12,900, , 8,600, , 88,500, , 1,13,100 1,17,400, , 1,10,000, , Date Particulars, 2017, Balance b/d, Realisation, (expenses), General, reserve, , 1,26,000 1,26,000, , J.F., , Sonia, (Rs.), , Rohit, (Rs.), , Udit, (Rs.), , 70,000, —, , 90,000 1,10,000, 12,000, —, , 40,000, , 24,000, , 16,000, , 1,10,000 1,26,000 1,26,000, , Bank Account, Dr., , Cr., , Date Particulars, 2017, , J.F., , Balance b/d, Realisation, (assets realised), , Amount, (Rs.), , Date Particulars, 2017, , 60,000, 5,73,000, , J.F., , Realisation [bank loan], Realisation, [creditors and, bills payable], Realisation, (Sonia’s husband loan), Sonia’s capital, Rohit’s capital, Udit’s capital, , 6,33,000, , Amount, (Rs.), 1,30,000, 54,000, , 1,30,000, 88,500, 1,13,100, 1,17,400, 6,33,000, , Note: No entry has been recorded in firm’s books for the actual realisation expenses, incurred by Rohit because he gets Rs. 12,000 as his remuneration which has been, duly accounted for., , Illustration 6, Romesh and Bhawan were in partnership sharing profit and losses as 3:2. Their, Balance Sheet as on March 31, 2017, was as follows:, Balance Sheet of Romesh and Bhawan as on March 31, 2014, Liabilities, Bank loan, Creditors, Bills payables, Bhawan loan, Capitals:, Romesh, Bhawan, , Amount, (Rs.), 60,000, 80,000, 40,000, 20,000, 1,00,000, 2,00,000, , Assets, Cash at bank, Debtors, Stock, Investments, Buildings, , Amount, (Rs.), 30,000, 70,000, 2,00,000, 1,40,000, 60,000, , 3,00,000, 5,00,000, , 2018-19, , 5,00,000
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Dissolution of Partnership Firm, , 245, , They decided to dissolve the firm. The following information is available:, 1. Debtors were recovered 5% less. Stock was realised at books value and, building was sold for Rs.51,000,, 2. It is found that investment not recorded in the books amounted to, Rs.10,000. The same were accepted by one creditor for this amount and, other Creditors were paid at a discount of 10%. Bills payable were paid full,, 3. Romesh took over some of the Investments at Rs.8,100 (book value less, 10%). The remaining investment were taken over by Bhawan at 90% of, the book value less Rs.900 discount,, 4. Bhawan paid bank loan along with one year interest at 6% p.a,, 5. An unrecorded liability of Rs.5,000 paid., Close the books of the firm and prepare necessary ledger accounts., Solution, Books of Romesh and Bhawan, Realisation Account, Dr., , Cr., , Particulars, , Amount, (Rs.), , Debtors, 70,000, Stock, 2,00,000, Investments, 1,40,000, Buildings, 60,000, Bank (bills payable), Bank (creditors), Bhawan’s capital, (loan with interest), Bank (unrecorded liabilities), , 4,70,000, 40,000, 63,000, 63,600, 5,000, , Particulars, , Amount, (Rs.), , Bank loan, Creditors, Bills payable, Romesh’s Capital (investment), Bhawan’s Capital (investment), Bank:, Debtors, 66,500, Stock, 2,00,000, Buildings, 51,000, Loss transferred to :, Romesh capital, 11,400, Bhawan capital, 7,600, , 6,41,600, , 60,000, 80,000, 40,000, 8,100, 1,17,000, , 3,17,500, , 19,000, 6,41,600, , Partner’s Capital Accounts, Dr., , Cr., , Date Particulars, 2017, Realisation, [investment], Realisation, [loss], Bank, , J.F., , Romesh, (Rs.), , Bhawan, (Rs.), , Date Particulars, 2017, , 8,100 1,17,000, , Balance b/d, Realisation, [bank loan], , J.F. Romesh, (Rs.), , Bhawan, (Rs.), , 1,00,000, , 2,00,000, 63,600, , 1,00,000, , 2,63,600, , 11,400, 7,600, 80,500 1,39,000, 1,00,000 2,63,600, , 2018-19
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246, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, Bank Account, , Dr., , Cr., , Date Particulars, 2017, , J.F., , Balance b/d, Realisation, (assets realised), , Amount, (Rs.), , Date Particulars, 2017, , 30,000, 3,17,500, , Realisation[creditor], Realisation, [unrecorded liability], Bhawan loan, Realisation, (bills payable], Romesh‘s capital, Bhawan’s capital, , 3,47,500, , J.F., , Amount, (Rs.), 63,000, 5,000, 20,000, 40,000, 80,500, 1,39,000, 3,47,500, , Note: No entry has been made for acceptance of unrecorded investments by a creditor as, part payment of his dues as per rules., , Illustration 7, Sonu and Ashu sharing profits as 3:1 and they agree upon dissolution. The, Balance Sheet as on March 31, 2017 is as under:, Balance Sheet of Sonu and Ashu as on March 31, 2017, Liabilities, Loan, Creditors, Capital, Sonu, Ashu, , Amount, (Rs.), 12,000, 18,000, 1,10,000, 68,000, , 1,78,000, , Assets, Cash at bank, Stock, Furniture, Debtors, Plant and Machinery, , 208,000, , Amount, (Rs.), 25,000, 45,000, 16,000, 70,000, 52,000, 2,08,000, , Sonu took over plant and machinery at an agreed value of Rs.60,000., Stock and Furniture were sold for Rs.42,000 and Rs.13,900 respectively., Debtors were took over by Ashu at Rs.69,000. Creditors were paid subject, to discount of Rs.900. Sonu agrees to pay the loans. Realisation expenses, were Rs.1,600., Prepare Realisation Account, Bank Account and Capital Accounts of, the Partners., , 2018-19
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Dissolution of Partnership Firm, , 247, , Solution, Books of Sonu and Ashu, Realisation Account, Dr., , Cr., , Particulars, , Amount, (Rs.), , Stock, Furniture, Debtors, Plant and Machinery, Bank (creditors), Sonu’s capital (loan), Bank (realisation expenses), Profit transferred to :, Sonu’s capital, 900, Ashu’s capital, 300, , 45,000, 16,000, 70,000, 52,000, 17,100, 12,000, 1,600, , Particulars, , Amount, (Rs.), , Loan, Creditors, Sonu’s capital, (plant& machinery), Ashu’s capital (debtors), Bank:, Stock, 42,000, Furniture, 13,900, , 12,000, 18,000, 60,000, 69,000, 55,900, , 1,200, 2,14,900, , 2,14,900, , Partners Capital Accounts, Dr., , Cr., , Date Particulars, 2017, Realisation, [plant and machinery], Realisation, [debtors], Bank, , J.F., , Sonu, (Rs.), , Ashu, (Rs.), , Date Particulars, 2017, , 60,000, 69,000, , J.F., , Balance b/d, Realisation [loan], Realisation [profit], Bank, , Sonu, (Rs.), , Ashu, (Rs.), , 1,10,000 68,000, 12,000, 900, 300, 700, , 62,900, 1,22,900 69,000, , 1,22,900 69,000, , Bank Account, Dr., , Cr., , Date Particulars, 2017, Balance b/d, Realisation (assets, realised), Ashu’s capital, , J.F., , Amount Date Particulars, (Rs.) 2017, 25,000, 55,900, , Realisation [creditor], Realisation [expenses], Sonu’s capital, , J.F., , Amount, (Rs.), 17,100, 1,600, 62,900, , 700, 81,600, , 81,600, , Illustration 8, Anju, Manju and Sanju sharing profit in the ratio of 3:1:1 decided to dissolve, their firm. On March 31, 2014 their position was as follows:, , 2018-19
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248, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, Balance Sheet Anju, Manju and Sanju as on March 31, 2017, , Liabilities, , Amount, (Rs.), , Creditors, Loan, Capitals:, Anju, Manju, Sanju, , 60,000, 15,000, 2,75,000, 1,10,000, 1,00,000, , 4,85,000, , Assets, Cash at bank, Stock, Furniture, Debtors, 2,42,000, Less: Provision for, doubtful debts, 12,000, Buildings, , 5,60,000, , Amount, (Rs.), 35,000, 83,000, 12,000, , 2,30,000, 2,00,000, 5,60,000, , It is agreed that:, 1. Anju takes over the Furniture at Rs.10,000 and Debtors amounting to, Rs.2,00,000 at Rs.1,85,000. Anju also agrees to pay the creditors,, 2. Manju is to take over Stock at book value and Buildings at book value, less 10%,, 3. Sanju is to take over remaining Debtors at 80% of book value and, responsibility for the discharge of the loan,, 4. The expenses of dissolution amounted to Rs.2,200., Prepare Realisation Account, Bank Account and Capital Accounts of the partners., Solution, Dr., , Books of Anju, Manju and Sanju, Realisation Account, , Particulars, , Stock, 83,000, Furniture, 12,000, Debtors, 2,42,000, Buildings, 2,00,000, Anju capital (creditors), Sanju capital (loan), Bank (realisation expenses), , Amount, (Rs.), , 5,37,000, 60,000, 15,000, 2,200, , Particulars, Provision for doubtful debts, Creditors, Loan, Anju’s capital :, Furniture, 10,000, Debtors, 1,85,000, Manju’s capital :, Stock, 83,000, Buildings, 1,80,000, Sanju’s capital :, (remaning debtors less, 20% of book value), Loss transferred to :, Anju’s capital, 21,360, Manju’s capital, 7,120, Sanju’s capital, 7,120, , 6,14,200, , 2018-19, , Cr., Amount, (Rs.), 12,000, 60,000, 15,000, 1,95,000, 2,63,000, 33,600, , 35,640, 6,14,240
Page 249 :
Dissolution of Partnership Firm, , 249, Partner’s Capital Accounts, , Dr., Date Particulars, 2017, , J.F., , Realisation, (assets), Realisation, (loss), Bank, , Anju, (Rs.), , Manju, (Rs.), , Sanju, (Rs.), , Date Particulars, 2017, , 1,95,000 2,63,000 33,600, , Balance b/d, , 21,360, 1,18,640, , Realisation, (creditors), Realisation, (loan), Bank, , 3,35,000, , 7,120, , 7,120, 74,280, , 2,70,120 1,15,000, , Cr., J.F., , Anju, (Rs.), , Manju, (Rs.), , 2,75,000 1,10,000 1,00,000, 60,000, 15,000, 1,60,120, 3,35,000 2,70,120 1,15,000, , Bank Account, , Dr., Date Particulars, 2017, , J.F., , Balance b/d, Manju’s capital, , Amount, (Rs.), , Sanju, (Rs.), , Date Particulars, 2017, , 35,000, 1,60,120, , Cr., J.F., , Realisation (expenses), Anju’s capital, Sanju’s capital, , 1,95,120, , Amount, (Rs.), 2,200, 1,18,640, 74,280, 1,95,120, , Illustration 9, Sumit, Amit and Vinit are partners sharing profit in the ratio of 5:3:2. Their, Balance Sheet as on March 31, 2017 was as follows:, Balance Sheet of Sunit, Amit and Vinit as on March 31, 2017, Liabilities, Capitals:, Sumit, Amit, Vinit, Profit and Loss, Mrs. Amit’s loan, Sundry creditors, , Amount, (Rs.), 40,000, 50,000, 60,000, , 1,50,000, 10,000, 40,000, 90,000, 2,90,000, , Assets, Machinery, Investments, Stock, Debtors, Cash at bank, , Amount, (Rs.), 80,000, 1,50,000, 10,000, 35,000, 15,000, , 2,90,000, , The firm was dissolved on that date. Amit took over his wife’s loan. One of the, Creditors for Rs.2,600 was not claim the amount. Other assets realised as follows:, 1. Machinery was sold for Rs.70,000,, 2. Investments with book value of Rs.1,00,000 were given to Creditors in, full settlement of their account. The remaining Investments were took, over by Vinit at an agreed value of Rs.45,000,, , 2018-19
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250, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , 3. Stock was sold for Rs.11,000 and Debtors for Rs.3,000 proved to be bad,, 4. Realisation expenses were Rs.1,500., Prepare ledger accounts to close the books of the firm., Solution, Books of Amit, Sumit and Vinit, Realisation Account, Dr., , Cr., , Particulars, , Amount, (Rs.), , Machinery, 80,000, Investments, 1,50,000, Stock, 10,000, Debtors, 35,000, Amit’s Capital (wife’s loan), Bank (realisation expenses), , 2,75,000, 40,000, 1,500, , Particulars, , Amount, (Rs.), , Sundry creditors, Mrs.Amit’s loan, Bank :, Machinery, 70,000, Stock, 11,000, Debtors, 32,000, Vinit’s capital (investment), Loss transferred to :, Amit’s capital, 14,250, Sumit’s capital, 8,550, Vinit’s capital, 5,700, , 3,16,500, , 90,000, 40,000, , 1,13,000, 45,000, , 28,500, 3,16,500, , Partners Capital Accounts, , Dr., Date Particulars J . F., 2017, , Realisation, (assets), Realisation, (loss), Bank, , Amit, (Rs.), , Sumit, (Rs.), , Vinit, (Rs.), , Date Particulars, 2017, , 45,000, 14,250, , 8,550, , 5,700, , 70,750, , 44,450 11,300, , 85,000, , 53,000 62,000, , Balance b/d, Realisation, (Mrs. Vinit’s, loan), Profit and Loss, , Cr., J.F., , Amit, (Rs.), , Sumit, (Rs.), , Vinit, (Rs.), , 40,000 50,000 60,000, 40,000, 5,000, , 3,000, , 2,000, , 85,000 53,000 62,000, , Bank Account, Dr., , Cr., , Date Particulars, 2017, Balance b/d, Realisation, (assets realised), , J.F., , Amount Date Particulars, (Rs.) 2017, 15,000, 1,13,000, , 1,28,000, , Realisation (expenses), Amit’s capital, Sumit’s capital, Vinit’s capital, , J.F., , Amount, (Rs.), 1,500, 70,750, 44,450, 11,300, 1,28,000, , Note: No entry has been made for the investments taken over by the creditors as per rules., , 2018-19
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Dissolution of Partnership Firm, , 251, , Illustration 10, Meena and Tina are partners in a firm and sharing profit as 3:2. They decided to, dissolve their firm on March 31, 2017 when their Balance Sheet was a follows:, Balance Sheet Meena and Tina as on March 31, 2017, Liabilities, Capital :, Meena, Tina, Sundry creditors, Bills payable, , Amount (Rs.), 90,000, 80,000, , 1,70,000, 60,000, 20,000, , Assets, , Amount (Rs.), , Machinery, Investments, Stock, Sundry Debtors, Cash at bank, , 70,000, 50,000, 22,000, 1,03,000, 5,000, , 2,50,000, , 2,50,000, , The assets and liabilities were disposed off as follows :, (a) Machinery were given to creditors in full settlement of their account and Stock, were given to bills payable in full settlement., (b) Investment were took over by Tina at book value. Sundry debtors of book value Rs., 50,000 took over by Meena at 10% less and remaining debtors realised Rs. 51,000., (c) Realisation expenses amount to Rs. 2,000., Prepare necessary ledger accounts to close the book of the firm., , Solution, Particulars, , Books of Meena and Tina – Realisation Account, Amount (Rs.) Particulars, , Assets transferred :, Machinery, 70,000, Investments, 50,000, Stock, 22,000, Sundry debtors, 1,03,000, Bank (realisation expenses), , 2,45,000, 2,000, , Amount (Rs.), , Sundry creditors, Bills payable, Tina’s Capital (investment), Meena’s Capital (debtors of, books value Rs. 50,000, less 10%), Bank, Debtors, Loss transferred to :, Meena’s capital, 12,600, Tena’s capital, 8,400, , 2,47,000, , 60,000, 20,000, 50,000, 45,000, , 51,000, 21,000, 2,47,000, , Partner’s Capital Accounts, Dr., Particulars, Realisation (investment), Realisation (debtors), Realisation (loss), Bank, , Mena, (Rs.), , Tina, (Rs.), , 50,000, 45,000, 12,600 8,400, 32,400 21,600, , Cr., Tina, (Rs.), , Particulars, , Meena, (Rs.), , Balance b/d, , 90,000 80,000, , 90,000 80,000, , 2018-19, , 90,000 80,000
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252, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, Bank Account, , Dr., , Cr., , Particulars, , Amount (Rs.), , Balance b/d, Realisation (assets realised), , 5,000, 51,000, , Particulars, , Amount (Rs.), , Realisation (expenses), Mena’s capital, Tina’s capital, , 56,000, , 2,000, 32,400, 21,600, 56,000, , Terms Introduced in the Chapter, 1., 2., 3., , Dissolution of Partnership, Dissolution of Partnership, Firm, Partnership at Will, , 4., 5., 6., 7., , Compulsory Dissolution, Dissolution by Notice, Realisation Expenses, Realisation Account, , Summary, 1. Dissolution of Partnership Firm : The dissolution of a firm implies the, discontinuance of partnership business and separation of economic relations, between the partners. In the case of a dissolution of a firm, the firm closes its, business altogether and realises all its assets and pays all its liabilities. The, payment is made to the creditors first out of the assets realised and, if necessary,, next out of the contributions made by the partners in their profit sharing ratio., When all accounts are settled and the final payment is made to the partners, for the amounts due to them, the books of the firm are closed., 2. Dissolution of Partnership : A partnership gets terminated in case of admission,, retirement death, etc. of a partner. This does not necessarily involve dissolution, of the firm., 3. Realisation Account : The Realisation Account is prepared to record the, transactions relating to sale and realisation of assets and settlement of creditors., Any profit or loss arising act of this process is shared by partners’ in their, profit sharing ratio. Partners’ accounts are also settled and the Cash or Bank, account is closed., , Questions for Practice, Short Answer Questions, 1. State the difference between dissolution of partnership and dissolution of, partnership firm., 2. State the accounting treatment for:, i. Unrecorded assets, ii. Unrecorded liabilities, 3. On dissolution, how will you deal with partner’s loan if it appears on the, (a) assets side of the balance sheet, (b) liabilities side of balance sheet., , 2018-19
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Dissolution of Partnership Firm, , 253, , 4. Distinguish between firm’s debts and partner’s private debts., 5. State the order of settlement of accounts on dissolution., 6. On what account realisation account differs from revaluation account., Long Answer Questions, 1. Explain the process dissolution of partnership firm?, 2. What is a Realisation Account?, 3. Reproduce the format of Realisation Account., 4. How deficiency of crditors is paid off?, , Numerical Questions, 1. Journalise the following transactions regarding realisation expenses :, [a] Realisation expenses amounted to Rs.2,500., [b] Realisation expenses amounting to Rs.3,000 were paid by Ashok, one of the, partners., [c] Realisation expenses Rs.2,300 borne by Tarun, personally., [d] Amit, a partner was appointed to realise the assets, at a cost of Rs.4,000., The actual amount of realisation amounted to Rs.3,000., 2. Record necessary journal entries in the following cases:, [a] Creditors worth Rs.85,000 accepted Rs.40,000 as cash and Investment, worth Rs.43,000, in full settlement of their claim., [b] Creditors were Rs.16,000. They accepted Machinery valued at Rs.18,000, in settlement of their claim., [c] Creditors were Rs.90,000. They accepted Buildings valued Rs.1,20,000 and, paid cash to the firm Rs.30,000., 3. There was an old computer which was written-off in the books of accounts in, the pervious year. The same has been taken over by a partner Nitin for Rs.3,000., Journalise the transaction, supposing. That the firm has been dissolved., 4. What journal entries will be recorded for the following transactions on the, dissolution of a firm:, [a] Payment of unrecorded liabilities of Rs.3,200., [b] Stock worth Rs.7,500 is taken by a partner Rohit., [c] Profit on Realisation amounting to Rs.18,000 is to be distributed between, the partners Ashish and Tarun in the ratio of 5:7., [d] An unrecorded asset realised Rs.5,500., 5. Give journal entries for the following transactions :, 1. To record the realisation of various assets and liabilities,, 2. A Firm has a Stock of Rs. 1,60,000. Aziz, a partner took over 50% of the, Stock at a discount of 20%,, 3. Remaining Stock was sold at a profit of 30% on cost,, 4. Land and Buildging (book value Rs. 1,60,000) sold for Rs. 3,00,000 through, a broker who charged 2%, commission on the deal,, 5. Plant and Machinery (book value Rs. 60,000) was handed over to a Creditor, at an agreed valuation of 10% less than the book value,, 6. Investment whose face value was Rs. 4,000 was realised at 50%., , 2018-19
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254, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , 6. How will you deal with the realisation expenses of the firm of Rashim and Bindiya, in the following cases:, 1. Realisation expenses amounts to Rs. 1,00,000,, 2. Realisation expenses amounting to Rs. 30,000 are paid by Rashim, a partner., 3. Realisation expenses are to be borne by Rashim for which he will be paid, Rs. 70,000 as remuneration for completing the dissolution process. The, actual expenses incurred by Rashim were Rs. 1,20,000., 7. The book value of assets (other than cash and bank) transferred to Realisation, Account is Rs. 1,00,000. 50% of the assets are taken over by a partner Atul, at, a discount of 20%; 40% of the remaining assets are sold at a profit of 30% on, cost; 5% of the balance being obsolete, realised nothing and remaining assets, are handed over to a Creditor, in full settlement of his claim., You are required to record the journal entries for realisation of assets., 8. Record necessary journal entries to record the following unrecorded assets, and liabilities in the books of Paras and Priya:, 1. There was an old furniture in the firm which had been written-off completely, in the books. This was sold for Rs. 3,000,, 2. Ashish, an old customer whose account for Rs. 1,000 was written-off as, bad in the previous year, paid 60%, of the amount,, 3. Paras agreed to takeover the firm’s goodwill (not recorded in the books of, the firm), at a valuation of Rs. 30,000,, 4. There was an old typewriter which had been written-off completely from, the books. It was estimated to realize Rs. 400. It was taken away by Priya at, an estimated price less 25%,, 5. There were 100 shares of Rs. 10 each in Star Limited acquired at a cost of, Rs. 2,000 which had been written-off completely from the books. These, shares are valued @ Rs. 6 each and divided among the partners in their, profit sharing ratio., 9. All partners wishes to dissolve the firm. Yastin, a partner wants that her, loan of Rs. 2,00,000 must be paid off before the payment of capitals to the, partners. But, Amart, another partner wants that the capitals must be paid, before the payment of Yastin’s loan. You are required to settle the conflict, giving reasons., 10. What journal entries would be recorded for the following transactions on the, dissolution of a firm after various assets (other than cash) on the third party, liabilities have been transferred to Reliasation account., 1. Arti took over the Stock worth Rs. 80,000 at Rs. 68,000., 2. There was unrecorded Bike of Rs. 40,000 which was taken over By Mr. Karim., 3. The firm paid Rs. 40,000 as compensation to employees., 4. Sundry creditors amounting to Rs. 36,000 were settled at a discount, of 15%., 5. Loss on realisation Rs. 42,000 was to be distributed between Arti and Karim, in the ratio of 3:4., , 2018-19
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Dissolution of Partnership Firm, , 255, , 11. Rose and Lily shared profits in the ratio of 2:3. Their Balance Sheet on March, 31, 2017 was as follows:, Balance Sheet of Rose and Lily as on March 31, 2017, Liabilities, Creditors, Lily’s loan, Profit and Loss, Capitals:, Lily, Rose, , Amount, (Rs.), 40,000, 32,000, 50,000, 1,60,000, 2,40,000, , Assets, Cash, Debtors, Less: Provision for, doubtful debts, Inventory, Bills receivable, Buildings, , 5,22,000, , Amount, (Rs.), 16,000, 80,000, 3,600, , 76,400, 1,09,600, 40,000, 2,80,000, 5,22,000, , Rose and Lily decided to dissolve the firm on the above date. Assets, (except bills receivables) realised Rs. 4,84,000. Creditors agreed to take, Rs. 38,000. Cost of realisation was Rs. 2,400. There was a Motor Cycle in, the firm which was bought out of the firm’s money, was not shown in the, books of the firm. It was now sold for Rs. 10,000. There was a contingent, liability in respect of outstanding electric bill of Rs. 5,000 Bill Receivable, taken over by Rose at Rs. 33,000., Show Realisation Account, Partners Capital Acount, Loan Account and, Cash Account., (Ans : Realisation Profit Rs. 15,600, Total of Cash Account Rs. 5,10,000), 12. Shilpa, Meena and Nanda decided to dissolve their partnership on March, 31,2017. Their profit sharing ratio was 3:2:1 and their Balance Sheet was, as under:, Balance Sheet of Shilpa, Meena and Nanda as on March 31, 2017, Liabilities, Capitals:, Shilpa, Meena, Bank loan, Creditors, Provision for doubtful debts, General reserve, , Amount, (Rs.), 80,000, 40,000, 20,000, 37,000, 1,200, 12,000, , Assets, Land, Stock, Debtors, Nanda’s capital, Cash, , 1,90,200, , 2018-19, , Amount, (Rs.), 81,000, 56,760, 18,600, 23,000, 10,840, , 1,90,200
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256, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , The stock of value of Rs. 41,660 are taken over by Shilpa for Rs. 35,000 and she, agreed to discharge bank loan. The remaining stock was sold at Rs. 14,000 and, debtors amounting to Rs. 10,000 realised Rs. 8,000. land is sold for Rs. 1,10,000. The, remaining debtors realised 50% at their book value. Cost of realisation amounted to, Rs. 1,200. There was a typewriter not recorded in the books worth Rs. 6,000 which, were taken over by one of the Creditors at this value. Prepare Realisation Account., (Ans : Profit on Realisation Rs. 20,940, Total of Cash Account Rs. 1,64,650), 13. Surjit and Rahi were sharing profits (losses) in the ratio of 3:2, their Balance, Sheet as on March 31, 2017 is as follows:, Balance Sheet of Surjit and Rahi as on March 31, 2017, Liabilities, , Amount, (Rs.), , Creditors, Mrs. Surjit loan, Reserve, Rahi’s loan, Capital’s:, Surjit, Rahi, , 38,000, 10,000, 15,000, 5,000, 10,000, 8,000, , Assets, Bank, Stock, Debtors, Furniture, Plant, Investment, Profit and Loss, , 86,000, , Amount, (Rs.), 11,500, 6,000, 19,000, 4,000, 28,000, 10,000, 7,500, 86,000, , The firm was dissolved on March 31, 2017 on the following terms:, 1. Surjit agreed to take the investments at Rs. 8,000 and to pay Mrs. Surojit’s loan., 2. Other assets were realised as follows:, Stock, Rs. 5,000, Debtors, Rs. 18,500, Furniture, Rs. 4,500, Plant, Rs. 25,000, 3. Expenses on realisation amounted to Rs. 1,600., 4. Creditors agreed to accept Rs. 37,000 as a final settlement., You are required to prepare Realisation account, Partner’s Capital account, and Bank account., (Ans : Loss on Realisation Rs. 6,600, Total of Cash Account Rs. 64,500), 14. Rita, Geeta and Ashish were partners in a firm sharing profits/losses in the, ratio of 3:2:1. On March 31, 2017 their balance sheet was as follows:, Liabilities, Capitals:, Rita, Geeta, Ashish, Creditors, Bills payable, General reserve, , Amount, (Rs.), 80,000, 50,000, 30,000, , 1,60,000, 65,000, 26,000, 20,000, , Assets, Cash, Debtors, Stock, Investments, Plant, , 2,71,000, , 2018-19, , Amount, (Rs.), 22,500, 52,300, 36,000, 69,000, 91,200, , 2,71,000
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Dissolution of Partnership Firm, , 257, , On the date of above mentioned date the firm was dissolved:, 1. Rita was appointed to realise the assets. Rita was to receive 5% commission, on the rate of assets (except cash) and was to bear all expenses of realisation,, 2. Assets were realised as follows:, Rs., Debtors, 30,000, Stock, 26,000, Plant, 42,750, 3. Investments were realised at 85% of the book value,, 4. Expenses of realisation amounted to Rs. 4,100,, 5. Firm had to pay Rs. 7,200 for outstanding salary not provided for earlier,, 6. Contingent liability in respect of bills discounted with the bank was also, materialised and paid off Rs. 9,800,, Prepare Realisation account, Capital Accounts of Partner’s and Cash Account., (Ans : Loss on Realisation Rs. 1,15,970, Total of Cash Account Rs. 1,65,705), 15. Anup and Sumit are equal partners in a firm. They decided to dissolve the, parntership on December 31, 2017. When the balance sheet is as under :, Balance Sheet of Anup and Sumit as on December 31, 2017, Liabilities, , Amount, (Rs.), , Sundry Creditors, Reserve fund, Loan, Capital, Anup, Sumit, , 27,000, 10,000, 40,000, 60,000, 60,000, , 1,20,000, , Assets, Cash at bank, Sundry Debtors, Plants, Stock, Lease hold land, Furniture, , 1,97,000, , Amount, (Rs.), 11,000, 12,000, 47,000, 42,000, 60,000, 25,000, 1,97,000, , The Assets were realised as follows :, Lease hold land, Furniture, Stock, Plant, Sundry Debtors, , Rs., 72,000, 22,500, 40,500, 48,000, 10,500, , The Creditors were paid Rs. 25,500 in full settlement. Expenses of realisation, amount to Rs. 2,500., Prepare Realisation Account, Bank Account, Partners Capital Accounts to close, the books of the firm., (Ans : Realisation Profit Rs. 6,500), , 2018-19
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258, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , 16. Ashu and Harish are partners sharing profit and losses as 3:2. They decided, to dissolve the firm on December 31, 2017. Their balance sheet on the above, date was:, Balance Sheet of Ashu and Harish as on December 31, 2017, Liabilities, Capitals:, Ashu, Harish, Creditors, Bank overdraft, , Amount, (Rs.), 1,08,000, 54,000, , 1,62,000, 88,000, 50,000, , Assets, Building, Machinery, Furniture, Stock, Investments, Debtors, Cash in hand, , 3,00,000, , Amount, (Rs.), 80,000, 70,000, 14,000, 20,000, 60,000, 48,000, 8,000, 3,00,000, , Ashu is to take over the building at Rs. 95,000 and Machinery and Furniture is, take over by Harish at value of Rs. 80,000. Ashu agreed to pay Creditor and, Harish agreed to meet Bank overdraft. Stock and Investments are taken by, both partner in profit sharing ratio. Debtors realised for Rs. 46,000, expenses, of realisation amounted to Rs. 3,000. Prepare necessary ledger account., (Ans : Loss on Realisation Rs. 6,000, Cash/Bank Total Rs. 59,600), 17. Sanjay, Tarun and Vineet shared profit in the ratio of 3:2:1. On December 31,2017, their balance sheet was as follows :, Balance Sheet of Sanjay, Tarun and Vineet as on December 31, 2017, Liabilities, Capitals:, Sanjay, Tarun, Vineet, Creditors, Bills payable, , Amount, (Rs.), 1,00,000, 1,00,000, 70,000, , 2,70,000, 80,000, 30,000, , Assets, Plant, Debtors, Furniture, Stock, Investments, Bills receivable, Cash in hand, , 3,80,000, , Amount, (Rs.), 90,000, 60,000, 32,000, 60,000, 70,000, 36,000, 32,000, 3,80,000, , On this date the firm was dissolved. Sanjay was appointed to realise the assets., Sanjay was to receive 6% commission on the sale of assets (except cash) and, was to bear all expenses of realisation., Sanjay realised the assets as follows : Plant Rs. 72,000, Debtors Rs. 54,000,, Furniture Rs. 18,000, Stock 90% of the book value, Investments Rs. 76,000, and Bills receivable Rs.31,000. Expenses of realisation amounted to Rs.4,500., Prepare Realisation Account, Capital Accounts and Cash Account, (Ans : Loss on Realisation Rs.61,300, Total of Cash Account Rs.3,37,000), , 2018-19
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Dissolution of Partnership Firm, , 259, , 18. The following is the Balance Sheet of Gupta and Sharma as on December 31,2017:, Balance Sheet of Gupta and Sharma as on December 31, 2017, Liabilities, , Amount, (Rs.), , Sundry Creditors, Mrs.Gupta’s loan, Mrs.Sharma’s loan, Reserve fund, Provision of doubtful debts, Capital, Gupta, 90,000, Sharma, 60,000, , 38,000, 20,000, 30,000, 6,000, 4,000, , Assets, Cash at bank, Sundry Debtors, Stock, Bills receivable, Machinery, Investment, Fixtures, , Amount, (Rs.), 12,500, 55,000, 44,000, 19,000, 52,000, 38,500, 27,000, , 1,50,000, 2,48,000, , 2,48,000, , The firm was dissolved on December 31, 2017 and asset realised and settlements, of liabilities as follows:, (a) The realisation of the assets were as follows:, Rs., Sundry Debtors, 52,000, Stock, 42,000, Bills receivable, 16,000, Machinery, 49,000, (b) Investment was taken over by Gupta at agreed value of Rs.36,000 and, agreed to pay of Mrs. Gupta’s loan., (c) The Sundry Creditors were paid off less 3% discount., (d) The realisation expenses incurred amounted to Rs.1,200., Journalise the entries to be made on the dissolution and prepare Realisation, Account, Bank Account and Partners Capital Accounts., (Ans : Loss on Realisation Rs.36,560, Total of Cash Account), 19. Ashok, Babu and Chetan are in partnership sharing profit in the proportion of, 1/2, 1/3, 1/6 respectively. They dissolve the partnership of the December 31,, 2017, when the balance sheet of the firm as under:, Balance Sheet of Ashok, Babu and Chetan as on December 31, 2017, Liabilities, Sundry Creditors, Bills payable, Babu’s loan, Capital’s :, Ashok, Babu, Chetan, Current accounts :, Ashok, Babu, Chetan, , Amount, (Rs.), 20,000, 25,500, 30,000, 70,000, 55,000, 27,000, , 1,52,000, , 10,000, 5,000, 3,000, , 18,000, , Assets, Bank, Sundry Debtors, Stock, Machinery, Investment, Freehold property, , 2,45,500, , 2018-19, , Amount, (Rs.), 7,500, 58,000, 39,500, 48,000, 42,000, 50,500, , 2,45,500
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260, , Accountancy – Not-for-Profit Organisation and Partnership Accounts, , The machinery was taken over by Babu for Rs.45,000, Ashok took over the, Investment for Rs.40,000 and Freehold property took over by Chetan at, Rs.55,000. The remaining Assets realised as follows: Sundry Debtors Rs.56,500, and Stock Rs.36,500. Sundry Creditors were settled at discount of 7%. A Office, computer, not shown in the books of accounts realised Rs.9,000. Realisation, expenses amounted to Rs.3,000., Prepare Realisation Account, Partners Capital Account, Bank Account., (Ans : Profit on Realisation Rs.2,400, Total of Cash Account Rs.1,34,100), 20. The following is the Balance sheet of Tanu and Manu, who shares profit and, losses in the ratio of 5:3, On December 31,2017:, Balance Sheet of Tanu and Manu as on December 31, 2017, Liabilities, Sundry Creditors, Bills payable, Bank loan, Reserve fund, Capital, Tanu, Manu, , Amount, (Rs.), 62,000, 32,000, 50,000, 16,000, 1,10,000, 90,000, , 2,00,000, , Assets, , Amount, (Rs.), , Cash at bank, Sundry Debtors, Stock, Motor car, Machinery, Investment, Fixtures, , 16,000, 55,000, 75,000, 90,000, 45,000, 70,000, 9,000, , 3,60,000, , 3,60,000, , On the above date the firm is dissolved and the following agreement was made:, Tanu agree to pay the bank loan and took away the sundry debtors. Sundry, creditors accepts stock and paid Rs.10,000 to the firm. Machinery is taken, over by Manu for Rs.40,000 and agreed to pay of bills payable at a discount of, 5%.. Motor car was taken over by Tanu for Rs.60,000. Investment realised, Rs.76,000 and fixtures Rs.4,000. The expenses of dissolution amounted to, Rs.2,200., Prepare Realisation Account, Bank Account and Partners Capital Accounts., (Ans : Loss on Ralisation Rs.37,600, Total of Cash Account Rs.1,06,000), , Check-list to Check your Understanding, Test your Understanding – I, 1. True, 2 True, 3. True, 4. False, 5. True, 6. True, 7. True, 8. False., Test your Understanding – II, 1. (c), 2. (d), 3. (b), 4. (d),, , 5. (c),, , 6. (a),, , 7. (b),, , 8. (c), , Test your Understanding – III, 1. Debit, Realisaton, 2. External, Credit, Realisation, 3. Capital Accounts,, Profit sharing ratio. 4. Credited, 5. Debited, 6. Creditor, 7. Pay,, Realisation, 8. Realisation, Capital, 9. Not recorded, 10. Capital., , 2018-19
