Ch-01: Accounting For Partnership Firms - Fundamental: Maintenance of Partners Capital Alc
Ch-01: Accounting For Partnership Firms - Fundamental: Maintenance of Partners Capital Alc
Ch-01: Accounting For Partnership Firms - Fundamental: Maintenance of Partners Capital Alc
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.
Maintenance of Partners Capital Alc
Partners Capital A/c can be maintained by two methods
1. Fixed capital method
2. Fluctuating capital method
In fixed capital method two accounts are prepared partners capital account and partners current
account while in fluctuation method only one account is prepared i.e. partners capital account
Final Accounts of Partnership firm
Following accounts are prepared by a firm
1. Trading ,Profit and loss A/c
2. P/L appropriation A/c
3. Partners capital A/c
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4. Balance sheet
Particulars A B Particulars A B
xxx xxx xxx xxx
To bal b/d (if Dr bal) By bal. b/d (if cr bal)
xxx xxx xxx xxx
To Drawings By Int on capital
Fluctuating Capital Method: In this method Partners Capital doesn't remain fixed. It Keeps on
changing. Only one A/c is prepared by Partners i.e. Partners capital A/c. All adjustments are
recorded in capital A/c only. It may have Dr. or Cr. balance.
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Partners Capital A/c
Dr. Cr.
Particulars A B Particulars A B
xxx xxx xxx xxx
To bal b/d (if Dr bal) By bal. bld (if cr bal)
xxx xxx xxx xxx
To Bank(permanent withdrawal) By Bank (additional Cap)
xxx xxx xxx xxx
To Drawings By Int on capital
xxx xxx xxx xxx
To Int on drawings By Salary
xxx xxx xxx xxx
To P/LAPP(share of loss) By Commission
xxx xxx xxx xxx
To bal c/d (incase of cr. bal. By P/L App (Share of Profit)
xxx xxx
By bal c/d (incase of dr. bal.
xxxx xxxx xxxx xxxx
Adjustment All adjustments a are made in Current A/c All adjustments are made in Capital A/c
Fixed The capital remains unchanged The balance of capital fluctuates from
Balance unlessthere is addition or withdrawal year to year
of Cap.
Credit Capital A/c always shows Cr balance. Capital A/c may Show Dr or Cr. bal.
Balance
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S.No. Particulars Dr. Cr.
2 Interest on capital
Interest on Capital A/c Dr.
To Partners Capital/Current A/c
For transferring to P/L appropriation A/C
P/L App. A/c Dr.
To Interest on capital A/c
3 Salary
Salary A/c (individually) Dr.
To Partners Capital/Current A/c
For transferring to P/L appropriation A/C
P/L App. A/c Dr.
To Salary A/c (individually)
4 Commission to partners
Commission A/c (individually) Dr.
To Partners Capital/Current A/c
5 Interest on drawings
Partners Capital/Current A/c Dr.
To Interest on Drawings
For transferring to P/L appropriation A/C
Interest on Drawings A/c Dr.
To P/L Appropriation A/c
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Profit and Loss Appropriation A/c for the year ended
Particulars ( Particulars (
xxx xxx
To P/L A/c (in case of loss) By P/L A/c ( in case of profits)
xxx xxx
To Interest on capital By Interest on drawings
xxx xxx
To salary To Partners Cap/Current A/c
(share of losses)
xxx
To commission
xxx
To Partners Cap/Current A/c(share
of profit)
xxxxx xxxxx
Past Adjustment:
Sometimes after closing the accounts, i.e., preparing the financial statement, some errors or omission
in the accounts of the earlier years are noticed. For example, interest on capital or drawings is
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omitted, allowed or charged at higher or lower rate, profits or losses are distributed among the
partners in a wrong ratio and so on. These errors and omissions are rectified by adjusting the Capital
Accounts of the affected partners by passing (A) an adjustment entry, or (B) Adjusting entries.
Particulars A B C Firm
+ Interest on Capital + + + -
+ + + -
- Interest on Drawings - - - +
+ + + -
Excess profit taken back in their P & L Sharing Ratio - - -
+ - +
Particulars X Y Z Firm
1. Profit distributed in wrong ratio taken back Dr. (-)75,000 (-)50,00 (-)25,000 +1,50,000
2. The same profit now correctly distributed in +30,000 +45,000 +75,000 1,50,000
correct ratio Cr.
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Adjustment required Dr. -45,000 -5,000 +50,000
A/c Dr 45,000
5,000
50,000
(Being adjustment entry made)
Practical Problems:
Partnership Deed
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 10,000 per year.
(ii) Shyam had advanced a loan to the firm. He claims interest @10% p.a.
(ii) Mohan has contributed 20,000 and Shyam 50,000 as capital.
(iv) Mohan wants equal share in profits.
(v) 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.
(iii) Methods of settlement of dispute among the partners can't be part of the partnership deed.
(iv) If the deed is silent, interest at the rate of 6% p.a. would be charged on the drawings made by the
partner.
Interest on Capital & Interest on Drawings:-
3. A and B are partners sharing profits and losses in the ratio of 3:2. Their capital accounts showed
balances of 1,50,000 and 2,00,000respectively on Jan 01, 2003. Show the treatment of interest on
capital for the year ending December 31, 2006 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 50,000;
(b) If partnership deed provides for interest on capital @ 8% p.a. and the firm incurred a loss
of 10,000 during the year;
(c) If partnership deed provides for interest on capital @ 8% p.a. and the firm earned a profit of
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
14,000 during the year.
Hint: In the absence of any information interest on capitals will be appropriation of profit.
Guarantee of Profit
4. Ram, Mohan and Sohan are partners with capitals of 5, 00,000, 2, 50,000 and 2, 00,000
respectively. After providing interest on capital @10% p.a. the profits are divisible as follows:
Ram1/2, Mohan 1/3 and Sohan 1/6. Ram and Mohan have guaranteed that Sohan's share in the profit
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shall not be less than 25, 000, in any year.The net profit for the year ended March 31, 2016 is
2, 00,000, before charging interest on capital.
You are required to show distribution of profit.
(Ans: Profit to Ram 48,000, Mohan 32,000 and Sohan 25,000).
Past Adjustment
5. The net profit of X, Y and Z for the year ended 31st March, 2021 was 60, 000 and the same was
distributed among them in their agreed ratio of 3:1:1. It was subsequently discovered that the under
mentionedtransactions were not recorded in the books:
(i) Interest on Capital @ 5% p.a.
(ii) Interest on drawings amounting to X 700, Y 500 and Z 300.
(iii) Partner's Salary: X 1, 000, Y 1,500 p.a.
The capital accounts of partners were fixed as: X 1, 00,000, Y 80, 000and Z 60, 000.
Record the adjustment entry.
(Ans: X Dr. 2,700, Y Cr. 2,600 and Z Cr. 100]
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To Interest on Partners loan A/c
TRUE / FALSE :
1. The nature of Profit and Loss Account is real. [F]
2. Registration of partnership is optional. [T]
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3. A body corporate can be a partner in partnership firm. [F]
4. Sleeping partner are those who do not take part in conduct of the business. [F]
5. When the Partnership agreement is silent about the treatment of interest on capital then it will be
treated as charge on profit.[F]
6. Fixed capital always shows Dr. balance. [F]
7. When a partnership firm gives loan to its partner then interest on loan will be debited in profit
and loss account. [T]
8. In case of fixed capital account method drawing out of capital is shown in partner current
account.[F]
commission is shown in Profit and Loss Appropriation A/c. [F]
10. Interest as a charge means interest on capital is to be allowed whether the firm has earned
profit or incurred loss. [T]
11. In the absence of partnership deed mutual relations are governed by the Indian partnership act
2013. [T]
12. Capital in the beginning is calculated by subtracting drawing and adding profit distributed. [F]
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Ch-02: Goodwill: Nature and Valuation:
Meaning of Goodwill:-It is the reputation that helps the business to earn more profits as compared to
a newly setup business. In accounting, the monetary value of such advantage is known as
Factors Affecting the Value of Goodwill:-
The main factors affecting the value of goodwill are as follows:
(a) Nature of business (b) Location
(c) Efficiency of management. (d) Market situation.
Need for Valuation of Goodwill
In a partnership firm, goodwill needs to be valued in the following circumstances:
1. Change in the profit sharing ratio amongst the existing partners; 2. Admission of new
partner;
3. Amalgamation of partnership firm. 4. Death of a partner and
5. Dissolution of a firm involving sale of business as a going concern. 6. Retirement of a partner;
Methods of Valuation of Goodwill:-
1.Average Profits Method:-
(a) Simple Average:-
Stepwise procedure to calculate Goodwill under this method:
Step 1: Work out profits or losses given for each of the past year after taking into account
abnormalities, if any.
Step 2: Calculate average by dividing the total profit of all the years by the number of years
Step 3: Goodwill= Average Profit x Number of year's purchase.
(b) Weighted Average Profit:-
Under this method, earlier years are less important than the recent yea Thus, each year's profit is
multiplied by its respective number (weight) in chronological order. The latest year will be given the
highest weight and the earliest year will be given lowest weight. Each profit figure will be multiplied
by its weight and then the total of these products will be calculated. This total will be divided by the
total of weights.
Then, Goodwill = Weighted Average Profit x Number of years' purchase.
2. Super Profit Method:-
Stepwise procedure to calculate Goodwill under this method:
Calculate the average profit,
Calculate the normal profit on the capital employed on the basis of the normal rate of return,
Formula , Normal Profit = Capital Employed x NRR /100
Calculate the super profits by deducting normal profit from the average profits,
Formula, SuperProfit = Average Profit - Normal Profit
Then, Goodwill = Super profits x Number of years 'purchase.
3. Capitalisation Method:-
Under this method the goodwill can be calculated in two ways:
(a) by Capitalizing the Average Profits, or (b) by Capitalizing the Super Profits.
(a) Capitalisation of Average Profits: This involves the following steps:
(i) As certain the Average Profits based on the past few years' performance.
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(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 x 100/Normal Rate of Return
As certain the actual capital employed (net assets) by deducting outside liabilities from thetotal assets
(excluding goodwill).
Capital Employed/Net Assets = Total Assets (excluding Goodwill) Outside Liabilities
Compute the Value of Goodwill by deducting Net Assets from the Capitalised Value of Average
Profits, i.e.(ii) (iii).
(b) Capitalisation of Super 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 profit = Capital Employed x Normal Rate of Return/100
Calculate average profit for past years, as specified.
(iv) Super profits = average profits/Actual profit - normal profits
(v) Goodwill = Super Profits x 100/ Normal Rate of Return
Note:- 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.
Valuation of Goodwill
1. Compute the value of goodwill on the basis of four years' purchase of the average profits based on
the last five years? The profits/losses for the last five years were as follows:
2017 25,000; 2018 40,000; 2019 - 15,000) loss; 2020 80,000; 2021 1,00,000
Ans: 1, 84,000.
2. Capital employed in a business is 2, 00,000. The normal rate of returnon capital employed is 15%.
During the year 2002 the firm earned a profit of 48, 000. Calculate good will on the basis of 3 years
purchaseof super profit?
Ans: 54, 000.
3. A business has earned average profits of 1, 00,000 during the last few years. Find out the value of
goodwill by capitalisation method, given that the assetsof the business are 10, 00,000 and its external
liabilities are 1, 80,000. The normal rate of return is 10%?
Ans: 1, 80,000.
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(Being the compensation of gaining partners to Sacrificing partners)
All Partners Capital/ Current A/c Dr. (In New Profit Sharing Ratio)
To Goodwill A/c (With value of Goodwill)
(Being the goodwill debited to Partners Capital accounts in New profit sharing ratio)
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8. Calculate the value of goodwill at 3 years' purchase of Super Profit, when: Capital employed
2,50,000; Average profit 30,000 and normal rate of return is 10%.
(a) 3000 (b) 25,000 (c) 30,000 (d) 1 5,000 [d]
9. What are super profits:-
(a) Actual profit Normal Profit (b) Normal Profit - Actual profit
(c) Actual profit + Normal Profit (d) None of the above [a]
10. The net assets of the firm including fictitious assets of 5,000 are 85,000. The net
liabilities of the firm are 30,000.The normal rate of return is 10% & the average profits of the firm
are 8,000. Calculate the goodwill as per capitalization of super profits
(a) 20,000 (b) 30,000
(c) 25,000 (d) None of the above
11. Which of the following items are added to previous profits for finding normal profits
for valuation of goodwill?
(a) Loss on sale of fixed assets
(b) Loss due to fire, earthquake etc
(c) Undervaluation of closing stock
(d) All of the above [a]
12. The profits earned by a business over the last 5 years are as follows 12,000; 13,000;
14,000: 18,000 and 2,000 (loss). Based on 2 years purchase of the last 5 years profits, value of
Goodwill will be :
(a) 23,600 (b) 22,000
(c) 1,10,000 (d) 1,18,000 [d]
13. Following are the methods of calculating goodwill except:
(a) Super Profit method (b) Average Profit method
(c) Weighted Average Profit method (d) Capital Profit method [d]
TRUE / FALSE :
1. Location of business does not affect the goodwill of business. (F)
2 profit into consideration the future maintainable profits. (T)
3. Goodwill can be sold in part. (F)
4. Purchased goodwill may arise on acquisition of an existing business concern. (T)
5. Self-Generated goodwill is recorded in the books of accounts as some consideration is paid for it.
(F)
6. Goodwill is a fictitious asset. (F)
7. Goodwill is valued during dissolution of a firm. (F)
8. In the event of change in profit sharing ratio, General Reserve existing inthe Balance Sheet is
transferred to capital accounts of partners in their new ratio. (F)
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Ch-03: Change in profit sharing Ratio Among the Existing Partners
Any change in existing agreement among farmers amounts to reconstitution of the film. This
results in an existing agreement and a new agreement comes into existence. However, the firm
continues Modes of Reconstitution Partnership. Reconstitutions of a firm usually takes place
in any of the filling following situations:
Change in Profit sharing ratio among partners.
Admission of a new partner
Retirement and Death of Partner
Sale of Business to others.
Amalgamation of firms.
In case of Change in Profit sharing ratio. When there is change in profit sharing ratio
amongst existing partners, there is sacrifice and gain ;one partner may gain and the other
sacrifice.
Sacrificing ratio: The ratio in which one partner sacrifices his share in favour of
another partner is called sacrificing ratio
Gaining ratio The ratio in which one partner gains due to change in profit sharing
ratio is called gaining ratio.
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Ans. (b)
2. X, Y, Z shared profits as 3:2:1. On January 1, 2010 they decided to change the ratio to equal
ratio. Goodwill was valued at 24,000. What will be journal entries to give effect to the change in
ratio.
a) Z's Cap A/c Dr. 4,000
To Cap. A/c 4,000
b) Cap A/c Dr. 4,000
To Z's Cap A/c 4 ,000
c) Goodwill A/c Dr. 24,000
apital A/c 12,000
8,000
To Capital A/c 4,000
d) none of the above.
Ans- (a)
3. Reconstitution of a partnership firm, can take place on which occasion?
a) Change in profit sharing ratio
b) Admission of partner
c) Retirement and death of partner
d) all of the above
Ans- (d)
4. In case of change in profit sharing ratio, workmen compensation reserves existing in theBalance
sheet is transferred to Capital Alc of partners
a) after providing for claim of workmen if any
b) ignoring the claim of workmen (if any)
c) both a & b the above
d) none of the above
Ans. (a)
5. S, T& W were partners in a firm. They admitted V as a new partner. S and T sacrifice 1/3rd &
1/4th of their share respectively in favour of V. Calculate the new profit sharing ratio of S, T, W &
V.
a) 8:9:10:10
b) 8:9:12:7
c) 8:9:7:10
d) 8:7:9 :10
Ans. (b)
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Ch-04: ADMISSION OF PARTNER
Accounting Steps:
Step1: Revaluation of Assets and Reassessment of Liabilities.
Step2: Treatment of Accumulated Profits or Losses. After welcome of New Partner
Step3: New Profit Sharing Ratio and Sacrificing Ratio.
Step4: Treatment of Goodwill.
Step5: Adjustment of Capital and New Balance Sheet.
Note: - First two steps are calculated on the basis of old balance sheet, Old Partners' Capital A/c
Old Profit Sharing Ratio. If, firstly these two steps are completed by students then there will be no
chance of mistake in accounting treatment.
Step1: Revaluation of Assets and Reassessment of Liabilities.
The Journal Entries recorded for revaluation of assets and reassessment of liabilities are as follows:-
(a) For increase in the value of an asset:-
Asset A/c Dr.
To Revaluation A/c (Gain)
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(b) For reduction in the value of an asset:-
Revaluation A/c Dr.
To Asset A/c (Loss)
(c) Appreciation in the amount of a liability:-
Revaluation A/c Dr.
To Liability A/c (Loss)
(d) For reduction in the amount of a liability:-
Liability A/c Dr.
To Revaluation A/c (Gain)
(e) For an unrecorded asset:-
Asset A/c Dr.
To Revaluation A/c
(f) For an unrecorded liability (Gain):-
Revaluation A/c Dr.
To Liability A/c (Loss)
(g) For transfer of gain on Revaluation if credit balance:-
Revaluation A/c Dr.
To Old Partners Capital A/c s (Old ratio) (Individually)
(h) For transferring loss on revaluation:-
Old P Capital A/c s Dr. (Individually) (Old ratio)
To Revaluation A/c
Step 2: Treatment of Accumulated Profits or Losses.
The journal entries recorded for Accumulated Profits or Losses are as follows:
1. For Accumulated Profit:-
Profit & Loss A/c (Profit)
Reserve A/c Dr
A/c Dr.
Investment Fluctuation Reserve A/c Dr.
To Old Capital A/c (Individually) (In Old Profit Sharing Ratio)
2. For Losses:-
Old Capital A/c Dr (Individually)
To Profit & Loss A/c (Loss)
To Deferred Revenue Expenses A/c (In Old Profit Sharing Ratio)
Step 3: New Profit sharing ratio and sacrificing ratio:-
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 the new partner acquires his sharefrom 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 amongthe old partners will
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change keeping in view their respective contribution tothe 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 1/5th share in the future profits of the firm. Calculate new profit sharing ratio of Anil, Vishal and
Sumit.
Solution: hare = 1/5;
Remaining Share 1-1/5 = 4/5.
hare = 4/5 x 3/5 = 12/25
ew Share = 4/5 x 2/5 = 8/25
hare = 1 x 5/5 x 5 = 5/25
New profit sharing ratio of Anil, Vishal and Sumit will be 12:8:5.
Note: It has been assumed that the new partner acquired his share from old partners in old ratio.
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 ;
1/10 = 5/10
Bharti,s share = 2/5 1/10 = 3/10
So, New profit sharing ratio is 5:3:2.
Illustration 3:-
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 1/4th of his share and Shyam 1/3rd of his share in favour of Ghanshyam.
Calculate new profit sharing ratio of Ram, Shyam and Ghanshyam.
Solution: Ram sacrifice = 3/5 x 1/4 = 3/20; Shyam sacrifice = 2/5 x 1/3 =2/15;
new share= 3/5 3/20 = 9/20
share = 2/5 2/15 = 4/15
new share = 3/20 + 2/15 = 17/60.
So, New ratio is 27:16:17.
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.
Step4: Treatment of Goodwill.
There are different situations relating to the accounting treatment of goodwill at the time of admission
of new partner. When a new partner is admitted, goodwill can be treated by
1) Premium method and , 2) Revaluation method.
All these are given in detail under the following categories:
1) Premium method:
This method is followed when the new partner brings his share of goodwill in cash. Amount of
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premium (share of goodwill) is shared by old partners in sacrificing ratio.
Journal:
a) Cash A/c Dr
To Premium for Goodwill A/c
(Premium brought in by new partner)
b) Premium for Goodwill A/c Dr
apital A/c
(Goodwill shared in sacrificing ratio)
(I) Goodwill paid by the New Partner to the Old Partners privately:
No entry will be passed in the books of the firm for premium paid privately. Entry for cash brought in
by him as capital shall only be passed. However if there is any goodwill A/c existing in the balance
sheet of old partners before admission, it should be immediately written off among the old partners in
old ratio.
(II) Goodwill paid by new partner retained in business:
(a) Cash A/c Dr
To Premium for Goodwill A/c
(Premium brought in by New Partner)
(b) Premium for Goodwill A/c Dr
To Sacrificing apital A/c
(Goodwill shared in Sacrificing Ratio)
(III) Goodwill withdrawn by old partners:
Entries (a) and (b) same as above.
For withdrawal:
c) apital A/c Dr
To Cash A/c
Treatment of existing Goodwill appearing in the Balance Sheet:
Existing goodwill to be written off by debiting O Capital Account in Old Ratio.
Journal entry:
A/c atio)
To Goodwill A/c
(Being the existing goodwill written off)
Eg: A and B are partners sharing profits and losses in the ratio 3:2. They admitted C into partnership
for 1/4th share. Goodwill of the firm is valued at
already appears in the books a 5,000 as premium.
For writing off goodwill:
A/c Dr 6,000
A/c Dr 4,000
To Goodwill A/c 10,000
(Being goodwill written off in old ratio)
However, if partners decide to maintain 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.
So, in the above case C 2,500 only as premium. 10,000
20,000 - 10,000)] which will be credited A/c in sacrificing ratio.
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2) Revaluation Method:
This method is followed when the new partner does not bring his share of goodwill in cash. Goodwill
account is raised in the books by crediting old partners in old profit sharing ratio. At that time
possibilities are:
(a) No goodwill appears in books at the time of admission.
Goodwill account must be raised at its full value:
Goodwill A/c Dr
To O apital A/c
When the Incoming or New Partner does not bring his share of Goodwill:
(i) Goodwill A/c (With Value of Goodwill)
To A/c (In old Profit Sharing Ratio)
(Being the Goodwill account raised)
(ii) All Partners Capital/ Current A/c Dr. (In New Profit Sharing Ratio)
To Goodwill A/c (With value of Goodwill) (Being the Goodwill account written off)
When the Incoming or New Partner brings a PART of his share of Goodwill:
(i) Premium for Goodwill A/c (With Goodwill brought)
urrent A/c Value of Goodwill)
To Sacrificing Partners Capital/Current A/c (In Sacrificing Ratio)
(Being the Goodwill transferred in Sacrificing Ratio)
(b) Goodwill already appears in the books:
When goodwill appearing in books is less than the agreed value:
Goodwill A/c Dr
To Old Part apital A/c
(Being goodwill raised to its agreed value)
When goodwill appearing in books is more than agreed value:
apital A/c Dr
To Goodwill A/c
(Being goodwill brought down to its agreed value)
When the Incoming or New Partner does not bring his share of Goodwill:
1. Amar and Sachin are partners sharing profits of 3:2. Chetan is admitted as partner w.e.f. 1st April
2021 and their new profit sharing ratio is 3:2:1. Goodwill appeared in the books at 20,000.
Goodwill as on the date of admission was valued at 1, 80,000. Pass the journal entries giving effect
to the arrangement under both the methods.
First Method:
Date Particulars L Debit Credit
F
(i) Capital/ Current A/c Dr. 12,000
Capital/ Current A/c Dr. 8,000
To Goodwill A/c 20,000
(Being existing goodwill written off in their Old profit sharing ratio)
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(ii) A/c (1,80,000x1/6) 30,000
Capital/ Current A/c (30,000x3/5) 18,000
Capital/ Current A/c (30,000x2/5) 12,000
(Being the goodwill credited to sacrificing partners in their
sacrificing ratio)
Working Note:
Calculation of sacrificing ratio Old ratio 3:2 ;
New ratio 3:2:1
Amar 3/5-3/6=3/30 (Sac);
Sachin 2/5-2/6=2/30 (Sac);
Sacrificing ratio is 3:2
Second Method:
Date Particulars LF Debit Credit
When the Incoming or New Partner brings a PART of his share of Goodwill:
2. Bharat and Sunil were partners in a firm sharing profits and losses in the ratio of 1:2. On 1st April,
2021 Rajiv was admitted as a new partner for 1/4th share in the share of goodwill is
2, 50,000 out of which he 1,00,000.
Pass the necessary Journal Entries when the Goodwill Account is raised for the amount not brought
by the incoming partner and is also written off.
Journal Entries
(i) Goodwill A/c Dr. (2,50,000-1,00,000) 1,50,000
To Capital/Current A/c 50,000
To Capital/Current A/c 1,00,000
(Being the goodwill raised for the amount not brought by New Partner and distributed among
Sacrificing Partners in Sacrificing Ratio 1:2)
32
(ii) Capital/ Current A/c Dr. 1,50,000
To Goodwill A/c 1,50,000
(Being goodwill written off by same amount)
Hidden Goodwill:
Sometimes the value of Goodwill is not given. It is inferred or estimated from other related
information given in question
Example:- A & B are two partners in 1, 00,000
th
respectively. C is admitted for 1/5 share and he is bringing 80,000 as his capital. Calculate the
value of goodwill.
Solution:
Value of Goodwill = Capital x 5/1) (A's Capital+ B's Capital+ C's Capital)
= ( 80,000 x 5/1) ( 1, 20,000 + 1, 00,000+ 80,000)
= 4,00, 000 3,00,000
= 1, 00,000
So C's share of Goodwill = 1,00,000 x 1/5 = 20,000
33
*Note: It means new partner C bring his share of goodwill in cash. So, In this case journal
entries will be same as given in table of (II) situation
Step 5: Adjustment of capital and New Balance Sheet.
After the admission of a partner, the capitals of all partners may be adjusted as per agreement. The
adjustment may take any of the following forms:
I-Adjustment of the capitals of the old partners on the basis of new partner's capital
Steps:
(i) Calculate the total capital of the firm on the basis of new partner's capital and his share in profits.
Total Capital/New Capital= New partner's capital x Reciprocal of the proportion of his share in profit.
(ii) Calculate the new capitals of all partners by dividing total capital in new ratio.
(iii) Prepare old partners' capital A/c s (after all adjustments regarding Revaluation, General Reserve,
Goodwill etc) and find out the actual balances of their capitals.
(iv) Compare the new capitals as in (ii) with old capital balances as in (iii) and work outsurplus or
deficiency.
(v) Surplus will be paid back to the old partners and if there is deficiency the same will be contributed
in cash by the old partners.
(If it is specifically required under agreement, the surplus can be Cr. to their current A/c s and
deficiency can be Dr. to their current A/c s)
(vi) If goodwill is not brought in cash, it can be adjusted either (i) through new partner's capital A/c
this will reduce his original capital contributed by him or (ii) if it is adjusted through new partner's
current A/c this will not affect the original capital contributed by him.
II. Finding the new partner's sufficient capital on the basis of the old partners' capital or the
total capital of the firm
Steps:
(i) Prepare Old Partners' Capital A/c s (after all adjustments regarding Revaluation, General Reserve,
Goodwill etc.)
(ii) Calculate the total Capital of the new firm as follows:
Total Capital of the firm = Combined adjusted x Capital of old partners Reciprocal of the Combined
Proportion of their share of profit
(iii) New partner's capital will be equal to his share of the Total Capital.
(iv) If goodwill is not brought in cash by the new partner, it should be better Dr. to his Current
Account. This will make the calculation of his sufficient capital more accurate and simple.
34
2. There is a need of revaluation of assets and liabilities on admission of a partner because
(a) Assets and Liabilities should appears at revised values
(b) Any profit and loss an account of change in values belong to old partners
(c) All unrecorded assets and liabilities get recorded
(d) None of Above [b]
3. On admission of a partner, which of the following items in the Balance Sheet is transferred to the
credit of Capital Accounts of old partners in the old Profit-sharing Ratio, if Capital Accountsare
maintained following Fluctuating Capital Accounts Method
(a) Deferred Revenue Expenditure; (b) Profit and Loss Account (Debit Balance);
(c) Profit and Loss Account (Credit Balance); (d) Balance in Drawings Account of partners. [c]
4. If the new partner brings his share of goodwill in cash , it will shared by old partner in :
(a) Sacrificing ratio (b) Old profit sharing Ratio
(c) New Ratio (d) Capital ratio [a]
5. Revaluation Account is a :
(a) Real Account (b) Nominal Account
(c) Personal Account (d) None of the Above [b]
6. When new partner brings cash for goodwill , the amount is credited to :
(a) Realisation Account (b) Cash account
(c) Premium for Goodwill Account (d) Revaluation Account [c]
7. The Credit Balance of Profits and Loss appears in the books at the time of admission of partner will
be transferred to :
(a) Profit and Loss Appropriation Account
(b) All Partners Capital Account
(c) Old Partners Capital Account
(d) Revaluation Account [c]
8. Goodwill of the firm is valued at 1, 00,000. Goodwill also appears in the books at 50,000. C is
admitted for1/4th Share. The amount of goodwill to be brought in by C will be :
(a) 20,000 (b) 25,000
(c) 30,000 (d) 40,000 [b]
9. If the new partner brings any additional amount of cash other than his capital contributionsthen it is
termed as :
(a) Capital (b) Reserves (c) Profits (d) Premium for Goodwill [d]
10. X and Y are partners sharing profits and losses in the ratio of 3:2. Z is admitted for 1/5th share in
profits which he gets from X. New profit sharing ratio will be
(a)12 :8 :5 (b) 8 :12 :5 (c) 2:2:1 (d) 2:2:2 [c]
11. A and B are partners sharing profits in the ratio of 7:3. C is admitted as a new partner. A gave
1/7th of his share and B gave 1/3rd of his share to C. New Profit-sharing Ratio
will be:
(a) 6:2:2 (b) 4:1:1 (c) 3:2:2 (d) None [a]
12. X and Y share profits and losses in the ratio of 4: 3. The admit Z in the firm for 3/7th sharewhich
he gets 2/7th from X and 1/7th from Y. New Profit-sharing Ratio will be :
(a) 7:3:3 (b) 2:2:3 (c) 5:2:3 (d) 2:3:3 [b]
35
13. A and B are partners, sharing profits in the ratio of 5: 3. They admit C for 1/5th share in profits,
which he acquires equally from both A and B. New profit sharing ratio will be:
(a) 21 : 11 : 8 (b) 20 : 10 : 4 (c) 15 : 10 : 5 (d) 10 : 5 : 4 [a]
14. A, B and C share profits and Losses in the ratio, of 3 : 2 : 1. D is admitted for 1/6th share which he
gets from A. New ratio will be:
(a) 2:2:1:1 (b) 3:1:1:1 (c) 2:2:2:1 (d) 1:1:2:2 [a]
15. A and B are partners sharing profits in the ratio of 3:2. On admission of C for 1/5th share, Land
is appreciated by 10% (Book Value 80,000), Building is decreased by 20% ( 2, 00,000),
Unrecorded Debtors of 1,250 are bought in the books and Creditors of 2,750 need not be paid.
The Gain (profit) /loss on revaluation will be:
(a) Loss 28,000 (b) Loss 40,000 (c) Profit 28,000 (d) Profit 40,000 [a]
16. X and Y are partners sharing profits in the ratio of 3:1. They admit Z as a partner who pays
4,000 as Goodwill .New Profit-sharing Ratio being 2:1:1 among X, Y& Z. Goodwill will be credited
to:
(a) X and Y as 3,000 and 1,000
(b) X only
(c) Y Only
(d) None [b]
17. R and S are partners sharing profits in the ratio of 5:3. T joins the firm and R gives him 1/4th of his
share and S gives 1/5th of his share to him. New Profit-sharing Ratio will be:
(a) 75 :48 : 37 (b) 45 :32 : 27 (c) 13 :7 : 4 (d) 35 :30 : 25 [a]
18. A, B and C are partners haring profits in ratio of 3:2:1. They admit D as partner in the firm. A,
B and C give 1/3rd , 1/6th & 1/9th share of their respective profits. The share of profit of D will be:
(a) 1/10 (b) 13/54 (c) 12/54 (d) 10/55 [b]
19. A and B are partners sharing profits in ratio of 3:2. A's Capital is 30,000 and B's Capitalis
15,000. They admit C for 1/5th share of profits. C will bring as his capital:-
(a) 9,000 (b) 12,000 (c) 14,500 (d) 11,250 [d]
20. X and Y are partners Z is admitted as partner for 1/7th share. New Profit sharing Ratio will be
(a) 2:3:1 (b) 3:3:1 (c) 6:5:2 (d) 1:1:1 [b]
21. A and B share profits equally. They admit C for 1/7th share. New Profit sharing Ratio of Aand B
is: (a) 4/7, 1/7 (b) 3/7, 3/7 (c) 2/7, 2/7 (d) 2/7, 4/7. [b]
22. A and B are partners C is admitted for 1/5th share. C brings 1, 20,000 as his share in Capital. Net
worth of the firm is:
(a) 1,00,000 (b) 4,00,000 (c) 1,20,000 (d) 6,00,000 [d]
23. A and B share profits in the ratio of 3:4. C is admitted for 1/5th share. New Profit-sharing ratio
will be
(a) 3:4:1 (b) 12:16:7 (c) 16:12:7 (d) 12:6 :7 [b]
Practical Questions:-
1. A and B were partners in a firm sharing profits and losses in the ratio of 3:2.They admits C into the
partnership with 1/6th share in the profits. Calculate the new profit sharing ratio? (Ans- 3:2:1)
36
2. P and Q are partners sharing profits in 2:1 ratio. They admitted R into partnership giving him 1/5th
share which he acquired from P and Q in 1:2 ratio. Calculate new profit sharing ratio. (Ans- 3:1:1)
3. Sandeep and Navdeep are partners in a firm sharing profits in 5:3 ratios. 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)
Goodwill
4. 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 premiumin cash. The
Goodwill of the firm was valued at 80, 000 on Kanwar's admission. Record necessary journal entry
for goodwill on Kanwar's admission.
Revaluation A/c, Accumulated Profit or Losses, Partners' Capital A/c s & their adjustment, Balance
Sheet of New Firm
37
Ch-05 : Retirement and Death of a partner.
Effect of retirement / death of a partner on change in profit sharing ratio, treatment of goodwill,
treatment for revaluation of assets and reassessment of liabilities, adjustment of accumulated profits
and reserves and preparation of balance sheet.
profit till the date of death.
Journal entry for the transfer of profit and loss on revaluation at the time of retirement/death of a
partner.
For Profits:
Revaluation A/c Dr.
To All Partner's Capital A/c (in Old Ratio)
(Being Profit on Revaluation transferred to All Partners' Capital A/c in Old Profit Sharing Ratio)
For losses:
All the Partners' Capital A/c Dr. (in Old Ratio)
To Revaluation A/c
(Being loss on Revaluation transferred to All Partners' Capital A/c in Old Profit Sharing Ratio)
Treatment of undistributed profit at the time of retirement/death of the partner.
The undistributed profits are transferred to all partners' capital account in the old profit sharing
ratio.
General Reserve A/c Dr.
Profit& Loss A/c Dr.
To All Partners' Capital A/c (in Old Ratio)
(Being undistributed profits transferred to All Partners' Capital A/c in Old Profit Sharing Ratio)
Treatment of undistributed losses at the time of retirement/death of a partner
The undistributed losses are transferred to all partners' capitalaccounts in their old profit sharing ratio.
All partners' Capital A/c Dr. (in Old Ratio)
To Profit & Loss A/c
To Advertisement Suspense A/c
To Deferred Revenue A/c
(Being undistributed losses are transferred to All Partners' Capital A/c in Old Profit Sharing Ratio)
Practice Questions:-
Q1. A, B, & C are partners with ratio 4:5:6. Find out new ratio if i) A retires, B retires, C retires.
Sol. Old Ratio between partners A, B & C is 4:5:6. So, New Ratio i) 5:6 ii) 4:6 iii) 4:5
Q2. A, B, & C are partners with ratio 3:2:1.Find out new ratioif A retires and his share is purchased by B
alone.
Sol. Old Ratio between partners A, B, & C is 3:2:1. A retires leaving the share of 3/6 and this share is
purchased by B. So, B's New Share 2/6 +3/6 =5/6 and C's share is 1/6. So New Ratio is 5:1.
Q3. Roman, Preet and Sanjay are partners with equal profit sharing ratio.Roman decided to retire from
the firm and new ratio is fixed as 5:3, determine the gaining ratio.
Sol. Gaining Ratio = New Ratio Old Ratio
Preet's Gaining Share = 5/8-1/3=15/24-8/24=7/24
Sanjay's Gaining Share =3/8-1/3=9/24-8/24=1/24
Gaining Ratio=7:1
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Q4. A, B and C were partners sharing profits in the ratio of 5:3:2. B retires on 1st January, 2016 with A
and C agreed to share the profits in futurein the ratio of 6:4. Find the Gaining ratio.
Sol. Gaining Ratio = New Ratio Old Ratio
A's Gaining Ratio = 6/10-5/10 = 1/10
C's Gaining Ratio=4/10-2/10=2/10
Gaining ratio= 1:2
Q5. A, B and C are partners in a firm sharing profits in the ratioof 5:3:2. A retires and his share is taken
up by B and C equally.Goodwill of the firm is 60,000. Pass necessary journal entry.
Sol:- B's Capital A/c Dr 15,000
C's Capital A/c Dr 15,000
To A's Capital A/c 30,000
(Being adjustment of goodwill done on retirement of A)
Working Note:- Old Ratio is 5:3:2, New Ratio11:9 and Gaining Ratio is1:1.
A's share of goodwill = 60,000 x 5/10= 30,000
Q6. L, M and N were partners sharing profits and losses in the ratio of 5:3:2. On 31st March, 2016 their
Balance Sheet was as under:
Prepare Revaluation Account, Partners' Capital A/c and Balance sheet.
N retired on 31stMarch2016 and it was agreed that:
Goodwill of the firm is to be valued at 2, 00,000.
Machinery be valued at 1, 40,000; Patents at 40, 000and Property at 1, 50,000 on this date.
40
Partner s Capital A/c
Particulars L( M( N( Particulars L( M( N(
To Loan A/c ........ ....... 85,000 By balance b/d 1,50,000 1,25,000 75,000
To balance c/d 1,80,000 1,45,000 ...... By General Reserve A/c 15,000 10,000 5,000
By Profit on 15,000 10,000 5,000
Revaluation A/c
Z retires on the above date and the new profit sharing ratiobetween X and Y will be 5:4.following terms
were agreed:
(a) Land and buildings be reduced by10%.
(b) Out of the Insurance premium paid during the year 5, 000 be carried forward as unexpired.
(c) There is no need of any provision for doubtful debts.
(d) Goodwill of the firm be valued at 36, 000 and adjustment in this respect be made without raising
a goodwill A/c.
Pass necessary Journal Entries & Prepare the Capital Accounts and the New Balance sheet.
Q.2. A, B, C and D were partners sharing profits in the ratioof 3:3:2:2 respectively. On 1st April, 2014 D
retired owing to ill health. It was decided by A, B and C that in future their profit sharing ratio would be
41
3:2:1.Complete the following Journal in this regard:
42
Ch-06: Dissolution of Partnership Firm
43
DISSOLUTION OF FIRM VS DISSOLUTION OF PARTNERSHIP FIRM
Effect on
All Accounts Books are closed Accounts Books are not closed
accounts
Calculation of Assets are realized and liabilities Assets are revaluated and liabilities
profit or loss are paid by preparing realization are reassessed by preparing
account and profits are Revaluation account. Profit or loss
distributedamong the partners calculate disposed to the partners
Capital account.
44
Realisation A/c Dr
To Sundry Assets A/c
(b) When Provisions of related assets are transferred to realisation A/c :
Provision for Depreciation A/c Dr.
To Realisation A/c
(c) When Assets are realized :
Cash/bank A/c Dr.
To Realisation A/c
(d) When liabilities are transferred to the Realisation Account :
Sundries Liabilities A/c Dr.
To Realisation A/c
(e) When Liabilities are paid:
Realisation A/c Dr.
To Cash/Bank A/c
(f) When Asset is taken over by the partner:
Partner s capital A/c Dr.
To Realisation A/c
(g) When Liability taken over by the partner:
Realisation A/c Dr.
To Partners capital A/c
(h) When Liabilities are paid:
Realisation A/c Dr.
To Cash/Bank A/c
(i) When Asset is taken over by the partner:
Partner s Capital A/c Dr.
To Realisation A/c
REALISATION A/c
45
Partner s Capital A/c
Particulars LF A B Particulars LF A B
To Realisation A/c (Loss xxx xxx By balance b/d xxx xxx
on Realisation)
To Realisation A/c (Asset xx xxx By General Reserve xxx xx
taken over)
To Bank A/c(final xxx xxx By P/L A/c xxx xxx
Payment)
By Realisation A/c xxx xxx
(Profit on realization)
xxxx xxxx xxxx xxxx
Preparation of Bank A/c:- Since the business is being closed, no need to prepare a balance sheet, we
prepare Cash/Bank Account. All cash realized are shown on the debit side of cash/Bank account and
all cash payments are shown on the credit side of Cash/Bank A/c.
46
(d) Amit, a partner was appointed to realise the assets, at a cost of 4, 000. The actual amount of
realization amounted to 3,000.
Date Particulars LF Debit Credit
a Realisation A/c.... Dr. 2,500
To Bank A/c 2,500
b Realisation A/c.... Dr. 3,000
To Ashok capital A/c 3,000
c No Entry
d Realisation A/c... Dr. 4,00
To Amit capital A/c 4,000
Q. Prateek, Neeraj and Umang were partners in a firm, sharing profits and losses in the ratio of 7:2:1.
The firm was dissolved on 31st March, 2021. After transfer of assets (other than cash) and external
liabilities to the realisation Account, the following transactions took place. Pass journal entry.
(a) Furniture of 45,000 was sold by auction for 66,000 and the a
to 2,000.
(b) Office equipment was sold 90, 000 was taken over by creditors of the book value of 82,000 in
full settlement.
(c) Umang had given a loan of 1, 09,000 to the firm. He accepted 1, 00,000 in full settlement of his
loan.
(d) Investments were 53,000 out of which 23,000 was taken by Neeraj at 25,000. Balance of the
investments was sold for 35,000.
(e) Expenses incurred on dissolution were 21,000 and were paid by Prateek.
(f) Loss on revaluation was 40,000
Ans.
a) Cash/Bank A/c Dr 64,000
To Realization A/c 64,000
(b) Realisation A/c Dr 2,000
To Bank A/c 2,000
(c) No Entry
(d) Umang Capital A/c Dr 1,90,000
To Cash/Bank A/c 1,00,000
To Realization A/c 90,000
47
On the above date the firm was dissolved:
(a) Shanti took over 40% of the stock at10% less than its book value and the remaining stock was sold
for 40, 000. Furniture realised 80, 000.
(b) An unrecorded investment was sold for 20, 000. Machinery wassold at a loss of 60, 000.
(c) Debtors realised 55,000
There was an outstanding bill for repairs for which 19,000 was paid.
Prepare Realisation A/c
48
Ch-07 : Company Accounts- Accounting for Share Capital
Total capital of the company is divided into a number of small indivisible units of a fixed amount and
each such unit is called a share. The fixed value of a share, printed on the share certificate, is called
nominal/ par / face value of a share. However, a company can issue shares at a price different from the
face value of a share.
Fundamentals of Accounting: Issue; Forfeiture And Re-issue of Shares.
As per SEBI guidelines, a company is free to price its issue, if it has a three years track record of
consistent profitability and in case of new company, if it is promoted by a company with a five years
track record of consistent profitability.
1. Authorised Share Capital.
2. Issued Share Capital.
3. Subscribed Share Capital.
4. Called-up Share Capital.
5. Paid-up Share Capital.
6. Reserve Share Capital.
Reserve Capital is different from Capital reserve, Capital reserves are part of and and
refers to those reserves which are not available for declaration of dividend.
Types of Shares
Share issued by a company can be divided into following categories:
(i) Preference Shares They enjoy preferential rights in the matter of:
(a) Payment of dividend, and
(b) Repayment of capital.
Types of Preference Shares
Preference shares can be of various types, which are as follows:
(a) Cumulative Preference Shares.
(b) Non-cumulative Preference Shares.
(c) Participating Preference Shares.
(d) Non-participating Preference Shares.
(e) Redeemable Preference Shares.
(f) Non-redeemable Preference Shares.
(g) Convertible Preference Shares.
(h) Non-convertible Preference Shares Equity Shares.
The shares can be issued by a company either For cash or For consideration other than cash.
A public limited company cannot make any allotment of shares unless the amount of minimum
subscription stated in the prospectus has been subscribed and the sum payable as application money for
such shares has been paid to and received by the company.
49
As per guidelines of the Securities Exchange Board of India (SEBI), a company must receive a
minimum of 90% subscription.
Against the entire issue (including devolvement on underwriters in case of underwritten issue) before
making any allotment of shares or debentures to the public.
The minimum application money to be paid by an applicant along with the application money shall not
be less than 25% of the issue price. Companies (Amendment) Bill, 2003 require application money to
be not less than 25% of the nominal value of security. Thus, the issue price of shares is generally
received by the company in instalments and these instalments are known as under:
JOURNAL ENTRIES FOR ISSUE OF SHARES FOR CASH
Upon the issue of share capital by a company, the under mentioned entries are made in the financial
books:
(i) On receipt of the application money
Bank Account Dr. (with the actual amount received)
To Shares Application Account
(ii) On allotment of share
Share Allotment Account Dr. (With the amount due on allotment)
Share Application Account Dr. (With the application amount received on allotted shares.)
To Share Capital (With the amount due Account on allotment and application).
(iii) On receipt of allotment money
Bank Account Dr. (with the amount actually received on allotment.)
To Share Allotment Account
Sometimes separate Application and Allotment Accounts are not prepared and entries relating to
application and allotment monies are passed through a combined Application and Allotment Account.
(iv) On a call being made
Share Call Account Dr. (with the amount due on the call.)
To Share Capital Account
(v) On receipt of call money
Bank Account Dr. (with the due amount actually received on call)
To Share Call Account
When shares are issued at a premium, the premium amount is credited to a separate account called
Premium is not a part of share capital.
(ii) Share Application A/c Dr. [No. of Shares Applied for x Application Amount per share]
To Securities Premium A/c [No. of Shares allotted x Premium Amount per share]
To Share capital A/c [No. of Shares allotted x per share for capital]
(b) Premium Amount called with Allotment Money
(i) Share Allotment A/c Dr.[ No. of Shares Allotted x Allotted and Premium Money per share]
To Share Capital A/c [No. of Shares Allotted x Allotment Amount per share]
To Securities Premium A/c [No. of Share Allotted x Premium Amount per share]
(Amount due on allotment of Shares @ per share including premium)
(ii) Bank A/c Dr.
To Share Allotment A/c (Money received including premium consequent upon allotment)
Kinds of Companies
(i) Private companies According to Section 2 (68) of the Companies Act, 2013, it is a company with
minimum paid-up share capital of 1,00,000 or such higher amount as may be prescribed in the
50
Companies Act, 2013 and which by its Articles of Association
(a) Restricts the right to transfer its shares, if any.
(b) Except in one person company, limits the number of its members excluding its present and past
employee members to 200; if the past or present employee acquired the shares while in employment and
continue to hold them. If any share is held jointly by two or more persons, they shall be treated as a
single member.
(c) Prohibits any invitation to the public to subscribe for any securities of the company.
The minimum number of members required to form a private company is two. The name of a private
company ends with the words,
(ii) Public company As per Section 2 (7) of Companies Act, 2013, public company is a company which
(a) is not a private company.
(b) has minimum capital of Rs 5 lakh or such higher paid-up capital as may be prescribed.
(c) is a private company, which is a subsidiary of a public company. Minimum requirement of a public
company is seven persons.
(iii) One person company is a company which has only one person as a member. It is acompany
incorporated as a private company which has only one member. Rule 3 of theCompanies (Incorporation)
5. Types of Shares:-
Preference shares According to Section 43 (b) of the Companies Act, 2013, preference shares are the
shares which carry the following two preferential rights:
Preferential right of dividend to be paid as fixed amount or an amount calculated at a fixed rate, which
may either be free of or subject to income tax.
Return of capital on the winding up of the company before that of equity shares. Holders of preference
shares are called preference shareholders.
Equity shares According to Section 43(a) of the Companies Act 2013, equity share is that share which is
not a preference share. Equity shares are the most commonly issued class of shares which carry the
maximum and of the business. The risks being losing partor all of the value of shares if
the business incurs losses, the rewards being payment of higher dividends and appreciation in the
market value.
6. Share Capital It is that part of the capital of a company, which is represented by the total nominal
value of shares, which it has issued.
7. Kinds of Share Capital
(i) Authorised share capital According to Section 2(8) of Companies Act, 2013, or
means such capital as is authorised by the memorandum of acompany to be the
maximum amount of share capital of a company.
(ii) Issued capital According to Section 2(50) of the Companies Act, 2013, issued capital means such
capital as the company issues from time to time for subscription.
means
such part of the capital which is for the time being subscribed by the members of a company.
(a) Subscribed and fully paid-up Shares are sai - entire
nominal (face) value is called and also paid-up by the shareholders.
(b) Subscribed but not fully paid-up Shares are said to be but not fully paid- when
the company has called-up the entire nominal (face) value of the share but has not received it.
the company has not called-up the entire nominal (face) value of share.
51
A reference has been made two terms
Called-up capital According to Section 2(15) of the Companies Act, 2013, -
means such part of the capital, which has been called for payment. Thus, it means the amountof
nominal (face) value called-up by the company to be paid by the shareholders towards the share
capital.
Paid-up share capital According to -up share
-
company has received against the amount against the shares towards share capital.
8. Reserve Capital It is that portion of uncalled share capital which shall not be capable of beingcalled
up except in the event and for the purpose of the company being wound up.
9. Capital Reserve is the reserve which is not free for distribution as dividend. Itis
mandatory to create capital reserve in case of capital profits earned by the company. Reserves which
are created out of capital profits are not readily available for distribution as dividend among the
shareholders, e.g. premium on issue of shares of debentures, profits on re- issue of shares, profits prior
to incorporation, premium on redemption of debentures.
10. Minimum Subscription It is the amount stated in the prospectus as the minimum amount thatmust
be subscribed. Unless the sum payable on application for the sum so stated (minimum subscription)
has been paid to and received by the company by cheque or other instruments, security cannot be
allotted.
11. Presentation of Share Capital in Balance Sheet.
As per Schedule III of Companies Act, 2013, share capital is to be disclosed in balance
sheet in the following manner.
Comprehensive Question
Himalaya Company Limited issued for public subscription of 1, 20,000 equity shares of
10 each at a premium of 2 per share payable as under:
With Application 3 per share
On allotment (including premium) 5 per share
On First call 2 per share
Applications were received for 1, 60,000 shares. Allotment was made on pro-rata basis.Excess money
on application was adjusted against the amount due on allotment.
Rohan, whom 4,800 shares were allotted, failed to pay for the two calls. These shares were subsequently
forfeited after the second call was made. All the shares forfeited were reissuedto Teena as fully paid at
7 per share.
Record journal entries in the books of the company to record these transactions relating to share capital.
Also show the balance sheet.
Sol. Journal Entries
Date Particulars L.F Debit ( ) Credit ( )
52
(Share Application money received for 1,60,000shares
@ 3 per share)
53
Bank A/c Dr. 2,30,400
To Share Final Call A/c 2,30,400
(Share Final Call received on 1,15,200 shares @
2 per share and 4,800 shares failed to pay)
Balance Sheet
Particulars Note No. Amount
II. Assets
1. Non-Current Assets
2. Current Assets
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a. Cash and Cash Equivalents 3 14,54,400
Total 14,54,400
Notes to Accounts:-
Note No. Particulars Amt.
1 Share Capital
Authorised Share Capital
shares of 10 each
Issued Share Capital
1,20,000 shares of 10 each 12,00,000
Subscribed, Called-up and Paid-up Share Capital
1,20,000 shares of 10 each 12,00,000
1. each at a
premium of . 3 per share payable as follows:
With Application
On Allotment (including premium)
On First Call
On Second Call
Applications were received for 30,000 shares and allotment was made on pro-rata basis.Money overpaid
on applications was adjusted to the amount due on allotment.
Mr. Mohit whom 400 shares were allotted, failed to pay the allotment money and the first call, and his
shares were forfeited after the first call. Mr. Joly, whom 600 shares were allotted, failed to pay for the
two calls and hence, his shares were forfeited.
the whole of
Mr. shares being included.
Record journal entries in the books of the Company and prepare the Balance Sheet.
55
2. Journalise the following transactions in the books Bhushan Oil Ltd.:
-paymentof allotment
shares were not made. The
forfeited shares were reissued at . 70 per share as fully paid-up.
forfeited for
non-payment of
share fully paid-up.
-payment of fi per share.
These shares were reissued at . 45 per share fully paid-up.
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Share Capital A/c Dr. 36,000
Share premium A/c Dr. 12,000
To Share Allotment A/c 18,000
To Share Forfeiture A/c 30,000
(600 shares forfeited afterallotment)
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Share Allotment 11,82,000
Share First Call 9,65,000
Working Notes:
58
Ch-08 : Company Accounts- Accounting Issue of Debentures
59
security i.e., in addition to the prime security. It is only to be realised when the prime security failsto
pay the amount of the loan. Debentures issued as collateral securitymay or may not be recorded in the
books of accounts if an accounting entry is not passed it is disclose under the loan if an accounting
entryis passed it is shown below the loan first as debenture issued and there after Debenture
Suspense Account is deducted.
Kinds of Debentures
1. Secured or Mortgaged Debentures
2. Unsecured or Naked Debentures
3. Registered or bearer Debentures
4. Redeemable or Irredeemable Debentures
5. Convertible and Non-Convertible Debentures
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Sept. 30 Debenture holders A/c Dr. 24,000
To Bank A/c 24,000
(Payment of Interest)
Sept. 30 Income Tax Payable A/c Dr 6,000
To Bank A/c 6,000
(TDS deposited with Income tax authorities)
2022 Interest on Debentures A/c Dr 30,000
March 31 To Debenture holders A/c 24,000
To Income Tax Payable A/c 6,000
(Half-yearly Interest due on Debentures and Tax
deducted at source)
March 31 Debenture holders A/c Dr 24,000
To Bank A/c 24,000
(Payment of Interest)
March 31 Income Tax Payable A/c Dr 6,000
To Bank A/c 6,000
(TDS deposited with Income tax authorities)
Q 2. Give Journal Entries for the Issue of Debentures in the following conditions.
1. Issued 2,000, 12% Debentures of 100 each at par, redeemable also at par.
2. Issued 2,000, 12% Debentures of 100 each at a discount of 2%, redeemable at par.
3. Issued 2,000, 12% Debentures of 100 each at a premium of 5%, redeemable at par.
4. Issued 2,000, 12% Debentures of 100 each at par but redeemable at 5% premium.
5. Issued 2,000, 12% Debentures of 100 each at a discount of 2%, redeemable at a premium of 5%.
6. Issued 2,000, 12% Debentures of 100 each at a premium of 5%, redeemable at a premium of 10%.
Solution Journal
Date Particulars L.F Dr. ( ) Cr. ( )
Case 1 Bank A/c Dr. 2,00,000
To 12% Debentures Application & Allotment A/c 2,00,000
(Application money received)
12% Debentures Application & Allotment A/c Dr. 2,00,00
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To 12% Debentures A/c 2,00,000
(Transfer of Application money to DebenturesA/c,
issued at a discount of 2%)
Case 3 Bank A/c Dr. 2,10,000
To 12% Debentures Application & AllotmentA/c 2,10,000
(Application money received)
12% Debentures Application & Allotment A/c Dr. 2,10,000
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repayment at the end of 4 years . Y Ltd. has a balance of 5, 00,000 in Securities Premium Reserve.
The company decided to write off discount on issue of debentures from Securities Premium Reserve
in the first year. Pass the journal entry.
Solution: JOURNAL
Date Particulars LF Debit ( ) Credit ( )
Securities Premium Reserve A/c Dr 10,000
To Discount on Issue of DebenturesA/c 10,000
(Being Discount on Issue of Debentures written off)
Q3.On 1st April, 2021, S Ltd. issued 6,000, 8% Debentures of nominal (face) value of 100 each
redeemable at 5% premium in equal proportions at the end of 5, 10 and 15 year Ithas a balance of
10,000 in Securities Premium Reserve.
Pass Journal entries. Also give Journal entry for writing off Loss on Issue of Debentures.
Date Particulars LF Debit( ) Credit ( )
2021 Bank A/c Dr 6 , 00,000
Apr1 To Debenture Application &Allotment A/c 6 , 00,000
(Being Application money received)
Apr 1 Debenture Application &Allotment A/c Dr 6,00,000
Loss on Issue of Debentures A/c Dr 30,000
To 9% Debentures A/c
To Premium on Redemption of Debentures 6,00,000
(Being Application money transferred) 30,000
2022 Securities Premium Reserve A/c Dr 10,000
Mar31 Statement of Profit & Loss A/c Dr 20,000
To Loss on Issue of Debentures A/c
(Being Loss on Issue of Debentures written off) 30,000
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Ch-09: Financial Statements of Company
Financial statements are the basic and formal annual reports through which the corporate
management communicates financial information to its owners and various other external parties
which include investors, tax authorities, government, employees, etc. These refer to:the balance
sheet (position statement) as at the end of accounting period, the statement of profit and loss of a
company and the cash flow statement.
PART 1
Form of balance sheet
REVISED SCHEDULE III OF THE COMPANIES ACT 2013BALANCE
SHEET AS
PARTICULARS (1) NOTE FIGURES AS AT THE FIRGURES AS AT
NO (2) END OF CURRENT THE END OF THE
REPORTING PERIOD PREVIOUS REPO-
(3) RTING PERIOD (4)
1. EQUITY AND LIABILITIES
(1) Funds
(a) Share Capital
(b) Reserves and Surplus
(c) Money received against sharewarrants
(2) Share Applications MoneyPending Allotment
(3) Non-Current Liabilities
(a) Long-term borrowings
(b) Deferred tax liabilities(Net)
(c) Other Long-term Liabilities
(d) Long-term provisions
(4) Current Liabilities
(a) Short-term borrowings
(b) Trade payables
(c) Other current liabilities
(d) Short-term provisions
TOTAL
II ASSETS
1. Non-Current Assets
(a) Fixed Assets
(i)Tangible Assets
(ii) Intangible assets
(iii) Capital work-in progress
(iv) Intangible assets underdevelopment
(b) Non-current investments
(c) Deferred tax assets (net)
(d)Long-term loans and advances
(e) Other non-current assets
(2) Current Assets
(a) Current investments
(b) Inventories
(c) Trade receivables
(d) Cash and cash equivalents
(e) Short-term loans and advances
(f) Other current assets
TOTAL
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PART -II
STATEMENT OF PROFIT AND LOSS (
PARTICULARS (1) NOTE FIGURES FOR THE FIGURES FOR
NO (2) CURRENT THE PREVIOUS
RERPORTING REPORTING
PERIOD (3) PERIOD (4)
I. Revenue from operations
II. Other income
III. Total Revenue ( I+II )
IV. Expenses:
Cost of materials consumed
Purchases of stock-in-trade
Changes in inventories of finishedgoods
Work-in-progress and stock-in-trade
Employees benefits expenses
Finance costs
Depreciation and amortization expenses
Other expenses
Total expenses
V. Profit Before Tax (III-IV)
VI. Tax
VII. Profit After Tax (V-VI)
PRACTICE QUESTIONS:-
Q 1.Under which sub headings will the following items be placed in the Balance sheet of a company as
per revised Schedule III of the Companies act 2013.
(1) Capital reserve (2) Bonds (3) Loans repayable on demand
(4) Vehicles (5) Goodwill (6) Loose Tools
Q2.Under which major headings and sub headings will the following items be shown in the balance
Sheet of a company as per schedule III of the Companies act 2013.
(1) Balance of the statement of profit and loss. (2) Loan of 1,00,000 payable three years.
(3) Short- term deposits payable on demand (4) Loose tools
(5) Trademark (6) Land
(7) Cash at bank (8) Trade payables.
MULTIPLE CHOICE QUESTION:-
Q1. While preparing the Balance sheet of a company, Securities Premium Reserve is shown under:
(a) Non-Current liabilities (b) Share capital
(c) Long term borrowings (d) Reserves and surplus
Q2. Call in advance appears in a sheet under:
(a) Current liabilities (b) Share Capital
(c) Long term Borrowings (d) Reserves and Surplus
Q3. Analysis of financial statement is significant for:
(a) Creditors (b) Management
(c) Employees (d) All of the above
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Ch-10: Financial Statements Analysis
The process of critical evaluation of the financial information contained in the financial statements
in order to understand and make decisions regarding the operations of the firm iscalled
PRACTICE QUESTIONS:-
(1) What do you mean by financial statements analysis?
(2) State any four limitations of financial analysis.
(3) State any four limitations of financial analysis.
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Ch-11: Accounting Ratios
Relationship between two figures, expressed in arithmetical terms is called a ratio. Accounting ratio is
one of the tools of financial analysis which requires regrouping of data byapplication of arithmetical
relationships which provides crucial financial information and points out the areas which require
investigation.
OBJECTIVES:-
1. To know the areas of the business which need more attention;
2. To know about the potential areas which can be improved with the effort in the desireddirection;
3. To provide a deeper analysis of the profitability, liquidity, solvency and efficiency levels inthe
business;
4. To provide information for making cross sectional analysis by comparing the performancewith the
best industry standards;
5. To provide information derived from financial statements useful for making projectionsand
estimates for the future.
Methods of Expressing Ratios:-
(a) Proportion Ratio Pure Ratio or Simple Ratio
(b) Rate or so many times Method
(c) Percentage Method
(d) Fraction Method.
CLASSIFICATION OF RATIOS:-
A. Liquidity Ratio
B. Solvency Ratio
C. Activity Ratio
D. Profitability Ratio
A. Liquidity Ratios:
To meet its commitments, business needs liquid funds. The ability of the business to pay the amount
due to stakeholders as and when it is due is known as liquidity, and the ratios calculated to measure it
are known as Liquidity ratios are also known as short-term solvency ratio. Thereare
two types of Liquidity ratios, they are:-
1.Current Ratio:- Current Ratio is the proportion of current assets to current liabilities. It is also
known as working capital ratio. The ideal ratio of current ratio is 2:1.It is expressed as follows:
Current Ratio = Current Assets
Current Liabilities
List of Current assets:- Current Investments, Inventories, Trade Receivables (less provision, Cash
and Cash Equivalents, Short-term loans And advances, Other Current Assets(Prepaid exp., Accrued
income, Advance Tax.)
List of current liabilities:- Short-term Borrowings(including Bank overdraft),Trade payables, other
current liabilities(Unpaid dividends, int. Accrued on borrowings, income received in advance,
outstanding exp.) Short-term provisions (provision for tax and proposed dividend).
2. Liquid Ratio:- Liquid ratio is also known as Quick Ratio or Acid Test Ratio. Current ratio is the
proportion of Current Assets to Current Liabilities. An ideal Quick ratio is said to be 1:1. It is
expressed as below:-
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Quick Ratio = Quick Assets
Current Liabilities.
Quick Assets = Current Assets (Prepaid expenses + Closing Stock)
B. Solvency Ratio:-
These ratios are calculated to assess the ability of the firm to meet itslong-term liabilities as and when
they become due. Some important solvency ratios are:-
1. Debt Equity Ratio:- Debt Equity Ratio measures the relationship between Long-term Debt and
Equity. Ideal ratio of Debt Equity ratio is 2:1.
Debt Equity Ratio = Debt
Equity
Debt here means Lon-term Debt and Equity means shareholders fund or Net worth.
Long-term Debt includes Long-term Borrowings and Long-term Provisions.
For Example:- Debentures, Mortgage Loan, Bank loan, loan from financial institutions, Public
Deposits, etc. Share Capital and Reserve and Surplus.
2. Total Assets to Debt Ratio:- Total assets to Debt ratio establishes relationship between Total
Assets and Long-term Debt.
Total Assets to Debt Ratio= Total Assets
Debt
Total Assets = Non-Current Assets (Tangible and Intangible + Non-current Investments+ Long-term
Loans and Advances) + Current Assets.
Debt = Long-term Borrowings and Long-term Provisions.
3. Proprietary Ratio:- Proprietary ratio expresses relationship of P (Shareholders) funds to
Net Assets and is calculated as follows :
Proprietary Ratio = Shareholders fund
Total Assets.
4. Interest coverage Ratio:- This ratio is calculated by dividing the Profit before Charging Interest
and Income-tax by fixed interest charges. An Interest Coverage Ratio of 6 to 7 times is considered
appropriate and is calculated as follows :
Interest Coverage Ratio= Net Profit before charging Interest and Tax
Fixed Interest Charges.
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Inventory Turnover Ratio = Cost of Revenue from Operation
Average Inventory
Cost of Revenue from operation= Opening Inventory + Purchases + Direct Expenses. Closing Stock
or
= Revenue from operations Gross Profit
2. Trade Receivables Turnover Ratio:- It expresses the relationship between Credit Revenue from
Operations and Average Trade Receivables during the year.
3. Trade Payables Turnover Ratio:- It expresses the relationship between credit Purchase and
average trade payables during the year.
Trade Payables Turnover Ratio= Net Credit Purchase
Average Trade payables
4. Working Capital Turnover Ratio:- This ratio indicates the velocity of utilization of net working
capital. A higher ratio measures the efficient utilization of working capital.
Working Capital Turnover Ratio= Cost of Revenue from operations/Net Revenue from operations
Working Capital
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D. Profitability ratios:- Profitability ratios are calculated to analyse the earning capacity of the
business which is the outcome of utilisation of resources employed in the business. Thereis a close
relationship between the profit and the efficiency with which the resources employed in the business
are utilised. Following are the important profitability ratios:-
1. Gross Profit Ratio:- This ratio shows the relationship between Gross Profit and Revenue from
operations.
Gross Profit Ratio= Gross Profit x 100
Revenue from operations
Cost of Revenue from operation= Opening Inventory + Purchases + Direct Exp. Closing Stock
or
= Revenue from operations Gross Profit.
2. Operating Ratio:- It is computed to analyse cost of operation in relation to Revenue from
operations. Lower the Operating Ratio, better it is, because it will leave higher margin of profit on
Revenue from operations. It is calculated as follows:
Operating Expenses = Employee Benefit Exp. + Depreciation + Other Exp. (i.e. Office and
Administration Exp. + Selling and Distribution Exp. + Discount + Bad debts + Interest on short-term
loans)
3. Operating Profit Ratio:- It is calculated to reveal operating margin. It may becomputed directly or
as a residual of operating ratio. It is calculated as follows:
Operating Profit Ratio= Operating Profit x 100
Revenue from operations
Operating Expenses = Employee Benefit Exp. + Depreciation + Other Exp. (i.e. Office and
Administration Exp. + Selling and Distribution Exp. + Discount + Bad debts + Interest on short-term
loans)
Operating Profit = Gross Profit other operating Exp. + other operating incomesOther operating
incomes = commission Received + Discount Received.
Operating Profit Ratio = 100 Operating Ratio.
4. Net Profit Ratio:- It establishes the relationship between Net Profit and Revenue from operations.
It is calculated as follows:
Net Profit Ratio= Net Profit x 100
Revenue from operations
Net Profit = Gross Profit Indirect Expenses. & losses + Other Incomes.
Generally, Net Profit refers to Profit after Tax (PAT).
5. Return on Investment:- It is also known as Return on Capital Employed or Rateof Return Yield on
Capital. It explains the overall utilisation of funds by a business enterprise. It is calculated as follows:
Return on Investment= Net Profit before Interest, Tax & Dividend x100
Capital Employed
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-Current Liabilities (Long-term Borrowings +Long-term
Provisions)
Capital Employed = Non-current assets + working capital
Non-current assets = Tangible Assets + Intangible assets + Non-CurrentInvestments + Long term Advances.
Working capital = Current Assets Current Liabilities.
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Q8 The ideal Current ratio is:
(a) 1:2 (b) 2:1 (c) 1:1 (d) 40%
HINT (b)
9 Opening Inventory of a firm is 80,000. Cost of revenue from operation is 6,00,000.
Inventory Turnover Ratio is 5 times. Its closing inventory will be:
(a) 1,60,000 (b) 1,20,000 (c) 80,000 (d) 2,00,000
HINT (a)
PRACTICE QUESTIONS:-
1. A company has a Current Ratio of 4:1 and Quick Ratio is 2.5:1. Assuming that the
Inventories are 22,500, find out Total Current Assets and Current Liabilities.
Ans. Current ratio = 4:1; Quick Ratio = 2.5:1
Inventory = 4 - 2.5 = 1.5
If Inventory is 1.5, then Current Assets = 4
If Inventory = 22,500, then Current Assets = 4 x 22,500/1.5 = 60,000
Current Liabilities = 60,000/4 = 15,000.
2. From the following, Calculate Stock Turnover Ratio
Net Revenue = 2, 00,000; Gross Profit = 25%,
Opening Inventory = 5000
Closing Inventory = 15,000
Ans. Inventory Turnover Ratio = Cost of Revenue from Operation/Average inventory
Cost of Revenue= Revenue - Gross Profit
Cost of Revenue = 2, 00,000 50,000 = 1, 50,000
Average Inventory = Opening Inventory + Closing Inventory
2
= 5,000+
2
= 20,000/2= 10,000
1,50,000/10,000 = 15 Times.
3. Calculate Gross Profit and Revenue
Average Inventory = 80,000
Inventory Turnover Ratio = 6 times
Selling price = 25% above cost
Ans. Inventory Turnover Ratio = Cost of Revenue/Average Inventory
6 = Cost of Revenue/80,000
Cost of Revenue = 80,000 x 6 = 4,80,000
Gross Profit = 4,80,000 x 25/100 = 1,20,000
Revenue = Cost of Revenue + Gross Profit
= 4,80,000 + 1,20,000 = 6,00,000.
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Ch-12: Cash Flow Statement.
MEANING OF CASH FLOW STATEMENT:- Cash Flow Statement is a statement that shows the flow of cash
and cash equivalents during the period under report.
OBJECTIVES OF CASH FLOW STATEMENT:-
1. To ascertain the sources of cash and cash equivalents under operating, investing andfinancing
activities by the enterprise.
2. To ascertain the applications of cash and cash equivalents under operating, investingand financing
activities by the enterprise.
3. To ascertain net change in cash and cash equivalents being the difference between receipts and
payments under operating, investing and financing activities between the dates of two balance sheets.
Particulars
I. CASH FLOW FROM OPERATING ACTIVITIES
(A) Net profit before tax and extraordinary items (as per working note)
(B) Add : Items to be added
*Depreciation
*Goodwill, Patents and Trademarks amortised
*Interest on Bank Overdraft/Cash Credit
*Interest on Borrowings and Debentures
*Loss on Sale of Fixed Assets
*Increase in Provision for doubtful debts
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(G) Cash generated from Operations (D+E-F)
(H) Less : Income tax paid (Net of tax refund)
(I) Cash flow before Extraordinary items
*Extraordinary items (+/-)
----
Cash Flow From (or Used in) Operating Activities
II. CASH FLOW FROM INVESTING ACTIVITIES
Proceeds from sale of fixed assets
Proceeds from sale of investments (other than Current Investments to
be included in cash & cash equivalents and Marketable Securities)
Proceeds from sale of intangible assets
Interest and Dividend received (for non-financial companies Only)
Rent received
Payment for Purchase of Fixed Assets
Payment for Purchase of Investments (Other than Marketable
Securities)
Payment for purchase of intangible assets like goodwill
Extraordinary items (e.g. Insurance Claim on machinery against fire) (+/-)
Cash Flow From (or used in) Investing Activities .-.-.-.
III. CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from Issue of Shares and Debentures
Proceeds from Other Long-term Borrowings
Increase/decrease in Bank Overdraft/Cash Credit
Payment of Final Dividend
Payment of Interim Dividend
Payment of Interest on Debentures and Loans (Short-term and long-term)
Repayment of Loans
Redemption of Debentures/Preference Shares
Payment of Share Issue Expenses
Payment for Buy-back of Shares as Extraordinary Activities (.....)
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WORKING NOTES:
Net Profit Before tax and extraordinary items:
Net Profit as per Statement of Profit & Loss or difference between closing balance & opening
balance of surplus i.e., balance in statement of profit & loss
Add: + Transfer to Reserves.
+ Proposed Dividend for current year.
+ Interim Dividend paid during the year.
+ Provision for Tax for the current year.
+ Extraordinary Items, if any, Debited to the Statement of Profit & Loss.
Less: - Extraordinary Items, if any, Credited to the Statement of Profit & Loss.
- Refund of Tax Credited to the Statement of Profit & Loss.
Net Profit Before Tax and Extraordinary Items.
NOTES:
1. Amounts in brackets mean amounts that are to be deducted.
2. Increase/Decrease in unpaid interest on debentures/loans affect Cash Flow from Financing
Activities.
3. Increase/Decrease in Unclaimed dividend affects Cash Flow from Financing Activities.
4. Increase/Decrease in Accrued interest on investments affects Cash Flow from InvestingActivities.
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accounting year may not be given, which shall be the balancing figure.
PRACTICE QUESTIONS:-
(1) While preparing cash flow statement what type of activity is payment of cash to acquire
Debentures by an investment company?
Hint: - Operating Activity.
(2) State how cash flow statements are historical in nature?
Hint: - Cash flow statement is historical in nature because it is prepared on the Profit and Loss A/c and
Balance sheet, which is based on past transactions.
(3) Under which type of activity will you classify of Equity Shares at P while preparing
cash flow statement?
Hint: - Financing Activity.
(4) Give any two transactions which result into Inflow of cash.
Hint: - Sale of goods for cash and cash received from trade receivables.
(5) Give an example of the activity which remains financing activity for every enterprise.
Hint: - Payment of dividend on shares.
(6) When is dividend received considered as Operating Activity?
Hint:- Dividend received in case of a finance company is considered as an Operating Activity.
(7) When is interest received considered as Financing Activity?
Hint: - Interest received on calls- in- arrear by a company is considered as Financing Activity.
(8) Dividend paid by a trading or manufacturing company is classified under which activity while
preparing Cash Flow Statement?
Hint: - Financing Activity.
(9) Interest paid by an investment company will come under which kind of activity while preparing
Cash Flow Statement?
Hint: - Operating Activity.
(10) Under which type of activity will you classify ommission and Royalty while
preparing Cash Flow Statement?
Hint: - Operating Activity.
(11) Under which type of activity will you classify interest paid on long-term borrowings while
preparing Cash Flow Statement?
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Hint: - Financing activity.
(12) Interest received by a finance company is classified under which kind activity while preparing a
Cash Flow Statement.
(13) State why Cash Flow Statement is not a substitute for Income Statement?
Hint: - Because Cash Flow Statement shows only the Inflows and Outflows of cash as Incomes
Statement shows both Cash and Non-cash items of Revenue nature and shows the Net Income during
the year.
(14) State whether the payment of cash to trade payables will result in Inflow, Outflow or No flow of
Cash.
Hint: - Outflow.
(15) State whether depreciation charged by a company will result in Inflow, Outflow or No flow of
Cash.
Hint:- No flow.
More Questions:-
1. Calculate Cash Flow from Operating Activities from the following :
Profit made during the year 2,50,000 after considering the following items:
Depreciation on fixed assets 10,000.
Amortization of goodwill 5,000
Loss on sale of machinery 7,000.
Profit on sale of land 3,000.
Additional information:-
Particulars 31/03/2013 ( ) 31/03/2012 ( )
Trade receivables 23,000 22,000
Trade payables 10,000 15,000
Prepaid expenses 4,000 6,000
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2. Following are the Balance Sheets of XYZ Ltd., as on 31st March, 2021 and 2022
Prepare a Cash Flow Statement after taking into account the following adjustments:
Depreciation provided on machinery during the year 2, 00,000.
Solution: Cash Flow Statement
A) Cash Flows From Operating Activities
Particulars Details ( ) Amt. ( )
Net Profit 1,00,000
Add: Proposed d vidend 80,000
Net Profit Before Tax and Dividend 1,80,000
Adjust non-cash and non-operating items:
Add- Depreciation 2,00,000
Amortization of Intangible assets 60,000 2,60,000
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Operating Profit Before Working Capital Changes 4,40,000
Add- decrease in CA & Increase in CL
Working note:
Purchase of Tangible Assets:
Dr. Tangible Assets A/c Cr.
Particulars Amt. ( ) Particulars Amt . ( )
To Balance b/d 9,00,000 By Depreciation 2,00,000
To Bank A/c (purchase) 9,00,000 By Balance b/d 16,00,000
18,00,000 18,00,000
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