Accounting for Not-for-Profit Organisation 1

LEARNING OBJECTIVES
After studying this chapter,
T here are certain organisations which are set up
for providing service to its members and the
public in general. Such organisations include clubs,
you will be able to;
charitable institutions, schools, religious
• Identiy the need for, and organisations, trade unions, welfare societies and
nature of accounting records societies for the promotion of art and culture. These
relating to not-for-profit
organisations; organisations have service as the main objective and
not the profit as is the case of organisations in
• List the principal financial business. Normally, these organisations do not
statements prepared by not-
undertake any business activity, and are managed
for-profit organisations;
by trustees who are fully accountable to their
• Prepare the Receipt, and members and the society for the utilization of the
Payment Account and Income funds raised for meeting the objectives of the
and Expenditure Account;
organisation. Hence, they also have to maintain
• Prepare Income and proper accounts and prepare the financial statement
Expenditure Account and which take the form of Receipt and Payment
Balance Sheet from a given Account; Income and Expenditure Account; and
Receipt and Payment
Account; Balance Sheet. at the end of for every accounting
period (normally a financial year).
• Explain treatment of certain This is also a legal requirement and helps them
peculiar items of Receipts
to keep track of their income and expenditure, the
and Payments such as
subscriptions from members, nature of which is different from those of the business
special funds, legacies, sale organisations. In this chapter we shall learn about
of old fixed assets, etc. 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

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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

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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.

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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. Cr.
Date Receipts L.F. Bank Office Date Payments L.F. Bank Office
Amount Amount Amount Amount
(Rs.) (Rs.) 2014 (Rs.) (Rs.)

2014 2014
April 1 Balance b/d 35,000 20,000 April 15 Insurance premium 15,000
April 10 Subscriptions 1,20,000 May 12 Printing and 10,750
stationery
April 10 Entrance fees 13,000 May 20 Postage and 430
May 20 Life membership 12,000 courier fees
fees June 16 Telephone 810
June 12 Locker rent 42,000 expenses
July 23 Life membership 8,000 July 10 Wages and salaries 22,000
fees July 15 Rates and Taxes 17,000
Aug. 20 Donation for 60,000 July 30 Govt. securities 1,00,000
building Aug. 13 Printing and 15,000
Sept. 13 Subscriptions 30,000 stationery
(2013-14) Aug. 15 Postage and 480
Sept. 13 Subscription 45,000 courier service
Sept. 10 Lighting 12,250

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Accounting for Not-for-Profit Organisation 5

Sept. 14 Entrance fees 10,000 Sept 13 Telephone expenses 830

Nov. 9 Subscription 35,000 Oct. 1 Wages and salaries 10,000 12,000
Oct. 18 Printing and 13,000
Nov. 9 Subscription 10,000 stationery
(2015-16) Oct. 31 Govt. securities 1,00,000
2015 Dec. 31 Wages and Salaries 22,000
Feb. 07 Subscription 25,000 2015
Jan. 21 Courier charges 240
Mar. 28 Interest on 18,000 Feb. 2 Telephone 960
government expenses
securities Mar. 10 Postage and 850
Courier fees
Mar. 27 Lighting 14,000
Mar. 27 Wages and Salaries 22,000
Mar. 31 Balance c/d 70,000 23,400
4,21,000 62,000 4,21,000 62,000

Part A
Item wise Aggregation of various Receipts
Subscriptions (2014–2015)
Date Amount (Rs.)
April 10, 2014 1,20,000
Sept. 13, 2014 45,000
Nov. 9, 2014 35,000
Feb. 7, 2015 25,000
Total 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 Amount (Rs)
April 10, 2014 13,000
Sept.14, 2014 10,000
Total 23,000

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Locker Rent
Date Amount (Rs)
June 12, 2014 42,000
Total 42,000

Life Membership fee

Date Amount (Rs)
May 20, 2014 12,000
July 23, 2014 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 10,750
Aug. 13, 2014 15,000
Oct. 18, 2014 13,000
Total 38,750

Lighting
Date Amount (Rs.)
Sept. 10, 2014 12,250
March 27, 2015 14,000
Total 26,250

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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.

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Figure 1

Receipts Payments

1. Donations 1. Purchase of Fixed Assets

(a) General 2. Purchase of Sports Material
(b) Specific purpose 3. Investment in Securities
2. Entrance Fees 4. Printing and Stationery
3. Legacies 5. Postage and Courier Charges
4. Sale of Investments 6. Advertisements
5. Sale of Fixed Assets 7. Wages and Salary
6. Subscriptions from Members 8. Honorarium
7. Life Membership Fees 9. Telephone Charges
8. Sale of old Newspapers 10. Electricity and Water Charges
9. Sale of Old Sports Material 11. Repairs and Renewals
10. Interest on Fixed Deposits 12. Upkeep of Play Ground
11. Interest/ Dividend on Investments 13. Conveyance Charges
12. Proceed from Charity Shows 14. Subscription for Periodicals
13. Sale of Scrap 15. Audit Fees
14. Grant-in-aid 16. Entertainment Expenses
15. Interest/Dividend on Specific 17. Municipal Taxes
Fund Investments 18. Charity
16. Miscellaneous Receipts. 19. Insurance
Receipt and Payment Account is given below:
Receipt and Payment Account for the year ending ————-
Receipts Amount Payments Amount
(Rs.) (Rs.)
Balance b/d Balance b/d (Bank overdraft) xxx
Cash in Hand xxx Wages and Salaries xxx
Cash at Bank xxx Rent xxx
Subscriptions xxx Rates and Taxes xxx
General Donations xxx Insurance xxx
Sale of newspaper/ xxx Printing and Stationery xxx
periodicals/waste paper Postage and courier xxx
Sale of old sports materials xxx Advertisement xxx
Interest on fixed deposits Sundry expenses xxx
Interest/Dividend on general xxx Telephone charges xxx
investments Entertainment expenses xxx
Locker Rent xxx Audit fees xxx
Sale of scraps xxx Honorarium xxx
Proceeds from charity show xxx Repair and Renewals xxx
Miscellaneous receipts xxx Upkeep of ground xxx
Grant-in-aid xxx Conveyance xxx
Legacies xxx Newspapers and Periodicals xxx
Specific Donations xxx Purchases of Assets xxx
Sale of Investments xxx Purchase of Investments xxx
Sale of Fixed Assets xxx Balance c/d xxx

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Accounting for Not-for-Profit Organisation 9

Life membership fees xxx Cash in hand xxx

Entrance fees xxx Cash at Bank* xxx
Receipts on account of xxx
specific purpose funds
Interest on specific funds' xxx
investments
Balance b/d (Bank Overdraft)* 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.

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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 20,000
Cash at bank as on April 1, 2014 35,000
Subscription: Rs.
2013-14 30,000
2014-15 2,25,000
2015-16 10,000 2,65,000
Donation for Building 60,000
Entrance fees 23,000
Life membership fee 20,000
Printing and Stationery 38,750
Lighting 26,250
Rates and Taxes 17,000
Telephone charges 2,600
Postage and courier 2,000
Wages and Salaries 88,000
Insurance Premium 15,000
Interest on government securities 18,000
Locker rent 42,000
Purchase of government securities 2,00,000
Cash in hand as on March 31, 2015 23,400
Cash at bank as on March 31, 2015 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. Cr.
Receipts Amount Payments Amount
(Rs.) (Rs.)
Cash in hand as on 20,000 Printing and Stationery 38,750
April 1, 2014 Lighting 26,250
Cash at bank as on 35,000 Rates and Taxes 17,000
April 1, 2014 Telephone charges 2,600
Subscription: Postage and Courier 2,000
2013–14 30,000 Wages and Salaries 88,000
2014–15 2,25,000 Insurance Premium 15,000
2015–16 10,000 2,65,000 Purchase of govt. securities 2,00,000
Donation for building 60,000 Cash in hand as on 23,400
Entrance fees 23,000 March 31, 2015
Life membership fee 20,000 Cash at bank as on 70,000
Interest on investment in 18,000 March 31, 2015
Government securities
Locker rent 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 Amount Particulars Amount
(Rs.) (Rs.)
Opening cash balance 1,000 Sale of old sports materials 1,200
Opening bank balance 7,200 Donation received for pavilion 4,600
Subscriptions collected for: Rent paid 3,000
2015-16 Rs. 500 Sports materials purchases 4,800
2016-17 Rs. 7,600 Purchase of refreshments 600
2017-18 Rs. 900 9,000 Expenses for maintenance 2,000
Sale of refreshments 1,000 of tennis court
Entrance fees received 1,000 Salary paid 2,500
Tournament expenses 2,400
Furniture purchased 1,500
Office expenses 1,200
Closing cash in hand 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. Cr.
Receipts Amount Payments Amount
(Rs.) (Rs.)
Balance b/d Rent 3,000
Cash 1,000 Sports materials purchased 4,800
Bank 7,200 Purchase of refreshments 600
Subscriptions Maintenance expenses for 2,000
2015-16 500 tennis court
2016-17 7,600 Salary 2,500
2017-18 900 9,000 Tournament expenses 2,400
Sale of refreshments 1,000 Furniture purchased 1,500
Entrance fees 1,000 Office expenses 1,200
Sale of old sports materials 1,200 Balance c/d
Donation for pavilion 4,600 Cash 400
Bank (balancing figure) 6,600
25,000 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.

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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. Cr.
Expenditure Amount Income Amount
(Rs.) (Rs.)
Printing and Stationery 38,750 Subscriptions 2,25,000
Lighting 26,250 Entrance fees 23,000
Rates and Taxes 17,000 Interest on investment 18,000
Telephone charges 2,600 in government securities
Postage and courier charges 2,000 Locker rent 42,000
Wages and Salaries 88,000
Insurance Premium 15,000
Surplus (Excess of income 1,18,400
over expenditure)
3,08,000 3,08,000

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Note that-
1. 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 Amount Payments Amount
(Rs.) (Rs.)
Balance b/d 3,200 Salary 1,500
(Cash in hand) Rent 800
Subscriptions 22,500 Electricity 3,500
Entrance Fees 1,250 Taxes 1,700
Donations 2,500 Printing and Stationery 380
Rent of hall 750 Sundry expenses 920
Sale of investments 3,000 Books purchased 7,500
Govt. bonds purchased 10,000
Fixed deposit with bank 5,000
(on 31.03.2017)
Balance c/d
Cash in hand 400
Cash at bank 1,500 1,900
33,200 33,200

Solution
Books of Clean Delhi Club
Income and Expenditure Account for the year ending March 31, 2017
Dr. Cr.
Expenditure Amount Income Amount
(Rs.) (Rs.)
Salary 1,500 Subscriptions 22,500
Rent 800 Entrance fees 1,250
Electricity 3,500 Donation 2,500
Taxes 1,700 Rent of hall 750
Printing & Stationery 380
Sundray Expenses 920
Surplus 18,200
(excess of income over
expenditure)
27,000 27,000

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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 Income Amount
(Rs.) (Rs.)
Balance c/d Bank 25,000 Purchase of furniture (1.7.14) 5,000
Subscriptions Salaries 2,000
2013 1,500 Telephone expenses 300
2014 10,000 Electricity charges 600
2015 500 12,000 Postage and Stationery 150
Donation 2,000 Purchase of books 2,500
Hall rent 300 Entertainment expenses 900
Interest on bank deposits 450 Purchase of 5% government 8,000
Entrance fees 1,000 papers (1.7.14)
Miscellaneous expenses 600
Balance c/d:
Cash 300
Bank 20,400
40,750 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 Amount Income Amount
(Rs.) (Rs.)
Salaries 2,000 Subscriptions 10,400
Add: Outstanding 1,500 3,500 Donation 2,000
Telephone expenses 300 Entrance Fees (50% of Rs. 1,000) 500
Electricity charges 600 Bank interest 450
Postage and Stationery 150 Add: Outstanding interest 150 600

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Entertainment expenses 900 Interest on investment 200

Add: Outstanding 500 1,400 Hall rent 300
expenses
Miscellaneous expenses 600
Depreciation on furniture 375
Surplus 7,075
(Excess of Income over
Expenditure)
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 Income and Expenditure Receipt and Payment
Account Account

Nature It is like as profit and loss It is the summary of the cash

account. book.
Nature of Items It records income and It records receipts and
expenditure of revenue payments of revenue as well as
nature only. capital nature.
Period Income and expenditure Receipts and payments may
items relate only to the also relate to preceding and
current period. succeeding periods.
Debit side Debit side of this account Debit side of this account
records expenses and losses. records the receipts.
Credit side Credit side of this account Credit side of this account
records income and gains. 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 rep- Balance at the end represents
resents excess of income cash in hand at the end and
over expenditure or vice- bank balance (or bank
versa. overdraft).

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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.

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18 Accountancy – Not-for-Profit Organisation and Partnership Accounts

Balance Sheet of as on ...............

Liabilities Amount Assets Amount
(Rs.) (Rs.)
Capital fund:
Opening Balance ...... Cash in hand and /or Cash ......
Add: Surplus at Bank
OR Outstanding Incomes ......
Less: Deficit Prepaid Expenses ......
Add: Capitalised Income of the ...... Stock of Consumable Items:
Current Year on account of: Previous Balance
Legacies ...... Add: Purchases in the current
Entrance Fees ...... period
Life Membership Fees ...... Less: Value consumed during ......
Closing Balance ...... the period
Special Fund/Donations: Previous Balance ......
Previous Balance (If any ) Add: Purchases in the current
Add: Receipts for the item period
during the period Less: Book Value of the Asset
Add: Income earned on sold/disposed off
fund/Donations’ Closing Balance ......
Investments
Less: Expenses paid out of
fund/Donations
Net Balance ......
Creditors for Purchases
and/or supplies ......
Bank Overdraft ......
Outstanding Expenses:
Income received in Advance ......
...... ......

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. Cr.
Receipts Amount Payments Amount
(Rs.) (Rs.)
Balance b/d (Cash in Hand) 18,000 Balance b/d (bank overdraft) 16,000
Member’s subscriptions 2,50,000 Upkeep of field and pavilion 1,15,000
Member’s admission fee 15,000 Tournament expenses 40,000
Sale of old sports materials 2,500 Rates and Insurance 10,000
Hire of ground 28,000 Telephone 3,500
Subscription for tournament 60,000 Postage and Courier charges 4,000
Life membership fee 20,000 Printing and Stationery 26,000
Donations 6,00,000 Miscellaneous expenses 4,400

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Accounting for Not-for-Profit Organisation 19

Secretary’s honorarium 30,000

Grass seeds 2,600
Investments 6,00,000
Purchase of sports materials 68,000
Balance c/d 74,000
9,93,500 9,93,500

Assets at the beginning of the year were:

Rs.
Play ground 5,00,000
Cash in hand 18,000
Stock of sports materials 85,000
Printing and Stationery 11,000
Subscriptions receivable 28,000
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. Cr.

Expenditure Amount Income Amount

(Rs.) (Rs.)
Upkeep of field and pavilion 1,15,000 Subscriptions 2,50,000
Rates and Insurance 10,000 Add: Outstanding
Telephone 3,500 (closing) 42,000
Postage and Courier charges 4,000 2,92,000
Printing & stationery 26,000 Less: Outstanding
Add: Opening stock 11,000 (opening) 28,000 2,64,000
Available for use 37,000 Admission fees 15,000
Less: Closing stock 25,900 11,100 Sale of old sports material 2,500
Stationery consumed 4,400 Rent of hall 28,000
Miscellaneous expenses 30,000
Secretary’s honorarium 2,600
Grass seeds
Sports materials consumed:
Opening stock 85,000
Add: Purchases 68,000
1,53,000
Less: Closing stock 76,500 76,500
Surplus 52,400
(Excess of income over
expenditure)
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.

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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 Assets Amount
(Rs.) (Rs.)
Capital Fund 6,26,000 Cash in hand 74,000
Add: Surplus 52,400 Outstanding subscriptions 42,000
6,78,400 Stock of sports materials 76,500
Add: Life membership Stock of printing 25,900
fee 20,000 6,98,400 and stationery
Pavilion Fund: Investments 6,00,000
Surplus from Tournament Play ground 5,00,000
(Rs.60,000-40,000) 20,000
Donation 6,00,000 6,20,000
13,18,400 13,18,400

Balance Sheet of Excellent Cricket Club as on March 31, 2014

Liabilities Amount Assets Amount
(Rs.) (Rs.)
Bank overdraft 16,000 Cash in hand 18,000
Capital/General fund Outstanding subscription 28,000
(balancing figure) 6,26,000 Stock of sports materials 85,000
Printing and Stationery 11,000
Play ground 5,00,000
6,42,000 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.

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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:
Rs.
Subscriptions received in 2016-17 20,000
Less: Subscriptions for the year 2015-16 3,000
17,000
Less: Subscription for the year 2017-18 2,000
15,000
Add: Subscriptions outstanding for the year 2016-17 6,000
Income from subscriptions for the year 2016-17 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 J.F. Amount Date Particulars J.F. A m o u n t
(Rs.) (Rs.)
Balance b/d 3,000 Balance b/d Nil
(outstanding at the (received in advance
beginning) during previous year)
Income and Expenditure 21,000 Cash (subscription 20,000
Account (balancing figure) received)
Balance c/d 2,000 Balance c/d 6,000
(received in advance) (outstanding at the end)
26,000 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 2,50,000
Add: Subscriptions outstanding on 31.3.2017 35,000
Add: Subscriptions received in advance on 1.4.2016 25,000
3,10,000
Less: Subscriptions outstanding on 1.4.2016 50,000
2,60,000
Less: Subscriptions received in advance on 31.3.2017 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 J.F. Amount Date Particulars J.F. Amount
(Rs.) (Rs.)
Balance b/d (outstanding) 50,000 Balance b/d (advance) 25,000
Income and Receipts and Payments A/c 2,50,000
Expenditure Account 2,30,000 Balance c/d (outstanding) 35,000
(balancing figure)
Balance c/d (advance) 30,000
3,10,000 3,10,000

Relevant items of subscription can be shown in the opening and closing

balance sheet as under:

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Accounting for Not-for-Profit Organisation 23

Balance Sheet as on March 31, 2014

Liabilities Amount Assets Amount
(Rs.) (Rs.)
Subscriptions received in advance 25,000 Subscription outstanding 50,000
*Relevant data only
Balance Sheet as on March 31, 2015
Liabilities Amount Assets Amount
(Rs.) (Rs.)
Subscriptions received in advance 30,000 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 2,500
2016-17 26,750
2017-18 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 30,250
Add: Subscriptions outstanding on March 31, 2016 2,250
Add: Subscriptions received in advance on April 1, 2016 NIL
32,500
Less: Subscriptions outstanding on April 1, 2016 2,750
29,750
Less: Subscriptions received in advance on March 31, 2017 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:

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24 Accountancy – Not-for-Profit Organisation and Partnership Accounts

Details (Rs.) (Rs.)

(i) Outstanding as on 01.04.2016 2,750
Received for 2015–16 2,500 250
(ii) Due for 2016–17 (125×230) 28,750
Received for 2016–17 26,750 2,000
Outstanding as on 31-3-2017 2,250

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 7,000
2014-15 30,000
2015-16 5,000 42,000

Additional Information: Rs.

1. Subscriptions outstanding March 31, 2014 8,500
2. Total Subscriptions outstanding March 31, 2015 18,500
3. Subscriptions received in advance 4,000
as on March 31, 2014

Solution
Income and Expenditure Account
for the year ending on March 31, 2015
Expenditure Amount Income Amount
(Rs.) (Rs.)
Subscriptions 30,000
Received for 2014-15
Add: Outstanding for 2014-15 17,000
Add: Received in advance for 4,000
2014-15
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).

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Accounting for Not-for-Profit Organisation 25

Balance Sheet (Relevant Data) as on March 31, 2015

Liabilities Amount Assets Amount
(Rs.) (Rs.)
Subscription Received in Subscription Outstanding:
Advance for 2014-15 2013-14 1,500
5,000 2014-15 1,7000 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

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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.

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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 Credit
Amount Amount
(Rs.) (Rs.)

Prize Fund 80,000

Prize Fund Investments 80,000
Income from Prize Fund Investments 8,000
Prizes awarded 6,000

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28 Accountancy – Not-for-Profit Organisation and Partnership Accounts

Solution
Balance Sheet as on………..
Liabilities Amount Assets Amount
(Rs.) (Rs.)
Prize fund 80,000 Prize Fund Investments 80,000
Add: Income from 8,000
Investments 88,000
Less: Prizes Awarded 6,000 82,000

Illustration 9
(a) Show the following information in financial statements of a ‘ Not-for-Profit’
Organisation:
Details Amount
(Rs.)
Match Expenses 16,000
Match Fund 8,000
Donation for Match Fund 5,000
Sale of Match tickets 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 Amount Assets Amount
(Rs.) (Rs.)
Match fund 8,000
Add: Donation 5,000
(Specific)
Add: Sale of Match 7,000
Tickets 20,000
Less: Match Expenses 16,000 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.

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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 April 1, 2014 March 31, 2015
Stock of stationery 4,000 3,000
Creditors for stationery 9,000 2,500

Solution

Details Amount
(Rs.)

Payment made for the purchase of stationery as per

Receipts and Payments account 23,000
Less: Creditors in the beginning 9,000
Payment made for the year 2014-15 14,000
Add: Payment not yet made (i.e. creditors at the end) 2,500
Stationery Purchased for the year 2014-15 16,500
Add: Stock in the beginning 4,000
Stationery Available for consumption during 2014-15 20,500
Less: Stock at the end 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

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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 40,000
Add: Opening stock 12,000
52,000
Less: Closing stock 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 3,70,000

Creditors for medicines purchased:
On 1.4.2014 25,000
On 31.3.2015 17,000
Stock of Medicines:
On 1.4.2014 62,000
On 31.3.2015 54,000
Advance to suppliers of medicines:
On 1.4.2014 11,500
On 31.3.2015 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 7,500
Creditors for sports material as on April 1, 2014 2,000
Stock of sports material as on March 31, 2016 6,200
Amount paid for sports material during the year 2015-16 17,000
Advance paid for sports material as on March 31, 2016 3,500
Creditors for sports material as on March 31, 2016 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 Amount Payments Amount
(Rs.) (Rs.)
Balance b/d Salaries 24,000
Cash 27,500 Electric bill 21,000
Bank 60,000 87,500 Food stuff for restaurant 60,000
Member’s subscriptions: Telephone bill 35,000
2015-2016 12,500 Subscription for periodicals 14,500
2016-2017 1,00,000 Printing and stationery 13,000
2017-2018 10,000 1,22,500 Sports expenses 50,000
Sale of furniture Secretary’s honorarium 30,000
(book value: Rs. 8,000) 10,000 8% Investments (31.3.2017) 1,00,000
Sale of food stuffs 1,00,000 Balance c/d:
Sale of old periodicals 3,200 Cash 21,500
and newspapers Bank 45,000 66,500
Hire of ground used 48,750
for marriage
Donation for sports fund 25,000
Locker Rent 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.
Furniture 1,00,000
Building 6,50,000
Sports fund 15,000
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.

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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 Amount Income Amount

(Rs.) (Rs.)
Salary 24,000 Subscriptions 1,00,000
Add: Outstanding 4,000 28,000 Add: Outstanding 12,500 1,12,500
Electric Bill 21,000 Sale of old periodicals 3,200
Telephone Bill 35,000 Profit on sale of furniture 2,000
Add: Outstanding 2,000 37,000 Hire of ground for marriage 48,750
Subscription for periodicals 14,500 Locker rent 17,050
Printing and Stationery 13,000 Less: Opening o/s 3,050
Add: Opening Stock 2,000 14,000
15,000 Add: Closing o/s 1,500 15,500
Less: Closing stock 3,000 12,000
Secretary's honorarium 30,000 Sale of Food Stuff 1,00,000
Sports Expenses 50,000 Cost of food Consumed 60,000 40,000
Less: Opening Balance
of sports fund 15,000
35,000
Less: Donation for
Sports 25,000 10,000

Depreciation On:
Furniture 11,500
Building 32,500 44,000
Surplus (Excess of Income over 25,450
Expenditure)

2,21,950 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 Assets Amount
(Rs.) (Rs.)
Sports fund 15,000 Cash in hand 27,500
Capital/General Fund 8,42,550 Cash at bank 60,000
(Balancing figure) Outstanding subscription 15,000
Outstanding locker Rent 3,050
Printing & Stationery 2,000
Furniture 1,00,000
Buildings 6,50,000
8,57,550 8,57,550

Balance Sheet of Entertainment Club as on March 31, 2017

Liabilities Amount Assets Amount
(Rs.) (Rs.)
Subscriptions received in
advanced 10,000 Cash in hand 21,500
Outstanding Telephone Bill 2,000 Cash at bank 45,000
Salary Outstanding 4,000 Outstanding subscriptions 15,000
Capital/General Fund 8,42,550 (2015 Rs 2500 and 2016 Rs 12500)
Add: Surplus 25,450 8,68,000 Outstanding locker Rent 1,500
Printing and Stationery 3,000
Furniture 1,00,000
Less: Sales 8,000
92,000
Less: Depreciation 11,500 80,500

Building 6,50,000
Less: Depreciation 32,500 6,17,500
Investment 1,00,000

8,84,000 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 Amount Payments Amount
(Rs.) (Rs.)
Balance b/d 41,000 Salaries and Wages:
Subscriptions: 2013-14 4,800
2013-14 7,200 2014-15 83,200 88,000
2014-15 3,37,600 Sundry expenses 37,000
2015-16 12,000 3,56,800 Freehold land 60,000
Entrance fees 16,000 Stationery 16,000
Locker rent 58,000 Rates 24,000
Revenue from refreshment 48,000 Refreshment expenses 37,500
Income from investments 56,000 Telephone charges 4,000
Investments 2,50,000
Audit fee 6,000
Balance c/d 53,300
5,75,800 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.

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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 Income Amount
(Rs.) (Rs.)
Salaries and Wages 83,200 Subscriptions 3,60,000
Sundry Expenses 37,000 Entrance fees 16,000
Less: Outstanding on Locker rent 58,000
31.3.2014 2,800 34,200 Income from refreshment:
Stationery : (consumed) Revenue from 48,000
Opening stock 2,000 refreshment
Add: Purchases 16,000 Less: Refreshment 37,500 10,500
Less: Closing stock 3,600 14,400 expenses
Rates 24,000 Income from 56,000
Less: Paid for 2015-16 6,000 investments
Add: Prepaid in 2014-15 6,000 24,000 Add: Accrued income 1,500 57,500
Telephone charges 4,000 on current year
Add: Outstanding 1,400 5,400 investment
audit fee 6,000
Surplus Depreciation on building 10,000
(excess of Income over
expenditure) 3,24,800

5,02,000 5,02,000

Balance Sheet as on March 31, 2015

Liabilities Amount Assets Amount
(Rs.) (Rs.)
Outstanding Telephone 1,400 Cash and Bank Balance 53,300
Expenses Subscription in Arrears 23,200
Subscription received in 12,000 Stock of Stationery 3,600
Advance Rates Prepaid 6,000
General Fund 12,49,400 Accrued Interest on investment: 1,500
Add: Surplus 3,24,800 15,74,200 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 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 Assets Amount
(Rs.) (Rs.)
Outstanding Sundry Expenses 2,800 Cash and Bank balance 41,000
Outstanding Salary and Wages 4,800 Subscription in arrears 8,000
General Fund 12,49,400 Stock of stationery 2,000
(Balancing figure) Rates prepaid 6,000
Investments 8,00,000
Building 4,00,000
12,57,000 12,57,000

Working Note :

Subscription Account
Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
(Rs.) (Rs.)
Opening Balance or 8,000 Receipt and Payment 3,56,800
Balance b/d (Arrears Balance c/d 23,200
for 2013-14)
Income and Expenditure 3,60,000
(1800×200)
Balance 12,000
c/d (Advance for
2015-16)
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 Amount Payment Amount

(Rs.) (Rs.)
Opening cash in hand 10,000 Salaries 20,000
Subscription: Stationery 4,500
2014-15 15,000 Rates and Taxes 1,500
2015-16 20,000 Telephone charges 7,500
2016-17 5,000 40,000 8% govt. securities at par 25,000
Profit from sports 17,800 Sundry expenses 500
Interest on 8% govt. securities 5,000 Courier service charges 300
Closing cash in hand 13,500
72,800 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 Assets Amount
(Rs.) (Rs.)
Outstanding Expenses: Building 2,00,000
Telephone charges 3,000 Investment in 8% Govt. 75,000
Sundry Expenses 250 3,250 Securities
Subscription received in 2,000 Stock of stationery 1,500
Advance Prepaid Rates and Taxes 1,250
General Fund 3,00,000 Subscription outstanding 17,500
(balancing figure) Cash in hand 10,000
3,05,250 3,05,250

Income and Expenditure Account

for the year ending on March 31, 2015
Expenditure Amount Income Amount
(Rs.) (Rs.)
Salaries 20,000 Profit on Sports 17,800
Stationery (paid) 4,500 Interest on 8% Govt. 5,000
Add: Opening stock 1,500 Securities Received
6,000 Add: Receivable 1,000 6,000
Less: Closing stock 2,000 Total Subscription 40,000
Stationery consumed 4,000 Received during
Rates and Taxes 1,500 the current year

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38 Accountancy – Not-for-Profit Organisation and Partnership Accounts

Less: Closing Prepaid 1,250 Add: Opening 2,000

250 Subscription in advance
Add: Opening Prepaid 1,250 1,500 Add: Outstanding at 5,500
Telephone charges paid 7,500 the end of the
Add: Outstanding 1,500 Current Year
(Current Year) 9,000 (2,500+3,000)= 47,500
Less: Outstanding 3,000 6,000 Less: Subscription 5,000
(Previous year) received in 42,500
Sundry expenses paid 500 Advance(Closing)
Add: Outstanding 300 Less: Outstanding 17,500 25,000*
(Current Year) 800 at the start of
Less: Outstanding 250 550 the Current Year
(Previous year) Deficit: (Excess of Expenditure 3,550
Depreciation on building 20,000 over to Income)
Courier charges 300
52,350 52,350

• Verification: 500 × 50 = 25000.

Balance Sheet of Friendship Club as on March 31, 2016
Liabilities Amount Assets Amount
(Rs.) (Rs.)
Outstanding Expenses: Building : 2,00000
Telephone charges 1,500 Less: depreciation 20,000 1,80,000
Sundry Expenses 300 1,800 Investment in 8% 75,000
Subscription received in 5,000 Govt. Securities:
Advance Add: Purchases 25,000 1,00,000
General Fund 3,00,000 Stock of stationery 2,000
Less: Deficit 3,550 2,96,450 Interest on 8% 1,000
Govt. securities Receivable
Prepaid Rates and Taxes 1,250
Subscription outstanding 5,500
(Rs.17,500-Rs. 5,000)
+Rs. 3,000= Rs.5,500
Cash in hand 13,500
3,03,250 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.

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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 Credit Balance Amount
(Rs.) (Rs.)
Building 6,25,000 Admission fees 12,500
Furniture 1,00,000 Tuition fees received 5,00,000
Library books 1,50,000 Creditors for supplies 15,000
Investment @12% 5,00,000 Rent for the school hall 10,000
Salaries 5,00,000 Miscellaneous receipts 30,000
Stationery 40,000 Government grant 3,50,000
General expenses 18,000 General fund 10,00,000
Sports expenses 15,000 Donation for library books 62,500
Cash at bank 50,000 Sale of old furniture 20,000
Cash in hand 2,000
20,00,000 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
Income and Expenditure Account
for the year ending on March 31, 2017
Expenditure Amount Income Amount
(Rs.) (Rs.)
Loss on sale of old furniture 30,000 Admission fees 12,500
(50,000 –20,000) Tuition fees 5,00,000
Salaries 5,00,000 Add: Outstanding 25,000 5,25,000
Add: outstanding 30,000 5,30,000 Rent for the school hall 10,000
Stationery 40,000 Miscellaneous receipts 30,000
General expenses 18,000 Government grant 3,50,000
Depreciation: Interest accrued on 60,000
Furniture 3,000 investments
Building 31,250
Library books 22,500 56,750
Sports expenses 15,000
Surplus (excess of income 2,97,750
over expenditure)
9,87,500 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 1,000
Depreciation on furniture of Rs. 40,000 for 6 months 2,000
Total depreciation 3,000

Balance Sheet as on March 31, 2017

Liabilities Amount Assets Amount
(Rs.) (Rs.)
Creditors for Supplies 15,000 Buildings 6,25,000
Outstanding Salaries 30,000 Less: Depreciation 31,250 5,93,750
Donation for Library Books 62,500 Furniture 1,00,000
General fund 10,00,000 Less: Sold 50,000
Add: Surplus 2,97,750 12,97,750 50,000
Less: Depreciation 3,000 47,000
Accrued fees 25,000
Library books 1,50,000
Less: Depreciation 22,500 1,27,500
Investments @ 12% 5,00,000
Interest accrued 60,000
Cash at bank 50,000
Cash in hand 2,000
14,05,250 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
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 2,05,000

Furniture as on March 31, 2016 21,000
Additions of furniture during the year 23,500
Billiard Table and other accessories as on March 31, 2016 22,250
China glass and cutlery and Linen as on March 31, 2016 6,250
Restaurant receipts during the year 9,68,000
Restaurant stock as on March 31, 2016 9,750
Receipts from billiard Room during the year 86,000
Subscription received during the year 88,750
Interest on deposit received during the year 6,000
Honorarium paid to Secretary 80,000
Purchases for restaurant 5,59,500
Rent and Rates 87,250
Wages (restaurant Rs. 1,25,000) 2,30,750
Repairs and Renewals 44,750
Lighting 44,250
Fuel 33,500
Sundry expenses 8,000
Cash in hand as on March 31, 2016 4,375
Bank balance as on March 31, 2016 36,875
Bank deposit @10% as on March 31, 2016 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
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 Payments Amount

(Rs.) (Rs.)
Opening Balance: Rent and Rates 87,250
Cash in hand 4,375 Wages:
Cash at bank 36,875 41,250 Restaurant 1,25,000
Subscriptions 88,750 Others 1,05,750 2,30,750
Interest on deposit 6,000 Repairs and Renewals 44,750
Restaurant receipts 9,68,000 Furniture purchased 23,500
Billiard receipts 86,000 Honorarium of Secretary 80,000
Purchases for restaurant 5,59,500
Lighting 44,250
Fuel 33,500
Sundry expenses 8,000
Closing balance:
Cash in hand 8,500
Cash at bank 70,000 78,500
(balancing figure)
11,90,000 11,90,000

Trading Account
for the year ending on March 31, 2017

Details Amount Details Amount

(Rs.) (Rs.)
Opening stock 9,750 Restaurant receipts 9,68,000
Purchases 5,59,500 Cost of boarding expenses 68,750
Less: Previous year 7,500 5,52,000 of the staff
Wages 1,25,000 Closing stock 11,250
Depreciation of 1,250
glass cutlery
Cost of boarding expenses 50,000
of the staff
Fuel 33,500
Profit transferred to 2,76,500
Income and Expenditure
10,48,000 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 Income Amount
(Rs.) (Rs.)
Wages 1,05,750 Subscription Received 88,750
Repairs and Renewals 44,750 Add: Outstanding 12,500
Honorarium of Secretary 80,000 this year 1,01,250
Lighting 44,250 Less: Outstanding 12,000
Rent and Rates 87,250 previous year 89,250
Cost of boarding Less: Advance for 3,000 86,250
expenses of the staff 18,750 Next year
Sundry expenses 8,000 Interest received 6,000
Depreciation on: Add: Accrued 4,000 10,000
Furniture 4,450 Billiard receipts 86,000
Billiard table 2,670 7,120 Profit transferred 2,76,500
Surplus: (Excess of Income from trading Account
over Expenditure) 62,880
4,58,750 4,58,750

Balance Sheet of Pleasant Club as on March 31, 2017

Liabilities Amount Assets Amount
(Rs.) (Rs.)
Capital Fund 2,05,000 Furniture:
Add: Surplus 62,880 2,67,880 Opening Balance 21,000
Subscription received 3,000 Add: Additions 23,500
in Advance 44,500
Less: Depreciation 4,450 40,050
Billiard Table 22,250
Less: Depreciation 2,670 19,580
Glass and cutlery 6,250
Less: Depreciation 1,250 5,000
Restaurant stock 11,250
Subscription Outstanding 12,500
Interest Accrued 4,000
Bank deposit 1,00,000
Cash in hand 8,500
Cash at bank 70,000
2,70,880 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
44 Accountancy – Not-for-Profit Organisation and Partnership Accounts

Receipt and Payment Account

For the year ending on March 31, 2017

Receipts Amount Payments Amount

(Rs.) (Rs.)
Balance b/d 24,000 Rent and Rates 48,750
Subscriptions Furniture purchased 40,000
2015-16 23,250 Creditors for sports materials 61,000
2016-17 3,36,000 Purchases for sports materials 10,000
2017-18 13,000 3,72,250 Cost of prizes awarded 20,750
Sale of sports materials 26,000 Match expenses 35,150
Entrance fees 40,000 Miscellaneous expenses 1,50,000
General donation 20,250 Balance c/d 1,34,050
Donation for prize fund 14,000
Interest on prize fund
Investments 1,500
Miscellaneous receipts 1,700
4,99,700 4,99,700

Additional Information:
Details Apr. 01, 2016 Mar. 31, 2017

Sports materials 20,000 25,000

Furniture 2,00,000 ?
5% Prize fund investments 60,000 ?
Creditors for sports materials 7,000 14,750
Subscription in arrears 23,750 ?
Prize fund 60,000 ?
Rent paid in advance ---- 3,750
Outstanding rent 3,750
Outstanding miscellaneous expenses 11,400 20,100
Miscellaneous expenses paid in advance 3,750 4,250
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.

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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 Amount Income Amount

(Rs.) (Rs.)
Rent 48,750 Subscriptions 3,36,000
Less: Opening 3,750 Add: Received
Outstanding in advance
45,000 01.04.2016 7,000
Less: Closing rent paid in 3,750 41,250 Add: Outstanding
advance Sports Materials (2015–2016) 17,000 3,60,000
Opening stock 20,000 (Rs.3,60,000–Rs.3,43,000)
Add: Payments 61,000 General donations 20,250
to creditor Entrance fees 20,000
81,000 Sports materials
Add: Closing creditor 14,750 (Profit on sale)
95,750 (i.e. 26,000–20,000) 6,000
Add: Cash purchase 10,000 Miscellaneous receipts 1,700
1,05,750
Less: Opening creditor 7,000
98,750
Less: Sports material 20,000
Sold
78,750
Less: Closing stock 25,000 53,750
Match expenses 35,150
Depreciation on furniture 24,000
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 1,58,200
(Closing)
Surplus (Excess of 95,600
income over expenditure)
4,07,950 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 Assets Amount
(Rs,) (Rs,)
Capital Fund (Balancing figure) 2,42,350 Furniture 2,00,000
Prize fund 60,000 5% Prize Fund Investments 60,000
Creditors for 7,000 Subscription Receivable 23,750
Sports Materials (i.e. outstanding)
Subscription Received in Advance 7,000 Stock of Sports Materials 20,000
Outstanding Expenses: Miscellaneous Expenses 3,750
Paid in Advance
Rent 3,750 Cash in hand 24,000
Miscellaneous 11,400 15,150
Expenses
3,31,500 3,31,500

Balance Sheet of Entertainment as on March 31, 2017

Liabilities Amount Assets Amount
(Rs.) (Rs.)
Capital fund 2,42,350 Furniture:
Add: Surplus 95,600 Opening balance 2,00,000
Entrance fees 20,000 3,57,950 Additions 40,000
Prize fund 60,000 2,40,000
Add: Donations 14,000 Less: Depreciation 24,000 2,16,000
Interest received 1,500 5% Prize fund investments 60,000
Interest accrued* 1,500 Subscription receivable
77,000 (i.e. Outstanding):
Less: Prizes awarded 20,750 56,250 (2015-2016) 500
Creditors for sports materials 14,750 (2016-2017) 17,000 17,500
Subscription received in advance 13,000 Stock of sports materials 25,000
Outstanding miscellaneous 20,100 Miscellaneous expenses 4,250
expenses Paid in advance
Prepaid rent 3,750
Accrued interest on 1,500
Prize fund investments
Cash in hand 1,34,050

4,62,050 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.

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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 Payments Amount

(Rs.) (Rs.)
Cash in hand as on 3,000 Printing and Stationery 6,000
April 1, 2016 Lighting & Water 2,600
Cash at bank as on 15,000 Rent 21,000
April 1, 2016 Advertisement 2,820
Subscription: Miscellaneous Expenses 4,400
2015-16 12,000 Staff Salaries 85,000
2016-17 46,000 Furniture purchased 28,000
2017-18 15,600 73,600 Honorarium 15,000
Entrance fees 25,200 Books 5,000
Tuition fees: Cash in hand as on 9,180
2016-17 80,000 March 31, 2017
2017-18 10,000 90,000 Cash at bank as on 45,000
Interest on investment: March 31, 2017
2015-16 4,000
2016-17 6,000 10,000
Miscellaneous receipts 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 Amount Income Amount
(Rs.) (Rs.)
Printing and Stationery 7,800 Subscription 46,000
Lighting & Water 2,600 Interest on investment 6,800
Rent 24,000 Miscellaneous incomes 7,200
Staff salaries 84,000 Tuition fees 90,000
Advertisement 3,200
Honorarium 15,000
Misc. expenses 4,400
Depreciation on furniture 4,000
Surplus(Excess of income 5,000
over expenditure)
1,50,000 1,50,000

Prepare opening and closing balance sheet

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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 Amount Assets Amount
(Rs.) (Rs.)
Capital/General Fund 2,54,000 Investments 1,60,000
(Balancing figure) Furniture 40,000
Books 20,000
Outstanding subscription 12,000
Accrued Interest on Invest. 4,000
Cash in hand 3,000
Cash at bank 15,000
2,54,000 2,54,000

Balance Sheet of Shiv-e-Narain Education Trust as on March 31, 2017

Liabilities Amount Assets Amount
(Rs.) (Rs.)
Tuition fee advance 10,000 Investments 1,60,000
Rent Outstanding 3,000 Furniture 40,000
Advertisement Outstanding 380 Less: Depreciation 4,000
Printing & Stationery 1,800 36,000
Outstanding Add: Purchases 28,000 64,000
Advance Subscription 15,600 Books 20,000
Capital/ Add: Purchases 5,000 25,000
General Fund 2,54,000 Interest Accrued 800
Add Entrance fee 25,200 Outstanding tuition fee 10,000
Add Surplus 5,000 2,84,200 Staff Salary Advance 1,000
Cash in Hand 9,180
Cash at Bank 45,000
3,14,980 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

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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. Not-for -Profit Organisation.
2. Receipts and Payments Account
3. Income and Expenditure Account
4. Entrance Fee
5. Life Membership
6. Special Receipts
7. Subscription
8. Donation
9. Incidental Trading Activity
10. 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-for-
Profit 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

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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. State the meaning of ‘Not- for- Profit’ Organisations.
2. State the meaning of Receipt and Payment Account.
3. State the meaning of Income and Expenditure Account.
4. What are the feature of Receipt and Payment Account?
5. 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?

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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 5,000
Cash at Bank 25,000
Subscriptions 1,65,000
Donations 35,000
Investment Purchased 80,000
Rent Paid 20,000
General Expenses 21,500
Postage and stationery 2,000
Courier charges 1,000
Sundry Expenses 2,500
Closing Cash in Hand 12,000
(Ans: Cash at Bank (balancing figure) Rs. 91,000)

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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 Amount Payments Amount
(Rs.) (Rs.)
Balance b/d Furniture 3,000
Cash at Bank 22,000 Investments 55,000
Cash in Hand 8,800 Advance for building 20,000
Donations 32,000 Charities 60,000
Subscriptions 50,200 Salaries 10,400
Endowment fund 60,000 Rent and Taxes 4,000
Legacies 24,000 Printing 1,000
Interest on Investment 3,800 Postage 300
Interest on Deposits 800 Advertisements 1,100
Sale of old newspapers 500 Insurance 4,800
Balance c/d:
Cash at bank 32,000
Cash in hand 10,500
2,02,100 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 5,20,000

previous year
Fees for the year outstanding 30,000
Salary paid , including Rs. 5,000 on account 68,000
of the previous year
Salary outstanding at the end of the year 3,000
Entertainment expenses 8,000
Tournament expenses 25,000
Meeting Expenses 18,000
Traveling Expenses 7,000
Purchase of Books and Periodicals, including 40,000
Rs. 31,000 for purchase of Books
Rent 15,000
Postage, telegrams and telephones 6,000
Printing and Stationery 18,000
Donations received 25,000
(Ans : Excess of income over expenditure Rs. 3,23,000)

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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 35,000
Sports Fund Investments 35,000
Interest on Sports Fund 4,000
Donations for Sports Fund 15,000
Sports Prizes awarded 10,000
Expenses on Sports Events 4,000
General Fund 80,000
General Fund Investments 80,000
Interest on General Fund Investments 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 12,25,000
construction of a permanent Pavilion
Expenditure incurred up to 31.3.2017 on its construction 10,80,000
The total estimated expenditure on construction 25,00,000
of Pavilion being

(b) Tournament Fund:

Balance as on 1.4.2016 10,700
Subscriptions for tournament received during the year 65,800
Expenditure incurred during the year on conducting 72,400
tournaments

(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.

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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 Amount Payments Amount
(Rs.) (Rs.)
Balance b/d General Expenses 3,200
Cash in hand 4,000 Newspaper 1,850
Cash at Bank 15,550 Electricity 3,000
Subscriptions Fixed deposit with bank 18,000
2016 1,200 (on 31.06.2017) @ 10% p.a.
2017 26,500 Books 7,000
2018 500 28,200 Salary 3,600
Sale of old newspapers 1,250 Rent 6,500
Govt. grant 12,000 Postage charges 300
Sale of old furniture Furniture (purchased) 10,500
(book value Rs.5000) 3,700 Balance c/d
Interest received on FD 450 Cash in hand 3,000
Cash at bank 8,200
65,150 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 Amount Payments Amount
(Rs.) (Rs.)
Balance from last year 2,270 Rent 6,600
Subscriptions 32,500 Electric charges 3,200
Life membership fee 3,250 Lecturer’s fee 730
Donation 2,500 Office expenses 1,480
Profit from entertainment 7,250 Printing and Stationery 1,050
Sale of old Books 750 Legal fee 1,870
(books value Rs.1,000) Books 6,500
Interest 350 Furniture purchased 8,600
Expenses on nukar drama 1,300
Cash in hand 8,040
Cash at bank 9,500
48,870 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 Amount Payments Amount
(Rs.) (Rs.)
Balance b/d 7,890 Salary 11,000
Subscriptions 52,000 Electric charges 5,500
Life membership fee 2,200 Billiard Table 17,500
Entrance fee 3,200 Office expenses 4,100
Tournament fund 26,000 Printing & Stationery 2,300
Locker Rent 1,250 Tournament expenses 18,500
Sale of old sports equipment Repair of ground 2,000
(Costing Rs.2,200) 2,500 Furniture purchased 7,700
Sale of old newspaper 750 Sports equipment 12,000
Legacy 37,500 Cash in hand 12,690
Cash at bank 10,000
Fixed deposit
(on 1.10.2017 for 10% p.a) 30,000
1,33,290 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.

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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 Payments Amount
(Rs.) (Rs.)
Cash in hand as on 1.4.16 6,800 Salaries 24,000
Subscription 60,200 Traveling Expenses 6,000
Donation 3,000 Stationery 2,300
Sale of furniture 4,000 Rent 16,000
(Book value Rs.6000) Repair 700
Entrance fee 800 Books purchased 6,000
Life membership fee 7,000 Building purchased 30,000
Interest on investment 5,000 Cash in hand as 31.03.2017 1,800
(@ 5% for full year)
86,800 86,800

Additional Information:
As on As on
01.04.2016 31.03.2017

(i) Subscription received in advance 1,000 3,200

(ii) Outstanding subscription 2,000 3,700
(iii) Stock of stationery 1,200 800
(iv) Books 13,500 16,500
(v) Furniture 16,000 8,000
(vi) Outstanding rent 1,000 2,000
(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 Amount Payments Amount
(Rs.) (Rs.)
Opening Cash in hand 2,600 Rent 18,000
Entrance fees 3,200 Wages 7,000
Donation for building 23,000 Billiard table 14,000
Locker rent 1,200 Furniture 10,000
Life membership fee 7,000 Interest 2,000
Profit from entertainment 3,000 Postage 1,000
Subscription 40,000 Salary 24,000
Cash in hand 4,000
80,000 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 Payments Amount
(Rs.) (Rs.)
Opening cash balance 12,000 Furniture 4,000
Subscription Telephone expenses 800
2014-15 2,000 Salary
2015-16 22,000 24,000 2014-15 1,000
Entrance fees 2,800 2015-16 4,000
Locker rent 1,000 Newspapers 700
Life membership fee 1,200 Sundry expenses 1,000
Government grant 11,000 Defence bonds 18,000
Land 20,000
Closing cash balance 2,500
52,000 52,000

Balance Sheet for the year ending March 31, 2016

Liabilities Amount Assets Amount
(Rs.) (Rs.)
Advance locker rent 200 Cash in hand 12,000
Subscription received in 1,000 Outstanding subscription 3,000
Advance Building 35,000
Outstanding salary 2,000
Loan 10,000
Capital fund 36,800
50,000 50,000

(Ans : Surplus Rs.31500, Total of Closing Balance Sheet Rs.80500)

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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 Payments Amount
(Rs.) (Rs.)
Balance b/d 15,000 Furniture 18,000
Sale of Old furniture Library books 10,000
(costing Rs. 6,000) 4,000 Salaries 72,000
Subscriptions: General expenses 18,000
2015-16 18,000 Electric charges 12,000
2016-17 60,000 Newspapers 33,800
2017-18 12,000 90,000 Postage 3,000
Sale of old newspapers 10,800 Stationery 40,000
Profit from entertainment 44,000 Audit fee 8,000
Rent 84,000 Balance c/d 33,000
2,47,800 2,47,800

Balance Sheet as on March 31, 2017

Liabilities Amount Assets Amount
(Rs.) (Rs.)
Outstanding Salary 6,000 Cash 15,000
Capital Fund 6,94,000 Outstanding subscription 18,000
Library Books 30,000
Furniture 37,000
Land and Building 6,00,000
7,00,000 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.

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Accounting for Not-for-Profit Organisation 59

Details Amount
(Rs.)
Sports Fund as on April 1, 2016 80,000
Sports Fund Investments 80,000
Interest on Sports Fund Investments 8,000
Donations for Sports Fund 30,000
Sports Prizes awarded 16,000
Expenses on Sports Events 7,000
General Fund 2,00,000
General Fund Investments 2,00,000
Interest on General Fund Investments 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 Amount Payments Amount
(Rs.) (Rs.)
Cash in hand 14,000 Rent 6,000
Cash at bank 60,000 Salary 12,000
Subscription: Postage 300
2016 5,000 Electricity charges 6,000
2017 83,000 Purchase of furniture 20,000
2018 3,000 91,000 Books 3,000
Sale of investment 90,000 Defence Bonds 1,50,000
Interest on investment 2,000 Help to needy students 22,000
Sale of furniture 3,200 Cash in hand 10,900
(book value Rs.3,000) Cash at bank 30,000
2,60,200 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 Amount Payment Amount
(Rs.) (Rs.)
Balance b/d Charity 11,500
Cash in hand 11,500 Rent and taxes 3,200
Cash at bank 12,600 Salary 6,000
Donation 9,000 Printing 600
Subscription: 42,800 Postage 300
Legacies 18,000 Advertisements 4,500
Interest on investment 4,500 Insuranc es 2,000
Sale of old newspapers 200 Furniture 21,600
Investment 23,000
Balance c/d:
Cash in hand 9,900
Cash at bank 16,000
98,600 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.

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Accounting for Not-for-Profit Organisation 61

Receipt and Payment Account for the year ending March 31, 2017
Receipts Amount Payments Amount
(Rs.) (Rs.)
Balance b/d 3,500 General expenses 900
Subscription: Salary 16,000
2015-16 2,000 Postage 1,300
2016-17 70,000 Electricity charges 7,800
2017-18 3,000 75,000 Furniture 26,500
Sale of old Books 2,000 Books 13,000
(costing Rs.3,200) Newspapers 600
Rent from use of hall 17,000 Meeting expenses 7,200
Sale of newspapers 400 T.V. set 16,000
Profit from entertainment 7,300 Balance c/d 15,900
1,05,200 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 Amount Payments Amount
(Rs.) (Rs.)
Balance b/d 7,250 Salary 12,500
Subscriptions 81,750 Stationery 1,700
Donations 3,000 Electricity charges 9,550
Grant from Government 15,000 Insurance 7,500
Sale of newspapers 300 Equipments 30,000
Proceeds of charity show 16,500 Petty expenses 500
Interest on investments 7,000 Expenses on charity show 12,900
@ 10% for full year Newspapers 1,000
Sundries income 400 Lectures fee 16,500
Honorarium to Secretary 12,000
Balance c/d 27,050
1,31,200 1,31,200

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Additional Information:
01.01.2017 31.12.2017
Rs. Rs.
Outstanding salaries 1,200 1,800
Insurance prepaid 700 300
Subscription outstanding 3,750 2,500
Subscription received in advanced 1,750 1,000
Electricity charges outstanding — 1,250
Stock of stationery 2,250 700
Equipments 25,600 50,200
Building 1,20,000 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 Credit Balances

Rs. Rs.
Stock-in-hand 1170 Receipts Dining Room 87,660
Purchases 24,660 Subscriptions 9,450
Dining Room 32,370 Billiard's Receipts 7,300
Rent 10,470 Sunday Receipts 410
Wages 18,690 Interest on Fixed Deposit 270
Repairs and Renewals 5,400 Sundry Credtiors 5370
Fuel and Light 5,280 Grant from Institute 42,000
Misc. Expenses 4,050 (permanent)
Cash in hand 560 Income and Exp. A/c 1,380
Cash at bank 2,760 (2016)
Fixed Deposit 8,500
Sundry Debtors 2,250
China glass, cutlery & linen 600
Billiard Table 2,070
Fixtures and Fittings 870
Furniture 4,140
Club Premises 30,000
1,53,840 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)

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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 Amount (Rs.)
Tournament fund 40,000
Add: Receipts from tournament 16,000
56,000
Less: Tournament Expenses 14,000
Balance to remain on the Liabilities side of 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 Amount
(Rs.)
Prize Fund 22,000
Add: Interest 3,000
25,000
Less: Prizes Paid 5,000
Balance to remain on the Liabilities side of the
Balance Sheet 20,000
Prize fund Investments would appear on the Assets
Side of the Balance Sheet 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.

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Accounting for Partnership : Basic Concepts 2

LEARNING OBJECTIVES
Y ou have learnt about the preparation of final
accounts for a sole proprietary concern. As the
business expands, one needs more capital and
After studying this chapter, larger number of people to manage the business and
you will be able to : share its risks. In such a situation, people usually
• Define partnership and adopt the partnership form of organisation.
list its essential features; Accounting for partnership firms has it’s own
• Identify the provisions of peculiarities, as the partnership firm comes into
the Indian Partnership existence when two or more persons come together
Act 1932 that are
relevant for accounting; to establish business and share its profits. On many
• Prepare partners’ capital issues affecting distribution of profits, there may not
accounts under fixed and be any specific agreement between the partners. In
fluctuating capital such a situation the provisions of the Indian
methods;
Partnership Act 1932 apply. Similarly, calculation
• Explain the distribution of interest on capital, interest on drawings and
profit or loss among the
partners and prepare the maintenance of partners capital accounts have their
Profit and Loss own peculiarities. Not only that a variety of
Appropriation Account; adjustments are required on the death of a partner
• Calculate interest on or when a new partner is admitted and so on. These
capital and drawing
under various situations; peculiar situations need specific treatment in
• Explain how guarantee
accounting that need to be clarified.
for a minimum amount The present chapter discusses some basic
of profit affects the aspects of partnership such as distribution of profit,
distribution of profits
among the partners; maintenance of capital accounts, etc. The treatment
of situations like admission of partner, retirement,
• Make necessary
adjustments to rectify death and dissolution have been taken up in the
the past errors in subsequent chapters.
partners capital
accounts; and
2.1 Nature of Partnership
• Prepare final accounts of
a partnership firm; 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

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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 co-
ownership 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

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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;

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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.

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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.

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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 J.F. Amount Date Particulars J.F. Amount
(Rs.) (Rs.)
Bank (permanent xxx Balance b/d xxx
withdrawal of capital) (opening balance)
Balance c/d xxx Bank (fresh capital xxx
(closing balance) introduced)
xxx xxx

Partner’s Current Account

Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
(Rs.) (Rs.)
Balance b/d (in case xxx Balance b/d xxx
of debit opening bal,) (in case of credit
Drawings xxx opening balance)
Interest on drawings xxx Salary xxx
Profit & Loss a/c xxx Commission xxx
Interest on capital
Profit & Loss xxx
Balance c/d xxx Appropriation
(in case of credit (share of profit)
closing balance) Balance c/d xxx
(in case of debit
closing balance)
xxxx xxxx

Fig. 2.1: Proforma of Partner’s Capital and Current Account under

Fixed Capital Method.

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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 Date Particulars J.F. Amount
(Rs.) (Rs.)
Drawings xxx Balance b/d xxx
Bank (fresh xxx
Interest on drawings xxx capital introduced)
Profit and Loss xxx Salaries xxx
A/c Interest on capital xxx
(for share of loss) Profit and Loss xxx
Balance c/d Appropriation
(for share of profit)
xxxx 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 Under this method, two Each partner has one account,
accounts separate accounts are i.e. capital account, under this
maintained for each partner method
viz. ‘capital account’ and ‘
current account’.
(ii) Adjustments All adjustments for drawings, All adjustments for drawings,
salary, interest on capital, salary interest on capital, etc.,
etc. are made in the current are made in the capital accounts,
accounts and not in the
capital accounts.
(iii) Fixed balance The capital account balance The balance of the capital
remain unchanged unless account fluctuates from year
there is addition to or to year
withdrawal of capital.
(iv) Credit balance The capital accounts The capital account
always show a credit balance. may sometimes show a debit
balance.

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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 Sameer Yasmin
(Rs.) (Rs.)
Additional capital contributed 3,00,000 2.00,000
on July 1, 2014
Interest on capital 5% 5%
Drawings (during 2014-15) 30,000 20,000
Interest on drawings 1,800 1,200
Salary 20.000
Commission 10,000 7,000
Share in loss 60,000 40,000
for the year 2014-15

Solution
Fixed Capital Method
Partner’s Capital Accounts
Dr. Cr.
Date Details L.F. Sameer Yasmin Date Details L.F. Sameer Yasmin
Amount Amount Amount Amount
(Rs.) (Rs.) (Rs.) (Rs.)
Balance c/d 18,00,000 12,00,000 Balance b/d 15,00,000 10,00,000
(Additional
capital) 3,00,000 2,00,000
18,00,000 12,00,000 18,00,000 12,00,000

Partner’s Current Accounts

Dr. Cr.
Date Particulars J.F. Amount Amount Date Particulars J.F. Amount Amount
(Rs.) (Rs.) (Rs.) (Rs.)
Sameer Yasmin Sameer Yasmin
Drawings 30,000 20,000 Interest on 82,500 55,000
Interest on 1,800 1,200 capital
drawings Partner’s 20,000 7,000
Profit and Loss 60,000 40,000 salary
A/c Commission 10,000

Balance c/d 20,700 800

1,12,500 6 2 , 0 0 0 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. Rs.
15,00,000
X 5% on Rs. 15,00,000 for 1 Year =5× = 75,000
100
3,00,000 6
5% on Rs. 3,00,000 for 6 months =5× × = 7,500
100 12
82,500
10,00,000
Y 5% on Rs. 10,00,000 for 1 year =5× = 50,000
100
2,00,000 6
5% on Rs. 2,00,000 for 6 month =5× × = 5,000
100 12
55,000
Fluctuating Capital Method
Dr, Partner’s Capital Accounts Cr.
Date Particulars J.F. Amount Amount Date Particulars J.F. Amount Amount
(Rs.) (Rs.) (Rs.) (Rs.)
Sameer Yasmin Sameer Yasmin
Drawings 30,000 20,000 Balance b/d 15,00,000 10,00,000
Interest on 1800 1200 Bank 3,00,000 2,00,000
Drawings Interest on 82,500 55,000
Profit and 60,000 40,000 capital
Loss Salary 20,000 7000
Balance c/d 18,20,700 12,00,800 Commission 10,000 -
19,12,500 12,62,000 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:
Soumya Bimal
(Rs.) (Rs.)
Capital Accounts 3,00,000 2,00,000
Current Accounts (Cr.) 1,00,000 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.

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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)

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74 Accountancy – Not-for-Profit Organisation and Partnership Accounts

(b) For transferring interest on capital to Profit and Loss Appropriation Account:
Profit and Loss Appropriation A/c Dr.
To Interest on Capital A/c
3. 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
4. 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
5. 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
6. 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 Particulars Amount
(Rs.) (Rs.)
Profit and Loss Profit and Loss xxx
(if there is loss) xxx (if there is profit)
Interest on Capital xxx Interest on Drawings xxx
Salary to Partner xxx xxx
Commission to Partner xxx
Interest on Partner’s Loan xxx
Partners’ Capital Accounts xxx
(distribution of profit)
xxxx xxxx

Fig. 2.3: Proforma of Profit and Loss Appropriation Account

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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. Cr.
Particulars Amount Particulars Amount
(Rs.) (Rs.)
Amits’ salary 12,000 Net profit 35,660
Babus’ commission 5,000 Interest on drawings:
Interest on Capitals : Amit 270
Amit 3,000 Babu 180
Babu 2,400 Charu 90 540
Charu 1,800 7,200
Share of profit transferred to
Capital accounts :
Amit 6,000
Babu 4,000
Charu 2,000 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.

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Solution
Profit and Loss Appropriation Account
Dr. Cr.
Particulars Amount Particulars Amount
(Rs.) (Rs.)
Babul’s salary 2,500 Net profit 15,000
Interest on capital: (before Babul’s salary)
Amitabh 3,000
Babul 1,800
Manager’s commission 750
(5% of Rs. 15,000)
Profit transferred to partner’s
capital account;
Amitabh 4,170
Babul 2,780 6,950
15,000 15,000

Amitabh’s Capital Account

Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
(Rs.) 2016 (Rs.)
2017 2016
Mar.31 Balance c/d 57,170 Apr.01 Balance b/d 50,000
2017
Mar.31 Interest on capital 3,000
Mar.31 Profit & Loss 4,170
Appropriation a/c
57,170 (share of profit) 57,170

Babul’s Capital Account

Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
2017 (Rs.) (Rs.)
2017 2016
Mar.31 Balance c/d 37,080 Apr.01 Balance b/d 30,000
2017 Salary 2,500
Mar.31 Interest on capital 1,800
Mar.31 Profit & Loss 2,780
Appropriation
(share of profit)
37,080 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

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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:
 6   6 8
For Mansoor  Rs. 2,00,000 ×  +  Rs. 1,00,000 × × 
 100 100 12 
= Rs. 12,000 + Rs. 4,000 = Rs. 16,000
 6   6 6
For Reshma  Rs. 1,50,000 ×  +  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.

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Accounting for Partnership : Basic Concepts 79

Solution
Statement Showing Calculation of Interest on Capital

For Saloni
(Rs,)
Rs. 2,00,000 × 8 ×1
Interest on Rs. 2,00,000 for full year = = 16,000
100

Rs.50,000 × 9 × 8 3,000
Add: Interest on Rs. 50,000 for 9 months= =
12 ×100 19,000

Rs.30,000 × 8 × 6
Less: Interest on 30,000 for 6 months = = 1,200
12 ×100

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.)
Rs.3,00,000 × 8 ×1
Interest on Rs. 3,00,000, for full year @8% = = 24,000
100

Rs.60,000 × 8 × 9 3,600
Add: Interest on Rs. 60,000, for 9 months = =
100 ×12 27,600

Rs.15,000 × 8 × 3
Less: Interest on Rs. 15,000 for 3 months = = 300
100 ×12
(Money withdrawn) 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).

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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 Krish

Rs. Rs.
Capital at the end 1,50,000 75,000
Add: Drawings during the year 20,000 5,000
1,70,000 80,000
Less: Share of profit (credited) 12,000 4,000
1,58,000 76,000
Less: Additional capital —- 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:
 12   12 6
 Rs. 60,000 ×  +  Rs. 16,000 × ×  = Rs. 7,200 + Rs. 960
100   100 12 
= 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.

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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.

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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:

Total Period in Months + 1 12+1 1

Average Period = = = 6 months.
2 2 2

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Accounting for Partnership : Basic Concepts 83

Rs.1,20,000×8×13×1
Interest on Drawings = = Rs. 5,200.
100×2 ×12

(b) When the amount is withdrawn at the end of each month

Total period in Months – 1 12 − 1 1

Average Period = = = 5 months
2 2 2
Rs.1,20,000 × 8 ×11×1
Interest on Drawings = = 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.
Total period in Months 12
Average Period = = = 6 months
2 2
Rs.1,20,000 × 8 × 6 ×1
Interest on Drawings = = 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 Time Period Interest
(Rs.) (Rs.)
8
April 1, 2016 30,000 12 months 30,000 × ×1
100
= 2,400

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84 Accountancy – Not-for-Profit Organisation and Partnership Accounts

9 8
July 1, 2016 30,000 9 months 30,000× ×
12 100
= 1,800
6 8
Oct. 1, 2016 30,000 6 months 30,000× ×
12 100
= 1,200
3 8
Jan. 1, 2017 30,000 3 months 30,000× ×
12 100
= 600
Total 1,20,000 = 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:
8 15 1
Rs. 1,20,000 × × × = Rs. 6,000.
100 2 12

(b) If the amount is withdrawn at the end of each quarter

Statement Showing Calculation of Interest on Drawings
Date Amount Time Period Interest
(Rs.) (Rs.)
9× 8
June 30, 2016 30,000 9 months 30,000 ×
12 ×100
= 1,800
6 8
September 30, 2016 30,000 6 months 30,000 × ×
12 100
= 1200
3 8
December 31, 2016 30,000 3 months 30,000 × ×
12 100
= 6,000
March 31, 2017 30,000 0 months
Total 1,20,000 = 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:
8 9 1
= Rs. 1,20,000 × × × = Rs. 3,600
100 2 12

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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 16,000
June 30, 2016 15,000
October 31, 2016 10,000
December 31, 2016 14,000
March 1, 2017 11,000

Calculation of interest on drawings will be as follows:

Statement Showing Calculation of Interest on Drawings
Date Amount Time Period Product
(Rs.) (Rs.)
April 1, 2016 16,000 12 months 1,92,000
June 30, 2016 15,000 9 months 1,35,000
Oct. 31, 2016 10,000 5 months 50,000
Dec. 31, 2016 14,000 3 months 42,000
Mar. 1, 2017 11,000 1 month 11,000
Total 4,30,000

1
Interest = Sum of Products × Rate ×
12
7 1 30100
= Rs. 4,30,000 × × = = 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.

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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.
36,000 × 9 ×13 ×1
Interest on drawings = Rs. = 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 2 3 4
Date Amount Period (Interest)
withdrawn (in months)
(Rs.) (Rs.)
9 10
Jun. 1, 2016 12,000 10 12,000× × = 900
100 12

9 7
Aug. 31, 2016 8,000 7 8,000× × = 420
100 12

9 6
Sept. 30, 2016 3,000 6 3,000× × = 135
100 12

9 4
Nov. 30, 2016 7,000 4 7,000× × = 210
100 12
9 2
Jan. 31, 2017 6,000 2 6,000× × = 90
100 12
Total Interest 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 Harry Ali
(Rs.) (Rs.)
2015
January, 01 5,000 7,000
April, 01 8,000 4,000
September, 01 5,000 5,000
December, 01 4,000 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 Ali
Amount Period Product Amount Period Product
(Rs.) (in months) (Rs.) (Rs.) (in months) (Rs.)

5000 12 60,000 7,000 12 84,000

8000 9 72,000 4,000 9 36,000
5000 4 20,000 5,000 4 20,000
4000 1 4,000 10,000 1 10,000
1,56,000 1,50,000

Amount of Interest
1,56,000 ×10 ×1
Mannu = Rs. = Rs. 1,300
100 ×12
1,50,000 ×10 ×1
Ali = Rs. = 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

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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:
 8 6
 Rs.60,000 × ×  = Rs. 2,400
100 12 

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

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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 Amount Particulars Amount
(Rs.) (Rs.)
Mohit’s capital Net profit 1,60,000
(share of profit) 80,000
Less: Share in 6,667 73,333
deficiency
Rohan’s capital
(share of profit) 40,000
Less: Share in 3,333 36,667
deficiency
Rahul’s capital
(share of profit) 40,000
Add: Deficiency
received from:
Mohit 6,667
Rohan 3,333 50,000
1,60,000 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:
2
Mohit = Rs. 1,60,000 × = Rs. 80,000
4
1
Rohan = Rs. 1,60,000 × = Rs. 40,000
4
1
Rahul = Rs. 1,60,000 × = 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:
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
1 1 3
The new partner Rahul’s share is The remaining profit is 1 – = , to be shared
4 4 4
between Mohit and Rohan in the ratio of 2:1.

3 2 2
Mohit’s new share = × =
4 3 4
3 1 1
Rohan’s new share = × =
4 3 4
2 1 1
Thus, New profit sharing ratio comes to be : : 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

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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. Cr.
Particulars Amount Particulars Amount
(Rs.) (Rs.)
Interest on capital Net profit 1,50,000
John 25,000
Mathew 20,000
Mohanty 15,000 60,000
Capital accounts shared info :
John 45,000
Less: Share of
deficiency 15,000 30,000
Mathew 30,000
Mohanty 15,000
Add: Deficiency 15,000 30,000
received from
John
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.

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Profit and Loss Appropriation Account

Dr. Cr.
Particulars Amount Particulars Amount
(Rs.) (Rs.)
Capital Accounts: Net profit 1,20,000
(for share of profit)
Mahesh 72,000
6/10 × 1,20,000
Less: Deficiency share 7,800 64,200
Dinesh 36,000
3/10 × 1,20,000
Less: Deficiency share 5,200 30,800
Rakesh 12,000
Add: Share of
Deficiency from
Mahesh 7,800
Dinesh 5,200 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
Mahesh’s share in profit will be × =
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.
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.

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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 Dr. 9,000
To Rameez’s capital A/c 3,000
To Zaheer’s capital A/c 6,000
(Interest on capital)

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(ii) Rameez’s capital A/c Dr. 4,500

Zaheer’s capital A/c Dr. 4,500
To Profit and Loss Adjustment A/c 9,000
(Loss on adjustment)

(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 Rameez Zaheer

(Rs.) (Rs.)
(i) Amount which should have been 3,000 6,000
credited as interest on capital
(ii) Amount actually credited by 4,500 4,500
way of share of profit
(Rs. 9,000 divided equally)—
(iii) Difference between (i) and (ii) Dr. 1,500 Cr. 1,500
(Net effect) (Excess) (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. 1,500
To Zaheer’s Capital A/c 1,500
(Adjustment for omission of interest on capital)

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.

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Accounting for Partnership : Basic Concepts 95

Statement showing Net Effect of Omitting Interest on Drawings

Particulars Nusrat Sonu Himesh Total
(Rs.) (Rs.) (Rs.)
Amount which should have been 2,000 1,500 1,000 4,500
debited by way of interest on
drawings
Amount that should have been 2,250 1,350 900 4,500
credited by way of share of profit
Required Adjustment Cr. 250 Cr. 150 Cr.100
(Short) (Excess) (Excess)

Journal Entry for adjustment of interest on drawings would be:

Sonu’s Capital A/c Dr. 150
Himesh’s Capital A/c Dr. 100
To Nusrat’s Capital A/c 250
(Adjustment for omission of interest on drawings)

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 Neha
2015-16 2 2 2
2014-15 4 5 1
2013-14 1 2 2
Record adjustment entry.

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,

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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.
Debit Credit
Amount Amount
(Rs.) (Rs.)
Capitals
Kapil — 60,000
Vineet — 50,000
Current accounts (on April 01, 2013) 2,800
Kapil —
Vineet — 1,600
Drawings: —
Kapil 12,000 —
Vineet 8,000 —
Stock as on 1.4.2016 11,000
Purchases and Sales 54,000 80,000
Returns 2,000 1,500
Wages 2,500 —
Salaries 4,000 —
Printing and Stationery 500 —
Bills receivables 12,000 —
Bills payables — 2,000
Debtors and Creditors 36,000 8,000
Discounts 1,200 1,500
Rent and Rates 800 —
Bad debts 1,400 —
Insurance 400 —
Postage and Telegrams 300 —
Salesman’s commission 3,400 —
Land and Building 24,000 —
Plant and Machinery 20,000 —
Furniture 13,500 —
Overdraft — 2,000
Trade expenses 400 —
Cash in hand 500 —
Cash at bank 1,500 —
2,09,400 2,09,400

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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 11,000 Sales 80,000
Purchases 54,000 Less: Returns 2,000 78,000
Less: Returns 1,500 52,500 Closing stock 18,000
Wages 2,500 Goods destroyed by fire 8,000
Gross Profit c/d 38,000
1,04,000 1,04,000
Salaries 4,000 Gross Profit b/d 38,000
Add: Outstanding 1,000 5,000 Discount received 1,500
Printing and Stationery 500
Rent and Rates 800
Insurance 400
Discount allowed 1,200
Trade expenses 400
Postage and Telegrams 300
Bad debts 1,400
Add: Provision 1,800 3,200
Salesman’s commission 3,400
Loss due to fire 1,000
(Rs. 8000–Rs. 7000)
Depreciation:
Land and Buildings 1,200
Furniture 1,350
Plant and Machinery 3,000 5,550
Net Profit transferred to 17,750
Profit and Loss Appropriation
39,500 39,500

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Profit and Loss Appropriation Account

Dr. Cr.
Particulars Amount Particulars Amount
(Rs.) (Rs.)
Interest on capital: Profit and Loss 17,750
Kapil 3,600 Interest on drawings:
Vineet 3,000 6,600 (for 6 months)
Salary to Kapil 1,200 Kapil 360
Net profit (transferred to Vineet 240 600
capital accounts)
Kapil 6,330
Vineet 4,220 10,550
18,350 18,350

Partner’s Current Accounts

Dr. Cr.
Date Particulars J.F. Kapil Vineet Date Particulars J.F. Kapil Vineet
(Rs.) (Rs.) (Rs.) (Rs.)
Drawings 12,000 8,000 Balance b/d 2,800 1,600
Interest on drawings 360 240 Interest on capital 3,600 3,000
Balance c/d 1,570 580 Salary 1,200 —
Share of profit 6,330 4,220
13,930 8,820 13,930 8,820

Balance c/d 1,570 580

Balance Sheet as on March 31, 2017

Liabilities Amount Assets Amount
(Rs.) (Rs.)
Overdraft 2,000 Land and Building 24,000
Bill payables 2,000 Less: Depreciation 1,200 22,800
Creditors 8,000 Plant and Machinery 20,000
Outstanding salaries 1,000 Less: Depreciation 3,000 17,000
Capital: Furniture 13,500
Kapil 60,000 Less: Depreciation 1,350 12,150
Vineet 50,000 1,10,000 Stock 18,000
Current Accounts Debtors 36,000
Kapil 1,570 Less: Provision for 1,800 34,200
Vineet 580 2,150 discount on debtors
Insurance company 7,000
Bill receivables 12,000
Cash at bank 1,500
Cash in hand 500
1,25,150 1,25,150

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Terms Introduced in the Chapter

• Partnership • Interest on Capital
• Partnership Firm • Interest on Drawings
• Partnership Deed • Average Period
• Fixed Capital Account • Profit and Loss Appropriation
• Fluctuating Capital Account Account
• Profit and Loss Adjustment 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’.

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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?

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7. In the absence of Partnership deed, specify the rules relating to the following :
(i) Sharing of profits and losses.
(ii) Interest on partner’s capital.
(iii) Interest on Partner’s drawings.
(iv) Interest on Partner’s loan
(v) 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)

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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

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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;

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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.
Sukesh Vanita
(Rs.) (Rs.)
Capital Accounts 40,000 40,000
Current Accounts (Cr.) 7,200 (Cr.) 2,800
Drawings 10,850 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)

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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 Amount Assets Amount
(Rs.) (Rs.)
Neelkant’s Capital 10,00,000 Sundry Assets 30,00,000
Mahadev’s Capital 10,00,000
Neelkant’s Current Account 1,00,000
Mahadev’s Current Account 1,00,000
Profit and Loss Apprpriation
(March 2017) 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)

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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.
May 31, 2016 600
June 30, 2016 500
August 31, 2016 1,000
November 1, 2016 400
December 31, 2016 1,500
January 31, 2017 300
March 01, 2017 700
Rohan At the beginning of each month 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)

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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 :
Rs.
February 01 4,000
May 01 10,000
June 30 4,000
October 31 12,000
December 31 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)

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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)

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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

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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 Amount Assets Amount
(Rs.) (Rs.)
Mannu’s Capital 30,000 Drawings :
Shristhi’s Capital 10,000 40,000 Mannu 4,000
Shristhi 2,000 6,000
Other Assets 34,000
40,000 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)

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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:
(Rs.)
2014 Profit 59,000
2015 Profit 62,000
2016 Loss (4,000)
2017 Profit 78,000
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 Anju Manju Mamta
2014 4 3 5
2015 3 2 1
2016 1 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.

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112 Accountancy – Not-for-Profit Organisation and Partnership Accounts

Account Name Debit Credit

Amount Amount
(Rs.) (Rs.)
Capital
Dinker 2,35,000
Ravinder 1,63,000
Drawings
Dinker 6,000
Ravinder 5,000
Opening Stock 35,100
Purchases and Sales 2,85,000 3,75,800
Carriage inward 2,200
Returns 3,000 2,200
Stationerry 1,200
Wages 12,500
Bills receivables and Bills payables 45,000 32,000
Discount 900 400
Salaries 12,000
Rent and Taxes 18,000
Insurance premium 2,400
Postage 300
Sundry expenses 1,100
Commission 3,200
Debtors and creditors 95,000 40,000
Building 1,20,000
Plant and machinery 80,000
Investments 1,00,000
Furniture and Fixture 26,000
Bad Debts 2,000
Bad debts provision 4,600
Loan 35,000
Legal Expenses 200
Audit fee 1,800
Cash in hand 13,500
Cash at Bank 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.

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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 Credit
Amount Amount
(Rs.) (Rs.)
Capital
Kajol 1,15,000
Sunny 91,000
Current accounts [on 1-04-2005]
Kajol 4,500
Sunny 3,200
Drawings
Kajol 6,000
Sunny 3,000
Opening stock 22,700
Purchases and Sales 1,65,000 2,35,800
Freight inward 1,200
Returns 2,000 3,200
Printing and Stationery 900
Wages 5,500
Bills receivables and Bills payables 25,000 21,000
Discount 400 800
Salaries 6,000
Rent 7,200
Insurance premium 2,000
Traveling expenses 700
Sundry expenses 1,100
Commission 1,600
Debtors and Creditors 74,000 78,000
Building 85,000
Plant and Machinery 70,000
Motor car 60,000
Furniture and Fixtures 15,000
Bad debts 1,500
Provision for doubtful debts 2,200
Loan 25,000
Legal expenses 300
Audit fee 900
Cash in hand 7,500
Cash at bank 12,000
5,78,100 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
Reconstitution of a Partnership Firm –
Admission of a Partner 3

LEARNING OBJECTIVES
After studying this chapter
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
you will be able to:
• Explain the concept of for all. Any change in the existing agreement
reconstitution of a partnership amounts to reconstitution of the partnership firm.
firm; This results in an end of the existing agreement and
• Identify the matters that need
adjustments in the books of
a new agreement comes into being with a changed
firm when a new partner is relationship among the members of the partnership
admitted; firm and/or their composition. However, the firm
• Determine the new profit continues. The partners often resort to reconstitution
sharing ratio and calculate
the sacrificing ratio; of the firm in various ways such as admission of a
Define goodwill and new partner, change in profit sharing ratio,
enumerate the factors that retirement of a partner, death or insolvence of a
affect it; partner. In this chapter we shall have a brief idea
• Explain the methods of about all these and in detail about the accounting
valuation of goodwill;
implications of admission of a new partner or an on
• Describe how goodwill will
be treated under different change in the profit sharing ratio.
situations when a new
partner is admitted; 3.1 Modes of Reconstitution of a Partnership
• Make necessary adjustments Firm
for revaluation of assets and
reassessment of liabilities; Reconstitution of a partnership firm usually takes
• Make necessary adjustments place in any of the following ways:
for accumulated profits and
losses; Admission of a new partner: A new partner may be
• Determine the capital of each admitted when the firm needs additional capital or
partner, if required according
to the new profit sharing ratio managerial help. According to the provisions of
and make necessary Partnership Act 1932 unless it is otherwise provided
adjustments; in the partnership deed a new partner can be
• Make necessary adjustments admitted only when the existing partners
on change in the profit
sharing ratio among the unanimously agree for it. For example, Hari and
existing partners. Haqque are partners sharing profits in the ratio of

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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

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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
1
Sumit’s share =
5
1 4
Remaining share = 1− =
5 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.
Note: It has been assumed that the new partner acquired his share from old partners in
old ratio.

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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
1 2
Dinesh’s share = or
5 10
3 1 5
Akshay’s share = − =
5 10 10
2 1 3
Bharati’s share = − =
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
3
Jyoti’s share =
10
3 2 4
Anshu’s new share = − =
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.

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Admission of a Partner 119

Solution
3
Ram’s old share =
5
1 3 3
Share surrendered by Ram = of =
4 5 20
3 3 9
Ram’s new share = − =
5 20 20
2
Shyam’s old share =
5
1 2 2
Share surrendered by Shyam = of =
3 5 15
2 2 4
Shyam’s new share = − =
5 15 15
Ghanshyam’s new share = 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
1
Pal’s share =
4
Das’s new share = Old Share – Share Surrendered
4 1 11
= − =
5 4 20
1
Sinha’s new share =
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

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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

5
Rohit’s old share =
8
4
Rohit’s new share =
7
5 4 3
Rohit’s sacrifice = − =
8 7 56
3
Mohit’s old share =
8
2
Mohit’s new share =
7
3 2 5
Mohit’s sacrifice = − =
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.

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Admission of a Partner 121

Solution

1
Marry’s share =
4
1 3
Remaining share = 1− =
4 4
This 3/4 share is to be shared by Amar and Bahadur in the ratio of 2:1.
Therefore,
2 3 6 2
Amar’s new share = of = or
3 4 12 4
1 3 3 1
Bahadur’s new share = of = or
3 4 12 4
New profit sharing ratio of Amar, Bahadur and Mary will be 2:1:1.
3 2 2
Amar’s sacrifice = − =
5 4 20
2 1 3
Bahadur’s sacrifice = − =
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
4
Ramesh’s old share =
7
2
Ramesh’s new share =
6
4 2 10
Ramesh’s sacrifice = − =
7 6 42
3
Suresh’s new share =
6
3
Suresh’s old share =
7
3 3 3
Suresh’s gain = − =
6 7 42
1 7
Mohan’s share = or
6 42

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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:
9 3 4
(a) A , B , C
16 16 16
8 4 4
(b) A , B , C
16 16 16
10 2 4
(c) A , B , C
16 16 16
8 9 10
(d) A , B , C
16 16 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,

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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

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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 4,00,000
2014 3,98,000
2015 4,50,000
2016 4,45,000
2017 5,00,000
Total 21,93,000
Total Profit of Last 5 Years 21,93,000
Average Profit = = Rs. = Rs. 4,38,600
No.of years 5
Goodwill = Average Profits × No. of years purchased
= Rs. 4,38,600 × 4 = Rs. 17,54,400

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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 20,000
2013–14 24,000
2014–15 30,000
2015–16 25,000
2016–17 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 Profit Weight Product

(Rs.)

2012–13 20,000 1 20,000

2013–14 24,000 2 48,000
2014–15 30,000 3 90,000
2015–16 25,000 4 1,00,000
2016–17 18,000 5 90,000

15 3,48,000

3,48,000
Weighted Average Profit = Rs. = Rs. 23,200
15
Goodwill = Rs. 23,200 × 3 = Rs. 69,600

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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

Calculation of Adjusted Profit 2012 2013 2014 2015

Rs. Rs. Rs. Rs.

Given Profits 20,200 24,800 20,000 30,000

Less: Management Cost 4,800 4,800 4,800 4,800
Add: Capital Expenditure 15,400 20,000 15,200 25,200
Charged to Revenue - - 6,000 -
15,400 20,000 21,200 25,200
Less: Unprovided Depreciation - - 200 580
15,400 20,000 21,000 24,620
Less: over valuation of Closing Stock - 2,400 - -
15,400 17,600 21,000 24,620
Add: over value of opening stock - - 2,400 -
Adjusted Profits 15,400 17,600 23,400 24,620

Calculation of weighted average profits:

(Rs.)
Year Profit Weight Product
2012 15,400 1 15,400
2013 17,600 2 35,200
2014 23,400 3 70,200
2015 24,620 4 98,480
Total 10 2,19,280

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2,19,280
Weight Average Profit = Rs. = Rs. 21,928
10
Goodwill = Rs. 21,928 × 3 = Rs. 65,784
Notes to Solution
(i) Depreciation of 2014 = 10% of Rs. 6000 for 4 months
= Rs. 6000 × 10/100 × 4/12 = Rs. 200
(ii) Depreciation of 2015 = 10% of Rs. 6000 – Rs. 200 for one year
= Rs. 5800 × 10/100 + Rs. 580
(iii) 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.
Capital Employed × Normal Rate of Return
Normal Profit =
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.

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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
Capital Employed × Normal Rate of Return
Normal Profits =
100

5,00,000 × 10
= Rs. = Rs. 50,000
100
Average Profits:

Year Profit
(Rs.)

2011 40,000
2012 50,000
2013 55,000
2014 70,000
2015 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
Interest on capital = 1,00,000 × = Rs. 15,000…………(i)
100
Add: partner’s salary = Rs. 6,000 × 2 = Rs. 12,000…………(ii)

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Normal Profit(i+ii) = Rs. 27,000

1,08,000
Average Profit = Rs. 30,000+Rs.36,000+Rs.42,000 = Rs.
3
= Rs. 36,000
Super Profit = Average Profit–Normal Profit
= Rs. 36,000–Rs. 27,000
= Rs. 9,000
Goodwill = Super Profit × No of years’ purchase
= Rs. 9,000 × 2
= Rs. 18,000

3.5.4.3 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
1,00,000 × 100
Rs. = Rs. 10,00,000
10

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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.
100
Rs. 18,000 × = 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 Profits (Loss)
(Rs.)
2012 10,000
2013 15,000
2014 4,000
2015 (5,000)
2016 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.

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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
Normal Profit = Rs.1,00,000 × = 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.

3.5.5 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 Dr.
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)

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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 Dr.
To New Partner’s Capital A/c
(Amount brought by new partner for his
share of goodwill)
(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) Dr.
To Cash A/c
(The amount of goodwill withdrawn by the
existing partners)

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

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Admission of a Partner 133

Books of Sunil and Dalip

Journal
Date Particulars L.F. Debit Credit
(Rs.) (Rs.)
(i) Cash A/c Dr. 24,000
To Sachin’s Capital A/c 20,000
To Goodwill A/c 4,000
(The amount brought in by Sachin as
Capital and Goodwill)

(ii) Goodwill A/c Dr. 4,000

To Sunil’s Capital A/c 2,500
To Dalip’s Capital A/c 1,500
(Goodwill transferred to Sunil and Dalip
in the ratio of 5:3)
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. Debit Credit
(Rs.) (Rs.)
1. Same as in (a) above
2. Same as in (a) above,
3. Sunil’s Capital A/c Dr. 2,500
Dalip’s Capital A/c Dr. 1,500
To Cash A/c 4,000
(Cash withdrawn by Sunil and Dalip
equal to their share of goodwill)
(c) When 50% of the amount of goodwill credited to existing partners
is withdrawn.
Journal
Date Particulars L.F. Debit Credit
(Rs.) (Rs.)
1. Same as in (a) above,
2. Same as in (a) above
3. Sunil’s Capital A/c Dr. 1,250
Dalip’s Capital A/c Dr. 750
To Cash A/c 2,000
(Cash withdrawn for 50% of their share
of goodwill)

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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 2 12 -10 2
= − = =
5 4 20 20
For Sanjay, old ratio is 2/5 and the new ratio is 1/4, hence, his sacrificing
2 1 8−5 3
ratio is = − = =
5 4 20 20

Books of Vijay and Sanjay

Journal
Date Particulars L.F. Debit Credit
(Rs.) (Rs.)
1. Cash A/c Dr. 35,000
To Ajay’s Capital A/c 30,000
To Goodwill A/c 5,000
(The amount of capital and goodwill
brought by Ajay)
2. Goodwill A/c Dr. 5,000
To Vijay’s Capital A/c 2,000
To Sanjay’s Capital A/c 3,000
(the amount of goodwill brought by Ajay
shared by Vijay and Sanjay in their
sacrificing ratio)
3. Vijay’s Capital A/c Dr. 2,000
Sanjay’s Capital A/c Dr. 3,000
To Cash A/c 5,000
(Cash withdrawn by Vijay and Sanjay
for their share of goodwill)

Note: Alternatively, journal entries (1) and (2) could be as follows:

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Admission of a Partner 135

Books of Vijay and Sanjay

Journal
Date Particulars L.F. Debit Credit
(Rs.) (Rs.)
1. Cash A/c Dr. 35,000
To Ajay’s Capital A/c 35,000
(Ajay brought in Rs. 30,000 for capital
and Rs. 5,000 as goodwill)
2. Ajay’s Capital A/c Dr. 5,000
To Vijay’s Capital A/c 2.000
To Sanjay’s Capital A/c 3,000
(Amount of goodwill brought in by Ajay
shared by Vijay and Sanjay in their
sacrificing in the ratio of 2:3)
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. Debit Credit
(Rs.) (Rs.)
Vijay’s Capital A/c Dr. 6,000
Sanjay’s Capital A/c Dr. 4,000
To Goodwill A/c 10,000
(Goodwill written-off in old ratio)

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.

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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 L.F. Debit Credit
(Rs.) (Rs.)
1. Cash A/c Dr. 38,000
To Venkat’s Capital A/c 30,000
To Goodwill A/c 8,000
(Amount brought in by Venkat as his
capital and his share of goodwill)
2. Goodwill A/c Dr. 8,000
To Srikant’s Capital A/c 4,800
To Raman’s Capital A/c 3,200
(Goodwill brought in by Venkat shared
by old partners in their ratio of sacrifice)
3. Srikant’s Capital A/c Dr. 7,200
Raman’s Capital A/c Dr. 4,800
To Goodwill A/c 12,000
(Goodwill already appearing in books
written-off in the old ratio)
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.

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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 L.F. Debit Credit
(Rs.) (Rs.)
1. Cash A/c Dr. 16,000
To Chaudhary’s Capital A/c 16,000
(Amount brought for capital)
2. Goodwill A/c Dr. 30,000
To Ahuja’s Capital A/c 18,000
To Barua’s Capital A/c 12,000
(Goodwill raised at full value in old ratio)

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
1
as a new partner for 3
share in profits. Tushar is to bring in Rs. 30,000 as his

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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.

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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. Debit Credit
(Rs.) (Rs.)
Cash A/c Dr. 10,000
To Rahul’s Capital A/c 10,000
(Amount brought by Rahul as Capital)
Goodwill A/c Dr. 30,000
To Ram’s Capital A/c 18,000
To Rahim’s Capital A/c 12,000
(Goodwill raised at full value in the
old profit sharing ratio)

(b) When goodwill appears in the books at Rs 15,000

Journal
Date Particulars L.F. Debit Credit
(Rs.) (Rs.)
Cash A/c Dr. 10,000
To Rahul’s Capital A/c 10,000
(Amount brought by Rahul as capital)
Goodwill Dr. 15,000
To Ram’s Capital A/c 9,000
To Rahim’s Capital A/c 6,000
(Goodwill raised to its agree value)

(c) When the goodwill appears in the books at Rs 36,000

Journal
Date Particulars L.F. Debit Credit
(Rs.) (Rs.)
Cash A/c Dr. 10,000
To Rahul’s Capital 10,000
(Amount brought by Rahul as capital)
Ram’s Capital A/c Dr. 3,600
Rahim’s Capital A/c Dr. 2,400
To Goodwill A/c 6,000
(Goodwill brought down to its
agreed vlaue)

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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. Debit Credit

(Rs.) (Rs.)
Cash A/c Dr. 25,000
To C’s Capital A/c 25,000
(Cash brought in by C as Capital)
Goodwill 18,000
To A’s Capital A/c 9,000
To B’s Capital A/c 9,000
(Goodwill raised at its full value)
A’s Capital A/c Dr. 8,000
B’s Capital A/c Dr. 6,000
C’s Capital A/c Dr. 4,000
To Goodwill A/c 18,000
(Goodwill written-off)

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.

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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. Debit Credit
(Rs.) (Rs.)
C’s Capital A/c Dr. 4,000
To A’s Capital A/c 1,000
To B’s Capital A/c 3,000
(Adjustment for C’s share of goodwill)
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

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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

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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
1
Sam’s share =
5
Total capital of new firm = 5 × Rs.60,000 = Rs. 3,00,000
Hem’s+Nem’s+Sam’s = Rs.80,000 + Rs. 50,000 + Rs.60,000
= Rs.1,90,000
Goodwill of the firm = Rs.1,10,000 (Rs. 3,00,000 – Rs.1,90,000)
1
Sam’s share = × Rs.1,10,000 = Rs. 22,000
5

Books of Hem, Nem and Sam

Journal

Date Particulars L.F. Debit Credit

2007 Amount Amount
(Rs.) (Rs.)
1. Bank A/c Dr. 60,000
To Sam’s Capital A/c 60,000
(Cash brought by Sam for his capital)

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2. Goodwill A/c Dr. 1,10,000

To Hem’s Capital A/c 66,000
To Nem’s Capital A/c 44,000
(Credit given for goodwill to Hem and
Nem on Sam’s admission)

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 Dr. 22,000
To Hem’s Capital A/c 13,200
To Nem’s Capital A/c 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

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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 Particulars L.F. Debit Credit

2015 Amount Amount
(Rs.) (Rs.)
Apr.15 General Reserve A/c Dr. 20,000
To Rajinder’s capital A/c 16,000
To Surender’s capital A/c 4,000
(General Reserve balance transferred
to the capital account of Rajinder and
Surinder on Narender’s admission)
Rajinder’s Capital A/c Dr. 8,000
Surender’s Capital A/c Dr. 2,000
To Profit and Loss A/c 10,000
(Debit balance of Profit and Loss A/c
transferred to old partners’ capital
accounts)

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

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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 Dr.
To Revaluation A/c (Gain)
(ii) For reduction in the value of an asset
Revaluation A/c Dr.
To Asset A/c (Loss)
(iii) For appreciation in the amount of a liability
Revaluation A/c Dr.
To Liability A/c (Loss)
(iv) For reduction in the amount of a liability
Liability A/c Dr.
To Revaluation A/c (Gain)
(v) For an unrecorded asset
Cash A/c Dr.
To Revaluation A/c (Gain)
(vi) For an unrecorded liability
Revaluation A/c Dr.
To Cash A/c (Loss)
(vii) For transfer of gain on Revaluation if credit balance
Revaluation A/c Dr.
To Old Partners Capital A/cs (Old ratio)
(individually)
(viii) For transferring loss on revaluation
Old partner’s Capital A/cs Dr.
(Individually) (Old ratio)
To Revaluation A/c
Note: Entries (i), (ii), (iii) and (iv) are recorded only with the amount increase and decrease
in the value of assets and liabilities.

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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 Assets Amount

(Rs.) (Rs.)
Sundry creditors 20,000 Cash in hand 3,000
Captials Debtors 12,000
A 30,000 Stock 15,000
B 20,000 50,000 Furniture 10,000
Plant and Machinery 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
1
goodwill for 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 Particulars L.F. Debit Credit

2015 Amount Amount
(Rs.) (Rs.)
April Bank A/c Dr. 20,000
01 To C’s capital account 15,000
To Goodwill A/c 5,000
(Cash brought in by C as capital
and goodwill/premium)

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148 Accountancy – Not-for-Profit Organisation and Partnership Accounts

02 Goodwill A/c Dr. 5,000

To A’s Capital A/c 3,000
To B’s Capital A/c 2,000
(Premium divided between
A and B in sacrificing ratio 3:2)
03 Revaluation A/c Dr. 3,100
To Stock A/c 1,500
To Furniture 1,000
To Provision for Doubtful Debt A/c 600
(Revaluation in the value of assets
on revaluation)
04 Plant and Machinery A/c Dr. 3,000
Investment A/c 1,000
To Revaluation A/c 4,000
(Increase in the value of assets
on revaluation)
05 Revaluation A/c Dr. 200
To Outstanding Electricity A/c 200
(Amount provided for outstanding
electricity bill)
06 Sundry Creditors A/c Dr. 100
To Revaluation A/c 100
(Amount not likely to be claimed
by the creditors written off)
07 Revaluation A/c Dr. 800
To A’s Capital A/c 480
To B’s Capital A/c 320
(Profit on revaluation of assets and
re-assessment of liabilities transferred
to A and B in old profit sharing ratio)
Revaluation Account
Dr. Cr.

Particulars Amount Particulars Amount

(Rs.) (Rs.)
Stock 1,500 Plant and Machinery 3,000
Furniture 1,000 Investments 1,000
Provision for Doubtful 600 Sundry Creditors 100
Outstanding Electricity 200
Profit on Revaluation
transferred to:
A’s Capital 480
B’s Capital 320
4,100 4,100

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Admission of a Partner 149

Partner’s Capital Accounts

Dr. Cr.

Date Particulars A B C Date Particulars A B C

2017 (Rs.) (Rs.) (Rs.) 2017 (Rs.) (Rs.) (Rs.)

Apr.01 Balance 33,480 22,320 15,000 Apr.1 Balance b/d 30,000 20,000
c/d Bank 15,000
Goodwill 3,000 2,000
Revaluation 480 320
(Profit)

33,480 22,320 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 Amount Assets Amount
(Rs.) ( Rs.)
Bills Payable 10,000 Cash in hand 10,000
Sundry creditors 58,000 Cast at bank 40,000
Outstanding expenses 2,000 Sundry debtors 60,000
Capitals Stock 40,000
A 1,80,000 Plant and machinery 1,00,000
B 1,50,000 3,30,000 Building 1,50,000
4,00,000 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.

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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 Particulars Amount
(Rs.) (Rs.)
Stock in hand 4,000 Plant and machinery 20,000
Provision for doubtful debts 3,000 Buildings 15,000
Creditors
profit on revaluation 1,000
transferred to:
A’s Capital 18,000
B’s Capital 9,000 27,000
35,000 35,000

Partners’ Capital Accounts

Dr. Cr.
Date Particulars A B C Date Particulars A B C
2017 (Rs.) (Rs.) (Rs.) 2017 (Rs.) (Rs.) (Rs.)

March Balance c/d 2,38,000 1,79,000 1,00,000 March Balabce b/d 1,80,000 1,50,000
31 31 Bank 1,00,000
Goodwill 40,000 20,000
Revaluation 18,000 9,000
2,38,000 1,79,000 1,00,000 2,38,000 1,79,000 1,00,000

Balance Sheet of A, B and C as on April 01, 2016

Liabilities Amount Assets Amount
(Rs.) (Rs.)
Bills Payable 10,000 Cash in hand 10,000
Sundry Creditors 59,000 Cash at bank 2,00,000
Outstanding Expenses 2,000 Sundry Debtors 60,000
Capitals Less: Provision for 3,000 57,000
A 2,38,000 doubtful debts
B 1,79,000 Stock 36,000
C 1,00,000 5,17,000 Plant and Machinery 1,20,000
Buildings 1,65,000
5,88,000 5,88,000

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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.

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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
1
C’s Share =
4
1 3
Remaining Shares = 1− =
4 4
3 2 6
A’s New Share = × =
4 3 12
3 1 3
B’s New Share = × =
4 3 12
1 3 3
C’s New Share = × =
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:
2
A’s capital = of 80,000 = Rs. 40,000
4
1
B’s capital = 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 Credit
Amount Anount
(Rs.) (Rs.)
A’s Capital A/c Dr. 5,000
To Cash A/c 5,000
(Excess capital withdrawn by A)

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Admission of a Partner 153

Cash A/c Dr. 5,000

To B’s Capital A/c 5,000
(Deficiency made good by additional
amount brought in by B)

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:
1 1 3
A = − =
2 8 8
1 1 5
B − = =
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:
3 5 1 1 9 5 4 6
: : : or : : : or 9:5:4:6
8 24 6 4 24 24 24 24

2. Required capitals of all partners:

9
A’s Capital = Rs. 1,20,000 × = Rs. 45,000
24
5
B’s Capital = Rs. 1,20,000 × = Rs. 25,000
24

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154 Accountancy – Not-for-Profit Organisation and Partnership Accounts

4
C’s Capital = Rs. 1,20,000 × = Rs. 20,000
24
6
D’s Capital = Rs. 1,20,000 × = 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. Debit Credit
Amount Amount
(Rs.) (Rs.)
Cash A/c Dr. 5,000
To A’s Capital A/c 5,000
(Deficiency made good by
additional amount brought in by A)
B’s Capital A/c Dr.
C’s Capital A/c Dr. 10,000
To Cash A/c 10,000
(Excess amounts withdrawn by B and C) 20,000
Cash A/c Dr. 30,000
To D’s Capital A/c 30,000
(Cash brought in by D as Capital)

Alternatively, for entries (2) and (3) above shall be

Books of A, B, C and D
Journal
Date Particulars L.F. Debit Credit
Amount Amount
(Rs.) (Rs.)
A’s Current A/c Dr. 5,000
To A’s Capital A/c 5,000
(Deficiency in A’s capital transferred to
A’s Current Account)
B’s Capital A/c Dr. 10,000
C’s Capital A/c Dr. 10,000
To B’s Current A/c 10,000
To C’s Current A/c 10,000
(Excess Capital of B transferred
to their current account)

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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 Assets Amount
(Rs.) (Rs.)
Creditors 8,000 Cash in hand 2,000
Bills payable 4,000 Cash at bank 10,000
General Reserve 6,000 Sundry debtors 8,000
Capitals: A 50,000 Stock 10,000
B 32,000 82.,000 Furniture 5,000
Machinery 25,000
Building 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 Particulars L.F. Debit Credit

2017 Amount Anount
(Rs.) (Rs.)
March 1 Cash A/c Dr. 42,000
To C’s Capital A/c 30,000
To Goodwill A/c 12,000
(Amounts of capital and goodwill
brought in by C)
Goodwill A/c Dr. 12,000
To A’s Capital A/c 8,000
To B’s Capital A/c 4,000
(Goodwill brought in by C transferred to
A and B in their ratio of sacrifice)
Revaluation A/c Dr. 2,480
To Machinery A/c 2,000
To Provision for Bad Debts A/c 480
(Decrease in the value of machinery and
creation of provision for bad debts)

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156 Accountancy – Not-for-Profit Organisation and Partnership Accounts

Building A/c Dr. 5,000

To Revaluation A/c 5,000
(Increase in the value of building)
Revaluation A/c Dr. 2,520
To A’s Capital A/c 1,680
To B’s Capital A/c 840
(Profit on revaluation distributed
between A and B)
General Reserve A/c Dr. 6,000
To A’s Capital A/c 4,000
To B’s Capital A/c 2,000
(Undistributed profit transferred
to A and B)
A’s Capital A/c Dr. 3,680
To A’s Current A/c 3,680
(The excess of capital transferred to
partner’s current account)
B’s Capital A/c Dr. 8.840
To B’s Current A/c 8,840
(The excess of B’s capital transferred to
partner’s current account)
Revaluation Account
Dr. Cr.
Particulars Amount Particulars Amount
(Rs.) (Rs.)
Machinery 2,000 Building 5,000
Provision for bad debts 480
Transfer of profit on
revaluation to:
A’s Capital 1,680
B’s Capital 840 2,520
5,000 5,000

Partner’s Capital Accounts

Dr. Cr.
Date Particulars A B C Date Particulars A B C
(Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)

Current Accounts 3,680 8,840 Balance b/d 50,000 32,000

Balance c/d 60,000 30,000 30,000 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

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Admission of a Partner 157

Partner’s Current Accounts

Dr. Cr.
Date Particulars A B C Date Particulars A B C
(Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)

Balance c/d 3,680 8,840 - Capital A/cs 3,680 8,840 -

Balance Sheet of A, B and C as on March 31, 2017

Liabilities Amount Assets Amount
(Rs.) (Rs.)
Creditors 8,000 Cash in hand 44,000
Bills Payable 4,000 Cash at bank 10,000
Partners Current accounts: Sundry Debtors 8000
A 3,680 Less: Provision for 480 7,520
B 8,840 12,520 Doubtful Debts
Capitals Stock 10,000
A 60,000 Furniture 5,000
B 30,000 Machinery 23,000
C 30,000 1,20,000 Buildings 45,000
1,44,520 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.
1
C’s Share of Profits =
4
1 3
Remaining Share = 1− =
4 4
2 3 6 1
A’s New Share = of = =
3 4 12 2
1 3 3 1
B’s New Share = of = =
3 4 12 4
Thus, new profit sharing ratio between A, B and C is 2:1:1
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 :
2
A’s Capital = of 1,20,000 = Rs. 60,000
4
1
B’s Capital = of 1,20,000 = Rs. 30,000
4

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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 Amount Assets Amount
(Rs.) (Rs.)
Sundry Creditors 20,000 Cash in hand 5,000
Partner’s Capital Sundry Debtors 20,000
W 40,000 Less: Provision for 700 19,300
R 30,000 70,000 doubtful debts
Stock 25,000
Plant and Machinery 35,000
Patents 5,700
90,000 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

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Admission of a Partner 159

66,000
Average Profits = Rs. = Rs. 16,500
4
5
Goodwill at 2 ½ Years purchase = Rs .16,500 × = Rs. 41,250
2
4
B’s share of goodwill = Rs. 41,250 × = Rs, 11,000.
15

Books of W, R and B
Journal
Date Particulars L.F. Debit Credit
2015 (Rs.) (Rs.)
Jan. 01 Cash A/c Dr. 41,000
To B’s Capital A/c 30,000
To Goodwill A/c 11,000
(Sum brought in by B as his Capital and
his share (4/5) of the goodwill)
Goodwill A/c Dr. 11,000
To W’s Capital A/c 6,600
To R’s Capital A/c 4,400
(Goodwill brought by B credited to W’s
and R’s capital accounts in old profit
ratio of 3:2 )
W’s Capital A/c Dr. 3,300
R’s Capital A/c 2,200
To Cash A/c 5,500
(Amount (half of goodwill)
withdrawn by the old partners)
Revaluation A/c Dr. 5,300
To Provision for Doubtful Debts A/c 300
To Stock A/c 5,000
(Increase in provision for doubtfull debts to
Rs 1,000 (5% of Rs 20,000) and decrease
in value of stock)
Plant and Machinery A/c Dr. 5,000
Patents A/c Dr. 6,300
To Revaluation A/c 11,300
(Increase in value of Plant and
Machinery and Patents)
Revaluation A/c Dr. 3,000
To Sundry Creditors A/c 3,000
(Increase in liabilities)

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160 Accountancy – Not-for-Profit Organisation and Partnership Accounts

Revaluation A/c Dr. 3,000

To W’s Capital A/c 1,800
To R’s Capital A/c 1,200
(Being profit on adjustment transferred
to partners’ capital accounts)

Cash Account
Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
2015 (Rs.) 2015 (Rs.)
Jan. 1 Balance b/d 5,000 Jan. 1 W’s Capital 3,300
B’s Capital 30,000 R’s Capital 2,200
Goodwill 11,000 Balance c/d 40,500
46,000 46,000

B’s Capital Account

Dr. Cr.
Date Particulars J.F. Anount Date Particulars J.F. Amount
2015 (Rs.) 2015 (Rs.)
Jan. 1 Balance c/d 30,000 Jan. 1 Cash 30,000
30,000 30,000

W’s Capital Account

Dr. Cr.
Date Particulars J.F. Anount Date Particulars J.F. Amount
2015 (Rs.) 2015 (Rs.)
Jan.1 Cash 3,300 Jan. 1 Balance b/d 40,000
Balance c/d 45,100 Goodwill 6,600
Revaluation 1,800
48,400 48,400

R’s Capital Account

Dr. Cr.
Date Particulars J.F. Anount Date Particulars J.F. Amount
2015 (Rs.) 2015 (Rs.)
Jan. 1 Cash 2,200 Jan. 1 Balance b/d 30,000
Balance c/d 33,400 Goodwill 4,400
Revaluation 1,200
35,600 35,600

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Admission of a Partner 161

Revaluation Account
Dr. Cr.
Particulars Anount Particulars Amount
(Rs.) (Rs.)
Provision for 300 Plant and Machinery 5,000
doubtful debts Patents 6,300
Stock 5,000
Sundry Creditors 3,000
Profit transferred to:
W 3/5 1,800
R 2/5 1,200 3,000
11,300 11,300

Balance Sheet of W, R and B as on January 01, 2015

Liabilities Amount Assets Amount
(Rs.) (Rs.)
Sundry Creditors 23,000 Cash in hand 40,500
Capitals: Sundry debtors : 20,000
W 45,100 Less: Provision for
R 33,400 doubtful debits 1,000 19,000
B 30,000 1,08,500 Stock 20,000
Plant & Machinery 40,000
Patents 12,000
1,31,500 1,31,500

The new profit sharing ratio will be:

4 3 11 3 33
W = (1 − )× = × =
15 5 15 5 75
4 2 11 2 22
R = (1 − )× = × =
15 5 15 5 75
4 20
B = =
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

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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 C gaining 116  − and 216  − . In such a situation, first of
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 Amount Assets Amounts
Rs. Rs.
Sundry Creditors 1,50,000 Cash at Bank 40,000
General Reserve 80,000 Bills Receivable 50,000
Partner's Loan : Sundry Debtors 60,000
Dinesh 40,000 Stock 1,20,000
Ramesh 30,000 70,000 Fixed Assets 2,80,000
Partners Capital :
Dinesh 1,00,000
Ramesh 80,000
Suresh 70,000 2,50,000
5,50,000 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.

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Admission of a Partner 163

3. 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.
4. The value of stock be reduced to Rs. 1,12,000.
5. 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 Dr. 51,000
To Revaluation A/c 51,000
(Increase in value of fixed assets)
Revaluation A/c Dr. 11,000
To Stock A/c 8,000
To Provisions for 3,000
Doubtful debts A/c
(Decrease in value of stock and creation
of provision for doubtful debts)
Revaluation A/c Dr. 40,000
To Dinesh's Capital A/c 15,000
To Ramesh's Capital A/c 15,000
To Suresh's Capital A/c 10,000
(Profit on revaluation transferred to partners'
capital accounts in old profit sharing ratio)
General Reserve A/c Dr. 80,000
To Dinesh's Capital A/c 30,000
To Ramesh's Capital A/c 30,000
To Suresh's Capital A/c 20,000
(General reserve, transferred to partners'
capital accounts in old ratio)
Suresh's Capital A/c Dr. 7,500
To Dinesh's Capital A/c 3,750
To Ramesh's Capital A/c 3,750
(Goodwill adjusted in partner's capital
accounts in their sacrificing/gaining ratio)

Working Notes:
1. Gain or sacrifice of partners
Dinesh Ramesh Suresh
Old Share 3/8 3/8 2/8
New Share 1/3 1/3 1/3
Difference 1/24 1/24 2/24
(sacrifice) (sacrifice) (gain)

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164 Accountancy – Not-for-Profit Organisation and Partnership Accounts

2. 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
1
Goodwill = Rs. 20,000 × 4
2
= Rs. 90,000
Suresh in expected to bring in Rs. 7,500
2
as he gain share in profits.
24
Dinesh in expected to receive Rs. 3,750
1
as he sacrifices share in profits
24
Ramesh is expected to receive Rs. 3,750
1
as he sacrifices
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.
(a) Good will A/c Dr. 90,000
To Dinesh's Capital A/c 33,750
To Ramesh's Capital A/c 33,750
To Suresh's Capital A/c 22,500
(Goodwill raised in old ratio)
(b) Dinesh's Capital A/c Dr. 30,000
Ramesh's Capital A/c Dr. 30,000
Suresh's Capital A/c Dr. 30,000
To Goodwill A/c 90,000

3. Capital Accounts
Date Particulars J.F. Dinesh Ramesh Suresh Date Particulars J.F. Dinesh Ramesh Suresh
(Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)

Dinesh's 3,750 Balance b/d 1,00,000 80,000 70,000

Account Profit on
Ramesh's 3,750 Revaluation 15,000 15,000 10,000
Account General
Balance c/d 1,48,750 1,28,750 92,500 Reserve 30,000 30,000 20,000
Suresh's 3,750 3,750
Account
1,48,750 1,28,750 1,00,000 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 Amount Assets Amount
(Rs.) (Rs.)
Sundry Creditors 1,50,000 Cash at Bank 40,000
Partner's Loan : Bills Receivable 50,000
Dinesh 40,000 Sundry Debtors 60,000
Ramesh 30,000 70,000 Less Prov. for Doubtful
Debts 3,000 57,000
Capitals: Stock 1,12,000
Dinesh 1,48,750 Fixed Assets 3,31,000
Ramesh 1,28,750
Suresh 92,500 3,70,000
5,90,000 5,90,000

Terms Introduced in the Chapter

1. Reconstitution of Partnership Firm.
2. Revaluation of Assets.
3. Reassessment of liabilities.
4. Undistributed and accumulated profits and losses.
5. Accumulated Losses.
6. Goodwill.
7. Profit Sharing Ratio.
8. Reserves.
9. Revaluation Account.
10. Sacrificing Ratio.
11. 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

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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.

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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)

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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:

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Admission of a Partner 169

Rs.
2013 40,000
2014 50,000
2015 60,000
2016 50,000
2017 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

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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?

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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 Amount Assets Amount

(Rs.) (Rs.)
Bills Payable 10,000 Cash in Hand 10,000
Creditors 58,000 Cash at Bank 40,000
Outstanding 2,000 Sundry Debtors 60,000
Expenses Stock 40,000
Capitals: Plant 1,00,000
A 1,80,000 Buildings 1,50,000
B 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:

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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 Amount Assets Amount
(Rs.) (Rs.)
Sundry creditors 41,500 Cash at Bank 26,500
Reserve fund 4,000 Bills Receivable 3,000
Capital Accounts Debtors 16,000
A 30,000 Stock 20,000
B 16,000 Fixtures 1,000
Land & Building 25,000
91,500 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.

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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
6 5 3
and losses in the ratio of : : respectively.
14 14 14

Liabilites Amount Assets Amount

(Rs.) (Rs.)
Creditors 9,000 Land and Buildings 24,000
Bills Payable 3,000 Furniture 3,500
Capital Accounts Stock 14,000
Arun 19,000 Debtors 12,600
Bablu 16,000 Cash 900
Chetan 8,000 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:

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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 Amount Assets Amount
(Rs.) (Rs.)
Creditors 8,000 Cash in hand 2,000
Bills payable 4,000 Cash at bank 10,000
General reserve 6,000 Sundry debtors 8,000
Capital accounts: Stock 10,000
Azad 50,000 Funiture 5,000
Babli 32,000 82,000 Machinery 25,000
Buildings 40,000
1,00,000 1,00,000

It was agreed that:

i) Chintan will bring in Rs. 12,000 as his share of goodwill premium.
ii) Buildings were valued at Rs. 45,000 and Machinery at Rs. 23,000.
iii) A provision for doubtful debts is to be created @ 6% on debtors.
iv) 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 Amount Assets Amount
(Rs.) (Rs.)
Creditors 15,000 Land & Building 35,000
Bills Payable 10,000 Plant 45,000
Ashish Capital 80,000 Debtors 22,000
Dutta’s Capital 35,000 Less : Provision 2,000 20,000
Stock 35,000
Cash 5,000
1,40,000 1,40,000

It was agreed that:

i) The value of Land and Building be increased by Rs. 15,000.
ii) The value of plant be increased by 10,000.
iii) Goodwill of the firm be valued at Rs. 20,000.
iv) Vimal to bring in capital to the extent of 1/5th of the total capital of the
new firm.

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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).

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Reconstitution of a Partnership Firm –
Retirement/Death of a Partner 4

LEARNING OBJECTIVES
After studying this chapter
you will be able to:
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
• calculate new profit partner, the existing partnership deed comes to an
sharing ratio and gaining
ratio of the remaining
end, and in its place, a new partnership deed needs
partners after the to be framed whereby, the remaining partners
retirement/death of a continue to do their business on changed terms and
partner; conditions. There is not much difference in the
• describe the accounting
treatment of goodwill in accounting treatment at the time of retirement or in
the event of retirement/ the event of death. In both the cases, we are required
death of a partner; to determine the sum due to the retiring partner (in
• make the necessary entries case of retirement) and to the legal representatives
in respect of unrecorded
assets and liabilities; (in case of deceased partner) after making necessary
• make necessary adjust- adjustments in respect of goodwill, revaluation of a
ment for accumulated assets and liabilities and transfer of accumulated
profits or losses; profits and losses. In addition, we may also have to
• ascertain the retiring/
compute the new profit sharing’s ratio among the
deceased partner claim
against the firm and remaining partners and so also their gaining ratio,
explain the mode of its This covers all these aspects in detail.
settlement;
• prepare the retiring
4.1 Ascertaining the Amount Due to Retiring/
partner’s loan account, if
required; and Deceased Partner
• prepare the deceased
partner’s executor’s
The sum due to the retiring partner (in case of
account in the case of retirement) and to the legal representatives/
death of a partner and the executors (in case of death) includes:
balance sheet of a (i) credit balance of his capital account;
reconstituted firm.
(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;

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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.

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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
2 3
Share acquired by Naveen = of
3 10
2 3 2
= × =
3 10 10
1 3
Share acquired by Tarun = of
3 10
1 3 1
= × =
3 10 10

5 2 7
Share of Naveen = + =
10 10 10

2 1 3
Share of Tarun = + =
10 10 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 :

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Retirement/Death of a Partner 179

3 5 6 −5 1
Amit’s Gaining Share = − = =
5 10 10 10
2 2 4−2 2
Gagan’s Gaining Share = − = =
5 10 10 10

Thus, Gaining Ratio of Amit and Gagan = 1:2

1 2
This implies Amit gains 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.

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180 Accountancy – Not-for-Profit Organisation and Partnership Accounts

Solution

3 2
Gaining Given, Ratio of Harpreet and Shreya = 3:2 = :
5 5
3 2 1
Old Profit Sharing Ratio of between Alka, Harpreet and Shreya 3:2:1 = : :
6 6 6
3 3 9
Share acquired by Harpreet = of =
5 6 30
2 3 6
Share acquired by Shreya = of =
5 6 30
New Share = Old Share + Acquired Share
2 9 19
Harpreet’s New Share = + =
6 30 30
1 6 11
Shreya’s New Share = + =
6 30 30
New Profit Sharing Ratio of Harpreet and Shreya = 19:11

Illustration 3
Murli, Naveen and Omprakash are partners sharing profits in the ratio of
3 1 1
, and . Murli retires and surrenders 2/3rd of his share in favour of Naveen
8 2 8
and the remaining share in favour of Omprakash. Calculate new profit sharing
and the gaining ratio of the remaining partners.

Solution
Naveen Omprakash
1 1
(i) Old Share
2 8
(ii) Share Acquired by Naveen and
2 3 2 1 3 1
Omprakash from Murli = of = of =
3 8 8 3 8 8
1 2 1 1
(iii) New Share = (i) + (ii) = + +
2 8 8 8
6 3 2 1
= or = or
8 4 8 4
3 1
Thus, the New profit sharing Ratio = : or 3:1, and the
4 4

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Retirement/Death of a Partner 181

2 1
Gaining Ratio = : 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
Lakshya Manoj Naresh
2 1 4
(i) Old Share
10 10 10
3 3 2 3
(ii) Acquired Share from Kumar of of Nil
5 10 5 10
9 6
= = Nil
50 50
2 9 1 6 4
(iii) New share = (i) = (ii) + = + = + Nil
10 50 10 50 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
5 3 45 − 24 21
Sadhna’s Gaining Share = − = =
8 9 72 72
3 2 27 − 16 11
Kamana’s Gaining Share = − = =
8 9 72 72
Gaining Ratio between Sadhna and Kamana = 21:11.

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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
of , and . Calculate the new profit sharing ratio between continuing
4 8 16
partners if (a) Azad retires; (b) Vijay retires; (c) Amit retires.
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
ratio of , 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.

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:

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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 Dr.
(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)
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. 60,000
To A’s capital A/c 30,000
To B’s capital A/c 20,000
To C’s capital A/c 10,000
(Goodwill raised at full value and credited
to all the partners in their old profit
sharing ratio)

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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 30,000
To B’s capital A/c 20,000
To C’s capital A/c 10,000
(Goodwill raised at full value and credited
to all partners in old ratio)
(ii) A’s capital A/c Dr. 45,000
C’s capital A/c Dr. 15,000
To Goodwill A/c 60,000
(Goodwill written off and debited to
remaining partners in the new ratio)
(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. 15,000
C’s capital A/c Dr. 5,000
To goodwill A/c 20,000
(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. 15,000
C’s capital A/c Dr. 5,000
To C’s capital A/c 20,000
(B’s share of goodwill adjusted to remaining
partners’ capital accounts in gaining ratio)

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.

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Retirement/Death of a Partner 185

Solution
(a) When Goodwill is raised and written-off
Journal

Date Particulars L.F. Debit Credit

Amount Amount
(Rs.) (Rs.)
(i) Goodwill A/c Dr. 72,000
To Keshav’s Capital A/c 32,000
To Nirmal’s Capital A/c 24,000
To Pankaj’s Capital A/c 16,000
(Goodwill raised at its full value in
old profit sharing ratio)
(ii) Keshav’s Capital A/c Dr. 45,000
Pankaj’s capital A/c Dr. 27,000
To Goodwill A/c 72,000
(Goodwill written off in the new profit
sharing ratio)

(b) When goodwill is not to appear in firm’s books at all

Journal
Date Particulars L.F. Debit Credit
Amount Amount
(Rs.) (Rs.)
Keshav’s Capital A/c Dr. 13,000
Pankaj’s Capital A/c Dr. 11,000
To Nirmal’s Capital A/c 24,000
(Nirmal’s share of goodwill adjusted to Keshav
and Pankaj in their gaining ratio of 13:11)

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
Keshav’s Gaining Share = − =
8 9 72
3 2 11
Pankaj’s Gaining Share = − =
8 9 72
13 11
Hence, Gaining Ratio between Keshav and Pankaj is 13:11 i.e. :
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. Debit Credit
Amount Amount
(Rs.) (Rs.)
Kirti’s Capital A/c Dr. 6,000
Shewata’s Capital A/c Dr. 6,000
To Jaya’s Capital A/c 12,000
(Jaya’s share of goodwill adjusted to
remaining in their gaining ratio)

Working Notes
1. Jaya’s Share of Goodwill
2
= Rs. 36,000 × = Rs. 12,000
6
2. Calculation of Gaining Ratio
Gaining Share = New Share – Old Share
1 1 2 −1 1
Kirti’s Gain = − = =
3 6 6 6
1 2 2−2 0
Ekta’s Gain = − = = (Neither Gain nor Sacrifice)
3 6 6 6
1 1 2 −1 1
Shewata’s Gain = − = =
3 6 6 6

1 1
Hence, Gaining ratio between Kirti and Shewata : = 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.

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Retirement/Death of a Partner 187

Solution
Books of Deepa and Shilpa
Journal
Date Particulars L.F. Debit Credit
Amount Amount
(Rs.) (Rs.)
Shilpa’s Capital A/c Dr. 48,000
To Neeru’s Capital A/c 36,000
To Deepa’s Capital A/c 12,000
(Shilpa compensated Neeru for her share of
goodwill and to Deepa for the sacrifice made
by her on Neeru’s retirement)
Working Notes
1. Calculation of Gaining Ratio
Gaining Share = New Share – Old Share
2 5 4 −5 1  1
Deepa’s Gaining Share = − = =− =   i.e., Sacrifice.
5 10 10 10  10 

3 2 6−2 4
Shilpa’s Gaining Share = − = = i.e., Gain
5 10 10 10
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. 1,20,000 × = Rs. 12,000
10
3
Neeru’s (Retiring Partner’s Sacrifice) = Rs. 1,20,000 × = Rs. 36,000.
10
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

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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. Debit Credit
Amount Amount
(Rs.) (Rs.)
Hanny’s Capital A/c Dr. 30,000
Pammy’s Capital A/c Dr. 20,000
Sunny’s Capital A/c Dr. 10,000
To Goodwill A/c 60,000
(Existing goodwill written-off in old ratio)
Hanny’s Capital Dr. 14,000
Sunny’s Capital Dr. 14,000
To Pammy’s Capital A/c 28,000
(Pammy’s share of goodwill adjusted to
Hanny’s and Sunny’s capital account
to the extent of their gain)

Working Notes
1
(i) Pammy’s share of current value of goodwill of Rs. 84,000
3
1
= 84,000 × = Rs. 28,000
3

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Retirement/Death of a Partner 189

(ii) Gaining Share = New Share – Old Share

2 3 1
Hanny’s Gaining Share = − =
3 6 6
1 1 1
Sunny’s Gaining Share = − =
3 6 6
1 1
This gaining Ratio of Hanny and Sunny is : = 1:1
6 6

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. Debit Credit
Amount Amount
(Rs.) (Rs.)
Goodwill A/c Dr. 4,000
To Deepak’s Capital A/c 2,000
To Nakul’s Capital A/c 1,200
To Rajesh’s Capital A/c 800
(Increase in the value of goodwill credited to
all partners’ capital accounts in their old
profit sharing ratio of 5:3:2)

(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

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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. Debit Credit
Amount Amount
(Rs.) (Rs.)
Mohan Lal’s Capital A/c Dr. 4,000
Girdhari Lal’s Capital A/c Dr. 3,000
Shyam Lal’s Capital A/c Dr. 1,000
To Goodwill A/c 8,000
(Decrease in the value of goodwill adjusted
among all the partners’ capital accounts in
their old profit sharing ratio)

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

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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. Rs.
P’s Capital A/c Dr. 9,000
Q’s Capital A/c Dr. 6,000
To R’s Capital A/c 15,000
(R’s share of goodwill adjusted in P’s
and Q’s capital accounts in their
gaining ratio of 3:2)

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.

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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) Dr.
To Revaluation A/c
(Increase in the value of assets)
2. For decrease in the value of assets
Revaluation A/c Dr.
To Assets A/c’s (Individually)
(Decrease in the value of assets)
3. For increase in the amount of liabilities
Revaluation A/c Dr.
To Liabilities A/c (Individually)
(Increase in the amount of liabilities)
4. For decrease in the amount of liabilities
Liabilities A/c’s (Individually) Dr.
To Revaluation A/c
(Decrease in the amount of liabilities)
5. For an unrecorded asset
Assets A/c Dr.
To Revaluation A/c
(Unrecorded asset brought into book)
6. For an unrecorded liability
Revaluation A/c Dr.
To Liability A/c
(Unrecorded liability brought into books)
7. 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)

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Retirement/Death of a Partner 193

(or)
All Partners’ Capital A/c’s (Individually) Dr.
To Revaluation A/c
(Loss on revaluation transferred to
partner’s capital accounts)

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 Assets Amount
(Rs.) (Rs.)
Sundry Creditors 55,000 Goodwill 25,000
Reserve Fund 30,000 Buildings 1,00,000
Capital Accounts: Patents 30,000
Mitali 1,50,000 Machinery 1,50,000
Indu 1,25,000 Stock 50,000
Geeta 75,000 3,50,000 Debtors 40,000
Cash 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 Particulars L.F. Debit Credit

2017 Amount Amount
(Rs.) (Rs.)
Mar. 31 Revaluation A/c Dr. 10,000
To Machinery A/c 10,000
(Decrease in the value of machinery)
Patents A/c Dr. 10,000
Buildings A/c Dr. 25,000
To Revaluation A/c 35,000
(Increase in the value of patents and buildings)
Revaluation A/c Dr. 25,000
To Mitali’s Capital A/c 12,500
To Indu’s Capital A/c 7,500
To Geeta’s Capital A/c 5,000
(Profit on revaluation transferred to all
partner’s capital accounts in old profit
sharing ratio)

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Revaluation Account
Dr. Cr.
Liabilities Amount Assets Amount
(Rs.) (Rs.)
Machinery 10,000 Patents 10,000
Profit Buildings 25,000
transferred to:
Mitali’s Capital A/c 12,500
Indu’s Capital A/c 7,500
Geeta’s Capital A/c 5,000 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 Dr.
To All Partners’ Capital A/c’s (Individually)
(Reserves transferred to all partners’
capital account’s in old profit sharing ratio).
(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 Amount Assets Amount
(Rs.) (Rs.)
Creditors 50,000 Land and Building 3,00,000
General Reserve 90,000 Stock 30,000
Capital Accounts: Bank 10,000
Inder 1,00,000 Cash 5,000
Gajender 55,000
Harinder 50,000 2,05,000
3,45,000 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 L.F. Debit Credit
Amount Amount
(Rs.) (Rs.)
2017 General Reserve A/c Dr. 90,000
Mar. 31 To Inder’s Capital A/c 45,000
To Gajender’s Capital A/c 30,000
To Harinder’s Capital A/c 15,000
(General Reserves transferred to all partners’
capital accounts in the old ratio on
Inder’s retirement)

4.7 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 Dr.
To Cash/Bank A/c
2. When retiring partner’s whole amount is treated as loan.
Retiring Partner’s Capital A/c Dr.
To Retiring Partner’s Loan A/c
3. When retiring partner is partly paid in cash and the remaining amount treated
as loan.
Retiring Partner’s Capital A/c Dr. (Total Amount due)
To Cash/Bank A/c (Amount Paid)
To Retiring Partner’s Loan A/c (Amount of Loan)

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4. When Loan account is settled by paying in instalment includes principal and

interest.
a) For interest on loan
Interest A/c Dr.
To Retiring Partner’s Loan A/c
b) For payment of instalment
Retiring Partner’s Loan A/c Dr.
To Cash/Bank A/c
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 J.F. Amount Date Particulars J.F. Amount

(Rs.) (Rs.)
Year-I Bank 22,200 Year -1 Mahinder Capital 60,000
(15,000+7,200) Interest 7,200
Balance c/d 45,000
67,200 67,200

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Retirement/Death of a Partner 197

Year-II Bank 20,400 Year-II Balance b/d 45,000

(15,000+5,400) Interest 5,400
Balance c/d 30,000
50,400 50,400

Year-III Bank 18,600 Year-III Balance b/d 30,000

(15,000+3,600) Interest 3,600
Balance c/d 15,000

33,600 33,600

Year-IV Bank 16,800 Year-IV Balance b/d 15,000

(15,000+1,800) 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. Cr.

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

(Rs.) (Rs.)
Year-I Bank 20,000 Year-I Mohan’s Capital 60,000
Balance c/d 47,200 Interest 7,200
67,200 67,200

Year-II Bank 20,000 Year-II Balance b/d 47,200

Balance c/d 32,864 Interest 5,664
52,864 52,864

Year-III Bank 20,000 Year-III Balance b/d 32,864

Balance c/d 16,808 Interest 3,944
36,808 36,808

Year-IV Bank 18,825 Year-IV Balance b/d 16,808

Interest 2,017
18,825 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 J.F. Amount Date Particulars J.F. Amount

(Rs.) (Rs.)
Year-I Bank 19,754 Year -I Mohinder’s Capital 60,000
Balance c/d 47,446 Interest 7,200
67,200 67,200

Year-II Bank 19,754 Year -II Balance b/d 47,446

Balance c/d 33,386 Interest 5,694
53,140 53,140

Year-III Bank 19,754 Year-III Balance b/d 33,386

Balance c/d 17,638 Interest 4,006
37,392 37,392

Year-IV Bank 19,754 Year-IV Balance b/d 17,638

Interest 2,116
19,754 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...

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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 Assets Amount

(Rs.) (Rs.)
Capital Accounts : Goodwill 56,000
Vijay 1,80,000 Stock 90,000
Ajay 1,20,000 Debtors 66,000
Mohan 1,00,000 4,00,000 Land and Buildings 1,20,000
Bills Payable 12,000 Machinery 1,59,000
General Reserve 42,000 Motor Van 31,000
Creditors 90,000 Cash at bank 22,000
5,44,000 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 Amount Assets Amount
(Rs.) (Rs.)
Capitals: Land 4,00,000
Shyam 7,20,000 Building 3,80,000
Gagan 4,15,000 Plant & Machinery 4,65,000
Ram 3,45,000 14,80,000 Furniture & Fittings 77,000
Reserve Fund 1,80,000 Stock 1,85,000
Sundry Creditors 1,24,000 Sundry Debtors 1,72,000
Outstanding Expresses 16,000 Cash in hand 1,21,000
18,00,000 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.

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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 Particulars Amount

(Rs.) (Rs.)
Stock 13,000 Furniture 3,000
Provision for Doubtful Debt 10,000 (Loss on Revaluation
transferred to :
Ashish’s capital 10,000
Suresh’s capital 6,000
Lokesh’s capital 4,000 20,000
23,000 23,000

Partners’ Capital Accounts

Dr. Cr.

Date Particu- J.F. Ashish Suresh Lokesh Date Particu J.F. Ashish Suresh Lokesh
2017 lars (Rs.) (Rs.) (Rs.) 2017 lars (Rs.) (Rs.) (Rs.)

Mar.31 Revaluation 10,000 6,000 4,000 Mar.31 Bal. b/d 7,20,000 4,15,000 3,45,000
(Loss) Reserve fund 90,000 54,000 36,000
Suresh’s Ashish’s 20,000
Capital 20,000 40,000 Capital
Cash Lokesh’s 40,000
Suresh’s 40,000 Capital
Loan 4,83,000
Balance c/d
7,80,000 3,37,000
8,10,000 5,29,000 3,81,000 8,10,000 5,29,000 3,81,000

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Balance Sheet of Ashish and Lokesh as on April 01, 2017

Liabilities Amount Assets Amount
(Rs.) (Rs.)
Capitals : Land 4,00,000
Ashish 7,80,000 Buildings 3,80,000
Lokesh 3,37,000 11,17,000 Plant and Machinery 4,65,000
Suresh’s Loan 4,83,000 Furniture 80,000
Sundry Creditors 1,24,000 Stock 1,72,000
Outstanding Expresses 16,000 Sundry Debtors 1,72,000
Less: Provision for
Doubtful Debts 10,000 1,62,000
Cash (Rs. 1,21,000–Rs. 40,000) 81,000
17,40,000 17,40,000

Working Notes
1. Gaining Share = New Share – Old Share
3 5 6 − 5 1
Ashish’s Gain = − = =
5 10 10 10
2 2 4 − 2 2
Lokesh’s Gain = − = =
5 10 10 10
Gaining Ratio between Ashish and Lokesh = 1 : 2,
3
2. Suresh’s Share of Goodwill = × Rs. 2,00,000 = Rs. 60,000
10

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 Amount Assets Amount
(Rs.) (Rs.)
Sundry Creditors 49,000 Cash 8,000
Reserves 14,500 Debtors 19,000
Capital: Stock 42,000
Shyam 80,000 Machinery 85,000
Gagan 62,500 Building 1,22,000
Ram 75,000 2,17,500 Patents 9,000
Employees’ Provident Fund 4,000
2,85,000 2,85,000

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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. Debit Credit
Amount Amount
(Rs.) (Rs.)
2017 Revaluation A/c Dr. 20,550
Mar. 31 To Machinery A/c 7,000
To Stock A/c 12,000
To Debtors A/c 1,550
(Loss on revaluation of assets recorded
on Gagan’s retirement)
Building A/c Dr. 30,000
To Revaluation A/c 30,000
(Appreciation in the value of Building
on Gagan’s retirement)
Revaluation A/c Dr. 9,450
To Shyam’s Capital A/c 3,780
To Gagan’s Capital A/c 3,780
To Ram’s Capital A/c 1,890
(Profit on revaluation transferred to partners’
capital accounts in the ratio of 2 : 2 : 1)
Reserve A/c Dr. 14,500
To Shyam’s Capital A/c 5,800
To Gagan’s Capital A/c 5,800
To Ram’s Capital A/c 2,900
(Reserve transferred to partner’s capital accounts)
Shyam’s Capital A/c Dr. 15,750
Ram’s Capital A/c Dr. 12,250
To Gagan’s Capital A/c 28,000
(Gagan’s share of goodwill adjusted to Shyam
and Ram in their gaining ratio of 9 : 7)
Gagan’s Capital A/c Dr. 1,00,080
To Gagan’s Loan A/c 1,00,080
(Amount payable to retiring partner transferred
to his loan account)

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Retirement/Death of a Partner 203

Balance Sheet of Shyam and Ram as on March 31, 2017

Liabilities Amount Assets Amount
(Rs.) (Rs.)
Sundry Creditors 49,000 Cash 8,000
Employees’ Provident Fund 4,000 Debtors 17,450
Capitals : Stock 30,000
Shyam 73,830 Machinery 78,000
Ram 67,540 1,41,370 Building 1,52,000
Gagan’s Loan 1,00,080 Patents 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 Assets Amount
(Rs.) (Rs.)
Machinery 7,000 Building 30,000
Stock 12,000
Debtors 1,550
(Profit on Revaluation)
Transfer to Capital
Shyam 3,780
Gagan 3,780 9,450
Ram 1,890 30,000 30,000

Partners’ Capital Accounts

Date Particulars J.F. Shyam Gagan Ram Date Particulars J.F. Shyam Gagan Ram
2 01 7 (Rs.) (Rs.) (Rs.) 2 01 7 (Rs.) (Rs.) (Rs.)

Mar.31 Gagan’s Capital 15,750 12,250 Mar.31 Bal. b/d 80,000 62,500 75,000
Gagan’s Loan 1,00,080 Revaluation 3,780 3,780 1,890
Bal. c/d 73,830 67,540 Profit 5,800 5,800 2,900
Reserve
Shyam’s Capital 15,750
Ram’s Capital 12,250
89,580 1,00,080 79,790 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.

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204 Accountancy – Not-for-Profit Organisation and Partnership Accounts

4.8 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 Dr.
To Cash / Bank A/c
(ii) For amount of capital to be brought in by the partner:
Cash / Bank A/c Dr.
To Partners’ Capital A/c
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

Mohit Sohan

New Capital based new ratio is 80,000 40,000

Existing Capital (after adjustments) is 82,000 41,000
Cash to be brought in on (Paid off) 2,000 1,000

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Retirement/Death of a Partner 205

Books of Mohit and Sohan

Journal
Date Particulars L.F. Debit Credit
Amount Amount
(Rs.) (Rs.)
Mohit’s Capital A/c Dr. 2,000
Sohan’s Capital A/c Dr. 1,000
To Cash A/c 3,000
(Excess capital withdrawn by Sohan)

2. 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
3
Asha’s New Capital = Rs. 2,40,000 × = 1,80,000
4
1
Lata’s New Capital = Rs. 2,40,000 × = 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.
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) 20,000 20,000

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Books of Asha and Lata

Journal
Date Particulars L.F. Debit Credit
Amount Amount
(Rs.) (Rs.)
Cash A/c Dr. 20,000
To Asha Capital A/c 20,000
(Cash brought by Asha)
Lata’s Capital A/c Dr. 20,000
To Cash A/c 20,000
(Surplus capital withdrawn by Lata)

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) = 60,000
Balance in Rahul’s Capital account (after adjustment) = 50,000
Amount payable to Lalit (Retiring partner) = 70,000
Total capital of new firm (i) + (ii) + (iii) = 1,80,000

b. Calculation of new capitals of the continuing partners

1
Pankaj’s New Capital = Rs. 1,80,000 × = Rs. 90,000
2
1
Rahul’s New Capital = Rs. 1,80,000 × = Rs. 90,000
2

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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 Rahul
(Rs.) (Rs.)
New Capital (Rs. 1,80,000 in the ratio of 1 : 1) 90,000 90,000
Existing capital (after adjustment) 60,000 50,000
Cash to be brought in 30,000 40,000

Books of Pankaj and Rahul

Journal
Date Particulars L.F. Debit Credit
Amount Amount
(Rs.) (Rs.)
Cash A/c Dr. 70,000
To Pankaj’s Capital A/c 30,000
To Rahul’s Capital A/c 40,000
(Amounts brought by Pankaj and Rahul)
Lalit’s Capital A/c Dr. 70,000
To Cash A/c 70,000
(Amount paid to Lalit on retirement)

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 Amount Assets Amount
(Rs.) (Rs.)
Creditors 21,000 Buildings 1,00,000
Mohit’s Capital 80,000 Machinery 50,000
Neeraj’s Capital 40,000 Stock 18,000
Sohan’s Capital 40,000 Debtors 20,000
General Reserve 20,000 Less: Provision 1,000 19,000
for Bad Debt
Cash at bank 14,000
2,01,000 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.

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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 Particulars Amount
(Rs.) (Rs.)
Provision for Doubtful Debt 2,000 Building 20,000
Machinery 10,000
Capital (Profit on
Revaluation)
Mohit 4,000
Neeraj 2,000
Sohan 2,000 8,000
20,000 20,000

Dr. Partners’ Capital Accounts Cr.

Date Particulars J.F. Mohit Neeraj Sohan Date Particulars J.F. Mohit Neeraj Sohan
2017 (Rs.) (Rs.) (Rs.) 2017 (Rs.) (Rs.) (Rs.)
Mar.31 Neeraj’s Capital 12,000 6,000 Mar.31 Bal. b/d 80,000 40,000 40,000
Balance c/d 82,000 65,000 41,000 General Reserve 10,000 5,000 5,000
Revaluation 4,000 2,000 2,000
(Profit)
Mohit’s Capital 12,000
Sohan’s Capital 6,000
94,000 65,000 47,000 94,000 65,000 47,000

Bank 65,000 Bal. b/d 82,000 65,000 41,000

Bank 2,000 1,000
Bal. c/d 80,000 40,000
(1)
82,000 65,000 41,000 82,000 65,000 41,000

Balance Sheet as on March 31, 2017

Liabilities Amount Assets Amount
(Rs.) (Rs.)
Creditors 21,000 Building 1,20,000
Bank overdraft 54,000 Machinery 40,000
Capital Stock 18,000
Mohit 80,000 Debtors 20,000
Sohan 40,000 1,20,000 Less: Provision for 3,000 17,000
Doubtful Debts
(1,000+2,000)
1,95,000 1,95,000

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Retirement/Death of a Partner 209

Working Notes
1. Bank Account
Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
(Rs.) (Rs.)
Balance b/d 14,000 Mohit’s Capital 2,000
Balance c/d 54,000 Sohan’s Capital 1,000
(overdraft) Neeraj’s Capital 65,000
68,000 68,000

2. It is assumed that bank overdraft is taken to pay the retiring partners.

3. Cash to be brought in or withdrawn by Mohit and Sohan :
Mohit Sohan
(Rs.) (Rs.)
(a) New capitals (Rs.1,20,000 in the
ratio of 2:1) 80,000 40,000
(b) Existing capital (after adjustments)
as calculated 82,000 41,000
Cash to be brought (paid off) 2,000 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 Amount Assets Amount

(Rs.) (Rs.)
Bills Payable 6,250 Land and Building 12,000
Sundry Creditors 10,000 Debtors 10,500
Reserve Fund 2,750 Less Provision 500 10,000
Capitals for bad debts
A 20,000 Bill receivables 7,000
B 15,000 Stock 15,500
C 15,000 50,000 Plant and Machinery 11,500
Cash at bank 13,000
69,000 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 Amount Assets Amount

(Rs.) (Rs.)
Sundry Creditors 16,000 Building 23,000
Capitals: Debtors 7,000
R 20,000 Stock 12,000
S 7,500 Patents 8,000
M 12,500 40,000 Bank 6,000
56,000 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

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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 × Share of Deceased Partner
3 4
= Rs. 1,00,000 × × = Rs. 10,000
12 10
The journal entry will be recorded as follows :
Profit & Loss Suspense A/c Dr. 10,000
To Champak’s Capital A/c 10,000
(Champak’s share of profit transferred to his capital account)
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:
Total Profit Rs. 1,36,000 + Rs. 1,54,000 + Rs. 1,00,000
Average Profit = =
No. of years 3

Rs. 3,90,000
= = Rs. 1,30,000
3
3 months 4
Champak’s share of profit = Rs. 1,30,000 × ×
12 months 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

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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

1,00,000
If sale is Rs.1, the profit =
8,00,000

1,00,000
If sale is Rs.1,50,000, the profit = × 1,50,000
8,00,000
= Rs. 18,750
Champak’s share of profit = Rs. 7,500
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 Dr.
To Deceased Partner’s Capital A/c
(Share of profit for the intervening period)

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 Amount Assets Amount
(Rs.) (Rs.)
Creditors 11,000 Buildings 20,000
Reserve Fund 6,000 Machinery 30,000
Anil’s Capital 30,000 Stock 10,000
Bhanu’s Capital 25,000 Patents 11,000
Chandu’s Capital 15,000 70,000 Debtors 8,000
Cash 8,000
87,000 87,000

Anil died on October 1, 2017. It was agreed between his executors and the
remaining partners that :
(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

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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 Particulars J.F. Amount Date Particulars J.F. Amount
2017 (Rs.) 2017 (Rs.)
Oct.1 Anil’s Executors 57,000 April,1 Balance b/d 30,000
Oct. 1 Reserve Fund 3,000
Bhanu’s Capital 11,250
Chandu’s Capital 7,500
Profit & Loss 3,750
(Suspense)
Interest on Capital 1,500
57,000 57,000

Anil’s Executor’s Account

Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
2017 (Rs.) 2017 (Rs.)
Oct.1 Bank 28,500 Oct.1 Anil’s Capital 57,000
Balance c/d 28,500
57,000 57,000

Working Notes
1. Revaluation Account
Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
(Rs.) (Rs.)
Patents 3,000 Building 5,000
Machinery 2,000
5,000 5,000

2. Goodwill = 2½ years’ purchase × Average Profit

Rs. 13,000 + Rs.12,000 + Rs.20,000 + Rs.15,000
Average Profit =
4

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214 Accountancy – Not-for-Profit Organisation and Partnership Accounts

Rs. 60,000
= = Rs. 15,000
4
5
Goodwill = × Rs. 15,000
2
= Rs. 37,500
5
Anil’s Share of Goodwill = × 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
6
Profit for 6 months = Rs. 15,000 × = Rs. 7,500
12
5
Anil’s share of profit = Rs. 7,500 × = Rs. 3,750
10
4. Interest on Capital
(April 1, 2017 to October 1, 2017)
10 6
= Rs. 30,000 × ×
100 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 Amount Assets Amount
(Rs.) (Rs.)
Creditors 40,000 Goodwill 30,000
Reserve Fund 25,000 Fixed assets 60,000
Capitals: Stock 10,000
Mohit 30,000 Sundry Debtors 20,000
Sohan 25,000 Cash at bank 15,000
Rahul 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.

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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 Date Particulars J.F. Amount
(Rs.) (Rs.)
Goodwill 12,000 Apr. 1 Balance b/d 25,000
Sohan’s Executor 94,158 Jun.15 Reserve Fund 10,000
Mohit’s Capital 9,600
Rahul’s Capital 9,600
Profit & Loss suspense 1,333
Joint life policy 50,000
Interest on Capital 625
1,06,158 1,06,158

Working Notes
1. Sohan’s Share of Goodwill
2
= Goodwill of the Firm ×
5
2
= Rs. 48,000 × = Rs. 19,200
5
Goodwill of the Firm = 3 × Average Profit
Rs. 64,000
= 3 × = 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
months. 2

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216 Accountancy – Not-for-Profit Organisation and Partnership Accounts

Rs. 64,000 2 2.5

= × ×
4 5 12
= Rs. 1,333
3. Joint Life Policy = Rs. 1,25,000
2
Sohan’s Share = × Rs. 1,25,000
5
= Rs. 50,000
12 2.5
4. Interest on Capital = Rs. 25,000 × ×
100 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 Amount Assets Amount

(Rs.) (Rs.)
Sundry Creditors 25,000 Buildings 26,000
Reserve Fund 20,000 Investments 15,000
Capitals: Debtors 15,000
Pinki 15,000 Bills Receivables 6,000
Qureshi 10,000 Stock 12,000
Rakesh 10,000 35,000 Cash 6,000
80,000 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.

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Retirement/Death of a Partner 217

Terms Introduced in the Chapter

• Retirement of a Partner. • Executors of deceased Partner
• Death of a Partner. • Executor’s Account.
• Gaining Ratio

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.

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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.

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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 Assets Amount
(Rs.) (Rs.)
Creditors 49,000 Cash 8,000
Reserves 18,500 Debtors 19,000
Digvijay’s Capital 82,000 Stock 42,000
Brijesh’s Capital 60,000 Buildings 2,07,000
Parakaram’s Capital 75,500 Patents 9,000
2,85,000 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 Amount Assets Amount
(Rs.) (Rs.)
Trade Creditors 3,000 Cash-in-Hand 1,500
Bills Payable 4,500 Cash at Bank 7,500
Expenses Owing 4,500 Debtors 15,000
General Reserve 13,500 Stock 12,000
Capitals: Factory Premises 22,500
Radha 15,000 Machinery 8,000
Sheela 15,000 Losse Tools 4,000
Meena 15,000 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.

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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 Amount Assets Amount
(Rs.) (Rs.)
General Reserve 12,000 Bank 7,600
Sundry Creditors 15,000 Debtors 6,000
Bills Payable 12,000 Less: Provision for 400 5,600
Outstanding Salary 2,200 Doubtful Debt
Provision for Legal Damages 6,000 Stock 9,000
Capitals: Furniture 41,000
Pankaj 46,000 Premises 80,000
Naresh 30,000
Saurabh 20,000 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).

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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 Assets Amount
(Rs.) (Rs.)
Sundry Creditors 1,00,000 Cash at Bank 20,000
Capital Accounts: Stock 30,000
Puneet 60,000 Sundry Debtors 80,000
Pankaj 1,00,000 Investments 70,000
Pammy 40,000 2,00,000 Furniture 35,000
Reserve 50,000 Buildings 1,15,000
3,50,000 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 Amount Assets Amount
(Rs.) (Rs.)
Sundry Creditors 16,000 Bills Receivable 16,000
General Reserve 16,000 Furniture 22,600
Capital Accounts: Stock 20,400
Prateek 30,000 Sundry Debtors 22,000
Rockey 20,000 Cash at Bank 18,000
Kushal 20,000 70,000 Cash in Hand 3,000
1,02,000 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 Amount Assets Amount
(Rs.) (Rs.)
Bills Payable 12,000 Freehold Premises 40,000
Sundry Creditors 18,000 Machinery 30,000
Reserves 12,000 Furniture 12,000
Capital Accounts: Stock 22,000
Narang 30,000 Sundry Debtors 20,000
Suri 30,000 Less: Reserve for Bad 1,000 19,000
Bajaj 28,000 88,000 Debt
Cash 7,000
1,30,000 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).

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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:
Books of Rajesh, Pramod and Nishant
Balance Sheet as on March 31, 2015
Liabilities Amount Assets Amount
(Rs.) (Rs.)
Bills Payable 6,250 Factory Building 12,000
Sundry Creditors 10,000 Debtors 10,500
Reserve Fund 2,750 Less: Reserve 500 10,000
Capital Accounts: Bills Receivable 7,000
Rajesh 20,000 Stock 15,500
Pramod 15,000 Plant and Machinery 11,500
Nishant 15,000 50,000 Bank Balance 13,000
69,000 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 Assets Amount
(Rs.) (Rs.)
Sundry Creditors 19,800 Land and Building 26,000
Telephone bills Outstanding 300 Bonds 14,370
Accounts Payable 8,950 Cash 5,500
Accumulated profits 16,750 Bills Receivable 23,450
Capitals : Sundry Debtors 26,700
Stock 18,100
Jain 40,000 Office Furniture 18,250
Gupta 60,000 Plants and Machinery 20,230
Malik 20,000 1,20,000 Computers 13,200
1,65,800 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 Amount Assets Amount
(Rs.) (Rs.)
Bills Payable 12,000 Buildings 21,000
Creditors 14,000 Cash in Hand 12,000
General Reserve 12,000 Bank 13,700
Capitals: Debtors 12,000
Arti 20,000 Bills Receivable 4,300
Bharti 12,000 Stock 1,750
Seema 8,000 40,000 Investment 13,250
78,000 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.

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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 Assets Amount
(Rs.) (Rs.)
Creditors 14,000 Investments 10,000
Reserve Fund 6,000 Goodwill 5,000
Capitals: Premises 20,000
Nithya 30,000 Patents 6,000
Sathya 30,000 Machinery 30,000
Mithya 20,000 80,000 Stock 13,000
Debtors 8,000
Bank 8,000
1,00,000 1,00,000

Mithya dies on August 1, 2015. The agreement between the executors of Mithya
and the partners stated that :
1
(a) Goodwill of the firm be valued at 2 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
Dissolution of Partnership Firm 5

Y 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.
LEARNING OBJECTIVES According to Section 39 of the partnership Act 1932,
After studying this chapter the dissolution of partnership between all the partners
you will be able to : of a firm is called the dissolution of the firm. That
• State the meaning of means the Act recognises the difference in the
dissolution of
breaking of relationship between all the partners of a
partnership firm;
firm and between some of the partners; and it is the
• Differentiate between
dissolution of partner- breaking or discontinuance of relationship between
ship and dissolution of a all the partners which is termed as the dissolution of
partnership firm; partnership firm. This brings an end to the existence
• Describe the various of firm, and no business is transacted after
modes of dissolution of dissolution except the activities related to closing of
the partnership firm; the firm as the affairs of the firm are to be wound up
• Explain the rules by selling firm’s assets and paying its liabilities and
relating to the settlement discharging the claims of the partners.
of claims among all
partners;
5.1 Dissolution of Partnership
• Prepare Realisation
Account; 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;

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Dissolution of Partnership Firm 227

(3) Retirement of a partner;

(4) Death of a partner;
(5) Insolvency of a partner;
(6) Completion of the venture, if partnership is formed for that; and
(7) 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;

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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 The business is not The business of the firm is
business terminated. closed.
2. Settlement of Assets and liabilities are Assets are sold and
assets and revalued and new balance liabilities are paid-off.
liabilities sheet is drawn.
3. Court’s Court does not intervene A firm can be dissolved by
intervention because partnership is the court’s order.
dissolved by mutual
agreement.
4. Economic Economic relationship Economic relationship
relationship between the partners between the partners
continues though in comes to an end.
a changed form.
5. Closure of books Does not require because The books of account are
the business is not closed.
terminated.
6. Other dissolution It may or may not involve It necessarily involves
dissolution of the firm. 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.

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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).

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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)
Dr. Realisation Account Cr.
Particulars Amount Particulars Amount
(Rs.) (Rs.)
Land and Building xxx Sundry creditors xxx
Plant and Machinery xxx Bills payables xxx
Furniture and Fittings xxx Bank overdraft xxx
Bills receivables xxx Outstanding expenses xxx
Sundry debtors xxx Provision for doubtful debts xxx
Cash/Bank xxx Cash/Bank (sale of assets) xxx
(payment of liabilities) Partner’s capital account xxx
Cash/Bank xxx (assets taken by the partner)
(payment of unrecorded liabilities) Loss (transferred to partners xxx
Partner’s capital account xxx capital accounts)
(liability assumed by the partner)
Profit (transferred to partners’ xxx
capital account’s in their profit
sharing ratio)

Total xxxxx Total xxxxx

Fig. 5.1: Format of Realisation Account

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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 Assets Amount
(Rs.) (Rs.)
Supriya’s Capital 32,500 Cash and Bank 40,500
Monika’s Capital 11,500 Stock 7,500
Sundry Creditors 48,000 Sundry debtors 21,500
Reserve fund 13,500 Less: Provision 500 21,000
for doubtful debts
Fixed Assets 36,500
1,05,500 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. Cr.
Particulars Amount Particulars Amount
(Rs.) (Rs.)
Assets transferred: Provision for doubtful debts 500
Stock 7,500 Sundry creditors 48,000
Sundry debtors 21,500 Bank
Fixed assets 36,500 Debtors 20,425
Bank Stock 7,000
Creditors 48,000 Fixed assets 42,000 69,425
Realisation expenses 1,500
Profit transferred to:
Supriya Capital 1,755
Monika Capital 1,170 2,925
1,17,925 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 Date Particulars J.F. Supriya Monika
(Rs.) (Rs.) (Rs.) (Rs.)
Bank 42,355 18,070 Balance b/d 32,500 11,500
Reserve fund 8,100 5,400
Realisation (Profit) 1,755 1,170
42,355 18,070 42,355 18,070

Cash and Bank Account

Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
(Rs.) (Rs.)
Balance b/d 40,500 Realisation 48,000
Realisation 69,425 Realisation 1,500
Supriya’s Capital 42,355
Monika’s Capital 18,070
1,09,925 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 Dr.
To Assets (Individually) A/c
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) Dr.
To Realisation A/c
3. For sale of assets
Bank A/c Dr.
To Realisation A/c
4. For an asset taken over by a partner
Partner’s Capital A/c Dr.
To Realisation A/c

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Dissolution of Partnership Firm 233

5. For payment of liabilities

Realisation A/c Dr.
To Bank A/c
6. For a liability which a partner takes responsibility to discharge
Ralisation A/c Dr.
To Partner’s Capital A/c
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 Dr.
To Bank A/c

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 Dr.
To Realisation A/c
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 Dr.
To Bank A/c
(b) When realisation expenses are paid by a partner on behalf of the firm:
Realisation A/c Dr.
To Partner’s Capital A/c
(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 Dr.
To Bank A/c
(ii) if the partner himself pays the realisation expenses, no entry is required
(iii) For agreed remuneration to such partner
Realisation A/c Dr.
To Partner’s Capital A/c

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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 Dr.
To Realisation A/c
10. For settlement of any unrecorded liability
Realisation A/c Dr.
To Bank A/c
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) Dr.
To Realisation A/c
12. For transfer of accumulated profits in the form of reserve fund or general
reserve:
Reserve Fund/General Reserve A/c Dr.
To Partners’ Capital A/c (individually)
13. For transfer of fictitious assets, if any, to partners’ capital accounts in
their profit sharing ratio:
Partners’ Capital A/c (individually) Dr.
To Fictitious Asset A/c
14. For payment of loans due to partners
Partner’s Loan A/c Dr.
To Bank A/c
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 Dr.
To Partner’s Capital A/c
The balance is paid to partners whose capital accounts show a credit balance
and the following entry is recorded.
Partners’ Capitals A/cs (individually) Dr.
To Bank A/c
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.

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Dissolution of Partnership Firm 235

Test your Understanding – II

P) the Correct Answer
Tick (P
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.

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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 Amount Assets Amount
(Rs.) (Rs.)
Reserve fund 2,500 Cash at bank 2,500
Creditors 2,000 Stock 2,500
Capitals: Furniture 1,000
Sita 5,000 Debtors 2,000
Rita 2,000 Plant and Machinery 4,500
Meeta 1,000 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
Dr. Realisation Account Cr.
Particulars Amount Particulars Amount
(Rs.) (Rs.)
Creditors 2,000
Stock 2,500 Rita’s capital 200
Furniture 1,000 [Unrecorded assets]
Debtors 2,000 Bank [assets realised]:
Plant and Machinery 4,500 Plant and Machinery 4,250
Bank [Creditors] 1,960 Debtors 1,850
Sita’s capital 60 Stock 3,500
(realisation expenses] Furniture 750 10,350
Profit transferred to:
Sita’s capital 212
Rita’s capital 212
Meeta’s capital 106 530
12,550 12,550

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Dissolution of Partnership Firm 237

Dr. Partner’s Capital Accounts Cr.

Date Particulars J.F. Sita Rita Meeta Date Particulars J.F. Sita Rita Meeta
(Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)
Bank 450 Balance b/d 5,000 2,000 1,000
Realisation (asset) 200 Reserve fund 1,000 1,000 500
Bank 5,822 3,012 1,606 Realisation
[profit] 212 212 106
Realisation
(expenses) 60 — —
6,272 3,212 1,606 6,272 3,212 1,606

Dr. Bank Account Cr.

Date Particulars J.F. Amount Date Particulars J.F. Amount
(Rs.) (Rs.)
Balance b/d 2,500 Realisation (Creditor) 1,960
Realisation Sita’s Capital 450
(assets realised) 10,350 [expenses]
Sita’s Capital 5,822
Rita’s Capital 3,012
Meeta’s capital 1,606
12,850 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 Amount Assets Amount
(Rs.) (Rs.)
Capitals: Bank 30,000
Nayana 1,00,000 Debtors 25,000
Arushi 50,000 1,50,000 Stock 35,000
Creditors 20,000 Furniture 40,000
Arushi’s current account 10,000 Machinery 60,000
Workmen Compensation Fund 15,000 Nayana’s current account 10,000
Bank overdraft 5,000
2,00,000 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;

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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 Particulars L.F. Debit Credit
2017 Amount Amount
(Rs.) (Rs.)
Realisation A/c Dr. 1,60,000
To Debtors 25,000
To Stock A/c 35,000
To Furniture A/c 40,000
To Machinery A/c 60,000
(Assets transferred to Realisation Account)
Creditors A/c Dr. 20,000
Bank overdraft A/c Dr. 5,000
To Realisation A/c 25,000
(Liabilities transferred to Realisation Account)
Realisation A/c Dr. 27,000
To Bank A/c 27,000
(Creditors, Bank overdraft, Outstanding
repair bill paid)
Bank A/c Dr. 1,57,825
To Realisation A/c 1,57,825
(Assets sold and bad debts recovered)
Nayana’s Capital A/c Dr. 15,750
To Realisation A/c 15,750
(Half stock take over by Nayana at 10% less)
Realisation A/c Dr. 15,575
To Nayana’s Current A/c 5,788
To Arushi’s Current A/c 5,787
(Realisation profit transferred to partner’s
current account)
Workman Compensation Fund A/c Dr. 15,000
To Nayana’s Current A/c 7,500
To Arushi’s Current A/c 7,500
(Compensation fund transfered to partners’
Current account)

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Dissolution of Partnership Firm 239

Arushi Current A/c Dr. 23,287

To Arushi’s Capital A/c 23,287
(Current account balance transferred to
Capital account)
Nayana Capital A/c Dr. 12,462
To Nayana’s Current A/c 12,462
(Current account balance transferred to Capital
account)
Nayana’s Capital A/c Dr. 87,538
Arushi’s Capital A/c Dr. 73,287
To Bank A/c 1,60,825
(Final amounts due to partners paid)

Realisation Account
Dr. Cr.
Particulars Amount Particulars Amount
(Rs.) (Rs.)
Creditors 20,000
Debtors 25,000 Bank overdraft 5,000
Stock 35,000 Bank:
Furniture 40,000 Investment 25,000
Machinery 60,000 1,60,000 Furniture 30,000
Bank: Machinery 50,000
Creditors 20,000 Debtors (90%) 31,500
Bank overdraft 5,000 Stock : 20,125
Outstanding bill 2,000 27,000 Bad debts
Profit transferred to : recovered 1,200 1,57,825
Nayana’s capital 5,788 Nayana’s capital
Arushi’s capital 5,787 11,575 (stock taken over) 15,750
1,98,575 1,98,575

Partners’ Current Accounts

Dr. Cr.
Date Particulars J.F. Nayana Arushi Date Particulars J.F. Nayana Arushi
2017 (Rs.) (Rs.) 2017 (Rs.) (Rs.)
Balance b/d 10,000 Balance b/d 10,000
Realisation 15,750 Workmen 7,500 7,500
Arushi’s capital 23,287 Compensation
Fund
Realisation (profit) 5,788 5,787
Nayana’s Capital 12,462
25,750 23,287 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 J.F. Nayana Arushi Date Particulars J.F. Nayana Arushi
2017 (Rs.) (Rs.) 2017 (Rs.) (Rs.)
Nayana’s current 12,462 Balance b/d 1,00,000 50,000
account Arushi’s 23,287
Bank 87,538 73,287 current account
1,00,000 73,287 1,00,000 73,287

Bank Account
Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
(Rs.) (Rs.)
Balance b/d 30,000 Realisation 27,000
Realisation 1,57,825 Nayana’s capital 87,538
Arushi’s capital 73,287
1,87,825 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.

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Dissolution of Partnership Firm 241

Illustration 4
Following is the Balance Sheet of Ashwani and Bharat on March 31, 2017.
Balance Sheet Ashwani and Bharat as on March 31, 2017
Liabilities Amount Assets Amount
(Rs.) (Rs.)
Creditors 76,000 Cash at bank 17,000
Mrs.Ashwani’s loan 10,000 Stock 10,000
Mrs.Bharat loan 20,000 Investments 20,000
Investment fluctuation fund 2,000 Debtors 40,000
Reserve fund 20,000 Less: Provision
Capitals: for doubtful debts 4,000 36,000
Ashwani 20,000 Buildings 70,000
Bharat 20,000 40,000 Goodwill 15,000
1,68,000 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
Books of Ashwani and Bharat
Dr. Realisation Account Cr.
Particulars Amount Particulars Amount
(Rs.) (Rs.)
Investment 20,000 Provision for doubtful debts 4,000
Debtors 40,000 Creditors 76,000
Buildings 70,000 Mrs. Ashwani loan 10,000
Stock 10,000 Mrs. Bharat loan 20,000
Goodwill 15,000 1,55,000 Investment fluctuation fund 2,000
Ashwani’s Capital 10,000 Ashwani’s Capital[stock] 8,000
(Mrs.Ashwani’s loan} Bharat’s capital (Typewriter) 600
Bank (Mrs. Bharat’s loan) 20,000 Bharat’s capital (Investment) 9,000
Bank (creditors) 75,620 Bank:
Bank (realisation expenses) 2,000 Investment 9,000
Profit transferred to: Debtors 38,000
Ashwani’s Capital 27,990 Buildings 1,30,000
Bharat’s Capital 27,990 55,980 Goodwill 12,000 1,89,000
3,18,600 3,18,600

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242 Accountancy – Not-for-Profit Organisation and Partnership Accounts

Partner’s Capital Accounts

Dr. Cr.
Date Particulars J.F. Ashwani Bharat Date Particulars J.F. Ashwani Bharat
2017 (Rs,) (Rs,) 2017 (Rs,) (Rs,)
Realisation Balance b/d 20,000 20,000
(stock) 8,000 — Reserve fund 10,000 10,000
Realisation Realisation 10,000 —
[sale of typewriter] 600 [Mrs. Ashwini’s
Realisation loan]
[investment] 9,000 Realisation (profit) 27,990 27,990
Bank 59,990 48,390
67,990 57,990 67,990 57,990

Bank Account
Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
2017 (Rs.) 2017 (Rs.)
Balance b/d 17,000 Realisation [creditors] 75,620
Realisation 1,89,000 Realisation [expenses] 2,000
Realisation
(Mrs.Bharat’s loan) 20,000
Ashwani’s capital 59,990
Bharat’s capital 48,390
2,06,000 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:

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Dissolution of Partnership Firm 243

Balance Sheet of Sonia, Rohit and Udit as on March 31, 2017

Liabilities Amount Assets Amount
(Rs.) (Rs.)
Creditors 30,000 Buildings 2,00,000
Bills payable 30,000 Machinery 40,000
Bank loan 1,20,000 Stock 1,60,000
Sonia’s husband’s loan 1,30,000 Bills receivable 1,20,000
General reserve 80,000 Furniture 80,000
Capitals: Cash at bank 60,000
Sonia 70,000
Rohit 90,000
Udit 1,10,000 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
Books of Sonia, Rohit and Udit
Dr. Realisation Account Cr.
Particulars Amount Particulars Amount
(Rs.) (Rs.)
Buildings 2,00,000 Creditors 30,000
Machinery 40,000 Bills payable 30,000
Stock 1,60,000 Bank loan 1,20,000
Bills receivable 1,20,000 Sonia’s husband’s loan 1,30,000
Furniture 80,000 6,00,000 Bank:
Bank (Bank Loan) 1,30,000 Buildings 1,90,000
Bank Bills receivable 1,10,000
[creditors and Bills payable] 54,000 Stock 1,50,000
Bank [Sonia’s husbands loan] 1,30,000 Machinery 48,000
Rohit’s capital 12,000 Furniture 75,000 5,73,000
(reslisation expenses) Loss transferred to
capital accounts:
Sonia 21,500
Rohit 12,900
Udit 8,600 43,000
9,26,000 9,26,000

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244 Accountancy – Not-for-Profit Organisation and Partnership Accounts

Partner’s Capital Accounts

Dr. Cr.
Date Particulars J.F. Sonia Rohit Udit Date Particulars J.F. Sonia Rohit Udit
2017 (Rs.) (Rs.) (Rs.) 2017 (Rs.) (Rs.) (Rs.)
Realisation 21,500 12,900 8,600 Balance b/d 70,000 90,000 1,10,000
(Loss) Realisation — 12,000 —
Bank 88,500 1,13,100 1,17,400 (expenses)
General 40,000 24,000 16,000
reserve
1,10,000 1,26,000 1,26,000 1,10,000 1,26,000 1,26,000

Bank Account
Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
2017 (Rs.) 2017 (Rs.)
Balance b/d 60,000 Realisation [bank loan] 1,30,000
Realisation 5,73,000 Realisation 54,000
(assets realised) [creditors and
bills payable]
Realisation 1,30,000
(Sonia’s husband loan)
Sonia’s capital 88,500
Rohit’s capital 1,13,100
Udit’s capital 1,17,400
6,33,000 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 Amount Assets Amount
(Rs.) (Rs.)
Bank loan 60,000 Cash at bank 30,000
Creditors 80,000 Debtors 70,000
Bills payables 40,000 Stock 2,00,000
Bhawan loan 20,000 Investments 1,40,000
Capitals: Buildings 60,000
Romesh 1,00,000
Bhawan 2,00,000 3,00,000
5,00,000 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 Particulars Amount
(Rs.) (Rs.)
Bank loan 60,000
Debtors 70,000 Creditors 80,000
Stock 2,00,000 Bills payable 40,000
Investments 1,40,000 Romesh’s Capital (investment) 8,100
Buildings 60,000 4,70,000 Bhawan’s Capital (investment) 1,17,000
Bank (bills payable) 40,000 Bank:
Bank (creditors) 63,000 Debtors 66,500
Bhawan’s capital 63,600 Stock 2,00,000
(loan with interest) Buildings 51,000 3,17,500
Bank (unrecorded liabilities) 5,000 Loss transferred to :
Romesh capital 11,400
Bhawan capital 7,600 19,000
6,41,600 6,41,600

Partner’s Capital Accounts

Dr. Cr.
Date Particulars J.F. Romesh Bhawan Date Particulars J.F. Romesh Bhawan
2017 (Rs.) (Rs.) 2017 (Rs.) (Rs.)
Realisation 8,100 1,17,000 Balance b/d 1,00,000 2,00,000
[investment] Realisation 63,600
Realisation [bank loan]
[loss] 11,400 7,600
Bank 80,500 1,39,000
1,00,000 2,63,600 1,00,000 2,63,600

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Bank Account
Dr. Cr.

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

2017 (Rs.) 2017 (Rs.)
Balance b/d 30,000 Realisation[creditor] 63,000
Realisation 3,17,500 Realisation 5,000
(assets realised) [unrecorded liability]
Bhawan loan 20,000
Realisation 40,000
(bills payable]
Romesh‘s capital 80,500
Bhawan’s capital 1,39,000
3,47,500 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 Amount Assets Amount
(Rs.) (Rs.)
Loan 12,000 Cash at bank 25,000
Creditors 18,000 Stock 45,000
Capital Furniture 16,000
Sonu 1,10,000 Debtors 70,000
Ashu 68,000 1,78,000 Plant and Machinery 52,000
208,000 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.

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Solution
Books of Sonu and Ashu
Realisation Account
Dr. Cr.
Particulars Amount Particulars Amount
(Rs.) (Rs.)
Stock 45,000 Loan 12,000
Furniture 16,000 Creditors 18,000
Debtors 70,000 Sonu’s capital 60,000
Plant and Machinery 52,000 (plant& machinery)
Bank (creditors) 17,100 Ashu’s capital (debtors) 69,000
Sonu’s capital (loan) 12,000 Bank:
Bank (realisation expenses) 1,600 Stock 42,000
Profit transferred to : Furniture 13,900 55,900
Sonu’s capital 900
Ashu’s capital 300 1,200
2,14,900 2,14,900

Partners Capital Accounts

Dr. Cr.
Date Particulars J.F. Sonu Ashu Date Particulars J.F. Sonu Ashu
2017 (Rs.) (Rs.) 2017 (Rs.) (Rs.)
Realisation 60,000 Balance b/d 1,10,000 68,000
[plant and machinery] Realisation [loan] 12,000
Realisation 69,000 Realisation [profit] 900 300
[debtors] Bank 700
Bank 62,900
1,22,900 69,000 1,22,900 69,000

Bank Account
Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
2017 (Rs.) 2017 (Rs.)
Balance b/d 25,000 Realisation [creditor] 17,100
Realisation (assets 55,900 Realisation [expenses] 1,600
realised) Sonu’s capital 62,900
Ashu’s capital 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:

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Balance Sheet Anju, Manju and Sanju as on March 31, 2017

Liabilities Amount Assets Amount
(Rs.) (Rs.)
Creditors 60,000 Cash at bank 35,000
Loan 15,000 Stock 83,000
Capitals: Furniture 12,000
Anju 2,75,000 Debtors 2,42,000
Manju 1,10,000 Less: Provision for
Sanju 1,00,000 4,85,000 doubtful debts 12,000 2,30,000
Buildings 2,00,000
5,60,000 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
Books of Anju, Manju and Sanju
Dr. Realisation Account Cr.
Particulars Amount Particulars Amount
(Rs.) (Rs.)
Provision for doubtful debts 12,000
Stock 83,000 Creditors 60,000
Furniture 12,000 Loan 15,000
Debtors 2,42,000 Anju’s capital :
Buildings 2,00,000 5,37,000 Furniture 10,000
Anju capital (creditors) 60,000 Debtors 1,85,000 1,95,000
Sanju capital (loan) 15,000 Manju’s capital :
Bank (realisation expenses) 2,200 Stock 83,000
Buildings 1,80,000 2,63,000
Sanju’s capital :
(remaning debtors less
20% of book value) 33,600
Loss transferred to :
Anju’s capital 21,360
Manju’s capital 7,120
Sanju’s capital 7,120 35,640
6,14,200 6,14,240

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Dr. Partner’s Capital Accounts Cr.

Date Particulars J.F. Anju Manju Sanju Date Particulars J.F. Anju Manju Sanju
2017 (Rs.) (Rs.) (Rs.) 2017 (Rs.) (Rs.) (Rs.)
Realisation
(assets) 1,95,000 2,63,000 33,600 Balance b/d 2,75,000 1,10,000 1,00,000
Realisation
(loss) 21,360 7,120 7,120 Realisation 60,000
Bank 1,18,640 74,280 (creditors)
Realisation 15,000
(loan)
Bank 1,60,120
3,35,000 2,70,120 1,15,000 3,35,000 2,70,120 1,15,000

Dr. Bank Account Cr.

Date Particulars J.F. Amount Date Particulars J.F. Amount
2017 (Rs.) 2017 (Rs.)
Balance b/d 35,000 Realisation (expenses) 2,200
Manju’s capital 1,60,120 Anju’s capital 1,18,640
Sanju’s capital 74,280
1,95,120 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 Amount Assets Amount
(Rs.) (Rs.)
Capitals: Machinery 80,000
Sumit 40,000 Investments 1,50,000
Amit 50,000 Stock 10,000
Vinit 60,000 1,50,000 Debtors 35,000
Profit and Loss 10,000 Cash at bank 15,000
Mrs. Amit’s loan 40,000
Sundry creditors 90,000
2,90,000 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,

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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 Particulars Amount
(Rs.) (Rs.)
Machinery 80,000 Sundry creditors 90,000
Investments 1,50,000 Mrs.Amit’s loan 40,000
Stock 10,000 Bank :
Debtors 35,000 2,75,000 Machinery 70,000
Amit’s Capital (wife’s loan) 40,000 Stock 11,000
Bank (realisation expenses) 1,500 Debtors 32,000 1,13,000
Vinit’s capital (investment) 45,000
Loss transferred to :
Amit’s capital 14,250
Sumit’s capital 8,550
Vinit’s capital 5,700 28,500
3,16,500 3,16,500

Dr. Partners Capital Accounts Cr.

Date Particulars J . F. Amit Sumit Vinit Date Particulars J.F. Amit Sumit Vinit
2017 (Rs.) (Rs.) (Rs.) 2017 (Rs.) (Rs.) (Rs.)
Realisation 45,000 Balance b/d 40,000 50,000 60,000
(assets) Realisation
Realisation 14,250 8,550 5,700 (Mrs. Vinit’s 40,000
(loss) loan)
Bank 70,750 44,450 11,300 Profit and Loss 5,000 3,000 2,000
85,000 53,000 62,000 85,000 53,000 62,000

Bank Account
Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
2017 (Rs.) 2017 (Rs.)
Balance b/d 15,000 Realisation (expenses) 1,500
Realisation 1,13,000 Amit’s capital 70,750
(assets realised) Sumit’s capital 44,450
Vinit’s capital 11,300
1,28,000 1,28,000

Note: No entry has been made for the investments taken over by the creditors as per rules.

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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 Amount (Rs.) Assets Amount (Rs.)
Capital : Machinery 70,000
Meena 90,000 Investments 50,000
Tina 80,000 1,70,000 Stock 22,000
Sundry creditors 60,000 Sundry Debtors 1,03,000
Bills payable 20,000 Cash at bank 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
Books of Meena and Tina – Realisation Account
Particulars Amount (Rs.) Particulars Amount (Rs.)
Assets transferred : Sundry creditors 60,000
Machinery 70,000 Bills payable 20,000
Investments 50,000 Tina’s Capital (investment) 50,000
Stock 22,000 Meena’s Capital (debtors of 45,000
Sundry debtors 1,03,000 2,45,000 books value Rs. 50,000
Bank (realisation expenses) 2,000 less 10%)
Bank
Debtors 51,000
Loss transferred to :
Meena’s capital 12,600
Tena’s capital 8,400 21,000
2,47,000 2,47,000

Partner’s Capital Accounts

Dr. Cr.
Particulars Mena Tina Particulars Meena Tina
(Rs.) (Rs.) (Rs.) (Rs.)
Realisation (investment) 50,000 Balance b/d 90,000 80,000
Realisation (debtors) 45,000
Realisation (loss) 12,600 8,400
Bank 32,400 21,600
90,000 80,000 90,000 80,000

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252 Accountancy – Not-for-Profit Organisation and Partnership Accounts

Bank Account
Dr. Cr.
Particulars Amount (Rs.) Particulars Amount (Rs.)
Balance b/d 5,000 Realisation (expenses) 2,000
Realisation (assets realised) 51,000 Mena’s capital 32,400
Tina’s capital 21,600
56,000 56,000

Terms Introduced in the Chapter

1. Dissolution of Partnership 4. Compulsory Dissolution
2. Dissolution of Partnership 5. Dissolution by Notice
Firm 6. Realisation Expenses
3. Partnership at Will 7. 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.

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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%.

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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.

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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 Amount Assets Amount
(Rs.) (Rs.)
Creditors 40,000 Cash 16,000
Lily’s loan 32,000 Debtors 80,000
Profit and Loss 50,000 Less: Provision for
Capitals: doubtful debts 3,600 76,400
Lily 1,60,000 Inventory 1,09,600
Rose 2,40,000 Bills receivable 40,000
Buildings 2,80,000
5,22,000 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 Amount Assets Amount
(Rs.) (Rs.)
Capitals: Land 81,000
Shilpa 80,000 Stock 56,760
Meena 40,000 Debtors 18,600
Bank loan 20,000 Nanda’s capital 23,000
Creditors 37,000 Cash 10,840
Provision for doubtful debts 1,200
General reserve 12,000
1,90,200 1,90,200

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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 Assets Amount
(Rs.) (Rs.)
Creditors 38,000 Bank 11,500
Mrs. Surjit loan 10,000 Stock 6,000
Reserve 15,000 Debtors 19,000
Rahi’s loan 5,000 Furniture 4,000
Capital’s: Plant 28,000
Surjit 10,000 Investment 10,000
Rahi 8,000 Profit and Loss 7,500
86,000 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 Amount Assets Amount
(Rs.) (Rs.)
Capitals: Cash 22,500
Rita 80,000 Debtors 52,300
Geeta 50,000 Stock 36,000
Ashish 30,000 1,60,000 Investments 69,000
Creditors 65,000 Plant 91,200
Bills payable 26,000
General reserve 20,000
2,71,000 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 Assets Amount
(Rs.) (Rs.)
Sundry Creditors 27,000 Cash at bank 11,000
Reserve fund 10,000 Sundry Debtors 12,000
Loan 40,000 Plants 47,000
Capital Stock 42,000
Anup 60,000 Lease hold land 60,000
Sumit 60,000 1,20,000 Furniture 25,000

1,97,000 1,97,000

The Assets were realised as follows :

Rs.
Lease hold land 72,000
Furniture 22,500
Stock 40,500
Plant 48,000
Sundry Debtors 10,500
The Creditors were paid Rs. 25,500 in full settlement. Expenses of 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)

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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 Amount Assets Amount
(Rs.) (Rs.)
Capitals: Building 80,000
Ashu 1,08,000 Machinery 70,000
Harish 54,000 1,62,000 Furniture 14,000
Creditors 88,000 Stock 20,000
Bank overdraft 50,000 Investments 60,000
Debtors 48,000
Cash in hand 8,000
3,00,000 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 Amount Assets Amount
(Rs.) (Rs.)
Capitals: Plant 90,000
Sanjay 1,00,000 Debtors 60,000
Tarun 1,00,000 Furniture 32,000
Vineet 70,000 2,70,000 Stock 60,000
Creditors 80,000 Investments 70,000
Bills payable 30,000 Bills receivable 36,000
Cash in hand 32,000

3,80,000 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)

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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 Assets Amount
(Rs.) (Rs.)
Sundry Creditors 38,000 Cash at bank 12,500
Mrs.Gupta’s loan 20,000 Sundry Debtors 55,000
Mrs.Sharma’s loan 30,000 Stock 44,000
Reserve fund 6,000 Bills receivable 19,000
Provision of doubtful debts 4,000 Machinery 52,000
Capital Investment 38,500
Gupta 90,000 Fixtures 27,000
Sharma 60,000 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 Amount Assets Amount
(Rs.) (Rs.)
Sundry Creditors 20,000 Bank 7,500
Bills payable 25,500 Sundry Debtors 58,000
Babu’s loan 30,000 Stock 39,500
Capital’s : Machinery 48,000
Ashok 70,000 Investment 42,000
Babu 55,000 Freehold property 50,500
Chetan 27,000 1,52,000
Current accounts :
Ashok 10,000
Babu 5,000
Chetan 3,000 18,000
2,45,500 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 Amount Assets Amount
(Rs.) (Rs.)
Sundry Creditors 62,000 Cash at bank 16,000
Bills payable 32,000 Sundry Debtors 55,000
Bank loan 50,000 Stock 75,000
Reserve fund 16,000 Motor car 90,000
Capital Machinery 45,000
Tanu 1,10,000 Investment 70,000
Manu 90,000 2,00,000 Fixtures 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.

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