PROJECT WORK

ACCOUNTANCY: CLASS 12
(2) Super Profit Method-In this method, an examination
Project Work # 01 is made to know how much profit is being earned by the firm
in comparison to the normal profits of other firm engaged in
Objective-Valuation of Goodwill on the basis of two the similar type of business. The excess profit earned by the
firms. business over the normal profit earned by the similar business
Presentation GoodwiII firms under normal condition is known as super profit. Goodwill
is then determined on the basis of the super profit.
Goodwill is an intangible assets of a developing business.
In form of formula
Though it has various elements of a business assets, but it does
not have any certain physical form. Its origin depends on good (1)Calculation of actual or Average profit
business relations and fame. (2) Calculation of Normal Profit
Meaning--Goodwill refers to the fame and name earned Capital Employed x Normal Rate of Return
by a firm through the hard work, dedication by their owners. 100
If a firm provides better services to its customers then those (3) Calculation of Super Profit = Actual Proft or Average
customers who will be satisfied will contact the firm again and Profit - Normal Profit
again as a result the firm in future will be able to earn more (4) Value of Goodwill = Super Profit xNumber of years
profit. of Purchase.
Hence, goodwill is the value of the good name earned by (3) Capitalisation Method-In this method, goodwill is
the firm in the business in which is engaged and is able to calculated by following two methods
earn excess profit over the normal profit earned by the firm (i) Capitalisation of Average Profit
engaged in the similar type of business. (i) Capitalisation of Super Profit
Methods of Valuation of Goodwill () Capitalisation of Average Profit-In this method, first
of all average profit is determined and than amount of capital is
The following are methods prevalent for valuation of determined which will be required to earn the average profit at
goodwill the normal rate of return. Such capital is known as capitalised
(1)Average profit method, value of average profit. The following method is adopted to
(2) Super profit method, calculate goodwil]
(3) Capitalisation method. (1) Calculation of average profit
Total Profit of Past Years
METHODS
AVERAGE OF VALUATION
SUPER Number of Past Years
PROFIT PROFIT
METHOD OF GOODWILL METHOD (2) Capitalised Value of Average Profit
Average Profit x 100
Normal Rate of Return
(3) Actual invested capital in business
CAPITALISATION
METHOD
= Total Tangible Assets* External Liabilities
(4) Value of Goodwill = Capitalised Value of Average Profit
Actual Capital Employed
*Total Tangible Assets = Total Assets - Old Goodwill - Non
CAPITALISATION OF CAPITALISATION OF business Investment - Fictitious Assets
SUPER PROFIT
AVERAGE PROFIT (i) Capitalisation of Super Profit-In this method, first
of all super profit is determined and then it is determined as to
(1) Average Profit Method-This method is a simplestand what amount of capital will be required to earn the amount of
and practical method of valuation of goodwill which is used super profit at a normal rate of return. This capital is the actual
commonly. In this method, the value of goodwill is calculated amount of goodwill. In this method the calculation of goodwill
by multiplying the average estimated profit of past years with
number of years of is done as under-
a certain numbers (commonly known as
(1) Calculation of Average Profit
purchase.) (2) Determine Capital Employed in Business
Value of Goodwill = Average Profit x Numbers of years (3) Calculation of Normal Profit
of purchase
profit of past years has to be (4) Calculation of Super Profit = Average Profit - Normal
In this method, average Profit
determined. The average profit is calculated by the following
Super Profit x 100
formula (5) Value of Goodwill =
Total Profit of Past Years NormalRate of Return
Average Profit = Number of Past Years Normal Rate of Return = Normal Rate of Yield
1
Shivalal Project Book Accountancy : Class 12
 Additional Informations
Valuation of Goodwill
On the basis of following information related to firm "A
Particulars Firm A Firm
&B' determine the value of goodwill Average Capital Employed
(a) On the basis of average profit of three
years of Normal Rate of Return 4,10%00,000 ?6,00,000
(b) On the basis of super profit of three years of purchase. 10%
(c) On the basis of purchase. Profit : 2018-19 64,000
(d) On the basis of capitalisation ofaverage profit. 2019-20 59,000 70,000
capitalisation of super profit. 2020-2 1 66,000 50,000
1.20,000
Solution :
Fira ' Firm B
64.000 + 59000 + 66.000 70,000 +50,000+1,20,000
Average Profit= Average Profit =
3
3
1,89,000 2,40,000
3 =763.000 3
= 80,000

Normal Profit = 4,00,000 x 10 =40,000 Normal Profit =

6,00, 000× 10
=760.000
100 100
Super Profit = Average Profit - Normal Profit Super Profit = Average Profit - Normal Proft
=63.000 40,000 = 80,000 60,000
= 23.000 =20.,000
(a) Calculation of Goodwill on the basis of Average Profit of three
years of purchase :
Goodwill = Average Profit x Number of Years of Purchase Goodwill = Average Profit x Number of Years of Purchase
63.000 × 3
80,000 × 3
= 1,89,000 = 2,40,000
(b) Calculation of Goodwill on the basis of Super
Profit of three years of purchase :
Goodwill = Super Profit x Number of Years of Purchase
Goodwill = Super Profit x Number of Years of Purchase
= 23,000 × 3
= 20,000 × 3
= 69,000
= 60,000
(c) Calculation of Goodwill on the basis of
Capitalisation of Average Profit :
Capitalised Value of Average Profit
Capitalised Value of Average Profit
Average Profit x 100
Normal Rate of Return Average Profit x 100
63,000 >x 100 Normal Rate of Return
10 =6.30,000 80,000 x 100
Goodwill = Capitalised Value of Average Profit 10 =8,00,000
Average Capital Employed Goodwill = Capitalised Value of Average Profit
= 6,30,000 4,00,000 - Average Capital Employed
? 8,00,000
= 2,30,000 6,00,000
={ 2,00,000
(a) Calculation of Goodwill on the basis of
Capitalisation Super Proft
of
Super Profit x100
Goodwill = Normal Rate of Return Super Profit x 100
Goodwill
23,000 x 100 Normal Rate of Return
10
= 2,30,000 20,000 x 100
= 2,00,000
toknow
organisation. An accountant through this process Comesoperating
Project Work # 02 about the profit earning
Objective-Analysis ofAccounting Ratios of anCompany.
the business of a capacity and effhiciency incan collect
Company. In addition, an investor
the information about the meet out
the
Presentation- Ratio Analysis requirement of liquidity of assets to
By the use working capital of a company. aboutthe
Ratio analysis is a process which is used to examine of ratio
R determine the financial condition and capacity of any performance analysis, one can make viewsareas. Thus.
of the Company
ratio analysis in the competitiveeficiency and
provide information regarding
2 Class12
:
Shivalal Project Book Accountancy :
capacity of the group of companies within the same sector and On the basis of the aforesaid information and financial
industry.
Meaning of Ratio Analysis-Ratio analysis is a process of statement, analysis & examine the company performance &
financial health on the basis of ratio analysis and comment.
comparison and examination of financial date by use of financial
statements of company. It is a method to evaluate the financial Solution : On the basis of income statement and balance
sheet of Tata Ltd. of two years an investigation has to be
health and its performance by active use of datas of financial
made on company's performance and financial health and also
statements. Hence, this analysis leads to end the necessity to make comments.
of analysis and comparison of linear items of
statement.
financial The examination of company's performance and financial
This method mainly helps the management of the health can be carried out with the help of following ratios-
company
and the investors to collect information in firms of percentage (A) Liquidity ratio
about the progress of the company. Instead, it also highlights (B) Solvency ratio
about the limitations and deficiency in regard to operations (C) Activity ratio
efficiencyof a firm. Hence, the management can benefit himself (D) Profitability ratio
to take correct decisions in respect to financial activities by (A) Liquidity Ratio
carrying out ratio analysis. The company is benefitted largely Current Assets
by use of ratio analysis. Current Ratio =
Current Liabilities
Analysis of Accounting Ratio ofa Company 15,20,000
The following information are related to Tata Ltd In year 2022 = = 1:9: 1
8,00,000
31-03-2022 31-03-2023 24,00,000
In year 2023 = = 2-4 : 1
10,00,000
Sales 30,00,000 40,00,000 Quick or Liquid Assets
Cost of goods sold 22,50,000 31,00,000 Quick Ratio =
Current Liabilities
Administrative expenses 1,20,000 1,35,000
Selling & Distribution Expenses 2,50,000 2,90,000
7,20,000
In year 2022 =
8,00,000 = 0-9: 1
Depreciation 1,10,000 1,17,500
Interest on Mortgage Loan 40,000 55,000 8,50,000
In year 2023 = 0-85 : 1
Share Issue Expenses Written Off 5,000 5,000 10,00,000
Tax Provision 1,50,000 1,80,000 Comments : Though their has been an increase in the
current ratio of 2023, but still the short-term financial position
Balance Sheet of Tata Ltd. of the company cannot be said satisfactory. The reason for this
S. Note is that inspite of increase in current ratio their has not been
N.
Particulars
No.
31-03-2022 31-03-2023 increase in quick ratio. This means that the increase in current
ratio is due to the increase in stock. A large portion of current
assets are in form of stock which is considered as least liquid.
I. Equity and Liabilities
1. Shareholders Fund : (B) Solvency Ratio
(a) Share Capital (Equity) 9,00,000 10,00,000
Long - term Debts
(b) Reserve & Surplus : Debt Equity Ratio Shareholders Funds
General Reserve 5,70,000 9,90,000
Share Issue Expenses (20,000) (15,000) 8,00,000
In year 2022 =
2. Non-Current Liabilities 9,00,000 + 5,70,000 20, 000
(a) 10% Mortgage Loan 8,00,000 11,00,000
8,00,000
3. Current Liabilities : = 0:55:1
14,50,000
(a) Sundry Creditors 6,50,000 8,20,000
(b) Short-term Provisions 11,00,000
In year 2023 =
Tax Provisions 1,50,000 1,80,000 10,00,000 +9,90, 000- 15,000
Total 30,50,000 40,75,000 11,00,000
=
= 0-56 :1
II. Assets : 19,75,000
1. Non-Current Assets
15,30,000 16,75,000 Total Assets to Debt Ratio =
Long- term Debts
(a) Fixed Assets x 100
2. Current Assets :
Total Assets
(a) Inventories 8,00,000 15,50,000 8,00,000
In year 2022 x100= 26-2%
(b) Debtors 6,00,000 7,20,000 30,70,000 - 20,000
(c) Cash & Bank 1,20,000 1,30,000
l1,00,000
Total 30,50,000 40,75,000 In year 2023 = x 100 = 27%
40,90,000 - 15,000
Shivalal Project Book Accountancy: Class 12
 decrease in quick ratio is also indicative
fromComments:
The debt eauity ratio has of the
slightly increased
055 to 0:56,
Similarly, total ssets to debt ratio has slightly
inereased from 26:2% to 27%o. The long-ternm financial in level of stock.
Increase in debtor turnover ratio
fact of inc
of the
company seems to be
satisfactory.
position from debtors is being mode realised faster indicates thhat col e
(C) Activity Ratio (D) Profitability Ratio
Stock or
Inventory Turnover Ratio Gross Profit Ratio =
Gross Profit
Net Sales x 100
Cost of Goods Sold
Gross Profit = Net Sales -
Average Inventory Cost of
In year 2022= 22,50,000
8,00,000 = 2-8 times
Net Sales = Total Sales
Gross Profit Ratio : Sales RetGoods
urns Sol
Average Stock or Inventory 7,50,000 × 100
For 2022 =
Opening Inventory + Closing Inventory 30,00,000 = 25%

For 2023 =
9,00,000
Average Stock in 2023 = 8,00,000 + 15,50,000 40,00, 000 x 100 = 22:59%
2
23,50, 000 Operating Ratio Operating Cost
Net Sales X 100
2 =711,75,000 Operating Cost = Cost of Goods Sold +
Inventory Turnover Ratio in 2023 = 31,00,000
11,75,000 2-63 times Operating Ratio : Operating Exxpense:
Debtors Turnover Ratio = Sales For 2022 = 22,50,000 + 3,70,000
Average Debtors 30,00, 000 x 100
Average Debtors =Opening Debtors + Closing Debtors 26,20,000
2 30,00, 000 x 100
= 87:33%
Debtors Turnover Ratio in 2022 = 30,00, 000
6,00, 000 =5 times For 2023 = 31,00, 000 + 4,25,000
Average Debtors in 2023 = 6,00,000 + 7,20,000 40,00, 000 x 100
2 35,25,000
40,00. 000X 100
13,20,000
2 76,60,000 = 88·13%
Debtors Turnover Ratio in 2023 = 40,00, 000 Net Profit Ratio Net Profit
6,60,000 =6-06 Times Net Profit = Net Net Sales x 100
Capital Employed Turnover Ratio = Cost of Goods sold Sales Cost of Goods Sold -
Capital Employed = Equity Share Capital
Capital
Employed Administrative
Expenses - Selling Expens
Surplus + Mortgage Loan Share
+ Reserve & Depreciation Interest Share Issu:
Capital Employed in 2022 = Issue Expenses Net Profit
Expenses written off Tax Provision
9,00,000 5,70,000 + 8,00,000
+ Ratio :
? 22,50,000
- 20,000 For 2022 = 75,000 x 100 = 2:5%
Capital Employed in 2023 = 10,00,000 + 30,00,000
9,90,000 For 2023 = 1,17,500
+
11,00,000 15,000 40,00, 000 x 100 = 2-93%
=30,75,000
Capital Employed Turnover Ratio Return on Equity = Net Profit after tax x 100
For 2022 = 22, 50, 000
22, 50,000 1time Shareholders Funds =Shareholders
Equity Share fund
Capital +Expenses
Reserves
&
For 2023 = 31,00, 000 For 2022 = Surplus Share Issue
=14.50.000
Comments : Inspite of
30,75.000 1-008 times 9,00,000
For 2023 = 10,00,000 +5,70,000+
9,90,000 -- 20,000
15,000 = 19.75,00
increase in Return On Equity :
stock-turnover ratio indicates that companysales,
and unsold
the decrease in
is carrying obsolete
goods in large quantity. Increase in
current ratio and For 2022 = 75,000
4 14,50,000
= 517%
12
Class
Shivalal Project Book Accoutancy :
 1,17,500 (B) When changed values are not to be recorded in
For 2023 = x 100 In such a case, the revaluation account
19,75,000 books of account
= 5.94% is not opened. The profit & loss is calculated on revaluation
of assets & liabilities. The adjustment of profit & loss on
Net Profit after tax
Earning per Share revaluation is done through an adjustment entry and is debited
No. of Equity shares
or credited in sacrificing or gaining ratio either in their capital
Earning Per Share : account or current account. The following entry will be passed
75,000 in this regard.
For 2022 = 0-83 per share
90,000 In case of profit on revaluation :
Gaining Partners Capital/Current Alc Dr.
1,17,500
For 2023
1,00,000 = 1:18 per share To Sacrificing Partners Capital/Current A/c
In case of loss on revaluation :
Comments : There is a fall of 2-5% in gross profit ratio, Sacrificing Partners Capital/Current Alc Dr.
which indicates that in comparison to increase in value of sales
their is. comparatively more increase in value of purchase, wages To Gaining Partners Capital/Current A/c
and other expenses. There has been an increase in operational Revaluation of Assets & Liabilities at the Time of
ratio which has resulted a decrease in profit on sale. Admission of New PartnerThe new partner before joining
The net profit ratio has increased from 2:5% to 2-93% the firm wants to be satisfied that the assets and liabilities shown
which indicates better efficiency and profitability. in the balance sheet are at true or not. Similarly, the old partners
Return on equity has increased from 5-17% to 5-94% as also with that the changes in value of assets and liabilities due
a result of which earning per share has increased from 0-83 to to passage of firm have been duly incorporated in the books of
1-18 which indicates the improvement in overall profitability. account. For revaluation of assets and liabilities an account is
Conclusion opened known as revaluation account. This is similar to profit
Inspite of increase in sales their is a decrease noticed & loss adjustment account. The profit and loss arising from
in gross profit ratio which is alarming and for which the this account is distributed among the old partners in old profit
management should immediately focus upon cost control and sharing ratio.
Revaluation of Assets & Liabilities in case of Retirement
inventory control. Whereas total profitability and financial health
is concerned the condition appears to be much reasonable and or Death of PartnerAssets & liabilities are revalued in the
satisfactory. similar manner at the time of retirement or death of partner as
valued at the time of admission of new partner. However, the
Project Work # 03 profit & loss arising from revaluation of assets & liabilities at
the time of retirement or death of partner is distributed among
Objective-Analysis of Journal Entries related to the retired or deceased partner along with the other partners in
Revaluation Account. old profit sharing ratio, but in case of admission of new partner,
Presentation-At the time of change in profit sharing ratio profit & loss on revaluation is not distributed to new partner.
of existing partners or at the time of reconstitution of the firm
revaluated. The Accounting Records Related to Revaluation
the assets and liabilities of the firm should be Account
of assets
reason for it may be that the sales value or actual value
from the values as shown in financial Following accounting records will be made for revaluation
&& liabilities may vary value
statement. It may be possible that due to passage of time assets of assets & liabilities
value of some
of some assets may have increased or the 1. Decrease in the Value of Assets
may have
may have decreased and no records of such changes revaluation of
Revaluation A/c Dr.
been made in books of account. The need for To Assets A/c
may also be necessary because the changes
assets & liabilities At the time of decrease in the value of assets, revaluation
the change
In the value of assets and liabilities may be prior to account will be debited, because it is a loss and assets account
should distribute the
In profit sharing ratio, hence, the partners will be credited because it is a decrease in value of assets.
profit & loss arising due to change in values in old profit sharing 2. Increase in the Value of Assets
ratio.
Accounting records of revaluation of assets and liabilities Assets Alc Dr.
are made in following circumstances To Revaluation Alc
books
(a) When changed values are to be recorded in the On Increase in the value of assets, revaluation account
of account. will be credited because it is a profit and value of assets has
(D) When changed values are not to be recorded in books increased the asset account will be debited.
of account. 3. Decrease in the Value of Liabilities
(A) When changed values are to be recorded in books Liabilities Alc Dr.
OT account--In Such situation for revaluation of assets and To Revaluation Ac
1abilities a revaluation account is opened which is like profit
&Toss adjustment account. It is like a nominal account. Hence, On decrease in the value of liabilities, revaluation account
Dy the amount of loss this account is debited and is credited by will be credited as it is a profit, liabilities account will be debited
the amount of gain or profit. because it is a reduction in liabilities.