Illustration 1.

Current Assets of a company are ` 17,00,000. Its Current Ratio is 2.5 : 1 and Liquid Ratio
is 0.95 : 1. Calculate Current Liabilities, Liquid Assets and Inventory.
Solution:
Current Assets
Current Ratio =
Current Liabilities
` 17 , 00 , 000
2.5 =
Current Liabilities
` 17 , 00 , 000
Current Liabilities = = ` 6,80,000
2.5
Liquid Assets
Liquid Ratio =
Current Liabilities
Liquid Assets
0.95 = ; Liquid Assets = ` 6,46,000
` 6 , 80 , 000
Inventory = Current Assets – Liquid Assets
= ` 17,00,000 – ` 6,46,000 = ` 10,54,000.

Illustration 2.
Total Debt ` 15,00,000; Current Liabilities ` 5,00,000; Capital Employed ` 15,00,000. From
the given information, calculate Debt to Total Assets Ratio.
Solution:
Debt ` 10,00,000
Debt to Total Assets Ratio = = = 0.5 : 1.
Total Assets ` 20,00,000
Notes: 1. Debt = Total Debt – Current Liabilities
= ` 15,00,000 – ` 5,00,000 = ` 10,00,000.
2. Total Assets = Capital Employed + Current Liabilities
= ` 15,00,000 + ` 5,00,000 = ` 20,00,000.

Illustration 3.
From the following information compute:
(i) Debt to Equity Ratio; (ii) Debt to Total Assets Ratio; (iii) Proprietary Ratio.
Particulars `
Long-term Borrowings 5,00,000
Long-term Provisions 2,50,000
Current Liabilities 1,25,000
Non-Current Assets 9,00,000
Current Assets 2,25,000

Solution:
Debt/Long-term Debt ` 7 , 50 , 000
(i) Debt to Equity Ratio = = = 3 : 1.
Shareholders' Funds ` 2 , 50 , 000
Debt = Long-term Borrowings + Long-term Provisions
= ` 5,00,000 + ` 2,50,000 = ` 7,50,000.
1
 Shareholders’ Funds = Total Assets – Non-Current Liabilities – Current Liabilities
= (Non-Current Assets + Current Assets) – (Long-term
Borrowings + Long-term Provisions) – Current Liabilities
= (` 9,00,000 + ` 2,25,000) – (` 5,00,000 + ` 2,50,000) – ` 1,25,000
= ` 11,25,000 – ` 7,50,000 – ` 1,25,000 = ` 2,50,000.

Debt ` 7 , 50 , 000
(ii) Debt to Total Assets Ratio = = = 0.67 : 1.
Total Assets ` 11, 25 , 000
Debt = Long-term Borrowings + Long-term Provisions
= ` 5,00,000 + ` 2,50,000 = ` 7,50,000.
Total Assets = Non-Current Assets + Current Assets
= ` 9,00,000 + ` 2,25,000 = ` 11,25,000.

Shareholders' Funds ` 2 , 50 , 000

(iii) Proprietary Ratio = = = 0.22 : 1.
Total Assets ` 11, 25 , 000
Illustration 4.
Calculate Working Capital Turnover Ratio from the following: `
Cost of Revenue from Operations 1,50,000
Current Assets 1,00,000
Current Liabilities 75,000
Solution:
Cost of Revenue from Operations
Working Capital Turnover Ratio =
Working Capital

` 1, 50 , 000
= = 6 Times.
` 25 , 000
Working Capital = Current Assets – Current Liabilities
= ` 1,00,000 – ` 75,000 = ` 25,000.
Note: When Revenue from Operations is not given, Working Capital Turnover Ratio can also be calculated
on the basis of Cost of Revenue from Operations.

Illustration 5.
From the following Balance Sheet of Breeze Ltd. as at 31st March, 2022, calculate Current Ratio:
Particulars Note No. `

I. EQUITY AND LIABILITIES

1. Shareholders’ Funds
(a) Share Capital 2,10,000
(b) Reserves and Surplus 40,000
2. Current Liabilities
(a) Short-term Borrowings 20,000
(b) Trade Payables 60,000
Total 3,30,000

2
II. ASSETS
1. Non-Current Assets
Property, Plant and Equipment and Intangible Assets:
— Property, Plant and Equipment 1,60,000
2. Current Assets
(a) Inventories 72,000
(b) Trade Receivables 32,000
(c) Cash and Bank Balances 66,000
Total 3,30,000

Additional Information:
1. Inventories include spare parts of ` 10,000.
2. Proposed dividend for the year ended 31st March, 2022 is ` 80,000.
Solution:
Current Assets (WN 1) ` 1, 60 , 000
Current Ratio = = = 2 : 1.
Current Liabilities (WN 2) ` 80 , 000
Working Notes:

1. Current Assets = Inventories (excluding Spare Parts) + Trade Receivables + Cash and Bank Balances
= (` 72,000 – ` 10,000) + ` 32,000 + ` 66,000 = ` 1,60,000.

2. Current Liabilities = Short-term Borrowings + Trade Payables

= ` 20,000 + ` 60,000 = ` 80,000.

3. Proposed Dividend for a particular accounting year is not a liability unless it is declared (approved) by
the shareholders in the AGM held after the end of the accounting year, i.e., in the next financial year.

Illustration 6.
Calculate following ratios from the given information:
(i) Working Capital Turnover Ratio, (ii) Gross Profit Ratio,
(iii) Operating Ratio, and (iv) Current Ratio.

Information:
Particulars `

Revenue from Operations (Net Sales) 2,00,000

Cost of Revenue from Operations (Cost of Goods Sold) 1,20,000
Operating Expenses 30,000
Current Assets 60,000
Current Liabilities 30,000
Capital Employed 2,40,000
Long-term Borrowings 1,60,000

(ISC 2006, Modified)

3
Solution:
Revenue from Operations
(i) Working Capital Turnover Ratio =
Working Capital

` 2 , 00 , 000
= = 6.67 Times.
` 30 , 000

Working Capital = Current Assets – Current Liabilities

= ` 60,000 – ` 30,000 = ` 30,000.

Gross Profit ` 80 , 000

(ii) Gross Profit Ratio = ×100 =  100  40%.
Revenue from Operations ` 2 , 00 , 000
Gross Profit = Revenue from Operations – Cost of Revenue from Operations
= ` 2,00,000 – ` 1,20,000 = ` 80,000.

(iii) Operating Ratio

Cost of Revenue from Operations (Cost of Goods Sold) + Operrating Expenses

=
×100
Revenue from Operations

` 1, 20 , 000  ` 30 , 000
=  100  75%.
` 2 , 00 , 000

Current Assets ` 60,000

(iv) Current Ratio = = = 2 : 1.
Current Liabilities ` 30,000

Illustration 7.
Calculate Return on Investment (ROI) from the following details:
Particulars
`
Equity Share Capital 10,00,000
General Reserve 2,40,000
10% Debentures 8,00,000
Current Liabilities 2,00,000
Net Profit after Tax 1,20,000
Income Tax Provided 30,000

Solution:
Net Profit before Interest and Tax ` 2 , 30 , 000
Return on Investment = ×100 = × 100
Capital Employed ` 20 , 40 , 000
= 11.27%.
Net Profit before Interest and Tax = Net Profit after Tax + Income Tax + Interest on Debentures
= ` 1,20,000 + ` 30,000 + ` 80,000 = ` 2,30,000.
Capital Employed = Equity Share Capital + General Reserve + 10% Debentures
= ` 10,00,000 + ` 2,40,000 + ` 8,00,000 = ` 20,40,000.
4
Illustration 8.
The following figures have been extracted from the books of Arvind & Company Limited:
Particulars `
Revenue from Operations (Net Sales) 12,00,000
Net Purchases 5,00,000
Administrative Expenses 65,000
Selling and Distribution Expenses 35,000
Gross Profit 20% on sales
Net Profit after Tax 10,00,000
Total Assets 40,00,000
Equity Share Capital of ` 10 each 10,00,000
10% Preference Share Capital of ` 10 each 3,00,000
Reserves and Surplus 2,00,000
8% Debentures 8,00,000
Opening Debtors 1,20,000
Closing Debtors 80,000
Opening Bills Receivable 60,000
Closing Bills Receivable 40,000
Opening Creditors 1,30,000
Closing Creditors 70,000
Closing Bills Payable 50,000
Opening Bills Payable 1,10,000

From the above information, calculate the following:

(i) Debt to Total Assets Ratio; (ii) Debt to Equity Ratio;
(iii) Operating Ratio; (iv) Operating Profit Ratio;
(v) Earning Per Share; (vi) Trade Receivables Turnover Ratio;
(vii) Trade Payables Turnover Ratio.
Note: All calculations are to be made up to two places of decimal. (ISC 2011, Modified, 14 Marks)

Solution:
Debt ` 8,00,000
(i) Debt to Total Assets Ratio = = = 0.2 : 1.
Total Assets ` 40,00,000

Debt (Long-term Debt) = 8% Debentures = ` 8,00,000

Total Assets = ` 40,00,000 (Given).

Debt/Long-term Debt ` 8,00,000

(ii) Debt to Equity Ratio = = = 0.53 : 1.
Shareholders' Funds ` 15,00,000

Note: Debt (Long-term Debt) = 8% Debentures = ` 8,00,000.

Shareholders’ Funds = Equity Share Capital + Preference Share Capital
+ Reserves and Surplus
= ` 10,00,000 + ` 3,00,000 + ` 2,00,000 = ` 15,00,000.
5
 (iii) Operating Ratio
Cost of Revenue from Operations (Cost of Goods Sold)* + Operatin
ng Expenses**
= × 100
Revenue from Operations

` 9,60,000 + ` 1,00,000
= ×100 = 88.33%.
` 12,00,000
*Cost of Revenue from Operations = Revenue from Operations – Gross Profit
= ` 12,00,000 – ` 2,40,000 = ` 9,60,000.
**Operating Expenses = Administrative Expenses + Selling and
Distribution Expenses
= ` 65,000 + ` 35,000 = ` 1,00,000.

Operating Profit
(iv) Operating Profit Ratio = × 100
Revenue from Operations

Gross Profit – Operating Expenses

= × 100
Revenue from Operations

` 2, 40,000 – ` 65,000 – ` 35,000

= × 100
` 12,00,000
` 1, 40 , 000
=  100  11.67%.
` 12 , 00 , 000
Alternatively: Operating Profit Ratio = 100 – Operating Ratio.
= 100 – 88.33 = 11.67%.

Net Profit after Tax and Preference Dividend

(v) Earning Per Share (EPS) =
Number of Equity Shares

` 10,00,000 – ` 30,000
= = ` 9.70.
1,00,000

(vi) Trade Receivables Turnover Ratio

Credit Revenue from Operations, i.e., Net Credit Sales

=
Average Trade Receivables, i.e., Average Debtors + Average Bills Receivable

` 12,00,000
= = 8 Times.
` 1, 50,000
OpeningDebtors + OpeningBills Receivable
ngBills Receivable
+ ClosingDebtors + Closin

Note: Average Trade Receivables =
2

` 1,20,000 + ` 60,000 + ` 80,000 + ` 40,000

= = ` 1,50,000.
2
6
 Net Credit Purchases ` 5,00,000
(vii) Trade Payables Turnover Ratio = = = 2.78 Times.
Average Trade Payables ` 1,80,000

Opening Creditors + Opening Bills Payable

+ Closing Creditors + Closiing Bills Payable
Average Trade Payables =
2
` 1, 30 , 000 + ` 1, 10 , 000 + ` 70 , 000 + ` 50 , 000
= = ` 1,80,000.
2
Illustration 9.
From the following, calculate Proprietary Ratio:
Particulars Note No. `
I. EQUITY AND LIABILITIES
1. Shareholders’ Funds
(a) Share Capital 1,50,000
(b) Reserves and Surplus 25,000
2. Non-Current Liabilities
Long-term Borrowings 60,000
3. Current Liabilities
Trade Payables 15,000
Total 2,50,000
II. ASSETS
1. Non-Current Assets
(a) Property, Plant and Equipment and Intangible Assets:
—Property, Plant and Equipment (Machinery) 1,25,000
(b) Non-current Investments (Trade) 75,000
2. Current Assets
(a) Inventories 35,000
(b) Cash and Bank Balances 15,000
Total 2,50,000

Solution:
Shareholders' Funds/Equity ` 1,75,000 (Note)
Proprietary Ratio = = = 0.7 or 70%.
Total Assets ` 2, 50,000

Note: Calculation of Shareholders’ Funds or Equity:

Equity and Liabilities Part Approach ` Assets Part Approach `
Equity Share Capital 1,50,000 Fixed Assets 1,25,000
Add: Reserves and Surplus 25,000 Trade Investments 75,000
Shareholders’ Funds 1,75,000 Working Capital 35,000*
2,35,000
Less: Long-term Borrowings (Debentures) 60,000
Shareholders’ Funds 1,75,000

*Working Capital = Current Assets – Current Liabilities = ` 50,000 – ` 15,000 = ` 35,000.

7
Illustration 10.
From the following information, calculate the following ratios:
(i ) Debt to Equity Ratio; (ii) Proprietary Ratio; and (iii) Debt to Total Assets Ratio.

BALANCE SHEET OF XYZ LTD.

as at 31st March, 2022
Particulars Note No. `
I. EQUITY AND LIABILITIES
1. Shareholders’ Funds
(a) Share Capital 15,00,000
(b) Reserves and Surplus 6,00,000
2. Non-Current Liabilities
(a) Long-term Borrowings (12% Debentures) 4,50,000
(b) Long-term Provisions 50,000
3. Current Liabilities
(a) Short-term Borrowings (Bank Overdraft) 2,00,000
(b) Trade Payables 12,00,000
Total 40,00,000
II. ASSETS
1. Non-Current Assets
(a) Property, Plant and Equipment and Intangible Assets:
—Property, Plant and Equipment (Fixed Assets) 16,50,000
(b) Non-current Investments 1,60,000
2. Current Assets
(a) Inventories 9,10,000
(b) Trade Receivables 12,40,000
(c) Cash and Bank Balances 40,000
Total 40,00,000

Solution:
Debt/Long-term Debt ` 5 , 00 , 000
(i) Debt to Equity Ratio = = = 0.24 : 1.
Shareholders' Funds ` 21, 00 , 000

Shareholders' Funds ` 21,00,000

(ii) Proprietary Ratio = = = 0.53 : 1.
Total Assets ` 40,00,000

Debt ` 5 , 00 , 000
(iii) Debt to Total Assets Ratio = = = 0.125 : 1.
Total Assets ` 40 , 00 , 000

Notes:

1. Long-term Debt = Long-term Borrowings + Long-term Provisions

= ` 4,50,000 + ` 50,000 = ` 5,00,000.

2. Shareholders’ Funds = Share Capital + Reserves and Surplus

= ` 15,00,000 + ` 6,00,000 = ` 21,00,000.

8
Illustration 11.

From the following information, calculate the following ratios (up to two decimal places):
(i) Debt to Equity Ratio;
(ii) Interest Coverage Ratio;
(iii) Proprietary Ratio.
Particulars `
Equity Share Capital 2,00,000
5% Preference Share Capital 60,000
General Reserve 1,20,000
Fixed Assets 5,05,000
Current Assets 1,20,000
Current Liabilities 40,000
Loans @ 10% Interest 5,00,000
Tax Paid during the Year 30,000
Profit for the Current Year after Interest and Tax (Available for the Shareholders) 90,000

(ISC 2014 , 6 Marks)

Solution:

Debt/Long-term Debt ` 5,00,000

(i) Debt to Equity Ratio = = = 1.06 : 1.
Equity/Shareholders' Funds ` 4,70,000

Debt/Long-term Debt = Loan @ 10% interest = ` 5,00,000.

Equity/Shareholders’ Funds = Equity Share Capital + 5% Preference Share Capital

+ General Reserve + Profit for the Current Year after
Interest and Tax (available for the shareholders)
= ` 2,00,000 + ` 60,000 + ` 1,20,000 + ` 90,000
= ` 4,70,000.

Net Profit before Interest and Tax

(ii) Interest Coverage Ratio =
Interest

` 1, 70 , 000
= = 3.4 Times.
` 50 , 000

Net Profit before Interest and Tax = Profit for the Current Year after Interest and Tax
+ Interest + Tax for the Year
= ` 90,000 + ` 50,000 (i.e., 10% of ` 5,00,000) + ` 30,000
= ` 1,70,000.
9
 Shareholders' Funds ` 4 , 70 , 000
(iii) Proprietary Ratio = = = 0.75 : 1.
Total Assets ` 6 , 25 , 000
Shareholders’ Funds = Equity Share Capital + 5% Preference Share Capital
+ General Reserve + Profit for the Current Year after Interest and
Tax (available for the shareholders)
= ` 2,00,000 + ` 60,000 + ` 1,20,000 + ` 90,000 = ` 4,70,000.
Total Assets = Fixed Assets + Current Assets
= ` 5,05,000 + ` 1,20,000 = ` 6,25,000.

Illustration 12.
Calculate Opening and Closing Trade Receivables from the following information if Trade
Receivables Turnover Ratio is 3 Times:
(i) Cash Revenue from Operations is 1/3rd of Credit Revenue from Operations.
(ii) Cost of Revenue from Operations ` 2,40,000.
(iii) Gross Profit 25% on Cost of Revenue from Operations.
(iv) Trade Receivables at the end were 3 times more than that in the beginning.

Solution:

Total Revenue from Operations = Cost of Revenue from Operations + Gross Profit
= ` 2,40,000 + 25% of ` 2,40,000 = ` 3,00,000

Calculation of Credit Revenue from Operations:

Let Credit Revenue from Operations = x
x
Cash Revenue from Operations =
3
x
x + = ` 3,00,000
3
3x + x = ` 9,00,000

` 9 , 00 , 000
x= = ` 2,25,000 (Credit Revenue from Operations)
4
Credit Revenue from Operations
Trade Receivables Turnover Ratio =
Average Trade Receivables

` 2 , 25, 000
3=
Average Trade Receivables

` 2 , 25 , 000
Average Trade Receivables = = ` 75,000
3
10
Calculation of Opening and Closing Trade Receivables:

Opening Trade Receivables + Closing Trade Receivables

Average Trade Receivables =
2

[Let Opening Trade Receivables = x, Closing Trade Receivables = x + 3x = 4x]

x  4x
` 75,000 =
2

x + 4x = ` 1,50,000; x = ` 1,50,000/5 = ` 30,000 (Opening Trade Receivables)

Closing Trade Receivables = 4x = ` 30,000 × 4 = ` 1,20,000.

Illustration 13.
Calculate Trade Payables Turnover Ratio from the following for the year 2021–22: `
Total Purchases 3,90,000
Trade Payables (1st April, 2021) 50,000
Trade Payables (31st March, 2022) 60,000
Payment to Trade Payables by Cheque 2,50,000
Discount Received from Creditors 15,000
Returns to Credit Suppliers 10,000

Solution:

Net Credit Purchases

Trade Payables Turnover Ratio =
Average Trade Payables

` 2 , 75 , 000 ( WN 1 and 2)
= = 5 Times.
1 / 2 ( ` 50 , 000 + ` 60 , 000)

Working Notes:
1. Calculation of Net Credit Purchases:

Dr. TRADE PAYABLES ACCOUNT Cr.

Particulars ` Particulars `
To Bank A/c 2,50,000 By Balance b/d 50,000
To Discount Received A/c 15,000 By Purchases A/c (Total Credit Purchases) 2,85,000
To Purchases Return A/c 10,000 (Balancing Figure)
To Balance c/d 60,000
3,35,000 3,35,000

2. Net Credit Purchases = Total Credit Purchases – Purchases Return

= ` 2,85,000 – ` 10,000 = ` 2,75,000.
11
Illustration 14.
Calculate Working Capital Turnover Ratio from the following:
Current Assets ` 9,00,000; Total Sales ` 30,50,000; Current Liabilities ` 3,00,000; Sales
Return ` 50,000.

Solution: Calculation of Working Capital Turnover Ratio:

Revenue from Operations

Working Capital Turnover Ratio =
Working Capital

` 30 , 00 , 000
= = 5 Times.
` 6 , 00 , 000

Revenue from Operations = Total Sales – Sales Return

= ` 30,50,000 – ` 50,000 = ` 30,00,000
Working Capital = Current Assets – Current Liabilities
= ` 9,00,000 – ` 3,00,000 = ` 6,00,000.

Illustration 15.
A company earns Gross Profit of 25% on cost. For the year ended 31st March, 2021, its Gross
Profit was ` 5,00,000; Equity Share Capital of the company was ` 10,00,000; Reserves and Surplus
` 2,00,000; Long-term Loan ` 3,00,000 and Non-current Assets were ` 10,00,000.
Compute the ‘Working Capital Turnover Ratio’ of the company.

Solution:
Revenue from Operations
Working Capital Turnover Ratio =
Working Capital

` 25,00,000 (WN 1)
= = 5 Times.
` 5,00,000 (WN 2)
Working Notes:

1. Calculation of Revenue from Operations:

Let Cost of Revenue from Operations = x
It means Gross Profit = 25% of x or .25x
` 5,00,000 = 0.25x
x = ` 5,00,000/0.25 = ` 20,00,000
Revenue from Operations = Cost of Revenue from Operations + Gross Profit
= ` 20,00,000 + ` 5,00,000 = ` 25,00,000.

2. Working Capital = Equity Share Capital + Reserves and Surplus + Long-term Loans – Non-current Assets
= ` 10,00,000 + ` 2,00,000 + ` 3,00,000 – ` 10,00,000 = ` 5,00,000.
12
Illustration 16.
From the following data, calculate Inventory Turnover Ratio:
Total Sales ` 2,20,000; Sales Return ` 20,000; Gross Profit ` 50,000; Closing Inventory
` 60,000; Excess of Closing Inventory over Opening Inventory ` 20,000.

Solution:
Cost of Revenue from Operations ` 1, 50 , 000
Inventory Turnover Ratio = = = 3 Times.
Average Inventory ` 50 , 000

Opening Inventory = Closing Inventory – Excess of Closing Inventory

over Opening Inventory
= ` 60,000 – ` 20,000 = ` 40,000

Average Inventory = (Opening Inventory + Closing Inventory) ÷ 2

= (` 40,000 + ` 60,000) ÷ 2 = ` 50,000

Cost of Revenue from Operations

= Revenue from Operations (Net Sales) – Gross Profit
= ` 2,00,000 – ` 50,000 = ` 1,50,000.

Illustration 17.
From the following Statement of Profit & Loss, calculate Operating Ratio:

STATEMENT OF PROFIT & LOSS for the year ended 31st March, 2022
Particulars Note No. `
I. Income
Revenue from Operations 1 5,00,000
II. Expenses
Purchases of Stock-in-Trade 2,50,000
Change in Inventories of Stock-in-Trade (20,000)
Employees Benefit Expenses 2 60,000
Other Expenses 3 70,000
Total 3,60,000
III. Net Profit (I – II) 1,40,000

Notes to Accounts
1. Revenue from Operations `
Sales 5,20,000
Less: Return 20,000
Net Sales 5,00,000
2. Employees Benefit Expenses
Wages 60,000
3. Other Expenses
Carriage Inwards 10,000
Administrative Expenses 30,000
Selling and Distribution Expenses 20,000
Loss on Sale of Machinery 10,000
70,000

13
Solution:
Operating Ratio
Cost of Revenue from Operations (Cost of Goods Sold) + Operatting Expenses
= ×100
Revenue from Operations
` 3 , 00 , 000  ` 50 , 000
=  100  70%.
` 5 , 00 , 000

Cost of Revenue from Operations (Cost of Goods Sold)

= Purchases of Stock-in-Trade + Change in Inventories of
Stock-in-Trade + Employees Benefit Expenses (Wages)
+ Other Expenses (Carriage Inwards)
= ` 2,50,000 – ` 20,000* + ` 60,000 + ` 10,000 = ` 3,00,000.
*Change in Inventories of Stock-in-Trade is a negative amount.
Operating Expenses = Administrative Expenses + Selling and Distribution Expenses
= ` 30,000 + ` 20,000 = ` 50,000.
Note: Loss on sale of machinery will be excluded for calculating the Operating Ratio.

Illustration 18 (Calculation of Return on Investment When Opening Balance Sheet is given).

From the following Balance Sheet of King Ltd., you are required to calculate Return on
Investment for the year 2021–22:
BALANCE SHEET OF KING LTD.
as at 31st March, 2022
Particulars Note No. `
I. EQUITY AND LIABILITIES
1. Shareholders’ Funds
(a) Share Capital—Equity Shares of ` 10 each fully paid 2,50,000
(b) Reserves and Surplus 2,10,000
2. Share Application Money Pending Allotment ...
3. Non-Current Liabilities
(15% Long-term Borrowings) 8,00,000
4. Current Liabilities 4,00,000
Total 16,60,000
II. ASSETS
1. Non-Current Assets
(a) Property, Plant and Equipment and Intangible Assets:
—Property, Plant and Equipment 8,00,000
(b) Non-current Investments:
(i) 10% Trade Investments 1,00,000
(ii) 10% Other Investments 60,000
2. Current Assets 7,00,000

Total 16,60,000

Note: Net Profit before Tax for the year 2021–22 is ` 4,86,000.
14
Solution:
Net Profit before Interest and Tax
Return on Investment or Capital Employed = × 100
Capital Employed
` 6,00,000
= × 100 = 50%.
` 12,00,000
Calculation of Net Profit before Interest and Tax: `
Net Profit before Tax 4,86,000
Add: Interest on Long-term Borrowings (15% on ` 8,00,000) 1,20,000
6,06,000
Less: Interest on Non-trade Investment (10% of ` 60,000) 6,000
Net Profit before Interest and Tax for ROI 6,00,000
Capital Employed (Liabilities Side Approach)
Capital Employed = Share Capital + Reserves and Surplus (Opening) + Non-current Liabilities
– Non-trade Investments
= ` 2,50,000 + ` 2,10,000 + ` 8,00,000 – ` 60,000 = ` 12,00,000.

Capital Employed (Assets Side Approach)

Capital Employed = Non-current Assets (excluding Non-trade Investments) + Current Assets
– Current Liabilities
= ` 9,00,000 + ` 7,00,000 – ` 4,00,000 = ` 12,00,000.
Illustration 19 (Calculation of Return on Investment When Closing Balance Sheet is given).
Following is the Balance Sheet of Paliwal Exports Ltd. as at 31st March, 2022:
Particulars Note No. `
I. EQUITY AND LIABILITIES
1. Shareholders’ Funds
(a) Share Capital 5,00,000
(b) Reserves and Surplus (Profit for 2021–22 ` 9,72,000) 13,92,000
2. Non-Current Liabilities
(15% Long-term Borrowings) 16,00,000
3. Current Liabilities 8,00,000
Total 42,92,000
II. ASSETS
1. Non-Current Assets
(a) Property, Plant and Equipment and Intangible Assets:
—Property, Plant and Equipment 18,00,000
(b) Non-current Investments:
(i) 10% Trade Investments 2,00,000
(ii) 10% Other Investments 1,20,000
2. Current Assets 21,72,000

Total 42,92,000

You are required to calculate Return on Investment for the year 2021–22 with reference
to Opening Capital Employed.
15
Solution:
Net Profit before Interest and Tax
Return on Investment or Capital Employed = × 100
Capital Employed

` 12,00,000
= × 100 = 50%.
` 24,00,000

Calculation of Net Profit before Interest and Tax: `

Net Profit 9,72,000
Add: Interest on Long-term Borrowings (15% on ` 16,00,000) 2,40,000
12,12,000
Less: Interest on Non-trade Investments (10% on ` 1,20,000) 12,000
Net Profit before Interest and Tax 12,00,000

Capital Employed (Liabilities Side Approach)

Capital Employed = Share Capital + Reserves and Surplus + Non-current Liabilities
– Non-trade Investments – Current Year’s Profit
= ` 5,00,000 + ` 13,92,000 + ` 16,00,000 – ` 1,20,000 – ` 9,72,000 = ` 24,00,000.

Capital Employed (Assets Side Approach)

Capital Employed = Non-current Assets (excluding Non-trade Investments) + Current Assets
– Current Liabilities – Current Year’s Profit
= ` 20,00,000 + ` 21,72,000 – ` 8,00,000 – ` 9,72,000 = ` 24,00,000.

Illustration 20.
From the given information, calculate following ratios: (i) Gross Profit Ratio, (ii) Current
Ratio, (iii) Inventory Turnover Ratio, (iv) Liquid Ratio and (v) Debt to Equity Ratio.

Information:
Revenue from Operations ` 25,20,000; Cost of Revenue from Operations, (Cost of Goods
Sold) ` 19,20,000; Net Profit ` 3,60,000; Opening Inventory ` 3,00,000; Closing Inventory
` 5,00,000; Other Current Assets ` 7,60,000; Fixed Assets ` 14,40,000; Share Capital
` 15,00,000; Debt (long-term) ` 9,00,000; Current Liabilities ` 6,00,000; Securities Premium
Reserve ` 3,00,000.

Solution:
Gross Profit ` 6,00,000
(i) Gross Profit Ratio = ×100 = × 100 = 23.81%.
Revenue from Operations ` 25, 20,000

Gross Profit = Revenue from Operations – Cost of Revenue from Operations

= ` 25,20,000 – ` 19,20,000 = ` 6,00,000.
16
 Current Assets ` 12,60,000
(ii) Current Ratio = = = 2.1 : 1.
Current Liabilities ` 6,00,000

Current Assets = Closing Inventory + Other Current Assets

= ` 5,00,000 + ` 7,60,000 = ` 12,60,000.

Cost of Revenue from Operations (Cost of Goods Sold)

(iii) Inventory Turnover Ratio =
Averagee Inventory

` 19 , 20 , 000
= = 4.8 Times.
` 4 , 00 , 000 (Note)

Opening Inventory + Closing Inventory

Note: Average Inventory =
2

` 3 , 00 , 000  ` 5 , 00 , 000
=  ` 4 , 00 , 000 .
2

Quick or Liquid Assets Other Current Asssets ` 7,60,000

(iv) Liquid Ratio = = = = 1.27 : 1.
Current Liabilities Current Liabilities ` 6,00,000

Debt/Long-term Debt ` 9,00,000

(v) Debt to Equity Ratio = = = 0.5 : 1.
Shareholders' Funds (Note) ` 18,00,000
Note: Shareholders’ Funds = Equity Share Capital + Securities Premium Reserve
= ` 15,00,000 + ` 3,00,000 = ` 18,00,000.

Illustration 21.
From the following information, calculate (up to two decimal places):
(i) Liquid Ratio; (ii) Current Ratio;
(iii) Proprietary Ratio; (iv) Working Capital Turnover Ratio;
(v) Gross Profit Ratio; (vi) Operating Ratio;
(vii) Net Profit Ratio.
Particulars `
Cost of Revenue from Operations/Cost of Goods Sold 6,00,000
Operating Expenses 50,000
Gross Sales 8,00,000
Sales Return 10,000
Total Current Assets 3,00,000
Total Current Liabilities 1,00,000
Total Assets 7,00,000
Closing Inventory 30,000
Prepaid Insurance 5,000
Share Capital 5,60,000
Reserves and Surplus 34,000
(ISC 2012, Modified, 14 Marks)

17
Solution:
Quick or Liquid Assets ` 2,65,000
(i) Liquid Ratio = = = 2.65 : 1.
Current Liabilities ` 1,00,000
Note: Quick or Liquid Assets = Total Current Assets – Closing Inventory – Prepaid Insurance
= ` 3,00,000 – ` 30,000 – ` 5,000 = ` 2,65,000.

Current Assets ` 3,00,000

(ii) Current Ratio = = = 3 : 1.
Current Liabilities ` 1,00,000

Shareholders' Funds ` 5,94,000

(iii) Proprietary Ratio = = = 0.85 : 1.
Total Assets ` 7,00,000

Note: Shareholders’ Funds = Share Capital + Reserves and Surplus

= ` 5,60,000 + ` 34,000 = ` 5,94,000.

Revenue from Operations

(iv) Working Capital Turnover Ratio =
Working Capital

` 7,90,000
= = 3.95 Times.
` 2,00,000

Notes: 1. Revenue from Operations = Gross Sales – Sales Return

= ` 8,00,000 – ` 10,000 = ` 7,90,000.
2. Working Capital = Current Assets – Current Liabilities
= ` 3,00,000 – ` 1,00,000 = ` 2,00,000.

Gross Profit
(v) Gross Profit Ratio = × 100
Revenue from Operations

` 1, 90 , 000
=  100  24.05%.
` 7 , 90 , 000

Note: Gross Profit = Revenue from Operations – Cost of Revenue from Operations (Cost of Goods Sold)
= ` 7,90,000 – ` 6,00,000 = ` 1,90,000.

Cost of Revenue from Operations

(Cost of Goods Sold) + Operating Expenses
(vi) Operating Ratio = ×100
Revenue from Operations

` 6 , 00 , 000  ` 50 , 000 ` 6 , 50 , 000

=  100 =  100  82.28%.
` 7 , 90 , 000 ` 7 , 90 , 000

Net Profit ` 1, 40 , 000

(vii) Net Profit Ratio = ×100 =  100  17.72%.
Revenue from Operations ` 7 , 90 , 000

Note: Net Profit = Gross Profit – Operating Expenses

= ` 1,90,000 – ` 50,000 = ` 1,40,000.
18
 MEANING OF KEY TERMS USED IN THE CHAPTER

1. Ratio
It is an arithmetical expression of relationship between two interdependent or related items.

2. Accounting Ratio
Accounting Ratio means ratio calculated on the basis of accounting information (data).

3. Ratio Analysis
Analysis of financial statements on the basis of accounting ratios is known as Ratio Analysis.

4. Pure Ratio
It is a ratio expressed as a quotient. For example, Current Ratio is ratio of Current Assets to
Current Liabilities. If Current Assets are ` 20 lakh and Current Liabilities are ` 10 lakh, then the
Current Ratio is 2 : 1.

5. Percentage
It is a ratio expressed in percentage. For example, Net Profit Ratio is calculated as percentage
of Revenue from Operations. if Net Profit is ` 10 lakh and Revenue from Operations
is ` 50 lakh, then Net Profit Ratio comes to 20%.

6. Times
It is a ratio expressed in number of times. For example, Trade Receivables Turnover Ratio is
3 times [Calculated by dividing Credit Revenue from Operations (` 3,00,000) by Average Trade
Receivables (` 1,00,000)].

7. Fraction
It is a ratio expressed as a fraction. For example, ¾ or .75.

8. Liquidity Ratios
These ratios show the ability of the enterprise to meet its short-term financial commitments. These
include: Current Ratio and Quick Ratio/Liquid Ratio.

9. Solvency Ratios
These ratios measure long-term financial position of the enterprise. These include: Debt to Equity
Ratio; Proprietary Ratio; Debt to Total Assets Ratio and Interest Coverage Ratio.

10. Activity or Turnover Ratios

These ratios measure efficiency in use of assets of the enterprise in generating sales. These include:
Trade Receivables Turnover Ratio; Trade Payables Turnover Ratio; Working Capital Turnover Ratio
and Inventory Turnover Ratio.
11. Profitability Ratios
These ratios show the profitability of the enterprise. These include: Gross Profit Ratio; Net Profit
Ratio; Operating Ratio; Operating Profit Ratio, Earning Per Share (EPS), Price Earning (P/E)
Ratio and Return on Investment (ROI).
1
 S U M M A RY O F T H E C H A P T E R

• Accounting Ratio is a mathematical expression of the relationship between two items or group of items
shown in the financial statements. In simple words, when ratios are calculated on the basis of accounting
information these are called accounting ratios.

• Ratio Analysis is the process of computing, determining and presenting the relationship of items and
group of items in the financial statements. It is an important tool or technique of financial analysis.

• Ratio may be expressed as (i) Pure ratio; (ii) Percentage; (iii) Number of Times; or (iv) Fraction.

• Objectives of Ratio Analysis

(i) To simplify the accounting information.
(ii) To analyse the Financial Statements.
(iii) To judge the operating efficiency of business.
(iv) To help in forecasting, planning and control.
(v) To help in comparative analysis.
(vi) To find out strengths and weaknesses of the business.

• Limitations of Ratio Analysis

(i) Ratios may be misleading if they are based on incorrect accounting information.
(ii) Variance in accounting practices.
(iii) Ignores price level changes.
(iv) Only quantitative analysis and not qualitative analysis.
(v) Based on historical data. Hence, it is historical analysis.
(vi) Only symptom and not cure.
(vii) No single standard ratio.
(viii) In the absence of absolute data, ratios may be misleading.
(ix) Not free from bias.
(x) Window dressing.

• Classification of Accounting Ratios

Liquidity Ratios Solvency Ratios Activity Ratios Profitability Ratios
1. Current Ratio 1. Debt to Equity Ratio 1. Trade Receivables 1. Gross Profit Ratio
2. Quick/Liquid Ratio 2. Proprietary Ratio Turnover Ratio 2. Net Profit Ratio
3. Debt to Total Assets 2. Trade Payables 3. Operating Ratio
Ratio Turnover Ratio 4. Operating Profit
4. Interest Coverage 3. Working Capital Ratio
Ratio Turnover Ratio 5. Earning Per Share (EPS)
4. Inventory 6. Price Earning (P/E) Ratio
Turnover Ratio 7. Return on Investment (ROI)

2
 Summary of Important Accounting Ratios
Description of the Ratio Formula Significance How Expressed Remarks
I. Liquidity Ratios
1. Current Ratio Current Assets This ratio shows short-term financial Pure Current Assets mean those assets which are
Current Liabilities soundness of the business. A higher ratio e.g., 2 : 1 either in the form of cash or can be converted
means better capa­city to meet its current into cash within a year or within the
obligation. The ideal Current Ratio is 2 : 1. period of Operating cycle. For example—
In case it is very high it shows the idleness Cash and Bank Balances, Inventory (Stock),
Trade Receivables (Debtors + Bills Receivable)
of funds.
Prepaid Expenses, etc.
Loose Tools and Spare Parts are excluded
from Current Assets for the ratio.
Current Liabilities are those liabilities which
are payable within a year or within the
period of Operating cycle. For example—
Trade Payables (Creditors + Bills Payable),
Bank Overdraft, Outstanding Expenses, etc.
2. Quick/Liquid/Acid Quick Assets or Liquid Assets Quick Ratio is a fairly stringent measure Pure Quick Assets

3
Test Ratio Current Liabilities of liquidity. It is based on those current = Current Assets – Inventory (Stock)
assets which are highly liquid. Quick Ratio – Prepaid Expenses
of 1 : 1 is considered as ideal. The higher
the Quick Ratio, the better the short-term
financial position.

II. Solvency Ratios Long-term Debts are Long-term Borrowings

1. Debt to Equity Ratio Debt/Long-term Debt This ratio assesses long-term financial Pure + Long-term Provisions.
position and soundness of the long-term Shareholders’ Funds =
Equity (Shareholders ’ Funds)
financial policies of the firm. In general, Share Capital + Reserves and Surplus
Or
lower the Debt to Equity Ratio higher the
Non-Current Assets + (Current Assets –
protection enjoyed by the lenders. Current Liabilities) – Non-Current Liabilities,
i.e., Non-Current Assets + Working Capital
– Non-Current Liabilities
Or Tangible Assets + Intangible Assets +
Non-Current Investments + Long-term
Loans and Advances + Working Capital
– (Long-term Borrowings + Long-term
Provisions).
 2. Proprietary Ratio Shareholders ’ Funds This ratio shows the extent to which the Fraction Shareholders’ Funds mean same as in the Debt to
Total Assets total assets have been financed by the Equity Ratio.
proprietor. The higher the ratio, greater Total Assets include Non-Current Assets and
the satisfaction for lenders and creditors. Current Assets.
3. Debt to Total Assets Ratio Debt This ratio measures the safety margin Pure Ratio, Debt = Long-term Borrowings + Long-term
Total Assets available to the lenders of Long-term e.g., 2 : 1 Provisions.
debts. It measures the extent to which Total Assets include Non-Current Assets and
debt is being covered by assets. Current Assets.
4. Interest Coverage Ratio Net Profit before Interest It measures the safety margin available Times Interest means interest on long-term debts.
and Tax to lenders.
Interest
III. Activity Ratios
1. Trade Receivables Turnover Credit Revenue This ratio indicates efficiency in the Times Trade Receivables includes Debtors and Bills
Ratio from Operations collection of amount due from Trade Receivable.
Average Trade Receivables Receivables. The higher the ratio, the Average Trade Receivables
better it is since it indicates that debts are
Opening Trade Receivables
being collected more quickly.

4
+ Closing Trade Receivables
=
2
2. Trade Payables Turnover Net Credit Purchases This ratio indicates the efficiency with Times Trade Payables includes Creditors and Bills
Ratio Average Trade Payables which creditors are managed and paid. Payable.
Average Trade Payables
Opening Trade Payables
+ Closing Trade Payables
=
2
3. Working Capital Revenue from Operations This ratio shows the number of times the Times Working Capital =
Turnover Ratio Working Capital working capital has been employed in Current Assets – Current Liabilities
the process of carrying on business. The
higher the ratio, the better the efficiency
in the utilisation of working capital.
4. Inventory Cost of Revenue from This ratio measures how fast the stock is Times Average Inventory =
Turnover Ratio Operations (Cost of Goods Sold) moving and generating sales. A higher Opening Inventory + Closing Inventory
ratio, means more efficient management 2
Average Inventory
of inventories and vice versa.
 IV. Profitability Ratios
1. Gross Profit Ratio Gross Profit % Gross Profit = Revenue from Operations – Cost of
× 100 Revenue from Operations
Revenue from Operations The ratio indicates the relationship
between gross profit and revenue Cost of Revenue from Operations = Cost of
from operations. A higher ratio Materials Consumed (Stock-in-Trade + Purchases
indicates low Cost of Revenue of Stock-in-Trade + Direct Expenses) + Changes
from Operations (Cost of Goods in Inventories of WIP and Finished Goods +
Sold). Purchases of Stock-in-Trade
Revenue from Operations = Credit Revenue from
Operations + Cash Revenue from Operations
Net Sales = Total Sales – Sales Return
2. Net Profit Ratio Net Profit after Tax The ratio indicates the overall efficiency % Net Profit = Revenue from Operations – Cost of
× 100 Revenue from Operations (Cost of Goods Sold) –
Revenue from Operations of the business. A higher Net Profit Ratio
is better for the business. Indirect Expenses – Tax
Or
Gross Profit + Other Incomes – Indirect Expenses
– Tax
3. Operating Ratio Cost of Revenue from The ratio is calculated to judge the % Cost of Revenue from Operations (Cost of Goods
Operations operational efficiency of the business. A Sold) = Revenue from Operations – Gross Profit

5
(Cost of Goods Sold) decline in the Operating Ratio is better
+ Operatiing Expenses because it would leave a high margin,
× 100
Revenue from Operations which means more profit.
4. Operating Profit Ratio Net Operating Profit The main objective of computing this % Net Operating Profit = Gross Profit – Operating
× 100 Expenses (i.e., Administrative Expenses and Selling
Revenue from Operations ratio is to determine the operational
efficiency of the management. Expenses) + Operating Incomes

5. Earning Per Share Net Profit after Tax The ratio helps in evaluating the ` This ratio helps in evaluating the prevailing market
− Preference Dividend prevailing market price of share in the Per Share price of share. The more the earning per share
Number of Equity light of profit earning capacity. better is the performance and prospects of the
Shares company.
6. Price Earning Ratio Martket Value of an The objective of computing this ratio Times It is very important ratio to know whether the
Equity Share is to find out the expectations of the shares of the company are undervalued or in
EarningPer Share shareholders. estimating future market price.

7. Return on Investment Net Profit before The objective of computing this ratio is to % Return on investment is a fair measure of the
Interest and Tax know how efficiently the resources of the profitability of any concern with the result that
 100 the performance of different industries may be
Capital Employed business are used.
compared.
 MEANING OF KEY TERMS USED IN THE CHAPTER

1. Cash Flow Statement

It is the statement that shows flow of Cash and Cash Equivalents during the period under report.

2. Cash Flows
These are the inflows (receipts) and outflows (payments) of Cash and Cash Equivalents.

3. Cash
It comprises of Cash on Hand and demand deposits with banks.

4. Cash Equivalents
These are short-term, highly liquid investments that are readily convertible into known amount of cash
and which are subject to an insignificant risk of change in value. An investment normally qualifies as
cash equivalent only when it has short maturity period of, say, three months or less from the date
of acquisition, i.e., purchase.
Short-term Investments and Marketable Securities are taken as Cash and Cash Equivalents.
Cash equivalents are held for the purpose of meeting short-term cash commitments rather than
for investment or other purposes.

5. Operating Activities
These are the principal revenue producing activities of the enterprise and other activities that are not
Investing or Financing Activities.

6. Investing Activities
These are activities of acquisition and disposal of long-term assets and other investments not
included in cash equivalents.

7. Financing Activities
These are the activities that result in change in the size and composition of the owner’s capital
(including preference share capital in the case of a company) and borrowings of the enterprise.
Bank Overdraft and Cash Credit are taken as Short-term Borrowings. Thus, they are shown under
Financing Activities.

S U M M A RY O F T H E C H A P T E R

• Cash Flows are the inflows and outflows of Cash and Cash Equivalents.

• Cash Flow Statement is a statement that shows the flow of Cash and Cash Equivalents during a period.
This statement shows the net increase or net decrease of Cash and Cash Equivalents under each activity
(operating/investing/financing) and collectively.

• When does the Flow of Cash Arise?

Cash Flow arises when the net effect of transactions is either to increase or to decrease the amount of
Cash or Cash Equivalents.
1
• Cash means Cash in Hand and Demand Deposits with Bank.

• Cash Equivalents: Cash Equivalents are short-term, highly liquid investments that are readily convertible
into known amount of cash and which are subject to an insignificant risk of change in value. An investment
normally qualifies as cash equivalent only when it has a short maturity of, say, three months or less from
the date of acquisition.
Examples of Cash Equivalents are: (a) Treasury bills, (b) Commercial papers, (c) money market funds and
(d) Investment in Preference Shares redeemable within three months can also be taken as cash equivalents
if there is insignificant risk of change in its value.
Cash Equivalents also include Bank Balance, Short-term Investments and Marketable Securities.

• Operating Activities: Operating Activities are the principal revenue producing activities of the enterprise
and other activities that are not investing or financing activities.

• Investing Activities: Investing Activities are the acquisition and disposal of long-term assets and other
investments not included in cash equivalents.

• Financing Activities: Financing Activities are the activities that result in change in the size and composition
of the owners’ capital (including Preference Share Capital in the case of a company) and borrowings of
the enterprise.

Notes: • Bank Overdraft and Cash Credit are Short-term Borrowings. They are shown under Financing
Activities in Cash Flow Statement.

• Current Investment is a part of Working Capital.

• Short-term Investments and Marketable Securities are part of Cash Equivalents.

• Proposed Dividend (also called final dividend) is the dividend proposed by the Board of Directors
of the company but it is paid only after it is approved, i.e., declared by the shareholders. Shareholders
have the power to approve it, not approve it or approve it at a lower rate. In effect, declaration of final
dividend is contingent on approval by the shareholders. Proposed Dividend is not accounted and shown
as short-term provision in the Balance Sheet because it is prescribed by revised Accounting Standard–4,
Contingencies and Events Occurring After the Balance Sheet Date that Proposed Dividend should
not be provided in the books of account but should be shown in the Notes to Accounts.

Since, declaration and payment of dividend is contingent upon approval of the shareholders, it becomes
a liability only after being approved by the shareholders. As a result, it will be accounted in the books of
account in the next year after it is approved by the shareholders. It means Proposed Dividend for the current
year will be approved by the shareholders in the next year and thereafter it will be paid. Whereas Proposed Dividend
for the previous year will be approved by the shareholders in the current year and will be paid in the current year.

Dividend is an appropriation of profit and not a charge. Therefore, it is debited to Surplus, i.e., Statement
of Profit & Loss by passing the following entry:

Surplus, i.e., Balance in Statement of Profit & Loss A/c ...Dr.

To Dividend Payable A/c
(Being the dividend declared)
2
 The effect of this is as follows:
(i) Proposed Dividend for previous year is shown as outflow of cash assuming that the shareholders
have approved the proposed dividend as was recommended;
(ii) No effect is given to Proposed Dividend for the current year as it is not provided for.

Dividend paid is debited to Dividend Payable Account and balance, if any is retained in ‘Dividend Payable
Account’ or may be transferred to ‘Unpaid Dividend Account’ which is shown in the Balance Sheet as Other
Current Liabilities under Current Liabilities.

Dividend paid during the year, whether out of Dividend Payable Account or Unpaid Dividend Account,
is shown as Outflow of Cash (Cash Used) under Cash Flow from Financing Activities.

• Preparation of Cash Flow Statement: Cash Flow Statement is prepared following the steps as under:

Step 1: Compute Cash Flow from Operating Activities, which may be positive or negative.

Step 2: Compute Cash Flow from Investing Activities, which may be positive or negative.

Step 3: Compute Cash Flow from Financing Activities, which may be positive or negative.

Step 4: The cash flows under each activity, i.e., Operating Activity, Investing Activity and
Financing Activity as computed in Steps 1, 2 and 3 are shown in Cash Flow Statement and net
flow is determined. This will be Net Increase or Decrease in Cash and Cash Equivalents.

Step 5: Add Opening Balance of Cash and Cash Equivalents to cash flows as arrived at in Step 4.

Step 6: The amount so determined should be equal to Balance of Cash and Cash Equivalents at the
end of the year.

TREATMENT OF MISCELLANEOUS EXPENDITURE

Miscellaneous Expenditure such as Loss on Issue of Debentures, Discount on
Issue of Debentures, Underwriting Commission, Preliminary Expenses are written
off in the year in which they are incurred from Securities Premium (if it exists) or
from Statement of Profit & Loss.

3
Illustration 1.
From the following Balance Sheet of Bhushan Steel Ltd., calculate Cash Flow from
Operating Activities:
Particulars Note No. 31st March, 31st March,
2022 (`) 2021 (`)
I. EQUITY AND LIABILITIES
1. Shareholders’ Funds
(a) Share Capital 1 10,00,000 9,00,000
(b) Reserves and Surplus 2 2,36,000 1,40,000
2. Current Liabilities
(a) Trade Payables 3 1,66,000 1,10,000
(b) Other Current Liabilities 4 32,000 40,000
(c) Short-term Provisions 5 1,00,000 80,000
Total 15,34,000 12,70,000
II. ASSETS
1. Non-Current Assets
Property, Plant and Equipment and Intangible Assets:
(i ) Property, Plant and Equipment 6 6,40,000 4,76,000
(ii) Intangible Assets 7 1,80,000 2,30,000
2. Current Assets
(a) Current Investment
—Marketable Securities 20,000 30,000
(b) Inventories 1,74,000 1,94,000
(c) Trade Receivables 5,04,000 3,20,000
(d) Cash and Bank Balances 16,000 20,000
Total 15,34,000 12,70,000

Notes to Accounts
Particulars 31st March, 31st March,
2022 (`) 2021 (`)
1. Share Capital
Equity Share Capital 8,00,000 6,00,000
12% Preference Share Capital 2,00,000 3,00,000
10,00,000 9,00,000
2. Reserves and Surplus
General Reserve 1,40,000 80,000
Surplus, i.e., Balance in Statement of Profit & Loss 96,000 60,000
2,36,000 1,40,000
3. Trade Payables
Creditors 1,00,000 80,000
Bills Payable 66,000 30,000
1,66,000 1,10,000
4. Other Current Liabilities
Outstanding Expenses 32,000 40,000
5. Short-term Provisions
Provision for Tax 1,00,000 80,000
6. Property, Plant and Equipment
Land and Building 2,40,000 3,16,000
Plant 4,00,000 1,60,000
6,40,000 4,76,000
7. Intangible Assets
Goodwill 1,80,000 2,30,000

Note: Proposed Dividend on Equity Shares for the years ended 31st March, 2022 and 2021 were ` 80,000
and ` 60,000 respectively.
1
Solution: CASH FLOW FROM OPERATING ACTIVITIES
Particulars ` `

Net Profit before Tax (Note 1)

2,92,000
Add: Non-cash Expenses:

Depreciation on Land and Building (` 3,16,000 – ` 2,40,000) 76,000
Goodwill amortised 50,000 1,26,000
Operating Profit before Working Capital Changes 4,18,000
Add: Decrease in Current Assets and Increase in Current Liabilities:

Creditors 20,000
Bills Payable 36,000
Inventories 20,000 76,000

4,94,000
Less: Increase in Current Assets and Decrease in Current Liabilities:

Trade Receivables 1,84,000
Outstanding Expenses 8,000 1,92,000
Cash Generated from Operations
3,02,000
Less: Income Tax paid (Note 4) 80,000
Cash Flow from Operating Activities 2,22,000

Notes: `
1. Profit for the year (` 96,000 – ` 60,000) 36,000

Add: Transfer to General Reserve 60,000

Dividend Paid (Proposed Dividend for the year ended 31st March, 2021) (Note 2) 96,000

(On Equity and Preference Shares)

Provision for Tax (Note 3) 1,00,000

Net Profit before Tax 2,92,000

2. Proposed Dividend on Equity Shares for the year ended 31st March, 2021 is ` 60,000. But before
dividend is paid on Equity Shares, dividend on Preference Shares is to be paid @ 12% on ` 3,00,000,
i.e., Preference Share Capital as at 31st March, 2021.
`
Preference Dividend 36,000
Equity Dividend 60,000
Total Dividend paid during the year 96,000

3. ‘Provision for Tax’ in the Equity and Liabilities part of the current year’s Balance Sheet is added to current
year’s profit to calculate ‘Net Profit before Tax’ as provision is made out of the current year’s profit.

4. ‘Provision for Tax’ in the Equity and Liabilities part of the previous year’s Balance Sheet is
presumed to have been paid during the year. Hence, it is deducted to calculate the Cash Flow from
Operating Activities.

2
Illustration 2.
From the following information, calculate Cash Flow from Financing Activities:

Particulars 31st March, 2022 (`) 31st March, 2021 (`)

Equity Share Capital 6,00,000 4,50,000

10% Preference Share Capital 1,50,000 2,25,000
Securities Premium Reserve 22,500 7,500
10% Debentures 6,00,000 4,50,000
Bank Overdraft 1,50,000 1,00,000

Notes: 1. Proposed Dividend on: 31st March, 2022 (`) 31st March, 2021 (`)
10% Preference Shares 22,500 22,500
Equity Shares 60,000 45,000
2. Fresh Debentures are issued on 31st March, 2022.
3. An interim dividend of ` 45,000 was paid during the year.

Solution: CALCULATION OF CASH FLOW FROM FINANCING ACTIVITIES

Particulars
`

Proceeds from Issue of Equity Shares [` 6,00,000 – ` 4,50,000 + ` 15,000 (Premium)] 1,65,000
Redemption of 10% Preference Shares (` 2,25,000 – ` 1,50,000) (75,000)
Proceeds from Issue of Debentures ( ` 6,00,000 – ` 4,50,000) 1,50,000
Increase in Bank Overdraft 50,000
Interest paid on Debentures (45,000)
Dividend paid on Preference Shares (22,500)
Dividend paid on Equity Shares (45,000)
Interim dividend paid during the year (45,000)
Cash Flow from Financing Activities 1,32,500

Note: Dividend (both Preference and Equity) are declared by shareholders in the AGM held in the next financial
year. Proposed Dividend for the year ended 31st March, 2021 is declared and paid in the financial year ended
31st March, 2022. Similarly, Proposed Dividend for the year ended 31st March, 2022 will be declared
and paid in the year ended 31st March, 2023. Therefore, Outflow of cash for dividend for the year
ended 31st March, 2022 is dividend proposed for the year ended 31st March, 2021.

3
Illustration 3.
Following is the extract of the Balance Sheet of Puma Ltd.:
Liabilities 31st March, 2021 (`) 31st March, 2022 (`)
Equity Share Capital 5,00,000 5,00,000
10% Preference Share Capital 5,00,000 5,00,000
Surplus, i.e., Balance in Statement of Profit & Loss 2,50,000 4,50,000

Additional Information:
1. Proposed Dividend on Equity Shares for the years ended 31st March, 2021 and 2022
are ` 1,50,000 and ` 1,80,000 respectively.
2. Interim Dividend of ` 20,000 was paid on 31st December, 2021.
How will these items be shown in the Cash Flow Statement?
Solution: CASH FLOW STATEMENT for the year ended 31st March, 2022
Particulars    `
Cash Flow from Operating Activities
Net Profit before Tax (Note 1) 4,20,000
Cash Flow from Financing Activities
Final Dividend paid on Preference Shares (Proposed in Previous Year) (50,000)
Final Dividend paid on Equity Shares (Proposed in Previous Year) (1,50,000)
Interim Dividend paid (20,000)
Cash Used in Financing Activities (2,20,000)

Notes:
1. Calculation of Net Profit before Tax: `
Closing Surplus, i.e., Balance in Statement of Profit & Loss 4,50,000
Less: Opening Surplus, i.e., Balance in Statement of Profit & Loss 2,50,000
2,00,000
Add: Final Dividend on Preference Shares (Proposed in Previous Year) (Note 2) 50,000
Dividend paid on Equity Shares (Proposed in Previous Year) 1,50,000
Interim Dividend paid during the Year 20,000
Net Profit before Tax 4,20,000
2. Dividend on Preference Shares is paid before dividend is paid on Equity Shares. Information given in the
question is for dividend on equity shares. Thus, dividend on preference shares is shown as paid.

Illustration 4.
From the following extract of a company’s Balance Sheet, calculate Cash Flow from Financing
Activities for the year ending 31st March, 2022:
Particulars 31st March, 2022 31st March, 2021
` `
Equity Share Capital 9,00,000 7,00,000
Securities Premium Reserve 1,25,000 1,00,000
12% Debentures 4,00,000 3,00,000
Dividend Payable (Unclaimed Dividend) 7,000 ...
Bank Overdraft 12,000 10,000

Note: Dividends proposed on Equity Shares for the years ended 31st March, 2021 (2020–21) and 2022
(2021–22) are ` 75,000 and ` 65,000 respectively.
4
Additional Information:
(i) Debentures were issued on 1st April, 2021, at a discount of 10%.
(ii) Discount on Issue of debentures was written off from Securities Premium Reserve at
the end of the year.
Solution: CASH FLOW FROM FINANCING ACTIVITIES
Particulars `
Proceeds from Issue of Equity Shares [(` 9,00,000 – ` 7,00,000)] 2,00,000
Receipt of Securities Premium [` 25,000 + ` 10,000 (Discount written off)] 35,000
Proceeds from Issue of Debentures [(` 4,00,000 – ` 3,00,000) – ` 10,000 (Discount)] 90,000
Increase in Bank Overdraft 2,000
3,27,000
Less: Dividend Paid (WN 1 and 2) 68,000
Interest on Debentures (12% of ` 4,00,000) 48,000 1,16,000
Cash Flow from Financing Activities 2,11,000

Working Notes:
1. Dr. DIVIDEND PAYABLE ACCOUNT Cr.
Particulars
` Particulars `
To Bank A/c (Dividend Paid) (Bal. Fig.) 68,000 By Surplus, i.e., Balance in Statement
To Balance c/d (Unclaimed Dividend) 7,000 of Profit & Loss A/c (Dividend approved) 75,000
75,000 75,000

2. Discount on Issue of Debentures written off from Securities Premium Reserve will not be considered while
calculating operating profit before working capital changes because it was not debited to Statement
of Profit & Loss, i.e., it was not taken to determine net profit.

Illustration 5.
From the following extract of a company’s Balance Sheet, calculate for the year ending
31st March, 2022:
(i) Cash Flow from Investing Activities.
(ii) Cash Flow from Financing Activities.
Particulars 2021–22 (`) 2020–21 (`)
Equity Share Capital 13,00,000 12,00,000
Long-term Borrowing (10% Bank Loan) 60,000 1,00,000
Dividend Payable 3,000 ...
Property, Plant and Equipment:
Plant and Machinery 1,70,000 1,40,000
Less: Accumulated Depreciation (24,000) (40,500)
1,46,000 99,500
Non-Current Investments 1,00,000 20,000
Land (At cost) 5,00,000 7,00,000
Goodwill 30,000 40,000

Additional Information:
1. Proposed equity dividends for the years ended 31st March, 2021 and 2022 are ` 21,000
and ` 20,000 respectively.
2. Loan instalment and interest on loan was paid at the end of the financial year.
5
 3. During the year:
(a) The company provided depreciation on Plant and Machinery amounting to ` 13,500.
(b) The company sold 70% of its Non-Current Investments which it held in the beginning
of the year, at a profit of 20% on its book value. (ISC 2014, Modified)

Solution:

(i) Cash Flow from Investing Activities: `

Proceeds from Sale of Non-current Investments (WN 3) 16,800
Payment for Purchase of Non-current Investments (WN 3) (94,000)
Proceeds from Sale of Land 2,00,000

Cash Flow from Investing Activities 1,22,800

(ii) Cash Flow from Financing Activities:

Proceeds from Issue of Equity Shares 1,00,000
Repayment of Bank Loan (40,000)
Payment of Interest on Bank Loan (10,000)
Payment of Dividend (WN 2) (18,000)

Cash Flow from Financing Activities 32,000

Working Notes:

1. It is assumed that the company has written back excess depreciation during the year because it has not sold
Plant and Machinery. Since, depreciation is considered while preparing Cash Flow from Operating Activities it
will not have any effect on Cash Flow from Investing Activity and Cash Flow from Financing Activity.

2. Dividend declared during the year ` 21,000

Less: Dividend Payable (given) ` 3,000
Dividend paid during the year ` 18,000

3. Dr. NON-CURRENT INVESTMENTS ACCOUNT Cr.

Particulars ` Particulars `
To Balance b/d 20,000 By Bank A/c (Sale) 16,800
To Gain on Sale of Non-Current Investments A/c 2,800 (` 14,000 + 20% of ` 14,000)
(Statement of Profit & Loss) By Balance c/d 1,00,000
To Bank A/c (Purchase) (Balancing Figure) 94,000
1,16,800 1,16,800

6
Illustration 6.
From the following Balance Sheet of Star Ltd. as at 31st March, 2022, prepare
Cash Flow Statement:
Particulars Note No. 31st March, 31st March,
2022 (`) 2021 (`)
I. EQUITY AND LIABILITIES
1. Shareholders’ Funds
(a) Share Capital 3,50,000 3,00,000
(b) Reserves and Surplus 1 70,000 50,000
2. Non-Current Liabilities
Long-term Borrowings (12% Debentures) 80,000 1,00,000
3. Current Liabilities
(a) Short-term Borrowings (Bank Loan) 15,000 25,000
(b) Trade Payables 1,65,000 60,000
Total 6,80,000 5,35,000
II. ASSETS
1. Non-Current Assets
(a) Property, Plant and Equipment and Intangible Assets:
—Property, Plant and Equipment 2 4,10,000 3,00,000
(b) Non-current Investments 40,000 50,000
2. Current Assets
(a) Inventories 52,000 30,000
(b) Trade Receivables 60,000 40,000
(c) Cash and Bank Balances 1,18,000 1,15,000
Total 6,80,000 5,35,000

Notes to Accounts
Particulars 31st March, 31st March,
2022 (`) 2021 (`)
1. Reserves and Surplus
Capital Reserve 2,000 ...
General Reserve 33,000 20,000
Surplus, i.e., Balance in Statement of Profit & Loss 35,000 30,000
70,000 50,000
2. Property, Plant and Equipment
Machinery (Cost) 4,70,000 3,50,000
Less: Accumulated Depreciation 60,000 50,000
4,10,000 3,00,000

Additional Information:
(i) During the year, Machinery costing ` 20,000 (accumulated depreciation thereon
` 15,000) was sold for ` 12,000.
(ii) During the year, Non-current Investments were sold at a profit of 20%, which is
transferred to Capital Reserve.
(iii) Debentures were redeemed at par on 1st April, 2021.
(iv) Tax of ` 15,000 was paid during the year.
(v) Interim Dividend paid during the year amounted to ` 25,000.
7
Solution: Star Ltd.
CASH FLOW STATEMENT for the year ended 31st March, 2022
Particulars ` `
A. Cash Flow from Operating Activities
Net Profit before Tax (WN 1) 58,000
Add: Non-cash and Non-operating Expenses:
Depreciation on Machinery (WN 3) 25,000
Interest on Debentures (12% of ` 80,000) 9,600
92,600
Less: Gain (Profit) on Sale of Machinery (WN 2) 7,000
Operating Profit before Working Capital Changes 85,600
Add: Increase in Current Liabilities:
Trade Payables 1,05,000
1,90,600
Less: Increase in Current Assets:
Inventories 22,000
Trade Receivables 20,000 42,000
Cash Generated from Operations 1,48,600
Less: Tax Paid 15,000
Cash Flow from Operating Activities 1,33,600
B. Cash Flow from Investing Activities
Purchase of Machinery (WN 2) (1,40,000)
Proceeds from Sale of Machinery 12,000
Proceeds from Sale of Non-current Investments (WN 4) 12,000
Cash Used in Investing Activities (1,16,000)
C. Cash Flow from Financing Activities
Cash Proceeds from Issue of Shares 50,000
Interim Dividend Paid (25,000)
Redemption of Debentures (20,000)
Interest on Debentures (9,600)
Bank Loan Paid (10,000)
Cash Used in Financing Activities (14,600)
D. Net Increase in Cash and Bank Balances (A + B + C) 3,000
E. Cash and Bank Balances in the beginning of the Period 1,15,000
F. Cash and Bank Balances at the end of the period (D + E) 1,18,000

Working Notes:
1. Calculation of Net Profit before Tax: `

Surplus, i.e., Balance in Statement of Profit & Loss (Closing) 35,000

Less: Surplus, i.e., Balance in Statement of Profit & Loss (Opening) 30,000
Profit for the Year 5,000
Add: Transfer to General Reserve (` 33,000 – ` 20,000) 13,000
Provision for Tax 15,000
Interim Dividend Paid 25,000
Net Profit before Tax 58,000

8
2. Dr. MACHINERY ACCOUNT Cr.

Particulars ` Particulars `
To Balance b/d 3,50,000 By Accumulated Depreciation A/c 15,000
To Gain (Profit) on Sale of Machinery A/c* 7,000 By Bank A/c (Sales) 12,000
(Statement of Profit & Loss) By Balance c/d 4,70,000
To Bank A/c (Bal. Fig.—Purchase) 1,40,000
4,97,000 4,97,000

`
*Sale Value 12,000
Less: Book Value on the date of sale (i.e., ` 20,000 – ` 15,000) 5,000
Gain (Profit) on Sale of Machinery 7,000

3. Dr. ACCUMULATED DEPRECIATION ACCOUNT Cr.

Particulars ` Particulars `
To Machinery A/c (Transfer) 15,000 By Balance b/d 50,000
To Balance c/d 60,000 By Statement of Profit & Loss (Bal. Fig.) 25,000
75,000 75,000

4. Dr. NON-CURRENT INVESTMENTS ACCOUNT Cr.

Particulars ` Particulars `
To Balance b/d 50,000 By Bank A/c (Sale Value*) 12,000
To Capital Reserve A/c (Gain*) 2,000 By Balance c/d 40,000
52,000 52,000

*Calculation of ‘Sale Value’ and ‘Profit on sale of Non-current Investments (NCI):

Book Value of Sold Investments = Opening Value – Closing Value = ` 50,000 – ` 40,000 = ` 10,000.
Profit on Sale = 20% × ` 10,000 = ` 2,000.
Sale value of Non-current Investments = Book Value + Profit = ` 10,000 + ` 2,000 = ` 12,000.

5. As the gain (profit) on sale of Non-current Investment is not transferred to Statement of Profit & Loss but is
transferred to Capital Reserve, it will not affect Net Profit before Tax.

9
Additional Questions

1. Following is the summarised Balance Sheet of Wye Ltd. as at 31st March, 2023:
Particulars Note No. 31st March, 31st March,
2023 (`) 2022 (`)
I. EQUITY AND LIABILITIES
1. Shareholders’ Funds
(a) Share Capital:
Equity Share Capital 5,00,000 5,00,000
(b) Reserves and Surplus 1,20,000 1,10,000
2. Non-Current Liabilities

Long-term Borrowings: (Secured Loans) 4,00,000 5,50,000
(Unsecured Loans) 1,00,000 ...
3. Current Liabilities
Trade Payables (Creditors) 5,80,000 3,80,000
Total 17,00,000 15,40,000
II. ASSETS
1. Non-Current Assets
Property, Plant and Equipment and Intangible Assets:
—Property, Plant and Equipment 9,90,000 10,40,000
2. Current Assets
(a) Inventories 3,00,000 2,00,000
(b) Trade Receivables 3,00,000 2,00,000
(c) Cash and Bank Balances 1,10,000 1,00,000
Total 17,00,000 15,40,000

You are required to prepare Comparative Balance Sheet.

[Ans.
Particulars Share Reserves Secured Unsecured Current Non-current Current
Capital and Surplus Loans Loans Liabilities Assets Assets
Absolute Change (`) Nil 10,000 (1,50,000) 1,00,000 2,00,000 (50,000) 2,10,000
Percentage Change (%) Nil 9.09 (27.27) ... 52.63 (4.81) 42.00
]

2. From the following Statement of Profit & Loss, prepare Comparative Income Statement:
Particulars Note 31st March, 31st March,
No. 2023 (`) 2022 (`)
I. Income
Revenue from Operations (Net Sales) 20,00,000 17,50,000

Other Income 75,000 50,000
Total
20,75,000 18,00,000

1
 II. Expenses

Purchases of Stock-in-Trade 11,60,000 10,00,000

Change in Inventories of Stock-in-Trade 10,000 (25,000)

Employees Benefit Expenses (Wages) 3,00,000 3,00,000

Depreciation and Amortisation Expense 50,000 50,000
Other Expenses 90,000 75,000
Total
16,10,000 14,00,000
III. Profit before Tax (I – II) 4,65,000 4,00,000

[Ans.
Particulars Revenue from Other Purchases of Changes in Other Profit
Operations Income Stock-in-Trade Inventories Expenses before Tax
Absolute Change (`) 2,50,000 25,000 1,60,000 35,000 15,000 65,000
Percentage Change (%) 14.29 50.00 16.00 140.00 20.00 16.25
]

2
 MEANING OF KEY TERMS USED IN THE CHAPTER
BALANCE SHEET

Equity and Liabilities

1. Shareholders’ Funds
Shareholders’ Funds are the funds of the shareholders of the company. It comprises of: Share Capital,
Reserves and Surplus and Money Received against Share Warrants.
(a) Share Capital
It is the amount received by the company as capital. It includes both Equity Share Capital and Preference
Share Capital.
(b) Reserves and Surplus
It is the amount set aside out of Surplus (profit) or received as Securities Premium Reserve. It may be free
reserve or committed reserve.
(c) Money Received against Share Warrants
It is the amount received against Share Warrants. Share Warrant is a financial instrument which
gives the holder the right to acquire Equity Shares specified therein at a specified date at a
specified price.
2. Share Application Money Pending Allotment
It is the amount received as share application and against which the company will make allotment.
3. Non-Current Liabilities
Non-Current Liabilities are defined in Schedule III of the Companies Act, 2013 as those liabilities which are not
Current Liabilities. These are sub-classified into: Long-term Borrowings; Deferred Tax Liabilities (Net); Other
Long-term Liabilities and Long-term Provisions.
(a) Long-term Borrowings
Long-term Borrowings are the borrowings which as on the date of borrowings, are repayable after more
than 12 months from the date of Balance Sheet or after the period of Operating Cycle.
(b) Deferred Tax Liabilities (Net)
It is the amount of tax on the temporary difference between the accounting income and taxable income.
It is only a book entry and not an actual liability. It arises when accounting income is more than the
taxable income.
(c) Other Long-term Liabilities
These are the liabilities, other than Long-term Borrowings of the company.
(d) Long-term Provisions
These are the provisions for liabilities that will be payable after 12 months from the date of Balance Sheet
or after the period of Operating Cycle.
4. Current Liabilities
Current Liabilities are those liabilities which are:
(a) expected to be settled in company’s normal Operating Cycle; or
(b) due to be settled within 12 months after the reporting date; (Reporting date is the date on which financial
statements are prepared); or
(c) held primarily for the purpose of being traded; or
(d) there is no unconditional right to defer settlement for at least 12 months after the reporting date.
Current liabilities are classified into: Short-term Borrowings; Trade Payables; Other Current
Liabilities; and Short-term Provisions.
1
(a) Short-term Borrowings
These are the borrowings which as on the date of borrowing, are repayable within 12 months or within
the period of a Operating Cycle from the date of Balance Sheet.

(b) Trade Payables

These are the amounts payable for goods purchased or services taken in the normal course of business and
are payable within 12 months from the date of Balance Sheet or within the period of a Operating Cycle.

(c) Other Current Liabilities

These are short-term liabilities, other than short-term borrowings, trade payables and short-term provisions.

(d) Short-term Provisions

These are provisions for liabilities that will be payable within 12 months from the date of Balance Sheet or
within the period of a Operating Cycle.

5. Operating Cycle
It is the time between the acquisition of assets for processing and their realisation into Cash and Cash
Equivalents.
Where the Operating Cycle cannot be identified, it is assumed to be of 12 months.
Operating Cycle is determined for each business separately. It means a company can have more than one
Operating Cycle.

ASSETS
6. Non-Current Assets
Non-Current Assets are those assets which are not Current Assets. These are sub-classified into: Property,
Plant and Equipment and Intangible Assets; Non-Current Investments; Deferred Tax Assets (Net); Long-term
Loans and Advances; and Other Non-Current Assets.
(a) Property, Plant and Equipment and Intangible Assets
(i ) Property, Plant and Equipment
These are the assets which have physical existence, i.e., can be seen and touched. Examples are:
land, building, machinery, computers, etc.
(ii) Intangible Assets
These are the assets which do not have physical existence. Examples are: patents,
trademarks, computer software, etc.
(iii) Capital Work-in-Progress
Capital Work-in-Progress means expenditure incurred on construction or development of tangible
assets.
(iv) Intangible Assets Under Development
Intangible Assets Under Development means expenditure incurred on development of
intangible assets.
(b) Non-Current Investments
Non-Current Investments are those investments that are invested to be held for a period of more than 12 months
from the date of Balance Sheet or after the period that is more than the period of a Operating Cycle.
A trade investment is Non-Current Investment when it is invested to be held for more than 12 months from
the date of Balance Sheet or for a period that is more than the period of a Operating Cycle.
2
(c) Deferred Tax Assets (Net)
It is the amount of tax on the temporary difference between the accounting income and taxable
income. It is only a book entry and not an actual asset. It arises when accounting income is less than the
taxable income.

(d) Long-term Loans and Advances

Long-term Loans and Advances are loans and advances given by the company that are repayable or
adjustable after 12 months from the date of Balance Sheet or after the period of Operating Cycle.

(e) Other Non-Current Assets

All Non-Current Assets that are not shown or classified under the above heads are Other
Non-Current Assets.

7. Current Assets
Current Assets are those assets which are:
(a) expected to be realised in or intended for sale or consumption in normal Operating Cycle of the
company; or
(b) held primarily for the purposes of trading; or
(c) expected to be realised within 12 months from the reporting date or closing date. (Reporting date is
the date for which financial statements are prepared.); or
(d) Cash and Cash Equivalent unless it is restricted from being exchanged or used to settle a liability for
at least 12 months after the reporting date.

Current Assets are classified into: Current Investments; Inventories; Trade Receivables; Cash and Cash
Equivalents; Short-term Loans and Advances; and Other Current Assets.

(a) Current Investments

Current Investments are those investments that are invested to be held for a period of less than 12 months
from the date of Balance Sheet or within the period of Operating Cycle.

(b) Inventories
Inventories mean stock. It is the tangible asset held
(i) for the purpose of sale in the normal course of business;
or
(ii) for the purpose of using it in the production of goods meant for sale or service to be rendered.
Inventory may be opening or closing inventory or both.
In case of trading company, it comprises of stock of goods traded in.
In case of a manufacturing company, it comprises of raw materials, work-in-progress and finished goods.
Inventories are valued at lower of cost or net realisable value, i.e., market price.

(c) Trade Receivables

Trade Receivables are the amounts receivable for sale of goods or services rendered in the
normal course of business receivable within 12 months of the reporting date or within the period of
Operating Cycle.

3
(d) Cash and Bank Balance
It includes cash in hand and balance with bank.

(e) Short-term Loans and Advances

Short-term Loans and Advances are loans and advances given by the company that are repayable or adjustable
within 12 months from the date of Balance Sheet or within the period of Operating Cycle.

(f ) Other Current Assets

All other current assets that are not shown or classified under the above heads are Other Current Assets.

S U M M A RY O F T H E C H A P T E R

• According to Section 2(40) of the Companies Act, 2013, Financial Statement includes:
(i) a Balance Sheet as at the end of the financial year;
(ii) a Profit and Loss Account (Statement of Profit and Loss);
(iii) Cash Flow Statement for the year;
(iv) a Statement of Changes in Equity, if applicable; and
(v) any explanatory note annexed to, or forming part of, any document referred to above.

• The form and contents of the Balance Sheet are prescribed in Schedule III, Part I of the Companies Act, 2013.

• Balance Sheet: Balance Sheet is a statement which shows the financial position of an enterprise as at a
particular date. It lists the balances of various assets and liabilities as at a particular date.

• Appropriation of Profit: Profit is appropriated out of the balance in Surplus, i.e., Balance in Statement
of Profit and Loss under Reserves and Surplus. Profit for the year is transferred and added to the existing
balance and appropriations (say transfer to Debenture Redemption Reserve, General Reserve, Workmen
Compensation Reserve, Proposed Dividend, etc.) are deducted. Appropriations are shown under appropriate
reserves (Debenture Redemption Reserve, General Reserve, Workmen Compensation Reserve, etc.).
Proposed Dividend is shown under Short-term Provisions.

• Provision: Provision is the amount set aside to meet future liability, the amount of which cannot be
determined with reasonable accuracy. Provisions are accounted in the books of account making the
best estimate.

• Reserve means amount set aside out of profit and other surpluses to meet future uncertainties.

Loss on Issue of Debentures, Discount on Issue of Debentures, Underwriting Commission and Preliminary
Expenses are written off in the year they are incurred from Securities Premium Reserve (if exists), or from
Surplus, i.e., Balance in Statement of Profit and Loss.

4
Illustration 1.
The following balances have been extracted from the books of Vanity Ltd. as at 31st March, 2017:

. TRIAL BALANCE
as at 31st March, 2017
Particulars Dr. (`) Cr. (`)

Equity Share Capital (5,000 shares of ` 100 each fully paid) ... 5,00,000
Fixed Assets 7,30,000 ...
Reserves and Surplus ... 2,00,000
Inventories 50,000 ...
Cash and Bank Balances 1,58,000 ...
Creditors ... 40,000
Bills Payable ... 20,000
Underwriting Commission on Issue of Shares 10,000 ...
5% Debentures (1/5 of the Debentures to be redeemed on 31st March, 2018) ... 2,00,000
Interest accrued and due on 5% Debentures ... 8,000
Trade Receivables 20,000 ...
Total 9,68,000 9,68,000

* The question is modified in view of changed AS-4, Contingencies and Events Occurring after the
Balance Sheet Date to Dividend paid.
You are required to prepare as at 31st March, 2017:
(i) The Balance Sheet of Vanity Ltd. as per Schedule III of the Companies Act, 2013.
(ii) Notes to Accounts. (ISC 2018, Modified, 12 Marks)

Solution: BALANCE SHEET OF VANITY LTD. (AN EXTRACT)

as at 31st March, 2017
Particulars Note No. `
I. EQUITY AND LIABILITIES
1. Shareholders’ Funds
(a) Share Capital 1 5,00,000
(b) Reserves and Surplus 2 1,90,000
2. Non-Current Liabilities
Long-term Borrowings 3 1,60,000
3. Current Liabilities
(a) Short-term Borrowings 4 40,000
(b) Trade Payables 5 60,000
(c) Other Current Liabilities 6 8,000
Total 9,58,000

1
 II. ASSETS
1. Non-Current Assets
Property, Plant and Equipment and Intangible Assets 7,30,000
2. Current Assets
(a) Inventories 50,000
(b) Trade Receivables 20,000
(c) Cash and Bank Balance 1,58,000
Total 9,58,000

Notes to Accounts
Particulars `
1. Share Capital
Authorised Capital
...Equity Shares of ` 100 each ...
Issued Capital
5,000 Equity Shares of ` 100 each 5,00,000
Subscribed Capital
Subscribed and fully paid-up:
5,000 Equity Shares of ` 100 each 5,00,000

2. Reserves and Surplus

Reserves and Surplus 2,00,000
Less: Underwriting Commission on Issue of Shares 10,000 1,90,000

3. Long-term Borrowings
5% Debentures (4/5 of the Debentures to be redeemed after 31st March, 2018) 1,60,000

4. Short-term Borrowings
Current Maturities of Long-term Debts (1/5 of Debentures to be redeemed on 31st March, 2018) 40,000

5. Trade Payables
Creditors 40,000
Bills Payable 20,000 60,000

6. Other Current Liabilities

Interest Accrued and due on 5% Debentures 8,000

2
 MEANING OF KEY TERMS USED IN THE CHAPTER

1. Redemption of Debentures
Redemption of Debentures means repayment of the amount of debentures.

2. Debentures Redemption Reserve (DRR)

It is a reserve set aside of profits available for payment as dividend for the purpose of redemption
of debentures.
It is created for Non-convertible Debentures (NCD) and Non-convertible part of Partly Convertible Debentures
(PCD).

3. Debentures Redemption Investment (DRI)

It is an investment made by a company on or before 30th April of the current year of an amount that is
at least equal to 15% of the nominal value of debentures to be redeemed by 31st March of next year.

4. Redemption of Debentures out of Capital

When profits are not transferred from Surplus, i.e., Balance in Statement of Profit and Loss to Debentures
Redemption Reserve (DRR) before the redemption of debentures, such redemption is Redemption of
Debentures out of capital.

5. Redemption of Debentures out of Profits

When adequate profits are transferred from Surplus, i.e., Balance in Statement of Profit and Loss to Debentures
Redemption Reserve (DRR) before redemption of debentures, such redemption is Redemption of Debentures
out of profits.

6. Redemption of Debentures in Lump Sum

It means all the debentures are redeemed at the date specified for redemption of debentures.

7. Redemption in Instalment by Draw of Lots

It means redemption of debentures (selected by lottery) at the specified date.

8. Redemption by Purchase from Open Market

When a company purchases its own debentures from open market for the purpose of cancellation, such
an act of purchasing and cancelling the debentures is redemption by purchase from open market. The
company may purchase its own debentures from the open market with the objective of (i ) immediate
cancellation, or (ii ) as investments.

1
 SUMMARY OF THE CHAPTER
• Redemption of Debentures is a process of repayment of loan taken by issue of debentures.

• Methods of Redemption of Debentures:

1. On maturity in lump sum;
2. In instalments by draw of lots;
3. By purchase of Own Debentures from Open Market, and
4. By Conversion into Shares or New Class of Debentures (It is not in Syllabus).

• Sources of Redemption of Debentures: Debentures can be redeemed by utilising any of the

following sources:
(i) Redemption Out of Capital: When debentures are redeemed without transfer of profits from Surplus,
i.e., Statement of Profit & Loss to Debentures Redemption Reserve (DRR), at the time of redemption
of debentures, such redemption is said to be out of capital.
(ii) Redemption Out of Profits: When debentures are redeemed only out of profits and amount equal to
nominal (face) value of Debentures is transferred from Surplus, i.e., Statement of Profit & Loss to
Debentures Redemption Reserve (DRR) before the redemption of debentures, such redemption is
said to be out of profits.
(iii) Redemption Partly out of Profits and Partly out of Capital: It means that the company does not transfer
100 per cent nominal (face) value of total redeemable debentures of a particular series to DRR out
of surplus.

• Debentures Redemption Reserve (DRR) is created out of profits of the company available for payment
as dividend for the purpose of redemption of debentures.
DRR is created before the redemption of Debentures.
As per the provisions of Section 71(4) of the Companies Act, 2013 read with Rule 18(7) (b) of the Companies
(Share Capital and Debentures) Rules, 2014, only an unlisted company (other than NBFCs and HFCs) shall
transfer at least 10 per cent of nominal (face) value of the outstanding debentures of that class out of
surplus available for payment of dividend to DRR.
DRR is required to be created only in case of Non-convertible Debentures (NCD) and Non-convertible
portion of Partly Convertible Debentures (PCD)
All India Financial Institutions regulated by RBI, Banking Companies, other financial institutions as per
Section 2(42), Non-Banking Finance Companies, (NBFCs), Housing Finance Companies (HFCs) (whether
listed or unlisted) and listed companies are exempt from creating DRR.
Debentures Redemption Investment: All companies except All India Financial Institutions, Banking
Companies, unlisted Non-banking Financial Companies (NBFCs) and unlisted Housing Finance Companies
(HFCs) shall on or before 30th April of the current year, deposit or invest (as the case may be) at
least 15% of the amount of its debentures maturing during the year ending on 31st March of the
next year.

2
 MEANING OF KEY TERMS USED IN THE CHAPTER

1. Debenture

It is a written acknowledgement of Debt issued by the company. ‘Debenture’ includes debenture stock,
bonds or any other instrument of a company, evidencing a debt, whether constituting a charge on the
assets of the company or not.

2. Debentureholder

The person who owns the debentures.

3. Issue of Debentures for Cash

It means issue of debentures against consideration being received through bank.

4. Issue of Debentures for Consideration other than Cash

It means issue of debentures against which amount is not received as consideration but is received in
kind, i.e., assets or services.

5. Issue of Debentures as Collateral Security

It means issue of debentures to secure a loan.

6. Issue of Debentures at Par

It means that debentures are issued at its nominal (face) value of debentures.

7. Issue of Debentures at Premium

It means that the issue price of the debentures is higher than their nominal (face) value.

8. Issue of Debentures at Discount

It means that the issue price of the debentures is lower than their nominal (face) value.

9. Redemption of Debentures at Par

It means that the redemption value and the nominal (face) value of debenture is same.

10. Redemption of Debentures at Premium

It means that the redemption value of the debenture is higher than its nominal (face) value.

1
 S U M M A RY O F T H E C H A P T E R

• Debenture: A debenture is a written instrument acknowledging a debt and issued under the common
seal of the company. It is an agreement for the repayment of the principal sum at a specified date and
for the payment of interest at the specified rate.

• Types of Debentures
(i) From the Security Point of View: Secured Debentures or Unsecured Debentures.
(ii) From the Redemption Point of View: Redeemable Debentures or Irredeemable Debentures.
(iii) From the Registration Point of View: Registered Debentures or Bearer Debentures.
(iv) From the Convertibility Point of View: Convertible Debentures or Non-Convertible Debentures.
• Issue of Debentures: Debentures can be issued for: (i) cash, (ii) consideration other than cash,
and (iii) as Collateral Security. These debentures can be issued: (a) at par, or (b) at premium, or (c) at discount.
Accounting for issue of debentures for cash is the same as the accounting for issue of shares with one
difference, i.e., the word ‘Shares’ shall be replaced by ‘Debentures’ and ‘Share Capital’ by ‘Debentures’. The
terms used for the issue of shares will be changed at the time of issue of debentures.

Terms for Issue of Shares Terms for Issue of Debentures

1. Shares Application/Allotment/First Call ..., etc. Debentures Application/Allotment/First Call ..., etc.
2. Share Capital Debentures
Note: Premium on the issue of shares or debentures is called Securities Premium.
Only Debentures can be issued at discount.
• Issue of Debentures for Consideration other than Cash: A company can issue debentures to promoters,
underwriters and the vendors as a payment for the purchase of the assets, such an issue of debentures
is known as issue of debentures for consideration other than cash.
• Excess of purchase consideration over Net Assets acquired is debited to ‘Goodwill Account’.
• Excess of Net Assets acquired over purchase consideration is credited to ’Capital Reserve Account’.
• Issue of Debentures as Collateral Security: Collateral security means an additional security pledged
against loan. A company can issue its own debentures as a collateral security.
No interest is payable on such debentures.
• Writing off Discount/Loss on Issue of Debentures: Discount or Loss on Issue of Debentures is a
capital loss for a company which is written off in the year when debentures are allotted. It is written
off from (i) Securities Premium Reserve (if it has a balance); or from (ii ) Capital Reserve or from
(iii) Statement of Profit and Loss.
• Underwriting Commission is written off in the year in which it is incurred. It is written off from Securities
Premium Reserve (if it has a balance) or from Statement of Profit and Loss.
• Premium on Redemption of Debentures is to be shown under the main head ‘Non-Current Liabilities’
and sub-head ‘Long-term Borrowings’.
• Interest on Debentures is an expense for the company. It is a charge against the profits of the company
and is payable whether the company earns profit or not. It is shown as ‘Finance Costs’ in the Statement
of Profit and Loss.

2
Illustration 1.
Mayur Ltd. issued 5,000; 9% Debentures of ` 100 each at par and obtained a loan of ` 8,00,000
from bank, which is collaterally secured by ` 10,00,000; 9% Debentures of ` 100 each. How are
debentures shown in the Balance Sheet of the company if the company has passed an entry for
issue of debentures as collateral security in the books?

Solution: AN EXTRACT OF BALANCE SHEET OF MAYUR LTD. as at ...

Particulars Note No. `

I. EQUITY AND LIABILITIES

Non-Current Liabilities
Long-term Borrowings 1 13,00,000

Note to Accounts
1. Long-term Borrowings `
5,000; 9% Debentures of ` 100 each 5,00,000
Bank Loan 8,00,000
10,000; 9% Debentures of ` 100 each issued as Collateral Security 10,00,000
Less: Debentures Suspense A/c 10,00,000 ...
13,00,000

Illustration 2.
Pass the Journal entries for the following:
(i) Dhoni Ltd. issued 20,000; 10% Debentures of ` 100 each at par, redeemable at par
after 5 years.
(ii) Stokes Ltd. issued 30,000; 10% Debentures of ` 100 each at a discount of 5% to be
repaid at par at the end of 5 years.
(iii) Corney Ltd. issued 10% Debentures of ` 100 each of the value ` 40,00,000 at a premium
of 5% to be redeemed at par.
(iv) Daniel Ltd. issued ` 50,00,000; 12% Debentures of ` 100 each at par redeemable at
the end of 10 years at 105%.
(v) Emily Ltd. issued ` 60,00,000; 12% Debentures of ` 100 each at a discount of 5%
repayable at a premium of 10% at the end of 5 years.
(vi) Feather Ltd. issued ` 70,00,000; 12% Debentures of ` 100 each at a premium of 5%
redeemable at 110%.

Solution:
(i) JOURNAL OF DHONI LTD.
Date Particulars L.F. Dr. (`) Cr. (`)
Bank A/c ...Dr. 20,00,000
To Debentures Application and Allotment A/c 20,00,000
(Being the debentures application money received)
Debentures Application and Allotment A/c ...Dr. 20,00,000
To 10% Debentures A/c 20,00,000
(Being 20,000; 10% Debentures of ` 100 each issued at par)

1
(ii) JOURNAL OF STOKES LTD.
Date Particulars L.F. Dr. (`) Cr. (`)
Bank A/c ...Dr. 28,50,000
To Debentures Application and Allotment A/c 28,50,000
(Being the debentures application money received)
Debentures Application and Allotment A/c ...Dr. 28,50,000
Discount on Issue of Debentures A/c ...Dr. 1,50,000
To 10% Debentures A/c 30,00,000
(Being the issue of 30,000; 10% Debentures of ` 100 each at a discount of 5%)
(iii ) JOURNAL OF CORNEY LTD.
Date Particulars L.F. Dr. (`) Cr. (`)
Bank A/c ...Dr. 42,00,000
To Debentures Application and Allotment A/c 42,00,000
(Being the debentures application money received)
Debentures Application and Allotment A/c ...Dr. 42,00,000
To 10% Debentures A/c 40,00,000
To Securities Premium Reserve A/c 2,00,000
(Being the issue of 40,000; 10% Debentures of ` 100 each at a premium of 5%)
(iv) JOURNAL OF DANIEL LTD.
Date Particulars L.F. Dr. (`) Cr. (`)
Bank A/c ...Dr. 50,00,000
To Debentures Application and Allotment A/c 50,00,000
(Being the debentures application money received)
Debentures Application and Allotment A/c ...Dr. 50,00,000
Loss on Issue of Debentures A/c ...Dr. 2,50,000
To 12% Debentures A/c 50,00,000
To Premium on Redemption of Debentures A/c 2,50,000
(Being the issue of 50,000; 12% Debentures of ` 100 each at par redeemable at 105%)
(v) JOURNAL OF EMILY LTD.
Date Particulars L.F. Dr. (`) Cr. (`)
Bank A/c ...Dr. 57,00,000
To Debentures Application and Allotment A/c 57,00,000
(Being the debentures application money received)
Debentures Application and Allotment A/c ...Dr. 57,00,000
Loss on Issue of Debentures A/c ...Dr. 9,00,000
To 12% Debentures A/c 60,00,000
To Premium on Redemption of Debentures A/c 6,00,000
(Being the issue of 60,000; 12% Debentures of ` 100 each at a
discount of 5% and repayable at a premium of 10%)
(vi) JOURNAL OF FEATHER LTD.
Date Particulars L.F. Dr. (`) Cr. (`)
Bank A/c (` 70,00,000 + 5% of ` 70,00,000) ...Dr. 73,50,000
To Debentures Application and Allotment A/c 73,50,000
(Being the debentures application money received)
Debentures Application and Allotment A/c ...Dr. 73,50,000
Loss on Issue of Debentures A/c ...Dr. 7,00,000
To 12% Debentures A/c 70,00,000
To Securities Premium Reserve A/c 3,50,000
To Premium on Redemption of Debentures A/c 7,00,000
(Being the issue of 70,000; 12% Debentures of ` 100 each
at a premium of 5% and redeemable at a premium of 10%)

2
Illustration 3.
HP Ltd. issued 10,000, 6% Debentures of ` 100 each at a discount of 10% redeemable at a
premium of 10%. The company had balance in Securities Premium Reserve of ` 3,00,000
in that year. It decided to write off Loss on Issue of Debentures in the year debentures
were issued. It had balance of ` 3,00,000 in Bank on that date.
Pass the Journal entries for issue of debentures and for writing off loss on issue of debentures
and prepare the Balance Sheet.

Solution: JOURNAL OF HP LTD.

Date Particulars L.F. Dr. (`) Cr. (`)
Bank A/c   ...Dr. 9,00,000
To Debentures Application and Allotment A/c 9,00,000
(Being the application money received)
Debentures Application and Allotment A/c  ...Dr. 9,00,000
Loss on Issue of Debentures A/c ...Dr. 2,00,000
To 6% Debentures A/c 10,00,000
To Premium on Redemption of Debentures A/c 1,00,000
(Being 10,000; 6% Debentures of ` 100 each issued at 10%
discount and redeemable at 10% premium)
Securities Premium Reserve A/c ...Dr. 2,00,000
To Loss on Issue of Debentures A/c 2,00,000
(Being the loss on Issue of Debentures written off)

BALANCE SHEET OF HP LTD. as at ...

Particulars Note No. `

I. EQUITY AND LIABILITIES

1. Shareholders’ Funds
Reserves and Surplus 1 1,00,000
2. Non-Current Liabilities
Long-term Borrowings 2 11,00,000
Total 12,00,000
II. Assets
Current Assets
Cash and Bank Balances 3 12,00,000
Total 12,00,000

Notes to Accounts
Particulars `
1. Reserves and Surplus
Securities Premium Reserve (Opening Balance) 3,00,000
Less: Loss on Issue of Debentures written off 2,00,000
1,00,000
2. Long-term Borrowings
10,000, 6% Debentures of ` 100 each 10,00,000
Premium on Redemption of Debentures 1,00,000
11,00,000
3. Cash and Bank Balances
Cash at Bank (` 3,00,000 + ` 9,00,000) 12,00,000

3
Illustration 4.
Citizen Ltd. issued 10,000, 9% Debentures of ` 100 each on 1st April, 2019 at a discount of ` 10
redeemable at a premium of 10%. On 1st January, 2020, it issued 1,00,000 equity shares of ` 10 each
at a premium of ` 1 per share. The debentures as well as shares were subscribed.
The company had balance of ` 50,000 in Securities Premium Reserve Account as on 1st April, 2019.
Pass the necessary Journal entries.

Solution: JOURNAL
Date Particulars L.F. Dr. (`) Cr. (`)
2019
April 1 Bank A/c ...Dr. 9,00,000
To Debentures Application and Allotment A/c 9,00,000
(Being the application money received for 10,000, 9% Debentures)
April 1 Debentures Application and Allotment A/c ...Dr. 9,00,000
Loss on Issue of Debentures A/c ...Dr. 2,00,000
To 9% Debentures A/c 10,00,000
To Premium on Redemption of Debentures A/c 1,00,000
(Being 10,000, 9% Debentures issued)
2020
Jan. 1 Bank A/c ...Dr. 11,00,000
To Equity Shares Application and Allotment A/c 11,00,000
(Being the application money received on 1,00,000 equity shares
@ ` 11 per share)
Jan. 1 Equity Shares Application and Allotment A/c ...Dr. 11,00,000
To Equity Share Capital A/c 10,00,000
To Securities Premium Reserve A/c 1,00,000
(Being the Shares allotted and application money appropriated)
March 31 Securities Premium Reserve A/c ...Dr. 1,50,000
Statement of Profit & Loss (Finance Cost) ...Dr. 50,000
To Loss on Issue of Debentures (Finance Cost) A/c 2,00,000
(Being the Loss on issue of debentures written off)

Illustration 5.
On 1st April, 2013, Relaxo Ltd. purchased assets of ` 5,00,000 and took over liabilities of
` 90,000 of Greg Ltd. at an agreed value of ` 3,80,000. It issued to the vendor, 10%
Debentures of ` 100 each at 5% discount, redeemable at par after 5 years, in satisfaction of the
purchase price.
On the same date, the company issued 500, 11% Debentures of ` 100 each as a collateral
security to a bank who had advanced a loan of ` 45,000 to it for a period of 3 years
and also issued 5,000, 12% Debentures of ` 100 each at par, redeemable after 3 years at
5% premium.

4
Additional Information:
The interest on debentures is paid half yearly on 30th September and 31st March each
year. Tax deducted at source @ 20%. The Company had ` 1,20,000 in its Securities Premium
Reserve Account at the end of the year (Ignore interest on bank loan).
You are required to pass Journal entries in the books of Relaxo Ltd. for the year ended
31st March, 2014. (ISC Sample Question Paper 2015)
Solution: JOURNAL OF RELAXO LTD.

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

2013
April 1 Sundry Assets A/c  ...Dr. 5,00,000
To Sundry Liabilities A/c 90,000
To Capital Reserve A/c (Balancing Figure) 30,000
To Greg Ltd. 3,80,000
(Being the assets and liabilities of Greg Ltd. taken over for a
consideration of ` 3,80,000)
April 1 Greg Ltd.  ...Dr. 3,80,000
Discount on Issue of Debentures A/c ...Dr. 20,000
To 10% Debentures A/c 4,00,000
(Being 4,000; 10% Debentures of ` 100 each issued to Greg Ltd.
towards payment of purchase consideration)
April 1 Bank A/c ...Dr. 45,000
To Bank Loan A/c 45,000
(Being loan taken from Bank)
April 1 Debentures Suspense A/c ...Dr. 50,000
To 11% Debentures A/c 50,000
(Being 500, 11% Debentures of ` 100 each issued as collateral
security to bank against loan of ` 45,000)
April 1 Bank A/c ...Dr. 5,00,000
To Debentures Application A/c 5,00,000
(Being the applications received against issue of 5,000,
12% Debentures of ` 100 each issued at par)
April 1 Debentures Application A/c ...Dr. 5,00,000
Loss on Issue of Debentures A/c ...Dr. 25,000
To 12% Debentures A/c 5,00,000
To Premium on Redemption of Debentures A/c 25,000
(Being 5,000, 12% Debentures allotted, redeemable at 5% premium)
Sept. 30 Debentures’ Interest A/c ...Dr. 50,000
To Debentureholders’ A/c 40,000
To TDS Payable A/c 10,000
(Being interest due on 10% Debentures and 12% Debentures for the
half year ended 30th September, 2013 and TDS deducted @ 20%)
(Notes 2 and 3)
Sept. 30 Debentureholders’ A/c ...Dr. 40,000
To Bank A/c 40,000
(Being the interest paid to debentureholders)

5
Sept. 30 TDS Payable A/c ...Dr. 10,000
To Bank A/c 10,000
(Being the TDS deposited in Government Account)
2014
March 31 Debentures’ Interest A/c ...Dr. 50,000
To Debentureholders’ A/c 40,000
To TDS Payable A/c 10,000
(Being the interest due on 10% Debentures and 12% Debentures for
the half year ended 31st March, 2014, TDS being deducted @ 20%)
(Notes 2 and 4)
March 31 Debentureholders’ A/c ...Dr. 40,000
To Bank A/c 40,000
(Being the interest paid to debentureholders)
March 31 TDS Payable A/c ...Dr. 10,000
To Bank A/c 10,000
(Being the TDS deposited in Government Account)
March 31 Statement of Profit & Loss ...Dr. 1,00,000
To Debentures’ Interest A/c 1,00,000
(Being the transfer of Debentures’ interest to Statement of Profit and Loss)
March 31 Securities Premium Reserve A/c ...Dr. 45,000
To Discount on Issue of Debentures A/c 20,000
To Loss on Issue of Debentures A/c 25,000
(Being the Discount on Issue of Debentures and Loss on Issue of
Debentures written off from Securities Premium Reserve)

Notes: 1. Interest is not paid on Debentures issued as Collateral Security. Therefore, interest on 500, 11%
Debentures of ` 100 each is not accounted.
2. Calculation of Interest:

4,000, 10% Debentures of ` 100 each `
Yearly Interest = ` 4,00,000 × 10/100 = ` 40,000

Interest for Half Year 20,000
5,000, 12% Debentures of ` 100 each
Yearly Interest = ` 5,00,000 × 12/100 = ` 60,000

Interest for Half Year 30,000
Total Interest for Half Year 50,000
TDS @ 20% of ` 50,000 10,000
3. Interest on Debentures is accounted as paid to Debentureholders net of TDS amount. Therefore,
net amount of interest (amount of interest less TDS) is paid to Debentureholders and amount
of TDS is deposited in Government Account.
4. Debenture interest for the half year ended 30th September, 2013 and TDS is paid within the
year ended 31st March, 2014. It is assumed that, debenture interest for the half year ended
31st March, 2014 and TDS are paid on 31st March, 2014.

6
Illustration 6 (Debentures Oversubscribed).
Eucalyptus Tree Ltd. issued 15,000, 10% Debentures of ` 100 each for subscription, payable
` 50 on application and balance on allotment.
Applications were received for 17,500 debentures. The company declined allotment to
applications for 2,500 debentures and allotted debentures to the remaining applicants in full.
Allotment money was called and received.
Pass the necessary Journal entries.
Solution: JOURNAL OF EUCALYPTUS TREE LTD.
Date Particulars L.F. Dr. (`) Cr. (`)
Bank A/c ...Dr. 8,75,000
To Debentures Application A/c 8,75,000
(Being the application money received on 17,500 debentures
@ ` 50 each)
Debentures Application A/c ...Dr. 8,75,000
To 10% Debentures A/c 7,50,000
To Bank A/c 1,25,000
(Being 15,000; 10% Debentures allotted and amount refunded on
rejected applications)
Debentures Allotment A/c ...Dr. 7,50,000
To 10% Debentures A/c 7,50,000
(Being the allotment money due)
Bank A/c ...Dr. 7,50,000
To Debentures Allotment A/c 7,50,000
(Being the due amount received)

7
Illustration 1.
Mayur Ltd. issued 5,000; 9% Debentures of ` 100 each at par and obtained a loan of ` 8,00,000
from bank, which is collaterally secured by ` 10,00,000; 9% Debentures of ` 100 each. How are
debentures shown in the Balance Sheet of the company if the company has passed an entry for
issue of debentures as collateral security in the books?

Solution: AN EXTRACT OF BALANCE SHEET OF MAYUR LTD. as at ...

Particulars Note No. `

I. EQUITY AND LIABILITIES

Non-Current Liabilities
Long-term Borrowings 1 13,00,000

Note to Accounts
1. Long-term Borrowings `
5,000; 9% Debentures of ` 100 each 5,00,000
Bank Loan 8,00,000
10,000; 9% Debentures of ` 100 each issued as Collateral Security 10,00,000
Less: Debentures Suspense A/c 10,00,000 ...
13,00,000

Illustration 2.
Pass the Journal entries for the following:
(i) Dhoni Ltd. issued 20,000; 10% Debentures of ` 100 each at par, redeemable at par
after 5 years.
(ii) Stokes Ltd. issued 30,000; 10% Debentures of ` 100 each at a discount of 5% to be
repaid at par at the end of 5 years.
(iii) Corney Ltd. issued 10% Debentures of ` 100 each of the value ` 40,00,000 at a premium
of 5% to be redeemed at par.
(iv) Daniel Ltd. issued ` 50,00,000; 12% Debentures of ` 100 each at par redeemable at
the end of 10 years at 105%.
(v) Emily Ltd. issued ` 60,00,000; 12% Debentures of ` 100 each at a discount of 5%
repayable at a premium of 10% at the end of 5 years.
(vi) Feather Ltd. issued ` 70,00,000; 12% Debentures of ` 100 each at a premium of 5%
redeemable at 110%.

Solution:
(i) JOURNAL OF DHONI LTD.
Date Particulars L.F. Dr. (`) Cr. (`)
Bank A/c ...Dr. 20,00,000
To Debentures Application and Allotment A/c 20,00,000
(Being the debentures application money received)
Debentures Application and Allotment A/c ...Dr. 20,00,000
To 10% Debentures A/c 20,00,000
(Being 20,000; 10% Debentures of ` 100 each issued at par)

1
(ii) JOURNAL OF STOKES LTD.
Date Particulars L.F. Dr. (`) Cr. (`)
Bank A/c ...Dr. 28,50,000
To Debentures Application and Allotment A/c 28,50,000
(Being the debentures application money received)
Debentures Application and Allotment A/c ...Dr. 28,50,000
Discount on Issue of Debentures A/c ...Dr. 1,50,000
To 10% Debentures A/c 30,00,000
(Being the issue of 30,000; 10% Debentures of ` 100 each at a discount of 5%)
(iii ) JOURNAL OF CORNEY LTD.
Date Particulars L.F. Dr. (`) Cr. (`)
Bank A/c ...Dr. 42,00,000
To Debentures Application and Allotment A/c 42,00,000
(Being the debentures application money received)
Debentures Application and Allotment A/c ...Dr. 42,00,000
To 10% Debentures A/c 40,00,000
To Securities Premium Reserve A/c 2,00,000
(Being the issue of 40,000; 10% Debentures of ` 100 each at a premium of 5%)
(iv) JOURNAL OF DANIEL LTD.
Date Particulars L.F. Dr. (`) Cr. (`)
Bank A/c ...Dr. 50,00,000
To Debentures Application and Allotment A/c 50,00,000
(Being the debentures application money received)
Debentures Application and Allotment A/c ...Dr. 50,00,000
Loss on Issue of Debentures A/c ...Dr. 2,50,000
To 12% Debentures A/c 50,00,000
To Premium on Redemption of Debentures A/c 2,50,000
(Being the issue of 50,000; 12% Debentures of ` 100 each at par redeemable at 105%)
(v) JOURNAL OF EMILY LTD.
Date Particulars L.F. Dr. (`) Cr. (`)
Bank A/c ...Dr. 57,00,000
To Debentures Application and Allotment A/c 57,00,000
(Being the debentures application money received)
Debentures Application and Allotment A/c ...Dr. 57,00,000
Loss on Issue of Debentures A/c ...Dr. 9,00,000
To 12% Debentures A/c 60,00,000
To Premium on Redemption of Debentures A/c 6,00,000
(Being the issue of 60,000; 12% Debentures of ` 100 each at a
discount of 5% and repayable at a premium of 10%)
(vi) JOURNAL OF FEATHER LTD.
Date Particulars L.F. Dr. (`) Cr. (`)
Bank A/c (` 70,00,000 + 5% of ` 70,00,000) ...Dr. 73,50,000
To Debentures Application and Allotment A/c 73,50,000
(Being the debentures application money received)
Debentures Application and Allotment A/c ...Dr. 73,50,000
Loss on Issue of Debentures A/c ...Dr. 7,00,000
To 12% Debentures A/c 70,00,000
To Securities Premium Reserve A/c 3,50,000
To Premium on Redemption of Debentures A/c 7,00,000
(Being the issue of 70,000; 12% Debentures of ` 100 each
at a premium of 5% and redeemable at a premium of 10%)

2
Illustration 3.
HP Ltd. issued 10,000, 6% Debentures of ` 100 each at a discount of 10% redeemable at a
premium of 10%. The company had balance in Securities Premium Reserve of ` 3,00,000
in that year. It decided to write off Loss on Issue of Debentures in the year debentures
were issued. It had balance of ` 3,00,000 in Bank on that date.
Pass the Journal entries for issue of debentures and for writing off loss on issue of debentures
and prepare the Balance Sheet.

Solution: JOURNAL OF HP LTD.

Date Particulars L.F. Dr. (`) Cr. (`)
Bank A/c   ...Dr. 9,00,000
To Debentures Application and Allotment A/c 9,00,000
(Being the application money received)
Debentures Application and Allotment A/c  ...Dr. 9,00,000
Loss on Issue of Debentures A/c ...Dr. 2,00,000
To 6% Debentures A/c 10,00,000
To Premium on Redemption of Debentures A/c 1,00,000
(Being 10,000; 6% Debentures of ` 100 each issued at 10%
discount and redeemable at 10% premium)
Securities Premium Reserve A/c ...Dr. 2,00,000
To Loss on Issue of Debentures A/c 2,00,000
(Being the loss on Issue of Debentures written off)

BALANCE SHEET OF HP LTD. as at ...

Particulars Note No. `

I. EQUITY AND LIABILITIES

1. Shareholders’ Funds
Reserves and Surplus 1 1,00,000
2. Non-Current Liabilities
Long-term Borrowings 2 11,00,000
Total 12,00,000
II. Assets
Current Assets
Cash and Bank Balances 3 12,00,000
Total 12,00,000

Notes to Accounts
Particulars `
1. Reserves and Surplus
Securities Premium Reserve (Opening Balance) 3,00,000
Less: Loss on Issue of Debentures written off 2,00,000
1,00,000
2. Long-term Borrowings
10,000, 6% Debentures of ` 100 each 10,00,000
Premium on Redemption of Debentures 1,00,000
11,00,000
3. Cash and Bank Balances
Cash at Bank (` 3,00,000 + ` 9,00,000) 12,00,000

3
Illustration 4.
Citizen Ltd. issued 10,000, 9% Debentures of ` 100 each on 1st April, 2019 at a discount of ` 10
redeemable at a premium of 10%. On 1st January, 2020, it issued 1,00,000 equity shares of ` 10 each
at a premium of ` 1 per share. The debentures as well as shares were subscribed.
The company had balance of ` 50,000 in Securities Premium Reserve Account as on 1st April, 2019.
Pass the necessary Journal entries.

Solution: JOURNAL
Date Particulars L.F. Dr. (`) Cr. (`)
2019
April 1 Bank A/c ...Dr. 9,00,000
To Debentures Application and Allotment A/c 9,00,000
(Being the application money received for 10,000, 9% Debentures)
April 1 Debentures Application and Allotment A/c ...Dr. 9,00,000
Loss on Issue of Debentures A/c ...Dr. 2,00,000
To 9% Debentures A/c 10,00,000
To Premium on Redemption of Debentures A/c 1,00,000
(Being 10,000, 9% Debentures issued)
2020
Jan. 1 Bank A/c ...Dr. 11,00,000
To Equity Shares Application and Allotment A/c 11,00,000
(Being the application money received on 1,00,000 equity shares
@ ` 11 per share)
Jan. 1 Equity Shares Application and Allotment A/c ...Dr. 11,00,000
To Equity Share Capital A/c 10,00,000
To Securities Premium Reserve A/c 1,00,000
(Being the Shares allotted and application money appropriated)
March 31 Securities Premium Reserve A/c ...Dr. 1,50,000
Statement of Profit & Loss (Finance Cost) ...Dr. 50,000
To Loss on Issue of Debentures (Finance Cost) A/c 2,00,000
(Being the Loss on issue of debentures written off)

Illustration 5.
On 1st April, 2013, Relaxo Ltd. purchased assets of ` 5,00,000 and took over liabilities of
` 90,000 of Greg Ltd. at an agreed value of ` 3,80,000. It issued to the vendor, 10%
Debentures of ` 100 each at 5% discount, redeemable at par after 5 years, in satisfaction of the
purchase price.
On the same date, the company issued 500, 11% Debentures of ` 100 each as a collateral
security to a bank who had advanced a loan of ` 45,000 to it for a period of 3 years
and also issued 5,000, 12% Debentures of ` 100 each at par, redeemable after 3 years at
5% premium.

4
Additional Information:
The interest on debentures is paid half yearly on 30th September and 31st March each
year. Tax deducted at source @ 20%. The Company had ` 1,20,000 in its Securities Premium
Reserve Account at the end of the year (Ignore interest on bank loan).
You are required to pass Journal entries in the books of Relaxo Ltd. for the year ended
31st March, 2014. (ISC Sample Question Paper 2015)
Solution: JOURNAL OF RELAXO LTD.

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

2013
April 1 Sundry Assets A/c  ...Dr. 5,00,000
To Sundry Liabilities A/c 90,000
To Capital Reserve A/c (Balancing Figure) 30,000
To Greg Ltd. 3,80,000
(Being the assets and liabilities of Greg Ltd. taken over for a
consideration of ` 3,80,000)
April 1 Greg Ltd.  ...Dr. 3,80,000
Discount on Issue of Debentures A/c ...Dr. 20,000
To 10% Debentures A/c 4,00,000
(Being 4,000; 10% Debentures of ` 100 each issued to Greg Ltd.
towards payment of purchase consideration)
April 1 Bank A/c ...Dr. 45,000
To Bank Loan A/c 45,000
(Being loan taken from Bank)
April 1 Debentures Suspense A/c ...Dr. 50,000
To 11% Debentures A/c 50,000
(Being 500, 11% Debentures of ` 100 each issued as collateral
security to bank against loan of ` 45,000)
April 1 Bank A/c ...Dr. 5,00,000
To Debentures Application A/c 5,00,000
(Being the applications received against issue of 5,000,
12% Debentures of ` 100 each issued at par)
April 1 Debentures Application A/c ...Dr. 5,00,000
Loss on Issue of Debentures A/c ...Dr. 25,000
To 12% Debentures A/c 5,00,000
To Premium on Redemption of Debentures A/c 25,000
(Being 5,000, 12% Debentures allotted, redeemable at 5% premium)
Sept. 30 Debentures’ Interest A/c ...Dr. 50,000
To Debentureholders’ A/c 40,000
To TDS Payable A/c 10,000
(Being interest due on 10% Debentures and 12% Debentures for the
half year ended 30th September, 2013 and TDS deducted @ 20%)
(Notes 2 and 3)
Sept. 30 Debentureholders’ A/c ...Dr. 40,000
To Bank A/c 40,000
(Being the interest paid to debentureholders)

5
Sept. 30 TDS Payable A/c ...Dr. 10,000
To Bank A/c 10,000
(Being the TDS deposited in Government Account)
2014
March 31 Debentures’ Interest A/c ...Dr. 50,000
To Debentureholders’ A/c 40,000
To TDS Payable A/c 10,000
(Being the interest due on 10% Debentures and 12% Debentures for
the half year ended 31st March, 2014, TDS being deducted @ 20%)
(Notes 2 and 4)
March 31 Debentureholders’ A/c ...Dr. 40,000
To Bank A/c 40,000
(Being the interest paid to debentureholders)
March 31 TDS Payable A/c ...Dr. 10,000
To Bank A/c 10,000
(Being the TDS deposited in Government Account)
March 31 Statement of Profit & Loss ...Dr. 1,00,000
To Debentures’ Interest A/c 1,00,000
(Being the transfer of Debentures’ interest to Statement of Profit and Loss)
March 31 Securities Premium Reserve A/c ...Dr. 45,000
To Discount on Issue of Debentures A/c 20,000
To Loss on Issue of Debentures A/c 25,000
(Being the Discount on Issue of Debentures and Loss on Issue of
Debentures written off from Securities Premium Reserve)

Notes: 1. Interest is not paid on Debentures issued as Collateral Security. Therefore, interest on 500, 11%
Debentures of ` 100 each is not accounted.
2. Calculation of Interest:

4,000, 10% Debentures of ` 100 each `
Yearly Interest = ` 4,00,000 × 10/100 = ` 40,000

Interest for Half Year 20,000
5,000, 12% Debentures of ` 100 each
Yearly Interest = ` 5,00,000 × 12/100 = ` 60,000

Interest for Half Year 30,000
Total Interest for Half Year 50,000
TDS @ 20% of ` 50,000 10,000
3. Interest on Debentures is accounted as paid to Debentureholders net of TDS amount. Therefore,
net amount of interest (amount of interest less TDS) is paid to Debentureholders and amount
of TDS is deposited in Government Account.
4. Debenture interest for the half year ended 30th September, 2013 and TDS is paid within the
year ended 31st March, 2014. It is assumed that, debenture interest for the half year ended
31st March, 2014 and TDS are paid on 31st March, 2014.

6
Illustration 6 (Debentures Oversubscribed).
Eucalyptus Tree Ltd. issued 15,000, 10% Debentures of ` 100 each for subscription, payable
` 50 on application and balance on allotment.
Applications were received for 17,500 debentures. The company declined allotment to
applications for 2,500 debentures and allotted debentures to the remaining applicants in full.
Allotment money was called and received.
Pass the necessary Journal entries.
Solution: JOURNAL OF EUCALYPTUS TREE LTD.
Date Particulars L.F. Dr. (`) Cr. (`)
Bank A/c ...Dr. 8,75,000
To Debentures Application A/c 8,75,000
(Being the application money received on 17,500 debentures
@ ` 50 each)
Debentures Application A/c ...Dr. 8,75,000
To 10% Debentures A/c 7,50,000
To Bank A/c 1,25,000
(Being 15,000; 10% Debentures allotted and amount refunded on
rejected applications)
Debentures Allotment A/c ...Dr. 7,50,000
To 10% Debentures A/c 7,50,000
(Being the allotment money due)
Bank A/c ...Dr. 7,50,000
To Debentures Allotment A/c 7,50,000
(Being the due amount received)

7
 MEANING OF KEY TERMS USED IN THE CHAPTER

1. Company
It is an entity incorporated through the process of law for undertaking (usually) a business. It is an artificial
person distinct and separate from its members who are known as shareholders.
A company may be one person company or private company or a public company.
2. One Person Company
It is a company which has only one person as a member.
3. Private Company
It is a company which has minimum paid-up capital as may be prescribed* and which by its Articles of
Association:
(i ) restricts the right to transfer its shares, if any.
(ii) except in One Person Company, limits the number of its members excluding its present and past
employee members to 200; if the past or present employee acquired the shares while in employment
and continue to hold them.
If any share is held jointly by two or more persons, they shall be treated as a single member.
(iii ) prohibits any invitation to the public to subscribe for any securities of the company.
The minimum number of members required to form a private company is two.
The name of a Private Company ends with the words, ‘Private Limited’.
4. Public Company
It is a company which has minimum paid-up capital as may be prescribed* and which
(i ) is not a one person company or a private company;
(ii) is a private company, which is a subsidiary of a public company.
The minimum number of members required to form a public limited company is seven. There is no restriction
on maximum number of members.
The name of a Public Company ends with the word ‘Limited’.
5. Share
‘Share’ means a share in the Share Capital of a company and includes stock.
[Section 2(84) of the Companies Act, 2013]
It is a unit into which Share Capital of a company is divided.
6. Preference Share Capital
It is a kind of share capital which carries preferential rights in respect of dividend payment and repayment
of capital over Equity Shareholders, if the company is wound up.
7. Equity Share Capital
It is that share capital which is not Preference Share capital.
8. Allotment of Shares
Allotment is the allocation of shares to the successful applicants by the company.
9. Allotment Money
The amount payable on allotment is called Allotment Money.
10. Authorised or Nominal Capital
‘Authorised Capital’ or ‘Nominal Capital’ means such capital as is authorised by the Memorandum of a
company to be the maximum amount of Share Capital of the company.
[Section 2(8)]
*Companies are not required to have minimum paid-up capital w.e.f. 29th May, 2015.
1
It is the maximum amount of capital which the company is, for the time being, authorised to raise. It
includes both Preference Share Capital and Equity Share Capital.
11. Issued Capital
‘Issued Capital’ means such capital as the company issues from time to time for Subscription.
[Section 2(50)]
12. Subscribed Capital
‘Subscribed Capital’ means such part of the capital which is for the time being subscribed by the members
of a company. [Section 2(86)]
13. Paid-up Share Capital or Share Capital Paid-up
‘Paid-up Share Capital’ or ‘Share Capital Paid-up’ means such aggregate of money credited and paid-up as
is equivalent to the amount received as paid-up in respect of shares issued and also includes any amount
credited as paid-up in respect of shares of a company, but does not include any other amount received in
respect of such shares, by whatever name called.
[Section 2(64)]
14. Subscribed and Fully Paid-up
It is the amount of share capital issued by a company that is subscribed on which the company has called
and also received entire nominal (face) value of the share.
15. Subscribed but not Fully Paid-up
It is the amount of share capital issued by a company that is subscribed but the company has not received
entire nominal (face) value of the share.
16. Reserve Capital
It is that part of the authorised capital that a company resolves to call in the event of its winding up.
17. Capital Reserve
It is a reserve created out of capital profits.
18. Issue of Shares for Cash
It means the consideration for shares is received through cash/cheque or any other banking instrument
against the shares.
19. Issue of Shares for Consideration Other than Cash
It means the consideration for shares is received otherwise than through cash/cheque or any other banking
instrument but they have been issued for assets purchased or services taken.
20. Par Value
Par value means the Nominal or Face value of a share.
21. Issue of Shares at Par
It means the issue price and nominal (face) value of the share is same.
22. Issue of Shares at Premium
It means the issue price of the share is higher than its nominal (face) value.
23. Shares Payable in Lump Sum
It means that shares are issued for a consideration payable in Lump sum, i.e., entire issue price of a share is
payable, along with the application.
24. Shares Payable in Instalments
It means that shares are issued for a consideration not payable in Lump sum but in parts, i.e., issue price
of a share is payable, partly on application and partly on allotment and calls.

2
25. Undersubscription of Shares
The shares are said to be undersubscribed if the number of shares applied for is less than the number of
shares issued for subscription.
26. Oversubscription of Shares
When the company receives applications for more shares than issued, it is known as Oversubscription.
27. Pro rata Allotment
Pro rata allotment means allotment in proportion of shares applied for.
28. Calls-in-Arrears
It is that part of the calls money that has been called-up by the company but has not been received by it.
29. Calls-in-Advance
It is that amount which has not been called-up by the company but has been received by it.
30. Forfeiture of Shares
Forfeiture of shares means cancellation of allotted shares.
31. Reissue of Shares
Reissue of shares means sale of forfeited shares.

S U M M A RY O F T H E C H A P T E R

• A company is an entity formed by an association of persons through the process of law for undertaking
(usually) a business.
The essential characteristics of a company are:
(i) It is a voluntary association of individuals coming into existence through the process of law for
under­taking (usually) a business venture.
(ii) It is an artificial person created by the process of law.
(iii) It has a separate legal entity.
(iv) It has a perpetual succession, i.e., it can be created and wound up by law only.
(v) It has a common seal, i.e., official seal of the company.
(vi) The shares of a company can be transferred from one person to another.
• Share and Share Capital
Share means a share in the capital of a company and includes stock.
[Section 2(84) of the Companies Act, 2013]
Share capital of a company is divided into small units with a definite face value. Each of these small units
is called a share. Share capital is that part of the capital of a company which is represented by the total
nominal value of shares, it has issued.
• Sub-Division of Share Capital
(i) Authorised Share Capital: ‘Authorised Capital’ or ‘Nominal Capital’ means such capital as is authorised by
the Memorandum of a company to be the maximum amount of Share Capital of the company.
[Section 2(8)]
(ii) Issued Share Capital: ‘Issued Capital’ means such capital as the company issues from time to time
for Subscription. [Section 2(50)]
(iii) Subscribed Share Capital: ‘Subscribed Capital’ means such part of the capital which is for the time
being subscribed by the members of a company. [Section 2(86)]

3
 (iv) Called-up Share Capital is the amount of nominal value of share capital that has been called by the
company to be paid by the shareholders. [Section 2(15)]
(v) Paid-up Share Capital: ‘Paid-up Share Capital’ or ‘Share Capital Paid-up’ means such aggregate of
money credited and paid-up as is equivalent to the amount received as paid-up in respect of shares
issued and also includes any amount credited as paid-up in respect of shares of a company, but
does not include any other amount received in respect of such shares, by whatever name called.
[Section 2(64)]
Reserve Capital is a part of subscribed share capital that a company resolves, by a Special Resolution, not
to call except at the time of winding up of the company.
Capital Reserve is the amount of profit arising out of capital transactions.
• Types of Shares: Shares that can be issued are Preference Shares or Equity Shares.
Preference Shares are the shares that carry preferential right as to dividend at fixed rate or amount and
preferential right as to repayment of capital.
Equity Shares are the shares that are not Preference Shares.
Shares can be issued for cash and for consideration other than cash.
Shares can be issued at par or at premium.
Shares are said to be issued at par when they are issued at a price equal to the nominal (face) value,
i.e., when the issue price and nominal (face) value are same.
Shares are said to be issued at premium when they are issued at a price higher than nominal
(face) value.
• A Company can issue its shares:
(i) for cash, and (ii) for consideration other than cash.
• Oversubscription of Shares means shares applied for are more than the shares offered for subscription.
• Undersubscription of Shares means shares applied for are less than the shares offered for subscription.
• Pro rata Allotment means allotment of shares in a fixed proportion. Pro rata allotment takes place only
when the shares are oversubscribed.
• Securities Premium Reserve can be utilised for the following purposes:
(i) issuing fully paid bonus shares;
(ii) writing off preliminary expenses;
(iii) writing off expenses such as share issue expenses, commission, discount allowed on issue of
securities or debentures;
(iv) providing for the premium payable on redemption of debentures or Preference Shares; or
(v) in buying-back its own shares.
• Call is a demand by a company to the holders of partly paid shares to pay a further instalment towards
full nominal value.
• Calls-in-Arrears is the amount not yet received by the company against the call or calls demanded.
Calls not received by the company is transferred to Calls-in-Arrears Account.
• Calls-in-Advance is the amount received by the company from shareholders against the calls not yet
made. Calls-in-Advance is shown as Other Current Liability.
• Interest on Calls: Interest on Calls-in-Arrears may be collected by the Company from the shareholders, if
its Articles of Association so provides. If the company has adopted ‘Table F’ of the Companies Act, 2013,
then it can charge interest @ 10% p.a. from the due date to the date of actual payment.
Interest may be paid on Calls-in-Advance if its Articles of Association so provides. If the company has
adopted ‘Table F’ of the Companies Act, 2013 then it is required to pay interest @ 12% p.a. from the
date of receipt to the due date.

4
• Forfeiture of shares means cancellation of shares and forfeiting the amount received against these
shares. Forfeiture of shares takes place when a shareholder fails to pay the calls made.
• Journal Entry for forfeiture of shares:
Share Capital A/c ...Dr. [With the amount called-up on shares forfeited]
To Forfeited Shares A/c [With the amount already received less premium]
To Calls-in-Arrears A/c [With the amount due but not paid on allotment and Calls]
Securities Premium Reserve Account—How dealt when shares are forfeited. In case Securities Premium Reserve
Account has been credited and also it has been received: Securities Premium Reserve Account is not debited
because of the restrictions imposed by Section 52(2) of the Companies Act, 2013 as to utilisation.
In case Securities Premium Reserve Account has been credited but the amount has not been received:
Securities Premium Reserve Account is debited because the amount has not been received and therefore,
Section 52(2) of the Companies Act, 2013 does not apply.
• Reissue of Shares: Forfeited shares may be reissued by the company at par, at premium or at discount.
When such shares are reissued at a discount, the amount of discount allowed per share must not exceed
the amount forfeited on such a share in respect of capital (amount received per share minus any premium
received thereon).

Regarding Reissue of Forfeited Shares, Always Remember:

1. Discount on Reissue cannot exceed the forfeited amount.
2. If the Discount on reissue is less than the amount forfeited, the surplus (i.e., gain on reissue of shares)
is transferred to Capital Reserve.
3. When only a part of the forfeited shares is reissued then the gain on reissue of such shares is
transferred to Capital Reserve.
4. The forfeited amount on shares not yet reissued is shown in the Balance Sheet as an addition to the
share capital.
5. When the shares are reissued at Discount, such discount is debited to Forfeited Shares Account.
6. If the shares are reissued at a price which is more than the nominal (face) value of the shares, the
excess amount is credited to Securities Premium Reserve Account.
7. In case the forfeited shares are reissued at a price higher than the paid-up value, the excess of issue
price over paid-up value is credited to ‘Securities Premium Reserve Account’.

• In Pro rata Allotment: When shares are reissued at a premium, excess money received on application is
first be adjusted towards Share Capital and the balance, if any, is utilised towards Securities Premium Reserve.

5
Illustration 1.
Midee Ltd. invited applications for issuing 27,000 Equity Shares of ` 100 each payable
as follows:
` 50 per share on application;
` 10 per share on allotment;
Balance on first and final call.
Applications were received for 40,000 shares. Full allotment was made to the applicants
of 7,000 shares. The remaining applicants were allotted 20,000 shares on pro rata basis.
Excess money received on application was adjusted towards allotment and call.
Rumant holding 600 shares belonged to the category of applicants to whom full allotment
was made, paid the call money at the time of allotment. Ankur, who belonged to the
category of applicants to whom shares were allotted on pro rata basis did not pay after
application money on his 200 shares. Ankur’s shares were forfeited after the first and final
call. These shares were later reissued at ` 105 per share as fully paid-up.
Prepare the necessary Ledger Accounts in the books of the company and also prepare the
Balance Sheet.

Solution:
Dr. BANK ACCOUNT Cr.
Particulars
` Particulars `
To Equity Shares Application A/c 20,00,000 By Balance b/d 27,17,500
(40,000 × ` 50)
To Equity Shares Allotment A/c 70,000
(` 2,70,000 – ` 2,00,000)
To Calls-in-Advance A/c (600 × ` 40) 24,000
To Equity Shares First and Final Call A/c 6,02,500
To Equity Share Capital A/c (200 × ` 100) 20,000
To Securities Premium Reserve A/c (200 × ` 5) 1,000
27,17,500 27,17,500

Dr. EQUITY SHARES APPLICATION ACCOUNT Cr.

Particulars
` Particulars `
To Equity Share Capital A/c (27,000 × ` 50) 13,50,000 By Bank A/c (40,000 × ` 50) 20,00,000
To Equity Shares Allotment A/c (20,000 × ` 10) 2,00,000
To Calls-in-Advance A/c (Balancing Figure) 4,50,000
20,00,000 20,00,000

Dr. EQUITY SHARES ALLOTMENT ACCOUNT Cr.

Particulars
` Particulars `
To Equity Share Capital A/c (27,000 × ` 10) 2,70,000 By Equity Shares Application A/c 2,00,000
(20,000 × ` 10)
By Bank A/c 70,000
2,70,000 2,70,000

1
Dr. EQUITY SHARES FIRST AND FINAL CALL ACCOUNT Cr.
Particulars
` Particulars `
To Equity Share Capital A/c (27,000 × ` 40) 10,80,000 By Bank A/c 6,02,500
By Calls-in-Advance A/c [(600 × ` 40) + ` 4,50,000] 4,74,000
By Calls-in-Arrears A/c (WN 1) 3,500
10,80,000 10,80,000

Dr. CALLS-IN-ADVANCE ACCOUNT Cr.

Particulars
` Particulars `
To Equity Shares First and Final Call A/c 4,74,000 By Equity Shares Application A/c 4,50,000
(` 4,50,000 + ` 24,000) By Bank A/c 24,000
4,74,000 4,74,000

Dr. CALLS-IN-ARREARS ACCOUNT Cr.

Particulars
` Particulars `
To Equity Shares First and Final Call A/c 3,500 By Equity Share Capital A/c 3,500
3,500 3,500

Dr. FORFEITED SHARES ACCOUNT Cr.

Particulars
` Particulars `

To Capital Reserve A/c 16,500 By Equity Share Capital A/c 16,500

16,500 16,500

Dr. SECURITIES PREMIUM RESERVE ACCOUNT Cr.

Particulars
` Particulars `

To Balance b/d 1,000 By Bank A/c 1,000

1,000 1,000

Dr. CAPITAL RESERVE ACCOUNT Cr.

Particulars
` Particulars `

To Balance c/d 16,500 By Forfeited Shares A/c 16,500

16,500 16,500

Dr. EQUITY SHARE CAPITAL ACCOUNT Cr.

Particulars
` Particulars `

To Calls-in-Arrears A/c 3,500 By Equity Shares Application A/c 13,50,000

To Forfeited Shares A/c 16,500 By Equity Shares Allotment A/c 2,70,000
To Balance c/d 27,00,000 By Equity Shares First and Final Call A/c 10,80,000
By Bank A/c 20,000
27,20,000 27,20,000

2
 BALANCE SHEET OF MIDEE LTD. as at ...
Particulars Note No. `
I. EQUITY AND LIABILITIES
Shareholders’ Funds
(a) Share Capital 1 27,00,000
(b) Reserves and Surplus 2 17,500
Total 27,17,500
II. ASSETS
Current Assets
Cash and Cash Equivalents 3 27,17,500

Notes to Accounts
1. Share Capital `
Authorised Capital
... Equity Shares of ` 100 each ...
Issued Capital
27,000 Equity Shares of ` 100 each 27,00,000
Subscribed Capital
Subscribed and Fully paid-up
27,000 Equity Shares of ` 100 each 27,00,000
2. Reserves and Surplus
Capital Reserve 16,500
Securities Premium Reserve 1,000
17,500
3. Cash and Cash Equivalents
Cash at Bank 27,17,500

Working Notes:
Shares Applied Shares Offered
40,000 27,000
↓ ↓
7,000 (applied) 7,000 (Issued)
33,000 (applied) 20,000 (Issued)
1. Calculation of Equity Shares First and Final Call money due but not paid by Ankur:
33,000
Number of Shares Applied by Ankur = × 200 = 330 shares.. `
20,000
(i) Application Money Received from Ankur (330 × ` 50) 16,500
(ii) Less: Application money adjusted (200 × ` 50) 10,000
(iii) Excess Application Money 6,500
(iv) Money Due on Allotment (200 × ` 10) 2,000
Excess Application Money Adjusted on Allotment 2,000
(v) Balance Excess Application Money to be Adjusted on
Equity Shares First and Final Call (` 6,500 – ` 2,000) 4,500
(vi) Equity Shares First and Final Call to be paid by Ankur (200 × ` 40) 8,000
Less: Excess Application Money to be adjusted on Equity Shares First and Final Call [WN 1(v)] 4,500
Equity Shares First and Final Call Money due but not paid by Ankur 3,500
2. Money Received on Allotment later: `
Total Allotment Money due (27,000 × ` 10) 2,70,000
Less: Excess Application Money Adjusted 2,00,000
70,000
Add: Money Received in Advance from Rumant for Equity Shares First and Final Call (600 × ` 40) 24,000
Total Money Received 94,000
3. Since Ankur’s shares were reissued at premium fully paid-up, therefore, the entire gain, i.e., ` 16,500
received on 330 shares @ ` 50 as application money to be transferred to Capital Reserve.
3
Illustration 2.
Hardcore Computers Ltd. having an authorised capital of 20,000 shares @ ` 10 each, issued
15,000 shares to the public. Applications were received for 10,000 shares. The amount
payable was as follows:
On Application ` 3 per share;
On Allotment ` 4 per share;
On First and Final Call ` 5 per share.
All the sums were duly received by the company except the following:
Mr. Perfect, a holder of 100 shares did not pay the allotment and the call money.
Mr. Right, a holder of 200 shares did not pay the call money.
The company forfeited all the shares of Mr. Perfect and subsequently reissued them at
` 8 fully paid-up.
Show entries in Cash Book and Journal of the company. Also, prepare Balance Sheet.
(ISC 2001)
Solution: In the Books of Hardcore Computers Ltd.
Dr. CASH BOOK (BANK COLUMN ONLY) Cr.
Particulars `  Particulars `
To Shares Application A/c 30,000 By Balance c/d 1,18,900
(Application money received
for 10,000 shares @ ` 3 per share)
To Shares Allotment A/c 39,600
(Allotment money received on 9,900
shares @ ` 4 per share)
To Shares First and Final Call A/c 48,500
(First and final call money received on
9,700 shares @ ` 5 per share)
To Share Capital A/c 800
(Amount received on reissue of
100 forfeited shares)
1,18,900 1,18,900
To Balance b/d 1,18,900

JOURNAL
Date Particulars L.F. Dr. (`) Cr. (`)
Shares Application A/c ...Dr. 30,000
To Share Capital A/c 30,000
(Being the shares application money transferred to Share Capital Account
on allotment of 10,000 shares)
Shares Allotment A/c ...Dr. 40,000
To Share Capital A/c 20,000
To Securities Premium Reserve A/c 20,000
(Being the allotment money made due on 10,000 shares @ ` 4 per share)
Calls-in-Arrears A/c ...Dr. 400
To Shares Allotment A/c 400
(Being allotment money not received on 100 shares transferred to
Calls-in-Arrears Account)
Shares First and Final Call A/c ...Dr. 50,000
To Share Capital A/c 50,000
(Being the first and final call money due)

4
 Calls-in-Arrears A/c ...Dr. 1,500
To Shares First and Final Call A/c 1,500
(Being the shares first and final call money not received on 300 shares)
Share Capital A/c (100 × ` 10) ...Dr. 1,000
Securities Premium Reserve A/c (100 × ` 2) ...Dr. 200
To Calls-in-Arrears A/c 900
To Forfeited Shares A/c (100 × ` 3) 300
(Being 100 shares forfeited for non-payment of allotment and calls money)
Forfeited Shares A/c (100 × ` 2) ...Dr. 200
To Share Capital A/c 200
(Being the reissue of 100 forfeited shares at a discount
of ` 2 per share)
Forfeited Shares A/c (` 300 – ` 200) ...Dr. 100
To Capital Reserve A/c 100
(Being the gain on reissue of 100 forfeited shares transferred
to Capital Reserve)

BALANCE SHEET OF HARDCORE COMPUTERS LTD. as at ...

Particulars Note No. `
I. EQUITY AND LIABILITIES
Shareholders’ Funds
(a) Share Capital 1 99,000
(b) Reserves and Surplus 2 19,900
Total 1,18,900
II. ASSETS
Current Assets
Cash and Cash Equivalents 3 1,18,900
Total 1,18,900

Notes to Accounts
1. Share Capital `
Authorised Capital
20,000 Equity Shares of ` 10 each 2,00,000
Issued Capital
15,000 Equity Shares of ` 10 each 1,50,000
Subscribed Capital
Subscribed and fully paid-up
9,800 Equity Shares of ` 10 each 98,000
Subscribed but not fully paid-up
200 Equity Shares of ` 10 each 2,000
Less: Calls-in-Arrears 1,000 1,000
99,000
2. Reserves and Surplus
Capital Reserve 100
Securities Premium Reserve 19,800
19,900
3. Cash and Cash Equivalents
Cash at Bank 1,18,900

Note: The issue price of each share is ` (3 + 4 + 5), i.e., ` 12 whereas the face value of each share is ` 10. In the
absence of any information, it is assumed that the premium is included in the allotment money.

5
Illustration 3.
Pioneer Ltd. invited applications for 12,000 shares of ` 100 each to be issued at a premium
of 10% payable as follows:
On application ` 25; on allotment ` 50 (including premium);
on the first and the final call ` 35.
Applications were received for 10,000 shares and all of these were accepted. All the moneys
due were received except the first and final call on 100 shares which were forfeited. 60 of
these forfeited shares were reissued @ ` 90 per share credited as fully paid.
You are required to:
(i) pass necessary Journal entries.
(ii) prepare Balance Sheet of the company. (ISC 2007)

Solution: JOURNAL OF PIONEER LTD.

Date Particulars L.F. Dr. (`) Cr. (`)
Bank A/c ...Dr. 2,50,000
To Equity Shares Application A/c 2,50,000
(Being the application money received on 10,000 shares @ ` 25 each)
Equity Shares Application A/c ...Dr. 2,50,000
To Equity Share Capital A/c 2,50,000
(Being the shares application money transferred to Equity Share Capital
Account on allotment)
Equity Shares Allotment A/c ...Dr. 5,00,000
To Equity Share Capital A/c 4,00,000
To Securities Premium Reserve A/c 1,00,000
(Being the allotment money due on 10,000 shares @ ` 50 each)
Bank A/c ...Dr. 5,00,000
To Equity Shares Allotment A/c 5,00,000
(Being the allotment money received on 10,000 shares)
Equity Shares First and Final Call A/c ...Dr. 3,50,000
To Equity Share Capital A/c 3,50,000
(Being the first and final call money due on 10,000 shares @ ` 35 each)
Bank A/c (9,900 × ` 35) ...Dr. 3,46,500
Calls-in-Arrears A/c (100 × ` 35) ...Dr. 3,500
To Equity Shares First and Final Call A/c 3,50,000
(Being the first and final call money received on 9,900 shares @ ` 35 each)
Equity Share Capital A/c (100 × ` 100) ...Dr. 10,000
To Calls-in-Arrears A/c (100 × ` 35) 3,500
To Forfeited Shares A/c (100 × ` 65) 6,500
(Being the forfeiture of 100 shares for non-payment of first and final call)
Bank A/c (60 × ` 90) ...Dr. 5,400
Forfeited Shares A/c (60 × ` 10) ...Dr. 600
To Equity Share Capital A/c 6,000
(Being the reissue of 60 shares @ ` 90 each as fully paid)
Forfeited Shares A/c ...Dr. 3,300
To Capital Reserve A/c (WN 1) 3,300
(Being the gain on reissue transferred to Capital Reserve)

6
 BALANCE SHEET OF PIONEER LTD. as at ...
Particulars Note No. `

I. EQUITY AND LIABILITIES

Shareholders’ Funds
(a) Share Capital 1 9,98,600
(b) Reserves and Surplus 2 1,03,300
Total 11,01,900
II. ASSETS
Current Assets
Cash and Bank Balance 3 11,01,900
Total 11,01,900

Notes to Accounts
1. Share Capital `
Authorised Capital
... Equity Shares of ` 100 each ...
Issued Capital
12,000 Equity Shares of ` 100 each 12,00,000
Subscribed Capital
Subscribed and fully paid-up
9,960 Equity Shares of ` 100 each 9,96,000
Add: Forfeited Shares A/c 2,600
9,98,600
2. Reserves and Surplus
Capital Reserve 3,300
Securities Premium Reserve 1,00,000
1,03,300
3. Cash and Bank Balance
Cash at Bank 11,01,900

Working Notes:
1. Calculation of Amount transferred to Capital Reserve: `
Amount forfeited on Reissued Shares (` 6,500 × 60/100) 3,900
Less: Reissue Discount 600
Gain (Profit) on reissue to be transferred to Capital Reserve 3,300

2. Dr. BANK ACCOUNT Cr.

Particulars `  Particulars `
To Equity Shares Application A/c 2,50,000 By Balance c/d 11,01,900
To Equity Shares Allotment A/c 5,00,000
To Equity Shares First and Final Call A/c 3,46,500
To Equity Shares Capital A/c 5,400
11,01,900 11,01,900

3. Till the forfeited shares are reissued, balance of Forfeited Shares Account ` 2,600 (i.e., ` 6,500 – ` 600 – ` 3,300)
will be shown in the Note to Accounts on Share Capital as addition to paid-up capital.
4. Securities Premium Reserve will not be considered at the time of forfeiture of shares since premium has been
received by the company.
7
Illustration 4 (Issue of shares at Premium, Issue Price is Payable in Instalments).
New India Ltd. was registered with a capital of ` 1,00,00,000 in equity shares of ` 100 each.
It issued a prospectus inviting applications for 20,000 shares at 40% premium payable as follows:
On Application ` 50 (including ` 10 premium);
On Allotment ` 40 (including ` 10 premium);
On First Call ` 30 (including ` 10 premium);
On Second and Final Call ` 20 (including ` 10 premium).
Applications were received for 20,000. The amount due was received.
Pass the necessary Journal entries and also show how ‘Share Capital’ will appear in the
Balance Sheet of the Company.

Solution: JOURNAL OF NEW INDIA LTD.

Date Particulars L.F. Dr. (`) Cr. (`)
  Bank A/c ...Dr. 10,00,000
To Equity Shares Application A/c 10,00,000
(Being the application money received on 20,000 shares @ ` 50 per share)

  Equity Shares Application A/c ...Dr. 10,00,000

To Equity Share Capital A/c (20,000 × ` 40) 8,00,000
To Securities Premium Reserve A/c (20,000 × ` 10) 2,00,000
(Being the application money adjusted)

  Equity Shares Allotment A/c ...Dr. 8,00,000

To Equity Share Capital A/c (20,000 × ` 30) 6,00,000
To Securities Premium Reserve A/c (20,000 × ` 10) 2,00,000
(Being the allotment money due on 20,000 shares)

  Bank A/c ...Dr. 8,00,000

To Equity Shares Allotment A/c 8,00,000
(Being the allotment money received)

Equity Shares First Call A/c ...Dr. 6,00,000

To Equity Share Capital A/c (20,000 × ` 20) 4,00,000
To Securities Premium Reserve A/c (20,000 × ` 10) 2,00,000
(Being the first call due on 20,000 shares)

  Bank A/c ...Dr. 6,00,000

To Equity Shares First Call A/c 6,00,000
(Being the first call amount received on 20,000 shares)

  Equity Shares Second and Final Call A/c ...Dr. 4,00,000

To Equity Share Capital A/c (20,000 × ` 10) 2,00,000
To Securities Premium Reserve A/c (20,000 × ` 10) 2,00,000
(Being second and final call money due on 20,000 shares)

  Bank A/c ...Dr. 4,00,000

To Equity Shares Second and Final Call A/c 4,00,000
(Being second and final call amount received)

8
 BALANCE SHEET OF NEW INDIA LTD. as at ...
Particulars Note No. `
I. EQUITY AND LIABILITIES
Shareholders’ Funds
(a) Share Capital 1 20,00,000
(b) Reserves and Surplus 2 8,00,000
Total 28,00,000
II. ASSETS
Current Assets
Cash and Bank Balance 3 28,00,000
Total 28,00,000

Notes to Accounts
1. Share Capital `
Authorised Capital
1,00,000 Equity Shares of ` 100 each 1,00,00,000
Issued Capital
20,000 Equity Shares of ` 100 each 20,00,000
Subscribed Capital
Subscribed and fully paid-up
20,000 Equity Shares of ` 100 each 20,00,000
2. Reserves and Surplus
Securities Premium Reserve 8,00,000
3. Cash and Bank Balance
Cash at Bank 28,00,000
Note: When the question requires preparation of Balance Sheet, Notes to Accounts is also prepared because
Schedule III prescribes that detail of the line items (main heads) is to be shown in the Notes to Accounts.
Illustration 5.
Ashish & Co. Ltd. purchased multimedia business of HT Impex owned by Dinesh and
issued 40,000 fully paid Equity Shares of ` 10 each at a premium of 20% and balance
amount ` 2,00,000 was paid by cheque. Following assets and liabilities were taken over:
Plant ` 3,00,000 Land and Building ` 5,00,000
Stock ` 2,00,000 Creditors ` 3,00,000
Bills Payable ` 1,00,000
Journalise the above transactions in the books of Ashish & Co. Ltd.
Solution: JOURNAL OF ASHISH & CO. LTD.
Date Particulars L.F. Dr. (`) Cr. (`)
Plant A/c ...Dr. 3,00,000
Land and Building A/c ...Dr. 5,00,000
Stock A/c ...Dr. 2,00,000
Goodwill A/c (Balancing Figure) ...Dr. 80,000
To Creditors A/c 3,00,000
To Bills Payable A/c 1,00,000
To Dinesh 6,80,000
(Being the purchase consideration for acquiring the business)
Dinesh ...Dr. 6,80,000
To Equity Share Capital A/c 4,00,000
To Securities Premium Reserve A/c 80,000
To Bank A/c 2,00,000
(Being the purchase consideration settled by issue of 40,000 fully
paid Equity Shares of ` 10 each at a premium of 20% and payment
of ` 2,00,000 by cheque)

9
Illustration 6.
Rainforest Ltd. issued for subscription 1,00,000 Equity Shares of ` 10 each payable as ` 3 on
application; ` 3 on allotment; ` 2 on the first call; and ` 2 on the second and final call.
All the shares were applied for and allotted. Mohan, to whom 10,000 shares were allotted,
paid the total amount due on his shares along with the allotment money. The company
has not made the second and final call yet.
Pass entries in the Cash Book and Journal. Also, show Calls-in-Advance Account and the
Balance Sheet.

Solution: In the Books of Rainforest Ltd.

Dr. CASH BOOK (BANK COLUMN ONLY) Cr.
Date Particulars ` Date Particulars `
To Equity Shares Application A/c 3,00,000 By Balance c/d 8,20,000
(` 3 on 1,00,000 shares)
To Equity Shares Allotment A/c 3,00,000
(` 3 on 1,00,000 shares)
To Calls-in-Advance A/c 40,000
(` 4 on 10,000 shares)
To Equity Shares First Call A/c 1,80,000
(` 2 on 90,000 shares)
8,20,000 8,20,000

JOURNAL
Date Particulars L.F. Dr. (`) Cr. (`)
Equity Shares Application A/c ...Dr. 3,00,000
To Equity Share Capital A/c 3,00,000
(Being the transfer of application money to Equity Share Capital Account
on allotment of shares)
Equity Shares Allotment A/c ...Dr. 3,00,000
To Equity Share Capital A/c 3,00,000
(Being the allotment money due on 1,00,000 shares @ 3 per share)
Equity Shares First Call A/c ...Dr. 2,00,000
To Equity Share Capital A/c 2,00,000
(Being the amount due on First Call)
Calls-in-Advance A/c ...Dr. 20,000
To Equity Shares First Call A/c 20,000
(Being the Calls-in-Advance adjusted)

Dr. CALLS-IN-ADVANCE ACCOUNT Cr.

Date Particulars ` Date Particulars `
To Equity Shares First Call A/c 20,000 By Bank A/c (10,000 × ` 4) 40,000
To Balance c/d 20,000
40,000 40,000
By Balance b/d 20,000

10
 BALANCE SHEET OF RAINFOREST LTD. as at ...
Particulars Note No. `

I. EQUITY AND LIABILITIES

1. Shareholders’ Funds
Share Capital 1 8,00,000
2. Current Liabilities
Other Current Liabilities 2 20,000
Total 8,20,000
II. ASSETS
Current Assets
Cash and Bank Balance 3 8,20,000
Total 8,20,000

Notes to Accounts
1. Share Capital `
Authorised Capital
... Equity Shares of ` 10 each ...
Issued Capital
1,00,000 Equity Shares of ` 10 each 10,00,000
Subscribed Capital
Subscribed but not fully paid-up
1,00,000 Equity Shares of ` 10 each; ` 8 called-up 8,00,000
2. Other Current Liabilities
Calls-in-Advance 20,000
3. Cash and Bank Balance
Cash at Bank 8,20,000

Illustration 7.
Dahlia Ltd. took over assets of ` 70,00,000 and liabilities of ` 14,00,000 of Moon Ltd.
Dahlia Ltd. paid the purchase consideration by issuing 40,000 equity shares of ` 100 each
at a premium of 10% and ` 20,00,000 by cheque.

Calculate:
(i) Purchase Consideration; and
(ii) Capital Reserve or Goodwill, if any.

Solution:

(i) Purchase Consideration = ` 40,00,000 (Nominal Value of Share Capital) + ` 4,00,000

(Securities Premium Reserve) + ` 20,00,000 (Cheque)
= ` 64,00,000.

(ii) Goodwill = Purchase Consideration – Net Assets

= ` 64,00,000 – ` 56,00,000 = ` 8,00,000
Net Assets Acquired = ` 70,00,000 – ` 14,00,000 = ` 56,00,000.
11
Illustration 8.
Primrose Ltd. was registered with an Authorised Share Capital of ` 10,00,000 divided into
1,00,000 Equity Shares of ` 10 each. Out of these, 20,000 Equity Shares were issued to a vendor
as fully paid for purchase of machinery. 65,000 shares were issued for subscription payable
` 2 per share along with application, ` 2 per share each on allotment, first call, second call
and final call. 60,000 shares were applied for and allotted. The company had made calls up
to first call and received the called-up amount except a call of ` 2 per share on 5,000 shares.
Prepare the Balance Sheet of Primrose Ltd.
Solution: Primrose Ltd.
BALANCE SHEET as at ...
Particulars Note No. `
I. EQUITY AND LIABILITIES
Shareholders’ Funds
Share Capital 1 5,50,000
Total 5,50,000
II. ASSETS
1. Non-Current Assets
Property, Plant and Equipment and Intangible Assets
—Property, Plant and Equipment 2 2,00,000
2. Current Assets
Cash and Bank Balance 3 3,50,000
Total 5,50,000

Notes to Accounts
1. Share Capital `
Authorised Capital
1,00,000 Equity Shares of ` 10 each 10,00,000
Issued Capital
85,000 Equity Shares of ` 10 each 8,50,000
[Out of the above, 20,000 Equity Shares have been issued as fully paid-up pursuant to a
contract (purchase of machinery) for consideration other than cash]
Subscribed Capital
Subscribed and fully paid-up
20,000 Equity Shares of ` 10 each 2,00,000
[The above Equity Shares have been issued as fully paid-up pursuant to a contract
(purchase of a machinery) for consideration other than cash]
Subscribed but not fully paid-up
60,000 Equity Shares of ` 10 each; ` 6 called-up 3,60,000
Less: Calls-in-Arrears (5,000 × ` 2) 10,000 3,50,000
5,50,000
2. Property, Plant and Equipment
Machinery 2,00,000
3. Cash and Bank Balance
Cash at Bank 3,50,000

12
 MEANING OF KEY TERMS USED IN THE CHAPTER
1. Dissolution of Partnership
It implies change in relationship of partners of the firm but the firm continues its business. In other words,
there is dissolution of partnership whenever a partnership is reconstituted, viz., admission, retirement, death or
insolvency of a partner.
2. Dissolution of Firm
Dissolution of partnership among all the partners of a firm is called dissolution of the firm. In such a case the
business of the firm also comes to an end.
3. Firm’s Debts
Firm’s Debts means the debts owed by the firm to outsiders.
4. Private Debts
Private Debts means debts owed by a partner to any other person.
5. Realisation Account
It records the realisation of assets and payments of liabilities. It is prepared to determine gain (profit)/loss on
realisation of assets and settlement of liabilities.
6. Unrecorded Asset
Any asset which is not recorded in the books of the firm, is called unrecorded asset.
7. Unrecorded Liability
Any liability which is not recorded in the books of the firm is known as unrecorded liability.

SUMMARY OF THE CHAPTER

• Dissolution of partnership between/among all the partners of a firm is called Dissolution of the Firm:
In case of dissolution of a firm, the business of the firm is closed, the assets are realised and the liabilities
are paid.
• Dissolution of partnership refers to the change in the existing relations of the partners: The firm
continues its business. It may take place on admission/retirement/death/insolvency of a partner or change
in the profit-sharing ratio.
Settlement of Accounts (Section 48)
• Treatment of Losses: Losses including deficiencies of capital are to be paid in the following order:
(i) First out of profits of the firm;
(ii) Then out of capitals of the partners; and
(iii) Lastly by partners individually in their profit-sharing ratio. [Section 48 (a)]
• Application of Assets: The assets of the firm, including any sum contributed by the partners to make up
the deficiencies of capital will be applied in the following manner and order:
(i) in paying firm’s debts to the third parties.
(ii) in paying to each partner rateably what is due to him on account of loans and advances;
(iii) in paying to each partner rateably what is due to him on account of capital;
(iv) the surplus, if any, shall be distributed between/among the partners in their profit-sharing ratio.
[Section 48(b)]

1
Treatment of Firm’s Debts and Private Debts (Section 49)
1. Application of Firm’s Property: Firm’s property is applied first towards the payment of firm’s debts; then the
surplus, if any, is applied towards the payment of partner’s loan to the firm and balance towards his capital.
2. Application of Partner’s Private Property: Partner’s private property is applied first in payment of his private
debts and the surplus, if any, in payment of firm’s debts if the firm’s liabilities exceed the firm’s assets.
• Closing of Firm’s Books: Firm’s books are closed by preparing the following accounts:
(i) Realisation Account; (ii) Loan by Partners Accounts;
(iii) Partners’ Capital Accounts; and (iv) Bank or Cash Account.
• Realisation Account: It is a nominal account and is prepared on the dissolution of a firm. The object of
this account is to show the gain (profit) or loss on the realisation of assets and payment of liabilities.
• If Fixed Capital Account Method is followed, balance in Current Accounts is transferred to Capital Accounts
of the Partners and adjustments are passed through the Capital Accounts. No adjustments are required to
be passed through Current Account.
• Bank Overdraft is not to be transferred to Realisation Account.
• Bank Loan is to be transferred to Realisation Account.
• Partner’s Loan Account (Loan by a partner to the firm) is to be passed through Cash or Bank Account.
• Loan given to a partner is transferred (debited) to his Capital Account.

Accounting Entries Relating to Dissolution

The following entries are passed at the time of the dissolution of the firm:
Transfer of assets (except cash and Realisation A/c ...Dr. At book value
bank balance) To Sundry Assets A/c
Transfer of liabilities (except loans by Sundry Liabilities A/c ...Dr. At book value
partners, capitals and undistributed profits) To Realisation A/c
Sale of assets Cash/Bank A/c ...Dr. At realised value
To Realisation A/c
Assets taken over by partner Partner’s Capital A/c ...Dr. At agreed value
To Realisation A/c
Payment of liabilities Realisation A/c ...Dr. Amount of payment
To Cash/Bank A/c
Any liability taken over by the partner Realisation A/c ...Dr. At agreed value
To Partner’s Capital A/c
Payment of realisation expenses Realisation A/c ...Dr. Amount of payment
To Cash/Bank A/c
Sale of unrecorded assets Cash/Bank A/c ...Dr. Amount received on sale
To Realisation A/c
Payment of an unrecorded liability (which Realisation A/c ...Dr. Paid amount
does not exist in the Balance Sheet) To Cash/Bank A/c
Payment of realisation expenses by Realisation A/c ...Dr. Amount of payment
any partner To Partner’s Capital A/c
Credit balance of Realisation Account Realisation A/c ...Dr. In profit-sharing ratio
(Gain or Profit) To Partners’ Capital A/cs
Debit balance of Realisation Account Partners’ Capital A/cs ...Dr. In profit-sharing ratio
(Loss) To Realisation A/c

2
Notes:

1. When an asset or liability is taken to the Realisation Account any related fund or reserve is also transferred
to Realisation Account and not to Partners’ Capital Accounts.
2. If the question is silent about the realisation of an asset, its value is assumed to be nil.
3. If the question is silent about the payment of a liability, then it has to be paid out in full.
4. Bank overdraft is taken to the Bank/Cash A/c and not transferred to Realisation Account but bank loan is
transferred to Realisation Account.
5. Loan taken from a partner is passed through Cash or Bank Account.
6. Loan given to a partner is transferred (debited) to his Capital Account.

3
Illustration 1.
Aman and Harsh were partners in a firm. They decided to dissolve their firm. Pass necessary
Journal Entries for the following after various assets (other than Cash and Bank) and third
party liabilities have been transferred to Realisation Account:
(a) There was furniture worth ` 50,000. Aman took over 50% of the furniture at 10% discount
and the remaining furniture was sold at 30% profit on book value.
(b) Profit and Loss Account was showing a credit balance of ` 15,000 which was distributed
between the partners.
(c) Harsh’s loan of ` 6,000 was discharged at ` 6,200.
(d) The firm paid realisation expenses amounting to ` 5,000 on behalf of Harsh who had to
bear these expenses.
(e) There was a bill for ` 1,200 under discount. The bill was received from Soham who proved
insolvent and a first and final dividend of 25% was received from his estate.
( f ) Creditors, to whom the firm owed ` 6,000, accepted stock of ` 5,000 at a discount of 5%
and the balance in cash.
(g) The loss on dissolution was ` 8,000. (ISC 2014, 10 Marks)
JOURNAL
Date Particulars   L.F. Dr. (`) Cr. (`)
(a) (i) Aman’s Capital A/c ...Dr. 22,500
  To Realisation A/c 22,500
(Being 50% of furniture taken by Aman at 10% discount)
(ii) Cash/Bank A/c ...Dr. 32,500
To Realisation A/c 32,500
(Being the balance furniture sold)
(b) Profit and Loss A/c ...Dr. 15,000
To Aman’s Capital A/c 7,500
To Harsh’s Capital A/c 7,500
(Being the balance in the Profit and Loss Account credited to
Partners’ Capital Accounts)
(c) Harsh’s Loan A/c ...Dr. 6,000
Realisation A/c ...Dr. 200
To Cash/Bank A/c 6,200
(Being the loan of Harsh of ` 6,000 discharged by paying
` 6,200; ` 200 being interest)
(d) Harsh’s Capital A/c ...Dr. 5,000
To Cash/Bank A/c 5,000
(Being the realisation expenses paid on behalf of Harsh)
(e) (i) Realisation A/c ...Dr. 1,200
To Cash/Bank A/c 1,200
(Being the payment of dishonoured discounted Bill Receivable)
(ii) Cash/Bank A/c ...Dr. 300
To Realisation A/c 300
(Being the first and final dividend of 25% received from the
estate of Soham)
(f ) Realisation A/c ...Dr. 1,250
To Cash/Bank A/c 1,250
(Being the payment made to creditors)
(g) Aman’s Capital A/c ...Dr. 4,000
Harsh’s Capital A/c ...Dr. 4,000
To Realisation A/c 8,000
(Being the loss on realisation debited to Partners’ Capital Accounts)

1
Illustration 2.
Following is the Balance Sheet of Ravi and Prakash as at 31st March, 2012:

Liabilities ` Assets `
Sundry Creditors 60,000 Cash 25,000
Ravi’s Loan 15,000 Debtors 42,000
General Reserve 15,000 Less: Provision for Doubtful Debts 6,000 36,000
Investments Fluctuation Fund 2,000 Stock 12,000
Ravi’s Capital 30,000 Investments 18,000
Prakash’s Capital 10,000 Plant and Machinery 41,000
1,32,000 1,32,000

The firm was dissolved on 31st March, 2012, on the following terms:
(a) Ravi took over stock at ` 8,000.
(b) Creditors payable after two months were paid immediately at a discount of 6% p.a.
(c) Debtors realised ` 35,000.
(d) Plant and Machinery and Investments realised ` 60,000.
(e) An old computer completely written off was taken over by Prakash at ` 1,200.
(f) Realisation expenses of ` 2,000 were paid by Ravi.
You are required to prepare:
(i) Realisation Account.
(ii) Partners’ Capital Accounts.
(iii) Cash Account. (ISC 2013, 4 Marks)

Solution:
Dr. REALISATION ACCOUNT Cr.
Particulars ` Particulars `

To Debtors A/c 42,000 By Provision for Doubtful Debts A/c 6,000

To Stock A/c 12,000 By Sundry Creditors A/c 60,000
To Investments A/c 18,000 By Investments Fluctuation Fund A/c 2,000
To Plant and Machinery A/c 41,000 By Ravi’s Capital A/c (Stock) 8,000
To Cash A/c (Creditors) 59,400 By Cash A/c (Assets Realised):
[` 60,000 – (` 60,000 × 6/100 × 2/12)] Debtors 35,000
To Ravi’s Capital A/c (Expenses) 2,000 Plant and Machinery and
Investments 60,000 95,000
By Prakash’s Capital A/c (Computer) 1,200
By Loss transferred to:
Ravi’s Capital A/c 1,100
Prakash’s Capital A/c 1,100 2,200
1,74,400 1,74,400

2
Dr. PARTNERS’ CAPITAL ACCOUNTS Cr.
Particulars Ravi Prakash Particulars Ravi Prakash
` ` ` `

To Realisation A/c 8,000 1,200 By Balance b/d 30,000 10,000

To Realisation A/c (Loss) 1,100 1,100 By General Reserve A/c 7,500 7,500
To Cash A/c (Bal. Fig.) 30,400 15,200 By Realisation A/c 2,000 ...
39,500 17,500 39,500 17,500

Dr. CASH ACCOUNT Cr.

Particulars ` Particulars `

To Balance b/d 25,000 By Realisation A/c (Liabilities Paid) 59,400

To Realisation A/c (Assets Realised) 95,000 By Ravi’s Loan A/c 15,000
By Ravi’s Capital A/c (Final Payment) 30,400
By Prakash’s Capital A/c (Final Payment) 15,200
1,20,000 1,20,000

Illustration 3.
Ajit, Bikram and Rahul were in partnership sharing profits and losses equally. Their Balance
Sheet as at 31st March, 2022 was as follows:
Liabilities ` Assets `

Capital A/cs: Land and Building 1,50,000

Ajit 80,000 Furniture 10,000
Bikram 80,000 Computer 25,000
Rahul 80,000 2,40,000 Debtors 70,000
Creditors 1,00,000 Stock 50,000
Bills Payable 55,000 Bills Receivable 5,000
Bank Overdraft 15,000 Loan to Rahul 1,00,000
4,10,000 4,10,000

The firm was dissolved on the above date on the following terms:
(i) Debtors realised ` 50,000; Stock ` 20,000; Land and Building ` 1,00,000.
(ii) Firm had an unrecorded asset which realised ` 50,000 and also an unrecorded liability of
` 75,000.
Prepare Realisation Account, Capital Accounts of the Partners and Bank Account.

3
Solution:
Dr. REALISATION ACCOUNT Cr.
Particulars ` Particulars `

To Sundry Assets (Transfer): By Sundry Liabilities (Transfer):

Land and Builing A/c 1,50,000 Creditors A/c 1,00,000
Furniture A/c 10,000 Bills Payable A/c 55,000
Computer A/c 25,000 By Bank A/c (Assets Realised):
Debtors A/c 70,000 Debtors 50,000
Stock A/c 50,000 Stock 20,000
Bills Receivable A/c 5,000 Land and Building 1,00,000
To Bank A/c (Liabilities Paid): Unrecorded Asset 50,000 2,20,000
Creditors 1,00,000 By Loss on Realisation transferred to:
Bills Payable 55,000 Ajit’s Capital A/c 55,000
Unrecorded Liability 75,000 2,30,000 Bikram’s Capital A/c 55,000
Rahul’s Capital A/c 55,000
5,40,000 5,40,000

Dr. PARTNERS’ CAPITAL ACCOUNTS Cr.

Particulars Ajit Bikram Rahul Particulars Ajit Bikram Rahul

` ` ` ` ` `

To Realisation A/c 55,000 55,000 55,000 By Balance b/d 80,000 80,000 80,000
To Loan to Rahul A/c ... ... 1,00,000 By Bank A/c (Deficiency) ... ... 75,000
To Bank A/c (Final Payment) 25,000 25,000 ... (Balancing Figure)
80,000 80,000 1,55,000 80,000 80,000 1,55,000

Dr. BANK ACCOUNT Cr.

Particulars ` Particulars `

To Realisation A/c (Assets Realised) 2,20,000 By Balance b/d (Bank Overdraft)

15,000
To Rahul’s Capital A/c (Cash brought in) 75,000 By Realisation A/c (Liabilities Paid) 2,30,000
By Capital A/cs (Final Payment):
Ajit 25,000
Bikram 25,000
2,95,000 2,95,000

Notes: 1. Furniture and Computer have not realised any amount.

2. Loan to Rahul is transferred (debited) to his Capital Account as per ISC Council Guidelines.

3. Bank Overdraft is transferred to Bank/Cash Account and not to Realisation Account.

4
Illustration 4 (Values of Assets are not Given).
Akash and Bhanu were partners from 1stApril, 2019 with capitals of ` 60,000 and ` 40,000 respectively.
They shared profits in the ratio of 3 : 2. They carried on business for two years. In the first year
ended 31st March, 2020, they earned a profit of ` 50,000 but in the year ended 31st March, 2021,
loss of ` 20,000 was incurred. As the business was no longer profitable, they dissolved the firm on
31st March, 2021. Creditors on that date were ` 20,000. The partners withdrew for personal use
` 8,000 per partner per year. The assets realised ` 1,00,000. The expenses of realisation were ` 3,000.
Prepare Realisation Account, Partners’ Capital Accounts and Cash Account.
Solution:
Dr. REALISATION ACCOUNT Cr.
Particulars
` Particulars `
To Sundry Assets A/c (WN 2) 1,18,000 By Creditors A/c 20,000
To Cash A/c (Creditors) 20,000 By Cash A/c (Assets Realised) 1,00,000
To Cash A/c (Expenses) 3,000 By Loss transferred to:
Akash’s Capital A/c 12,600
Bhanu’s Capital A/c 8,400 21,000
1,41,000 1,41,000

Dr. PARTNERS’ CAPITAL ACCOUNTS Cr.

Particulars Akash (`) Bhanu (`) Particulars Akash (`) Bhanu (`)
To Realisation A/c (Loss) 12,600 8,400 By Balance b/d (WN 1) 62,000 36,000
To Cash A/c (Final Payment) 49,400 27,600
62,000 36,000 62,000 36,000

Dr. CASH ACCOUNT Cr.

Particulars
` Particulars `
To Realisation A/c (Assets Realised) 1,00,000 By Realisation A/c (Creditors) 20,000
By Realisation A/c (Expenses) 3,000
By Akash’s Capital A/c (Final Payment) 49,400
By Bhanu’s Capital A/c (Final Payment) 27,600
1,00,000 1,00,000

Working Notes:
1. Calculation of Capitals as at 31st March, 2021:
Dr. PARTNERS’ CAPITAL ACCOUNTS Cr.
Date Particulars Akash (`) Bhanu (`) Date Particulars Akash (`) Bhanu (`)
2020 2019
March 31 To Cash A/c 8,000 8,000 April 1 By Cash A/c 60,000 40,000
March 31 To Balance c/d 82,000 52,000 2020
March 31 By Profit and Loss
Appropriation A/c 30,000 20,000
90,000 60,000 90,000 60,000
2021 2020
March 31 To Cash A/c 8,000 8,000 April 1 By Balance b/d 82,000 52,000
March 31 To Profit and
Loss A/c 12,000 8,000
March 31 To Balance c/d 62,000 36,000
82,000 52,000 82,000 52,000

5
2. In this problem, the book value of Sundry Assets on the date of dissolution is not given. Therefore, it is necessary to
prepare the Memorandum Balance Sheet as at that date.

MEMORANDUM BALANCE SHEET

as at 31st March, 2021

Liabilities
` Assets `

Akash’s Capital 62,000 Sundry Assets (Balancing Figure) 1,18,000

Bhanu’s Capital 36,000
Creditors 20,000
1,18,000 1,18,000

6
 MEANING OF KEY TERMS USED IN THE CHAPTER

1. Death of a Partner
Death of a partner leads to reconstitution of the firm. The firm may continue its business with the remaining
partners.

2. Revaluation of Assets
Revaluation of Assets means change in the value of assets, i.e., present value being different from the book value of
the assets.

3. Reassessment of Liabilities
Reassessment of Liabilities means reassessing the liabilities and determining the change, i.e., whether the
liability is more or less than that shown in the books of account.

4. Gaining Ratio
Ratio in which the continuing partners acquire deceased partner’s share is called gaining ratio.

5. New Profit-sharing Ratio

Ratio in which the continuing partners (i.e., partners other than deceased partner) decide to share future profits
and losses, is known as new profit-sharing ratio.

6. Profit and Loss Suspense Account

It is the account which is debited to adjust the share of profit of deceased partner between the date
of last Balance Sheet and the date of death, when profit-sharing ratio of continuing partners does not change.

SUMMARY OF THE CHAPTER

• Adjustment on Death of a Partner: At the time of death of a partner, few accounting issues arise and
are settled, e.g., calculation of the new profit-sharing ratio and the gaining ratio, revaluation of assets and
liabilities, treatment of goodwill, accumulated profits, reserves and surplus, share in profits or losses of the
outgoing partner up to the date of retirement.

• New Profit-sharing Ratio: The ratio in which the continuing partners (i.e., partners other than the deceased
one) decide to share the future profits and losses, is known as the ‘New Profit-sharing Ratio’.
New Profit Share = Old Profit Share + Acquired Profit Share
Unless agreed otherwise, it is presumed that the continuing partners acquire the deceased partner’s share in
their old profit-sharing ratio.
• Gaining Ratio: The ratio in which the continuing partners acquire the deceased partner’s share is known
as the ‘Gaining Ratio’.
Gaining Ratio = New Ratio – Old Ratio
Gain of a Partner = New Profit Share – Old Profit Share
• Adjustment with regard to Goodwill: When a partner dies his share of profit is taken by the remaining
partners. The remaining partners then compensate the deceased partner in the form of goodwill in their gaining
ratio. The following entry is recorded for this purpose:
Gaining Partners’ Capital/Current A/cs ...Dr. [In gaining ratio]
To Deceased Partner’s Capital A/c [With his share of goodwill]
If Goodwill Account appears in the old Balance Sheet, it is written off by passing the following entry:
All Partners’ Capital/Current A/cs ...Dr. [In old ratio]
To Goodwill A/c

1
• Revaluation of Assets and Reassessment of Liabilities: At the time of death of a partner, assets are
revalued and liabilities are reassessed; the increase or decrease in value of each asset/liability is recorded in
the Revaluation Account. The net balance in the Revaluation Account is transferred to the Capital Accounts
of all the partners (including the deceased partner) in their old profit-sharing ratio.
• Adjustment for Reserves and Accumulated Profits/Losses: For the past undistributed profits or reserves,
the amount is credited to all the partners in the old profit-sharing ratio.
• Excess of Workmen Compensation Reserve over the Workmen Compensation Liability is credited to all Partners
in their Old Profit-sharing Ratio.
• Excess of Investment Fluctuation Reserve over difference between Book Value and Market Value is credited to
all Partners in their Old Profit-sharing Ratio.
• Amount Due to a Deceased Partner: Amount due to a deceased partner includes:
(i ) Capital on the date of last Balance Sheet.
(ii ) Interest or salary, if any, payable to him.
(iii ) Share of profit or loss till the date of death.
(iv) Share in the gain (profit) or loss on revaluation of assets and reassessment of liabilities.
(v) Share in the goodwill of the firm.
(vi ) Share in the General Reserve or Profit and Loss Account appearing in the Balance Sheet.
Out of the total of (i) to (vi), the amount of drawings and interest on drawings till the date of death is deducted.
The net amount payable will be settled by paying him cash or by transferring it to deceased partner’s
executor’s account.

• Share of Profit up to the Date of Death: If a partner dies on any date after the date of Balance Sheet;
his share of profit is calculated from the beginning of the accounting year to the date of death on
the basis of average profit or last year’s profit. It is calculated on the basis of time or on the basis of sales.
When share of profit is estimated
If profit-sharing ratio of the continuing partners does not change:
Profit and Loss Suspense A/c ...Dr.
To Deceased Partner’s Capital A/c
If profit-sharing ratio of the continuing partners changes:
Continuing (Gaining) Partners’ Capital/Current A/cs ...Dr. [In Gaining Ratio]
To Deceased Partner’s Capital A/c
In case loss is estimated
The entries given above are passed in reverse manner.
When share of profit is determined and not estimated
Financial statements, i.e., Profit & Loss Account and Balance Sheet are prepared for the intervening period, i.e.,
from the date of last Balance Sheet up to the date of death and profit or loss is determined. In this situation,
the Journal entries passed are as follows:
In case of profit:
Profit and Loss Appropriation A/c ...Dr.
To Partners’ Capital A/cs [In their Profit-sharing Ratio]
In case of loss:
Partners’ Capital A/cs ...Dr. [In their Profit-sharing Ratio]
To Profit and Loss Appropriation A/c
Note: The balance of Profit and Loss Suspense Account is shown in the interim Balance Sheet in the
Assets Side.
2
Deceased Partner’s share of profit will be credited to his Capital Account and debited to the continuing
Partners’ Capital Accounts in the Gaining Ratio when the profit-sharing ratio of the continuing partners,
in between them, changes.
Gaining Partners’ Capital/Current A/cs ...Dr. [in Gaining Ratio]
To Deceased Partner’s Capital A/c

• Amount Due to Deceased Partner: The deceased partner’s share is also calculated in the same way as
in the case of retiring partner’s share. Amount due to a deceased partner shown by his Capital Account
is transferred to his Executor’s Account. The entry will be:
Deceased Partner’s Capital A/c ...Dr.
To Deceased Partner’s Executor’s A/c

• Settlement of Deceased Partner’s Executor’s Account: If the amount is paid in cash or in instalment,
the entry will be:
Deceased Partner’s Executor’s A/c ...Dr.
To Cash/Bank A/c

• In the absence of an agreement, the outgoing partner at his option is entitled to receive either interest
@ 6% p.a. till the amount is paid off or a share of the profit which has been earned by using the amount
due to him. [Section 37 of Indian Partnership Act, 1932]

3
Illustration 1.
Bina and Anita are partners. Their partnership agreement provides for the following:
(i) Accounts are to be balanced on 31st December each year.
(ii) Profits are to be divided as follows:
Bina: one-half; Anita: one-third and carried to Reserve: one-sixth.
(iii) That in the event of death of a partner, her executors will be entitled to the following:
(a) Capital to her credit on the date of death.
(b) Proportionate profit till date of death based on the average profit of the last three
completed years.
(c) Share of Goodwill based on three years’ purchases of the average profit for the three
preceding completed years.
Profits for the three years were: 2005—` 42,000; 2006—` 39,000 and 2007—` 45,000.
On 31st December, 2007, Anita’s Capital stood at ` 60,000 and firm’s General Reserve stood at
` 30,000. Anita expired on 1st May, 2008.
From the above, prepare Anita’s Executors’ Account as would appear in the firm’s ledger
transferring the amount to her Loan Account with proper working notes. (ISC 2009)

Solution:
Dr. ANITA’S EXECUTORS’ ACCOUNT Cr.
Particulars
` Particulars `
To Anita’s Executors’ Loan A/c 1,28,000 By Anita’s Capital A/c 60,000
(Balancing Figure) By General Reserve A/c (` 30,000 × 2/5) 12,000
By Bina’s Capital A/c (Goodwill) (WN 2) 50,400
By Profit and Loss Suspense A/c (WN 3) 5,600
1,28,000 1,28,000

Working Notes:
1. Reserves, Goodwill and Share in Profit up to 1st May, 2008 will be shared in the ratio of 3 : 2.

2. Goodwill is valued as follows:

( ` 42, 000 + ` 39 , 000 + ` 45, 000 )
Firm’s Goodwill = × 3 = ` 1,26,000
3
Anita’s Share of Goodwill = ` 1,26,000 × 2/5 = ` 50,400.

3. Anita’s Share in Profit up to 1st May, 2008: `

(i) Average Profit of last 3 years 42,000
(ii ) Profit for 4 months 14,000
(iii) Anita’s Share in Profit (2/5 of ` 14,000) 5,600

1
Illustration 2.
Puneet, Sudhir and Reet are partners sharing profits and losses equally. Their Balance Sheet
as at 31st March, 2022 is given below:
Liabilities
` Assets `
Capital A/cs: Machinery 50,000
Puneet 41,000 Furniture 28,000
Sudhir 41,000 Fixtures 21,000
Reet 45,000 1,27,000 Stock 9,500
General Reserve 15,000 Debtors 45,000
Creditors 23,500 Less: Provision for Doubtful Debts 3,000 42,000
Cash 15,000
1,65,500 1,65,500

Reet died on 1st April, 2022 and the following agreement was to be put into effect:
(i) Assets were to be revalued: Machinery to ` 58,500; Furniture to ` 23,000; Stock to ` 7,500.
(ii) A debtor whose dues of ` 10,000 were written off as bad debt paid 50% in settlement.
(iii) A provision of ` 5,000 was made for tax.
(iv) Goodwill was valued at ` 30,000 and Reet was to be credited with her share.
(v) ` 10,000 were to be paid to the executor of the deceased partner on 1st April, 2022.
You are required to show:
(a) Revaluation Account,
(b) Capital Accounts of the Partners, and
(c) Balance Sheet of the new firm.
Solution:
Dr. REVALUATION ACCOUNT Cr.
Particulars
` Particulars `
To
Furniture A/c (` 28,000 – ` 23,000) 5,000 By Machinery A/c 8,500
To
Stock A/c (` 9,500 – ` 7,500) 2,000 (` 58,500 – ` 50,000)
To
Provision for Tax A/c 5,000 By Bad Debts Recovered A/c 5,000
To
Gain (Profit) transferred to
Partners’ Capital A/cs:
Puneet 500
Sudhir 500
Reet 500 1,500
13,500 13,500

Dr. PARTNERS’ CAPITAL ACCOUNTS Cr.

Particulars Puneet (`) Sudhir (`) Reet (`) Particulars Puneet (`) Sudhir (`) Reet (`)
To Reet’s Capital A/c (WN) 5,000 5,000 ... By Balance b/d 41,000 41,000 45,000
To Reet’s Executor’s A/c ... ... 60,500 By Revaluation A/c 500 500 500
To Balance c/d 41,500 41,500 ... By Puneet’s Capital A/c ... ... 5,000
(WN)
By Sudhir’s Capital A/c ... ... 5,000
(WN)
By General Reserve A/c 5,000 5,000 5,000
46,500 46,500 60,500 46,500 46,500 60,500

2
 BALANCE SHEET OF PUNEET AND SUDHIR as at 1st April, 2022
Liabilities ` Assets `

Capital A/cs: Machinery 58,500

Puneet 41,500 Furniture 23,000
Sudhir 41,500 83,000 Fixtures 21,000
Reet’s Executor’s A/c (` 60,500 – ` 10,000) 50,500 Stock 7,500
Creditors 23,500 Debtors 45,000
Provision for Tax 5,000 Less: Provision for Doubtful Debts 3,000 42,000
Cash (` 15,000 – ` 10,000 + ` 5,000) 10,000
1,62,000 1,62,000

Working Note:

STATEMENT SHOWING THE ADJUSTMENT FOR GOODWILL

Particulars Puneet (`) Sudhir (`) Reet (`)

Share of Goodwill before death of Reet (1 : 1 : 1) 10,000 10,000 10,000

Share of Goodwill after death of Reet (1 : 1)* 15,000 15,000 ...
Gain (+)/Sacrifice (–) (+)5,000 (+)5,000 (–)10,000

* Profit-sharing Ratio is equal before or after the death of Reet, because nothing has been mentioned in respect of
Profit-sharing Ratio.

Illustration 3.
Jai, Ankur and Aditya were partners in a firm sharing profits and losses in the ratio of 3 : 2 : 1.
Aditya died on 30th June, 2021. Balance Sheet of the firm as at 31st March, 2021 is as follows:

BALANCE SHEET
Liabilities ` Assets `

Jai’s Capital 1,20,000 Plant and Machinery 1,20,000

Ankur’s Capital 80,000 Furniture and Fittings 75,000
Aditya’s Capital 40,000 Investments 20,000
Jai’s Current A/c 8,000 Stock-in-Trade 32,000
Ankur’s Current A/c 2,500 Sundry Debtors 25,000
General Reserve 30,000 Bills Receivable 11,000
Bills Payable 17,000 Cash at Bank 18,500
Sundry Creditors 20,000 Cash in Hand 11,000
Aditya’s Current A/c 5,000
3,17,500 3,17,500

Following decisions were taken by the continuing partners:

(i) Goodwill of the firm is valued at ` 30,000.
3
 (ii) Provision for Doubtful Debts is to be raised @ 5% on Sundry Debtors.
(iii) Plant and Machinery is to be reduced by 10%, Furniture and Stock-in-Trade are to be
appreciated by 5% and 10% respectively.
(iv) Advertising Expenses ` 2,100 are to be carried forward to the next accounting year.
(v) Jai and Ankur are to share profits and losses equally in future.
(vi) Profit for the year ended 31st March, 2021 was ` 4,08,000 and Aditya‘s share in profit is
to be determined on the basis of profit for the immediate previous year.
(vii) Fixed Capitals are to be converted into Fluctuating Capitals by transferring Current Account
balances to the respective Partners’ Capital Accounts.
Prepare Revaluation Account, Capital Accounts of the three Partners, showing the necessary
adjustments at Aditya’s death; and prepare Aditya’s Executors’ Account to show that Adi-
tya’s Executors were paid ` 1,300 immediately and ` 33,000 including interest of 10% p.a. on
31st December, 2021 and balance on 30th June, 2022.

Solution:
Dr. REVALUATION ACCOUNT Cr.

Particulars ` Particulars `

To Provision for Doubtful Debts A/c 1,250 By Furniture and Fittings A/c 3,750
To Plant and Machinery A/c 12,000 By Stock-in-Trade A/c 3,200
By Advertising Expenses A/c 2,100
By Loss on Revaluation transferred to:
Jai’s Capital A/c 2,100
Ankur’s Capital A/c 1,400
Aditya’s Capital A/c 700 4,200
13,250 13,250

Dr. PARTNERS’ CAPITAL ACCOUNTS Cr.

Particulars Jai (`) Ankur (`) Aditya (`) Particulars Jai (`) Ankur (`) Aditya (`)

To Aditya’s Current A/c ... ... 5,000 By Balance b/d 1,20,000 80,000 40,000
(Transferred) By Partners’ Current A/cs 8,000 2,500 ...
To Aditya’s Capital A/c ... 5,000 ... By General Reserve A/c 15,000 10,000 5,000
(WN 1) By Ankur’s Capital A/c ... ... 5,000
To Revaluation A/c 2,100 1,400 700 (Goodwill)
To Aditya’s Capital A/c ... 17,000 ... By Ankur’s Capital A/c (WN 2) ... ... 17,000
(WN 2)
To Aditya’s Executors’ A/c ... ... 61,300
To Balance c/d 1,40,900 69,100 ...

1,43,000 92,500 67,000 1,43,000 92,500 67,000

4
Dr. ADITYA’S EXECUTORS’ ACCOUNT Cr.

Date Particulars ` Date Particulars `

2021 2021
June 30 To Cash A/c 1,300 June 30 By Aditya’s Capital A/c 61,300
Dec. 31 To Bank A/c (` 30,000 + ` 3,000) 33,000 Dec. 31 By Interest A/c 3,000
2022 2022 (` 60,000 × 10/100 × 6/12)
March 31 To Balance c/d 30,750 March 31 By Interest A/c (` 30,000 × 10/100 × 3/12) 750
65,050 65,050
2022 2022
June 30 To Bank A/c 31,500 April 1 By Balance b/d 30,750
   June 30 By Interest A/c 750
(` 30,000 × 10/100 × 3/12)
31,500 31,500

Working Notes:
1. Gain/(Sacrifice) of Each Partner: Jai Ankur Aditya
New Profit Share 1/2 1/2 ...
Old Profit Share 3/6 2/6 1/6
Gain/(Sacrifice) 1/2 – 3/6 = Nil 1/2 – 2/6 = 1/6 (Gain) –1/6 (Sacrifice)
Ankur will compensate Aditya for his share of Goodwill, i.e., ` 30,000 × 1/6 = ` 5,000. He is only gaining partner.
2. Share of profit of Aditya from 1st April, 2022 to 30th June, 2022 is debited to Ankur’s Capital Account due to change in
new profit-sharing ratio.
3. Aditya’s share of profit = ` 4,08,000 × 1/6 × 3/12 = ` 17,000.
4. The date of closing the accounts is 31st March and date of payment of instalment is 30th June.
5. Interest on 31st December, 2021 ` 3,000, is accrued and due.
Interest on 31st March, 2022 ` 750 is accrued but not due.

5
 MEANING OF KEY TERMS USED IN THE CHAPTER

1. Retirement of a Partner
When a partner ceases to be a partner of the firm (other than because of death), it is known as retirement of
a partner.
A partner may retire from the firm:
(i ) if there is an agreement to that effect, or
(ii ) if all the partners agree to his/her retirement, or
(iii ) if the partnership is at will, by giving notice in writing to other partners of his or her intention to retire.
It leads to reconstitution of the firm.

2. Revaluation of Assets
Revaluation of Assets means change in the value of assets, i.e., present value being different from the book value of
the assets.

3. Reassessment of Liabilities
Reassessment of Liabilities means reassessing the liabilities and determining the change, i.e., whether the
liability is more or less than that shown in the books of account.

4. Gaining Ratio
Ratio in which the continuing partners acquire retiring partner’s share is called gaining ratio.

5. New Profit-sharing Ratio

Ratio in which the continuing partners (i.e., partners other than retiring partner) decide to share future profits
and losses, is known as new profit-sharing ratio.

6. Profit and Loss Suspense Account

It is the account which is debited to adjust the share of profit of retiring partner between the date of
last Balance Sheet and the date of retirement, when profit-sharing ratio of continuing partners does not
change.

SUMMARY OF THE CHAPTER

• Retirement of a Partner: When a partner ceases to be a partner and the firm continues its operations, it
is called ‘Retirement of a Partner’.
• Adjustment on Retirement of a Partner: At the time of retirement of a partner, few accounting issues
arise and are settled, e.g., calculation of the new profit-sharing ratio and the gaining ratio, revaluation of
assets and liabilities, treatment of goodwill, accumulated profits, reserves and surplus, share in profits or
losses of the outgoing partner up to the date of retirement.
• New Profit-sharing Ratio: The ratio in which the continuing partners (i.e., partners other than the retiring
one) agree to share future profits and losses, is known as the ‘New Profit-sharing Ratio’.
New Profit Share = Old Profit Share + Acquired Profit Share
Unless agreed otherwise, it is presumed that the continuing partners acquire the retiring partner’s share in their
old profit-sharing ratio.
1
• Gaining Ratio: The ratio in which the continuing partners take the retiring partner’s share is known as the
‘Gaining Ratio’.
Gaining Ratio = New Ratio – Old Ratio
Gain of a Partner = New Profit Share – Old Profit Share
• Adjustment with regard to Goodwill: When a partner retires, his share of profit is taken by the remaining
partners. The remaining partners then compensate the retiring partner in the form of goodwill in their gaining
ratio. The following entry is recorded for this purpose:
Gaining Partners’ Capital/Current A/cs ...Dr. [In gaining ratio]
To Retiring Partner’s Capital/Current A/c [With his share of goodwill]
If Goodwill Account appears in the old Balance Sheet, it is written off by passing the following entry:
All Partners’ Capital/Current A/cs ...Dr. [In old ratio]
To Goodwill A/c
• Hidden Goodwill: If a firm pays an amount in excess of total amount due to the retiring partner
(after making all adjustments), then the excess amount is treated as hidden goodwill or his share
of goodwill.
• Revaluation of Assets and Reassessment of Liabilities: At the time of retirement of a partner, assets are
revalued and liabilities are reassessed; the increase or decrease in value of each asset/liability is recorded in
the Revaluation Account. The net balance in the Revaluation Account is transferred to the Capital Accounts
of all the partners (including the outgoing partner) in their old profit-sharing ratio.
• Adjustment for Reserves and Accumulated Profits/Losses: For the past undistributed profits or reserves,
the amount is credited to all the partners in the old profit-sharing ratio.
• Excess of Workmen Compensation Reserve over the Workmen Compensation Liability is credited to all Partners
in their Old Profit-sharing Ratio.
• Excess of Investment Fluctuation Reserve over difference between Book Value and Market Value is credited to
all Partners in their Old Profit-sharing Ratio.
• Adjustments for Reserves and Accumulated Profits/Losses through Single Adjustment Entry: The net
effect may also be adjusted through the following entry:
(i ) In Case of Net Profit: Gaining Partners’ Capital/Current A/cs ...Dr..
To Sacrificing Partners’ Capital/Current A/c
(ii ) In Case of Net Loss: Sacrificing Partners’ Capital/Current A/cs ...Dr.
To Gaining Partners’ Capital/Current A/cs
• Amount Due to a Retiring Partner: Amount due to a retiring partner includes:
(i ) Capital on the date of last Balance Sheet.
(ii ) Interest or salary, if any, payable to him.
(iii ) Share of profit or loss till the date of retirement.
(iv) Share in the gain (profit) or loss on revaluation of assets and reassessment of liabilities.
(v) Share in the goodwill of the firm.
(vi ) Share in the General Reserve or Profit and Loss Account appearing in the Balance Sheet.
Out of the total of (i ) to (vi), the amount of drawings and interest on drawings till the date of retirement
is deducted.
The net amount payable will be settled by paying him cash or by transferring it to a separate Loan Account.

2
Illustration 1.
On 31st March, 2021, Balance Sheet of Anu, Bharat and Bela, sharing profits and losses in
proportion to their capitals, stood as follows:
Liabilities
` Assets `
Creditors 1,08,000 Cash in Hand 80,000
Capital A/cs: Debtors 1,00,000
Anu 4,50,000 Less: Provision for Doubtful Debts 2,000 98,000
Bharat 3,00,000 Stock 90,000
Bela 1,50,000 9,00,000 Machinery 2,40,000
Land and Building 5,00,000
10,08,000 10,08,000

On 1st April, 2021, Bharat retired from the firm and the remaining partners decide to carry on
the business. Following adjustments of assets and liabilities were agreed before the determining
the amount payable to Bharat:
(i) An Unrecorded Asset (computer) of ` 15,000 to be recorded.
(ii) Land and Building to be appreciated by 10%.
(iii) Provision for Doubtful Debts to be brought up to 5% of Debtors.
(iv) A warranty claim of ` 12,000 to be recorded.
(v) A provision for ` 20,000 to be made in respect of an outstanding bill for repairs.
(vi) Stock is overvalued by 20% and Machinery is undervalued by ` 15,000.
(vii) Goodwill of the firm is to be valued at 50% of the profits of last three years credited
to retiring partner’s Capital Account in the last three years. Profits for the years ended
31st March, 2019, 2020, and 2021 were ` 3,00,000, ` 3,50,000 and ` 4,30,000 respectively.
Bharat’s share of the same to be adjusted in the Capital Accounts of Anu and Bela who
share the future profits in the proportion of 3/4th and 1/4th respectively.
(viii) Bharat is to be paid ` 50,000 and balance be transferred to his Loan Account.
Prepare Revaluation Account, Capital Accounts of Partners and Balance Sheet of the firm of
Anu and Bela.

Solution:
Dr. REVALUATION ACCOUNT Cr.
Particulars
` Particulars `
To Provision for Doubtful Debts A/c 3,000 By Computer A/c (Unrecorded) 15,000
(` 5,000 – ` 2,000) By Land and Building A/c 50,000
To Warranty Claim A/c 12,000 By Machinery A/c 15,000
To Provision for Outstanding Repairs A/c 20,000
To Stock A/c (WN 1) 15,000
To Gain (Profit) transferred to:
Anu’s Capital A/c 15,000
Bharat’s Capital A/c 10,000
Bela’s Capital A/c 5,000 30,000
80,000 80,000

1
Dr. PARTNERS’ CAPITAL ACCOUNTS Cr.
Particulars Anu Bharat Bela Particulars Anu Bharat Bela
` ` ` ` ` `

To Bharat’s Capital A/c 45,000 ... 15,000 By Balance b/d 4,50,000 3,00,000 1,50,000
—Goodwill (WN 2) By Capital A/cs: (WN 2)
To Cash A/c ... 50,000 ... Anu ... 45,000 ...
To Bharat’s Loan A/c—Traff. ... 3,20,000 ... Bela ... 15,000 ...
To Balance c/d 4,20,000 ... 1,40,000 By Revaluation A/c—Gain 15,000 10,000 5,000
4,65,000 3,70,000 1,55,000 4,65,000 3,70,000 1,55,000

By Balance b/d 4,20,000 ... 1,40,000

BALANCE SHEET OF ANU AND BELA

as at 1st April, 2021
Liabilities
` Assets `

Creditors 1,08,000 Cash in Hand 30,000

Provision for Outstanding Repairs 20,000 Debtors 1,00,000
Warranty Claim 12,000 Less: Provision for Doubtful Debts 5,000 95,000
Bharat’s Loan 3,20,000 Stock 75,000
Capital A/cs: Computer 15,000
Anu 4,20,000 Machinery (` 2,40,000 + ` 15,000) 2,55,000
Bela 1,40,000 5,60,000 Land and Building 5,50,000
10,20,000 10,20,000

Working Notes:
` 90 , 000
1. Value of Stock =  100  ` 75, 000.
120
Therefore, it is overvalued by ` 15,000 (i.e., ` 90,000 – ` 75,000).

2. Bharat’s Share of Goodwill: `

Profit of last three years (` 3,00,000 + ` 3,50,000 + ` 4,30,000) 10,80,000
Profit credited to Bharat’s Capital Account (` 10,80,000 × 2/6) 3,60,000
Value of Firm’s Goodwill (50% of ` 3,60,000) 1,80,000
Bharat’s Share of Goodwill, viz., ` 1,80,000 × 2/6 = ` 60,000 debited to Anu’s and Bela’s
Capital Accounts in their Gaining Ratio, i.e., 3 : 1 and credited to Bharat’s Capital Account by means of
the following Journal entry:

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

Anu’s Capital A/c (3/4th) ...Dr. 45,000

Bela’s Capital A/c (1/4th) ...Dr. 15,000
To Bharat’s Capital A/c 60,000

2
Illustration 2.
The Balance Sheet of Sambit, Sneha and Darpan who are sharing profits in the ratio of 2 : 3 : 1
as at 31st March, 2021 is given below:
Liabilities
` Assets `

Creditors 7,20,000 Goodwill 24,000

Workmen Compensation Reserve 40,000 Land and Building 5,00,000
Investment Fluctuation Reserve 20,000 Investment (Market Value ` 92,000) 1,00,000
Capital A/cs: Stock 1,60,000
Sambit 2,00,000 Debtors 6,00,000
Sneha Less: Provision for Doubtful Debts
4,00,000 20,000 5,80,000
Darpan 6,00,000 12,00,000 Bank 5,92,000
Deferred Revenue Expenditure 24,000
(Advertisement Suspense)
19,80,000 19,80,000

Darpan retired on 1st April, 2021 and Sambit and Sneha decide to share future profits and
losses in the ratio of 3 : 2 and 50% is to be paid immediately to Darpan and the balance in two
equal annual instalments together with interest @ 10% p.a.
Following adjustment of assets and liabilities have been agreed upon before the determining
the amount payable to Darpan:
(i) Goodwill is to be valued at 2 years’ purchase of average profit of last three completed
years. The profits for the years ended 31st March, 2019, 2020 and 2021 were: ` 96,000;
` 1,86,000 and ` 2,76,000 respectively.
(ii) Land and Building was undervalued by ` 50,000 and Stock was overvalued by ` 16,000.
(iii) Provision for doubtful debts is to be made for amount equal to 5% of the debtors.
(iv) Claim on account of workmen compensation is ` 16,000.
(v) Sambit and Sneha decide to continue showing balance of reserves, and
(a) After adjusting Workmen Compensation claim from Workmen Compensation
Reserve;
(b) After adjusting fall in market value of Investments from Investment Fluctuation
Reserve.
(vi) Deferred Revenue Expenditure (Advertisement Suspense) will also continue in
the books.
Darpan’s share in these reserves and losses should be adjusted by opening Current.
Accounts of Sambit and Sneha.
Pass the necessary Journal entries and prepare the necessary ledger accounts and the
Balance Sheet.
3
Solution: JOURNAL
Date Particulars L.F. Dr. (`) Cr. (`)
2021
Sambit’s Capital A/c ...Dr. 8,000
April
1 Sneha’s Capital A/c ...Dr. 12,000
Darpan’s Capital A/c ...Dr. 4,000
To Goodwill A/c 24,000
(Being the existing goodwill written off)
Sambit’s Capital A/c (` 3,72,000 × 8/30) ...Dr. 99,200
To Sneha’s Capital A/c (` 3,72,000 × 3/30) 37,200
To Darpan’s Capital A/c (` 3,72,000 × 5/30) 62,000
(Being the goodwill adjusted by debiting gaining partner (Sambit for 8/30) and
crediting Sacrificing partners (Sneha for 3/30) and (Darpan for 1/6)) (WN 1 and 2)
Land and Building A/c ...Dr. 50,000
To Revaluation A/c 50,000
(Being the increase in value of assets recorded)
Revaluation A/c ...Dr. 26,000
To Stock A/c 16,000
To Provision for Doubtful Debts A/c 10,000
(Being the decrease in value of stock and increase in provision recorded)
Revaluation A/c ...Dr. 24,000
To Sambit’s Capital A/c 8,000
To Sneha’s Captial A/c 12,000
To Darpan’s Capital A/c 4,000
(Being the transfer of gain (profit) on revaluation)
Workmen Compensation Reserve A/c ...Dr. 16,000
To Workmen Compensation Claim A/c 16,000
(Being the workmen compensation claim adjusted)
Investment Fluctuation Reserve A/c ...Dr. 8,000
To Investment A/c 8,000
(Being the fall in market value of investment adjusted)
Sambit’s Current A/c ...Dr. 3,200
To Sneha’s Current A/c 1,200
To Darpan’s Capital A/c 2,000
(Being accumulated profits, losses and reserves adjusted by
debiting gaining partner and crediting sacrificing partners) (WN 3)
Darpan’s Capital A/c ...Dr. 6,64,000
To Bank A/c 3,32,000
To Darpan’s Loan A/c 3,32,000
(Being 50% payment made and the balance transferred to Darpan’s
Loan Account)
Ledger Accounts:
Dr. REVALUATION ACCOUNT Cr.
Particulars ` Particulars `
To Stock A/c 16,000 By Land and Building A/c 50,000
To Provision for Doubtful Debts A/c 10,000
To Gain (Profit) on Revaluation transferred to:
Sambit’s Capital A/c 8,000
Sneha’s Capital A/c 12,000
Darpan’s Capital A/c 4,000 24,000
50,000 50,000

4
Dr. PARTNERS’ CAPITAL ACCOUNTS Cr.
Particulars Sambit Sneha Darpan Particulars Sambit Sneha Darpan
` ` ` ` ` `
To Goodwill A/c 8,000 12,000 4,000 By Balance b/d 2,00,000 4,00,000 6,00,000
To Sneha’s Capital A/c 37,200 ... ... By Sambit’s Capital A/c ... 37,200 62,000
To Darpan’s Capital A/c 62,000 ... ... By Revaluation A/c 8,000 12,000 4,000
To Bank A/c ... ... 3,32,000 By Sambit’s Current A/c ... ... 2,000
To Darpan’s Loan A/c ... ... 3,32,000
To Balance c/d 1,00,800 4,37,200 ...
2,08,000 4,49,200 6,68,000 2,08,000 4,49,200 6,68,000

BALANCE SHEET as at 1st April, 2021

Liabilities ` Assets `
Creditors 7,20,000 Land and Building 5,50,000
Workmen Compensation Claim 16,000 Investment 92,000
Workmen Compensation Reserve 24,000 Stock 1,44,000
(` 40,000 – ` 16,000) Debtors 6,00,000
Investment Fluctuation Reserve 12,000 Less: Provision for Doubtful Debts 30,000 5,70,000
(` 20,000 – ` 8,000) Bank (` 5,92,000 – ` 3,32,000) 2,60,000
Sneha’s Current A/c 1,200 Sambit’s Current A/c 3,200
Darpan’s Loan 3,32,000 Advertisement Suspense A/c 24,000
Sambit’s Capital A/c 1,00,800
Sneha’s Capital A/c 4,37,200 5,38,000
16,43,200 16,43,200

Working Notes:
1. Calculation of Gain/(Sacrifice) of each Partner:
New Profit Share Old Profit Share Difference
Sambit 3/5 2/6 3/5 – 2/6 = 8/30 (Gain)
Sneha 2/5 3/6 2/5 – 3/6 = –3/30 (Sacrifice)
Darpan ... 1/6 0 – 1/6 = –1/6 or –5/30 (Sacrifice)
2. Adjustment of Goodwill:
` 96 , 000  ` 1, 86 , 000  ` 2, 76 , 000
Average Profit =  ` 1, 86 , 000
3
Firm’s Goodwill = ` 1,86,000 × 2 = ` 3,72,000
Darpan’s Share of Goodwill = 1/6 of ` 3,72,000 = ` 62,000
Sambit is the only gaining partner. He will compensate both Darpan and Sneha, the sacrificing partners.
Sambit will compensate Sneha to the extent of sacrifice made by her, i.e., ` 3,72,000 × 3/30 = ` 37,200.
3. Adjustment of Accumulated Profits, Losses and Reserves: `
Workmen Compensation Reserve (` 40,000 – ` 16,000) 24,000
Add: Investment Fluctuation Reserve (` 20,000 – ` 8,000) 12,000
36,000
Less: Advertisement Suspense Account 24,000
Net Amount 12,000
Adjustment Journal Entry: ` `
Sambit’s Current A/c (` 12,000 × 8/30) ...Dr. 3,200
To Sneha’s Current A/c (` 12,000 × 3/30) 1,200
To Darpan’s Capital A/c (` 12,000 × 5/30) 2,000
5
Illustration 3.
Niti, Gaurav and Shyam were partners sharing profits in the ratio of 3 : 2 : 1. Balance Sheet of
the firm as at 31st March, 2022 was as follows:

Liabilities
` Assets `

Creditors 21,000 Cash at Bank 5,750

Employees’ Provident Fund 6,000 Debtors 40,000
Workmen Compensation Reserve 12,000 Less: Provision for Doubtful Debts 2,000 38,000
Investments Fluctuation Reserve 6,000 Stock 37,650
Niti’s Capital 68,000 Investments (Market value ` 17,600) 15,000
Gaurav’s Capital 32,000 Patents 10,000
Shyam’s Capital 21,000 Plant and Machinery 50,000
Goodwill 6,000
Advertisement Expenditure 3,600
1,66,000 1,66,000

Shyam retired on 1st April, 2022 on the following terms:

(i) Goodwill of the firm be valued at ` 30,000 and Shyam’s share of it be adjusted into the
Capital Accounts of Niti and Gaurav.
(ii) Value of the Patents was to be reduced by 20% and that of Plant and Machinery to 90%.
(iii) Provision for Doubtful Debts was to be raised to 6%.
(iv) Liability for Workmen Compensation to the extent of ` 3,000 is to be created.
(v) Shyam took the Investments at their market value.
(vi) Amount due to Shyam is to be settled on the following basis:
50% on retirement, 50% of the balance within one year and the balance by a bill of
exchange (without interest) at 3 months.
You are required to pass Journal entries for Goodwill, prepare Revaluation Account, Partners’
Capital Accounts and the Balance Sheet of Niti and Gaurav after Shyam’s retirement.

Solution: JOURNAL
Date Particulars L.F. Dr. (`) Cr. (`)
2022
April 1 Niti’s Capital A/c ...Dr. 3,000
Gaurav’s Capital A/c ...Dr. 2,000
Shyam’s Capital A/c ...Dr. 1,000
To Goodwill A/c 6,000
(Being the existing book value of goodwill written off)
April 1 Niti’s Capital A/c ...Dr. 3,000
Gaurav’s Capital A/c ...Dr. 2,000
To Shyam’s Capital A/c 5,000
(Being the Shyam’s share of goodwill credited to him by debiting gaining
partners in their gaining ratio of 3 : 2) (WN 1)

6
Dr. REVALUATION ACCOUNT Cr.

Particulars ` Particulars `
To Patents A/c 2,000 By Investments A/c (` 17,600 – ` 15,000) 2,600
To Plant and Machinery A/c 5,000 By Loss on Revaluation transferred to:
To Provision for Doubtful Debts A/c 400 Niti’s Capital A/c 2,400
(6% of ` 40,000 – ` 2,000) Gaurav’s Capital A/c 1,600
Shyam’s Capital A/c 800 4,800
7,400 7,400

Dr. PARTNERS’ CAPITAL ACCOUNTS Cr.

Particulars Niti Gaurav Shyam Particulars Niti Gaurav Shyam
` ` ` ` ` `
To Goodwill A/c 3,000 2,000 1,000 By Balance b/d 68,000 32,000 21,000
To Shyam’s Capital A/c 3,000 2,000 ... By Workmen Compen-
(WN 1) (Goodwill) sation Reserve A/c 4,500 3,000 1,500
To Revaluation A/c 2,400 1,600 800 By Investments Fluctua-
(Loss) tion Reserve A/c 3,000 2,000 1,000
To Advertisement By Niti’s Capital A/c ... ... 3,000
Expenditure A/c 1,800 1,200 600 (WN 1) (Goodwill)
To Investments A/c ... ... 17,600 By Gaurav’s Capital A/c ... ... 2,000
To Bank A/c (WN 2) ... ... 4,250 (WN 1) (Goodwill)
To Shyam’s Loan A/c ... ... 2,125
(WN 2)
To Bills Payable A/c ... ... 2,125
(WN 2)
To Balance c/d 65,300 30,200 ...
75,500 37,000 28,500 75,500 37,000 28,500

BALANCE SHEET OF NITI AND GAURAV as at 1st April, 2022

Liabilities ` Assets `
Creditors 21,000 Cash at Bank (` 5,750 – ` 4,250) 1,500
Workmen Compensation Claim 3,000 Debtors 40,000
Employees’ Provident Fund 6,000 Less: Provision for Doubtful Debts 2,400 37,600
Bills Payable (Shyam) 2,125 Stock 37,650
Shyam’s Loan 2,125 Patents 8,000
Niti’s Capital 65,300 Plant and Machinery 45,000
Gaurav’s Capital 30,200
1,29,750 1,29,750

Working Notes:
1. Shyam’s Share of Goodwill = ` 30,000 × 1/6 = ` 5,000, which is contributed by Niti and Gaurav in their Gaining
Ratio, i.e., 3 : 2.
2. Amount Due to Shyam = ` (21,000 + 1,500 + 1,000 + 3,000 + 2,000) – ` (1,000 + 800 + 600 + 17,600) = ` 8,500.
Amount paid on retirement = 50/100 × ` 8,500 = ` 4,250.
Amount payable within one year = 50/100 (` 8,500 – ` 4,250) = ` 2,125.
Bills Payable to Shyam = ` 2,125.
3. Excess Workmen Compensation Reserve (` 12,000 – ` 3,000) is transferred to Partners’ Capital Accounts.
4. Advertisement Expenditure shown in the Balance Sheet is a fictitious asset (or Deferred Revenue
Expenditure). Therefore, it is debited to Partners’ Capital Accounts in the Profit-sharing Ratio.
5. Shyam took the investments at market value. Therefore, Investments Fluctuation Reserve being free
reserve or undistributed profit is transferred to the Partners’ Capital Accounts in their profit-sharing ratio.
7
Illustration 4.
Inder, Kirti and Lavina are partners sharing profits in the ratio of 4 : 3 : 1. Their Balance Sheet
as at 31st March, 2022 is given below:
Liabilities ` Assets `

Creditors 70,000 Cash in Hand 80,000

Bills Payable 30,000 Cash at Bank 20,000
Workmen Compensation Reserve 20,000 Stock 75,000
General Reserve 80,000 Debtors 1,30,000
Capital A/cs: Less: Provision for Doubtful Debts 5,000 1,25,000
Inder 2,00,000 Investment in Debentures 1,50,000
Kirti 3,00,000 Investment in Shares 1,00,000
Lavina 2,00,000 7,00,000 Plant and Machinery 1,20,000
Building 2,30,000
9,00,000 9,00,000

On 1st April, 2022, Kirti retired from the firm selling her share of profit to Inder for
` 36,000 and to Lavina for ` 45,000 in the ratio of 4 : 5. For the purpose of Kirti’s retirement, it
was agreed that:
(i) Stock is to be appreciated by 20% and Building by 10%.
(ii) Investment in Debentures is sold for ` 70,000.
(iii) Provision for Doubtful Debts is increased to 10%.
(iv) Investment in Shares is sold for ` 2,35,000.
(v) Claim on account of Workmen Compensation is ` 12,000.
(vi) Revaluation Expenses were ` 5,000 and were paid.
(vii) Amount due to Kirti is to be settled on the following basis:
50% on retirement and the balance within one year.
(viii) Capital of the newly constituted firm is fixed at ` 6,00,000 to be contributed by
Inder and Lavina in new profit-sharing ratio. Adjustment is to be made in cash.
Calculate New Profit-sharing Ratio and prepare Revaluation Account and Partners’ Capital Accounts.

Solution:
Calculation of New Profit-sharing Ratio:
Kirti’s share is 3/8 which she is surrendering in favour of Inder and Lavina in the ratio of 4 : 5
Therefore Inder will get 4/9 of 3/8 = 1/6 and Lavina will get 5/9 of 3/8 = 5/24
Total share of Inder in the new firm will be: 4/8 + 1/6 = 16/24 or 2/3
Total share of Lavina in the new firm will be: 1/8 + 5/24 = 8/24 or 1/3
New Profit-sharing Ratio of Inder and Lavina = 2 : 1.
8
Dr. REVALUATION ACCOUNT Cr.

Particulars ` Particulars `

To Provision for Doubtful Debts A/c 8,000 By Stock A/c 15,000

To Investment in Debentures A/c 80,000 By Building A/c 23,000
(` 1,50,000 – ` 70,000) By Investment in Shares A/c 1,35,000
To Cash A/c (Revaluation Expenses) 5,000 (` 2,35,000 – ` 1,00,000)
To Gain (Profit) transferred to:
Inder’s Capital A/c 40,000
Kirti’s Capital A/c 30,000
Lavina’s Capital A/c 10,000 80,000
1,73,000 1,73,000

Dr. PARTNERS’ CAPITAL ACCOUNTS Cr.

Particulars Inder (`) Kirti (`) Lavina (`) Particulars Inder (`) Kirti (`) Lavina (`)

To Kirti’s Capital A/c 36,000 ... 45,000 By Balance b/d 2,00,000 3,00,000 2,00,000
(WN 1) By General Reserve A/c 40,000 30,000 10,000
To Cash A/c ... 2,22,000 ... By Inder’s Capital A/c ... 36,000 ...
(50% of dues) (WN 1)
To Kirti’s Loan A/c ... 2,22,000 ... By Lavina’s Capital A/c ... 45,000 ...
To Balance c/d 4,00,000 ... 2,00,000 (WN 1)
By Revaluation A/c 40,000 30,000 10,000
By Workmen Compen-
sation Reserve A/c 4,000 3,000 1,000
By Cash A/c (WN 2) 1,52,000 ... 24,000
4,36,000 4,44,000 2,45,000 4,36,000 4,44,000 2,45,000

Working Notes:
1. Kirti sold her share to Inder and Lavina in the ratio of 4 : 5. The consideration of ` 36,000 and ` 45,000 will be credited to Kirti’s
Capital Account and the respective amount will be debited to Inder’s and Lavina’s Capital Accounts.
2. Total Capital of the New Firm is ` 6,00,000. New Profit-sharing Ratio is 2 : 1.
Inder’s Contribution as Capital in New Firm’s Capital = ` 6,00,000 × 2/3 = ` 4,00,000
Lavina’s Contribution as Capital in New Firm’s Capital = ` 6,00,000 × 1/3 = ` 2,00,000
After all adjustments, Inder’s Capital will be ` (2,00,000 + 40,000 + 40,000 + 4,000 – 36,000) = ` 2,48,000. Therefore, Inder
will bring in (` 4,00,000 – ` 2,48,000) = ` 1,52,000.
After all adjustments, Lavina’s Capital will be ` (2,00,000 + 10,000 + 10,000 + 1,000 – 45,000) = ` 1,76,000. Therefore, Lavina
will bring in (` 2,00,000 – ` 1,76,000) = ` 24,000.

9
Illustration 1.
Anya and Balraj are in partnership sharing profits and losses in the ratio of 3 : 2. Their
Balance Sheet as on 31st March, 2020 is as under:
Liabilities
` Assets `
Anya’s Capital 88,000 Goodwill 5,000
Balraj’s Capital 1,27,000 Land and Building 30,000
Workmen Compensation Reserve 10,000 Investments (Market Value ` 22,500) 25,000
Investment Fluctuation Reserve 5,000 Debtors 50,000
Employees’ Provident Fund 5,000 Less: Provision for Doubtful Debts 5,000 45,000
Arvind’s Loan 1,50,000 Stock 1,50,000
Bank Balance 1,25,000
Advertisement Suspense A/c 5,000
3,85,000 3,85,000

On 1st April, 2020, they admit Arvind as a partner on the following terms:
(i) Anya will give 1/3rd of his share while Balraj will give 1/10 from his share in favour
of Arvind.
(ii) Arvind’s loan will be converted into his capital.
(iii) Arvind brings in 60% of his share of goodwill by cheque.
(iv) Goodwill is to be valued at 2 years’ purchase of super profit of last three completed
years. Profits for the last three years ended 31st March, are as follows:
2018—` 2,40,000; 2019—` 4,65,000; and 2020—` 6,90,000.
The normal profit is ` 3,15,000 with same amount of capital invested in similar industry.
(v) Land and Building was found undervalued by ` 25,000, Stock was found overvalued by
` 35,000 and Provision for Doubtful Debts is to be made equal to 5% of the debtors.
(vi) Claim on account of Workmen Compensation is ` 5,000. An unrecorded accrued
income of ` 5,000 be provided for. A debtor whose dues of ` 25,000 were written
off as bad debts, paid ` 20,000 in full settlement.
(vii) Workmen Compensation Reserve and Investment Fluctuation Reserve are to be
shown in the books of new firm after adjusting Workmen Compensation Claim and
difference between book value and market value of investment.
(viii) Capital Accounts of the partners to be readjusted on the basis of their profit-sharing
ratio and any excess or deficiency be adjusted in cash.
Prepare Revaluation Account, Partners’ Capital Accounts and the Balance Sheet of the new firm.
Solution:
Dr. REVALUATION ACCOUNT Cr.
Particulars
` Particulars `
To Stock A/c 35,000 By Land and Building A/c 25,000
To Gain (Profit) on Revaluation transferred to: By Provision for Doubtful Debt A/c:
Anya’s Capital A/c 10,500 Existing 5,000
Balraj’s Capital A/c 7,000 17,500 Less: Required (5% of ` 50,000) 2,500 2,500
By Bad Debts Recovered A/c 20,000
By Accrued Income A/c 5,000
52,500 52,500

1
Dr. PARTNERS’ CAPITAL ACCOUNTS Cr.
Particulars Anya (`) Balraj (`) Arvind (`) Particulars Anya (`) Balraj (`) Arvind (`)

To Goodwill A/c 3,000 2,000 ... By Balance b/d 88,000 1,27,000 ...
To Advertisement By Arvind’s Loan A/c ... ... 1,50,000
Suspense A/c 3,000 2,000 ... By Premium for Goodwill A/c 36,000 18,000 ...
To Bank A/c (Bal. Fig.) ... 10,000 ... By Arvind’s Current A/c (WN 3) 24,000 12,000 ...
To Balance c/d (WN 6) 2,00,000 1,50,000 1,50,000 By Revaluation A/c (Profit) 10,500 7,000 ...
By Bank A/c (Bal. Fig.) 47,500 ... ...
2,06,000 1,64,000 1,50,000 2,06,000 1,64,000 1,50,000

BALANCE SHEET OF THE NEW FIRM as at 1st April, 2020

Liabilities
` Assets `

Capital A/cs: Land and Building 55,000

Anya 2,00,000 Investments 22,500
Balraj 1,50,000 Debtors 50,000
Arvind 1,50,000 5,00,000 Less: Provision for Doubtful Debts 2,500 47,500
Current A/cs: Stock (` 1,50,000 – ` 35,000) 1,15,000
Anya 1,500 Bank Balance (WN 7) 2,36,500
Balraj 750 2,250 Accrued Income 5,000
Workmen Compensation Reserve 5,000 Arvind’s Current A/c 38,250
Investment Fluctuation Reserve 2,500
Employees’ Provident Fund 5,000
Workmen Compensation Claim 5,000
5,19,750 5,19,750

Working Notes:
1. Calculation of Arvind’s Share, Sacrificing Ratio and New Ratio:
New Profit Share = Old Profit Share – Profit Share surrendered
Anya’s New Profit Share = 3/5 – (1/3 × 3/5) = 3/5 – 1/5 = 2/5 or 4/10
Balraj’s New Profit Share = 2/5 – 1/10 = (4 – 1)/10 = 3/10
Arvind’s Profit Share = 1/5 + 1/10 = (2 + 1)/10 = 3/10
New Profit-sharing Ratio of Anya, Balraj and Arvind = 4/10 : 3/10 : 3/10 = 4 : 3 : 3
Sacrificing ratio of Anya and Balraj = 1/5 : 1/10 = 2 : 1.

2. Calculation of Arvind’s Share of Goodwill:

` 2,40,000 + ` 4,65,000 + ` 6,90,000
A. Average Profit = = ` 4,65,000
3
B. Normal Profit = ` 3,15,000
C. Super Profit = Average Profit – Normal Profit = ` 4,65,000 – ` 3,15,000 = ` 1,50,000
D. Firm’s Goodwill = Super Profit × No. of years’ purchase = ` 1,50,000 × 2 = ` 3,00,000
E. Arvind’s Share of Goodwill = ` 3,00,000 × 3/10 = ` 90,000.

2
3. Journal Entries with respect to Goodwill: ` `
Bank A/c (60% of ` 90,000) ...Dr. 54,000
To Premium for Goodwill A/c 54,000
Premium for Goodwill A/c ...Dr. 54,000
To Anya’s Capital A/c 36,000
To Balraj’s Capital A/c 18,000
Arvind’s Current A/c (` 90,000 – ` 54,000) ...Dr. 36,000
To Anya’s Capital A/c 24,000
To Balraj’s Capital A/c 12,000
4. For Adjustment of Workmen Compensation Reserve and Investment Fluctuation Reserve:
Workmen Compensation Reserve = ` 10,000 – ` 5,000 (Claim) ` 5,000
Investment Fluctuation Reserve = ` 5,000 – (` 25,000 – ` 22,500) ` 2,500
` 7,500
Adjustment Entry with respect to Workmen Compensation Reserve and Investment Fluctuation Reserve:
` `
Arvind’s Current A/c (` 7,500 × 3/10) ...Dr. 2,250
To Anya’s Current A/c (` 7,500 × 1/5) 1,500
To Balraj’s Current A/c (` 7,500 × 1/10) 750
Note: For adjusting capital of Anya, Balraj and Arvind this adjustment is made through Partners’ Current Accounts.

5. Dr. PARTNERS’ CURRENT ACCOUNTS Cr.

Particulars Anya (`) Balraj (`) Arvind (`) Particulars Anya (`) Balraj (`) Arvind (`)
To Anya’s Capital A/c ... ... 24,000 By Arvind’s Current A/c 1,500 750 ...
To Balraj’s Capital A/c ... ... 12,000 By Balance c/d ... ... 38,250
To Anya’s Current A/c ... ... 1,500
To Balraj’s Current A/c ... ... 750
To Balance c/d 1,500 750 ...
1,500 750 38,250 1,500 750 38,250

6. Adjustment of Capital:
Total Capital of the Firm = ` 1,50,000 × 10/3 = ` 5,00,000
Thus, Anya’s New Capital = ` 5,00,000 × 4/10 = ` 2,00,000;
Balraj’s New Capital = ` 5,00,000 × 3/10 = ` 1,50,000; and
Arvind’s Capital = ` 1,50,000.

7. Dr. BANK ACCOUNT Cr.

Particulars
` Particulars `

To Balance b/d 1,25,000 By Balraj’s Capital A/c 10,000

To Bad Debts Recovered A/c 20,000 By Balance c/d 2,36,500
To Premium for Goodwill A/c 54,000
To Anya’s Capital A/c 47,500
2,46,500 2,46,500

3
Illustration 2.
Ashutosh and Bibek are partners sharing profits in the ratio of 3 : 2. They admit Charu
as a new partner from 1st April, 2020 and decided to share future profits in the ratio of
4 : 3 : 3. The Balance Sheet as at 31st March, 2020 is given below:
Liabilities
` Assets `

Ashutosh’s Capital 1,76,000 Goodwill 34,000

Bibek’s Capital 2,54,000 Land and Building 60,000
Workmen Compensation Reserve 20,000 Investment (Market value ` 45,000) 50,000
Investment Fluctuation Reserve 10,000 Debtors 1,00,000
Employees’ Provident Fund 34,000 Less: Provision for Doubtful Debts 10,000 90,000
Burman’s Loan 3,00,000 Stock 3,00,000
Bank Balance 2,50,000
Advertisement Suspense A/c 10,000
7,94,000 7,94,000

Terms of Charu’s admission are as follows:

(i) Charu contributes proportionate capital and 60% of her share of goodwill in cash.
(ii) Goodwill is to be valued at 2 years’ purchase of super profit of last three completed
years. Profits for the years ended 31st March, were:
2018—` 4,80,000; 2019—` 9,30,000; 2020—` 13,80,000.
Normal profit is ` 5,30,000 with same amount of capital invested in similar industry.
(iii) Based on Government Approved valuer’s report, Land and Building was valued at
` 1,60,000. Valuer was paid ` 5,000 as his fee for valuation.
(iv) Stock was found overvalued by ` 26,000.
(v) Provision for Doubtful Debts is to be made equal to 5% of the debtors.
(vi) Claim on account of Workmen Compensation is ` 10,000.
(vii) Workmen Compensation Reserve and Investment Fluctuation Reserve are to appear
in the books of the new firm after adjusting Workmen Compensation Claim and
difference between the book value and market value of investment. This adjustment
is to be made through Partners’ Current Accounts.
Prepare Revaluation Account, Partners’ Capital Accounts and Balance Sheet of the new firm.

Solution:
Dr. REVALUATION ACCOUNT Cr.

Particulars
` Particulars `

To Stock A/c 26,000 By Land and Building A/c 1,00,000

To Bank A/c (Valuer’s Fee) 5,000 By Provision for Doubtful Debts A/c:
To Gain (Profit) on Revaluation Existing 10,000
transferred to: Less: Required (` 1,00,000 × 5/100) 5,000 5,000
Ashutosh’s Capital A/c 44,400
Bibek’s Capital A/c 29,600 74,000
1,05,000 1,05,000

4
Dr. PARTNERS’ CAPITAL ACCOUNTS Cr.
Particulars Ashutosh Bibek Charu Particulars Ashutosh Bibek Charu
` ` ` ` ` `

To Goodwill A/c 20,400 13,600 ... By Balance b/d 1,76,000 2,54000 ...
To Advertisement By Bank A/c (WN 5) ... ... 3,00,000
Suspense A/c 6,000 4,000 ... By Premium for Goodwill A/c 96,000 48,000 ...
To Balance c/d 3,54,000 3,46,000 3,00,000 By Charu’s Current A/c (WN 3) 64,000 32,000 ...
By Revaluation A/c (Profit) 44,400 29,600 ...
3,80,400 3,63,600 3,00,000 3,80,400 3,63,600 3,00,000

BALANCE SHEET OF THE NEW FIRM

as at 1st April, 2020
Liabilities
` Assets `

Employees’ Provident Fund 34,000 Land and Building 1,60,000

Workmen Compensation Claim 10,000 Investment 45,000
Workmen Compensation Reserve 10,000 Debtors 1,00,000
(` 20,000 – ` 10,000) Less: Provision for Doubtful Debts 5,000 95,000
Investment Fluctuation Reserve 5,000 Stock 2,74,000
Burman’s Loan 3,00,000 Bank Balance (WN 6) 6,89,000
Current A/cs (WN 7): Charu’s Current A/c (WN 7) 1,00,500
Ashutosh 3,000
Bibek 1,500 4,500
Capital A/cs:
Ashutosh 3,54,000
Bibek 3,46,000
Charu 3,00,000 10,00,000
13,63,500 13,63,500

Working Notes:
1. Calculation of Sacrificing Ratio: Ashutosh Bibek
(a) Old Share 3/5 2/5
(b) New Share 4/10 3/10
(c) Share surrendered (a – b) 3/5 – 4/10 = 2/10 2/5 – 3/10 = 1/10
Thus, Sacrificing Ratio of Ashutosh and Bibek = 2/10 : 1/10 = 2 : 1.
2. Calculation of Charu’s Share of Goodwill:
` 4,80,000 + ` 9,30,000 + ` 13,80,000
(a) Average Profit = = ` 9,30,000
3
(b) Normal Profit = ` 5,30,000

(c) Super Profit = Average Profit – Normal Profit = ` 9,30,000 – ` 5,30,000 = ` 4,00,000

(d) Firm’s Goodwill = Super Profit × No. of years’ purchase = ` 4,00,000 × 2 = ` 8,00,000

(e) Charu’s Share of Goodwill = ` 8,00,000 × 3/10 = ` 2,40,000.

5
3. Journal Entries with respect to Goodwill: ` `

(i) Bank A/c ...Dr. 1,44,000

To Premium for Goodwill A/c 1,44,000

(ii) Premium for Goodwill A/c ...Dr. 1,44,000

To Ashutosh’s Capital A/c 96,000
To Bibek’s Capital A/c 48,000

(iii) Charu’s Current A/c (` 2,40,000 – ` 1,44,000) ...Dr.

96,000
To Ashutosh’s Capital A/c 64,000
To Bibek’s Capital A/c 32,000

4. For Adjustment of Workmen Compensation Reserve and Investment Fluctuation Reserve: `

Workmen Compensation Reserve = ` 20,000 – ` 10,000 (Claim) 10,000
Investment Fluctuation Reserve = ` 10,000 – (` 50,000 – ` 45,000) 5,000
15,000

Adjustment Entry with respect to Workmen Compensation Reserve and Investment Fluctuation Reserve:
` `
Charu’s Current A/c (` 15,000 × 3/10) 4,500
To Ashutosh’s Current A/c (` 15,000 × 2/10) 3,000
To Bibek’s Current A/c (` 15,000 × 1/10) 1,500
5. Calculation of Charu’s Capital: `
Ashutosh’s Adjusted Capital 3,54,000
Bibek’s Adjusted Capital 3,46,000
Combined Capital of Ashutosh and Bibek for 7/10th share 7,00,000
Thus, Charu’s Capital for 3/10th share = ` 7,00,000 × 10/7 × 3/10 = ` 3,00,000.

6. Dr. BANK ACCOUNT Cr.

Particulars
` Particulars `
To Balance b/d 2,50,000 By Revaluation A/c (Valuer’s fee) 5,000
To Premium for Goodwill A/c 1,44,000 By Balance c/d 6,89,000
To Charu’s Capital A/c 3,00,000
6,94,000 6,94,000

7. Dr. PARTNERS’ CURRENT ACCOUNTS Cr.

Particulars Ashutosh Bibek Charu Particulars Ashutosh Bibek Charu
` ` ` ` ` `
To Ashutosh’s Capital A/c ... ... 64,000 By Charu’s Current A/c 3,000 1,500 ...
(WN 3) (WN 4)
To Bibek’s Capital A/c ... ... 32,000 By Balance c/d ... ... 1,00,500
(WN 3)
To Ashutosh’s Current A/c ... ... 3,000
(WN 4)
To Bibek’s Current A/c ... ... 1,500
(WN 4)
To Balance c/d 3,000 1,500 ...
3,000 1,500 1,00,500 3,000 1,500 1,00,500

6
Illustration 3.
Aman, Burman and Kapil are partners sharing profits and losses in the ratio of 3 : 2 : 1.
They admit Dev as a partner for 1/3rd share of profits w.e.f. 1st April, 2021. An extract of
their Balance Sheet as at 31st March, 2021 is as follows:
Liabilities ` Assets `
Workmen Compensation Reserve 90,000
Show the accounting treatment of Workmen Compensation Reserve on the admission of
Dev under following two alternative cases:
Case 1. When liability for Workmen Compensation is determined at ` 60,000.
Case 2. When liability for Workmen Compensation is determined at ` 1,50,000.
Solution: JOURNAL
Date Particulars L.F. Dr. (`) Cr. (`)
2021
April 1
Case 1 Workmen Compensation Reserve A/c ...Dr. 90,000
To Workmen Compensation Claim A/c 60,000
To Aman’s Capital A/c 15,000
To Burman’s Capital A/c 10,000
To Kapil’s Capital A/c 5,000
(Being the amount in excess of liability transferred to Capital Accounts of
old partners in their old profit-sharing ratio)
Case 2 Workmen Compensation Reserve A/c ...Dr. 90,000
Revaluation A/c ...Dr. 60,000
To Workmen Compensation Claim A/c 1,50,000
(Being the liability towards Workmen Compensation accounted)
Aman’s Capital A/c ...Dr. 30,000
Burman’s Capital A/c ...Dr. 20,000
Kapil’s Capital A/c ...Dr. 10,000
To Revaluation A/c 60,000
(Being the loss on revaluation transferred to Old Partners’ Capital Accounts
in their old profit-sharing ratio)

Illustration 4 (Comprehensive).
Nimrat and Kirti are partners in a firm sharing profits and losses in the ratio of 7 : 3.
Their Balance Sheet as at 31st March, 2021 is as follows:
Liabilities
` Assets `
Sundry Creditors 40,000 Cash in Hand 36,000
Bank Overdraft 20,000 Sundry Debtors 46,000
General Reserve 10,000 Less: Provision for
Capital A/cs:    Doubtful Debts 2,000 44,000
Nimrat 50,000 Stock-in-Trade 50,000
Kirti 40,000 90,000 Furniture 30,000
1,60,000 1,60,000

On 1st April, 2021, Anahat joins the firm as a partner for 1/4th share of future profits on
the following terms and conditions:
(i) Goodwill is valued at ` 40,000 and Anahat is to bring the necessary amount in cash as
premium for goodwill.
7
(ii) 20% of the General Reserve is to be transferred to Workmen Compensation Reserve
against expected claim.
(iii) Stock-in-Trade is to be reduced by 40% and Furniture is to be reduced to 40%.
(iv) Provision for Doubtful Debts is to be increased to ` 4,000.
(v) Nimrat is to pay the Bank Overdraft.
(vi) Anahat is to introduce ` 30,000 as his share of Capital to which amount of other
Partners’ Capitals shall have to be adjusted.
Pass necessary Journal entries to carry out the above transactions and prepare the Balance
Sheet of the firm after Anahat’s admission.

Solution: JOURNAL
Date Particulars L.F. Dr. (`) Cr. (`)

2021
April 1 General Reserve A/c ...Dr. 10,000
To Workmen Compensation Reserve A/c 2,000
To Nimrat’s Capital A/c 5,600
To Kirti’s Capital A/c 2,400
(Being 20% of General Reserve retained as Workmen Compensation
Reserve and the balance credited to Nimrat and Kirti in the ratio of 7 : 3)
April 1 Revaluation A/c ...Dr. 40,000
To Stock-in-Trade A/c 20,000
To Furniture A/c 18,000
To Provision for Doubtful Debts A/c 2,000
(Being decrease in value of assets and increase in provision recorded)
April
1 Nimrat’s Capital A/c ...Dr. 28,000
Kirti’s Capital A/c ...Dr. 12,000
To Revaluation A/c 40,000
(Being loss on revaluation debited to Nimrat and Kirti in the ratio of 7 : 3)
April 1 Bank Overdraft A/c ...Dr. 20,000
To Nimrat’s Capital A/c 20,000
(Being bank overdraft paid by Nimrat credited to her Capital Account)
April 1 Cash A/c ...Dr. 40,000
To Anahat’s Capital A/c 30,000
To Premium for Goodwill A/c (` 40,000 × 1/4) 10,000
(Being capital and goodwill brought in Cash)
April 1 Premium for Goodwill A/c ...Dr. 10,000
To Nimrat’s Capital A/c 7,000
To Kirti’s Capital A/c 3,000
(Being goodwill credited to Nimrat and Kirti in their sacrificing
ratio of 7 : 3)
April 1 Cash A/c ...Dr. 7,000
To Nimrat’s Capital A/c (WN 2 and 3) 7,000
(Being the deficit capital brought in by Nimrat)
April 1 Kirti’s Capital A/c ...Dr. 7,000
To Cash A/c (WN 2 and 3) 7,000
(Being the surplus capital withdrawn by Kirti)

8
 BALANCE SHEET OF THE NEW FIRM
as at 1st April, 2021
Liabilities
` Assets `

Sundry Creditors 40,000 Cash in Hand (WN 4) 78,000

Workmen Compensation Reserve 2,000 Sundry Debtors 46,000
Capital A/cs (WN 3): Less: Provision for Doubtful Debts 4,000 42,000
Nimrat 63,000 Stock-in-Trade (` 50,000 – ` 20,000) 30,000
Kirti 27,000 Furniture (` 30,000 – ` 18,000) 12,000
Anahat 30,000 1,20,000
1,62,000 1,62,000

Working Notes:
1. Calculation of New Profit-sharing Ratio:
Anahat joins the firm for 1/4th share of profit. Therefore, 3/4 (i.e., 1 – 1/4) will be shared by Nimrat and Kirti in the
ratio of 7 : 3.
Nimrat’s New Share = 3/4 × 7/10 = 21/40; Kirti’s New Share = 3/4 × 3/10 = 9/40;
Anahat’s Share = 1/4 or 10/40.
∴ New Profit-sharing Ratio = 21/40 : 9/40 : 10/40 = 21 : 9 : 10.
Old ratio and sacrificing ratio of the partners Nimrat and Kirti are same, viz., 21 : 9 = 7 : 3. Goodwill amount,
therefore, will be credited to Nimrat and Kirti in the ratio of 7 : 3.
2. Adjusted Capitals of Nimrat and Kirti in the New Firm:
Total Capital of New Firm on the basis of Anahat’s Capital = ` 30,000 × 4/1 = ` 1,20,000.
Nimrat’s Capital in the New firm = ` 1,20,000 × 21/40 = ` 63,000;
Kirti’s Capital in the New firm = ` 1,20,000 × 9/40 = ` 27,000.

3. Dr. PARTNERS’ CAPITAL ACCOUNTS Cr.

Particulars Nimrat Kirti Anahat Particulars Nimrat Kirti Anahat
` ` ` ` ` `

To Revaluation A/c 28,000 12,000 ... By Balance b/d 50,000 40,000 ...
—Loss By Cash A/c ... ... 30,000
To Cash A/c (Bal. Fig.) ... 6,400 ... By Premium for Goodwill A/c 7,000 3,000 ...
To Balance c/d (WN 2) 63,000 27,000 30,000 By General Reserve A/c 5,600 2,400 ...
(Adjusted Capital: By Bank Overdraft A/c 20,000 ... ...
New Firm) By Cash A/c (Bal. Fig.) 8,400 ... ...
91,000 45,400 30,000 91,000 45,400 30,000

4. Dr. CASH ACCOUNT Cr.

Particulars
` Particulars `

To Balance b/d 36,000 By Kirti’s Capital A/c 6,400

To Anahat’s Capital A/c 30,000 By Balance c/d 78,000
To Premium for Goodwill A/c 10,000
To Nimrat’s Capital A/c 8,400
84,400 84,400

5. General Reserve can be used for any purposes being a free reserve. After transferring ` 2,000 to Workmen
Compensation Reserve, ` 8,000 is distributed between Nimrat and Kirti in their Old Profit-sharing Ratio.
9
Illustration 5 (When New Partner does not bring his Share of Premium for Goodwill in Cash).
Amit and Basu are partners in a firm. Their Balance Sheet as at 31st March, 2022 was
as follows:
Liabilities
` Assets `

Provision for Doubtful Debts 4,000 Cash 10,000

Workmen Compensation Reserve 5,600 Sundry Debtors 80,000
Outstanding Expenses 3,000 Stock 20,000
Creditors 30,000 Machinery 38,600
Capital A/cs: Amit 50,000 Profit and Loss A/c 4,000
Basu 60,000 1,10,000
1,52,600 1,52,600

On 1st April, 2022, they admitted Charu as a partner on the following conditions:
(i) Charu brings ` 40,000 as her share of Capital but she is unable to bring any amount
for Goodwill.
(ii) New profit-sharing ratio between Amit, Basu and Charu will be 3 : 2 : 1.
(iii) Claim on account of Workmen Compensation is ` 3,000.
(iv) To write off Bad Debts amounting to ` 6,000.
(v) Creditors are to be paid ` 2,000 more.
(vi) ` 2,000 be provided for a liability towards customer’s warranty claim.
(vii) Outstanding Expenses be brought down to ` 1,200.
(viii) Expenses on revaluation amounting to ` 5,000 are paid by Amit.
(ix) Out of the amount of insurance which was debited entirely to Profit and Loss Account
last year, ` 5,000 be carried forward as an unexpired insurance.
(x) Goodwill is valued at 1 1 years’ purchase of the average profit of last 3 years, less
2
` 12,000. Profits for the last 3 years amounted to ` 10,000; ` 20,000 and ` 30,000.
Prepare Revaluation Account, Partners’ Capital Accounts and opening Balance Sheet.

Solution:
Dr. REVALUATION ACCOUNT Cr.

Particulars
` Particulars `

To Sundry Debtors A/c (Bad Debts) 2,000 By Outstanding Expenses A/c 1,800
To Creditors A/c 2,000 By Unexpired Insurance Premium A/c 5,000
To Liability for Warranty Claim A/c 2,000 By Loss on Revaluation transferred to:
To Amit’s Capital A/c (Revaluation Expenses) 5,000 Amit’s Capital A/c 2,100
Basu’s Capital A/c 2,100 4,200
11,000 11,000

10
Dr. PARTNERS’ CAPITAL ACCOUNTS Cr.

Particulars Amit (`) Basu (`) Charu (`) Particulars Amit (`) Basu (`) Charu (`)
To Profit and Loss A/c (Loss) 2,000 2,000 ... By Balance b/d 50,000 60,000 ...
To Revaluation A/c (Loss) 2,100 2,100 ... By Workmen Compensation
To Balance c/d 52,200 60,200 40,000 Reserve A/c 1,300 1,300 ...
By Revaluation A/c 5,000 ... ...
By Charu’s Current A/c ... 3,000 ...
By Cash A/c ... ... 40,000
56,300 64,300 40,000 56,300 64,300 40,000

OPENING BALANCE SHEET OF THE RECONSTITUTED FIRM

as at 1st April, 2022

Liabilities
` Assets `
Workmen Compensation Claim 3,000 Cash 50,000
Outstanding Expenses 1,200 Sundry Debtors 74,000
Liability for Warranty Claim 2,000 Stock 20,000
Creditors 32,000 Unexpired Insurance Premium 5,000
Capital A/cs: Amit 52,200 Machinery 38,600
Basu 60,200 Charu’s Current A/c 3,000
Charu 40,000 1,52,400
1,90,600 1,90,600

Working Notes:
1. Workmen Compensation Reserve exists in the Balance Sheet at ` 5,600, whereas, the liability for Workmen
Compensation is ` 3,000. Therefore, ` 2,600 (i.e., ` 5,600 – ` 3,000) is transferred to the Capital Accounts
of the old partners in their old ratio.
2. Provision for Doubtful Debts appearing in the Balance Sheet is ` 4,000, whereas, actual Bad Debts
amounted to ` 6,000. Therefore, ` 2,000 is debited to Revaluation Account as loss.
3. Valuation of Goodwill:

` 10 , 000  ` 20 , 000  ` 30 , 000

Average Profit =  ` 20 , 000.
3
Goodwill = (` 20,000 × 3/2) – ` 12,000 = ` 30,000 – ` 12,000 = ` 18,000.
Charu’s share of Goodwill = ` 18,000 × 1/6 = ` 3,000.
4. Sacrifice = Old Profit Share – New Profit Share

1 3
Amit’s Sacrifice = − = 0;
2 6
1 2 1
Basu’s Sacrifice =  
2 6 6
Hence, Basu alone has sacrificed. Therefore, Charu’s share of Goodwill is credited to Basu’s Capital
Account only.

11
Illustration 6 (Adjustment of Capital when partners’ capitals are fixed).
Rumant, Monica and Charlie are partners in a firm sharing profits in the ratio of 3 : 2 : 1. On
1st April, 2022, their Balance Sheet is as follows:
Liabilities
` Assets `
Capital A/cs: Monica’s Current Account 14,000
Rumant 3,50,000 Land and Building 3,50,000
Monica 3,00,000 Plant and Machinery 1,35,000
Charlie 2,50,000 9,00,000 Furniture 1,60,000
Current A/cs: Investments 73,000
Rumant 8,000 Bills Receivable 34,000
Charlie 12,000 20,000 Sundry Debtors 87,000
General Reserve 30,000 Stock 2,74,000
Profit and Loss Account 14,000 Bank 87,000
Creditors 1,60,000
Bills Payable 90,000
12,14,000 12,14,000

On the above date, Neelam is admitted on the following terms:

(i) Neelam will bring ` 1,00,000 as her capital and will get 1/6th share in profits.
(ii) She will bring necessary cash for her share of goodwill premium. The goodwill of the
firm was valued at ` 1,80,000.
(iii) The new profit-sharing ratio will be 2 : 2 : 1 : 1.
(iv) Bills Receivable for ` 14,008 discounted from Bank but dishonoured was not recorded.
(v) The value of Stock, Furniture and Investments is reduced by 20% whereas the value of Land
and Building and Plant and Machinery will be appreciated by 20% and 10% respectively.
(vi) The Capital Accounts of the partners will be adjusted on the basis of Neelam’s capital
through their Current Accounts.
Prepare Revaluation Account, Partners’ Current Accounts, Capital Accounts and Balance
Sheet of the new firm.
Solution:
Dr. REVALUATION ACCOUNT Cr.
Particulars
` Particulars `
To Stock A/c 54,800 By Land and Building A/c 70,000
To Furniture A/c 32,000 By Plant and Machinery A/c 13,500
To Investments A/c 14,600 By Loss transferred to:
Rumant’s Current A/c 8,950
Monica’s Current A/c 5,967
Charlie’s Current A/c 2,983 17,900
1,01,400 1,01,400

Dr. PARTNERS’ CURRENT ACCOUNTS Cr.

Particulars Rumant Monica Charlie Particulars Rumant Monica Charlie
` ` ` ` ` `
To Balance b/d ... 14,000 ... By Balance b/d 8,000 ... 12,000
To Revaluation A/c 8,950 5,967 2,983 By General Reserve A/c 15,000 10,000 5,000
To Balance c/d 2,01,050 94,700 1,66,350 By Profit and Loss A/c 7,000 4,667 2,333
By Premium for
Goodwill A/c (WN 2) 30,000 ... ...
By Partners’ Capital A/cs 1,50,000 1,00,000 1,50,000
2,10,000 1,14,667 1,69,333 2,10,000 1,14,667 1,69,333

12
Dr. PARTNERS’ CAPITAL ACCOUNTS Cr.
Particulars Rumant Monica Charlie Particulars Rumant Monica Charlie
` ` ` ` ` `
To Partners’ Current A/cs 1,50,000 1,00,000 1,50,000 By Balance b/d 3,50,000 3,00,000 2,50,000
(Bal. Fig.) (Transfer)
To Balance c/d (WN 3) 2,00,000 2,00,000 1,00,000
3,50,000 3,00,000 2,50,000 3,50,000 3,00,000 2,50,000

Dr. NEELAM’S CAPITAL ACCOUNT Cr.

Particulars
` Particulars `
To Balance c/d 1,00,000 By Bank A/c 1,00,000
1,00,000 1,00,000

BALANCE SHEET OF THE NEW FIRM as at 1st April, 2022

Liabilities
` Assets `
Capital A/cs: Land and Building 4,20,000
Rumant 2,00,000 Plant and Machinery 1,48,500
Monica 2,00,000 Furniture 1,28,000
Charlie 1,00,000 Investments 58,400
Neelam 1,00,000 6,00,000 Bills Receivable 34,000
Current A/cs: Sundry Debtors (` 87,000 + ` 14,008) 1,01,008
Rumant 2,01,050 Stock 2,19,200
Monica 94,700 Bank 2,02,992
Charlie 1,66,350 4,62,100 (` 87,000 + ` 1,00,000 + ` 30,000 – ` 14,008)
Creditors 1,60,000
Bills Payable 90,000
13,12,100 13,12,100

Working Notes:
1. Calculation of Sacrificing Ratio:
Sacrifice = Old Profit Share – New Profit Share
Old Ratio of Rumant, Monica and Charlie = 3 : 2 : 1
New Ratio of Rumant, Monica, Charlie and Neelam = 2 : 2 : 1 : 1
Rumant’s Sacrifice= 3/6 – 2/6 = 1/6; Monica’s Sacrifice = 2/6 – 2/6 = 0; Charlie’s Sacrifice = 1/6 – 1/6 = 0
Since sacrifice of Monica and Charlie is nil, it implies that Rumant sacrificed entire 1/6th share in favour of Neelam.
2. Goodwill of the firm = ` 1,80,000
Goodwill for 1/6th share = ` 1,80,000 × 1/6 = ` 30,000
Goodwill payable to Rumant by Neelam = ` 30,000.
3. Capital of the Partners in the New Firm on the basis of Neelam’s Capital:
Neelam� s Capital ` 1,00,000
Total Capital of the New Firm = = = ` 6,00,000
Neelam’s Share of Profit 1/6
Rumant’s Capital in New Firm = ` 6,00,000 × 2/6 = ` 2,00,000;
Monica’s Capital in New Frm = ` 6,00,000 × 2/6 = ` 2,00,000;
Charlie’s Capital in New Frm = ` 6,00,000 × 1/6 = ` 1,00,000;
Neelam’s Capital in New Frm = ` 1,00,000.

13
 MEANING OF KEY TERMS USED IN THE CHAPTER

1. Admission of Partner or Partners

Admission of a Partner or partners means new partner or partners being admitted into partnership.

2. New Profit-sharing Ratio

New Profit-sharing Ratio is the ratio in which all the partners or partners including the new or incoming
partner or partners share future profits and losses of the firm.

3. Sacrificing Ratio
Sacrificing Ratio is the ratio in which the old or existing partners forego, i.e., sacrifice their share in favour
of the new partner or partners.

4. Goodwill
Goodwill is an intangible asset resulting from the efforts made in the past by the existing partners of the
firm which results in profits in the future years.

5. Revaluation of Assets
Revaluation of Assets means change in the value of assets, i.e., present value being different from the book
value of the assets.

6. Reassessment of Liabilities
Reassessment of Liabilities means reassessing the liabilities and determining the change, i.e., whether the
liability is more or less than that shown in the books of account.

7. Revaluation Account
It is a nominal account, prepared to ascertain gain (profit)/loss on account of revaluation of assets
and reassessment of liabilities. It is credited with the increase in value of assets and decrease in the
value of liabilities. It is debited with the increase the value of liabilities and decrease in the value
of assets. It is closed by transferring the gain (profit) or loss to the Capital Accounts or Current
Accounts of the old or existing partners in their old profit-sharing ratio.

8. Reserve
Reserve means accumulated or undistributed profits. It is created out of profits.
The reserve created is sometimes invested outside the business in instruments such as securities, which
then becomes a Reserve Fund.

9. Workmen Compensation Reserve

It is a reserve created out of profits for payment of compensation to workers.

10. Investments Fluctuation Reserve

It is a reserve created out of profits to meet the fall in the market value of investment.

1
 SUMMARY OF THE CHAPTER
• When the existing partners of a firm allow a person to become a partner in the firm, it is called admission
of a partner.
• The matters that require adjustment at the time of admission of a new partner are:
(i ) Adjustment for change in Profit-Sharing Ratio. Calculation of New Profit-sharing Ratio and Sacrificing
Ratio.
(ii ) Adjustment for goodwill.
(iii ) Adjustment of Profit/Loss arising from the Revaluation of Assets and Reassessment of Liabilities.
(iv) Adjustment of Accumulated Profits, Reserves and Losses.
(v) Adjustment of Capital.
• Change in Profit-sharing Ratio takes place at the time of admission of a new partner in the firm.
• The ratio in which all partners including the incoming partner share the future profits and losses is known
as New Profit-Sharing Ratio.
Unless agreed otherwise, the New Profit-sharing Ratio of existing, i.e., old partners among them will be
same as their old profit-sharing ratio.
• The ratio in which the old (existing) partners have agreed to sacrifice their share in profit in favour of
an incoming partner is called Sacrificing Ratio.
Sacrificing Share = Old Profit Share – New Profit Share.
Unless agreed otherwise, Sacrificing Ratio of old partners will be the same as their old profit-sharing ratio.
• The partners whose share in profit increase due to change in profit-sharing ratio are called Gaining
Partners and the partners whose share in profit decrease are called Sacrificing Partners.
• Goodwill is the reputation of the organisation which attracts customers and increases the profit earning
capacity of the business.

ACCOUNTING TREATMENT OF GOODWILL ON ADMISSION OF A PARTNER

1. Goodwill (Premium) paid Privately No Entry

2. Goodwill brought in Cash Cash/Bank A/c ...Dr.

To Premium for Goodwill A/c
Distribution of Goodwill Premium for Goodwill A/c ...Dr.
To Sacrificing Partners’ Capital A/cs [In sacrificing ratio]
or
To Sacrificing Partners’ Current A/cs
(When capitals are fixed)

3. Goodwill withdrawn by Sacrificing (Old) Partners Sacrificing Partners’ Capital A/cs ...Dr.
To Cash/Bank A/c

4. Goodwill not brought in Cash New Partner’s Current A/c ...Dr.

To Sacrificing Partners’ Capital A/cs [In sacrificing ratio]

5. Goodwill brought in Kind Assets A/c ...Dr.

To Premium for Goodwill A/c

Note: Write off the goodwill appearing in the Old Balance Sheet by debiting the Old Partners’ Capital Accounts
(in case of fluctuating capitals) or Current Accounts (in case of fixed capitals) in their old profit-sharing
ratio and crediting the Goodwill Account.
2
• Unless otherwise stated, the Partners’ Capitals should be assumed to be fluctuating. Current
Accounts are to be used in case of Fixed Capitals.
• When the incoming partner cannot bring premium for goodwill in cash, adjustments are to be done
through the Current Account of Incoming Partner.
• Revaluation Account or Profit and Loss Adjustment Account is prepared to revalue the assets and
reassess the liabilities of the firm at the time of reconstitution of the firm.
Dr. REVALUATION ACCOUNT Cr.
(i) Decrease in the value of assets. Increase in the value of assets.
(ii) Increase in amount of liabilities. Decrease in amount of liabilities.
(iii) Unrecorded liabilities. Unrecorded assets.
(iv) Gain (Profit)—difference. Loss—difference.

• Need to Revalue Assets and Reassess Liabilities: Assets are revalued and liabilities are reassessed at
the time of admission of a partner because new partner should neither benefit nor suffer because of
changes in the value of assets and liabilities as on the date of admission.
• Any Past Profits or General Reserve are also credited to Old Partners’ Capital Accounts in their profit-
sharing ratio. If there are any past losses, they will be debited to Old Partners’ Capital Accounts.
• Workmen Compensation Reserve is a reserve created out of profit to meet the workmen compensaton
claim, if any arise in future. Excess of Workmen Compensation Reserve over the Workmen Compensation
Claim should be credited to old partners’ Capital Accounts in their old ratio.
• Investments Fluctuation Reserve is created out of profit to guard against the fall in the price of the
investment. Excess of Investment Fluctuation Reserve over difference between book value and market value
should be credited to old partners in their old profit sharing ratio.
• Accounting Treatment of Accumulated Profits, Reserves and Losses through Single Journal Entry: The net
effect of accumulated profits, reserves and losses is adjusted through the following entry:
(i ) In Case of Net Profit: Gaining Partners’ Capital/Current A/cs ...Dr.
To Sacrificing Partners’ Capital/Current A/cs
(ii ) In Case of Net Loss: Sacrificing Partners’ Capital/Current A/cs ...Dr.
To Gaining Partners’ Capital/Current A/cs
• Employees’ Providend Fund is a statutory liability. Hence, is not distributed among the partners.
• Adjustment of Capital:
(i ) Adjustment of Old Partners’ Capitals on the basis of New Partner’s Capital:
Step 1: Calculate the total capital of the new firm.
Step 2: Determine the new capital of each partner.
Step 3: Ascertain the present capitals of old partners (Adjusted).
Step 4: Find out the surplus/deficit capitals by comparing Step 2 and Step 3.
(ii ) Calculation of the New Partner’s Capital on the basis of Old Partners’ Capitals:
Step 1: Determine the total adjusted capital of the old partners.
Step 2: Determine the total capital of the new firm.
Step 3: Determine the total capital of the incoming partner as follows:
Total capital of the new firm (Step 2) × Share of incoming partner.
In the absence of any contract, Shortage or Surplus of Capital should be adjusted in Cash and not
by transfer to Current Account.

3
Illustration 1 (Calculation of Capital Employed and Valuation of Goodwill when Non-trade Investments
are given).
Balance Sheet of M/s Super Stores as at 31st March, 2022 was as follows:

Liabilities
` Assets `

Capital A/cs: Land and Building 4,00,000

Alia 1,50,000 Computers 70,000
Ranbir 1,50,000 Furniture 30,000
Rishi 1,50,000 4,50,000 Investments 1,00,000
Reserves 2,50,000 Stock 2,00,000
Sundry Creditors 3,00,000 Sundry Debtors 1,50,000
Outstanding Expenses 10,000 Bills Receivable 50,000
Cash Credit (Bank) 90,000 Cash in Hand 50,000
Deferred Revenue Expenditure:
Advertisement Suspense 50,000
11,00,000 11,00,000

Average Profit was ` 1,25,000. You are to calculate goodwill at 3 years’ purchase of Super Profits,
if the Normal Rate of Return is 15% of Capital Employed.

Solution: (i) CALCULATION OF CAPITAL EMPLOYED

Liabilities Side Approach ` Assets Side Approach `

Partners’ Capitals: Total Assets 11,00,000

Alia 1,50,000 Less: Investments (Note) 1,00,000
Ranbir 1,50,000 Deferred Revenue Expenses 50,000 1,50,000
Rishi 1,50,000 4,50,000 (Advertisement Suspense)
Add: Reserves 2,50,000 9,50,000
7,00,000 Less: Current Liabilities:
Less: Investments (Note) 1,00,000 Sundry Creditors 3,00,000
Deferred Revenue Expenditure 50,000 1,50,000 Outstanding Expenses 10,000
(Advertisement Suspense) Cash Credit (Bank) 90,000 4,00,000
5,50,000 5,50,000

(ii) Normal Profit = 15% of ` 5,50,000 = ` 82,500

Average Profit = ` 1,25,000
Super Profit = ` 1,25,000 – ` 82,500 = ` 42,500
Goodwill = No. of years’ purchase × Super Profit
= 3 × ` 42,500 = ` 1,27,500.

Note: Unless investments are specified to be trade investments, they are considered to be Non-trade Investments.
They are, therefore, deducted to calculate Capital Employed.

1
Illustration 2.
From the following information, calculate value of goodwill of M/s Amit & Co.:
(i) At three years’ purchase of Average Profit.
(ii) At the two years’ purchase of Super Profit.
(iii) On the basis of Capitalisation of Super Profit.
(iv) On the basis of Capitalisation of Average Profit.

Information:
(a) Average Capital Employed—` 6,00,000.
(b) Net Profit/Loss of the firm for the past three years: 2020—` 2,00,000 (Profit); 2021—` 1,00,000
(Loss); 2022—` 2,30,000 (Profit).
(c) Normal Rate of Return on capital is 12%.
(d) Remuneration of each partner ` 30,000 per annum to be considered as a charge
against profit.
(e) Assets—` 6,50,000; Partners’ Capital—` 6,00,000.

Solution:
(i) Calculation of Goodwill at three years’ purchase of Average Profit:

` 2,00,000  ` 1, 00 , 000  ` 2,30,000

Average Profit = = ` 1,10,000
3

Average Normal Profit = Average Profit – Partners’ Remuneration

= ` 1,10,000 – ` 60,000 = ` 50,000
Value of Goodwill = Average Normal Profit × Numbers of Years’ Purchase
= ` 50,000 × 3 = ` 1,50,000.

(ii) Calculation of Goodwill at three years’ purchase of Super Profit:

Normal Profit = Capital Employed × Normal Rate of Return/100
12
= ` 6,00,000 × = ` 72,000
100

Super Profit = Average Profit – Normal Profit

= ` 50,000 – ` 72,000 = (` 22,000)
Since the firm does not have Super Profit, the value of goodwill is nil.

(iii) On the basis of Capitalisation of Super Profit:

The firm does not have Super Profit. Hence, the value of goodwill is nil.

2
(iv) On the basis of Capitalisation of Average Profit:
Goodwill = Total Capitalised Value of the Business – Net Assets

Average Normal Profit × 100

Total Capitalised Value of the Business =
Normal Rate of Return

` 50 , 000 × 100
=
12
= ` 4,16,666 or ` 4,16,667 (say)
Net Assets = Total Assets – Outside Liabilities
Outside Liabilities = Total Assets – Partners’ Capital
= ` 6,50,000 – ` 6,00,000 = ` 50,000
∴ Net Assets = ` 6,50,000 – ` 50,000 = ` 6,00,000
Value of Goodwill = ` 4,16,667 – ` 6,00,000 = (` 1,83,333)
The value of goodwill is nil since capitalised value of business is less than the net assets.