INDEX

Chapter Chapter Name Page

No. no.
1. Introduction of accounting 1 – 20
2. Journal entries 21 – 23
3. Depreciation AS-6 24 – 38
4. Rectification of errors 39 – 42
5. Final Accounts 43 – 67
6. Partnership Accounting 68 – 150
7. Issue of share 151 – 217
8. Issue of debenture 218 – 237
9. Redemption of debenture 238 – 254
10. Inventory valuation 255 – 262
11. Bank reconciliation accounting 262 – 264
12. Non profit organisation 265 – 293
13. Redemption of Preference Share Capital 294 – 300
14. Incomplete Records(Single Entry System) 301 – 311
 INTRODUCTION OF ACCOUNTING

SAI KRIPA
INTRODUCTION OF ACCOUNTING AND ACCOUNTING PROCESS

TOPICS TO BE COVERED
• Meaning & Terms
• Golden Rules of Accounting
• Journal Entries
• Ledger Posting
• Preparation of Trail Balance

TOPIC – 1
MEANING & TERMS

1. ACCOUNTING: -
Accounting is Recording Financial Transactions, Summarising them and communicating the financial
information to users (i.e. Proprietors, Creditors, Investors, Government agencies, researchers,
Consumers, Public etc.). It is because of these characteristics that accounting is necessary for each
and every enterprise and now it becomes the Language of Business.

“Accounting is the art of recording, classifying and summarising in a significant manner and In terms
of money; transactions and event which are, in part at least, of a financial character, and interpreting
the result thereof.”Issued by Terminology of the American Institute of Certified Public Accountants

2. PILLARS OF ACCOUNTING: -
Accounting is based on fivepillars; all the terms and transactions used in Accounting are classified
under these five Pillars of Accounting only. We have Golden Rules for these five Pillars and all
transactions are converted into journal entries or Accounting equations with the use of such Five
Pillars of Accounting. These Five Pillars are as follows: -
i. ASSETS
ii. LIABILITIES
iii. CAPITAL
iv. EXPENSES
v. INCOMES

PILLARS OF ACCOUNTING

ASSETS LIBILITIES CAPITALS EXPENSES INCOMES

Assets: -Assets is anything which will enables the firm to get cash or a Benefit in Future. Assets are
Classified into five board categories such as: -

Fixed Assets: Fixed Assets are those assets which are acquired not with purpose of resale and held
with enterprises for more than one year. For Example- Land, Building, Machinery, Motor Cars,
Furniture, etc.

1
 INTRODUCTION OF ACCOUNTING

Current Assets: Current Assets are those Assets which are acquired with the intention to resale them
or convert into cash, they held with the enterprises for shorter period i.e. up to one year. For
Example- Purchased Goods for the purpose of resale, Debtors, Bills receivable, Cash/Bank, etc.
Tangible Assets: Tangible Assets are those Assets which have physical existence, i.e. they can be seen
and touched. For Example- Land, Building, Plant, Machinery, Stock, etc.
Intangible Assets: Intangible Assets are those Assets which do not have physical existence, i.e. they
cannot be seen and touched. For Example- Goodwill, Trade-marks, prepaid expenses, etc.
Wasting Assets: Wasting Assets are those assets which are natural resources extracted and
consumed ass a raw material or otherwise. For Example-Mines, Quarries, Oil wells, etc.

Liabilities: - Liabilities means amount which business takes from outsiders and its business obligation
to repay such amount at due date. It is also known as External Liabilities of the business.

As per Accounting Entity Concept Business has its separate legal entity and it is differ from its
business man. Any amount invested by Business man in business as Capital is Liability of the business
as business has to repay such amount to the business man after specific period, so the Capital is also
a liability of the Business however it is an Internal Liability.

Liability of a business is classified in to three big categories such as: -

Long term liabilities: - Long term liabilities are those liabilities which are payable by the business
after a long period generally more than one year. For Example- Secured Loans, Un-secured loan,
Debentures, long terms loans, etc.
Current Liabilities: - These are short term liabilities which company has to pay within one year time.
For Example- Creditors, Bank overdraft, short term loans, etc.
Contingent Liabilities: -These are not the real liabilities of the business; these are the conditions
which are exits at the date of Balance sheet which may leads to Future Liabilities which may or may
not arises in future. For Example- Penalties under any law, chances of filling case by creditor or other
party against business.

Capitals: - Capital is the amount invested by the business man in the business. It may be in cash or
Assets. It is the internal liability of the business as business has to refund such money back to its
Business man. It is also known as Owner’s Equity.

Expenses:-Expenses are the amount Spent by the business. Expenses are classified into two
categories such as: -

Capital Expenditures: - It is the Expenditure where amount spent to purchase Assets which will
increase the earning capacity of the business, i.e. it will brings benefit to the business in more than
one accounting period. Capital Expenditures are shown in Balance sheet as Assets.
Revenue Expenditure: -Revenue Expenditures are those in which amount spend by organisation to
meet its regular obligations such as Salaries, Rent, Interest, other expenses. This amount will not
increase business earning capacity however it helps in maintaining its earning capacity of business.

Income: - Income is the Profit earned by the business during the period of time.

2
 INTRODUCTION OF ACCOUNTING

ASSETS LIABILITIES CAPITALS EXPENSES INCOMES

Some of the Items covered under these heads
o Land o Creditors o Amount o Rent o Rent
o Building o Bills Payable invested o Salary Received
o Plant o Loans o Wages o Interest
o Machinery o Debentures o Purchase Received
o Furniture o Bank of Goods o Discount
o Stock overdraft o Freight Received
o Vehicles o Secured or o Carriage o Sale of
o Debtors un-secured o Electricity Goods
o Bills Loans exp o Dividend
Receivable o Outstanding o Telephone Received
o Prepaid expenses Exp o Other
Expenditures o Provisions o Other incomes
o Goodwill, expenses
patent, trade o Discount
mark, etc. allowed
o Cash/ Bank

3. OTHER IMPORTANT TERMS

There are some other terms also which one should understand while proceeding further such as: -

Revenue: - Revenue means amount received to the business from its main operation of business,
such as Sale of goods for manufacturing business and Income from services for Service Business. It is
income of the business but prior to deducting expenses from it.

Debtors: - A person who gives amount to the business generally on account of credit sale made to
him. In such case there is oral commitment between business and debtor. Debtor is the assets of the
business.

Bills Receivable: - Bills Receivable is the assets of the business, when Debtors gives written
commitment to pay their due amount, than that written commitment is known as Bills receivable.

Accounting Period: - Accounting period means the period of 12 months followed by the business to
maintain its accounts, at the end of 12 months business has to close its books of accounts and has to
calculate profit or loss of the Accounting year. Two types of Accounting period can be followed such
as: -
Calendar year: - under calendar year business starts its books of account on 1st January and ends on
31st December every year.
Financial Year: - under financial year business starts its books of account on 1st April and ends on 31st
March every year.

Prepaid Expenses: - It is an expense that has been paid in advance and the benefit from such
expenses is realised in the next year. For example- suppose Mr A follows accounting period as
calendar year and he finalising account of the year ending 31st December 2009 and he came to know
that he has paid an Annual Insurance Expenses of Rs 24,000 whose period is 1st may 2009 to 30th Apr
2010. Than in such case payment has been made for Rs 24000 in year 2009 but its part benefit i.e.
benefit for 4 months will be realise in next year.

3
 INTRODUCTION OF ACCOUNTING

Prepaid Insurance Exp 2009 =24,000 * 4= Rs 8,000

12

Goodwill, trademarks, Patent etc.: - These are the Intangible assets of the business, Goodwill is the
assets which Business crate after working hard and by providing quality product in cheap rates,
because of Goodwill business earn high profits, increased Sales, Customer’s attractions, etc.
Trademarks and Patents are the registered assets of the business these are attained by registering
business antique formula of making goods, firm’s name, Firm’s knowledge of using particular
machine, etc.
Creditors: - A person who takes amount from the business generally on account of credit purchase
made from him. In such case there is oral commitment between business and creditor. Creditor is
the Liability of the business.

Bills Payable: - Bills Payable is the Liabilities of the business, when Business gives written
commitment to the creditor to him the money due on business, than that written commitment is
known as Bills payable.

Bank overdraft: - Bank overdraft is the Liability of the business. It is the facility given by the bank to
the business that in any time business can withdraw amount from the bank in excess of the amount
deposit by business, that excess amount which business withdraw is known as Bank overdraft and is
the liability of the business. Business also has to pay Interest on such Overdraft amount and such
Interest is the Expenses of the Business.

Outstanding Expenses: - It is an expense that has not been paid yet but the benefit thereof has
already been availed.For example- suppose Mr A follows accounting period as calendar year and he
finalising account of the year ending 31st December 2009 and he came to know that he has not paid
the Rent of the Building of Rs 50,000 in which his office located for whole year i.e. for the period 1 st
January 2009 to 31th December 2009. Than in such case payment has not been made for Rs 50,000 in
year 2009 but its benefit has already been realise in current year itself.

Outstanding Rent of year 2009 = Rs 50,000

Provisions: - Provisions are the liabilities of the business. Provisions are created to cover the future
expected expenses, this expenses are recorded at present and payment will be made when expenses
arises. For Example- Provision for income tax/ service tax, Provision for doubtful debt, etc.

Purchases: - The term purchases are used only for purchase of those goods which are purchased for
producing finished product or for the purpose of resale. Purchase includes both Cash purchase and
Credit Purchase.
Purchase Return: - When the initial purchase goods are returned back to Supplier than it is known as
Purchase return. This purchase is deducted from Purchases to find out Net Purchases. It is also
known as Return Outward.

Sale: - The terms Sales are used only for Sale of those goods which are dealt by the firm. Sale
includes both Cash Sale and Credit Sale.
Sales Return: - When the Sold Goods returned back by the Customer to the firm than it will known as
Sales return. It will be deducted from Sales to find out the Net Sales. It is also known as Return
Inward.

4
 INTRODUCTION OF ACCOUNTING

Discount Allowed: - Discount allowed is an expenditure of the business, to earn profit and to
maximise the sales business allowed discount to its Debtors/ Customers. Discounts are of two types
such as: -
Cash Discount: - It is the discount allowed to customer to pay amount as early as possible, it is
allowed when debtor make payment to the business. It is the expense of the business.
Trade Discount: - It is also known as bulk discount, this discount is allowed when customer place big
order or purchase big quantity of discount, this discount is not recorded as expenditure, its amount
will be deducted from sale price of goods. It is not recorded in journal entry.

Discount Received: - It is income of business it is received when business has to pay amount to the
creditor; it is recorded as income of the business.

Insolvent: - Insolvent is a person who is not in a position to pay the amount due on him, and amount
non recoverable from him is treated as expense of the business.

Bad Debt: - Bad debt is the amount which was due from debtor but now it become irrecoverable
from debtor and now be consider as expenses of the business.

Depreciation: -All the fixed Assets purchased by the business have depreciated i.e. reduced over its
useful life; it is an expense of company.

4. ACCOUNTING CONCEPTS
There are Ten Accounting concepts which everyone has to follow while maintaining books of
accounts of the Business. These Accounting Concepts are universally applicable, and accepted by all
accounting Institutes. These are back bone of Accountancy, they are as follows: -

Business Entity Concept: - According to this concept business is considered separate from its
business man. All transactions are viewed and recorded in the books of accounts from the Business
point of view and not business man point of view. For Example- amount invested by Mr X a business
man in his Firm XYZ Limited will be viewed and recorded from the XYZ Limited’s point of view and
not from X’s point of view, so such amount will become liability of the business and business has to
show such liability in his Balance Sheet.

Money Measurement Concept: - According to this Concept only those transaction are recorded in
the books of accounts which can be measures in terms on money only and those transactions which
are not measures in terms of money are not recorded in books of accounts. This concept states that
money is the common denominator in recording all transaction. For Example- suppose business has
50,000 kg of raw material or it has 65,000 square feet of land that in books of accounts only their
monetary value will be shown i.e. they will be converted into money terms.
This concept has limitations also as it is not recorded those transactions which are not in money
terms however it effected routine work or profitability of business such as- suppose there will be a
fight between management and worker and due to this factory remain close for 2 months, this will
affect the profitability of business but it cannot be recorded anywhere as management Fight cannot
converted in term of money.

Going Concern Concept: - According to this concept it is assumed that business will continue for an
indefinite period and there is no intention to close the business or scale down its operation
significantly. For Example- Because of this concept Business will consider for purchasing long term
assets like Land, Machinery, Plant, etc. this concept will assume that business man will run the
business in future and will not have any intention to make his production down.

5
 INTRODUCTION OF ACCOUNTING

Accounting Period Concept: - According to this concept the indefinite life of business is broken into
smaller period generally one year to measure its performance i.e. to calculate profit. This concept
states that as per going concern concept the life of business is indefinite, but the performance of the
business will be measures in one year intervals.

Cost Concept: -This concept is for assets of the company, according to this concept all assets are
recorded it the books of the accounts at the value which are spend for its purchase that is assets are
recorded at purchase cost of it and same will be reduced for the depreciation point of view, suppose
a firm purchased Land for Rs 1500,000 and Depreciation of land is Rs 100,000 so at the end of the
year Land will be show in Balance sheet at Rs 1400,000 (1500,000 – 100,000). This concept has one
limitation also that it will not consider market value of assets it recorded assets on historical cost
only for example- If in above example such land is purchased in year 1990 than in Balance Sheet it
will be recorded at Purchase cost reduced by depreciation however its market value on present date
is Rs 75,00,000.

Dual Aspect Concept: - According to dual aspect concept, every transaction entered into enterprises
must have two effects. These two effects must be of equal amount For Example- Mr X invested Rs
500,000 in his business XYZ Limited, this transaction will also recorded with effects such as Capital of
the Business will increases and Assets (cash) will also increase.

Revenue Recognition Concept: - According to these concept Revenue will be Recognised/

considered when transaction is entered and obligation to receive payment is arises, For Example- if
goods are sold in the month of March but its payment received in August than the Revenue is
recognised in March i.e. when transaction of sale occurred and legal obligation to receive amount is
arises.

Matching Concept: -According to matching concept all the cost which is incurred to earn the
revenue should be recognised as expenses in the period when revenue is recognised. For Example-
Rs 25000 is spend to make the sale of goods whose income is recognised in next year than such
expenses will be considered to be the expense of next year and in current year it will become
prepaid expense and show in Balance sheet as Assets.

Accrual Concept: -As per this concept, a transaction is recorded at the time when it take place and
not when the settlement take place. For Example- Mr X Purchased a Car on May 2009 but its
payment was made on December 2009 than in such case Car will be recorded in balance sheet of X
as Assets on May 2009 as Computer become assets of X on May 2009 with legal obligation.

Verifiable Objective Concept: - This Concept states that Accounting should be free from all personal
bias. All accounting transaction should be evidenced and supported by business documents. For
Example- Sale should be recorded only if there are Sales invoices/ bills.

5. ACCOUNTING CONVENTIONS
Accounting Conventions means guideline and frameworks that are used in preparing financial
statements of the enterprises. There are four Accounting conventions such as: -

Convention of full disclosure: - According to this convention there should be complete and
understandable reporting on the financial statement of all the significant information relating to the
economic affairs of the business.

6
 INTRODUCTION OF ACCOUNTING

Convention of Consistency: - According to this convention, any accounting practise once adapted
and selected should be applied consistently year after year. This convention helps in making financial
statement capable of being comparable from previous year to current year.

Prudence Concept: - This Concept states that financial statement must present a realistic picture of
enterprises, it can easily understandable with English saying that “Do not anticipate a profit, but
provide for all possible losses” and “it takes into consideration all prospective losses but not the
prospective profits/gains.” It is also known as Conservatism approach or conservatism state of mind.

Materiality Concept: - Material Concept states that item or event must be disclosed in financial
statement only if it is material. The term material means important nature of such event, materiality
define by American Accountant association that “an item is regarded as material if there is a reason
to believe that knowledge of it would influence the decision of investors.” For Example- An event of
spending an amount of Rs 500,000 paid for repair of Plant & Machinery where the Business has Sales
of Rs 350,000 only however same event will become immaterial for the business were Sales are Rs
50,00,00,000/-

6. BASIS OF ACCOUNTING
One of the basic functions of accountancy is to provide information related to profit earned by a
business enterprise during an accounting period. There are two methods for preparing financial
statements and calculating profit of the period such as: -

BASIS OF ACCOUNTING

Cash Basis Accounting Accrual Basis of Accounting

Accrual Basis Accounting: - Under Accrual basis of accounting all the Accounting concepts like
Revenue Recognition, Accrual concept and matching concept are applied. Under this system of
accounting Incomes and Expenses are recorded when they are due actual receipt or payment of
money is irrelevant in such system.

Cash Basis Accounting: - This is a system were the transactions are recorded only when cash is paid
or received by/to the business. Under this system there is no concept of Accrual or Matching
concepts, here transaction are recorded only when Cash paid or received. For Example- an amount
of Rs 25,000 is paid for rent of next year but it will recorded as expenditure in a year in which it is
paid not when the benefit realise from it. Suppose a Sale of goods were made on 2009 but its
amount were received in 2010 than it will considerbeing the Income of the year 2010.

Financial Statements
The aim of accounting is to keep systematic records to ascertain financial performance and financial
position of an entity and to communicate the relevant financial information to the interested user
groups. The financial statements are basic means through which the management of an entity
makes public communication of the financial information along with selected quantitative details. All
the entities will prepare financial statements viz., balance sheet, profit and loss account, cash flow
statement etc. by following various accounting concepts, principles, and conventions which have
been already discussed in detail.

Qualitative Characteristics of Financial Statements

7
 INTRODUCTION OF ACCOUNTING

Understandability: An essential quality of the information provided in financial statements is that it

must be readily understandable by users. For this purpose, it is assumed that users have a
reasonable knowledge of business, economic activities and accounting and study the information
with reasonable diligence. Information about complex matters that should be included in the
financial statements because of its relevance to the economic decision-making needs of users should
not be excluded merely on the ground that it may be too difficult for certain users to understand.

Relevance: To be useful, information must be relevant to the decision-making needs of users.

Information has the quality of relevance when it influences the economic decisions of users by
helping them evaluate past, present or future events or confirming, or correcting, their past
evaluations.

Reliability: To be useful, information must also be reliable, Information has the quality of reliability
when it is free from material error and bias and can be depended upon by users to represent
faithfully that which it either purports to represent or could reasonably be expected to represent.

Comparability: Users must be able to compare the financial statements of an enterprise through
time in order to identify trends in its financial position, performance and cash flows. Users must also
be able to compare the financial statements of different enterprises in order to evaluate their
relative financial position, performance and cash flows.

Materiality: The relevance of information is affected by its materiality. Information is material if its
misstatement (i.e., omission or erroneous statement) could influence the economic decisions of
users Investors.

Completeness: To be reliable, the information in financial statements must be complete within the
bounds of materiality and cost. An omission can cause information to be false or misleading and thus
unreliable and deficient in terms of its relevance.

Capital Expenditure V/S Revenue Expenditure

Revenue expenditures are transferred to profit and loss account in the year of spending while capital
expenditures are transferred to profit and loss account of the year in which their benefits are
utilised. Therefore we can conclude that it is the time factor, which is the main determinant for
transferring the expenditure to profit and loss account. Also expenses are recognized in profit and
loss account through matching concept which tells us when and how much of the expenses to be
charged against revenue. However, distinction between capital and revenue creates a considerable
difficulty. In many cases borderline between the two is very thin.

The basic considerations in distinction between capital and revenue expenditures are:

Nature of business: For a trader dealing in furniture, purchase of furniture is revenue expenditure
but for any other trade, the purchase of furniture should be treated as capital expenditure and
shown in the balance sheet as asset. Therefore, the nature of business is a very important criteria in
separating an expenditure between capital and revenue.

Recurring nature of expenditure: If the frequency of an expense is quite often in an accounting year
then it is said to be an expenditure of revenue nature while non-recurring expenditure is infrequent
in nature and do not occur often in an accounting year. Monthly salary or rent is the example of
revenue expenditure as they are incurred every month while purchase of assets is not the

8
 INTRODUCTION OF ACCOUNTING

transaction done regularly therefore, classified as capital expenditure unless materiality criteria
defines it as revenue expenditure.

Purpose of expenses: Expenses for repairs of machine may be incurred in course of normal
maintenance of the asset. Such expenses are revenue in nature. On the other hand, expenditure
incurred for major repair of the asset so as to increase its productive capacity is capital in nature.
However, determination of the cost of maintenance and ordinary repairs which should be expensed,
as opposed to a cost which ought to be capitalised, is not always simple.

Effect on revenue generating capacity of business: The expenses which help to generate income/
revenue in the current period are revenue in nature and should be matched against the revenue
earned in the current period. On the other hand, if expenditure helps to generate revenue over
more than one accounting period, it is generally called capital expenditure.
When expenditure on improvements and repair of a fixed asset is done, it has to be charged to Profit
and Loss Account if the expected future benefits from fixed assets do not change, and it will be
included in book value of fixed asset, where the expected future benefits from assets increase.

Materiality of the amount involved: Relative proportion of the amount involved is another
important consideration in distinction between revenue and capital.

Example 1
State with reasons whether the following statements are ‘True’ or ‘False’.
i. Overhaul expenses of second-hand machinery purchased are Revenue Expenditure.
ii. Money spent to reduce working expenses is Revenue Expenditure.
iii. Legal fees to acquire property is Capital Expenditure.
iv. Amount spent as lawyer’s fee to defend a suit claiming that the firm’s factory site belonged
to the plaintiff’s land is Capital Expenditure.
v. Amount spent for replacement of worn out part of machine is Capital Expenditure.
vi. Expense incurred on the repairs and white washing for the first time on purchase of an old
building are Revenue Expenses.
vii. Expenses in connection with obtaining a license for running the cinema is Capital
Expenditure.
viii. Amount spent for the construction of temporary huts, which were necessary for
construction of the Cinema House and were demolished when the cinema house was ready,
is Capital Expenditure.

Example 2
State with reasons whether the following are Capital or Revenue Expenditure:
i. Expenses incurred in connection with obtaining a license for starting the factory for ` 10,000.
1,000 paid for removal of Inventory to a new site.
ii. Rings and Pistons of an engine were changed at a cost of ` 5,000 to get fuel efficiency.
iii. Money paid to Mahanagar Telephone Nigam Ltd. (MTNL) ` 8,000 for installing telephone in
the office.
iv. A factory shed was constructed at a cost of ` 1,00,000. A sum of ` 5,000 had been incurred in
the construction of temporary huts for storing building material

Example 3
State with reasons, how you would classify the following items of expenditure:
i. Overhauling expenses of ` 25,000 for the engine of a motor car to get better fuel efficiency.
ii. Inauguration expenses of ` 25 lacs incurred on the opening of a new manufacturing unit in
an existing business.

9
 INTRODUCTION OF ACCOUNTING

iii. Compensation of ` 2.5 crores paid to workers, who opted for voluntary retirement.

Example 4
Classify the following expenditures and receipts as capital or revenue:
i. ` 10,000 spent as travelling expenses of the directors on trips abroad for purchase of capital
assets.
ii. Amount received from Trade receivables during the year.
iii. Amount spent on demolition of building to construct a bigger building on the same site.
iv. Insurance claim received on account of a machinery damaged by fire.

Example 5
Are the following expenditures capital in nature?
i. M/s ABC & Co. run a restaurant. They renovate some of the old cabins. Because of this
renovation some space was made free and number of cabins was increased from 10 to 13.
The total expenditure was 20,000.
ii. M/s New Delhi Financing Co. sold certain goods on installment payment basis. Five
customers did not pay installments. To recover such outstanding installments, the firm spent
` 10,000 on account of legal expenses.
iii. M/s Ballav & Co. of Delhi purchased a machinery from M/s Shah & Co. of Ahmedabad. M/s
Ballav & Co. spent ` 40,000 for transportation of such machinery. The year ending is 31st
Dec, 2019.

Example 6
Classify the following expenditures as capital or revenue receipt or capital or revenue expenditure:
i. Traveling expenses of the chief executive officer for trips abroad for purchase of capital
assets.
ii. Amount spent on making a few more exists in a Cinema Hall to comply with Government
orders.
iii. Insurance claim received on account of inventory damaged by fire.
iv. Amount paid for removal of stock to a new site.
v. Cost of repairs on second-hand car purchased to bring it into working condition.

Example 7
Classify the following expenditures as capital or revenue expenditure:
i. Insurance claim received on account of inventory damaged by fire.
ii. Amount spent as lawyer’s fee to defend a suit claiming that the firm’s factory site belonged
to the plaintiff’s land.
iii. Travelling expenses of the chief financial officer on trips abroad for purchase of special
machinery.
iv. Dividend received from XYZ limited during the year.

Example 8
Classify the following expenditures as capital or revenue expenditure:
i. Expenses incurred to keep the machine in working condition.
ii. Registration fees paid at the time of purchase of a building.
iii. Expenses incurred for advertisement in newspaper.
iv. Amount spent on renewal fee of patent rights.
v. Cost of repairs on second-hand car purchased to bring it into working condition.

Example 9
Classify the following expenditures as capital or revenue expenditure:

10
 INTRODUCTION OF ACCOUNTING

i. An extension of railway tracks in the factory area.

ii. Amount spent on painting the factory
iii. Payment of wages for building a new office extension.
iv. Amount paid for removal of stock to a new site.
v. Rings and Pistons of an engine were changed to get full efficiency

Contingent Assets
A contingent asset may be defined as a possible asset that arises from past events and whose
existence will be confirmed only after occurrence or non-occurrence of one or more uncertain future
events not wholly within the control of the enterprise
As per the concept of prudence as well as the present accounting standards, an enterprise should
not recognise a contingent asset.

Contingent Liability
a possible obligation that arises from past events and the existence of which will be confirmed only
by the occurrence or non-occurrence of one or more uncertain future events not wholly within the
control of the enterprise.
An enterprise should not recognise a contingent liability in balance sheet, however it is required to
be disclosed in the notes to accounts, unless possibility of outflow of a resource embodying
economic benefits is remote

Provisions
Provision means “any amount written off or retained by way of providing for depreciation, renewal
or diminution in the value of assets or retained by way of providing for any known liability of which
the amount cannot be determined with substantial accuracy”.

Accounting Policy
Accounting Policies refer to specific accounting principles and methods of applying these principles
adopted by the enterprise in the preparation and presentation of financial statements. Policies are
based on various accounting concepts, principles and conventions.
There is no single list of accounting policies, which are applicable to all enterprises in all
circumstances. Enterprises operate in diverse and complex environmental situations and so they
have to adopt various policies.

Selection of Accounting Policy

It is believed that no unified and exhaustive list of accounting policies can be suggested which has
universal application. Three major characteristics which should be considered for the purpose of
selection and application of accounting policies.
• Prudence
• Substance over form
• Materiality.
The financial statements should be prepared on the basis of such accounting policies, which exhibit
true and fair view of state of affairs of Balance Sheet and the Profit & Loss Account.

Change In Accounting Policy

A change in accounting policies should be made in the following conditions:
It is required by some statute
For compliance with an Accounting Standard.
Change would result in more appropriate presentation of financial statement.

11
 INTRODUCTION OF ACCOUNTING

MULTIPLE CHOICE QUESTIONS

Q. I. Keeping permanent record of business transactions is known as:
(a) Accounting (b) Book Keeping
(c) Financial Accounting (d) Branches of Accounting

Q. 2. When recorded transactions of same type and nature are grouped under one head it is known
as:
(a) Recording (b) Summarizing
(c) Classifying (d) Accounting

Q. 3. The next after classifying is:

(a) Accounting (b) Interpretation
(c) Determination (d) Summarizing

Q. 4. The whole process of classifying, summarizing, analysing and interpreting the results of
business transaction is known as:
(a) Accounting (b) Summarizing
(c) Classifying (d) Recording

Q. 5. Accounting work begins with and ends with to the users:

(a) Communication, Business transactions (b) Business transactions, communication (c) Profit + Loss,
Balance (d) Income Expenditure

Q. 6. In financial accounting is prepared for the calculation of business income

(a) Trading Account (b) Balance Sheet
(c) Profit and Loss (d) Funds flow statement

Q. 7. To show financial position is prepared:

(a) Profit and Loss- (b) Funds flow statement
(c) Cash flow statement (d) Balance Sheet

Q. 8. The is the basis of recording transaction between the owner and the business as
business transactions
(a) Periodicity assumption (b) Business entity assumption
(c) Money measurement (d) Going concern assumption

Q. 9. The business entity assumption guides accountants to treat owner's contribution (i.e. capital f
business
(a) Liability (b) Assets
(c) Revenue (d) Expenses
(0; Assets
(c) Revenue (d) Expenses

Q. 10. The business entity assumption is applicable to type of business enterprise

(a) Selected (b) Unique
(c) Every (d) None of these

Q. 11. According to business entity assumption the personal transactions of the owner of a
Business recorded in the books of the business

12
 INTRODUCTION OF ACCOUNTING

(a) Arc not (b) Are

(c) are sometimes (d) None of these

Q. 12. Going concern assumption states that every business is viewed as continuing its
Operations
(a) For a definite period (b) Indefinitely (c) For a short period (d) None of these

Q. 13. Fixed assets are shown in the books at their

(a) Cost price (b) Sales price
(c) List price (d) None of these

Q. 14. The assumption that a business enterprise will not be sold or closed down in the near future is
know, as
(a) Entry assumption (b) Going concern assumption
(c) Money measurement assumption (d) None of these

Q. 15. On the basis of going concern assumption a business prepares its

(a) Bank statements (b) Cash statements
(c) Financial statement (d) None of these

Q. 16. Recording of transactions in the books of accounts with a definite period in view is called
assumption
(a) Going concern (b) Periodicity
(c) Money measurement (d) Business entity

Q. 17. Periodical ascertainment of profit helps in judging the of a business unit

(a) Profit (b) Capability
(c) Performance (d) Accuracy

Q. 18. The commonly accepted accounting period is

(a) Four year (b) Three year
(c) Two year (d) One year

Q. 19. According to the periodicity assumption, revenues and expenses are related to
period
(a) Current (b)Past
(c) Future (d) None of these

Q. 20. Only monetary transactions arc recorded in books of accounts. This implies
(a) Business entity assumption (b) Money measurement assumption
(c) Periodicity assumption (d) Going concern assumption

Q. 21. Transactions are assumed to be for specific period normally one year. This implies
(a) Going concern assumption (b) Money measurement assumption
(c) Periodicity assumption (d) Business entity assumption

Q. 22. Business is separate and distinct from its owner

(a) Money measurement assumption (b) Going concern assumption
(c) Periodicity assumption (d) Business entity assumption

Q. 23. Business is looked upon as a continuing entity. This assumption is

13
 INTRODUCTION OF ACCOUNTING

(a) Going concern assumption (b) Periodicity assumption

(c) Money measurement assumption (d) Business entity assumption

Q. 24. Accrual concept relates to the determination of

(a) Expenses & Losses (b) Incomes and gains
(c) Expenses & Incomes (d) Losses

Q. 25. Profit the capital

(a) Increases (b) Decreases
(c) Remains constant (d) None of these

Q. 26. Owner's capital is decreased by

(a) Revenue (b) Profit (c) Expenses (d) Loss

Q. 27. Excess of revenue over expense is called

(a) Profit (b) Loss
(c) Income (d) Income/profit

Q. 28. Loss is the excess of over

(a) Income. Expenditure (b) Expenses, Expenses
(c) Expenditure, Income (d) Revenue, Expenses

Q. 29. By following the convention of consistency, financial statements of various years becomes
(a) Comparable (b) Reliable
(c) Accruable (d) None of Durable

Q. 30. Unsold goods are valued at cost price or market price whichever is
(a) Higher (b) Durable
(c) Lower (d) None of these

Q. 31. Outflow of money is called as

(a) Expenses (b) Revenue
(c) Profit (d) None of the above

Q. 32. Each business record only those aspects of transactions which are
(a) Important (b) Unimportant
(c) Fixed (d) Fluctuating

Q. 33. As per the convention of consistency, every year methods are followed
(a) Different (b) Unique
(c) Same (d) None of these

Q. 34. The Owners would like to know about the of the business
(a) Social position (b) Financial position
(c) Political position (d) Professional position

Q. 35. The creditors are interested in knowing the of the business

(a) Situation (b) Cash
(c) Solvency (d) Liabilities

14
 INTRODUCTION OF ACCOUNTING

Q. 36. All the material facts would be in the financial statements

(a) Half disclosed (b) Full disclosed
(c) Limited disclosed (d) None of these

Q. 37. The full disclosure convention provides information

(a) Reliable (b) False
(c) Limited (d) None of these

Q. 38. Name of convention that states closing stock is valued at cost price or market price whichever
is lower.
(a) Convention of conservatism (b) Convention of full disclosure
(c) Entity (d) Going Concern

Q. 39. Name of convention that states the same accounting methods should be adopted every year
in preparing financial statements
(a) Convention of consistency (b) Convention of full disclosure
(c) Convention of materiality (d) Convention of conservatism

Q. 40. Give the name of the convention that says probable losses should be recorded but not
probable profits
(a) Convention of materiality (b) Convention of conservatism
(c) Convention of consistency (d) Convention of full disclosure

Q.41. Items of value owned are called

(a) Liabilities (b) Revenue
(c) Assets (d) Property

Q.42. Assets are not meant for

(a) Sale (b) Purchase
(c) Maintenance (d) None of these

Q.43. The balance of assets which keep on changing is called as assets

(a) Complete (b) Fixed
(c) Reasonable (d) Current

Q.44. Assets acquired for long-term use are called as

(a) Current assets (b) Non-Current assets
(c) Complete assets (d) Reasonable assets

Q.45. Outsider's and owner's claim against the assets of the firm is called
(a) Current assets (b) Fixed assets
(c) Current liabilities (d) Liabilities

Q.46. Liabilities are classified into two categories. And

(a) Primary and secondary (b) External and internal
(c) Primary and Main (d)None of these

Q.47. Owner's claim is liability

(a) External (b) Main

15
 INTRODUCTION OF ACCOUNTING

(c) Internal (d) None of these

Q.48. Outsider's claim is liability

(a) External (b) Internal
(c) Main (d) None of these

Q.49. Owner's claim against the assets of the business is also called as
(a) Liabilities (b) Expenditure
(c) Capital (d) Revenue

Q.50. Accounting equation is also called as Equation

(a) Funds flow statement (b) Cash flow statement
(c) Balance sheet (d) Ratio analysis

Q.51. Assets = + Liabilities

(a) Working capital (b) Capital
(c) Current liabilities (d) Current assets

Q.52. Accounting equation satisfies the concept of accounting

(a) Dual (b) Money measurement
(c) Business entity (d) Going concern

Q.53 Capital = Assets -

(a) Current liabilities (b) Liabilities
(c) Current assets (d) Funds

Q.54. Accounting equation serves as a basis for preparing

(a) Ratio analyses (b) Funds flow statement
(c) Balance sheet (d) Cash flow statement

Q.55. liabilities = - Capital

(a) Current Assets (b) Drawings
(c) Funds (d) Assets

Q. 56. In accounting equation assets are equal to

(a) Capital only (b) Capital + Liabilities
(c) Capital - Liabilities (d) Liabilities - Capital

Q. 57. Which of the following is a list of assets only?

(a) Cash, stock, debtors, machinery (b) Cash, Creditors, loan
(c) Capital, furniture bills payable (d) Capital, prepaid expenses, outstanding cx|

Q.58. Which of the following is a list of liabilities only?

(a) Cash, stock, debtors
(b) Cash, loan, creditors
(c) Creditors, loan, bank overdraft, bills payable

16
 INTRODUCTION OF ACCOUNTING

(d) Prepaid rent, salary outstanding, bills receivables

Q. 59. Goods purchased from Ritu for Rs. 60,000 in cash. What effect will the transaction have on the
accounting equation?
(a) Increase and decrease in assets (b) Increase and decrease in liability
(c) Increase and decrease in liability
(d) Decrease in assets and decrease in liability.

Q. 60. Rent outstanding Rs. 20,000. What effect will this transaction have on the accounting
equation?
(a) Increase and decrease in assets (b) Increase and decrease in liability
(c) Increase in liability and increase in assets
(d)Increase in liability and decrease in capital

Q. 61. Interest on drawings amounted to Rs. 5,000. What effect will this transaction have on the
accounting equation?
(a) Increase and decrease in assets (b) Increase and decrease in liability
(c) Increase and decrease in capital
(d) Decrease in assets and decrease in liability.

Q. 62. The proprietor of a business is treated as a creditor for capital introduced by him according to
(a) Money measurement concept (b) Cost concept
(c) Business entity concept (d) Dual aspect concept

Q. 63. If capital at the end = Rs. 7000/-, capital introduced = Rs. 5000/-, Drawing = Rs. 8000/, Loss=
10,000/-, then capital in the beginning is equal to
(a) Rs. 12,000 (b) Rs. 16,000
(c)Rs. 20,000 (d)Rs. 30,000

Q. 64. Inflow of money is called as

(a) Expenses (b) Revenue
(c)Loss (d) None of the above

Q. 65. Accounting Principles represent

(a) A consensuses at a particular time to the recording of accounting transactions.
(b) Inviolable laws fixed by a legal board
(c) Laws fixed by accounting expert
(d) Laws fixed by the respective governments.

Q. 66. Consistency with reference to application of accounting principles refers to the fact that
(a) Companies in the same industry use identical accounting procedure and methods and are
consistent.
(b) Income and assets have not been overstated.
(c) Accounting methods and procedures used have been consistently applied from year to year
(d) All methods and procedure have been unlisted.

Q. 67. X started business with a capital of Rs. 20,000/- and purchased goods worth Rs. 20,000 and
purchased goods worth Rs. 2000/- on credit. These transactions may be expressed in the accounting
equation such as
(a)Rs. 22,000 = Rs. 20,000 + Rs 2000
(b) Rs. 20,000 = Rs. 22,000 + Rs 2000

17
 INTRODUCTION OF ACCOUNTING

(c) Rs. 22,000 = Rs. 22,000 + 0

(d) Rs. 22,000 = 0 + Rs. 22,000

Q. 68. Accounting records transactions in term of

(a) Commodity (b) Monetary units
(c) Production unit (d) None of these

Q. 69. Market price or actual price, whichever is less, is the generally accepted accounting principle
for valuation of
(a) Stock in trade (b) Fixed assets
(c) Current assets (d) All of these

Q. 70. Consider the following data pertaining to Alpha Ltd.

Particulars Rs.
Cost of machinery purchased on 1 st April, 2005 10,00,000
Installation charges 1,00,000
Market value as on 31 st March, 2006 12,00,000
While finalizing the annual accounts, if the company values the machinery At Rs. 12,00,000. Which
the following concepts is violated by the Alpha Ltd.?
(a) Cost (b) Matching
(c) Realisation (d) Periodicity

Q. 72. Match the following items from column A with column B

No. Column A Column B
Consistency (a) Affairs of business are distinguished from
personal affairs of the proprietor
Money measurement (b) Accounting policies are not changed frequently.
Entity (c) Anticipated income should not be recognised in
the financial statements.
Conservatism (d) Loyalty of the management team is not disclosed
in the financial statements.

Q. 73. A proprietor Mr. A has reported a profit of Rs. 1,25,000 at the end of financial year after
taking into consideration the following amount
(i) The cost of an asset of Rs. 25,000 has been taken as an expense.
(ii) Mr. A is anticipating a profit of Rs. 10,000 on the future sale of a car shown as assets in his books.
(iii) Salary of Rs. 7,000 payable in the financial year has not been taken into account
(vi) Mr. A purchased an asset for Rs. 75,000 but its fair value on date of purchase was Rs. 85,000 He
recorded the value of asset in his books by Rs. 85,000.

Answer the following questions taking the above facts in mind:

1) Which is the correct amount of profit to be reported in the books?
(a) Rs. 1,25,000 (b) Rs. 1,35,000
(c) Rs. 1,50,000 (d) Rs. 1,33,000

2) Which measurement base should be followed in the statement (iv) ?

(a) Historical cost (b) Current cost
(c) Replacement cost (d) Present value

3) Which concept should be followed in the statement (ii) ?

(a) Conservatism (b) Materiality

18
 INTRODUCTION OF ACCOUNTING

(c) Historical cost (d) Accrual

4) Which concept should be followed in the statement (iii) ?

(a) Materiality (b) Historical cost
(c) Current cost (d) Accrual

Answers:
1. (b) 2. (c) 3. (d) 4.(a) 5. (b).6. (c) 7. (d) 8. (b) 9. (a) 10. (c) 11. (a) 12. (b) 13. (a) 14. (b) 15. (c) 16. (b)
17. (c) 18. (d) 19. (a) 20. (b) 21. (c) 22. (d) 23. (a) 24. (c) 25. (a) 26. (d) 27. (a) 28. (c) 29. (a) 30. (c) 31.
(a) 32. (a) 33. (c) 34. (b) 35. (c) 36. (b) 37. (a) 38. (a) 39. (a) 40. (b) 41. (c) 42. (a) 43. (d) 44. (b) 45.
(d)46. (b) 47. (c) 48. (a) 49. (c) 50. (c) 51. (b) 52. (a) 53. (b) 54. (c) 55. (d) 56. (b) 57. (a) 58. (c) 59. (a)
60. (d) 61. (c) 62. (c) 63. (c) 64. (b) 65. (a) 66. (c) 67. (a) 68. (b) 69. (a) 70. (a) 71. 1-C, 2-D, 3-A, 4-B,
72. 1-B, 2-D, 3-A, 4- C, 73. 1-D, 2-A, 3-A, 4-D.

TOPIC – 2
GOLDEN RULES OF ACCOUNTING

Accounting starts from recording and summarising of daily transactions, for the desired end result
(i.e. calculation of profit) we first have to convert the daily transaction into Journal entries and then
journal entries into Ledgers, than Ledgers to trail balance and with the help of trail balance we
prepare the Trading, Profit & Loss A/C and Balance sheet.

TRANSACTION

JOURNAL ENTRIES

LEDGERS

TRAIL BALANCE

PROFIT & LOSS ACCOUNT

AND
BALANCE SHEEET

There are Five Golden rules for pillars of accounting, which helps us to convert transactions into
journal entries they are as follows: -

Debit FOR ASSETS Credit Debit FOR EXPENSES Credit

19
 INTRODUCTION OF ACCOUNTING

Debit FOR LIABILITIES Credit Debit FOR INCOMES Credit

Debit FOR CAPITALS Credit

20
 JOURNAL ENTRIES

SAI KRIPA
JOURNAL ENTRIES

Example – 1
Journalize the transactions given below in the books of Kohli.
2006 April:
i. Kohli starts business with Rs. 25.000. Kohli opens account with bank and deposits Rs. 18.000.
ii. Kohli purchases furniture. Rs. 850 and typewriter. Rs.1500. Payment made by cheque.
iii. Goods purchased from M/s. Rao and Murty on credit, Rs. 5.600.
iv. Goods purchased from M/s. Khan & Singh for cash. Rs. 1,100.
v. Goods sold on credit to M/s Mohan Lai & Co.. Rs. 1500/-
vi. Goods sold on credit to M/s Basu Co., Rs. 2.800/-
vii. Paid for office stationery. Rs. 250/-
viii. Paid rent for April, Rs. 200/-
ix. Installed neon sign at a cost of Rs. 1,000.
x. Received cash from M/s. Mohanlal & Co., Rs 1470; allowed them discount, Rs. 30.
xi. Issued cheque for Rs. 5.500 in full settlement (i.e. nothing more is due them) to M/s Rao &
Murty.
xii. Deposited Rs. 1.200 in bank
xiii. Received bill for two table fans. Rs. 300 from M/s Electrician Bros.
xiv. One electric fan stolen.
xv. Paid insurance premium. Rs. 450 by cheque.
xvi. Insurance Premium Rs. 200 paid to L IC.

Example – 2
Pearey Lai was carrying on business as a stationery merchant. On I st January. 2006 his assets and
liabilities were as under

Assets: Furniture and Fixtures Rs. 2.400: Stock of Stationery Rs. 35.600; Cash at Bank Rs. 3.500; Cash
in Hand Rs. 400; due from Bimal Rs. 1,600; Due from Kewal Rs. 800.

Liabilities: Due to Landlord (December rent). Rs 150; Due to Sharma Bros. Rs. 1,400: Due to Verma
Sons. Rs. 550.
The Transactions during January 2006 were:

Date Transactions Amount

2006
JAN
2 Cash Sales 150
2 Sales to J.P. Stores on credit 450
3 Purchases from Verma Sons 380
4 Paid rent to Landlord (for December 1998) 150
4 Used Stationery for office 60
4 Used Stationery- for domestic Purposes 20
6 Sold Stationery- to LP. College on Credit 250
6 Bought Postage stamps 15
7 Paid Insurance Premium by cheque 350
7 Received cheque from Kewal in full settlement 780
9 Issued cheque in favour of Verma Sons in full settlement of the amount 540
10 due on 1st Jan. 600
11 Cash Sales 500

21
 JOURNAL ENTRIES

11 Sent Cash to Bank 1000

11 Received cheque from Bimal on account 430
11 Cash received from J.P. Stores 20
11 Goods received back from J.P. Stores
13 Bimal's Cheque returned dishonoured.
13 Issued cheque in favour of Sharma Bros, in full settlement. 1350
15 Sales on credit to Kewal 500
16 Cheque in favour of Sharma Bros, returned dishonoured because of
improper rubber stamp. -
17 Incurred advertising, Rs. 250; paid cash Rs. 100 and stationery given for
balance. -
20 Exchanged old furniture for new; price of new furniture Rs. 600; value
of old furniture Rs. 200 (cost Rs. 350). balance paid in cash. -
22 Bimal declared Insolvent; 40* received against amount due from him.
22 Sent cheque to Sharma Bros. 1400
23 Kewal claims Rs. 50 as special allowance because of defect in goods -
25 Borrowed from Mrs. Pearey Lai @ 9% p.a. Money put in Bank. 10,000
25 Installed a small printing machine at a cost of Rs. 9.500; paid by cheque. -
25 Repairs to furniture 100
28 Cash sales 400
28 Paid Income Tax 100
30 Withdrawn for domestic use 200
30 Amount drawn from bank for office use 600
31 Paid salaries. 250
31 Amount due to Landlord as rent for January 150

Example – 3
From the following transactions Pass Journal entries for the month of Aug 2012.
Rs.

1 Received from D & Co. Rs. 1,350 in full settlement of Rs. 1 400
4 Received for cash sales 1250.00
5 Paid to Rajesh & Co. Rs. 775 in full settlement of his account for 800.00
7 Purchased office furniture 670.00
13 Paid for postal stamps 25.00
15 Paid for office rent for month of July, 2006 125.00
17 Used office cash for meeting personal expenses 150.00
19 Sold goods on credit to Mr. Faithful 1700.00
20 Paid to Rajnikant Rs. 670 in full settlement of his account for Rs. 700
20 Deposited in the Bank all cash in excess of Rs. 200.

Example – 4
Record the following transactions in the journal
1986
July 1 Ram started business with Cash Rs. 25.000, Goods Rs. 15,000 and furniture Rs. 10,000.
2 Sold Goods to Ramesh for Rs. 5,000 at a Trade discount of 107c and cash discount of 2%, Received 60%
amount immediately.
3 Purchased Goods from Sagar Chand for Rs. 4,000 at a trade discount of 5%.
4 Opened a Bank Account and deposit Rs. 5,000.

22
 JOURNAL ENTRIES

5 Paid to Sagar Chand Rs. 3,750 by cheque in full settlement of his account.
7 Received cheque from Ramesh Rs. 1,000 and cheque was immediately deposited in to Bank.
10 Sold old News Paper for Rs. 10.
12 Cheque of Ramesh dishonoured.
13 Sold goods to Naresh Rs. 4.000 at a trade discount of 5%.
14 Naresh returned goods of a List price of Rs. 1,000.
15 Received a cheque from Naresh Rs. 1,000.
17 Naresh s cheque deposited into Bank.
20 Naresh becomes insolvent and Only 60 Paise in the rupee received from his estate in full and final
settlement.
21 Paid salaries by cheque Rs. 500.
25 Paid Life Insurance premium by cheque Rs. 300.
27 Bank charges debited by the Bank Rs. 50.
31 Paid Trade Expenses Rs. 200.

Example – 5
Pass Journal for following transactions:
i. Amount deposited in to Bank.
ii. Amount withdrawn from Bank.
iii. Cheque deposited on the date of receipt of cheque.
iv. Cheque received not deposited on the same day.
v. When above cheque deposited in Bank.
vi. Amount directly deposited by customer in Bank.
vii. Cheque deposited dishonoured.
viii. Cheque received from customer to whom discount is given & cheque deposited on the same
day.
ix. In case of dishonoured of above cheque.
x. Payment made to a person by cheque.
xi. Amount withdrawn from Bank for personal use.
xii. Int. charged by Bank.
xiii. Bank charges charged by Bank.
xiv. Intt. given by Bank.

23
 DEPRECIATION

SAI KRIPA
DEPRECIATION

Topics to be covered
• Meaning and term
• Preparation of Assets Ledger
• Preparation of Provision of Depreciation on assets ledger
• Change in Method of Depreciation
• Other methods of charging depreciation.

Topic – 1
MEANING AND TERMS

Depreciation
According to the Accounting Standard – 6 issued by The institute of Chartered accountants of India
“Depreciation is a measures of wearing out, consumption or other loss of the value of the
depreciable assets arising from use, effluxion of time or obsolescence through technology and
market change. Depreciation is allocated so as to charge fair proportion of depreciable amount in
each accounting period during the expected useful life of the assets.”

Depreciable Assets
Depreciable assets are the assets which have following characteristics: -
I. They are expected to use for more than one accounting period
II. They have a limited useful life
III. They are held by enterprise for use and for the purpose of sale in the ordinary course of
business.

Objectives of Providing Depreciation

Depreciation is provided in order to achieve following objective: -
I. To calculate proper profit
II. To show the assets at its reasonable value
III. To provide for replacement of an assets
IV. To maintain provision and better liquidity
V. Depreciation leads to saving in Income Tax

Causes of Depreciation
There are the two main causes for charging depreciation on fixed as such as Internal Cause and
External Cause.
A. Internal Cause:- It includes following Causes
i. Wear & Tear of assets
ii. Disuse
iii. Change in Production Technique
iv. Reduced Demand
v. Technical Progress
vi. Depletion
B. External Causes:- It includes Following Causes
i. Obsolescence:- It is induced by new inventions, improvement, loss of demand due to
change in fashion, for any reason has a direct impact on the economic life of the
assets.

- 24 -
 DEPRECIATION

ii. Effuxion of time: - There are some Intangible Assets which decreases in value as time
elapses such as copyright, patent right, leased assets, etc.

Methods of Calculating Depreciation

There are Nine methods suggested by AS – 6 “Depreciation” for charging depreciation on fixed
assets such as: -
i. Straight Line Method (SLM)
ii. Diminishing Balance Method (WDV)
iii. Sum of Year’s Digit method
iv. Inventory or revaluation method
v. Annuity method
vi. Depreciation fund method
vii. Insurance policy method or Capital redemption policy method
viii. Depletion method
ix. Machine Hour rate

TOPIC – 2
PREPARATION OF ASSETS LEDGER
Depreciation are most commonly charged by first two methods i.e. Straight line method and
diminishing balance method.

Journal Entries
1. For Purchase of Assets

Assets A/C Dr
To Bank A/C

2. For Charging Depreciation on Assets

Depreciation on Assets A/C Dr

To Assets A/C

3. For Sale of Assets in case of LOSS

Bank A/C Dr
P&L (loss) A/C Dr
To Assets A/C

4. For Sale of Assets in case of PROFIT

i. Bank A/C Dr (With Full amount including profit)

To Assets

ii. Assets A/C Dr (with profit amount only)

To P&L (profit)

MACHINERY A/C
Date Particular Amount Date Particular Amount

- 25 -
 DEPRECIATION

To Bank Xxxx BY Depreciation Xxxx

To P&L (profit) xxxx By Bank Xxxx
By P&L (loss) Xxxx

Example – 1
Jija Ji Limited purchases a Plant of Rs 950,000 on 1st January 2001 and on 1st July 2001 Company
purchase another Plant of Rs 250,000. On 1st October 2002, a part of Plant purchased on 1st January
2001 for Rs 250,000 was sold for Rs 150,000 and on same date company purchased an another Plant
of Rs 55,000
Company adopted a policy to charge Depreciation on its Plant @ 15% P.A on Original Cost Method.

Prepare Machinery Account for the year 2001 to 2003. Assuming firm close its books on 31st
December every year.

MACHINERY A/C
Date Particular Amount Date Particular Amount

Note – 1
Calculation of Profit on loss on sale of machinery

- 26 -
 DEPRECIATION

Example – 2
Abc Limited purchase a second hand machine of Rs 54,000 on 1st July 2004 and spent Rs 6000 for its
overhauling and installation. On 1st October2004 Company purchase another machine of Rs 40,000,
on 1st July 2006 company sold 40% of machine purchased on 1stJuly 2004 at a loss of Rs 480 and on
same date company purchased an another machine of Rs 50,000.
On 1st October 2007 Company sold its machine which was purchased on 1st October 2004 at Rs
30,000, and purchase another machine of Rs 25,000 on same date. Company charge Depreciation on
its Machinery @ 10% P.A on Reducing Balance Method.

Prepare Machinery Account for the year 2004 to 2008, assuming firm close its books on 31st March
every year.

MACHINERY A/C
Date Particular Amount Date Particular Amount

- 27 -
 DEPRECIATION

Note – 1
Calculation of Profit on loss on sale of machinery

TOPIC – 3
PREPARATION OF PROVISION OF DEPRECIATION ON ASSETS LEDGER

- 28 -
 DEPRECIATION

Under this method company accumulate depreciation under the separate ledger called “Provision
for Depreciation on assets A/C” here depreciation is not deducted from assets although it is
accumulated under liability side of balance sheet.

Journal Entries
1. For Purchase of Assets

Assets A/C Dr
To Bank A/C

2. For Charging Depreciation on Assets

Depreciation on Assets A/C Dr

To Provision for depreciation on assets A/C

3. For Sale of Assets in case of LOSS

i. Bank A/C Dr
P&L (loss) A/C Dr
To Assets A/C

ii. Provision for depreciation on assets Dr

To Assets A/C

4. For Sale of Assets in case of PROFIT

i. Bank A/C Dr (With Full amount including profit)

To Assets

ii. Assets A/C Dr (with profit amount only)

To P&L (profit)

iii. Provision for depreciation on assets Dr

To Assets A/C

MACHINERY A/C
Date Particular Amount Date Particular Amount
To Bank Xxxx By Bank Xxxx
To P&L (profit) xxxx By P&L (loss) Xxxx
By Provision for
Depreciation on Machinery Xxxx

Provision for Depreciation on Machinery A/C

Date Particular Amount Date Particular Amount
To Assets A/C xxxx By Depreciation Xxxx

Example – 3

- 29 -
 DEPRECIATION

Surya Limited purchase a Plant of Rs 130,000 on 1st Jan 2009 and spent Rs 5000 for its overhauling,
Rs 2000 for installation and Rs 15000 for brokerage. On 1st July 2009 Company purchase another
machine of Rs 40,000, On 1st Oct 2009 Company purchase another Plant of Rs 60,000.
On 1st July 2010 company sold Second Plant at Rs 36,500 and on same date company purchased an
another machine of Rs 50,000.
Company charge Depreciation on its Plant @ 10% P.A on Reducing Balance Method.

Prepare Plant Account and Provision for Depreciation on plant A/C for the year 2009 to 2011,
assuming firm close its books on 31st December every year.

Solution
PLANT A/C
Date Particular Amount Date Particular Amount

Provision for Depreciation on Plant A/C

- 30 -
 DEPRECIATION

Date Particular Amount Date Particular Amount

Note – 1
Calculation of Profit or loss on sale of Plant

Example – 4

- 31 -
 DEPRECIATION

You are given the following balances as on 1st April, 2008:

Particulars Amount

Machinery A/C 9,00,000

Provision For Depreciation on Machinery 2,48,000

A/C

Depreciation is charged on Machinery @ 20% P.A by the Diminishing Balance method. A piece of
Machinery Purchased on 1st October 2004 for Rs 225,000 was sold on 1st July 2008 at Rs 95,000 and
on same date purchased another machine for Rs 100,000.

Prepare Machinery Account for the year 2008-2009, assuming firm close its books on 31st March
every year.

Solution
MACHINERY A/C
Date Particular Amount Date Particular Amount

Provision for Depreciation on Machinery A/C

Date Particular Amount Date Particular Amount

- 32 -
 DEPRECIATION

Note – 1
Calculation of Profit or loss on sale of Machinery

TOPIC – 4
CHANGE IN THE METHOD OF DEPRECIATION
Some Time Company Decided to change the method of depreciation charged on fixed assets i.e. it
can be change from SLM to WDV or WDV to SLM as per the need and requirement of Company.
Change can be made from prospective effect or it can be made from Retrospective Effect.
Prospective Effect means changing method from current year without making any change in
previous year however in retrospective effect depreciation method is changed in both current as
well as previous years.

Under Retrospective effect, method is changed from past year and it may leads to profit or loss to
the firm For example company has Assets of Rs 100,000 which is purchased 4 years ago and
company charge depreciation @ 10% by SLM i.e. company already charged Rs 40,000
(10,000+10,000+10,000+10,000) as depreciation on assets and current book value of assets is Rs
60,000 (100,000-40,000) however if company followed WDV method with same rate of depreciation
than total depreciation should be charged on assets will be Rs 34,390 (10,000+9,000+8,100+7290)
and book value of assets is to be Rs 65,610 (100,000-34,390). So if company decided to change
method of depreciation from SLM to WDV than it will leads to income to the Company of Rs 5,610
(40,000-34,390) or (65,610-60,000).

- 33 -
 DEPRECIATION

Journal Entry

For Profit to the Company

Assets A/C Dr
To Profit & Loss A/C

For Loss to the Company

Profit & Loss A/C Dr

To Assets A/C

Example – 5
Ria Limited purchases a Furniture of Rs 200,000 on 1st Apr 2008 and paid Rs 120,000 in cash and
balance in three equal instalments of Rs 35,000 each to Pia Limited. On 1st Sep 2008 Company
purchase another Furniture of Rs 50,000.
On 1st July 2011 company sold Half Furniture purchased on 1st Sep 2008 at Rs 19,200 and on same
date company purchased an another Furniture of Rs 40,000.
Company charge Depreciation on its Plant @ 20% P.A on Reducing Balance Method and from the
year 2011-12 company decided to charge Depreciation @ 10% Straight Line Method with
prospective Effect.

Prepare Furniture Account for the year 2009 to 2012, assuming firm close its books on 31st March
every year.

Solution
MACHINERY A/C
Date Particular Amount Date Particular Amount

- 34 -
 DEPRECIATION

Note – 1
Calculation of Profit or loss on sale of Furniture

TOPIC – 5
OTHER METHODS OF CHARGING DEPRECIATION
There are seven other methods of charging Depreciation on fixed assets which are briefly given
below such as:-

SUM OF YEAR’S DIGIT METHOD

Under this Method Depreciation is charged on assets by taking ratio of estimated life of the Assets
for example if assets is purchased now and it has economic life of 3 years than for the first year it will
be run for 3 years and for second year it will be run for 2 years and for third year it will be run for 1
year so it will be depreciated in the ratio of (3:2:1) i.e. in first year depreciation will be Cost of Assets
* 3/6 and accordingly.

Example – 6
Cost of the Assets is Rs 11,000 and its Salvage value after nine years will be Rs 875. Calculate annual
depreciation by Sum of year digit method.

Solution

- 35 -
 DEPRECIATION

DEPLETION METHOD
This method is generally used for natural resource assets such as mineral deposits, oil, timber
stands, gas resources, etc. These natural resources get exhausted by exploitation. Therefore periodic
depletion is better not to be calculated in term of year rather it is better to calculate cost per unit
and then multiply such cost per unit to the resources used during the year.

Depletion per unit = Acquiring cost – Residual value

Estimated life in terms of production units
Example – 7
A Timber company acquired a timber track of Rs 370,000 and spent Rs 30,000 for its loading and
unloading. The track is estimated to have 70,00,000 board meter of timber it is estimated that
cutover land can be sold at Rs 50,000 at the end.
Calculate Depletion per board meter and what will be the depletion during the year if company cut
200,000 timber board meters during the year.

Solution

- 36 -
 DEPRECIATION

MACHINE HOUR RATE

Under this method life of the assets is not estimated in number of years, it is calculated in the
number of machine hour worked by machine. Proper records are maintained for running of machine
hours.

Hourly Depreciation = Cost of machine

Machine Hours
Example – 8
Mamamiya limited purchased a machine at a cost of Rs 500,000 and its estimated hours for its life
are 100,000 machine hours.
Calculate Hourly depreciation and depreciation during the year if machine work during the year for
5,000 hours.

Solution

- 37 -
 DEPRECIATION

Production Base Method

Under this method life of the assets is not estimated in number of years, it is calculated on the total
production basis of machine. Proper records are maintained for Production.

Depreciation per unit = Cost of machine-Scrap value

Machine Hours

Example – 9
Surju limited purchased a machine at a cost of Rs 900,000 and its estimated Production for its life are
200,000 units with scrap value of Rs 50,000
Calculate depreciation per unit and depreciation during the year if machine produced 40,000 units
during the year.

- 38 -
 RECTIFICATION OF ERROR

SAI KRIPA
RECTIFICATION OF ERROR

Topics to be covered
• Meaning and term
• Journal Entries

Topic – 1
MEANING AND TERMS

Rectification of errors
On the basis of books of account, financial statements are prepared. This financial statement
provides management & other user groups the information about the performance by the entity &
its financial health. Similarly the book of account provides various types of information to the
management for day to day operation & control.
If such information is not error free, the user group will be mislead their decisions so taken can
prove to be wrong. Hence it is absolutely necessary that all errors (if there are any) must be
located/identified & then rectified. Larger the volume of transactions greater is the chances of error.
Similarly quality of persons involved in accounting department & the control system used will also
influence the level of errors.
It’s humane to err. And its human being only who has to identify & rectify errors.

Types of Error
Errors of Principle:
That means there is error in applying some accounting principle.
Such errors will not affect the agreement of trial balance i.e. these are double sided error.
Ex. treating revenue expense as capital expenditure or vice versa or the recording of sale of fixed
assets as ordinary sale

Clerical Errors:
These are the errors committed in applying the accounting procedure. Such errors may or may not
affect the agreement of trial balance.
These can be further classified as follows.
A. Errors of Omission
B. Errors of Commission
C. Compensating Errors

Errors of Omission
i. Omitting an entry completely from the subsidiary book. Full omission hence Trial Balance
will agree. Ex.: Sale of Rs. 5,000 to A on 30. June.2006 is not recorded.
ii. Omitting to post the ledger account from the subsidiary books. Partial omission hence Trial
Balance will not agree.
Ex.: A sale entry of Rs. 10.000 not posted to As a/c.

Errors of Commission
i. Writing wrong amount in the Subsidiary book Trial Balance will agree.
Ex.: A purchase of Rs.5,000/ - from X is entered in purchase book as Rs. 500/-
ii. Posting the wrong account in the ledger Trial Balance will agree.
Ex.: From Sales book A s account is debited by Rs. 8000 instead of B's account.
iii. Wrong casting of subsidiary books

- 39 -
 RECTIFICATION OF ERROR

Ex. Total of Bills Receivable book is taken as 1,05.000/- instead of 1.00.500/-

iv. Posting the wrong amount in the ledger
Ex.: From Sales Return book A s account is credited by Rs.8,000 instead of Rs.8.800/-
v. Posting an amount on the wrong side of an account
Ex.: From Sales Book L's account is credited
vi. Wrong balancing of an account
Ex.: Balance of Furniture account is taken as Rs.7,000/- instead of Rs.3.000/-

Note. In case of errors described in (iii) to (vi) above. Trial Balance will not agree.

Compensating Errors:
Two or more mistakes which compensate the effect of each other on trial balance & hence Trial
Balance will agree.
Ex.: Excess debit Rs. 1.000 to Furniture a/c & Excess credit of Rs. 1,000 to Sales a/c.

Suspense
When trial balance does not tally, the difference is put to an account named as Suspense a/c.
Difference is:
▪ Debited (if debit side of trial balance is short) or
▪ Credited (if credit side of trial balance is short) to Suspense a/c

i. Thus with the help of suspense a/c trial balance is artificially tallied.
ii. While passing rectification entry for one sided errors, the one effect Dr. or Cr. will go into
the a/c in which mistake is committed & the other effect will be given to Suspense a/c.
iii. When all such one sided errors are rectified the Suspense a/c will become Nil
iv. While rectifying double sided errors, suspense account will not get affected.

Whenever required by the question, amount & nature of difference in Trial balance can be
ascertained by preparing a Suspense a/c. The balancing figure of suspense account after all
rectification would be the difference of trial balance.

TOPIC – 2
JOURNAL ENTRIES
Here both wrong entry and right entry were passed to rectify the stated error.

Example – 1
Correct the following errors unearthed before preparation of the Trial Balance.
i. A welding machine purchased for Rs 5600 from the Oxygen Co. Ltd, has been entered in the
purchase Day Book
ii. The total of the Returns outwards Book is Rs. 100 short.
iii. A sale of Rs. 175 to M/s Gupta & Mukherjee has been entered in the sales Book as Rs. 157.
iv. A purchase of Rs. 215 from M/s Guha & Roy had been posted to the debit of their account.
v. Discount allowed to D. Majhail. Rs.15 had not been entered in the Cash Book, but the full
amount (including discount) has been credited to D. Majhail's account.
vi. Licence fee for proprietor's gun. Rs. 30 had been debited to General Expenses Account.
vii. A sale of Rs.200 for old furniture has been passed through the sales book.

Example – 2

- 40 -
 RECTIFICATION OF ERROR

Ganesh drew a Trial Balance of his operations for the year ended 31.03.2006. There was a difference
in the Trial Balance which he closed with a Suspense Account. On a scrutiny by the Auditors, the
following errors were found:
i. Purchases day book for the month of April, was under cast by Rs 1000
ii. Sales day book of October, was overcast by Rs. 10,000
iii. Furniture purchased for Rs. 8,100 was entered in the Furniture Account as Rs. 810.
iv. A bill for Rs. 10,000 drawn by Ganesh was not entered in the Bills Receivable Book.
v. Machinery purchased for Rs. 10,000 was entered in the purchased day book.

Pass necessary Journal Entries to rectify the same and ascertain the difference in the Trial Balance
that was shown under the Suspense Account in respect of the above items.

Example – 3
The accountant of X prepared the Trial Balance for the year ended 31st March, 2006. But there was a
difference and the accountant put the difference in Suspense Account. Rectify the following errors
found and prepare the Suspense Account;
i. The total of the Returns outward book Rs.420 has not been posted in the ledger.
ii. Purchase of Rs.350 from Y has been entered in the sales book However Ys a/c has been
correctly entered
iii. A sale of Rs.390 to Z has been credited to his account as Rs.290.
iv. Old furniture sold for Rs 5,400 had been entered as Rs 4,500 in sales account.
v. Goods taken by proprietor, Rs.500 have not been entered in the books at all.

Example – 4
A book-keeper finds the difference in the Trial Balance amounting to Rs. 1,000 and puts it in the
Suspense Account. Later on he detects the following errors.
i. Purchased goods from Ravi Rs. 15.000 but entered into Sales Book
ii. Received one bill for Rs. 25.000 from Arun but recorded in Bills Payable Book.
iii. An item of Rs. 3,500 relating to prepaid rent account was omitted to be brought forward.
iv. An item of Rs. 2,000 in respect of purchase returns, had been wrongly entered in the
purchase book, parts a/c was correctly posted.
v. Rs. 25,000 paid to Hari against our acceptance was debited to Hansh Account.
vi. Bills received from Janki for repairs done to Machine Rs. 2,500 and Machine supplied for Rs.
45.000 was entered in the Purchase Book as Rs. 46.000. Janki a/c was credited with Rs.
47.500.

Give rectifying journal entries with full narration and prepare Suspense Account.

Example – 5
The trial balance of a firm is out. The following errors were found subsequently, to have been
committed. Pass journal entries to correct them, and ascertain the difference in the Trial Balance.
i. An amount of Rs. 100 was received from D. Das on 31st December. 2005, but had been
entered in the Cash Book on 3rd January, 2006.
ii. The Returns Inwards Books for December has been cast Rs. 100 short.
iii. The purchase of an office table costing Rs.300 had been passed through the Purchase Day
Book.
iv. Rs.375 paid for wages to workmen for making show cases had been charged to wages
account.
v. A purchase of Rs. 671 had been posted to the debit of the creditor's account as Rs.617.The
creditor is P.Panna & Co.

- 41 -
 RECTIFICATION OF ERROR

vi. A cheque for Rs.200 received from P.C Joshi has been dishonoured on maturity and was
passed to the debit of Allowances Account.
vii. Goods amounting to Rs. 100/- had been returned by a customer and were taken into stock
but no entry in respect thereof was made in the books.
viii. Rs 2,000 paid for the purchase of a motor-cycle for Mr. Dutt (a partner) had been charged to
Miscellaneous Expenses Account
ix. A sale of Rs.200 to Singhani & Co. was credited to their account.
x. A sale of Rs. 1.000 had been passed through the Purchase Day Book. The customer's account
has. however, been correctly debited.
xi. While carrying forward the total of the sales book from one page to the next, the amount
was written as Rs. 176,658 instead of Rs.167,368.

Example – 6
Pass necessary journal entries to rectify the following errors:
i. An amount of R.s.200 withdrawn by the proprietor for his personal use has been debited to
trade expenses account.
ii. A purchase of goods from Nathan amounting to Rs. 300 has been wrongly entered through
the sales-book.
iii. A credit sale of Rs. 100 to Santhanam has been wrongly passed through the purchases-book.
iv. Rs. 150 received from Malhotratiave been credited to Mehrotra.
v. Rs 375 paid on account of salary to the cashier Dhawan stands debited to his personal
account.
vi. A contractor's bill for extension of premises amounting to Rs. 2,730 has been debited to
building repairs account.
vii. On 25th June, goods of the value of Rs. 500 were returned by Akash Deep and were taken
into stock but the returns were entered in the books under date 3rd July. i.e after the
expiration of the financial year on 30th June.
viii. A bill of Rs 200 for old office furniture sold to Sethi was entered in the sales-day-book.
ix. The periodical total of the sales-book was cast short by Rs. 100.
x. An amount of Rs. 80 received on account of interest was credited to commission account.

- 42 -
 FINAL ACCOUNTS

SAI KRIPA
FINAL ACCOUNTS

Topics to be covered
• Meaning and term
• Practical Questions

Topic – 1
MEANING AND TERMS

Types of Accounts to be prepared

Following accounts are prepared under final accounts such as: -
• Trading account
• Profit & loss Account
• Manufacturing account
• Balance Sheet

Direct Expense V/S Indirect Expense

All Expenses which are directly linked with production are known direct expenses, that all expenses
are necessary for production for example Wages, carriage inward, Power, manufacturing exp etc.
All Expenses which are not directly linked with production are known indirect expenses for example
Salary, carriage outward, Rent, Selling and admin exp etc.

Direct Income V/S Indirect Income

- 45 -
 FINAL ACCOUNTS

All Income which are generated from sale of goods and services are known as direct income,
however all those income which are earned from other sources are known as indirect incomes for
example rent received, discount and commission received etc

TOPIC – 2
ADJUSTMENTS
Following adjustments should be under stand for making final accounts: -

1. Closing Stock
Closing Stock A/C Dr
To Trading A/C

2. Outstanding Expenses
Expenses A/C Dr

- 46 -
 FINAL ACCOUNTS

To Outstanding Expenses A/C

3. Prepaid Expenses
Prepaid Expenses A/C Dr
To Expenses A/C

- 47 -
 FINAL ACCOUNTS

4. Accrued Income
Accrued Income A/C Dr
To Income A/C

5. Advance Income

- 48 -
 FINAL ACCOUNTS

Income A/C Dr
To Advance Income A/C

6. Depreciation on Fixed Assets

Depreciation on Fixed Assets A/C Dr
To Fixed Assets A/C

- 49 -
 FINAL ACCOUNTS

7. Bad Debt
Bad Debt A/C Dr
To Debtor A/C

- 50 -
 FINAL ACCOUNTS

8. Provision for Doubtful Debt

A. For Increasing Provision
Profit and Loss A/C Dr
To Provision for Doubtful debt A/C

B. For Reducing Provision

Provision for Doubtful debt A/C Dr
To Profit and Loss A/C

- 51 -
 FINAL ACCOUNTS

9. Provision for Discount on debtor

Profit and Loss A/C Dr
To Provision for Discount on debtor A/C

- 52 -
 FINAL ACCOUNTS

10. Interest on capital

Interest on Capital A/C Dr
To Capital A/C

11. Interest on Drawing

Capital A/C Dr
To Interest on Drawing A/C

- 53 -
 FINAL ACCOUNTS

12. Goods given as charity

Charity A/C Dr
To Purchase A/C

- 54 -
 FINAL ACCOUNTS

13. Goods Distributed as Free sample

Advertisement A/C Dr
To Purchase A/C

14. Goods withdrawn for personal use

Drawings A/C Dr
To Purchase A/C

- 55 -
 FINAL ACCOUNTS

15. Goods use to make an Assets

Assets A/C Dr
To Purchase A/C

- 56 -
 FINAL ACCOUNTS

16. Goods Destroyed by fire/ theft

A. Loss by Fire
Loss by fire A/C Dr
To Purchase A/C

B. For insurance Claim

Insurance Company A/C Dr
To Insurance Claim A/C

- 57 -
 FINAL ACCOUNTS

17. Manager Commission

Manager Commission A/C Dr
To Outstanding Manager commission A/C

- 58 -
 FINAL ACCOUNTS

Manager Commission

Before After

Profit X Rate Profit X Rate

100 rate + 100

- 59 -
 FINAL ACCOUNTS

The following are the balances extracted from the books of Shri Shrinivas as on 31.03.2023, who
carries on business under the name and style of M/s Shrinivas and Associates at Chennai:

Particulars Debit (`) Credit (`)

Capital A/c 14,11,400
Purchases 12,00,000

Purchase Returns 18,000

Sales 15,00,000

Sales Returns 24,000

Freight Inwards 62,000

Carriage Outwards 8,500

- 60 -
 FINAL ACCOUNTS

Rent of Godown 55,000

Rates and Taxes 24,000

Salaries 72,000

Discount allowed 7,500

Discount received 12,000

Drawings 20,000

Printing 6,000

Insurance premium 48,000

Electricity charges 14,000

General expenses 11,000

Bank charges 3,800

Bad debts 12,200

Repairs the Motor vehicle 13,000

Interest on loan 4,400

- 61 -
 FINAL ACCOUNTS

Provision for Bad-debts 10,000

Loan from Mr. Rajan 60,000

Sundry creditors 62,000

Motor vehicles 1,00,000

Land and Buildings 5,00,000

Office equipment 2,00,000

Furniture and Fixtures 50,000

Stock as on 31.03.2022 3,20,000

Sundry debtors 2,80,000

Cash at Bank 22,000

Cash in Hand 16,000

Total 30,73,400 30,73,400

Prepare Trading and Profit and Loss Account for the year ended 31.03.2023 and theBalance
Sheet as at that date after making provision for the following:

- 62 -
 FINAL ACCOUNTS

i. Depreciate Building by 5%, Furniture and Fixtures by 10%, Office Equipment by 15% and
Motor Car by 20%.
ii. Value of stock at the close of the year was ` 4,10,000.
iii. One month rent for godown is outstanding.
iv. Interest on loan from Rajan is payable @ 10% per annum. This loan was taken on01.07.2022
v. Reserve for bad debts is to be maintained at 5% of Sundry debtors.
vi. Insurance premium includes ` 42,000 paid towards proprietor's life insurance policyand the
balance of the insurance charges cover the period from 01.04.2022 to 30.06.2023.

Example 2
The following is the trial balance of Prakesh as at 31st December, 2022:

Dr. Cr.

` `
Prakesh’s capital account 3,83,450
Stock 1 January, 2022 2,34,000 -

Sales - 19,48,000
Returns inward 43,000 -
Purchases 16,08,500 -

Return outward 29,000

- 63 -
 FINAL ACCOUNTS

Carriage inwards 98,000 -

Rent & taxes 23,500 -
Salaries & wages 46,500 -
Sundry debtors 1,20,000 -
Sundry creditors - 74,000
Bank loan @ 14% p.a. - 1,00,000
Bank interest 5,500 -
Printing and stationary expenses 72,000 -
Bank balance 40,000 -
Discount earned - 22,200
Furniture & fittings 25,000 -
Discount allowed 9,000 -
General expenses 57,250 -
Insurance 6,500 -
Postage & telegram expenses 11,650 -
Cash balance 1,900 -
Travelling expenses 4,350 -

- 64 -
 FINAL ACCOUNTS

Drawings 1,50,000 -
25,56,650 25,56,650

The following adjustments are to be made:

i. Included amongst the debtors is ` 15,000 due from Ravi and included among thecreditors `
5,000 due to him.
ii. Provision for bad and doubtful debts be created at 5% and for discount @ 2% on sundry
iii. debtors.
iv. Depreciation on furniture & fittings @ 10% shall be written off.
v. Personal purchases of Prakash amounting to ` 3,000 had been recorded in thepurchases day
book.
vi. Interest on bank loan shall be provided for the whole year.
vii. A quarter of the amount of printing and stationary expenses is to be carried forward tothe
next year.
viii. Credit purchase invoice amounting to ` 2,000 had been omitted from the books.
ix. Stock on 31.12.2022 was ` 3,93,000.
Prepare
Trading & profit and loss account for the year ended 31.12.2022 and Balance sheet as on 31
December, 2022.

Example 3
Mr. Bansal submitted to you the following trial balance, which he has not been able to agree.Rewrite
the trial balance and prepare trading and profit and loss account for the year ended 31.3.2021 and a
balance sheet as on that date after giving effect to the undermentioned adjustments:

- 65 -
 FINAL ACCOUNTS

Particulars Dr. Cr.

Capital - 16,000

Opening stock 17,500 -

Closing stock - 18,790

Drawings 3,305 -

Returns inward - 550

Carriage inward 1,240 -

Deposit with X - 1,400

Returns outward 840 -

Carriage outward - 725

Rent paid 800 -

Rent outstanding 150 -

Purchases 13,000 -

Sundry debtors 5,000 -

- 66 -
 FINAL ACCOUNTS

Sundry creditors - 2,200

Furniture 1,500 -

Sales - 29,000

Wages 850 -

Cash 1,370 -

Advertisement 950

46,505 68,665

Adjustments:
i. Write off ` 600 as bad debt and make a provision for doubtful debts at 5% on balancesundry
debtors.
ii. Stock valued at ` 2,000 was destroyed by fire on 25th March,2021, but insurancecompany
admitted a claim for ` 1,500 only and paid the sum in April,2021
iii. Depreciation to be provided on furniture at 10% per annum

- 67 -
 PARTNERSHIP ACCOUNTING

SAI KRIPA
Fundamental of Partnership Firm

Topics to be covered
• Meaning and term in partnership.
• Calculation of interest on capital.
• Preparation of profit and loss appropriation account.
• Preparation of capital account.
• Past adjustments.
• Guarantee to a partner

Topic – 1
Meaning and Terms

Meaning of partnership firm

According to section.4 of the Indian partnership Act,1932, “partnership is the relation between 2 or
more person who have agreed to share the profit of the business carried on by or any of them acting
for all”.

PARTNER DEED AND CONTAINED OF DEED

The document, containing the agreement in writing amongst partners is called partnership deed.
Partnership deed contained the following particular:-
✓ Description of the partner and firm.
✓ Principal palace of business.
✓ Nature of the business.
✓ Commencement of partnership.
✓ Capital contribution.
✓ Interest on capital and interest on drawing.
✓ Profit sharing ratio.
✓ Interest on loan.

PROVISITION IN LIEU OF PARTNERSHIP DEED

In lieu of partnership deed following provisions are following:
✓ No salaries given to any partner.
✓ No interest on capital is allowed.
✓ No interest on drawing is charge.
✓ Interest on loan is allowed at 6% P.A.
✓ Profit sharing equally.

MINOR AS PARTNER
▪ Minor being not eligible to enter into any contract cannot become a partner
▪ But Section 30 of partnership act permits that a minor can be included to the benefit of
partnership
▪ Hence, minor will not able to share losses
▪ After attaining majority, within 6 months he has to decide either to become partner or not

Topic – 2
Calculation of Interest on Capital

- 68 -
 PARTNERSHIP ACCOUNTING

As per accounting entity concepts, a partner and a partnership firm are different, so as amount
invested by partner in the firm is treated as amount leading by partner in the firm and firm has to
pay interest on the amount invested by the partner and same become expanses of the firm and
income of the partner.

Interest on capital= Capital x rate + interest on additional capital.

Example – 1
A and B stated business on 1.1.2009 with capital of Rs 80,000 and Rs 20,000 respectively. During the
year A introduce Rs 20,000 as additional capital on 1.7.2009 and B introduced Rs 30,000 as
additional capital on 1.10.2009 interest on capital is to be allowed at 10% P.A. calculate the interest
on capital payable to A and B for the year ended 31.12.2009.

Solution

Example – 2
A and B are partners sharing profit or loss in the ratio of 3:2 respectively. Their capital as on 31st
march 2013 are Rs 180,000 and Rs 120,000 respectively. Their drawings during the year amounted
to Rs 40,000 and Rs 50,000 respectively. Profit yearned during the year 2012-13 amounted to Rs
250,000. Partnership deed provides Interest on capital is to be allowed at 10% P.A. Calculate the
interest on capital payable to A and B for the year 2012-13.

Solution

Working Note

- 69 -
 PARTNERSHIP ACCOUNTING

Note – 1
Calculation of Opening Capital

Particulars A B

Topic – 3
Preparation of Profit and loss appropriation Account
Profit & loss appropriation account is prepared to calculated devisable profit of the partners and it is
prepared on the basis of partnership firm only. It includes NET PROFIT AND NET LOSS incurred from
profit and loss account and it include all the expenses and income of partnership firm related to its
partner such as Salary to partner, Commission to partner, Interest on capital, Interest on Drawing,
Interest on loan, etc.
Format of Profit and loss appropriation Account
PROFIT AND LOSS APPROPRIATION ACCOUNT
Particulars Amount Particulars Amount
To interest on capital By Net profit
A By interest on drawing
xxx XXXX A xxx
B B xxx XXXX
xxx
To salaries XXXX
A By loss distributed
xxx A xxx
B XXXX B xxx XXXX
xxx
To interest on loan
A XXXX
xxx
B
xxx
To commission XXXX
A
xxx
B
xxx

To profit distributed
A
xxx
B
xxx

- 70 -
 PARTNERSHIP ACCOUNTING

XXXXXX XXXXXX

Example – 3
Ram and Mohan are partners in a firm sharing profit and losses in the ratio of 7:3 according to the
partnership deed, ram was to be paid salaries of Rs 5000 per month and Mohan was to get a bonus
of Rs 40,000 P.A interest on capital was to be allowed @10% P.A interest on drawing was to be
charge @8% P.A. interest on ram drawing was Rs 3000 and on Mohan’s drawing Rs 2000, ram is
entitled to a commission of 20% on profit after charging all expanses including such commission
their capital were Rs400,000 and Rs 150,000 respectively the firm earned as profit of Rs 250,000for
the year ended 31.4.2004. Prepare profit and loss appropriation account.

Solution
PROFIT AND LOSS APPROPRIATION ACCOUNT
Particulars Amount Particulars Amount

Working Note
Note – 1
Calculation of Ram’s Commission

Topic – 4
PREPARATION OF CAPITAL ACCOUNT

- 71 -
 PARTNERSHIP ACCOUNTING

Partner capital account is prepared to calculate closing capital of the partner. It should be noted that
IF ANY AMOUNT IS GIVEN TO PARTNER THEN HIS CAPITAL IS INCREASED AND AMOUNT IS TAKEN
FROM PARTNER THEN HIS CAPITAL IS DECREAED. Partner capital account can be prepared by two
methods:-
Method of partner account
1. Fixed capital.
2. Fluctuating capital account.

Fixed capital method

Under fixed capital account method two set of account are prepared first is partner capital account
with opening and closing balance of capital and all their transaction like interest on capital, interest
on drawing, drawing, salaries to partner, interest on loan, profit etc. it transferred to partner current
account.
CAPITAL ACCOUNT
Particulars Amount Particulars Amount
To bank balance (permanent Xxx By balance b/d Xxx
withdrawal)
By bank (permanent addition) Xxx
To balance c/d Xxx
CURRENT ACCOUNT
Particulars Amount Particulars Amount
To drawing Xxx By balance b/d Xxx
To interest on drawing Xxx By interest on capital Xxx
By salaries Xxx
By profit Xxx
By commission Xxx
By balance c/d Xxx By interest on loan Xxx

Xxx Xxx

Fluctuating capital account method

Under fluctuating capital account method only one account is prepared known as partner capital
account and all the transaction will be transferred to such account.

CAPITAL ACCOUNT
Particulars Amount Particulars Amount
To drawing Xxx By balance b/d Xxx
To interest on drawing Xxx By interest on capital Xxx
By salaries Xxx
By profit Xxx
To balance c/d Xxxx By commission Xxx
By interest on loan Xxx
Xxx Xxx

Example – 4
Shyam and Mohan are partner in a firm sharing profit and loss in the ratio is 3:2. According to
partnership deed Shyam was to be paid salaries were Rs10,000 per month and Mohan were get a
commission of 10% on gross turnover of the firm. Interest on capital were allowed 10% P.A and

- 72 -
 PARTNERSHIP ACCOUNTING

interest on drawing was to be charges were 8% p.a. Interest on Shyam’s drawing were Rs 3000 and
Mohan drawing were Rs 2000, Shyam is entitled to a commission of 10% on profit after charging all
expanses including such commission. Their capital was Rs 500,000 and Rs 250,000 respectively. The
firm earned a profit Rs 350,000 on 31.3.2004. Firm annual turnover is Rs 500,000.
Prepare profit and loss appropriation account and partner capital account.

Solution
PROFIT AND LOSS APPROPRIATION ACCOUNT
Particulars Amount Particulars Amount

CAPITAL ACCOUNT
Particulars Shyam Mohan Particulars Shyam Mohan

Working Note
Note – 1
Mohan Commission

- 73 -
 PARTNERSHIP ACCOUNTING

Note – 2
Shyam’s Commission

Example – 5
A and B are partner in the firm sharing profit in the ratio 3:2. According to the partnership deed, A
and B will get salaries of Rs 20,000 each. A advance a loan of Rs 200,000 to firm on which he is
untilled to get interest 6% p.a. interest capital was to be allowed @ 8% p.a. drawing of A and B are
Rs 50,000 and Rs 40,000 respectively. Partner to decided transfer 10% of divisible profit in general
reserve. Their fixed capitals were Rs 400,000 and Rs 200,000 respectively and their current account
shown a balance of Rs 10,000 and Rs 15,000 respectively. The firm earn a profit Rs 400,000 for the
year ended 31.3.2004.
Prepared profit and loss appropriation account and partner capital account as per fixed capital
account

Solution
PROFIT AND LOSS APPROPRIATION ACCOUNT
Particulars Amount Particulars Amount

CAPITAL ACCOUNT
Particulars A B Particulars A B

Current ACCOUNT

- 74 -
 PARTNERSHIP ACCOUNTING

Particulars A B Particulars A B

Working Note
Note – 1
A’s Interest on Loan

Topic – 5
PAST ADJUSTMENTS
Some times after closing of the account and after preparation of profit and loss appropriation
account and the capital account partner fond out some mistake for which they cannot reopen the
account so an adjustment entry with capital are passed to rectify problems.

To rectify the above mistake we have to consider effect of mistake first on capital and then from
partnership firm, example if partner salaries are not given then to rectify the mistake we have to
increase their capital and decreases firm profit.

Example – 6
Ram and mohan are partner sharing profit and loss in the ratio of 3:2 respectively. Their capitals are
Rs 100,000 and 80,000 respectively. On 31st march 2012 they decided to make following adjustment
without showing their effect in books of accounts such as: -
• Profit of the year ended 31st march 2012 is Rs 100,000 and is now to be distributed in the
ratio of 1:1 respectively.
• Interest on capital is allowed @ 10%
• Ram is entitled to a monthly salary of Rs 1200
• Interest on drawing is Rs 3000 and Rs 2000 respectively.
• Mohan is entitled to a 5% commission on turnover of Rs 200,000.

Solution

- 75 -
 PARTNERSHIP ACCOUNTING

Note - 1
PROFIT AND LOSS APPROPRIATION ACCOUNT
Particulars Amount Particulars Amount

Note - 2
Statement of rectification
Partner Dr Cr Dr Cr

Note – 3
Amount given to partners

Topic – 6

- 76 -
 PARTNERSHIP ACCOUNTING

GUARANTEE TO A PARTNER
Some time a partner is guaranteed by other partner for minimum share of Profit however if any
amount of deficiency arises than such deficiency has to be bear by other partners in their profit
sharing ratio.

Example – 7
Raja, Ram and Mohan are partner in a firm sharing profit and loss in the ratio is 3:2:1 respectively.
According to partnership deed Raja was to be paid salaries were Rs10,000 per month and Mohan
were get a commission of 10% on gross turnover of the firm. Interest on capital were allowed 10%
P.A and interest on drawing was to be charges were 8% p.a. Interest on Raja’s drawing were Rs 3000,
Ram’s drawing were Rs 5000 and Mohan drawing were Rs 2000, Raja is entitled to a commission of
10% on profit after charging all expanses including such commission. Their capital was Rs 500,000, Rs
300,000 and Rs 250,000 respectively. Mohan is guaranteed by other partners that his share of profit
in any year shall not be less than Rs 45000. The firm earned a profit Rs 350,000 on 31.3.2004. Firm
annual turnover is Rs 500,000.
Prepare profit and loss appropriation account and partner capital account.

Solution
PROFIT AND LOSS APPROPRIATION ACCOUNT
Particulars Amount Particulars Amount

- 77 -
 PARTNERSHIP ACCOUNTING

ADMISSION OF A PARTNER

Topics to be covered
• Meaning and term
• Calculation of new profit sharing ratio.
• Calculation of sacrifice ratio.
• Calculation of goodwill.
• Calculation of hidden goodwill.
• Treatment of goodwill.
• Preparation of revaluation account, capital account, balance sheet.
• Treatment of capital adjusted.

Topic – 1
MEANING AND TERMS

Profit Sharing Ratio:- Total profit of the Partnership firm is shared among the partners in the agreed
ratio, which may be based on the work performed by them, Capital invested by them, on the basis of
their expertise, etc.

Goodwill:- Goodwill stands for the extra value of firm as compare with the other firms in the same
industry. Partnership firm earned goodwill by providing quality product at reasonable rate to its
users. Goodwill is also known as reputation of Partnership firm. As per Accounting Standard – 14
“Amalgamation” and Accounting Standard – 10 “Fixed Assets” Firm cannot show Self-generated
Goodwill in its Balance sheet, however if they purchase the business of another Firm and paid
amount for their Goodwill than only they can show amount of such goodwill in their balance sheet.

Premium: - Premium is the part of Goodwill which is brought by an Incoming partners for the old
partners. Such premium is distributed to old partners in their Sacrificing ratio and they can withdraw
such amount from the business.

Topic – 2
CALCULATION OF NEW PROFIT SHARING RATIO
A New profit sharing ratio of Partners can be computed with the help of three methods.

New Profit Sharing ratio

Simple Method Subtracting Method Multiple Method

Example – 1
Ram, Mohan and Sohan are partners sharing and loss in the ratio of 3:2:1 respectively, they decided
to admit Poja as partner for 1/5th share in profit. Calculate new profit sharing ratio and sacrificing
ratio.

- 78 -
 PARTNERSHIP ACCOUNTING

New Profit Sharing ratio

Sacrificing Ratio

Example – 2
A, B and C are partner profit and loss sharing it the ratio of 2:2:1 respectively, they decided to take P
as partner P takes 1/8th share from A and 1/6th share from C.

New Profit Sharing ratio

- 79 -
 PARTNERSHIP ACCOUNTING

Sacrificing Ratio

Example – 3
A, B and C are partner profit and loss in the ratio of 5:3:2 respectively. They decided to take P as a
partner B surrender 1/4th of his share in favour of P and C surrender 1/6 th of his share in favour of P.

New Profit Sharing ratio

- 80 -
 PARTNERSHIP ACCOUNTING

Sacrificing Ratio

Topic – 3
CALCULATION OF SACRIFICING RATIO
Sacrificing ratio is a ratio in which old partners makes sacrifice for new partner, it is calculated for
distributing premium among the old partners. It is calculated by Subtracting New ratio from old
ratio.

Sacrificing ratio

Old Ratio – New Ratio

NOTE: IN SIMPLE METHOD OLDRATIO IS EQUAL TO SACRIFING RATIO

Topic – 4
CALCULATION OF FIRM’s GOODWILL
Partnership Firm has to calculate firm’s Goodwill at the time of admission of new partner into the
firm. Goodwill can be calculated from the given formulas:

- 81 -
 PARTNERSHIP ACCOUNTING

Firm Goodwill

Average Profit Method Super Profit Method Capitalisation Method

Simple Average Weighted Average Average Capitalisation Super Capitalisation

Formulas

Sample average method

Goodwill = average profit x no. of year purchase

Average profit = total profit / no. of year

Weight age average profit

Goodwill = weight age average profit x no. of year purchase

Average profit = total product / total weight

Super profit method

Goodwill = super profit x no. of year purchase

Super profit = average profit – normal profit

Normal profit = capital employed normal rate / 100

Average capitalization method

Goodwill = required capital - actual capital

Required capital = average profit x 100 / normal rate

Actual capital = total assets – outside liabilities

Super profit capitalization method

Goodwill = super profit x 100 / normal rate

Super profit = average profit – normal profit

Example – 4
A and B are partner sharing profit and loss in the ratio 3:2 respectively their balance sheet showed
capital amount of Rs 300,000 and Rs 200,000. They decided to admit P as a partner for 1/4th share in
the profit. For the valuation of goodwill A and B decided to calculated goodwill on the basis of the 3
year purchase. Normal return in same kind of business is 10%.

- 82 -
 PARTNERSHIP ACCOUNTING

Calculated goodwill of the firm by following method

❖ Simple average method
❖ Weight age average method
❖ Super profit method
❖ Average capitalization method
❖ Super profit capitalization method

Additional information:
Profits for the last 4 year are:
2000. 110,000 (include loss on fire Rs 10000)
2001. 80,000 (including dividend received Rs 20000)
2002. 50,000
2003. 50,000 (exclude a sale invoice Rs 300)

Solution

Rectified Profit
Year Profit Adjustment Rectified Profit

Simple Average Profit Method

Weighted Average Profit method

- 83 -
 PARTNERSHIP ACCOUNTING

Year Profit Weight W.Profit

Super Profit method

Average Capitalisation method

- 84 -
 PARTNERSHIP ACCOUNTING

Super Capitalisation method

Example – 5
A partnership firm earn the following net profit during last 3 years:
1997 280000
1998 320000

- 85 -
 PARTNERSHIP ACCOUNTING

1999 340000

Partnership Capital Account during the periods were as follows:

1.1.1997 800000
31.12.1997 950000
31.12.1998 1080000
31.12.1999 1150000

A similar firm earn 25% on capital.

Required: -
i. Valuation of goodwill taking one year’s weighted average profit.
ii. Valuation of goodwill taking 5 year super profit based on average capital employed.
iii. Valuation of goodwill on capitalization basis.

Solution
Weighted Average Profit method

Year Profit Weight W.Profit

Super Profit method

- 86 -
 PARTNERSHIP ACCOUNTING

Average Capitalisation method

Topic – 5
CALCULATION OF HIDDEN GOODWILL
Some time new partner brings amount for capital and goodwill in lumsome without segregating the
amount of capital and goodwill in such case goodwill is calculated with the help of hidden or infrared
method.

- 87 -
 PARTNERSHIP ACCOUNTING

Example – 6
A and B are partner sharing profit and loss in the ratio of 3:2. They decided to admit R as a partner
for 1/5th share. R brings Rs 200,000 for his capital and his share of premium. Capital balances of
other partner are Rs 400,000 and Rs 200,000 respectively.
Calculate amount of goodwill brought by new partner R.

Solution

Topic – 6
TREATMENT OF GOODWILL
Treatment of Goodwill means passing a journal entry for the Goodwill. Journal entries is to be under
stood as per the following cases.

Case – A

- 88 -
 PARTNERSHIP ACCOUNTING

When new partner paid his share of premium in cash and old partner retained that amount in
business.

Old partner capital A/C Dr

To Goodwill A/C
(Being Old Goodwill W/off)

Cash A/C Dr
To New partner capital A/C
To Premium A/C
(Being amount received)

Premium A/C Dr
To Old partner capital A/C
(Being premium transfer to old partners)

Example – 7
A and B are partner sharing profit and loss in the ratio of 3:2. Balance sheet as on 31.3.2005, shown
Goodwill amounted to Rs 50,000. They decided to admit R as a partner for 1/5 th share. R brings his
capital Rs 150,000 and Rs 30,000 as his premium.
Pass necessary journal entries and capital account.

Solution
Journal Entries
Date Particulars DR CR

Case – B
When new partner paid his share of premium in cash and old partner withdrawn that amount
from business
Old partner capital A/C Dr
To Goodwill A/C

- 89 -
 PARTNERSHIP ACCOUNTING

(Being Old Goodwill W/off)

Cash A/C Dr
To New partner capital A/C
To Premium A/C
(Being amount received)

Premium A/C Dr
To Old partner capital A/C
(Being premium transfer to old partners)

Old partner capital A/C Dr

To Bank A/C
(Being Premium Withdrawn by old partners in sacrificing ratio)

Example – 8
A and B are partner sharing profit and loss of 3:2. Balance sheet as on 31.3.2005 showed goodwill
amounted to Rs 60,000. They decided to admit R as partner for 1/5th share. R Rs 150,000 as capital
and Rs 30,000as his share premium, half such premium is withdrawn by old partner.
Pass necessary journal entry and capital account.

Solution
Journal Entries
Date Particulars DR CR

Example – 9
A, B and C are partner sharing profit and loss in the ratio of 2:2:1 Balance sheet as on 31.3.2005,
shown a goodwill amounted to Rs 50,000 they decided to admit P as partner for 1/10share. R brings
Rs 150,000as capital and Rs 30,000 as share of premium. New profit sharing ratios of partner are
3:3:3:1. Prepare capital account and journal entries.

- 90 -
 PARTNERSHIP ACCOUNTING

Solution
Journal Entries
Date Particulars DR CR

Working Notes
Note – 1
Sacrificing ratio

Note – 2
Amount of sacrifice

- 91 -
 PARTNERSHIP ACCOUNTING

Case – C
When new partner does not bring his share of the premium in cash

Old partner capital A/C Dr

To Goodwill
(Being Goodwill write off)

Cash / bank A/C Dr

To New partner capital A/C
(Amount received from partner)

New partner capital A/C Dr

To Old partner capitals A/C
(Premium transfer to old partner in sacrifice ratio)

Old partner capital A/C Dr

To Bank A/C
(Premium withdrawn by old partner in sacrifice ratio)

Example – 10
A and B are partner sharing profit and loss in 3:2. Balance sheet as on 31.3.2005 shown Goodwill
amounted Rs 100,000 they decided to admit R as a partner 1/5th share. R brings Rs 250,000 as
Capital but did not bring his share of premium of Rs 25,000 Full amount of premium is withdrawn by
old partner.
Pass necessary journal entry.

Solution
Journal Entries
Date Particulars DR CR

- 92 -
 PARTNERSHIP ACCOUNTING

Case – D
When new partner bring only part of his share of premium in cash

Old partner capital A/C Dr

To Goodwill
(Being Goodwill write off)

Cash / bank A/C Dr

To New partner capital A/C
To premium
(Amount received from partner)

Premium A/C Dr
To Old partner capital A/C
(Being premium transfer to old partners)

New partner capital A/C Dr

To Old partner capitals A/C
(Premium transfer to old partner in sacrifice ratio)

Old partner capital A/C Dr

To Bank A/C
(Premium withdrawn by old partner in sacrifice ratio)

Example – 11
A and B are partners sharing profit/loss in the ratio of 3:2 respectively, their balance sheet as on 31
march 2005, showed a goodwill amounted to Rs.75,000/- they decide to admit R as partner for 1/5
share. R bring Rs.150,000/- as capital and Rs.10,000/- as his share of premium out of Rs.25,000/-
Pass necessary journal entries and capital account.

Solution
Journal Entries
Date Particulars DR CR

- 93 -
 PARTNERSHIP ACCOUNTING

Case – E
When new partner paid his share of premium privately to old partner.

Old partner capital A/C Dr

To Goodwill
(Being Goodwill write off)

Cash / bank A/C Dr

To New partner capital A/C
(Amount received from partner)

Example – 12
A and B partner sharing profit/loss in the ratio of 3:2 respectively, they decided to admit Q as
partner for 1/4th share. R bring Rs.150,000/- as capital and paid his share of premium privately to A
and B.
Pass necessary journal entries.

Solution
Journal Entries
Date Particulars DR CR

Case – F
When new partner paid his share of premium and capital in kind

Old partner capital A/C Dr

To Goodwill
(Being Goodwill write off)

Assets A/C Dr
To New partner capital A/C
To premium

- 94 -
 PARTNERSHIP ACCOUNTING

(Amount received from partner)

Premium A/C Dr
To Old partner capital A/C
(Being premium transfer to old partners)

Old partner capital A/C Dr

To Bank A/C
(Premium withdrawn by old partner in sacrifice ratio)

Example – 13
A and B are partner sharing profit/loss in the ratio of 3:2 respectively, their balance sheet as on 31
mar. 2005, showed a goodwill amounted to Rs.60,000/- they decided to admit R as partner for 1/4th
share. R bring a machine of Rs.150,000/- a plant of Rs.1,00,000/-and stock of Rs.50,000/- for his
share of capital of Rs.2,50,000/- and for premium. Half of such premium is withdrawn by old partner.
Pass necessary journal entry and capital account.

Solution
Journal Entries
Date Particulars DR CR

Topic – 7
PREPARATION OF REVALUATION ACCOUNT, CAPITAL ACCOUNT, BALANCE SHEET
Revaluation account is prepared to calculate the profit and loss earned by old partner because of
any appreciation and depreciation in the assets and liabilities of the partnership firm. Such profit or
loss will be distributed among old partners in old ratio.

Format of revaluation Account

REVALUATION ACCOUNT

- 95 -
 PARTNERSHIP ACCOUNTING

PARTCULAR AMOUNT PARTICULAR AMOUNT

To decrease in assets XXXX By increase in assets XXXX
To increase in liabilities XXXX By decrease in liabilities XXXX
To unrecorded liabilities XXXX By unrecorded assets XXXX
To provision credit XXXX By provision not required XXXX
To profit transfer: By loss transfer to: XXXX
A XXX A XXXX
B XXX XXXX XXX XXXX
B
XXX
XXXX XXXX

Example – 14
A and B are partner sharing profit/loss in the ratio 3:2 respectively their balance sheet as on 31st
march 2007 are given below they decided to admit P as a partner for 1/4th share in profit P bring Rs
100000 as his share of the capital and 15000 his share of goodwill in cash.
Balance sheet
As on 31st march 2007
Liabilities Amount Assets Amount
Capital a/c Cash in hand 3000
A 150000 Debtors 70000
B 50000 200000 Plant & machinery 100000
Creditor 30000 Stock 27000
Reserve fund 15000 Investment 50000
Bills payable 10000 Goodwill 50000
Investment fluctuation fund 15000 20000

270000 270000
Adjustments
a. Investment is revalued at Rs 75000.
b. A provision of 10% is required to be created on sundry debtor.
c. Plant & machinery is depreciated by 10%.
d. Stock is depreciated up to Rs 24000.
Prepare revaluation A/C, Partners Capital a/c, and Balance sheet.

Solution

REVALUATION ACCOUNT
PARTCULAR AMOUNT PARTICULAR AMOUNT

Capital Account

- 96 -
 PARTNERSHIP ACCOUNTING

Particulars A B C Particulars A B C

Balance Sheet
Liabilities AMOUNT Assets AMOUNT

Working Note
Note – 1
Journal Entries
Journal Entries
Date Particulars DR CR

- 97 -
 PARTNERSHIP ACCOUNTING

Topic – 7
CAPITAL ADJUSTMENT
When new partner enter into the partnership firm than some time question ask to revalue the
capitals of old partners on the basis of new partner capital. There are two method of capital
adjustments such as: -

Capital Adjustment

When New partner’s Capital Given When New partner’s Capital not Given

Steps of Capital Adjustment

Capital Adjustment – 1
When new partner capital is given

Step – i: - Calculate New profit sharing Ratio

Step – ii: - Calculate Firm’s Capital on the base of new partners’ capital
Firm’s Capital = new partners capital * reciprocal of his share

Step – iii: - Calculate Partners Capital

Partners capital = Firm Capital * New profit sharing ratio

Step – iv: - Calculate balancing figure as Cash/Current balance

Capital Adjustment – 2
When New partner capital is not given.

Step – i: - Prepare Partner’s Capital account and calculate the balance c/d of old partners

Step – ii: - Calculate Firm’s Capital

Firm Capital = Balance C/D of Old partners * Reciprocal of Remaining Share

Step – iii: - Calculate new partner’s Capital

New Partner’s Capital = Firm Capital * His Share of profit

Example – 15
A and B are partner sharing profit and loss in the ratio of 3:2 respectively. Balance sheet shown
capital amount of Rs 300,000and Rs 250,000 respectively they decided to admit P as a partner for
1/4th share in profit P bring Rs 265,000 as share of capital but did not bring Rs 15,000 as his share of
goodwill in cash.
Calculate new capital of all partners after adjusting by taking P’s capital as base.

Solution

- 98 -
 PARTNERSHIP ACCOUNTING

Example - 16
A and B as partner sharing profit and loss in the ratio of 3:2 their balance sheet as on 31st march
2007 are given below, they decided to admit P as a partner for 1/4th share of profit P bring his capital
and his share of premium 15000 in cash.

Balance sheet
Liabilities Amount Assets Amount
Capital a/c: Cash in hand 35000
A 125000 Land and building 85000
B 75000 200000 Plant and machinery 88000

- 99 -
 PARTNERSHIP ACCOUNTING

Stock 27000
Creditors 25000 Investment 15000
Reserve fund 15000 Prepaid salaries 5000
Outstanding rent 5000 Deferred revenue
Unclaimed dividend 25000 expenditure 15000

270000 270000
Adjustments
a. Investments market value comes at Rs 25000 and old partner take over such at this value.
b. Liabilities for unclaimed dividend value at Rs 20000.
c. Plant and machinery is overvalued by 10%.

Prepare revaluation a/c , partner capital a/c , and balance sheet.

Solution
REVALUATION ACCOUNT
PARTCULAR AMOUNT PARTICULAR AMOUNT

Capital Account
Particulars A B C Particulars A B C

Balance Sheet
Liabilities AMOUNT Assets AMOUNT

- 100 -
 PARTNERSHIP ACCOUNTING

Working Note
Note – 1
Journal Entries
Journal Entries
Date Particulars DR CR

Note – 2
Capital Adjustment

- 101 -
 PARTNERSHIP ACCOUNTING

RETIREMENT OF A PARTNER

Topics to be covered
• Meaning and term
• Calculated of new profit sharing ratio
• Calculation of gaining ratio
• Treatment of goodwill
• payment to retiring partner
• Preparation of revaluation account , capital account , and balance sheet
• Treatment of capital adjustment

Topic – 1
MEANING AND TERMS

Retirement of a partner: - A partner can retire from the partnership firm as per partnership deed
and on the date of such retirement all the assets and liabilities is need to be revalued and new profit
sharing ratio has to be calculated. A retiring partner will be entitled to take his share of capital and
goodwill in the partnership firm.

Topic – 2
CALCULATION OF NEW PROFIT SHARING RATIO
A New profit sharing ratio of Partners can be computed with the help of two methods.

New Profit Sharing ratio

Very Very Simple Method Take over Method

Very Very Simple Method

Example – 1
A , B and C are partner sharing profit and the loss and 5:3:2 respectively; B decided to retire from the
partnership firm. Calculate New Profit Sharing Ratio of firm after B’s retirement.

Solution

- 102 -
 PARTNERSHIP ACCOUNTING

Take over Method

Example – 2
A , B and C are partner sharing profit and loss equally, A decided to take retirement and gives his
share of profit to B and C in the ratio 3:2. Calculate New Profit Sharing Ratio of firm after A’s
retirement.

Solution
New profit sharing ratio

- 103 -
 PARTNERSHIP ACCOUNTING

Gaining Ratio

Topic – 3
CALCULATION OF GAINING RATIO
Gaining ratio is compute for the remaining partners only, this ratio shows the level of gain incurred
by the remaining partners from the retirement of a retiring partner. Amount of share of premium of
retiring partner is given by the remaining partner to the retiring partner in this ratio.

Gaining ratio

New Ratio – Old Ratio

Topic – 4
TREATMENT OF GOODWILL
In the case of retirement retiring partner take his share of goodwill from remaining partners in
gaining ratio and of remaining partner’s Capital decrease and capital account of retiring partner
increases.

JOURNAL ENTEY FOR GOODWILL

Remaining partner capital A/C Dr

To Retiring partner capital A/C
[Being goodwill given by partner in gaining ratio]

Example – 3

- 104 -
 PARTNERSHIP ACCOUNTING

A , B and C are partner sharing profit and loss equally; A decided to take retirement and his share of
profit is taken over by B and C in the ratio of 2:1. Goodwill of the firm is valued Rs 120000/-.
Calculated NPSR and Pass journal entry for treatment of goodwill.

Solution

Journal Entry
Date Particulars DR CR

New Profit Sharing Ratio

Gaining Ratio

A’s Share of Goodwill

- 105 -
 PARTNERSHIP ACCOUNTING

Topic – 5
PAYMENT TO RETIRING PARTNER
At the time to retirement all amount due to retiring partner can be settled by 4 ways either by cash
or by taken such amount as loan or partly in cash and partly in loan or transferring such amount to
executor account of retiring partner.

Payment to Retiring Partner

In Cash Through Loan Partly in Cash & Partly In Loan Through executor A/C

Topic – 5
PREPARATION OF REVALUATION ACCOUNT, CAPITAL ACCOUNT, BALANCE SHEET.
Revaluation account is prepared to calculate the profit and loss earned by all partner because of any
appreciation and depreciation in the assets and liabilities of the partnership firm. Such profit or loss
will be distributed among all partners in old ratio.

Format of revaluation Account

REVALUATION ACCOUNT
PARTCULAR AMOUNT PARTICULAR AMOUNT
To decrease in assets XXXX By increase in assets XXXX
To increase in liabilities XXXX By decrease in liabilities XXXX
To unrecorded liabilities XXXX By unrecorded assets XXXX
To provision credit XXXX By provision not required XXXX
To profit transfer: By loss transfer to: XXXX
A XXX A XXXX
B XXX XXXX XXX XXXX
B
XXX
XXXX XXXX

Example – 4
A , B and c are partner sharing profit and loss in the ratio of 2:2:1. Their balance sheet as on 31st
march 2009. C decided to retire.
Balance sheet
As on 31st march 2009
Liabilities Amount Assets Amount
Capital a/c Cash in hand 5000
A 100000 Debtors 75000
B 100000 Plant & machinery 100000
C 50000 250000 Stock 25000

- 106 -
 PARTNERSHIP ACCOUNTING

Creditor 30000 Investment 50000

Reserve fund 15000 Patent 25000
Bill payable 10000 Goodwill 25000

305000 305000

Adjustments

a. Investment is revalued at Rs 75000.

b. A provision of 10% is required to be created on S. debtors.
c. Plant & machinery are depreciated by 10%.
d. Stock is depreciated up to Rs 24000.
e. Patents are found value less.
f. Goodwill of the firm is valued at Rs 50000/- C’s share is adjusted from the capital remaining
partner.
g. Half amount due to C is paid by cash and balance is transferred to a loan account of C.
Prepare revaluation account, partner capital account, balance sheet.

Solution
REVALUATION ACCOUNT
PARTCULAR AMOUNT PARTICULAR AMOUNT

Capital Account
Particulars A B C Particulars A B C

Balance Sheet
Liabilities AMOUNT Assets AMOUNT

- 107 -
 PARTNERSHIP ACCOUNTING

Working Note
Note – 1
Calculation of C’s Share of Goodwill

Note – 2
Journal Entries
Journal Entries
Date Particulars DR CR

Topic – 6
CAPITAL ADJUSTMENT
When partner retire from the partnership firm than some time question ask to revalue the capitals
of remaining partners. There are two methods of capital adjustments such as: -

Capital Adjustment

When Firm’s Capital Given When Firm’s Capital not given

- 108 -
 PARTNERSHIP ACCOUNTING

Steps of Capital Adjustment

Capital Adjustment – 1
When Firm’s capital is given

Step – i: - Calculate New profit sharing Ratio

Step – ii: - Calculate Partners Capital

Partners’ capital = Firm Capital * New profit sharing ratio

Step – iii: - Calculate balancing figure as Cash/Current balance

Example – 6
A , B and C are partner sharing profit and loss in the ratio 2:2:1. Their balance sheet as on 31st march
2009. B decided to retire to the firm and his share is taken over by A and C in the ratio of 3:2.
Balance sheet
Liabilities Amount Assets Amount
Capital account Cash in hand 15000
A 125000 Land & building 125000
B 75000 Plant & machinery 147000
C 75000 2765000 Stock 25000
Creditor 55000 Investment 18000
Reserve fund 25000 Prepaid salaries 25000

355000 355000

Adjustment
a. Land and building is valued at Rs 189700.
b. Prepaid salaries come to Nil during course of revaluation.
c. Plant and machinery is depreciated at 10%.
d. B share of goodwill comes of Rs 30000.
e. B will be paid Rs 35000 in cash and balance will transfer his loan a/c carrying interest @
10% P.A.
f. Total capital of firm valued at Rs 255000.
Prepare revaluation account, partner capital account, and balance sheet.

Solution

REVALUATION ACCOUNT
PARTCULAR AMOUNT PARTICULAR AMOUNT

- 109 -
 PARTNERSHIP ACCOUNTING

Capital Account
Particulars A B C Particulars A B C

Balance Sheet
Liabilities AMOUNT Assets AMOUNT

Working Note
Note – 1
Capital Adjustment

- 110 -
 PARTNERSHIP ACCOUNTING

Note – 2
Cash Account
CASH ACCOUNT
PARTCULAR AMOUNT PARTICULAR AMOUNT

Capital Adjustment – 2
When Firm’s capital is not given.

Step – i: - Prepare Partner’s Capital account and calculate the balance c/d of remaining partners

Step – ii: - Calculate Firm’s Capital

Firm Capital = Balance C/D of remaining partners + Amount bring by remaining for retiring

- 111 -
 PARTNERSHIP ACCOUNTING

Step – iii: - Calculate remaining partner’s Capital

Remaining Partner’s Capital = Firm Capital * New profit sharing ratio

Step – iv: - Calculate balancing figure as Cash.

Example – 7
P , Q and R are partner sharing profit and loss in the ratio 5:3:2. Balance sheet as on 31st Dec 2009
are given. R decided to retire.
Balance sheet
Liabilities Amount Assets Amount
Capital a/c Bank 58000
P 150000 Land & B 125000
Q 100000 Plant & M 85000
R 100000 350000 Stock 72000
Debtor 100000
Creditor 50000 Deferred revenue expenditure 10000
Reserve fund 30000
Provision on debts 20000

450000 450000

Adjustment
a. Creditor includes old outstanding of Rs 22,000 which is now to be write off from the book of
a/c.
b. Provision on debtor is required 10%.
c. Stock undervalued by 10%.
d. Goodwill of the R is Rs32,000
e. R will paid by the cash brought by P and Q to make their capital proportionate to their profit
sharing ratio. Minimum bank balance will be maintained at Rs 18000.
Prepare revaluation account, capital account, and balance sheet.

Solution
REVALUATION ACCOUNT
PARTCULAR AMOUNT PARTICULAR AMOUNT

- 112 -
 PARTNERSHIP ACCOUNTING

Capital Account
Particulars P Q R Particulars P Q R

Balance Sheet
Liabilities AMOUNT Assets AMOUNT

Working Note
Note – 1
Calculation of amount of stock undervalued

- 113 -
 PARTNERSHIP ACCOUNTING

Note – 2
Capital Adjustment

Note – 3
Cash Account
CASH ACCOUNT
PARTCULAR AMOUNT PARTICULAR AMOUNT

- 114 -
 PARTNERSHIP ACCOUNTING

Topic – 7
JOINT LIFE POLICY
A partnership firm can take the joint life policy on the life of its all partners, and in such case if any
partner enter into the firm or any partner retire from the firm or in case of dissolution of partnership
firm only “Surrender value of such policy” is received to the firm however in case of Death of any
partner or in case of maturity of the policy “Full amount” is received to the firm.

Joint Life Policy

Admission of Partner Retirement of Partner Death of Partner Dissolution of Firm

Surrender Value Surrender Value Full Value Surrender Value

DEATH OF A PARTNER
Topics to be covered
• Meaning and term
• Calculated of new profit sharing ratio
• Calculation of gaining ratio
• Treatment of goodwill
• Payment to retiring partner
• Preparation of revaluation account , capital account , and balance sheet

Topic – 1
MEANING AND TERMS

Death of a partner: - In case of death of a partner, all the amount due to such deceased partner such
as his share of Capital, his share of goodwill, Interest on capital on such capital, any salary, and his
share of profit up to the date of retirement. In this type of question we have prepare deceased
partner’s Capital account and all the balance sing figure is transfer to his legal representative.

Topic – 2
CALCULATION OF NEW PROFIT SHARING RATIO
A New profit sharing ratio of Partners can be computed with the help of two methods.

New Profit Sharing ratio

Very Simple Method Take over Method

Very Simple Method

Example – 1
A , B and C are partner sharing profit and the loss and 2:3:2 respectively; B decided to retire from the
partnership firm. Calculate New Profit Sharing Ratio of firm after B’s retirement.

Solution

- 115 -
 PARTNERSHIP ACCOUNTING

Take over Method

Example – 2
A , B and C are partner sharing profit and loss equally, A decided to take retirement and gives his
share of profit to B and C in the ratio 2:1. Calculate New Profit Sharing Ratio of firm after A’s
retirement.

Solution
New profit sharing ratio

Gaining Ratio

- 116 -
 PARTNERSHIP ACCOUNTING

Topic – 3
CALCULATION OF GAINING RATIO
Gaining ratio is compute for the remaining partners only, this ratio shows the level of gain incurred
by the remaining partners from the death of a deceased partner. Amount of share of premium of
deceased partner is given by the remaining partner to the deceased partner in this ratio.

Gaining ratio

New Ratio – Old Ratio

Topic – 4
TREATMENT OF GOODWILL
In the case of Death, deceased partner take his share of goodwill from remaining partners in gaining
ratio and of remaining partner’s capital decrease and capital account of deceased partner increases.

JOURNAL ENTEY FOR GOODWILL

Remaining partner capital A/C Dr
To Retiring partner capital A/C
[Being goodwill given by partner in gaining ratio]

Example – 3
P , Q and R are partner sharing profit and loss in the ratio 2:2:1. Q died in car accident. Goodwill of
the firm is valued Rs 150,000. Pass journal entry for treatment of goodwill.
Solution

Journal Entry
Date Particulars DR CR

Q’s Share of Goodwill

- 117 -
 PARTNERSHIP ACCOUNTING

Topic – 5
PAYMENT TO DECEASED PARTNER
At the time to death, all amount due to deceased partner can be settled by 4 ways either by cash or
by taken such amount as loan or partly in cash and partly in loan or transferring such amount to
executor account of retiring partner.

Payment to Deceased Partner

In Cash Through Loan Partly in Cash & Partly In Loan Through executor A/C

Topic – 6
PREPARATION OF REVALUATION ACCOUNT, CAPITAL ACCOUNT, BALANCE SHEET.
Revaluation account is prepared to calculate the profit and loss earned by all partner because of any
appreciation and depreciation in the assets and liabilities of the partnership firm. Such profit or loss
will be distributed among all partners in old ratio.

Format of revaluation Account

REVALUATION ACCOUNT
PARTCULAR AMOUNT PARTICULAR AMOUNT
To decrease in assets XXXX By increase in assets XXXX
To increase in liabilities XXXX By decrease in liabilities XXXX
To unrecorded liabilities XXXX By unrecorded assets XXXX
To provision credit XXXX By provision not required XXXX
To profit transfer: By loss transfer to: XXXX
A XXX A XXXX
B XXX XXXX XXX XXXX
B
XXX
XXXX XXXX

Topic – 7
TIME DUARATION OF AMOUNT GIVEN TO DECEASED PARTNER
On death of a partner some item are given only for the time span for which he was available in the
business and some items are given full in totally without time basis some examples are given.

Amount Given to Deceased Partner Time Period

a. Capital amount a. full value
b. Goodwill amount b. full value
c. Profit up to date death c. time value
d. Interest on capital d. time basis
e. Salaries / commission e. time basis

- 118 -
 PARTNERSHIP ACCOUNTING

f. Interest on drawing f. time basis

g. Drawing g. time basis
h. Reserve fund / P&L balance h. full basis
i. Joint life policy i. Full basis
j. Revaluation account j. Full basis
k. Goodwill write off k. Full basis

Example – 4
P , Q AND R are partner sharing profit and loss in the ratio of 2:2:1. Balance sheet as on 31.3.2009 R
died 1.10.2009 his share is taken over by P and Q in the ratio of 3:2.
Balance sheet
liabilities Amount Assets Amount
Capital account Cash 5000
P 200000 Land & B 250000
Q 200000 Plant & M 145000
R 100000 300000 Debtor 10000
Investment 60000
Creditor 55000 P & L A/C 20000
Reserve fund 25000

580000 580000

Adjustment
a. Land and building is valued at Rs 215000
b. Investment is overvalued by Rs 5000
c. Plant & machinery is undervalued by 15000
d. R share of goodwill comes of 30000
e. R is entitled to an annual salary of Rs 24,000 and interest on capital 12%
f. Joint life policy of company amounted to Rs 50,000 surrender value Rs 15000
g. Total amount due to R will be transfer to his executer a/c.

Prepare Revaluation A/C, capital A/C.

Solution
REVALUATION ACCOUNT
PARTCULAR AMOUNT PARTICULAR AMOUNT

R’s Capital Account

Particulars Amount Particulars Amount

- 119 -
 PARTNERSHIP ACCOUNTING

Working Note
Note – 1
Treatment of Goodwill

Note – 2
Calculation of Interest on Capital

Note – 3
R’s Salary

Topic – 8
CALCUATION OF PROFIT IN THE YEAR IN WHICH PARTNER DIED
On death of a partner his legal executor is entitled to a profit of the year in which partner is died
profit of every is calculated at the end of every year, however on the date of retirement we have to
take approximate profit for giving the share to deceased partner this approximation can be taken by
3 method:
 Average profit basis
 On the basis of last year profit
 Sales/ Turnover Basis

Average profit basis

Died partner share = average profit * His share * Time

- 120 -
 PARTNERSHIP ACCOUNTING

Average profit = Total profit

No. of year

On the basis of last year

Died partner share = last year profit * His share * Time

Last year profit = profit immediately prior to death of a partner

Sale / turnover basis

Died partner share = sale during died partner period *rate of profit* His share
100

Sales during died partner period = sales during the period when died partner existed in the firm

Rate of profit = net profit % of firm.

Example – 5
A , B and C are partner sharing profit and loss in the ratio of 3:2:3. Firm sale of year 2009 is 2400,000
B died on 30.6.2008 on that date sales ledger show a credit balance of RS 800,000 firm closed his
account 31.12.2009.
Calculate
 Average profit
 Profit of last year
 Sale duration basis

Additional information
Profits of last 4 years are as follow:

31.12.2008 240,000
31.12.2007 100,000
31.12.2006 180,000
31.12.2005 120,000

SOLUTION

BY AVERAGE PROFIT BASIS

- 121 -
PARTNERSHIP ACCOUNTING

BY LAST YEAR PROFIT BASIS

BY SALE/TURNOVER METHOD

- 122 -
 PARTNERSHIP ACCOUNTING

Example – 6
A , B and C are partner sharing profit and loss in the ratio of 2:2:1. Balance sheet as on 31.3.2005 and
his share is taken over by A and C in the ratio 3:2
Balance sheet
Liabilities Amount Assets Amount
Capital a/c Cash 55000
A 150000 Land & building 150000
B 100000 Plant & machinery 177000
C 100000 350000 Debtor 100000
Investment 28000
Creditor 55000 P&L a/c 25000
Reserve fund 25000
B’s loan a/c 100000
Provision for debtor 5000

535000 535000

Adjustment
a. L&B is valued at Rs 185,700
b. Investment is valued at Rs 35,000 and B take over the investment
c. Plant & machinery is depreciated by 10%
d. B share of goodwill comes of RS 30000
e. B loan will continue to be held under liabilities of new firm & B’s has carried interest @ 12%.
f. B’s share of profit up to the date of retirement will be calculated on last year profit. Profit of
the year ended 31.3.2004 was Rs 150000.
g. Total amount due to B will be transfer to his executer a/c.
Prepare revaluation account, capital accounts and Balance sheet after B death.

Solution
REVALUATION ACCOUNT
PARTCULAR AMOUNT PARTICULAR AMOUNT

Capital Account
Particulars A B C Particulars A B C

- 123 -
 PARTNERSHIP ACCOUNTING

BALANCESHEET
LIABILITIES AMOUNT ASSETS AMOUNT

Working Note
Note – 1
Profit and loss Adjustment A/C
Profit and loss Adjustment A/C
PARTCULAR AMOUNT PARTICULAR AMOUNT

Note – 2
Calculation of Interest on B’s Loan

- 124 -
 PARTNERSHIP ACCOUNTING

Note – 3
B’s Share of Profit

Note – 4
Journal Entries
S.No Particular Dr Cr

- 125 -
 PARTNERSHIP ACCOUNTING

SAI KRIPA
DISSOLUTION OF PARTNERSHIP FIRM

Topics to be covered
• Meaning and term
• Journal entries for dissolution
• Format of realization A/C
• Insolvency of single partner (Garner V/S Murray rule)
• Insolvency of All partners
• Distribution of cash

Topic – 1
MEANING AND TERMS
Meaning of dissolution
The term dissolution means coming to an end or discontinuation. The dissolution of the firm implies
a complete breakdown of the partnership relation among the entire partner. Dissolution of the
partnership merely involves change in the relation of the partner but does not end the firm. So the
dissolution of the firm may or may not include the dissolution of the firm but the dissolution
necessarily means the dissolution of the firm partnership.
On dissolution of the firm the business of the form cases to exist since its affairs are would up by
selling the assets and by paying the liabilities and discharging the claims of the partner.

Types of Dissolution
There are many types of dissolution such as:

DISSOLUTION BY AGREEMENT:All the partner gives their consent and dissolution will be done as per
the partnership agreement

COMULSORY DISSOLUTION:
a. When all the partner or all excepting one partner becomes insolvent or unsound mind
b. When the business become unlawful.
c. Expiry of the specific venture or project for which the firm was formed.

DISSOLUTION BY NOTICE: In case of a partnership at will the firm may be dissolved if any one of the
partner gives a notice in writing.

DISSOLUTION BY COURT:A court may order a partnership firm to be dissolved in the cases:
a. When a partner becomes of unsound mind
b. When a partner becomes permanently incapable of performing his/her duties as a partner.

- 126 -
 PARTNERSHIP ACCOUNTING

c. When a partner transfer his/her share interest in the firm to a 3rd party.
d. When the court regards dissolution to be just and equitable.

Topic – 2
JOURNAL ENTRIES

1) For Transfer of assets to realisation account

Realization A/C Dr [individually transfer of assets]

To Assets A/c

2) For Transfer of liabilities to realisation account

External liabilities A/C Dr [individually]

To Realization A/C

3) For Transfer of Provisions to realisation account

Provision for doubtful debts A/C Dr

Provision for depreciation A/C Dr
Any other realization A/C Dr
To Realization A/C

4) For Treatment of Accumulated Reserves

Profit & loss A/C Dr

General reserve A/C Dr
To Partner capital A/C

5) For Assets taken over by partner

Partner capital A/C Dr

To Realization A/C

6) For Sale of Assets in the market

Bank A/C Dr
To Realization A/C

7) For settlement of loan given by partner

Partner loan A/C Dr

To Bank A/C

8) For Payment of liability by partner

Realization A/C Dr

- 127 -
 PARTNERSHIP ACCOUNTING

To Partner capital A/C

9) For Payment of liability in cash

Realization A/C Dr
To Bank A/C

10) For treatment of unrecorded Assets

Sale of unrecorded assets

Cash /Bank A/C Dr

To Realization A/C

Unrecorded assets taken by the partner

Partner capital A/C Dr

To Realization A/C

For treatment of unrecorded Liability

Payment of unrecorded liabilities

Realization A/C Dr
To Bank A/C

Unrecorded liabilities payment by partner

Realization A/C Dr
To Partner capital A/C

11) For treatment of realisation expense

Expense born by firm, paid by firm

Realization A/C Dr
To Bank A/C

Expense born by partner, paid by firm

Partner capital A/C Dr

To Bank A/C

Expense born by Firm, paid by Partner

Realization A/C Dr
To partner capital A/C

- 128 -
 PARTNERSHIP ACCOUNTING

Expense born by Partner, paid by Partner

No Entry

Topic – 3
PREPARATION OF REALISATION ACCOUNT
Realisation account is prepared at the time of dissolution of a partnership firm, all the assets and
external liabilities are transferred to realisation account and accordingly assets are sold from this
account and liabilities are paid from this account any profit or loss from such account is transfer to
partners in their profit sharing ratio.
Format of Realisation account

RELIZATION ACCOUNT
Particular Amount Particular Amount
To All assets a/c xxx BY All external liabilities xxx
[BOOK VALVE]
By Cash / bank a/c xxx
To Cash / bank a/c xxx [amount realization on sale of
[Payment of external various assets]
liabilities]
xxx By Partner capital a/c xxx
To Partner capital a/c [if any assets is taken over]
[Liabilities paid by the partner]
xxx By Loss transfer to partners’
To Cash / bank a/c capital:
[Expanses on realization] A:
xxx xxx xxx
To Partner capital a/c B:
[Expanses paid by the xxx
partner of realization]

To Profit transfer to partners’

capital:
A: xxx
xxx
B:
xxx

Xxx Xxx

Example – 1
Soniya and Mayank are partners in firm profit sharing ratio 3:2. Balance sheet as follow:
Liabilities Amount Assets Amount
Capital a/c Cash at Bank 26,000
Soniya 50,000 Land & building 30,000
Mayank30,000 80,000 Stock 36,500
Debtor 20,000
Creditor 28,000 Investment 10,500
Reserve fund 5,000 Joint life policy 50,000

- 129 -
 PARTNERSHIP ACCOUNTING

Soniya loan a/c 20,000 Goodwill 11,500

MrsMayank’ s loan 8,500
Provision for debtor 3,000
Investment Fluctuation Fund 15,000
Joint Life policy reserve 25,000

184,500 184,500
On the Balance sheet date partner decided to dissolve their partnership firm and for this they
appointed Mayank for realisation of Assets and liabilities and he will receive 10% commission on sale
of Assets and realisation exp has to be borne by him. The assets were realised as follows:-

a. Debtor realized at a discount of 5%

b. Stock were taken over by Sonia at Rs 30,000
c. Land and Building at Rs 42000
d. Mrs Mayank’s loan is paid by Mayank
e. There was a unrecorded typewriter which was taken over by Mayank at Rs 15,000
f. Realization expanses amounted to Rs 5000, paid by Firm
g. Half of Creditors are settled by giving investment and remaining creditors were paid at a
discount of 5%.
h. Surrender value of Joint life policy is amounted to Rs 42,500

Solution

REALISATION ACCOUNT
PARTCULAR AMOUNT PARTICULAR AMOUNT

- 130 -
 PARTNERSHIP ACCOUNTING

Capital Account
Particulars Sonia Mayank Particulars Sonia Mayank

Bank Account
Particulars AMOUNT Particulars AMOUNT

- 131 -
 PARTNERSHIP ACCOUNTING

Working note
Note – 1
Journal entries

Topic – 4
Insolvency of Single Partner
IF any partner becomes insolvent then he is unable to bring the amount of his share in partnership
due to insolvency and such loss has to bear by the solvent partners in their Capital Ratio.
Partners can follow both Fixed and Fluctuating method of Capital and in such case we have to
calculate capital ratio as follows: -
In Fixed Method: Only Capital balance is considered
In Fluctuating Method: Capital along with reserves are considered

STEPS FOR SOLVING QUESTION OF INSOLVENCY OF PARTNER

I. In case of loss on realisation all solvent partner will bring cash equal to the share of their
loss.
II. Insolvency loss has to be bear by all solvent partners which have (Cr balance) in their capital
account
III. If any partner is Solvent but it has Dr Balance in their capital account than he will not share
any loss of insolvency but bring cash for his share of loss on realisation.

Journal Entry

Solvent Partner’s Capital A/C Dr

To Insolvent Partner’s Capital A/C

- 132 -
 PARTNERSHIP ACCOUNTING

Example – 2
Read, Write and Add are partners sharing profit and loss in the ratio of 5:3:2 respectively, their
balance sheet as on 31st march 2010 is as follows: -
Balance sheet
31st March 2010
Liabilities Amount Assets Amount
Read loan 15,000 Plant and fitting 30,000
Creditor 17,800 Stock 2,000
Loan on Hypothecation of 6,200 Debtor 18,400
stock
J.L.P Reserve 12,400 J.L.P 15,000
Provision for bad debts 400 Patent and trade mark 10,000
Mrs Add Loan 3,000 Cash at bank 8,000
Capital A/c Investment 3,000
Read 30,000
Write 10,000
Add 2,000 42,000
96,800 96,800

Additional Information

The firm was dissolved on 31.03.2010 and you are given the following information: -

i. Add had taken a loan from Insurer for Rs 5000 on the security of J.L.P. The policy was
surrender and insurers paid a sum of Rs 10200 after deducting Rs 5000 for Add’s loan and
Rs300 as interest thereon.
ii. One of the creditors took sum of the patents whose book value was Rs 6000 at the valuation
of Rs 4500 the balance of that creditor was paid in cash.
iii. The firm had previously purchased some share in a joint stock company and had written
them of on finding them useless. The shares were now found to be worth Rs3000 and the
loan creditor agreed to accepts the share at this value and balance amount were paid in
cash.
iv. The reaming assets realized the following amount :
o Plant & machinery: 17,000
o Stock: 1,000
o Debtor: 16,700
v. Patents 50 % of their book value.

- 133 -
 PARTNERSHIP ACCOUNTING

vi. Loan of Mrs Add is paid by Mr Add at agreed consideration of Rs 2,800.

vii. The exp. Of realization amounted to Rs 2300 were paid by Read.
viii. Investments were taken over by read at book value.
ix. Add become insolvent and no amount is recovered from his private estate.

Prepare the Realization A/c, Partner capital A/c and Bank Account.
Solution

REALISATION ACCOUNT
PARTCULAR AMOUNT PARTICULAR AMOUNT

- 134 -
 PARTNERSHIP ACCOUNTING

Capital Account
Particulars Read Write Add Particulars Read Write Add

Bank Account
Particulars AMOUNT Particulars AMOUNT

Working note
Note – 1
Journal entries

- 135 -
 PARTNERSHIP ACCOUNTING

Note – 2
Calculation of Capital Ratio

Note – 3
Calculation of insolvency Loss of Add

Topic – 5
Insolvency of All Partners
Some Times all partners become insolvent due to lack of availability of funds in such case Firm is not
in the position to pay all its liabilities. Here payment has to be made on preference basis, i.e. All
secured liabilities such as Secured Creditors, Secured Bank loans etc will be paid first.

STEPS FOR SOLVING QUESTION OF INSOLVENCY OF ALL PARTNER

i. Identify the Secured Creditors and such secured creditor will not be transfer to realisation
account and a separate ledger with the name of Secured liability will be open for such
secured creditors.
ii. Assets were sold through realisation account.
iii. Close Bank account and transfer the available fund available in bank account to secured
liability account and any less payment made to secured liabilities will be adjusted through
Deficiency account.
iv. Close Partners Capital account with the adjustment of Deficiency Account.

- 136 -
 PARTNERSHIP ACCOUNTING

v. At last prepare deficiency account and it will be automatically balance and books of account
of the firm will be closed.

Example – 3
Rakesh and Rajesh are partners in firm profit sharing ratio 3:2. Balance sheet as on 31st March 2012
shows as follows:
Balance Sheet
Liabilities Amount Assets Amount
Capital a/c Bank 11500
Rakesh Land & building 38000
22500 29000 Stock 7500
Rajesh Debtor
6500 38000 21500 20,000
5000 Less: Provision 1500 10,000
Creditor 5000 Investment
Reserve fund 8500
Rakesh loan a/c 1500
Secured Bank loan
Investment Fluctuation Fund

87,000 87,000

Adjustment:
a. Debtor realized at Rs 5500
b. Stock at Rs 3000
c. Building at Rs 22000
d. There was a unrecorded typewriter which was taken over by Rakesh at Rs 1500
e. Realization expanses amounted to Rs 1500.

Solution
REALISATION ACCOUNT
PARTCULAR AMOUNT PARTICULAR AMOUNT

- 137 -
 PARTNERSHIP ACCOUNTING

Sundry liabilities Account

Particulars AMOUNT Particulars AMOUNT

Capital Account
Particulars Rakesh Rajesh Particulars Rakesh Rajesh

Bank Account
Particulars AMOUNT Particulars AMOUNT

Deficiency Account

- 138 -
 PARTNERSHIP ACCOUNTING

Particulars AMOUNT Particulars AMOUNT

Example – 4
A, B and C carried on business in partnership, sharing Profits and loss in the ratio of 1: 2: 3. They
decided to form a private limited company, AB (P) ltd, and C is not interested to take over the shares
in AB (P) Ltd. The authorised share capital of the company is Rs 1200,000 divided into 12,000
ordinary shares o f R s 1 0 0 e a c h .
The company was incorporated and took over goodwill as valued and certain assets of the
partnership firm on 31.3.2006. The Balance Sheet of the partnership firm on that date was as follows

Liabilities Amount Assets Amount

Capital Accounts: Fixed Assets:
A 1,00,000 Machinery 120,000
B 2,00,000 Land 174,000
C 3,00,000 Motorcycles 30,000
Current Accounts: Furniture & fittings 11,000
A 39,420 Current Assets:
B 60,580 Stock 235,000
A's Loan A/c Debtors 43,000
28,000 30,000 Cash in hand 87,000
+ Interest accrued C's overdrawn 100,000
2,000 70,000
Current Liability:
Creditors 800,000 800,000

C. who retired was presented by the other partners (A and B) with one motorcycle valued in the
books of the firm Rs 9,000. The remaining motorcycle were sold In the open market for Rs 13,000. C
also received certain furniture for which he was charged Rs 2,000. The debtors which were all
considered good, were taken over by C for Rs 40,000. A and B were charged in their profit sharing
ratio for the book value of Motorcycle presented by them to C.

It was agreed that C who is not willing to take the shares in AB (P) ltd was discharged first by
providing necessary cash. A and B should bring cash if necessary.
AB (P) Ltd. took over the remaining furniture and fittings at a price of rs 13,000 the machinery for Rs
125,000, the stock at an agreed value of Rs 200,000 and the land at its book value. The value of the
goodwill of the partner agreed at Rs 88,000. The creditors of the firm were settled by the firm for Rs
70,000. A's loan account together with interest accrued was transferred to his capital account.
The purchase consideration was discharged by the company by the issue of equal number of fully
paid up equity shares at par to A and B.
Prepare realisation A/C, Capital A/C of the partners and cash A/C, also draw the balance sheet of the
AB (P) limited.

Example – 5

- 139 -
 PARTNERSHIP ACCOUNTING

X and Y carrying on business in partnership sharing Profits and Losses equally, wished to dissolve the
firm and sell the business to X Limited Company on 31-3-2006. when the firm's position was as
follows:
Liabilities Amount Assets Amount
X-s Capital 150,000 Land 100,000
Vs Capital 100,000 Furniture & fittings 40,000
Sundry Creditors 60,000 Stock 100,000
Debtor 66,000
Cash 4,000

The arrangement with X Limited Company was as follows:

1) Land and Building was purchased at 20% more than the book value.
2) Furniture and stock were purchased at book values less 15%.
3) The goodwill of the firm was valued at Rs 40.000.
4) The Arm's debtors, cash and creditors were not to be taken over, but the company agreed to
collect the book debts of the firm and discharge the creditors, of the firm as an agent, for
which services, the company was to be paid 5% on all collections from the firm's debtors and
3% on cash paid to firm's creditors
5) The purchase price was to be discharged by the company in fully paid equity shares of Rs 10
each at a premium of Rs 2 per share,

The company collected all the amounts from debtors. The creditors were paid off less by 11,000
allowed by them as discount. The company paid the balance due to the vendors in cash.

Prepare the Realisation account, the Capital accounts of the partners and the Cash account In the
books of partnership firm.

Example – 6
Ajay. Vijay. Ram and Shyam are partners in a firm sharing profits and losses in the ratio of 4:1:2.3.
The following is their Balance Sheet as at 31st March,

Liabilities Amount Assets Amount

Capital Accounts: Stock 200,000
Ajay : Debtors :
700,000 10,00,000 350,000 300,000
Shaym : 3,00,000 (-) Provision : 140,000
300,000 (50,000) 310,000
Creditors Cash in hand
Other Assets
Capitals 350,000
Vijay : 200,000
13,00,000 Ram : 1300,000
150,000

On 31st March, 1996 the firm is dissolved and the following points are agreed upon
1) Ajay is to take over sundry debtors at 80% of book value.
2) Shyam is to take over the stocks at 95% of the value and
3) Ram is to discharge sundry creditors.
4) Other assets realize Rs 300,000 and the expenses of realization come to Rs 30,000

- 140 -
 PARTNERSHIP ACCOUNTING

5) Vijay is found insolvent and Rs 21,900 is realized from his estate.

Prepare Realization Account and Capital Accounts of the partners. Show also the Cash A/c

Example – 7
A, B and C are partners in A & Company sharing profits and losses in the ratio of 2:2:1 respectively.
The Balance Sheet of A & Company as at 31st March, 1993 is as follows:

Liabilities Amount Assets Amount

Capital Accounts: Fixed Assets 200,000
A 146,000 Stock 125,000
B 54,000 Debtors 125,000
C 50,000 Cash in hand 5,000
C’s Loan 25,000 B’s Current A/C 20,000
Loan from Mrs A 50,000
Creditor 125,000
Provision for DD 25,000

475,000 475,000

The firm was dissolved on the date of Balance Sheet due to continued losses. After preparing the
above balance sheet as on 31-3-1993 it was discovered that purchases amounting to Rs 20,000 in
March, 1993 were not recorded in books, though the goods were received during March, 1993.
Fixed Assets realized Rs 100,000, Stocks Rs 105,000 and Debtors Rs 102,500. Creditors were paid
after deduction of discount @ 2%. The expenses of realization came to Rs 5,400. A agreed to take
over the loan of Mrs. A. B is insolvent and his estate is unable to contribute anything.

Prepare the relevant accounts to close the books of A & Company applying the decision of Garner vs
Murray.

- 141 -
 PARTNERSHIP ACCOUNTING

Dissolution during the course of business

Example – 8
Mr. Malik and Mr. Dinesh were carrying on business as equal partners The firm's Balance Sheet as on
31st December. 1999 was as follows:

Liabilities Amount Assets Amount

Sundry Creditors 65,500 Stock 54,000
•
Bank Overdraft 30,000 Plant and Machinery 182,000
bills Payable 12,500 Offico Furniture 15,000
Capital Accounts: Book Debts 73,000
Malik 150,000 Joint Life Policy 9,500
Dinesh 148,000 Leasehold Premises 34,500
Profit and Loss A/c 26,000
(debit balance)
Drawings Account:
Malik 9,000
Dinesh 3,000
406,000 406,000

The business was carried on till 30th June 2000. The partners withdrew in equal amounts half the
amount of profits made during the period of six months (From January - June 2000) after 10% p a.
had been written off Leasehold premises 10% p a. off plant and machinery and 5% p a. off office
furniture. Meanwhile sundry creditors were reduced by Rs 10,000

On 30th June 2000 stock was valued at Rs 63,400. Bill Payable was reduced by Rs 2,300 and Bank
Overdraft by Rs 15,000. Book Debts were valued at Rs 65,000 The Joint Life Policy was realized for Rs
9.500 and other items remained the same as on 31 at December, 1999.

On 30th June 2000 the firm sold the business to a Limited Company. The value of the goodwill was
estimated at Rs 108,000 and the rest of the assets were valued on the basis of the Balance Sheet as
on 30th June. 2000. The Company paid the purchase consideration in fully paid equity shares of Rs
10 each, at par

You are required to prepare a Realisation Account and Capital Account of the partners as on 30th
June. 2000.

Example – 9
Neel, Neha and Neeraj are partners in a firm M/s. NHJ & Co. sharing profits and losses in the ratio of
3: 2: 1. They are also entitled to interest on Loan at 10% p a., but not interest on Capital.
The partners decided to dissolve the firm on 31.3.2002. The following is their Balance Sheet which
was drawn upto 31.12.2001

- 142 -
 PARTNERSHIP ACCOUNTING

Balance Sheet
Liabilities Amount Assets Amount
Capitals Building 210,000
Neel : 168,000 Furniture 35,000
Neha : 115,500 283,500 Motor Cycle 140,000
Neel’s Loan 77,000 Stock 192,500
S. Creditor 280,000 S. Debtor 140,000
Bank overdraft 105,000 Neeraj’s Capital 28,000

745,500 745,500

Between the Balance Sheet date and the date of dissolution, purchases amounted to Rs 105,000 and
sales Rs 157,500. In addition to payments made to Creditors, a sum of Rs 42,000 and Rs 21,000 were
paid on account of Salaries and general expenses. Each partner withdrew Rs 2,800 per month. On
31.3.2002 Debtors Creditors and Stock amounted to Rs 2,10,000, Rs 2,45,500 and Rs 157,500
respectively.

During course of proceedings the partners decided to transfer the entire business to a private
limited company with all assets, liabilities and partner’s loan for a consideration of Rs 315,000.
Dissolution expenses amounted to Rs 9,000 and were borne by Neel.

Prepare necessary Ledger Accounts, Profit and Loss Account. Partners Capital Account and Balance
Sheet as at 31.3.2002 of the firm M/s. NHJ & Co. Also ascertain the amount of profit on realization.

Example – 10
A, B. C, and D are sharing profits and losses in the ration 5:5:4:2. Frauds committed by C during the
year were found out and it was decided to dissolve the partnership on 31st March 2010 when their
Balance Sheet was as under:

Liabilities Amount Assets Amount

Capital Building 120,000

A 90,000 Stock 85,500
B 90,000 Investments 29,000
C — Debtors 42,000
D 35,000 Cash 14,500
General reserve 24,000 C 15,000
Trade creditors 47,000
Bills payable 20,000
306,000 306,000

Following information is given to you:

a) A cheque for Rs 4,300 received from debtor was not recorded in the books end was
misappropriated by C.
b) Investments costing Rs 5,400 were sold by C at 7,900 and the funds transferred to his
personal account. This sale was omitted from the firm's books.
c) A creditor agreed to take over investments of the book value of Rs 5,400 at Rs 8,400. The
rest of the creditors were paid off at a discount @ 2%.
d) The other assets realised as follows:
Building 105% of book value

- 143 -
 PARTNERSHIP ACCOUNTING

Stock Rs 78,000
Investments The rest of investments were sold at a profit of Rs 4,800
Debtors The rest of the debtors were realised at a discount of 12%
e) The bills payable were settled at a discount of Rs 400
f) The expenses of dissolution amounted to Rs 4,900.
g) It was found out that realisation from C's private assets would only be Rs 4,000.

Prepare the necessary Ledger Accounts.

Example – 11
The following is the Balance Sheet as at 30th June. 2000 of Lai. Parveen and Queen, partners of a
firm, sharing profits and losses equally.
Liabilities Amount Assets Amount
Capital Accounts: Plant and Machinery 42,000
Lai 20,000 Building 18,000
Parveen 30,000 Motor Car 3,200
Queen 5,000 55,000 Sundry Debtors 23,000
Current Account: Stock-in-trade 21,000
Lai 16,000 Bank Balance 1,800
Parveen 18,000 34,000 Current Account:
Trade Creditors 17,600 Queen 7,800
Provision for payments
of excise duty 8,400

Creditor for
expenses 1,000
116,800 116,800

The Firm accepts an offer from Z Co. Ltd.. to take over the following assets at values given opposite
to each:
Plant and Machinery 30,000
Building 40,000
Stock-in-trade 18,000

The Company agrees to discharge 75% of the consideration due in equity shares of Rs 10 each to be
allotted at a premium of Re. 1 per share. The balance of consideration will be retained by the
company, at an interest of 15% per annum, to be paid six months after the transfer is put through. .

The firm realizes its sundry debtors for Rs 20,000; motorcar is taken by partner Lai at an agreed
value of Rs 5,000 paid by him in cash; expenses of realization met by the firm came to Rs 500; the
liability to excise duty was finally discharged at Rs 10,000.

Queen Private Assets are worth Rs 15,000 and his individual liabilities and debts amount to Rs
18,000.

Record the above transactions in the books of the firm and close the books -assuming that the
transactions were all put thropgh on 1st July. 2000. Show the ledger accounts only. Rule in Gamer vs.
Murray is to be applied

- 144 -
 PARTNERSHIP ACCOUNTING

Example – 12
A, B, C and D are partners sharing profit and losses in the ratio of 3:3:2:2 respectively, their balance
sheet as on 31.12.2009 are as follows: -
Balance Sheet
Liabilities Amount Assets Amount
Capitals Furniture 12,000
A : Trade marks 21,000
60,000 105,000 Stock 30,000
B : 46,500 S. Debtor :
45,000 30,000 48,000 46,500
S. Creditor (-) Provision :
A’s loan (1,500)
Capitals 66,000
C :
181,500 48,000 181,500
D :
18,000

On 31.12.2009, the firm was dissolved and B was appointed to realise the assets and to pay off the
liabilities. He was entitled to receive 5% commission on the amount finally paid to other partners. He
agreed to bear the expenses of realisation. The assets were realised as follows Debtors Rs 33,000;
Stock Rs 24,000; Furniture Rs 3,000; Trademarks Rs 12,000.
Creditors were paid off in full, in addition, a contingent liability for Bills Receivable discounted
materialised to the extent of Rs 7,500. AIso there was a joint iife policy for Rs 90,000. This was
surrendered for Rs 9,000. Expenses of realisation amounted to Rs 1,500. C was insolvent but Rs
11,100 was recovered from his estate
Prepare Realisation Account. Bank Account and Capital Accounts of the partners

Topic – 5
Distribution of cash
Whenever firm is dissolved, cash is realised and paid to concerned partner, such payment require
order for realease of payment, following order is followed: -
I. Secured Creditor/liability
II. Unsecured liability
III. Partner’s relative loan
IV. Partner loan
V. Partner’s Capital

- 145 -
 PARTNERSHIP ACCOUNTING

For payment purpose distribution sheet is prepared, such distribution sheet can be prepared by two
methods such as: -
1. Highest capital relative method/ Proportionate capital method
2. Maximum loss method

HIGHEST CAPITAL RELATIVE METHOD/ PROPORTIONATE CAPITAL METHOD

Following steps are followed while preparing distribution sheet from this method such as: -
a) Calculate Unit capital for each partner
b) Identify lowest value of unit capital
c) Calculate standard capital based on lowest unit capital
d) Repeat step (a) to (c) unless order is formed

Example – 13
Particulars A B C
Capitals 450,000 600,000 400,000
Ratio 3 2 1

Solution

Example – 14
Particulars A B C
Capitals 900,000 600,000 250,000
Ratio 2 3 1

- 146 -
 PARTNERSHIP ACCOUNTING

Example – 15
Particulars A B C D
Capitals 300,000 450,000 900,000 600,000
Ratio 2 3 1 2

Example – 16
The following is the Balance Sheet of Anand. Bharat and Cheema on 31st December, 2000 when they
decided to dissolve the partnership.
Balance Sheet
Liabilities Amount Assets Amount
Creditors 2,000 Sundry Assets 48,500
Anand's Loan 5,000 Cash 500
Capital Account

- 147 -
 PARTNERSHIP ACCOUNTING

Anand
:15,000 42,000
Bharat
:18,000 49,000 49,000
Cheema :
9,000

The Assets realized the following sums in installments:

I. 1,000
II. 3,000
III. 3,900
IV. 6,000
V. 20,100
The expenses of realization were expected to be Rs 500 but ultimately amounted to Rs 400 only.
Show how at each stage the cash received should be distributed between partners. They share
profits in the ratio of 2:2:1

Example – 17
The firm of LMS was dissolved on 31-3-1995, at which date its Balance Sheet stood as follows:
Liabilities r Assets r
Creditors 2,00,000 Fixed Assets 45,00,000
Bank Loan 5,00,000 Cash and Bank 2,00,000
L's Loan 10,00,000
Capital
L 15,00,000
M 10,00,000
S 5,00,000
47,00,000 47.00.000

Partners share profits equally. A firm of Chartered Accountants Is retained to realize the assets and
distribute the cash after discharge of liabilities. Their fees which are to Include all expenses is fixed at
Rs 100,000. No loss is expected on realization since fixed assets include valuable land and building.
Realizations are:
i. 560,000
ii. 15,00,000
iii. 15,00,000
iv. 30,00,000
v. 30,00,000

The Chartered Accountant firm decided to pay off the partners in 'Higher Relative Capital Method'.
You are required to prepare a statement showing distribution of cash with necessary workings

Example – 18
The Arm of Richa presented you with the following Balance Sheet drawn as at 31st March 2008:
Liabilities Amount Assets Amount
Sundry Creditors 37,000 Cash on hand 3,000
Capital Accounts of Sundry Debtors 34,000
Partners: Stock in trade 39,000
Akram 40,000 Plant and machinery 51,000
Balram 30,000 Current Account

- 148 -
 PARTNERSHIP ACCOUNTING

Charan 27,000 97,000 Balram 4,000 7,000

Charan 3,000
134,000 134,000

Partners shared profits and losses in the ratio of 4:3:3. Due to difference among the partners, it was
decided to wind up the firm, realize the assets and distribute cash among the partners at the end of
each month.
The following realizations were made
May 1998 Rs 15,000 from debtor and Rs 20,000 by sale of stock, Expenses on
realization were Rs 500.
June 1998 Balance of debtors realized Rs 10,000. Balance of stock fetched Rs 24,000.
August 1998 Part of machinery was sold for Rs 18,000. Expenses incidental to sale were
Rs 600
September 1998 Part of machinery valued in the books at Rs 5.000 was taken by Akram to
part discharge at an agreed value of Rs 10,000. Balance of machinery was
sold for Rs 30,000 (net).

Partners decided to keep minimum cash balance of Rs 2,000 in the first 3 months and Rs 1,000
thereafter.
Show how the amounts due to partners will be settled. All working should from part of your answer.

MAXIMUM LOSS METHOD

1. Calculate total payable to partner
2. Calculate cash available
3. Calculate maximum loss, distribute such loss to partner
4. Any negative balance of partners is shared by other partners in the ratio of capital
5. Any positive balance is cash to be paid to partners

Example – 19
Particulars A B C
Capitals 200,000 250,000 150,000
Ratio 2 1 3
Available Cash Rs 30,000

- 149 -
 PARTNERSHIP ACCOUNTING

Example – 20
A, B and C are partners sharing profits and losses in the ratio of 5:3:2. Their capitals were Rs 9,600,
Rs 6,000 and Rs 8,400 respectively.
After paying creditors, the liabilities and assets of the firm were:
Rs Rs
Liabilities for interest on loans Investments 1,000
from: Furniture 2,000
Spouses of partners 2,000 Machinery 1,200
Partners 1,000 Stock 4,000

The assets realized in full in the order in which they are listed above. B is insolvent.
You are required to prepare a statement showing the distribution of cash as and when available,
applying maximum possible loss procedure.

Example – 21
Amar, Akbar and Antony are in partnership. The following is their Balance Sheet as at March 31.
2010 on which date they dissolved their partnership. They shared profit in the ratio of 5:3:2.

Liabilities Rs Assets Rs
Creditors 80,000 Plant and machinery 60,000
Loan A/c— Amar 20,000 Premises 80,000
Capital A/cs— Amar 100,000 Stock 60,000
Akbar 30,000 Debtors 1,20,000
Antony 99,990

320,000

It was agreed to repay the amounts due to the partners as and when the assets were realised.
Apr 15. 2010 Rs 60,000
May 1.2010 Rs 146,000
May 31. 2010 Rs 94,000

Prepare a statement showing how the distribution should be made under maximum loss method.

- 150 -
 Issue of Shares

SAI KRIPA
ISSUE OF SHARES

Topics to be covered
• Meaning & terms
• Journal entries for issue of shares
• Under subscription & over subscription treatment
• Calls in arrear & calls in advance treatment
• Forfeiture of shares treatment
• Re-issue of share treatment
• Forfeiture of share in case of oversubscription of shares
• Issue of share other than Cash

TOPIC – 1
Meaning & Terms

SHARES: -shares are a unit of a company which issued by company to raise funds known as Share
Capital of the company. Shares are of two types:-
▪ Equity share
▪ X% Preference shares
Equity Shares:- Equity share holders are owner of the company, they have all right on the remaining
earning of the company and their investments are irredeemable.

X% Preference shares:- Preference shareholders are loan provider for the company they have fixed
percentage of earning in the company’s profit, their Investments are redeemable after specific
period of time.

Basis of difference Equity shares X% Preference Shares

Type of ownership Equity share holders are owner X% Preference shareholders are
of company. loan provider to the company.

Earning Equity share holders earn Preference shareholders earn

dividend only after dividend dividend prior to Equity share
distribution to preference holders but after Interest
shareholders. distribution to Debentures and
Loans.
Redemption facility No Repayment/ Redemption Irredeemable preference shares
made available to Equity share cannot be issued in India.
holders, their money refunded Maximum period of
only at the time of Liquidation redemptions is 20 years from its
to the company. issue.

Voting right Equity Share holders have Preference Shareholders does

voting right in company’s annual not have any voting right in
general meeting (AGM) company’s decision

Guaranteed Earning Equity share holders earn Preference shareholders earn

dividend without any fixed fixed percentage of dividend
%tage. from company’s earning.

- 151 -
 Issue of Shares

COMPANY:-Company is an legal entity, formed under “Indian Companies Act 1956”. It has its own
legal existence i.e. (it can sue or can be sued by any one). Companies are of various types Such as:-

Public Company:- Public Company are those company which have more than 51% of shareholding
with Government of India. Their management and policies are maintained and regulated by GOI. For
Example: National Fertilizers Limited, BSES, etc.

Private Company:- Private Company are those companies which have 100% of shareholding with
General Public. Their management and policies are maintained and regulated by its Board of
Directed, which are selected by equity shareholders. For Example: Reliance India Private Limited,
Tata Industries Private Limited, etc.

Government Company:- Government Company are those companies which are owned and
controlled by Government of India. For Example: MTNL, BSNL etc.

SHARE CAPITAL:- Share Capital is the money raised by company from its Shareholders. Share Capital
is of various types such as:-
Authorised Share Capital:- Authorised Share Capitals are total share Capital that company can issued
to its shareholders in its whole life.

Issued Share Capital:- Issued Share Capital are the capital issued by the company to its shareholders,
it can be less than Authorised capital but cannot exceeds from Authorised Capital

Subscribed Share Capital:- Subscribed Share Capital are those capital which are applied by the
shareholders and it can be equal to Issued capital or it can be less/ more thanIssued capital which
leads to Under Subscription or Over Subscription.

Called up Share Capital:- Called up capital is the part of issued capital. Company take money from its
shareholders in instalments and that instalments are known as Calls.

Paid up Share Capital:- Paid up Capital is the amount paid by the shareholders against the Calls of
the Company, it can be Equal to the Called up Capital or can bemore/ less than Called up Capital
which leads to Calls in advance or Calls in arrears.

Example – 1
ABC Limited has Authorised Capital of Rs 15,00,000/- which includes 1, 00,000 equity shares of Rs 10
each and 50,000 12% Preference shares of Rs 10 each. Company Issued 45,000 equity shares to
public which is fully subscribed. Company called only Rs 8 out of Rs 10 which is paid by all
shareholders of the Company.
Prepare Balance sheet of ABC Limited and show various type of Share Capitals of the company.

Solution
Balance Sheet of ABC Limited
As on 31st March 2010
LIABILITES AMOUNT ASSETS AMOUNT

- 152 -
 Issue of Shares

TOPIC – 2
JOURNAL ENTRIES FOR ISSUE OF SHARES

Shares are issued in instalments and the shareholder has to pay the money for his share in
instalments. Instalments can be 3 or more such as:-
▪ Share Application Money
▪ Share Allotment Money
▪ Share Xst Call money
Company issued share in market and any person who is intrusted in purchasing company’s share will
write an application to the money and demand the shares from company, along with the application
money for such shares. After receiving Applications and Application money company allot shares to
respective shareholders and called allotment money from them. After Allotment being made its on
company’s choice to Call, Calls’s Money from shareholders as per company’s need of Fund.

Company Can issue share at various mode depending upon its own goodwill and market scenario
such as:-
Share can issue at PAR
Share can issue at PREMIUM

Share can issue at PAR

Under this situation company issued share at its face value.

Journal Entries

For receiving Share Application Money

Bank A/C Dr

- 153 -
 Issue of Shares

To Share Application
(Being amount received)

For transferring Share Application Money into Share Capital

Share Application A/C Dr

To Share Capital
(Being Amount transfer)
For transferring Share Allotment Money into Share Capital

Share Allotment A/C Dr

To Share Capital
(Being Amount transfer)

For receiving Share Allotment Money

Bank A/C Dr
To Share Allotment
(Being amount received)

For transferring Share Call Money into Share Capital

Share 1st& Final Call A/C Dr

To Share Capital
(Being Amount transfer)

For receiving Share Call Money

Bank A/C Dr
To Share 1st& Final Call
(Being amount received)

Example – 2
XYZ private limited issued 8000 Equity shares of Rs 10 each, payable as follows
At Application Rs 2
At Allotment Rs 3
At Share 1st Call Rs 4
At Share Final Call Rs 1

All shares are fully subscribed by the public and all amount due were received to the company.
Pass necessary journal entries to record the above issue of share.

Solution
Journal Entries in the book of
XYZ limited

- 154 -
 Issue of Shares

S.NO PARTICULARS DR CR

Share can issue at PREMIUM

Under this situation company issued shares at more than its face value, company earn benefits due
to its market goodwill, Premium on share can be call at any time, it can be called along with
Application money, along with Allotment money or can be called along with Call money.

Journal Entries

For receiving Share Application Money

Bank A/C Dr
To Share Application
(Being amount received)

- 155 -
 Issue of Shares

For transferring Share Application Money into Share Capital

Share Application A/C Dr

To Share Capital
(Being Amount transfer)
For transferring Share Allotment Money into Share Capital

Share Allotment A/C Dr

To Share Capital
To Share Security Premium
(Being Amount transfer)

For receiving Share Allotment Money

Bank A/C Dr {along with premium money}

To Share Allotment
(Being amount received)

For transferring Share Call Money into Share Capital

Share 1st& Final Call A/C Dr

To Share Capital
(Being Amount transfer)

For receiving Share Call Money

Bank A/C Dr
To Share 1st& Final Call
(Being amount received)

Example – 3
PQR private limited issued 15,000 Equity shares of Rs 10 each at a premium of 10%, amount were
payable as follows
At Application Rs 3
At Allotment Rs 4
At Share 1st Call Rs 2 (along with premium)
At Share Final Call Rs 2

All shares are fully subscribed by the public and all amount due were received to the company.
Pass necessary journal entries to record the above issue of share.

Solution
Journal Entries in the book of
PQR limited
S.NO PARTICULARS DR CR

- 156 -
 Issue of Shares

Example – 4
ZMR private limited issued 25,000 Equity shares of Rs 10 each at a premium of 20%, amount were
payable as follows
At Application Rs 3 (along with premium Rs 1)
At Allotment Rs 3
st
At Share 1 Call Rs 3 (along with premium Rs 1)
At Share Final Call Rs 3

- 157 -
 Issue of Shares

All shares are fully subscribed by the public and all amount due were received to the company.
Pass necessary journal entries to record the above issue of share.

Solution
Journal Entries in the book of
ZMR limited
S.NO PARTICULARS DR CR

- 158 -
 Issue of Shares

TOPIC – 3
UNDER SUBSCRIPTION & OVER SUBSCRIPTION TREATMENT

UNDER SUBSCRIPTION
Sometimes shares issued by the company are not fully subscribed (demanded) by the public and that
leads to under subscription of company’s share.

As per “Stock Exchange Board of India” guidelines if any company’s shares are under subscribed than
it has to refund all application money to its shareholder with in 7days from the day of receipt.
However company can move on and carry on allotment if its 90% shares are subscribed.

Example – 5
TTR private limited issued 20,000 Equity shares of Rs 10 each at a premium of 10%, amount were
payable as follows
At Application Rs 2
At Allotment Rs 5
st
At Share 1 Call Rs 4

Pass necessary journal entries to record the above issue of share

A. Applications were received only for 16,000 shares.
B. Applications were received for 19,000 shares and all amount due were received to the
company.
Solution
Case - A
Journal Entries in the book of
TTR limited
S.NO PARTICULARS DR CR

Case - B

- 159 -
 Issue of Shares

Journal Entries in the book of

TTR limited
S.NO PARTICULARS DR CR

OVER SUBSCRIPTION TREATMENT

Sometimes shares issued by the company are oversubscribed (i.e. demand for shares are more than
its supply) by the public and that leads to oversubscription of company’s share.

Company use three methods to solve such problem:-

▪ By Rejection
▪ By Prorata Allotment

By Rejection:- company rejected all extra share application money, under this policy first come first
service is used i.e. the shareholder who applied first will receive share first and extra application
money is refunded.

- 160 -
 Issue of Shares

By Prorata Allotment:- Under this policy company allotted share in part/ sharing basis that is the
applicant who applied more share will receive less shares and his extra received money is transfer
to the amount due from him in further allotment or calls. This policy is combination of Rejection and
Sharing of shares.

Journal Entries
For receiving Share Application Money

Bank A/C Dr {including extra share money}

To Share Application
(Being amount received)

For transferring Share Application Money into Share Capital

Share Application A/C Dr

To Share Capital
To Share Allotment {Amount transfer to allotment}
To Bank {Amount Refunded}
(Being Amount transfer)

For transferring Share Allotment Money into Share Capital

Share Allotment A/C Dr

To Share Capital
(Being Amount transfer)
For receiving Share Allotment Money

Bank A/C Dr {after deducting amt received on app}

To Share Allotment
(Being amount received)

For transferring Share Call Money into Share Capital

Share 1st& Final Call A/C Dr

To Share Capital
(Being Amount transfer)

For receiving Share Call Money

Bank A/C Dr
To Share 1st& Final Call
(Being amount received)

Example – 6
Raj Kumar private limited issued 45,000 Equity shares of Rs 10 each, amount were payable as follows
At Application Rs 2
At Allotment Rs 4
At Share 1st Call Rs 3

- 161 -
 Issue of Shares

At Share Final Call Rs 1

Applications were received for 70,000 shares, company rejected the application of 15,000 shares
and balances were allotted on Prorata basis. All amount due were fully received to the company.
Pass necessary journal entries to record the above issue of share.

Solution
Journal Entries in the book of
RAJ KUMAR limited
S.NO PARTICULARS DR CR

- 162 -
 Issue of Shares

TOPIC – 4
CALLS IN ADVANCE & CALLS IN ARREAR TREATMENT

CALLS IN ADVANCE
Sometimes some shareholders paid their future dues before their due date and that leads to Calls in
advance. That Calls in advance money is the liability of the company, company has to transfer such
money into share capital at due date and sometimes company has to pay Interest on such Calls in
advance money.

Journal Entries
For receiving Share Application Money and Advance money of Allotment

Bank A/C Dr
To Share Application
To Calls in advance for allotment
(Being amount received)

For transferring Share Application Money into Share Capital

Share Application A/C Dr

To Share Capital
(Being Amount transfer)

For transferring Share AllotmentAdvance Money into Share Capital

Calls in Advance foe Allotment A/C Dr
To Share Capital A/C
(Being amount of advance transfer to share capital)

For transferring Share Allotment Money into Share Capital

Share Allotment A/C Dr

To Share Capital
(Being Amount transfer)

For receiving Share Allotment Money

Bank A/C Dr
To Share Allotment
(Being amount received)

For Interest due on Calls in advance on allotment

Interest on calls in advance A/C Dr

To Share holder A/C
(Being interest due to shareholder)

For Interest on Calls in advance paid.

- 163 -
 Issue of Shares

Share holder A/C Dr

To Bank A/C
(Being Interest Paid)

For transferring Share Call Money into Share Capital

Share 1st& Final Call A/C Dr

To Share Capital
(Being Amount transfer)

For receiving Share Call Money

Bank A/C Dr
To Share 1st& Final Call
(Being amount received)

Example – 7
Sunder & Sunder private limited issued 55,000 Equity shares of Rs 10 each, on 1st Jan 2010, amount
were payable as follows
1st Jan 2010 At Application Rs 3
1st may 2010 At Allotment Rs 4
1st July 2010 At Share 1st Call Rs 3

All shares are fully subscribed by the public and all amount due were received to the company but in
case of Mr Radhey Sham who hold 5000 shares paid his all dues along with Application.
Pass necessary journal entries to record the above issue of share. Interest on calls in advance (10%
p.a)
Solution
Journal Entries in the book of
Sunder & Sunder limited
DATE PARTICULARS DR CR

- 164 -
Issue of Shares

- 165 -
Issue of Shares

- 166 -
 Issue of Shares

Working notes
Note - 1
Calculation of Interest on Calls in advance

CALLS IN ARREAR
Sometimes some shareholders failed to paid the Allotment/ Call money due to them.

Journal Entries
For receiving Share Application Money
Bank A/C Dr
To Share Application
(Being amount received)

For transferring Share Application Money into Share Capital

Share Application A/C Dr

To Share Capital
(Being Amount transfer)

For transferring Share Allotment Money into Share Capital without considering Calls in arrear

Share Allotment A/C Dr

To Share Capital
(Being Amount transfer)

- 167 -
 Issue of Shares

For receiving Share Allotment Money from good shareholders only

Bank A/C Dr
To Share Allotment
(Being amount received)

For transferring Share Call Money into Share Capital

Share 1st& Final Call A/C Dr

To Share Capital
(Being Amount transfer)

For receiving Share Call Money

Bank A/C Dr
To Share 1st& Final Call
(Being amount received)

Example – 8
Ram swaroop private limited issued 90,000 Equity shares of Rs 10 each at a premium of 10%,
amount were payable as follows
At Application Rs 2
At Allotment Rs 4
At Share 1st Call Rs 3
At Share 2st Call Rs 2

All shares are fully subscribed by the public and all amount due were received with the exception of
following:-

▪ Mr A who holds 5000 shares failed to paid Share Allotment and Calls.
▪ Mr X who allots 6000 shares failed to paid Share Calls money.
Pass necessary journal entries to record the above issue of share.

Solution
Journal Entries in the book of
Ram swaroop limited
DATE PARTICULARS DR CR

- 168 -
Issue of Shares

- 169 -
Issue of Shares

- 170 -
 Issue of Shares

Example – 9
Rajveer private limited issued 60,000 Equity shares of Rs 10 each, amount were payable as follows
At Application Rs 3
At Allotment Rs 4
At Share 1st Call Rs 4

All shares are fully subscribed by the public and all amount due were received with the exception of
Mr R who holds 4000 shares failed to paid Share Allotment and Calls, however Mr P who holds 1500
shares paid his entire amount due along with Share Allotment money.
Pass necessary journal entries to record the above issue of share.

Solution
Journal Entries in the book of
Rajveer limited
DATE PARTICULARS DR CR

- 171 -
Issue of Shares

- 172 -
 Issue of Shares

TOPIC – 5
FORFEITURE OF SHARES TREATMENT
Company forfeited the shares of those shareholders who failed to paid any Allotment or call money,
and any amount received from such shareholders were treated as income of Company.While passing
the forfeiture’s entry it should be noted that first we have to check that whether these forfeited
shares are originally issued at Par, Premium or at Discount. These shares can further be Re-issued in
the market.

FORFEITED SHARES

ORIGINALLY ISSUED AT

PAR PREMIUM

Normal Treatment

If Received If Not Received

Not Show in J. Entry Show in J.Entry

Journal Entries

IF AT PAR

For Passing Forfeiture entry

Share Capital A/C Dr {With Paid Amount Only}

To Share Forfeiture A/C
To Share Calls in Arrear
(Being Share Forfeited which are originally issued at PAR)

IF AT PREMIUM

If Premium Received to Company

Share Capital A/C Dr

To Share Forfeiture A/C
To Share Calls in Arrear
(Being Share Forfeited which are originally issued at Premium)

If Premium Not Received to Company

Share Capital A/C Dr

Share Security Premium A/C Dr {With Premium Money}
To Share Forfeiture A/C
To Share Calls in Arrear
(Being Share Forfeited which are originally issued at Premium, and premium nor received)

- 173 -
 Issue of Shares

Example – 10
XYZ Limited Forfeited 3500 shares of Rs 10 each of Mr Shyam who failed to pay the Allotment of Rs 3
and Share Final Call of Rs 1.
Pass the necessary Journal Entries for the above case.
Solution
Journal Entries in the book of
XYZ limited
DATE PARTICULARS DR CR

Example – 11
Singh Limited Forfeited 5000 shares of Rs 10 each which was issued at a premium of 10% payable on
Allotment. These shares are held by Mrs Sunita who failed to pay Allotment of Rs 4 and Share Final
Call of Rs 3, however she was successfully paid the application of Rs 4.
Pass the necessary Journal Entries for the above case, is your answer be change if Sunita Successfully
paid the Allotment Money.

Solution

Case - A
Journal Entries in the book of
Singh limited
DATE PARTICULARS DR CR

Case - B
Journal Entries in the book of
Singh limited
DATE PARTICULARS DR CR

- 174 -
 Issue of Shares

Example – 12
Pooja Limited Forfeited 2500 shares of Rs 10 each which was issued at a premium of 20%. These
shares are held by Mrs Gupta who failed to pay Allotment of Rs 5 (including premium) and Share
First Call of Rs 2 and Share final Call of Rs 1.
Pass the necessary Journal Entries for the above case
Solution
Journal Entries in the book of
Pooja limited
DATE PARTICULARS DR CR

Example – 13
Suraj Mittal Limited Forfeited 15000 shares of Rs 10 each which was issued at a premium of 10%
payable on Allotment. These shares are held by MrGaurav who failed to pay Allotment of Rs 3 and
Share first Call of Rs 2 and Share Final Call Rs 2 is not yet made by company.
Pass the necessary Journal Entries for the above case.

Solution
Journal Entries in the book of
Suraj Mittal limited
DATE PARTICULARS DR CR

- 175 -
 Issue of Shares

Example – 14
Pia private limited issued 65,000 Equity shares of Rs 10 each at a premium of 10%, amount were
payable as follows
At Application Rs 2
At Allotment Rs 4
At Share 1st Call Rs 3
At Share 2st Call Rs 2

All shares are fully subscribed by the public and all amount due were received with the exception of
following:-

▪ Mr A who holds 5000 shares failed to paid Share Allotment and Calls.
▪ Mr X who allots 6000 shares failed to paid Share Calls money.
These Shares are forfeited by the Company after Final Call is Being Made.
Pass necessary journal entries to record the above issue of share.

Solution
Journal Entries in the book of
Pia Mittal limited
DATE PARTICULARS DR CR

- 176 -
Issue of Shares

- 177 -
 Issue of Shares

Example – 15
Ram Gopal private limited issued 90,000 Equity shares of Rs 10 each at a premium of 10%, amount
were payable as follows
At Application Rs 3
At Allotment Rs 5 (along with premium Rs 1)
st
At Share 1 & Final Call Rs 3
All shares are fully subscribed by the public and all amount due were received with the exception of
following:-
▪ Mr Sita ram who holds 10,000 shares failed to pay Share Allotment and his shares were
forfeited after allotment call.
▪ Mr Sinaha who allots 5000 shares failed to pay Share Allotment and Share Calls, his share
were forfeited after Final Call being made.
Pass necessary journal entries to record the above issue of share.
Solution
Journal Entries in the book of
Ram Gopal Mittal limited
DATE PARTICULARS DR CR

- 178 -
Issue of Shares

- 179 -
Issue of Shares

- 180 -
 Issue of Shares

TOPIC – 6
RE-ISSUE OF SHARE TREATMENT
Forfeited shares can be reissued in the Market to the general Public, under Reissue of share the
amount due on shares were called in Lumsome instead of calling in Instalments. Forfeited Shares
can be reissued at any mode i.e. it can be reissued at PAR or PREMIUM or at DISSCOUNT.

RE-ISSUE OF SHARE

PAR PREMIUM

Journal Entries

IF REISSUED AT PAR

Bank A/C Dr
Share Forfeiture A/C Dr
To Share Capital
(Being Forfeited Shares are reissued)

Share Forfeiture A/C Dr

To Capital Reserve
(Being Profit on share forfeiture is transfer to Capital reserve)

IF REISSUED AT PREMIUM

Bank A/C Dr
Share Forfeiture A/C Dr
To Share Capital
To Security Premium A/C
(Being Forfeited Shares are reissued)

Share Forfeiture A/C Dr

To Capital Reserve
(Being Profit on share forfeiture is transfer to Capital reserve)
Example – 16
Mittal Limited Forfeited 10,000 shares of Rs 10 each. These shares are held by Mr A who failed to
pay Allotment of Rs 3 and Share first Call of Rs 2 and Share Final Call Rs 2, and further these shares
were reissued to Mr X at Rs 8 per share.
Pass the necessary Journal Entries for the above case.

Solution
Journal Entries in the book of
Mittal limited
S.NO PARTICULARS DR CR

- 181 -
 Issue of Shares

Working Note
Note – 1
Share Capital reserve money

Example – 17
Sarju Limited Forfeited 25,000 shares of Rs 10 each. These shares are held by Mr Pia who failed to
pay Share first Call of Rs 3 and Share Final Call Rs 2, and further these shares were reissued to Mr X
at a premium of 10%.
Pass the necessary Journal Entries for the above case.

Solution
Journal Entries in the book of
Sarju limited
S.NO PARTICULARS DR CR

- 182 -
 Issue of Shares

Example – 18
Rojer Limited Forfeited 12,000 shares of Rs 10 each which was originally issued at a premium of 20%.
These shares are held by Mr Z who failed to pay Share first Call of Rs 3 and Share Final Call Rs 3, and
further these shares were reissued at Rs 7 per shares in the market.
Pass the necessary Journal Entries for the above case.

Solution
Journal Entries in the book of
Rojer limited
S.NO PARTICULARS DR CR

- 183 -
 Issue of Shares

Example – 19
Saniya Nahewal Limited Forfeited 15,000 shares of Rs 10 each which was originally issued at a
premium of 10% payable at time of allotment. These shares are held by Mrs Sonia who failed to pay
Share Allotment of Rs 3 and Share Final Call Rs 3. Saniya Nahewal limited reissued only 10,000 shares
at 7 per shares in the market.
Pass the necessary Journal Entries for the above case.

Solution
Journal Entries in the book of
Rojer limited
S.NO PARTICULARS DR CR

- 184 -
 Issue of Shares

Working Note
Note – 1
Share Capital reserve money

Example – 20
Rafel private limited issued 75,000 Equity shares of Rs 10 each at a premium of 10%, amount were
payable as follows
At Application Rs 3
At Allotment Rs 5
st
At Share 1 & Final Call Rs 3

- 185 -
 Issue of Shares

Applications were received for 100,000 shares and Company rejected the application money of
10,000 shares and balances were allotted on pro-rata basis. All amount due were received with the
exception of following:-
▪ Mr Shyam who allots 10,000 shares failed to pay Share Final and his shares were forfeited by
the company.
Out of Forfeited shares 7500 shares were reissued at Rs 8 per share in the market.
Pass necessary journal entries to record the above issue of share.

Solution
Journal Entries in the book of
Rafel limited
DATE PARTICULARS DR CR

- 186 -
Issue of Shares

- 187 -
Issue of Shares

- 188 -
 Issue of Shares

Working Note
Note – 1
Share Capital reserve money

Example – 21
Mittal & Sons private limited issued 15,000 Equity shares of Rs 10 each at a premium of 10%,
amount were payable as follows
At Application Rs 2
At Allotment Rs 5
At Share 1st Call Rs 3
At Share Final Call Rs 1
All amount due were received with the exception of following:-

Shares MoneyReceived
11000 Full Amount
2000 Rs 10
1500 Rs 7
500 Rs 2

All Forfeited shares were reissued at Rs 8 per share in the market.

Pass necessary journal entries to record the above issue of share.
Solution
Journal Entries in the book of
Mittal & Sons limited
DATE PARTICULARS DR CR

- 189 -
Issue of Shares

- 190 -
Issue of Shares

- 191 -
 Issue of Shares

TOPIC – 7
FORFEITURE OF SHARE IN CASE OF OVERSUBSCRIPTION OF SHARES
This type of question is most favourate questions of the board examiner. Ifa question is of over
subscription and extra money received on application is transfer on allotment and shareholder
failed to pay Allotment than we have to consider such question differently, we have to prepare an
additional working note to identify the Amount received from him on share application, Amount
due from him on Share Allotment and so on.

FORMAT OF WORKING NOTE PREPARE IN SUCH QUESTIONS

Note – 1
Share Applied by Mr Z

Share Applied by Mr Z = Total Share Applied – Rejected shares x Share Allotted to Mr Z

Total Shares Allotted

Or

Share Allotted to Mr Z = Total Shares Allotted x Share Applied by Mr Z

Total Share Applied – Rejected shares

Note – 2
Extra Money received from Mr Z

Amount received from Mr Z on Application (Share Applied by Z * Application money) = xxxx

Less: -Amount Utilised on Share Application (Share Allotted to Z * Application money) = (xxxx)
Extra Money received on Application from Z (Balance Fig) = xxxx

Note – 3
Amount in allotment

Amount Due on Allotment (Total Share Allotted * Allotment Money) = xxxxx

Less: - Amount already received on Application for Allotment = (xxxx)
Less: - Calls in Arrears on Allotment due to Mr Z = (xxxx)
{Shares Allotted to Z * Allotment money – Extra money in Note - 2}
Final Amount received on Share Allotment (Balancing Figure) = xxxxx

- 192 -
 Issue of Shares

Example – 22
Harpal Singh private limited issued 150,000 Equity shares of Rs 10 each, amount were payable as
follows
At Application Rs 3
At Allotment Rs 5
At Share 1st& Final Call Rs 2
Applications were received for 250,000 shares and Company rejected the application money of
50,000 shares and balances were allotted on pro-rata basis. All amount due were received with the
exception of following:-
▪ Mr Ghanshyam who allots 7500 shares failed to pay Share Allotment and Share Final.
▪ Mrs Sudha Who Applied 20,000 shares Failed to pay Share final Call.
Company forfeited all shares of Ghanshyam and Sudha, and these Forfeited shares were reissued at
Rs 8 per share in the market.
Pass necessary journal entries to record the above issue of share and show your working notes.

Solution
Journal Entries in the book of
Harpal Singh limited
DATE PARTICULARS DR CR

- 193 -
Issue of Shares

- 194 -
Issue of Shares

- 195 -
 Issue of Shares

Working Note
Note – 1
Share Allotted to Mrs Sudha

Note – 2
Amount Received on Share Allotment

- 196 -
 Issue of Shares

Example – 23
Vivek Sinha private limited issued 200,000 Equity shares of Rs 10 each, amount were payable as
follows
At Application Rs 2
At Allotment Rs 6
st
At Share 1 & Final Call Rs 2
Applications were received for 350,000 shares and Company rejected the application money of
50,000 shares and balances were allotted on pro-rata basis. All amount due were received with the
exception of following:-
▪ Mr Suraj who Applied 45,000 shares failed to pay Share Allotment and Share Final.
▪ Mrs Chander Who Allotted 20,000 shares Failed to pay Share final Call.
Company forfeited all shares of Suraj and Chander and out of Forfeited Shares Company reissued
only 40,000 shares (Which includes all shares of Suraj). at Rs 8 per share in the market.
Pass necessary journal entries to record the above issue of share and show your working notes.

Solution
Journal Entries in the book of
Vivek Sinha limited
DATE PARTICULARS DR CR

- 197 -
Issue of Shares

- 198 -
Issue of Shares

- 199 -
 Issue of Shares

Working Note
Note – 1
Amount Received on Share Allotment

Note – 2
Amount transfer to Share Capital Reserve

- 200 -
 Issue of Shares

Example – 24
Gupta & Sons private limited issued 500,000 Equity shares of Rs 10 each at a premium of 20%,
amount were payable as follows
At Application Rs 3 (Including premium Rs 1)
At Allotment Rs 5 (Including premium Rs 1)
st
At Share 1 & Final Call Rs 4
Applications were received for 700,000 shares and Company rejected the application money of
100,000 shares and balances were allotted on pro-rata basis. All amount due were received with the
exception of following:-
▪ Mr Ram who Allotted 75,000 shares failed to pay Share Allotment and Share Final.
▪ Mrs Roopa Who Applied 30,000 shares Failed to pay Share final Call.
Company forfeited all shares and out of Forfeited Shares Company reissued only 42,500 shares
(Which includes all shares of Roopa). At Rs 7 per share in the market.
Pass necessary journal entries to record the above issue of share and show your working notes.

Solution
Journal Entries in the book of
Gupta & Sons limited
DATE PARTICULARS DR CR

- 201 -
Issue of Shares

- 202 -
Issue of Shares

- 203 -
 Issue of Shares

Working Note
Note – 1
Share Allotted to Mrs Roopa

Note – 2
Amount Received on Share Allotment

- 204 -
 Issue of Shares

Note – 3
Amount transfer to Share Capital Reserve

Example – 25
On April1, 2013, Poja ltd make an issue of 200,000 equity shares of Rs.10 each at a premium of Rs.2
per share, payable as follows:

- 205 -
 Issue of Shares

Rs.3 on Application
Rs.5 on allotment (including Re.2 premium)
Rs.4 on first call and final call

Applications were received for Rs 650,000 shares, company allotted shares as follows: -
i. 30,000 Shares 30,000
ii. 200,000 Shares 50,000
iii. 250,000 Shares 50,000
iv. 140,000 shares 70,000
v. 30,000 shares NIL

Rest of the applicants were issued shares on pro rata basis and their excess money was adjusted
towards allotment.
Mr Gupta, to whom 15,000 shares were allotted from the category in which 140,000 Shares were
applied, failed to pay the allotment money his shares were forfeited after allotment. Mr Haldi Ram,
who applied for 9000 shares from the category in which 30,000 shares were applied failed to pay the
call and on his such failure , his share were forfeited.
Out of Forfeited shares only 10,000 shares were reissued as fully paid on receipt of Rs.8 per share,
the whole of Haldi Ram’s shares being included.

Pass necessary journal entries for the above issue of share.

Solution
Journal Entries in the book of
Poja limited
DATE PARTICULARS DR CR

- 206 -
Issue of Shares

- 207 -
Issue of Shares

- 208 -
 Issue of Shares

Working Note
Note – 1
Share Allotted to Mr Haldi Ram

Note – 2
Seven column note for calculation of refund amount
Category Share Share Extra Extra Amount Amount Amount Amount Refun
applied allotted shares money due on adjust on due on 1st adjust on
allotment allotment call 1st call

Note – 3
Amount Received on Share Allotment

- 209 -
 Issue of Shares

Note – 3
Amount transfer to Share Capital Reserve

- 210 -
 Issue of Shares

TOPIC – 8
ISSUE OF SHARE OTHER THAN CASH
Company’s shares can be issued in the market in mode other than cash. In other words Company
purchases Assets from market and in place of making payment to Vendor (i.e. Creditor) company
issues shares for such consideration. Company can purchase only individual assets or company can
also purchase Business of Vendor (i.e. both Assets and Liabilities of Vendor).

Shares issued other than Cash

For

Individual Assets Purchased Business Purchased

Normal treatment Balancing Fig As GOODWILL/CAPITAL RESERVE

Individual Assets Purchased

In such case company purchased Assets from market and in place of making payment to the vendor
company issues shares, such issue can be at Par, Premium or at Discount. In this question we have to
calculate number of share issued by the company.

Journal Entries

For Purchased of Sundry Assets

Sundry Assets A/C Dr

To Vendor’s A/C
(Being Assets Purchased from vendor)

For any partly payment in cash/bank

- 211 -
 Issue of Shares

Vendor’s A/C Dr
To Bank A/C
(Being payment made to vendor)

For Share issued to vendor at Par/ Premium/ at Discount

Vendor’s A/C Dr
To Shares Capital A/C
To Security Premium A/C
(Being shares issued to vendor at Par/ Premium/ Discount)

Working Note
Note – 1
Number of shares issued

Numbers of shares issued = Net Purchase Price of Assets

Issue Price (Face value of share + premium)

Example – 26
Ramprakash limited purchase a Building of Rs 700,000 from M/s Sorabh and paid 30% of amount in
cash and balance is settled by issuing equity share of Rs 10 each at premium of 25%.
Pass journal entries for above transaction.
Solution
Journal Entries in the book of
Ramprakash limited
DATE PARTICULARS DR CR

Working Note
Note – 1
Number of shares issued

- 212 -
 Issue of Shares

Example – 27
Surajprakash limited purchase a Plant & Machinery of Rs 400,000 from Raj and accepted a Bill
payable of Rs 80,000 and balance is settled by issuing equity share of Rs 10 each at premium of 20%.
Pass journal entries for above transaction.

Solution
Journal Entries in the book of
Surajprakash limited
DATE PARTICULARS DR CR

Working Note
Note – 1
Number of shares issued

Whole Business Purchased

Under this situation Company purchased both Assets and Liabilities of vendor and an agreed
PURCHASE CONSIDERATION for both has been decided and that amount is paid to him in shares if

- 213 -
 Issue of Shares

the value of assets purchased are less than the value of Liabilities and Purchase consideration than
such balancing figure will be considered as Goodwill, otherwise considered as Capital Reserve.

Journal Entries

For Purchased of Sundry Assets

Sundry Assets A/C Dr

Goodwill A/C (Balancing Figure) Dr
To Sundry Liabilities
To Vendor’s A/C
To Capital Reserves(Balancing Figure)
(Being Business Purchased from vendor)

For any partly payment in cash/bank

Vendor’s A/C Dr
To Bank A/C
(Being payment made to vendor)

For Share issued to vendor at Par/ Premium/ at Discount

Vendor’s A/C Dr
To Shares Capital A/C
To Security Premium A/C
(Being shares issued to vendor at Par/ Premium/ Discount)

Working Note
Note – 1
Number of shares issued

Numbers of shares issued = Net Purchase consideration

Issue Price (Face value of share + premium)

Example – 28
ABC Limited purchased Assets of Rs 360,000 and a liabilities of Rs 80,000 from Mr X for a agreed
purchase consideration of Rs 315,000 and ABC Limited issued shares of Rs 10 each for above
consideration.
Pass journal entries for above transactions.

Solution
Journal Entries in the book of
ABC limited

- 214 -
 Issue of Shares

DATE PARTICULARS DR CR

Working Note
Note – 1
Calculation of Goodwill/ Capital Reserve

Note – 2
Number of shares issued

- 215 -
 Issue of Shares

Example – 29
Sarvodya Limited purchased business of Surya which includes Building of Rs 125,000, Land of Rs
200,000, S. Debtors of Rs 50,000, Stock of Rs 25,000, S. Creditors of Rs 35,000, Bank loan of Rs
55,000. Agreed purchase consideration for these are decided to be Rs 285,000 and Sarvodya Limited
issued shares of Rs 10 each for above consideration at a premium of 5%.
Pass journal entries for above transactions.

Solution
Journal Entries in the book of
Sarvodya limited
DATE PARTICULARS DR CR

Working Note
Note – 1
Calculation of Goodwill/ Capital Reserve

- 216 -
 Issue of Shares

Note – 2
Number of shares issued

- 217 -
 Issue of Debentures

SAI KRIPA
Issue of debentures

Topics to be covered
• Meaning & terms
• Journal Entries for issue of Debentures
• Journal entries for Interest of Debentures
• Issue of debentures on redemption basis
• Discount/ loss on issue of debenture Written off treatment
• Issue of debenture other than cash
• Issue of Share as Collateral Security

TOPIC – 1
MEANING & TERMS

DEBENTURES
Debentures are the another source of finance of the company. It is also known as fixed liability
finance of the company. Debenture holders are treated as creditor of the company they allegeable
for fixed rate of interest from the company and their amount will be repaid after a specific period of
time.

INTEREST ON DEBENTURES
Company has to pay interest to the debenture holder on yearly or half yearly basis as May specified
in the term of issue. Interest is charged to revenue i.e. interest of debentures is deducted from net
profit and remaining amount is distributed to preference and equity share holders.

DEBENTURES v/s SHARES

Basis of difference Shares X% Debentures
Type of ownership Shareholders are owner of X% Debenture holders are loan
company. provider to the company.
Earning Equity sha+ Debenture holders earn
re holders earn dividend only Interest prior to Dividend of
after payment made to shareholders.
Debenture holders.
Redemption facility No Repayment/ Redemption Debenture holders enjoy the
made available to right of Redemption/
Shareholders, their money Repayment after a fixed period
refunded only at the time of of time.
Liquidation to the company.
Voting right Shareholders have voting right Debenture holders does not
in company’s annual general have any voting right in
meeting (AGM) company’s decision
Guaranteed Earning Shareholders earn dividend Debenture holders earn fixed
only if there is profit left after percentage of
payment of Interest and Tax. Interestirrespective of the fact
that company earn Profit or
Loss.

TOPIC – 2

- 218 -
 Issue of Debentures

JOURNAL ENTRIES FOR ISSUE OF DEBENTURES

Debentures are issued in one instalment or it can also issue in instalments and the Debenture holder
has to pay the money for his debentures in instalments. Instalments can be 3 or more such as:-
▪ Debenture Application Money
▪ Debenture Allotment Money
▪ Debenture Xst Call money
Generally company issued share in market in single instalment and all the money is called at
Application stage itself.

Company Can issue debentures at various modes depending upon its own goodwill and market
scenario such as:-
Debenture can issue at PAR
Debenture can issue at PREMIUM
Debenture can issue at DISCOUNT

Debenture can issue at PAR

Under this situation company issued Debenture at its face value.

Journal Entries

For receiving Debenture Application Money

Bank A/C Dr
To Debenture Application
(Being amount received)

For transferring debenture Application Money into Debenture

Debenture Application A/C Dr

To x% Debentures
(Being Amount transfer)

Debenture can issue at PREMIUM

Under this situation company issued Debenture at more than its face value, company earn benefits
due to its market goodwill.

Journal Entries

For receiving Debenture Application Money along with premium money

Bank A/C Dr
To Debenture Application
(Being amount received)

For transferringDebenture Application Money into Debenture

- 219 -
 Issue of Debentures

Debenture Application A/C Dr

To x% Debentures
To Premium on issue of debenture
(Being Amount transfer)

Debenture can issue at DISCOUNT

Under this situation company issued Debenture at less than its face value, generally new listed
companies issued Debenture at discount.

Journal Entries

For receiving Debenture Application Money with discount

Bank A/C Dr
To Debenture Application
(Being amount received)

For transferringDebenture Application Money into Debenture

Debenture Application A/C Dr

Discount on issue of debenture A/C Dr
To x% Debentures
(Being Amount transfer)

Example – 1
ABC limited issued 25,000, 9% Debentures of Rs 100 each, redeemable at par, to the journal public
and all amount were called in lumsome.
Pass journal Entries if such debentures were issued
Case-I Issued at Par
Case-II Issued at a premium of 20%
Case III Issued at a discount of 10%
Solution
Case-I
Journal Entries in the book of
ABC limited
DATE PARTICULARS DR CR

Case-II

- 220 -
 Issue of Debentures

Journal Entries in the book of

ABC limited
DATE PARTICULARS DR CR

Case-III
Journal Entries in the book of
ABC limited
DATE PARTICULARS DR CR

TOPIC – 3
JOURNAL ENTRIES FOR INTEREST OF DEBENTURES
Company has to pay interest to the debenture holder on yearly or half yearly basis as May specified
in the term of issue. Generally interest is payable on half yearly basis, company first recognise the
interest expense and then paid amount to debenture holders.

Journal Entries
For Amount transfer to debenture holders

Interest on Debentures A/C Dr

To Debenture Holders A/C
(Being Amount transfer to debenture holders)

For Payment of Amount

- 221 -
 Issue of Debentures

Debenture Holders A/C Dr

To Bank A/C
(Being amount paid)

Interest of dentures = Debenture Amount * Rate * Time

Example – 2
Himalaya limited issued 60,000, 12% Debentures of Rs 100 each at a premium of 10%, redeemable
at par. On 1st April 2009. Company has a policy to pay Interest to Debenture holders on half yearly
basis.
Pass journal Entries for issue of debentures.

Solution
Journal Entries in the book of
Himalaya limited
DATE PARTICULARS DR CR

Working Notes

- 222 -
 Issue of Debentures

Note-1
Calculation of Interest on debentures

TOPIC – 4
ISSUE OF DEBENTURES ON REDEMPTION BASIS
At the time of issue of debentures company has to specify that how this debentures
Is redeemed i.e. whether debentures were redeemed at PAR, PREMIUM or at DISCOUNT. If the
debentures were redeemed in par than normal treatment will be done but if the debenture will be
redeemed in Premium than company has to recognised loss at the issue of debentures however if
debentures were redeemed at Discount than company cannot recognised profit at the time of issue
of debentures. There can be 9 situations for issue of debentures
o Issue at Par, Redeemed at Par
o Issue at Premium, Redeemed at Par
o Issue at Discount, Redeemed at Par
o Issued at Premium, Redeemed at Premium
o Issue at Discount, Redeemed at Premium
o Issue at Par, Redeemed at Premium
o Issue at Par, Redeemed at Discount
o Issue at Premium, Redeemed at Discount
o Issue at Discount, Redeemed at Discount

In case of Redemption at Par and Discount normal journal entries is passed as they are learn before
but in case redemption at Premium company has to recognised loss on issue of debenture at the
time of issue of debenture.

Journal Entries

- 223 -
 Issue of Debentures

CASE - 1
Issued at Par, Redemption at Premium

Bank A/C Dr
To Debenture Application A/C
(Being amount received)

Debenture Application A/C Dr

Loss on issue of Debenture A/C Dr
To X% Debenture A/C
To Premium on redemption of debentures
(Being amount transfer and loss recognised)

CASE - 2
Issued at Premium, Redemption at Premium

Bank A/C Dr {with premium amount}

To Debenture Application A/C
(Being amount received)

Debenture Application A/C Dr

Loss on issue of Debenture A/C Dr
To X% Debenture A/C
To Premium on issue of debentures
To Premium on redemption of debentures
(Being amount transfer and loss recognised)

CASE - 3
Issued at Discount, Redemption at Premium

Bank A/C Dr {after discount money}

To Debenture Application A/C
(Being amount received)

Debenture Application A/C Dr

Discount on issue of debentures A/C Dr
Loss on issue of Debenture A/C Dr
To X% Debenture A/C
To Premium on redemption of debentures
(Being amount transfer and loss recognised)

Example – 3
Sudha Limited issued 50,000, 9% debentures of Rs 100 each at premium of 10%, redeemable at
Discount of 20%. All amounts were called at once and all money was received from debenture
holders.
Pass Journal entries for issue of debenture in above case and whether your answer is change if
redemption will be made at 20% premium.
Solution

- 224 -
 Issue of Debentures

Case - A
Journal Entries in the book of
Sudha limited
DATE PARTICULARS DR CR

Case - B
Journal Entries in the book of
Sudha limited
DATE PARTICULARS DR CR

Example – 4
Mira Limited issued 10,000, 12% debentures of Rs 100 each, redeemable after 4 years. All amounts
were called at once and all money was received from debenture holders.
Pass Journal entries in the following cases: -
o Issue at 10% Premium, Redeemed at Par
o Issue at 15% Discount, Redeemed at Par
o Issued at 10% Premium, Redeemed at 20% Premium
o Issue at 15% Discount, Redeemed at 25% Premium
o Issue at Par, Redeemed at 20% Premium
o Issue at 10% Premium, Redeemed at 30% Discount
o Issue at 15% Discount, Redeemed at 25% Discount

- 225 -
 Issue of Debentures

Solution
Journal Entries in the book of
Mira limited
CASES PARTICULARS DR CR

- 226 -
 Issue of Debentures

TOPIC – 5
DISCOUNT/ LOSS ON ISSUE OF DEBENTURE WRITTEN OFF TREATMENT
Company has to write off the discount on issue of debentures/ loss on issue of share on systematic
basis. Company can use Security premium and Profit & loss account to write off of these losses.

Journal Entries

For issue of debenture

Bank A/C Dr
To Debenture Application A/C
(Being amount received)

Debenture Application A/C Dr

Discount on issue of debentures A/C Dr
To X% Debentures
(Being amount transfer)

OR

Discount on issue of Debenture A/C Dr {with discount amount}

To X% Debentures
(Being amount of discount recognised)

For writing off discount on issue of debenture

Profit & Loss A/C or Security Premium A/C Dr

To Discount on issue of debentures
(Being amount of discount write off)

- 227 -
 Issue of Debentures

Company has to write off discount on issue of debenture/ loss on issue of debenture in systematic
manner. Company can use simple average method to write of discount or it can also use Ratio of
debenture amount outstanding method.

SIMPLE AVERAGE METHOD

Example – 5
Raj Limited issued 50,000, 9% debentures of Rs 100 each at Discount of 12%, redeemable at Par,
after three years. All amounts were called at once and all money was received from debenture
holders. Company decided to write off debentures on equal instalment of three years.
Pass Journal entries and prepare Discount on issue of debenture A/C.

Solution
Journal Entries in the book of
Raj limited
DATE PARTICULARS DR CR

- 228 -
 Issue of Debentures

Discount on issue of debenture A/C

DATE PARTICULARS AMOUNT DATE PARTICULARS AMOUNT

Working Note
Note – 1
Annual Amount of Discount write off

RATIO OF DEBENTURE AMOUNT OUTSTANDING METHOD

Example – 6
Rohan Limited issued 40,000, 12% debentures of Rs 50 each at Discount of 15% on 1st April 2007,
redeemable at Par. All amounts were called at once and all money was received from debenture
holders. Company redeemed debentures as follows: -
Date Debenture Redeemed
31st march 2009 20,000
st
31 march 2010 8,000
31st march 2011 5,000
31st march 2012 Balance
Prepare Discount on issue of debenture A/C.

- 229 -
 Issue of Debentures

Discount on issue of debenture A/C

DATE PARTICULARS AMOUNT DATE PARTICULARS AMOUNT

Working Note
Note – 1
Annual Amount of Discount writes off

Amount of discount =

DATE DEBENTURE AMOUNT OUTSTANDING RATIO ANNUAL INSTALMENT

- 230 -
 Issue of Debentures

Example – 7
Gupta Limited issued 20,000, 6% debentures of Rs 100 each at premium of 15% redeemable at
Premium of 5%. All amounts were called at once and all money was received from debenture
holders. Company redeemed debentures as follows: -
Date Debenture Redeemed (Rs)
1st Year 500,000
nd
2 Year 1000,000
3rd year 500,000
Prepare Discount on issue of debenture A/C.

Solution
Journal Entries in the book of
Gupta limited
DATE PARTICULARS DR CR

- 231 -
 Issue of Debentures

Loss on issue of debenture A/C

DATE PARTICULARS AMOUNT DATE PARTICULARS AMOUNT

Working Note
Note – 1
Annual Amount of Loss writes off

Amount of Loss =

DATE DEBENTURE AMOUNT OUTSTANDING RATIO ANNUAL INSTALMENT

- 232 -
 Issue of Debentures

TOPIC – 6
ISSUE OF DEBENTURES OTHER THAN CASH
Company’s debentures can be issued in the market in mode other than cash. In other words
Company purchases Assets from market and in place of making payment to Vendor (i.e. Creditor)
company issues debentures for such consideration. Company can purchase only individual assets or
company can also purchase Business of Vendor (i.e. both Assets and Liabilities of Vendor).

Debenture issued other than Cash

For

Individual Assets Purchased Business Purchased

Normal treatment Balancing Fig As GOODWILL/CAPITAL RESERVE

Individual Assets Purchased

In such case company purchased Assets from market and in place of making payment to the vendor
company issues debentures, such issue can be at Par, Premium or at Discount. In this question we
have to calculate number of Debenture issued by the company.

Journal Entries

For Purchased of Sundry Assets

Sundry Assets A/C Dr

To Vendor’s A/C
(Being Assets Purchased from vendor)

For any partly payment in cash/bank

Vendor’s A/C Dr
To Bank A/C
(Being payment made to vendor)

For debentures issued to vendor at Par/ Premium/ at Discount

Vendor’s A/C Dr
Discount on issue of Shares Dr
To X% Debenture A/C
To Security Premium A/C
(Being debenture issued to vendor at Par/ Premium/ Discount)

Working Note
Number of shares issued

Numbers of debenture issued = Net Purchase Price of Assets

Issue Price (Face value of debentures +/- premium/ discount)

- 233 -
 Issue of Debentures

Example – 8
Mittal limited purchase a Building of Rs 10,00,000 from M/s Ram and paid 50% of amount in cash
and balance is settled by issuing 9% debentures of Rs 100 each at premium of 25%.
Pass journal entries for above transaction.
Solution
Journal Entries in the book of
Mittal limited
DATE PARTICULARS DR CR

Working Note
Note – 1
Number of debenture issued

Whole Business Purchased

Under this situation Company purchased both Assets and Liabilities of vendor and an agreed
PURCHASE CONSIDERATION for both has been decided and that amount is paid to him in
debentures if the value of assets purchased are less than the value of Liabilities and Purchase
consideration than such balancing figure will be considered as Goodwill, otherwise considered as
Capital Reserve.

Journal Entries
For Purchased of Sundry Assets

Sundry Assets A/C Dr

Goodwill A/C (Balancing Figure) Dr
To Sundry Liabilities
To Vendor’s A/C
To Capital Reserves(Balancing Figure)
(Being Business Purchased from vendor

- 234 -
 Issue of Debentures

For any partly payment in cash/bank

Vendor’s A/C Dr
To Bank A/C
(Being payment made to vendor)

For debentures issued to vendor at Par/ Premium/ at Discount

Vendor’s A/C Dr
Discount on issue of Shares Dr
To X% Debentures A/C
To Security Premium A/C
(Being debentures issued to vendor at Par/ Premium/ Discount)

Working Note
Number of debentures issued

Numbers of debentures issued = Net Purchase consideration

Issue Price (Face value of debentures +/- premium/ discount)

Example – 9
ABC Limited purchased Assets of Rs 420,000 and a liabilities of Rs 65,000 from Mr Parkash for an
agreed purchase consideration of Rs 360,000 and ABC Limited issued debentures of Rs 100 each at a
discount of 10% for above consideration.
Pass journal entries for above transactions.

Solution
Journal Entries in the book of
ABC limited
DATE PARTICULARS DR CR

- 235 -
 Issue of Debentures

Working Note
Note – 1
Calculation of Goodwill/ Capital Reserve

Note – 2
Number of debenture issued

TOPIC – 7
ISSUE OF SHARE AS COLLATERAL SECURITY
A Collateral security may be defined as a subsidiary or secondary or additional security beside the
primary security. When a company obtains a loan or overdraft from bank or any other financial
institution,it may pledge or mortgage some assets as a secured loan against the said loan or
overdraft as Primary security and sometime apart from primary security company has to issue
secondary/ collateral security of its Debentures. There are two accounting treatment for such
Collateral Security: -
• Show Collateral security in Balance sheet.
• Pass Journal Entries.
Treatment of debenture Issued as Collateral security

Show in Balance sheet Pass Journal Entries

- 236 -
 Issue of Debentures
Treatment – 1
Show in Balance sheet
Under such treatment company will show the loan amount in balance sheet and in foot note specify
that this loan is taken against the collateral of Debentures of the Company.

LIABILITIES AMOUNT ASSETS AMOUNT

Bank Loan xxxx
(By issuing x% Debenture of
Rs____ as Collateral security)

Treatment – 2
Pass Journal entry
Under such treatment company pass the journal entry to record the debenture issued as Collateral
security.

DATE PARTICULARS DR CR
DEBENTURE SUSENSE A/C xxxxx
Dr Xxxxx
TO X% DEBENTURE A/C
(Being X% Debenture issued as collateral
security against a Bank loan of Rs________)

Example – 10
Raj Narayan Limited take a loan of Rs 700,000 from ICICI Bank and mortgage 10,000 12% debenture
of Rs 100 each as collateral security against such Loan to the Bank.
Suggest how these transactions can be recorded in the books of Raj Narayan.

Solution
Treatment - 1
Balance Sheet
LIABILITIES AMOUNT ASSETS AMOUNT

Treatment - 2
Journal Entries in the book of
Raj Narayan limited
DATE PARTICULARS DR CR

- 237 -
 REDEMPTION OF DEBENTURES
SAI KRIPA
Redemption of debentures

Topics to be covered
• Meaning & terms
• Redemption out of Capital and Profit
• Redemption by Draw of Lots
• Redemption by purchase in open market
• Redemption by Conversion of debentures

TOPIC – 1
MEANING & TERMS

Redemption of Debentures
Company has to repay the amount taken from the debenture holders at fixed period of time and this
is known as Redemption of Debentures. Company can redeemed the Debenture at Par value, at
Premium value or at Discount, depending upon the terms of issue. Company can use various
methods to redeemed debentures.

Methods to redemption of debentures

Debentures can be redeemed by various methods such as: -
• Redemption out of Capital & profits.
• Redemption by Draw of lots.
• Redemption by Purchase in open market.
• Redemption by Conversion.

Redemption out of capital & profits: - Company can redeem debentures by withdrawal of money
from business. In such case company has to payamount to the debenture holders in lumsome and
for this company has to provide 50% of Debenture amount in Debenture Redemption Reserve/
Sinking Fund.

Redemption by draw of Lots: -Under this method company redeemed debenture amount in
Instalments and company has to provide 50% of Debenture amount in Debenture Redemption
Reserve/ Sinking Fund.

Redemption by Purchase in Open Market: - Company Purchase its own debentures from the
market, i.e. purchase directly from the debenture holders in secondary market.

Redemption by Conversion: - Company can convert its debentures into Equity share, Preference
share or can also be converted into new Debentures at the time of redemption of debentures.

Debenture Redemption Reserve

As per the Guideline Issued by the Security Exchange Board of India known as SEBI, every company
who will redeemed debenture out of its profit or Capital has to transfer 10% of its debenture
amount into a Specific Reserve known as Debenture Redemption Reserve, it is also known as Sinking
Fund Account at the end of the year in which debentures are issued. This reserve is kept with the
company till redemption of Debenture and after redemption is done this reserve is transfer to
General Reserve, for other purposes.

- 238 -
 REDEMPTION OF DEBENTURES
TOPIC – 2
REDEMPTION OUT OF CAPITAL AND PROFIT
Company can redeem debentures by withdrawal of money from business. In such case company has
to pay amount to the debenture holders in lumsome. Company has to redeemed debenture as per
the mode specified at the time of issue of debenture i.e. Company can redeem debenture at Par,
Premium or Discount. As per SEBI guide lines, company has to maintain 10% of its debenture
amount in its Debenture Redemption Reserve (DRR)/ Sinking Fund Account to provide security to the
debentures. Company can debit its Profit & Loss A/C or can use Security premium amount for the
same. Debenture can be redeemed at Par, Premium or at Discount, journal entries in these cases are
given below: -
At the time of redemption company Has to Invest 15% of Debenture amounts to Debenture
Redemption Investment account.

Redemption at PAR

Journal Entries

For transfer of amount to DRR

Profit & Loss A/C or Security Premium A/C Dr

To Debenture Redemption Reserve A/C
(Being 10% of Debenture nominal amount is transfer to DRR)

For Investment to DRI

DRI Dr
To Bank A/C
(Being 15% of Debenture nominal amount is invested to DRI)

For Investment to DRI Sold

Bank Dr
To DRI A/C
(Being investment to DRI sold)

For transferring the amount to Debenture Holders

X% Debenture A/C Dr
To Debenture Holders A/C
(Being amount transfer to Debenture holders)

For Payment made to Debenture Holders

Debenture Holders A/C Dr

To Bank A/C
(Being Amount Paid)

For Transferring DRR amount into General reserve

Debenture Redemption Reserve A/C Dr

To General reserve A/C

- 239 -
 REDEMPTION OF DEBENTURES
(Being Amount Transfer)

Redemption at PREMIUM

Journal Entries

For transfer of amount to DRR

Profit & Loss A/C or Security Premium A/C Dr

To Debenture Redemption Reserve A/C
(Being 10% of Debenture nominal amount is transfer to DRR)

For Investment to DRI

DRI Dr
To Bank A/C
(Being 15% of Debenture nominal amount is invested to DRI)

For Investment to DRI Sold

Bank Dr
To DRI A/C
(Being investment to DRI sold)

For transferring the amount to Debenture Holders

X% Debenture A/C Dr
Premium on Redemption A/C Dr {With Premium amount}
To Debenture Holders A/C
(Being amount transfer to Debenture holders)

For Payment made to Debenture Holders

Debenture Holders A/C Dr {Including Premium amount}

To Bank A/C
(Being Amount Paid)

For Transferring DRR amount into General reserve

Debenture Redemption Reserve A/C Dr

To General reserve A/C
(Being Amount Transfer)

Example – 1
Suraj Limited, on 1st Jan 2009 issued 12,000 9% Debenture of Rs 100 each at premium of 20% and
repayable after four years at Par. All amounts were called and received from debenture holder. After
four years i.e. on 31stDecember 2012 Company redeemed its debenture and amount were paid to
the debenture holders.
Pass journal Entries for the Issue of Debenture as Well as Redemption of Debentures.

- 240 -
 REDEMPTION OF DEBENTURES
Solution

Journal Entries in the book of

Suraj limited
DATE PARTICULARS DR CR

Example – 2
Somya Limited, on 1st April 2007 issued 15,000 12% Debenture of Rs 100 each at premium of 20%
and repayable after Three years at Premium of 10%.At the time of issue of Debenture company has
balance of Rs 20,000 in its Debenture Redemption Reserve A/C. After Three years i.e. on 31st March
2010 Company redeemed its debenture and amount were paid to the debenture holders.
Pass journal Entries for the Issue of Debenture as Well as Redemption of Debentures.
Solution

Journal Entries in the book of

Somya limited
DATE PARTICULARS DR CR

- 241 -
 REDEMPTION OF DEBENTURES

Working Notes
Note – 1
Amount transfer to DRR Account

Example – 3
Ranbaxy Limited, on 1st April 2008 issued 50,000 18% Debenture of Rs 100 each at premium of 20%
and repayable after Three years at Premium of 10%.At the time of issue of Debenture company has
balance of Rs 2,00,000 in its Debenture Redemption Reserve A/C. After Three years i.e. on 31st
March 2011 Company redeemed its debenture and amount were paid to the debenture holders.
Pass journal Entries for the Issue of Debenture as Well as Redemption of Debentures.
Solution

- 242 -
 REDEMPTION OF DEBENTURES
Journal Entries in the book of
Ranbaxy limited
DATE PARTICULARS DR CR

Working Notes
Note – 1
Amount transfer to DRR Account

TOPIC – 3
REDEMPTION BY DRAW OF LOTS
Under this method company redeemed debenture amount to debenture holders in Instalments, i.e.
total debentures are not redeemed at once debentures are redeemed in Instalments.
Company can also use the benefit of instalment in case of amount transfer to the DRR account, i.e.
the amount transfer to DRR account can also be done through instalments.

- 243 -
 REDEMPTION OF DEBENTURES
Example – 4
Reliance Limited, on 1st Jan 2007 issued 20,000 9% Debenture of Rs 100 each at premium of 20% and
repayable at Par. After Three years i.e. on 31st December 2010 Company starts redeeming its
debenture as follows: -
Dates Debentures
st
31 March 2010 5000
31st March 2010 8000
31st March 2010 7000

Company also transfer amount to DRR account in two instalments i.e. on 31st March 2008 and 31st
March 2009.
Pass journal Entries for the Issue of Debenture as Well as Redemption of Debentures.

Solution

Journal Entries in the book of

Reliance limited
DATE PARTICULARS DR CR

- 244 -
 REDEMPTION OF DEBENTURES

Working Notes
Note – 1
Amount transfer to DRR Account

TOPIC – 4
REDEMPTION BY PURCHASE IN OPEN MARKET
There are two types of Markets, i.e. Primary Market and Secondary Market, under primary market
public applied shares and debenture from the company and company allotted the shares and
debentures to the respective applicants, this is also known as “Initial Public Offer (IPO)”. However in
secondary market company has no role, here share & debentures are sold by one person to another
and normal demand and supply rules are applied.

- 245 -
 REDEMPTION OF DEBENTURES
For the purpose of Redemption Company can also enter into Secondary Market and Purchase its
own Debentures from the debenture holders.
Company enters into secondary market and Purchase its own Debenture for two Purposes: -
• For Immediate Cancellation of Debenture
• For Investment Purpose

Purpose of Purchase of Own Debentures

For Immediate Cancelation For Investment Purpose

FOR IMMEDIATE CANCELATION

Company can purchase its own Debenture for immediate cancellation purpose, here company
purchase debentures from its debenture holders indirectly and automatically company itself become
the holder of its debenture and now there is no need for redemption of such debentures.
Company purchases own debentures and it will be treated as Assets of company and this assets will
be Cancelled by reducing Debenture liability.

Journal Entries

For Purchase of Own Debentures

Own Debenture A/C Dr {With Purchase Price}

To Bank A/C
(Being Own Debenture Purchased)

For Redemption of X% Debentures

X% Debenture A/C Dr
Premium on Redemption A/C Dr
To Debenture Holders A/C
To Discount on Redemption
(Being amount due to debenture holders)

For Cancellation of Debentures

Debenture Holders A/C Dr

To Own Debenture A/C
To Profit on cancellation
(Being debenture holder’s liability cancelled)

Transfer of Profit on cancellation to Capital Reserve

Profit on Cancelation A/C Dr

To Capital Reserve A/C
(Being amount transfer to Capital Reserve)

- 246 -
 REDEMPTION OF DEBENTURES
Example – 5
CBA limited purchased 12,000 9% own Debenture of Rs 100 each at Rs 95 per debenture for
immediate cancellation.
Pass necessary Journal Entries for the above case.
Solution

Journal Entries in the book of

CBA limited
DATE PARTICULARS DR CR

Working Notes
Note – 1
Amount of profit on cancellation

Example – 6
Ram limited issued 50,000 10% debenture of Rs 100 each at par on 1st April 2007 and redeemable at
premium of 10%. On 31st March 2009 Company decided to redeemed 10,000 debentures by the way
of purchase in open market and on same date market value of debenture is Rs 105 per debentures.
Pass Journal Entries for issue as well as Redemption of debentures.
Solution

- 247 -
 REDEMPTION OF DEBENTURES
Journal Entries in the book of
Ram limited
DATE PARTICULARS DR CR

TOPIC – 5
REDEMPTION BY CONVERSION OF DEBENTURES
Company has a right to give Option to the Debenture holder that they can convert their debentures
into Equity shares, Preference Shares or in New Debentures.
Here Company does not required to make outflow of cash for debenture redemption, the holdings
of debenture holders are converted into Equity/ Preference shares or in new debentures.
Company can convert Debenture at Par/ Premium or can be at Discount.

Conversion of Debenture

PAR PREMIUM DISCOUNT

Normal Treatment Number of share calculated Number of share calculated

(No profit no loss) (Profit to the company) (Loss to the company)

Journal Entries

- 248 -
 REDEMPTION OF DEBENTURES

Conversion at PAR

For redemption of Debenture

X% Debenture A/C Dr
Premium on Redemption A/C Dr
To Debenture Holder A/C
To Discount on Redemption
(Being amount transfer to debenture holder)

For Conversion of Debenture into Share or New Debentures

Debenture Holder A/C Dr

To Equity/ Preference Capital or New Debentures
(Being amount converted)

Conversion at PREMIUM

For redemption of Debenture

X% Debenture A/C Dr
Premium on Redemption A/C Dr
To Debenture Holder A/C
To Discount on Redemption
(Being amount transfer to debenture holder)

For Conversion of Debenture into Share or New Debentures

Debenture Holder A/C Dr

To Equity/ Preference Capital or New Debentures
To Premium on conversion A/C
(Being amount converted)

Working note

Calculation of Number of Shares issued = Total amount due to Debenture Holder

Share amount + Premium

Conversion at DISCOUNT

For redemption of Debenture

X% Debenture A/C Dr
Premium on Redemption A/C Dr
To Debenture Holder A/C
To Discount on Redemption
(Being amount transfer to debenture holder)

For Conversion of Debenture into Share or New Debentures

- 249 -
 REDEMPTION OF DEBENTURES

Debenture Holder A/C Dr

Discount on conversion A/C Dr
To Equity/ Preference Capital or New Debentures
(Being amount converted)

Working note

Calculation of Number of Shares issued = Total amount due to Debenture Holder

Share amount – Discount

Example – 7
Divya Pratap Limited had 19,500 9% Debenture of Rs 100 each which are due for Redemption,
company converted these debenture into 12% Preference shares of Rs 10 each.
Pass Journal entries in following case: -
o Conversion are made at Par
o Conversion at a premium of 30%
o Conversion at a discount of 40%
Pass journal entries for the above cases.
Solution
Case - 1

Journal Entries in the book of

Divya Pratap limited
DATE PARTICULARS DR CR

Working Notes
Note – 1
Number of Preference shares issued

- 250 -
 REDEMPTION OF DEBENTURES

Case - 2
Journal Entries in the book of
Divya Pratap limited
DATE PARTICULARS DR CR

Working Notes
Note – 1
Number of Preference shares issued

Case - 3
Journal Entries in the book of
Divya Pratap limited
DATE PARTICULARS DR CR

- 251 -
 REDEMPTION OF DEBENTURES

Working Notes
Note – 1
Number of Preference shares issued

Example – 8
Sudha Limited had 4500 12% Debenture of Rs 100 each, which were redeemable at a premium of
10%. After four years company gives an option to its debenture holders to convert their debenture
into new debenture carrying an interest rate of 15% of Rs 100 each at discount of 10%.
Only 40% Debenture holders give the application to the company to exercise such option and
company converted the holding of such debenture holders.
Pass journal entries for the above case

Solution
Journal Entries in the book of
Sudha limited
DATE PARTICULARS DR CR

Working Notes
Note – 1
Number of 15% Debentures issued

- 252 -
 REDEMPTION OF DEBENTURES

Example – 9
On 1st January 2007, Pyare Limited issued 1500 8% Debentures of Rs 100 each at a discount of 5%
and redeemable at a premium of 10%. After three years company gives the option to its debenture
holders to convert its debenture into Equity shares of Rs 10 each at discount of 10%.
60% debenture holders approached company to convert their debentures into equity shares.
Pass journal entries for the above case

Solution
Journal Entries in the book of
Pyare limited
DATE PARTICULARS DR CR

- 253 -
 REDEMPTION OF DEBENTURES

Working Notes
Note – 1
Number of Equity shares issued

- 254 -
 INVENTORY VALUATION

SAI KRIPA
INVENTORY VALUATION

Topics to be covered
• Meaning and term
• Practical Questions

Topic – 1
MEANING AND TERMS

Inventory
Inventories are the assets held
• for resale (finished goods and stock in trade) or
• for consumption in the process of production (raw material, packing material, stores and
spares, etc.) or
• In the course of conversion into finished goods (WIP).
Inventory is commonly referred to as stock or closing stock.

Items included in Inventory

The inventory mainly includes:
❖ For a manufacturer.
• Raw material
• Work-in-progress
• Finished goods, stock-in-trade and
• Others like store, spares, packaging material etc.
❖ For a trader :
• Finished Goods/Stock-in-trade

Inventory System
Inventory system refers to system of ascertaining the inventory i.e. how much balance of an item is
there.
The most common systems are:
i. Periodic/Physical Inventory system
ii. Perpetual inventory system

Periodic/Physical Inventory system

• No records of inventor) are maintained.
• Inventory is ascertained by physical counting at the end of the year and then valued.
• It is simple and commonly followed by small organisations.

Unless otherwise specified, we can always assume that inventory/closing stock for annual financial
account purposes is ascertained by physical counting and then valuing.

Perpetual inventory system

• Inventory records also known as stores records arc maintained in which details of each and
every item are kept.
• The records may be in only quantity form or may include value also (known as priced
ledger). The details of receipt and issue are recorded instantly and balance ascertained.
• Hence balances of all items of inventory are always available. The balance of year end can be
used in financial accounting for final accounts.

- 255 -
 INVENTORY VALUATION

Inventory Valuation
The inventory may be valued:
• at cost or
• at net realisable value or
• at cost or net realisable value whichever is lower.

AS-2 requires inventory should be valued at lower of the cost and net realisable value.
This is in accordance with the prudence principle. Because if the inventory value reduces the
anticipated loss gets recognized but in case the value increases the expected profit (which is not yet
realized) is not recognized.

Inventory Cost means

❖ Cost is the expenditure necessarily incurred to bring the inventory into its present form and
condition.
❖ The cost may be calculated by different methods/cost formulas. The more commonly used
and recognized methods are:
• Specific identification/specific pricing method
• First In First out (FIFO)
• Last In First Out (LIFO)
• Weighted Average Method
The cost includes various elements in it. e.g., Material, Labour, Direct Expenses, Manufacturing
Expenses, Administration Expenses, Selling-Distribution Expenses and Interest.
But generally for valuation of closing stock of Finished goods and WIP we include expenses upto
manufacturing stages only ie. Material, Labour, Direct expense and Manufacturing overhead
(Variable and Fixed both)
That means, administration expenses, selling expenses and interest is not included in inventory
valuation.
As per AS-2 Accounting Standard on “Inventory valuation” only FIFO method and Weighted average
methods are permitted for valuation.
AS-2 requires expenses up to manufacturing stage (including fixed overheads) should be included in
cost. Cost should include those expenses which are necessarily incurred to bring inventory into its
present stage and condition.

Net Realisable Value

• The net realisable value in case of Raw Material will be generally the replacement price (i.e.
the price which will be payable if we purchase that material at the end of the year).
• In case of finished goods/stock-in-trade the net realisable value will be the net selling price
which will be receivable if we sale that goods at the end of the year in the normal course of
business.
• Net realizable price in case of raw materials = Replacement price = Purchase price +
Expenses of completing purchase.
• Net realizable price in case of finished goods = Net selling price = Selling price (-) Expenses of
completing sale.

Comparison of cost & Net realisable value

❖ Cost of the individual material or a group of items, which are interchangeable, should be
compared with the realisable value of that group of items and lower should be taken for
inventory valuation.

- 256 -
 INVENTORY VALUATION
❖ That is all inventories taken together should not be compared.
❖ In case of finished goods the cost of production will be compared with the net realisable
value. (Le, the net price which will be receivable if we sale that goods at the end of the year).
❖ In case of Raw material:
• If the replacement price is less than the cost, then raw material inventory should be
valued at replacement price.
• But there is an exception to this i.e. when the price of the finished goods for which
raw material will be used is sufficient to cover the cost of material and other
expenses, then we can value the material stock at cost even when replacement price
is less.
❖ In case of WIP:
• It may be valued only on cost or estimated cost basis if realizable value cannot be
ascertained.
• But if it has to be compared with realisable price then in the cost of WIP, the further
estimated expenditure will be added and that total cost will be compared with the
realisable value of Finished Goods.
• This is done because WIP as it is may not have market price.
• Alternatively as per AS-2, sale value (-) cost of completion (-) cost of selling be
compared with WIP cost.

Requirements of Accounting Standard – 2

• Inventory should be valued at cost or net realisable value whichever is lower.
• Cost should be valued by FIFO or Weighted Average basis. Specific price method can be
followed when material is acquired for a particular transaction or contract. Standard cost
and retail price method (adjusted selling price method) is permitted in only specific
situation.
• Cost should be valued on absorption costing basis (i.e., including variable cost +
proportionate fixed production overhead). Administration overhead. Selling & Distribution
cost, storage cost and interest should be excluded for stock valuation.

TOPIC – 2
PRACTICAL QUESTIONS

Example – 1
How valuation will be done In following cases :
Items Cost Net selling price Replacement price Remarks
(net of selling ex (including purchase
a. Finished goods 500 p.)
600 exp)
—
1000 units in stock
—
b. Finished goods 500 460 1000 units in stock
—
c Raw material 200 220 600 units in stock
—
d. Raw material 200 175 600 units in stock, finished
goods for which this raw
material is used will be sold at
Rs 600
—
e. WIP 260 600 200 units in stock, further cost
—
f. WIP 260 460 240 further cost
200 units in stock,
240
Solution
Items Value Remarks/Workings

- 257 -
 INVENTORY VALUATION

Example – 2
M/s. Subhalaxmi Traders find out the following historical cost and net realisable value for various
types of inventories. Find out value of Closing Stock in accordance with AS-2 (Revised) • Valuation of
Inventories issued by ICAI.
Inventory Categories 01 02 03 04 05 06
Historical Cost 17,400 20,100 18,200 16,500 15,400 21,400 = 109,000
Net Realisable Value 12,200 27,400 19,100 17,200 16,800 20,900 = 113,600

Solution
Items Value Remarks/Workings

Example – 3
A firm has two products A and B. It analyses its costs for the products as follows:
Particulars A (Rs.) B (Rs.)

Materials 1,20,000 1,40,000

Labour 80,000 1,00,000
Production Expenses 70,000 70,000
Administration Expenses 50,000 50,000
Advertising 30,000 30,000
3,50,000 3,90,000
Production was 20,000 units of A and 30,000 units of B. The selling price was Rs. 20 per unit of A but
the price of was only Rs. 10; agents in both cases received commission @ 5% of the selling price. The
closing stock was 2,000 units and 3,000 units of A and B respectively. What is the value that should
be put on the closing stock?

Solution

- 258 -
 INVENTORY VALUATION
Particulars A B

Example – 4
The following are the details of a spare part of Sriram Mills:
Date Transactions Amount
1-1-06 Opening Stock Nil
1 -1 Purchases 100 units @ Rs. 30 per unit
15-1 Issued for consumption 50 units
1-2 Purchases 200 units Rs 40 per unit
15-2 Issued for consumption 100 units
20-2 Issued for consumption 100 units
I -3 Purchases 150 units @ Rs. 50 per unit
15-3 Issued for consumption 100 units
Find out the value of stock as on 31-3-06 if the company follows:
I. First in First Out basis 2. Last in First Out basis 3. Weighted Average basis

Example – 5
A manufacturer has the following record of purchase of a condenser which he uses while
manufacturing radio sets:
Purchases were as follows
Date Quantity Price per
(Units) (Unit)
Dec-4 900 5.00
Dec-10 400 5.50
Dec-11 300 5.50
Dec-19 200 6.00
Dec-28 800 4.75
2600
Value the closing stock under different methods?
Issues were made as follows Date Quantity (Units)
Dec-5 600
Dec-12 400
Dec-29 600

Example – 6
From the following particulars for the years 2004 and 2005 determine the value of the closing stock
at the end of 2005.
2004 2005

- 259 -
 INVENTORY VALUATION
Rs. Rs.
Opening Stock 20..000 30,000
Purchases 1,20,000 1,90,000
Sales 2,00,000 2,40,000
Uniform rate of gross profit may be assumed.
At the end of 2005, goods purchased were received, but no entry was made for this credit purchase
since invoice was not received. These goods cost Rs. 20,000.

Solution
Trading A/C 2004-05
Particulars Amount Particulars Amount

Trading A/C 2005-06

Particulars Amount Particulars Amount

Example – 7
From the following particulars ascertain the value of stock as on 31st March, 2006 and also the profit
for the year. Stock as on 1 -4-2005 Rs. 14,250; Purchases Rs.76.250; Manufacturing Expenses Rs.
15,000; Selling Expenses Rs. 6050; Administrative Expenses Rs. 3,000; Financial Charges 2.150; Sales
Rs. 1.24,500.
At the time of valuing stock as on 31st March, 2005 it was found that an abnormal item was
purchased for Rs 3250 and it was sold during the year for Rs.4,500. Barring the transaction relating
to this item, the gross profit earned during the year was 20 per cent on sales.

- 260 -
 INVENTORY VALUATION
Solution
Trading A/C
Particulars Amount Particulars Amount

Profit & loss A/C

Particulars Amount Particulars Amount

Example – 8
X who was closing his books on 31-3-2006 failed to take the actual Stock which he did only on 9th
April, 2006, when it was ascertained by him to be worth Rs. 25,000.
It was found that sales are entered in the sales book on the same day of dispatch and return inwards
in the return book as and when the goods are received back. Purchases are entered in the purchases
day book once the invoices are received.
It was found that sale, between 31-3-2006 and 9-4-2006 as per the sales day book are Rs. 1,720.
Purchases between 31 -3-2006 and 9-4-2006 as per purchases day book are Rs 120. out of these
goods amounting to Rs 30 were not received until after the stock was taken.
Goods invoiced during the month of March, 2006 but goods received only on 4th April, 2006
amounted to Rs. 100. Rate of gross profit is 33.33% on cost.
Ascertain the value of physical stock as on 31-3-2006.

Solution
Particulars Amount

- 261 -
 INVENTORY VALUATION

Example – 9
A trader prepared his accounts on 31st March, each year. Due to some unavoidable reasons, stock
taking was done on 15th March, 2006 on which date the total cost of goods in his godown came to
Rs. 50,000. The following facts were established between 15th March and 31st March, 2006.
i. Sales Rs. 41,000 (including cash sales Rs. 10,000)
ii. Purchases Rs. 5,034 (including cash purchases Rs. 1,990)
iii. Sales Returns Rs. 1,000
Goods are sold by the trader at a profit of 20% on sales.
You are required to ascertain the value of stock on hand on 31 si March. 2006.

Solution
Particulars Amount

- 262 -
 BANK RECONCILIATION STATEMENT

SAI KRIPA
BANK RECONCILIATION STATEMENT
By: - RAKESH KALRA
8447200919

Question – 1
Prepare a Bank Reconciliation statement from the following particular and show the balance as par
Cash Book. {10 Marks}
a. Pass Book shows a Debit Balance of Rs 35,000 as on 31st December 2010.
b. Cheque drawn in the last week of December 2010 of Rs 35,000 but the cheques of Rs 15000
is cleared on 3rd January 2011.
c. Cheque of Rs 40,000 issued on 28th December 2010 but cheques of Rs 25,000 were not
presented till 31st December 2010.
d. Interest on Bank overdraft amounted to Rs 5,500 not entered in Cash Book.
e. A cheque of Rs 10,500 was deposited in the bank in the beginning of the December, which
became dishonoured but no information available in cash book.
f. Bank charges of Rs 1500 not recorded in cash book.

Question – 2
On examining the Bank Pass Book of Hari Dass limited, it is found that the balance shown on 31st
March 2000, the close of the company’s financial year differs from the Credit balance of Rs 59,850
shown by the Cash Book on that Date. From a detailed comparison of the entries it is found that:

i. A cheque of Rs 5,500 received from one of debtor was correctly entered in Cash Book
however the same were not deposited into bank.
ii. Bank Charges of Rs 1500not entered in the Cash book.
iii. A cheque of Rs 6,000 issued to Sunita (Creditor) was correctly presented in the pass Book
but the same failed to be recorded in Cash Book.
iv. Mrs Sunena (a debtor) of Rs 9,000 paid her due directly into bank but no entry has been
passed in the Cash book.
v. A Cheque of Rs 10,500 is deposited in Bank during the month of March this year but the
same become dishonoured but no information is received from bank till yet.
vi. Cheques totalling Rs 25,750 were issued by the company and duly recorded in cash book
before 31st March 2000, but cheques of totalling 15,000 were not presented for payment till
31st March 2000.
vii. A telephone bill of Rs 5,500 was directly paid by the bank but no information is received in
cash book.
viii. Dividend of Rs 8,900 on company’s Investment was received by bank but no information is
made available in the cash book.
ix. Cheques totalling Rs 42,500 were deposited by the company into Bank and duly recorded in
cash book before 31st March 2000, but cheques of totalling Rs 12,500 were cleared till 31st
March 2000.
x. Bank has made a credit of Rs 550 for any outstanding entry not recorded earlier but the
same is not entered in cash book.
xi. Bank Charges Rs 1,800 as Interest on Debit balance of Company and same is not entered in
Cash Book.
xii. A cheque of Rs 5,550 was deposited into bank and the same is cleared till 31st March 2000,
but the cheque was entered in cash book as Rs 5,050.

- 263 -
 BANK RECONCILIATION STATEMENT

Question – 3
On examining the Bank Pass Book of Raj limited, it is found that the balance shown on 31st March
2010, the close of the company’s financial year differs from the bank balance of Rs 23,650 shown by
the Cash Book on that Date. From a detailed comparison of the entries it is found that: {16 Marks}
i. Rs 2860 is entered in the cash book as paid into bank but no entry has been made in Pass
book.
ii. Bank Charges of Rs 550 entered twice in the Cash book.
iii. Mrs Priya (a debtor) of Rs 6500 paid her due directly into bank but no entry has been passed
in the Cash book.
iv. A bill of Rs 7500 is discounted from bank is entered in the cash book without recording the
discount charges of Rs 500
v. Cheques totalling Rs 18950 were issued by the company and duly recorded in cash book
before 31st March 2010, but cheques of totalling 8950 were not presented for payment till
31st March 2010.
vi. An Electricity bill of Rs 2500 were directly paid by the bank but no information is received in
cash book
vii. No entry has been made in the cash book to record the dishonour on 15 th March 2010, of a
cheque for Rs 2550 received from Mr Raja.
Bank Charges of Rs 1500 and Bank Interest of Rs 1050 were not recorded in Cash book.

Question – 4
Cash book balance and Pass book balance does not match on 31st March 2009, prepare Bank
Reconciliation Statement from the following Transactions: -

a. Cash Book showed a Debit Balance of Rs 2,50,000

b. Certain Cheques of Rs 75,000 were deposited on 29 th March 2009; however cheques of Rs
25,000 were cleared in the month of April.
c. Three cheques of Rs 5,000 Rs 15,000 and Rs 25,000 were issued in the month of March
however only first Cheque of Rs 5,000 were presented in the month of March.
d. Mr Gupta one of Customer Deposited Rs 30,000 directly into Bank.
e. Bank Paid Rs 15,000 for telephone charges directly which is not known to us.
f. Bank credited interest Rs 1,000
g. A cheque of Rs 25,000 was deposited in Bank but it became dishonoured and its intimation
is not received from Bank.
h. A cheque Received from customer is recorded in bank column of cash book but not sent to
bank for payment.
i. Bank Debited Rs 500 for annual charges.

- 264 -
 NON-PROFIT ORGANISATION

SAI KRIPA
Non-profit organisation

Topics to be covered
• Preparation of Receipts and payment account.
• Preparation of Income and Expenditure account.
• Income and Expenditure adjustment.
• Preparation of income and expenditure from receipt and payment account

TOPIC – 1
Preparation of Receipts and Payment Account

Steps in the preparation of receipts and payment account

a. Take the opening balance of cash in hand and cash at bank and enter them on the debit side. In
case there is bank overdraft at the beginning of the year enter the same on the credit side of
this account.
b. Show the total amount of the all receipts on its debit side irrespective of their nature and
whether they pertain to past, current and future period.
c. Show the total amount of all payment on its credit side irrespective of their nature and whether
they pertain to past, current and future period.
d. None of receivable income and payable expanses is to be entered in this account as they do not
involve inflow and outflow of cash.
e. Find out the difference the total of debit side and the total of credit side of the amount enter
the same of the credit side as the closing balance of cash/bank. In the case the total of the credit
side is more than of the total of the debit side show the difference on the debit as bank
overdraft at the closing the account.

Format of Receipt and Payment Account

Receipt and Payment A/C

Receipt Amount Payment Amount
To Balance b/d By Balance b/d (bank xxxx
- Cash in hand : overdraft) xxxx
xxxx xxxx By Wages and salaries xxxx
- Bank : xxxx By Rent xxxx
xxxx xxxx By Rates and taxes xxxx
To Subscription xxxx By Insurance xxxx
To General Donation xxxx By Printing and stationery xxxx
To Sale of newspaper xxxx By Waste paper xxxx
To Sale of old sport materials By Postage and courier xxxx
To Interest on fixed deposit xxxx By Advertisement xxxx
To Interest/Dividend on general xxxx By Sundry expanses xxxx
investment xxxx By Telephone charge xxxx
To Locker rent xxxx By Entertainment expanses xxxx
To Sale of scraps xxxx By Audit expanses xxxx
To Honorarium received xxxx By Honorarium xxxx
To Proceeds from charity show xxxx By Repair and renewals xxxx
To Miscellaneous receipts xxxx By Upkeep of ground xxxx
To Grant-in-aid xxxx By Conveyance xxxx

- 265 -
 NON-PROFIT ORGANISATION

To Legacies xxxx By Newspaper and periodicals xxxx

To Specific donation xxxx By Purchases of assets xxxx
To Sale of investment xxxx By Purchases of investment
To Sale of fixed assets xxxx
To Life membership fees By Balance c/d
To Entrance fees xxxx - Cash in hand: xxxx
To Receipts on account of xxxx
specific purpose fund xxxx - Cash at bank:
To Interest on specific fund xxxx
investment xxxx

To Balance b/d (bank overdraft) xxxxx xxxxx

Important Terms

a. Subscription: - Subscription is an annual membership fees which is paid by all members and
it is an Income of the Non-Profit Organisation. It is the basic source of earning of a NPO.

b. Donation: - Donation is an amount which is received to the NPO from outsiders which are
not its member. Donation received by the NPO can be a General Donation or Specific
Donation. General donation can be used for any purpose and that’s why it treated as
“Income“ of the NPO. However in case of specific donation the donor specified the purpose
for which it has to be use such as Match Fund, Sports Fund, Building Fund etc. the amount
received for specific donation will be treated as “Liability” of the NPO.

c. Honorarium: -Honorarium is paid/ received for any special service such as guest lecture,
guest appearance, Chief Guest etc. if it is paid by NPO than it is a Expense and NPO received
it than it become an Income of NPO.

d. Legacies: - Legacy is an amount which is received under any will. Sometime some peoples
remit their income/ money to NPO under their Will and it became an Income of NPO.

e. Life Membership Fees: - If NPO received a Life membership fees from its member than it
became a Liability of a NPO.

f. Entrance Fees: - Entrance Fees is paid by the member during his admission into the NPO.
This amount is capitalised by NPO and became a Liability of NPO.

Example – 1
From the following particular relating to Silver point, prepare a receipts and payment account for the
year ending 31.3.2010.

Particular Amount Particular Amount

Opening cash bal. 1000 Sport materials purchase 4800
Sale of old sport materials 7200 Purchase of refreshment 600
Subscription: Expanses for maintenance of
2009 tennis court 2000
500 Salaries paid 2500
2010 9000 Tournament expanses 2400
7600 1000 Furniture purchases 1500

- 266 -
 NON-PROFIT ORGANISATION

2011 1000 Office expanses 1200

900 4600 Cash in hand 400
Sale of the refreshment 3000
Entrance fees received
Donation received from pavilion
Rent paid
Solution
Receipt and Payment A/C
In the books of Silver Point as on 31st March 2010
Receipt Amount Payment Amount

TOPIC – 2
Preparation of Income and Expenditure Account

Steps in the preparation of income and expenditure account

a. Prepare the receipts and payment account thoroughly.
b. Exclude the opening balance of cash and bank as they are not an income.
c. Exclude the capital receipts and capital payment as these are to be shown in the balance
sheet.
d. Consider only the revenue receipts to be shown on the income side of the income and
expenditure account. Some of this need to be adjusted by excluding the amount relating to
the preceding and the succeeding period and including the amount related to the current
year not yet received.
e. Take the revenue expanses to the expenditure side of the income and expenditure account
with due adjustment as per the additional information provided relating to the amount
received in the advance and those yet not received.
f. Consider the following item not appearing in the receipts and payment account that need to
be taken in to account for determine the surplus/deficit for the current year:
- Depreciation of the fixed assets.
- Provision for doubtful debts.

- 267 -
 NON-PROFIT ORGANISATION

- Profit and loss sale of fixed assets.

Distinction between income and expenditure account and receipts and payment account

Basis of distinction Income and expenditure account Receipts and payment account

Nature It is like as profit and loss account. It is the summery of the cash book.
Nature of item It record income and expenditure of It is record receipts and payment of
revenue nature. revenue as well as capital nature.
Period Income and expenditure item relate Receipts and payment may also
only to the current period. relate to preceding and succeeding
Debit side Debit side of this account record periods.
expanses and losses. Debit side of this account record the
Credit side Credit side of this account record receipts.
income and gain. Credit of this account record the
Depreciation Includes depreciation. payment.
Opening balance There is not opening balance. Does not include depreciation.
Balance at beginning represent cash
in hand / cash at bank or overdraft
at the beginning.
Closing balance Balance at the end represents excess Balance at the end represent cash
of the income over expenditure or in hand and cash at bank balance or
vice-versa. bank overdraft.

Format of Receipt and Payment Account

Income and Expenditure A/C

Expenditure Amount Income Amount
To Printing and stationary Xxxx By Subscription xxxx
To Lighting xxxx By Entrance fees xxxx
To Rates and taxes xxxx By Interest on investment on
To Telephone charge xxxx government securities xxxx
To Postage and courier charger xxxx By Locker rent xxxx
To Wages and salaries xxxx
To Insurance premium xxxx By Deficits (Bal. Fig) xxxx

To Surplus (Bal. Fig) xxxx

xxxxx xxxxx
Example – 2
From the under mentioned Receipts and payment account for the year ending March 31.3.2009 of
Nagi club, prepare an income and expenditure account for the same period:
RECEIPTS AND PAYMENT ACCOUNT FOR THE YEAR ENDING MARCH 31.2009
Receipts Amount Payment Amount
To Balance b/d 25000 By Purchase of the furniture 5000
To Subscriptions 12000 By Salaries 2000
To Donation 2000 By Telephone expanses 300
To Hall rent 300 By Electricity charges 600
To Interest on bank deposits 450 By Postage and stationery 150
To Entrance fees 1000 By Purchases of book 2500

- 268 -
 NON-PROFIT ORGANISATION

By Entertainment expanses 900

By Purchases of 5% government
paper (1.7.08) 8000
By Miscellaneous expanses 600

By Balance c/d
Cash:
300 20700
Bank:
20400
40750 40750
The following additional information is available:
a. Salaries outstanding Rs 1500.
b. Bank interest receivable Rs 150.
c. Entertainment expanses outstanding Rs 500.
d. 50% of entrance fees is to be capitalized.
e. Furniture is be depreciated at 10% p.a.

Solution
Income & Expenditure A/C
Expenditure Amount Income Amount

TOPIC – 3
Income and Expenditure Adjustments

Subscription Treatment

Example – 3

- 269 -
 NON-PROFIT ORGANISATION

A club received Rs 20000 as subscription during the year 2005-06 of which Rs 3000 relate to year
2004-05 and Rs 2000 to 2006-07 and at the end year 2005-06 Rs 6000 are outstanding.

Solution
Income & Expenditure A/C
Expenditure Amount Income Amount

Example – 4
As per receipts and payment accounts for the year ended on 31.3.2006 the subscription received
were Rs 250000. Additional information given as:
- Subscription outstanding on 1.4.2005 Rs 50000
- Subscription outstanding on 31.3.2006 Rs 35000
- Subscription received in advance as on 1.4.2005 Rs 25000
- Subscription received in advance on 31.3.2006 Rs 30000
As certain the amount of income and subscription for the year 2005-06 and show how to relevant
item of the subscription appear in opening and closing balance sheet.

Solution
Income & Expenditure A/C
Expenditure Amount Income Amount

Closing Balance sheet

As on 31st March 2006
Liabilities Amount Assets Amount

Opening Balance sheet

As on 31st March 2005
Liabilities Amount Assets Amount

- 270 -
 NON-PROFIT ORGANISATION

Example – 5
Extracts of receipts and payment account for the year ended 31.3.2006 are given below:
Receipts
Subscription Rs
2004-05 2500
2005-06 26750
2006-07 1000
Total 30250

Additional information:
- Total no. of member is 230.
- Annual member fees 125.
- Subscription outstanding on 1.4.2005 is Rs 2750.

Solution
Income & Expenditure A/C
Expenditure Amount Income Amount

Closing Balance sheet

As on 31st March 2006
Liabilities Amount Assets Amount

Opening Balance sheet

As on 31st March 2005
Expenditure Amount Income Amount

Example – 6
From the following extract of receipts and payment account and the additional information given
below, compute the amount of income and shown as how ending 31.3.2007 and the balance sheet
on that date:

- 271 -
 NON-PROFIT ORGANISATION

Receipts and payment account for the year ending 31.3.2007

Receipt Amount Payment Amount

Subscription
2005-06 7000
2006-07 30000
2007-08 5000 42000
Additional information:
1. Subscription outstanding 31.32006. Rs 8500
2. Total subscription outstanding 31.3.2007. Rs 17,500
3. Subscription received in advance as on 31.3.2006. Rs 2500

Solution
Income & Expenditure A/C
Expenditure Amount Income Amount

Closing Balance sheet

As on 31st March 2006
Liabilities Amount Assets Amount

Opening Balance sheet

As on 31st March 2005
Liabilities Amount Assets Amount

Example – 7
From the following extract of receipts and payment account and the additional information given
below, compute the amount of expenditure in salaries and shown as how ending 31.3.2010 and the
balance sheet on that date:
Receipts and payment account for the year ending 31.3.2007
Receipt Amount Payment Amount
By Salaries 32,000

Outstanding For 2006-07 :- Rs 3000

Outstanding For 2005-06 :- Rs 2500
Prepaid Of 2005-06 :- Rs 1500
Prepaid Of 2006-07 :- Rs 3500

- 272 -
 NON-PROFIT ORGANISATION

Solution

Income & Expenditure A/C

Expenditure Amount Income Amount

Closing Balance sheet

As on 31st March 2011
Liabilities Amount Assets Amount

Opening Balance sheet

As on 31st March 2010
Liabilities Amount Assets Amount

Donation/ Fund Treatment

If a NPO receive a Specific donation or Fund than that same has to be kept by it in its Liabilities until
they has used for the said specified purpose. However NPO can invest such amount in F.D or bank to
earn interest than in such case “all the income from such Fund will be added in the fund and All the
Expenses will be deducted from Fund.”

Example – 8
Show how you would deal with following item in the final account of a club.
Details Dr Cr
Prize fund 80000
Prize fund investment 80000
Income from prize fund investment 8000
Prizes awarded 6000
Solution
Closing Balance sheet
As on 31st March 2011
Liabilities Amount Assets Amount

- 273 -
 NON-PROFIT ORGANISATION

Example – 9
Shown the following information in financial statement of a not-for-profit organization:
Details Amount (Rs.)
Match expanses 16000
Match fund 8000
Donation for match fund 5000
Sale of match tickets 7000
What will the effect, if match expanses go up by Rs.6000 other things remaining the same?

Solution
(Case - A)
Closing Balance sheet
As on 31st March 2011
Liabilities Amount Assets Amount

(Case - B)

Closing Balance sheet

As on 31st March 2011
Liabilities Amount Assets Amount

Income & Expenditure A/C

Expenditure Amount Income Amount

Consumption Treatment
Sometime question provides opening and closing stock of some items than in such case we have to
calculate consumption for such item by using following formula, if the opening balance and closing
balance of creditor is also given than we have to prepare Creditor account for calculating Puchase.

Consumption of Medicine = Opening Stock of Medicine + Purchase – Closing Stock of Medicine

- 274 -
 NON-PROFIT ORGANISATION

Example – 10
Extract of a receipts and payment account for the ended on March 31.2006.
Payment of stationery Rs 23000.
Additional information:
Details April 1.2005 March 31.2006
Stock of stationery 4000 3000
Creditor of the stationery 9000 2500

Solution
Income & Expenditure A/C
Expenditure Amount Income Amount

Note – 1
Creditor Account
Creditor A/C
8Particular Amount Particular Amount

Note – 2
Consumption of Stationary

Example – 11
Find out the cost of medicines consumed during 2005-06 from the following information:
Details Amount
Payment for purchases of medicines 370000
Creditor for medicines purchase
On 1.4.2005 25000
On 31.3.2006 17000
Stock of medicines
On 1.4.20005 62000
On 31.3.2006 54000
Advance of suppliers of medicines
On 1.4.2005 11500
On 31.3.2006 18200

Solution
Income & Expenditure A/C
Expenditure Amount Income Amount

- 275 -
 NON-PROFIT ORGANISATION

Note – 1
Creditor Account
Creditor A/C
Particular Amount Particular Amount

Note – 2
Advance Account
Advance to Supplier A/C
Particular Amount Particular Amount

Note – 3
Consumption of Medicine

Example – 12
Following is the Receipts and payment account of an Entertainment Club for the period 1.4.2006 to
31.3.2007.
Receipts and payment account for the ending year 31.3.2007
Receipts Amount Payment Amount
To Balance b/d By Salaries 24000
Cash 27500 By Electric bill 21000
Bank 60000 87500 By Food stuff for restaurant 60000
To Member’s subscription By Telephone bill 35000
2005-06 12500 By Subscription for periodicals 14500
2006-07 100000 By Printing and stationery 13000
2007-08 10000 122500 By Sport expanses 50000
To Sale of the furniture By Secretary honorarium 30000
(book value Rs.8000) 10000 By 8% investment (30.9.2006) 100000
To Sale of food stuffs 100000
To Sale of old periodicals and By Balance c/d
newspaper 3200 Cash 21500
To Hire of the ground used to for Bank 66500
marriage 48750 45000
To Donation of sport fund 25000
To Locker rent 17050

- 276 -
 NON-PROFIT ORGANISATION

414000 414000

Additional information:
a) During 2006-07 the club had 225 member each paying annual subscription of Rs.500. out of
30 members who had not paid annual subscription during of 2005-06. 25 members cleared
their arrears in 2006-07 and the arrears of the remaining 5 member who left the club on
1.4.2006 were treated as irrecoverable.
b) During 2006-07 an amount of Rs.35000 was deposited with MTNL delhi for adjusted of the
telephone bills. On 31.3.2007 the following statement was received from the telephone
office:
- Amount deposited 35000
- Interest on deposited 3000
- Less: telephone rent and bills for 2006-07 22000
- Balance of deposited on 31.3.2007 16000
c) Stock of the foodstuff for restaurant run the club amount to Rs 16000 and Rs 18000 at the
ended of 2005-06 and 2006-07 respectively.
d) Advance payment of subscription for periodicals, magazines, newspaper amounted to Rs
3000 and Rs.2500 at the end of 2005-06and 2006-07 respectively.
e) On a April 1.2006 other balance were as under:
a. Furniture 100000
b. Building 650000
c. Sports fund 15200
f) Depreciate Furniture and building @12.5% and 5% respectively.
Prepare income and expenditure account and balance sheet as on 31.3.2007.

Solution
Income & Expenditure A/C
Expenditure Amount Income Amount

- 277 -
 NON-PROFIT ORGANISATION

Closing Balance sheet

As on 31st March 2007
Liabilities Amount Assets Amount

Working Notes
Note -1
Opening Balance sheet

Opening Balance sheet

As on 31st March 2006
Liabilities Amount Assets Amount

Note – 2
Consumption of Food Stuff

- 278 -
 NON-PROFIT ORGANISATION

TOPIC – 4
PREPARATION OF INCOME AND EXPENDITURE FROM RECEIPT AND PAYMENT ACCOUNT

Example – 13
On the basis of the following information, calculate the amount paid for stationary for the year ended
31st March, 2010.
Particulars Amount
Stock of stationery on April 1,2009 3,000
Advance given to creditor on April 1, 2009 1,200
Creditors for stationery on April 1,2009 3,000
Amount of Stationary shown in Income and Expenditure during the year 2009-10 15,500
Advance given to creditor on 31st March, 2010 2,500
Stock of stationery on 31st March,2010 700
Creditors for stationery on 31st March,2010 2,500
Solution

Creditor for refreshment

Particular Amount Particiular Amount

Advance for refreshment

Particular Amount Particular Amount

Example – 14
Extracts of Income and Expenditure account for the year ended 31.3.2012 are given below:
Receipts
Income & Expenditure A/C
Expenditure Amount Income Amount

- 279 -
 NON-PROFIT ORGANISATION

By Subscription A/C 500,000

Additional information:
- Total no. of member is 5000.
- Annual member fees Rs 100.
- Subscription outstanding on 1.4.2011 is Rs 30,000.
- Subscription received in advance on 1.4.2011 is Rs 50,000.
- Subscription received in advance on 31.3.2012 is Rs 65,000.
- Subscription Received during the year amounted to Rs 525,000

Solution

Example – 15
Following is the Income and Expenditure account of a “Cricket Sports Club” for the period 1.4.2009
to 31.3.2010.
Expenditure Amount Income Amount
To Cricket Match Exp over & By Subscription :-
above donation 5,000 145,000
To Salary (+) outstanding of P/Y
6000 12,000
(-) prepaid of C/Y 6,200 (-) outstanding of C/Y 140,000
(800) 12,500 (15,000) 80,000
(+) prepaid of P/Y 84,000 (+) Advance of P/Y 4,000
1000 15,500 5,000
To Electricity Bill (-) Advance of C/Y 12,000
To consumption of refreshment (13,000)
To Telephone Bill 5,700 By Sale of refreshment
To Printing and Stationary By sale of old newspaper
5500 By Interest on Investment
(+) outstanding of C/Y 5,700 8,000
1200 5,000 (+) Acurred of C/Y
96,400 4,000

- 280 -
 NON-PROFIT ORGANISATION

(-)outstanding of P/Y
(1000)
To Depreciation
On Furniture
2700
On Machinery
3000
To Honorarium
To Surplus
244,000 244,000
Additional information:

- Following balances appears on the 31st march of each year:

Particulars 31.03.2009 31.03.2010
Outstanding Subscription 13,500 16,500
Subscription received in advance 5,000 13,000
Outstanding printing and stationary
exp. 1,000 1,200
Salary paid in advance 1,000 800
Creditor for refreshment 3,000 6,000
Stock of refreshment 22,000 6,000
12% Investment 100,000 100,000
Donation for cricket Match 8,000 -
Machinery 30,000 100,000
Cash 30,000 9000
Bank overdraft 5,500 ?

- Charge depreciation on Furniture and Machinery @12% and 10% respectively.

- Sale of old motor car for Rs. 25000 at cost.
- Furniture purchased on 1.10.2009 for Rs. 45,000
- Machinery purchased on 31.03.2009 for Rs. 70,000

Prepare receipts and payment account and balance sheet as on 31.3.2010.

Solution
Receipt and Payment A/C
Receipt Amount Payment Amount

- 281 -
 NON-PROFIT ORGANISATION

Closing Balance sheet

As on 31st March 2010
Liabilities Amount Assets Amount

Working Notes
Note -1
Opening Balance sheet
Opening Balance sheet
As on 31st March 2009
Liabilities Amount Assets Amount

Note -2
Consumption of Refreshment
Creditor for refreshment

- 282 -
 NON-PROFIT ORGANISATION

Particular Amount Particiular Amount

Note -3
Subscription Treatment

Note -4
Salary paid

Note -5
Printing and stationary paid

Example – 16
From the following data, prepare an Income and Expenditure Account for the year ended 31st
December. 2005, and a statement of affairs as at that date of the Mayura Hospital:

- 283 -
 NON-PROFIT ORGANISATION

Receipts and Payments Account for the year ended 31 December, 2005
To Balances Rs. By Salaries: (Rs. 3,600 for 2004) 15,600
Cash 400 Hospital Equipment 8,500
Bank 2,600 3,000 Furniture purchased 3,000
To Subscriptions: Additions to Building 25,000
For 2004 2,550 Printing and Stationery 1,200
For 2005 12,250 Diet expenses 7,800
For 2006 1,200 16,000 Rent and rates (Rs. 150 for 2006) 1,000
To Government Grant: Electricity and water charges 1,200
for building 40,000 office expenses 1,000
for maintenance 10,000 Investments 10,000
Fees from sundry patients 2,400 Balances:
To Donations (not to be capitalised) 4,000 Cash 700
To Net collections from benefit shows 3,000 Bank 3,400 4,100
78,400 78,400

Additional Information:
- Value of building under construction as on 31.12.2005 : 70,000
- Value of hospital equipment on 31.12.2005 : 25,500
- Building Fund as on 01.01.2005 : 40,000
- Subscriptions in arrears as on 31.12.2004 : 3,250
- Investments in 8% Govt, securities were made on 1" July, 2005.

Example – 17
The following is the Income and Expenditure Account o Gorakhpur Club for the year ended 31st
March, 2008:

Expenditure Amount Income Amount

To Salaries 15,750 By Subscription 55,000
To Stationery 1,250 By Donation 7,500
To Rates and Taxes 6,210 By Profit on annual meet 16,000
To Postage, Telephone etc. 2,520 By Sale of souvenirs 5,250
To Sundry Expenses 8,210 By Profit on sale of
To Repairs and Maintenance 5,260 Billiards table 1,410
To Table Tennis Balls 1,210
To Printing of Souvenir 2,500
To Affiliation Fee to Main Club till
31.3.2008 500
To Electricity 6,250
To Water Charges 1,210
To Billiard Room Expenditure 2,460
To Depreciation on Sundry Assets 1,560
To Surplus 30,270

85,160 85,160

The following further information is available:

Particulars 1.04.2007 31.03.2008
Sundry Assets 46,500 47,650

- 284 -
 NON-PROFIT ORGANISATION

Outstanding Subscriptions 1,560 2,610

Advance Subscriptions 2,500 1,600
Expenses Outstanding
Printing and Stationer 150 210
Telephone Bills 220 240
Electricity 125 225
Due towards purchase of Billiards Balls - 165
Office Bearers' Fund 3,465 4,260

The Billiard Table was used for six months during the year and its book value was Rs. 10,240 as on
30th Sep 2007.
The club is affiliated to the Main Club. It has paid-year's subscription in advance Rs. 1,000. Out of the
donation, a-sum of Rs. 1,000 announced at the Annual Meet was duly taken into account but had
not been received till 31st March, 2008.
All amounts received towards Office Bearers' Fund were credited to the Fund and the expenses
amounting Rs. 2,785 were also charged to the Fund directly.

From the above particulars prepare a Receipts and Payments Account for the year and draw the
Balance Sheet as on 31st March, 2008

Example – 18
Following is the Receipts and Payment Account of Mayur Club for the year ended 31 March, 2008:.

Receipts Amount Payments Amount

Opening balance (1.4.2007) 39,100 Sports materials 304,500
Cash on hand 50,000 Salaries 315,000
Cash at bank Equipment purchased 60,000
Subscriptions Bank fixed deposit on
For the year: 2006 - 07 : 31.3.2008 150,000
18,000 Rent
For the year: 2007 - 08 : 985,500 148,500
Ground maintenance 22,120
963,000
45,000 Insurance 38,400
For the year: 2008 - 09 :
Stationery
4500 3,450
Sundry expenses
Interest on bank Fixed deposits @ 5,880
Closing balance as on
10%
31.3.2008
Cash on hand :
31,700 71,700
Cash at bank :
11,19,600 40,000 11,19,600

Following additional information is provided to you:

- The Club has 220 members. The annual subscription is Rs 4,500 per member.
- Depreciation to be provided on furniture @ 10% and on sports equipment @ 5% p.a.
- On 31st March, 2008, Stock of sports material in hand (after members use during the year) is
valued at Rs 78,000 and stock of stationer at Rs 3,150.
- Rent for 1 month is outstanding
- Unexpired insurance amounts to Rs. 9,600.
- On 31st March, 2007 the Club had the following Assets:
• Furniture : 270,000
• Sports equipment : 180,000

- 285 -
 NON-PROFIT ORGANISATION

• Bank fixed deposit : 450,000

• Stock of stationery : 1,500
• Stock of sports material : 73,500
• Unexpired insurance : 8,400
• Subscription in arrear : 22,500

Note: there was no liability on 31.3.2007

Your are required to prepare:
i. Income and Expenditure Account
ii. Balance sheet as at 31st March 2008

Example – 19
From the following Income & Expenditure A/c of Premium Sports Club for the year ended 31st
March, 2012, you are required to prepare Receipts & Payment A/c for the year ended 31st March,
2012 and Balance Sheet

Expenditure Amount Income Amount

To Salaries 118,800 By Subscription 420,000
To Rent 216,000 By Entrance Fee 120,000
To Printing & Stationery 28,000 By Profit on sale of Sports
To Postage & Telephone 41,600 Material 5,500
To Membership Fee 3,200 By Interest on 8% Govt.
To Electricity Charges 38,500 Bonds 12,000
To Garden Upkeep 19,300 By Sale of Old Newspaper 11,600
To Sports Material Utilized
62,800
To Repairs & Maintenance
To Depreciation 18,700
13,000
To Miscellaneous Expenses
5,700
To Surplus
3,500

569,100 569,100

The following information is provided to you:

Particulars 1.04.2011 31.03.2012
Fixed Assets 240,000 ?
Bank Balance 8,300 ?
Stock of Sports Material 43,450 35,670
Outstanding Subscription 10,200 5,700
Subscription received in advance 2,400 4,900
8% Government Bond 150,000 150,000
Outstanding Salaries 16,000 14,300
Outstanding Rent 21,000 15,000
Advance for Stationery 1,350 1,550
Outstanding Repairs & Maintenance 1,200 Nil
Creditors for purchase of Sports Material
3,400 4,200

- 286 -
 NON-PROFIT ORGANISATION

- Some of Fixed Assets were purchased on 01.10.2011 and depreciation to be charged @5%
p.a.
- Sports Material worth 72,000 was purchased on credit during the year.
- The Club became member of State Table Tennis Association on 01.01.2012 when it paid fee
up to 31.12.2012.
- 50% of Entrance Fee is to be capitalized.
- Interest on 8% Government Bonds was received for two quarters only
- A fixed deposit of Rs 80,000 were made on 31st March 2012

Example – 20
The following is the Income and Expenditure Account of a charitable hospital for the year 2005:
Expenditure Rs Income Rs
Salaries 23,500 Subscriptions 22,000
Diet expenses 2,000 Donations 4,000
Rent 500 Interest on investments
Insurance 200 for one year @ 5% 9,000
Office expenses 800 Miscellaneous receipts 600
Surgery and Dispensary
Expenses 1,000
Depreciation on :
Building 3,750
Furniture 120
Instruments HQQ 4,670
Surplus 2,930
35,600 35,600
Additional Information:

Cash in hand on 31-12-2004 200

Cash at bank on 31-12-2004 5,400
Building on 31-12-2004 75,000
Furniture on 31-12-2004 2,000
Instruments on 31-12-2004 3,500
Subscriptions outstanding on 31-12-2004 1,500
Salaries outstanding on 31-12-2004 1,800
Subscriptions received in advance on 31-12-2004 600
Subscriptions received in advance on 31-12-2005 800
Subscriptions outstanding on 31-12-2005 4,500
Salaries outstanding on 31-12-2005 2,000
Instruments purchased during the year 500
Cash in hand on 31-12-2005 150

You are required to prepare the Receipts and Payments Account for the year 2005 and a Balance
Sheet of the hospital as at 31 December 2005. Also show your workings.

Example – 21
From the following Income and Expenditure Account and the Balance Sheet of club. Prepare Its
Receipts and Payments Account and Subscriptions Account for the year ended 31-3-2005:
Income and Expenditure A/C
For the year 2004-05

- 287 -
 NON-PROFIT ORGANISATION

Expenditure Amount Income Amount

To Upkeep of ground 10,000 By Subscription 17,320
To printing 1,000 By sale of old newspaper 260
To salaries 11,000 By lecture 1,500
To Depreciation of furniture 1,000 By Entrance fees 1,300
To Rent 600 By misc. income 400

By Deficit 2820

23,600 23,600

Balance sheet
31.03.2005
Liabilities Amount Assets Amount
Subscription in advance 100 Furniture 9,000
Prize Fund: Grounds and building 47,000
25,000 Prize Fund Investment 20,000
Add: Interest 24,000 Cash in hand 2,300
1,000 Subscription 700
Less: Prize awarded
(2,000) 53,600

Capital Fund : 1,300

56,420
Less: Deficit 79,000 79,000
(2820)

Entrance Fees

The following adjustments have been made in the above accounts:

i. Upkeep of ground Rs 600 and Printing Rs 240 relating to 2003-04 were paid in 2004-05
ii. One-half of entrance fees have been capitalised
iii. Subscriptions outstanding in 2003-04 were Rs 800 and for 2004-05 Rs 700.
iv. Subscriptions received in advance in 2003-04 were Rs 200 and in 2004-05 for 2005-06 Rs
100.

Example – 22
The following are the Receipts and Payments Account and Income and Expenditure Account of a club
for the year ending December 31, 2005
Receipts and Payments A/C
31 December 2005
Particulars Amount Particulars Amount
To Balance b/d 7,600 By Salaries 4,800
To Entrance fees 5,200 By Insurance 1,000
To Subscriptions By Rates and taxes 1,400
(including for 2004 Rs 1,500) 17,000 By Addition to library on
To Proceeds from sale of old 31-12 2005 2,500
newspapers 120

- 288 -
 NON-PROFIT ORGANISATION

To Rent of library hall By Payments of creditors of 1,300

(including for 2004 Rs 700) 2,080 last year 100
To Proceeds from lectures and By Postage 500
entertainment 6,000 By Repairs 800
To sale of old furniture 300 By Printing and stationery
By Electric installation 9000
expenses
By Sundry expenses (including 4,300
outstanding) 12,600
By Balance c/d
38,300 38,300

Income and Expenditure A/C

31st December 2005
Expenditure Amount Income Amount
To Salaries 4,800 By Entrance Fees 5,200
To Rates and Taxes 1,400 By Subscriptions 17,700
To Insurance 650 By Rent of Library Hall 2,130
To Repairs 500 By Sale of old newspapers 120
To Printing and Stationery 800 By Proceeds from lectures and
To Postage 100 entertainment 6,000
To Sundry expenses 1900
To Depreciation
Building @ 2.5% :
700
Library Books @ 10% : 4,570
3,370 50
Investment @ 5% :
500 16,380
To Loss on sale of old furniture
31,150 31,150
To Surplus

The club sold all its furniture during the year to replace them by new ones.
Prepare opening and closing balance sheet.

Example – 23
The following particulars relate to Delhi Sports Club: Income and Expenditure Account for the Year
Ended 31 December, 2005 as follows:
Income and Expenditure A/C
31st December 2005
Expenditure Amount Income Amount
To Salaries 1,500 By Entrance Fees 10,500
To Stationery 2,200 By Subscriptions 15,600
To Advertising 1,600 By Rent 4,000
To Audit Fees 500
To Fire Insurance 1,000
To Depreciation on Sports 9,000

- 289 -
 NON-PROFIT ORGANISATION

To Surplus 14,300

30,100 30,100

Receipts and Payments Account For the Year Ended 31 December, 2005
Particulars Amount Particulars Amount
To Balance B/D 4,200 By Salaries 1,000
To Entrance Fees 10,500 By Stationery
To Subscriptions 2004 :
2004 : 400 2,600
600 2005 : 1,600
2005 : 16,000 2,200 1,200
15,000 3,500 By Advertising 20,000
2006 : By Fire Insurance 7,800
400 By Investment
To Rent 34,200 By Balance C/D 34,200

The assets on 1 January 2005 included club grounds and pavilion Rs 44,000; Sports equipment Rs
25,000 and furniture Rs 4,000. Subscriptions in arrears on that date were Rs 800.

Prepare:
Balance Sheet as on 31 December, 2004.
Balance Sheet as on 31 December 2005.
Have you any suggestion regarding Club's Furniture Account?

Example – 24
From the given income and expenditure account and receipt and payment account. Prepare opening
and closing balance sheets.
Income and Expenditure A/C
31st December 2005
Expenditure Amount Income Amount
To Salaries By Subscriptions 8,000
11,000 12,000 By Medical Fees 14,000
Add: outstanding :
1000
1,370
To Insurance
1,500 6,000
Less : prepaid :
(130) 2,630

To Medicines 22,000 22,000

To Surplus

Receipts and Payments Account For the Year Ended 31 December, 2005
Particulars Amount Particulars Amount
To Balance B/D 3,000 By Salaries 12,000
To Subscriptions 9,500 By Insurance 1,500

- 290 -
 NON-PROFIT ORGANISATION

To Medical fees 14,000 By Medicines 6,000

To Donation 5,500 By Medical Equipment 5,000
By Investment 5,000
By Balance C/D 2,500

32,000 32,000

Opening balances as on 1-1-2005:

- Medical equipment 32000
- Furniture 5,000
- Cash 3,000
- Outstanding subscriptions 1,000
- Outstanding salary 1,000

Example – 25
From the following information relating to Young Boys Club. Prepare balance Sheet as on 1 April
2005 and as on 31 March 2006:
- Club's Assets as on 1-4-2005
- Club Grounds and Pavilion 50,000
- Sports Equipments 30,000
- Furniture 7,000
- Stock of stationery 1,000
- Subscriptions Receivable 1,200

Receipts and Payments Account For the Year Ended 31 March, 2006
Particulars Amount Particulars Amount
To Balance B/D 5,000 By Salaries 10,000
To Entrance Fees 12,000 By Stationery 3,000
To Subscriptions By Audit fees 1,000
2004 -2005 : By Advertising 2,000
900 By Fire Insurance 1,500
2005-2006 : 19,400 By Furniture 2,000
18,000 2,200 By Investment 18,000
2006-2007 : 300 By Balance C/D 1,400
500
To Rent 38,900 38,900
To Sale of news paper

Income and Expenditure A/C

31st March 2006
Expenditure Amount Income Amount
To Salaries 11,000 By Entrance Fees 12,000
To Stationery 2,800 By Subscriptions 19,000
To Advertising 3,000 By Rent 2,400
To Audit Fees 1,500 By Sale of newspaper 300
To Fire Insurance 1,200
To Depreciation on Sports
equipment 5,000
To Depreciation on Furniture 800

- 291 -
 NON-PROFIT ORGANISATION

To Surplus 8,400

33,700 33,700

Example – 26
The following are the items of receipts and payment account of bangali as summarised by the books
of accounts of the secretary:

Receipts and Payments Account For the Year Ended 31 December, 2005
Particulars Amount Particulars Amount
To Balance B/D 42,000 By Manager’s Salaries 10,000
To Entrance Fees By Printing & stationery 26,000
2004 : By Advertising 18,000
10,000 110,000 By Fire Insurance 12,000
2005 : By Investment 200,000
100,000 By Balance C/D 76,000
To Subscriptions
2004 : 160,000
6000 30,000
2005 :
150,000 342,000 342,000
2006 :
4,000
To Interest on Investment
It is ascertained from the enquiry that the following represented a fair picture of the income and
expenditure account for the year ended 2005 for audit purpose:

Income and Expenditure A/C

31st December 2005
Expenditure Amount Income Amount
To Manager’s Salaries 15,000 By Entrance Fees 105,000
To Printing & stationery : By Subscriptions 156,000
20,000 24,000 By Interest on investment 40,000
Add: outstanding : 16,000
4000 5,000
To Advertising (Accrual nil) 10,000
To Audit Fees 49,400
To Fire Insurance
To Depreciation 181,600

To Surplus 301,000 301,000

You are required to prepare the Balance Sheet of the Club as on 31-12-2004 and 31-12-2005, it being
given that the value of the fixed assets as on 31-12- 2004 were: Building-440,000; Cricket
equipment-Rs 250,000 and Furniture Rs 40,000. The rates of depreciation are: Building @5%, Cricket
equipment @ 10%, Furniture @ 6%. You are entitled to make assumptions as may be justified.

Example – 27

- 292 -
 NON-PROFIT ORGANISATION

Following are the Receipts and Payments and Income and Expenditure Account of Delhi Club for the
year ending 31 March, 2004.
Receipts and Payments A/c
Receipts Payments Rs
Balance Ltd 1,000 Ground Maintenance 1,200
Subscriptions Salary & Honorarium
2002-03 400 (including salary of
2003-04 10300 02-03 Rs 700/-) 1,800
2004-05 500 11,200 Water & Electricity 350
Legacy 800 Books out of Donation 3,000
Donation for Fixed Deposit out of
Library 7,000
Match Fund 3,300 Donation 4,000
Sale of Furniture 500 Match Expenses 2,200
Crockery 1,000
Food 2,000
Entertainment 2,000
Sports Materials 2,000
Balance Ltd 4,250
23,800 23,800

Income and Expenditure A/c for the year ending March, 2004
Expenditure Amount Income Amount
To Ground Maintenance 1,200 By Subscriptions 10,400
To Salary & Honorarium 1,800
To Entertainment 2,000
To Loss as Sale of Furniture 300
To Electricity & Water 350
To Sports Material used 75% of
total stock 2,010
To Food consumed 80% of total
stock 1,500

To Surplus 1,240
10,400
10,400

Additional information:
- Subscription outstanding on 31-3-03 Rs 550 estimated at Rs 500.
- Subscription outstanding on 31-3-04 Rs 120.
- Furniture on 31-3-03 Rs 3,000.
- Crockery on 31-3-04 Rs 2,500.
You are required to prepare balance Sheet as on 1-4-03 and 31 March 2004.

- 293 -
 REDEMPTION OF PREFERENCE SHARE

SAI KRIPA
REDEMPTION OF PREFERENCE SHARE

Topics to be covered
• Meaning & terms
• Journal Entries for Redemption of Preference Share

TOPIC – 1
MEANING & TERMS

Redemption of Preference Share

Preference shares can be redeemed by two methods that is it can be redeemed out of profit or they
can be redeemed out of fresh issue of shares.

Statutory requirements (section 80) regarding redemption of preference shares:

i. Preference shares can be redeemed either
ii. Out of the proceeds of the fresh issue of shares or
iii. Out of profits or
iv. A Combination of fresh issue and profits.
v. Only fully paid shares can be redeemed.
vi. If Redemption is made at premium, premium (Extra amount payable over the face value)
payable on redemption of preference shares must be provided out of the profits of the
Company or out of share premium A/c. before shares are redeemed.

Accounting for redemption out of profit:

i. Preference shares can be redeemed out of profits which otherwise would be available for
dividend payment, like P & L A/c. balance. General Reserve. Dividend equalisation fund etc.
ii. An amount equal to the Nominal Value of the shares being redeemed should be transferred
to capital Redemption Reserve a/c.
iii. This capital Redemption Reserve A/c. can be used only for issue of fully paid bonus shares.

TOPIC – 2
JOURNAL ENTRIES FOR REDEMPTION OF PREFERENCE SHARE
REDEMPTION OUT OF PROFIT
Journal Entries to be passed:
P & L A/c./Gen. Reserve A/c. Dr.
To Capital Redemption Reserve
A/c.
(Amount equal to Nominal value of Pref. Share being redeemed, transferred to C.R.R. A/c.)

Pref. share capital A/c. Dr. Pref. shares being redeemed.

Premium on Redemption A/c. Dr. Premium payable, if any.
To Preference shareholders A/c. Total amount due to Pref. shareholders

Share Premium/P & L A/c. Dr.

To Premium on Redemption A/c.
(Premium payable on redemption A/c. written off)

Pref. Shareholders A/c. Dr.

- 294 -
 REDEMPTION OF PREFERENCE SHARE

To Bank A/c.
(Amount paid)

If any shareholder is not traced out. Then the amount due to them will remain outstanding in Pref.
Shareholders A/c. Entry for payment will be passed for net amount paid but no other entry will
change.

REDEMPTION OUT OF FRESH ISSUE

i. The proceeds of the fresh issue of shares must be equal to or more than the nominal value
of the Preference shares to be redeemed.
ii. Proceeds for this purpose means:
iii. If shares are issued at par or at premium, then the face value of the shares is the proceeds.
• If issue is made at discount, then proceeds will mean face value minus discount.
• If the amounts are not fully called up, then only the amount called and received is
considered as proceeds.
iv. Students must have noted it is issue of shares equity or preference, but not Issue ol
debenture.

Journal Entries to be passed

Entries for the issue of fresh share capital will come as seen in the Issue of shares chapter.
Bank A/C Dr
To Share Capital A/C
To Security Premium A/C

Note: Rest entries are same as above except the capital reserve entry

Example – 1
Liabilities Rs. Assets Rs.
Share Capital Sundry Assets 34,00.000
Issued ami paid up Cash 6,00,000
10.000 8% Redeemable preference 10.00,000
shares of Rs.100 each
1.00.000 Equity Shares of Rs.10 each 10.00,000
Capital Reserve 5,00.000
General Reserve 2,00,000
Profit and Loss Account 9.50,000
Creditors 3.50.000
40.00,000 40,00,000

The Preference Shares were redeemable on 31-3-2006 at a premium of 25%. For the purpose, the
company decided to issue 50.000 Equity Shares of Rs. 10 each at a premium of Rs.4 per share payable
in full on 15-3-2006. Show the necessary entries.
Solution
Journal Entries
DATE PARTICULARS DR CR

- 295 -
 REDEMPTION OF PREFERENCE SHARE

Example – 2
The following balances extracted from the books of S Ltd.
➢ 11 % Redeemable Preference Shares of Rs. 100 each fully paid.
➢ 10% Redeemable Preference Shares of Rs. 100 each Rs.80 per share paid up.
➢ 4.000 Equity Shares of Rs. 10 each fully paid
➢ General Reserve Rs.70.000. Profit and Loss A/c. Rs.30,000
The preference Shares are redeemed at a premium of 10%. For this purpose, the company makes
the following issues.
i. 5,000 Equity Shares of Rs.10 each at a premium of 10%
ii. 1,000 8% Debentures of Rs.10 each.
Pass Journal Entries.
Solution
Journal Entries in the book of
S limited
DATE PARTICULARS DR CR

- 296 -
 REDEMPTION OF PREFERENCE SHARE

Example – 3
Foot fault Ltd. had equity capital of Rs.2.00.000 divided into shares of Rs. 100 each 11% cumulative
redeemable preference shares of Rs.100 each for Rs.1,00,000 and Rs.50.000 and Rs.40,000
respectively to the credit of profit and loss Account and General Reserves as on 31st March, 1990. It
had also Rs.8,000 to the credit of Share Premium Account.
As per the agreement with the preference shareholders, the Directors decided to redeem the shares
on 1 -4-1990 at a premium of 10%. It was also decided to sell certain investments whose book and
market value on 31 -3-1990 were Rs.40,000 and Rs.50.000 respectively to enable redemption .
For purpose of redemption, the Board decided to utilise free reserve to the minimum extent
possible. It was decided to issue right equity shares at a premium of 20% to finance the redemption.
Holders of 100 preference shares were not traceable.
Show the necessary journal entries to record the above transactions in the books of Foot fault Ltd.
and also how the items will appear on the Balance Sheet of the Company.

Solution
Journal Entries in the book of
Foot fault limited
DATE PARTICULARS DR CR

- 297 -
 REDEMPTION OF PREFERENCE SHARE

Balance Sheet
Liabilities Amount Assets Amount

Working Note

- 298 -
 REDEMPTION OF PREFERENCE SHARE

Example – 4
The following is the Balance Sheet of Trinity Ltd. as at 31J 1995:
Balance Sheet at on 31st March. 1995
Liabilities | Assets Rs.
Share Capital Fixed Assets
Authorised Gross Block 3.00.000
10,000 10% Redeemable LESS : Depreciation 1,00,000
Preference
Shares of Rs. 10 each 1.00.000 200,000
90,000 Equity Shares of Rs 10 each 9.00,000
Issued. Subscribed & paid up 10,00,000 Investments 1.20,000
capital
10,000 10% Redeemable Current Assets & loans & Advances
Shares of Rs 10 each
Preference 1.00.000 Inventory 25.000
10,000 Equity Shares of Rs.10 each 1.00,000 Debtors 25,000
Cash and Bank 50,000 1,00,000
Reserves and Surpluses 2,00.000 Balances
General reserve 1.20.000
Share Premium 70.000
Profit and Loss A/C 18.500
2.08,500
Current Liabilities and Provisions 11.500
Total 4,20,000 Total 4,20.000
The following additional information is available with regard to company's operation:
i. The company redeemed the preference shares at a premium of 10%
ii. To meet the cash requirement of redemption, the company sold a portion of the
investment, so as to leave a minimum cash of Rs 30,000 after such redemption.
iii. Investments were sold at 90% of cost on 31.3.1995.
You are required to
Prepare necessary journal entries to record redemption.

Solution

- 299 -
 REDEMPTION OF PREFERENCE SHARE

Journal Entries in the book of

Trinity Ltd limited
CASES PARTICULARS DR CR

Working Note

- 300 -
 SINGLE ENTRY SYSTEM

SAI KRIPA
SINGLE ENTRY SYSTEM

Topics to be covered
• Comparison method
• Conversion method

TOPIC – 1
COMPARISON METHOD
Under single entry system organisation does not any books of account related to double entry
system, under this method profit has been calculated by computing opening capital with closing
capital for this we have to prepare statement of profit and loss account.
Statement of Profit and loss Account
Particulars Amount
Opening Capital xxxxx
Add: Additional capital xxxx
Less: Drawings (xxxx)

Desired Closing Capital xxxxx

Actual Closing Capital xxxxx

Profit/Loss xxxxx

Example – 1
The Income Tax Officer, assessing the income of Shri Moti for the financial years
1997-98 and 1998-99 feels that Shri Moti has not disclosed the full income. He gives you the
following particulars of assets and liabilities of Shri Moti on 1st April 1997 and 1st April, 1999
For 1st Apr 1997
Assets
Cash in hand 25,500
Stock 56,000
Sundry Debtors 41,500
Land and Building 1,99,000
Wife's Jewellery 75,000
Liabilities
Owing to Moti's Brother 40,000
Sundry Creditors 35,000

For 1st Apr 1998

Assets
Cash in hand 16,000
Stock 91,500
Sundry Debtors 52,500
Land and Building 1,90,000
Motor Car 1,25,000
Wife's Jewellery 1,25,000
Loan to Moti's Brother 20,000
Liabilities
Sundry Creditors 55,000
During the two years the domestic expenditure was Rs.4000 p.m. The declared income of the
financial years were Rs 105,000 for 1997-98 and Rs 123,000 for 1998-99 respectively

- 301 -
 SINGLE ENTRY SYSTEM

State whether the Income-tax officer's contention is correct. Explain by giving your workings.

Solution
Statement of Profit and loss Account
Particulars Amount

Statement of Affair
Liabilities Amount Assets Amount

Statement of Affair
Liabilities Amount Assets Amount

Example – 2
V.P. Keeps his books in Single Entry System. On 1.1.92 his position was as follows:
Sundry Creditors Rs. 20,000; Cash in hand Rs. 300; Cash at Bank Rs. 10,500; Sundry Debtors Rs.
40,000; Stock Rs. 10,000; Plant Rs. 20,000.
On 31.12.1992 the position was as indicated below:
Sundry Creditors Rs. 35,000; Cash in hand 500; Cash at bank Rs. 22,000; Sundry Debtors Rs. 49,000;
Stock Rs. 12,000; Plant Rs. 45,000.

- 302 -
 SINGLE ENTRY SYSTEM

V.P. drew Rs. 500 at the end of every month. He introduced Rs. 25,000 by way of additional capital
Depreciate Plant at 10% and raises a reserve of 20 % against Sundry Debtors.
You are required to prepare a Statement of Profit and Loss for the year and a Statement of Affairs at
the year ending.

Solution
Statement of Profit and loss Account
Particulars Amount

Statement of Affair
Liabilities Amount Assets Amount

Statement of Affair
Liabilities Amount Assets Amount

Example – 3
The following is the Balance Sheet of M/s P.Q and R as on December 31,1990:
Balance Sheet
Liabilities Amount Assets Amount

- 303 -
 SINGLE ENTRY SYSTEM

Sundry Creditors 4,200 Cash in Hand 400

Bills Payable 2,800 Cash at Bank 3,800
P's Fixed Capital 15,000 Sunday Debtors 8,400
Q's Fixed Capital 10,000 Stock 6,700
R's Fixed Capital 5,000 Furniture & Fittings 2,000
P's Current Account 480 Machinery & Plant 16,000
Q's Current Account 340 R's Current Account 520

37,820 37,820
The partners share profits in the ratio of 3: 2:1 after charging 6% interest on capitals. During 1991
the drawings were p @ Rs. 400 per month; Q @ Rs. 300 per month and R @ Rs. 250 per month.

On 31st December, 1991 the various assets were: Cash in hand Rs. 300; Sundry Debtors Rs. 9,600;
Stock Rs. 10,200; Furniture & Fittings Rs. 1,800 and Machinery & Plant Rs. 25,000 Liabilities were:
Sundry Creditors Rs. 3,400; Bills Payable Rs. 2,400 and Bank Overdraft Rs. 6,000.
Ascertain the profit or loss made by the firm in 1991 and show the Balance Sheet on 31rt December,
1991.

Example – 4
A and B started business on January, 1 1983 with Rs. 50,000 as capital, contributed equally, but the
profit sharing ratio was 3:2. Their drawings were Rs 300 and Rs 200, p.m. respectively. They had kept
no account except the following information:

Outs Exps. 4,000 3,000

Machinery at Cost 20,000 25,000
Stock-in-trade 30,000 30,000
Debtors 50,000 60,000
Cash 2,000 500
Creditors 30,000 20,000
Bank Balance (as per pass book) 6,000 8,000
Provision is to be made for depreciation at 10% on the cost of machinery as at end of year. Debtors
on 31.12.83 include Rs. 5,000 for goods sent out on consignment at 25 per cent above cost and the
goods were not sold until 1984. A cheque for Rs. 1,000 had been deposited on 31.12.83 but was
credited on 2.1.84.
Cheque for Rs. 2,000 issued on 26.12.84 was presented on 3.1.85. A Cheque for Rs. 1000 was directly
deposited by a customer on 27.12.84. A Cheque for Rs. 500 deposited in Dec 1984 was dishonoured
but no adjustments for these were made.
Determine the profits for 1983 and 1984 draw up a Balance Sheet as at 31st December, 1984

Example – 5
Ramesh carries on business as dressmaker. He does not keep any accounts but wants to ascertain his
profit of loss for the year 1990. He gives you has idea of the assets and liabilities as on 31.12.1989;
and 31.12.1990 which is as follows:
31.12.1989 31.12.1990
Rs. Rs.
Cash in hand. 470 430
Bank Balance as per Pass Book 6,230 8,170
Book Debts 3,100 2,900
Stock in trade. 15,000 18,000
Investment in D.C.M. Debentures. 8,000 3,000
Equipment at cost. 6,000 10,000

- 304 -
 SINGLE ENTRY SYSTEM

Owing for Supplies. 5,000 6,000

On enquiry you find the following:

i. Certain cheques for payment for taxes amounting to Rs. 2,500 issued on 28.12.89 had not
been presented; these were paid in Jan. 1990.
ii. Stock in trade is valued at selling price; profit loading invoicing the mark up in 1989 has 25%
on selling price but during 1990 it was 25% on cost.
iii. Book debts on 31.12.89 include Rs. 1,000 for goods sent on sale or return basis, the
customers still having the right to return the goods.
iv. The investments are shown at face value, the purchase having been made at 95%.
v. Half the equipment as on 31.12.89 was purchased in 1988 and the remaining in 1989;
depreciation @ 10% p.a. on original cost on closing balance is charged.
vi. A cheque for Rs. 500 was returned by the bank dishonoured on 30th Dec. 1990 and a
customer had deposited Rs. 700 directly into the bank on the same date. Ramesh did not
know of these as yet.
vii. His drawings during 1990 have been at the rate of Rs. 500 p.m.
viii. A cheque issued for Rs. 3,100 for his income tax was not presented as on 31.12.1990. You
are requested to ascertain the profit earned or loss suffered by Ramesh in 1990.

Example – 6
Suresh does not maintain has books of accounts under the double entry system but keeps slips of
papers from which he makes up his annual accounts he has borrowed moneys from a bank to which
he has to render figures of profits every year. He has given the bank the following profit figures
Years Profit
1987 20,000
1988 32,000
1989 35,000
1990 48,000
1991 55,000

The bank appoint s you to audit the statements and verify whether the figures of profits reported
are correct or not for this purpose the following figures are made available to you :
i. Position as on 31* December 1986: Sundry debtors Rs. 20,000; Stock on trade (at 95% of the
cost) Rs. 47,500 Cash on hand and at Bank Rs. 12,600; Trade Creditors Rs. 6,000 Expenses
due Rs. 1,600.
ii. He had borrowed Rs. 5,000 from his wife on 30th September 1986 on which he had agreed to
pay simple interest at 12% p.a. The loan was repaid along with interest on 31* December 88.
iii. In December 1987, he had advanced Rs. 8,000 to A for purchase of vacant land. The property
was registered in March 1989 after payments of balance consideration of Rs. 32,000 Costs of
registration incurred for this were Rs. 7,500.
iv. Suresh purchased jewelry for Rs. 15,000 for his daughters in October 1989 marriage
expenses incurred in January for Rs. 1990 were Rs. 24,000.
v. A new V.C.R. was purchased by him in March 1991 for Rs. 18,000 and presented by him to
his friend in November 1991.
vi. His annual household expenses amounted to a minimum of Rs. 24,000.
vii. The position of assets and liabilities as on 31* December 1991 was found to be Overdraft
with bank (secured against property Rs. 12,000; Trade creditors Rs. 10,000; Expenses
payable Rs. 600 sundry debtors (including Rs. 600 due from a peon declared insolent by
court) Rs. 28, 800 stock in trade (at 125% of cost to reflect market value) Rs. 60,000 and cash
on hand Rs. 250.

- 305 -
 SINGLE ENTRY SYSTEM

It is found that the rate of profit has been uniform through the period and the proportion of sales
during the year to total sales for the period was in the ratio of 3:4:4:6:8. Ascertain the annual profit
and indicate differences, if any with those reported by Suresh to bank earlier.
All working are to form part of your answer.

TOPIC – 2
CONVERSION METHOD
Here single entry system is converting into double entry system, here rough data is converting into
full trail balance by calculating missing figures. Following journal entries need to under stand under
this topic: -

Journal Entries

For drawing Bill receivable

Bills receivable A/C Dr
To Debtors A/C

For Accepting Bills payable

Creditor A/C Dr
To Bills Payable A/C

For Endorsing Bills receivable

Creditor A/C Dr
To Bills receivable A/C

For Dishonoured Of Bill Receivable

Debtor A/C Dr
To Bills receivable A/C

For Dishonoured of Bill Receivable in case Discounting

Debtor A/C Dr
To Bank A/C

For Dishonoured of Bill Receivable in case Endorsement

Debtor A/C Dr
To Creditor A/C

For Dishonoured Of Bill Payable

Bills Payable A/C Dr
To Creditor A/C

For Sale return

Sale return/Return Inward A/C Dr
To Debtor A/C

For Purchase return

Creditor A/C Dr
To Purchase return
Example - 7

- 306 -
 SINGLE ENTRY SYSTEM

From the following information obtained from Mr. X a Trade who does not keep proper Accounts,
prepare a Trading and profit and loss Account for the year ended 31" March, 1993 and the balance
sheet as on that date;
Withdrawal as per passbook; Rs-
Rent, rates, taxes and insurance 12,000 Furniture purchased on 1st April 1992 2,000
Printing charges 1,000 Advertisement Expenses 1,000
Postage and telegrams 1,000 X's Drawings 10,000
Paid for purchases 50,000 Salaries 8,000
Wages 8,000
i. Balance a! Bank on 31.3.93 was Rs. 3,000
ii. Stock on 1.4.1992 was Rs. 24,000 and stock on 31* March, 1993 was Rs. 4,000 less than of
stock on 1.4.1992 Out of stock on 1.4.1992 spoiled stocks were sold for Rs. 2,000 which were
not deposited into Bank Account.
iii. Payment for purchases includes Rs. 4,000 for last year's purchase. Rs. 1,000 of previous
year's purchases is still unpaid on 31.3.1993. Current year's unpaid invoices not ticked off in
purchase register amounted to Rs. 5,000.
iv. Collections for sale were Rs. 100,000 which includes Rs. 12,000 in respect of previous years
sale. Balance of unticked bills of last year's sale still amounted to Rs. 8,000 on 31rt March
1993. Unticked bills of the current year totalled up to Rs. 20,000.
v. Salaries Rs. 500 and wages Rs. 500 were outstanding on 31.31993.
vi. Furniture on 31.3.1992 amounts to Rs. 6,000 and machinery on the same date were Rs.
50,000. Prepaid insurance on 31.3.1993 amounted to Rs. 400.
vii. Depreciation at 10% p.a. shall be provided on furniture and at 25% p a. on machinery. He
maintained purchases and sales register and items are ticked off on collection or payment.
All collections are deposited and payments are all in cheques. Petty expenses Rs. 1,000 were
paid out of his drawings. All purchases and sales were made on credit basis.

Example – 8
The following information is supplied from which you are required to prepare that profit and loss.
Account for the year ended 318t December, 1989 and Balance sheet as that date:
Assets and Liabilities: 1.1.1989 31.12.1989
Sundry Assets 18,000 20,000
Stock 14,000 19,000
Cash in Hand 8,200 4,800
Cash at Bank 2,200 8,000
Debtors ? 26,000
Creditors 12,000 9,000
Miscellaneous expenses Outstanding 1,000 600
Details relating to the year's transactions are:
Receipts in the year and discount credited to debtors account 2,45,000
Details Amount Details Amount
Returns from debtors 6,000 Bad Debts 1,000
Sales cash and credit 300,000 Discount allowed by 4,000
Returns to creditors 3000 creditors
Receipts from debtors deposited 243,000 Payments to creditors by 236,200
into bank cheque 10,000
Salary and wages paid out of bank 18,000 Cash purchases
Drawings by cash 9,400 Miscellaneous expenses paid 5,000
Cash withdrawn from bank 21,000 by cash

- 307 -
 SINGLE ENTRY SYSTEM

Purchase sundry assets by 2,000

Cheque ?
Cash sales deposited in bank

Example – 9
M/s Ice Limited gives you the following information to find out Total Sales and Total Purchases:

Particulars Amount (Rs)

Debtors as on 01.04.2011 70,000
Creditors as on 01.04.2011 81,000
Bills Receivables received during the year 47,000
Bills Payable issued during the year 53,000
Cash received from customers 136,000
Cash paid to suppliers 1,72,000
Bad Debts recovered 16,000
Bills Receivables endorsed to creditors 27,000
Bills Receivables dishonoured by customers 5,000
Discount allowed by suppliers 7,000
Discount allowed to customers 9,000
Endorsed Bills Receivables dishonoured 3,000
Sales Return 11,000
Bills Receivable discounted 8,000
Discounted Bills Receivable dishonoured 2,000
Cash Sales 1,68,500
Cash Purchases 1,97,800
Debtors as on 31.03.2012 82,000
Creditors as on 31.03.2012 95,000

Example – 10
Mr. A. runs a business of readymade garments. He close the books of accounts on 31- March, 201
Balance Sheet as on 31- March, 2010 was as follows:
Liabilities Rs Assets Rs
A's capital a/c 4.04.000 Furniture 40,000
Creditors 82.000 Stock 2,80,000
Debtors 1,00,000
Cash in hand 28,000
Cash at bank 38,000
486.000 4,86,000
You are furnish with the following information:
i. His sales, for the year ended 31st March, 2011 were 20% higher then the sales of previous
year, out of which 20% sales was cash sales.
Total sales during the year 2009-10 were Rs 5,00,000
ii. Payments for all the purchases were made by cheques only.
iii. Goods were sold for cash and credit both. Credit customers pay by cheques only.
iv. Depreciation on furniture is to be charged 10% p.a.
v. Mr. A sent to the bank the collection of the month at the last date of the each month after
paying salary of 1 2,000 to the clerk. Office expenses Rs 1,200 and personal expenses Rs 500.

Analysis of bank pass book for the year ending 31" March, 2011 disclosed the following:
Rs

- 308 -
 SINGLE ENTRY SYSTEM

Payments to creditors 300,000

Payments of rent up to 31st March, 2011 16,000
Cash deposited into bank during the year 80,000

The following are the balances on 31st March, 2011:

Rs
Stock 160,000
Debtors 120,000
Creditors for goods 146,000
On the evening of 31st March 2011, the cashier absconded with the available cash in the cash book.
You are required to prepare Trading and Profit and Loss A/c for the year ended 31st March, 2011 and
Balance Sheet as on that date. All the workings should form part of the answer.

Example – 11
The books of account of Ruk Ruk Maan of Mumbai showed the following figures:
31.3.2008 31.3.2009
Rs. Rs.
Furniture & Fixtures 2*0,000 234,000
Stock 2,45,000 3,20,000
Debtors 1,25,000 ?
Cash in hand & Bank 1,10,000 ?
Creditors 1,35,000 1,90,000
Bill Payable 70,000 80,000
Outstanding Salaries 19,000 20,000
An analysis of the cash book revealed the following:
Rs.
Cash sales 16,20,000
Collection from debtors 1038,000
Discount allowed to debtors 20,000
Cash purchases 6,15,000
Payment to Creditors 9,73,000
Discount received from creditors 32,000
Payment for bills payable 4,30,000
Drawings for domestic expenses 1,20,000
Salaries paid 2,36,000
Rent paid 1,32,000
Sundry trade expenses 81,000
Depreciation is provided on furniture & fixtures 0 10% pa. on diminishing balance method. Ruk Ruk
Maan maintains a steady gross profit rate of 25% on sales.
You are required to prepare trading and profit and loss account for the year ended 31st March, 2009
and balance sheet on same date.

Example – 12
Following is the Balance sheet of Mr. Ram, a small trader, as on 31" March, 2008:

Details Amount Details Amount

Creditors 1,00,000 Cash 10,000
Capital 4,00,000 Bank 20,000
Stock 80,000
Debtors 1,00,000
Fixed Assets 2,90,000

- 309 -
 SINGLE ENTRY SYSTEM

500,000 500,000
A fire occurred on the night of 31" March, 2009, destroying the accounting records as well as the
closing cash of the trader. However, the following information was available:
i. Debtors and creditors as on 31" March, 2009 showed an increase of 20% as compared to 31-
March, 2008.
ii. Credit period:
Debtors: 1 month Creditors: 2 months
iii. Stock was maintained at the same level throughout the year.
iv. Cash sales constituted at 20% of the total sales.
v. All purchases were on credit basis only.
vi. Current ratio on 31st March, 2009 was exactly 2.
vii. Total expenses excluding depreciation for the year amounted to Rs.5,00,000.
viii. Depreciation was provided @ 10% on the closing book value of fixed assets.
ix. Bank and cash transactions for the financial year 2008-09 were as under.
a) Payment to creditors included Rs. 1,00,000 by cash.
b) Received from debtors included Rs. 11,80,000 by way of cheques.
c) Cash deposited into the Bank Rs.2,40,000.
d) Personal drawings from Bank Rs. 1,00,000.
e) Fixed assets purchased and paid by cheques Rs.4,50,000.
x. Assume that cash destroyed by fire is written off in the Profit and Loos account.
You are required to prepare:
• Trading and Profit and Loss account of Shri Ram for the year ended 31* March, 2009.
• A Balance Sheet as at that date.

Example – 13
The books of Mr. Z showed the following information:
Particulars 1.1.2007 31.12.2007
Bank Balance 50,000
-
Debtors 87,500
-
Creditors 46,000
Stock 50,000 62,500
Fixed Assets 7,500 9,000
54005

The following are the details of the bank transactions:

Receipt from customer: 3,40,000

Payment to Creditors 2,80,000
Capital brought in 5,000
Sale of Fixed assets 1,750
Expenses paid 49,250
Drawings 25,000
Purchase of Fixed assets 5,000
Other information:
i. Cost of goods sold 260,000
ii. Gross profit 25% on cost of goods sold
iii. Book value of Assets sold 2,500

Prepare Trading, Profit & loss account for the year ended 31.12.2007 and Balance Sheet as at
31.12.2007.

- 310 -
 SINGLE ENTRY SYSTEM

Example – 14
Mr. Y keeps his books under single entry system. On 31* March.2006 his Balance sheet was as
follows:
Liabilities Amt Assets Amt
Capital of Mr. Y 4,50 ,000 Fixed assets 2,25,000
Creditors 8,70,000 Stock 9,15,000
Bills payable 1,87,500 Debtors 2,22,000
Expenses outstanding 67,500 Bills receivable 90,000
Prepaid insurance 3,000
Cash/Bank balance 1,20,000
15,75,000 15,75,000
(i) Following are the summary of cash and bank transactions for the year ended 31st
March,2007:
Amount (Rs)
Cash sales 1,10,70,000
Collection from debtors 2,265,000
Payments to creditors 1,12,60,500
Paid for bills payable 12,22,500
Sundry expenses paid 9,31,050
Drawing for domestic expenses by Mr. Y 3,60,000
Cash and bank balance as on 31.3.200 71,90,950

(ii) Following further details are furnished: Amount (T)

Gross profit on sales @10%
Bills receivable from debtors during the year 6,52,500
Discount allowed to debtors 54,000
Discount received from creditors 42,000
Bills receivable endorsed to creditors 22,500
Annual fire insurance premium paid
(This is paid on 1* August every year) 9,000
Depreciation fixed assets @10%

(iii) Balances as on 31.3.2007 are given below:

Stock in hand 9,75,000

Debtors 2,28,000
Bills receivable 2,10,000
Bills payable 2,10,000
Outstanding expenses 7,500
Prepare Trading, Profit and Loss Account for the year ended 31st March, 2007 and Balance Sheet on
that date.

- 311 -