Accountancy

Accountancy
Chapter 1 Partnership Accounts – Fundamentals
Chapter 2 Reconstitution of Partnership - Changing Ratio or Admission of a new Partner
Chapter 3 Reconstitution of Partnership – Retirement / Death of a Partner
Chapter x Dissolution of Partnership firm (This chapter is deleted for 2009 exam and added back for 2010)
Chapter 4 Company Accounts – Shares
Chapter 5 Company Accounts – Debentures
Chapter 6 Accounting for Non-Profit Organizations
Chapter 7 Analysis of Financial Statements - Ratio Analysis
Chapter 8 Analysis of Financial Statements - Cash Flow Statements
Detailed Syllabus for 2009 Examination
Accounting for Not-For-Profit Organisations, Partnership Firms and Companies
Unit 1: Accounting for Not-For-profit Organisations (10 marks)

• Not for profit organisation: Meaning and examples.
• Receipts and payments: Meaning and concept of fund based accounting.
• Preparation of Income and Expenditure Account and Balance Sheet from Receipt and Payment
Account with additional information.
Unit 2: Accounting for Partnership firms (5 marks)
• Nature of Partnership firm: Partnership Deed-meaning, importance.
• Partners' Capital Accounts : Fixed vs Fluctuating Capital, Division of Profit among partners, Profit and
Loss Appropriation Account including past adjustments.
Unit 3: Reconstitution of Partnership (20 marks)

• Changes in Profit Sharing Ratio among the existing partners-Sacrificing Ratio and Gaining Ratio.
• Accounting for Revaluation of Assets and Liabilities and distribution of reserves and Accumulated
Profits.
• Goodwill: Nature, Factors affecting and methods of valuation: Average profit, Super profit and
Capitalisation methods.
• Admission of a Partner: Effect of Admission of Partner, Change in Profit Sharing Ratio, Accounting
Treatment for Goodwill (as per AS 10), Revaluation of Assets and Liabilities, Reserves (accumulated
Profits) and Adjustment of Capitals.
• Retirement/Death of a Partner: Change in Profit Sharing ratio, accounting treatment of Goodwill,
Revaluation of Assets and Liabilities, Adjustment of accumulated Profits (Reserves) and capitals.
Unit 4: Accounting for Share Capital and Debenture (25 marks)
• Share Capital: Meaning, Nature and Types.
• Accounting for share capital: Issue and Allotment of Equity and Preference Shares;; Private
placement of shares, meaning of employee stock option plan, public subscription of shares : over
subscription and under subscription; issue at par, premium and at discount; calls in advance, calls in
arrears, issue of shares for consideration other than cash.
• Forfeiture of shares : accounting treatment, re-issue of forfeited shares.
• Presentation of Share Capital and Debenture in company’s Balance Sheet.
• Issue of debenture-at par and premium; issue of debenture for consideration other than cash.
• Redemption of debentures out of capital; redemption methods : lump sum payment, draw by lots,
purchase in the open market and conversion (excluding cum-interest and exinterest).
Part B: Financial Statement Analysis
Unit 5: Analysis of Financial Statements (12 marks)

• Financial Statements of a Company: preparation of simple balance sheet of a company in
the prescribed form with major headings only.
• Financial Statement Analysis: meaning, significance, limitations,
• Tools for Financial Statement Analysis: Comparative Statements, Common Size Statements,
Accounting Ratios: meaning and objectives, types of ratios: Liquidity Ratios: Current Ratio, Liquid
RatioSolvency Ratios: Debt to Equity, Total Assets to Debt, Proprietary Ratio Activity Ratios:
Inventory Turnover, Debtors Turnover, Payables Turnover,Working Capital Turnover, Fixed Assets
Turnover, Profitability Ratio: Gross Profit, Operating Ratio, Net Profit Ratio, Return on Investment,
Earning Per Share, Dividend per Share, Price Earning Ratio
Unit 6: Cash Flow Statement (8 marks)
• Cash Flow Statement: Meaning and objectives, preparation, adjustments related to depreciation,
dividend and tax, sale and purchase of non-current assets (as per revised standard issued by ICAI)
Unit 7: Project Work in Accounting (20 marks)
(Please refer to the guidelines published by the CBSE)
OR
Part C: Computerised Accounting (20 marks)
Unit 5: Overview of Computerized Accounting System (5 marks)

• Concept and types of Computerised Accounting System (CAS)
• Features of a Computerized Accounting System
• Structure of a Computerised Accounting System
Unit 6: Accounting using Database Management System (DBMS) (8 marks)
• Concept of DBMS
• Objects in DBMS: Tables, Queries, Forms, Reports
• Creating data tables for accounting
• Using queries, forms and reports for generating accounting information. Applications of DBMS in
generating accounting information such as shareholders’ records, sales reports, customers’ profile,
suppliers’ profile, payroll, employees’ profile, petty cash register.
Unit 7: Accounting Applications of Electronic Spreadsheet (7 marks)
• Concept of an Electronic Spreadsheet (ES)
• Features offered by Electronic Spreadsheet
• Applications of Electronic Spreadsheet in generating accounting information, preparing depreciation
schedule, loan repayment schedule, payroll accounting and other such applications.
Unit 8: Practical Work in Computerised Accounting (20 marks)
(Please refer to the guidelines published by the CBSE)
Accounting for Partnership

Fundamentals - introduction
Syllabus
Ø Nature of Partnership Firm: Partnership deed – Meaning, importance
Ø Final Accounts of Partnership: Fixed Vs. Fluctuating Capital, Division of Profit among partners, Profit
and Loss Appropriation Account 5 Marks
Nature / Characteristics of Partnershp
Partnership Deed - Meaning and Impact
Contents of the Partnership Deed
Special Aspects of Financial Accounts of Partnership
1. Fixed and Fluctuating Capitals
2. Division of profit among partners
3. Past adjustments
4. Guarantee of profits
5. Accounting for joint life policy
Miscellaneous adjustments
Additional illustrations
Theory questions
Numerical questions
Chapter Introduction
A partnership firm is a business jointly owned by two or more persons. Partnership is defined by
Indian Partnership Act of 1932 as “the relation between persons who have agreed to share profits of a
business carried on by all or any one of them acting for all”. This definition highlights the following
features of a partnership business.
i) A partnership involves two or more persons.

ii) It is formed on the basis of an agreement.
iii) It is formed for conducting a business.
iv) Profit or loss arising from the business will be shared by the partners.
v) It may be run by all the partners or any one of the partners representing all of them.
Accounting for partnership involves several special adjustments due to the presence of more than one
owner. It should safeguard the rights of partners and it should establish liabilities of partners in an
impartial manner. Any error in accounting decision will result in undue advantage to some partners at
the expense of others. This problem does not arise in a sole trading business since there is only one
owner, whose decisions, whether they are right or wrong would affect only his own interest.

Fundamentals 1
Syllabus
Nature / Characteristics of Partnership
1. Two or More Owners
The basic feature of a partnership is the presence of more than one owner of the business.
Partnership is formed by two or more persons joining together to conduct a business within the legal
framework of Indian Partnership Act of 1932. The maximum number of partners in a firm is legally
restricted to 10 for banking business and 20 for non banking business.
2. Agreement
As stated in the definition a partnership business is based on the agreement between partners. This
agreement should be in conformity with the provisions of Indian Partnership Act, 1932, which is the
governing law for the partnership firms in India. From the legal point of view, it is not compulsory that
the partnership agreement is made in writing. But it is a matter of common sense that the agreement
is made in writing to avoid unnecessary dispute between partners in future. The written agreement
between partners is known as Partnership Deed.
3. Business
The object of partnership is to conduct a lawful business. In the absence of such a business, an
agreement between individuals will not become a partnership in the legal sense.
4. Sharing of profit
A business activity will result in profit or loss. This profit or loss has to be shared by the partners.
Usually the profit sharing ratio will be mentioned in the partnership agreement. But if it is not
mentioned in the agreement, the Partnership Act specifies that, the partners shall share profit or loss
equally.
5. Mutual Agency
Mutual principal agency relationship is a special feature of a partnership business. Due to this
relationship any act by a partner on behalf of the firm shall be automatically be binding on other
partners also. Similarly any default of a partner shall be considered a default of all the partners.
Partnership Deed – Meaning, Impact

Partnership deed is the written agreement between partners. This agreement contains all the terms
and conditions agreed between partners. Rights, duties and liabilities of all partners are stated in the
partnership deed.
The effect or impact of partnership deed is that it guides partners’ decisions at all stages of the
business. In the absence of a Partnership Deed or when the Deed is silent on an issue, the partners
are expected to follow the relevant provisions of the Indian Partnership Act, 1932. The Act gives
guidelines on the general principles of partnership business. If the partners agree on any specific
condition such as interest on capital, salary etc. such agreements are to be clearly stated in the
partnership deed.
Contents of the Partnership Deed

A Partnership Deed contains elaborate provisions on almost all aspects of a partnership business. If
the partnership deed does not contain any specific condition on any issue, it will be decided according
to the provisions of the Partnership Act. Following is the list of major items mentioned in a partnership
deed.
i) Name address of the partnership business
ii) Names and addresses of partners
iii) Nature of partnership business
iv) Profit or loss sharing arrangement
v) Duties and responsibilities of each partner in conducting the business
vi) Method of accounting, auditing etc.
vii) Conditions regarding maintenance of bank account.
viii) Conditions regarding drawings
ix) Conditions regarding interest on capital, interest on drawings etc.
x) Whether, or not salary is allowed to partners, conditions regarding salary.
xi) Conditions regarding loans from partners, loans to partners
xii) Valuation and presentation of goodwill
xiii) Procedures for settlement of accounts in the event of retirement or death of a partner.
xiv) Arbitration clause, to settle disagreement if any.
Rules Applied in the Absence of Specific Conditions in the

Partnership Deed.
In the absence of specific conditions in the partnership deed regarding the following issues, they will
be settled according to the provisions of the Partnership Act as follows:
a. A partner is not entitled to any salary for his service rendered to the firm.
b. Partner is not entitled to interest on capital
c. No interest is charged on partner’s drawings.
d. A Partner is entitled to interest at the rate of 6% p.a. on any loan given to the firm.
f. The profit or loss from the business has to be shared equally.

Fundamentals 2
Syllabus
Special Aspects of Final Accounts of Partnership
1. Fixed and Fluctuating Capital Accounts

The partners of a firm have the option to decide whether their capital accounts may remain fixed or
fluctuating. This aspect is not much relevant in a sole trading business, where the capital account is
usually fluctuating. Stability in capital balances is important in a firm, because the capital investment is
usually one of the major aspects of partner’s business relationship. When the capital accounts are
said to be ‘fixed’ it implies that the capital accounts will remain steady for a reasonably long time. In
other words the daily items of credit and debit to partners will not be recorded in the capital accounts.
They will open current accounts in each partner’s name. These current accounts are regarded as
subsidiary capital accounts. Daily transactions related to a partner are recorded in his current account,
instead of capital account. Thus the current account keeps on changing as the transactions are
posted into it, while the capital balance stays the same. However, if there is any additional capital
investment by a partner or capital withdrawal, other than minor routine drawings, it will be recorded in
the capital account, not in the current account. In the event of rescheduling of capitals transfers can
be made from current accounts to capital or vice versa to adjust the capital balances.
When the capital accounts are fluctuating there will not be a current account in the name of partner.
All transactions related to a partner, such as salary to a partner, interest on capital, additional capital
investment and similar items are directly credited to the capital accounts of partner. Drawings, interest
on drawings capital withdrawal etc. are debited to the capital accounts. Thus the balance in the capital
account keeps on changing with every transaction posted into it.
The following comparative table shows the difference between fixed and fluctuating capital accounts:
Fixed Capital Fluctuating Capital

1. Opening and Closing balances Opening and closing balances rarely
in the capital account will remain remain the same.
the same.
2. Current Accounts will be opened Current accounts are not required.
in the name of partners when
capitals are fixed.
3. Regular transactions related to All regular transactions related to
partners are not entered in the partners are recorded in their capital
capital accounts. accounts.
4. Fixed capital accounts always Fluctuating capital accounts can
have credit balance sometimes have debit balance
The following accounts with imaginary figures show the difference between Fixed and Fluctuating
Capital Accounts.
a. Fixed Capital
Illustration 1.01
Abraham’s Capital Account
Date Particulars Amount Date Particulars Amount
2002 2002 By Balance b/d 30,000
Dec To Balance c/d 30,000- Jan1
31
30,000 30,000
Abraham’s Current Account
2002 2002
Dec To Drawings A/c 18,100 Jan 01 By Balance b/d 2,000
31 To interest on 200
Dec drawings Dec 31 By Salary 6,000
31 Dec 31 By Commission 1,500
To balance c/d 5,000 Dec 31 By Interest on capital 1,800
Dec 31 By Net divisible profit 12,000
Dec
31 23,300 23,300
b. Fluctuating Capital
Abraham’s Capital Account
2002 2002 By Balance b/d * 32,000
Dec To Drawings 18,100 Jan 01
31 To Interest on Capital 200 Dec 31 By Salary 6,000
To Balance c/d 35,000 Dec 31 By Commission 1,500
Dec 31 By Interest on capital 1,800
By Net divisible profit 12,000
53,300 53,300
* Note: Opening balance of capital account in part (b) includes current account balance also.

Fundamentals 3
Syllabus
2. Division of Profit among Partners
Profit making and profit sharing are the main objectives of partnership business. When the partners do
not have any special conditions regarding the profit distribution the task of profit sharing is a simple,
one-step operation of dividing the profit in the given ratio. But in actual practice the partners are
compelled to include many conditions such as interest on capital, interest on drawings, salaries,
commission on profit etc. The purpose of these special conditions is to fairly compensate extra capital,
extra effort or similar additional factors contributing to the profitability of the firm. Thus the profit
distribution becomes little more complex. A profit and loss appropriation account is prepared with full
details of profit distribution. This is prepared as a supplementary account to the profit and loss
account, prior to preparing the balance sheet.
Illustration 1.02
A & B are equal partners in a firm with capitals of Rs.75,000 and Rs.50,000 on 1st January 2002. A is
entitled to a salary of Rs.24,000 per annum and B is entitled to a salary of Rs.18,000 per annum. They
have withdrawn 50% of their salaries during the year. A and B are entitled to commissions at the rate
of 5% and 3% respectively on the net profit after salary.
Net profit during the year 2002 before partner’s salary amounted to Rs.84,000. Prepare:
a. Profit and Loss Appropriation Account
b. Capital Accounts of partners (assuming capitals are fluctuating)
c. Capital Accounts and Current Accounts of partners (assuming capitals are fixed)
Profit & Loss Appropriation A/c

Particulars Amount Particulars Amount
To Salary – A 24,000 By P & L Account- 84,000
profit
To Salary – B 18,000
Commission to A 2,100
(42,000x5/100)
Commission to B 1,260
(42,000x3/100)
Net Divisible Profit 19,320
A
19,320
B 84,000 84,000
Note: when profit sharing ratio is not given in the question; it should be shared equally.
a. When capital accounts are fluctuating.
Capital Accounts
Particulars A B Particulars A B
To Cash 12,000 9,000 By Balance b/d 75,000 50,000
By Salary 24,000 18,000
To Balance c/d 108,420 79,580 By Commission 2,100 1,260
By Net Divisible 19,320 19,320
120,420 88,580 Profit 120,4 88,580
20
b. When capital accounts are fixed
Capital Accounts
Particulars A B Particulars A B
By Balance b/d 75,000 50,000
To Balance c/d 75,000 50,000

Fundamentals
Syllabus
3. Past Adjustments
3.1. Omission of Interest on Capital / Interest on Drawings

This step is almost like rectification of errors that you studied last year. Let us first consider
omission of interest on capital. Interest on capital is taken out of the available net profit and
distributed to partners. Thereafter the balance of net profit is distributed in the profit sharing ratio.
So, when the interest on capital is omitted in the first place it means that the entire net profit is
distributed.
Now how do we correct it?

Simple, take out the total amount required for paying interest on capital from the capital accounts
of partners in the profit sharing ratio, and give it back to them as interest.
What is the use of taking out from partners and give them back the same?
We usually do not give back exactly what we take out. The profit sharing ratio plays a very
important role here. See the next illustration. We take out the total interest divided equally from the
three partners, and redistribute them as interest according to capital balance. The point to notice
here is, that there is no definite relationship between profit sharing ratio and capital balance. In the
illustration the partners are sharing profits and losses equally even though their capitals are not
equal.
Illustration 1.06
A, B and C who are equal partners in a firm have capitals of Rs.30,000; Rs.30,000 and Rs.15,000
respectively. The profit for the year 2001 was distributed equally. However, interest on capital @10%
was omitted. Pass a journal entry to rectify the error.
Details A B C Total
Interest to be credited 3,000 3,000 1,500 7,500

The amount to be 2,500 2,500 2,500 7,500
debited
(7500/3) 500(Cr.) 500 (Cr.) 1,000(Dr) 0
Net adjustment
Journal Entry
C’s Capital account Dr. 1,000
To A’s Capital account 500
To B’s Capital account 500
(Capital adjustment for rectification of omission)
Illustration 1.07
A, B and C sharing profits and losses in the ratio 2:2:1 had capitals of Rs.50,000 each.. The profit for
the year 2001 was distributed without providing for interest on capital @10% as agreed in the
Partnership Deed. Pass a journal entry to rectify the error.
Details A B C Total
Interest to be 5,000 5,000 5,000 15,000

credited 6,000 6,000 3,000 15,000
The amount to be
debited
(15000 at 2:2:1 1,000(Dr.) 1,000(Dr.) 2,000(Cr) 0
Net adjustment
Journal Entry
A’s Capital Account Dr.1,000
B’s Capital Account Dr.1,000
To C’s Capital Account 2,000
(Capital adjustment for rectification of omission0
Illustration 1.08
A, B and C have distributed their profit for the year 2001 in the ratio 2:1:1. However they left out the
interest @10% on their fixed capitals of Rs.40,000, Rs,40,000 and Rs. 20,000 respectively. Pass a
journal entry to rectify the omission.
Details A B C Total
Interest to be credited 4,000 4,000 2,000 10,000

The amount to be debited 5,000 2,500 2,500 10,000
(10,000 at 2:1:1
Net adjustment 1,000(Dr.) 1,500(Cr.) 500(Dr) 0
Journal Entry
A’s Current Account Dr. 1,000
C’s Current Account Dr. 500
To B’s Current Account 1,500
(Adjustment for rectification of omission
Note: When capitals are fixed, all adjustment should be done through current account.
Illustration 1.09
A, B and C have distributed their profit for the year 2001 in their profit sharing ratio 2:1:1 after crediting
interest on capitals @10% instead of 8% on their fixed capitals of Rs.40,000, Rs.40,000 and
Rs.20,000 respectively. Pass journal entry to rectify the error.
Details A B C Total
Excess interest to debit 800 800 400 2,000

(2%) 1,000 500 500 2,000
The total amount to
credit
(2000 at 2:2:1
200(Cr.) 300(Dr.) 100(Cr) 0
Net adjustment
Journal Entry
B’s Current Account Dr.300
To A’s Current Account 200
To C’s Current Account 100
(Adjustment for rectification of omission)
Illustration 1.10
A, B and C started business with capitals of Rs.100,000 Rs.80,000 and Rs.60,000 respectively. They
agreed to share profits and losses equally. Their partnership deed provided for interest on capital @
10%. Interest on drawings have been estimated to be Rs.250 on A, Rs.200 on B and Rs.150 on C.
Interest on capital had been credited to partners at 8% instead on 10%. Interest on drawings had
been completely omitted. Pass a journal entry to rectify the above errors.
Details A B C Total
Interest to credited @2% +2,000 +1,600 +1,200 4,800

Interest on Drawings -250 -200 -150 -600
Total amount reversed -1400 -1,400 -1,400 -4,200

(in profit sharing ratio)
Net adjustment 350(Cr.) 350(Dr) 0
Journal Entry
C’s Capital Account Dr. 350
A’s Capital Account 350
(Capital adjustment for rectification)
3.2 Redistribution of Profit in a Different Ratio

Illustration 1.11
A B and C have distributed their profits and losses in the ratio 3:2:1. They have decided to share
profits and losses equally with effect from the last three years. The previous three years’ profits have
been Rs.21,000, Rs.18,000 and Rs. 24,000. You are required to pass a journal entry to give effect to
the above arrangement.
Details A B C Total
Profit for the 3 years 31,500 21,000 10,500 63,00

reversed Dr. 21,000 21,000 21,000 0
The redistributed 63,00
equally Cr. 10,500(Dr.) 0 10,500(Cr) 0
Net Adjustment 0
Journal Entry
A’s Capital Account Dr.10,500
(Adjustment to effect redistribution of profit)
3.3 Omission of Outstanding Expenses and Incomes

Outstanding expenses and outstanding incomes have direct effect on the net profit. Outstanding
expense is an expense in the first place and a liability as well. When it is omitted it means a higher
profit is distributed to partners and a liability is not provided in the books. Outstanding income has the
opposite effect. Rectification of these errors is a simple procedure.
i) If the number of items is less, correct it by passing simple rectification entry, by debiting
outstanding income, crediting outstanding expense and passing the difference into capital
account. This way you are creating asset account in the books for the outstanding income,
creating liability account for the outstanding expense, and transferring the net loss or gain into
capital accounts.
ii) When the number of items involved is more or when it is specifically asked in the question, you
should open a profit and loss adjustment account.
iii) P&L adjustment account can be safely assumed as a combined capital account of partners. When
you want debit partner’s capital account you can debit P&L adjustment account instead.
iv) When there is an outstanding expense, we usually debit capital accounts and credit outstanding
expense account. Now you debit P&L adjustment account for any outstanding expense and credit
it for the outstanding income.
v) The net balance of profit and loss adjustment account is transferred to the capital accounts of
partners in the profit sharing ratio.
Illustration 1.12
A, B and C have distributed their profit for the year ended 31st December, 2001 in their profit sharing
ratio of 2:1:1. However it was found out in January, 2002 that outstanding expenses of Rs.3,500; and
prepaid expenses Rs.1,500 have been left out while preparing the profit and loss account for the year
2001.
You are required to rectify this error by:
a) Passing Journal Entry (without Profit and Loss Adjustment Account)
b) Through Profit and Loss Adjustment Account.
a. Rectification without opening P&L Adjustment Account
Details A B C
Credit Outstanding Exp (Rs.3500) and 1,750 875 875
Dr.> 750 375 375
------------------------- ------------------------ -------------------------
Debit Prepaid Exp (Rs.1,500) and --
1,000(Dr) 500(Dr.)
Cr.> 500(Dr.)
Rectification Entry:
Prepaid Expenses Account Dr. 1,500
A’s Capital Account Dr. 1,000
B’s Capital Account Dr. 500
To Outstanding Expenses 3500
(Rectification of omission)
b. Rectification through P&L Adjustment Account
Journal Entries
Profit and loss adjustment account Dr. 3,500
To Outstanding Expenses 3,500
(Outstanding expenses brought into books)
-------------------------------------------------------------------------------------
Prepaid expenses account Dr.1,500
To Profit and Loss Adjustment Account 1,500
(Omission of prepaid expenses brought into books)
-------------------------------------------------------------------------------------
B’s Capital Account Dr. .500
To Profit and Loss Adjustment Account 2,000
(Net balance in account transferred)
Profit and Loss Adjustment Account
To Outstanding 3,500 By Prepaid expense 1,500
expense By Net adjustment
A
1,000
B 500 2,000
3,500 C 500 3,500
Illustration 1.13
A, B and C have distributed their profit for the year ended 31st December, 2001 equally as provided in
the partnership deed. However it was subsequently found out that commission received and credited
in P& L account included Rs. 6,000 received in advance and interest accrued on investment Rs.4,500
are unaccounted.
Pass a journal entry to give effect to the above items in the books and prepare profit and loss
adjustment account.
Journal Entries
P&L Adjustment account Dr. 6,000
To Commission Rec’d in Advance 6,000
(Omission of advance income rectified)
--------------------------------------------------------------------------------------
Accrued Interest Account Dr. 4,500
To P& L Adjustment Account 4,500
(Omission of accrued income rectified)
--------------------------------------------------------------------------------------
A’s Capital Account Dr. 500
B’s Capital Account Dr.500
C’s Capital Account Dr.500
To P&L Adjustment Account 1,500
(Net difference transferred)
Profit and Loss Adjustment Account

To Commission 6,000 By Acc. Interest 4,500
Advance By Net adjustment
A
500
B 500 1,500
6,000 C 500 6,000

Fundamentals
Syllabus
4. Guarantee of Profits
Sometimes partners agree to guarantee minimum profit to a partner as a special privilege. There can
be many reasons for granting such a privilege. Attracting a reputed individual, who is unwilling to bear
the risk of income fluctuations to become a partner, is one of such reasons. If the share of profit for
such a partner falls short of the minimum amount guaranteed, the other partners will adjust that
shortage form their share of profit according to the agreed conditions. If the share of profit of the
partner holding guarantee privilege comes equal or more than the guaranteed sum, that actual share
will be given without any adjustments.
Illustration 1.14
A, B and C have agreed to share their profits and losses in the ratio 3:3:2 in which C is guaranteed a
minimum profit of Rs.12,000. The divisible profit for the year 2001 amounted to Rs.42,000. Show
distribution of profit.
To A's Capital By P & L 42,000
15,750 Account
less adjusted to C 15,000
750
To B's Capital
15,750
less adjusted to C 15,000
750
To C's Capital
10,500
add share adjusted 12,000
1,500
from A & B
42,000 42,000
If the entries of deduction and subtraction seem confusing, you can directly put C's share of
12,000 in his name and divide the balance amount of 30,000 in the ratio 3:3 (equally). The next
illustration is done that way. But remember when you do this way in the examination don't forget to
show the steps/workings to convince the examiner that you know the concept clear.
Illustration 1.15
A, B and C sharing profits and losses in the ratio of 3:2:1 in with C having a minimum guarantee of
Rs.8,000. The profit available for distribution at the end of the year was found to be Rs.42,000. Show
distribution of profit.

To A's Capital 20,400 By P & L Account 42,000
(34,000x3/5)
To B's Capital 13,600
(34,000x2/5)
To C's Capital 8,000
42,000 42,000
You can divide 42,000 in the ratio 3:2:1 and then rearrange the amount. But here we are directly
crediting C's share and dividing the balance of Rs.34,000 in the ratio 3:2.
Illustration 1.16
A, B and C are partners sharing profits and losses in the ratio 2:1:1, with capitals of Rs.40,000,
Rs.30,000 and Rs.20,000 respectively. C’s minimum profit after interest on capitals @6% has been
guaranteed to be not less than Rs.10,000. A & B have agreed that if C’s profit falls below the
guaranteed sum such deficiency would be shared by them equally. The net profit before interest on
capitals is estimated to be Rs.38,400. Prepare profit and loss appropriation account.
Here you cannot adopt direct distribution as in the previous case since the partners will bear the loss equally. When you distribute
balance of profit after paying the partner with guarantee, the loss is automatically gets distributed in the profit sharing ratio. If any other
ratio is to be applied for sharing the loss, you must adopt 'subtraction and addition' method.
Profit & Los Appropriation A/c

To Interest on Capitals: 2,400 By P&L Account 38,400
A
1,800
B
1,200
C
Profit to A
16,500
Less: C's Share Adj. 15,625
875
Profit share to B
8,250
875
Profit Share to C
8,250
Add: Share Adj A+B 10,000
1,750
38,400 38,400
Illustration 1.17
Rs.30,000 and Rs.20,000 respectively. C’s minimum profit after interest on capitals @6% has been
guaranteed to be not less than Rs.10,000. A & B have agreed that if C’s profit falls below the
guaranteed sum such deficiency would be shared by them in the ratio 3:2. The net profit before
interest on capitals is estimated to be Rs.38,400. Prepare profit and loss appropriation account.

To Interest on 2,400 By P&L Account 38,400
Capitals: A
1,800
B
1,200
C
Profit to A
16,500
1,050
Profit share to B
8,250
700
0Profit Share to C
8,250
Add: Share Adj A+B 10,000
1,750
38,400 38,400
Illustration 1.18
Rs.30,000 and Rs.20,000 respectively. A has personally guaranteed that he shall bear the deficiency
if C’s share of profit after interest on capitals of partners @6% falls below Rs.10,000. The net profit
before interest on capitals is estimated to be Rs.38,400. Prepare profit and loss appropriation account.

To Interest on Capitals: 2,400 By P&L Account 38,400
A
1,800
B
1,200
C
Profit to A
16,500
1,750
Profit share to B 8,250
0Profit Share to C
8,250
Add: Share Adj A 10,000
1,750
38,400 38,400
5. Accounting for Joint Life Policy

A partner ceases to be a partner either by retirement or death. At the time of retirement or death of a
partner the continuing partners, have to settle his dues. Since retirement is a pre-planned event
proper arrangement for this settlement can be made. Death comes unexpectedly. The firm suffers the
loss of an experienced partner and it has the added burden of settling a huge amount of capital and
other dues to the deceased partner. Unlike retirement, death of a partner results in a financial
emergency, as the amount due cannot be delayed for long time. Unless adequate precautions are
made, this emergency can turn into deep financial crisis.
(Please refer Chapter 4 – Retirement of Partners for details on Joint Life Policy)
Fundamentals
Syllabus
Miscellaneous Adjustments
Interest on Capital
Interest is allowed on partner’s capitals only if there is a specific agreement in the partnership deed.
When interest is allowed on partner’s capital it should be calculated on the basis of period of capital
investment. Suppose a partner makes additional investment after three months from the starting of a
year, interest on this additional capital is allowed for nine months only, not for the full year.
Illustration - 1.19
A & B started business on 1st January 2001, with capitals of Rs.50,000 each. A introduced additional
capital of Rs.25,000 on 1st July 2001 and B introduced the same amount on 1st October 2001.
Calculate interest on capital @12%, payable to A and B at the end of the year.
Interest on capital - A
n Opening capital for 12 months (50,000 x 12%) = 6,000
On Additional Capital 6 months (25,000x 12%x6/12) = 1,500
Total interest payable to A 7,500
Interest on capital - B
On opening capital for 12 months (50,000 x 12%) 6,000
On additional capital for 3 months (25,000x12%x3/12) 750
6,750
Illustration 1.20
On 1st January 2001 the capital accounts of A & B showed balances of Rs.70,000 and Rs.50,000
respectively. A introduced additional capital of Rs.50,000 on 31st March 2001 and B introduced
additional capital of Rs.30,000 on 1st September, 2001. Interest on capital is allowed @ 12% p.a.
Calculate interest on capital payable at the end of 2001.
When interest is allowed on the net monthly balance of capital account, interest on drawings will not
be charged, because the drawings becomes deduction from capital, and the interest on capital is
automatically reduced.
Interest on A’s Capital

On Opening capital for 12 months (70,000 x 12%) = 8,400
On Additional Capital 9 months (50,000x 12%x9/12) = 4,500
Total interest payable to A 12,900
Interest on B’s Capital

On opening capital for 12 months (50,000 x 12%)= 6,000
On additional capital for 4 months (30,000x12%x 4/12) = 1,200
7,200
Illustration 1.21: A & B started business with Rs.100,000 each on 1st January, 2001. A introduced
additional capital of Rs.50,000 on 1st July and B introduced Rs.50,000 on 1st September. A withdrew
Rs.12,000, drawn in 4 installments of Rs.3000 each at the end of each quarter. B withdrew Rs.1,000
per month, at the end of each month.
Interest on capital is allowed on the net monthly balance of capital account @12% p.a. Calculate
interest payable to A & B.
In this question interest is allowed on the net monthly balance of capital. But what is this monthly
balance? Is it opening balance or closing balance? The idea behind interest on net balance is to give
interest on the exact amount of capital used in the business. Suppose A added 10,000 at the end of
January, he is not entitled to interest on this amount in the month of January, simply because it was
not used in January. We cannot frame a that interest is allowed on the opening balance or closing
balance. The main point to remember here is that the interest is allowed only on the capital used.
Net Monthly Balances in Capital accounts of A & B

Month Interest Month Interest
On on
January 100,000 January 100,000
February 100,000 February 99,000
March 100,000 March 98,000
April 97,000 April 97,000
May 97,000 May 96,000
June 97,000 June 95,000
July 144,000 July 94,000
August 144,000 August 93,000
September 144,000 September 142,000
October 141,000 October 141,000
November 141,000 November 140,000
December 141,000 December 139,000
Total 1,446,000 Total 1,334,000
A’s Capital Account

April = 100,000-3,000 on 31st March
July = Rs.97,000-3,000 on 30th June + 50,000 on 1st July
October = 144,000 – 3000
December 31st –3,000 has no effect on this year’s interest
B’s Capital Account
September = 93,000 – 1,000 + 50,000
Interest Allowed 1446000 x 12 %, for 1 month 14,460

to A Rs.
Interest Allowed 1334,000 x 12 %, for 1 month 13,340
to B Rs.
Illustration 1.22. The closing balances in the capital accounts of A & B On 31st Dec. 2001 were
Rs.78,000 and Rs.65,000 respectively. During the year A introduced Rs.15000 on 1st July 2001 and
withdrew @ Rs.1,000 at the end of each month. B introduced additional capital of Rs.25,000 on 31st
March, 2001 and withdrew Rs.7,000 on 30th June and Rs.3,000 on 30th September. Calculate interest
on capital @ 6% p.a. to be credited to each partner on 31st December, 2001 based on the net monthly
capitals.
Read the question carefully. The capital balances given here are not the opening balances, but the closing balances of 2001, and you
have the details of withdrawals during 2001. Now you must reverse to the beginning of the year and calculate the monthly balances
to arrive at the correct interest on capital.
Opening Capital = Closing Capital + drawings – additional capital.

Opening Capital of A = 78,000 + 12,000 - 15,000 = 75,000
Opening Capital of B = 65,000 + 10,000 – 25,000 = 50,000
Net Monthly Balances in Capital Accounts of A & B
A’s Capital B’s Capital

Month Interest Month Interest
On On
January 75,000 January 50,000
February 74,000 February 50,000
March 73,000 March 50,000
April 72,000 April 75,000
May 71,000 May 75,000
June 70,000 June 75,000
July 84,000 July 68,000
August 83,000 August 68,000
September 82,000 September 68,000
October 81,000 October 65,000
November 80,000 November 65,000
December 79,000 December 65,000
Total 924,000 Total 774,000
Interest allowed to A = 924,000 x 6% x 1/12 = Rs. 4,620

Interest allowed to B = 774,000 x 6% x 1/12 = Rs. 3,870
Interest on Drawings
Illustration 1.23 Following is the details of drawings made by A & B from their firm during the year
2001. Calculate interest on drawings @ 6% p.a. to be debited to their accounts at the end of the year.
A's Drawings Rs. B's Drawings Rs.
31-1-2001 1,500 28-2-2001 1,000

31-3-2001 500 1-4-2001 1,500
1-5-2001 2,000 1-7-2001 1,000
30-9-2001 1,000 1-10-2001 1,500
31-12-2001 1,000 1-12-2001 1,000
6,000 6,000
This question clearly shows the effect of period of drawing on the amount of interest charged.
See that both these partners have withdrawn the same amount during the year 2001. But the interests charged are different,
because of difference in period of drawing.
Interest on A’s drawings Interest on B’s drawings
Amount Period Equivale Amount Period Equivale

nt nt
Withdra till end 1 month Withdraw till end 1 month
wn n
1,500 11 16,500 1,000 10 10,00
0
500 9 4,500 1,500 9 13,50
0
2,000 8 16,000 1,000 6 6,000
1,000 3 3,000 1,500 3 4,500
1,000 0 0 1,000 1 1,000
6,000 40,000 6,000 35,00
0
Interest on A’s drawings = 40,000 x 6% x 1/12 = Rs. 200
Interest on B’s drawings = 35,000 x 6% x 1/12 = Rs. 175
Illustration 1.24
The closing balances in the drawings accounts of A, B and C show Rs.12,000 each on 31st December,
2001. They withdrew this amount in monthly installments of Rs.1,000. A’s drawings were made at the
beginning of each month, B on 15th and C at the end of each month.
Calculate interest on drawings @6% p.a. to be debited to them on 31st December 2001.
Interest on A’s Drawings = 12,000 x 6% x 6.5/12 = Rs.390

Interest on B’s Drawings = 12,000 x 6% x 6/12 = Rs.360
Interest on C’s Drawings = 12,000 x 6% x 5.5 /12 = Rs.330
Commission to Partners
Commission is allowed to a partner for his service if all partners agree to such a payment. Again, in
the absence of a specific condition in the partnership deed, a partner is not entitled to any salary or
commission for his service rendered to the firm.
When commission is allowed it may be stated as ‘payable on the profit before charging commission’
or ‘payable on the profit after charging commission’. If commission is payable on the profit before
charging commission, it simply means that the commission is to be calculated at the given percent on
the given amount of profit. But if it is a certain percentage after charging such commission, the amount
of commission should be exactly the percentage specified on the balance of profit after deducting
such commission, not the total amount. The following illustration will clarify the point.
he idea of commission on the net profit ‘before charging such commission’ and ‘after charging commission’ sounds confusing ‘Butler
English’. But read it very carefully. This ‘before charging’ condition is exactly what we all normally understand. If the profit is 100 and
10% commission is allowed it simply means the commission is Rs.10 and the balance of profit available is Rs.90. The trouble hare is to
take out 10% of the profit left after taking out such commission. Does this sound confusing again? In the above example Rs.10 is not
10% of the balance of profit of Rs.90. This is the problem. Now how to solve it? Remember that the commission is 10% of the balance
of profit, which means if the balance is 100 then commission is 10. In other words it is not to be calculated as 10 out of 100 but as 10 out
of 110.
Study carefully how B’s commission is calculated in illustration 1.25
Illustration 1.25
A & B are equal partners in a firm. Their partnership deed provided for commission to A @5% of the net profit
before charging any commission. B is entitled to 5% commission on the profit after charging all commissions.
Net profit before any such commission was Rs.42,000. Calculate commissions and profit share of each partner.
Commission payable of to A = 5% of 42,000 ie. Rs.2,100.
Commission payable to B = 5% of the N/P after all commissions.
Net profit available after charging A’s commission = Rs.39,900 (42,000 – 2,100)
Which is B’s commission + ‘N/P after all commissions’
Now B’s commission is to be 5% of the balance after deducting B’s commission.
If B’s commission is Rs.5, the balance available should be Rs.100
Which means the total should be 105.
Again, if the total available is 105, B will get a commission of 5 and the balance of Rs.100 will remain. ie. for
every 105, B will get a commission of Rs.5.
Therefore B’s commission is Rs.39,900 x 5/105 = Rs.1,900
Notice that the balance available is Rs.38,000 and B’s commission of Rs.1,900 is exactly 5% of
Rs.38,000.

Fundamentals
Syllabus
Calculation of Capital Ratio
Capital ratio should be understood as investment ratio. Money is considered an important working
factor in the business. When the capital contribution of a partner is higher, it also means that his
money worked more in making the profit. In calculating the capital ratio the amount and the period of
investment are to be considered. Suppose A contributes 10,000 in January and B contributes the
same amount on 1st July, A's capital has worked double that of B due to earlier investment, even
though both the amounts are the same at the end of the year. Therefore, capital ratio should be based
on the amount of capital multiplied by the number of months the investment remained with the firm.
Illustration 1.26
A started business on 1st January 2001, with a capital investment of Rs.50,000. B joined on 1st May
with a capital contribution of Rs.75,000 and C joined with 1st July with Rs.50,000 as capital.
They made a profit of Rs.25,000 in the first year. Distribute profit in the capital ratio.
Date & Amount Months Effective

for which Amount
money was
used
A on 1st Jan 12 600,000
Rs.50,000
B on 1st may 8 600,000

Rs.75,000
C on Ist July 6 300,000

Rs.50,000
Capital Ratio between A, B & C = 600000:600000:300000 ie. 2:2:1
Illustration 1.27
A & B started business on 1st January 2001. They have decided to share profits and losses in the
capital ratio. Calculate their capital ratio form the following details
A's Capital Account
Particulars Amoun Particulars Amoun
t t
Mar 1 To Cash – 9,000 Jan 1 By Cash 65,000
Drawing..
Oct 1 To Cash – 10,000 Jul 1 By Cash..addl. 40,000
Drawing. Cap.
Dec 31 To bal c/d 86,000
105,000 105,00
0
B's Capital Account

Jan 1 By Cash 50,000
Apr 1 To Cash – Drwng. 19,500
Oct 1 To Cash – Drwng. 5,500 Jul 1 By Cash.. addl. 25,000
Cap.
Sept 1 By Cash – addl. 10,500
Cap.
Dec To bal c/d 60,500
31
85,500 85,500
Fundamentals
Syllabus
Theory Questions
1. What is meant by partnership?
2. Define ‘Partnership Deed’.
3. Mention any three features of partnership.
4. Distinguish between fixed and fluctuating capital accounts.
5. List the circumstances under which the fixed capitals of partners may change.
6. State provisions of the Partnership Act, 1932, in the absence of a partnership agreement regarding the
following:
(a) Division of profit (b) Interest on capital and (c) Interest on partner’s drawings
7. State any three items that should be included in the partnership agreement form accounting point of view.
8. Why is profit and loss appropriation account prepared?
9. Write note on ‘guarantee of profit’ to a partner.
10. Name any six items, which are shown in the profit and loss appropriation account.
11. How will you calculate interest on the drawings of equal amounts on the first day of every month of a
calendar year?
12. How will you calculate interest on the drawings of equal amounts on the last day of every month of a
calendar year?
13. How will you calculate interest on the drawings of equal amounts on 15th day of every month of a calendar
year?
14. List any two items appearing on the debit side of the partner’s current account.
15. In the absence of partnership deed, how are the interest on capital and interest on partner’s loan treated?
16. Give items that may appear on the credit side of partner’s current account.
17. State at least five important points from accounting point of view which must be incorporated in the
partnership deed.
18. In the absence of partnership deed, state four important points that you should note for proper accounting
treatment amongst the partners. (hint: rules regarding salary to partners, interest on capital etc.)
Reconstitution of Partnership
Admission or Changing Ratios 1
Syllabus
Changes in profit sharing ratio among the existing partners, Sacrificing Ratio and Gaining Ratio
Ø Accounting for revaluation of assets and liabilities and distribution of reserves and accumulated profits
Ø Goodwill: nature, factors affecting and methods of valuation, average profit, super profit and capitalization
methods
Ø Admission of a Partner: Effect of admission of partner, change in profit sharing ratio, accounting treatment
for goodwill, revaluation assets and liabilities, reserves (accumulated profits) and adjustment of capitals
A partnership business may undergo several structural changes during its lifetime. New partners may join or
existing ones may leave the business. While making such major changes in the structure of business,
partners carefully evaluate their accounts. They have to reset the system on a correct starting point. They
check the values of assets and liabilities appearing in the books. If there are discrepancies they have to be
rectified before introducing a major change. Reconstitution of a partnership business can take place under
the following situations:
• Admission of a new partner
• Changing profit sharing ratio among existing partners
• Retirement / death of a partner
• Amalgamation of two partnership firms
The most important accounting adjustment is resetting of old accounts. It is a common adjustment in all
cases of reconstitution. In this chapter you will find reconstitution by admission and reconstitution by
changing ratios. Reconstitution by admission is more important on examination point of view. The following
are the common adjustments at the time of reconstitution of a partnership business.
1. Revaluation of assets and liabilities
2. Distribution of reserves and accumulated profits
3. Calculation of new ratio, sacrificing ratio and gaining ratio
4. Treatment of goodwill
5. Readjustment of capital accounts
1. Revaluation of Assets and Liabilities

Assets and liabilities are often shown in the accounts at their historical value rather than realisable value.
Due to conservatism the partners usually do not revise the values of assets even when their actual market
values are much higher than book values. Similarly inadequate depreciation, change in technology etc.
make the book values of certain assets more than their realisable value. It is not practical for the partners to
keep on changing the book values of their assets every time there is a change in their market values. The
difference between book value and market value is not a problem as long as the partnership business goes
on normally. But when they change the structure of the partnership in the form of revision in profit sharing
ratio, admission of a new partner, retirement or death of a partner, amalgamation of two partnership firms or
absorption of a firm by another, the values of assets and liabilities are to be reassessed and difference if
any, should be accounted.
What is the purpose of revaluation?

When the realisable value of asset or liability is different from the book value there is a profit or loss hidden
in the difference in value. The partners should distribute all the profits and losses in the existing profit
sharing ratio before changing the ratio. If the ratio remains unchanged there is practically no use in
estimating the hidden profit or loss. However, if this profit or loss is not distributed prior to changing profit
sharing ratio some partners will lose and others gain due to the change in ratio.
For example: A&B, who were equal partners purchased land for Rs.10,000 in Jan 1975. They decided to
share profits and losses in the ratio 2:1 from 1st January 2001. The actual market value of land on 1st
January was Rs.70,000; whereas the book value remains at the purchase price of Rs.10,000. There is a
Retirement / Death of Partners 1
Syllabus
Ø Retirement / Death of a Partner: Change in profit sharing ratio, accounting treatment of goodwill,
revaluation of assets and liabilities, adjustment of accumulated profits (reserves) and capitals
A person becomes a partner at his own will, as a result of a voluntary agreement. It does not happen
due to inheritance or any other external factor on which one has no control. Similarly a partner can
retire from the firm at his will subject to reasonable restrictions.
From the accounting pint of view retirement or death of a partner have almost similar effect.
Retirement is a planned exit of a partner, while death is an unplanned exit.
Retirement or death dissolves the partnership. This dissolution does not mean the winding up of
the business. It happens only in the legal aspect, not in its physical aspect. The remaining partners
will continue to run the firm in a reorganised form with a new agreement. As retirement is a
planned event, it is mostly done at the end of a financial year. The partners prepare themselves to
deal with the problems associated with retirement. Death comes unexpectedly. It can happen any
time during a financial year. Exit of a partner can create a vacuum in management and a financial
emergency. Accounting treatment for retirement and death are almost the same. Capital and
current account balances, along with the share of accumulated profits funds etc. are to be settled.
Settlement of claim from Life insurance policies also has to be done. In the event of death,
calculation of the deceased partner’s share of profit for the period of his service during the year of
death is an additional factor to be accounted.
The following are the common accounting aspects to be considered at the time of retirement or death
of partners.
1. Change in profit sharing ratio

2. Treatment of goodwill
4. Accumulated profits; reserves; losses etc.
5. Adjustment of Joint Life Policy
6. Adjustment of capital
1. Change in profit sharing ratio
Retirement or death reduces the number of partners to share future profits or losses. Naturally the
share of profit for the continuing partners will increase by the retirement or death of a partner.
Recalculation of ratios is the first step in for further accounting procedures. Revision in ratio may be
indicated in any of the following ways in a question:
a. Old ratio is given and nothing is mentioned about the new arrangement
after retirement.
This is practically the easiest way of presenting new profit sharing arrangement. The new ratio
under this method is found out simply by canceling the outgoing partner’s share of profit assuming
that the ratio between the continuing partners does not change. When this method is followed the
outgoing partner’s share merges into the continuing partners share in their profit sharing ratio.
Example: A, B and C have been sharing profits and losses in the ratio 3:2:1. B has retired from the
business. Find out new ratio between A & C.
Here B is retired and nothing is mentioned about the arrangement between A & C. The new ratio is
found out by simply canceling the B’s share of profit.
New ratio = 3:1
Here B’s share of 2/3 of profit is merged in the shares of A and C in the ratio 3:1.
b. The outgoing partner’s share is taken over by the continuing partners in a

certain ratio.
A & B have been sharing profits and losses in the ratio 3:2:1. B retired from the firm. His share of
profit is divided equally between A & C. Find out new ratio.
Here B’s share of 2/6 is shared between A & C equally. The new share of A is his old share of 3/6 +
1/6 from B. Thus his new share is 4/6. C’s new share is his old share of 1/6 + 1/6 from B. Thus his
new share is 2/6. New profit sharing ratio is 4:2 that is 2:1.
c. The new ratio is directly given.

When the new ratio is directly given, the need for calculating it is taken away. But it is important to
remember that new ratio is only a first step for further adjustments in accounts on retirement or
death.
2. Accounting Treatment of goodwill
Accounting treatment of goodwill on retirement and death is very close to that in admission Following
are the different methods followed:
1. The outgoing partner’s share adjusted in the books

(Margin Adjustment)
This method is similar to the premium method adopted in admission of partners. Under this method
the outgoing partner’s share of goodwill is credited to his capital account and the continuing partner’s
capital accounts are debited for the same in the “gaining ratio.”
Gaining ratio
Gaining ratio is the ratio of gain. You have seen this in the earlier chapters. Retirement or death of
partners is one situation where gaining ratio is applied for adjusting goodwill. When a partner leaves
the firm the ratio is revised and the continuing partners will share the outgoing partner’s portion of
profit in addition to their old ratio. It is calculated by deducting the old ratio from the new.
Calculation of gaining ratio is important when the partners decide to adjust the outgoing partner’s
share of goodwill without raising the goodwill account in the firm.
[Notice that we use sacrificing ratio when the new partner brings in cash for the share of goodwill on admission. Compare the two
situations carefully learn thoroughly the difference in accounting treatment.]
2. Goodwill raised in the books

This is the revaluation method of treatment of goodwill. Goodwill is raised in the books of the firm by
debiting goodwill account and crediting “all partners’ capital accounts” in the old ratio.
With this journal entry goodwill account is actually opened in the books and will appear in the future
balance sheets at its full value. The outgoing partner gets his share of goodwill along with the
continuing partners.
If the continuing partners decide to reduce the value of goodwill or to write it off completely they can
do so by debiting their capital accounts in the new ratio and crediting the goodwill account with the
amount to be reduced. The outgoing partners share or his position is in no way affected due to this
step.

Revaluation of assets and liabilities are done exactly the same way it is done on admission of a
partner. The reason behind revaluation in admission or retirement is to make the balance sheet reflect
a true and fair view of the assets and liabilities of the firm, prior to making any other major changes in
the ownership structure of the business. Any loss or gain in this rearrangement should go to those
persons, only to those persons, who are responsible. In other words the incoming new partner in
admission or the outgoing partner in retirement or death shall not lose or gain due to wrong valuation
of assets and liabilities.
Revaluation is done in the books through a revaluation account. Profit or loss on revaluation is
transferred to the capital accounts of all partners (including the outgoing partner) in the old profit
sharing ratio.
Remember the rule we follow in admission; “old partners in old ratio”. Here also we apply the same
rule. We don’t call them old partners just because we don’t have any “new partner in retirement”. Also
notice that the expression “outgoing partner” is used in this book as a convenient term to refer the
“retiring partner” as well as the “deceased partner”. Again deceased partner means dead partner.
The term deceased sounds less deadly.
4. Reserves and Accumulated profits losses etc.

Accumulated profits, reserves, losses etc. are treated on retirement or death exactly the way they
were done in admission. The profits or reserves are transferred to the credit of capital accounts of all
partners in the old profit sharing ratio. As a result these items will disappear from the books and from
future balance sheets as well. Accumulated losses that are appearing on the asset side of the balance
sheet are transferred to the debit side of all partners in the old profit sharing ratio.
5. Adjustment of Joint Life Policy

Joint life policy is a precautionary measure to protect the firm from financial crisis, on account of
death of a partner. This is a life insurance policy by which more than one life is insured. In case of
a partnership firm all partners are covered usually by a single life insurance policy. The firm, not
the partner, pays the premium on this policy. In the event of death of any one of the
partners, the insurance company will pay the full amount assured sum to the firm.
This amount will be regarded as a special income to the firm and credited to capital accounts
of all partners in the profit sharing ratio.
Does it sound little unfair on the part of the continuing partners to share the insurance amount
in the profit sharing ratio? How can someone share the life insurance money on the death of
another man? This doubt is quite natural.
A person is allowed to take any number of policies on his own life and pay from his private
income. Nobody except the legal heirs will get the insurance amount. But the joint life policy
discussed here is different. The main aim of this policy is not supporting the family of the
partner, but to save the firm from landing into financial crisis due to death of a partner.
However this indirectly helps the family of the deceased by quick settlement of dues. Here all
the partners (including the deceased one) decided together to insure their lives jointly and pay
the premium from the firm’s funds. There is another aspect also to this problem. Suppose the
entire insurance claim is credited only to the deceased partner. This will defeat the very
purpose for which the policy is taken. The capital account or the amount payable to the
executors will directly increase to the extent of the insurance claim. Now firm has to find out
other sources of finance to settle original capital investment and reserves. Therefore it is
perfectly logical to consider the insurance amount as a business income and share the amount
in the normal profit sharing ratio.
Sometimes the partners insure their lives separately and pay the premium from the firm. This will help
the continuing partners to keep their life insurance policy valid even after the death of a partner. When
there are separate life insurance policies, the full amount due on the policy of deceased partner and
the surrender values of the policies of the continuing partners will be credited to all partners in their
profit sharing ratio. The surrender values will appear in the subsequent balance sheets.
The following are the three methods of accounting treatment of joint life policies:
i. The insurance premium treated as normal business expense

When insurance premium is treated as normal business expense, the premium paid will be initially
debited to the premium account and later on transferred to the profit and loss account just like any
other business expense.
Journal entries
a) For payment of premium:
Joint life insurance premium account Dr.
To Cash
b) For Transfer of expense to P & L account

P & L account Dr.
To Joint Life Premium Account
c) At the time of maturity (claim due to death)

Insurance Claim Account Dr. (full amount of insurance policy)
To All Partner’s Capital Accounts (in the profit sharing ratio)
d) For cash received

Cash / Bank account Dr.
To Insurance Claim
Illustration 3.01
A, B, and C sharing profits and losses in the ratio 2:1:1 have taken a joint life policy for Rs.100,000
with an annual premium of Rs.1,000 on 1st January 2000. C died on 10th February 2002. The
Insurance Company settled the claim on 15th Feb 2002..Pass necessary journal entries in the books of
the firm and show the Joint Life Premium and Insurance Claim accounts.
First Year
Jan 1, 2000
JLP Premium account Dr.1,000
To Cash Account 1,000
(JLP premium paid)
----------------------------------------------------------------------------------------
Dec.31, 2000
Profit and Loss Account Dr.1,000
To JLP premium Account 1,000
(JLP Premium written off as expense)
Second Year
Jan1, 2001
JLP Premium Account Dr.1,000
To Cash 1,000
(JLP Premium paid)
----------------------------------------------------------------------------------------
Dec.31, 2001
Profit and Los Account Dr.1,000
To JLP Premium 1,000
(JLP Premium written off)
Third Year
Jan1st, 2002
JLP Premium Account Dr.1,000
To Cash 1,000
(JLP Premium paid)
----------------------------------------------------------------------------------------
Feb10, 2002
Insurance Claim Account Dr.100,00
To A’s Capital Account 40,000
To B’s Capital Account 40,000
(Insurance claim/policy maturity due to C’s death)
----------------------------------------------------------------------------------------
Feb 15, 2002
Bank Account Dr.100,000
To Insurance Claim 100,000
(Insurance claim settled)
JLP Premium Account

1Jan,200 To Cash 1,000 31 By P&L 1,000
0 Dec2000 Account
1,000 1,000
1 Jan To Cash 1,000 31 Dec, By P&L 1,000

2001 2001 Account
1,000 1,000
1 Jan To Cash 1,000 31 Dec By P &L 1,000

2002 2002 Account
1,000 1,000
Insurance Claim Account

Feb To A’s Cap Feb 10, By Bank 100,000
10,2002 40,000 2002
To B’s Cap
40,000
To C’s Cap 100,000
20,000
100,000 100,000
Syllabus
ii. The surrender value is retained as asset.
Surrender value of an insurance policy is the amount which the insurance company will pay back to
the insured if he decides to cancel the policy before maturity. The insurance company usually would
not pay anything if the policy is cancelled in the first year. But thereafter, they company will agree to
refund a small portion of the premium paid if the customer decides to discontinue the policy. With each
payment of premium some portion it is added to the surrender value of the policy. The portion thus
added into the surrender value is not considered a capital expense. Only the remaining part is written
off to Profit and Loss account as expense.
Journal entries:
a. For Payment of Premium
Joint life policy account Dr.
To cash
(Notice that the joint life policy (asset) account, not the premium (expense) account is debited)
------------------------------------------------------------------------------------------------
b. For the premium above surrender value is transferred:
P & L account Dr.
To Joint Life Policy Account
------------------------------------------------------------------------------------------------
c. At the time of maturity (claim due to death)
Insurance Claim Account Dr. (full value insured)
To Joint Life Policy
------------------------------------------------------------------------------------------------
d. For the Claim Settlement
Bank/cash Account Dr.
To Insurance Claim
------------------------------------------------------------------------------------------------
e. For Closing JLP account
JLP account Dr. (balance amount)
To All Partner’s Capital Accounts (Profit sharing ratio)
Illustration 3.02
A,B, and C sharing profits and losses in the ratio 2:1:1 have taken a joint life policy for Rs.100,000 with
an annual premium of Rs.1,000 on 1st January 2000.The surrender values for the policy were:
31st Dec. 2000-nil;
31st Dec. 2001-Rs.300;
31st Dec. 2002- Rs.750
31st Dec. 2003- Rs.1,250
C died on 10th February 2003. The Insurance Company settled the claim on 15th Feb, 2003. Pass
necessary journal entries in the books of the firm and show the Joint Life Policy and Insurance Claim
accounts.
The full amount of premium paid in the first year Rs. 1,000 would be regarded an expense in that year.
The premium paid in the second year resulted in surrender value of Rs300, and therefore only Rs. 700
will be considered an expense in the second year. The third premium payment resulted in an addition
of Rs. 450 to the surrender value and therefore only Rs.550 is considered to be the expense.
Journal Entries
First Year
Jan1, 2000
Joint life policy account Dr.1,000
To Cash 1,000
Syllabus
Miscellaneous Illustrations
Illustration 3.04
The following is the Balance sheet of A B and C who are equal partners, as on 31st December 2001.
C decided to retire from the firm. A & B agreed to continue to remain equal partners for future.
Balance Sheet
(as on 31st December 2001)
Liabilities Amount Assets Amount
Capital A 30,000 Cash 2,500
Capital B 20,000 Stock 17,750
Capital C 15,000 Debtors
16,400
Reserves 4,500 Less: Reserve 15,000
1,400
Creditors 5,500 Machinery 18,750
Building 21,000
75,000 75,000
The following adjustments have been made for retirement
a. Stock reduced to Rs. 15,000 and Machinery Increased to Rs.20,000
b. C’s share of Goodwill Rs.6,000 is adjusted in the accounts.
c. B paid cash Rs.10,000 to C; and the balance amount due to him is transferred to C's loan account
Prepare revaluation account, capital accounts of partners and the Balance Sheet of the firm after C's
retirement.
Revaluation Account
To Stock 2,750 By Machinery 1,250
By Partner’s Capital
accounts 1,500
(Revaluation Loss)
2,750 2,750
Cash Account
To Balance b/d 2,500 By C’s Capital a/c 10,000
To B’s Capital 10,000
account
12,500 12,500
Capital Accounts
Particulars A B C Particulars A B C
To 500 500 500By Balance 30,000 20,000 15,000
Revaluation 3,000 3,000 b/d 3,000
a/c 10,000By Cap A - 3,000
To C’s Cap – 12,000gw 1,500 1,500 1,500
gw 28,000 28,000 - By Cap B - 10,000
To B’s Capital gw
To C’s loan 31,500 31,500 22,500By Reserves 31,50 31,500 22,500
a/c By C’s Cap) 0
To Bal c/d
Balance Sheet
A’s Capital 28,000 Cash in Hand 2,500
B’s Capital 28,000 Stock 15,000
C’s Loan Account 12,000 Debtors 16,400
Creditors 5,500 Less: Reserve 1,400 15,000
Machinery 20,000
Building 21,000
73,500 73,500
Illustration 3.05
Following is the Balance Sheet of A, B and C sharing profits and losses in the ratio 2:1:1, as on31st
December 2001
Balance Sheet
A's Capital 25,000Machinery 20,000
B's Capital 25,000Buildings 31,600
C's Capital 15,500Furniture 6,300
Creditors 4,500Debtors 6,400
Stock 5,700
70,000 70,000
A has decided to retire from the firm Following revaluations and adjustments are made for retirement.
1. Machinery are revalued at Rs.30,000 and A took over half of the machinery the revised value.
2. An unrecorded typewriter given to Mr. A for Rs.1,000
3. Creditors include Rs.1,500 due to Mrs.A which is taken over by Mr. A.
4. Goodwill of the firm is valued at Rs.14,000.
5. Balance in A's capital account is to be transferred to his loan account.
Pass Journal Entries; prepare Ledger and the Balance Sheet of the firm after A's retirement.
Revaluation Account
To Capital accounts By Machinery a/c 10,000
(Revaluation By A’s Capital –
profit) Unrecorded asset 1,000
A 5,500
B 2,750 11,000
C 2,750 11,000 11,000
Capital Accounts
To A’s Capital – - 3,500 3,500By Balance c/d 25,000 25,000 15,500
G/wl 15,000 By B’s Capital- 3,500
To Machinery 1,000 Gw 3,500
a/c By C’s Capital- 1,500
To Revaluation – 23,000 Gw 5,500 2750 2750
By Creditors-
unrecorded asset
24,250 14,750rs.A
To A’s loan a/c By Revaluation
a/c
To balance c/d
39,000 27,750 18,250 39,00 27,750 18,250
0
Balance Sheet
B’s Capital 24,250 Machinery 15,000
C’s Capital 14,750 Buildings 31,600
A’s Loan Account 23,000 Furniture 6,300
Creditors(4500- 3,000 Debtors 6,400
1500) Stock 5,700
65,000 65,000
Illustration 3.06
The following is the Balance Sheet of A, B and C as on 31st December 2001. B has decided to retire
from the firm.
Balance Sheet
A's Capital 40,000 Land 30,000
B's Capital 25,000 Buildings 33,000
C's Capital 20,000 Stock 10,300
Creditors 6,600 Debtors 15,700
Loan 3,400 Cash 6,000
95,000 95,000
The following arrangements have been made as part of the retirement plan.
a. Their old profit sharing ratio of 2:1:1 will change as 2:1 after B's retirement
b. Land and Building to be appreciated to Rs.35,000 and Rs.36,000 respectively.
c. Stock to be reduced to Rs.9,500
d. The goodwill of the firm is estimated to be worth Rs.18,000.
e. Lives of partners have been jointly insured for Rs.60,000 which is now surrendered for Rs.18,000.
The entire amount of the policy has been paid to C in part settlement of the amount due to him.
Prepare revaluation account, necessary ledger accounts and the Balance Sheet of the firm
immediately after B's retirement.
Revaluation Account
To Stock 800 Land 5,000
To Capital a/c Buildings 3000
A
3,600
B 7,200
1,800 8,000 8,000
C
1,800
Cash Account
To Balance b/d 6,000 By B’s Capital 18,000
To JLP 18,000 By balance c/d 6,000
24,000 24,000
Capital Accounts
To B’s Cap 3,000 - 1,500By balance 40,000 25,000 20,000
gw 18,000 b/d - 3,000 -
To Cash 17,800 By A’s Cap- - 1,500 -
To B’s loan gw 9,000 4,500 4,500
a/c 49,600 - 24,800By B’s Cap- 3,600 1,800 1,800
52,600 35,800 26,300gw 52,60 35,800 26,300
By JLP 0
To balance By
c/d
Revaluation
Balance Sheet
A’s Capital 49,600 Land 35,000
B’s Capital 24,800 Buildings 36,000
C’s loan account 17,800 Stock 9,500
Loan 3,400 Cash 6,000
102,200 102,200
Illustration 3.07
A, B and C sharing profits and losses in the ratio 2:1:1 had their Balance Sheet as on 31st
December2001 as follows
Balance Sheet
C's Capital 18,500 Machinery 17,500
Reserves 6,500 Furniture 4,100
Cash at Bank 5,400
85,000 85,000
A has decided to retire on that date subject to the following arrangements:
B & C shall share future profits and losses equally.

The values of Land, Buildings and Machinery are estimated to be worth Rs.5,000, Rs.3000 and
Rs.1,000 more than their respective book values.
A’s share of goodwill is estimated at Rs.3,000
They have decided the future capital shall be Rs.100,000 to be shared by B &C in the new profit
sharing ratio. The amount due to A has to be paid off immediately.
Prepare revaluation account, capital accounts of partners, cash account and the new Balance Sheet.
Revaluation Account
To Capital By Land 5,000
accounts By Buildings 3,000
A 4,500 By Machinery 1000
B 2,250 9,000
C 2250 9,000 9,000
Cash Account
To Balance b/d 5,400 By A’s Capital 45,750
To C’s Capital 29,125 By balance c/d 11,400
57,150 57,150
Capital Accounts
To Cash 45,750 By Balance 35,000 25,000 18,500
To A’s Cap 1,500
1,500b/d 3,250 1,625 1,625
-gw By Reserves 1,500 - -
By B-gw 1,500
By C-gw 4,500 2,250 2,250
50,000 50,000By 22,625 29,125
To Balance 45,750 51,500 51,500Revaluation 45,75 51,500 51,500
c/d By Cash 0
Balance Sheet
B’s Capital 50,000 Land 38,000
C’s Capital 50,000 Buildings 28,000
Machinery 18,500
Furniture 4,100
Cash 11,400
100,000 100,000
Syllabus
Illustration 3.08
The following Balance Sheet shows the financial position of A B and C as on 31st December 2001. C
has decided to retire from the firm on the conditions listed below.
Balance Sheet
C's Capital 20,000 Furniture 4,500
Creditors 5,200 Stock 6,200
P & L Account 4,800 Debtors 10,250
Investment 8,500
Cash 3,550
85,000 85,000
1. The old profit sharing ratio of 2:1:1 shall change as 1:1

2. The goodwill of the firm is valued at Rs.18,000; C's share shall be adjusted in capital accounts
without raising goodwill.
3. Land should be appreciated by 20% and buildings to be depreciated by Rs.2,000.
Prepare revaluation account, capital accounts of partners and the balance sheet immediately after C's
retirement
Revaluation Account
To Building 2,000 By Land 6,000
To Capital 4,000
Accounts 6,000 6,000
Capital Accounts
To C’s 4,500 By Balance 30,000 25,000 20,000
Cap–G/w b/d 2,400 1,200 1,200
- - 26,700 By P&L a/c 4,500
To C’s 34,400 22,700 - 2,000 1,000 1,000
Loan 34,400 27,200 26,700 By B’s Cap-Gw 26,700
To balance By
c/d Revaluation
Balance Sheet
Liabilities Amou Assets Amoun
nt t
A’s Capital a/c 34,400 Land 36,000
B’s Capital a/c 22,700 Buildings 20,000
Furniture 4,500
Loan account C 26,700 Stock 6,200
Investment 8,550
Cash 3,550
89,000 89,000
Illustration 3.09
A, B and C had the following financial position on 31st December 2001. B decided to retire on that
date
Balance Sheet
Capital A 25,000 Machinery 17,700
Capital B 19,500 Buildings 23,000
Capital C 18,000 Land 19,600
General Reserve 1,500 Petty cash 500
Creditors 6,000 Office Equipment 5,700
Cash at Bank 3,500
70,000 70,000
The following arrangements have been made for retirement.

The value of buildings to be reduced to Rs.20,000 and machinery to Rs.17,100
The old profit division arrangement of equal sharing has been changed to 2:1 between A and C.
Goodwill of the firm is estimated to be worth Rs.21000; B's share thereof should be adjusted through
capital accounts.
The total capital of the firm after retirement has been decided to be Rs.75,000 to be shared by A and C
in their new profit sharing ratio
Amount due to B is paid off immediately.
Prepare revaluation account, capital accounts of partners and the balance sheet of A & C after B's
retirement.
Revaluation Account
To buildings 3,000 By Capital Accounts 3,600
To Machinery 600 (Revaluation loss)
Bank Account
To Balance b/d 3,500 By B’s Capital 25,800
To A’s Capital 32,700
To B’s Capital 7,700 By balance c/d 18,100
43,900 43,900
Capital Accounts
To 1,200 1,200 1,200 By Balance 25,000 19,500 18,000
Revaluatio 7,000 b/d 500 500 500
n By Reserves 7000
To B’s 50,000 25,000 By A’s Cap GW 32,700 7,700
Cap-Gw By Cash
To Balance 58,200 25,800 26,200 58,20 27,000 26,200

b/d 0
Balance Sheet
A’s Capita 50,000Machinery 17,100
B’s Capital 25,000Buildings 20,000
Creditors 6,000Land 19,600
Office Equipment 5,700
Cash at Bank 18,100
Petty Cash 500
81,000 81,000
Illustration 3.10
The following Balance Sheet shows the financial position of A,B and C sharing profits and losses in the
ratio 3:2:1, as on 31st December 2001
Balance Sheet
Capital A 25,000 Buildings 25,500
Capital B 21,000 Machinery 16,800
Capital C 12,400 Debtors 8,900
Reserves 1,600 Joint Life Policy 4,500
Cash 4,300
60,000 60,000
A has decided to retire on the following conditions:
1. Buildings and Machinery to be revalued 10 % less.

2. Debtors include an amount of Rs.400 known to be bad; reserve of Rs.370 to be maintained.
3. Joint life policy was surrendered for Rs.6,500.
4. B & C invested an additional capital of Rs.30,000 in such a way that their new balances would be in
in the new profit sharing ratio; A's capital balance is paid off
Pass necessary journal entries, open ledger accounts and prepare the new Balance Sheet of the firm.
Revaluation Account
To Buildings 2,550 By Capital a/c – loss 5,000
To Machinery 1,680
To Debtors 400
To Reserve for D/d 370
5,000 5,000
Cash Account
To balance b/d 4,300 By A’s Capital 24,300
To JLP 6,500
To C’s Capital 19,300 By balance c/d 16,500
40,800 40,800
Capital Accounts
To 2,500 1,250
1,250 By Balance 25,000 21,000 12,400
Revaluatio 24,300 b/d 800 400 400
n By 1,000 500 500
To Cash 31,350 31,350 Reserves 10,700 19,300
26800 32600 32600 By Joint Life 26,80 32,600 32,600
To Balance P
0
o
c/d l
i
c
y
By Cash
Balance Sheet
Capital B 31,350 Cash 16,500
Capital C 31,350 Buildings 22,950
Machinery 15,120
Debtors 8,500
less: Reserve 370 8,130
63,700 63,700
Syllabus
Illustration 3.11
The following is the Balance Sheet of A, B and C as on 31st December,2001. C decided to retire from
the partnership.
Balance Sheet
C's Capital 15,000 Debtors
9,000
Creditors 7,500 Less: Reserve 8,200
800
Cash 8,300
57,500 57,500
The following revaluations and adjustments have been made for retirement.
a. Old profit sharing ratio of 2:1:1 is changed to 1:1 between A & B.
b. Land is appreciated by 20%
c. A debtor for Rs.500 is known to be insolvent, and the amount is to be reduced from debtors.
d. Present provision for doubtful debts is to be maintained unchanged.
e. Goodwill of the firm is valued at Rs.15,000, C's share is adjusted in the books without raising
goodwill account
f. A Joint Life Policy, not appearing is the books is surrendered for Rs.14,000, 50% of C's account is
settled immediately on retirement.
Prepare necessary Ledger Accounts and the Balance Sheet of the firm after C's retirement.
Revaluation Account
To Debtors 500 By Land 4300
To Capital 3800
Accounts 4300 4300
Cash Account
To Balance b/d 8,300 By C’s Capital a/c 11,600
To Joint Life policy 14,000 By balance c/d 10,700
40,800 40,800
Capital Accounts
Particulars A B C
Particulars A B C
To C’s Cap 3,750 By Balance b/d 20,000 15,000 15,000
GW 11,600By JLP 7,000 3,500 3,500
To Cash 11,600By B’s capital 3,750
To C’s Loan 28,900 15,700 Gw 1,900 950 950
To balance 28,900 19,450 23,200By Revaluation 28,90 19,450 23,200
c/d 0
Balance Sheet
A’s Capital 28,900 Land 25,800
B’s Capital 15,700 Buildings 19,500
Debtors 8,500
Loan account 11,600 less: Reserve 800 7,700
C 7,500 Cash 10,700
Creditors 63,700 63,700
Illustration 3.12
A, B and C sharing profits and losses equally had the following balance sheet as on 31st December,
2001.
Balance Sheet
Capital : A 35,000 Machinery & Tools 25,900
:B 21,000 Motor Vehicles 24,000
:C 15,000 Debtors 12,400
Reserves 1,200 Stock 8,500
JLP Reserve 7,500 Joint Life Policy 7,500
Creditors 4,700 Cash 6,100
84,400 84,400
B died on 31st March, 2002. A & C decided to continue business as equal partners. They have settled
the full amount due to B immediately after revising the values of assets liabilities and goodwill as listed
below.
Value of Motor vehicles were reduced to Rs.20,000 and a provision for of Rs.500 were created for
doubtful debts. Partner's lives have been jointly insured for Rs.30,000 and the insurance company
settled the claim with an additional bonus of Rs.6,000. B's share of current year's profit is worked out
on the estimation of Rs.12,000 profit for for the whole year.
Goodwill is valued at Rs.13,500..
Prepare revaluation account capital accounts and the new balance sheet of A and C.
Revaluation Account
To Motor 4000 By Capital Accounts 4500
Vehicles 500
To Bad debts 4500 4500
reserve
Cash Account
To balance b/d 6100 By B’s Executors a/c 37400
To Joint Life 36000 By balance c/d 4700
Policy 42100 42100
Capital Accounts
Particulars A BC Particulars A B C
To 1500 1500
1500 By Balance 35000 21000 15000
Revaluation 37400 b/d 400 400 400
To B’s By Reserves 12000 12000 1200
Executors By Joint life 0 0 00
50400 - 30400 policy 1000
51900 38900 31900 By Goodwill 5190 38900 31900
To balance By P&L 0
c/d
Balance Sheet
Capital Account A 43,650Machinery and Tools 25,900
Capital Account C 23,650Motor Vehicles 20,000
Creditors 4,700Debtors 12,400
less Provisions 11,900
500 8,500
Stock 4,700
Cash 1,000
72,000 P&L account 72,000
Illustration 3.13
The following Balance Sheet shows the financial position of A B and C as on 31st December, 2001.
Balance Sheet
Capital: A 25,000 Machinery 35,800
:B 25,000 Furniture 20,500
:C 15,000 Joint life Policy 13,200
Reserves 6,500 Debtors 3,700
Creditors 8,500 Cash in Hand 6,800
80,000 80,000
B died on 30th April 2002. Consider the following arrangement as per provisions of their partnership
deed and prepare necessary ledger accounts and the revised Balance sheet of the firm.
a. The old profit sharing arrangement of 2:2:1 between A, B and C to be revised as 1:1 between A & C
b. Goodwill of the firm is estimated to be worth Rs.20,000. The deceased partner's share is to be
adjusted.
c. The insurance company paid the full value of Rs.30,000 on the policy.
d. Machinery and furniture have been revalued 5% less than their present book values.
e. The profit for the year 2001 was Rs.18,000. It is assumed that the firm will earn the same profit
during the current year as well for working out B's profit share for the current year.
f. Funeral expenses of Rs.5,000 paid from the cash in hand, is to be shared equally by A & C.
g. A & C have agreed to retain Rs.25,000 of Mr. B's capital in Mrs. B's Loan account carrying interest
@12%, to support the family. The excess amount is immediately paid off.
Prepare necessary accounts for reconstitution, and the new balance sheet of the firm.
Revaluation Account
To Machinery 1,790
To Furniture 1,025 By Capital accounts 2,815
2,815 2,815
Cash Account
To balance b/d 6,800 By B’s Funeral Exp. 5,000
To JLP 30,000 By B’s Executors a/c 18,594
By balance c/d 13,206
36,800 36,800
Capital Accounts
Particulars A B C
Particulars A B C
To 1,126 1,126
563 By Balance 25,000 25,000 15,000
Revaluatio 2,000 -6,000 c/d 2,600 2,600 1,300
n 25,000 By 2,000
To B’s 18,594 Reserves 6,000
Capital 2,500 2,500 By A’s Cap- 6,720 6,720 3,360
To Mrs. B’s 28,694 10,597 G/w 2,400
Loan 34,320 44,720 19,660 By B’s Cap- 34,32 44,720 19,660
To B’s G/w 0
Executors By JLP
To B’s By P & L a/c
Funeral
To balance
c/d
Balance Sheet
A’s Capital 28694 Machinery 34010
C’s Capital 10597 Furniture 19475
Debtors 3700
Mrs. B’s Loan 25000 Cash 13206
Creditors 8500 P & L account 2400
72,791 72,791
Syllabus
Illustration 3.14
A B and C were partners in a firm sharing profits and losses in the ratio of their capitals. Their Balance
Sheet on 31.12. 1996 was as follows:
Balance Sheet
Creditors 3,000Furniture 8,000
Reserve fund 3,200Stock 6,000
Capitals: Debtors 6,000
A 10,000 Bills Payable 1,000
B 5,000 20,0000Cash 5,200
C 5,000 ________ _______
26,200 26,200
A died on 31. 3. 1997. Under the terms of partnership deed the executors of a deceased partner were
entitled to:
a. Amount standing to the credit of the partner
b. Interest on capital @ 5%
c. Share of goodwill on the basis of twice the average profits for the past three years.
d. Share of profit from the last financial year to the date of death on the basis of profit for the last year’s
profit. Profits for 1994, 1995 and 1996 were Rs.6,000, Rs.8,000 and Rs.7,000 respectively.
A’s executors were paid Rs.1,800 on 1.4.1997 and the balance in 4 equal instalments from 31.3.1998
with interest @6% p .a.
Pass necessary journal entries and draw up A’s account to be rendered to his executor and his
executor’s account for the year 1997 and 1998 [Delhi comptt.1998]
Journal Entries
Reserve fund Dr. 3,200

To B’s Capital 800
To C’s Capital 800
(Reserve fund transferred to capital accounts)
Interest on capital Account Dr. 125

To A’s Capital Account 125
(Interest on capital for upto date of death)
______________________________________________________________
B’s Capital Dr.3,500

C’s Capital Dr.3,500
(Goodwill raised in the books)
______________________________________________________________
P & L Account Dr. 875

To A’s Capital Account 875
(Profit till the date of death)
______________________________________________________________
To A’s Executor’s Account 19,600
(Balance in capital account transferred to Executor’s Account)
A’s Capital Account
To A’s Executor’s A/c 19,600 By Balance c/d 10,000
By Reserve fund 1,600
By B’s Capital 3,500
By C’s Capital 3,500
By Interest on capital 125
By P&L Account 875
---------- -----------
19,600 19,600
A’s Executor’s Account

1.4.97 To Cash 1,800 31.3.97 By A’s Capital 19,600
31.3.9 To Cash 5,518 By Interest 1,068
8 (4450+1068) 31.3.98
To Balance c/d 13,350
31.3.9 ------------ ------------
8 20,668 20,668
====== ======
1.4.98 By Balance b/d 13,350
Illustration 3.15
A B and C carrying on partnership business sharing profits in the ratio of 3:2:1 respectively. On 31st
December 1996, the Balance Sheet of the firm stood as follows:
Balance Sheet
Liabilities AmountAssets Amount
Creditors 27,180 Cash 9,400
Capitals Debtors 16,000
A 30,000 Stock 23,380
B 20,000 Buildings 46,000
C 20,000 P&L Account 2,400
----------- ----------
97,180 97,180
====== ======
B retired on the above mentioned date on the following terms:

i) Buildings to be appreciated by Rs.14,000
ii) Provision for doubtful debts to be made at 5% on debtors
iii) Goodwill of the firm is valued at Rs.36,000 and adjustment in this respect was to be made at
continuing partner’s capital accounts.
iv) Rs. 6,000 to be paid to B immediately and the balance in his capital account to be transferred
to his loan account.
Prepare revaluation account, Capital accounts, Cash account and the Balance Sheet of the firm after
B’s retirement.
Revaluation Account
Particulars AmountParticulars Amount
To Prov. for DD 800 By Buildings 14,000
To Revaluation profi
A 6,600
B 4,400 13200 ---------
C 2,200 ---------- 14,0000
14,000 =====
=====
Capital Account A
To P & L a/c 1,200 By Balance b/d 30,000
To B’s Cap – G/w 9,000 By Revaluation a/c 6,600
26,400
______ ______
36,600 36,600
Capital Account B
To P & L A/c 800 By Balance b/d 20,000
To Cash 6,000 By Revaluation a/c 4,400
To B’s Loan A/c 29,600 By A’s Capital G/w 9,000 12,000
----------- By B’s Capital G/w 3,000 ----------
36,400 36,400
===== ======
Capital Account C
To P & L a/c 400 By Balance b/d 20,000
To B’s Cap G/w 3,000 By Revaluation 2,200
--------- ---------
22,200 22,200
===== =====
Balance Sheet
A’s Capital 26,400 Cash 3,400
C’s Capital 18,800 Debtors 16,000
Less: Provision 800 15,200
B’s Loan a/c 29,600 Stock 23,380
Creditors 27,180 Buildings 60,000
--------- ---------
101,980 101,980
===== =====
Illustration 3.16
A, B and C were partners sharing profits and losses in the ratio 3:2:1 ratio. On 28 Feb 2000 B retired. On the
date of his retirement the balance in his capital account was Rs.35,000. The other assets and liabilities on that
date were as follows:
Cash Rs. 10,000; Buildings Rs.100,000; Plant and Machinery Rs.40,000; Stock Rs.20,000; Debtors Rs.20,000
and investments Rs.30,000.
The following was agreed between the partners on B’s retirement:
i) Buildings to be appreciated by 20%
ii) Plan and Machinery to appreciated by 20%
iii) A provision of 5% to be created for bad and doubtful debts.
iv) Stock was to be valued at Rs.18,000 and investments Rs.35,000.
v) An old photocopier previously written off was sold for Rs.2,000.
vi) Partners had to pay Rs.5,000 to the family of an employee who died in an accident.
B was paid Rs.7,500 in cash and the balance in three equal yearly instalments with interest @10% starting from
1.4.2000.
Pass necessary journal entries to record the above adjustments. Prepare Revaluation account and B’s Loan
account till it is finally paid. The firm closes its books on 31st March every year.[Delhi Compt. 2000]
Journal Entries
Revaluation A/c 12,000
Dr. 4,000
To Plant and Machinery 1,000
To Provision for Bad Debts 2,000
To Stock Account 5,000
To Cash - Compensation
(Losses on Revaluation of assets and 20,000
liabilities) 5,000
Buildings 2,000
Ac/ Dr. 27,000
Investment
A/c Dr.
Cash A/c – 15,000
photocopier Dr. 7,500
To Revaluation 5,000
(Gains on revaluation of assets and 2,500
liabilities)
Revaluation Account 40,000
Dr. 7,500
To A’s Capital A/c 32,500
To B’s Capital A/c
To C’s Capital A/c
(Revaluation profit distributed)
B’s Capital Account
Dr.
To Cash A/c
To B’s Loan A/c
(Part payment for B’s Capital, and Balance
transferred to Loan a/c)
Revaluation A/c
To Plant & Machinery 4,000 By Buildings A/c 20,000
To Prov for D.D 1,000 By Investment A/c 5,000
To Stock 2,000 By Cash – Unrecorded 2,000
To Emp. 5,000
Compensation
To Rev. Profit trf.
A’s Capital 7,500
B’s Capital 5,000 15,000
C’s Capital 2,500 ---------- ----------
27,000 27,000
====== =====
B’s Capital A/c

To Cash 7,500 By Balance b/d 35,000
To B’s Loan a/A/c 32,500 By revaluation 5,000
--------- ----------
40,000 40,000
B’s Loan A/c

Date Particulars AmountDate Particulars Amount
Mar31, 00 To bal c/d 32,500Mar 1, 00 By B’s Capital 32,500
--------- --------
32,500 32,500
Mar31, 01 To Cash 14,083Apr 1, 00 32,500
Mar 31,01 To bal c/d 21,667Mar 31,01 3,250
--------- --------
35,750 35,750
Mar 31,02 To Cash 13,000Apr 1, 01 21,667
Mar 31,02 To bal c/d 10,834Mar31, 02 2,167
--------- --------
23,834 23,834
==== ====
Mar31, 03 To Cash 11,917Apr 1,02 10,834
Mar31, 03 1,083
--------- --------
11,917 11,917
Syllabus
Illustration 4.17
P,Q and R were partners in a firm sharing profits in the ratio 2:2:1. Their balance sheet on 31.3.1998
was as follows:
Balance Sheet
Sundry Creditors 30,000 Cash at Bank 3,000
Provident fund 8,000 Debtors 25,000
Reserve fund 12,000 Less: Provision 1,000 24,000
Capital Accounts Stock 12,000
P 30,000 Investments 14,000
Q 30,000 Patents 7,000
R 20,000 Plant & Machinery 70,000
--------- --------
130,000 130,000
===== =====
R retired on the above date on the following terms:

i) Goodwill of the firm valued at Rs.100,000, but it was not to remain in the books of the new firm.
ii) Value of patents was to be reduced by 20% and that of Plant and Machinery by 10%.
iii) Provision for doubtful debts was to be raised to 6%.
iv) R took over investments at a value of 15,800
v) Liability on account of provident fund was only Rs.6,600
Show journal entries for the treatment of goodwill, prepare Revaluation account, Capital accounts of
partners and the Balance Sheet of P and Q after R’s retirement.
[Foreign 2000]
Pl. Note: The ideal treatment for this question is to raise goodwill in the full value, in old ratio and
writing it off in the new ratio. But since this method is not favoured by CBSE, you have to adjust the
margins only.
Particulars L/f Amount Amount

Dr. Cr.
P’s Capital Account 10,000
Dr. 10,000
Q’s Capital Account 20,000
Dr.
To R’s Capital Account
(Goodwill written off in the new ratio)
Revaluation Account
To Patents 1,400 By Investment 1,800
To Plant and 7,000 By Provident fund 1,400
Machinery 500 By Loss trf to Capitals:
To Provision for DD P 2,280
Q 2,280
R 1,140 5,700
---------- ----------
8,900 8,900
====== =====
Capital Account P
To R’s Capital 10,000 By balance b/d 30,000
To Revaluation 2,280 By Reserve fund 4,800
To balance c/d 22,520

---------- ---------
34,800 34,800
Capital Account Q
To R’s Capital 10,000 By balance b/d 30,000
To Revaluation 2,280 By Reserve fund 4,800
To balance c/d 22,520
---------- ----------
34,800 34,800
===== =====
Capital Account R
To Revaluation 1,140 By balance b/d 20,000
To Investment 15,800 By Reserve fund 2,400
To R’s Loan Account 25,460 By P’s Capital –gw 10,000
By R’s Capital -gw 10,000
---------- ----------
42,400 42,400
===== =====
Balance Sheet
Capital P 22,520 Cash at Bank 3,000
Capital R 22,520 Debtors
25,000 23,500
R’s Loan Account 25,460 Less: Provision 12,000
Sundry Creditors 30,000 1,500 5,600
Provident fund 6,600 Stock 63,000
--------- Patents --------
107,100 Plant and Machinery 107,100
===== =====
Illustration 3.18
X,Y and Z were sharing profits and losses in the ratio 5:3:2. On 31st December 1997, their Balance
Sheet stood as follows:
Balance Sheet
Capitals: Cash 20,000
X Buildings 50,000
75,000 Patents 15,000
Y 175,000 Stock 25,000
62,500 Debtors 20,000
Z 27,500 Machinery 75,000
37,500 15,000 Goodwill 12,500
----------- ----------
Creditors 217,500 217,500
General Reserve
Z died on April 1st 1998. It was agreed that

i) Goodwill was valued at 2 ½ years purchase of average profits for the last four years, which were,
1994: Rs.32,500; 1995: Rs.30,000; 1996 Rs.40,000 and 1997 Rs.41,500.
ii) Machinery is valued at Rs.70,000; Patents Rs.20,000 and Buildings Rs.62,500.
iii) For the purpose of calculating Z’s share of profit for the year of 1998, it was agreed that the same
may be calculated based on the average profit of the last 4 years.
iv) A sum of Rs.15,900 was paid in cash to Z’s executors and the balance in 2 equal annual
instalments together with interest @12% p.a.
Give necessary journal entries to record the above transactions and prepare Z’s executors accounts till
it is finally closed. [Delhi Compt. 2001]
Note:
1. You cannot prepare executors account unless you prepare revaluation account and at least the capital
account of Z
2. Adjustment need to be made for the hidden part of goodwill; Here the value of goodwill is Rs.90,000; out of
which Rs.12,500 is already in the books. Adjustment for the remaining Rs.77,500 need to be made. In this
case the old goodwill will remain in the books at Rs.12,500 Alternatively, you can write off the existing
goodwill in the old profit sharing ratio and pass adjustment for the entire Rs.90,000. This is followed below.
Journal Entries
Dr. Cr.
Revaluation Account Dr. 5,000
To Machinery 5000
(Machinery Reduced)
--------------------------------------------------
Patents Account Dr. 5,000
Buildings Account Dr. 12,500
To Revaluation Account 17,500
(Buildings and Patents raised)
--------------------------------------------------
Revaluation Account Dr. 15,000
To X’s Capital Account 7,500
To Y’s Capital Account 4,500
To Z’s Capital Account 3,000
(Revaluation profit transferred)
--------------------------------------------------
P & L Account Dr. 1,800
To Z’s Capital Account 1,800
(Current adjusted estimated profit share
credited)
--------------------------------------------------
X’s Capital Dr 6,250
Y’s Capital Dr. 3,750
Z’s Capital Dr. 2,500
To Goodwill 12,500
(Excess value added to goodwill)
----------------------------------------------- --
X’s Capital Dr. 11,250
Y’s Capital Dr. 6,750
To Z’s Capital 18,000
------------------------------------------------------------------
Z’s Capital Account Dr. 60,300

To Z’s Executor’s Account 60,300
(Capital balance transferred to Executors)
--------------------------------------------------
Z’s Executors Account Dr
To Cash 15,900
(Part payment against Z’s due) 15,900
Revaluation Account
To Machinery Account 5,000 By Patents 5,000
To Profit Trf. By Buildings 12,500
X 6,250
Y 3,750
Z 2,500 12,500
---------- ---------
17,500 17,500
Capital Account X
To Goodwill 6,250 By Balance b/d 75,000
To Z’s Capital 11,250 By General Reserve 7,500
To Balance c/d 71,250 By Revaluation 6,250
---------- ---------
88,750 88,750
Capital Account Y
To Z’s Capital 6,750 By General Reserve 4,500
To Balance c/d 60,250 By Revaluation 3,750
--------- ---------
70,750 70,750
Capital Account Z
By General Reserve 3,000
By Revaluation 2,500
By X’s Capital 11,250
By Y’s Capitla 6,750
To Z’s Executor’s A/c 60,300 By P & L Account 1,800
---------- ----------
62,800 62,800
Balance Sheet
Capital X 71,250 Cash 4,100
Capital Y 60,250 Buildings 62,500
Patents 20,000
Z’s Executor’s Account 44,400 Stock 25,000
Machinery 70,000
P &L Account 1,800
----------- -----------
203,400 203,400
Z’s Executor’s Account

To Cash 15,900 By Z’s Capital 60,300
--------- --------
60,300 60,300
To Cash 27,528 By Balance b/d 44,400

To Balance c/d 22,200 By Interest 5,328
--------- ---------
49,728 49,728
To Cash 24,864 By Balance c/d 22,200

By Interest 2,664
--------- --------
24,864 24,864
Illustration 3.19
A, B and C were partners sharing profits and losses in the ratio 1/2, 1/3, 1/6 respectively. The Balance
Sheet of the firm on 31st March, 1998 was as follows:
Balance Sheet
Provident fund 3,000 Debtors 30,000
Reserve fund 9,000 Less provision 1,000 29,000
Capitals: Stock 25,000
A 40,000 Investments 10,000
B 36,500 Patents 5,000
C 20,000 Plant and Machinery 48,000
--------- ---------
121,100 121,100
C retired on the above date on the following terms:

i) Goodwill of the firm was valued at Rs.27,000 but it was to be adjusted in capital account.
ii) Value of patents was to be reduced by 20% and that of Machinery by 10%
iii) Provision for doubtful debts was to be raised to 6%
iv) C took over investments at Rs.15,800
v) Liability on account of provident fund was only Rs.2,500
Show necessary journal entries for the treatment of goodwill, prepare Revaluation account, Capital
accounts of partners and the Balance Sheet of A and B after C’s retirement. [CBSE Delhi – 2002,
adapted]
Journal Entries
Particulars L/F Amount Amount
Dr. Cr.
A’s Capital 2,700
Dr 1,800
B’s Capital 4,500
Dr.
To C’s Capital Account
(Goodwill adjusted in capital accounts)
Revaluation Account
To Patents 1,000 Investments 5,800
To Plant and 4,800 Provident fund 500
Machinery 800 By Loss trf.
To Prov. for A’s Cap 150
Doub.debts B’s Cap 100
C’s Cap 50 300
------- -------
6,600 6,600
Capital Accounts
Particulars A B C Particulars A B Ct
To -- -- 15,800 By Balance b/d 40,000 36,500 20,000
investments 150 100 50 By Reserve 4,500 3,000 1,500
To -- -- 10,150 fund
Revaluation 41,650 37,600 -
a/c --------- --------- -------- -------- -------- ---------
To C’s Loan 58,000 48,500 26,000 58,000 48,500 26,000
a/c
To Balance
c/d
Balance Sheet
Provident fund 2,500 Debtors
C’s Loan 10,150 30,000 28,200
Capital accounts: Less: Provision 25,000
A 1,800 4,000
41,650 79,250 Stock 43,200
B --------- Patents ----------
37,600 104,500 Plant and Machinery 104,500
--------------
Syllabus
Illustration 3.20
Following is the Balance Sheet of Hari, Ram and Shyam as on 31st December, 1994.
Balance Sheet
Sundry Creditors 3,000 Tools 1,000
Reserve Fund 3,200 Furniture 8,000
Capital Accounts: Stock 6,000
10,000 Debtors 6,000
Hari: 5,000 Cash at Bank 5,000
5,000 Cash in Hand 200
Ram: ---------- ---------
26,200 26,200
Shyam
Ram died on 31st March, 1995. Under the partnership agreement the executor of Ram was entitled to:
a. Amount standing to the credit of his capital account
b. Interest on capital which amounted to Rs.62.50
c. His share of goodwill Rs.3,500
d. His share of profit from the closing of the last financial year to the date of death which amounted to
Rs.437.50.
Ram’s executor was paid Rs.1,800 on 1st April, 1995 and the balance in four equal yearly instalments
starting from 31.3.1996 with interest @6% p.a.
Pass the necessary journal entries and draw up Ram’s Account to his executor and his Executor’s
Account till it is finally paid.
Journal Entries
Dr. Cr.
Reserve Fund Account Dr. 3,200
To Hari’s Capital Account 1,067
To Ram’s Capital Account 1,067
To Shyam’s Capital Account 1,066
(Reserve fund transferred to capital account)
_____________________________________
_
62.50
Interest on capital account Dr. 62.50
To Ram’s Capital Account
(Interest on capital credited to deceased
partner)
_____________________________________
_ 1,750
Hari Dr. 1,750
Shyam Dr. 3,500
( Deceased partner’s share of goodwill credited
to capital account)
_____________________________________
_ 437.50
437.50
Profit and Loss account Dr.
( Deceased partner’s estimated profit for the
current year till the date of death)
Ram’s Capital Account

To Ram’s Executor’s 10,067.00 By Balance b/d 5,000.00
Account By Reserve fund 1,067.00
By Interest on Capital 62.50
By Hari 1,750.00
By Shyam 1,750.00
By Profit and Loss a/c 437.50
------------ ----------
10,067.00 10,067.00
Ram’s Executor’s Account

Date Particulars Amou Date Particulars Amoun
nt t
1995 To Cash 1,800 1995 By Ram’s 10,067

April 1 April Capital
1
1996 To Cash 2,563
March (2,067 + 1996 496
31 496) 6,200 March By Interest
By balance --------- 31 ---------
c/d 10,563 10,563
===== =====
2,439 6,200
1997 By Balance
March To Cash 1996 b/d
31 (2067 + 372) 4,133 April 372
1
To balance --------- By Interest ---------
c/d 6,572 1997 6,572
===== March =====
31
2,315 4,133
1998 2,066 By Balance 248

March To cash --------- 1997 b/d ---------
31 (2067 + 248) 4,381 April 4,381
To balance ===== 1 By Interes =====
c/d 2,066
2,190 1998
March
1999 31 By balance 124
March --------- b/dt --------
31 To cash 2,190 2,190
1998
April By interest
1
1999
March
31
Retirement / Death of Partners
Syllabus
Theory Questions
1. What is the purpose of revaluation of assets and liabilities at the time of retirement of a partner?
2. What is ‘gaining ratio’ in the context of retirement or death of a partner?
3. Discuss the accounting treatment of goodwill on retirement without creating a goodwill account in
the books.
4. Explain the accounting treatment of reserves and surplus at the time of retirement of a partner.
5. What are the accounting problems arising from the retirement of a partner?
6. What is Joint Life Policy?
7. What are the major differences in accounting steps between retirement and death of a partner?
8. Distinguish between sacrificing ratio and gaining ratio.
9. List the items which the retiring partner is entitled to claim from the firm.
Retirement / Death of Partners
Syllabus
Numerical Questions
3.01 The following balance sheet shows the financial position of A, B and C as on 31st December,
2001. A died on 1st May.
Balance Sheet
Capital A 30,000 Land 26,000
Capital B 24,500 Buildings 20,500
Capital C 16,500 Debtors
16,400
Creditors 3,500 Less: Reserve 15,000
1,400
Outstanding 500 Investments 9,700
expenses
Cash 3,800
75,000 75,000
The following accounting adjustments have been made for settling A's dues.
Value of land and buildings be increased by Rs.3,000 and Rs.2,200 respectively.

Value of investments is raised to Rs.12,000
Goodwill of the firm is at Rs.22,500.
A's share of profit till the date of death is estimated to be Rs.3,200.
The investments were given to A's executors at the revised value, in part settlement of the amount
due and the balance transferred to Mrs. A's loan account carrying interest @ 8%.
Pass necessary journal entries and prepare the revised Balance Sheet.
Revaluation Profit: Rs. 7500; Balance Sheet Total Rs. 73,700
3.02 The following Balance Sheet shows the financial position of A & B, sharing profits and
losses in the ratio 3:2. B died on 1st April.
Balance Sheet
(As on 31st March, 2002)
A's Capital 25,000 Cash in Hand 4,000
B's Capital 18,000 Machinery 16,000
Creditors 7,500 Buildings 23,000
General Reserve 4,500 Debtors 7,400
Furniture 4,600
55,000 55,000
A has decided to continue business as sole proprietorship. B's share of goodwill is estimated to be
worth Rs.7,500. Also the value of building is estimated to be worth Rs.28,000 and of Machinery
Rs.15,000.
B's capital account is transferred to his executor's account carrying interest @ 6% p.a.
Prepare necessary accounts and the Balance Sheet of A.
Revaluation Profit: Rs.4000; Balance Sheet Total Rs.59,000
3.03 The following is the balance sheet of A, B and C as on 31st December, 2001. B died on 1st
March.
Balance Sheet

Accountancy

Transféré par

Informations du document

Description originale:

Copyright

Formats disponibles

Partager ce document

Partager ou intégrer le document

Options de partage

Avez-vous trouvé ce document utile ?

Ce contenu est-il inapproprié ?

Droits d'auteur :

Formats disponibles

Accountancy

Transféré par

Droits d'auteur :

Formats disponibles

Accountancy

Chapter 1 Partnership Accounts – Fundamentals

Chapter 2 Reconstitution of Partnership - Changing Ratio or Admission of a new Partner

Chapter 3 Reconstitution of Partnership – Retirement / Death of a Partner

Chapter 4 Company Accounts – Shares

Chapter 5 Company Accounts – Debentures

Chapter 6 Accounting for Non-Profit Organizations

Chapter 7 Analysis of Financial Statements - Ratio Analysis

Chapter 8 Analysis of Financial Statements - Cash Flow Statements

Detailed Syllabus for 2009 Examination

Accounting for Not-For-Profit Organisations, Partnership Firms and Companies

Unit 1: Accounting for Not-For-profit Organisations (10 marks)

Unit 3: Reconstitution of Partnership (20 marks)

Unit 5: Analysis of Financial Statements (12 marks)

Unit 5: Overview of Computerized Accounting System (5 marks)

Accounting for Partnership

i) A partnership involves two or more persons.

Accounting for Partnership

Partnership Deed – Meaning, Impact

Contents of the Partnership Deed

Rules Applied in the Absence of Specific Conditions in the

Accounting for Partnership

1. Fixed and Fluctuating Capital Accounts

Fixed Capital Fluctuating Capital

Accounting for Partnership

Profit & Loss Appropriation A/c

a. When capital accounts are fluctuating.

b. When capital accounts are fixed

To Balance c/d 75,000 50,000

3.1. Omission of Interest on Capital / Interest on Drawings

Now how do we correct it?

Interest to be credited 3,000 3,000 1,500 7,500

Interest to be 5,000 5,000 5,000 15,000

Interest to be credited 4,000 4,000 2,000 10,000

Excess interest to debit 800 800 400 2,000

Interest to credited @2% +2,000 +1,600 +1,200 4,800

Total amount reversed -1400 -1,400 -1,400 -4,200

3.2 Redistribution of Profit in a Different Ratio

Profit for the 3 years 31,500 21,000 10,500 63,00

3.3 Omission of Outstanding Expenses and Incomes

a. Rectification without opening P&L Adjustment Account

b. Rectification through P&L Adjustment Account

Profit and Loss Adjustment Account

Accounting for Partnership

Profit & Loss Appropriation A/c

Profit & Los Appropriation A/c

Profit & Los Appropriation A/c

Profit & Los Appropriation A/c

Profit share to B 8,250

5. Accounting for Joint Life Policy

Interest on A’s Capital

Interest on B’s Capital

Net Monthly Balances in Capital accounts of A & B

A’s Capital Account

Interest Allowed 1446000 x 12 %, for 1 month 14,460

Opening Capital = Closing Capital + drawings – additional capital.

Net Monthly Balances in Capital Accounts of A & B

A’s Capital B’s Capital

Interest allowed to A = 924,000 x 6% x 1/12 = Rs. 4,620

31-1-2001 1,500 28-2-2001 1,000

Amount Period Equivale Amount Period Equivale

Interest on A’s Drawings = 12,000 x 6% x 6.5/12 = Rs.390

Study carefully how B’s commission is calculated in illustration 1.25