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UNIT 1

Depreciation
Learning Objectives
After completing this unit, the student will be able to
• Understand the meaning and purpose of depreciation
• Understand different methods of providing depreciation
Meaning of Depreciation
It means gradual and permanent decrease in the value of any asset either
in quality or quantity or value of an asset.
Definitions
According to William Pickles “Depreciation is permanent and continuing
Diminution in the quality, quantity or value of and Assets “.
In the words of R.N. Carter “depreciation is the gradual and permanent
decrease in the value of and Assets from any cause”
According to ICMA terminology “Depreciation is the diminition in
intrinsic value of Assets due to use or lapse of time.
From the above said definition we can say that depreciation is the
permanent and continuous decrease in the value of the assets.
Assets are acquired for running a business . These assets are divided
into two types.
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(1) Fixed Assets (2) Current Assets


1. Fixed Assets : Fixed assets are those which are fixed in nature and
are acquired for Prolonged use e.g., Plant and Machinery, Building, Furniture
etc.
2. Current Assets : Current assets are those which are acquired for
short – term proposes in the business e.g., Stock, Debtors , Cash etc.
The regular and constant use of the fixed assets may lead to a fall in the
value of quality and quantity of assets . The term depreciation represents loss or
decrease in the value of assets due to wear and tear, obsolescence, effluxion of
time or permanent fall in the market value.
Need for Depreciation
1. To ascertain the correct profit : The main aim of calculating
depreciation is to derive correct profit. Depreciation is an invisible expense. It
is desirable to charge depreciation to profit& loss accounts because the assets
are used for earning purposes. The assets are used for earning income of the
business. The reduction in the value of the asset should be provided from the
income in order to calculate correct profit.
2. To Show to Financial Position : Balance sheet show the correct
financial position of the firm. As such to prepare balance sheet asset must be
show at their correct values by deducting the value of depreciation.
3. To Create Provision for replacement of assets : If the provision
for depreciation is not provided the profit of the firm will be over stated. The
amount for provision of depreciation is debited in the profit and loss account is
available for the replacement the asset, when its life is over.
Causes of depreciation
1. Wear and tear : The asset may decrease in its value because of
constant use in the business. This is also caused because of erosion. When the
asset is exposed to sun, wind or rain it may lose its value.
2. Lapse of Time : Assets may have a fixed life period. After the expiry
of its life, the asset may become useless. This may happen in plant and machinery,
lease. Copyright, patents etc. After the expiry of the fixed life the asset may
become useless.
3. Accident : The assets may reduce in value because of the accident.
It is not a gradual decrease, but there is a permanent loss in its value.
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4. Inadequacy of Assets : The increase in the size or growth of the


business may cause inadequacy of the asset . As a result the asset may be
terminated.
5. Obsolescence : When the asset become outdated, it becomes
useless in the business. So it is to be replaced by new and modern assets with
the latest technology. Thus the old asset losses its value.
6. Depletion : Asset may be exhausted through its working e.g., mines,
minerals, oil etc. These assets get exhausted because of extraction and
exploitation. Hence the assets become useless.
Factors influencing depreciation
1. Wear and tear due to constant use.
2. Decrease in the market value of the asset.
3. Due to obsolescence i.e., permanent change in the asset may be
result in the uselessness of the asset.
4. Non-functioning of a machine may cause depreciation.
5. Accident and damage of an asset will cause depreciation.

Methods of Providing depreciation


The following are the main methods of providing depreciation.
1. Fixed Instalment Method.
2. Diminishing Balance Method.
3. Depreciation Fund Method .
4. Insurance Policy Method.
5. Revaluation Method.
6. Annuity Method.
7. Depletion Method.
8. Machine Hour Rate Method.
9. Global Method.
10. Sum of Digits Method.
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Fixed Instalment Method


This method is also known as “ Straight Line” or “Original Cost Methods”.
Under , this method a fixed percentage of original value of the asset is written
off every year. In this method depreciation is charged equally every year throughout
the life of the asset. The depreciation charged on the asset is fixed throughout
the effective life of the asset. At the end of the working life of the asset, balance
in the asset account will be Zero. The amount of depreciation is calculated as
follows :
Cost of the Asset - Scrap Value
Annual Depreciation =
Estimated Life of the Asset
Illustration 1
If a machine costing Rs 20,000 is estimated to have a life of 9 years
and the value is estimated Rs. 2000 at the end of its life, the amount of depreciation
will be
Cost of the Asset - Scrap Value
Annual Depreciation =
Estimated Life of the Asset

20, 000  2000


Annual Depreciation = = 2000
9

Method of a Calculation of Rate of Depreciation


Annual Depreciation
Rate of Depreciation = x 100
Total cost of the Asset
If annual depreciation is Rs. 2,000 and the cost of the asset is Rs 20,000
2 0 0 0
Rate of Depreciation = x 100 = 10%
2 0 , 0 0 0
Advantages
1. This method is simple and easy to understand.
2. Calculation if deprecation is very easy. The value of asset can be
written down to zero
3. This method is very suitable to those which have a fixed life e.g.,
furniture and fixtures, lease etc.
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Disadvantages
1. It is difficult to estimate the life of certain assets with accuracy
e.g. machinery.
2. The interest on the amount invested in the purchase of asset is not
taken into consideration.
3. In this method, it becomes difficult to calculate the depreciation on
additions made during the particular year.
4. The same amount of depreciation is charged every year irrespective
of the use of the asset. Thus, it does not take into account the effective
utilization of the asset.
Journal Entries
Dr. Cr.
Date Particulars Amount Amount
Rs.(A) Rs.(A)

xx When the asset is purchase


Asset Account Dr. xxx ---

To Bank Account --- xxx

(Being the asset purchased)


xx When the depreciation is provided on the asset
Depreciation Account Dr. xxx ---

To Asset Account --- xxx

(Being the depreciation calculated)


xx When the depreciation is transferred to P&L A/c.
Profit & Loss A/c Dr. xxx ---

to Depreciation A/c --- xxx

(Being the depreciation transferred to P & L A/c)


xx When the asset is sold after its working life
Bank Account Dr. xxx ---

To Asset Account --- xxx

(Being the asset sold)


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xx Profit earned on sale of Asset transferred to P&L A/c


Asset Account Dr. xxx ---
To Profit & Loss A/c --- xxx
(Being the profit tranferred to P&L A/c)
When loss occured on the sale of an Asset
xx xxx ---
Profit & Loss Acount Dr.
To Asset Account --- xxx
(Being the loss on sale transferred to P&L A/c)

Illustration 2 :
On 1st January 2008 , a firm purchased plant and machinery costing
Rs. 52,000. It is estimated that its working life is 5 years and at the end of which
it will fetch Rs.2,000. Show Plant and Machinery account for 3 years, if
depreciation is charged according to straight line method.
Cost of Asset - Scrap Value
Solution : Annual Depreciation =
Estimated life of the asset

52, 000 - 2, 000


Annual Depreciation = = A 10,000
5
Dr. Plant and Machinery Account Cr.
Date Particular Amount Date Particular Amount
Rs.(A) Rs.(A)

1.1.2008 To Bank 52,000 31.12. 08 By Depreciation 10,000


By Balance c/d 42,000
52,000 52,000
1.1.2009 To Balance b/d 42,000 31.12.09 By Depreciation 10,000
By Balance c/d 32,000
42,000 42,000
1.1.2010 To Balance b/d 32,000 31.12.10 By Depreciation 10,000
By Balance c/d 22,000
32,000 32,000
1.1.2011 To Balance b/d 22,000
Paper - II Accountancy - II 115

Illustration No. 3
A machine was purchased on 1st July 2006 at a cost of A 18,000 and
A 2,000 was spent on its installation . The depreciation was written off at the
rate of 10% on its original cost. The books were closed on 31st December
every year. Show the machinery account and depreciation account for three
years.
Dr. Plant and Machinery Account Cr.

Date Particular Amount Date Particular Amount


Rs.(A) Rs.(A)

1.7.2006 To Bank 18,000 31.12.06 By Depreciation 1,000


To Bank 2,000 ,, By Balance c/d 19,000
20,000 20,000
1.1.2009 To Balance b/d 19,000 31.12.07 By Depreciation 2,000
,, By Balance c/d 17,000
19,000 19,000
1.1.2008 To Balance b/d 17,000 31.12.08 By Depreciation 2,000
,, By Balance c/d 15,000
17,000 17,000
1.1.2009 To Balance b/d 15,000

Dr. Depreciation Account Cr.


Date Particular Amount Date Particular Amount
Rs.(A) Rs.(A)

31.12. 06 To Machinery a/c 1,000 31.12.06 By P & L a/c 1,000


31.12.07 To Machinery a/c 2,000 31.12.07 By P & L a/c 2,000
31.12.08 To Machinery a/c 2,000 31.12.08 By P & L a/c 2,000
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Illustration no 4
Jagadish purchased a second hand machine for A 57,000 on
01.05.2008 and spent A 3,000 for its repairs. On 31.12.2011 the machine
became unsuitable and sold for.A 40,000. The books were closed on
31st December every year. Prepare machinery account from 2008 to 2011
charging depreciation @ 12% p.a. Under fixed installment method.

Dr. Machinery Account Cr.

Date Particular Amount Date Particular Amount


Rs.(A) Rs.(A)

1.5.2008 To Bank 57,000 31.12.08 By Depreciation 4,800


To Bank (Repairs) 3,000 ,, By Balance c/d 55,200
60,000 60,000
31.11.09 To Balance b/d 55,200 31.12.09 By Depreciation 7,200
,, By Balance c/d 48,000
55,200 55,200
1.1.2010 To Balance b/d 48,000 31.12.10 By Depreciation 7,200
,, By Balance c/d 40,800
48,000 48,000
1.1.2011 To Balance b/d 40,800 31.12.11 By Depreciation 7,200
31-12-11 To P&L A/c 6,400 ,, By Balance c/d 40,000
(Profit on sale)
47,200 47,200

Calculation of profit or loss on the sale of the asset :


Cost of the Asset (57,000 + 3000) 60,000
Less : Total Depreciation (4800 +(7200+7200+7200) 26,400
Written down value (W.D.V) 33,600
Less : Sale of machinery on 31.12.2011 40,000
Profit on Sale 6,400
Paper - II Accountancy - II 117

Note : If the sale value is more than the W.D.V of the asset, it is profit.
If the sale value is less than the W.D.V. of the asset , it is loss.
Diminishing Balance Method
This method is also known as “Written Down value Method” or
“Reducing balance method” The depreciation under this method is calculated at
a fixed percentage on the diminished value of the asset i.e. depreciation is
calculated on the brought down balance of the asset. So the amount of
depreciation at the beginning year will be more when compared to the later
year. So the depreciation charged on every year goes on decreasing.
Advantages
1. Fresh calculation of depreciation is not necessary as and when addition
are made .
2. The Asset is never completely written off, so that charged is made to
revenue every year
3. Higher repair charges at the end of life of the asset are offset by lower
amounts of depreciation.
4. The method is recognised by income tax authorities as well as
Companies Amendment Act,1988.
Disadvantages
1. In this method, the calculation of depreciation is slightly complicated.
2. The value of the asset cannot be brought down to zero.
3. This method lays too much emphasis on the historical cost.
4. It is difficult to determine the suitable rate of depreciation.
5. It does not provide funds to replace the assets.
Illustration No. 5
A trader purchased machinery for A 10.000 on 1.1.2009 Calculate
depreciation@ 10% per annum under diminishing balance method for the first 4
years. Show the Machinery account.
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Dr. Machinery Account Cr.

Date Particular Amount Date Particular Amount


Rs.(A) Rs.(A)

1.1.2009 To Bank 10,000 31.12.09 By Depreciation 1,000


,, By Balance c/d 9,000
10,000 10,000
1.1.2010 To Balance b/d 9,000 31.12.10 By Depreciation 900
,, By Balance c/d 8,100
9,000 9,000
1.1.2011 To Balance b/d 8,100 31.12.11 By Depreciation 810
,, By Balance c/d 7,290
8,100 8,100
1.1.2012 To Balance b/d 7,290 31.12.12 By Depreciation 729
,, By Balance c/d 6,561
7,290 7,290
1.1.2013 6,561

Illustration No. 6
Mr. Rao purchased a machine for A 44,000 on 1.7.2009 and spent
A 6,000 on it erection on 31.12.2011 the machine became obsolete and was
sold for A 40,000. Calculate depreciation @ 10% p.a. under diminishing Balance
Method. Show the Machinery account.
Profit Loss on sale of Assets :
Cost of Assets (44,000+6,000) A 50,000
Less depreciation
2009 2,500
2010 4,750
Paper - II Accountancy - II 119

2011 4,275
W.D.V. as on 31.12.2012 A 38,475
Less amount realized on sale A 40,000
Dr. Machinery Account Cr.
Profit on the sale of machine A 1,525
Date Particular Amount Date Particular Amount
Rs.(A) Rs.(A)

1.7.2009 To Bank 44,000 31.12.09 By Depreciation 2,500


To Bank 6,000 ,, By Balance c/d 47,500
50,000 50,000
1.1.2011 To Balance b/d 47,500 31.12.10 By Depreciation 4,750
,, By Balance c/d 42,750
47,200 47,500
1.1.2011 To Balance b/d 42,750 31.12.11 By Depreciation 4,275
To P&L A/c 1,525 ,, By Bank 40,000
(Profit on sale)
44,275 44,270

Illustration No 7
On 1.1.2009 ‘X’ purchased furniture worth A 25.000. on 1st July 2010
He purchased additional second hand furniture worth A 5,000 and spent
A 2,000 for its repairs. Assuming the annual depreciation is charged @ 10%
p.a. Prepare machinery account under diminishing Balance method for 3 years.
Purchased furniture on 01-01-2009 = 25,000
Purchased second hand furniture On 01-07-2010 = 5,000
+ Repairs = 2,000
A 7,000
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Dr. Furniture Account Cr.

Date Particular Amount Date Particular Amount


Rs.(A) Rs.(A)

1.1.2009 To Bank 25,000 31.12.09 By Depreciation 2,500


,, By Balance c/d 22,500
25,000 25,000
1.1.2010 To Balance b/d 22,500 31.12.10 By Depreciation 2,600
1.7.2010 To Bank 5,000 ,, By Balance c/d 26,900
To Bank (Repairs) 2,000
29,500 29,500
1.1.2011 To Balance b/d 26,900 31.12.11 By Depreciation 2,690
,, By Balance c/d 24,210
26,900 26,900
1.1.2012 To Balance b/d 24,210

Illustration No. 8
On 1.4.2010 a company purchased a machinery for A 30,000.
Depreciation was provided @10% per annum on straight line method at the
end of each year. With effect from 1.1.2011 the company decided to change
the method of depreciation to Diminishing Balance Method @12% per annum.
On 31.3.2012 the machinery became useless and sold for A 21,000. Prepare
Machinery Account.
Working Notes:
Machinery purchased on 1.4.2010 : A 30,000
Rate of depreciation 10%
From 1-1-2011 depreciation charged 12% under diminishing balance
method.
On 31-03-2012, Machinery sold for A 21,000
Paper - II Accountancy - II 121

Dr. Machinery Account Cr.

Date Particular Amount Date Particular Amount


Rs.(A) Rs.(A)

1.4.2010 To Bank 30,000 31.12.10 By Depreciation 2,250


,, By Balance c/d 27,750
30,000 30,000
1.1.2011 To Balance b/d 27,750 31.12.11 By Depreciation 3,330
,, By Balance c/d 24,420
27,750 27,750
1.1.2012 To Balance b/d 24,420 31.03.12 By Depreciation 733
,, By Bank 21,000
By P&L A/c. 2,687
( Loss)

24,420 24,420

Short Answer Type Question


1. Define depreciation.
2.What are the causes of depreciation?
3. Write the main method of charging depreciation?
4. What is the need for providing depreciation ?
5. How is the depreciation calculated in the fixed installment method ?
6. How is the depreciation calculated in the diminishing Balance Method?
7. How do you calculate the rate of depreciation under fixed installment
method?
8. How is a profit & loss on sale of assets is calculated?
10. Distinguish between fixed installment and Diminishing Balance
Method?
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Exercises
Fixed installment Method
1. Furniture is purchased for A 35,000/-. It is decided to depreciate the
asset on straight line method at 10% per annum. Show furniture account for 5
years.
(Ans. Balance A 17,500)
2. A machine is purchased for A 50,000. The rate of depreciation is to
be charged at 20% per annum. Prepare machinery account for four years under
Fixed installment method.
(Ans. Balance A 10,000)
3. A firm purchased a machine for A 1,00,000 on 1.4.2008. Show the
machinery account for 4 years charging depreciation on Fixed Installment Method
@ 15% p.a.
(Ans. Balance A 43,750)
4. Mr. Ravi purchased a machine for A 68,000 on 1st January 2008.
The residual value after 10 year is 8,000. Calculate depreciation chargeable
under equal installment method at the end of 31st December of every year.
Prepare machinery account for 3 Years.
(Ans. Balance A 50,000)
5. A firm purchased a plant and machinery for A 40,000 on 1st January
2009. The life of the asset was estimated to be four years and it was decided to
depreciate 90% of the cost by straight line method over a period of estimated
life. Show the plant and machinery account for 4 years.
(Ans. Annual Depreciation A 9,000, Balance on 1.1.13 A 4,000)
Diminishing balance method
6. On 1st January 2009 a firm purchased a machine for A 30.000.
Assuming the depreciation is charged @10% on diminishing balance method.
Prepare machinery account for three years.
(Ans. Balance A 21,870)
8. A company purchased a plant worth A 25.000 on 31.3.2009
depreciation is calculate @10% per annum, under diminishing balance method.
Show the machinery accounts up to 31st December 2011.
(Ans. Balance A 18,731)
Paper - II Accountancy - II 123

9. A company purchased a plant a worth A 25,000 on 01.7.2009 is


calculated @ 10% per annum. Under diminishing Balance Method. Show the
machinery account up to 31st Dec 2012.
(Ans. Balance A 17,313)
10. Lee & Co. purchased a second hand machine costing A 45,000 on
1st Jan. 2009 and spent Rs. 5,000 on its repairs. The depreciation is charged
@ 15% p.a. on diminishing balance method. Prepare machinery account for
the first four years.
(Ans. Balance A 26,400)
Sales of Asset
11. Machinery bought on 1st Jan 2009 for A 20,000 has become obsolete
and sold on 31st Dec, 2012 for A 13,000. Calculate the profit or loss assuming
depreciation is charged @ 15% p.a . on straight line method.
(Ans. Profit A 5,000)
12. Machinery purchased on 1.7.2009 for A 10,000 was sold on
31.12.2011 for A 5,000. Calculate the profit or loss of sale assuming depreciation
is charged @ 10% per annum under fixed installment method.
(Ans. Loss A 2,500)
13. Furniture worth A 10,000 was purchased as on 1.1.2009. The
furniture was sold on 31.12.2012 for A 6,000. Find the profit or loss on the
sale of furniture charge depreciation @ 10% p.a under diminishing balance
method.
(Ans. Loss A 925)
14. A second hand machine was purchased for A 12,000 on 1.1.2009
and A 3,000 spent towards repairs. On 30.6.2012 the machine became
unsuitable and was sold for A 10,000. Charge depreciation @ 15% on
Diminishing Balance Method. Show the machinery account.
(Ans. Loss. A 4,202)
5. Furniture worth A 20,000 was purchased on 1.1.2010 and on
1.4.2011 additional furniture worth A 8000 was purchased and A 2,000 was
spent on its perfection. On 31.12.2011 furniture purchased on 1.1.2010 was
sold for Rs. 15,000. Prepare the furniture account up to 31.12.2012 charging
depreciation @ 12% p.a. as per diminishing balance method.
(Ans. Loss A 488, Balance : A 8008).
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UNIT 2
Accounts of Non-Trading
Concerns
Learning Objectives
After completing this unit, the student will be able to
• Understand the meaning and purpose of depreciation
• Understand different methods of providing depreciation
Meaning of Non-Trading
The purpose of every trading or manufacturing activity is to make profit.
But there are certain charitable and social institutions which are not created
with a profit making object but for promoting and development and welfare
activities; both for the general and public and for its members. Educational
institutions, hospitals, clubs, charitable trusts.., are called Non-Trading Concerns.
These non-profitable institutions are not interested in the quantum of profit
earned by them during the year but certainly they are interested in the quantum
of profits earned by them during the year, but certainly they are not interest in
knowing their Income and expenditure during the year and their financial positions
at the end of each year. To achieved these objectives they prepare the following
statements.
1. Receipts and payments account.
2. Income and expenditure account.
3. Balance Sheet.
Paper - II Accountancy - II 125

These concepts of capital revenue are very important in the preparation


of Final Accounts of non-trading concerns . Therefore, it is necessary to know
the distinction between capital and revenue items.
Capital and Revenue
One of the objects of accounting is to determine whether the business
has earned profit or not. For this purpose a proper distinction has to made
between capital and revenue as regards expenditure, receipts and losses are
required. Failure to distinguish capital from revenue will affect the whole results.
For example, plant purchased may be charged to the purchases account, proceeds
from the sale of fixed assets may be treated as income. In each case both the
profit and loss account and balance sheet will be affected. While preparing the
final accounts all revenue items are included in the revenue account i.e. Income
and expenditure A/C and balance sheet. Any error committed in distinguishing
between “Capital” and “Revenue” will Effect the as ascertainment of correct
profit.
It is very difficult to give clear cut rules as to make a distinction between
the capital and revenue expenditure. However the following rules may serve as
guide for making distinction between capital and revenue expenditure.
Capital Expenditure
Capital expenditure is such an expenditure which benefits the business
over a long period it include assets acquired for the purpose of earning and not
for resale, improving extending fixed assets, increasing the earning capacity of
the business and rising capital for the business. Purchase of new plant, additions
to the buildings brokerage and commission paid for procuring long term loans
are a few examples of such expenditure. All items of capital expenditure appear
on the assets side of the balance sheet.
Revenue Expenditure
Revenue expenditure is the expenditure incurred in one accounting period
and the full benefit is enjoyed in the same period. Therefore, it is normally of
recurring nature. Such an expenditure does not increased the earning capacity
of the business and is does not bring into existence and assets. It includes
expenses incurred for acquiring assets for resale at a profit or for conversion
into finished product, for maintaining fixed assets in good working order e.g.,
normal repairs and renewal of plant, White washing of building, replacement of
machinery etc., for keeping the organization going e.g. rent, rates and taxes
wages and salaries, insurance and other trade charges. All items of revenue and
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other trade charges . All items of revenue expenditure appear in the trading and
profit and loss account.
Revenue expenditure becoming capital expenditure
An expenditure which is primarily of revenue nature but incurred for the
purpose of acquiring any asset or adding to its value, is termed ‘ capitalized
expenditure’. The following are some of the examples of revenue expenditure
becoming capital expenditure.
1. Repairs : Repairs are usually revenue expenditure but, if we
purchase a second hand machinery and pay for repairs necessary as ‘capitalized
expenditure’ . The following are some of the examples of revenue expenditure
becoming capital expenditure.
2. Wages : Wages are usually based as a revenue charge but if paid
to the employees for the construction or erection or installation of fixed assets of
the business, then these will be become capital expenditure and should be added
to the cost of the fixed asset concerned.
3. Legal Expenses : These are usually a revenue charge but, if incured
on acquiring a property, should be added to the cost of the asset acquired cost
of the asset.
4. Freight And Carriage : These are usually a revenue item, but
payments made for transporting newly acquired asset will be treated as a capital
expenditure and will from additional cost of the asset.
5. Interest : Interest on borrowing and capital are generally a revenue
item and is allowed to be treated as capital item if paid during the period of
construction.
6. Preliminary expense : Initial expenses, connected with the
formation of a company through revenue in nature are allowed to be capitalized
and can be shown as an asset in the balance sheet
7. Brokerage and stamp duty : Normally these are revenue items ,
but brokerage and stamp duty paid on the purchase of a property may be treated
as capital expenditure.
8. Development expenditure: In concerns line mines, tea plantations,
collieries, horticulture rubber plantation etc,. a sizeable is spent during the period
of development and such expenses incurred up to the time they begin to earn,
must to be treated as capital expenditure.
Paper - II Accountancy - II 127

9. Advertising : A huge sum spent on advertising in a year, the benefit


of which shall accrue in future years, also may have the affect of creating a future
goodwill, therefore such sums may be capitalized. For example, lakhs of rupees
spent in changing the name from Binaca to Cibaca.
10. Raw materials and stores : They are usually a revenue charge ,
but if consumed to make a fixed asset, they must be treated as part of the cost
of the asset.
Deferred Revenue Expenditure
It is the expenditure which would normally be treated as revenue
expenditure, but it is not written off in one year as a benefit is not completely
exhausted in the year during which it is incurred as it may as it may be spread
over a number of year. Therefore, a proportionate amount will be charged to
the profit and is account of each year and the balance is carried forward to
subsequent yea as differed revenue expenditure and is shown as an asset in the
balance sheet. Sometimes extra ordinary losses are also treated as deferred
revenue expenditure and charged to profit and loss account for four to five
years.
Usual items of capital Expenditure
The following items usually represent capital expenditure :
1. Cost of acquisition of fixed asset like goodwill, land, building,
leasehold premises, tools and equipment , furniture, trademarks etc.
2. Expenses of putting a new asset in working condition like installation
and erection expenses of any fixed asset.
3. Additions or extensions or structural improvement to the existing
assets leading to increase in their working efficiency or revenue earning capacity
or cost reduction e.g., refurnishing of the seating accommodation of a cinema
hall etc,.
4. Expenses incurred for the development of mines and plantation.
5. Formation expenditure of a business i.e. preliminary expenses like
preparing and filling the legal documents required for starting a business etc.
Usual items of Revenue Expenditure
The following are usual items of revenue expenditure
1. Expenses incurred in the ordinary conduct and administration of the
business e.g. rents, salaries , wages, advertisement etc.
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2. Expenses incurred in purchasing raw material or stock of finished


goods for resale stores and supplies like grease, cotton, oil for
machines etc,.
3. Expenses incurred to maintain assets in working order like ordinary
repairs, renewals or alterations etc,.
4. Expenses incurred in maintaining or pushing sales like carriage of
finished goods commissions travelling expenses, free samples
and gifts etc.
5. Loss arising from sale of fixed assets.
6. Loss arising from damage , destruction, theft of stock, trade cash etc
7. Loss arising from depreciation in the values of fixed assets or book
value of asset discarded.
8. Annual renewal fees of patents etc.
Capital and Revenue Receipts
Capital receipts if business comprise capital contributed by partners or
by the share holders , loans, raised , sale proceeds of any fixed assets, etc,. In
case of clubs and associations receipts o account of life subscriptions , entry
fee, government grants, legacies and endowments are capital receipts. Revenue
receipts of a business are cash from sale , discount received, commission, interest
on investment etc. In case of clubs and association, annual subscription, sale or
games articles, receipts, arising when the premises are given to others of ruse
for use, are revenue receipts. Revenue receipts are shown in the revenue account
i.e. Income ND Expenditure account while the capital receipts are taken to the
balance sheet.
To decide of a particular receipts is of capital nature the following guide
lines may be followed.
1. Nature of receipts is to be determined by its character in the hands
of the person receiving it and not by the source from which payments was made
e.g. pay of interest out of capital by a company still under construction is capital
expenditure for the company but revenue receipts in the hands of the persons
receiving it.
2. In case of a single transaction of purchase and sale of property the
motive of the owner will decide whether the receipt is capital revenue e.g. If A
sells shares held by him as investment; it is capital or receipts but if A sells the
share with speculations motive it will be revenue receipts.
Paper - II Accountancy - II 129

3. A receipts on account of sale of a fixed asset is a capital receipt


while a receipt on account of a sale of current asset is a revenue receipts for e.g.
sale proceeds of building plant etc. Constitute receipt while sale if stock –in-
trade is revenue receipts.
4. If the receipts is in substitution of a source of income then it Is capital
receipts but, it is in substitution of income alone it is revenue receipt. For e.g. if
a railway passenger meets with an accident and dies, or is permanently disabled,
the compensation received from the railway department is capital receipt because
this receipts is in substitution of source of income i.e., his life but if he temporarily
disabled the receipts will be revenue as it is in substitution of income i.e. loss of
earning as during the period of disablement.
5. If a sum is received for the surrender of certain right , it is capital
receipts but if the sum is received is a compensation for loss of future profits
then it is a revenue goods for e.g. A, the railway company for working on the
field adjacent to the railway lines, amount paid by the railway company to A is
a revenue receipt because the receipts is in lieu if his right to work upon the clay
field.
Example of Capital Receipts
1. Compensation received for the loss of right of future remunerations.
2. Compensation received for suspension of export license.
3. Compensation received by a partner of a partnership firm from
another partner for relinquishing all his rights in the partners firm.
Example of Revenue Receipts
1. Receipts of annuity for transfer of a capital asset.
2. Lump-sum received in consideration of reduction of remuneration.
3. Compensation received for premature termination of contract.
4. Considerations received for transfer of permits etc.
Capital and Revenue Losses
Revenue loss is the of some revenue receipts in the course of the business
and in incidental to it. Any loss which is termed as revenue loss is a capital loss
for e.g. loss of stock-in-trade by fire of white ants by theft is a revenue loss
whereas loss of fixed asset like building, plant etc by fire or earth quake is a
capital loss.
130 Office Assistantship

Loss caused to the business by reason of cash being misappropriated


by employees is a revenue loss. If the funds reach home of the owner and lost
after then the loss it outside the trade and not incidental to the business, therefore
it is capital loss ( expectations are banks or lending houses ).
Receipts and Payments Account
It is summary of cash transaction at the end of a particular period showing
the receipts and payments of cash during the period under different heads.
The features of this account are
1. It is period by non-trading concerns in lieu of cash book.
2. It is real account.
3. Its start with the opening balance of cash in hand and at the bank.
4. All receipts and payments of cash are entered on the debit and
credit side respectively.
5. No distinction is made between in the capital and revenue items
while entering transactions in the receipts and payments account.
6. All receipts and payments whether they are relating to the current,
proceeding or succeeding period are written in this account.
7. Opening balance of this account cash in hand at the beginning of the
accounting period and closing balance shows cash in hand at the
end of accounting period.
8. All types of accounts i.e., real and nominal are written in this account.
9. No adjustment for outstanding , prepaid expenses provision for
doubtful debts or depreciations are made in this account its it is
prepared in cash system of accounting.
10. It does not reveal the financial results or the financial position of the
association or clubs because accrued incomes and outstanding
expenses are not taken into account.
A specimen of the receipts and payments account of a club for a particular
year is given below
Paper - II Accountancy - II 131

Receipts and Payments Account of .......for the year ending 31.03.2012


Dr. A Cr.
Receipts Payments A
To Balance b/d xxx By Rent xxx
To Subscriptions xxx By Fixed Assets xxx
To Entrance fee xxx By Sports material purchased xxx
To Legacy xxx By Building xxx
To Donations for building xxx By Ground maintenance xxx
To Interest received xxx By Salaries xxx
To Sale of furniture xxx By Honorarium xxx
To Sale of old sports materials xxx By Stationery xxx
To Match fund xxx By Investments xxx
To Life membership fees xxx By Entertainments xxx
By Balance c/d xxx
xxx xxx
To Balance b/d xxx

Illustration 1
Stadium club kept its account on cash basis and the figures for the year
2011 are given below. You required to prepare Receipts and Payments Account.
Subcription Received A A
2010 800 Salaries 4,800
2011 7,200 Postage 480
Receipt from Stationery 1,200
Common Room 5,000 Rent 2000
Hiring Rooms 400 Cash in hand
Billiards Rooms 2,400 01-01-2011 720
Supplies from Electricity 1600
entertainment room 3,400
Wages to Watchman’s 2,720
132 Office Assistantship

Receipts and Payments Account of stadium club for———in the year


ending on 31st Dec 2011.
Dr. Cr.
Receipts A Payments A
To Balance b/d 720 By Supplies for 3,400
entertainment
To Subscriptions
2010 800 By Watchman’s wages 2,720
2011 7,200 By Salaries 4,000
To Receipt from c.room 5,000 By Postage 480
To Hiring of rooms 400 By Stationery 1,200
To Billiards rooms 2,400 By Rent 2,000
By Electricity 1,600
By Balance c/d 1,120

16,520 16,520
To Balance b/d 1,120

Income and expenditure Account


It is prepared by Non-trading concerns of profit and loss account to
know whether during a particular period the income of the concerns or
organization has exceeded or fallen short of the expenses , this account is prepared
. In this account current expenses are compared with current incomes. The
feature of this account are.
1. It is not start with any opening balance.
2. It is a nominal account. Expenses are shown in the debt side and
incomes in the credit side.
3. Only revenue items are recorded in it. Capital items are totally
excluded.
4. Only incomes and expenses of the concerned year are recorded in it
and income and expenditure relating to the proceeding or
succeeding periods are included while preparing this account.
Paper - II Accountancy - II 133

5. This account is prepared on mercantile system of accountancy .


Therefore all adjustment relating to the proceeding or succeeding periods are
excluded while depreciations and doubtful debts will be made.
6. Only adjustment accounts are taken into consideration for the
preparations of this account. For personal and real accounts a balance sheet
must be prepared along with this account.
7. The balance in the account shows either surplus i.e., excess of income
over expenditure or deficit i.e. the excess of expenditure over income.
Difference between receipts and payments Account and Income and
Expenditure Account

Receipts and Payments Account Income and Expenditure Account

1. It is a real account 1. It is a nominal account


2. It is like cash book prepared by 2. It is like profit and loss account
trading concerns prepared by trading concerns.
3. It starts with a balance being cash 3. It does not start with any opening
at the begining of the year balance
4. Receipts are shown on the debit side 4. Income are shown on the credit side
and payments on credit side. and expenditure on the debit side.
5. All items whether of capital or 5. Only revenue items are shown in
revenue nature are shown in this this account.
account.
6. All receipts and payments whether 6. Income and expenditure of the
they are of preceding current or current year are shown in it.
succeding period are entered in it.
7. Outstanding receipts and payments 7. Income and expenses are shown
are not shown in it as it is prepared after including outstanding income
on cash basis. and expenses on accrual basis.
8. The closing balance represents cash 8. The closing balance, represents
in hand on that date. surplus or deficit for the period.
9. It is not necessary to prepare 9. In addition to this account balance
balance sheet along with this account sheet must be prepared in order to
accomodate real and personal `
account.
134 Office Assistantship

Income and Expenditure Account for the year ended......


Dr. Cr.
Expenditure Rs. Income Rs.

To Salaries xxx By Subscriptions xxx


To Honorarium xxx By Interest on Securities xxx
to Wages of Groundsmen xxx By Proceeds of entertainment xxx
and lectures
To Upkeep of Ground xxx
To Printing and Stationery xxx By Rent of Hall xxx
To Postage xxx By Grant from Government, xxx
Local authorities
To Telephone charges xxx
By Interest on Deposits xxx
To Lighting xxx
By General Donations xxx
To Bank Charges xxx
(small amount)
To General Expenses xxx
By Entrance Fees
(if not capitalised) xxx
To Rent, Rates and taxes xxx
To Insurance xxx By Advertisement in Year Book xxx
To Audit Fees xxx By Locker Rent xxx
To Cost of entertainment xxx By Sale of grass xxx
To Subscription to periodicals xxx By Profit on sale of asset xxx
To Sports materials used xxx By Miscellaneous Receipts xxx
To Depreciation xxx By Excess of Expenditure over xxx
Income (Deficit)
To Repairs xxx
To Loss on sale of assets xxx
To Excess of Income over xxx
Expenditure/Surplus

xxx xxx
Paper - II Accountancy - II 135

Preparations of Income and Expenditure account from Receipts and


Payments Account
The following steps are to be taken to convert a Receipts and Payments
account into an Income and Expenditure account.
1. Leave the opening and closing balance of cash given in the receipts
and payments account.
2. Only revenue items of income and expenditure should be taken
leaving all those items which are of capital nature.
3. Make all adjustment for outstanding and prepaid incomes and
expenses , provision for depreciations or bad debts etc.
4. Take items of the current period only i.e., items relating to the
proceeding and succeeding periods are to be ignored.
5. In the Incomes and Expenditure account, expenditure is recorded
in the debit side and income is recorded on the credit side.
6. Once income and expenditure account is balanced it shows either
surplus of defect If credit balance is more than debit balance it is called ‘ surplus’
and If the debit balance is more than credit balance it is called as ‘Deficit’.
Illustrations 2
For the following particulars, prepare income and expenditure account
of Hyderabad Golf Club for the year ending 31-March 2011.
Rs.(A)
Subscriptions received for 2010-2011 11,000
Entrance fees received for 2010-2011 1,500
Subscriptions and entrance fee for 2009-2010 realized 560
Subscriptions and entrance fees for 2012 3,100
Miscellaneous fees 4,200
Expenses for 2010-2011 14,200
Expenses unpaid 460
Audit fees for 2010-2011 not paid 400
Interest on Loan Paid 640
136 Office Assistantship

Capital expenditure in 2010-2011 4,120


Provide for depreciations for this year 340
Cash in hand 3,600
Hyderabad Golf Club Income and Expenditure Account
for the year ended 31st March 2011.
Dr. Cr.
Expenditure Rs.(A) Income Rs.(A)
To Expenses 14,000 By Subscriptions 11,000
Add : Unpaid 460 14,460 By Entrance Fee 1,500
To Audit fees 400 By Miscellaneous fees 4,200
To Interest on loan 640
To Depreciation 340
To Surplus 860

16,700 16,700

Balance Sheet
The Income and Expenditure Account is accompanied by the balance
sheet. In trading concerns, a balance sheet is to be prepared even by non-
trading concerns to complete the double entry. The balance sheet covers all
those items such as Assets, Liabilities and Capital fund.
Capital Fund
Capital fund is similar to capital account of trading concerns, Non-trading
concerns do not have formal capital like that of trading concerns. Hence, excess
of income over expenditure, capital receipts that are capitalized are accumulated
under the heading “Capital Fund” and shown as liability in the Balance Sheet.
Some special terms pertaining to non-trading organization
While preparing final accounts of non-profit organizations the following
items are often used.
Paper - II Accountancy - II 137

1. Legacy : When an account is received as per will of some person,


it is called ‘Legacy’. As it non-recurring and capital in nature it is to be capitalized
. But if the amount is small it can be taken as an income .
2. Donations : Donations are often received by these organizations
from both individuals and institutions. Donations is the amount received as a gift.
Donations may be broadly classified into two categories viz; specific donations
and general donations.
a. Specific Donations : A donations received for a specific purpose,
whether big or small is capitalized an is taken to the liabilities side of the balance
sheet. For example, a donations for the construction of a building. This amount
should be utilised only for the purpose for which it is received i.e, construction
for building.
b. General Donations : A general donation is the amount given by
parties without specifically mentioning the purpose for which it should be utilized.
This amount can be spent for any purpose. However, normally general donation
of big amounts are capitalized and small amounts are treated as revenue income
3. Endowment Fund : ‘Endowment’ is the money or property given
by parties so as to provide a permanent source of income to support the
institution. For ex. The corpus fund of university. Since the fund provides a
permanent means of support any amount received on account of this is capitalized
and shown as a Liability. But the in interest or divided received on account of
this fund is treated as revenue.
4. General Fund : Amounts which are received for no Specific purpose
and which are capitalized are shown under this head on the liabilities side of the
balance sheet But the income obtained on account of this fund is taken to the
credit side of income and expenditure account.
5. Specific Funds : Amount received for a specific purpose are
capitalized and shown in the balance sheet on its liabilities side e.g. prize fund,
buildings fund. Receipts and income on account of these specific fund should be
added to the fund account and should not be taken to income and expenditure
account. All expenses on account of these funds should be deducted from the
particular fund in the balance sheet only. In case the expenses exceed the fund
amount the excess expenses should be charged to the debit side of the income
and expenditure account.
6. Subscription : Amounts agreed to the paid by the member or
subscribers regularly at periodical interval are called ‘subscription’. They are a
138 Office Assistantship

regular source of income to the organization. Hence subscription are shown as


income.
Balance Sheet Proforma
Balance Sheet as at ........
Liabilities Rs. Assets Rs.

Outstanding Expenses xxx Cash in Hand xxx

Income Recieved in advance xxx Cash At Bank xxx

Bank Loan or Overdraft xxx Investments xxx


Special Fund xxx Outstanding subscriptions xxx

Less : Expenses xxx xxx Interest Receivable xxx

Specific Donations xxx Rent Receivable xxx

Capital Fund xxx Prepaid Expenses xxx

Add Surplus xxx xxx Stock of stamps and stationery xxx


Less Deficit (if any)xxx xxx Stock of sports material xxx

Library books xxx

Furniture and fixtures xxx

Land and Buildings xxx

Club ground and pavilion xxx


xxx xxx

7. Admission or Entrance Fees : This is the amount received from a


member at the time of his initial admission or readmission into the organization.
There is a different of opinion about the treatment of this items in accounts.
Some people argue that is should be capitalized. Since it is not a recurring items
as each member pays it once only. However , there are others who argue that,
though it is paid by each member only once the club or association received .it
regularly there fore it should be treated as income. Leaving the arguments a
side, in the absence of specific instructions to capital entrance of admission fee
must be treated as revenue income i.e. shown in the credit side of income and
expenditure account.
Paper - II Accountancy - II 139

8. Honorarium :It is taken payment made to certain people for their


services. It is generally treated as revenue expenditure and charged to the Income
and Expenditure account. But if he amount is paid on account of a specific
programme conducted in connections with a specific fund, the amount should
be deducted from the specific fund in the balance sheet.
9. Sale of Old Assets : Any receipt from the sale of old asset such as
furniture is a capital receipt and as such it should not be taken income and
expenditure account. It should be deducted for the concerned asset In the Balance
sheet. However , any loss on the sale of asset in charged to income and
expenditure account. In case of gain on the sale of an asset, if the amount is
small, it is taken to the income and expenditure account, but if it is a big, it is
treated as a capital gain and shown in the Balance Sheet.
10. Sale of Old Newspapers : The amount received of in account of
selling old news papers or old sport materials etc, is treated as revenue income.
Questions
1. What is Capital Expenditure Illustrate ?
2. What is Revenue Expenditure Illustrate ?
3. Distinguish Capital and Revenue Expenditure .
4. What is Deferred Revenue Expenditure ?
5. What are Capital and Revenue ?
6. Explain the importance of distinguishing the capital and Revenue items
while preparing final accounts of Non-trading concerns .
7. What types of accounts are prepared by non-trading concerns ?
8. What is Receipts and Payments accounts ?
9. What is Income and Expenditure account ?
10. Discuss the main characteristics of Income and Expenditure account.
11. What is opening Balance Sheet ? With purpose it is prepared ?
12. From the following particulars prepare a Receipts and Payments
account.
Rs.(A)
Cash in hand 1,000
Cash at Bank 5,000
140 Office Assistantship

Subscription received 33,000


Donations received 2,600
Investments purchased 10,000
Rent Paid 4,000
General expenses 2,000
Postage & Stationary 700
Sundry expenses 300
Cash balance at close 200
(Ans : Closing Bank balance A 24,300)
13. Prepare a Receipts and Payments account from the following
particulars .
Rs. (A)
Opening balance of cash in 1,800
Rent Paid 450
Stationary purchased 540
Subscriptions received
Previous year 1,800
Current year 4,050 5,850
Honorarium Paid 810
Sale of old furniture 1,890
Flood relief expenses 684
Repairs 756
(Ans : Cash balance A.6 ,300)
14. From the following particulars prepare Income and Expenditure
account.
Rs.(A)
Fee collected (including Rs. 24,000
on account of last year) 2,24,000
Fee outstanding for current year 40,000
Advertisement 3,200
Paper - II Accountancy - II 141

Salary Paid (including Rs.2,400 on


account of last year) 19,200
Salary outstanding (current year) 4,000
Tournament expenses 8, 000
Meeting expenses 16,000
Travelling & Conveyance 6,000
Purchase of books 16,000
Periodicals 8,000
Rent 9, 600
Postage, Telephone and Telegrams 13,600
Printing & Stationary 4,000
Donations received 6,400
(Ans : Surplus A 1,56,800)
15. Following is the Receipts and Payments account of Vishakhapatnam
cultural club for the year ended 31.12.2012.
Dr. Cr.
Receipts Rs.(A) Payments (Rs.)A
To Donation 25,000 By Salaries 900
To Life membership 2,000 By Cricket 300
To Sports competition fund 5,000 By Tennis 270
To Subscription 1,600 By Insurance 180
(Including A50 for 2012) By Billiards 85
To Locker rent 50 By Printing 15
To Interest on securities 200 By Telephone 125
To Cricket 150 By Investments 9,000
To Billiards 100 By Balance c/d 23,325
To Tennis 100

34,200 34,200
142 Office Assistantship

Subscription receivable for 2012 A 150, outstanding salaries A 100,


Half of the donations are to be capitalized, accrued interest A 300. Prepaid
Insurance A 30. Prepare Income and Expenditure account for the year ended
31.12.2012.
(Ans : Surplus A 13,155)
16. From the following Receipts and Payments accounts of Youth
Society prepare an Income and Expenditure account for the year ended
31.3.2012.
Receipts and Payments Account for the year ended 31.3.2012
Dr. Cr.
Receipts Rs.(A) Payments Rs.(A)
To Balance b/d 3,485 By Books 6,150
To Entrance fee 650 By Printing & Stationery 465
To Donations 6,000 By News Papers 1,110
To Subscriptions 6,865 By Sports Material 5,000
To Interest on Investment 1,900 By Repairs 650
To Sale of furniture 685 By Investments 2,000
To Sale of old news paper 465 By Furniture 1,000
To Preceeds from entertai- 865 By Salaries 1,500
ment
By Balance c/d 3,165
To Miscellaneous receipts 125

21,040 21,040

The Entrance fees and Donations are to be capitalized. Sports materials


are valued at A 4,000 on 31.3.2012.
(Ans : Surplus A 5,495)
17. From the following Receipts and Payments account for the year
ending 31.3.2012. Prepare an income and expenditure account for the period
ending 31.3.2012 and Balance Sheet as on that date.
Paper - II Accountancy - II 143

Dr. Cr.
Receipts Rs.(A) Payments Rs.(A)
To Donations received 35,000 By Salaries 37,500
To Subscriptions 1,15,000 By Help to poor students 37,000
To Life membership fee 50,000 By Expenses on free 34,500
75,000 dispensary
To Legacy
To Interest received 4,000 By Postage and Stationery 3,500
By Furniture 50,000
By Investments 75,000
By Cash in hand 41,500

2,79,000 2,79,000

Additional Information :
1. Subscription outstanding for the year A 5,000.
2. Salaries unpaid A 5,000.
3. Help to poor students promised but unpaid A 16,000.
4. Expenses of dispensary outstanding A 3,000.
5. Postage and Stationary expenses yet to be paid A 4,000.
(Ans: Surplus : A 18,500, B/S Total : A 1,71,500)
18. Vijayawada sports club was started on 1.4.2011. Their Receipts
and Payments a/c for the year 2011-2012 is given below.
The following Adjustments
1. Subscription receivable for the year A 300/-
2. Salaries Unpaid A 170/-
3. Entrance fee is to be capitalized.
4. Insurance is for one year and is premium paid up to 31st Dec 2012.
Prepare the income and Expenditure account for 2011-2012.
144 Office Assistantship

Receipts and Payments account as on 31.03.2012


Dr. Cr.
Receipts Rs.(A) Payments Rs.(A)
To Donations 50,000 By Buildings 40,000
To Entrance fee 4,000 By Tournament expenses 900
To Tournament fund 10,000 By Furniture 2,100
Revenue Receipts Revenue Payments
To Subscriptions 3,200 By Salaries 1,800
(Incl. A 100/- for 2012-13)
By Cricket expenses 1,140
To Rent 100
By Insurance 360
To Other Receipts 700
By Gardener salary 600
To Cricket fee 400
By Investments 18,000
By Balance c.d 3,500
68,400
68,400

(Ans : Excess of income over expenditure A800)


19. The Receipts and Payments account of the Hyderabad Friends Club
for the period ending 31.3.2011 is given below.
Subscription fee outstanding for the year 2010-2011 Rs. 150. Salaries
unpaid for the year Rs.85. From the above particulars prepare an Income and
Expenditure account of the club for the year ended 31.3.2011 and the balance
sheet in that date.
Dr. Cr.
Receipts Rs.(A) Payments Rs.(A)
To Donation received 25,000 By Buildings 20,000
To Reserve Fund 2,000 By Furniture 1,050
(Being life member By Trounament expenses
fee received) from match fund 450
Paper - II Accountancy - II 145

To Match fund 5000


Revenue Receipts : Revenue Payments :
To Subscriptions By Salaries 900
(Including Rs. 50 for 2011-12) 1,600
By Cricket 300
To Lockers Rent 50
By Tennis 270
To Interest on securities 50
By Insurance (paid upto
To Cricket 200 31st Dec. 2011) 180
To Sundries 25 By Gardening 85
To Tennis 175 By Printing 15
To Billiards 100 By Telephone 125
By Sundries 75
By Investments (at cost) 9,000
By Blance c/d 1,750
34,200 34,200

(Ans : Excess of Income over expenditure A 400/- Balance Sheet Total


: A 32,085)
20. Tarnaka Sports Club’s Receipts and Payments account for the year
ending 31.3.2012 is given here under.
Additional Information :
1. Subscriptions receivable for 2010-2011 were A 1000/- and for
2011-2012 A 1,050.
2. Games equipment in the beginning was Rs.1,000/- and at the end
A 1,250 /-
3. Provide depreciations at 10% 0n grass cutting machine .
Prepare Income and Expenditure for the year ending 31.3.2012 and
opening and closing balance sheet.
146 Office Assistantship

Dr. Cr.
Receipts Rs.(A) Payments Rs.(A)
To Cash in hand 250 By Salary to workmen 2,000
To Cash in Bank 2,250 By Grass cutting machine 1,000
To Subscription 6,750 By Rent 450
To Tournment fund 2,500 By Games expenditure 3,500
To Life membership fee 1,500 By Tournment expenditure 1,000
To Entrance fee 250 By Office expenditure 2,250
To Donation for pavilion 4,000 By Games equipment 1,500
To Sale of grass 200 By Balance c/d
Cash in Hand 750
Cash at Bank 5,250
17,700 17,700

(Ans: Deficit A. 2,300. Balance Sheet total A 9,200)


21. Prepare Income and Expenditure account and balance sheet of
Hyderabad Club from the particulars is given below for the year ending 31.3.2012.

Dr. Receipts and Payments account as on 31.3.2012 Cr.


Receipts Rs.(A) Payments Rs.(A)
To Balance b/d 1,200 By Salaries 6,500
To Subscriptions By Rent 1,200
(Including A 400 2012-13) 6,400
By Printing & Stationery 180
To Interest on investment
(Investment cost A 40,000)
By Postage 50
2,500
To Bank Interest By Cycle purchased 800
50
To Sale of furniture By Govt. Bonds 1,000
500
By Balance c/d 920
TABLE

10,650 10,650
Paper - II Accountancy - II 147

Additional Information
1. Subscription received included A 200 of 2010-2011.
2. Rent paid included A 100 for March 2012 monthly rent is Rs.100.
3. Subscriptions due for 2001-2002 A 300.
4. Salaries Payable sold was A 600.
5. Cost of furniture sold was A 640.
(Ans : Deficit : A 20 capital fund 41,940 Balance Sheet total A 43,020).
148 Office Assistantship

UNIT 3
Partnership Accounts - I
Learning Objectives
After studying this unit, the student will be able to
• Learn elements of partnership
• Understand about partnership deed
• Understand about methods of maintaining partners capital account.
• Understand about sharing the profit and losses.
• Know about admission of partner
According to section 4 of the Indian Partnership Act, 1932 the term
“Partnership is the relationship between two or more persons who have agreed
to share the profit of a business carried on by all or any of them acting for all”.
Hence the essence of the partnership is the agreement two or more
persons, who are individually called partners and collectively a firm. A maximum
of 20 persons( 10 in case of banking business) are legally permitted to form a
partnership.
Essential Elements of Partnership
The essential elements of partnership are as under.
1. There must be two or more persons.
2. There must be an agreement entered into by all partners concerned.
Paper - II Accountancy - II 149

3. There must be a business.


4. There must be sharing of profits of the business .
5. There must be a mutual agency i.e. business must be carried on by
or any them for all, In other words, a partner is both an agent and the principle.
A ‘partner’ is an ‘Agent’ in the sense that he can bind by his acts of other
partners. A ‘Partner’ is a ‘Principal’ in the sense that he can be bound by the
acts of the partners. The name under which the business carried is called the
firm name and the partnership has no separate legal entity apart from the partners
constituting it.
Partnership Deed
The document containing the terms of agreement is called it “ Partnership
Deed”. The deed usually includes the following particulars.
a. Name of the firm and names and addresses of all partners.
b. Capital to be provided by each partner.
c. Interest on capital and drawings.
d. Salary to be paid to partners , if any
e. Profit sharing ratio.
f. Rights and duties of partners .
g. Method of revaluation of asset and liabilities , whenever required.
h. Procedure for settlement of account at the time of dissolution.
i. Mode of settlement of accounts in case of retirement or death of a
partner.
Accounting Treatment and Partnership Act
In case partnership deed does not contain required information on any
point, the provisions of the partnership act will be applicable. According to the
Act.
a. All partners should be share the profit or loss equally among
themselves.
b. No interest is allowed on capital amounts and no interest is charged
in drawing.
c. A partners is not entitled to any ‘ salary’ from the firm, for his work
as a partner.
150 Office Assistantship

d. Any partners who provides loan over and above the agreed amount
of capital shall be paid interest at 6% p.a. on the loan amount.
e. Every partners is entitled to an equal share in the properties if the
firm at the time of sale of the business assets of amalgamation.
Partner have the freedom to agree and decide In a different manner in
the above said issues and include the same. In partnership deed. Partnership
Act comes into force only where partnership deed I silent on any issue.
Methods of Maintaining of Partner’s capital Account
The partner’s capital account may be maintained according to
a. Fluctuating Capital method.
b. Fixed Capital method.
Under fluctuating capital method items affecting the capital accounts of
partners such as interest on capital, interest on drawings, drawings, partners
salaries, commission, their share of profit or loss etc. are passed through capital
account . In short, only one account for each partner is maintained and all the
transactions relating to a partner are recorded in his capital account itself. As a
result of this balance in his capital keeps on fluctuating.
The specimen of capital account under fluctuating capital given below.
Partner’s Capital A/c
Particulars Rs.(A) Particulars Rs.(A)
To Drawing a/c xxx By Balance b/d xxx
To Interest on drawing a/c xxx By Bank/Cash xxx
To P & L appropriation a/c xxx (Additional capital) a/c
(Share of loss if any) By Interest on Capital a/c xxx
To Balance c/d xxxx By Salaries a/c xxx
By Commission a/c xxx
(to partner)
By P&L appropriation a/c xxx
(Share of profit)
xxx xxx
Paper - II Accountancy - II 151

Under fixed capital method, for each partner two accounts namely
“capital account“ current account” are maintained. The transaction relating to
introduction or withdrawal capital are recorded in capital account and other
transaction like interest on capital, Drawings , salary, commission, share to profit
or loss are recorded in current account. As result of these , the capital account
will continue to show the same balance from year to unless some amount of
additional capital is introduced is withdrawn while the balance current accounts
keeps of fluctuating.
The specimen of capital and current accounts under fixed capital method
are given below
Partners Capital A/C

Particulars Amount Particulars Amount


Rs.(A) Rs.(A)
To Cash / Bank xxx By Balance b/d xxx
(Withdrawal of capital)
To Balance c/d xxx By Bank/Cash a/c xxx
(Additional Capital)
xxxx xxx
By Balance b/d xxx

Partner current a/c is then maintained which as follows.


Partner’s Current A/C
Particulars Amount Particulars Amount
Rs.(A) Rs.(A)
To Balance b/d xxx By Balance b/d xxx
(Can be seen on the asset (can be seen on the
side of the balance sheet) liabilities side of the balance
To Bank a/c sheet)
xxx
By Interest on capital a/c xxx
(Drawings)
By Salaries a/c xxx
To Interest on drawing a/c xxxx
152 Office Assistantship

To P&L appropriation a/c xxx By Commission a/c xxx


(Share of loss) By P & L appropriation a/c xxx
To Balance c/d xxxx
(Share of profit)
By Balance c/d xxx

xxx xxx

Admission of a Partner
A new person can be admitted as partner only with the consent of all
existing partners. Since partnership arises of an agreement, it is necessary that
an agreement should be reached, on the one side among the partner themselves
and another side between the existing partners and the incoming partner.
A new partners may be admitted into a firm either for getting additional
capital or skill both. The new partner acquires two rights.
(a) The right to share in the profit of the business and
(b) The right to share in the assets the partnership.
The following points have be discussed in the case of a admission
(a) Treatment of Goodwill.
(b) Calculation of new profit sharing ratio and the sacrificing ratio.
(c) Revaluation of Asset and Liabilities.
(d) Adjustment of undistributed profit or losses and Reserves.
(e) Adjustment of Capital between the partners.
Accounting treatment of good will on admission of a partner
There are several ways of treatment of goodwill which are discussed
here under :
1. At the time of admission the incoming partner gives to each of the
existing partner his shares of goodwill privately. In this case, the amount of goodwill
remains a private adjustment between the existing and incoming partners.,. This
arrangement is not mentioned as well as not recorded in the books of accounts
of partnership firm.
Paper - II Accountancy - II 153

2. The incoming partners brings goodwill amount in cash into the


partnership firm in additional to his a capital. The goodwill amount received by
the firm is distributed between the existing partners and their respective capital
accounts are credited accordingly. In this case one journal entry is recorded
with the amount of goodwill received and another entry to transfer this amount
to the capital accounts of existing partners.
(a) Cash Account ……… Dr.
To Goodwill Account
(b) Goodwill Account ( Dr. in the sacrificing ratio)
To (existing ) partners
Capital accounts
It should be noted that the goodwill account will get closed but the
amount remains in the firms and is used as additional capital.
3. The goodwill amount brought by the incoming partners is distributed
among the existing partners and credited to their respective capital accounts.
Later withdraw the amount credited to the capital accounts. In this case time
journal entries are recorded in the books.
(a) Cash Account…….. Dr
To Goodwill Account
(b) Goodwill Account …… Dr
To (existing) partner’s capital Accounts
(c) ( Existing ) Partner Capital Account Dr.
To cash Account
The only difference between this and the proceeding methods is , in
the proceeding method the amount of goodwill is retained in the business where
as in this method partner withdraw that amount.
4. Goodwill amount is not bought in the form of cash by the incoming
partner. The Goodwill account is raised in the books of the firm giving
corresponding credit to the capital accounts of the existing partners.
Goodwill Account Dr.
To (Existing) Partners Capital Account
In this method goodwill appears in the balance sheet as an asset.
154 Office Assistantship

5. Goodwill account is raised crediting the existing partner’s capital


account and the written off debiting the capital accounts of all partners including
incoming partner. In this method balance sheet will not contain goodwill. Two
entries are recorded for this purpose one raising the goodwill and other to write
off the goodwill.
(a) Goodwill Account …… Dr.
To (existing ) partners capital account
(b) Partner Capital accounts …. Dr.
(Including incoming partner)
To Goodwill Account.
Illustration 1
Shanthi and Kranti are partner sharing profit and losses in the ratio of
3:1. They admit sahiti with 1/5th sharing profits. Sahiti is required to bring A
15,00,000 as her capital In additional to her share of Goodwill. The total goodwill
is valued at A 8,00,000. Show the accounting treatment In different of goodwill
method that can be followed by the partners.
Solution
1. When Sahiti pays her share of goodwill l to shanthi and kranti
privately. Sahiti’s share of goodwill will be 1/5th of the total goodwill.
8,00,000 x 1/5 = A 1,60,000
This amount will be shared by Shanthi and Kranti in 3:1 ratio.
Shanti 1,60,000 x 3/4 = A 1,20,000.
Kranti 1,60,000 x 1/4 = A 40,000.
In this method sahiti pays A 1,20,000 to Shanti and A 40,000 to Kranti
privately. No entries are made in the books of accounts of the partnership.
However, for the capital brought by Sahiti a journal entry is recorded..
Cash Account ………. Dr. 15,00,000
To Sahiti Capital Account 15,00,000
2. When the amount of goodwill brought by Sahiti is distributed between
Shanti and Kranti and the amount remains in the partnership from the following
entries are recorded in the books.
Paper - II Accountancy - II 155

(a) Cash Account … Dr. 16,60,000 --


To Sahiti capital Account -- 15,00,000
To Goodwill Account --- 1,60,000
(b) Goodwill Account ………. Dr. 1,60,000 ---
To Shanti’s Capital Account --- 1,20,000
To Kranti’s Capital Account --- 40,000
3. When the goodwill amount brought by Sahiti distributed between
shanti and kranti and they withdraw the amounts credited to their capital
accounts, the entries required are :
(a) Cash Account ……… Dr. 16,60,000 ---
To Shanti’s Capital Account --- 15,00,000
To Goodwill Account --- 1,60,000
(b) Good will Account ……. Dr. 1,60,000 ---
To Shanti’s Capital Account --- 1,20,000
To Kranti’s Capital Account --- 40,000
(c) Shanti ‘s Capital Account ……….. Dr. 1,20,000 ---
Kranti’s Capital Account…. Dr. 40,000 ---
To Cash Account --- 1,60,000
4. When Sahiti does not bring her share of goodwill in the form of cash
and goodwill account is raised in the books of accounts with its full value the
following entry is made .
Goodwill Account………… Dr. 8,00,000
To Shanti’s Capital Account --- 6,00,000
To Kranti’s Capital Account --- 2,00,000
In this method goodwill appears in the Balance Sheet it full value i.e.
A 8,00,000.
5. When Sahiti does not bring any cash goodwill and when it is decided
that the goodwill should not appear in the Balance sheet of the firm it is first
raised and then written off thus giving the necessary advantage to the existing
partners.
156 Office Assistantship

For raising the goodwill account an entry is recorded debiting the goodwill
accounts and crediting the existing partners capital accounts.
Goodwill Account……. Dr. 8,00,000 ---
To Shanti’s ’s Capital Account --- 6,00,000
To Kranti’s Capital Account --- 2,00,000
Subsequently when the goodwill account is proposed to be written off
all the partners capital accounts (including the incoming Shanti’s CapitalAccount)
will be debited and goodwill account will be credited. For this purpose the
partners new profit sharing ratio should be calculated.
Shanti’s and Kranti’s new share
After Sahiti’s admission = Total share- Sahiti Share

1 4
= 1- =
5 5

This combined new share of Shanti and Kranti will be distributed between
both of there in their original profit sharing ratio .
4 3 3
Shanti’s Share = x =
5 4 5
4 1 1
Kranti’s Share = x =
5 4 5

The new profit sharing ratio of partners would thus be


Shanti : Kranti : Sahiti
3 : 1 : 1
5 5 5

3 : 1 : 1
(Calculation of new profit sharing ratio is discussed in detail subsequently
in this chapter itself).
To write off goodwill account raised earlier. The partners capital accounts
should be debited and goodwill account credited. Goodwill when distributed in
the new profit sharing ration would be as under.
Paper - II Accountancy - II 157

3
Shanti = 8,00,000 x = 4,80,000
5
1
Kranti = 8,00,000 x = 1,60,000
5
1
Sahiti = 8,00,000 x = 1,60,000
5

The following entry is recorded to write off the goodwill account.


Shanti’s Capital Account Dr. 4,80,000 ---
Kranti’s Capital Account Dr. 1,60,000 ---
Sahiti’s Capital Account Dr. 1,60,000 ---
To Goodwill --- 8,00,000.
Profit Sharing Ratio
Calculation new profit sharing ratio becomes necessary whenever there
is a change, either in the number of partners in a partnership firm or merely a
charge in the profit sharing ratio without any change in the number of partners.
Different methods of providing information for this purpose and
calculation of new profit sharing ratio are discussed below.
Method-(i) : If this share of incoming partner is known the remaining
profit must be shared by existing in their original profit sharing ratio.
Method (ii) : If the incoming partner purchased his share from the
existing partners in a particular ratio, the new sharing of new share of existing
partners will be decided by deducting that portion which they have surrendered
( in favour of incoming partner) from their original share.
Method (iii) : In some cases, existing partners surrender a particular
fraction of their shares in favour of incoming partners and the fraction that is
surrendered may require additional calculation. What is surrendered should be
calculated first and then it should be deducted from the original share of existing
partners to get their new profit sharing ratio. The incoming partners share will be
the total of all fractions surrendered by existing partners.
158 Office Assistantship

Illustration 2 (Method 1)
Sathyam and sundaram are partners sharing profit in 7:3 ratio. They
admit Shivam allowing as share of 3/7 in the profits. Calculate new profit sharing
ratio of the partners.
Solution
Total profit =1

3
Shivam’s share =
7
1 3 4
Share of Sathyam and Sundaram together = - =
1 7 7

Sathyam and Sundaram will share this 4 / 7 profit in their original profit
sharing ratio i.e.; 7:3.
4 7 4
Sathyam share = x =
7 10 10
4 3 12
Sundaram = x =
7 10 70

New profit of sharing ratio of Sathyam, Sundaram and Shivam would be


4 12 3
: :
10 70 7
28 12 30
= : :
70 70 70

= 28 : 12 : 30
= 14 : 6 : 15
Illustration (Method -2)
Sahityam and Nrityam are partners sharing the profit in 7:3 ratio.
Manikyam secures admission I the firm by purchasing 2/7th share from Sahityam
and 1/7th share from Nrityam. Calculate new profit sharing ratio of the partners.
Paper - II Accountancy - II 159

Solution
Sahityam new share = Sahityam’s original share – portion surrendered
in favour of Manikyam.
7 2 29
= - =
10 7 70

Nrityam’s new share = Nrityam original share – portion surrendered in


favour of manikyam.
3 1 11
= - =
10 7 70

Portion purchased Portion purchased


Manikyam’s Share = +
From Sahityam From Nrityam
2 1 3 30
= + = or
7 7 7 70

New profit sharing ratio of the partners would be


Sahityam Nrityam Manikyam
29 11 30
70 70 70
29 : 11 : 30
Illustration (Method- 3)
Ram and Shyam are partners sharing profit in 7:3 ratio. They admit
Bhim as their partner.
Ram surrendered 1/7th of his share and Shyam surrendered 1/3rd of his
share I favour of Bhim calculate the new profit sharing ratio of the partners.
Solution
Ram surrendered 1/7th of his share sharing at 7/10
7 1 1
Share surrendered by Ram will equal to x =
10 7 10
160 Office Assistantship

Ram’s new share = Ram’s old share - portion surrendered


7 1 6
= - =
10 10 10

Shayam surrendered 1/3 rd of his share standing at 3/10


There fore share surrendered by Shyam will be equal to
3 1 1
= x =
10 3 10

Shyam new share = Shyam’s old share – portion surrendered


3 1 2
= - =
10 10 10
Bhim’s new share = Share he gets from Ram + Share he gets from Shyam
1 1 2
= + =
10 10 10
New profit sharing ratio of Ram, Shyam and Bhim
1 1 2
= : : = 6:2:2
10 10 10

=3:1:1
Sacrificing Ratio
When the partners of a firm invite a new a person to join them as a
partner, it is but nature that the existing partners should be prepared to sacrifice
a portion of their share in the profit in favour of the incoming partner. This obviously
means that the share of the existing partner gets reduced when a new partner is
admitted. The ratio in which the existing partners lose a portion of tier share is
called sacrificing ratio. Different methods followed to calculate the sacrificing
ratio are as follows.
Method – 1.1. When original profit sharing ratio of existing partners
and the ratio of incoming partner is known, and nothing is mentioned about the
sacrificing ratio of existing partners, it is assumed that they have contributed to
the mentioned partners share In their original profit sharing ratio.
Paper - II Accountancy - II 161

Method (II). If original profit sharing ration of existing partners and the
new profit sharing ration of all the partners (Including incoming partner) are
known new share of the existing partners should be deducted from their original
share to find out their sacrificing ratio. This can be done in two different methods.
Illustration 4 (Method 1)
Kousalya and Sumithra are partners sharing profit in 3:2 ratio. They
admit Kaikeyi and allow here 1/7 share in the profit of the firm. Calculate the
sacrificing ratio of Kousalya and Sumithra and their new profit sharing ratio
along with Kaikeyi.
Solution
In this problem , no mention is made as to the extent of Sacrifice made
by Kousalya and Sumithra when they admitted Kaikeyi with 1/7 share in the
profit . Hence it is presumed and they (Kousalya & Sumithra) contributed to
the share of Kaikeyi in their original profit sharing ratio viz.3:2. No. Calculation
is required to obtain the sacrificing ratio. Their original profit sharing ratio itself
id the sacrificing ratio.
New profit sharing ratio is calculated as under.
1
Share of Kaikeyi =
7
1 1 6
What remains for Kousalya and Sumithra is - =
1 7 7
and they share this 6 / 7 of the profit in 3:2 ratio (their original profit sharing
ratio)
6 3 18
Kousalya’s new share = x =
7 5 35
6 2 12
Sumithra’s new share = x =
7 5 35

New profit sharing ratio of Kousalya, Sumithra and Kaikeyi would be


18
: 12 : [ 1 x 5 ]
35 35 7 5
162 Office Assistantship

18 12 5
= : :
35 35 35

= 18 : 12 : 5
Illustration (Method 1&2)
Rohini and Devaki are sharing profit in 4:3 ratio. Yashoda is admitted as
partner and now Rohini, Devaki and Yashoda share profit in 7 : 4 : 3 . Calculate
the sacrificing ratio.
Sacrificing ratio can be calculated in two different methods in such cases.
Methods (i)
Sacrifice by Rohini = Rohini’s original share – Rohini’s new share
4 7 4 2 7 8 7 1
= - =[ x ]- = - =
7 14 7 2 14 14 14 14

Sacrifice by Devaki = Devaki’s original share – Devaki new share


3 4 3 2 4 6 4 2
= - =[ x ]- = - =
7 14 7 2 14 14 14 14

Sacrificing ratio of Rohini and Devaki would be 1/14 : 2/14 = 1:2


Method (ii)
Rohini Devaki Yashoda Total of Ratios
Original share of partner 4 : 3 : ---- = 7
New ratio of partners 7 : 4 : 3 = 14
Both original and new ratio’s should be arranged that in both the cases
total is equal to one another. In this case the total of original ratios is 7 and the
total of new ratio is 14 . If all the original ratios( including total ) are multiplied by
2 the total of ratios will be same in both the cases. Then the difference between
the original and new ratios will be the sacrifice ratio. After rearranging the above
ratios multiplying the original ratios with 2 they will be.
Paper - II Accountancy - II 163

Rohini Devaki Yashoda Total of Ratios


Original share of partner 8 : 6 : ---- = 14
New ratio of partners 7 : 4 : 3 = 14
Sacrificing ratio 1 : 2
Note : If the total of the ratio cannot be made by equal by rearrangement
be set of ratio both (original ratio & new ratios ) can be rearranged.
If the total of the original ratios is 10 and the new ratios add up to 4, the
set of original ratios can be multiplied by 2 and the other set (new ratio) can be
multiplied by 5 to make both the total equal viz. 20.
If the total of the original ratios is 7 and the new add up to 22, the set of
original ratios can be multiplied by 22 and the others set (new ratios) can be
multiplied with 7 make both the totals equal to 158.
Revaluation of Asset and Liabilities when a new partner is admitted
As time passes, the value of some assets may fall and simultaneously
some other assets may rise in value . Whenever a change In the number of
partners is taking place it becomes necessary have been already done by the
partnership firm, every year by transferring the depreciation on assets to the
profit and loss account. However is review of adequacy of adjustments made
becomes necessary at the time of admission / retirement death of a partner . In
case a new Partner admission of the incoming partner.
When the revised value are required to be shown in the books.
Adjustment required in the value of assets and liabilities are effected
through opening an account called Revaluation Account. Sometimes this account
is also called profit and loss adjustment account. The increase in the value of
assets is recorded through a journal entry debiting the asset account concerned
and crediting the Revaluations account. In case of fall in the value of an asset,
revaluations account is debited and the assets concerned is account of liability
concerned. An increase in liability is debited to revaluations account and credited
in the account of liability concerned. When a liability is required to be decreased
the liability account is debited and revaluations account credit. After adjusting
the values of all the assets adjustment made. This should be distributed among
the partners of the form in their profit during ratio and transferred to their capital
accounts when they are in correct from the entries will be following .
(a) For a decrease in the value of assets and increase in the value of
liabilities.
164 Office Assistantship

Revaluations (profit & Loss Adjustment ) Account Dr.


To Asset Account ……
(Individual asset accounts with the respective reductions value)
To Liability Account …….
(Individual liability account with respective amounts of increase )
(b) For an increase in the value of asset and decrease in the value of liabilities :
Asset Account …... Dr.
(Individual asset accounts with respective increase in value )
Liabilities Account……… Dr.
(Individual liability accounts with respective decrease in value)
To Revaluation Account
(c) For distribution of gain loss among the partners
Revaluation Account…. Dr.
To partner’s Capital Account
(Individual Partner’s Capital Account with their share of gain )
Partners Capital Account Dr.
(Individual partners Capital Account with their share of loss )
To Revaluation Account.
Illustrations 3 :
Govind and Gopal are sharing the profit in 3:2 ratio . The balance sheet
of their partnership firm appears as under.
The partners propose to Admit Goverdhan with a share of 3/8 in the
profit of the firm from 1.04.2012. The incoming partner will be bring A 3,00,000
as capital besides A 85,000 as his share at Good Will, in which will remain in
business.
Govind and Gopal want to make the following adjustment in the books
before admitting Goverdan.
1. Stock and furniture should be depreciated by 12.5 percent
respectively.
Paper - II Accountancy - II 165

2. Buildings to be raised in value of 75,000.


3. A provision for bad debts to be credited with 5 percent of Sundry
debtors.
4. An investment not recorded earlier in the books worth A 21,500
should be brought into books.
5. A contingent liability worth A 6,000 became a certain liability. Write
necessary journal entries, prepare important accounts and show the
balance sheet of the firm after Goverdhan admission .
Balance Sheet of Govind and Gopal as on 31-03-2012.

Liabilities Amount Assets Amount


Rs.(A) Rs.(A)
Capital Cash 7,100
Govind 3,40,500 Bank 1,19,250
Gopal 3,40,500 6,81,000 Sundry Debtors 55,000
Sundry Creditors 1,24,350 Stock 1,80,000
Furniture 44,000
Buildings 4,00,000

8,05,350 8,05,350
Solutions
Before Admitting Goverdhan into Partnership Firm
Journal Entries
Dr. Cr.
Amount Amount
Date Particulars LF Rs. (A) Rs. (A)
2012 Revaluatoin A/c... 33,450 ---
March 31 To Stock A/c --- 22,500
To Furniture A/c --- 2,200
To Provision for bad debts A/c --- 2,750
To Liability A/c --- 6,000
166 Office Assistantship

Dr. Cr.
Amount Amount
Date Particulars LF Rs. (A) Rs. (A)
(Being depreciation on assets and
provision for bad debts and liability)
March 31 Building A/c ......... Dr. 75,000
--
Investment A/c ......... Dr. 21,500
To Revaluation A/c -- 96,500
(Being appreciation on building and
for recording the investments not
entered earlier)
--
March 31 Revaluation A/c 63,050
To Govind’s Capital A/c -- 37,830
To Gopal’s Capital A/c -- 25,220
(Being profit on revaluation
distributed between the partners)

Revaluation Account
Dr. Cr.
Particulars Amount Particulars Amount
Rs.(A) Rs.(A)
To Stock Account 22,500 By BuildingAccount 75,000
To Furniture Account 2,200 By Investment Account 21,500
To Provision for bad 2,750
debt.
To Liability Account 6,000
To Govind’s Capital A/c. 37,830
To Gopal’s Capital A/c. 25,220

96,500 96,500
Paper - II Accountancy - II 167

Govind’s Capital Account


Dr. Cr.
Particulars Amount Particulars Amount
Rs.(A) Rs.(A)
To Balance c/d 3,78,330 By Balance b/d 3,40,500
By Revaluation A/c 37,830
3,78,330 3,78,330
By Balance b/d 3,78,330

Gopal’s Capital Account


Dr. Cr.
Particulars Amount Particulars Amount
Rs.(A) Rs.(A)
To Balance c/d 3,65,720 By Balance b/d 3,40,500
By Revaluation A/c 25,220
3,65,720 3,65,720
By Balance b/d 3,65,720

After Admitting Goverdhan as a partner


Journal Entries
Dr. Cr.
Amount Amount
Date Particulars Rs. (A) Rs. (A)
2012 Cash A/c... 3,85,000 --
April 1 To Goodwill A/c -- 85,000
To Goverdhan’s Capital A/c -- 3,00,000
(Being the amount brought by the
incoming partner as goodwill and
capital)
168 Office Assistantship

Dr. Cr.
Amount Amount
Date Particulars LF Rs. (A) Rs. (A)

2000 Goodwill A/c ......... Dr. 85,000 --


April 1 To Goving Capital A/c -- 51,000
--
To Gopal’s Capital A/c 34,000
(Being goodwill distributed between
the partners and transferred to their
capital accounts)

Goodwill Account
Dr. Cr.
Particulars Amount Particulars Amount
Rs.(A) Rs.(A)
To Govind A/c 51,000 By Cash Account 85,000
To Gopal’s Capital A/c 34,000
3,65,720 85,000

Govind’s Capital Account


Dr. Cr.
Particulars Amount Particulars Amount
Rs.(A) Rs.(A)
To Balance c/d 4,29,330 By Balance b/d 3,78,330
By Goodwill A/c 51,000
4,29,330 4,29,330
By Balance b/d 4,29,330
Paper - II Accountancy - II 169

Gopal’s Capital Account


Dr. Cr.
Particulars Amount Particulars Amount
Rs.(A) Rs.(A)
To Balance c/d 3,99,720 By Balance b/d 3,65,720
By Goodwill A/c 34,000
3,99,720 3,99,720
By Balance b/d 3,99,720

Goverdhan’s Capital Account


Dr. Cr.
Particulars Amount Particulars Amount
Rs.(A) Rs.(A)
To Balance c/d 3,00,000 By Balance b/d 3,00,000

3,00,000 3,00,000
By Balance b/d 3,00,000

Cash Book
Dr. Cr.
Particulars Amount Particulars Amount
Rs.(A) Rs.(A)
To Balance b/d 7,100 By Balance c/d 3,92,100
To Goodwill A/c 85,000
To Goverdhan Capital A/c 3,00,000

3,92,100 3,92,100
170 Office Assistantship

Balance Sheet of M/s. Govind, Gopal and Goverdhan


as on 01-04.2012
Liabilities Amount Assets Amount
Rs.(A) Rs.(A)
Sundry Creditors 1,24,350 Cash 3,92,100
Contingent Liability 6,000 Bank 1,19,250
Capital Accounts : Sundry Debtors 55,000
Govind 4,29,330 Less: Res. for bad debt 2,750 52,250
Gopal 3,99,720 Stock (1,80,000-22,500) 1,57,500
Goverdhan 3,00,000 11,29,050 Furniture (44,000-2,200) 41,800
Investments 21,500
Buildings (4,00,000+75,000) 4,75,000
12,59,400 12,59,400
Illustration 4
When the Goodwill is over valued in the books of the old firm.
(When Goodwill is shown at value greater than its present value in the books.)
L and M were partners in a firm sharing profit and losses in the ratio of
3:2. The balance sheet of the firm as on 31-12-2012 was as follows.
Liabilities Amount Assets Amount
Rs.(A) Rs.(A)
Sundry Creditors 20,000 Cash in hand 1,00,000
Outstanding expenses 2,000 Stock 50,000
Bills payable 18,000 Sundry Debtors 25,000
Reserve fund 10,000 Bills receivable 1,00,000
Capitals Land & Buildings 1,00,000
L 3,00,000 Plant and Machinery 1,25,000
M 2,00,000 5,00,000 Good will 50,000
5,50,000 5,50,000
Paper - II Accountancy - II 171

On 1-1-2013 Mr. N is to be admitted on the following terms and


conditions
(1) N is to bring Rs.2,00,000 for 1/4th sharing in the profits.
(2) The firm’s assets as to be revalued as follows .
Land & Building is to be brought to Rs.1,80,000/-
Plant & Machinery is to be reduced by 10%.
R.D.D is to be created @ 10% on Sundry Debtors.
Stock is to be reduced by 20%.
Goodwill is to be revalued at Rs.35,000/-.
(3) The outstanding expenditure is need not be paid.
Show Revaluations Account, Partners Capital accounts, Goodwill
Account and the Balance sheet after the admission of ‘N’.
Solutions :
Revaluation Account
Dr. Cr.
Particulars Amount Particulars Amount
Rs.(A) Rs.(A)
To Plant and Machinery A/c 12,500 By Land & Buildings 80,000
To Res. for D.Debt A/c 2,500 By Outstanding Expenses 2,000
To Stock A/c 10,000
To L’s Capital A/c 34,200
To M’s Capital A/c 22,800
To (Profit on Revaluation 57,000
transferred to Capital A/c
in 3:2 ratio)

82,000 82,000
172 Office Assistantship

Goodwill Account
Dr. Cr.
Particulars Amount Particulars Amount
Rs.(A) Rs.(A)
To balance b/d 50,000 By L’s Capital A/c 9,000
(3/5 x 15000)
By M’s Capital A/c 6,000
(2/5 x 5000)
50,000 By Balance c/d 35,000
35,000 50,000

Note : Revaluations of Overvalued goodwill or undervalued goodwill


of the old firm is concerned only to the old partners, hence to be debited or
credited (as the case may be ) only to old partners Capital Account in old ratio.
Capital Accounts of Old Partners
Dr. Cr.
Particulars L M Particulars L M
Rs.(A) Rs.(A) Rs.(A) Rs.(A)
To Goodwill A/c 9000 6,000 By Bal b/d 300000 200000
To Bal c/d 331200 220800 By Res. Fund A/c 6,000 4,000
By Revaluation A/c 34200 22800

340200 226800 340200 226800


By Balance b/d 331200 220800
Paper - II Accountancy - II 173

Capital Accounts of N (New Partner)


Dr. Cr.
Particulars Amount Particulars Amount
Rs.(A) Rs.(A)
To balance c/d 2,00,000 By Cash 2,00,000

2,00,000 2,00,000
By Balance b/d 2,00,000

Balance sheet of L,M and N as on 1-1-2013

Liabilities Amount Assets Amount


Rs.(A) Rs.(A)
Sundry Creditors 20,000 Cash in hand 3,00,000
Bills payable 18,000 (1,00,000+2,00,000)
Capital A/c’s : Stock 50,000
L’s Capital 3,31,200 Less : Dep 10,000 40,000
M’s Capital 2,20,800 Sundry Debtors25,000
N’s Capital 2,00,000 7,52,000 Less : RBD 2,500 22,500
Bills Receivables 1,00,000
Land & Building 1,00,000
Add: Appr. 80,000 1,80,000
Plant & Machinery 1,25,000

Less : Dep 12,500 1,12,500


Goodwill 35,000
7,90,000 7,90,000
174 Office Assistantship

Exercises
Admission of a partner
1. A and B are carrying on business in a partnership, sharing profit &
Losses in the ratio of 2 : 3. There Balance sheet as at 31-3-2010 was as under.
Balance Sheet

Liabilities Amount Assets Amount


Rs.(A) Rs.(A)
Sundry Creditors 50,000 Cash in hand 30,000
Capital Accounts : Cash at Bank 20,000
A 2,80,000 Sundry Debtors 1,00,000
B 4,20,000 7,00,000 Stock 2,00,000
Furniture 50,000
Buildings 3,50,000
7,50,000 7,50,000

On that date they admit ‘ C ’ on to partnership and given him 1/4th


share in the future profit on the following terms.
(a) ‘C ’ is to bring in A 3,00,000 as his Capital and A 1,00,000 as
good will, which sum is to remain in the business.
(b) Stock and Furniture are to be reduced in value by 10%
(c) Buildings are to be appreciated by A 50,000
(d) A provision of 5% to be created on sundry Debtors for doubtful
debts.
Write journal Entries to recorded the above arrangement and show the
opening Balance Sheet of the new firm.
(Balance Sheet A 11,70,000, Revaluations profit A 20,000)
Paper - II Accountancy - II 175

2. The Balance Sheet of Srinitha & Srihitha who are partners sharing
profit & losses in the ratio 2:1 , on 31-3-2012 was a under .
Balance Sheet
Liabilities Amount Assets Amount
Rs.(A) Rs.(A)
Sundry Creditors 1,00,000 Cash 5,000
Bills payable 3,20,000 Sundry Debtors 4,00,000
Less :
Provision for D.D 5,000 3,95,000
General Reserve 1,80,000 Stock 2,50,000
Capitals Furniture 1,00,000
Srinitha 3,00,000 Buildings 3,00,000
Srihitha 1,50,000 4,50,000
10,50,000 10,50,000

On that date Srinidhi was admitted for 1/3 share to profit on the follows terms
(a) That Srinidhi brings in Cash A 90,000 for Goodwill & A1,50,000 as
Capital.
(b) That half of the goodwill shall be withdrawn by the holds partners.
(c) The provision for bad and doubtful debts is to be increased by
A10,000.
(d) That a liability for A 8,500 be created against outstanding salaries.
(e) That the Stock & Furniture to reduced by 5%.
(f) That the value of Building s be appreciated by 10 %.
Prepare Revaluation a/c, Partners Capital Account & Balance Sheet of
new firm.
(Balance Sheet A 12,47,500, Revaluations Loss A 6,000)
176 Office Assistantship

3. Naveen and Kiran are partners sharing their profits in the ratio of 3:2
on 31-12-2012. The Balance Sheet is as under.
Balance Sheet
Liabilities Amount Assets Amount
Rs.(A) Rs.(A)
Creditors 16,000 Cash in hand 2,000
Bank O.D 10,000 Cash in Bank 10,000
Bills Payable 12,000 Debtors 20,000
Capitals A/cs : Stock 18,000
Naveen 48,000 Furniture 10,000
Kiran 24,000 72,000 Buildings 30,000
Machinery 20,000

1,10,000 1,10,000

Adjustments :
1-1-2012 Rajesh was admitted as partners in the following conditions .
(a) Firm’s Goodwill valued for A10,000
(b) Depreciate stock, furniture , machinery @ 10%.
(c) Appreciate Buildings @ 10%.
(d) Provide Reserve for Bad Debts at 5% on the debtors.
(e) Rajesh has to brings A 16,000/- in cash for his share of Capital.
Prepare necessary accounts & the new balance sheet of the firm after
Rajesh’s entry.
(Ans : Revaluations loss A2,800; Capital A/C Balance- Naveen
A 52,320 ; Kiran A 26,880; Rajesh A 16,000- B/s Total A 1,33,200.
Paper - II Accountancy - II 177

4. X, Y Share profit in the ratio of 1:1. Their Balance Sheet as on


31-12-2012 is given below.

Liabilities Amount Assets Amount


Rs.(A) Rs.(A)
Outstanding expenses 10,000 Cash in hand 4,000
Creditors 48,000 Cash in Bank 38,000
Overdrafts 40,000 Debtors 40,000
Bills payable 20,000 Furniture 12,000
Capital Accounts Buildings 57,000
X 45,000 Machinery 42,000
Y 30,000 75,000

1,93,000 1,93,000

They admitted Z on the following conditions.

(a) Depreciations on Machinery , Buildings, Furniture by 5%.

(b) Provision for bad debts 5% in debtors.

(c) Create Goodwill A30,000/-

(d) She Should brings A 45,000/- as capital for ¼ th Share .

Prepare profit & Adjustment account & new Balance Sheet on 1.1.13

(Ans : Revaluations Loss A 7,550 ; Capital Balance X-A 56,225;


Y- A 41,225; Z- A 45,000; B/s Total A 2,60,450)

5. Given below is the Balance Sheet of A and B who are carrying o a


partnership business as in 31-12-2012. A and B share profits and Losses in the
ratio of 2:1.
178 Office Assistantship

Balance Sheet

Liabilities Amount Assets Amount


Rs.(A) Rs.(A)
Bills payable 10,000 Cash in hand 10,000
Creditors 58,000 Cash in Bank 40,000
Outstanding 2,000 Sundry Debtors 60,000
Capitals A/cs : Stock 40,000
A 1,80,000 Plant and Machinery 1,00,000
B 1,50,000 3,30,000 Buildings 1,50,000

4,00,000 4,00,000

‘C’ is admitted as a partner on the date if the Balance Sheet ion the
following terms.
(a) ‘C’ will brings in Rs.1,00,000 as his capital & A 60,000 as his share
of Goodwill for ¼ share of profit.
(b) Plant and Machinery is to be appreciate to A 20,000 &. The value
of Building is to be appreciated by 10%.
(c) Stock is found overvalued by A 4,000.
(d) A provision for bad & doubtful debts is to be created at 5% on
debtors.
(e) Creditors were unrecorded to the extent of A 1,000 /-
Pass the journal entries, prepare the profit & Loss adjustment account
and show the Balance Sheet after the admission of ‘C’.
(Ans : Revaluations profit A 27,000; Capital Account
Balances A- A 2,38,000; B – A 1,79,000; C - A 1,00,000;
Balance Sheet Total A 5,88,000)
Paper - II Accountancy - II 179

6. X and Y were sharing profits in the positions of 2/3 and 1/3 showed
the following as their Balance Sheet on 31-12-2012.

Liabilities Amount Assets Amount


Rs.(A) Rs.(A)
Sundry Creditors 29,950 Buildings 25,000
Bills payable 3,000 Plant and Machinery 17,500
Capital Accounts Stock 10,000
X 15,000 Sundry Debtors 4,850
Y 10,000 25,000 Cash in hand 600

57,950 57,950

They agreed to admit Z into partnership on the following terms


(a) Z was to bring A 7,5000 as his Capital & A 3,000 as goodwill
for ¼ share in the future profits of the firm.
(b) That the Value of stock, Plant & Machinery were to be reduced by
5%.
(c) That a reserved of A 375 was to be created in respect of sundry
debtors.
(d) That the Building account was to be appreciated by 10%.
(e) That the Good will was to be retained in the business.
Prepare profit & Loss Adjustment Account, the Capital Account , &
the new balance sheet of the firm.
(Ans : Revaluation Profit A.750 ; Capital A/c Balance X –
A 17,500; Y – A 11,250; Z – A 7,500; Balance sheet Total A 69, 200)
180 Office Assistantship

7. On 31-12-12 the Balance Sheet of equal Partner P,Q and R is


given below.
Balance Sheet

Liabilities Amount Assets Amount


Rs.(A) Rs.(A)
Sundry Creditors 29,950 Buildings 41,000
Bills payable 3,000 Furniture 3,200
Capital Accounts Stock 25,200
P 15,000 Sundry Debtors 32,000
Q 10,000 Cash in hand 4,200
R 18,000 82,000

1,05,600 1,05,600

They admitted Mr. ‘S’ on the following conditions.


(a) ‘ S’ has to bring A 24,000 towards Good will and A 30,000 as
Capital for his 1/4th Share.
(b) ½ (half) of the Good Will be taken away by the old Partners, from
the business.
(c) Depreciation @ 5% to be Provided on Stock & Furniture.
(d) 5% provision for Bad debts Reserve on debtors required.
(e) Buildings is to be valued at A 59,000/-
Prepare Profit and Loss adjustment account, Capital Account and
Balance Sheet as on 1-1-2011
(Ans : Revaluation Profit – A 14,980, Capital A/C Balance P-
A 43,993; Q - A 37,993; R- A 26,994; S- A 30,000; Balance Sheet
Total A 1,62,580.)
Paper - II Accountancy - II 181

Short Answer Type Questions


1. Ram, Laxman were partners sharing Profits & Loss in the ratio of
3:2: They admit Bharath giving him 1/5th share in the future profits. Calculate the
new profit sharing ratio.
2. X and Y were partners in a firm. They shared Profit and Losses in
the ratio 3:1; Z was admitted on 1-1-2013 & the new profit sharing ratio is
5:1:4. Find the sacrificing ratio.
3. P and Q were partners sharing profits & losses in 5:3 ratio. R got
admitted by purchasing 2/8 share from P and 1/8 share from Q. Find the profit
sharing ratio of all the partners.
4. Calculate Goodwill by 3 years purchase of average profits. Profit
for 2001-2002, 2003-2004 & 2005 were A 509,000, A 75,000, A 65,000
& A 20,000.
182 Office Assistantship

UNIT 4
Partnership Accounts - II
Learning Objectives
After studying this unit, the student will be able to
• Understand method for retirement of partner
• Understand about goodwill treatment
• Learn about revaluation of the assets and liabilities
• Understand about sharing the profit and losses.
Retirement of a Partners
Every partners has to right to retire from the firm as and when he
desires. He has to give suitable notice of this purpose. The issues that rise at the
time of retirement of a particulars are almost the same in comparison with the
admission of a partners viz.
(1) Ascertaining the good will amount.
(2) Calculations of the new profit sharing ratio of remaining partners.
(3) Revaluations of Assets and Liabilities of a firm and distribution of
revaluation of profit / loss among the partners.
(4) Distribution of accumulated / undistributed profits/ reserve among
the partners .
Paper - II Accountancy - II 183

(5) Adjustments Capital balances of partners in proportion to their profit


sharing ratio if there is change it.
In addition to the above mentioned issues there could be one more
issue for considerations at the time of retirement of a partner. Of the partner
retires in the middle of any accounting year, profits of the firm for the period
beginning from the first day of that accounting year till the date of retirement has
to be ascertained . The retirement partner’s share in such amount should be
credited to his capital account. Profits of the firm, in such Circumstances is
generally calculated based on the profits earned by the firm in the preceding few
years.
The issues are discussed hereunder in brief as they already discussed in
details while dealing with admission of a partner.
1. Goodwill : There are different ways in which the accounting of
goodwill carry be completed at the time of retirement of a partner. Once the
goodwill amount is ascertained ( in any method discussed at the time of admission)
one of the following procedure can be adopted.
(a) Goodwill account is debited with the full value crediting account of
the partners (including retiring partner) in their sharing ratio. This is done when
there is no goodwill account will account books stated earlier. In this method
goodwill appears in the balance sheet of the firm.
(b) I f the goodwill account is already there which is proposed to be
increased now and entry is recorded with the amount of difference between the
purposed amount and existing amount. In this entry goodwill account is debited
and Capital account of the partners credited.
(c) If the existing goodwill account is proposed to be reduced an entry
is recorded with the difference amount debiting the partner’s capital accounts
and crediting the goodwill account.
(d) If the remaining partners desire that goodwill should not appear in
the balance sheet, good will account can be closed by debiting the existing
partner’s Capital account and crediting the goodwill account.
(e) Another method of ensuring that the goodwill should not be appears
in the balance sheet is to recorded an entry debiting the remaining partner’s
Capital account and crediting retirement partner’s capital account. In this method
goodwill account is not opened at all.
2. New Profit Sharing Ratio : When one of the partners retires,
remaining partners will share the profit in the same ratio. There will be no
184 Office Assistantship

change in their profit sharing ratio and hence no fresh calculations is required.
However , if the partner desire that these should be a charge in their profit
sharing ratio their agreement forms the basis for their new profit sharing ratio.
Ion such case also calculations of fresh profit sharing ratio Is not required to be
made.
3. Revaluation of Assets and Liabilities : The retiring partner should
be allowed his share of profit arising out of the adjusted values of assets liabilities.
Similarly he should be held responsible to share the loss if any arising out of the
decrease in the value of assets or increase in the liabilities which did not find a
place in the books of accounts earlier. There for all the necessary adjustment in
the value of asset and liabilities should be made through evaluations account.
The resultant profit and loss should be distributed among the partner (including
the retirement partner) and transferred to their respective capital account . The
procedure required to be adopted is similar to that which was discussed in
detail at the time of admission of a partner.
4. Accumulated Profit/Reserves : The retiring has to right to share
the undistributed and accumulated profits and reserved (general serves only)
maintained till the date of his retirement . Hence such amounts should be
distributed his share in these amounts should be transferred to his capital account.
The procedure is already explained while dealing with a admission of a partner.
5. Adjustment of Capital Balances : If the partner agree that their
capital amounts should be in the same ratio, the difference between the required
amounts and actual amount should be transferred to the current account of the
partner concerned . In such cases, each partner will have two accounts viz.
Capital account and current account in the books of the firm sometimes the
difference can be settled in the form of cash, either by taking away or bringing in
which will affected cash a/c.
Profit Sharing Ratio
On the retirement or death of a partner, it is necessary to know what is
the new ratio in which the remaining partners are going to continue to share their
future profit / loss. The new ratio can be calculated and follows:
Case 1 . When no new profit sharing ratio is specified in the
problem :
In such a case it is presumed that the remaining partners are going to
continue with the same old ratio of their, striking off the retiring partner’s share.
For example A,B, and C are partners sharing profits and losses in the ratio of
3:2:1 and B retires from the firm , then the new ratio of A& C will be 3:1, i.e. ¾
Paper - II Accountancy - II 185

: ¼ after striking off of B’s share. Remember it was 3:2:1 . Now it is only 3:1 and
hence ¾ : ¼. It means the total profit is made into 4 parts of which A gets 3
parts and C gets one parts.
Illustration 1 :
Keshav, Govind and Madhav are three partners and Losses in the ratio
of ½ : 2/5 : 1/10 .Keshav retires from the firm. Find the new profit sharing ratio
of remaining partners.
Solutions : Simply the ratio by taking the common denominator
i.e. ½ : 2/5 : 1/10 can be expressed as 5/10 : 4/10 ; 1/10 i.e. 5:4:1.
Now strike off Keshav’s share and what remains is 4:1 which is the
new ratio of Govind and Madhav i.e. 4/5 : 1/5.
Similarly if Govind is retiring, the new of Keshav and Madhav is 5:1,
1.e, /6 and 1/6 .
5

If Madhav is retiring , then the new ratio of Keshav and Govind would
be 5 : 4 i.e. 5/9 : 4/9.
Case (2) : The share of retiring partner may be purchased by the new
partner. In such a case, the remaining partners will be getting their old share of
profit plus what is purchased from the retiring partners share . It shall be made
clear from the following illustration.
Illustration 2 :
A ,B, and C partners sharing profits and losses in the ratio of 1/5 : 1/3 :
7
/15 respectively. C retires and his share is purchased by A & B in the ratio of
3:2. Calculate the new profit sharing ratio of A & B.
A gets 3/5th of C’s share = 7/15 x 3/5 = 21/75
B gets 2/5th of C’s share = 7/15 x 2/5 = 14/75
Hence A’s new share will be his old share + the portion of C’s share.
i.e.. A’s new share = 1/5 + 21/75 = 15+ 21/75 = 36/75
B’s new share = 1/3 + 14/75 = 25+14/75 = 39/75
Hence the new ratio of A,B = 36 : 39 = 12:13
Gaining Ratio :
When a partner retries, his share Will be adjusted among the other
partner Who continue the business. That means, there is an increased in the
186 Office Assistantship

share of remaining partners. The remaining partners are going to gain on the
retirement of any partner.
The amount which they get extra on the retirement of one partner, in
addition to their old share is known as the gain. The ratio of increase between
the remaining partner is known as gaining ratio.
Gaining ratio = New Ratio – Old ratio.
21
I n the previous example of A ,B and C, A was gaining /75 and B was
14
gaining /75. Hence, the gaining ratio of A,B = 21 : 14 = 3 : 2 .
The gaining ratio can be calculated as under .
Case (1) : When no new ratio is specified.
In such a case, it is understood that the remaining partners are going to
continue with their old share itself, which means that they are to share the retiring
partners share also in the old ratio. Hence, the new ratio of the gaining ratio of
the remaining partners would be the same. It shall be clear from the following
example.
Illustration 3 :
X ,Y and Z share profit of the ratio of 6 : 7 : 8. Y retires calculate the
gaining ratio of X and Z.
Solution : In this problem, the new ratio is not mentioned. Hence the
new ratio of X and Z will be 6 : 8 which remaining after striking off Y ’s share.
We known the gaining ratio = New ratio – Old ratio.
X’s gaining ratio = 6/14 – 6/21 = 18 – 12/42 = 6/42
Z’s gaining ratio = 8/14 – 8/21 = 24-16/42 = 8/42
Gaining ratio of X,Z = 6:8 which is equal to new ratio which is also 6:8.
It is clear from the above illustration that, if the new ratio or the gaining
ratio is not mentioned in the problem, the remaining partners gain in the same
ratio as their new profit sharing ratio.
Case 2 : When the new profit sharing ratio is specified in the
problem.
In such a case , gaining ratio can be calculated by deducting the old
ratio from the new ratio i.e., gaining Ratio = New ratio – old ratio.
Paper - II Accountancy - II 187

Illustration 4:
X,Y & Z are partners with 6 : 7 : 8 ratio Y retires from the firm. X and
Z share the profit in the ratio of 10 : 11. Calculated the gaining ratio and X and Z.
Solution : In this problem the new ratio of X and Z is mentioned. Hence,
gaining ratio = New ratio – Old Ratio.
X’s gaining ratio = 10/12 – 6/21 =10-6/21 = 4/21.
Y’s gaining ratio = 11/21-8/21=3/21
Gaining ratio f X,Z = 4:3
Surrendered by Y is shared by X and Z as 4 to X and 3 to Z.
Journal Entries at the time of retirement
Journal Entries , certain and Accounts in the ledger – At a glance
(1) For any increase in the value of any Asset on revaluation.
Asset A/c………… Dr.
To Revaluation A/c
(2) For any decrease in the value of any asset
Revaluations A/c……. Dr
To Assets A/c
(3) For any increase in the value of Liabilities.
Revaluation A/c……….. Dr
To Liabilities A/c
(4) For any decrease in the value of any liabilities
Liabilities A/c……… Dr
To Revaluation A/c
(5) Balance in Revaluation A/c
(a) In case of profit
(Excess of credit over debit )
Revaluation A/c….. Dr
To All Partners capital A/c
188 Office Assistantship

(including the retiring partner in the old ratio)


(b) In case of Lose.
(Excess of Debit over credit )
All partners Capital A/c….. Dr
To Revaluation A/c
· * Note . Revaluation A/c is also called P&L adjustment A/c
(6) Transfer of general reserve and Accumulated profits.
General Reserve A/c…… Dr

Accumulated profits A/c….. Dr


To All partner Capital A/c
Illustration No. 5
A,B,C and D are partner In a firm is sharing profit and losses in the ratio
of 4:3:2:1. The Balance Sheet as on 31-12-2012 is as follows.
Balance Sheet

Liabilities Amount Assets Amount


Rs.(A) Rs.(A)
Sundry Creditors 10,000 Lease hold land 30,000
Bills payable 8,000 Buildings & Presmises 20,000
Bank Loan 12,000 Furniture 1,200
Capital Accounts Plant & Machinery 8,800
A 10,000 Stock 1,000
B 8,000 Sundry debtors 800
C 9,000 Cash & Bank 200
D 5,000 32,000
62,000 62,000
Paper - II Accountancy - II 189

On the above date ‘A’ decided to retire from the firm on the following
terms.

(a) Goodwill of the firm to be raised at A 10,000

(b) Lease hold and buildings & premises should be appreciated by


20% and 30% respectively.

(c) Furniture ,Plant, & Machinery and stock are to be reduced by 10%.

(d) Provision is to be created on Sundry Debtors at 10% for bad debts.

(e) The amount payable to ‘A’s retirement and Balance Sheet of the
new firm. Also journalize the transactions.

Revaluation Account

Dr. Cr.
Particulars Amount Particulars Amount
Rs.(A) Rs.(A)
To Furniture A/c 120 By Leasehold land A/c 6,000
To Plant & Machinery A/c 880 By Building & Premises A/c 6,000
To Stock A/c 100
To P.B.D.D A/c 80
To Capital A/cs
A = 4,328
B = 3,246
C = 2,164
D = 1,082 10,820
(Profit on revaluation 12,000 12,000
transferred to partners)
190 Office Assistantship

A’s Capital Account


Dr. Cr.
Particulars Amount Particulars Amount
Rs.(A) Rs.(A)
To Loan A/c 18,328 By Balance b/d 10,000
By Goodwill 4,000
By Revaluation a/c 4,328

18,328 18,328

B’s Capital Account


Dr. Cr.
Particulars Amount Particulars Amount
Rs.(A) Rs.(A)
To Balance c/d 14,246 By Balance b/d 8,000
By Goodwill 3,000
By Revaluation a/c 3,246

14,246 14,246
By Balance b/d 14,246
C’s Capital Account
Dr. Cr.
Particulars Amount Particulars Amount
Rs.(A) Rs.(A)
To Balance c/d 13,164 By Balance b/d 9,000
By Goodwill 2,000
By Revaluation a/c 2,164
13,164 13,164
By Balance b/d 13,164
Paper - II Accountancy - II 191

Dr. D’s Capital Account Cr.

Particulars Amount Particulars Amount


Rs.(A) Rs.(A)
To Balance c/d 7,082 By Balance b/d 5,000
By Goodwill 1,000
By Revaluation a/c 1,082

7,082 7,082
By Balance b/d 7,082
Balance Sheet of B,C and D as on 1-1-2013
Liabilities Amount Assets Amount
Rs.(A) Rs.(A)
Sundry Creditors 10,000 Lease hold land 30,000
Bills payable 8,000 +Appreciation 6,000 36,000
Bank Loan 12,000 Bldgs & Pre. 20,000
Capital Accounts + Appreciation 6,000 26,000
B 14,246 Furniture 1,200
C 13,164 - Dep 120 1,080
D 7,082 34,492 P & Machinery 8,800
A’s Loan A/c 18,328 -Dep 880 7,920
Stock 1,000
-Dep 100 900
Sundry Debtors 800
-P.B.D.D 80 720
Cash & Bank 200
Goodwill 10,000
82,820 82,820
192 Office Assistantship

Illustration
A, B and C were carrying on business in partnership sharing profits and
losses in the ratio of 3:2:1. On 31st December 2012, Balance sheet of the firm
stood as follows.
Balance Sheet

Liabilities Amount Assets Amount


Rs.(A) Rs.(A)
Sundry Creditors 13,590 Cash 5,900
Capital Accounts Debtors 8,000
A 15,000 Stock 11,690
B 10,000 Buildings 23,000
C 10,000 35,000 Plant and Machinery 10,000
General Reserve 12,000 Furniture 2,000
60,590 60,590

B retired on the above mentioned date on the following terms.


i. Buildings be appreciated by A 7,000
ii. Provision for bad debts be made @ 5% on debtors
iii. Goodwill of the firm raised at A 9000 and immediately written off.
iv. A 5,000 be paid to B immediately and the balance due to him be
treated as a loan carrying interest @ 6% per annum.
Prepare revaluation account, Partners capital account and new Balance
Sheet.
Revaluation Account
Dr. Cr.
Particulars Amount Particulars Amount
Rs.(A) Rs.(A)
To P.D.D 400 By Building A/c 7,000
To Profit 6,600
(Transfer to Partners) 7,000 7,000
Paper - II Accountancy - II 193

A’s Capital Account


Dr. Cr.
Particulars Amount Particulars Amount
Rs.(A) Rs.(A)
To Goodwill A/c 6,750 By Balance b/d 15,000
To Balance c/d 22,050 By Goodwill 4,500
By Revaluation a/c 3,300
By General reserve 6,000
28,800 28,800
By Balance b/d 22,050
B’s Capital Account
Dr. Cr.
Particulars Amount Particulars Amount
Rs.(A) Rs.(A)
To Cash 5,000 By Balance b/d 10,000
To Loan A/c 14,200 By Goodwill 3,000
By Revaluation a/c 2,200
By General reserve 4,000
19,200 19,200
C’s Capital Account
Dr. Cr.
Particulars Amount Particulars Amount
Rs.(A) Rs.(A)
To Goodwill A/c 2,250 By Balance b/d 10,000
To Balance c/d 12,350 By Goodwill 1,500
By Revaluation a/c 1,100
By General reserve 2,000
14,600 14,600
By Balance b/d 14,600
194 Office Assistantship

Balance Sheet of A & C as on 01-01-2013

Liabilities Amount Assets Amount


Rs.(A) Rs.(A)
Sundry Creditors 13,590 Cash 5,900
Capital Accounts Less : B’s Cap. 5,000 900
A 22,050 Debtors 8,000
C 12,350 34,400 Less: P.D.D 400 7,600
B’s Loan A/c 14,200 Stock 11,690
Building 23,000
+ App. 7,000 30,000
P. & Machinery 10,000
Furniture 2,000
62,190 62,190

Exercises
1) X,Y,Z were partners sharing profits in the ratio of ½,1/6,1/3/ Their
Balance Sheet on 31-12-2012 was as follows.

Liabilities Amount Assets Amount


Rs.(A) Rs.(A)
Sundry Creditors 20,500 Buildings 50,000
Bills Payable 10,000 Plant and Machinery 25,000
Capital Accounts Furniture 2,500
X 15,000 Stock 22,500
Y 10,000 Debtors 20,000
Z 10,000 80,000 Reserve 1,000 19,000
Reserve fund 12,000 Cash 3,500
1,22,500 1,22,500
Paper - II Accountancy - II 195

Z retires, so the following adjustment were agreed upon for ascertainment


of the payment be made to him
(1) Appreciate the Buildings by 10% and Stock by 15%.
(2) Depreciate Plant by 10% and furniture by 7 ½ %.
(3) Reserve for Doubtful debts to be made up to A 1,500.
(4) Create Goodwill with A 20,000
(5) The amount pay able to should be transferred to Loan account.
(6) It is assumed that goodwill credited to retiring partner is being
reduced from X and Y’s Capital Balance Sheet.
(Ans : Revaluations profit – A 5,187; Z’s Loan A/c – A 47,396
Balance Sheet Total – A 1,27,687)
(2) Ram, Seetha, Geetha are sharing profits and losses in the ratio of
5:3:2 on 31st December , 2012. The balance sheet was as follows.

Liabilities Amount Assets Amount


Rs.(A) Rs.(A)
Sundry Creditors 21,000 Cash 50,500
Bills payable 10,000 Debtors 31,000
General Reserve 20,000 (-) Res. for b.debt 500 30,500
Capital Accounts Stock 20,000
A 80,000 Machinery 40,000
B 60,000 Building 80,000
C 30,000 1,70,000
2,21,000 2,21,000

On 1st January, 2013 Geeta retired on the following terms


1. Value of buildings to be appreciated by 10%
2. Bad debts reserve to be increased to A 1,200
3. Goodwill is to be created A 40,000
196 Office Assistantship

4. Amount due to Geeta is to be transferred to 8% loan account in her


name.
(Ans. Revaluation Profit - A 7,300; Geeta’s 8% Loan A/c -
A 43,460 Balance Sheet Total A 2,68,300)
(3) Suryam, Chandram, Viswam are partners sharing profit and losses
in the ratio of 5:3:2. Their Balance Sheet as on 31.12.2012 is given below.

Liabilities Amount Assets Amount


Rs.(A) Rs.(A)
Sundry Creditors 1,21,000 Buildings 80,000
Bills Payable 10,000 Machinery 1,40,000
Capital Accounts Stock 20,000
Suryam 80,000 Debtors 31,000
Chandram 60,000 Reserve 500 19,000
Viswam 30,000 1,70,000 Cash 50,500
Reserve fund 20,000 1,22,500
3,21,000 3,21,000

Viswam retries on the following adjustments.


(1) Appreciate Buildings by 10% and depreciate , Machinery by 20%
and stock revalued at A 15,000.
(2) Bad debts reserve is to be increased up to A 1.200
(3) Goodwill is to be created for A 49,000.
Prepare profit and loss adjustment account and ne balance sheet.
(Ans : Revaluations Loss – A 25,700 : V’s Loan A/c – A 39,660;
Balance Sheet total – A 3,44,300).
(4) Mythill, Mayuri and Mounica are partners sharing profits and losses
equally. Their Balance Sheet on 31st March 2011 is given below.
Paper - II Accountancy - II 197

Liabilities Amount Assets Amount


Rs.(A) Rs.(A)
Sundry Creditors 20,000 Cash & Bank 18,000
Reserve fund 18,000 Debtors 30,000
Capital Accounts Stock 24,000
Mythili 50,000 Machinery 40,000
Mayuri 40,000 Buildings 46,000
Mounica 30,000 1,20,000

1,58,000 1,58,000

On the above date, Mounica decided to retire from the firm on the
following conditions.

(i) Goodwill of the firm be valued at A 24,000.

(ii) Depreciate stock & Machinery by 10%.

(iii) Buildings will be appreciated to A 56,000

(iv) Provide 5% on the debtors towards reserve for doubtful debts.

Write Revaluations Account, Capital Account and Balance Sheet after


due to amount is paid to be cash in ,Mounica to the extent possible and Balance
transferred to a plan A/C.

(Ans : Revaluations profit – A 2,100; Mounica Loan A/c –


A 26,700; Balance sheet – A1,66,100).

5. Manasa , Madhuri and ,Madhavi are partners sharing profit and


losses equally. Their Balance Sheet as on 31st March , 2011 is given below .
198 Office Assistantship

Liabilities Amount Assets Amount


Rs.(A) Rs.(A)
Sundry Creditors 1,00,000 Cash & Bank 90,000
Profit & Loss A/c 90,000 Debtors 1,50,000
Capital Accounts Stock 1,20,000
Manasa 2,50,000 Machinery 2,00,000
Madhuri 2,00,000 Buildings 2,30,000
Madhavi 1,50,000 6,00,000

7,90,000 7,90,000

On above date Madhavi , decided to retire from the firm on the following
conditions
(a) Goodwill of the firm to be valued at A 1,20,000.
(b) Depreciate stock and Machinery by 10 %.
c. Buildings to be appreciated up to A 2,80,000.
d. Provide 5% on debtors towards reserve for doubtful debts.
Pass journal entries, ledger accounts and new balance sheets of the
firm as on 1.4.2012.
(Balance sheet Total A 9,20,500, Revaluations profit A 10,500).
UNIT 5
Hire Purchase and
Installment Purchase System
Learning Objectives
After studying this unit, the student will be able to
• Understand the concept of hirepurchase
• Understand about characteristics features of hirepurchase
• Difference between hire purchase and installment purchase
• Understand about defaulters and repossession of assets
Hire Purchase and Installment Purchase System
According to section 2(c) of the Hire Purchase act, 1972 “Hire
Purchase” agreement means an agreement under which goods are let on hire
and under which the hirer has an option to purchase them in accordance with
the terms of agreement and include an agreement under which (i) possession of
good is delivered by the owner thereof to a person on condition that such
persons pays the agreed amount, in periodical installment, (ii) the property in
the goods is to pass to such a person on the payment of the last installment and
(iii) such person has a right to terminate the agreement any time before the
property so passes”.
Features of Hire Purchase Agreement
1. Hire purchaser obtain only possession of the goods.
2. Ownership of the goods remains with the hire vendor while signing
the agreement.
200 Office Assistantship

3. Hirer purchaser agrees to pay hire purchase price in installment.


4. Each installment paid is treated as hire charges.
5. Each installment consists partly interest and partly capital payment.
6. Only after the payment of last installment the ownership is transferred
to the buyer.
7. Hire purchaser has the option, any time before the last installment is
due, to terminate the agreement and returns the goods.
8. If any default is committed by the hire purchaser the hire vendor has
the right to repossess the goods. He need not refund the installment
received.
Terms used in Hire purchase Agreement
1. Hire Vendor : The seller of the goods under hire purchase agreement
is called hire vendor.
2. Hire Purchaser : The buyer of goods in hire purchase agreement is
called hire purchaser.
3. Cash Price : Cash price means the price at which the goods may be
purchased by the hirer for cash.
4. Hire Purchase Price : The total amount payable by hire – purchase
to hire vendor under the hire purchase agreement is called hire
purchase price. The hire purchase price will be more than cash price,
because in addition to cash price, interest (or finance charges) are
also included in the price.
5. Down Payment : Down payment means the initial payment payable
by the hire – purchase at the time of entering into hire purchase
agreement.
Contents of the Hire Purchase agreement
According to section 4 of the hire purchase act, every hire purchase
agreement must state.
(a) The hire purchase price of the goods.
(b) The cash price of the goods.
(c) The date on which agreement commences.
(d) Number of installment and the amount of each installment.
Paper - II Accountancy and Tally - II 201

(e) Description of the goods sold on hire purchase basis.


Installment Purchase System
Under the installment purchase system, both the possession and
ownership of the goods are transferred to the buyer immediately on signing the
agreement. It is a credit sale where in the buyer agrees to pay the price in
installment over a period of time. In case the buyer makes a defaults in payment
of installment, the seller cannot take back the goods sold, he can only sue for
non – payment of the installments due.
Features of the Installment Purchase Agreement
1. It is outright credit sale of goods.
2. The buyer gets immediate ownership and possession of the goods.
3. In case of default, the seller cannot repossess the goods.
4. In case of default, the installment paid by buyer are not forfeited. The
seller can sue the buyer only for unpaid installments.
Common features of hire purchase agreement and installment purchase
system
1. Price is paid in installments.
2. Possession is given to the buyer.
3. Total price paid is more than the cash price.
Distinction between Hire Purchase System and installment purchase
system
Hire Purchase System Instalment Purchase System
1. It is governed by Hire Purchase 1. It is governed by sale of Goods
Act, 1972 Act, 1930
2. It is an agreement of hiring 2. It is an agreement of sale
3. The parties to the contract are 3. The parties to the contract are
called Hire Purchaser and Hire- called buyer and seller.
Vendor
4. The ownership of the goods is 4. The ownership of the goods is
transferred to the buyer only after transferred to the buyer as soon
the payment of the last instalment. as the contract is signed.
202 Office Assistantship

5. The relation between hire 5. The relation between the buyer and
purchaser and hire vendor is that seller is that of debtor and creditor
of a bailee and a bailor. till last instalment is paid.
6. The buyer cannot hire out, sell 6. The buyer can hire out, sell, transfer,
transfer, pledge, destroy the pledge the goods.
goods.
7. The buyer may return goods 7. Unless there is default on the part
without further payment, except of the seller, goods cannot be
for instalments already due. returned.
8. If the buyer fails to pay any 8. The seller cannot repossess teh
instalment, the goods can be goods. He can sue the buyer for
repossessed by the seller. the amount due.
9. In case of default, the total 9. In case of default, total amount of
instalments paid is forfeited and instalment paid by the buyer cannot
treated as hire charges. be forfeited

Calculation of Interest
1. When rate of Interest, Cash price and Hire Purchase Price are given
When cash price, rate of interest etc are given interest is calculated on
the total cash price remaining unpaid at the time of paying the installment. While
calculating interest for the last installment, the difference between the installment
payable and the unpaid cash price is taken to be the interest, interest on unpaid
price it not to be calculated. The calculations are explained with the help of an
example.
Example :
Cash price A 17,430. Rate of interest 10%
Down payment A 5,000. Three annual installment of A 5,000 each.
Solution
Note : Interest at 10% on 4,540 amounts to A 454 where as the
interest taken is A 460. The difference is because the installments are rounded
off.
Paper - II Accountancy and Tally - II 203

Cash Price 17430


Less initial payment 5000
12430
Add : Interest (10% on A 12,430) 1243
13673
Less : First instalment 5000
8673
Add : Interest (10% on A 8,673) 867
9540
Less : Second Instalment 5000
4540
Add : Interest (5000 - 4540) 460
5000
Less : Third Instalment 5000

2. When rate of interest is not given


When rate of interest is not given, total interest payable will be divided
in the ratio of outstanding balance of hire purchase price . this is explained with
help of an example.
Example : Cash price R 30,000 Down payment R 6,000. Balance in
three annual installment of R 10,000 each. Find interest in each installment.
Solution
Cash price 30,000
Less down payment 6,000
Cash price paid in installments 24,000
Total payment = 10,000 x 3 = 30,000 + Down payment. R 6,000 =
R 36,000.
204 Office Assistantship

Less cash price R 30,000 total interest for three years R 6,000. This is
to be divided in the ratio of amount outstanding before paying each installment.
Amount outstanding before paying first installment R 30,000
Amount outstanding before paying second installment R 20,000
Amount outstanding before paying third installment R 10,000
30,000 : 20,000 : 10,000. i:e. 3 : 2 : 1
3
Interest for first year /6 x 6,000 = R 3000
Interest for second year 2/6 x 6000 = R 2000
1
Interest for third year /6 x 6000 = R 1000
3. When cash price is not given : (Back calculation method)
In some cases, cash price is not given. Since the asset purchased cannot
be capitalized at hire purchase price (or installment purchase price). It is necessary
to start with the last installment and deduct interest from it. Interest is calculated
as follows.
Rate of interest
x Amount due
100 + Rate of interest.
Suppose the rate of interest is 10% and A has to pay. R 100, then he
will pay R 10 towards interest , and R 100 towards principal amount, then the
amount due before paying the installment is R 110. Every installment paid includes
interest, hence from the installment paid interest should be deducted. To this last
but one installment should be added and again interest (calculated as per the
formula given above) deducted. This process should be continued till the first
installment. Then Down payment should be added. This will give cash price.
While calculating interest, it should be noted that the amount on which interest is
calculated goes on increasing from third year to second year from second year
of first year, the calculations are made from last year to first year, this methods is
also called ‘ Back calculation methods’.
Example
Rate of interest = 10%. Down payment R 5000. Balance in Four annual
installment of R 10,000 each. Calculate the cash price and interest included in
each installment.
Paper - II Accountancy and Tally - II 205

Solution

Amount due before 4th instalment 10,000


Less interest (10/110 x 10000) 909
9,091
Add : Third Instalment 10,000
Amount due before 3rd instalment 19,091
Less interest (10/110 x 19091) 1,736
17,355
Add : Second Instalment 10,000
Amount due before 2nd instalment 27,355
Less interest (10/110 x 27,355) 2,487
24,868
Add First Instalment 10,000
Amount due before Instalment 34,868
Less interest ((10/110 x 34,868) 3,169
31,699
Add Down payment 5,000
Cash Price 36,699

The accuracy of the above calculation can be checked by starting the


calculations from the cash price.
Cash Price 36,699
Less initial payment 5,000
31,699
Add Interest (10% of A 31,699) 3,170
34,869
Less First instalment 10,000
24,869
206 Office Assistantship

Add Interest (10% on A 24,869) 2487


27,356
Less : Second Instalment 10,000
17,356
Add Interest (10% on A 17,356) 1,736
19,092
Less : Third Instalment 10,000
9,092
Add Interest (10% on A 9092) 908
10,000
Less Fourth Instalment 10,000

Hire Purchase System


Journal Entries in the books of the Buyer
There are two methods of recording transaction in the books of the
buyer. Under the first methods every time an installment in paid, asset account is
debited with the portion of installment which is paid towards cash price of the
asset. Under the second method the asset accounts is debited with the total
cash price of the asset at the time of signing the contract.
First method
At the time of making down payment (or initial payment)
Asset Account Dr. (with the intial payment)
To Bank Account
(i) When instalments become due
Asset Account Dr. (with payment towards cash price)
Interest Account Dr. (with the interest due)
To Hire Vendor Account (with the amount of instalment)
(ii) When instalment is paid
Hire Vendor Account Dr. (with the amount paid)
Paper - II Accountancy and Tally - II 207

To Bank Account Dr.


(iii) When depreciation is charged
Depreciation Account Dr. (With the depreciation charged)
To Asset Account

Note : While providing depreciation total cash price of the asset and
not the debit balance of the asset account should be taken into consideration.
(iv) When interest and depreciation are closed by transfer to profit and
loss account.
Profit and Loss Account Dr.
To Depreciation A/c
To Interest A/c
Second method
At the time of making down payment

(i) Asset Acount Dr. (With cash price of the asset)


To hire Vendor A.c
(ii) For making initial payment
Hire Vendor Account Dr. (With amount paid)
To Bank Account
At the time of paying each
installment
(iii) For interest due (With the interest due)
Interest Account Dr.

To Hire Vendor Account


(iv) For payment of instalment
Hire Vendor Account Dr. (With the amount paid)
To Bank Account
208 Office Assistantship

(v) For depreciation on Asset Dr. (With the amount of depreciation)


Depreciation A/c
To Asset A/c
(vi) For transfer of interest and
depreciation of P&L A/c
Profit and Loss Account Dr.

To Interest A/c
To Depreciation A/c
Journal entries in the books of vendor
At the time of signing the contract
\ (i) For sale of goods on hire
purchase
Hire Purchaser’s A/c Dr. (With total cash price of the goods
sold)
To Sales A/c
(ii) For cash received on delivery
Bank Account Dr. (With initial payment)
To Hire purchase A/c
(iii) At the end of the first year
and all subsequent years
Hire Purchase’s A/c Dr. (With interest due)
To Interest A/c
(iv) For receiving the Instalment
Bank Account Dr. (With the instalment received)
To Hire Purchaser’s A/c
(v) For transfer of interest to P&L
account
Interest A/c Dr.
To P&L A/c
Paper - II Accountancy and Tally - II 209

Defaults and Repossession


If the buyer does not pay the installment when they become due, he
commits defaults and the seller has a right to take back the goods sold on hire
purchase system. He may take possession of complete goods or only part of
the total assets sold to buyer. The accounting treatment is as follows.
I. When he takes back the possession of complete goods
In the books of buyer
Taking the second method as the basis, all usual entries up to the date of
defaults are passed. Entry for the interest due up to the date of defaults should
be passed, but the entry for receiving the installment defaulted should not be
passed. The seller’s accounts should be closed by transferring it to the Asset
Account by debiting Seller’s account and crediting asset account. The balance
left in the asset account should be closed by transferring it to profit and loss
account.
In the books of seller :
All usual entries up to the date of defaults are passed except the entry
for receiving the installment which is defaulted.
The buyer’s accounts is closed by crediting his account and debiting
goods returned accounts. This account is debited with expenses incurred for
repairs of the goods returned and credited with amount received on resale. Any
balance left in the account being profit or loss, is transferred to profit and loss
account.
II. When seller takes possession of only part of the total assets sold to
buyer
In the books of the buyer :
1. The seller’s account is debited and asset account is credited with the
agreed values of the asset taken over by the seller. The basis for calculating the
agreed values of the asset taken over by the seller will be given in the problem.
As a results of this entry the seller’s account in the books of the buyer will not be
closed, the balance left in seller’s account represent the amount still payable by
buyer to seller.
2. The value of the asset not taken over by the seller is ascertained by
providing depreciation at the normal rate. This is shown as balance in the asset
account. After the above adjustment, the difference in the asset account is
transferred to profit and loss account.
210 Office Assistantship

In the books of seller


The goods returned account will be debited and purchase account
credited with the agreed values of the goods taken back. The balance left in
buyer’s account represents the amount still payable by the purchaser. The rest
of the treatment is same as explained above.
Installment Purchase System
(i) When delivery of the asset is
taken
Asset Account Dr. (With cash price)
Interest Suspense Account Dr. (With total interest)
To Vendor Account (With instalment price)
(ii) For making down payment
Vendor Account Dr. (With initial payment)
To Bank Account
At the time of paying each
instalment
(iii) For the adjustment of interest
due
Dr. (With interest due)
Interest Account
To Interest Suspens A/c
(iv) For payment of instalment
Vendor Account Dr.
To Bank Account
(v) For depreciation
Depreciation A/c Dr.
To Asset Account
(vi) For transfer of interest and depreciation to Profit and Loss Account
Profit and Loss A/c Dr.
To Interest Account
To Depreciation Account
Paper - II Accountancy and Tally - II 211

Note : Balance of Interest Suspense Account will appear on the asset


side of the Balance sheet

(i) When goods are sold on


Instalment system
Purchaser’s A/c Dr. (With instalment price)
To Sales A/c Dr. (With Cash price)
To Interest Suspense A/c (With total interest receivable)
(ii) For receiving down payment
Bank Account Dr.
To Purchaser’s A/c
At the time of receiving each
instalment
(iii) For interest due
Interest Suspense A/c Dr.
To Interest A/c
(iv) For receiving instalment
Bank Account Dr.
To Purchaser’s A/c
(v) For transfer of interest to P&L
Account
Interest Account Dr.
To P & L A/c

Illustration
Salman purchased a van on Ist January, 2008 the cash price being
A 1,12,000. The purchase is on hire purchase basis, A 30,000 being paid on
signing the agreement and there after A 30,000 being paid annually for 3 years.
Interest was charged at 5% p.a. Depreciation was written off at the rate of
20% p.a. on the reducing installment system. Give necessary ledger account in
the books of Salman.
212 Office Assistantship

Solution : Working Notes


Cash Price 1,12,000
Less : Initial payment 30,000
Balance 82,000
Add : Interest @ 5% on A 82,000 4,100
86,100
Less : First Instalment 30,000
Balance 5,610
Add : Interest @ 5% on A 56,100 2,805
58,905
Less : Second Instalment 30,000
Balance 28,905
Add : Interest (A 30,000-A 28,905) 1,095
30,000
Less : Third Instalment 30,000
Ledger Accounts in the books of Salman
Dr. Van Account Cr.
Date Particulars Rs (A) Date Particulars Rs.(A)
2008 2008
Jan 1 To Hire Vendor 1,12,000 Dec 31 By Depreciation 22,400
,, By Balance c/d 89,600
1,12,000 1,12,000
2009
Jan 1 To Balance b/d 89,600 2009 By Depreciation 17,920
Dec 31
By Balance c/d 71,680
89,600 89,600
2010
Jan-1 To Balance b/d 71,680 2010
Dec 31 By Depreciation 14,336
Paper - II Accountancy and Tally - II 213

Date Particulars Rs (A) Date Particulars Rs.(A)


Dr. Cr.
,,
71,680 By Balance c/d 57,344
71,680
2011
Jan-1 To Balance b/d 57,344

Hire Vendor Account


Dr. Cr.
Date Particulars Rs (A) Date Particulars Rs.(A)
2008 2008
Jan 1 To Bank-Initial Jan 1 By Van A/c 1,12,000
payment 30,000 4,100
Dec 31 By Interest A/c
,,
To Bank - First
instalment 30,000
Dec. 31 To Balance c/d 56,100
1,16,100 1,16,100
2009 To Bank Second
2009 By Balance b/d 56,100
Dec. 31 Instalment 30,000
Jan 1
,, By Interest 2,805
To Balance c/d 28,905 Dec 31
58,905 58,905
2010 2010
Dec. 31 To Bank Third Jan 1 By Balance b/d 28,905
Instalment 30,000
Dec 31 By Interest 1,095
30,000 30,000

Rs (A) Interest A/c Rs (A)


2008 2008
Dec 31 To Hire Vendor 4,100 Dec 31 By P & L A/c 4,100
2009 2009
Dec 31 To Hire Vendor 2,805 Dec 31 By P & L A/c 2,805
2010 2010
Dec 31 To Hire Vendor 1,095 Dec 31 By P & L A/c 1,095
214 Office Assistantship

Illustration 2
A Ltd purchased on Ist Jan, 2008 from B Ltd a machine on installment
purchase system whose cash price was Rs. 74,500. Payment was to be made
in four installment of Rs.20,000 each, the first payment to be made immediately
and the other three at the end of 2008, 2009 & 2010. Interest was taken to be
5% p.a. depreciation is 10% p.a. on the diminishing value. Give ledger account
in the books of A ltd.
Solution

Cash Price of the machine 74,500


Less : Initial payment 20,000
Balance due 54,500
Add : Interest @ 5% on A 54,500 2,725
57,225
Less : First Instalment 20,000
Balance due 37,225
Add : Interest @ 5% on A 37,225 1,861
39,086
Less : Second Instalment 20,000
Balance due 19,086
Add : Interest (A 20,000-A 19086) 914
20,000
Less : Third Instalment 20,000

Ledger Accounts in the books of A Ltd.


Dr. Machinery Account Cr.
2008 2008
Jan 1 To B Ltd 74,500 Dec 31 By Dep. A/c 74,500

,, By Balance c/d 67,050

74,500 74,500
Paper - II Accountancy and Tally - II 215

2009 2009
Jan 1 To Balance b/d 67,050 Dec 31 By Dep. A/c 6,705

,, By Balance c/d 60,345

67,050 67,050

2010 2010
Jan 1 To Balance b/d 60,345 Dec 31 By Dep. A/c 6,0355

,, By Balance c/d 54,310

60,345 60,345

2011
Jan 1 To Balance b/d 54,310

Dr. Interest Suspense Account Cr.


2008 2008
Jan 1 To Bal Ltd 5,500 Dec 31 By Interest A/c 2,725
,,
By Balance c/d 2,775

5,500 5,500
2009 2009
Jan 1 To Balance b/d 2,775 Dec 31 By Interest A/c 1,861
,,
By Balance c/d 914

2,775 2,775
216 Office Assistantship

2010 2009
Jan 1 To Balance b/d 914 Dec 31 By Interest A/c 914

914 914

B Ltd Account

2008 2008
Jan 1 To Bank 20,000 Jan 1 By Machine A/c 74,500
Dec 31 To Bank 20,000 ,, By Interest
5,500
Dec 31 To Balance c/d
Suspense A/c
40,000

80,000 80,000

2009 2008
Dec 31 To Bank 20,000 Jan 1 By Balance b/d 40,000
Dec 31 To Balance c/d 20,000 ,,

40,000 40,000

2010 2010
Dec 31 To Bank 20,000 Jan 1 By Balance b/d 20,000

20,000 20,000
Paper - II Accountancy and Tally - II 217

Interest Account

2008 2008
Dec 31 To Interest 2,725 Dec 31 By P&L A/c 2,725
Suspense A/c.

2,725 2,725

2009 2008
Dec 31 To Interest 1,861 Dec 31 By P&L A/c 1,861
Suspense A/c.

1,861 1,861

2010 2010
Dec 31 To Interest 914 Dec 31 By P&L A/c 914
Suspense A/c.

1,861 914

Illustration 3
A purchased an Asset from B for A 60,000. Payment to be made
A 20,000 down and three installment of A 15,000 each at end of each year .
Rate of interest charged is 5% p.a. Buyer depreciates asset at 10% p.a. on
written down value method.
Because of financial difficulties, A, after having paid down payment and
first installment till the end of first year, could not pay second installment and
seller took possession of the truck. Seller after spending A 500 on repairs of the
asset, sold it away for A 32,000. Show ledger account in the books of both
parties.
218 Office Assistantship

In the books of A (Buyer)


Asset Account
1st 1st
Year To B (cost price) 60,000 Year By Dep. A/c 6,000

By Balance c/d 54,000

60,000 60,000
2nd 2nd
Year To Balance b/d 54,000 Year By Dep. A/c 5,400
By B A/c 28,350
By P & L A/c 20,250
54,000 54,000

Dr. B’s Account Cr.


1st 1st
Year To Bank initial 20,000 Year By Asset A/c 60,000
payment
By Interest 2,000
To Bank (first
installment 15,000

To Balance c/d 27,000

62,000 62,000
2nd 2nd
Year To Asset A/c 28,350 Year By Balance b/d 27,000
By Interest 1,350

28,350 28,350
Paper - II Accountancy and Tally - II 219

In the books of B (Seller)


A’s Account
Dr. Cr.
1st 1st
Year To Sales A/c 60,000 Year By Bank (initial 20,000
payment )
To Interest 2,000
By Bank (first
installment 15,000

By Balance c/d 27,000

62,000 62,000
2nd 2nd
Year To Balance b/d 27,000 Year By Goods 28,350
repossessed A/c
To Interest 1,350

28,350 28,350

Goods Repossessed Account or Asset A/c

Dr. Cr.

To A A/c 28,350 By Bank 32,000


,, Bank exp. of
repairs 500
,, Profit & Loss A/c 3,150
(Profit)
32,000 32,000
220 Office Assistantship

Short Answer Type Questions


1. Calculate the amount of interest include in the three installments in
hire purchase, given the following information.
Cash price of the asset is A 14,900 interest is at 5% per annum,,
payments made were:
2008 January 1 Cash down A 4000
2008 December 31 I Installment A 4000
2009 December 31 II Installment A 4000
2010 December 31 III Installment A 4000
( Ans. Interest 2008 A 545, 2009 A 372 & 2010 A 183)
2. Ramu purchased asset on hire purchase system. Ascertain the amount
of interest included in three installments on the basis of the following information.
Cash price of the asset A 11,175
Initial payment A 3,000
Balance in three installment of A 3,000
Each at the end of each year
Rate of interest 5% p.a.
(Interest : First year A 408.75, Second year A 279.18, 3rd year A 137.07)

3. Mohan purchases a motor cycle on hire purchase system. The total


cash price of the motor cycle is A 15,980, payable A 4,000 as down payment
and three further installment of A 6,000, A 5,000 and A 2,000 payable at the
end of first, second and third year respectively. Interest is charged at 5% per
annum. You are required to calculate the interest paid by sri ram to the seller
each year.
(Interest A 599, A 329, A 92)
4. Muneer purchased machinery under hire purchased system from
Salman. The cash price of the machinery was A 15,000.
The payment for the purchase is to be made as under
On signing the agreement A 3,000. First Year end A 5,000. Second
year end A 5,000. Third year end A 5,000.
Calculate the interest included in each installment.
Paper - II Accountancy and Tally - II 221

5. On the basis of the following information ascertain the interest included


in each installment.
Cash price A 9,000
Initial payment A 3,000
Balance in three installment of A 3,000
Each payable at the end of each year.
(Ans. Interest 1st year A1, 500, 2nd year A 1,000, 3rd year A 500)

6. A Machine the Cash price of which is A 1,800 is sold on hire purchase


system for A 2,000 payable in four quarterly installment of hire 500 each. The
first installment is paid at the end of the first quarter. Show the amount of interest
included in each installment.
(Ans. A 80, A 60, A 40 and A 20)
7. An asset is purchased on hire purchase system. The term of payment
are as follows.
A 2,000 to be paid on signing the agreement.
A 2,800 at the end of the first year.
A 2,600 at the end of the second year.
A 2,400 at the end of the third year.
A 2,200 at the end of the fourth year.
Interest is charged at the rate of 10% p.a. Calculate the cash price of
the asset.
(Ans. Cash Price A 10,000, Interest 1st year A 800, 2nd year
A 600, 3rd year A 400 and 4th year A 200)
8. Ram prasad purchased an asset on hire purchase system. Payment
was to be made as under
A
On signing the agreement 20,000
At the end of the first year 15,000
At the end of the second year 15,000
At the end of the Third year 10,000
222 Office Assistantship

Interest is charged at the rate of 10 percent p.a.


Determine the cash price of the asset.
(Ans. Cash Price A 53,546)
9. On 1-1-2008 K and sons purchased a Machine on installment system,
A 6,000 payable on delivery and three annual installment of A 6,400, A 8,900,
and A 8,800. The vendor A and Co. charged interest at 10% p.a. Calculate
cash price of the machine.
(Ans. Cash Price 25,785)
10. The payment schedule of a color TV purchased on hire purchase
system is as follow.
A 4,400 on signing the agreement
A 6,160 at the end of first year
A 5,720 at the end of second year
A 5,280 at the end of third year and
A 4,840 at the end of fourth year
Interest is charged @ 10% per annum. Calculate the cash price of the
T.V.
(Ans. A 22,000)
11. On 1st January 2008 the company sold an Autorickshaw on
hire purchase system for A 20,000 to be paid as follows.
On signing the agreement A 2,400; at the end of the first year
A 3,400, second year A 3,200 third year A 11,000; interest included in A
20,000 being charged on the cash value at per 10 per cement annum. Ascertain
the cash value of the autorickshaw and write up the purchaser’s account in the
book of the Hire Sales Company.
(Ans. A 16,400)
12. Give journal entries to be passed in the books of purchaser and
vendor under hire purchase system.
13. State what journal entries will be passed in the books of buyer and
seller under Installment purchase system.
Paper - II Accountancy and Tally - II 223

Problems
1. The Hyderabad Transport company purchased motor car from the
Tata motor co. on hire purchase agreement on 1st January 2008 paying cash A
10,000 as down payment and agreeing to pay further three installment of A
10,000 each on 31st December each year. The cash price of the car is A37,250
and the Tata Motor Company charges interest at 5 percent p.a. the Hyderabad
Transport Company writes off 10 percent p.a. as depreciation on the reducing
installment system. Journalize these transaction in the books of both the parties.
(Interest 2008, A 1,363; 2009 A 931 & 2010 A 456)
2. On 1st January 2005 Messrs. Ram & CO. took from Auto car Ltd.
Delivery of a Motor Van on hire purchase system. A 2,000 being paid on delivery
and the balance in five installment of A 3,000 each payable annual on
31st December. The vendor company charges 5 percent p.a. interest on yearly
balances. The cash down value of the van is A 15,000. Show the necessary
ledger account in the books of Ram & Co. the company provides 10% p.a.
depreciation according to reducing Installment system.
(Ans. Interest 1st year, A 650, Second year A 533, 3rd year
A 409, 4th year A 280 and 5th year A128)
4. A company purchased a motor cycle on hire purchase system on
1st January 2008. The first installment of A 6,000 was paid immediately and the
balance by four equal installment of A 6,000 was each to be paid on the last
date of each year. The vendor charged 5% per annum interest on the unpaid
balance. The cash price of the press on delivery was A 27,300. Depreciation
is to charged at 10% on the diminishing balance of the asset.
Draw up Vendor’s Account, Motor cycle account , interest account
and depreciation account in the books of the buyer.
(Ans. Interest A 1,065, A 818, A 559 and A 258)
5. Ashaaz Purchased a machine on hire purchase system , the cash
price of which was A 14,6000. A 11,400 were paid at the time of contract on
1st July 2000 and the balance was to paid by half-yearly installment of A 800
plus interest at 5 percent p.a. Depreciation charged by Ashaaz is 10 percent
p.a. on diminishing balance method. Accounts are closed on 30th June. Prepare
machinery account, hire vendor account , interest account and depreciation
account in Ashaaz’s Ledgers.
(Ans. Interest A 80, A 60, A 40 and A 20)
224 Office Assistantship

4. Muneer purchased an asset for A 60,000 payment to be made year.


Rate and three installment of A 18,000 each at the end of each depreciates
asset at 10% p.a. on written down value method.
Due to financial difficulties Muneer could not pay installment after the
first installment and the selling company took possession of the asset. The selling
company after spending A 1,500 on repairs of the asset sold it away for A38,000.
Prepare the necessary ledger accounts in the books of both the parties.
(Ans. Loss on default transferred to Profit and Loss Account
A13,950. Seller’s account transferred to asset account A 34,650,
Profit on resale A 1,850)
6. Lallu purchased a Lorry from Kishen for A 1,50,000 payable A50,000
down and the balance in four annual equal installments for A 25,000 each at the
end of each year, together with interest @ 10% p.a. The lorry is depreciated at
20% p.a. on the reducing balance system.
Lallu pays cash down and three successive installment but fail to the last
installment. Consequently Kishens reclaims the lorry. He spends, A 5,000 on
repair and sell it for A50,000.
Show the ledger account in the books of Lallu
(Ans. Loss on default A 33,940)
UNIT 6
Company Accounts
Learning Objectives
After studying this unit, the student will be able to
• Understand characteristic of company
• Understand types of companies
• Learn about classification of shares
• Issue of shares
According to Justice Marshall a company is ‘an artificial being, invisible,
intangible and existing only in the contemplation of Law. “According to Sec.
3(1) of the Companies Act defines a company as ‘company formed and
registered under this Act, or an existing company’. An existing company means
a company formed and registered under any of the former companies Acts.
Characteristics of a Company
1. It is a voluntary association of person
2. A company has a separate legal existence. It can hold, purchase and
sell property, can enter into contracts with others in its name.
3. It has a perpetual or continuous existence. Its existence is not effected
by the death, lunacy or insolvency of any member. Members may be changing
from time to time, but the company goes on for ever.
4. The liability of the members is limited to the extent of the face value
of shares held by them.
226 Office Assistantship

5. The shares in a joint stock company are freely transferable, except in


case of private companies.
6. It has a common seal. Being an artificial person it can act only through
natural persons, called Directors. All documents prepared by directors will be
valid only when it contains the common seal.
7. There is a separate of ownership and management. A company is
owned by share holders and managed by a separate body called ‘Board of
Directors’.
8. In a public limited company, the manimum number of members are
seven and there is no maximum limit. In case of private limited companies the
minimum number is two and the maximum number is fifty.
9. A company comes into existence only after its registration under the
companies Act. A company from incorporation to liquidation is governed by
various provisions of the companies Act.
Kinds of Joint Stock Companies
Companies can be classified on the basis of certain characteristics like
(i) incorporation (ii) liability and (iii) membership.
1. Statutory Companies : Statutory companies are formed by the
special Act passed by the parliament or state assemblies examples : Reserve
Bank of India, Life Insurance Corporation etc.
2. Registered Companies : These are the companies formed and
registered under the Companies Act.
Classification on the basis of liability
1. Companies limited by shares : In case of such companies liability
of each member is limited to the extent of the face value of shares held by him.
2. Companies limited by Guarantee : In case of such companies
liability is limited to the extent of the guarantee given to contribute to the assets
of the company in the event of its wound up. If the guarantee is given to addition
to the shares then the total liability shall be equal to the unpaid amount on shares
and the amount of guarantee given.
3. Unlimited Companies : In case of unlimited companies the liability
of the members is unlimited and the members are personally liable to the creditors
of the company for making up the deficiency. Such companies are rarely formed
these days.
Paper - II Accountancy - II 227

Classification on the basis of membership


1. Private Companies : A private company means a company which
by its articles (i) restricts the right to transfer its shares (ii) limits the number of its
members to fifty excluding past or present employees of the company who are
members of the company and (iii) prohibits any invitation to the public to
subscribe for any shares or debentures of the company.
2. Public Companies : Public companies are those companies which
are not private companies.
Classes of Shares : Total capital of the company is divided into units
of small denomination. Each unit into which capital of the company is divided is
called a share. If the total capital of the company is Rs. 50,00,000. It can be
divided 5,00,000 units of Rs. 10 each then unit of Rs. 10 is a share of Rs. 10
each.
According to Companies Act, 1956 a company can issue two classes
of shares, namely preference shares and equity shares.
Preference Shares : According to companies Act, preference share is
that part of the share capital of the company which enjoys preferential rights as
to (a) payment of dividend at a fixed rate and (b) return of capital on the winding
up of the company.
Types of Preference Shares
1. Cumulative and Non cumulative Preference shares : If a
company does not each sufficient profits during a particular year, dividends on
preference shares may not be paid for that year. But if preference shares are
cumulative, such unpaid dividends are treated as arrears and are carried forward
to subsequent years. When the company wants to pay any dividend to equity
share holders, it must first pay arrears of such dividend to cumulative preference
share holders. If the company goes into liquidation, arrears of dividend are not
payable unless they are either declared or articles of association contain express
provision in this regard. A non-cumulative preference share is that share where
the arrears of dividends do not accumulate. If a dividend is not declared in any
year then it lapses. Unless otherwise stated, in the articles of association
preference shares are cumulative.
2. Participating and Non Participating preference shares
A participating preference share is a share which carries the right of
sharing profits left after paying equity and preference dividends at specified rates.
A non participating preference share is that share which does not carry the right
228 Office Assistantship

of sharing in the surplus after paying specified dividend to equity share holders,
unless other wise stated in the Articles Preference Shares are seemed to be
non-participating.
3. Convertible and Non Convertible preference shares : A
convertible preference share is one which can be converted into equity shares.
When it cannot be converted, it is called non-convertible preference shares.
4. Redeemable preference shares : Redeemable preference share
are those which are redeemable within a stipulated period in accordance with
the terms of issue. After amendment made in 1988 such shares must be redeemed
within a period of ten years.
5. Equity Shares : An equity shares is a share which is not a preference
share. Equity shareholders do not have any right to get fixed rate of dividend.
Rate of dividend may vary from year to year. Equity share holder will get dividend
and repayment of capital after meeting the claims of preference share holders.
Distinction between Preference Shares and Equity Shares
1. Preference Dividend is paid before 1.Equity share holders will get
paying any dividend on equity shares. dividend only after paying dividend
to preference share holders.
2. At the time of liquidation after payment 2. Equity shares are repaid after full
of creditors, preference shares are repayment is made on preference
redeemed before equity shares. shares.
3. The rate of dividend is fixed. 3. Rate of dividend is not fixed, it
may vary from year to year.
4. In case of preference shares (cumulaive 4. There is no questions of
preference shares) arrears of dividends accumulation of arreas of dividend.
will accumulate.
5. Preference shares (conventible pref. 5. Equity shares cannot be
shares) can be converted into equity converted into preference shares.
shares.
6. Preference shareholders donot have 6.Equity shareolders have voting
voting rights unless their rights are affected. right.
7. Redeemable preference share are 7. There is no provision for
redeemable according to the provision of redemption of equity shares.
Sec 80A of the Companies Act.
Paper - II Accountancy - II 229

Classes of Shares
Uses of companies Act, 1956, a public company can issue only two
classes of shares namely preference shares and equity shares. Preference shares
have preference over equity shares for
(i) Payment of dividends and
(ii) Repayment of capital in the event of windings up.
Equity shares do not have any preference for payment of dividend or
repayment of capital. Their clamps arise only after satisfying the claims of
preference shares.
Presentation of information relating to share capital in the
Balance sheet of a company.
The prescribed form of the balance sheet of company given in schedule
IV of the companies act 1946, requires the description of share capital under
followings categories.
1. Authorized or Nominal or Registered Capital : It refers to that
amount which is stated in the memorandum of association as the share capital
or the company. This is the maximum limit of capital which the company is
authorized to issue and beyond which the company cannot issue shares unless
the capital clause in the memorandum is altered.
2. Issued Capital : It refers to that part of the authorized capital of the
company which has actually been offered to the public for subscription.
3. Subscribed Capital : It refers to that part of that issued capital
which has actually has been subscribed by the public and subsequently allotted
to them by the directors of the company.
4. Called up Capital : It refers to that part of the subscribed capital
which has been called up by the company for payment.
5. Paid Up Capital : That part of the called-up capital which is actually
paid by the share holders is known as paid-up- capital. The sum which is still to
be paid Is known as Calls in Arrears.
230 Office Assistantship

Issue of Shares : Journal Entries.

1. For receiving application money


Bank Account Dr. (With the money received on
application)
To Share Applicaiton A/c
2. For transferring the application money
to Share Capital Account.
Share Application A/c Dr. (With the application money on
shares alloted)
To Share Capial A/c
3. For the amount due towards allotment
Share Allotment A/c
Dr. (With the amount due on shares
To Share Capital A.c alloted)
4. On receipt of allotment money
Bank A/c Dr. (With amount received on
allotment)
To Share Allotment A/c
5. For the amount due towards first call
Share First Call A/c Dr. (With the amount due on first
call)
To Share Capital A/c
6. On receipt of First Call Money
Bank A/c Dr. (With the amount received on
First Call)
To Share First Call A/c

Similarly entries are made for second and final calls. Each time entries
are made first for the amount due and then for the amount received.
Note : If cash book entries are asked for 1, 4 and 6 entries should be
shown only in cash book and not in the journal.
Adjustment of excess application money
If the number of shares applied for is more than the number of shares
issues, the shares are said to be oversubscribed . If the applications are rejected
the application money be refused . The entry is
Paper - II Accountancy - II 231

Share Application Account Dr. (With the application money


To Bank Account refunded on shares rejected)

When the shares are allotted on prorata basis (i.e. less shares are allotted
to the person applying for more shares rateably) then excess application money
may be adjusted towards allotment and other calls. For utilization of application
money towards allotment.

Share Application Account Dr. (With the amount transferred


To Share Allotment A/c from application account to
allotment account)

For transfer of application money to Calls in Advance

Share Application Account Dr. (With the amount transferred to


To Calls in Advance Account Calls in Advance)

In future whenever calls in advance money is adjusted towards some


call due then the following journal entry is made.

Calls in Advance Account Dr. (With the amount adjusted


To Calls Account towards relevant call)

Interest on calls on Advance : A company has to pay interest on calls


in advance from the date of receipt of the amount till the date when calls is due
for payment. The rate of interest is determined by the articles of association. If
articles association is silent then provisions of table a will apply which provides
for payment of interest on calls in advance at the rate of 6 percent p.a. The
entry for payment of interest in calls in advance is
Interest calls in advance A/c Dr…..
To Bank Account
Interest on calls in advance account appears on the asset side of the
balance sheet till it written off.
232 Office Assistantship

Issue of Shares at Premium


When shares are issued at a price higher than the face value they are
said to be issued at premium. Generally premium is included in the allotment
money . In such a case the journal entry is
Share Allotment A/c Dr (With the amount due to allotment
including premium)
To share Capital A/c (With share money)
To share Premium A/c (With premium money)
Share Premium account appears in balance sheet under ‘Reserves and
Surplus’.
Issue of Shares at discount
When shares are issued at price lower than sheet under they are said to
be issued at a discount. The discount is generally recorded at the time of allotment
.The entry is
Share Allotment Account Dr (With the amount due )
Discount on Issue of share A/C Dr (With discount allowed
To share capital account (with the total)
Discount on issue shares is shown in balance sheet on the assets side
under ‘Miscellaneous Expenditure’ (to the extent not written off or adjusted).
Forfeiture of Shares : When a share holder fails to pay the call made
on him his shares may be forfeited.
(a) Forfeiture of shares issued at p.a
Share Capital A/c Dr (With the No. of shares forfeited x
amount called per share).
To share Forfeited A/c (With the amount already paid by
the share holder on the shares
forfeited).
To Various calls accounts (With the amount that remains
unpaid on calls).
(b) Forfeiture of share issued at premium and the premium money unpaid
by the share holder .
Paper - II Accountancy - II 233

Share Capital Account Dr (With the No. of shares forfeited


x amount called up per share
excluding premium).
Share premium account Dr (With the premium money
remaining unpaid on the shares
forfeited).
To share Forfeited A/c (With the amount already
received from the shares
forfeited).
To various call accounts (With the amount that remains
unpaid on calls)
If premium on shares is already received on the shares forfeited then
share premium account should not be debited.
Re-Issue of Shares Forfeited : The entry is
Bank Account Dr. (With the amount received on re-
issue)
Shares Forfeited account Dr. (With the discount allowed)
To share capital A/c (With the paid up value of shares)
Profit on shares forfeited is transferred to Capital Reserve A/c.
The entry is :
Shares Forfeited account Dr.
To Capital Reserve a/c
Note : The amount forfeited on shares not yet reissued will remain in
the shares Forfeited account.
Issue of Shares for consideration other than cash
(a) To vendors for the purchase of assets.
(i) Sundry Assets A/c. Dr (With the purchase price good
(individually) upon)
To Vendors Accounts
(ii) Vendors account
To Share Capital a/c.
234 Office Assistantship

To Share Premium
Account (if any)
(b) To promoters for the services rendered by them.
Goodwill A/c Dr (With the nominal value of
share allotted).
To Share Capital A/c..
Illustration : 1
Base Informatics Ltd. offered 1,00,000 Equity shares of the nominal
value of A 10 each. The amount payable on the shares were on application
A 4.00, On allotment A 3.00, on first and final call A 3.00.
The actual subscription was only for A 90,000 shares. All money payable
by share holders were received except form Sudhakar who has taken 1,000
shares but failed to pay the final call. His shares were forfeited and reissued to
Prabhakar at A 6.00 each.
Show journal entries in the books of the Company in respect of the
above (including cash transaction).
Journal Entries in the books of Base Informatics Ltd.
Debit Credit
S.no. Particulars L.F. Amount Amount
Rs. Rs.

1 Bank A/c Dr. - 3,60,000 -


To Equity Share Application A/c - 3,60,000
(Being application money received)

2 Equity Share Application A/c Dr. - 3,60,000 -


To Equity Share Capital A/c - 3,60,000
(Being Cash deposited in bank)
3 Equity Share Allotment A/c Dr. - 2,70,000 -
To Equity Share Capital A/c - 2,70,000
(Being amount due towards allotment)
4 Bank A/c Dr. - 2,70,000
To Equity Share Allotment A/c 2,70,000
(Being allotment money received)
Paper - II Accountancy - II 235

5 Equity Share First & Final call A/c Dr. 2,70,000 --


To Equity Share Capital A/c -- 2,70,000
(Being the amt. due towards first & final call)

6 Bank A/c Dr. 2,67,00 --


To Equity Share first and final call A/c -- 2,67,000
(Being first & final call money received
on 1,000 shares)

7 Equity Share Capital A/c Dr. 10,000 --


To Equity Share first and final call A/c -- 3,000
To Share Forfeited A/c -- 7,000
(Being the forfeiture of 1,000 shares on
which first and final call money was not
recieved)

8. Bank A/c Dr. 6,000 --


Share Forfeited A/c 4,000 --
To Equity Share capital A/c -- 10,000
(Being the reissue of forfeited Shares
@ Rs. 6 per share)
.
9. Shares Forfeited A/c Dr. 3,000 --
To Capital Reserve A/c -- 3,000
(Being balance of shares forfeited A/c
transferred to capital reserve A/c)

Exercises
1. PQR limited issued 10,000 shares of A 10 each payable A 2 on
application A 5 on allotment and the remaining balance on call. Applications
were received for 9,000 shares and the shares were duly allotted. All cash due
236 Office Assistantship

on allotment and call was received .Write the journal entries in the books of
company and prepared cash book.
2. On 1st January 2012 the Directors of Wipro Limited has issued
1,00,000 shares at A 10 per share. The share amount payable is as follows
A 2.50 on application ,A 3.00 on allotment , Rs. 2.50 on first call and balance on
final call. Applications were received for 1,20,000 shares/ The directors of the
company decided to reject the applications for 20,000 shares and to return the
money . The allotment money for 90,000 shares is received .No calls were
made. Write journal entries.
3. Reliance limited invite applications for 60,000 shares at A 100 each
at premium of A 10 per share. The share were payable as follows, on application
A 30, on allotment A 60 including premium, on call A 20. Application were
received for 50,000 shares. Allotment money was received for 38,000 shares.
No calls were made till to date. Write journal entries.
4. A company has issued 80,000 shares A 100 each at premium of
A 20. The authorized capital of this company consist of 1, 00,000 shares of
A 100 each. Applications were received for 60,000 shares and fully paid. Show
how the share capital would be shown in the balance sheet.
5. Base Informatics Limited issued 4,00,000 shares of A 10 each at a
premium of A 2 . All amounts should be paid on application 3,00,000 applications
were received and fully allotted. Journalize the above transactions.
6. XYZ was holding 100 shares A 100 each, A 80 per share called up.
He paid A 30 on application but failed to pay A 20 on allotment and A 30 on
first call. His shares were forfeited. Journalize the above transaction for forfeiture.
7. In accordance with the provisions of the articles of association the
director forfeited 500 ordinary shares of A 20 each on which only A10 per
share was received though fully called, and reissued them upon the payment
of the amount in areas together with a premium of A 2 per share. Journalize the
above transaction.
Problems
1. India Limited was registered with an authorized capital of A 5,00,00
divided into 50,000 shares of A 10 each. It issued 40,000 shares payable as
under.
On application A 2 on first call A 3 .
On Allotment A 3 on final call A 2.
Paper - II Accountancy - II 237

The public applied for 30,000 shares. These were allotted . All the
money due on allotment and call was received except the first call on 1,000
shares on final call on 1,500 shares. Pass journal entries and prepare the opening
balancing sheet.
(Ans. Balance Sheet Total A 2,94,000)
2. Mahesh Company Limited, Issued 5,000 shares of A 100 each The
shares were payable as under.
(Rs) A
On Application 25
On Allotment 20
On First call 30
On Final Call 25
The public applied for 3,000 shares. The directors did not make the
final calls. All money called on shares were received except first call money on
200 shares.
Pass journal entries and prepared the opening balance sheet of the
company.
3. A limited company was formed on January 1, 2012 with an authorized
capital A 3,00,000 divided into 1,000 shares of A 100 each.
On the same date, the company issued a prospectus asking for
subscriptions to 900 shares payable A 25 per share on applications A 40 on
allotment and the remainder on a call.
All share were applied for and allotted and the call cash due on allotment
and call was received.
Give the entries necessary to record the above in the books of the
company and show how share capital will appear in the balance sheet.
(Ans. Balance sheet total A 90,000)
4. ABC Company LTD, Issued 10,000 shares of A 100 each payable
as under
A 30 on application
A 20 on Allotment
238 Office Assistantship

A 20 on First Call
A 30 on Final call
The public applied for 15.000 shares. The allotment was made as under
To the applicants of 8,000 shares - Full
To the applicants of 5,000 shares - 2,000
Subsequently the first final calls were made. Under the terms of issue
surplus application money could be kept against allotment and subsequent calls.
All amount due on calls was received, give journal entries and prepare the opening
balance sheet of the company .
(Ans. Balance Sheet Total A 10,00,000)
5. Base Informatics Limited issued 5,000 equity share of A 10 each at
premium of A 2 per share payable A 2 on application A 5 on allotment (including
premium) A 3 on first call and balance on final call. The shares were all subscribed
and amount received on calls except the first call on 1,000 shares and final calls
on 1,500 shares. Give cash book and journal entries for the above transaction,
also prepare its opening balance sheet.
(Ans. Balance Sheet total A 54,000)
6. Monica Ltd., invite applications for 20,000 shares of A 100 each at
a premium of A 10 per share. The share were payable as follows
On application A 20
On Allotment A 40 (including premium)
On First Call A 30
On Final Call A 20
The public applied for 40,000 shares. Allotment made were as follows
To the application of 16,000 shares – Full
To the application of 16,000 shares – 4000 shares.
To the applications of 8,000 shares - Nil
The Company was authorized to retains all sums over paid for adjustment
against money due to allotment and on calls. The company exercised this power.
The directors made the allotment on 1st April 2011 on first call on 1st July 2012.
By the end of 2012 no further call had been made . All money the due to
Paper - II Accountancy - II 239

allotment were collected and against first call director had received A 5,00,000.
Give journal entries and the balance sheet of the company on 31st December
2012 assuming the directors he paid interest due to share holders in cash at the
rate of 6 percent per annum.
(Balance Sheet total A17,80,000)
7. X ltd issued 25,000 equity shares of 10 each at a discount of 10
percent payable as follows
On Application A 2.00
On Allotment A 2.00
On First Call A 2.50
On Final Call A 2.50
Application were received for 20,000 shares and all of these were
accepted. All money due was received except the final call on 1,000 shares.
Pass necessary journal entries and show how these transactions would appear
in Balance sheet of the company.
(Ans. Balance Sheet total A 1,97,500)
8. Chaya Ltd issued 2,000 Equity shares of A 100 each payable as
follows, A 20 on application A 30 on allotment A 20 on first call money and 30
on the final call were received with the exception of first and final calls on 50
shares. These shares were forfeited and reissued at later date at the rate of A 70
per share. Give journal to record the above transaction and prepare balance
sheet of the company.
(Ans. Balance Sheet A 1,51,000)
240 Office Assistantship

UNIT 7
Company Accounts - II
Learning Objectives
After studying this unit, the student will be able to
• Understand about the gross profit
• Understand about the net profit
• Learn about distribution of profit to the share holders
• Learn how to transfer net profit to reserves
Trading account shows the Gross Profit or the Gross Loss of the business.
Gross profit or Gross loss is the difference between the cost of the goods and
its sale proceeds, plus the value of closing or the unsold stock. Here the cost of
the goods included all direct expenses, connected with the purchase or the
manufacture of the goods.
Trading account is prepared just like any other account. It is debited with
items with the cost of the goods and credited with the sale proceed and the
value of the closing stock.
Items to be written on the debit side of the Trading Account
1. Opening Stock
This is the value of the balance of goods brought, from the previous year,
into the current year.
Paper - II Accountancy - II 241

2. Purchases
This is the value of the goods purchased in the current year.
3. Purchases Return
This is the value of the goods returned to the sellers. Purchases return
reduce the value of goods purchased. So it is deducted from the purchases.
4. Carriage or Freight Inward
This includes all charges of bringing purchased goods to the business place.
They are transport charges and also loading and unloading charges. If in any
trial balance only carriage or freight is given then it should be treated as carriage
inward only.
5. Import Duty and Excise Duty
Import duty increases the cost of the goods imported, and excise duty
increases the cost of the goods manufactured.
6. Marine and Factory Insurance
Marine Insurance is for the safety of the goods imported and factory
insurance is for the safety of the goods manufactured. These are also add to the
cost of the goods.
7. Clearing Charges
Goods, which come by ship or railway require complicated procedure,
before it is delivered to its owner. The expenses incurred to complete this
procedure are called, clearing charges. These are also a part of the cost of the
goods.
8. Factory Rent & Lighting
These are direct expenses for the manufacture of the goods. So they are
also added to the cost of the goods.
9. Fuel and Power
These are the expenses incurred to move machines for production. So
these expenses are also debited in the trading account, as cost of the goods.
10. Manufacturing Wages
Manufacturing wages or simply wages are paid for the production of the
goods. This is a part of the cost of the good manufactured. If in a trial balance
productive wages are separately given, then only the productive wages should
242 Office Assistantship

be debited in Trading account, as cost of the goods. If in a trial balance wages


and salaries are given together then it should not be included in the Trading
account as the cost of the goods. It is a general expense
Other Expenses

Apart from the above mentioned expenses all other expenses which are
considered as the direct cost of the goods, either purchased or manufactured
are debited into the trading account.

Items to be Written on the Credit Side of the Trading Account

1. Sales

It represents the amount realised or the sale proceeds from the sale of the
goods, during the year.

2. Sales Return

It represents the value of the goods returned by our customers. Sales return
reduce the actual sales. So it is deducted from the sales.

3. Closing Stock

It is the value of the unsold goods at the end of the trading period. It is
credited into the trading account. Closing stock usually does not appear in the
trial balance. At the end of the trading period the unsold stock or closing stock
is valued. It is called “Stock taking”. Closing stock is valued at the cost price or
the market price, whichever is lower. It should not be valued at the selling price.
It should be noted that the closing stock of the current year, will be the opening
stock for the next year.

After debiting and crediting various items, the trading account is balanced
as any other account. Credit balance in the trading account shows the Gross
profit and debit balance the Gross loss. The Gross profit or the Gross loss of
the trading account is transferred to profit and loss account, to find the Net
Profit or Net Loss of the business. This will close the trading account.
Paper - II Accountancy - II 243

PROFORMA OF TRADING ACCOUNT


Trading Account of ....................... for the Year ending .................
Dr. Cr.

Particulars R R Particulars R R

To Opening Stock xxx


By Sales xxx
To Purchases xxx
Less : Returns xx xxx
Less Returns xx xxx
By Closing Stock xxx
To Carriage Inward xxx
By Goods destroyed xxx
To Wages xx by fire
To Freight & Cartage xx By Gross loss (Trans- xxx
To Import / Excise Duty xx fer to P&L A/c)

To Factory Expenses xx
To Gross Profit C/d xx
xxx xxx

Closing Entries in Relation to Trading Account


Trading account is prepared by transferring into it some of the ledger account
balances, given in the trial balance. For transferring the ledger balances in to
trading account, some journal entries are necessary. These entries are called
“Closing Entries”. It is because these entries close the ledger accounts, whose
balances are transferred to trading account.
The following are the closing entries in relation to the trading account.
1. Trading account is debited and the accounts whose debit balances are
transferred account are credited. This closes these accounts in the ledger.
2. The account whose credit balances are to be transferred to trading
account are debited and the Trading account is credited. This closes these
accounts in the ledger.
3. Closing stock is debited and trading account is credited. This opens the
closing stock account in the ledger. This entry is actually an adjusting entry. But
is made at the time, when the other accounts are closed. So it is included in the
closing entries.
244 Office Assistantship

Format o f Profit & Loss Account

Dr. Profit & Loss Account of .......... for the year ending ............... Cr
Particulars Rs. Particulars Rs.
To Gross Loss b/d xxx By Gross Profit b/d xxx
To Salaries & Wages xxx By Discount Received xxx
To Rent, Rates and Taxes xxx By Commission earned xxx
To Fire Insurance Premium xxx By Rent Earned
xxx
To Repairs and Maintenance xxx
By Interest earned xxx
To Depreciation on Assets xxx
By Profit on sale of fxed assets xxx
To Audit Fees xxx
By income from investments xxx
To Bank Charges xxx
By Net loss (transfer to capital) xxx
To Legal Charges xxx
To Discount allowed xxx
To Interest paid xxx
To Carriage outward xxx
To Freight outward xxx
To Commission to salesman xxx
To Travelling Expenses xxx
To Entertainment Expenses xxx
To Reserve for Bad debts xxx
To Advertising and Publicity xxx
To Bad debts xxx
To Loss on goods destroyed xxx
To Interest in Capital xxx
To Interest on Loan xxx
To loss on sale of Fixed Assets xxx
To Net Profit (transfer to capital)xxx

xxx xxx
Paper - II Accountancy - II 245

In case of company it is not necessary to split the profit and loss account
into three sections (i.e. Trading Account, profit and loss account and profit and
loss appropriation account) . Only profit and loss account may be prepared
which may cover items appearing in Trading Account and profit and loss
appropriation account. It is desirable to split the profit and loss account into
three sections so that Gross Profit, Net Profit and Net Profit carried to the
balance sheet may be ascertained. Profit and loss appropriation section of the
profit and loss account shows the appropriation of profit and is popularly
known as ‘Below the line’. It is prepared as follows.
Profit and Loss Appropriation Account
Dr. Cr.
To Transfer to Reserves xxx By Last year’s Balance xxx
To Dividends Paid xxx By Current Year’s Net Profit xxx
(Transferred from profit and
(interim or Final)
loss A/c)
To Dividends proposed xxx
By Excess provisions xxx
To Surplus Carried to xxx (which are no longer required)
Balance sheet
By Reserves withdrawn xxx
(if any)

xxx xxx

Important adjustments relating to company final accounts


1. Interest Outstanding on Debentures
In case of debentures interest for full year should be debited to profit
and loss account, whether paid or not. Example : The trial balance of a company
shows 6% of . Debentures at A 1,00,000 and interest paid on debentures at
A 3,000 then the profit and loss account will be debited debentures interest will
be shown as a liability along with debentures under the headings ‘Secured Loans’.
2. Preliminary Expenses
These are expenses incurred at the time of this foundation of a company.
It is fictitious asset. It appears in the balance sheet on the asset side under the
headings ‘Miscellaneous Expenditure’ (to the extent not written off). It is written
off over a period of years by debiting profit and loss account . For example it in
trial balance of a company Preliminary Expenses appear at A 20,000 and
A 5,000 are to be company off then profit and loss account will be debited
246 Office Assistantship

with A 5,000 as Preliminary Expenses written off. In balance sheet preliminary


expenses will appears art A15,000 under ‘Miscellaneous Expenditure (to the
extent not written off or adjusted).
3. Discount on the Issue of Debentures
It is fictitious asset and is shown in balance sheet on the asset side. This
should be written off as early as possible and in any case not later than the date
of redemption of debentures. Whenever it is written off, profit and loss account
is written off, Profit and loss account is debited and discount (or loss ) on tissue
of debentures is credited.
Suppose in the trial balance of a company prepared on 31-12-2009, 8
percent Debentures ( to be redeemed on 31-12-2012) appears at A 1,00,000
and discount on debentures at A 4,000. Then it is ad visible to write off 1/4 of
discount on debentures i.e., A 1,000 in 2009 because after four year (commencing
from 2009) there will not be debentures in the company so there cannot be
discount on debentures account in the books. In 2009 profit and loss account
will debited with A 1,000 as ‘Discount on Debentures (1/4 written off)’. In
balance sheet prepared on 31-12-2009 discount on debentures will appear at
A 3,000 on the asset side under the headings ‘Miscellaneous Expenditure ( to
the extent not written off or adjusted).
4. Income Tax Provision
Since the actual amount payable as Income Tax will known only when
the assistant is made by Income-Tax department, the liability for income-tax has
to be estimated and provided for the books. The entry is
Profit and Loss A/c.
To provision for income tax A/c
The provision for income tax given as adjustment in a problem will appear
in profit and loss account on the debit side and again in balance sheet on the
liabilities side under the heading ‘Current Liabilities and provisions’ .
Sometimes the provision for income tax made in the last year and income
tax paid is given balance with a note that there is not further liability in respect of
Income tax for previous year. In such a case if the income tax paid is more than
provision made the balance should be debited to profit and loss appropriation
account. Similarly it the income tax paid is less than the amount provided for,
the difference is credited to profit and loss appropriation account.
Paper - II Accountancy - II 247

5. Dividends
Dividends paid, interim dividends paid. Final dividends paid, given in
trial balance will appear only in profit and loss appropriation account. Students
should not get confused between dividends paid and unclaimed dividends.
Dividends paid will appear in profit and loss appropriation account. Whereas
unclaimed dividends will appear in balance sheet under Current Liabilities.
Proposed dividends given in adjustments will appear in profit and loss
appropriation account debit side and again in Balance sheet on the liabilities
side.
Dividends on equity shares cannot be paid unless preference dividends
is paid in full. Dividends should be always calculated on the paid-up capital of
the company.
6. Transfer to Reserve Fund
If any amount is given in adjustment as to be transferred to Reserve
Fund, dividend equalization fund, Sinking Fund etc., then first it is to be taken
in profit and loss appropriation account debit side and then added to the
concerned fund reserve account in balance sheet on the liabilities side.
Other points to be noted while preparing final accounts.
1. Interest of Sinking Funds Investments should be credited to profit
and loss account (and only directly fund). Then the amount should be debited
to appropriation and credited to Sinking fund account together with the annual
installments.
2. In case of fixed asset , original cost, addition made during the year
cost of the asset sold during year and depreciation written off against the asset
should be shown clearly in Balance Sheet.
3. In case of investment stock, stock loose tools mode of valuation
(cost or market price) is to be shown.
4. In case of sundry debtors and loans and advances, amounts
outstanding for more than six months must be shown separately. The amounts
which are secured and unsecured and which are doubtful and amounts due from
director should be shown.
5. In case of share capital information has to be given regarding different
classes of shares, right of redemption if any, shares issued for consideration
other than cash and shares issued as bonus shares and the source from which
these have been issued.
248 Office Assistantship

Illustration 1 :
From the under mentioned Trial Balance of Kranthi Ltd. Prepare Trading
and Profit and Loss Account for the year ended 31st March 2012 a at that date.

Rs.(A) Rs.(A)

Purchases 75,000 Sales 1,35,00


Salaries 3,000 Discount received 1,200
Plant and Machinery 40,000 Transfeees 150
Sundry Debors 22,500 General Reserve 5,000
Wages 5,000 P& L A/c as on 1-4-2011 40,000
Rent 1,800 Share Capital
Bad Debts 250 10,000 Equity Shares of 1,00,000
(A) 10 each.
Stock 1-04-2011 10,500
Income Tax 12,000
Dividend 13,000
Interim Dividend 8,000
Insurance Premium 90

The following adjustments are necessary


(a) Depreciate Plant and Machinery at 7 1/2 %
(b) Stock on 31st March 2012 amounted to A 18,000
(c) Bad Debts Reserve at 2 1/2 % on Debtors.
(d) One quarter’s insurance premium is to be provided for.
Paper - II Accountancy - II 249

Trading and P&L Account of Kranthi Ltd. for the year ended 31st March 2012
Dr. Cr.
To Op. stock 10,500 By Sales 1,35,000
To Purchases 75,000 By Closing Stock 18,000
To Wages 5,000
To Gross profit 62,500
1,53,000 1,53,000
To Salaries 3,000 By Gross profits 62,500
To Rent 1,800 By Discount 1,200
To Income Tax 12,000 By Transfer fees 150
To Insurance 90
+ Outstanding 30 120
To Dep on
P&L Mach. 3,000
To Provision D.D 563
+ Bad Debts 250 813
To Net Profit 43,117
63,850 63,850

Profit and Loss Appropriation Account


Dr. Rs. (A) Cr.
To General Reserves 5,000 By Balance b/d 40,000
To Dividends 13,000 By Net Profit b/d 43,117
To Interim Dividends 8,000
To Surplus 57,117
(Transfer to Balance
sheet)

83,117 83,117
250 Office Assistantship

Exercises
1. The following Trial Balance of Wipro Ltd was extracted from their
books on 31st December 2012

Rs. (A) Rs. (A)


Purchases 3,04,000 Share Capital 1,44,000
Plant and Machinery 28,800 Provision for B.D.D 1,120
Stock in trade on 1-1-12 25,600 Returns outwards 14,400
Salaries 14,400 Sales 4,11,200
Carriage outwards 2,000 Discount 4,480
Carriage inwards 8,000 P & L A/c (Credit balance) 25,000
Discount allowed 5,600
Return inwards 12,800
Insurance 4,000
Dividends 20000
Interim dividends 22,400
Rates & Taxes 6,400

You are required to prepare the Trading and P & L appropriation account
for the year ended 31-12-2012, in doing so take the following adjustments into
account.
(a) Plant and machinery is to be depreciated by 10 percent
(b) Stock in trade on 30th June 2005 is A 28,800.
(c) Salaries due but not paid amounts to A 1,200
(d) The Provision for bad debts is to be raised to A 2,400
(e) Insurance paid in advance amounts to A 800
(f) Rates paid in advance amounts to A 1,600
(Ans. Gross Profit 1,04,000, Net Profit A 73,120, Surplus A 55,720)
Paper - II Accountancy - II 251

2. The Goodluck manufacturing company was registered with a nomial


capital of A 6,00,000 in equity shares of A10 each. The following is the list of
balances extracted from its books on 31st December 2012.

Rs.
Plant and Machinery ...... 3,30,000
Interim Divident paid on Aug. 1, 2012 ...... 37,500
Stock, 1st January 2012 ...... 75,000
Sundry Debtors ...... 87,000
Purchases ...... 1,85,000
Preliminary Expenses ...... 5,000
Wages ...... 84,865
General Expenses ...... 16,835
Freight and Carriage ...... 13,115
Salaries ...... 14,500
Directors Fees ...... 5,725
Bad Debts ...... 2,110
Debenture Interest Paid ...... 9,000
Subscribed and fully called-up capital ...... 4,00,000
6 % Debentures ...... 3,00,000
Profit and Loss Account (Cr. Balance) ...... 14,500
Sales ...... 4,15,000
General Reserve ...... 25,000
Bad Debts Reserve on 1st Jan 2012 ...... 3,500
Prepare Trading and P&L account and P&L appropriation A/c in proper
form after making the following adjustments. Depreciate Plant and machinery
10% , write off A 500 from preliminary expenses, provide half year debentures
interest due, leave bad and doubtful debts reserve at 5 percent on sundrydebtor.
Stock as on 31st December 2012 was A 95,000.
(Ans. Gross Profit 1,52,020, Net Profit A 60,500, Surplus A 37,500)
252 Office Assistantship

3. From the following balances prepare Trading Account and Profit &
Loss Account, Profit and Loss Appropriation A/c for the year ended 31st
March 2012.
Rs. (A)
Purchases 5,69,842
Stock on 1-4-2011 ...... 68,892
Patents ...... 1,560
Freehold Premises ...... 55,026
Productive wages ...... 25,090
Salaries ...... 22,060
Bad Debts ...... 476
Repairs to Building ...... 5,056
Interest on Bank overdraft ...... 1,260
Plant and Machinery ...... 80,140
Printing and Stationery ...... 33,400
Director’s Fees ...... 6,400
Auditor’s Fees ...... 3,000
Rates and Taxes ...... 7,576
Debtors ...... 45,000
Sundry office expenses ...... 1,052
Share capital (25000 shares of A 10) ..... 2,50,000
Unclaimed dividends ...... 1,106
Reserver for bad debts ...... 1,150
Purchase returns ...... 5,500
Sales ...... 1,91,800
Rents from property ...... 12,260
P&L Credit balance ...... 10,000
Discount received ...... 4,000
Commission received ...... 5,000
Paper - II Accountancy - II 253

The following adjustments have to be made before closing the accounts


(a) Value of closing stock is A 1,40,200
(b) Depreciation on Plant and Machinery has to be written off at 10%
per annum, on patent at 15 percent and on premises at 5 percent per annum.
(c) Provide for Bad and Doubtful Debts at 5 percent.
(d) Carry forward A 500 on account of Rates and Taxes.
(e) Proposed dividends 10% on Share Capital.
(Ans. Gross Profit 168,175, Net Profit A 85,557, Surplus A 72,557)
Format of the revised Schedule VI - Profit and Loss Account
Part II – Form of Statement of Profit And Loss
Name of the Company
Statement of Profit and Loss for the year ended 31 March, 20X2
Particulars Note As at 31st As at 31st
No. March 20X2 March 20X1
A (Rs.) A (Rs.)
A. CONTINUING
OPERATIONS
1. Revenue from operations
(gross)
Less: Excise duty
Revenue from operations (net)
2. Other income
3. Total revenue (1+2) xxx xxx
4. Expenses
(a) Cost of materials consumed
(b) Purchases of stock-in-trade
(c) Changes in inventories of
finished goods, work-in-
progress and stock-in trade
(d) Employee benefits expense
254 Office Assistantship

(e) Finance costs


(f) Depreciation and amortisation
expense.
(g) Other expenses Total expenses xxx xxx
5. Profit / (Loss) before exceptional
and extraordinary items and tax
xxx xxx
(3 – 4)
6. Exceptional items xxx xxx
7. Profit / (Loss) before xxx xxx
extraordinary items and tax (5 +
6)
8. Extraordinary items
9. Profit / (Loss) before tax (7 + 8) xxx xxx
10. Tax expense:
(a) Current tax expense for current
year
(b) (Less): MAT credit (where
applicable)
(c) Current tax expense relating to
prior years
(d) Net current tax expense
(e) Deferred tax xxx xxx
11. Profit / (Loss) from continuing xxx xxx
operations (9 +10)
B D I S C O N T I N U I N G
OPERATIONS
12.i Profit / (Loss) from discontinuing
operations (before tax)
12.ii Gain / (Loss) on disposal of assets /
settlement of liabilities attributable to
the discontinuing operations.
Paper - II Accountancy - II 255

12.iii Add / (Less): Tax expense of


discontinuing operations
(a) On ordinary act ivit ies
attributable to the discontinuing
operations
(b) On gain / (loss) on disposal of
assets / settlement of liabilities
13. Profit / (Loss) from
discontinuing operations (12.i + xxx xxx
12.ii + 12.iii)
C TOTAL OPERATIONS
xxx xxx
14. Profit / (Loss) for the year (11
xxx xxx
+ 13)
15. Earnings per equity share:
(1) Basic
(2) Diluted
256 Office Assistantship

UNIT 8
Company Accounts - III
Learning Objectives
After studying this unit, the student will be able to
• Understand about Share capital, Calls in arrears
• Understand about reserves and surplus
• Learn about short term and long term liabilities
• Learn about fixed assets and current assets
Definition
A financial statement that summarizes a company’s assets, liabilities
and shareholders’ equity at a specific point in time. These three balance sheet
segments give investors an idea as to what the company owns and owes, as
well as the amount invested by the shareholders.
The balance sheet must follow the following formula:
Assets = Liabilities + Shareholders’ Equity
It’s called a balance sheet because the two sides balance out. This
makes sense: a company has to pay for all the things it has (assets) by either
borrowing money (liabilities) or getting it from shareholders (shareholders’
equity).
Each of the three segments of the balance sheet will have many accounts
within it that document the value of each. Accounts such as cash, inventory and
Paper - II Accountancy - II 257

property are on the asset side of the balance sheet, while on the liability side
there are accounts such as accounts payable or long-term debt. The exact
accounts on a balance sheet will differ by company and by industry, as there is
no one set template that accurately accommodates for the differences between
different types of businesses.
(Simplified) Proforma of Balance Sheet
Liabilities (Rs.) A Assets (Rs.) A

Share capital Fixed Assets


(With all particulars of 1. Good will xxx
Authorised, Issued,
2. Land and Buildings xxx
Subscribed Capital,
Called up Capital 3. Leasehold property xxx
Less : Calls in Arrears xxx 4. Plant and machinery xxx
Add Forfeited Shares xxx 5. Furniture and Fittings xxx
Reserves and Surplus 6. Patents and Trade marks xxx
1. Capital Reserve xxx 7. Vehicles xxx
2. Capital Redemption xxx Investments xxx
Reserve.
Current Assets
3. Share Premium xxx
Loans and Advances
4. Other Reserver xxx
(A) Current Assets
Less : Debit balance of xxx
Profit and Loss 1. Interest Accrued on xxx
A/c (if any) Invesment.

5. Profit & Loss 2. Loose Tools xxx


xxx
Appropriation Account 3. Stock in Trade xxx
6. Sinking Fund xxx 4. Sundry Debtors
Secured Loans Less : Provision for doubtful xxx
Debentures debts

Add : Outstanding Interest 5. Cash in hand xxx


xxx
Loans from Banks 6. Cash at Bank xxx
xxx
258 Office Assistantship

Unsecured Loans (B) Loans and Advances


Fixed Deposits xxx 7. Advances to subsidiaries xxx
Short term loans and 8. Bills receivable xxx
advances xxx
9. Prepaid expenses xxx
Current Liabilities and
Miscellaneous
Provisions
Expenditure (to written off
(A) Current Liabilities or adjusted)
1. Bills Payable xxx 1. Preliminery expenses xxx
2. Sundry Creditors xxx 2. Discount on Issue of xxx
Shares and debentures
3. Income received in xxx
advance 3. Underwriting Commission xxx
4. Unclaimed Dividends xxx Profit and Loss Account
xxx
(loss, if any)
5. Other liabilities xxx
(B) Provisions
6. Provision for taxation xxx
7. Proposed Dividends xxx
8. Provident fund and
pension fund
xxx xxx

A standard company balance sheet has three parts: assets, liabilities and
ownership equity. The main categories of assets are usually listed first, and
typically in order of liquidity. Assets are followed by the liabilities. The difference
between the assets and the liabilities is known as equity or the net assets or the
net worth or capital of the company and according to the accounting equation,
net worth must equal assets minus liabilities.
Another way to look at the same equation is that assets equals liabilities
plus owner’s equity. Looking at the equation in this way shows how assets were
financed: either by borrowing money (liability) or by using the owner’s money
(owner’s equity). Balance sheets are usually presented with assets in one section
and liabilities and net worth in the other section with the two sections “balancing.”
Paper - II Accountancy - II 259

The Central Government, in exercise of the powers under section 641(1)


of the Companies Act, 1956 has replaced the existing Schedule VI with the
revised Schedule VI on the 28th February, 2011 pertaining to the preparation
of Balance Sheet and Profit and Loss Account under the Companies Act, 1956.
This revised Schedule VI has been framed as per the existing non converged
Indian Accounting Standards notified under the Companies (Accounting
Standards), Rules, 2006. The Revised Schedule VI shall come into force for
the Balance Sheet and Profit and Loss Account to be prepared for the financial
year commencing on or after 1.4.2011.
Form of Balance Sheet
Name of the Company
Balance Sheet as at 31 March, 20X2
Particulars Note As at 31st As at 31st
No. March 20x2 March, 20x1
A EQUITY AND LIABILITIES
1 Shareholder’s Fund
(a) Share capital xxx xxx
(b) Reserves and surplus xxx xxx
(c) Money received against share Warrants xxx xxx
2 Share application money pending allotment
3 Non-current liabilities
(a) Long-term borrowings xxx xxx
(b) Deferred tax liabilities (net) xxx xxx
(c) Other long-term liabilities xxx xxx
(d) Long-term provisions xxx xxx
4 Current liabilities
(a) Short-term borrowings xxx xxx
(b) Trade payables xxx xxx

(c) Other current liabilities xxx xxx

(d) Short-term provisions xxx xxx


260 Office Assistantship

TOTAL xxx xxx


B ASSETS
1 Non-current assets
(a) Fixed assets
(i) Tangible assets xxx xxx
(ii) Intangible assets xxx xxx
(iii) Capital work-in-progress xxx xxx
(iv) Intangible assets under devp. xxx xxx
(v) Fixed assets held for sale xxx xxx
(b) Non-current investments xxx xxx
(c) Deferred tax assets (net) xxx xxx
(d) Long-term loans and advances xxx xxx
(e) Other non-current assets xxx xxx
2 Current assets
(a) Current investments xxx xxx
(b) Inventories xxx xxx
(c) Trade receivables xxx xxx
(d) Cash and cash equivalents xxx xxx
(e) Short-term loans and advances xxx xxx
(f) Other current assets xxx xxx
TOTAL xxx xxx
Paper - II Accountancy - II 261

The following balances appeared in the books of Docomo company


Ltd as on March 31, 2012. Prepare a balance sheet
Rs. (A)

Buildings 1,01,000
Plant and Machinery 70,400
Furniture 10,200
Motor vehicles 40,800
Cash in hand 30,000
Bills receivable 45,000
Sundry Debtors 1,14,000
Investments 8,000
Share Capital (Issued and Subscribed capital
1,50,000
15,000 shares of A10/- each fully paid up)
Pention fund 40,000
Dividend Equalization fund 20,000
Taxation provision 17,000
Unclaimed dividends 2,000
Public Deposits 3,200
Trade Creditors 1,48,000
8% Debentures 1,00000
Cash at bank 1,06,600
Adjustments :
1. The authorised capital of the company consists of 20,000 shares of
A10 each
2. Stock on March 31, 2012 A 73,200
3. Outstanding expenses : manufacturing expenses A 45,000 and salaries
A 3,000
4. Interest accrued on securities A 200.
262 Office Assistantship

5. General charges prepaid A 1,600.


6. Provide depreciation on building at 2% p.a. on plant and machinery
at 10% p.a. on furniture at 10% p.a. and on motor vehicles at 20%
p.a.
7. Outstanding interest on debentures for 6 months A 4,000.
8. The directors propose a dividend @20% for current year.
9. The taxation provision shown in the trial balance is after payment of
taxes for assessment upto last year. For the current year a provision of A 20,000
is to be made. and Balance sheet as on March 31, 2012.
Balance sheet of Docomo Co. Ltd as on March 31, 2012

Liabilities Rs (A) Particulars Rs.(A)


Share Capital Assets
Authorised Capital Fixed Assets
20,000 Shares of Rs. 10/- Buildings 1,01,000
each 2,00,000
Less Depr 2% 2,020 98,980
Issued, Subscribed Capital
Plant & Mach. 70,400
15,000 shares of A10
each, fully called and paid 1,50,000 Less. Depr 10% 7,040 63,360
up.
Furniture 10,200
Reserves and Surplus
Less. Depr. 10% 1,020 9,180
Profit & Loss A/c 17,560
Motor Vehicle 40,800
Dividend Equalisation 20,000
Less : Dept. 20% 8,160 32,640
Fund
Investments 8,000
Secured Loans
Current Assets, Loans
8% Debtures 1,00,000
and Advances
Add out. Int. 4,000 1,04,000
(A) Current Assets
Unsecured loans
Interest accrued 200
Public Deposits 3,200
Stores and spare parts 30,000
Current Liabilities and
Stock in Trade 73,200
Provisions
Sundry Debtors 1,14,000
Paper - II Accountancy - II 263

Liabilities Rs (A) Particulars Rs.(A)


(A) Current Liabilities Cash at Bank 1,06,600
Trade Creditors 1,48,000 (B) Loans and Advances
Unclaimed Dividends 2,000 Bills receivables 45,000
Outstanding Expenses Prepaid expenses 1,600
Manufacturing exp. 45,000 Miscellaneous
Expenditure
Salaries 3,000 48,000
(to the extent not written off
(B) Provisions
or adjusted.)
Provision for taxation 20,000
Proposed dividends 30,000
Pension Fund 40,000

5,82,760 5,82,760

Exercise No. 1
The Mahesh manufacturing company ltd. was registered with a nominal
capital of A 6,00,000 in equity shares of A 10 each. The following is the list of
balances extracted from its books on 31st December 2012.

Subcribed and fully called-up capital 4,00,000


Calls in Arrears 7,500
Premises 3,00,000
Plant and Machinery 3,30,000
Fixtures and Fittings 7,200
Sundry Debtors 87,000
Goodwill 25,000
Cash in Hand 750
Cash at Bank 39,900
264 Office Assistantship

Priliminary expenses 5000


6 % debentures 3,00,000
Bills payable 38,000
Sundry Creditors 50,000
General Reserves 45,000
Investment 20,000
P&L Appropriation A/c (Credit Balance) 37,500

Prepare a balance sheet in proper form after making the following


adjustments.
1. Depreciation on Plant and Machinery 10%
2. Write off A 500 from preliminary expenses
3. Provide half years debenture interest due.
4. Provision for doubtful debt 5% on debtor.
5. Stock on 31st December 2012 A 95,000
(Ans. Balance sheet Total A 8,72,000)
Exercise No. 2
The following is the Trial balance of A.B.C Ltd. as at 30th June 2012.
Prepare Balance sheet in the form prescribed under the companies Act.

Authorised capital
50,000 Shares at A10 each. 5,00,000
Subscribed Capital
10,000 shares at A10 each. 1,00,000
Calls in Arrears 6,400
Land 10,000
Building 25,000
Paper - II Accountancy - II 265

Plant and Machinery 15,000


Furniture and fixtures 3,200
Investments 21,400
Bills Receivable 1,200
Sundry Debtors 42,800
Sundry Creditors 13,200
Cash at Bank 13,000
Cash in Hand 2,500
Share premium 6,000
General reserve 24,000
Debentures 15,000
Provision for Taxation 6,400
Profit and loss adjustment account (Deficit) 2,465

Adjustments :
1. Charge depreciation on Buildings at the rate of 2 1/2 %.
2. Charge depreciation on Plant and machinery at 10%
3. Charge depreciation on Furniture and fixture at 10%.
4. Provision of 5% on Sundry Debtors for bad debts
5. Carry forward Fire Insurance A 120.
6. Provide for the following outstanding liabilities
(a) Wages A 3,200
(b) Salaries A 500
(c) Rent and Taxes A 200
7. The value of stock on 30th June 2012 A 30,000
266 Office Assistantship

Exercise No. 3
Ramada Co. Ltd was registered with an authorised Capital of
A 10,00,000 divided into 10,000 ordinary shares of A 50 each and 5,000
10% preference shares of A 100 each. The following Trial balance was extracted
from the books of the company as on 31st December 2012. Prepare balance
sheet as on 31 December 2012.

Plant and Machinery 2,85,000


Lease hold premises 7,00,000
Calls in Arrears on ordinary shares 5,000
Sundry Debtors 3,00,000
Prepaid advertisement expenses 1,40,000
Furniture and fixtures 29,000
Cash in hand 1,000
Ordinary shares capital (8,000 shares fully called up) 4,00,000
Preference Shares 5,00,000
Sundry Creditors 60,000
Profit and loss adjustment account (Surplus) 1,14,000
Bank overdraft 25,000
Debentures 5,00,000

Adjustments :
1. Depreciate Plant and Machinery at 10%
2. Raise bad debts Reserve at 2.5% of Sundry Debtors
3. Closing stock amounted to A 2,50,000
4. Provision for taxation A 75,000 required.
Paper - II Accountancy - II 267

Base Informatics Ltd. was registered under the companies act. The
following particulars are given, prepare a balance sheet as on 31st March 2012.
Particulars Amount in Rs. (A)
Share Capital 2,50,000
General Reserve 5,000
Land and Building 1,00,000
P & L appropriation account (Credit balance) 20,000
Plant and Machinery 50,000
Long term borrowings 1,00,000
Furniture 20,000
Long term liabilities 50,000
Goodwill 15,000
Short term borrowings 18,060
Non current assets 14,000
Trade payable 30,900
Long term loans and advances 45,000
Other current liabilities 39,800
Short term provisions 1,240
Premises 10,000
Current investments 58,000
Inventories 45,000
Trade receivables 1,00,000
Cash in hand 15,000
Cash at bank 34,000
Prepaid insurance 500
Other current assets 4,000
268 Office Assistantship

Solution
Base Informatics Ltd
Balance Sheet as at 31 March, 2012
Particulars As at 31st
March, 2012
A EQUITY AND LIABILITIES
1 Shareholder’s Fund
(a) Share capital 2,50,000
(b) Reserves and surplus 25,000
(c) Money received against share Warrants ----
1. 2,75,000
2 Share application money pending allotment 2. ----
3 Non-current liabilities 1,00,000
(a) Long-term borrowings ---
(b) Deferred tax liabilities (net) 50,000
(c) Other long-term liabilities ---
(d) Long-term provisions
3. 1,50,000
4 Current liabilities
(a) Short-term borrowings 18,060
(b) Trade payables 30,900
(c) Other current liabilities 39,800
(d) Short-term provisions 1,240

4. 90,000

TOTAL ( 1 + 2 + 3 + 4) 5,15,000

B ASSETS
1 Non-current assets
Paper - II Accountancy - II 269

(a) Fixed assets


(i) Tangible assets 1,70,000
(ii) Intangible assets 15,000
(iii) Capital work-in-progress ---
(iv) Intangible assets under devp.. ---
(v) Fixed assets held for sale ---
(b) Non-current investments 14,000
(c) Deferred tax assets (net) ---
(d) Long-term loans and advances 45,000
(e) Other non-current assets 10,000
1. 2,54,000
2 Current assets
(a) Current investments 58,000
(b) Inventories 45,000
(c) Trade receivables 1,00,000
(d) Cash and cash equivalents 49,000
(e) Short-term loans and advances 5,000
(f) Other current assets 4,000
2. 2,61,000
TOTAL (1 + 2) 5,15,000