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CHAPTER 1
( FUNDAMENTALS OF PARTNERSHIP)
Nature of Partnership
The sole proprietorship has its limitations such as limited capital, limited managerial ability
and limited risk-bearing capacity. Hence, when a business expands or when it is to be set up
on a scale, which needs more capital and involves more risk, two or more persons join hands
to run it. They agree to share the capital, the management, the risk and profits of the business.
Such mutual economic relationship based on a written or an oral agreement amongst these
persons is termed as 'partnership'. The persons who have entered into partnership are
individually known as 'partners' and collectively as 'firm'.
The Indian Partnership Act, 1932 defines partnership as "the relation between persons
who have agreed to share the profits of a business carried on by all or any of them acting for
all". Based on this definition, the essential features of partnership are as follows:
1. Two or more persons : To form a partnership, there must be at least two persons. There
is, however, a limit on the maximum number of persons who constitute a partnership
firm. It should not exceed 10 if the firm is carrying on a banking business and 20 if it is
engaged in any other business.
2. Agreement between the partners : A partnership is created by an agreement. It is neither
created by operation of law as in the case of Hindu Undivided Family nor by status. The
agreement forms the basis of economic relationship amongst the partners. The agreement
can be written or oral.
3. Business : The agreement should be for carrying on some legal business. A joint
ownership of some property by itself does not constitute partnership. However, the joint
ownership of the property may be used for forming the partnership in order to pursue the
business objectives for which the partnership is formed.
4. Sharing of profits : The agreement should be to share the profits of the business. If some
persons join hands to carry on some charitable activity, it will not be termed as
partnership. Of course, the ratio in which the partners will share the profits is determined
by the agreement or in the absence of the agreement; it is shared equally amongst the
partners.
5. Business carried on by all or any of them acting for all : The firm's business may be
carried on by all the partners or any one of them acting for all. This means that
partnership is based on the concept of mutual agency relationship. A partner is both an
agent (he can, by his acts, bind the other partners) and a principal (he is bound by the acts
of other partners). The implication of this is that partner binds others and others bind him
in the same way. Further implication of this is that each partner is entitled to participate
in the conduct of business affairs and act for and on behalf of the firm.
Partnership Deed
Meaning
A partnership is formed by an agreement. This agreement may be written or oral. Though the
law does not expressly require that there should be an agreement in writing but the absence of
a written agreement may be a source of trouble in managing the affairs of the partnership
firm. Therefore, a partnership deed should be written, assented and signed by all the partners.
1. Profit Sharing : The partners shall share the profits of the firm equally irrespective of
their capital contribution.
2. Interest on Capital : No interest is allowed to partners on the capital contributed by
them. Where, however, the agreement provides for interest on capital, such interest is
payable only out of the profits of the business. In other words, if there are losses, interest
on capital will not be allowed even if the agreement so provides.
3. Interest on Loan : If any partner, apart from his share of capital, advances money to the
firm as a loan, he is entitled to interest on such amount at the rate of 6 per cent per
annum. Such interest shall be paid even out of the assets of the firm. This means that
interest on loan shall be paid even if there are losses. Implying, thereby, that it is a
charge against the revenues.
4. Interest on Drawings : No interest will be charged on drawings made by the partners.
Following are the specific issues that require special attention in case of partnership accounts:
There are two methods by which the capital accounts of partners can be maintained.
These are:
l Fluctuating Capital Method; and
l Fixed Capital Method.
The items that usually appear on the debit and the credit side of the Partners' capital
account are :
l Credit Side
1. Capital introduced or the opening balance;
2. Additions to capital made during the year, if any;
3. Interest on capital, if any;
4. Salary to the partners, if any;
5. Commission and bonus to the partners;
6. Share of profit.
l Debit Side
1. Drawings made during the year, if any;
2. Interest on drawings, if any;
3. Share of loss, if any;
4. Withdrawal of capital, if any;
5. Closing Balance.
Thus, the capital account of a partner will appear as follows:
Partners' Capital Account
Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
(Rs.) (Rs.)
Drawings *** Opening balance ***
Interest on *** Addition to capital ***
drawings Interest on capital ***
Share of loss *** Salary ***
Withdrawal of *** Commission/Bonus ***
capital Share of profit ***
Closing balance ***
Partners' Current
Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
(Rs.) (Rs.)
Opening balance* **** Opening balance* ****
Drawings **** Interest on capital ****
Interest on **** Salary ****
drawings **** Commission/Bonus ****
Share of loss **** Share of profit ****
Closing balance* **** Closing balance* ****
Total **** Total ****
Format of Current Account
* In Partners' Current Account, opening balance and closing balance may appear on either side, i.e. debit
or credit.
Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
(Rs.) (Rs.)
Drawings 4,000 Cash 40,000
Balance c/f 52,400 Salary 6,000
Interest on Capital 2,400
Profit and Loss
Appropriation A/c. 8,000
(Share of profit 2/3
of Rs. 12,000)
Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
(Rs.) (Rs.)
Drawings 8,000 Cash 25,000
Balance c/f 22,500 Interest on Capital 1,500
Profit and Loss 4,000
Appropriation A/c
(Share of profit 1/3
of Rs.12,000)
Total 30,500 Total 30,500
Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
(Rs.) (Rs.)
Balance c/f 40,000 Cash 40,000
Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
(Rs.) (Rs.)
Drawings 4,000 Salary 6,000
Balance c/f 12,400 Interest on Capital 2,400
Profit and Loss 8,000
Appropriation
(Share of profit 2/3
of Rs. 12,000)
Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
(Rs.) (Rs.)
Distribution of Profit
In case of partnership firm, the net profit (after charging the interest on capital, partners'
salary and commission and after taking into account the interest on drawings) is to be shared
by all the partners in the agreed profit sharing ratio. As stated earlier, in the absence of any
specific agreement to this effect, the profit is to be distributed equally among the various
partners.
Profit and Loss Appropriation Account
As stated above, the net profit as shown by the profit and loss account of a partnership firm
needs certain adjustments with regard to interest on capitals, interest on drawings, salary,
commission to the partners, if provided, under the agreement. For this purpose, 'Profit and
Loss Appropriation Account' may be prepared. This is merely an extension of the profit and
loss account and is prepared to show how net profit is to be distributed among the partners.
This account is credited with net profit and interest on drawings, and debited with interest on
capitals, salary or commission to partners. If, however, the profit and loss appropriation
account shows a net loss, it will be shown on the debit side of the profit and loss
appropriation account. After these adjustments have been made, the Profit and Loss
Appropriation Account will show the amount of profit or loss, which shall be distributed
among the partners in the agreed profit sharing ratio.
For preparing the profit and loss appropriation account, the following journal entries
have to be recorded for various items:
(ii) For transferring Interest on Capital to Profit and Loss Appropriation Account:
Profit and Loss Appropriation a/c Dr.
Interest on Capital a/c
(i) Interest on Drawings is a gain to the firm and is charged to Partner's Capital/Current
Account
Partners Capital/Current a/c Dr.
Interest on Drawings a/c
(ii) For transferring Interest on Drawings to Profit and Loss Appropriation Account, the following
entry is to be recorded:
(i) Salary allowed to a partner is a gain of the individual partner and charge against the profits of the
firm as per partnership agreement. For this following entry is recorded:
4. Partner's Commission
(i) Commission is an expense for the firm and a gain to the partner. For this, following entry is made:
(ii) Commission paid to a partner is charged to Profit and Loss Appropriation account by recording
the following entry:
Profit and Loss Appropriation a/c Dr.
Commission to partners a/c
If Profit:
Profit and Loss Appropriation a/c Dr.
Partner's Capital/Current a/c
If Loss:
Partner's Capital/Current a/c Dr.
Profit and Loss Appropriation a/c
The Profit and Loss Appropriation Account will appear as follows:
Rs. Rs.
You are required to prepare the Profit and Loss Account for the year ended December
31, 2000 and Balance Sheet as at that date. The following adjustments are to be made:
Dr. Cr.
Particulars Amount Particulars Amount
(Rs.) (Rs.)
Opening Stock 11,500 Sales 1,60,000
Purchases 85,000 Less : Returns 1,500 1,58,500
Less: Returns 2,500 82,500
Wages 14,000
Carriage Inwards 5,800
Gross Profit c/f 57,200 Closing Stock 12,500
1,71,000 1,71,000
Salaries to staff 12,250 Gross Profit b/f 57,200
Rent 3,750
Postage and Telegram 500
Advertising Exp. written off 1,800
Telephone Charges 500
Printing and Stationery 750
Commission 5,000
Travelling Expense 2,000
Depreciation
Plant 4,000
Furniture 250
Motor Van 4,172 8,422
Provision for Bad Debts 2,025
Salary to Akash 1,800
Interest on capital :
Aakriti 3,250
Akash 2,000 5,250
Net Profit Transferred to
Capital a/c:
Aakriti 7,892
Akash 5,261 13,153
You are required to record the necessary journal entries relating to appropriation of
profit and prepare the profit and loss appropriation account and the partners' capital accounts.
Solution
Books of Ajit, Chaudhary and Vishal
Journal
Date Particulars L.F. Debit Credit
Amount Amount
2001 (Rs.) (Rs.)
Profit and Loss Appropriation Account for the year ended December 31,2001
Dr. Cr.
Particulars Amount Particulars Amount
(Rs.) (Rs.)
Ajit's Salary 12,000 Net profit as per profit 35,660
Choudhary's Commission 5,000 and loss account
Interest on Capital: Interest on Drawings :
Ajit's Capital 3,000 Ajit's Capital 270
Choudhary's Capital 2,400 Choudhary's capital 180
Vishal's Capital 1,800 7,200 Vishal's Capital 90 540
Capital Accounts -
Share of Profit:
Ajit's Capital 6,000
Choudhary's Capital 4,000
Vishal's Capital 2,000 12,000
Total 36,200 Total 36,200
Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
2001 (Rs.) 2001 (Rs.)
Drawings 6,000 Cash 50,000
Interest on Drawings 270 Salary 12,000
Balance c/f 64,730 Interest on Capital 3,000
Profit and Loss
Appropriation
(Share of profit) 6,000
Total 71,000 Total 71,000
Choudhary's Capital Account
Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
2001 (Rs.) 2001 (Rs.)
Drawings 4,000 Cash 40,000
Interest on Drawings 180 Commission 5,000
Balance c/f 47,220 Interest on Capital 2,400
Profit and Loss
Appropriation
(Share of profit) 4,000
Dr. Cr.
Pawan Purna
(Rs.) (Rs.)
Capital Account 30,000 20,000
Current Account (Cr.) 10,000 8,000
The partnership deed provided that Pawan is to be paid salary @ Rs. 500 p.m. whereas Purna
is to get commission of Rs. 4,000 for the year.
Interest on capital is to be allowed @ 6% p.a. The drawings of Pawan and Purna for the
year were Rs. 3,000 and Rs. 1,000, respectively. Interest on
drawings for Pawan and Purna works out at Rs. 75 and Rs. 25, respectively. The net profit of
the firm before making these adjustments was Rs. 24,900.
Prepare the Profit and Loss Appropriation Account and the partners' capital and current
accounts.
Solution
Dr. Cr.
Particulars Amount Particulars Amount
(Rs.) (Rs.)
Pawan's Salary 6,000 Net profit as per Profit and 24,900
Purna's Commission 4,000 Loss account
Interest on Capital: Interest on drawings :
Pawan's current 1,800 Pawan's current a/c 75
Purna's current 1,200 3,000 Purna's current a/c 25 100
Capital accounts
(Share of Profit):
Pawan's current 7,200
Purna's current 4,800 12,000
1. Normally, interest on the opening balance at the beginning of the year is allowed for the
whole accounting year.
2. If additional capital is invested during the year, interest for the relevant period is
calculated.
3. If part of the capital is withdrawn during the year, interest on the part of the capital that
was invested for the whole year, interest is calculated for the whole year and it is added
with the amount of interest that is calculated on the remaining capital that was invested
for the relevant period. For example, Anmol has Rs. 30,000 as balance in his capital
account at the beginning of the year. In the middle of the year he withdrew Rs.10,000
from his capital. He is entitled for interest @ 10% p.a.
(b) If amount is withdrawn at the end of each quarter, the amount of interest is
calculated on total drawings for a period of four and a half months.
* Instead of this cumbersome calculation, the same result can be obtained by calculating the Interest on the sum of
product for a period of one month = Rs. 24,000 × 10/100 × 1/12 = Rs. 200
Illustration 6 (Interest on Drawings)
Rajesh is a partner in a firm. He withdrew the following amounts during the year 2000 :
Rs.
January 31 6,000
March 31 4,000
June 30 8,000
September 30 3,000
October 31 5,000
The interest on drawings is to be charged @ 6% p.a. Assuming the accounting year
closes on December 31each year, interest on drawings to be debited to Rajesh shall be worked
out as follows :
1 2 3 4
Date Amount(Rs.) Period Months Product(Rs.)
(2×3)
Jan 31 6,000 11 66,000
March 31 4,000 9 36,000
June 30 8,000 6 48,000
Sept 30 3,000 3 9,000
Oct 31 5,000 2 10,000
Total 26,000 1,69,000
Rate of interest 1
sum of products
100 12
= 6/100 × Rs. 1,69,000 × 1/12
= Rs. 845
Alternatively, interest can be calculated separately for each amount for the period
involved and then totalled. In that case also, we shall arrive at the same amount of interest.
Solution
If the fixed amount is withdrawn on the first day of every month, the average period will
be calculated with the help of following formula :
Average period = (Total period in months + 1)/2
If the fixed amount is withdrawn on the last day of every month, the average period will
be calculated by the following formula :
Average period = (Total period in months – 1)/2
In illustration 6, the partners withdrew a fixed amount on the first day of every month.
Hence, the interest on drawings can also be calculated by applying the average period
formula.
Average period = (Total period in months + 1)/2
= (12 +1)/2 = 6.5 Months
Interest on drawings for 6.5 months @ 5% p.a.
5 13 1
= 12000
100 2 12
= Rs. 325
Solution
Maneesh's total drawings = Rs.5,000 × 4 = Rs.20,000
Mohan's total drawings = Rs.5,000 × 4 = Rs.20,000
12 3
Number of months for which interest will be charged = 7.5 months
2
6 15 1
Interest = Rs. 20,000 Rs. 750
100 2 12
6 9 1
Interest = Rs. 20,000 Rs. 450
100 2 12
1.4 Guarantee of Profit to a Partner
Guarantee is an assurance that a partner will not get as his share of profit less than the
guaranteed amount. There may be two situations :
(a) Guarantee to one partner by (others) the firm,
(b) Guarantee to a partner by another partner individually. (a)
Guarantee to one partner by (others) the firm
Sometimes, a partner is guaranteed a minimum amount by way of his share in the profits
of the firm. Such a guarantee may be given to an existing partner or to a new partner at
the time of admission. Such guaranteed amount shall be paid to partner when his share
of profit, as calculated, according to his profit sharing ratio is less than the guaranteed
amount. The deficiency of such guaranteed amount will be borne by the other partner's
in their profit sharing or agreed ratio as the case may be.
Example, Soni and Mita are partners and they decide to admit Mary into the partnership
firm. The profit sharing ratio is agreed as 3:2:1 with a guaranteed amount of Rs. 5,000 to
Mary. For the year ended 2001, the business earns a profit of Rs. 24,000. Mary's share
works out to Rs. 4,000 (1/6 of Rs. 24,000). This is Rs. 1,000 less than the guaranteed
amount of Rs. 5,000. Hence, Mary will get Rs. 4,000 as her share of the profit in the
profit sharing ratio and the deficiency of Rs.1,000 (i.e. the amount by which Rs. 4,000
falls short of the guaranteed amount) shall be transferred to the credit of Mary by
transfer from Soni and Mita in their profit sharing ratio, i.e. 3:2.
Notes to Solution :
Printer's share = Rs. 96,000 × 2/12 = Rs. 16,000.
Since Printer has been guaranteed a minimum amount of Rs. 20,000, therefore, he will given Rs.
20,000 and remaining amount i.e., Rs. 20,000 – Rs.16,000 = Rs. 4,000 will be borne by Mouse,
Keyboard and Monitor in the ratio of 4:3:3.
Solution
The Profit and Loss Appropriation Account will be prepared as follows :
The Profit and Loss Appropriation Account for the
year ended March 31, 2001
Dr. Cr.
Particulars Amount Particulars Amount
(Rs.) (Rs.)
Share of Profit Net Profit as per profit 76,000
Kim and loss account
(2/4 of 76,000) 38,000
Less: Mohit's
deficiency
(2/3 of 9,000) 6,000 32,000
Lal
(1/4 of 76,000) 19,000
Mohit
(1/4 of 76,000) 19,000
Add: deficiency
borne by Kim 6,000 25,000
Total 76,000 Total 76,000
Past Adjustments
Sometimes, after the final accounts have been prepared and the partners' capital account are
closed, it is found that certain items have been omitted by
mistake or have been wrongly treated. Such omissions and commissions usually relate to the
interest on capital, interest on drawings, salary to partners, etc. In such a situation, necessary
adjustments have to be made in the partners' capital account through an account called Profit
and Loss Adjustment Account. The following procedure may be helpful in recording
necessary adjustments :
1. If, interest on capital is one of the items of omissions, then first ascertain the partners'
capital at the beginning. This can be done by deducting partners' share of current year's
profit from their capitals at the end and adding their drawings thereto.
2. Work out the amounts of omitted items that are to be credited to partners' capital
accounts such as interest on capital, salaries to partners, etc. The following journal entry
for the adjustment is recorded :
Profit and Loss Adjustment a/c Dr.
Partners' Capital a/c (individually)
3. Work out the amounts of omitted items which are to be debited to Partners' Capital
Accounts such as interest on drawings and record the following adjustment entry are
recorded :
Partners' Capital (individually) a/c Dr.
Profit and Loss Adjustment a/c
4. Work out the balance of the Profit and Loss Adjustment Account. The credit balance of
the Profit and Loss Adjustment Account reflects the profit and the debit balance, the
loss. This is to be distributed among the partners.
5. The balance of the Profit and Loss Adjustment Account as worked out in point 4 above
be transferred to the partners' capital accounts in their profit sharing ratio. Thus, the
Profit and Loss Adjustment Account will stand closed. It will involve the following
journal entry :
If it is a credit balance (profit)
Profit and Loss Adjustment a/c Dr.
Partners' Capital (individually) a/c
If it is a debit balance (loss)
Partners' Capital (individually) a/c Dr.
Profit and Loss Adjustment a/c
The adjustment can also be made directly in the Partners' Capital Accounts without
preparing a Profit and Loss Adjustment Account. In such a situation,
we shall prepare a statement to find out the net effect of omissions and commissions and then
to debit the capital account of the partner who had been credited in excess and credit the
capital account of the partner who had been debited in excess.
(iii) Asha was entitled to salary of Rs.5,000 and Bony, a commission of Rs.2,000 for the
whole year.
It was decided to make the necessary adjustments to record the above omissions. Give
the necessary journal entries and prepare the profit and loss adjustment account and Partners'
capital accounts.
Solution
(1) Partners capital at the beginning
Asha Bony
(Rs.) (Rs.)
Capital at the end 60,000 50,000
Less: Share of Profit (10,000) (10,000)
(Rs. 20,000 shared equally) 50,000 40,000
Add: Drawings 8,000 6,000
Capital at the beginning 58,000 46,000
5 6
8,000 Rs. 200
100 12
For a Single adjustment entry an analysis table to find out the amount to be debited or
credited to the capital accounts of the partners individually.
Analysis Table
Journal Entry
Statement of Adjustment
Goodwill
Goodwill is also one of the special aspects of partnership accounts which requires adjustment
at the time of a change in the profit sharing ratio, the admission of a partner or the retirement
or death of a partner.
Meaning of Goodwill
Over a period of time, a well-established business develops an advantage of good name,
reputation and wide business connections. This helps the business to earn more profits as
compared to a newly set up business. In accounting, the monetary value of such advantage is
known as 'goodwill'.
It is regarded as an intangible asset. In other words, goodwill is the value of the
reputation of a firm in respect of the profits expected in future over and above the normal
profits. It is generally observed that when a person pays for goodwill, he/she pays for
something, which places him in the position of being able to earn super profits as compared to
the profit earned by other firms in the same industry.
In simple words, goodwill can be defined as ''the present value of a firm's anticipated
excess earnings'' or as "the capitalized value attached to the differential profit capacity of a
business". Thus, goodwill exists only when the firm earns super profits. Any firm that earns
normal profits or is incurring losses has no goodwill.
For example, if the past average profits of a business works out at Rs. 20,000 and it is
expected that the same profits will be available in future, the value of goodwill will be
Rs. 60,000 (Rs. 20,000 × 3), if three years, purchase of the past average profits
constitute the basis of valuation of the goodwill.
Illustration 12 (Goodwill)
The profit for the last five years of a firm were as follows year 1999 Rs. 4,00,000; year 2000
Rs. 3,98,000; year 2001 Rs. 4,50,000; year 2002 Rs. 4,45,000 and year 2003 Rs. 5,00,000.
Calculate goodwill of the firm on the basis of 4 years purchase of 5 years average profits.
Solution
Year Profit
Rs. Rs.
1999 4,00,000
2000 3,98,000
2001 4,50,000
2002 4,45,000
2003 5,00,000
Total 21,93,000
Year Rs.
1999 40,000
2000 50,000
2001 60,000
2002 50,000
2003 60,000
Solution
Calculation of Average Profits
(Profits)
Year Rs.
1999 40,000
2000 50,000
2001 60,000
2002 50,000
2003 60,000
Total 2,60,000
Average Profits = 2,60,000/5
= Rs. 52,000
Goodwill = Rs. 52,000 × 4
= Rs. 2,08,000
Illustration 14 (Goodwill)
The following were the profits of a firm for the last three years.
Year ending Profit (Rs.)
March 31
2000 4,00,000 (including an abnormal gain of
Rs. 50,000)
2001 5,00,000 (after charging an abnormal loss of
Rs. 1,00,000)
2002 4,50,000 (excluding Rs. 50,000 payable on the
insurance of plant and machinery )
Calculate the value of firm's goodwill on the basis of two years purchase of the average
profits for the last three years.
Solution
Calculation of average maintainable profits.
Rs.13,50,000
Average profit = Rs. 4,50,000
3
Solution
Year Profit
ended 31 March Rs. Weight Product
1999 20,000 1 20,000
2000 24,000 2 48,000
2001 30,000 3 90,000
2002 25,000 4 1,00,000
2003 18,000 5 90,000
Total 15 3,48,000
3,48,000
Weighted Average Profit Rs. 23,200
15
Goodwill = 23,200 × 3 = Rs. 69,600
Illustration 16 (Goodwill)
Calculate goodwill of a firm on the basis of three years' purchase of the weighted average
profits of the last four years. The profit of the last four years were : 2000 Rs. 20,200; 2001 Rs.
24,800; 2002 Rs.20,000 and 2003 Rs. 30,000. The weights assigned to each year are : 2000-1;
2001- 2; 2002- 3 and 2003-4.
You are supplied the following information :
(i) On September 1, 2002 a major plant repair was undertaken for Rs. 6,000 which was
charged to revenue. The said sum is to be capitalized for goodwill
calculation subject to adjustment of depreciation of 10% p.a. on reducing balance
method.
(ii) The closing stock for the year 2001 was overvalued by Rs. 2,400.
(iii) To cover management cost an annual charge of Rs. 4,800 should be made for the
purpose of goodwill valuation.
Solution
Calculation of adjusted 2000 2001 2002 2003
profit Rs. Rs. Rs. Rs.
Given Profits 20,200 24,800 20,000 30,000
Less Management Cost 4,800 4,800 4,800 4,800
15,400 20,000 15,200 25,200
Add Capital expenditure
charged to revenue - - 6,000 -
15,400 20,000 21,200 25,200
Less unprovided
depreciation - - 200 580
15,400 20,000 21,000 24,620
Less over valuation of
closing stock - 2,400 - -
15,400 17,600 21,000 24,620
Add over value of opening - - 2,400 -
stock
Adjusted Profit 15,400 17,600 23,400 24,620
2,19,280
Weight Average Profit = Rs. 21,928
10
Goodwill = 21,928 × 3 = Rs. 65,784
Notes to the Solution
(i) Depreciation of 2002 = 10% of Rs. 6,000 for 4 months
= 6,000 × 10/100 × 4/12 = Rs. 200
(ii) Depreciation of 2003 = 10% of Rs. 6,000 – Rs. 200 for one years
= 5,800 ×10/100 = Rs. 580
(iii) Closing stock of 2001 will become opening stock of 2002.
2. Super Profits Method : The basic assumption in the average profits method of
calculating goodwill is that, if a new business is set up, it will not be able to earn any
profits during the first few years of its operations. Hence, the person who purchases an
existing business has to pay in the form of goodwill a sum equal to the total profits he is
likely to receive for the first 'few years'.
It is also contended that the buyer's real benefit does not lie in total profits; it is limited
to such amounts of profits which are in excess of the normal return on capital employed in
similar business. Therefore, it is desirable to value, goodwill on the basis of the excess profits
and not the actual profits. The excess of actual profits over the normal profits is termed as
super profits. Normal profits can be ascertained as follows :
The goodwill under the super profits method is ascertained by multiplying the super
profits by certain number of years' purchase. If, in the above example, it is expected that the
benefit of super profits is likely to be available for 5 years in future, the goodwill will be
valued at Rs. 15,000 (3,000 × 5). Thus, the steps involved under the method are :
4. Calculate goodwill by multiplying the super profits by the given number of years'
purchase.
Illustration 17 (Goodwill)
The books of business showed that the capital employed on December 31,2001, Rs. 5,00,000
and the profits for the last five years were: 1997-Rs. 40,000; 1998-Rs. 50,000; 1999-Rs.
55,000; 2000-Rs. 70,000 and 2001-Rs. 85,000. You are required to find out the value of
goodwill based on 3 years purchase of the super profits of the business, given that the normal
rate of return is 10%.
Solution
5,00,000 10
= Rs. 50,000
100
Average Profits :
Year Profit
Rs.
1997 40,000
1998 50,000
1999 55,000
2000 70,000
2001 85,000
Total Profit Rs. 3,00,000
Illustration 18 (Goodwill)
Capital employed in a business on March 31, 2003 was Rs. 20,00,000 and the profits for the
last five years were as follows :
Year ending Profit
31st March Rs.
1999 2,60,000
2000 2,80,000
2001 2,70,000
2002 2,50,000
2003 2,10,000
Calculate the value of goodwill on the basis of 3 years' purchase of the super profits of
the business. The normal rate of return is 10%.
Solution
Rs. 20,00,000 10
Rs. 2,00,000
100
Rs.12,70,000
= Rs. 2,54,000 5
Illustration 19 (Goodwill)
The capital of the firm of Anu and Benu is Rs. 1,00,000 and the market rate of interest is
15%. Annual salary to partners is Rs. 6,000 each. The profits for the last 3 years were Rs.
30,000; Rs. 36,000 and Rs. 42,000. Goodwill is to be valued at 2 years purchase of the last 3
years' average super profits. Calculate the goodwill of the firm.
Solution
= Rs. 36,000
Super Profit = Average Profit – Normal Profit
= Rs. 36,000 – Rs. 27,000
= Rs. 9,000
Goodwill = Super Profit × No of years' purchase
= Rs. 9,000 × 2
= Rs. 18,000
3. Capitalization Method : Under this method the goodwill can be calculated in two ways :
(a) by capitalizing the average profits, or (b) by capitalizing the super profits.
(ii) Capitalize the average profits on the basis of the normal rate of return as
follows :
Average Profits × 100/Normal Rate of Return
This will give the total value of business.
(iii) Ascertain the actual capital employed (net assets) by deducting outside
liabilities from the total assets (excluding goodwill).
(iv) Compute the value of goodwill by deducting net assets from the total value
of business, i.e. (ii) – (iii).
Illustration 20 (Goodwill)
A business has earned average profits of Rs. 1,00,000 during the last few years and the
normal rate of return in a similar type of business is 10%. Ascertain the value of goodwill by
capitalization method, given that the value of net assets of the business is Rs. 8,20,000.
Solution
Capitalized Value of Average Profits
Rs. 1,00,000
100
= Rs 10,00,000
10
Goodwill = Capitalized Value – Net Assets
= 10,00,000 – 8,20,000
= Rs. 1,80,000
(b) Capitalization of Super Profits : Under this method following steps are involved :
(i) Calculate Capital employed of the firm, which is equal to total assets minus
outside liabilities.
(ii) Calculate required profit on capital employed by using the following
formula :
Profit = Capital Employed × Required Rate of Return/100
(iii) Calculate average profit of past years, that is, 3 to 5 years.
(iv) Calculate super profits by deducting required profits from average profits.
(v) Multiply the super profits by the required rate of return multiplier, that is,
(iii) Rama Brothers earn a net profit of Rs. 30,000 with a capital of Rs. 2,00,000. The normal
rate of return in the business is 10%. Use capitalization of super profits method to value
the goodwill.
Solution
(i) Total Profit = Rs. 10,000 + 15,000 + 4,000 + 6,000 – 5,000 = Rs. 30,000
Average Profit = Rs. 30,000/5 = Rs. 6,000
Goodwill = Average Profit × 3 = Rs. 6,000 × 3 = Rs. 18,000.
Average Profit = Rs. 12,000
Remuneration to Partners = Rs. 3,000
Average actual profit = Rs. 12,000 – Rs. 3,000 = Rs. 9,000
Normal Profit = Rs. 1,00,000 × 8/100 = Rs. 8,000
Super Profit = Average Profit – Normal profit = Rs. 9,000 – 8,000
(ii)
= Rs. 1,000
Goodwill = Super Profit × 3 = 1,000 × 3 = Rs. 3,000
(iii) Normal Profit = Rs. 2,00,000 × 10/100 = Rs. 20,000
Super Profit = Average Profit – Normal Profit = Rs. 30,000 – 20,000
= Rs. 10,000
Goodwill = Super Profit × 100/Normal Rate of Return
= 10,000 × 100/10 = Rs. 1,00,000
4. Present Value of Super Profits : Under this method, goodwill is estimated as the present
value of the future super profits. This requires following steps :
(i) Calculate the future super profits for next 5 to 7 years depending upon the business
potential.
(ii) Choose the required rate of return.
(iii) Calculate present value factors.
(iv) Multiply present value factors with future super profits.
(v) The sum of product of present value factors and super profits is the value of
goodwill.
Illustration 22 (Goodwill)
A firm has the forecasted profits for the coming 5 years as follows :
Year I II III IV V
Profits (Rs.) 1,00,000 1,20,000 90,000 1,00,000 1,50,000
The total assets of the firm are Rs. 10,00,000 and outside liabilities are Rs. 2,00,000. The
present value factor at 10% are as follows :
Year I II III IV V
PVF 0.9091 0.8264 0.7513 0.6830 0.6209
Calculate the Value of goodwill.
Solution
Year I II III IV V
Sometimes, the partners of a firm may agree to change their existing profit sharing ratio. As a
result of this, some partners will gain in future profits while others will lose. In such a
situation, the partner who gains by the change in the profit sharing ratio must compensate the
partner who has made the sacrifice because this effectively amounts to one partner buying the
share of profits from another partner. For example, Anu and Benu are partners in a firm
sharing profits in the ratio of 3:2. They decide to have an equal share in profits in future. In
this case, Anu looses 1/l0th (3/5 – 1/2) share of profits and Benu gains this 1/l0th. Hence,
Benu must compensate Anu for her loss in the share of future profits.
A life assurance policy obtained jointly on the lives of the members of a partnership firm is
called a joint life policy. Since the firm has an insurable interest in the lives of its members,
hence to make finances available for payment to the retiring partner on his retirement or to the
legal heirs of the deceased partner, it obtains a joint life policy. The payment for the policy
may be made either privately by the partners or by the firm. The joint life policy matures on
the death of any one of the partners or on the expiry of the time for which it is obtained.
Maturity of the policy means that the insurance company becomes liable to pay the sum
assured to the firm either on the death of a partner or on the expiry of the time whichever
happens earlier.
Accounting Treatment
The premium on the joint life policy may be paid either privately by the partners or by the
firm. When the premium is paid privately by the partners then no accounting treatment is
required in the books of the firm. But when the premium is paid out of the firms cash then the
transactions relating to joint life policy will be shown in the books of the firm. The treatment
of joint life policy in the books of the firm will depend upon the fact whether the premium
paid has been considered as revenue expenditure or capital expenditure.
When premium paid is considered by the firm as a revenue expenditure then it opens in
its books an account called 'Joint Life Policy Premium Account'. Premium paid annually is
debited to this account and credited to cash account. At the end of the year the premium paid
is transferred to joint life policy account. These two entries of payment of premium and its
writing off to profit and loss account are recorded every year. On maturity of the policy the
maturity amount received from the insurance company is credited to the capital accounts of
all the partners including the retiring/deceased partner in their profit sharing ratio.
When premium paid is considered as a capital expenditure then the firm opens in its
books 'Joint Life Policy Account' which is an asset account.
Premium paid is debited to this account and credited to bank account. At the end of the year the 'Joint Life
Policy Premium Account' is reduced to surrender value by debiting the difference between the premium
paid and surrender value. Surrender value is that amount of money which the insurance company pays to
the policy holders in the event of surrendering the policy to the insurance company before the date of its
maturity. At the time of maturity of the policy a joint life policy account is credited with an amount which
is equal to the claim receivable from the insurance company. Afterwards the joint life policy account is
closed by transferring its balance to the capital accounts of all the partners in their profit sharing agreement.
CHAPTER - 2
ADMISSION OF A PARTNER
Kapil and Krish are running a partnership firm dealing in toys. They are
one of the most successful businessmen in the locality. They now decide
to start manufacturing toys that are electronically operated to diversify
their busmess. For this they need more capital and also technical expertise.
Mohit; their friend is an electronic engineer and has capital also. They
have persuaded him to join their firm. In case, he joins the partnership
firm, this will be a case of admission of a partner. As a result, he may need
to bring in capital and share of goodwill. In this lesson, you will learn
about goodwill and other ajustments at the time of admission of a partner.
Mohit will bring in capital and share of goodwill. Some changes in the
value of some assets and liabilities of the existing firm are need to bring
them at their realistic value, on his admission. There may be other issues
involing finance on his admission. All this need accounting treatment. In
this lesson you will learn accounting treatment and adjustments to be
made on the admission of a partner.
ADMISSION OF A PARTNER
Meaning, New Profit Sharing Ratio and Sacrificing Ratio
Meaning
An existing partnership firm may take up expansion/diversification of the
business. In that case it may need managerial help or additional capital. An
option before the partnership firm is to admit partner/partners, when a
partner is admitted to the existing partnership firm, it is called admission
of a partner.
Sacrificing Ratio
At the time of admission of a partner, existing partners have to surrender
some of their share in favour of the new partner. The ratio in which they
agree to sacrifice their share of profits in favour of incoming partner is
called sacrificing ratio. Some amount is paid to the existing partners for
their sacrifice. The amount of compensation is paid by the new partner to
the existing partner for acquiring the share of profit which they have
surrendered in the favour of the new partner.
Sacrificing Ratio is calculated as follows:
Illustration 1
Deepak and Vivek are partners sharing profit in the ratio of 3 : 2. They
admit Ashu as a new partner for 1/5 share in profit. Calculate the new
profit sharing ratio and sacrificing ratio.
Solution:
Calculation of new profit sharing ratio:
Let total Profit = 1
New partner‘s share = 1/5
Remaining share = 1 – 1/5 = 4/5
Deepak‘s new share = 3/5 of 4/5 i.e. 12/25
142
Admission of a Partner
l The new partner purchases his/her share of the profit from the
Existing partner in a particular ratio.
In this case : the new profit sharing ratio of the existing partners is to be
ascertained after deducting the sacrifice agreed from his share. It means
the incoming partner has purchased some share of profit in a particular
ratio from the existing partners.
Illustration 2
Neha and Parteek are partners, sharing profit in the ratio of 5 : 3. They
admit Nisha as a new partner for 1/6 share in profit. She acquires this
share as 1/8 from Neha and 1/24 share from Parteek. Calculate the new
profit sharing ratio and sacrificing ratio.
Solution
Neha‘s and Parteek existing ratio is 5 : 3
Neha‘s new share = 5/8-1/8 = 4/8 or 12/24
Parteek‘s new share = 3/8-1/24 = 8/24
Nisha‘s share = 1/8+1/24 =4/24
The new profit sharing ratio of Neha, Parteek and Nisha is
12/24 : 8/24 : 4/24
= 12 : 8 : 4 = 3 : 2 : 1
(ii) Sacrifice ratio = 1/8 : 1/24 or 3 : 1
Illustration 3
Him and Raj shared profits in the ratio of 5:3. Jolly was admitted as a
partner. Him surrendered 1/5 of his share and Raj 1/3 of his share in
favour of Jolly. Calculate the new profit sharing ratio.
Solution :
Him surrenders 1/5 of his share, i.e., = 1/5 of 5/8 = 1/8
Raj surrenders 1/3 of his share, i.e., = 1/3 of 3/8 = 1/8
So, sacrificing ratio of Him and Raj is 1/8 : 1/8 or equal.
Him‘s new share = 5/8 – 1/8 = 4/8
and Raj‘s new share = 3/8 – 1/8 = 2/8
Jolly‘s New share = 1/8 + 1/8 = 2/8
New profit sharing ratio of Him‘s, Raj‘s and Jolly‘s is
= 4/8 : 2/8 : 2/8 or 4 : 2 : 2 or 2 : 1 : 1.
144
Admission of a Partner
Meaning of Goodwill
Over a period of time, a business firm develops a good name and reputation
among the customers. This help the business earn some extra profits as
compared to a newly set up business. In accounting capitalised value of this
extra profit is known as goodwill. For example, your firm earns say Rs 1200
and the normal profit was expected from your firm Rs 700. The rate of return
is @ 10%. In this case goodwill is ascertained as under :
4. Quality : If a firm is known for the quality of its products the value of
goodwill will be high.
For example, the average profits of a firm of say 3 years and the goodwill
is to be calculated at 2 years purchase of the average profits works out at
Rs.25,000 and it is assumed that the same profits will be the value of the
goodwill will be Rs.50,000[Rs.25,000 × 2]. Thus the goodwill is
calculated as goodwill = average profits × Number of years purchase.
Illustration : 4
The profit for the last five years of a firm were as follows Year 2001 Rs.
1,20,000: Year 2002 Rs.1,50,000: Year 2003 Rs.1,70,000: Year 2004
Rs.1,90,000: Year 2005 Rs.2,00,000. Calculate goodwill of the firm on the
basis of 3 years purchases of 5 years average profits.
Solution :
Year Profit (Rs.)
2001 1,20,000
2002 1,50,000
2003 1,70,000
2004 1,90,000
2005 2,00,000
Total 8,30,000
146
Admission of a Partner
* Super Profit Method : Super profits is the excess of actual profit over
the normal profits. If a new business earns certain percentage of the
capital employed, it is called ‗normal profit‘. The value of the
goodwill is calculated at an agreed number of years purchase is
multiplied by the Super profit. Normal profit is that profit which is,
earned by other business unit of the same business. Normal profit will
be calculated as follows:
Normal profit = Capital employed × normal rate of return/100
Actual Profit : These are the profit earned during the year or it is also
taken as the average of the last few years profit.
Super Profit = Actual Profit – Normal Profit
Illustration : 5
The profit of firm for past years were as follow :
Profit Rs.
2002 80,000
2003 85,000
2004 90,000
2005 1,00,000
2006 1,10,000
The weight to be used are 1, 2, 3, 4, and 5 for the years from 2002- 2006.
Solution
Year Profit Weight Products
2002 80,000 1 80,000
2003 85,000 2 170000
2004 90,000 3 270000
2005 1,00,000 4 400000
2006 1,10,000 5 550000
15 1470000
14,70,000
Weighted Average Profit = = Rs 98,000
15
Illustration : 6
A firm earned the following net profits during the last 4 years
148
Admission of a Partner
Rs.
2003 90,000
2004 1,20,000
2005 1,60,000
2006 1,80,000
Solution:
Total profit of 4 years = Rs. 90,000 + Rs. 1,20,000 + Rs. 1,60,000 + Rs.
1,80,000
= Rs.5,50,000
= Rs.1,37,500
× 10/ 100
= Rs.1,00,000
= Rs.37,500
4 years‘ of purchase
Illustration : 7
A firm earned average profit during the last few years is Rs.40,000 and the
normal rate of return in similar business is 10%. The total assets is
Rs.3,60,000 and outside liabilities is Rs.50,000. Calculate the value of
goodwill with the help of Capitalisation of Average profit method.
Solution:
Capital employed = Total assets - Outside liabilities
= Rs.3,60,000 - Rs.50,000
= Rs.3,10,000
Illustration : 8
The capital invested in a firm is Rs.4,60,000 and the rate of return in the
similar business is 12%. The firm earns the following profit in the last 4
years:
2003 Rs. 60,000 2005 Rs. 80,000
2004 Rs. 70,000 2006 Rs. 90,000
Calculate the value of goodwill by Capitalisation method.
150
Admission of a Partner
Solution
Total Profit = Rs.60,000 + Rs.70,000 + Rs.80,000 + Rs.90,000/4
Average Profit = Rs.3,00,000/4
= Rs.75,000
Capitalised Value = Average profit × 100/12
= Rs.75,000x100/12
= Rs.6,25,000
Goodwill = Capitalised value – Capital employed
= Rs.6,25,000 – Rs.4,60,000
= Rs.1,65,000
Illustration : 9
A firm earns a profit of Rs.26,000 and has invested capital amounting to
Rs.2,20,000. In the same business normal rate of earning profit is 10%.
Calculate the value of goodwill with the help of Capitalisation of super
profit method.
Solution
Actual profit = Rs. 26,000
Normal profit = Rs. 2,20,000 x 10/ 100 = Rs.22,000
Super Profit = Actual Profit – Normal Profit
6. Rs. 26,000 – Rs.22,000
7. Rs. 4,000
Goodwill = Super profit × 100/normal rate of profit
4. Rs. 4,000 × 100/10
5. Rs. 40,000
Admission of a Partner
TREATMENT OF GOODWILL
The new partner acquires his/her share profit from the existing partners.
This will result in the reduction of the share of existing partners.
Therefore, he/she compensates the existing partners for the sacrifices.
He/she compensates them by making payment in cash or in kind. The
payment is equal to his/her share in the goodwill.
If, he/she does not pay for goodwill, then amount equal to his/her share of
goodwill will be deducted from the capital. The amount brought in by him/
her as goodwill or amount of goodwill deducted from his/her capital and
152
divided between the existing partners in their sacrificing ratio. At the time
of admission of a new partner any goodwill appearing in the books, will be
written off in existing ratio among the existing partners.
2. The new partner brings his/her share of goodwill in cash and the
amount of goodwill is retained in the Business:
When, the new partner brings his/her share of goodwill in cash. The
amount brought in by the new partner is transferred to the existing
partner in the sacrificing ratio. If there is any goodwill account in the
balance sheet of existing partner, it will be written off immediately in
existing ratio among the partners. The journal entries are as follows:
* The existing goodwill in the books of the firm will be written off
in existing profit ratio as;
Existing Partners Capital A/c Dr. [individually]
To Goodwill A/c
(Existing goodwill written off)
(ii) For bringing cash for Capital and goodwill
Cash/Bank A/c Dr.
To Premium for Goodwill A/c
To New partner‘s Capital A/c
(Cash brought in for capital and goodwill)
= For amount of goodwill transferred to existing partner capital
account:
Premium for Goodwill A/c Dr.
To Existing Partner‘s Capital/current A/c [individually]
(The amount of goodwill credited to existing partner‘s capitals in
sacrificing ratio)
Admission of a Partner
Illustration : 10
Tanaya and Sumit are partners in a firm sharing profit in the ratio 5 : 3.
They admitted Gauri as a new partner for 1/4th share in the profit. Gauri
brings Rs. 30,000 for her share of goodwill and Rs.1,20,000 for capital.
Make journal entries in the books of the firm after the admission of Gauri.
The new profit sharing ratio will be 2 : 1 : 1.
Solution :
Books of Tanaya, Sumit and Gauri
Date Particulars LF Debit Credit
Amount Amount
(Rs) (Rs)
Working Note:
Calculation of sacrificing ratio [existing ratio – new ratio]
Partners Existing ratio New ratio Sacrifice Sacrificing ratio
Tanaya 5/8 2/4 5/8 – 2/4 = 1/8 Tanaya : Sumit
Sumit 3/8 1/4 3/8 – 1/4 = 1/8 1:1
Solution:
Books of Tanaya, Sumit and Gauri
Date Particulars LF Debit Credit
amount amount
Rs Rs
Goodwill appears in the books of the firm and new partner does not
bring his/her share of goodwill in cash:
If the goodwill account appears in the books of the firm, and the new
partner is not able to bring goodwill in cash. In this case, the amount of
goodwill existing in the books is written off by debiting the capital
account of existing partners in their existing profit sharing ratio.
Illustration 12
Ashmita and Sahil are partners sharing profit in the ratio of 3 : 2. They agree
to admit Charu for 1/5 share in future profit. Charu brings Rs. 2,50,000 as
capital and enable to bring her share of goodwill in cash, the goodwill of
the firm to be valued at Rs. 1,80,000. At the time of admission goodwill
existed in the books of the firm at Rs.80,000. Make necessary journal
entries in the books of the firm.
Solution:
Notes Books of Ashmita, Sahil and Charu
Date Particulars LF Debit Credit
amount amoun
Rs Rs
Working Note :
Ashmita and Sahil sacrifice their profit in favour of Charu in their existing
profit sharing ratio i.e. 3 : 2. Therefore, the sacrificing ratio is 3 : 2.
Value of Goodwill = Rs.1,80,000
Charu‘s share in Profit = 1/5
Charu‘s share of Goodwill = Rs. 1,80,000 × 1/5 = Rs. 36,000
156
Admission of a Partner
Illustration 13
Tanu and Puneet are partners sharing profit in the ratio of 5 : 3. They
admit Tarun into the firm for 1/6 share in profit which he takes 1/ 18 from
Tanu and 2/ 18 from Puneet. Traun brings Rs.9,000 as goodwill out of his
share of Rs. 12,000. No goodwill account appears in the books of the firm.
Make necessary journal entries in the books of the firm.
Solution:
JOURNAL
Date Particulars LF Debit Credit
Amount Amount
Rs Rs
159
Admission of a Partner
Revaluation account
Dr. Cr.
Assets Assets
Liabilities Liabilities
Illustration 14
Karan and Tarun are partners sharing profit and losses in the ratio of 2 : 1.
Their Balance Sheet was as follows:
Balance Sheet of Karan and Tarun as on December 31,2006
Liabilities Amount (Rs.) Assets Amount (Rs.)
Creditors 10,000 Cash in hand 7,000
Bills payable 7,000 Debtors 26,000
Building 20,000
Capitals: Investment 15,000
Karan 40,000 Machinery 13,000
Tarun 30,000 Stock 6,000
70,000
87,000 87,000
160
Admission of a Partner
Revaluation account
Dr. Cr.
Particulars Amount (Rs.) Particulars Amount (Rs.)
Provision for Building 2,000
Doubtful Debts 800 Investment 1,500
Machinery 650 Creditors 500
Profit transferred to
Karan‘s Capital 1,700
Tarun‘s Capital 850
2,550
4,000 4,000
161
Admission of a Partner
Accumulated Profit or Reserve appearing in the Balance Sheet
19.7 ADJUSTMENTS OF RESERVES AND A
19.8 Any accumulated profit or reserve appearing in the balance sheet at
the time of admission of a new partner, is credited in the existing
partner‘s capital account in existing profit sharing ratio. If there is
any loss, the same will be debited to the existing partner in the
existing ratio. For this purpose the following journal entries are
made as:
(i) For distribution of undistributed profit and reserve.
Reserves A/c Dr
Profit & Loss A/c(Profit) Dr.
To Partner‘s Capital A/c [individually]
[Reserves and Profit & Loss (Profit) transferred to
all partners capitals A/c in existing profit sharing ratio]
(ii) For distribution of loss
Partner‘s Capital A/c Dr. [individually]
ToProfit and Loss A/c [Loss]
[Profit & Loss (loss) transferred to all partners
capitals A/c in existing profit sharing ratio]
Illustration 15
Rohit and Soniya are partners sharing profit in the ratio of 4:3. On lst
April 2006 they admit Meena as as new partner for 1/4 shares in profits.
On that date the balance sheet of the firm shows a balance of Rs.70,000 in
general reserve and debit balance of Profit and Loss A/c of Rs.21,000.
make the necessary journal entries.
Solution
Journal
Date Particulars LF Debit Credit
Amount Amount
(Rs.) (Rs.)
General Reserve Dr 70,000
To Rohit‘s Capital A/c 40,000
To Soniya‘s Capital A/c 30,000
[Transfer of general reserve to
the existing partner‘s capital accounts]
162
Admission of a Partner
Illustration : l6
Bhanu and Etika are partners sharing profit and losses in the ratio of 3:2
respectively. Their Balance Sheet as on March 31, 2006 was as under:
Balance Sheet of Bhanu and Etika as on December 31,2006
Particulars Amount Particulars Amount
(Rs.) (Rs.)
On that date, they admit Deepak into partnership for 1/3 share in future
profit on the following terms:
(i) Furniture and stock are to be depreciated by 10%.
(ii) Building is appreciated by Rs.20,000.
(iii) 5% provision is to be created on Debtors for doubtful debts.
(iv) Deepak is to bring in Rs.50,000 as his capital and Rs.30,000 as
goodwill.
Make necessary ledger account and balance sheet of the new firm.
Solution :
Revaluation account
Dr. Cr.
Particulars Amount Particulars Amount
(Rs.) (Rs.)
163
Admission of a Partner
Capital account
Dr. Cr.
Illustration: 17
Ashu and Pankaj are partners sharing profit in the ratio of 3 : 2, their
Balance sheet on March 31, 2007 was as follows:
Balance Sheet of Ashu and Pankaj
as on March 31,2007
Liabilities Amount Assets Amount
(Rs.) (Rs.)
Revaluation account
Dr. Cr.
Profit transferred to
Ashu‘s Capital A/c 4,908
Pankaj‘s Capital A/c 3,272 8,180
16,500 16,500
Capital account
Dr. Cr.
5,09,180 5,09,180
Bank account
Dr Cr
Particulars Amount
Amount Particulars
(Rs} (Rs)
1,92,000 1,92,000
Working Note:
18-15
Ashu 3/5 3/6 30 Ashu:Pankaj
12 − 10 2
Pankaj 2/5 2/6 3:2
30 30
166
Admission of a Partner
Admission of a Partner
Admission of a Partner
If the capital of the new partner is given, the entire capital of the new firm
will be determined on the basis of the new partner‘s capital and his profit
sharing ratio. Therefore the capital of other partners is ascertained by
dividing the total capital as per his profit sharing ratio.
170
Admission of a Partner
Illustration 19
Asha and Boby are partners sharing profit in the ratio of 5:3 with capital of
Rs.80,000 and Rs.70,000 respectively. They admit a new partner Nitin.
The new profit sharing ratio of Asha, Boby and Nitin is 5:3:2 respectively.
Ntin brings Rs.40,000 as capital. The profit on revaluation of assets and
reassessment of liabilities is Rs.6,400. it is agreed that capitals of the
partner‘s should be in the new profit sharing ratio. Calculate new capital
of each partner.
Solution:
Actual Capital of Asha and Boby
Asha Boby
(Rs.) (Rs.)
Balance in Capital A/c 80,000 70,000
Add Profit on Revaluation (5 : 3) 4,000 2,400
Capital after Adjustment 84,000 72,400
On comparing Asha‘s adjusted capital with the new capital we find that
the Asha brings Rs.16,000 [Rs.1,00,000 - Rs.84,000] or the amount may
be debited to her current account.
On comparing the Boby‘s adjusted capital with the new capital, we find
that the Boby is to withdraw Rs. 12,400 [Rs.72,400 - Rs.60,000] or the
amount may be credited to his current account.
Sometimes the capital of the new partner is not given. He/she is required
to bring an amount proportionate to his/her share of profit. In such a case,
171
Admission of a Partner
For example, the capital account of Sumit and Anu show the balance after
all adjustments and revaluation are Rs.90,000 and Rs.60,000 respectively.
They admit Rohit as a new partner for 1/4 share in the profits. Rohit‘s
capital is calculated as follows:
Total share = 1
Rohit‘s share in the profit = 1/4
Remaining share = 1 – 1/4 = 3/4
3/4 share of profit combined capital of Sumit and Anu
= Rs.90,000+Rs.60,000 = Rs.1,50,000
Total Capital of the firm = Rs.1,50,000 × 4/3
= Rs.2,00,000
Rohit‘s capital for 1/4 share of profits = Rs.2,00,000 × 1/4 = Rs.50,000
Rohit brings in Rs.50,000 as his Capital
Illustration : 20
Manoj and Hema are partner sharing profit and losses in the ratio of
7 : 3. On March 31,2006, their Balance Sheet was as follows:
Balance Sheet of Manoj and Hema
as on March 31,2006
Liabilities Amount Assets Amount
(Rs.) (Rs.)
172
Admission of a Partner
7. Tarun brings Rs.40,000 as his capital and Rs. 12,000 for goodwill for
1/6 share of profit of the firm.
Revaluation account
Dr. Cr.
Capital account
Dr. Cr.
Bank account
Dr Cr
Working Note:
174
Admission of a Partner
= Adjustment of Capital:
Tarun brought capital for 1/6 share = Rs.40,000
Total Capital of the firm = Rs. 40,000 × 6/1 = Rs.2,40,000
Manoj‘s Capital = Rs. 2,40,000 × 7/12 = Rs. 1,40,000
Hema‘s Capital = Rs. 2,40,000 × 3/12 = Rs.60,000 Tarun‘s
Capital = Rs. 2,40,000 × 2/12 = Rs.40,00
Sacrificing Ratio
At the time of admission of an incoming partner, existing partners have to
surrender some of their share in favour of the new partner. The ratio in
which they surrender their profits is known as sacrifice ratio.
Admission of a Partner
Meaning of Goodwill:
A established firm develops wide business connections. This helps the firm to earn more
profits as compared to a new firm. The monetary value of such advantage is known as
―Goodwill‖.
TERMINAL QUESTIONS
CHAPTER-3
OBJECTIVES
After studying this lesson, you will be able to:
state the meaning of retirement/death of a partner;
calculate new profit sharing ratio and gaining ratio;
make adjustments relating to goodwill, accumulated reserves and
undistributed profits at the time of retirement/death of a partner;
explain the need for revaluation of assets and reassessment of
liabilities at the time of retirement/death;
prepare the revaluation account relating to retirement/death of a partner;
illustrate the various methods of settling the claim of retiring partner
and the related accounting treatment;
illustrate the accounting treatment of partners capital and its
adjustment; ascertain profit up to the date of death of a partner;
prepare the account of the deceased partner‘s executor.
180
Retirement and Death of a Partner
181
Retirement and Death of a Partner
Various cases of new ratio and gaining ratio are illustrated as follows:
182
Retirement and Death of a Partner
Anuj, Babu and Rani share profit in the ratio of 5 : 4 : 2. Babu retires and
his share is taken by Rani, So Rani‘s share is 2/11 + 4/11 = 6/11, Anuj
share will remain unchanged i.e, 5/11. Thus, the new profit sharing ratio of
Anuj and Rani is 5 : 6.
Illustration 1
Neru, Anu and Ashu are partners sharing profit in the ratio of 4 : 3 : 2.
Ashu retires. Find the new ratio of Neru and Anu if terms for retirement
provide the following :
(i) ratio is not given
(ii) equal distribution of Ashu‘s share
Retirement and Death of a Partner
Solution:
(i) New profit sharing ratio of Neru and Anu is 4 : 3.
(ii) Ashu‘s share = 2/9
Neru gets = 1/2 of 2/9 = 2/9 × 1/2 = 1/9
Neru‘s New share = 4/9 + 1/9 = 5/9 Anu
gets = 1/2 of 2/9 = 2/9 × 1/2 = 1/9 Anu‘s
New Share = 3/9 + 1/9 = 4/9
New profit sharing ratio of Neru and Anu is 5/9 : 4/9 or 5 : 4
184
Retirement and Death of a Partner
Illustration 2
Ashish, Barmon, and Chander are partners sharing profits and losses in the
ratio of 2 : 1 : 2 respectively. Chander retires and Ashish and Barman decide
to share the profits and losses equally in future. Calculate the gaining ratio.
Solution:
Gaining ratio = New Ratio – Existing Ratio
Hence, Ashish gets = 1/2 – 2/5
= 1/10
Barman gets = 1/2 – 1/5
= 3/10
Gaining ratio between Ashish and Barman is 1 : 3
TREATMENT OF GOODWILL
The retiring partner is entitled to his/her share of goodwill at the time of
retirement because the goodwill is the result of the efforts of all partners
including the retiring one in the past. The retiring partner is compensated
for his/her share of goodwill. As per Accounting Standard 10 (AS-10),
goodwill is recorded in the books only when some consideration in money
is paid for it. Therefore, goodwill is recorded in the books only when it is
purchased and the goodwill account cannot be raised on its own.
Illustration 3
Mitu, Udit and Sunny are partners sharing profit equally. Sunny retires
and the goodwill of the firm is valued at Rs 54,000. No goodwill account
appears in the books of the firm. Mitu and Udit share future profit in the
ratio of 3 : 2. Make necessary journal entry for goodwill.
Solution:
Journal
Date Particulars LF Debit Credit
Amount Amount
(Rs.) (Rs.)
186
Retirement and Death of a Partner
in their existing profit sharing ratio and crediting the goodwill account. In
such a case, the following journal entry is made:
Partners‘ Capital A/c Dr (including retiring partner‘s capital A/c)
To Goodwill A/c
Illustration 4
Tanu, Priya and Mayank are partners‘ sharing profit in the ratio of 3 : 2 : l.
Priya retires and on the date of Priya‘s retirement goodwill is valued at
Rs.90,000. Goodwill already appears in the books at a value of Rs.48,000.
New ratio of Tanu and Mayank is 3 : 2. Make the necessary journal entries.
Solution:
Journal
Date Particulars LF Debit Credit
Amount Arnount
(Rs.) (Rs.)
188
Retirement and Death of a Partner
To Revaluation A/c
To Revaluation A/c
Illustration 5
Mudit, Mohit and Sonu are partners sharing profit in the ratio 3 : 2 : 1.
Mudit retires from the partnership. In order to settle his claim, the
following revaluation of assets and liabilities was agreed upon:
Solution
Revaluation account
Dr Cr
190
Retirement and Death of a Partner
But, the following deductions are made from his/her Capital Account on
account of :
The total amount so calculated is the claim of the retiring partner. He/she
is interested in receiving the amount at the earliest. Total payment may be
made immediately after his/her retirement. However, the resources of the
firm may not be adequate to make the payment to the retiring partner in
lumsum. The firm makes payment to retiring partner in instalments.
The following journal entry is made for disposal of-the amount payable to
the retiring partner :
To Cash/Bank A/c
Illustration 6
Om, Jai and Jagdish are partners sharing profit in the ratio of 3 : 2 : l.
Their balance sheet as on December 31st 2006 is as under :
192
Retirement and Death of a Partner
Solution :
It is assumed that Om and Jagdish gaining ratio remains 3 : l.
3. Gaining ratio = 3 : 1.
Om gets = 2/6 × 3/4 = 1/4
Om‘s new share = 3/6 + 1/4 = 3/4
Jagdish gets 2/6 × 1/4 = 1/12
Jagdish‘s new share = 1/6 + 1/12 = 3/12 = 1/4
New profit sharing ratio between Om and Jagdish is 3/4 : 1/4 = 3 : 1.
Retirement and Death of a Partner
Revaluation Account
Dr. Cr.
Profit transferred to
Capital Accounts:
Om 6,000
Jai 4,000
28,000 28,000
Capital account
Dr. Cr.
Om Capital — 15,000 —
194
Retirement and Death of a Partner
Illustration 7
Taking the figures of the pervious illustration, assuming that he is paid 40% of the amount due
immediately and the balance in three equal yearly instalments. The interest payable is 12% p.a.
Solution:
The amount due to Jai = Rs.1,52,000
Amount paid immediately = Rs.1,52,000 × 40/100
= Rs.60,800
Amount of three equal instalments = Rs.1,52,000 – Rs.60,800 × 3
= Rs.91,200 ÷ 3 = Rs.30,400
1st Instalment at the end of 1st Year = Rs.30,400 + Rs. 10,944
= Rs.41,344
Interest @ 12% pa. = Rs.91,200 × 12/100
= Rs.10,944
2nd Instalment at the end of 2nd Year = Rs.30,400 + Rs.7,296
= Rs.37,344
Interest @ 12% pa. = Rs.60,800x1.2/ 100
= Rs.7,296
3rd Instalment at the end of 3rd Year = Rs.30,400 + Rs.3,648
= Rs.34,048
Interest @ 12% pa. = Rs.30,400 × 12/100
= Rs.3,648
196
Retirement and Death of a Partner
III. Find the total amount due to Munish, who is retiring as a partner:
1. Credit balance in Munish capital account Rs.20,000.
2. Munish‘s share of goodwill Rs.7,000
3. General reserve balance shown in Balance sheet Rs.10,000
4. Profit on Revaluation of Assets /liabilities Rs.3,000
5. Interest on drawings Rs.5,00.
6. Munish share in the profit of the firm 1/2
Illustration 8
Roopa, Sunder and Shalu are partners sharing profit in the ratio of 5 : 3 : 2.
Roopa retired, when their capitals were: Rs.46,000, Rs.42,000 and
Rs.38,000 respectively after making all adjustments on retirement. Sunder
and Shalu decided to have a total capital of the firm at Rs.84,000 in the
proportion of 7 : 5. Calculate actual cash to be paid or brought in by each
partner and make necessary journal entries.
Solution:
Total Capital of the New firm = Rs.84,000
Sunder‘s share in the new capital = Rs.84,000 × 7/12
= Rs.49,000
Shalu‘s share in the new capital = Rs.84,000 × 5/12
= Rs.35,000
Retirement and Death of a Partner
On comparing Sunder‘s share in the new capital of the firm with the
amount standing to the credit of his capital, It is observed that he has to
bring Rs.7,000 the deficit amount (Rs.49,000 – 42,000) in Cash.
Similarly, Shalu‘s share in the new capital of the firm is Rs.35,000 while
Rs.38,000 stands credited to her capital account. So she is allowed to
withdraw Rs.3,000, the surplus amount (Rs.38,000 – Rs.35,000) from the
firm so as to make her capital in proportion to her new profit share ratio.
journal
Date Particulars LF Debit Credit
Amount Arnount
(Rs.) (Rs.)
Illustration 9
Sumit, Amit and Neha are partners sharing profit in the ratio of 4 : 3 : 1.
when Amit retired , their adjusted capitals were Rs.76,000: Rs.45,000 and
Rs.34,000 respectively. Sumit and Neha decided to have their total capital
of the firm in the ratio of 3 : 2. The necessary adjustments were to be
made in cash only. Calculate actual cash to be paid off or brought in by
each partner.
198
Retirement and Death of a Partner
Solution:
Total of the adjusted capitals of the remaining partners.
Sumit = Rs. 76,000
Neha = Rs. 34,000
Total = Rs.110,000
Sumit‘s share in the new capital of the firm is Rs.66,000 while Rs.76,000
stands credited to his capital account. So he will withdraw Rs.10,000
(Rs.76,000 – Rs.66,000) from the firm so as to make his capital in
proportion to his new profit sharing ratio.
Similarly, Neha‘s share in the new capital of the firm is Rs.44,000 while
Rs.34,000 stands credited to her capital account, She has to bring Rs,10,000
(Rs,44,000 – 34,000) in Cash to make up the deficit in the capital account.
Illustration 10
The Balance Sheet of Rohit, Nisha and Sunil who are partners in a firm
sharing profits according to their capitals as on 31st March 2006 was as
under:
Liabilities Amount As.sets Amount
(Rs.) (Rs.)
2,00,000 2,00,000
On the date of Balance Sheet, Nisha retired from the firm, and following
adjustments were made:
19
Retirement and Death of a Partner
(iv) Goodwill of the firm is valued at Rs.56,000 and the retiring partner‘s
share is adjusted.
(v) The capital of the new firm is fixed at Rs.1,20,000.
Solution:
Revaluation Account
Dr. Cr.
Particulars Amount Particulars Amount
(Rs.) (Rs.)
Capital account
Dr. Cr.
200
Retirement and Death of a Partner
1,95,500 1,95,500
Working Notes :
(i) (a) Profit sharing ratio is 60,000:40,000:40,000 i.e. = 3:2:2
= 6/35 : 4/35
= 6:4=3:2
Bank account
Dr Cr
66,143 66,143
Rohit Sunil
(Rs.) (Rs.)
Illustration 11
Chauhan Triphati and Gupta are partners in a firm sharing profit and
losses in the ratio of 1/2, 1/6 and 1/3 respectively. The Balance Sheet on
March 31, 2006 was as follows :
Liabilities Amount Assets Amount
(Rs.) (Rs.)
202
Retirement and Death of a Partner
Gupta retires from the business and the partners agree to the following
revaluation:
= Freehold premises and stock are to be appreciated by 20% and 15%.
respectively
= Machinery and furniture are to be depreciated by 10% and 7%
respectively
= Bad debts reserve is to be increased to Rs.3,000.
= On Gupta retirement, the goodwill is valued at Rs.42,000.
= The remaining partners have decided to adjust their capitals in their
new profit sharing ratio after retirement of Gupta. Surplus/deficit, if
any in their capital account will be adjusted through cash.
Prepare necessary ledger accounts and Balance Sheet of reconstituted
firm.
Solution:
Revaluation Account
Dr. Cr.
Particulars Amount Particulars Amount
(Rs.) (Rs.)
Provision for Bad debts 1,000 Freehold Premises 16,000
Machinery 6,000 Stock 6,600
Furniture 1,680
Profit transferred to
Capital Accounts:
Chauhan 6,960
Triphati 2,320
Gupta 4,640 13,920
22,600 22,600
Capital Account
Dr. Cr.
203
Retirement and Death of a Partner
Working Note:
(c) In the absence of agreement, retiring partner‘s capital account is transferred to his loan account.
(d) In the absence of agreement, existing ratio of remaining partners is gaining ratio i.e. 3 : 1
(e) Calculation of Cash brought in (or paid off) by remaining partner.
Chauhan Tirphati
3. Total Capital of Chauhan and Tirphati
(Rs.68,460 + 62,820 = Rs.1,31,280 in the
ratio of 3 : 1) 98,460 32,820
Adjusted existing Capital 68,460 62,820
Excess or Deficit (Excess) 30,000 (Deficit) 30,000
204
Retirement and Death of a Partner
DEATH OF A PARTNER
On the death of a partner, the accounting treatment regarding goodwill,
revaluation of assets and reassessment of liabilities, accumulated reserves
and undistributed profit are similar to that of the retirement of a partner,
When the partner dies the amount payable to him/her is paid to his/her
legal representatives. The representatives are entitled to the followings :
(iv) The amount standing to the credit to the capital account of the
deceased partner
(v) Interest on capital, if provided in the partnership deed upto the date of
death:
(vi) Share of goodwill of the firm;
(vii) Share of undistributed profit or reserves;
(viii) Share of profit on the revaluation of assets and liabilities;
(ix) Share of profit upto the date of death;
(x) Share of Joint Life Policy.
The following amounts are debited to the account of the deceased
partner‘s legal representatives:
(4) Drawings
(5) Interest on drawings
(6) Share of loss on the revaluation of assets and liabilities;
(7) Share of loss that have occurred till the date of his/her death.
The above adjustments are made in the capital account of the deceased
partner and then the balance in the capital account is transferred to an
account opened in the name of his/her executor.
The payment of the amount of the deceased partner depends on the
agreement. In the absence of an agreement, the legal representative of a
deceased partner is entitled to interest @ 6% p.a. on the amount due from
the date of death till the date of final payment.
205
Retirement and Death of a Partner
6. Time Basis
7. Turnover or Sales Basis
The total profit of previous year is Rs. 2,25,000 and a partner dies three
months after the close of previous year, the profit of three months is Rs.
31,250 i.e. 1,25,000 × 3/12, if the deceased partner took 2/10 share of
profit, his/her share of profit till the date of death is Rs. 6,250 i.e. Rs.
31,250 × 2/10
Illustration 12
Arun, Tarun and Neha are partners sharing profits in the ratio of 3 : 2 : 1
Neha dies on 31st May 2006. Sales for the year 2005-2006 amounted to
Rs.4,00,000.and the profit on sales is Rs.60,000. Accounts are closed on
31 March every year. Sales from lst April 2006 to 31st May 2006 is
Rs.1,00,000.
Calculate the deceased partner‘s share in the profit upto the date of death.
Solution :
Profit from 1st April 2006 to 31st May 2006 on the basis of sales:
If sales are Rs.4,00,000, profit is Rs.60,000
If the sales are Rs.1,00,000 profit is : 60,000/4,00,000 × 1,00,000
= Rs.15,000
Neha‘s share = 15,000 × 1/6 = Rs.2,500
206
Retirement and Death of a Partner
Illustration 13
Nutan, Sumit and Shiba are partners in a firm sharing profits in the ratio
5 : 3 : 2. On 31st December 2006 their Balance Sheet was as under:
Liabilities Amount Assets Amount
(Rs.) (Rs.)
Creditors 52,000 Building 60,000
Reserve Fund 15,000 Plant 50,000
Capitals : Stock 27,000
Nutan 60,000 Debtors 25,000
Sumit 45,000 Cash 10,000
Shiba 30,000 1,35,000 Bank 30,000
2,02,000 2,02,000
Nutan died on 1 July 2007. It was agreed between her executor and the
remaining partners that:
7. Goodwill to be valued at 2½ years purchase of the average profits of
the last Four years, which were: 2003 Rs. 25,000; 2004 Rs.20,000;
2005 Rs.40,000 and 2006 Rs.35,000.
8. Building is valued at Rs.70,000; Plant at Rs.46,000 and Stock at
Rs.32,000.
9. Profit for the year 2006 be taken as having accrued at the same rate as
that of the previous year.
10. Interest on capital is provided at 9% p.a.
11. On 1 July 2007 her drawings account showed a balance of Rs.20,000.
12. Rs.25,950 are to be paid immediately to her executor and the balance
is transferred to her Executors Loan Account.
Prepare Nutan‘s Capital Account and Nutan‘s Executor‘s Account as on
1st July 2007.
Solution
(i) Valuation of Goodwill:
Total Profit = Rs.25,000 + Rs.20,000 + Rs.40,000 + Rs.35,000
= Rs. 1,20,000
207
Retirement and Death of a Partner
208
Retirement and Death of a Partner Nutan’s Executor’s accounts
Dr. Cr.
Particulars Amount Particulars Amount
(Rs.) (Rs.)
1,01,950 1,01,950
CHAPTER-4
DISSOLUTION OF A PARTNERSHIP FIRM
Dissolution of a Partnership
The relation of partnership among different partners is changed without changing the
partnership firm. Thus, in case of dissolution of partnership, the economic basis of
relationship of partners is reconstituted without affecting the entity of the firm which
continues to remain in business as ever before. A partnership is dissolved by change of
mutual contract in the following cases :
7. Change in profit sharing ratio among partners;
8. Admission of a new partner;
9. Retirement of a partner, where at least two persons remain as partners;
10. Death of a partner (Section 42);
11. Adjudication of a partner as an insolvent;
12. Completion of a venture if partnership is formed for that;
13. Expiry of the period of partnership if partnership is for a pre-determined period;
Dissolution of a Firm
1.2 Where all the partners or all except one partner, become insolvent or insane
rendering them incompetent to sign a contract;
1.3 Where the business becomes illegal;
Where all the partners except one decide to retire from the firm;
Where all the partners or all except one partner dies;
Where the partnership deed includes any provision regarding the happening of the
following :
Expiry of the period for which the partnership was formed;
Completion of the specific venture or project for which the firm was formed.
6. Dissolution by notice : In case of partnership at will, the firm may be dissolved if any of
the partners gives a notice in writing to the other partners signifying his intention of
seeking dissolution of the firm.
7. Dissolution by court : A court, may order a partnership firm to be dissolved (under
Section 44), in case of a suit by a partner in the following situations :
A partner becomes insane;
A partner becomes permanently incapable of performing his duties as a partner;
Settlement of Accounts
In case of dissolution of firm, the firm ceases to conduct business and has to settle its
accounts. For this purpose, it disposes off all its assets for making payment to all the
claimants against it.
Section 48 of the Partnership Act provides the following rules for the settlement of
accounts between the partners :
l Loss to be paid first out of profits, next out of capital and lastly by the partners
individually in the proportion in which they were entitled to share the profits. In other
words, losses are to be shared by the partners in their profit sharing ratio;
l Assets of the firm are first to be applied in paying off the debts of the firm to the third
parties, next in paying off to each partner proportionately what is due to him from the
firm for advances as distinguished from
capital; and the residue to be divided among the partners in the proportion in which they
were entitled to share profits. In simple words, following is the order of payment from
the proceeds of the sale of the firm :
l Expenses of realization;
l Payment to outside creditors. It is to be noted that secured creditors are to be paid
off first out of the proceeds of secured assets before anything is paid to unsecured
creditors;
l Loans and advances made by partners‘ spouse;
l Loans and advances made by a partner apart form his capital; and
l Final claims of the partners on their capital account.
Journal Entries
* For transferring the assets
Transfer to the debit of realization account at their gross book values of all accounts of
assets excluding cash, bank and the fictitious assets.
Realization a/c Dr.
Assets a/c(individually)
It is to be noted that debit balance such as accumulated losses deferred expenses are not
transferred to the realization account. These are transferred to the partners‘ capital
account in their profit sharing ratio by recording the following entry :
14. When the profit (loss) on realization is transferred to partners’ capital account in their
respective profit sharing ratio :
(a) In case of profit on realization
Realization a/c Dr.
Partners‘ Capitals a/c(individually)
Solution
Books of Ram and Shyam
Realization Account
Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
(Rs.) (Rs.)
1
Sundry assets 75,000 Bank 1,00,000
Bank: Creditors 12,500
Creditors 12,500 Bills payble 7,500
Bills payable 7,500
Capital Accounts:
Ram 12,500
Shyam 12,500 25,000
Total 1,20,000 Total 1,20,000
Notes to the Solution
Capital + Liabilities = Assets
Capital + Creditors + Bills payable = Assets
1
Rs. 25,000 + 30,000 + 12,500 + 7,500 = Rs. 75,000
Dec. 31 Realization a/c 13,600 10,200 10,200 Jan. 1 Balance b/f 1,16,510 87,770 65,720
Bank 102,910 77,570 55,520
Realization Account
Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
2002 (Rs.) 2002 (Rs.)
Dec31 Assets 2,94,000 Dec31 Bank (Assets) 2,60,000
Bank (Creditors) 24,000 Creditors 24,000
Loss transferred to:
Kumar‘s Capital 13,600
Yash‘s Capital 10,200
Zakir‘s Capital 10,200
Bank Account
Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
2002 (Rs.) 2002 (Rs.)
Dec31 Realization 2,60,000 Dec 31 Realization 24,000
(assets) (Creditors)
Capital :
Kumar 1,02,910
Yash 77,570
Zakir 55,520
Total 2,60,000 Total 2,60,000
218
Realization Account
Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
2003 (Rs.) 2003 (Rs.)
Dec31 Stock 3,000 Dec31 Sundry Creditors 19,000
Debtors 10,000 Provision for 500
Furniture and Fixture 2,000 doubtful debts
Plant and Machinery 14,000 Loan by Anju‘s brother 5,000
Investments 5,000 Bank (assets realized) 26,500
Anju‘s Capital 5,000 Anju‘s capital 4,000
(Anju brother‘s loan) (Investment)
Bank (Expenses) 300 Capitals (loss on
Bank (Creditors) 18,525 realization)
Anju 1,695
Manju 1,130 2,825
Total 57,825 Total 57,825
Bank Account
Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
2003 (Rs.) 2003 (Rs.)
Dec31 Balance b/f 5,750 Dec 31 Realization :
Realization a/c 26,500 Creditors 18,525
(assets realized) Expenses 300
Manju‘s Loan 7,500
Manju‘s Capital 2,370
Anju‘s Capital 3,555
Total 32,250 Total 32,250
Prepare the Balance Sheet of the firm as on June 1, 2001 and necessary ledger accounts
to close the books of the firm.
Solution
Books of X and Y
Balance Sheet as at June 1, 2001
Realization Account
Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
2001 (Rs.) 2001 (Rs.)
June Sundry Assets 76,200 June Creditors 50,000
1 Cash (expenses) 2,000 1 Cash (Assets
Cash (Creditors) 50,000 realised) 59,200
Capitals:
Loss on
realisation :
X 11,400
Y 7,600 19,000
Total 1,28,200 Total 1,28,200
Cash Account
Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
2001 (Rs.) 2001 (Rs.)
June Balance b/f 5,400 June Realization 2,000
1 Realization 59,200 1 (expenses)
(Assets) Realization 50,000
Y‘s capital 4,000 (Creditors)
X Loan‘s 8,000
X‘s capital 8,600
Total 68,600 Total 68,600
X’s Loan Account
Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
2001 (Rs.) 2001 (Rs.)
June 1 Cash 8,000 June 1 Balance b/f 8,000
Capital Accounts
Dr. Cr.
Date Particulars J.F. X Y Date Particulars L.F. X Y
2001 Rs. Rs. 2001 Rs. Rs.
Loan to Y - 6,400 Balance b/d 20,000 10,000
Realization Cash - 4,000
(Loss) 11,400 7,600
Cash 8,600 -
Total 20,000 14,000 Total 20,000 14,000
Dinesh agreed to purchase investments at Rs. 25,000. Ramesh took over stock at Rs.
10,500 and Debtors at Rs. 11,800. Plant and Equipment was sold for Rs. 45,000. Unrecorded
assets realized cash of Rs. 3,000. Actual realization
expenses amounted to Rs. 1,800. Prepare necessary ledger accounts on the dissolution of
firm.
Solution
Books of Dinesh, Ramesh and Satish
Realization Account
Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
2002 (Rs.) 2002 (Rs.)
Mar. Plant and Equip. 60,000 Mar. Creditors 27,500
31 Stock 11,000 31 Provision for 900
Investment 30,000 doubtful debts
Debtors 14,200 Investment 9,000
Dinesh‘s Capital 2,000 fluctuation fund
(expenses) Dinesh‘s Capital 25,000
Cash (Payment to 27,500 (Investments)
Creditors) Ramesh‘s Capital 10,500
(Stock)
Ramesh‘s Capital 11,800
(Debtors)
Cash (Plant and 45,000
Equipment)
Cash (Unrecorded 3,000
assets)
Capitals :
(Loss on realization)
Dinesh 6,000
Ramesh 3,600
Satish 2,400 12,000
Total 1,44,700 Total 1,44,700
Cash Account
Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
2002 (Rs.) 2002 (Rs.)
Balance b/f 11,200 Realization (Creditors) 27,500
Equipment 45,000 Dinesh‘s Capital 46,000
Realization 3,000 Ramesh‘s Capital 4,100
(Unrecorded asset)
Satish‘s Capital 18,400
Total 77,600 Total 77,600
Partner’s Capital
Dr. Cr.
Date Particulars J.F. Dinesh Ramesh Satish Date Particulars J.F. Dinesh Ramesh Satish
Rs. Rs. Rs. Rs. Rs. Rs.
Balance b/f - - 16,000 Balance c/d 75,000 30,000 -
Realization 6,000 3,600 2,400 Cash - - 18,400
(Loss) Realization 2,000
Realization 25,000 - - (Expenses)
(Investments)
Realization - 10,500 -
(Stock)
Realization - 11,800 -
(Debtors)
Cash 46,000 4,100 -
Solution
Books of A, B and C
Realization Account
Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
2003 (Rs.) 2003 (Rs.)
Mar31 Land and Buildings 50,000 Mar31 Accounts payable 20,000
Office equipments 5,000 Bank Loan 7,000
Stock 40,000 Joint Life Policy 18,000
Accounts Receivable 30,000 Reserve
Joint Life Policy 18,000 Bank :
Bank 20,000 Joint Life 11,500
(Accounts Policy
Payable) Land 2,00,000
Less: and
Office Equip. 7,000 Building
Debentures 8,000 Stock 30,000
Discount 200 Accounts 20,000 2,61,500
15,200 4,800 Receivable
Total c/f 1,47,800 Total c/f 306,500
Total b/f 1,47,800 Total b/f 306,500
Bank 7,000 B‘s Capital 6,500
(Bank Joint Life Policy
Overdraft)
Less: Stock 5,000 2,000
Bank (Realization 1,800
Expenses)
Capitals-Gain on
Realization
A Rs. 53,800
B Rs. 53,800
C Rs. 53,800 1,61,400
Bank Account
Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
2003 (Rs.) 2003 (Rs.)
Mar Balance b/f 6,000 Mar Realization 4,800
31 Realization : 31 (Accounts
Joint Life Policy 11,500 Payable)
Land and Buildings 2,00,000 Realization 2,000
Stock 30,000 (Bank
Accounts 20,000 Overdraft)
Receivables Realization 1,800
Realization (Expenses)
Accounts B‘s Loan 20,000
Receivable Capital :
A 80,800
B 81,300
C 76,800 2,38,900
Total 2,67,500 Total 2,67,500
Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
2003 (Rs.) 2003 (Rs.)
Mar Bank 76,800 Mar Balance b/f 53,800
31 31 Realization (Gain) 23,000
Total 76,800 Total 76,800
They decided to take up liabilities : R : Sundry Creditors and K : Bills Payable. Assets
realized – Debtors Rs. 4,000; Furniture – Rs. 10,000; Stock Rs. 4,000; Lorry Rs.15,000 and
Land and Buildings Rs. 35,000. Expenses on realization amounted to Rs. 500.
Record necessary journal entries for the above transactions and prepare realization
account, cash account and capital accounts of partners.
Solution
Books of R and K
Journal
Cash Account
Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
2000 (Rs.) 2000 (Rs.)
Dec31 Balance b/f 5,000 Dec31 Realisation – 500
Realization - 68,000 Expenses
Assets Capitals –
R 31,250
K 41,250 72,500
Total 73,000 Total 73,000
There was a typewriter written off which realised Rs. 500. They had a joint life policy of
Rs. 20,000 which was surrendered for Rs. 5,000. Goodwill was sold for Rs. 5,000. Other
assets realized – stock Rs. 6,700; debtors 50%; plant and machinery 10% less than its book
value. Creditors were paid Rs. 16,000. But an outstanding bill of Rs. 400 for repairs was to be
paid off. Expenses on realization amounted to Rs. 620.
Give journal entries to record the above transactions and also prepare necessary
ledger accounts.
Solution
Books of Lata, Geeta and Neeta
Journal
Date Particulars L.F. Debit Credit
Amount Amount
2001 (Rs.) (Rs.)
Mar 31 Realization a/c Dr. 70,000
Stock 10,000
Sundry Debtors 20,000
Plant and Machinery 40,000
( All assets transferred to realization account)
Sundry Creditors a/c Dr. 16,600
Bills Payable a/c Dr. 3,400
Mortgage loan a/c Dr. 15,000
Realization a/c 35,000
( All external liabilities transferred
realization account)
Realisation a/c Dr. 16,000
Bank a/c 16,000
( Payment made to creditors)
Realization a/c Dr. 400
Bank a/c 400
(Outstanding bill of repairs paid off)
Bank a/c Dr. 5,500
Realization a/c 5,500
(Unrecorded assets – a typewriter and
J.L.P Surrender value realized Rs. 500 and
Rs. 5,000 respectively)
Bank a/c Dr. 52,700
Realization a/c 52,700
(Assets realized at the time of dissolution)
Realization a/c Dr. 15,400
Bank a/c 15,400
( Bills payable and mortgage paid off)
Realization a/c Dr. 620
Bank a/c 620
(Realization expenses paid off)
Lata‘s capital a/c Dr. 5,400
Geeta‘s capital a/c Dr. 3,240
Neeta‘s capital a/c Dr. 1,080
Realization a/c 9,720
(Transfer of loss to partner‘s capital account)
General Reserve a/c Dr. 4,500
Lata‘s capital a/c 2,500
Geeta‘s capital a/c 1,500
Neeta‘s Capital a/c 500
(General reserve distributed among partners)
Lata‘s Capital a/c Dr. 19,100
Geeta‘s Capital a/c Dr. 16,260
Neeta‘s Capital a/c Dr. 9,420
Bank a/c 44,780
(Final payment to partners after dissolution)
Bills Payable Account
Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
2001 (Rs.) 2001 (Rs.)
Mar31 Realization 3,400 Mar31 Balance b/f 3,400
Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
2001 (Rs.) 2001 (Rs.)
Mar31 Realisation 15,000 Mar31 Balance b/f 15,000
Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
2001 (Rs.) 2001 (Rs.)
Mar31 Capitals : Mar31 Balance b/f 4,500
Lata 2,500
Geeta 1,500
Neeta 500
Total 4,500 Total 4,500
Stock Account
Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
2001 (Rs.) 2001 (Rs.)
Mar31 Balance b/f 10,000 Mar31 Realization 10,000
Debtors Account
Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
2001 (Rs.) 2001 (Rs.)
Mar31 Balance b/f 25,000 Mar31 Realization 25,000
Realization Account
Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
2001 (Rs.) 2001 (Rs.)
Mar31 Stock 10,000 Mar31 Provision for 5,000
Debtors 25,000 bad debts
Plant and Machine 40,000 Sundry creditors 16,600
Bank : Bills payable 3,400
Sundry Mortgage loan 15,000
creditors 16,000 Bank – assets
Bills realized :
payable 3,400 Stock 6,700
Mortgage 15,000 34,400 Debtors 12,500
loan Plant and 36,000
Bank : (repairs 400 Machinery 55,200
outstanding) Bank – unrecorded
Realization 620 assets realised –
expenses Goodwill 2,500
Typewriter 500
Joint
life policy 2,500 5,500
Partner Capitals –
Loss :
Lata : 5,400
Geeta : 3,240
Neeta : 1,080 9,720
Total 1,10,420 Total 1,10,420
Capital Account
Dr. Cr.
Date Particulars J.F. Lata Geeta Neeta Date Particulars J.F. Lata Geeta Neeta
2001 Rs. Rs. Rs. 2001 Rs. Rs. Rs.
Mar31 Realization 5,400 3,240 1,080 Mar31Balance b/f 22,000 18,000 10,000
(Loss) General
Bank 19,100 16,260 9,420 Reserve 2,500 1,500 500
Total 24,500 19,500 10,500 Total 24,500 19,50010,500
Bank Account
Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
2001 (Rs.) 2001 (Rs.)
Mar31 Balance b/f 19,500 Mar31 Realization 34,400
Realization (liabilities)
(Assets Realization 400
Realized) 55,200 (unrecorded
Realization 5,500 liabilities)
(Unrecorded Realization 620
assets) (Expenses)
Capitals :
Lata 19,100
Geeta 16,260
Neeta 9,420 44,780
Total 80,200 Total 80,200
The firm was dissolved on June 30, 2002 and following was the position :
4. Raman agreed to pay off his wife‘s loan.
5. Debtors realized Rs. 12,000.
6. Ramesh took away all the investments at Rs. 12,000.
7. Other assets realized as follows :
Plant and Fittings 20,000
Building 50,000
Goodwill 6,000
4. Sundry creditors and Bills payable were settled at 5% discount.
5. Raman accepted stock at Rs 8,000 and Ramesh took over bills receivable at 20%
discount.
6. Realization expenses amounted to Rs. 2,000.
Record journal entries and also prepare various ledger accounts.
Solution
Books of Raman and Ramesh
Journal
Date Particulars L.F. Debit Credit
2002 Amount Amount
(Rs.) (Rs.)
June 30 Realization a/c Dr. 1,11,000
Investments 15,300
Stock 8,700
Bills receivable 10,000
Debtors 17,000
Plant and fittings 25,000
Buildings 25,000
Goodwill 10,000
(Sundry asset accounts closed by
transferring to Realization accounts)
‗‘ Provision for bad and doubtful debts a/c Dr. 2,000
Sundry creditors Dr. 20,000
Bills payable Dr. 20,000
Bank overdraft Dr. 10,000
Mrs. Raman‘s loan Dr. 20,000
Employees provident Dr. 1,200
Investment fluctuation fund Dr. 2,800
Realization a/c 76,000
(Sundry external liabilities transferred to
Realization account)
‗‘ Realization a/c Dr. 38,000
Bank a/c 38,000
(Payment to creditors and bills payable)
Realization a/c Dr. 11,200
Bank a/c 11,200
(Payment of bank overdraft and
employees‘ provident fund)
Realization a/c Dr. 2,000
Bank a/c 2,000
(Payment of realization expenses)
Realization a/c Dr. 20,000
Raman‘s Capital a/c 20,000
(Mrs. Raman‘s loan paid off by Raman)
Bank a/c Dr. 88,000
Realization a/c 88,000
(Assets realized)
Ramesh‘s Capital a/c Dr. 20,000
Raman‘s Capital a/c Dr. 8,000
Realization a/c 28,000
(Bills receivable taken over by Ramesh
and investments and stock taken over
by Raman)
Realization a/c Dr. 9,800
Ramesh‘s Capital a/c 4,900
Raman‘s Capital a/c 4,900
(Profit on realization)
Ramesh‘s loan a/c Dr. 10,000
Ramesh‘s Capital a/c 10,000
(Ramesh‘s loan transferred to his capital)
General Reserve a/c Dr. 2,000
Ramesh‘s Capital a/c 1,000
Raman‘s Capital a/c 1,000
(General reserve distributed)
Raman‘s Capital a/c Dr. 2,000
Ramesh‘s Capital a/c Dr. 2,000
Proft and Loss a/c 4,000
(Transfer of loss to partners‘ capital
accounts)
Raman‘s Capital a/c Dr. 35,900
Ramesh‘s Capital a/c Dr. 13,900
Bank a/c 49,800
(Final payment to partners)
Realization Account
Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
2002 (Rs.) 2002 (Rs.)
June Investments 15,300 June Provision for bad 2,000
30 Stock 8,700 30 and Doubtful
Bills receivable 10,000 debts
Debtors 17,000 Sundry creditors 20,000
Plant and fittings 25,000 Bills payable 20,000
Buildings 25,000 Bank overdraft 10,000
Goodwill 10,000 Mrs. Raman‘s loan 20,000
Bank – Employees‘ P.F. 1,200
Creditors 19,000 38,000 Investment
Bills Payable19,000 Fluctuation 2,800
Bank – Bank 10,000 Fund
Overdraft Bank –
Employee‘s P.F. 1,200 Debtors 12,000
Bank (Realization 2,000 Plant and 20,000
Expenses) Fittings
Raman‘s Capital : 20,000 Building 50,000
(Mrs. Roman‘s loan) Goodwill 6,000 88,000
Capital Account: Ramesh‘s capital–
Raman 4,900 Bills Receivable 8,000
Ramesh 4,900 9,800 Raman‘s Capital–
Stock 8,000
Ramesh‘s Capital-
Investment 12,000
Total 1,92,000 Total 1,92,000
Bank Account
Dr. Cr.
Date Particulars J. Amount Date Particulars J. Amount
2002 F. (Rs.) 2002 F. (Rs.)
June Balance b/f 13,000 June Realization :
30 Realization : 30 Creditors 19,000
Debtors 12,000 Bills Payable 19,000 38,000
Plant and 20,000 Realization
Fittings : Expense 2,000
Buildings 50,000 Realization –
Goodwill 6,000 88,000 Employees‘ 1,200
Provident fund
Realization –
Bank Overdraft 10,000
Raman‘s Capital 35,900
Ramesh‘s Capital 13,900
Total 1,01,000 Total 1,01,000
Capital Accounts
Dr. Cr.
Date Particulars J.F. Raman Ramesh Date Particulars L.F. Raman Ramesh
2002 Rs. Rs. 2002 Rs. Rs.
(A) For
considerat
ion other
than cash
(B) For cash
(A) Issue of shares
for
UNIT 2 consideration
other than cash
CHAPTER -1
(iii) Sometimes
ISSUE OF SHARES shares are
issued to the
promotors of the
company in lieu
CTIVES of the services
provided by
them during the
PROCEDURE OF ISSUE OF SHARES incorporation of
Face value of a share is the par value of the share. It is also known as the the
Nominal value or denomination of a share. To issue shares a company
follows a definite procedure which is controlled and regulated by the
Companies Act and Securities Exchange Board of India (SEBI). There are
different ways of issue of shares which may be:
Issue of Shares
The company may receive the share money in one instalment along with
application. In this case the following journal entries are made in the
books of the company
1. On Receipt of Application Money
Bank A/c Dr
To Share Application A/c
(Application money received on ….shares of Rs…each)
2. On transferring the Application Money
Share Application A/c Dr
To Share Capital A/c
(Application money transferred to share capital A/c)
256
Issue of Shares
In the above case the transactions are recorded in journal as given below :
257
Issue of Shares
On the receipt of share allotment money the following journal entry is made:
Bank A/c Dr
Calls on shares
After the receipt of application and allotment money the money that
remains unpaid can be called up by the company as and when required.
Thus a call is a demand made by the company asking the shareholders to
remit the called up amount on shares allotted to them.
The company may demand the remaining money in more than two
instalments. The amount called after the allotment is known as call money.
There may be one or more calls, depending on the funds requirements of
the company. When only one call is made Call Money is Due :
Share First and Final Call A/c Dr
To Share Capital A/c.
(Call money due on …. share @ Rs … per share).
Solution :
Fashion Fabrics Ltd.
Journal entries
S.No. Particulars L.F Dr Cr
Amount Amount
Rs Rs
259
Issue of Shares
Relevant Accounts
Bank A/c
Dr Cr
300000 300000
260
Issue of Shares
500000 500000
I. Full Subscription
261
Issue of Shares
Option I
The company may reject the applications for shares in excess of the shares
offered for issue and a letter of rejection is sent to such applicants. In this
case the application money received from these applicants is refunded to
them in full. The journal entry made is as follows:
Share Application A/c Dr
To Bank A/c
(Application money on … shares refunded to the applicants)
262
Issue of Shares
Option II
Illustration 2
The Full Health Care Ltd has offered to public for subscription 20000
shares of Rs 100 each payable as Rs 30 per share on application, Rs 30 per
share on allotment and the balance on call. Applications were received for
30000 shares. Applications for 5000 shares were rejected all together and
applicaiton money was returned. Remaining applicants were alloted the
offered shares. Their excess application money was adjusted towards some
due on allotment. Calls were made and duly received. Make journal
entries in the books of the company.
263
Issue of Shares
Solution
Full Health Care Ltd.
Journal entries
S.No. Particulars L.F Dr Cr
Amount Amount
Rs Rs
264
Issue of Shares
265
Issue of Shares
Further, the company may demand the total amount of premium in more
than one instalment. In case the company doesn‘t specify the particular
call with which Securities Premium is to be paid it is supposed to be called
at the time of Allotment.
Or/and
Share Call A/c Dr
Applications were received for 100000 shares and allotment was made to
all.
Make journal entries.
266
Issue of Shares
Solution:
267
Issue of Shares
268
Issue of Shares
Illustraion 4
Sri Krishna Agro Chemical Ltd. was registered with a capital of Rs
5000000 divided into 50000 shares of Rs 100 each. It issued 10000 shares
at discount of Rs 10 per share, payable as :
Solution
Sri Krishna Agro Chemicals Ltd
Journal entries
270
Issue of Shares
per share including the uncalled amount of Rs 2 per share along with the
call money, it means he has paid Rs 2 per share in advance, which will be
credited to calls in Advance A/c. The company is required to pay interest
on this amount @ 6% till the date of its appropriation.
Accounting teatment
Following journal entry is made for calls-in-advance.
Bank A/c Dr
To Calls-in-Advance A/c
(Calls in advance received on…….shares @ Rs …….per share)
Appropriation of calls-in-Advance A/c say in the final call
Journal entry will be :
Calls-in-Advance A/c Dr
To Bank A/c
(Interest paid on the amount of Call-in-Advance)
Illustration 5
India Software Ltd. offered 50000 shares of Rs 10 each to the public
payable as:
Rs 2 on application
Rs 3 on allotment
Rs 2 on First call and the balance as and when required.
All the shares were applied for and duly allotted but Mukesh a shareholder
holding 200 shares paid the entire balance on allotment.
Make necessary journal entries.
271
Issue of Shares
Solution
India Software Ltd.
Journal entries
Date Particulars L.F Dr Cr
Amount Amount
Rs Rs
272
Issue of Shares
Calls in arrears
When the company sends notice to the shareholders to pay allotment and
/or call money, it has to be paid by them within the specified time period.
If it is not paid by any one or more of the shareholders, the unpaid amount
becomes arrears due from them. Such arrears are transferred to an account
termed as Calls-in-Arrears A/c. The company is authorised to charge
interest on calls-in-Arrears @ 5% p.a. for the intervening peroid. (The
period between date of non-receipt of the due amount and the date of
actual receipt of the due amount).
Accounting Treatment
The following jounal entry is made to record Calls-in-Arrears:
Calls-in-Arrears A/c Dr
To Share Allotment/Call A/c
(Share allotment/ Call money not received on …. shares)
When the unpaid balance is received later on the following journal entry is
made:
Bank A/c Dr
To Calls in Arrears A/c
(Amount due on allotment/ call remaining unpaid now received on……
shares.)
The company may charge interest on the amount of calls in arrears at a
given rate from the date of amount due till it is paid journal entry will be
Bank A/c Dr
To Interest on calls in arrears A/c
Illustration 6
X Ltd. made its first call of Rs 20 per share on 1st July 2006. Zahir holding
200 shares failed to pay the call money. He could pay the money only on 31st
December, 2006. Company charged interest @12% per annum.
Make necessary journal entry for the interest charged by the company.
Solution
12 6
Amount of interest due 4000 240
100 12
273
Issue of Shares
Journal entry
S.No.Particulars L.F Dr Cr
Amount Amount
Rs Rs
Illustration 7
All the money were received except the first call money on 400 shares;
which was received later on with final call.
Make necessary journal entries.
Solution :
Journal entries
274
Issue of Shares
Illustration 8
275
Issue of Shares
Solution
Progressive Industries Ltd
Journal entries
276
Issue of Shares
CHAPTER--2
ISSUE OF DEBENTURES
share capital is the main source of finance of a joint stock company. Such
capital is raised by issuing shares. Those who hold the shares of the
company are called the shareholders and are owners of the company.
Company may need additional amount of money for a long period. It
cannot issue shares every time. It can raise loan from the public. The
amount of loan can be divided into units of small denominations and the
company can sell them to the public. Each unit is called a ‗debenture‘ and
holder of such units is called Debenture holder. The amount so raised is
loan for the company. In this lesson we shall learn about issue of
debentures and its accounting treatment.
OBJECTIVES
DEBENTURE AND ITS TYPES
A Debenture is a unit of loan amount. When a company intends to raise
the loan amount from the public it issues debentures. A person holding
debenture or debentures is called a debenture holder. A debenture is a
document issued under the seal of the company. It is an acknowledgment
of the loan received by the company equal to the nominal value of the
debenture. It bears the date of redemption and rate and mode of payment
of interest. A debenture holder is the creditor of the company.
Types of debentures
Debenture can be classified as under :
314
Issue of Debentures
ISSUE OF DEBENTURES
By issuing debentures means issue of a certificate by the company under
its seal which is an acknowledgment of debt taken by the company.
315
Issue of Debentures
Illustration 1
Shining India Ltd. issued 5000 8% Debentures of Rs 100 each payable as
follows
Rs 20 on Application
Rs 30 on Allotment
Rs. 50 on First and Final call
316
Issue of Debentures
All the debentures were applied for and allotted. All the calls were duly
received. Make necessary journal entries in the books of the company.
Solution :
Shining India Ltd.
Dr Cr
S.No. Particulars LF Amount Amount
Rs Rs
Over subscription
Company if receives applications for number of debentures that exceed the
number of debentures offered for subscription, it is called over
subscription. There can be following treatment of the excess application
money received :
317
Issue of Debentures
Illustration 2
ABC Ltd issued 5000 10% Debentures of Rs 100 each payable as Rs 40
on application and Rs 60 on allotment. Applications were received for
6000 debentures. Applicants for 500 debentures were sent letter of regret
and money was returned. Allotment was made proportionately to the
remaining applicants. Over subscription was applied to the amount due on
allotment. All money was duly received.
Make journal entries for the above transactions in the books of the company.
318
Issue of Debentures
Illustration 3
A company has issued 5000 10% Debentures of Rs 100 each at a premium
of 20% payable as Rs 60 on application
Rs 60 on allotment (including premium)
All the debentures were subscribed for and money was duly received.
Make journal entries.
Solution
Journal entries
Dr Cr
Date Particulars LF Amount Amount
Rs Rs
Journal entry for issue of debentures at discount (at the time of allotment)
To Debentures A/c
Illustration 4
A company has issued 2000 9% debentures of Rs 100 each at a discount of
10% payable as
Rs 40 on application
Rs 50 on allotment
Solution
Dr Cr
Date Particulars LF Amount Amount
Rs Rs
Accounting Treatment :
1. Purchase of Assets
Sundry Assets A/c Dr
(Individually)
To Vendors A/c
(Purchase of assets)
(v) Allotment of debentures
At par
Vendors' A/c Dr
To Debentures A/c
(issue of debentures at par to vendors)
(ii) At discount
Vendors' A/c Dr
Debentures Discount A/c Dr
To Debentures A/c
(Issue of debentures to vendors at a discount of
Rs ... per debenture)
322
(iii) At premium
Vendors‘ A/c Dr
To Debentures A/c
Illustration 5
M.B. Electronics Ltd. purchased machinery for Rs 198000 and issued 9%
debentures of Rs 100 each to the vendors. Make journal entries if the
debentures were issued
(a) at par
(b) at a premium of Rs 10
(c) at a discount of Rs 10
Solution :
Dr Cr
S.No. Particulars Amount Amount
Rs Rs
(Machine purchased)
323
Issue of Debentures
Working notes
Amount due = Rs 198000
Rs 198000
No. of denentures to be issue = = 1800
Rs 110
Working notes
Amount due to vendor = Rs 198000
324
Issue of Debentures
To Debentures A/c
To Securities Premium A/c
(Issue of ... debentures of Rs .... at a premium of Rs ....)
(iv) Issue at par, redeemable at premium
Bank A/c Dr
Loss on Issue of Debentures A/c Dr
To Debentures A/c
To Premium on Redemption of Debenture A/c
(Issue of ... debentures of Rs ... a redeemable at a premium of Rs ...)
(v) Issued at discount and redeemable at premium
Bank A/c Dr
Discount on Issue of Debentures A/c Dr
Loss on Issue of Debentures A/c Dr
To Debentures A/c
To Premium on Redemption of Debenture A/c
(issue of ... debentures of Rs ... at a discount of
Rs ... redeemable at a premium of Rs ....)
Illustration 6
Make journal entries if 200 debentures of Rs 500 each have been issued as
:
= Issued at Rs 500, redeemable at Rs 500
= Issue at Rs 450; redeemable at Rs 500
= Issued at Rs 550; redeemable at Rs 500
= issued at Rs 500; redeemable at Rs 550
= Issued at Rs 450; redeemable at Rs 550
Solution : Journal
Dr Cr
Date Particulars LF Amount Amount
Rs Rs
325
(ii) Bank A/c Dr 90000
Discount on Issue of Debentures A/c Dr 10000
To Debentures A/c 100000
(Issue of 200 debentures of Rs 50
each at Rs 450)
327
Issue of Debentures
Bank
Loan
Illustration 7
Sky Rocketing Company Ltd issued 6000 10% debentures of Rs 100 each
to the bank as collateral security against a loan of Rs 500000 taken from
the bank. Record the issue of debentures in the books of the company and
show the issued Debentures in the Balance Sheet of the Company.
Solution
(i) No journal entry is required
328
Issue of Debentures
(ii) Journal
Dr Cr
Date Particulars LF Amount Amount
Rs Rs
Miscellaneous expenditure
Debenture suspense A/c 600000
TotalRs100000amount of Discount
Number5= of years
Illustration 8
A company issues 1000 debentures of Rs 1000 each at a discount of 10%
for a period of 5 years i.e. to be redeemed after 5 years. Calculate the
amount of discount to be written off each year and prepare on issue of
debentures discount account.
Solution
Amount of discount =
b1000 Rs1000 g 10
= Rs 100000
100
Accounting Treatment
Journal entry to write off debenture discount each year
330
Issue of Debentures
Dr. Cr.
Profit and Loss A/c ...Dr 20000
To Discount on Issue of Debentures A/c 20000
(Amount of Discount on Issue of Debentures written off)
Discount on Issue of Debentures Account till the amount of discount is written off, is shown as under :
Jan 1 Debenture A/c 100000 Dec 31 Profit & Loss A/c 20000
100000 100000
Jan 1 Balance b/d 80000 Dec. 31 Profit & Loss A/c 20000
80000 80000
Jan 1 Balance b/d 60000 Dec 31 Profit & Loss A/c 20000
60000 60000
Jan 1 Balance b/d 40000 Dec 31 Profit & Loss A/c 20000
40000 40000
Jan 1 Balance b/d 20000 Dec 31 Profit & Loss A/c 20000
20000 20000
331
Issue of Debentures
Illustration 9
A company has issued 2000 9% debentures of Rs 1000 each at a discount
of 10%. If the debentures are to be redeemed in five equal annual
instalments, calculate the amount of Discount on Issue of Debentures to be
written off each year and prepare Discount on Issue of Debentures A/c.
Solution
Calculation of Amount of Discount on Issue of Debentures Account
Total amount of Discount on Issue of Debentures A/c
= = Rs 200000
10
1st 3000000 5 = 100000
4
2nd 2400000 4 300000 = 80000
15
3
3rd 1800000 3 300000 = 60000
15
2
4th 1200000 2 300000 = 40000
15
1
5th 600000 1 300000 = 20000
15
15
Journal entry
Dr. Cr.
1st year Profit and Loss A/c ...Dr 100000
To Debenture Discount A/c 100000
(Discount on issue of debenture
written off)
332
ACCOUNTANCY
Issue of Debentures
Similarly entry will be made every year with the respective amount of
discount.
Discount on issue of Debentures account till the amount of discount is
written off will be shown as under.
Jan 1 Debentures A/c 300000 Dec 31 Profit & Loss A/c 100000
300000 300000
Jan 1 Balance b/d 200000 Dec. 31 Profit & Loss A/c 80000
200000 200000
Jan 1 Balance b/d 120000 Dec 31 Profit & Loss A/c 60000
120000 120000
Jan 1 Balance b/d 60000 Dec 31 Profit & Loss A/c 40000
60000 60000
Jan 1 Balance b/d 20000 Dec 31 Profit & Loss A/c 20000
20000 20000
33
Issue of Debentures
Debentures A/c at the time of issue of debentures. This amount will also
be written off in the same manner as is done in case of writing off
Discount on Issue of Debentures. This is illustrated as under :
Illustration 10
A company issues 1000 10% Debentures of Rs 1000 each on 1st Jan, 2006
payable at a premium of 10% after 5 years. Make journal entries and open
Rs100000
Loss on Issue of Debentures A/c for the year ending 31st December 2006.
5
Solution
1000 Rs1000 10
Amount of Loss on issue of Debentures = 100 = Rs 100000
2006 2006
Jan 1 10% Debentures A/c 100000 Dec 31 By Profit & Loss A/c 20000
Dec 31 By Balance cld 80000
100000 100000
2007
Jan 1 Balance b/d 80000
334
Journal Entry
2006 Profit and Loss A/c Dr 20000
Dec 31 To Loss on Issue of Debentures A/c 20000
(Loss on Issue of Debentures transferred
to Profit and Loss A/c)
Illustration 11
Refer Illustration No. 10. A company decides to redeem its debentures in
five equal instalments beginning from the end of first year. Make journal
entry for the writing off and show Loss on Issue of Debentures A/c for
first year.
Solution
Journal Entry
2006 Profit and Loss A/c Dr 33333
Dec 31 To Loss on Issue of Debentures A/c 33333
(Amount of Loss on Issue of Debentures
written off for 2006)
335
Issue of Debentures
2006 2006
Jan 1 10% Debentures A/c 100000 Dec 31 Profit & Loss A/c 33333
100000 100000
2007
Interest on Debentures
If you have seen an advertisement in newspaper regarding issue of
debentures by a company, you must have noticed that ‗Debenture‘ is
always prefixed by a certain percentage say 9% Debentures or 12%
Debentures. Have you ever thought what meaning does this prefix carry. It
is the rate of interest per annum that will be paid to the debenture holders.
Companies generally pay interest on its debentures after every six months.
Journal entries that are made in the books of the company are as follows;
(i) Payment of Interest on Debentures
Debenture Interest A/c Dr
To Bank A/c
(Interest on ....% Debentures paid for six months ending ...@ ....% pa)
(ii) Transfer of Debenture Interest to Profit and Loss A/c
Profit and Loss A/c Dr
To Debenture Interest A/c
(Debenture Interest transferred to Profit and Loss A/c)
Illustration 12
X Ltd has issued 5000 9% Debentures of Rs 1000 each, on 1st April, 2006
Interest is payable after every six months. Make journal entries for the
interest paid for the first six months after the date of issue.
336
Solution.
Calculation of Interest payable at six monthly intervals :
Amount of Debentures 9 6
100 12
Amount of Debentures = 5000 × Rs 1000 = Rs 5000000
Interest on Debentures for six month ending 30th September, 2006
= Rs 5000000 9 6 = Rs 225000
100 12
Journal Entry
2006 Dr. Cr.
30th Sept. Debentures Interest A/c Dr 225000
To Bank A/c 225000
(Interest on 5000 9% Debentures @ Rs 1000
per debenture paid for 6 months ending
30th Sept 2006)
2007
31st Mar Profit and Loss A/c Dr 225000
To Debentures Interest A/c 225000
(Debenture Interest transferred
to profit and Loss A/c)
CHAPTER- 3
Introduction :
As per the companies act it is a stationary obligation to prepare final accounts
of companies along with Profit and Loss A/C with in a stipulated time.
Preparation of Profit & Loss Account:-
The Principle for preparation of Profit & Loss a/c is same as it is a firm or
company, modified by the special provisions laid down in the companies act. It consists
of Trading Account to show Gross Profit, Profit & Loss a/c to determined net profit, and
Profit & Loss appropriation a/c to give a view about the manner in which Profits are
disposed.
No form for Profit & Loss a/c has been prescribed in the Companies act as it has
been prescribed for Balance Sheet, but requirement as to Profit and Loss a/c are given
in Part II of Schedule VI.
. Certain items Appearing in Profit & Loss A/c:-
The following are the some of the important items appearing in Profit &
Loss A/c and their treatment if it is given in Trail Balance and Adjustment.
(v) Dividends & Interest received:- It relates to income of the company
and appears credit side of Profit & Loss a/c.
19.9 Provision for Taxation:- It should be credited to Profit & Loss a/c. If it is
given in adjustment, it is debited to Profit & Loss A/c and second time on the
Liabilities side of Balance sheet.
19.10 Income tax Paid:- It is treated as advance tax is paid so it appears on Asset
side of “Loan & Advances” head.
19.11 Preliminary Expenses:- It appears Asset side of Balance Sheet. If
adjustment is there, the (adjustment appears) written off amount debited Profit &
Loss A/c, and the same deducted from the item in Balance Sheet.
19.12 Discount & Expenses on issue of shares / Debentures:- It is appears on
the Assets side of Balance Sheet. If adjustment is there on these items, the
written off amount appears on debit side of Profit & Loss A/c and the same
deducted from the respective items, in Asset side of Balance sheet.
19.13 Interest on Debentures:- If it is given in Trail balance it is debited to
Profit & Loss A/c. If it is given in adjustment it appears both side of Profit &
Loss A/c Debit and Liabilities side of Balance sheet.
Dr Cr
Amount Amount
Particulars Particulars
(Rs) (Rs)
To Opening Stock Xxxxx By Sales xxxxx
To Purchases xxxxx (-) Returns xxx Xxxxx
(-) Returns xxx Xxxxx By Closing Stock Xxxxx
To Carriage inwards Xxxxx
To Productive wages Xxxxx
To Freight Xxxxx
To Gross Profit Xxxxx
(Transferred to Profit & Loss
A/c) Xxxxxx xxxxxx
Illustration: -
Illustration 2:-
PremRaj Ltd had a nominal Capital of Rs.6, 00,000 dividend in to shares of Rs.10/-each.
The Balances as per Ledger of the Company as at Dec.31, 2005 was as follows: -
Particulars Rs Particulars Rs
Prepare the Final Accounts and the Balance sheet relating to 2005 from
the figures given above after taking in to account the following:-
(ii) Depreciate Plant & Machinery by 10 % and Fixtures by 5%;
(iii) Write off1/5 of Preliminary Expenses;
(iv) Rs.10, 000 of wages were utilized in adding rooms to the Premises; no entry
has as yet been made for it
(v) Leave Bad Debts Provision at 5% of the Sundry Debtors;
(vi) Provide a final dividend @5%
(vii) Transfer Rs.10,000 to General Reserve; and
(viii) Make a Provision for Income Tax to the extent of Rs.25, 000.
st
(ix) The stock on 31 December 2005 was Rs.1, 01,000.
Trading and Profit & loss A/c of the Prem Raj Co., Ltd., for the year
ended 31-12-2005.
Dr Cr
Figures Figures
Figures for Figures for
relating relating
the Current the Current
st st
to 31 Expenses to 31 Incomes
Year Year
Dec Dec
Rs. Rs.
2005 2005
To Stock 75,000 By Sales 4,15,00
To Purchases 1,85,000 By Stock 1,01,000
To Wages 84,800
Less Charged to
Premises 10,000 74,800
To Freight 13,100
To Gross Profit C/d 1,68,100
5,16,000 5,16,000
To General Expenses
To salaries 16,900 By Gross Profit
To Debenture Interest* 14,500 b/d 1,68,100
By Interest due
Paid 9,000 on Govt.
Add out Securities
Standing 9,000 (4% on
_______ 18,000 Rs.60,0000) 2,400
To Directors’ Fees 5,740
To Preliminary
Expenses 1,000
To Depreciation- Plant
& Machinery 36,000
Fixtures 360
______ 36,360
To Provision for Bed
Debts-
Required 4,350
Add Bad
Debts 2,110
______
6,460
Less Existing
Provision 3,500
_______ 2,960
To Provision for
Income Tax 25,000
To Net Profit c/d 50,040
1,70,500 1,70,500
Balance Sheet of the Quick Ltd. as at December 31, 2005
(not in prescribed form)
Amount Amount
Liabilities Assets
Rs. Rs.
Share Capital: Fixed Assets:
Authorised – 60,000 Good will
Shares of Rs. 10 each Premises 25,000
Issued 6,00,000 Plant and 3,10,000
Subscribed & paid – up Machinery 3,60,000
Capital : Less Depre-
46,000 Shares Citations 36,000
of Rs.10 each _________
fully called 4,60,000 Fixtures 7,200 3,24,000
Less Calls in Less Depre-
Arrear 7,500 4,52,500 Citations 360
Reserves and Surplus: Current Assets: 6,840
General Reserve 35,000 Investments
P.& L., A/c 24,415 Interest Due 60,000
Stock 2,400
Secured Loans : Sundry Debtors 87,000 1,01,000
6% Debentures 3,00,000 Less Provision
Interest Outstanding 9,000 For Bad Debts 4,350
Current Liabilities: Cash in Hand
Bills Payable 38,000 Cash in Bank 82,650
Sundry Creditors 50,000 Preliminary Expenses 750
Provision for Income Tax 25,000 39,900
Proposed Dividend 22,625 4,000
9,56,540 9,56,540
Alternatively, the Trading and Profit and Loss Account and the Profit and
Loss Appropriation Account may be merged together and presented as
follows: -
Trading and Profit & loss A/c of the Prem Raj Co., Ltd., for the year
ended 31-12-2005.
Dr Cr
Figures Figures
Figures for Figures for
relating relating
st
the Current st
the Current
to 31 Expenses to 31 Incomes
Year Year
Dec Dec
Rs. Rs.
2005 2005
To Stock 75,000 By Sale 4,15,000
To Purchases 1,85,000 By Stock 1,01,000
To Wages 74,800 By Interest on
To Freight 13,100 Government.
To General Expenses 16,900 Securities 2,400
To Salaries 14,500
To Debenture interest 18,000
To Director’s Fees 5,740
To Preliminary
Expenses 1,000
To Depreciation – Plant
& Machinery 36000
Fixtures 360 36,360
To Provision for Bad
Debts:
Required 4350
Add Bad Debts 2110
6460
Less Existing
Provision 3500 2,960
To Provision for Income
– Tax 25,000
To General Reserve 10,000
To Interim Dividend 7,500
To Proposed Dividend 22,625
To Balance of Profit 9,915
5,18,400 5,18,400
Balance Sheet:-
It must be drawn up in such a form and should have such contents as will
give affairs. For this purpose it should be drawn up as far as possible in
conformity with the form set out in Part –I of schedule VI of the companies
Act. Section 210 of the companies Act requires that at every annual
general meeting of the shareholders, the Board of Directors of the
Company shall lay before the company a Balance Sheet at the end of
each trading period.
Immovable
Capital Reserve Properties.
Capital Redemption
Reserve Current Assets,
Share Premium Loans and
Account Advances
Other Reserve
A) Current Assets
Less: Debit Balance in Interest accrued
Profit and Loss on Investments
Account, if any. Stores &
Surplus, i.e., balance in Spare parts
Profit and Loss Loose Tools
Account after providing Stock – in – Trade
for proposed Work-in-Progress
allocations, namely,
Dividend, Bonus, etc. Sundry Debtors
Proposed additions to
Reserves, Sinking a) Debts
Funds out standing for a
period exceeding
Secured Loans six months
Debentures b) Other debts
Loans & Advances Less: Provision
from Banks
Loans & Advances Cash balance in
from Subsidiaries hand Bank Balances:
Other Loans & a)With Scheduled
Advances Banks
B) With others
Unsecured Loans
Fixed Deposits B) Loans&
Loans & Advances Advances
from Subsidiaries
Advances and Loans
Short term loans and to Subsidiaries
advances: Advances and Loans
a) from Banks to partnership firms in
b) from others which the company
or any of its
Current Liabilities subsidiaries is a
and Provisions partner
a) Current Liabilities
Acceptances Bills of Exchange
Sundry Creditors
Advance payments Advances
and unexpired recoverable in cash
discounts or in kind or for value
Unclaimed to be received, e.g.,
dividends, other Rates, Taxes,
Liabilities (if any) Insurance, etc.
Interest Accrued but Balance with
not due on loans Customs, Port Trust
etc. (Where payable
B) Provisions on demand)
Provision of
Taxation Proposed Miscellaneous
Dividends For Expenditure
contingencies (To the extent not
For Provident Fund write off or adjusted)
Scheme Preliminary
For Insurance, Expenses Expenses
Pension and similar including commission
staff other provisions or brokerage on
Contingent Liabilities underwriting or
(A foot note to the subscription of
balance sheet is shares or debentures
added to show Interest paid out of
separately and these capital during
are not included in construction (also
the total) stating the rate of
interest)
Claims against the
company not Development
acknowledged as expenditure not
debts uncalled liability adjusted
on shares partly paid Other items
Arrears of fixed (specifying nature)
cumulative dividends
Estimated amount of Profit and Loss
contracts remaining to Account
be executed on capital (Show here the debit
account and not balance of profit and
provided for other Loss Accountant
moneys for which the carried forward, after
company is deduction of the
contingently liable. uncommitted
reserves, if any.)
Summing up:
Glossary :
Illustration:
The following was the Trail balance of Sri. Nagi Reddy Textiles of Kurnool
as on 31-12-05.
Trail Balance
Particulars Debit Rs. Credit Rs.
Call in Arrears 5,000
Land & Building 5,00,000
Machinery 4,00,000
Purchases & Sales 4,00,000 9,00,000
Preliminary Expenses 1,00,000
Wages 10,000
Director fees 2,000
Bad debts 3,000
Profit & Loss A/c 1,00,000
Sundry Debtors & Creditors 1,00,000 50,000
General Reserve 50,000
1-1-05 Stock 50,000
Cash in hand 10,000
Cash at Bank 50,000
Salaries 20,000
Share Capital 4,00,000
Bills Payable 1,50,000
16,50,000 16,50,000
Adjustments:-
(v) Depreciate Machinery @10 %
(vi) Write off ¼ Preliminary Expenses.
(vii) Transfer Rs.5000 to General Reserve
(viii) Closing stock 1,00,000.
11,95,000 11,95,000
UNIT -- 3
Consignment—What is it?
Quite often it happens that a manufacturer or a wholesale dealer who does not find ready market in
his own place becomes desirous of seeking a good market elsewhere. Even when there is a good market
for his goods in his own place, he is often anxious to make his goods popular elsewhere. For this purpose
the merchant employs a leading dealer at the place where he wants to push his goods to act as his agent
and sell goods on his behalf and risk as agent on commission. Goods so sent to a person are known
as Consignment. The person who sends such goods is known as the Consignor and the person to whom
the goods are sent is known as the consignee. Such goods sent to the Consignee remain the property of
the Consignor. The Consignee to whom the goods are sent does not buy them, but, merely undertakes
to sell them on behalf of the consignor. He is not responsible for any loss or damage to the goods, if such
loss or damage is caused for no fault of the Consignee.
Such a shipment of the goods by the Consignor cannot be treated as ordinary sale and such transactions
require special treatment in the books of accounts.
Proforma Invoice :
When goods are despatched, the consignor makes out a ‗Pro-Forma Invoice‘ giving indication of the
price of the goods at which the consignee ought to sell the goods. Pro-Forma Invoice is a statement which
is similar to that of an invoice, but it is called proforma because it does not make the consignee responsible
to pay the amount named therein.
The consignor generally mentions a higher price than his cost so that consignee does not know the
profit of the consignor.
Account Sales :
Periodically, the consignee will send statements of sales and expenses incurred, commission earned
and the consequent amount due to the consignor. Such a statement is made in a form known as ‗‗Account
Sales‘‘. An Account Sales may be defined as a ‗‗statement prepared and sent by the consignee to the
consignor at periodical travels, say three months or six moths detailing therein the goods payable and the
net amount due from the consignee after deducting the advances, if any, paid already.‘‘ The following is
a specimen :—
Accounts Sales
Account Sales of 65 cases of Fancy goods ex. S.S. Vikram sold by Messers A. Dutt & Co., Colombo,
Ceylon on account and risk of Messers Thankers & Co., Delhi, India.
Accounting treatment
Entries in the Books of the Consignor
1. On Despatch of Goods : Rs. Rs.
Consignment Outward A/c Dr. ?
or
Consignments to such and such
Person or Place A/c Dr.
To Goods sent on Consignment A/c ?
(With either the cost of the goods consigned
or with the amount of the higher price charged
Consignment.)
Here Sales Account is not credited because sending goods on consignment does not mean actual
sales. These goods are returnable by the Consignee if it cannot effect sale. Hence a new account ‗‗Goods
sent on Consignment‘‘ is opened.
2. On Paying Expenses (by the Consignor) :
Consignment Outward A/c Dr.
To Case (or bank) A/c
(For amount spent on carriage, freight, insurance, etc., at the time of despatching the goods.)
3. (On Receipt of an Advance from the Consignee :
Case (or Bank or Bills Receivable) a/c Dr.
To Consignee‘s Personal A/c
(An advance of rs....received against consignment from the Consignee).
4. If the Advance is in the form of a Bill Receivable and the same is discounted by the
Consignor :
Cash (or bank) A/c Dr.
*Discount A/c Dr.
To B/R A/c
(No further entry is made in the books of the Consignor till an Account Sales is received from
the Consignee.)
5. On Receipt of Account Sales :
(i) Consignee‘s Personal A/c Dr.
To Consignment Outward A/c
(With the gross proceeds of the Account sales.)
(ii) Consignment Outward A/c Dr.
To Consignee‘s Personal A/c
(With the expenses incurred by the Consignee plus commission payable to the Consignee as per
Account Sales.)
6. On Receipt of Remittance from the Consignee :
Cash (or Bank or Bills Receivable) A/c Dr.
To Consignee‘s Personal A/c
7. For unsold Stock (if any) with the Consignee
Stock on Consignment A/c Dr.
To Consignment outward A/c
8. Entry for Profit & Loss :
If all the goods dent have been sold, and the cosignment account to such and such person or place
was debited with the cost price of the goods, the Consignment Outward Account will now reflect profit
or loss. In case it results in a profit, the entry will be :
Consignment Outward A/c Dr.
To Profit and Loss A/c
(The profit earned on Consignment to such and such place transferred to Profit & Loss A/c.)
In case the consignment deal results in loss, the entry will be reverse, i.e.,
Profit & Loss A/c Dr.
To Consignment Outward A/c
(The loss of Consignment A/c transferred to Profit & Loss A/c.)
*Note:— The discount charge is financial expense and discount acount therefore is transferred to
profit and loss account and not to consignment account.
Lastly, the ‗‗Goods sent on consignment A/c‘‘ will be transferred to the Purchase or Trading A/c. The
journal entry will be ;
Goods sent on Consignment A/c Dr.
To Trading A/c
*Note:— This entry is the everse of the ntry paswsed at the time when goods ae sent on Consignment
to the Consignee.
till he incurs expenditure on them and sells them at his place. But he must keep a detailed note of the
receipt of these goods, otherwise they are mixed with his own goods.
The Entries are
1. On Receipt of Goods :
No Entry. Only a detailed note is maintained.
2. Expenses of the Consignee :
Consignor‘s Personal A/c Dr.
To Cash (or Bank) A/c
(Custom-duty, dock charges, unloading charges
at the time of receiving the goods and later on,
advertisement, godown rent, etc., paid)
3. When (and if) an Advance is given :
Consignor‘s Personal A/c Dr.
To Cash (r Bank or Bills Payable) A/c
4. When goods are sold :
(i) For Cash .......... (i) Cash (or bank) A/c..... Dr.
Consignor‘s Personal A/c
(ii) On Credit ....... (ii) Debtors A/c ........ Dr.
To Consignor‘s Personal A/c
(iii) If Purchased by the.... (iii) Purchase A/c..... Dr.
Consignee himself To Consignor‘s Personal A/c
5. For Commission Earned :
Consignor‘s Personal A/c....... Dr.
To Commission A/c.
6. On Settling the account of the Consignor :
Consignor‘s Personal A/c ........ Dr.
To Cash (or Bank or B/P) A/c
\
Solution : (Entries made on Cost Price Basis)
Books of D. Dogra (Consignor)
Journal
Dr. Cr.
Rs. Rs.
(1) Consignment to madras A/c 7,500
To Goods sent on Consignment A/c 7,500
(500 articles sent to M. Monga, Agent, Cost being Rs.15 per article).
130
(9) Consignment to Madras A/c Dr. 3030
To Profit & Loss Account 3030
(Profit on consignment transferred to Profit & Loss Account)
M. Monga
Rs. Rs.
To Consignment to madras A/c 8,400 By Bank A/c 3,000
By Cosignment to
Madras A/c 570
By Bank A/c 4,830
8,400 8,400
Bank Account
Dr. Cr.
Rs. Rs.
To M. Monga 3,000 By Consignment to Madras A/c 500
Rs. Rs.
To Trading A/c Transfer 7,500 By Consignment to Madras A/c 7,500
Profit & Loss A/c
D. Dogra 150
To Bank Account 150
(Expenses incurred on the Consignment on behalf of D. Dogra
Storage 50
Insurance 100
150
D.Dogra 420
To Commission Account 420
(5% Commission on Sales made on half of D. Dogra; 3% Commission
+ 2% Del Credere Com.)
D. Dogra 4,830
To Bank Account 4,830
(Amount due to D. Dogra remitted).
Ledger
D.Dogra
Dr. Cr.
Rs. Rs.
To Bank A/c (Advance) 3,000 By Bank A/c (Sale proceeds) 8,400
To Bank A/c (Expenses) 150
To Commission A/c 420
To Bank A/c (amount remitted) 4,830
8,400 8,400
Bank Account
Rs. Rs.
To D. Dogra 8,400 By D. Dogra 3,000
By D. Dogra 150
By. D. Dogra 4,830
Commission Account
By D. Dogra 420
Entries made on Invoice Price basis. If it is desired to make entries on the basis of invoice price,
the following will be the changes as compared to the solution given above :
Instead of entry No. 1 there will be the following entry ;
Rs. Rs.
1. Consignment to Madras A/c
To Goods sent on consignment A/c 10,000
(500, articles consigned at an invoice price of Rs.20 each (cost Rs.15) 10,000
Rs. Rs.
7. Stock on Consignment A/c 3,600
To Consignment to Madras A/c 3,600
Value of Stock at Madras Rs.
150 goods articles @ Rs.20 3,000
proportionate expenses 150
50 damaged articles 450
3,600
In the Balance Sheet the stock on consignment will be shown at Rs.2,850 i.e., Rs.3,000 minus the
reserve of Rs.750.
Abnormal Loss. In the illustration, it has been mentioned that 50 articles have been damaged and
have been valued at Rs.450 Had there been no damage, the value (at cost) would have been Rs.800.
Cost @ Rs.15 Rs.750
Proportionate Expenses Rs.50
Rs.800
Thus, there is a loss of Rs.350, i.e., Rs.800 less Rs.450 In the absence of such loss, the profit on
consignment would have been Rs.2,680 + Rs.350, i.e., Rs.3,030 This is a better measure of the profit on
consignment. To ensure that the Consignment Account shows true consignment profit, such a loss would
be recorded by means of the following entry ;
Profit and Loss Account Dr. 350
To Consignment Account 350
This entry will no doubt increase the profit shown y the consignment account ut will not inflate profits
because the amount concerned is being debited in the Profit and Loss Account.
Loss of Stock
In case the goods sent on consignment are lost or damaged in transit or otherwise, the loss is that
of the consignor and not of the consignee. Accordingly the consignor will have to make the entries for
such loss. There may be two types of losses viz. Normal loss and Abnormal loss.
Normal Loss:—Normal loss is natural, unavoidable and inherent in the nature of goods or commodities
or articles sent on consignment. This type of loss is a part of the cost of the consignment, so the consignor
does not make separate entry for such a loss. However, the normal loss has to be taken into consideration
while valuaing the unsold consignment stock in the hand of the consigne.
The accounting treatment of normal loss is to charge the total cost of the goods to the remaining goods
after the normal loss. In other words, the value of the unsold stock is calculated in proportion to the total
cost of the goods consigned.
Total Cost of the goods sent
Value of unsold stock = unsold quantity
Total quantity sent – quantity of normal loss
Suppose 10,000 tones of coal are despatched. The cost of 1 tonne of coal is Rs.80 and the freight
incurred is Rs.36,000. To the Consignor the total cost comes to rs.8,35,000. In the nature of coal some
shortage is unavoidable. Suppose the Consignee receives only 9,500 tonnes. It is legitimate to say that the
cost is Rs.8,36,000 for 9,500 tonnes.
In that case the Consignor can properly say that the cost of 1 tonne of coal is Rs.8,36,000
9,500
or Rs.88. If 2,000 tonnes of coal are left unsold with the Consignee, the value of stock will e 2,000 ×
88 i.e. Rs.1,76,000.
Illustration 2 :
Mr. Datta Consigned to hatt 10,000 kgs of flour, costing Rs.33,000. He spent Rs.550 as forwarding
charges. 12% of the Consignment was lost in weighning and handling. Mr. Bhatta sold 8,200 kgs. of flour
at Rs.6 per kg, his selling expenses being Rs.3,300 and Commission 5% on sales. Prepare the Consignment
Account.
Solution :
Ledger of Mrs. Datta
Consignment Account
Rs. Rs.
To Goods sent on Consignment Account 3,3000 By Bhatt (Sales) (8,200×6) 49,200
To Bank (forwarding Charges) 880 By Stock on
To Consignee‘s A/c Consignment* 2,310
Rs.
Selling Expenses 3,300
Commission
@5% on Rs.49,200 2,460 5,760
To Profit & Loss Account 11,870
51,510 51,510
Working Notes :
(i) Calculation of Closing Stock :
Total Quantity of Flour Consigned 10,000 kgs.
Less : Normal Loss 12% 1,200 kgs.
Sales 8,200 kgs.
9,400 kgs.
33,880
= 600 = 2,310
8,800
Abnormal loss:- It arises due to abnormal factors or circumstances such as fire, theft Pilferage,
sabotage etc. In case of abnormal loss the price is not inflated at all. This loss is calculated y adding
proportionate direct expenses incurred by the consignor and the consignee as the case may be to the
original cost of the goods.
The accounting Entry is :
Debit Abnormal Loss A/c
Credit Consignment A/c
In case the stock is insured, the amount of claim admitted by the insurance company should be
reduced from the Abnormal loss and only the net loss amount should be debited to Abnormal loss or P&L
A/c.
The entry will be :
Debit : Insurance Company A/c (with the amount of claim admitted)
Debit : Profit and Loss (Abnormal Loss A/c) (with the amount of loss)
Credit: Consignment A/c (with the amount of Total Abnormal loss)
The procedure for calculating the Abnormal loss and the valuation of the remaining stock is
summarised as under :
(i) Calculation of Abnormal loss :
Add Cost of goods Lost
Proportionate Expenses of the goods lost
Less any amount of claim
(if any received from the insurance company)
(ii) Valuation of Closing Stock
Closin g Stock
(1) Cost of the goods – × Cost of total goods consigned
Total goods consigned
Add. Proportionate Non-recurring (direct) expenses incurred before the loss –
closin g stock
× Expenses incurred before the loss
Total goods consigned
Add: Proportionate expenses (Direct only)
quantity unsoid
incurred after the loss : × Expenses incurred after the loss.
(Total quantity sent goods Lost)
Illustration 3 :
Philips Radio of Calcutta despatched 1,000 transistors at Rs.700 each to Mohan Bros. of Delhi, the
consignors paid freight Rs.7,500, cartage Rs.500 and insurance Rs.2,500 Mohan Bros. received only 900
sets and incurred he following expenses.
Rs.
Octroi and other Expenses 1,00,000
Cartage 5,000
Sales expenses 6,000
The consignee sold 600 sets only. You are required to calculate the value of closing stock.
Solution :
Calculation of the value of unsold stock
Sets received 900-sets sold 600 = unsold stock 300
Rs.
(i) Cost of unsold stock 300 × 700 = 2,10,000
(ii) Add: Proportionate Expenses Paid by consignor
3
(7500 + 500 + 2500) × 10,500 = 3,150
10
(iii) Add: Proportionate Expense Octroi 1,00,000
paid by consignee Cartage 5,000
1, 05, 000
300 = 35,000
900
2,48,150
Illustration 4 :
S of Bombay consigned 10,000 kg. of oil to D of Calcutta. The cost of oil was Rs.2 per kg. S paid
Rs.5,000 as freight and insurance. During transit 250 kg were accidentally destroyed for which the
insurers paid directly to the consignors Rs.450 if full settlement of the claim.
D reported that 7,500 kg were sold @ Rs.3 per kg. The expenses being on godown rent Rs. 200 on
advertisement Rs.1,000 and on salesman salary Rs.2,000 D. is entitled to a commission of 3% plus 1.5%
del credere. D reported a loss of 100 kg. due to leakage. D. settled the accounts by bank draft. Prepare
the accounts is the books of S.
Consignment to Calcutta A/c
Dr. Cr.
Rs. Rs.
To Goods on Consignment A/c 20,000 By Bank (Ins. Co.) 450
To Bank—Freight & Insurance 5,000 By P & L A/c (abnormal loss 175
To D—Expenses 3,200 By D—(Sale proceeds) 22,500
To D—Commission
By Consignment Stock A/c 5,431
Rs. By P & L A/c—Loss 657
Ordinary 3% 675
Del Credere 1.5% 338 1,013
29,213 29,213
D
Dr. Dr.
Rs. Rs.
To Consignment to Calcutta A/c By Consignment to Calcutta A/c
—(sale proceeds) 22,500 (Exp.) 3,200
By Consignment to Calcutta A/c
(commission) 1,013
By Bank 18,287
22,500 22,500
Working Notes :
(A) Cost of Goods destroyed Rs.
Cost of 10,000 kg.@Rs.2 20,000
Freight 5,000
Total cost of 10,000 kg. 25,000
(B) Value of Stock still unsold Kg.
Quantity received by D = 9,750 (excluding accidental loss)
100
Less Normal leakage =
9,650
Cost of 9,650 kg = Rs.25,000-625 = Rs.24,375
100
Cost of 2,150 kg. = 2 1 5 0 = Rs.5,431
125
Illustration 5 (Valuation of Stock):
A company sends 300 bales of cotton to its consignee at profit 20% on sale. The cost of each
bale to company is Rs.600 per bale. The following are the expenses incurred in connection with this
consignment :
(a) Rs.900 paid by the consignor for despatching goods.
(b) Rs.2,000 paid by the consignee by way of freight, duty and landing charges.
(c) Rs.1,000 paid by the consignee by way of godown rent, salaries of salesman.
Required :
The Valuation of stock at the end (at invoice price) if the consignee sells away 2/3rd of the consignment.
Solution :
Total bales sent 300
Less bales sold 2/3rd or 300 200
Bales unsold 100
Cost price of 100 ales at Rs.550 per bale 60,000
Add Profit at 20% on sale or 25% on cost 15,000
Add 1/3rd direct expenses : 75,000
Expenses paid by Consignor 900
Expenses paid by Consignor 2,000
1/3rd thereof 2,900 967
Note : In the consignment account, stock reserve account will appear at Rs.15,000 on the debit side.
Deepak’s Account
Dr. Cr.
Rs. Rs.
To Consignment account (Sales) 2,25,000 By Consignment account
(Commission) 9,000
By Consignment Account
(Commission) 2,250
By Consignment Account
(Exp.) 3,000
By Balance c/d 2,10,750
2,25,000 2,25,000
Working Notes :
(1) Calculation of Consignment Stock
Sale Price = 100 + 25 = 125
100 100
Cost of Sales = Sales × = 2,25,000 × = Rs.1,80,000
125 125
Cost of the goods available for sale = Rs. 20,000 + Rs.2,00,000 = Rs.2,20,000
Hence stock at the end = Rs.2,20,000 - Rs.1,80,000 = Rs.40,000
(2) Since Deepak is paid del-credere commission, bad debts of Rs.3,000 would be borne by him.
Illustration 7 :
Messrs. Sundar & Company consigned 1,000 tins of Ghee costing Rs.60 per tin to their agents, Bansal
Stores, at Calcutta. The agents sold 400 tins at Rs.80 per tin for cash, 400 tins at Rs.82 per tin on credit
and they took over the balance to their own stock at Rs.82 per tin. Messrs. Sundar & Company paid
freight and carraige Rs.500 and miscellaneous expenses Rs.200. They drew on Bansal Stores at 3 Months
for Rs.45,000, which was duly accepted by the later. The expenses incurred by the Bansal Stores were :
Carriage Rs.50
Octroi Rs.40
Storage Rs.110
Miscellaneous Rs.100
They were entitled to 5% commission and 2% del credere commission on total gross sale proceeds.
They sent their account sales to their principal showing as a deduction there from their commission and
the various expenses incurred by them a month later. All the debtors except one who owed Rs.200 paid
cash and the bansal Stores remitted the amounts due on consignment.
Show the journal entries in the books of the consignor and the consignee‘s account and consignment
account in the consignor‘s ledger. Show also the entries relating to consignment inwards and the consignor‘s
personal accounts at it would appear in the consignee‘s ledger.
Journal Entries
(In the books of Consignor)
Rs. Rs.
(1) Consignment Account Dr. 60,000
To Goods sent on consignment account 60,000
(being the goods sent on consignment)
Solution :
Books of A, Delhi
Consignment of BOmbay Account
Books of B
2202 Jan. 1 Rs. 2002 March 15 Rs.
To Bills Payable 10,000 By Bank 17,750
To bank-Expenses 400 By Balance c/d 500
March 15
To Commission Account 1,065
March 31
To Bank 6,785
18,250 18,250
Note:
(i) Stock at the end (At Invoice Price) Rs.
10 Packets @ Rs.100 (Invoice Price) 1,000
Add Proportionate expenses incurred by A i.e. 1/20th of Rs.640 32
1,032
(ii) Abnormal Loss
Cost of 15 packets damaged 1,200
640
Add Proportionate expenses 15 48
200
1,248
600
Le ss Value of 15 packets @ Rs.20 Per Packet
648
(iii) Since 10 Packets are still in the stock-in-hand, advance to that extent has not been adjusted.
Hence Rs.500 is carried forward i.e.
10
10,000 ×
200
Solution :
Books of Oils Ltd., Pune.
Consignment to Madras Account
2,92,125 2,92,125
Loose-in-Transit Account
6,250 6,250
Ramesh and Co.
Working Notes :
(1) Cost of ghee destroyed in transit Rs.
Cost of 10,000 Kg. of ghee @ Rs. 20 2,00,000
Freight and Insurance 50,000
Total cost of 10,000 Kg. 2,50,000
(2,50, 000 250)
Cost of 250 Kg. 10,000
6,250
A firm, having branches, would like to know the profits earned or losses incurred at each branch. The
system of accounting adopted by the firm (known as Head Office) will will depend on the type of branch.
The branches may be classified as under :
(i) Branches receiving goods only from the head office, selling goods only for cash, remitting all
cash received to the head office, expenses being met out of remittance from the head office.
(ii) The branches similar to (i) above, except that the goods are sold both for cash and credit.
(iii) The branches similar to (ii) except that the head office sends to the branches goods at invoice
price.
(iv) Branches functioning as an autonomous unit.
(v) Foreign Branches.
Accounts for the first three types of branches are kept by the head office. The last two types of
branches maintain an independent set of books of account.
Under the category (iii) the goods are invoiced to the branch at selling price (invoice price) by the
H.O. To ascertain correct profit, necessary adjusting entries are recorded to reduce the selling price to
cost price. Similarly closing stock is valued at invoice price. Now for reducing closing stock, stock reserve
is created. Thus the following journal entries will be passed in the books of H.O.
(i) Branch a/c Dr. Invoice value of goods sent.
To goods sent to Branch A/c
(ii) Branch A/c Dr. Cash sent for expenses.
To Bank A/c
(iii) Bank A/c Dr. Cash remitted by the branch to the H.O.
To Branch A/c (Cash consists of sales and receipts from Drs.)
(iv) Branch Stock A/c Dr. Branch stock (at invoice Price) and branch
Branch Debtors A/c Dr. debtors at the end of the year.
To Branch A/c
(v) Goods Sent to Branch A/c Dr. Invoice price on goods sent to branch adjusted.
To Branch A/c (Loading on the goods sent)
(vi) Branch A/c Dr. Invoice value of closing stock adjusted.
To Branch Stock Reserve A/c
(vii) Branch A/c Dr. Profit at branch
To Profit and Loss A/c
(viii) Goods sent to Branch A/c Dr. Goods sent to Branch Transferred.
To Trading A/c
Take an example. A new branch is opened and goods costing Rs.40,000. are sent to it. Further,
Rs.5,000 are sent by the H.O. to the branch for expenses. The branch remits Rs.51,000. as sale proceeds
194
to the H.O. All the goods sent by H.O. has been sold by the branch. Thus it is clear that the branch has
made a profit of 51,000-45,000 = Rs.6,000. This will be recorded in the books of H.O. as follows (without
narrations)
Rs. Rs.
To Bank 5,000
In the above example, there was no unsold stock. If there is closing stock, it should be valued on the
basis of well-accepted principle, i.e. Cost or market Price, whichever is lower of the two. The journal
entry of the unsold stock will be :
Branch Stock A/c Dr.
To Branch A/c
In case, the branch sells goods on credit, the entry for closing debtors will be :
Branch Debtors A/c Dr.
To Branch A/c
The closing stock and closing Debtors will be shown in the Balance Sheet and transferred to the
Branch A/c next year. It should further noted that Branch is credited when it remits Cash to H.O. This
cash consists of Cash sales and collected from debtors. Branch accounts should not be debited.
Illustration-1 : A Limited opened a branch at Shimla in 2002. Goods were invoiced at cost plus 25%.
From the following prepare ledger accounts in the books of A Limited.
Rs.
Goods sent to Simla (Invoice Price) 40,000
Sales at Simla :
Cash Sales 21,000
Credit Sales 16,000
Cash collected from debtors 14,500
Discount allowed 200
Cash sent to Branch for expenses 4,000
Stock at Branch, 31st Dec.2002 (Invoice Price) 3,200
195
Solution
A. Ltd’s Books
Shimla Branch A/c
Dr. Cr.
Rs. Rs.
2002 To Goods sent to 2002 By Bank (Remittance)
Branch A/c 40,000 Cash sales 21,000
Dec.31 To Bank (Expenses) 4,000 Cash Form Drs. 14,500 35,500
To Bank stock Dec.31 By Branch Stock A/c 3,200
Reserve A/c 640 By Branch Debtors A/c 1,300
To P & L A/c By Goods sent to Branch A/c 8,000
transfer 3,360 (loading)
48,000 48,000
196
Branch Stock Reserve A/c
Rs. Rs.
2002 2002
Dec.31 To Balance c/d 640 Dec.31 By Shimla Branch A/c 640
2000
Jan.1 By Balance 640
197
(5) In case of credit sales by the branch
(7) When any amount is spent or discount etc. is allowed on debtors of the branch.
(9) Entry for difference in price i.e. invoice price and cost relating to opening stock at branch goods
sent to branch.
(10) In case of closing stock at branch, reverse entry of the above is to be passed i.e.
198
(12) Transfer of balance of branch adjustment account to general profit and loss account, then
Illustration-2
A Ltd. has a branch in Calcutta. Goods are invoiced at cost plus 25%.
Opening Balance 2002
Stock 3,200
Debtors 1,300
Goods sent to Branch (Invoice price) 75,000
Sales at Calcutta
Cash Sales 32,000
Credit Sales 38,000
Cash collected from Debtors 33,400
Discount allowed 400
Bad Debts written off 250
Cash sent to Branch for expenses 5,500
Stock at end 7,900
199
Branch Stock Reserve A/c
2002 2002
Dec. 31 To Br. Adjustment A/c 640 Jan.1 By Balance b/d 640
Illustration-3
Agra head office supplies goods to its branch at Alwar at invoice price which is cost plus 50%. All
Cash received by the branch is remitted to Agra and all branch expenses are paid by the head office.
From the following particulars related to Alwar Branch for the year 2006, prepare Branch debtors account
200
Branch stock account and Branch Adjustment Account in the books of the head office so as to find out
the gross profit and net profit made by the branch.
Rs.
Stock with Branch on 1.1.2006 (at invoice price) 66,000
Branch Debtors on 1.1.2006 22,000
Petty cash balance on 1.1.2996 500
Goods received from head office (at invoice price) 2,04,000
Goods returned to Head Office 6,000
Credit Sales 87,000
Sales Returns 3,000
Allowance to customer on selling price
(already adjusted while invoicing) 2,000
Cash received from debtors 93,000
Discount allowed to debtors 2,400
Expenses (cash paid by Head Office)
Rs.
Rent 2,400
Salaries 24,000
Petty Cash 2,000 28,400
Cash Sales 1,06,000
Stock with Branch on 31.12.2006 (at invoice price 69,000
Petty Cash balance on 31.12.2006 100
[Delhi B.Com. (Pass) 2001]
Solution
In the books of Agra Head Office
Alwar branch debtors accounts
Dr. Cr.
Particulars Rs. Particulars Rs.
To Balance b/d 22,000 By Branch Cash A/c 93,000
To Branch stock A/c By Branch Expenses A/c
(credit sales) 87,000 (Discount allowed to Debtors) 2,400
By Sales Returns 3,000
By Balance c/d 10,600
1,09,000 1,09,000
201
Dr. Alwar Branch Stock Account Dr.
To balance b/d 66,000 By branch A/c-cash sales 1,06,000
To Goods sent to Branch A/c 2,04,000 By Branch Debtors A/c-credit sales 87,000
To Branches Debtors A/c By Branch Adjustment A/c
Sales Return 3,000 Allowance to customer
On selling price (already
Adjusted while invoicing) 2,000
By Goods sent to branch A/c
Returns to H.O. 6,000
By Shortage-in-stock A/c 3,000
By Balance c/d 69,000
2,73,000 2,73,000
Illustration-4
Delhi Head Office supplies goods to its branch at Kanpur at Invoice Price which is cost plus 50%.
All Cash received by the branch is remitted to Delhi and all branch expenses are paid by the head office.
From the following particulars related to Kanpur branch for the year 2006 prepare :
(i) Branch Account, and
(ii) Branch Stock Account, Branch Debtors Account, Branch expenses A/c and Branch Adjustment
account in the books of the head office so as to find out the gross profit and net profit made
by the branch.
202
Rs.
Stock with branch on 1.1.06 (at invoice price) 60,000
Branch Debtors on 1.1.06 12,000
Petty Cash balance on 1.1.06 10
Goods received from head office (at invoice price) 1,86,000
Goods returned to head office 3,000
Credit sales less returns 84,000
Allowances to customer at selling price
(already adjusted while invoicing) 2,000
Cash received from Debtors 90,000
Discount allowed to Debtors 2,400
Expenses (Cash paid by head office):
Rent 2,400
Salaries 24,000
Petty Cash 1,000 27,400
96,000 96,000
2,46,000 2,46,000
203
Kanpur Branch Account
Dr. Cr.
Particulars Rs. Particulars Rs.
To Stock 60,000 By Cash-Remittance
To Branch Cash 12,000 Cash Sales 1,04,000
To Petty Cash 10 Cash from Debtor 90,000 1,94,000
To Goods Sent to Branch 1,86,000 By Goods Sent to H.O. (Returns) 3,000
To Reserve for returns (1/3 of By Stock Reserve (1/3 of 60,000) 20,000
3,000) 1,000 By Reserve for Goods Sent (1/3 of 1,86,000) 62,000
To Stock Reserve (1/3 of By Stock at Branch (Given) 54,000
54,000) 18,000 By Branch debtors A/c 3,600
To Branch Expenses 27,400 By Petty Cash 100
To Cash (Petty expenses) 90
To Profit transferred to Gen.
P & L A/c
32,200
3,36,700 3,36,700
204
UNIT -- 4
JOINT VENTURES
*Underwritng means undertaking the responsibility that shares or debentures issued by company will
be taken up by the public. If the public does not take them, the underwriters agree to take up the shares
or debentures.
4. Scope Consignment is concerned Joint Venture may be
only with the sale of undertaken for any type of
movable goods. legal business e.g. construc-
ction of roads, building etc.
in addition to purchase and
sale of goods.
5. Finance Consignor (Principal) provides Funds are provided by the
the funds. Co-Ventures.
6. Profits and commission The Consignee is entitled Profits (or losses) are
to receive only commission shared by the Co-ventures
and reimbursement of his in the predetermined ratios
expenses. No share in the or equally in the absense of
profits or liability for losses. an agreement. Commission
may or may not be granted to
Co-ventures.
7. Number of Persons There are normally two The number of Co-venturers
parties namely the principal will be at least two though it
and the agent. may be more than two with
equal status i.e. that each is
a principal and agent at the
same time like partners.
Record of Transactions
*It is never called as B‘s Capital A/c since A and B are not partners.
Dr. B’s A/c Cr.
Rs. Rs.
To Joint Venture A/c By Joint Venture A/c
(Cash recd. from C) 73,900 —Goods 50,000
By Joint Venture A/c—exps. 800
By Joint Venture A/c—Profit 5,680
By Balance c/d 17,420
73,900 73,900
To Balance b/d 17,420
Rs.
Total Sales By C = 1,50,000
Less=his expenses 1,600
Less-his commission 3% of 1,50,000 4,500
6,100
Balance 1,43,900
Less amount sent to A 70,000
*Amount received by B 73,900
B’s Ledger
Dr. Joint Venture Account with A Cr.
Rs. Rs.
To Goods A/c 50,000 By Cash (received from C) 73,900
To Cash (Exps.) 800 By A (received from C) 70,000
To A (Goods) 78,000
To A (Expenses) 900
To A (Profit) 8,520
To P & L A/c 5,680
1,43,900 1,43,900
Dr. A Cr.
To Joint Venture A/c (From C) 70,000 By Joint Venture A/c—Goods 78,000
To Balance c/d 17,420 By Joint Venture A/c—Exps. 900
By Joint Venture A/c—Profit 8,520
87,420 87,420
Alternative Method :
On receipt of details of transactions effected by other parties, each party may prepare, in his books,
a ‗‗Memorandum Joint Venture Account (Memorandum Joint Venture is similar to Joint venture A/c) by
combining all this information received from other parties. The memorandum joint venture account is
prepared only to find out the profit or loss made. It is not a part of accounts. As part of accounts, only
the account of the other party under the style, say, Joint Venture with ‗‗B‘‘ A/c‘‘ is opened. This account
is debited with expenditure incurred venture this account is credited. The share of profit (as ascertained
by the memorandum joint venture account) is debited to this account and credited to Profit and Loss A/
c. This account will then show the amount due to or by the other party and will be closed by remittance
from one to the other party.
The above illustration is now worked out according to this method.
A’s Ledger
Joint Venture with ‘B’ Account
Dr. Cr.
Rs. Rs.
To Goods A/c 78,000 By Cash 70,000
To Cash (Exps.) 900 By Balance c/d 17,420
To Profit & Loss A/c 8,520
87,420 87,420
To balance b/d 17,420
B’s Ledger
Joint Venture with ‘A’ Account
Dr. Cr.
Rs. Rs.
To Goods A/c 50,000 By Cash 73,900
To Cash 800
To Profit & Loss A/c 5,680
To Balance c/d 17,420
73,900 73,900
By balance b/d 17,420
Rs. Rs.
To A (goods) 78,000 By A Cash 70,000
To A (Exp) 900 By B Cash 73,900
To B (goods) 50,000
To B Exp. 800
To Profit A 8520
B 5680
1,43,900 1,43,900
*It is never called as B‘s Capital A/c since A and B are not partners.
Illustration-2
A of delhi and B of Bangalore entered into a Joint Venture for purchases and sales of one lot of
Mopeds. The cost of each Moped was Rs.3,000 and the fixed retail selling price Rs.3,000 The following
were the recorded transactions :
2002
Jan. 1
A Purchase 100 Mopeds paying Rs.72,000 in cash on account.
A raised a loan from Canara Bank for Rs.50,000@ 18% p.a. interest, repayable with interest on
1.3.2002.
A forwarded 80 Mopeds to B incurring Rs.2,880 as forwarding and insurance charges.
Jan.7
B received the consignment and paid Rs.720 as clearing charges.
Feb.1
A sold 5 Mopeds for Cash
B sold 20 Mopeds for Cash
B raised a loan of Rs.1,50,000 from Union Bank repayable with interest at 18% p.a. on 1.3.2002.
B telegraphically transferred Rs.1,50,000 to A incurring charges of Rs.50 A paid balance due for the
Mopeds.
Feb. 26
A sold the balance Mopeds for Cash
B sold the balance Mopeds for Cash
A paid selling expenses Rs.5,000
B paid selling expenses Rs.20,000
March. 1
Accounts settled between the venturers and loans repaid. Profit being appropriated equally.
You are required to show :
(1) The Memorandum Joint Venture Account.
(2) Joint Venture with B Account in A‘s Books.
(3) Joint Venture with A Account in B‘s Books.
You are to assume that each venturer recorded only such transactions concluded by him.
Solution :
Memorandum Joint Venture Account
For the period between Jan 1 to March 2002
Books of ‘A’
Joint Venture with B Account
To Bank (Part payment of Cost) 72,000 By Bank (Sale proceeds) 22,500
To Bank (Forwarding Charges) 2,880 By Bank (Remittance from B) 1,50,000
To Bank (Balance cost of purc- By Bank (Sale proceeds) 67,500
hase) 2,88,000 By Bank (Cash recovered 1,58,180
To Bank (Selling expenses) 5,000 in settlement)
To Bank (Interest on Bank Loan) 1,500
To Profit and Loss A/c
(Share of profit) 28,800
3,98,180 3,98,180
Books of ‘A’
Joint Venture with A Account
To Bank (Clearing Charges) 720 By Bank (Sale
To Bank (Remittance plus telegraphics proceeds 20 Mopeds) 90,000
transfer charges) 1,50,050 By bank (Sale proceeds of 2,70,000
To bank (Selling expenses) 20,000 60 Mopeds)
To Bank (Interest on Bank Loan) 2,250
To Profit and Loss Account
(Share of profit) 28,800
To Bank (payment in settlement) 1,58,180
3,60,000 3,60,000
A’s Account
B’s Account
To Joint Venture (Material) 30,000 By Joint bank 1,50,000
To Joint bank 1,85,000 By Joint Venture (Stock) 40,000
By Joint Venture (Interest) 15,000
By Joint Venture (Profit) 10,000
2,15,000 2,15,000
In the books of ‘A’
Joint Venture Investment Account
To Cash (Capital) 2,50,000 By Bank Account 1,25,000
To Cash (Architect‘s fees) 20,000 By Shares 1,60,000
To Stock 50,000 By Plant taken over 80,000
To Interest 25,000
To Profits 20,000
3,65,000 3,65,000
Notes : (1) Joint Venture transactions are recorded in a separate set of books meant for Joint Venture
and not in the books of either of the co-venturers.
(2) Though plant is an asset it is simply transferred to Joint Venture Account to be used for Joint
Venture. The depreciation value of the plant is recorded on the credit side of the Joint Venture Account.
However, in this illustration since half of the plant is taken over by Co-Venturer (A) and the other half
is sold, the amounts are credited to Joint Venture account, and A‘s Account and Joint bank Account are
debited respectively.
(3) Interest on Capital is calculated @ 10% for one year.
Construction of Building, Bridges, Roads etc.
Such works are usually undertaken for joint stock companies which become contractee. Price is
usually received partly in cash and partly in the form of shares and debentures. The joint venturers have
to sell these shares/debentures in order to determine the overall profits/loss of the Venture. The shares/
debentures may be either sold in the market or one or more co-venturers may take them at an agreed
price. The additional entries, then are made as follows :
(1) For Contract price Contractee‘s (Company‘s) Account Dr.
becoming due To Joint Venture Account
(2) On receipt of contract Joint Bank Account Dr. (for cash)
price Shares Account Dr. (for shares/debentures
To Contractee (Company)
(3) On Sale of shares/ Joint Bank Account Dr.
debentures Co-Venturers Account Dr.
To Shares/Debentures Account
(4) For profit on sale of Shares/Debentures Account Dr.
shares/debentures To Joint Venture Account
(5) For Loss on sale of Joint Venture Account Dr.
shares/debentures To shares/Debentures Account
Illustration-4 (Construction of a Building)
A, B and C enter into a joint venture for supervision of the construction of a multistory building for
a joint stock company for a contract price of Rs.1,00,000.
Incidental expenses might have to be paid by the Venturers but as per agreement they are entitled
to be re-imbursed to the extent of actual such expenditure or Rs.5,000 whichever is less. In this way A
spends Rs.4,000; B Rs.5,000 and C Rs.6,000. The Venturers are to share profits and losses equally but
C being a technical person, is entitled to a special commission of 10% of the profit of the venture after
charging such commission. They open a joint bank account to which A contributes Rs.20,000, B Rs.15,000
and C Rs.15,000. B also gives his own plant to the venture for which he charges Rs.8,000. Materials are
purchased for Rs.20,000 and wages amount to Rs.30,000.
At the end of the Venture the company paid the agreed contract price (keeping Rs.10,000 as retention
money) to the extent of Rs.30,000 in cash and the balance in equity shares of the company of Rs.10 at
an agreed value of Rs.12 per share. The shares are subsequently sold in the market @ Rs. 13 per share.
Unused materials costing Rs.2,000 are taken over by A at Rs.1,000. The plant is taken back by B at an
agreed value of Rs.2,000 C takes up the retention money at Rs.7,000.
Show necessary ledger accounts in the books of the venturer.
Solution :
Joint Venture Account
Rs. Rs.
To A 4,000 By Joint Bank Account 30,000
B 5,000 By Shares Account 60,000
C 5,000 14,000 By Shares Account
To B (Plant) 8,000 (Profit on sale) 5,000
To Joint Bank Account By A (Unused materials) 1,000
Materials 20,000 By B (Plant 2,000
Wages 30,000 50,000 By C (Retention money) 7,000
To C (Commission) 3,000
10% of Rs. 30,000
1/11 of Rs. 33,000 3,000
To Net Profit :
A 10,000
B 10,000
C 10,000 30,000
1,05,000 1,05,000
A’s Account
To Joint Venture By Joint Venture Rs.
(Unused materials) 1,000 (Incidental expenses) 4,000
To Joint Bank Account 33,000 By Joint Bank 20,000
By Joint Venture—Profits 10,000
34,000 34,000
B’s Account
To Joint venture (Plant) 2,000 By Joint Venture
To Joint Bank 36,000 (Incidental expenses) 5,000
By Joint Bank Account 15,000
By Joint Venture Plant 8,000
By Joint Venture-Profit 10,000
38,000 38,000
C’s Account
To Joint Venture (Retention By Joint Venture (Incidental
money) 7,000 expenses) 5,000
To Joint Bank Account 26,000 By Joint Venture
(Commission) 3,000
By Joint bank Account 15,000
By Joint Venture-profits 10,000
33,000 33,000
Solution :
Total land purchased 18,000 sq. meters
Less: 1/6th left for public roads 3,000 sq. meters
land available for sale of 30 plots. 15,000 sq. meters
Each plot measures 500 sq. metres
15,000
hence, there are = 30 plots.
500
(2) Sales
(a) 10 plots i.e. 10 × 500 sq. metres
= 5,000 sq. metres @ Rs.20 per sq. metre
= Rs. 60,000 less 2% of this as brokerage
= 60,000—1,200 58,800
(b) One plot to A for Rs. 5,000
(c) Remaining 19 plots sold for 76,200
1,40,000
1,42,000 1,42,000
Joint Bank Account
Rs. Rs.
To A 60,000 By Joint Venture A/c
To B 40,000 (cost of land and other
To Joint Venture-sales 1,35,000 expenses) 87,000
To Joint Venture-sale 2,000 By A 88,000
By B 62,000
2,37,000 2,37,000
A
To Joint Venture-cost of plot 5,000 By Joint Bank (Investment) 60,000
To Joint Bank (Settlement) 88,000 By Joint Venture (Profit) 3,000
93,000 93,000
B
Rs. Rs.
To Joint bank (settlement) 62,000 By Joint Bank (Investment) 40,000
By Joint Venture (profits) 22,000
62,000 62,000
Illustration - 6
A and B enter into a joint venture for guaranteeing the subscription at par of 1,00,000 shares of Rs.20
each of a joint stock company. They agree to share profits and losses in the ratio of 2 : 3. The terms
with the company are : 4½% commission in cash and 6,000 fully paid up shares of the company.
The public take up 88,000 of the shares and the balance shares of the guaranteed issue are taken
up by A and B who provide cash equally. The commission in cash is taken by the partners in the ratio
4 : 5.
The entire share holding of the Joint Venture is then sold through brokers : 25% at a price of Rs.9;
50% at a price of Rs.8.75; 15% at a price of Rs.8.0 and the remaining 10% is taken over by A and B
equally at Rs. 8 per share.
Prepare a joint venture account and the separate accounts of A and B showing the adjustment of
final balance between A and B. Ignore interest and income tax.
1,05,000 1,05,000
A’s Account
Rs. Rs.
To Joint Bank (Cash Commission) 20,000 By Joint Bank
To Shares 7,200 (Contribution) 60,000
To Joint bank-Final settlement 64,900 By Joint Venture
(Profit) 32,100
92,100 92,100
B’s Account
Rs. Rs.
To Joint Bank (Cash Commission) 25,000 By Joint Bank (Contribution) 60,000
To Shares 7,200 By Joint venture (Profit) 48,150
To Joint bank) Final Settlement 75,950
1,08,150 1,08,150
Shares Account
Rs. Rs.
To Joint Bank (Shares purchased) 1,20,000 By Joint Bank (25%) 40,500
To Joint Venture (Commission) 60,000 By Joint Bank (50%) 78,750
By Joint Bank (15%) 21,600
By A‘s A/c (5%) 7,200
By B‘s A/c (5%) 7,200
By Joint Venture (Loss on Sale) 24,750
1,80,000 1,80,000
Rs. Rs.
To A (Contribution) 60,000 By Shares (purchased) 1,20,000
To B (Contribution) 60,000 By A 20,000
To Joint Venture (Commission) 45,000 By B 25,000
To Shares By A (Final settlement) 64,900
25% 40,500 By B (Final settlement) 75,950
50% 78,750
15% 21,600
3,05,850 3,05,850
Illustration-7
X and Y undertake jointly to build for a newly stated joint stock company for a contract price of
Rs.1,000,000 payable as to Rs.80,000 by instalments in cash and Rs.20,000 in fully paid shares of the new
company. A banking account is opened in the joint name, X contributing Rs. 25,000 and Y Rs,15,000. They
have to share profits and losses in the proportion of 2/3 and 1/3 respectively. Their transactions were as
follows :
Paid wages Rs.30,000
Bought materials Rs.79,000 on credit from Z.
Paid architect‘s fees Rs.3,000
The contract was completed and the price dully received: Z‘s dues were dully paid off. The joint
venture was closed by X taking up all the shares of the company at an agreed valuation of Rs.16,000
and Y taking up unused stock of materials for Rs.3,000 as mutually valued.
Prepare the necessary accounts to record the above transactions.
Solution :
Dr. Joint Bank Account Cr.
Rs.
To X (Capital contributed) 25,000 By Joint venture A/c—Wages 30,000
To Y (Capital contributed) 15,000 By Joint Venture A/c—Architect-
To Joint Venture A/c fees 2,000
(Amount Received from By Z 79,000
contractee) 80,000 By X (Amount returned) 1,000
By Y (Amount returned) 8,000
1,20,000 1,20,000
Z
Rs. Rs.
To Joint Bank Account 79,000 By Joint Venture Account 79,000
X’s A/c
To Joint Venture A/c By Joint Venture A/c 25,000
Loss 8,000
To Shares a/c 16,000
To Joint Bank A/c 1,000
25,000 25,000
Y’s A/c
To Joint Venture A/c By Joint venture A/c 15,000
(Material) 3,000
To Joint venture A/c
Loss 4,000
To Joint Bank A/c 8,000
15,000 15,000
Illustration-8
A and B enter into a Joint Venture sharing profit and loss equally. A purchased goods for Rs. 5,000
and B spent Rs.3,000 for freight on 1st jan. 2002. On the same day B bought goods worth Rs.10,000 on
credit. Further expenses were incurred as follows :
On 1-2-2002—Rs.1,500 By B
On 1-3-2002—Rs.500 By A
Sales were made against cash as follows :
15-1-2002—Rs.3,000 By A
31-1-2002—Rs.6,000 By B
15-2-2002—Rs.3,000 By A
1-3-2002—Rs.4,000 By B
Creditors for goods were paid as follows :
1-2-2002—Rs.5,000 By A
1-3-2002—Rs.5,000 By B
On 31st March 2002 the balance stock was taken over by B at Rs.9,000 The accounts between the
venturers were settled by cash payment on this date. The venturers are entitled to interest at 12% per
annum.
Prepare necessary ledger accounts in the books of Venturers.
Solution
Memorandum Joint Venture Account
Rs. Rs.
To Cost of goods ; By Sales A 6,000
A 5,000 B 10,000
B 10,000 By Interest B 50
To Freight-B 1,000 By B-Stock 9,000
To Expenses-A 500
B 1,500
To Interest-A 135
To profit—A 3,457
B 3,458
25,050 25,050
A’s Ledger
Joint Venture with B Account
2002 Rs. 2002
Jan.1. To Bank (Purchase) 5,000 Jan 15 By Bank (sale proceeds) 3,000
Feb.1. To bank (Creditors) 5,000 Feb 15 By bank (sale proceeds 3,000
Mar.1. To Bank (Expenses) 500 Mar.15 By Bank (amount
‘‘ 31 To Interest A/c 135 received in settlement) 8,902
To Profit & Loss account-
share of profit 3,457
14,092 14,092
B’s Ledger
Joint Venture with A Account
2202 Rs. 2002 Rs.
Jan.1 To bank (freight) 1,000 Jan 31 By Bank (sale) 6,000
To Creditors (goods Mar.31 By Creditors
bought- on credit 10,000 paid by co-venturer 5,000
Feb 1 To bank (expenses) 1,500 By Bank (sale) 4,000
Mar.31 To Profit & Loss account Mar.31 By Stock account
(share of profit) 3,458 stock taken over 9,000
To bank (amount paid to By Interest account 50
A in settlement
8,092
24,050 24,050
Calculation of Interest
Payment by A
Date Amount Month Int. Till 31-3-2002
@1% p.m.
Rs. Rs.
1-1-2002 5,000 3 150
1-3-2002 500 1 5
1-2-2002 5,000 2 100
255
Amount received by A
Date Amount Month Int. Till 31-3-2002
@1% p.m.
Rs. Rs.
15-1-2002 3,000 2½ 75
15-2-2002 3,000 1½ 45
120
Net Interest due to A 135
Payment by B
Date Amount Month Int. Till 31-3-2002
@1% p.m.
1-1-2002 1,000 3 30
1-2-2002 1,500 2 30
1-3-2002 5,000 1 50
110
Amount received by B
Date Amount Month Int. Till 31-3-2002
@1% p.m.
31-1-2002 6,000 2 120
1-3-2002 4,000 1 40 160
Net Interest due from B 50
Solution :
Consignment to Calcutta Account
Rs. Rs.
To Goods sent on consignment 15,000 By Bose (Sale proceeds) 15,000
To Bank (expenses) 500 By Goods sent on consignment
(Loading) 5,000
To Bose (Freight) 540
To Stock reserve (15 × 50) 750 By bank (Insurance Claim) 800
To Bose-Commission 3,000 By Abnormal loss 250
To Profit & Loss Account By Stock on consignment 2,415
(Profit on consignment) 3,675
23,465 23,465
Notes : (1) Interest has been allowed on investment in goods only; the question of expenses and of
claim received cancelling out one another.
(2) For the purpose of Joint Venture no stock reserve is required.
(3) Adjustment is required as under :
Amount already received by Bose (Commission) Rs.3,000
Amount receivable by Bose as co-Venturer :
Commission 1,500
Expenses 400
1,900
Less : Loss to be debited to him 162 1,738
1,262
Entries on Conversion into Joint Venture
Rs. Rs.
(1) Bose Dr. 1,262
To Profit and Loss Account 1,262
(Amount due to Bose under the Joint Venture Arrangement being Rs.3,000 whereas he previously
received Rs.3,000 amount now adjusted)
(2) Profit and Loss Account Dr. 375
To Stock Reserve 375
(Our share of the unrealised profit on unsold stock 50% of Rs.3,000
Exercise :
(1) Das, Bose and Gupta undertake to erect a five storied mansion for National Housing Trust Ltd.
The contract price is agreed at Rs.25,00,000 to be paid in cash Rs.22,00,000 by four equal instalments
and the balance amount in 13% debentures of the company. They agreed to share equally the profits and
losses. They opened a joint banking account with the cash contributed as stated below :
Das Rs.3,00,000; Bose Rs.3,75,000; and Gupta Rs.2,00,000. Das arranges the preparation of the
building plan etc. and pays Rs.32,000 as architects‘s fees; Bose brings a concrete Mixer and other
implements valued at Rs.80,000 and Gupta brings a Motor Lorry valued at Rs.75,000.
They paid out of joint banking account for the following : Materials Rs.12,26,800; Wages Rs.7,32,200;
Sundry expenses Rs.20,000 and plant Rs.60,000.
On Completion of the venture, concrete mixer is sold for Rs.50,000 and plant and other implements
are sold as scarp for Rs.10,000. Gupta Takes back the Motor Lorry at Rs.40,000. Das took over the
Debentures at a valuation of Rs.2,80,000.
Show the necessary accounts for the joint venture.
(Ans. Profit on joint venture Rs.3,54,000; Final payments: Dass Rs.1,70,000; Bose Rs.5,73,000 and
Gupta Rs.3,53,000.
(2) S and R carrying on a business separately as contractors, jointly take up the work of constructing
a building at an agreed price of Rs.3,50,000 payable in cash Rs.2,40,000 and in fully paid shares of a
company for the balance of Rs.1,10,000. A bank account is opened in which S and R paid Rs.75,000 and
Rs.50,000 respectively. The following costs were incurred in completing the constructions and the contract
price was duly realised :
(i) Wages paid Rs.90,000
(ii) Material purchased for Cash Rs.2,10,000
(iii) Materials supplied by R from his stock Rs.27,000.
(iv) Consulting Engineer‘s fees paid by S. Rs.3,000
The accounts were closed, S taking up all the shares of the company at an agreed valuation of
Rs.48,000, treating loss on shares as joint venture loss and R taking the remaining stock of materials at
Rs.9,000
Prepare and close the joint venture accounts and personal accounts of S and R assuming that a
separate set of books are opened for this purpose and that the net result of the venture is shared by s
and R in ratio of 2 :1.
(Ans. Loss on Joint venture Rs.36,000; Amounts brought in by S. Rs.9,000 and R Rs.56,000)
(3) Shyam took a contract for Rs.1,62,000 for supply of material in connection with tube wells. He
entered into a joint venture contract with Ashok. It was agreed to share profit and losses equally.
Following were the terms of the joint venture :
Shyam will contribute Rs.1,50,000 as capital on which he will get interest at 4% p.a. This amount was
given to Ashok on 1 January 2002 Shyam was entitled to a commission of 2% on the contract price. Ashok
being a technician will be entitled to a salary of Rs.400 per month. He will also get Rs1,500 because his
plant will be used on the contract.
Ashok made the following payments : Raw Materials Rs.50,000; Wages Rs.60,000; Repairs of
Machinery Rs.5,000 and Establishment expenses Rs.4,500.
Contract was complete on 30 September 2002 Shyam received the amount from Ashok.
Open Joint Venture Account, Shaym‘s Account and Cash Account in the books of Ashok.
(Ans. Joint Venture Profit Rs.36,000; Payment to Shyam Rs.1,72,825)
(4) B of Bombay and C of Calcutta enter into a joint venture to consign scrap iron A of agra, to be
sold on their risk. They share profit or losses equally. A is entitled to a commission of 10% of the net
proceeds after charging such commission.
B sends 50 tonnes costing Rs.3,000 per tonne and pays freight and other expenses of Rs.30,000. C
sends 70 tonnes costing Rs.3,000 per tonne and pays freight and other expenses of Rs.40,000.
All the scraps are sold by A @ Rs.10,000 per tonne and he pays selling expenses of Rs.12,000. he
remits Rs.5,00,000 to B and the balance of net proceeds to C by bank draft.
You are required (a) to show accounts in the books of B and C to record their own transactions and
(b) to prepare a Memorandum Joint Venture Account.
(Ans. Profit on Joint venture Rs.4,45,000; final settlement for Rs.32,500)
AMALGAMATION, ABSORPTION &
RECONSTRUCTION
The following terms are used in this standard with the meanings
specified:
(ii) Shareholders holding not less than 90% of the face value of the
equity shares of the transferor company (other than the equity
shares already held therein, immediately before the
amalgamation, by the transferee company or its subsidiaries or
their nominees) become equity shareholders of the transferee
company by virtue of the amalgamation.
Explanation
Types of Amalgamations
Generally speaking, amalgamations fall into two broad categories. In the first
category are those amalgamations where there is a genuine pooling not
merely of the assets and liabilities of the amalgamating companies but also of
the shareholders‘ interests and of the businesses of these companies. Such
amalgamations are amalgamations which are in the nature of ‗merger‘ and
the accounting treatment of such amalgamations should ensure that the
resultant figures of assets, liabilities, capital and reserves more or less
represent the sum of the relevant figures of the amalgamating companies. In
the second category are those amalgamations which are in effect a mode by
which one company acquires another company and, as a consequence, the
shareholders of the company which is acquired normally do not continue to
have a proportionate share in the equity of the combined company, or the
business of the company which is acquired is not intended to be continued.
Such amalgamations are amalgamations in
Where assets and liabilities are restated on the basis of their fair values, the
determination of fair values may be influenced by the intentions
of the transferee company. For example, the transferee company may
have a specialised use for an asset, which is not available to other
potential buyers. The transferee company may intend to effect changes in
the activities of the transferor company which necessitate the creation of
specific provisions for the expected costs, e.g. planned employee
termination and plant relocation costs.
Consideration
The consideration for the amalgamation may consist of securities, cash or
other assets. In determining the value of the consideration, an assessment is
made of the fair value of its elements. A variety of techniques is applied in
arriving at fair value. For example, when the consideration includes
securities, the value fixed by the statutory authorities may be taken to be the
fair value. In case of other assets, the fair value may be determined by
reference to the market value of the assets given up. Where the market value
of the assets given up cannot be reliably assessed, such assets may be valued
at their respective net book values.
Certain reserves may have been created by the transferor company pursuant
to the requirements of, or to avail of the benefits under, the Income-tax Act,
1961; for example, Development Allowance Reserve, or Investment
Allowance Reserve. The Act requires that the identity of the reserves should
be preserved for a specified period. Likewise, certain other reserves may
have been created in the financial statements of the transferor company in
terms of the requirements of other statutes. Though, normally, in an
amalgamation in the nature of purchase, the identity of reserves is not
preserved, an exception is made in respect of reserves of the aforesaid
nature (referred to hereinafter as ‗statutory reserves‘) and such reserves
retain their identity in the financial statements of the transferee company
in the same form in which they appeared in the financial statements of the
transferor company, so long as their identity is required to be maintained
to comply with the relevant statute. This exception is made only in those
amalgamations where the requirements of the relevant statute for
recording the statutory reserves in the books of the transferee company
are complied with. In such cases the statutory reserves are recorded in the
financial statements of the transferee company by a corresponding debit
to a suitable account head (e.g., ‗Amalgamation Adjustment Account‘)
which is disclosed as a part of ‗miscellaneous expenditure‘ or other
similar category in the balance sheet. When the identity of the statutory
reserves is no longer required to be maintained, both the reserves and the
aforesaid account are reversed.
Disclosure
(a) 24. For all amalgamations, the following disclosures are
considered appropriate in the first financial statements
following the amalgamationnames and general nature of
business of the amalgamating companies;
(b) effective date of amalgamation for accounting purposes;
(c) the method of accounting used to reflect the amalgamation; and
(d) particulars of the scheme sanctioned under a statute.
(i) All the assets and liabilities of the transferor company become,
after amalgamation, the assets and liabilities of the transferee
company.
Shareholders holding not less than 90% of the face value of the
equity shares of the transferor company (other than the equity
shares already held therein, immediately before the
amalgamation, by the transferee company or its subsidiaries or
their nominees) become equity shareholders of the transferee
company by virtue of the amalgamation.
If, at the time of the amalgamation, the transferor and the transferee
companies have conflicting accounting policies, a uniform set of
accounting policies should be adopted following the amalgamation. The
effects on the financial statements of any changes in accounting policies
should be reported in accordance with Accounting Standard (AS)
5 Net Profit or Loss for the Period, Prior Period Items and Changes in
Where the requirements of the relevant statute for recording the statutory
reserves in the books of the transferee company are complied with,
statutory reserves of the transferor company should be recorded in the
financial statements of the transferee company. The corresponding debit
should be given to a suitable account head (e.g., ‗Amalgamation
Adjustment Account‘) which should be disclosed as a part of
‗miscellaneous expenditure‘ or other similar category in the balance
sheet. When the identity of the statutory reserves is no longer required to
be maintained, both the reserves and the aforesaid account should be
reversed.
Common Procedures
The consideration for the amalgamation should include any non-cash
element at fair value. In case of issue of securities, the value fixed by the
statutory authorities may be taken to be the fair value. In case of other
assets, the fair value may be determined by reference to the market value
of the assets given up. Where the market value of the assets given up
cannot be reliably assessed, such assets may be valued at their respective
net book values.
Disclosure
For all amalgamations, the following disclosures should be made in the
first financial statements following the amalgamation:
(b) the amount of any difference between the consideration and the
value of net identifiable assets acquired, and the treatment
thereof.
‗Contingencies and Events Occurring After the Balance Sheet Date‘, but
the amalgamation should not be incorporated in the financial statements.
In certain circumstances, the amalgamation may also provide additional
information affecting the financial statement
.
Note:
Amalgamation in nature of merger: The entries in the case of amalgamation in the
nature of merger is almost similar to the entries given above, the only difference is:
In the second basic entry above, instead of opening the Goodwill/Capital reserve
a/c, the difference between purchase consideration paid and book value of the share
capital of vendor company is adjusted in general reserve. If general reserve is not
sufficient then balance adjusted in profit & loss account. Similarly any difference in
actual debenture value and the amount paid to them is also adjusted to general
general reserve is not sufficient then balance adjusted in profit & loss
reserve. If
account.
Where ever Goodwill/Capital reserve a/c is debited or credited in above entries we will have to
debit or credit general reserve account.
Following will remain same in both the methods of amalgamation
Calculation of Purchase consideration.
Discharge of Purchase consideration.
Entries in books of vendor company.
Purchasing company held shares Vendor company held shares Both vendor and purchasing
in vendor company (P V) in purchasing company company held shares in each
(V P) other (P< V)
Calculation of purchase consideration
PC (Given/calculated) xxx PC (Given/calculated) PC (Given/calculated) xxx
Less: % reduction for shares xxx Less: % reduction for shares
Held by purchasing Less: Value of shares Held Held by purchasing
company in vendor by vendor company in company in vendor
company xxx purchasing company company xxx
Net PC xxx xxx Less: Value of shares Held
Net PC by vendor company in
xxx purchasing company xxx
Net PC xxx
www.caplanet.com
% = Shares held by X Value= No of shares held X
100 purch. comp. Intrinsic value per share
Total shares of
vendor comp.
337
77
Issue of Shares
TERMINAL QUESTIONS
278
Issue of Shares
279
Issue of Shares